Fitch Ratings has affirmed the ratings of American International Group, Inc. (AIG) as summarized below:

–Issuer Default Rating (IDR) at ‘BBB’;

–Senior unsecured notes at ‘BBB’;

–Subordinated hybrid securities at ‘B’;

–Short-term IDR at ‘F1′.

AIG’s Rating Outlook has been revised to Stable from Evolving.

Fitch has also removed the ‘A+’ Insurer Financial Strength (IFS) ratings of AIG’s domestic property/casualty subsidiaries from Rating Watch Negative and affirmed the ratings and assigned Stable Rating Outlooks. Additionally, Fitch has affirmed the ‘A-’ IFS ratings of AIG’s life insurance subsidiaries and revised the Rating Outlooks to Stable from Evolving

The ‘A+’ IFS rating on AIG’s American Life Insurance Company (ALICO) subsidiary remains on Rating Watch Positive where it was placed on March 8, 2010 after AIG announced ALICO’s planned sale to MetLife, Inc. The ‘A+’ IFS rating on AIG’s American International Assurance Company (Bermuda) Limited subsidiary remains on Rating Watch Evolving reflecting Fitch’s belief that the company is likely to be divested by AIG as part of re-structuring efforts.

Fitch’s ratings on AIG continue to reflect an implied ‘government support floor’ based on the company’s well publicized financial assistance package from the Federal Reserve Bank of New York (FRBNY) and U.S. Treasury that totaled $134 billion outstanding as of March 31, 2010. Absent ongoing government support, Fitch’s IDR and unsecured debt ratings on AIG would be below investment grade due to the company’s still very high leverage, and large, albeit declining, risk exposures in its non-insurance operations. As a result, AIG’s IDR and unsecured debt ratings benefit by at least one rating category from the government support. The IFS ratings of AIG insurance subsidiaries only indirectly benefit from government support, and are currently at their approximate ‘stand alone’ levels.

Fitch’s ratings on AIG and Stable Outlook on the company, are underpinned by the agency’s belief that the U.S. Treasury’s approximate 80% equity ownership interest in AIG, and presumed desire, within reason, to maximize the value of that equity ownership, is large enough to discourage the Treasury from monetizing its investment in AIG prior to the company possessing a capital structure and business model supportive of the company’s current ratings. Underlying this belief is Fitch’s view that AIG’s ability to retain IFS ratings in the ‘A’ range and investment grade senior unsecured ratings would be important to potential investors in AIG.

The revision in Outlooks to Stable from Evolving reflects Fitch’s view that AIG’s re-structuring plan has solidified meaningfully and capital market conditions have improved significantly since the previous Evolving Outlooks were assigned in May 2009. The current Stable Outlooks indicate that Fitch believes that AIG’s ratings are unlikely to change over the next 12 to 24 months. AIG’s ultimate transition from a majority government owned and supported entity to an independent entity could result in future ratings migration that is not reflected in Fitch’s current near-term Stable Outlook.

Should AIG effectively execute its strategies to repay monies owed the U.S. government via asset sales and divestitures and wind-down non-core operations, and the U.S. Treasury were to divest its ownership interest (likely via capital markets transactions), Fitch believes the company’s IDR would likely approximate its current level. Future ratings levels and Outlooks will be greatly influenced by the then levels of leverage throughout the organization, as well as the then competitive positions and balance sheet profiles of the organization’s remaining insurance company subsidiaries.

Whether considering AIG’s consolidated debt outstanding or considering only debt issued or guaranteed at the holding company level, Fitch believes that the AIG organization’s financial leverage, measured by traditional debt-to-capital ratios or by Fitch’s Total Financing & Commitments (TFC) ratio, are likely to remain higher than those of typical insurance holding companies for the near term even after consideration of the AIG’s previously announced sale of ALICO and assuming that the company’s American International Assurance Group Limited (AIA) subsidiary is divested either through an initial public offering or a sale to third-party. Fitch’s assessment of AIG’s financial leverage incorporates debt issued by subsidiaries, primarily AIGFP, and guaranteed by AIG, and includes debt that is often considered ‘operating type’ debt in the sense that it may have been used to fund assets purchased to earn some form of spread income. Fitch calculates AIG’s consolidated debt-to-capital ratio at March 31, 2010 at 57% and considering only debt issued or guaranteed by AIG, at 36%. Additionally, at year-end 2009 the company’s TFC ratio was 3.3 times (x) compared to a more typical high-end range of under 2.0x. The agency views the impact on these leverage ratios from the ALICO sale and the potential disposition of AIA as modest since proceeds will first be used to redeem preferred interests held by the FRBNY and second reduce borrowings due the FRBNY.

