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A.M. Best Maintains Under Review Negative Status on American International Group, Inc. Operations Designated For Sale
OLDWICK, N.J.-(Business Wire)-October 3, 2008 - A.M. Best Co. has commented that all financial strength ratings, issuer credit ratings and debt ratings are unchanged and remain under review with negative implications for American International Group, Inc. (AIG) (New York) and its subsidiaries.
This comment follows AIG’s publicly announced plan to sell many of its businesses, including domestic personal auto, International Lease Finance Corporation, AIG’s domestic life and retirement services and certain foreign life operating units including ALICO.
AIG’s main core remaining business focus is expected to be domestic commercial and foreign general property/casualty insurance. AIG may also retain a majority ownership of AIA, its flagship life company in Southeast Asia. AIG’s plan as set forth is expected to generate sufficient cash to fully repay utilization of the $85 billion Federal Reserve Credit Facility as well as accrued interest and fees.
AIG management maintains an imperative to utilize sale proceeds to repay monies borrowed from the Federal Reserve Credit Facility at disadvantageous interest rates. While A.M. Best is optimistic that the plan will be diligently executed, there are as yet no named buyers or post-acquisition balance sheets representing the remaining businesses, and any timing delays could have unforeseen effects, which causes A.M. Best to be unwilling to revise ratings and/or the under review status at this time.
AIG’s domestic and foreign property/casualty operations have proven their significant profit generating capability. However, near-term profitability should not be expected to be as robust given policyholders seeking to diversify some risk away from AIG, decline in benefits emanating from current reduction in market confidence, continuing soft market conditions and the change in perceived value in the implicit and explicit support of AIG, which will no longer be a diversified conglomerate with very significant financial flexibility. A.M. Best maintains heightened sensitivity to the possibility of erosion of franchise value and employee departures, which would have a detrimental impact to profitability. Noteworthy, the Federal Reserve and insurance regulators have an atypical but decided interest in supporting AIG to achieve its goals.
A.M. Best acknowledges that management has set forth a concrete action plan that, if fully executed, should generate sufficient funds to retire the Federal Reserve Credit Facility, which is expected to be substantially utilized absent asset sale consideration. Information regarding AIG’s post-plan balance sheet stability, invested asset quality, liquidity and debt service capability is currently insufficient to allow an appropriate analysis and therefore, consideration of a change in ratings and/or the under review status for those businesses that management expects to remain as core to the streamlined AIG. In A.M. Best’s opinion, the core property/casualty operations currently maintain adequate surplus and policyholder security, and it is anticipated that management as well as insurance regulators will look to ensure this continues. Nonetheless, A.M. Best remains concerned regarding the consolidated AIG disposition of troubled assets supporting securities lending and matched investment programs, third quarter 2008 results as well as operating and financial leverage.
A.M. Best believes that many of the operating units expected to be sold are premier opportunities for interested parties to garner significant quality market share quickly and that many could not be currently duplicated. The Federal Reserve Credit Facility generally requires AIG’s asset sales to be cash transactions. A.M. Best believes that competition for asset sales may be challenged by the lack of credit availability in current volatile markets and potential reluctance of bidders to raise cash through stock dilution. In addition, benefits to AIG from new federal legislation or intervention cannot be factored in as of the date of this release. As information regarding beneficial legislation, federal intervention or specific buyer information is received, ratings and the under review status will be revised as appropriate.
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.
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