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United States Government Accountability Office

GAO

Report to Congressional Committees

April 2010

TROUBLED ASSET
RELIEF PROGRAM
Update of
Government
Assistance Provided
to AIG

GAO-10-475

April 2010

TROUBLED ASSET RELIEF PROGRAM
Accountability Integrity Reliability

Highlights

Update of Government Assistance Provided to AIG

Highlights of GAO-10-475, a report to
congressional committees

Why GAO Did This Study

What GAO Found

Assistance provided by the
Department of the Treasury
(Treasury) under the Troubled
Asset Relief Program (TARP) and
the Board of Governors of the
Federal Reserve System (Federal
Reserve) to American International
Group, Inc. (AIG)—a holding
company that, through its
subsidiaries, is engaged in a broad
range of insurance and insurancerelated activities in the United
States and abroad—represents one
of the federal government’s largest
investments in a private sector
institution since the financial crisis
began in 2008. Treasury and the
Federal Reserve provided
assistance to AIG in September
2008 that was restructured in
November 2008 and March 2009. As
part of GAO’s statutorily mandated
oversight of TARP, this report
updates the risk and repayment
indicators GAO originally reported
in September 2009 (GAO-09-975).
Specifically in this report, GAO
discusses (1) trends in AIG’s
financial condition, (2) trends in
the unwinding of AIG Financial
Products (AIGFP), (3) the financial
condition of AIG’s insurance
companies, and (4) the status of
AIG’s repayment of its federal
assistance. To update the
indicators, GAO primarily used
data as of December 31, 2009, and
more current publicly available
information; reviewed rating
agencies’ reports; identified critical
activities; and discussed them with
officials from Treasury, Federal
Reserve, and AIG.

Since our last report in September 2009, AIG’s financial condition has
remained relatively stable, as measured by several indicators, largely due to
the federal assistance provided by the Federal Reserve and Treasury to assist
AIG as a result of their determination that the company posed systemic risk to
the financial system. Specifically, the Federal Reserve and Treasury have
made more than $182 billion available to assist AIG since March 2008. As of
December 31, 2009, the outstanding balance of the assistance provided to AIG
was $129.1 billion, about $8.4 billion more than the balance on September 2,
2009 (see table). The federal assistance also appears to be facilitating a more
orderly restructuring of the company. GAO’s indicators show that, in general,
the improvements in AIG’s condition in the second quarter of 2009 continued
into the third and fourth quarters due largely to ongoing federal assistance.

Treasury, Federal Reserve, and AIG
provided technical comments that
are incorporated, as appropriate.
View GAO-10-475 or key components.
For more information, contact Orice Williams
Brown at (202) 512-8678 or
williamso@gao.gov.

Several indicators show that AIGFP has continued to unwind its credit default
swap positions. AIGFP also has shown progress in unwinding its Super Senior
credit default swap portfolio but has made less progress in reducing the
remaining multi-sector collateralized debt obligations (securities backed by a
pool of bonds, loans, or other assets) portfolio. Several indicators on the
status of AIG’s insurance companies illustrate that AIG’s insurance operations
are showing signs of recovery, but federal assistance has been a critical factor.
For the first time since the second quarter of 2008, additions to AIG life and
retirement policyholder contract deposits have exceeded withdrawals. AIG’s
property/casualty companies also have shown some improvements.
AIG is continuing to repay its debt to the federal government, but much of the
progress reflects the numerous exchanges of debt that AIG owed the Federal
Reserve Bank of New York Revolving Credit Facility (facility) with various
issues of preferred equity. As a result of this shift from debt to equity, which
has occurred gradually, the authorized amount of the facility has decreased
and the amount of preferred equity interests held in AIG and various special
purpose vehicles for the government has increased. For example, as of
December 30, 2009, the amount of assistance available to AIG through the
facility had dropped to $35 billion and the amount AIG owed the facility had
dropped to $23.4 billion, while the amount of equity or equity interest held by
the government increased to almost $95 billion. Consequently, the
government’s exposure to AIG is increasingly tied to the future health of AIG,
its restructuring efforts, and its ongoing performance. However, the
sustainability of any positive trends in AIG’s operations depends on how well
it manages its business in this current economic environment. Similarly, the
government’s ability to fully recoup the federal assistance will be determined
by the long-term health of AIG, the company’s success in selling businesses as
it restructures, and other market factors such as the performance of the
insurance sectors and the credit derivatives markets that are beyond the
control of AIG or the government. We will continue to monitor these issues in
our future work.
United States Government Accountability Office

Highlights of GAO-10-475 (continued)
Overview of Federal Assistance Provided to AIG as of December 31, 2009
Dollar in billions
Amount of
assistance
authorized
Description of the federal assistance
Implemented

Debt

Equity

Outstanding
balance

Federal Federal Reserve Bank of New York (FRBNY) created a
Reserve Revolving Credit Facility to provide AIG a revolving loan
that AIG and its subsidiaries could use to enhance their
liquidity positions. In exchange for the facility and $0.5
million, a trust received Series C preferred stock for the
benefit of the Treasury, which gave the trust a 77.9 percent
voting interest in AIG.

$35

a

N/A

$23.435

FRBNY created a special purpose vehicle (SPV)—Maiden
Lane II—to provide AIG liquidity by purchasing residential
mortgage backed securities from AIG life insurance
companies. FRBNY provided a loan to Maiden Lane II for
the purchases. FRBNY also terminated its securities
lending program with AIG, which had provided additional
liquidity associated with AIG’s securities lending program
when it created Maiden Lane II.
FRBNY created an SPV called Maiden Lane III to provide
AIG liquidity by purchasing collateralized debt obligations
from AIG Financial Products’ counterparties in connection
with the termination of credit default swaps. FRBNY again
provided a loan to the SPV for the purchases.
AIG created two SPVs, one for one for American
International Assurance Company, Ltd (AIA) and one for
American Life Insurance Company (ALICO), to hold the
shares of certain of its foreign life insurance businesses to
enhance AIG’s capital and liquidity, and facilitate an orderly
restructuring of AIG. FRBNY received on December 1,
2009, preferred equity interests in the SPVs of $16 billion
and $9 billion, respectively, in exchange for reducing debt
by AIG owed on the Revolving Credit Facility. The SPVs
allowed AIG to strengthen its balance sheet by reducing
debt and increasing equity and also were intended to
facilitate dispositions to generate cash for repayment.
Treasury Treasury purchased Series D cumulative preferred stock of
AIG. AIG used the proceeds to pay down part of the
Revolving Credit Facility. Series D stock was later
exchanged for Series E noncumulative preferred stock.
Unpaid dividends on the Series D shares were added to the
principal amount of Series E stock that Treasury received.
Treasury purchased Series F noncumulative preferred
stock of AIG. Treasury has committed to provide AIG with
up to $29.835 billion through an equity capital facility to
meet its liquidity and capital needs in exchange for an
increase in the aggregate liquidation preference of the
Series F shares.
Subtotals
c
Total authorized and outstanding assistance

22.5

N/A

15.739

b

30

N/A

18.159

b

N/A

25

25

N/A

40

41.605

Proceeds from dispositions of AIG
businesses and internal cash flows of
AIG.

N/A

29.835

5.179

Proceeds from dispositions of AIG
businesses and internal cash flows of
AIG.

$87.5

$94.835
$182.335

$129.117

Sources to repay the government
Proceeds from dispositions of AIG
businesses, internal cash flows, and
restructuring part of the Revolving Credit
Facility from debt into equity. The initial
commitment fee paid by AIG was
reduced by $0.5 million to pay for the
Series C shares. The trust must
reimburse FRBNY for this amount when
it disposes of the Series C shares.
Proceeds from asset sales in Maiden
Lane II will be used to repay the FRBNY
loan to Maiden Lane II.

Proceeds from asset sales in Maiden
Lane III will be used to repay the
FRBNY loan.

On March 1, 2010, AIG announced
agreement to sell AIA to Prudential PLC
for approximately $35.5 billion
(approximately $25 billion in cash plus
$10.5 billion in equity linked securities
and preferred stock). On March 8, 2010,
AIG announced agreement to sell
ALICO to Met Life for approximately
$15.5 billion ($6.8 billion in cash plus
$8.7 billion in Met Life equity and equitylinked securities).

Source: AIG SEC filings, Federal Reserve, and Treasury data.

Notes: Analysis does not include AIG’s government debt under the FRBNY Commercial Paper Funding
Facility of $4.739 billion as of December 31, 2009. This facility expired for new issuances on
February 1, 2010, and will close upon maturity of all remaining commercial paper outstanding.
a

The facility was initially $85 billion, was reduced to $60 billion in November 2008, and was reduced to
$35 billion in December 2009. Balance shown includes accrued interest and fees of $5.535 billion.

b

Government debt shown for Maiden Lane facilities as of December 31, 2009, are principal only and do
not include accrued interest of $265 million for Maiden Lane II and $340 million for Maiden Lane III.
Principal owed as of March 31, 2010, was $14.970 billion for Maiden Lane II and $16.929 billion for
Maiden Lane III.

c

Does not include AIG’s participation in the Federal Reserve’s Commercial Paper Funding Facility.

United States Government Accountability Office

Contents

Letter

1
Background
Federal Assistance Remains Key to Stabilizing AIG’s Financial
Condition
AIGFP Continues to Unwind Its CDS Portfolio Positions and
Reduce Its Number of Full-Time Equivalent Employees
AIG’s Insurance Operations Continue to Show Signs of Recovery,
but Federal Aid to Life Insurance Companies Has Been Critical
to Their Progress
While AIG Continues to Make Progress in Repaying Some of Its
Federal Assistance, the Government’s Ability to Fully Recoup
the Assistance Will be Determined by AIG’s Restructuring and
Long-term Health
Agency Comments and Our Evaluation

45
53

Appendix I

AIG Operations

57

Appendix II

AIG’s Credit Ratings and an Overview of
Definitions of Credit Ratings

64

Appendix III

Corporate Liquidity Available to AIG

68

Appendix IV

Value of Preferred and Common Shares of AIG

69

Appendix V

AIG Insurance Subsidiaries’ Capital and Surplus

71

Appendix VI

Revenues and Expense of AIG Life Insurance and
Retirement Services

72

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13
28

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GAO-10-475 Troubled Asset Relief Program

Appendix VII

Operating Ratios for AIG’s Property/Casualty
Companies

74

Detail on AIG’s Federal Assistance and the
Repayment of that Assistance

77

Appendix IX

Disposition of AIG Assets

80

Appendix X

GAO Contact and Staff Acknowledgments

82

Appendix VIII

Glossary of Terms

83

Tables
Table 1: U.S. Government Efforts to Assist AIG and the
Government’s Remaining Exposure as of December 31,
2009
Table 2: Amount of Outstanding Commercial Paper by Source,
December 31, 2007, through December 31, 2009
Table 3: Composition of U.S. Government Efforts to Assist AIG and
the Government’s Approximate Remaining Exposures, as
of December 31, 2009, or latest available date as noted
Table 4: Credit Ratings, as of March 31, 2009; May 15, 2009; and
December 15, 2009
Table 5: Summary of Rating Agencies’ Ratings
Table 6: Amounts of Available Corporate Liquidity at November 5,
2008; February 18, 2009; April 29, 2009; July 29, 2009;
October 28, 2009; and February 17, 2010
Table 7: Dispositions Closed and Agreements Announced but not
yet Closed, Second Quarter of 2008 through March 31,
2010

Page ii

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20

47
65
67

68

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GAO-10-475 Troubled Asset Relief Program

Figures
Figure 1: AIG: Corporate Available Liquidity and Company-Wide
Debt Projections, Third Quarter of 2008 through Fourth
Quarter of 2009
Figure 2: AIG: Trends in and Main Components of Consolidated
Shareholders’ Equity, Fourth Quarter of 2007 through
Fourth Quarter of 2009
Figure 3: Quarterly AIG Pretax Operating Income/Loss by
Operating Segment, First Quarter of 2008 through Fourth
Quarter of 2009
Figure 4: AIG Credit Default Swap Premiums, January 2007
through March 2010
Figure 5: Status of the Winding Down of AIG’s Financial Products
Corporation, Quarterly from September 30, 2008, through
December 31, 2009
Figure 6: AIGFP: Net Notional Amount, Fair Value of Derivative
Liability, and Unrealized Market Valuation Losses and
Gains for AIGFP’s Super Senior (rated BBB or better)
Credit Default Swap Portfolio, Third Quarter of 2008
through Fourth Quarter of 2009
Figure 7: AIGFP: Total Gross Notional Amounts of Multi-Sector
Collateralized Debt Obligations Compared to Portions of
Portfolio That Has Underlying Assets that are Rated Less
Than BBB, Third Quarter of 2008 through Fourth Quarter
of 2009
Figure 8: AIG Insurance Subsidiaries: Regulatory Capital at
December 31, 2007; December 31, 2008; and December 31,
2009, and Primary Activities That Affected Regulatory
Capital During 2009
Figure 9: AIG Life and Retirement Services: Additions to and
Withdrawals from Policyholder Contract Deposits
Including Annuities, Guaranteed Investment Contracts,
and Life Products, First Quarter of 2007 through Fourth
Quarter of 2009
Figure 10: AIG General Insurance: Premiums Written by Division,
First Quarter of 2007 through Fourth Quarter of 2009
Figure 11: Debt and Equity Federal Assistance Provided to AIG
Compared to AIG’s Book Value (Shareholder’s Equity),
December 2004 through December 2009 and Partial Data
as of March 31, 2010
Figure 12: Proceeds from Dispositions by Quarter, Second Quarter
of 2008 through March 31, 2010

Page iii

18

22

25
27

30

33

35

38

40
42

51
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GAO-10-475 Troubled Asset Relief Program

Figure 13: AIG, Its Subsidiaries, and Percentage Ownership by
Parent Company as of February 28, 2010
Figure 14: Market Capitalization (Value) of AIG Outstanding
Common Shares, Including Federally Owned Preferred C
Shares That Are Convertible Into 79.77 Percent AIG’s
Outstanding Common Shares, December 2004 through
December 2009
Figure 15: AIG Insurance Subsidiaries: Capital and Surplus at
December 31, 2008, and September 30, 2009, and Primary
Activities That Affected Them In the First Nine Months of
2009
Figure 16: AIG Life Insurance and Retirement Services: Key
Quarterly Revenues and Expenses, First Quarter of 2007
through Fourth Quarter of 2009
Figure 17: AIG Property/Casualty Insurance: AIG Commercial
Insurance Operating Ratios, First Quarter of 2007 through
Fourth Quarter of 2009
Figure 18: AIG Property/Casualty Insurance: AIG Foreign General
Insurance Operating Ratios, First Quarter of 2007 through
Fourth Quarter of 2009
Figure 19: FRBNY Revolving Credit Facility Balance Owed and
Total Amount Available, October 2008 through March
2010
Figure 20: Amounts Owed and Portfolio Value of Maiden Lane II
Figure 21: Amounts Owed and Portfolio Value of Maiden Lane III

Page iv

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70

71

73

75

76

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78
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GAO-10-475 Troubled Asset Relief Program

Abbreviations
AIA
AIG
AIGFP
ALICO
CDO
CDS
FRBNY
NAIC
NYSE
RMBS
S&P
SEC
SIGTARP
SPV
TARP

American International Assurance Company, Ltd
American International Group, Inc.
AIG Financial Products
American Life Insurance Company
collateralized debt obligations
credit default swaps
Federal Reserve Bank of New York
National Association of Insurance Commissioners
New York Stock Exchange
residential mortgage-backed security
Standard & Poor’s
Securities and Exchange Commission
Special Inspector General for the Troubled Asset
Relief Program
special purpose vehicle
Troubled Asset Relief Program

This is a work of the U.S. government and is not subject to copyright protection in the
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without further permission from GAO. However, because this work may contain
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necessary if you wish to reproduce this material separately.

Page v

GAO-10-475 Troubled Asset Relief Program

United States Government Accountability Office
Washington, DC 20548

April 27, 2010
Congressional Committees
Assistance provided to American International Group, Inc. (AIG)
represents one of the federal government’s largest investments in a private
sector institution since the current financial crisis began in 2008. AIG is a
holding company that, through its subsidiaries, engages in a broad range of
insurance and insurance-related activities in the United States and abroad,
including general insurance, life insurance and retirement services,
financial services, and asset management. The potential demise of this
company in 2008 threatened to further disrupt the already-troubled
financial markets. To minimize the likelihood of such a scenario, the
Board of Governors of the Federal Reserve System (Federal Reserve) and,
subsequently, the Department of the Treasury (Treasury) deemed AIG to
be systemically significant, opening the door for these entities to provide
extraordinary assistance to AIG. The Federal Reserve, through its
emergency powers under section 13(3) of the Federal Reserve Act, and
Treasury, through the Emergency Economic Stabilization Act of 2008 (the
act), which authorized the Troubled Asset Relief Program (TARP),
collaborated to make available more than $180 billion in assistance to
AIG. 1 The assistance has been used to strengthen AIG’s financial condition
and to avert a failure of the company and, in turn, further disruption of the
financial markets. The ability of the government to recoup its assistance
depends on the long-term health of AIG, its sales of certain businesses, and
other factors.

1

The Emergency Economic Stabilization Act of 2008 (the act), Pub. L. No. 110-343, 122 Stat.
3765 (2008), codified at 12 U.S.C. §§ 5201 et seq. The act originally authorized Treasury to
purchase or guarantee up to $700 billion in troubled assets. The Helping Families Save
Their Homes Act of 2009, Pub. L. No. 111-22, Div. A, 123 Stat. 1632 (2009), amended the act
to reduce the maximum allowable amount of outstanding troubled assets under the act by
almost $1.3 billion, from $700 billion to $698.741 billion.

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GAO-10-475 Troubled Asset Relief Program

Under our statutorily mandated responsibilities for providing timely
oversight of TARP, we are continuing to report on the federal
government’s assistance to AIG. 2 To help Congress monitor the condition
of AIG and the government’s ability to recoup the federal assistance
provided to AIG, we have developed indicators to monitor trends in AIG’s
operations and the status of repayments. Because the government
assistance to AIG is a coordinated approach, in addition to providing
timely reporting of Treasury’s assistance to AIG, we are also monitoring
the efforts of the Federal Reserve. 3 In September 2009 we issued a report
on the status of government assistance to AIG in which we first reported
on these indicators. 4 Since then, we have continued to monitor the
financial risk posed by AIG, its financial condition, and the status of its
repayment efforts. 5 This 60-day report provides an update on the AIG
indicators primarily based on AIG’s latest available public filings as of
December 31, 2009, and other more current publicly available information
where available. Specifically, the report discusses (1) trends in AIG’s
financial condition, (2) trends in the unwinding of AIG Financial Products
(AIGFP), (3) the financial condition of AIG’s insurance companies, and (4)
the status of AIG’s repayment of its federal assistance.

2
GAO is required to report at least every 60 days on findings resulting from, among other
things, oversight of TARP’s performance in meeting the purposes of the act, the financial
condition and internal controls of TARP, the characteristics of both asset purchases and
the disposition of assets acquired, TARP’s efficiency in using the funds appropriated for the
program’s operation, and TARP’s compliance with applicable laws and regulations. 12
U.S.C. § 5226(a).
3

Our ability to review the Federal Reserve’s assistance was clarified by the Helping
Families Save Their Homes Act of 2009, enacted on May 20, 2009, which provided GAO
authority to audit Federal Reserve actions taken under section 13(3) of the Federal Reserve
Act “with respect to a single and specific partnership or corporation.” Among other things,
this amendment provides GAO with authority to audit Federal Reserve actions taken with
respect to three entities also assisted under TARP—Citigroup, Inc.; AIG; and Bank of
America Corporation. This amendment also gave GAO the authority to access information
from entities participating in TARP programs, such as AIG, for purposes of reviewing the
performance of TARP.
4

GAO, Troubled Asset Relief Program: Status of Government Assistance to AIG,
GAO-09-975 (Washington, D.C.: Sept. 21, 2009). For our previous testimony on the
assistance provided to AIG, see GAO, Federal Financial Assistance: Preliminary
Observations on Assistance Provided to AIG, GAO-09-490T (Washington, D.C.: Mar. 18,
2009).
5

GAO has recently been asked by Chairman Towns and Representative Cummings, House
Committee on Oversight and Government Reform, and Ranking Member Bachus, House
Committee on Financial Services, to undertake a review of the Federal Reserve’s actions
concerning its assistance to AIG. This report predates those requests and does not attempt
to answer questions raised in either request.

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GAO-10-475 Troubled Asset Relief Program

To conduct this work, we updated previously published indicators that
address several dimensions of AIG’s business, including its credit ratings,
operating performance, capital, debt repayment, and liquidity position.
The data used to create the indicators are collected from several sources,
but most are based on publicly available information, such as AIG’s 10K
and 10Q filings with the Securities and Exchange Commission (SEC) and
National Association of Insurance Commissioners (NAIC) reports. We
analyzed AIG’s SEC filings through the fourth quarter of 2009 and
supplements for those filings. We also analyzed information from
Thomson Reuters and NAIC. We asked credit rating agencies for their
most recent ratings of AIG. We also analyzed data from recent issues of
the Federal Reserve weekly statistical releases H.4.1 and Treasury’s
Financial Position Paper 09-07. AIG also provided updated information on
its asset dispositions. We assessed the reliability of the data and found that
the data were sufficiently reliable for our purposes.
To assess AIG’s financial condition, we updated indicators of key AIG
credit ratings, its corporate debt and liquidity positions, trends in
shareholder equity, operating income/losses, and its credit default swap
(CDS) premiums. To assess the unwinding of AIGFP, we updated our
indicators on AIGFP’s trading positions and employee count, as well as its
CDS portfolio. 6 To assess the financial condition of AIG’s insurance
companies, we reviewed the regulatory capital of AIG’s largest domestic
property/casualty and life insurance/retirement services companies,
additions to and withdrawals from policyholder contract deposits,
revenues and expenses for life insurance and retirement services, AIG
general insurance premiums written, and combined ratios. To determine
the status of AIG’s repayment of its federal assistance, we updated the
composition of the government’s direct and indirect assistance to AIG, the
Federal Reserve Bank of New York’s (FRBNY) Revolving Credit Facility
balance, balances on the Maiden Lane facilities, and AIG’s divestitures and

6
CDS are bilateral contracts that are sold over the counter and transfer credit risks from
one party to another. The seller, who is offering credit protection, agrees, in return for a
periodic fee, to compensate the buyer if a specified credit event, such as default, occurs.

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GAO-10-475 Troubled Asset Relief Program

asset dispositions. 7 We report the balances of the federal debt and equity
assistance as of December 31, 2009, because our primary source for equity
data, which is AIG’s 10Q filing with the SEC, is only available quarterly,
and the 10Q report containing more current data is not yet publicly
available. No single indicator provides a definitive measure of AIG’s
progress, and the indicators in this report should be considered
collectively. We selected indicators that appeared to track the most critical
activities related to the goals for federal assistance to AIG. Since our last
report, we have developed two new indicators of AIG’s financial condition:
one new indicator to track the performance of AIG’s insurance companies
and one new indicator to track federal assistance to AIG.
We conducted our work from November 2009 to April 2010 in accordance
with all sections of GAO’s Quality Assurance Framework that are relevant
to our objectives. The framework requires that we plan and perform the
engagement to obtain sufficient and appropriate evidence to meet our
stated objectives and to discuss any limitations in our work. We believe
that the information and data obtained, and the analysis conducted,
provide a reasonable basis for any findings and conclusions.

Background

AIG comprises approximately 400 companies and has operations in more
than 130 countries and jurisdictions worldwide. As of December 31, 2009,
AIG had assets of $847.6 billion and revenues of $96 billion for the 12
preceding months. The AIG companies are among the largest domestic life
insurers and domestic property/casualty insurers in the United States, and
they also comprise large foreign general insurance and life insurance
businesses. Appendix I illustrates the breadth of AIG’s operations and its
subsidiaries.

AIG Operations

Historically, AIG has issued commercial paper to help finance its
operations. For example, as of December 31, 2007, AIG reported having

7

FRBNY created Maiden Lane II as a special purpose vehicle to provide AIG liquidity
through its purchase of residential mortgage-backed securities from AIG life insurance
companies. FRBNY provided a loan to the special purpose vehicle for the purchases. It also
terminated a previously established securities lending program with AIG. FRBNY also
created Maiden Lane III as a special purpose vehicle to provide AIG liquidity through its
purchase of collateralized debt obligations from AIG Financial Products’ counterparties in
connection with termination of credit default swaps. FRBNY again provided a loan to the
special purpose vehicle for the purchases. See GAO-09-975 (starting on page 30) for more
discussion on FRBNY’s creation of these special purpose vehicles.

