Best Affirms AIG, U.S. Property/Casualty Subs Ratings; Outlook Stable

January 28, 2013

A.M. Best Co. has affirmed the issuer credit rating (ICR) of “bbb” of New York-based American International Group, Inc. (AIG), as well as the financial strength rating (FSR) of ‘A’ (Excellent) and the ICRs of “a” of the members of the Chartis U.S. Insurance Group, and the members of the Lexington Insurance Pool, both headquartered in Boston, Mass.

In addition Best has affirmed the FSR of ‘A’ (Excellent) and the ICR of “a” of American International Reinsurance Company Ltd. (AIRCO), a Bermuda-domiciled reinsurer.

The outlook for all of the ratings above is stable.

Best has also affirmed the FSR of ‘A’ (Excellent) and the ICR of “a” of New York-based AIU Insurance Company (AIUI); however, the outlook for these ratings is negative

The ratings for the members of Chartis US “reflect its supportive level of risk-adjusted capitalization, generally solid operating earnings and its leadership position in the global commercial lines insurance market,” Best said.

As overall offsetting factors, Best cited the “effect of soft market conditions on the group’s recent underwriting and operating results,” adding that it expects “continued adverse development of prior years’ loss reserves and the group’s exposure to natural and man-made catastrophe losses.”

Best’s report points out that “Chartis US has historically demonstrated an ability to produce favorable operating results despite variability in its underwriting performance; however, this ability has been challenged in recent years.”

Best said the stable outlook on the ratings “reflects AIG’s position in the U.S. commercial market; its ability to lead, attract and retain clients by leveraging its significant global capacity, extensive product offerings and innovation; as well as its greater emphasis on technical pricing and predictive modeling.”

Best noted that while “reserve development remains a concern, the stable outlook suggests that any future reserve development will be within a level acceptable to A.M. Best.” The rating agency also indicated that it “expects that the group will continue to maintain a supportive level of risk-adjusted capitalization through favorable net earnings while providing shareholder dividends to its parent in accordance with historical norms.

“Chartis US’ risk-adjusted capitalization declined slightly in 2012, primarily as a result of losses related to Superstorm Sandy,” Best continued. “These losses were partially offset by a $1 billion capital contribution and lower net written premiums and loss reserves. The resulting level of risk-adjusted capitalization is well-supportive of the ratings.

“The group has remained a leading provider of global commercial lines insurance products, with an operating scope that remains a key differentiator in its ability to provide products and services that meet the needs of global and local insurers. Net written premiums continued to decline in 2012, primarily as a result of underwriting actions. Premium and customer retentions improved and favorable pricing actions begun in 2011 continued at an accelerated pace. Further increases in rate levels are expected in 2013, although rate changes may be of a lesser magnitude.”

However, Best continued, “despite these actions, underwriting results remain under pressure, primarily as a result of losses due to catastrophe and weather events.

“Loss reserve movements have been more modest in recent years, following a $5.2 billion increase in loss reserves recorded in 2010. The transfer of Chartis US’ outstanding asbestos reserves to National Indemnity Company (Omaha, NE) in 2011 has further stabilized reserves.” Best said that in its opinion the “estimated deficiency of the group’s reserves has declined as a result of these actions,” but, Best added, that it expects “reserves will continue to develop adversely over the near-to-midterm.”

The report noted that the ratings for the members of Lexington (the pool) “recognize its supportive level of risk-adjusted capitalization, favorable development of prior years’ loss reserves over a number of years, consistent generation of positive pre-tax operating and net income (even in years with significant catastrophe losses) and its position as the largest excess and surplus writer in the U.S. market.”

As partial offsetting factors Best cited “the effects of soft market conditions and catastrophe and weather-related events on recent underwriting results and the long-tailed nature of its excess casualty writings.”

Best said the stable outlook on Lexington is based on its “expectation that favorable operating results will continue to drive supportive levels of risk-adjusted capitalization despite variability of underwriting results.”

The report further noted that the “pool’s continued actions to reduce its exposure to natural and man-made catastrophes have benefited its risk-adjusted capital level, underwriting results in 2011 and 2012 reflect the effects of events that are within management’s risk tolerance. Further reduction of the net impact of catastrophe and significant weather events—which may be achieved through further underwriting actions, rate increases and changes in the pool’s reinsurance program – is expected during 2013.

