While American International Group reported a 2011 fourth-quarter net profit of more than $11billion, its property and casualty subsidiary Chartis came in withan underwriting loss of $5.2 billion, primarily because of itsreserve charge.

In February, New York-based insurer AIG announced itwould take a $4.1 billion charge in the fourth quarter to bolsterits reserves. The company then reported its fourth-quarter andyear-end results, showing a greater underwriting loss than lastyear.

Following the release of Chartis'results, Standard & Poor's Rating Services lowered Chartis'counterparty-credit and financial-strength ratings. S&P saidits view is that the P&C company “will not be able tooutperform the industry over the next one to two years despite itsglobal presence.”

S&P lowered Chartis' rating to “A” from“A-plus.” 

For the 2010 fourth quarter, Chartis' net underwriting lossstood at $5.2 billion compared to a loss of $2.6 billion for thesame period in 2009. This translated into a combined ratio of160.5, up 28 points. However, net premium written increased 9percent, or $649 million, to $7.6 billion.

For the year, underwriting loss stood at $5.5 billion, up from$2.6 billion in the prior year. The combined ratio stood at 116.8,up 8.8 points from 2009. Net premium written grew 3 percent, or$959 million, to $32 billion.

During a conference call with financial analysts, Robert H.Benmosche, president and chief executive officer of AIG, said thecompany decided to take the reserve charge after an in-depth reviewof its reserves. He said the action was a testament to thecompany's strength that it could take the charge while otherinsurers are using their reserves to prop up their balancesheets.

During a question-and-answer period, an analyst pointed out thatthe reserve charge accounted for about 51 points of the company'scombined ratio. He asked if this quarter was an indicator of thecompany's outlook for the future.

Executives said there were expenses in the business resultingfrom a shift from pure commercial to other insurance products andthose costs would level out in the future.

Kristian P. Moor, executive vice president for domestic generalinsurance, said the combined-ratio increase could be broken downinto a couple of developments.

For one, as reserves are strengthened in one market, loss ratiosare affected accordingly. There were “additional attritionallosses” that increased the loss ratio and required adjustmentsretroactively.

Additionally, natural catastrophe losses totaled $200 millionduring the quarter, primarily from the Australia floods and Arizona hail storms.

There were also $100 million in losses that did not meet thecriteria for natural catastrophe losses. These were severe lossesin the $5 million to $20 million range that impacted the combinedratio.

When asked about the standing of AIG in the insurance industry,Mr. Benmosche still remains a formidable player in themarketplace.

“We've come through a horrible period of time where there werequestions about the survivability of AIG, but when you look at ourretentions, they remained extremely strong, and that is because ofthe core competency of the people of this company,” he said. “Weare seeing clients coming back. So I would say that we are clearlythe leader here and that is why we are starting to not writecertain businesses, because we have the confidence we can do that.And as the markets improve, we'll come back into thosemarkets.”

S&P said Chartis' fourth-quarter underwriting results werelower than expected, notwithstanding the adverse reservedevelopment. The rating agency said it recognizes “that some ofthis deterioration stemmed from nonrecurring items that we don'texpect will affect prospective operating performance” at Chartisand that the company has shifted toward lower-volatility businesslines and engaged in underwriting initiatives. Chartis has beengetting out of the workers' compensation and excess casualtymarkets since 2006.

S&P affirmed its “A-plus” rating for AIG's life insurancegroup, SunAmerica Financial, and its “A-minus” rating on AIG. Thediversification between the P&C and life business was onereason S&P affirmed AIG's rating. Also, AIG faces lessuncertainty due to its executed recapitalization plan, S&P said.

Shortly after the reserve charge was announced, Fitch Ratingsdropped the financial strength rating of AIG's domesticnon-life insurance subsidiaries to “A” from “A-plus.” Fitch saidChartis' recent history of missing the mark on claims costs “raisesconcerns about the companies' ability to generate consistentrun-rate underwriting results” in line with Fitch's previousratings.