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Rating Action:

Moody's affirms AIG's Baa1 senior debt rating, downgrades P&C insurance ratings to A2 from A1, stable outlook

Global Credit Research - 26 Jan 2016

Affirms A2 insurance financial strength ratings of AIG Life and Retirement with stable outlook

New York, January 26, 2016 -- Moody's Investors Service has affirmed the Baa1 senior unsecured debt rating of American International Group, Inc. (NYSE: AIG), and has downgraded the insurance financial strength (IFS) ratings of AIG's property casualty (P&C) subsidiaries in the US and Canada to A2 from A1. The rating agency also affirmed the A2 IFS ratings of AIG Life and Retirement (AIG L&R). These actions follow AIG's announcement of a large P&C reserve charge along with an updated strategic plan to narrow its focus through selected divestitures, improve its financial performance, and return at least $25 billion of capital to shareholders over the next two years. The rating outlook for these entities is stable.

Moody's placed on review for downgrade the Baa1 IFS rating of United Guaranty Residential Insurance Company (UGRIC) based on AIG's plan to conduct an initial public stock offering of up to 19.9% of UGRIC's parent, United Guaranty Corporation, as a first step toward full separation. The rating agency also placed on review for downgrade the A2 IFS rating of AIG's P&C subsidiary in China given that this rating reflects implicit and explicit support from AIG P&C affiliates. (Please see below for a complete list of affected ratings.)

RATINGS RATIONALE

"The downgrade of AIG's main P&C units reflects persistent adverse loss development and weak underwriting results plus the ongoing challenge of setting reserves for long-tail casualty lines," said Bruce Ballentine, Moody's lead analyst for AIG.

AIG took a $3.6 billion charge to strengthen its P&C loss reserves, effective in Q4 2015, continuing a history of reserve problems that included charges totaling about $7 billion in 2009-10. The company has announced underwriting and expense initiatives to boost its P&C profits, but these efforts will be constrained by increasingly difficult market conditions, said Moody's. Offsetting the reserve charge, AIG contributed about $3 billion of capital to its P&C subsidiaries, drawing on the large liquidity pool the parent holds to support its operating subsidiaries as needed.

In affirming the AIG L&R ratings, Moody's cited the group's strong market presence and good capitalization. "AIG L&R is a large, diversified US life insurer, although streamlining initiatives under the new strategic plan could weaken the credit profile," said Laura Bazer, Moody's lead analyst for AIG L&R.

With the AIG L&R and P&C ratings aligned at A2, AIG now has a two-notch differential between its main IFS ratings and the parent senior debt rating, rather than the standard three-notch spread. "Our affirmation of the parent ratings, with narrower notching, reflects the diversification benefit from owning sizable P&C and life insurance businesses along with the company's good geographic spread," said Mr. Ballentine.

AIG PARENT

AIG's Baa1 senior debt rating is based on its leading market positions in global P&C insurance and US life insurance, its diversification across products and geographic regions, its successful divestment/unwinding of noncore holdings, and the healthy liquidity of the parent company. These strengths are tempered by the company's record of weak profits and volatile reserves in P&C insurance, its above-average exposure to structured and alternative investments (although the company plans to reduce its hedge fund allocation), and the complexity of risk management across its many business lines and countries/regions.

AIG aims to return at least $25 billion of capital to shareholders over the next two years, funded through a combination of ordinary dividends and tax-sharing payments from operating companies, capital released from operating companies through reinsurance transactions and reduced hedge fund investments, proceeds from divestitures, and increased financial leverage at the parent company. Moody's expects that AIG will manage these initiatives so as to balance the interests of creditors and shareholders, maintaining ample resources to support the operating subsidiaries as needed.

Moody's cited the following factors that could lead to a rating upgrade for AIG: (i) improvement in the stand-alone credit profiles of the US P&C operations and AIG L&R, (ii) consolidated return on capital in the high single digits, and (iii) improvement in financial flexibility (e.g., total leverage below 25%, pretax interest coverage in the high single digits).

