Author Archives: Matthew Lerner

About Matthew Lerner

Matthew Lerner is a former business content writer at RIMS.
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Greenberg, New York State Settle Long-Running Civil Case

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One of Wall Street’s longest-running dramas closed Feb. 10 as New York State and Maurice “Hank” Greenberg finally ended a legal clash which began in 2005 under the stewardship of then Attorney General Elliot Spitzer.

Former American International Group, Inc. CEO Greenberg and the Attorney General’s office reached a settlement over accusations that the company engaged in fraudulent transactions to boost reserves and hide losses.

Greenberg, who was chairman and CEO of AIG from 1967 until his ouster in 2005 and now serves as chairman and CEO of C.V. Starr & Co., will pay some $9 million to end his role in the saga. Also, Howard Smith, former AIG CFO and Greenberg’s lieutenant will pay $900,000 to settle the charges stemming from two alleged transactions designed to misrepresent company finances.

This included a $500 million deal in the year 2000 with reinsurer General Re, part of businessman Warren Buffet’s Berkshire Hathaway Inc., to pad AIG’s loss reserves. Greenberg allegedly initiated the Gen Re deal with a call to the company’s CEO.

The two former AIG leaders were also said to be involved in a deal with Capco Reinsurance Co., which masked a $210 million underwriting loss as an investment loss.

The sums paid by the men are related to performance bonuses earned from 2001 to 2004, according to New York Attorney General Eric Schneiderman, who inherited the long-running conflict. Schneiderman sought to ban the men from the securities industry and from serving as directors and officers of public companies as part of the settlement, which ultimately did not include these provisions.

Schneiderman had previously dropped a $6 billion damage claim against Greenberg and others, once a class action settlement was approved in 2013 under which Greenberg paid $115 million to AIG shareholders.

A 2009 settlement with the U.S. Securities and Exchange Commission over charges related to AIG‘s accounting saw Greenberg pay $15 million and Smith $1.5 million to the agency.

Late last year Greenberg and the Attorney General’s office turned to mediation after trial testimony had already begun in state court. The mediation, which ultimately produced the settlement, was run by alternative dispute resolution specialist Kenneth Feinberg.

The finale to the case was perhaps more of a whimper than a bang, with settlements hardly headline-grabbing and no one admitting to much more than accounting slips.

In a press release from the N.Y. State Attorney General’s Office, Schneiderman sounded a triumphant tone. “Today’s agreement settles the indisputable fact that Mr. Greenberg has denied for 12 years: that Mr. Greenberg orchestrated two transactions that fundamentally misrepresented AIG’s finances,” Schneiderman said in the statement. “After over a decade of delays, deflections, and denials by Mr. Greenberg, we are pleased that Mr. Greenberg has finally admitted to his role in these fraudulent transactions and will personally pay $9 million to the State of New York.”

Greenberg, who was unapologetic, in his statement said, “The Gen Re transaction was done for the purpose of increasing AIG’s loss reserves, and the Capco transaction was done for the purpose of converting underwriting losses into investment losses. I knew these facts at the time that I initiated, participated in and approved these two transactions…As a result of these transactions, AIG’s publicly-filed consolidated financial statements inaccurately portrayed the accounting, and thus the financial condition and performance for AIG’s loss reserves and underwriting income.”

The pundits had their say as well, split as to what it all meant.

“The taxpayers of New York State should be furious,” said the Wall Street Journal’s Paul Gigot, editorial page editor. “The $9 million fine amounts to pin money for Mr. Greenberg…It won’t come close to covering the state’s costs for pursuing the case over so many years…The real lessons of the Greenberg case start with the absurd lengths that progressive prosecutors will go to punish capitalists they don’t like,” Gigot said.

Mr. Greenberg’s lawyer David Bois called the deal with the Attorney General a “nuisance settlement,” according to the New York Times.

Others were less forgiving of Mr. Greenberg. “Just because he hasn’t pled guilty to fraud doesn’t mean he’s been vindicated,” David Schiff, a former insurance analyst who followed AIG, told the Times.

ILS Roars into 2017 as Maturities Loom

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Alternative capital markets continue to see robust activity and at least one major carrier is bullish for the future of insurance-linked securities (ILS), even as the added capacity continues to pressure rates overall.

The insurance-linked securities market saw $5.9 billion of issuance in 2016 and is off to a strong start in the first quarter of 2017 with more than $500 million of new issues already on the books for January, according to a new report from Swiss Re, which sees continued potential upside.

“Market conditions are extremely favorable at the moment and pipelines appear to be swelling, therefore it would not be entirely surprising to see the market challenge record issuance,” the company said in its new report, Insurance Linked Securities Market Update, Volume XXVI, February 2017.

The report also notes that the first half of 2017 will see the largest-ever amount of maturities for a half-year as some $6.4 billion in bonds mature, which could have the effect  of reducing the overall total market outstanding depending on how robust issuance continues to be during the first half of 2017.

“To put it in perspective, the approximately $6.4 billion of bonds set to mature in first half 2017 is larger than all but the four largest historical full-year issuances,” Swiss Re said in its report.

2016 was an unusual year for the ILS market in that the patterns of issuance by quarter differed from most years, according to the report.

“New issuance volumes were atypical,” said the report, with third quarter issuance larger for the first time than that of the second quarter, usually the busiest quarter for new issuance due to the U.S. wind season.

Further, fourth quarter issuance was the largest of the four quarterly totals. Total bonds outstanding remained at just around the record level of   billion, due largely to the outsized fourth-quarter levels of new issues.

In yet another market anomaly, the 20 new transactions in 2016 was the lowest number of new deals brought to market since 2009.

The average size of those deals, however, at approximately $300 million, was second only to 2014, which included the largest-ever catastrophe bond, the mammoth $1.5 billion Everglades Re from Citizens Property Insurance Corporation (Florida Citizens). The 2016 average deal size of $300 million was also 20% larger than that in 2015, according to Swiss Re.

U.S. wind and earthquake were as usual the most frequently secured perils, but they were joined by a slate of newer and diversifying perils including Canada earthquake, Europe windstorm, Japan typhoon and earthquake, Australia cyclone and earthquake, extreme morbidity, and for the first time since 2005, motor third party liability, according to the report.

The 2016 insurance-linked securities market also differed from other recent examples as it was momentarily roiled by the first Category 5 hurricane since Dean and Felix in 2007.

As Hurricane Matthew roared towards the Florida coast during the first days of October, it touched secondary trading, particularly among those bonds “focused in the state of Florida, especially Blue Halo, Laetere, First Coast and Everglades,” said the Swiss Re report.

“As we have observed in the past during hurricane events, notably during Hurricane Odile and Hurricane Patricia in 2014 and 2015 respectively, the ILS secondary market quickly responded to the threat of Hurricane Matthew in October,” according to the report. “Following the formation of the hurricane, bonds with large wind exposure in Florida and the Gulf traded at a significant discount as the hurricane approached the Florida coast.”

Trading quickly returned to normal, however, as Matthew eventually made landfall on Oct. 8 southeast of McClellanville, South Carolina, as a Category 1 hurricane with 75 mph winds.

Total alternative capital levels in the sector are now pegged at some $78 billion.