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Related Issuers
AIG Europe Limited
AIG Financial Products Corp.
AIG Life and Retirement
AIG Life Holdings, Inc.
AIG Liquidity Corp.
AIG Management France S.A.
AIG Matched Funding Corp.
AIG Property Casualty Company
AIG Property Casualty Inc.
AIG Specialty Insurance Company
AIG SunAmerica Global Financing II
AIG SunAmerica Global Financing II
AIG SunAmerica Global Financing III
AIG SunAmerica Global Financing V
AIG SunAmerica Global Financing VI
AIG SunAmerica Global Financing X
AIG SunAmerica Global Financing XI
AIG SunAmerica Global Financing XIII
AIG SunAmerica Global Financing XIV
AIG SunAmerica Institutional Funding Note Issuance Program
AIG-FP Capital Funding Corp.
AIG-FP Matched Funding (Ireland) P.L.C.
AIG-FP Matched Funding Corp.
AIU Insurance Company
American General Capital II
American General Institutional Capital A
American General Institutional Capital B
American General Life & Accident Insurance Co
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American General Life Insurance Company
American Home Assurance Company
American International Group, Inc.
ASIF Global Financing XIX
ASIF Global Financing XV
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ASIF I
ASIF II
ASIF III (Jersey) Limited
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First SunAmerica Life Insurance Company
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United Guaranty Mortgage Indemnity Company
United Guaranty Residential Insurance Co.
United States Life Ins. Co. in The City of NY
Western National Life Insurance Company
Rating Action:

Moody's lowers AIG ratings by one notch; outlook stable

12 Jan 2011

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
No Related Data.
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