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United States Government Accountability Office

GAO

Report to Congressional Committees

July 2011

TROUBLED ASSET
RELIEF PROGRAM
The Government’s
Exposure to AIG
Following the
Company’s
Recapitalization

GAO-11-716

July 2011

TROUBLED ASSET RELIEF PROGRAM
The Government’s Exposure to AIG Following the
Company’s Recapitalization
Highlights of GAO-11-716, a report to
congressional committees

Why GAO Did This Study

What GAO Found

Assistance provided by the
Department of the Treasury (Treasury)
under the Troubled Asset Relief
Program (TARP), and the Board of
Governors of the Federal Reserve
System (Federal Reserve) to American
International Group, Inc. (AIG)
represented one of the federal
government’s largest investments in a
private sector institution. 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.

Largely due to the federal assistance Treasury and the Federal Reserve provided
to AIG, as measured by several indicators, AIG’s financial condition generally
has remained relatively stable or showed signs of improvement since GAO’s last
report in January 2011. However, the company recently recorded losses because
of claims resulting from earthquakes and floods, in particular the ones that hit
Japan in March 2011. As of March 31, 2011, the outstanding balance of the
Federal Reserve and Treasury assistance to AIG was $85 billion, down from
$123.1 billion in December 2010 (see table). Also, several indicators on the
status of AIG’s insurance companies illustrate that its insurance operations are
showing signs of recovery. In particular, throughout 2010 and into the first quarter
of 2011, additions to AIG life and retirement policyholder contract deposits
exceeded withdrawals. In addition, AIG’s property/casualty companies have
remained stable.

As part of GAO’s statutory oversight of
TARP, this report updates a set of
indicators GAO last reported in
January 2011. Specifically, GAO
discusses (1) trends in the financial
condition of AIG and its insurance
companies, (2) the status of the
government’s exposure to AIG, and
(3) trends in the unwinding of AIG
Financial Products (AIGFP). To update
the indicators, GAO primarily used
available public filings as of March 31,
2011, 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.

Several indicators also show that the government’s exposure to AIG has
continued to decline with the execution of AIG’s recapitalization in January 2011,
but the return to the government on its investment continues to depend on AIG’s
long-term health, market conditions, and timing of Treasury’s exit. With the
recapitalization, AIG paid the Federal Reserve Bank of New York (FRBNY) about
$21 billion to completely repay its debt to the FRBNY revolving credit facility.
Treasury also exchanged its Series C, Series E, and Series F preferred stocks
for approximately 1.655 billion shares of AIG common stock that have a cost
basis of about $49.148 billion. Consequently, the government’s remaining $85
billion in assistance to AIG is composed of balances owed by Maiden Lanes II
and III to FRBNY and Treasury’s common stock in AIG and preferred interests in
AIA Group Limited. As of March 31, 2011, the amount of assistance available to
AIG also has been reduced to $123.9 billion. As Treasury sells its stock in AIG to
exit the company, several indicators show that the most likely investors will be
institutions, many of whom already have holdings in insurance companies.
Several indicators show that AIGFP has continued to unwind its credit default
swap (CDS) positions and its portfolio of super senior CDS. AIGFP has
decreased its number of outstanding trade positions and its number of
employees, and AIG has reported that it wants to complete the active unwind of
AIGFP’s portfolios by June 30, 2011. Also, AIGFP continues to see overall
declines in its super senior CDS portfolio, including regulatory capital, multisector
collateralized debt obligations, corporate collateralized loan obligations, and
mezzanine tranches (the riskiest portions of related securities that are issued
together). The government’s ability to fully recoup its exposure to AIG continues
to be determined by the long-term health of AIG; changes in market conditions;
and how Treasury balances its interest in selling its shares in AIG as soon as
practicable while striving to maximize taxpayers’ return. GAO will continue to
monitor these issues in its future work.

View GAO-11-716 or key components. For
more information, contact Tom McCool at
(202) 512-2642 or mccoolt@gao.gov.
United States Government Accountability Office

Highlights of GAO-11-716 (continued)
Overview of Federal Assistance Provided to AIG as of March 31, 2011

Dollar in billions
Amount of assistance
authorized
Description of the federal assistance
Federal
Reserve

Treasury

Debt

Equity

Outstanding
balance

FRBNY created a Special Purpose Vehicle (SPV)—
Maiden Lane II—to provide AIG liquidity by purchasing
residential mortgage-backed securities from AIG life
insurance companies. FRBNY provided a loan to
Maiden Lane II for the purchases. FRBNY also
terminated its securities lending program with AIG,
which had provided additional liquidity associated with
AIG’s securities lending program when it created
Maiden Lane II.

$22.5

n/a

$12.353

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

n/a

12.346

On January 14, 2011, as part of the closing of the
recapitalization, Treasury provided up to $2 billion in
liquidation preference to AIG through a new AIG facility
(Series G cumulative mandatory convertible preferred
stock). AIG drew all but $2 billion remaining under the
Series F to purchase a portion of the SPV preferred
interests that were exchanged with Treasury.

n/a

The preferred interests in the AIA and ALICO SPVs had
an aggregate liquidation preference of approximately
$26.4 billion at December 31, 2010, which were
purchased by AIG and transferred to Treasury as part
of the closing of the recapitalization. The remaining
preferred interests, which have an aggregate liquidation
preference of approximately $20.3 billion following a
partial repayment on January 14, 2011, with proceeds
from the sale of ALICO, were transferred from FRBNY
to AIG and subsequently transferred to Treasury as part
of the recapitalization.

n/a

20.3

11.164

In total, Treasury received 1.655 billion shares of AIG
common stock (approximately 92 percent of the
d
company).

n/a

49.148

Subtotal

$52.5

Total authorized (debt and equity)

49.148

Proceeds from asset sales,
asset maturities, and interest will
be used to repay the FRBNY
loan. In March 2011, AIG offered
to buy the Maiden Lane assets,
but FRBNY rejected this offer.

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

Under the agreements, the
SPVs generally may not
distribute funds to AIG until the
liquidation preferences and
preferred returns on the
preferred interests have been
repaid in full and concurrent
distributions have been made on
certain participating returns
attributable to the preferred
interests.

Over time, Treasury will sell the
shares, with the goal of
recouping taxpayers’ funds.

$71.448
$123.948

Total authorized and outstanding assistance

Sources to repay the
government

$85.011

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

Government debt shown for the Maiden Lane facilities is as of March 30, 2011, and reflects principal
only and does not include accrued interest of $492 million for Maiden Lane II and $586 million for
Maiden Lane III. As of May 25, 2011, principal owed was $10.542 billion and $11.985 billion and accrued
interest was $514 million and $610 million for Maiden Lane II and Maiden Lane III, respectively.

On May 27, 2011, the available amount of the Series G preferred stock was reduced to $0 as a result
of AIG’s primary offering of its common stock and the Series G preferred stock was cancelled.

In February 2011 AIG used $2.2 billion of proceeds from the sale of two life insurance companies to
reduce the ALICO and AIA liquidation preferences. On March 8, 2011, AIG used $6.9 billion from the
sale of MetLife equity securities to repay Treasury’s remaining $1.4 billion of preferred interests in the
ALICO SPV and reduce by $5.5 billion Treasury’s remaining preferred interests in the AIA SPV. On
March 15, 2011, Treasury received another payment of $55.8 million, reducing the remaining
preferred interest on the AIA SPV to $11.164 billion.
d

Treasury’s cost basis in AIG common shares of $49.148 billion comprises of liquidation preferences of
$40 billion for series E preferred shares, $7.543 billion for series F preferred shares, and unpaid dividend
and fees of $1.605 billion. On May 24, 2011, Treasury sold 200 million shares of its common stock in
AIG and on May 27, 2011, AIG issued and sold 100 million shares of common stock, reducing its
holdings to approximately 1.5 billion shares, or approximately 77 percent of the equity interest in AIG,
and increasing the total number of outstanding common shares to approximately 1.9 billion.

The Federal Reserve and Treasury had made $182.3 billion in assistance available as of December
31, 2009. This amount was subsequently reduced to $123.9 billion.
United States Government Accountability Office

Contents

Letter

1
Background
AIG’s Financial Condition and Insurance Operations Remained
Stable after AIG’s Recapitalization and the Restructuring of
Federal Assistance
The Federal Government’s Exposure to AIG Has Been Reduced
and Return on Investment Will Depend on AIG’s Long-Term
Health, Market Conditions, and Timing of Exit
AIGFP Has Continued to Unwind Its CDS Portfolio Positions and
Reduce Its Number of Full-Time Equivalent Employees
Agency Comments

32
50
61

Appendix I

AIG Operations

Appendix II

Federal Assistance to AIG and the Government’s Remaining
Exposure as of AIG’s Recapitalization

Appendix III

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

Appendix IV

Trends in and Changes in the Composition of Consolidated
Shareholders’ Equity

GAO Contact and Staff Acknowledgments

Appendix V

Glossary of Terms

Tables
Table 1: Outstanding U.S. Government Efforts to Assist AIG and
the Government’s Remaining Exposure, as of March 31,
2011

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GAO-11-716 TARP

Table 2: Composition of Government Efforts to Assist AIG and the
Government’s Approximate Remaining Exposures, as of
March 31, 2011
Table 3: Dates and Values of Maiden Lane II Asset Auctions, April
6, 2011–May 19, 2011
Table 4: U.S. Government Efforts to Assist AIG and the
Government’s Remaining Exposure, as of January 14, 2011
Table 5: Summary of Rating Agencies’ Ratings
Table 6: AIG’s Key Credit Ratings, March 31, 2009, through March
31, 2011

37
40
72
76
78

Figures
Figure 1: Net Cash Flows and Changes in Cash from Operating,
Investing, and Financing Activities, from First Quarter
2007 through First Quarter 2011
Figure 2: AIG CDS Premiums on AIG, January 2007 through May
31, 2011
Figure 3: AIG Life and Retirement Services Additions and
Withdrawals from Policyholder Contract Deposits
(Including Annuities, Guaranteed Investment Contracts,
and Life Products), First Quarter 2007 through First
Quarter 2011
Figure 4: Chartis Insurance Premiums Written by Division, First
Quarter 2007 through First Quarter 2011
Figure 5: Quarterly Statutory Underwriting Ratios of AIG (Chartis
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
First Quarter of 2011
Figure 6: Composition of Direct Debt and Equity Federal
Assistance to AIG before and upon Announcement and
Execution of Recapitalization Agreement
Figure 7: Amounts Owed and Portfolio Value of Maiden Lane II,
December 24, 2008–May 25, 2011
Figure 8: Amounts Owed and Portfolio Value of Maiden Lane III,
December 24, 2008–May 25, 2011
Figure 9: Market Value of AIG Common Stock at Various Share
Prices—140.463 Million Publicly Held Shares and 1.655
Billion Shares Owned by Treasury upon Execution of
Recapitalization

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21
23

25
27

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39
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GAO-11-716 TARP

Figure 10: Month-End Closing Share Prices of AIG Common Stock
Compared to the S&P 500 Index and Breakeven Share
Price for Treasury’s 1.655 Billion Shares, September 2008
through May 2011
Figure 11: Market Values of Institutional and Other Holdings of
Common Stock in AIG and Nine Other Insurers Based on
Share Prices, on March 14, 2011
Figure 12: Approximate Number and Aggregate Market Values of
Insurance Holdings for 1,979 Institutions, from Data
Obtained in Late April and Early May 2011
Figure 13: Status of the Winding Down of AIGFP, Quarterly from
September 30, 2008, through March 31, 2011
Figure 14: 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 2008 through First Quarter 2011
Figure 15: 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 2008 through First Quarter 2011
Figure 16: AIG, Its Subsidiaries, and Percentage Ownership by
Parent Company as of December 31, 2010
Figure 17: AIG Trends in and Main Components of Consolidated
Shareholders’ Equity, Fourth Quarter 2007 through First
Quarter 2011

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52

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GAO-11-716 TARP

Abbreviations
AIA
AIG
AIGFP
ALICO
CDO
CDS
DPW
EESA
Federal Reserve
FRBNY
IPO
OTS
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
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
Office of Thrift Supervision
residential mortgage-backed security
Standard & Poor’s
Securities and Exchange Commission
Special Inspector General for TARP
special purpose vehicle
Troubled Asset Relief Program
Department of the Treasury

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GAO-11-716 TARP

United States Government Accountability Office
Washington, DC 20548

July 18, 2011
Congressional Committees
Assistance provided to American International Group, Inc. (AIG) has
represented one of the federal government’s largest investments in a
private-sector institution. 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 property/casualty
insurance, life insurance and retirement services, financial services, and
asset management. Its potential demise 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. Recently,
AIG, the Federal Reserve, Treasury, and the AIG Credit Facility Trust
took several steps to recapitalize the company and Treasury had begun
to divest its AIG holding. However, the extent to which Treasury will
further recoup its investment will continue to depend on the long-term
health of AIG and a number of other factors. Under our statutorily
mandated responsibilities for providing timely oversight of TARP, we are

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 (Dodd-Frank 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.

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GAO-11-716 TARP

continuing to report on the federal government’s assistance to AIG. 2 To
help Congress monitor the condition of AIG and the government’s ability
to recoup its assistance to AIG, we have developed indicators to monitor
trends in AIG’s financial condition and the status of the government’s
exposure to AIG. Because government assistance to AIG is a coordinated
approach, in addition to providing timely reporting of Treasury’s
assistance to AIG, we are monitoring the efforts of the Federal Reserve. 3
In September 2009 we issued a report on the financial condition and the
status of government’s exposure to AIG in which we first reported on
these indicators. Since then, we have continued to monitor the financial
risk posed by AIG, its financial condition, and the status of its repayment
efforts. 4 This report provides an update on the AIG indicators primarily
based on AIG’s latest available public filings as of March 31, 2011, and
other more current publicly available information where available.
Specifically, the report discusses (1) trends in the financial condition of
AIG and its insurance companies, (2) the status of the government’s

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).

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 for 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.
4

See GAO, 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 (Washington, D.C.: Jan. 20, 2011) and 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).
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-11-716 TARP

exposure to AIG, and (3) trends in the unwinding of AIG Financial
Products (AIGFP).
To conduct this work, we updated previously published indicators that
address several dimensions of AIG’s business. 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
supplements for those filings through the first quarter of 2011. We
conducted analysis using data from Thomson Reuters Datastream, SNL
Financial, and Yahoo Finance.com. We obtained the March 31, 2011,
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 transaction reports.
To assess AIG’s financial condition, we updated indicators of key AIG
credit ratings, trends in shareholders’ equity, cash flows, operating
income and losses, and its credit default swap (CDS) premiums. To
assess the financial condition of AIG’s insurance companies, we reviewed
the additions to and withdrawals from policyholder contract deposits, and
AIG general insurance premiums written, and underwriting ratios for AIG
and several of its peers.
To monitor the status of the government’s exposure to AIG, we updated
some indicators, ceased reporting others, and developed several new
ones. We updated our indicator of the composition of the government’s
direct and indirect assistance to AIG and the balances on the Maiden
Lane facilities. We no longer include our indicator of the FRBNY’s
revolving credit facility balance because the credit facility has been
terminated. 5 We also ceased reporting on the indicator on AIG’s
divestitures and asset dispositions because the government’s exposure is
less driven by AIG’s divestiture of assets and more by the return Treasury

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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will receive when it disposes of its shares in AIG. Conversely, we have
added several new indicators. One shows the composition of the
government’s direct assistance to AIG before and upon announcement
and execution of the recapitalization agreement. We reported the
balances of the federal debt and equity assistance as of March 31, 2011,
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. A second new indicator shows the
market value of AIG’s common stock to estimate the profits and losses to
Treasury if its shares in AIG are sold at various average prices. A third
new indicator shows the month-end share prices of AIG common stock
compared to the Standard and Poor’s (S&P) 500 Index. A fourth new
indicator compares Treasury-owned AIG shares to daily trading volume in
AIG stock. A fifth compares the market capitalization and composition of
shareholders for AIG with those for other large insurance companies. One
other new indicator, developed under the premise that institutions with
major insurance holdings might consider adding AIG as an insurance
holding, presents data on total dollars of insurance holdings of nearly
2,000 institutions. As circumstances have evolved, we believe these new
metrics provide useful information on AIG’s financial condition, as well as
the government’s exposure and ability to recoup its investment.
To assess the unwinding of AIGFP, we updated our indicators on
AIGFP’s trading positions and employee count and CDS portfolio. 6 In this
section, as in other sections of the report, no single indicator provides a
definitive measure of AIG’s progress, but collectively the indicators
appear to track the most critical activities related to the goals for federal
assistance to AIG.
We determined that the data were sufficiently reliable for the purposes of
our report. The data used to construct the indicators in this report came
largely from AIG’s public filings, Treasury, and Federal Reserve. We have
reviewed these data and found them to be sufficiently reliable for our
purposes. We also used data from SNL, Thomson Reuters, and
Yahoo.com. We have relied on SNL and Thomson Reuters data for past
reports, and we determined that these auxiliary data were sufficiently
reliable for the purpose of presenting and analyzing trends in financial

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

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markets. GAO reports also have relied on data from Yahoo.com, and in
our limited review of these data we found them to be reliable for our
purposes. We also reported data from four rating agencies. Although we
have reported on actions needed to improve the oversight of rating
agencies, we used these data because the ratings are used by AIG,
Treasury, and the markets. We also relied on AIG’s financial data, which
we found reliable for our purposes.
We conducted our work from February to July 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 is an international insurance organization serving customers in more
than 130 countries. As of March 31, 2011, AIG had assets of $611.2
billion and revenues of $17.4 billion for the 3 preceding months. AIG
companies serve commercial, institutional, and individual customers
through worldwide property/casualty networks. In addition, AIG
companies provide life insurance and retirement services in the United
States. Appendix I illustrates the breadth of AIG’s operations and its
subsidiaries.

