AIG Seen Easily Absorbing Mark-to-Market Hit

American International Group Inc. is an "unsinkable ship" because the giant insurer has enough extra capital to absorb a potential mark-to-market hit of $5 billion to $20 billion from its credit derivatives business, analysts at Friedman Billings Ramsey said Wednesday.AIG AIG, part of the Dow Jones Industrial Average, had $20.2 billion of excess capital at the end of September, $3 billion of which was generated during the first three quarters of 2007, according to estimates of Bijan Moazami and his FBR colleaguesThe New York-based company also produces roughly $16 billion of annual operating income, the said in a note to clients.These financial cushions may come in handy when AIG reports fourth-quarter results on Thursday. Earlier in February, the insurer disclosed disagreements with its auditor about how it values some derivative exposures. See full story.The problems are centered on collateralized debt obligations, or CDOs. These complex securities are partly backed by mortgage securities.As house prices have fallen and as delinquencies and foreclosures surge, the market value of these securities have dropped sharply.AIG Financial Products, the insurer's derivatives unit, has a large exposure to these securities. The unit's portfolio of credit derivatives had a net notional exposure of $505 billion at the end of September.More than $62 billion of that was related to CDOs, mainly backed by subprime U.S. residential mortgage-backed securities, Fitch Ratings said.AIG Financial Products sold guarantees on CDOs, using credit-default swaps, a type of derivative-based insurance that pays out in the event of a default. It sold "super senior" credit-default swaps that guaranteed higher-quality parts of CDOs.