S&P Lowers AIG Ratings to ‘AA+’; To Hold Conference

March 31, 2005

And then there was one. The announcement late yesterday, March 30, that Standard & Poor’s Ratings Services has lowered its long-term counterparty credit and senior debt ratings on American International Group Inc. to “AA+” from “AAA”, leaves Berkshire Hathaway’s insurance units (General Re, National Indemnity, GEICO, etc.) as the last large “AAA” rated insurers.

S&P also said that it lowered its preferred stock rating on AIG to “AA-” from “AA”, and its counterparty credit and financial strength ratings on most of AIG’s wholly owned subsidiaries to “AA+” from “AAA”. In addition all of the ratings remain on S&P’s CreditWatch with negative implications, where they were placed on March 15, 2005. S&P’s “A-1+” short-term ratings on the AIG group are unaffected.

Lower ratings were probably inevitable, given the investigations, managerial changes and accounting problems (See related articles) that have significantly affected AIG. S&P specifically said its “rating actions follow AIG’s announcement that the filing of its 10-K will be delayed further,” but it also pointed out that “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’s GAAP shareholders’ equity of about $1.7 billion (about 2 percent of shareholders’ equity).”

“The number and scope of inappropriate financial transactions–some characteristic of aggressive financial management–have diminished our assessment of management and its internal controls, corporate governance, and aggressive culture,” stated S&P credit analyst Grace Osborne. “In addition, the potential breadth of management involvement in these transactions raises broader enterprise risk-management concerns.”

Specifically S&P noted that “AIG’s business position and practices could be weakened as regulators respond to continuing findings from ongoing internal and external probes. Similarly, with the sharp drop in market capitalization, Standard & Poor’s is concerned that management’s attention will be diverted from rebuilding its financial services franchise to dealing with legal and regulatory issues.”

The rating agency indicated, however, that it still has confidence in AIG. It said it believes that the group’s “global, well-diversified financial services group will generate very strong earnings and profits.” S&P also noted that “AIG’s newly appointed CEO and CFO have initiated a rigorous internal review and are remediating internal-control issues.”

S&P said it would continue to monitor their progress. “We plan to resolve the CreditWatch status of the ratings following AIG’s 10-K filing, which management believes will be by April 30, 2005,” Osborne added. “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.”

S&P’s bulletin stressed that the “adjusted financial leverage and interest coverages remain very strong for the rating category.” It also said it was “currently reviewing the impact of this rating action on structured finance transactions and will be updating the market as soon as that review is complete.”

Standard & Poor’s will hold a teleconference today, March 31, at 4:00 p.m. EST to discuss these rating actions and the broader issues affecting AIG. Callers everywhere but the U.K. can access this teleconference by dialing (1) 484-630-6046, and callers in the U.K. should dial (44) 20-7943-5370. The passcode is SANDP, and the Conference ID is 5334235.

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