Insurance major AIG says its sub-prime risks are manageable

American International Group (AIG) announced on Wednesday 5 December that its risks from the sub-prime crisis were “manageable”. Chief executive Martin Sullivan, who heads the world''s largest insurer quelled investor fears in a presentation to demonstrate that while defaults and foreclosures in the housing market would continue through 2008, they were unlikely to cause the insurer any major damage.

Sullivan said the possibility that the AIG financial products unit would sustain a loss was “close to zero”. That unit handles the company''s $450 billion worth of credit derivatives, and had been seen as one of the most vulnerable to damage from the ongoing sub-prime crisis.

AIG shares rose $2.70, or 4.9 per cent, to close at $58.15 after trading at a two-and-a-half-year low of $50.86 only two weeks ago. Analysts had warned at the time that AIG might have to go in for further write-downs. The presentation reassured investors, providing details of its mortgage insurance, consumer finance and credit derivatives units.

Sullivan said he expected five-year adjusted earnings-per-share growth to be 10 per cent to 12 per cent, and return on equity to be 15 per cent to 16 per cent. This is the first time AIG has given this kind of specific forecast.

AIG acknowledged that the sub-prime crisis — which has so far cost the finance industry more than $50 billion in losses and two top CEOs their jobs — had hurt the world’s largest insurer by market capitalisation. Mortgage insurers have been among the hardest hit by a tightening in the housing market as fewer homeowners need their products.

AIG officials said that they foresaw a pre-tax write-down in their portfolio of credit default swaps of $500 million to $600 million since the end of October. At the end of the third quarter, AIG had posted an after-tax loss of $229 million in this portfolio, or about $350 million before taxes, followed by another $550 million pre-tax loss in October. But the total portfolio is nearly $450 billion, and the insurer can hold devalued investments until recovery.

AIG has very little exposure to structured investment vehicles (SIVs), which many investors see as dangerous. Raters have said they may cut ratings for over $100 billion worth of securities issued by off-balance-sheet SIV funds — bank-affiliated investment funds that raise cash by issuing short-term debt and buy longer-dated, high-yielding assets, often US mortgages. These funds have run into deep trouble this year, as investor interest in their debt has dried up.