S&P’s Ratings on AIG Unchanged by New Board Chairman

July 23, 2010

Standard & Poor’s Ratings Services said today that its ratings on American International Group (AIG; A-/Negative/A-1) and AIG’s insurance subsidiaries (most of which are rated A+/Negative/–) are not affected by the company’s announcement that Robert S. (Steve) Miller has succeeded Harvey Golub as chairman of AIG’s board of directors.

“Given Steve Miller’s new position, we have recently discussed with him the current challenges and operational risks associated with AIG’s restructuring plan and exit plan from government control,” S&P said. “It is our understanding that he and the other board members will collaborate with the company’s CEO to lead AIG through its restructuring plans.”

However, S&P also indicated that it continues to “believe that the current plans’ execution risks remain relatively high, primarily because of external market conditions, we do not see this chairmanship change adding to the existing challenges, and we expect a relatively smooth transition.”

S&P also pointed to a previous comment to the effect that the “ratings on Hong Kong-based American International Assurance Co. Ltd. (AIA; A+/Developing/– local-currency rating) and its core subsidiary, American International Assurance Co. (Bermuda) Ltd. (AIAB; A+/Developing/– local-currency rating), are not affected by the revival of IPO plans and the appointment of a new executive chairman and chief executive officer from AIG (see “Ratings On AIA And AIAB Unaffected By Revival Of IPO Plans And Appointment of New Executive Chairman And CEO,” July 20, 2010).

“The 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,” S&P continued. “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 ‘BB’ assessment of the company’s stand-alone 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.

“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. Although future investment losses are possible given current market conditions, we believe 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 percent lower than at year-end 2009.
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 and adjusting for planned restructuring, 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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