Fitch Upgrades AIG Senior Debt Ratings to 'BBB+'; Outlook Stable

Thu Feb 27, 2014 12:12pm EST

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(The following statement was released by the rating agency) CHICAGO, February 27 (Fitch) Fitch Ratings has upgraded American International Group, Inc.'s Issuer Default Rating (IDR) to 'A-' from 'BBB+'. The ratings on AIG's senior debt obligations are upgraded to 'BBB+' from 'BBB'. The Insurer Financial Strength (IFS) ratings of AIG's rated property/casualty insurance subsidiaries are affirmed at 'A'. The IFS ratings of the company's U.S. life insurance subsidiaries led by AGC Life Insurance Company are affirmed at 'A+'. In addition the long-term senior secured ratings of securities issued by ASIF Global Financing, ASIF II Program and ASIF III Program were revised to 'A+' from 'A' and are also affirmed at 'A+'. The revision brings the long-term senior secured ratings of these entities in line with AIG Life and Retirement's IFS ratings, which were previously upgraded on Feb. 14, 2013 and affirmed on Aug. 8, 2013. The Rating Outlook is Stable. A complete list of ratings is provided at the end of this release. KEY RATING DRIVERS The holding company upgrade recognizes the continued improvement in the organization's capital position and debt servicing capabilities. The company's financial leverage as measured by the ratio of financial debt and preferred securities to total capital (excluding operating debt and the impact of FAS 115) declined to 18% at year-end 2013 from 31% at year-end 2010. Fitch's total financial commitment (TFC) ratio has also improved, to 1.1x at year-end 2013 from 2.5x at year-end 2010. The sale of aircraft leasing subsidiary International Lease Finance Corporation (ILFC) to AerCap Holdings N.V. that is expected to close in second quarter 2014 will further reduce TFC to a pro forma level of approximately 0.7x. The upgrade of the IDR and debt ratings is also based on Fitch's view that the improved earnings and dividend capacity of AIG's Life and Retirement segment can support the interest and debt service payments of the holding company. The holding company rating now reflects the application of standard notching between the holding company IDR and the life operating companies' implied IDR. AIG reported significantly improved profitability in 2013. Net income increased by over 160% to $9.1 billion, which corresponds with a return on equity of 9.2%. Pre-tax operating income was $4.8 billion for AIG's Property Casualty segment and $5.1 billion for Life and Retirement operations in 2013. Earnings growth at the insurance subsidiaries and the repayment of higher coupon debt has led to significantly improved interest coverage. Operating-earnings-based interest coverage on financial debt improved to 6.7x in 2013 from 2.2x in 2012. AIG's ability to meet holding company obligations is primarily supported by dividend capacity from the insurance subsidiaries. Cash distributions from subsidiaries totaled $8.7 billion in 2013. The company has built a strong holding company liquidity position that includes $7.2 billion of unencumbered cash and investments at year end 2013, and $4.4 billion of available capacity from credit facilities. AIG property/casualty subsidiary ratings consider the company's unique market position in the global insurance market given its absolute size. Lower catastrophe losses and benefits from recent pricing underwriting and portfolio repositioning actions led to a decline in the property casualty combined ratio to 101.3% in 2013 from 108.5% a year earlier. The company's underwriting results were affected by modest unfavorable reserve development in 2012 and 2013. AIG's underwriting performance continues to lag large commercial insurer peers. The ratings of AIG's Life and Retirement subsidiaries are driven by these entities' strong statutory capital position, more conservative asset allocation and return to stronger operating profits and earnings stability. The company has demonstrated that the effects of the previous financial crisis have subsided. Operating income has improved in 2012 and 2013 as a result of higher fee income driven by growth in assets under management, continued active spread management, higher investment income and low levels of surrender activity. These positive factors are offset somewhat by concerns as to the effect of continued very low interest rates on product performance and future profitability. The 'A+' senior secured notes ratings assigned to the securities issued by ASIF Global Financing, ASIF II Program and ASIF III Program recognizes that the obligations are secured by a funding agreement with cash flow structures that enable the trustees to make payments on the notes. Thus the notes are dependent upon the credit quality of AIG Life and Retirement and are assigned the insurer's IFS rating. All ratings reflect AIG's success in restructuring and deleveraging efforts over the last five years. All government support was repaid by AIG in 2012. The company is now an independent publicly held corporation with an operating focus on global property/casualty insurance and domestic life insurance and retirement products. RATING SENSITIVITIES Key triggers that could lead to future rating upgrades include: --Demonstration of higher and more consistent earnings within Property/Casualty or Life and Retirement operating segments that translate into average earnings-based interest coverage above 10.0x. This would correspond with insurance pre-tax operating earnings of approximately $14 billion; --Further improvement in AIG's capital structure and leverage metrics that reduce the