AIG Operations

AIG 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 March 31, 2011, AIG’s total gross derivatives
assets had a fair value of $11.9 billion, of which $8.4 billion pertained to
capital markets, down from $28.1 billion and $23.5 billion, respectively, at
the end of September 2010. 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 mortgagebacked securities (RMBS). This program was the initial source of AIG’s
liquidity problems in 2008.

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Federal, state, and international authorities regulate AIG and its
subsidiaries. Until recently, the Office of Thrift Supervision (OTS) was the
consolidated supervisor of AIG, which was a thrift holding company by
virtue of its ownership of the AIG Federal Savings Bank. 7 As the
consolidated supervisor, the OTS was charged with identifying systemic
issues or weaknesses and helping ensure compliance with regulations
that govern permissible activities and transactions. 8 AIG’s domestic, life,
and property/casualty insurance companies are regulated by the state
insurance regulators in states in which these companies are domiciled. 9
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 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
degrees.
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

In 1999, AIG became a savings and loan holding company when the Office of Thrift
Supervision (OTS) granted AIG approval to organize AIG Federal Savings Bank. Until
March 2010, AIG was subject to OTS regulation, examination, supervision and reporting
requirements. As the consolidated supervisor, OTS was charged with identifying systemic
issues or weaknesses and ensuring compliance with regulations that govern permissible
activities and transactions. Since March 2010, AIG reports that it has been in discussions
with the Autorité de Contrôle Prudentiel and the UK Financial Services Authority regarding
the possibility of proposing another of AIG’s existing regulators as its equivalent
supervisor.

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).
9

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

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GAO-11-716 TARP

the sale of certain AIG assets. 10 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. 11
The Congressional Oversight Panel, which helped provide oversight of
TARP, also issued several reports that reviewed the government’s
actions precipitating its assistance to AIG and executive compensation,
and identified several of its concerns with the rescue of AIG. 12 The
panel’s June 2010 report 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.

Office of the Special Inspector General for the Troubled Asset Relief Program, Quarterly
Report to Congress (Jan. 26, 2011); 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).
11

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).

Congressional Oversight Panel, June Oversight Report: The AIG Rescue, Its Impact on
Markets, and the Government’s Exit Strategy (Washington, D.C: Jun. 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 of interest by acting at various times as
advisors to, potential rescuers of, and counterparties, with AIG; (4) AIG might not repay
taxpayers for the assistance they provided; and (5) the AIG bailout might be seen as
setting a precedent by implicitly guaranteeing “too big to fail” firms. Also see the panel’s
February Oversight Report: Executive Compensation Restrictions in the Troubled Asset
Relief Program (Washington, D.C.: Feb. 10, 2011), and March Oversight Report: The
Final Report of the Congressional Oversight Panel (Washington, D.C.: Mar. 16, 2011).
Pursuant to EESA’s requirements, the Congressional Oversight Panel terminated on April
3, 2011.

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GAO-11-716 TARP

In Late 2008, the 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. 13 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 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’s RMBS
assets, which were purchased with the cash collateral for its securities
lending, declined in value and became less liquid. The values of the
collateralized debt obligations (CDO) against which AIGFP had written
CDS protection also declined. 14 These losses forced AIG to use an
estimated $9.3 billion of its cash reserves in July and August 2008 to
repay securities lending counterparties that terminated existing
agreements and 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 further
increased financial pressures on the company and the number of
counterparties refusing 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 an AIG revolving credit facility and they demanded that any
outstanding loans be repaid and the facility be terminated.

In our March 2009 testimony on CDS, 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).
14

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

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GAO-11-716 TARP

Concerns about an AIG Failure
Led the Federal Reserve and
Treasury to Assist the
Company and Subsequently
Restructure That Assistance

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 and twice restructured that assistance. In September
2008, the Federal Reserve, with the support of Treasury, authorized
FRBNY to provide a secured loan to AIG of up to $85 billion through a
revolving credit facility.
As AIG borrowed from the facility, its mounting debt led to concerns that
the company’s credit ratings would be lowered, which would have caused
its condition to deteriorate. In response, the Federal Reserve and
Treasury restructured AIG’s debt in November 2008. As part of the
restructuring terms, 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. 15
The proceeds of this sale were used to pay down a portion of AIG’s
outstanding balance on the revolving credit facility and the borrowing limit
on the facility was reduced to $60 billion.
To provide further relief, in late 2008, FRBNY created two new facilities—
Maiden Lane II LLC and Maiden Lane III LLC—to purchase some of
AIG’s more troubled assets. Maiden Lane II LLC was created to purchase
RMBS assets from AIG’s U.S. securities lending portfolio, which placed
significant demands on AIG’s working capital. The Federal Reserve
authorized FRBNY to lend up to $22.5 billion to Maiden Lane II, and in
December 2008 FRBNY loaned $19.5 billion to Maiden Lane II. 16 The
facility purchased $39.3 billion in face value of the RMBS directly from
AIG domestic life insurance companies. Maiden Lane III LLC was created
to purchase multisector CDOs on which AIGFP had written CDS
contracts. These CDOs had become the greatest threat to AIG’s liquidity
position. 17 In connection with the purchase of the CDOs, AIG’s CDS

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.

AIG also acquired a subordinated $1 billion interest in the facility to absorb the first $1
billion of any losses.

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

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GAO-11-716 TARP

counterparties agreed to terminate the CDS contracts. 18 The Federal
Reserve authorized FRBNY to lend up to $30 billion to Maiden Lane III,
and in November and December 2008 FRBNY loaned a total of $24.3
billion to Maiden Lane III. 19 FRBNY officials expected FRBNY’s loans to
Maiden Lane II and Maiden Lane III to be repaid with the proceeds from
the interest and principal payments or liquidation of the assets in the
facilities but were prepared to hold the assets to maturity if necessary.
In March 2009, the Federal Reserve and Treasury further restructured
AIG’s assistance by reducing the debt AIG owed on the revolving credit
facility by $25 billion. In exchange, FRBNY received preferred equity
interests totaling $25 billion in two special purpose vehicles (SPV) created
by AIG 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 were an
undisclosed percentage of the fair market value of ALICO and AIA as
determined by FRBNY.
On April 17, 2009, to reduce AIG’s leverage and dividend requirements,
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. The $1.6 billion difference between the initial
aggregate liquidation preference of the Series E and Series D stock
represented 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 resembled common stock, principally because its
dividends were noncumulative, rating agencies viewed the stock more
positively when rating AIG’s financial condition. In addition, to strengthen
AIG’s capital levels and further reduce AIG’s leverage, 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

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.
19

AIG also paid $5 billion for an equity interest in Maiden Lane III and agreed to absorb the
first $5 billion of any losses.

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GAO-11-716 TARP

common stock. As AIG drew on the facility, the aggregate liquidation
preference of the Series F stock increased.

In January 2011, the
Recapitalization of AIG
Changed the Composition
of Federal Assistance to
AIG

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, and the
AIA and ALICO SPVs. Implementation of the recapitalization plan began
on January 6, 2011, when AIG’s board of directors 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 each party to
the recapitalization plan determined as of January 12 that it expected the
recapitalization would close on January 14. On January 14, 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 plan was executed on
January 14, 2011.
The closing of AIG’s recapitalization led to a restructuring of the
government’s assistance to AIG in a manner intended to facilitate the
eventual sale of the government’s stock. 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 AIA and ALICO SPVs that held the net cash proceeds from the
initial public offering (IPO) of AIA and the sale of ALICO. As security for
the loans from the SPVs, AIG pledged, among other collateral, its equity
interests in Nan Shan Life Insurance Company, Ltd. and International
Lease Finance Corporation and the assets held by the SPVs, including
the ordinary shares of AIA held by the AIA SPV and the MetLife securities
received from the sale of ALICO. 20 The net cash proceeds from the AIA

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. And on February 1, 2011, AIG reported that it completed the sale of
AIG Star Life Insurance Co., Ltd. and AIG Edison Life Insurance Company, to Prudential
Financial, Inc., for $4.8 billion, consisting of $4.2 billion in cash and $0.6 billion in the
assumption of third-party debt.

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GAO-11-716 TARP

IPO were approximately $20.1 billion and from the ALICO sale to MetLife
were approximately $7.2 billion. 21
Second, Treasury, AIG, and the AIG Credit Facility Trust took several
steps to exchange the various preferred interests in AIG for common
stock.


The trust exchanged its shares of AIG’s Series C preferred stock (par
value $5.00 per share) for about 562.9 million shares of AIG common
stock. The trust subsequently transferred these shares to Treasury.



Treasury exchanged its shares of AIG’s Series E preferred stock
(par value $5.00 per share) for about 924.5 million shares of AIG
common stock.



Treasury exchanged its shares of AIG’s Series F preferred stock for
the preferred interests in the AIA and ALICO SPVs, 20,000 shares of
the Series G preferred stock, and about 167.6 million shares of AIG
common stock. AIG and Treasury amended and restated the Series F
securities purchase agreement to provide for AIG to issue 20,000
shares of Series G preferred stock to Treasury. AIG’s right to draw on
Treasury’s equity capital facility tied to the Series F stock was then
terminated with the closing of the recapitalization. AIG’s right to draw
on the Series G preferred stock was made 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. According to the
agreement, dividends on the Series G preferred stock would be
payable on a cumulative basis at a rate per annum of 5 percent,
compounded quarterly. AIG drew down approximately $20.3 billion
remaining under Treasury’s equity capital facility tied to the Series F
preferred stock, less $2 billion that AIG designated to be available
after the closing for general corporate purposes under the Series G
preferred stock, and used the amount it drew down on the equity
facility to repurchase all of FRBNY’s preferred interests in the AIA and
ALICO SPVs. AIG then transferred the repurchased preferred

21
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 continue to apply after the closing. Also, AIG agreed to provide Treasury and
FRBNY with certain control and information rights.

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GAO-11-716 TARP

interests to Treasury as part of the consideration for the drawdown on
Treasury’s equity capital facility. In addition, if AIG did not repay any
draws on the equity facility tied to the Series G preferred stock by
March 31, 2012, then Treasury’s Series G preferred stock would be
converted to common stock. The terms were that the price would be
based on the lesser of $29.29 and 80 percent of the average volume
weighted average price over the 30 trading days commencing
January 20, 2011. 22
At closing, Treasury held approximately 1.655 billion shares of AIG
common stock, which represented approximately 92 percent of the
outstanding AIG common stock.
Third, 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. 23 The AIG Credit
Facility Trust, Treasury, and FRBNY did not receive any of these
warrants. According to Treasury officials, the warrants were issued to
address the AIG board of directors’ desire to compensate existing
shareholders for the dilutive effect of the recapitalization plan.
Fourth, AIG used proceeds from the sale of ALICO to reduce Treasury’s
preferred interests (aggregate liquidation preference) in the ALICO and
AIA SPVs to approximately $20.3 billion. This occurred on January 14,
2011. (Subsequent to the recapitalization, on March 8, 2011, AIG used
$6.9 billion from the sale of MetLife equity securities to repay Treasury’s
remaining $1.4 billion of preferred interests in the ALICO SPV and reduce
by $5.5 billion Treasury’s remaining preferred interests in the AIA SPV to
$11.3 billion.)
As of January 14, 2011, when the restructuring closed, Treasury owned
about $20.3 billion in preferred equity in AIA and ALICO SPVs and at then
current stock prices, about $49.1 billion in common equity in AIG, giving

AIG was not to directly redeem the Series F preferred stock while FRBNY held preferred
interests in the AIA and ALICO SPVs, but AIG had the right to use cash to repurchase a
corresponding amount of the preferred interests in the SPVs from FRBNY, which would
then be transferred to Treasury to reduce the aggregate liquidation preference of the
Series F preferred stock.

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

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GAO-11-716 TARP

Treasury an increased total exposure to AIG of about $69.4 billion (see
app. II for additional detail). As shown in table 1, with the completion of
the restructuring, as of the end of the first quarter of 2011, the
government’s exposure has been reduced to $85 billion, and most of this
exposure was in the form of Treasury’s ownership of AIG common stock.
Table 1: Outstanding U.S. Government Efforts to Assist AIG and the Government’s Remaining Exposure, as of March 31, 2011
Dollars in billions
Amount of assistance
authorized
Description of the federal assistance

Outstanding Sources to repay the
balance government

Debt

Equity

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

$22.5

n/a

$12.353a Proceeds from asset sales,
asset maturities, and
interest will be used to
repay the FRBNY loan. In
March 2011, AIG offered to
buy the Maiden Lane
assets, but FRBNY rejected
this offer.

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.

n/a

12.346a Proceeds from asset sales,
asset maturities, and
interest will be used to
repay the FRBNY loan.

n/a

The preferred interests in the AIA and ALICO SPVs had
an aggregate liquidation preference of approximately
$26.4 billion at December 31, 2010, which were
purchased by AIG and transferred to Treasury as part of
the closing of the recapitalization. The remaining
preferred interests, which have an aggregate liquidation
preference of approximately $20.3 billion following a
partial repayment on January 14, 2011, with proceeds
from the sale of ALICO, were transferred from FRBNY to
AIG and subsequently transferred to Treasury as part of
the recapitalization.

n/a

20.3

Federal Reserve

Treasury

Page 14

0 The facility was undrawn.b

11.164c Under the agreements, the
SPVs generally may not
distribute funds to AIG until
the liquidation preferences
and preferred returns on
the preferred interests have
been repaid in full and
concurrent distributions
have been made on certain
participating returns
attributable to the preferred
interests.

GAO-11-716 TARP

Amount of assistance
authorized
Description of the federal assistance
In total, Treasury received 1.655 billion shares of AIG
common stock (approximately 92 percent of the
company).d
Subtotal

Debt

Equity

n/a

49.148d

$52.5

$71.448

Outstanding Sources to repay the
balance government
49.148d Over time, Treasury will sell
the shares, with the goal of
recouping taxpayers’ funds.

$123.948e

Total authorized (debt and equity)
Total outstanding assistance

$85.011
Sources: GAO analysis of AIG SEC filings, and Federal Reserve and Treasury data.
a

Government debt shown for the Maiden Lane facilities is as of March 30, 2011, and reflects principal
only and does not include accrued interest of $492 million for Maiden Lane II and $586 million for
Maiden Lane III. As of May 25, 2011, principal owed was $10.542 billion and $11.985 billion and
accrued interest was $514 million and $610 million for Maiden Lane II and Maiden Lane III,
respectively.

On May 27, 2011, the available amount of the Series G preferred stock was reduced to $0 as a
result of AIG’s primary offering of its common stock and the Series G preferred stock was cancelled.
c

Treasury’s cost basis in AIG common shares of $49.148 billion comprises liquidation preferences of
$40 billion for series E preferred shares, $7.543 billion for series F preferred shares, and unpaid
dividend and fees of $1.605 billion. On May 24, 2011, Treasury sold 200 million shares of its common
stock in AIG and on May 27, 2011, AIG issued and sold 100 million shares of common stock,
reducing its holdings to approximately 1.5 billion shares, or approximately 77 percent of the equity
interest in AIG, and increasing the total number of outstanding common shares to approximately 1.9
billion.
e

The Federal Reserve and Treasury had made 182.3 billion in assistance available as of December
31, 2009. This amount was subsequently reduced to $123.9 billion.

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AIG’s Financial
Condition and
Insurance Operations
Remained Stable after
AIG’s Recapitalization
and the Restructuring
of Federal Assistance

Since we last reported on AIG’s indicators in January 2011, AIG’s
financial condition and operating results generally have remained
relatively stable or showed signs of improvement. 24 Our indicators for
tracking AIG’s financial condition include credit ratings; the level of
shareholders’ equity; the market value of AIG’s common stock; AIG’s
cash flows; CDS premiums on AIG; and insurance contract deposits,
premiums written, and underwriting profitability. 25 AIG’s credit ratings
remained fairly stable through 2010 but showed mixed trends in the first
quarter of 2011. 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 throughout 2010 and into
2011. The company’s net cash flows from operating, investing, and
financing activities improved or became more stable in 2010 and were
affected by the recapitalization of AIG in the first quarter of 2011. The
downward-trending and stabilizing prices offered for CDS premiums on
AIG that began in May 2009 continued through May 2011. Overall trends
in indicators related to the performance of AIG’s insurance companies
stabilized or improved, with the exception of underwriting profitability for
AIG’s property/casualty companies.

While AIG’s Credit Ratings
Remained Fairly Stable in
2010, They Showed Mixed
Trends in the First Quarter
of 2011

Ratings of AIG’s debt and financial strength by various credit rating
agencies either remained largely unchanged from May 2009 through
2010, primarily because federal assistance has provided AIG with needed
capital, but in the first quarter of 2011 the ratings have shown mixed
trends. Credit ratings measure a company’s ability to repay its obligations
and directly affect that company’s cost of and ability to access unsecured

However, as discussed later in this section, according to AIG, the earthquake and
tsunami that hit Japan in March 2011 caused the company to record catastrophe losses of
$864 million in Chartis International.

Since our previous update in January 2011, we have ceased coverage of several
indicators that track AIG’s financial condition. We discontinued the indicator on corporate
available liquidity and companywide debt maturity timetable and the associated discussion
and table on available corporate liquidity because AIG no longer has direct federal
assistance outstanding in the form of debt or any remaining untapped federal assistance
available for future borrowing. We also did not include the indicator on outstanding
commercial paper because the FRBNY Commercial Paper Funding Facility is terminated
and AIG has no outstanding commercial paper. We excluded the indicator on the
operating income and losses of AIG’s operating segments. We could not update this
indicator because AIG has been realigning segments as part of the restructuring and as a
result of divestitures but has not published realigned data for all prior quarters since the
federal assistance.

