MOODY'S AFFIRMS AIG's RATINGS (Aaa SENIOR UNSECURED); OUTLOOK STABLE
Moody's Investors Service has affirmed the ratings of American International Group, Inc. (AIG) - senior unsecured debt at Aaa (outlook: stable) - as well as those of its rated subsidiaries.
According to Moody's, the affirmation of AIG's ratings and rating outlooks is based on the organization's ability to sustain its overall exceptional franchise strength and financial profile during a period of pronounced stress, but also significant opportunity, in major industry sectors in which it participates. Moody's noted that AIG has by no means been immune to a difficult competitive environment in its major business segments - including liability and catastrophe-related claim challenges facing general insurers and reinsurers, and credit-related challenges facing life insurers, providers of spread-based retail and institutional savings products, and commercial and consumer finance enterprises. The rating agency added, however, that it continues to see such challenges as being manageable for AIG at its current rating level, given its diversified sources of earnings and cash flow, its strong capitalization, and its ability to benefit from a pronounced flight to quality in some of its more credit-sensiti
Moody's noted that AIG's Aaa credit rating is supported primarily by the overall excellent franchise strength of the company's core insurance businesses - general insurance and life insurance in the US and international/global markets, which continue to account for the preponderance of AIG's overall earnings; by the strength and diversity, both geographically and by business segment, of its earnings and cash flows; by the overall excellent capitalization and liquidity of its principal subsidiary operations and of the organization as a whole; and by the holding company's historically conservative financial profile.
Expanding on the rationale for its rating and outlook affirmation, Moody's noted that it views AIG's domestic and foreign general insurance operations to be very well positioned competitively to capitalize on sharply improved pricing and contract terms in the commercial and specialty property and liability insurance marketplace, supported by the insurer's strong client and broker distribution relationships in large and complex accounts. Moody's added that the group's sound capitalization and earnings capacity - together with its tightly managed reinsurance program - should enable it to offset exposures to a combination of adverse claim development on commercial liability business written in recent years, and increased litigation costs associated with asbestos run-off liabilities and with directors' and officers' liability claims as a result of a rising tide of corporate bankruptcies and shareholder lawsuits. Although the general insurance operations did sustain significant gross losses from the September 11
, 2001 terrorist attacks, net losses were substantially lower and manageable, reflecting large reinsurance cessions.
With respect to AIG's domestic and foreign life insurance and retirement savings operations, Moody's noted that the group's foreign life operations remain a significant source of franchise strength and that the American General acquisition significantly strengthened AIG's presence in the domestic life insurance and annuity businesses, expanding its product offerings and distribution capabilities, and providing greater balance and stability to AIG's overall insurance earnings and revenue streams. The rating agency added that exposures to troubled corporate credits, primarily through the life companies' investment portfolios, as well as continued concern regarding strain on capital arising from the aggressive pace of growth in institutional wholesale funding agreement business - primarily at the SunAmerica operations, remain general concerns. Moody's noted, however, that it expects that the pace of growth in institutional spread business will moderate and that credit-related losses will be easily manageable,
relative to the life insurance group's overall strong cash flow and earnings trend. (The reader is referred to Moody's credit report, published in August 2002, on the SunAmerica Life Insurance Company, et al.)
Commenting on AIG's non-insurance operations, Moody's noted that these businesses - which Moody's views as providing some benefit of diversification to the parent, but not a fundamental source of support for AIG's Aaa credit rating - are expected to continue to comprise a relatively smaller portion of total corporate earnings. Specifically, in the non-guaranteed financial services segment, Moody's noted that adverse developments in the aviation sector have resulted in an increased, but manageable capital burden on International Lease Finance, and that general economic conditions could constrain margins over the intermediate term at AIG's consumer finance operations. In the guaranteed financial services segment, Moody's noted that AIG Financial Products continues to perform strongly, reflecting a combination of strong credit and market risk management, and that recent growth in products providing accrual-based earnings should help to stabilize margins in that segment. The rating agency added, however, that
it expected that AIG-FP's growth trend - as well as that of AIG's other financial services operations - would also remain commensurate with that of the remainder of the organization, so as not to strain the parent's and its subsidiaries' capital resources.
At the holding company level, Moody's noted that AIG's use of financial leverage to support the capital needs of its subsidiaries has historically been modest - averaging about 10% of total capitalization - and that corporate debt service coverage levels have similarly been robust - e.g. at or above 25-30 times. The rating agency noted that these levels weakened significantly immediately following the American General acquisition in mid-2001 as AIG assumed and subsequently guaranteed AGC's corporate debt obligations. Moody's added, however, that AIG has made progress in the interim toward restoring its leverage and coverage levels to historical norms without materially diluting capitalization levels at its subsidiary operations, and that it believes that AIG remains firmly committed to completing the de-leveraging process by year-end 2003. Moody's added that rapid growth in asset-intensive businesses at subsidiaries that are guaranteed or otherwise supported by the parent - primarily involving derivative a
nd structured financial transactions at AIG Financial Products and funding agreement businesses at SunAmerica - have become an incremental concern. The rating agency expects, however, that such growth will be carefully controlled in order to maintain balance in the sources and quality of earnings and to ease capital strain on certain subsidiary operations. Finally, Moody's commented that it views positively the holding company's establishment of an "office of the chairman" earlier in 2002 as a means of broadening executive responsibility and strategic decision-making at the parent, as well as its commitment to providing enhanced financial disclosure and transparency.
