American International Group Tuesday moved to calm investors shaken by its earlier disclosure that derivatives losses could more than triple to about $5 billion, a development that earned it a rebuke from its auditor for a "material weakness" in internal controls.
AIG, the world's largest insurer, said in a statement on Tuesday that the size of any write-down was not expected to be material to the company.
AIG shares gained 4 percent to $46.60, after falling nearly 12 percent on Monday to the stock's lowest level in five years.
Investors pushed the shares down on Monday, after AIG disclosed in a regulatory filing that its mark-to-market unrealized losses on a credit default swap portfolio within its AIG Financial Products unit were expected to be about $4.88 billion through November, compared with an earlier indication of a loss of up to $1.5 billion.
The loss could wipe out AIG's fourth-quarter earnings, some analysts said.
AIG, which is expected to release quarterly results later this month, has not yet disclosed whether it saw further deterioration in December.
"The valuation adjustment as of Dec. 31, 2007, is likely to be significant, and will likely cause AIG to report an accounting loss for the quarter," S&P credit analyst Rodney Clark said.
AIG's larger estimate does not factor in a spread differential benefit that otherwise would have lowered the net unrealized loss to about $1.6 billion.
While not alone in its troubles valuing securities that have nose-dived in value as a result of the subprime mortgage crisis, S&P said alarm bells were raised by AIG being the first to be cited with a material weakness in this area.
S&P Rating Services on Tuesday chopped its outlook on AIG to "negative" from "stable," indicating the greater likelihood of a ratings downgrade.
The insurance giant's accounting woes served to remind investors of an earlier accounting scandal tied to its bookkeeping for some finite risk reinsurance contracts that led to the ouster of then-CEO Maurice "Hank" Greenberg, after almost four decades at AIG's helm.
"Monday's market reaction seemed to be more based on a loss of management credibility than to any significant increase in loss estimates," Goldman Sachs' Tom Cholnoky said in an investor note.
AIG Chief Executive Martin Sullivan, who replaced Greenberg in 2005, in December told investors the company's exposure to the U.S. residential housing market was "accurately identified."
"We are confident in our marks and the reasonableness of our valuation methods," he said at the time.
While the company has now back-peddled on how it values the risky derivatives, it assured investors that its business remains financially sound.
The potential losses are "not indicative of the losses (AIG Financial Products) may realize over time," AIG said in its Tuesday statement.
"Based upon its most current analyses, AIG believes that any losses AIGFP may realize over time as a result of meeting its obligations under these derivatives will not be material to AIG."