New stress tests from Goldman Sachs show that AIG’s life entities could require a capital infusion of up to $3 billion from the holding company, if the coronavirus (COVID-19) outbreak results in major financial market pressures.
Analysts felt that the preferred funding options for such a scenario would be a suspension of buybacks and replacement of a portion of AIG’s $3 billion of maturing debt.
One stress test applied to AIG involved 50bps 10 UST yield, 20% immediate decline in equities and stressed credit in-line with the 2008 Financial Crisis, while the other was for 50bps 10 UST yield, 35% decline in equities and stressed credit that is at least 50% worse than in 2008.
The tests were also applied to the life operations of Allstate, although Goldman Sachs found that the company’s life subsidiaries appeared well capitalised under these scenarios.
For AIG analysts observed that under our illustrative stressed and severe stressed cases, the company would need to contribute $2.2 billion and $3.0 billion, respectively, to its life insurance subsidiaries to retain their current 402% RBC.
Suspending share repurchases could form one method of funding this contribution, as AIG is expected to have $2 billion of share repurchases over the next six quarters.
AIG also has over $3 billion of debt maturing by the end of 2021, which analysts do not expect to be replaced. They noted that the company could issue $1-2 billion of debt to fund contributions to its subsidiaries while still lowering its financial leverage.
Additionally, AIG could seek approval for an extraordinary distribution from the P&C companies, although this course of action was considered to be lower probability, as the P&C operation’s earnings remain modest.