Shares of American International Group fell as much as 8 percent Thursday on concern the world's largest insurer could face larger-than-expected losses from a credit derivatives portfolio that has already led it to $11 billion in write-downs.
"AIG believes economic losses from its (credit default swap) exposures are unlikely to exceed $900 million. However, our analysis suggests losses of $3 billion, with downside to more than $13 billion if the fixed income crisis deepens," wrote Morgan Stanley analyst Nigel Dally in a research note.
Default swaps are akin to an insurance policy on underlying securities, including collateralized debt that have exposure to the subprime mortgage crisis.
Morgan Stanley's analysis of likely economic losses at AIG was related to a CDS portfolio managed by AIG Financial Products, which led the insurer to record its greatest-ever loss in the fourth quarter.
On a quarterly earnings call with investors last month, AIG said by current estimates of a worst-case scenario, it could record losses on the swap portfolio of up to $900 million.
"If the fixed income crisis deepens, these losses, coupled with escalating credit losses and lower earnings from segments exposed to the residential housing crisis, could lead to a capital shortfall at the company," Dally added, in the note.
An AIG spokesman said he had no comment on Thursday's Morgan Stanley report.
Morgan Stanley cut its AIG rating to "equal weight" from "overweight," and reduced its 12-month price target for the stock to $50, indicating a "meaningful risk of the stock trading down to book value ($38 at year end) or below in the short term if the crisis deepens."
AIG shares were down $2.77, or 6.4 percent, at $40.88 on the New York Stock Exchange, after earlier touching $40.13. The stock is a component of the Dow Jones industrial average.