A.M. Best Co. has commented that the issuer credit rating (ICR) of “bbb” of American International Group, Inc. (AIG) [NYSE: AIG] is unchanged following the announcement of AIG’s intention to repurchase shares of its common equity totaling up to $3 billion, in connection with the offering by the United States Department of the Treasury (Treasury) of $6 billion of its AIG common stock, with the option to offer the underwriters a further $900 million. AIG’s repurchase will be at the public offering price. The outlook for the ICR is stable. The ICRs and financial strength ratings of AIG’s property/casualty and life/health operations are also unchanged, as are the outlooks for those ratings.
In addition to the repurchase of shares, AIG and Treasury announced an agreement under which AIG will repay the remaining preferred interest of $8.5 billion in AIA Aurora LLC (AIA SPV), a special purpose vehicle that holds ordinary shares of AIA Group Ltd. The agreement includes the release of certain AIG assets— including its remaining shares of AIA Group Limited and International Lease Finance Corporation (ILFC)—which had been encumbered to secure AIG’s obligations to repay the government’s preferred interest in AIA SPV.
The sale of shares by Treasury represents a continuation of efforts to fully divest its AIG shares, which began in May 2011 with the sale of 300 million shares. The sale of $6 billion will reduce Treasury’s ownership of AIG’s common equity to approximately 70%, down from approximately 92% following the execution of AIG’s recapitalization plan in January 2011 and 77% following the May 2011 offering.
The expansion of AIG’s previously announced share repurchase program, repayment of Treasury’s preferred interest in AIA SPV and the release of AIG’s assets reflect the continued progress that has been made to strengthen AIG’s capital structure and improve financial flexibility since the recapitalization. Proceeds from the recent monetization of non-core assets will enable the company to repurchase the shares without impacting liquidity at the holding company level. AIG’s financial leverage and interest coverage ratios are expected to remain within A.M. Best’s guidelines following the share repurchase.
A.M. Best does not expect positive movement on AIG’s ratings in the near to mid term. Key factors that could trigger negative actions on the ratings and/or outlook of AIG include a change in the ratings of a major AIG insurance subsidiary; a significant reduction or withdrawal of AIG’s ability to access its lines of credit; recognition of a failure of management to disclose information that is relevant to the rating process; and deterioration in the financial position of AIG, whether driven by its insurance or non-insurance operations.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “A.M. Best’s Ratings & the Treatment of Debt” and “Equity Credit for Hybrid Securities.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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