OLDWICK, N.J. - (Business Wire)
A.M. Best Co. has affirmed the financial strength ratings (FSR) and issuer credit ratings (ICR) of the insurance subsidiaries of
American International Group, Inc. (AIG) (New York, NY). In addition, A.M. Best has affirmed the ICR of
“bbb
” of AIG. All the above ratings have been assigned a negative outlook. (See link below for a detailed listing of the companies and ratings.)
A.M. Best’s removal of the ratings from under review reflects the protracted time frame necessary for an orderly sale of AIG’s assets, which exceeds the usual near term time frame incorporated in an under review status. Clearly, the issues affecting these ratings continue to be reviewed as they change or emerge, and the ratings could be downgraded at any time if events do not meet expectations. Alternatively, the sale of a business to a higher rated organization could result in an upgrade to the business sold.
A.M. Best’s rating affirmations are heavily based on the U.S. Government’s intervention and provision of immense capital levels partially without recourse to AIG. All of A.M. Best’s future rating considerations are based on continued U.S. Government support as long as support is needed. A.M. Best believes the sale of AIG’s businesses will be a lengthy and protracted process absent a near term and significant turn around of market conditions, which is not expected. A.M. Best remains quite guarded regarding the ultimate valuation of the businesses based on a host of factors including: cost and availability of financing for potential acquirers, varied perceptions of value, reduction of competitive bidders, reduced enthusiasm over franchise availability and length of time assets remain on the market generating negative speculation. The negative outlook reflects the interim concern of franchise deterioration during a period of potential disparity between expected and offered valuations. If this materializes beyond expectations, or there is a material deviation from the expected time line, A.M. Best expects to downgrade the ratings of those businesses affected.
The material support provided to AIG from the Federal Reserve Bank of New York and the U.S. Government in its entirety is the underlying impetus to affirm the current ratings. However, A.M. Best views the terms of the preferred stock investment to be significantly less than equity-like, and the capital structure and financial leverage of AIG at September 30, 2008 and estimated to be at December 31, 2008 are outside of the range representative of its ratings. In particular, the $23 billion of equity reflecting the U.S. Government’s 79.9% interest in the company is supporting the $24.5 billion third quarter net loss. However, A.M. Best views the amortizing asset supporting this equity as less than tangible capital underlying an already strained capital and leverage structure.
These rating actions follow AIG’s announcement of its third quarter financial results, restructuring of the company’s $85 billion credit facility with the Federal Reserve Bank of New York and permanent solutions for AIG’s U.S. Securities Lending Program (Securities Lending) and Multi-Sector Credit Default Swap exposure. The third quarter net loss of $24.5 billion was outside of A.M. Best’s expectations and further increases the scale of the required asset sales. Contributing to this loss were after tax net realized capital losses of $15.1 billion, including other than temporary impairments (OTTI) of $16.2 billion much of which emanates from valuations or changes in accounting treatment due to AIG’s lack of intent to hold such securities to recovery, particularly with respect to Securities Lending collateral. The numbers also reflected a significant $2.3 billion (after tax) of issuer specific credit write-offs including $.9 billion (after tax) of Lehman Brothers exposure as well as an additional $4.6 billion (after tax) of additional AIGFP unrealized market valuation losses. However, the magnitude and capital implications of the net loss continue to be overshadowed by AIG’s liquidity issues, which have been fully supported by the Federal Reserve Bank of New York.
The Residential Mortgage Backed Securities (RMBS) held in connection with the Securities Lending program will be monetized through the formation of a special purpose vehicle (SPV) and sale of approximately $40 billion face value securities for approximately $23.5 billion. The SPV will be funded with an approximate $22.5 billion senior loan provided by the Federal Reserve Bank of New York and an approximate $1 billion junior loan provided by AIG. The senior loan is recourse only to SPV assets. Principal and interest on the RMBS will be used to first repay the senior loan and secondarily the junior loan with any residual cash flows split between the loans. Non-RMBS securities with a market value of $6.2 billion constitute the remainder of the Securities Lending program and will be disposed in the market or other means to monetize these assets. AIG can now exit Securities Lending domestically and provide more attractive balance sheets to potential acquirers of the domestic life and retirement services businesses.
