AIG CEO Shakeup Leads Best To Downgrade Life Units

A.M. Best Co. dropped the financial strength ratings of American International Group's domestic life and retirement services subsidiaries a notch yesterday, citing “uncertainty” caused by the insurer's abrupt management change.

The Oldwick, N.J., firm acted after Sunday's sudden departure of AIG Chief Executive Officer Martin Sullivan, who was replaced by company Chairman Robert B. Willumstad.

Best, which made no change for other AIG subsidiaries, reduced its life retirement subsidiaries “Superior” financial strength ratings to “A-plus” from “A-double-plus,” and issuer credit ratings to “double-A” from “double-A-plus.”

Concurrently, Best said it has downgraded AIG's issuer credit rating to “A-plus” from “double-A-minus.” The outlook for these ratings it said is negative.

Best said its downgrades reflected a belief that AIG's sudden reversal decision to institute a change in management and the future uncertainty of the outcome of such a change highlight a deeper level of systemic challenges facing AIG, surpassing A.M. Best's expectations.”

In May at the company's annual meeting Mr. Willumstad had said Mr. Sullivan's management had the board's support.

Mr. Willumstad in a conference call with financial analysts Monday said he was embarking on a top-to-bottom review to reverse the company's steep drop in stock value and protect it against market volatility.

Over the past 52 weeks the price of AIG shares has gone from a high of $72.91 to close Friday at $34.18. Yesterday the stock closed at $32.28. Much of that drop has been related to the company's huge losses from its involvement in investments impacted by the drop in the subprime mortgage securities market.

Best said it believes AIG's need to embark on a companywide strategic and operational review of all of its businesses is not representative of its highest rating categories.

“The uncertainty caused by such a review, coupled with the decision to upgrade management talent may have a negative effect on AIG's franchises,” the firm said.

Best noted that regardless of the management change, the AIG board headed by Mr. Willumstad “was in a corporate governance and oversight position during a crucial time with the responsibility to review AIG's risk appetite, exposure accumulations and capital management.”

Best said the insurer “is at a critical juncture now and will require future economic and business vision to allow a return of confidence from the company's numerous constituents. Furthermore, the potential sale of noncore businesses would reduce the historical benefits of diversification.”

Best was not optimistic that the change at the top will rapidly reverse AIG's fortunes, saying that under new leadership, “a quick economic turnaround, absent capital market improvements, is not expected.”

According to the rating firm, an AIG sale of mortgage-related securities “may not be imminent due to AIG's ability to wait for market reversals. Given the size of AIG's life and retirement services and property-casualty businesses, results from potential reengineering will be long term.”

Best said it believes AIG's life and retirement services and property-casualty franchises continue to maintain enviable franchise value and sustainable competitive advantages, and have the ability to generate significant earnings, product proliferation, overall diversification and considerable intellectual capital.

Best also announced the downgrade of Hartford Steam Boiler Group's “Superior” financial strength rating to “A-plus” from “A-double-plus” and issuer ratings to “double-a” from “double-a-plus.” The outlook for the financial strength rating was listed as stable, and the outlook for the issuer credit ratings was revised to negative from stable.