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AIG downgrade forecast since 2001 by Rapid Ratings

AIG downgrade forecast since 2001 by Rapid Ratings

5 April - While traditional ratings agencies have only recently downgraded their ratings of insurance giant, American International Group, Australia-based credit ratings agency, Rapid Ratings, can report that it has rated the company at below investment grade since as far back as 2001.

AIG is currently under review by both the Office of the Attorney General for the State of New York and the Securities and Exchange Commission looking into issues arising from pending investigations into non-traditional insurance products and certain assumed reinsurance transactions and from AIG's decision to review the accounting treatment of certain additional items.

Using its quantitative ratings system which uses only financial data (income statement, balance sheet, cash flow statement), benchmarked against global industry peers and using 25 – 30 years of corporate information, Rapid Ratings has rated AIG between C3 (47) and C2 (54) since 2001, a sub-investment grade rating, where there is a medium risk of payment default and where asset quality is considered only ‘reasonable’.

In addition, AIG has a negative outlook meaning that its credit rating is expected to deteriorate further in both the medium-term (1- 2 years) and in the long-term (3 – 5 years).

Rapid Ratings’ composite risk report of AIG, which compares a company’s average share price with its current rating to determine whether the market is undervaluing or overvaluing the stock has recommended AIG as a sell since 2004. (In 2003 it was recommended as a hold, and in 2002 and 2001 also a sell.)

“Neither the market nor other ratings agencies have been able to predict the troubles at AIG. Rapid Ratings quantitative system, which predicted troubles at AIG as far back as 2001, has demonstrated that a company’ share price is a lagging indicator of risk and not always a good benchmark when determining financial health,” said Dr Patrick Caragata, managing director and CEO of Rapid Ratings.

He went on to say: “Rapid Ratings’ review of companies in the insurance industry show that many are weaker than are perceived in the market, although some like, Aetna and Ace, are quite strong relative to their competitors. But, brand name and scale are not good predictors of risk or proxies for the level of risk.”

Part of the problem is that the core business of underwriting is not consistently profitable, in some cases for quite a few years, while the investment side of the business has only recovered in the last year or so from the stock market collapse earlier in the decade.

He continued: “Keep in mind that five years ago, with the merger of Citibank and Travellers Insurance, the wave of the future was for banking to merge with the insurance industry. Now that Citigroup has sold off much of its insurance business, the question is how healthy can the insurance industry be when it is characterised by stiff competition, low margins, business model problems, ethical issues and the requirement to finance the consequences of randomly generated disasters. The future of the industry depends much on how it adapts to and utilises derivatives such as credit default swaps and how it manages the related risks.

“Increased scrutiny by regulators will mean that some of the questionable practices of enhancing revenue and profit will disappear. The next step is a period of consolidation through mergers and acquisition with a drive for greater economies of scale.”

Rapid Ratings’ System

At the heart of Rapid Ratings’ software-driven research are 25 industry-specific quantitative financial models that generate credit risk ratings for approximately 15,000 global companies. Rapid Ratings utilizes publicly available corporate financial data as inputs to generate a risk rating. Each industry model employs 62 financial ratios and a sophisticated multivariate econometric global benchmarking system. The models include a database of over 250,000 companies that reference 25-30 years of financial data.

Rapid Ratings’ Background

Rapid Ratings provides corporate financial health research on both listed and unlisted companies in the US, Canada, Singapore, Australia and New Zealand for investment funds, brokers, banks, large creditors, financial planner networks, financial advisors, accounting firms and retail investors. Rapid Ratings is the only qualified Australasian research firm to provide equity recommendation reports to some top research firms on Wall Street such as Lehman Brothers and Bank of New York Jaywalk, through the global settlement selection. Rapid Ratings’ research is now available on Bloomberg and will shortly be seen on several global networks.

Rapid Ratings is 76% owned by Collection House Limited, an Australian company that is listed on the ASX. Rapid Ratings has offices in New York, Toronto, Singapore, Sydney, Brisbane and Wellington.


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