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AIG Discusses Effects Of Credit Squeeze

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American International Group Inc. has included a blunt warning about recent market turmoil in the documents announcing its new securities offerings.

AIG, New York, hopes to compensate for the effects of the credit market upheaval on its finances by raising $5.3 billion through the sale of equity units, $7.4 billion through the sale of common stock, and as much as $5 billion more through the sale of “high equity content fixed income securities.”

AIG recently announced that its financial services operations, which include the mortgage, commercial finance, leasing and capital markets units, posted $8.5 billion in operating losses during the first quarter 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 attributed $4.4 billion in net realized capital losses to its life insurance and retirement services operations.

In the equity unit offering prospectus, AIG notes that disruption in the U.S. residential mortgage and credit markets had a significant adverse effect on the life and retirement operating results.

“AIG expects that this disruption will continue to be a key factor in the remainder of 2008 and beyond, especially in its U.S.-based operations,” AIG says in the prospectus. “The volatility in operating results will be further magnified by the continuing market shift to variable products with living benefits.”

AIG has responded by “increasing its liquidity position and investing in shorter duration investments,” the company says. “While prudent in the current environment, such actions will reduce overall investment yields.”

Recent capital markets volatility also has put pressure on credit lenders, “resulting in increased costs for premium financing, which could affect future sales of products where such financing is used, primarily in large universal life policies in domestic life insurance,” AIG says.

AIG also notes that, if the credit rating agencies reduce its longer-term senior debt rating by 1 notch, that could force it to provide $1.8 billion in additional collateral for various financial operations outside the life unit.

If the rating agencies cut the company’s rating by 2 notches, that would give counterparties the right to call for AIG to provide about $9.8 billion in additional collateral, the company says.