UPDATE 3-AIG says regulators probing mortgage contracts

(Adds analyst comment, pargraphs 10-12)

By Lilla Zuill

NEW YORK, June 6 (Reuters) - American International Group Inc (AIG.N) said on Friday that the U.S. Securities and Exchange Commission and Department of Justice were investigating whether it overstated the value of contracts linked to subprime mortgages.

"AIG has received inquiries from the SEC and the DOJ regarding the evaluation of AIG Financial Products credit default swaps portfolio," spokesman Chris Winans said.

"While we cannot say where the inquiry will lead, we can say it is not unusual to receive such questions following the kind of volatility that AIG Financial Products and the rest of the credit markets have experienced," Winans added.

Over the last two quarters, the world's largest insurer has posted record losses stemming from more than $20 billion in write-downs on the credit default swap (CDS) investments held by its financial products unit, sending shares in the world's largest insurer down sharply.

AIG shares fell $2.48, or 6.8 percent, to close at $33.93 on the New York Stock Exchange, after touching an 11-year low of $33.65. The stock has been more than halved over the last year.

Credit protection costs have risen for AIG in recent months as losses mounted from mortgage-related investments.

"Amid the credit market uncertainty, we have consistently and promptly provided our best estimates of our CDS portfolio valuations and potential exposures," said Winans.

AIG management said last year that the company did not expect to realize any losses from the CDS portfolio, and did not expect unrealized market valuation losses to be severe. In the months since, however, it has recorded the more than $20 billion in write-downs of the value of these assets.

CREDIT WOES

Financial services firms worldwide have recorded more than $300 billion in write-downs and credit-related losses since the credit crunch last year caused a nosedive in the value of a range of investments with links to mortgages.

For AIG investors concern over these investments trumps worry about an SEC probe, said Donn Vickrey, an analyst at the research firm Gradient Analytics. Vickrey did believe the SEC probe was the main driver behind the steep selloff in AIG shares on Friday.

"Longer term, the SEC isn't the biggest issue," he said, adding it was not uncommon for regulators to conduct a review when a company posts a large, unexpected loss.

Another thorn for AIG was concern that the value of its franchise could be slipping, Vickrey said.

In addition to the large investment write-downs, AIG posted weaker-than-expected, first-quarter operating earnings from insurance units. (additional reporting by Varsha Tickoo in Bangalore; Editing by Gary Hill, Leslie Gevirtz)