NEW YORK (Bloomberg) ? American International Group Inc., the world?s biggest insurer, faces higher financing costs and lower earnings after the company lost its top credit ratings because of flawed accounting.

AIG?s senior debt, rated AAA by Standard & Poor?s since 1983, was cut one level by S&P and Moody?s Investors Service on concern the company manipulated its financial statements with improper reinsurance contracts. The downgrades removed AIG from a list of eight US companies with AAA ratings from both S&P and Moody?s.

The accounting errors and credit-rating downgrade may shave more than a percentage point off AIG?s profit growth, said Lehman Brothers Holdings Inc. analyst Eric Berg.

A lower rating means AIG, which owes bondholders $88 billion, will pay more to borrow in the future. The New York-based insurer yesterday said accounting mistakes may have inflated its net worth by as much as 2 percent, or $1.7 billion, during the past 14 years.

?Our definition of a AAA company is one that doesn?t have to be in the newspaper for these kinds of things day in and day out,? S&P analyst Steve Ader said on a conference call yesterday.

Moody?s downgraded AIG?s senior debt today to Aa1, citing a ?culture of financial aggressiveness and of control inadequacies.? S&P lowered AIG?s debt to AA+ yesterday, and both ratings companies said more downgrades may follow.

?Understandably, we are disappointed by these actions,? AIG spokesman Joseph Norton said. ?However, we don?t believe they will have a significant impact on our business or our ability to serve customers.?

Maurice Greenberg was forced out as AIG?s chief executive officer this month after almost four decades at the helm, as the US Securities and Exchange Commission and New York Attorney General Eliot Spitzer broadened their investigations of accounting irregularities.

AIG yesterday said in a statement that the improper accounting may have stretched back to 1991. The company described more than eight instances of flawed accounting, with effects ranging from understated insurance losses to overstated investment income. AIG delayed its annual report for a second time and said the filing may not be ready until April 30.

Investigators also have evidence that suggests AIG sought to make its reserves for claims appear bigger with the transactions, people familiar with the probe said this week.

Eight hours after AIG?s statement, S&P said its view of the company?s management and controls had diminished.

?It has somewhat of an impact on the company?s mystique,? said Tom Davis, an analyst at Loomis Sayles Inc. in Boston, which oversees about $60 billion and held 1.39 million shares of the company?s G shares as of December. ?They fought to have the AAA rating because in many markets it?s still viewed as a badge of distinction.?

Shares of AIG declined $1.75, or 3.1 percent, to $55.41 in New York Stock Exchange composite trading, and have declined 24 percent since the company announced last month it received subpoenas on its accounting.

Bond investors anticipated the downgrade. AIG?s debt hasn?t traded in line with its AAA peers since the company received subpoenas in February, according to data compiled by Merrill Lynch & Co.

AIG?s $1 billion of 5.375 percent bonds repayable in 2012 yield about 5.33 percent, or 89 basis points more than U.S. government debt of similar maturity. That?s 25 basis points more than investors demand to own MetLife Inc.?s $500 million 5 percent bonds maturing in 2013, which are rated A by S&P.

AIG remains among the highest-rated insurers and the blow to its image ?is by no means insurmountable?, said Davis of Loomis Sayles. The downgrade?s biggest impact will be in AIG?s aircraft- leasing and asset-management subsidiaries that sell products with guaranteed returns, Lehman?s Berg said. Those businesses will probably experience smaller profit margins as financing costs rise, he said.

In a ?worst-case? scenario, AIG?s profit will grow at an annual rate of 9.4 percent in the next five years, compared with a previous estimate of 11 percent, Berg said in a report before S&P?s announcement. Berg rates AIG shares ?overweight? and said the stock?s decline in the past six weeks exaggerates the negative effects of AIG?s accounting problems.

The credit-rating cuts will increase AIG?s borrowing costs, reducing profit by 1 cent a share for this year and next year, JPMorgan Chase & Co. analyst Jimmy Bhullar said today in a note to clients and investors. Bhullar, who has an ?overweight? rating on AIG, lowered his 2005 earnings estimate to $4.90 a share from $5.22 a share to reflect accounting errors.

The improper accounting may have repercussions for PricewaterhouseCoopers LLC, AIG?s auditor since at least 1993, said Andrew Barile, a consultant in Rancho Santa Fe, California, who wrote a book in 1995 on the non-traditional reinsurance policies that Spitzer and the SEC are probing.