Troubled Asset Relief Program
Update of Government Assistance Provided to AIG Gao ID: GAO-10-475 April 27, 2010Assistance provided by the Department of the Treasury (Treasury) under the Troubled Asset Relief Program (TARP) and the Board of Governors of the Federal Reserve System (Federal Reserve) to American International Group, Inc. (AIG)--a holding company that, through its subsidiaries, is engaged in a broad range of insurance and insurance-related activities in the United States and abroad--represents one of the federal government's largest investments in a private sector institution since the financial crisis began in 2008. Treasury and the Federal Reserve provided assistance to AIG in September 2008 that was restructured in November 2008 and March 2009. As part of GAO's statutorily mandated oversight of TARP, this report updates the risk and repayment indicators GAO originally reported in September 2009 (GAO-09-975). Specifically in this report, GAO discusses (1) trends in AIG's financial condition, (2) trends in the unwinding of AIG Financial Products (AIGFP), (3) the financial condition of AIG's insurance companies, and (4) the status of AIG's repayment of its federal assistance. To update the indicators, GAO primarily used data as of December 31, 2009, and more current publicly available information; reviewed rating agencies' reports; identified critical activities; and discussed them with officials from Treasury, Federal Reserve, and AIG.
Since our last report in September 2009, AIG's financial condition has remained relatively stable, as measured by several indicators, largely due to the federal assistance provided by the Federal Reserve and Treasury to assist AIG as a result of their determination that the company posed systemic risk to the financial system. Specifically, the Federal Reserve and Treasury have made more than $182 billion available to assist AIG since March 2008. As of December 31, 2009, the outstanding balance of the assistance provided to AIG was $129.1 billion, about $8.4 billion more than the balance on September 2, 2009. The federal assistance also appears to be facilitating a more orderly restructuring of the company. GAO's indicators show that, in general, the improvements in AIG's condition in the second quarter of 2009 continued into the third and fourth quarters due largely to ongoing federal assistance. Several indicators show that AIGFP has continued to unwind its credit default swap positions. AIGFP also has shown progress in unwinding its Super Senior credit default swap portfolio but has made less progress in reducing the remaining multi-sector collateralized debt obligations (securities backed by a pool of bonds, loans, or other assets) portfolio. Several indicators on the status of AIG's insurance companies illustrate that AIG's insurance operations are showing signs of recovery, but federal assistance has been a critical factor. For the first time since the second quarter of 2008, additions to AIG life and retirement policyholder contract deposits have exceeded withdrawals. AIG's property/casualty companies also have shown some improvements. AIG is continuing to repay its debt to the federal government, but much of the progress reflects the numerous exchanges of debt that AIG owed the Federal Reserve Bank of New York Revolving Credit Facility (facility) with various issues of preferred equity. As a result of this shift from debt to equity, which has occurred gradually, the authorized amount of the facility has decreased and the amount of preferred equity interests held in AIG and various special purpose vehicles for the government has increased. For example, as of December 30, 2009, the amount of assistance available to AIG through the facility had dropped to $35 billion and the amount AIG owed the facility had dropped to $23.4 billion, while the amount of equity or equity interest held by the government increased to almost $95 billion. Consequently, the government's exposure to AIG is increasingly tied to the future health of AIG, its restructuring efforts, and its ongoing performance. However, the sustainability of any positive trends in AIG's operations depends on how well it manages its business in this current economic environment. Similarly, the government's ability to fully recoup the federal assistance will be determined by the long-term health of AIG, the company's success in selling businesses as it restructures, and other market factors such as the performance of the insurance sectors and the credit derivatives markets that are beyond the control of AIG or the government. We will continue to monitor these issues in our future work.
GAO-10-475, Troubled Asset Relief Program: Update of Government Assistance Provided to AIG
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
April 2010:
Troubled Asset Relief Program:
Update of Government Assistance Provided to AIG:
GAO-10-475:
GAO Highlights:
Highlights of GAO-10-475, a report to congressional committees.
Why GAO Did This Study:
Assistance provided by the Department of the Treasury (Treasury) under
the Troubled Asset Relief Program (TARP) and the Board of Governors of
the Federal Reserve System (Federal Reserve) to American International
Group, Inc. (AIG)”a holding company that, through its subsidiaries, is
engaged in a broad range of insurance and insurance-related activities
in the United States and abroad”represents one of the federal government
‘s largest investments in a private sector institution since the
financial crisis began in 2008. Treasury and the Federal Reserve
provided assistance to AIG in September 2008 that was restructured in
November 2008 and March 2009. As part of GAO‘s statutorily mandated
oversight of TARP, this report updates the risk and repayment
indicators GAO originally reported in September 2009 (GAO-09-975).
Specifically in this report, GAO discusses (1) trends in AIG‘s
financial condition, (2) trends in the unwinding of AIG Financial
Products (AIGFP), (3) the financial condition of AIG‘s insurance
companies, and (4) the status of AIG‘s repayment of its federal
assistance. To update the indicators, GAO primarily used data as of
December 31, 2009, and more current publicly available information;
reviewed rating agencies‘ reports; identified critical activities; and
discussed them with officials from Treasury, Federal Reserve, and AIG.
Treasury, Federal Reserve, and AIG provided technical comments that
are incorporated, as appropriate.
What GAO Found:
Since our last report in September 2009, AIG‘s financial condition has
remained relatively stable, as measured by several indicators, largely
due to the federal assistance provided by the Federal Reserve and
Treasury to assist AIG as a result of their determination that the
company posed systemic risk to the financial system. Specifically, the
Federal Reserve and Treasury have made more than $182 billion
available to assist AIG since March 2008. As of December 31, 2009, the
outstanding balance of the assistance provided to AIG was $129.1
billion, about $8.4 billion more than the balance on September 2, 2009
(see table). The federal assistance also appears to be facilitating a
more orderly restructuring of the company. GAO‘s indicators show that,
in general, the improvements in AIG‘s condition in the second quarter
of 2009 continued into the third and fourth quarters due largely to
ongoing federal assistance.
Several indicators show that AIGFP has continued to unwind its credit
default swap positions. AIGFP also has shown progress in unwinding its
Super Senior credit default swap portfolio but has made less progress
in reducing the remaining multi-sector collateralized debt obligations
(securities backed by a pool of bonds, loans, or other assets)
portfolio. Several indicators on the status of AIG‘s insurance
companies illustrate that AIG‘s insurance operations are showing signs
of recovery, but federal assistance has been a critical factor. For
the first time since the second quarter of 2008, additions to AIG life
and retirement policyholder contract deposits have exceeded
withdrawals. AIG‘s property/casualty companies also have shown some
improvements.
AIG is continuing to repay its debt to the federal government, but
much of the progress reflects the numerous exchanges of debt that AIG
owed the Federal Reserve Bank of New York Revolving Credit Facility
(facility) with various issues of preferred equity. As a result of
this shift from debt to equity, which has occurred gradually, the
authorized amount of the facility has decreased and the amount of
preferred equity interests held in AIG and various special purpose
vehicles for the government has increased. For example, as of December
30, 2009, the amount of assistance available to AIG through the
facility had dropped to $35 billion and the amount AIG owed the
facility had dropped to $23.4 billion, while the amount of equity or
equity interest held by the government increased to almost $95
billion. Consequently, the government‘s exposure to AIG is
increasingly tied to the future health of AIG, its restructuring
efforts, and its ongoing performance. However, the sustainability of
any positive trends in AIG‘s operations depends on how well it manages
its business in this current economic environment. Similarly, the
government‘s ability to fully recoup the federal assistance will be
determined by the long-term health of AIG, the company‘s success in
selling businesses as it restructures, and other market factors such
as the performance of the insurance sectors and the credit derivatives
markets that are beyond the control of AIG or the government. We will
continue to monitor these issues in our future work.
Table: Overview of Federal Assistance Provided to AIG as of December
31, 2009 (Dollar in billions):
Implemented:
Federal Reserve:
Description of the federal assistance: Federal Reserve Bank of New
York (FRBNY) created a Revolving Credit Facility to provide AIG a
revolving loan that AIG and its subsidiaries could use to enhance
their liquidity positions. In exchange for the facility and $0.5
million, a trust received Series C preferred stock for the benefit of
the Treasury, which gave the trust a 77.9 percent voting interest in
AIG.
Amount of assistance authorized: Debt: $35[A];
Amount of assistance authorized: Equity: N/A;
Outstanding balance: $23.435;
Sources to repay the government: Proceeds from dispositions of AIG
businesses, internal cash flows, and restructuring part of the
Revolving Credit Facility from debt into equity. The initial
commitment fee paid by AIG was reduced by $0.5 million to pay for the
Series C shares. The trust must reimburse FRBNY for this amount when
it disposes of the Series C shares.
Federal Reserve:
Description of the federal assistance: FRBNY created a special purpose
vehicle (SPV)”Maiden Lane II”to provide AIG liquidity by purchasing
residential mortgage backed securities from AIG life insurance
companies. FRBNY provided a loan to Maiden Lane II for the purchases.
FRBNY also terminated its securities lending program with AIG, which
had provided additional liquidity associated with AIG‘s securities
lending program when it created Maiden Lane II.
Amount of assistance authorized: Debt: $22.5;
Amount of assistance authorized: Equity: N/A;
Outstanding balance: $15.739[B];
Proceeds from asset sales in Maiden Lane II will be used to repay the
FRBNY loan to Maiden Lane II.
