Fitch Affirms AIG & Places ALICO on Watch Positive on ALICO Sale to Met Life

Following the announcement by American International Group (AIG) that it has agreed to sell subsidiary American Life Insurance Company (ALICO) to MetLife, Inc. (MET), Fitch Ratings has affirmed AIG's Issuer Default Rating (IDR) and senior and hybrid securities ratings. Additionally, Fitch has revised the Rating Watch status of ALICO's 'A+' Insurer Financial Strength (IFS) rating to Positive from Evolving.

Today's transaction is valued at $15.5 billion and marks the second major divestiture disclosed by AIG this month. On March 1 AIG announced that it had entered into an agreement to sell its AIA Group Limited (AIA) subsidiary to Prudential plc for $35.5 billion. Fitch affirmed AIG's IDR and related ratings and revised its Rating Watch status for AIA to Positive from Evolving when that transaction was announced.

Fitch views the ratings impact of the ALICO and AIA sales similarly. As a result, the agency has taken equivalent rating actions after the two transactions were announced.

AIG's ratings have considered the likelihood of a divestiture of ALICO since AIG formulated its restructuring plan with the federal government in the fourth quarter of 2008. Fitch views AIG's ability to execute on an anticipated transaction favorably but considers the impact of the transaction to largely be a ratings neutral event, thus prompting the affirmation of AIG's ratings.

The movement to a Positive from an Evolving Rating Watch for ALICO reflects the company's likely acquisition by a higher rated entity. Fitch rates the IFS of MET's insurance subsidiaries 'AA-'. Fitch will assess the acquisition's ultimate impact on ALICO's ratings following additional analysis of MET's plans for ALICO including, among other items, the nature of the integration process and how ALICO's balance sheet will be managed. Fitch will provide additional commentary on ALICO as this analysis proceeds.

Terms of the transaction call for AIG to receive approximately $6.8 billion of cash. Fitch's expectation is that the company will use these proceeds to redeem preferred interests in ALICO that are currently owned by the Federal Reserve Bank of New York (FRBNY).

The transaction also calls for the special purpose vehicle (SPV) formed by AIG and the FRBNY to hold the interests in ALICO to receive $8.7 billion of common equity and hybrid securities issued by MET. Fitch's expectation is that subject to market conditions and the expiration of a minimum-holding period, these proceeds will be monetized with the first $2.2 billion used to redeem the FRBNY's remaining interest in ALICO and the majority of the balance used to repay debt outstanding under AIG's credit facility with the FRBNY.

At year-end 2009 AIG's consolidated long-term debt totaled $131 billion including $23 billion of debt outstanding under its credit facility with the FRBNY. As a result, Fitch believes that subsequent to the sale of ALICO and corresponding debt reductions, AIG's leverage while improved, will remain high due in part to high debt levels at the company's aircraft leasing and consumer finance subsidiaries.

Fitch's ratings of AIG continue to be 'floored' by an assumption of government support, as AIG's debt leverage and coverage continue to fall outside of Fitch's guidelines for an investment grade credit. Fitch will consider whether it is appropriate to reassess the level of government support to be assumed for the rating as funds to the government are repaid.

Fitch takes no action on any ratings of AIG's affiliated companies related to the divestiture of ALICO.