Reduction of the liquidity drain from AIG’s Multi-Sector Credit Default Swaps (CDS) will be accomplished through a similar SPV structure. The SPV will be comprised of a senior loan provided by the Federal Reserve Bank of New York and a junior loan provided by AIG. The senior loan is recourse only to SPV assets. The counterparties to the CDS contracts held approximately $33 billion of collateral as of September 30, 2008. Any future upside emanating from the SPV will be shared between the loans.
The U.S. Government support continues with a restructure of the current $85 billion two year credit facility into a new $60 billion five year credit facility with significantly lower interest carry and a $40 billion preferred stock investment with a 10% per annum cumulative compounding dividend. In addition to the loans to the SPV and restructure of the credit facility, four AIG affiliates, including subsidiaries of AIG Funding, Inc. and International Lease Finance Corporation, maintain access to the Federal Reserves’ Commercial Paper Funding Facility (CPFF), which has been substantially utilized.
A.M. Best has reviewed the potential liquidity drain from AIG’s operations including AIG Financial Products Corp. (FP), the matched investment program, as well as liquidity support offered by AIG to several business segments and debt maturities. While it is not possible to obtain certainty of the cash needs of unwinding FP’s varied and complicated products into hesitant and illiquid markets, it appears that remaining capacity under the recast credit facility will be sufficient for the near term although expectations are quite fluid and changes in ratings and outlook could be made as information is continually reviewed.
A.M. Best has and will continue to review the rate and exposure monitoring reports provided by the Commercial Insurance Group including rate and exposure changes. To date the review does not warrant a rating revision; however, due to the lag in capturing bound policies versus current market quotes some concern remains. In addition, A.M. Best has reviewed employee turnover in key AIG business segments through a specific listing of key employees. While the current review does not indicate significant turnover at this point in the areas reviewed, we expect this issue will continue to evolve, and A.M. Best will continue to focus on this as a measure of the inherent value of the subsidiary businesses.
The rating affirmations of AIG’s domestic life and retirement services subsidiaries reflect the individual financial strength and operating performance of the operating subsidiaries organized under AIG's domestic life and retirement services operations. The ratings recognize the life and retirement services estimated modest statutory after tax operating earnings performance presented through third quarter 2008, sufficient risk-adjusted capitalization and its diverse product portfolio. In an effort to maintain the value of the franchise, AIG's domestic life and retirement services entities have benefited from roughly $16 billion of capital infusions to offset significant losses stemming from its securities lending portfolios.
Partially offsetting these positive rating factors are that AIG’s core annuity and spread businesses remain vulnerable to interest rate risk and the effects of the global economic environment. The life and retirement services subsidiaries continue to face challenges due to competitive pressures in its core domestic product lines. Through third quarter 2008, annuity surrenders have increased and sales in its retirement services annuity portfolios have been reduced. Through third quarter 2008, AIG’s various initiatives are supportive of its commitment to recapitalize these subsidiaries.
Concurrently, A.M. Best has assigned a category of NR-5 (Not Formally Followed) to the FSR and an “nr” to the ICR of AIG Assurance Canada due to a legal entity merger into AIG Life Insurance Company of Canada (both of Toronto, Ontario) effective October 1, 2008.
For a complete listing of American International Group’s FSRs, ICRs and debt ratings, please visit www.ambest.com/press/111001aig.pdf.
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.
A.M. Best Co.
Analysts
Joyce Sharaf—P/C
908-439-2200, ext. 5046
joyce.sharaf@ambest.com
or
Marc Steinberg—L/H
908-439-2200, ext. 5225
marc.steinberg@ambest.com
or
Public Relations
Jim Peavy
908-439-2200, ext. 5644
james.peavy@ambest.com
or
Rachelle Morrow
908-439-2200, ext. 5378
rachelle.morrow@ambest.com
