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Rating Action:

Moody's reiterates negative outlook on AIG; US life ops negative

07 Aug 2008
Moody's reiterates negative outlook on AIG; US life ops negative

New York, August 07, 2008 -- Moody's Investors Service has affirmed the ratings of American International Group, Inc. (NYSE: AIG -- senior unsecured debt rated Aa3) while reiterating the company's negative rating outlook. The rating agency also affirmed the Aa2 insurance financial strength ratings of AIG's Domestic Life Insurance and Retirement Services subsidiaries (DLIRS), while changing the DLIRS rating outlook to negative from stable. The ratings and outlooks on all other AIG subsidiaries have been affirmed. These rating actions follow AIG's announcement of a $5.4 billion net loss for the second quarter of 2008. The affirmations are based on Moody's understanding that AIG will actively address potential liquidity and capital needs at various operating units, including DLIRS and AIG Financial Products Corp. (AIGFP). Failure to address these concerns in the near term could lead to rating downgrades at the parent company, DLIRS and/or other operating units.

The second-quarter net loss includes after-tax unrealized market valuation losses of $3.6 billion on mortgage-exposed credit default swaps (CDS) at AIGFP, and after-tax realized capital losses of $4.0 billion, largely from other-than-temporary impairment (OTTI) of residential mortgage-backed securities (RMBS) held by the DLIRS companies. AIG's shareholders' equity account declined by $1.6 billion during the quarter to $78.1 billion as of June 30, 2008, as the net loss and unrealized depreciation of investments offset a $7.5 billion common stock issuance in May 2008. AIG's broader capital base, including common equity and hybrid securities with significant equity content, increased during the quarter as a result of hybrid issuance totaling $12.8 billion.

Over the past nine months, AIG has absorbed after-tax unrealized market valuation losses on CDS totaling $16.8 billion, and after-tax realized capital losses (principally OTTI) totaling $9.1 billion. Also during this period, the company has posted to its equity account net after-tax unrealized investment depreciation totaling $12.1 billion.

The negative outlook on the DLIRS companies reflects their weakened capital position as a result of persistent OTTI losses, which also generally flow through the regulatory financial statements and reduce regulatory capital. The DLIRS companies' Aa2 insurance financial strength ratings incorporate Moody's expectation of a combined NAIC risk-based capital (RBC) ratio of 350% or higher. To the extent that the RBC ratio has fallen below this level, Moody's expects that the company will take steps to strengthen the capitalization during the remainder of the year.

Moody's noted that the DLIRS companies hold a majority of AIG's RMBS, both directly and through their securities lending collateral. Securities lending typically involves relatively short-term funding (secured by the lent securities), with the cash collateral invested in longer-term assets, including RMBS. With RMBS generally trading well below par, Moody's expects that AIG will maintain ample alternative sources of liquidity to repay securities borrowers who may want to reduce or exit their positions.

"AIG's DLIRS group is a leading US life insurer, with well diversified products and distribution channels," said Moody's Laura Bazer, lead analyst for these operations. "The negative outlook reflects continued weakness in the RMBS market and the resulting strains on the group's asset quality and capitalization."

The rating agency noted that the negative outlook on AIG (parent company) incorporates the challenges within DLIRS, as well as the growing CDS liabilities and collateral requirements at AIGFP, whose obligations are unconditionally guaranteed by AIG. Moody's expects that AIG and AIGFP will maintain robust coverage of liquidity needs, even in severely adverse scenarios.

Moody's has estimated that AIG's ultimate economic losses on CDS and RMBS will likely be materially smaller than the current market values would suggest. Nevertheless, current market values have a meaningful impact on collateral requirements at AIGFP and regulatory capital levels at several insurance subsidiaries.

"AIG faces near-term challenges through its exposures to the troubled US mortgage market," said Bruce Ballentine, lead analyst for AIG. "We believe that the company's diversified operations and its financial flexibility will help it to weather the storm."

Moody's last rating action on these entities took place on May 22, 2008, when AIG's senior unsecured debt rating was downgraded to Aa3 (negative outlook) from Aa2, and the DLIRS companies' insurance financial strength ratings were downgraded to Aa2 (stable outlook) from Aa1.

Moody's has affirmed the following ratings while maintaining a negative outlook:

American International Group, Inc. -- long-term issuer rating at Aa3, senior unsecured debt at Aa3, subordinated debt at A1, senior unsecured debt shelf at (P)Aa3, subordinated debt shelf at (P)A1, preferred stock shelf at (P)A2.

Moody's has affirmed the following ratings while changing the outlook to negative from stable:

Domestic Life Insurance & Retirement Services subsidiaries -- AIG Annuity Insurance Company, AIG Life Insurance Company, AIG SunAmerica Life Assurance Company, American General Life and Accident Insurance Company, American General Life Insurance Company, American International Life Assurance Company of New York, First SunAmerica Life Insurance Company, SunAmerica Life Insurance Company, The United States Life Insurance Company in the City of New York, The Variable Annuity Life Insurance Company -- insurance financial strength 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 -- senior secured debt 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 $19.9 billion and a net loss of $5.4 billion for the second quarter of 2008. Shareholders' equity was $78.1 billion as of June 30, 2008.

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.

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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