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GAO-10-475 Troubled Asset Relief Program

$13.1 billion of commercial paper outstanding, and as of December 31,
2009, it continued to have $4.7 billion outstanding. 8 It is also a participant
in the derivatives market through AIGFP—a financial products subsidiary
that engaged in a variety of financial transactions, including standard and
customized financial products, which were a major source of AIG’s
liquidity problems. As of December 31, 2009, AIG’s total gross derivatives
assets had a fair value of $34.5 billion, of which $32.0 billion pertained to
AIGFP. Additionally, until 2008, AIG had maintained a large securities
lending program operated by its insurance subsidiaries. The securities
lending program allowed insurance companies, primarily AIG’s life
insurance companies, to lend securities in return for cash collateral that
was invested in, among other investments, residential mortgage-backed
securities (RMBS). This program was another major source of AIG’s
liquidity problems in 2008.
AIG and its subsidiaries are regulated by federal, state, and international
authorities. The Office of Thrift Supervision was the consolidated
supervisor of AIG, which is a thrift holding company by virtue of its
ownership of the AIG Federal Savings Bank. As the consolidated
supervisor, the Office of Thrift Supervision was charged with identifying
systemic issues or weaknesses and helping ensure compliance with
regulations that govern permissible activities and transactions. 9 AIG’s
domestic, life, and property/casualty insurance companies are regulated
by the state insurance regulators in the state in which these companies are
domiciled. 10 These state agencies regulate the financial solvency and
market conduct of these companies within their states, and they have the
authority to approve or disapprove certain transactions between an
insurance company and its parent or its parent’s subsidiaries. These
agencies also coordinate the monitoring of companies’ insurance lines
among multiple state insurance regulators. For AIG in particular, these
regulators have reviewed reports on liquidity, investment income, and
surrender and renewal statistics; evaluated potential sales of AIG’s
domestic insurance companies; and investigated allegations of pricing
disparities. Finally, AIG’s general insurance business and life insurance

8

Commercial paper refers to short-term promissory notes that are issued primarily by
corporations to finance their short-term credit needs.
9

For more information on the role of consolidated supervisors, see GAO, Financial Market
Regulation: Agencies Engaged in Consolidated Supervision Can Strengthen Performance
Measurement and Collaboration, GAO-07-154 (Washington, D.C.: Mar. 15, 2007).
10

The primary state insurance regulators include New York, Pennsylvania, and Texas.

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GAO-10-475 Troubled Asset Relief Program

business that are conducted in foreign countries are regulated by the
supervisors in those jurisdictions to varying degree.
In addition, Treasury’s purchase, management, and sale of assets under
TARP, including those associated with AIG, are subject to oversight by the
Special Inspector General for TARP (SIGTARP). As part of its quarterly
reports to Congress, SIGTARP has provided information on federal
assistance and the restructuring of the federal assistance provided to AIG,
as well as information on the unwinding of AIGFP and the sale of certain
AIG assets. 11 SIGTARP’s reporting on AIG’s activities has also included
reports that focused on federal oversight of AIG compensation and efforts
to limit AIG’s payments to its counterparties. 12

Federal Reserve and
Treasury Provided
Assistance to AIG to Limit
Systemic Risk to the
Financial Markets

In September 2008, the Federal Reserve (and FRBNY) and Treasury
determined through analysis of information provided by AIG and
insurance regulators, as well as publicly available information, that market
events in September 2008 could cause AIG to fail, which would have posed
systemic risk to financial markets. 13 Consequently, the Federal Reserve
and Treasury took steps to ensure that AIG obtained sufficient funds to
continue to meet its obligations, and could complete an orderly sale of its
operating assets and close its investment positions in its securities lending
program and AIGFP. The federal government first provided assistance to

11

SIGTARP: Office of the Inspector General for the Troubled Asset Relief Program,
Quarterly Report to Congress, January 30, 2010; Office of the Inspector General for the
Troubled Asset Relief Program, Quarterly Report to Congress, October 21, 2009; Office of
the Inspector General for the Troubled Asset Relief Program, Quarterly Report to
Congress, July 21, 2009; Office of the Inspector General for the Troubled Asset Relief
Program, Quarterly Report to Congress, April 21, 2009; and Office of the Inspector General
for the Troubled Asset Relief Program, Initial Report to the Congress, February 6, 2009.

12

SIGTARP: Office of the Inspector General for the Troubled Asset Relief Program, Extent
of Federal Agencies’ Oversight of AIG Compensation Varied, and Important Challenges
Remain, October 14, 2009, and Office of the Inspector General for the Troubled Asset
Relief Program, Factors Affecting Efforts to Limit Payments to AIG Counterparties,
November 17, 2009.

13

As we said in our March 2009 testimony on credit default swaps, there is no single
definition for systemic risk. Traditionally, systemic risk was viewed as the risk that the
failure of one large institution would cause other institutions to fail. This micro-level
definition is one way to think about systemic risk. Recent events have illustrated a more
macro-level definition: the risk that an event could broadly affect the financial system
rather than just one or a few institutions. See GAO, Systemic Risk: Regulatory Oversight
and Recent Initiatives to Address Risk Posed by Credit Default Swaps, GAO-09-397T
(Washington, D.C.: Mar. 5, 2009).

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GAO-10-475 Troubled Asset Relief Program

AIG in September 2008 and has taken subsequent steps to modify and
amend that assistance.

AIG’s Financial Problems
Mounted Rapidly in 2008

From July through early September in 2008, AIG faced increasing liquidity
pressure following a downgrade in its credit ratings in May 2008 due in
part to losses from its securities lending program. The company was
experiencing declines in its securities lending reinvestment portfolio of
RMBS assets and declining values of collateralized debt obligations (CDO)
against which AIGFP had written CDS protection. 14 These losses forced
AIG to use an estimated $9.3 billion of its cash reserves in July and August
2008 to repay securities lending counterparties that terminated existing
agreements and to post additional collateral required by the trading
counterparties of AIGFP. AIG attempted to raise additional capital in the
private market in September 2008, but was unsuccessful. On September
15, 2008, the rating agencies downgraded AIG’s debt rating, which resulted
in the need for an additional $20 billion to fund its added collateral
demands and transaction termination payments. Following the credit
rating downgrade, an increasing number of counterparties refused to
transact with AIG for fear that it would fail. Also around this time, the
insurance regulators decided they would no longer allow AIG’s insurance
subsidiaries to lend funds to the parent company under a revolving credit
facility that AIG maintained. Furthermore, the insurance regulators
demanded that any outstanding loans be repaid and that the facility be
terminated.

The Federal Reserve and
Treasury Have Taken a Variety
of Steps to Assist AIG

Because of increasing concerns that an AIG failure would have posed
systemic risk to financial markets, in 2008 and 2009 the federal
government agreed to make more than $182 billion of federal assistance
available to AIG. First, in September 2008, the Federal Reserve, with the
support of Treasury, authorized FRBNY to lend AIG up to $85 billion. 15 The
secured loan was set up as a Revolving Credit Facility that AIG could use
as a reserve to meet its obligations. This debt was subsequently
restructured in November 2008 and March 2009.

14

CDOs are securities backed by a pool of bonds, loans, or other assets.

15
The Federal Reserve announced that, as a condition of establishing the initial $85 billion
credit facility, a trust established for the sole benefit of the U.S. Treasury would become
the majority equity investor in AIG. This was achieved through the establishment of an
independent trust to manage Treasury’s beneficial interest in preferred shares (Series C) of
AIG. When the trust agreement was executed in January 2009, the Series C stock was
convertible into approximately 77.9 percent of the issued and outstanding shares of
common stock of AIG.

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Specifically, AIG’s mounting debt—the result of borrowing from the
Revolving Credit Facility—led to concerns that its credit ratings would be
lowered, which would have caused its condition to deteriorate further. In
response, the Federal Reserve and Treasury restructured AIG’s debt in
November 2008. Under the restructured terms, Treasury purchased $40
billion in shares of AIG preferred stock (Series D), and the cash from the
sale was used to pay down a portion of AIG’s outstanding Revolving Credit
Facility balance. The limit on the Revolving Credit Facility was also
reduced to $60 billion, and other changes were made. This restructuring
was critical to helping AIG maintain its credit ratings.
In March 2009, the Federal Reserve and Treasury announced plans to
further restructure AIG’s assistance. According to the Federal Reserve,
debt owed by AIG on the Revolving Credit Facility would be reduced by
$25 billion in exchange for FRBNY’s receipt of preferred equity interests
totaling $25 billion in two special purpose vehicles (SPV). Both SPVs were
created by AIG to hold the outstanding common stock of two life
insurance holding company subsidiaries of AIG—American Life Insurance
Company (ALICO) and American International Assurance Company, Ltd
(AIA). FRBNY’s preferred equity interest, which was valued at $25 billion
in December 2009, is an undisclosed percentage of the fair market value of
ALICO and AIA as determined by FRBNY. On March 1, 2010, AIG
announced that its board had approved the sale of AIA to Prudential PLC
and the transaction is expected to close by the end of 2010 for
approximately $35.5 billion in cash and equity securities, pending approval
by regulators and stockholders. 16 And on March 8, 2010, AIG announced
that its board had agreed to sell ALICO to MetLife and the transaction is
expected to close by the end of 2010 for about $15.5 billion in cash and
equity securities, pending approval by regulators. 17
Federal assistance to AIG also included FRBNY’s creation of two new
facilities to purchase some of AIG’s more troubled assets. AIG’s securities
lending program continued to be one of the greatest ongoing demands on
its working capital, and on November 10, 2008, FRBNY announced plans

16

According to AIG, cash proceeds from the sale will allow AIG to buy back all of FRBNY’s
preferred equity interest in AIA and repay part of the FRBNY Revolving Credit Facility.

17

According to AIG, cash proceeds from the sale will allow AIG to reduce part of FRBNY’s
preferred equity interest in ALICO. Over time, the MetLife securities in the ALICO SPV will
be sold and the funds will be used to FRBNY’s remaining preferred interests in ALICO and,
subsequently, repay AIG’s debt on the FRBNY Revolving Credit Facility.

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to create a RMBS facility—Maiden Lane II LLC—to purchase RMBS assets
from AIG’s U.S. securities lending collateral portfolio. The Federal Reserve
authorized FRBNY to lend up to $22.5 billion to Maiden Lane II; AIG also
acquired a subordinated, $1 billion interest in the facility, which will
absorb the first $1 billion of any losses. On December 12, 2008, FRBNY
extended a $19.5 billion loan to Maiden Lane II to fund its portion of the
purchase price of the securities. The facility purchased $39.3 billion face
value of the RMBS directly from AIG subsidiaries (domestic life insurance
companies). As of December 30, 2009, Maiden Lane II owed $16 billion in
principal and interest to FRBNY.
In addition, on November 10, 2008, FRBNY announced plans to create a
separate facility—Maiden Lane III LLC—to purchase multi-sector CDOs on
which AIGFP had written CDS contracts. 18 This facility was aimed at
facilitating the restructuring of AIG by addressing the greatest threat to
AIG’s liquidity position. In connection with the purchase of the CDOs,
AIG’s CDS counterparties agreed to terminate the CDS contracts. 19 The
Federal Reserve authorized FRBNY to lend up to $30 billion to Maiden
Lane III. On November 25, and December 18, 2008, FRBNY extended a
total of $24.3 billion in loans to Maiden Lane III; AIG also paid $5 billion
for an equity interest in Maiden Lane III and agreed to absorb the first $5
billion of any losses. As of December 30, 2009, Maiden Lane III owed $18.5
billion in principal and interest to FRBNY.
According to FRBNY officials, FRBNY loans to Maiden Lane II and Maiden
Lane III are both expected to be repaid with the proceeds from the interest
and principal payments or liquidation of the assets in the facility. The
repayment will occur through cash flows from the underlying securities as
they are paid off. Accordingly, the Federal Reserve has not set a date for
selling the assets; rather it has indicated that it is prepared to hold the
assets to maturity if necessary.
In March 2009, the Federal Reserve announced its intention to assist AIG
in the form of credit made under section 13(3) of the Federal Reserve Act.

18

A multi-sector CDO is a CDO backed by a combination of corporate bonds, loans, assetbacked securities, or mortgage-backed securities.

19

AIGFP sold CDS on multi-sector CDOs. As a result, to unwind these contracts, Maiden
Lane III was created to purchase the CDOs from AIG’s CDS counterparties. In exchange for
purchasing the underlying assets, the counterparties agreed to terminate the CDS
contracts, thereby eliminating the need for AIG to post additional collateral as the value of
the CDOs fell.

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FRBNY was authorized to make loans of up to an aggregate amount of
approximately $8.5 billion to SPVs to be established by certain AIG
domestic life insurance subsidiaries. As announced, the SPVs were to
repay the loans from the net cash flows they were to receive from
designated blocks of existing life insurance policies issued by the
insurance companies. The proceeds of the FRBNY loans were to pay down
an equivalent amount of outstanding debt under the Revolving Credit
Facility. However, in February 2010, AIG announced that it is no longer
pursuing this life insurance securitization transaction with FRBNY.
Treasury has also provided assistance to AIG. On November 10, 2008,
Treasury’s Office of Financial Stability announced plans under TARP to
purchase $40 billion in AIG preferred shares. AIG entered into an
agreement with Treasury on November 25, 2008, whereby Treasury agreed
to purchase $40 billion of fixed-rate cumulative preferred stock of AIG
(Series D) and received a warrant to purchase approximately 2 percent of
the shares of AIG’s common stock. 20 As previously discussed, the proceeds
of this sale were used to pay down AIG’s outstanding balance on the
Revolving Credit Facility by the same amount.
On April 17, 2009, AIG and Treasury entered into an agreement in which
Treasury agreed to exchange its $40 billion of Series D cumulative
preferred stock for $41.6 billion of Series E fixed-rate noncumulative
preferred stock of AIG, allowing for a reduction in leverage and dividend
requirements. The $1.6 billion difference between the initial aggregate
liquidation preference of the Series E stock and the Series D stock
represents a compounding of accumulated but unpaid dividends owed by
AIG to Treasury on the Series D stock. Because the Series E preferred
stock more closely resembles common stock, principally because its
dividends are noncumulative, rating agencies viewed the stock more
positively when rating AIG’s financial condition.
Finally, also on April 17, 2009, Treasury provided a $29.835 billion Equity
Capital Facility to AIG whereby AIG issued to Treasury 300,000 shares of
fixed-rate noncumulative perpetual preferred stock (Series F) and a
warrant to purchase up to 3,000 shares of AIG common stock. The facility
was intended to strengthen AIG’s capital levels and improve its leverage.

20

Cumulative preferred stock is a form of capital stock in which holders of preferred stock
receive dividends before holders of common stock, and dividends that have been omitted
in the past must be paid to preferred shareholders before common shareholders can
receive dividends.

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As AIG draws on the Equity Capital Facility, the aggregate liquidation
preference of the Series F stock is adjusted upward. 21 As of December 31,
2009, AIG had drawn down about $5.2 billion of the commitment. Table 1
provides an overview of the various forms of assistance, the purpose of
each form of assistance, the amounts authorized, the amounts loaned or
used for investments, and the outstanding balance as of December 31,
2009.
Table 1: U.S. Government Efforts to Assist AIG and the Government’s Remaining Exposure as of December 31, 2009
Dollars in billions
Amount of
assistance
authorized
Implemented
Federal
Reserve

Description of the federal
assistance

Debt

Equity

Outstanding
balance

Sources to repay the
government

FRBNY created a Revolving Credit
Facility to provide AIG a revolving loan
that AIG and its subsidiaries could use
to enhance their liquidity positions. In
exchange for the facility and $0.5
million, a trust received Series C
preferred stock for the benefit of the
Treasury, which gave the trust a 77.9
percent voting interest in AIG.

$35a

N/A

$23.435

Proceeds from dispositions of AIG
businesses, internal cash flows,
and restructuring part of the
Revolving Credit Facility from debt
into equity. The initial commitment
fee paid by AIG was reduced by
$0.5 million to pay for the Series C
shares. The trust must reimburse
FRBNY for this amount when it
disposes of the Series C shares.

FRBNY created an SPV—Maiden
Lane II—to provide AIG liquidity by
purchasing RMBS from AIG life
insurance companies. FRBNY
provided a loan to Maiden Lane II for
the purchases. FRBNY also terminated
its securities lending program with AIG,
which had provided additional liquidity
associated with AIG’s securities
lending program when it created
Maiden Lane II.

22.5

N/A

15.739b

Proceeds from asset sales in
Maiden Lane II will be used to
repay the FRBNY loan.

21

The securities purchase agreement indicates that the amount of $29.835 billion is equal to
$30 billion minus $165 million in retention payments made by AIGFP; AIG Trading Group,
Inc.; and their respective subsidiaries to their employees in March 2009.

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GAO-10-475 Troubled Asset Relief Program

Dollars in billions
Amount of
assistance
authorized
Implemented

Debt

Equity

Outstanding
balance

FRBNY created an SPV called Maiden
Lane III to provide AIG liquidity by
purchasing CDOs from AIG Financial
Products’ counterparties in connection
with the termination of credit default
swaps. FRBNY again provided a loan
to the SPV for the purchases.

30

N/A

18.159b

AIG created two SPVs (AIA and
ALICO) to hold the shares of certain of
its foreign life insurance businesses.
FRBNY received on December 1,
2009, preferred equity interests in the
SPVs of $16 billion and $9 billion,
respectively, in exchange for reducing
debt by AIG owed on the Revolving
Credit Facility. The SPVs allowed AIG
to strengthen its balance sheet by
reducing debt and increasing equity
and also were intended to facilitate
dispositions to generate cash for
repayment of the federal assistance.

Treasury

Description of the federal
assistance

N/A

25

25

On March 1, 2010, AIG
announced agreement to sell AIA
to Prudential PLC for
approximately $35.5 billion
(approximately $25 billion in cash,
plus $10.5 billion in equity linked
securities and preferred stock).
Cash proceeds will allow AIG to
buy back all of FRBNY’s preferred
equity interest in AIA and repay
part of the revolving credit facility.
On March 8, 2010, AIG
announced agreement to sell
ALICO to Met Life for
approximately $15.5 billion ($6.8
billion in cash, plus $8.7 billion in
Met Life equity and equity-linked
securities). Cash proceeds will
allow AIG to buy back part of
FRBNY’s preferred equity interest
in ALICO. Over time, AIG will
convert equity securities it
received to cash to buy back
FRBNY’s remaining preferred
equity interest in ALICO and repay
more of its debt on the revolving
credit facility.

Treasury purchased Series D
cumulative preferred stock of AIG. AIG
used the proceeds to pay down part of
the Revolving Credit Facility. Series D
stock was later exchanged for Series E
noncumulative preferred stock. Unpaid
dividends on the Series D shares were
added to the principal amount of
Series E stock that Treasury received.

N/A

40

41.605

Proceeds from dispositions of AIG
businesses and internal cash
flows of AIG.

Page 12

Sources to repay the
government
Proceeds from asset sales in
Maiden Lane III will be used to
repay the FRBNY loan.

GAO-10-475 Troubled Asset Relief Program

Dollars in billions
Amount of
assistance
authorized
Implemented

Description of the federal
assistance

Debt

Treasury purchased Series F
noncumulative preferred stock of AIG.
Treasury has committed to provide
AIG with up to $29.835 billion through
an equity capital facility to meet its
liquidity and capital needs in exchange
for an increase in the aggregate
liquidation preference of the Series F
shares.
Subtotals

Equity

Outstanding
balance

N/A

29.835

5.179

$87.5

Total authorized and outstanding
assistancec

Sources to repay the
government
Proceeds from dispositions of AIG
businesses and internal cash
flows of AIG.

$94.835
$182.335

$129.117

Source: GAO analysis of AIG SEC filings, Federal Reserve, and Treasury data.

Notes: Analysis does not include AIG’s government debt under the FRBNY Commercial Paper
Funding Facility of $4.739 billion at December 31, 2009. This facility expired for new issuances on
February 1, 2010, and will close upon maturity of all remaining commercial paper outstanding.
a

The facility was initially $85 billion, was reduced to $60 billion in November 2008, and was reduced
to $35 billion in December 2009. Balance shown as owed includes accrued interest and fees of
$5.535 billion.

b

Government debt shown for Maiden Lane facilities as of December 31, 2009, are principal only and
do not include accrued interest of $265 million for Maiden Lane II and $340 million for Maiden Lane
III. Principal owed as of March 31, 2010, was $14.970 billion for Maiden Lane II and $16.929 billion
for Maiden Lane III.

c

Federal Assistance
Remains Key to
Stabilizing AIG’s
Financial Condition

Does not include AIG’s participation in the Federal Reserve’s Commercial Paper Funding Facility.

Since our last report in September 2009, AIG’s financial condition has
remained relatively stable as measured by several indicators. These
include the strength of AIG’s credit ratings; trends and levels of available
liquidity and sources for working capital; the level of shareholders’ equity
and trends in operating income; and CDS premiums on AIG, which is the
going market price for credit protection on AIG. However, this
stabilization remains largely attributable to the assistance AIG has
received from the Federal Reserve and Treasury, not its ability to access
private sources of capital. Specifically, AIG’s credit ratings have remained
stable over the fourth quarter in large part because government support
has continued to fill AIG’s short-term capital needs and allowed AIG to
meet its payment obligations. Similarly, AIG’s level of available corporate
liquidity has stabilized, although the FRBNY Revolving Credit Facility and
Treasury’s Equity Capital Facility continue to be its primary sources of

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working capital. While the company’s long-term goal is to rely on private
sources of capital and its own operations instead of the government, AIG
remains heavily reliant on federal assistance to meet its liquidity needs.
Trends and level of AIG’s consolidated shareholders’ equity—generally a
company’s total assets minus total liabilities—showed improvements in
2009. While these trends were largely driven by the federal assistance,
AIG’s performance has contributed to the improvements in its equity
position. Specifically, the efforts of AIG, FRBNY, and Treasury to
restructure the composition of the federal assistance have reduced AIG’s
debt and boosted its shareholders’ equity. However, whether AIG will
return to positive retained earnings, which should further increase
shareholder’s equity, remains unclear. Finally, measures of AIG’s operating
income and losses illustrated that because of federal assistance, the large
increasing losses AIG experienced through 2008 slowed in 2009. AIG
generated a modest income in the second quarter of 2009 but experienced
increasing losses in the following third and fourth quarters. However,
these losses were only a fraction of the size of the operating losses in 2008.
Finally, trends in CDS premiums on AIG showed that prices offered for
credit protection on AIG have been stabilizing or trending down since May
of 2009.

AIG’s Credit Ratings
Remained Stable Between
May and December 2009

Ratings of AIG’s debt and financial strength by various credit rating
agencies have not changed from May 2009 through December 15, 2009,
primarily because federal assistance has provided AIG with needed
capital. Credit ratings measure a company’s ability to repay its obligations
and directly affect that company’s cost of and ability to access unsecured
financing. If a company’s ratings are downgraded, its borrowing costs can
increase, capital can be more difficult to raise, business partners may
terminate contracts or transactions, counterparties can demand additional
collateral, and operations can become more constrained generally. Rating
agencies can downgrade the company’s key credit ratings if they believe it
is unable to meet its obligations. In AIG’s case, this could affect its ability
to raise funds and could increase the cost of financing its major insurance
operations, and, in turn, impede AIG’s restructuring efforts. A downgrade
in AIG’s credit ratings also could result in downgrades on insurer financial
strength ratings for the AIG life and property/casualty companies, further
declines in credit limits, and counterparties demanding that AIG post
additional collateral. Collectively, these effects from a rating downgrade
could impede AIG’s restructuring efforts and hamper any plans to access
traditional sources of private capital to replace the public investments.
Conversely, an upgrade in AIG’s credit ratings would indicate an

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GAO-10-475 Troubled Asset Relief Program

improvement in its condition and possibly lead to lower borrowing costs
and facilitate corporate restructuring.
AIG’s key credit ratings have remained unchanged since May 2009. 22 For
example, from March 31, 2009, to December 15, 2009, AM Best, Moody’s,
and Standard & Poor’s (S&P) maintained the same credit ratings for AIG’s
long-term debt and the financial strength of its property/casualty and life
insurance companies due in large part to the Federal Reserve and
Treasury’s support. 23 While contributing to stable ratings thus far, the scale
of this assistance eventually may raise questions about AIG’s future
prospects if the company is not able to raise capital from private sources.
For example, because of the importance of the federal funds to AIG’s
solvency, Fitch’s ratings of AIG in several categories were lowered in May
2009. However, Fitch’s ratings have not changed since May 2009. The
general stability of AIG’s long-term debt ratings has allowed the company
to avoid collateral and termination payments that could result from a
ratings downgrade because counterparties might demand such payments
at the sign of weakening financial strength. Similarly, generally stable lifeinsurer financial strength ratings have helped keep down both the
surrender rate of domestic retirement services and any pressure on the
company to exit businesses that serve high net-worth clients or businesses
governed by trust contracts. Further, generally stable property/casualty
financial strength ratings have helped hold down any significant losses in
net premiums written and operating losses. AIG’s credit ratings remained
unaffected with the December 2009 placement of AIA and ALICO into
SPVs.

