MARKET SECURITY UPDATE
September 16, 2008
RE: American International Group, Inc.
American International Group, Inc. (AIG) is one of the largest insurance groups in the world and
has some of the highest ratings afforded by the major rating agencies.
This chronology of events is intended to assist our clients in understanding the effects of the
disruption in credit markets and the exposure to subprime mortgages on AIG’s year-end 2007
and second quarter 2008 earnings. This update includes the rating action taken by Standard &
Poor’s on September 12, 2008 and the rating actions of A.M. Best, Moody’s and Fitch on
September 15, 2008. The report reflects the current status of the financial strength ratings
assigned by all of the major rating agencies to date.
The Aon Market Security Committee met on Monday, September 15, 2008, and agreed that the
AIG companies would remain authorized companies for use by our clients. The ratings that
have been assigned to the insurance company members of the AIG Group by all four of the
major rating agencies remain well above our minimum requirements. We will continue to
monitor the situation and will update this document in the event that any significant events take
place in the future.
Current Property/Casualty Ratings
The current insurer financial strength ratings for the lead property/casualty insurers are as
follows:
S&P's: AA+, rating affirmed, CreditWatch negative, effective 9/12/08.
Moody's: Aa3, rating affirmed, on review for possible downgrade, effective 9/15/08,
Fitch: AA-, Rating Watch Negative, effective 9/15/08, and
Best's: A, rating downgraded, under review with negative implications, effective 9/15/08,
Below are some of the salient points from recent company press releases and rating agency
rationales followed by a summary of the current and prior ratings assigned by the four major
rating agencies for the lead property/casualty and life/health insurance operations and the
parent company senior debt. The complete text of all articles is available upon request.
Recent Events
According to press accounts on September 15, 2008, there is a deal between AIG and New
York State insurance regulators which would allow the AIG to access $20 billion of liquid assets
from its own insurance company subsidiaries in exchange for less liquid and marketable
investment holdings of the parent company. The deal would theoretically improve the corporate
liquidity position without impacting the operations of the insurance companies and the liquidity of
those companies would be returned upon sale of the assets.
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On September 15, 2008, A.M. Best Co. downgraded the financial strength rating (FSR) to A
(Excellent) from A+ (Superior) and issuer credit ratings (ICR) to "a" from "aa" of the domestic life
and retirement services subsidiaries of American International Group, Inc. (AIG).
In addition, A.M. Best downgraded the FSRs to A (Excellent) from A+ (Superior) and ICRs to "a"
from "aa-" of AIG's domestic property/casualty subsidiaries. A.M. Best also downgraded the
FSRs to A (Excellent) from A+ (Superior) and ICRs to "a" from "aa-" of the subsidiaries of AIG's
60% majority owned company, Transatlantic Holdings, Inc.
Concurrently, A.M. Best has downgraded the ICR to "bbb" from "a+" of American International
Group, Inc., the parent of the insurance company subsidiaries. Additionally, A.M. Best
downgraded all debt ratings of Transatlantic Holdings, Inc. and downgraded the FSR to A
(Excellent) from A+ (Superior) and ICRs to "a" from "aa" of the Hartford Steam Boiler Group
(Connecticut).
At the same time, A.M. Best downgraded the FSRs to A (Excellent) from A+ (Superior) and
ICRs to "a" from "aa-" of the Personal Lines Pool and operating subsidiaries of 21st Century
Insurance Group. A.M. Best also downgraded the ICR to "bbb" from "a-" and debt ratings of
21st Century Insurance Group. All ratings have been placed under review with negative
implications.
Best stated that these rating actions were based on the rapid deterioration of the already
existing fragile condition of AIG's financial strength and flexibility. Specifically, AIG's lack of
liquidity at the holding company level and management's need to secure funding options are not
representative of financial stability and not reflective of AIG's current ratings.
Also on September 15, 2008, Fitch Ratings downgraded the Issuer Default Rating (IDR) and
outstanding debt ratings of American International Group, Inc. (AIG) as follows:
--Long-term IDR to 'A' from 'AA-';
--Senior unsecured debt to 'A' from 'AA-'.
--Short-term IDR to 'F1' from 'F1+';
--Commercial paper program to 'F1' from 'F1+'.
Fitch also downgraded AIG's holding company and subsidiary debt and insurer financial
strength (IFS) ratings. The ratings also remain on Rating Watch Negative by Fitch.
Fitch stated the rating actions reflect Fitch's view that AIG's financial flexibility and ability to raise
holding company cash is extremely limited due to recent declines in the company's stock price,
widening credit spreads, and difficult capital market conditions. The rating actions also reflect
benefits derived from a plan announced by New York's governor that grants certain AIG
operating company subsidiaries the authority to exchange up to $20 billion of assets with AIG in
order to promote the company's liquidity. Fitch believes that AIG's ability to fund collateral
requirements and replace capital lost due to the company's on-going exposure to the U.S.
residential mortgage market is now largely dependent on accessing assets provided under the
plan outlined by New York's governor and by asset sales.
