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United States Government Accountability Office

GAO

Report to Congressional Addressees

January 2011

TROUBLED ASSET
RELIEF PROGRAM
Third Quarter 2010
Update of
Government
Assistance Provided
to AIG and
Description of Recent
Execution of
Recapitalization Plan

GAO-11-46

January 2011

TROUBLED ASSET RELIEF PROGRAM
Accountability Integrity Reliability

Highlights
Highlights of GAO-11-46, a report to
congressional addressees

Third Quarter 2010 Update of Government Assistance
Provided to AIG and Description of Recent Execution
of Recapitalization Plan

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) represents one of
the federal government’s largest
investments in a private-sector
institution since the financial crisis
began in 2008. AIG is a holding
company that, through its
subsidiaries, engaged in a broad
range of insurance and insurancerelated activities in the United
States and abroad.

Largely due to the federal assistance Treasury and the Federal Reserve
provided to AIG, as measured by several indicators, AIG’s financial condition
has generally remained relatively stable or showed signs of improvement
since GAO’s last report in April 2010. As of September 30, 2010, the
outstanding balance of the Federal Reserve and Treasury assistance to AIG
was $123.7 billion, down from $129.1 billion in December 2009 (see table).
Overall, federal assistance appears to be facilitating a more orderly
restructuring of the company.

As part of GAO’s statutory
oversight of TARP, this report
updates a set of indicators GAO
last reported in April 2010.
Specifically, GAO discusses (1)
trends in AIG’s financial condition,
(2) trends in the unwinding of AIG
Financial Products (AIGFP) and
the financial condition of AIG’s
insurance companies, and (3) the
status of the government’s
exposure to AIG. To update the
indicators, GAO primarily used
available public filings as of
September 30, 2010, and more
current publicly available
information; reviewed rating
agencies’ reports; and identified
critical activities and discussed
them with officials from Treasury,
the Federal Reserve, and AIG.
Treasury, the Federal Reserve, and
AIG provided technical comments
that GAO incorporated, as
appropriate.

View GAO-11-46 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 and its portfolio of super senior credit default swaps. Several
indicators on the status of AIG’s insurance companies illustrate that its
insurance operations are showing signs of recovery, but federal assistance has
been a critical factor. In particular, in the first three quarters of 2010, additions
to AIG life and retirement policyholder contract deposits exceeded
withdrawals and the companies’ pretax operating incomes, which increased
slightly in 2009 remained positive. AIG’s property/casualty companies have
remained stabilized.
AIG repaid some of its debt to the federal government, but a larger volume of
activity involved exchanging AIG’s debt on the revolving credit facility
(facility) with the Federal Reserve Bank of New York (FRBNY) for federally
owned preferred interests in AIG ($40 billion) and AIA Group Limited (AlA)
and American Life Insurance Company (ALICO) special purpose vehicles
(SPV) ($25 billion). 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 SPVs for the
government has increased. For example, as of September 30, 2010, the amount
of assistance available to AIG through the facility had been reduced to $29.2
billion and the amount AIG owed the facility was reduced to $20.5 billion.
Also, FRBNY’S preferred interests in the SPVs created to hold the shares of
certain foreign life insurance companies—AIA and ALICO—have increased
nearly $1 billion and the Series F stock held by Treasury has increased more
than $2 billion since December 31, 2009. Upon the execution of the
recapitalization plan on January 14, 2011, all of the government’s assistance to
AIG is now in the form of common stock and preferred interests.
Consequently, the government’s, and thus the taxpayer’s, exposure to AIG
increasingly is expected to be tied to the success of AIG, its ongoing
performance, and its value as seen by investors of AIG’s common stock. The
sustainability of any positive trends in AIG’s operations depends on how well
AIG manages its business, and the government’s ability to fully recoup the
federal assistance will be determined by the long-term health of AIG and
subject to uncertainty arising from the likelihood of future changes in general
economic, regulatory, and market conditions. GAO will continue to monitor
these issues in its future work.

United States Government Accountability Office

Highlights of GAO-11-46 (continued)
Overview of Federal Assistance Provided to AIG as of September 30, 2010
Dollar in billions
Amount of assistance
authorized
Description of the federal assistance
Implemented
Federal FRBNY created a revolving credit facility to provide a
Reserve 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 Treasury, which gives
the trust an approximately 79.75 percent voting interest
in AIG.
FRBNY created a 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 AIGFP 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 AIA and one for ALICO,
to hold the shares of certain of its foreign life insurance
businesses. On December 1, 2009, FRBNY received
preferred interests in the SPVs of $16 billion and $9
billion, respectively, in exchange for reducing debt 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 Treasury purchased Series D cumulative preferred
stock of AIG. AIG used the proceeds to pay down part
of the FRBNY 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
Total authorized (debt and equity)
Total outstanding assistance

Debt

Equity

Outstanding
balance

a

n/a

$20.470

22.5

n/a

13.656

b

30

n/a

14.638

b

n/a

25

25.955

n/a

40

41.605

n/a

29.835

7.378

$81.675

$94.835
d
$176.510

$29.175

c

Sources to repay the government
On January 14, 2011, AIG announced
that it executed the signed
recapitalization plan, which stated that
AIG is using the net cash proceeds from
the recent AIA IPO and the sale of
ALICO to MetLife to repay the FRBNY
revolving credit facility.
Proceeds from asset sales in Maiden
Lane II will be used to repay the FRBNY
loan.

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

On November 1, 2010, AIG announced
the completion of an initial public
offering of AIA on the Hong Kong Stock
Exchange that generated gross
proceeds of $20.51 billion. Also, on
November 1, 2010, AIG announced that
it had closed on the sale of ALICO to
MetLife for approximately $16.2 billion,
of which $7.2 billion is in cash. The cash
proceeds will allow AIG to fully repay
and close the revolving credit facility on
closing of the recapitalization plan.
Proceeds from dispositions of AIG
businesses and internal cash flows of
AIG.

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

$123.702

Source: GAO analysis of AIG Securities and Exchange Commission filings, Federal Reserve, and Treasury data.
a

The borrowing limit on the revolving credit facility was initially $85 billion, but was reduced to $60 billion
in November 2008 and then reduced again to $35 billion in December 2009. The facility was reduced to
$34.2 billion by March 31, 2010, to $33.728 billion by June 30, 2010, and to $29.175 billion by October
6, 2010; these reductions were attributed to repayments from proceeds obtained from the sale of
various assets and businesses. The authorized and outstanding balances ast of September 30, 2010,
shown above, include outstanding principal and exclude accrued interest and fees of $6.182 billion. The
AIG loan balance reported in the H.4.1 reflects the outstanding principal balance, capitalized interest,
unamortized deferred commitment fees, and the allowance for the loan restructuring, which was initially
recorded in July 2009.
b
Government debt shown for Maiden Lane facilities as of September 29, 2010, are principal only and do
not include accrued interest of $408 million for Maiden Lane II and $499 million for Maiden Lane III.
c
As of January 14, 2011, AIG had drawn down approximately $21 billion as part of the restructuring plan.
d
The Federal Reserve and Treasury had made $182.3 billion in assistance available as of December 31,
2009. This amount was subsequently reduced to $176.5 billion.

United States Government Accountability Office

Contents

Letter

1
Background
Federal Assistance Remains Key to Improving AIG’s Financial
Condition
AIGFP Has Continued to Unwind Its CDS Portfolio Positions and
Reduce Its Number of Full-Time Equivalent Employees
AIG’s Insurance Operations Have Continued to Show Signs of
Recovery, but Federal Aid to Life Insurance Companies Has
Been Critical to Their Progress
The Federal Government’s Exposure to AIG Has Declined and Its
Ability to Fully Recoup Its Assistance Will Be Determined by
AIG’s Long-term Health and Market Conditions
Agency Comments and Our Evaluation

55
69

Appendix I

AIG Operations

72

Appendix II

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

79

Appendix III

Corporate Liquidity Available to AIG

83

Appendix IV

Value of Preferred and Common Shares of AIG

85

Appendix V

AIG Insurance Subsidiaries’ Capital and Surplus

87

Appendix VI

Revenues and Expense of AIG Life Insurance and
Retirement Services

89

Underwriting Ratios for AIG’s Property/Casualty
Companies

92

Appendix VII

Page i

4
13
32

43

GAO-11-46 Troubled Asset Relief Program

Appendix VIII

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

95

Appendix IX

Disposition of AIG Assets

99

Appendix X

GAO Contact and Staff Acknowledgments

Glossary of Terms

102

103

Tables
Table 1: U.S. Government Efforts to Assist AIG and the
Government’s Remaining Exposure, as of September 30,
2010
Table 2: Amount of Outstanding Commercial Paper by Source,
December 31, 2007, through September 30, 2010
Table 3: Composition of U.S. Government Efforts to Assist AIG and
the Government’s Approximate Remaining Exposures, as
of September 30, 2010
Table 4: AIG’s Key Credit Ratings, March 31, 2009, through
September 30, 2010
Table 5: Summary of Rating Agencies’ Ratings
Table 6: Amounts of Available Corporate Liquidity, November 5,
2008, through and October 27, 2010
Table 7: Dispositions Closed and Agreements Announced but Not
Yet Closed, September 30, 2008, through November 30,
2010

Page ii

11
21

58
80
82
83

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GAO-11-46 Troubled Asset Relief Program

Figures
Figure 1: AIG Corporate Available Liquidity and Companywide
Debt Projections, Third Quarter of 2008 through Third
Quarter of 2010
Figure 2: AIG Trends in and Main Components of Consolidated
Shareholders’ Equity, Fourth Quarter of 2007 through
Third Quarter of 2010
Figure 3: Net Cash Flows and Changes in Cash from Operating,
Investing, and Financing Activities, from First Quarter of
2007 through Third Quarter of 2010
Figure 4: Quarterly AIG Pretax Operating Income and Loss by
Operating Segment, First Quarter of 2008 through Fourth
Quarter of 2009
Figure 5: AIG Credit Default Swap Premiums on AIG, January 2007
through November 30, 2010
Figure 6: Status of the Winding Down of AIG Financial Products
Corp., Quarterly from September 30, 2008, through
September 30, 2010
Figure 7: Net Notional Amount, Fair Value of Derivative Liability,
and Unrealized Market Valuation Losses and Gains for
AIGFP’s Super Senior (rated BBB or better) CDS
Portfolio, Third Quarter of 2008 through Third Quarter of
2010
Figure 8: Total Gross and Net Notional Amounts of Multisector
CDOs Compared to Portions of Gross National Portfolio
That Have Underlying Assets That Were Rated Less than
BBB, Third Quarter of 2008 through Third Quarter of 2010
Figure 9: Regulatory Capital for AIG Domestic Insurance
Subsidiaries and Primary Activities That Affected
Regulatory Capital during 2009
Figure 10: AIG Life and Retirement Services Additions and
Withdrawals from Policyholder Contract Deposits for AIG
Life and Retirement Services Including Annuities,
Guaranteed Investment Contracts, and Life Products,
First Quarter of 2007 through Third Quarter of 2010
Figure 11: AIG General Insurance Premiums Written by Division,
First Quarter of 2007 through Third Quarter of 2010

Page iii

18

23

27

29
32

35

39

42

45

47
50

GAO-11-46 Troubled Asset Relief Program

Figure 12: Quarterly Statutory Underwriting Ratios of AIG
(Domestic and Foreign Property/Casualty Insurance
Companies) Compared to Averages for 15 Peers and AIG’s
Property/Casualty Investment Income and Net Income as
Percents of Premiums Earned, First Quarter 2007 through
Third Quarter of 2010
Figure 13: Debt and Equity Federal Assistance Provided to AIG
Compared with AIG’s Book Value, December 2004
through September 30, 2010
Figure 14: Proceeds from Dispositions by Quarter, September 30,
2008, through November 30, 2010
Figure 15: AIG, Its Subsidiaries, and Percentage Ownership by
Parent Company as of September 1, 2010
Figure 16: Market Capitalization of AIG Outstanding Common
Shares, Including Trust-Owned Preferred C Shares That
Are Convertible into Approximately 79.75 Percent of
AIG’s Outstanding Common Shares, December 2004
through September 2010
Figure 17: AIG Domestic Insurance Subsidiaries: Capital and
Surplus at December 31, 2009, and September 30, 2010,
and Primary Activities That Affected It During the First 9
Months of 2010
Figure 18: Key Quarterly Revenues and Expenses for AIG Domestic
Life Insurance and Retirement Services Companies for
First Quarter of 2007 through Third Quarter of 2010
Figure 19: Key Quarterly Revenues and Expenses for AIG, Life
Insurance and Retirement Services Companies for AIG
Foreign Life Insurance and Retirement Services
Companies First Quarter of 2007 through Third Quarter of
2010
Figure 20: AIG Commercial Insurance Operating Ratios, First
Quarter of 2007 through Third Quarter of 2010
Figure 21: AIG Foreign General Insurance Operating Ratios, First
Quarter of 2007 through Third Quarter of 2010
Figure 22: FRBNY Revolving Credit Facility Balance Owed and
Total Amount Available, October 2008 through December
1, 2010
Figure 23: Amounts Owed and Portfolio Value of Maiden Lane II
through December 1, 2010
Figure 24: Amounts Owed and Portfolio Value of Maiden Lane III
through December 1, 2010

Page iv

54

66
68
73

86

88

90

91
93
94

96
97
98

GAO-11-46 Troubled Asset Relief Program

Abbreviations

AIA
AIG
AIGFP
ALICO
CDO
CDS
CPFF
DPW
EESA
Federal Reserve
FRBNY
IPO
NAIC
NYSE
RMBS
S&P
SEC
SIGTARP
SPV
TARP
Treasury

AIA Group Limited
American International Group, Inc.
AIG Financial Products Corp.
American Life Insurance Company
collateralized debt obligation
credit default swap
commercial paper funding facility
direct premiums written
Emergency Economic Stabilization Act of 2008
Board of Governors of the Federal Reserve System
Federal Reserve Bank of New York
initial public offering
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
Department of the Treasury

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-11-46 Troubled Asset Relief Program

United States Government Accountability Office
Washington, DC 20548

January 20, 2011
Congressional Addressees
Assistance provided to American International Group, Inc. (AIG)
represented one of the federal government’s largest investments in a
private-sector institution since the 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
(EESA), 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 avert a failure of the company and, in turn, further disruption of the
financial markets. While Treasury, the Federal Reserve Bank of New York
(FRBNY), the AIG Credit Facility Trust, AIG, and two special purpose
vehicles (SPV)—ALICO Holdings LLC and AIA Aurora LLC—recently
signed a restructuring agreement designed to enable AIG to more quickly

1

EESA, 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 EESA 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.
While the Secretary of the Treasury extended the authority provided under EESA through
October 3, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (DoddFrank Act), Pub. L. No. 111-203, 124 Stat. 1376 (2010), enacted on July 21, 2010, (1) reduced
Treasury’s authority to purchase or insure troubled assets to $475 billion and (2) prohibited
Treasury from using its authority, under EESA to incur any additional obligations for a
program or initiative unless the program or initiative already had begun before June 25,
2010.

Page 1

GAO-11-46 Troubled Asset Relief Program

repay the assistance, Treasury’s ability to recoup its investment depends
on the long-term health of AIG and a number of other factors. 2
Under our statutorily mandated responsibilities for providing timely
oversight of TARP, we are continuing to report on the federal
government’s assistance to AIG. 3 To help Congress monitor the condition
of AIG and the government’s ability to recoup its assistance to AIG, we
have developed indicators to monitor trends in AIG’s operations and the
status of repayments. Because government assistance to AIG is a
coordinated approach, in addition to providing timely reporting of
Treasury’s assistance to AIG, we also are monitoring the efforts of the
Federal Reserve. 4 In September 2009 we issued a report on the status of
government assistance to AIG where we first reported on these indicators,
which we updated that report in April 2010. 5 Since then, we have
continued to monitor the financial risk posed by AIG, its financial
condition, and the status of its repayment efforts. 6 This report provides an

2

For the signed agreement, see AIG’s 8K filing dated December 8, 2010.

3

We must report at least every 60 days on findings resulting from oversight of TARP’s
performance in meeting the purposes of EESA, 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, TARP’s
compliance with applicable laws and regulations, and other matters. 12 U.S.C. § 5226(a).
4

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 us
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 us with authority to audit Federal Reserve actions taken with
respect to three entities also assisted under TARP—Citigroup, Inc.; AIG; and the Bank of
America Corporation. It also gives us the authority to access information from entities
participating in TARP programs, such as AIG, for purposes of reviewing the performance of
TARP. Section 1109 of the Dodd-Frank Act provided us authority to review various aspects
of Federal Reserve facilities initiated in response to the financial crisis. This related work is
underway and we will issue a future report on the results.
5

See GAO, Troubled Asset Relief Program: Status of Government Assistance to AIG,
GAO-09-975 (Washington, D.C.: Sep. 21, 2009). For our previous testimony on the
assistance provided to AIG, see Troubled Asset Relief Program: Update of Government
Assistance Provided to AIG, GAO-10-475 (Washington, D.C.: Apr. 27, 2010) and Federal
Financial Assistance: Preliminary Observations on Assistance Provided to AIG,
GAO-09-490T (Washington, D.C.: Mar. 18, 2009).
6

Representatives Towns and Cummings, House Committee on Oversight and Government
Reform, and Representative Bachus, House Committee on Financial Services, asked us to
review certain Federal Reserve actions relating to its assistance to AIG. We will address
questions raised by these requests in a future report.

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GAO-11-46 Troubled Asset Relief Program

update on the AIG indicators primarily based on AIG’s latest available
public filings as of September 30, 2010, 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 and performance
of AIG’s insurance companies, and (4) the status of the government’s
exposure to AIG.
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 reports. We analyzed
AIG’s SEC filings, and any supplements for those filings, through the third
quarter of 2010. We also analyzed information from Thomson Reuters
Datastream and the National Association of Insurance Commissioners. We
obtained the most recent ratings of AIG from credit rating agencies. 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 and losses, and its credit default
swap (CDS) premiums. We also included a new indicator of AIG’s
operating, investing, and financing cash flows. To assess the unwinding of
AIGFP, we updated our indicators on AIGFP’s trading positions and
employee count and CDS portfolio. 7 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 and 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.

7

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 to compensate
the buyer in return for a periodic fee if a specified credit event, such as default, occurs.

