AIG Settlements, $80 M To Justice $46 M To SEC

By Michael Ha

NU Online News Service, Nov. 24, 9:54 a.m. EST? American International Group said it has reached an agreement with the U.S. Justice Department and Securities and Exchange Commission to settle investigations of its non-traditional insurance product sales for a total of $120 million and the emplacment of an independent monitor at the company.[@@]

According to AIG, the agreement with the Justice Department Fraud Section concerns its transactions with PNC Bank in Pennsylvania and Brightpoint in Indiana. The company said AIG Financial Products will pay $80 million to the Justice Department that will foreclose future prosecutions.

AIG said that its arrangement with the SEC calls for a independent monitor , "an independent consultant", who will examine insurance product sales between 2000 and 2004 to determine if the companies involved violated accounting procedures or misreported results on their balance sheet.

The insurer said that the agreement with SEC involves no admission or denial of wrongdoing and involves the payment of $46 million in fees and interest on the PNC transactions

The settlement was well below one analyst estimate, which guessed that the company would have to pay more than $400 million.

AIG announced yesterday that it had agreed in principle to settle a U.S. Department of Justice investigation and said that the U.S. Securities and Exchange Commission staff has also agreed to recommend an AIG settlement offer to the SEC.

AIG said its settlement activities involved "issues arising from certain structured transactions with The PNC Financial Services Group, Brightpoint Inc., and related matters." Terms of the preliminary settlement were not disclosed.

Andrew Kligerman, from UBS Investment Research in New York, noted that while AIG didn't provide settlement details, the combined SEC and the Justice Department monetary penalties may total less than $450 million, "if the fines resemble those charged against PNC and in other recent deferred prosecution agreements."

Mr. Kligerman praised the AIG announcement as "early Thanksgiving" for AIG investors. "This is positive news as we believe it will likely remove some of the regulatory overhang on AIG," Mr. Kligerman said in his research note today.

AIG said last month that a federal grand jury in Indianapolis was investigating the company over activity that federal officials said allowed a mobile phone company to put out a misleading balance sheet in 1999.

The AIG dealings with Brightpoint Inc. of Plainfield, Ind., were the subject of a Securities Exchange Commission case, which the New York-based insurer settled for $10 million in 2003.

In its announcement, AIG said the U.S. Attorney for the Southern District of Indiana informed the company that it is a target in the grand jury probe over "non-traditional insurance" or "income-smoothing" products marketed by AIG.

AIG also said in a prior announcement that the SEC was looking into similar income-smoothing activity connected with transactions involving its AIG Financial Products Corp., PNC Bank and two unnamed insurance groups.

According to AIG, the grand jury in Indianapolis was looking at products "that were directed at creating agreements with businesses that would appear to be insurance and accounted for as insurance, but did not involve any actual risk transfer."

The AIG announcement comes as other companies have come under scrutiny for non-traditional products. In recent weeks both the SEC and New York attorney general have issued subpoenas for material related to these products. Companies that were served include Swiss Re, MBIA Inc., St. Paul Travelers, ACE Ltd., Platinum Underwriters Holdings, and Zurich Financial Services.

Fitch Ratings' Managing Director Julie Burke, commenting on the AIG announcement, said it's "a step in the right direction--the first step in putting this behind them." Ms. Burke was one of the authors of Fitch's special report last week on a non-traditional insurance product?finite risk reinsurance.

"The preliminary accords remove a bit of uncertainty over AIG. Whenever you've got action outstanding, that's always a concern. So this will put that to rest," said Ms. Burke.

But Ms. Burke also struck a note of caution and said the widening industry-wide investigation into non-traditional insurance products will continue as before, and that it's possible that even AIG is not quite out of trouble just yet.

She warned that what's been announced is "not a firm settlement yet." Ms. Burke said that there could potentially be more regulatory issues with AIG concerning its various insurance products.

"I am sure that the SEC and others investigated more than just Brightpoint Inc. and The PNC Financial Services Group," Ms. Burke said. "The fact that actions were brought against those deals, I don't know if that precludes them from looking at or ultimately pursuing other deals. So I think it's still uncertain at this point for AIG."

Ms. Burke said insurers should get used to the idea that the scrutiny into non-traditional products will continue and may even gain momentum going forward.

"Various regulators seem very focused on non-traditional insurance products, and so I think we will probably see more scrutiny going forward rather than less," she told National Underwriter.

"Regulators are kind of in a discovery process, to see if there is anything that needs to be further examined."

Ms. Burke noted, "These non-traditional insurance products have been around for a long time. They aren't necessarily illegal but there is an increased scrutiny on these products now."

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AIG Settlements, $80 M To Justice $46 M To SEC

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