A.M. Best Co. and Standard & Poor’s Ratings Services have both issued statements in relation to American International Group’s announcement of a $61.7 billion fourth quarter loss, and the subsequent increase in financial support from the U.S. Treasury (See related articles).
Essentially neither rating agency sees any change in AIG’s ratings. However S&P, which gives a counterparty credit rating on AIG of ‘A-/A-1’ and an ‘A+’ counterparty credit and financial strength ratings on the Group’s insurance subsidiaries, said it has “removed all of these ratings from CreditWatch, where they were placed on Nov. 8, 2008, with negative implications.” That action, however, does not apply to S&P’s ratings on International Lease Finance Corp. (ILFC; ‘BBB+’/Watch Dev/A-2), which will “remain on CreditWatch developing pending a planned sale of the company.”
Best, which rates AIG and most of its subsidiaries ‘A’ (Excellent), said that in view of the strong support from the Federal Government provided by the Federal Reserve Bank of New York it saw no reason to change either the financial strength ratings (FSRs) or the issuer credit ratings (ICRs).
However, both rating agencies continue to assign negative outlooks to AIG’s ratings.
Best said its “decision to leave the ratings unchanged at this time reflects the continued commitment of the U.S. Government to support AIG’s financial position, demonstrated by the new and revised plans announced today.” However Best reiterated that despite the “continued financial support of the government,” the negative rating outlook reflects its concern “regarding the billions of remaining notional exposure at the AIG Financial Products unit and the negative implications and challenges associated with AIG’s “core” franchise, including the recent and potential employee turnover, continued market acceptance in the commercial casualty sector and the inherent competitive pressures brought on by professional insurance brokers and risk managers alike.”
S&P credit analyst Kevin Ahern explained that the rating agency’s “affirmation primarily reflects our view that the U.S. Treasury and the Federal Reserve will continue their financial support of and ongoing commitment to AIG as the revised recapitalization the company announced today improves its capital adequacy and reduces pressure on debt holders. The ratings reflect a combination of the extraordinary external support from the U.S. government in light of AIG’s status as a highly systemically important financial institution. We expect this support to be ongoing during AIG’s period of stress.”
S&P added that the “ratings are also based on the stand-alone insurance subsidiaries’ ‘A+’ credit characteristics. The long-term counterparty credit rating on AIG reflects a six-notch uplift from AIG’s stand-alone credit profile.”
Best noted that AIG’s management believes plans to ultimately spin off a portion of AIG’s core franchise P/C business should “help to alleviate” some of the financial concerns. It also indicated that a “potential initial public offering of AIA and ALICO is being reviewed as an alternative path to monetization of these assets.
“The domestic life and retirement savings subsidiaries continue to face pressures as operating results are expected to erode from prior levels as a result of poor equity market performance, spread compression and lower sales. Additionally, overall distribution for the domestic life and retirement services has tempered due to various factors associated with the risks and reputation of the overall franchise.”
Best said it “expects to finalize its annual review of AIG’s statutory operating companies in the coming months.” However, Best also stated that while AIG’s “secure rating is heavily weighted on the financial support provided by the U.S. Government,” Best plans to conduct a review of AIG’s operating entities that “goes beyond the government’s involvement and its ability to stabilize AIG and protect the interests of policyholders.”
Best’s added that its “view of AIG’s financial flexibility and the fungibility of capital across the organization, as well as the adequacy of capital at the operating unit level, will need to be reflected in the rating evaluation of AIG’s operating subsidiaries. In addition, trends in operating performance and business profile are further considerations that are a part of A.M. Best’s published rating methodology.
“Deterioration in those areas may lead to a downgrade in the financial strength ratings and the issuer credit rating of the holding company. While the ratings may be downgraded, it is unlikely that the financial strength ratings assigned to the key operating companies will be downgraded below ‘A-‘ (Excellent) so long as the full commitment of
the U. S. Government supporting AIG remains.”
S&P more or less took the same position as Best. It said that, “although in our view the actions of the U.S. government have largely eliminated the risks of further rapid deterioration in the company’s creditworthiness, intermediate-term concerns about the company’s ability to retain key staff and market profitable new business remain.
“AIG expects that the planned sale of the life operations, which we believe likely, will take longer than originally planned, partly because of the lack of liquidity in the capital markets.”
That analysis is the basis for the negative outlook, which, S&P said, “reflects our view that increased pressure on the performance of AIG’s insurance businesses is likely. We believe AIG is particularly susceptible to these broader market trends given its somewhat weakened position.”
S&P added that although so far it has seen no “clear evidence of long-term damage to AIG’s franchise, there have been widespread reports that competitors are actively pursuing AIG’s accounts and key underwriting personnel.
“If those losses are significant and threaten future business prospects, we could lower the ratings, though likely by no more than two notches. If AIG’s business were to stabilize and government support continues, we would consider revising the outlook to stable.”