AIG to purchase Validus for $5.56 billion cash; Moody's also affirms A2 insurance financial strength ratings of AIG PC US
New York, January 22, 2018 -- Moody's Investors Service has affirmed the Baa1 senior unsecured
debt rating of American International Group, Inc. (NYSE:
AIG) and the A2 insurance financial strength ratings of AIG's US
property & casualty insurance operations (AIG PC US). These
actions follow AIG's announcement of plans to acquire Bermuda-based
Validus Holdings, Ltd. (Validus, NYSE: VR) for
cash of $5.56 billion, funded with cash on hand.
The parties expect to complete the transaction around mid-2018,
pending approval by Validus shareholders and various regulators,
and other closing conditions. The rating outlook for AIG and AIG
PC US is stable. This action does not affect the ratings of AIG
Life and Retirement or AIG Europe Limited.
RATINGS RATIONALE
Moody's said the proposed acquisition signals AIG's shift
in focus under CEO Brian Duperreault toward acquisitions and organic investments
rather than returning cash to shareholders. Strategic benefits
for AIG include a boost to P&C profits and further diversification
across products, geographic regions and client segments.
Validus has a good track record in catastrophe modeling, technical
pricing and risk management. The main operating units at Validus
include a property-focused reinsurer, an insurance-linked
securities asset manager, a Lloyd's of London syndicate and
a US specialty insurer.
Despite these strategic benefits, Moody's regards the proposed
transaction as credit negative for AIG based on a likely increase in gross
catastrophe exposure, a drop in parent company liquidity when it
pays out the cash consideration, and execution risk inherent in
such an acquisition. Some Validus units may continue to operate
autonomously under AIG ownership, but the combined group may see
attrition among modelers and underwriters.
AIG's ratings reflect its leading market positions in global P&C
insurance and US life insurance and retirement services, its diversification
across products and geographies, and the current liquidity of the
parent company. Tempering these strengths are the company's
record of volatile loss reserves and weak profits in P&C insurance,
its above-average exposure to structured and alternative investments,
and the complexity of risk management across its many business lines and
countries/regions.
The ratings of AIG PC US reflect its position as one of the largest US
commercial insurers, its broad range of products and its expertise
in writing large and complex risks. The group benefits from AIG's
global network, through which it serves multinational accounts.
In early 2017, AIG PC US reduced its reserve risk on old accident
years by purchasing a large adverse development cover from National Indemnity
Company, a subsidiary of Berkshire Hathaway Inc. Challenges
for AIG PC US include its record of volatile earnings, its exposure
to natural and man-made catastrophes and its low regulatory risk-based
capital (RBC) ratio relative to peers. Given the low RBC ratio,
Moody's expects that AIG parent will continue to hold a large pool
of cash and short-term investments to support its subsidiaries
as needed.
AIG reported a net loss of $1.7 billion for Q3 2017,
driven by pretax catastrophe losses of $3.0 billion and
a pretax charge of $836 million to bolster P&C loss reserves.
The catastrophe losses stemmed mainly from Hurricanes Harvey, Irma
and Maria, each of which caused significant losses, but none
large enough to trigger reinsurance recoveries under AIG's event-based
catastrophe reinsurance program. The company likely suffered further
catastrophe losses in Q4 2017 from California wildfires. Steady
profits from its life and retirement business have helped AIG withstand
the volatile P&C results.
AIG's CEO has announced several initiatives to strengthen the P&C
performance, including recruiting/reassigning various business leaders,
reestablishing some specialty units, placing greater reliance on
individual account underwriting (supported by technical pricing tools),
reducing policy limits, and revamping the catastrophe reinsurance
program to limit earnings volatility. Given the scope of these
changes, Moody's expects it will take a couple of years for
AIG to stabilize its P&C results.
FACTORS THAT COULD AFFECT AIG RATINGS
Moody's cited the following factors that could lead to a rating
upgrade for AIG: (i) improvement in the standalone credit profiles
of major operating units, (ii) consolidated return on capital in
the high single digits, and (iii) improvement in financial flexibility
(e.g., total leverage below 25%, pretax
interest coverage in the high single digits).
