On Monday, American International Group Inc.’s (AIG) property-casualty insurance (P&C) subsidiary, Chartis, was downgraded by Standards and Poor’s (S&P) rating agency.
Based on Chartis’ weaker-than-expected fourth quarter performance, S&P lowered it to “A” from “A+.” However, Chartis continues to enjoy investment grade status. Currently, AIG’s two dominant businesses are: general insurer Chartis and life insurer SunAmerican Financial Group.
During the fourth quarter of 2010, Chartis incurred a significant operating loss of $4.0 billion compared with $1.8 billion in the year-ago quarter based on reserve additions net of discounts and loss sensitive premium adjustments of $4.2 billion. Approximately 80% of the total reserve charges were incurred on asbestos, excess casualty, excess workers’ compensation, and primary workers’ compensation, four long-tail lines of business.
However, it is notable that both premiums written and premiums earned increased 9.4% and 6.5%, year over year, to $7.6 billion and $8.6 billion, respectively. Nevertheless, the increase reflected the consolidation of Fuji Fire & Marine Insurance Company (Fuji). Excluding Fuji, worldwide net premiums written declined 3.3% over prior-year period.
The loss was also attributable to challenging economic conditions that impacted payrolls and cargo shipments, and a competitive property-casualty market. These factors also resulted in higher claim and claim adjustment expenses and higher underwriting expenses. Consequently, combined ratio deteriorated to 160.5% compared with 132.5% in the prior-year period.
Moreover, growth prospects of Chartis continue to appear bleak in the upcoming quarters based on intense competition and the sluggish P&C cycle.
Some Light of Hope Ahead…
Although results appeared sluggish due to AIG’s ongoing business restructuring initiatives, stability was retained in life insurance operations that drove the book value per share during the quarter. As a result of this, S&P upgraded its outlook on AIG and all of its operating companies to stable from negative.
Primarily, the rating agency remains optimistic on AIG’s life insurance operation unit, SunAmerica, whose assets under management grew to $248.5 billion as of December 31, 2010, up 8% year over year. Unrealized gains totaled $3.3 billion at the end of 2010 compared to losses in 2009. However, operating income decreased marginally to $1.0 million from $1.1 billion in the year-ago quarter.
Further, divestiture of assets and focus on core life and property-casualty business has helped it to attain the top life insurer position in the US. Moreover, with the successful completion of the recapitalization program and full repayment of the FRBNY credit facility in January this year, AIG has sought optimism with respect to its capital stability. This has also enabled AIG to raise more than $5.5 billion of new, non-government debt through a debt offering, a contingent capital facility and new bank facilities, thereby restoring its operating flexibility and overall confidence for stable growth in the long run.
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