Page 3

GAO-11-46 Troubled Asset Relief Program

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, FRBNY’s revolving credit facility balance, balances on
the Maiden Lane facilities, and AIG’s divestitures and asset dispositions. 8
We report the balances of the federal debt and equity assistance as of
September 30, 2010, because our primary source for equity data—AIG’s
10Q filing with SEC—is only available quarterly, and the 10Q report
containing more current data is not yet publicly available. We also updated
selected information to reflect the January 14, 2011, closing of AIG’s
recapitalization plan. 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 to track the performance of AIG’s insurance companies and one to
track federal assistance to AIG.
We conducted our work from May 2010 to January 2011 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 September 30, 2010,
AIG had assets of $872 billion and revenues of $19.1 billion for the three
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.

8

FRBNY created Maiden Lane II as 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. FRBNY also created Maiden Lane III as an SPV to
provide AIG liquidity through its purchase of collateralized debt obligations from AIGFP’s
counterparties in connection with termination of CDS. FRBNY again provided a loan to the
SPV for the purchases. See GAO-09-975 (starting on page 30) for more discussion on
FRBNY’s creation of these SPVs.

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GAO-11-46 Troubled Asset Relief Program

AIG Operations

Historically, AIG has issued commercial paper to help finance its
operations, but since the recent financial crisis, at the corporate level, AIG
has had to draw on other short-term funding sources. 9 For example, as of
December 31, 2007, AIG reported having $13.1 billion of commercial paper
outstanding, and as of September 30, 2010, it had none outstanding. It also
continues to be a participant (although at declining levels) 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 September 30, 2010, AIG’s total gross derivatives
assets had a fair value of $28.1 billion, of which $23.5 billion pertained to
capital markets, down from $34.5 billion and $32 billion, respectively, at
the end of 2009. 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 investments such as residential mortgage-backed
securities (RMBS). This program was the initial source of AIG’s liquidity
problems in 2008.
Federal, state, and international authorities regulate AIG and its
subsidiaries. Until recently, the Office of Thrift Supervision was the
consolidated supervisor of AIG, which was 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. 10
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. 11 These state agencies regulate the financial
solvency and market conduct of these companies, 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

9

Commercial paper refers to short-term promissory notes that are issued primarily by
corporations to finance their short-term credit needs.
10

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).
11

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

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GAO-11-46 Troubled Asset Relief Program

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
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. 12 SIGTARP’s reporting on AIG’s activities also has included
reports that focused on federal oversight of AIG compensation and efforts
to limit AIG’s payments to its counterparties. 13 The Congressional
Oversight Panel, which helps provide oversight of TARP, also issued a
report in June 2010, which reviewed the government’s actions
precipitating its assistance to AIG and identified several of its concerns
with the rescue of AIG. 14 It concluded that while the government averted a
financial collapse, it put billions of taxpayer dollars at risk, changed the
marketplace, and adversely affected the confidence of the American
people in the market.

12

SIGTARP: Office of the Special Inspector General for the Troubled Asset Relief Program:
Quarterly Report to Congress (Oct. 26, 2010); Quarterly Report to Congress (July 21, 2010);
Quarterly Report to Congress (Apr. 20, 2010); Quarterly Report to Congress (Jan. 30,
2010); Quarterly Report to Congress (Oct. 21, 2009); Quarterly Report to Congress (July 21,
2009); Quarterly Report to Congress (Apr. 21, 2009); and Initial Report to the Congress
(Feb. 6, 2009).
13

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 (Oct. 14, 2009); and Factors Affecting Efforts to Limit Payments to AIG
Counterparties (Nov. 17, 2009).
14

Congressional Oversight Panel, June Oversight Report: The AIG Rescue, Its Impact on
Markets, and the Government’s Exit Strategy (Washington, D.C., June 10, 2010).
Specifically, the panel was concerned that (1) the government did not exhaust its options
before committing $85 billion in assistance to AIG; (2) the assistance distorted the
marketplace; (3) some banks displayed a conflict in interest by acting at various times as
advisors to, potential rescuers of, and counterparties with AIG; (4) AIG may not repay
taxpayers for the assistance they provided; and (5) the AIG bailout may be seen as setting a
precedent by implicitly guaranteeing “too big to fail” firms.

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

In September 2008, the Federal Reserve, 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. 15 Consequently, the Federal Reserve and Treasury took
steps to help 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 AIG in
September 2008 and subsequently modified and amended 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 the value and market liquidity of the RMBS assets
that comprised to collateral for its securities lending operation and
declining values of collateralized debt obligations (CDO) against which
AIGFP had written CDS protection. 16 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.

15

In our March 2009 testimony on credit default swaps, we noted that no single definition
for systemic risk exists. 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).

16

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

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The Federal Reserve and
Treasury Took 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. 17 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. As of September 30, 2010, the amount
of assistance to available AIG through the FRBNY facility had declined by
about $5.8 billion from December 31, 2009 because of mandatory
prepayments that reduced the amount available under the facility,
lowering the amount of federal assistance available to AIG to $176.5
billion.
In late 2008, 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 balance from the
revolving credit facility. The limit on the facility also was 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 SPVs. AIG created both SPVs to hold the
outstanding common stock of two life insurance company subsidiaries—
American Life Insurance Company (ALICO) and AIA Group Limited (AIA).
FRBNY’s preferred interests, which were valued at $25 billion in June
2010, are an undisclosed percentage of the fair market value of ALICO and
AIA as determined by FRBNY. On March 1, 2010, AIG announced that its

17

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. The independent trust would manage the Treasury’s
beneficial interest in preferred shares (Series C) of AIG. The Series C stock is convertible
into approximately 79.75 percent of the issued and outstanding shares of common stock of
AIG.

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board had approved the sale of AIA to Prudential PLC. The ultimate
disposition is discussed later in the report.
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
to create an RMBS facility—Maiden Lane II LLC—to purchase RMBS
assets from AIG’s U.S. securities lending 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 September 29, 2010, Maiden Lane II owed $14.1 billion
in principal and interest to FRBNY, down from $16 billion in December
2009.
In addition, on November 10, 2008, FRBNY announced plans to create a
separate facility—Maiden Lane III LLC—to purchase multisector 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, 2008, 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 September 29, 2010, Maiden Lane III owed $15.1
billion in principal and interest to FRBNY, down from $18.5 billion in
December 2009.

18

A multisector CDO is a CDO backed by a combination of corporate bonds, loans, assetbacked securities, or mortgage-backed securities.
19
AIGFP sold CDS on multisector 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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When the Maiden Lanes were created, FRBNY officials said that the
FRBNY loans to Maiden Lane II and Maiden Lane III were both expected
to be repaid with the proceeds from the interest and principal payments or
liquidation of the assets in the facilities. The repayment is to occur through
cash flows from the underlying securities as they were paid off.
Accordingly, the Federal Reserve did 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.
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 was no longer
pursuing this life insurance securitization transaction with FRBNY.
Treasury also has 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.
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

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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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.
As AIG draws on the equity capital facility, the aggregate liquidation
preference of the Series F stock is adjusted upward. 21 As of September 30,
2010, AIG had drawn down about $7.4 billion of the commitment, up from
$5.2 billion in December 2009. 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 September 30, 2010.
Table 1: U.S. Government Efforts to Assist AIG and the Government’s Remaining Exposure, as of September 30, 2010
Dollars in billions
Description of the federal
assistance

Amount of assistance
authorized
Debt

Equity

Outstanding
balance

$29.175a

n/a

$20.470

Sources to repay the
government

Federal Reserve
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 gives the trust an
approximately 79.75 percent voting
interest in AIG.

On January 14, 2011, AIG
announced that it executed the
signed recapitalization plan,
which stated that AIG is using
the net cash proceeds from the
recent AIA IPO and sale of
ALICO to MetLife to repay the
FRBNY credit facility.

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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Dollars in billions
Amount of assistance
authorized

Sources to repay the
government

Debt

Equity

Outstanding
balance

22.5

n/a

13.656b

Proceeds from asset sales,
asset maturities, and interest
will be used to repay the
FRBNY loan.

FRBNY created an SPV called Maiden
Lane III to provide AIG liquidity by
purchasing CDOs from AIGFP’s
counterparties in connection with the
termination of CDS. FRBNY again
provided a loan to the SPV for the
purchases.

30

n/a

14.638b

Proceeds from asset sales,
asset maturities, and interest
will be used to repay the
FRBNY loan.

AIG created two SPVs (AIA and ALICO) to
hold the shares of certain of its foreign life
insurance businesses. On December 1,
2009, FRBNY received preferred equity
interests in the SPVs of $16 billion and $9
billion, respectively, in exchange for
reducing debt that 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.

n/a

$25

25.955

On November 1, 2010 AIG
announced the completion of an
initial public offering of AIA on
the Hong Kong Stock Exchange
that generated gross proceeds
of $20.51 billion. Also, on
November 1, 2010, AIG
announced that it had closed on
the sale of ALICO to MetLife for
approximately $16.2 billion ($7.2
billion in cash, plus $9 billion in
MetLife securities). Cash
proceeds will allow AIG to fully
repay and close the revolving
credit facility on closing of the
recapitalization plan.

n/a

40

41.605

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

Description of the federal
assistance
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.

Treasury
Treasury purchased Series D cumulative
preferred stock of AIG. AIG used the
proceeds to pay down part of the FRBNY
revolving credit facility. Series D stock was
later exchanged for Series E
noncumulative preferred stock. Unpaid
dividends ($1.605 billion) on the Series D
shares were added to the principal amount
of Series E stock that Treasury received.

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Dollars in billions
Amount of assistance
authorized
Debt

Equity

Outstanding
balance

n/a

29.835

7.378c

$81.675

Description of the federal
assistance

$94.835

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

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

$176.510d

Total authorized (debt and equity)
Total outstanding assistance

$123.702
Sources: GAO analysis of AIG SEC filings, Federal Reserve, and Treasury data.
a

The borrowing limit on the revolving credit facility was initially $85 billion, reduced to $60 billion in
November 2008, and reduced to $35 billion in December 2009. The facility was reduced to $34.2
billion by March 31, 2010, to $33.728 billion by June 30, 2010, and to $29.175 billion by October 6,
2010; these reductions were attributed to repayments from proceeds obtained from the sale of
various assets and businesses. The authorized outstanding balances as of September 30, 2010
shown above include principal and exclude accrued interest and fees of $6.182 billion. The AIG loan
balance reported in the H.4.1 reflects the outstanding principal balance, capitalized interest,
unamortized deferred commitment fees, and the allowance for the loan restructuring, which was
initially recorded in July 2009.

b

Government debt shown for the Maiden Lane facilities as of September 29, 2010, are principal only
and do not include accrued interest of $408 million for Maiden Lane II and $499 for Maiden Lane III.

c

As of January 14, 2011, AIG had drawn down approximately $21 billion as part of the restructuring
plan.
d

The Federal Reserve and Treasury had made $182.3 billion in assistance available as of December
31, 2009. This amount was subsequently reduced to $176.5 billion.

Federal Assistance
Remains Key to
Improving AIG’s
Financial Condition

As of the third quarter of 2010, AIG’s financial condition has remained
relatively stable or slightly improved as measured by several indicators
since we last reported on AIG’s indicators in April 2010. 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. This improvement is 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 fairly stable through the third quarter of 2010 in
large part because government support has continued to fill AIG’s shortterm capital needs and allowed AIG to meet its payment obligations.
Similarly, AIG’s level of available corporate liquidity has remained fairly

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stable, although the FRBNY revolving credit facility and Treasury’s equity
capital facility continue to be its primary sources of working capital. While
the company’s long-term goal is to rely on private sector sources of
liquidity and its own operations instead of the government, AIG remains
heavily reliant on federal assistance to meet its liquidity needs. Trends and
the level of AIG’s consolidated shareholders’ equity—generally, a
company’s total assets minus total liabilities—improved in 2009 and
remained fairly stable in the first nine months of 2010. While federal
assistance largely drove the improvements, AIG’s performance also has
contributed to the improvements in its equity position. While our new
indicator of AIG’s cash flows shows that the company’s net cash flows
from operating, investing, and financing activities have been improving,
AIG remains dependent on federal assistance for liquidity. 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 shareholders’ equity, remains unclear. Further,
measures of AIG’s operating income and losses illustrate 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 third and fourth quarters.
However, these losses were smaller than the operating losses experienced
in 2008. During the first three quarters of 2010 AIG generated income from
continuing operations that was more than offset by larger losses from
discontinued operations. Finally, trends in CDS premiums on AIG showed
that the downward-trending and stabilizing prices offered for credit
protection on AIG that began in May 2009 has continued through
November 2010.

AIG’s Credit Ratings
Remained Fairly Stable
from December 2009
through September 2010

Ratings of AIG’s debt and financial strength by various credit rating
agencies have either remained unchanged or improved slightly from
December 2009 through September 2010, 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

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operations, and, in turn, impede its 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
improvement in its condition and possibly lead to lower borrowing costs
and facilitate corporate restructuring.
While some of AIG’s key credit ratings declined in 2009 and early 2010,
overall, they have remained unchanged or improved slightly since
December 2009. 22 For example, from December 2009 to March 31, 2010, all
four of the major rating agencies maintained the same credit ratings for
AIG’s long-term and short-term debt due in large part to Federal Reserve
and Treasury support. 23 Over this same period, AM Best and Standard and
Poor’s (S&P) also maintained their same ratings for the financial strength
of AIG’s property/casualty and life insurance companies, while Moody’s
lowered their life insurer ratings from “A1/developing” to “A1/negative.”
Also, Fitch placed AIG’s U.S. property/casualty companies on “rating
watch negative.” This occurred in February 2010 because of its concerns
about AIG’s reserve adequacy and the underlying profitability of its
casualty businesses. The downgrade followed AIG’s disclosure of the
company’s fourth quarter 2009 results, which included a $2.3 billion pretax
increase in reserves in its domestic property/casualty companies for prior
accident years. However, in early July 2010, Fitch reviewed all of AIG’s
ratings, affirmed those ratings; revised the rating outlook to “stable” from
“evolving,” removed the property/casualty companies from “rating watch
negative;” and reassigned them as “stable outlook.” Fitch’s ratings of AIG
have remained unchanged since then. In April 2010, S&P affirmed its
ratings of AIG and maintained their negative outlook, reflecting its view of
the challenges AIG faces in sustaining the performance of its insurance
operations and capitalizing its life insurance businesses. S&P’s ratings also

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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have remained unchanged. Moody’s, however, as of September 2010,
placed AIG’s short-term ratings on review for possible downgrade. While
contributing to stable ratings thus far, the level of the federal assistance
eventually may raise questions about AIG’s future prospects if the
company is not able to raise capital from private sources. The importance
of AIG’s forthcoming credit ratings is underscored by the recent
recapitalization and restructuring plan; one of the conditions for
recapitalization is that the financial condition of AIG; the primary
insurance companies of Chartis, Inc.; and the primary insurance
companies of SunAmerica Financial Group, taking into account the
recapitalization and the ratings profile of these companies, are to be
reasonably acceptable to FRBNY, Treasury, the AIG Credit Facility Trust,
and AIG. But there are no assurances that AIG and its subsidiaries will
meet this condition.
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 life-insurer 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 financial strength
ratings for property/casualty have helped hold down any significant losses
in net premiums written and operating losses.

Federal Assistance
Continues to Allow AIG to
Maintain a Steady Level of
Liquid Assets and Debt
Projections Remain Stable

Since the fourth quarter of 2008, federal assistance has provided AIG with
a stable source of liquidity, and projections of debt 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

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.

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how AIG obtains the funds needed to meet its obligations. The third
indicator 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
companywide 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. 25
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 a portion of 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. 26
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 CPFF.

25

CPFF, a Federal Reserve emergency facility that became operational in October 2008 and
closed in February 2010, provided a liquidity backstop to U.S. issuers of commercial paper
through an SPV that purchased eligible 3-month unsecured and asset-backed commercial
paper from eligible issuers using financing provided by FRBNY. Its purpose was to enhance
the liquidity of the commercial paper market.

26

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-11-46 Troubled Asset Relief Program

Figure 1: AIG Corporate Available Liquidity and Companywide Debt Projections, Third Quarter of 2008 through Third Quarter
of 2010
Dollars in millions
Corporate
available
liquidity
(as of date)

Q3 - 2008

$33,420
(11/5/08)

Companywide debt maturing in:
2009

2010

$28,057

$62,960
Federal Reserve
facility (FRF)

2011

2012

26,653
(2/18/09)

$14,517

$13,230

Q2 - 2009

Q3 - 2009

58,193
21,581

17,492

15,212

9,865

40,431
FRF
8,861

17,741

16,999

15,080

9,598

47,405
FRF
8,430

17,204

15,355

9,786

44,816
FRF
8,575

16,413

10,317

49,620
(4/29/09)

50,559

50,519

50,574
19,815

36,679
(2/17/10)
16,310

10,289

23,435
FRF
8,870

10,029

27,400
FRF
9,089

12,029

26,457
FRF
8,881

9,808

20,470
FRF
6,446

33,674
(4/28/10)

3,461

3,370

53,442
13,495

15,910

37,081
(7/28/10)

3,464

57,378
0

Q3 - 2010

41,009
FRF
8,957

49,886
19,432

0

Q2 - 2010

3,264

50,160
(10/28/09)

0

Q1 - 2010

$3,151

52,585
(7/29/09)

7,643

Q4 - 2009

Thereafter

$10,756

13,809

Q1 - 2009

2014

$61,882

21,690

Q4 - 2008

2013

8,720

13,180

37,394
(10/27/10)

3,379

53,899
0

4,283

10,336

4,208

Source: GAO analysis of AIG SEC filings.

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GAO-11-46 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.

By February 2010, the amount of corporate liquidity available to AIG had
fallen to $36.6 billion, largely because the borrowing limit on the revolving
credit facility was reduced in December 2009 by $25 billion (from $60
billion to $35 billion) as part of the transfer of AIA and ALICO into two
SPVs in which FRBNY received preferred interests. 27 Over this same
period, the amount of company-wide debt stabilized as well, due to
restructuring and deleveraging activity. From February to October 2010,
the amount of corporate available liquidity has remained relatively
constant. These trends suggest that since late 2008, the Federal Reserve’s
actions have been critical for AIG’s solvency. The amount of AIG debt to
mature in 2014—about $4.2 billion—will be about 35 percent lower than
the $6.4 billion of debt to mature in 2013, the year in which the FRBNY
revolving credit facility expires. 28
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. 29 Beginning in October 2008,
AIG’s primary source of funds shifted from private sector sources to the
FRBNY revolving credit facility and the CPFF. This changed beginning in
2009 when the CPFF and AIG’s bilateral facilities and cash and short-term
investments became secondary sources of liquidity and Treasury’s equity
capital facility became a primary source of funds for AIG. From February
2010 through the third quarter of 2010, the only nonfederal sources of
corporate liquidity available to AIG have been cash and short-term
investments, and as of October 27, 2010, that amount was $515 million, a

27

In this transaction, FRBNY received preferred interests valued at $25 billion, and in
exchange the debt AIG owed to the FRBNY revolving credit facility was lowered by an
equivalent amount.
28

On September 30, 2010, AIG, Treasury, FRBNY, and the AIG Credit Facility Trust agreed
in principle to a plan that would recapitalize AIG and in the process require that AIG repay
the FRBNY revolving credit facility.

