AIG to Take $1.8-Billion Charge

American International Group Inc. sent shock waves across the insurance business Tuesday as it admitted that it had drastically underestimated U.S. liability claims on its books.

AIG, the world’s largest insurer, said it would take a $1.8-billion charge to pay for heavier-than-expected workers’ compensation and executives’ liability claims, which have built up over the last few years.

It blamed U.S. courts handing over large awards and a spike in shareholder lawsuits from corporate scandals such as Enron Corp. AIG Chief Executive Maurice Greenberg suggested that other insurers were suffering from the same problems.

The hit on an insurer known for high premiums and keeping a tight rein on claims surprised investors. AIG’s shares tumbled as much as 10% before recovering somewhat and closing down $3.63, or 6.6%, at $51.70 in New York Stock Exchange trading.

Shares of rivals such as ACE and Travelers Property Casualty Corp. also fell sharply. So did Chubb Corp., which announced an unexpected reserve charge of $175 million and warned that 2003 earnings would fall short of analysts’ expectations. Chubb shares sank $2.97 to $51.60 on the NYSE.

All 25 stocks in the Standard & Poor’s 500 insurance index declined, as the index fell 4.4%.

“We believed that the reserve cushion AIG had built up in the 1990s would allow the company to avoid a big one-time charge,” Merrill Lynch analyst Jay Cohen said. “Clearly, the dramatic liability trends overwhelmed AIG’s ability to manage this issue over time.”

AIG’s Greenberg cited an unpredictable surge in claims for the hole in its reserves. In particular, he cited the corporate scandals that led to shareholder lawsuits and payouts on directors’ and officers’ liability policies, known as D&O; policies, which pay executives’ legal expenses and settlements when a company is sued.

Greenberg suggested that other insurers would have to grapple with the same issues, raising the specter of large reserve charges by other firms.