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GAO-11-716 TARP

financing. If a company’s ratings are downgraded, its borrowing costs can
increase, capital can be more difficult to raise, business partners may
terminate contracts or transactions, counterparties can demand additional
collateral, and operations can become more constrained generally. Rating
agencies can downgrade the company’s key credit ratings if they believe
it is unable to meet its obligations. In AIG’s case, this could affect its
ability to raise funds and could increase the cost of financing its major
insurance operations. Downgrades 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.
Several of AIG’s key credit ratings were unchanged in 2009, remained
fairly stable over the remainder of 2010, and became mixed in the first
quarter of 2011. 26 In April 2010, S&P affirmed its ratings of AIG and
maintained its negative outlook, reflecting its view of the challenges AIG
faces in sustaining the performance of its insurance operations and
capitalizing its life insurance businesses. In early July 2010, Fitch
reviewed all of AIG’s ratings and affirmed them. AIG’s short-term debt
ratings also have been generally stable, but two rating agencies
downgraded their ratings slightly in the most recent quarter (Fitch, a third
rating agency, withdrew its ratings of AIG’s short-term debt in November
2010). Since December 2010, S&P has increased its rating on AIG longterm debt to “A-/stable,” while decreasing its ratings on short-term debt to
“A-2, because the recapitalization was executed.” As of January 2011,
Moody’s had lowered its ratings on AIG long-term debt to “Baa1/stable”
and short-term debt to “P-2/stable.”
The company’s life insurer financial strength ratings overall have received
mixed ratings from three rating agencies with mixed changes by two
agencies, reflecting views of the financial strength of these companies.
The ratings have helped keep down both the surrender rate of domestic

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

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GAO-11-716 TARP

retirement services and any pressure on the company to exit businesses
that serve high net-worth clients or businesses governed by trust
contracts. Since December 2010, A.M. Best has withdrawn its life insurer
rating on one AIG legal entity as it was merged into an existing life
company. In the first quarter of 2011, S&P raised its ratings on the
financial strength of AIG’s life insurers to “A+/stable.” Conversely,
Moody’s lowered its ratings of these insurers to “A2/stable.” The lower
ratings by Moody’s reflect its view that while AIG’s core insurance
operations stabilized in 2010, AIG has not yet improved enough to justify
higher ratings in the absence of continued government support. And in
April 2011, Fitch upgraded AIG’s life insurer ratings to “A/stable.” AIG’s
financial strength ratings for property/casualty, which had been generally
stable, were downgraded in the first quarter of 2011, but the movement in
the rating has not been large, which has helped limit any significant
losses in net premiums written and operating losses. In early July 2010,
Fitch revised the rating outlook to “stable” from “evolving,” removed the
property/casualty companies from “rating watch negative,” and
reassigned them as “stable outlook.” In January 2011, Fitch lowered its
ratings on these companies to A/stable and Moody’s lowered its ratings to
“A1/stable,” again reflecting its view that AIG’s core insurance operations
stabilized in 2010, but they have concerns about how AIG would perform
without continued government support. Similarly, in February 2011, S&P
lowered its ratings on AIG’s property/casualty insurers to “A/stable
because the Chartis companies’ operating performance was lower than
S&P’s expectations.” While federal assistance helped stabilize AIG’s
ratings, rating agencies’ views of AIG’s insurance companies’
performance and the recapitalization have led to some volatility in these
ratings and the level of federal assistance eventually may raise questions
about AIG’s future prospects to the degree the company has limited
success in raising capital from private sources.

Shareholders’ Equity
Improved in the Three
Quarters of 2009 and 2010
and Has Remained Stable
in the First 3 Months of
2011

In contrast to the decreases in 2008, AIG’s shareholders’ equity
increased over the first three quarters of 2009 primarily due to unrealized
appreciation on investments. But since September 2009, AIG’s
shareholders’ equity has increased at a much slower rate as accumulated
deficits have increased. Rising accumulated deficits generally indicate
operating losses, while decreasing accumulated deficits generally indicate
a return to operating profitability. Shareholders’ equity generally is the
amount by which a company’s total assets exceed total liabilities, and
represents the extent to which a company could absorb losses before
imminent risk of failure or insolvency. The primary components of a
company’s shareholders’ equity are capital raised by issuing and selling

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GAO-11-716 TARP

common and preferred stock to investors, also known as paid-in capital,
unrealized appreciation on investments, and retained earnings that a
company accumulates over time from operating profits. 27
AIG’s shareholders’ equity declined from the fourth quarter of 2007
through the first quarter of 2009 and the composition of its shareholders’
equity changed from mostly retained earnings in 2007 to completely paidin capital by the end of 2008, reflecting the importance of federal
assistance to its solvency. Over this period, AIG’s shareholders’ equity fell
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 seven of eight
quarters throughout 2009 and 2010, amounting to $85 billion in the first
quarter of 2011. From the last quarter of 2007 through the last quarter of
2008, retained earnings were the primary source of shareholders’ equity.
However, retained earnings declined throughout 2008, becoming
cumulative deficits by the end of 2008. 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. While
AIG’s accumulated deficits fluctuated from the second quarter of 2009
through the third quarter of 2010, by the end of 2010 such deficits had
been reduced to about $3.5 billion and by the end of the first quarter of
2011 were $3.2 billion. Also, since the fourth quarter of 2008, paid-in
capital has remained the primary source of shareholders’ equity because
of the federal assistance (see app. IV).

Net Cash Flows from AIG’s
Operating, Investing, and
Financing Activities
Stabilized in 2010 because
of Federal Assistance but
Adjusted in 2011 due to the
Recapitalization

AIG’s cash flows stabilized throughout 2010 and are much improved over
2008, but are not at the precrisis levels the company achieved during the
first three quarters of 2007. During that period in 2007, AIG generated
cash from its operating activities indicating that it was profitable and
generated cash through its financing activities, which further showed that
it had access to the capital markets. The indicator of cash flows and net
changes in cash tracks cash flows from and overall net changes in cash.
It uses data from AIG’s quarterly Consolidated Statements of Cash Flows.

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.

Page 19

GAO-11-716 TARP



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.
As shown in figure 1, throughout 2009 and 2010 AIG’s cash flows began
to stabilize, but in the first quarter of 2011, the company reported large
cash in flows and cash out flows that were mainly due to its
recapitalization. AIG’s full-year operating cash flows (see inset box in
figure 1) decreased from $35.2 billion in 2007 to $755 million in 2008,
primarily because of negative cash flows of $15.2 billion in the third
quarter of 2008. However, in 2009 and 2010, these cash flows were
$18.6 billion and $16.9 billion, respectively. In 2009 this was because of
quarterly cash flows of around $4 billion in each of the first three quarters
of 2009 and $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. The negative
amounts increased over the first three quarters of 2010, but they were
much smaller than the negative amounts recorded in the first three
quarters of 2009 and decreased significantly in the fourth quarter of 2010.
Throughout 2009 and 2010, the company had net cash inflows from
operating activities and had 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-producing 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. In the first quarter of 2011,
AIG’s net cash flows diminished primarily due to payments the company
made to FRBNY. The company’s net cash flows decreased to $5.3 billion

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GAO-11-716 TARP

for its operating activities, mostly because of a $6.4 billion payment to the
FRBNY revolving credit facility and $2 billion in unrealized losses on
earnings. However, the company’s operating activities benefited from
$1.2 billion in net cash flows provided by discontinued operations. AIG’s
net cash flows also decreased for its financing activities, by nearly $34.5
billion, largely because of $26.4 billion in repayment of the FRBNY SPV
preferred interests, $14.6 billion in FRBNY credit facility payments, and
$9.1 billion in repayment of Treasury SPV preferred interests, offset in
part by $20.3 billion in proceeds drawn on a Treasury’s Series F equity
facility. In addition, instead of investing in operations or acquiring
businesses, the company had $39.6 billion in net cash in flows from
investment activities due largely to $30.5 billion that included activities
related to AIG’s recapitalization and $4.2 billion from sales of short-term
investments.
Figure 1: Net Cash Flows and Changes in Cash from Operating, Investing, and Financing Activities, from First Quarter 2007
through First Quarter 2011
Dollars in millions
2007
Net change $122
in cash

$-58

2008

$587

-$7

$147

-$247

Net
cash
provided

$1,571

2010

-$1,009

55,430
16,017

3,637

14,731

$9,930

7,501

10,118

7,622

8,299

7,829

-22,290

-25,548

-1,972

-$1,587

$764

2011

-$361

-$1,392

558
3,998

6,976
4,038

1,615
3,938

-133

-8,998

-9,443

-6,562

-3,994
-3,371

17,427

-11,789

-15,240

-$180

39,617

17,701

$8,216

-$18,024

-$755

Full year operating cash flows
2010: $16,910
2009: $18,584
2008:
$755
2007: $35,171

14,194

-5,657

Net
cash
used

2009

$16,381 -$9,961 -$4,442

6,610

3,195

Q1-266
-4,516

6,576

5,344

1,795

-4,261
-1,551

-4,245
-1,460

-489

-2,698

Q1
-5,312

-25,777
-34,485
-65,258

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

Note: Operating cash flows of $755 million for 2008 and $35.171 billion for 2007 include both
continuing and discontinued operations as of year end 2010. Operating cash flows from continuing
operations was net cash used of $122 million for 2008 and net cash provided of $32.792 billion for
2007.

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GAO-11-716 TARP

AIG CDS Premiums
Appear to Be Continuing
to Trend Downward
Toward Precrisis Levels

Dropping from their 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. 28 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 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 May 31, 2011, were similar to their March 2008 level for the 3-year and
5-year CDS premiums (see fig. 2). 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 March 2010 through May 2011, AIG’s CDS
premiums have moderated slightly. While the overall trend is positive,
whether this decline in the cost to protect against an AIG default reflects
confidence in the stand-alone 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.

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-11-716 TARP

Figure 2: AIG CDS Premiums on AIG, January 2007 through May 31, 2011
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

3,922
(9/16/08)

4,000

April 2009: More Fed assistance
through Series F shares

3,683
(5/4/09)

3,500
(9/16/08)

March 2010:
Agreement to
sell ALICO for
$15.5 billion

4,534
(5/4/09)

3,000

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

January 2011:
Restructuring
plan executed

September 2010:
Restructuring plan
announced

2,000
106
(5/31/11)
1,000

182
(5/31/11)

9.2
(1/2/07)

0
Jan. Mar. May July Sept. Nov. Jan. Mar. May July Sept. Nov. Jan. Mar. May July Sept. Nov. Jan. Mar. May July Sept. Nov. Jan. Mar. May
2007

2008

2009

2010

2011

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.

Deposits Continued to
Exceed Withdrawals in
AIG’s Life Insurance and
Retirement Services
Companies

Deposits at AIG’s life and retirement service companies have been
improving compared with withdrawals. Specifically, deposits exceeded
withdrawals in each quarter of 2010 and in the first quarter of 2011. We
use one indicator to monitor AIG’s life insurance and retirement services
companies. It 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. 29 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 this case, a run would be a considerable rise in the volume of customers seeking to
close or redeem their annuity or insurance contracts for cash to levels that could strain an
insurer’s liquidity.

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GAO-11-716 TARP

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 an insurance
company’s liquidity.
As shown in figure 3, additions to policyholders’ contract deposits have
exceeded withdrawals for AIG’s life and retirement services since the first
quarter of 2010. Beginning in the fourth quarter of 2008, these services
saw a sharp decline in additions to deposits and a large spike in
withdrawals, resulting in a gap of more than $26 billion. Without more
granular data, determining 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. 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 were lower because businesses slated for sale were
shifted from continuing operations, contract deposits continued to exceed
withdrawals. In each of the last three quarters of 2010 and the first
quarter of 2011, deposits exceeded withdrawals by more than $1 billion.

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GAO-11-716 TARP

Figure 3: AIG Life and Retirement Services Additions and Withdrawals from Policyholder Contract Deposits (Including
Annuities, Guaranteed Investment Contracts, and Life Products), First Quarter 2007 through First Quarter 2011

Dollars in millions
27

,36

30,000

3
,88

89
8,2
16

04
84

4,8

3,6

4,8
04

3,9

2,3

3,7

77
5,1

5,000

3,6

4,3

6,4

8,1

79
7,8

8,6

6,9

10,000

,54

,96

,12

6
,32
12

,40

4
14
,45

9
0

,43

,60

,10
1

,19
14

8
0

,76

,07
14

15,000

,00

,30

16
,9

20,000

,06

25,000

0
Q1
2007

Q1
2008

Q1
2009

Q1
2010

Q1
2011

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

Note: Contract deposit additions and withdrawals were calculated from data on continuing operations
as reflected in the AIG’s Consolidated Statement of Cash Flows. Data for similar calculations on
discontinued operations were not available.

Chartis’ Premiums Written
Appear to Have Remained
Stable

Dollar volumes of premiums written for Chartis, which includes Chartis
U.S. (AIG’s property/casualty insurance businesses in the United States
and Canada) and Chartis International (AIG’s property/casualty insurance
businesses in other parts of the world), trended downward in 2007 to
2008, but started to stabilize in 2009 and 2010 and improve in the first
quarter of 2011. 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 Chartis, we
developed an indicator that tracks the trends in quarterly premiums
written by Chartis since the beginning of 2007. “Premiums written” is the
dollar volume of business in a particular period. This indicator is important
because Chartis is 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. However, the indicator on volume of premiums written is limited

Page 25

GAO-11-716 TARP

because it 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
industrywide cycle characterized by hardening and softening markets.
As illustrated in figure 4, quarterly dollar volumes of premiums written by
Chartis U.S. have followed an annual recurring pattern with highest
volumes generally occurring in the second and third quarters, and overall,
the trends appear to have stabilized. For Chartis U.S., 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 each
quarter of 2010 were below levels in the same quarters of 2009, but the
rates at which they were declining moderated and premium volumes for
the first quarter of 2011 increased slightly, indicating that the trends may
have stabilized. As for Chartis International, the 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. 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 two quarters were higher than the same two quarters of 2009.
Gains were stronger in the last two quarters of 2010, and even stronger in
the first quarter of 2011. However, according to AIG, Chartis U.S. and
Chartis International recorded catastrophic losses of $139 million in the
fourth quarter of 2010 and expect additional significant claims in 2011 due
to flooding in Australia in 2010 and 2011. Also according to AIG, the
earthquake and tsunami that hit Japan in March 2011 materially affected
AIG’s consolidated financial position and results of operations, with the
company recording catastrophe losses of $864 million in Chartis
International.

Page 26

GAO-11-716 TARP

Figure 4: Chartis Insurance Premiums Written by Division, First Quarter 2007 through First Quarter 2011
Dollars in millions
7,000

6,449
5,971

5,986

6,000

6,079
5,630

5,650

Chartis
international
5,038

5,124
4,968

5,000

5,002
4,738

4,000 3,618
3,270
3,000

3,647

4,339

4,740

4,219

4,184

3,982

3,787

4,410

3,858

3,726

3,857
3,552

3,242

2,954

2,921

3,074

2,711

3,596

4,128
Chartis U.S.

3,054

2,678

2,000
Transatlantic
Personal lines

1,000

Mortgage guaranty
0
Q1
2007

Q1
2008

Q1
2009

Q1
2010

Q1
2011

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 sold.
The personal lines companies were sold to a third party on July 1, 2009. Commercial insurance
retained the private client business historically written by the personal lines segment.

The Underwriting of AIG’s
Property/Casualty
Companies Has Not Been
Profitable, but Net Income
Was Positive because of
Investment Income

In nearly every quarter since the first quarter of 2008, underwriting in
AIG’s property/casualty companies has not been profitable, but net
income generally has been positive because investment income more
than offset underwriting losses. 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. 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. 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. 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 (combining the loss ratio and the expense

Page 27

GAO-11-716 TARP

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.
Our indicator tracks AIG’s underwriting ratios quarterly compared with the
average underwriting ratios of its 15 property/casualty insurance peers or
competitors and AIG’s investment income and net income as percentages
of premiums earned. To identify the 15 property/casualty insurance peers
of AIG, 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. 30 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 5 compares AIG ratios to those of its peers. AIG’s
combined ratios were usually higher than the average of its peers. Also,
since the first quarter of 2008, the combined ratio for these AIG
companies exceeded 100 in all but one quarter (with the highest ratio in
the fourth quarter of 2010) indicating AIG’s underwriting usually was not
profitable. In contrast, the ratios for its peers averaged less than 100 in all
but four quarters, indicating that their underwriting usually was profitable.
The top panel of the figure also shows that while AIG’s expense ratios
have been lower than the average of its peers in every quarter, its loss

We reviewed 30 property/casualty companies and identified 15 as AIG’s
property/casualty insurance peers based on the similarities 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.

Page 28

GAO-11-716 TARP

ratios have been higher than the average of its peers in every quarter. 31
The lower panels of the figure show that despite a combined ratio usually
over 100 and the higher-than-peer average underwriting costs, AIG’s
property/casualty companies had positive net income in 13 of the 16
quarters because investment income more than offset the underwriting
losses. 32

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.

