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Announcement:

Moody's affirms AIG's ratings and maintains negative outlook

03 Mar 2008
Moody's affirms AIG's ratings and maintains negative outlook

New York, March 03, 2008 -- Moody's Investors Service has affirmed the ratings of American International Group, Inc. (NYSE: AIG -- senior unsecured debt rating of Aa2), following the company's announcement of a $5.3 billion net loss for the fourth quarter of 2007. The net result includes significant unrealized market valuation losses on super-senior credit default swaps (CDS) on multi-sector collateralized debt obligations with subprime mortgage content. Moody's said that AIG's super-senior CDS have more moderate exposure to recent mortgage vintages than those of many other market participants, such that AIG's ultimate economic losses may be materially smaller than estimated market values would suggest. Nevertheless, the rating agency said that a material increase in market valuation losses and/or a realization of significant economic losses on this portfolio could lead to a downgrade of AIG's ratings. The rating outlook for AIG remains negative.

AIG's fourth-quarter 2007 results included a $7.2 billion after-tax unrealized market valuation loss on super-senior CDS as well as $2.1 billion of after-tax realized capital losses, mainly from other-than-temporary impairment of investment securities. Also in the fourth quarter, AIG posted to its equity account $2.5 billion in after-tax unrealized depreciation of investments. All of these charges pertained largely to subprime mortgage exposures.

Moody's changed AIG's rating outlook to negative from stable on February 12, 2008, based on the company's sizable exposure to the US subprime mortgage market, where credit quality and liquidity remain under pressure, along with the company's trend toward higher operating and financial leverage over the past few years. The rating agency noted that uncertainty surrounding the valuation of subprime mortgage exposures could add significant volatility to AIG's earnings and capital position over the near-to-medium term, thereby weakening the firm's financial flexibility to some extent.

In addition to the super-senior CDS portfolio, Moody's is monitoring the residential mortgage-backed securities (RMBS) held by AIG's insurance subsidiaries, both directly and through securities lending activities. Moody's noted that AIG generally holds well diversified senior tranches within RMBS pools, such that the ultimate economic losses on these securities may be significantly smaller than current market values would suggest. Still, Moody's is concerned that market value fluctuations on RMBS could add volatility to the earnings and capital levels of specific insurance subsidiaries and to AIG as a whole.

Other areas of potential volatility for AIG are the subprime and second-lien mortgage portfolios insured by the Mortgage Guaranty unit, as well as the subprime and non-prime mortgage loans held by the Consumer Finance unit.

According to Moody's, AIG's ratings reflect its leading positions in many insurance markets, its broad business and geographic scope, its strong earnings and cash flows, and its excellent financial flexibility. These strengths are tempered by the intrinsic volatility in certain General Insurance and Financial Services businesses, by the significant volume of spread-based investment business in the Asset Management segment, and by the company's sizable exposure to the US subprime mortgage market. Moody's expects that AIG will maintain its strategic focus on insurance, with Financial Services accounting for no more than 20% of consolidated operating income.

Moody's cited the following factors that could lead to a stable rating outlook for AIG: (i) improvements in stand-alone credit profiles of major operating units, (ii) continued strong group profitability, with returns on equity exceeding 15%, (iii) remediation of all material weaknesses in internal controls over financial reporting, and (iv) adjusted financial leverage (including pension and lease adjustments and excluding debt of finance-type operations and match-funded investment programs) comfortably below 20%.

Moody's cited the following factors that could lead to a rating downgrade for AIG: (i) a decline in the stand-alone credit profile of one or more substantial operating units, (ii) a decline in group profitability, with returns on equity remaining below 12% over the next few quarters, (iii) a decline in financial flexibility, with adjusted financial leverage exceeding 20% or adjusted pretax interest coverage remaining below 15x over the next few quarters, or (iv) incremental subprime-related realized and/or unrealized after-tax losses exceeding $5 billion.

The last rating action on AIG took place on February 12, 2008, when Moody's changed the rating outlook to negative from stable.

AIG, based in New York City, is a leading international insurance and financial services organization, with operations in more than 130 countries and jurisdictions. The company is engaged through subsidiaries in General Insurance, Life Insurance & Retirement Services, Financial Services and Asset Management. AIG reported total revenues of $110.1 billion and net income of $6.2 billion for the year 2007. Shareholders' equity was $95.8 billion as of December 31, 2007.

For more information, please visit our website at www.moodys.com/insurance.

New York
Bruce Ballentine
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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