American International Group reorganized its biggest unit and charged derivatives veteran Peter Hancock with turning around the struggling property and casualty business.

The move may be a sign that AIG CEO Robert Benmosche, who is battling cancer, is grooming Hancock as a successor. Hancock, who is seen as one of the fathers of credit derivatives, joined AIG last year and is currently executive vice president for finance, risk and investments.

AIG's Chartis unit accounted for nearly half of the company's revenue last year. But it has not been consistently profitable and took a charge of more than $4 billion last quarter to cover asbestos claims.

Fixing the unit is a priority for AIG, which is in the middle of a multiyear effort to repair its overall balance sheet and prepare for the U.S. government to withdraw its support. The government bailed out AIG in 2008 during the financial crisis and now owns 92 percent of the company.

Chartis has been hampered by big losses from businesses that include worker's compensation as well as asbestos. The unit is also suffering as insurance rates globally are hovering at their lowest level in at least a decade.

Analysts have questioned whether the unit charges enough for its policies, but the company itself has said it does not underprice.

AIG is hoping to turn Chartis into an engine for consistent profits. It lost $2.5 billion in 2008, eked out a small gain in 2009 and lost $116 million before taxes last year.

Peter brings an enormous skill in problem solving, Benmosche told Reuters.

Hancock is an outsider in the insurance business. After 20 years at JPMorgan Chase & Co , he formed a boutique investment bank with partners who included Nobel Prize winner Robert Merton. He joined AIG in 2010.

RESTRUCTURING

The previous CEO of Chartis, Kristian Moor, will become vice chairman of the division, reporting to Hancock.

Hancock has been instrumental in AIG's recapitalization efforts, structuring a plan for the company to repay its obligations to the U.S. Federal Reserve and Treasury Department.

A team of 20 has been working on the plan to reorganize Chartis for three months, Hancock said in an interview. The unit has 40,000 employees.

AIG's restructuring efforts received a blow on Tuesday when the Federal Reserve rejected the insurer's bid for a pool of mortgage-backed securities that it took over during the darkest days of the financial crisis.

AIG had been earning low returns on billions of dollars of cash it had ready to buy the bonds, which it had been hoping to put in its investment portfolios. The Fed plans to auction off the assets instead.

The Chartis reorganization also shifts the responsibilities of other executives and puts the business into two global operating units, commercial and consumer.

Shares of AIG were down 2 percent at $35.33 in afternoon trading.

(Reporting by Lauren Tara LaCapra; Additional reporting by Ben Berkowitz; Editing by Derek Caney and Lisa Von Ahn)

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