22

See appendix II for a detailed listing of AIG’s historical and current credit ratings and an
explanation of the meaning of the various credit ratings.

23

AIG’s long-term debt was rated at A-/Negative (S&P) and A3/Negative (Moody’s), and its
short-term debt was rated at A-1 (S&P) and P-1 (Moody’s). While these ratings are
described using slightly different terminology, they tend to show relative consistency in the
strength of AIG’s debt.

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GAO-10-475 Troubled Asset Relief Program

Federal Assistance Has
Allowed AIG to Maintain a
Steady Level of Liquid
Assets, and Debt
Projections Have
Remained Stable

Since the fourth quarter of 2008, AIG’s available corporate liquidity has
remained stable due to federal assistance, and projections of debt have
also remained fairly stable. Because a financially healthy business should
have adequate holdings of liquid assets to cover maturing debt, we use
three indicators to monitor AIG’s corporate liquidity. 24 One indicator
monitors the timing of potential future demand on AIG’s corporate
liquidity posed by its maturing debt and AIG’s ability to meet its cash
payment needs. If working and short-term capital become less accessible
or if the level of maturing debt increases, AIG could face a higher risk of
another liquidity crisis. The second indicator monitors the amount of
corporate liquidity available from specific sources. Sources of available
liquidity provide an indication of how AIG obtains the funds needed to
meet its obligations. The third indicator, which we have added since our
initial reporting on AIG in September 2009, monitors the extent to which
AIG has used commercial paper to strengthen its liquidity position. The
greater the portion of current available liquidity provided by AIG’s own
operations, the less reliant AIG will be on federal assistance.
As indicated in figure 1, by the third quarter of 2008, AIG’s corporate-level
liquid assets (corporate liquidity) were becoming insufficient to meet its
company-wide debt obligations, with much of that debt—attributable to
the Federal Reserve’s Revolving Credit Facility—maturing in 2010. In the
fourth quarter of 2008, AIG’s remaining available corporate liquidity
reached a low of $26.7 billion, as AIG began utilizing its access to the
Commercial Paper Funding Facility (CPFF) by issuing commercial paper.
In that same quarter the Federal Reserve restructured the original payment
date for the credit facility. This restructuring reduced the amount of
maturing debt in the facility from $62.9 billion in the third quarter of 2008
to $40.4 billion in the fourth quarter of 2008, which occurred when
proceeds from the issuance of the new Series D preferred stock (new with
the restructuring) to Treasury were used to pay down the balance owed on
the facility. The restructuring also gave AIG more time to repay its debt to
the facility, moving the due date from 2010 to 2013. 25 From the fourth
quarter of 2008 to the third quarter of 2009, AIG nearly doubled its
available corporate liquidity to about $50 billion because of its access to
the restructured FRBNY Revolving Credit Facility and the FRBNY CPFF.

24

Liquid assets—such as accounts receivable, cash on hand, Treasury Bills, and certificates
of deposits—are assets that can be converted easily and quickly to cash.

25

The amount of maturing debt was reduced when the amount authorized on the facility
was reduced from the original $85 billion to $60 billion.

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GAO-10-475 Troubled Asset Relief Program

As of February 2010, the amount of corporate liquidity available to AIG
had fallen to $36.6 billion, largely because the ceiling on the Revolving
Credit Facility was reduced again in December 2009 by $25 billion (from
$60 billion to $35 billion) when AIG transferred AIA and ALICO into two
SPVs in which FRBNY received a preferred equity interest. 26 Over this
same period, the amount of company-wide debt stabilized as well, due to
restructuring and deleveraging activity. These trends suggest that since
late 2008, the Federal Reserve’s actions were critical for AIG’s solvency.

26

In this transaction, FRBNY received preferred equity valued at $25 billion, and in
exchange the debt AIG owed to the FRBNY Revolving Credit Facility was lowered by an
equivalent amount.

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GAO-10-475 Troubled Asset Relief Program

Figure 1: AIG: Corporate Available Liquidity and Company-Wide Debt Projections, Third Quarter of 2008 through Fourth
Quarter of 2009 (dollars in millions)
Corporate
available
liquidity
(as of date)

Company-wide debt maturing in:
2009

2010

2012

2013

62,960
Federal
Reserve
facility
(FRF)

Q3 - 2008
33,420
(11/5/08)

2011

28,057

21,690

Thereafter

61,882
14,517

13,230

10,756

Q4 - 2008
26,653
(2/18/09)

40,431
FRF
21,581

17,492

15,212

9,865

Q1 - 2009

8,861

47,405
FRF

49,620
(4/29/09)
17,741

16,999

15,080

9,598

58,193

53,710

8,430

Q2 - 2009
44,816
FRF

52,585
(7/29/09)

17,204

13,809

15,355

9,786

53,783

8,575

Q3 - 2009
41,009
FRF

50,160
(10/28/09)

19,815

10,317

16,310

10,289

23,435
FRF
8,870

54,035

8,957

19,432

7,643

16,413

Q4 - 2009
36,579
(2/17/10)

0

53,256

Source: GAO analysis of AIG SEC filings.

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GAO-10-475 Troubled Asset Relief Program

Notes: Available liquidity is at the corporate level, and debt maturing is at the corporate and
operating-division levels. Much of the debt of the operating divisions is associated with assets serving
as collateral or funding sources; thus repayment of this debt is not likely to rely on corporate liquidity.
The figures exclude borrowings on consolidated investments that were less than 3.5 percent of total
long-term borrowings.

Data disclosed by AIG indicate that since November 2008 the corporate
liquidity available to AIG essentially has been the undrawn portions of
three federally provided sources—the FRBNY Revolving Credit Facility,
the CPFF, and Treasury’s Equity Capital Facility. Over time, AIG’s primary
source of funds has shifted away from FRBNY’s Revolving Credit Facility
and CPFF to Treasury’s Equity Capital Facility, which remained its
primary source of funds through 2009. Since late 2008, less than $5 billion
has been available from AIG’s internal sources or from private sector
sources. Thus, federal sources have allowed AIG to substantially improve
its liquidity position relative to what it would have been able to achieve on
its own. See appendix III for further discussion of AIG’s available
corporate liquidity.
Historically, AIG issued commercial paper to third parties to meet its
liquidity needs, but since October 2008, the company has relied on
FRBNY’s CPFF to purchase its commercial paper. Because commercial
paper is typically unsecured and issued by companies with high credit
ratings, AIG’s ability to access the traditional commercial paper market
(independent of Federal Reserve programs) would be a positive signal
regarding its financial condition. As shown in table 2, AIG’s commercial
paper programs, which reflect the amount of commercial paper AIG has
issued to third parties, have steadily decreased from a high of about $13
billion in December 2007. Due to the general breakdown of the U.S.
commercial paper market and reluctance from market participants to
purchase or roll over AIG’s commercial paper, by September 30, 2008, the
balance had dropped to $5.6 billion. As of December 31, 2009, AIG had no
outstanding commercial paper held by third parties. According to AIG, this
is because all of AIG’s third party commercial paper had matured and,
currently, AIG’s subsidiaries do not have access to third party commercial
paper funding. This funding source had been replaced by commercial
paper purchased by FRBNY’s CPFF, which was utilized by AIG until the
facility expired on February 1, 2010. As a result of the facility closing,
AIG’s CPFF amount outstanding had decreased to $4.7 billion from a high
of $15 billion one year earlier. However, given AIG’s ongoing reliance on
federal assistance, it remains unclear when support provided by CPFF will
be replaced with funds from AIG’s own operations. Unlike many of the
other large institutions that received government support as a result of the
financial crisis, AIG has not yet been able to tap traditional sources of

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GAO-10-475 Troubled Asset Relief Program

short-term capital, including commercial paper or other debt markets until
recently. In particular, International Lease Finance Corp. (ILFC) and
American General Finance (AGF) recently have been able to access the
capital markets. In March 2010, ILFC sold $4.05 billion of secured debt and
unsecured debt, and in April 2010, AGFS Funding Company—a whollyowned indirect subsidiary of AGF—entered into and fully drew down a $3
billion, 5-year term loan.
Table 2: Amount of Outstanding Commercial Paper by Source, December 31, 2007, through December 31, 2009
Dollars in millions
Dec. 31,
2007

Sept. 30,
2008

Dec. 31,
2008

Mar. 31,
2009

June 30,
2009

Sept. 30,
2009

Dec. 31,
2009

$0

$0

$15,105

$12,242

$11,152

$9,607

$4,739

FRBNY CPFF program
AIG’s Commercial Paper programs
Total

13,114

5,600

613

196

197

0

0

$13,114

$5,600

$15,718

$12,438

$11,349

$9,607

$4,739

Sources: GAO analysis of AIG SEC filings.

Note: Does not include $1.1 billion outstanding by Nightingale.

Shareholders’ Equity
Continued to Improve in
2009

In contrast to the downward trends in 2008, AIG’s shareholders’ equity
increased over the first three quarters of 2009 and its negative retained
earnings, also known as accumulated deficits, decreased by nearly 85
percent. Rising accumulated deficits generally indicate mounting losses,
while decreasing accumulated deficits could indicate a return to
profitability. Shareholders’ equity is generally calculated by subtracting a
company’s total assets from its total liabilities, and represents the
company’s ability to absorb negative shocks and prevent failure due to
insolvency. One source of shareholders’ equity is capital raised by issuing
and selling common and preferred stock to investors, also referred to as
paid-in capital. Another source is retained earnings, which the company
accumulates over time through its operations. 27
As figure 2 shows, AIG’s shareholders’ equity had declined from the fourth
quarter of 2007 through the first quarter of 2009, and more significantly,
the composition of its shareholders’ equity changed from mostly retained

27

Other capital included payments advanced to purchase shares, the cost of Treasury stock,
and accumulated other comprehensive income or loss as originally reported. Our
computations adjusted the value of AIG’s common stock and paid-in capital for the
retroactive effect of the July 2009 reverse stock split.

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GAO-10-475 Troubled Asset Relief Program

earnings in 2007 to completely paid-in capital by the end of 2009, reflecting
the importance of federal assistance to its solvency. Specifically, AIG’s
shareholder’s equity fell almost 48 percent, from $95.8 billion at the end of
2007 to $45.8 billion by the end of the first quarter of 2009, but rose the
second and third quarter of 2009 and declined slightly to $69.7 billion in
the fourth quarter of 2009. In the last quarter of 2007, retained earnings
was the primary source of shareholders’ equity, contributing $89 billion of
AIG’s $95.8 billion in shareholders’ equity. However, retained earnings
declined throughout 2008 becoming cumulative deficits by the end of 2008
because of a net loss for the year of about $99.3 billion. At its lowest point,
in the first quarter of 2009, AIG reported a negative balance of $16.7 billion
in accumulated deficits, and shareholders’ equity fell to $45.8 billion. AIG’s
accumulated deficit improved to a negative balance of $3.1 billion and $2.6
billion in the second and third quarter of 2009, respectively, contributing to
the increase in shareholders’ equity. However, in the fourth quarter of
2009, the accumulated deficit increased to $11.5 billion, lowering
shareholders’ equity. As shown in figure 2, starting in the fourth quarter of
2008, paid-in capital become the primary source of shareholders’ equity
because of the federal assistance.

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GAO-10-475 Troubled Asset Relief Program

Figure 2: AIG: Trends in and Main Components of Consolidated Shareholders’ Equity, Fourth Quarter of 2007 through Fourth
Quarter of 2009
Dollars in millions
100,000

95,801
89,029

79,703

80,000

78,088
79,856

71,182

79,732

80,631

79,707

82,678
72,712

76,496

73,743
69,824

60,000

57,958
52,710

49,291

45,759

40,000

39,871

20,000
16,816
9,726

9,816

0
-3,073

-2,618

-12,368

-11,491
-16,706

-20000
Q4
2007

Q1

Q2

Q3

Q4

2008

Q1

Q2

Q3

Q4

2009
Retained earnings/accumulated deficits
Additional paid-in capital
Total shareholders’ equity
Source: GAO analysis of AIG SEC filings.

Note: Other components of total shareholders’ equity are preferred stock (Series C preferred stock)
and Series D (cumulative preferred stock), which was exchanged in April 2009 for Series E
noncumulative preferred stock, accumulated other comprehensive losses, and Treasury stock.
Drawdowns from the approximately $30 billion committed under the Series F equity capital facility will
increase paid-in capital in the future by an equal amount.

There are several federal actions that caused these fluctuations and
changes in shareholders’ equity. Federal government actions significantly
increased AIG’s shareholders’ equity. Between the third and fourth
quarters of 2008, the adjusted value of common and preferred stock and
paid-in capital increased from $39.9 billion to $79.9 billion, of which
almost $73 billion was paid-in capital that could be attributed to two
government actions:

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GAO-10-475 Troubled Asset Relief Program

•

In September 2008, AIG, through a noncash transaction, added $23 billion
to shareholders’ equity as additional paid-in capital to record the fair value
of preferred shares (Series C) that were later issued in order to obtain
AIG’s Revolving Credit Facility established by FRBNY. 28

•

In November 2008, Treasury purchased $40 billion of cumulative preferred
shares (Series D) and received a warrant from AIG. AIG recorded the
transaction as additional paid-in capital repaid.
The value of the federal government’s common equity interests in AIG is
tied to the market value of AIG’s common stock, which has fluctuated over
the last year. As a result, growth in value of the government’s equity stake
depends on further growth of the value of common shares. The values of
the shares increased between March and September 2009 but fell slightly
in the fourth quarter of 2009. 29 The market value of AIG’s common shares
outstanding peaked in December 2006 at $186.4 billion and by June 2008,
as AIG’s losses from its derivatives businesses continued to mount, the
shares’ market value declined to $71.1 billion (see appendix IV). During
the last two quarters of 2008, when federal assistance was initially
provided to AIG, AIG shares further declined in value, falling to $4.2 billion
by the end of 2008. During the first quarter of 2009, AIG’s common shares
fell roughly 36 percent, underperforming the Thomson Reuters Insurance
Index and the New York Stock Exchange (NYSE) Composite Index,

28

This amount was based on the fair value of common shares into which the preferred
Series C would be convertible on September 16, 2008, which was the date on which AIG
received FRBNY’s commitment. AIG also recorded this amount as a prepaid commitment
fee for the $85 billion credit facility to be treated as an asset to be amortized as interest
expense over the 5-year term of the FRBNY facility. The only cash involved in this
transaction was $500,000 that FRBNY paid by reducing the commitment fee it charged AIG
for the Series C preferred shares. Through June 30, 2009, $10.2 billion of this asset was
amortized through the accumulated deficit and thus reduced shareholders equity. For more
detail on Series C preferred shares, see GAO-09-975.

29

As previously discussed, the federal equity investment includes federally owned Series C
preferred shares that are convertible into 79.77 percent of total outstanding common
shares. Under the terms of the Series C preferred stock issuance, the preferred stock is
convertible into AIG’s common stock. The conversion formula provides that the trust will
receive 79.77 percent of AIG’s common stock less the percentage of common stock that
may be acquired by or for the benefit of Treasury as a result of warrants or other
convertible preferred stock held by Treasury. Treasury received a warrant to purchase
2,690,088 shares of AIG Common Stock in connection with its purchase of Series D
preferred stock, and an additional warrant to purchase AIG common stock in connection
with its purchase of Series F preferred stock. Proceeds from the sale of the trust stock will
be deposited in the U.S. Treasury General Fund.

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GAO-10-475 Troubled Asset Relief Program

pushing the value of its common stock below $3 billion. 30 Over the second
and third quarter of 2009, AIG’s stock price increased by 121 percent and
outperformed both the NYSE Composite and the Insurance Index,
resulting in a market capitalization of about $4.5 billion. However, since
we last reported in September 2009, the value of the shares has fallen by
more than 22 percent compared to gains of 13 and 8 percent respectively
for the Insurance Index and NYSE Composite Index.

Income from AIG’s
Operations Has Begun to
Stabilize with Federal
Assistance

With the benefit of federal assistance, several of AIG’s operating segments
are beginning to stabilize, producing income instead of losses. To the
extent that AIG’s operating entities are profitable, they will generate
income that could improve AIG’s ability to sell certain businesses, retain
others, and repay its federal assistance. If the businesses operate at a loss,
AIG could face greater risks in its ability to repay the federal assistance
and its ability to remain viable. The following indicator tracks the
operating income and losses (before taxes) for AIG’s insurance businesses
and its major segments, including asset management, financial services,
and other services that it expects to sell off as part of the restructuring.
As shown in figure 3, all of AIG’s operating segments had operating losses
in the last two quarters of 2008, but by the first quarter of 2009, some of
the segments had considerably smaller operating losses, and other
segments had operating income due in part to federal assistance such as
Maiden Lane II and Maiden Lane III. AIG’s general insurance segment
(which includes AIG’s domestic and foreign property/casualty businesses)
reported an operating loss in 2008, largely due to operating losses from
insurance underwriting, large net realized capital losses, and reduced
investment income in the second half of the year. After three quarters with
operating income in 2009 and operating losses in the fourth quarter, this
segment ended the year with a relatively small operating profit for 2009.
The improvement in 2009 relative to 2008 was largely due to reduced net
realized capital losses and increased investment income that more than
offset larger insurance underwriting losses. This is noteworthy, because
historically, the general insurance segment has generated the largest
operating income of all AIG segments. For example, operating income

30

The Insurance Index is a stock price index maintained by Thomson Reuters comprised of
insurance companies that conduct a variety of insurance activities. As a result the index is
a good proxy for the stock market performance for the insurance sector. The NYSE
Composite Index is designed to measure the performance of all common stocks listed on
the NYSE and therefore, provides a measure of overall stock market performance.

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GAO-10-475 Troubled Asset Relief Program

from this segment accounted for more than half of AIG’s total operating
income for 2006 and 2007 combined. Tracking the operating performance
of this segment is also important because AIG plans to retain its
property/casualty insurance businesses among its core operations after the
restructuring and divestitures of other businesses. As a result, AIG’s ability
to repurchase its preferred shares from Treasury will be partly contingent
on the health of this segment.
Figure 3: Quarterly AIG Pretax Operating Income/Loss by Operating Segment, First Quarter of 2008 through Fourth Quarter of
2009
Dollars in billions
5.0 Total income
-11.21
1.5

-8.69

-27.51

-59.13

-6.21

0.52

1.2

1.0 0.7

0.1

0
-1.9

-2.0

-1.4

-3.0

-7.60
2.0

1.4

0.1
-1.6

-1.3
-3.2

-3.8

-3.9

-5.0

0.7 0.7

0.1

-1.4 -1.1

-1.3

-2.6

-0.36

-5.9
-8.1

-8.2

-8.8

-10.0

-15.0

-15.0

-18.6

-20.0
Q1

Q2

-17.9

-18.6

Q4

Q3

2008

Q1

Q2

Q3

Q4

2009
General insurance
Life insurance and retirement services
Financial services
Other (net of consolidation and eliminations)
Source: GAO analysis of AIG SEC filings.

Notes: The insurance data include both investment and underwriting performance.
The “other operations and consolidating adjustments” includes consolidations and eliminations,
interest expense on the FRBNY facility, restructuring costs, expenses of corporate staff not
attributable to specific reportable segments, corporate level net realized capital gains and losses, net
gains and losses on sale of divested businesses, results from noncore businesses that include certain
mortgage guaranty and asset management operations, and equity earnings in partly owned
companies.

Figure 3 also shows that AIG’s life insurance and retirement services
segment incurred the largest operating losses of all of AIG’s segments

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GAO-10-475 Troubled Asset Relief Program

during the last half of 2008. Its losses could be largely attributed to net
realized capital losses in the investment portfolios of domestic and foreign
life insurance businesses due to severe market price declines in certain
commercial mortgage-backed securities and other securities. In 2009 the
life insurance and retirement services segment reported an operating
profit compared to a loss in 2008, primarily because net realized capital
losses declined and investment results improved. These improved
investment results more than offset the decline in premium revenues,
increase in claims and benefits, and related expenses.
The financial services segment reported losses in 2008 that were primarily
attributed to unrealized market valuation losses from credit valuation
adjustments in AIGFP’s super senior credit default swap portfolio, and
credit valuation adjustments on AIGFP assets and liabilities (see figure 3).
In 2009 Financial Services reported an operating profit of $517 million,
primarily because the combined operating profit for AIGFP and Aircraft
Leasing were greater than the operating loss from consumer finance.
Finally, AIG’s other operations reported losses in the fourth quarter of
2008 that generally resulted from fees and interest expenses associated
with the FRBNY Revolving Credit Facility, net realized capital losses, and
operating losses of asset management and mortgage guaranty that are in
this category as noncore businesses and the decline in the value of AIG’s
equity interest in Maiden Lane III. In 2009 most of these factors also
contributed to the operating losses reported from AIG’s other operations.

AIG Credit Default Swap
Premiums Appear to Be
Returning to Precrisis
Levels

Dropping from their recent peak in May 2009, AIG CDS premiums have
decreased and appear to be returning to precrisis levels. These premiums,
which are the price insured parties pay to purchase CDS protection
against AIG defaulting on senior unsecured debt, are another indicator of
AIG’s financial strength. This indicator measures what the market believes
to be AIG’s probability of default by tracking prices (premiums, expressed
in basis points) paid by an insured party against a possible default on a
senior unsecured bond and the spreads between the 3-year and 5-year
premiums. 31 This measure pertains to CDS prices on AIG and not AIGFP’s
CDS inventory that the company is winding down; it is a composite of
what dealers would charge customers for CDS on AIG. Higher basis point

31

A basis point is a common measure used in quoting yield on bills, notes, and bonds and
represents 1/100 of a percent of yield.

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GAO-10-475 Troubled Asset Relief Program

levels indicate a higher premium for a CDS contract. The higher the CDS
premiums, the greater the market’s perception of credit risk associated
with AIG. Conversely, the lower the CDS premiums, the lower the market’s
expectation that AIG will default or the greater its confidence in AIG’s
financial strength.
AIG’s CDS premiums have continued to decrease since May 2009, and as
of January 2010 were similar to the level they were one year earlier, and
generally have continued to decline through March 2010 (see figure 4).
Over the same period—May 2009 through March 2010—the credit default
swap index for the insurance sector declined, but not as much as the CDS
premiums for AIG. While the trend is positive, it remains unclear whether
this decline in the cost to protect against an AIG default reflects
confidence in the standalone creditworthiness of AIG or whether the
decline is due to the ongoing federal assistance to AIG. As the Federal
Reserve has noted, the premium on AIG’s CDS is based on both the
market’s assessment of the government’s level of commitment to assist
AIG and AIG’s financial strength.
Figure 4: AIG Credit Default Swap Premiums, January 2007 through March 2010
Basis points
5,000

3,922
(9/16/08)

4,000

3,500
(9/16/08)

4,534
(5/4/09)
3,683
(5/4/09)

3,000

2,000

1,000

279
(3/31/10)

9.2
(1/2/07)

214
(3/31/10)

0

Jan. Feb.Mar. Apr. May JuneJuly Aug.Sept.
Oct. Nov. Dec.Jan. Feb. Mar. Apr. May JuneJuly Aug.
Sept.Oct. Nov.Dec. Jan. Feb.Mar. Apr. MayJuneJuly Aug.
Sept.Oct. Nov.Dec. Jan.Feb.Mar. Apr.
2007

2008

2009

2010

3-year CDS
5-year CDS
Source: GAO analysis of Thomson Reuters Datastream.

