American International Group Inc. has reached tentative agreements with the Justice Department and the Securities and Exchange Commission to settle investigations into its sale of "income smoothing" insurance to two companies that may have used the products to mislead investors, the insurance giant said yesterday.
AIG's official statement did not outline the terms of the proposed deals. One would end the SEC's probe of an AIG subsidiary's transactions with PNC Financial Services Group Inc., a Pittsburgh bank holding company. Last year PNC paid $115 million to settle allegations that it had inflated its 2001 profits by using insurance to shift $762 million in bad loans and investments off its books.
New York-based AIG has already paid the SEC $10 million to end the commission's civil fraud investigation of a similar deal with Brightpoint Inc., an Indiana cell phone distributor.
AIG said yesterday that its "agreement in principle" with the Justice Department covers its dealings with PNC as well as Brightpoint. It was not clear yesterday whether the Justice Department settlement involves a separate payment.
The twin investigations of AIG are part of an industry-wide probe of the use of "nontraditional" or "finite" insurance to smooth out volatile corporate earnings. Under the contracts, which have been in vogue for a decade, a company pays the carrier a premium and then can file a claim if its earnings fall below a predetermined range. But regulators, including the SEC and New York Attorney General Eliot L. Spitzer, have become concerned in recent years that the arrangements are not true insurance -- where the insurer takes on risk in exchange for premiums -- but rather a loan by the company to the insurance carrier that will eventually be repaid. Regulators are concerned the deals can mislead investors by making it appear corporate earnings are rising at a steady pace when they are not.
When AIG settled over Brightpoint, SEC enforcement chief Stephen M. Cutler said the commission was committed to stamping out "so-called financial products that are, in reality, just vehicles to commit financial fraud." In addition to AIG, insurance carriers Ace Ltd., St. Paul Travelers Cos. and Swiss Re have disclosed receiving subpoenas in connection with the larger investigation.
Spokespeople for the SEC and the U.S. attorney's office in Indianapolis, which is spearheading the Justice Department inquiry, would not comment, citing official policies that prevent them from discussing settlements unless they are officially announced. Neither the five SEC commissioners nor the full Justice Department have approved AIG's settlement offer, the company statement said.
These settlements have no impact on a separate investigation by Spitzer's office into allegations that AIG underwriters colluded with insurance brokers to rig bids for corporate liability insurance. Two AIG executives have pleaded guilty to criminal charges and the carrier has said it is also trying to reach a settlement with Spitzer on that issue.
Joe Norton, an AIG spokesman, said he could not comment beyond the statement.
AIG shares closed at $64.20, up $1.35, or 2.15 percent. The company's stock is now up more than 15 percent from its 52-week low, set in late October, just before the firm said it was seeking to settle with the SEC and Spitzer.