Despite American International Group's recent profitable quarter, Moody's Investors Service said its outlook remains negative and it has doubts about the company's ability to fully repay its government loans.
Only partial repayment is "a real possibility," according to Moody's analyst Bruce Ballentine.
The rating firm said it maintains the long-term issuer rating of "A3-good" and short-term issuer rating of "Prime-1," but retains its negative outlook despite AIG's second-quarter report showing its first quarterly profit since the third quarter of 2007.
AIG's two largest business segments–General Insurance (which was recently re-branded as Chartis) and Life Insurance and Retirement Services–have experienced significant declines in business volumes and operating income over the past year, Moody's noted.
However, the rating agency added that both segments showed signs of stabilization or slight improvement in this year's second quarter compared with the first three months of the year.
The remaining company segments–Financial Services and Asset Management–showed "a clear improvement" by reporting only moderate second-quarter operating losses, Moody's said. "However, those units remain a potential drag on the group and may require additional capital/liquidity support and/or restructuring actions," Moody's said.
When the government agreed to financially support the failing conglomerate last year, it took a 79.9 percent interest in the firm. With Washington backing AIG, Moody's said the company is preserving value in its major operating units.
The Moody's analysis said AIG's "A3″ senior unsecured debt rating reflects its expectation of the firm's business and financial profile following its government-backed restructuring. The business profile will be driven largely by the market presence and performance of AIG's core General Insurance operations, Moody's said.
Moody's added that as financial markets improve, the agency believes "the government's primary motivation for supporting AIG will shift from avoiding systemic risk in the financial markets toward protection/enhancement of the debt and equity interests held by the New York Fed and the Treasury."
"So long as the realizable value of AIG's assets (including assets/operations to be divested and those to be retained) falls within the range currently contemplated, Moody's believes the government will receive full repayment of its senior secured loan as well as partial, or even full, recovery on its preferred stock investments, giving it incentive to continue supporting other creditors," the agency said.
Mr. Ballentine said the Fed has provided $40 billion in senior secured loan money to AIG, and the Treasury has extended close to $42 billion in Troubled Asset Relief Program funds used to buy perpetual preferred shares and warrants from AIG.
It is not clear that there will be money there to repay the TARP outlay, he said.
AIG did not issue a comment about the Moody's report.
Meanwhile, in other AIG news, while three Ohio pension funds have reached a $115 million settlement agreement with Maurice Greenberg, the firm's former CEO, as well as three other former company executives regarding charges of "anti-competitive practices," AIG itself remains a defendant in the case, Ohio Attorney General Richard Cordray announced.
Mr. Cordray made it clear he intends to vigorously pursue the civil action against AIG, filed in the U.S. District Court in the Southern District of New York.
The pension funds–the Ohio Public Employees Retirement System, State Teachers Retirement System of Ohio, and Ohio Police and Fire Pension Fund–alleged that between Oct. 28, 1999 and April 1, 2005, AIG and its executives engaged in "anti-competitive practices, such as market division through the use of undisclosed contingent commissions and bid-rigging."
There were also allegations of a massive accounting fraud that led to a $3.9 billion restatement of AIG's publicly available financial and regulatory filings, according to Mr. Cordray's statement.
Mr. Cordray said he is now preparing the case for trial against AIG itself, which he identified as the primary defendant.
"My office has negotiated agreements totaling $284.5 million from secondary defendants in this case," Mr. Cordray said. "Yet AIG itself has so far refused to do right by investors who were wronged."
He characterized this as "completely unacceptable in light of AIG's request to receive hundreds of millions of dollars in bonus compensation, underwritten by taxpayers, due to a federal bailout caused by AIG's poor business decisions and the financial crises. Such misconduct simply underscores why my office will continue to hold Wall Street accountable for its wrongs."
A representative for AIG released a statement, which noted that "AIG has already paid $800 million to investors, including those that are part of the alleged class in this lawsuit–an amount which is almost three-times what all the other defendants have agreed to pay combined."
The company went on to say that "any additional payments from AIG would not only come at the expense of taxpayers, but would greatly benefit the plaintiffs' lawyers who are litigating these claims and who would undoubtedly seek millions in fees from any judgment or settlement."
Mr. Greenberg's representative declined to comment. The others to settle include:
o Howard I. Smith, AIG's former CFO, who recently settled charges filed by the Securities and Exchange Commission (SEC) involving accounting fraud.
o Christian M. Milton, AIG's former vice president of reinsurance, who in January was sentenced to four years in prison on charges of conspiracy, securities fraud, mail fraud and making false statements to the SEC.
o Michael J. Castelli, AIG's former controller.
o Other related corporate entities–C.V. Starr & Company Inc., and Starr International Company Inc.–which are now headed up by Mr. Greenberg.
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