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GAO
May 2012

United States Government Accountability Office

Report to Congressional Committees

TROUBLED ASSET
RELIEF PROGRAM
Government’s
Exposure to AIG
Lessens as Equity
Investments Are Sold

GAO-12-574

May 2012

TROUBLED ASSET RELIEF PROGRAM
Government’s Exposure to AIG Lessens as Equity
Investments Are Sold
Highlights of GAO-12-574, a report to
congressional committees

Why GAO Did This Study

What GAO Found

Assistance provided by Treasury under
the Troubled Asset Relief Program
(TARP) and by the Federal Reserve to
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.

Since GAO’s last report in July 2011, more of the assistance provided by the
Department of the Treasury (Treasury) and the Board of Governors of the
Federal Reserve System (Federal Reserve) to benefit American International
Group, Inc. (AIG) has been repaid. As of March 22, 2012, the remaining
assistance to AIG was $46.3 billion, including unpaid dividends and accrued
interest. This amount includes Treasury’s $35.9 billion investment in AIG
common stock and a balance of $8.3 billion owed by Maiden Lane III to the
Federal Reserve Bank of New York (FRBNY). This remaining assistance was
down from $92.5 billion in March 2011 and $154.7 billion in December 2010.
Several indicators show that as of March 2012, the government’s remaining
outstanding assistance to AIG has continued to be reduced, mostly because of
repayments on the FRBNY loan to Maiden Lane II; repayment of AIA Aurora,
LLC, a special purpose vehicle; and sales of Treasury’s common stock in AIG.
The government’s outstanding assistance to AIG is largely composed of
Treasury’s common stock in AIG. Treasury’s sales of AIG stock in May 2011 and
March 2012 have yielded total proceeds of $11.8 billion and reduced Treasury’s
ownership to 70 percent of the company. Based on the $30.83 closing share
price of AIG common stock on March 30, 2012, Treasury could recoup the total
value of assistance extended to AIG and take in an additional $2.7 billion
including dividends. The remaining assistance through Maiden Lane III will likely
be repaid in full and net additional returns to the government. When all the
assistance is considered, the amount the federal government ultimately takes in
could exceed the total support extended to AIG by more than $15.1 billion. This
analysis is primarily based on repayments and recoveries and market valuation
of AIG’s stock and does not include estimates of subsidy costs associated with
the assistance. The actual repayment of the remaining assistance continues to
depend on AIG’s long-term health, the timing of Treasury’s sale and the share
price of AIG stock, among other things. As Treasury arranges to sell its stock in
AIG to exit the company, several indicators suggest that the most likely buyers
will be institutions, many of whom already have considerable holdings in other
insurance companies.

As part of GAO’s statutory oversight of
TARP, this report updates a set of
indicators GAO last reported in July
2011. Specifically, GAO discusses
(1) the status of the government’s
exposure to AIG and (2) trends in the
financial condition of AIG and its
insurance companies. To update the
indicators, GAO primarily used
available public filings as of December
31, 2011, and other publicly available
information as of March 31, 2012;
reviewed rating agencies’ reports; and
identified critical activities and
discussed them with relevant agency
officials.
Treasury, the Federal Reserve, and
AIG provided technical comments that
GAO incorporated, as appropriate.

View GAO-12-574. For more information,
contact Lawrance L. Evans at (202) 512-4802
or evansl@gao.gov.

Several indicators show that in 2011, AIG had positive net income and its
insurance operations were stable and profitable. AIG had a net income for 2011
of $18.5 billion, primarily attributable to an income tax benefit and divested
businesses. AIG’s operating cash flows declined in 2011, which was mostly due
to cash payments covering several years of accrued interest and fees on the
FRBNY revolving credit facility and reduction in cash flows from the absence of a
full year of operating cash flows of foreign life subsidiaries that were sold during
the year. Also, payments on catastrophic loss claims and asbestos liabilities
reduced operating cash flows. The indicator on AIG’s quarterly insurance
operating performance shows that AIG was profitable in most quarters and that
investment income contributed considerably to that profitability, including several
quarters when insurance underwriting by itself was not profitable. The
sustainability of any positive trends in AIG’s operations will depend on how well it
manages its business in the current economic environment. GAO will continue to
monitor these issues.
United States Government Accountability Office

Contents

Letter

1
Background
Federal Government’s Exposure to AIG Continued to Decline in
2011; Further Reductions Depend on Future Market Conditions
AIG’s Financial Condition and Insurance Operations Have
Remained Stable Since July 2011
Agency Comments

5
14
42
54

Appendix I

Maiden Lane II Asset Auctions

Appendix II

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

Appendix III

GAO Contact and Staff Acknowledgments

Appendix IV

Glossary of Terms

Tables
Table 1: Outstanding Government Efforts to Assist AIG and the
Government’s Remaining Exposure, as of March 22, 2012
Table 2: Composition and Repayment Progress of Federal
Assistance to AIG, as of March 22, 2012
Table 3: Percentage Distribution of the Assets in the Maiden Lane II
Portfolio, December 31, 2008, through December 31, 2011
Table 4: Percentage Distribution of the Assets in the Maiden Lane
III Portfolio, December 31, 2008, through December 31,
2011
Table 5: Dates and Values of Maiden Lane II Asset Auctions, April
6, 2011, through February 28, 2012
Table 6: Summary of Rating Agencies’ Ratings
Table 7: AIG’s Key Credit Ratings, March 31, 2009, through
December 31, 2011

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12
18
25
28
58
60
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GAO-12-574 TARP: AIG Equity Investments

Figures
Figure 1: Changes in Composition and Level of Federal Assistance
through March 22, 2012
Figure 2: Repayment Progress of Federal Assistance to AIG, as of
March 22, 2012
Figure 3: Amounts Owed and Portfolio Value of Maiden Lane II,
December 24, 2008, through March 22, 2012
Figure 4: Portfolio Composition for Maiden Lane II, December 31,
2008, through December 31, 2011
Figure 5: Amounts Owed and Portfolio Value of Maiden Lane III,
December 24, 2008, through March 22, 2012
Figure 6: Portfolio Composition for Maiden Lane III, December 31,
2008, through December 31, 2011
Figure 7: Distribution of the Shares of AIG Common Stock
Outstanding, the Market Value of Treasury’s Share of AIG
Common Stock, and the Percentage of the Stock Held by
Treasury, September 2010 to March 2012
Figure 8: Market Value of AIG Common Stock at Various Average
Share Prices
Figure 9: Month-End Closing Share Prices of AIG Common Stock
Compared to the S&P 500 Index and Breakeven Share
Price for Treasury’s Remaining 1,248 Million Shares,
September 2008 through March 2012
Figure 10: Number of Trading Days and Months It Would Take to
Sell 1,248 Million Shares of AIG Common Stock Using
Average Daily Trading Volume Over Rolling 12 Month
Period from the Fourth Quarter of 2008 Through February
29, 2012
Figure 11: Market Values of Institutional and Other Holdings of
Common Stock in AIG and Nine Other Insurers Based on
Share Prices on March 5, 2012
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: Net Cash Flows and Changes in Cash from Operating,
Investing, and Financing Activities, from First Quarter
2007 through Fourth Quarter 2011
Figure 14: AIG CDS Premiums on AIG, January 2007 through March
2012

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20
23
24
26
27

32
34

37
39
41
45
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GAO-12-574 TARP: AIG Equity Investments

Figure 15: 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
Percentages of Premiums Earned, First Quarter 2007
through Fourth Quarter of 2011

Abbreviations
AIA
AIG
AIGFP
ALICO
CDO
CDS
DPW
EESA
Federal Reserve
FRBNY
RMBS
S&P
SBF
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
residential mortgage-backed security
Standard & Poor’s
securities borrowing facility
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-12-574 TARP: AIG Equity Investments

United States Government Accountability Office
Washington, DC 20548

May 7, 2012
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, mortgage guaranty,
aircraft leasing, 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 for the benefit of
AIG.1 This assistance has been used to strengthen AIG’s financial
condition and avert the company’s failure and, in turn, further disruption of
the financial markets. Since January 2011, when AIG, the Federal
Reserve, and Treasury took steps to recapitalize AIG, the company has
continued repayment of its federal assistance. 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

EESA, Pub. L. No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C. §§ 5201 et seq.
EESA 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, 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-12-574 TARP: AIG Equity Investments

TARP, we are continuing to report on the federal government’s
assistance to AIG.2
To help Congress monitor the condition of AIG and the government’s
ability to recoup its assistance to AIG, we have developed indicators to
monitor the status of the government’s exposure to AIG and trends in
AIG’s financial condition. Because government assistance to AIG is a
coordinated approach, in addition to providing timely reporting of
Treasury’s assistance to AIG, we are also monitoring the efforts of the
Federal Reserve.3 In September 2009 we issued a report on the 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

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 Wall Street Reform and Consumer Protection
Act provided us authority to review various aspects of Federal Reserve facilities initiated in
response to the financial crisis.

See GAO, Troubled Asset Relief Program: The Government’s Exposure to AIG Following
the Company’s Recapitalization, GAO-11-716 (Washington, D.C.: July 18, 2011);
Troubled Asset Relief Program: Third Quarter 2010 Update of Government Assistance
Provided to AIG and Description of Recent Execution of Recapitalization Plan, GAO-11-46
(Washington, D.C.: Jan. 20, 2011); and Troubled Asset Relief Program: Status of
Government Assistance to AIG, GAO-09-975 (Washington, D.C.: Sept. 21, 2009). For our
previous testimony on the assistance provided to AIG, see 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). For our
review of the assistance offered by the Federal Reserve to AIG, see Financial Crisis:
Review of Federal Reserve Financial System Assistance American International Group,
Inc., GAO-11-616 (Washington, D.C.: Sept. 30, 2011).

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GAO-12-574 TARP: AIG Equity Investments

December 31, 2011, and other more recent publicly available information
where available. Specifically, the report discusses (1) the status of the
government’s exposure to AIG and (2) trends in the financial condition of
AIG and its insurance companies.
To conduct this work, we updated previously published indicators that
address several dimensions of AIG’s business. Data used to create the
indicators were collected from several sources, but most were based on
publicly available information, such as AIG’s 10K and 10Q filings with the
Securities and Exchange Commission (SEC) and insurance regulatory
filings with the respective states of domicile (copies of which were
provided to the National Association of Insurance Commissioners). We
analyzed AIG’s SEC filings and supplements for those filings through the
fourth quarter of 2011. We analyzed data from Thomson Reuters
Datastream, SNL Financial, and Yahoo Finance.com. We obtained the
ratings data 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 105(a) and transaction reports.
To monitor the status of the government’s exposure to AIG, we updated
some indicators, excluded others, and developed several new ones. We
updated and revised our indicators of the composition of the
government’s assistance to AIG to more broadly include all of the Federal
Reserve Bank of New York (FRBNY) and Treasury assistance that has
been provided to AIG since 2008. We did not include our indicator that
focused on the composition and level of the government’s direct
assistance to AIG before and upon announcement and execution of the
recapitalization agreement because another new indicator provides a
longer historical perspective on the level and composition of all
government assistance to, and on behalf of, AIG. In addition, we have
added several new indicators to track the status of the government’s
exposure to AIG because, with the Treasury exchanging most of its
preferred equity for common equity in January 2011 as part of AIG’s
recapitalization, our main focus is on the government’s prospects for full
recovery of the assistance provided and the progress and timing of that
recovery thus far. The new indicators show (1) the progress in recovering
the federal assistance through March 22, 2012, highlighting the amount of
assistance drawn and recovered, the remaining assistance yet to be
recovered, and the value of assets to be monetized to recover the
remaining assistance; (2) the composition of the Maiden Lane II [this
special purpose vehicle (SPV) has been fully liquidated] and Maiden Lane
III portfolios; (3) the percentage distribution of the assets in those
portfolios; (4) the distribution of the shares of AIG common stock

