U.S.I., Alliant Resources Under S&P Scrutiny

U.S.I. Holdings Corp. was not initially subpoenaed by New York Attorney General Eliot Spitzer, Mr. Fraser said. "However, on Oct. 29, they indicated that they do expect to be subpoenaed by the New York attorney general?which would follow the subpoena already received from Connecticut attorney general."

Mr. Fraser noted that S&P analysts will continue to speak to U.S.I. Holdings' management team to find out more about "what type of financial impact there will be going forward, regarding increased scrutiny from regulatory authorities."

On the other rating development this week, S&P decided to change its outlook to "Negative" from "Stable" on Alliant Resources Group, but the ratings agency stressed that Alliant Resources has not yet been subpoenaed by any regulatory authorities.

"And we don't believe it's actually been implicated in any class-action suit," Mr. Fraser observed. However, Alliant Resources is part of the insurance brokerage industry, and the broker does fall under that cloud, he said.

Further, given that there is extreme pressure on contingent commissions right now in the brokerage industry, Mr. Fraser said, there is a potential that Alliant Resources' earnings and cash flow could be hurt by its loss of contingent commissions. He added that he and other S&P analysts will be talking to Alliant Resources management to try to assess any future financial impact.

Ratings developments on U.S.I. Holdings and Alliant Resources are only the latest actions taken by S&P that are at least partly related to the ongoing investigation of the insurance industry. Last Friday, S&P changed the outlook from "Stable" to "Negative" on AIG's "triple-A" counter-party credit rating, as well as the outlook of its guaranteed subsidiaries, in large part because of the ongoing investigations, the ratings agency said.

Mark Puccia, managing director at S&P, in explaining the ratings action on AIG, pointed out during the analysts call "a heightened degree of scrutiny in the insurance industry, as evidenced by the investigations initiated by New York's attorney general, the U.S. Justice Department, the Securities and Exchange Commission, and various other state regulatory and judicial authorities."

Mr. Puccia said S&P knows of no allegations that could result in a material financial impact to AIG or result in actions that could impair AIG's competitive position. On the other hand, however, "there is the breadth of investigations that have the potential to place AIG under greater scrutiny than others in the industry," he said.

Mr. Puccia noted AIG's announcement that it plans to seek "a prompt resolution of any outstanding issues with the SEC as well as with the Justice Department." He said he doesn't believe terms of any settlement will be material to AIG?either in the context of fines or any changes in policies or procedures?given AIG's excellent financial strength.

But there may be more teeth to Attorney General Spitzer's investigation. "There is more uncertainly in the New York attorney general's investigation of AIG and the insurance investigation at large," Mr. Puccia said.

"AIG encourages a growth-oriented culture," he observed, "and as a highly visible player in the insurance industry and whose largest market, the United States, is under intense scrutiny by federal and state agencies, we believe it is appropriate to revise the outlook on the holding company and indicate that the ratings of the holding company might be under pressure if ongoing investigations produce meaningful findings."

S&P also took a negative rating action on ACE Ltd., another major insurer cited by the New York attorney general in his civil lawsuit against Marsh & McLennan Companies Inc. In changing the outlook on ACE Ltd. and some of its subsidiaries to "Negative" from "Stable," S&P said it had considered several recent as well as existing developments.

One factor is the New York attorney general's investigation into ACE, which has the potential to create greater scrutiny for ACE than other companies in the industry, said Damien Magarelli, associate director at S&P. Other factors include ACE's high reinsurance recoverable level, which now equals 27 percent of total assets and 1.6 times shareholders' equity, as well as its goodwill, which equals 5 percent of total assets and 28 percent of shareholders' equity.

Another consideration was ACE's "aggressive growth strategy" that has led the insurer to compete directly with some larger carriers by turning to more competitive rates. In the case of ACE, "there were these separate issues that contributed in their own right to the ?Negative' outlook," Mr. Magarelli said.

Since the bid-rigging investigation scandal first surfaced on Oct. 14, S&P has taken a string of negative rating actions against brokers. On Oct. 21, S&P lowered Marsh & McLennan senior debt rating to "triple-B-plus," leaving it on "Credit Watch Negative." It also cut Aon Corporation's senior debt rating to "triple-B-plus," putting it on "Credit Watch Negative." And it placed a "Credit Watch Negative" status on Willis Group Holdings Ltd.'s "triple-B-minus" senior debt rating.

Oct. 22, S&P lowered its outlook on the commercial-lines p-c insurance industry from "Stable" to "Negative." But Mark Puccia, managing director at S&P, noted that particular action doesn't mean every company in this sector now has a "Negative" outlook on its rating.

"Rather, it reflects the fact that the industry now finds itself in a new environment," Mr. Puccia had said, "and in that environment, economic and regulatory pressures create a likelihood that a larger number of companies will see their ratings downgraded than will see their ratings upgraded."