AIG's Debt Rating Is Cut Due to Mortgage Losses

Moody's Investors Service cut the debt rating of American International Group, the world's largest insurer, to Aa3 from Aa2, citing losses from its exposure to the U.S. mortgage market and credit derivatives.

Moody's, which had placed AIG's rating on review for a possible downgrade after the insurer earlier this month unveiled a $7.8 billion first-quarter net loss, said the outlook on the rating was negative.

AIG's largest quarterly loss this month marks the firm's second consecutive quarter of record losses.

The downgrade came hours after AIG had announced it raised $20 billion with a sale of equity, debt and convertible securities. It places the insurer 3 notches below the top credit rating.

"Today's one-notch downgrade reflects AIG's sizable mortgage related losses and write-downs to date," the rating agency said, referring to market losses on credit default swaps (CDS) amounting to $13 billion and realised losses on residential mortgage-backed securities (RMBS) aggregating over $5 billion.

These losses, posted in the past two quarters, were in addition to the $9 billion write-down in investments.

The rating agency said the negative outlook reflected the company's exposure to further volatility in the U.S. mortgage market as well as uncertainty surrounding the strategic direction for AIG Financial Products, the unit holding the thorny credit derivatives.

Data released on Thursday showed declines in U.S. home prices accelerated in the first quarter and hinted at darkening clouds over a struggling mortgage market.

Falling home prices have wreaked havoc on the housing market since last year, stoking a rise in foreclosures as homeowners find their homes are worth less than they owe their lenders, with Credit Suisse estimating the crisis may cost nearly 13 percent of residential borrowers their homes by 2012.

Moody's also downgraded the ratings of several of AIG's subsidiaries because of weakened support from the parent.

It cut the insurance financial strength ratings of the DLRS companies to Aa2 from Aa1 and that on the Commercial Insurance Group companies, AIG UK Limited and American International
Assurance Company (Bermuda) Ltd. to Aa3 from Aa2.

The DLRS companies, or domestic life and retirement services subsidiaries, hold most of AIG's RMBS through their securities lending collateral and directly, Moody's said.

AIG said the $20 billion it raised was in excess of the $12.5 billion it initially planned due to "strong demand."

AIG is the latest in a procession of companies to write down bad assets and raise more capital. Analysts estimate companies globally have recorded more than $300 billion of write-downs and raised more than $200 billion of fresh capital.

"The fresh capital restores some of the equity that was eroded by declining market values of CDS and RMBS, and it will help AIG to absorb economic losses that may develop over time,"
said Moody's analyst Bruce Ballentine.

Late on Wednesday, ratings agency Standard & Poor's said it no longer had AIG under review for a possible downgrade, citing the capital raising.

S&P rates AIG "AA-minus," the fourth highest investment grade. The outlook is negative, indicating a downgrade over the next year or two has not been ruled out.

AIG shares rose more than 2 percent on Thursday to $37.81.