(Bloomberg News) American International Group Inc., the company defending itself against a $1 billion workers' compensation lawsuit filed by rival insurers, may have handed its accusers momentum by agreeing to pay $146.5 million to settle a probe by regulators.

"That certainly can't help their position in court," said Edward Priz, president of Riverside, Ill.-based commercial insurance consultant Advanced Insurance Management LLC.

AIG will pay $100 million in fines and $46.5 million in taxes and assessments to resolve the 50-state investigation, the Pennsylvania insurance regulator said yesterday. New York-based AIG was suspected of cheating state-run funds that serve as insurers of last resort against workplace injuries.

AIG, once the world's largest insurer, shortchanged the state pools by underreporting premiums it made selling workers' compensation protection, rivals including Liberty Mutual Holding Co. said in court documents filed in 2009 in U.S. District Court in Chicago. The state insurers of last resort, which cover injuries at employers that pose unattractive risks, are funded by contributions from carriers that offer the coverage.

"Accurate company financial data is an essential ingredient of proper insurance regulation," Pennsylvania acting commissioner Robert Pratter said in a statement. "This reflects the seriousness of the violations in this instance over a sustained period of time--primarily prior to 1996--by AIG's prior senior management."

Liberty Mutual

The agreement, endorsed by eight states including Pennsylvania, is contingent upon approval by at least 35 other regulatory jurisdictions and AIG's settlements with rival insurers, according to the statement.

AIG had $338 million in escrow for the settlement of claims tied to its contribution to the workers' compensation pools, according to its third-quarter report.

AIG Chief Executive Officer Robert Benmosche has settled legal disputes with investors and former CEO Maurice "Hank" Greenberg to focus on repaying a $182.3 billion U.S. government rescue. AIG filed a complaint last year against Boston-based Liberty Mutual and rivals including Hartford Financial Services Group Inc., saying they cheated the state pools.

"If this settlement becomes final, we will have resolved all remaining regulatory issues related to AIG's workers' compensation premium reporting for our stakeholders," Mark Herr, an AIG spokesman, said in a statement.

Bailed Out

The insurer slipped 13 cents to $55.63 at 9:35 a.m. in New York Stock Exchange composite trading. AIG had surged 86 percent this year through yesterday after declining 4.5 percent in 2009 and 97 percent in 2008. AIG agreed this month to retire its obligations with the Federal Reserve. The Treasury Department, which owns the majority of AIG's equity, plans to reduce its influence over the company by selling stock to private investors.

Richard Angevine, a spokesman for Liberty Mutual, and Gregory Quinn of the National Council on Compensation Insurance Inc., which is involved in the litigation against AIG, didn't respond to phone messages seeking comment.

The case is National Council on Compensation Insurance Inc. v. American International Group Inc. 1:07-cv-02898, U.S. District Court, Northern District of Illinois (Chicago).