The following factors could lead to a rating downgrade: (i) deterioration in the stand-alone credit profiles of major operating units, (ii) insufficient liquidity within operating units or at the parent relative to the company's or Moody's stress tests, or (iii) a decline in financial flexibility (e.g., total leverage of 35% or higher, pretax interest coverage below four times). To the extent AIG sheds major businesses and reduces its diversification, Moody's could widen the notching between the IFS ratings of the operating companies and the senior debt rating of the parent.

PROPERTY CASUALTY

AIG has one of the world's largest P&C networks, writing a broad range of commercial and consumer coverages. The A2 IFS ratings of the US and Canadian subsidiaries are based on their market leadership in commercial and specialty lines, diversified product offerings, and expertise in writing large and complex risks. These units also benefit from AIG's global footprint, which helps the group serve multinational accounts and deploy resources to markets and business lines that offer favorable returns.

Challenges for the P&C group include a record of adverse loss development and weak profitability, along with exposure to natural and man-made catastrophes. A majority of the reserves are in long-tail casualty lines, heightening the risk and uncertainty regarding ultimate losses. AIG aims to improve its profitability through better client segmentation and risk selection, exiting subpar business units, greater use of reinsurance, and reducing its expenses. However, this effort may be hampered by a downward trend in commercial P&C pricing, continued low yields on fixed-income investments, and modest global economic growth.

Moody's cited the following factors that could lead to a rating upgrade for AIG's US pool members: (i) improvement in underwriting results and profitability (e.g., combined ratio consistently below 100%, return on capital above 8%), (ii) consistent favorable development of loss reserves, and (iii) improvement in AIG's financial flexibility (e.g., total leverage below 25%, pretax interest coverage in the high single digits).

The following factors could lead to a rating downgrade: (i) deterioration in underwriting results (e.g., combined ratio above 103%, return on capital below 5%), (ii) significant further adverse loss development, or (iii) a decline in statutory surplus by more than 10% in a given year.

AIG's Canadian subsidiary could see a rating upgrade in the event of: (i) a shift in business mix to more granular, less volatile product lines, (ii) lower gross catastrophe risk, (iii) strong profitability with a return on capital above 10%, and (iv) rating upgrades of other AIG P&C companies.

The Canadian subsidiary's rating could be downgraded in the event of: (i) outsized growth in more volatile product lines, (ii) a return on capital below 8% on a sustained basis, (iii) a meaningful decline in regulatory capital (e.g., decline of more than 10% in a given year or a Canadian MCT regulatory solvency ratio below 230%), or (iv) rating downgrades of other AIG P&C companies.

AIG's Chinese subsidiary is a leading foreign insurer in that market, with good brand recognition and a global network to serve multinational clients. However, the foreign ownership leads to regulatory constraints, limiting the company's growth rate and elevating its expense ratio. In reviewing this company's A2 IFS rating for downgrade, Moody's will consider the implicit and explicit support it receives from AIG, as well as the strategic importance of the Chinese presence to AIG. Deep integration and support could lead to a rating confirmation, whereas low growth potential and limited parental support could lead to a downgrade.

AIG LIFE AND RETIREMENT

The A2 IFS ratings of AIG L&R are based on the group's continuing significant (top 10 in several cases) positions in a number of individual annuity, life insurance and retirement product markets along with good capitalization, said Moody's. Reducing hedge fund exposure, as the company has proposed, should improve the quality of AIG L&R's investments, although it will incrementally lower long-term net investment income and profitability.

Offsetting these strengths are AIG L&R's significant exposure to interest rate risk and spread compression from its dominant fixed annuity businesses, and a growing exposure to equity market and hedging risks, largely through its growing individual variable annuity business.

AIG L&R's streamlining of distribution channels, including the planned sale of AIG Advisor Group, and its greater use of life reinsurance, will result in a smaller, more narrowly focused life insurance operation with lower capital levels over the next two years. Moody's still expects the group to maintain a consolidated NAIC risk-based capital (RBC) ratio of at least 425% and statutory return on capital (ROC) in the 4%-8% range, consistent with its ratings.

