On Feb. 29, 2008, Standard & Poor's Ratings Services affirmed its 'AA'
counterparty credit rating on American International Group Inc. (NYSE:AIG) and
affirmed its 'AA+' counterparty credit and financial strength ratings on AIG's
core operating subsidiaries (see ratings list).
The outlook remains negative.
The affirmation follows AIG's announcement of 2007 net income of $6.2
billion, down 56% from the prior year. The earnings included charges of $7.5
billion (after tax) for market valuation losses on AIG Financial Products
(AIGFP) super senior credit default swap portfolio and an additional $1.7
billion of other-than-temporary impairment charges on investments, largely
related to U.S. residential mortgage-backed securities (MBS). These charges
clearly exceeded Standard & Poor's expectations, but not by a level that would
change the ratings. AIG's capitalization to absorb these losses is still
considered very strong, with $95.8 billion of shareholders' equity as of Dec.
31, 2007.
Standard & Poor's has put significant effort into modeling AIGFP's super
senior exposure in order to evaluate the expected ultimate economic losses,
which can differ significantly from reported accounting losses. In
supplemental materials, AIG stated that its severe stress scenario produced an
expected loss of $900 million. Standard & Poor's detailed best estimate
approach, which used a different method, produced a slightly lower result. In
addition, we also evaluated AIG's holdings using the same conservative method
used in the detailed analysis of bond insurers published Feb. 25, 2008, and
this method produced stressed losses of $3.5 billion. This range of outcomes
is wide and highly sensitive to changes in assumptions, but in all cases is
significantly lower than the reported accounting loss.
Given the current illiquid markets for MBS and related CDOs, it is not
surprising that AIG's market valuations differ significantly from expected
economic losses. It is important to note that AIGFP pulled back writing credit
default swaps on CDOs with underlying subprime collateral in late 2005, and as
a result, only 5% of its exposures are in the most problematic 2006 and 2007
vintages. For this reason, AIG's risk profile is viewed as favorable to those
of many peer institutions. AIGFP has not yet been required to pay any cash
losses under these contracts.
AIG's core operating earnings in insurance, retirement services, and
aircraft leasing businesses remain strong and form a strong offset to the
negative results in AIGFP. However, earnings challenges persist in certain
other AIG businesses due to the current conditions, most notably, mortgage
insurance unit United Guaranty Corp. and consumer lender American General
Finance Corp.
Outlook
The negative outlook reflects the continued uncertainty around estimating
economic losses and fair market values in the U.S. mortgage market. Standard &
Poor's believes that AIG will ultimately recover a meaningful portion of the
2007 unrealized market valuation loss, but the timing and the amount are
difficult to estimate.
Standard & Poor's could lower its ratings on AIG by one notch if ultimate
economic losses develop to levels similar to the 2007 charge. However, if
recoveries emerge and there is greater clarity around the ultimate loss level,
the ratings may be affirmed and the outlook revised to stable. There is
unlikely to be significant clarity around the ultimate losses for at least two
quarters, and the result will be influenced by a potential recession or
downturn in the U.S. economy.
In addition, Standard & Poor's remains concerned about the disclosure of
a material weakness in controls around the valuation methods used for the
AIGFP super senior portfolio. We recognize that market values are difficult to
determine in the current illiquid markets, but so far AIG is the only major
financial institution to report such a weakness. We are currently planning to
review AIG's methods and controls in comparison with peers. If the weakness is
considered to be significant, this could also result in a one-notch downgrade.
Ratings List
Ratings Affirmed
American International Group Inc.
Counterparty Credit Rating AA/Negative/A-1+
Senior Unsecured AA
Preferred Stock
Local Currency A+
Commercial Paper
Local Currency A-1+
AIG Mexico Seguros Interamericana S.A. de C.V.
Counterparty Credit Rating
Caval - Mexican Rating Scale mxAAA/Stable/--
21st Century Casualty Co.
21st Century Insurance Co. of the Southwest
21st Century Insurance Co.
AIG Annuity Insurance Co.
AIG Casualty Co.
AIU Insurance Co. Taiwan
AIU Insurance Co.
American General Life Insurance Co.
American Home Assurance Co.
American Home Assurance Hong Kong
American Home Assurance Malaysia
American Home Assurance Singapore
American International Assurance Co. (Bermuda) Ltd.
American International Assurance Co. Ltd.
American International Pacific Insurance Co.
American International South Insurance Co.
American Life Insurance Co. (DE)
Commerce & Industry Insurance Co.
First Sunamerica Life Insurance Co.
Granite State Insurance Co.
Illinois National Insurance Co.
