Standard & Poor’s Ratings Services indicated that its ratings on American International Group Inc. – currently ‘AA-‘ with a negative outlook/Debt ‘A-1+’ – and AIG’s subsidiaries are unaffected by yesterday’s report of an operating loss of $5.4 billion. S&P said that, given the “market conditions during the second quarter,” the reported losses were within its expectations.
“Our current estimates presume an ultimate loss of about $8 billion on the combined portfolios of the insurance companies’ investments and the AIG Financial Products credit default swaps,” said the bulletin. “This compares to reported accounting losses of more than $25 billion over the last three quarters.
“This discrepancy implies that significant recoveries are likely, but given the stagnant nature of any market recovery, it is unlikely that any gains on the portfolios will occur before late 2009 or 2010.” That represents a change in S&P’s “prior assumptions,” as it had expected that some “recoveries would emerge in late 2008. However, the sizeable capital raise of more than $20 billion during the second quarter diffuses the impact of this likely temporary loss.”
S&P added, however that it remains concerned “about AIG’s large securities lending program, which amounted to $64 billion as of Dec. 31, 2007. AIG invested the proceeds of this program in largely subprime and Alt-A mortgage-backed securities with a duration far longer than the liabilities that they support, which we consider higher risk than most other insurance company programs.”
In addition S&P pointed out that these “securities are now experiencing large market-value losses, despite a large majority still being very highly rated. This also is a consequence of the current market disruption, and the losses are included in our current loss estimate for the company. Although the magnitude of the market-value losses is large, it is reasonable given the size of AIG’s capital base following their recent capital raise.”
S&P also noted that its “outlook on AIG remains negative, which implies that there is a meaningful chance of a one-notch downgrade. If earnings do not stabilize by the third quarter, then a downgrade of one notch is likely. However, if recoveries in the market value of the insurance and CDS portfolios begin to emerge and insurance profits remain strong, we could revised the outlook to stable.”
Source: Standard & Poor’s – www.standardandpoors.com
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