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GAO-12-574 TARP: AIG Equity Investments

outstanding that illustrates the government’s level of ownership and
equity exposure to AIG; and (5) one estimate of how long it might take
Treasury to sell its common stock in AIG on the open market to help
illustrate why we find that it would be more likely and practical for
Treasury to sell its AIG stock to institutions.
To assess AIG’s financial condition, we updated indicators of AIG’s cash
flows and its credit default swap (CDS) premiums and key credit ratings.
To assess the financial condition of AIG’s insurance companies, we
compared the underwriting ratios for AIG with those of several of its
peers. We have excluded the indicator on AIG’s shareholders’ equity that
in 2008 was at risk of full depletion by massive losses if not for
government assistance because AIG no longer faces such depletion risk
and also is not at risk of such depletion while in the process of repaying
the assistance provided. For example, AIG will not be required to buy
back its common shares from Treasury to repay the assistance that was
converted to common equity. Such a requirement would reduce AIG’s
equity. Instead, Treasury may recover much of that assistance by selling
those shares to the public.5 We excluded the indicator that tracks
quarterly life insurance contract deposits and withdrawals because of
dispositions that considerably reduced the size of this segment and
because of the relative stability of the remaining businesses since 2009.
Instead, our cash flow indicator tracks AIG overall cash flows that include
the cash flow impact of this segment. We excluded the indicator on
quarterly premiums written because AIG’s business volume has remained
fairly stable in 2010 and 2011. We also no longer update or include
indicators that monitor AIG’s progress in unwinding AIG Financial
Products Corp. (AIGFP) because, as we discuss later, the company has
reported that AIGFP’s derivatives portfolio was largely wound-down as of
the second quarter of 2011.
The data used to construct the indicators in this report came largely from
AIG’s public filings, Treasury, and the Federal Reserve. We have
reviewed these data and found them to be sufficiently reliable for our
purposes. We also used data from SNL Financial, Thomson Reuters, and
Yahoo.com. We have relied on SNL Financial and Thomson Reuters data

On March 13, 2012, Treasury sold 206,896,552 shares of its AIG stock at $29 per share.
As part of this sale, AIG purchased 103,448,276 of those shares for $3 billion. This
transaction is expected to reduce total AIG shareholders’ equity by approximately $3
billion.

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for past reports, and we determined that these data were sufficiently
reliable for the purpose of presenting and analyzing trends in financial
markets. Our reports also have relied on data from Yahoo.com, and in our
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 market
participants. We also relied on AIG’s financial data, which we found
reliable for our purposes.
We conducted this performance audit from February 2012 to May 2012 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.

Background

AIG is an international insurance organization serving customers in more
than 130 countries. As of December 31, 2011, AIG had assets of $555.8
billion and revenues of $64.2 billion for the preceding year. 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.

AIG Operations

AIG provides insurance and retirement services through several
companies. More than 90 percent of the company’s revenues in 2011
came through Chartis and SunAmerica Financial Group. Chartis offers
property/casualty insurance and other products and services both in the
United States and around the world commercially and to individual
consumers, while SunAmerica Financial Group offers life insurance and
retirement services. In 2011, AIG also generated 7 percent of its
revenues in aircraft leasing operations. The remaining revenues were
generated by its other businesses, which included among others, the
remaining derivatives portfolio of AIGFP. According to AIG’s 10K for
2011, the active wind-down of the AIGFP derivatives portfolio was
completed by the end of the second quarter of 2011, and the remaining
AIGFP derivatives portfolio consists predominantly of transactions AIG
believes are of low complexity and low risk and support AIG’s risk

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management objectives or are not economically appropriate to unwind
based on a cost-versus-benefit analysis.
Federal, state, and international authorities regulate AIG and its
subsidiaries. Until March 2010, the Office of Thrift Supervision was the
consolidated supervisor of AIG, which was a thrift holding company by
virtue of its ownership of the AIG Federal Savings Bank.6 AIG has
recently stated that it believes the company will be subject to additional
regulation because of reforms contained in the Dodd-Frank Wall Street
Reform and Consumer Protection Act to the extent that the statute and
the regulations under it will affect the financial services they provide
customers. AIG’s domestic, life, and property/casualty insurance
companies are regulated by the state insurance regulators in states in
which these companies are domiciled.7 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. 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

In 1999, AIG became a savings and loan holding company when the Office of Thrift
Supervision granted AIG approval to organize AIG Federal Savings Bank. Until March
2010, AIG was subject to Office of Thrift Supervision regulation, examination, supervision,
and reporting requirements. As the consolidated supervisor, the Office of Thrift
Supervision was charged with identifying systemic issues or weaknesses and ensuring
compliance with regulations that govern permissible activities and transactions. 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). As we
reported in GAO-11-716 in July 2011, AIG reported 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.

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

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provided to AIG, as well as information on the unwinding of AIGFP and
the sale of certain AIG assets.8 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.9
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.10

Federal Reserve and
Treasury Provided
Assistance to AIG

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 at the time could have caused AIG to fail, which would have
threatened the stability of financial markets.11 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

SIGTARP, Quarterly Report to Congress (Washington, D.C.: Jan. 26, 2012); Quarterly
Report to Congress (Washington, D.C.: Jan. 26, 2011); Quarterly Report to Congress
(Washington, D.C.: Oct. 26, 2010); Quarterly Report to Congress (Washington, D.C.: July
21, 2010); Quarterly Report to Congress (Washington, D.C.: Apr. 20, 2010); Quarterly
Report to Congress (Washington, D.C.: Jan. 30, 2010); Quarterly Report to Congress
(Washington, D.C.: Oct. 21, 2009); Quarterly Report to Congress (Washington, D.C.: July
21, 2009); Quarterly Report to Congress (Apr. 21, 2009); and Initial Report to the
Congress (Washington, D.C.: Feb. 6, 2009).
9
SIGTARP, Extent of Federal Agencies’ Oversight of AIG Compensation Varied, and
Important Challenges Remain (Washington, D.C.: Oct. 14, 2009), and Factors Affecting
Efforts to Limit Payments to AIG Counterparties (Washington, D.C.: Nov. 17, 2009).
10

Congressional Oversight Panel, June Oversight Report: The AIG Rescue, Its Impact on
Markets, and the Government’s Exit Strategy (Washington, D.C: June 10, 2010); 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.
11

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).

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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 residential mortgage-backed securities (RMBS) assets purchased
with the cash collateral for the company’s securities lending, which
declined in value and became less liquid. In addition, the values of the
collateralized debt obligations (CDO) against which AIGFP had written
CDS protection declined in value, triggering collateral calls.12 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. 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.

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

Federal Reserve’s assistance to AIG. In September 2008, prior to
TARP, AIG received government assistance in the form of a loan from
FRBNY. In exchange, AIG provided shares of preferred stock to the AIG
Credit Facility Trust created by FRBNY. This trust received 100,000
shares of Series C preferred stock, and Treasury received a 79.8 percent
voting interest in AIG in exchange for FRBNY providing AIG a revolving
loan.13 On October 6, 2008, the Federal Reserve authorized the creation
of the AIG securities borrowing facility (SBF) to provide up to $37.8 billion
of direct funding support to a securities lending program operated by
certain AIG domestic insurance companies. From October 8, 2008,
through December 11, 2008, FRBNY provided cash loans to certain AIG
domestic life insurance companies, collateralized by investment-grade
debt obligations. AIG’s borrowing under the AIG SBF peaked at $20.6
billion before the AIG SBF was fully repaid in connection with the creation

CDOs are structured securities issued in tranches and backed by a pool of bonds, loans,
or other assets.
13

These preferred shares were later converted to common stock and transferred to
Treasury.

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GAO-12-574 TARP: AIG Equity Investments

of Maiden Lane II LLC in December 2008.14 To provide further relief, in
late 2008, FRBNY created two SPVs—Maiden Lane II LLC and Maiden
Lane III LLC—to purchase some of AIG’s more troubled assets.


Maiden Lane II replaced the AIG SBF and was created to serve as a
longer-term solution to AIG’s security lending program liquidity
problems by purchasing RMBS assets from AIG’s U.S. securities
lending portfolio, which were the source of 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 the SPV $19.5 billion to fund its portion of the
purchase price.15 The facility purchased $39.3 billion in face value of
the RMBS directly from AIG domestic life insurance companies.



Maiden Lane III was created to purchase multisector CDOs on which
AIGFP had written CDS contracts.16 In connection with the purchase
of the CDOs, AIG’s CDS counterparties agreed to terminate the CDS
contracts.17 The Federal Reserve authorized FRBNY to lend up to $30
billion to Maiden Lane III, and in November and December 2008
FRBNY loaned the SPV $24.3 billion.18

In March 2009, the government restructured its assistance to AIG, which
included 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 SPVs created by AIG to hold the outstanding
common stock of two life insurance company subsidiaries—American Life

14
The interest rate on AIG SBF loans was 100 basis points plus the average overnight
repurchase agreement rate offered by dealers for the relevant collateral type.
15
AIG also acquired a subordinated $1 billion interest in the facility to absorb the first $1
billion of any losses.
16

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

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.
18

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-12-574 TARP: AIG Equity Investments

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.
Treasury’s assistance to AIG. In addition to the FRBNY support,
Treasury started providing TARP assistance to AIG in November 2008 by
purchasing preferred shares (these were later converted to common
stock). Using TARP funds, Treasury purchased $40 billion of Series D
cumulative preferred stock, which was exchanged in April 2009 for $41.6
billion of Series E noncumulative preferred stock.19 The difference of $1.6
billion was in accumulated but unpaid dividends on the Series D stock.20
That same month, also using TARP funds, 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 Series F fixed-rate noncumulative perpetual preferred
stock and a warrant to purchase up to 3,000 shares of AIG common
stock. As AIG drew on the facility, the aggregate liquidation preference of
the Series F stock increased.

The January 2011
Recapitalization of AIG
Changed the Composition
of Federal Assistance

In January 2011, AIG, FRBNY, Treasury, the AIG Credit Facility Trust,
AIA Aurora LLC (AIA special purpose vehicle—SPV), and ALICO
Holdings LLC (ALICO SPV) implemented a plan to recapitalize AIG and
restructure the government’s assistance in a manner intended to facilitate
the eventual sale of the government’s AIG stock. First, using loans to AIG
from the AIA and ALICO SPVs, AIG repaid FRBNY in cash all the
amounts owed under the FRBNY revolving credit facility and FRBNY
terminated the credit facility. Second, Treasury, AIG, and the AIG Credit
Facility Trust took steps to exchange the various preferred interests in
AIG for common stock.

19
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.
20
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.

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GAO-12-574 TARP: AIG Equity Investments



The trust exchanged its shares of AIG’s Series C preferred stock for
about 562.9 million shares of AIG common stock and subsequently
transferred these shares to Treasury.



Treasury exchanged its shares of AIG’s Series E preferred stock for
about 924.5 million shares of AIG common stock and its shares of
AIG’s Series F preferred stock for (1) preferred interests in the AIA
and ALICO SPVs, (2) 20,000 shares of the Series G preferred stock,
and (3) 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.21 AIG drew down the remaining available
funds on the equity facility and used that amount to repurchase all of
FRBNY’s preferred interests in the AIA and ALICO SPVs. AIG then
issued shares of common stock and transferred the shares and the
repurchased preferred interests to Treasury in payment of the
liquidation preference of the Series F preferred stock.

