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Announcement:

Moody's affirms AIG's ratings (senior debt at Baa1) with stable outlook

07 Aug 2012

New York, August 07, 2012 -- Moody's Investors Service has affirmed the ratings of American International Group, Inc. (NYSE: AIG -- senior unsecured debt at Baa1) following the announcement that AIG is repurchasing $3 billion worth of its common stock from the US Treasury. The rating agency also affirmed the A1 insurance financial strength ratings of US-based members of Chartis, the A2 insurance financial strength ratings of SunAmerica Financial Group (SunAmerica) and other ratings supported by these entities (see list below). The outlook for these ratings is stable.

RATINGS RATIONALE

Through a transaction announced shortly after AIG's second-quarter 2012 earnings release, the US Treasury is selling $5.75 billion worth of AIG shares, including the $3 billion being repurchased by AIG and $2.75 billion being purchased by the public. This is the Treasury's third sale of AIG shares in 2012, and it reduces the Treasury's ownership stake in AIG to about 53% from about 77% at the start of the year. AIG has participated in all three of the Treasury's offerings, repurchasing a total of $8 billion worth of shares, including the current transaction.

AIG's latest share buyback was facilitated by the monetization of a majority of its subordinated interest in Maiden Lane III (ML III), a special purpose vehicle being liquidated by the Federal Reserve Bank of New York through auctions of ML III assets. AIG carried its subordinated ML III interest at a fair value of $8.1 billion as of June 30, 2012. This interest is being monetized through a cash payment of $6.0 billion received by AIG in July, another $1.9 billion due in August and residual amounts due thereafter.

AIG has held the ML III interest within its Direct Investment book (DIB), a runoff portfolio that includes the parent company's Matched Investment Program and certain non-derivative assets and liabilities of the former AIG Financial Products Corp. portfolio. As of June 30, 2012, The DIB had total assets of $37.6 billion and total liabilities of $29.2 billion, excluding the value of related interest rate and foreign exchange hedges. After giving effect to the ML III monetization, AIG estimated that it had more than $5 billion of excess liquidity in the DIB, a sufficient cushion to fund the latest share repurchase.

"Monetization of the ML III interest has significantly enhanced the liquidity of the DIB while also reducing its capital requirements," said Bruce Ballentine, Moody's lead analyst for AIG. "We believe the DIB and AIG as a whole have sufficient capital and liquidity to support the current ratings, even after the share buybacks of recent months."

Despite the likelihood that the DIB has sufficient assets to cover its liabilities, Moody's has changed its characterization of DIB borrowings from operating debt to financial debt. This is based on certain illiquid assets held by the DIB as well as AIG's transfers of assets into and out of the DIB. "Treating the DIB borrowings as financial debt will highlight the expected runoff of the DIB over the next several years," said Ballentine. More than half the DIB's debt ($22.4 billion outstanding on June 30, 2012) is scheduled to mature over the next five years.

Based on Moody's calculations, AIG had total leverage of 33% on June 30, 2012, and pretax interest coverage of about 3x for preceding 12 months. The leverage ratio is consistent with the company's ratings, while the coverage ratio is somewhat weak for the ratings. The ratings incorporate Moody's expectation that AIG will improve its financial flexibility metrics through some combination of earnings growth and debt reduction, so as to achieve pretax interest coverage exceeding 4x within 12-18 months. The rating agency also expects that AIG will operate well within the constraints of its own capital and liquidity stress testing framework.

AIG

AIG's ratings reflect the leading market positions of its core insurance operations, its broad diversification across products and geographic areas, its divestiture/unwinding of noncore businesses over the past few years and the strong liquidity of the parent company. The company's credit profile is constrained by the weak profitability of core operations (on a combined basis), the continuing exposure to certain noncore activities with weaker credit profiles and the complexity of risk management across numerous business lines and regions.

Moody's cited the following factors that could lead to a rating upgrade for AIG: (i) improvement in the intrinsic credit profiles of Chartis and/or SunAmerica, (ii) further de-risking/divesting of noncore businesses, and (iii) improvement in financial flexibility metrics (e.g., total leverage below 30%, pretax interest coverage in high single digits).

The following factors could lead to a rating downgrade for AIG: (i) deterioration in the intrinsic credit profiles of Chartis and/or SunAmerica, (ii) losses from noncore businesses exceeding half a year's normalized income from core operations, (iii) insufficient liquidity within the core operations or at the parent per the company's stress testing framework, or (iv) deterioration in financial flexibility metrics (e.g., total leverage of 40% or higher, normalized pretax interest coverage remaining below 4x).

CHARTIS

The Chartis ratings are based on the group's strong market position in commercial and specialty lines, its expertise in writing large and complex risks, and its broad product and geographic diversification. The extensive product offerings and global footprint allow Chartis to deploy capital to markets that offer favorable returns. These strengths are offset by the group's weak profitability over the past few years, its history of adverse loss development, and its exposure to natural and man-made catastrophes.

