Fitch Ratings has affirmed all ratings of
The Rating Outlook for AIG Life and the holding company has been revised to Negative from Stable due to the disruption to economic activity and the financial markets from the coronavirus pandemic. The P&C subsidiaries Rating Outlook remains Stable.
KEY RATING DRIVERS
Fitch's current assessment of the impact of the coronavirus pandemic, including its economic impact, is based on a set of ratings assumptions described below. These assumptions were used by Fitch to develop pro forma financial metrics for AIG that Fitch compared to both ratings guidelines defined in its criteria and relative to previously established Rating Sensitivities for AIG.
The Negative Outlook for AIG Life and the holding company reflects Fitch's concern regarding the impact of the economic fallout on AIG Life's balance sheet fundamentals and financial performance over the next one to two years. Today's rating actions follows Fitch's recent action to revise the rating outlook on the
AIG Life's financial performance had been strong and stable over recent years, but is expected to deteriorate given less favorable equity market performance and further pressure on interest margins. The core Life and Retirement ROE was 8.4% in 1Q20, down from prior periods. Based on the application of Fitch's Coronavirus Rating Case assumptions, AIG Life's pro forma Prism score is expected to be modestly below 'Strong' before considering any management actions, which is below expectations for the current rating level. Favorably, AIG Life's RBC ratio is expected to have improved in 1Q20, reflecting effective hedging and the company is expected to contribute to AIG Life a portion of the proceeds from its pending sale of legacy business to Fortitude Re once completed.
The Stable Outlook for AIG's P&C subsidiaries reflects Fitch's view that balance sheet fundamentals will largely remain in line with rating expectations despite the pressure from the economic fallout related to the coronavirus pandemic. AIG P&C reported
AIG Life's ratings continue to reflect its favorable business profile, benefitting from its diversified business mix with major market share in several product lines. Favorably, AIG Life's variable annuity block is considered below-average in risk compared with some peers and its hedging program was effective in 1Q20.
Holding company liquidity is robust at
Assumptions for Coronavirus Impact (Ratings Case):
Fitch used the following key assumptions, which are designed to identify areas of vulnerability, in support of the pro forma ratings analysis cited above:
Decline in key stock market indices by 35% relative to
Increase in two-year cumulative high yield bond default rate to 16%, applied to current non-investment grade assets, as well as, 12% of 'BBB' assets.
Capital market access is limited for issuer at senior debt levels of 'BBB' and below.
A COVID-19 infection rate of 5% and a mortality rate (as a percent of infected) of 1%.
For the non-life and reinsurance sectors, a negative impact on the industry-level accident year loss ratio from COVID-19-related claims at 3.5 percentage points, partially offset by a favorable impact from the auto line averaging 1.5 percentage points.
RATING SENSITIVITIES
The ratings remain sensitive to any material change in Fitch's Rating Case assumptions with respect the coronavirus pandemic. Periodic updates to our assumptions are possible given the rapid pace of changes in government actions in response to the pandemic, and the pace with which new information is available on the medical aspects of the outbreak. A discussion of how ratings would be expected to be impacted under a set of Stress Case assumptions is included at the end of this section to help frame sensitivities to a severe downside scenario.
Factors that could, individually or collectively, lead to negative rating action/downgrade of the P&C and holding company ratings:
A material adverse change in Fitch's Ratings Assumptions with respect to the coronavirus impact;
Combined ratio sustained above 105%;
Reversion to significant net adverse reserve development;
A sustained increase in the financial leverage ratio above 28%;
Significant reductions in debt servicing capacity from holding company assets and available dividends from subsidiaries to a level below 4.5x annual interest on financial debt;
Material declines in risk-based capital ratios or Prism capital model scores at the non-life insurance subsidiaries;
Any downgrade of the P&C subsidiaries' IFS ratings would likely lead to a downgrade of holding company ratings.
Factors that could, individually or collectively, lead to negative rating action/downgrade of the life and holding company ratings:
A material adverse change in Fitch's Ratings Assumptions with respect to the coronavirus impact.
