The company also agreed to retain an independent consultant for three years to monitor AIG internal controls and a remediation plan.

Of the settlement money, regulators said $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 where 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 said the company had agreed to pay $25 million to settle charges related to two improper transactions designed to pump up its financial statements.

"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," said 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 said it apologized for the activity that led to the civil suit brought by Mr. Spitzer and Mr. 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 said.

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

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

In Alexandria, Va., the Justice Department has brought criminal charges against five people related to AIG reinsurance transactions. One of the accused--John Houldsworth, a former General Re executive, who has entered a guilty plea and agreed to cooperate--has said Mr. Greenberg arranged the illegal activity.

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

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

Attorneys for Mr. 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 Mr. Spitzer that the blame for all improper company activities lay with the former CEO.

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

Mr. Spitzer said 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 added that changing management and implementing reforms put the company "on a path toward resurgence."

Mr. Mills said 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 federal court in Manhattan, alleging that AIG's reinsurance transactions with General Re Corp. were designed to falsely inflate AIG's loss reserves by $500 million in order to quell analyst criticism that the insurer's reserves were declining.

The complaint identified a number of other transactions in which AIG misstated financial results with sham transactions and entities the SEC said were created for the purpose of misleading the investing public.

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

The complaint also charged that in 2000, AIG engaged in a transaction with Capco Reinsurance Company, Ltd. to conceal approximately $200 million in underwriting losses in its general insurance business by improperly converting them to capital (or investment) losses to make those losses less embarrassing to AIG.

In 1991, the complaint alleges, AIG established Union Excess Reinsurance Company Ltd., an offshore reinsurer, to which it ultimately ceded approximately 50 reinsurance contracts for its own benefit.

Although AIG controlled Union Excess, the SEC said it improperly failed to consolidate Union Excess's financial results with its own, and concealed its control over Union Excess from its auditors and regulators.

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

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

S&P said while a portion of the settlement will be available to resolve shareholder lawsuits, it may not entirely mitigate the future costs of litigation. S&P noted that the company continues to be involved in litigation with former affiliates controlled by Mr. Greenberg, resulting in management "distraction and the possibility of monetary costs."

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