S&P: AIG Ratings Unchanged after AIA Deal Fails; Outlook Negative

June 7, 2010

Standard & Poor’s Ratings Services announced that its on American International Group Inc. , currently ‘A-‘ – Negative – debt ‘/A-1,’ and its insurance subsidiaries (most of which are rated A+/Negative/–) are not affected by the company’s announcement that it has terminated its agreement to sell AIA Group Ltd. (AIA) to the UK’s Prudential PLC.

“We consider this development to be a setback in AIG’s overall restructuring plan to reduce outstanding indebtedness to the Federal Reserve Bank of New York and exit from the TARP preferred stock owned by the U.S. Treasury Department,” S&P explained. “Nonetheless, the sale termination is not affecting the ratings and outlook on AIG, as AIG still maintains a level of flexibility in selling AIA, and its overall credit risk characteristics so far remain unchanged.”

S&P did add that it believes the sale of AIA “will now take longer than AIG previously anticipated and poses increased execution risk because of the volatile conditions in the capital and equity markets.”

The rating agency also explained that its ratings on AIG “reflect our opinion of the extraordinary support the company has received from the U.S. government in light of AIG’s perceived status as a highly systemically important U.S. financial institution.

“The ratings are also based on our view of the company’s ‘A+’ rated multi-line insurance subsidiaries. We expect that the extraordinary government support will continue during AIG’s period of stress. As a result, the long-term counterparty credit rating on AIG includes a five-notch uplift from our assessment of the company’s stand-alone ‘BB’ credit profile.

“AIG’s stand-alone credit profile is ‘BB’ based on our view of the high level of leverage that funds its capital structure and dependence on operating-company asset sales to repay its debt.”

S&P also pointed out that during the first quarter of 2010, “AIG’s operating subsidiaries that are continuing ongoing operations stabilized further, in our opinion, producing $2.2 billion in pretax operating income despite catastrophe losses at Chartis.

“Operating results continue to benefit from the improvement in the capital markets and contracting credit spreads, resulting in stabilizing impairments and realized capital losses for the period.”

The analysis recognized that “future investment losses are possible given current market conditions;” however S&P also said it believes “the U.S. government’s actions have reduced material exposures, such as the guarantees on the multi-sector CDO portfolio and securities lending asset/liability mismatch.

“AIG Financial Products Corp. continues to reduce the notional amount of its derivative portfolio, which was $755 billion as of March 31, 2010, 20% lower than at year-end 2009.”

S&P explained that the negative outlook on the parent company reflects the “ongoing operational risk associated with the divestiture of AIG’s noncore assets and legislative risk related to the government’s continued willingness and ability to provide extraordinary support to AIG if needed.

“If AIG’s operating performance does not improve to a level approaching its historical performance, factoring what we consider its strong but diminished competitive position, we could lower the rating one notch. However, if operating performance returns to historical levels and capitalization remains consistent or improves, we could revise the outlook to stable.”

Source: Standard & Poor’s

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