NEW YORK (Bloomberg) — Moody's Investors Service cut the senior unsecured debt rating of American International Group Inc., the world's biggest insurer by assets, and said the company may face more losses from the US sub-prime mortgage market.

Friday's reductions also affect some subsidiaries and "largely conclude" the possible cuts Moody's announced May 9 and May 15 following AIG's record $7.8 billion first-quarter loss, the credit-rating firm said yesterday in a statement. AIG's rating was cut by one notch to the fourth-highest investment grade at Aa3 from Aa2, with a negative outlook, Moody's said.

The rating outlook reflects "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.," a unit of the New York-based insurer, according to the statement.

Standard & Poor's and Fitch Ratings reduced their ratings earlier this month on AIG after about $15 billion in write-downs tied to credit-default swaps and residential mortgage-backed securities. AIG said yesterday its cash cushion is now sufficient after raising $20.3 billion in stock and hybrid bond sales. That's 62 percent more than the $12.5 billion the company said it needed on May 8.

"The fresh capital restores some of the equity that was eroded," Bruce Ballentine, an analyst at Moody's, said in the statement. "It will help AIG to absorb economic losses that may develop over time."

AIG spokesman Chris Winans declined to comment. The company fell 86 cents, or 2.3 percent, to $36.95 in New York Stock Exchange composite trading at 4.15 p.m. AIG has slumped 37 percent this year, making it the worst performer in the Dow Jones Industrial Average.

Chief executive officer Martin Sullivan has announced more than $19 billion of declines on contracts that protect fixed- income investors after reassuring shareholders in December that writedowns from the housing market would be "manageable."

Moody's cut the rating to Aa3 on AIG's Commercial Insurance Group companies as well as AIG UK Ltd. and American International Assurance Company Ltd. because of holdings tied to the U.S. residential mortgage market. Domestic life insurance and retirement services units had their insurance financial strength grade cut to Aa2 from Aa1.

The insurer has replaced most of the capital lost from the write-downs, S&P said in a note on May 21, removing AIG from a list of companies at risk of a credit-rating cut within three months.

AIG remains at risk of a downgrade in the next two years, S&P said. The firm downgraded AIG to AA-, its fourth-highest of 10 investment-grade ratings, on May 8 after AIG announced first- quarter results.

AIG's $1 billion 5.05 percent senior unsecured notes maturing in 2015 traded at 268 basis points above US Treasuries on Friday, up two basis points from May 21, data compiled by Bloomberg show. A basis point is 0.01 percentage point.

US house prices sank 3.1 percent in the first three months of 2008 from a year earlier, the second quarterly decline since June after 13 years of increases, according to the Office of Federal Housing Enterprise Oversight.