A.M. Best Elevates AIG to Stable - Analyst Blog
January 30 2012 - 7:15AM
Zacks
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
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