Posted on 03 Mar 2010
A.M. Best Co. has commented that the ratings of American International Group, Inc. (AIG) and its subsidiaries are unchanged following the announcement that AIG will sell the AIA Group, Limited (AIA) to Prudential plc in a deal valued at approximately $35.5 billion. Of the consideration, approximately $16 billion in cash will be used to redeem a preferred interest with a liquidation preference held by the Federal Reserve Bank of New York (FRBNY) in the special purpose vehicle formed to hold the interests in AIA. An additional $9 billion in cash will be used to reduce the outstanding balance on the FRBNY Credit Facility. Additional non-cash proceeds of $10.5 billion will be monetized over time, with the proceeds also to be used to reduce the FRBNY Credit Facility.
The sale of AIA is a continuation of AIG's efforts to liquidate assets and repay the assistance provided to it by the U.S. Government in late 2008 and early 2009. By accelerating the monetization of AIA through a sale, rather than pursuing an option to sell the company through a series of public offerings, AIG management has indicated that it will have an increased ability to focus on its core business areas.
A.M. Best notes that the sale of AIA and the potential transaction related to AIG's other foreign life insurance operation, American Life Insurance Company (ALICO), while expected, represent the sale of two significant operating units that have provided consistent and substantial cash flow to AIG historically.
Despite these potential transactions, AIG will maintain a highly leveraged capital structure. A.M. Best is evaluating additional forward-looking information to determine the impact of these transactions on AIG's future cash flows and earnings required to meet the company's debt service and other corporate needs. Continued improvement in capital markets may provide some relief to AIG, as its invested assets return to more normal valuations; however, soft insurance market conditions will continue to challenge profitability at the company's core property/casualty operating subsidiaries. Reduced premium receipts and the potential impact of competitive market pricing on future earnings continue to be concerns with respect to current and future profitability within the property/casualty industry, while additionally, low interest rates, asset impairments and equity market volatility are ongoing challenges in the life and annuity sector. Further comment on the ratings will be made once this evaluation is completed.
A.M. Best notes that the ratings of AIG continue to reflect the support of the U.S. Government and remain heavily dependent on the continuation of such support.