Shares of American International Group Inc. (AIG), the world's largest insurer, fell almost 7 per cent on Friday as regulators examine the firm's accounting of derivatives tied to sub-prime mortgages.
The Securities and Exchange Commission and the Justice Department are currently carrying out the investigation into the company's valuations of credit-default swaps that wiped out profit for two consecutive quarters.
After the news became public, there was panic selling in the AIG scrip which declined seven per cent to end the day on $33.93. The stock has lost more than half of its value in the last one year.
In the ongoing financial crisis, AIG has notched up record losses over the last two quarters. It ended 2007 with $5.3 billion quarterly loss, and things only got worse the next quarter when losses added up to $7.8 billion. The losses were driven by a $9.1 billion pretax write-down on its credit default swaps and an additional $6.1 billion write-down on AIG's investment portfolio.
On 11 February, AIG disclosed that its auditor, PricewaterhouseCoopers, had discovered ''material weakness'' in its accounting for its swaps portfolio and in May, the insurance giant announced the $7.8 billion loss.
Shareholders have repeatedly expressed their concerns over the management's confusion over its own exposure to credit default swaps, derivatives that act like insurance contracts, allowing investors to bet on the likelihood of default for securities like bonds backed by sub-prime mortgages. Unlike the initial estimates of a $1.1 billion loss on its swap portfolio, the company ended up losing more than $7 billion after tax on this product.
In a continuation of the disjointed management style, AIG raised $20 billion of capital in May after announcing plans to raise only $12.5 billion. Confounding shareholders further, the company then raised its dividend, though not as much as it had planned, while simultaneously issuing more shares, diluting the shares of its existing investors.
AIG, which agreed to pay $1.64 billion to settle state and federal probes in 2006, joins a growing list of firms facing government scrutiny over losses tied to home loans. The company is cooperating with the regulators, said a spokesman, Chris Winans.