AIG Hit By Credit Suisse, Fitch

American International Group’s stock price sank today after Credit Suisse upped its loss estimates for the firm by billions. On Friday a rating firm took negative action against the giant insurer.

AIG shares, which sold for close to $70 12 months ago, were at $18.99 in late afternoon trading on the New York Stock Exchange.

Fitch Ratings late Friday said it had updated its assessment of American International Group and placed its ratings of the insurer and its subsidiaries on Rating Watch Negative.

Credit Suisse cited AIG’s credit default swap portfolio as a problem and said it estimated that AIG Financial Products is “sitting on a $6.5 billion loss vs. our previous estimate of a loss of $2.6 billion.”

The firm said it was lowering the company’s third-quarter earnings per share estimate to a loss of 86 cents from a gain of 13 cents.

Based on our mark-to-market analysis of AIG’s investment portfolio, Credit Suisse said it expects AIG’s book value to decline by 6 percent.

The estimate for AIG is being lowered largely due to elevated losses from its derivatives business. If AIG continues to hold its exposures, a de-risking strategy may result in losses remaining elevated given the very poor liquidity conditions for securities with residential housing exposures, the firm said.

Credit Suisse said in the event of a one notch ratings downgrade from both Moody’s and S&P, AIG would be required to post up to $13.3 billion of additional collateral.

Fitch, before Friday, had previously put a long-term Negative Rating Outlook on AIG and the majority of its insurance-related subsidiaries rated by Fitch, and a Stable Rating Outlook on AIG's financial services subsidiaries.

Fitch Rating Watches are generally event-driven actions that are expected to be resolved over a relatively short period.

Financial subsidiaries rated included AIG Capital Corporation (AIGCC), International Lease Finance Corp. (ILFC) and American General Finance Inc. (AGF).

Fitch noted that it does not rate AIG Financial Products (AIGFP), which have been a significant source of recent quarterly losses reported by AIG.

The rating service said moving all rated AIG entities to Rating Watch Negative reflects its uncertainty regarding potential outcomes of AIG's previously announced business unit review, which is expected to be completed in late September.

Also reflected in the change, Fitch said, is ongoing uncertainty associated with the company's potential for additional realized and unrealized losses on its various residential mortgage backed securities-related exposures, including its portfolio of credit default swaps collateralized by structured finance collateralized debt obligations (CDOs) and resultant collateral posting and capital needs.

Fitch said it believes that completion of AIG's review of its various business units will likely provide clarity around some of its rating concerns over the next four to six weeks.

However, the company noted that concerns related to both AIGFP's and AIG's insurance operations' exposure to credit-market volatility is more likely to emerge over a longer period of time that may extend over the next two quarterly reporting periods.

Although Fitch noted that AIG has publicly acknowledged that ILFC will remain a core holding of AIG, Fitch said its decision to place ILFC on Rating Watch Negative reflects a heightened overall level of uncertainty surrounding the AIG organization and the indirect impact this can have on ILFC.