Sucheta Dalal :UPDATE 6-AIG settles fraud charges for $1.64 bln
Sucheta Dalal

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UPDATE 6-AIG settles fraud charges for $1.64 bln  

February 15, 2006

By Ed Leefeldt

NEW YORK, Feb 9 (Reuters) - American International Group Inc. <AIG.N>, the world's largest insurer by market value, on Thursday agreed to pay $1.64 billion to settle charges of fraud, bid-rigging and improper accounting, the biggest regulatory settlement by a single company in U.S. history.


The settlement with New York Attorney General Eliot Spitzer and State Insurance Superintendent Howard Mills, the U.S. Securities and Exchange Commission and the Justice Department ends a long-running investigation of the company, and was widely anticipated.


It does not resolve pending cases against former AIG chief executive Maurice "Hank" Greenberg and former chief financial officer Howard Smith, who were forced out last spring. Both have denied any wrongdoing.


"AIG today is a better company for all that we have been through," said Martin Sullivan, who replaced Greenberg as chief executive.


The company will take a $1.15 billion after-tax charge for the fourth quarter of 2005 for the settlement. It also said it "regrets and apologizes" for its conduct, and said providing incorrect information to investors and regulators was "wrong."


In settling, Spitzer pointed the finger directly at Greenberg, who built AIG over nearly four decades, and Smith.


"There are some who continue to deny there was any wrongdoing at the company," the attorney general said in an interview in New York City. "I think the facts are overwhelming in establishing that -- from the highest levels of AIG -- there was an intent to misrepresent its financial condition."


A spokesman for Greenberg maintained that any suggestion the former CEO was involved in wrongdoing is false. A lawyer for Smith could not immediately be reached for comment.




Spitzer said AIG's new management has done a "spectacular" job of cooperating with investigators and instituting reforms.


The settlement tops the $850 million that Marsh & McLennan Cos. <MMC.N>, the insurance broker once run by Greenberg's son Jeffrey, agreed to pay to resolve bid-rigging accusations by Spitzer. It also tops the $750 million penalty that the SEC imposed against WorldCom Inc. for accounting fraud.


"This settlement removes the largest cloud overhanging the company," said Rob Haines, an analyst with CreditSights.


AIG shares rose 74 cents, or 1.1 percent, to close at $67.12. The shares have risen 34 percent from their 52-week low set last April 29, but remain 8 percent below their level about a year ago, before the company disclosed receiving subpoenas from Spitzer and the SEC.


AIG will pay $800 million to a fund for investors deceived by its false financial statements, including a $100 million SEC penalty.


Policyholders harmed by bid-rigging will receive $375 million. Another $344 million will go to states harmed by AIG's understating of workers' compensation premiums. New York fined AIG $100 million, and the Justice Department fined it $25 million.


AIG agreed not to pay contingent commissions for certain types of insurance, and said it will support legislation to end them. Such commissions involve brokers and insurers rewarding each other for steering business.


The penalties, along with a higher reserve for property and casualty losses, will reduce AIG's book value by less than 3 percent, UBS AG insurance analyst Andrew Kligerman said.


AIG also agreed to retain an independent consultant for three years to review internal controls and practices. Sullivan said naming a consultant is a "top priority" for the company.


Separately, AIG said it will take a $1.1 billion fourth-quarter charge to increase its loss reserves, and expects $550 million of charges and insurance losses for catastrophes including Hurricanes Katrina and Wilma.


On the conference call, AIG said it plans to report 2005 results on or before March 16. (Additional reporting by Jonathan Stempel and Joseph A. Giannone)







-- Sucheta Dalal