American International Group (AIG), the world’s largest insurance company, gave warning yesterday that it would need to write down the value of investments in sub-prime mortgages by about $4.88 billion (£2.5 billion) for October and November.

The group, which predicted as recently as December that the write-down for those two months would be $1.1 billion, said the increase related to a change in the way it calculated the value of investments in its sub-prime mortgage derivatives portfolio.

AIG gave warning that its auditor, PricewaterhouseCoopers, had found a “material weakness” in the way the company values its portfolio of credit swaps and said that it had not yet determined the decline for December.

Pricewaterhouse yesterday said: “[AIG] is still accumulating market data in order to update its valuation.”

The announcement sent AIG’s shares to their biggest fall in 20 years, with the stock sliding 12 per cent to close at $44.74.

It also prompted Fitch to review AIG’s AA credit rating on the basis that the disclosure “brings additional uncertainty to the potential impact on the financial statements”. Fitch added that any downgrade would probably be limited to one notch.

The dive in share price caps a year in which AIG has lost about a third of its market value because of its heavy exposure to the US home-loan market – as a sub-prime mortgage lender, a mortgage insurer and an investor in mortgage bonds and related securities.

Yesterday’s losses related to AIG’s investments in credit swaps involving collateralised debt obligations (CDOs), which are pools of bonds and other asset-backed securities. Credit swaps are tradeable insurance policies, with the owner effectively acting as the insurer. They have seen their value plummet as the surge in defaults on US mortgages feeds through into a jump in home-loan insurance claims.

Last August, AIG said its exposure to the sub-prime crisis was “minimal”, and in November it said its exposure to the debt remained “high quality” with “substantial protection”.

AIG’s credit swap writedowns come after similar multibillion-dollar writedowns in monoline bond insurers such as MBIA and Ambac in recent weeks.

Meanwhile, Swiss Re, the world’s biggest reinsurer, lost just over $1 billion in October on two credit-default swaps.

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