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COVID-19 risk sees Fitch turn negative on AIG Life and holding company

6th May 2020 - Author: Luke Gallin

Fitch Ratings has revised the rating outlook to negative from stable for AIG Life and the holding company, citing the economic fallout and financial market stress being caused by the ongoing COVID-19 outbreak.

AIG LogoAt the same time, global financial services ratings agency Fitch has maintained its stable outlook on AIG’s P&C insurance subsidiaries.

Additionally, Fitch has affirmed all ratings of AIG, including the ‘A-‘ Issuer Default Rating (IDR), ‘A’ (Strong) Insurer Financial Strength (IFS) ratings of the P&C insurance subsidiaries and ‘A+’ (Strong) IFS ratings of AIG Life.

“The Negative Outlook for AIG Life and the holding company reflects Fitch’s concern regarding the impact of the economic fallout on AIG Life’s balance sheet fundamentals and financial performance over the next one to two years,” says Fitch.

Back in March, Fitch revised its rating outlook for the US life insurance industry from stable to negative amid COVID-19-induced uncertainty and disruption.

In the near-term, the ratings agency states that its main concerns include the decline in interest rates, fading equity markets, elevated credit losses, rating migration and increased levels of mortality. Over the longer-term, Fitch is especially concerned about the potential for a prolonged, steep macroeconomic downturn, changes in policyholder behaviour, and persistently low interest rates.

“AIG Life’s financial performance had been strong and stable over recent years, but is expected to deteriorate given less favorable equity market performance and further pressure on interest margins,” says Fitch.

The global insurer and reinsurer announced its first-quarter 2020 results recently, posting an underwriting loss within its General Insurance unit amid an estimated $272 million of COVID-19 related losses. In Life and Retirement, AIG’s Q1 2020 adjusted pre-tax net income reached $574 million, which is down on the $924 million reported in the same period in 2019.

“Based on the application of Fitch’s Coronavirus Rating Case assumptions, AIG Life’s pro forma Prism score is expected to be modestly below ‘Strong’ before considering any management actions, which is below expectations for the current rating level,” explains Fitch.

Fitch does highlight some positives, including the fact AIG Life’s RBC ratio is expected to have improved in the first-quarter, reflecting effective hedging. Furthermore, Fitch expects AIG to contribute a portion of the proceeds from its pending sale of legacy business Fortitude Re to AIG Life, once the deal completes.

Regarding the still stable outlook for AIG’s P&C operations, Fitch explains that it expects that balance sheet fundamentals will mostly remain in line with rating expectations in spite of the pressures from the economic fallout related to the current crisis.

“Fitch believes AIG’s P&C operations could move to a modest underwriting loss in 2020 following a 99% 2019 combined ratio. However, the segment remains positioned for longer term performance improvement from changes in risk appetite and business mix over the last three years, as well as better market pricing fundamentals,” says the ratings agency.

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