AIG shares fall on fresh mortgage market concerns

By Lilla Zuill

NEW YORK (Reuters) - Shares of American International Group Inc (AIG.N), the world's biggest insurer, fell 16 percent on Tuesday on fears that the company's large exposure to the mortgage markets could trigger the need to raise fresh capital.

"AIG is in a weak position as either a seller of equities or assets," said Clifford Gallant, an insurance analyst with Keefe, Bruyette & Woods.

"Either way, there is the risk of charges or dilution" for investors, he added.

AIG shares were down $3.75 at $19.01 in afternoon trading on the New York Stock Exchange.

AIG, which has recorded unrealized losses of more than $20 billion over the past three quarters on credit default swaps that guarantee mortgage-linked securities, raised more than $20 billion earlier this year, severely diluting shareholders' investments.

Investors are growing increasingly skittish ahead of a special meeting called for later this month. Those fears are compounded by worries that more losses may be in the pipeline, stoked by signs that other financial services firms, including Lehman Brothers Holdings Inc LEH.N, may be hit anew by mortgage losses.

AIG's new chief executive, Robert Willumstad, is due to unveil a sweeping turnaround plan for the insurer on Sept. 25, which could include carving the company into pieces.

On Tuesday an AIG spokesman declined to comment on whether the insurer might need to boost capital again, citing a strategic review currently under way.

When AIG released its second-quarter results last month, Willumstad called capital levels "satisfactory," at least for the time being.

Much may depend on changes to the company's credit ratings, since further downgrades could necessitate the posting of billions of dollars more in collateral, according to an Aug. 6 filing with the U.S. Securities and Exchange Commission.

Selling or spinning off AIG's financial products unit, home to the thorny credit default swaps, would likely alleviate credit concerns. But AIG could find it tough to convince counterparties to sign off on such a deal, if it means guarantees would no longer be backed by AIG's financial strength ratings and capital position.

(Editing by Gerald E. McCormick and John Wallace)