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AM Best Comments on AIG's P/C Restructuring

Source: AM Best

Posted on 22 Apr 2009

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A.M. Best Co. reported that the ratings and outlook of the property/casualty subsidiaries of American International Group, Inc. (AIG) remain unchanged following the company's announcement of the acceleration of its restructuring and re-branding of its global property/casualty operations, AIU Holdings.

The domestic and foreign property/casualty subsidiaries of AIG will be placed in a special purpose vehicle (SPV), and AIG will purchase from AIU Holdings its equity interests in certain AIG affiliates.

While capital and surplus remain unchanged, the quality of capital in these subsidiaries is expected to improve as these investments in these AIG affiliates will be exchanged for high quality, liquid assets of equal value. Specifically, the property/casualty business' interest in International Lease Finance Corp., United Guaranty Corp. and TRH Holdings (Transatlantic) will be transferred to AIG. A.M. Best also views this restructuring as a positive first step in positioning the commercial insurance business as an independent global property/casualty organization and in preparation for a future public equity offering. The plan to rebrand the global property/casualty business was specifically designed to further distance the property/casualty insurance operations from AIG in identity and to enhance confidence among employees, brokers and customers.

The announcement of the restructuring alone has no immediate effect on these ratings given the continued legal ownership structure and the considerable time that will be required to complete the planned divestiture. In concurrence with this announcement, A.M. Best is in the process of completing its review of the domestic property/casualty operations and expects to formally announce the results of that review in the near term.

Under this proposed structure, all subsidiary companies of this new SPV will continue to be part of AIG, which is majority owned by the U.S. Government. While management emphasizes its ready access to capital (if necessary), the ultimate financial flexibility available to these subsidiary companies is limited to AIG's further borrowing from U.S. Government sources at present. Other near-term challenges that may be encountered by these subsidiary companies include market acceptance of the re-branding initiative, maintenance of their franchise value and intellectual capital, account retention and the ability to sustain their distinguishing competitive advantages with innovative programs and significant market capacity. Some longer-term challenges include: the financial effects on AIG as it divests itself of a minority stake in a company that is a key dividend source; the actual execution of the divestiture itself; and management's ability to establish a successful, independent operation absent the franchise value it once had under AIG.

The financial strength rating of A (Excellent) and issuer credit ratings of "a" are unchanged for the following property/casualty subsidiaries of American International Group, Inc.:

AIG Commercial Lines Pool and Strategic Affiliates

-- AIG Commercial Insurance Company of Canada

-- American International Insurance Company of Puerto Rico

-- American International Specialty Lines Insurance Company -- Audubon Indemnity Company

-- Audubon Insurance Company

-- National Union Fire Insurance of Louisiana

-- AIG Casualty Company

-- American Home Assurance Company

-- American International South Insurance Company

-- Commerce and Industry Insurance Company

-- Granite State Insurance Company

-- Illinois National Insurance Company

-- Insurance Company of the State of Pennsylvania

-- National Union Fire Insurance Company of Pennsylvania

-- New Hampshire Insurance Company

Lexington Insurance Pool

-- AIG Excess Liability Insurance Company

-- Landmark Insurance Company

-- Lexington Insurance Company

-- AIG Excess Liability Insurance International