American International Group, Inc. (NYSE: AIG), one of the world's largest insurance firms, said it expects to record a $4.1 billion charge in the fourth quarter to boost the loss reserves in its Chartis property and casualty insurance subsidiaries.
New York-based AIG has also got permission from Treasury Dept. to retain $2.0 billion proceeds from the recently closed sale of AIG Star Life Insurance Co. Ltd and AIG Edison Life Insurance Co. to support the capital of Chartis insurance subsidiaries. As a result, AIG expects that the Chartis insurance companies' statutory surplus will remain largely unaffected.
The strengthening to Chartis loss reserves reflects adverse development on prior accident years in classes of business with long reporting tails, AIG said in a statement.
A major chunk of the charge (80 percent) is related to the four classes -- asbestos, excess casualty, excess workers' compensation, and primary workers' compensation. The majority of the strengthening relates to development in accident years 2005 and prior.
The total reserve strengthening represents about 6 percent of AIG's total general insurance net liability for unpaid claims and claims adjustment expense of $63.7 billion reported at Sept. 30, 2010.
AIG is expected to report its fourth quarter results after the market closes on Feb.24. Wall Street expects the company to earn 61 cents a share on revenue of $13.99 billion, according to analysts polled by Thomson Reuters.
Chartis, which means map in the Greek, is a division of AIG that is in the process of being spun off. In July 2009, AIG formed a special purpose vehicle (SPV) for Commercial Insurance, Foreign General Insurance, and Private Client Group operations and renamed Chartis in preparation for a IPO or other equity offer.
For the third quarter ended Sept. 2010, Chartis' operating income was $1.1 billion, compared to $719 million in the third quarter of 2009. The third quarter of 2010 combined ratio was 99.3 compared to 105.2 last year. For the third quarter, Chartis wrote $8.6 billion in net premiums, an increase of 7 percent from last year.
Shares of AIG were down 20 cents in the Wednesday pre-market trading at $42.17. They closed Tuesday's regular trading session at $42.37.