A.M. Best places AIG’s financial rating under review

A.M. Best Co. has placed the financial strength rating (FSR) of A++ (Superior) of the domestic life and retirement services subsidiaries of American International Group (AIG) (New York) [NYSE: AIG] under review with negative implications.
In addition, A.M. Best has placed the FSRs of A+ (Superior) of most of AIG’s domestic property and casualty subsidiaries and AIG’s 60% majority-owned company, Transatlantic Holdings, Inc. (New York), under review with negative implications.
The rating actions follow AIG’s Feb. 11, 2008 filing with the U.S. Securities Exchange Commission (SEC), clarifying its methodology in determining the fair value of the derivatives business of AIG Financial Products Corp (AIGFP).
“The fair value losses associated with declines in valuations of [a] particular swap portfolio do not necessarily reflect permanent economic losses, but a change in the fair value assessments of the underlying collateral, which includes a mix of approximately 50% subprime mortgages as well as asset-backed auto loans, credit cards and other collateral,” A.M. Best said in a press release.
“Given management’s due diligence in providing its protections, it is likely that true economic losses will not reach the level of fair value accounting adjustments.”
Model development over the past several months, as well as refinement of data, has caused revisions of fair value determination, A.M. Best notes.
“The necessity of the model improvements, which continued into 2008, contributed to [AIG’s] independent auditors conclusion that at Dec. 31, 2007 AIG had a material weakness in its internal control and oversight relating to the fair valuation of AIGFP’s super senior credit default swap portfolio.”
A.M. Best said its concerns about AIG were “tempered by the strong franchise value and sustainable competitive advantages of AIG’s property and casualty and life and retirement services operating segments, ability to generate significant earnings, overall diversification and considerable intellectual capital.”