“The generally favorable development of prior years’ loss reserves also has contributed to the pool’s supportive risk-adjusted capital position. Although the level of favorable development is likely to decline in future years,” Best said, it “anticipates that Lexington will continue to benefit from even modest positive changes in reserves in the future.”

The report also underscored the fact that “Lexington remains the largest provider of excess and surplus lines insurance in the United States, with direct written premiums more than three times that of its next largest domestic competitor. The pool has historically maintained a significant expense advantage over its peers in the surplus lines composite, which has offset its historically above-average level of loss and loss adjustment expenses.

“Consistent generation of pre-tax operating and net income has resulted in steady organic capital generation, although substantial stockholder dividend payments in recent years have reduced the resulting benefit to surplus. In more recent years, the gap in expenses between Lexington and the industry as a whole has narrowed as it retains more risk and receives less benefit of ceding commissions.” Nonetheless, Best indicated that it expects “Lexington will continue to enjoy at least a several point advantage on its expense ratio relative to the industry.

“Lexington continues to maintain significant gross and net exposure to natural and man-made catastrophes in the United States, although it has implemented a series of underwriting actions to reduce that exposure through achievement of higher rate levels, limits on aggregate exposures and reduced new business in catastrophe-exposed areas. Historically, the pool experienced higher-than-average loss and loss adjustment expenses than is typical for surplus lines insurers as a result of these exposures.

In addressing these concerns related to this exposure, Best said they “continue to be tempered by Lexington’s ability to withstand catastrophes as measured by Best’s catastrophe stress test and were further enhanced by the minimal impact of losses from Superstorm Sandy on risk-adjusted capitalization. As noted above, the effect of events that are within Lexington’s risk tolerances have had a significant impact on underwriting and operating results in 2011 and 2012.”

Best explained that “AIRCO’s ratings acknowledge its supportive level of risk-adjusted capitalization, the historical profitability of the business it assumes from its affiliates and its role as the primary Bermuda presence for AIG.”

As offsetting factors Best cited “AIRCO’s historically limited direct business profile, substantial gross exposure to a closed block of U.K. deferred and payout annuities and the variability in reserves assumed from a U.K. affiliate.”

Best said its outlook for AIRCO’s ratings reflects its “expectation that the company’s business will continue to generate favorable results and that risk-adjusted capitalization will be maintained at a level that is supportive of the ratings.”

Best explained that its ratings for AIUI “reflect its adequate level of risk-adjusted capitalization, historically favorable operating performance, restored focus on core businesses and its long-standing presence in the Japanese insurance market.”

As offsetting factors Best noted the “variation in surplus and premium revenue in recent years (related in part to its former quota share agreement with a U.K. affiliate, which was novated in the fourth quarter of 2010), poor underwriting and operating results in 2011 and 2012 related to the 2011 Tohoku earthquake and the future role of AIUI within the AIG enterprise. The outlook reflects these offsetting factors.”

In conclusion Best said, it has historically “considered parental support and financial flexibility when evaluating AIG’s property/casualty subsidiaries. While there is no specific consideration of those factors in the current ratings of the companies, AIG has continued to strengthen its balance sheet through the sale of non-core businesses, has negotiated improved terms for its syndicated bank credit facilities and its financial flexibility has been improved by the sale of the U.S. Treasury’s common equity position in the company.”

Best summarized the companies and their respective ratings as follows: ratings
The FSR of ‘A’ (Excellent) and ICRs of “a” have been affirmed for the following companies, which are collectively referred to as the Chartis U.S. Insurance Group:
•National Union Fire Insurance Company of Pennsylvania
•The American Home Assurance Company
•Commerce and Industry Insurance Company
•Chartis Property Casualty Company
•Insurance Company of the State of Pennsylvania
•New Hampshire Insurance Company
•Chartis Insurance Company – Puerto Rico
•Chartis Insurance Company of Canada
•Chartis Casualty Company
•Granite State Insurance Company
•Illinois National Insurance Company

The FSR of ‘A’ (Excellent) and ICRs of “a” have been affirmed for the following companies, which are collectively referred to as the Lexington Insurance Pool:
•Lexington Insurance Company
•Chartis Specialty Insurance Company
•Chartis Excess Limited

Source: A.M. Best

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