AIG improves its capital structure in 4Q14



Debt repurchases and issuance

In 4Q14, AIG (AIG) repurchased previously issued more expensive debt—high coupon hybrid and senior notes—of around $3.7 billion and issued a total of ~$2.75 billion of long-term debt in October 2014 and January 2015. This debt repurchase resulted in ~$800 million charges in 4Q14.

For the full year 2014, AIG repurchased $6.5 billion of high coupon debt. Replacing existing higher coupon debt with lower coupon debt and reducing total outstanding debt will help AIG reduce its interest burden by ~$249 million per year, alongside de-risking the capital structure.

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AIG’s leverage ratio was slightly above the 16% range when considering the debt issuances in January 2015, lower than the end-2013 position. Total outstanding debt at the end of 2014 was $31.2 billion, compared to $41.7 billion at the end of 2013. The leverage was on the lower side of the target range, according to AIG’s management.

Capital ratios

Insurers like AIG, ACE (ACE), Allstate (ALL), Chubb (CB), and those in the Financial Select Sector SPDR ETF (XLF), need to maintain capital in the form of liquid assets for payments of unexpected large claims. The capital requirement for an insurance company is stipulated by regulatory bodies.

In the United States, insurers are required to maintain risk-based capital. Risk-based capital ratios are calculated as a ratio of the capital available to an insurer to the required capital. For more information, please refer to the Market Realist series, An investor’s guide to the insurance business.

AIG is adequately capitalized with the risk-based capital ratio of 490% for the life insurance subsidiaries and 440% for the non-life insurance subsidiaries.

In the next article, we’ll review AIG’s cash position.


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