NEWARK, New Jersey (Bloomberg) - American International Group Inc. (AIG) bypassed its normal risk review in what prosecutors say was a sham transaction to inflate loss reserves by $500 million, a witness testified at the trial of five insurance executives.

AIG vice-president Jay Morrow said he normally gets 50 to 100 pages of data on deals to analyse risk and set premiums. He got no such information when his company agreed to reinsure $600 million in policies from General Reinsurance Corp., he said. General Re agreed to pay $500 million in premiums, which AIG booked as reserves. Prosecutors said a secret side deal removed risk from the transaction and aided phony accounting at AIG.

"There was no data at all," Mr. Morrow told federal jurors today in Hartford, Connecticut, where the trial of the five executives is in its third week. "There was no way for me to analyze" the risk, he said.

Four ex-General Re executives, including former CEO Ronald Ferguson, are on trial with AIG's former head of reinsurance, Christian Milton.

Assistant US Attorney Raymond Patricco asked Morrow, an actuary with 27 years experience at AIG, "In your experience, have you ever seen another deal where this data was not kept in an AIG underwriting file?", Mr. Morrow said no.

Mr. Morrow said he asked Mr. Milton for the data in December 2000.

"He indicated that he did not have the data and was not able to keep the data," Mr. Morrow said. He said Mr. Milton did the underwriting on the deal.

Mr. Morrow testified that Mr. Milton also told him that AIG, the world's largest insurer by assets, was not expecting losses on the deal.

Prosecutors said AIG initiated the transaction after analysts criticised the company for reducing loss reserves by $59 million in the third quarter of 2000 as premiums grew.

On cross-examination, Mr. Morrow acknowledged that he was unaware that Mr. Milton had communicated financial data about the deal to AIG's accounting department. Mr. Morrow also said Mr. Milton never told him that the deal was a no-risk transaction.

Mr. Morrow's testimony followed that of former General Re vice-president Richard Napier, a government witness who pleaded guilty to conspiring to abet false accounting at AIG.

The government's other key witness, former General Re executive John Houldsworth, is expected to testify this week. Mr. Houldsworth also pleaded guilty to conspiracy and is cooperating with prosecutors.

Mr. Ferguson, 66, and Mr. Milton, 60, are on trial with former General Re finance chief Elizabeth Monrad, 53; Christopher Garand, 60, a former senior vice-president; and Robert Graham, 59, a former assistant general counsel.

AIG reversed the reinsurance transaction and agreed in 2006 to pay $1.64 billion to settle probes of sales and accounting practices that led to the ouster of CEO Maurice "Hank" Greenberg. He is not charged with a crime and denies any knowledge of an improper transaction.

General Re is owned by Omaha, Nebraska-based Berkshire Hathaway Inc., whose chairman is billionaire Warren Buffett, 77. He has not been charged with wrongdoing and denies any knowledge of improper dealings.