NEW YORK—American International Group Inc.'s reported decision to hold off on an initial public offering of property/casualty unit Chartis Inc. is understandable given financial market conditions, several observers say.

Regardless of its ownership, Chartis has a long way to go before it fully recovers from the calamity that struck its parent during the financial crisis, they say.

Meanwhile, Anastasia Kelly, AIG's vice chairman for legal, human resources, corporate affairs and corporate communications, resigned last week as the insurer continued to deal with controversies over executive pay.

Late last month, Bloomberg, citing people familiar with the situation, reported that AIG CEO Robert Benmosche signaled that he wants to keep the unit and told the firm's employees that he considers Chartis a core holding.

A spokesman for AIG declined to comment.

Chartis, formerly AIU Holdings Inc., was formed last year through combining AIG's domestic and foreign property/casualty insurance businesses. AIG's previous CEO, Edward Liddy, said in April 2009 that the insurer was accelerating the unit's separation for a sale or public offering of a minority stake, although no date was set. At the time, AIG also said any decision on its future would depend on market conditions.

Analysts say any plans AIG has to keep Chartis likely are driven in part by continuing difficult economic conditions and delaying a sale or IPO may be temporary until conditions improve.

“Even with a recovery in the financial markets, the prospects are not good. Valuations for property/casualty companies are very low by historic standards, and the asset sales environment is very difficult right now,” said Mark Lane, a research analyst with William Blair & Co. in Chicago.

If Mr. Benmosche views “Chartis as a core business going forward, then he's saying he's not prepared to give up 20% of that business at an inadequate valuation,” said John Wicher of John Wicher & Associates Inc. in San Francisco. “It strikes me as good leadership.”

Despite pressure to repay the U.S. government for the late 2008 bailout to avert AIG's near-collapse, “you don't want to see bad decisions being made, and a healthy property/casualty business is in the best interest of both” shareholders and customers, Mr. Wicher said.

Observers say the move seems consistent with Mr. Benmosche's broader approach to divestitures. Since he took over AIG in August 2009, the CEO has slowed the pace of asset sales to try to generate higher values for the units to repay AIG's approximately $182 billion rescue package.

Cathy Seifert, an equity analyst with Standard & Poor's Corp. in New York, said AIG is “between a rock and hard place.” Because Chartis is one of AIG's more valuable assets, “to the extent they can retain the unit and hold onto franchise value, it is a good thing,” she said. However, “we can't overlook the fact that they still need to repay the government.”

The potential plan change for Chartis also underscores the difficulty that AIG is experiencing in executing its rebranding campaign, observers said. The insurance unit was renamed twice last year to distance itself from AIG, settling in July 2009 on a name that AIG said was derived from the Greek word for “map.” In November, when the Chartis name was added to roughly 30 units, Chartis wrote to customers that it was an “important step” in advancing the goal of achieving operational independence.

Despite inching away from AIG, Chartis still faces numerous challenges, observers say. Since the government bailout, limits on executive compensation and lingering concerns about the insurer's financial strength have caused some employees and customers to leave.

“Rebranding is much more than just changing your name; you have to gain respect for your brand,” said Bill Bergman, an analyst with Morningstar Inc. in Chicago. “Everyone knows Chartis is AIG, and I think they have to go out and earn their stripes.”

AIG may build more value for the Chartis unit by focusing “on the health of the business, rebuilding relationships with brokers and serving clients,” Mr. Bergman said.

Several observers said the lack of clarity surrounding Chartis also is a concern.

“Buyers really want to know they have a long-term relationship with their insurer, and right now the situation seems very fluid,” said S&P's Ms. Seifert.

A December survey by Barclays Capital Inc. found that about 80% of large commercial insurance buyers have part of their exposures insured with Chartis compared with 90% six months earlier. Of those with coverage through Chartis, about 75% planned to keep their business with Chartis, up from 41% six months earlier, the survey found. Many buyers however, continue to reduce their counterparty exposure to AIG by diversifying their programs to include other insurers, the survey said.

The “faint-of-heart” customers already have left AIG, said David Wood, a policyholder attorney and partner with Anderson Kill Wood & Bender P.C. in Ventura, Calif.

“The buyers that have stayed with Chartis know what they are getting. They understand the relative health of AIG's insurance units regardless of the name, or whether or not it is tethered to its parent,” Mr. Wood said.

Meanwhile, last week, Ms. Kelly, AIG's chief legal officer, resigned in reaction to a federal pay cap imposed on executives at firms that took government bailout funds.

According to an AIG statement, “Ms. Kelly resigned for "good reason' under the terms of AIG's executive severance plan based on the reduction in her base salary that was mandated by the Special Master for Executive Compensation for TARP Recipients.”

Previously, according to the Wall Street Journal, AIG investigated five executives who threatened to resign over the pay limits imposed by the U.S. government. Four of them later rescinded their threats, according to the paper.