Fitch views AIG’s high consolidated financial leverage as due in part to debt issued by the company’s aircraft leasing and consumer finance subsidiaries; International Lease Finance Corp. (ILFC) and American General Finance Inc. (AGF). As a result, Fitch views AIG’s ability to either divest ILFC and AGF, including their debt, or to reduce the subsidiaries’ leverage in some manner, as keys to the company’s ability to emerge from its restructuring process with a consolidated capital structure that is comparable to those of its insurance company competitors. Fitch considers ILFC and AGF to be ‘non-core’ AIG subsidiaries, and thus rates those companies largely on a stand-alone basis. Nevertheless, Fitch believes that ILFC’s and AGF’s debt should be considered when evaluating the AIG organization’s overall financial leverage given the reputational risk to AIG that could result from a default by either ILFC or AGF; and given Fitch’s view that ILFC retains economic value that AIG would presumably like to preserve and realize at some future date. Fitch notes that ILFC’s and AGF’s near-term debt maturities are modest given the companies’ recent re-financing efforts.

Fitch views AIG’s operating-earnings-based interest coverage from core operations as reasonable for the rating category. However, the agency believes that the company’s near-term consolidated interest coverage remains materially exposed to potential operating losses from non-core businesses, losses on the sales of various assets, and restructuring charges related to asset sales. Given AIG’s planned sale of ALICO, potential future sale of AIA, and Fitch’s belief that ILFC and AGF are unlikely to be part of AIG’s portfolio of businesses over the long term, the agency views the company’s long-term interest coverage as largely being driven by the company’s commercial insurance, foreign general insurance, and domestic life and retirement services businesses. Using pre-tax operating earnings from these three business units, and excluding the non-cash amortization of the FRBNY commitment fee, which is reported by AIG as interest expense, Fitch calculates the company’s average interest coverage ratio from 2005 through the first quarter 2010 (1Q’10) at 7.5x. Viewed over a shorter 2007-through 1Q’10 time-horizon, AIG’s interest coverage ratio calculated in this manner declines meaningfully to 5.7x.

Fitch’s affirmation of AIG’s property/casualty subsidiaries’ IFS ratings and the removal of the ratings from Rating Watch Negative, reflects the agency’s belief that AIG follows a sensible reserving process and that the company’s accident-year loss ratios in key business lines reflect reasonable levels of conservatism. Fitch also believes that AIG’s reserves are likely to be more volatile than that of commercial line peer companies that write less long-duration excess casualty business but views this volatility as adequately factored into the company’s current ratings. Finally, the affirmation of the property/casualty subsidiaries’ ratings reflects the companies’ ability to maintain their strong competitive positions despite the effect of negative publicity surrounding AIG since the company received its initial financial assistance from the U.S. Government in September 2008.

Fitch’s affirmation of AIG’s life and annuity subsidiaries’ IFS ratings reflect the company’s solid competitive position in the domestic life insurance and annuity markets. These business units are rebounding from the AIG organization’s financial difficulties by restoring relationships with distribution channels, and completing various re-branding strategies. Additionally, Fitch believes that the severe asset-quality problems that AIG’s domestic life and annuity operations experienced in 2008 and 2009 from its securities lending activities are largely behind the company due to steps take in late 2008 in conjunction with the Federal Reserve Bank of New York (FRBNY) and write-downs already taken.

Fitch has affirmed the following ratings and assigned Stable Outlooks:

American International Group, Inc.

–Long-term IDR at ‘BBB’

–Senior debt at ‘BBB’;

–Short-term IDR at ‘F1′;

–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’;

–Commercial paper at ‘F1′.

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 Aug., 11, 2010 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 ‘B’.

American General Institutional Capital A

–7.57% capital securities due Dec. 1, 2045 at ‘B’.

American General Institutional Capital B

–8.125% capital securities due March 15, 2046 at ‘B’.

Fitch has removed the following ratings from Rating Watch Negative, affirmed the ‘A+’ IFS ratings 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 Overseas, Limited.

Fitch has affirmed the following IFS ratings at ‘A-’ and revised the Outlooks to Stable from Evolving;

–AGC Life Insurance Company;

–Western National Life Insurance Company;

–American General Life Insurance Company;

–SunAmerica Annuity and Life Assurance Company;

–American General Life and Accident Insurance Company;

–American General Life Insurance Company;

–American International Life Assurance Company of New York;

–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 Global Financial Program

–Program ratings at ‘A-’.

The following ‘A+’ IFS rating remains on Rating Watch Positive:

–American Life Insurance Company.

The following ‘A+’ IFS rating remains on Rating Watch Evolving:

–American International Assurance Company (Bermuda) Limited.

These rating actions reflect the application of Fitch’s current criteria which is available on Fitch’s web site at ‘www.fitchratings.com‘ and specifically include:

–’Insurance Rating Methodology’, dated Dec. 29, 2009;

–’Non-Life Insurance Rating Criteria (Global)’ dated March 2, 2007.

Additional information is available at ‘www.fitchratings.com‘.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM‘. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE.

Fitch Affirms AIG’s Ratings; Removes Domestic Property/Casualty Subsidiaries from Watch Negative

Tags: american international group, american life insurance company, federal reserve bank of new york, international group inc, property casualty

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