Liquidity Crisis Crushes AIG s Stock: The Pain Continues (Part 3) September 16, 2008

Transcription

1 Liquidity Crisis Crushes AIG s Stock: The Pain Continues (Part 3) September 16, 2008 Yesterday, American International Group (AIG) stock declined precipitously, a trend which continued in early trading today. This was due to market reaction over the demise of Lehman Brothers and the sale of Merrill Lynch to Bank of America, announced early yesterday morning, as well as to continued worries over AIG s exposure to credit default swaps (CDS) written on mortgage-backed securities and CDO s with mortgage exposure, and investment losses on subprime-related holdings in its insurance subsidiaries 1. Yesterday evening all of the major credit rating agencies reacted by downgrading both the debt ratings of AIG as well as the financial strength ratings of AIG s many life and property and casualty insurance subsidiaries (see Appendix). These downgrades only exacerbated short-term liquidity issues facing AIG by triggering contractual agreements that may require the posting of additional collateral or early termination of some CDS contracts. Additional collateral requirement estimates have ranged between $10 and $18 billion. AIG is now in the midst of a severe liquidity crisis in which it faces immediate cash needs to meet collateral calls and is likely to post additional reserves for investment losses. With over $1 trillion in assets at 6/30/08 and valuable business properties to sell, AIG is attempting to buy time to dispose of some of these assets to raise necessary longer term capital. Given deep unease within world capital markets and the perceived need for AIG to act soon, it may be difficult for AIG to sell these assets at anything besides bargain prices. New York Insurance Department Development In an attempt to stave off the collapse of more New York financial services firms, New York governor David Patterson announced yesterday that the New York Department of Insurance was allowing the exchange of $20 billion of assets between AIG and some of its New York insurance subsidiaries. The transaction, still short on details, will apparently allow AIG to shift less liquid assets to the insurance subsidiaries in exchange for more liquid assets, which could then be posted for collateral in something like a repurchase agreement. There was no indication given of what insurance subsidiaries are involved, the types of assets exchanged, or the terms of the exchange. It does not appear that any other insurance department was involved in this transaction or agreed to such a swap for its domiciled AIG subsidiaries, keeping in place all legal separation between AIG s regulated statutory insurance entities and the parent (please see the Appendix for the states of domicile for each AIG subsidiary). The table on the following page shows the AIG statutory entities that are domiciled in New York, as well as their invested assets and surplus as of 6/30/2008. As can be seen, the majority of financial resources in the New York companies are housed in the property & casualty units, and within American Home Assurance Company in particular. 1 For more information on the development of the AIG situation, please see our multiple releases over the past several months, including Review of Six Month 2008 Statutory Results for the AIG Life Insurers (August 28, 2008), and AIG Large Loss Announced: The Pain Continues (Part 2) (August 7, 2008). ALIRT Insurance Research Page 1 September 16, 2008

2 New York Domiciled AIG Insurers Inv. Assets Surplus NAIC Company 6/30/2008 6/30/2008 Life American Intern'l Life, NY 6, First Sunamerica Life 6, United States Life Ins. Co. 4, PC AIG National Ins. Co AIU Insurance Co. 2,022 1, American Home Assur. Co. 21,903 6, American Intern'l Ins. Co Commerce & Industry Ins Co 7,237 2, Putnam Reins. Co Transatlantic Reins. Co** 11,706 3,598 Life Insurance Subsidiaries Totals 62,083 15,820 **Transatlantic Reinsurance Company is 59% owned by AIG. Our August 28, 2008 release, Six Month 2008 Statutory Results for the AIG Life Insurers, provided a look at the latest financials and attendant ALIRT scores for the AIG s U.S. life insurers. We include this table again below 2. We reiterate that AIG s life insurance subsidiaries are separate legal entities from the parent and are afforded solvency protection by the respective insurance departments in which they are domiciled. Total ALIRT Scores and Surplus for the AIG U.S. Life Insurers Total ALIRT Score Total Surplus ($ Mns.) % Chng. in Surplus 12/31/07 3/31/08 6/30/08 12/31/07 3/31/08 6/30/08 2Q Mo. 08 AIG Annuity Ins. Co ,878 3,785 4, % -13% AIG Life Ins. Co % -7% AIG SunAmerica Life ,222 1,175 1,005-14% -18% American Gen l L&A % -35% American Gen l Life, TX ,025 5,101 5, % -4% American Int l Life, NY % -23% First SunAmerica Life % -11% SunAmerica Life ,917 5,318 5,795 +9% -2% United States Life, NY % -27% Variable Annuity Life ,649 3,136 3,382 +8% -7% 2 Please note that Total ALIRT Scores for both AIG s life and P&C companies have declined slightly given the recent downgrades by all of the major credit rating agencies. ALIRT Insurance Research Page 2 September 16, 2008

