UPDATE 3-Insurer AIG posts large loss on bad mortgage bets

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By Lilla Zuill

NEW YORK, Aug 6 (Reuters) - American International Group Inc (AIG.N) posted its third consecutive quarterly net loss of more than $5 billion on Wednesday as it wrote down bad mortgage-related investments, sending its shares down almost 8 percent.

The world's largest insurer and one of the hardest hit in the credit crisis also reported a general deterioration in its mainstream insurance businesses, which were hurt in particular by a decline in investment income and losses from its mortgage insurer, United Guaranty Corp.

"Our second quarter results were adversely affected by the severe conditions in the housing and credit markets and a very difficult investment environment," AIG's chairman and chief executive Robert Willumstad said in a statement. Willumstad took the CEO job in June after Martin Sullivan resigned.

"We have a lot of work to do to restore AIG's profitability to where it should be," Willumstad warned, adding that AIG was considering all options as it looked to improve results and its risk profile and protect its capital base.

"We are examining every business, as well as the assumptions underlying how we do business in the markets where we have a presence," Willumstad said. He said a progress report would be issued in late September.

BATHED IN RED

AIG said its second-quarter net loss was $5.36 billion, or a loss of $2.06 a share, compared with net income of $4.28 billion, or $1.64 a share, a year ago. It had an adjusted net loss of 51 cents a share. Analysts, on average, had forecast a profit of 46 cents a share, according to Reuters Estimates.

It was the second-largest loss in AIG's 89-year history, surpassed only by the $7.7 billion net loss it recorded in the first quarter of 2008. AIG has posted net losses exceeding $18 billion over the past three quarters.

Long known for profitability, AIG said some of its workers had received Wells notices, indicating the U.S. Securities and Exchange Commission was considering civil action. The Justice Department and SEC are investigating investments that led to AIG's quarterly losses.

AIG said it recorded $5.56 billion in second quarter unrealized market valuation losses on credit default swaps, the same area that led to losses in the prior two quarters.

The company's financial ratings have been lowered, and it has been forced to raise $20 billion in recent months to strengthen its balance sheet.

Portfolio manager Thomas Russo at Gardner, Russo & Gardner in Lancaster, Pennsylvania, which manages more than $3 billion in assets and owns AIG shares, said he was concerned that AIG's credit losses would undermine its insurance business. AIG is best known for its insurance business.

Russo said he owns AIG shares because of strong growth forecasts for its foreign life insurance and retirement services. "What would be important is to know ... is this an up-to-date and full reflection of what they know to be their exposures," he said.

Much of the second-quarter 2008 loss was due to what AIG described as "severe, rapid declines in fair values of certain residential mortgage-backed securities and other structured securities in the second quarter." AIG said it had concluded that it could not "reasonably assert that the recovery period would be temporary."