Moody's changes AIG's rating outlook to negative
New York, February 12, 2008 -- Moody's Investors Service has changed the rating outlook for American
International Group, Inc. (NYSE: AIG -- senior
unsecured debt rated Aa2) to negative from stable, based on the
company's sizable exposure to the US subprime mortgage market,
where credit quality and liquidity remain under pressure. The potential
for loss within this mortgage portfolio is made more significant to AIG's
credit profile because of the company's recent trend towards a more
aggressive capital structure, with operating leverage and financial
leverage rising over the past few years. Moody's also changed
the rating outlooks to negative from stable on several AIG subsidiaries
(i) that have substantial exposure to the US subprime mortgage market,
or (ii) whose ratings rely on significant explicit or implicit support
from the parent company.
The Capital Markets business, conducted by AIG Financial Products
Corp. (backed long-term issuer rating of Aa2), has
written large notional amounts of super-senior credit default swaps
(CDS) against multi-sector collateralized debt obligations (CDOs)
with subprime mortgage content. The CDS contracts are highly customized
and illiquid, particularly in the current market, making it
difficult to determine their fair value for financial reporting purposes.
The company's auditors have concluded that AIG had a material weakness
related to the valuation process as of December 31, 2007.
Moody's said that AIG's multi-sector CDOs have more
moderate exposure to recent vintages than those of many other participants
in this market, such that the ultimate economic losses may be materially
smaller than estimated market valuations would suggest. Moreover,
the internal control weakness appears to be narrow in scope and may be
relatively easy for AIG to remediate. Nevertheless, the CDS
valuation process is likely to remain difficult for the duration of the
mortgage market slump, potentially adding significant volatility
to AIG's earnings and capital position.
Moody's noted that AIG faces volatility in connection with its sizable
investments in residential mortgage-backed securities, including
subprime and Alt-A securities, a majority of which are held
by AIG's US life insurance subsidiaries, both directly and
through their securities lending activities. These securities are
exposed to realized capital losses (through securities sales and other-than-temporary
impairment) as well as unrealized losses (included in other comprehensive
income). Ultimate losses incurred in this portfolio could be lower
than losses recognized to date, but near-term valuations
may add significant volatility to the earnings and capital positions of
the US life subsidiaries.
Other areas of potential volatility are the subprime and second-lien
mortgage portfolios insured by United Guaranty Residential Insurance Company
(insurance financial strength rating of Aa2) and affiliates, as
well as the subprime and non-prime mortgage loans held by American
General Finance Corporation (senior unsecured debt rated A1).
Moody's said that it has applied various market stress scenarios
to AIG's subprime exposures over the past several months,
with AIG demonstrating sufficient capital strength and earnings power
to support the existing ratings. The rating agency will continue
this process in the weeks ahead, incorporating its revised expectations
for cumulative losses across different loan types.
According to Moody's, AIG's ratings reflect its leading market
positions in all major business segments, 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 business units, 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 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' cited the following factors that could lead to a rating downgrade:
(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 falling below 12%, (iii) a decline
in financial flexibility, with adjusted financial leverage exceeding
20% or adjusted pretax interest coverage below 15x, (iv)
net special charges (e.g., associated with natural
or man-made catastrophes or subprime mortgage exposures) exceeding
one-half-year's worth of normalized earnings,
or (v) a material shift in the company's strategic emphasis away
from insurance (e.g., Financial Services accounting
for more than 20% of consolidated operating income).
The last rating action on the parent company took place on December 11,
2007, when Moody's assigned a Aa2 rating to a $1 billion
issue of retail junior subordinated debentures.
Moody's has affirmed the following ratings, while changing
the outlook to negative from stable:
AIG Capital Trusts I & II -- backed trust preferred stock shelf
at (P)Aa3;
AIG Life Holdings (US), Inc. -- backed senior unsecured
debt at Aa2;
AIG Program Funding, Inc. -- backed senior unsecured
debt shelf at (P)Aa2;
AIG Retirement Services, Inc. -- backed senior unsecured
debt at Aa2;
AIG SunAmerica funding agreement-backed note programs -- AIG
SunAmerica Global Financing Trusts, ASIF I & II, ASIF
III (Jersey) Limited, ASIF Global Financing Trusts -- backed
senior unsecured debt at Aa2;
AIG SunAmerica subsidiaries -- AIG SunAmerica Life Assurance Company,
First SunAmerica Life Insurance Company, SunAmerica Life Insurance
Company -- backed insurance financial strength at Aa2;
AIG UK Limited -- insurance financial strength at Aa2;
American General Capital II -- backed trust preferred stock at Aa3;
American General Institutional Capital A & B -- backed trust
preferred stock at Aa3;
American International Group, Inc. -- long-term
issuer rating at Aa2, senior unsecured debt at Aa2, senior
unsecured debt shelf at (P)Aa2, subordinated debt shelf at (P)Aa3,
preferred stock shelf at (P)A1;
Capital Markets subsidiaries -- AIG Financial Products Corp.,
AIG Matched Funding Corp., AIG-FP Capital Funding
Corp., AIG-FP Matched Funding Corp.,
Banque AIG -- backed senior unsecured debt at Aa2;
Domestic Life Insurance & Retirement Services subsidiaries --
AIG Annuity Insurance Company, AIG Life Insurance Company,
American General Life and Accident Insurance Company, American General
Life Insurance Company, American International Life Assurance Company
of New York, The United States Life Insurance Company in the City
of New York, The Variable Annuity Life Insurance Company --
insurance financial strength at Aa1;
Mortgage Guaranty subsidiaries -- United Guaranty Commercial Insurance
Company of North Carolina, United Guaranty Mortgage Indemnity Company,
United Guaranty Residential Insurance Company, United Guaranty Residential
Insurance Company of North Carolina -- insurance financial strength
at Aa2.
Moody's has affirmed the following ratings with a stable outlook:
AGFC Capital Trust I -- backed trust preferred stock at A3;
AIG Funding, Inc. -- backed short-term debt at
Prime-1;
AIG Liquidity Corp. -- backed short-term debt at Prime-1;
American General Finance Corporation -- long-term issuer rating
at A1, senior unsecured debt at A1, short-term debt
at Prime-1;
American General Finance, Inc. -- short-term
debt at Prime-1;
CommoLoco, Inc. -- backed short-term debt at
Prime-1;
ILFC E-Capital Trusts I & II -- backed trust preferred
stock at A3;
International Lease Finance Corporation -- senior unsecured debt
at A1, short-term debt at Prime-1;
Transatlantic Holdings, Inc. -- senior unsecured debt
at A2;
Transatlantic Reinsurance Company -- insurance financial strength
at Aa3.
Moody's has affirmed the following rating with a positive outlook:
AIG General Insurance (Taiwan) Co., Ltd. -- insurance
financial strength at A2.
Moody's will address the rating outlooks on the following AIG subsidiaries
in separate press releases:
AIG Edison Life Insurance Company -- insurance financial strength
at Aa2;
American International Assurance Company (Bermuda) Limited -- insurance
financial strength at Aa2;
American Life Insurance Company -- insurance financial strength at
Aa2;
Domestic Brokerage Group subsidiaries -- AIG Casualty Company;
AIU Insurance Company; American Home Assurance Company; American
International Specialty Lines 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
at Aa2.
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 $91.6 billion and net income of $11.5
billion for the first nine months of 2007. Shareholders' equity
was $104.1 billion as of September 30, 2007.
Moody's insurance financial strength ratings are opinions of the ability
of insurance companies to repay punctually senior policyholder claims
and obligations. 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