American International Group’s plan to downsize by divesting its Life & Retirement business is drawing cautious and wary reactions from rating agencies that follow the property/casualty insurance giant.

They said that they’re worried about what the divestiture will do to AIG’s bottom line, and some threaten ratings downgrades. At the same time, they generally plan to wait and see how the separation is executed before making final ratings decisions.

AIG has offered only broad strokes so far about its plans to separate the L&R business. The insurer disclosed on Oct. 26 that while it hasn’t determined yet how to achieve a full separation of its P/C and Life & Retirement businesses, its goal is to maximize shareholder value and establish “two independent, market-leading companies.”

Standard & Poor’s

Standard & Poor’s placed AIG’s property/casualty entities on CreditWatch with negative implications and launched an assessment of the standalone credit profile of the Life and Retirement business. The L&R business is placed on CreditWatch with developing implications.

S&P said it is worried about the potential loss of business and earnings diversification the L&R business provides AIG overall.

Other issues include “uncertainty regarding the future expense structure and underwriting performance of the remaining P/C operations, and uncertainty regarding the capital structure.”

S&P noted AIG General Insurance (property/casualty) has continued to have improved operating results, though they “have been below average relative to peers.” It also expressed concern about how AIG would navigate continued COVID-19-related losses and the economic uncertainty they will bring.

“We anticipate the company to generate underwriting losses and premium declines in 2020 despite hardening of rates,” S&P said in its assessment.

Fitch Ratings

Fitch placed AIG’s ‘A-‘ long-term default rating on rating watch negative in response to the news. At the same time, it affirmed AIG’s Life & Retirement’s insurer financial strength ratings at ‘A+’ and the IFS ratings of AIG’s property/casualty ratings at ‘A’. AIG’s Life subsidiaries continue with a negative outlook, however, and stable outlook for the property/casualty subsidiaries.

For Fitch, the lack of specifics is a point of concern, and it expects AIG to take a hit from less diversified earnings streams.

“The Negative Watch on the AIG holding company reflects the anticipated consequences of the separation plans,” Fitch said. “As control of the earnings of Life business diminishes, a shift to notching of the AIG holding company ratings based on the property/casualty insurance ratings is likely, resulting in a one- notch downgrade of the current ratings, if Fitch’s standard practices are applied.”

A.M. Best

A.M. Best said AIG’s long-term issuer credit rating of “bbb” would remain unchanged, as would its “A” (Excellent) financial rating and the long-term issuer credit ratings of “a” for its P/C subsidiaries. As well, it’s “A” financial strength rating and “a” issuer credit rating for the Life & Retirement Group would stay the same. All ratings have a stable outlook, too.

For A.M. Best, keeping things steady amounts to a wait-and-see attitude, plus acknowledgement of the steps AIG management has taken over the years to improve its stability and capacity for healthy growth – “all of which has improved AIG P/C’s operational profile.”

A.M. Best noted that the Life & Retirement arm has helped a consolidated AIG with operational profitability and diversification.

Its final assessment depends on details of how the separation will take place, “plus the impact it will have on the overall capital structure and credit quality at AIG and each segment, along with a planned timeline.“

Moody’s

Moody’s Investors Service affirmed the A2 insurance financial strength rating of AIG’s General Insurance (property/casualty) and Life and Retirement subsidiaries, but placed the parent debt ratings on review for a possible downgrade. The ratings outlook is stable, though Moody’s said it will conduct a more detailed review based on AIG’s “likely reduced diversification following the separation of Life and Retirement” from AIG proper.

AIG “has benefited from the diversified earnings and cash flows of its two core segments. The parent in turn has maintained a large liquidity pool to support its subsidiaries as needed,” Moody’s said. “Such diversification and pooling of resources has supported a parent company senior debt rating two notches below the subsidiary IFS ratings rather than the typical three-notch spread for US-based insurers.”

Moody’s said it would “consider widening the notching given AIG’s plan to separate its main segments.” It will also make a final ratings decision based on “the operating performance, balance sheet strength, liquidity and ownership structures of these businesses segments as they move toward separation.”

Sources: S&P, Fitch, A.M. Best, Moody’s