Credit Crisis Throws AIG Into ‘Uncharted Waters’

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American International Group, on the heels of reporting its largest-ever loss, said that the subprime crisis had thrown it into “uncharted waters” that were likely to remain choppy through 2008.

The world’s biggest insurer did not rule out further write-downs and losses but said the crisis that led to a $5.3 billion fourth-quarter loss was not expected to be material in the long run.

“We are in unchartered waters,” Chief Executive Martin Sullivan said on a conference call on Feb. 29, a day after reporting AIG’s largest quarterly loss since it was founded in 1919.

$11.2 Billion Write-Down

Its shares fell 7 percent and led other insurers lower. The KBW Insurance Index was down 2 percent, with AIG the biggest drag.

The world’s largest insurer said the loss stemmed largely from a $11.12 billion write-down of a super senior credit swap portfolio in its AIG Financial Products unit.

AIG said it had not incurred a realized loss in the credit swap portfolio since it entered this business in 1998, but it forecast potential realized losses of $900 million over time, based on current analysis.

No Plan to Quit

Sullivan said the financial products business had provided high returns over its history, and while all businesses are reviewed periodically, there was no immediate plan to shed it.

AIG’s difficulty in valuing its derivatives portfolio earned it a rebuke from its auditor, which earlier this month cited “material weakness” in the company’s internal controls.

“We have already begun the process to remediate the material weakness identified by (PricewaterhouseCoopers),” Sullivan said, indicating that AIG could take the rest of 2008 to do so.

Joe Cassano, head of AIG Financial Products, has agreed to leave AIG but will remain a consultant, Sullivan said.

Deterioration in U.S. residential and credit markets also took a hit on two other AIG units, he said.

Rating Agencies Concerned

United Guaranty posted an operating loss of $348 million, and American General Finance reported $9 million in fourth-quarter operating income after increasing its provision for finance receivable losses and a decline in mortgage banking revenues.

AIG said the deterioration in its credit swaps had raised the concern of rating agencies, resulting in its being assigned a negative outlook or having its ratings put under review for possible downgrade.

As a result, the insurer said it was prudent to preserve capital, and said it was suspending its share buyback program for the foreseeable future.

Goldman Sachs analyst Tom Cholnoky, in a research note, said investors were likely to worry about future write-downs and could also be rattled by the suspension of share repurchases.