AM Best has affirmed the Long-Term Issuer Credit Rating (Long-Term ICR) of "bbb" of American International Group, Inc. (AIG) (headquartered in New York, NY) [NYSE: AIG]. AM Best also has affirmed the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term ICRs of "a" of its property/casualty insurance subsidiaries (collectively referred to as AIG PC). The outlook of these Credit Ratings (ratings) is stable. Concurrently, AM Best has downgraded the Long-Term ICR to "a" from "a+" and affirmed the FSR of A (Excellent) for the members of the AIG Life & Retirement Group (AIG L&R). The outlook of the Long-Term ICR has been revised to stable from negative, while the outlook of the FSR is stable. (Please see below for a detailed listing of the companies and ratings.)
AIG's ratings reflect its consolidated risk-adjusted capitalization at the strongest level, as measured by Best's Capital Adequacy Ratio (BCAR), which is an improvement from the very strong level seen in the 2019 review period. Additionally, consolidated risk-adjusted capital is likely to improve now that the Fortitude Reinsurance Company Ltd. (Fortitude RE) transaction has closed. While the closing of Fortitude RE brought with it significant write-downs during 2020, these write-downs did not impact the general insurance or life and retirement statutory entities, and cash flow is still expected to be positive. Overall, AM Best views this transaction as positive for AIG as it sheds longer-tail risk liabilities, along with potentially riskier, longer-duration assets paired with those reserves. Access to the capital markets and significant liquidity at the holding company level also aids the balance sheet. An offsetting factor in the balance sheet strength assessment is the increase in financial leverage and a lower interest coverage ratio expected for 2020.
AIG's historical operating performance has been hampered by significant losses in general insurance, but the company has made strides in refining its risk profile and AM Best expects further improvement. AIG's business profile is global, with a distinctly diverse set of property/casualty and life and annuity products, a broad distribution network and significant market share on many of its lines of business.
The ratings of AIG PC reflect the group's balance sheet strength, which AM Best categorizes as very strong, as well as its marginal operating performance, favorable business profile and appropriate enterprise risk management (ERM).
AIG PC's risk-adjusted capital position improved in 2019, reflective of a material reduction in net loss reserves as the group continues to pay down claims for older accident years. The group's balance sheet strength continues to benefit from reinsurance support from highly rated companies. Offsetting these positive factors is the continued reduction in surplus levels that have decreased in each of the past five years, as well as the group's high gross underwriting leverage, which has risen in recent years as a result of increased use of reinsurance to curb volatility and increase underwriting profitability.
AM Best views AIG PC's operating performance as marginal. The group has been materially impacted over the last five years by underwriting losses and a reduction in investment income, leading to a five-year operating ratio of 102.1 that continues to lag the commercial casualty composite performance over the same time period by a considerable margin. However, AM Best notes that the group's operating performance has demonstrated a steadily improving trend for the past three calendar years, attributable to numerous underwriting and risk management initiatives, as well as positive pricing momentum in most key business lines. The potential for further improvement in the near term is reduced by uncertainty related to the COVID-19 pandemic, which could dampen growth opportunities, increase underwriting losses and creates the possibility of investment impairments.
The ratings of AIG L&R ratings reflect its balance sheet strength, which AM Best categorizes as adequate, as well as its strong operating performance, favorable business profile and appropriate ERM.
The Long-Term ICR downgrade reflects a revision in AM Best's assessment of the AIG L&R's operating performance to strong from very strong. AM Best believes the group's more-recent returns, and prospective returns, will be more in line with its strong rated peers, driven by intense competition within the annuity segment and record low interest rates, both of which are likely to continue to drive spread income and fee income lower. In addition, the low interest rate environment is likely to negatively impact the top and bottom lines within the individual and group annuity segments.
AIG L&R's balance sheet assessment remains stable at adequate, and its year-over-year risk-adjusted capital position remains virtually unchanged at year-end 2019. The risk-adjusted capital position benefits from the large modified coinsurance agreement with Fortitude RE, which reduces much of the risk from the longer-term structured settlements book of business. AIG L&R has had a high dividend payout ratio back to the parent due in large part to a series of de-risking practices, which has lowered the need for additional capital, but overall capital and surplus growth has been limited. Going forward, the parent holding company may become less reliant on AIG L&R dividends due its recent sale of Fortitude RE, increased liquidity and improving performance within its general insurance segment. AIG L&R's ratings also reflect its favorable business profile with a diverse set of product offerings and national reach with its robust distribution network.
The FSR of A (Excellent) and the Long-Term ICRs of "a" have been affirmed with stable outlooks for the following subsidiaries of AIG, which are collectively referred to as the AIG Property Casualty Insurance Group:
- National Union Fire Insurance Company of Pittsburgh, PA
- American Home Assurance Company
- Lexington Insurance Company
- Commerce and Industry Insurance Company
- AIG Property Casualty Company
- The Insurance Company of the State of Pennsylvania
- New Hampshire Insurance Company
- Illinois National Insurance Company
- AIG Specialty Insurance Company
- AIU Insurance Company
- AIG Assurance Company
- AIG Insurance Company - Puerto Rico
- AIG Insurance Company of Canada
- AIG Insurance Hong Kong Limited
- Granite State Insurance Company
- Tudor Insurance Company
- Stratford Insurance Company
- Western World Insurance Company
- Blackboard Specialty Insurance Company
- Blackboard Insurance Company
- American International Group UK Limited
- American International Reinsurance Company, Ltd.
- AIG Asia Pacific Insurance Pte. Ltd.
- Validus Reinsurance, Ltd.
- Validus Reinsurance (Switzerland) Ltd.
The Long-Term ICRs have been downgraded to "a" from "a+" and the FSR of A (Excellent) affirmed, with the outlook of the Long-Term ICR revised to stable from negative and the FSR outlook maintained as stable, for the following operating subsidiaries of AIG, which are collectively referred to as the AIG Life & Retirement Group:
- AGC Life Insurance Company
- American General Life Insurance Company
- United States Life Insurance Company in the City of New York
- The Variable Annuity Life Insurance Company
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