American International Group, Inc

Assignment on American International Group, Inc BY: ABC Date American International Group, Inc Introduction AIG is world’s largest insurance company providing financial services and insurance. It is engaged in insurance and other financial activities through its subsidies. It is performing activities in United States and abroad. It has 88 million customers and providing services in more than 130 countries. It has 64000 employees in 90 different countries. It has three businesses. Property consultancy, life insurance and united guaranty corporations are these three businesses. Property insurance provides insurance for commercial and institutional customers. Life insurance provides insurance for life and retirement plans. In 2014, it was ranked on 40th number among insurance companies. It market capitalization is 17.40 billion as per 2015. It was established in 1919 By Edwin Cornelius Vander Starr as general insurance agency with the name of AAU American Asiatic Underwriter. In 1922, it expanded its branches in Malaysia, Indonesia, Philippines, south Asia and China. It opened first branch in United States in1926 with the name of America International Underwriters Corporation. In 1930, it opened branch in Cuba. It entered in Germany and Japan after world war two. From 1940-1950 it expanded in Italy, United Kingdom and France. It acquired Globe & Rutgers Fire insurance company in 1952. In 1970, company faced political challenges. It further expanded business by providing insurance for pollution liability and risk of politics. Its shares were first listed on New York stock exchange in 1984. It acquired American General Corporation in 2000. In 2005, company engaged in accounting scandal and enrolled by Security and exchange commission. Penalty of 1.6 million was imposed by attorney general of New York. ALLEGATION SUMMARY AND CHARGES Commissioner claimed that AIG has been involved in sham transaction from 2000 to 2005. He said that financial statements were falsified by company materially. Company structured sham transactions with Gen Re. in fourth quarter of 2000. $500 million was added in balance sheet as lose reserves. In 2005, AIG accepted that by restating transactions shareholders equity would reduce by 2.7%. Stocks were disturbed by AIG during period of fraud. In 2003, $10 million civil penalty was imposed by commissioner to enabling bright Inc for preparation of false statements. In November 2004, $126 million penalty was imposed on company for concealing its under performing loans from balance sheet. CITATION Gre10 \l 1033 (Greider, 2010)Facts After commissioner order of internal investigation in February 2005, AIG conducted investigation from March to May in 2005. In March, CEO took retirements from company and CFO took leaves. In May 2005, AIG completed its internal review and after restatement of financial statement, it announced that shareholder equity would reduce by $2.26 billion. It was summarized in restatement that transactions were recorded improperly. Two sham reinsurance transactions were performed by Gen Re and AIG. These transactions included paying reinsurance premium of $500 million by Gen Re. Other transaction was of $500 for reinsuring risk by AIG. CITATION blo05 \l 1033 (bloomberg.COM)NEED OF SCRUTINY In 2001 SEC recognize that AIG has created bogus transaction with the help of its client company. It ordered internal investigation. In 2003, $10 million was settled with commissioner. Federal Grant jury conducted investigation in 2004. Compliant of big rigging filed against AIG in 2004. Attack of federal authorities In February 2006, SEC filed case against AIG in district court of United States. The case was not related with accounting rules violation. Case included two companies Gen Re and AIG for structuring transactions without economic substances. Violation of 16 courts implied on company. Conspiracr, security frauds, false statement and mail fraud were included in violation. Company paid charges of $126 million. Penalty was imposed as $48 and $40 million. CEO of company was required to par $115 million for defeating shareholders. Legal charges were $150 million. CITATION sec06 \l 1033 (SEC)Calculation of Manipulated of transactions In the end of 2000 and start of 2001, AIG announced increase in premium and reduction in reserves by $59 million. Share prices were reduced by 6%, from $99.37 to $93.31. Ferguson was called by CEO of AIG, Greenberg. It was planned by CEO with the help of Ferguson to transfer $500 million loss in reserves in balance sheet. In two transactions, loss was transferred. First transaction In 2000, $250 million having cap of $300 million Second transaction In 2001, $250 million having cap of $300 million For performance of deal, $5 million was provided to Gen Re. it was settled that premium would be paid by Gen Re in two transactions amounting $250 million each. For these sham transactions, AIG used accounting of reinsurance while Gen Re used accounting of deposit. Statutory requirement of North America requires disclosure of reserve and premium related with transactions of reinsurance. Foreign subsidiary of Gen RE does not require filling U.S reports. Paper trail was used for presenting deal with Gen Re held liable for $500 million without paying any amount. CITATION key05 \l 1033 (kay)Announcement of deal Announcement of deal was made. Assets were categorized into two parts received premium and receivable premium. Assetsliabilities Premium received=$10 millionAdditional reserves=$500 million Premium receivable=$490 million Premium received and receivable was