Fitch Affirms AIG's Ratings; Outlook Positive
Fitch Ratings has affirmed American International Group, Inc.'s ratings, including the long-term IDR at 'A-'. Fitch has also affirmed the ratings on AIG's senior debt obligations at 'BBB+'. Additionally, Fitch has affirmed the Insurer Financial Strength (IFS) ratings of AIG's rated property/casualty insurance subsidiaries at 'A' and the IFS ratings of the company's U.S. life insurance subsidiaries led by AGC Life Insurance Company at 'A+'. AIG's Rating Outlook is Positive. A complete list of ratings is provided at the end of this release.
The Positive Outlook reflects the improvement in AIG's capital position and debt servicing capabilities over the past several years. Fitch believes AIG's leverage metrics are on par with higher rated peers and improved earnings within the insurance operations and reductions in interest expense have led to better GAAP earnings-based interest coverage. Continued earnings stability and coverage improvement are key factors toward considering future rating upgrade actions.
KEY RATING DRIVERS
AIG's ratings reflect the company's long-term success in restructuring and deleveraging efforts. AIG is an independent publicly held corporation with an operating focus on global property/casualty insurance, domestic life insurance and retirement products, and mortgage guaranty insurance. The August 2015 sale of AIG's remaining ordinary shares of AerCap Holdings N.V. was a major step in exiting non-insurance operations.
AIG's financial leverage as measured by the ratio of financial debt and preferred securities to total capital (excluding operating debt and the impact of FAS 115) was 17.5% at June 30, 2015, up from 16.5% at year-end 2014. Pro forma financial leverage adjusting for the July 2015 repurchase of $3.7 billion of AIG parent debt and the issuance of $2.79 billion of senior debt is 17.2%. Fitch's total financial commitment (TFC) ratio was 0.4x at June 30, 2015.
AIG's GAAP earnings-based interest coverage improved to 10.8x in the first half of 2015 (1H15), up from 9.0x in 2014 and 6.7x in 2013. Recent refinancing of higher cost debt with long-term lower coupon obligations will reduce interest expense further.
AIG's ability to meet holding company obligations is primarily supported by dividend capacity from the insurance subsidiaries. Cash distributions from subsidiaries totalled $8.3 billion in 2014 and $4.7 billion thus far in 2015. The company has built a strong holding company liquidity position that includes $13.4 billion of unencumbered cash and investments at June 30, 2015, and $4.5 billion of available capacity from credit and contingent liquidity facilities.
AIG property casualty subsidiary ratings consider the company's unique market position in the global insurance market given its absolute size, underwriting capabilities, and consolidated capital adequacy that is comparable to higher rated peers. AIG's property casualty subsidiaries financial strength benefits from the improvements in capital strength and liquidity of the parent holding company.
Lower catastrophe losses and benefits from recent pricing underwriting and portfolio repositioning actions led to profitability improvement in the last two years for property casualty operations. Still, the GAAP property casualty combined ratio of 99.4% thus far in 2015 and 102.2% in 2014 is weaker than large commercial insurer peers. Modest unfavorable annual loss reserve development continues to affect AIG's performance.
The ratings of AIG's U.S. life insurance subsidiaries are driven by these entities' strong statutory capital position; leading market share in key lines of business; diversification of revenues from insurance premiums, spread business and fees; and solid operating profits and earnings stability.
Fitch expects the life subsidiaries' year-end 2014 risk-based capital (RBC) ratio will remain above the company's long-term target range of between 425% to 470% as well as the agency's median guideline for the current rating category. Additionally AIG's operating and asset leverage metrics compare favorably to peers.
Since 2012, AIG's U.S. life insurance subsidiaries have consistently generated in excess of $4 billion in pre-tax operating earnings. Pre-tax operating income declined by 12% during 1H15 2015 to $2.2 billion. This reflects lower returns on alternative assets, lower yield enhancements from bond call and tender income, higher general operating expenses primarily due to international growth, unfavorable mortality experience within the life business relative to 1H14, and lower average assets in the life subsidiaries due to the dividends paid to the holding company at the end of 2014.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, AIG is considered a systemically important financial institution (SIFI). Though ultimate regulatory capital standards for SIFI's are still being formulated, AIG now operates under a more rigorous compliance and governance framework that entails greater disclosure and documentation requirements, as well as completion of various regulatory stress-testing analyses. Completing these processes have influenced the organization's overall risk management efforts and may help to reduce future volatility in earnings and capital.
Key triggers that could lead to an upgrade include:
--Improvement in GAAP earnings-based interest coverage to 10x or above;
--No material changes in AIG's capital structure including maintenance of financial leverage and total financing and commitments (TFC) ratio at current levels as well as risk-based capital at the company's insurance subsidiaries;
--Stable to improving overall operating earnings.
Key triggers that could lead to an upgrade in the ratings of AIG's property/casualty subsidiaries include:
--A shift to sustainable underwriting profitability, with greater loss reserve stability or reserve redundancies.
