Best Comments on Ratings of Chartis U.S. Insurance Group

February 11, 2011

Best Comments on Ratings of Chartis U.S. Insurance Group
A.M. Best Co. has commented that the financial strength rating of ‘A’ (Excellent) and issuer credit ratings of “a” of the New York-based Chartis U.S. Insurance Group, whose members are wholly owned, indirect subsidiaries of American International Group, Inc., “are unchanged following AIG’s announcement of what is expected to be a $4.1 billion (net of discount and loss sensitive adjustments of $446 million) charge to strengthen its loss and loss adjustment reserves.”

However, Best said that its outlook for the ratings is negative.

Best also explained that Chartis’ “reserve strengthening relates primarily to prior year reserves on several of its long-tail businesses, including asbestos and excess casualty, as well as primary and excess workers’ compensation.”

As far as AIG’s actions are concerned, Best noted that it has “entered into an agreement with the United States Treasury, under which AIG will retain $2.0 billion of the net cash proceeds from the sale of AIG Star Life Insurance Co. Ltd. and AIG Edison Life Insurance Company.

“AIG will use these proceeds, along with other funds, to support the capital of the Chartis insurance subsidiaries in connection with the loss reserve strengthening.”

Best acknowledged that the capital addition would significantly increase Chartis’ reserves; however, Best said the “ratings remain unchanged,” as it contemplates “a reserve shortfall in its most recent assessment of the group’s reserves and thus views the charge as being within its previous estimate of the group’s reserve deficiency.

“Furthermore, the capital contributions to the operating Chartis insurance companies are expected to neutralize any change in statutory surplus and Chartis’ risk-adjusted capitalization as estimated by Capital Adequacy Ratio following the increase in reserves.”

Best also said it “believes recent changes in AIG’s risk management and actuarial functions contributed to the refinement in Chartis’ reserve analysis and judgments used in estimating loss reserves, which should prove beneficial going forward. Consequently, no change in ratings is warranted at this time.”

Source: A.M. Best

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