Fitch Ratings has affirmed its 'BBB' rating on American International Group, Inc.'s (AIG) senior unsecured notes and its 'A' Insurer Financial Strength (IFS) ratings on various AIG insurance company subsidiaries, all with a Stable Rating Outlook. Additionally, Fitch has affirmed AIG's Issuer Default Rating (IDR) at 'BBB' and revised the Rating Outlook to Positive from Stable. Fitch has also upgraded its ratings on AIG's various subordinated debt issues to 'BB' from 'BB-'.
Today's rating actions follow a periodic review of AIG's recent operational and financial results. Fitch's ratings on AIG and its subsidiaries primarily reflect the benefits of the AIG organization's strong competitive positions in life and non-life insurance partially offset by the comparatively poor recent operating results of the company's core insurance operations.
The Positive Outlook on AIG's IDR and the upgrade of the company's subordinated securities ratings reflect improvements in the AIG's liquidity and financial profile over the last 12-18 months as it shed operations and de-leveraged.
As part of its rating analysis, Fitch considers the credit profile of AIG absent consideration of the U.S. Treasury's majority ownership. Fitch's assessments of AIG's stand-alone IDR and senior unsecured debt are 'BBB' and 'BBB-', respectively, with a Positive Outlook. These levels are one notch higher than they were when Fitch last commented on AIG's stand-alone assessments.
AIG's IDR is now equivalent to its stand-alone assessment, while the rating on AIG's senior unsecured debt reflects a one-notch uplift derived from the U.S. Treasury's approximate 78% equity ownership in AIG.
Fitch believes that AIG has reasonable access to public and private capital markets, a key characteristic of investment-grade rated insurance holding companies. Since December 2010, the company has raised $6.9 billion through public debt and equity offerings and entered into a $4.5 billion syndicated bank credit facility. In addition, AIG has significantly reduced its financial leverage over the last 12-18 months and the company's ratio of holding company financial debt-to-capital of 19% at Sept. 30, 2011, approximates that of industry peers.
However, broader leverage metrics, such as Fitch's Total Financings & Commitment (TFC) Ratio, indicate that AIG remains more leveraged than insurance industry peers, due to the company's comparatively heavy use of debt to fund spread-based investments, the financing needs of the company's aircraft leasing subsidiary, and the notional value of the company's run-off portfolio of credit-default swap (CSDS) contracts, all of which Fitch views as forms of leverage. At Sept. 30, 2011, AIG's TFC ratio was 1.6 times (x), a dramatic improvement from the company's year-end 2008 ratio of 10.4x but still higher than insurance industry averages which Fitch estimates at approximately 1.0x for large domestic life insurers and 0.5x for large commercial lines focused non-life insurers.
The agency estimates AIG's annual run-rate interest expense from holding-company financial debt at approximately $1.6 billion. After adjusting Chartis' pre-tax operating earnings to exclude abnormal catastrophe-related losses and prior accident year reserve charges, Fitch calculates AIG's recent operating earnings-based interest coverage generated by the company's core Chartis and SunAmerica Financial Group (SAFG) units at 4.0x-4.5x compared to industry averages in the 7.0x-9.0x range. Recent coverage ratios before these adjustments have been in the 1.6x-2.0x range.
Fitch believes that AIG's net earnings are likely to be more exposed to capital market and economic volatility than those of insurance industry peers over the next 12-24 months due to the company's investments in publicly-traded operating companies and special purpose vehicles which are marked-to-market each quarter, and due to its investment in its aircraft leasing subsidiary, whose earnings Fitch views as highly cyclical.
AIG has disclosed its goal of improving its normalized after-tax operating return on equity (ROE) to 10% or higher by year-end 2015, compared to 6.2% as of year-end 2010, through a combination of earnings growth and capital management initiatives. Key components of these efforts call for the growth in assets under management at SAFG and reducing Chartis' combined ratio to 90%-95%. Fitch believes that if these objectives are achieved, AIG's operating performance would more closely resemble those of similarly positioned peers that generally carry higher ratings than AIG.
Fitch notes that Chartis has implemented changes to its underwriting processes that more explicitly consider each business line's risk-adjusted profitability and the cost of capital required to support the underwritten business. The agency views these changes as more closely aligning Chartis' underwriting practices with those of peers that have similarly large market shares and strong competitive potions. SAFG's domestic life insurance and annuity business and Chartis' global non-life insurance business have large market shares in specific business lines and markets that Fitch views as evidence of strong competitive positions.
SAFG is a leader in bank distributed annuities, retirement products targeted at educators, and has a solid position in the term life insurance market. The agency notes that SAFG has re-established distribution arrangements with principally all distributors that discontinued sales of SAFG's products during the height of the financial crisis. Nevertheless, Fitch's view is that it will take additional time for the company's new sales trends, and premiums and deposit base to recover to levels the organization produced prior to the financial crisis. Importantly, the SAFG companies maintain strong NAIC risk-based capital (RBC) ratios and traditional leverage ratios that approximate those of peers.
Based on premiums written, Chartis is the largest commercial line insurance company in the U.S. where it has leading market shares in liability business lines. Fitch believes that the company enjoys a meaningful size and scale advantage over its peers and that Chartis' competitive position remains comparable to those of its peers domestically, and unmatched internationally.
Chartis' long-term underwriting results have lagged those of peers due to prior accident year reserve development that adversely affect comparative results. Additionally, the company's NAIC RBC ratios are generally lower by a meaningful margin than those of large domestic peers that concentrate on writing commercial insurance.