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GAO-10-475 Troubled Asset Relief Program

Note: A basis point is a common measure used in quoting yield on bills, notes, and bonds and
represents 1/100 of a percent of yield. CDS provide protection to the buyer of the CDS contract if the
assets covered by the contract go into default.

AIGFP Continues to
Unwind Its CDS
Portfolio Positions
and Reduce Its
Number of Full-Time
Equivalent Employees

A critical factor leading to AIG’s financial crisis was the significant losses
that AIGFP experienced from its derivatives trading business and the
strains those losses put on AIG’s corporate liquidity in 2008. A key part of
AIG’s reorganization and divestiture strategy is closing out or
eliminating—also known as “unwinding”—these derivatives and closing
AIGFP. Since the fall of 2008, AIGFP has attempted to unwind its
derivatives portfolio by attempting to strike the most efficient balance
between eliminating its positions quickly and mitigating portfolio losses.
As discussed earlier, AIGFP had underwritten CDS protection on CDOs to
a range of counterparties. Most of AIGFP’s positions on its CDS contracts
on multi-sector CDOs were eliminated when Maiden Lane III purchased
CDOs from AIGFP’s CDS counterparties late in 2008. With these
purchases, the counterparties agreed to terminate the CDS contracts,
which eliminated the need for AIG to post additional collateral as pricing
continued to fall and eased its liquidity crisis. Since then, AIGFP has been
in the process of closing out the remainder of its derivatives portfolio. To
analyze AIGFP’s progress, we monitored several groups of indicators
dating back to at least September 2008. The following four indicators—
number of outstanding derivatives trade positions, gross notional amount
of outstanding derivatives contracts, number of risk books, and number of
AIGFP employees—show different dimensions of the unwinding process.
Their trends suggest AIGFP is making progress. We also analyzed AIGFP’s
Super Senior CDS portfolio, where underlying collateral of CDOs are rated
investment grade, and their remaining multi-sector CDO portfolio, where
underlying collateral of CDOs are rated less than BBB. We found that
AIGFP has made and continues to make progress in unwinding its super
senior portfolio, but that it has made little progress since the fourth
quarter of 2008 in closing out CDOs with lower rated underlying collateral.

AIGFP Continues to
Unwind Its Operations

Our indicators show that from September 2008 through December 2009,
AIGFP made significant progress in winding down its operations. A key
reason for AIG’s recent financial crisis was the strain on corporate
liquidity that resulted from the performance of AIGFP’s derivatives
portfolios. The values of the investment-grade CDOs protected by CDS
contracts written by AIG declined in the summer of 2008. In response to
the declining values, AIGFP had to make collateral payments to the CDS
counterparties. As previously discussed, to help eliminate the financial

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strain arising from collateral payments, in the fall of 2008, the federal
government created Maiden Lane III LLC, which purchased $29.3 billion
worth of CDOs from AIGFP’s CDS counterparties. In turn, these
counterparties agreed to terminate the CDS contracts, because for the
counterparties, the risk of possible downgrades or defaults on the CDOs
had been eliminated by selling them to Maiden Lane III. Therefore, the
counterparties no longer needed the protection that AIGFP’s CDS
contracts had provided them. The strains on corporate liquidity have
decreased as AIGFP has continued to eliminate its positions in CDS
contracts.
Figure 5 illustrates several dimensions along which AIGFP has reduced its
size:
•

First, since September 2008, AIGFP has closed out more of its outstanding
trade positions, which refers to the number of AIGFP’s outstanding long
and short derivative contracts. At September 30, 2008, it had 44,000
positions, and at December 31, 2009, the number had declined to 16,100,
down from 19,200 at the end of the previous quarter.

•

Second, because of the positions that have been closed out, the gross
notional value of derivatives positions outstanding—which is a measure of
the size of AIGFP’s inventory of derivatives outstanding—was reduced to
$900 billion in December 2009, about half of the value 15 months earlier
and $300 billion less than in the previous quarter.

•

Third, the reduction in positions also has resulted in a marked decrease in
the number of AIGFP’s businesses or risk books. In its switch from a
strategy of growth and profit maximization to risk mitigation and
unwinding, AIGFP reorganized its business into 22 separate risk books
determined in part by the type of risk, which falls into the following five
groupings: (1) credit books, (2) investment securities and liabilities books,
(3) capital markets books, (4) principal guaranty products, and (5) private
equity and strategic investment books. Initially, AIGFP focused on closing
out its riskiest books and, according to AIGFP, this goal has been
substantially accomplished. The number of books decreased from 22 to 15
from September 2008 to the end of the second quarter of 2009 and had not
changed as of December 2009.

•

Finally, since September 2008, the number of AIGFP employees had
dropped by almost half to 237 as of the end of 2009. Staff may leave for
several reasons, such as the sale of businesses, closing offices, or
employee resignation, but the trend towards fewer staff is clear, and

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GAO-10-475 Troubled Asset Relief Program

together with the above indicators, the evidence shows that AIGFP was
much smaller at the end of 2009 than it was 15 months earlier.
Figure 5: Status of the Winding Down of AIG’s Financial Products Corporation,
Quarterly from September 30, 2008, through December 31, 2009
9/30/08
Approximate
number of
outstanding
trade
positions
Gross notional of
long and short
derivatives
positions outstanding
(dollars in trillions)
Number
of
businesses
(risk books)

Number of
employees

12/31/08

3/31/09

6/30/09

9/30/09

12/31/09

22,500

19,200

16,100

1.3

1.2

44,000
35,000

1.8

22

428

1.6

21

375

28,000

1.5

17

362

15

319

0.9

15

15

257

237

Source: Testimony by Mr. Edward M. Liddy, Chairman and Chief Executive Officer, AIG, before the House Financial Services
Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, March 18, 2009; AIG Restructuring
Update, May 7, 2009; and AIG.

Note: Due to Financial Accounting Standard 161, AIGFP changed its methodology for computing the
gross notional for March 2009 leading to a slight increase of previously reported values. September
and December notionals were estimated and restated numbers were 2.0 and 1.8, respectively. The
March number was 1.5.

In September 2009 we reported that AIGFP officials believed that most of
the unwinding could be completed by the end of 2009. In February 2010,
Federal Reserve and Treasury officials confirmed that AIGFP is on track
to close out its riskiest positions and that AIGPF will no longer be in
business by the end of 2010, although the company’s positions may not be
entirely unwound by the end of the year. According to these officials,
positions that cannot practicably be exited by year-end and trade positions
for hedging AIG and subsidiary debt (that are currently managed by
AIGFP) will likely be managed either centrally within AIG, by other AIG
business units, or by third parties. However, AIG noted that the winding
down of AIGFP and its portfolios remains linked to AIG’s credit ratings
and, as mentioned earlier, these efforts could be adversely affected if
AIG’s credit ratings were downgraded.

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GAO-10-475 Troubled Asset Relief Program

AIGFP Continues to Make
Progress in Unwinding Its
Investment Grade, Super
Senior Credit Default
Swaps Portfolio

Our indicators suggest that AIGFP continues to make progress in
unwinding its portfolio of credit default swaps written on investment
grade CDOs (those having a rating of BBB or higher from rating agencies).
This super senior CDS portfolio was written on the super senior tranche of
CDOs and had a net notional amount of approximately $375 billion in the
third quarter of 2008. 32 The notional amount denotes the size of the
portfolio on which AIGFP wrote credit protection. This is the maximum
dollar-level exposure for the portfolio taking into account offsetting
positions, and it measures an underlying quantity upon which payment
obligations are computed. A decrease in the net notional amount could
indicate progress in unwinding AIGFP’s obligations. To measure this
progress, we analyzed the net notional amounts of AIGFP’s super senior
CDS portfolio, the fair value of AIGFP’s derivative liability, and the
unrealized market valuation loss or gain. The fair value of its derivative
liability represents the fair market valuation of AIGFP’s liabilities in each
asset portfolio. The unrealized market valuation loss (or gain) tracks the
increase (or decrease) in this valuation from quarter to quarter. As with
the overall portfolio, a decrease in the net notional amount could indicate
progress in unwinding AIGFP’s obligations. A decrease in the fair value of
derivative liability could result in a decrease in the cost to AIGFP to
transfer the respective derivatives to other counterparties in any effort to
reduce its liabilities (i.e., the risk associated with the liabilities is viewed
more favorably in the marketplace and reflects increased willingness to
hold the liabilities). Therefore, such a decrease would be accompanied by
comparable unrealized market valuation gains.
The indicators suggest that AIGFP is in the process of liquidating its CDS
portfolio. The net notional amount of the portfolio and the fair value of
derivative liability are both decreasing, and the portfolio has experienced
modest unrealized gains as market conditions have improved. This
progress is evident across several of AIGFP’s risk books (see figure 6):
•

AIGFP’s regulatory capital CDS book: The regulatory capital book
represented derivatives written for European banks that allowed them to
reduce the amount of capital they needed to set aside to cover potential
losses on certain asset portfolios of residential mortgages and corporate
loans by buying protection against losses on underlying assets. 33 The net

32

A tranche is a portion or class of a security. A security may have several tranches, each
with different risks and rates of return, among other differences.

33

In exchange for a periodic fee, these institutions received credit protection for a portfolio
of diversified loans, thus reducing minimum capital requirements set by their regulators.

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GAO-10-475 Troubled Asset Relief Program

notional amount of this book dropped from about $250 billion in the fall of
2008 to about $150 billion in the fourth quarter of 2009, and the fair value
of the liabilities fell over the same period from $397 million to negative
$116 million. Though these CDS contracts continue to have a high net
notional value relative to the other types of products, AIGFP continues to
believe that these contracts will expire or be called by counterparties with
little to no cost to AIG. AIGFP does not plan to sell these contracts but
plans to let them expire because management believes that trying to sell
them would not be cost effective. 34 This book also has experienced
unrealized market gains in the last three quarters of 2009.
•

AIGFP’s CDS on multi-sector CDO book: These CDOs represent the CDS
portfolio that, according to Federal Reserve officials, is a synthetic long
credit position and written on CDO transactions that generally had
underlying collateral of residential mortgage-backed securities,
commercial mortgage-backed securities, and CDO tranche securities.
There was a large drop in the net notional and fair values of the multisector CDOs from the third quarter to the fourth quarter of 2008. The
decrease largely resulted from federal assistance provided through the
purchase of the underlying assets in this category by Maiden Lane III and
subsequent termination of the related CDS. In the fourth quarter of 2009,
the net notional amount stood at about $7.9 billion and the fair value at
$4.4 billion, both less than 15 percent of their values in the third quarter of
2008. Also in the fourth quarter of 2009, the book has seen unrealized gains
for the second time in a year.

•

Corporate collateralized loan obligations and mezzanine tranches books:
This portfolio consists of CDS transactions primarily written on portfolios
of senior unsecured loans and mezzanine tranches, a portfolio of CDS
transactions written on obligations that were rated less than investment
grade (BBB or higher) at origination. AIGFP has also shown progress in
reducing the CDS portfolio related to its corporate collateralized loan
obligation portfolio. Unlike the previous two risk books, the corporate
collateralized loan obligation book has had no unrealized market losses
over the last year. The mezzanine tranche book had unrealized gains in the
first three quarters of 2009 but a loss in the fourth quarter of 2009.

34

According to AIG, the schedule by which they expected these positions to be called or
terminated has slowed as the Basel Committee on Banking Supervision of the Bank for
International Settlements has suggested a delay in the implementation of certain Basel II
provisions, which could affect capital requirements and cause the banks to delay the
termination of these transactions in the expected time frame.

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GAO-10-475 Troubled Asset Relief Program

Figure 6: AIGFP: Net Notional Amount, Fair Value of Derivative Liability, and Unrealized Market Valuation Losses and Gains
for AIGFP’s Super Senior (rated BBB or better) Credit Default Swap Portfolio, Third Quarter of 2008 through Fourth Quarter of
2009

Multi-sector
collateralized debt
obligationsb

Regulatory capitala

Corporate collateralized
loan obligationsc

Mezzanine tranchesd

Dollars in billions
250

249.95
234.45
192.55

200
Net
notional
amount

177.47 171.70
150.05

150
100

71.64
50.68

50.55

50
12.56

11.98

49.60

40.94
22.58

9.15

8.17

Q3 Q4 Q1 Q2
2008
2009

Q3

Q4

4.51

4.42

22.08

7.93

5.01

4.70

4.22

3.50

3.50

3.48

Q3 Q4 Q1 Q2
2008
2009

Q3

Q4

0.08

0.03

0.14

Q3 Q4 Q1 Q2
2008
2009

Q3

Q4

0
Q3 Q4 Q1 Q2
2008
2009

Q3

Q4

Q3 Q4 Q1 Q2
2008
2009

Q3

Q4

1.10

0.46

0.31

Q3 Q4 Q1 Q2
2008
2009

Q3

Q4

566

147

Dollars in billions

Fair
value
of
derivative
liability

30
25
20
15
10
5
0

30.21

5.91
0.40

0.38

0.39

0.05

6.72

5.27

1.53

0.03

2.55

2.20

0.15

0.20

0.18

-0.12

Q3 Q4 Q1 Q2
2008
2009

Q3

Q4

16

147

Q3 Q4 Q1 Q2
2008
2009

Q3

Q4

332

92

Dollars in millions
Unrealized
market
valuation
gain/loss

1,000
-1,000
-3,000
-5,000
-7,000

23
-272

-18

-14

-809

-284

1,020

358

792

18

42

13

105

45
-111

-538

-6,262 -5,832

Q3 Q4 Q1 Q2
2008
2009

Q3

Q4

Q3 Q4 Q1 Q2
2008
2009

Q3

Q4

Q3 Q4 Q1 Q2
2009
2008

Q3

Q4

Q3 Q4 Q1 Q2
2008
2009

Q3

Q4

Source: GAO analysis of AIG SEC filings.

Note: The data for unrealized market valuation gains or losses correspond to the indicated 3-month
quarter. The unrealized market valuation loss (gain) tracks the increase (decrease) in this valuation
from quarter to quarter. Also, clarifications have been made to the presentation of this data in the
prior report (GAO-09-975) in which some losses were shown without brackets and gains with
brackets.
a

Regulatory capital represents the CDS portfolio sold to provide regulatory capital relief to primarily
European financial institutions. In exchange for a periodic fee, these institutions received credit
protection for a portfolio of diversified loans, thus reducing minimum capital requirements set by their
regulators.

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GAO-10-475 Troubled Asset Relief Program

b

Multi-sector collateralized debt obligations (CDOs) represent the CDS portfolio sold primarily for
arbitrage purposes and written on CDO transactions that generally had underlying collateral of
residential mortgage-backed securities, commercial mortgage-backed securities, and CDO tranche
securities.

c

The corporate collateralized loan obligations portfolio consists of CDS transactions primarily written
on portfolios of senior unsecured loans.
d

A tranche is a piece or portion of a structured deal, or one of several related securities that are
issued together but offer different risk-reward characteristics. The mezzanine tranche is subordinated
to the senior tranche, but is senior to the equity tranche. The senior tranche is the least risky tranche
whereas the equity tranche is the first loss and riskiest tranche.

AIG Has Made Less
Progress in Reducing the
Noninvestment Grade
Multi-Sector CDO Portfolio
than the Total Portfolio,
with Little Change in the
Value of the Underlying
Assets Since the First
Quarter 2009

Our indicator uses the gross notional amount to track the size of AIGFP’s
multi-sector CDO portfolio and its composition with respect to the credit
quality of the underlying assets. Our indicator shows that the gross
notional amount of AIGFP’s multi-sector CDO portfolio was reduced
significantly in the fourth quarter of 2008 with the purchase of CDOs by
Maiden Lane III and that since then AIG has continued to reduce the gross
notional amount. However, as the portfolio has been unwinding, its
underlying credit rating has declined but the longer term trend is not yet
clear. Tracking the credit rating of the underlying assets (collateral) of the
remaining holdings in AIGFP’s multi-sector CDO portfolio is an important
indicator of whether AIG might be required to post additional collateral in
the future. If the credit rating of these assets declines, AIG may be
required to post additional collateral. According to AIG, in most cases the
underlying assets for AIGFP’s multi-sector CDS portfolio at inception were
rated at least BBB (by S&P) or Baa (by Moody’s). As AIGFP unwinds, if
considerable portions of underlying assets of the remaining holdings in the
multi-sector CDO portfolio are downgraded below BBB ratings,
counterparties could require AIG to post additional collateral, which
would increase demands on AIG’s operating cash flows and liquid assets
and slow the completion of the unwinding of AIGFP.
As shown in figure 7, the gross notional amount of AIGFP’s multi-sector
CDOs and CDOs that had underlying assets rated less than BBB decreased
significantly. However, while the notional amount of the CDO portfolio
has continued to decrease, the amount with lower rated underlying assets
has increased slightly. The total gross notional amount dropped from
$108.5 billion to $25 billion in the fourth quarter of 2008, primarily due to
Maiden Lane III purchasing the CDOs underlying AIGFP’s CDS contracts.
At the end of the fourth quarter of 2009, the overall notional amount of the
CDOs had been reduced to about $17.9 billion, illustrating that AIGFP has
continued to unwind this portfolio. The gross notional amount with
underlying assets rated less than BBB also decreased from $26.9 billion at
the end of third quarter of 2008 to $8 billion by the end of the fourth

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GAO-10-475 Troubled Asset Relief Program

quarter of 2008 but has increased steadily since that time from about $10
billion to just more than $11 billion by the end of 2009. Consequently, of
the remaining portfolio, the percentage with underlying assets rated less
than BBB has grown to 61.8 percent of the total portfolio as of the end of
the fourth quarter of 2009 as the notional amount of the multi-sector CDOs
has continued to be reduced. This change in portfolio composition is
largely because of the successful unwinding of portfolio holdings that have
underlying assets rated BBB or above even though credit rating of the
remaining portfolio has deteriorated since the end of 2008.
Figure 7: AIGFP: Total Gross Notional Amounts of Multi-Sector Collateralized Debt Obligations Compared to Portions of
Portfolio That Has Underlying Assets that are Rated Less Than BBB, Third Quarter of 2008 through Fourth Quarter of 2009
Dollars in millions

Percentage of CDOs rated less than BBB
80

120,000
108,452

70
100,000

61.8%
60

80,000

58.7%
42.4%

50

52.5%

40

60,000
32.0%

30

24.8%

40,000

26,939

25,036

20

24,008

19,813

18,558

20,000

10,888

10,406

10,170

8,002

17,909
11,071

10
0

0
Q3
2008

Q4

Q1

Q2

Q3

Q4

2009
All other
Commercial mortgage-backed securities
Prime residential mortgage-backed securities
CDOs
Alt-A residential mortgage-backed securities
Subprime residential mortgage-backed securities
Total multi-sector CDOs (including investment grade CDOs)
Percentage of CDOs rated less than BBB
Source: GAO analysis of AIG SEC filings.

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GAO-10-475 Troubled Asset Relief Program

AIG’s Insurance
Operations Continue
to Show Signs of
Recovery, but Federal
Aid to Life Insurance
Companies Has Been
Critical to Their
Progress

Given the importance of AIG’s insurance operations to its long-term
financial health, we analyzed AIG’s insurance operations by tracking
several indicators of both its property/casualty and life insurance
companies. We tracked the annual regulatory capital of AIG’s insurance
subsidiaries. The most recent data show that in 2008 and 2009, AIG’s
insurers maintained capital above regulatory minimums, but the recent
federal assistance was critical to the health of domestic life and retirement
companies. In particular, for AIG’s life and retirement services, our
indicators of additions to and withdrawals from policyholder contracts
show that deposits are growing, and our analysis of their revenues shows
that for the year 2009 operating income from these companies increased
slightly, although dipping somewhat in the third quarter. We analyzed
AIG’s property/casualty companies by tracking their insurance premiums
written, and the trends also show slight increases. While the insurance
companies generally showed some growth, our last set of insurance
indicators shows that in the third quarter of 2009 these companies’ costs of
doing business also increased.

AIG’s Insurers Maintained
Capital Levels Higher Than
the Minimum Set By NAIC,
but the Domestic Life and
Retirement Companies
Needed Federal Assistance
to Maintain Capital Ratio

The most recent data show that capital maintained by AIG’s insurers has
exceeded NAIC minimums, and several of AIG’s life and retirement
companies have benefited from federal assistance. This indicator of AIG’s
capital—which will be updated annually as newer NAIC data become
available—is intended to monitor the capital of AIG insurers that, if
depleted by losses, could require additional capital contributions through
federal assistance (e.g., by AIG drawing on FRBNY’s Revolving Credit
Facility or Treasury’s Equity Facility). NAIC requires that insurance
companies hold a minimum amount of capital, known as risk-based
capital. According to NAIC, “a company reporting total adjusted capital of
200 percent or more of minimum risk-based capital (RBC) is a ‘no action’
level company; nothing needs to be done by regulators.” 35 On the other
hand, NAIC states that “total adjusted capital of less than 70 percent
triggers a mandatory control that requires the regulator to take steps to
place the insurer under control.” Moreover, a company’s credit ratings are
influenced by, among other things, its ratio of total adjusted capital to its
authorized control level risk-based capital. 36 Adverse movements in the

35

“Total adjusted capital” is a company’s actual amount of capital and surplus; it refers to a
company’s capital base.

36

The authorized control level risk-based capital is the level at which an insurance
commissioner can seize or first take control of an insurance company.

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GAO-10-475 Troubled Asset Relief Program

primary components of capital and shareholders’ equity may indicate
weak performance by the company.
AIG’s property/casualty insurers and domestic life insurance and
retirement services companies have maintained levels of capital higher
than the minimum requirement set by NAIC, as shown in figure 8. The
property/casualty companies and domestic life companies had adjusted
capital of at least 400 percent and 600 percent, respectively, of risk-based
capital at year end 2007, 2008, and 2009. However, the domestic life
companies were only able to maintain their capital ratios with federal
assistance. Specifically, according to Federal Reserve officials, Maiden
Lane II’s direct purchase of $39.3 billion of RMBS at fair value helped
these companies reduce the risks that were created by their securities
lending activities in 2008. Further, AIG used funds from the FRBNY
Revolving Credit Facility to contribute capital to these companies,
primarily to make up for the losses in the securities lending portfolio. 37 In
contrast, AIG’s domestic property/casualty companies have maintained
levels of adjusted capital in excess of requirements with virtually no direct
federal assistance. Because AIG companies report adjusted capital no
more than once annually in their year-end filings with NAIC, this indicator
can be updated only once a year after the calendar year-end data become
available. We determined that a proxy for quarterly tracking of the
adjusted capital is the capital and surplus that AIG reports in its quarterly
filings with NAIC because the same activities would affect both measures.
More information about this indicator and the results for the first 9 months
of 2009 is included in appendix V.

37

As discussed earlier, FRBNY created Maiden Lane II, an SPV, to provide AIG liquidity
through its purchase of residential mortgage-backed securities from AIG life insurance
companies. FRBNY provided a loan to the SPV for the purchases. It also terminated a
previously established securities lending program with AIG.

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GAO-10-475 Troubled Asset Relief Program

Figure 8: AIG Insurance Subsidiaries: Regulatory Capital at December 31, 2007; December 31, 2008; and December 31, 2009,
and Primary Activities That Affected Regulatory Capital During 2009 (dollars in millions)
Primary activities that affected capital of AIG's largest
domestic PC and life insurance retirement services companies
Net
income
or loss
Adusted capital
12/31/08

AIG’s
largest
domestic
property/
casualty
companies

12/31/08

5,464

Change in
net
deferred
income
tax

Investor
capital
contributions

Stockholder
dividendsb

459

0

0

25,295

12/31/08

12/31/07

2,374

646

5,966

-1,010

12/31/08

6,065

26,598

Aggregate
write-ins
for gains
and
losses in
surplus

2009

-1,348
12/31/07

Change in
nonadmitted
assets

12/31/09

5,966

24,092

12/31/09

Authorized control level
risk-based capital

Change in
net
realized
cap gains
and
losses

2008

24,092

3,083

2,327
-3,019

12/31/08
15,653

12/31/08

12/31/09

2,474
AIG’s
largest
domestic
life insurance/
retirement
services
companies

12/31/09

1,951

-4,623

16,537

2009

6,770
1,439

396
-1,296

12/31/07

12/31/08

12/31/07

0

0

-7,091

12/31/08

2008
23,116

20,040
15,653
2,474

2,901

N/Aa

N/Aa

N/Aa
-52

-17,602
-24,214
Source: AIG and GAO analysis of AIG financial statements filed with NAIC.
a

NAIC financial statements show unrealized capital losses separately from net income.

b

Includes dividends paid within AIG.

