Chartis U.S. IFS rating to A1 from Aa3; SunAmerica Financial IFS rating to A2 from A1; AIG senior debt to Baa1 from A3; rating action prompted by pending removal of gov't funding facilities; ratings now reflect intrinsic credit profiles of core units.
New York, January 12, 2011 -- Moody's Investors Service has downgraded by one notch the insurance
financial strength (IFS) ratings of American International Group,
Inc.'s (NYSE: AIG) core operations as well as the senior
unsecured debt rating of the parent company. The IFS ratings of
Chartis U.S. were downgraded to A1 from Aa3; the IFS
ratings of SunAmerica Financial Group (SAFG) were downgraded to A2 from
A1; and the senior unsecured debt rating of AIG was downgraded to
Baa1 from A3. The rating outlook for AIG and its core operations
has been revised to stable from negative, reflecting the lower rating
levels as well as the stabilization of core businesses, declining
exposure to noncore businesses, and a pro forma capital structure
that is consistent with the new ratings.
RATING RATIONALE
Today's rating action follows AIG's announcement that it expects
to complete its recapitalization -- a critical step toward independence
from government support -- on January 14, 2011 (assuming no
material change in the relevant facts, circumstances and conditions).
The downgrades reflect Moody's view that while the core insurance
operations have stabilized over the past year, they have not yet
improved sufficiently to justify the previous ratings in the absence of
continued government support. Moody's also believes that
the incremental risk associated with noncore businesses, while reduced,
remains a negative credit consideration that will no longer be mitigated
by government support.
The IFS ratings of the core insurance businesses previously incorporated
one notch of uplift related to government ownership and support,
including the large funding facilities available to AIG from the Federal
Reserve Bank of New York (FRBNY) and the U.S. Treasury.
Those funding commitments will be eliminated through the recapitalization,
leaving AIG and its subsidiaries dependant on their own earnings and cash
flows, along with non-government funding sources, to
address their liquidity and capital needs. Although the government
will hold a controlling interest in AIG following the recapitalization,
Moody's believes that the government may seek to sell down its stake
quickly, assuming favorable market conditions. Accordingly,
Moody's has removed the government support from these ratings.
The ratings of Chartis U.S. and SAFG now reflect their intrinsic
credit profiles. AIG's Baa1 senior unsecured debt rating
is notched downward from the IFS ratings of the core operations to reflect
the structural subordination of the parent relative to the operating companies.
For a simple insurance organization with one major operating unit,
there is typically a three-notch rating differential between the
operating company and the parent. The notching can be narrowed
to reflect the diversification benefits of two or more distinct operating
units, and the notching can be widened to reflect the incremental
risks of noncore operations. In the case of AIG, the core
operations of Chartis and SAFG are well diversified across products and
geographic regions. These benefits are largely offset, in
Moody's view, by the residual risks of noncore businesses.
As a result, AIG's senior unsecured debt rating is positioned
three notches below the Chartis IFS ratings and two notches below the
SAFG IFS ratings.
Moody's notes that AIG's pro forma capital structure,
giving effect to the recapitalization, is consistent with the revised
ratings. Whereas the adjusted financial leverage ratio might point
toward somewhat higher ratings, the total leverage ratio (which
incorporates both financial debt and guaranteed operating debt) and the
interest coverage ratios, collectively, are indicative of
an insurance organization with IFS ratings in the A range and a senior
unsecured debt rating in the Baa range.
Other rating changes at the parent company include a downgrade of the
short-term issuer rating to Prime-2 from Prime-1,
concluding a review for possible downgrade initiated on September 30,
2010, and an upgrade of the subordinated debt rating to Baa2 from
Ba2, concluding a review for possible upgrade initiated on November
5, 2010. The downgrade of the short-term issuer rating
reflects the pending removal of government funding facilities as well
as the downgrade of the long-term senior debt rating to Baa1 (which
corresponds to a short-term debt rating of Prime-2).
The upgrade of the subordinated debt rating represents a return to the
typical one-notch differential between the senior and subordinated
debt ratings of an insurance holding company. Moody's had
widened this differential during the government intervention at AIG to
signal the heightened risk of a coupon deferral or restructuring of the
subordinated debt.
The rating changes cited above have caused similar changes for AIG-related
issuers and instruments whose ratings are supported by these entities.
