Best Affirms AIG and P&C Subs Ratings; Outlook Stable

February 21, 2014

A.M. Best has affirmed the issuer credit rating (ICR) of “bbb” of American International Group, Inc. (AIG), as well as the financial strength rating (FSR) of ‘A’ (Excellent) and the ICRs of “a” of AIG’s U.S. property/casualty subsidiaries (collectively referred to as the AIG PC U.S. Insurance Group [AIG PC US]), headquartered in New York, NY.

Best has also affirmed the FSR of ‘A’ (Excellent) and the ICR of “a” of American International Reinsurance Company Ltd. (AIRCO), a Bermuda-domiciled reinsurer. The outlook for all of these ratings is stable.

“The ratings for the members of AIG PC US reflect its supportive level of risk-adjusted capitalization, generally solid operating earnings and its leadership position in the global commercial lines insurance market,” Best said.

As offsetting factors Best cited “recent underwriting results, which remain well below the group’s historical levels, Best’s expectation of continued adverse development of prior years’ loss reserves and the group’s exposure to natural and man-made catastrophe losses.”

Best said the stable outlook “reflects AIG’s position in the U.S. commercial market; its ability to lead, attract and retain clients by leveraging its significant global capacity, extensive product offerings and innovation; as well as its greater emphasis on technical pricing and predictive modeling.”

Best’s report also noted that the “group continues to generate positive operating returns despite challenges in restoring underwriting profitability. While reserve development remains a concern, the stable outlook suggests that any future reserve development will be within a level acceptable to A.M. Best.”

Best also said it “expects that the group will continue to maintain a supportive level of risk-adjusted capitalization through favorable net earnings while providing shareholder dividends to its parent in accordance with historical norms.

In addition Best pointed out that “AIG PC US’ risk-adjusted capitalization declined in 2013, primarily as a result of sizeable dividend payments to AIG. However, the resulting level of risk-adjusted capitalization continues to be supportive of the ratings.

“The group has remained a leading provider of global commercial lines insurance products, with an operating scope that remains a key differentiator in its ability to provide products and services that meet the needs of global and local insurers. Premium and customer retentions improved and favorable pricing actions continued in 2013. These actions have allowed for favorable improvement in underwriting results for the year, although underwriting performance remains below the group’s historical levels.

“Loss reserve movements have been more modest in recent years, and the group has taken favorable action to further stabilize reserves. Best’s estimated deficiency of the group’s reserves has declined as a result of these actions,” but Best also indicated that it “expects that reserves will continue to develop adversely over the near to midterm.”

The ratings for AIG PC US are reflective of a legal entity simplification strategy undertaken by AIG. This process unstacked cross-ownership of several companies within the group and the consolidation of the previous two U.S. pools.

Best said “AIRCO’s ratings acknowledge its supportive level of risk-adjusted capitalization, the historical profitability of the business it assumes from its affiliates and its role as the primary Bermuda presence for AIG.”

As offsetting factors Best cited “AIRCO’s historically limited direct business profile, substantial gross exposure to a closed block of U.K. deferred and payout annuities—albeit covered by intercompany protection—and the variability in reserves assumed from a U.K. affiliate.”

Best did indicate, however, that “AIRCO’s direct business profile is expected to increase due to the legal entity simplification strategy and reorganization implemented in 2013. The outlook reflects Best’s expectation that the company’s business will continue to generate favorable results and that risk-adjusted capitalization will be maintained at a level that is supportive of the ratings.”

Best also explained that, historically, it has “considered parental support and financial flexibility when evaluating AIG’s property/casualty subsidiaries. While there is no specific consideration of those factors in the current ratings of the companies, AIG has continued to strengthen its balance sheet through the sale of non-core businesses and demonstrate improvement in its financial flexibility.”

In conclusion Best said: “Upward movement in the ratings is not expected in the near term. Factors that may drive downward movement in the ratings or outlook include deterioration in risk-adjusted capitalization below the level required to support the ratings; underwriting or operating performance that is not in line with Best’s expectations; recognition of adverse development of loss reserves in excess of the deficiency assumed by Best; or deterioration in the financial condition of AIG.”

Best’s report summarized the corporate entities covered by the ratings analysis as follows: The FSR of ‘A’ (Excellent) and ICRs of “a” have been affirmed for the following companies, which are collectively referred to as the AIG PC U.S. Insurance Group:

– National Union Fire Insurance Company of Pennsylvania

– The American Home Assurance Company

– Lexington Insurance Company

– Commerce and Industry Insurance Company

– AIG Property Casualty Company

– Insurance Company of the State of Pennsylvania

– New Hampshire Insurance Company

– Granite State Insurance Company

– Illinois National Insurance Company

– AIG Specialty Insurance Company

– Chartis Excess Limited

– AIG Insurance Company – Puerto Rico

– AIG Insurance Company of Canada

– AIG Assurance Company

– AIU Insurance Company

Source: A.M. Best

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