Standard & Poor’s (S&P) has cut its counterparty credit and financial strength ratings on AIG subsidiary Chartis from A+ to A after Chartis reported a fourth-quarter loss of $US4 billion ($3.94 billion).

The ratings agency says Chartis’ operating performance “has been lower than our expectations and will likely remain so”, and it now views the property and casualty insurer as strategically important rather than a core business of AIG.

However, the counterparty rating for AIG, the holding company, was maintained at A- as its liquidity and financial profile continue to improve and US Government support decreases.

AIG’s retirement arm SunAmerica was affirmed at A+, as S&P says the company’s competitive position and operating performance continue to improve.

The ratings agency also revised its outlook on AIG and its operating companies to stable from negative, saying the group will sustain its competitive position while its operating performance remains consistent.

The Chartis re-rating flows through to Chartis Australia Insurance, which received an A rating on its long-term counterparty credit and financial strength ratings.

The financial strength ratings on AIU Japan and American Home Assurance Co in Japan were lowered to A from A+ as they are owned by Chartis.

S&P credit analyst Steven Ader says the agency has recognised the overall improvement in the financial profiles of SunAmerica and AIG group but the Chartis downgrade reflects the deterioration in Chartis’ operating performance.

Chartis’ accident-year combined ratio, excluding prior-year reserve development, was 111.3% for the fourth quarter and 103.6% for the 12 months ended December 31, which he says is a “marked deterioration from the 101.2% combined ratio for 2010 through September 30”.

Chartis made a fourth-quarter loss after strengthening its reserves by $US4 billion.

AIG has said Chartis has been reducing writings in capital-intensive businesses to target higher-margin, less volatile segments and Mr Ader acknowledges some of the deterioration in profit came from non-recurring items.

But he says the downgrade “reflects our modified view that Chartis will not be able to outperform the industry over the next one to two years, despite its formidable competitive global presence”.

Although underwriting initiatives and the shift to lower-volatility business lines would support future profitability, Mr Ader said continued pricing pressure in the US and, to a lesser extent, international markets, would hamper improvement.