AIG Down 12% on Revised Loss of $5.9 Billion

123jump.com Staff
11 Feb, 2008
New York City

American International Group Inc reported that it may lose $5.96 billion in a portfolio of credit default swaps on securities based on home loans which earlier was estimated to have a loss of only $1.604 billion. AIG stock fell 12%. PriceWaterhouseCoopers also said that there is a material weakness in the internal controls at valuing these securities, which prompted Fitch, rating agency to put the insurer on a possible downgrade from its current AA rating.

[R]3:00PM New York – AIG drops 12% after it reports material weakness in evaluating its portfolio of swaps and declares sharply higher loss of $4.9 billion.[/R]

American International Group Inc reported that it may lose $5.96 billion in a portfolio of credit default swaps on securities based on home loans which earlier was estimated to have a loss of only $1.604 billion. AIG ((AIG)) stock fell 11.66% or $5.92 to $44.76.

The method used to value these securities relies on market prices and not on the ratings issued by rating agencies on the debt securities. AIG in a filing with the SEC clarified that the current method used to evaluate these securities did not include the provision for accelerated amortization of in the senior collateralized debt obligations known as CDOs.

The previous filings in September 30, 2007, October 31, 2007, and November 30, 2007 did not include losses from these provisions and are now revised to gross decline in valuations to $5.9 billion. After taking into account certain benefits related to cash flow in the structure of the debt and the benefit of the spread differential the loss is estimated at the end of November 2007 was $1.6 billion, sharply lower than the current revised estimate.

The current method of loss estimation does not include losses in the month of December 2007. Fitch, a rating agency, is likely to lower AA rating of AIG because of the current market conditions and a material weakness cited by its auditor PriceWaterhouseCoopers.

The filing with the SEC noted in a foot note that “AIG has not yet determined the amount of the increase in the cumulative decline in fair value of super senior credit default swap portfolio to be included in its December 31, 2007 financial statements.

AIG is still accumulating market data in order to update its valuation of the super senior credit default swap portfolio. AIG currently expects that the adjustment for cash flow diversion features will be included in determining the fair value of super senior credit default swap portfolio at December 31, 2007.

However, as a result of current difficult market conditions, AIG is not able to reliably quantify the differential between spreads implied from cash CDO prices and credit spreads implied from the pricing of credit default swaps on the CDOs, and therefore AIG will not include any adjustment to reflect the spread differential (negative basis adjustment) in determining the fair value of super senior credit default swap portfolio at December 31, 2007.”

The filing also noted in the last paragraph that AIG has been advised by its independent auditors, PricewaterhouseCoopers that they have concluded that at December 31, 2007, AIG had a material weakness in its internal control over financial reporting and oversight relating to the fair value valuation of the super senior credit default swap portfolio.

AIG’s assessment of its internal controls relating to the fair value valuation of the AIGFP super senior credit default swap portfolio is ongoing, but AIG believes that it currently has in place the necessary compensating controls and procedures to appropriately determine the fair value of super senior credit default swap portfolio for purposes of AIG’s year-end financial statements.