Monday's Financial Winners & Losers

The financial sector was dragging down the rest of the market Monday amid yet more harbingers of dwindling forthcoming profits.

Taking a particularly big hit today was American International Group (AIG Quote) after the New York insurance giant disclosed that it had severely underestimated the valuation plunge of its super senior credit default swaps, or contracts that shift the risk of credit default to the buyer.

AIG now has the portfolio's gross cumulative value sliding $5.96 billion as of Nov. 30 vs. the previously stated figure of $1.6 billion, having recently factored in certain harmful "structural mitigants, such as triggers that accelerate amortization of the more senior CDO [collateralized debt obligation] tranches" that weren't "adequately quantif[ied]" before. AIG explained that it had relied on "market prices, not credit ratings," in its prior method of calculating credit-default risk. As of Sept. 30, AIG valued the total portfolio at $513 million, including $78 million worth of multi-sector CDOs that had "some exposure to U.S. subprime mortgages."

Prompting the big valuation adjustment was AIG's auditor, PricewaterhouseCoopers, which cited a "material weakness in [AIG's] internal control over financial reporting and oversight" regarding that portfolio. AIG shares were sinking $5.37, or 10.6%, to $45.31.

In more credit woes, a Bear Stearns analyst pegged writedowns for S&P 500 financial-services firms at between $125 billion and $175 billion, according to Reuters. All in all, said the analyst, total mortgage-related losses in the U.S. should be at least twice the low end of that range.

And Bank of America pointed to the brittle broad market, soft fixed-income sales and trading, and mortgage-market exposure, among other things, in slashing current-quarter earnings targets for Goldman Sachs (GS Quote), Bear Stearns (BSC Quote), Morgan Stanley (MS Quote), and Lehman Brothers (LEH Quote), as per Reuters.

BofA also named Goldman and Citigroup (C Quote) as being the most susceptible to more writedowns in leveraged loans this quarter.

Goldman jutted into the red a few times, but recently added 0.7% to $188.38. Bear, Morgan and Lehman were slipping at least 1.4% apiece as Citi traded around the flat line, losing a dime at $25.93.

The NYSE Financial Sector Index, which tracks all of the above stocks, was falling about 107 points, or 1.4%, to 7,357.55.

Also applying pressure here was insurance broker Brown & Brown (BRO Quote) after late Friday's report that fourth-quarter earnings dropped 12.3% year over year to $33 million, or 23 cents a share, missing Thomson Financial's analyst estimates by 7 cents a share. The Florida-based company said the quarter was a "very challenging" one as renewals in property and casualty lines of insurance continued lagging 15% to 30% behind expiring premiums. Piper Jaffray cut the stock to neutral from buy, after which B&B shares fell $3.56, or 15.8%, to $19.01.

Elsewhere in the insurance sector, Chicago-based CNA Financial (CNA Quote) also missed sharply with a fourth quarter operating profit of $223 million, or 82 cents a share. Analysts were looking for $1.03 a share; a year earlier, CNA made 91 cents a share. And health insurer Centene (CNC Quote) was cut to neutral-equivalent ratings at both Credit Suisse and Wachovia following Friday's disappointing earnings report.

CNA shares slid 18.4% to $26.31 while Loews (LTR Quote), which owns an 89% stake in CNA (based on Sept. 30 numbers), lost 8.3% to $41. Centene stock was off another 11.2% to $19.03.

Away from earnings, HSBC (HBC Quote) slipped 2% to $70.05 after The Sunday Times of London reported that the Britain-based bank is on the brink of putting its 300 French retail branches up for sale.

And MBIA (MBI Quote) lost some more ground today even though Warburg Pincus officially disclosed its 16.5% stake in the struggling bond insurer through a Schedule 13D filing, which implies intent to exert control. Last week, Warburg agreed to buy $300 million in MBIA shares as part of the Armonk, N.Y., firm's $1 billion equity offering, which followed Warburg's December equity-purchase agreement to infuse MBIA with up to $1 billion.