1:30PM New York – AIG drops 7% after it reported largest loss in its nine decade history.

AIG (AIG: chart) reported that its net income for full year 2007 was $6.20 billion or $2.39 per diluted share, compared to $14.05 billion or $5.36 in 2006. Net income, as reported, includes the effect hedging activities.

Full year 2007 adjusted net income was $9.31 billion or $3.58 per diluted share, compared to $15.41 billion or $5.88 in 2006.

The net loss for the fourth quarter of 2007 was $5.29 billion or $2.08 per diluted share, compared to net income of $3.44 billion or $1.31 per diluted share in 2006. The adjusted net loss for the fourth quarter of 2007 was $3.20 billion or $1.25 per diluted share, compared to adjusted net income of $3.85 billion or $1.47 per diluted share in 2006.

On February 11, AIG lifted its estimates of losses from home and leveraged loans to $5.96 billion which was earlier estimated to be $1.604 billion.

AIG stock dropped 7% or $3.35 to $46.80.

AIG President and Chief Executive Officer Martin J. Sullivan said, “During 2008, we expect the U.S. housing market to remain weak and credit market uncertainty will likely persist. Continuing market deterioration would cause AIG to report additional unrealized market valuation losses and impairment charges.”

In the fourth quarter AIG took a huge charge of $11.12 billion or after tax of $7.23 billion for a net unrealized market valuation loss related to credit default swap portfolio. AIG asserted in the earnings release that the losses taken are not indicative of the losses that the company may realize over a period of time and are likely to reverse over the life of several contracts.

Fourth quarter results also included pre-tax net realized capital loss of $2.63 billion from its investment portfolio and $643 million from mortgage securities available for sale.

At December 31, 2007, AIG’s consolidated assets were $1.061 trillion and shareholders’ equity was $95.80 billion. Shareholders’ equity declined from September 30, 2007 due to the fourth quarter 2007 net loss and an additional $2.54 billion in after-tax unrealized depreciation of investments reported in other comprehensive income.

Book value per share at December 31, 2007 was $37.87, including a reduction of $0.36 per share related to payments of $912 million advanced to repurchase shares.

During the fourth quarter of 2007, AIG repurchased 21,257,364 shares of its common stock, bringing the total to 76,361,209 shares repurchased for full year 2007. An additional 12,196,187 shares were purchased through February 15, 2008, for a total of 88,557,396 shares purchased since March 2007. All future stock buybacks are suspended.

General Insurance fourth quarter 2007 operating income before net realized capital gains declined 15.8% to $2.11 billion compared to the fourth quarter of 2006. Underwriting results in the Domestic Brokerage Group and Foreign General were offset by a $348 million operating loss in Mortgage Guaranty and a $184 million operating loss in Personal Lines.

Included within these results are $175 million in losses and reinstatement premiums related to the fourth quarter 2007 California wildfires.

Life Insurance & Retirement Services fourth quarter 2007 operating income before net realized capital gains (losses) increased 9.2 percent to $2.66 billion.

In the fourth quarter of 2007, Financial Services reported a $10.25 billion operating loss, before net realized capital or losses and another-than-temporary impairment charge on available for sale mortgage investment securities of $635 million.

Asset Management group fourth quarter 2007 operating income before net realized capital gains was $458 million, an 11.8% decrease compared to the fourth quarter of 2006. The decrease in operating income was primarily due to the continued run off of the Guaranteed Investment Contract GIC business and lower partnership income compared to the fourth quarter of 2006 in the GIC and other asset management lines.