Scandal stocks •  •  •  •  •  •

NEW YORK (MONEY Magazine) - In October, New York State attorney general Eliot Spitzer brought a suit against the largest U.S. insurance broker, Marsh & McLennan, charging that it essentially rigged bids on corporate insurance policies.

AIG was one of the companies that Spitzer claimed played along, and two of its employees pleaded guilty to criminal charges related to the case.

At about the same time, AIG also became the target of a federal investigation into insurance policies that allegedly helped corporations manipulate their earnings.

The Spitzer investigation is by far the more serious worry. The politically savvy prosecutor is not just chasing down isolated abuses. He's determined to alter the way the entire industry does business.

That's a huge threat to some firms -- notably Marsh & McLennan -- but on balance the risk to AIG looks manageable. AIG gets about 20 percent of its operating income from the sorts of policies that are under discussion. And the new scrutiny of brokerage practices will only partially reduce AIG's profits on that business.

The company is trying to get the problem out of the way as quickly as possible by promising to cooperate with Spitzer, and it has also agreed to a $126 million settlement with the Securities and Exchange Commission and the Department of Justice that completes the settlement of the other probes. That's not a painfully high price for a company with revenue of more than $95 billion a year and nearly $11 billion in net income.

Even after analysts reduced their earnings estimates, the stock trades at just 12.7 times expected profits. That price/earnings ratio is 20 percent below that of the broad market, even though Wall Street analysts expect AIG's earnings growth to outpace that of both the average blue chip and the property/casualty insurance industry.

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