Fitch Affirms AIG's Ratings; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed American International Group, Inc.'s (AIG) ratings including the Long-term Issuer Default Rating (IDR) at 'A-' and 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 U.S. life insurance subsidiaries at 'A+'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.

AIG's ratings reflect the company's previous success in restructuring and deleveraging efforts. 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. 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, and diversification of revenues from insurance premiums, spread business and fees.

KEY RATING DRIVERS

AIG continues to execute on its plans to further tighten operational focus. Earlier this year the company completed the sale of its independent broker-dealer network for a pre-tax gain of $225 million and reduced its investment in People's Insurance Company (Group) of China Limited. AIG also announced the proposed sale of its mortgage insurance subsidiary to Arch Capital Group for $3.4 billion.

Profit improvement plans emphasize a 14% reduction in operating expenses and target to improve the property/casualty loss ratio by six points over the next two years in part through further shifts in business mix to curtail unprofitable segments, including U.S. casualty. During the first quarter of 2016 AIG entered into a two-year reinsurance arrangement to cede a proportional share of its new and renewal U.S. casualty portfolio. Between the third quarter of 2015 and the first quarter of 2016, the company also transferred $2.5 billion of loss reserves to its run-off segment to more actively manage these claims.

A shift to steady, moderate underwriting profits in AIG's property casualty operations would have significant implications for AIG's overall profitability and debt servicing capability. The company noted significant progress in reducing the accident year loss ratio at mid-year 2016 from underwriting and pricing actions, reinsurance utilization and changes in the business mix. The Property Casualty current accident year combined ratio (consolidated to include commercial, personal lines and run-off) improved to 97.9% at mid-year 2016 versus 98.6% in the prior year first half.

Overall, operating performance for AIG's life insurance subsidiaries has generally been stronger and more stable than its property casualty subsidiaries; however, 2015 and 2016 results for the life and retirement businesses have been impacted by lower investment returns and adjustments related to the update of actuarial assumptions. The company is executing on a plan to improve returns by narrowing its distribution and product focus as well as reducing its exposure to alternative assets, particularly hedge funds, which should improve the quality and stability of earnings going forward.

Fitch believes capitalization is strong at both the property casualty and life subsidiaries. The U.S. property casualty companies' consolidated NAIC RBC ratio at year-end 2015 was 208% of the company action level (CAL). AIG's life subsidiaries' capitalization metrics are characterized by NAIC RBC ratios and operating leverage ratios that are generally on par or better than industry averages. June 30, 2016 RBC ratio is estimated at 497%, down slightly from 502% at year-end 2015, but still above AIG's long-term target range of between 425% -470% as well as Fitch's median guideline for the current rating category.

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 21.5% at June 30, 2016, up from 18.4% at year-end 2015. The increase was due to the issuance of new senior notes which exceeded the tender of $736 million of currently outstanding debt. Despite the increase, financial leverage remains within management's target leverage ratio of 20% - 25%. AIG's GAAP operating earnings-based interest coverage increased to 7.1x through the first half of 2016 from 4.7x in full year 2015.

AIG's capital plan includes a commitment to return at least $25 billion of capital to shareholders through 2017, funded by distributions from insurance subsidiaries, asset divestitures, capital freed up from asset sales and reinsurance transactions and debt financing. To date, the company has returned almost $8 billion to shareholders via common share and warrant repurchases as well as dividends. This is one of the largest returns of capital relative to existing shareholders equity that Fitch has observed in many years in the insurance industry, and from a credit perspective is viewed by Fitch as aggressive.

Holding company liquidity currently includes $6.7 billion of unencumbered cash and investments at June 30, 2016, and $4.5 billion of available capacity from credit and contingent liquidity facilities. The company has targeted maintaining $6 billion - $8 billion of liquidity assets at the parent going forward, which represents a significant multiple of annual debt servicing obligations.

RATING SENSITIVITIES

Key triggers that could lead to an upgrade include:

--Successful completion of pending strategic actions and greater certainty that the corporate and operating structure is in place for the longer term, and further meaningful restructuring actions are unlikely;

--A shift to sustainable property/casualty segment underwriting profitability, with demonstration of greater loss reserve stability or reserve redundancies;

--Improvement in GAAP earnings to a level consistent with interest coverage at 10x or above;

--While achieving the above, maintenance of financial leverage and risk-based capital at the company's insurance subsidiaries remaining within newly revised targeted levels.

