The American International Group Inc. life and retirement operations took a hit in the first quarter along with the rest of the company.

AIG, New York, is reporting a $7.8 billion net loss for the latest quarter on $14 billion in revenue, compared with $4.1 billion in net income on $31 billion in revenue for the first quarter of 2007.

The financial services operations, which include the mortgage, commercial finance, leasing and capital markets units, suffered $8.5 billion in operating losses, down from $444 million in net gains during the first quarter of 2007, as a result of unrealized market valuation losses related to the credit default swap portfolio at the company’s AIG Financial Products unit.

But AIG also suffered from “difficult results across each segment,” securities analysts at Bank of America Securities, a unit of Bank of America Corp., Charlotte, N.C., write in a comment in the company’s earnings.

Operating income fell to $1.3 billion, from $3.1 billion at the property-casualty operations.

The life and retirement operations are reporting a $1.8 billion operating loss on $17 billion in premiums, deposits and other considerations, compared with $2.3 billion in operating income on $13 billion in premiums, deposits and other considerations for the first quarter of 2007.

Domestic life operating income increased 17%, to $418 million.

Net flows of cash into retirement services products were strong, the amount of life insurance in-force increased and sales of private-placement variable universal life insurance were strong, AIG says.

But annualized group life and group health earned premiums fell to $897 million, from $942 million.

The life and retirement operations were hurt by a decline in income from partnerships and unit trusts.

Excluding the effects of partnerships and other enhancements, AIG’s “net spread” on domestic group retirement products – the gap between that it pays to customers and what it earns on its own investments – fell to 2.23%, from 2.3%.

The net spread fell to 2.31%, from 2.45%, for domestic fixed annuities, and to 2.36%, from 2.61%, for domestic variable annuities.

Including the effects of partnerships and other enhancements, the net spread fell to 1.87%, from 2.86%, for domestic group retirement products; to 2.01%, from 3.06%, for fixed annuities; and to 1.61%, from 2.86%, for variable annuities.

Overall shareholders’ equity fell to $80 billion, from $96 billion.

“While we anticipated a difficult trading environment, the severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations,” AIG President Martin Sullivan says in a statement.

AIG says it intends to strengthen its balance sheet by raising about $12.5 billion in capital through a stock sale and a sale of equity-linked securities.

The New York office of Fitch Ratings responded to the AIG earnings announcement by cutting the issuer default and senior debt ratings it has assigned to the company to AA minus, from AA.

If AIG does not succeed at raising new capital, Fitch may lower the ratings another notch, the firm says.

Standard & Poor’s Ratings Services, New York, says it has lowered its counterparty credit rating on AIG to AA minus, from AA.

“Although we expected that AIG would have some losses in the first quarter, the level of the additional losses exceeds these expectations,” says S&P credit analyst Rodney Clark.

If AIG were to raise no additional capital, S&P might lower its ratings on the company 2 notches, Clark says.