CHICAGO–(BUSINESS WIRE)–Fitch Ratings has downgraded the Insurer Financial Strength (IFS) ratings of American International Group, Inc.’s domestic non-life insurance subsidiaries to ‘A’ from ‘A+’. Fitch has concurrently affirmed AIG’s Issuer Default Rating (IDR) rating and debt ratings as well as life insurance subsidiaries’ IFS ratings. The Outlook for all ratings is Stable. A complete list of ratings is included at the end of this commentary.
The downgrades follow yesterday’s announcement by AIG that it expects to report a $4.1 billion pretax charge in the fourth quarter 2010 to increase its domestic non-life insurance subsidiaries’ reserves for prior-accident years.
The rating actions reflect Fitch’s view that the volatility of AIG’s domestic non-life subsidiaries’ reserves is inconsistent with expectations for the ‘A+’ ratings level.
The agency views AIG’s recent record of adverse reserve development as a significant outlier relative to that of the company’s large commercial insurance lines competitors and to the overall non-life insurance market. Fitch believes that this is partially attributable to AIG’s larger than its peers’ market share in long-duration excess casualty and workers compensation business lines which presents significant and unique reserving challenges. The agency notes that AIG has reduced these business lines’ relative contribution to the company’s overall non-life premium base with a goal that this could contribute to more stable reserves going forward.
Fitch believes that AIG’s domestic non-life insurance subsidiaries’ recent history of reporting significant adverse reserve development raises concerns about the companies ability to generate consistent run-rate underwriting results commensurate with their previous ratings. Fitch notes that while a majority of the reserve charge is attributable to older accident years, reserves for more recent accident years have also developed adversely.
Favorably, management has indicated that the effect of the reserve charge on AIG’s non-life subsidiaries’ capitalization will be partially offset by a $2 billion capital injection funded from proceeds generated by the recently completed sales of AIG Star Life Insurance Co. Ltd. and AIG Edison Life Insurance Company.
Fitch has affirmed AIG’s parent company ratings reflecting the agency’s on-going belief that upon AIG’s emergence from ownership by the U.S. Treasury, the company’s capital structure and earnings profile have the potential to support ‘standard’ insurance holding company notching.
Key rating drivers that could produce revisions in Rating Outlooks to Positive or lead to upgrades in AIG’s stand-alone IDR or its subsidiaries’ IFS ratings include:
–Enhanced underwriting profitability and reserve stability of the company’s non-life insurance subsidiaries;
–Further stabilization of sales trends and profitability of the company’s domestic life insurance subsidiaries;
–Material increases in risk-based capital ratios at either the domestic life insurance or the non-life insurance subsidiaries;
–Further declines in outstanding notional values of AIG Financial Products Corp.’s (AIGFP) CDS portfolio without significant liquidity or capital drains. Such a decline would most directly affect Fitch’s view of AIG’s stand-alone IDR;
–Further clarity around AIG’s plans for its International Lease Finance Corp. (ILFC) subsidiary and how ILFC’s funding needs over the long term can be met without adding contingent risks to AIG’s profile;
–The transition of AIG’s capital structure and leverage to that of a more traditional insurance holding company resulting in a narrowing of the notching between insurance company ratings and holding company ratings. Under such a scenario as government support declines, per Fitch’s notching criteria, the IDR of the holding company would migrate to one notch higher than the senior unsecured debt rating.
Key rating drivers that could produce a revision in the Rating Outlook to Negative or lead to downgrades in AIG’s stand-alone IDR or its subsidiaries’ IFS rating include:
–Declines in underwriting profitability and 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’ sales or profitability trends;
–Material declines in risk-based capital ratios at either the domestic life insurance or the non-life insurance subsidiaries;
–Evidence that AIGFP’s CDS portfolio run-off is not proceeding as currently envisioned;
–A deterioration in Fitch’s view of the implied rating support provided by the U.S. Treasury’s interests in AIG that is not fully offset from a rating perspective by improvements in AIG’s stand-alone financial profile. The agency believes that the most plausible situation under which this could occur would be a significant unwinding of the Treasury’s ownership position prior to further run-off of AIGFP’s CDS portfolio.
