Aug. 6 (Bloomberg) -- American International Group Inc., the world's biggest insurer by assets, posted a $5.36 billion loss as writedowns tied to the housing slump wiped out profit for a third straight quarter. Shares fell 8.2 percent in extended trading.

The loss in the period ended June 30 equaled $2.06 a share, compared with profit of $4.28 billion, or $1.64, a year earlier, the New York-based company said today in a statement. The loss excluding the declines in the value of some investments was $1.32 billion, or 51 cents a share, missing by $1.28 the average estimate of 19 analysts surveyed by Bloomberg.

``They're still dealing with the environment for credit- default swaps, which is very difficult,'' said Keith Wirtz, who helps manage $23 billion including 1.3 million AIG shares as chief investment officer of Fifth Third Asset Management in Cincinnati. ``Investment income is being pressured.''

Chief Executive Officer Robert Willumstad promised there are ``no sacred cows'' in his three-month review of AIG units as he tries to reverse a 50 percent stock slide this year and net losses in two previous quarters totaling $13 billion. Willumstad, 62, replaced Martin Sullivan June 15 after investors including former CEO Maurice ``Hank'' Greenberg demanded Sullivan's ouster.

The insurer reduced the value of credit-default swaps, guarantees AIG sold to protect fixed-income investors, by $5.56 billion and marked down other holdings by $6.08 billion before taxes.

Housing Writedowns

The biggest insurers in the U.S. and Bermuda posted more than $77 billion in writedowns linked to the collapse of the mortgage market from the start of 2007 through the first quarter, with AIG representing about half that total.

AIG raised $20.3 billion in May by selling debt and equity to replenish capital and protect against further writedowns. Citigroup Inc. analyst Joshua Shanker said in a research note that month that AIG may seek $10 billion more.

The insurer fell $2.38 to $26.71 at 6:03 p.m. in New York. AIG is the second-worst performer this year in the Dow Jones Industrial Average behind General Motors Corp. Second-quarter results were announced after the close of regular trading today.

``We have a lot of work to do to restore AIG's profitability to where it should be,'' Willumstad said in the statement. He said he'll update investors on his turnaround plan next month.

AIG has other units affected by the worst U.S. housing slump since the Great Depression, including a mortgage insurer and home lender. The company said June 17 that its Wilmington Finance Inc. unit will stop originating mortgages through brokers and reduce the number of loans it makes directly to homebuyers.

Mortgage Insurance

AIG's mortgage insurer, United Guaranty Corp., had an underwriting loss of $564 million, a fourfold increase from a year earlier. The unit, which reimburses lenders when borrowers don't pay their loans, said 4.9 percent of policies were at least 60-days past due, almost double a year earlier.

The unit may be unprofitable through the middle of next year, the company said today. In June, 67,908 insured borrowers fell at least 60 days delinquent industrywide, compared with 43,214 who got out of arrears, according to the Washington-based Mortgage Insurance Companies of America.

AIG's American General Finance lost $40 million as the home lender increased its allowance for loan losses and spent money to scale back its Wilmington Finance Inc. mortgage business. The unit earned a profit of $43 million in the same period a year earlier.

One in every 171 U.S. households was foreclosed on, received a default notice or was warned of a pending auction in the second quarter, said RealtyTrac Inc., double the rate of a year earlier.

Hedge Funds, Private Equity

Earnings from private equity and hedge fund holdings plunged more than 90 percent to $91 million in the quarter after declining 84 percent in the period ended March 31. AIG had $29.9 billion in the so-called ``alternative'' holdings as of June 30. Hedge funds returned $207 million while private equity resulted in a $116 million loss.

Allstate Corp., Hartford Financial Services Group Inc. and Lincoln National Corp. all said second-quarter returns from such investments declined by more than 60 percent.

The financial products unit responsible for credit-default swaps guaranteed more than $460 billion of assets for fixed- income investors at the end of March, including $60.6 billion in securities tied to subprime mortgages.

AIG named former Goldman Sachs Group Inc. Vice Chairman Suzanne Nora Johnson to the board last month to help restore investor confidence. Investors including billionaire Eli Broad pressured Willumstad to bolster the company's financial leadership.

New Leadership

Richard Holbrooke, a former U.S. ambassador to the United Nations, and Ellen Futter, president of the American Museum of Natural History in New York, resigned from the board.

Willumstad, who is also AIG's chairman, has said he'll meet with the insurer's unit heads, business partners and regulators to get a better feel for the company, which has about $1 trillion of assets, 116,000 employees and operations in more than 100 countries.

AIG is struggling with writedowns at the same time prices are declining industrywide for commercial insurance. Rates in the U.S. fell 13 percent in the second quarter from a year earlier as insurers cut prices to win market share, according to a survey by the Council of Insurance Agents & Brokers in Washington.

Ten analysts recommend investors accumulate shares of AIG, eight have ``hold'' ratings, and none say ``sell,'' according to Bloomberg data through yesterday.

(To hear AIG's second-quarter conference call tomorrow at 8:30 a.m. New York time, visit LIVE )

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

Last Updated: August 6, 2008 18:19 EDT