AIG Settles $146M Lawsuit - Analyst Blog

Recently, American International Group Inc. (AIG) negotiated with the insurance regulators and settled a multi-state workers compensation probe for $146.5 million. This comprises about $100 million in fines and other penalties to resolve claims and about $46.5 million in additional taxes and assessments.

The litigation was filed by the insurance regulators who alleged that AIG and its affiliates had deliberately reported more than $2 billion of its workers compensation premiums as general or commercial automobile liability premiums. Moreover, the the norms were violated quite a number of times between 1975 and 1996, which finally caught sight of the regulators. Accordingly, the $100 million fine money will be shared by all 50 states in the US.

Other terms of the settlement also require AIG and its affiliates, who were involved in providing inaccurate financial data, will have to file restated financial statements by March 1, 2011, to reflect the reallocation and re-adjustments of the defrauded premiums. Further, the new settlement requires approval from 35 of the 43 states by March 1, next year. As of now, only about eight states have agreed in the US, one of whom – Massachusetts – will receive $3.4 million dollars from this settlement.

AIG will now be monitored by insurance regulators for at least a couple of years, and any deceit or breach would require an additional fine of up to $150 million, among other charges. This introduces an extraordinary compliance risk for the company.

However, despite the crisis, the $338 million held by AIG in escrow at the end of the third quarter will help the company fund the new settlement fine and taxes.

In 2006, AIG had also paid charges of over $1 billion in a lawsuit by federal prosecutors and securities regulators and New York prosecutors and insurance officials over a range of issues, including the underpayment of taxes on workers compensation premiums.

Nevertheless, the settlement negotiation is expected to shed off most of the litigation burden from AIG's shoulders. This, in turn, will help the company focus on generating new operating efficiencies. AIG has already come a long way in restructuring its business in order to repay its $182 billion bailout loan that was taken by the US government during the peak of the financial crisis in 2008.

AIG's prime restructuring includes execution of the recapitalization plan, successful IPO of AIG's AIA Group Ltd. and asset disposals such as its ALICO unit to arch rival MetLife Inc. (MET) Japan-based AIG Star and AIG Edison to Prudential Financial Inc. (PRU) and AGF to Fortress Investment Group LLC (FIG). The company is also negotiating for its Nan Shan unit Taiwan, while also intending to vend its rail-car leasing wing, AIG Rail Service Inc.

Moreover, AIG's airplanes leasing unit, ILFC, is also posing recovery trends, thereby helping AIG regain its financial flexibility through several financial measures. After the repayment of $2 billion loan in October this year, ILFC also repaid $800 million to lenders last week, reported through a regulatory filing. The payment was made against the latest $2.5 billion credit agreement amendment so that the impairments charges recorded are not counted against the subsidiary in determining covenants.

 
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