company's TFC ratio to below 0.5x; --Continued improvement in the operating earnings of the Life and Retirement segment which could lead to an upgrade of those subsidiary ratings; --A shift to modest sustainable breakeven or better underwriting results, with greater loss reserve stability or reserve redundancies could lead to an upgrade of property casualty subsidiary IFS ratings. Key triggers that could lead to a future rating downgrade include: --Increases in financial leverage as measured by financial debt-to-total capital to a sustained level above 30%, or a material increase in the TFC ratio from current levels; --Significant reductions in debt servicing capacity from holding company assets and available dividends from subsidiaries to a level below 6x annual interest on financial debt; --Large underwriting losses and/or heightened reserve volatility of the company's non-life insurance subsidiaries that Fitch views as inconsistent with that of comparably-rated peers and industry trends; --Deterioration in the company's domestic life subsidiaries' profitability trends; --Material declines in risk-based capital ratios at either the domestic life insurance or the non-life insurance subsidiaries, and/or failure to achieve the above noted capital structure improvements. Fitch has upgraded the following ratings with a Stable Outlook: American International Group, Inc. --Long-term IDR to 'A-' from 'BBB+'. AIG International, Inc. --Long-term IDR to 'A-' from 'BBB+'; --USD175 million of 5.60% senior unsecured notes due July 31, 2097 to 'BBB+' from 'BBB'. American International Group, Inc. --Various senior unsecured note issues to 'BBB+' from 'BBB'; --USD1 billion of 4.125% senior unsecured notes due Feb. 15, 2024 to 'BBB+' from 'BBB'; --USD1.5 billion of 4.875% senior unsecured notes due June 2022 to 'BBB+' from 'BBB'; --USD800 million of 4.875% senior unsecured notes due Sept. 15, 2016 to 'BBB+' from 'BBB'; --EUR420.975 million of 6.797% senior unsecured notes due Nov. 15, 2017 to 'BBB+' from 'BBB'; --GBP323.465 million of 6.765% senior unsecured notes due Nov. 15, 2017 to 'BBB+' from 'BBB'; --GBP338.757 million of 6.765% senior unsecured notes due Nov. 15, 2017 to 'BBB+' from 'BBB'; --USD256.161 million of 6.820% senior unsecured notes due Nov. 15, 2037 to 'BBB+' from 'BBB'; --USD1 billion of 3.375% senior unsecured notes due Aug. 15, 2020 to 'BBB+' from 'BBB'; --USD250 million of 2.375% subordinated notes due Aug. 24, 2015 to 'BBB' from 'BBB-'; --EUR750 million of 8.00% series A-7 junior subordinated debentures due May 22, 2038 to 'BBB-' from 'BB+'; --USD4 billion of 8.175% series A-6 junior subordinated debentures due May 15, 2058 to 'BBB-' from 'BB+'; --GBP309.850 million of 5.75% series A-2 junior subordinated debentures due March 15, 2067 to 'BBB-' from 'BB+'; --Eur409.050 million of 4.875% series A-3 junior subordinated debentures due March 15, 2067 to 'BBB-' from 'BB+'; --GBP900 million of 8.625% series A-8 junior subordinated debentures due May 22, 2068 to 'BBB-' from 'BB+'; --USD687.581 million of 6.25% series A-1 junior subordinated debentures due March 15, 2087 to 'BBB-' from 'BB+'. AIG Life Holdings, Inc. --Long-term IDR to 'A-' from 'BBB+'; --USD150 million of 7.50% senior unsecured notes due July 15, 2025 to 'BBB+' from 'BBB'; --USD150 million of 6.625% senior unsecured notes due Feb. 15, 2029 to 'BBB+' from 'BBB'; --USD300 million of 8.50% junior subordinated debentures due July 1, 2030 to 'BBB-' from 'BB+'; --USD500 million of 7.57% junior subordinated debentures due Dec. 1, 2045 to 'BBB-' from 'BB+'; --USD500 million of 8.125% junior subordinated debentures due March 15, 2046 to 'BBB-' from 'BB+'. Fitch has affirmed the following ratings with a Stable Outlook: AGC Life Insurance Company American General Life Insurance Company The Variable Annuity Life Insurance Company United States Life Insurance Company in the City of New York -- IFS rating at 'A+'. AIU Insurance Company American Home Assurance Company AIG Assurance Company AIG Europe Limited AIG MEA Limited American International Overseas Limited AIG Property Casualty Company AIG Specialty Insurance Company Commerce & Industry Insurance Company Granite State Insurance Company Illinois National Insurance Company Insurance Company of the State of Pennsylvania Lexington Insurance Company National Union Fire Insurance Company of Pittsburgh, PA New Hampshire Insurance Company --IFS rating at 'A'. Fitch has revised and affirmed the following ratings: ASIF Global Financing --USD750 million of 6.9% senior secured notes due March 15, 2032 to 'A+' from 'A'; ASIF II Program --JPY10 billion of 2.7045% senior secured notes due July 23, 2014 to 'A+' from 'A'; --GBP200 million of 6.375% senior secured notes due Oct. 5, 2020 to 'A+' from 'A'; --USD82 million of 0% senior secured notes due Jan. 2, 2032 to 'A+' from 'A'. ASIF III Program --CHF150 million of 3% senior secured notes due Dec. 29, 2015 to 'A+' from 'A'; --GBP350 million of 5.375% senior secured notes due Oct. 14, 2016 to A+' from 'A'; --GBP250 million of 5% senior secured notes due Dec. 18, 2018 to 'A+' from 'A'; --EUR200 million of 1.66% senior secured notes due Dec. 20, 2024 to 'A+' from 'A'. Contact: Primary Analyst James B. Auden, CFA Managing Director +1-312-368-3146 Fitch Ratings, Inc. 70 W. Madison Street Chicago IL 60602 Secondary Analyst Tana M. Higman Director +1-312-368-3122 Committee Chairperson Keith M. Buckley, CFA Managing Director +1-312-368-3211 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Insurance Rating Methodology', Nov. 13, 2013. Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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