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Rating Action:

Moody's affirms AIG's ratings (senior debt Baa1) following announced acquisition of Validus; outlook stable

22 Jan 2018

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

No Related Data.
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