NEW YORK (Bloomberg) — American International Group Inc., the insurer rescued by the US, has an $11 billion shortfall in reserves to pay property-casualty claims that may hinder efforts to repay the government, Sanford Bernstein said. The company slipped 14.7 percent in New York trading.

AIG may have been "aggressive" in pricing its workers' compensation and professional liability policies and cut back on its use of reinsurance, analyst Todd Bault said yesterday in a research note. He slashed his price target on New York-based AIG's shares by 40 percent to $12.

Chief executive officer Robert Benmosche is seeking to bolster profitable underwriting units to help repay loans within the $182.3 billion bailout that was required after investment losses tied to sub-prime mortgages. Insurance operations, already facing customer and employee defections, may need additional funds to pay claims, Bault said.

"AIG shareholders and the federal government face considerably more uncertainty than they may have anticipated," Bault said. "AIG would likely have to take some kind of reserve charge" before selling its Chartis property-casualty business or holding a public offering for the division.

AIG declined $4.90 to $28.40 in New York Stock Exchange composite trading yesterday, the biggest drop in the Standard & Poor's 500 Index. The insurer may lose customers "driven by fear over its potentially weakened claims-paying ability" to competitors including Travelers Cos., Chubb Corp., and Ace Ltd., Bault said. Mark Herr, a spokesman for AIG, didn't immediately return a message seeking comment.

Chartis will lose sales rather than cut rates to unprofitable levels, contrary to claims by rivals that it's under-pricing insurance, the unit's chief financial officer Robert Schimek said this month.

Comments from competing insurers that Chartis has been selling coverage at unsustainable rates "reflect a big degree of frustration by the marketplace that they've been unable to unseat the Chartis organisation in the vast majority of business," Schimek said in a November 12 conference. "We are in an organisation that has walked away from premium."

Insurers including Chubb and Liberty Mutual Group Inc. have said AIG was offering coverage at below-market rates to retain clients after getting bailed out last year. The Government Accountability Office, the investigative arm of the US Congress, said in a March 18 report it found no evidence of under-pricing by AIG.

Fitch Ratings and the National Council on Compensation Insurance have said rising medical costs may pressure insurers that sell workers compensation coverage. The council in May changed its short-term view for the business to "guarded" from "optimistic".