AIG admits errors in credit loss estimates

Independent auditors cited material weakness in the valuation of AIG's collateralised debt obligation (CDO) holdings in the insurer’s super senior portfolio, held by AIG Financial Products (AIGFP), a wholly owned subsidiary, leading to a miscalculation of its US subprime exposure losses. According to a filing with the Securities and Exchange Commission (SEC) on February 11, writedowns for the year to November were expected to be about $5.2 billion, more than triple the $1.6 billion disclosed in December.

The insurer also admitted it had “not yet determined the amount of the increase in the cumulative decline in fair value of AIGFP’s super senior credit default swap portfolio”, meaning more writedowns could be announced in the future. “AIG is still accumulating market data in order to update its valuation of the AIGFP super senior credit default swap portfolio," it continued.

AIG’s miscalculation highlights the depth of the market’s uncertainty on the amount of losses linked to exposure to US subprime residential mortgages. Peer Steinbruck, the German finance minister, recently stated at the G-7 meeting in Tokyo on February 9 that global losses could reach $400 billion, over three times the estimates made by Wall Street banks. This raises concern that there will be more losses, not only at AIG, but also at other financial companies that have similar problems. AIG is one of the companies that makes up the 30 Dow Jones Industrial index, a price-weighted average of 30 stocks representing leading companies in major industries.

AIG responded in a statement today that the mark-to-market unrealised losses are not indicative of the losses AIGFP will realise over time, as these losses are a result of meeting its obligations under these derivatives and are not material to AIG. The company believes the losses implied by the writedowns will be recouped over time in the absence of defaults on the underlying portfolio.

Fitch Ratings has since placed its issuer default rating, holding company ratings and subsidiary debt ratings on rating watch negative. Standard & Poor's and Moody's Investors Service have also changed AIG’s outlook from stable to negative. Fitch said AIG had large exposure to the US residential mortgage crisis, and that the area of AIG "most exposed to further deterioration in this market" was the credit derivatives portfolio within AIGFP.

See also: Credit crisis losses could reach $400 billion
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Subprime losses hit Q4 results