Press release from Business Wire
A.M. Best Revises Outlook to Stable for Most American International Group, Inc. North American Property/Casualty Companies
Friday, January 27, 2012
OLDWICK, N.J. (Business Wire) -- A.M. Best Co. has affirmed the financial strength ratings of A (Excellent) and issuer credit ratings (ICR) of “a” of Chartis US Insurance Group and its members (Chartis US) and the Lexington Insurance Pool and its members (Lexington), headquartered in Boston, MA. The outlook for these ratings has been revised to stable from negative. (See list below for member details.)
A.M. Best also has affirmed the FSR of A (Excellent) and ICR of “a” of AIU Insurance Company (AIU). The outlook for these ratings remains negative.
Concurrently, A.M. Best has affirmed the FSR of B+ (Good) and ICR of “bbb-” of American General Property Insurance Company (AGPIC) (headquartered in Houston, Texas). The outlook for these ratings has been revised to stable from negative.
In addition, A.M. Best has withdrawn the FSRs of A (Excellent) and ICRs of “a” of Chartis Select Insurance Company and Landmark Insurance Company, due to the merger of these companies with and into their immediate parents, Lexington Insurance Company and National Union Insurance Company of Pittsburgh, Pa., respectively.
All companies are subsidiaries of American International Group, Inc. (AIG) (New York, NY) (NYSE: AIG). Unless otherwise noted, all companies are headquartered in New York, NY.
The ratings of Chartis US reflect its supportive level of risk-adjusted capitalization, the group's leadership position in the global property/casualty market, the successful implementation of Chartis' rebranding, the effect of new leadership on management's approach to the business, and its favorable earnings prospects in light of the financial, cultural and operational initiatives put in place since 2010. Offsetting these positive factors are the effect of soft market conditions on underwriting results, A.M. Best's expectation of continued emergence of adverse development of prior years' loss reserves and the group's exposure to natural and man-made catastrophe events which, although diminished by recent underwriting actions, remains a significant contributor to underwriting variability.
The stable outlook reflects Chartis US' market position; its ability to lead, attract and retain clients by leveraging its significant global capacity, extensive product offerings and innovation; and greater emphasis on technical pricing and predictive modeling. 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. A.M. Best also 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. The change in outlook to stable from negative also considers the continued improvements at AIG including the January 2011 implementation of the company's recapitalization plan, AIG's recent issuance of debt and equity in the public capital markets, enhanced holding company liquidity and the orderly wind down of its financial products division. (Please refer to today's press release titled, “A.M. Best Revises Outlook to Stable for American International Group, Inc. and Most of Its U.S. Insurance Subsidiaries” for details.)
Chartis US' risk-adjusted capital position remained stable in 2011 and is well-supportive of the ratings at its current level. A decline in affiliated investments in recent years has served to improve both the level and quality of risk-adjusted capital, as have actions to reduce the group's exposure to natural catastrophes. Surplus declined in 2011, primarily due to underwriting losses driven by catastrophes and by payment by the group members of shareholder dividends in line with historical levels. A.M. Best anticipates that future dividends will be taken in accordance with AIG's strategy of maintaining more capital at the holding company level, which affords a greater level of flexibility to deploy resources throughout the enterprise. At the same time, A.M. Best expects that capital will be maintained at a sufficient level to support the ratings at the operating entities. AIG has issued Capital Maintenance Agreements to its key operating subsidiaries as part of its capital management plan in support of this expectation.
Underwriting performance improved through the first nine months of 2011 compared with 2010, but is expected to be slightly worse than the industry average for the year. Chartis US' 2011 results for that period were impacted by the unusually high level of global catastrophe activity in the year, which added approximately nine points to the combined ratio. Results as of September 30, 2011 also were modestly impacted by adverse development of prior years' loss reserves. A.M. Best notes that the favorable comparison of 2011 results to 2010 is substantially affected by the impact of increases in reserves for prior years' losses in 2010, which totaled $5.2 billion and added over 26 points to the reported statutory combined ratio in that year. The reserve increase in 2010 was, as indicated previously, within A.M. Best's estimate of the group's reserve deficiency and, as such, did not drive a change in the group's ratings. Favorable rate changes accelerated through 2011, and Chartis US expects to continue achieving rate increases through 2012.
Future development of loss reserves will be favorably impacted by the 2011 loss portfolio transfer of Chartis US' asbestos reserves to National Indemnity Company, a subsidiary of Berkshire Hathaway Inc. Offsetting this favorable effect is A.M. Best's expectation that the group's reserves—even after consideration of the benefit of this agreement—remain deficient, although at a lower level than prior to these actions. A.M. Best's assessment of the group's risk-adjusted level reflects this expectation. Further, A.M. Best anticipates that Chartis US' reported underwriting results will continue to reflect increases in prior years' loss reserves in the near to mid term.
