New York, August 07, 2012 -- Moody's Investors Service has affirmed the ratings of American International
Group, Inc. (NYSE: AIG -- senior unsecured debt
at Baa1) following the announcement that AIG is repurchasing $3
billion worth of its common stock from the US Treasury. The rating
agency also affirmed the A1 insurance financial strength ratings of US-based
members of Chartis, the A2 insurance financial strength ratings
of SunAmerica Financial Group (SunAmerica) and other ratings supported
by these entities (see list below). The outlook for these ratings
is stable.
RATINGS RATIONALE
Through a transaction announced shortly after AIG's second-quarter
2012 earnings release, the US Treasury is selling $5.75
billion worth of AIG shares, including the $3 billion being
repurchased by AIG and $2.75 billion being purchased by
the public. This is the Treasury's third sale of AIG shares
in 2012, and it reduces the Treasury's ownership stake in
AIG to about 53% from about 77% at the start of the year.
AIG has participated in all three of the Treasury's offerings,
repurchasing a total of $8 billion worth of shares, including
the current transaction.
AIG's latest share buyback was facilitated by the monetization of
a majority of its subordinated interest in Maiden Lane III (ML III),
a special purpose vehicle being liquidated by the Federal Reserve Bank
of New York through auctions of ML III assets. AIG carried its
subordinated ML III interest at a fair value of $8.1 billion
as of June 30, 2012. This interest is being monetized through
a cash payment of $6.0 billion received by AIG in July,
another $1.9 billion due in August and residual amounts
due thereafter.
AIG has held the ML III interest within its Direct Investment book (DIB),
a runoff portfolio that includes the parent company's Matched Investment
Program and certain non-derivative assets and liabilities of the
former AIG Financial Products Corp. portfolio. As of June
30, 2012, The DIB had total assets of $37.6
billion and total liabilities of $29.2 billion, excluding
the value of related interest rate and foreign exchange hedges.
After giving effect to the ML III monetization, AIG estimated that
it had more than $5 billion of excess liquidity in the DIB,
a sufficient cushion to fund the latest share repurchase.
"Monetization of the ML III interest has significantly enhanced
the liquidity of the DIB while also reducing its capital requirements,"
said Bruce Ballentine, Moody's lead analyst for AIG.
"We believe the DIB and AIG as a whole have sufficient capital and
liquidity to support the current ratings, even after the share buybacks
of recent months."
Despite the likelihood that the DIB has sufficient assets to cover its
liabilities, Moody's has changed its characterization of DIB
borrowings from operating debt to financial debt. This is based
on certain illiquid assets held by the DIB as well as AIG's transfers
of assets into and out of the DIB. "Treating the DIB borrowings
as financial debt will highlight the expected runoff of the DIB over the
next several years," said Ballentine. More than half
the DIB's debt ($22.4 billion outstanding on June
30, 2012) is scheduled to mature over the next five years.
Based on Moody's calculations, AIG had total leverage of 33%
on June 30, 2012, and pretax interest coverage of about 3x
for preceding 12 months. The leverage ratio is consistent with
the company's ratings, while the coverage ratio is somewhat
weak for the ratings. The ratings incorporate Moody's expectation
that AIG will improve its financial flexibility metrics through some combination
of earnings growth and debt reduction, so as to achieve pretax interest
coverage exceeding 4x within 12-18 months. The rating agency
also expects that AIG will operate well within the constraints of its
own capital and liquidity stress testing framework.
AIG
AIG's ratings reflect the leading market positions of its core insurance
operations, its broad diversification across products and geographic
areas, its divestiture/unwinding of noncore businesses over the
past few years and the strong liquidity of the parent company.
The company's credit profile is constrained by the weak profitability
of core operations (on a combined basis), the continuing exposure
to certain noncore activities with weaker credit profiles and the complexity
of risk management across numerous business lines and regions.
Moody's cited the following factors that could lead to a rating upgrade
for AIG: (i) improvement in the intrinsic credit profiles of Chartis
and/or SunAmerica, (ii) further de-risking/divesting of noncore
businesses, and (iii) improvement in financial flexibility metrics
(e.g., total leverage below 30%, pretax
interest coverage in high single digits).
The following factors could lead to a rating downgrade for AIG:
(i) deterioration in the intrinsic credit profiles of Chartis and/or SunAmerica,
(ii) losses from noncore businesses exceeding half a year's normalized
income from core operations, (iii) insufficient liquidity within
the core operations or at the parent per the company's stress testing
framework, or (iv) deterioration in financial flexibility metrics
(e.g., total leverage of 40% or higher,
normalized pretax interest coverage remaining below 4x).
CHARTIS
The Chartis ratings are based on the group's strong market position in
commercial and specialty lines, its expertise in writing large and
complex risks, and its broad product and geographic diversification.
The extensive product offerings and global footprint allow Chartis to
deploy capital to markets that offer favorable returns. These strengths
are offset by the group's weak profitability over the past few years,
its history of adverse loss development, and its exposure to natural
and man-made catastrophes.
"Much of Chartis's business is in long-tail US casualty lines,
heightening the risk and uncertainty surrounding loss reserves,"
noted Ballentine. Chartis also has greater investment risk through
alternative investments and below-investment-grade structured
securities than similarly rated peers.
Moody's cited the following factors that could lead to a rating upgrade
for Chartis: (i) improvement in underwriting results and profitability
(e.g., combined ratio below 100%, return
on capital exceeding 8%), (ii) stable loss reserves (e.g.,
adverse development not exceeding 1% of net reserves), and
(iii) improvement in AIG's financial flexibility (e.g.,
total leverage below 30%, pretax interest coverage in high
single digits).