Key triggers that could lead to a downgrade include:

--Increase in financial leverage to above 25%, or an increase in the TFC ratio to above 0.7x;

--Significant reductions in debt servicing capacity from holding company assets and available dividends from subsidiaries to a level below 4.5x annual interest on operating debt;

--Large underwriting losses and/or further material reserve volatility of the company's non-life insurance subsidiaries;

--Sharp deterioration in the company's domestic life insurance 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 ratings with a Stable Outlook:

American International Group, Inc.

--Long-Term IDR at 'A-';

--Various senior unsecured note issues at 'BBB+';

--EUR42.24 million of 6.797% senior unsecured notes due Nov. 15, 2017 at 'BBB+';

--GBP100.2 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+';

--USD638.4 million of 3.375% senior unsecured notes due Aug. 15, 2020 at 'BBB+';

--USD708 million of 6.4% senior unsecured notes due Dec. 15, 2020 at 'BBB+';

--USD1.5 billion of 3.3% senior unsecured notes due Mar. 1, 2021 at 'BBB+';

--USD1.5 billion of 4.875% senior unsecured notes due June 1, 2022 at 'BBB+';

--EUR750 million 1.5% senior unsecured notes due June 8, 2023 at 'BBB+';

--USD1 billion of 4.125% senior unsecured notes due Feb. 15, 2024 at 'BBB+';

--USD1.25 billion of 3.75% senior unsecured notes due July 10, 2025 at 'BBB+';

--USD1.5 billion 3.9% senior unsecured notes due April 1, 2026 at 'BBB+';

--USD1.2 billion of 3.875% senior unsecured notes due Jan. 15, 2035 at 'BBB+';

--USD500 million of 4.7% senior unsecured notes due July 10, 2035 at 'BBB+';

--USD1 billion of 6.25% senior unsecured notes due May 1, 2036 at 'BBB+';

--USD243.43 million of 6.820% senior unsecured notes due Nov. 15, 2037 at 'BBB+';

--USD 2.25 billion of 4.5% senior unsecured notes due July 16, 2044 at 'BBB+';

--USD350 million of 4.35% senior unsecured notes due March 20, 2045 at 'BBB+';

--USD750 million of 4.8% senior unsecured notes due July 10, 2045 at 'BBB+';

--USD290 million of 4.9% senior unsecured notes due July 17, 2045 at 'BBB+';

--USD800 million of 4.375% senior unsecured notes due Jan. 15, 2055 at 'BBB+';

--USD20.3 million of 5.60% senior unsecured notes due July 31, 2097 at 'BBB+';

--EUR12.85 million of 8.00% series A-7 junior subordinated debentures due May 22, 2038 at 'BBB-';

--USD607.17 million of 8.175% series A-6 junior subordinated debentures due May 15, 2058 at 'BBB-';

--GBP88.2 million of 5.75% series A-2 junior subordinated debentures due March 15, 2067 at 'BBB-';

--EUR162.6 million of 4.875% series A-3 junior subordinated debentures due March 15, 2067 at 'BBB-';

--GBP5.6 million of 8.625% series A-8 junior subordinated debentures due May 22, 2068 at 'BBB-';

--USD403.18 million of 6.25% series A-1 junior subordinated debentures due March 15, 2087 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+';

--USD116.4 million of 8.50% junior subordinated debentures due July 1, 2030 at 'BBB-';

--USD78.9 million of 7.57% junior subordinated debentures due Dec. 1, 2045 at 'BBB-';

--USD227.3 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

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

--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

--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 on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 17 May 2016)

https://www.fitchratings.com/site/re/881564

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010956

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Contacts

Fitch Ratings
Primary Analyst
James B. Auden, CFA, +1-312-368-3146
Managing Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Tana M. Higman, +1-312-368-3122
Director
Committee Chairperson
or
Keith M. Buckley, +1-312-368-3211
Managing Director
or
Media Relations, New York
Hannah James, +1-646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
James B. Auden, CFA, +1-312-368-3146
Managing Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Tana M. Higman, +1-312-368-3122
Director
Committee Chairperson
or
Keith M. Buckley, +1-312-368-3211
Managing Director
or
Media Relations, New York
Hannah James, +1-646-582-4947
hannah.james@fitchratings.com