The rating action follows AIG's acknowledgement that the company had a material weakness in internal controls related to the valuation of AIG Financial Products Corp.
Fitch Ratings has placed American International Group’s Issuer Default Rating (IDR), holding company ratings and subsidiary debt ratings including International Lease Finance and American General Finance on rating watch negative. A list of ratings is detailed below.
The rating action follows AIG's acknowledgement in an 8K filing today that as of Dec. 31, 2007, its independent auditor believed that the company had a material weakness in internal controls related to the valuation of AIG Financial Products Corp. (AIG FP) super-senior credit derivative portfolio. Fitch believes this material weakness along with current market conditions, contributes to uncertainty regarding the valuation of AIG FP's super senior credit portfolio prior to the publication of December 31, 2007 audited financial statements. AIG's announcement indicates that it believes that it has compensating controls and procedures to appropriately determine the fair value of AIG FP's portfolio. Resolution of Fitch's Rating Watch will include an assessment of these procedures. AIG FP's obligations are guaranteed by AIG.
AIG has relatively large exposure to the current U.S. residential mortgage crisis. Fitch believes the area of AIG most exposed to further deterioration in this market is the credit derivative portfolio within AIG FP, with its large net notional exposure of $505 billion at Sep. 30, 2007. Included in this total is $62.4 billion of collateralized debt obligations backed by structured finance (SF CDOs) collateral, mainly subprime U.S. residential mortgage-backed securities (RMBS).
Fitch has stated that it believes AIG will not be immune to potential losses from U.S. residential mortgage crisis, although at the present time the agency believes these losses should be absorbed by the existing capital base and future earnings stream. The announcement brings additional uncertainty to the potential impact on the financial statements.
Fitch expects to resolve the rating watch after reviewing the 2007 audited financial statements, assessing how the material weakness in internal controls affects its view of AIG FP's exposures, gaining additional clarification on steps AIG plans to take to remediate the material weakness and further review of the AIG FP portfolio. Fitch will evaluate the valuation of credit derivatives as well as assess the potential for economic losses on the SF CDO portfolio. While Fitch notes that this asset class has been under considerable credit deterioration in the past few months, Fitch is currently comforted by the fact that AIG FP's SF CDO portfolio was almost entirely underwritten before 2006. While under considerable stress, collateral from pre-2006 U.S. RMBS vintages is generally expected to perform better than 2006-2007 vintages.
If weakness at AIG FP leads to a rating downgrade at the holding company, Fitch believes the magnitude would be limited to one notch. Fitch currently has unusually narrow notching between AIG's insurer financial strength (IFS) ratings ('AA+') and holding company ratings ('AA' senior debt), reflecting the organization's very strong financial flexibility, modest financial leverage and significant cash flow from diverse regulated and non-regulated subsidiaries. In addition, Fitch would expect to maintain the current notching between the holding company and the Finance subsidiaries.
Fitch places the following ratings on Rating Watch
--Senior debt 'AA';
--Junior Subordinated debentures 'AA-';
AIG International, Inc.
--Senior debt 'AA';
AIG Life Holdings (US), Inc. (formerly American General Corp.)
--Senior debt 'AA'.
American General Capital II
--Preferred securities 'AA-'.
American General Institutional Capital A and B
--Capital securities 'AA-'.
HSB Capital Trust I
--Preferred securities 'AA'.
21st Century Insurance Group
--Senior debt 'AA'.
United Guaranty Corporation
--Long Term Rating 'AA'.
Ezer Mortgage Insurance Company (ISR)
--Insurer Financial Strength (IFS) Rating 'AA+
AIG Capital Corporation
International Lease Finance Corp.
--Long-term IDR at 'A+';
--Senior unsecured debt at 'A+';
--Preferred stock at 'A';
American General Finance, Inc.
American General Finance Corp.
--Senior debt 'A+';
AGFC Capital Trust I
--Preferred stock 'A'.