AM Best takes a dim view of AIG

First came mammoth losses – $5.29 billion in the fourth quarter
of 2007 and $7.8 billion in the first quarter of 2008. Then came a
$20 billion capital raising exercise followed within weeks by the
announcement that its CEO of three years standing, Martin Sullivan,
had resigned with immediate effect.

For US credit rating agency AM Best (AMB) Sullivan’s sudden
departure was the trigger for downgrades of AIG’s issuer credit
rating (from A+ to AA-) and its US life and retirement services
subsidiaries’ issuer credit ratings (from AA+ to AA) and financial
strength ratings (from A++ to A+). The outlook for all these
ratings is negative, noted AMB.

The rating agency explained the downgrades were based on its belief
that AIG’s sudden 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 AM
Best’s expectations”.

AMB also referred to a two- to three-month global strategic review
being undertaken by Robert Willumstad, who now holds the positions
of chairman and CEO of AIG. AMB stressed it believes AIG’s “need to
embark on a company-wide strategic and operational review of all of
its businesses is not representative of AM Best’s highest rating
categories”.

Willumstad, who has a predominantly retail banking background, was
appointed as AIG’s chairman in November 2006.

Harsh comment was also directed at AIG’s directors, which noted:
“Regardless of the management change, the board of directors 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.”

AIG’s road to recovery will not be an easy one, concluded
AMB.

“AIG is at a critical juncture right now and will require future
economic and business vision to allow a return of confidence from
the company’s numerous constituents,” said AMB.

“Given the size of AIG’s life and retirement services and
property/casualty businesses, results from potential re-engineering
will be long term,” it added.

A long road to recovery also appears to be reflected in AIG’s share
price which has shed almost a quarter of its value since the
announcement of Sullivan’s departure. AIG’s share price decline
since its peak of $70.69 in March 2007 now stands at 63
percent.

For 53-year-old, British-born Sullivan his departure ended a
37-year career with AIG which he began as a clerk in the insurer’s
London office. However, for Sullivan his departure carries with it
one significant benefit: a substantial severance package.

In a filing to the Securities and Exchange Commission AIG disclosed
that Sullivan would receive a package of $47 million in recognition
of his long service.

The package comprises a severance payment of $15 million, a $4
million pro rata bonus and equity and cash awards valued at about
$28 million.