NEW YORK (Bloomberg) - Sub-prime mortgages have proved to be a bigger catastrophe for captains of the insurance industry than any natural disaster.

American International Group Inc. (AIG) cut the 2007 cash bonus for CEO Martin Sullivan by 42 percent as the world's largest insurer reported its biggest quarterly loss in 89 years. Ambac Financial Group Inc. denied Robert Genader any bonus, slashed his cash compensation by 71 percent and then replaced him in January. The reduction was the most of any insurer in the Standard & Poor's (S&P) 500 Insurance Index.

Boards are holding CEOs accountable for $38 billion of sub-prime losses by slicing their salaries and bonuses by an average 20 percent, according to regulatory filings from companies in the S&P insurance index. That compares with an average 8.2 percent increase for the CEOs in 2005, when directors excused them for $41.1 billion of costs from Hurricane Katrina, the most expensive disaster in US history.

"Fewer and fewer companies are willing to pay bonuses in a bad year," said Richard Furniss, an executive compensation consultant at Stamford, Connecticut-based Towers Perrin, who tracks insurance companies. "There's too much liability, too many red faces, and too much bad publicity for the directors if they do that."

Twelve of 20 insurers in the S&P index that have reported CEO compensation so far paid CEOs less in salary and bonuses in 2007, regulatory filings show. Bermuda-based Ace Ltd. had not filed its annual proxy statement with executive compensation data as of the close of business on Thursday.

The pay reductions cover a year when the S&P insurance index fell 7.7 percent, including AIG's 19 percent decline in New York Stock Exchange composite trading, Genworth Financial Inc.'s 26 percent drop, and Ambac's 71 percent plunge.

Insurance chiefs may not get raises this year either, based on the International Monetary Fund's estimate that industry losses tied to mortgage markets may reach $130 billion. Most of the writedowns stem from sub-prime loans to people with poor credit histories.

"The insurance industry is in the business of avoiding big problems," said Paul Newsome, a Chicago-based analyst at Sandler O'Neill & Partners LP. "Management should be paid on how well they pull that off."

New York-based AIG, which led insurers with $18 billion of subprime markdowns, singled out those losses for cutting the pay of 53-year-old Mr. Sullivan and his deputies, including chief financial officer Steven Bensinger and "senior executives with direct responsibility for financial services and asset management operations," according to the company's filing.

Genworth, the Richmond, Virginia-based insurer spun off by General Electric Co., cut CEO Michael Fraizer's annual cash incentive to $1.4 million last year from $3 million in 2006 after the company's profit fell 8.1 percent on fourth-quarter losses in its US mortgage insurance business and mortgage related bonds.

Mr. Fraizer, 49, has been Genworth's CEO since the company began trading publicly in 2004.

XL Capital Ltd., the Bermuda-based insurer, and MBIA Inc., the largest bond insurer, also reduced pay after losses tied to the credit markets and replaced their CEOs.

Progressive Corp., which had minimal investments in subprime holdings, and Safeco Corp., which has none, still reduced the compensation of senior managers after reporting lower earnings.

Progressive, the third-largest US auto insurer, cut the salary and cash bonus of 52-year-old Glenn Renwick by 24 percent to $1.58 million after the company's net income fell 28 percent.

The cash compensation of Safeco CEO Paula Rosput Reynolds, 51, dropped 24 percent to $2.21 million, after the company's fourth-quarter earnings declined because of losses in the automobile insurance unit.

"I think executive pay now is more fully aligned with shareholder growth," said Harry Graham, a Washington-based managing director for compensation and benefits at Smart Business Advisory and Consulting LLC.

Stock and option awards are excluded from the calculations, since annual figures for equity compensation reported to the US Securities and Exchange Commission (SEC) can include grants from prior years. Executives can decide when to cash in such awards after they have vested.

SEC reporting requirements on stock awards make determining boards' intentions difficult, while the annual cash bonus "is most reflective of annual performance," said Furniss of Towers Perrin.

The bonus targets that many compensation committees have set for CEOs in 2008 are "unaggressive" because of predictions of earnings erosion for auto and business insurers, he said.

Still, if another Katrina were to strike this year, boards may be less likely to let their CEOs off the hook, said John Gayley, another Towers Perrin principal in the executive compensation practice.

After disclosure requirements and public scrutiny increased, compensation committees have become less willing to forgive executives for the toll taken by catastrophes, called "cats" in the industry, he said.

"Boards used to actually consider ignoring cats," Mr. Gayley said. "They'd say, 'this is just too big. You did everything else right'. They are less willing to do that now."