P&C Financial Leverage Up in 2011; AIG's Recapitalization Biggest Capital Mix Change

NU Online News Service, April 17, 2:03 p.m. EST

American International Group’s recapitalization efforts have resulted in the insurance giant nearly halving its debt-and-preferred-to-total-capital ratio to 41.6 percent in 2011 compared to 81.2 percent in 2010, according to a Fitch Ratings Special Report on financial leverage for property and casualty insurers.

“During 2011, AIG took various steps to recapitalize the company and reduce the federal government’s interest in the company,” says Fitch. 

The three primary factors driving improvement, according to the report, are the repayment of about $21 billion in indebtedness under its Federal Reserve Bank of New York credit facility, the conversion of about $72 billion of government-owned preferred stock to common equity and a reduction of AIG’s deferred-tax-asset valuation allowance by $16.6 billion.

Owing mainly to these efforts, P&C carriers in Fitch’s universe show a drop in total-debt-and-preferred-securities-to-capital in 2011 to 23.5 percent compared to 36.4 percent in 2010. Additionally the insurers’ financial-leverage ratio declined to 22.7 percent in 2011 from 29.9 percent in 2010.

However, excluding AIG, Fitch says insurers and reinsurers in its coverage universe saw average financial leverage increase modestly in 2011, “as higher borrowings offset anemic growth in shareholders‘ equity due to weak earnings.”

Fitch says the P&C industry maintains “balance-sheet strength and reasonable debt-servicing capacity that is within ratings expectations, albeit lower than prior years.” Catastrophe losses, competitive markets and weaker investment income drove the decline, Fitch says.

Excluding AIG, the P&C industry’s total-debt-and-preferred-securities-to-capital in 2011 was 24.4 percent, up from 23.9 in 2010. The financial-leverage ratio excluding AIG was 23.5 percent, up from 23.1 percent in 2010.

Fitch says it expects favorable movement in 2012. “[A]ssuming a reversion toward historical natural-catastrophe losses, and with recent favorable premium-rate movement, earnings are expected to noticeably improve and coverage ratios will return to mid-single-digit levels in 2012,” the ratings agency says.

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