Saturday March 15, 2008
AIG faces new credit jitters
NEW YORK: Shares in American International Group (AIG) fell as much as 8% on Thursday on concern the world's largest insurer could face larger-than-expected losses from a credit derivatives portfolio that has already led it to US$11bil in writedowns.
“AIG believes the economic losses from its (credit-default swap) exposures are unlikely to exceed US$900mil. However, our analysis suggests losses of US$3bil, with downside to more than US$13bil if the fixed-income crisis deepens,” Morgan Stanley analyst Nigel Dally wrote in a research note.
Default swaps are akin to an insurance policy on underlying securities, including collateralised debt that have exposure to the subprime mortgage crisis.
Morgan Stanley's analysis of likely economic losses at AIG was related to a CDS portfolio managed by AIG Financial Products, which led the insurer to record its biggest-ever loss in the fourth quarter.
On a quarterly earnings call with investors last month, AIG said by current estimates of a worst-case scenario, it could record losses on the swap portfolio of up to US$900mil.
“If the fixed-income crisis deepens, these losses, coupled with escalating credit losses and lower earnings from segments exposed to the residential housing crisis, could lead to a capital shortfall at the company,” Dally added in the note. – Reuters
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