New York state regulators will announce plans Tuesday to hire an independent consultant to determine if giant insurer American International Group Inc. improperly booked premiums the company received for workers' compensation coverage to avoid payments into various workers' compensation funds.
The regulators allege AIG booked some workers' compensation premium as general-liability coverage, according to people familiar with the matter. The regulators believe the practice occurred through much of the 1990s, but was apparently discontinued, the people said. Internal AIG documents obtained by the regulators indicate the practice helped the firm save tens of millions annually, the people said. The authorities' interest in the matter was detailed this morning in The Wall Street Journal.
Investigators at the New York State Insurance Department and the New York Attorney General's office are seeking to determine if the undercounting took place despite complaints from some AIG staffers, the people said. Investigators have obtained a 1992 internal AIG legal memorandum they believe declares the then-ongoing practice to be improper or illegal, the people said. The regulators believe similar warnings were made years earlier, the people said.
AIG has said it is cooperating on all regulatory matters. One person familiar with the situation said Monday that if the regulators pursue the workers' compensation matter, AIG might contend that a statute of limitations applies. This person said the matter had been brought to the attention of regulators by AIG in the 1990s and that the practice was discontinued.
The focus on workers' compensation premium comes as state and federal regulators are probing an array of accounting matters at AIG. The investigations triggered the dismissal of AIG's chief financial officer, Howard I. Smith, and the retirement of longtime chairman and chief executive Maurice R. "Hank" Greenberg.
The latest development comes as a report by lawyers for AIG and its board raises serious questions about the integrity of AIG's financial-reporting systems, including checks and balances in the accounting process at the behemoth insurer, according to people knowledgeable about the matter.
The report into the company's accounting indicates that Messrs. Greenberg and Smith oversaw critical aspects of the company without certain financial and accounting controls in place to oversee their work, according to the knowledgeable people. Mr. Greenberg hasn't seen the draft report, according to one of his lawyers, but "looks forward to addressing the issues." Mr. Smith's lawyer couldn't be reached for comment late Monday.
The internal AIG report, more than 150 pages long, doesn't contain a specific red flag, but points to various ways that top management ran the company without controls, according to the people familiar with it. The report's authors note that a few employees declined to cooperate, leaving some gaps in the internal probe's findings, according to one of the people familiar with it.
Mr. Greenberg retired last month amid mounting regulatory scrutiny of AIG's accounting, particularly regarding the booking of complicated reinsurance transactions. Mr. Smith was dismissed last month after he indicated he would exercise his constitutional right to avoid potential self-incrimination during questioning by authorities; AIG has fired various executives it says have declined to help in the probes, which involve the New York attorney general, the New York Insurance Department, the Securities and Exchange Commission and the U.S. Department of Justice.
One of the transactions under investigation by authorities took place in 2000 with a unit of Berkshire Hathaway Inc., and others were with offshore reinsurance entities, among other matters. Last month, AIG acknowledged a range of problems and potential problems that could shave $1.77 billion, or 2%, off its book value. People familiar with the matter have said the eventual accounting adjustment could pass that mark, at least modestly.
The lawyers' report, which is expected to be finalized and shared with regulators this week, also is expected to include questionable transactions and accounting beyond those AIG disclosed in its news release last month, the people said. The report was prepared by lawyers at Simpson Thacher & Bartlett and Paul, Weiss, Rifkind, Wharton & Garrison.
--Theo Francis contributed to this article.
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