S&P Lowers Chartis’ Ratings to ‘A’; Outlook Changed to Stable

March 1, 2011

Standard & Poor’s Ratings Services has lowered its counterparty credit and financial strength ratings on American International Group Inc.’s (AIG) Chartis operating subsidiaries to ‘A’ from ‘A+’. S&P also said it has revised the outlook on AIG and all its operating companies to stable from negative.

In addition, S&P affirmed its ‘A+’ counterparty credit and financial strength ratings on the SunAmerica Financial group of insurance companies and its ‘A-‘ counterparty credit rating on AIG.

“While recognizing the overall improvement in the holding company’s and SunAmerica’s financial profiles, we lowered the Chartis ratings because of the deterioration in the group’s operating performance,” explained credit analyst Steven Ader.

S&P said that “notwithstanding the previously announced $4.1 billion adverse prior-year reserve development (see “American International Group Inc. And Operating Companies Ratings Unaffected By Announced $4.1 Billion Charge,” Feb. 9, 2010) already incorporated into our analysis, Chartis’ fourth-quarter 2010 underwriting results were lower than expected.

“The group’s accident-year combined ratio (excluding prior-year reserve development) was 111.3 percent for the fourth quarter and 103.6 percent for the 12 months ended Dec. 31, 2010. This is a marked deterioration from the 101.2 percent combined ratio for 2010 through Sept. 30.”

Ader explained that “although we recognize that some of this deterioration stemmed from nonrecurring items that we don’t expect will affect prospective operating performance, the downgrade reflects our modified view that Chartis will not be able to outperform the industry over the next one to two years, despite its formidable competitive global presence.”

As part of its overall analysis S&P said that, although it believes that a “combination of underwriting initiatives and a continued shift toward lower-volatility business lines will support future profitability, continued pricing pressure in the U.S and–to a lesser extent–in the International segment will hamper improvement.

“The decline in operating performance relative to historical norms drives our revised view that although Chartis remains a strategically important part of the AIG group that we believe is important to the group’s long-term strategy, we no longer view it as core, as defined under our group methodology.”

In regard to the ratings on SunAmerica, S&P indicated that it had “identified competitive pressure and prospective operating performance as potential weaknesses to the rating. However, we affirmed the ratings because the companies’ competitive position has strengthened as the issues related to the government bailout fade.

“For example, SunAmerica has been able to expand distribution and has re-entered into agreements with independent distributors. As a result, net flows, though still negative, have improved markedly, reflecting a stabilization of surrenders. SunAmerica’s operating performance has continued to improve, with pretax operating income (before realized gains/losses) of $4.0 billion in 2010, a 75 percent increase from 2009.”

S&P explained that it has affirmed the ‘A-‘ rating on AIG “because of the strength of the Chartis and SunAmerica operating companies as well as the diversification between property/casualty and life insurance profile that they provide. We expect that each operating unit will contribute approximately equal pretax operating income in the coming years.

“This benefit–in combination with reduced uncertainty resulting from the recently executed recapitalization plan, including the accelerated repayment of federal government obligations–is a further strength to the AIG rating. AIG has improved its overall liquidity position through its successful wind-down of AIG Financial Products, the reduction of other contingent liquidity needs, and the recent issuance of senior unsecured fixed-rate debt. Overall, AIG’s financial profile continues to strengthen as government support decreases.”

In addition the report noted that the ‘A-‘ rating on AIG “continues to receive a one-notch uplift from the company’s stand-alone credit profile because of the continued, albeit diminished, support from the U.S government.

“The ‘A’ ratings on the Chartis subsidiaries reflect our opinion of the group’s strong and diverse competitive profile, strong capital adequacy, and strong though diminished operating performance.

“The ‘A+’ ratings on SunAmerica reflect our opinion of its very strong competitive position and strong and improving operating performance, somewhat offset by capital–which, though strong and further supported by holding-company liquidity–remains a weakness to the rating. AIG’s enterprise risk management (ERM), though markedly improved at the holding company, also remains a weakness to the ratings.”

S&P said that the stable outlook “reflects our belief that the group will sustain its competitive position while reporting industry-consistent operating performance at Chartis. We expect that premium and deposit growth at SunAmerica will be in the low single digits as SunAmerica continues to benefit from its very strong competitive position and uncertainty at the AIG group declines because of the repayment of government debt.

“Chartis will likely continue to shift its business toward less-volatile lines of business that will translate into more consistent operating performance. AIG’s ERM should strengthen as the Chartis and SunAmerica operating companies implement improved risk-management processes and are further integrated into the AIG organization.

“We could lower the ratings on AIG, Chartis, and SunAmerica if the group’s performance were to fall short of our expectations, particularly if there were a shortfall in earnings (expected pretax consolidated operating earnings of $7 billion), capitalization (currently strong), or leverage. Alternatively, we could raise the ratings if the consolidated group, while demonstrating enhanced ERM practices, were to improve its operating performance, particularly at Chartis, to a level markedly above industry norms while continuing to shift Chartis’ risk profile to less-volatile, short–duration, non-catastrophe-exposed business lines.”

Source: Standard & Poor’s

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