Key Credit Issues
Moody's noted that it will continue to closely monitor the following key credit issues:
- reduction in the holding company's leverage profile, including consideration of capital needs with respect to support agreements provided to certain subsidiaries;
- developments at the corporate level relating to issues of corporate governance and Board-level oversight;
- continued stability and quality of AIG's reported earnings and cash flow;
- continued balance of AIG's business mix and moderation in prospective growth rates in certain credit-sensitive businesses; and
- strong capitalization levels at all of AIG's principal subsidiaries - at levels consistent with their current rating levels - and in consideration of issues cited above with respect to several of AIG's principal operating units.
Ratings affirmed are as follows:
American International Group, Inc - senior unsecured debt at Aaa; prospective senior unsecured debt shelf rating of (P) Aaa; issuer rating at Aaa; rating for commercial paper at Prime-1;
American General Corporation - guaranteed senior unsecured debt at Aaa;
American General Capital I, II, III - trust preferred securities at Aa1;
American General Institutional Capital A and B - trust preferred stock at Aa1;
Western National Corporation - guaranteed senior unsecured debt at Aaa;
AIG Financial Products Corp. - guaranteed senior unsecured debt at Aaa; guaranteed commercial paper at Prime-1;
AIG Financial Products (Japan) - guaranteed senior unsecured debt at Aaa;
AIG Funding - guaranteed commercial paper program at Prime-1;
AIG Liquidity Corp - guaranteed commercial paper program at Prime-1;
AIG Matched Funding Corp. - guaranteed senior unsecured debt at Aaa;
Banque AIG SA - guaranteed senior unsecured debt at Aaa;
International Lease Finance Corporation - senior debt at A1; prospective senior unsecured debt shelf rating at (P) A1; preferred stock rating at A3; and short-term debt rating for commercial paper at Prime-1;
American General Finance Corporation - senior debt at A1; prospective senior unsecured debt shelf rating at (P)A1; long-term counterparty rating at A1;
American General Finance Corporation - commercial paper rating at Prime-1, extendible commercial notes at Prime-1;
American General Finance, Inc. - commercial paper rating at Prime-1;
CommoLoCo, Inc. - commercial paper rating at Prime-1;
Members of the Domestic Brokerage Group Intercompany Pool:
National Union Fire Insurance Company of Pittsburgh, PA - insurance financial strength at Aaa;
American Home Assurance Company - insurance financial strength at Aaa;
Birmingham Fire Insurance Company - insurance financial strength at Aaa;
Commerce & Industry Insurance Company - insurance financial strength at Aaa;
AIU Insurance Company - insurance financial strength at Aaa;
New Hampshire Insurance Company - insurance financial strength at Aaa;
Insurance Company of the State of Pennsylvania - insurance financial strength at Aaa;
American International Specialty Lines Insurance Company - insurance financial strength at Aaa;
AIG Life Insurance Company - insurance financial strength rating at Aaa;
American International Life Assurance Company of New York - insurance financial strength rating at Aaa;
American Life Insurance Company - insurance financial strength rating at Aaa;
American International Assurance Company (Bermuda) Limited - insurance financial strength rating at Aaa;
SunAmerica Life Insurance Company - supported insurance financial strength rating at Aaa; supported short-term insurance financial strength rating of Prime-1;
First SunAmerica Life Insurance Company - supported insurance financial strength rating at Aaa; supported short-term insurance financial strength rating of Prime-1;
AIG SunAmerica Life Assurance Company - supported insurance financial strength rating at Aaa; supported short-term insurance financial strength rating at Prime-1;
Variable Annuity Life Insurance Company -insurance financial strength at Aa1;
AIG Annuity Insurance Company - insurance financial strength at Aa1;
American General Life & Accident Insurance Company - insurance financial strength at Aa1;
American General Life Insurance Company - insurance financial strength at Aa1;
Franklin Life Insurance Company - insurance financial strength at Aa1;
Old Line Life Insurance Company - insurance financial strength at Aa1;
United States Life Insurance Company in the City of New York - insurance financial strength at Aa1;
All American Life Insurance Company - insurance financial strength at Aa1;
United Guaranty Residential Insurance Company - insurance financial strength at Aaa;
United Guaranty Mortgage Indemnity Company - insurance financial strength at Aaa.
American International Group, Inc. is a New York-based holding company for an extensive network of international property and casualty insurance, life insurance and financial services companies. AIG is among the leading underwriters of commercial and specialty lines insurance in the USA, and it is the largest U.S.-based international insurance organization. As of June 30, 2002, AIG reported total assets of $524 billion and shareholders' equity of $55 billion. For the first six months of 2002, AIG reported consolidated revenues of $32.8 billion, and net income of $3.8 billion.
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