Federal Reserve:
Description of the federal assistance: FRBNY created an SPV called
Maiden Lane III to provide AIG liquidity by purchasing collateralized
debt obligations from AIG Financial Products‘ counterparties in
connection with the termination of credit default swaps. FRBNY again
provided a loan to the SPV for the purchases.
Amount of assistance authorized: Debt: $30;
Amount of assistance authorized: Equity: N/A;
Outstanding balance: $18.159[B];
Sources to repay the government: Proceeds from asset sales in Maiden
Lane III will be used to repay the FRBNY loan.
Federal Reserve:
Description of the federal assistance: AIG created two SPVs, one for
one for American International Assurance Company, Ltd (AIA) and one
for American Life Insurance Company (ALICO), to hold the shares of
certain of its foreign life insurance businesses to enhance AIG‘s
capital and liquidity, and facilitate an orderly restructuring of AIG.
FRBNY received on December 1, 2009, preferred equity interests in the
SPVs of $16 billion and $9 billion, respectively, in exchange for
reducing debt by AIG owed on the Revolving Credit Facility. The SPVs
allowed AIG to strengthen its balance sheet by reducing debt and
increasing equity and also were intended to facilitate dispositions to
generate cash for repayment.
Amount of assistance authorized: Debt: N/A;
Amount of assistance authorized: Equity: $25;
Outstanding balance: $25;
Sources to repay the government: On March 1, 2010, AIG announced
agreement to sell AIA to Prudential PLC for approximately $35.5
billion (approximately $25 billion in cash plus $10.5 billion in
equity linked securities and preferred stock). On March 8, 2010, AIG
announced agreement to sell ALICO to Met Life for approximately $15.5
billion ($6.8 billion in cash plus $8.7 billion in Met Life equity and
equity-linked securities).
Treasury:
Description of the federal assistance: Treasury purchased Series D
cumulative preferred stock of AIG. AIG used the proceeds to pay down
part of the Revolving Credit Facility. Series D stock was later
exchanged for Series E noncumulative preferred stock. Unpaid dividends
on the Series D shares were added to the principal amount of Series E
stock that Treasury received.
Amount of assistance authorized: Debt: N/A;
Amount of assistance authorized: Equity: $40;
Outstanding balance: $41.605;
Sources to repay the government: Proceeds from dispositions of AIG
businesses and internal cash flows of AIG.
Treasury:
Description of the federal assistance: Treasury purchased Series F
noncumulative preferred stock of AIG. Treasury has committed to
provide AIG with up to $29.835 billion through an equity capital
facility to meet its liquidity and capital needs in exchange for an
increase in the aggregate liquidation preference of the Series F
shares.
Amount of assistance authorized: Debt: N/A;
Amount of assistance authorized: Equity: $29.835;
Outstanding balance: $5.179;
Sources to repay the government: Proceeds from dispositions of AIG
businesses and internal cash flows of AIG.
Subtotals:
Amount of assistance authorized: Debt: $87.5;
Amount of assistance authorized: Equity: $94.835.
Total authorized and outstanding assistance[C]:
Amount of assistance authorized: Debt: [Empty];
Amount of assistance authorized: Equity: $182.335;
Outstanding balance: $129.117.
Source: AIG SEC filings, Federal Reserve, and Treasury data.
Notes: Analysis does not include AIG‘s government debt under the FRBNY
Commercial Paper Funding Facility of $4.739 billion as of December 31,
2009. This facility expired for new issuances on February 1, 2010, and
will close upon maturity of all remaining commercial paper outstanding.
[A] The facility was initially $85 billion, was reduced to $60 billion
in November 2008, and was reduced to $35 billion in December 2009.
Balance shown includes accrued interest and fees of $5.535 billion.
[B] Government debt shown for Maiden Lane facilities as of December
31, 2009, are principal only and do not include accrued interest of
$265 million for Maiden Lane II and $340 million for Maiden Lane III.
Principal owed as of March 31, 2010, was $14.970 billion for Maiden
Lane II and $16.929 billion for Maiden Lane III.
[C] Does not include AIG‘s participation in the Federal Reserve‘s
Commercial Paper Funding Facility.
[End of table]
View [hyperlink, http://www.gao.gov/products/GAO-10-475] or key
components. For more information, contact Orice Williams Brown at
(202) 512-8678 or williamso@gao.gov.
[End of section]
Contents:
Letter:
Background:
Federal Assistance Remains Key to Stabilizing AIG's Financial
Condition:
AIGFP Continues to Unwind Its CDS Portfolio Positions and Reduce Its
Number of Full-Time Equivalent Employees:
AIG's Insurance Operations Continue to Show Signs of Recovery, but
Federal Aid to Life Insurance Companies Has Been Critical to Their
Progress:
While AIG Continues to Make Progress in Repaying Some of Its Federal
Assistance, the Government's Ability to Fully Recoup the Assistance
Will be Determined by AIG's Restructuring and Long-term Health:
Agency Comments and Our Evaluation:
Appendix I: AIG Operations:
Appendix II: AIG's Credit Ratings and an Overview of Definitions of
Credit Ratings:
Appendix III: Corporate Liquidity Available to AIG:
Appendix IV: Value of Preferred and Common Shares of AIG:
Appendix V: AIG Insurance Subsidiaries' Capital and Surplus:
Appendix VI: Revenues and Expense of AIG Life Insurance and Retirement
Services:
Appendix VII: Operating Ratios for AIG's Property/Casualty Companies:
Appendix VIII: Detail on AIG's Federal Assistance and the Repayment of
that Assistance:
Appendix IX: Disposition of AIG Assets:
Appendix X: GAO Contact and Staff Acknowledgments:
Glossary of Terms:
Tables:
Table 1: U.S. Government Efforts to Assist AIG and the Government's
Remaining Exposure as of December 31, 2009:
Table 2: Amount of Outstanding Commercial Paper by Source, December
31, 2007, through December 31, 2009:
Table 3: Composition of U.S. Government Efforts to Assist AIG and the
Government's Approximate Remaining Exposures, as of December 31, 2009,
or latest available date as noted:
Table 4: Credit Ratings, as of March 31, 2009; May 15, 2009; and
December 15, 2009:
Table 5: Summary of Rating Agencies' Ratings:
Table 6: Amounts of Available Corporate Liquidity at November 5, 2008;
February 18, 2009; April 29, 2009; July 29, 2009; October 28, 2009;
and February 17, 2010:
Table 7: Dispositions Closed and Agreements Announced but not yet
Closed, Second Quarter of 2008 through March 31, 2010:
Figures:
Figure 1: AIG: Corporate Available Liquidity and Company-Wide Debt
Projections, Third Quarter of 2008 through Fourth Quarter of 2009:
Figure 2: AIG: Trends in and Main Components of Consolidated
Shareholders' Equity, Fourth Quarter of 2007 through Fourth Quarter of
2009:
Figure 3: Quarterly AIG Pretax Operating Income/Loss by Operating
Segment, First Quarter of 2008 through Fourth Quarter of 2009:
Figure 4: AIG Credit Default Swap Premiums, January 2007 through March
2010:
Figure 5: Status of the Winding Down of AIG's Financial Products
Corporation, Quarterly from September 30, 2008, through December 31,
2009:
Figure 6: AIGFP: Net Notional Amount, Fair Value of Derivative
Liability, and Unrealized Market Valuation Losses and Gains for
AIGFP's Super Senior (rated BBB or better) Credit Default Swap
Portfolio, Third Quarter of 2008 through Fourth Quarter of 2009:
Figure 7: AIGFP: Total Gross Notional Amounts of Multi-Sector
Collateralized Debt Obligations Compared to Portions of Portfolio That
Has Underlying Assets that are Rated Less Than BBB, Third Quarter of
2008 through Fourth Quarter of 2009:
Figure 8: AIG Insurance Subsidiaries: Regulatory Capital at December
31, 2007; December 31, 2008; and December 31, 2009, and Primary
Activities That Affected Regulatory Capital During 2009:
Figure 9: AIG Life and Retirement Services: Additions to and
Withdrawals from Policyholder Contract Deposits Including Annuities,
Guaranteed Investment Contracts, and Life Products, First Quarter of
2007 through Fourth Quarter of 2009:
Figure 10: AIG General Insurance: Premiums Written by Division, First
Quarter of 2007 through Fourth Quarter of 2009:
Figure 11: Debt and Equity Federal Assistance Provided to AIG Compared
to AIG's Book Value (Shareholder's Equity), December 2004 through
December 2009 and Partial Data as of March 31, 2010:
Figure 12: Proceeds from Dispositions by Quarter, Second Quarter of
2008 through March 31, 2010:
Figure 13: AIG, Its Subsidiaries, and Percentage Ownership by Parent
Company as of February 28, 2010:
Figure 14: Market Capitalization (Value) of AIG Outstanding Common
Shares, Including Federally Owned Preferred C Shares That Are
Convertible Into 79.77 Percent AIG's Outstanding Common Shares,
December 2004 through December 2009:
Figure 15: AIG Insurance Subsidiaries: Capital and Surplus at December
31, 2008, and September 30, 2009, and Primary Activities That Affected
Them In the First Nine Months of 2009:
Figure 16: AIG Life Insurance and Retirement Services: Key Quarterly
Revenues and Expenses, First Quarter of 2007 through Fourth Quarter of
2009:
Figure 17: AIG Property/Casualty Insurance: AIG Commercial Insurance
Operating Ratios, First Quarter of 2007 through Fourth Quarter of 2009:
Figure 18: AIG Property/Casualty Insurance: AIG Foreign General
Insurance Operating Ratios, First Quarter of 2007 through Fourth
Quarter of 2009:
Figure 19: FRBNY Revolving Credit Facility Balance Owed and Total
Amount Available, October 2008 through March 2010:
Figure 20: Amounts Owed and Portfolio Value of Maiden Lane II:
Figure 21: Amounts Owed and Portfolio Value of Maiden Lane III:
Abbreviations:
AIA: American International Assurance Company, Ltd:
AIG: American International Group, Inc.
