United States securities regulators are investigating whether American International Group Inc (AIG.N)  overstated the value of contracts linked to subprime mortgages, according to reports by the Wall Street Journal.

AIG shares dropped 4.8% to $34.65 in early trading on the New York Stock Exchange.

According to the newspaper which quoted sources familiar with the matter, the way AIG valued credit default swaps (CDS), including those backed by subprime mortgages, is a subject of concern.

Over the last two quarters AIG has posted record losses stemming from write-downs to the market value of these investments, held by a financial products unit.

However, without confirming or denying whether the U.S. Securities and Exchange Commission had launched a review, AIG spokesman Chris Winans said. “We always cooperate with all our regulators whenever we are asked to do so.”

At the same time, the newspaper report stated that the U.S. Justice Department and the federal prosecutor's office in Brooklyn, New York, have asked for information the SEC is gathering, which could signal the possibility of a criminal investigation, according to the Journal.

The Journal says that AIG, the SEC, the Justice Department and the U.S attorney did not immediately return calls seeking comment. However, according to the newspaper, an AIG spokesman said the company would co-operate in regulatory and governmental reviews on all matters.

Credit protection costs have risen for AIG, the world's largest insurer, in recent months as losses mounted from mortgage-related investments. It posted its largest ever quarterly loss of $7.8 billion last month after writing down assets linked to subprime mortgages.

Winans said the company, with each update on the matter since last August, has provided substantial details to investors on how its estimates were calculated, based on the data available at the time. “Amid the credit market uncertainty, we have consistently and promptly provided our best estimates of our CDS portfolio valuations and potential exposures.”  

AIG management last year said the company did not expect to realize any losses from the CDS portfolio, and did not expect unrealized market valuation losses to be severe. In the months since, it has recorded more than $20 billion in unrealized write-downs of the value of these assets, stirring investor concern.

Financial services firms worldwide have recorded more than $300 billion in write-downs and credit-related losses since the credit crunch last year caused a nosedive in the value of a range of investments with links to mortgages.

In 2006 the insurance giant reportedly settled an accounting scandal for $1.6 billion. The probe had earlier led to the ouster of AIG's longtime chief executive, Maurice “Hank” Greenberg.