NEW YORK (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 business in 1987 and built it into a unit providing financial guarantees on more than $500 billion of assets at year-end, including $61.4 billion in securities with ties to US sub-prime 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 businesses.

AIG fell as much as 7.7 percent in New York trading after posting the biggest quarterly loss in its 89-year history yesterday as it wrote down the value of so-called credit-default swaps. The world's largest insurer said for the first time in a statement that realised losses on the portfolio "could be material" to quarterly earnings. The fourth-quarter net loss was $5.29 billion.

Cassano, 52, "has decided, with our concurrence, that he would like to pursue opportunities outside of AIG," chief executive officer Martin Sullivan said yesterday in a conference call with analysts and investors.

AIG disclosed on February 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.

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 sub-prime mortgages, said it expects more write-downs this year amid the worst US 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 $3.12, or 6.2 percent, to $47.03 at 1.06 p.m. in New York Stock Exchange composite trading.