In addition, 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.22 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. Also, AIG
used proceeds from the sale of ALICO and the initial public offering of AIA
to reduce Treasury’s preferred interests (aggregate liquidation
preference) in the ALICO and AIA SPVs to approximately $20.3 billion.

AIG drew down approximately $20.3 billion remaining under Treasury’s equity capital
facility tied to the Series F preferred stock. According to Treasury, $40 billion of Series E
preferred stock was exchanged for AIG common stock, $20.3 billion of Series F preferred
stock was exchanged for SPV preferred stock, $7.5 billion of Series F preferred stock was
exchanged for AIG common stock, and $2 billion of Series F preferred stock was
exchanged for Series G preferred stock. AIG designated the $2 billion in Series G
preferred stock to be available after the closing for general corporate purposes under the
Series G preferred stock. 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. 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.
22

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

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GAO-12-574 TARP: AIG Equity Investments

At the closing of the recapitalization, Treasury held approximately 1.655
billion shares of AIG common stock (at then-current stock prices, these
shares were valued at about $49.148 billion), representing approximately
92 percent of the outstanding AIG common stock, and owned about $20.3
billion in preferred interests in AIA and ALICO SPVs. These investments
gave Treasury an increased total exposure to AIG of over $69 billion.
As shown in table 1, as of March 22, 2012, approximately 1 year following
AIG’s 2011 recapitalization, Federal Reserve’s and Treasury’s exposure
to AIG, excluding unpaid dividends and accrued interest, was $44 billion.
Since AIG’s recapitalization, most of the government’s exposure has
been in the form of Treasury’s ownership of AIG common stock.
Table 1: Outstanding Government Efforts to Assist AIG and the Government’s Remaining Exposure, as of March 22, 2012
Dollars in millions
Outstanding
balance

Description of the federal assistance

Sources to repay the
government

Federal Reserve
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.
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 to fund the purchases along with funds paid to the
counterparties by AIG.

$0a

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

8,271a

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

Proceeds from asset sales used to
pay down the preferred interests.

Treasury
The remaining preferred interests in the AIA SPV had an aggregate
liquidation preference of approximately $16.9 billion following a
partial repayment on January 14, 2011. From February through
March 22, 2012, AIG used proceeds from various sales to fully repay
the preferred interest on the AIA SPV, and certain participating
returns attributable to the preferred interests.

Treasury received 1.655 billion shares of AIG common stock
(approximately 92 percent of the company). On May 24, 2011,
Treasury sold 200 million of these shares and on March 13, 2012,
sold 206.9 million shares. These sales reduced Treasury’s shares to
1,248.1 million shares (approximately 70 percent of the company).c

35,743

Total outstanding assistance, excluding unpaid dividends and
accrued interest

$44,014

Treasury’s goal is to sell the shares
over time to recoup taxpayers’
funds.

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

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GAO-12-574 TARP: AIG Equity Investments

Government debt shown is the remaining principal owed for the Maiden Lane III facility as of March
22, 2012, and reflects principal only and does not include accrued interest of $718 million for the
Maiden Lane III loan. On January 19, 2012, FRBNY announced that it sold Maiden Lane II assets
with a current face value of $7.014 billion through a competitive process to Credit Suisse Securities
(USA) LLC, and on February 8, 2012, it announced that it sold Maiden Lane II assets with a current
face value of $6.2 billion through a competitive process to Goldman Sachs & Co. In March 2012,
FRBNY sold the remaining securities in the Maiden Lane II portfolio and used proceeds to fully pay
the remaining debt and accrued interest.
b

On August 18, 2011, AIG reduced the remaining liquidation preference of preferred interests that
Treasury holds in the AIA SPV to approximately $9.3 billion by applying the proceeds of $2.15 billion
from the sale of Nan Shan Life Insurance Company, Ltd., its Taiwan-based life insurance company, to
Ruen Chen Investment Holding Co., Ltd., for $2.16 billion in cash. Additional payments through
November 1, 2011, further reduced the remaining liquidation preference in AIA SPV to approximately
$9 billion. On March 22, 2012, Treasury announced that AIG fully repaid Treasury for its remaining
preferred interest in the AIA SPV.
c

Treasury’s cost basis in 1.655 billion AIG common shares of $47.543 billion comprises liquidation
preferences of $40 billion for Series E preferred shares, plus $7.543 billion for Series F preferred
shares. In addition, unpaid dividends and fees of $1.605 billion are to be repaid as part of the
liquidation preference. On May 24, 2011, Treasury sold 200 million shares of its common stock in
AIG, reducing its holdings from approximately 1.655 billion shares to 1.455 billion shares, and AIG
sold 100 million newly issued shares of common stock, increasing the total number of outstanding
common shares to approximately 1.9 billion. These transactions reduced Treasury’s equity interest in
AIG to approximately 77 percent. Treasury’s overall cost basis in its remaining shares was $41.799
billion that was derived from its cost basis per share of $28.7269. Treasury’s overall cost basis per
share is the combined cost basis of AIG common shares within TARP ($43.53) and AIG common
shares outside of TARP. Treasury received the common shares outside of TARP from a trust created
by FRBNY for the benefit of the Treasury. The trust exchanged its AIG Series C preferred shares, for
AIG common shares. The May 2011 sale included about 132 million AIG common shares within
TARP on which Treasury had a realized loss and about 68 million AIG common shares, with no cost
basis outside of TARP, on which Treasury had a realized gain. Overall, Treasury had a realized gain
as the 200 million shares were sold at a higher price ($29 per share) than Treasury’s overall cost
basis. On March 13, 2012, Treasury sold 206,896,552 shares of AIG common stock at $29 per share,
for total proceeds of $6 billion. This sale, plus Treasury’s sale in May 2011, yielded total proceeds of
$11.8 billion, including $7.79 billion from sales of AIG common stock within TARP. Remaining
outstanding assistance to Treasury of $35.743 billion was computed by subtracting from $47.543
billion (Treasury’s cost basis in 1.655 billion shares) proceeds totaling $11.8 billion from Treasury’s
sales of AIG stock in May 2011 and March 2012. The information does not reflect returns from the
sale, announced by FRBNY on April 26, 2012, of some of the Maiden Lane III holdings through a
competitive bid process to a consortium of financial institutions.

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GAO-12-574 TARP: AIG Equity Investments

Federal Government’s
Exposure to AIG
Continued to Decline
in 2011; Further
Reductions Depend
on Future Market
Conditions

As of March 22, 2012, the date Treasury announced that AIG had fully
repaid Treasury for its remaining preferred interest in the AIA SPV, the
government’s exposure to AIG had decreased to approximately $44
billion.23 We reported in July 2011 that this exposure had increased from
$120.7 billion in September 2009 to $129.1 billion in December 2009 and
then decreased to $86.1 billion as of March 31, 2011.24 The reduction
was due to several factors, including AIG’s full repayment of the debt
related to Maiden Lane II and the liquidation preference in the AIA SPV,
as well as Treasury selling almost 407 million shares of the 1.655 billion
shares AIG common stock it received in exchange for preferred shares in
AIG as part of AIG’s January 2011 recapitalization. We have developed
three new indicators that show the composition and level of all
government assistance to AIG at points in time, including the portfolio of
assistance and AIG’s repayment of that assistance as of March 22, 2012.
Since AIG no longer has outstanding debt directly owed to the
government and the government is focusing on recouping its common
equity investments in AIG by selling its AIG stock and its remaining debt
in Maiden Lane III by selling its investment portfolio, we have added new
indicators to track these investments in greater detail. One of these new
indicators tracks the level of Treasury’s ownership of AIG stock.25

The Government Has
Recouped Some of Its
Assistance to AIG

Three new indicators track the changing composition and level of
government assistance to AIG and where that assistance stood as of
March 22, 2012. The first indicator shows the assistance available to AIG
and the levels of assistance actually used since FRBNY provided its initial
assistance to AIG in October 2008. Its purpose is to show the progress

23
In table 1 we reported outstanding assistance to be $44 billion, which includes $35.7
billion in outstanding AIG common stock owned by Treasury—the portion of the original
cost of the shares to be repaid. By contrast, figure 1 reports the remaining federal
assistance to be $44.2 billion, which includes Treasury’s $35.9 billion cost of its AIG
common stock. This cost is the product of 1,248,141,210 shares multiplied by the original
breakeven price of $28.7269 on all 1.655 billion shares AIG received as part of the
recapitalization in January 2011 plus unpaid dividends.
24

We reported the amounts for 2009 and 2010 in GAO-11-46, GAO-10-475, and
GAO-09-975 .
25

This new indicator replaces a prior indicator of the composition of the government’s
direct assistance to AIG before and upon announcement and execution of the
recapitalization agreement because other new indicators allow us to focus more directly
on the government’s exposure to AIG through its remaining debt and equity investments.

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GAO-12-574 TARP: AIG Equity Investments

AIG has made in repaying its assistance and changes in composition and
level of that assistance.
This indicator (see fig. 1) covers both the debt and equity assistance from
both FRBNY and Treasury. It shows that the maximum federal assistance
available to AIG grew from $122.8 billion as of October 29, 2008, to
$172.4 billion as of December 31, 2009.26 Over the same period, the
government’s exposure fluctuated between 68 percent and 81 percent of
this cap. The assistance included (1) FRBNY’s loans through the
revolving credit and secured borrowing facilities (the latter facility was
opened for 2 months in 2008); (2) loans to Maiden Lanes II and III; (3)
FRBNY’s receipt of preferred interests in two AIG SPVs, namely AIA
Aurora LLC and ALICO Holdings LLC; and (4) Treasury’s purchase of
AIG’s Series D/E preferred stock and Series F preferred stock. By
December 31, 2010, the assistance available to AIG had been reduced to
$154.7 billion, primarily because of repayments from the Maiden Lane
facilities. The amount of assistance both available and provided to the
company was reduced as part of the January 2011 recapitalization that
resulted in the government owning 92 percent of AIG’s common stock.
This ownership was reduced to approximately 77 percent in May 2011
after Treasury sold 200 million shares of its common stock in AIG and
reduced further to approximately 70 percent in March 2012 after Treasury
sold 206,896,552 shares.27 As of March 22, 2012, outstanding
government assistance was $44.2 billion, of which $35.9 billion or about
81 percent was in the form of Treasury’s remaining holdings in AIG
common stock and $8.3 billion was in remaining principal owed on
Maiden III.

The peak amount of assistance available to AIG was $182.3 billion.

27
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 outstanding 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. On March 13,
2012, AIG bought half of the approximately 207 million shares of AIG common stock that
Treasury sold on that date, which reduced total outstanding AIG common shares to
approximately 1.793 billion and Treasury’s holdings to approximately 1.248 billion shares
and common equity ownership to approximately 70 percent.

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GAO-12-574 TARP: AIG Equity Investments

Figure 1: Changes in Composition and Level of Federal Assistance through
March 22, 2012

Note: Amounts shown do not include accrued interest and dividends.
a

Remaining available authorized assistance for October 2008 and December 31, 2008, was
comprised of undrawn amounts on FRBNY’s revolving credit facility, secured borrowing facility, and
loans to Maiden Lanes II and III. For December 31, 2009, and December 31, 2010, this amount
included undrawn amounts on Treasury’s Series F facility.
b

Treasury’s cost of AIG Common Stock is the product of the remaining shares held by Treasury
(1,655,037,962 shares on March 31, 2011; 1,455,037,962 shares on December 31, 2011; and
1,248,141,410 shares on March 22, 2012) times Treasury’s original breakeven price of $28.7262 per
share. Including unpaid dividends, the breakeven price would be $29.6967 per share.

