A slew of ratings cuts on American International Group Inc. Monday included its mortgage insurance business, one of only two in the sector that had retained AA grades from all three major rating agencies.

The fate of a small subsidiary like United Guaranty Corp. in Greensboro, N.C., is vastly overshadowed by the systemic threat posed by the parent's potential collapse after being devastated by mortgage-related losses. AIG reportedly was hunting for $70 billion or more of funding, without which it might have to file for bankruptcy protection.

But the clouds surrounding the New York insurance company add gloom to an already unsettled mortgage insurance industry.

Standard & Poor's Corp. reduced its financial strength ratings on most AIG operating units, including its principal mortgage insurance company, by three notches, to A-plus. Fitch Inc. cut its rating on the mortgage insurer by two notches, to AA-minus. Moody's Investors Service Inc. put its Aa3 rating for the company on review for a possible downgrading.

A spokeswoman for AIG said that United Guaranty remains "open for business." She would not elaborate, and United Guaranty's chief executive, William Nutt, did not return a phone call.

AIG's mortgage insurance business posted an operating loss of $518 million in the second quarter, five times more than in the year earlier. Its share of new policies written rose 2 percentage points, to 13.2%, putting it in fourth place, according to National Mortgage News. It was the fifth-largest company in the industry in terms of insurance in force at June 30, with $135.2 billion outstanding.

So far, the housing downturn has forced only one mortgage insurer, the relatively small Triad Guaranty Inc. in Winston-Salem, N.C., out of the market. It stopped writing new policies in July and has insisted that it has the capacity to pay claims on outstanding coverage.

Regarding the market for a potential sale of United Guaranty, James Brender, an analyst at Standard & Poor's, said in an interview Monday, "There are entities exploring ways to enter the market. So that tells you that the mortgage insurance space is at least somewhat attractive." United Guaranty "has licenses. … When you cut out the second-lien book, their legacy issues aren't as bad as some of the others. So from that regard, there might be a buyer. On the other hand, it's mortgage credit risk," which has few takers in the current climate.

Any buyer is unlikely to be a company already in the business, he said. "If the competitors had any … excess capital — they don't have excess capital — I think they'd much rather use it on new business than to gamble that they're buying" United Guaranty "at a good price."

In a research note published last week, Steve Stelmach, at Friedman, Billings, Ramsey Group Inc.'s FBR Capital Markets Corp., considered the possibility that Congress might repeal the requirement "for mortgage insurance and the associated premiums" on high loan-to-value mortgages guaranteed by Fannie Mae and Freddie Mac as part of an effort to spur mortgage liquidity. There is a "very real possibility" that the industry could be made obsolete, he wrote, and he maintained that "runoff valuations" are appropriate for these companies.

S&P said last week that the new leadership at Fannie and Freddie, which were placed in conservatorship this month, could depart from their predecessors' willingness to continue accepting coverage from weakened insurers. However, this risk is not "significant enough to justify any rating actions at this time," S&P said.

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