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In order to reach a settlement for the shortchanging of workers’ compensation pool, American International Group Inc. (AIG - Analyst Report) has agreed to pay over $16.8 million to the supervisory body in the Pennsylvania probe. The company was accused of underreporting its liabilities under the inter-company policyholder guarantees.

The penalty is touted to be the largest amount paid by any insurance company to the Pennsylvania Insurance Department. This sum is inclusive of an amount of $3.6 million owed to the Workers’ Compensation Security Fund, $4.6 million in premium taxes and assessments and $8.6 million in fines.

The penalty amount is part of a $146.5 million settlement reached with the U.S. regulators two years back wherein AIG was accused of understating the premium amount and thereby affecting its obligations towards the state pools. The amount is inclusive of $46.5 million in taxes and assessments and the balance in fines.

Our Take

Resolving such issues is a welcome as they lessen the company’s litigation overhang. Last year, the company proposed a payment of $450 million in order to settle the charge of underestimating the premium amount for workers compensation by almost 300%. Yet, the impact on its financials cannot be ignored either.

In fact, over the years, the company has been affected by ample lingering issues due to the disposing of its bad assets, litigations, judicial probes and regulatory limitations on its business. The reputation of the company has also been marred by such issues substantially.

Moreover, these issues are leading to an escalation in expenses and weighing on the proceeds from asset sales, which otherwise, could have been used for growth and debt repayment purposes.

AIG currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We also maintain our long term Neutral recommendation on its shares. The company’s closest peer Eastern Insurance Holdings, Inc. has a Zacks #1 Rank, which translates into a short-term Strong Buy rating.

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