AIGFP: AIG Financial Products:
ALICO: American Life Insurance Company:
CDO: collateralized debt obligations:
CDS: credit default swaps:
FRBNY: Federal Reserve Bank of New York:
NAIC: National Association of Insurance Commissioners:
NYSE: New York Stock Exchange:
RMBS: residential mortgage-backed security:
S&P: Standard & Poor's:
SEC: Securities and Exchange Commission:
SIGTARP: Special Inspector General for the Troubled Asset Relief
Program:
SPV: special purpose vehicle:
TARP: Troubled Asset Relief Program:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
April 27, 2010:
Congressional Committees:
Assistance provided to American International Group, Inc. (AIG)
represents one of the federal government's largest investments in a
private sector institution since the current financial crisis began in
2008. AIG is a holding company that, through its subsidiaries, engages
in a broad range of insurance and insurance-related activities in the
United States and abroad, including general insurance, life insurance
and retirement services, financial services, and asset management. The
potential demise of this company in 2008 threatened to further disrupt
the already-troubled financial markets. To minimize the likelihood of
such a scenario, the Board of Governors of the Federal Reserve System
(Federal Reserve) and, subsequently, the Department of the Treasury
(Treasury) deemed AIG to be systemically significant, opening the door
for these entities to provide extraordinary assistance to AIG. The
Federal Reserve, through its emergency powers under section 13(3) of
the Federal Reserve Act, and Treasury, through the Emergency Economic
Stabilization Act of 2008 (the act), which authorized the Troubled
Asset Relief Program (TARP), collaborated to make available more than
$180 billion in assistance to AIG.[Footnote 1] The assistance has been
used to strengthen AIG's financial condition and to avert a failure of
the company and, in turn, further disruption of the financial markets.
The ability of the government to recoup its assistance depends on the
long-term health of AIG, its sales of certain businesses, and other
factors.
Under our statutorily mandated responsibilities for providing timely
oversight of TARP, we are continuing to report on the federal
government's assistance to AIG.[Footnote 2] To help Congress monitor
the condition of AIG and the government's ability to recoup the
federal assistance provided to AIG, we have developed indicators to
monitor trends in AIG's operations and the status of repayments.
Because the government assistance to AIG is a coordinated approach, in
addition to providing timely reporting of Treasury's assistance to
AIG, we are also monitoring the efforts of the Federal Reserve.
[Footnote 3] In September 2009 we issued a report on the status of
government assistance to AIG in which we first reported on these
indicators.[Footnote 4] Since then, we have continued to monitor the
financial risk posed by AIG, its financial condition, and the status
of its repayment efforts.[Footnote 5] This 60-day report provides an
update on the AIG indicators primarily based on AIG's latest available
public filings as of December 31, 2009, and other more current
publicly available information where available. Specifically, the
report discusses (1) trends in AIG's financial condition, (2) trends
in the unwinding of AIG Financial Products (AIGFP), (3) the financial
condition of AIG's insurance companies, and (4) the status of AIG's
repayment of its federal assistance.
To conduct this work, we updated previously published indicators that
address several dimensions of AIG's business, including its credit
ratings, operating performance, capital, debt repayment, and liquidity
position. The data used to create the indicators are collected from
several sources, but most are based on publicly available information,
such as AIG's 10K and 10Q filings with the Securities and Exchange
Commission (SEC) and National Association of Insurance Commissioners
(NAIC) reports. We analyzed AIG's SEC filings through the fourth
quarter of 2009 and supplements for those filings. We also analyzed
information from Thomson Reuters and NAIC. We asked credit rating
agencies for their most recent ratings of AIG. We also analyzed data
from recent issues of the Federal Reserve weekly statistical releases
H.4.1 and Treasury's Financial Position Paper 09-07. AIG also provided
updated information on its asset dispositions. We assessed the
reliability of the data and found that the data were sufficiently
reliable for our purposes.
To assess AIG's financial condition, we updated indicators of key AIG
credit ratings, its corporate debt and liquidity positions, trends in
shareholder equity, operating income/losses, and its credit default
swap (CDS) premiums. To assess the unwinding of AIGFP, we updated our
indicators on AIGFP's trading positions and employee count, as well as
its CDS portfolio.[Footnote 6] To assess the financial condition of
AIG's insurance companies, we reviewed the regulatory capital of AIG's
largest domestic property/casualty and life insurance/retirement
services companies, additions to and withdrawals from policyholder
contract deposits, revenues and expenses for life insurance and
retirement services, AIG general insurance premiums written, and
combined ratios. To determine the status of AIG's repayment of its
federal assistance, we updated the composition of the government's
direct and indirect assistance to AIG, the Federal Reserve Bank of New
York's (FRBNY) Revolving Credit Facility balance, balances on the
Maiden Lane facilities, and AIG's divestitures and asset dispositions.
[Footnote 7] We report the balances of the federal debt and equity
assistance as of December 31, 2009, because our primary source for
equity data, which is AIG's 10Q filing with the SEC, is only available
quarterly, and the 10Q report containing more current data is not yet
publicly available. No single indicator provides a definitive measure
of AIG's progress, and the indicators in this report should be
considered collectively. We selected indicators that appeared to track
the most critical activities related to the goals for federal
assistance to AIG. Since our last report, we have developed two new
indicators of AIG's financial condition: one new indicator to track
the performance of AIG's insurance companies and one new indicator to
track federal assistance to AIG.
We conducted our work from November 2009 to April 2010 in accordance
with all sections of GAO's Quality Assurance Framework that are
relevant to our objectives. The framework requires that we plan and
perform the engagement to obtain sufficient and appropriate evidence
to meet our stated objectives and to discuss any limitations in our
work. We believe that the information and data obtained, and the
analysis conducted, provide a reasonable basis for any findings and
conclusions.
Background:
AIG comprises approximately 400 companies and has operations in more
than 130 countries and jurisdictions worldwide. As of December 31,
2009, AIG had assets of $847.6 billion and revenues of $96 billion for
the 12 preceding months. The AIG companies are among the largest
domestic life insurers and domestic property/casualty insurers in the
United States, and they also comprise large foreign general insurance
and life insurance businesses. Appendix I illustrates the breadth of
AIG's operations and its subsidiaries.
AIG Operations:
Historically, AIG has issued commercial paper to help finance its
operations. For example, as of December 31, 2007, AIG reported having
$13.1 billion of commercial paper outstanding, and as of December 31,
2009, it continued to have $4.7 billion outstanding.[Footnote 8] It is
also a participant in the derivatives market through AIGFP--a
financial products subsidiary that engaged in a variety of financial
transactions, including standard and customized financial products,
which were a major source of AIG's liquidity problems. As of December
31, 2009, AIG's total gross derivatives assets had a fair value of
$34.5 billion, of which $32.0 billion pertained to AIGFP.
Additionally, until 2008, AIG had maintained a large securities
lending program operated by its insurance subsidiaries. The securities
lending program allowed insurance companies, primarily AIG's life
insurance companies, to lend securities in return for cash collateral
that was invested in, among other investments, residential mortgage-
backed securities (RMBS). This program was another major source of
AIG's liquidity problems in 2008.
AIG and its subsidiaries are regulated by federal, state, and
international authorities. The Office of Thrift Supervision was the
consolidated supervisor of AIG, which is a thrift holding company by
virtue of its ownership of the AIG Federal Savings Bank. As the
consolidated supervisor, the Office of Thrift Supervision was charged
with identifying systemic issues or weaknesses and helping ensure
compliance with regulations that govern permissible activities and
transactions.[Footnote 9] AIG's domestic, life, and property/casualty
insurance companies are regulated by the state insurance regulators in
the state in which these companies are domiciled.[Footnote 10] These
state agencies regulate the financial solvency and market conduct of
these companies within their states, and they have the authority to
approve or disapprove certain transactions between an insurance
company and its parent or its parent's subsidiaries. These agencies
also coordinate the monitoring of companies' insurance lines among
multiple state insurance regulators. For AIG in particular, these
regulators have reviewed reports on liquidity, investment income, and
surrender and renewal statistics; evaluated potential sales of AIG's
domestic insurance companies; and investigated allegations of pricing
disparities. Finally, AIG's general insurance business and life
insurance business that are conducted in foreign countries are
regulated by the supervisors in those jurisdictions to varying degree.
