Additionally all AIG-rated ratings that were not previously on Rating Watch have been placed on Rating Watch Negative pending the completion of the capital raising plan. If capital raising is completed, Fitch will remove all ratings from Rating Watch Negative and affirm AIG with a Negative Rating Outlook. Failure to complete the capital raising in a timely manner would likely result in a one-notch downgrade of the listed ratings.

The rating actions follow the release of AIG's first- quarter 2008 financial results as well as the preliminary conclusion of Fitch's evaluation of estimated economic expected and stress losses related to AIG Financial Products Corp. (AIGFP) credit default swaps on collateralized debt obligations backed by structured finance (SF CDOs) collateral. AIGFP's obligations are guaranteed by AIG.

First-quarter 2008 results were adversely affected by AIG's relatively large exposure to the current U.S. residential mortgage crisis. Fitch believes the area of AIG most exposed to this market is $61 billion of SF CDOs collateralized mainly by subprime U.S. residential mortgage-backed securities (RMBS), that are included within its broader $469 billion notional credit derivatives portfolio.

For the second straight quarter, the company recognized a significant FAS 133 unrealized market valuation loss on the credit derivative portfolio. The $9.1 billion pre-tax loss in the first quarter brings the cumulative market value loss to over $20 billion. However, Fitch has stated that from an analytical perspective, the more important ratings consideration is AIGFP's exposure from an economic and stressed loss perspective, especially during periods of market stress when market values may become disconnected from underlying fundamentals.

Fitch has completed its detailed analysis of the underlying SF CDOs, including those not rated by Fitch, to evaluate the potential range of economic and stress scenario losses. Fitch estimates economic expected losses on a present value discounted basis of between $1.6 billion and $5 billion on this portfolio. Applying a 'AA' rating category ratings stress (AIG's current rating level), estimated losses on a discounted basis rise to between $8.8 billion and $11.7 billion. It should be noted that economic expected losses reflect an estimate of future losses Fitch ultimately expects AIG to incur, whereas 'AA' stress losses reflect what Fitch views as reasonable target capital guidelines to support AIGFP's SF CDO exposure.

As AIGFP's credit derivatives business was historically underwritten to a zero loss assumption, these estimated losses are material and imply performance outside of Fitch's previous expectations for the rating. Fitch believes further deterioration in the U.S. residential mortgage market could increase these estimates.

Unlike monoline financial guarantors that have similar types of exposure, AIGFP is required under many of its credit derivative contracts to post collateral for adverse market movements as well as for changes in its own rating. As of April 30, 2008, AIGFP had posted collateral against its credit derivatives portfolio of $9.7 billion. Further deterioration in credit markets could lead to additional collateral posting requirements. Separately, per contract terms, downgrades of AIG's ratings by Standard & Poor's or Moody's Investors Service would also lead to collateral posting requirements. Fitch believes AIG has adequate liquidity to fund these requirements under most reasonable scenarios.

The company also recognized significant realized and unrealized capital losses in its investment portfolio during the quarter. AIG realized other than temporary impairments of $6.1 billion on a pre-tax basis including $4.1 billion related to market severity. In addition, AIG had unrealized capital losses during the quarter of $10.8 billion on a pre-tax basis. The after-tax unrealized capital losses are a direct charge to shareholders equity and do not run through the income statement.

Overall, these charges as well as lower than expected run-rate earnings led to a $16.1 billion decline in stated shareholders equity for the quarter. This follows a fourth-quarter 2007 decline of $8.3 billion. Cumulatively, shareholders equity has declined by 23% since Sept. 30, 2007.

Positively, AIG has announced a capital-raising initiative to replenish some of the decline in shareholders equity. Fitch expects the capital raise to include a mix of pure equity, mandatorily convertible securities and hybrid securities. A successful capital raise will both strengthen leverage and capital ratios, and also aid liquidity.

At March 31, 2008, adjusted financial leverage was 17.8%, above the 15% target to maintain Fitch's unusually narrow notching between holding company ratings and operating company ratings prior to today's rating action. With the capital raising and three quarters of earnings, Fitch expects this ratio to fall to below 15% by year-end 2008.

