NEW YORK (Bloomberg) — MBIA Incorporated, MGIC Investment Corporation, and American International Group led insurers to their worst year in New York trading since 2002 on losses related to the US housing market.

The KBW Insurance Index declined about seven percent in 2007 as record US home foreclosures sapped the value of mortgage-linked securities backed by insurers or held in their portfolios. At the same time, competition forced down commercial property rates.

"It was a pretty bad year" for the stocks, said Meyer Shields, an analyst at Stifel Nicolaus & Co. in Baltimore. Pressure to lower rates in 2008 will "be worse for the commercial lines, and the same slog continues for the brokers," he said.

AIG, the world's largest insurer, may write down $1.1 billion on derivative contracts that protect investors from losses on mortgage-linked assets and other holdings, the New York-based company said at the beginning of December. Its securities backed by residential mortgages declined by $2.6 billion in October and November. AIG has lost 18 percent in 2007 through Monday in New York Stock Exchange composite trading.

MBIA, the biggest bond insurer, declined 74 percent on concern it may not have enough capital to cover losses on securities it guarantees, including those linked to mortgages. The Armonk, New York-based company dropped 16 percent December 28 after Warren Buffett's Berkshire Hathaway Inc. won a New York state license to start a rival bond insurer.

"This could potentially hurt MBIA and Ambac," said Rob Haines, an analyst at CreditSights in New York. Berkshire will "be a formidable competitor." Ambac Financial Group, the second-largest bond insurer, dropped 71 percent in 2007.

MBIA spokesman Willard Hill didn't immediately return a request for comment left at his office.

MGIC, the largest US mortgage insurer, fell 64 percent after reporting its first quarterly loss on costs to bail out lenders from bad loans. The Milwaukee-based company said it doesn't expect to be profitable in 2008. Number two PMI Group, of Walnut Creek, California, is down 72 percent. Philadelphia-based Radian Group, the third-largest, has lost 79 percent.

US home foreclosures rose 68 percent in November from a year earlier as adjustable-rate mortgages left subprime borrowers unable to meet higher payments, according to RealtyTrac, an Irvine, California-based seller of foreclosure information.

Genworth Financial, the only company with a profitable US mortgage-insurance operation in the third quarter, said on December 11 that the business will contribute losses of as much as 25 cents a share in 2008. Genworth, based in Richmond, Virginia, has declined 25 percent this year.

"I am not satisfied with our stock price," chief executive officer Michael Fraizer said. "It's driven by the concern and the fear in the housing market."

Genworth also sells life insurance, long-term care coverage and variable annuities, and protects mortgages in countries including Canada and Australia.

Aon Corporation, the world's second-biggest insurance brokerage, has posted the second-largest gain in the index, adding 35 percent. Chicago-based Aon reported third-quarter profit that beat analysts' expectations and said it would cut 2,700 jobs, about six percent of its workforce, as falling commercial insurance prices threaten sales.

Marsh & McLennan, the biggest broker, dropped 13 percent. The New York-based company ousted CEO Michael Cherkasky on December 21 for failing to restore profit lost because of a 2004 bid-rigging probe. London-based Willis Group Holdings, the third-largest broker, dropped 4.7 percent, and number four Arthur J. Gallagher & Co., based in Itasca, Illinois, lost 18 percent.

Net income for US property and casualty insurers in the first nine months of 2007 rose 7.1 percent to $49.4 billion on higher investment income and capital gains, according to Robert Hartwig, president of the New York-based Insurance Information Institute. Still, underwriting profitability declined, with 93.8 cents of every premium dollar going to pay claims and expenses, compared with 91.5 cents a year earlier.

US property coverage rates have fallen 15 percent from a year earlier as another quiet hurricane season fueled price competition, AIG Executive Vice President Kristian Moor said in a November 15 conference call.

Allstate Corporation, the largest publicly traded US home and auto insurer, said on December 9 the profit margin on property and casualty coverage may decline in the fourth quarter. The Northbrook, Illinois-based insurer is down 19 percent this year, its worst share performance since 2001.

Life insurers climbed, led by Aflac, the world's biggest seller of supplemental health insurance. Aflac, which gets three-quarters of its revenue from Japan, has no holdings linked to subprime US mortgages. The Columbus, Georgia-based insurer gained 37 percent, leading the index.

MetLife, the largest US life insurer, rose 4.9 percent, and number two Prudential Financial climbed nine percent after four successive annual gains of at least 17 percent. Newark, New Jersey-based Prudential and New York-based MetLife said 2008 earnings will be below analysts' estimates.

"If the securities markets don't thrive next year, that creates a real challenge for sales growth" at life insurers because they rely on sales of variable annuities, said Donald Light, analyst with Boston-based consulting firm Celent.