New York AG (meaning either “attorney general” or “aspiring governor”) Eliot Spitzer and the Securities and Exchange Commission issued subpoenas yesterday to American International Group Inc. in connection with investigations into AIG’s earnings management techniques relating to certain types of insurance arrangements.
Inamuch as many non-traditional insurance products blend insurance with financing, Mr. Spitzer and other government regulators use Enron Corp.’s use of such products to hide billions in debt in off-balance sheet partnerships as justification for these investigations. Thus, regulators rationalize that such investigations are necessary to protect investors from being misled.
More specifically, the “alternative risk” transactions that regulators such as Mr. Spitzer are typically investigating these days in the insurance industry allow insurers to improve their balance sheets in the short run by shifting claims reserves, which cannot pass muster with accounting rules unless risk is also shifted. Thus, speculation is that Mr. Spitzer is investigating whether AIG entered into transactions that essentially allowed AIG to borrow another company’s reserves in order to make its reserves look more robust to investors than they really were.
Mr. Spitzer’s new probe into nontraditional insurance comes on the heels of the announcement last month of the issuance of subpoenas to Berkshire Hathaway Inc., Warren Buffett’s holding company. Those subpoenas sought documentation and information relating to loss-mitigation insurance products from Berkshire’s General Re insurance unit. Speculation is that Mr. Spitzer’s investigation into AIG may be connected to transactions it had with General Re.