UPDATE 1-Moody's cut PMI Group's, AIG's mortgage insurers

(Adds action on AIG's mortgage insurance subsidiaries)

NEW YORK, July 9 (Reuters) - Moody's Investors Service on Wednesday cut its ratings on the mortgage insurance arms of PMI Group(PMI.N) and American International Group (AIG.N), citing rising losses from mortgage securities.

"While U.S. mortgage insurance demand and new business quality have both improved in recent months, performance of (PMI's mortgage insurance companies') exposures originated prior to 2008 has eroded capitalization and those exposures remain vulnerable to further economic deterioration," Moody's said in a statement.

The performance of all of PMI's mortgage portfolio has deteriorated, with Alt-A, variable rate and interest-only mortgages performing the worst, Moody's said.

Higher-than-average delinquencies in their portfolios has left capital adequacy at PMI's subsidiaries at the lower end of the range for mortgage insurers continuing to write new business, Moody's added.

The ratings on AIG's insurance arms were also cut due to high mortgage defaults in their portfolios and uncertainty over their ultimate losses, Moody's said.

These losses are mitigated by the companies' robust capital adequacy and the implicit and explicit support provided to them by AIG, Moody's said.

Moody's cut the insurance financial strength ratings of PMI's mortgage insurance arms three notches to "A3," the seventh-highest investment grade, from "A3."

PMI's senior debt was also cut five notches to "Baa3," the lowest investment grade, from "A1" and the junior subordinated debt was cut five notches to "Ba1," one step below investment grade, from "A2."

The outlook on the ratings is negative, indicating an additional downgrade is more likely over the next 12 to 18 months.

The insurance financial strength ratings on AIG's mortgage insurance arms were cut one notch to "Aa3," the fourth-highest investment grade. The outlook is also negative. (Reporting by Karen Brettell; Editing by Jan Paschal)