Best Analyzes AIG; Affirms Most P/C, L&H Ratings; Outlook Negative

A.M. Best Co. has affirmed the financial strength ratings (FSR) and issuer credit ratings (ICR) of most P/C life/health insurance subsidiaries of American International Group, Inc., as well as the ICR of “bbb” of AIG.

Best also said it has downgraded the FSR to ‘A-‘ (Excellent) from ‘A’ (Excellent) and ICR to “a-” from “a” of Merit Life Insurance Company of Evansville, Indiana, and has withdrawn the FSR of ‘B+’ (Good) and ICR of “bbb-” and assigned an NR-3 (Rating Procedure Not Applicable) to the FSR and an “nr” to the ICR of Illinois-based American General Indemnity Company.

In addition Best has withdrawn the FSRs of ‘B+’ (Good) and ICRs of “bbb-” and assigned an NR-5 (Not Formally Followed) to the FSRs and an “nr” to the ICRs of American General Property Group and American General Property Insurance Company of Florida. American General Property Group consisted of American General Property Insurance Company
(AGPIC) of Nashville, Tenn. and AGPIC’s wholly owned subsidiary, American General Property Insurance Company of Florida (AGPIC – FL).

However Best said the “outlook for all ratings is negative.”

The ratings of the Chartis US Insurance Group (formerly referred to as AIG Commercial Lines Group), which is comprised of the commercial pool led by National Union Fire Insurance Company of Pittsburgh, Pa. and a number of related entities, and the Lexington Insurance Pool, led by Lexington Insurance Company, “reflect their supportive level of risk-adjusted capitalization; improved underwriting and operating performance through third quarter 2009; and the prominent position of these entities as global providers of commercial insurance,” best explained.

However, the “franchise damage resulting from the near collapse of AIG; considerable exposure to natural and man-made catastrophe losses (in terms of policy limits and insureds); price softening in nearly all core business segments; the risk associated with rebranding initiatives; and the continued challenges of its association with AIG,” all constitute offsetting factors.

The ratings of New York-based AIU Insurance Company “recognize its supportive level of risk-adjusted capitalization, strong historic operating performance and termination of the quota share reinsurance agreement that generated below average results in 2008,” Best continued. But, as offsetting these rating factors, Best noted the “variations in the company’s surplus and business profile in recent years and the potential for run-off of liabilities associated with the aforementioned reinsurance contract to vary from the company’s other business.”

The ratings of Yosemite Insurance Company, based in Evansville, Ind., acknowledge its “supportive level of risk-adjusted capitalization, continued better-than-average underwriting performance and consistently strong operating performance,” said Best. “These positive factors are partially offset by the company’s dependence on its affiliated finance companies as the sole source of its business and distribution channel, as well as the effect of development of loss reserves associated with the general liability business historically written and assumed by the company.

“AGPIC’s ratings are reflective of its supportive level of risk-adjusted capitalization, offset by its limited business profile resulting from its decision to cease writing new policies. AGPIC had no in-force business at December 31, 2008, and its operations consist primarily of settlement of claims associated with prior business. AGPIC – FL was merged into its parent effective September 30, 2009,” Best continued. “The group’s ratings were withdrawn and the group dissolved with the merger of AGPIC-FL into AGPIC.”

In discussing AIG’s Domestic Life and Retirement Services entities, Best said their condition reflects “the modest improvements recorded in their statutory after tax operating earnings performance, sufficient risk-adjusted capitalization as well as their diverse product portfolios. Partially offsetting these rating factors include the significant investment risk in real estate linked assets, limited partnerships and below investment grade bonds; lower levels of capital and surplus when reviewed in conjunction with the past five years; and the interest sensitive nature of a number of the annuity and institutional spread-based businesses from AIG’s retirement services segment, which are being negatively impacted by current economic conditions. In addition, similar to the property/casualty operations, the individual life and retirement subsidiaries have suffered reputational damage from the fallout of AIG’s 2008 crisis, which has resulted in loss of market share.

“The ratings of American Life Insurance Company (ALICO), based in Wilmington, Del., “acknowledge its role as a major international distributor of insurance and retirement savings products for AIG. Through third quarter 2009, ALICO reported a modest improvement in its statutory after tax operating earnings performance. ALICO continues to maintain adequate risk-adjusted capitalization and is diversified geographically and by product line.”

However Best cautioned that the “lower level of capital and surplus when reviewed in conjunction with the past five years, the regulatory challenges associated with conducting business abroad and the execution risk as ALICO moves toward separation from AIG,” are all offsetting factors.

Best said it has taken into account AIG’s recently closed a transaction with the Federal Reserve Bank of New York (FRBNY), “positioning ALICO for an initial public offering or third party sale, based upon market conditions and regulatory approvals. As part of this transaction, AIG has contributed the equity of ALICO to a special purpose vehicle (SPV) in exchange for interests in the SPV. The FRBNY has received preferred interests in the ALICO SPV, while AIG holds all of the common interests in the ALICO SPV.”

Best also explained that the “downgrading of Merit Life’s ratings reflects its limited business profile, the decline in operating earnings through 2009 and the challenges impacting the domestic credit insurance markets. Merit Life’s business is focused on the credit life and accident business within American General Finance Corporation, which A.M. Best does not view as a key operation within AIG’s domestic life and retirement services. The ratings continue to reflect Merit Life’s adequate risk-adjusted capitalization and profitable statutory operating results.”

The negative outlook of all rated entities acknowledges “the franchise damage and continuing challenges to the companies’ within the AIG enterprise,” Best explained. “The withdrawal of American General Indemnity Company’s ratings recognizes the diminished business profile of the company, which had no in-force policies at year-end 2008, and subsequently has run off all remaining liabilities.

“AIG’s ICR reflects the ratings of its operating domestic property/casualty and life/health insurance subsidiaries. It also reflects the financial support of the U.S. Government, which was initially put into place in September 2008 and substantially modified on two subsequent occasions.”

In summation Best pointed out that its ratings on AIG and its subsidiaries since September 2008 have been and remain “heavily dependent upon the continuation of the U.S. Government’s support. Future rating decisions will reflect the performance of AIG’s operating domestic property/casualty and life/health insurance subsidiaries and any changes in governmental support of AIG and its obligations.”

For a complete listing of American International Group, Inc. and its subsidiaries’ FSRs, ICRs and debt ratings, go to: www.ambest.com/press/121606aig.pdf.

Source: A.M. Best – www.ambest.com.