2. American International Specialty Insurance Co.

The forced divestiture of a block of business and a huge reserve boost tempered American International Specialty Insurance Co.'s results last year but not enough to hurt the insurer's ranking among the top 10 surplus lines insurers.

Anchorage, Alaska-based AISLIC, a subsidiary of New York-based American International Group Inc., reported $1.81 billion of nonadmitted premiums written in 2005, a 10.2% drop from its 2004 results but strong enough to maintain the insurer's ranking as the second-largest surplus lines insurer.

Gross premiums written for the insurer dropped 14% last year to $1.87 billion, and net written volume fell 14.7% to $317.5 million.

But the drop in gross premiums does not necessarily mean that the business was lost to AIG, said Robert Schimek, chief financial officer for AIG's Domestic Brokerage Group and a senior vp and treasurer at AISLIC. AIG's profit centers determine which units will underwrite a risk based on state laws and where a policyholder would be best served, he said. Therefore, the drop in gross premiums means that AIG redistributed that business elsewhere within the organization, he said. Overall, AIG's surplus lines business grew between 6% and 8% in 2005, according to Mr. Schimek.

AISLIC reported a loss of more than $36.4 million last year, compared with a profit of nearly $84.8 million in 2004. But its policyholder surplus grew 2.2% last year to nearly $358.7 million.

AISLIC restated its 2004 results last year after settling a dispute with Alaska insurance regulators over the insurer's life settlements business.

In this business, an investor purchases the life insurance policy of an individual who does not expect to live much longer.

For the policy, the investor pays the policyholder more than the policy's cash surrender value but less than the policy's full limits. After the policyholder dies, the investor collects the full policy limits, which the investor hopes will exceed the sum of the policy's purchase price and the premiums the investor paid on the policy after purchasing it from the policyholder.

To avoid public relations and accounting problems associated with the business, AIG structured the business in a manner that showed AISLIC writing surety policies to another AIG unit that then would file claims against those policies and use claims payments to purchase life settlements, according to a lawsuit by New York Attorney General Eliot Spitzer and New York State Insurance Superintendent Howard Mills. The lawsuit charged that the business arrangement among the AIG companies created false underwriting income (BI, May 30, 2005).

Under AISLIC's settlement with Alaska regulators, all the life settlements business was moved out of AISLIC. The business no longer is treated as insurance but as a financial transaction in a new AIG subsidiary, New York-based AIG Life Settlements L.L.C. AISLIC restated its 2004 results to account for the loss of this business.

AISLIC's net loss last year was driven by its share of the nearly $1.82 billion charge AIG took to bolster its net reserves, Mr. Schimek said, but no single book of business compelled the reserve boost.

For the first half of 2006, AISLIC reported $751.7 million of nonadmitted premiums, a 9.2% drop from 2005. Net income during the first half, however, more than doubled to nearly $38.7 million.

Among the surplus lines business that AISLIC writes is environmental liability coverage, and the market for that business is stable, he said.

AISLIC also writes what Mr. Schimek characterized as risk-finance business. Those are nontraditional risks "that don't fit cleanly into any of our other profit centers," he said.

The insurer's products, however, tend to be "very customized" to its clients needs, Mr. Schimek said. As a result, the insurer faces little competition for that business, he said.