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Fitch Affirms AIG's Ratings; Assigns Negative Outlook
February 14, 2017 / 10:05 PM / 10 months ago

Fitch Affirms AIG's Ratings; Assigns Negative Outlook

(The following statement was released by the rating agency) CHICAGO, February 14 (Fitch) Fitch Ratings has affirmed all ratings of American International Group, Inc. (AIG), including the 'A-' Issuer Default Rating (IDR), 'A' Insurer Financial Strength (IFS) Rating of the property/casualty (P&C) insurance subsidiaries, which have also been removed from Rating Watch Negative. The 'A+' ratings of the life insurance subsidiaries are affirmed. The Rating Outlook is Negative for all ratings. KEY RATING DRIVERS The parent company and P&C subsidiary ratings were placed on Rating Watch Negative in January 2017 following an announcement by AIG that material adverse development from U.S. commercial insurance segments would be reported in 4Q16 results and that the company had entered into an adverse reserve development reinsurance agreement with National Indemnity Company (NICO). The agreement provides $20 billion of coverage for longer tail U.S. commercial lines reserves from 2015 and prior, retroactive to Jan. 1, 2016. AIG reported $5.5 billion of 4Q16 unfavorable development, leading to a net loss of $849 million for full year 2016, compared with $2.2 billion of net income in 2015. The rating affirmations primarily reflect that despite the net loss in 2016, AIG has maintained holding company and subsidiary capital levels within previous rating guidelines. Also, while 2016 interest coverage ratios are down sharply to approximately 3.1x, significant resources are available for servicing holding company debt, including $8.4 billion in parent company liquidity at yearend 2016. The Negative Rating Outlook largely reflects continued uncertainty regarding AIG's ability to meet profitability targets for 2017 expressed as part of the company's strategic plan. An increase in recent accident year (AY) loss ratios from the fourth quarter charge reveal further weakness in underwriting and reserve quality, and indicate that greater improvement than previously anticipated is necessary to return to adequate underwriting profitability. AIG's capital plan to return at least $25 billion of capital to shareholders through 2017 appears to be on track. AIG's financial leverage ratio, excluding the effect of FAS 115 was approximately 23% at year-end 2016. Capitalization remains strong at both the property casualty and life subsidiaries. From a profitability perspective, AIG has taken significant actions in the last 12 months to change the operating risk profile and improve profitability, including non-core operation divestitures, reinsurance purchases, expense reductions and property/casualty underwriting initiatives. Results of many of these actions will take some time to fully materialize. However, the Consumer Insurance segment reported an approximate 31% improvement in 2016 after-tax operating earnings. Overall, operating performance for AIG's life insurance subsidiaries has generally been stronger and more stable than its property casualty subsidiaries. In 2016, pre-tax operating income increased 11% in the core life and retirement segments, largely driven by a higher net positive impact from actuarial assumption updates. The company is executing on a plan to improve returns by narrowing its distribution and product focus as well as reducing its exposure to hedge funds, which should improve the quality and stability of earnings going forward. AIG reported total adverse development on P&C business of $5.8 billion in 2016, following $4.2 billion in 2015. This reserve experience is a sharp outlier to peers as most large underwriters have reported net favorable development over this time span. A substantial portion of calendar year 2016 reserve development is in recent underwriting periods as the 2015 accident year loss ratio in Commercial Insurance is now 6 points higher than initial estimates. Commercial insurance remains a primary source of uncertainty. Efforts to improve commercial insurance results and reduce volatility are reflected in an 18% reduction in commercial lines written premiums in 2016 as well as recent reinsurance transactions that include a reduction in the retention for the company-wide property catastrophe reinsurance program to $1.5 billion from $3 billion previously. Initial reserves ceded in the NICO cover are $12.8 billion for consideration of approximately $9.8 billion, plus a modest interest component. The reinsurance agreement has $7.2 billion of limit remaining against future adverse development in covered segments. Over the longer term, the success of AIG's profit improvement plan and maintaining capital adequacy corresponding to subsequent changes in operating risk profile will greatly influence future rating levels. RATING SENSITIVITIES Key triggers that could lead to a downgrade include: --Further reserve development within the NICO cover that approaches exhaustion of available limits and/or material development in the 2016 accident year; --A failure to move towards underwriting profits in commercial insurance; --Increase in financial leverage to above 25%, or an increase in the TFC ratio to above 0.7x; --Significant reductions in debt servicing capacity from holding company assets and available dividends from subsidiaries to a level below 4.5x annual interest on financial debt; --Sharp deterioration in the company's domestic life insurance subsidiaries' profitability trends; --Material declines in risk-based capital ratios or Prism scores at either the domestic life insurance or the non-life insurance subsidiaries. Key triggers that could lead to a return to a Stable Outlook: --Demonstration of greater loss reserve stability or reserve redundancies, particularly within the 2016 accident year; --Successful completion of pending strategic actions and greater certainty that the corporate and operating structure is in place for the longer term, and further meaningful restructuring actions are unlikely; --A shift to sustainable property/casualty segment underwriting profitability, and execution of targeted near term expense reduction plans; --Stability and modest profit improvements within Life and Retirement Segments; --While achieving the above, maintenance of financial leverage and risk-based capital at the company's insurance subsidiaries remaining within newly revised targeted levels. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings with a Negative Outlook: American International Group, Inc. --Long-Term IDR at 'A-'; --Senior unsecured note issues at 'BBB+'; --Junior subordinated debentures at 'BBB-'. AIG International, Inc. --Long-Term IDR at 'A-'. AIG Life Holdings, Inc. --Long-Term IDR at 'A-'; --Senior unsecured notes at 'BBB+'; --Junior subordinated debentures at 'BBB-'. AIU Insurance Company American Home Assurance Company AIG Assurance Company AIG Europe 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'. 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+'. ASIF Global Financing --Senior secured notes at 'A+'. ASIF II --Senior secured notes at 'A+'. ASIF III Program --Senior secured notes at 'A+'. Contact: Primary Analyst James B. Auden, CFA Managing Director +1-313-368-3146 Fitch Ratings, Inc. 70 W. Madison St. Chicago, IL 60602 Secondary Analyst Jamie R. Tucker, CPA Associate Director +1-212-612-7856 Committee Chairperson Keith M. 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