Outlook reflects AIG's exposure to further volatility in the US mortgage market

Moody's Investors Service has downgraded the senior unsecured debt rating of American International Group to Aa3 from Aa2.

The rating agency has also downgraded the ratings of several subsidiaries, including those whose ratings have relied on material support from the parent company, as well as those with significant exposure to the US residential mortgage market.

These rating actions largely conclude the reviews for possible downgrade announced by Moody's on May 9 and May 15, 2008, following AIG's announcement of a $7.8bn net loss for the first quarter of 2008.

The rating outlook for AIG (parent company) is negative, reflecting the company's exposure to further volatility in the US mortgage market as well as uncertainty surrounding the strategic direction for AIG Financial Products Corp. (AIGFP).

When announcing the review for possible downgrade, Moody's said that the review process could lead to a rating downgrade of one or two notches at the parent company.

Today's one-notch downgrade reflects AIG's sizable mortgage related losses and write-downs to date. Over the past two quarters, AIG has recorded after-tax unrealized market valuation losses exceeding $13bn on mortgage-exposed credit default swaps (CDS) at AIGFP, and after-tax realised capital losses exceeding $5bn, largely from other-than-temporary impairment (OTTI) of residential mortgage-backed securities (RMBS) held by AIG's Domestic Life and Retirement Services (DLRS) subsidiaries.

Also during this period, AIG posted to its equity account more than $9bn in after-tax unrealised depreciation of investments, again mostly RMBS. Moody's noted that AIG's ultimate economic losses on CDS and RMBS may be materially smaller than estimated market values would suggest.

In response to these losses and write-downs, AIG has raised more than $20bn of capital during May 2008 -- a clear positive for creditors, in Moody's view. The new issuance includes approximately $7.5 billion of common stock, $5.9 billion of equity units (hybrids) and $6.9bn of junior subordinated debentures (hybrids). The hybrid securities have been designed to receive significant equity treatment for financial leverage calculations.

"The recent issuance of common stock and hybrids enhances the company's capital and liquidity profiles," said Moody's Bruce Ballentine, lead analyst for AIG. "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."