29

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.

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GAO-11-46 Troubled Asset Relief Program

fraction of the $36.9 billion available through the FRBNY and Treasury
facilities. However, the need for corporate level liquidity has lessened as
key AIG subsidiaries have stabilized or improved and accessed the capital
markets. And on November 30, 2010, AIG re-entered the long-term debt
market, issuing $2 billion in notes, the proceeds of which, according to
AIG, will be used for general corporate purposes and to build liquidity for
the AIG parent company in anticipation of the termination of the FRBNY
revolving credit facility, which was terminated on January 14, 2011. Thus,
federal sources have substantially improved AIG’s 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 between October 2008 and March 2010 the company
relied on FRBNY’s CPFF to purchase its commercial paper. Because
commercial paper typically is 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
sign of its financial condition. As shown in table 2, AIG’s commercial
paper programs, which reflect the amount of commercial paper AIG issued
to third parties, were at a high of about $13 billion in December 2007. By
September 30, 2008, the balance had dropped to $5.6 billion because of a
general breakdown of the U.S. commercial paper market and reluctance
from market participants to purchase or roll over AIG’s commercial paper.
Since September 2009, these programs have not issued any new
commercial paper and after June 30, 2010, no third parties held AIG’s
outstanding commercial paper. According to AIG, all of its third-party
commercial paper has matured, and currently, neither the AIG parent
company nor its subsidiaries have access to third-party commercial paper
funding. This funding source had been replaced by commercial paper
purchased by FRBNY’s CPFF, which AIG utilized until the facility expired
on February 1, 2010. As a result of the facility closing, AIG’s amount
outstanding with CPFF had decreased to $4.7 billion from a high of $15
billion one year earlier, and as of September 30, 2010, AIG had no
commercial paper outstanding with CPFF. In September 2010, the AIG
parent company reported that it did not intend to access the commercial
paper market. Instead, AIG told us that upon the closing of its planned
recapitalization, it has access to at least $9.5 billion in liquidity, which
includes a bank facility, the right to drawdown approximately $2 billion on
the Series G preferred stock, and other factors. 30 However, through the

30

Series G preferred stock is discussed in more detail later in this report.

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GAO-11-46 Troubled Asset Relief Program

third quarter of 2010, AIG continued to depend on the FRBNY revolving
credit facility and the Treasury equity facility as its primary sources of
liquidity.
Table 2: Amount of Outstanding Commercial Paper by Source, December 31, 2007, through September 30, 2010
Dollars in millions
Dec. 31, Sept. 30,
2007
2008
FRBNY CPFF program
AIG’s commercial paper
programs
Nightingale Finance
LLC
Total

Dec. 31,
2008

Mar. 31, June 30, Sept. 30,
2009
2009
2009

Dec. 31,
2009

Mar. 31, June 30, Sept. 30,
2010
2010
2010

$0

$0

$15,105

$12,242

$11,152

$9,607

$4,739

$1,185

$0

$0

13,114

5,600

613

196

197

0

0

0

0

0

n/a

n/a

n/a

n/a

n/a

n/a

n/a

1,100

0

0

$13,114

$5,600

$15,718

$12,438

$11,349

$9,607

$4,739

$2,285

$0

$0

Source: GAO analysis of AIG SEC filings.

Note: According to AIG, Nightingale Finance LLC is a structured investment vehicle sponsored but
not consolidated by AIGFP. Before March 31, 2010, AIG had not consolidated the $1.1 billion of
outstanding commercial paper issued by its affiliate Nightingale Finance LLC. AIG repaid CPFF on
April 26, 2010, and repaid commercial paper of Nightingale Finance LLC during the second quarter of
2010 through an increase in borrowings under the FRBNY revolving credit facility.

Shareholders’ Equity
Improved in 2009 and
Stabilized in the First Nine
Months of 2010

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. But since September 2009, AIG’s shareholders’ equity has
increased at a much slower rate and accumulated deficits have increased.
Rising accumulated deficits generally indicate mounting losses, while
decreasing accumulated deficits could indicate a return to profitability.
Shareholders’ equity generally is calculated by subtracting a company’s
total liabilities from its total assets, and represents the company’s ability to
absorb negative shocks and prevent failure due to insolvency. Capital
raised by issuing and selling common and preferred stock to investors,
also known as paid-in capital, is one source of shareholders’ equity.
Retained earnings, which the company accumulates over time through its
operations, are another source. 31

31
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-11-46 Troubled Asset Relief Program

As figure 2 shows, AIG’s shareholders’ equity 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
earnings in 2007 to completely paid-in capital by the end of 2008, reflecting
the importance of federal assistance to its solvency. Over this period,
AIG’s shareholders’ equity fell almost 52 percent, from $95.8 billion at the
end of 2007 to $45.8 billion by the end of the first quarter of 2009.
However, shareholders’ equity rose in the second and third quarter of 2009
and increased to nearly $81 billion at the end of the third quarter of 2010.
From the last quarter of 2007 through the last quarter of 2008, retained
earnings were the primary source of shareholders’ equity ($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 quarters 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. AIG’s accumulated deficits continued to grow
throughout the first three quarters of 2010, amounting to negative $14.5
billion by the end of the third quarter, primarily because of losses from
discontinued operations of $4.4 billion that more than offset $1.1 billion of
income from continuing operations. Also as shown in figure 2, starting in
the fourth quarter of 2008, paid-in capital became and has remained the
primary source of shareholders’ equity because of the federal assistance.

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GAO-11-46 Troubled Asset Relief Program

Figure 2: AIG Trends in and Main Components of Consolidated Shareholders’ Equity, Fourth Quarter of 2007 through Third
Quarter of 2010
Dollars in millions
100,000

95,801
89,029

79,703

80,000

78,088

79,732

75,470

82,678

80,627

79,686

79,836

71,182

72,712

73,743

69,824

60,000

80,842

78,693

76,496

78,201
78,634

75,001

57,958
52,710

49,291

45,759

40,000

39,871

20,000
16,816
10,308

10,218

0
-3,073

-2,618
-11,491

-12,368

-9,871

-12,120

-16,706

-20,000
Q4
2007

Q1

Q2

Q3

Q4

2008

Q1

Q2

Q3

2009

Q4

Q1

Q2

-14,486

Q3

2010

Retained earnings and accumulated deficits
Preferred and common stock and 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), with the Series D preferred stock 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.

Several federal actions caused fluctuations and changes in shareholders’
equity in 2008 and 2009. 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:

Page 23

GAO-11-46 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 to obtain AIG’s
revolving credit facility established by FRBNY. 32

•

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
upon closing of the recapitalization and restructuring plan is tied to the
market value of AIG’s common stock, and growth in value of the
government’s equity stake depends on growth of the value of common
shares. 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 app. IV). During the last two quarters of 2008,
when the federal government initially provided assistance to AIG, AIG
shares further declined in value, falling to $4.2 billion by the end of 2008.
Since March 1, 2009, when the AIG credit facility trust and AIG entered
into the purchase agreement for Series C preferred stock, AIG’s common
shares outstanding have fluctuated between $2.7 billion and $5.9 billion,
and as of September 2010 were valued at $5.3 billion. Over that same
period, the values of the government’s preferred shares increased from
$10.6 billion in March 2009 to a peak of $23.5 billion in September 2009,

32

This amount was based on the fair value of common shares into which the preferred
Series C would be convertible on September 16, 2008; the date 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 to AIG for issuing the Series C preferred shares by reducing the
commitment fee FRBNY charged AIG for the facility by an equivalent amount. Through
June 30, 2009, $10.2 billion of this asset was amortized through the accumulated deficit and
thus reduced shareholders equity. For more information on Series C preferred shares, see
GAO-09-975.

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GAO-11-46 Troubled Asset Relief Program

and as of September 2010 were valued at $20.8 billion. 33 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, pushing the value of its
common stock below $3 billion. 34 However, from the first quarter to the
end of the fourth quarter of 2009, AIG’s stock price increased by roughly
50 percent and outperformed both the NYSE Composite Index and the
Insurance Index, resulting in a market capitalization of about $4.0 billion.
AIG’s common shares appreciated another 15 percent during first two
quarters of 2010, compared with gains of 7 percent and losses of 10
percent for the Insurance Index and NYSE Composite Index, respectively.
As of the end of the second quarter of 2010 the market capitalization of
AIG’s publicly traded common shares was $4.7 billion, and by the end of
the third quarter of 2010 was roughly $5 billion. When the recapitalization
plan closed on January 14, 2011, the market capitalization of AIG’s publicly
traded common shares was approximately $7.3 billion.

33

As previously discussed, the federal equity investment includes Series C preferred shares
that are convertible into approximately 79.75 percent of total outstanding common shares.
Under the terms of the Series C preferred stock issuance, AIG agreed to issue preferred
stock convertible into AIG’s common stock to a trust created on behalf of the U.S. Treasury
(the AIG Credit Facility Trust). This independent trust was established to manage the U.S.
Treasury’s beneficial interest in Series C preferred shares. The conversion formula
provides that the trust will receive approximately 79.75 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.

34

Thomson Reuters maintains the Insurance Index, a stock price index comprising 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
NYSE and, therefore, provides a measure of overall stock market performance.

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GAO-11-46 Troubled Asset Relief Program

Net Cash Flows from AIG’s
Operating, Investing, and
Financing Activities
Appear to be Stabilizing,
but AIG Still Is Dependent •
on Federal Assistance for
Liquidity

We have added a new indicator of cash flows and net changes in cash
using data from AIG’s quarterly Consolidated Statements of Cash Flows.
This indicator tracks the cash flows and net changes in cash for AIG’s
operating, financing, and investing activities.
Operating activity cash flows indicate whether the company’s core
businesses are profitable.

•

Financing activity cash flows indicate the extent to which a company uses
the capital markets for equity and debt financing such as issuing its stock,
bonds, and commercial paper to investors and obtaining bank loans and
other forms of bank credit.

•

Investing activity cash flows indicate the extent to which a company
invests in its production capacity and efficiency (capital expenditures),
acquires and divests businesses, and has financial investments such as
stocks and bonds.
Generally, a healthy and growing company can generate cash internally
from operations, generate cash externally from financing activities, and
use this cash for growth in its operations or investments in financial
assets. This indicator shows that with the benefit of federal assistance,
AIG has resumed positive operating cash flows and cash flows from
investing and financing activities have improved, though not quite at pre
crisis levels of 2007.
As shown in figure 3, during the first three quarters of 2007, before
receiving federal assistance, AIG generated cash from its operating
activities indicating that it was profitable and generated cash through its
financing activities, which in turn indicated that it had access to the capital
markets. It also used cash in its investing activities; however, during the
latter part of 2008, AIG’s operating and financing cash flows deteriorated
rapidly because of severe operating and investment losses and reduced
access to the capital markets. Cash flows from investing activities moved
from negative to positive as AIG shifted to selling investment assets and
businesses to generate liquidity. However, cash generated from these
activities was insufficient for AIG to meet near-term liquidity needs that
spiked when rapidly deteriorating credit and capital markets and company
credit ratings triggered certain obligations on which creditors demanded
immediate payment. AIG obtained federal assistance to meet these
creditor demands.

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GAO-11-46 Troubled Asset Relief Program

Figure 3: Net Cash Flows and Changes in Cash from Operating, Investing, and Financing Activities, from First Quarter of 2007
through Third Quarter of 2010
Dollars in millions
2007
Net
change
in cash

$122

$-58

2008
$587

-$7

$147

-$247

3,637

-$9,961

2010

17,701

Net
cash
provided

-$4,442

$1,571

-$1,009

-$755

558
3,998

6,976
4,038

1,615
3,938

6,610

Q4

Q1

Q2

Q3

Q4

-133

-8,998

-9,443

-6,562

-3,994
-3,371

-$1,587

$764

-$361

6,576

5,344

55,430
14,194
16,017

$8,216

14,731

$9,930

7,501

10,118

7,622

8,299

7,829

Q1

Q2

Q3

Q4

Q1

Q2

-5,657
-$18,024

Net
cash
used

2009

$16,381

-22,290

-25,548

-11,789

-1,972

17,427

Q3
-15,240

3,195

Q1-266
-4,516

Q2

Q3

-4,261

-4,245
-1,460

-1,551

-25,777

-65,258

From investing activities
From financing activities
From operating activities
Source: GAO analysis of AIG SEC filings.

Throughout 2009, AIG’s cash flows began to stabilize. In particular,
quarterly operating cash flows returned to net positive. Net cash flows
from operating activities were around $4 billion for the first three quarters
of 2009 and rose to $6.6 billion in the fourth quarter. Since the third
quarter of 2008, quarterly financing cash flows have been negative,
reflecting the company’s still limited access to the private capital markets.
Although the negative amounts have increased over the first three quarters
of 2010, they are much smaller than the negative amounts recorded in the
first three quarters of 2009. Throughout 2009 and the first three quarters of
2010 the company has had net cash inflows from operating activities and
since the fourth quarter of 2009, has returned to a precrisis condition of
net cash outflows from investing activities—the latter indicating that the
company is once again purchasing or expanding its base of income to
produce assets rather than selling them to raise cash. AIG reported in its
second quarter 2010 10Q that it primarily used its cash flows to meet its
debt obligations and the liquidity needs of its subsidiaries. Because of the
improving operating and financing cash flows and access to federal

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GAO-11-46 Troubled Asset Relief Program

assistance, AIG has not had to sell assets aggressively to generate cash.
Taken collectively, while the three cash flows show signs of some stability
through the third quarter of 2010, AIG continues to rely on federal
assistance to ensure that it can meet its liquidity needs.

Income from AIG’s
Operations Began to
Stabilize in 2009 with
Federal Assistance

With the benefit of federal assistance, several of AIG’s operating segments
continued 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 as part of the restructuring. Because AIG
realigned its operating segments in the first and second quarters of 2010
but has not publicly issued restated segment information for all prior
quarters covered in our indicator, we cannot update this indicator beyond
the fourth quarter of 2009. Thus our reporting on this indicator will be
limited.
As shown in figure 4, 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 largely was 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
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 also is 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

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GAO-11-46 Troubled Asset Relief Program

to redeem its preferred shares held by Treasury partly will be contingent
on the health of this segment.
Figure 4: Quarterly AIG Pretax Operating Income and Loss by Operating Segment, First Quarter of 2008 through Fourth
Quarter of 2009
Dollars in billions
Total income

5

-11.21

-8.69

1.5

-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

-1.3

-1.6
-3.2

-3.8

-3.9

-5

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

-15

-15.0

-18.6

-20
Q1

Q2

-17.9

-18.6

Q4

Q3

2008

Q

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” include 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.
Because AIG restated its operating segments in each quarter of 2010 but has not publicly issued
restated segment information for all prior quarters covered in our indicator, we cannot further update
this indicator for analysis of levels and trends across multiple quarters and years.

Figure 4 also shows that AIG’s life insurance and retirement services
segment incurred the largest operating losses of all of AIG’s segments
during the last half of 2008. Its losses largely could be 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

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GAO-11-46 Troubled Asset Relief Program

commercial mortgage-backed 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, the increase in
claims and benefits, and related expenses.
The financial services segment reported losses in 2008 that primarily were
attributed to unrealized market valuation losses from credit valuation
adjustments in AIGFP’s portfolio of super senior credit default swaps, and
credit valuation adjustments on AIGFP assets and liabilities (see figure 4).
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 activities
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
Trending Toward Precrisis
Levels

Dropping from their recent peak in May 2009, AIG CDS premiums have
decreased and appear to be trending toward 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. 35 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 levels indicate a higher premium for a CDS contract.
The higher the CDS premiums, the greater the market’s perception of

35

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-11-46 Troubled Asset Relief Program

credit risk associated with AIG. Conversely, the lower the CDS premiums,
the greater its confidence in AIG’s financial strength (the lower the
market’s expectation that AIG will default).
AIG’s CDS premiums have continued to decrease since May 2009 and as of
November 30, 2010, were similar to their level in June and August 2008 for
the 3-year and 5-year CDS premiums (see figure 5). From May 2009
through March 2010, the CDS index for the insurance sector declined, but
not as much as the CDS premiums for AIG. From May through November
2010, AIG’s CDS premiums moderated slightly. While the overall trend is
positive, 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 is unclear. As
the Federal Reserve has noted, the premium on AIG’s CDS is based both
on the market’s assessment of the government’s level of commitment to
assist AIG and AIG’s financial strength.

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GAO-11-46 Troubled Asset Relief Program

Figure 5: AIG Credit Default Swap Premiums on AIG, January 2007 through November 30, 2010
November 2008: Treasury pays off $40 billion
of Fed Facility for Series D shares

Basis points
September 22, 2008: AIG entered
FED Revolving
Credit Facility

5,000

April 2009: More Fed
assistance through Series F
4,534
(5/4/09)

3,922
(9/16/08)

4,000

December 2009: Fed
exchanges $25 billion of
Fed Facility for equity in
AIA and ALICO

3,683
(5/4/09)

3,500
(9/16/08)

March 2010: M
Agreement to
sell ALICO for
$15.5 billion

3,000

2,000
189
(11/30/10)
265
(11/30/10)

1,000

9.2
(1/2/07)

0
Jan.
2007

Mar.

May

July

Sept. Nov.

Jan.

Mar.

May

July

Sept.

2008

Nov.

Jan.

Mar.

May

2009

July

Sept.

Nov.

Jan.

Mar.

May

July

Sept. Nov.

2010

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

Note: CDS provide protection to the buyer of the CDS contract if the assets covered by the contract
go into default.

