Also affirms A2 insurance financial strength ratings of core property casualty and life and retirement operations
NOTE: On March 03, 2017, the press release was corrected as follows: In the first line of the debt list under Global Capital Markets, Baa1 was added as the backed long-term issuer rating. Revised release follows.
New York, February 15, 2017 -- Moody's Investors Service has affirmed the Baa1 senior unsecured debt
rating of American International Group, Inc. (NYSE:
AIG), and has affirmed the A2 insurance financial strength (IFS)
ratings of AIG's US property casualty operations (AIG PC US) and of AIG
Life and Retirement (AIG L&R). These actions follow AIG's announcement
of Q4 2016 results, including a $5.6 billion charge
to strengthen its PC loss reserves. The rating outlook for these
entities is stable.
The Q4 charge continues a pattern of reserve problems at AIG, given
its industry-leading exposure to long-tail US casualty lines.
The stable rating outlook reflects Moody's view that AIG will improve
its PC underwriting performance through strategic initiatives now underway,
and that it will manage the capital of its operating subsidiaries and
the overall group in a way that protects policyholders and creditors.
RATINGS RATIONALE
AIG's Q4 reserve charge mainly pertains to US casualty lines over
a range of accident years, with more than half of the charge tied
to the recent period of 2011-15. The adverse development
reflects a combination of AIG's struggles during and after the financial
crisis of 2008-09, when the company competed aggressively
to retain clients, along with more recent adverse claim experience
in such lines as commercial auto, medical malpractice and excess
casualty. This action follows AIG's reserve charges of about
$4 billion in 2015 and a total of $7 billion in 2009-10.
AIG has strategic initiatives underway to strengthen its PC underwriting
performance, including better risk selection with a focus on client
profitability, a more efficient operating model, greater use
of reinsurance to protect against catastrophes and other severe losses,
and an accelerated reduction in US casualty premiums. Given the
past volatility, it will take time for the company to show the efficacy
of these initiatives and deliver sustainable profits.
In January 2017, AIG announced a retroactive reinsurance agreement
with Berkshire Hathaway's National Indemnity Company (NICO) covering
AIG's US casualty reserves for accident years 2015 and prior.
NICO assumes 80% of AIG's paid losses in excess of $25
billion up to a contract limit of $50 billion. Based on
reserves booked to date, including the Q4 2016 charge, NICO
would pay $12.8 billion under the contract, and that
amount could increase by up to $7.2 billion should losses
rise to the contract limit. The reinsurance reduces AIG's
exposure to adverse loss development, at least for the next few
years, a benefit partly offset by the cost of the contract,
including forgone investment income on the premium of approximately $10
billion paid to NICO. Any losses above the contract limit would
revert to AIG.
AIG PARENT
AIG's Baa1 senior debt rating is based on its leading market positions
in global PC insurance and US life insurance, its diversification
across products and geographic regions, and the healthy liquidity
of the parent company. Tempering these strengths are the company's
record of volatile reserves and weak profits in PC insurance, its
above-average exposure to structured and alternative investments
(although the company is reducing its hedge fund investments) and the
complexity of risk management across its many business lines and countries/regions.
AIG maintains a liquidity pool of $6-$8 billion to
support its subsidiaries as needed.
AIG continues to pursue the strategic plan launched in January 2016,
including its aggressive target of returning at least $25 billion
of capital to shareholders by the end of 2017. The company returned
$13 billion to shareholders in 2016. Additional capital
returns will be funded through a combination of ordinary dividends and
tax-sharing payments from operating companies, capital released
from operating companies through reinsurance transactions and reduced
hedge fund investments, and proceeds or capital released from divesting
or running off noncore assets. Moody's expects that AIG will manage
these initiatives in a way that balances the interests of policyholders,
creditors and shareholders.
Moody's cited the following factors that could lead to a rating upgrade
for AIG: (i) improvement in the stand-alone credit profiles
of AIG PC US and AIG L&R, (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: (i) deterioration
in the stand-alone credit profiles of major operating units,
(ii) insufficient liquidity within operating units or at the parent relative
to the company's or Moody's stress tests, or (iii) a decline in
financial flexibility (e.g., total leverage approaching
35% or higher, pretax interest coverage remaining below five
times). To the extent AIG sheds additional businesses and further
reduces its diversification, or faces constraints on the dividend
capacity of its subsidiaries, Moody's could widen the notching between
the IFS ratings of the operating companies and the senior debt rating
of the parent.
