Updated from 11:35 a.m. EST
American International Group
will take a $1.8 billion fourth-quarter charge to boost its claim reserves is causing investors to sour on the giant insurer.
AIG was down $5.58, or 10%, to $49.75 in early trading, down 35% from its 52-week high set nearly a year ago. The slump in the stock dragged down other insurers as well.
, which reported higher fourth quarter profits but lowered its outlook for 2003, was trading down just over 6% to $51.15.
The news comes a week before AIG is set to report fourth-quarter earnings on Feb. 13. Investors seem disappointed not only in the size of the after-tax charge but AIG's failure to foreshadow the move in any way.
Some investors said they were surprised by the size of the charge. Michael Stead, a portfolio manager with Wells Capital Management, who owns shares in AIG, said after announcement: "I wish I didn't own any."
The charge is big enough to wipe out the $1.84 million in net profit AIG generated in the third quarter. Before the announcement, the Thomson Financial First Call estimate had AIG earning 91 cents in the fourth quarter, a 14% decline from last year.
AIG attributed the charge to its needs to boost reserves for higher payouts on director and officers' liability policies, rising workers' compensation claims and increased commercial losses. The insurer said the higher reserves didn't include claims stemming from asbestos-related litigation, something other big insurers, such as
Travelers Property & Casualty
( TAPA), have been putting up reserves for. Travelers fell 68 cents, or 4.2% to $15.47.
In total, AIG is increasing its reserves by $2.8 billion. Last month, Travelers took a $1.3 billion after-tax charge, after boosting its litigation reserves by $2.45 billion -- most of that was for asbestos litigation.
Analysts and industry observers said the sharp sell-off in AIG shares is an indication that the insurance giant -- once regarded as the industry's blue-chip player -- has lost some of its luster. Some suggested there is lingering concern that AIG may still take a charge down the road to boost its reserves for asbestos-related claims, despite the company's claims to the contrary.
"It had been considered invincible and more or less insulated from a lot of the industry's problems," said Michael Paisan, a Legg Mason insurance analyst.
Meanwhile, the impact of the massive charge was causing some credit rating agencies to rethink their current ratings on AIG's corporate debt. Fitch Ratings on Tuesday placed AIG's long-term debt on a "negative" watch -- something that often foreshadows an eventual downgrade.
Egan-Jones Ratings, a small corporate rating services, went a step further in downgrading AIG's corporate debt Tuesday morning. Egan-Jones lowered AIG's debt to "AA," which is two notches below the comparable ratings at Standard & Poor's and Moody's Investors Service. But Egan-Jones said the financial outlook at AIG should remain steady because of the insurer's ability to pass on large premium increases to its commercial customers.
A.M. Best, a firm that specializes in rating insurance companies, said it planned no change in its rating for AIG.
A ratings downgrade by either Moody's or S&P would be more significant, since it could result in higher borrowing and financing costs for AIG.
AIG officials used the announcement as a chance to denounce plaintiffs' lawyers and so-called runaway jury awards. The firm urged federal legislators to reform the nation's legal system to limit corporate liability to shareholders suits and mass tort litigation.
"Unlike the abrupt burst of the asset bubble, the liability bubble has yet to contract in the economy," said AIG Chairman and Chief Executive Maurice "Hank" Greenberg. "The rampant rise in jury awards and a tort system in urgent need of reform are important aspects of the overall U.S. liability picture. AIG is working hard, as are others, to achieve meaningful tort reform."
AIG offered little guidance about the firm's performance this year, except to say it anticipated it "will have a good year."