Standard & Poor’s Ratings Services said that it is keeping its ratings on American International Group Inc. on CreditWatch with negative implications, notwithstanding increased market speculation about the possibility of the company taking larger charges to shareholders’ equity.

The charges resulted from AIG’s internal probe into questionable financial transactions and widening spreads in the credit derivative swap market. Most AIG ratings were lowered on March 30, following AIG’s announcement that the newly appointed executive team uncovered a number of questionable transactions that needed to be investigated further and established expectations that the filing of the firm’s financials would likely be made by April 30.

The preliminary impact of the findings was estimated to be $1.7 billion after taxes (about 2% of shareholders’ equity), S&P says. And, S&P indicated that the ratings weren’t likely to fall further, barring any material restatement of its consolidated financial statements or additional material governance issues, “especially in light of the strong, diversified operational cash flows.”

“As the scope of the internal and external investigations broadens and the time horizon for its completion lengthens, concerns grow that the financial impact of preliminary findings might have been underestimated,” it says. However, even if the preliminary estimate turns out to be as much as 100% too low, Standard & Poor’s expects to affirm the company’s financial strength ratings because of the insurance operations’ strong, diversified market position and revenue generating-capabilities. “However, in such a scenario, it is less certain that the counterparty credit and senior debt ratings on American International Group Inc. and its guaranteed subsidiaries would be maintained at the same level as the financial strength ratings on the
insurance companies.”

Factors (individually or in combination) that would adversely alter Standard & Poor’s view of earnings capacity would be additional material governance issues, a large charge-off of previously recorded revenue and earnings, the emergence of operational earning’s volatility as accounting techniques to smooth earnings are eliminated, increased strain on future earnings for historical losses, and the full financial and operational impact of recent accounting practices as they translate into regulatory penalties and fines and increased litigation costs, it adds.