American International Group Inc., which activist investor Carl Icahn is pressuring to divest assets, had the outlook on its credit rating changed to negative from stable by Standard & Poor’s after the insurer announced plans to sell a stake in mortgage insurer United Guaranty Corp.
S&P put the holding company’s A- counterparty credit rating on outlook negative, while also placing UGC’s ratings on CreditWatch Negative.
AIG had said Tuesday it will have an initial public offering for 19.9 percent of the operation, and ultimately will exit the venture, under a plan to return $25 billion to shareholders over the next two years.
AIG CEO Peter Hancock also announced the creation of a “legacy” portfolio of assets, encompassing about $22 billion of adjusted equity, that he will sell or wind down.
“The revised outlook reflects the potential for weaker earnings due to the divestiture of UGC, reduced investment income as capital is returned to shareholders, and the lack of improvement in projected interest expense in 2016 and 2017,” S&P said of the holding company in a statement Wednesday. Of UGC, the ratings firm added: “It is not yet clear to what extent the existing explicit support provided by AIG will be modified or withdrawn, or whether the stand-alone credit characteristics, including capitalization, may change.”
Moody’s Investors Service also took rating action.
Moody’s affirmed its Baa1 senior unsecured debt rating of AIG, and downgraded the insurance financial strength (IFS) ratings of AIG’s property/casualty (P/C) subsidiaries in the U.S. and Canada to A2 from A1.
The rating agency also affirmed the A2 IFS ratings of AIG Life and Retirement (AIG L&R).
These actions follow AIG’s announcement of a $3.6 billion P/C reserve charge along with an updated strategic plan to narrow its focus through selected divestitures, improve its financial performance, and return at least $25 billion of capital to shareholders over the next two years. Moody’s said the rating outlook for these entities is stable.
Moody’s placed on review for downgrade the Baa1 IFS rating of United Guaranty based on AIG’s plan to conduct an initial public stock offering of up to 19.9 percent of the mortgage insurer’s parent as a first step toward full separation.
“The downgrade of AIG’s main P&C units reflects persistent adverse loss development and weak underwriting results plus the ongoing challenge of setting reserves for long-tail casualty lines,” said Bruce Ballentine, Moody’s lead analyst for AIG.
AIG took a $3.6 billion charge to strengthen its P/C loss reserves, effective in Q4 2015, continuing a history of reserve problems that included charges totaling about $7 billion in 2009-10, according to Moody’s. The company has announced underwriting and expense initiatives to boost its P/C profits, but Moody’s believes these efforts will be “constrained by increasingly difficult market conditions.” Offsetting the reserve charge, AIG contributed about $3 billion of capital to its P/C subsidiaries, drawing on the large liquidity pool the parent holds to support its operating subsidiaries as needed.
In affirming the AIG L&R ratings, Moody’s cited the group’s strong market presence and good capitalization. “AIG L&R is a large, diversified U.S. life insurer, although streamlining initiatives under the new strategic plan could weaken the credit profile,” said Laura Bazer, Moody’s lead analyst for AIG L&R.
With the AIG L&R and P&C ratings aligned at A2, AIG now has a two-notch differential between its main IFS ratings and the parent senior debt rating, rather than the standard three-notch spread. “Our affirmation of the parent ratings, with narrower notching, reflects the diversification benefit from owning sizable P&C and life insurance businesses along with the company’s good geographic spread,” said Ballentine.
Moody’s said that AIG’s challenges for its P/C group include a record of adverse loss development and weak profitability, along with exposure to catastrophes. A majority of the reserves are in long-tail casualty lines, heightening the risk and uncertainty regarding ultimate losses.
AIG’s plan is to improve its P/C profitability through better client segmentation and risk selection, exiting subpar business units, greater use of reinsurance, and reducing its expenses. However, Moody’s contends, “this effort may be hampered by a downward trend in commercial P&C pricing, continued low yields on fixed-income investments, and modest global economic growth.”
A.M. Best was critical of AIG’s strategic plan because A.M. Best said it is considering how the actions might affect “the business profile and future earnings capacity” of the insurer.
Its financial strength rating for AIG and its subsidiaries is now under review with negative implications. A.M. Best also placed AIG’s issuer credit rating under the same status.
“A.M. Best is concerned that approximately 41 percent of the [reserve] strengthening relates to 2011-2013 accident years, for which either favorable or modestly adverse development had been previously reported,” the ratings entity said.
A.M. Best added that the total amount of the deficiency reported exceeded its assumptions of loss reserve deficiency, “excluding the reversal of statutory discounts of reserves for workers compensation.”
Sources; S&P, Moody’s, A.M. Best