In addition, Treasury's purchase, management, and sale of assets under
TARP, including those associated with AIG, are subject to oversight by
the Special Inspector General for TARP (SIGTARP). As part of its
quarterly reports to Congress, SIGTARP has provided information on
federal assistance and the restructuring of the federal assistance
provided to AIG, as well as information on the unwinding of AIGFP and
the sale of certain AIG assets.[Footnote 11] SIGTARP's reporting on
AIG's activities has also included reports that focused on federal
oversight of AIG compensation and efforts to limit AIG's payments to
its counterparties.[Footnote 12]
Federal Reserve and Treasury Provided Assistance to AIG to Limit
Systemic Risk to the Financial Markets:
In September 2008, the Federal Reserve (and FRBNY) and Treasury
determined through analysis of information provided by AIG and
insurance regulators, as well as publicly available information, that
market events in September 2008 could cause AIG to fail, which would
have posed systemic risk to financial markets.[Footnote 13]
Consequently, the Federal Reserve and Treasury took steps to ensure
that AIG obtained sufficient funds to continue to meet its
obligations, and could complete an orderly sale of its operating
assets and close its investment positions in its securities lending
program and AIGFP. The federal government first provided assistance to
AIG in September 2008 and has taken subsequent steps to modify and
amend that assistance.
AIG's Financial Problems Mounted Rapidly in 2008:
From July through early September in 2008, AIG faced increasing
liquidity pressure following a downgrade in its credit ratings in May
2008 due in part to losses from its securities lending program. The
company was experiencing declines in its securities lending
reinvestment portfolio of RMBS assets and declining values of
collateralized debt obligations (CDO) against which AIGFP had written
CDS protection.[Footnote 14] These losses forced AIG to use an
estimated $9.3 billion of its cash reserves in July and August 2008 to
repay securities lending counterparties that terminated existing
agreements and to post additional collateral required by the trading
counterparties of AIGFP. AIG attempted to raise additional capital in
the private market in September 2008, but was unsuccessful. On
September 15, 2008, the rating agencies downgraded AIG's debt rating,
which resulted in the need for an additional $20 billion to fund its
added collateral demands and transaction termination payments.
Following the credit rating downgrade, an increasing number of
counterparties refused to transact with AIG for fear that it would
fail. Also around this time, the insurance regulators decided they
would no longer allow AIG's insurance subsidiaries to lend funds to
the parent company under a revolving credit facility that AIG
maintained. Furthermore, the insurance regulators demanded that any
outstanding loans be repaid and that the facility be terminated.
The Federal Reserve and Treasury Have Taken a Variety of Steps to
Assist AIG:
Because of increasing concerns that an AIG failure would have posed
systemic risk to financial markets, in 2008 and 2009 the federal
government agreed to make more than $182 billion of federal assistance
available to AIG. First, in September 2008, the Federal Reserve, with
the support of Treasury, authorized FRBNY to lend AIG up to $85
billion.[Footnote 15] The secured loan was set up as a Revolving
Credit Facility that AIG could use as a reserve to meet its
obligations. This debt was subsequently restructured in November 2008
and March 2009.
Specifically, AIG's mounting debt--the result of borrowing from the
Revolving Credit Facility--led to concerns that its credit ratings
would be lowered, which would have caused its condition to deteriorate
further. In response, the Federal Reserve and Treasury restructured
AIG's debt in November 2008. Under the restructured terms, Treasury
purchased $40 billion in shares of AIG preferred stock (Series D), and
the cash from the sale was used to pay down a portion of AIG's
outstanding Revolving Credit Facility balance. The limit on the
Revolving Credit Facility was also reduced to $60 billion, and other
changes were made. This restructuring was critical to helping AIG
maintain its credit ratings.
In March 2009, the Federal Reserve and Treasury announced plans to
further restructure AIG's assistance. According to the Federal
Reserve, debt owed by AIG on the Revolving Credit Facility would be
reduced by $25 billion in exchange for FRBNY's receipt of preferred
equity interests totaling $25 billion in two special purpose vehicles
(SPV). Both SPVs were created by AIG to hold the outstanding common
stock of two life insurance holding company subsidiaries of AIG--
American Life Insurance Company (ALICO) and American International
Assurance Company, Ltd (AIA). FRBNY's preferred equity interest, which
was valued at $25 billion in December 2009, is an undisclosed
percentage of the fair market value of ALICO and AIA as determined by
FRBNY. On March 1, 2010, AIG announced that its board had approved the
sale of AIA to Prudential PLC and the transaction is expected to close
by the end of 2010 for approximately $35.5 billion in cash and equity
securities, pending approval by regulators and stockholders.[Footnote
16] And on March 8, 2010, AIG announced that its board had agreed to
sell ALICO to MetLife and the transaction is expected to close by the
end of 2010 for about $15.5 billion in cash and equity securities,
pending approval by regulators.[Footnote 17]
Federal assistance to AIG also included FRBNY's creation of two new
facilities to purchase some of AIG's more troubled assets. AIG's
securities lending program continued to be one of the greatest ongoing
demands on its working capital, and on November 10, 2008, FRBNY
announced plans to create a RMBS facility--Maiden Lane II LLC--to
purchase RMBS assets from AIG's U.S. securities lending collateral
portfolio. The Federal Reserve authorized FRBNY to lend up to $22.5
billion to Maiden Lane II; AIG also acquired a subordinated, $1
billion interest in the facility, which will absorb the first $1
billion of any losses. On December 12, 2008, FRBNY extended a $19.5
billion loan to Maiden Lane II to fund its portion of the purchase
price of the securities. The facility purchased $39.3 billion face
value of the RMBS directly from AIG subsidiaries (domestic life
insurance companies). As of December 30, 2009, Maiden Lane II owed $16
billion in principal and interest to FRBNY.
In addition, on November 10, 2008, FRBNY announced plans to create a
separate facility--Maiden Lane III LLC--to purchase multi-sector CDOs
on which AIGFP had written CDS contracts. [Footnote 18] This facility
was aimed at facilitating the restructuring of AIG by addressing the
greatest threat to AIG's liquidity position. In connection with the
purchase of the CDOs, AIG's CDS counterparties agreed to terminate the
CDS contracts.[Footnote 19] The Federal Reserve authorized FRBNY to
lend up to $30 billion to Maiden Lane III. On November 25, and
December 18, 2008, FRBNY extended a total of $24.3 billion in loans to
Maiden Lane III; AIG also paid $5 billion for an equity interest in
Maiden Lane III and agreed to absorb the first $5 billion of any
losses. As of December 30, 2009, Maiden Lane III owed $18.5 billion in
principal and interest to FRBNY.
According to FRBNY officials, FRBNY loans to Maiden Lane II and Maiden
Lane III are both expected to be repaid with the proceeds from the
interest and principal payments or liquidation of the assets in the
facility. The repayment will occur through cash flows from the
underlying securities as they are paid off. Accordingly, the Federal
Reserve has not set a date for selling the assets; rather it has
indicated that it is prepared to hold the assets to maturity if
necessary.
In March 2009, the Federal Reserve announced its intention to assist
AIG in the form of credit made under section 13(3) of the Federal
Reserve Act. FRBNY was authorized to make loans of up to an aggregate
amount of approximately $8.5 billion to SPVs to be established by
certain AIG domestic life insurance subsidiaries. As announced, the
SPVs were to repay the loans from the net cash flows they were to
receive from designated blocks of existing life insurance policies
issued by the insurance companies. The proceeds of the FRBNY loans
were to pay down an equivalent amount of outstanding debt under the
Revolving Credit Facility. However, in February 2010, AIG announced
that it is no longer pursuing this life insurance securitization
transaction with FRBNY.
Treasury has also provided assistance to AIG. On November 10, 2008,
Treasury's Office of Financial Stability announced plans under TARP to
purchase $40 billion in AIG preferred shares. AIG entered into an
agreement with Treasury on November 25, 2008, whereby Treasury agreed
to purchase $40 billion of fixed-rate cumulative preferred stock of
AIG (Series D) and received a warrant to purchase approximately 2
percent of the shares of AIG's common stock.[Footnote 20] As
previously discussed, the proceeds of this sale were used to pay down
AIG's outstanding balance on the Revolving Credit Facility by the same
amount.
On April 17, 2009, AIG and Treasury entered into an agreement in which
Treasury agreed to exchange its $40 billion of Series D cumulative
preferred stock for $41.6 billion of Series E fixed-rate noncumulative
preferred stock of AIG, allowing for a reduction in leverage and
dividend requirements. The $1.6 billion difference between the initial
aggregate liquidation preference of the Series E stock and the Series
D stock represents a compounding of accumulated but unpaid dividends
owed by AIG to Treasury on the Series D stock. Because the Series E
preferred stock more closely resembles common stock, principally
because its dividends are noncumulative, rating agencies viewed the
stock more positively when rating AIG's financial condition.
Finally, also on April 17, 2009, Treasury provided a $29.835 billion
Equity Capital Facility to AIG whereby AIG issued to Treasury 300,000
shares of fixed-rate noncumulative perpetual preferred stock (Series
F) and a warrant to purchase up to 3,000 shares of AIG common stock.
The facility was intended to strengthen AIG's capital levels and
improve its leverage. As AIG draws on the Equity Capital Facility, the
aggregate liquidation preference of the Series F stock is adjusted
upward.[Footnote 21] As of December 31, 2009, AIG had drawn down about
$5.2 billion of the commitment. Table 1 provides an overview of the
various forms of assistance, the purpose of each form of assistance,
the amounts authorized, the amounts loaned or used for investments,
and the outstanding balance as of December 31, 2009.
