Fitch Revises AIG's Rating Outlook to Positive; Affirms 'A-' IDR
Lastly, Fitch has revised AIG's Rating Outlook to Positive from Stable. A complete list of ratings is provided at the end of this release.
KEY RATING DRIVERS
The Outlook revision to Positive reflects the improvement in AIG's capital position and debt servicing capabilities over the past several years. Fitch believes AIG's leverage metrics are now on par with higher rated peers. 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 considering towards future rating upgrade actions.
The ratings reflect AIG's long term success in restructuring and deleveraging efforts. AIG is now 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 2014 sale of aircraft leasing subsidiary International Lease Finance Corporation (ILFC) 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) declined to 16% at year-end 2014 from 31% at year-end 2010. Fitch's total financial commitment (TFC) ratio has also improved, to 0.5x at year-end 2014 from 2.5x at year-end 2010.
AIG's GAAP earnings-based interest coverage improved to 9.0x in 2014 from 6.7x in 2013. Recent refinancing of higher cost debt with long term lower coupon obligations will reduce interest expense further in 2015.
AIG's ability to meet holding company obligations is primarily supported by dividend capacity from the insurance subsidiaries. Cash distributions from subsidiaries totaled \$8.3 billion in 2014. The company has built a strong holding company liquidity position that includes \$6.9 billion of unencumbered cash and investments at year end 2014, 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 102.2% in 2014 and 101.1% in 2013 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 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. Pretax operating income declined modestly by 5% to \$4.7 billion in 2014. This reflects lower returns on alternative assets, higher general operating expenses and increases in policyholder benefit reserves partially offset by higher fee income from VAs, stable value wrap business and group retirement products driven by growth in assets under management.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, AIG is considered a systematically 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.
Conversely, 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;
--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.
Fitch has affirmed the following ratings with a Positive Outlook:
American International Group, Inc.
--Long-term IDR at 'A-';
--Various senior unsecured note issues at 'BBB+';
--US\$250 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+';
--US\$1 billion of 2.3% senior unsecured notes due July 16, 2019 at 'BBB+';
--US\$1 billion of 3.375% senior unsecured notes due Aug. 15, 2020 at 'BBB+';
--US\$1.286 billion of 6.4% senior unsecured notes due Dec. 15, 2020 at 'BBB+';
--US\$1.5 billion of 4.875% senior unsecured notes due June 2022 at 'BBB+';
--US\$1 billion of 4.125% senior unsecured notes due Feb. 15, 2024 at 'BBB+';
--US\$ 1.2 billion of 3.875% senior unsecured notes due Jan. 15, 2035 at 'BBB+';
--US\$256.161 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-';
--US\$2.25 billion of 4.5% senior unsecured notes due July 16, 2044 at 'BBB+';
--US\$800 million of 4.375% senior unsecured notes due Jan. 15, 2055 at 'BBB+';
--US\$2,832.3 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-';
--US\$496.2 million of 6.25% series A-1 junior subordinated debentures due March 15, 2087 at 'BBB-';
--US\$113.2 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-';
--US\$135.5 million of 7.50% senior unsecured notes due July 15, 2025 at 'BBB+';
--US\$150 million of 6.625% senior unsecured notes due Feb. 15, 2029 at 'BBB+';
--US\$251 million of 8.50% junior subordinated debentures due July 1, 2030 at 'BBB-';
--US\$201 million of 7.57% junior subordinated debentures due Dec. 1, 2045 at 'BBB-';
--US\$405.9 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
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
--US\$750 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+';
--US\$82 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+'.