AIG hit by multi-notch downgrade, Israelis say not exposed

As the markets had dreaded, the international credit rating agencies yesterday downgraded American International Group on liquidity worries as its stock plunged, but Israeli insurance sources reassure that local exposure to the insurance giant is low. Meanwhile, a local credit agency downgraded a local AIG firm by four notches yesterday.

AIG, which also operates in Israel, found its credit rating slashed by at least two notches by the three top global rating agencies, which warned that more downgrades could follow. The triple strike jolted the insurer as it struggled to cobble together financing following the tumult that has brought two of the biggest Wall Street investment banks to their knees - Lehman Brothers has collapsed and Merrill Lynch has been sold.

Investors Service cut AIG's rating to A2 from Aa3, a two-notch downgrade. Standard & Poor's Ratings Services lowered the rating to A-minus from AA-minus, a three-peg reduction, and Fitch Ratings reduced its standing to A from AA-minus, a two-notch cut. AIG's ratings are still investment grade, but all three firms warned that more downgrades could follow.

There is a difference between Lehman Brothers, Merrill Lynch and AIG: The latter is not only an investment firm, it's also an insurance company. The potential collapse of an insurer has a completely different significance, outside the sphere of investments: It means that insurance policies wouldn't be paid. The company has provided insurance covering almost half a trillion dollars worth of fixed-income assets in the United States and Europe. If AIG collapses, so does the protection it provides.

In Israel, AIG owns 50% of AIG Israel (the other half is owned by the Aurec group), and owns 100% of the mortgage insurance company EMI.

The downgrades were announced hours after New York State officials pieced together a $20 billion lifeline to give AIG temporary respite. JPMorgan and Goldman Sachs are exploring putting together a syndicated credit facility of $70 billion to $75 billion for AIG, among other options. The funding would be critical for the insurer's survival in the longer term.

AIG's troubles, much like those of some of its Wall Street peers, stem from guarantees it wrote on mortgage-linked derivatives that have left it with a total of $18 billion in losses over the past three quarters.

Ahead of the downgrades, shares of AIG, once the world's largest insurer ranked by market value, plummeted 61%.

Here at home, insurance-sector sources said on Monday that the local insurance companies are not significantly exposed to AIG. Nor have Israel's institutional investors - pension funds, provident funds and the like - invested in AIG's securities in any significant way, they surmised - or in securities issued by Lehman Brothers or Merrill Lynch, for that matter. The immediate damage to Israeli savers from the crisis on Wall Street is not large, the sources add.

In Israel AIG provides home, property and car insurance, travel insurance, and executive liability insurance. Importantly, it also acts as a reinsurer, providing coverage for the insurance companies themselves, mainly in the area of liability insurance.

If the parent company AIG deteriorates to such a degree that it fails to honor its reinsurance agreements, the entire world insurance sector - and Israel - will be hard hit, resulting in a wave of rising premiums.

At present, market sources say the chance that AIG will sink to defaulting on its contractual obligations is small. Israel's institutional investors have invested little money abroad, in part because of their provincialism, in part because of the shekel's strong appreciation this year against the dollar. Right now, the fact that most pension money is invested right here in Israel played in favor of the Israeli saver.

It is true that if the financial crisis worsens even more and the global economy slips into recession, the Israeli economy is likely to hurt, and the saver too. It's already happening to a degree: Growth forecasts for this year and 2009 are being lowered.

Meanwhile, the local credit rating agency Midroog yesterday downgraded EMI by four whole notches, from Aaa to A2, entirely because of the downgrades at the parent company. The Midroog rating doesn't relate to bonds, it's a general rating of the company, representing the agency's opinion of EMI's ability to meet its mortgage insurance commitments.

Meirav Arlosoroff and Eti Aflalo contributed reporting.