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

The significant losses that AIGFP experienced from its derivatives trading
business and the strains these losses put on AIG’s liquidity in 2008 were
critical factors contributing to AIG’s financial crisis. A key part of AIG’s
reorganization and divestiture strategy is closing out or eliminating—also
known as “unwinding”—these derivatives and closing AIGFP, which
according to AIG will not be done for a significant amount of time. Since
the fall of 2008, AIGFP has been unwinding 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
multisector 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 values of the CDOs
continued to fall and eased the stress on its financial condition. Since then,

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GAO-11-46 Troubled Asset Relief Program

AIGFP has been closing out the remainder of its derivatives portfolio. To
analyze AIGFP’s progress, we monitored several groups of indicators
dating to at least September 2008. The four indicators we monitored—
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 has continued to make progress. We also
analyzed AIGFP’s super senior CDS portfolio, in which the underlying
collateral of CDOs was rated investment-grade, and their remaining
multisector CDO portfolio, in which the underlying collateral of CDOs was
rated less than BBB. We found that while AIGFP continues to make
progress in unwinding its super senior portfolio, it has made less progress
since the fourth quarter of 2008 in closing out CDOs with lower-rated
underlying collateral. AIGFP asserts that this result is consistent with its
strategy of maintaining positions that have potentially significant upside
profit opportunity and very limited potential liquidity risk. The multisector
CDO portfolio represents one such set of positions. This strategy, with
respect to the multisector CDO portfolio, has resulted in market valuation
gains of $940 million over the past five quarters.

AIGFP Has Continued to
Unwind Its Operations

Our indicators show that from September 2008 through September 2010,
AIGFP made significant progress in winding down its operations. A key
reason for AIG’s financial problems was the strain on 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 we previously discussed, the federal government created Maiden Lane
III LLC to help eliminate the financial strain arising from collateral
payments. Maiden Lane III purchased $29.3 billion in 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. The strains on
liquidity have decreased as AIGFP has continued to eliminate its positions
in CDS contracts. Figure 6 illustrates several dimensions along which
AIGFP has reduced its size:
•

First, since September 2008, AIGFP has closed out 87 percent of its
outstanding trade positions, which refers to 38,300 of AIGFP’s outstanding
long and short derivative contracts. At September 30, 2008, it had 44,000

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GAO-11-46 Troubled Asset Relief Program

positions; by December 31, 2009, the number had declined to 16,100; and
as of September 30, 2010, the number had declined to 10,200. The 10,200
trade positions include approximately 4,500 nonderivative asset and
liability positions whose management was transferred to AIG’s asset
management group and AIG’s treasury. According to AIG, from September
2008 through September 2010, the number of counterparties has been
reduced by about 74 percent, and the number of trades dated more than 50
years has been reduced by 96 percent from 67 to 3.
•

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
$506 billion as of September 30, 2010, down from $940 billion in December
2009, $1.2 trillion in the previous quarter, and $2 trillion in September
2008.

•

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 and placed them in 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 positions across all risk books. AIG officials said that in
certain cases, some books were dominated by risky positions, so these
entire books were targeted. According to AIGFP and Federal Reserve
officials, this goal has been substantially accomplished. The number of
books decreased from 22 in September 2008 to 15 at the end of the second
quarter of 2009; to 13 by March 31, 2010; and to 12 as of September 30,
2010. The 12 books include 5 risk books related to the transfer of the
nonderivative asset and liability positions described above. AIG reports
that AIGFP’s priority in 2010 has been to unwind complete books.

•

Finally, the number of AIGFP employees dropped most significantly—
from 428 to 257—between September 2008 and September 2009. Since that
time the pace has slowed and as of September 30, 2010, the number was
212. 36 The 212 positions include 17 employees responsible for managing
AIGFP’s cash assets that AIGFP transferred to AIG and 46 employees who
report to both AIG and AIGFP. According to AIG, AIGFP has closed its

36

AIGFP staff may leave for several reasons, such as the sale of businesses, closure of
offices, or resignation.

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GAO-11-46 Troubled Asset Relief Program

Tokyo and Hong Kong offices and its Banque AIG office in London is
expected to be taken over by AIG Asset Management in the first quarter of
2011.
Figure 6: Status of the Winding Down of AIG Financial Products Corp., Quarterly
from September 30, 2008, through September 30, 2010
9/30/08 12/31/08 3/31/09
Approximate
number of
outstanding
trade
positions

Number of
employees

9/30/09 12/31/09 3/31/10

22,500

19,200

6/30/10

9/30/10

44,000
35,000

Gross notional of
$2.00
long and short
derivatives
positions outstanding
(dollars in trillions)
Number
of
businesses
(risk books)

6/30/09

22

428

$1.80

21

375

28,000

$1.52

17

362

$1.33

15

319

$1.16

16,100

14,300

11,900

10,200

$0.94

$0.76

$0.60

$0.50

15

15

13

13

12

257

237

233

226

212

Source: GAO presentation of AIG corporate information.

Notes: 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 2008 notionals were estimated and restated numbers were 2 and 1.8, respectively.
The March 2009 number was 1.5.

AIGFP officials believed that most of the unwinding could be completed
by the end of 2009, but they later indicated that the vast majority of the
remaining positions would be unwound by the end of 2010. In February
2010, Federal Reserve and Treasury officials said that AIGFP was on track
to close out its riskiest positions and that AIGFP no longer would be in
business by the end of 2010, although the company’s positions might not
be entirely unwound by the end of the year. In August 2010, Federal
Reserve and AIG officials confirmed that, according to the measures
established by AIG, AIGFP had met their targets to date and generally
expected AIGFP to meet or exceed its targets if current market conditions
persisted. AIG reported in the third quarter of 2010 that of AIGFP’s
remaining approximately 10,200 trade positions, the management of
approximately 4,500 nonderivative asset and liability positions was
transferred to AIG’s direct investment business. AIG anticipates that the

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GAO-11-46 Troubled Asset Relief Program

remaining derivatives positions will continue to be reported as AIGFP
under capital markets, a component of AIG’s financial services reporting
segment. 37 However, Federal Reserve and 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 affected adversely if
AIG’s credit ratings were downgraded. In August 2010, the Federal Reserve
noted that the successful execution of AIG’s plan to reduce the size of its
portfolios was subject to market conditions and counterparties’
willingness to transact with AIGFP. AIG reported in September 2010, that
it will take substantial time to wind-down AIGFP because of the long-term
duration of AIGFP’s derivative contracts and the complexity of AIGFP’s
portfolio.

AIGFP Has Continued to
Make Progress in
Unwinding Its Portfolio of
Investment-Grade, Super
Senior Credit Default
Swaps

Our indicators suggest that AIGFP continued to make progress in
unwinding its portfolio of credit default swaps written on investmentgrade CDOs (those having a rating of BBB or higher from rating agencies).
This 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. 38 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 gain (or loss) 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

37

Through the third quarter of 2010, AIG has reported on its operations through four
reporting segments—general insurance, domestic life insurance and retirement services,
foreign life insurance and retirement services, and financial services. The financial services
segment includes commercial aircraft and equipment leasing, capital markets operations,
consumer finance and insurance premium financing, both in the United States and abroad.

38

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.

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GAO-11-46 Troubled Asset Relief Program

other counterparties in an 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 has continued to liquidate its CDS
portfolio. The net notional amount of the portfolio is being reduced;
however, the portfolio has experienced a combination of unrealized gains
and losses. According to Federal Reserve officials, AIGFP management
has recognized that the size and risks of the remaining CDS portfolios
need to be further reduced and that AIG and AIGFP have been developing
an action plan to efficiently reduce these risks. AIG’s progress is evident
across several of its risk books (see fig. 7):
•

AIGFP’s regulatory capital CDS book. The regulatory capital book
represents 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. 39 The net
notional amount of this book dropped from about $250 billion in the fall of
2008 to about $65.5 billion in the third quarter of 2010, and the fair value of
the CDS liability fell over the same period from $397 million and shifted to
an asset with a fair value of $186 million. These CDS contracts continue to
have a high net notional amount relative to the other AIGFP products, and
the company continues to believe that these contracts will expire or be
called by counterparties with little to no cost to AIG. According to the
Federal Reserve, this portfolio has been downsized significantly due to
counterparties’ willingness to exit trades at no cost to AIGFP. AIGFP does
not plan to sell these contracts but plans to let them expire because
management believes that, based on stress tests, trying to sell them would

39

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-11-46 Troubled Asset Relief Program

not be cost-effective. 40 This book also has experienced minimal but mixed
unrealized market gains and losses in the first three quarters of 2010.
•

AIGFP’s CDS on multisector CDO book. These CDOs represent the CDS
portfolio that, according to Federal Reserve officials, is a synthetic credit
position and written on CDO transactions that generally had underlying
collateral of residential mortgage-backed securities, commercial mortgagebacked securities, and CDO super senior tranche securities. 41 Federal
assistance provided through the purchase of the underlying assets in this
category by Maiden Lane III and subsequent termination of the related
CDS led to a drop of more than 80 percent in the net notional and fair
values of the multisector CDOs from the third quarter of 2008 in the fourth
quarter of 2008—$12.6 billion and $5.9 billion, respectively. As of the third
quarter of 2010, the net notional amount continued to show declines and
had dropped to $6.9 billion and, similarly, the fair value of the derivative
liability declined to $3.6 billion. Also, in the first three quarters of 2010,
multisector CDOs continued to show unrealized market valuation gains.

•

Corporate collateralized loan obligations and mezzanine tranche 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 rated less than investment-grade
(investment-grade is rated BBB or higher) at origination. The net notional
amount of the corporate portfolio continued to drop throughout the first
three quarters of 2010, while the amount for the mezzanine portfolio
dropped in the first two quarters but increased slightly in the most recent
quarter. The fair value of derivative liability for the corporate
collateralized loan obligation book portfolio, which fell significantly from
the fourth quarter of 2008 through the first quarter of 2010, has changed

40
According to AIG, AIGFP has not been required to make any payments as part of
terminations initiated by counterparties. The regulatory benefit of these transactions for
the counterparties is generally derived from the terms of Basel I that existed through the
end of 2007, which was replaced by Basel II. As financial institution counterparties
transitioned to Basel II, AIG expects them to receive little or no additional regulatory
benefit from these CDS transactions, except in a small number of specific instances.
According to AIG, the schedule by which these positions are called or terminated has
slowed. This development likely has been impacted by changes in capital standards that
have been recently proposed by the Basel Committee, which when implemented are
expected to have various degrees of impact on global financial institutions, including the
AIGFP counterparties.

41

According to AIG, the outstanding multisector CDO portfolio at June 30, 2010, was
written on CDO transactions, including synthetic CDOs. Synthetic CDOs are backed by
credit derivatives such as CDS or options contracts instead of assets such as bonds or
mortgage backed securities.

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GAO-11-46 Troubled Asset Relief Program

little since then. Also, this corporate collateralized loan book had
unrealized market gains throughout 2009, followed by relatively small
losses over the first two quarters of 2010, and a small gain in the third
quarter of 2010. By comparison, the fair value of derivative liability and the
unrealized market valuations of the mezzanine tranche book have changed
little in 2010. AIG officials commented that the smaller movement is
consistent with a decrease in the size of the portfolio (see fig. 7).
Figure 7: Net Notional Amount, Fair Value of Derivative Liability, and Unrealized Market Valuation Losses and Gains for
AIGFP’s Super Senior (rated BBB or better) CDS Portfolio, Third Quarter of 2008 through Third Quarter of 2010

Multisector
collateralized debt
obligationsb

Regulatory capitala

Corporate collateralized
loan obligationsc

Mezzanine tranchesd

Dollars in billions
250 250.0 234.5
200
Net
notional
amount

192.6

177.5

171.7
150.1

150

109.4

100
64.5 65.5

71.6
50.7 50.5 49.6

50

40.9

6.9

22.6 22.1 16.4
15.7 12.5

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2008

2008

2008

12.6 12.0

0

Fair
value
of
derivative
liability

2010

8.2

2009

7.9

7.6

6.8

2010

Dollars in billions
30.21
30
25
20
15
10
5.91 6.72 5.27
4.51 4.42 4.25 3.78 3.64
5
0.40 0.38 0.39 0.05
0.03
0
-0.12 -0.16 -0.14 -0.19
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2008

Unrealized
market
valuation
gain
or loss

2009

9.2

2009

2010

2008

Dollars in millions
1,000
23 16 147 39
51
0
-20
-18 -14
-1,000 -272
-2,000
-3,000
-4,000
-5,000
-6,000
-7,000
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2008

2009

2010

2009

2010

1.53

2009

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2008

2009

-809

-6,262

358

92 158 241 117

-284

792 566

2010

147

4.2

3.5

3.5

2009

3.5 3.1

2.6

2.9

2010

0.15 0.20 0.18 0.08 0.03 0.14 0.21 0.19 0.22

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2008

8
-7

-538

4.7

2008

2.55 2.20
1.10 0.46 0.31 0.31 0.39 0.31

1,020
332

2010

5.0

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

18

2009

42

13

105

2010

45

23
-111 -71

-83

-24

-5,832

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2008

2008

2009

2010

2009

2010

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2008

2009

2010

Source: GAO analysis of AIG SEC filings.

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GAO-11-46 Troubled Asset Relief Program

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.
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.

b

Multisector CDO 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’s Multisector CDO
Portfolio has Changed
Significantly Since the
First Quarter 2009

The gross notional amount of AIGFP’s multisector CDO portfolio was
reduced significantly in the fourth quarter of 2008 with the purchase of
CDOs by Maiden Lane III, and since then, AIG has continued slowly to
reduce the gross notional amount. Our indicator uses the gross notional
amount to track the size of AIGFP’s multisector CDO portfolio and its
composition with respect to the credit quality of the underlying assets.
However, as the portfolio has been unwinding, its underlying credit rating
has not improved while the longer-term trend is not yet clear. According to
AIG officials, the SEC filings about the composition of the multisector
CDOs on which it has written credit default protection summarizes the
gross transaction notional amount, percentage of the total CDO collateral
pools, ratings, and vintage breakdown of collateral securities in the
multisector CDOs, by asset-backed securities category. However, the gross
notional data does not account for the attachment points of the specific
transactions. When taken into account, the gross notional of the
underlying CDOs of $15.4 billion is reduced to a net notional exposure of
$6.9 billion.
As shown in figure 8, the total gross notional amount of AIGFP’s
multisector CDOs and of CDOs that had underlying assets rated less than
BBB were reduced considerably in the fourth quarter of 2008, but
reductions since then have been much smaller. The total gross notional
amount for the multisector CDOs was reduced from $108.5 billion to $25
billion during the fourth quarter of 2008, primarily due to Maiden Lane III
purchasing the CDOs underlying AIGFP’s CDS contracts. The gross
notional for these CDOs has continued to be reduced each quarter and as
of the third quarter of 2010, had been reduced to about $15.4 billion as

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GAO-11-46 Troubled Asset Relief Program

AIGFP has continued to unwind this portfolio. In contrast, while the gross
notional amount with underlying assets rated less than BBB decreased
from $26.9 billion at the end of the third quarter of 2008 to $8 billion in the
following quarter, the amount increased about $3 billion throughout 2009
to just more than $11 billion by the end of 2009. However, in the first three
quarters of 2010 the trend reversed, and the gross notional for this portion
of the portfolio was reduced to $10.3 billion. Despite this drop, as of the
end of the third quarter of 2010, the underlying credit rating of the
portfolio has not improved, with more than 67 percent of the remaining
CDO portfolio comprising CDOs with underlying assets rated lower than
BBB. This change in portfolio composition largely resulted from the
successful unwinding of portfolio holdings that have underlying assets
rated at least BBB. According to AIG officials, the amount of future
collateral posting requirements of this portfolio is a function of AIG’s
credit ratings, the ratings of the reference obligations, and any further
decline in the market value of the relevant reference obligations, with the
latter being the most significant factor. In addition, the amount of
collateral posting requirements is a function of the collateral provisions in
the specific credit support annexes, which are legal documents that detail
the terms of collateral for derivative transactions. In the case of the
multisector CDO portfolio, a significant portion of the remaining positions
are not subject to additional collateral postings. AIGFP currently posts
$3.1 billion against the $6.9 billion of net notional exposure in the
multisector CDO portfolio.

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GAO-11-46 Troubled Asset Relief Program

Figure 8: Total Gross and Net Notional Amounts of Multisector CDOs Compared to Portions of Gross National Portfolio That
Have Underlying Assets That Were Rated Less than BBB, Third Quarter of 2008 through Third Quarter of 2010
Dollars in millions

Percentage of CDO collateral rated less than BBB
80

120,000
108,452
67.4%
100,000

61.8%

67.3%

64.3%

58.7%

36,808

70
60

52.5%

80,000

50
42.4%
40

60,000
32.0%
40,000

30

24.8%
71,644

26,939
20,000

25,036

20

24,008

12,480

19,813

12,024

10,170

8,002

18,558

17,909

16,766

10,662 10,406

10,384 10,888

9,983 11,071

9,192

15,420
10,787

8,618

15,357
10,398

11,984

9,151

8,174

7,926

7,574

6,802

6,929

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

0
Q3
2008

10

8,428 10,341

12,556

2009

0

2010
All other
Commercial mortgage-backed securities
Prime residential mortgage-backed securities
CDOs
Alt-A residential mortgage-backed securities
Subprime residential mortgage-backed securities
Subordination below the super senior risk layer
Net notional of multisector CDOs (including investment grade CDOs)
Percentage of CDOs rated less than BBB
Source: GAO analysis of AIG SEC filings.

Note: Gross notional is equal to the net notional plus the subordination amounts.

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GAO-11-46 Troubled Asset Relief Program

AIG’s Insurance
Operations Have
Continued 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 from 2008 through the first
half of 2010, 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, our indicators show
that for AIG’s life and retirement services, additions to policyholder
contracts exceeded withdrawals and operating income for the domestic
and foreign life insurance and retirement services businesses declined in
the first two quarters of 2010 compared to the fourth quarter of 2009, but
remained positive. We also analyzed AIG’s property/casualty companies by
tracking their insurance premiums written. While the pattern has been
somewhat cyclical, overall trends in volume of premiums written appear
to have stabilized though not fully recovered to the levels of 2007. Finally,
while the insurance companies generally showed some growth, our
indicators show that the property/casualty companies’ underwriting was
not profitable in the first two quarters of 2010 although underwriting costs
relative to premiums earned in the first two quarters 2010 declined
considerably from the fourth quarter 2009. Underwriting costs relative to
net premiums earned for the international companies declined in the
second quarter of 2010 to the point where their underwriting again became
profitable.

