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Rating Action:

Moody's reviews AIG's Ba2 hybrid ratings for upgrade; also rates multi-purpose shelf

Global Credit Research - 05 Nov 2010

Core insurance results stable in 3Q 2010; overall net loss driven largely by costs of government funding and discontinued operations.

New York, November 05, 2010 -- Moody's Investors Service has placed the Ba2 subordinated debt rating of American International Group, Inc. (NYSE: AIG) on review for possible upgrade in light of the company's recently completed divestitures of its international life insurance units. The initial public offering (IPO) of AIA Group Limited (AIA Group) and the sale of American Life Insurance Company (ALICO) are important milestones in AIG's government-backed restructuring effort. Moody's also assigned provisional ratings to AIG's "well-known seasoned issuer" shelf registration (senior unsecured debt at (P)A3, negative outlook), as detailed below.

AIG's core insurance operations generated pretax operating income (before net realized capital gains (losses)) of $2.1 billion for 3Q 2010, which was fairly consistent with the prior two quarters and within rating expectations. The company reported a net loss of $2.4 billion attributable to AIG in 3Q 2010 as compared to a net loss of $2.7 billion in 2Q 2010. In each period the net loss was driven largely by the costs of government funding arrangements as well as noncash charges within discontinued operations.

REVIEW OF SUBORDINATED DEBT RATING

AIG's subordinated debt rating currently sits five notches below the senior debt rating, signaling the risk of a coupon deferral or restructuring of the subordinated debt in the event of another market downturn. Moody's rating review will focus on (i) the stabilization of AIG's core insurance businesses over the past several quarters, (ii) the recapitalization plan announced at the end of September and targeted for completion by the end of 1Q 2011, and (iii) AIG's progress in divesting or unwinding noncore businesses, most importantly the divestitures of AIA Group and ALICO.

"We expect to narrow the notching between the senior and subordinated debt ratings as AIG completes its recapitalization and moves toward independence," said Bruce Ballentine, Moody's lead analyst for AIG. As part of the rating review, Moody's will consider the likely extent of government ownership and support beyond the recapitalization and how that might affect creditors. The typical notching for a fully independent insurer is a one-notch differential between senior and subordinated debt ratings, according to the rating agency.

Moody's maintains a negative outlook on AIG's senior debt rating to reflect the difficult market conditions facing its core insurance operations as well as the firm's continuing exposure to noncore businesses with weaker credit profiles. Mr. Ballentine noted, however, "Even in an adverse scenario leading to a downgrade of the senior debt rating, it is likely that the subordinated debt rating would be upgraded so as to reduce the differential between the two."

CORE INSURANCE RESULTS STABLE IN 3Q 2010

CHARTIS: Chartis (insurance financial strength (IFS) rating of Aa3 on US-based members, negative outlook) recorded net premiums written of $8.6 billion in 3Q 2010, up about 10% versus 2Q 2010, mainly because of the first-time consolidation of Fuji Fire & Marine Insurance Company Limited, a Japanese insurer in which Chartis acquired a controlling interest during the first half of the year. Chartis's pretax operating income (before net realized capital gains (losses)) grew to $1.1 billion in 3Q 2010 from $955 million in the prior quarter. Because of continued soft pricing in US commercial lines, Chartis is finding more attractive new business opportunities internationally than in the US, thereby showing the benefit of its geographic diversification. Moody's expects Chartis to maintain a leading market presence in commercial property & casualty insurance, albeit with profitability constrained by the difficult market environment. The rating agency also noted that Chartis writes substantial business in long-tail casualty lines, which heightens the uncertainty and risk related to loss reserving.

SFG: For SunAmerica Financial Group (SFG -- IFS rating of A1, negative outlook), total premiums, deposits and other considerations fell by about 11% to $4.4 billion in 3Q 2010 from $5.0 billion in 2Q 2010, mainly reflecting a slowdown in fixed annuity sales due to the low interest rate environment. Pretax operating income (before net realized capital gains (losses)) declined to $978 million in 2Q 2010 from $1.1 billion in the prior quarter. Realized capital gains (losses) swung to a positive $20 million in 3Q 2010 from a negative $966 million in 2Q 2010, as SFG took selective gains to offset other-than-temporary impairments, which have gradually declined in recent quarters. SFG is exposed to further losses on commercial mortgage loans and mortgage-backed securities, albeit this exposure is mitigated by strong regulatory capital levels and the likelihood of parental support if needed.

