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Fitch Upped AIG's AGC Life

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Fitch Ratings lifted the insurer financial strength (IFS) rating of American International Group Inc.’s (AIG - Free Report) US life insurance arm – AGC Life Insurance Co. Additionally, the ratings agency asserted other credit and debt ratings of the company.

Accordingly, Fitch upgraded the AGC’s IFS to “A+” from “A,” while it affirmed the IFS of AIG’s property-casualty (P&C) wing at “A." AIG’s issuer default rating (IDR) of was avowed at “BBB+”, whereas the company’s senior debt rating continues to be pegged at “BBB”. The outlook for all the ratings remains stable.

AIG has come a long way post its financial crisis, according to Fitch. The full repayment of the government bailout loan has injected financial flexibility into the company and helped management completely focus on generating higher operating leverage from its businesses.

Subsequently, AIG’s life insurance operations have been improving on account of stability in surrender activity along with recoupment of higher investment returns, aided by improved base yields due to the recovery in the financial market over the past couple of years. While the low interest rate environment continues to pose tough challenges on this business, Fitch anticipates this segment to generate higher profitability with stable operating earnings of about $4.0 billion, on an annual basis, backed by a solid statutory capital.

Moreover, the ratings agency remains confident of AIG’s P&C business based on its strong brand name, underwriting capability and global expansion of a multilateral product portfolio. Although this segment has underperformed when compared with its peer group, over the past 5 years, most of the issues were related to the company have subsided now.

Concurrently, AIG has repositioned its P&C portfolio to strengthen its underwriting capacities, thereby filling loopholes to produce lower loss ratio over the past several quarters. The interest coverage ratio also improved from 4.2x at end of Jun 2012 to 4.9x at the end of Sep 2012. While the macro factors such as higher catastrophe losses continue to mar the bottom line in 2012, this segment is expected to grow as markets rebound in the future.

On the liquidity front, AIG has seen vast improvement in its financial leverage to 22% now from 31% at 2010-end. Although, the company total financial commitment (TFC) ratio improved to 1.3x now from 2.5x at 2010-end, it is still higher than the peer group. These are further expected to recover once the company culminates the sale of its aircraft leasing unit – International Lease Finance Corp. (ILFC), to a Chinese consortium by mid-2013.

While anyrobust growth appears overly ambitious at present, we believe a positive turnaround in the global economy and an improved macro scenario is likely to pave the way for significant growth of AIG. Currently, the company carries a Zacks Rank #4 (Sell).

Meanwhile, other outperformers of the insurance industry include XL Group Plc (XL - Free Report) , Aegon NV (AEG - Free Report) and First American Financial Corp. (FAF - Free Report) , all of which carry a Zacks Rank #1 (Strong Buy).

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