added up to make $500 million. AIG loss reserves 2000 4th quarter Reported (million) Contract (million) Actual (million) 2001 1st quarter $106 -$205 -$144 $63 -$205 -$187 The picture created by AIG looked good and investors were happy that reserves are increased by$106 million. They made judgment on behalf of financial statements and made investments in stocks. $31.8 million was payable by Gen Re to AIG. $7.5 million were paid by Gen RE as premium to HSB. It further paid $9.1 million for reinsuring losses of HSB. For sham contract of reinsurance, CRD pays $0.4 million to Gen Re and received loss payment. Loss payment was amounting $13 million. LPT premium was paid by CRD to AIG amounting $10 million. Gen Re and CRD were left with fees of $5.2 million. Overall summary of round cash game is given below. Gen Re= $31.8 - $ 7.5 - $9.1 + $0.4- $13.0 = $2.6Million CRD= - $0.4 + $13.0 - $10.0 = $2.6Million Gen Re was left with $ 2.6 million and CRD too was left with balance of $2.6 million. Regulations for accounting information and records Rule 10-b 21 and 13-b 21 states that misleading information should not be provided in financial statements and falsification of financial statement is prohibited by rule. No risk deal Transactions involved two contracts. First contract was having maturity date of December 2000. Second contract was having maturity date of March 2001. CRD was reinsured by National Union for losses not exceeding $600 million. Gen Re was liable for $500 premium in exchange of consideration. It was known by both executives that transaction involves no risk. In other words, it was riskless transaction. It was reflected on face of agreement that national union would pay $600 million of risk that was only $100 million in true sense, as it would receive $500 million in premium. In real sense, there was no risk associated with National Union and no premium liability was associated with CRD. From total amount of $500 million, $490 were on basis of withheld. CRD would retain this $490million and nothing would be paid. AIG took aside $10 million as prefunded amount that CRD was obliged to pay. Contract did not reflect this portion. It is concluded from above game that no one will gain or loss in this contract. Only fees of $5 were given to Gen Re for acceptance of deal and manipulating financial statements. CITATION Spi09 \l 1033 (Spitzer)Addition of loss reserves in financial statements Announcement of agreement was made by AIG. It was reflected in transaction that risk of Gen Re is transferred towards AIG. Only executives of both companies know that no risk is transferred. it falsely increased loss reserves by$250 million. Premium was increased by 4250 million in financial statements. Impact of scandal This scandal affected company. Investors lost their interest in companies. Company paid fine for misleading investors. It also affects government of United States as government was un aware of fraud. Government owned more than 80% shares of company so it was alarming for government. Government regulations related with accounting transaction pointed out. Risk of public increased after scandal. Company behaves unethically and lost trust of public. Conclusion AIG increased loss reserves in balance sheet by providing investors wrong picture of financial statement. With the help of Gen RE, it created two sham transactions that were having no economic substances. CEO and CFO of AIG were two main players in this scandal. After manipulation in accounts from 2000-2005, in 2006 AIG was held liable for penalty of $1.64 million. It settled $10 million penalty with SEC in 2003. Total fraud was having value of $3.9 million. It included bid rigging, stock price and accounting statement manipulation. After receiving order of investigation from SEC, AIG announced decrease in shareholders equity by $2.26 billion. This scandal affected employees, government, public as well as company. CEO and CFO were fired and company paid $115 million for settling shareholders claim. It badly affected government because it was owned 80% by government. They lost rules by doing improper transactions. This scandal effected people involved in other insurance companies and having insurance. It badly affected employees of company and employees feel insecure for their position in company. Company further asked employees to buy shares and contribute for sustainability of company. This was world’s largest insurance company and it affected government regulations and SEC regulations. Interest of public was affected. People involved in insurance contract with other companies also lost their interest. Recommendation It is important for SEC to implement strategies to reduce frauds in organizations. Yearly audit of big companies should perform by SEC to minimize risk of fraud. Company should keep eye on top employees. Closer track of accounts is necessary to investigate fraudulent activity. References BIBLIOGRAPHY \l 1033 bloomberg.COM. (n.d.). AIG: What Went Wrong. Retrieved APRIL 2005, from BLOOMBERG USINESS. Greider, w. (2010, april). The AIG Bailout Scandal. Retrieved from the nation: http://www.thenation.com/article/153929/aig-bailout-scandal# kay, j. (n.d.). Top insurance company mired in allegations of accounting fraud. Retrieved march 24, 2005, from WORLD SOCIAlist web site: https://www.wsws.org/en/articles/2005/03/aig-m24.html SEC. (n.d.). AAER. Retrieved FEBRUARY 2006, from SEC. Spitzer, E. (n.d.). the Real AIG Scandal. Retrieved march 18, 2009, from 911 truth.org: http://www.911truth.org/article.php?story=20090318180726341

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