Credit crisis throws AIG into "uncharted waters"

By Lilla Zuill

NEW YORK (Reuters) - American International Group (AIG.N), on the heels of reporting its largest-ever loss, said on Friday the subprime crisis had thrown it into "uncharted waters" that were likely to remain choppy through 2008.

The world's largest insurer recorded a loss of $5.3 billion on Thursday, stemming from a $11.12 billion write-down of a super senior, or highly rated, credit swap portfolio in its AIG Financial Products unit.

AIG has not ruled out further write-downs and losses in this portfolio, which is akin to an insurance policy on other companies' derivatives, but said it does not expect a decline in the value of its credit swaps to be material to the company in the long run.

Its shares fell 6.5 percent and led other insurers lower. The KBW Insurance Index .KIX was down about 2 percent, with AIG the biggest drag.

"We are in uncharted waters," Chief Executive Martin Sullivan said on a conference call on Friday, a day after reporting AIG's largest quarterly loss since it was founded in 1919.

AIG said it had not incurred a realized loss in the credit swap portfolio since it entered this business in 1998. Under a worst-case scenario it projects potential realized losses of up to $900 million, based on current analysis.

The deterioration in AIG's derivatives portfolio is another example of how the global credit crisis is expanding throughout the financial services sector.

UBS on Friday estimated that the global credit crisis is likely to result in losses of more than $600 billion.

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.

The fourth-quarter loss was a blot on Sullivan's record of turning a profit in every quarter since he was installed as CEO almost three years ago, replacing Maurice "Hank" Greenberg who was forced out under the cloud of an accounting scandal.

Joe Cassano, head of AIG Financial Products, which is responsible for the credit swap portfolio, agreed to leave AIG, but will serve as a consultant through 2008, Sullivan said.

Deterioration in the U.S. residential and credit markets hit two other AIG units, Sullivan said.

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.