The AIG Scandal 2005 started when AIG management was issuing a press release describing its third quarter earnings in 2000 to the public. The report showed that the premium of AIG was significantly increasing, while its loss reserves was decreasing by $59 million. However, according to many industry analysts, along with the positive earnings, AIG in fact should show an increase in its loss reserves as well. This caused the investors of AIG suspected that AIG was drawing down its loss reserves to boost its profits. The suspicious of the investors has unfortunately led to the falling of AIG stock price from $99.60 to $93.30 on New York Stock Exchange (NYSE).
In order to increase the loss reserves of AIG, Greenberg (the CEO of AIG) invited Ferguson (the CEO of General RE) to do an unusual deal by taking advantage of both subsidiary companies, which were NUFIC (the subsidiary of AIG) and CRD (the subsidiary of General RE). In the dealing, both parties agreed that CRD was to pay a total of $500 million to NUFIC, whereas NUFIC was to provide $600 million of reinsurance coverage. The payment of $500 million represented that two subsidiaries would enter into two contracts where each contract was paid in different times.
In the first
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Therefore, there were a few steps taken by Greenberg and Ferguson to make CRD paid $10 million without really paying. Firstly, General RE paid only $7.5 million to commute the existing contract with HSB. Secondly, General RE paid a premium of $9.1 million to NUFIC to reinsure the HSB losses which were just commuted. Thirdly, CRD paid its parent company, General RE a premium of $0.4 million for a fake reinsurance contract. Fourthly, GRD received a loss payment of $13 million from General RE. Finally, CRD paid $10 million to NUFIC. In the end, the combination of both General RE and CRD, they was totally left with $5.2 million to cover the