Table 1: U.S. Government Efforts to Assist AIG and the Government's
Remaining Exposure as of December 31, 2009 (Dollar in billions):
Implemented:
Federal Reserve:
Description of the federal assistance: Federal Reserve Bank of New
York (FRBNY) created a Revolving Credit Facility to provide AIG a
revolving loan that AIG and its subsidiaries could use to enhance
their liquidity positions. In exchange for the facility and $0.5
million, a trust received Series C preferred stock for the benefit of
the Treasury, which gave the trust a 77.9 percent voting interest in
AIG.
Amount of assistance authorized: Debt: $35[A];
Amount of assistance authorized: Equity: N/A;
Outstanding balance: $23.435;
Sources to repay the government: Proceeds from dispositions of AIG
businesses, internal cash flows, and restructuring part of the
Revolving Credit Facility from debt into equity. The initial
commitment fee paid by AIG was reduced by $0.5 million to pay for the
Series C shares. The trust must reimburse FRBNY for this amount when
it disposes of the Series C shares.
Federal Reserve:
Description of the federal assistance: FRBNY created a special purpose
vehicle (SPV)”Maiden Lane II”to provide AIG liquidity by purchasing
residential mortgage backed securities from AIG life insurance
companies. FRBNY provided a loan to Maiden Lane II for the purchases.
FRBNY also terminated its securities lending program with AIG, which
had provided additional liquidity associated with AIG‘s securities
lending program when it created Maiden Lane II.
Amount of assistance authorized: Debt: $22.5;
Amount of assistance authorized: Equity: N/A;
Outstanding balance: $15.739[B];
Proceeds from asset sales in Maiden Lane II will be used to repay the
FRBNY loan to Maiden Lane II.
Federal Reserve:
Description of the federal assistance: FRBNY created an SPV called
Maiden Lane III to provide AIG liquidity by purchasing collateralized
debt obligations from AIG Financial Products‘ counterparties in
connection with the termination of credit default swaps. FRBNY again
provided a loan to the SPV for the purchases.
Amount of assistance authorized: Debt: $30;
Amount of assistance authorized: Equity: N/A;
Outstanding balance: $18.159[B];
Sources to repay the government: Proceeds from asset sales in Maiden
Lane III will be used to repay the FRBNY loan.
Federal Reserve:
Description of the federal assistance: AIG created two SPVs, one for
one for American International Assurance Company, Ltd (AIA) and one
for American Life Insurance Company (ALICO), to hold the shares of
certain of its foreign life insurance businesses to enhance AIG‘s
capital and liquidity, and facilitate an orderly restructuring of AIG.
FRBNY received on December 1, 2009, preferred equity interests in the
SPVs of $16 billion and $9 billion, respectively, in exchange for
reducing debt by AIG owed on the Revolving Credit Facility. The SPVs
allowed AIG to strengthen its balance sheet by reducing debt and
increasing equity and also were intended to facilitate dispositions to
generate cash for repayment.
Amount of assistance authorized: Debt: N/A;
Amount of assistance authorized: Equity: $25;
Outstanding balance: $25;
Sources to repay the government: On March 1, 2010, AIG announced
agreement to sell AIA to Prudential PLC for approximately $35.5
billion (approximately $25 billion in cash plus $10.5 billion in
equity linked securities and preferred stock). On March 8, 2010, AIG
announced agreement to sell ALICO to Met Life for approximately $15.5
billion ($6.8 billion in cash plus $8.7 billion in Met Life equity and
equity-linked securities).
Treasury:
Description of the federal assistance: Treasury purchased Series D
cumulative preferred stock of AIG. AIG used the proceeds to pay down
part of the Revolving Credit Facility. Series D stock was later
exchanged for Series E noncumulative preferred stock. Unpaid dividends
on the Series D shares were added to the principal amount of Series E
stock that Treasury received.
Amount of assistance authorized: Debt: N/A;
Amount of assistance authorized: Equity: $40;
Outstanding balance: $41.605;
Sources to repay the government: Proceeds from dispositions of AIG
businesses and internal cash flows of AIG.
Treasury:
Description of the federal assistance: Treasury purchased Series F
noncumulative preferred stock of AIG. Treasury has committed to
provide AIG with up to $29.835 billion through an equity capital
facility to meet its liquidity and capital needs in exchange for an
increase in the aggregate liquidation preference of the Series F
shares.
Amount of assistance authorized: Debt: N/A;
Amount of assistance authorized: Equity: $29.835;
Outstanding balance: $5.179;
Sources to repay the government: Proceeds from dispositions of AIG
businesses and internal cash flows of AIG.
Subtotals:
Amount of assistance authorized: Debt: $87.5;
Amount of assistance authorized: Equity: $94.835.
Total authorized and outstanding assistance[C]:
Amount of assistance authorized: Debt: [Empty];
Amount of assistance authorized: Equity: $182.335;
Outstanding balance: $129.117.
Source: AIG SEC filings, Federal Reserve, and Treasury data.
Notes: Analysis does not include AIG‘s government debt under the FRBNY
Commercial Paper Funding Facility of $4.739 billion as of December 31,
2009. This facility expired for new issuances on February 1, 2010, and
will close upon maturity of all remaining commercial paper outstanding.
[A] The facility was initially $85 billion, was reduced to $60 billion
in November 2008, and was reduced to $35 billion in December 2009.
Balance shown includes accrued interest and fees of $5.535 billion.
[B] Government debt shown for Maiden Lane facilities as of December
31, 2009, are principal only and do not include accrued interest of
$265 million for Maiden Lane II and $340 million for Maiden Lane III.
Principal owed as of March 31, 2010, was $14.970 billion for Maiden
Lane II and $16.929 billion for Maiden Lane III.
[C] Does not include AIG‘s participation in the Federal Reserve‘s
Commercial Paper Funding Facility.
[End of table]
Federal Assistance Remains Key to Stabilizing AIG's Financial
Condition:
Since our last report in September 2009, AIG's financial condition has
remained relatively stable as measured by several indicators. These
include the strength of AIG's credit ratings; trends and levels of
available liquidity and sources for working capital; the level of
shareholders' equity and trends in operating income; and CDS premiums
on AIG, which is the going market price for credit protection on AIG.
However, this stabilization remains largely attributable to the
assistance AIG has received from the Federal Reserve and Treasury, not
its ability to access private sources of capital. Specifically, AIG's
credit ratings have remained stable over the fourth quarter in large
part because government support has continued to fill AIG's short-term
capital needs and allowed AIG to meet its payment obligations.
Similarly, AIG's level of available corporate liquidity has
stabilized, although the FRBNY Revolving Credit Facility and
Treasury's Equity Capital Facility continue to be its primary sources
of working capital. While the company's long-term goal is to rely on
private sources of capital and its own operations instead of the
government, AIG remains heavily reliant on federal assistance to meet
its liquidity needs. Trends and level of AIG's consolidated
shareholders' equity--generally a company's total assets minus total
liabilities--showed improvements in 2009. While these trends were
largely driven by the federal assistance, AIG's performance has
contributed to the improvements in its equity position. Specifically,
the efforts of AIG, FRBNY, and Treasury to restructure the composition
of the federal assistance have reduced AIG's debt and boosted its
shareholders' equity. However, whether AIG will return to positive
retained earnings, which should further increase shareholder's equity,
remains unclear. Finally, measures of AIG's operating income and
losses illustrated that because of federal assistance, the large
increasing losses AIG experienced through 2008 slowed in 2009. AIG
generated a modest income in the second quarter of 2009 but
experienced increasing losses in the following third and fourth
quarters. However, these losses were only a fraction of the size of
the operating losses in 2008. Finally, trends in CDS premiums on AIG
showed that prices offered for credit protection on AIG have been
stabilizing or trending down since May of 2009.
AIG's Credit Ratings Remained Stable Between May and December 2009:
Ratings of AIG's debt and financial strength by various credit rating
agencies have not changed from May 2009 through December 15, 2009,
primarily because federal assistance has provided AIG with needed
capital. Credit ratings measure a company's ability to repay its
obligations and directly affect that company's cost of and ability to
access unsecured financing. If a company's ratings are downgraded, its
borrowing costs can increase, capital can be more difficult to raise,
business partners may terminate contracts or transactions,
counterparties can demand additional collateral, and operations can
become more constrained generally. Rating agencies can downgrade the
company's key credit ratings if they believe it is unable to meet its
obligations. In AIG's case, this could affect its ability to raise
funds and could increase the cost of financing its major insurance
operations, and, in turn, impede AIG's restructuring efforts. A
downgrade in AIG's credit ratings also could result in downgrades on
insurer financial strength ratings for the AIG life and property/
casualty companies, further declines in credit limits, and
counterparties demanding that AIG post additional collateral.
Collectively, these effects from a rating downgrade could impede AIG's
restructuring efforts and hamper any plans to access traditional
sources of private capital to replace the public investments.
Conversely, an upgrade in AIG's credit ratings would indicate an
improvement in its condition and possibly lead to lower borrowing
costs and facilitate corporate restructuring.
AIG's key credit ratings have remained unchanged since May 2009.
[Footnote 22] For example, from March 31, 2009, to December 15, 2009,
AM Best, Moody's, and Standard & Poor's (S&P) maintained the same
credit ratings for AIG's long-term debt and the financial strength of
its property/casualty and life insurance companies due in large part
to the Federal Reserve and Treasury's support.[Footnote 23] While
contributing to stable ratings thus far, the scale of this assistance
eventually may raise questions about AIG's future prospects if the
company is not able to raise capital from private sources. For
example, because of the importance of the federal funds to AIG's
solvency, Fitch's ratings of AIG in several categories were lowered in
May 2009. However, Fitch's ratings have not changed since May 2009.
