November 10, 2017 / 3:38 PM / in a year

Fitch Rates AIG's New Senior Notes 'BBB+'; Outlook Remains Negative

(The following statement was released by the rating agency) CHICAGO, November 10 (Fitch) Fitch Ratings assigns a rating of 'BBB+' to American International Group, Inc.'s (AIG) new offering of senior notes, and affirms all outstanding ratings including the 'A-' Issuer Default Rating (IDR), 'A' (Strong) Insurer Financial Strength (IFS) rating of the property/casualty (P&C) insurance subsidiaries and 'A+' (Strong) IFS rating of the life insurance subsidiaries. The Rating Outlook is Negative. The new issuance consists of $400 million 4.45% senior unsecured, zero coupon callable notes issued in Taipei that mature in 2047 and rank pari passu with the existing senior unsecured debt. KEY RATING DRIVERS The ratings affirmation follows the announcement of a net loss of $1.7 billion in third quarter 2017 relating to approximately $3 billion in total reported losses from natural catastrophes and $837 million of Commercial Insurance adverse loss reserve development. Fitch revised AIG's Rating Outlook to Negative in February 2017 following large 2016 loss reserve charges and a full year GAAP net loss of $849 million, tied largely to adverse loss experience in the Commercial Insurance segment that indicated a need for greater improvement than previously anticipated in commercial lines experience to generate an underwriting profit. Fitch's affirmation of the ratings reflects its expectation that the volatility in Commercial results will decline over the next 12 months and the segment will move towards an underwriting profit. AIG's P&C subsidiaries' ratings consider the company's unique market position in the global insurance market given its absolute size, underwriting capabilities, and consolidated capital adequacy that is comparable to higher rated peers. The ratings of AIG's U.S. life insurance subsidiaries are driven by these entities' strong statutory capital position, leading market share in key lines of business, and diversification of revenues from insurance premiums, spread business and fees. The hiring of Brian Duperreault in May 2017 as CEO led to a re-evaluation of the prior strategic plan. Several structural and operational changes in Commercial Insurance have commenced to reduce inherent volatility and promote underwriting profitability. Return of capital through share repurchases are anticipated to sharply decline, with a renewed emphasis on deploying earnings into the existing business and new growth opportunities. Continued Commercial segment underwriting actions led to a 15% decline in segment net written premiums in the first nine months of 2017. The segment combined ratio was 133.9% at nine months 2017, which includes approximately 27 points for catastrophe losses, and compares with 133.1% in the full-year 2016. Reserve increases reported in the third quarter were largely in the 2016 accident year. AIG has approximately $6.9 billion of coverage remaining for future adverse development in covered segments for accident year 2015 and prior from the retroactive reinsurance treaty purchased in early 2017. Overall, operating performance for AIG's life insurance subsidiaries is stronger and more stable than the property casualty subsidiaries. In the first nine months of 2017, the core Life and Retirement segments produced after-tax operating earnings of approximately $1.9 billion, a 20% increase from the same period in 2016, largely reflecting improved expense efficiencies and profitable growth in life insurance business. Fitch views AIG Life's diversification and strong business positions as key ratings strengths, though the company does have exposure to legacy underperforming businesses. Over recent years, AIG Life narrowed its distribution and product focus, and is now focused on reducing its expenses, while enhancing its digital experience and underwriting in order to improve the quality and stability of earnings going forward. AIG's interest coverage ratio was 3.9x in the first nine months of 2017 compared with 3.1x in the full-year 2016. Significant holding company resources remain available for debt servicing including $6.7 billion in parent company liquidity at Sept. 30, 2017. The company's financial leverage ratio, excluding the effect of FAS 115 was 25% at Sept. 30, 2017. Capitalization remains strong at both the property casualty and life subsidiaries, demonstrated by Prism capital-model scores of "Strong" in 2016. AIG's life and P&C RBC ratios were 509% and 206%, respectively, at year-end 2016. RATING SENSITIVITIES Key sensitivities that could lead to a downgrade include: --Further reserve development within the NICO cover for 2015 and prior long tail reserves that approaches exhaustion of available limits and/or further material development in the 2016 or 2017 accident years; --A failure to move towards underwriting profits in commercial insurance; --Increase in financial leverage to above 28%, 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 Consumer Insurance segment's 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 sensitivities that could lead to a return to a Stable Outlook, which Fitch expects to review over the next six to 12 months include: --Demonstration of greater loss reserve stability or reserve redundancies, particularly within the 2016 and 2017 accident years; --A shift to sustainable property/casualty segment underwriting profitability. --Continued stability in the company's Consumer Insurance segment; --Maintaining capitalization metrics, including RBC ratios and Prism scores, for the company's insurance subsidiaries near current 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+'. Fitch has assigned the following rating: American International Group, Inc. ---Senior unsecured notes due in 2047 at 'BBB+'. Contact: Primary Analyst James B. 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