Category Archives: Financial Crisis

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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.

Can ORSA Work For All Businesses?

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In addition to impacting the way countless organizations conduct business, the 2008 financial crisis was an awakening for regulators charged with reviewing and setting the rules that shape the way organizations assume risk. Insurance, perhaps the riskiest business of them all, did not go unscathed.

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Not only are insurers responsible for managing their own internal risks, but careful calculations and guidelines are built into their business models to ensure that the risks fall within set parameters.

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Regulators will argue, however, that this wasn’t always the case.

Own Risk Solvency Assessment (ORSA) was adopted and now serves as an internal process for insurers to assess their risk management processes and make sure that, under severe scenarios, they remains solvent.

U.S. insurers required to perform an ORSA must file a confidential summary report with their lead state’s department of insurance.  The assessment aims to demonstrate and document the insurer’s ability to:

  • Withstand financial and economic stress with a quantitative and qualitative assessment of exposures
  • Effectively apply enterprise risk management (ERM) to support decisions
  • Provide insights and assurance to external stakeholders

While ORSA is requirement for insurers, a new study by RIMS and the Property Casualty Insurers Association, Communicating the Value of Enterprise Risk Management: The Benefits of Developing an Own Risk and Solvency Assessment Report, maintains that ORSA can be used for all organizations looking to strengthen their ERM function.

According to the report:

Whether or not required by regulation or standard-setting bodies, documenting the following internal practices is a worthwhile endeavor for any company in any sector to utilize in their goal to preserve and create value:

  • Enterprise risk management capabilities

  • A solid understanding of the risks that can occur at catastrophic levels related to the chosen strategy

  • Validation that the entity has adequately considered such risks and has plans in place to address those risks and remain viable.

The connection between the ORSA regulation imposed on insurers and the development of an ERM program within an organization outside of the insurance industry is apparent.

ORSA and ERM both require the organization to strengthen communication between business functions. Breaking down those silos are key to uncovering business risk, but perhaps more importantly, is the interconnectedness of those risks.

Secondly, similar to ERM in non-insurance companies, ORSA requires risk management to document its findings, processes and strategies. Such documentation allows for the process of managing risks to be effectively communicated to operations, senior leadership, regulators and stakeholders. Additionally, documentation enhances monitoring efforts, the ability to make changes to the program and is a benefit that allows ERM to reach a “repeatable” maturity level as defined by the RIMS Risk Maturity Model.

Developing an ERM program has become a priority for many organizations as senior leaders recognize the value of having their entire organization thinking, talking and incorporating risk management into their work. Examining and implementing ORSA strategies can be an effective way for risk professionals to get their ERM program off the ground and operational.

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Brexit Creates Turmoil

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Brexit
Britain’s unexpected vote to leave the European Union has left many unanswered questions, some of which may not be resolved for years as Britain and the EU iron out the details of the split. Meanwhile, in the wake of the announcement, oil prices dropped, global stock markets have taken a significant hit, the Euro and the British Pound plunged.

Fitch said today that overall, Britain’s decision is broadly “credit negative” for most U.K. sectors.

During a Eurasia Group conference call this morning, Europe associate Charles Lichfield asserted, “The U.K. has lost relevance to Washington.” In the past, he explained, the United States has worked closely with Britain on many European issues, but will now bolster relations with Germany, Spain and other countries, bypassing Britain.

According to the Wall Street Journal:

The move triggered a selloff across markets dragging down the British pound, commodities and shares in U.K.-listed banks, utilities and oil-and gas companies including BP PLC and Royal Dutch Shell PLC, whose shares fell 6.2% and 4.9%, respectively.

A spokesman for Shell said the company will work with the U.K. government and European institutions on navigating a British exit from the EU, known as Brexit. The Bank of England announced it was prepared to use its $371.85 billion war chest to stabilize the market.

The uncertainty in the marketplace after the referendum could hurt oil companies by exacerbating the already-challenging environment created by lower oil prices.

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In the aftermath of the vote, U.K. Prime Minister David Cameron announced plans to step down.

The referendum is expected to jolt the U.S. economy, likely driving up the value of the dollar.

Members of the insurance industry and their buyers are wondering what the impact on Lloyd’s and the London market will be. So far, Lloyd’s has maintained a cool façade.

“I am confident that Lloyd’s will stay at the center of the global specialist insurance and reinsurance sector, and I look forward to continuing our valuable relationship with our European partners,” Chairman John Nelson said in a statement on the vote. “For the next two years our business is unchanged.

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Lloyd’s has a well prepared contingency plan in place and Lloyd’s will be fully equipped to operate in the new environment.”

The Financial Times, however, expects the insurance sector to be “hit hard” by the vote and that the impact could have a negative impact on the London market.

According to the FT, “One of the big attractions to insurers of operating via Lloyd’s is that it has passporting rights into the EU. Many of the insurers who do business there at the moment say that after a Brexit they will simply shift some of their business to subsidiaries within the EU, bypassing the Lloyd’s market in the process.”

Brexit is also expected to have more impact on the life insurance market than property/casualty. “The impact on the non-life insurers was more muted, given that many of them have little cross-border business and hold very conservative investment portfolios.

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Shares in Direct Line, RSA and Admiral were all down in mid-single digits,” according to the FT.

Companies Report Increased Optimism and Risk Appetite

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Heading into the fourth quarter, private companies reported higher profitability, greater risk appetite, and notable plans for growth in 2015, according to a survey from PwC.

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The Q3 “Trendsetter Barometer” reports that more companies are seeing profitability increases, and optimism about the U.S. economy rose to 63%—the highest level since early 2011.

The study’s most notable findings include:

PwC Trendsetter Barometer

About 80% of companies expect revenue growth in 2015, with almost a third projecting double-digit change. When planning for that success, the biggest anticipated challenges reported will include direct hits to the supply chain and the workforce:

PwC Growth