AIG falls on worries about subprime exposure

NEW YORK, Aug 1 (Reuters) - American International Group Inc (AIG.N) shares fell as much as 6.5 percent on Wednesday on worries about the insurer's exposure to the subprime real estate market, but they pared losses after analysts said the fears were overblown.

AIG, the world's largest insurer, had $814.4 billion in cash and invested assets at the end of the first quarter, with about 3.6 percent in subprime residential mortgage-backed securities, according to the insurer.

A "Heard on the Street" column in the Wall Street Journal on Wednesday questioned whether big insurers such as AIG were protected from the subprime fallout as defaults rise in these more risky mortgages.

AIG shares fell $1.63, or 2.5 percent, to $62.55 on the New York Stock Exchange early Wednesday afternoon, after sliding to $60, the lowest since last August.

AIG spokesman Chris Winans said the New York-based life and property insurer would provide an update on its subprime exposure after it reports earnings next Wednesday. However, he repeated a statement from July 26 that "all but a very small amount" of the insurer's collateralized debt obligations were investment quality and none of them had been downgraded in recent months.

"I'm not worried," said Matt Nellans, an analyst with Morningstar. "AIG has survived worse than this."

AIG also has a consumer finance unit whose defaults have been running in line with reserves at about 2 percent, said Paul Newsome, an analyst with A.G. Edwards Inc.

"You would have to have substantial defaults above that, perhaps even fivefold, and that would only cut back the company's earnings by about 10 percent to 15 percent," said Newsome. He called that "highly unlikely." Investors remain skittish about insurers' exposure to the market after two mortgage insurers, MGIC Investment Corp (MTG.N) and Radian Group Inc (RDN.N), disclosed on Monday that each of them could be forced to write down about $500 million for their subprime joint venture.

((Reporting by Ed Leefeldt, editing by Richard Chang; edward.leefeldt@reuters.com; Reuters Messaging: edward.leefeldt.reuters.com@reuters.net; +1 646 223 6315)) Keywords: AIG STOCK/

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