AIG Subs Affirmed, Outlook Neg

Moody's Investors Service confirmed the "Aaa" insurance financial strength (IFS) ratings of the eight rated members of AIG's U.S. commercial insurance group (Domestic Brokerage Group, or DBG). DBG's "Aaa" IFS ratings had been placed under review for possible downgrade Feb. 4, 2003. Moody's said, however, that the outlook for these ratings, is negative reflecting its continuing negative outlook on the "Aaa" senior unsecured long-term credit rating of the insurers' ultimate parent, American International Group Inc.

According to Moody's, the confirmation of the "Aaa" insurance financial strength ratings of members of AIG's Domestic Brokerage Group reflects the group's core strategic role within the worldwide AIG organization as the group's major business platform in the U.S. property/casualty insurance sector. Because they represent the domestic P/C business, which is integral to AIG's strategic identity, DBG members receive tangible financial and operational benefits from the "Aaa"-rated parent company and, indirectly, from other members of the AIG's diversified group. Moody's noted that DBG's ratings today would likely be one notch lower absent these benefits. The "Aaa" rating and the negative rating outlook on the DBG members reflects the linkage between the DBG members and AIG.

The group's exceptional credit profile reflects its consistent and unparalleled leadership in U.S. commercial and specialty property/casualty insurance, according to Moody's.

The risk profile and volatility of DBG's business have increased, however, as reflected in the group's significant fourth quarter 2002 charge to increase its core reserves. The nature, size and timing of this reserve re-estimation suggests that the group's business is less predictable than Moody's had previously expected, and raises the possibility that continued reserve strengthening in 2003 and perhaps into 2004 for business written in prior years could persist. Moody's said that the nature of the feedback loop between reserving and pricing is such that any substantial and enduring mis-estimating of loss reserves raises questions about the adequacy of pricing during the intervening period.

While this remains a risk, Moody's said that this risk is largely offset by the beneficial effect of recent premium rate level changes and tightened contractual terms and conditions, which have contributed to stronger earnings and dramatically improved cash flow at DBG in 2003.

Safeco and Subs Affirmed

S&P affirmed its "BBB+" counterparty credit rating on Safeco Corp. and its "A+" counterparty credit and financial strength ratings on the members of the Safeco Insurance Co. Intercompany Pool, which are Safeco Corp.'s property/casualty companies. The outlook on these companies is stable.

At the same time, S&P lowered its counterparty credit and financial strength ratings on Safeco Life Insurance Co. and its wholly-owned subsidiaries—Safeco National Life Insurance Co. and First Safeco National Life Insurance Co. NY—(collectively referred to as Safeco Life) to "A-" from "A" and placed the ratings on CreditWatch with developing implications.

S&P took these rating actions after Safeco Corp. announced Sept. 29, 2003, that it intends to sell its life companies. Safeco Life had historically maintained good capitalization, but in 2002 through the second quarter of 2003, capitalization dropped to the low "BBB" range of S&P capital adequacy model. Although S&P believes corrective actions will enable Safeco's operating results to continue improving, the group faces moderate execution risk to produce sustainable earnings, especially in light of disposition of its non-core lines of business, which historically were reliable sources of income for the group. Safeco's operating performance is expected to show continued improvement over the next two years, with a combined ratio of 100 to 102 percent in 2003.

Atlantic Mutual Downgraded

Fitch Ratings downgraded the ratings of the Atlantic Mutual Cos. (AMC). The group's insurer financial strength ratings were downgraded to "BBB-" from "BBB" and the surplus note rating of Atlantic Mutual Insurance Company was downgraded to "BB-" from "BB." All ratings were removed from Rating Watch Negative. The outlook is stable.

The rating actions follow announcements that AMC sold the renewal rights to a substantial portion of its marine business to Travelers Indemnity Co. to conclude a previously announced capital raising initiative. Fitch believes it is likely that the proceeds from the renewal rights sale will not be sufficient to replenish the capital that would be lost if AMC were to strengthen reserves to the required level indicated by Fitch's modeling.

Positively, Fitch notes AMC's progress in its capital raising efforts and improvements in the quality of capital. In addition to the benefits realized on the renewal rights sale, AMC raised $15 million through the sale of surplus notes earlier this year. AMC also realized gains of approximately $50 million on its investment portfolio. Fitch also notes that AMC has used the proceeds of these efforts to substantially reduce the level of soft capital that had been generated by previous reinsurance transactions.