Standard & Poor’s Ratings Services lowered its long-term counterparty credit, senior debt, and preferred stock ratings on American International Group Inc. Friday, and removed them from CreditWatch with negative implications.

It also lowered its financial strength ratings on the three insurance subsidiaries that are ultimately guaranteed by AIG (AIG Life Insurance Co. of Canada, AIG Life Insurance Co. of Puerto Rico, and American International Assurance Co. Ltd.). The firm’s ratings were placed on CreditWatch on March 15, following the announcement of management changes and a delay in the 2004 10-K filing. The outlook on all of these companies is negative.

“The downgrade on the holding company reflects both the size and scope of the accounting adjustments in its recently released 10-K filing,” said Standard & Poor’s credit analyst Grace Osborne. “Although AIG’s overall earnings are considered strong, its property/casualty earnings, as restated, indicate greater volatility as well as less robust profitability than was previously reported.”

AIG has indicated that it will review domestic and foreign property/casualty reserves, including asbestos and environmental reserves, and Standard & Poor’s estimates that the potential for incremental reserve additions is as much as US$1 billion-US$2 billion.

Several investigations by states’ attorneys general, the SEC, and insurance regulators are underway, and the company is the subject of shareholder suits, the rating agency notes. The ratings incorporate Standard & Poor’s assumptions about potential legal or regulatory settlements, disgorgement of profits, and litigation costs that slightly exceed US$1 billion.

Since March 15, when AIG announced the departure of two senior executives and the delay in its 10-K filing, a number of investigations — both internal and external — were launched to explore its business, accounting and reporting practices. The resulting restatements had the net effect of decreasing year-end 2004 GAAP shareholders’ equity by US$2.3 billion to US$80.6 billion, S&P reports.

“Although we expect AIG to easily manage the impact of legal or regulatory settlements and the potential for adverse reserve development by year-end 2005, aggregate costs in excess of estimates would cause the ratings to come under further review,” Osborne said.

AIG maintains healthy liquidity at the holding company level, but any significant regulatory challenge to the distribution of dividends or the smooth execution of the intercompany liquidity facility would cause the senior debt and preferred stock ratings to be reviewed, it notes.

S&P adds that capital is expected to grow through a strong but lower level of earnings, with the maintenance of ongoing positive earnings momentum a key element of the ratings. Share-repurchase activity is expected to remain modest.