Fitch considers Chartis' reported reserves to be within a reasonable range of estimates the agency developed in part based on Schedule P data included in the company's combined statutory annual statement. Additionally, Fitch believes that the risk of the company experiencing material adverse development is adequately incorporated into Chartis' current ratings. Fitch's view is that Chartis' June 2011 decision to reinsure its asbestos claims and charges the company took in 2009 and 2010 to add to prior accident year reserves have materially decreased the company's exposure to adverse reserve development.
Key rating drivers that could lead to rating upgrades include:
--Earnings improvements at Chartis and SAFG that translate into higher earnings-based interest coverage;
-- Further transition of AIG's capital structure and leverage metrics to those of a more traditional insurance holding company that generates a meaningful reduction in the company's TFC ratio.
--Enhanced underwriting profitability and demonstrated reserve stability of the company's non-life insurance subsidiaries;
--Further stabilization of sales trends and profitability of the company's domestic life insurance subsidiaries;
--Material increases in Chartis' NAIC risk-based capital ratios.
Key rating drivers that could lead to rating downgrades include:
--Declines in underwriting profitability and 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' sales or profitability trends;
--Material declines in RBC ratios at either the domestic life insurance or the non-life insurance subsidiaries.
Fitch has taken the following rating actions:
American International Group, Inc.
--Long-term IDR affirmed at 'BBB'; Outlook to Positive from Stable;
--Various senior unsecured note issues affirmed at 'BBB';
--USD1.2 billion of 4.250% senior unsecured notes due Sept. 15, 2014 affirmed at 'BBB';
--USD800 million of 4.875% senior unsecured notes due Sept. 15, 2016 affirmed at 'BBB';
--Eur420.975 million of 6.797% senior unsecured notes due Nov. 15, 2017 affirmed at 'BBB';
--GBP323.465 million of 6.765% senior unsecured notes due Nov. 15, 2017 affirmed at 'BBB';
--GBP338.757 million of 6.765% senior unsecured notes due Nov. 15, 2017 affirmed at 'BBB';
--USD256.161 million of 6.820% senior unsecured notes due Nov. 15, 2037 affirmed at 'BBB';
--Eur750 million of 8.00% series A-7 junior subordinated debentures due May 22, 2038 upgraded to 'BB' from 'BB-';
--USD1.960 billion 5.67% series B-1 debentures due Feb. 15, 2041 upgraded to 'BB' from 'BB-';
--USD1.960 billion of 5.82% series B-2 debentures due May 1, 2041 upgraded to 'BB' from 'BB-';
--USD1.960 billion of 5.89% series B-3 debentures due Aug. 1, 2041 upgraded to 'BB' from 'BB-;
--USD 4 billion of 8.175% series A-6 junior subordinated debentures due May 15, 2058 upgraded to 'BB' from 'BB-';
--USD 1.1 billion of 7.700% series A-5 junior subordinated debentures due Dec. 18, 2062 upgraded to 'BB' from 'BB-';
--GBP309.850 million of 5.75% series A-2 junior subordinated debentures due March 15, 2067 upgraded to 'BB' from 'BB-';
--Eur409.050 million of series A-3 junior subordinated debentures due March 15, 2067 upgraded to 'BB' from
'BB-';
--GBP900 million of 8.625% series A-8 junior subordinated debentures due May 22, 2068 upgraded to 'BB' from 'BB-';
--USD750 million of 6.45% series A-4 junior subordinated debentures due June 15, 2077 upgraded to 'BB' from 'BB-';
--USD687.581 million of 6.25% series A-1 junior subordinated debentures due March 15, 2087 upgraded to 'BB' from 'BB-'.
AIG International, Inc.
--Long-term IDR affirmed at 'BBB', Outlook to Positive from Stable;
--$175 million of 5.60% senior unsecured notes due July 31, 2097 affirmed at 'BBB'.
SunAmerica Financial Group, Inc.
--Long-term IDR affirmed at 'BBB', Outlook to Positive from Stable;
--$150 million of 7.50% senior unsecured notes due July 15, 2025 affirmed at 'BBB';
--$150 million of 6.625% senior unsecured notes due Feb. 15, 2029 affirmed at 'BBB'.
American General Capital II
--$300 million of 8.50% preferred securities due July 1, 2030 upgraded to 'BB' from 'BB-'.
American General Institutional Capital A
--$500 million of 7.57% capital securities due Dec. 1, 2045 upgraded to 'BB' from 'BB-'.
American General Institutional Capital B
--$500 million of 8.125% capital securities due March 15, 2046 upgraded to 'BB' from 'BB-'.
Fitch has affirmed the following IFS ratings at 'A' with a Stable Outlook:
AGC Life Insurance Company
AIU Insurance Company
American General Life Insurance Company
American General Life Insurance Company of Delaware
American General Life & Accident Insurance Company
American Home Assurance Company
Birmingham Fire Insurance Company of Pennsylvania
Chartis Casualty Company
Chartis Europe Limited
Chartis MEMSA Insurance Company Limited
Chartis Overseas Limited
Chartis Property Casualty Company
Chartis Specialty Insurance Company
Commerce & Industry Insurance Company
First Sunamerica Life 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
New Hampshire Insurance Company
SunAmerica Annuity and Life Assurance Company
SunAmerica Life Insurance Company
United States Life Insurance Company in the City of New York
Variable Annuity Life Insurance Company
Western National Life Insurance Company
Fitch has affirmed the following program ratings at 'A':
ASIF II Program
ASIF III Program
ASIF Global Financing
Fitch has withdrawn the 'A' Insurer Financial Strength Rating of First SunAmerica Life Insurance Company. The company has been merged into United States Life Insurance Company.
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', Sept. 22, 2011.
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018
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