Insurance Co. of the State of Pennsylvania
New Hampshire Insurance Co. Hong Kong
New Hampshire Insurance Co. Thailand
New Hampshire Insurance Co.
United Guaranty Mortgage Indemnity Co.
United Guaranty Residential Insurance Co.
United States Life Insurance Co. in the City of New York
Variable Annuity Life Insurance Co.
Counterparty Credit Rating
Local Currency AA+/Negative/--
Financial Strength Rating
Local Currency AA+/Negative/--
AIG SunAmerica Life Assurance Co.
National Union Fire Insurance Co. of Pittsburgh, PA
Counterparty Credit Rating
Local Currency AA+/Negative/A-1+
Financial Strength Rating
Local Currency AA+/Negative/--
AIG-FP Matched Funding Corp.
American General Assignment Services Trust
United Guaranty Corp.
Counterparty Credit Rating
Local Currency AA/Negative/--
Banque AIG
Counterparty Credit Rating
Local Currency AA/Negative/--
Senior Unsecured
Local Currency AA
Financial Program
Local Currency AA/--/--
SunAmerica Life Insurance Co.
Counterparty Credit Rating
Local Currency AA+/Negative/A-1+
Financial Strength Rating
Local Currency AA+/Negative/A-1+
SunAmerica Life Insurance Co. (Separate Accounts) I
Counterparty Credit Rating
Local Currency AA+/Negative/--
Financial Program
Local Currency AA+/--/--
United Guaranty Residential Insurance Co. of NC
Counterparty Credit Rating
Local Currency AA-/Negative/--
Financial Strength Rating
Local Currency AA-/Negative/--
21st Century Insurance Group
Counterparty Credit Rating AA/Negative/--
Senior Unsecured
Local Currency AA
AHICO First American-Hungarian Insurance Co
AIG Advantage Insurance Co.
AIG Centennial Insurance Co.
AIG Czech Republic Pojistovna, a.s.
AIG Edison Life Insurance Co.
AIG Europe (Ireland) Ltd.
AIG Europe (Netherlands) N.V.
AIG Europe S.A.
AIG Excess Liability Insurance Company Ltd.
AIG Excess Liability Insurance International Limited
AIG Global Trade & Political Risk Insurance Co.
AIG Hawaii Insurance Co. Inc.
AIG Indemnity Insurance Co.
AIG Poland Insurance Co. S.A.
AIG Preferred Insurance Co.
AIG Premier Insurance Co.
AIG Slovakia Insurance Co. A.S.
AIG U.K. Ltd.
AIU Insurance Co. Foshan China Branch
AIU Insurance Co. Guangzhou
AIU Insurance Co. Shanghai Province
AIU Insurance Co. Shenzhen China Branch
AIU Japan
ALICO Japan
American General Life & Accident Insurance Co.
American Home Assurance Co. (New Zealand Branch)
American Home Japan
American Home Korea
American International Assurance Co (Australia) Ltd.
American International Assurance Co. (Bermuda) Ltd. (New Zealand Branch)
American International Assurance Co. (Bermuda) Ltd. - Korea Branch
American International Insurance Co. of California
American International Insurance Co. of New Jersey
American International Insurance Co. of PR
American International Insurance Co.
American International Life Assurance Co. of New York
Audubon Insurance Co.
First American Czech Insurance Co. A.S.
HSB Engineering Insurance Ltd.
Landmark Insurance Co.
New Hampshire Indemnity Co. Inc.
Financial Strength Rating
Local Currency AA+/Negative/--
AIG Financial Products Corp.
Counterparty Credit Rating AA/Negative/A-1+
Senior Unsecured
Local Currency AA
AIG Funding Inc.
Counterparty Credit Rating
Local Currency --/--/A-1+
Commercial Paper
Local Currency A-1+
AIG Life Insurance Co.
American International Specialty Lines Insurance Co.
Lexington Insurance Co.
Counterparty Credit Rating
Local Currency AA+/Negative/--
Financial Strength Rating
Local Currency AA+/Negative/--
Financial Enhancement Rating
Local Currency AA+/--/--
AIG Life Insurance Co. of Canada
AIG Life Insurance Co. of PR
AIG United Guaranty Insurance (Asia) Ltd.
Financial Strength Rating
Local Currency AA/Negative/--
AIG Liquidity Corp.
Counterparty Credit Rating
Local Currency --/--/A-1+
Financial Program
Local Currency --/--/A-1+
AIG Matched Funding Corp.
Counterparty Credit Rating
Local Currency AA/Negative/A-1+
Senior Unsecured
Local Currency AA
Financial Program
Local Currency AA/--/--
AIG Life Holdings (US) Inc.
Counterparty Credit Rating
Local Currency AA/Negative/--
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