Under questioning by Assistant U.S. Attorney Raymond Patricco, Jay Morrow, an AIG senior vp and actuary, also noted what he described as a number of unusual features of the two-part loss portfolio transfer from a Gen Re unit to AIG in the fourth quarter of 2000 and the first quarter of 2001.

One of the deal’s unusual aspects, Mr. Morrow said, was that AIG was given “minimal information” about the underlying business being ceded by Gen Re. “There was no data at all. Without data, there was no way for me to analyze what the expected losses would be,” Mr. Morrow told jurors.

Mr. Morrow’s testimony came at the start of the third week of a trial of Mr. Milton and four former Gen Re executives for engineering the loss portfolio deal to help AIG artificially inflate its loss reserves by $500 million. The deal actually transferred no risk, and the defendants agreed that AIG would secretly refund a $10 million premium to Gen Re and pay the reinsurer a $5 million fee for entering the deal, prosecutors allege.

Charged with Mr. Milton are Ronald E. Ferguson, Gen Re’s former chief executive officer; Christopher P. Garand, former senior vp in charge of U.S. finite underwriting for Gen Re; Robert Graham, former senior vp and legal counsel for the reinsurer; and Elizabeth Monrad, Gen Re’s former chief financial officer.

Because the portfolio transfer was retrospective, AIG could not report the premium and reserves in its statutory financial statements, Mr. Morrow testified. Mr. Milton told Mr. Morrow in late 2000, though, that he was “pretty sure” that AIG would account for the deal as reinsurance��"allowing an increase in its reserves��"on financial reports prepared in accordance with generally accepted accounting principles, Mr. Morrow told jurors.

AIG did account for the portfolio transfer as reinsurance and carried the related reserves on its GAAP financial statements until 2004, Mr. Morrow said.

Another unusual aspect of the deal, Mr. Morrow testified, was that no paid claims were ever reported under the reinsurance agreement and the reserves never fluctuated over the years the deal was in force.

Questioned by Mr. Milton’s lawyer, Frederick P. Hafetz of Hafetz & Necheles in New York, Mr. Morrow conceded that it was possible the portfolio deal did include some risk transfer and that Mr. Milton never said it was a no-risk deal.

Mr. Morrow also said it was not necessarily improper for such a deal to be accounted for differently under statutory and GAAP rules.

Also today, former Gen Re Senior Vp Richard Napier completed his testimony after several days of cross-examination. On Friday, defense lawyers challenged Mr. Napier about different stories he has given about who first proposed that the portfolio deal be structured as a nonrisk transaction.

Mr. Napier��"who pleaded guilty to conspiracy and is cooperating with prosecutors��"earlier testified that Mr. Garand first proposed a no-risk deal and that Mr. Milton later OK’d the idea after checking with others at AIG.

In a June 2005 statement that accompanied his plea agreement, though, Mr. Napier said under oath that Mr. Ferguson told him that he discussed the idea of a nonrisk transaction with former AIG CEO Maurice R. Greenberg when Mr. Greenberg called to initiate the deal in October 2000.

“Has the government ripped up your plea agreement as a result of the perjury you committed in federal court?” demanded Michael Horowitz, a lawyer representing Mr. Ferguson with Cadwalader, Wickersham & Taft L.L.P. in Washington.

“Not yet,” Mr. Napier replied, adding that the statement in his plea agreement was not correct.

Jonathan Rich, a lawyer with Proskauer Rose L.L.P., representing Mr. Garand, accused Mr. Napier of telling several different versions of the story about the no-risk idea’s origin.

Citing government interviews of Mr. Napier starting in 2005, Mr. Rich asked Mr. Napier if he had not, at various times, said that the idea first came from Mr. Milton, Ms. Monrad and finally Mr. Garand.

Mr. Napier said he did not recall saying that the idea was Ms. Monrad’s, and that his earlier statement naming Mr. Milton as the idea’s originator was mistaken.

John Houldsworth, former CEO of Gen Re’s Cologne Re Dublin unit and another key government witness, is expected to begin his testimony Wednesday.

----------------------------------------------------------------------------------------------

Copyright © 2008 Crain Communications, Inc.

Presented by InsuranceHeadlines.com