Best Lowers Some AIG Ratings; Comments on Management Changes

A.M. Best Co. has downgraded the financial strength ratings (FSR) to ‘A+’ (Superior) from ‘A++’ (Superior) and issuer credit ratings (ICR) to “aa” from “aa+” for the domestic life and retirement services subsidiaries of American International Group, Inc. Best also downgraded AIG’s ICR to “a+” from “aa-” and assigned the ratings a negative outlook.

In addition Best downgraded the FSR to ‘A+’ (Superior) from A++ (Superior) and ICRs to “aa” from “aa+” of Hartford Steam Boiler Group. The outlook for the FSR is stable, but Best has revised the outlook for the ICRs to negative from stable.

Best noted that, other than the above changes, “the ratings and outlooks of AIG’s remaining subsidiaries are unchanged.” (See link below for a detailed list of the companies and ratings.)

The downgrades followed AIG’s announcement that its Board Chairman Robert Willumstad has been named as the new CEO, replacing Martin Sullivan (See IJ web site – https://www.insurancejournal.com/news/national/2008/06/16/91004.htm).

Best said the downgrades are based on its belief that “AIG’s sudden reversal decision to institute a change in management and the future uncertainty of the outcome of such a change highlight a deeper level of systemic challenges facing AIG,” which have surpassed its expectations.

Best also said it believes that “AIG’s need to embark on a company-wide strategic and operational review of all of its businesses is not representative of A.M. Best’s highest rating categories. The uncertainty caused by such a review, coupled with the decision to upgrade management talent may have a negative affect on AIG’s franchises.”

The rating agency also pointed out: “Regardless of the management change, the Board of Directors was in a corporate governance and oversight position during a crucial time with the responsibility to review AIG’s risk appetite, exposure accumulations and capital management. ” Best described AIG as being at a “critical juncture now,” which “will require future economic and business vision to allow a return of confidence from the company’s numerous constituents.

“Furthermore, the potential sale of non-core businesses would reduce the historical benefits of diversification.”

On a more positive note Best said its “expectations for noticeable improvements under new leadership are significant.” However it ruled out a “quick economic turnaround, absent capital market improvements.” Notably, “the sale of mortgage-related securities may not be imminent due to AIG’s ability to wait for market reversals,” i.e. having taken around $7 billion in write downs, AIG is hoping that at least some of the securities involved may recover a significant portion of their value. Best also observed that given the size of AIG’s life and retirement services and P/C businesses, “results from potential re-engineering will be long term.”

Best’s bulletin did conclude with an endorsement for AIG. The rating agency said it “believes that AIG’s life and retirement services and property/casualty franchises continue to maintain enviable franchise value and sustainable competitive advantages, and have the ability to generate significant earnings, product proliferation, overall diversification and considerable intellectual capital.”

For a complete listing of American International Group, Inc.’s FSRs,
ICRs and debt ratings, go to: www.ambest.com/press/061702aig.pdf.

Source: A.M. Best – www.ambest.com