Feb. 29 (Bloomberg) -- American International Group Inc. said the head of its financial products unit, Joseph Cassano, is stepping down after the insurer reported $11.1 billion in losses on contracts sold to fixed-income investors.

Cassano co-founded the unit in 1987 and built it into a business providing financial guarantees on more than $500 billion of assets at year-end, including $61.4 billion in securities tied to subprime mortgages. He will be replaced on an interim basis by William Dooley, 54, a senior vice president of the New York-based insurer's financial services division.

AIG fell as much as 7.8 percent in New York trading after posting a $5.29 billion fourth-quarter loss yesterday, the biggest in its 89-year history, on writedowns of so-called credit-default swaps. The world's largest insurer, led by Chief Executive Officer Martin Sullivan, said for the first time in a statement that realized losses on the portfolio ``could be material'' to quarterly earnings.

``If you're the CEO, you try not to take the last bullet,'' said James Huguet, chief executive of Tampa, Florida-based Great Companies Inc., which manages $400 million including 162,000 AIG shares. ``You're going to find somebody to take that bullet before you. Someone lower down should have put controls in place to make sure this didn't happen.''

Cassano, 52, ``has decided, with our concurrence, that he would like to pursue opportunities outside of AIG,'' Sullivan said today in a conference call with analysts and investors.

AIG disclosed on Feb. 11 that the swaps lost $4.88 billion in October and November and its auditor said the company used faulty accounting in providing a previous estimate that was about one-quarter the size.

`Difficult Estimates'

Assigning a value to the swaps, which protect investors against losses, involves ``difficult estimates and judgments,'' Sullivan said. ``At all times we have brought our best estimate.''

AIG, which has units that originate, insure and invest in subprime mortgages, said it expects more writedowns this year amid the worst U.S. housing slump in a quarter century. The company doesn't plan to repurchase shares for the ``foreseeable future,'' beyond commitments made last year, AIG said in the statement.

The insurer dropped $3.29, or 6.6 percent, to $46.86 at 4:03 p.m. in New York Stock Exchange composite trading.

Contracts on AIG's debt increased 17 basis points to 199 basis points, CMA Datavision prices show. Credit-default swaps, which rise when perceptions of credit quality worsen, protect bondholders against default and pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Cassano, Dooley

Cassano's retirement is effective March 31 and he will serve as a consultant to the company through the year, Sullivan said. The division Dooley supervises includes financial products, an airplane-leasing operation, and a bank. Cassano reported to Dooley, said spokesman Chris Winans.

Losses from mortgage-related investments have led to the replacement of executives at some of the world's largest financial firms, including Bear Stearns Cos. Chief Executive Officer James ``Jimmy'' Cayne, Citigroup Inc. CEO Charles Prince and Merrill Lynch & Co.'s Stan O'Neal. Less senior executives at Morgan Stanley, Bank of America Corp. and HSBC Holdings Plc have also left.

AIG joined insurers including XL Capital Ltd. in reporting losses from ventures guaranteeing fixed-income securities. XL, based in Bermuda, lost $1.06 billion in the fourth quarter as it wrote down the value of investments including a stake in bond insurer Security Capital Assurance Ltd.

To contact the reporter on this story: Hugh Son in New York Hson1@bloomberg.net.

Last Updated: February 29, 2008 18:30 EST