Key triggers that could lead to a return to a Stable Outlook include:
--Increase in financial leverage to above 20%, or an increase in the TFC ratio to above 0.7x from 0.5 currently;
--Significant reductions in debt servicing capacity from holding company assets and available dividends from subsidiaries to a level below 6x annual interest on financial debt;
--Large underwriting losses and/or heightened reserve volatility of the company's non-life insurance subsidiaries;
--Deterioration in the company's domestic life subsidiaries' profitability trends;
--Material declines in risk-based capital ratios at either the domestic life insurance or the non-life insurance subsidiaries.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following AIG entities with a Positive Rating Outlook:
American International Group, Inc.
--Long-term Issuer Default Rating (IDR) 'A-';
--Various senior unsecured note issues 'BBB+';
--USD999.55 million of 5.05% senior unsecured notes due Oct. 1, 2015 'BBB+';
--EUR42.24 million of 6.797% senior unsecured notes due Nov. 15, 2017 'BBB+';
--GBP100.2 million of 6.765% senior unsecured notes due Nov. 15, 2017 'BBB+';
--USD1 billion of 2.3% senior unsecured notes due July 16, 2019 'BBB+';
--USD638.4 million of 3.375% senior unsecured notes due Aug. 15, 2020 'BBB+';
--USD708 million of 6.4% senior unsecured notes due Dec. 15, 2020 'BBB+';
--USD1.5 billion of 4.875% senior unsecured notes due June 2022 'BBB+';
--USD1 billion of 4.125% senior unsecured notes due Feb. 15, 2024 'BBB+';
--USD1.25 billion of 3.75% senior unsecured notes due July 10, 2025 'BBB+';
--USD1.2 billion of 3.875% senior unsecured notes due Jan. 15, 2035 'BBB+';
--USD500 million of 4.7% senior unsecured notes due July 10, 2035 'BBB+';
--USD1.0 billion of 6.25% senior unsecured notes due May 1, 2036 'BBB+';
--USD243.43 million of 6.820% senior unsecured notes due Nov. 15, 2037 'BBB+';
--USD 2.25 billion of 4.5% senior unsecured notes due July 16, 2044 'BBB+';
--USD350 million of 4.35% senior unsecured notes due Mar. 20, 2045 'BBB+';
--USD750 million of 4.8% senior unsecured notes due July 10, 2045 'BBB+';
--USD290 million of 4.9% senior unsecured notes due July 17, 2045 'BBB+';
--USD800 million of 4.375% senior unsecured notes due Jan. 15, 2055 'BBB+';
--USD20.3 million of 5.60% senior unsecured notes due July 31, 2097 'BBB+';
--EUR12.85 million of 8.00% series A-7 junior subordinated debentures due May 22, 2038 'BBB-';
--USD607.17 million of 8.175% series A-6 junior subordinated debentures due May 15, 2058 'BBB-';
--GBP88.2 million of 5.75% series A-2 junior subordinated debentures due March 15, 2067 'BBB-';
--EUR162.6 million of 4.875% series A-3 junior subordinated debentures due March 15, 2067 'BBB-';
--GBP5.6 million of 8.625% series A-8 junior subordinated debentures due May 22, 2068 'BBB-';
--USD403.18 million of 6.25% series A-1 junior subordinated debentures due March 15, 2087 'BBB-'.
AIG International, Inc.
--Long-term IDR 'A-'.
AIG Life Holdings, Inc.
--Long-term IDR 'A-';
--USD135.5 million of 7.50% senior unsecured notes due July 15, 2025 'BBB+';
--USD150 million of 6.625% senior unsecured notes due Feb. 15, 2029 'BBB+';
--USD116.4 million of 8.50% junior subordinated debentures due July 1, 2030 'BBB-';
--USD78.9 million of 7.57% junior subordinated debentures due Dec. 1, 2045 'BBB-';
--USD227.3 million of 8.125% junior subordinated debentures due March 15, 2046 'BBB-'.
AGC Life Insurance Company
American General Life Insurance Company
The Variable Annuity Life Insurance Company
United States Life Insurance Company in the City of New York
--IFS rating 'A+'.
AIU Insurance Company
American Home Assurance Company
AIG Assurance Company
AIG Europe Limited
American International Overseas Limited
AIG Property Casualty Company
AIG Specialty Insurance Company
Commerce & Industry Insurance Company
Granite State Insurance Company
Illinois National Insurance Company
Insurance Company of the State of Pennsylvania
Lexington Insurance Company
National Union Fire Insurance Company of Pittsburgh, PA
New Hampshire Insurance Company
--IFS rating 'A'.
ASIF Global Financing
--USD750 million of 6.9% senior secured notes due March 15, 2032 'A+'.
ASIF II Program
--GBP200 million of 6.375% senior secured notes due Oct. 5, 2020 'A+';
--USD82 million of 0% senior secured notes due Jan. 2, 2032 'A+'.
ASIF III Program
--CHF150 million of 3% senior secured notes due Dec. 29, 2015 'A+';
--GBP350 million of 5.375% senior secured notes due Oct. 14, 2016 'A+';
--GBP250 million of 5% senior secured notes due Dec. 18, 2018 'A+';
--EUR200 million of 1.66% senior secured notes due Dec. 20, 2024 'A+'.
Additional information is available on www.fitchratings.com
Insurance Rating Methodology (pub. 14 Jul 2015)
Dodd-Frank Rating Information Disclosure Form
James B. Auden, CFA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Tana M. Higman
Keith M. Buckley
Alyssa Castelli, +1-212-908-0540