CHICAGO--()--Fitch Ratings has upgraded the Insurer Financial Strength (IFS) ratings of American International Group, Inc.'s (AIG) U.S. life insurance subsidiaries led by AGC Life Insurance Company to 'A+' from 'A'. Fitch has also affirmed the 'A' IFS ratings of AIG's rated property/casualty insurance subsidiaries, as well as AIG's Issuer Default Rating (IDR) of 'BBB+' and senior debt rating of 'BBB'. The Rating Outlook is Stable. A complete list of ratings is provided at the end of this release.
KEY RATING DRIVERS
The upgrade of the life insurance subsidiaries is driven by continued improvement in AIG's Life & Retirement subsidiaries statutory capital position, recovery of investment values over time and return to stronger operating profits and earnings stability. Fitch believes the company has largely recovered from the effects of the financial crisis and is capable of consistently generating approximately $4 billion of annual run-rate operating earnings. Surrender activity has stabilized and is currently at or below historical levels and is now reflective of the low interest rate environment rather than AIG-specific issues. Net investment spreads have improved as a result of an increase in base yields due to the reinvestment of cash and short-term investments in 2011 combined with lower interest credited. These positive factors are offset somewhat by concerns as to the effect of continued very low interest rates on product performance and future profitability.
All ratings reflect AIG's success in restructuring and deleveraging efforts over the last four years. AIG has been restored as an independent publicly held corporation. All previous government borrowings and other support have been repaid and the remaining 15.9% U.S. Department of the Treasury ownership in AIG's common stock was sold in December 2012. The organization more closely represents a traditional insurance holding company with an operating focus on global property/casualty insurance and domestic life insurance and retirement products. These efforts will further advance with the pending sale of 90% of AIG's ownership of aircraft leasing firm International Lease Finance Corporation (ILFC) which is expected to close by midyear 2013.
The company's financial leverage as measured by the ratio of financial debt and preferred securities to total capital (excluding operating and ILFC debt and the impact of FAS 115) declined from 31% at year-end 2010 to approximately 22% currently. Fitch's Total Financial Commitment (TFC) ratio, while still high compared to most insurance peers, has improved from 2.5x at year-end 2010 to a current level of 1.3x. Elimination of ILFC debt and airline purchase commitments will further reduce financial leverage and TFC. AIG has also created an adequate liquidity position and has demonstrated access to capital markets through execution of several recent financing transactions.
AIG property/casualty subsidiary ratings consider the company's unique market position in the global insurance market given its absolute size, product capabilities and geographic scope. Operating and underwriting performance has lagged peer and industry norms over the last five years. AIG has taken significant measures recently to reposition the business mix and invest in underwriting and claims technology. These activities, coupled with favorable pricing trends in the last 18 months have started to generate some loss ratio improvement. However, year-end 2012 underwriting results will be marred significantly by losses from Hurricane Sandy that AIG previously estimated at $2 billion pre-tax ($1.3 billion post-tax).
AIG reported significantly improved profitability in the first nine months of 2012, with net income of $7.6 billion relative to a modest net loss in the prior year period. This earnings improvement was largely attributable to investment income growth, as well as better underwriting performance within AIG's property/casualty insurance operations. The property/casualty combined ratio improved to 103.2% in the first nine months of 2012 from 109.3% in 2011 largely due to sharply lower catastrophe losses. Life & Retirement pre-tax income improved by 22% in the same period versus the prior year. Core operating subsidiary interest coverage on financial debt was 4.9x in the first three quarters of 2012.
Key triggers that could lead to future rating upgrades include:
--Demonstration of higher and more consistent earnings within Property/Casualty or Life & Retirement operating segments that translate into average earnings-based interest coverage above 7.0x; This would correspond with operating earnings of approximately $11 billion;
--Further improvement in AIG's capital structure and leverage metrics that reduce the company's TFC ratio to below 0.7x;
-- A shift toward consistent underwriting profits would promote positive movement in the property/casualty subsidiary financial strength ratings.
Key triggers that could lead to a future rating downgrade include:
--Increases in financial leverage as measured by financial debt to total capital to a sustained level above 30%, or a material increase in the TFC ratio from current levels;
--Large underwriting losses and/or heightened reserve volatility of the company's non-life insurance subsidiaries that Fitch views as inconsistent with that of comparably-rated peers and industry trends;
--Deterioration in the company's domestic life subsidiaries' profitability trends;
--Material declines in RBC ratios at either the domestic life insurance or the non-life insurance subsidiaries, and/or failure to achieve the above noted capital structure improvements.