Decline in capitalization, including a Prism score maintained below 'Strong';
Deterioration in profitability trends evidenced by a core Life and Retirement ROE below 10%.
A sustained increase in the financial leverage ratio above 28%;
Significant reductions in debt servicing capacity from holding company assets and available dividends from subsidiaries to a level below 4.5x annual interest on financial debt;
Any downgrade of the life insurance subsidiaries' IFS ratings would likely lead to a downgrade of holding company ratings.
Factors that could, individually or collectively, lead to positive rating action/upgrade of the P&C ratings:
A material positive change Fitch's Rating Assumptions with respect to the coronavirus impact;
A positive rating action is prefaced by Fitch's ability to reliably forecast the impact of the coronavirus pandemic on the financial profile of both the
Combined ratio sustained in the mid 90's;
Demonstration of loss reserve stability or reserve redundancies;
Achieving and maintaining a Prism score of 'Very Strong.
Factors that could, individually or collectively, lead to positive rating action/upgrade of the Life ratings:
A material positive change Fitch's Rating Assumptions with respect to the coronavirus impact;
A positive rating action is prefaced by Fitch's ability to reliably forecast the impact of the coronavirus pandemic on the financial profile of both the
Improved capitalization demonstrated by a Prism score of 'Very Strong';
Continued strong and stable financial results.
Holding company ratings are unlikely to be upgraded absent an upgrade of both the P&C and Life subsidiaries' IFS ratings.
Stress Case Sensitivity Analysis
Fitch's more severe Stress Case assumes a 60.0% stock market decline, two-year cumulative high yield bond default rate of 22.0%, more prolonged declines in government rates, heightened pressure on capital markets access and a coronavirus infection rate of 15.0% and mortality rate of 0.75%.
The implied rating impact under the Stress Case would be a downgrade of one to two notches of the holding company and life ratings and a one notch downgrade of the P&C ratings.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
ENTITY/DEBT RATING PRIOR
AGC Life Insurance Company Ins Fin Str A+ Affirmed A+
Commerce And Industry Insurance Company Ins Fin Str A Affirmed A
AIG Property Casualty Company Ins Fin Str A Affirmed A
American International Group, Inc. (AIG) LT IDR A- Affirmed A-
senior unsecured
LT BBB+ Affirmed BBB+
junior subordinated
LT BBB- Affirmed BBB-
preferred
LT BBB- Affirmed BBB-
AIG Specialty Insurance Company Ins Fin Str A Affirmed A
Insurance Company of theState of Pennsylvania (The) Ins Fin Str A Affirmed A
American General Life Insurance Company Ins Fin Str A+ Affirmed A+
ASIF III Program
senior secured
LT A+ Affirmed A+
Granite State Insurance Company Ins Fin Str A Affirmed A
Validus Holdings, Ltd. LT IDR A- Affirmed A-
senior unsecured
LT BBB+ Affirmed BBB+
senior secured
LT A+ Affirmed A+
AIG Life Holdings, Inc. LT IDR A- Affirmed A-
senior unsecured
LT BBB+ Affirmed BBB+
junior subordinated
LT BBB- Affirmed BBB-
TheVariable Annuity Life Insurance Company Ins Fin Str A+ Affirmed A+
United States Life Insurance Company In theCity of New York Ins Fin Str A+ Affirmed A+
ASIF Global Financing
senior secured
LT A+ Affirmed A+
Illinois National Insurance Co. Ins Fin Str A Affirmed A
Lexington Insurance Company Ins Fin Str A Affirmed A
American Home Assurance Company Ins Fin Str A Affirmed A
AIU Insurance Co. Ins Fin Str A Affirmed A
New Hampshire Insurance Company Ins Fin Str A Affirmed A
National Union Fire Insurance Company of Pittsburgh, PA Ins Fin Str A Affirmed A
AIG Assurance Company Ins Fin Str A Affirmed A
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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