The following factors could lead to a rating downgrade for AIG:
(i) deterioration in the standalone credit profiles of major operating
units, (ii) significant decline in AIG parent liquidity pool available
to support subsidiaries, or (iii) a decline in financial flexibility
(e.g., total leverage rising toward 35% or
higher, pretax interest coverage remaining below five times).
FACTORS THAT COULD AFFECT AIG PC US RATINGS
Moody's cited the following factors that could lead to a rating
upgrade for AIG PC US: (i) improvement in underwriting results and
profitability (e.g., combined ratio below 95%,
return on capital consistently above 8%), (ii) favorable/benign
development of loss reserves, and (iii) improvement in AIG's
financial flexibility (e.g., total leverage below
25%, pretax interest coverage in the high single digits).
The following factors could lead to a rating downgrade for AIG PC US:
(i) deterioration in underwriting results (e.g., combined
ratio remaining above 100%, return on capital below 5%),
(ii) significant further adverse loss development, or (iii) a decline
in statutory surplus by more than 10% in a given year.
RATING ACTIONS
Moody's has affirmed the following ratings:
American International Group, Inc. -- long-term
issuer rating Baa1, senior unsecured debt Baa1, junior subordinated
debt Baa2 (hyb), short-term issuer rating Prime-2,
senior unsecured shelf (P)Baa1, senior unsecured MTN program (P)Baa1,
subordinated shelf (P)Baa2, junior subordinated shelf (P)Baa2;
AIG Life Holdings, Inc. -- backed senior unsecured debt
Baa1, backed junior subordinated debt Baa2 (hyb);
AIG Property Casualty U.S., Inc. -- AIG
Assurance Company, AIG Property Casualty Company, AIG Specialty
Insurance Company, AIU Insurance Company, American Home Assurance
Company, Commerce and Industry Insurance Company, Granite
State Insurance Company, Illinois National Insurance Co.,
Lexington Insurance Company, National Union Fire Insurance Company
of Pittsburgh, Pa., New Hampshire Insurance Company,
The Insurance Company of the State of Pennsylvania -- insurance financial
strength A2;
AIGFP and subsidiaries:
AIG Financial Products Corp. -- backed long-term issuer
rating Baa1, backed short-term issuer rating Prime-2;
AIG Management France S.A. -- backed senior unsecured
debt Baa1;
AIG Matched Funding Corp. -- backed senior unsecured debt
Baa1, backed short-term issuer rating Prime-2;
AIG-FP Matched Funding Corp. -- backed senior unsecured
debt Baa1, backed senior unsecured MTN program (P)Baa1;
SAFG Retirement Services, Inc. -- backed senior unsecured
debt Baa1.
The rating outlook for these entities is stable.
The principal methodologies used in rating AIG Financial Products Corp.,
AIG Life Holdings, Inc., AIG Management France S.A.,
AIG Matched Funding Corp., AIG-FP Matched Funding
Corp., American International Group, Inc. and
SAFG Retirement Services, Inc. were Global Life Insurers
published in April 2016 and Global Property and Casualty Insurers published
in May 2017. The principal methodology used in rating AIG Assurance
Company, AIG Property Casualty Company, AIG Specialty Insurance
Company, AIU Insurance Company, American Home Assurance Company,
Commerce and Industry Insurance Company, Granite State Insurance
Company, Illinois National Insurance Co., Lexington
Insurance Company, National Union Fire Insurance Company of Pittsburgh,
Pa., New Hampshire Insurance Company and The Insurance Company
of the State of Pennsylvania was Global Property and Casualty Insurers
published in May 2017. Please see the Rating Methodologies page
on www.moodys.com for a copy of these methodologies.
Moody's insurance financial strength ratings are opinions of the
ability of insurance companies to pay senior policyholder claims and obligations.
AIG, based in New York City, is a leading international insurance
organization serving customers in more than 80 countries and jurisdictions.
For the first nine months of 2017, AIG reported total revenues of
$36.9 billion and net income attributable to AIG of $576
million. AIG shareholders' equity was $72.5
billion as of September 30, 2017.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Bruce Ballentine
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Marc R. Pinto, CFA
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
