NU Online News Service

A.M. Best Co. said yesterday that it has placed the financial strength rating and issuer credit ratings of American International Group's domestic life and retirement services subsidiaries under review with negative implications.

Those units had an "A-plus-plus (Superior)" financial strength rating and an issuer credit rating of "aa-plus."

The Oldwick, N.J.-based rating firm said the financial strength ratings of "A-plus (Superior)" and issuer credit ratings of "aa-minus" of most of AIG's domestic property-casualty subsidiaries, as well as AIG's 60 percent majority-owned company, Transatlantic Holdings Inc., are under review with negative implications.

Also put under negative review was American International Group Inc. and all debt ratings of Transatlantic Holdings Inc. and 21st Century Insurance Group.

The Best action is the latest negative move by a rating firm against the New York-based insurance giant since the firm said in a filing Monday with the Securities and Exchange Commission that accounting firm PricewaterhouseCoopers found a lack of oversight at AIG had left the company unable to reliably quantify the value of its investments tied to the sagging subprime mortgage market.

Specifically, the PwC pointed to the AIG senior credit default swap portfolio with respect to the multisector collateralized debt obligations (CDOs) of AIG Financial Products Corp.

The SEC disclosures, Best noted, revealed that further refinements of data used in its internal models resulted in a significantly higher decline in valuation through Nov. 30, 2007, and due to current difficult market conditions, the material benefit of spread differentials incorporated through November 2007 are not quantifiable and will not benefit portfolio valuation at Dec. 31, 2007.

AIG "will reflect a sizable fair value decline," Best said, but added that the fair value losses associated with declines in valuations of the credit swap portfolio do not necessarily reflect permanent economic losses but a change in the fair value assessments of the underlying collateral.

Best said this collateral includes a mix of approximately 50 percent subprime mortgages as well as asset-backed auto loans, credit cards and other collateral. 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.

Best said it understands that the fair value valuation is exceptionally difficult given market conditions; however, the decline in valuation, negative earnings implications and accounting conclusions are representative of the risk inherent in this business.

The implied support incorporated into the AIG operating subsidiary ratings will need to be re-evaluated in light of the financial volatility caused by AIG's derivatives business. In addition, uncertainty remains in AIG's investment portfolio valuations, and to a lesser extent, results of its mortgage insurance and consumer finance businesses.

Given the uncertainty in market conditions and continued potential re-estimation of the value of the swap portfolio in the near term, additional time is required for Best to re-evaluate implied support, the firm said.

The rating firm said its concerns are tempered by the strong franchise value and sustainable competitive advantages of AIG's property-casualty and life and retirement services operating segments, ability to generate significant earnings, overall diversification and considerable intellectual capital.

Best added that following a detailed review of year-end 2007 results and further discussion with AIG management, it will re-evaluate the company's "under review" status.

Fitch Ratings put AIG on Rating Watch Negative on Monday, and on Tuesday Standard & Poor's announced it had revised its outlook on the parent company and its core operating subsidiary to negative from stable.