FINITE OR FINESSE PART ll

Richard Galant of Newsday:  Now, though, Bermuda faces a storm of a different kind. Bermuda-related companies are caught in the web of a wide-ranging investigation by spitzer and the securities and exchange commission.” So, if everything seemed board-room, offshore, and not relevant, just consider these easy-to-see connected realities.

            Guilty pleas. So far, ten executives have entered guilty pleas. Four from AIG

, three from M&M, one from ACE. So 80% of the guilty pleas involve big insurance entities with a major presence in Bermuda.

            Marsh&McLennan, a major player in Bermuda’s insurance world, has already paid a penalty of $850m and cut its global staff. Jeffrey Greenberg [son of Maurice ‘Hank’ Greenberg] was required to ‘step down’ as M&M’s CEO. Insurance broker AON has paid a $190m penalty. That’s $1.04bn, so far, in penalties.

            AIG, the biggest player in Bermuda’s insurance world, is under investigation for questionable accounting practices that may go back fourteen years. AIG has admitted to ‘irregularities’. In its 30th April 10-K, AIG will admit to a new accounting loss of $1.77bn. To avoid harsh legal action, Maurice ‘Hank’ Greenberg [Jeffrey and Evan’s father] had to step down as CEO. Michael Murphy and four other Bermuda based AIG executives have made hasty departures.

            ACE, highly visible in Bermuda’s insurance world, has had 43 subpoenas – so far. ACE’s CEO is Evan Greenberg [Maurice’s son and Jeffrey’s brother]. In connection with Spitzer’s investigation, ACE has fired two top execs and, like AIG, remains under investigation.

            PwC [PricewaterhouseCoopers], the Bermuda-based global accounting and audit firm, profitably audited AIG’s books for thirty years. Accusations of accounting legerdemain, especially if they stick, have the potential to place PwC in the same embarrassing position as Arthur Andersen was with ENRON.

            Finite Risk Insurance. Bermuda leads in the development and sale of this new insurance specialty. However, this particular insurance product, as it is actually applied in the marketplace, is causing accounting headaches and difficulties and is upsetting some investors and oversight agencies.

            Investigations. USA state investigators, the SEC, and the Federal Justice Department, are investigating everything thing I’ve written about. They are now probing deeper and wider, and are questioning even more insurers, transactions, and accounting statements. ‘Hank’ Greenberg, under increasing pressure, invoked his Fifth Amendment rights and was less cooperative than Warren Buffett.

            Ultimately, what does this mean to us – to you – here in our Bermuda?

            It means that pressure on AIG will continue. AIG and its subsidiaries may downsize as they ‘adjust’ and ‘restate’ dollar numbers in order to ‘correctly state’ true values. AIG could slide from its current position as the world’s biggest insurance entity.  The web of inter-connected companies that do huge slices of their business with AIG could all have reduced incomes, lower profitability, and lower levels of employment. Even if, because of the magnitude of difference, AIG remains as the world’s largest insurer, it is still likely to emerge a leaner entity. 

            With ‘finite risk insurance’ taking this major hit, Bermuda’s whole insurance industry could shrink. Bermuda could find that employment of both local and permit workers could fall.

            In the global elephant fight, the Irish are happily knocking back extra Guinnesses as they contemplate a possible flight of ‘insurance’ capital from reputationally damaged Bermuda to ‘cleaner’ Ireland.           

            Already, some Irish websites are touting that Ireland has no term limits on work permits, is “a couple of times cheaper” than Bermuda, has more affordable housing, a good family environment, and more parking. Ireland does admit though, that it doesn’t have Bermuda’s warm and sunny climate.

            Lastly, regulatory agencies in the EU are planning to apply a new set of insurance regulations for all insurers and insurance transactions in the EU. The New York Times reports: “A European Union directive currently under discussion and scheduled to take effect next year [2006] will establish a regulatory framework spanning the 25-country union.”

            As a dependent territory of the UK – now the seventh state in the EU – it’s possible that under our current constitutional arrangement, these regulations can be made to apply to us in Bermuda. If there is any kind of dispute in this matter, then, under current constitutional arrangements, resolution may well lie within the EU’s supranational judicial system, and not within our own island system.

            On 19 November 2004, I wrote: “The stronger of Bermuda’s two national pillars is now under attack and the assaulting forces are still forming-up and massing their resources. The main assault is yet to come.”

            Four and a half months later, the main assault has begun.

 

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