American International Group Inc. yesterday announced a $1.64 billion settlement with state and federal regulators and an additional $1.69 billion pre-tax charge against earnings for the fourth quarter of 2005 following a review of its loss reserves by an independent consultant.
The settlement with the New York attorney general and state Insurance Department as well as the U.S. Securities and Exchange Commission and the Department of Justice, resolves pending litigation and investigations into fraud, bid-rigging, and improper accounting.
The credit rating of the insurance giant and its subsidiaries — which provide guaranteed investment contracts to municipal housing bond issuers — will not be affected, all three major rating agencies said yesterday. AIG provides an estimated $20 billion in GICs to reinvest mortgage payments and guarantee a rate of return sufficient to cover debt service requirements for municipal issuers.
The New York-based insurer, which was previously rated triple-A, was hit with a series of downgrades after it was reported last year that regulators were investigating its business practices, leading to a $2.7 billion earnings restatement last May.
Fitch Ratings said in a statement yesterday that it “views the financial effect of the settlement as a sizable but manageable figure for a company with AIG’s earnings profile and overall financial flexibility.” Fitch currently assigns AA-plus insurer financial strength ratings to the AIG subsidiaries it rates.
Standard & Poor’s said in a statement that it “expects the company to meet the cost of these items with its current liquidity resources, including short-term borrowings, which will reduce the company’s liquidity position for a period of time.”
However, the rating agency said AIG’s outlook remains negative due to other litigation, continuing weaknesses in its controls, and a lack of information over the deficiency in its loss reserves. Standard & Poor’s assigns a AA to the counterparty rating it uses to determine the value GICs provide to housing bonds.
Moody’s Investors Service rates AIG’s senior-unsecured rating — which it uses to assess GICs — as Aa2.
While condemning the insurer’s past actions, regulators praised reforms the insurer is making.
In a statement, Attorney General Eliot Spitzer blamed senior managers for deceiving the investing public and regulators. “However, by changing management, implementing reforms, and providing restitution to injured investors, customers, and states, the company has placed itself on a path toward resurgence,” Spitzer said.
“AIG is committed to business practices that provide transparency and fairness in the insurance markets,” president and chief executive officer Martin J. Sullivan said in a statement. “We have already implemented a wide range of improvements in our accounting, financial reporting, and corporate governance, and will continue to make enhancements in these areas.”
Under the settlement, $800 million will to go investors deceived by false financial statements, $375 million to AIG policyholders harmed by bid-rigging, and $344 million will go to states harmed by its practices involving workers’ compensation funds. New York and the SEC have also each assessed $100 million in penalties against AIG.
