A.M. Best Comments on Ratings of American International Group, Inc. and Its Subsidiaries.
The majority of AIG's subsidiaries were downgraded on September 15, 2008 based on the potential repercussions of the immediate liquidity crisis facing AIG earlier this week, as well as the long-term outlook for the financial and operational structure subsequent to the sale of certain of AIG's assets and business segments. The extension of a two year $85 billion secured loan from the Federal Reserve has removed the imminent threat of bankruptcy and staved off the concern of a disorderly unraveling of AIG's businesses. In addition, A.M. Best recognizes the potential for its newly appointed chief executive officer to utilize his outside perspective to make objective decisions toward the future direction of AIG.
A.M. Best believes it is premature to declare financial stability to such an extent that a change in outlook or ratings is warranted. The ratings of AIG's major property/casualty and life and retirement services subsidiaries--which remain within the Excellent rating category--were downgraded as a result of the removal of financial lift afforded to the subsidiaries by the perceived financial flexibility, capital levels, business diversification and stable balance sheet of AIG on a consolidated basis. AIG's ability to provide rating enhancement based on these factors is not viable. While A.M. Best remains optimistic for the insurance businesses based on its knowledge of the subsidiaries' sufficient capital levels, quality management and enviable franchise value, the long-term corporate structure within which the remaining businesses will operate is not clear.
Despite notable relief with regard to liquidity, A.M. Best's short-term concerns include potential for policyholder departures and surrenders and continued erosion of confidence from consumers, policyholders, counterparties, credit facility banks and employees. In addition, A.M. Best needs to monitor potential erosion of franchise value and whether AIG has the ability to realize the true economic value of its franchises upon sale. Potential suitors for AIG's assets may require certain undesirable investments to remain with AIG clouding the balance sheet quality assessment. Cash requirements in the orderly run off of the securities lending program and matched investment programs will require AIG cash intervention. With regard to a streamlined AIG, the financial flexibility, balance sheet strength, beneficial funding costs and investor and creditor confidence previously sustaining AIG do not exist at this time.
The events leading to the current crisis stemmed from company-wide excessive exposure concentrations to the mortgage industry, which remained unchecked by AIG's risk management efforts. Management's improvements of its enterprise risk management capabilities will need to be more transparent to A.M. Best in order to provide comfort that in times of insurance or capital market disruptions exposure is manageable. In addition, given the current fragility of the capital markets, A.M. Best remains concerned regarding the efforts to de-risk AIG Financial Products. The ability to tap the $85 billion of federally funded cash should be sufficient to support this effort; however, the cost of drawing this facility is exorbitant and could impede profitability going forward.
A.M. Best believes that AIG's financial leverage is considerably higher than the company's debt-to-capital calculation as A.M. Best incorporates a higher level of debt and lower level of capital in the deconsolidation of non-insurance operations. The current liquidity crisis clarifies the pitfalls of excluding non-guaranteed debt. Financial leverage is expected to be variable as an orderly sale of assets is achieved and proceeds applied. A.M. Best will require more time for clarity regarding AIG's ability to repay proceeds from any borrowings from the Federal Reserve as well as existing debt. Also, the level of debt remaining subsequent to asset sales and the burden the debt places on the remaining businesses and balance sheet is a basic factor in rating decisions.
A.M. Best will revise AIG's ratings and outlooks when definitive information regarding sale of assets and assessment of potential buyers is made in the next few weeks, as well as response to information emerging from de-risking initiatives and strategic business decisions and potential usage of the Federal Reserve facility.
Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.