Posted on: Tuesday, May 3, 2005
AIG slapped with credit downgrades
By Carrie Johnson
Washington Post
WASHINGTON — Two credit-rating services yesterday downgraded the debt of American International Group Inc. The move came one day after the insurance giant announced it would restate earnings between 2000 and 2003, reducing its net worth by an additional $1 billion because of widespread accounting irregularities.
AIG, which has replaced its chief executive and top financial officer, is facing investigations by the Justice Department, Securities and Exchange Commission, New York Attorney General Eliot Spitzer, and state insurance regulators. The company told investors late Sunday that it needed another month to review its books before releasing its annual report for 2004, which has been delayed twice since the probes picked up steam in February.
AIG officials said the company's net worth would drop by about 3 percent to $2.7 billion, $1 billion more than they had anticipated in a March news release. They said the restatement, which also covers the first three quarters of 2004, will correct accounting errors related to a variety of "improper or inappropriate transactions or entries" that were designed to make its financial results look better.
AIG added that the deals under scrutiny may have involved "misrepresentations to members of management, regulators and AIG's independent auditors."
Fitch Ratings promptly downgraded AIG's senior debt obligations to AA from AA+, citing "the uncertainty surrounding AIG's financial condition and future financial performance." Moody's Investors Service cut the company's long-term senior debt rating to Aa2 from Aa1.
AIG spokesman Christopher Winans said the credit downgrades would have little impact on the ability of AIG subsidiaries to issue new debt. The company has obtained waivers from conditions in its loan agreements, provided AIG releases its annual report by May 31, the company said Sunday night.
AIG's stock closed at $53.44, an increase of $2.59, or more than 5 percent, since Friday.
"It is clear that operating earnings were significantly manipulated by AIG management," wrote A.G. Edwards & Sons Inc. analysts in a research note issued yesterday.
Analysts warned that AIG's future operating earnings could be more volatile than in the past. But they also cited disclosures by the company that it had uncovered problems with its accounting for derivatives, financial instruments tied to the underlying value of a particular currency or commodity, that could offset announced cuts and increase AIG's net worth as of Dec. 31, 2004, by a total of $2.4 billion.
AIG also reported that independent auditors at PricewaterhouseCoopers LLP continue to review its books and the auditors had deemed the company's internal controls ineffective, in part because senior managers could "circumvent" them.