AIG’s Insurers Maintained
Capital Levels Higher Than
the Regulatory Minimum,
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 National Association of Insurance Commissioners (NAIC)
minimums, and several of AIG’s life and retirement companies have
benefited from federal assistance. This indicator of AIG’s capital—which
we will update 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
(for instance, by AIG drawing on FRBNY’s revolving credit facility or
Treasury’s equity capital 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 is a ‘no action’ level company; nothing
needs to be done by regulators.” 42 On the other hand, NAIC states that

42

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

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GAO-11-46 Troubled Asset Relief Program

“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. 43 Adverse movements in the primary components
of capital and shareholders’ equity may indicate weak performance by the
company.
As previously reported, 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 9. 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 only were 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. 44 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 the capital and surplus that AIG reports in
its quarterly filings with NAIC are proxy for quarterly tracking of the
adjusted capital because the same activities would affect both measures.
More information about this indicator and the results of a proxy indicator
that we developed for the first nine months of 2010 are included in
appendix V.

43

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.
44

As discussed earlier, FRBNY created Maiden Lane II, an SPV, to provide AIG liquidity
through its purchase of RMBS 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-11-46 Troubled Asset Relief Program

Figure 9: Regulatory Capital for AIG Domestic Insurance Subsidiaries and Primary Activities That Affected Regulatory Capital
during 2009
Dollars in millions
Other major 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
$24,092

Stockholder
dividendsb

Authorized control level
risk-based capital
12/31/08

$5,464

Change in
net
realized
cap gains
and
lossesa

12/31/09

$5,966
AIG’s
largest
domestic
property/
casualty
companies

12/31/09

Investor
capital
contributions

Change in
net
deferred
income
tax

Aggregate
write-ins
for gains
and
losses in
surplus

$25,295

2009

$2,374

$0

$646

$0
-$1,348

12/31/07
26,598

12/31/08

12/31/07

12/31/08

6,065

5,966

$459
-$1,010

2008

24,092

2,327

3,083
n/a
-4,623

12/31/08

12/31/09

15,653

12/31/08

1,951

n/a

n/a

-3,019

12/31/09

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

Change in
nonadmitted
assets

16,537

2009

6,770
396

0

1,439

0
-1,296

12/31/07

12/31/08

12/31/07

12/31/08

-7,091

2008
23,116

20,040
15,653
2,474

2,901

n/a

n/a

n/a

-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-11-46 Troubled Asset Relief Program

Business at AIG’s Life
Insurance and Retirement
Services Companies Has
Shown Deposits Recently
Exceeding Withdrawals
and Their Operating
Income Has Remained
Positive

Deposits at AIG’s life and retirement service companies have been
improving compared with withdrawals, and their operating income has
remained positive. We use 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 10, 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 affected the liquidity position of certain entities in 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 exceeded
withdrawals—by more than $700 million—but withdrawals again
exceeded deposits in the fourth quarter of 2009. In 2010, while the dollar
volume of contract deposits and withdrawals reported are lower because

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GAO-11-46 Troubled Asset Relief Program

of businesses slated for sale were shifted from continuing operations,
contract deposits continued to exceed withdrawals, by $755 million, $1.2
billion, and $1.6 billion in the first, second, and third quarters, respectively.
Figure 10: AIG Life and Retirement Services Additions and Withdrawals from Policyholder Contract Deposits for AIG Life and
Retirement Services Including Annuities, Guaranteed Investment Contracts, and Life Products, First Quarter of 2007 through
Third Quarter of 2010

4

Dollars in millions
27

,36

30,000

3
,88

,40

8

89
8,2
16

04

3,9

13

77
5,1

39

85

0

2,3

5,000

3,6

4,3

94

6,4

12

8,1

79

8,6

7,8

6,9

88

10,000

01

10

,54

6

12

13

,96

,12
13

6
,32
12

1

4
14
,45

5

16

9
0

,43

,60

16

15

1
,10

,19
14

15

5

16

8
0

,76

,07
14

14

15

14

15,000

,00

1

,30

9

,99

7

20,000

19

,06

3

25,000

0
Q1
2007

Q2

Q3

Q4

Q1
2008

Q2

Q3

Q4

Q1
2009

Q2

Q3

Q4

Q1
2010

Q2

Q3

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
the companies suffered large operating losses in 2008 not because of their
underwriting activities but because of losses from their investment
activities (capital losses). Yet beginning in early 2009 and continuing into
the first three quarters of 2010, their investment losses have become
smaller and thus their operating incomes have become positive. 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 their operating income of $1.2 billion,

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GAO-11-46 Troubled Asset Relief Program

resulting in an operating loss of $3.4 billion. 45 For the full year 2009, net
realized capital losses were $3.2 billion for the domestic companies and
$0.6 billion for the foreign companies, much lower than they were for
2008—$32.6 billion for the domestic companies and $11.8 billion for
foreign companies. In turn, in 2009 the reported operating income was $3.5
billion for domestic companies and $4.2 billion for foreign companies,
compared with operating losses of $31.1 billion for domestic companies
and $6.3 billion for the foreign companies in 2008. The reported net
realized capital losses for the domestic companies were nearly $800
million in the first quarter of 2010 but the losses gave way to a reported
$20 million gain in the third quarter 2010. The pretax operating net income
increased over that same period, from $327 million to $998 million.
Foreign companies reported realized capital losses in the first quarter of
2010 of $61 million, but these were followed by gains the next two
quarters. Pretax operating income for these companies in the first three
quarters of 2010 fluctuated at about $700 million and in the third quarter of
2010 was about half of the amount of income in the last quarter of 2009
(see app. VI).

AIG’s Property/Casualty
Companies Premiums
Written Appear to Have
Remained Stable

For the property/casualty commercial companies, dollar volumes of
premiums written trended downward throughout 2007 and 2008, but
started to stabilize in the first quarter in 2009 and this trend has continued
through the first three quarters of 2010. 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
to AIG’s property/casualty companies, we developed an 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 also can 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

45

The life insurance and retirement services segment losses associated with investment
activity through the segment’s 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-11-46 Troubled Asset Relief Program

companies and rebranded (renamed) several other AIG companies. 46
However, the indicator on volume of premiums written 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. 47 According to
the survey, low demand continued to put pressure on the rates.
As illustrated in figure 11, quarterly dollar volumes of premiums written by
AIG’s general insurance companies followed an annual recurring pattern
with highest volumes generally occurring in the second and third quarters.
For these companies, this pattern recurred at declining levels in 2009 as
premium volumes in each quarter were lower than levels in same quarters
of 2008, which were lower than levels in the same quarters of 2007. Also,
premium volumes in the first three quarters of 2010 were below levels in
the same quarters of 2009, but the rates at which they were declining
moderated, indicating that the trends may have stabilized. As for foreign
general insurance, such an annual recurring pattern and declines in
premium volumes were not as consistent or pronounced. Premium
volumes in the first three quarters of 2008 were higher than in the
corresponding quarters of 2007. Then from the fourth quarter of 2008
through the third quarter of 2009 premium volumes were lower than in the
corresponding prior year quarters before rebounding in the fourth quarter
of 2009 to slightly exceed the premium volume in the fourth quarter of
2008. This trend continued into 2010 as premium volumes in the first three
quarters were higher than the same three quarters of 2009.

46
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.
47

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

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GAO-11-46 Troubled Asset Relief Program

Figure 11: AIG General Insurance Premiums Written by Division, First Quarter of 2007 through Third Quarter of 2010
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

4,000 3,618

4,339
3,270

3,000

3,647

4,738
4,219

4,184

3,787

4,410

3,858

3,726

3,857
3,552

3,242

2,954

2,921

4,740

Commercial insurance

3,074

Foreign general

2,711
3,054

2,678

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

Q1
2010

Q2

Q3

Source: GAO analysis of AIG quarterly financial supplements.

Note: 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 also can be viewed from the
perspective of their underwriting profitability. For property/casualty
insurers, underwriting profitability can be measured using the combined
ratio, which is the sum of the loss and the expense ratios. 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 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 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 indicate an underwriting loss.

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GAO-11-46 Troubled Asset Relief Program

AIG’s combined ratios in both commercial and foreign general
property/casualty insurance businesses were below 100 throughout 2007
and the first half of 2008. These ratios rose and exceeded 100 in the second
half of 2008 and repeated a similar pattern in 2009. However, the loss
ratios for AIG’s commercial insurance rose significantly in the third and
fourth quarters of 2008. The combined ratio spiked in the fourth quarter of
2008, largely due to an administrative charge (that also spiked the expense
ratio) to recognize permanent impairment of goodwill of previously
acquired businesses. 48 The higher combined ratio also was 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, largely due to increased claims
costs related to a reserve strengthening charge. The commercial insurance
combined ratios dropped significantly in the first quarter of 2010 and since
then have remained at just more than 100, indicating that its commercial
insurance underwriting was not profitable during these quarters. The
combined ratio for AIG’s foreign general insurance fell in the second
quarter of 2010 to its lowest level in a year to 95.6, indicating that for this
segment of business, underwriting again became profitable. 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. 49 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

48

A company records goodwill on its books when it 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 write-down that lost value as an
impairment.
49

Errors and omissions insurance is a liability insurance that protects professionals and
companies against claims by clients for actual or alleged negligent actions and other errors
and omissions in the performance of contracted services. Directors and officers insurance
protects a company’s directors and officers from liability arising from actions relating to
the duties they perform as it relates to the company.

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GAO-11-46 Troubled Asset Relief Program

related to the remediation and audit of general insurance (Chartis, Inc.),
pension costs, and post-retirement liability costs. 50
We also developed a new indicator to quarterly track AIG’s underwriting
ratios compared with the average underwriting ratios of its
property/casualty insurance peers or competitors and AIG’s investment
income and net income as percentages of premiums earned. The indicator
shows that in nearly every quarter since the first quarter of 2008, AIG’s
property/casualty companies have not had profitable underwriting but
generally they have had positive net income, largely because of their
investment income. We analyzed the distributions of 2009 direct premiums
written (DPW) by lines of business of 30 property/casualty companies that
each had more than $1 billion in DPW for 2009. 51 From these companies
we defined a “peer” of AIG as a company that generated more than 90
percent of its DPW in lines that accounted for more than 60 percent of
AIG’s DPW. We defined a nonpeer of AIG as a company that generated
more than 80 percent of its DPW in lines that accounted for less than 40
percent of AIG’s DPW or more than 50 percent of its DPW in a single line
that was less than 20 percent of AIG’s DPW.
The top panel of figure 12 compares AIG ratios to those of its peers. Its
combined ratios were usually higher than the average of its peers.
However, since the first quarter of 2008, the combined ratio for these AIG
companies exceeded 100 in all but two quarters (indicating AIG’s
underwriting usually was not profitable), whereas the ratios for its peers
averaged less than 100 in all but three quarters, indicating that their
underwriting usually was profitable. The top panel of the figure also
indicates that while AIG’s expense ratios (which measure the level of

50

For a more detailed discussion of the condition of AIG’s insurance operations, see
appendix VII.
51

We reviewed 30 property/casualty companies and identified 15 of these companies as
AIG’s property/casualty insurance peers based on the similarities we found in the
distributions of their premiums written in 2009 by lines of business. As did AIG, these
companies wrote premiums in several property/casualty lines of insurance. The companies
are ACE, Alleghany, Allianz SE, American Financial, Arch Capital, Argo Group, Chubb,
C.N.A., Fairfax Financial, Hartford Financial Services, Liberty Mutual, Markel, Old
Republic, Travelers, and WR Berkley. Other property/casualty insurers not identified as
peers were mostly companies concentrated in private auto insurance or home or farm
owners insurance and other lines of insurance that were not major lines for AIG. These
companies are Allstate; Assurant, Inc.; Bank of America; Berkshire Hathaway (GEICO);
Erie Insurance Group; FM Global; Nationwide Mutual; Progressive; QBE Insurance Group;
State Farm Fire and Casualty; State Farm Mutual Auto Insurance; Tokio Marine; United
Services Automobile Association; White Mountains; and Zurich Financial Services.

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GAO-11-46 Troubled Asset Relief Program

underwriting administrative expenses relative to net premiums earned)
have been lower than the average of its peers in every quarter, its loss
ratios (which measure the level of claims costs and loss adjustment
expenses relative to net premiums earned) have been higher than the
average of its peers in every quarter. 52 The lower panels of the figure show
that despite the higher-than-peer average underwriting costs, AIG’s
property/casualty companies had positive net income in all but 2 of the 15
quarters presented and that the companies’ investment income was a
major factor.

52

Historical operating ratios for commercial insurance have been revised to include Private
Client Group and exclude HSB Group, Inc. The loss ratio for the fourth quarter of 2009
includes a $2.3 billion increase in the reserve for prior years’ adverse loss development.
The underwriting expense for the fourth quarter of 2008 includes a $1.2 billion charge for
impairment to goodwill, increasing the expense ratio by 22.5 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.

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GAO-11-46 Troubled Asset Relief Program

Figure 12: Quarterly Statutory Underwriting Ratios of AIG (Domestic and Foreign Property/Casualty Insurance Companies)
Compared to Averages for 15 Peers and AIG’s Property/Casualty Investment Income and Net Income as Percents of
Premiums Earned, First Quarter 2007 through Third Quarter of 2010
Quarterly statutory underwriting ratios of AIG compared to averages for 15 property/casualty (PC) insurance peers
140

136.1

120

113.4
98.8

100
89.5

91.1
90.0

100.0

90.0

80 85.5

92.4
75.9

95.6
81.3

109.0
91.1

60.1

61.6

65.3

62.1

64.4

29.5

29.5

28.1

30.3

31.9

29.3

27.8

19.6

19.9

22.2

22.9

23.9

20.8

96.8

22.3

Q1

Q2

Q3

Q4

Q1

Q2

Q3

40

79.2

97.9

99.1

97.6

107.8

100.5

100.5

Average combined
insurance peers

83.7
76.9

AIG’s loss ratio
Average loss ratio of

66.9

68.1

68.8 15 PC insurance peers

31.6

33.4

33.6

32.4

30.9 of 15 insurance peers

22.3

24.4

25.9

Q2

Q3

Q4

67.8

67.5

31.2

30.1

25.0

Q1

61.6

31.3

78.4

64.2

65.7

66.3

AIG’s combined ratio

99.7 ratio of 15 PC

81.4
76.7

29.8

20

102.8

81.2

67.8

60

110.3

99.0

92.9
89.4

76.1

70.1

65.9

113.1
105.8

104.2

102.1

93.4
96.3

119.1

29.4

26.0

Average expense ratio
29.4 AIG’s expense ratio

0
2007

Q4

2008

2009

Q1

Q2

Q3

2010

AIG’s PC investment income as a percent of net premiums earned
30
25.2

25
20
15

12.0

14.3

13.8

14.7

Q3

Q4

13.1

12.2

13.0

13.8

Q1

Q2

Q3

Q4

15.0
11.9

Q1

Q2

15.1

17.1

15.0

12.4

10
5
0
Q1
2007

Q2

2008

AIG’s PC net income as a percent of net premiums earned
22.4
25
18.7
17.3
20 18.4
13.2
15
6.9
10
5
0
-5
-10
-15
-20
-19.7
Q1
Q2
Q3
Q4
Q1
Q2
Q3
2007

Q3

Q4

2009

2008

Q1

Q2

Q3

2010

22.6

7.9

10.5

13.0

12.2

16.3
2.4

-10.5

Q4

Q1

Q2

Q3

2009

Q4

Q1

Q2

Q3

2010

Sources: GAO analysis of AIG and peers data per SNL Financial.

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GAO-11-46 Troubled Asset Relief Program

Note: We determined AIG’s property/casualty peers for our analysis by comparing various
property/casualty companies’ distribution of premiums written in 2009 by their lines of business.
Similar to AIG, its peers have several lines of business. The 15 peers are ACE, Alleghany, Allianz SE,
American Financial, Arch Capital, Argo Group, Chubb, C.N.A., Fairfax Financial, Hartford, Liberty
Mutual, Markel, Old Republic, Travelers, and WR Berkley. Other property/casualty companies were
not included in the peer group for this analysis. Most of these companies either concentrated on the
private auto insurance business or home/farm owners insurance, neither of which is among AIG’s
largest lines of business. These companies are Allstate; Assurant, Inc.; Bank of America; Berkshire
Hathaway (GEICO); Erie Insurance Group; FM Global; Nationwide Mutual; Progressive; QBE
Insurance Group; State Farm Fire and Casualty; State Farm Mutual Auto Insurance; Tokio Marine;
United Services Automobile Association; White Mountains; and Zurich Financial Services.

The panels of figure 12 also show that for AIG’s domestic and foreign
property/casualty insurance combined, underwriting for the segment was
not profitable in 10 of the 15 quarters spanning 2007 through the third
quarter of 2010, but returns from investments for these companies more
than offset the underwriting losses, making the segment profitable
overall. 53 While our data cover just under 4 years, 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.
However, investment returns were high enough for these general
insurance divisions combined to remain profitable in 2007, 2009, and the
first three quarters of 2010, but were not large enough to outweigh the
nearly $4.4 billion in general insurance investment losses in 2008.

The Federal
Government’s
Exposure to AIG Has
Declined and Its
Ability to Fully
Recoup Its Assistance
Will Be Determined by
AIG’s Long-term
Health and Market
Conditions

Our analysis of the composition of the federal assistance, including the
amount of direct and indirect assistance and the sources of that
assistance, shows that the federal exposure to AIG has declined since we
last reported, and while AIG, Treasury, FRBNY, the AIG Credit Facility
Trust, and the AIA and ALICO SPVs have executed a plan to recapitalize
AIG and restructure the federal assistance to AIG in the hope of repaying
the government’s assistance, whether the federal government, in particular
Treasury, will fully recoup its assistance may not be known for some time.
As of September 30, 2010, total authorized federal assistance was reduced
from $182.3 billion as of December 2009 to $176.5 billion, primarily
because of a reduction in the credit limit of the FRBNY revolving credit
facility. For the same time period, largely due to fluctuations in asset
values, outstanding federal assistance was reduced from $129.1 billion to
$124.6 billion. Specifically, the debt related to Maiden Lanes II and III
owed to FRBNY on behalf of AIG decreased from $33.9 billion to $28.3
billion as of September 30, 2010. The values of the Maiden Lane II and

53

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

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GAO-11-46 Troubled Asset Relief Program

Maiden Lane III portfolios have continued to increase slightly from
September 2009 through September 30, 2010, while the principal and
interest owed to FRBNY has declined. We also tracked AIG’s book value
(shareholders’ equity) as an indicator on the prospect of AIG’s repayment
and found that it largely has stabilized through September 2010, due to the
unprecedented actions the Federal Reserve and Treasury have taken to
assist AIG. In addition, we tracked AIG’s divestiture of businesses as
another indicator on the prospect of AIG’s repayment. AIG is using the net
cash proceeds from the recent AIA initial public offering (IPO) and the
sale of ALICO to MetLife to repay the FRBNY revolving credit facility. On
January 14, 2011, AIG and relevant parties executed a recapitalization and
restructuring plan through which AIG repaid the outstanding balance in
FRBNY’s revolving credit facility. Nevertheless, the extent to which the
government can recoup the assistance to AIG depends on AIG’s long-term
health and is subject to uncertainty arising from the likelihood of future
changes in general economic and market conditions.

