The Company

The News

Shares of

American International Group

AIG, a component of the Dow Jones Industrial Average, joins other prominent names in admitting it can't figure out how to value some of its assets tied to home loans made to the riskiest borrowers. According to documents filed with the Securities and Exchange Commission on Monday, the New York-based insurance giant now puts the gross cumulative decline in value of its credit-derivatives portfolio at $4.88 billion. Earlier, management projected the decline to be between $1.05 billion and $1.15 billion. Accountants are still trying to refine their methods for crunching December's numbers.

AIG's complex portfolio holds credit default swaps, some of which involve collateralized debt obligations, or CDOs. Some CDOs are backed by mortgages including those made to subprime borrowers.

The company also warned that its independent auditor, PricewaterhouseCoopers, has found "material weakness" in how AIG determines the value of its credit-derivatives portfolio. Ratings agency Fitch announced Monday it was putting the insurer's rating on "negative" credit watch.

The Analysis

These aren't new problems for AIG, which previously announced losses of $890 million in that portfolio through the end of October, says analyst Alan Devlin at Atlantic Equities Research, based in London.

"They say they have not determined the entire rate of decline of fair value for the portfolio," he says. "And this news has been far more negative. They'll have to do this for December, too. This one has been far more negative."

So while Monday's revised loss disclosure won't be the last piece of subprime-linked bad news, it's almost certainly the most severe drop for AIG, Devlin says.

Friedman Billings Ramsey analyst Bijan Mozami added while the damage isn't over, it won't be so crippling that investors should disregard the stock.

"The subprime fallout has certainly taken its toll on AIG's stock price, but we believe that additional losses are more than manageable, as not all losses will be taken at the same time and not all impact the income statement," he wrote. AIG shares have lost a third of their value over the past 52 weeks.

Mozami wrote Monday that AIG could see a maximum of about $7.8 billion of after-tax additional losses, or about $3.01 on a per-share basis, which represents less than half of the company's full-year earnings.

The Bottom Line

While the subprime mess and its continuing ripples are hitting insurers hard, AIG's net is cast widely enough to have a multitude of strong businesses with strong name recognition, and the company has exhibited "phenomenal expense control," Mozami wrote.

But the confusing language in which it sent out its latest piece of bad news was a way in which "they didn't help themselves," says Devlin. AIG's losses aren't a secret, nor is the cause, but he says the company could be more upfront as it struggles to right itself.

A quick rundown of potential and actual problems offers plenty of red flags for small investors. For heavily risk-tolerant buyers, AIG's size and corresponding strength may see it through and leave it in better shape than its peers when the subprime dust finally settles.