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AIG’s Balance Sheet Stayed Strong with Moderate Leverage in 3Q15

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Debt repurchases and issuance

In 3Q15, American International Group (AIG) repurchased previously issued, more expensive debt in the form of high coupon hybrid and senior notes. The company repurchased an approximate $3.4 billion aggregate principal amount of certain debt issued or guaranteed by AIG for an aggregate purchase price of ~$3.7 billion.

As of September 30, 2015, the weighted average coupon on AIG’s financial debt stood at less than 5%, and the maturity profile improved significantly.

In 3Q15, AIG issued the following funds through its issue of debt:

  • $1.3 billion aggregate principal amount of 3.75% Notes due in 2025
  • $500 million aggregate principal amount of 4.70% Notes due in 2035
  • $750 million aggregate principal amount of 4.80% Notes due in 2045

Additionally, AIG issued $290 million and $420 million aggregate principal amounts of 4.90% Callable Notes due in 2045.

AIG’s book value, excluding other comprehensive income and deferred tax assets, rose by 2.7% to $79.40 in 3Q15 when compared with the third quarter of the previous year.

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Leverage

AIG’s long-term debt-to-equity ratio stood at 30.8% in the third quarter of 2015, compared with 28.5% as of June 30, 2015. Its total outstanding debt at the end of 3Q15 was $30.7 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 2.9% for the third quarter, whereas normalized return on equity was -0.9%.

Capital ratios

Insurers such as AIG, ACE (ACE), Allstate (ALL), and Chubb (CB) together form 0.88% of the Vanguard Dividend Appreciation ETF (VIG). 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 the ratio of capital available to an insurer to required capital.

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

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