AIG removed from watch negative

Fitch Ratings has affirmed and removed all of its ratings on American International Group, Inc. (AIG) and subsidiaries from watch negative, which it originally place in March 2005.
In addition, Fitch has assigned ‘AA’ Issuer Default Ratings (IDRs) to AIG and several of its downstream holding company subsidiaries. The Rating Outlook is Stable.
Fitch says its rating action reflects the belief that “the majority of the uncertainties surrounding AIG over the last 12-to-14 months have been resolved and that the company’s financial profile and competitive positioning remain supportive of its current ratings.”
Despite a year of unprecedented challenges including management changes, investigations, restatements, reserve charges, regulatory settlements and catastrophe losses, Fitch says AIG generated net income of over US$10 billion and a return on equity of 12.3% in 2005.
Fitch adds that the rating action reflects its heightened comfort with AIG’s domestic commercial lines P&C operation’s reserve adequacy and run-rate underwriting profitability. In addition, the rating agency explains that its actions incorporate its belief that AIG’s domestic commercial lines P&C companies’ medium-term focus includes building and retaining capital to more appropriate levels for the current ratings.
The current capital levels of AIG’s domestic commercial lines P&C unit, especially risk-based capitalization, are viewed by Fitch as materially below those of comparably-rated commercial line peers. Additionally, Fitch explains that this unit’s current capitalization is generally weaker than that of many of AIG’s other core insurance operations, but not to an extent that requires a differentiation between the insurer financial strength ratings of this unit and those of AIG’s other core insurance operations.
AIG’s ratings were placed on watch negative after the company announced it would delay filing its 2004 10-K in order to complete a review of its accounting records and procedures. The review stemmed from regulatory investigations and subsequent civil suit against AIG brought by the Securities and Exchange Commission (SEC) and the Office of the New York Attorney General (NYAG).
AIG’s ratings remained on watch negative throughout 2005 as the company conducted its accounting review and worked to resolve its regulatory issues. In May 2005, AIG announced that it had hired an independent third-party to conduct a review of the adequacy of its general insurance reserves. Additionally, AIG’s on-going accounting review identified errors and changes in adjustments that led to two restatements that collectively reduced its previously reported year-end 2004 shareholders equity by US$2.2 billion.
In February 2006, AIG announced that it had entered into a US$1.6 billion settlement (US$1.2 billion after-tax) agreement with the SEC, NYAG, United States Department of Justice and New York State Department of Insurance (NYDOI). AIG concurrently announced that the completion of its reserve study would result in a fourth-quarter 2005 reserve increase of US$1.7 billion pretax (US$1.1 billion after-tax).
Fitch says it views the financial effect of the settlement as a sizable but manageable figure for a company with AIG’s earnings profile and financial flexibility. However, the agency retained its negative rating watch at that time largely because of concerns about the domestic commercial line P&C subsidiaries capitalization and reserve adequacy.