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By CYRIL TUOHY, managing editor of Risk & Insurance®

A major ratings house Wednesday reaffirmed the financial strength of the bulk of the property/casualty and life and health subsidiaries of American International Group Inc. through the end of the third quarter.

The rating remains unchanged since the companies were downgraded one notch from A+ in September 2008, in the wake of the near-collapse of AIG, the parent company.

Best Analyst Jennifer Marshall said the rating reflected the fact that the companies had enough capital available to support their risk exposures, showed better underwriting and operating performance, and retained the bulk of their policies and customers around the world.

"It is still an excellent rating, and we believe that, based on our analysis of the capitalization, the rating is appropriate," said Marshall.

Offsetting factors included the lingering reputational damage to the AIG franchise in the wake of the parent company's near collapse last year, exposure to natural and man-made catastrophe losses, softening prices in nearly all core segments, the risk associated with rebranding initiatives and the continued involvement of the government in the company's affairs.

Marie Ali, a spokeswoman for Chartis, said the rating proved the commercial property/casualty units were financial sound.

"A.M. Best's rating affirmation reflects Chartis' solid capitalization, improved earnings and strong competitive market position despite the challenges we have faced," she said.

THE DETAILS

Included in the Chartis U.S. Insurance Group are 15 property/casualty subsidiaries. The Lexington Pool comprises four separate excess and specialty insurance companies. AIU is a New York-based auto insurer. Yosemite, based in Indiana, sells credit-related insurance products.

AIU, noted Best, has ended a quota-share reinsurance agreement that generated below average results in 2008. But the company also faces the potential for run-off of liabilities associated with the reinsurance contract.

Yosemite's strong underwriting and operating performance was partially offset by its dependence on its affiliated finance companies as the sole source of its business and distribution channel, Best also noted.

Best retains a "negative" outlook on the companies because of their ties with AIG, the holding company, said Marshall.

"AIG is still affected by government support," said Marshall.

Earlier this month, for example, as part of package of broader compensation reforms designed to encourage managers to act in the long-term interests of shareholders and customers, the Treasury Department's Special Master for TARP Executive Compensation, Kenneth R. Feinberg, restricted cash compensation to three-quarters of AIG's 100 best-paid employees to $500,000 a year.

Over the past year, AIG has sold off several of its subsidiary companies to raise cash to repay the government.

But will that be enough? Government repayment obligations aside, news reports earlier this month, citing a report by Sanford C. Bernstein analyst Todd Bault, pointed to AIG having an $11 billion reserve shortfall to pay claims.

INDUSTRY OUTLOOK DOWN TOO

Reports by Fitch Ratings and insurance industry analysts Keefe, Bruyette & Woods paint a somber picture for the property/casualty sector in 2010 as premium volumes decline and combined ratios clock in at a projected 104-105 level.

Separate statements made by Mike Fitzgerald, a senior analyst with Celent, quoted in recent media reports, also delivered a negative outlook on the property/casualty sector next year. Prices are still soft, and there's still too much capacity in the marketplace, Fitzgerald said.

December 17, 2009

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