AIG PC US
AIG PC US is one of the largest commercial PC insurers in the US.
The pool members' A2 IFS ratings reflect the group's market leadership
in commercial and specialty lines, its diversified product offerings
and its expertise in writing large and complex risks. The group
also benefits from AIG's global network, through which it serves
multinational accounts, along with the large liquidity pool and
diversified funding sources of AIG parent.
Challenges for AIG PC US include volatile earnings, with large swings
in yearly loss development, along with exposure to natural and man-made
catastrophes. The group has historically focused on long-tail
casualty lines, heightening the risk and uncertainty surrounding
ultimate losses. AIG aims to improve its underwriting performance
through better client segmentation and pricing, reducing expenses,
exiting subpar business lines and greater use of reinsurance. However,
this effort may be hampered by soft pricing in commercial lines and modest
global economic growth. AIG PC US also has a lower regulatory risk-based
capital (RBC) ratio than similarly rated peers, and greater exposure
to structured and alternative investments, although the firm is
cutting back on hedge fund investments.
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: (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 relative to the evolving risk profile.
AIG LIFE AND RETIREMENT
The A2 IFS ratings of AIG L&R are based on their leading (top five
in several cases) positions in a number of individual annuity and retirement
product markets. The group has completed certain life reinsurance
transactions and alternative securities sales, returning over $1
billion of capital to AIG in 2016, while keeping its regulatory
RBC ratio within rating expectations.
Offsetting these strengths are AIG L&R's significant exposure
to interest rate risk and spread compression from its dominant fixed annuity
business, although this risk would decrease if rates continued to
rise, and growing exposure to equity market and hedging risks,
largely through its growing individual variable annuity business.
Moody's noted that AIG L&R might face greater pressure to pay
dividends to AIG parent following the Q4 2016 PC reserve charge,
which could constrain the dividend capacity of the PC operations.
Moody's said the following factors could lead to a rating upgrade for
AIG L&R: (i) greater diversification away from annuity products,
(ii) consolidated statutory return on capital consistently exceeding 8%,
(iii) regulatory RBC ratio of at least 425% (company action level,
including the effects of reinsurance), with no decline in consolidated
statutory surplus exceeding 10% in a given year, and (iv)
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: (i) consolidated
statutory return on capital below 4% and/or continued earnings
volatility, (ii) capital distributions to AIG parent exceeding amounts
indicated by the group's strategic plan, (iii) a decline in
consolidated statutory surplus exceeding 10% in a given year (outside
the strategic plan), (iv) regulatory RBC ratio below 350%
(company action level, including the effects of reinsurance),
or (v) gross pretax asset losses exceeding of $700 million 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 and Retirement -- American General Life Insurance Company,
The United States Life Insurance Company in the City of New York,
The Variable Annuity Life Insurance Company -- insurance financial
strength A2;
AIG Life and Retirement funding agreement-backed notes:
AIG Global Funding -- senior secured debt A2, senior secured
MTN program (P)A2;
AIG SunAmerica Global Financing X -- senior secured debt A2;
ASIF II -- senior secured debt A2, senior secured MTN program
(P)A2;
ASIF III (Jersey) Limited -- senior secured debt A2, senior
secured MTN program (P)A2;
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;
Global Capital Markets:
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 Capital Funding Corp. -- backed senior unsecured
debt Baa1;
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 Capital 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 June 2016. The principal
methodology used in rating AIG Global Funding, AIG SunAmerica Global
Financing X, American General Life Insurance Company, ASIF
II, ASIF III (Jersey) Limited, The United States Life Insurance
Company in the City of New York and Variable Annuity Life Insurance Company
was Global Life Insurers published in April 2016. 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 June
2016. Please see the Rating Methedoogies page on www.moodys.com
for copies 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 global insurance
organization providing PC insurance, life insurance, retirement
products and other financial services to customers in more than 80 countries
and jurisdictions. AIG generated total revenues of $52 billion
and a net loss attributable to AIG of $849 million in 2016.
AIG shareholders' equity was $76 billion as of 31 December
2016.
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.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead analyst and the Moody's legal entity that has issued the ratings.
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: 212-553-0376
SUBSCRIBERS: 212-553-1653
Marc R. Pinto, CFA
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