Over the First Three
Quarters of 2010, Total
Government Exposure Has
Declined

The government’s exposure has decreased by about $4.5 billion since
December 2009 to $124.6 billion as of September 30, 2010 (see table 3). 54
As discussed, the federal government has provided various forms of direct
and indirect 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 September 30, 2010, about $20.5 billion of assistance was
being provided directly to AIG via a secured loan through the facility. This
is less than 30 percent of the peak balance of $72.3 billion reached in
October 2008. According to AIG, the company has drawn on the facility to
address its short-term liquidity needs as it has not been able to issue
commercial paper at the corporate level (see table 2) and because certain
of its regulated subsidiaries are restricted from making dividend payments,
or advancing funds, to AIG. However, as discussed earlier, an IPO for AIA
occurred in late October 2010 and ALICO was sold in November 2010 to
MetLife, generating cash proceeds to repay the facility, on closing of the
announced recapitalization plan, as discussed later.

•

Second, in the form of equity shares owned by the government, the
government had a September 30, 2010, balance of $73.3 billion of AIG
shares through (1) Treasury’s Series E noncumulative preferred stock,

54

See table 5 in GAO-09-975.

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GAO-11-46 Troubled Asset Relief Program

(2) Treasury’s equity capital facility that is associated with the fixed-rate
Series F noncumulative perpetual preferred stock, and (3) FRBNY’s
preferred interests in the AIA and ALICO SPVs. This direct government
investment, which as of September 30, 2010, has grown by more than $1.5
billion from $71.8 billion in December 2009, is the primary form of federal
assistance to AIG. It resulted from the November 2008 and March and
April 2009 restructurings and the December 2009 transaction in which the
Federal Reserve exchanged $25 billion of its debt for $25 billion in
preferred interests in the AIA and ALICO SPVs. On April 1, 2010, AIG
announced that pursuant to the terms of the Series E and F preferred
stock agreements, which provide that Treasury has the right to elect
directors to AIG’s board in the event that AIG does not pay dividends on
those series of preferred stock for a total of four quarterly periods,
Treasury elected two directors to the AIG board of directors.
•

Third, in the form of debt owed to the government on behalf of AIG,
FRBNY 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 CDOs from AIGFP’s CDS
counterparties, respectively. As of September 30, 2010, the government’s
exposure (not including interest dividends and fees) on those loans was
$28.3 billion, down from $33.9 billion as of December 2009.
FRBNY acquired its preferred interests in the AIA and ALICO SPVs in
exchange for reducing a substantial portion of AIG’s debt under the
FRBNY revolving credit facility. Moreover, in February 2010 AIG said that
it was not going to pursue a previously announced life insurance
securitization transaction. Specifically, AIG and FRBNY announced in
March 2009, when federal assistance to AIG was restructured for a second
time, that FRBNY would loan SPVs up to $8.5 billion to acquire the rights
to cash flows from insurance policies issued by certain AIG domestic life
insurance subsidiaries. AIG had planned to use proceeds from the sale of
insurance policy cash flows to the SPV to repay FRBNY debt.

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GAO-11-46 Troubled Asset Relief Program

Table 3: Composition of U.S. Government Efforts to Assist AIG and the Government’s Approximate Remaining Exposures, as
of September 30, 2010
Dollars in billions
Direct AIG assistance

Amount
authorized

Indirect AIG assistance

AIG debt owed Government
to government
equity

Other debt
owed to Government
government
equity

Accrued
interest
dividends
and fees

Total
government
exposure

$6.182

$20.47a

Federal Reserve
Revolving Credit
Facility

$29.175

$14.288a

n/a

n/a

n/a

Maiden Lane II

22.5

n/a

n/a

$13.656b

n/a

0.408

14.064

Maiden Lane III

30

n/a

n/a

14.638b

n/a

0.499

15.137

AIA and ALICO

25

n/a

$25.955c

n/a

n/a

n/a

25.955

40

n/a

40d

n/a

n/a

1.605

41.605d

29.835

n/a

7.378e

n/a

n/a

n/a

7.378e

Total direct
assistance

n/a

$14.288

$73.333

n/a

n/a

$7.787

$95.408

Total indirect
assistance

n/a

n/a

n/a

$28.294

n/a

$0.907

$29.201

$176.51

$14.288

$73.333

$28.294

n/a

$8.694

$124.609

Treasury
Series D and E
Series F
Totals

Total direct and
indirect
assistance to
benefit AIG

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

Note: Data are as of September 30, 2010, or latest available.
a

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 gives the trust an
approximately 79.75 percent voting interest in AIG. FRBNY reduced the amount of the commitment
fee on the revolving credit facility by $500,000 to pay for the Series C stock. The AIG loan balance
reported in the H.4.1 reflects the outstanding principal balance, capitalized interest, unamortized
deferred commitment fees, and the allowance for the loan restructuring, which was initially recorded
in July 2009. On January 14, 2011, AIG announced that it executed the recapitalization action plan,
which stated that AIG is using the net cash proceeds from the recent AIA IPO and sale of the ALICO
to Metlife to repay the FRBNY revolving credit facility.

b

FRBNY created an SPV—Maiden Lane II LLC—to alleviate liquidity and capital pressures on AIG by
purchasing RMBS from AIG U.S. insurance subsidiaries, and another SPV called Maiden Lane III
LLC to alleviate liquidity and capital pressures on AIG by purchasing CDOs from AIGFP’s
counterparties in connection with the termination of CDS. Principal owed as of September 29, 2010,
was $13.656 billion for Maiden Lane II LLC and $14.638 billion for Maiden Lane III LLC.

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GAO-11-46 Troubled Asset Relief Program

c

AIG created two SPVs to hold the shares of certain of its foreign life insurance businesses (AIA and
ALICO). In November 2010, the company announced that it sold ALICO to MetLife for approximately
$16.2 billion (including approximately $7.2 billion in cash and the remainder in MetLife securities) and
in October 2010 it announced that it had raised more than $20.5 billion in gross proceeds in the initial
public offering of two-thirds of the shares of AIA. On January 14, 2011, AIG announced that it
executed the signed recapitalization plan, which stated that the funds for repaying the FRBNY
revolving credit facility were to come from the net cash proceeds from the IPO of 67 percent of AIA
and the sale of ALICO.
d

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 liquidation preference
amount of Series E stock that Treasury received. When the Series D preferred shares were
exchanged for Series E preferred shares, $1.605 billion of accrued but unpaid dividends were
included in the liquidation preference of the Series E preferred stock. On January 14, 2011, AIG
announced that it executed the signed recapitalization plan, which stated that Treasury’s shares of
AIG’s Series E preferred stock were to be exchanged for approximately 924.5 million shares of AIG
common stock.
e

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. On
January 14, 2011, AIG announced that it executed the signed recapitalization plan, which stated that
AIG was to draw down amounts remaining on the Series F preferred stock and use them to
repurchase all or a portion of FRBNY’s preferred interests in the AIA and ALICO SPVs. According to
this plan, AIG and Treasury were to amend and restate the Series F securities purchase agreement
to provide for the issuance of Series G preferred stock by AIG to Treasury. According to the plan,
AIG’s right to draw on Treasury’s equity capital facility was to terminate with the closing of the
recapitalization. Treasury’s shares of the Series F preferred stock have been exchanged for (1)
preferred interests in the AIA and ALICO SPVs transferred to Treasury, (2) newly issued shares of
Series G preferred stock, and (3) approximately 167.6 million shares of AIG common stock.

Due to restructuring and mandatory repayments from the sale of assets,
the borrowing limit on the amount of direct assistance available to AIG
through the FRBNY revolving credit facility has been lowered several
times since the facility was created, and the amount AIG owes the facility
also has been reduced (see app. VIII). Initially, FRBNY made $85 billion in
assistance available to AIG. Both the available assistance and, in turn, the
outstanding balance were reduced in November 2008 when the
government first restructured its 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. 55 The proceeds of this sale were used to pay down AIG’s

55

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-11-46 Troubled Asset Relief Program

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 outstanding debt, and increased the federal
equity position by $40 billion. It also involved a reduction of the borrowing
limit on the credit facility from $85 billion to $60 billion.
The borrowing limit and outstanding balance were again reduced in
December 2009 when FRBNY received preferred interests in the AIA and
ALICO SPVs, 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 interests in the SPVs
of the same amount. In effect, the transactions exchanged debt for equity.
Also, the borrowing limit on the credit facility was reduced from $60
billion to $35 billion. To accelerate its efforts to repay the revolving credit
facility AIG announced in March 2009 that it would generate proceeds of
about $51 billion once pending agreements to sell AIA and ALICO to
Prudential PLC and MetLife, respectively, were finalized. Later, AIG
announced that it had terminated its pending agreement to sell AIA to
Prudential PLC. In late October 2010 an IPO of two-thirds of the shares of
AIA generated $20.5 billion in cash, and in November 2010 ALICO was sold
to MetLife for $16.2 billion, including approximately $7.2 billion in cash
and the remainder in MetLife securities. According to the executed
recapitalization plan, the net cash proceeds from both transactions were
to be loaned by the SPVs to AIG to repay the revolving credit facility.
The borrowing limit on the facility was reduced several more times in 2010
because of mandatory repayments from proceeds from sales of assets and
businesses. In addition, in August 2010 International Lease Finance
Corporation raised $3.9 billion by issuing senior secured debt in the
private market. Like an asset sale, this activity triggered a mandatory
prepayment under the FRBNY credit agreement with AIG. The outstanding
balance includes outstanding principal and capitalized interest net of
unamortized deferred commitment fees and allowance for loan
restructuring. 56 Changes in amounts owed on the facility fluctuate weekly
and could increase or decrease depending on liquidity needs related to

56

Balance includes accrued interest and fees of $6.182 billion as of September 30, 2010.

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GAO-11-46 Troubled Asset Relief Program

ongoing operations and restructuring activities, such as more conversions
of debt to preferred equity. 57
We also are monitoring the status of the government’s indirect assistance
to AIG through the Maiden Lane II and Maiden Lane III facilities (see app.
VIII). FRBNY provided loans to the facilities, giving Maiden Lane II capital
to purchase RMBS from AIG’s domestic life insurance companies and
Maiden Lane III capital to purchase multisector 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. For Maiden Lanes II and III, FRBNY debt and portfolio values
peaked at $43.9 billion and $48.2 billion, respectively, in December 2008.
At that time, the combined portfolio value was $4.3 billion higher than the
combined FRBNY debt. Since then, and through September 29, 2010, the
debt was reduced by $14.7 billion and the portfolio value, which has
fluctuated over time, by $9.3 billion. This indicated that during that 21month period, market prices of portfolio assets overall had not
deteriorated while the debt was being reduced by cash flows generated by
the portfolio from investment yields and asset maturities. Thus, as of
September 29, 2010, Maiden Lane II had a portfolio value of $15.9 billion
and Maiden Lane III had a portfolio value of $23 billion against unpaid
FRBNY debt of $14.1 billion and $15.1 billion, respectively.
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 but
added that it has the authority to change its portfolio strategy at any time.
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 repay the debt. Federal
Reserve officials also said that they constantly evaluate opportunities to

57

See appendix VIII for additional details about amounts owed under FRBNY’s revolving
credit facility.

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GAO-11-46 Troubled Asset Relief Program

sell assets—while still meeting their objective of maximizing long-term
cash flows—and have been able to sell a handful of assets across the two
Maiden Lanes. They clarified that their decision to sell an asset depends on
an asset’s discounted expected future cash flows and weighting those cash
flows across scenarios by how likely they are to occur. The value of these
assets relative to the outstanding loan balance had improved since the
latter part of 2008 and the Maiden Lanes have continued to receive
payments of principal and interest on their portfolios. The officials added
that the assets in the Maiden Lanes are high-quality bonds and thus they
expect to continue receiving timely payments of interest and principal on
most bonds in the portfolio regardless of the holding period. In their view,
the risk is that these payments cease as the underlying portfolio has
substantially matured or defaulted prior to the full repayment of
outstanding principal. 58 As assets mature, are sold, or pay interest, any
portion remaining after paying operating expenses of the Maiden Lanes
will go toward reducing the loan balance. These payments will reduce the
amount of principal owed by the Maiden Lanes to FRBNY. As of
September 30, 2010, proceeds from the Maiden Lanes had been used to
pay down $15.5 billion of the outstanding principal. 59

AIG and Relevant Parties
Executed the Five
Transactions Provided in
the Master Transaction
Agreement in the Closing
of the Recapitalization
Plan

In September 2010, AIG reached an agreement in principle for a
recapitalization to begin to repay its federal assistance. Most of the plan
hinged on the success of several transactions that involved a restructuring
of the government’s assistance to AIG. On December 8, 2010, this
agreement was superseded by a master transaction agreement signed by
AIG, FRBNY, Treasury, the AIG Credit Facility Trust (the Trust), as well as
the AIA and ALICO SPVs, and this plan was executed on January 14, 2011.
First, AIG repaid FRBNY in cash all the amounts owed under the FRBNY
revolving credit facility, which as of September 30, 2010, was
approximately $20.5 billion, and the credit facility was terminated. The
funds for repayment came from loans to AIG from the SPVs that held the
net cash proceeds from the IPO of AIA and the sale of ALICO. The net cash

58

Federal Reserve officials added that BlackRock, its investment manager for the Maiden
Lanes, currently produces moderate and extreme stress case scenarios to evaluate the
potential risk to their outstanding loans if either significant downside shock were to occur.
As of June 30, 2010, they said that BlackRock projected full repayment of interest and
principal on the FRBNY loans to Maiden Lane II and III under the moderate and extreme
stress scenarios.

59

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

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GAO-11-46 Troubled Asset Relief Program

proceeds from the AIA IPO were approximately $20.1 billion and from the
ALICO sale to MetLife were approximately $7.2 billion.
Second, AIG drew down an amount available under Treasury’s equity
capital facility established pursuant to the Series F preferred stock
securities purchase, less an amount up to $2 billion. AIG used the amount
drawn down to repurchase all or a portion of FRBNY’s preferred interests
in the AIA and ALICO SPVs and then transferred the repurchased
preferred interests to Treasury in partial consideration for the Series F
shares. 60 In addition to the value provided by the remaining equity stake in
AIA and equity interests in MetLife received as part of the ALICO sale, AIG
used the proceeds from the sales or dispositions of its interests in its Nan
Shan Life Insurance Company, Ltd.; AIG Star Life Insurance Co. Ltd.; AIG
Edison Life Insurance Company; International Lease Finance Corporation;
and Maiden Lane II LLC and Maiden Lane III LLC to repay the proceeds
loaned to AIG from the AIA and ALICO SPVs, providing funds that the
SPVs used to redeem any of the preferred interests in the SPVs that
remained outstanding after the closing. 61 Any preferred interests in the
SPVs not transferred to Treasury at closing continue to be held by FRBNY
and would be senior to the preferred interests in the SPVs transferred to
Treasury. AIG has the right to designate up to $2 billion of the remaining
Series F preferred stock to a new Series G cumulative mandatory
convertible preferred stock for general corporate purposes (this is
discussed in more detail below).
Third, AIG and Treasury amended and restated the securities purchase
agreement related to the Series F preferred stock so that AIG could issue
to Treasury Series G preferred stock at closing, and AIG’s right to draw on
the Series F preferred stock was terminated. AIG’s right to draw on the
Series G preferred stock is subject to terms and conditions substantially
similar to those in the agreement. According to Treasury officials, the
terms of the Series G stock would make it punitive for AIG to draw on the
stock for financing. Indeed, according to the agreement, dividends on the

60

In connection with the issuance of the Series E and F preferred stocks and as a
participant in TARP, AIG had agreed to a number of covenants with Treasury related to
corporate governance, executive compensation, political activity, and other matters. These
covenants will continue to apply after the closing. Also, AIG will agree to provide Treasury
and FRBNY with certain control and information rights.

61
On January 12, 2011, AIG announced an agreement to sell its 97.57 percent interest in Nan
Shan Life Insurance Company, Ltd. to Ruen Chen Investment Co., Ltd. of Taiwan for $2.16
billion in cash.

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GAO-11-46 Troubled Asset Relief Program

Series G preferred stock would be payable on a cumulative basis at a rate
per annum of 5 percent, compounded quarterly. In addition, Treasury and
AIG officials said that if AIG did not repay its draw on this facility within a
year, then Treasury’s Series G preferred stock would be converted to
common stock at the lesser of 29.29 percent and 80 percent of the average
volume weighted average price over the 30 trading days commencing
immediately after the date the common stock trades without the right to
receive warrants in connection with the recapitalization. 62
Fourth, the various preferred stock held by the Trust and Treasury were
exchanged for common stock. The exchanges included the following:
1. The Trust’s shares of AIG’s Series C perpetual, convertible,
participating preferred stock were exchanged for approximately 562.9
million shares of AIG common stock, which are now held by Treasury;
2. Treasury’s shares of AIG’s Series E fixed rate noncumulative preferred
stock were exchanged for approximately 924.5 million shares of AIG
common stock; and
3. Treasury’s shares of the Series F preferred stock were exchanged for
preferred interests in the AIA and ALICO SPVs transferred to Treasury,
newly issued shares of Series G preferred stock, and approximately 167.6
million shares of AIG common stock.
Treasury now holds approximately 1.655 billion shares of AIG common
stock, representing approximately 92.1 percent of the AIG common stock
that would be outstanding as of the closing.
Fifth, AIG issued to holders of AIG common stock, by means of a dividend,
10-year warrants to purchase up to 75 million shares of AIG common stock
at an exercise price of $45 per share. 63 According to Treasury officials, the
warrants were issued to address the AIG board of directors’ desire to

62

AIG may not directly redeem the Series G preferred stock while FRBNY continues to hold
any preferred interests in the AIA and ALICO SPVs, but AIG will have the right to use cash
to repurchase a corresponding amount of the preferred interests in the SPVs from FRBNY,
which will then be transferred to Treasury to reduce the aggregate liquidation preference of
the Series G preferred stock. If FRBNY no longer holds preferred interests in the AIA and
ALICO SPVs, AIG may redeem in cash the Series G preferred stock, at the liquidation
preference plus accrued and unpaid dividends.
63

Exercise price is the price at which the option holder may buy or sell the underlying asset.

