American International Group Inc. (AIG) has agreed to pay $146.5 million in fines and additional taxes to state insurance regulators for alleged under-reporting of premiums to states more than a decade ago.

The company will pay $100 million in penalties to all 50 states and the District of Columbia and another $46.5 million in additional taxes and assessments to eight state insurance departments that led the examination.

The deal resolves a multi-state probe that examined whether AIG violated premium reporting rules governing workers compensation insurance from 1985 to 1996. The misreporting had the effect of lowering the premium taxes and premium-based assessments AIG paid, according to regulators.

The settlement was announced by acting Pennsylvania Insurance Commissioner Robert L. Pratter on behalf of all states.

"Accurate company financial data is an essential ingredient of proper insurance regulation," said Pratter. "AIG will pay a significant penalty, $100 million divided among the participating states, to resolve violations of insurance laws. This reflects the seriousness of the violations in this instance over a sustained period of time –primarily prior to 1996 – by AIG's prior senior management."

Under the terms of the settlement, AIG will:

• Pay a $100 million fine to be apportioned among all the participating states;
• Pay approximately $46.5 million in additional taxes and assessments;
• Enter into a compliance plan containing agreed-upon specific steps and standards for evaluating AIG's ongoing compliance with workers compensation insurance rating and reporting requirements;
• Submit to periodic internal and state monitoring and a confirmatory examination at the end of 24 months; and
• Agree to pay a contingent potential fine of up to $150 million if AIG fails to meet the terms of the compliance plan.

The AIG insurance companies will be filing restated financial statements by March 1, 2011 reflecting the reallocation of approximately $2.1 billion of premium.

The multi-state examination was led by the states of Delaware, Florida, Indiana, Massachusetts, Minnesota, New York, Pennsylvania and Rhode Island. All the other states and the District of Columbia are participating in the settlement.

The scope of the examination was AIG's financial reporting of workers compensation insurance for the years 1985 through 1996. The examination found AIG did not comply with rating, forms and financial reporting laws. It found that AIG misreported $2.12 billion of workers compensation premium that was reported instead as general or commercial automobile liability premium.

In early 2006, AIG reached a $343 million settlement with New York and other states' attorneys general for underpayment of workers compensation premiums taxes and residual market assessments. AIG was found to have improperly booked workers' compensation premiums as general liability premiums from at least 1985 through 1996. One effect was to reduce AIG's taxes and residual market payments for those years. That 2006 deal was part of an overall $1.6 billion settlement of fraud, bid-rigging and improper accounting charges with the Securities and Exchange Commission and New York officials.

The alleged misreporting occurred under previous AIG management. Pratter said AIG's current chief executive officer and board of directors cooperated fully throughout the examination.

This settlement is conditioned upon its adoption by at least 35 of the remaining 43 states and the District of Columbia by March 1, 2011.

AIG said it hopes states go along.

"We are pleased that if this settlement becomes final, we will have resolved all remaining regulatory issues related to AIG's workers compensation premium reporting for our stakeholders,'' Joe Norton, company spokesman, said in a statement to Insurance Journal. "The settlement represents AIG's unwavering commitment to regulatory compliance and principled corporate governance."

State regulatory issues may be resolved, however, the agreement is also conditional upon settlements of lawsuits between AIG and some of its workers' compensation competitors over whether the residual markets and state guaranty funds whose assessments are based on reported premiums have been shortchanged by misreporting. A U.S. District Court judge in Chicago ruled in August, 2009 that the trade group National Council on Compensation Insurance Inc. (NCCI) did not have standing to sue for $1 billion on behalf of the residual markets but individual insurers have filed their own lawsuits and AIG has also sued other insurers.

AIG, which received a total of $182 million in government bailout funds, is progressing on its restructuring plan that will allow it pay back the government.