AIG Downgraded

Standard & Poor’s Ratings Services lowered its long-term counterparty credit and senior debt ratings on American International Group Inc. to “AA” from “AA-Plus.” S&P also removed the New York-based insurance company from its credit watch list for these categories.

The decision was in response to AIG’s announcement that it was restating earnings for five years and raising reserves.

AIG-which is under investigation by state and federal regulators over accounting issues-filed its long-awaited 2004 annual report with the Securities and Exchange Commission, restating financial results for the past five years.

Moody’s Investors Service confirmed its long-term senior debt ratings on AIG at “Aa2” based on the report and revised its outlook to stable. Fitch Ratings termed AIG’s filing a modest positive development but kept the company’s debt on negative ratings watch because of significant short-term and longer-term uncertainties.

S&P said it took the action because of the size and scope of the accounting adjustments in its recently released 10-K filing. The agency also expressed concern about the possibility that AIG, after a company-initiated study, could raise its reserves. S&P estimated the increase could be up to $2 billion. An increase in reserves typically reduces profits.

It also noted several investigations by states’ attorneys general, the SEC and insurance regulators are underway, and the company is the subject of shareholder suits. The ratings incorporate S&P’s assumptions about potential legal or regulatory settlements, disgorgement of profits, and litigation costs that slightly exceed $1 billion.

Argonaut Group Raised

S&P raised its counterparty credit rating on Argonaut Group Inc. to “BBB-” from “BB+.” At the same time, S&P raised its counterparty credit and financial strength ratings on Argonaut Group Inc.’s operating insurance companies to “A-” from “BBB+.” S&P also raised its preferred stock rating on Argonaut by two notches to “BB” from “B+.” The notching between the preferred stock rating and holding company counterparty credit rating was narrowed to two notches in accordance with our criteria for investment-grade ratings. The outlook on Argonaut and its subsidiaries is stable.

The upgrade reflects Argonaut’s improved and strong capitalization as of year-end 2004, improved earnings, improved competitive position, successful execution of its strategic focus on niche markets where it can excel, and a level of financial leverage supportive of the rating, according to S&P.

Partially offsetting these strengths are capital considerations and underwriting results that, while profitable, are not yet as strong as some of its competitors. S&P expects underwriting results to continue improving in 2005 with a combined ratio of 95-96 percent, driven by strong results in excess and surplus lines, lower expected catastrophe losses, and continued consistent underwriting profits from the Select Markets and Public Entity segments.

Selective Affirmed

A.M. Best Co. affirmed the financial strength rating of “A+” (superior) and assigned issuer credit ratings of “aa-” to Selective Insurance Group and its six property/casualty pooling members. All ratings have a stable outlook.

The ratings reflect Selective’s solid capitalization, historically favorable operating performance, quality management team and strong regional market presence within the small commercial lines business segment. In addition, the ratings recognize Selective’s disciplined underwriting culture, broad product offerings, the leveraging of its agency relationships, conservative investment philosophy and prudent capital management.

Furthermore, the group has made significant advancements in Web-based technology in recent years, enabling its agency and claims management specialists to be more responsive to local agents and customers. Selective’s operating results have improved substantially over the past several years and, despite the recent emergence of more competitive property/casualty markets, are expected to remain strong in 2005.

Partially offsetting these positive factors is Selective’s above-average net underwriting leverage and investment leverage, the emergence of unfavorable prior year loss reserve development in recent years and the group’s relatively high geographic concentration in New Jersey, where competition within personal lines from existing players and new entrants has become intense.

Safeway Group Members Upgraded

A.M. Best Co. upgraded the financial strength ratings to “A” (excellent) from “A-” (excellent) of Safeway Insurance Co. of Illinois, Alabama, Georgia, Louisiana and Oak Brook County Mutual Ins. Co. of Texas. Best also assigned a financial strength rating of “A” (excellent) to Safeway Direct Insurance Co. of California. All six companies are members of the Safeway Insurance Group, headquartered in Westmont, Ill. Best additionally affirmed the financial strength rating of “B” (fair) of Safeway Property Insurance Co. of Florida. All ratings have a stable outlook.

These ratings reflect Safeway’s excellent capitalization and sustained operating profitability. These positive rating attributes are derived from the group’s underwriting discipline, multiple distribution channels and efforts to refine its infrastructure and operations. Despite catastrophe exposure and rising loss costs, Safeway has produced profitable operating results reflective of favorable loss experience and a competitive expense ratio. In addition, Safeway has benefited from price firming, which has been prevalent in the nonstandard automobile marketplace in recent years. As a result, surplus grew approximately 35 percent over the past two years.

Topics Profit Loss Underwriting AIG