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
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)
Moody's has affirmed the following ratings while maintaining a negative
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
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
Financial Institutions Group
Moody's Investors Service