Fitch Affirms AIG's Ratings; Outlook Stable
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed American International Group, Inc.'s (AIG) Issuer Default Rating (IDR) at 'A-', senior debt obligations at 'BBB+', 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 and retirement insurance subsidiaries at 'A+'. The Rating Outlook is Stable. A complete list of ratings is provided at the end of this release.
KEY RATING DRIVERS
The ratings reflect AIG's success in restructuring and deleveraging efforts over the last five years. The company'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) declined to 18% at June 30, 2014 from 31% at year-end 2010. Fitch's total financial commitment (TFC) ratio has also improved, to 0.6x at June 30, 2014 from 1.2x at year-end 2013 due to the sale of aircraft leasing subsidiary International Lease Finance Corporation (ILFC) to AerCap Holdings N.V. as well as through the repayment of holding company debt and a reduction in Direct Investment Book debt.
AIG reported significantly improved profitability in 2013 and thus far in 2014. AIG reported net income of $4.7 billion through the first half of 2014, which corresponds with a return on equity of 9%. Pre-tax operating income was $2.5 billion for AIG's Property/Casualty segment, $2.6 billion for Life and Retirement operations and $286 million for Mortgage Insurance.
Earnings growth at the insurance subsidiaries and the repayment of higher coupon debt has led to significantly improved interest coverage. Operating earnings-based interest coverage on financial debt improved to 8.6x thus far in 2014, up from 6.7x in 2013 and 2.2x in 2012. AIG's ability to meet holding company obligations is primarily supported by dividend capacity from the insurance subsidiaries. Cash distributions from subsidiaries totaled $3.1 billion in the first half of 2014. The company has built a strong holding company liquidity position that includes $9.7 billion of unencumbered cash and investments at June 30, 2014, and $4.4 billion of available capacity from credit facilities.
AIG property/casualty subsidiary ratings consider the company's unique market position in the global insurance market given its absolute size. Lower catastrophe losses and benefits from recent pricing underwriting and portfolio repositioning actions led to a slight decline in the property/casualty combined ratio to 99.9% in the first half of 2014 from 100% a year earlier. The company's recent underwriting results have been affected by modest unfavorable reserve development. AIG's underwriting performance continues to lag large commercial insurer peers.
The ratings of AIG's Life and Retirement subsidiaries are driven by these entities' strong statutory capital position, more conservative asset allocation and return to stronger operating profits and earnings stability. The company has demonstrated that the effects of the previous financial crisis have subsided. Operating income has improved in 2012, 2013 and thus far in 2014 as a result of higher fee income driven by growth in assets under management, continued active spread management, higher investment income and low levels of surrender activity. These positive factors are offset somewhat by concerns as to the effect of continued very low interest rates on product performance and future profitability.
The 'A+' senior secured notes ratings assigned to the securities issued by ASIF Global Financing, ASIF II Program and ASIF III Program recognizes that the obligations are secured by a funding agreement with cash flow structures that enable the trustees to make payments on the notes. Thus the notes are dependent upon the credit quality of AIG Life and Retirement and are assigned the insurer's IFS rating.
Key triggers that could lead to future rating upgrades include:
--Demonstration of higher and more consistent earnings within Property/Casualty or Life and Retirement operating segments that translate into average earnings-based interest coverage above 10.0x. This would correspond with insurance pre-tax operating earnings of approximately $14 billion;
--Further improvement in AIG's capital structure and leverage metrics that reduce the company's TFC ratio to below 0.5x;
--Continued improvement in the operating earnings of the Life and Retirement segment which could lead to an upgrade of those subsidiary ratings;
--A shift to modest sustainable breakeven or better underwriting results, with greater loss reserve stability or reserve redundancies could lead to an upgrade of property/casualty subsidiary IFS 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;
--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 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 risk-based capital 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 affirmed the following ratings with a Stable Outlook:
American International Group, Inc.
--Long-term IDR at 'A-';
--Various senior unsecured note issues at 'BBB+';
--USD250 million of 2.375% subordinated notes due Aug. 24, 2015 at 'BBB';
--EUR61.8 million of 6.797% senior unsecured notes due Nov. 15, 2017 at 'BBB+';
--GBP537 million of 6.765% senior unsecured notes due Nov. 15, 2017 at 'BBB+';
--USD1 billion of 2.3% senior unsecured notes due July 16, 2019 at 'BBB+';
--USD1 billion of 3.375% senior unsecured notes due Aug. 15, 2020 at 'BBB+';
--USD1.286 billion of 6.4% senior unsecured notes due Dec. 15, 2020 at 'BBB+';
--USD1.5 billion of 4.875% senior unsecured notes due June 2022 at 'BBB+';
--USD1 billion of 4.125% senior unsecured notes due Feb. 15, 2024 at 'BBB+';
--USD256.161 million of 6.820% senior unsecured notes due Nov. 15, 2037 at 'BBB+';
--EUR56.6 million of 8.00% series A-7 junior subordinated debentures due May 22, 2038 at 'BBB-';
--USD1.5 billion of 4.5% senior unsecured notes due July 16, 2044 at 'BBB+';
--USD2,832.3 billion of 8.175% series A-6 junior subordinated debentures due May 15, 2058 at 'BBB-';
--GBP172.6 million of 5.75% series A-2 junior subordinated debentures due March 15, 2067 at 'BBB-';
--EUR356.2 million of 4.875% series A-3 junior subordinated debentures due March 15, 2067 at 'BBB-';
--GBP84.1 million of 8.625% series A-8 junior subordinated debentures due May 22, 2068 at 'BBB-';
--USD496.2 million of 6.25% series A-1 junior subordinated debentures due March 15, 2087 at 'BBB-';
--USD113.2 million of 5.60% senior unsecured notes due July 31, 2097 at 'BBB+'.
AIG International, Inc.
--Long-term IDR at 'A-'.
AIG Life Holdings, Inc.
--Long-term IDR at 'A-';
--USD135.5 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+';
--USD251 million of 8.50% junior subordinated debentures due July 1, 2030 at 'BBB-';
--USD201.0 million of 7.57% junior subordinated debentures due Dec. 1, 2045 at 'BBB-';
--USD405.9 million of 8.125% junior subordinated debentures due March 15, 2046 at '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 at 'A+'.
AIU Insurance Company
American Home Assurance Company
AIG Assurance Company
AIG Europe Limited
AIG MEA 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 at 'A'.
ASIF Global Financing
--USD750 million of 6.9% senior secured notes due March 15, 2032 at 'A+'.
ASIF II Program
--GBP200 million of 6.375% senior secured notes due Oct. 5, 2020 at 'A+';
--USD82 million of 0% senior secured notes due Jan. 2, 2032 at 'A+'.
ASIF III Program
--CHF150 million of 3% senior secured notes due Dec. 29, 2015 at 'A+';
--GBP350 million of 5.375% senior secured notes due Oct. 14, 2016 at 'A+';
--GBP250 million of 5% senior secured notes due Dec. 18, 2018 at 'A+';
--EUR200 million of 1.66% senior secured notes due Dec. 20, 2024 at 'A+'.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology', Nov. 13, 2013.
Applicable Criteria and Related Research:
Insurance Rating Methodology