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

Page 29

GAO-11-716 TARP

Figure 5: Quarterly Statutory Underwriting Ratios of AIG (Chartis 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 First Quarter of 2011
Average loss ratio (ALR)
Average expense ratio (AER)
Average combined ratio (ACR)

Quarterly statutory underwriting ratios of AIG compared to averages for 15 property/casualty (PC) insurance peers
200
191.1

175
150
136.1

125
100

113.4

89.5

75 85.5
65.9

91.1
90.0
70.1

93.4
90.0
67.8

98.8

100.0

92.4

96.3

75.9

76.1

102.1
95.6
81.3

119.1
104.2

109.0
91.1

96.8
89.4

61.6

65.3

62.1

64.4

66.3

50 60.1
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

22.3

97.9
76.7

105.8

110.3
100.5

99.1
81.4

97.6
83.7

79.2
61.6

99.0

92.9

81.2

31.3

164.9
113.1

107.8
102.8
100.5
76.9

65.7

67.8

67.5

64.2

66.9

68.1

31.2

30.1

31.6

33.4

33.6

32.4

25.0

22.3

24.4

25.9

29.8

29.4

26.0

103.9

118.1
AIG’s combined ratio
102.0

ACR of 15 PC
insurance peers
90.78 AIG’s loss ratio

99.7
78.4
68.8

68.7

ALR of 15 PC
69.3 insurance peers

30.9

35.3

32.7 AER of 15
insurance peers

29.4

26.3

27.3 AIG’s
expense ratio

0
2007

2008

2009

2010

Q1
2011

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

13.1

12.2

13.0

13.8

15.0
11.9

12.4

15.2

17.1

15.0

16.2

14.0

10
5
0
Q1

2007

2008

AIG’s PC net income as a percent of net premiums earned
22.4
30 18.4
17.3
18.7
20
13.2
6.9
10
0
-10
-20
-19.7
-30
-40
-50
-60
-70
-80
Q1
2007

2009

2008

22.6
7.9

10.5

2010

13.0

12.2

Q1
2011

16.3
2.4
-0.2

-10.5

-68.4

2009

Q1
2010

Q1
2011

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

Page 30

GAO-11-716 TARP

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 were concentrated either in
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.

While our data cover only 4 full calendar years, they suggest a pattern of
loss and expense ratios rising in the latter part of three of those years.
However, investment returns were high enough for the peers combined to
be profitable in 13 of 17 quarters. The capital losses in the fourth quarter
of 2010 (68.4 percent) largely reflect a $3.7 billion fourth quarter loss in
AIG’s property/casualty net income. Moreover, in the fourth quarter of
2010, AIG’s combined ratio increased sharply to 191.1, while the average
ratio of its peers rose modestly to 103.9. The sharp increase for AIG
resulted primarily from domestic property/casualty insurance in which
claims and claims adjustment expenses rose 105 percent and
underwriting expenses rose 31 percent, while premiums earned declined
4 percent. Second, the 4 percent rise in premiums earned by foreign
property/casualty insurance was more than offset by increases of 30
percent in claims and claims adjustment expenses and 19 percent in
underwriting expenses. Claims and claims adjustment expenses
increased mostly from actual losses exceeding estimated losses (adverse
loss development) that was recognized and recorded in 2010 for
asbestos and excess casualty and workers’ compensation coverage in
years prior to 2010. Increased underwriting expenses reflect increased
costs in areas such as brokers’ commissions, employee incentive
programs, marketing, financial systems, impairments of intangible assets,
divestitures, and workforce reductions. However, in the first quarter of
2011, the loss ratio and combined ratio declined considerably from the
fourth quarter of 2010 due to declines in claims and claims adjustment
expenses. 33

An impairment to an intangible asset is a decline in its fair value or expected future cash
flows that is recognized by reducing the asset’s value that is carried on the books.

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GAO-11-716 TARP

The Federal
Government’s
Exposure to AIG Has
Been Reduced and
Return on Investment
Will Depend on AIG’s
Long-Term Health,
Market Conditions,
and Timing of Exit

As of March 31, 2011, total authorized federal assistance to AIG had
been reduced to $122.3 billion, and federal exposure decreased to $86.1
billion. Factors contributing to the reductions include ongoing repayment
of the debt related to Maiden Lanes II and III and the recapitalization of
AIG, including the repayment of the FRBNY revolving credit facility, the
sale of ALICO to MetLife and repayment of Treasury’s preferred
liquidation preference in ALICO and partial repayment of Treasury’s
liquidation preference in AIA, and Treasury’s exchange of its various
preferred shares in AIG for 1.655 billion shares of AIG common stock.
After recapitalization, all remaining direct assistance to AIG was in the
form of equity. In relation to exposure, since AIG has repaid the FRBNY
revolving credit facility, it no longer has outstanding debt directly owed to
the government. Consequently, we changed some of our indicators, with
new indicators focusing on the market value of AIG common stock,
trading volume in AIG stock, and shareholders in insurance companies.
The government has considerable common equity exposure to AIG as a
result of the recapitalization (92 percent of AIG’s common stock, which in
May 2011, was reduced to approximately 77 percent after Treasury sold
200 million shares of its common stock in AIG). 34 This stock is now a
government asset that is to be sold to repay the $49.148 billion in equity
assistance to AIG. The extent of recovery of this assistance to AIG is tied
to Treasury’s prospects for selling the stock. Moreover, the extent to
which the government can recoup the assistance to AIG depends on
AIG’s long-term health and the timing of Treasury’s offerings to sell its
stock and is subject to uncertainty associated with future economic and
financial market conditions.

AIG’s Recapitalization Has
Changed the Composition
of Government’s Direct
Assistance to AIG and
Sources for Repayment

The recent recapitalization of AIG reduced the level and changed the
composition of direct federal assistance. It also increased the resources
available for the federal government to recoup its assistance to AIG. To
capture these changes, we updated our indicators. We discontinued our
indicator that compared the debt and equity federal assistance provided
to AIG with AIG’s book value and replaced it with a new indicator on the
composition of debt and equity federal assistance to AIG before and upon

On May 24, 2011, AIG sold 100 million shares of common stock, which were issued on
May 27, 2011, increasing the total number of common shares to approximately 1.9 billion.
On May 24, 2011, Treasury sold 200 million shares of its common stock in AIG, reducing
its holdings to approximately 1.5 billion shares, or approximately 77 percent of the equity
interest in AIG as of May 27, 2011.

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GAO-11-716 TARP

announcement and execution of AIG’s recapitalization. The indicator
shows the changing composition and level of the federal assistance and
the composition and value of identified resources for repaying that
assistance at several points in time. Tracking both is critical to
understanding the nature of the government’s ongoing assistance to AIG
and the prospects for full recovery of that assistance.
Figure 6 shows that prior to and upon the announcement of AIG’s
recapitalization plan on September 30, 2010, AIG’s direct federal
assistance amounted to about $95.6 billion, including approximately
$20.5 billion from FRBNY’s revolving credit facility, $26 billion liquidation
preference in AIA and ALICO, and $41.6 billion and $7.5 billion liquidation
preference in Series E and Series F preferred shares, respectively. Prior
to the announcement, resources available to repay the federal
government consisted of all of AIG’s assets, generally, plus other
specified repayment resources with an estimable market value—namely
Treasury’s convertible preferred Series C shares in AIG, as shown in the
figure. These preferred shares had an estimated market value of $22
billion that was derived from applying the September 30, 2010, share
price of publicly traded AIG common shares to the 562.9 million AIG
common shares that could be exchanged for the Series C preferred
shares. Upon the recapitalization announcement, other specified
repayment resources increased by more than $33 billion in market value
because of provisions in the plan to exchange Series C, E, and F
preferred shares for 1.655 billion shares of AIG common stock. In
addition, as indicated by the dashed lines in figure 6, proceeds of
undetermined amounts were expected to be generated from the AIA IPO
and sale of ALICO to MetLife, as both transactions were pending as of
September 30, 2010.

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GAO-11-716 TARP

Figure 6: Composition of Direct Debt and Equity Federal Assistance to AIG before and upon Announcement and Execution of
Recapitalization Agreement
Dollars in billions, except per share amounts
9/30/10

Before
recapitalization
announcement

Federal liquidation preference in Series E preferred shares
Federal liquidation preference in Series F preferred shares
FRBNY’s liquidation preferences in AIA and ALICO SPVs
Principal and interest owed to FRBNY on revolving credit facility
Market value of AIG common shares not federally controlleda

25.955
20.470
4.427

Market value of Series C preferred shares

22.008

Upon
recapitalization
announcement

Pending AIA 22.008
IPO and sale Total identified
of ALICO repayment sources

Upon
execution of
recapitalization

25.955
20.470
4.427

Pending AIA 54.218
IPO and sale Total identified
54.218 of ALICO
repayment sources

U.S. Treasury’s cost on 1.655 billion AIG commone sharesd
Remaining liquidation preference on AIA and ALICO SPVSe

Market value of AIG common shares not federally controlleda
Market value of 1.655 billion AIG common sharesc
AIG’s pledged remaining interest in ALICO and AIAf
Pledged assets--Star Edison, Nan Shan, and ILFC
Pledged assets--AIG’s equity in Maiden Lanes II and III (1/12/11, 1/12/11)

controlleda
c

Market value of AIG common shares not federally
Market value of 1.655 billion AIG common shares
AIG’s pledged remaining interest in AIA
Pledged proceeds upon sales of–Star Edison, Nan Shan, and ILFCf
Pledged assets--AIG’s equity in Maiden Lanes II and III (1/12/11, 3/30/11)

69,440
Total direct federal
assistance outstanding

49.148
20.292
6.356

74.889

111,874
Total identified
repayment sources

20.292
10.250
6.443

3/31/11
U.S. Treasury’s cost on 1.655 billion AIG common sharesd
Remaining liquidation preference on AIAe

95,573
Total direct
federal
assistance
outstanding

41.605
7.543

Market value of 1.655 billion AIG common sharesc

1/14/11

95,573
Total direct
federal
assistance
outstanding

41.605
7.543

49.148
11.164

60.312
Remaining direct
federal assistance
outstanding

4.980
58.157
11.164
4.360
6.488

80.169
Total identified
repayment sources

Source: Treasury, AIG, and AIG press releases and SEC filings.
a

Not part of repayment sources.

Convertible into 79.77 percent of AIG common shares.

$32.76 as of September 30, 2010, $45.25 as of January 14, 2011, $37.35 as of March 11, 2011.

$40 billion plus $7.543 billion for Series E and F preferred plus $1.605 billion of unpaid dividends.

Obtained for Treasury by AIG drawdown on Series F.

Estimated or expected pledged disposition proceeds consists of $2.2 billion from the February 1,
2011, sale of Star and Edison, and $2.16 billion from the January 12, 2011, sale of Nan Shan Life
Insurance Company. Amounts for International Lease Finance Corporation (ILFC) are not available.

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GAO-11-716 TARP

As further illustrated in figure 6, upon the execution of the recapitalization
in January 2011, the amount of direct federal assistance was reduced to
just over $69.4 billion, which included $49.148 billion for the cost of
Treasury’s 1.655 billion in AIG common shares and about $20.3 billion in
Treasury’s remaining liquidation preference in the AIA and ALICO SPVs.
Thus all remaining direct assistance was in the form of equity. Identified
sources for repayment increased to more than $111 billion from the
increased value of AIG’s common stock and the inclusion of AIG’s
pledged remaining interest in AIA, pledged estimated proceeds from
several AIG expected dispositions, and AIG’s equity in Maiden Lanes II
and III.
By the end of the first quarter 2011, direct federal assistance to AIG was
further reduced by about $9 billion. In February 2011, AIG used $2.2
billion of proceeds from the sale of two life insurance companies to
reduce the ALICO and AIA liquidation preferences. On March 8, 2011,
AIG used $6.9 billion from the sale of MetLife equity securities to repay
Treasury’s remaining $1.4 billion of preferred interests in the ALICO SPV
and reduce by $5.5 billion Treasury’s remaining preferred interests in the
AIA SPV. On March 15, 2011, Treasury received another payment of
$55.8 million, reducing the remaining preferred interest on the AIA SPV to
$11.164 billion. However, the value of the available sources for
repayment also decreased with the decline in the value of AIG’s common
stock. With AIG’s recapitalization, Treasury is the only federal entity with
remaining direct assistance to AIG and the amount of that assistance has
been reduced. Several sources have been designated for recovering that
assistance, with the bulk of the repayment expected to come from
proceeds to Treasury on future sales of its AIG stock.

Total Government
Exposure Has Decreased
through the First Quarter
of 2011

The government’s exposure to AIG, which was $120.7 billion in
September 2009 and increased to $129.1 billion in December 2009,
decreased to $86.1 billion as of March 31, 2011. 35 As discussed, the
federal government has provided various forms of direct and indirect
assistance to AIG, but with the recapitalization of AIG, the amount and
scope of that assistance has been reduced. Since AIG has repaid the
FRBNY revolving credit facility, it no longer has outstanding debt directly

We reported the amounts for 2009 and 2010 in GAO-09-975, GAO-10-475, and
GAO-11-46. The amounts for January 2011 are reported in app. II.

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GAO-11-716 TARP

owed to the government. The only debt owed to the government that
relates to AIG are the loans to be repaid by Maiden Lane II and Maiden
Lane III—the SPVs established by FRBNY—to provide indirect
assistance to AIG by purchasing RMBS assets from AIG’s life insurance
companies and CDOs from AIGFP’s CDS counterparties, respectively. As
of March 31, 2011, the government’s exposure to the Maiden Lanes had
been reduced to $25.8 billion. Also, the government’s remaining equity
interests had been reduced to its preferred interests in the AIA SPV of
approximately $11.2 billion and its ownership of over 92 percent of AIG
through Treasury’s 1.655 billion shares of AIG common stock. As of
March 31, 2011, the government’s exposure was about $49.1 billion, but
on May 24, 2011, Treasury sold 200 million shares of AIG stock, reducing
its holdings to approximately 1.5 billion shares, or approximately 77
percent of the equity interest in AIG. 36 Table 2 illustrates our indicator on
the composition of the assistance and the government’s remaining
exposure as of March 31, 2011.

Treasury sold a total of 200 million AIG common shares at $29 per share, consisting of
approximately 132 million TARP shares and 68 million non-TARP shares (shares received
from the trust created by the FRBNY). Receipts for non-TARP common stock totaled
$1.97 billion and are not included in TARP collections.

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GAO-11-716 TARP

Table 2: Composition of Government Efforts to Assist AIG and the Government’s Approximate Remaining Exposures, as of
March 31, 2011
Dollars in billions
Direct AIG assistance
AIG debt
owed to
Amount
authorized government

Indirect AIG assistance

Government
equity

Other debt
owed to Government
government
equity

Accrued
interest
Total
dividends government
and fees
exposure

Federal Reserve
Maiden Lane II

$22.5

n/a

$12.353a

n/a

$0.492

$12.845a

Maiden Lane III

n/a

12.346a

n/a

0.586

12.932a

20.3b

n/a

$11.164b

n/a

11.164b

47.543c

n/a

47.543c

n/a

1.605

49.148c

$58.707

$1.605

$60.312

$58.707

Treasury
Series G
AIA
1.655 billion shares of AIG
common stock

Total
Total direct assistance
Total indirect assistance
Total direct and indirect
assistance to benefit AIG

$122.343

$24.699

$1.078

$25.777

$24.699

$2.683

$86.089

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

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. Government assistance shown for the
Maiden Lane facilities is as of March 30, 2011. As of May 25, 2011, principal owed was $10.524
billion and $11.985 billion and accrued interest was $514 million and $610 million for Maiden Lane II
and Maiden Lane III, respectively.
b

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. In February 2011, AIG used $2.2 billion of proceeds
from the sale of two life insurance companies to reduce the ALICO and AIA liquidation preferences.
On March 8, 2011, AIG used $6.9 billion from the sale of MetLife equity securities to repay Treasury’s
remaining $1.4 billion of preferred interests in the ALICO SPV and reduce by $5.5 billion Treasury’s
remaining preferred interests in the AIA SPV. On March 15, 2011, Treasury received another
payment of $55.8 million, reducing the remaining preferred interest on the AIA SPV to $11.164 billion.
c

On May 24, 2011, Treasury sold 200 million shares of its common stock in AIG, reducing its holdings
to approximately 1.5 billion shares, or approximately 77 percent of the equity interest in AIG, and on
May 27, 2011, AIG announced that it issued 100 million shares of common stock, increasing the total
number of outstanding common shares to approximately 1.9 billion.

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GAO-11-716 TARP

We also are monitoring the status of the government’s indirect assistance
to AIG through the Maiden Lane II and Maiden Lane III facilities. As
discussed earlier, 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. By monitoring the principal and
interest owed on these facilities, we can track FRBNY’s ongoing exposure
related to financial assistance it provided to AIG. The Maiden Lane II and
Maiden Lane III portfolios were funded primarily by loans from FRBNY,
which are not debt on AIG’s books. At the time of implementation, the
Federal Reserve had said that it planned to keep the Maiden Lane assets
until they matured or increased in value to maximize the amount of
money recovered through their sale, but that it had the authority to
change its portfolio strategy at any time. 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,
according to specific percentages for each LLC. In addition to the FRBNY
investments in the facilities, AIG invested $1 billion in Maiden Lane II and
$5 billion in Maiden Lane III.
As shown in figure 7, 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 May 25, 2011, the portfolio value was $15
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 $11 billion on May 25,
2011, which is about $4 billion less than the facility’s portfolio value as of
that same date. Overall, $9 billion of the principal on the FRBNY loan has
been repaid.

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GAO-11-716 TARP

Figure 7: Amounts Owed and Portfolio Value of Maiden Lane II, December 24, 2008–May 25, 2011
Dollars in billions
25

Principal
paid as of
May 25, 2011

20 19.5

20.0
18.6 18.4

17.7
16.1

16.8

16.0 15.7

15.8

15.3 15.4

14.8

16.2

15.9

14.7

15.9
15.0

14.1

13.5

12.8
11.0

9.0

1.0

12/24/08

3/25/09

1.0

1.1

12/30/09

3/31/10

6/30/10

1.1

0
7/1/09

9/30/09

9/29/10

12/29/10

3/30/11

5/25/11

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.

