The American International Group is reporting, in the fourth quarter, the company will have to take a charge back of over $4 billion in order to secure reserves on what they call long-tail insurance policies. These policies were sold by the company’s Chartis branch which offers property and casualty coverage. The boost is due, in part, to the rising cost of claims and risk management. These long-tail claims generally can take years to resolve and accrue heavy price tags during that period.
There are concerns that AIG has been favoring subpar property and casualty coverage, making them look financially sound but leaving them susceptible to problems in the long-run when claims begin to roll in.
The insurer has pumped money into its Chartis reserve before, in 2010. That year, analyst Todd Bault issued caution concerning AIG and citing as much as an $11 billion shortage in reserve for claims payments. AIG decried the analysis as being faulty, but pumped some $2.3 billion in the reserves. While still far from Bault’s prediction, the additional $4 billion charge puts AIG back quite a bit.
In September of 2010, AIG took part in an agreement to sell two Japanese subsidiaries. They have stated that the proceeds will be put towards increasing funding for Chartis.
Catherine Seifert, an insurance analyst at Standard & Poor’s Equity Research wrote “We are encouraged, but not surprised, by this move since AIG’s loss trends indicated to us that reserve were too skimpy.”
The insurer was front and center during the U.S. financial meltdown in 2008 when the Federal Reserve Bank stepped in to help the ailing corporation due to a credit rating downgrade.
AIG has stated that they will withhold their fourth-quarter earnings until February 24, when the market closes.