Fitch Removes AIG and Subsidiaries from Negative Watch

April 11, 2006

Fitch Ratings has affirmed and removed from its Rating Watch Negative all of its ratings on American International Group, Inc. (AIG) and subsidiaries.

Fitch originally placed AIG on Rating Watch Negative in March 2005.

In addition, Fitch has assigned ‘AA’ Issuer Default Ratings (IDRs) to AIG and several of its downstream holding company subsidiaries. The rating outlook is stable.

Fitch’s rating action reflects its belief that the majority of the uncertainties surrounding AIG over the last 12-to-14 months have been resolved and that the company’s financial profile and competitive positioning remain supportive of its current ratings. Despite a year of unprecedented challenges including management changes, investigations, restatements, reserve charges, regulatory settlements and catastrophe losses, AIG generated net income of over $10 billion and a return on equity of 12.3% in 2005.

Fitch’s rating action also reflects its heightened comfort with AIG’s domestic commercial lines property/casualty operation’s reserve adequacy and run-rate underwriting profitability. Fitch’s actions also incorporate its belief that AIG’s domestic commercial lines property/casualty companies’ medium-term focus includes building and retaining capital to more appropriate levels for the current ratings.

Fitch views the current capital levels of AIG’s domestic commercial lines property/casualty unit, especially risk-based capitalization, as materially below those of comparably-rated commercial line peers. Additionally, Fitch views this unit’s current capitalization as generally weaker than that of many of AIG’s other core insurance operations, but not to an extent that requires Fitch to differentiate between the insurer financial strength ratings of this unit and those of AIG’s other core insurance operations.

Fitch notes that it is currently developing a proprietary economic capital model that it anticipates implementing throughout the second half of 2006. Going forward, the agency expects this model to play an important role in its ratings analysis on AIG and in its ratings analysis in general. Fitch’s analysis will continue to include a review of output from insurers’ internal capital models, if available, and regulatory solvency ratios.

Fitch retained the unusually narrow notching between AIG’s insurer financial strength ratings and holding company ratings upon implementing the agency’s new notching and recovery rating methodology. The narrow notching reflects the organization’s very strong financial flexibility and significant cash flow from diverse regulated and non-regulated subsidiaries. The narrow notching also reflects the results of Fitch’s standard peer and comparative analysis, application of which supports AIG’s current ratings. Going forward, Fitch expects AIG to manage holding company leverage below 15%.

AIG’s ratings were placed on Rating Watch Negative by Fitch after the company announced it would delay filing its 2004 10-K in order to complete a review of its accounting records and procedures. The review stemmed from regulatory investigations and subsequent civil suit against AIG brought by the Securities and Exchange Commission (SEC) and the Office of the New York Attorney General (NYAG).

AIG’s ratings remained on Rating Watch Negative throughout 2005 as the company conducted its accounting review and worked to resolve its regulatory issues. In May 2005, AIG announced that it had hired an independent third-party to conduct a review of the adequacy of its general insurance reserves. Additionally, AIG’s on-going accounting review identified errors and changes in adjustments that led to two restatements that collectively reduced its previously reported year-end 2004 shareholders equity by $2.2 billion.

In February 2006, AIG announced that it had entered into a $1.6 billion settlement ($1.2 billion after-tax) agreement with the SEC, NYAG, United States Department of Justice and New York State Department of Insurance (NYDOI). AIG concurrently announced that the completion of its reserve study would result in a fourth-quarter 2005 reserve increase of $1.7 billion pretax ($1.1 billion after-tax).

Fitch viewed the financial effect of the settlement as a sizable but manageable figure for a company with AIG’s earnings profile and financial flexibility. However, the agency retained its Negative Rating Watch at that time largely because of concerns about the domestic commercial line property/casualty subsidiaries capitalization and reserve adequacy.

Source: Fitch

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