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AIG Faces Lawsuit; Names AIA Head

Along with the burden of repaying the bailout money, American International Group Inc. (AIG - Analyst Report) agreed on Friday to pay $725 million to three Ohio public pension funds for the arrangement of a class action lawsuit, filed with Securities and Exchange Commission in October 2004 over accusations of inflating the claim reserves.

The claim was submitted to the Manhattan federal court on behalf of the Ohio Public Employees Retirement System, the State Teachers Retirement System of Ohio and the Ohio Police and Fire Pension Fund, collectively called the Ohio funds, opposed to AIG and its three executives.

The court case alleges that AIG fraudulently entered into a reinsurance transaction with another company to drive up its reported claims reserves. It also failed to disclose illegal contingent commission agreements with other insurance companies, including Marsh, Inc., a subsidiary of Marsh & McLennan Companies Inc. (MMC - Analyst Report).

Further, AIG got involved in bid-rigging and provided brokers with hollow quotes, which were not justified by the underwriters. As a result, AIG's earnings, income, and earnings per share were overstated.

AIG's lawsuit came in notice when the past New York Attorney General Eliot Spitzer filed a claim against MMC, alleging that the company was involved in bid-rigging and that it had illegal insurance contracts.

The investigation against AIG unveiled anti-competitive market division, accounting violations and stock price exploitation, which led to the resignation of the former CEO Mr. Greenberg. Plaintiffs suffered weighty losses from their holdings in AIG and are now expected to recover over $1 billion from AIG, making it the tenth largest class action settlement in US and the largest since the current financial crisis began in 2008. The settlement is, however, subject to court approval.

AIG's settlement of $725 million will be done in two steps. It will make an initial payment of $175 million within 10 days of preliminary court approval of the settlement. The remaining $550 million will be raised through one or more common stock offerings.

The Ohio funds have previously announced settlements of $72 million with General Reinsurance Corporation, $97.5 million with PricewaterhouseCoopers LLP and $115 million with Mr. Greenberg, other AIG executives and related corporate entities.

Additionally, AIG stated on Friday that Mark Tucker, the former CEO of UK's Prudential plc (PUK - Snapshot Report), is expected to lead AIG's Asian life-insurance unit, American International Assurance (AIA). He will take over from Mark Wilson, who is currently the CEO of AIA.

AIG had originally planned to sell off its AIA unit to Prudential for $35.5 billion. But Mr. Wilson did not permit to accept a lower price of $30.4 billion offered by Prudential. Although AIG's CEO Mr. Benmosche approved the lower price but he was opposed by AIG's board, which ended the deal.

It however fueled tensions between Mr. Benmosche and Harvey Golub, who later stepped down as the chairman on July 14. Mr. Wilson's replacement signals the similar reason, as AIG's CEO wants to speed up the disposal of assets and reimburse the bailout funds.

Now, the AIG board is determined to take AIA public in Hong Kong by October or November 2010. Consequently, AIG is optimistic about repaying $15 billion to $20 billion to the government from the open offering of AIA in Hong Kong. Mr. Wilson would continue to assist with AIA's stock offering until the end of the year.

Mr. Tucker was employed with Prudential for four years, and is now expected to help AIA provide a competitive threat in the region. AIA will benefit from his experience of running a big public company.

AIG, which had nearly collapsed, was bailed out in September 2008 with a $182.3 billion taxpayer-funded rescue package. AIG's board has been putting in rigorous efforts to completely settle up the government debt.

AIG has already made significant movement toward its plan and sold its American Life Insurance Co. to MetLife Inc. (MET - Analyst Report) for $15.5 billion in March 2010.

We believe that the new head of AIA will try to conclude the public offering within three to four months and focus on returning money to the US Treasury. AIG will also focus on paying back taxpayers and restoring the merit of its franchise after the litigation settlement.

However, such allegations and charges against the company will dampen investors' confidence in the stock and damage its reputation. Further, it will harm AIG's relationship with major clients, who have already become more cautious running with the firm. Additionally, such fines also dent the company's financials.

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