AM Best

A.M. Best Removes Ratings of AIG's Property/Casualty and Life Subsidiaries From Under Review; Affirms, Assigns Negative Outlook



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Jim Peavy

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Rachelle Morrow

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OLDWICK, N.J. - MAY 28, 2008 12:00 AM (EDT)
A.M. Best Co. affirmed the financial strength rating (FSR) of A++ (Superior) and issuer credit ratings (ICR) of "aa+"of the domestic life and retirement services subsidiaries of American International Group, Inc. (AIG). The ratings have been removed from under review with negative implications and assigned a negative outlook.

In addition, A.M. Best has affirmed the FSRs of A+ (Superior) and ICRs of "aa-"of most of AIG's domestic property/casualty subsidiaries. The ratings have been removed from under review with negative implications and assigned a negative outlook. Also, A.M. Best has affirmed the FSRs of A+(Superior) and ICRs of "aa-" of the subsidiaries of AIG's 60% majority owned company, Transatlantic Holdings, Inc. (New York). The ratings have been removed from under review with negative implications and assigned a stable outlook.

Concurrently, A.M. Best has downgraded the ICR to "aa-" from "aa" of American International Group, Inc. (New York, NY) [NYSE: AIG]. The rating has been removed from under review with negative implications and assigned a negative outlook.

A.M. Best also has affirmed the ICR of "a-" and all the debt ratings of Transatlantic Holdings, Inc. The ratings have been removed from under review with negative implications and assigned a stable outlook.

Additionally, A.M. Best has affirmed the FSR of A++ (Superior) and ICRs of "aa+" of the Hartford Steam Boiler Group (Connecticut) as the group has met the criteria for A.M. Best's highest rating category on a stand-alone basis. The outlook for these ratings is stable.

The FSRs of A+ (Superior) and ICRs of "aa-" of the Personal Lines Pool and operating subsidiaries of 21 Century Insurance Group as well as the the ICR of "a-" and debt ratings of 21st Century Insurance Group remain under review with negative implications. Due to the change in leadership, A.M. Best will hold discussions with management to evaluate future strategies and business plans. A.M. Best expects to finalize this evaluation during the third quarter of 2008.

See the link below for a detailed listing of the companies and ratings.

The companies were placed under review on February 14, 2008 following AIG's February 11, 2008 SEC Form 8-K. A.M. Best had maintained the under review status on AIG's major insurance subsidiaries through the release of the company's first quarter 2008 financial results pending continued management discussions and completion of the annual review. The first quarter results included a $7.8 billion net loss that was substantially due to continued significant pre-tax unrealized market valuation losses of $9.1 billion on the credit default swap (CDS) portfolio. The net loss also included $6.1 billion of pre-tax realized capital losses, including other than temporary impairments (OTTI) of $5.6 billion. The net results coupled with substantial unrealized losses contributed to the $16.1 billion decline in shareholders' equity.

A.M. Best's affirmation of the ratings of the domestic life and retirement services and property/casualty operations was based on the enviable franchise value and sustainable competitive advantages of these operating segments, the ability to generate significant earnings, product proliferation, overall diversification and considerable intellectual capital. The positive reputation and earnings contributions prior to inclusion of realized losses should not be overshadowed or undervalued. AIG's ability and willingness to provide implicit and explicit support remains and, coupled with the quality of these franchises, was the basis of the affirmation.

The holding company downgrade reflects AM Best's viewpoint of the detrimental implications of AIG's risk management and aggressive risk appetite relating to investment concentrations within the securities lending portfolio and matched investment programs tied to mortgage related securities. The risk appetite, larger than A.M. Best's expectations, was regardless of AIG's market surveillance resources within the mortgage industry. A.M. Best's concerns also included potential liquidity issues within the securities lending program, lack of proactive management or containment of exposure to the mortgage and real estate industry on both the liability and asset sides of AIG's balance sheet, and over reliance on the amount of support provided by the company's strong balance sheet.

Noteworthy is the significant concentration of mortgage and asset-backed securities in the sizable securities lending portfolio which resulted in the majority of the consolidated OTTI losses. The negative performance of this portfolio permeated the earnings of AIG's major business segments, although they mainly were concentrated in Life and Retirement Services, clouding its otherwise positive performance, and to a lesser extent in Asset Management.

The company's actions have led to earnings volatility, management distraction, and a decline in equity which prior to the capital raise temporarily increased financial leverage. Asset writedowns have reduced subsidiary capital accumulation leading to additional capital support from the parent company. A.M Best believes there is no tangible evidence that these concerns will result in franchise deterioration. A.M. Best believes that AIG's rated subsidiaries are adequately capitalized for their rating level. To their considerable credit, AIG easily raised approximately $20 billion of capital through offerings of straight equity, mandatory convertible and hybrid securities. AIG's ICR continues to reflect its considerable ability to attract investors, and its liquidity was positively tested over the last few quarters in that counterparties apparently maintained their confidence in AIG. However, AIG's financial flexibility has been somewhat compromised, in part due to a material decline in share value.

The negative outlook should be considered long term. The outlook anticipates continued earnings variability in the next few quarters albeit to a lesser extent. A change in outlook is less dependent upon a reversal of the market valuation adjustments and more heavily weighted toward unexpected franchise detriment and greater comfort in AIG's level of risk appetite.

For a complete listing of American International Group's FSRs, ICRs and debt ratings, please visit AIG.

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.

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