AIG 2007 Annual Report Download - page 71

American International Group, Inc. and Subsidiaries
including the residential mortgage-backed securities portfolio. If AIG outlook on ILFC’s corporate credit rating (AA-) to negative. A
requires significant amounts of cash on short notice in excess of negative ratings outlook by S&P indicates that a rating may
normal cash requirements or is required to post or return collateral in be lowered, but is not necessarily a precursor of a ratings
connection with its investment portfolio, derivative transactions or change.
securities lending activities, then AIG may have difficulty selling these )Moody’s Investors Service (Moody’s) changed its rating
investments or terminating these transactions in a timely manner or outlook for AIG and its subsidiaries that have substantial
may be forced to sell or terminate them for less than what AIG might exposure to the U.S. subprime mortgage market or whose
otherwise have been able to, or both. Although AIGFP has no current ratings rely on significant explicit or implicit support from AIG
intent to do so, if AIGFP sells or closes out its derivative transactions to negative. Moody’s rates AIG ‘Aa2’ and nearly all of its
prior to maturity, the effect could be significant to AIG’s overall insurance subsidiaries either ‘Aa1’ or ‘Aa2’. A negative
liquidity. ratings outlook by Moody’s indicates that a rating may be
lowered, but is not necessarily a precursor of a ratings
AIG’s liquidity may be adversely affected by requirements to change.
post collateral. Certain of the credit default swaps written by )Fitch Ratings (Fitch) placed AIG’s and its subsidiaries’ long-
AIGFP contain collateral posting requirements. The amount of term debt ratings (AA), including ILFC (A+) and AGF (A+), on
collateral required to be posted for most of these transactions is Rating Watch Negative. Rating Watch Negative indicates that
determined based on the value of the security or loan referenced a rating has been placed on active rating watch status. Fitch
in the documentation for the credit default swap. Continued indicated that it expects to resolve the Rating Watch after it
declines in the values of these referenced securities or loans will reviews AIG’s 2007 audited financial statements.
increase the amount of collateral AIGFP must post which could )A.M. Best Company (A.M. Best) placed most of its financial
impair AIG’s liquidity. strength and issuer credit ratings on AIG’s domestic Life
See also Management’s Discussion and Analysis of Financial Insurance and Retirement Services (A++) and Domestic
Condition and Results of Operations — Capital Resources and General Insurance subsidiaries (including Transatlantic) (A+),
Liquidity — Liquidity. as well as AIG’s issuer credit rating (AA), under review with
negative implications. A.M. Best indicated that following a
Investment Concentration detailed review of AIG’s 2007 audited financial statements
Concentration of AIG’s investment portfolios in any particular and fur ther discussion with AIG management, it will re-
segment of the economy may have adverse effects. Any evaluate the ‘‘under review’’ rating status.
concentration of AIG’s investment portfolios in any particular indus- Financial strength and credit ratings by the major ratings
try, group of related industries, asset classes, such as residential agencies are an important factor in establishing the competitive
mortgage-backed securities and other asset-backed securities, or position of insurance companies and other financial institutions
geographic sector could have an adverse effect on the investment and affect the availability and cost of borrowings. Financial
portfolios and consequently on AIG’s consolidated results of opera- strength ratings measure an insurance company’s ability to meet
tions or financial condition. While AIG seeks to mitigate this risk by its obligations to contract holders and policyholders, help to
having a broadly diversified portfolio, events or developments that maintain public confidence in a company’s products, facilitate
have a negative effect on any particular industry, asset class, group marketing of products and enhance a company’s competitive
of related industries or geographic region may have a greater adverse position. Credit ratings measure a company’s ability to repay its
effect on the investment portfolios to the extent that the portfolios obligations and directly affect the cost and availability to that
are concentrated. Further, AIG’s ability to sell assets relating to such company of unsecured financing. AIG’s ratings have historically
particular groups of related assets may be limited if other market provided it with a competitive advantage. However, a ratings
participants are seeking to sell at the same time. downgrade could adversely affect AIG’s business and its consoli-
dated results of operations in a number of ways, including:
Credit Ratings )increasing AIG’s interest expense;
)reducing AIGFP’s ability to compete in the structured prod-
Ratings actions regarding AIG could adversely affect AIG’s ucts and derivatives businesses;
business and its consolidated results of operations. Following )reducing the competitive advantage of AIG’s insurance
AIG’s filing with the SEC on February 11, 2008 of a Current subsidiaries, which may result in reduced product sales;
Report on Form 8-K regarding the valuation of AIGFP’s super )adversely affecting relationships with agents and sales
senior credit default swap portfolio and reporting the conclusion representatives;
by AIG’s independent auditors that AIG had a material weakness )in the case of a downgrade of AGF or ILFC, increasing their
in internal control over financial reporting and oversight relating to interest expense and reducing their ability to compete in
this valuation, the following credit rating actions were taken: their respective businesses; and
)Standard & Poor’s, a division of The McGraw-Hill Companies, )triggering the application of a termination provision in certain
Inc. (S&P) affirmed its ‘AA’ counterparty credit ratings on AIG of AIG’s contracts, principally agreements entered into by
and its ‘AA+’ counterparty credit and financial strength AIGFP and assumed reinsurance contracts entered into by
ratings on AIG’s core subsidiaries, but revised the rating Transatlantic.
outlook to negative. In addition, S&P revised its rating
AIG 2007 Form 10-K 17