Credit rating giant Moody's Investors Service (Moody’s) recently allocated definitive A2 insurance financial strength (IFS) ratings to American International Group, Inc.’s (AIG - Free Report) arms, namely- UK-based American International Group UK Limited (AIG UK) and Luxembourg-based AIG Europe S.A. (AESA).
The above two recently-formed indirect units of the parent company will continue with AIG’s property & casualty (P&C) business in the UK and other European countries, respectively, replacing the UK-based AIG Europe Limited (AIEGL). The rating outlook of these subsidiaries is stable.
The rating action was undertaken by Moody’s following the October 2018 approval of AIGEL's plan by the High Court of England & Wales to move its business into AIG UK and AESA in preparation for Brexit. AIGEL will transfer the current UK business to AIG UK and its existing other European business affairs to AESA while both AIG UK and AESA will commence writing AIG's P&C business in respective regions, effective Dec 1, 2018.
The IFS ratings on the units replace the provisional ratings assigned by Moody’s in May 2018. The agency will withdraw its current IFS rating for AIGEL once it is merged with AESA.
The AIG UK and AESA ratings signify a solid market position in the UK commercial lines, diversified product offerings in Europe, investment strategy and the support provided by affiliates. The ratings reflecting explicit and implicit backing from affiliates include reinsurance ceded to AIG's flagship P&C business activities in the United States and the required capital available from AIG parent. However, such positives are somewhat offset by the group’s weak operating results over the recent years, primarily due to adverse loss development along with catastrophe loss, and its moderate capitalization on a statutory basis.
For recovering from its profit challenges in its European and global P&C operations, AIG has appointed many new P&C business leaders and is even shifting its resources toward comparatively profitable segments. The company has also taken strict actions to restrict policy limits, buy more reinsurance to check volatility and decrease costs. The credit rating entity projects to take a year or more for the parent company to stabilize its P&C results in Europe and worldwide.
Factors Leading to Stable Outlook
The stable rating outlook of the subsidiaries mirror the parent company’s intent to improve its P&C results by lowering volatility from reserves and catastrophes and also working on improving its combined ratio by containing it below 100%.
Factors That Drive Future Ratings
The rating upgrade can be seen for AIG UK and AESA provided that there is betterment in underwriting results and profitability, benign development of loss reserves, progress in the AIG PC US ratings and also if gross underwriting leverage is less than 3.5x.
Factors that can downgrade the ratings of new units are persistently poor underwriting performances, adverse loss development, losses inducing the capital to decline by more than 10% in a particular year or deterioration of the AIG PC US ratings.
Shares of this Zacks Rank #2 (Buy) company have lost 27.5% in a year’s time, wider than its industry’s decline of 14%.
Other Stocks to Consider
Investors looking for some other top-ranked stocks in the same industry may also consider options like Cigna Corporation (CI - Free Report) , MetLife, Inc. (MET - Free Report) and MGIC Investment Corporation (MTG - Free Report) .
Cigna offers insurance and related products and services in the United States and internationally. It sports a Zacks Rank #1 (Strong Buy) and came up with trailing four-quarter surprise of 13.46%. You can see the complete list of today’s Zacks #1 Rank stocks here.
MetLife offers services in the insurance, annuities, employee benefits and asset management businesses. The stock carries a Zacks Rank of 2 and delivered average beat of nearly 9.67% in the last four reported quarters.
MGIC Investment Corporation provides private mortgage insurance and ancillary services in the United States. The company came up with an encouraging earnings surprise of 34.32% over the preceding four reported quarters. It is a Zacks #2 Ranked stock.
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