3 Based upon the reported financial statements as of 6/30/08, AIG s life insurance subsidiaries remain solvent, helped by substantial capital infusions into a number of subsidiaries in the second quarter 2008 and continued positive earnings. Several issues of concern, however, face a number of the life insurance subsidiaries which include: 1) Several of these companies reported substantial net capital losses tied to investments in residential mortgage-backed securities as of 6/30/08 3. Market values for many assetbacked securities have deteriorated since the end of the second quarter, and as a result net capital losses for the AIG group and/or the AIG U.S. life insurers could widen in the third quarter, potentially reducing surplus and offsetting some of the positive impact from the capital infusions received in the first six months of ) A potential run-on-the-bank at any of the AIG subsidiaries would likely have a deleterious effect both on the earnings, as well as investment results and liquidity, if the company is forced to sell assets into troubled capital markets (lower equity markets, wider credit spreads, etc.). It is our experience that no insurance company is set up to withstand a wholesale run on its invested asset base, and if such a run were to occur, departments of insurance may well step in to take protective action. 3) It is highly unlikely that AIG will be able to provide additional surplus infusions to any insurance subsidiary in the coming quarters to offset potential operating or investment losses, leading to further potential deterioration in insurer surplus positions. Property & Casualty Subsidiaries On the following page we provide a look at the latest financials and attendant ALIRT scores for AIG s property & casualty (P&C) insurers. We reiterate that AIG s P&C insurance subsidiaries are separate legal entities from the parent and are afforded solvency protection by the respective insurance departments in which they are domiciled. Generally, the nature of P&C operations deemphasizes the relative importance of investment results, therefore AIG s P&C operations have not suffered nearly the investment losses seen in the life subsidiaries. This removes one of the chief concerns regarding operating viability going forward. While the operating results of certain subsidiaries have been affected by the current downturn in P&C pricing, AIG s P&C franchise remains one of the country s most important and wide reaching and may be attractive to a number of potential buyers. Possible concerns regarding AIG s property & casualty operations going forward turn largely on the possibility of further ratings downgrades (discussed later), especially by A.M. Best. Much P&C distribution requires an A.M. Best rating of A- or higher and if AIG s operating subsidiaries were to fall below that critical rating level, it would likely substantially hamper the ability of these companies to produce business going forward. While A.M. Best s rating on the AIG P&C subsidiaries is now A (3 rd highest, after a one notch downgrade), if the parent were to seek Chapter 11 protection, a possibility exists that these ratings could be downgraded further. It should also be noted that AIG has a mortgage insurance operation through its United Guaranty subsidiaries and that the operating profitability for these companies has been adversely impacted by the downturn in the U.S. housing market. However, the existence of contingent reserves, put aside for just such losses, has partially offset surplus deterioration at these companies. 3 For details on specific net capital losses and surplus infused, please see our Review of Six Month 2008 Statutory Results for the AIG Life Insurers (August 28, 2008). ALIRT Insurance Research Page 3 September 16, 2008

