UPDATE 1-Insurance chief says AIG bailout was unavoidable

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WASHINGTON, Oct 6 (Reuters) - Washington policy-makers had no choice but to rescue American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) after a dramatic investor crisis left the giant insurer starved for cash, New York insurance chief Eric Dinallo told lawmakers on Tuesday.

"Was the bailout necessary? I believe it was," Dinallo told the House of Representatives Committee on Oversight and Government Reform, according to a copy of his prepared remarks obtained by Reuters.

"Most of AIG's operations, in particular its insurance operations, are solid, profitable companies. Many are leaders in their markets. They have substantial value. But that value could not be realized," quickly, he said.

While the AIG insurance business was sound, Dinallo said, a branch of the company made unwise forays into the risky subprime mortgage market and credit-default swap market.

Credit default swaps are used to protect against the risk that a borrower will default on it debt, or to speculate on a borrower's credit quality.

"The insurance companies... are solvent and have the funds to pay any policyholder claims," he said. "AIG's problems came from its parent company and from its non-insurance operations."

Dinallo blamed the crisis at AIG, in part, on the credit downgrades by ratings agencies, which he faulted for not "waiting to see the results of its restructuring only two weeks away."

Along with the New York mayor's office and the U.S. Treasury Department, Dinallo tried arrange a private takeover of AIG, but said that "no commercial private sector rescue was possible."

In mid-September, Washington organized a rescue in which the Federal Reserve agreed to lend up to $85 billion to AIG for two years in exchange for a 79.9 percent equity stake. (Reporting by Patrick Rucker; Editing by Leslie Adler)