AM Best affirms ratings of AIG and majority of its subsidiaries

AM Best has removed from under review with negative implications and affirmed the financial strength ratings (FSR) of American International Group (AIG) and the majority of its insurance subsidiaries.

In addition, AM Best has removed from under review with negative implications and affirmed the FSR of A (Excellent) of AIG Asia Pacific Insurance (AIG API). The outlook assigned to each rating is stable.

In January 2016, the ratings of AIG and its insurance subsidiaries were placed under review with negative implications following the strengthening of loss reserves in AIG’s non-life business by $3.6 billion during the fourth quarter of 2015. The total amount of the deficiency reported at that time exceeded AM Best’s assumptions of loss reserve deficiency, excluding the reversal of statutory discounts of reserves for workers’ compensation.

The under review status by AM Best also considered the potential impact on AIG’s business profile and future earnings capacity from the strategic actions being taken by management to improve profitability and efficiency and maximise shareholder value.

AM Best has reviewed the year-end financial information of AIG and its rated subsidiaries, in particular the impact of the reserve strengthening, and also had the opportunity to discuss the planned actions in greater detail with management. From this review, it has been possible to make a satisfactory assessment that AIG’s consolidated risk-adjusted capitalisation remains supportive of the ratings of AIG and its subsidiaries.

AIG continues to implement a series of strategic actions and organisational changes to improve results and narrow its focus, although there remains execution risk, as well as continuing competitive pressures that could impede progress of the stated plans.

There is a continued strengthening of its balance sheet through the sale of non-core businesses, as well as an improvement in its financial flexibility. AIG’s financial leverage and coverage ratios are within AM Best’s guidelines for the current rating.

According to AM Best, the ratings affirmations for the members of the AIG Property Casualty US Insurance Group (AIG PC US) reflect the group’s supportive level of risk-adjusted capitalisation and its leadership position in the global commercial lines insurance market.

The ratings also benefit from the support offered by its parent, AIG, which includes a significant capital contribution following the aforementioned reserve strengthening, as well as AIG’s financial flexibility and overall diversification.

Offsetting rating factors include AIG PC US’ underwriting results which have lagged the commercial casualty composite and broader property and casualty (P/C) industry, continued adverse development of prior years’ loss reserves and the execution risks associated with management’s stated corrective actions.

Also, AM Best have said the rating affirmations of AIG Life & Retirement Group (AIG L&R) reflect the group’s acceptable risk-adjusted capitalisation, strong statutory and GAAP earnings from core business lines and a very strong business profile with a significant market presence.

In addition, AIG L&R has a very broad product mix and diversified distribution platform resulting in increased sales of group retirement and individual annuity products. Offsetting factors for AIG L&R include potential earnings pressure due to spread compression on its large book of interest-sensitive business, significant parental dividend pay-outs and exposures to some higher risk asset classes.

The rating affirmations of American International Reinsurance Company (AIRCO), a Bermuda-domiciled reinsurer, acknowledge its supportive level of risk-adjusted capitalisation, the historical profitability of the business it assumes from its affiliates and its role as the primary Bermuda presence for AIG. Offsetting these factors are AIRCO’s historically limited direct business profile and substantial gross exposure to a closed block of UK deferred and pay-out annuities, which are retroceded to an affiliated.

AM Best said the affirmation of the ratings of AIG Europe (AEL) reflects its strong risk-adjusted capitalisation, good operating performance and a strong business profile that is supported by excellent distribution capabilities across Europe. Partially offsetting rating factors include operating performance that has shown some volatility in recent years but is generally good, as well as changes in senior management at AEL

The rating affirmations of AIG Insurance Hong Kong (AIG HK) reflect its improved risk-adjusted capitalisation level as the company reduced its overall risk retention in 2015. Partially offsetting rating factors are the company’s continued volatile underwriting results, which are mainly attributable to unfavourable loss experience in the general liability (workers’ compensation) and financial lines of business, and a consistently higher expense ratio relative to its industry peers. AIG HK’s market share in Hong Kong has deteriorated over the past few years and will continue to be challenged by the competitive market environment.