Fitch: AIG Investor Pressure Merits Monitoring; No Rating Changes
In AIG's third quarter 2015 earnings conference call, the company indicated that shareholder suggestions are considered, but a breakup of AIG is not part of the company's current strategic plan. Management believes there are benefits to having a combined life and property/casualty business, and AIG has completed significant efforts to focus operations and eliminate non-core businesses in recent years.
Fitch believes that evaluating the benefits and drawbacks of any proposed future reorganization at AIG from a credit perspective is difficult until a genuine plan of action is put forward. In any large corporate spinoff transaction, variables including capitalization and financial leverage of newly separated entities, as well as an assessment of the credibility of strategic plans and earnings prospects of each independent organization would be primary considerations of any rating decision.
On Oct. 28, investor Carl Icahn sent a letter to AIG CEO Peter Hancock suggesting that shareholders would benefit from a breakup of AIG into smaller, more focused entities. The letter suggests that a separation would promote operating and cost efficiencies allowing the new entities to generate a return on equity that is more in line with peers. The letter also suggests that the designation of AIG as a Non-Bank Systematically Important Financial Institution (SIFI) would likely be removed after a break-up of the organization into smaller segments, reducing regulatory compliance costs and the potential for more restrictive future capital requirements.
In March 2015 Fitch assigned a Positive Outlook to AIG's Insurer Financial Strength (IFS) and holding company debt ratings based in large part on previous progress in reducing leverage in the capital structure from divesting non-core operations and recent refinancing activity, earnings improvement within insurance operations, and better debt servicing capability provided by stronger interest coverage levels and continued favorable parent company liquidity.
Fitch currently views AIG's SIFI status as a credit neutral. It remains unclear what regulatory capital standards AIG will be subject to going forward and whether these standards will differ considerably from non-SIFI insurer requirements. If capital standards are higher than peers, Fitch would need to weigh the credit benefits of enhanced capital levels against the potential negatives of a decline in relative competitive position.
The IFS ratings of AIG's life subsidiaries are currently 'A+', and property/casualty subsidiaries are rated 'A' reflecting unique performance and capital attributes of each major segment. Fitch does not currently rate AIG's mortgage insurance operations. The parent holding company senior debt rating at 'BBB+' is currently notched off of the life company ratings with consideration of holding company attributes including financial leverage and liquidity, as well as diverse sources of funds for debt servicing from insurance operating subsidiaries.
Key factors described in Fitch's March press release that could lead to future ratings upgrades for AIG include maintaining holding company and subsidiary capital at current levels, further improvements in GAAP earnings based interest coverage, continued earnings stability within life operations and further improvement in property/casualty earnings derived from a shift toward breakeven or better underwriting performance. Rating Outlooks are established typically within a 12-18 month future horizon. Fitch will strongly consider AIG's near-term performance relative to these rating triggers in future rating actions. Any broader strategic actions announced by the company will receive consideration as events unfold.