On Monday, Fitch Ratings agency raised the insurer financial strength ratings (FSR) of American International Group Inc.’s (AIG“>AIG) life insurance unit, SunAmerica Financial Group, based on improved financial outlook and healthy capital re-establishment.
Accordingly, the rating agency upgraded the FSR for SunAmerica to “A” from “A-”, reflecting a stable outlook. While the worst is now behind AIG, the operating performance of SunAmerica improved substantially given the reduction in investment losses, lower surrender experience and higher capital adequacy metrics. These factors also helped the company’s life insurance unit generate earnings of $4.0 billion in 2010, increasing 74% from $2.3 billion in 2009.
Furthermore, the rating agency remains optimistic on AIG’s SunAmerica, whose assets under management grew to $248.5 billion as of December 31, 2010, up 8% year over year. Unrealized gains totaled $3.3 billion at the end of 2010 compared to losses in 2009.
Fitch believes that although AIG will take some time to revert to its position pre-recession, its life insurance unit is slowly but steadily moving ahead by boosting its business generation capacity to mitigate other downsides such as margin pressure, interest rate risk and regulatory uncertainty.
However, the rating agency did not push up the ratings of AIG’s other non-life units. In February this year, Fitch had downgraded the FSR of AIG’s property and casualty (P&C) insurance unit, Chartis US Insurance Group, to “A” from “A+”, although outlook for the non-life insurance unit remains stable. The demotion was based on higher-than-expected loss reserve charges during the fourth quarter of 2010. The consistent increase in adverse reserve development poses additional risk on AIG’s underwriting capabilities.
The weak performance by Chartis was also followed by a rating downgrade from Standards and Poor’s (S&P), during the same period. Moreover, growth prospects of Chartis continue to appear bleak in the upcoming quarters based on intense competition and the sluggish P&C cycle. However, S&P upgraded its outlook on AIG and all of its operating companies, including SunAmerica, to stable from negative, based on the improved performance.
Currently, Chartis and SunAmerica are AIG’s two dominant businesses in the US. Although the company has been posting sluggish results, due to AIG’s ongoing business restructuring initiatives, stability is witnessed in life insurance operations that are driving the book value per share.
Further, divestiture of assets and focus on core life and property-casualty business have helped it to attain the top life insurer position in the US. Moreover, with the successful completion of the recapitalization program and full repayment of the FRBNY credit facility in January this year, AIG is optimistic about its capital stability.
This has also enabled AIG to raise more than $5.5 billion of new, non-government debt through a debt offering, a contingent capital facility and new bank facilities, thereby restoring its operating flexibility and overall confidence for stable growth in the long run.
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