Risk Management

AIG Agrees to $1.6 Billion Settlement

The company will pay no contingent commissions in excess casualty lines of insurance through 2008.
Stephen TaubFebruary 9, 2006

As widely expected, American International Group (AIG) has agreed to pay more than $1.6 billion to settle charges of fraud, bid-rigging, and improper accounting.

The agreement was announced simultaneously by the New York State Attorney General, the New York Insurance Department, the Securities and Exchange Commission, the Department of Justice, and company officials.

Under the agreement, $800 million will go to investors deceived by false financial statements, $375 million will be awarded to AIG policyholders harmed by bid-rigging activities, and $344 million will go to states harmed by AIG’s practices related to workers’ compensation funds. In addition, New York State and the SEC have each assessed $100 million in penalties against the company. The SEC’s penalty will go into the fund for investors.

“AIG has today acknowledged that the company over a period of years intentionally misled investors, regulators, and policyholders about the company’s financial condition and operations,” said Howard Mills, state insurance superintendent.

As part of the settlement, AIG agreed to retain an independent consultant for three years. The consultant will conduct a review that will include the adequacy of AIG’s internal controls over financial reporting and the remediation plan that AIG has implemented as a result of its own internal review.

In addition, AIG will sharply curtail the use of “contingent commissions,” and will pay no contingent commissions in excess casualty lines of insurance through 2008. The company has also pledged to support legislation banning contingent commissions and requiring greater disclosure of compensation to brokers and agents.

AIG president and chief executive officer Martin J. Sullivan added: “It was important that we resolve these outstanding investigations by the DoJ, SEC, NYAG, and DoI. AIG has fully cooperated with these authorities throughout their investigations, and we will continue to do so.” He also noted that the company already has implemented a wide range of improvements in its accounting, financial reporting, and corporate governance.

“This important settlement arose out of our industrywide investigation into the misuse of finite insurance and reinsurance,” said Linda Chatman Thomsen, director of the SEC’s division of enforcement. “While this settlement concludes our investigation of AIG, our investigation continues with respect to others who may have participated in AIG’s securities laws violations.”

The deal does not resolve the pending case against the company’s former chairman and chief executive officer, Maurice R. “Hank” Greenberg, and its former chief financial officer, Howard Smith.