To complement the previous indicator, we developed two indicators that
provide more detail on the composition of the federal assistance. The first
one lists each of the FRBNY facilities established to assist AIG,

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GAO-12-574 TARP: AIG Equity Investments

Treasury’s preferred equity interests in AIG, and Treasury’s common
stock in AIG, and the second shows the progress that AIG has made in
repaying the federal assistance as of March 22, 2012. For each form of
assistance the indicator provides (1) potential returns, (2) the total
assistance drawn by or on behalf of AIG, (3) a summary of the debt that
was restructured as preferred equity and the eventual exchange of the
preferred equity for common equity, (4) accrued interest and dividend on
all assistance provided, (5) the amount of the assistance that has been
repaid and the amount that remains outstanding, and (6) the current value
of the assets that are the sources to recoup or repay the remaining
assistance. The purpose of the indicator is to summarize the activities of
each form of assistance provided to or on behalf of AIG from the
beginning in 2008 to the remaining assistance owed to the government as
of March 22, 2012.
As shown in table 2, the FRBNY revolving credit facility has been repaid,
including interest and fees, and closed. AIG’s initial maximum authorized
assistance (cap) under the facility was $85 billion. In November 2008,
when Treasury repaid $40 billion of the assistance in exchange of Series
D preferred shares, the facility’s cap was reduced by $25 billion, which
was $15 billion less than the $40 billion repayment. This effectively
provided AIG access to $15 billion of additional assistance, which allowed
it the opportunity to draw up to $100 billion ($15 billion plus $85 billion) on
the credit facility. AIG’s maximum draw on the facility reached $88.549
billion (including accrued interest), which occurred on April 26, 2010. The
indicator also shows that for Maiden Lane II and Maiden Lane III,
respectively, total assistance was $19.494 billion and $24.339 billion. As
of March 22, 2012, the FRBNY loan and accrued interest on the Maiden
Lane II facility were fully repaid. The remaining $8.989 billion in
assistance owed (which includes accrued interest) all pertains to Maiden
Lane III and the current value of assets to be monetized to pay back that
remaining assistance is $17.449 billion. It also shows that a portion of
Treasury’s preferred equity interests (Series D/E and F) have been
exchanged for AIG common stock. As of March 22, 2012, that assistance
amounted to $37.3 billion (this includes $1.6 billion of dividends), which is
to be repaid by the sale of AIG common stock, valued at $38.5 billion
(1,248,141,410 shares of government-owned AIG stock at $30.83 a
share, which was the closing price of AIG on March 30, 2012). Based on
the composition of the remaining federal assistance to AIG, the
repayment and recovery progress thus far on all assistance as of March
22, 2012, and the March 30, 2012, value of the remaining shares of AIG
stock held by Treasury, the government could receive total returns of
approximately $15.1 billion in excess of the assistance provided, including

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GAO-12-574 TARP: AIG Equity Investments

Interest, dividends, and fees. This analysis does not include estimates of
subsidy costs associated with the assistance.
Table 2: Composition and Repayment Progress of Federal Assistance to AIG, as of March 22, 2012
Dollars in millions

Total

Revolving
credit
facility
(RCF)a

Maiden
Lanes II
and IIIb

Series
D/E

Series F

Potential or realized return to the government
in excess of assistance provided (interest,
dividends, and fees plus net gain or loss)

$15,138

$6,700

$4,261

$1,440

$2,737

Total or maximum assistance drawn by or on
i
behalf of AIG by facility

$160,217

$88,549a

$43,833c

n/aa

$27,835j

n/aa

n/a

Debt restructured as preferred equity

(65,000)a

n/a

$40,000a

n/a

$25,000a

n/a

Preferred equity exchanged for common
stock

n/a

(40,000)

(7,543)

n/a

$47,543

11,126

6,700

1,381d

n/a

1,440

1,605

Total assistance repaid by or on behalf of AIG (125,006)

(30,249)

(36,225)
n/a

(20,292)

(26,440)

Interest, dividends, and fees on assistance
provided

AIA and
ALICO
SPVs AIG stock

(11,800)

Remaining assistance, including unpaid
dividends and accrued interest, owed to the
government

46,337

8,989f

37,348

Current value of assets to be monetized or
pledged as security for repaying remaining
assistance

55,929

n/a

17,449f

n/a

38,480g

Estimated gain or (loss) to the
government on assistance to AIG

$4,012

n/a

$2,880f, h

n/a

$1,132

$11,126
4,012

$6,700
n/a

$1,381
2,880

n/a
$0

$1,440
n/a

$1,605
1,132

$15,138

$6,700

$4,261

$1,440

$2,737

Potential or realized return to the government
in excess of assistance provided

Interest, dividends, and fees

Estimated gain or (loss) to the
government on assistance to AIG
Totals—return to the government

Sources: GAO analysis of Treasury, Federal Reserve, and AIG data.

Note: N/a means not applicable.
a

AIG’s initial maximum authorized assistance (cap) under the RCF was $85 billion. In November
2008, when Treasury repaid $40 billion of the assistance in exchange of Series D preferred shares,
the RCF cap was reduced by $25 billion, which was $15 billion less than the $40 billion repayment.
This effectively provided AIG access to $15 billion of additional assistance which allowed AIG the
opportunity to draw up to $100 billion ($15 billion plus $85 billion) on the RCF. AIG’s maximum draw
on the RCF reached $88.549 billion on April 26, 2010. On this date the $88.549 billion was comprised
of $23.549 billion that AIG owed under the RCF, plus $40 billion of RCF borrowings previously repaid
by Treasury in exchange for Series D preferred shares and $25 billion previously converted to
preferred liquidation preferences in the AIA and ALICO SPVs.

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GAO-12-574 TARP: AIG Equity Investments

The values for the Maiden Lane facilities are as of March 22, 2012. For Maiden Lane II and Maiden
Lane III, respectively, total assistance was $19.494 billion and $24.339 billion. As of March 22, 2012,
the FRBNY loan and accrued interest on the Maiden Lane II facility were fully repaid. The remaining
assistance owed all pertains to Maiden Lane III and consists of unpaid principal of $8.271 billion and
unpaid interest of $718 million; current value of assets to be monetized to pay back remaining
assistance was $17.449 billion.
c

The Federal Reserve Board authorized the SBF that provided AIG access to $37.8 billion of direct
funding support from October 8, 2008, through December 11, 2008, to a securities lending program
operated by certain AIG domestic insurance companies. By providing overnight loans against
investment grade debt obligations, the SBF was intended to reduce pressure on AIG’s subsidiaries to
meet demands for returning cash collateral by liquidating the portfolio of RMBS in strained markets.
The interest rate on the SBF was 100 basis points—a common measure used in quoting yield on
bills, notes, and bonds and represents 1/100 of a percent of yield—plus the average overnight
repurchase agreement rate offered by dealers for the relevant collateral type. AIG’s borrowing under
the SBF peaked at $20.6 billion before it was fully repaid in connection with the creation of Maiden
Lane II LLC. This $20.6 billion is included in the $43.833 of total borrowings on the Maiden Lane
facilities.
d

Interest income on loans totaling $1.381 billion consisted of accrued and paid interest of $80 million
on the secured borrowing facility before it was closed into Maiden Lane II, $583 million paid on
Maiden Lane II, and accrued and unpaid interest of $718 million on Maiden Lane III.
e

On March 13, 2012, Treasury sold 206,896,552 shares of AIG common stock at $29 per share, for
total proceeds of $6 billion. This sale plus Treasury’s sale in May 2011 yielded total proceeds of $11.8
billion, including $7.79 billion from sales of AIG common stock within TARP.
f

For Maiden Lane III, because the assets to be monetized have a greater fair value than the
remaining assistance owed, the government is expected to be fully repaid. The information on Maiden
Lane III does not reflect returns from the sale, announced by FRBNY on April 26, 2012, of some of
the Maiden Lane III holdings through a competitive bid process to a consortium of financial
institutions.

This is the market value of 1,248,141,410 shares of government-owned AIG stock at $30.83 a share,
which was the closing price of AIG on March 30, 2012.
h

Total gain consisted of a $2.220 billion gain plus accrued interest of $580 million to FRBNY on the
full repayment of the Maiden II loan and AIG’s payment to FRBNY of $80 million for accrued interest
on the secured borrowing facility.

Each facility’s maximum assistance drawn, when added together totaled $160.217. This amount is
greater than the maximum assistance outstanding at any one time because the maximum amounts
drawn occurred at different times for each facility. Specifically, on Dec 24, 2008, when the maximum
amount drawn on the Maiden Lane facilities reached $43.833 billion, $80.018 billion was drawn on
the RCF and Series F was not yet created; thus total outstanding assistance at that time was
$123.851 billion. Around April 26, 2010, when the maximum amount drawn on the RCF reached
$88.549 billion, only $7.543 was drawn on the Series F facility and $31.339 billion was owed on the
Maiden Lane facilities, for total outstanding assistance of $127.431 billion. In January 2011, when the
maximum amount drawn on the Series F facility reached $27.865 billion, the remaining balance still
owed on the RCF was fully repaid and part of the $25 billion of preferred equity in AIA and ALICO
was repaid as part of the recapitalization, while $26.303 billion was owed on the Maiden Lane
facilities for total outstanding assistance of under $80 billion.

As part of AIG restructuring that closed on January 14, 2011, $2 billion of authorized assistance
under the Series F preferred shares was used to provide authorized assistance under Series G
preferred shares. No amounts were ever drawn on the Series G facility and the authorized amount
was reduced to zero when AIG issued common stock on May 27, 2011.

Figure 2 shows the progress that has been made in repaying the federal
assistance to AIG as of March 22, 2012. As of that date, $125 billion had
been repaid by or on behalf of AIG and the government had $46.337
billion in remaining assistance outstanding, including $11.1 billion in
accrued interest and fees and unpaid dividends. The remaining

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GAO-12-574 TARP: AIG Equity Investments

assistance outstanding comprised $37.3 billion in AIG stock valued at
$38.5 billion as of March 30, 2012, and $9 billion in debt and accrued
interest owed to FRBNY by Maiden Lane III that is secured by assets
valued at $17.4 billion as of March 22, 2012.
Figure 2: Repayment Progress of Federal Assistance to AIG, as of March 22, 2012

Maiden Lane II Has Repaid
FRBNY and Maiden Lane
III’s Assets Have Been
Reduced Significantly

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

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GAO-12-574 TARP: AIG Equity Investments

interest owed on these facilities, we can track FRBNY’s historical and
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 were to be repaid from cash generated by investment
yields, maturing assets, and sales of assets in the facilities. Such cash
was 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 were 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 of March 7, 2012,
FRBNY had been fully repaid by Maiden Lane II, but the assistance to
AIG through Maiden Lane III was not fully repaid. This assistance is the
only debt owed to the government that relates to AIG and as of March 22,
2012, the principal and interest owed by Maiden Lane III had been
reduced to $9 billion from $11.5 billion in July 2011.
Maiden Lane II has fully repaid FRBNY. As shown in figure 3, the
portfolio value of Maiden Lane II, which was as high as $20 billion in
December 2008, was reduced to $9.3 billion by the end of 2011. This
occurred primarily because of cash flows from the facility’s assets and in
2011 nearly $10 billion (face value) in assets were sold through auctions
(see app. I). As of March 7, 2012, the facility had fully repaid the FRBNY
loan, and as of March 21, 2012, the deferred payment or interest payable
to subsidiaries of AIG had been reduced to zero and the SPV had net
portfolio holdings of only $19 million.
To repay FRBNY, as we discussed in our July 2011 report, in early April
2011, FRBNY began offering securities in the Maiden Lane II RMBS
portfolio for sale to a group of dealers on more or less a weekly basis
through early June 2011, a strategy that it hoped would avoid market

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GAO-12-574 TARP: AIG Equity Investments

disruption.28 FRBNY’s investment manager, BlackRock Solutions,
disposed of the Maiden Lane II securities through a competitive sales
process. To maximize returns to the public, FRBNY did not stipulate a
time frame for disposing of these assets. Through June 9, 2011, Maiden
Lane II held several auctions and sold nearly $10 billion from its portfolio.
As of March 7, 2012, the facility had fully repaid FRBNY the outstanding
principal and interest.