The Rating Watch Negative is expected to be removed once the capital raising efforts are completed and the ratings can be affirmed. This is expected to be executed in the near term. Fitch expects to affirm the ratings with a Negative Outlook. The Negative Outlook reflects the continued downside risk in AIG's credit derivative portfolio and investment portfolio, and the potential for additional collateral calls if the broad credit markets as well as the U.S. residential mortgage market continue to deteriorate beyond March 31, 2008 levels. If markets stabilize and uncertainty is lessened, Fitch would envision moving to a Stable Outlook.

Fitch downgraded the following ratings and they remain on Rating Watch Negative:

American International Group, Inc.

--IDR to 'AA-' from 'AA';

--Senior debt to 'AA-' from 'AA;

--Junior Subordinated debentures to 'A+' from 'AA-'.

AIG International, Inc.

--IDR to 'AA-' from 'AA';

--Senior debt to 'AA-' from 'AA.

AIG Life Holdings (US), Inc. (formerly American General Corp.)

--IDR to 'AA-' from 'AA';

--Senior debt to 'AA-' from 'AA.

American General Capital II

--Preferred securities to 'A+' from 'AA-'.

American General Institutional Capital A and B

--Capital securities to 'A+' from 'AA-'.

HSB Capital Trust I

--Preferred securities to 'AA-' from 'AA'.

21st Century Insurance Group

--IDR to 'AA-' from 'AA';

--Senior debt to 'AA-' from 'AA.

United Guaranty Corporation

--Long Term Rating to 'AA-' from 'AA'.

Ezer Mortgage Insurance Company (ISR)

--Insurer Financial Strength (IFS) Rating to 'AA' from 'AA+.

Fitch placed the following ratings on Rating Watch Negative:

American International Group, Inc.

--Short Term IDR 'F1+'.

AIG Funding, Inc.

--Commercial paper 'F1+'.

Fitch has placed the following 'AA+' IFS ratings on Rating Watch Negative:

Life Companies

--AGC Life Insurance Company

--AIG Annuity Insurance Company

--AIG Life Insurance Company

--AIG SunAmerica Life Assurance Company

--American General Life and Accident Insurance Company

--American General Life Insurance Company

--American International Assurance Company (Bermuda) Limited

--American International Life Assurance Company of New York

--American Life Insurance Company

--First SunAmerica Life Insurance Company

--SunAmerica Life Insurance Company

--The United States Life Insurance Company in the City of New York

--The Variable Annuity Life Insurance Company

National Union Inter-company Pool Members:

--AIG Casualty Company (formerly Birmingham Fire Ins. Co. of PA)

--American Home Assurance Company

--American International South Insurance Company

--Commerce and Industry Insurance Company

--Granite State Insurance Company

--Illinois National Insurance Co.

--National Union Fire Insurance Company of Pittsburgh, PA

--New Hampshire Insurance Company

--The Insurance Company of the State of Pennsylvania

Lexington Inter-company Pool Members:

--AIG Excess Liability Insurance Company, Ltd. (formerly Starr Excess Liability Ins. Co., Ltd.)

--Landmark Insurance Company

--Lexington Insurance Company

AIG Personal Lines Inter-company Pool Members:

--21st Century Casualty Company

--21st Century Insurance Company

--21st Century Insurance Company of the Southwest

--AIG Advantage Insurance Company (formerly Minnesota Ins. Co.)

--AIG Auto Insurance Company of New Jersey

--AIG Centennial Insurance Company

--AIG Hawaii Insurance Company

--AIG Indemnity Insurance Company

--AIG National Insurance Company, Inc.

--AIG Preferred Insurance Company

--AIG Premier Insurance Company

--American International Insurance Company

--American International Insurance Company of California

--American International Insurance Company of New Jersey

--American International Pacific Insurance Company

--American Pacific Insurance Company

--New Hampshire Indemnity Company, Inc.

Non-Pool Companies

--AIU Insurance Company

--American International Specialty Lines Insurance Company

--Hartford Steam Boiler Inspection & Insurance Company

--United Guaranty Residential Insurance Company

Foreign Domiciled General Ins. Companies

--AIG MEMSA Insurance Company Ltd. (UAE)

--AIG (UK) Ltd. (formerly The Landmark Insurance Co. Ltd. (UK)

--American International Underwriters Overseas, Ltd. (Bermuda)

Fitch placed the following ratings on Rating Watch Negative:

ASIF Program

ASIF II Program

ASIF III Program

ASIF Global Financial Program

--Program rating 'AA+'.

For more information, please refer to the separate release issued today by Fitch that further describes the AIG Capital Corp, ILFC and AGF rating actions.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.