Viaticals add wrinkle to AIG woes

By Elliot Blair Smith, USA TODAY, May 27, 2005

Former AIG (AIG) boss Maurice Greenberg pushed the insurer into a controversial line of death benefits known as "viaticals" in late 2001 that grew into a $1 billion business for the insurer with the promise of big profits but also the possibility of bad publicity. It has delivered both.

The New York attorney general's office and the state's insurance superintendent alleged Thursday that AIG and its former CEO and chairman erected an elaborate fraud to avoid associating their names with the controversial death benefit, and to get around the accounting rule that requires the contracts to be booked initially at a paper loss.

Viaticals are settlement contracts that enable a life insurance policyholder to receive an immediate payment that is greater than he would get from its issuer by liquidating the policy but less than the payout at the time of his death. The purchaser of the viatical contract profits on the difference.

AIG's alleged fraud in this business is a new wrinkle in the continuing revelations about its aggressive accounting strategies.

The attorney general's lawsuit also added detail to its previous allegations that AIG potentially bilked New York and other states out of tens of millions of dollars in unpaid taxes on workers' compensation insurance. It allegedly did so by booking the business as general liability insurance rather than workers' compensation insurance, which is subject to special assessments.

The lawsuit contains confidential internal memorandums to Greenberg from company lawyers warning that the company's accounting for the workers' compensation premiums it underwrote violated state and federal law, putting the company and management at severe risk.

In April, the New York Department of Insurance launched an audit of AIG's workers' compensation insurance business to see if it had cheated the state. AIG said it had long since resolved any errors.

A statement issued Thursday by Greenberg's defense team, headed by lawyer David Boies, said it plans to "vigorously defend" the executive.

AIG said it was reviewing the complaint and cooperating with the attorney general. It remains one of the nation's largest workers' compensation insurance underwriters.

It allegedly also continues to invest in the viatical business through intermediary companies, though in March it paid the Alaska Division of Insurance $400,000 to settle a related complaint over its accounting for the business.

In April 2001, when AIG first considered investing in the death benefit, Greenberg wrote to a deputy overseeing the business: "It seems to me that anybody doing anything in the field stands the risk of adverse PR." He added, "I am uneasy about this," according to a copy of the memorandum contained in the New York lawsuit.

Nevertheless, Greenberg approved the program's launch later that year with the expectation it would invest $10 million the very first week. Company documents show that in less than two years, AIG turned a $76 million profit on $927 million invested.

According to the attorney general's complaint, AIG did so by creating a trust company known as Coventry Life Settlement Trust to acquire the life insurance contracts under its name. Coventry ostensibly was owned by an independent third party but controlled by AIG, the lawsuit says.

The lawsuit alleges that one AIG entity lent Coventry all of the money it required to invest in the viaticals while another issued "a fake surety policy" to Coventry, paid for with the borrowed money.

Coventry allegedly then filed false claims to AIG to fund its operations and split the profit with the insurer by purchasing more bogus insurance. The arrangement enabled AIG to book the investment as insurance, at a profit, rather than as a viatical, which must be booked at its cash surrender value.

Last year, the Alaska Division of Insurance ruled that the arrangement did not constitute insurance, after examining AIG's Alaskan subsidiary, American International Specialty Lines Insurance.

According to the New York lawsuit, AIG responded by shifting the business to a subsidiary in Bermuda, American International Reinsurance, which the lawsuit implicates in other allegedly illegal financial arrangements.

The New York lawsuit alleges that AIG "continues to account for this investment as if it were insurance." Alaskan insurance authorities were unavailable for comment. In the state's settlement agreement with AIG, it deemed improper the shift of Coventry's business from one subsidiary to another but said it would not contest the action.

The New York lawsuit alleges that AIG's alleged underpayment of taxes on its workers' compensation business came to the attention of Greenberg and other high-level managers as early as January 1992.

That is when former AIG general counsel Michael Joye warned Greenberg in a memorandum titled "Illegal Conduct" that "a federal criminal conviction would expose AIG to fines and penalties in the hundreds of millions of dollars and would jeopardize the careers of numerous longtime employees."

journal abstracts

Viatical settlements: effects on terminally ill patients

The Viatical Settlement Industry: They Bet on Your Life

Congress takes closer look at overhauling insurance regs

Life settlement training? Basic and homegrown.