MIXED RESULTS IN OTHER OPERATIONS

FINANCIAL SERVICES: The Financial Services operations, which are noncore to AIG, reported a pretax operating loss (before net realized capital gains (losses)) of $81 million in 3Q 2010 as compared to pretax operating income of $25 million in 2Q 2010. The change reflects asset impairment losses at International Lease Finance Corporation (ILFC -- corporate family rating of B1, stable outlook), partly offset by more favorable results at AIG Financial Products Corp. (AIGFP -- backed long-term issuer rating of A3, negative outlook). ILFC issued $4.4 billion in secured and unsecured notes during 3Q 2010. Moody's expects that ILFC will further develop its independent funding sources in preparation for an eventual separation from AIG. AIGFP continues to unwind its business, reducing the notional amount of its derivative portfolio by 46% (to $506 billion) and its total trade count by 37% (to 10,200) during the first nine months of 2010. As AIG moves toward independence, any residual risks associated with ILFC or AIGFP could place downward pressure on the parent company ratings.

UGC: United Guaranty Corporation (UGC -- lead company United Guaranty Residential Insurance Company has IFS rating of A3, negative outlook) reported a pretax operating loss (before net realized capital gains (losses)) of $124 million in 3Q 2010, as compared to pretax operating income of $226 million in the prior quarter. The change reflects unfavorable loss trends in UGC's second-lien mortgage and student loan portfolios, both of which are in runoff. Performance of the ongoing first-lien mortgage business has improved over the past few quarters.

DIVESTITURES COMPLETED OR UNDERWAY

AIG has divested numerous large and small businesses since the credit crisis of 2008, capped by the IPO of AIA Group and the sale of ALICO. Following is a summary of divestitures completed or announced:

- 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 late 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 on November 1, 2010, for about $16.2 billion in cash and MetLife securities;

- Agreement to sell Japanese life insurers AIG Star Life Insurance Co. Ltd. and AIG Edison Life Insurance Company to Prudential Financial Inc. for $4.8 billion in cash and assumed debt (expected to close in 1Q 2011);

- Agreement to sell 80% of consumer lender American General Finance to funds and affiliates of Fortress Investment Group LLC for $125 million (expected to close in 4Q 2010);

- Company expects to sell Taiwanese life insurer Nan Shan Life Insurance Company Ltd. within the next 12 months after a previously announced $2.2 billion sale agreement was blocked by Taiwan regulators.

RECAPITALIZATION PLAN

The main elements of AIG's recapitalization plan, announced on September 30, 2010, are: (i) repayment/termination of the Federal Reserve Bank of New York (FRBNY) credit facility through cash proceeds from the AIA Group IPO and the ALICO sale, (ii) allocation of most of the available amount of the Treasury's Series F preferred stock commitment to the purchase of special purpose vehicle preferred interests in AIA Group and ALICO now held by the FRBNY, such that these interests would be held by Treasury and redeemed over time, and (iii) conversion of the Treasury's Series C, E and outstanding F preferred interests to AIG common stock to be sold on the open market over time.

The plan also calls for AIG to (i) conduct a registered exchange offer of common stock and cash for its mandatorily convertible units (offer announced October 8, 2010), (ii) conduct a registered exchange or similar offer for one or more series of its junior subordinated debt, and (iii) reestablish access to the traditional bank, debt and equity markets. AIG's A3 senior debt rating incorporates Moody's view that the recapitalization will result in consolidated financial leverage and fixed charge coverage metrics that support such a rating.

Following the announcement of the recapitalization plan, Moody's placed AIG's Prime-1 short-term issuer rating on review for possible downgrade to reflect the pending elimination of large government funding commitments that have been available to AIG over the past couple of years. Upon the elimination of these commitments, the short-term rating would likely be downgraded to Prime-2, which is the typical short-term rating for corporate issuers that carry A3 long-term ratings.

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.

RATING ACTIONS AND RELATED INFORMATION

The following ratings have been placed on review for possible upgrade:

American International Group, Inc. -- subordinated debt at Ba2;

American General Capital II -- backed trust preferred stock at Ba2;

American General Institutional Capital A & B -- backed trust preferred stock at Ba2.

The following provisional ratings have been assigned:

American International Group, Inc. -- senior unsecured debt shelf at (P)A3 (negative outlook), subordinated debt shelf at (P)Ba2 (on review for possible upgrade).

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 rating AIG and its subsidiaries were Moody's Global Rating Methodology for Property and Casualty Insurers and Moody's Global Rating Methodology for Life Insurers, both published in May 2010. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found on Moody's website.

Please see the ratings tab on the AIG page on Moodys.com for the last rating action and the rating history.

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.

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
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New York, NY 10007
U.S.A.

Moody's reviews AIG's Ba2 hybrid ratings for upgrade; also rates multi-purpose shelf
No Related Data.
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