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On September 15, 2008, Moody's Investors Service downgraded the senior unsecured debt
rating of American International Group, Inc. to A2 from Aa3 in light of the continuing
deterioration in the US housing market and the consequent impact on the group's liquidity and
capital position due to its related investment and derivative exposures. The company's longterm and Prime-1 short-term ratings were placed on review for possible further downgrade. The
company has developed a wide-ranging plan to address capital and liquidity risks which
includes raising funds via secured borrowings, asset sales and other capital sources. If
successful, these actions would likely stabilize the ratings at current levels, although significant
execution risk exists with respect to some elements of that plan, especially given the current
level of instability in capital markets. Moody's noted, however, that further downgrades of the
parent and certain operating units are likely if the immediate liquidity and capital concerns are
not fully addressed. Such downgrades could amount to multiple notches.
Moody's said that the primary insurance operations are fundamentally solid but are nevertheless
subject to increased pressure due to investment deterioration and the negative reputational
impact of losses within the group's financial products business. The holding company
downgrade to A2 and continuing review reflect the losses at certain insurance and financial
products units as well as the severe implications of those losses -- and continuing exposures -for capital and liquidity. The dislocation in AIG's holding company financial position is
considered by Moody's to be indicative of a risk profile that is not consistent with a rating in the
Aa range, even if near term stresses on capital and liquidity are successfully remediated. The
current volatility in AIG's stock price and borrowing spreads have made it more difficult to
address the company's immediate liquidity and capital needs through traditional capital market
issuance; however, the company may be able to address these needs through alternative
means.
On September 12, 2008, Standard & Poor's Ratings Services placed its ratings on American
International Group Inc. (AA-/A-1+) and subsidiaries on CreditWatch with negative implications.
This action followed a significant decline in AIG's share price and an increase in credit spreads
on the company's debt. Standard & Poor's believes that AIG has sufficient capital and liquidity to
meet its policy obligations and potential collateral requirements, which are significantly greater
than the expected cash losses on the mortgage-related assets. However, additional market
value losses will place some strain on the company's resources. Given the movement in the
share price and credit spreads, S&P believes AIG's potential access to the capital market may
be more restricted in the short term.
Standard & Poor's will continue discussions with the company over the coming weeks regarding
liquidity and capital plans. Once the agency has more clarity on these issues, it could affirm the
current ratings on the holding company and operating companies or lower them by one to three
notches.
Second Quarter 2008 Results: On August 6, 2008, American International Group, Inc. (AIG)
reported a net loss for the second quarter of 2008 of $5.36 billion compared to 2007 second
quarter net income of $4.28 billion. The continuation of the weak U.S. housing market and
disruption in the credit markets, as well as global equity market volatility, had a substantial
adverse effect on AIG's results in the second quarter.
Net loss for the first six months of 2008 was $13.16 billion, compared to net income of $8.41
billion in the first six months of 2007.
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Included in the second quarter 2008 net loss was a pre-tax charge of approximately $5.56 billion
($3.62 billion after tax) for a net unrealized market valuation loss related to the AIG Financial
Products Corp. (AIGFP) super senior credit default swap portfolio. In addition, the second
quarter of 2008 included a pre-tax net loss of $518 million ($337 million after tax) for a credit
valuation adjustment on AIGFP's assets and liabilities in accordance with FAS 157 and FAS
159.
Additionally, second quarter 2008 results included pre-tax net realized capital losses of $6.08 +
billion ($4.02 billion after tax) arising primarily from other-than-temporary impairment charges in
AIG's investment portfolio. This compares to pre-tax net realized capital losses of $28 million
($17 million after tax) in the second quarter of 2007. The 2008 other-than-temporary impairment
charges resulted primarily from the severe, rapid declines in fair values of certain residential
mortgage-backed securities and other structured securities in the second quarter for which AIG
concluded it could not reasonably assert that the recovery period would be temporary.
In May 2008, AIG raised a total of approximately $20 billion in capital through the sale of $7.47
billion of common stock, $5.88 billion in equity units and $6.91 billion of high equity content fixed
maturity securities to strengthen AIG's financial capacity.
The results of the strategic review process announced earlier will be reported at an investor
meeting September 25, 2008.
New CEO: On June 15, 2008, American International Group, Inc. (AIG) announced that its
Board of Directors has named Chairman Robert B. Willumstad to the additional position of Chief
Executive Officer. Willumstad succeeds Martin J. Sullivan, who is leaving AIG and its Board of
Directors. The Board has also named Stephen F. Bollenbach as its lead independent director.
Capital Raising: On May 20, 2008, American International Group, Inc. (AIG) President and
CEO, Martin Sullivan, reported that the capital raising plan, when complete, will generate
proceeds of approximately $20 billion. In the announcement detailing the completion of the
capital raising program, AIG reported that the total amount raised, approximately $20 billion
exceeded the original targeted amount of $12.5 billion due to strong demand.
