AIG stock falls on fear over possible write-down

NEW YORK (Reuters) - The shares of American International Group Inc (AIG.N) fell and its debt protection costs rose on Thursday after reports that the world's largest insurer might be facing a large securities write-down when it reports third-quarter earnings on November 7.

AIG's shares were down 7 percent or $4.45 to $59.39 in afternoon trading on the New York Stock Exchange after hitting a new 52-week low of $59.06 earlier. Its debt protection costs surged.

Analysts and traders said the announcement by Merrill Lynch & Co Inc MER.N on Wednesday that it had taken a $7.9 billion write-down, largely due to bad investments related to risky subprime mortgages, has raised concerns about the mortgage exposures of other financial institutions.

Bond insurer MBIA Inc (MBI.N) also reported a third-quarter loss due to the declining value of credit derivatives, raising concerns that AIG may have similar exposures.

MBIA's loss has raised the sensitivity of AIG's derivative exposures, said Scott MacDonald, director of research at Aladdin Capital in Stamford, Connecticut. "It has generated a little bit of nervousness about what their earnings will look like."

AIG spokesman Chris Winans said his company would have no comment on market rumors or the stock activity.

The cost to insure AIG's debt with credit default swaps surged 71 percent to 63.5 basis points, or $63,500 per year for five years to insure $10 million in debt, from 37 basis points at Wednesday's close, according to Markit Intraday.

Analysts at the Royal Bank of Scotland said in a report on Thursday that they anticipate AIG will report large write-downs.

"Aside from brokers, expect AIG to take a pasting," they said.

The RBS report said that the bulk of Merrill's write-down. some $5.8 billion, came from the highest-rated senior pieces of Merrill's collateralized debt obligations, or CDOs.

RBS said AIG has acknowledged a senior portfolio of $465 billion, $64 billion of which is backed by subprime.

However, AIG has said that underlying tranches of CDOs would have to default before it faced losses and has also said that AIG does not mark its portfolio to market, the RBS report states.

"But the scale of the exposure must surely raise eyebrows here," the RBS report states.

Michael Chren, a senior portfolio manager with Allegiant Asset Management, said a rumor running through the market that AIG would have to take a write-down of $10 billion appeared to be "pure speculation" to him.

But rumors of a portfolio loss have surfaced before. In August, a Chicago research firm told the Wall Street Journal that the world's largest insurer would likely have to take a loss on derivatives such as CDOs.

Citi analyst Joshua Shanker said in a report on Thursday that he also expected a mark-to-market loss of $1.6 billion in AIG's portfolio, but with no impact on operating income. Such write-downs are normally a balance sheet item.

"Although high, it is small in relation to AIG's financial position," Shanker said in his report.

(Reporting by Karen Brettell and Ed Leefeldt; editing by Theodore d'Afflisio and Gerald E. McCormick)