HARRISBURG, Pa.—American International Group Inc.'s $100 million settlement with state insurance regulators over its alleged underreporting of workers compensation premiums relieves a long-term headache for the insurer, observers say.

Acting Pennsylvania Insurance Commissioner Robert L. Pratter announced the settlement on Dec. 22, under which AIG will pay about $46.5 million in taxes and assessments in addition to the $100 million settlement.

The $100 million will be divided among regulators in all 50 states and the District of Columbia.

Amounts range from $500,000, which 13 states and the District of Columbia will receive, to $15.6 million for California.

The multistate examination, which was led by regulators in Delaware, Florida, Indiana, Massachusetts, Minnesota, New York, Pennsylvania and Rhode Island, found noncompliance with rating, forms and financial reporting laws. Most significantly, according to the Pennsylvania Insurance Department's statement, it found that AIG misreported $2.12 billion in workers comp premiums as general commercial or automobile liability premiums.

The settlement must be approved by 35 of the remaining states and the District of Columbia by March 1, 2011, to be effective.

The agreement is also conditional upon settlements of AIG's pending litigation with insurer members of the workers compensation residual market and separate claims by insurance guaranty funds, according to the Pennsylvania Insurance Dept.

The residual market and guaranty fund claims arise from AIG's under reporting of workers comp insurance premium and its impact on the assessments charged others for the operation of the residual market and guaranty fund systems, according to the department.

In a statement, AIG said the examination focused on allegations of misconduct that occurred between 1975 and 1996, the same period that was the subject of a 2006 regulatory settlement between AIG and New York state (BI, Feb. 13, 2006).

“We are pleased that if this settlement becomes final, we will have resolved all remaining regulatory issues related to AIG's workers compensation premium reporting for our stakeholders,” AIG said in the statement.

Julie Burke, managing director at Fitch Ratings in Chicago, said the settlement brings “some certainty and closure” to an issue that has been “out there for a long time.”

—By Judy Greenwald