Auditors expose errors in insurer’s portfolio valuation causing share price to plummet
The $5bn write-down revealed on Monday by AIG, the world’s largest insurer, could spark legal action by US investors.
AIG publicly admitted that external auditors had discovered it miscalculated the losses on some of its investments, originally valued at $1bn. AIG was told by auditor Pricewaterhouse Coopers that material weaknesses existed in its internal auditing practices. But AIG said it believed it had compensating controls and procedures to appropriately determine the fair value of its portfolio.
AIG’s share price plummeted by nearly 12% to $44.74 by the close of trading on Monday, wiping $14bn off its market value.
Market sources suggested that AIG’s investors could seek legal action against the company under US securities legislation, or seek action from the US Securities Exchange Commission (SEC), if AIG was proved to have misled them.
Ratings agency Fitch has since threatened to downgrade the insurer, while pointing out that AIG had a large exposure to sub-prime losses.
According to the ratings agency, AIG had $62.4bn of collateralised debt obligations that were composed mainly of sub-prime debts.
Fitch said that if it were to downgrade AIG’s insurer financial strength rating, from AA+, it would be by a single notch, adding: “At present these losses should be absorbed by the existing capital base and future earnings stream.”
Jeremy Brazil, director of London underwriting at Markel International, said: “People only start to worry when ratings fall to around BBB, at which point it is difficult to confidently do business with such a company, especially at a reinsurance level.”
He added: “Other insurers may also have problems because they have similar securities in their investment portfolios.”
AIG has total assets of just over $1trillion. In 2006, the company had total revenues of approximately $113.2bn and net income of $14bn.