4 AIG P&C Subsidiary Total ALIRT Scores and Surplus Change YE Months 2008 Total ALIRT Score Total Surplus ($ Mns.) % Chng. in Surplus AIG P&C Subsidiaries 12/31/2007 3/31/2008 6/30/ /31/2007 3/31/2008 6/30/2008 2Q Mo st Century Ins. Co % 15% AIG Advantage % -9% AIG Casualty Co ,884 1,740 1,630-6% -13% AIG Centennial Ins. Co % -7% AIG Excess Liability ,248 1,390 1,452 4% 16% AIG Global Trade & Political Risk % -32% AIG Hawaii Ins. Co % -2% AIG Indemnity Ins. Co % -3% AIG National Ins. Co % -6% AIG Preferred Ins. Co % -3% AIG Premier Ins. Co % -9% AIU Insurance Co ,398 1,022 1,008-1% -28% American General Indemnity Co % 5% American Home Assurance Co ,297 6,806 6,527-4% -11% American Int'l Ins. Co. of Puerto Rico % 11% American Int'l Ins. Co % -3% American Int'l Ins. Co. of California % -9% American Int'l Ins. Co. of Delaware % 9% American Int'l Ins. Co. of New Jersey % -3% American Int'l Specialty Lines Ins. Co % 7% American Pacific Ins. Co % 11% Audubon Ins. Co % -5% Commerce & Industry Ins. Co ,688 2,779 2,878 4% 7% Hartford Steam Boiler Ins. & Ins. Co % -2% Insurance Co. of the State of PA ,900 1,933 1,889-2% -1% Landmark Insurance Company % 10% Lexington Ins. Co ,551 4,705 4,797 2% 5% National Union Fire Ins. Co. of Pittsburgh, PA ,157 12,312 12,195-1% 0% New Hampshire Indemnity Company % 30% New Hampshire Insurance Company ,369 1,391 1,393 0% 2% Putnam Reinsurance Company % 10% Transatlantic Reinsurance Company ,369 3,348 3,598 7% 7% United Guaranty Residential Ins. Co. of NC % -19% United Guaranty Ins. Co % 8% United Guaranty Residential Ins. Co % 28% Personal Lines Composite % 0% Commercial Lines Composite ,231 1,199 1,141-5% -7% ALIRT Insurance Research Page 4 September 16, 2008

5 Rating Agency Reaction In the Appendix, we provide a chart of the recent rating actions by all of the major credit rating agencies on AIG s insurance subsidiaries. Moody s: In its downgrade, Moody s cited the impact the continued deterioration in the U.S. housing market is having on AIG s liquidity and capital position due to its investment and derivative exposures. Moody s noted AIG s attempt to develop wide-ranging plans to address capital and liquidity risks via secured borrowings, asset sales, and other capital sources, but warned that further downgrades are likely if immediate liquidity and capital concerns are not fully addressed. Such downgrades could amount to multiple notches, it added. Standard &Poor s: In its downgrade, S&P noted AIG s reduced flexibility in meeting collateral needs and concerns over residential mortgage-related investment losses, as markto-market losses have placed significant pressure on AIG s ability to access capital and liquidity. S&P further noted that it is monitoring the completion of the NY insurance subsidiaries asset transfer to the parent as well as other liquidity options, including the potential sale of company assets. If these steps are not successful, S&P stated that rating could be lowered into the BBB category. Fitch: In its downgrade, Fitch stated that AIG s financial flexibility and ability to raise holding company cash is extremely limited due to declines in the stock price, widening credit spreads, and difficult capital market conditions. Fitch feels that AIG is likely to pursue other capital raising plans outside of the NY-brokered asset swap with its insurance units, including the sale of various operating units. A.M. Best: In its downgrade, cited the rapid deterioration of the already existing fragile condition of AIG s financial strength and flexibility. A.M. Best will continue to monitor AIG s plan to stabilize its financial condition. ALIRT Research s View AIG is currently striving to extricate itself from a severe credit crunch and stave off bankruptcy. Meanwhile, the company s insurance operations may be facing pressure as distributors decide how to proceed under the current circumstances. Compounding this is continuing deterioration in the U.S. housing market and worldwide capital markets, with attendant declines in equities and bond values. This has created a very fluid condition. We feel that no one is currently able to say with any certainty what the final outcome will be. However, we make the following points: AIG s insurance subsidiaries are overseen by insurance regulators in 20 domiciliary states 4. These subsidiaries are established as separate legal entities and are protected by state insurance laws. These laws not only regulate the ability of parent companies to remove assets from these insurance units and how assets are invested, but also provide for policyholder protection in the case of financial stress or insolvency. Should any of AIG s insurance subsidiaries face severe financial stress whether the parent enters into bankruptcy or not it is likely that the appropriate state insurance commissioner will take actions to protect the assets of that company for the benefit of policyholders. 4 Insurance subsidiaries are additionally reviewed by the insurance department in any state where they are licensed. ALIRT Insurance Research Page 5 September 16, 2008