Page 64

GAO-11-46 Troubled Asset Relief Program

compensate existing shareholders for the dilutive effect of the
recapitalization plan.
Implementation of the recapitalization plan began on January 6, 2011,
when AIG’s Board of Directors conditionally declared a dividend in the
form of warrants to purchase shares of AIG’s common stock to the holders
of AIG common stock subject to the condition that the parties to the
recapitalization plan determined as of January 12 and closed on January
14. On January 12, AIG announced that this condition had been satisfied. It
proceeded with the distribution of the warrants, which were 10-year
warrants to purchase up to 75 million shares of AIG common stock. The
warrants were issued on January 19, 2011, to AIG’s common shareholders
of record as of January 13, 2011. Each warrant entitles the holder to
purchase one share of AIG common stock, par value $2.50 per share (AIG
common stock), at $45 per share. With these exchanges completed,
Treasury now owns approximately 92 percent of the common stock of
AIG. Treasury also owns new Series G preferred shares, which AIG may
draw for general corporate purposes, and preferred interests in the AIA
and ALICO SPVs. AIG expects that over time, Treasury will sell its shares
of AIG common stock.

With Continued Federal
Debt and Equity
Assistance, AIG’s Book
Value Remained Generally
Stable over the First Nine
Months of 2010

To assess AIG’s prospects of repaying federal assistance, we developed an
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 tracks AIG’s book value
annually over several years before the financial deterioration that resulted
in federal assistance, and from that point forward compares the book
value with the level of federal debt and equity assistance provided but not
yet repaid on a quarterly basis.
Figure 13 shows that AIG’s shareholders’ equity peaked in December 2006
at $101.7 billion and bottomed at $45.8 billion in March 2009. It climbed to
$72.7 billion in September 2009, and has fluctuated more modestly since
then. As of September 30, 2010, shareholders’ equity was at $80.8 billion,
compared to $95.4 billion of total federal assistance on AIG’s books either
as debt owed or as preferred equity. However, as discussed earlier, as of
the third quarter 2010, AIG’s shareholders’ equity currently is positive,
which is entirely the result of federal assistance.

Page 65

GAO-11-46 Troubled Asset Relief Program

Figure 13: Debt and Equity Federal Assistance Provided to AIG Compared with AIG’s Book Value, December 2004 through
September 30, 2010
Dollars in billions
120
101.3

100

95.5
12.2

103.7
2.3

95.4

11.2

26.5

25.1

25.6

7.4

7.4

95.4

4.7

9.6

15.1

1010

27.4

99.5

98.7

20.5

23.4

80
47.4

41.0

44.8

40.4

60

24.5

26.0

101.7
95.8

86.3

78.1
71.2

5.2

3.2

1.2

40 79.7

63.0

75.0

69.8

75.5

58.0

52.7
40.0

20

7.4
80.8

72.7
45.8 41.6

41.6

41.6

41.6

41.6

41.6

41.6

0
Dec.
2004

Dec.
2005

Dec.
2006

Dec.
2007

June

Sept.

2008

Dec.

Mar.

June

Sept.

Dec.

2009

Mar.

June

Sept.

2010

Federal Reserve Commercial Paper Funding Facility
Principal and interest owed to FRBNY on credit facility

Debt and
equity federal
assistance

FRBNYl liquidation preferences in AIA and ALICO SPUs
Treasury liquidation preference in Series F Preferred Shares
Treasury liquidation preference in Series E Preferred Shares (replaced Series D shares)

Book value

AIG’s consolidated shareholders’ equity (assets minus liabilities or book values)
Source: GAO analysis of AIG SEC filings.

AIG Has Implemented
Major Divestitures

Part of AIG’s plan has been for the company to restructure itself into a
smaller company by selling some of its businesses, and that has included
major recent divestitures. In 2009 the company divested several of its
businesses and in the Fall of 2010, AIG sold ALICO and completed an IPO
of AIA, two insurance companies that were major subsidiaries of AIG.
According to Federal Reserve officials, the proceeds from the AIA and
ALICO transactions were to be held in an escrow-type account and would
not be used to pay either the FRBNY credit facility or the preferred
interests in the AIA and ALICO SPVs until all of the closing conditions of
the restructuring plan were met. Cash proceeds from certain other asset
sales will be available to fund operations and redeem preferred interests.
To track the progress of this activity, we developed an indicator to
chronologically track divestitures (or dispositions) by AIG and the terms

Page 66

GAO-11-46 Troubled Asset Relief Program

of such transactions, including cash proceeds. Our indicator groups the
divestitures and the related proceeds by the quarters in which the
transactions closed.
Figure 14 shows aggregate proceeds from dispositions closed by quarter
from the third quarter of 2008 through the third quarter of 2010, and as of
November 30, 2010, broken out by cash proceeds, noncash proceeds, and
proceeds with the cash portion not disclosed (figure does not include the
AIA IPO, which is not a disposition). AIG said that it has used the cash
proceeds from these sales to meet its obligations, including the credit
facility; to cover capital needs; and to provide loans to its subsidiaries. As
of November 30, 2010, AIG disclosed that it had received about $27.2
billion in total proceeds from sales, $12.9 billion of which was cash. Figure
14 shows that proceeds were increasing each quarter through the third
quarter of 2009. In the last quarter of 2009, AIG closed on the sale of 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 period that had not yet closed. The slowdown in sales also may have
reflected the asset-disposition strategy of AIG’s current president and
chief executive officer, which has been to hold assets in hopes for better
terms at a later date rather than to sell them quickly. 64

64

For a list of dispositions, see appendix IX.

Page 67

GAO-11-46 Troubled Asset Relief Program

Figure 14: Proceeds from Dispositions by Quarter, September 30, 2008, through
November 30, 2010
Dollars in millions
18,000

15,000
7,200
12,000

9,000

6,000
9,000
1,136

3,000

820

0

9/30/08 12/31/08

43
739
76
3/31/09

1,900

1,755

2,441

550

200

6/30/09

9/30/09

70
557

729

12/31/09 3/31/10

6/30/10

9/30/10 11/30/10

Proceeds not separated by cash and noncash in public disclosures
Cash proceeds
Noncash proceeds
Sources: AIG and GAO analysis of AIG press releases and SEC filings.

Most recently, AIG has reported significant progress in disposing of two of
its major assets. On March 8, 2010, AIG announced that its board had
agreed to sell ALICO to MetLife, and the sale subsequently was closed in
November 2010 for $16.2 billion, which is reflected in the figure above. In
March 2010, AIG also announced that its board had approved the sale of
AIA to Prudential PLC, but subsequently this sale was terminated and AIA
was positioned for an IPO. The IPO occurred in late October 2010 and
generated $20.5 billion, which is not reflected in the figure above since the
transaction was not a sale. On the closing of the recapitalization plan, the
net cash proceeds from the sale of ALICO and the AIA IPO were used to
repay the FRBNY revolving credit facility. 65 AIG, Treasury, FRBNY, and the

65
The cash proceeds will be lent by the SPVs to the parent company in the form of secured
nonrecourse loans and the loan proceeds will then be used to repay the facility. Also, at the
time of repayment and termination of the credit agreement, any remaining unamortized
prepaid commitment fee asset, which approximated $4.3 billion at September 30, 2010, will
be written off through a charge to earnings.

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GAO-11-46 Troubled Asset Relief Program

AIG Credit Facility Trust see these transactions as critical for AIG to repay
its federal assistance.
The unprecedented steps the Federal Reserve and Treasury have taken 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, including the most recent
recapitalization and restructuring plan, 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 2009 continued into the
first three quarters of 2010. However, the indicators also show that AIG
has continued to rely heavily on federal assistance for its liquidity needs
and equity capital structure.
Since the beginning of our monitoring effort, federal assistance provided
to AIG gradually has 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 SPVs
for the government. With the January 14, 2011, completion of the
restructuring plan, all of the government’s assistance to AIG is now in the
form of common stock and preferred interests. Consequently, the
government’s, and thus the taxpayer’s, exposure to AIG increasingly is
expected to be tied to the success of AIG, its ongoing performance, and its
value as seen by investors in AIG’s stock. The sustainability of any positive
trends in AIG’s operations will depend on how well it manages its business
in the current economic environment. Similarly, the government’s ability
to fully recoup its assistance will be determined by the long-term health of
AIG 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, which we
incorporated as appropriate.

Page 69

GAO-11-46 Troubled Asset Relief Program

We are sending copies of this report to interested congressional
committees and members, the Congressional Oversight Panel, Financial
Stability Oversight Board, Special Inspector General for TARP, 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.

Orice Williams Brown
Director, Financial Markets
and Community Investment

Page 70

GAO-11-46 Troubled Asset Relief Program

List of Congressional Addressees
The Honorable Max Baucus
The Honorable Thad Cochran
The Honorable Kent Conrad
The Honorable Orrin Hatch
The Honorable Daniel K. Inouye
The Honorable Tim Johnson
The Honorable Jeff Sessions
The Honorable Richard C. Shelby
United States Senate
The Honorable Hal Rogers
Chairman
The Honorable Norm Dicks
Ranking Member
Committee on Appropriations
House of Representatives
The Honorable Paul Ryan
Chairman
The Honorable Chris Van Hollen
Ranking Member
Committee on the Budget
House of Representatives
The Honorable Spencer Bachus
Chairman
The Honorable Barney Frank
Ranking Member
Committee on Financial Services
House of Representatives
The Honorable Dave Camp
Chairman
The Honorable Sander M. Levin
Ranking Member
Committee on Ways and Means
House of Representative

Page 71

GAO-11-46 Troubled Asset Relief Program

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 15, which illustrates the
AIG parent company and 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 September 30, 2010, AIG
had assets of $872 billion and revenues of $19.1 billion for the 3 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. According to
AIG, there have been no material changes in their organization chart as of
September 1, 2010.

Page 72

GAO-11-46 Troubled Asset Relief Program

Appendix I: AIG Operations

Figure 15: AIG, Its Subsidiaries, and Percentage Ownership by Parent Company as of September 1, 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 73

GAO-11-46 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%

}

}

90%

r

AMPLICO Powszechne Towarzystwo Emerytalne S.A. 50%

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

BPI-Philam Life Assurance Corporation 51%

cc
dd

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

n
Pharaonic American Life Insurance Company 74.875%

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

t

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 74

GAO-11-46 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 75

GAO-11-46 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.

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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 AIG and the Federal Reserve Bank of New York has 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 has 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.

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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 78

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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 remained largely 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
support that the Board of Governors of the Federal Reserve System
(Federal Reserve) and the Department of the Treasury provided. 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. Months later,
in February 2010, Fitch placed AIG’s U.S. property/casualty companies on
“rating watch negative,” but in early July 2010, Fitch reviewed all of AIG’s
ratings, affirmed those ratings, and revised the rating outlook to “stable”
from “evolving.” It removed the property/casualty companies from “rating
watch negative” and reassigned them as “stable outlook.” Fitch’s ratings of
AIG have remained unchanged since then. And in April 2010, S&P reported
that AIG made solid progress in its overall restructuring plan and in
stabilizing its insurance operations. S&P affirmed its ratings of AIG and
maintained their negative outlook, reflecting S&P’s view of the challenges
AIG faces in sustaining performance of its insurance operations and

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.

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

capitalizing its life insurance businesses. S&P’s ratings too have remained
unchanged.
Table 4: AIG’s Key Credit Ratings, March 31, 2009, through September 30, 2010
Mar. 31,
2009

May 15, Dec. 15,
2009
2009

Mar. 31,
2010

S&P

A-/
negativea

no
change

no
change

Moody’s

A3/
negativea

no
change

no
change

Fitch

A

BBB/
no
evolving change

Rating agency

July 31,
2010

Sep. 30,
2010

Potential consequences of future
downgrade

no change no change

no
change

no change no change

no
change

no change BBB/
stable

no
change

AIG Financial Products Corp. 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:
•
At September 30, 2010, a onenotch, two-notch, or three-notch
downgrade from S&P and Moody’s
would have cost AIG up to $1.2
billion, $2.4 billion, and $2.6 billion,
respectively, in cumulative
additional collateral postings and
termination payments.
•
At June 30, 2010, a one-notch,
two-notch, or three-notch
downgrade from S&P and Moody’s
would have cost AIG up to $1.7
billion, $3 billion, and $3.2 billion,
respectively, in cumulative
additional collateral postings and
termination payments.

no
change

Debt
Long-term

Short-term
S&P

A-1 for AIG no
Funding,
change
Curzon, and
a
Nightingale

no
change

no change no change

Moody’s

P-1 for AIG
a
funding

no
change

no
change

no change no change

Fitch

F1

no
change

no
change

no change no change

Financial strength

AIG affiliates in commercial paper
programs (AIG Funding, Curzon
Funding LLC, and Nightingale LLC)
could have been ineligible for
participation in the Federal Reserve’s
on review for
Commercial Paper Funding Facility
possible
(CPFF).b
downgrade

no
change
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.

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

Mar. 31,
2009

May 15, Dec. 15,
2009
2009

Mar. 31,
2010

AM Best

A/
a
negative

no
change

no
change

S&P

A+/
negative

no
change

Moody’s

A1/
developing

no
change

Fitch

AA-

Rating agency

July 31,
2010

Sep. 30,
2010

Potential consequences of future
downgrade

no change no change

no
change

no
change

no change no change

no
change

no
change

A1/
negative

no change

no
change

A-/
no
evolving change

No
change

A-/
stable

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.
Domestic life new 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.
A.M. Best commented on September
30, 2010, that its ratings of the AIG
holding company and its subsidiaries
were not changed by the
announcement of a plan for AIG to exit
government ownership.

Life insurer

Property/casualty insurer
AM Best

A/
a
negative

no
change

no
change

no
change

no change

no
change

S&P

A+/
negative

no
change

no
change

no
change

no change

no
change

Moody’s

Aa3/
negative

no
change

no
change

no change no change

no
change

Fitch

AA-

A+/
no
evolving change

placed
rating on
rating
watch negative

no
change

A+/
stable

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. A.M.
Best commented on September 30,
2010, that its ratings of the AIG holding
company and its subsidiaries were not
changed by the announcement of a
plan for AIG to exit government
ownership.

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

These are key ratings.

b

AIG’s International Lease Finance Corporation lost access to CPFF funds after an S&P downgrade
on Jan. 21, 2009. CPFF expired for new issuances on February 1, 2010, and as of June 30, 2010,
AIG had no commercial paper outstanding with the CPFF.

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Appendix II: AIG’s Credit Ratings and an
Overview of Definitions of Credit 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.
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 the obligation and the principal and interest are
adequately secured, but the bonds are more vulnerable
to a changing economy.

A

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
Ba1 and
interest and principle may be in danger, in cases in which below
default may be likely.

BB+ and
below

BB+ and
below

Sources: 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 midrange 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 82

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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 it is 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. Prior to October 2008, AIG’s corporate liquidity was available
through the private sector, but that month, AIG looked to other sources
for its corporate liquidity, namely FRBNY’s credit facility and the new
CPFF. In November 2008, these two sources became AIG’s primary
sources of liquidity. Throughout 2009 and into 2010, FRBNY’s credit
facility remained a primary source of liquidity, but CPFF and AIG’s
bilateral facilities and cash and short-term investments became secondary
sources of liquidity. Starting in April 2009, AIG was obtaining the funds
needed to meet its obligations primarily from the Department of the
Treasury’s equity capital facility, which remains its primary source of
liquidity into 2010, as well as from FRBNY’s credit facility.
Table 6: Amounts of Available Corporate Liquidity, November 5, 2008, through and October 27, 2010
Dollars in millions
Nov. 5,
2008

Feb. 18,
2009

Apr. 29,
2009

Jul. 29,
2009

Oct. 28,
2009

Feb. 17,
2010

Apr. 28,
2010

Jul. 28, Oct. 27,
2010
2010

$24,000

$24,800

$17,400

20,000

$18,300

$14,000

$11,007

$14,380 $14,587

Commercial paper under
CPFF and syndicated and
bilateral facilities

5,600

753

1,940

3,493

4,872

0

0

0

0

Unused bank syndicated
and bilateral facilities

3,820

0

0

0

0

0

0

0

0

AIG cash and short-term
investments

0

1,100

445

407

359

287

375

409

515

n/a

n/a

29,835

28,685

26,629

22,292

22,292

22,292

22,292

$33,420

$26,653

$49,620

$52,585

$50,160

$36,579

$33,674

FRBNY revolving credit
facility

Treasury equity capital
facility
Total

$37,081 $37,394

Source: GAO analysis of AIG Security and Exchange Commission filings.

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Appendix III: Corporate Liquidity Available
to AIG

Note: CPFF, a Federal Reserve emergency facility that became operational in October 2008 and
closed in February 2010, provided a liquidity backstop to U.S. issuers of commercial paper through a
special purpose vehicles that purchased eligible 3-month unsecured and asset-backed commercial
paper from eligible issuers using financing provided by FRBNY. Its purpose was to enhance the
liquidity of the commercial paper market.

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GAO-11-46 Troubled Asset Relief Program

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 equity investments 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 common
and preferred equity stakes depends on growth in the value of common
shares. As shown in figure 16, the market value of AIG’s common shares
outstanding peaked in December 2006 at $186.4 billion and by June 2008,
the 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, to $4.2 billion by the end of 2008.
From March 1, 2009, when the AIG credit facility trust and AIG entered
into a purchase agreement for Series C preferred stock, through
September 30, 2010, the value of AIG’s common shares outstanding have
fluctuated between $2.7 billion and $5.9 billion, and as of September 2010
were valued at $5.3 billion. The value of the Series C preferred shares is
part of the federal government’s equity investment in AIG, and under the
terms of the Series C preferred stock issuance, the preferred stock is
convertible into AIG’s common stock. The value of the federal
government’s Series C preferred shares is based on the value of common
shares outstanding. The value of both increased between March and
September 2009 when the share price of AIG common stock rose but fell
in the fourth quarter of that year when the share price declined. 1 Since the
fourth quarter of 2009, the government’s equity interest has increased from
just under $16 billion to almost $20.8 billion.