Fitch has withdrawn the following ratings, since the companies were merged into American General Life Insurance Co. effective Dec. 31, 2012 and no longer exist:
American General Life Insurance Company of Delaware
American General Life and Accident Insurance Company
Western National Life Insurance Company
SunAmerica Annuity and Life Assurance Company
SunAmerica Life Insurance Company
Fitch has upgraded the following ratings:
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 ratings upgraded to 'A+' from 'A'; Stable Outlook.
Fitch has affirmed the following ratings:
AIU Insurance Company
American Home Assurance Company
Chartis Casualty Company
Chartis MEMSA Insurance Company Limited
Chartis Overseas Limited
Chartis Property Casualty Company
Chartis 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 ratings at 'A'; Stable Outlook.
American International Group, Inc.
--Long-term IDR at 'BBB+' Outlook Stable;
AIG International, Inc.
--Long-term IDR at 'BBB+', Outlook Stable.
SunAmerica Financial Group, Inc.
--Long-term IDR at 'BBB+'; Outlook Stable.
American General Capital II
--USD300 million of 8.50% preferred securities due July 1, 2030 at 'BB+'.
American General Institutional Capital A
--USD500 million of 7.57% capital securities due Dec. 1, 2045 at 'BB+'.
American General Institutional Capital B
--USD500 million of 8.125% capital securities due March 15, 2046 at 'BB+'.
American International Group, Inc.
--Various senior unsecured note issues at 'BBB';
--USD$1.5 billion of 4.875% senior unsecured notes due June 2022 at 'BBB'.
--USD1.2 billion of 4.250% senior unsecured notes due Sept. 15, 2014 at 'BBB';
--USD800 million of 4.875% senior unsecured notes due Sept. 15, 2016 at 'BBB';
--EUR420.975 million of 6.797% senior unsecured notes due Nov. 15, 2017 at 'BBB';
--GBP323.465 million of 6.765% senior unsecured notes due Nov. 15, 2017 at 'BBB';
--GBP338.757 million of 6.765% senior unsecured notes due Nov. 15, 2017 at 'BBB';
--USD256.161 million of 6.820% senior unsecured notes due Nov. 15, 2037 at 'BBB'.
--USD250 million of 2.375% subordinated notes due 2015 at 'BBB-';
--EUR750 million of 8.00% series A-7 junior subordinated debentures due May 22, 2038 at 'BB+';
--USD1.960 billion 5.67% series B-1 junior subordinated debentures due Feb. 15, 2041 at 'BB+';
--USD1.960 billion of 5.82% series B-2 junior subordinated debentures due May 1, 2041 at 'BB+';
--USD1.960 billion of 5.89% series B-3 junior subordinated debentures due Aug. 1, 2041 at 'BB+';
--USD 4 billion of 8.175% series A-6 junior subordinated debentures due May 15, 2058 at 'BB+';
--USD 1.1 billion of 7.700% series A-5 junior subordinated debentures due Dec. 18, 2062 at 'BB+';
--GBP309.850 million of 5.75% series A-2 junior subordinated debentures due March 15, 2067 at 'BB+';
--EUR409.050 million of series A-3 junior subordinated debentures due March 15, 2067 at 'BB+';
--GBP900 million of 8.625% series A-8 junior subordinated debentures due May 22, 2068 at 'BB+';
--USD750 million of 6.45% series A-4 junior subordinated debentures due June 15, 2077 at 'BB+';
--USD687.581 million of 6.25% series A-1 junior subordinated debentures due March 15, 2087 at 'BB+'.
AIG International, Inc.
--USD175 million of 5.60% senior unsecured notes due July 31, 2097 at 'BBB'.
Sun America Financial Group, Inc.
--USD150 million of 7.50% senior unsecured notes due July 15, 2025 at 'BBB';
--USD150 million of 6.625% senior unsecured notes due Feb. 15, 2029 at 'BBB'.
ASIF II Program
ASIF III Program
ASIF Global Financing
--Program ratings at 'A'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology', Jan. 11, 2013.
Applicable Criteria and Related Research:
Insurance Rating Methodology -- Amended