The general stability of AIG's long-term debt ratings has allowed the
company to avoid collateral and termination payments that could result
from a ratings downgrade because counterparties might demand such
payments at the sign of weakening financial strength. Similarly,
generally stable life-insurer financial strength ratings have helped
keep down both the surrender rate of domestic retirement services and
any pressure on the company to exit businesses that serve high net-
worth clients or businesses governed by trust contracts. Further,
generally stable property/casualty financial strength ratings have
helped hold down any significant losses in net premiums written and
operating losses. AIG's credit ratings remained unaffected with the
December 2009 placement of AIA and ALICO into SPVs.
Federal Assistance Has Allowed AIG to Maintain a Steady Level of
Liquid Assets, and Debt Projections Have Remained Stable:
Since the fourth quarter of 2008, AIG's available corporate liquidity
has remained stable due to federal assistance, and projections of debt
have also remained fairly stable. Because a financially healthy
business should have adequate holdings of liquid assets to cover
maturing debt, we use three indicators to monitor AIG's corporate
liquidity.[Footnote 24] One indicator monitors the timing of potential
future demand on AIG's corporate liquidity posed by its maturing debt
and AIG's ability to meet its cash payment needs. If working and short-
term capital become less accessible or if the level of maturing debt
increases, AIG could face a higher risk of another liquidity crisis.
The second indicator monitors the amount of corporate liquidity
available from specific sources. Sources of available liquidity
provide an indication of how AIG obtains the funds needed to meet its
obligations. The third indicator, which we have added since our
initial reporting on AIG in September 2009, monitors the extent to
which AIG has used commercial paper to strengthen its liquidity
position. The greater the portion of current available liquidity
provided by AIG's own operations, the less reliant AIG will be on
federal assistance.
As indicated in figure 1, by the third quarter of 2008, AIG's
corporate-level liquid assets (corporate liquidity) were becoming
insufficient to meet its company-wide debt obligations, with much of
that debt--attributable to the Federal Reserve's Revolving Credit
Facility--maturing in 2010. In the fourth quarter of 2008, AIG's
remaining available corporate liquidity reached a low of $26.7
billion, as AIG began utilizing its access to the Commercial Paper
Funding Facility (CPFF) by issuing commercial paper. In that same
quarter the Federal Reserve restructured the original payment date for
the credit facility. This restructuring reduced the amount of maturing
debt in the facility from $62.9 billion in the third quarter of 2008
to $40.4 billion in the fourth quarter of 2008, which occurred when
proceeds from the issuance of the new Series D preferred stock (new
with the restructuring) to Treasury were used to pay down the balance
owed on the facility. The restructuring also gave AIG more time to
repay its debt to the facility, moving the due date from 2010 to 2013.
[Footnote 25] From the fourth quarter of 2008 to the third quarter of
2009, AIG nearly doubled its available corporate liquidity to about
$50 billion because of its access to the restructured FRBNY Revolving
Credit Facility and the FRBNY CPFF. As of February 2010, the amount of
corporate liquidity available to AIG had fallen to $36.6 billion,
largely because the ceiling on the Revolving Credit Facility was
reduced again in December 2009 by $25 billion (from $60 billion to $35
billion) when AIG transferred AIA and ALICO into two SPVs in which
FRBNY received a preferred equity interest.[Footnote 26] Over this
same period, the amount of company-wide debt stabilized as well, due
to restructuring and deleveraging activity. These trends suggest that
since late 2008, the Federal Reserve's actions were critical for AIG's
solvency.
Figure 1: AIG: Corporate Available Liquidity and Company-Wide Debt
Projections, Third Quarter of 2008 through Fourth Quarter of 2009
(dollars in millions):
[Refer to PDF for image: illustrated table]
Q3 - 2008:
Corporate available liquidity (as of date): $33,420 (11/5/08);
Company-wide debt maturing in 2009: $28,057;
Company-wide debt maturing in 2010: $62,960, Federal Reserve facility
(FRF); $21,690;
Company-wide debt maturing in 2011: $14,517;
Company-wide debt maturing in 2012: $13,230;
Company-wide debt maturing in 2013: $10,756;
Company-wide debt maturing thereafter: $61,882.
Q4 - 2008:
Corporate available liquidity (as of date): $26,653; (2/18/09);
Company-wide debt maturing in 2009: $21,581;
Company-wide debt maturing in 2010: $17,492;
Company-wide debt maturing in 2011: $15,212;
Company-wide debt maturing in 2012: $9,865;
Company-wide debt maturing in 2013: $40,431, FRF; $8,861;
Company-wide debt maturing thereafter: $58,193.
Q1 - 2009:
Corporate available liquidity (as of date): $49,620; (4/29/09);
Company-wide debt maturing in 2009: $17,741;
Company-wide debt maturing in 2010: $16,999;
Company-wide debt maturing in 2011: $15,080;
Company-wide debt maturing in 2012: $9,598;
Company-wide debt maturing in 2013: $47,405, FRF; $8,430;
Company-wide debt maturing thereafter: $53,710.
Q2 - 2009:
Corporate available liquidity (as of date): $52,585; (7/29/09);
Company-wide debt maturing in 2009: $13,809;
Company-wide debt maturing in 2010: $17,204;
Company-wide debt maturing in 2011: $15,355;
Company-wide debt maturing in 2012: $9,786;
Company-wide debt maturing in 2013: $44,816, FRF; $8,575;
Company-wide debt maturing thereafter: $53,783.
Q3 - 2009:
Corporate available liquidity (as of date): $50,160; (10/28/09);
Company-wide debt maturing in 2009: $7,643;
Company-wide debt maturing in 2010: $19,815;
Company-wide debt maturing in 2011: $16,413;
Company-wide debt maturing in 2012: $10,317;
Company-wide debt maturing in 2013: $41,009, FRF; $8,957;
Company-wide debt maturing thereafter: $54,035.
Q4 - 2009:
Corporate available liquidity (as of date): $36,579; (2/17/10);
Company-wide debt maturing in 2009: 0;
Company-wide debt maturing in 2010: $19,432;
Company-wide debt maturing in 2011: $16,310;
Company-wide debt maturing in 2012: $10,289;
Company-wide debt maturing in 2013: $23,435, FRF; $8,870;
Company-wide debt maturing thereafter: $53,256.
Source: GAO analysis of AIG SEC filings.
Notes: Available liquidity is at the corporate level, and debt
maturing is at the corporate and operating-division levels. Much of
the debt of the operating divisions is associated with assets serving
as collateral or funding sources; thus repayment of this debt is not
likely to rely on corporate liquidity. The figures exclude borrowings
on consolidated investments that were less than 3.5 percent of total
long-term borrowings.
[End of figure]
Data disclosed by AIG indicate that since November 2008 the corporate
liquidity available to AIG essentially has been the undrawn portions
of three federally provided sources--the FRBNY Revolving Credit
Facility, the CPFF, and Treasury's Equity Capital Facility. Over time,
AIG's primary source of funds has shifted away from FRBNY's Revolving
Credit Facility and CPFF to Treasury's Equity Capital Facility, which
remained its primary source of funds through 2009. Since late 2008,
less than $5 billion has been available from AIG's internal sources or
from private sector sources. Thus, federal sources have allowed AIG to
substantially improve its liquidity position relative to what it would
have been able to achieve on its own. See appendix III for further
discussion of AIG's available corporate liquidity.
Historically, AIG issued commercial paper to third parties to meet its
liquidity needs, but since October 2008, the company has relied on
FRBNY's CPFF to purchase its commercial paper. Because commercial
paper is typically unsecured and issued by companies with high credit
ratings, AIG's ability to access the traditional commercial paper
market (independent of Federal Reserve programs) would be a positive
signal regarding its financial condition. As shown in table 2, AIG's
commercial paper programs, which reflect the amount of commercial
paper AIG has issued to third parties, have steadily decreased from a
high of about $13 billion in December 2007. Due to the general
breakdown of the U.S. commercial paper market and reluctance from
market participants to purchase or roll over AIG's commercial paper,
by September 30, 2008, the balance had dropped to $5.6 billion. As of
December 31, 2009, AIG had no outstanding commercial paper held by
third parties. According to AIG, this is because all of AIG's third
party commercial paper had matured and, currently, AIG's subsidiaries
do not have access to third party commercial paper funding. This
funding source had been replaced by commercial paper purchased by
FRBNY's CPFF, which was utilized by AIG until the facility expired on
February 1, 2010. As a result of the facility closing, AIG's CPFF
amount outstanding had decreased to $4.7 billion from a high of $15
billion one year earlier. However, given AIG's ongoing reliance on
federal assistance, it remains unclear when support provided by CPFF
will be replaced with funds from AIG's own operations. Unlike many of
the other large institutions that received government support as a
result of the financial crisis, AIG has not yet been able to tap
traditional sources of short-term capital, including commercial paper
or other debt markets until recently. In particular, International
Lease Finance Corp. (ILFC) and American General Finance (AGF) recently
have been able to access the capital markets. In March 2010, ILFC sold
$4.05 billion of secured debt and unsecured debt, and in April 2010,
AGFS Funding Company--a wholly-owned indirect subsidiary of AGF--
entered into and fully drew down a $3 billion, 5-year term loan.
