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AIG property/casualty units downgraded by Moody's

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Moody's Investors Service Inc. has downgraded the financial strength rating of American International Group Inc.'s property/casualty units in the United States and Canada to A2 from A1, the New York-based rating agency said Wednesday.

“The downgrade of AIG's main P&C units reflects persistent adverse loss development and weak underwriting results plus the ongoing challenge of setting reserves for long-tail casualty lines,” said Bruce Ballentine, Moody's lead analyst for AIG, in the announcement.

Moody's noted that AIG took a $3.6 billion charge to strengthen its property/casualty loss reserves, effective in the fourth quarter of 2015, “continuing a history of reserve problems that included charges totaling about $7 billion in 2009-10.”

Moody's pointed out that AIG has announced both underwriting and expense initiatives to bolster its property/casualty profits. But the rating agency said the efforts “will be constrained by increasingly difficult market conditions.”

Moody's also said that offsetting the reserve charge, AIG contributed about $3 billion of capital to its property/casualty subsidiaries, “drawing on the large liquidity pool the parent holds to support its operating subsidiaries as needed.”

Moody's move came after AIG announced a plan Tuesday to improve its performance by offering a plan to sell nearly 20% of its mortgage guaranty insurance business in an initial public offering later this year, with the intent of selling the whole operation. AIG also announced that it had reached an agreement to sell its broker-dealer operations for an undisclosed sum.

Meanwhile, Keefe Bruyette & Woods Inc. issued what it called “final thoughts” on AIG's new strategy.

“We view the three main elements of AIG's strategic update as: improving the Commercial P&C loss ratio (counterintuitively, probably the easiest to achieve); returning $25 billion of capital over two years (medium difficulty); and lowering expenses (superficially easy, but quite difficult to do without impairing other performance metrics),” said Meyer Shields, Baltimore-based managing director At KBW, in an analysis issued Wednesday. It said that for some property/casualty lines, “AIG lacks the array of skills (pricing, risk selection, claims prevention, etc.) needed to generate adequate underwriting performance.”