A.M. Best has upgraded the issuer credit ratings (ICR) to “a+” from “a” and affirmed the financial strength rating (FSR) of A (Excellent) of American International Group, Inc.’s (AIG) (New York, NY) (NYSE:AIG) four domestic life/health companies. The outlook for the ICRs has been revised to stable from positive, while the outlook for the FSR is stable. AIG’s U.S. life, annuity and health operations are collectively referred to as AIG Life and Retirement (AIGL&R). (See below for a detailed listing of the companies.) The ratings reflect AIGL&R’s strong risk-adjusted capitalization, significant increase in sales and total revenue, improved operating performance and strong business profile with a significant market presence. AIGL&R continues to benefit from its reinstated relationships with all key distribution networks and has further expanded its marketing by establishing new relationships. The group has maintained its long-standing top ranking in bank fixed annuity sales and its number two ranking for 403(b) retirement plan assets under management, with 2013 being a record year for sales of 403(b) plan assets. In addition, AIGL&R continues to make progress toward achieving strong positions in a number of core business lines. Moreover, after experiencing elevated surrender rates over the last few years, policy surrenders have stabilized and are currently near historical norms. A.M. Best also notes that the group’s overall net flows have improved significantly from $1.3 billion at year-end 2012 to $4.6 billion as of year-end 2013, reflecting favorable experience from fixed annuities, variable annuities and retail mutual funds. The ratings of AIGL&R recognize its strong risk-adjusted capitalization, diverse business and earnings profile and robust multi-channel distribution platform. The life/health group’s solid and increasing statutory earnings over the past five years have facilitated growth in capital, comparing favorably to its peers. AIGL&R 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, AIGL&R’s liability profile is fairly 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 including structured securities, collateralized debt obligations (CDO), direct commercial mortgage loans and various alternative strategies. As AIGL&R continues to restructure its asset portfolio to achieve greater investment yield, A.M. Best remains cautious on its investment risk appetite. For 2013, AIGL&R continued to meet the substantial dividend expectations of its ultimate parent and managed the effect of the low interest rate environment on its spread-based businesses. 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, 2013, asset impairments have continued to remain low, which is notable given the uncertain economic environment and the group’s sizable structured asset and alternative investment portfolios. A.M. Best further notes that AIGL&R’s investments in non-agency mortgage-backed securities, asset-backed securities, CDOs and commercial mortgage-backed securities totaled approximately $48.9 billion at September 30, 2013 (statutory, amortized cost basis). This exposure represents roughly 260% of statutory total-adjusted capital. In addition, AIGL&R’s $14.9 billion exposure to alternative assets (hedge funds, private equity and real estate) represents additional risk within its investment portfolio.As part of its current capital management strategy, AIGL&R continues to pay high dividends to AIG, (albeit at less than current earnings), thus allowing for a steady increase in its 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 and potentially remove any capital maintenance agreements the group has with the parent in the future. Furthermore, AIG’s various implicit and explicit support initiatives are in line with this commitment. A.M. Best believes AIGL&R may experience positive rating movement if the positive trends in earnings and investment performance continues, exposure to structured assets and alternative investments remains constant and strong risk-adjusted capitalization is maintained. However, downward rating pressure may occur should the group 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 ICRs have been upgraded to “a+” from “a” and the FSR of A (Excellent) has been affirmed for the following four 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