NEW YORK (Bloomberg) — American International Group Inc., the world's largest insurer, fell to the lowest since 1995 in New York trading after Wachovia Corp. downgraded the company, saying it may post as much as $7 billion in losses on credit-default swaps in the second quarter.

The insurer may have another "sizable" write-down after about $20 billion in losses on the contracts over two quarters, analyst John Hall said today in a research note cutting New York- based AIG to "market perform" from "outperform."

"For the last two consecutive quarters, AIG has posted significant realised investment losses," Hall said. More losses "could offset operating earnings and put a dent in the company's recent capital raise".

The biggest insurers have posted more than $77 billion in write-downs tied the collapse of the US mortgage market since the start of 2007, with AIG representing about half that total. AIG sold swaps to protect investors from losses in fixed-income holdings including securities tied to subprime home loans.

AIG fell $1.91, or 8.5 percent, to $20.64 at 4.15 p.m. in New York Stock Exchange composite trading, the biggest drop since May. The company was the worst performer in the Dow Jones Industrial Average yesterday.

The securities that the swaps protect "worsened" during the second quarter, which should cause an after-tax write-down of $2 billion to $7 billion, Hall said.

AIG, which has units that originate, insure and invest in mortgages, has slumped 65 percent in New York trading this year. The largest insurer by assets hired Robert Willumstad as chief executive officer last month, replacing Martin Sullivan after two record quarterly net losses totaling about $13 billion. AIG raised $20.3 billion by selling stock and debt in May to protect against further writedowns.

"Despite raising capital, we believe AIG's relative capital advantage has disappeared and we believe it is unlikely to return," Hall said.

Willumstad has said there will be "no sacred cows" as he reviews AIG's businesses for possible divestitures. A turnaround plan will be announced by September, he said. AIG has since said it was keeping the company's aircraft-leasing unit.

Hall cut his estimate for the company's 2008 earnings 39 percent to $1.15 a share on the write-downs, a "slowing" market for property casualty coverage and declining investment returns from hedge funds and private equity.

Prices for business coverage in the US fell 14 percent in the first quarter from a year earlier industry-wide. Insurers are competing for revenue after two consecutive years of lower-than- average hurricane losses, according to a survey by the Council of Insurance Agents & Brokers in Washington.

AIG's income from private equity and hedge funds fell 84 percent in the first quarter to $197 million from $1.22 billion a year earlier because of credit market gridlock tied to the sub-prime market collapse. The company had $29.4 billion in alternative holdings as of March 31, about 3.5 percent of its investment portfolio.

Nine analysts recommend investors accumulate AIG shares, nine say "hold" and none "sell," according to Bloomberg data.