A.M. Best Co. maintains its existing under review status of the financial strength ratings (FSR) of member companies of American International Group Inc. (AIG) following AIG’s announcement that it has reached a $1.64 billion settlement ($1.15 billion after tax) with the United States Department of Justice, the Securities and Exchange Commission, the Office of the New York Attorney General and the New York State Insurance Department.
It is important to note that this resolves the well publicized outstanding litigation and negotiations with these agencies in connection with accounting, financial reporting and insurance brokerage practices and underpayment of workers’ compensation premium taxes and other assessments.
In addition, the company announced that the results of the independent actuarial review of its property/casualty reserves concluded with an overall $1.69 billion pre-tax ($1.10 billion after tax) charge or approximately 3% of its total net General Insurance loss and loss expense reserves. The loss reserve charge–while substantial in combination with the adverse development noted in 2005–is within A.M. Best’s expectations for reserve and earnings volatility that was partially considered in AIG’s under review status.
On March 15, 2005, the FSRs were placed under review due to the delay in the filing of AIG’s 2004 Form 10-K, the unexpected departures of the company’s former CEO and CFO and numerous regulatory inquiries. On May 4, 2005, the FSRs of most of AIG’s wholly-owned subsidiaries were downgraded to A+ (Superior) from A++ (Superior) after the company’s disclosure of the more complete findings from its extensive internal review and its decision to restate its GAAP financial statements.
The operating companies’ issuer credit ratings (ICR) were simultaneously downgraded to “aa-” from “aa+”. The downgrades incorporated a certain degree of continued negative fallout from AIG’s internal review and regulatory investigations including an expected substantial monetary settlement.
Payment of the $1.6 billion settlement will be sourced from holding company liquidity and will not affect the statutory results of the operating subsidiaries. The cash is expected to be sourced from normal subsidiary dividends and short-term capital sources. Payment of this settlement is not expected to have an impact on AIG’s ratings when they are removed from under review.
The under review status has been maintained throughout 2005 and will be into 2006 until A.M. Best has fully reviewed the refiled statutory financial statements for 2004 and year-end 2005 results and completed the capital models associated with the individual rating units.
This extensive review is almost solely concentrated on the U.S. domiciled property/casualty companies that comprise the Domestic Brokerage Group (DBG), which bears the brunt of the restatements. While 2004 and 2005 earnings are of major significance in light of the restatements, capital levels are of utmost interest, and expected levels have now been further compromised with the reserve charge to be taken in the fourth quarter of 2005.
The restatements resulted in material negative adjustments to opening 2004 surplus. The reserve charge includes both negative and positive development, although not necessarily reflected in the same operating entities. While the $1.7 billion reserve charge is a modest percentage of total reserves, the charges are concentrated in the DBG operating companies and represent a much more significant percentage of their capital. DBG’s capital levels were not considered robust before and therefore provided little cushion for the restated earnings and reserve charge.
A.M. Best has received the refiled statutory statements, and its review has been underway for the past few weeks. Should the capital models indicate surplus levels are inconsistent with current rating levels, discussions with AIG regarding a course of action will be necessary to affirm existing ratings. A.M. Best expects the review to continue for several weeks.
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