Best Affirms AIG’s ‘Superior’ Ratings

June 14, 2007

A.M. Best Co. has affirmed the financial strength ratings of American International Group Inc. and a number of companies that are part of AIG, as follows:
– AIG’s life and retirement services subsidiaries – financial strength rating (FSR) of “A+” (Superior) and the issuer credit ratings (ICR) of “aa+;”
– AIG’s domestic property/casualty subsidiaries – FSR of “A+” (Superior) and the ICRs of “aa-;”
– AIG corporate ICR of “aa.”

Best also affirmed the FSRs of “A+” (Superior) and the ICRs of “aa-” of New York-based Transatlantic Holdings, Inc. Group and Calif.-based 21st Century Insurance Group which are currently 59 percent and 61 percent, respectively, owned by subsidiaries of AIG. The FSRs and ICRs of these groups incorporate implicit support from the group.

Best affirmed the FSR of “A++” (Superior) and the ICRs of “aa+” of Conn.-based Hartford Steam Boiler Group, indicating that it has “met the criteria for A.M. Best’s highest rating category on a stand-alone basis.”

The outlook for all ratings is stable. For a complete list of Best’s ratings on AIG’s FSRs, ICRs and debt ratings go to: www.ambest.com/press/061303aig.pdf.

Best gave a detailed analysis of the world’s biggest insurance group (in terms of capitalization) that discussed the different areas in which it does business, its very strong position in a number of areas and some of its few weaknesses.

AIG’s domestic life and retirement services subsidiaries’ ratings “reflect their consistently strong earnings performance, solid risk-adjusted capitalization, sound liquidity position and diverse product portfolio,” said Best. AIG’s “diverse worldwide branding initiatives, as well as the favorable enterprise risk management (ERM) capabilities,” were also recognized as factors in making the Group a “market leader in its increasingly competitive markets.”

Best said AIG’s P/C subsidiaries’ ratings “reflect their recognized global leadership position, considerable earnings generating capability, product innovation and proliferation, geographic diversification, comprehensive distribution platform and specialized underwriting capability within their select and highly specialized market segments.” The report also noted the “record earnings in 2006 for AIG’s Domestic Brokerage Group,” as indicating the commercial subsidiaries’ “considerable earnings and capital generating capability absent the reserve increases and catastrophe losses that stifled underwriting results in 2005 and prior years. In addition, capital levels of these subsidiaries have materially increased from 2005.”

Best explained AIG’s continued “market leader” status in most commercial coverages, as indicative of its ability to compete strongly with “its innovative product offerings, ability and willingness to provide high coverage limits, cross selling opportunities, broad global capacity, extensive data and claims capability, as well as maintaining one of the lowest expense ratios in the industry.”

Best also indicated that AIG “continues to demonstrate its ability to enter markets, either through account size, geographic territory or industry specialization, and make a noticeable imprint in a fairly short time frame. AIG’s renewed focus on accounting integrity and future successful remediation of accounting concerns provides a level of stability. The ratings also acknowledge the considerable intellectual capital infused through AIG’s property/casualty operations.”

Best’s analysis of AIG did find a few offsetting factors, notably: ” the variable underwriting earnings produced by the Domestic Brokerage Group over the past few years, as well as the low stand-alone capitalization of prior years.” The earnings varied mainly due to “catastrophe losses and excessive negative reserve development, which was partially caused by AIG’s leadership position in certain commercial lines business segments.” Best said that while the “negative reserve development” seemed to have declined after 2006, “AIG’s Personal Lines Pool lag those of their similarly rated peers.”

Balancing out those negatives, Best indicated that AIG’s “Personal Client Group is gaining momentum, while the franchise of AIG Direct will be enhanced with the future integration of 21st Century.”

Best acknowledged AIG’s record earnings in 2006, “as well as the vast improvement in capital levels;” however the rating agency indicated that the increase in dividends to shareholders “projected for AIG’s Commercial and Lexington Pools will limit further capital accumulation. Therefore, parental support incorporated into the ratings continues to be maintained.” Best recognized that “AIG’s willingness and ability to provide capital” is evidenced by the 2005 infusions of $4.5 billion in cash and letters of credit following a $3.5 billion surplus decline.

AIG, particularly through Boston-based Lexington Insurance Company, “is a recognized national property insurer and maintains considerable gross and net exposure to both natural and man-made catastrophe losses through premium volume and policy limits,” Best continued. “While the policy limits provide a competitive distinction and can be viewed as aggressive,” Best said it “believes that the exposure is well managed and makes strategic use of AIG’s healthy balance sheet. With increased retention within its major catastrophe reinsurance protections, AIG is leaning more heavily on quota share reinsurance protection from high quality reinsurers.”

Discussing AIG’s past problems with reserves, Best indicated that the “adverse prior year reserve development taken each year from at least 2002 through 2006″…”has been considerably offset by reserve redundancies in 2003-2005, given that accident year loss ratios have been more conservatively established.” While “these redundancies are not assured to continue,” Best indicated it had “incorporated additional moderate core and asbestos and environmental reserve deficiencies in its capital models for potential negative effects of continued adverse development of accident years 2001 and prior.”

Best concluded with an analysis of AIG’s capital needs, pointing out that the Company will “need to provide capital to its subsidiaries in 2005,” as well as fund its recently announced stock repurchase program. This “will result in an increase to AIG’s financial leverage, although it remains at a moderate level (excluding the considerable level of debt not guaranteed by AIG and matched asset debt),” Best observed. “The holding company’s cash needs were financed mainly with additional debt in 2005 and 2006 as well as additional long-term debt and hybrid issuances in 2007. Therefore, there may be increased reliance on subsidiary dividends for the holding company. This position should be considered along with AIG’s rather immense worldwide proven financial flexibility, balance sheet strength and earnings diversification and capacity.”

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