A.M. Best Affirms AIG Ratings - Analyst Blog

Yesterday, A.M. Best Co. affirmed the credit and debt ratings of American International Group Inc. (AIG) and its US property-casualty and life-health subsidiaries namely, Chartis US Insurance Group, AIU Insurance Co., American General Property Insurance Co. and SunAmerica Financial Group.

The rating agency has affirmed issuer credit ratings (ICR) of “bbb” and debt ratings for AIG, reflecting a negative outlook. 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. These ratings also reflect a negative outlook.

Further, A.M. Best maintained FSR of “B+” (Good) and ICR of “bbb-” ratings on American General Property Insurance Co.

The negative outlook is based on AIG's persistently weak pricing across all core operations along with declining underwriting growth (year over year) and unfavourable development in prior years' loss reserves. Moreover, the intense risk associated with the implementation and successful completion of AIG's recapitalization plan sufficiently offsets the company's supportive level of risk-adjusted capitalization.

The rating agency, however, believes that SunAmerica Financial Group should improve its top line growth in the medium to long term, given the reduced volatility in operating performance, strong capital position and positive synergies stemming from enhancing product development initiatives and distribution capabilities.

Besides, ICR rating of AIG evaluates the company's exorbitant debt status and the acceptance of the recapitalization program, charted out by the US Federal Reserve, in late September. The company is yet to pay a huge chunk of the $182.5 billion government bailout loan taken in September 2008.

According to the proposed plan, the U.S. Federal Reserve Bank New York has agreed to divert AIG's TARP loan obligations toward the U.S. Treasury. In turn, the Treasury will convert $49.1 billion of preferred shares held with the government to about 1.7 billion shares of AIG's common stock, at a discounted price.

However, the Treasury is still expected to hold about 92% of AIG's common stock, the complete offload of which is not expected before the first quarter of 2011, after converting its preferred interests. This holding will be sold over time depending on the performance of AIG's shares in the market.

Moreover, A.M. Best cited AIG's restructuring initiatives, particularly, the comprehensive asset dispositions, focus on core operations and the liquidity support from the US government as prospects for future improvement. The reduced catastrophe losses and strong operational history should also pave way for growth in the upcoming quarters.

However, as of now, the rating agency remains cautious of the final execution of the growth prospects and stable liquidity, going forward, thereby justifying the current negative outlook. Several non-recurring charges, associated with the intense restructuring, are even expected to mar the desired upside in the upcoming quarters. Hence, we also recommend an Underperform rating, with a Zacks Rank #5, on the stock.

Last week, A.M. Best also affirmed the ICR of “a-” and debt ratings of Allstate Corp. (ALL), reflecting a stable outlook.

 
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