AIG 2005 Annual Report Download - page 66

corrective action to placing the insurer under regulatory and local companies in particular areas in which they are
control. active.
The statutory surplus of each of AIG’s domestic general and AIG’s strong ratings have historically provided a competi-
life insurance subsidiaries exceeded their RBC standards as of tive advantage. The effect on the business of AIG of recent
December 31, 2005. regulatory investigations, the Restatements, and subsequent
To the extent that any of AIG’s insurance entities would ratings actions is currently unknown, but these developments
fall below prescribed levels of surplus, it would be AIG’s may adversely affect the competitive position of AIG and its
intention to infuse necessary capital to support that entity. subsidiaries. See ‘‘Risk Factors — AIG Credit Ratings’’ in
A substantial portion of AIG’s General Insurance business Item 1A. Risk Factors.
and a majority of its Life Insurance business is carried on in
foreign countries. The degree of regulation and supervision in ITEM 1A.
foreign jurisdictions varies. Generally, AIG, as well as the Risk Factors
underwriting companies operating in such jurisdictions, must AIG’s Credit Ratings
satisfy local regulatory requirements. Licenses issued by foreign
authorities to AIG subsidiaries are subject to modification or The downgrades in AIG’s credit ratings will increase AIG’s
revocation by such authorities, and AIU or other AIG borrowing costs, may lessen AIG’s ability to compete in
subsidiaries could be prevented from conducting business in certain businesses and will require AIG to post additional
certain of the jurisdictions where they currently operate. In the collateral.
past, AIU has been allowed to modify its operations to From March through June of 2005, the major rating agencies
conform with new licensing requirements in most jurisdictions. downgraded AIG’s ratings in a series of actions. Standard &
In addition to licensing requirements, AIG’s foreign opera- Poor’s, a division of The McGraw-Hill Companies, Inc. (S&P),
tions are also regulated in various jurisdictions with respect to lowered the long-term senior debt and counterparty ratings of
currency, policy language and terms, amount and type of AIG from ‘AAA’ to ‘AA’ and changed the rating outlook to
security deposits, amount and type of reserves, amount and negative. Moody’s Investors Service (Moody’s) lowered AIG’s
type of local investment and the share of profits to be returned long-term senior debt rating from ‘Aaa’ to ‘Aa2’ and changed
to policyholders on participating policies. Some foreign coun- the outlook to stable. Fitch Ratings (Fitch) downgraded the
tries regulate rates on various types of policies. Certain long-term senior debt ratings of AIG from ‘AAA’ to ‘AA’ and
countries have established reinsurance institutions, wholly or placed the ratings on Rating Watch Negative.
partially owned by the state, to which admitted insurers are The agencies also took rating actions on AIG’s insurance
obligated to cede a portion of their business on terms which subsidiaries. S&P and Fitch lowered to ‘AA+’ the insurance
may not always allow foreign insurers, including AIG, full financial strength ratings of most of AIG’s insurance compa-
compensation. In some countries, regulations governing consti- nies. Moody’s lowered the insurance financial strength ratings
tution of technical reserves and remittance balances may generally to either ‘Aa1’ or ‘Aa2’. A.M. Best downgraded the
hinder remittance of profits and repatriation of assets. financial strength ratings for most of AIG’s insurance subsidiar-
In 1999, AIG became a unitary thrift holding company ies from ‘A++’ to ‘A+’ and the issuer credit ratings from ‘aa+’
when the Office of Thrift Supervision (OTS) granted AIG to ‘aa–’. Many of these companies’ ratings remain on a
approval to organize AIG Federal Savings Bank. Annually, the negative watch.
OTS conducts an examination of AIG. The OTS examination In addition, S&P changed the outlook on ILFC’s ‘AA–’
involves assessing the organization’s overall risk profile. long-term senior debt rating to negative. Moody’s affirmed
ILFC’s long-term and short-term senior debt ratings
Competition (‘A1’/‘P-1’). Fitch downgraded ILFC’s long-term senior debt
rating from ‘AA–’ to ‘A+’ and placed the rating on Rating
AIG’s Insurance, Financial Services and Asset Management Watch Negative and downgraded ILFC’s short-term debt rating
businesses operate in a highly competitive environment, both from ‘F1+’ to ‘F1’. Fitch also placed the ‘A+’ long-term senior
domestically and overseas. Principal sources of competition are debt ratings of American General Finance Corporation and
insurance companies, banks, investment banks and other non- American General Finance, Inc. on Rating Watch Negative.
bank financial institutions. S&P and Moody’s affirmed the long-term and short-term senior
The insurance industry in particular is highly competitive. debt ratings of American General Finance Corporation at
Within the United States, AIG’s General Insurance subsidiar- ‘A+’/‘A-1’ and ‘A1’/‘P-1’, respectively.
ies compete with approximately 3,100 other stock companies, These debt and financial strength ratings are current
specialty insurance organizations, mutual companies and other opinions of the rating agencies. As such, they may be changed,
underwriting organizations. AIG’s subsidiaries offering Life suspended or withdrawn at any time by the rating agencies as a
Insurance and Retirement Services compete in the United result of changes in, or unavailability of, information or based
States with approximately 2,000 life insurance companies and on other circumstances. Ratings may also be withdrawn at AIG
other participants in related financial services fields. Overseas, management’s request. This discussion of ratings is not a
AIG subsidiaries compete for business with foreign insurance complete list of ratings of AIG and its subsidiaries.
operations of the larger U.S. insurers, global insurance groups,
14 AIG m Form 10-K