U.S. federal and state authorities today announced a US$1.6 billion ($1.85 billion) pact with insurance giant American International Group Inc. over allegations that it committed securities fraud.

The Securities and Exchange Commission says that the settlement is part of a global resolution of federal and state actions under which AIG will pay to resolve claims related to improper accounting, bid rigging and practices involving workers’ compensation funds.

The commission announced the settlement in coordination with the Office of the New York State Attorney General, the Superintendent of Insurance of the State of New York and the US Department of Justice, which have also reached settlements with AIG.

Under the deal, AIG will pay US$800 million, including US$100 million as a penalty, into a fund under the supervision of the SEC to be available to make payments to investors, including investors involved in shareholder litigation relating primarily to AIG’s accounting and financial reporting practices. Another US$375 million will be paid into a fund under the supervision of the New York AG to be available principally to pay certain AIG insureds who purchased excess casualty policies through Marsh Inc. In addition, approximately US$343 million will be used to compensate each of the 50 states in connection with the underpayment of certain workers compensation premium taxes and other assessments. Finally, the payments include a fine of US$100 million to the State of New York and US$25 million in connection with the DOJ settlement.

Along with the financial penalty, the settlement with the commission provides that AIG will undertake corporate reforms designed to prevent similar misconduct from occurring. The penalty amount takes into account AIG’s substantial cooperation during the commission’s investigation, it noted. AIG has agreed to the deal, without admitting or denying the allegations of the complaint.

The commission’s complaint, filed today in federal court in Manhattan, alleges that AIG’s reinsurance transactions with General Re Corporation were designed to falsely inflate AIG’s loss reserves by US$500 million in order to quell analyst criticism that AIG’s reserves had been declining. The complaint also identifies a number of other transactions in which AIG materially misstated its financial results through sham transactions and entities created for the purpose of misleading the investing public.

In a statement today, AIG acknowledged that it was wrong to provide incorrect information to the investing public and regulators and that it “regrets and apologizes” for its conduct. Since the investigation began, AIG has also restated its earnings by more than US$3.5 billion. The firm said that these settlements will result in an after-tax charge of approximately US$1.15 billion to be recorded in the fourth quarter of 2005.

In a statement commenting on today’s announcement, AIG president and CEO Martin Sullivan said, “It was important that we resolve these outstanding investigations by the DOJ, SEC, NYAG and DOI. AIG has fully cooperated with these authorities throughout their investigations, and we will continue to do so.”

“These settlements are a major step forward in resolving the legal and regulatory issues facing AIG. We have already implemented a wide range of improvements in our accounting, financial reporting and corporate governance, and will continue to make enhancements in these areas. AIG is committed to business practices that provide transparency and fairness in the insurance markets,” he added.

Attorney General Eliot Spitzer said, “AIG was and 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. However, by changing management, implementing reforms and providing restitution to injured investors, customers and states, the company has placed itself on a path toward resurgence.”

“This important settlement arose out of our industry wide investigation into the misuse of finite insurance and reinsurance. While this settlement concludes our investigation of AIG, our investigation continues with respect to others who may have participated in AIG’s securities laws violations,” said Linda Chatman Thomsen, director of the commission’s Division of Enforcement.