"Much of Chartis's business is in long-tail US casualty lines, heightening the risk and uncertainty surrounding loss reserves," noted Ballentine. Chartis also has greater investment risk through alternative investments and below-investment-grade structured securities than similarly rated peers.

Moody's cited the following factors that could lead to a rating upgrade for Chartis: (i) improvement in underwriting results and profitability (e.g., combined ratio below 100%, return on capital exceeding 8%), (ii) stable loss reserves (e.g., adverse development not exceeding 1% of net reserves), and (iii) improvement in AIG's financial flexibility (e.g., total leverage below 30%, pretax interest coverage in high single digits).

The following factors could lead to a rating downgrade for Chartis: (i) continued weak underwriting results (e.g., combined ratio above 105%, return on capital below 5%), (ii) significant adverse reserve development (e.g., exceeding 5% of net reserves), or (iii) underwriting and/or investment losses causing Chartis's equity base to fall by more than 10% in a given year.

SUNAMERICA

SunAmerica's ratings are based on its significant (in several cases, top 10) market positions in a number of life insurance, individual annuity and retirement product markets. SunAmerica has continued to rebuild and even extend its sales and market presence in 2012. Pretax operating income has improved in recent quarters, given healthy sales and the reinvestment of cash over the past 18 months. Moody's expects this momentum to continue through 2012 and beyond.

Offsetting these strengths, SunAmerica has significant exposure to interest rate risk and spread compression from its dominant annuity businesses. This could put pressure on earnings if interest rates remain low over the next several years. SunAmerica's reduced emphasis on bank-sold fixed annuities year to date will temper this exposure.

"While redeploying cash, SunAmerica has accumulated significant holdings of structured securities and alternative assets," said Laura Bazer, Moody's lead analyst for SunAmerica. "These assets expose the group to further investment losses, particularly in a stress scenario, although the risk is mitigated by strong statutory capital levels." Most SunAmerica companies have NAIC risk-based capital (RBC) ratios exceeding 400%.

Moody's cited the following factors that could lead to a rating upgrade for SunAmerica: (i) improved profitability, with a statutory return on capital of at least 8% and lower earnings volatility, and (ii) pretax asset losses of no more than $400 million in 2012.

The following factors could lead to a rating downgrade for SunAmerica: (i) deterioration in key elements of the business profile such as brand, reputation, distribution channels and market share, (ii) statutory return on capital below 4%, or (iii) NAIC RBC ratios below 325%.

RATINGS AFFIRMED

The following ratings have been affirmed with a stable outlook:

AIG Funding, Inc. -- backed short-term debt Prime-2;

American General Capital II -- backed trust preferred stock Baa2 (hyb);

American General Institutional Capital A & B -- backed trust preferred stock Baa2 (hyb);

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

Chartis (US-based rated members) -- AIU Insurance Company; American Home Assurance Company; Chartis Property Casualty Company; Chartis Specialty Insurance Company; Commerce and Industry Insurance Company; National Union Fire Insurance Company of Pittsburgh, Pennsylvania; New Hampshire Insurance Company; The Insurance Company of the State of Pennsylvania -- insurance financial strength A1;

Global Capital Markets -- AIG Financial Products Corp., AIG Matched Funding Corp., AIG-FP Capital Funding Corp., AIG-FP Matched Funding Corp., AIG-FP Matched Funding (Ireland) P.L.C., Banque AIG -- backed long-term issuer rating or backed senior unsecured debt 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;

SunAmerica Financial Group -- American General Life and Accident Insurance Company, American General Life Insurance Company, American General Life Insurance Company of Delaware, SunAmerica Annuity and Life Assurance Company, SunAmerica Life Insurance Company, The United States Life Insurance Company in the City of New York, The Variable Annuity Life Insurance Company, Western National Life Insurance Company -- insurance financial strength A2;

SunAmerica Financial Group (short-term ratings) -- SunAmerica Annuity and Life Assurance Company, SunAmerica Life Insurance Company -- short-term insurance financial strength Prime-1;

SunAmerica Financial Group (funding agreement-backed note programs) -- AIG SunAmerica Global Financing Trusts, ASIF II, ASIF III (Jersey) Limited, ASIF Global Financing Trusts -- senior secured debt A2;

SunAmerica Financial Group, Inc. -- backed senior unsecured debt Baa1.

AIG, based in New York City, is a leading international insurance organization serving customers in more than 130 countries. AIG reported total revenues of $35.6 billion and after-tax operating income of $5.0 billion for the first half of 2012. AIG shareholders' equity was $105 billion as of June 30, 2012.

The principal methodologies used in this rating were Moody's Global Rating Methodology for Property and Casualty Insurers published in May 2010 and Moody's Global Rating Methodology for Life Insurers published in May 2010. Please see the Credit Policy page on www.moodys.com for copies of these methodologies.

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

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

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 ratings (senior debt at Baa1) with stable outlook
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