NEW YORK (Bloomberg) — American International Group Inc., the company rescued four times by the US government, is being probed by 50 state insurance regulators examining whether the firm violated rules governing workers' compensation sales.

The watchdogs may decide to fine New York-based AIG or impose other penalties after the investigation is finished in June, said Beth Dwyer, general counsel for the Rhode Island Insurance regulator, a lead state in the examination.

"The state actually decides what amount you can charge as an insurer," Dwyer said in an interview yesterday. "The question here is, 'did AIG follow those approved ratings, or did they do something else'?" The probe may distract AIG as the firm wrestles with repaying a federal loan and separate reviews into employee compensation.

The unit that sells US workers' compensation coverage may become part of AIU Holdings Inc., which the company said it would create to insulate businesses from the AIG name.

The investigation expanded last year when a group of 18 regulators, convened to take a preliminary look at AIG, determined that all 50 states should examine the insurer's conduct, Dwyer said.

The probe is an offshoot of a 2005 lawsuit from then-New York Attorney General Eliot Spitzer, who said AIG shortchanged the premiums used in calculating its obligations to state pools. In most states, companies that sell workers' compensation must fund pools that serve as insurers of last resort to cover injuries at employers that pose unattractive risks.

AIG agreed in 2006 to set aside more than $300 million to pay for misstating premiums to state programmes between 1985 and 1996. A group made up of about 600 rivals, the National Workers Compensation Reinsurance Pool, said that AIG underpaid for 35 years and owed more than $1 billion. The group sued the insurer in 2007 in federal court in Chicago.

Christina Pretto, a spokeswoman for AIG, said the insurer is working with a consultant hired by the regulators to resolve their review. The company was prepared to make payments to states under the 2006 agreement and put the funds on hold to wait for responses from regulators, she said.

"We remain optimistic that all parties will reach a resolution of this matter soon," she said.

The insurer filed a third-party complaint last March saying competitors including Liberty Mutual Group Inc. and a predecessor of Travelers Cos. also duped regulators while suppressing probes into their own practices.

Richard Angevine, a spokesman for Boston-based Liberty Mutual, didn't immediately return messages seeking comment. Jennifer Wislocki of Travelers had no immediate comment.

State regulators will consider that AIG is now majority owned by the US when weighing possible penalties, Dwyer said. Rhode Island insurance fines range from $1,000 to $50,000 per violation, she said.

"It's a factor that we'll have to consider," Dwyer said. "I don't know how it couldn't be."

AIG shares have plunged 98 percent in the last year. The company rose five cents to $1 in New York Stock Exchange composite trading yesterday.