On Friday, A.M. Best Co. affirmed the credit and debt ratings of American International Group Inc. (AIG) and its subsidiaries, while upgraded its outlook to stable from negative. The rating agency believes that most of the downsides related to AIG’s operations and capital have been discounted in 2011.
The rating agency has affirmed issuer credit ratings (ICR) of “bbb” and debt ratings for AIG. Alongside, the financial strength rating (FSR) of “A” (Excellent) and ICR of “a” has been asserted on Chartis and its associates, SunAmerica Financial Group and AIU Insurance Co. While the outlook for Chartis and SunAmerica has been revised to stable from negative, AIU Insurance still continues to maintain a negative outlook.
Further, A.M. Best maintained FSR of “B+” (Good) and ICR of “bbb-” ratings on American General Property Insurance Co. The outlook for this has been lifted to stable from negative. Previously, in December 2010, the rating agency had affirmed all the above ratings with a negative outlook.
Meanwhile, the rating agency upgraded AIG’s Japan-based The Fuji Fire & Marine Insurance Company Ltd.’s FSR to “A-” from “B++” and its ICR to “a-” from “bbb+”. Currently it has a stable outlook.
The revised stable outlook is based on AIG’s successful recapitalization in January last year, raising funds from the market through debt and equity in 2010 and 2011, the execution of new credit facilities and disposing of redundant assets. These steps to financial improvement have not only enhanced AIG’s liquidity but have also helped the company pay out a chunk of the government bailout debt. Additionally, the potential steps have also helped diminish the overall risk profile related to its non-insurance operations.
Besides, A.M. Best continues to acknowledge SunAmerica’s (AIG’s life and health division) business diversity along with its strong distribution network that enhances this division’s earnings potential. Over the past few years, SunAmerica has also been able to generate strong statutory earnings, which have helped it to maintain its liability equilibrium among spread, fee and mortality-based products. This has also aided in maintaining a strong risk-based capital position that compares favourably in the peer group.
However, risks related to SunAmerica’s investment profile, which primarily comprises structured securities, direct commercial mortgage loans and various alternative strategies, along with its vulnerability to low interest rate environment and increased dividend payouts to AIG should continue to mar the desired upside at least for some time.
Meanwhile, A.M. Best expects SunAmerica to incur modest impairment charges in 2012, given the ongoing economic volatility and its significant structured asset portfolio. The rating agency also anticipates some declines in the division’s risk-adjusted capital and total capitalization in future. As of September 30, 2011, SunAmerica’s total investments in mortgage- and asset-backed securities, collateralized debt obligations and commercial mortgage-backed securities were approximately $24 billion, while exposure to alternative assets totaled $7.7 billion, thereby injecting optimum risk to the investment portfolio and spread-based businesses.
Overall, A.M. Best believes that SunAmerica should improve its growth scale, given the positive synergies stemming from enhancing product development initiatives and distribution capabilities.
On the other hand, AIG’s general insurance division – Chartis – is believed to be benefited from the successful recapitalization last year. Additionally, its leading market position, wide-ranging products and services and pricing initiatives have helped Chartis maintain a stable risk-adjusted capital position in 2011. However, a weak P&C cycle, unfavourable underwriting experience, increased claims and losses from catastrophes along with escalated reserve losses from prior years substantially impede adequate growth. Nevertheless, A.M. Best expects rate increases in 2012 although underwriting is expected to be sluggish in the near term.
Overall, divestiture of assets and focus on core life and property-casualty business have enabled AIG improve its capital flexibility and also paved way for a new stock buy back program. However, sluggish insurance dynamics, increased catastrophe and restructuring losses amid weak global cues have been consistently generating cash outflows. These factors also affected the book value per share adversely. Nevertheless, AIG is poised to accentuate its operating and capital leverage upon dilution of government stake though it is a far-fetched goal due to absence of any growth catalyst. Hence, we maintain a Neutral stance on AIG in the long run with a Zacks Rank #3, implying a short-term Hold rating.
Last week, A.M. Best also affirmed the FSR of “A+” and ICR of “aa-” of Allstate Corp. (ALL), reflecting a stable outlook.
AMER INTL GRP (AIG): Free Stock Analysis Report
ALLSTATE CORP (ALL): Free Stock Analysis Report
