Fitch expects to resolve its Rating Watch within the next eight weeks, following further detailed analyses and discussions with management. At the conclusion of the review, the senior debt rating will either be affirmed at 'AAA' or lowered to 'AA+'.
Fitch believes that the $1.8 billion charge is easily absorbed from a corporate-wide perspective. The charge represents just 3% of AIG's consolidated GAAP shareholders' equity as of September 30, 2002 and an estimated 16% of 2002 consolidated operating earnings (nine month results annualized). GAAP shareholders' equity is expected to increase at year-end 2002.
The charge represents 13% of AIG's domestic property-casualty statutory policyholders' surplus at September 30, 2002 and an estimated 85% of Domestic Brokerage Group's 2002 earnings (nine month results annualized), although Fitch acknowledges that the reserve increase emanates from five distinct accident years. Given current hard market conditions, AIG expects to earn back any lost statutory capital in the near-term.
The Rating Watch review is not driven by the charge, per say, but rather Fitch's concern that over the past several years AIG's risk profile may have increased to levels inconsistent with a 'AAA' senior debt holding company-level rating, which warrants that a "fresh look" be taken at AIG's credit fundamentals and ratings. Fitch believes that the risk profile of the U.S. commercial lines property/casualty industry has deteriorated over the past several years and this has been reflected in wide-spread rating downgrades of most of AIG's competitors.
Other indications of a possible increase in AIG's risk profile include acquisitions over the past several years of large life insurance organizations that previously did not carry 'AAA' ratings (American General and SunAmerica) and exposure to financial services businesses, including AIG Financial Products, International Lease Finance and consumer finance. Although these operations provide diversification and growth opportunities for AIG, Fitch believes they are of a lower credit quality than AIG's other businesses, and thus potentially dilute consolidated credit quality.
Fitch will also focus on AIG's capitalization. Fitch notes that several of AIG's largest US life insurance company subsidiaries maintain NAIC risk-based capital ratios that currently fall below Fitch's published 'AAA' standards. In addition, the holding company provides guarantees for some subsidiary debt and contract obligations.
Fitch's review will also consider numerous overwhelming strengths exhibited by AIG. These include the company's pre-eminent global insurance organization, with excellent worldwide brands and franchises, strong balance sheet fundamentals and excellent operating results. In addition, the organization has exhibited strong underwriting skills and adept reinsurance management.
Fitch also views very favorably the diversified nature of the organization's products, distribution systems and geographic reach. This diversification, which is unequaled in the insurance industry and among the strongest in the broader financial services industry, has contributed to AIG's ability to generate stable and predictable operating res