S&P Outlook Turns Negative on AIG Units, Ratings Downgrade Possible

November 6, 2008

Standard & Poor’s Ratings Services has revised the CreditWatch status of its ratings on a number of American International Group Inc.’s P/C subsidiaries and other units with ratings derived from guarantees from those subsidiaries to negative from developing.

S&P added that the “ratings on AIG remain on CreditWatch negative, and the ratings on most of AIG’s life insurance operations remain on CreditWatch developing.”

The rating agency noted that it doesn’t expect AIG to sell its core P/C operations under its restructuring plan. Credit analyst Rodney A. Clark explained: “The ratings on these companies are on CreditWatch negative to reflect our view of the likelihood of increased pressure on the performance of that business.”

S&P revised its outlook on the entire U.S. commercial lines P/C sector to negative last August because of weakening pricing and adverse investment markets. “We believe AIG is particularly susceptible to these broader market trends, given its somewhat weakened position,” Clark added. “Although at this point we have not seen clear evidence of long-term damage to AIG’s franchise, there have been wide reports that competitors are actively pursuing AIG’s accounts and key underwriting personnel, which could pressure operating performance over time given the current market conditions the industry is facing.”

The bulletin did indicate that S&P could “resolve the CreditWatch status of the ratings on the property/casualty insurance companies in 2009, when we should get a better picture of the company’s experience in pricing and retention.” In addition S&P said it “expects some loss of business and personnel. If those losses are significant and threaten future business prospects, we could lower the ratings by one or two notches. However, if any declines are modest, we could affirm the ratings.

“By contrast, we expect that AIG will sell its life insurance operations under its planned restructuring. Most of the likely buyers are rated ‘AA-‘ or better, which could have a positive impact on the ratings on these AIG subsidiaries. We could raise these ratings once sales to higher-rated entities are completed. However, if the sale process is slow, the sale is to a lower-rated entity, or there is significant deterioration in the businesses, we could lower the ratings.”

The announcement pointed out that “all of the AIG ratings are based on stand-alone fundamentals as well as the significant liquidity support in the form of an $85 billion credit facility and a $37.8 billion securities lending back-stop facility provided by the Federal Reserve Bank of New York and, more recently, the Federal Reserve’s Commercial Paper Funding Facility.”

S&P added that its ” ratings anticipate the continued use of these programs to provide interim funding while AIG restructures its operations. The support measures the Federal Reserve has provided, which are meant to meet the enterprise’s liquidity and subsidiary capital needs, underpin AIG’s creditworthiness. Without them, it is likely the holding company would be rated in the speculative-grade category.”

Source: Standard & Poor’s – www.standardandpoors.com

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