AIG Downgraded by Fitch on Prospect of Falling Sales (Update3)

By Erik Holm
Bloomberg News
May 15, 2009

May 15 (Bloomberg) -- American International Group Inc., the insurer bailed out by the U.S., was downgraded by Fitch Ratings on the prospect the company will lose customers to competitors because of its faltering reputation.

The financial-strength rating of U.S. life and retirement operations was lowered to "A-" from "AA-" on the "effect of AIG's well-publicized difficulties on new sales," the ratings firm said today in a statement on the New York-based insurer. The property-casualty business was cut to "A+" from "AA."

Sales at the property-casualty division, once envisioned as the core of a scaled-back company, dropped 18 percent in the first quarter. AIG's life and retirement business said operating profit dropped by more than half to $1.2 billion on lower assets under management and falling sales of new policies. Premiums and other considerations fell by 11 percent to $8.3 billion on customer cancellations of contracts, known as surrenders.

"There is a clear correlation between increased surrenders and negative AIG publicity," Jay Wintrob, head of the retirement services division, said May 7 after the insurer posted its sixth straight quarterly loss.

Chief Executive Officer Edward Liddy needs to retain customers to preserve the value of units he is trying to sell to repay the federal bailout. The U.S. has committed $182.5 billion to the insurer, including an investment of as much as $70 billion, a $60 billion credit line and $52.5 billion to buy mortgage-linked assets owned or backed by the company. AIG has tapped more than $45 billion from the line.

AIG's issuer default rating was cut to "BBB" from "A," and ratings were reduced at units including the insurer's plane- leasing business, and consumer lender American General Finance.

Finance Unit

The downgrade of American General reflects the possibility of "AIG's reduced long-term willingness and ability to provide financial support," the ratings firm said. The unit posted an operating loss of $203 million in the first quarter, compared with profit of $11 million a year earlier.

Christina Pretto, a spokeswoman for the insurer, had no immediate comment.

AIG will probably continue to support the plane business, International Lease Finance Corp., the ratings firm said. The impact of the global recession on the aerospace industry may weigh on results at Los Angeles-based ILFC, which has remained profitable as the parent company endured record losses.

AIG slipped 12 cents, or 6.5 percent, to $1.72 at 4:15 p.m. in New York Stock Exchange composite trading. The insurer has plunged 96 percent in the past 12 months.

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