See GAO-11-716. 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 Federal Reserve 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.

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GAO-12-574 TARP: AIG Equity Investments

Figure 3: Amounts Owed and Portfolio Value of Maiden Lane II, December 24, 2008, through March 22, 2012

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.

As shown in the previous indicator, the outstanding loan balance was
being reduced while value of the assets in the Maiden Lane II portfolio
sometimes increased but mostly decreased by smaller amounts than the
reductions in the outstanding loan balances; two new indicators show
these assets in more detail.29 The first indicator (fig. 4) is intended to
show which categories of assets dominate the portfolio and which ones
remain as the portfolio unwinds. The second indicator (table 3) shows the
percentage distribution of the assets in the portfolio by category. Figure 4
and table 3 show that through December 2011, most of RMBS assets in
the portfolio were subprime, followed by Alt-A adjustable-rate mortgages

This is the most recent publicly available information as of April 1, 2012.

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GAO-12-574 TARP: AIG Equity Investments

(ARM), “other”, and option ARM. Figure 4 also shows that the portfolio
experienced little change until the first auction of Maiden Lane II assets in
April 2011 and then stabilized by June 9, 2011, the date of the last Spring
asset auctions.
Figure 4: Portfolio Composition for Maiden Lane II, December 31, 2008, through December 31, 2011

Note: In early April 2011, FRBNY began offering segments of the Maiden Lane II RMBS portfolio for
sale to a group of dealers on a more or less weekly basis through early June 2011, a strategy that it
hoped would avoid market disruption. Through June 9, 2011, Maiden Lane II held several auctions
and sold nearly $10 billion from its portfolio. In addition, on January 19, 2012, FRBNY announced that
it had sold assets with a current face value of $7 billion through a competitive process to Credit
Suisse Securities (USA) LLC and on February 8, 2012, it announced that it sold assets with a current
face value of $6.2 billion through a competitive process to Goldman Sachs & Co. More recently, on
February 28, 2012, FRBNY announced the sale of the remaining securities in the Maiden Lane II
portfolio, and as of March 7, 2012, the facility had repaid FRBNY the outstanding principal and
interest.

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Table 3 shows that the Maiden Lane II asset auctions generally resulted
in transactions that minimally changed the distribution of the assets in the
portfolio.30
Table 3: Percentage Distribution of the Assets in the Maiden Lane II Portfolio, December 31, 2008, through December 31, 2011
Securities
sector
12/31/08 3/31/09 6/31/09 09/30/09 12/31/09 3/31/10 6/30/10 9/30/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11
Subprime
Alt-A ARM
Option
ARM
Other

57.3%

59.5%

55.6%

55.1%

54.8%

55.0%

54.6%

54.8%

55.6%

54.4%

59.8%

59.6%

59.2%

27.7

26.9

29.7

30.8

31.3

30.9

30.8

30.5

29.4

29.1

23.5

23.7

23.9

–

5.6

5.9

6.1

6.5

6.8

7.5

6.0

5.9

15.0

13.6

9.1

8.2

7.9

7.7

7.9

8.2

8.9

10.6

10.7

11.0

Source: GAO analysis of Federal Reserve data.

Note: Cash and cash equivalents are not included.

A second major round of auctions of Maiden Lane assets began in
January 2012 and continued through late February 2012. According to
FRBNY’s February 28, 2012, announcement of its most recent and final
securities sale from Maiden Lane II, all of the SPV’s securities have been
sold and the result is full repayment of the $19.5 billion FRBNY loan, plus
$580 million in accrued interest on the loan and a net gain of
approximately $2.8 billion. While the Maiden Lane II portfolio was still
active, FRBNY officials noted Maiden Lane II’s assets were high-quality
bonds and thus they had expected to receive timely payments of interest
and principal on most bonds in the portfolio regardless of the holding
period. The assets continued to generate payments of interest and
returns of principal at maturity while the portfolio was active.
Maiden Lane III continues to unwind. As shown in figure 5, the portfolio
value of Maiden Lane III dropped from $28.2 billion in December 2008 to
$22.7 billion 1 year later and rose slightly to $24.2 billion by June 29,
2011. From June through October 2011 the portfolio’s value began to fall
again but has remained fairly stable since then at just under $18 billion.
During this period, principal and interest owed to FRBNY continued to be
reduced from $24.4 billion in December 2008 to $9 billion (which included
accrued interest of $718 million) as of March 22, 2012. Also, as of
December 30, 2009, the excess in value of the remaining portfolio over

This is the most recent publicly available information as of April 1, 2012.

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GAO-12-574 TARP: AIG Equity Investments

the remaining FRBNY debt was about $4.2 billion and as of March 22,
2012, it had increased to about $8.4 billion. Overall, $16.1 billion of the
principal on the FRBNY loan had been repaid as of March 22, 2012.
Figure 5: Amounts Owed and Portfolio Value of Maiden Lane III, December 24, 2008, through March 22, 2012

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 information does not reflect returns
from the sale, announced by FRBNY on April 26, 2012, of some of the Maiden Lane III holdings
through a competitive bid process to a consortium of financial institutions.

As shown previously in figure 5 and as was the case for Maiden Lane II,
the outstanding loan balance continued to be reduced while the value of
the assets in the Maiden Lane III portfolio increased in some periods, but
in some periods decreased, usually by a smaller amount than the
reductions in the outstanding loan balances. We have developed two new
indicators that show these assets in more detail. The first indicator (fig. 6)
shows the extent to which certain assets make up the investment portfolio
(to show which assets dominate the portfolio and which ones remain as
the portfolio unwinds) and the second indicator (table 4) shows the

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GAO-12-574 TARP: AIG Equity Investments

percentage distribution of the assets in the portfolio. Figure 6 shows that
through December 2011, most of the assets in the portfolio were highgrade ABS and commercial real estate CDOs.31
Figure 6: Portfolio Composition for Maiden Lane III, December 31, 2008, through December 31, 2011

Table 4 shows that over the life of the facility, most of the assets have
been high grade ABS CDOs followed by commercial real estate CDOs,
while there have been relatively few RMBS, commercial mortgagebacked securities (CMBS), and other assets.32

This is the most recent publicly available information as of April 1, 2012.

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GAO-12-574 TARP: AIG Equity Investments

Table 4: Percentage Distribution of the Assets in the Maiden Lane III Portfolio, December 31, 2008, through December 31,
2011
Securities
sector
High grade
ABS CDO

12/31/08 3/31/09 6/31/09 09/30/09 12/31/09 3/31/10 6/30/10 9/30/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11
70.4%

70.8%

69.7%

69.8%

68.9%

66.2%

66.4%

65.9%

65.2%

64.5%

63.8%

64.6%

63.4%

Commercial
real estate
CDO

18.0

19.6

20.1

20.0

21.0

23.7

23.9

24.0

25.0

25.9

26.3

25.8

27.0

Mezzanine
ABS CDO

11.6

9.6

9.1

9.2

8.9

9.0

8.6

8.9

8.5

8.3

8.4

8.1

8.2

RMBS,
CMBS, and
other

0.0

1.1

1.2

1.3

1.5

Source: GAO analysis of Federal Reserve data.

Note: Cash and cash equivalents are not included.

FRBNY officials 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 before
the underlying portfolio has substantially matured or defaults could occur
prior to the full repayment of outstanding principal.33 The assets in the
portfolio have continued to generate payments of interest and returns of
principal at maturity.
Maiden Lane III’s assets have continued 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 regularly 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

Federal Reserve officials added that BlackRock Solutions, its investment manager for
Maiden Lane III, 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 March 23, 2012, they said that BlackRock Solutions projected full
repayment of interest and principal on the FRBNY loans to Maiden Lane III under the
moderate and extreme stress scenarios. In early April 2012, the FRBNY changed the
investment objective for Maiden Lane III, which now allows BlackRock Solutions to
explore the sale of assets. There is no fixed timeframe for the sales; at each stage, the
Federal Reserve will sell an asset only if the best available bid represents good value for
the public, while taking appropriate care to avoid market disruption. On April 18, 2012,
FRBNY announced that it has initiated a competitive bid process for the MAX CDO
holdings in the Maiden Lane III portfolio.

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GAO-12-574 TARP: AIG Equity Investments

portfolio. Their decision to sell an asset depends on an asset’s discounted
expected future cash flows and weighing 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.

All Assistance Associated
with the ALICO and AIA
SPVs Has Been Repaid

As stated earlier, the government restructured its assistance to AIG in
March 2009. As part of that restructuring, FRBNY reduced the debt AIG
owed on the revolving credit facility by $25 billion and in exchange,
FRBNY received $25 billion of preferred equity interests in two SPVs
created by AIG to hold the outstanding common stock of two life
insurance company subsidiaries, ALICO and AIA. FRBNY’s preferred
interests were an undisclosed percentage of the fair market value of
ALICO and AIA as determined by FRBNY. In November 2010, the
company announced that it had 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. By January 14, 2011, the date
of AIG’s recapitalization, the aggregate liquidation preference of the AIA
and ALICO SPVs had grown to approximately $26.4 billion. Following the
sale of ALICO on January 14, a partial repayment by AIG reduced the
aggregate liquidation preference of the remaining preferred interests to
approximately $20.3 billion. These FRBNY preferred interests were
purchased by AIG and transferred to Treasury (Treasury refers to these
transferred amounts as “AIA preferred units” and “ALICO junior preferred
units”).34
Treasury received several repayments from AIG on its AIA and ALICO
SPV investments in 2011 and 2012 that resulted in AIG fully repaying
Treasury’s remaining capitalization investment in both SPVs. 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, and 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

34
Treasury exchanged its shares of AIG’s Series F preferred stock for the preferred
interests in the AIA and ALICO SPVs, along with 20,000 shares of the Series G preferred
stock and about 167.6 million shares of AIG common stock.

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GAO-12-574 TARP: AIG Equity Investments

preferred interests in the AIA SPV. Treasury received five additional
payments throughout 2011 totaling $3.3 billion, and by November 2011,
the remaining preferred interest on the AIA SPV had been reduced to $9
billion. Most recently, on March 22, 2012, Treasury announced that AIG
had fully repaid Treasury for its remaining preferred interest in the AIA
SPV.35

Treasury Would Have to
Sell Its AIG Common
Stock for at Least an
Average Share Price of
$29.70 to Fully Recover Its
Assistance, Including Cash
and Unpaid Dividends

The amount of the $37.348 billion (which includes unpaid dividends) in
remaining equity assistance to AIG that Treasury will recoup depends on
the prices at which it sells its remaining 1.248 billion shares.36 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, Treasury also is balancing this goal with exiting its assistance
as soon as is 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’s stock price.
We have developed a new indicator that tracks total shares of AIG’s
common stock outstanding, including shares of that stock held by
Treasury. The purpose of this indicator is to track the changing proportion
of Treasury’s remaining AIG common stock and the value of that stock as
Treasury sells its remaining shares of AIG’s stock to reduce its exposure
to AIG.
Figure 7 shows that in December 2010, about 1 month before AIG’s
recapitalization, there were about 147.1 million shares of AIG common
stock outstanding, most of which were held by Treasury. With the January
2011 recapitalization and the government exchanging its preferred shares
for common shares, the number of AIG common shares outstanding was

According to Treasury’s announcement, Treasury had expected AIG to repay the
remaining principal plus accrued interest and the AIA SPV with sales of ordinary shares in
AIA and Maiden Lane II proceeds by mid-March 2012 and the release of escrowed
proceeds from AIG’s sale of ALICO to MetLife in two tranches, one by November 2012
and the remainder in May 2013.
36
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.

