A.M. Best Affirms Ratings of American International Group, Inc. and Its Domestic Property/Casualty and Life Subsidiaries

A.M. Best Co. has affirmed the financial strength ratings (FSR) and issuer credit ratings (ICR) of the property/casualty and life/health subsidiaries of American International Group, Inc. (New York, NY) [NYSE: AIG]. A.M. Best also has affirmed the ICR of “bbb” of AIG. The outlook for all ratings is negative. (See link below for a detailed listing of the companies and ratings.)

The ratings of the Chartis US Insurance Group (Chartis), which is comprised of the commercial pool led by National Union Fire Insurance Company of Pittsburgh, Pa. (NUFIC) and two entities that are significantly reinsured by NUFIC, and the Lexington Insurance Pool, led by Lexington Insurance Company (Lexington), reflect their supportive level of risk-adjusted capitalization; their business profiles as leading global providers of commercial insurance and surplus lines products; operating results that are more in line with historical levels; reductions in exposure to natural and manmade catastrophes through underwriting actions; and improvement in customer retentions.

Offsetting rating factors include continued price softening in nearly all core business segments; a decline in underwriting performance through the third quarter of 2010, compared with the same time period in 2009, increased variability of development of prior years’ loss reserves and the as-yet demonstrated effectiveness of their evolving enterprise risk management regime. The execution risks associated with their parent’s recapitalization plan, including the primary equity offering, also are offsetting factors considered in the ratings for Chartis and Lexington.

The ratings of AIU Insurance Company (New York, NY) recognize its supportive level of risk-adjusted capitalization, strong historic operating performance and the future benefits to be gained from the novation of its affiliated quota share reinsurance agreement, which suppressed underwriting and operating profits in recent years.

American General Property Insurance Company’s (Nashville TN) ratings acknowledge its supportive level of risk-adjusted capitalization, offset by the company’s limited business profile resulting from its decision to cease writing new policies. Offsetting rating factors include the company’s minimal operating profile and the effects of its run-off status on operating results.

The ratings of the SunAmerica Financial Group’s (Los Angeles, CA) domestic life and retirement services subsidiaries, collectively known as SunAmerica Financial Group (SAFG) are based upon its strong capital position, reduced volatility in operating performance and SAFG’s ability to maintain a favorable market position despite organizational pressures in recent years, which stem from issues surrounding the group’s ultimate parent, AIG. The ratings also reflect the emerging synergies under the recently established SAFG structure, which helped create enhanced opportunities for product development and distribution capabilities among the individual entities through shared resources, which A.M. Best expects should position the group to record growth in revenues in the medium to longer term.

The negative outlook recognizes the execution risk associated with the remaining steps in AIG’s recapitalization plan, under which AIG will repay and terminate the Federal Reserve Bank of New York’s credit facility, facilitate the orderly exit of the U.S. Government’s interest in two special purpose vehicles and retire AIG’s remaining TARP support and preferred shares. In addition, the negative outlook on the SAFG entities reflects the challenges associated with the individual entities within SAFG regaining market momentum under their current distribution model, the reduced premium volumes on the domestic life side, which continues to decline from historical levels, while on the retirement services side, their spread-based businesses remain vulnerable to interest rate risks and the effects of the global economic environment. Moreover, the low interest rate environment is expected to impact overall investment returns, which may further pressure net operating results.

AIG’s ICR acknowledges the support the company received from the U.S. Government, the sales and divestitures of its non-core businesses and the earnings generated by its diverse operations, including its global property/casualty insurance network, as well as its strong, well-established leadership positions in key U.S. insurance markets. The ICR also reflects the continued financial support of the U.S. Government as AIG works to meet various conditions that must be completed before final execution of its planned recapitalization as described above. A liquidity facility through the U.S. Treasury will remain available to AIG until the company completes its stock offering in 2011, affording financial flexibility to AIG in the event of an immediate need. A.M. Best continues to monitor the execution of the recapitalization plan for its effects on AIG’s key balance sheet metrics and associated risks.

Notwithstanding the U.S. Government support, A.M. Best’s view of the rated entities within the AIG enterprise reflects its perspective of the fungibility of capital across the enterprise, as well as the adequacy of capital at the operating entity level. In addition, trends in operating performance and business profile also are considerations in the rating process. Changes in these areas may lead to revisions in the FSRs of the operating entities and ICRs of both the operating entities and holding company, even without revisions in the level of support from the U.S. Government.

For a complete listing of American International Group, Inc. and its subsidiaries’ FSRs, ICRs and debt ratings, please visit http://www.ambest.com/press/122007aig.pdf.

The principal methodology used in determining these ratings is Best’s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Property/Casualty Insurers”; “BCAR for Life and Health Insurers”; “Update to BCAR for Life & Health Insurers”; “Understanding BCAR for Life and Health Insurers”; “A.M. Best’s Liquidity Model for U.S. Life Insurers”; “Assessing Country Risk”; “Rating Members of Insurance Groups”; “The Treatment of Terrorism Risk in the Rating Evaluation”; “Natural Catastrophe Stress Test Methodology”; “Rating Natural Catastrophe Bonds”; “Catastrophe Risk Management Incorporated Within the Rating Analysis”; “Catastrophe Analysis in A.M. Best's Ratings”; “A.M. Best’s Perspective on Operating Leverage”; “A.M. Best Comments on Enterprise Risk Management and Capital Models”; “Equity Credit for Hybrid Securities”; and “Analyzing Contingent Capital Facilities.” Methodologies can be found at http://www.ambest.com/ratings/methodology.