American International Group Inc. said that valuation declines on credit-default swaps sold to European banks could have a ??material adverse effect? on the company??s results.
The risk of losses on the derivatives may last ??longer than anticipated,? the New York-based insurer said late yesterday in a regulatory filing updating the ??risk factors? in its 2008 annual report. The firm had $192.6bn in swaps allowing lenders to reduce the funds they had to hold in reserve as of March 31, AIG said.
??Given the size of the credit exposure, a decline in the fair value of this portfolio could have a material adverse effect on AIG??s consolidated results,? the company said.
The insurer said it doesn??t expect it will have to make payments under contractual agreements tied to the regulatory relief swaps. Most of the swaps will be terminated over the next 12 months, according to AIG.
AIG said it was unable to provide full details on the value of assets backed by the swaps because of confidentiality agreements with counterparties and lack of information about debtors on loans tied to the contracts.
The insurer??s $182.5bn bailout includes $30bn to help retire swaps linked to subprime mortgages. The package also includes $22.5 bn to unwind the securities-lending program, a $60bn credit line and an investment of as much as $70bn.
The $192.6bn figure for the swaps is comprised mostly of $99.4bn tied to corporate loans and $90.2bn linked to prime residential mortgages, the insurer said in a May 7 filing. The combined total was reduced from $234.4bn on Dec. 31.