Moody's said the following factors could lead to a rating upgrade for AIG L&R: (i) continued leading market presence and business diversification, (ii) consolidated statutory ROC consistently exceeding 8%, (iii) NAIC RBC ratio of at least 425% company action level, with no decline in consolidated statutory surplus exceeding 10% in a given year, and (iv) improvement in AIG's financial flexibility (e.g., total leverage below 25%, pretax interest coverage in the high single digits).

The following factors could lead to a rating downgrade: (i) consolidated statutory ROC below 4% and/or continued earnings volatility, (ii) a decline in consolidated statutory surplus by more than 10% in a given year, (iii) NAIC RBC ratio below 350% company action level, or (iv) pretax gross asset losses of 35 basis points or more in a given year.

UNITED GUARANTY

Moody's said the review for downgrade of UGRIC's Baa1 IFS rating is based on AIG's planned initial public offering of up to 19.9% of UGRIC's parent, UGC, as a first step towards full separation, pending regulatory and other approvals. The rating agency will consider what implicit and explicit support AIG will provide to UGRIC following the spinoff, including the potential termination of a capital maintenance agreement. UGRIC's IFS rating currently reflects a Baa2 stand-alone assessment plus one notch of rating uplift based on AIG support.

Moody's cited aspects of the proposed spinoff that would be credit negative for UGC and UGRIC, including fewer funding sources, a higher cost of capital, and higher reporting and compliance expenses as a public company. Nevertheless, the rating agency expects that UGRIC will remain a leading mortgage insurer, with AIG providing reinsurance protection for a transition period, or arranging for substitutes, to ensure that UGRIC complies with capital standards of Fannie Mae and Freddie Mae.

A multi-year extension of AIG's capital maintenance agreement and reinsurance support could lead to a rating confirmation for UGRIC. Absent such support, Moody's would likely downgrade UGRIC's IFS rating to its stand-alone credit profile of Baa2.

RATING ACTIONS

Moody's has affirmed the following ratings with a stable outlook:

American International Group, Inc. -- long-term issuer rating Baa1, senior unsecured debt Baa1, junior subordinated debt Baa2 (hyb), short-term issuer rating Prime-2, senior unsecured shelf/MTN program (P)Baa1, subordinated shelf (P)Baa2, junior subordinated shelf (P)Baa2, short-term note issuance program (P)Prime-2;

AIG Life and Retirement -- American General Life Insurance Company, The United States Life Insurance Company in the City of New York, The Variable Annuity Life Insurance Company -- insurance financial strength A2;

AIG Life and Retirement funding agreement-backed notes -- AIG Global Funding, AIG SunAmerica Global Financing Trusts, ASIF II, ASIF III (Jersey) Limited -- senior secured debt A2, senior secured MTN program (P)A2;

AIG Life Holdings, Inc. -- backed senior unsecured debt Baa1, backed junior subordinated debt Baa2 (hyb);

Global Capital Markets long-term ratings -- AIG Financial Products Corp., AIG-FP Capital Funding Corp., AIG-FP Matched Funding Corp., AIG-FP Matched Funding (Ireland) P.L.C., AIG Management France S.A., AIG Matched Funding Corp. -- backed long-term issuer rating or backed senior unsecured debt Baa1, backed MTN program (P)Baa1;

Global Capital Markets short-term ratings -- AIG Financial Products Corp., AIG Matched Funding Corp. -- backed short-term debt Prime-2;

SAFG Retirement Services, Inc. -- backed senior unsecured debt Baa1.

Moody's has placed the following ratings on review for downgrade:

AIG Insurance Company China, Ltd. -- insurance financial strength A2;

United Guaranty Residential Insurance Company -- insurance financial strength Baa1.

