AIG’s Balance Sheet Remains Strong with Moderate Leverage



Debt repurchases and issuance

In 2Q15, AIG (AIG) repurchased previously issued more expensive debt in the form of high coupon hybrid and senior notes. The company repurchased an approximately $915 million aggregate principal amount of certain junior subordinated debentures for an aggregate purchase price of ~$1.25 billion.

AIG also repurchased an approximately $22 million aggregate principal amount of certain senior notes for an aggregate purchase price of ~$24 million.

In July 2015, the company repurchased approximately $3.4 billion aggregate principal amount of certain debt for an aggregate purchase price of ~$3.7 billion. As a result of these actions, the weighted average coupon on AIG’s financial debt has declined to less than 5% per annum.

AIG’s book value, excluding other comprehensive income and deferred tax assets, increased by 10% to $62.22 in 2Q15 when compared with the second quarter of the previous year.

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AIG’s long-term debt-to-equity ratio stood at 28.5% in the second quarter of 2015, compared with 29.5% as of March 31, 2015. Total outstanding debt at the end of 2Q15 was $30.4 billion.

The company’s leverage was on the lower side of the target range, according to AIG’s management. AIG’s operating return on equity stood at 9.3% for the second quarter, whereas normalized return on equity was at 6.7%.

Capital ratios

Insurers like AIG, ACE (ACE), Allstate (ALL), and Chubb (CB) together form 2.91% of the Financial Select Sector SPDR ETF (XLF). These companies 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.

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.


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