Note: When Maiden Lane II was established in 2008 the par value of total securities purchased was
$39.3 billion. Since January 2010, FRBNY has published the current principal balance for each
security held by Maiden Lane II as of the end of the quarter.

Following an offer by AIG to repurchase the assets it had sold to Maiden
Lane II, FRBNY announced on March 30, 2011, that it had declined AIG’s
offer. FRBNY and the Board of Governors of the Federal Reserve System
said this was done to serve the public interest of maximizing returns from
any sale and promoting financial stability. In light of improved conditions
in the RMBS market and a high level of interest, FRBNY stated that it
would begin more extensive asset sales through a competitive sales
process. In early April 2011, FRBNY began offering segments of the
Maiden Lane II RMBS portfolio for sale to a group of dealers on more or
less a weekly basis through the middle of May 2011, a strategy that it
hopes will avoid market disruption. FRBNY’s investment manager,
BlackRock Solutions, is disposing of the Maiden Lane II securities
through a competitive sales process. To maximize returns to the public,
FRBNY has not stipulated a time frame for disposing of these assets, but
as shown in Table 3, through May 19, 2011, Maiden Lane II has held
several auctions, selling more than $8 billion from its portfolio.

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GAO-11-716 TARP

Table 3: Dates and Values of Maiden Lane II Asset Auctions, April 6, 2011–May 19,
2011
Date of auction
April 6, 2011
April 13, 2011

Face value of assets
a
sold

Cumulative assets
sold (face value)

Number of
b
CUSIPs sold

$1,326,856,873

626,080,072

1,952,936,945

April 14, 2011

534,127,946

2,487,064,891

April 28, 2011

1,122,794,209

3,609,859,100

May 4, 2011

1,773,371,055

5,383,230,155

May 10, 2011

427,486,898

5,810,717,053

May 12, 2011

1,373,506,029

7,184,223,082

878,641,682

8,062,864,764

May 19, 2011
Total

$8,062,864,764

29
270

Source: FRBNY.
a

Value is the face amount of the most recent balance of principal outstanding.

CUSIP stands for the Committee on Uniform Securities and Identification. A CUSIP number consists
of nine characters that uniquely identify a company or issuer and the type of security.

As shown in figure 8, 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 $24.4 billion as of May 25,
2011. By contrast, the level of debt has continued to be reduced since
December 2008, and as of May 25, 2011, stood at $12.6 billion. 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 $11.8 billion. Maiden Lane III’s assets are continuing to amortize
and the long-term plan is for this SPV to sell the portfolio’s assets to
repay the debt. Federal Reserve officials said that they constantly
evaluate opportunities to sell assets—while still meeting their objective of
maximizing long-term cash flows—and have been able to sell a handful of
assets across this portfolio. 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. Federal Reserve
officials said that there has been no change in the approach to the
disposition of Maiden Lane III assets.

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GAO-11-716 TARP

Figure 8: Amounts Owed and Portfolio Value of Maiden Lane III, December 24, 2008–May 25, 2011
Dollars in billions
30

28.2

Principal
paid as of
May 25, 2011

27.6

25 24.4

24.2
22.7

22.6
20.2

19.9

23.2

22.2

24.4

23.1

23.0

22.9

20.6
18.5
17.3
16.3

15.1

14.1
12.9

12.4

12.6

5.0

5.1

5.2

5.3

6/30/10

9/29/10

5.4

0
12/24/08

3/25/09

7/1/09

9/30/09

12/30/09

3/31/10

12/29/10

3/30/11

5/25/11

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.

Note: When Maiden Lane III was established in 2008 the par value of total securities purchased was
$62.1 billion. Since January 2010, FRBNY has published the current principal balance for each
security held by Maiden Lane III as of the end of the quarter.

The values of the assets in the Maiden Lane II and III portfolios have
continued to increase relative to the outstanding loan balances since the
latter part of 2008 and the assets in the portfolios have continued to
generate payments of interest and returns of principal at maturity.
According to FRBNY officials, 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 could cease

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GAO-11-716 TARP

before the underlying portfolio has substantially matured or defaults could
occur prior to the full repayment of outstanding principal. 37

Treasury Would Have to
Sell Its AIG Common
Stock for at Least an
Average Share Price of
$29.70 to Fully Recover Its
Assistance

The extent of the $49.148 billion in equity assistance to AIG that Treasury
will recoup depends on the prices at which it sells its 1.655 billion shares.
As a shareholder, selling AIG stock with the goal of maximizing taxpayers’
returns is a reasonable goal for Treasury. However, we have previously
reported that as a government agency providing temporary emergency
assistance, it needs to balance this goal with exiting its assistance as
soon as practicable. Treasury has retained Greenhill & Co., LLC to advise
it on selling and disposing of its AIG common shares. One way to
measure potential return to the taxpayer is to track the performance of the
company in the stock market.
We developed an indicator to show the market value of AIG’s stock at
various share prices and the profits or losses that Treasury would realize
if it could sell all of its stock at those share prices. A related indicator also
compares month-end share prices of AIG common stock with S&P’s 500
index since the federal government began providing assistance to AIG in
2008. Treasury’s cost basis of $49.148 billion for those shares was
established as part of AIG’s recapitalization plan, announced on
September 30, 2010, and executed on January 14, 2011, when Treasury
received 1.655 billion shares of AIG common stock to be the repayment
source for the $49.148 billion. This cost basis comprises $47.543 billion of
liquidation preferences in Series E and Series F preferred shares plus
$1.605 billion of unpaid dividends and fees. Treasury said that its primary
goal is to recoup taxpayers’ cash. As such, using the cash in/cash out
approach, Treasury included only the cost of the liquidation preferences
in the Series E and Series F preferred shares—$47.543 billion—to
calculate a breakeven share price to be $28.73. Under a different
approach that captures the entire amount of $49.148 billion, the
calculation of the breakeven share price would include the $1.605 billion

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. And as discussed above, FRBNY has begun to more extensively sell its
Maiden Lane II asset (see table 3), while Federal Reserve officials said that there has
been no change in the approach to disposition Maiden Lane III assets.

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GAO-11-716 TARP

of unpaid dividends and fees, and the breakeven share price would
increase to approximately $29.70. This represents the minimum average
price at which Treasury would need to sell all of its shares to fully recover
the $49.148 billion. As shown in figure 9, the amount of the $49.148
billion Treasury will recover depends on the prices at which it sells its
1.655 billion shares of AIG common stock. The figure shows several
higher and lower share prices at which Treasury could recover more or
less than the full amount of assistance. For example, at $40 a share
Treasury would recover an additional $17.1 billion while at $25 a share
Treasury would recover $7.8 billion less than the amount of assistance.
Figure 9: Market Value of AIG Common Stock at Various Share Prices—140.463 Million Publicly Held Shares and 1.655 Billion
Shares Owned by Treasury upon Execution of Recapitalization
Breakeven
point, including
unpaid dividend

Dollars in millions
except common stock
share prices

Breakeven
point, excluding
unpaid dividend

Share price

At $20

At $25

At $29.6967

At $30

At $35

At $40

At $50

At $28.7269

Total value of market cap
of AiG common stock

$35,909

$44,887

$53,319

$53,864

$62,841

$71,819

$89,773

$51,579

2,809

3,512

4,171

4,214

4,916

5,619

7,023

4,036

7,773

502

8,777

17,052

47,543

1,605

At $20

At $25

At $29.6967

At $30

At $35

At $40

At $50

of million
ValueNumber
of 140.463
employees
publicly
traded shares
at particular share prices

33,602
16,048

Share price

47,543

At $28.7269

U.S. Treasury’s cost (unpaid dividends and fees)
U.S. Treasury’s cost ($40,000 in series E shares plus $7,543 in series F shares)
Profit to U.S. Treasury
if 1,655 million shares are sold at particular average share prices
Loss to U.S. Treasury
Source: GAO analysis of AIG financial and share price data.

Note: Treasury’s cost comprises $40 billion plus $7.543 billion on Series E and F preferred shares,
respectively, plus $1.605 billion of unpaid dividends and fees on Series D preferred shares.

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GAO-11-716 TARP

Since January 2011 when AIG was recapitalized, the daily closing share
price of AIG stock has trended downward but remained above our $29.70
breakeven price until May 24 when it closed at $29.46 (see fig. 10). More
specifically, the price trended down from $45.25 per share on January 14,
2011, to $28.28 per share on May 25, 2011—its lowest price since early
March 2010. This 37.5 percent downtrend has reduced the value of
Treasury owned shares by $28.1 billion. In contrast, the S&P 500 index
increased over this same period. The downward trend and
underperformance of AIG common stock suggests that conditions for
Treasury to sell its AIG shares have deteriorated since the recapitalization
was executed.
Figure 10: Month-End Closing Share Prices of AIG Common Stock Compared to the S&P 500 Index and Breakeven Share
Price for Treasury’s 1.655 Billion Shares, September 2008 through May 2011
S&P 500 Index

1,400

Share price AIG stock in dollars

1,200

Restructuring plan
executed Jan. 14, 2011
$4

11
4.

06
14

Breakeven price including unpaid dividends: $29.7
$2

4.
$3

76
$3
5.

2.
$3

44
4.
$3

90
8.
$3
14
98
9.

8.
$2
20
3.
$2

800

Breakeven price excluding unpaid dividends: $28.73

600

3.
$3

60
7.
$2

60
5.
$2

80
3.
$3

40
1.
$3

1,000

400

$1
3

200

$8
.

0
Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug.Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug.Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May

2008

2009

2010

2011

AIG common stock month-end closing share price
Standard & Poor’s 500 month-end closing index
Source: GAO analysis of Yahoo Finance.com stock price data.

Notes: GAO retroactively adjusted AIG’s share price prior to July 2009 for the 1 for 20 reverse stock
split that took effect on July 1, 2009. In January 2011, AIG issued 10-year warrants to AIG common
shareholders as a 16.331455 percent dividend, as part of the Recapitalization Plan. None of the
warrants were issued to the Treasury or the FRBNY. The warrants, that expire January 19, 2021,
allow AIG shareholders of record on January 13, 2011 to purchase up to 74,997,778 shares of AIG
Common Stock at an exercise price of $45.00 per share. AIG share prices prior to January 2011(back
to July 2009) are actual closing prices and not adjusted for this dividend.

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GAO-11-716 TARP

Treasury Is Likely to Seek
Large Institutional Buyers
as Important Purchasers of
Its 1.655 Billion Shares of
Common Stock That It
Holds in AIG

The government has considerable common equity exposure to AIG as a
result of the recapitalization plan that resulted in Treasury acquiring 92
percent of AIG’s common stock. This AIG stock is now a government
asset that is to be sold to repay the $49.148 billion in equity assistance to
AIG. The government’s full recovery of this portion of assistance to AIG is
tied to Treasury’s prospects for selling AIG stock. Those prospects
depend on the share price discussed earlier, investor interest, and the
period over which Treasury sells its stock. Treasury officials told us that,
depending on market conditions, their goal is to sell the AIG stock in
blocks within 2 years and they will consider offers by institutions,
sovereign funds, retail investors, and others. Based on AIG common
stock’s average daily trading volume of 6.5 million shares over the 12
month period from June 1, 2010, to May 31, 2011, selling shares every
day it could take Treasury about 224 trading days to sell its remaining
1.455 billion shares of AIG common stock in the open market if it decided
to pursue this approach. 38 To accommodate such sales by Treasury, and
thus limit downward pressure such sales might have on AIG’s stock price,
existing and new buyers would need to collectively double the current
daily buying volume. Whether such increased buying of AIG stock could
occur is unknown. Our analysis suggests that it would not be feasible to
expect Treasury to be able to sell its shares in AIG in an orderly manner
in the open market, and supports the agency’s consideration of selling its
blocks of stock to institutional investors. 39 This strategy of selling to
institutional investors also may help Treasury balance its competing goals
of maximizing returns as a shareholder and exiting the investment as
government agency.
We developed two indicators that help illustrate the prospects for
institutional ownership of AIG. One indicator compares the market
capitalization of AIG with nine other large insurance companies and
compares the amount of stock the federal government holds in AIG to the
amount of stock institutional investors hold in the nine other large
insurance companies. Institutional ownership in the nine other large

The estimated 224 days was computed by dividing 1.455 billion shares by an average
daily trading volume of AIG common shares during the 12 month period, which was
6,501,438 shares.

Institutional investors include mutual funds, pension funds, trust funds, foundations,
endowments, investment banks, and other non-individual organization investors that hold
large volumes of securities and qualify for fewer investor protection regulations because
they are assumed to be knowledgeable investors.

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GAO-11-716 TARP

insurance companies could be indicative of potential institutional interest
in AIG. While this indicator is helpful in demonstrating that AIG eventually
could have majority institutional ownership like other large insurance
companies, it likely understates that potential because it is limited to
institutional holdings in nine insurance companies. Thus we developed a
second indicator to more broadly look at institutional ownership of
insurance companies.
Figure 11 shows that institutional investors collectively have majority
common stock ownership of each of nine large insurance companies and
this finding is consistent with comments by Treasury officials that
insurance companies tend to be largely held by institutional investors.
This suggests that Treasury may look to institutional investors to
purchase most of the stock that it holds in AIG. The data in figure 11,
obtained on March 14, 2011, show that institutional investors own on
average 79 percent of the companies, ranging from a low of 57 percent
for Prudential Financial to a high of 99 percent for C.N.A. The market
value of institutional holdings ranged from $7.8 billion (of C.N.A.) to $29.7
billion (of MetLife). Thus institutional holdings in each of the nine insurers
are smaller than Treasury’s holdings in AIG of $61 billion. If institutions
were to purchase AIG shares held by Treasury proportional to their 79
percent average ownership in the nine companies, the amount would be
$47.6 billion or 78 percent of $61 billion. This would be considerably
larger than institutional ownership in each of the other nine institutions
and raises questions about whether institutions collectively might desire
or have the capacity to acquire $47.6 billion of AIG stock.

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GAO-11-716 TARP

Figure 11: Market Values of Institutional and Other Holdings of Common Stock in
AIG and Nine Other Insurers Based on Share Prices, on March 14, 2011
Dollars in millions
70,000

66,200
5,180

60,000

Percentage of company’s stock held by institutions as of March 14, 2011
92%

73%

85%

99%

84%

50,000

63%

70%

57%

86%

47,130

40,000

17,438
61,020

29,550

30,000

25,320
20,620
1,650

20,000

12,707
16,820
4,541

10,000

18,970
12,279

17,480
2,622
14,858

7,850
79
7,772

11,600
1,856

29,692

3,545

13,580
3,259

21,775
16,844

9,744

9,506

0
AIG
at $36.87

ACE

Allstate

Chubb
Group

C.N.A.

Hartford MetLife Progressive Prudential Travelers
Financial
Financial
Services

AIG shares owned by U.S. Treasury after recapitalization
Rest of company’s market capitalization
Institutionally owned portion of company’s market capitalization
Source: GAO analysis of market capitalization and percentages of institutional holdings data from Yahoo.Finance.com.

Note: GAO identified, but did not include in the above analysis, 25 other insurers, each with a market
capitalization larger than $8 billion as of March 8, 2011. The combined market capitalization of the 25
insurers was $866 billion.

Institutions with major insurance holdings may consider acquiring stock in
AIG and such institutions may have the most capacity to buy Treasury’s
AIG stock. To analyze whether institutions collectively might have the
capacity to acquire most of Treasury’s AIG stock, we developed an
indicator on the aggregate insurance holdings of 1,979 institutions we
identified as shareholders in one or more of the nine insurance
companies analyzed in figure 11. This indicator is broader than that
shown in figure 11 because it identifies and quantifies all insurance
holdings of the 1,979 institutions. The premise behind the indicator is that
institutions that have existing insurance holdings also might consider
holding stock in AIG. The indicator provides the aggregate insurance
holdings of the institutions that invest in AIG and nine other large insurers.
As such, it may be useful for determining whether these institutions could
have the capacity to purchase Treasury’s AIG stock. The indicator is not

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GAO-11-716 TARP

intended as a device for speculating about whether the institutions should
or will purchase AIG stock. Also, it is not known whether other institutions
with considerable insurance holdings exist that would make total
institutional insurance holdings considerably larger than aggregate
amounts shown in the indicator.
Figure 12 shows that institutions with holdings in AIG and the nine large
insurers may have the resources to consider buying stock in AIG. The
figure shows that, using data from late April and early May 2011, the
1,979 institutions have an average of 14.2 percent of their holdings in
insurance companies. Of these institutions, 1,392 each had insurance
holdings of less than $100 million (totaling $26.5 billion), and 587 each
had insurance holdings of more than $100 million. Among these
institutions as the size of an institution’s insurance holdings increases, the
percent of their holdings in insurance companies decreases. For
example, investors with less than $100 million invested in insurance
companies have 88 percent of their aggregate investments in these
companies, but the largest two groups of investors—those with between
$4 billion and $5 billion and those with more than $5 billion invested in
insurance companies—have 13.1 percent and 6.3 percent, respectively,
of their aggregate investments in insurance companies. Consequently,
larger institutional investors might have a greater capacity to invest in
Treasury’s AIG stock. If the 19 institutions with the largest insurance
portfolios increased their insurance holdings to the 14.2 percent
aggregate average for all 1,979 institutions, their insurance investments
would increase by $300 billion, considerably larger than the $47.5 billion
of Treasury’s AIG stock. For these 19 institutions a percentage point
increase in their insurance holdings would amount to $38 billion, as these
institutions have combined total portfolio holdings of $3.8 trillion ($239.5
billion divided by 6.3 percent). Thus, $47.5 billion of AIG stock would raise
their insurance holdings from 6.3 percent to 7.6 percent. This suggests
that these institutions, as a group, have the capacity to purchase $47.5
billion of AIG stock, should they choose to do so, without concentrating
their holdings in insurance or considerably changing the distribution of
their holdings by industry. This would suggest that institutional investors,
especially larger institutions, collectively might have the capacity to add
AIG stock to their existing insurance holdings.

