Skip to main content
Publish date:

Moody's Hits AIG Debt

The troubled insurer's steep losses in the first quarter led the ratings agency to action.

Beaten down insurer

American International Group

(AIG) - Get American International Group, Inc. Report

got another slap on Friday when Moody's Investors Service downgraded its debt rating.

Moody's decided to review AIG's rating after the insurance giant posted a

$7.8 billion first-quarter loss

due to dropping values for debt instruments and credit derivatives. The losses came as a result of the mortgage market meltdown and credit market disruptions that also have hit Wall Street banks like


(C) - Get Citigroup Inc. Report


Merrill Lynch




Friday's one-notch downgrade reflects AIG's sizable mortgage related losses and writedowns to date," wrote Bruce Ballantin, the senior credit officer at Moody's. He went on to detail the $13 billion loss in credit default swaps and capital losses of $5 billion, along with $9 billion in unrealized depreciation or mortgage investments.

The debt rating is now Aa3, down from the previous level of Aa2 with a negative outlook. It is now three levels below the top credit rating. However, the rating is now more in line with Standard & Poor's rating for AIG, which gives the insurer an AA- rating and also a negative outlook. Fitch Ratings gives AIG an AA- rating.

TheStreet Recommends

An AIG spokesman said the company did not comment on ratings agency changes. Both Moody's and Standard & Poor's removed AIG from the watch list.

AIG has been under pressure since it reported two consecutive quarters of losses. Earlier this week, the company announced that it had

raised $20 billion

in an effort to create a capital cushion. AIG recently increased its dividend, but suspended its share buyback. Moody's seemed to look favorably on the capital raise.

"The recent issuance of common stock and hybrids enhances the company's capital and liquidity profiles," Ballantin wrote. "The fresh capital restores some of the equity that was eroded by declining market values of

credit default swaps and

residential mortgage-backed securities, and it will help AIG to absorb economic losses that may develop over time."

Goldman Sachs analyst Thomas Cholnoky on Thursday cut his estimates for AIG.

"The primary factor driving these adjustments include a higher share count based on a larger than expected equity offering and higher interest costs (less investment income offsets) based on a larger than expected hybrid offering," Cholnoky wrote. He maintained his price target of $45, but is concerned about more writedowns.

The insurer's trouble has drawn fire from former AIG chief Maurice "Hank" Greenberg, who

publicly chastised

the board in a letter filed with the


. Greenberg has

drawn scrutiny

himself, as the SEC sent a "Wells notice" indicating a possibility of an enforcement action. The notice follows a jury conviction of four former General Re executives and a former AIG executive of conspiracy and securities fraud.

To add to the problems the Jacksonville Police and Fire Pension Fund on Thursday sued AIG, alleging the insurer deceived investors about the susceptibility of its business.

The news sent AIG's shares down 86 cents to $36.95. Fellow insurer



tumbled as well.