The capital raising program involved the public offering and sale of 196,710,525 shares of AIG
common stock for $7.47 billion, and the public offering and sale of 78,400,000 equity units for
$5.88 billion. The total amount for these two offerings, $13.35 billion, represents an increase
from the $11.9 billion announced on May 12th due to the exercise by the underwriters of the
over-allotment options in full. The sale of fixed income securities totaled $6.9 billion and was
issued in three series. AIG issued $4 billion 8.175% Series A-6 junior subordinated debentures;
€750 million 8.0% Series A-7 junior subordinated debentures (U.S. dollar equivalent of $1.16
billion); and ₤900 million 8.625% Series A-8 junior subordinated debentures (U.S. dollar
equivalent of $1.75 billion).
First Quarter 2008 Results: On May 8, 2008, American International Group, Inc. (AIG)
reported that the continuation of the weak U.S. housing market, the disruption in the credit
markets, as well as equity market volatility, had a substantial adverse effect on its results for the
first quarter ended March 31, 2008. These factors were primarily responsible for AIG incurring a
net loss for the first quarter of 2008 of $7.81 billion. For the 2007 first quarter, in which none of
these external conditions existed in a material fashion, AIG reported net income of $4.13 billion.
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AIG emphasized that despite the difficult environment and its resulting effect on AIG's overall
financial performance for the first quarter, core insurance businesses continue to perform
satisfactorily. AIG is confident that, although present economic conditions are difficult, AIG's
unmatched competitive advantages, strong brand, and unmatched global franchise position it
extremely well for the future.
AIG also announced a plan to raise capital to fortify its balance sheet and provide increased
financial flexibility.
Following AIG’s first quarter earnings release on May 8, 2008, Standard & Poor’s and Fitch’s
AA+ insurer financial strength ratings were placed on credit watch with negative implications. In
addition, S&P and Fitch downgraded the parent company ratings from AA to AA-, both are on
negative credit watch. Moody’s placed AIG’s Aa2 as well as some of the life subsidiaries and
other subsidiaries that rely on AIG for explicit support on review for possible downgrade. In a
later release, Moody’s also placed its Aa2 financial strength ratings of the lead property/casualty
and life members of the group on review for possible downgrade.
Year-end 2007 Results: On February 28, 2008, American International Group, Inc. (AIG)
reported that its net loss for the fourth quarter of 2007 was $5.29 billion compared to net income
of $3.44 billion for the fourth quarter of 2006. The net income for full year 2007 was $6.20 billion
compared to $14.05 billion for full year 2006.
Included in both the full year and fourth quarter 2007 net income (loss) were charges of
approximately $11.47 billion pretax ($7.46 billion after tax) and $11.12 billion pretax ($7.23
billion after tax), respectively, for a net unrealized market valuation loss related to the AIGFP
super senior credit default swap portfolio. AIG believes that the unrealized market valuation
losses on this super senior credit default swap portfolio are not indicative of the losses AIGFP
may realize over time and that any credit impairment losses realized over time by AIGFP will not
be material to AIG's consolidated financial condition, although it is possible that realized losses
could be material to AIG's consolidated results of operations for an individual reporting period.
Following AIG’s release of its fourth quarter and full year results on February 28, 2008,
Standard & Poor’s and Moody’s affirmed their double-A ratings on AIG with the rating
outlooks remaining negative. In addition, Fitch commented that its double-A ratings of AIG
remained on Rating Watch Negative.
AIGFP Super Senior CDS: On February 11, 2008, American International Group, Inc. (AIG)
reported that $1.604 billion cumulative decline in valuation of the AIG Financial Products Corp.
(AIGFP) super senior credit default swaps corresponds to the sum of the cumulative decline of
$352 million as of September 30, 2007 as disclosed in the Form 8-K/A. This amount reflects
further refinement of data inputs used in the model and is net of a $3.628 billion negative basis
adjustment.
In addition, AIG reported that its independent auditors concluded AIG had a material weakness
in its internal control over financial reporting and oversight relating to the AIGFP super senior
credit default swap portfolio.
Following the company’s Form 8-K filing on February 11, 2008, Fitch placed AIG’s AA on
Rating Watch Negative; S&P and Moody’s revised their rating outlooks on AIG’s double-A from
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stable to negative; and, A.M. Best placed AIG’s “aa” rating, the life insurance operation’s A++,
and the property/casualty insurance operation’s A+ under review with negative implications.
*****
American International Group, Inc. (AIG), a world leader in insurance and financial services,
is the leading international insurance organization with operations in more than 130 countries
and jurisdictions. AIG companies serve commercial, institutional and individual customers
through the most extensive worldwide property-casualty and life insurance networks of any
insurer. In addition, AIG companies are leading providers of retirement services, financial
services and asset management around the world. AIG's common stock is listed on the New
York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo.
AIG reported total assets of $1.048 trillion and shareholders' equity of $95.8 billion for the year
ended December 31, 2007. As of June 30, 2008, AIG reported total assets of $1.050 trillion and
shareholders’ equity of $78.1 billion. Total revenues were $61.8 billion and $34.0 billion for the
six months ended in 2007 and 2008, respectively.
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