The group continues to enjoy its position as a leading provider of commercial insurance in the U.S. market and benefits from Chartis' global leadership position. The group's ability to provide global insurance services to multinational companies, as well as to meet the needs of local markets, remains a key differentiator of its business profile.
The ratings of Lexington reflect its supportive level of risk-adjusted capitalization, historically favorable development of prior years' loss reserves, consistent generation of favorable pre-tax operating and net income and its position as the leader in the U.S. excess and surplus lines market. Offsetting these factors are the effects of soft market conditions on the group's underwriting results; its exposure to natural catastrophes, which drives variability in underwriting performance; and the long-tailed nature of its excess casualty writings. The stable outlook reflects A.M. Best's expectation that the group will maintain a supportive level of risk-adjusted capital driven by continued favorable net earnings. The change in outlook to stable from negative also reflects A.M. Best's perspective on the reduced risk to Lexington from negative events at its ultimate parent, AIG.
Lexington's underwriting and operating results deteriorated through the first three quarters of 2011 from their 2010 level, driven by the significant level of catastrophe and weather-related events in the year. The effect of these events was partially offset by favorable development of the pool's reserves for prior years' losses. Despite the decline in underwriting performance driven by a near-historic level of global catastrophe activity, the group's underwriting losses through September 30, 2011 were relatively modest in the context of its surplus and asset bases. Underwriting results continue to benefit from a better than average expense ratio, but A.M. Best notes that Lexington's expense ratio has grown closer to its peer group average in recent years, driven in part by lower levels of net written premium (particularly in 2009).
Following the sharp decline in net written premium in 2009, Lexington's premiums rebounded in 2010 and 2011. The decline reflected both reduced demand for traditional excess and surplus (E&S) coverages (as admitted carriers sought to boost business by writing coverages traditionally offered on an E&S basis on their admitted paper) and the effects of AIG's 2008 crisis. The pool maintained its E&S leadership position, however, and as the aftermath of AIG's issues faded, customer and premium retentions have returned to near-normal levels. As with Chartis US, Lexington expects the positive rate actions that began in 2011 to continue through 2012.
The ratings of AIU reflect its supportive level of risk-adjusted capitalization, the historically favorable performance of its core book of Japanese A&H and auto insurance and its restored focus on that business. Offsetting these factors are the variability in surplus and results in recent years (related in part to the quota share reinsurance it provided to an affiliate in 2008 and 2009), the effects of the Tohoku earthquake and tsunami on 2011 results and the potential for continued changes in the company's legal entity structure as the previously announced restructuring of Chartis' business continues. The negative outlook on the ratings is reflective of these offsetting factors.
AGPIC's ratings reflect the company's sufficient level of risk adjusted capital to run off its remaining liabilities and the orderly progress of that run-off, offset by its limited business profile. The stable outlook reflects A.M. Best's expectation that the company will continue to maintain sufficient capital to facilitate the wind down of its business, and that there will be no negative impact on the company resulting from issues related to AIG.
A.M. Best does not expect positive movement on any of these ratings in the near to mid term. Potential drivers of downward movement in the ratings include deterioration in risk-adjusted capitalization below the level required to support the ratings; underwriting or operating performance that is not in line with A.M. Best's expectations; recognition of adverse development of prior years' loss reserves in excess of A.M. Best's expectations; recognition of a failure of management to disclose information that is relevant to the rating process; reduction in or withdrawal of lines of credit available to AIG or Chartis Inc.; and deterioration in the financial condition of AIG, whether driven by its insurance or non-insurance operations.
The FSR of A (Excellent) and the ICR of “a” have been affirmed and the outlook revised to stable from negative for Chartis US Insurance Group and its following members:
- National Union Fire Insurance Company of Pittsburgh, Pa.
- American Home Assurance Company
- Commerce and Industry Insurance Company
- Chartis Property and Casualty Company
- The 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 the ICR of “a” have been affirmed and the outlook revised to stable from negative for Lexington Insurance Pool and its following members:
- Lexington Insurance Company
- Chartis Specialty Insurance Company
- Chartis Excess Limited
The principal methodology used in determining these ratings is Best's Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best's rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “A.M. Best's Ratings & the Treatment of Debt”; “Assessing Country Risk”; Catastrophe Analysis in A.M. Best Ratings”; “Rating Members of Insurance Groups”; “Rating Natural Catastrophe Bonds”; “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Property/Casualty Insurers”; and “The Treatment of Terrorism Risk in the Rating Evaluation.” Methodologies can be found at www.ambest.com/ratings/methodology.
Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.
A.M. Best Co.
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Senior Manager, Public Relations
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Assistant Vice President, Public Relations