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GAO-10-475 Troubled Asset Relief Program

Business at AIG’s Life
Insurance and Retirement
Services Companies
Shows Deposits Improving
in Relation to Withdrawals
and Slight Increases in
Operating Income

Deposits at AIG’s life and retirement service companies have been
improving compared to withdrawals, and their operating income has
increased. We have identified two indicators to monitor AIG’s life
insurance and retirement services companies. The first indicator tracks
the additions to AIG life and retirement policyholder contract deposits and
is intended to monitor for potential redemption “runs” by AIG annuitants
and policyholders. Additions to policyholder contract deposits are
amounts customers have paid to AIG to purchase a policy or contract.
Withdrawals represent redemptions or cancellations of these instruments.
Sharp increases in contract withdrawals or reductions in contract deposits
could indicate sharply increased redemptions due to customer anxiety
about AIG in particular or insurance companies more broadly. Sharp
increases in redemptions could strain a company’s liquidity position. The
second indicator tracks the capital gains and operating income of these
companies and is intended to monitor the profitability of AIG’s life
insurance and retirement services companies. Operating income before
capital gains or losses provides an indication of the profitability of the
company’s underwriting operations, while capital gains and losses relate
to investment activities and not directly to insurance underwriting.
Increases in operating income or reductions in net realized capital losses
could indicate improvements in the operations of AIG’s life and retirement
services companies, including improvement in market conditions, lower
other-than-temporary impairments, and dissipating effects of lower credit
ratings and negative publicity related to the AIG brand since September
2008.
As shown in figure 9, in the fourth quarter of 2008 AIG life and retirement
services saw a sharp decline in additions to policyholders’ contract
deposits and a large spike in withdrawals, resulting in a gap of more than
$26 billion. Without more granular data, it is unclear whether the
withdrawals were driven by concerns about the condition of AIG or by the
overall economic downturn, which may have resulted in policyholders
cashing in policies for financial reasons. The excess of withdrawals over
deposits adversely impacted the liquidity position of certain entities within
this segment of AIG in late 2008. Conditions started to improve in the first
quarter of 2009, with a 77 percent reduction in the gap between additions
and withdrawals to about $6 billion, and that improvement continued
through the third and fourth quarters of 2009. The third quarter of 2009
was the first time since the second quarter of 2008 that additions to AIG
life and retirement policyholder contract deposits have exceeded
withdrawals, by just more than $700 million. In the fourth quarter of 2009,
withdrawals were $27 million more than deposits.

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GAO-10-475 Troubled Asset Relief Program

Figure 9: AIG Life and Retirement Services: Additions to and Withdrawals from Policyholder Contract Deposits Including
Annuities, Guaranteed Investment Contracts, and Life Products, First Quarter of 2007 through Fourth Quarter of 2009
4

Dollars in millions
27

,36

30,000

3

1
,40

8

16

89

8,2

8,1

79

01
8,6

6,9

88

10,000

7,8

10

,54

6

12

13

,96

4

14

6

,12
13

,32
12

,45
5

,88
16

0

39

,60
15

16
,4

1
,10
15

,19
14

,07

0

5

16

8
,76

14

14

15

14

15,000

,00

1

,30

9

,99

7

20,000

19

,06

3

25,000

85

0

5,000

0
Q1
2007

Q2

Q3

Q4

Q1
2008

Q2

Q3

Q4

Q1
2009

Q2

Q3

Q4

Additions to policyholder contract deposits
Withdrawals from policyholder contract deposits
Source: GAO analysis of AIG SEC filings.

A closer look at the revenues and expenses of these companies shows that
AIG’s large operating losses in 2008 were not the result of their
underwriting activities but instead were primarily caused by losses from
their investment activities. For example, in the fourth quarter of 2008, net
realized capital losses of AIG’s domestic life and retirement services
business accounted for $14.4 billion of its $15.2 billion in operating losses.
Similarly, in that same quarter, AIG’s foreign life insurance companies had
net realized capital losses of $4.6 billion, which more than offset its
operating income of $1.2 billion, resulting in an operating loss of $3.4
billion. 38 For the full year 2009, net realized capital losses were much less
than they were for 2008—$3.5 billion for the domestic companies and $1.3
billion for foreign companies. Thus, the domestic companies reported a

38

The life insurance and retirement services segment losses associated with investment
activity through its securities lending program accounted for a significant portion of AIG’s
losses in the fourth quarter of 2008. Appendix VI describes the revenues and expenses of
AIG’s life and retirement services programs in more detail.

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GAO-10-475 Troubled Asset Relief Program

smaller operating loss of $670 million and the foreign companies reported
operating income of about $1.3 billion (see appendix VI).

AIG’s Property/Casualty
Companies Premiums
Written Appear to Be
Stabilizing

For the property/casualty commercial companies, dollar volumes of
premiums written trended downward throughout 2007 and 2008, but
beginning with the first quarter in 2009, they appeared to be stabilizing. To
monitor trends in business volume in a way that includes the impact of
AIG’s financial troubles on its ongoing ability to retain existing business
and attract new business activity of AIG’s property/casualty companies,
we developed the following indicator that tracks the trends in quarterly
premiums written by these companies since the beginning of 2007.
“Premiums written” is the dollar volume of business in a particular period.
This indicator is important because AIG’s property/casualty insurance
businesses are expected to remain among AIG’s core businesses following
its restructuring. Trends in premiums written can also provide some
indication of the success of AIG’s efforts to maintain business volume. For
example, to retain and attract business, AIG formed Chartis, Inc. from
several of AIG’s property/casualty companies and rebranded (renamed)
several other AIG companies. 39 However, the volume of premiums written
indicator is limited because it only measures a business’s dollar volume
and does not break out dollar volume by new and existing business.
Therefore, the indicator cannot capture unit volume or the mix of
products that comprise the volume. Also, the indicator tracks only AIG’s
business and does not compare AIG’s business with that of its peers in the
property/casualty insurance industry. Such a comparison would be
important because property/casualty insurers as a group are subject to
market pressures that drive premium prices up and down according to an
industry-wide cycle characterized by hardening and softening markets. For
example, according to a fourth quarter 2009 survey of the Council of
Independent Agents and Brokers, commercial property/casualty premium
rates were falling in the fourth quarter 2009 at about the same rate as in
the third quarter. 40 According to the survey, low demand continued to put
pressure on the rates.

39

In July 2009, AIG announced that it had formed an SPV into which it would contribute the
equity of AIU Holdings—which included AIG’s commercial insurance, foreign general
insurance, and private client group operations—and would be called Chartis, Inc.

40

The Council of Insurance Agents and Brokers’ Quarterly Commercial P/C Market Index
Survey, fourth quarter 2009, January 22, 2010.

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GAO-10-475 Troubled Asset Relief Program

As illustrated in figure 10, the dollar volumes of premiums written by AIG’s
property/casualty commercial companies was trending down in 2007 and
2008 and stabilized somewhat in 2009. In the third quarter of 2009, these
companies’ commercial insurance premiums written exceeded $5 billion
for the first time since the third quarter of 2008 and were higher than in the
second quarter of 2009, a pattern not found when comparing the third and
second quarters of 2008 and 2007. However, by the end of the fourth
quarter of 2009 commercial premiums were just above the level earned in
the first quarter of 2009. Foreign general insurance premiums written were
also higher in the third quarter of 2009 than the second quarter, which did
not occur in 2008. However, by the end of the fourth quarter of 2009
foreign general insurance premiums written had reached their lowest level
since the fourth quarter of 2008. AIG officials had noted that in the fourth
quarter of 2008 and the first quarter of 2009, general insurance net
premiums written were also adversely affected by negative publicity
surrounding AIG’s financial challenges in other areas. When commenting
on the fourth quarter 2009 financial results, AIG’s president and chief
executive officer noted that AIG expects continued volatility in first
quarter of 2010, partly due to restructuring activities.
Figure 10: AIG General Insurance: Premiums Written by Division, First Quarter of 2007 through Fourth Quarter of 2009
Dollars in millions
7,000

6,449
5,971

6,079

5,986

6,000

5,630

5,650
5,124

4,968

5,000

5,002
4,219

4,184
4,000 3,618

4,339
3,270

3,000

3,647

Commercial
insurance

4,410

3,726
3,552

3,242

2,954

2,921

3,074

2,678

2,711
Foreign
general

2,000
Transatlantic
Personal lines

1,000

Mortgage guaranty
0
Q1
2007

Q2

Q3

Q4

Q1
2008

Q2

Q3

Q4

Q1
2009

Q2

Q3

Q4

Source: GAO analysis of AIG quarterly financial supplements.

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GAO-10-475 Troubled Asset Relief Program

Note: AIG intends to buy United Guaranty Corporation, AIG’s mortgage guaranty operations, from the
recently established AIU Holdings (Chartis, Inc.). Common shares of Transatlantic were sold during
the second quarter of 2009, reducing the aggregate ownership interest in Transatlantic to 14 percent,
and additional shares were sold in the first quarter of 2010, leaving AIG owning 1 percent of the
shares outstanding, which AIG also expects to sell. The personal lines companies were sold to a third
party on July 1, 2009. Commercial insurance will retain the private client business historically written
by the personal lines segment.

The health of AIG’s insurance companies can also be viewed from the
perspective of their operating profitability. For property/casualty insurers,
profitability can be measured using the combined ratio, which is the sum
of the loss ratio and the expense ratio. The loss ratio measures claims
costs plus claims adjustment expenses relative to net earned premiums. A
rising loss ratio indicates rising claims costs relative to the premiums
earned, which may be due to increased claims losses, decreased premiums
earned, or a combination of the two. For example, a loss ratio of 77.3
percent indicates that 77.3 cents out of every dollar in premiums earned
are used for claims and claims-related costs. The expense ratio measures
the level of underwriting administrative expenses relative to net premiums
earned and is a measure of underwriting efficiency. For example, an
expense ratio of 22.4 percent indicates that 22.4 cents out of every dollar
in premiums earned are used for underwriting expenses.
The combined ratio is an overall measure of a property-casualty insurer’s
underwriting profitability. Thus, a combined ratio of less than 100 percent
would indicate that an insurer’s underwriting is profitable and a ratio of
more than 100 percent would reflect a loss. AIG’s combined ratios in both
commercial and foreign general property-casualty insurance businesses
rose above 100 percent in the third quarter of 2009 for the first time since
the fourth quarter of 2008 and continued to rise in the fourth quarter of
2009, indicating that claims and administrative costs were higher and
rising faster than premium earned and thus their insurance underwriting
was not profitable in these two most recent quarters (see appendix VII).
However, as discussed earlier, AIG’s property/casualty insurance segment
was profitable in the third quarter of 2009 despite a combined ratio above
100 percent because positive investment returns more than offset
underwriting losses. 41 While our data cover only a 3-year period, they
suggest a pattern of loss and expense ratios rising in the latter part of
calendar years 2007, 2008, and 2009 for both commercial and foreign
general insurance. For commercial insurance the combined ratio spiked in
the fourth quarter of 2008, largely due to an administrative charge (that

41

Investment returns are not considered part of underwriting and thus are not included in
the ratios.

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GAO-10-475 Troubled Asset Relief Program

also spiked the expense ratio) to recognize permanent impairment of
goodwill of previously acquired businesses. 42 The higher combined ratio
was also partly due to a higher loss ratio because of increased claims costs
associated with Hurricane Ike and other major catastrophes in 2008. The
combined ratio also rose in the fourth quarter of 2009, and this was largely
due to increased claims costs related to a reserve strengthening charge.
Ratios for foreign general insurance also were higher in the first three
quarters of 2009 than in the comparable quarters of 2008 and 2007. AIG
officials said the foreign general loss ratio increased during 2009 primarily
because of higher claims generally related to Directors and Officers
insurance as well as professional liability insurance (Errors and Omissions
coverage) for financial institutions at the time of the worldwide credit
crisis, particularly in Europe. They also said that the foreign general
expense ratio increased because AIG sold its Brazil operations, which
resulted in decreased net premiums earned in 2008, more competitive
pricing in the insurance markets in 2009, and higher levels of general
operating expenses primarily related to remediation/audit of general
insurance (Chartis, Inc.), pension costs, and post retirement liability
costs. 43

42

Goodwill occurs when a company buys another entity and pays more than the market
value of all assets on the entity’s books. A company will pay more because of intangibles
such trademarks and copyrights on the books at historical cost and other factors—such as
human capital, brand name, and client base—that accounting conventions do not capture
on the books. If the company later determines that the entity has lost value and recovery is
not a realistic expectation it might decide record the lost value as an impairment.
43

For a more detailed discussion of the condition of AIG’s insurance operations, see
appendix VII.

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While AIG Continues
to Make Progress in
Repaying Some of Its
Federal Assistance,
the Government’s
Ability to Fully
Recoup the
Assistance Will be
Determined by AIG’s
Restructuring and
Long-term Health

We analyzed AIG’s progress in repaying its federal assistance using several
indicators. We developed an analysis of the composition of the federal
assistance to show the amount of direct and indirect assistance and the
sources of that assistance. It shows that AIG is continuing to repay its debt
to the federal government, but much of the recent progress reflects the
several exchanges of debt that AIG owed the FRBNY Revolving Credit
Facility with various issues of preferred equity. For example, we tracked
the amount of assistance available to AIG through the FRBNY Revolving
Credit Facility and the balance of the facility, and found that both were
reduced in December 2009, largely due to a transaction in which the
government received $25 billion in preferred equity in the SPVs created to
hold AIA and ALICO equity in exchange for decreasing the balance in the
Revolving Credit Facility by an equal amount, as previously discussed. We
also tracked the Maiden Lane II and Maiden Lane III portfolios and found
that their values increased slightly in the fourth quarter of 2009 while the
principal and interest owed to FRBNY continued to decline throughout
2009. We also tracked AIG’s book value (shareholders’ equity) and found
that it has been increasing, but this occurred because of the
unprecedented steps taken by the Federal Reserve and Treasury to assist
AIG. In addition, we tracked AIG’s divestiture of businesses and found that
in 2009 the company divested several of its businesses, but that activity
slowed significantly in the fourth quarter of 2009.

While the Amount of Debt
Owed to the Federal
Government Has
Continued to Decline, the
Amount of Preferred
Equity Held by the
Government Has Increased

AIG’s debt to the federal government has been reduced, and a main reason
for this is the restructuring of the composition of government assistance.
This indicator identifies the various components of federal assistance to
AIG as of December 31, 2009, or the latest available data. The U.S.
government remains committed to making available around $182 billion in
assistance to AIG. 44 Changes in the amount and composition of the federal
assistance may provide insights about the overall condition of AIG and the
extent of its reliance on federal assistance.
Based on the information provided in table 3, as of December 31, 2009, the
government had authorized $182 billion in government assistance to AIG.
Although the government’s current exposure of $129 billion is less than the
authorized amount, the exposure has increased by $8.4 billion since

44

This amount does not include AIG’s use of the Federal Reserve’s Commercial Paper
Funding Facility.

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September 2009. 45 As discussed earlier, the federal government has
provided various forms of assistance to AIG.
•

First, in the form of debt owed by AIG to the government, the government
has loaned money to AIG directly through the FRBNY Revolving Credit
Facility. As of year-end 2009, $23.4 billion of assistance was being
provided directly to AIG via a secured loan through the FRBNY Revolving
Credit Facility.

•

Second, in the form of equity shares owned by the government, the
government has a balance of $71.8 billion of AIG shares through a
combination of (1) Treasury’s Series E noncumulative preferred stock, (2)
Treasury’s Equity Capital Facility that is associated with the fixed-rate
Series F noncumulative perpetual preferred stock, and (3) the preferred
equity interest in the AIA and ALICO SPVs. This direct government
investment, which is now the primary form of federal assistance to AIG,
was the result of the November 2008 and March and April 2009
restructurings, and most recently, the December 2009 transaction in which
the Federal Reserve exchanged $25 billion of its debt for $25 billion in
preferred equity interest in AIA and ALICO SPVs. 46

•

Third, in the form of debt owed to the government on behalf of AIG, the
government has provided loans to Maiden Lane II and III—the SPVs
established by FRBNY—for the purpose of purchasing RMBS assets from
AIG’s life insurance companies and AIGFP’s CDS counterparties.
Currently, the government’s exposure on those loans is $33.9 billion.
As a result of these restructurings, the government has increased its
preferred equity interest in AIG by acquiring preferred stock in exchange
for reducing a substantial portion of AIG’s debt on the FRBNY Revolving

45

See table 5 in GAO-09-975.

46

In March 2010, AIG announced the pending sale of AIA for about $35.5 billion. AIG
expects to use approximately $16 billion in proceeds to redeem FRBNY’s preferred
interests in AIA and use approximately $9 billion to repay the FRBNY Revolving Credit
Facility. In addition, AIG announced that its board had approved the sale of AIA to
Prudential PLC by the end of 2010 for approximately $25 billion in cash and $10.5 billion in
equity securities, pending approval by regulators and stockholders. AIG intends to sell for
cash the $10.5 billion in face value of Prudential securities over time. According to AIG, all
net cash proceeds from the monetization of these securities will be used to repay any
outstanding debt under the FRBNY Credit Facility. More recently, on April 1, 2010, AIG
announced that per the terms of the Series E and F preferred stock agreements, since AIG
did not pay dividends on those series of preferred stock for four quarterly periods,
Treasury appointed two directors to the AIG board of directors.

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GAO-10-475 Troubled Asset Relief Program

Credit Facility. Moreover, in February 2010 AIG said that it was not going
to pursue the life insurance securitization transaction—originally AIG and
FRBNY announced in March 2009, when the federal assistance to AIG was
restructured for a second time, that FRBNY would loan SPVs up to $8.5
billion to acquire insurance policies of certain AIG domestic life insurance
subsidiaries. AIG had planned to use proceeds from the sale of insurance
policies to the SPV, which would have repaid its FRBNY debt from the net
cash flows they received from the life insurance policies.
Table 3: Composition of U.S. Government Efforts to Assist AIG and the Government’s Approximate Remaining Exposures, as
of December 31, 2009, or latest available date as noted
Dollars in billions
Direct AIG assistance

Indirect AIG assistance

Amount
authorized

AIG debt owed
to government

Government
equity

Revolving Credit
Facility

$35

$23.435

a

N/A

N/A

N/A

$23.435a

Maiden Lane II

22.5

N/A

N/A

$15.739b

N/A

15.739

b

Other debt owed Government
to government
equity

Total government
exposure

Federal Reserve

Maiden Lane III

30

N/A

N/A

18.159

N/A

18.159

AIA and ALICO

25

N/A

$25c

N/A

N/A

25.000

40

N/A

41.605d

N/A

N/A

41.605d

29.835

N/A

5.179

N/A

N/A

5.179

$23.435

$71.784

Treasury
Series D and E
Series F
Total direct
assistance
Total indirect
assistance
Total direct and
indirect
assistance to
benefit AIG

$95.219
$33.898

$182.335

$23.435

$71.784

$33.898

$33.898

$129.117

Source: GAO analysis of AIG SEC filings, and Federal Reserve Statistical Release H.4.1.

Note: Analysis does not include AIG’s government debt under the FRBNY Commercial Paper
Funding Facility of $4.739 billion at December 31, 2009. This facility expired for new issuances on
February 1, 2010, and will close upon maturity of all remaining commercial paper outstanding.
a

FRBNY reduced the amount of the commitment fee on the revolving credit facility by $500,000 to pay
for the Series C stock.

b

Values for the Maiden Lanes are as of December 30, 2009. Government debt shown for Maiden
Lane facilities do not include accrued interest of $265 million for Maiden Lane II and $340 million for
Maiden Lane III.

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GAO-10-475 Troubled Asset Relief Program

c

In March 2010 AIG reached agreements to sell AIA to Prudential PLC and ALICO to Met Life.
Combined proceeds are to be $31.5 billion in cash plus $19.2 billion in equity securities. Cash
proceeds and equity securities when converted to cash are to be used to buy back the $25 billion in
federal preferred equity interests and repay debt on the revolving credit facility.
d

When the Series E preferred shares were exchanged for Series D preferred shares, $1.605 billion of
accrued but unpaid dividends were included in the liquidation preference of the federal government.

As of December 30, 2009, the amount of direct assistance available to AIG
through the FRBNY Revolving Credit Facility had dropped to $35 billion,
and the amount AIG owed the facility had dropped to $23.4 billion (see
appendix VIII). Key reasons for the drop in available assistance and
outstanding balance were the November 2008 and March 2009
restructurings of the government’s assistance to the company from debt to
preferred equity. On November 25, 2008, AIG entered into an agreement
with Treasury whereby Treasury agreed to purchase $40 billion of fixedrate cumulative preferred stock of AIG (Series D) and received a warrant
to purchase approximately 2 percent of the shares of AIG’s common
stock. 47 The proceeds of this sale were used to pay down AIG’s
outstanding balance on the Revolving Credit Facility by the same amount.
This transaction left the government’s overall exposure unchanged,
allowed AIG to reduce its debt outstanding and increase the federal equity
position by $40 billion, and also involved a reduction of the borrowing
limit on the credit facility from $85 billion to $60 billion. More recently, in
December 2009 the outstanding balance and borrowing limit were further
reduced when FRBNY received preferred interests in the SPVs holding
AIA and ALICO, which was part of the March 2009 restructuring. In this
transaction the amount AIG owed on the facility was reduced by $25
billion and in exchange, FRBNY acquired preferred equity interest in the
SPVs of the same amount, which, in effect, was an exchange of debt for
equity. Also, the borrowing limit was reduced from $60 billion to $35
billion. In March 2010, AIG announced agreements to sell the AIA and
ALICO SPVs for total proceeds of $51 billion consisting of $31.5 billion in
cash and $19.2 billion in equity securities issued to AIG by the buyers.
According to AIG, it expects to close both sales later in 2010 and plans to
use the proceeds to repay federal assistance by redeeming the preferred

47

As discussed in the background section of this report, on April 17, 2009, AIG and Treasury
entered into an agreement in which Treasury agreed to exchange its $40 billion of Series D
cumulative preferred stock for $41.6 billion of Series E fixed-rate noncumulative preferred
stock in AIG. The $1.6 billion difference between the initial aggregate liquidation
preference of the Series D stock and the aggregate liquidation preference of the Series E
stock represents a compounding of accumulated but unpaid dividends owed by AIG to
Treasury on the Series D stock.

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GAO-10-475 Troubled Asset Relief Program

equity interests in the SPVs and paying down the Revolving Credit Facility.
Equity securities will be converted to cash as conditions allow, which will
be used to repay the federal assistance. Changes in amounts owed on the
facility fluctuate weekly and could increase or decrease depending on
liquidity needs related to ongoing operations and restructuring activities,
such as more conversions of debt to preferred equity. 48
We are also monitoring the status of the government’s indirect assistance
to AIG through the Maiden Lane II and Maiden Lane III facilities (see
appendix VIII). FRBNY provided loans to the facilities, giving Maiden Lane
II capital to purchase residential mortgage-backed securities from AIG’s
domestic life insurance companies and Maiden Lane III capital to purchase
multi-sector CDOs from AIGFP’s CDS counterparties. The Maiden Lane II
and Maiden Lane III portfolios were funded primarily by loans from
FRBNY, which are not debt on AIG’s books. The loans and related
expenses are to be repaid from cash generated by investment yields,
maturing assets, and sales of assets in the facilities. Such cash is to be
used to pay, in this order, operating expenses of the LLC, principal due to
FRBNY, interest due to FRBNY, principal due to AIG, and interest due to
AIG. Any remaining funds are to be shared between FRBNY and AIG. In
addition to the FRBNY investments in the facilities, AIG invested $1 billion
in Maiden Lane II and $5 billion in Maiden Lane III. The portfolio values of
the Maiden Lanes peaked in December 2008, with Maiden Lane II declining
through September 2009 but increasing in December 2009. Similarly, the
portfolio value of Maiden Lane III declined in July 2009 and values
fluctuated in September 2009 but had increased by the end of the year.
The Federal Reserve said that it plans to hold on to the Maiden Lane assets
until they mature or increase in value to a point where the Federal Reserve
can maximize the amount of money recovered through their sale. Our
analysis shows that the assets have declined in value since December
2008. Federal Reserve officials explained that the Maiden Lane assets are
amortizing and that the long term plan is for the Maiden Lanes to sell off
the portfolios’ assets, which will be used to fully repay the debt. The
Federal Reserve officials noted that the value of these assets as a percent
of the outstanding loan balance have improved between December 2008
and December 2009 and they believe that the Maiden Lanes will continue
to receive payments of principal and interest on their portfolios before

48

See appendix VIII for additional details about amounts owed under FRBNY’s Revolving
Credit Facility.

