A.M. Best Affirms Ratings of American International Group, Inc.’s Domestic Life/Health Subsidiaries
A.M. Best has affirmed the financial strength rating (FSR) of A (Excellent) and the issuer credit ratings (ICR) of “a+” of American International Group, Inc.‘s (AIG) (New York, NY) [NYSE: AIG] four domestic life/health companies. AIG’s U.S. life, annuity and health operations are collectively referred to as AIG Life & Retirement Group (AIGL&R). (See below for a detailed listing of the companies.) The outlook for both ratings is stable.
The ratings reflect AIGL&R’s solid risk-adjusted capitalization, increased total revenue and very strong business profile with a significant market presence. Offsetting factors include lower sales, primarily due to unusually large sales for their stable value wrap product in 2013, lower operating earnings due to marginally lower spread income, lower returns on alternative investments and reserve strengthening. Ignoring the stable value wrap products, sales were slightly better than the prior year by 2%. AIGL&R continues to benefit from its maintained 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 is ranked third for 403(b) retirement plan assets under management. Additionally, AIGL&R continues to make progress toward achieving strong market positions in a number of core business lines, such as fixed rate deferred annuity, K-12 assets and total annuity sales. Net flows are positive at approximately $455 million for 2014, down significantly from $4.6 billion in 2013, which was primarily due to two large group retirement surrenders. A.M. Best notes the company maintained strong risk-based capitalization after paying significant dividends to their parent of $4.7 billion in 2013 and $9.9 billion in 2014. This action supports AIG’s overall strategy to move excess capital from the insurance company to the parent for capital management initiatives, including share buyback activities, and to improve parent company liquidity.
The ratings reflect AIGL&R’s 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 elevated exposure to higher risk investments including structured securities, collateralized debt obligations (CDO), direct commercial mortgage loans and various alternative investment strategies. As AIGL&R continues to reposition its asset portfolio to achieve greater investment yield, A.M. Best remains cautious on its investment risk appetite. For 2014, 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 Sept. 30, 2014, 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 $51 billion at Sept. 30, 2014 (statutory, amortized cost basis), which represents an elevated exposure when compared with statutory total-adjusted capital. It should be noted that the investment quality of these assets has improved over time. In addition, AIGL&R’s $10.9 billion exposure to alternative assets (hedge funds, private equity and real estate) represents additional risk within its investment portfolio.
While its risk adjusted capital management ratios remain strong, AIG’s current capital management strategy has resulted in high parental dividend payments, thus pressuring growth in its risk-adjusted and absolute capitalization levels. However, A.M. Best notes that while the NAIC 2014 RBC ratio is lower when compared with the prior year, it remains well above the range of its current rating. Additionally, AIG’s executive management has indicated its commitment to maintain healthy capitalization ratios to support the ratings of AIGL&R and manage to target levels. Lastly, AIG’s various implicit and explicit support initiatives are in line with this commitment.
A.M. Best believes AIGL&R is well positioned at its current rating level, but may experience positive rating movement if trends in earnings and investment performance remain positive, 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 FSR of A (Excellent) and the ICRs of “a+” have been affirmed with a stable outlook for the following four domestic life/health subsidiaries of American International Group, Inc.:
- 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
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
Key insurance criteria reports utilized:
- A.M. Best’s Liquidity Model for U.S. Life Insurers
- A.M. Best’s Perspective on Operating Leverage
- Rating Members of Insurance Groups
- Risk Management and the Rating Process for Insurance Companies
- Understanding BCAR for U.S. and Canadian Life/Health Insurers
- Evaluating Country Risk
This press release relates to rating(s) that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.
A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
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