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A.M. Best Co. has revised the issuer credit rating (ICR) outlook to positive from stable and affirmed the financial strength rating (FSR) of A (Excellent) and ICR of “a” of American International Group, Inc.’s (AIG) (New York, NY) [NYSE: AIG] four domestic life/health companies. 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) (formerly SunAmerica Financial Group). (See below for a detailed listing of the companies and ratings.)
The revised outlook reflects AIGL&R’s improved risk adjusted capitalization, strong statutory operating earnings and the progress that continues to be made to restore its leading market positions. AIGL&R has been reinstated by all key distribution networks and has further expanded marketing by establishing new relationships. The group has maintained its long-standing top ranking in bank fixed annuity sales and number three ranking for 403(b) retirement plan assets under management. In addition, AIGL&R continues to make progress towards leading positions in other key product lines, with a number six ranking in variable annuity non-captive sales (up from a low point of number 18) and a number six 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 and are currently near historical norms. However, A.M. Best notes that overall net flows are negative through three quarters of 2012, driven by a significant decline in fixed annuity sales as the company exercised some discipline in the low interest rate environment.
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 companies’ solid, consistent statutory earnings over the last few 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 (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.:
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.
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