American International Group Inc. may pay as much as $1.5 billion to settle civil investigations by state and federal authorities into an accounting scandal, The Wall Street Journal said Friday, citing unnamed people familiar with the matter.
New York Attorney General Eliot Spitzer and the New York State Insurance Department last May filed a civil suit against the largest U.S. insurance company and its former chief executive, Maurice “Hank” Greenberg, charging it with misleading investors by using improper accounting.
A settlement is likely in two or three weeks and would include a deal with the Securities and Exchange Commission, a source familiar with the matter told Reuters.
AIG spokesman Chris Winans declined to comment on the report, other than to say, “we continue to cooperate with all our regulators.”
Talks are ongoing, a spokesman for Spitzer acknowledged, but it is too early to “speculate” on the potential deals of a settlement. “We’re in no position to comment,” he said.
A settlement of $1.5 billion would nearly equal the $1.57 billion in losses from Hurricanes Katrina and Rita that AIG suffered in the third quarter after what was the most devastating and expensive hurricane season ever.
A settlement would put an end to the lawsuit against AIG, but would not include a deal with Greenberg or former AIG Chief Financial Officer Howard Smith, The Wall Street Journal said. Greenberg and Smith have denied any wrongdoing.
Settling for $1 billion would represent about 25 cents an AIG share after taxes, Wachovia Securities analyst John Hall said in a research note Friday, and 1 percent of AIG’s book value. The cost rises to 38 cents a share if the settlement is not deductible.
“We had been projecting AIG’s regulatory settlement would total roughly $550 million,” Hall said. “While considerable, we don’t believe the divergence between our expectation and the reported settlement will have a material effect on AIG’s financial position.”
AIG’s shares, which closed at $70.26 on Thursday, trade at a price-to-book ratio of about 2.04, which is relatively high for its sector. Since Feb 11, the trading day before, the company said it had been subpoenaed for products that might help companies smooth earnings, AIG’s shares have fallen about 4 percent, while the S&P insurance index has risen about 10 percent.
Any SEC settlement would have to be reviewed by the agency’s five commissioners later this month, The Journal said. Terms of the deal could change in that time, but parties are negotiating a payment of about $1.5 billion.
The SEC has not brought a lawsuit against AIG, but the federal regulatory agency is expected to file and settle civil charges on the same day, if a deal can be reached.
Spitzer and the New York State Insurance Department filed a civil lawsuit against AIG, Greenberg, and its former chief financial officer Howard Smith in May saying they committed fraud and manipulated the books.
The suit charged that Greenberg and Smith, who were ousted as the investigation picked up steam, took part in numerous fraudulent business deals that exaggerated the strength of AIG’s underwriting business and propped up its stock price.
In addition to a fine, a settlement is likely to make formal a number of corporate governance reforms, some of which AIG has already put in place, the paper said.
Citing people close to the AIG board, the report said AIG is weighing three new director candidates. While interim Chairman Frank Zarb has said he would stay in the job until the annual meeting in May, the newspaper said he could stay up to another six months if a successor is not in place.