–AIG’s inability to transition its capital structure and leverage to those of a more traditional insurance holding company could result in a widening of the notching between the insurance subsidiary ratings and the holding company ratings. Under such a scenario as government support declines, per Fitch’s notching criteria AIG’s senior unsecured debt ratings would migrate to one notch lower than the holding company IDR rating.
Fitch has downgraded the following IFS ratings to ‘A’ from ‘A+’ and assigned Stable Outlooks:
–Chartis Property Casualty Company;
–American Home Assurance Company;
–Chartis Casualty Company;
–Commerce and Industry Insurance Company;
–Granite State Insurance Company;
–Illinois National Insurance Co.;
–National Union Fire Insurance Company of Pittsburgh, PA;
–New Hampshire Insurance Company;
–The Insurance Company of the State of Pennsylvania;
–Chartis Select Insurance Company;
–Landmark Insurance Company;
–Lexington Insurance Company;
–AIU Insurance Company;
–Chartis Specialty Insurance Company;
–Chartis MEMSA Insurance Company;
–Chartis UK Ltd.;
–Chartis Overseas, Limited.
Fitch has affirmed the following ratings with a Stable Outlook:
American International Group, Inc.
–Long-term IDR at ‘BBB’
–Senior debt at ‘BBB’;
–6.25% series A-1 junior subordinated debentures due March 15, 2087 at ‘B’;
–5.75% series A-2 junior subordinated debentures due March 15, 2067 at ‘B’;
–4.875% series A-3 junior subordinated debentures due March 15, 2067 at ‘B’;
–6.45% series A-4 junior subordinated debentures due June 15, 2077 at ‘B’;
–7.700% series A-5 junior subordinated debentures due Dec. 18, 2062 at ‘B’;
–8.175% series A-6 junior subordinated debentures due May 15, 2058 at ‘B’;
–8.00% series A-7 junior subordinated debentures due May 22, 2038 at ‘B’;
–8.625% series A-8 junior subordinated debentures due May 22, 2068 at ‘B’;
–5.67% series B-1 debentures due Feb. 15, 2041 at ‘B’
–5.82% series B-2 debentures due May 1, 2041 at ‘B’;
–5.89% series B-3 debentures due Aug. 1, 2041 at ‘B’.
AIG International, Inc.
–Long-term IDR at ‘BBB’;
–Senior debt at ‘BBB’;
–5.60% senior unsecured notes due July 31, 2097 at ‘BBB’.
AIG Life Holdings (US), Inc.
–Long-term IDR at ‘BBB’;
–7.50% senior unsecured notes due July 15, 2025 at ‘BBB’;
–6.625% senior unsecured notes due Feb. 15, 2029 at ‘BBB’.
American General Capital II
–8.50% preferred securities due July 1, 2030 at ‘BB-‘.
American General Institutional Capital A
–7.57% capital securities due Dec. 1, 2045 at ‘BB-‘.
American General Institutional Capital B
–8.125% capital securities due March 15, 2046 at ‘BB-‘.
Fitch has affirmed the following IFS ratings at ‘A-‘ with a Stable Outlook:
–AGC Life Insurance Company;
–Western National Life Insurance Company;
–SunAmerica Annuity and Life Assurance Company;
–American General Life and Accident Insurance Company;
–American General Life Insurance Company;
–First SunAmerica Life Insurance Company;
–SunAmerica Life Insurance Company;
–The United States Life Insurance Company in the City of New York;
–The Variable Annuity Life Insurance Company.
ASIF II Program
ASIF III Program
ASIF Global Financing
–Program ratings at ‘A-‘.
Additional information is available at ‘www.fitchratings.com’.
Applicable Criteria and Related Research:
–‘Insurance Rating Methodology’, dated Aug. 13, 2010;
–‘Life Insurance Rating Methodology’, dated March 24, 2010;
–‘Non-Life Insurance Rating Methodology’ dated March 24, 2010;
–‘Insurance Industry: Global Notching Methodology and Recovery Analysis’ dated Dec. 29, 2009.
Applicable Criteria and Related Research:
Insurance Rating Methodology
Life Insurance Rating Methodology
Non-Life Insurance Rating Methodology
Insurance Industry: Global Notching Methodology and Recovery Analysis
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