Bailed-out insurer American International Group Inc. said it would take a $4.1 billion charge at its Chartis unit after a review showed higher-than-expected claims on older policies for asbestos exposure and workers' compensation.
In a further bid to bolster capital at the unit, the U.S. government will allow AIG to retain $2 billion from recent sales.
Under Chief Executive Robert Benmosche, AIG had been selling businesses such as its AIG Star Life Insurance Co. and AIG Edison Life Insurance Co. to refocus on core units including global property insurer Chartis and U.S. life insurer SunAmerica.
But an annual loss-reserve review of Chartis showed it needed to put more money aside for accidents, mostly from 2005 and earlier, AIG said in a statement Wednesday.
To boost capital at Chartis after the fourth-quarter charge, the U.S. government agreed to let AIG keep half of its $4 billion in proceeds from the Star Life and Edison Life sales.
"I'm not surprised by this," said insurance equity analyst Cathy Seifert. "I think it's a very prudent move."
Chartis's reserving practices and methodology prior to 2005 seemed a little aggressive, relative to peers and in consideration of the mix of business it was writing, she explained.
AIG shares were down 63 cents or 1.5 percent at $41.74 in late morning trading, after earlier falling as much as 2.9 percent.
The government will still be repaid in full for its investment in AIG despite the change in the distribution of asset sale proceeds, a source familiar with the matter said on Wednesday.
"At the end of the day, the whole point is strengthening (AIG's) balance sheet," said the source, who was not authorized to discuss the matter publicly.
The company and the U.S. Treasury plan to sell at least $15 billion in stock in May.
The reserve strengthening — a total of $4.6 billion, excluding $446 million in discount and premium adjustments — is mostly in response to asbestos, excess casualty, excess workers' compensation and primary workers' compensation claims, the insurer said.
Changes to expectations of asbestos-related claims made up most of the charge. AIG said it had changed some of its loss-reserve-related assumptions, "taking into consideration recent, higher industrywide trends regarding expanding coverage theories for liability."
The changes in loss estimates for excess and primary workers' compensation resulted from continuing medical inflation, additional treatment specialties and longer claim periods, the company said. Losses from primary workers' compensation were "further compounded by reduced return to work opportunities in today's high unemployment environment."
AIG will report its fourth-quarter results after the market closes on Feb. 24. Through Tuesday, analysts on average had expected the company to report a profit of 61 cents a share, according to Thomson Reuters I/B/E/S.
The insurer reported a profit, stripping out extraordinary items and discontinued operations, of $2 billion through the first three quarters of this year.
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