Please see below for a full list of affected ratings.
RECAPITALIZATION
The recapitalization plan, announced by AIG at the end of September
2010, includes a series of steps to reduce the company's debt
burden and shift its ownership back to the public equity markets.
The main elements of the plan are: (i) repayment/termination of
the FRBNY credit facility through cash proceeds from recent divestitures,
namely the initial public offering (IPO) of AIA Group Limited (AIA Group)
and the sale of American Life Insurance Company (ALICO); (ii) allocation
of most of the available amount of the Treasury's Series F preferred
stock commitment to the purchase of preferred interests, currently
held by the FRBNY, in the special purpose vehicles formed to hold
AIA Group and ALICO, such that these interests will be held by Treasury
and redeemed over time, and (iii) exchange of the Treasury's
Series C, E and outstanding F preferred stock for AIG common stock
to be sold on the open market over time.
AIG has also completed or announced several related transactions in order
to reestablish access to the bank, debt and equity markets and to
strengthen its capital structure. One such transaction, confirmed
by the company this week, is the planned distribution of up to 75
million warrants to AIG's common shareholders of record as of January
13, 2011. Each warrant entitles the holder to purchase one
share of AIG common stock at $45 per share.
CHARTIS CREDIT PROFILE
The A1 IFS ratings of various members of Chartis reflect the group's
strong market presence in property & casualty (P&C) insurance,
including the top market share in U.S. commercial lines
and a global network that provides a distinct competitive advantage.
Chartis writes substantially all lines of P&C insurance and serves
more than 45 million clients worldwide. The global footprint and
diversified product set give Chartis significant growth opportunities,
even in a generally soft U.S. market for commercial lines.
These strengths are tempered by the group's long record of reserve
volatility and its weakened profitability since the onset of the financial
crisis.
Moody's believes that Chartis is taking steps to reduce its reserve
volatility and enhance its risk-adjusted return on capital.
The group is placing greater emphasis on consumer segments, multinational
business, specialty markets and accident & health lines,
while reducing its writings of the more volatile excess casualty,
workers' compensation and catastrophe-exposed property lines.
Chartis is also investing in enhanced financial reporting and risk management
capabilities. Nevertheless, the rating agency notes that
it could take time for these efforts to deliver more benign reserve development
and a more favorable return on capital.
SUNAMERICA FINANCIAL GROUP CREDIT PROFILE
The A2 IFS ratings of members of SAFG reflect its position as one of the
largest and most diversified providers of life insurance and retirement
services in the U.S. The group enjoys top-10 market
shares in a number of life insurance, individual annuity and retirement
products, despite business disruptions stemming from the AIG credit
crisis of 2008. SAFG remains the third-largest provider
of 403(b) retirement plans, with a focus on serving grade-school
teachers, and has earned back its leadership in the market for bank-distributed
fixed annuities. The group also remains an important provider of
individual life insurance and variable annuities -- the former,
in particular, a business with solid earnings capacity.
Offsetting these strengths, SAFG's premiums and deposits are
down materially from pre-crisis levels, and its profitability
remains weak relative to that of peers. SAFG is also exposed to
further investment losses, particularly from mortgage-backed
securities and commercial mortgage loans, although this exposure
is mitigated by strong regulatory capital levels.
NONCORE BUSINESSES
Since the start of the financial crisis, AIG has made substantial
progress in simplifying and de-risking the organization,
including the following:
• Various business sales completed from 2008 through the first nine
months of 2010, generating aggregate net proceeds of approximately
$7 billion.
• IPO of AIA Group completed in October 2010, generating gross
proceeds to AIG of $20.5 billion and valuing all of AIA
Group at about $30.5 billion.
• Sale of ALICO to MetLife Inc. completed in November 2010
for about $16.2 billion in cash and MetLife securities.
• Sale of 80% of consumer lender American General Finance
to funds and affiliates of Fortress Investment Group LLC completed in
November 2010 for $125 million, removing $17 billion
of debt from AIG's balance sheet.
• Agreement to sell Japanese life insurers AIG Star and AIG Edison
to Prudential Financial Inc. for $4.8 billion in
cash and assumed debt (expected to close in February 2011).
• Agreement to sell Taiwanese life insurer Nan Shan Life to Ruen
Chen Investment Holding Co., Ltd. for $2.16
billion in cash.
