American International Group will pay a record $1.64 billion tosettle state and federal charges of securities fraud, bid-riggingand failure to pay proper contributions to various state workers'compensation funds, state and federal regulators announcedtoday.

The settlement with New York Attorney General Eliot Spitzer, NewYork Insurance Superintendent Howard Mills and the Securities andExchange Commission also calls for changes in business practices bythe nation's largest insurer.

In its agreement, AIG agreed to cut back on the use ofcontingent commissions and will not pay them on excess casualtylines through 2008. Mr. Spitzer has charged that hidden,volume-based bonus commissions to brokers essentially served asinsurer kickbacks for steering business and incentives for riggingbids.

AIG also agreed to refrain from paying the commissions in anyline of business where competing companies with 65 percent of grosswritten premiums do not pay them. AIG said it will also supportlegislation to eliminate contingent commissions.

The company also agreed to retain an independent consultant forthree years to monitor AIG internal controls and a remediationplan.

Of the settlement money, regulators said $700 million will go toinvestors who were misled, $375 million to AIG policyholders hurtby bid-rigging and $344 million to the 50 states where AIG failedto make proper payments to workers' comp funds by underpayingpremium taxes and assessments.

New York and the SEC each assessed an additional $100 million inpenalties against the company, with the SEC fine going into thedefrauded investors' fund.

In addition, the U.S. Justice Department said the company hadagreed to pay $25 million to settle charges related to two impropertransactions designed to pump up its financial statements.

"Today's settlement sends a clear message to every publiclytraded corporation that 'hitting the numbers' must take a back seatto accurate financial reporting," said Acting U.S. Deputy AttorneyGeneral McNulty. "This settlement is a major step forward in ourefforts to strengthen the integrity of the investment marketplaceand our system of accountability."

In a statement acknowledging the misconduct, the company said itapologized for the activity that led to the civil suit brought byMr. Spitzer and Mr. Mills. "Providing incorrect information to theinvesting public and to regulators was wrong and is against thevalues of our current leadership and employees," AIG said.

AIG's agreement with Mr. Spitzer ends the case against thecompany but leaves Maurice Greenberg, the company's former chairmanand chief executive officer, and Howard Smith, AIG's former chieffinancial officer, still facing New York State civil fraudcharges.

Additionally the SEC investigation into the misuse of finitereinsurance to boost its balance sheet is continuing, as is itsprobe of others "who may have participated in AIG's securities lawsviolations," said Linda Chatman Thomsen, a representative of theSEC Enforcement Division.

In Alexandria, Va., the Justice Department has brought criminalcharges against five people related to AIG reinsurancetransactions. One of the accused--John Houldsworth, a formerGeneral Re executive, who has entered a guilty plea and agreed tocooperate--has said Mr. Greenberg arranged the illegalactivity.

Mr. Greenberg has been aggressively contesting charges that hemasterminded improperly reported transactions to pump up thecompany's stock price.

When reports surfaced earlier of the upcoming AIG agreement, Mr.Greenberg's representative, Howard Opinsky, said the investigationof the company was motivated "by political ambition fueled bythreats and settled out of fear." Mr. Spitzer is a New Yorkgubernatorial candidate. Mr. Opinsky added that "a settlement ofthis magnitude is totally disproportionate to the impact of thealleged misconduct."

Attorneys for Mr. Greenberg--who was forced from his AIG postslast year when the insurer came under scrutiny frominvestigators--have charged that AIG hired lawyers to draft areport convincing Mr. Spitzer that the blame for all impropercompany activities lay with the former CEO.

The company restated its earnings by more than $3.5 billionafter the accounting probe was announced.

Mr. Spitzer said in a statement that AIG "is a solid companythat didn't need to cheat. It finds itself in this position solelybecause some senior managers thought it was acceptable to deceivethe investing public and regulators." He added that changingmanagement and implementing reforms put the company "on a pathtoward resurgence."

Mr. Mills said the current management team's actions would allowthe insurer to "remain one of the world's premier financialservices companies."

The AIG agreement settles an SEC complaint, filed today infederal court in Manhattan, alleging that AIG's reinsurancetransactions with General Re Corp. were designed to falsely inflateAIG's loss reserves by $500 million in order to quell analystcriticism that the insurer's reserves were declining.

The complaint identified a number of other transactions in whichAIG misstated financial results with sham transactions and entitiesthe SEC said were created for the purpose of misleading theinvesting public.

Specifically, the SEC charged that in December 2000 and March2001, AIG entered into two sham reinsurance transactions with GenRe that had no economic substance, but were designed to allow AIGto improperly add a total of $500 million in phony loss reserves toits balance sheet in the fourth quarter of 2000 and the firstquarter of 2001.

The complaint also charged that in 2000, AIG engaged in atransaction with Capco Reinsurance Company, Ltd. to concealapproximately $200 million in underwriting losses in its generalinsurance business by improperly converting them to capital (orinvestment) losses to make those losses less embarrassing toAIG.

In 1991, the complaint alleges, AIG established Union ExcessReinsurance Company Ltd., an offshore reinsurer, to which itultimately ceded approximately 50 reinsurance contracts for its ownbenefit.

Although AIG controlled Union Excess, the SEC said it improperlyfailed to consolidate Union Excess's financial results with itsown, and concealed its control over Union Excess from its auditorsand regulators.

AIG said it would take a $1.5 billion after-tax charge for thesettlement for 2005's fourth quarter. AIG CEO Martin J. Sullivansaid the company is cooperating with all investigating authoritiesand has made changes to improve accounting and corporategovernance. AIG Chairman Frank Zarb said the company's board"believes that these settlements are in the best interest of thecompany."

Financial strength ratings for AIG remain under review, notedA.M. Best Company in Oldwick, N.J., while Standard and Poor's inNew York said the company's outlook "remains negative due to anumber of continuing uncertainties."

S&P said while a portion of the settlement will be availableto resolve shareholder lawsuits, it may not entirely mitigate thefuture costs of litigation. S&P noted that the companycontinues to be involved in litigation with former affiliatescontrolled by Mr. Greenberg, resulting in management "distractionand the possibility of monetary costs."

S&P also cited weaknesses in controls that could result infurther charges or restatements of past accounts.