6 Based upon the reported financial results as of 6/30/08, all of AIG s insurance subsidiaries remain solvent businesses. While AIG s life subsidiaries face the greater potential headwinds, given the possibility for further losses tied to residential mortgagebacked investment exposure, their surplus positions are such that a degree of losses could be taken without imperiling the solvency of the companies. Should investment losses, however, accelerate over the medium term, some of these companies may begin to face financial stress absent outside surplus support. Additional business risk exist for both AIG s insurance operations, including mass exodus from life and property & casualty products, which could create financial strain if insurers are forced to sell assets to cover obligations. Additional ratings downgrades also continue to be a concern should they result in a further crisis in confidence at the companies. The distinct possibility exists that AIG, in its attempt to raise capital, will sell some of its insurance assets. In fact, it has already been rumored in the financial press that AIG is considering the sale of its annuity operations. Such a sale would likely stifle the current lack of confidence in the companies, and also provide a source of capital support depending on the parent should any of these subsidiaries need additional surplus to offset investment/operating losses. This review is prepared by ALIRT Insurance Research, an independent insurance industry financial analysis firm. ALIRT provides its ALIRT (AnaLysis of Insurer Risk Trends) Services to institutional clients responsible for monitoring exposures to insurance company financial deterioration. This review is for the specific internal use of our clients, and may not be redistributed without the express written permission of ALIRT Insurance Research. While this review is prepared for your personal use, it is not a substitute for an impartial and thorough investigation of insurance company relative financial strength, and does not satisfy federal and state mandated fiduciary due diligence. Financial information contained in this review is obtained from public sources we consider reliable, but we cannot guarantee as accurate. This review should not be considered complete, includes expressions of our opinion, and must be accepted without responsibility to ALIRT. ALIRT Insurance Research, LLC Day Hill Road, Ste. 220, Windsor, CT Phone: (860) Fax: (860) info@alirtresearch.com ALIRT Insurance Research Page 6 September 16, 2008

7 APPENDIX: RATINGS ACTIONS ON AIG COMPANIES AS OF 9/16/2008 State of A.M. Best* Rating Fitch* Rating Old Moody's Current Old S&P Current Domicile Company Old Current Old Current Rating Rating Action Rating Rating Watch CA 21st Century Casualty Company PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative CA 21st Century Ins Co PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative AZ 21th Century Ins Co of The SW PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative MN AIG Advantage Ins Co PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative NJ AIG Auto INS CO OF New Jersey PC A+ A AA+ AA- N/R N/R N/R N/R PA AIG Casualty Company PC A+ A AA+ AA- Aa3 Aa3 Possible downgrade AA+ A+ Watch Negative PA AIG Centennial Insurance Company PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative DE AIG Excess Liab Ins Co Ltd PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative NJ AIG Global Trade & Pol Risk Ins Co PC N/R N/R N/R N/R N/R N/R N/R N/R HI AIG Hawaii Insurance Company Inc PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative PA AIG Indemnity Insurance Company PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative NY AIG National Insurance Company Inc PC A+ A AA+ AA- N/R N/R N/R N/R PA AIG Preferred Insurance Company PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative PA AIG Premier Insurance Company PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative NY AIU Insurance Company PC A+ A AA+ AA- Aa3 Aa3 Possible downgrade AA+ A+ Watch Negative IL American General Indemnity Co PC B+ B+ N/R N/R N/R N/R N/R N/R FL American General Prop Ins Co of FL PC B+ B+ N/R N/R N/R N/R N/R N/R TN American General Property Ins Co PC B+ B+ N/R N/R N/R N/R N/R N/R NY American Home Assurance Company PC A+ A AA+ AA- Aa3 Aa3 Possible downgrade AA+ A+ Watch Negative CA American International Ins Co of CA PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative DE American International Ins Co of DE PC N/R N/R N/R N/R N/R N/R