1

While not currently convertible because of the pending implementation of the AIG
recapitalization plan, the federal equity investment includes Series C preferred shares
owned by the Trust that are convertible into approximately 79.75 percent of total
outstanding common shares. The conversion formula provides that the trust will receive
79.9 percent of AIG’s common stock less the percentage of common stock that may be
acquired by or for the benefit of the 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 (now
Series E), 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 16: Market Capitalization of AIG Outstanding Common Shares, Including Trust-Owned Preferred C Shares That Are
Convertible into Approximately 79.75 Percent of AIG’s Outstanding Common Shares, December 2004 through September
2010
Dollars in millions except common stock share price
NYSE closing share price of AIG common stock (restated for 1/20 reverse split):
200,000
$1,249.38 $1,309.66 $1,388.91 $1,142.90 $523.90
180,000
160,000

186,402
170,507

177,169

147,475

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

71,146

60,000

NYSE closing share price of AIG common stock:
$66.60

$31.40

$20.00

$23.20

$44.11

10,642

12,345

2,691

3,122

5,937

Mar.

June

Sept.

$29.98

$34.14

$34.44

$39.10

15,953

18,166

18,326

20,806

4,049

4,607

4,653

5,283

Dec.

Mar.

June

Sept.

40,000
20,000

23,472
8,957

0
Dec.

Dec.

Dec.

Dec.

2004

2005

2006

2007

June
2008

4,223

Sept.

Dec.

2009

2010

Value of preferred series C shares based on convertibility into AIG 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 held by Treasury 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 a
proxy indicator 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 17, capital
and surplus for the first nine months of 2010 has changed little for AIG’s
largest domestic property/casualty companies and increased more than 12
percent for AIG’s 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 findings in our previous update and in
the results of the adjusted capital indicator discussed in the report, these
proxy results showed that AIG’s largest domestic property/casualty
companies and largest domestic life and retirement services companies
did not need federal assistance during the first nine months of 2010 to
boost their regulatory capital.

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Appendix V: AIG Insurance Subsidiaries’
Capital and Surplus

Figure 17: AIG Domestic Insurance Subsidiaries: Capital and Surplus at December 31, 2009, and September 30, 2010, and
Primary Activities That Affected It During the First 9 Months of 2010
Dollars in millions
Primary activities that affected capital and surplus in the first nine months of 2010
Capital and surplus
12/31/09
$26,973

Net
income

9/30/10

Deferred
income
taxes

Change in
nonadmitted
assets

Change in
asset valuation
reserve

$687

n/ab

n/ab

-480

-75

Stockholder
dividends

$27,209

AIG’s
largest
domestic
property/
casualty
companies

AIG’s
largest
domestic
life insurance
and retirement
services
companies

Change in
unrealized
capital gainsa

$1,398

$118
-$73

15,595

17,520

83

2,581

1,490
-1,660

Sources: AIG and GAO analysis of AIG financial statements filed with NAIC.
a

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

b

Dollar amount is either zero or too small to constitute a major activity. Also other categories were
excluded that had larger, but minor dollars of activity.

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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.
Figures 18 and 19 provide an indicator that can be used to track the
profitability 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. As
we have previously discussed, this was 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. This
was partly because of Maiden Lane II’s purchase of residential mortgagebacked securities from these companies, which helped prevent continued
liquidity strains on AIG. Most recently, as shown in figure 18, the reported
net realized capital losses for the domestic companies were nearly $800
million in the first quarter of 2010 but AIG reported a $20 million gain in
the third quarter 2010. Pretax operating net income increased over that
same period, from $327 million to $998 million.

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

Figure 18: Key Quarterly Revenues and Expenses for AIG Domestic Life Insurance and Retirement Services Companies for
First Quarter of 2007 through Third Quarter of 2010
Key components of operating income
Premium income and
other considerations
and fee income

Interest and
dividend income

Policyholder benefits
and claims incurred

Operating income
before net realized
capital gains or losses

Net realized capital
losses or gains

Pretax operating
income or loss

0
67

64
-3

99

8

6
1,
32
,1

-2

-2

,1

54

-3,000

97

08

7

3

51
2,

2,

35

8
26

27
1,

1,

9

0

8

20

Dollars in millions
3,000

-6,,000

-9000

-12,000

-15,000
123412341234123 123412341234123 123412341234123 123412341234123 123412341234123 123412341234123
2007

2008

2009

2010

2007

2008

2009

2010

2007

2008

2009

2010

2007

2008

2009

2010

2007

2008

2009

2010

2007

2008

2009

2010

Quarter
Source: GAO analysis of AIG’s quarterly financial supplements.

Note: As reported, the data do not reflect prior period restatements after December 31, 2009.

As shown in figure 19, foreign companies reported realized capital losses
in the first quarter of 2010 of $61 million, but these were followed by gains
the next two quarters. Pretax operating income for these companies in the
first three quarters of 2010, while fluctuating, at about $700 million is
about half of what it was at the end of 2009. Overall, after accounting for
policyholder operating income and a mix of realized capital gains and
losses both the domestic and foreign life companies reported positive
pretax operating income for the first three quarters of 2010. Whether these
positive results can continue is unclear.

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

Figure 19: Key Quarterly Revenues and Expenses for AIG, Life Insurance and Retirement Services Companies for AIG
Foreign Life Insurance and Retirement Services Companies First Quarter of 2007 through Third Quarter of 2010
Key components of operating income

1

5
34
1,

69

7

1

Pretax operating
income or loss

15

29

4

4
05

53

1,

Net realized capital
losses or gains

,6

79

-2

,6

29

1,

6

1
86

55

Operating income
before net realized
capital gains or losses

Policyholder benefits
and claims incurred

83

9

Interest and
dividend income

2,

20
6,

Dollars in millions
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
-1,000
-2,000
-3,000
-4,000
-5,000
-6,000

1

Premium income and
other considerations
and fee income

-4

-7,000

123412341234123 123412341234123 123412341234123 123412341234123 123412341234123 123412341234123
2007

2008

2009

2010

2007

2008

2009

2010

2007

2008

2009

2010

2007

2008

2009

2010

2007

2008

2009

2010

2007

2008

2009

2010

Quarter
Source: GAO analysis of AIG’s quarterly financial supplements.

Note: As reported, the data do not reflect prior period restatements after December 31, 2009.

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

Appendix VII: Underwriting Ratios for AIG’s
Property/Casualty Companies
The underwriting profitability of property/casualty insurers can be
measured using the combined ratio, which is the sum of the loss and the
expense ratios. 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 more than 100 percent would reflect an
underwriting loss.
As shown in figure 20, 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 also was 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 to more than
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 AIG’s insurance underwriting was not profitable. The combined
ratio’s rise in the fourth quarter of 2009 also largely was 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 (that is, claims arose years
after premiums were collected and were higher than reserve estimates). In
the first quarter of 2010 the ratio dropped significantly to just more than
102, and has changed little in the two subsequent quarters.

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

Figure 20: AIG Commercial Insurance Operating Ratios, First Quarter of 2007 through Third Quarter of 2010
Dollars in millions
146.87

150
133.33
120

108.96

91.23
90 86.74

83.57

96.32

99.82

93.94

68.56

73.47
66.29

102.43

106.5

121.39

101.7
Combined
ratio

82.84
87.04

60

106.36

100.40

74.38

90.20
79.83

22.08

74.63

Loss ratio

84.81

78.32

19.99

21.55

Q1
2009

Q2

Q3

76.15

82.2

79.7

64.16

43.13

30
18.18

17.28

18.68

Q2

Q3

17.76

21.94

19.31

21.92

Q1
2008

Q2

Q3

25.48

26.28

24.3

Q1
2010

Q2

Expense
22.0 ratio

0
Q1
2007

Q4

Q4

Q4

Q3

Sources: 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 loss ratio for the fourth quarter of 2009 includes a $2.3
billion increase in the reserve for prior years’ adverse loss development. The underwriting expense
for the fourth quarter of 2008 includes a $1.2 billion charge for impairment to goodwill, increasing the
expense ratio by 22.5 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, and the
ratios dropped to less than 100 in the second and third quarters of 2010
(see fig. 21). 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 their 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 postretirement
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 rose to more than 100 percent in the
last two quarters of 2009. In the first quarter of 2010 the ratio dropped to
102.6, and as of the second quarter 2010, the ratio had fallen to its lowest
level in a year to 95.6, indicating that for this line of business, underwriting
again became profitable, and changed little in the third quarter of 2010.

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

Figure 21: AIG Foreign General Insurance Operating Ratios, First Quarter of 2007 through Third Quarter of 2010
Dollars in millions
120

111.16
97.19

100
86.05

90.17

85.23

79.22

103.38

100.74
90.25

89.36

95.48

102.63

95.6

83.41

96.3
Combined
ratio

80

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

57.5

38.16

38.1

Q1
2010

Q2

60.9
Loss ratio

54.91

40.57

42.11

45.64

34.68

31.63

28.58

64.47

61.27

Expense
ratio
35.4

35.71

20

0
Q1
2007

Q2

Q3

Q4

Q1
2008

Q2

Q3

Q4

Q1
2009

Q2

Q3

Q4

Q3

Sources: 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 in October 2008 through the Federal Reserve Bank of New
York’s (FRBNY) revolving credit facility. This facility was fully repaid and
closed as part of the recapitalization plan that was executed on January
14, 2011, as discussed above. This indicator tracks the borrowing limit and
the amount owed on the facility since the initial borrowing. As shown in
figure 22, as of December 30, 2009, the amount of direct assistance
available to AIG through the facility was reduced to $35 billion and the
amount AIG owed the facility was reduced 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. The amount
available again was reduced in March 2010 to $34.2 billion and several
times thereafter because of AIG repayments from proceeds obtained from
sales of various assets. By December 1, 2010, the amount available had
been reduced to $28.8 billion, because of mandatory repayments that
reduced the amount available under the facility. The amount available was
determined by reference to principal outstanding, excluding capitalized
interest and fees. 1 As of December 1, 2010, the amount of assistance to
AIG through the FRBNY credit facility had been reduced to $21.3 billion.
Changes in amounts owed on the facility fluctuated weekly and could have
been related to increased or decreased liquidity needs of AIG’s operations
or payments by AIG on the facility, or could have resulted from
restructuring decisions such as the conversion of a portion of the facility
to preferred equity stakes in AIG.

1

Balance outstanding includes accrued interest and fees of $6.182 billion through
September 30, 2010.

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

Figure 22: FRBNY Revolving Credit Facility Balance Owed and Total Amount Available, October 2008 through December 1,
2010
Dollars in millions
90,000 Borrowing limit:
85,000 (until 11/26/08)
80,000
70,000
60,000

Revolving credit ceiling

60,000
50,000

72,332
10/22/08

40,000

Amount owed

35,000

34,156
28,786

30,000
20,000

21,326
12/1/10

10,000
0
Oct. Nov. Dec.

Jan.Feb. Mar. Apr.

2008

2009

May June July

Aug. Sept.

Oct. Nov. Dec.

Jan. Feb. Mar.

Apr. May June

July Aug Sept

Oct Nov Dec

2010
Sources: GAO analysis of Federal Reserve Statistical Release H.4.1 and Federal Reserve data.

Note: The Federal Reserve H.4.1 data that we used does not breakout principal from accrued interest
and fees. Thus the available credit is actually larger by the amount of accrued interest and
fees. Interest and fee data are found in AIG’s 10Q and 10K reports.

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 exposure that is related to
financial assistance provided 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 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 23, the portfolio value of Maiden Lane II peaked at $20
billion in December 2008 and was $14.8 billion at its lowest point at the
end of September 2009. As of December 1, 2010, the portfolio value had
risen to $16.3 billion. As the assets of Maiden Lane II have matured,
proceeds have been used to reduce debt (principal and interest) of the
facility from a maximum of $19.5 billion in December 2008 to $13.7 billion

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

on December 1, 2010, which is about $2.6 billion less than the facility’s
portfolio value as of that same date.
Figure 23: Amounts Owed and Portfolio Value of Maiden Lane II through December 1, 2010
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
14.8

15.8

15.3 15.4

16.3

15.9

14.7

14.1

13.7

10

5

1.0

1.0

12/17/08

12/24/08

1.0

1.0

1.0

1.0

1.0

1.0

1.1

1.1

1.1

0
3/25/09

7/1/09

9/2/09

9/30/09

12/30/09

3/31/10

6/30/10

9/29/10

12/1/10

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 counterparties to AIG
Financial Product Corporation’s credit default swaps. As shown in figure
24, the portfolio value of Maiden Lane III was $28.2 billion in December
2008, dropped to $22.7 billion one year later, and has remained fairly stable
since, amounting to $23.4 billion as of December 1, 2010. By contrast, the
level of debt has continued to be reduced since December 2008, and as of
December 1, 2010, stood at $14.5 billion, an average quarterly reduction of
about $1.1 billion dollars since September 30, 2009. Also since September
30, 2009, the excess in value of the remaining portfolio over the remaining
FRBNY debt increased from about $0.7 billion to about $8.9 billion.

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

Figure 24: Amounts Owed and Portfolio Value of Maiden Lane III through December 1, 2010
Dollars in billions
30

28.2

27.6

24.4

25

24.2
22.7

22.6
20.5

20.2

19.7

20

20.9

19.9

23.4

23.0

23.2

22.2

20.6
18.5
17.3
16.3

15.1

15.2

14.5

15

10

5

5.0

5.0

12/17/08

12/24/08

5.1

5.1

5.1

5.2

5.2

5.2

5.3

5.3

5.4

0
3/25/09

7/1/09

9/2/09

9/30/09

12/30/09

3/31/10

6/30/10

9/29/10

12/1/10

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 has been to sell some of its assets.
This indicator tracks sales or dispositions that have been closed and
agreements of pending dispositions that have been publicly announced but
not yet closed. As table 7 shows, AIG sold increasingly more of its assets
each quarter, from the last quarter of 2008 when it sold one asset for $820
million, to the third quarter of 2009 when it sold 12 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. As of
November 30, 2010, AIG disclosed that it had received $27.2 billion in total
proceeds from sales, $16.2 billion of which was from the sale of American
Life Insurance Company (ALICO) to MetLife. Also, of the total proceeds,
$12.9 billion was cash, including $7.2 billion from the sale of ALICO. In the
first quarter of 2010, AIG announced that it sold three assets, two of which
had combined reported cash proceeds of $729 million, and one had
proceeds that were not disclosed. The company also announced two new
sales in the second quarter of 2010 of undisclosed amounts and no new
sales the following quarter. However, in November 2010 AIG reported
selling a portion of its American General Finance business. It also sold
ALICO to MetLife. In addition, in October 2010, there was an initial public
offering for AIA that generated $20.5 billion (this transaction is not listed
in the following table since it is not an asset sale). On closing of the
recapitalization plan, AIG expected the net cash proceeds from the ALICO
sale and the AIA IPO to be sufficient to repay the FRBNY revolving credit
facility.
Table 7: Dispositions Closed and Agreements Announced but Not Yet Closed,
September 30, 2008, through November 30, 2010
Dollars in millions
Total
proceeds

Dispositions closed in quarter ending
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
Hartford Steam Boiler ($739 million cash)

Page 99

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Appendix IX: Disposition of AIG Assets

Dollars in millions
Total
proceeds

Dispositions closed in quarter ending
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

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. (secondary stock offering for cash)

452

Portion of its asset management business (all cash)

277

Consumer finance operations in Colombia

n/d

June 30, 2010
Consumer finance operations in Argentina

n/d

Consumer finance business in Poland

n/d

September 30, 2010
No dispositions closed

--

October 1–November 30, 2010
ALICO ($7.2 billion cash, $9 billion stock in MetLife)

Page 100

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Appendix IX: Disposition of AIG Assets

Dollars in millions
Total
proceeds

Dispositions closed in quarter ending
80 percent of American General Finance Inc.

n/d

Total proceeds on dispositions closed

$27,216

Total dislosed cash proceeds terms disclosed

$12,934

Disposition agreements announced but not yet closed as of November
30, 2010
UGC International Canada

n/d

UGC International Israel

n/d

ILFC portfolio of 53 aircraft

1,987

AIG Star and AIG Edison Life Insurance Companies ($4.2 billion cash)

4,800

Sources: AIG and GAO analysis of AIG press releases and Securities and Exchange Commission filings.

Notes: N/d means not disclosed.
On January 12, 2011, AIG announced an agreement to sell its 97.57 percent interest in Nan Shan
Life Insurance Company, Ltd. to Ruen Chen Investment Co., Ltd. of Taiwan for $2.16 billion in cash.

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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); Tania Calhoun, Rachel DeMarcus, Lawrance Evans, John
Forrester, Marc Molino, Barbara Roesmann, Jennifer Schwartz, 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 holds and orders 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 a business uses 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 in which 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
Obligation

Securities backed by a pool of bonds, loans, or other assets. In a basic
collateralized debt obligation, a pool of bonds, loans, or other assets are
pooled and securities then are issued in different tranches (see “tranche”
and “mezzanine tranche”) that vary in risk and return.

Combined Ratio

This ratio is a common measure of the performance of the daily operations
of an insurance company. It 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 of less than 100 percent generally
indicates that the company is making underwriting profit while a ratio of
more than 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, either by 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

Bilateral contracts that are sold over the counter and transfer credit risks
from one party to another. In return for a periodic fee, the seller (who is
offering credit protection) agrees 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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Glossary of Terms

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, in which 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. For example, the fair value of derivative liability
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. Current liabilities, such as
accounts payable or wages, are debts payable within 1 year, while longterm liabilities, such as leases and bond repayments, are payable over a
longer period.

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Glossary of Terms

Liquidity

Measure of the extent to which a business has cash to meet its immediate
and short-term obligations. Liquidity also is 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 leastrisky 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

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

Secured debt is backed or secured by a 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 in which 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 originally was 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. Also refers to a buyer’s market, as buyers hold much
of the power in negotiating prices.

Solvency

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

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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 purposes such as securitizing loans 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 repurchased
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 that
still is owned by the holder is higher or lower than the price the holder
paid for it.

Unsecured Debt

Unsecured debt is not backed by any pledge of collateral.

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.

(250539)

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