A.M. Best Co. has downgraded the Financial Strength Ratings (FSR) of most of American International Group Inc.’s (AIG) (New York) wholly-owned insurance subsidiaries to A+ (Superior) from A++ (Superior).
This action follows the company’s recent disclosure of the more complete findings from its extensive internal review. Further, its Issuer Credit Ratings (ICR) assigned to the operating companies on April 6, 2005 have been downgraded to “aa-” from “aa+”. The extent of the internal control issues disclosed in the report exceeded A.M. Best expectations, although the financial impact to shareholders’ equity was not.
The FSR and ICR ratings remain under review with negative implications. The under review status was placed on the financial strength ratings of these companies on March 15 following the company’s announcement that Maurice Greenberg stepped down as CEO and that the filing of AIG’s 2004 10K had been delayed.
The extent and number of accounting re-statements, as well as the disregard of accounting regulations and financial reporting to auditors, regulators and others made even more apparent in the current AIG report, are the direct causes of the downgrade.
Rating determinations have many components on both a qualitative and quantitative basis. The downgrade is not based on the absolute level of negative financial affect on shareholder’s equity, which A.M. Best understands and believes is manageable on a GAAP accounting basis given the still formidable financial strength of AIG. Rather, the action reflects the fact that the failure in internal controls, identified in AIG’s internal review, which will result in an adverse opinion by AIG’s auditors, is inconsistent with A.M. Best’s highest financial strength rating category.
While A.M. Best understands that the new management team is actively addressing the control issues and is instituting a new culture of heeding those controls, absolute faith in financial reporting, particularly on a statutory basis, cannot be assumed at the present time. Further, it may take time to re-establish the confidence of the group’s constituents.
The ratings will remain under review with negative implications until the filing of the financial statements occurs and A.M. Best has had an opportunity to more fully review various managerial, reputational, operational and financial issues.
The vulnerability to continued inquiries from regulators and possible related fines or penalties, several shareholder lawsuits, and potential changes in management at the operational level leaves AIG exposed to further financial and reputational risk at the present time.
As stated in A.M. Best’s report of April 6, 2005, the accounting issues are focused within AIG’s domestic property/casualty operating subsidiaries whose capital was not robust for their previous ratings. A.M. Best has yet to determine the extent of the statutory impact on capital of the accounting re-statements, which will need to be determined prior to the removal of the under review status.
Despite the downgrade, A.M. Best believes that AIG maintains one of the strongest and most unique insurance franchises in the industry, with a breadth of products, capacity, highly intelligent operational managers and ability to respond to market conditions remain intact.
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