Oct 04, 2010 (M2 EQUITYBITES via COMTEX) — Moody’s placed on Monday on review for possible downgrade the A1 insurance financial strength rating (IFSR) of Japanese AIG Edison Life Insurance Co.

The move follows the announcement of the company’s parent, US American International Group (NYSE: AIG | PowerRating) that it would sell AIG Edison and AIG Star Life Insurance to Prudential Financial (NYSE: PRU | PowerRating).

AIG Edison’s current A1 rating reflects the general corporate guarantee agreement between AIG Edison and American Home Assurance Co (AHAC), also a unit of AIG.

In the analysts’ view, the sale may lead to the guarantee’s suspension and if that takes place, obligations in effect or contracted for on the date of termination would remain covered until extinguished.

Nevertheless, a termination of the guarantee would likely result in a rating downgrade for AIG Edison, in light of the prospective nature of ratings.

The agency considers that in the absence of the guarantee, AIG Edison’s standalone credit profile would be more accordant with an A3 level, two notches below its current A1 rating.

On the other hand, after AIG Edison becomes a member of Prudential Financial, its credit profile could be underpinned by its affiliation and integration with other Prudential companies in Japan, Moody’s noted.

Once the sale is completed, Moody’s will look into how effectively the Prudential group companies, including Gibraltar Life Insurance, can collaborate, and reflect the new situation in the AIG Edison rating.

According to a BBC article today, “The US senate has voted to tighten up regulation of credit rating agencies as part of measures to prevent another financial crisis.” Pointing out that although banks acted recklessly, by selling high-risk products with low-risk ratings, the rating system is partially to blame for the financial crisis in the US, because it was the rating system which allowed the banks to do so.

Rating Agencies:

• Moody’s
• Standard & Poor’s
• Fitch

In order to prevent bank crises, in the future, the US senate is debating legislation that will tighten financial regulation. “The plans for tigher regulation come amid reports that several major Wall Street banks are being investigated by New York’s attorney general over whether they misled rating agencies over mortgage-related deals in the run-up to the crisis,” Rating agencies face new US regulation, BBC News.

Formerly in possession of S&P’s highest rating for financial strength, MassMutual Financial Group was demoted August 26th, 2009 to AA+, S&P’s second-highest rating.  MassMutual is a major provider for life insurance and other financial products, one of several industry providers to have suffered ratings downgrade in recent months.  S&P attributed MassMutual’s demotion to 1) its high proportion of illiquid capital, 2) high leveraging of its capital, and 3) broad downturn across the economy, all of which undermines MassMutual’s flexibility.

S&P is but one of ten Nationally Recognized Statistical Rating Organizations, and MassMutual’s status remains unchanged in the other nine NRSRO’s’ ratings.  However, it already occupies a place in Moody’s second-tier, and Moody’s has furthermore slated the group to be reviewed for yet further downgrade.  Nevertheless, A. M. Best and Fitch both award MassMutual their highest rank.

MassMutual still ranks among the highest institutions of the industry, though top competitors New York Life and Northwestern Mutual retain S&P’s attractive AAA rank.