A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength rating of A (Excellent) and issuer credit ratings (ICR) of “a” of the domestic life/health subsidiaries of American International Group, Inc. (AIG) (New York, NY) [NYSE: AIG]. AIG’s domestic life/health companies are collectively referred to as SunAmerica Financial Group (SAFG). (See below for a detailed listing of the companies and ratings.) The revised outlook reflects SAFG’s improved surrender rates, strong positive cash flows and the progress made to restore its leading market positions following a significant decline in 2009 due to issues surrounding its ultimate parent, AIG. Over the last 18-24 months, SAFG has been reinstated by all key distribution networks and has expanded marketing through the establishment of new relationships. The group has maintained its long-standing top ranking in bank fixed annuity sales and number three ranking for 403(b) retirement assets under management. In addition, SAFG continues to make progress towards leading positions in other product lines with a top-10 ranking in variable annuity non-captive sales (up from a low point of number 18) and a number five ranking in sales of term life insurance (up from number 12). Moreover, after experiencing elevated surrender rates over the last few years, policy surrenders have stabilized in 2011 and are currently near historical norms. Consequently, net flows have been positive for three consecutive quarters totaling $2.1 billion through September 30, 2011. The ratings of SAFG recognize its excellent risk-adjusted capitalization, diverse business and earnings profile and robust multi-channel distribution platform. The life/health companies’ solid, consistent statutory earnings over the last few years have facilitated growth in capital, comparing favorably to its peers. SAFG maintains a diverse business profile with established franchises in individual fixed and variable annuities, life insurance, group retirement plans and mutual funds. The group’s market positions are supported by a large and diversified distribution system that is made up of financial institutions, national, regional and independent broker dealers, career financial advisors, independent marketing organizations, insurance agents and a direct-to-consumer platform. Additionally, SAFG’s liability profile is well-balanced between spread, fee and mortality-based products, providing diversified sources of earnings.
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 dividends currently being paid to its ultimate parent and the effect of the low interest rate environment on SAFG’s spread-based businesses. Although A.M. Best believes future investment losses should be manageable in the context of SAFG’s current capitalization and earnings capabilities, material impairments are likely to occur in 2012 given the uncertain economic environment and the group’s sizable structured asset portfolio. A.M. Best notes that SAFG’s investments in non-agency mortgage-backed securities, asset-backed securities, collateralized debt obligations and commercial mortgage-backed securities totaled approximately $24 billion at September 30, 2011 (GAAP amortized cost basis). This exposure, coupled with direct commercial mortgage loans exceeding $12 billion, represents roughly 20% of general account assets. In addition, SAFG’s $7.7 billion exposure to alternative assets (hedge funds, private equity and real estate) brings additional risk to the investment portfolio.As part of its current capital management strategy, SAFG paid $1.6 billion in dividends to AIG during the first nine months of 2011. Given the enterprise’s plans to continue to upstream material dividends, A.M. Best expects SAFG’s risk-adjusted and total capitalization to decline somewhat going forward. However, A.M. Best notes that AIG’s executive management has indicated its commitment to maintain healthy capitalization ratios to support the ratings of SAFG’s domestic life and retirement services subsidiaries. Furthermore, AIG’s various implicit and explicit support initiatives are in line with this commitment. SAFG’s spread-based businesses remain vulnerable to spread compression and the effects of the low interest rate environment. A.M. Best believes SAFG is well-positioned at its current ratings for the foreseeable future. However, downward rating pressure may occur should SAFG experience unfavorable earnings trends, 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 Assurance Company
- American General Life and Accident Insurance Company
- American General Life Insurance Company
- American General Life Insurance Company of Delaware
- SunAmerica Annuity and Life Assurance Company
- SunAmerica Life Insurance Company
- The United States Life Insurance Company in the City of New York
- The Variable Annuity Life Insurance Company
- Western National Life Insurance Company