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GAO-12-574 TARP: AIG Equity Investments

increased to 1.796 billion, with the government holding 1.655 billion, or
about 92 percent, of the shares. Since the recapitalization, the
government has reduced its shares and AIG has issued more stock. As
we discussed in our July 2011 report, on May 24, 2011, a 300 million
share offering to the public was priced, consisting of 200 million
secondary shares from Treasury and 100 million primary shares from
AIG. The transaction (all 300 million shares) closed on May 27, 2011,
reducing Treasury’s holdings to approximately 1.5 billion shares. On May
27, 2011, AIG issued and sold 100 million shares of common stock,
increasing the total number of outstanding common shares to
approximately 1.9 billion. As a result, Treasury held approximately 77
percent equity interest in AIG. As of December 30, 2011, the market
value of Treasury’s remaining shares in AIG was about $33.8 billion.
Treasury’s equity interest in AIG was reduced further to approximately 70
percent in March 2012 after Treasury sold approximately 207 million
shares, half of which were purchased by AIG. When Treasury will sell its
remaining AIG shares will depend on how future market conditions enable
Treasury to meet its dual goals of maximizing taxpayer returns and exiting
its exposure to AIG as soon as is practical.

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GAO-12-574 TARP: AIG Equity Investments

Figure 7: Distribution of the Shares of AIG Common Stock Outstanding, the Market
Value of Treasury’s Share of AIG Common Stock, and the Percentage of the Stock
Held by Treasury, September 2010 to March 2012

Note: Total outstanding shares as of March 22, 2012, are reduced by 103,448,276 from the amount
shown as of December 31, 2011, to reflect Treasury-owned shares that AIG bought on March 13,
2012.

The following indicator shows the market value of AIG’s stock at various
share prices and the profits or losses that Treasury would realize if it were
to sell all of its stock at those share prices. A related indicator also
compares month-end share prices of AIG common stock with Standard
and Poor’s (S&P) 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, which was 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’ actual
cash outlays. As such, using the cash in/cash out approach, Treasury
included only the cost of the liquidation preferences in the Series E and

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GAO-12-574 TARP: AIG Equity Investments

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 owed—$49.148 billion—the breakeven share price would
include the $1.605 billion of unpaid dividends and fees and thus would
increase to approximately $29.70. This amount represents the minimum
average price at which Treasury would need to sell all of its shares to fully
recover the $49.148 billion owed by AIG.
As shown in figure 8, the amount of the $49.148 billion Treasury will
recover depends on the average price at which it sells its 1.655 billion
shares of AIG common stock (the size of Treasury’s holdings following
AIG’s recapitalization). The figure shows several share prices, some
higher and some lower than the breakeven share price, to indicate how
much of the full amount of assistance Treasury would recover at each
price. For example, at an average price of $40 a share Treasury would
recover an additional $17.1 billion, while at an average price of $25 a
share Treasury would recover $7.8 billion less than the amount of
assistance.

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GAO-12-574 TARP: AIG Equity Investments

Figure 8: Market Value of AIG Common Stock at Various Average Share Prices

Note: Treasury’s cost per share of $29.6967 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.

From January 2011, when AIG was recapitalized, the daily closing share
price of AIG stock trended downward but remained above our $29.70
breakeven price until May 24, 2011, when it closed at $29.46 (see fig. 9).
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 reduced the value
of Treasury-owned shares by $28.1 billion. In contrast, the S&P 500 index
increased over this same period. The AIG share price reached a low of
just over $20 per share in November 2011. Since then, however, the price
has risen to $30.83 per share as of March 30, 2012, which is above

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GAO-12-574 TARP: AIG Equity Investments

Treasury’s $28.73 breakeven price excluding the unpaid dividend and the
$29.70 breakeven price including the unpaid dividend. The current
upward trend in the price of AIG common stock suggests that conditions
for Treasury to sell its AIG shares have improved since November 2011.
Responding to these conditions, as previously stated, in early March 2012
Treasury sold 207 million shares of its AIG common stock for $6 billion.
Figure 9: Month-End Closing Share Prices of AIG Common Stock Compared to the S&P 500 Index and Breakeven Share Price
for Treasury’s Remaining 1,248 Million Shares, September 2008 through March 2012

Notes: AIG’s share price was retroactively adjusted 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 Treasury or FRBNY. The warrants, which 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 per share. AIG share prices prior to January 2011 (back to July
2009) are actual closing prices and not adjusted for this dividend.

Treasury Might Seek Large
Institutional Buyers for Its
AIG Stock

To better understand the options available to Treasury for selling its
remaining AIG common stock, we have developed a set of indicators that
examine the prospects of selling the stock on the open market versus
selling it to institutional buyers. The first indicator shows how long it would
take Treasury to sell its remaining shares of AIG common stock in the

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GAO-12-574 TARP: AIG Equity Investments

open market if it decided to pursue this approach. Following sales of 200
million shares in May 2011 and approximately 207 million shares in
March 2012, Treasury’s ownership of AIG common stock stood at 1.248
billion shares, or 70 percent, of AIG’s common stock. These shares are to
be sold to recoup the remaining $37.348 billion (including unpaid
dividends) 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 they will consider offers by institutions,
sovereign funds, retail investors, and others. This indicator provides the
number of trading days in a month and the number of months it would
take to sell Treasury’s remaining 1.248 billion shares of AIG common
stock, based on average daily trading volumes over rolling 12 month
periods. This metric is intended to provide perspective on the challenges
Treasury would likely face if it intended to sell its remaining 1.248 billion
shares in the open market.
Figure 10 shows that based on AIG common stock’s average daily trading
volume of 8.1 million shares over the 12 month period from March 1,
2011, to February 29, 2012, Treasury’s remaining 1.248 billion AIG
shares represent about 155 trading days (there are approximately 252
trading days in a year) or 7.4 months of average daily trading volume in
AIG common stock as of February 29, 2012.37 Over this 12 month period,
about 8.1 million shares were traded daily, on average, which was about
1 million shares higher than the 7.1 million share average daily trading
volume for the rolling 12 month period that ended March 31, 2011. The
figure shows that if average 12 month trading volumes were to increase
to levels that occurred in late 2009 and most of 2010, the remaining
common shares would represent as little as 3 months of daily trading
volume.

We are using the most recent full month prior to the March 22, 2012, cut-off that we
have been using for several of our other indicators.

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GAO-12-574 TARP: AIG Equity Investments

Figure 10: Number of Trading Days and Months It Would Take to Sell 1,248 Million Shares of AIG Common Stock Using
Average Daily Trading Volume Over Rolling 12 Month Period from the Fourth Quarter of 2008 Through February 29, 2012

Note: Calculations did not factor the potential for trading volume to increase with the increasing public
float as shares held by Treasury are sold.

These measures of trading volume in days suggests how long it might
take Treasury to sell its remaining AIG stock if it attempted to become a
daily active seller in the open market. However, for the open market to
accommodate such active selling by Treasury, at levels that match
existing average trading volume without considerable downward pressure
on AIG’s stock price, existing and new buyers would have to collectively
double the current daily buying volume. Whether such increased buying
of AIG stock would enter the market to accommodate such selling by
Treasury is unknown. Our analysis suggests that it would not be feasible
to expect Treasury to be able to sell its remaining 1.248 billion shares of
AIG stock in an orderly manner in the open market, which supports the
agency’s stated strategy of selling its stock in large blocks to institutional
investors.38 This strategy of selling to institutional investors also may help

Institutional investors include mutual funds, pension funds, trust funds, foundations,
endowments, investment banks, and other nonindividual 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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Treasury balance its competing goals of maximizing returns as a
shareholder and exiting the investment as government agency as soon as
practical.
The next two indicators help illustrate the prospects for institutional
ownership of AIG. One indicator compares the market capitalization of
AIG with that of 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 insurance
companies could indicate 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
does not capture the full potential for institutional interest in AIG because
it is limited to institutional holdings in nine insurance companies. A
second indicator more broadly portrays the institutional ownership of
insurance companies.
Figure 11 shows that institutional investors collectively have majority
common stock ownership of each of the nine large insurance companies.
This finding is consistent with comments by Treasury officials that
insurance companies tend to be largely held by institutional investors,
which suggests that Treasury may look to institutional investors to
purchase most of its AIG stock. The data, obtained for March 5, 2012,
show that institutional investors own on average 82.6 percent of the
companies. The ownership ranges from a low of 64 percent for Prudential
Financial to a high of 99 percent for CNA. The market value of
institutional holdings ranged from $7.7 billion (of CNA) to $30.2 billion (of
MetLife). Thus institutional holdings in each of the nine insurers are
smaller than Treasury’s holdings in AIG of $44.2 billion. If institutions
were to purchase the remaining AIG shares held by Treasury in
proportion to their 82.6 percent average ownership in the nine companies,
the amount would be $36.5 billion (which is 82.6 percent of $44.2 billion).
This amount 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 $36.5
billion of AIG stock.

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Figure 11: Market Values of Institutional and Other Holdings of Common Stock in
AIG and Nine Other Insurers Based on Share Prices on March 5, 2012

Notes: We identified, but did not include in our analysis for this figure, 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. CNA is 89.99 percent owned by Loews Corp.

Institutions with the largest insurance holdings may consider adding AIG
stock to their existing insurance holdings, and such institutions may have
the greatest 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 as of March 2012. 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 acquiring 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 intended as a device for speculating about

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whether the institutions should or will purchase AIG stock. Also, it is not
known whether other institutions with considerable insurance holdings
might exist that, if added to our analysis, would make total institutional
insurance holdings considerably larger than aggregate amounts shown in
the indicator.
Figure 12 shows that 1,979 institutions with existing insurance holdings
may have the resources to consider buying Treasury’s remaining 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 of these holdings for all 1,979 institutions, their
insurance investments would increase by $300 billion, considerably larger
than the $47.5 billion of AIG stock Treasury received as part of AIG’s
recapitalization. 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
should they choose to do so, these institutions, as a group, have the
capacity to purchase $47.5 billion of AIG stock without concentrating their
holdings in insurance or considerably changing the distribution of their
holdings by industry.

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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

Notes: The 1,979 institutions were identified as shareholders in the nine large insurers analyzed in
figure 12. The nine insurers are ACE, Allstate, Chubb, CNA, 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 of our analysis.
SNL Financial daily updates the market values of these holdings using daily stock prices. Because of
the volume of data used in this analysis, we could not obtain market values of holdings for all 1,979
institutions as of a single day. Rather, we used data over several days from late April to early May
2011. Thus, the aggregates for institutional holdings reflect quarterly 13F filings and market value
dates that differ among the 1,979 institutions.

