AIG pays $1.64 billion to settle suitsPosted On: Feb. 9, 2006 12:00 AM CST
NEW YORKAmerican International Group Inc. has agreed to pay more than $1.6 billion and to change certain business practices to settle civil fraud charges with state and federal regulators.
The long-rumored settlement, announced Thursday, resolves a lawsuit brought against AIG last May by New York Attorney General Eliot Spitzer and New York State Insurance Superintendent Howard Mills, who charged that the insurer and its senior management engaged in sham business deals and papered over losses to boost AIG's financial results, among other allegations.
The agreement also ends probes related to bid-rigging and improper accounting for workers compensation business, among other things, and it resolves a complaint filed by the Securities and Exchange Commission that largely repeats the allegations outlined in the suit filed by Messrs. Spitzer and Mills. That complaint was simultaneously filed and settled today in a Manhattan federal court.Under the settlement terms, AIG's $1.64 billion payment will be apportioned among several parties.
About half of the sum$800 millionwill be used to pay restitution to shareholders who were misled by the company's accounting practices.
Another $375 million will be used to compensate AIG policyholder clients that may have been harmed by bid-rigging activities, and $344 million will be funneled to several state workers compensation funds for money owed due to several years of improperly booked premiums.
In addition, AIG will pay various penalties to authorities, including the SEC, which will contribute its share to the fund for shareholders.
Beyond paying the restitution and penalties, AIG agreed to revamp certain business practicesmost notably agreeing to halt the practice of paying contingent commissions on excess casualty insurance business at least through 2008.
AIG further agreed to halt paying the profit- and volume-based commissions in any line of insurance where 65% of overall gross written premiums for that line is written by insurers that do not pay such commissions.
AIG additionally said it will support legislation seeking to discontinue contingent commissions altogether and to provide enhanced transparency of compensation agreements to brokers and agents. No further information on such legislation was provided in the settlement agreement.
In addition, the insurer itself will provide new disclosures about ranges of compensation its pays through an online tool later this year.
AIG's settlement also includes "additional reinsurance reporting obligations by AIG to the Insurance Department and monitoring of financial reporting and corporate governance practices by the Insurance Department and the SEC," according to statements from the New York Insurance Department and Office of the Attorney General.
"These settlements are a major step forward in resolving the legal and regulatory issues facing AIG. We have already implemented a wide range of improvements in our accounting, financial reporting and corporate governance, and will continue to make enhancements in these areas. AIG is committed to business practices that provide transparency and fairness in the insurance markets," AIG President and Chief Executive Officer Martin J. Sullivan said in a statement.
Commenting on the settlement, Mr. Spitzer in a statement said: "AIG was and is a solid company that didn't need to cheat. It finds itself in this position solely because some senior managers thought it was acceptable to deceive the investing public and regulators. However, by changing management, implementing reforms and providing restitution to injured investors, customers and states, the company has placed itself on a path toward resurgence."
As a result of the settlement, AIG said it will take an aftertax charge of approximately $1.15 billion in the fourth quarter of 2005.
AIG's settlement does not extend to former Chairman Maurice R. Greenberg and former chief financial officer Howard I. Smith, who were also named as defendants in the suit filed by Messrs. Spitzer and Mills.
Messrs. Greenberg and Smith have denied any wrongdoing and have vowed to fight the allegations in court.