Fitch On AIG Rating Watch Revision

On Sept. 17, Fitch Ratings revised its Rating Watch on American International Group Inc. (AIG) and its subsidiaries to Evolving from Negative following the announcement that its board has approved a transaction under which the Federal Reserve Bank of New York (Federal Reserve) will provide AIG with a two year $85 billion secured revolving credit facility. In exchange, the U.S. Government will receive a 79.9% ownership interest in AIG.

The Evolving Rating Watch is intended to communicate the highly dynamic nature of AIG’s current financial situation, which could evolve positively or negatively for different subsidiaries or securities. Fitch’s expectation is that it may revise ratings, Outlooks or Watches on individual securities’ ratings or specific legal entities within the AIG group, as it furthers its analysis and more details become available. Such actions could occur over the near or intermediate term.

For AIG as a whole, Fitch views this transaction as a favorable development that alleviates significant near-term liquidity concerns and provides a source of funding for potential future collateral requirements that are primarily derived from AIG’s AIG Financial Products Corp. (AIGFP) subsidiary. Additionally, Fitch believes that the agreement with the Federal Reserve provides a platform of stability for AIG’s primary operating subsidiaries and significantly curtails substantive pressure on AIG to sell assets quickly to fund potential cash calls. Fitch believes that this will enable AIG to take a more comprehensive and deliberate approach to restructuring the company that better serves the interests of policyholders and creditors.

These positives are tempered by the transaction’s effective subordination of essentially all of AIG’s senior debt and hybrid instruments. Loans under the facility are collateralized by all of AIG’s assets and of its primary non-regulated subsidiaries and include the stock of substantially all of the regulated subsidiaries. Due to the comparative high cost, AIG has incentive to use the facility sparingly, though Fitch acknowledges that AIG will need to actively draw down on this facility over the intermediate term.

Fitch views AIG’s most pressing challenges as evolving from meeting immediate liquidity needs to managing higher financial leverage, and related pressures on fixed charge coverage, likely to arise as a result of draws on the credit facility. To provide funds needed to service debt obligations, Fitch believes that AIG will likely sell a significant number of its operating company subsidiaries, and that these sales may include subsidiaries that Fitch had previously viewed as core operations. AIG needs to optimize operating company results under very difficult market conditions, in order to retain significant value in its subsidiaries that may be monetized in the future. Fitch believes any subsidiary would be considered for sale, and the ratings impact for any subsidiary that is ultimately sold would be greatly influenced by the credit quality of the buyer and terms of the sale.

Fitch’s ongoing analysis of AIG will include an assessment of the extent to which AIG may access funds available under the Federal Reserve transaction, and thus add to the company’s outstanding debt leverage, and what the prospects for repayment are given various forms of asset sales and projected internal cash generation.

Fitch is also evaluating the extent to which AIG’s capital structure includes securities with the ability to defer interest payments. AIG’s capital structure includes traditional and trust preferred securities and the company’s agreement with the Federal Reserve grants the US government the ability to veto payment of dividends on preferred stock. Fitch believes that AIG may stop paying dividends on traditional preferred securities and/or elect to defer interest on outstanding trust preferred securities on holding company securities.

Fitch’s Rating Watch revision from yesterday affects the following global entities:

American International Group, Inc.
–Long-term IDR ‘A’;
–Senior debt ‘A’;
–Junior subordinated debentures ‘A-‘;
–Short-term IDR to ‘F1’;

AIG Funding, Inc.
–Commercial paper ‘F1’ .

AIG International, Inc.
–Long-term IDR ‘A’;
–Senior debt ‘A’;.

AIG Life Holdings (US), Inc. (formerly American General Corp.)
–Long-term IDR ‘A’;
–Senior debt ‘A”.

American General Capital II
–Preferred securities ‘A-‘.

American General Institutional Capital A and B
–Capital securities ‘A-‘

HSB Capital Trust I
–Preferred securities ‘A’ ‘;

21st Century Insurance Group
–Long-term IDR ‘A’;
–Senior debt ‘A’

United Guaranty Corporation
–Long Term Rating ‘A’ ‘;

Ezer Mortgage Insurance Company (ISR)
–Insurer Financial Strength (IFS) Rating ‘A’;

ASIF Program
ASIF II Program
ASIF III Program
ASIF Global Financial Program
–Program ratings ‘AA-‘.

AIG Capital Corporation
–Long-term IDR ‘A’;
–Short-term IDR ‘F1’.

