Nov. 8 (Bloomberg) -- American International Group Inc. fell in German trading after the world's largest insurer reported a 27 percent profit decline on losses linked to the worst U.S. housing recession in 16 years.

AIG fell $1.77, or 3 percent, to $56.13 by 9:49 a.m. in Frankfurt from $57.90 at the close of regular trading on the New York Stock Exchange yesterday.

Third-quarter net income declined to $3.09 billion, the New York-based company said yesterday. Excluding losses taken on investments and changes in the value of derivatives, profit was $1.35 a share, missing by 27 cents the average estimate of 15 analysts compiled by Bloomberg. AIG recorded $864 million in losses on investments before taxes and marked down other holdings by $3.49 billion.

The results may bolster efforts by former Chief Executive Officer Maurice ``Hank'' Greenberg to shake up AIG, the third- worst performer in the Dow Jones Industrial Average this year after Citigroup Inc. and Home Depot Inc. Greenberg, who controls more than 11 percent of AIG shares, said last week he'll talk to investors about improving its performance and management.

``It's clearly a miss,'' Cliff Gallant, analyst with KBW Inc. in New York, said in an interview. ``Greenberg's going to use everything he can to leverage his position. He's always been good at that.'' Gallant rates the shares ``outperform.''

AIG has fallen 19 percent this year through the close of trading in New York on concerns about losses related to subprime mortgages. The company has units that originate, insure, and invest in home loans.

Mortgage-Backed Securities

About 46 percent of the $3.49 billion in markdowns were in securities linked to residential mortgages, AIG said in a presentation on its Web site. The insurer said it expects its principal to be repaid on the securities and that it marked down values because of market conditions. AIG had a total of $872.3 billion in cash and investments as of Sept. 30.

The company had $25.9 billion in subprime mortgage-backed securities and $3.75 billion of collateralized debt obligations backed by subprime loans as of Sept. 30, AIG said.

United Guaranty Corp., AIG's mortgage insurance unit, had an operating loss of $216 million, compared with a profit of $85 million a year earlier. For every dollar in premium revenue, United Guaranty paid out $2.14 in claims to reimburse lenders when borrowers fell behind on their house payments.

Defaults by U.S. homeowners with private mortgage insurance jumped 22 percent in September from the year-earlier period. United Guaranty is the fourth-largest U.S. mortgage insurer.

Slump for `Foreseeable Future'

The housing slump will continue for the ``foreseeable future'' and United Guaranty, the fourth-largest mortgage insurer in the U.S., will have a ``significant'' operating loss next year, AIG said in a regulatory filing.

Operating profit at AIG's American General Finance fell 61 percent to $78 million as the mortgage lender increased its allowance for loan losses.

Subprime loans are made to borrowers with low credit scores or heavy debts. Fallout from bad subprime debts has led to the departure of CEOs at Citigroup and Merrill Lynch & Co.

The company's quarterly net income declined to $3.09 billion, or $1.19 a share, from $4.22 billion, or $1.61 a year earlier.

Commercial Insurance

In its U.S. commercial insurance unit, the company's largest, profit increased 19 percent to $1.83 billion on falling claims costs. Policy sales declined 1 percent to $6.01 billion amid ``increasing competition and rate declines,'' the company said.

Industrywide, commercial insurers charged businesses 13 percent less to renew policies in the third quarter, the steepest decline since rates began to fall in 2004, according to a survey by the Council of Insurance Agents & Brokers in Washington. The largest commercial accounts fell 16 percent, according to the survey.

The price declines were driven in part by reductions in property rates in coastal areas as a result of calm hurricane seasons in the U.S. this year and last, the council said. No major storms have struck the country since a record season in 2005.

Hank Greenberg

Greenberg, 82, will meet other investors to discuss ``concerns over the direction and management'' and ``strategic alternatives'' for the company, including selling units, he said in a Nov. 2 regulatory filing.

Then-New York Attorney General Eliot Spitzer sued AIG and Greenberg in 2005, accusing him of ordering improper transactions to hide losses and inflate reserves. Several allegations against him were later dropped and Greenberg denies any wrongdoing.

AIG agreed last year to pay $1.64 billion to settle probes started by the U.S. Securities and Exchange Commission, the Justice Department and Spitzer, now the governor of New York. The insurer also restated 2000 to 2005 earnings, cutting profit by a total of $3.4 billion.

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

Last Updated: November 8, 2007 04:01 EST