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GAO-11-716 TARP

Figure 12: Approximate Number and Aggregate Market Values of Insurance
Holdings for 1,979 Institutions, from Data Obtained in Late April and Early May 2011
Dollars in millions
800,000
14.2%

14.2%

700,000
$681,713

600,000
500,000

$1,895
1.1%
Nineteen institutions have the largest insurance portfolios yet have the
lowest insurance allocation among 1,979 institutions. If the
institutions were to raise their insurance allocation to the
overall average of 14.2 percent they would shift.

$298,074
7.9%

400,000
300,000

Insurance holdings as a percent of total holdings
88.0%
69.2%
53.0%
48.6%
45.3%

33.5%

13.1%

$239,523

200,000
100,000

$108,249
$83,268

6.3%

$78,450

$67,094

$26,486

All
Under
$100M- $500M$1B$2Binstitutions $100M
$500M
$1B
$2B
$3B
Institutions that each have insurance holdings of:

$55,963

$3B$4B

$22,680

$4B$5B

More
than $5B

Number of institutions per holdings category
2,000
1,979
1,500
1,392
1,000
500
0

344

All
Under
$100M- $500M$1B$2Binstitutions $100M
$500M
$1B
$2B
$3B
Institutions that each have insurance holdings of:

$3B$4B

$4B$5B

More
than $5B

Source: GAO analysis of institutional insurance holdings data per SNL Financial.

Notes: The 1,979 institutions were identified as shareholders in the nine larger insurers analyzed in
figure 11. The large insurers are ACE, Allstate, Chubb, C.N.A., Hartford Financial Services, MetLife,
Progressive, Prudential Financial, and Travelers. Data on total insurance holdings of the 1,979
institutions were collected in late April and early May 2011. The 1,979 institutions were identified as
shareholders in the nine larger insurers analyzed in figure 12. The large insurers are ACE, Allstate,
Chubb, C.N.A., Hartford Financial Services, MetLife, Progressive, Prudential Financial, and Travelers.
Data on total insurance holdings of the 1,979 institutions were collected in late April and early May
2011. SNL Financial data on institutional stock holdings are from each institution’s latest available
Quarterly Form 13F filing with SEC. The latest available quarterly Form 13F filings differed among the
1,979 institutions at the time or our analysis. SNL daily updates the market values of these holdings
using daily stock prices. Because of the volume of data used in this analysis, GAO could not obtain
market values of holdings for all 1,979 institutions as of a single day but over several days from late
April to early May 2011. Thus, the above aggregates for institutional holdings reflect quarterly 13F
filings and market value dates that differ among the 1,979 institutions.

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GAO-11-716 TARP

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

A key part of AIG’s reorganization and divestiture strategy is “unwinding”
derivative positions (which drove its losses in 2008) and closing AIGFP.
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. Since then, AIGFP has been closing out
the remainder of its derivatives portfolio. 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. For example, since September 2008, AIGFP has closed
out about 94 percent of its outstanding trade positions. We also analyzed
AIGFP’s super senior CDS portfolio, on which AIGFP continues to make
progress. And, although AIGFP has reduced the total gross notional
amount of multisector CDOs, other portions of the CDO portfolio have
changed. As of the first quarter of 2011, more than 69 percent of the
remaining CDO portfolio comprised CDOs with underlying assets rated
lower than BBB.

AIGFP Has Continued to
Unwind Its Operations

Our indicators show that from September 2008 through March 2011,
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. 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 provided. Following
Maiden Lane III’s purchase of CDOs from AIGFP’s CDS counterparties
late in 2008, AIGFP became a smaller entity. As this smaller AIGFP has
continued to eliminate its positions in CDS contracts, the strains on AIG’s
liquidity also have decreased. Figure 13 illustrates several dimensions
along which AIGFP has reduced its size:


First, since September 2008, AIGFP has closed out about 94 percent
of its outstanding trade positions, which refers to 41,200 of AIGFP’s

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GAO-11-716 TARP

outstanding long and short derivative contracts. At September 30,
2008, it had 44,000 positions and as of March 31, 2011, the number
had declined to 2,800. According to AIG, from September 2008
through March 2011, 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 99 percent from 67 to 1. The company
reports that as a consequence of its wind-down strategy, AIGFP is
entering into new derivative transactions only to hedge its current
portfolio, reduce risk, and hedge the currency, interest rate, and other
market risks associated with its affiliated businesses.


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 86 percent, to about $280 billion as of March 31, 2011,
down from $940 billion in December 2009, 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 7 as of March 31, 2011.



Finally, the number of AIGFP employees, which dropped most
significantly (from 428 to 257) between September 2008 and
September 2009, since has dropped to 144 as of March 31, 2011. 40
The 144 includes 13 employees who were transferred elsewhere
within AIG in April 2011. According to AIG, AIGFP has closed its

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

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GAO-11-716 TARP

Tokyo and Hong Kong offices and is in the process of winding down
much of its London branch.
Figure 13: Status of the Winding Down of AIGFP, Quarterly from September 30, 2008, through March 31, 2011
9/30/08
Approximate
number of
outstanding
trade positions

3/31/09

6/30/09

9/30/09

22,500

19,200

12/31/09

3/31/10

6/30/10

9/30/10

12/31/10

3/31/11

16,100

14,300

11,900

10,200

3,900

2,800

$0.94

$0.76

$0.60

$0.50

$0.35

$0.28

12
7

44,000
35,000

Gross notional of
long and short
derivatives
positions outstanding
(dollars in trillions)

$2.00

Number
of businesses
(risk books)

Number of
employees

12/31/08

428

$1.80

28,000

$1.52

375

362

$1.33

319

$1.16

257

237

233

226

212

204

144

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. The
September and December 2008 notional values were estimated and the restated numbers were 2
and 1.8, respectively. The March 2009 number was 1.5.

The Federal Reserve and AIG noted that the winding down of AIGFP and
its portfolios remains linked to AIG’s credit ratings and these efforts could
be affected adversely if AIG’s credit ratings were downgraded. Previously,
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 previously
reported 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. More recently, AIG has reported that it wants to
complete the active unwinding of AIGFP’s portfolios by June 30, 2011. 41

AIG said that it will publicly report the unwinding status of AIGFP in its quarterly financial
report forthcoming in August 2011.

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GAO-11-716 TARP

According to AIG, the remaining AIGFP derivatives portfolio will consist
predominantly of transactions AIG believes will be of low complexity, low
risk, supportive of AIG’s risk-management objectives, or not economically
appropriate to unwind when comparing costs to benefits. AIG reports that
it may have to recognize unrealized market valuation losses if credit
markets deteriorate, which could adversely affect their financial condition.
Moreover, the time frame for unwinding AIGFP could be affected by how
and when the Basel I regulatory requirements are phased out. 42

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

Our indicators suggest that AIGFP continued to make progress in
unwinding its portfolio of CDS written on investment-grade CDOs (those
having a rating of BBB or higher from rating agencies). 43 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. 44 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
other counterparties in an effort to reduce its liabilities (that is, the risk

According to AIG, the regulatory benefit of the CDS transactions for AIGFP’s financial
institution counterparties was generally derived from the capital regulations known as
Basel I. When a new framework for international capital and liquidity standards, known as
Basel III, is fully implemented, AIG has stated that it may reduce or eliminate the
regulatory benefits to certain counterparties from these transactions, and may thus impact
the period of time that such counterparties are expected to hold the positions.
43

AIG refers to this as its Capital Markets super senior CDS portfolio.

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-11-716 TARP

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. 14):


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. 45 The net notional amount of this book dropped from about
$250 billion in the fall of 2008 to about $35.1 billion in the first quarter
of 2011, and the fair value of the CDS liability fell over the same
period from about $400 million and shifted to an asset with a fair value
of about $190 million. These CDS contracts continue to have a high
net notional amount relative to the other AIGFP products. According
to AIG, during 2010, of this book, $84.1 billion in net notional amount
was terminated or matured at no cost to AIGFP, and through February
16, 2011, AIGFP received notices regarding an additional $1.4 billion
in net notional amount to be terminated in 2011. As of December 31,
2010, AIGFP estimated that the weighted average expected maturity
of the portfolio was just over 3 years. AIG reports that this average
increased by about 1.8 years from a year earlier because some
counterparties did not terminate their transactions. Further, AIGFP
expects that counterparties will, to the extent possible, continue to

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-11-716 TARP

terminate these transactions prior to their maturity. 46 This book also
has experienced minimal but mixed unrealized market gains and
losses in 2010 and the first quarter of 2011.


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 RMBS, commercial mortgagebacked securities, and CDO super senior tranche securities. 47 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
to the fourth quarter of 2008—$12.6 billion and $5.9 billion,
respectively. As of the first quarter of 2011, the net notional amount
continued to show declines and had dropped to $6.2 billion. Similarly,
the fair value of the derivative liability declined to about $3.1 billion.
Also, throughout 2010 and into 2011, multisector CDOs continued to
show unrealized market valuation gains. According to the company,
AIGFP has reduced the size of its portfolio through ongoing
terminations of transactions in its regulatory capital portfolio, selling its
commodity index business, terminating and selling its foreign
exchange prime brokerage activities, and disposing of its
energy/infrastructure investment portfolio.

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.

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. 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.

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GAO-11-716 TARP



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. 48 The net notional amount of the corporate portfolio
continued to drop through 2010 and rose slightly in the first quarter of
2011, while the amount for the mezzanine portfolio dropped slightly in
this 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 continued to fall, albeit slightly. 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 through the first quarter of 2011. By
comparison, the fair value of derivative liability and the unrealized
market valuations of the mezzanine tranche book have changed little
since 2008. AIG officials commented that the smaller movement is
consistent with a decrease in the size of the portfolio (see fig. 14).

48
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.

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GAO-11-716 TARP

Figure 14: 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 2008 through First Quarter 2011

Multisector
collateralized debt
obligationsb

Regulatory capitala

Corporate collateralized
loan obligationsc

Mezzanine tranchesd

Dollars in billions
250 250.0 234.5
200
Net
notional
amount

177.5
150.1

150
100

71.6

64.5

38.1

50.7
12.6

Q3 Q4 Q2 Q4 Q2 Q4 Q1
2008

Fair
value
of
derivative
liability

2009

2010

0.38

9.2

2011 2008

40.9
22.1

7.9

6.8

6.7

6.2

Q3 Q4 Q2 Q4 Q2 Q4 Q1

Dollars in billions
30
25
20
15
10
5
0.40

50.5

35.1

2009

2010

15.7

12.3

12.7

Q3 Q4 Q2 Q4 Q2 Q4 Q1

2011 2008

2009

2010

5.0

4.7

3.5

2.6

2.8

2.7

Q3 Q4 Q2 Q4 Q2 Q4 Q1

2011 2008

2009

2010

2011

30.21

5.91

5.27

4.42

3.78

3.48

3.08

0.05
-0.12 -0.14 -0.17

1.53

2.55

1.10

0.31

0.39

0.17

0.13

0.15

0.20

0.08

0.14

0.19

0.20

-0.19

Q3 Q4 Q2 Q4 Q2 Q4 Q1
Q3 Q4 Q2 Q4 Q2 Q4 Q1
Q3 Q4 Q2 Q4 Q3 Q4 Q1
Q3 Q4 Q2 Q4 Q2 Q4 Q1
2008
2009
2010
2011 2008
2009
2010
2011 2008
2009
2010
2011 2008
2009
2010
2011

Unrealized
market
valuation
gain
or loss

Dollars in millions
1,020 792
1000
241 147 273
147
105
147
92
23
15
18
37
15
42
17
23
0
-13
-2
-18
-20
-111
-83
-284
-538
-1000 -272
-2000
-3000
-4000
-5000
-6000
-5,832
-6,262
-7000
Q3 Q4 Q2 Q4 Q2 Q4 Q1
Q3 Q4 Q2 Q4 Q2 Q4 Q1
Q3 Q4 Q2 Q4 Q2 Q4 Q1
Q3 Q4 Q2 Q4 Q2 Q4 Q1
2008
2009
2010
2011 2008
2009
2010
2011 2008
2009
2010
2011 2008
2009
2010
2011
Source: GAO analysis of AIG SEC filings.

Note: The data for unrealized market valuation gains or losses correspond to the indicated 3-month
quarter. The unrealized market valuation loss (gain) tracks the increase (decrease) in this valuation
from quarter to quarter.
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 RMBS, commercial mortgage-backed
securities, and CDO tranche securities.

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GAO-11-716 TARP

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 slowly has continued 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 and the longer-term trend remains unclear. According
to AIG officials, the SEC filings about the composition of the multisector
CDOs on which it has written credit default protection summarize 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 $13.6 billion is reduced to a net notional exposure of
approximately $6.2 billion.
As shown in figure 15, the total gross notional amount of AIGFP’s
multisector CDOs and of CDOs with underlying assets rated less than
BBB was 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 many of the CDOs underlying AIGFP’s CDS contracts. The
gross notional for these CDOs has continued to be reduced each quarter
and as of the first quarter of 2011, reached about $13.6 billion as 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. In 2010 the trend reversed, and
as of the first quarter of 2011 the gross notional amount for this portion of
the portfolio was reduced to $9.4 billion. Despite this drop, as of the first
quarter of 2011, the underlying credit rating of the portfolio has not
improved, with more than 69 percent of the remaining CDO portfolio

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GAO-11-716 TARP

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 $2.6 billion against
the $6.2 billion of net notional exposure in the multisector CDO portfolio.

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GAO-11-716 TARP

Figure 15: 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 2008 through First Quarter 2011
Dollars in millions

Percentage of CDO collateral rated less than BBB
80

120,000
108,452
67.4%
100,000

61.8%

67.3%

69.0%

69.2%

64.3%

58.7%

36,808

70
60

52.5%

80,000

50
42.4%
40

60,000
32.0%
40,000

24.8%
71,644

26,939

25,036

24,008

20
19,813

18,558

17,909

8,174

7,926

16,766
15,420
15,357
12,480
12,024
14,518
13,610
10
10,170 10,662 10,406 10,384 10,888 9,983 11,071 9,192 10,787 8,618 10,398
8,428 10,341 7,829 10,020 7,452 9,418
8,002

20,000

12,556

11,984

9,151

0
Q3
2008

2009

7,574

6,802

6,929

6,689

2010

6,158

Q1
2011

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.

Since 2009, federal assistance provided to AIG gradually has shifted from
debt to equity, and as of March 31, 2011, following the January 14, 2011,
recapitalization of AIG, the assistance consists of about 13 percent in
preferred interests in AIA, 57 percent in common interests in AIG, 30
percent in debt assistance to Maiden Lanes II and III, and the remaining
in accrued interest dividends and fees. Consequently, the government’s,
and thus the taxpayers’, 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. Since Treasury still has approximately 77

Page 60

GAO-11-716 TARP

percent equity interest in AIG, monitoring the markets to identify
divestment strategies that will strike the right balance between Treasury’s
competing goals of maximizing taxpayers’ returns and exiting its
investments as soon as practicable remains important. 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, the credit derivatives markets, and
investors’—including large institutional investors—support for the
company that are beyond the control of AIG or the government. We will
continue to monitor these issues in our future work.

Agency Comments

We provided a draft of this report to Treasury for review and comment.
Treasury did not provide written comments. We also shared a draft of this
report with the Federal Reserve and AIG. We received technical
comments from Treasury, the Federal Reserve, and AIG, which we have
incorporated in the report as appropriate.
We are sending copies of this report to appropriate congressional
committees, the Financial Stability Oversight Board, the Special Inspector
General for TARP, the Department of the Treasury, the federal banking
regulators, and other interested parties. 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 Thomas J. McCool at (202) 512-2642 or mccoolt@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 V.

Thomas J. McCool
Director
Center for Economics,
Applied Research and Methods

Page 61

GAO-11-716 TARP

List of Congressional Committees
The Honorable Daniel K. Inouye
Chairman
The Honorable Thad Cochran
Vice Chairman
Committee on Appropriations
United States Senate
The Honorable Tim Johnson
Chairman
The Honorable Richard C. Shelby
Ranking Member
Committee on Banking, Housing,
And Urban Affairs
United States Senate
The Honorable Kent Conrad
Chairman
The Honorable Jeff Sessions
Ranking Member
Committee on the Budget
United States Senate
The Honorable Max Baucus
Chairman
The Honorable Orrin G. Hatch
Ranking Member
Committee on Finance
United States Senate
The Honorable Hal Rogers
Chairman
The Honorable Norm Dicks
Ranking Member
Committee on Appropriations
House of Representatives

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GAO-11-716 TARP

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 Levin
Ranking Member
Committee on Ways and Means
House of Representative

Page 63

GAO-11-716 TARP

Appendix I: AIG Operations

American International Group, Inc. (AIG) is an international insurance
organization comprising approximately 230 companies and serving
customers in more than 130 countries. AIG companies serve commercial,
institutional, and individual customers through worldwide
property/casualty networks. In addition, AIG companies provide life
insurance and retirement services in the United States. Figure 16, which
illustrates the AIG parent company and subsidiaries that it directly owns,
conveys the complexity of the AIG organization. AIG’s subsidiaries are
AIG Life Holdings International, LLC; SunAmerica Financial Group, Inc.;
AIG Capital Corporation; AIG Financial Products Corp; AIUH, LLC (which
includes Chartis Inc.); United Guaranty Corporation; and several other
companies. 1 As of March 31 2011, AIG had assets of $611.2 billion and
revenues of $17.4 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 businesses.

