AIG agrees to US$1.6-billion settlement with Spitzer, U.S. regulators

American International Group Inc. (AIG) has agreed to pay more than US$1.6 billion in restitution and penalties, and to adopt a series of business practice reforms in order to settle civil fraud charges with state and federal regulators, according to New York Attorney General, the New York Insurance Department, the Securities and Exchange Commission (SEC) and the United States Department of Justice.

In a recent statement, AIG acknowledged its misconduct, stating it was wrong to provide incorrect information to the investing public and regulators, and that it “regrets and apologizes” for its conduct. Since the U.S. regulators’ investigation began, AIG has also restated its earnings by more than US$3.5 billion.

Under the terms of the agreement, US$800 million will go to investors deceived by false financial statements, US$375 million to AIG policyholders harmed by bid-rigging activities and US$344 million to states harmed by AIG’s practices between 1986 and 1995 (involving workers’ compensation funds). In addition, New York and the SEC have each assessed US$100 million in penalties against the Company. Payment of the SEC’s penalty will go into the fund established for investors.

The settlement addresses many of the transactions described in New York’s lawsuit.

Among the reforms in the agreement, AIG will sharply curtail the use of “contingent commissions.” It will pay no contingent commissions in excess casualty lines of insurance through 2008. In addition, AIG has agreed to stop paying such commissions in any line of insurance in which companies with 65% of gross written premiums do not do so. The Company has also agreed to support legislation banning contingent commissions and requiring greater disclosure of compensation to brokers and agents.

AIG will be providing new disclosures about ranges of compensation paid to brokers and agents by insurance product on a special Web site later this year.

The agreement also provides for 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.

The agreement does not resolve the pending case against AIG’s former chairman and CEO, Maurice R. “Hank” Greenberg, and its former CFO Howard Smith.