AIG Tumbles on Loss Reserve Questions

Updated to include closing share price, clarification of headline, spokesperson comment.

NEW YORK (TheStreet) -- American International Group (AIG Quote) shares extended losses late in Monday's session after an already bearish Bernstein Research issued a report saying the insurer's loss reserves are "significantly deficient" and slashed its price target on the stock by 40%.

The stock closed down 14.7% at $28.40. Volume of 40.7 million exceeded the issue's three-month daily average of 36.8 million. At the session's low of $28.04, the shares were down more than 50% from their late August 52-week high of $55.90. The decline put the stock convincingly below both its 50-day ($38.06) and 200-day ($32.13) moving averages.

Bernstein Research, which lowered its price target to $12 from $20 but maintained an underperform rating on the stock, said it now estimates AIG's loss reserves are short roughly $11 billion on a pre-tax basis, and called the conclusion of its analysis "a very unexpected result that could have major ramifications in the coming year." The firm said the deficiency in the reserves came "much sooner than we would have forecast two years ago." The $11 billion figure -- with a standard deviation of $4 billion either way -- is equal to about $10 per fully diluted share after-tax, or 24 points of the company's total 2008 earned premium, the firm said. An insurer's loss reserves represent monies set aside by the company to cover claim payouts.

An AIG spokesperson declined comment for this article.

Roughly $10 billion of the estimated deficiency was in three of the company's "long-tailed" casualty lines, according to Bernstein Research, with workers compensation associated with $1.8 billion; general liability, $5.6 billion; and professional liability, $2.6 billion.

The firm reached its conclusion about AIG's loss reserves while doing an analysis of the industry as a whole. The study sought to pinpoint possible competitive issues that could come up in the next few years, but found that, in general, the subgroups of the insurance sector all showed "strong and relatively comparable loss reserve adequacy to the other segments" with the average industry reserve adequacy running at about 8 points of 2008 earned premium.