NEW YORK, May 8 (Reuters) - Standard & Poor’s on Thursday cut American International Group’s Inc’s (AIG.N) rating one notch, citing a $7.8 billion first-quarter loss due to write-downs on credit default swaps and U.S. residential mortgage-backed securities.
S&P lowered the counterparty credit rating of the world’s largest insurer by market capitalization to “AA-minus,” the fourth highest investment grade, from “AA.”
The rating agency also said it may cut the ratings of AIG and its subsidiaries further, depending on the outcome of the insurer’s plans to raise about $12.5 billion in capital to strengthen its balance sheet. For details, click on [ID:nN08402912]
“Although we expected that AIG would have some losses in the first quarter, the level of the additional losses exceeds these expectations,” the rating agency said in a statement.
The rating agency said its model projects ultimate economic losses on AIG’s credit default swap portfolio of $3.5 billion as well as $3.4 billion of losses on subprime and Alt-A residential mortgage-backed securities held in investment portfolios.
These projected losses are smaller than the accounting charges AIG has taken, pointing to potential recoveries in the future.
“However, it is difficult to estimate with certainty the size or timing of those recoveries, which implies a somewhat weakened capital position for a period of time,” S&P said.
S&P said AIG’s rating will remain on review until it sees whether the company raises enough capital to justify current ratings. “A higher amount would likely result in the ratings being affirmed,” while a lower amount could prompt a one-notch rating cut, S&P said.
AIG’s shares fell 5.8 percent in after-market electronic trading after closing down 2 percent in the regular session to $44.15. Its credit default swaps widened to 110 basis points, or $110,000 to insure $10 million of debt, versus 99 basis points on Wednesday, according to Phoenix Partners Group. AIG’s CDS widened 5 to 10 basis points after it posted its largest ever loss, a trader in New York said.
Reporting by Anastasija Johnson; Editing by Diane Craft