The following factors could lead to a rating downgrade for Chartis:
(i) continued weak underwriting results (e.g., combined
ratio above 105%, return on capital below 5%),
(ii) significant adverse reserve development (e.g.,
exceeding 5% of net reserves), or (iii) underwriting and/or
investment losses causing Chartis's equity base to fall by more than 10%
in a given year.
SUNAMERICA
SunAmerica's ratings are based on its significant (in several cases,
top 10) market positions in a number of life insurance, individual
annuity and retirement product markets. SunAmerica has continued
to rebuild and even extend its sales and market presence in 2012.
Pretax operating income has improved in recent quarters, given healthy
sales and the reinvestment of cash over the past 18 months. Moody's
expects this momentum to continue through 2012 and beyond.
Offsetting these strengths, SunAmerica has significant exposure
to interest rate risk and spread compression from its dominant annuity
businesses. This could put pressure on earnings if interest rates
remain low over the next several years. SunAmerica's reduced
emphasis on bank-sold fixed annuities year to date will temper
this exposure.
"While redeploying cash, SunAmerica has accumulated significant
holdings of structured securities and alternative assets,"
said Laura Bazer, Moody's lead analyst for SunAmerica.
"These assets expose the group to further investment losses,
particularly in a stress scenario, although the risk is mitigated
by strong statutory capital levels." Most SunAmerica companies
have NAIC risk-based capital (RBC) ratios exceeding 400%.
Moody's cited the following factors that could lead to a rating upgrade
for SunAmerica: (i) improved profitability, with a statutory
return on capital of at least 8% and lower earnings volatility,
and (ii) pretax asset losses of no more than $400 million in 2012.
The following factors could lead to a rating downgrade for SunAmerica:
(i) deterioration in key elements of the business profile such as brand,
reputation, distribution channels and market share, (ii) statutory
return on capital below 4%, or (iii) NAIC RBC ratios below
325%.
RATINGS AFFIRMED
The following ratings have been affirmed with a stable outlook:
AIG Funding, Inc. -- backed short-term
debt Prime-2;
American General Capital II -- backed trust preferred stock Baa2
(hyb);
American General Institutional Capital A & B -- backed trust
preferred stock Baa2 (hyb);
American International Group, Inc. -- long-term
issuer rating Baa1, senior unsecured debt Baa1, subordinated
debt Baa2 (hyb), short-term issuer rating Prime-2,
senior unsecured shelf (P)Baa1, subordinated shelf (P)Baa2,
junior subordinated shelf (P)Baa2;
Chartis (US-based rated members) -- AIU Insurance
Company; American Home Assurance Company; Chartis Property Casualty
Company; Chartis Specialty Insurance Company; Commerce and Industry
Insurance Company; National Union Fire Insurance Company of Pittsburgh,
Pennsylvania; New Hampshire Insurance Company; The Insurance
Company of the State of Pennsylvania -- insurance financial
strength A1;
Global Capital Markets -- AIG Financial Products Corp.,
AIG Matched Funding Corp., AIG-FP Capital Funding
Corp., AIG-FP Matched Funding Corp.,
AIG-FP Matched Funding (Ireland) P.L.C.,
Banque AIG -- backed long-term issuer rating or backed senior
unsecured debt Baa1;
Global Capital Markets (short-term ratings) -- AIG
Financial Products Corp., AIG Matched Funding Corp.
-- backed short-term debt Prime-2;
SAFG Retirement Services, Inc. -- backed senior
unsecured debt Baa1;
SunAmerica Financial Group -- American General Life and
Accident Insurance Company, American General Life Insurance Company,
American General Life Insurance Company of Delaware, SunAmerica
Annuity and Life Assurance Company, SunAmerica Life Insurance Company,
The United States Life Insurance Company in the City of New York,
The Variable Annuity Life Insurance Company, Western National Life
Insurance Company -- insurance financial strength A2;
SunAmerica Financial Group (short-term ratings) --
SunAmerica Annuity and Life Assurance Company, SunAmerica Life Insurance
Company -- short-term insurance financial strength
Prime-1;
SunAmerica Financial Group (funding agreement-backed note programs)
-- AIG SunAmerica Global Financing Trusts, ASIF II,
ASIF III (Jersey) Limited, ASIF Global Financing Trusts --
senior secured debt A2;
SunAmerica Financial Group, Inc. -- backed
senior unsecured debt Baa1.
AIG, based in New York City, is a leading international insurance
organization serving customers in more than 130 countries. AIG
reported total revenues of $35.6 billion and after-tax
operating income of $5.0 billion for the first half of 2012.
AIG shareholders' equity was $105 billion as of June 30,
2012.
The principal methodologies used in this rating were Moody's Global Rating
Methodology for Property and Casualty Insurers published in May 2010 and
Moody's Global Rating Methodology for Life Insurers published in May 2010.
Please see the Credit Policy 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.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant 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.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Please see Moody's Rating Symbols and Definitions on the Rating
Process page on www.moodys.com for further information on
the meaning of each rating category and the definition of default and
recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history. The date on
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Consequently, Moody's provides a date that it believes is
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for further information.
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.
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
Robert Riegel
MD - Insurance
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
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SUBSCRIBERS: 212-553-1653
Moody's affirms AIG's ratings (senior debt at Baa1) with stable outlook