Table 2: Amount of Outstanding Commercial Paper by Source, December
31, 2007, through December 31, 2009 (Dollars in millions):
FRBNY CPFF program:
Dec. 31, 2007: $0;
Sept. 30, 2008: $0;
Dec. 31, 2008: $15,105;
Mar. 31, 2009: $12,242;
June 30, 2009: $11,152;
Sept. 30, 2009: $9,607;
Dec. 31, 2009: $4,739.
AIG's Commercial Paper programs:
Dec. 31, 2007: $13,114;
Sept. 30, 2008: $5,600;
Dec. 31, 2008: $613;
Mar. 31, 2009: $196;
June 30, 2009: $197;
Sept. 30, 2009: $0;
Dec. 31, 2009: $0.
Total:
Dec. 31, 2007: $13,114;
Sept. 30, 2008: $5,600;
Dec. 31, 2008: $15,718;
Mar. 31, 2009: $12,438;
June 30, 2009: $11,349;
Sept. 30, 2009: $9,607;
Dec. 31, 2009: $4,739.
Sources: GAO analysis of AIG SEC filings.
Note: Does not include $1.1 billion outstanding by Nightingale.
[End of table]
Shareholders' Equity Continued to Improve in 2009:
In contrast to the downward trends in 2008, AIG's shareholders' equity
increased over the first three quarters of 2009 and its negative
retained earnings, also known as accumulated deficits, decreased by
nearly 85 percent. Rising accumulated deficits generally indicate
mounting losses, while decreasing accumulated deficits could indicate
a return to profitability. Shareholders' equity is generally
calculated by subtracting a company's total assets from its total
liabilities, and represents the company's ability to absorb negative
shocks and prevent failure due to insolvency. One source of
shareholders' equity is capital raised by issuing and selling common
and preferred stock to investors, also referred to as paid-in capital.
Another source is retained earnings, which the company accumulates
over time through its operations.[Footnote 27]
As figure 2 shows, AIG's shareholders' equity had declined from the
fourth quarter of 2007 through the first quarter of 2009, and more
significantly, the composition of its shareholders' equity changed
from mostly retained earnings in 2007 to completely paid-in capital by
the end of 2009, reflecting the importance of federal assistance to
its solvency. Specifically, AIG's shareholder's equity fell almost 48
percent, from $95.8 billion at the end of 2007 to $45.8 billion by the
end of the first quarter of 2009, but rose the second and third
quarter of 2009 and declined slightly to $69.7 billion in the fourth
quarter of 2009. In the last quarter of 2007, retained earnings was
the primary source of shareholders' equity, contributing $89 billion
of AIG's $95.8 billion in shareholders' equity. However, retained
earnings declined throughout 2008 becoming cumulative deficits by the
end of 2008 because of a net loss for the year of about $99.3 billion.
At its lowest point, in the first quarter of 2009, AIG reported a
negative balance of $16.7 billion in accumulated deficits, and
shareholders' equity fell to $45.8 billion. AIG's accumulated deficit
improved to a negative balance of $3.1 billion and $2.6 billion in the
second and third quarter of 2009, respectively, contributing to the
increase in shareholders' equity. However, in the fourth quarter of
2009, the accumulated deficit increased to $11.5 billion, lowering
shareholders' equity. As shown in figure 2, starting in the fourth
quarter of 2008, paid-in capital become the primary source of
shareholders' equity because of the federal assistance.
Figure 2: AIG: Trends in and Main Components of Consolidated
Shareholders' Equity, Fourth Quarter of 2007 through Fourth Quarter of
2009 (Dollars in millions):
[Refer to PDF for image: combination vertical bar and line graph]
2007, Q4:
Retained earnings/accumulated deficits: $89,029;
Additional paid-in Capital: $10,218;
Total shareholders' equity: $95,801.
2008, Q1:
Retained earnings/accumulated deficits: $79,732;
Additional paid-in Capital: $10,308;
Total shareholders' equity: $79,703.
2008, Q2:
Retained earnings/accumulated deficits: $73,743;
Additional paid-in Capital: $16,816;
Total shareholders' equity: $78,088.
2008, Q3:
Retained earnings/accumulated deficits: $49,291;
Additional paid-in Capital: $39,871;
Total shareholders' equity: $71,182.
2008, Q4:
Retained earnings/accumulated deficits: -$12,368;
Additional paid-in Capital: $79,836;
Total shareholders' equity: $52,710.
2009, Q1:
Retained earnings/accumulated deficits: -$16,706;
Additional paid-in Capital: $79,686;
Total shareholders' equity: $45,759.
2009, Q2:
Retained earnings/accumulated deficits: -$3,073;
Additional paid-in Capital: $80,627;
Total shareholders' equity: $57,958.
2009, Q3:
Retained earnings/accumulated deficits: -$2,618;
Additional paid-in Capital: $82,678;
Total shareholders' equity: $72,712.
2009, Q4:
Retained earnings/accumulated deficits: -$11,491;
Additional paid-in Capital: $76,496;
Total shareholders' equity: $69,824.
Source: GAO analysis of AIG SEC filings.
Note: Other components of total shareholders' equity are preferred
stock (Series C preferred stock) and Series D (cumulative preferred
stock), which was exchanged in April 2009 for Series E noncumulative
preferred stock, accumulated other comprehensive losses, and Treasury
stock. Drawdowns from the approximately $30 billion committed under
the Series F equity capital facility will increase paid-in capital in
the future by an equal amount.
[End of figure]
There are several federal actions that caused these fluctuations and
changes in shareholders' equity. Federal government actions
significantly increased AIG's shareholders' equity. Between the third
and fourth quarters of 2008, the adjusted value of common and
preferred stock and paid-in capital increased from $39.9 billion to
$79.9 billion, of which almost $73 billion was paid-in capital that
could be attributed to two government actions:
* In September 2008, AIG, through a noncash transaction, added $23
billion to shareholders' equity as additional paid-in capital to
record the fair value of preferred shares (Series C) that were later
issued in order to obtain AIG's Revolving Credit Facility established
by FRBNY.[Footnote 28]
* In November 2008, Treasury purchased $40 billion of cumulative
preferred shares (Series D) and received a warrant from AIG. AIG
recorded the transaction as additional paid-in capital repaid.
The value of the federal government's common equity interests in AIG
is tied to the market value of AIG's common stock, which has
fluctuated over the last year. As a result, growth in value of the
government's equity stake depends on further growth of the value of
common shares. The values of the shares increased between March and
September 2009 but fell slightly in the fourth quarter of 2009.
[Footnote 29] The market value of AIG's common shares outstanding
peaked in December 2006 at $186.4 billion and by June 2008, as AIG's
losses from its derivatives businesses continued to mount, the shares'
market value declined to $71.1 billion (see appendix IV). During the
last two quarters of 2008, when federal assistance was initially
provided to AIG, AIG shares further declined in value, falling to $4.2
billion by the end of 2008. During the first quarter of 2009, AIG's
common shares fell roughly 36 percent, underperforming the Thomson
Reuters Insurance Index and the New York Stock Exchange (NYSE)
Composite Index, pushing the value of its common stock below $3
billion.[Footnote 30] Over the second and third quarter of 2009, AIG's
stock price increased by 121 percent and outperformed both the NYSE
Composite and the Insurance Index, resulting in a market
capitalization of about $4.5 billion. However, since we last reported
in September 2009, the value of the shares has fallen by more than 22
percent compared to gains of 13 and 8 percent respectively for the
Insurance Index and NYSE Composite Index.
Income from AIG's Operations Has Begun to Stabilize with Federal
Assistance:
With the benefit of federal assistance, several of AIG's operating
segments are beginning to stabilize, producing income instead of
losses. To the extent that AIG's operating entities are profitable,
they will generate income that could improve AIG's ability to sell
certain businesses, retain others, and repay its federal assistance.
If the businesses operate at a loss, AIG could face greater risks in
its ability to repay the federal assistance and its ability to remain
viable. The following indicator tracks the operating income and losses
(before taxes) for AIG's insurance businesses and its major segments,
including asset management, financial services, and other services
that it expects to sell off as part of the restructuring.
As shown in figure 3, all of AIG's operating segments had operating
losses in the last two quarters of 2008, but by the first quarter of
2009, some of the segments had considerably smaller operating losses,
and other segments had operating income due in part to federal
assistance such as Maiden Lane II and Maiden Lane III. AIG's general
insurance segment (which includes AIG's domestic and foreign property/
casualty businesses) reported an operating loss in 2008, largely due
to operating losses from insurance underwriting, large net realized
capital losses, and reduced investment income in the second half of
the year. After three quarters with operating income in 2009 and
operating losses in the fourth quarter, this segment ended the year
with a relatively small operating profit for 2009. The improvement in
2009 relative to 2008 was largely due to reduced net realized capital
losses and increased investment income that more than offset larger
insurance underwriting losses. This is noteworthy, because
historically, the general insurance segment has generated the largest
operating income of all AIG segments. For example, operating income
from this segment accounted for more than half of AIG's total
operating income for 2006 and 2007 combined. Tracking the operating
performance of this segment is also important because AIG plans to
retain its property/casualty insurance businesses among its core
operations after the restructuring and divestitures of other
businesses. As a result, AIG's ability to repurchase its preferred
shares from Treasury will be partly contingent on the health of this
segment.