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GAO-10-475 Troubled Asset Relief Program

maturity or sale. As assets mature, are sold, or pay interest, any portion
remaining after paying operating expenses of the Maiden Lanes goes
toward the loan balance. These payments will reduce the amount of
principal owed by the Maiden Lanes to FRBNY. As of December 30, 2009,
proceeds from the Maiden Lanes had been used to pay down $9.9 billion of
the outstanding principal. 49

AIG’s Book Value
(Shareholders’ Equity) Is
Increasing, Supported by
the Unprecedented
Federal Assistance
Provided to AIG in the
Form of Both Debt and
Equity

To assess the status of AIG’s prospects for repayment of federal
assistance, we have added a new indicator to track AIG’s book value
(shareholders’ equity). A rise in book value could indicate improved
prospects for repayment. Conversely, a decrease could indicate worsening
prospects for repayment. The indicator monitors the amount of federal
assistance provided in the form of debt and equity to AIG relative to AIG’s
book value. It provides annual snapshots of AIG’s book value over several
years prior to the financial deterioration that resulted in federal assistance,
and from that point forward compares the book value to the level of
federal debt and equity assistance provided but not yet repaid on a
quarterly basis.
Figure 11 shows that AIG’s shareholders’ equity peaked in December 2006
at $101.7 billion and decreased to a low of $45.8 billion in March 2009.
Since then it has increased, and as of the end of December 2009,
shareholders’ equity had climbed to $69.8 billion, which is about $30.1
billion less than the total federal assistance on AIG’s books either as debt
owed or as preferred equity. However, as discussed earlier, AIG’s positive
shareholders’ equity currently is entirely the result of federal assistance.

49

For additional trends information on Maiden Lane II, see appendix VIII.

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Figure 11: Debt and Equity Federal Assistance Provided to AIG Compared to AIG’s Book Value (Shareholder’s Equity),
December 2004 through December 2009 and Partial Data as of March 31, 2010
Dollars in billions
120

100

4.7

12.2

11.2
1.2

15.1

9.6
3.2

25.0

80
41.6

5.2

41.6
41.6

40.0

60
101.7
95.8

86.3

40 79.7

41.6
78.1
71.2

72.7
63.0
52.7

20

25.4

69.8

58.0
40.4

45.8 47.4

44.8

41.0
23.4

25.4

0
Dec.
2004

Dec.
2005

Dec.
2006

Dec.
2007

June

Sept.

Dec.

2008

Mar.

June

Sept.

Dec.

2009

Mar.
2010

Federal Reserve Commercial Paper Funding Facility
Debt and
equity federal
assistance

Federal liquidation preferences in AIA and ALICO
Federal liquidation preference in Series F Preferred Shares
Federal liquidation preference in Series E Preferred Shares (replaced Series D shares)
Principal and interest owed to FRBNY on credit facility

Book value

AIG’s consolidated shareholders’ equity (assets minus liabilities or book values)

Source: GAO analysis of AIG SEC filings.

Note: March 31, 2010, data was not yet available for all of the factors in figure.

AIG Divested Several
Business Units in 2009 and
Announced Two Major
Agreements in March 2010

Part of AIG’s restructuring plan is for the company to sell some of its
businesses. In 2009 the company divested several of its businesses and in
March 2010 announced agreements to sell AIA and ALICO. As AIG’s
restructuring unfolds, the cash proceeds from such sales are available to
fund operations, reduce AIG’s balance on the FRBNY Revolving Credit
Facility, and redeem preferred equity interests. In order to track the
progress of this activity, we have developed an indicator to
chronologically track divestitures (or dispositions) by AIG and the terms
of such transactions, including cash proceeds. Our indicator groups the
divestitures and the related proceeds by the quarters in which the
transactions closed.

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Figure 12 shows aggregate proceeds from dispositions closed by quarter
from the quarter ending in December 31, 2008, through the quarter ending
in March 31, 2010, broken out by cash proceeds, noncash proceeds, and
proceeds with the cash portion not disclosed. AIG said that it has used the
cash proceeds from these sales to meet its obligations, including the
FRBNY Revolving Credit Facility; to cover capital needs; and to provide
loans to its subsidiaries. AIG also reported that from January 2009 through
March 31, 2010, it has entered into other agreements that have not yet
closed. These include agreements announced in March 2010 to sell AIA
and ALICO for combined total proceeds of $51 billion that will be
comprised of $31.8 billion cash and $19.2 billion in equity securities. As
noted above, and according to Treasury officials, proceeds are expected to
be used to redeem federal preferred equity interests in AIA and ALICO and
reduce the outstanding balance in the Revolving Credit Facility.
Figure 12: Proceeds from Dispositions by Quarter, Second Quarter of 2008 through
March 31, 2010
Dollars in millions
5,000

4,000
1,900
3,000

1,136

2,000
1,755

2,441

43

1,000
820

550
76

0

70

739
200

557

729

9/30/08 12/31/08 3/31/09 6/30/09 9/30/09 12/31/09 3/31/10
Proceeds with cash portion not disclosed
Cash proceeds
Noncash proceeds
Source: AIG and GAO analysis of AIG press releases and SEC filings.

As of December 31, 2009, AIG disclosed that it had received $10.3 billion in
total proceeds from sales, $5 billion of which was cash. It also showed that
proceeds were increasing each quarter through the third quarter of 2009.

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In the last quarter of 2009, AIG closed on only one sale, AIG Finance—
Hong Kong, for $627 million. AIG officials told us that in addition to this
sale, AIG signed agreements on several other transactions during this time
period that had not yet closed. The slow down in sales also may reflect the
asset disposition strategy of AIG’s current president and chief executive
officer, which has been to hold assets in hopes for a higher return rather
than to sell them quickly. 50
The unprecedented steps taken by the Federal Reserve and Treasury to
assist AIG as a result of their determination that the company posed
systemic risk to the financial system have helped stabilize AIG’s
operations. The federal assistance also appears to be facilitating a more
orderly restructuring of the company. Our panel of indicators shows that,
in general, the improvements AIG made in the second quarter of 2009
continued into the third and fourth quarters. However, the indicators also
show that AIG continues to rely heavily on federal assistance for its
liquidity needs and its equity capital structure.
Federal assistance provided to AIG has gradually shifted from debt to
equity, with a reduction in the authorized amount of the FRBNY Revolving
Credit Facility and an increase in the amount of preferred equity interests
held in AIG and various special purpose vehicles for the government.
Consequently, the government’s, and thus taxpayer’s, exposure to AIG is
increasingly tied to the success of AIG, its restructuring efforts, and its
ongoing performance. However, the sustainability of any positive trends in
AIG’s operations depends on how well it manages its business in this
current economic environment. Similarly, the government’s ability to fully
recoup the federal assistance will be determined by the long-term health of
AIG, the company’s success in selling businesses as it restructures, and
other market factors such as the performance of the insurance sectors and
the credit derivatives markets that are beyond the control of AIG or the
government. We will continue to monitor these issues in our future work.

Agency Comments
and Our Evaluation

We shared a copy of the draft of this report with the Federal Reserve,
Treasury, and AIG. They provided technical comments that are
incorporated, as appropriate.

50

For a list of dispositions, see appendix IX.

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GAO-10-475 Troubled Asset Relief Program

We are sending copies of this report to the Congressional Oversight Panel,
Financial Stability Oversight Board, Special Inspector General for TARP,
interested congressional committees and members, Treasury, the federal
banking regulators, and others. The report also is available at no charge on
the GAO Web site at http:www.gao.gov.
If you or your staffs have any questions concerning this report please
contact Orice Williams Brown at (202) 512-8678 or williamso@gao.gov.
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. GAO staff who made
major contributions to this report are listed in appendix X.

Gene L. Dodaro
Acting Comptroller General
of the U.S. Government Accountability Office

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List of Congressional Committees
The Honorable Daniel K. Inouye
Chairman
The Honorable Thad Cochran
Vice Chairman
Committee on Appropriations
United States Senate
The Honorable Christopher J. Dodd
Chairman
The Honorable Richard C. Shelby
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate
The Honorable Kent Conrad
Chairman
The Honorable Judd Gregg
Ranking Member
Committee on the Budget
United States Senate
The Honorable Max Baucus
Chairman
The Honorable Charles E. Grassley
Ranking Member
Committee on Finance
United States Senate
The Honorable David R. Obey
Chairman
The Honorable Jerry Lewis
Ranking Member
Committee on Appropriations
House of Representatives
The Honorable John M. Spratt, Jr.
Chairman
The Honorable Paul Ryan
Ranking Member
Committee on the Budget
House of Representatives

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The Honorable Barney Frank
Chairman
The Honorable Spencer Bachus
Ranking Member
Committee on Financial Services
House of Representatives
The Honorable Sander M. Levin
Acting Chairman
The Honorable Dave Camp
Ranking Member
Committee on Ways and Means
House of Representatives

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Appendix I: AIG Operations

Appendix I: AIG Operations

American International Group, Inc. (AIG) is a holding company that,
through its subsidiaries, is engaged in a broad range of insurance and
insurance-related activities in the United States and abroad. These
activities include general insurance, life insurance and retirement services,
financial services, and asset management. Figure 13, which illustrates the
AIG parent company and its subsidiaries that it directly owns, conveys the
complexity of the AIG organization. AIG’s subsidiaries are Chartis
International, LLC; AIG Life Holdings International, LLC; ALICO Holdings,
LLC; Chartis Inc.; AIG Life Holdings (United States), Inc.; AIG Capital
Corporation; AIG Financial Products Corp; and 10 other companies. AIG
comprises approximately 400 companies and has operations in more than
130 countries and jurisdictions worldwide. As of December 31, 2009, AIG
had assets of $847.6 billion and revenues of $96 billion for the 12 preceding
months. The AIG companies are among the largest domestic life insurers
and domestic property/casualty insurers in the United States, and include
large foreign general insurance and life insurance businesses.

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Appendix I: AIG Operations

Figure 13: AIG, Its Subsidiaries, and Percentage Ownership by Parent Company as of February 28, 2010
AIG Credit Facility Trust

Public shareholders

Series C preferred Stock 100%
Approx. 79.8% of voting shares

Common stock:
Approx. 20.2% of voting shares

American International Group, Inc.
Chartis International, LLC 100%
Chartis Central Europe & CIS Insurance Holdings Corporation 100%

Chartis Overseas Limited 100%
a

Chartis Ukraine Insurance Company CJSC 74.08%
UBB-AIG Insurance and Reinsurance Company JSC 40%
Russian Reinsurance Company OAO 22.50%
Chartis Africa Holdings, Inc. 100%
Chartis Kenya Insurance Company Limited 66.67%
Chartis MEMSA Holdings, Inc. 100%
AIG Hayleys Investment Holdings (Private) Ltd. 100%
CHARTIS Insurance Limited 100%

CHARTIS Greece Representation of Insurance Services S.A. 51%

}

Chartis Iraq, Inc.
CHARTIS Lebanon S.A.L.
100%
Chartis Libya, Inc.
CHARTIS Sigorta A.S.
Tata AIG General Insurance Company Limited 26%
Chartis European Insurance Investments Inc. 100%
Ascot Corporate Name Limited 100%

100%
American International Underwriters Pakistan (Private) Limited
American International Underwriters (Philippines), Inc.
American International Underwriters Kabushiki Kaisha
Arabian American Insurance Company (Bahrain) E.C.
Chartis Chile Compania de Seguros Generales S.A.
CHARTIS Cyprus Ltd
Chartis Insurance Hong Kong Limited
Chartis Insurance Company - Puerto Rico
Chartis, I.I. - Puerto Rico
Chartis Insurance Ireland Limited
Chartis Insurance Management Services (Ireland) Limited
Chartis Luxembourg Financing Limited
Chartis Insurance (Guernsey) PCC Limited
Chartis Insurance (Thailand) Company Limited
CHARTIS MEMSA Insurance Company Limited
Chartis Philippines Insurance Inc.
Chartis Regional Headquarters Southeast Asia Pte. Ltd.
Chartis Seguros Brasil S.A.
Chartis Seguros Colombia S.A.
Chartis Seguros Uruguay S.A.
CHARTIS Takaful-Enaya B.S.C. (c)
Chartis Uganda Insurance Company Limited
Chartis Vietnam Insurance Company Limited
International Adjustment Company, Ltd.
Kendall Holdings Limited
Underwriters Adjustment Company, Inc [Panama]
Universal Insurance Broker Company Limited
La Meridional Compania Argentina de Seguros S.A. 95%

AIU Insurance Company 100%

Chartis North America, Inc. 100%

}

Chartis Life South Africa Limited
Chartis South Africa Limited

HPIS Limited 100%

}

Chartis Europe, S.A. 91.32%
Chartis Building Limited
Chartis Insurance Company CJSC
Chartis Malaysia Insurance Berhad
Chartis Reinsurance Services
Chartis Romania Insurance Company, SA
Chartis UK Holdings Limited 100%

}

AIG Global Trade & Political Risk Insurance Company
AIU Insurance Company (Trinidad & Tobago) Limited
Chartis Technology and Operations Management Corporation
Chartis Far East Holdings Kabushiki Kaisha 100%
T-PEC Corporation 48.64%

100%

Chartis UK Financing Limited 100%

Chartis Insurance UK Limited 100%
AIG Germany Holding GmbH 100%
WYNONNA 1837 AG 100%
Chartis Bermuda Limited 60%

j

Chartis Uzbekinvest Limited 51%
c

Inversiones Segucasai, C.A. 50%
C.A. de Seguros American International 93.72%
Richmond Insurance Company Limited 100%

100%

Richmond Insurance Company (Barbados) Ltd. 100%

Uzbek American Insurance Company 51%

Travel Guard Group Canada, Inc.
100%
Livetravel, Inc.
AIG Egypt Insurance Company S.A.E. 95.02%

}

i

Chartis UK Sub Holdings Limited 100%

Hellas Insurance Co.S.A. 50%

Travel Guard Worldwide, Inc. 100%

h

Chartis Europe Holdings Limited 63.92%

Johannesburg Insurance Holdings (Proprietary) Limited 100%

Chartis Insurance Company China Limited
100%
Chartis Taiwan Insurance Co., Ltd.

g

Chartis Overseas Association 67%

PT Chartis Insurance Indonesia 61.01%
Chartis Seguros Guatemala,S.A. 100%

}

Chartis Fianzas Guatemala,S.A. 99.398%
100%

e

Public shareholders

American International Group, Inc.

Chartis Vida Sociedad Anonima Seguros de Personas 99.99%
American International Underwriters del Ecuador S.A. 100%

Chartis Real Estate Investors Limited 100%

AIG Credit Facility Trust

Latin American Investment Guarantee Company, Ltd. 50%
Chartis Seguros, El Salvador, Sociedad Anonima 99.99%

b

d

f

AIG Metropolitana Compania de Segurosy Reaseguros S.A. 32.06%

Shanghai Partners 87.54%

Figure continued

Page 58

GAO-10-475 Troubled Asset Relief Program

Appendix I: AIG Operations

AIG Credit Facility Trust

Public shareholders

Series C preferred Stock 100%
Approx. 79.8% of voting shares

Common stock:
Approx. 20.2% of voting shares

American International Group, Inc.
AIG Life Holdings (International) LLC 100%

P

ALICO Holdings, LLC 100%

}

American Life Insurance Company 100%

American International Reinsurance Company, Ltd. 100%
AIG Life International Limited 100%
AIG Mexico Seguros Interamericana, S.A. de C.V. 100%
AIG Cuidandotu Salud, S.A. de C.V. 100%
NanShan Life Insurance Company, Ltd. 97.57%
k

AIA Aurora LLC 99%

AIG Hayat Sigorta A.S.
ALICO (Bulgaria) ZZD, EAD
Alico Life International Limited
AHICO Elso Amerikai Magyar Biztosito Zrt.
AMSLICO AIG Life poist’ovnaa.s.
American Life Insurance Company Gestorade
Fondos y Planos de Pensiones S.A.
ALICO S.A.
ALICO Compania de Seguros de Vida S.A.
Alico Nagasaki Operation Yugen Kaisha
Communication One Kabushiki Kaisha
Financial Learning KK
First American Czech Insurance Company, A. S.

ALICO a.d.o 99.99%

x

Hellenic ALICO Life Insurance Company Ltd. 27.5%
100%

UBB-ALICO Life Insurance Company JSC 40%
ALICO Italia S.p.A. 100%
y

Agenvita S.r.l 95%
ALICO Properties, Inc. 51%

AIA Group Limited 100%

American Life Insurance Company (Pakistan) Limited 61.84%

American International Assurance Company Limited 100%

American Life and General Insurance Company
(Trinidad and Tobago) Ltd. 80.92%

AIG Edison Life Insurance Company 10%

Inversiones Inversegven, C.A. 50%

El Pacifico-Peruano Suiza Compania de
Seguros S.A. 20.1%

}

AIA Shared Services Sdn. Bhd.
LC Ventura (Tampines) Pte. Ltd. 100%
TH Central Holdings Limited
P.C.-AIA Co. Ltd. 49%

l

AIG Financial Assurance Japan K.K. 100%

Seguros Venezuela, C.A. 92.7853%
q

Inversiones Interamericana S.A. 99.99%
m

American International Data Centre Limited 84%

Philam Equitable Life Assurance Company, Inc. 95%

}

}

r

90%

ALICO Colombia Seguros de Vida, S.A. 94.99%

AMPLICO Powszechne Towarzystwo Emerytalne S.A. 50%

s

cc
dd

AIG Life International Ltd. 100%
ee
ALICO Akcioardslco Dnistvoza Zivotno Osiguranje 99.99%

n
t

Pharaonic American Life Insurance Company 74.875%

BPI-Philam Life Assurance Corporation 51%

bb

“Master-D” ZAO 100%
ZAO ALICO Insurance Company 51%

First American Polish Life Insurance and
Reinsurance Company S.A. 100%

Philam Asset Management, Inc.
100%
Philam Insurance Agency and Call Center Services, Inc.
Philamlife Tower Management Corporation 47.01%

Alico Compania de Seguros de Retiros
ALICO Compania de Seguros S.A.

aa

ALICO European Holdings Limited (Ireland) 100%

La Interamericana Compania de Seguros de Vida S.A. 100%

The Phillippine American Life & General Insurance Company 99.78%

El Pacifico Compania y Reaseguros 61.99%

z

u
AIG Mexico, Compania de Seguros de Vida, S.A. de C.V. 99.99%

American International Assurance Bhd 100%
CJSC American Life Insurance Company AIG Life 99.99%

AIA Takaful International Bhd 100%

ALICO Asigurari Romania S.A. 98%

Quality Houses Public Co., Ltd. 10.81%

v
w

American International Assurance Company (Bermuda) Limited 100%

}

AIA (Vietnam) Life Insurance Company Limited 100%
PineBridge Investments Asia Limited
PT AIA Financial 80%

o

Tata AIG Life Insurance Company Ltd. 26%
AIG Credit Facility Trust

Grand Design Development Limited 100%
Bayshore Development Group Limited 100%

Public shareholders

American International Group, Inc.

AIA Australia Limited 100%
AIA Financial Services Limited 100%
AIG Star Life Insurance Co., Ltd. 100%
CLIS K.K. 10%

Figure continued

Page 59

GAO-10-475 Troubled Asset Relief Program

Appendix I: AIG Operations

AIG Credit Facility Trust

Public shareholders

Series C preferred Stock 100%
Approx. 79.8% of voting shares

Common stock:
Approx. 20.2% of voting shares

American International Group, Inc.
Chartis Inc. 100%

AIG Life Holdings (US), Inc. 100%
AGC Life Insurance Company 100%

Chartis U.S., Inc. 100%
American Home Assurance Company 100%
Chartis Non-Life Holding Company (Japan),
Inc. 100%
Fuji Fire & Marine Insurance Company ff
Limited 18.13%

}

American Fuji Fire & Marine
Insurance Company
Fuji Life Insurance Company, Limited 100%
Fuji International Insurance Company,
Limited
New Hampshire Insurance Company 100%
Chartis Casualty Company
Granite State Insurance Company
Illinois National Insurance Co.
Morefar Marketing, Inc.

}

100%

AIG Life of Bermuda, Ltd. 100%

National Union Fire Insurance Company
of Pittsburgh, PA 100%

American General Life Insurance Of
Bermuda, Ltd. 100%

}

National Union Fire Insurance
Company of Louisiana
National Union Fire Insurance 100%
Company of Vermont
Chartis Claims, Inc.

American General Life and Accident
Insurance Company 100%

Chartis Specialty Insurance Company 70% hh
Lexington Insurance Company 70%

ii

JI Accident & Fire Insurance
Company, Ltd. 50%

American General Lilfe
Insurance Company 100%
American General Annuity
Service Corporation 100%

Chartis Select Insurance Company 100%

The Variable Annuity Life
Insurance Company 100%

Chartis Excess Limited 100%

Quartz Holdings LLC 100%

VALIC Financial Advisors,Inc. 100%

Fieldstone Securitization I LLC 100%
Graphite Management LLC 100%
Lavastone Capital LLC 100%
Audubon Insurance Company 100%
Audubon Indemnity Company 100%
The Insurance Company of the State of
Pennsylvania
Landmark Insurance Company
Chartis Property Casualty Company
Chartis Insurance Company of Canada

American General Property
Insurance Company 100%

}

100%

Commerce and Industry Insurance
Company 100%

AIG Polska Towarzystwo Ubezpiecen gg
S.A. 99.25%
Risk Specialists Companies, Inc.100%
A.I. Risk Specialists Insurance 100%

}

Design Professionals Association Risk 100%
Purchasing Group, Inc.

United Guaranty Corporation 45.88%

jj

100%
AIG Centre Capital Group, Inc.
AIG United Guaranty Agenzia di
Assicurazione S.R.L.
AIG United Guaranty Insurance (Asia) Limited
AIG United Guaranty Mortgage Insurance
Company Canada
AIG United Guaranty Re, Ltd.
AIG United Guaranty, Sociedad Limitada
United Guaranty Direct Insurance Svcs, Inc.
United Guaranty Services Inc.
United Guaranty Insurance Company
United Guaranty Mortgage Insurance Co.
United Guaranty Mortgage Insurance
Company of North Carolina
United Guaranty Partners Insurance Co.
United Guaranty Residential
Insurance Company of North Carolina

Iris Energy, LLC 44%

mm

100%
Western National Life Insurance Co.
American General Life Insurance Co.
Of Delaware
American International Life Assurance
Company of New York
The United States Life Insurance Co.
in the City of New York
Al Life Settlement, Inc. 100%
American General Assurance Company 100%
American General Indemnity Company 100%

United Guaranty Residential Insurance kk
Company 75.03%
100%
First Mortgage Insurance Company
United Guaranty Commercial
Insurance Company of North Carolina
United Guaranty Credit Insurance Company
United Guaranty Mortgage
Indemnity Company
A.I.G. Mortgage Holdings Israel, Ltd. 100%

AIG Credit Facility Trust

Public shareholders

American International Group, Inc.

