Rating Action on AIG
by Zacks Equity ResearchMay 24, 2012 | Comments : 0 Recommended this article: (0)
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Fitch Ratings reiterated Issuer Default Rating (IDR) of 'BBB' of American International Group Inc. (
- Analyst Report
. The outlook remains positive. Subsequently, the rating agency also reiterated the Insurer Financial Strength ratings of ‘A’ on the company’s operating units with a stable outlook.
The rating affirmations came on the back of the company’s competitive positioning in the life and non-life insurance market. However, weak performances at the company’s core insurance operations dwarfed the positive.
The company’s continued efforts to divest unprofitable business and lower leverage has resulted in better financial flexibility and enhanced the financial profile, thereby inducing a positive outlook on AIG's IDR.
Also, following the $5.75 billion equity sale in May 2012, the federal government’s stake in AIG lowered to 61%. Further, the Federal Reserve Bank of New York, at an auction, sold $7.5 billion of collateralized debt obligations assets held in Maiden Lane III in April 2012.
The rating agency stated that a rating upgrade is likely if earnings-based interest coverage improves, driven by better earnings at Chartis and SunAmerica, the company’s subsidiaries. Also, lowering Total Financing Commitments ratios, reserve stabilization at AIG’s non-life insurance subsidiaries, improving sales and profitability at AIG’s domestic life insurance subsidiaries and better risk-based capital ratios at Chartis would act as catalysts for rating upgrade.
Nevertheless, the ratings will be subject to downgrade if underwriting profitability lowers, reserves at non-life insurance subsidiaries becomes unstable, company's domestic life subsidiaries' sales or profitability descend and risk-based capital ratios at either domestic life insurance or the non-life insurance subsidiaries deteriorates.
Concurrently, Fitch provided ‘BBB’ rating to AIG’s newly issued 4.875% $750 million senior notes with maturity scheduled in 2022.
Another credit rating agency, Standard & Poor's Ratings Services (S&P) assigned an 'A-' rating to the senior unsecured notes.
AIG expects to deploy the proceeds to repay debt maturing in 2013 along with general corporate purposes. However, this new issuance would increase AIG’s financial leverage to approximately 20%.
Furthermore, S&P expects a fixed charge coverage ratio of AIG to improve in 2012 based on improved operational performance at Chartis and SunAmerica.
We believe, the company’s strong ratings scores from eminent credit rating agencies will help retain investor confidence and augment its business going forward.
We retain our long term Neutral recommendation on AIG. The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates slight upward boost on the stock over the near term.
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