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AIG’s Financial
Condition and
Insurance Operations
Have Remained
Stable Since July 2011

With the government still holding the majority of AIG’s common stock, a
critical question is whether AIG’s financial condition and operating
performance and external perceptions about its financial condition and
operating performance can remain strong enough for the government to
recoup its investment. In 2011, two-thirds of the company’s revenues
were from its Chartis property/casualty and general insurance business
and a quarter were from their Sun Financial life insurance and retirement
services businesses. In 2011 the company also reported net income of
$18.5 billion, which was up $8.5 billion from 2010 and continued the
reversal of losses reported in 2009 and 2008. The $8.5 billion increase in
net income was primarily attributable to the favorable effect of an income
tax benefit in 2011 versus tax expense in 2010 partially offset by the
absence in 2011 of gains recognized in 2010 on sales of properties and
divested businesses. When gains and losses from sales of properties and
divested business are excluded AIG showed a loss from continuing
operations before taxes of $1.139 billion in 2011 versus a profit of $169
million in 2010. This reduction occurred because reduced operating
expenses were not fully offset by reduced revenues from the absence of
the full contribution of discontinued businesses. The indicators in this
section show that AIG’s financial condition and operating results have
remained relatively stable. To track AIG’s financial condition, we have
indicators of AIG’s cash flows, CDS premiums on AIG, and AIG’s credit
ratings.39 The company maintained stable net cash flows from operating,
investing, and financing activities throughout 2010 and 2011 while federal
assistance was reduced including as part of AIG’s recapitalization. The
prices offered for CDS on AIG decreased and stabilized starting May
2009 and have remained fairly stable through March 2012. AIG’s credit
ratings also have remained stable since the first quarter of 2011. To
assess the financial condition of AIG’s insurance companies, we reviewed

Since our previous update in July 2011, we have stopped tracking some indicators that
we used to track AIG’s financial condition. As noted previously, we no longer include the
indicator on AIG’s shareholders’ equity which, in 2008, would have been fully depleted by
massive losses, if not for government assistance. We no longer include it because AIG
has maintained positive equity since the government assistance 2008 and no longer
appears to face risk of depletion from losses. Also, AIG will not be required to repay
assistance by buying back all AIG common shares now held by Treasury. Such a
transaction could considerably reduce AIG’s equity.

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the underwriting profitability of these companies as a group.40 We found
that since the first quarter of 2010, the underwriting costs relative to
premium revenues of AIG’s property/casualty companies have been
higher than peers on average, but that AIG’s companies’ net income was
positive because of investment income.

AIG Maintained Stable Net
Cash Flows While
Reducing Federal
Assistance to a
Considerable Degree

AIG maintained stable cash flows throughout 2011 at levels much
improved over 2008, although divestures of certain AIG businesses since
2007 have made AIG a smaller organization. During the first three
quarters of 2007, AIG generated cash from its operating activities which
indicated that it was profitable. It also generated cash through its
financing activities, which indicated that it had access to the capital
markets and used cash in its investing activities which indicated that it
was growing its income-producing assets. The indicator of cash flows and
net changes in cash tracks cash flows from operating, financing and
investing activities and the combined net changes in cash from these
activities. It uses data from AIG’s quarterly and annual Consolidated
Statements of Cash Flows.


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.

We also have no longer include indicators that track the financial performance and
condition of AIG’s insurance companies. We no longer include the indicator on quarterly
life insurance contract deposits and withdrawals because divestitures have considerably
reduced the size of this segment and its impact on AIG overall and also because our cash
flow indicator on AIG’s overall operating, financing and investing cash flow captures the
cash flow impact of insurance contract deposits. Also we excluded the indicator on
quarterly dollar volume of insurance premiums written because AIG’s premium volume
over the past several quarters has remained fairly stable.

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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 incomeyielding financial assets.
As shown in figure 13, AIG began to stabilize its cash flows in 2009 and
maintained stable cash flows throughout 2010 and 2011. However, the
composition of its cash flows in 2011 changed from that of 2009 and
2010. After reporting operating cash flows of $16.9 billion and $18.6
billion in 2010 and 2009, respectively, the company reported operating
cash flows of $35 million in 2011, which was the lowest since the $755
million reported for 2008, as originally reported (this was restated as
negative $122 million in its 2010 10K). The decline in operating cash
flows in 2011 was mostly due to $6.4 billion of cash payments covering
several years of accrued interest and fees on the FRBNY credit facility
and a $10.4 billion reduction in cash flows from the absence of a full year
of operating cash flows of foreign life subsidiaries (AIA, ALICO, AIG Star,
AIG Edison, and Nan Shan) that were sold during the year. Payments on
catastrophic loss claims and asbestos liabilities also reduced operating
cash flows. Without these payments and reductions, operating cash flows
in 2011 could have been at least $16.8 billion. However, AIG’s net
change in cash from all cash flow activities combined in 2011 did not
change considerably from that reported in 2010 and 2009 as net cash
used in financing activities was largely offset by net cash generated from
investing activities. Net cash used in financing activities was higher in
2011 primarily due to full repayment of the FRBNY credit facility and
partial repayment of the SPV preferred interests in connection with the
recapitalization in January 2011. Net cash generated from investing
activities resulted primarily from the utilization of restricted cash
generated from the AIA initial public offering and ALICO sale and the
monetization of MetLife securities received in 2010 when ALICO was
sold.

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Figure 13: Net Cash Flows and Changes in Cash from Operating, Investing, and Financing Activities, from First Quarter 2007
through Fourth Quarter 2011

Note: Operating cash flows of $755 million for 2008 as originally reported (restated as negative $122
million in AIG’s 2010 10K) 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.

AIG’s cash flows began to stabilize in 2009 and 2010. Since the third
quarter of 2008, quarterly financing cash flows have been negative except
for two quarters, 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, AIG 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 filing with SEC that it primarily used its cash flows to meet its

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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 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
positive net cash flows from investment activities largely due to $30.5
billion that included activities related to AIG’s recapitalization and $4.2
billion from sales of short-term investments.

AIG CDS Premiums
Continue to Trend
Downward Toward
Precrisis Levels

Dropping from their peak in May 2009, AIG CDS premiums have
decreased and appear to be trending down generally toward precrisis
levels. CDS premiums are the price insured parties pay to purchase CDS
protection against AIG defaulting on senior unsecured debt, they are
another indicator of AIG’s financial strength. This indicator measures what
the market believes to be AIG’s probability of default by tracking
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.41 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).

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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AIG’s CDS premiums generally continued to decrease since May 2009,
and as of March 8, 2012, were similar to their March 2008 level for the 3year and 5-year CDS premiums (see fig. 14). 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 declined slightly. The premiums rose
somewhat during the latter part of 2011 but receded again in the first 3
months of 2012. While the overall trend is positive, meaning declining
premiums, the extent to which this decline in the cost to protect against
an AIG default reflects confidence in the stand-alone creditworthiness of
AIG or relative to the extent to which 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.
Figure 14: AIG CDS Premiums on AIG, January 2007 through March 2012

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

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AIG’s Credit Ratings Have
Remained Stable since the
First Quarter of 2011

Ratings of AIG’s debt and financial strength by various credit rating
agencies showed mixed trends in the first quarter of 2011, but since then
they have remained stable. 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 a company’s key
credit ratings if they believe it is unable to meet its obligations. In AIG’s
case, downgrades 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 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 remained fairly stable during the last
three quarters of 2010, became mixed in the first quarter of 2011, and
have since stabilized and remained stable through the end of 2011.42
Since our last report on AIG insurance sector ratings, S&P, Moody’s and
Fitch Ratings have not reported any changes to their ratings of AIG’s
long-term or short-term debt, nor have these agencies or AM Best
changed their ratings of AIG’s property/casualty financial strength ratings.
However, on January 27, 2012, AM Best revised their ratings outlook for
AIG’s life insurer and property/casualty lines from “negative” to “stable.”
According to the rating agency, the revised outlook for AIG’s life lines
reflects improved surrender rates, strong positive cash flows, and the
progress made to restore its leading market positions.43 The stable
outlook reflects Chartis’s U.S. market position; its ability to lead
underwrite, attract, and retain clients by leveraging its significant global

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

“Surrender rates” refer to the extent that customers are ‘cashing-in’ the value of their
policy, which results in a cash outflow for the life insurance company.

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capacity, extensive product offerings, and innovation; and greater
emphasis on pricing premiums to match the chance that clients will make
an insurance claim and using data-based models to determine insurance
premiums. It also suggests that estimates of their claim obligations
compares to earlier projections will be acceptable, and Chartis will
continue to maintain a supportive level of risk-adjusted capitalization
through favorable net earnings while providing shareholder dividends to
its parent in accordance with historical norms. The stable outlook also
reflects continued improvements at AIG including the January 2011
implementation of the company’s recapitalization plan, AIG’s recent
issuance of debt and equity in the public capital markets, enhanced
holding company liquidity and the orderly wind down of AIGFP. Only Fitch
Ratings has reported any rating change for AIG’s life insurer financial
strength rating, and this change was a rating upgrade, from A-/stable to
A/stable on April 25, 2011.

AIG’s Property/Casualty
Companies Were
Profitable throughout 2010
and 2011 Because
Investment Income More
than Offset Underwriting
Losses

To track the performance of AIG’s insurance companies, we use an
indicator of AIG’s underwriting ratios. 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 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

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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 2009.44 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 15 compares AIG’s ratios to those of its peers.
Since 2007, which was just prior to the onset of federal assistance to AIG,
AIG’s combined ratios usually have been higher than the average of its
peers. Nevertheless, since the first quarter of 2010—with the exception of
the third quarter of 2010 when the combined ratios of AIG’s peers
averaged 99.7 (a ratio of less than 100 indicates that the underwriting
was profitable)—the combined ratios for AIG and its peers have
exceeded 100, indicating that their underwriting usually has not been
profitable. By comparison, in 2007 the underwriting of both AIG and its
peers were profitable. From 2008 through 2009 underwriting remained
profitable for AIG peers but became unprofitable for AIG. 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 ratios have been

44
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,
Allegheny, Allianz SE, American Financial, Arch Capital, Argo Group, Chubb, CNA,
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/farm owners insurance
and other lines of insurance that were not major lines for AIG. These companies are
Allstate; Assurant, Inc.; Bank of America; Berkshire Hathaway (GEICO); Erie Insurance
Group; FM Global; Nationwide Mutual; Progressive; QBE Insurance Group; State Farm
Fire and Casualty; State Farm Mutual Auto Insurance; Tokio Marine; United Services
Automobile Association; White Mountains; and Zurich Financial Services.

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higher than the average of its peers in every quarter.45 The lower panels
of the figure show that despite a combined ratio usually over 100, AIG’s
property/casualty companies had positive net income in 16 of the 20
quarters because investment income, which increased every quarter in
2011, more than offset the underwriting losses.46

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.
46

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

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Figure 15: 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
Percentages of Premiums Earned, First Quarter 2007 through Fourth Quarter of 2011

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Note: The ratios are originally reported, nonrestated figures. We did not include restated figures
because they revise the prior periods to reflect the effect of discontinued operations, acquisitions, or
other changes to conform to the current period. 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, CNA, 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 5 full calendar years, they suggest a pattern of
loss ratios increasing overall and being volatile at times and expense
ratios that have remained fairly stable. Investment returns were high
enough for AIG to be profitable in 8 of the 12 quarters from 2007 through
2009, and 6 of the 8 quarters through the end of 2011. 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.47 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 and remained lower throughout 2011, with
no adverse loss development reported in the fourth quarter of 2011.

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-12-574 TARP: AIG Equity Investments

Since our last report in July 2011, much of the federal assistance to
benefit AIG has been repaid by or on behalf of AIG. Debt assistance
through Maiden Lane II has been repaid, as has equity assistance
through the AIA SPV. The remaining federal assistance to AIG consists of
remaining assets and accrued interest in Maiden Lane III and remaining
Treasury-owned common shares in AIG to be sold. With sales of AIG
common stock thus far, Treasury has reduced its equity interest in AIG
from 77 percent to 70 percent. However, 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 will remain important for Treasury.
Consequently, the government’s, and thus the taxpayers’, exposure to
AIG will be tied to the success and ongoing performance of AIG. 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 as well as other market factors
that are beyond the control of AIG or the government such as the
performance of the insurance sectors, the credit derivatives markets, and
investors’ interest in the company—including large institutional investors.
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 overall written comments. We also shared a
draft of this report with the Federal Reserve and AIG. We received written
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. In addition, the report also is
available at no charge on the GAO website at http://www.gao.gov.

