American International Group Inc. will pay $1.64 billion to settle state and federal charges of securities fraud, bid-rigging and failure to pay proper contributions to various state workers’ compensation funds, state and federal regulators announced today.

The settlement with New York Attorney General Eliot Spitzer, New York Insurance Superintendent Howard Mills and the U.S. Securities and Exchange Commission also calls for AIG to change business practices.

In the agreement, AIG has agreed to cut back on the use of contingent commissions and has agreed not to pay them on excess casualty lines through 2008. Spitzer has charged that hidden, volume-based bonus commissions to brokers served as incentives for steering business and for rigging bids.

AIG also has agreed to refrain from paying the commissions in any line of business where competing companies with 65% of gross written premiums do not pay them. AIG also says it will support legislation to eliminate contingent commissions.

The company has agreed to retain an independent consultant for 3 years to monitor AIG internal controls and develop a remediation plan.

Of the settlement money, regulators say $700 million will go to investors who were misled, $375 million to AIG policyholders hurt by bid-rigging and $344 million to the 50 states in which AIG failed to make proper payments to workers’ comp funds by underpaying premium taxes and assessments.

New York and the SEC each assessed an additional $100 million in penalties against the company, with the SEC fine going into the defrauded investors’ fund.

In addition, the U.S. Justice Department says AIG has agreed to pay $25 million to settle charges related to 2 improper transactions designed to make its financial statements look more attractive.

“Today’s settlement sends a clear message to every publicly traded corporation that ‘hitting the numbers’ must take a back seat to accurate financial reporting,” says Acting U.S. Deputy Attorney General McNulty. “This settlement is a major step forward in our efforts to strengthen the integrity of the investment marketplace and our system of accountability.”

In a statement acknowledging the misconduct, the company says it apologized for the activity that led to the civil suit brought by Spitzer and Mills.

“Providing incorrect information to the investing public and to regulators was wrong and is against the values of our current leadership and employees,” AIG says.

AIG’s agreement with Spitzer ends the case against the company but leaves Maurice Greenberg, the company’s former chairman, and Howard Smith, AIG’s former chief financial officer, still facing New York State civil fraud charges.

Additionally the SEC investigation into the company’s use of finite reinsurance is continuing, as is its probe of others “who may have participated in AIG’s securities laws violations,” says Linda Chatman Thomsen, a representative of the SEC Enforcement Division.

In Alexandria, Va., the Justice Department has brought criminal charges against 5 people who were involved with AIG reinsurance transactions.

Greenberg has been aggressively contesting charges that he used improperly reported transactions to pump up the company’s stock price.

When reports surfaced earlier of the upcoming AIG agreement, Greenberg’s representative, Howard Opinsky, said the investigation of the company was motivated “by political ambition fueled by threats and settled out of fear.”

“A settlement of this magnitude is totally disproportionate to the impact of the alleged misconduct,” Opinsky said.

Attorneys for Greenberg–who was forced from his AIG posts last year when the insurer came under scrutiny from investigators–have charged that AIG hired lawyers to draft a report convincing Spitzer that the blame for all improper company activities lay with Greenberg.

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

Spitzer says in a statement that AIG “is a solid company that didn’t need to cheat. It finds itself in this position solely because some senior managers thought it was acceptable to deceive the investing public and regulators.” He says changing management and implementing reforms put the company “on a path toward resurgence.”

Mills says the current management team’s actions would allow the insurer to “remain one of the world’s premier financial services companies.”

The AIG agreement settles an SEC complaint, filed today in the U.S. District Court in Manhattan, alleging that AIG used reinsurance transactions to inflate AIG’s loss reserves by $500 million in order to quell analyst criticism that the insurer’s reserves were declining.

The complaint says AIG also used other sham transactions and entities to mislead investors.

The complaint does not appear to refer to transactions related to AIG’s life insurance or annuity operations.

AIG says it will be recording a $1.5 billion after-tax charge for the fourth quarter of 2005 in connection with the settlement. AIG Chief Executive Martin Sullivan says the company is cooperating with all investigating authorities and has made changes to improve accounting and corporate governance.