Ownership of United Guaranty Corporation was transferred to AIG as a result of a
transaction involving Chartis U.S., Inc. that closed on February 24, 2011, but was effective
December 31, 2010.

Page 64

GAO-11-716 TARP

Appendix I: AIG Operations

Figure 16: AIG, Its Subsidiaries, and Percentage Ownership by Parent Company as of December 31, 2010
AIG Credit Facility Trust

Public shareholders

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

Common stock 100%
Approx. 20% of voting power

American International Group, Inc.

AIG Life Holdings (International) LLC 100%

SunAmerica Financial Group, Inc. 100%
AGC Life Insurance Company 100%

American International Reinsurance Company, Ltd. 100%

AIG Life of Bermuda, Ltd. 100%

Chartis Seguros Mexico, S.A. de C.V. 100%
AIG Edison Life Insurance Company 73.22%

American General Life Insurance of Bermuda, Ltd. 100%
American General Life and Accident
Insurance Company 100%

Toho Shinyo Hosho Company 100%
AIG Star Life Insurance Co., Ltd. 100%

American General Property Insurance Company
American General Bancassurance Services, Inc.

CLIS K.K. 10%

}

100%

American General Life Insurance Company 100%

AIG Business Services K.K.
100%
Capital System Service K.K.

}

American General Annuity Service Corporation
100%
Integra Business Processing Solutions Inc.

Nan Shan Life Insurance Company, Ltd. 97.57%

The Variable Annuity Life Insurance Company 100%
VALIC Financial Advisors, Inc. 100%
c

Iris Energy, LLC 44%

}

Western National Life Insurance Company
American General Life Insurance Company of Delaware 100%
The United States Life Insurance Company
in the City of New York
American General Assurance Company 100%
American General Indemnity Company 100%

AIG Credit Facility Trust

Public shareholders

American International Group, Inc.

Figure continued

Page 65

GAO-11-716 TARP

Appendix I: AIG Operations

AIG Global Asset Management Holdings Corp. 100%

American International Group KK 100%

Aig Global Real Estate Investment Corp. 100%

Equitable Investment Co. (Hong Kong) Ltd. 100%

AIG/Lincoln International, LLC 100%

SEA Insurance Co. Limited
SEA Insurance Sendirian Berhad
d

AIG/Lincoln Europe, L..L.C. 44.55%

}

100%

AIA Aurora LLC
AIG Federal Savings Bank
AIG Funding, Inc.
AIG BG Holdings, LLC
AIG Castle Holdings LLC
AIG Castle Holdings II LLC
AIG Financial Assurance Japan K.K.
AIG Life Insurance Company (Switzerland, Ltd.
American Security Life Insurance Company, Ltd.
MG Reinsurance Limited

AIG Consumer Finance Group, Inc. 100%
AIG Equipment Finance Holdings, Inc. 100%

}

Chartis Azerbaijan Insurance Company Open Joint Stock Company 51%

AIG/Lincoln Western Europe, L.L.C. 100%
AIG/Lincoln Eastern Europe, L.L.C.

AIG Commercial Equipment Finance, Inc.
AIG Rail Services, Inc.

AIG Financial Products Corp. 100%

AIG Global Services, Inc. 100%

AIG Capital Corporation 100%

100%

International Lease Finance Corporation 100%
Aircraft SPC - 12, Inc. 100%

AIG Trading Group, Inc. 100%

Whitney Leasing Limited 100%
Aircraft SPC - 9, Inc. 100%
Sierra Leasing Ltd. 100%

100%

AIA Matched Funding Corp.
AIG - FP Matched Funding Corp.
AIG - FP Partnership Investments Corp.
AIGFP (Cayman) NZLending Limited
Applewood Funding Corp.
Blackcap Investments LLC
Blackbird Investment LLC
Bluewood Investment LLC
Bullfinch Investments (Cayman) Limited
Highfield Holding Corp.
NFSeven (Cayman) Limited
Orangewood Investments LLC
Pearwood LLC
Yellowood Investment LLC

}

100%

AIG Financial Products (Jersey) Limited 100%
AIG - FP Investment Company (Bermuda) Limited 100%

}

AIG - FP Funding (Cayman) Limited
AIG - FP Special Finance (Cayman) Limited 100%
AIG - FP Pinestead Holdings Corp. 100%

AIG International Inc. 100%

Lakevista Holdings Corp. 79%

SAFG Retirement Services, Inc. 100%

Lakevista Corp. 21%

Clarges Funding LLC 100%

SunAmerica Life Insurance Company 100%

Hyperion Aircraft Inc. 100%

SunAmerica Annuity and Life Assurance Company 100%

Delos Aircraft Inc. 100%

SunAmerica Asset Management Corp. 100%

AIG - FP Capital Preservation Corp. 100%
FlamebrightInvestment Limited 100%
AIGFP NZFunding LLC 99%

AIG Credit Corp. 100%

SunAmerica Capital Services, Inc. 100%

}

A.I. Credit Corp. 100%

First SunAmerica Life Insurance Company 100%
SA Affordable Housing, LLC

Barnegat Funding Corp. 100%

SunAmerica Investments, Inc. 100%

Sorbier Holding Corp. 79%

Sorbier Investment Corp. 100%
NFFifty-Eight Corp. 79%
Heathwood Holding Corp. 79%

AIG Capital India Private Limited 99.99%

SunAmerica (Cayman) Co., Ltd. 100%
Heathwood Corp. 100%
AIG Advisor Group, Inc 100%

AIG - FP Structured Finance (Cayman) Limited 100% j

SagePoint Financial, Inc. 100%
Banque AIG S.A. 90%
Solus Hotel Portfolio Holding Company, LLC 100%
Solus Quorum Tampa, LLC 100%

Cherrywood Investments LLC 99%

Elgibright Investment Limited 90%
AIG Credit Facility Trust

Public shareholders

AIG Financial Products Hong Kong Limited 100%
l

Gibraltar Investment 100%
AIG - FP Broadgate Limited 100%

American International Group, Inc.

Cobroad Investments 99.99%

NFThirty-Nine Corp. 79%

Hillandale Holding, LLC 96.4%

Ambler Holding Corp. 100%
Spicer Energy II LLC 25.29%

Figure continued

Page 66

GAO-11-716 TARP

Appendix I: AIG Operations

AIG Credit Facility Trust
Series C preferred Stock 100%
Approx. 79.8% of voting power

Public shareholders
Common stock 100%
Approx. 20% of voting power

American International Group, Inc.
AIUH, LLC 100%
Chartis Inc. 100%
Chartis U.S., Inc. 100%
National Union Fire Insurance Company of Pittsburgh, Pa. 100%

American Home Assurance Company 100%

National Union Fire Insurance Company of Vermont 100%

Chartis Non-Life Holding Company (Japan), Inc. 100%
q

The Fuji Fire and Marine Insurance Company, Limited 38.62%
American Fuji Fire and Marine Insurance Company
Fuji Life Insurance Company Ltd.
Fuji International Insurance Company Limited
New Hampshire Insurance Company 100%
Chartis Casualty Company
Granite State Insurance Company
Illinois National Insurance Co.
Morefar Marketing, Inc.

}

Chartis Specialty Insurance Company 70%

Lexington Insurance Company 70%

Chartis Selected Insurance Company 100%
100%

Chartis Excess Limited 100%
United Guaranty Corporation 45.88%

Graphite Management LLC%
100%

Chartis Insurance Agency, Inc.
The Insurance Company of the State of Pennsylvania
Landmark Insurance Company
Chartis Property Casualty Company
Chartis Insurance Company of Canada
Chartis Aerospace Insurance Services, Inc.
Chartis WarrantyGuard, Inc.
Chartis Warranty Services, Inc.
Commerce and Industry Insurance Company 100%

}

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

Fieldstone Securitization I LLC 100%

}

Spruce Peak Realty, LLC 99%
100%

Quartz Holdings LLC 100%

Lavastone Capital LLC
Slate Capital LLC
Alabaster Capital LLC

M.tMansfield Company,Inc. 100%

100%

United Guaranty Residential Insurance Company 75.03% v
First Mortgage Insurance Company
United Guaranty Commerical Insurance Company
of North Carolina
United Guaranty Credit Insurance Company
United Guaranty Mortgage Indemnity Company

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

AIG United Guaranty Mexico, S.A. 99.999%

Risk Specialists Companies Insurance Agency, Inc 100%
Design Professionals Association Risk Purchasing Group, Inc. 100%
Medical Excess Insurance Services, Inc. 100%

Chartis Global Services, Inc. 100%

Medical Excess LLC 70%

Chartis Global Claims Services, Inc. 100%
Chartis Claims, Inc. 100%
AIG Credit Facility Trust

Public shareholders

American International Group, Inc.

Figure continued

Page 67

GAO-11-716 TARP

Appendix I: AIG Operations

Chartis International, LLC 100%

UBB- Chartis Insurance Company AD 40%

American International Underwriters Pakistan (Private) Limited
American International Underwriters (Philippines), Inc.
Arabian American Insurance Company (Bahrain) E.C.
Chartis China Real Estate Investors Limited
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 Management Services (Ireland) Limited
Chartis Luxembourg Financing Limited
Chartis Insurance (Guernsey) PCC Limited
Chartis Insurance (Thailand) Company Limited
CHARTIS MEMSA Insurance Company Limited
Chartis Global Management Company Limited
Chartis Seguros Brazil S.A.
Chartis Seguros Uruguay S.A.
CHARTIS Sigorta A.S.
Chartis Uganda Insurance Company Limited
Chartis Vietnam Insurance Company Limited
KendellHoldings Limited
Underwriters Adjustment Company, Inc (Panama)
Universal Insurance Broker Limited

Chartis Africa Holdings, Inc. 100%
Chartis Kenya Insurance Company Limited 66.67%
Chartis MEMSA Holdings, Inc. 100%
CHARTIS Investment Holdings (Private) Limited 100%
CHARTIS Insurance Limited 100%
CHARTIS Greece Representation of Insurance Services S.A. 51%
Chartis Iraq, Inc.
CHARTIS Lebanon S.A.L.
Chartis Libya, Inc.

}

100%

Tata AIG General Insurance Company Limited 26%
Chartis European Insurance Investments Inc. 100%
Ascot Corporate Name Limited
Manderley Limited

}

100%

Ascot Underwriting Holdings Limited 20%

Chartis North America, Inc.
Chartis Malaysia Insurance Berhad

}

Chartis Life South Africa Limited
Chartis South Africa Limited
100%

}

100%

PT Chartis Insurance Indonesia 61.21%

}

Chartis Building Limited
CJSC Chartis Insurance Company
Chartis Insurance Ireland Limited
100%
Chartis Reinsurance Services
Chartis Romania Insurance Company, SA
AIG Germany Holding GmbH 100%
WYNONA 1837 AG 100%
Chartis UK Holdings Limited 100%
Chartis UK Financing Limited 100%
Chartis UK Sub Holdings Limited100%
Chartis Insurance UK Limited 100%

Chartis UK Services Limited 100%
Direct Travel Insurance Sevices Limited 100%
Chartis Bermuda 60%

Chartis UzbekinvestLimited 51%
Inversiones Segucasai C.A. 50 %

Chartis Uzbekistan Insurance Company 51%

Travel Guard Worldwide, Inc. 100%

100%

Chartis Europe, S.A. 86.33%

Hellas Insurance Co. S.A. 50%

Poistovna AIG Slovakia a.s. 100%

}

Chartis Europe Holdings Limited 64.91%

Johannesburg Insurance Holdings (Proprietary) Limited 100%

AIU Insurance Company 100%

Chartis Overseas Association 67%

La Meridional Compania Argentina de Seguros S.A. 95%

Ascot Insurance Services Limited 100%

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

}

Chartis Overseas Limited 100%

Chartis Central Europe & CIS Insurance Holdings Corporation 100%

C.A. de Seguros American International 93.72%
z

Chartis Seguros Colombia S.A. 97.3%

Chartis Seguros Guatemala, S.A. 100%

Chartis Philippines Insurance, Inc. 91.38%

Chartis Egypt Insurance Company S.A.E. 95.02%

Chartis Fianzas Guatemala, S.A. 99.398%

CHARTIS TakafulEnaya B.S.C. (c) 81.19%

AIG Global Trade and Political Risk Insurance Company 100%

Chartis Seguros, El Salvador, Sociedad Amonima 99.99%

Chartis Far East Holdings KabushikiKaisha 100%

Chartis Vida, Sociedad Anonima Seguros de Personas 99.9%

Travel Guard Group Canada, Inc.
Livetravel, Inc.

}

100%

Techmark Japan KabushikiKaisha
Chartis Business Partners KabushikiKaisha

}

American International Underwriters delEcuador S.A. 100%

100%

AIG Metropolitana Compania de Seguros y Reaseguros S.A. 32.06% cc

JI Accident and Fire Insurance Company, Ltd. 50%
AIG Israel Insurance Company Ltd. 50.01%
Chartis Kazakhstan Insurance Company 100%

AIG Credit Facility Trust

Public shareholders

Chartis Technology and Operations Management Corporation 100%
Chartis Asia Pacific Pte. Ltd. 100%

American International Group, Inc.
Chartis Technology and Operations Mgmt. (M) Sdn. Bhd. 100%

Chartis Singapore Insurance Pte. Ltd. 100%
Chartis Australia Insurance Limited
Chartis New Zealand Limited

}

Chartis Ukraine Insurance Company CJSC 94.24%

Chartis China Real Estate Investors Partners 100%
100%
Shanghai Partners 87.54%
x

Figure continued

Page 68

GAO-11-716 TARP

Appendix I: AIG Operations

AIG Credit Facility Trust
Series C preferred Stock 100%
Approx. 79.8% of voting power

Public shareholders
Common stock 100%
Approx. 20% of voting power

American International Group, Inc.

AIUH, LLC 100%

United Guaranty Corporation 100%

Chartis Inc. 100%
Chartis U.S. Inc. 100%

The Insurance
Company of the
State of
Pennsylvania
100%

National Union
Fire Insurance
Company of
Pittsburgh, Pa.
100%

New Hampshire
Insurance
Company
100%

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

}

United Guaranty Residential Insurance Company 75.03%
First Mortgage Insurance Company
United Guaranty Commerical Insurance Company of North Carolina
United Guaranty Credit Insurance Company
United Guaranty Mortgage Indemnity Company
AIG United Guaranty Mexico, S.A. 99.999%

100%

}

100%

AIG Credit Facility Trust

Public shareholders

American International Group, Inc.

Source: AIG.

Page 69

GAO-11-716 TARP

Appendix I: AIG Operations

8.14 percent AIG Financial Assurance Japan K.K. and 18.64 percent American International Group, Inc.

45 percent AIG Business Service K.K. and 10 percent Capital System Service K.K..

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

30.45 percent AIGGRE Lincoln Chelsea I LLC.

21 percent NF Fifty-One (Cayman) Limited.

79 percent AIG Financial Products Corporation.

1 percent AIG Financial Products Corporation.

21 percent NF Thirty-nine Corporation.

21 percent NF Fifty-eight Corporation.

10 percent AIG Matched Funding Corporation.

1 percent AIG-FP Capital Preservation Corporation.

10 percent AIG Financial Products Corporation.

0.01 percent NF Ten (Cayman) Limited.

21 percent NF Thirty-nine Holding (Cayman) Limited.

3.6 percent AIG-FP Capital Preservation Corporation.

25.27 percent American General Life Insurance Company.

10.04 percent Chartis Far East Holdings K.K. and 6 percent Chartis Europe, S.A.

1 percent National Union Fire Insurance Company of Pittsburgh, Pennsylvania.

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

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

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

24.97 percent United Guaranty Residential Insurance Company of North Carolina.

0.001 percent United Guaranty Services, Inc.

0.02 percent Chartis Central Europe & CIS Insurance Holdings Corporation and 5.7 percent Steppe
Securities, LLC.
y

4.97 percent Chartis Global Management Consulting Limited.

39.79 percent PT. Tiara Citra Cemerlang.

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

0.01 percent Chartis Latin America Investments, LLC.

19.72 percent Chartis Overseas Association.

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

2.22 percent Chartis Bermuda Limited, 31.41 percent Chartis Overseas Limited, and 1.46 percent
Chartis Luxembourg Financing Limited.
ff

8.21 percent Chartis Overseas Limited and 5.46 percent Chartis UK Holdings Limited.

40 percent American International Reinsurance Company, Limited.

2.7 percent Chartis Insurance Company-Puerto Rico.

8.62 percent Chartis International, LLC.

18.81 percent Chartis International, LLC.

kk
jj

24.97 percent United Guaranty Residential Insurance Company of North Carolina.

0.001 percent United Guaranty Services, Inc.