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GAO-12-574 TARP: AIG Equity Investments

If you or your staffs have any questions concerning this report please
contact Lawrance L. Evans, Jr. at (202) 512-4802 or evansl@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 III.

Lawrance L. Evans, Jr.
Acting Director
Financial Markets and
Community Investment

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List of Congressional Committees
The Honorable Daniel K. Inouye
Chairman
The Honorable Thad Cochran
Vice Chairman
Committee on Appropriations
United States Senate
The Honorable 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-12-574 TARP: AIG Equity Investments

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

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GAO-12-574 TARP: AIG Equity Investments

Appendix I: Maiden Lane II Asset Auctions
Appendix I: Maiden Lane II Asset Auctions

To repay the Federal Reserve Bank of New York (FRBNY), in early April
2011, FRBNY began offering segments of the Maiden Lane II residential
mortgage-backed securities (RMBS) portfolio for sale to a group of
dealers on a more or less weekly basis through early June 2011, a
strategy that it hoped would avoid market disruption. Following an offer by
American International Group, Inc. (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. FRBNY’s investment manager, BlackRock
Solutions, disposed of the Maiden Lane II securities through a competitive
sales process. To maximize returns to the public, FRBNY did not stipulate
a time frame for disposing of these assets. Through June 9, 2011, Maiden
Lane II held several auctions and sold nearly $10 billion from its portfolio
(see table 5). In addition, on January 19, 2012, FRBNY announced that it
had sold assets with a current face value of $7 billion through a
competitive process to Credit Suisse Securities (USA) LLC and on
February 8, 2012, it announced that it sold assets with a current face
value of $6.2 billion through a competitive process to Goldman Sachs &
Co. According to FRBNY, the proceeds from both sales would enable the
repayment of the entire remaining outstanding balance of the FRBNY
loan to the Maiden Lane II in early March 2012. More recently, on
February 28, 2012, FRBNY announced the sale of the remaining
securities in the Maiden Lane II portfolio, and as of March 7, 2012, the
facility had repaid FRBNY the outstanding principal and interest.
Table 5: Dates and Values of Maiden Lane II Asset Auctions, April 6, 2011, through
February 28, 2012
Date of auction
April 6, 2011
April 13, 2011

Face value of
a
assets sold

Cumulative assets
sold (face value)

$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

May 19, 2011

878,641,682

8,062,864,764

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Appendix I: Maiden Lane II Asset Auctions

Date of auction

Face value of
a
assets sold

Cumulative assets
sold (face value)

June 9, 2011

1,898,594,878

9,961,459,642

January 19, 2012b

7,014,000,000

16,975,459,642

February 8, 2012b

6,200,000,000

23,175,459,642

6,000,000,000

29,175,459,642

February 28, 2012
Total

$29,175,459,642

Source: GAO analysis of FRBNY data.

Note: There were no asset auctions for Maiden Lane II from mid-June 2011 through mid-January
2012.
a

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

On January 19, 2012, FRBNY announced that it sold assets with a current face value of $7.014
billion through a competitive process to Credit Suisse Securities (USA) LLC and on February 8, 2012,
it announced that it sold assets with a current face value of $6.2 billion through a competitive process
to Goldman Sachs & Co. On February 28, 2012, FRBNY announced the sale of the remaining
securities in the Maiden Lane II portfolio with the sale of assets with a current face amount of $6
billion through a competitive process to Credit Suisse Securities (USA) LLC, As of March 21, 2012, in
addition to the facility having repaid FRBNY the outstanding principal and interest, had no deferred
payment and interest payable to subsidiaries of AIG had been reduced to zero and the SPV had net
portfolio holdings of only $19 million. The management of the portfolio generated a net gain for the
benefit of the public of approximately $2.8 billion, including $580 million in accrued interest on the
FRBNY loan.

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Appendix II: Overview of Definitions of
Credit Ratings and AIG’s Credit Ratings
Appendix II: 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 American International
Group, Inc.’s (AIG) case, this could affect its ability to raise funds and
increase the cost of financing its major insurance operations, and, in turn,
impede AIG’s restructuring efforts. Conversely, an upgrade in AIG’s credit
ratings would indicate an improvement in its condition and possibly lead
to lower borrowing costs and facilitate corporate restructuring.
Moody’s Investors Service (Moody’s), Standard and Poor’s (S&P), and
Fitch Ratings (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 6
provides an overview of the ratings for Moody’s, S&P, and Fitch.
Table 6: 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
A
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

BB+ and
below

Sources: GAO descriptions of information from Moody’s, S&P, and Fitch.
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.

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

S&P and Fitch: 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.

As shown in table 7, AIG’s key credit ratings remained largely unchanged
from May 2009 through December 2011, primarily because federal
assistance provided AIG with needed liquidity. From March 31, 2009, to
December 15, 2009, AM 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 Since we last
reported on the insurance ratings, S&P, Moody’s, and Fitch have not
reported any changes to their ratings of AIG’s long-term or short-term
debt. Nor have these agencies or AM Best changed their ratings of AIG’s
property/casualty financial strength ratings. However, on January 27,
2012, AM Best revised their ratings outlook for AIG’s life insurer and
property/casualty lines from “negative” to “stable.” According to the rating
agency, the revised outlook for AIG’s life lines reflects improved surrender
rates, strong positive cash flows, and the progress made to restore its
leading market positions. This stable outlook also reflects Chartis’s U.S.
market position; its ability to lead, attract and retain clients by leveraging
its significant global capacity, extensive product offerings and innovation;
and greater emphasis on technical pricing and predictive modeling. It
further suggests that any future reserve development will be acceptable,
that Chartis will continue to maintain a supportive level of risk-adjusted
capitalization through favorable net earnings while providing shareholder
dividends to its parent in accordance with historical norms. This stable
outlook also reflects continued improvements at AIG including the
January 2011 implementation of the company’s recapitalization plan,
AIG’s recent issuance of debt and equity in the public capital markets,
enhanced holding company liquidity and the orderly wind down of AIGFP.
Only Fitch has reported any rating change for AIG’s life insurer financial
strength rating, and this change was a rating upgrade, from A-/stable to
A/stable on April 25, 2011.

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

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

Table 7: AIG’s Key Credit Ratings, March 31, 2009, through December 31, 2011
Rating agency

Mar. 31,
2009

May 15,
2009

Dec. 15,
2009

Mar. 31, July 31, Sep. 30,
2010
2010
2010

Dec. 31,
2010

Mar. 31, July 31, Dec. 31,
2011
2011
2011

Debt
Long-term
Potential
consequences of
a future
downgrade

AIGFP would have to post collateral and termination payments. The total obligations depend on the market and
other factors at the time of the downgrade. For example:
At December 31, 2011, a one-notch downgrade from S&P would have resulted in negligible additional collateral
postings and termination payments, while a one-notch downgrade from Moody’s and a two-notch from S&P would
increase that cost to $264 million. Another notch downgrade would have increased that cost to $531 million. By
comparison, at June 30, 2010, a one-notch, two-notch, or three-notch downgrade from S&P and Moody’s would
have cost AIG negligibly and up to $298 million, and $650 million, respectively, in cumulative additional collateral
postings and termination payments.

S&P

A-/na
a

n/c

A-/s

n/c

Moody’s

A3/n

n/c

Baa1/s

n/c

Fitch

BBB/e

n/c

BBB/s

n/c

Short-term
Potential
According to AIG, currently the company does not issue commercial paper or other short term debt instruments.
consequences of Therefore, there would be no immediate financial impact if there was a downgrade of its short term ratings. Current
a future
credit facility pricing is tied to the long-term ratings.
downgrade
S&P

A-1 for AIG
Funding,
Curzon, and
a
Nightingale

n/c

A-2

n/c

Moody’s

P-1 for AIG
Fundinga

n/c

on review n/c
for
possible
downgrade

P-2/s

n/c

Fitch

n/c

affirmed
not
and
rated
withdrawn
Nov. 19,
2010

n/c

Financial
strength
Life insurer

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GAO-12-574 TARP: AIG Equity Investments

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

Rating agency

Mar. 31,
2009

May 15,
2009

Dec. 15,
2009

Mar. 31, July 31, Sep. 30,
2010
2010
2010

Dec. 31,
2010

Mar. 31, July 31, Dec. 31,
2011
2011
2011

Potential
consequences of
a future
downgrade

According to AIG, a ratings downgrade of SAFG Retirement Services Inc., would have a significant negative
impact. AIG’s domestic life insurance new business would be severely impacted, 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 including universal life, structured settlements, pensions and private placements. The company
would need to continue to dedicate key resources to retention and management of existing producer and client
relationships. Additional retention strategies would need to be implemented.
AIG’s retirement services businesses would also be highly impacted since the companies distribute through rating
sensitive distribution channels. There is a minimum rating that many banks or groups cannot go below and a
further downgrade would certainly result in the companies falling below that minimum. With respect to variable
annuities, a further ratings downgrade could cause a significant number of major firms to resuspend sales or to
initiate permanent suspension, which would increase surrender rates and, potentially foster partial withdrawals that
lock-in adverse death benefit exposures, and result in a significant loss of wholesalers.

AM Best

A/na

n/c

S&P

A+/n

n/c

A+/s

n/c

Moody’s

A1/developing n/c

n/c

A1/n

n/c

A2/s

n/c

Fitch

AA-

n/c

A-/s

n/c

A/s

n/c

A-/e

Property/casualty
insurer
Potential
consequences of
a future
downgrade

According to AIG, a further downgrade of Chartis’s financial strength rating from a leading rating agency could, in
the extreme, irreparably harm Chartis’s worldwide businesses, potentially putting Chartis into “run-off”, meaning
that it could only service business left with the company as it could not effectively write profitable, new business. In
the U.S., AM Best is the key rating agency for Chartis’s U.S. businesses, while Standard & Poor’s ratings have
greater impact on a global scale. A further degradation of either of these ratings could effectively put Chartis at a
severe competitive disadvantage.
Prior to September 2008, AIG’s credit ratings and financial position were advantageous for its property casualty
companies and provided an uplift in the insurance operations ratings. Since 2008, AIG’s financial challenges have
put downward pressure on Chartis’s financial strength ratings to the point that financial strength is no longer a key
competitive advantage for Chartis as most of its key competitors have stronger ratings.

AM Best

A/na

n/c

S&P

A+/n

n/c

A/s

n/c

Moody’s

Aa3/n

n/c

A1/s

n/c

Fitch

AA-

A+/e

n/c

placed
A+/s
rating
on
rating
watch negative

n/c

A/s

n/c

Sources: GAO description of information from AIG Securities and Exchange Commission filings; S&P, Fitch, Moody’s, and AM Best;
and AIG.

Note: N/c means no change, n means negative, e means evolving, and s means stable.
a

These are key ratings.

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Appendix III: GAO Contact and Staff
Acknowledgments
Appendix III: GAO Contact and Staff
Acknowledgments

GAO Contact

Lawrance L. Evans, Jr., (202) 512-4802 or evansl@gao.gov

Staff
Acknowledgments

In addition to the contact named above, Karen Tremba (Assistant
Director), Rachel DeMarcus, John Forrester, Marc Molino, Patricia Moye,
Jennifer Schwartz, and Melvin Thomas made important contributions to
this report.

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Appendix IV: Glossary of Terms
Appendix IV: 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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Appendix IV: 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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Appendix IV: 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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Appendix IV: 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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Appendix IV: 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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Appendix IV: 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.

(250624)

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