E.M.I. - Ezer Mortgage Insurance
Company Ltd. 100%
AIG United Guaranty Mexico, S.A. 99.999% ll

Figure continued

Page 60

GAO-10-475 Troubled Asset Relief Program

Appendix I: AIG Operations

AIG Credit Facility Trust

Public shareholders

Series C preferred Stock 100%
Approx. 79.8% of voting shares

Common stock:
Approx. 20.2% of voting shares

American International Group, Inc.
AIG Capital Corporation 100%

AIG Financial Products Corp. 100%

AIG Global Services, Inc. 100%

AIG Global Asset Mgmt. Holdings Corp. 100%
AIG Global Real Estate Investment Corp. 100%

American International Group KK 100%
Equitable Investment Co. (Hong Kong) Ltd. 100%

} 100%

AIG Realty, Inc. 100%

Sea Insurance Co. Limited
Sea Insurance Sendirian Berhad

AIG Securities Lending Corp. 100%

AIG Israel Insurance Company 50.01%

PineBridge Global Investment LLC 100%
PineBridge Investment LLC 100%
AIG Ports America, Inc. 100%
Ports America Holdings, Inc. 100%
Ports Insurance Company, Inc. 100%
AIG Consumer Finance Group, Inc. 100%
AIG Bank Polska S.A. 99.92%
AIG Equipment Finance Holdings, Inc. 100%

}

AIG Commercial Equipment Finance, Inc. 100%
AIG Rail Services, Inc.
International Lease Finance Corporation 100%
Aircraft SPC -12, Inc. 100%
Whitney Leasing Limited 100%
Aircraft SPC -9, Inc. 100%
Sierra Leasing Ltd. 100%
AIG Credit Corp. 100%
A.I. Credit Corp. 100%
American General Finance, Inc. [IN] 100%
American Financial Services of Alabama, Inc.
[DE] 100%
American General Finance Corp. [IN] 100%
100%
American General Consumer Discount Co.
American General Financial Services
of Illinois, Inc.
American General Financial Services, Inc. [DE]
American General Financial Services, Inc. [IN]
American General Financial Services, Inc. [NC]
American General Financial Services, Inc. [OH]
American General Financial Services, Inc. [SC]
American General Financial Services, Inc. [TX]
American General Financial Services, Inc. [WA]
Merit Life Insurance Co.
Ocean Finance and Mortgages Limited
Third Street Funding LLC
Yosemite Insurance Company

MorEquity, Inc. [NV] 100%

Caravan Investment Inc. 100%
AIG Caspian Insurance Company 51% nn
100%
AIG Federal Savings Bank
AIG Funding, Inc.
AIG BG Holdings, LLC
AIG Castle Holdings, LLC
AIG Castle Holdings, II LLC
AIG Life Insurance Company (Switzerland), Ltd.
American Security Life Insurance Company, Ltd.
MG Reinsurance Limited

AIG -FP Capital Preservation Corp. 100%

100%
AIG Matched Funding Corp.
AIG -FP Matched Funding Corp.
Bishopswood Corp.
Bluewood Investment LLC
DBY One, LLC
International Investment Company
(Bermuda) Limited
NF One (Cayman) Limited
NF Seven (Cayman) Limited
Orangewood Investment LLC
Yellowwood Investment LLC

Flamebright Investment Limited 100%
Bullfinch Investments (Cayman) Limited 91%
AIGFP NZ Funding LLC 99%

Pearwood Funding Corp. 100%
Pearwood LLC 100%

AIG Financial Products (Jersey) Limited 100%

Peachwood Funding Corp. 100%

AIG -FP Investment Co. (Bermuda) Limited 100%

NF One Hundred and Twenty-Three Corp. 100%

}

AIG -FP Funding (Cayman) Limited
AIG -FP Special Finance (Cayman) Limited 100%
NF Thirteen (Cayman) Limited

AIG -FP Pinestead Holdings Corp. 100%

}

AIG International Inc. 100%

Alberti Holding Company
Cedarstead Investment Corp.
100%
Pinestead Investment Corp.
Willowgrove Finance Company Limited

AIG Clearing Corporation 100%

Dukes Corp. 100%

AIG Trading Group, Inc. 100%

AIG Kazahkstan Insurance Co., S.A. 60%
Delaware American Life Insurance Co. 100%
GBN, LLC 100%
AIG Retirement Services, Inc. 100%
SunAmerica Life Insurance Co. 100%
SunAmerica Annuity and Life
Assurance Company 100%
SunAmerica Asset Mangement Corp. 100%
SunAmerica Capital Services, Inc. 100%

}

First Sun America Life Insurance Co.
100%
SA Affordable Housing, LLC

SunAmerica Investments, Inc. 100%
SunAmerica (Cayman) Co., Ltd. 100%

Cloudview (Cayman) Limited
Cloudview 3 (Cayman) Limited
Skyview (Cayman) Limited
Skyview 3 (Cayman) Limited

}

uu

}

AIG -FP Holdings Corp. 100%
TMS Investments LLC 100%
TMS Sub LLC 100%

Heathwood Holding Corp. 21%

vv

Heathwood Corp. 100%

Lakevista Holdings Corp. 79%

oo

Lakevista Corp. 21%

pp

AIG -FP Structured Finance (Cayman) Limited 100%

DBY Twenty-four Corp. 68%

ww

Brambling Investments LLC 100%

Clarges Funding LLC 100%
Banque AIG S.A. 90%

qq

Cherrywood Investments LLC 99%

Blackcap Investments LLC 100%

rr

Avon Holdings Corp. 100%
Avon LLC 100%
Avon Financing Corp. 100%
AIG Financial Products Hong Kong Limited 100%

AIG Advisor Group, Inc. 100%

Elgibright Investment Limited 90%
Bittern Investments Corp. 100%

New California Life Holdings, Inc. 33%

Sorbier Holding Corp. 79%
Sorbier Investment Corp. 100%
Malacees LLC

NF Fifty-Eight Corp. 79%

100%

SagePoint Financial Advisors, Inc. 100%

Aurora National Life Assurance Co. 100%

tt

The AIV Limited Partnership 99%

ss
Union Excess Reinsurance Company, Ltd 100% xx

Blackbird Investments LLC 100%
AIG Credit Facility Trust

Public shareholders

AIUH LLC 100%
Chartis Holdings, Inc. 100%

American International Group, Inc.

Wilmington Finance, Inc. 100%
American General Financial Services
of America, Inc. [DE] 100%
American General Home
Equity, Inc. [DE]100%
Source: AIG.

Page 61

GAO-10-475 Troubled Asset Relief Program

Appendix I: AIG Operations

a

5.73 percent Steppe Securities, L.L.C. and 20.18 percent American International Group, Inc.

b

10 percent American Life Insurance Company, and 9.40 percent American Home Assurance
Company.
c

4.99 percent Chartis Global Management Company Limited.

d

0.602 percent American International Underwriters (Guatemala), S.A.

e

0.01 percent Chartis Latin America Investments, LLC.

f

19.72 percent Chartis Overseas Association.

g

10 percent American Home Assurance Company; 11 percent National Union Fire Insurance
Company of Pittsburgh, PA.; and 12 percent New Hampshire Insurance Company.

h

1.42 percent Chartis Luxembourg Financing Limited; 32.39 percent Chartis Overseas Limited; and
2.28 percent Chartis Bermuda Limited.

i

8.68 percent Chartis Overseas Limited.

j

40 percent American International Reinsurance Company, Ltd.

k

1 percent American International Group, Inc., Federal Reserve Bank of New York 100 percent
interest with certain rights not customary of preferred holders.
l

51 percent Rich Development Limited.

m

16 percent Chartis Insurance Hong Kong Limited.

n

3.45 percent Kapatiran Realty Corporation; 11.24 percent Perf Realty Corporation; and 6.83 percent
Philam Properties Corporation.

o

20 percent PT Asta Indah Abadi.

p

Federal Reserve Bank of New York 100 percent interest with certain rights not customary of
preferred holders.

q

0.01 percent International Technical and Advisory Services Limited.

r

10 percent International Technical and Advisory Services Limited.

s

t

50 percent American Life Insurance Company.

7.50 percent AIG Egypt Insurance Company S.A.E.

u

0.00001 percent International Technical and Advisory Services Limited.

v

0.0005 percent International Technical and Advisory Services Limited and 0.0005 percent Borderland
Investments Limited.
w

1 percent Societatea de Asigurari AIG Romania SA and 1 percent International Technical and
Advisory Services Limited.
x

0.01 percent International Technical and Advisory Services Limited.

y

5 percent American Life Insurance Company.

z

2.77 percent Chartis Overseas Limited.

aa

90 American International Reinsurance Company, Limited.

Page 62

GAO-10-475 Troubled Asset Relief Program

Appendix I: AIG Operations

bb

38.01 percent American Life Insurance Company.

cc

49 percent American Life Insurance Company.

dd

5.01 percent International Technical and Advisory Services Limited.

ee

0.01 percent International Technical and Advisory Services Limited.

ff

10.36 percent AIU Insurance Company; 2.58 percent Chartis Overseas Limited; 7.73 percent Chartis
Europe,S.A.; and 2.76 percent American Home Assurance Company.
gg

75 percent American Life Insurance Company.

hh

10 percent Chartis Property Casualty Company; and 20 percent The Insurance Company of the
State of Pennsylvania.
ii

10 percent Chartis Property Casualty Company; and 20 percent The Insurance Company of the
State of Pennsylvania.
jj

35.12 percent New Hampshire Insurance Company; and 19 percent The Insurance Company of the
State of Pennsylvania.
kk

ll

24.97 percent United Guaranty Residential Insurance Company of North Carolina.

0.001 percent United Guaranty Services, Inc.

mm

29 percent American General Life and Accident Insurance Company and 1 percent Iris Energy
Holding, L.P.
nn

49 percent American International Group, Inc.

oo

21 percent NF Fifty-One (Cayman) Limited.

pp

79 percent AIG Financial Products Corp.

qq

10 percent AIG Matched Funding Corp.

rr

1 percent AIGFP Capital Preservation Corp.

ss

tt

10 percent AIG Financial Products Corp.

1 percent AIG Financial Products Corp.

uu

21 percent NF Thirty-nine Corp.

vv

79 percent AIG Financial Products Corp.

ww

17 percent AIGFP Pinestead Holdings Corp. and 15 percent NF Seven (Cayman) Limited.

xx

Although no AIG company owns an equity interest in Union Excess, control over Union Excess may
be implied through the timing and nature of certain reinsurance commutations.

Page 63

GAO-10-475 Troubled Asset Relief Program

Appendix II: AIG’s Credit Ratings and an
Overview of Definitions of Credit Ratings

Appendix II: AIG’s Credit Ratings and an
Overview of Definitions of Credit Ratings
Credit ratings measure a company’s ability to repay its obligations and
directly affect that company’s cost of and ability to access unsecured
financing. If a company’s ratings are downgraded, its borrowing costs can
increase, capital can be more difficult to raise, business partners may
terminate contracts or transactions, counterparties can demand additional
collateral, and operations can become more constrained generally. Rating
agencies can downgrade the company’s key credit ratings if they believe
the company is unable to meet its obligations. In American International
Group, Inc.’s (AIG) case, this could affect its ability to raise funds and
increase the cost of financing its major insurance operations, and, in turn,
impede AIG’s restructuring efforts. Conversely, an upgrade in AIG’s credit
ratings would indicate an improvement in its condition and possibly lead
to lower borrowing costs and facilitate corporate restructuring.
As shown in table 4, AIG’s key credit ratings have remained unchanged
since May 2009, primarily because federal assistance has provided AIG
with needed liquidity. For example, from March 31, 2009, to December 15,
2009, AM Best, Moody’s, and Standard & Poor’s (S&P) maintained the
same credit ratings for AIG’s long-term debt and the financial strength of
its property/casualty and life insurance companies due in large part to the
Board of Governors of the Federal Reserve System and the Department of
the Treasury’s support. 1 While contributing to stable ratings thus far, the
scale of this assistance eventually may raise questions about AIG’s future
prospects if the company is not able to raise capital from private sources.
For example, because of the importance of the federal funds to AIG’s
solvency, Fitch’s lowered its ratings of AIG in several categories in May
2009. However, Fitch’s ratings have not changed since May 2009.

1

AIG’s long-term debt was rated at A-/Negative (S&P) and A3/Negative (Moody’s), and its
short-term debt was rated at A-1 (S&P) and P-1 (Moody’s). While these ratings are
described using slightly different terminology, they tend to show relative consistency in the
strength of AIG’s debt.

Page 64

GAO-10-475 Troubled Asset Relief Program

Appendix II: AIG’s Credit Ratings and an
Overview of Definitions of Credit Ratings

Table 4: Credit Ratings, as of March 31, 2009; May 15, 2009; and December 15, 2009
Credit ratinga
Rating agency

Mar. 31, 2009 May 15, 2009

Dec. 15, 2009

Potential consequences of a ratings downgrade

Debt
Long-term
AIG Financial Products Corporation (AIGFP) would have to
post collateral and termination payments. The total
obligations depend on the market and other factors at the
time of the downgrade. For example:
•
By close of business on May 22, 2009, a 1-notch, 2notch, or 3-notch downgrade from S&P and Moody’s
would have cost AIGFP $3.8 billion, $6.8 billion, or
$7.7 billion, respectively.
•
By close of business on February 17, 2010, a 1-notch,
2-notch, or 3-notch downgrade from S&P and Moody’s
would have cost AIG $1.8 billion, $1.4 billion, or $0.3
billion, respectively.
S&P

A-/negativeb
b

no change

no change

Moody’s

A3/negative

no change

no change

Fitch

A

BBB/evolving

no change

S&P

A-1 for AIG
Funding,
Curzon, and
Nightingaleb

no change

no change

Moody’s

P-1 for AIG
Fundingb

no change

no change

Fitch

F1

no change

no change

Short-term

Financial
strength

AIG affiliates in commercial paper programs (AIG Funding,
Curzon Funding LLC, and Nightingale LLC) could be
ineligible for participation in the Federal Reserve’s
Commercial Paper Funding Facility (CPFF). AIG’s
International Lease Finance Corporation lost access to
CPFF funds after an S&P downgrade on January 21,
2009. The CPFF expired for new issuances on February 1,
2010, and will close upon maturity of all remaining
commercial paper outstanding.

Further downgrades of these ratings may prevent AIG’s
insurance companies from offering products and services
or result in increased policy cancellations or termination of
assumed reinsurance contracts. A downgrade in AIG’s
credit ratings may result in a downgrade of the financial
strength ratings of AIG’s insurance subsidiaries.

Life insurer
AM Best

A/negativeb

no change

Page 65

no change

Domestic retirement services would be severely affected
by a high surrender rate and further suspension of sales in
some firms, and would suffer a significant loss of
wholesalers.

GAO-10-475 Troubled Asset Relief Program

Appendix II: AIG’s Credit Ratings and an
Overview of Definitions of Credit Ratings

Credit ratinga
Rating agency

Mar. 31, 2009 May 15, 2009

Dec. 15, 2009

Potential consequences of a ratings downgrade

S&P

A+/negative

no change

New domestic life business would be severely affected, in
several instances forcing the company to exit businesses
that serve either the high-net-worth marketplace or
businesses that are governed by trust contracts. The
company would need to continue to dedicate key
resources to retention and management of existing
relationships.

no change

Moody’s

A1/developing no change

no change

Fitch

AA-

A-/evolving

no change

AM Best

A/negativea

no change

no change

S&P

A+/negative

no change

no change

Moody’s

Aa3/negative

no change

no change

Fitch

AA-

A+/evolving

no change

P&C insurer
AIG commercial property/casualty businesses expect that
a financial strength rating downgrade would result in a loss
of approximately 50 percent of the net premiums written
and operating losses for the domestic business. For the
foreign businesses, a downgrade could cause regulators to
further strengthen operational and capital requirements.
Staff retention could become a key issue, and premiums
would deteriorate significantly.

Sources: AIG Securities and Exchange Commission (SEC) filings; S&P, Fitch, Moody’s, and AM Best press releases; and AIG.
a

Credit ratings are explained in the appendix II.

b

These are key ratings.

Moody’s, S&P, and Fitch are three of the credit rating agencies that assess
the creditworthiness of AIG. Each of the rating agencies uses a unique
rating to denote the grade and quality of the bonds being rated. Table 5
provides an overview of the ratings for Moody’s, S&P, and Fitch.

Page 66

GAO-10-475 Troubled Asset Relief Program

Appendix II: AIG’s Credit Ratings and an
Overview of Definitions of Credit Ratings

Table 5: Summary of Rating Agencies’ Ratings
Grade and Quality

Definitions

Moody’sa

S&Pb

Fitchb

Highest grade and quality

There is an extremely strong capacity to meet financial
commitments on the obligation and bonds have little
investment risk.

Aaa

AAA

AAA

High grade and quality

There is a very strong capacity to meet financial
commitment on the obligation and bonds have very little
investment risk, but margins of protection may be lower
than with the highest grade bonds.

Aa

AA

AA

Upper medium grade and
quality

There is a strong capacity to meet financial commitment on A
the obligation and the principal and interest are adequately
secured, but the bonds are more vulnerable to a changing
economy.

A

A

Medium and lower
medium grade

There are adequate protections for these obligations, but
Baa
the bonds have investment and speculative characteristics.
This group comprises the lowest level of investment grade
bonds.

BBB

BBB

Noninvestment and
speculative grades

There is little protection on these obligations and the
interest and principle may be in danger, where default may
be likely.

BB+ and
below

BB+ and
below

Ba1 and below

Source: Moody’s Investors Service, S&P’s Ratings Services, and Fitch Ratings.
a

Moody’s has numerical modifiers of 1, 2, and 3 in each rating classification from Aa to B: “1”
indicates that the issue ranks in the higher end of the category, “2” indicates a mid-range ranking, and
“3” indicates that the issue ranks in the lower end of the category.
b

S&P’s Ratings Services and Fitch Ratings: Ratings from ‘AA’ to ‘CCC’ may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.

Page 67

GAO-10-475 Troubled Asset Relief Program

Appendix III: Corporate Liquidity Available
to AIG

Appendix III: Corporate Liquidity Available to
AIG
This indicator monitors the timing of potential future demand on
American International Group, Inc.’s (AIG) liquidity posed by its debt
obligations. These liquidity measures reflect AIG’s ability to meet its cash
payment needs. A decrease in available liquidity, or an increase in debt,
could increase the risk of insolvency. Sources of available liquidity provide
an indication of how AIG obtains the funds needed to meet its obligations.
The greater the portion of current available liquidity provided by AIG’s
own operations, the less reliant they are on federal assistance.
As shown in table 6, in November 2008, the major source of AIG’s
corporate available liquidity was the Federal Reserve Bank of New York’s
(FRBNY) Revolving Credit Facility, with lesser amounts available through
the FRBNY Commercial Paper Funding Facility (CPFF) and AIG’s bilateral
facilities. Overtime, AIG’s primary source of liquidity has shifted away
from CPFF and AIG’s bilateral facilities. Starting in April 2009, AIG was
obtaining the funds needed to meet its obligations primarily from the
Department of the Treasury’s Equity Facility, which remains its primary
source of liquidity into 2010, as well as from FRBNY’s Revolving Credit
Facility.
Table 6: Amounts of Available Corporate Liquidity at November 5, 2008; February 18, 2009; April 29, 2009; July 29, 2009;
October 28, 2009; and February 17, 2010
Dollars in millions
Nov. 5,
2008

Feb. 18,
2009

Apr. 29,
2009

July 29,
2009

Oct. 28,
2009

Feb. 17,
2010

$24,000

$24,800

$17,400

20,000

$18,300

$14,000

Commercial paper under CPFF and syndicated and
bilateral facilities

5,600

753

1,940

3,493

4,872

0

Unused bank syndicated and bilateral facilities

3,820

0

0

0

0

0

AIG Cash and short term investments

0

1,100

445

407

359

287

Treasury Equity Facility

0

0

29,835

28,685

26,629

22,292

$33,420

$26,653

$49,620

$52,585

$50,160

$36,579

FRBNY Revolving Credit Facility

Total

Source: GAO analysis of AIG SEC filings.

Note: The CPFF, which became operational in October 2008, provides a liquidity backstop to U.S.
issuers of commercial paper through an SPV that purchases eligible three-month unsecured and
asset-backed commercial paper from eligible issuers using financing provided by FRBNY. Its purpose
is to enhance the liquidity of the commercial paper market.

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Appendix IV: Value of Preferred and Common
Shares of AIG

Appendix IV: Value of Preferred and Common
Shares of AIG
The value of the federal government’s common equity investment in
American International Group, Inc. (AIG) is tied to the market value of
AIG’s common shares. As a result, growth in value of the government’s
preferred equity stake depends on further growth of the value of common
shares. As shown in figure 14, the market value of AIG’s common shares
outstanding peaked in December 2006 at $186.4 billion and by June 2008,
their market value had declined to $71.1 billion. During the last two
quarters of 2008, when federal assistance was initially provided to AIG,
AIG shares further declined in value, falling to $4.2 billion by the end of
2008. On March 1, 2009, the AIG Credit Facility Trust and AIG entered into
the Series C Preferred Stock Purchase Agreement. The values of the Series
C preferred shares increased between March and September 2009 but fell
in the fourth quarter. 1

1
The federal equity investment includes federally-owned Series C preferred shares that are
convertible into 79.77 percent of total outstanding common shares. Under the terms of the
Series C preferred stock issuance, the preferred stock is convertible into AIG’s common
stock. The conversion formula provides that the trust will receive 79.77 percent of AIG’s
common stock less the percentage of common stock that may be acquired by or for the
benefit of Treasury as a result of warrants or other convertible preferred stock held by
Treasury. Treasury received a warrant to purchase 2,690,088 shares of AIG Common Stock
in connection with its purchase of Series D preferred stock, and an additional warrant to
purchase AIG common stock in connection with its purchase of Series F preferred stock.
Proceeds from the sale of the trust stock will be deposited in the U.S. Treasury General
Fund.

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Appendix IV: Value of Preferred and Common
Shares of AIG

Figure 14: Market Capitalization (Value) of AIG Outstanding Common Shares, Including Federally Owned Preferred C Shares
That Are Convertible Into 79.77 Percent AIG’s Outstanding Common Shares, December 2004 through December 2009
Dollars in millions
200,000
180,000
160,000

186,402
170,507

177,169

147,475

140,000
120,000
100,000
80,000

71,146

60,000
40,000
20,000

23,472
8,957

0
Dec.

Dec.

Dec.

Dec.

June

2004

2005

2006

2007

2008

4,223

Sept.

Dec.

15,953

10,642

12,345

2,691

3,122

5,937

4,049

March

June

Sept.

Dec.

2009

Value of preferred series C shares based on convertibility into 77.9% of common shares
Market capitalization (value) of AIG’s common shares outstanding
Source: GAO analysis of AIG’s SEC filings and Treasury Financial Reporting Position Paper 09-07.

Note: The preferred Series C shares are in a trust for the benefit of the Treasury and in this figure do
not include a warrant that is convertible into 2 percent of common shares. See GAO-09-975 for more
details on the trust.

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Appendix V: AIG Insurance Subsidiaries’
Capital and Surplus

Appendix V: AIG Insurance Subsidiaries’
Capital and Surplus
Because information on adjusted capital and related activities is only
available annually in the year-end financial statements that American
International Group, Inc. (AIG) companies file with the National
Association of Insurance Commissioners (NAIC), we can only track it
once a year. To track adjusted capital more frequently, we developed an
indicator as a proxy that tracks capital and surplus as reported in AIG’s
quarterly filings with NAIC and major activities that could deplete capital
and surplus, as well as adjusted capital. As illustrated in figure 15, capital
and surplus for the first 9 months of 2009 increased for AIG’s largest
domestic property/casualty companies and largest domestic life and
retirement services companies, and no major activities had an adverse
effect large enough to deplete capital and surplus. Similar to the results of
the adjusted capital indicator discussed in the report, these proxy results
showed that AIG’s domestic property/casualty companies did not need
additional federal assistance during the first 9 months of 2009 to boost
their regulatory capital.
Figure 15: AIG Insurance Subsidiaries: Capital and Surplus at December 31, 2008, and September 30, 2009, and Primary
Activities That Affected Them In the First Nine Months of 2009 (dollars in millions)
Primary activities that affected capital and surplus in the first nine months of 2009
Net income

Capital and surplus
12/31/08

Unrealized
capital lossesa

Net deferred
income taxes

Gains and
losses write-ins
in suprlus

-1,188

-286

785

1,012

26,787

AIG’s
largest
domestic
property/
casualty
companies

2,294

541

0
-1,329

AIG’s
largest
domestic
life insurance/
retirement
services
companies

Change in nonadmitted assets

9/30/09

25,763

Paid in capital

14,595

16,221

166

3
-144

-1,079
Source: AIG and GAO analysis of AIG financial statements filed with NAIC.
a

NAIC financial statements show unrealized capital losses separately from net income.

