Subsequent to the announcement by American International Group Inc. (AIG) to sell the AIA Group, its pan-Asian life insurance companies, to Prudential Plc. (PUK), A.M. Best Co. said that the ratings of AIG and its subsidiaries remain unchanged.
The deal is valued at approximately $35.5 billion. This includes about $25 billion in cash, $8.5 billion in face value of equity and equity-linked securities and $2.0 billion in face value of preferred stock of Prudential. Subject to other terms of the deal, the transaction is expected to close by the end of 2010.
The company would use $25 billion cash to redeem the $16 billion stake in AIA from the Federal Reserve and repay the $9 billion credit facility. Additional non-cash proceeds of $10.5 billion will be monetized over time, with the proceeds also to be used for further debt repayment of Federal Reserve.
A.M. Best has an issuer credit rating of ‘bbb’ with a negative outlook for AIG. According to A.M. Best, the sale of AIA is a part of the company’s effort to repay the bailout money it received at the height of the financial crisis which helped prevent its collapse in Sep 2008.
The company has been working for the last several quarters to sell assets and streamline its operations. The sale of AIG’s American Life Insurance Co. (ALICO) unit for about $15 billion also remains pending with MetLife Inc. (MET). AIG’s ratings reflect the support of the U.S. Government and remain highly dependent on the continuation of such support.
A.M. Best Co. also noted that both AIA and ALICO, its foreign life insurance operation, have historically provided consistent and substantial cash flow to AIG. Hence, the transaction represents the sale of two significant operating units. In spite of these two potential transactions, the company would maintain a highly leveraged capital structure, according to A.M. Best Co.
With the improvements in the capital market, AIG is expected to experience a recovery in the value of its investments. However, the soft insurance market conditions continue to pose a significant challenge for the company’s core property/casualty operating subsidiaries.
Competitive pricing coupled with a decrease in premium receipts is a cause of concern for profitability. Additionally, the low interest rate environment, asset impairments and equity market volatility are the headwinds in the life and annuity sector.
However, the other issues to be dealt with head-on immediately to help revive AIG are improving overall managerial efficiency, inspiring confidence among the dejected staff and withstanding consistent pressure from the U.S. government to sell assets quickly to repay debt. Though the company stands to benefit from its scale of operations and the equity market appreciation, we remain concerned about its significant exposure to risky assets.
Read the full analyst report on “AIG”
Read the full analyst report on “PUK”
Read the full analyst report on “MET”
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