NEW YORK (Bloomberg) - American International Group Inc., the world's largest insurer, fell in New York trading after it missed analysts' profit estimates by the biggest margin in two years on losses related to the US housing recession.

The company dropped $1.90, or 3.3 percent, to $56 in New York Stock Exchange Composite trading. AIG, based in New York, recorded $864 million in investment losses before taxes and marked down other holdings, including mortgage-backed securities, by $3.39 billion when it reported third-quarter results on Wednesday.

"People are not convinced there's been an accurate assessment of what the real losses should be," Cliff Gallant, an analyst at KBW Inc. in New York who rates AIG "outperform,' said in an interview. "They think more losses will be forthcoming."

AIG has fallen 22 percent this year on concerns about losses related to sub-prime mortgages, making it the third-worst performer in the Dow Jones Industrial Average since December 31 after Citigroup Inc. and Home Depot Inc. The results give former CEO Maurice "Hank" Greenberg ammunition in his campaign to shake up AIG management.

"We obviously share your unhappiness with the current share price," CEO Martin Sullivan told analysts and investors today in a conference call. "I'm not satisfied with a number of our businesses."

AIG, which has units that originate, insure and invest in home loans, said it expects its principal to be repaid on the securities it marked down and that it lowered values because of market conditions. AIG had a total of $872.3 billion in cash and investments as of September 30.

"The financial services crisis clearly took its toll," Nigel Dally, analyst at Morgan Stanley in New York, wrote today in a research note. The magnitude of housing-related losses "was larger than expected," wrote Dally, who rates the company "overweight."

Sub-prime-linked losses reduced earnings by $743 million, said Dally, who included results from the mortgage insurance and credit protection units and AIG's investments. The insurer also marked down $1.61 billion in mortgage-backed securities.

AIG's third-quarter profit declined 27 percent to $3.09 billion, or $1.19 a share, from $4.22 billion, or $1.61 a year earlier, the company said after the close of regular trading 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.

The company had $25.9 billion in sub-prime mortgage-backed securities and $3.75 billion of collateralised debt obligations backed by sub-prime loans as of September 30, AIG said.

Hedge fund returns were 'flat' from July to September after helping AIG beat analysts' estimates the prior two quarters, the company said. Income on so-called alternative investments, including hedge funds and private equity, was $575 million compared with $1.02 billion in the second quarter.

AIG collects fees to manage alternative investments for clients and has also put about $27.1 billion of its own money into the holdings to back insurance policies.

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, as it paid more to bail out lenders from bad loans.

"The housing market will continue to adversely affect our operating results for the foreseeable future," said William Nutt, CEO of United Guaranty, the fourth-largest US mortgage insurer. The unit will likely have an operating loss in 2008, he said.

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

AIG expects $220 million in fourth-quarter losses from wildfires that scorched southern California last month. The losses, which the company estimates at $140 million after taxes, include payments to owners of businesses and high-end homes.

In its US commercial insurance unit, the company's largest, profit increased 19 percent to $1.83 billion on falling claims costs. Policy sales declined one 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 US this year and last, the council said.

No major storms have struck the country since a record season in 2005.

Mr. 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 November 2 regulatory filing.

He controls more than 11 percent of AIG shares through two closely held firms and his personal holdings.

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

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