Partially offsetting these strengths is the group’s exposure to higher risk investments (e.g., structured securities, direct commercial mortgage loans and various alternative strategies), the substantial dividend expectations of its ultimate parent and the anticipated effect of the low interest rate environment on AIGL&R’s spread-based businesses. Nevertheless, A.M. Best believes future investment losses should be manageable in the context of AIGL&R’s current capitalization level and earnings capacity. Based on results through September 30, 2012, asset impairments have continued their declining trend, which is notable given the uncertain economic environment and the group’s sizable structured asset and alternative investment portfolios. A.M. Best notes that AIGL&R’s investments in non-agency mortgage-backed securities, asset-backed securities, collateralized debt obligations and commercial mortgage-backed securities totaled approximately $34 billion at September 30, 2012 (statutory, amortized cost basis). This exposure represents roughly 200% of statutory total adjusted capital. In addition, AIGL&R’s $8.2 billion exposure to alternative assets (hedge funds, private equity and real estate) represents additional risk within the investment portfolio.
As part of its current capital management strategy, AIGL&R expects dividends to the parent to exceed earnings in 2013, which will likely result in a modest decline in the group’s risk-adjusted and absolute capitalization levels. However, A.M. Best notes that AIG’s executive management has indicated its commitment to maintain healthy capitalization ratios to support the ratings of AIGL&R’s domestic life and retirement services subsidiaries. Furthermore, AIG’s various implicit and explicit support initiatives are in line with this commitment.
AIGL&R's ratings could be upgraded if the positive trends in earnings and investment performance continue, net flows improve and strong risk-adjusted capitalization is maintained. However, downward rating pressure may occur should AIGL&R experience unfavorable trends in earnings or net flows, a decline in risk-adjusted capitalization in excess of A.M. Best's expectations or significant deterioration in investment performance.
The FSR of A (Excellent) and ICRs of “a” have been affirmed for the following domestic life/health subsidiaries of American International Group, Inc.:
- AGC Life Insurance Company
- American General Life Insurance Company
- The United States Life Insurance Company in the City of New York
- The Variable Annuity Life Insurance Company