International Lease Finance Corp.
–Long-term IDR ‘A;
–Senior unsecured debt ‘A’;
–Preferred stock ‘A-‘;
–Short-term IDR ‘F1’:
–Commercial paper ‘F1’.

American General Finance, Inc.
–Long-term IDR ‘A’;
–Short-term IDR ‘F1’;
–Commercial paper ‘F1’.

American General Finance, Corp.
–Long-term IDR ‘A’;
–Senior debt ‘A’;
–Short-term IDR ‘F1’;
–Commercial paper ‘F1’.

AGFC Capital Trust I
–Preferred stock ‘A-‘.

AIG Finance (Hong Kong) Ltd.
–Long-term local currency IDR ‘A’;
–Senior unsecured ‘A’;
–Short-term local currency IDR ‘F1’.

CommoLoCo Inc.
–Short term IDR ‘F1’;
–Commercial paper ‘F1’

The Rating Watch status on the following ‘AA-‘ Insurer Financial Strength (IFS) ratings have been revised to Evolving from Negative:

Life Companies
–AGC Life Insurance Company;
–AIG Annuity Insurance Company;
–AIG Life Insurance Company;
–AIG SunAmerica Life Assurance Company;
–American General Life and Accident Insurance Company;
–American General Life Insurance Company;
–American International Assurance Company (Bermuda) Limited;
–American International Life Assurance Company of New York;
–American Life Insurance Company;
–First SunAmerica Life Insurance Company;
–SunAmerica Life Insurance Company;
–The United States Life Insurance Company in the City of New York;
–The Variable Annuity Life Insurance Company.

National Union Inter-company Pool Members:
–AIG Casualty Company (formerly Birmingham Fire Ins. Co. of PA);
–American Home Assurance Company;
–American International South Insurance Company;
–Commerce and Industry Insurance Company;
–Granite State Insurance Company;
–Illinois National Insurance Co. ;
–National Union Fire Insurance Company of Pittsburgh, PA;
–New Hampshire Insurance Company;
–The Insurance Company of the State of Pennsylvania.

Lexington Inter-company Pool Members:
–AIG Excess Liability Insurance Company, Ltd. (formerly Starr Excess Liability Ins. Co., Ltd.);
–Landmark Insurance Company;
–Lexington Insurance Company.

AIG Personal Lines Inter-company Pool Members:
–21st Century Casualty Company;
–21st Century Insurance Company;
–21st Century Insurance Company of the Southwest;
–AIG Advantage Insurance Company (formerly Minnesota Ins. Co.);
–AIG Auto Insurance Company of New Jersey;
–AIG Centennial Insurance Company;
–AIG Hawaii Insurance Company;
–AIG Indemnity Insurance Company;
–AIG National Insurance Company, Inc.;
–AIG Preferred Insurance Company;
–AIG Premier Insurance Company;
–American International Insurance Company;
–American International Insurance Company of California;
–American International Insurance Company of New Jersey;
–American International Pacific Insurance Company;
–American Pacific Insurance Company;
–New Hampshire Indemnity Company, Inc..

Non-Pool Companies
–AIU Insurance Company;
–American International Specialty Lines Insurance Company;
–Hartford Steam Boiler Inspection & Insurance Company;
–United Guaranty Residential Insurance Company.

Foreign Domiciled General Insurance Companies
–AIG MEMSA Insurance Company Ltd. (UAE);
–AIG (UK) Ltd. (formerly The Landmark Insurance Co. Ltd. (UK);
–American International Underwriters Overseas, Ltd. (Bermuda).

The Rating Watch status on the following National Insurer Financial Strength (NIFS) ratings remains Negative:

–AIG South Africa Limited ‘AAA’ (zaf)
–AIG Life South Africa Limited ‘AAA’ (zaf)

The Rating Watch status on the following National Insurer Financial Strength (NIFS) ratings has been revised to Evolving from Negative:

–La Interamericana Cia de Seguros de Vida y Ahorro S.A. ‘AA+'(chl)
–La Interamericana Cia de Seguros Generales S.A. ‘AA+'(chl)
–AIG Union y Desarrollo, S.A. y Filial ‘AA'(slv)
–AIG, S.A. Seguro de Personas ‘AA-‘(slv)

The following National Insurer Financial Strength (NIFS) rating has been downgraded to reflect rating actions taken on AIG and the Rating Watch has been revised to Evolving from Negative:

Nan Shan Life Insurance Company Ltd.
–National IFS to ‘AA(twn)’ from ‘AAA(twn)’.

Source: Fitch Rating, www.fitchratings.com