S&P Sees No Rating Change for AIG from $4.1 Billion Charge

February 11, 2011

Standard & Poor’s Ratings Services announced that its ratings on American International Group Inc. (A-/Negative/A-2) and AIG’s insurance subsidiaries “are not affected by the company’s announcement that it expects to report a $4.1 billion charge for the fourth quarter of 2010 to strengthen loss reserves in its Chartis property/casualty insurance operations. This addition constitutes approximately 6 percent of carried reserves as of Sept. 30, 2010.”

S&P also noted that AIG has “entered into an agreement with the U.S. Department of the Treasury permitting AIG to apply $2 billion of the net cash proceeds from the recently closed sale of AIG Star Life Insurance Co. Ltd. and AIG Edison Life Insurance Co. to support the capital of the Chartis Insurance subsidiaries in connection with the loss-reserve strengthening.

“After the reserve charge and recapitalization, consolidated capital will remain strong and appropriate for the ratings. Although this charge hurt Chartis’ operating performance in 2010, we expect Chartis to report a combined ratio in the high 90 percent range in 2011, which includes potential reserve development but excludes significant catastrophe losses. Consolidated continuing pretax income (including the Domestic Life Insurance & Retirement Services segment) will be approximately $7 billion in 2011.

“The $4.1 billion reserve charge, net of discount, is primarily focused in the asbestos ($1.3 billion before discount), excess casualty ($1 billion), and workers’ compensation and related lines ($2 billion before discount).”

S&P also explained that a substantive proportion of the reserve strengthening “relates to accident-years 2005 and prior, though the company booked a significant amount in the more recent accident years. The adverse development in workers’ compensation is consistent with our belief that the industry will strengthen reserves in this line for most recent years (see “For The U.S. Workers’ Compensation Industry, Profitability Will Be Difficult To Achieve,” Dec. 7, 2010).”

However, S&P indicated that the “significant reserve additions that Chartis booked in the most recent accident years raises our concern about its prospective operating performance. Nevertheless, Chartis has materially reduced its workers’ compensation and excess casualty exposures since their peaks in 2006. For the nine months ended Sept. 30, 2010, gross workers’ compensation premium constituted 12.9 percent of the company’s commercial segment production compared with 17.3 percent for the same period in 2006. We believe Chartis effected similar reductions in the excess casualty businesses.

“After the application of the $2 billion of net cash proceeds from the recently closed sale of AIG Star Life Insurance Co. Ltd. and AIG Edison Life Insurance Co. and other capital actions, capitalization at Chartis and the overall group remains consistent with expectations, even including the recent reserve charge. Holding-company liquidity, bolstered by the Treasury agreement to retain $2 billion in cash proceeds and other cumulative positive developments, remains well appropriate for the rating.

“The ‘A-‘ long-term counterparty credit rating on AIG continues to receive a one-notch of uplift from the stand-alone credit profile because of the continued, albeit diminished, support from the U.S. government. The ‘A+’ ratings on AIG subsidiaries Chartis and SunAmerica Financial Group reflect our opinion of the companies’ combined strong and diverse competitive profile, consolidated capital adequacy, and historically strong–though diminished–operating performance.”

But S&P also noted that “enterprise risk management (ERM) is a weakness to the ratings, and the announced reserve charge raises concerns regarding overall risk controls.”

S&P’s outlook on AIG and its primary insurance operations remains negative “because of the uncertainty of the core insurance companies’ operating performance.” It will review the” ratings on both AIG and its insurance operations early this year, following our review of recent and prospective operating performance, paying particular attention to pricing, reserving and overall performance relative to peers. The review will also incorporate our upcoming discussions with AIG about its updated ERM programs and the operating units, including Chartis.”

Source: Standard & Poor’s

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