Fitch Ratings said today that its ratings on American International Group Inc. remain on Rating Watch Negative, following the firm’s US$1.6 billion settlement with regulators and prosecutors.

The decision follows today’s announcement by AIG that the company has entered into a US$1.6 billion settlement agreement with the U.S. Department of Justice, the Securities and Exchange Commission, Office of the New York Attorney General, and New York State Department of Insurance and that its fourth quarter 2005 earnings will include a US$1.7 billion pretax reserve increase.

Fitch views the financial effect of the settlement as a sizable but manageable figure for a company with AIG’s earnings profile and overall financial flexibility. Fitch says it plans to meet with AIG management in the near term to resolve its Rating Watch and anticipates that those discussions will focus on three key areas: AIG’s capital levels, the fourth quarter reserve charge, and its efforts to address weaknesses in internal controls.

The rating agency notes that accounting restatements reported by AIG in 2005 reduced its domestic property/casualty subsidiaries’ combined capital by US$3.5 billion and Fitch’s expectation is that the domestic property/casualty subsidiaries will bear the brunt of the US$1.7 billion fourth quarter 2005 pretax reserve increase. Fitch says it views the cumulative effect of the accounting restatements and charges as significant with respect to the property/casualty subsidiaries’ capital adequacy. It says it will review the companies’ traditional operating leverage ratios and risk-based capital ratios when 2005 annual statements become available. It expects to discuss the company’s capital plans with management in the next several weeks.

Fitch also says it believes that the potential for efforts to identify accounting transactions, which require adjustment and result in financial statement restatements, will persist. It believes that AIG has made significant progress in this area and the likelihood of the efforts materially affecting the company have declined.