A.M. Best Places AIG Ratings Under Review with Negative Implications

A.M. Best Co. has placed the financial strength rating (FSR) of A++ (Superior) and issuer credit ratings (ICR) of “aa+” of the domestic life and retirement services subsidiaries of American International Group (AIG) under review with negative implications.

In addition, A.M. Best has placed the FSRs of A+ (Superior)
and ICRs of “aa-“of most of AIG’s domestic property/casualty subsidiaries and AIG’s 60 percent majority owned company, Transatlantic Holdings, Inc. under review with negative implications. The FSRs and ICRs of these rating groups incorporate implicit support from AIG.

Concurrently, A.M. Best has placed the ICR of “aa” under review with negative implications for American International Group, Inc. A.M. Best also has placed all the debt ratings of Transatlantic Holdings, Inc. and 21st Century Insurance Group under review with negative implications.

The FSR of A++ (Superior) and ICR of “aa+” of the Hartford Steam Boiler Group (Connecticut) remain unaffected as the group has met the criteria for A.M. Best’s highest rating category on a stand-alone basis.

A.M. Best said these rating actions follow AIG’s Feb. 11, 2008, SEC Form 8-K filing clarifying its methodology in determining the fair value of the super senior credit default swap portfolio with respect to the multi-sector collateralized debt obligations (CDOs) of AIG Financial Products Corp. (AIGFP). The disclosures revealed that further refinements of data used in its internal models resulted in a significantly higher decline in valuation through Nov. 30, 2007.

AIG further disclosed that due to current difficult market conditions, the material benefit of spread differentials incorporated through November 2007 are not quantifiable and will not benefit portfolio valuation at December 31, 2007. Therefore, AIG will reflect a sizable fair vale decline.

The fair value losses associated with declines in valuations of this
particular swap portfolio do not necessarily reflect permanent economic losses but a change in the fair value assessments of the underlying collateral, which includes a mix of approximately 50 percent subprime mortgages as well as asset backed auto loans, credit cards and other collateral, according to A.M. Best, which added that it believes it is likely that true economic losses will not reach the level of fair value accounting adjustments.

Additionally, AIG’s model development over the past several months and refinement of data inputs and sources has caused revisions of the insurer’s fair value determination. The necessity of the model improvements, which continued into 2008, contributed to its independent auditors conclusion that at Dec. 31, 2007, AIG had a material weakness in its internal control and oversight relating to the fair valuation of AIGFP’s super senior credit default swap portfolio.

A.M. Best said that it “understands that the fair value valuation
is exceptionally difficult given market conditions; however, the decline in valuation, negative earnings implications and accounting conclusions are representative of the risk inherent in this business.”

The implied support incorporated into the operating subsidiary ratings will need to be re-evaluated in light of the financial volatility caused by
AIG’s derivatives business, A.M. Best said. In addition, uncertainty remains in AIG’s investment portfolio valuations, and to a lesser extent, results of its mortgage insurance and consumer finance businesses.

Given the uncertainty in market conditions and continued potential re-estimation of the value of the swap portfolio in the near term, A.M. Best said it needs more time to re-evaluate implied support.

A.M. Best said that the support incorporated into the subsidiaries’ rating also relies on AIG’s financial flexibility, which A.M. Best said it continues to believe is significant.

However, the ratings firm added that “that flexibility has been modestly compromised by a decline in stock value, higher financial leverage and tightened credit markets.”

A.M. Best reported that its concerns are tempered by the “strong franchise value and sustainable competitive advantages of AIG’s property/casualty and life and retirement services operating segments, ability to generate significant earnings, overall diversification and considerable intellectual capital.”

A.M. Best said it will re-evaluate the company’s status after seeing the 2007 year-end results and discussions with AIG management.

Source: A.M. Best Co.
www.ambest.com.