• Unwinding of a substantial portion of AIG Financial Products Corp.,
with the notional amount of derivatives and the total trade count falling
from about $2 trillion and 44,000, respectively,
in September 2008, to $506 billion and 10,200,
respectively, by the end of September 2010 (with significant further
reductions expected through year-end 2010).
• International Lease Finance Corp.'s raising of $14
billion during 2010 through a variety of secured and unsecured financings
and aircraft portfolio sales, substantially improving its liquidity
profile.
• United Guaranty Corp.'s strengthening of its underwriting
and claims management practices, helping the company to generate
an operating profit through the first nine months of 2010 after three
years of substantial losses.
Moody's believes that AIG has materially reduced the contingent
liquidity risks associated with its noncore businesses, such that
these businesses are unlikely to pose a major threat to the group's
financial position. Still, these operations could heighten
the volatility of AIG's periodic results. Moreover,
adverse developments in the noncore units could raise concerns among existing
and potential customers of the core insurance units, with negative
implications for retention rates and new business generation.
RATINGS DOWNGRADED, OUTLOOK REVISED TO STABLE FROM NEGATIVE
American International Group, Inc. -- long-term
issuer rating and senior unsecured debt to Baa1 from A3, senior
unsecured shelf to (P)Baa1 from (P)A3;
AIG Financial Products Corp. and subsidiaries -- 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 senior debt to Baa1 from A3;
Chartis U.S. -- 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 to A1 from Aa3;
SAFG Retirement Services, Inc. -- backed senior
unsecured debt to Baa1 from A3;
Stone Street Trust -- backed trust preferred stock to Baa1 from A3;
SunAmerica Financial Group -- American General Life and Accident
Insurance Company, American General Life Insurance Company,
American General Life Insurance Company of Delaware, First SunAmerica
Life Insurance Company, 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 to A2 from A1;
SunAmerica Financial Group (funding agreement-backed note programs)
-- AIG SunAmerica Global Financing Trusts, ASIF I & II,
ASIF III (Jersey) Limited, ASIF Global Financing Trusts --
senior secured debt to A2 from A1;
SunAmerica Financial Group, Inc. -- backed
senior unsecured debt to Baa1 from A3;
United Guaranty Corporation subsidiaries -- United Guaranty Mortgage
Indemnity Company, United Guaranty Residential Insurance Company
-- backed insurance financial strength to Baa1 from A3.
RATINGS DOWNGRADED CONCLUDING REVIEW, STABLE OUTLOOK
American International Group, Inc. -- short-term
issuer rating to Prime-2 from Prime-1;
AIG Financial Products Corp. -- backed short-term debt
to Prime-2 from Prime-1;
AIG Funding, Inc. -- backed short-term debt to
Prime-2 from Prime-1;
AIG Liquidity Corp. -- backed short-term debt to Prime-2
from Prime-1;
AIG Matched Funding Corp. -- backed short-term debt
to Prime-2 from Prime-1.
RATINGS AFFIRMED, OUTLOOK REVISED TO STABLE FROM NEGATIVE
Chartis Insurance UK Limited -- insurance financial strength at A1;
SunAmerica Financial Group (short-term ratings) -- First SunAmerica
Life Insurance Company, SunAmerica Annuity and Life Assurance Company,
SunAmerica Life Insurance Company -- short-term insurance
financial strength at Prime-1.
RATINGS UPGRADED CONCLUDING REVIEW, STABLE OUTLOOK
American International Group, Inc. -- subordinated debt
to Baa2 from Ba2, subordinated shelf to (P)Baa2 from (P)Ba2;
American General Capital II -- backed trust preferred stock to Baa2
from Ba2;
American General Institutional Capital A & B -- backed trust
preferred stock to Baa2 from Ba2.
GENERAL
AIG, based in New York City, is a leading international insurance
organization with operations in more than 130 countries and jurisdictions.
AIG shareholders' equity was $81 billion as of September 30,
2010.
Moody's insurance financial strength ratings are opinions of the ability
of insurance companies to punctually pay senior policyholder claims and
obligations. For more information, please visit our website
at www.moodys.com/insurance.
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.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit 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 ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service 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 the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
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
MD - Insurance
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's lowers AIG ratings by one notch; outlook stable
