Markets & Finance

AIG Falls from Its Triple-A Perch


On Mar. 30, Standard & Poor's Ratings Services lowered its long-term counterparty credit and senior debt ratings on American International Group (AIG) to AA+, from AAA. At the same time, Standard & Poor's cut its preferred stock rating on AIG to AA-, from AA.

S&P also reduced its counterparty credit and financial-strength ratings on most of AIG's wholly owned subsidiaries to AA+, from AAA. All of these ratings remain on CreditWatch with negative implications, where they were placed on Mar. 15. Standard & Poor's A-1+ short-term ratings on the AIG group are unaffected.

DISTRACTED MANAGEMENT? These rating actions follow AIG's announcement that the filing of its 10-K will be delayed further. Also, the newly appointed CEO, Martin Sullivan, and CFO, Steven Bensinger, have uncovered a number of questionable transactions that span more than five years and result in an aggregate decrease to AIG shareholders' equity (on a generally accepted accounting principles, or GAAP, basis) of about $1.7 billion (about 2% of shareholders' equity).

The number and scope of inappropriate financial transactions -- some characteristic of aggressive financial management -- have diminished Standard & Poor's assessment of management and its internal controls, corporate governance, and aggressive culture. Plus, the potential breadth of management involvement in these transactions raises broader enterprise risk-management concerns.

Moreover, AIG's business position and practices could be weakened as regulators respond to emerging findings from ongoing internal and external probes (see BW Online, 3/29/05, "Will AIG's Sullivan Survive?"). Similarly, with the sharp drop in market capitalization, S&P is concerned that management's attention will be diverted from rebuilding its financial-services franchise to dealing with legal and regulatory issues.

STRONG CASH FLOWS. Despite the preliminary findings, S&P believes AIG's global, well-diversified financial-services group will generate very strong earnings and profits. And AIG's newly appointed CEO and CFO have initiated a rigorous internal review and are remediating internal-control issues. We will continue to monitor their progress.

Standard & Poor's plans to resolve the CreditWatch status of the ratings following AIG's 10-K filing, which management believes will be by Apr. 30, 2005. Barring any material restatement of its consolidated financial statements and in light of the strong diversified operational cash flows, the counterparty credit, financial-strength, and senior debt ratings are not expected to fall further. Adjusted financial leverage and interest coverages remain very strong for the rating category.

Standard & Poor's is currently reviewing the impact of this rating action on structured-finance transactions and will update the market as soon as that review is complete. From Standard & Poor's Ratings Services


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