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Appendix VI: Revenues and Expense of AIG
Life Insurance and Retirement Services

Appendix VI: Revenues and Expense of AIG
Life Insurance and Retirement Services
The losses or gains of life insurance and retirement services may occur for
several reasons. For example, operating income before capital gains or
losses provides an indication of the profitability of a company’s
underwriting operations, while capital gains and losses relate to
investment activities not directly related to insurance underwriting.
Increases in operating income or reductions in net realized capital losses
could indicate improvements in the operations of American International
Group, Inc.’s (AIG) life and retirement services companies, including
improvement in market conditions, lower other-than-temporary
impairments, and dissipating effects of lower credit ratings and negative
publicity related to the AIG brand since September 2008.
Figure 16 provides an indicator that can be used to examine the reasons
for the profitability or losses of AIG’s life insurance and retirement
services. In 2008 the vast majority of losses incurred by AIG were not the
result of their underwriting activities but instead were caused by losses in
the investment portfolios of domestic and foreign life insurance
businesses due to severe market price declines in certain commercial
mortgage-backed securities and other securities. In subsequent quarters in
2009, AIG’s domestic life and retirement services business realized income
gains from operations partly because of Maiden Lane II’s purchase of
residential mortgage-backed securities from these companies, which
helped prevent continued liquidity strains on AIG.

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Appendix VI: Revenues and Expense of AIG
Life Insurance and Retirement Services

Figure 16: AIG Life Insurance and Retirement Services: Key Quarterly Revenues and Expenses, First Quarter of 2007 through
Fourth Quarter of 2009
Key components of operating income
Premium income and
other considerations

Interest and
dividend income

Policyholder benefits
and claims incurred

Operating income
before net realized
capital gains or losses

Net realized capital
losses or gains

Operating income
or loss

Dollars in millions
9,000
6,000
3,000
0
-3,,000
-6000

1,279

6,201

2,353

1,861

-9,,000

1,086
-2,154

-4,679

1,054

291

670

1,345

-364

-12000
-15,000
123412341234123412341234 123412341234123412341234 123412341234123412341234 123412341234123412341234 123412341234123412341234 123412341234123412341234

Quarters
Quarters
(2007-2009) (2007-2009)
Domestic
Foreign
Q4 - 2009
Source: GAO analysis of AIG’s quarterly financial supplements.

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Appendix VII: Operating Ratios for AIG’s
Property/Casualty Companies

Appendix VII: Operating Ratios for AIG’s
Property/Casualty Companies
The profitability of property/casualty insurers can be measured using the
combined ratio, which is the sum of the loss ratio and the expense ratio.
The loss ratio measures claims costs plus claims adjustment expenses
relative to net earned premiums. A rising loss ratio indicates rising claims
costs relative to the premiums, which may be due to increased claims
losses, decreased premiums revenue, or a combination of the two. The
expense ratio measures the level of underwriting administrative expenses
relative to net premiums earned and is a measure of underwriting
efficiency. The combined ratio is an overall measure of a property-casualty
insurer’s underwriting profitability. Thus, a combined ratio of less than 100
percent would indicate that an insurer’s underwriting is profitable, and a
ratio of above 100 percent would reflect an underwriting loss.
As shown in figure 17, the combined ratio for American International
Group, Inc.’s (AIG) commercial property-casualty insurance business
spiked in the fourth quarter of 2008, largely due to an administrative
charge to recognize impairment of goodwill of previously acquired
businesses. The higher combined ratio was also partly due to a higher loss
ratio because of increased claims costs associated with Hurricane Ike and
other major catastrophes in 2008. The combined ratio rose above 100
percent in the last two quarters of 2009, indicating that claims and
administrative costs were higher and rising faster than premium revenues
and thus their insurance underwriting was not profitable. The combined
ratio’s rise in the fourth quarter of 2009 was also largely due to increased
claims costs that arose because of a reserve strengthening charge AIG
made to address unexpected losses in excess casualty and excess workers’
compensation, two long-tail lines of business

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Appendix VII: Operating Ratios for AIG’s
Property/Casualty Companies

Figure 17: AIG Property/Casualty Insurance: AIG Commercial Insurance Operating Ratios, First Quarter of 2007 through
Fourth Quarter of 2009
Dollars in millions
146.87
Combined
ratio

150
133.33
120

108.96
91.23

90 86.74

83.57

96.32

68.56

82.84

73.47
66.29

74.38

90.20
78.32

74.63

79.83

84.81

64.16

43.13

30
18.18

17.28

Loss ratio
121.39

99.82

93.94

87.04

60

106.36

100.40

18.68

17.76

Q3

Q4

21.94

19.31

Q1
2008

Q2

22.08

21.92

19.99

21.55

Expense
ratio
25.48

0
Q1
2007

Q2

Q3

Q4

Q1
2009

Q2

Q3

Q4

Source: GAO analysis of AIG’s financial statements filed with SEC and quarterly financial supplements.

Note: Historical operating ratios for commercial insurance have been revised to include Private Client
Group and exclude HSB Group, Inc. The underwriting expense for the fourth quarter of 2008 includes
a $1.2 billion charge for impairment to goodwill, increasing the expense ratio by 22.50 points. Claims
related to major catastrophes were $1.4 billion in 2008, including hurricane claims of $1.1 billion in the
third quarter of 2008. Conversely, claims related to major catastrophes were $100 million in 2007.

Combined ratios for foreign general insurance were lower in the first three
quarters of 2007 and 2008 than in comparable quarters of 2009 (see fig. 18).
AIG officials attributed the higher 2009 numbers to several factors,
including increased loss ratios due to higher claim losses, particularly in
Europe, and increased expense ratios because of lower net premiums
earned that resulted from the sale of its Brazilian operations. In addition,
insurance markets becoming more competitive, and higher levels of
general operating expenses primarily related to remediation/audit of
general insurance (Chartis, Inc.), pension costs, and post retirement
liability costs contributed to the higher combined ratios in 2009. As with
AIG’s commercial insurance, the combined ratio in its foreign general
property-casualty insurance business also rose above 100 percent in the
last two quarters of 2009.

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Appendix VII: Operating Ratios for AIG’s
Property/Casualty Companies

Figure 18: AIG Property/Casualty Insurance: AIG Foreign General Insurance Operating Ratios, First Quarter of 2007 through
Fourth Quarter of 2009
Dollars in millions
120

97.19

100
86.05

90.17

85.23

79.22

103.38

100.74
90.25

89.36

111.16
Combined
ratio

95.48

83.41

80
Loss ratio
65.52

60
59.31
50.64

52.13

52.40

47.31

51.78

40
33.92

37.77

57.99

53.65

55.57

42.75
37.92

37.88

40.57

42.11

Expense
ratio
45.64

34.68

31.63

28.58

61.27
54.91

35.71

20

0
Q1
2007

Q2

Q3

Q4

Q1
2008

Q2

Q3

Q4

Q1
2009

Q2

Q3

Q4

Source: GAO analysis of AIG’s financial statements filed with SEC and quarterly financial supplements.

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Appendix VIII: Detail on AIG’s Federal
Assistance and the Repayment of that
Assistance

Appendix VIII: Detail on AIG’s Federal
Assistance and the Repayment of that
Assistance
The initial federal assistance to American International Group, Inc. (AIG)
was provided through the Federal Reserve Bank of New York’s (FRBNY)
Revolving Credit Facility. This indicator tracks the borrowing limit and the
amount owed on the facility since it was implemented. As shown in figure
19, as of December 30, 2009, the amount of direct assistance available to
AIG through the facility dropped to $35 billion, and the amount AIG owed
the facility dropped to $23.4 billion. The decreases in available assistance
and outstanding balance were attributable to the November 2008 and
December 2009 restructuring of the government’s assistance to the
company from debt to preferred equity. Changes in amounts owed on the
facility fluctuate weekly and could indicate increased liquidity needs
related to restructuring decisions. Lower balances could indicate
decreased liquidity needs, payments to the facility, and conversions to
preferred equity stakes in AIG.
Figure 19: FRBNY Revolving Credit Facility Balance Owed and Total Amount Available, October 2008 through March 2010
Dollars in millions
90,000

85,000

80,000
70,000
60,000

Borrowing limit

60,000
50,000

72,332
10/22/08

40,000

Balance

35,000

30,000
20,000
25,377
3/31/10

10,000
0
Oct.
2008

Nov.

Dec.

Jan. Feb.
2009

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.
2010

Feb.

Mar.

Sources: GAO analysis of Federal Reserve Statistical Release H.4.1 and Federal Reserve.

We also developed two indicators to monitor the status of the
government’s indirect assistance to AIG through Maiden Lane II and
Maiden Lane III. By monitoring the principal and interest owed on these
facilities, we can track FRBNY’s ongoing indirect exposure to AIG. The
Maiden Lane II and Maiden Lane III portfolios are funded primarily by
loans from FRBNY, which are not debt on AIG’s books. The loans and
related expenses are to be repaid from cash generated by investment

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Appendix VIII: Detail on AIG’s Federal
Assistance and the Repayment of that
Assistance

yields, maturing assets, and sales of assets in the facilities. In addition to
the FRBNY investments in the facilities, AIG invested $1 billion in Maiden
Lane II and $5 billion in Maiden Lane III.
FRBNY provided a loan to Maiden Lane II to purchase residential
mortgage-backed securities from AIG’s domestic life insurance companies.
As shown in figure 20, the portfolio value of Maiden Lane II peaked at $20
billion in December 2008 and was $14.8 billion at the end of September
2009. The level of debt (principal and interest) for the facility has been
reduced from a maximum of $19.5 billion to its level in December 2009 of
$16 billion.
Figure 20: Amounts Owed and Portfolio Value of Maiden Lane II
Dollars in billions
25

20

19.5

20.0

19.5

20.0
18.6 18.4

17.7

17.1

16.8

16.1
14.9

15

16.0

15.7

15.3

14.8

15.4

10

5

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

0
12/17/08

12/24/09

3/25/09

7/1/09

9/2/09

9/30/09

12/30/09

3/31/10

Principal and interest owed to FRBNY
Portfolio value
Principal and interest owed to AIG
Source: GAO analysis of weekly Federal Reserve Statistical Release H.4.1.

FRBNY also provided loans to Maiden Lane III so it could purchase multisector collateralized debt obligations from AIGFP’s credit default swaps
counterparties. As shown in figure 21, the portfolio value of Maiden Lane
III peaked at $28.2 billion in December 2008 and declined to $20.2 billion
just more than 6 months later in July 2009. The level of debt has continued
to be reduced since December 2008, and as of March 31, 2010, it stood at
$17.3 billion, which is 29 percent less than the amount owed at December
24, 2008.

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Appendix VIII: Detail on AIG’s Federal
Assistance and the Repayment of that
Assistance

Figure 21: Amounts Owed and Portfolio Value of Maiden Lane III
Dollars in billions
30

28.2

27.6

24.4

25

24.2
22.7

22.6
19.7

20

20.5

20.2

19.9

20.9

22.2

20.6
18.5
17.3

15.2

15

10

5

5.0

5.0

5.1

5.1

5.1

5.2

5.2

5.2

0
12/17/08

12/24/09

3/25/09

7/1/09

9/2/09

9/30/09

12/30/09

3/31/10

Principal and interest owed to FRBNY
Portfolio value
Principal and interest owed to AIG
Source: GAO analysis of weekly Federal Reserve Statistical Release H.4.1.

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Appendix IX: Disposition of AIG Assets

Appendix IX: Disposition of AIG Assets

Part of American International Group, Inc.’s (AIG) strategy to raise money
for repaying the federal government is to sell several of its assets. This
indicator tracks sales or dispositions that have been closed and
agreements of pending dispositions that have been publicly announced but
have not yet closed. As table 5 shows, AIG sold increasingly more of its
assets each quarter, from the last quarter of 2008 when it sold one asset for
$820 billion, to the third quarter of 2009 when it sold 12 of its assets for a
disclosed value of more than $4.5 billion (the proceeds for most of the
sales that quarter were not publicly disclosed). In the last quarter of 2009,
AIG sold only one asset—AIG Finance-Hong Kong—for $627 million. AIG
officials told us that in addition to the sale of this asset, AIG signed sales
agreements for several other transactions during this time period that had
not yet closed. As of December 31, 2009, AIG disclosed that it had received
$10.3 billion in total proceeds from sales, $5 billion of which was cash.
Most recently, AIG has announced that it has entered into agreements to
sell American International Assurance Company, Ltd (AIA) and American
Life Insurance Company (ALICO) for a combined $51 billion.
Table 7: Dispositions Closed and Agreements Announced but not yet Closed,
Second Quarter of 2008 through March 31, 2010
Dollars in millions
Dispositions closed in quarter ending

Total proceeds

September 30, 2008
N/A

N/A

December 31, 2008
Unibanco JV

$820

March 31, 2009
AIG Financial Products Energy Commodity Hedges (all cash) (part
of investment assets disposition below)
Philam Savings Bank

43

Hartford Steam Boiler ($739 million cash)

815

Spanish Solar Park (part of investment assets disposition below)
June 30, 2009
AIG Life Insurance Company of Canada (all cash)
Commodity Business (all cash)

263
15

AIG Retail Bank and AIG Card (Thailand) ($45 million cash)

540

AIG Private Bank ($253 million cash)

308

Darag

N/D

Real estate in Tokyo (all cash)

1,179

Transatlantic Holdings

1,136

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Appendix IX: Disposition of AIG Assets

Dollars in millions
Dispositions closed in quarter ending

Total proceeds

September 30, 2009
21st Century Insurance Group ($1.7 billion cash)

1,900

CFG China

N/D

Consumer finance operations in Mexico

N/D

A.I. Credit Life (all cash)

741

Investment assets—energy and infrastructure

1,900

AIG Credit Card Co (Taiwan)

N/D

CFG Thailand

N/D

AIG Systems Solution

N/D

Philam Plans

N/D

Philam Care

N/D

72 Wall Street (Manhattan office tower)

N/D

Consumer finance operations in Russia

N/D

December 31, 2009
AIG Finance-Hong Kong ($70 million cash)

627

March 31, 2010
Transatlantic Holdings, Inc.

452

portion of its asset management business

277

Total proceeds on dispositions closed

$11,016

Total known cash proceeds on closed dispositions with terms
disclosed

$5,734

Disposition agreements announced but not yet closed at March 31, 2010
Consumer finance operations in Argentina

N/D

Consumer finance operations in Colombia

N/D

Consumer finance business in Poland

N/D

Nan Shan

2,150

UGC International Canada

N/D

UGC International Israel

N/D

AIA ($25 billion cash, $8.5 billion equity linked securities $2.0 billion
preferred stock in Prudential PLC)

35,500

ALICO ($6.8 billion cash, $8.7 billion stock in Met Life)

15,500

Source: AIG and GAO analysis of AIG press releases and SEC filings.

Note: N/D means not disclosed.

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Appendix X: GAO Contact and Staff
Acknowledgments

Appendix X: GAO Contact and Staff
Acknowledgments
GAO Contact

Orice Williams Brown, (202) 512-8678 or williamso@gao.gov

Staff
Acknowledgments

In addition to the contacts named above, Karen Tremba (Assistant
Director); Farah Angersola, Tania Calhoun, Rachel DeMarcus, Lawrance
Evans, John Forrester, Marc Molino, Jennifer Schwartz, Jeremy Sebest,
and Melvin Thomas made important contributions to this report.

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Glossary of Terms

Glossary of Terms

Adjusted Basis

The net cost of an asset or security that is used to compute the gains or
loss on that asset or security. It is calculated by starting with the original
cost of an asset or security, then adding the value of any improvements,
legal fees, and assessments and subtracting the value of any accumulated
depreciation, amortization, and other losses.

Asset

An item owned by an individual, corporation, or government that provides
a benefit, has economic value, and could be converted into cash. For
businesses, an asset generates cash flow and may include, for example,
accounts receivable and inventory. Assets are listed on a company’s
balance sheet.

Book

A trader’s record or inventory of long (buy) and short (sell) positions on
securities it is holding and on orders that have been placed. A book may
hold few or several positions and a trader may have several books, which
are variously organized, such as by types of product or risk.

Capital

The value of cash, goods, and other financial resources used by a business
to generate income or make an investment. Companies can raise capital
from investors by selling stocks and bonds. Capital is often used to
measure the financial strength of a company.

Capital Market

The market for long-term funds where securities such as common stock,
preferred stock, and bonds are traded. Both the primary market for new
issues and the secondary market for existing securities are part of the
capital market.

Claims (Adjustment)
Expenses

Costs of adjusting a claim that include attorneys fees and investigation
expenses.

Collateral

Properties or other assets pledged by a borrower to secure credit from a
lender. If the borrower does not pay back or defaults on the loan, the
lender may seize the collateral.

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Glossary of Terms

Collateralized Debt
Obligations (CDO)

Securities backed by a pool of bonds, loans, or other assets. In a basic
CDO, a pool of bonds, loans, or other assets are pooled and securities are
then issued in different tranches (or slices) that vary in risk and return.

Combined Ratio

A common measure of the performance of the daily operations of an
insurance company. The ratio is calculated by adding the amount of
incurred losses and the amount of expenses incurred by the company and
dividing that combined amount by the earned premium generated during
the same period. The ratio describes the related cost of losses and
expenses for every $100 of earned premiums. A ratio below 100
percent generally indicates that the company is making underwriting profit
while a ratio above 100 percent generally means that it is paying out more
money in claims that it is receiving from premiums.

Commercial Paper

An unsecured obligation with maturities ranging from 2 to 270 days issued
by banks, corporations, and other borrowers with high credit ratings to
finance short-term credit needs, such as operating expenses and account
receivables. Commercial paper is a low-cost alternative to bank loans.
Issuing commercial paper allows a company to raise large amounts of
funds quickly without the need to register with the Securities and
Exchange Commission by either selling them directly to an investor or to a
dealer who then sells them to a large and varied pool of institutional
buyers.

Credit Default Swap (CDS)

CDS are bilateral contracts that are sold over the counter and transfer
credit risks from one party to another. The seller, who is offering credit
protection, agrees, in return for a periodic fee, to compensate the buyer,
who is buying credit protection, if a specified credit event, such as default,
occurs.

Derivative

A financial instrument, traded on- or off-exchange, the price of which
directly depends on the value of one or more underlying commodities.
Derivatives involve the trading of rights or obligations on the basis of the
underlying product, but they do not directly transfer property.

Directors and Officer
Liability Insurance

Provides coverage when a director or officer of a company commits a
negligent act or misleading statement that results in the company being
sued.

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Equity

Ownership interest in a business in the form of common stock or preferred
stock.

Errors and Omissions
Liability Insurance (or
Coverage)

Insurance protection to various professions for negligent acts or omissions
resulting in bodily injury, property damage or liability to a client.

Expense Ratio

The ratio of underwriting expenses to net premiums earned. It is a
measure of underwriting efficiency, where an increase in the ratio
represents increased expenses relative to premiums. The underwriting
expenses include the amortization of deferred policy acquisition costs
(commissions, taxes, licenses and fees, and other underwriting expenses
amortized over the policy term), and insurance operating costs and
expenses. For example, a 22.4 expense ratio indicates that 22.4 cents out
of every dollar in premiums earned are used for underwriting expenses.

Fair Value

An estimated value of an asset or liability that is reasonable to all willing
parties involved in a transaction taking into account market conditions
other than liquidation. The fair value of derivative liability, for example,
represents the fair market valuation of the liabilities in a portfolio of
derivatives. In this example, the fair value provides an indicator of the
dollar amount the market thinks the trader of the portfolio would need to
pay to eliminate its liabilities.

Goodwill (and Goodwill
Impairment)

Goodwill occurs when a company buys another entity and pays more than
the market value of all assets on the entity’s books. A company will pay
more because of intangibles—such trademarks and copyrights—on the
books at historical cost and other factors—such as human capital, brand
name, and client base—that accounting conventions do not capture on the
books. If the company later determines that the entity has lost value and
recovery is not a realistic expectation it might decide record the lost value
as an impairment.

Liability

A business’s financial obligation that must be made to satisfy the
contractual terms of such an obligation. A current liability, such as
accounts payable or wages, is a debt that is payable within 1 year, while a
long-term liability, such as leases and bond repayments, are payable over a
longer period.

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Liquidity

Measure of the extent to which a business has cash to meet its immediate
and short-term obligations. Liquidity is also measured in terms of a
company’s ability to borrow money to meet short-term demands for funds.

Loss Ratio

The ratio of claims and claims adjustment expenses incurred to net earned
premiums. For example, a 77.3 loss ratio indicates that 77.3 cents out of
every dollar in premiums earned are used to adjust and pay claims.

Mezzanine Tranche

A tranche is a piece or portion of a structured deal, or one of several
related securities that are issued together but offer different risk-reward
characteristics The mezzanine tranche is subordinated to the senior
tranche, but is senior to the equity tranche. The senior tranche is the least
risky tranche whereas the equity tranche is the first loss and riskiest
tranche.

Mortgage-Backed
Securities

Securities or debt obligations that represent claims to the cash flows from
pools of mortgage loans, such as mortgages on residential property. These
securities are issued by Ginnie Mae, Fannie Mae, and Freddie Mac, as well
as private institutions, such as brokerage firms and banks.

Notional Amount (Gross
and Net)

The amount upon which payments between parties to certain types of
derivatives contracts are based. The gross notional amount is not
exchanged between the parties, but instead represents the underlying
quantity upon which payment obligations are computed. The net notional
amount represents the maximum dollar level exposure for the portfolio.

Paid-in Capital

Paid-in capital is funds provided by investors in exchange for common or
preferred stock. Paid-in capital represents the funds raised by the business
from equity, and not from ongoing operations.

Preferred Stock
(Cumulative,
Noncumulative, etc)

A class of ownership in a corporation or stock that has characteristics of
both common stock and debt. Preferred shareholders receive their
dividends before common stockholders, but they generally do not have the
voting rights available to common stockholders.

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Retained Earnings

A calculation of the accumulated earnings of a corporation minus cash
dividends since inception.

Reverse Stock Split

A proportionate decrease in the number of shares held by stockholders
that a company generally institutes to increase the market price per share
of its stock. In a 1 for 10 stock split stockholders would own 1 share for
every 10 shares that they owned before the reverse split.

Risk-Based Capital
(Insurance)

The amount of required capital that an insurance company must maintain
based on the inherent risks in the insurer’s operations. Authorized control
level risk-based capital is the level at which an insurance commissioner
can first take control of an insurance company.

Secured/Unsecured Debt

Secured debt is debt backed or secured by a pledge of collateral.
Unsecured debt is not backed by any such pledge of collateral.

Securitization

The process of pooling debt obligations and dividing that pool into
portions (called tranches) that can be sold as securities in the secondary
market—a market where investors purchase securities or assets from
other investors. Financial institutions use securitization to transfer the
credit risk of the assets they originate from their balance sheets to those of
the investors who purchased the securities.

Shareholders’ Equity

Total assets minus total liabilities of a company, as found on a company’s
balance sheet. Shareholders’ equity is also known as owner’s equity, net
worth, or book value. The two sources for shareholders’ equity are money
that was originally invested in the company, along with additional
investments made thereafter, and retained earnings.

Soft Market

A market in which supply exceeds demand resulting in a lowering of
prices in that market. This is commonly referred to as a buyer’s market as
buyers hold much of the power in negotiating prices.

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Solvency

Minimum standard of financial health for an insurance company, where
assets exceed liabilities. In general, a solvent company is able to pay its
debt obligations as they come due.

Special Purpose Vehicle

A legal entity, such as a limited partnership that a company creates to
carry out some specific financial purpose or activity. Special purpose
vehicles can be used for a variety of purposes such as to securitize loans in
order to help spread the credit and interest rate risk of their portfolios
over a number of investors.

Trading Position

The amount of a security or commodity owned by an investor or a dealer.

Tranche

A tranche is a portion or class of a security. A security may have several
tranches, each with different risks and rates of return, among other
differences.

Treasury Stock

previously issued shares of a company that the company has purchased
back from investors.

Unrealized Gains and
Losses

A profit or loss on an investment that has not been sold. That is, an
unrealized profit or loss occurs when the current price of a security which
is still owned by the holder is higher or lower than the price the holder
paid for it.

Warrant

An options contract on an underlying asset that is in the form of a
transferable security. A warrant gives the holder the right to purchase a
specified amount of the issuer’s securities in the future at a specific price.

(250525)

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