Press Release - MAY 23, 2017
A.M. Best Removes From Under Review With Negative Implications and Affirms Credit Ratings of AIG and Its Subsidiaries
FOR IMMEDIATE RELEASE
OLDWICK - MAY 23, 2017
In January 2017, the ratings of AIG and its insurance subsidiaries were placed under review with negative implications following the announcement that the group had again incurred material adverse reserve development, primarily relating to its U.S. property/casualty long-tail business. The total amount of the group’s gross deficiency reported was $5.6 billion, which exceeded A.M. Best’s estimation. The under-review status also considered the potential impact on AIG’s risk-adjusted capitalization, liquidity, franchise value and future earnings capacity from the corrective actions being taken by management to improve profitability and meet shareholder return targets.
A.M. Best has analyzed the most recent financial information of AIG and its rated subsidiaries, in particular: the impact of the reserve development, the benefit of the adverse development cover and related loss portfolio transfer and an assessment of the adequacy of the group’s current reserve position. A.M. Best also has discussed with AIG management and reviewed the viability of the planned corrective actions, capital return goals and organizational changes, including the new modular management framework. Finally, AIG has announced Brian Duperreault as its new CEO, a move that brings his significant operating experience as an industry leader to the organization. From this review, it has been possible to make a satisfactory assessment that AIG’s consolidated risk-adjusted capitalization remains supportive of the ratings of AIG and its subsidiaries. This lessens A.M. Best’s immediate concerns regarding the execution risk of successfully implementing the corrective actions taken to improve overall operating performance, and susceptibility to reduced credibility of its franchise value. AIG maintains adequate liquidity and financial flexibility, while its financial leverage and coverage ratios are within A.M. Best’s guidelines for its current rating.
The rating affirmations for the members of the AIG Property Casualty US Insurance Group (AIG PC US) reflect the benefit the group receives by being a part of the AIG enterprise, which includes AIG’s liquidity and financial flexibility, diversified and dominant business profile and profitable consumer lines businesses. AIG’s overall support has helped limit the negative impact of the underwriting losses AIG PC US incurred on its long-tail casualty business, and has given the group time to make corrective actions. AIG PC US maintains supportive risk-adjusted capitalization and a leadership position in the global commercial lines insurance market. Additionally, AIG PC US should benefit from the leadership and experience of Duperreault, given his extensive industry experience running large global insurance enterprises. Offsetting rating factors include AIG PC US’ underwriting results, which have lagged the commercial casualty composite and the broader property/casualty industry, continued adverse development of prior years’ loss reserves and the execution risks associated with management’s stated corrective actions and restructuring measures.
The rating affirmations of AIG Life & Retirement Group (AIG L&R) reflect the group’s improved risk-adjusted capitalization, consistent and favorable statutory and GAAP operating earnings from core business lines and a very strong business profile with leading market positions in a number of market segments, including the not-for-profit and individual retirement markets. Moreover, AIG L&R has a very broad product mix and diversified distribution platform. On a statutory basis, capital and surplus increased significantly, reflecting a completed redundant reserve financing transaction with a highly rated, third-party reinsurer. Offsetting rating factors for AIG L&R include potential earnings pressure due to spread compression on its large book of interest-sensitive business, significant parental dividend payouts and exposures to some higher risk asset classes. In addition, premium income declined in 2016, primarily due to the U.S. Department of Labor’s fiduciary rules that affected the qualified marketplace.
The rating affirmations of American International Reinsurance Company Ltd. (AIRCO), a Bermuda-domiciled reinsurer, 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. Offsetting these factors are AIRCO’s historically limited direct business profile and substantial gross exposure to a closed block of U.K. deferred and payout annuities, which are retroceded to an affiliate.
The ratings affirmations of AIG Europe Limited (AEL) (United Kingdom) reflect its supportive risk-adjusted capitalization, track record of good operating performance and a strong business profile that is supported by excellent distribution capabilities across Europe. AEL’s technical performance in 2016 is considered a partially offsetting rating factor. The company realized a combined ratio of 113% for 2016 (as calculated by A.M. Best) driven by increased frequency and severity of claims experience in longer-tail liability and financial lines, coupled with a higher frequency of large losses incurred in the property and special risks segment. The associated strengthening of technical provisions at year-end 2016 also served to weaken AEL’s risk-adjusted capitalization, although A.M. Best considers it to remain supportive of the ratings. A.M. Best expects AEL’s risk-adjusted capitalization and technical performance to strengthen in 2017.
The rating affirmations of AIG Insurance Hong Kong Limited (AIG HK) reflect AIG HK’s sound risk-adjusted capitalization, as the company has reduced its overall risk retention since 2015. Over the past two years, the company has utilized reinsurance support from its affiliates to lower its risk retention in the commercial lines segment, while the stop-loss corridor and commission rate were renewed in December 2016 with improved terms. Offsetting rating factors include deterioration in AIG HK’s underwriting performance as a result of further adverse loss development from major claims in the financial lines segment. The continued soft market conditions may continue to place pressure on the company’s underwriting profitability.
The rating affirmations of AIG Asia Pacific Insurance Pte. Ltd. (AIG API) reflect the company’s good business profile and strong risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR). AIG API continues to maintain its position as the insurance market leader in Singapore. Although premiums have declined year-on-year in 2016, in line with the Singapore non-life market, the company thus far has been able to maintain its profitability despite increasing competition from new entrants. In accordance with an intragroup reinsurance arrangement, AIG API cedes a majority of its premiums to other members of the AIG group. This also supports AIG API’s risk-adjusted capitalization. Offsetting rating factors include an expected reduction in the capital of the company as AIG moves to improve capital efficiency across the group. Additionally, the reliance on AIG’s affiliates for reinsurance leads to concentration risk.
For a complete listing of American International Group, Inc. and its subsidiaries’ FSRs and Long-Term ICRs, please visit American International Group, Inc.
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