AIG set to assume US$5b in losses

By Miles Weiss  |   2008-6-28  |     NEWSPAPER EDITION

AMERICAN International Group Inc plans to absorb losses for a dozen insurance units after their securities-lending accounts suffered US$13 billion of writedowns tied to the subprime-mortgage collapse during the past year, according to Bloomberg News.

The world's largest insurer will assume as much as US$5 billion of any losses on sales of the investments, up from a previous commitment of US$500 million, said Christopher Swift, vice president for life and retirement services, in an interview. AIG will also inject an undisclosed amount of capital into some of the subsidiaries, he said.

Moody's Investors Service and AM Best Co both cited the writedowns in May when they downgraded New York-based AIG's credit ratings. State regulators in Texas said they didn't know AIG was investing cash collateral from the securities-lending business in subprime-linked assets and were concerned the insurance units hadn't put aside enough capital to cover potential losses.

Value reduction

"We were aware of this portfolio, but we didn't have transparency on what was in it because it was off-balance sheet," said Doug Slape, chief analyst at the Texas Department of Insurance in Austin, which oversees three AIG insurers that have suffered about 60 percent of the writedowns.

The reduction of asset values in the securities-lending portfolio was part of the US$38 billion in pretax writedowns that AIG reported during the past three quarters. That total included reductions of US$20 billion on guarantees known as credit-default swaps and US$18 billion on mortgage and asset-backed securities, including some tied to subprime home loans. Most of the mortgage-related holdings are in the securities-lending pool.