Page 70

GAO-11-716 TARP

Appendix II: Federal Assistance to AIG and the
Government’s Remaining Exposure as of AIG’s
Recapitalization

Appendix II: Federal Assistance to AIG and
the Government’s Remaining Exposure as of
AIG’s Recapitalization
In January 2011, the government’s remaining exposure to AIG was
adjusted by the recapitalization of AIG and the continued paydown of the
Federal Reserve Bank of New York (FRBNY) loan to Maiden Lane II and
Maiden Lane III special purpose vehicles (SPV). The plan to recapitalize
AIG was implemented when AIG’s board of directors declared a dividend
in the form of warrants to purchase shares of AIG’s common stock to the
holders of AIG common stock.
The closing of AIG’s recapitalization led to a restructuring of the
assistance provided by the Board of Governors of the Federal Reserve
System (Federal Reserve) to AIG, as shown in table 4. First, AIG repaid
FRBNY in cash all the amounts owed under the FRBNY revolving credit
facility and the credit facility was terminated. The funds for repayment
came from loans to AIG from the AIA Group Limited (AIA) and the
American Life Insurance Company (ALICO) SPVs that held the net cash
proceeds from the initial public offering (IPO) of AIA and the sale of
ALICO. As security for the repayment of the loans extended to it by the
SPVs, AIG pledged, among other collateral, its equity interests in Nan
Shan Life Insurance Company, Ltd. and International Lease Finance
Corporation and the assets held by the SPVs, including the ordinary
shares of AIA held by the AIA SPV and certain of the MetLife securities
received from the sale of ALICO. 1 The net cash proceeds from the AIA
IPO were approximately $20.1 billion and from the ALICO sale to MetLife
were approximately $7.2 billion. 2 In addition, repayments on the FRBNY
loans to Maiden Lane II and Maiden Lane III continued, reducing their
balances to approximately $12.8 billion and $13.5 billion, respectively.

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

Page 71

GAO-11-716 TARP

Appendix II: Federal Assistance to AIG and the
Government’s Remaining Exposure as of AIG’s
Recapitalization

Table 4: U.S. Government Efforts to Assist AIG and the Government’s Remaining Exposure, as of January 14, 2011
Dollars in billions
Amount of assistance
authorized
Debt

Equity

Outstanding
balance

Federal Reserve Bank of New York (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
Department of the Treasury (Treasury), which
gave the trust an approximately 79.75 percent
voting interest in AIG.

$0a

n/a

On January 14, 2011, FRBNY
announced the termination of its
assistance to AIG with the full
repayment of its loans to AIG,
including interest and fees, as a
result of the closing of the,
recapitalization plan. AIG used
cash proceeds from the recent
AIA Group Limited (AIA) initial
public offering and sale of
American Life Insurance
Company (ALICO) to MetLife to
repay the FRBNY credit facility.
With the closing, the trust
exchanged its Series C preferred
stock in AIG for approximately
562.9 million shares of AIG
common stock and subsequently
delivered to Treasury. With the
closing of AIG’s recapitalization,
the trust was also terminated.

FRBNY created a special purpose vehicle
(SPV)—Maiden Lane II—to provide AIG
liquidity by purchasing residential mortgagebacked 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.

22.5

n/a

12.777b

Proceeds from asset sales, asset
maturities, and interest will be
used to repay the FRBNY loan.
In March 2011, AIG offered to
buy the Maiden Lane assets, but
FRBNY rejected this offer.

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

n/a

13.526b

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

Description of the federal assistance

Sources to repay the
government

Federal Reserve

Page 72

GAO-11-716 TARP

Appendix II: Federal Assistance to AIG and the
Government’s Remaining Exposure as of AIG’s
Recapitalization

Amount of assistance
authorized
Debt

Equity

Outstanding
balance

n/a

On January 14, 2011, the credit
extended to AIG by FRBNY was
repaid with cash proceeds from
the public offering of 67 percent
of AIA and the sale of ALICO.
FRBNY’s remaining preferred
interests in the AIA and ALICO,
SPVs of about $20 billion, were
purchased by AIG, which drew
on Treasury’s Series F preferred
stock and then transferred by
AIG to Treasury as partial
consideration for the Series F
draw.

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.

n/a

With the closing of AIG’s
recapitalization, Treasury
exchanged its Series E preferred
stock in AIG for approximately
924.5 million shares of AIG
common stock.

Treasury purchased Series F noncumulative
preferred stock of AIG. Treasury was 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.

n/a

With the closing, Treasury’s shares
of Series F preferred stock in AIG
were exchanged for preferred
interests in the AIA and ALICO
SPVs that were transferred to
Treasury, newly issued shares of
Series G preferred stock, and
approximately 167.6 million shares
of AIG common stock.

On January 14, 2011, as part of the closing of
the recapitalization, Treasury provided up to
$2 billion in liquidation preference to AIG
through a new AIG facility (Series G
cumulative mandatory convertible preferred
stock). AIG drew all but $2 billion remaining
under the Series F to purchase a portion of the
SPV preferred interests that were exchanged
with Treasury.

n/a

The Series G facility had not
been used.

Description of the federal assistance
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.

Sources to repay the
government

Treasury

Page 73

GAO-11-716 TARP

Appendix II: Federal Assistance to AIG and the
Government’s Remaining Exposure as of AIG’s
Recapitalization

Amount of assistance
authorized
Debt

Equity

Outstanding
balance

The preferred interests in the AIA and ALICO
SPVs had an aggregate liquidation preference
of approximately $26.4 billion at December 31,
2010, which were purchased by AIG and
transferred to Treasury as part of the closing
of the recapitalization. The remaining preferred
interests, which have an aggregate liquidation
preference of approximately $20.3 billion
following a partial repayment on January 14,
2011 with proceeds from the sale of ALICO,
were transferred from FRBNY to AIG and
subsequently transferred to Treasury as part
of the recapitalization.

n/a

20.3

In total, Treasury received 1.655 billion shares
of AIG common stock (approximately 92
percent of the company).

n/a

49.148c

Description of the federal assistance

Subtotal

$52.5

Sources to repay the
government
Under the agreements, the SPVs
generally may not distribute
funds to AIG until the liquidation
preferences and preferred
returns on the preferred interests
have been repaid in full and
concurrent distributions have
been made on certain
participating returns attributable
to the preferred interests. In
February AIG used $2.2 billion of
proceeds from the sale of two life
insurance companies to reduce
the liquidation preferences of the
AIA and ALICO SPV preferred
interests. On March 8, 2011, AIG
used $6.9 billion from the sale of
MetLife equity securities to repay
Treasury’s remaining $1.4 billion
of preferred interests in ALICO
SPV and reduce by $5.5 billion
Treasury’s remaining preferred
interests in AIA SPV to $11.3
billion.
Over time, Treasury will sell the
shares, with the goal of
recouping taxpayers’ funds.

$71.448
$123.948d

Total authorized (debt and equity)
Total outstanding assistance

$95.751
Sources: 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, to $29.175 billion by October 6, 2010,
and to $0 on January 14, 2011. The reductions were attributed to mandatory repayments from
proceeds obtained from the sale of various assets and businesses.
b

Government debt shown for the Maiden Lane facilities is as of January 12, 2011, and represents
principal only and does not include accrued interest of $457 million for Maiden Lane II and $551 for
Maiden Lane III. As of March 2, 2011, principal owed was $12.353 billion and $12.434 billion and
accrued interest was $479 million and $574 million for Maiden Lane II and Maiden Lane III, respectively.

Treasury’s cost basis in AIG common shares of $49.148 billion comprises liquidation preferences of $40
billion for Series E preferred shares, $7.543 billion for Series F preferred shares, and unpaid dividend
and fees of $1.605 billion. Also, the Federal Reserve and Treasury had made 182.3 billion in assistance
available as of December 31, 2009. This amount was subsequently reduced to $123.9 billion.

The Federal Reserve and Treasury had made $182.3 billion in assistance available as of December
31, 2009. This amount was subsequently reduced to $123.9 billion. As of January 14, 2011,
Treasury’s total cash commitment in AIG was $68 billion

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Appendix II: Federal Assistance to AIG and the
Government’s Remaining Exposure as of AIG’s
Recapitalization

AIG’s recapitalization also affected the assistance provided by the
Department of the Treasury (Treasury) to AIG. Treasury, AIG, and the
AIG Credit Facility Trust exchanged the various preferred interests in AIG
for common stock, giving Treasury 1.655 billion shares of AIG common
stock, or approximately 92.2 percent of the outstanding AIG common
stock. First, the trust exchanged its shares of AIG’s Series C preferred
stock (par value $5.00 per share) for about 562.9 million shares of AIG
common stock, which it subsequently transferred to Treasury. Second,
Treasury exchanged its shares of AIG’s Series E preferred stock (par
value $5.00 per share) for about 924.5 million shares of AIG common
stock. Third, Treasury exchanged its shares of AIG’s Series F preferred
stock for the preferred interests in the AIA and ALICO SPVs, 20,000
shares of the Series G preferred stock, and about 167.6 million shares of
AIG common stock. As of January 14, 2011, Treasury owned about $20.3
billion in preferred equity in the AIA and ALICO SPVs and at then current
stock prices, about $49.1 billion in common equity in AIG, giving it a total
exposure to AIG of about $69.4 billion. AIG and Treasury amended and
restated the Series F securities purchase agreement to provide for AIG to
issue 20,000 shares of Series G preferred stock to Treasury. AIG’s right
to draw on Treasury’s equity capital facility tied to the Series F stock was
then terminated with the closing of the recapitalization. AIG’s right to draw
on the Series G preferred stock was made subject to terms and
conditions substantially similar to those in the agreement, including that
dividends on the Series G preferred stock would be payable on a
cumulative basis at a rate per annum of 5 percent, compounded
quarterly. AIG drew down approximately $20.3 billion remaining under
Treasury’s equity capital facility, less $2 billion that AIG designated to be
available after the closing for general corporate purposes under the
Series G preferred stock, and used the amount it drew down on the equity
facility to repurchase all of FRBNY’s preferred interests in the AIA and
ALICO SPVs. 3

3
AIG was not to directly redeem the Series F 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 F preferred stock.

Page 75

GAO-11-716 TARP

Appendix III: Overview of Definitions of Credit
Ratings and AIG’s Credit Ratings

Appendix III: Overview of Definitions of
Credit Ratings and AIG’s 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 AIG’s 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.
Moody’s, Standard and Poor’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

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.

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.

Medium and lower-medium
grade

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

Baa

BBB

Noninvestment and
speculative grades

There is little protection on these obligations and the interest
and principal may be in danger, in cases in which default
may be likely.

Ba1 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 76

GAO-11-716 TARP

Appendix III: Overview of Definitions of Credit
Ratings and AIG’s Credit Ratings

As shown in table 6, AIG’s key credit ratings remained largely unchanged
from May 2009 through 2010, primarily because federal assistance
provided AIG with needed liquidity, but in the first quarter of 2011 the
ratings have shown mixed trends. From March 31, 2009, to December 15,
2009, A.M. Best, Moody’s, and 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 Federal
Reserve and Treasury provided. 1 While the government’s assistance has
helped stabilize AIG’s ratings, 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 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.” In the first
quarter of 2011, AIG’s ratings have become more mixed, with long-term
debt and life insurer ratings changing little but short-term debt and
property/casualty ratings dropping slightly, because of the withdrawal of
government support.

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

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GAO-11-716 TARP

Appendix III: Overview of Definitions of Credit
Ratings and AIG’s Credit Ratings

Table 6: AIG’s Key Credit Ratings, March 31, 2009, through March 31, 2011
Rating agency

Mar. 31,2009

May 15,
2009

Dec. 15,
2009

Mar. 31,
2010

July 31,
2010

Sept. 30,
2010

Dec. 31,
2010

Mar. 31,
2011

Debt
Long-term
Potential
consequences of
a future
downgrade

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 December 31, 2010, a one-notch downgrade from S&P would have cost AIG up to $0.7 billion in cumulative
additional collateral postings and termination payments, while a one-notch downgrade from Moody’s and a twonotch from S&P would increase that cost to $1.1 billion. Another notch downgrade would have increased that cost
to $1.3 billion. By comparison, at September 30, 2010, a one-notch, 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.

S&P

A-/negativea

Moody’s

A3/negative

Fitch

no change

A-/stable

no change

Baa1/stable

BBB/evolving no change

no change

BBB/stable

no change

Short-term
Potential
consequences of
a future
downgrade

Further downgrades in these ratings may reflect a loss of liquidity provided by government funding facilities.

S&P

A-1 for AIG
Funding,
Curzon, and
Nightingalea

no change

Moody’s

P-1 for AIG
a
Funding

no change

on review for no change
possible
downgrade

P-2/stable

Fitch

no change

not rated

no change

affirmed
and
withdrawn
Nov.
19,2010

A-2

Financial
strength
Potential
consequences of
a future
downgrade

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.

Page 78

GAO-11-716 TARP

Appendix III: Overview of Definitions of Credit
Ratings and AIG’s Credit Ratings

Rating agency

Mar. 31,2009

May 15,
2009

Dec. 15,
2009

Mar. 31,
2010

July 31,
2010

Sept. 30,
2010

Dec. 31,
2010

Mar. 31,
2011

Life insurer
Potential
consequences of
a future
downgrade

Domestic retirement services could 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 could 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.

A.M. Best

A/negativea

no change

S&P

A+/negative

no change

A+/stable

Moody’s

A1/developing no change

no change

A1/negative no change

no change

A2/stable

Fitch

AA-

no change

no changeb

A-/ evolving

A-/stable

Property/casualty insurer
Potential
consequences of
a future
downgrade

AIG commercial property/casualty businesses expect that a financial strength rating downgrade could 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.

A.M. Best

A/negativea

no change

S&P

A+/negative

no change

A/stable

Moody’s

Aa3/negative

no change

A1/stable

Fitch

AA-

A+/evolving

no change

placed
rating on
rating
watch negative

A+/stable

no change

A/stableb

no change

no changeb

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

These are key ratings.

A.M. Best commented on February 9, 2011, that the ratings of the Chartis companies were
unchanged following the announcement of an expected $4.1 billion strengthening of reserves for prior
years’ losses. Fitch commented that regarding the financial strength ratings, it upgraded AIG’s life
insurer ratings to A/stable on April 25, 2011, and downgraded AIG’s property/casualty insurer ratings
to A on February 10, 2011.

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GAO-11-716 TARP

Appendix IV: Trends in and Changes in the
Composition of Consolidated Shareholders’
Equity

Appendix IV: Trends in and Changes in the
Composition of Consolidated Shareholders’
Equity
Since September 2009, AIG’s shareholders’ equity has increased at a
much slower rate than earlier in the year 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 extent
to which a company could absorb losses before risk of imminent failure or
insolvency. One component of shareholders’ equity is capital raised by
issuing and selling common and preferred stock to investors, also known
as paid-in capital. Another component is retained earnings, which the
company accumulates over time from operating profits. 1
As figure 17 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. Since that period, shareholders’ equity has risen in all but one
quarter in 2009 and 2010 and increased to approximately $85 billion at
the end of 2010 and the first quarter of 2011. 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

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

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Appendix IV: Trends in and Changes in the
Composition of Consolidated Shareholders’
Equity

from discontinued operations of $4.4 billion that more than offset $1.1
billion of income from continuing operations. This trend reversed in the
first quarter of 2011 when such deficits were reduced to about $3.2 billion.
Also as shown in figure 17, 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.
Figure 17: AIG Trends in and Main Components of Consolidated Shareholders’ Equity, Fourth Quarter 2007 through First
Quarter 2011
Dollars in millions
100,000

95,801
85,319

89,029

79,703

80,000

78,088

79,732

80,627

79,686

79,836

71,182

75,470

82,678

72,712
69,824

60,000

82,034

78,693

76,496

73,743

85,026

80,842
82,205

78,201
78,634

75,001

57,958
52,710

49,291

45,759

40,000

39,871

20,000
16,816
10,218

10,308

0
-3,073

-2,618

-3,466
-11,491

-12,368

-9,871

-12,120

-16,706

-20,000
Q4

2007

2008

2009

Q1
2010

-3,202

-14,486

Q1
2011

Retained earnings and accumulated deficits
Preferred and common stock and paid-in capital
Total shareholders’ equity
Source: GAO analysis of AIG SEC filings.

Note: Prior to AIG’s recapitalization on January 14, 2011, the other components of total shareholders’
equity included 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. As part of AIG’s recapitalization, the
company drew down approximately $20.3 billion under the Series F equity capital facility to purchase
an equivalent amount of FRBNY’s preferred interests in the AIA and ALICO special purpose vehicles,
which was then provided to Treasury. The drawdown also increased the paid-in capital in the first
quarter of 2011 by an equal amount. As part of the restructuring that closed on January 14, 2011, the
remaining amount available under the Series F equity capital facility was drawn—approximately $22.3
billion—and repaid.

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Appendix IV: Trends in and Changes in the
Composition of Consolidated Shareholders’
Equity

Several federal actions in 2008 and 2009 caused the changes in size and
composition of AIG shareholders’ equity. Federal government actions
significantly increased AIG’s shareholders’ equity. Between the third and
fourth quarters of 2008, the adjusted value of common and preferred
stock and paid-in capital increased from $39.9 billion to $79.9 billion, of
which almost $73 billion was paid-in capital that could be attributed to two
government actions:


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. 2



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.

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, $10.9 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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Appendix V: GAO Contact and Staff
Acknowledgments

Appendix V: GAO Contact and Staff
Acknowledgments
GAO Contact

Thomas J. McCool, (202) 512-2642 or mccoolt@gao.gov

Staff
Acknowledgments

In addition to the contact named above, Karen Tremba (Assistant
Director); Tania Calhoun, Rachel DeMarcus, John Forrester, Marc
Molino, Barbara Roesmann, Jeremy Sebest, and Melvin Thomas made
important contributions to this report.

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Glossary of Terms

Adjusted Basis

The net cost of an asset or security that is used to compute the gains or
losses 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.

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Glossary of Terms

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.

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 to record
the lost value as an impairment.

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Glossary of Terms

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.

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
least-risky tranche whereas the equity tranche is the first loss and riskiest
tranche.

Mortgage-Backed
Securities

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

Notional Amount (Gross
and Net)

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

Paid-in Capital

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.

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Glossary of Terms

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.

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.

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Glossary of Terms

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.

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.

(250593)

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