AIG says rating cuts to raise costs : US Business

NEW YORK (Reuters) - American International Group said on Friday two rating agency downgrades will likely increase funding costs for some of its businesses, and has required it to post $1.6 billion more in collateral.

The one-notch downgrades by Standard & Poor's and Fitch followed AIG's report on Thursday that it suffered a record first-quarter net loss of $7.8 billion, driven by a costly write-down in the market value of assets linked to subprime mortgages.

The earnings report came after the stock market close and sent AIG shares down $3.06, or nearly 7 percent, to $41.09 in Friday morning trade on the New York Stock Exchange.

"A one-notch downgrade of the holding company is very manageable for us," AIG Chief Executive Martin Sullivan told investors on a conference call.

"Importantly, both agencies kept the financial strength ratings of our insurance company subsidiaries at the "AA-plus" level, which is most important to us"

AIG, the world's largest insurer, announced plans on Thursday to raise $12.5 billion to boost its balance sheet.

Investors have been hopeful that the value of residential mortgage assets will shortly rebound, and thereby lower AIG's collateral requirements and help boost results in future quarters.

But Steve Bensinger, who is stepping aside as AIG chief financial officer, told investors he did not yet see signs of recovery in the structured credit market for residential mortgage securities, including subprime.

"We don't see any precise evidence to date that those markets have rebounded," he said on the call.

AIG has said it expects much of the costly revaluation of these securities to "reverse" over time, as market conditions improve.

On the decision to look for a new CFO, Sullivan said he and the board had decided it was "the right time to utilize Steve's talents and expertise in a segment of our business that is operating in a challenging environment." Bensinger will become vice chairman of financial services.

MORTGAGE WOES

While a decline in the market value of AIG's credit swap portfolio has been its biggest problem over the past two quarters, the company posted weak operating results across much of its business in the first quarter. The slump in the residential mortgage market hurt income at several units.

United Guaranty Corp, which insures private mortgages against default, reported an operating loss of $352 million. American General Finance, which makes loans, reported lower operating income due to reduced residential mortgage originations, a decline in revenue and an increase in its allowance for loan losses.

"Operating results of these business have been and will likely continue to be affected into 2009 by continued credit quality deterioration of mortgages and weak residential housing market and the overall U.S. economy," said Sullivan.

AIG expects United Guaranty to post a significant operating loss for the year, Bensinger said.

"UGC expects that the downward market cycle will continue to adversely affect its operating results for the foreseeable future," he added.

(Reporting by Lilla Zuill, editing by Dave Zimmerman and John Wallace)

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