Posted on 14 Aug 2007
The world’s largest insurance company, American International Group, told investors that housing market values would have to decline levels not seen since the Great Depression before the insurer would be harmed by its exposure to the residential mortgage market.
AIG’s exposure to subprime loans (those extended to consumers with less than stellar credit) exists on three levels — as a lender, investor in mortgage-backed securities and supplier of mortgage insurance. Still, the giant insurer describes its market risk as minimal, saying declines of 30 percent to 40 percent in home values and defaults among borrowers with strong credit would have to swell to more than 45 percent before AAA and AA bundles of securities were affected, where most of its holdings are located the company said.
AIG Chief Risk Officer Bob Lewis said, "We believe that it would take declines in housing values to reach Depression proportions - along with default frequencies never experienced - before our AAA and AA investments would be impaired.”
AIG currently has investments in residential market holdings totaling approximately $94.6 billion, representing about 11 percent of its total invested assets. Of that, the company has $28.7 billion, or 30 percent, in subprime residential mortgage-backed securities.
AIG said while its mortgage insurance group has seen a rise in delinquencies on first-lien mortgages, it reassured investors that it has ample cash and "doesn't need to liquidate any of its investment securities in a chaotic market."
Cliff Gallant, equity analyst with Keefe, Bruyette & Woods Inc., estimated that of AIG's $1.034 trillion in assets at June 30, it has some $3 billion to $5 billion that is at risk in the event of a subprime default - a small bit of the overall pool amounting to approximately $1 per share in exposure, what he calls "a reasonable worst-case scenario."