NEW YORK (Bloomberg) — American International Group, the world's largest insurer, saw its shares fall the most since August in New York trading on speculation the company may write down assets linked to subprime mortgages.

AIG spokesman Chris Winans said the company had no comment on the speculation or a report by Friedman, Billings, Ramsey & Co. estimating $9.8 billion in "potential" writedowns in units that originate, insure, and invest in home loans.

"Considering what we've seen at Bank of America, Merrill Lynch and Bear Stearns, it's certainly possible," said Marc Weinberger, head trader at W. Quillen Securities in New York. AIG fell $2.05, or 3.2 percent, to $61.79 in New York Stock Exchange composite trading yesterday afternoon after touching $58.46 earlier.

The writedowns would be "manageable", reducing third-quarter profit by $1.00 a share, said Bijan Moazami, the Friedman, Billings analyst. Moazami estimates profit of $1.72 a share without the writedowns. AIG has $32.6 billion in subprime-related assets, compared with $828.8 billion in total investments as of June 30.

The worst US housing slump in 16 years has deepened as the riskiest borrowers default on home loans at a record pace. MBIA Inc., the world's biggest bond insurer, reported its first-ever quarterly loss today after marking down the value of guarantees on collateralized debt obligations, which package securities including bonds backed by mortgages. The company wrote derivative contracts promising to pay CDO holders in the event of a default.

The company reports third-quarter results on November 7. AIG Chief Risk Officer Robert Lewis said on August 9 it would take a housing decline of "depression proportions" before the insurer would realise losses on its holdings.

"The problems in the housing market are getting bad enough that it's starting to affect people further up the food chain, including mortgage insurers and CDOs," said Brian Horey, general partner at Aurelian Partners, a New York-based firm that's bet against stocks of subprime lenders in the past and has no position in AIG.

Moazami estimates $5.9 billion in writedowns in AIG's investment portfolio, $1.4 billion at its mortgage lending unit, and $2.5 billion at the unit that insures lenders against homeowner defaults.

Joshua Shanker, an analyst at Citigroup in New York, said yesterday that AIG may report a $1.6 billion loss at another unit that sells credit protection on $64 billion of CDOs that hold subprime securities. Moazami estimated no losses at that unit.

AIG's credit-default swaps, used to speculate on a company's ability to repay its debt, climbed 19 basis points to 58 basis points, the biggest increase in at least three years, according to CMA Datavision in London.

Options traders increased their bets that AIG shares may continue to decline in the next three weeks and the price of the contracts surged to a two-year high.