AIG Reserve Charge Size A Surprise

Analysts expressed surprise at the size of the adverse reserve development taken by American International Group yesterday.

Overall, Bank of America property-casualty analyst Brian Meredith said the $1.1 billion after-tax negative reserve development along with the $1.64 billion settlement with state and federal authorities “are positives for the stock since they remove significant shareholder concerns and together they are less than one quarter's earnings.”

At a conference call with analysts last night, AIG chief executive officer Martin Sullivan refused to elaborate on the tenor of the discussions that led to the settlement other than to “say it was a very open and constructive dialogue.”

This came after UBS analyst Andrew Kligerman wondered since the share price had returned to its level of early 2005 how the shareholders were harmed.

Mr. Sullivan said that while the company will no longer pay broker contingency commissions for the most part, they will still be continued in the personal auto line.

As for the $800 million set aside for an SEC-supervised fund for shareholder litigation, Mr. Sullivan that none of the money would be returned to the company if shareholder suits did not exhaust it.

Mr. Sullivan also said that Milliman Inc. will continue to monitor reserve developments after its “ground-up” study resulted in a net reserve charge of $820 million not related to asbestos and environmental claims.

Mr. Meredith wrote “at first we were surprised at the size of the development given AIG appears to be the most conservatively reserved companies in the industry.”

He also expressed surprise that AIG would take down so many reserves on “relatively immature accident years.”

Mr. Sullivan said the figures came from a reserving method that relied much more closely on actual claims statistics rather than projections.

AIG Chief Financial Officer Steven Bensinger said a report on the process of internal control procedures will be available at the time company announces fourth quarter earnings in mid-March. He also said a consultant will then be hired to monitor the implementation of the procedures called for in the settlement agreement.