N/R N/R NJ American International Ins Co of NJ PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative PR American International Ins Co of PR PC A+ A N/R N/R N/R N/R AA+ A+ Watch Negative NY American International Insurance Co PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative CO American International Pacific Ins PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative PA American International South Ins Co PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative IL American Intl Specialty Lines Ins Co PC A+ A AA+ AA- Aa3 Aa3 Possible downgrade AA+ A+ Watch Negative DE American Life Ins CO PC N/R N/R N/R N/R N/R N/R N/R N/R HI American Pacific Insurance Co PC A+ A AA+ AA- N/R N/R N/R N/R MS Audubon Indemnity Company PC A+ A N/R N/R N/R N/R N/R N/R LA Audubon Insurance Company PC A+ A N/R N/R N/R N/R AA+ A+ Watch Negative NY Commerce & Industry Insurance Co PC A+ A AA+ AA- Aa3 Aa3 Possible downgrade AA+ A+ Watch Negative PA Granite State Insurance Company PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative CT Hartford Steam Boil Inspec & Ins Co PC A+ A AA+ AA- N/R N/R N/R N/R CT Hartford Steam Boil Inspec Ins Co CT PC A+ A N/R N/R N/R N/R N/R N/R IL Illinois National Insurance Co PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative PA Insurance Co of The State of PA PC A+ A AA+ AA- Aa3 Aa3 Possible downgrade AA+ A+ Watch Negative CA Landmark Insurance Company PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative DE Lexington Insurance Company PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative LA National Union Fire Ins Co of LA PC A+ A N/R N/R N/R N/R N/R N/R PA National Union Fire Ins Co of Pitts PC A+ A AA+ AA- Aa3 Aa3 Possible downgrade AA+ A+ Watch Negative PA New Hampshire Indemnity Co Inc PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative PA New Hampshire Insurance Company PC A+ A AA+ AA- N/R N/R AA+ A+ Watch Negative NY Putnam Reinsurance Company PC A+ A N/R N/R N/R N/R AA- AA- Negative NY Transatlantic Reinsurance Co PC A+ A N/R N/R Aa3 Aa3 Stable AA- AA- Negative NC United Gty Residential Ins Co of NC PC N/R N/R N/R N/R A3 A1 Review for downgrade A+ BBB+ Watch Negative NC United Guaranty Coml Ins Co of NC PC N/R N/R N/R N/R A1 A3 Review for downgrade N/R N/R NC United Guaranty Credit Insurance Co PC N/R N/R N/R N/R N/R N/R N/R N/R NC United Guaranty Insurance Co PC N/R N/R N/R N/R N/R N/R N/R N/R NC United Guaranty Mortgage Indem Co PC N/R N/R N/R N/R Aa3 Aa3 Possible downgrade AA+ A+ Watch Negative NC United Guaranty Mortgage Ins Co PC N/R N/R N/R N/R N/R N/R N/R N/R NC United Guaranty Mrtg Ins Co of NC PC N/R N/R N/R N/R N/R N/R N/R N/R NC United Guaranty Residential Ins Co PC N/R N/R AA+ AA- Aa3 Aa3 Possible downgrade AA+ A+ Watch Negative IN Yosemite Insurance Company PC A A N/R N/R N/R N/R N/R N/R State of A.M. Best Rating Fitch Rating Old Moody's Current Old S&P Current Domicile Company Old Current Old Current Rating Rating Action Rating Rating Watch MO AGC Life Insurance Company Life A+ A AA+ AA- N/R N/R N/R N/R TX AIG Annuity Ins CO Life A+ A AA+ AA- Aa2 Aa3 Review for downgrade AA+ A+ Watch Negative PR AIG Life Ins Co of Puerto Rico Life N/R N/R N/R N/R N/R N/R N/R N/R DE AIG Life Insurance Company Life A+ A AA+ AA- Aa2 Aa3 Review for downgrade AA+ A+ Watch Negative AZ AIG Sunamerica Life Assur CO Life A+ A AA+ AA- Aa2 Aa3 Review for downgrade AA+ A+ Watch Negative IL American General Assurance Co Life A+ A N/R N/R N/R N/R N/R N/R TN American General Life & Acc Ins Life A+ A AA+ AA- Aa2 Aa3 Review for downgrade AA+ A+ Watch Negative TX American General Life Insurance Co Life A+ A AA+ AA- Aa2 Aa3 Review for downgrade AA+ A+ Watch Negative NY American Internatl Life ASSR Co NY Life A+ A AA+ AA- Aa2 Aa3 Review for downgrade AA+ A+ Watch Negative DE American Life Insurance Co Life A+ A AA+ AA- Aa2 Aa3 Review for downgrade AA+ A+ Watch Negative DE Delaware American Life Insurance Co Life A+ A N/R N/R N/R N/R N/R N/R NY First Sunamerica Life Insurance Co Life A+ A AA+ AA- Aa2 Aa3 Review for downgrade AA+ A+ Watch Negative IN Merit Life Insurance Company Life A A N/R N/R N/R N/R N/R N/R CA Pacific Union Assurance Company Life A- A- N/R N/R N/R N/R N/R N/R AZ SunAmerica Life Insurance Co Life A+ A AA+ AA- Aa2 Aa3 Review for downgrade AA+ A+ Watch Negative NY United States Life Ins Co In NYC Life A+ A AA+ AA- Aa2 Aa3 Review for downgrade AA+ A+ Watch Negative TX Variable Annuity Life Insurance Co Life A+ A AA+ AA- Aa2 Aa3 Review for downgrade AA+ A+ Watch Negative *All A.M. Best rated companies were placed under review with negative implications. *All Fitch rated companies were kept on rating watch negative.