Moody's has downgraded the following ratings and assigned a stable outlook:

AIG Insurance Company of Canada -- insurance financial strength to A2 from A1;

AIG Property Casualty U.S., Inc. -- AIG Assurance Company, AIG Property Casualty Company, AIG Specialty Insurance Company, AIU Insurance Company, American Home Assurance Company, Commerce and Industry Insurance Company, Granite State Insurance Company, Illinois National Insurance Co., Lexington Insurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., New Hampshire Insurance Company, The Insurance Company of the State of Pennsylvania -- insurance financial strength to A2 from A1.

The principal methodologies used in rating AIG Financial Products Corp., AIG Life Holdings, Inc., AIG Management France S.A., AIG Matched Funding Corp., AIG-FP Capital Funding Corp., AIG-FP Matched Funding (Ireland) P.L.C., AIG-FP Matched Funding Corp., American International Group, Inc., and SAFG Retirement Services, Inc. were Global Life Insurers published in December 2015, Global Property and Casualty Insurers published in December 2015, and Mortgage Insurers published in December 2015. The principal methodology used in rating AIG SunAmerica Global Financing X, American General Life Insurance Company, ASIF II, ASIF III (Jersey) Limited, United States Life Ins. Co. in The City of NY, Variable Annuity Life Insurance Company, and AIG Global Funding were Global Life Insurers published in December 2015. The principal methodology used in rating AIG Assurance Company, AIG Property Casualty Company, AIG Specialty Insurance Company, AIU Insurance Company, American Home Assurance Company, Commerce and Industry Insurance Company, Granite State Insurance Company, Illinois National Insurance Co., Insurance Co. of the State of Pennsylvania, Lexington Insurance Company, National Union Fire Ins Co of Pittsburgh, Pa., New Hampshire Insurance Company, AIG Insurance Company of Canada, and AIG Insurance Company China, Ltd. were Global Property and Casualty Insurers published in December 2015. The principal methodology used in rating United Guaranty Residential Insurance Co. were Mortgage Insurers published in December 2015. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to pay senior policyholder claims and obligations.

AIG, based in New York City, is a leading international insurance organization serving customers in more than 100 countries and jurisdictions. AIG reported total revenues of $44 billion and net income attributable to AIG of $4 billion for the first nine months of 2015. AIG shareholders' equity was $99 billion as of September 30, 2015.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating for AIG Insurance Company of Canada has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Moody's has not provided advisory services but may have provided Ancillary or Other Permissible Service(s) to the rated entity, its related third parties and/or the party that requested the rating within the past two years (including during the most recently ended fiscal year). Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's credit rating agency in Canada" on the ratings disclosure page www.moodys.com/disclosures on our website for further information.

The person who approved American International Group, Inc., American General Life Insurance Company, The United States Life Insurance Company in the City of New York, The Variable Annuity Life Insurance Company, ASIF II, ASIF III (Jersey) Limited, AIG Life Holdings, Inc., AIG Financial Products Corp., AIG-FP Capital Funding Corp., AIG-FP Matched Funding Corp., AIG-FP Matched Funding (Ireland) P.L.C., AIG Management France S.A., AIG Matched Funding Corp., SAFG Retirement Services, Inc., United Guaranty Residential Insurance Company, AIG Insurance Company of Canada, AIG Assurance Company, AIG Property Casualty Company, AIG Specialty Insurance Company, AIU Insurance Company, American Home Assurance Company, Commerce and Industry Insurance Company, Granite State Insurance Company, Illinois National Insurance Co., Lexington Insurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., New Hampshire Insurance Company, The Insurance Company of the State of Pennsylvania, and AIG Global Funding credit ratings is Robert Riegel, MD-Insurance, Financial Institutions Group, 212-553-4663. The person who approved AIG Insurance Company China, Ltd. credit rating is Stephen Long, MD-Financial Institutions, Financial Institutions Group, 852-3758-1306.

The relevant office for each credit rating is identified in "Debt/deal box" on the Ratings tab in the Debt/Deal List section of each issuer/entity page of the Website.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Bruce Ballentine
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Riegel
MD - Insurance
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms AIG's Baa1 senior debt rating, downgrades P&C insurance ratings to A2 from A1, stable outlook
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