Figure 3: Quarterly AIG Pretax Operating Income/Loss by Operating
Segment, First Quarter of 2008 through Fourth Quarter of 2009 (Dollars
in billions):
[Refer to PDF for image: vertical bar graph]
2008, Q1:
General insurance: $1.5
Life insurance and retirement services: -$2.0;
Financial services: -$8.8;
Other (net of consolidation and eliminations): -$1.9;
Total income: -$11.21.
2008, Q2:
General insurance: $1.2;
Life insurance and retirement services: -$2.6;
Financial services: -$5.9;
Other (net of consolidation and eliminations): -$1.4;
Total income: -$8.69.
2008, Q3:
General insurance: -$1.3;
Life insurance and retirement services: -$15.0;
Financial services: -$8.2;
Other (net of consolidation and eliminations): -$3.0;
Total income: -$27.51.
2008, Q4:
General insurance: -$3.9;
Life insurance and retirement services: -$18.6;
Financial services: -$17.9;
Other (net of consolidation and eliminations): -$18.6;
Total income: -$59.13.
2009, Q1:
General insurance: $0.1;
Life insurance and retirement services: -$1.4;
Financial services: -$1.1;
Other (net of consolidation and eliminations): -$3.8;
Total income: -$6.21.
2009, Q2:
General insurance: $1.0;
Life insurance and retirement services: $0.7;
Financial services: $0.1;
Other (net of consolidation and eliminations): -$1.3;
Total income: $0.52.
2009, Q3:
General insurance: $0.7;
Life insurance and retirement services: $0.7;
Financial services: $1.4;
Other (net of consolidation and eliminations): -$3.2;
Total income: -$0.36.
2009, Q4:
General insurance: -$1.6;
Life insurance and retirement services: $2.0;
Financial services: $0.1;
Other (net of consolidation and eliminations): -$8.1;
Total income: -$7.6.
Source: GAO analysis of AIG SEC filings.
Notes: The insurance data include both investment and underwriting
performance.
[End of figure]
The "other operations and consolidating adjustments" includes
consolidations and eliminations, interest expense on the FRBNY
facility, restructuring costs, expenses of corporate staff not
attributable to specific reportable segments, corporate level net
realized capital gains and losses, net gains and losses on sale of
divested businesses, results from noncore businesses that include
certain mortgage guaranty and asset management operations, and equity
earnings in partly owned companies.
Figure 3 also shows that AIG's life insurance and retirement services
segment incurred the largest operating losses of all of AIG's segments
during the last half of 2008. Its losses could be largely attributed
to net realized capital losses in the investment portfolios of
domestic and foreign life insurance businesses due to severe market
price declines in certain commercial mortgage-backed securities and
other securities. In 2009 the life insurance and retirement services
segment reported an operating profit compared to a loss in 2008,
primarily because net realized capital losses declined and investment
results improved. These improved investment results more than offset
the decline in premium revenues, increase in claims and benefits, and
related expenses.
The financial services segment reported losses in 2008 that were
primarily attributed to unrealized market valuation losses from credit
valuation adjustments in AIGFP's super senior credit default swap
portfolio, and credit valuation adjustments on AIGFP assets and
liabilities (see figure 3). In 2009 Financial Services reported an
operating profit of $517 million, primarily because the combined
operating profit for AIGFP and Aircraft Leasing were greater than the
operating loss from consumer finance.
Finally, AIG's other operations reported losses in the fourth quarter
of 2008 that generally resulted from fees and interest expenses
associated with the FRBNY Revolving Credit Facility, net realized
capital losses, and operating losses of asset management and mortgage
guaranty that are in this category as noncore businesses and the
decline in the value of AIG's equity interest in Maiden Lane III. In
2009 most of these factors also contributed to the operating losses
reported from AIG's other operations.
AIG Credit Default Swap Premiums Appear to Be Returning to Precrisis
Levels:
Dropping from their recent peak in May 2009, AIG CDS premiums have
decreased and appear to be returning to precrisis levels. These
premiums, which are the price insured parties pay to purchase CDS
protection against AIG defaulting on senior unsecured debt, are
another indicator of AIG's financial strength. This indicator measures
what the market believes to be AIG's probability of default by
tracking prices (premiums, expressed in basis points) paid by an
insured party against a possible default on a senior unsecured bond
and the spreads between the 3-year and 5-year premiums.[Footnote 31]
This measure pertains to CDS prices on AIG and not AIGFP's CDS
inventory that the company is winding down; it is a composite of what
dealers would charge customers for CDS on AIG. Higher basis point
levels indicate a higher premium for a CDS contract. The higher the
CDS premiums, the greater the market's perception of credit risk
associated with AIG. Conversely, the lower the CDS premiums, the lower
the market's expectation that AIG will default or the greater its
confidence in AIG's financial strength.
AIG's CDS premiums have continued to decrease since May 2009, and as
of January 2010 were similar to the level they were one year earlier,
and generally have continued to decline through March 2010 (see figure
4). Over the same period--May 2009 through March 2010--the credit
default swap index for the insurance sector declined, but not as much
as the CDS premiums for AIG. While the trend is positive, it remains
unclear whether this decline in the cost to protect against an AIG
default reflects confidence in the standalone creditworthiness of AIG
or whether the decline is due to the ongoing federal assistance to
AIG. As the Federal Reserve has noted, the premium on AIG's CDS is
based on both the market's assessment of the government's level of
commitment to assist AIG and AIG's financial strength.
Figure 4: AIG Credit Default Swap Premiums, January 2007 through March
2010:
[Refer to PDF for image: multiple line graph]
Specific notations on the graph include the following:
1/2/07:
5-year CDs: 9.2 basis points.
9/16/08:
3-year CDs: 3,922 basis points;
5-year CDs: 3,500 basis points.
5/4/09:
3-year CDs: 4,534 basis points;
5-year CDs: 3,683 basis points.
3/31/10:
3-year CDs: 214 basis points;
5-year CDs: 279 basis points.
Source: GAO analysis of Thomson Reuters Datastream.
Note: A basis point is a common measure used in quoting yield on
bills, notes, and bonds and represents 1/100 of a percent of yield.
CDS provide protection to the buyer of the CDS contract if the assets
covered by the contract go into default.
[End of figure]
AIGFP Continues to Unwind Its CDS Portfolio Positions and Reduce Its
Number of Full-Time Equivalent Employees:
A critical factor leading to AIG's financial crisis was the
significant losses that AIGFP experienced from its derivatives trading
business and the strains those losses put on AIG's corporate liquidity
in 2008. A key part of AIG's reorganization and divestiture strategy
is closing out or eliminating--also known as "unwinding"--these
derivatives and closing AIGFP. Since the fall of 2008, AIGFP has
attempted to unwind its derivatives portfolio by attempting to strike
the most efficient balance between eliminating its positions quickly
and mitigating portfolio losses. As discussed earlier, AIGFP had
underwritten CDS protection on CDOs to a range of counterparties. Most
of AIGFP's positions on its CDS contracts on multi-sector CDOs were
eliminated when Maiden Lane III purchased CDOs from AIGFP's CDS
counterparties late in 2008. With these purchases, the counterparties
agreed to terminate the CDS contracts, which eliminated the need for
AIG to post additional collateral as pricing continued to fall and
eased its liquidity crisis. Since then, AIGFP has been in the process
of closing out the remainder of its derivatives portfolio. To analyze
AIGFP's progress, we monitored several groups of indicators dating
back to at least September 2008. The following four indicators--number
of outstanding derivatives trade positions, gross notional amount of
outstanding derivatives contracts, number of risk books, and number of
AIGFP employees--show different dimensions of the unwinding process.
Their trends suggest AIGFP is making progress. We also analyzed
AIGFP's Super Senior CDS portfolio, where underlying collateral of
CDOs are rated investment grade, and their remaining multi-sector CDO
portfolio, where underlying collateral of CDOs are rated less than
BBB. We found that AIGFP has made and continues to make progress in
unwinding its super senior portfolio, but that it has made little
progress since the fourth quarter of 2008 in closing out CDOs with
lower rated underlying collateral.
AIGFP Continues to Unwind Its Operations:
Our indicators show that from September 2008 through December 2009,
AIGFP made significant progress in winding down its operations. A key
reason for AIG's recent financial crisis was the strain on corporate
liquidity that resulted from the performance of AIGFP's derivatives
portfolios. The values of the investment-grade CDOs protected by CDS
contracts written by AIG declined in the summer of 2008. In response
to the declining values, AIGFP had to make collateral payments to the
CDS counterparties. As previously discussed, to help eliminate the
financial strain arising from collateral payments, in the fall of
2008, the federal government created Maiden Lane III LLC, which
purchased $29.3 billion worth of CDOs from AIGFP's CDS counterparties.
In turn, these counterparties agreed to terminate the CDS contracts,
because for the counterparties, the risk of possible downgrades or
defaults on the CDOs had been eliminated by selling them to Maiden
Lane III. Therefore, the counterparties no longer needed the
protection that AIGFP's CDS contracts had provided them. The strains
on corporate liquidity have decreased as AIGFP has continued to
eliminate its positions in CDS contracts.
Figure 5 illustrates several dimensions along which AIGFP has reduced
its size:
* First, since September 2008, AIGFP has closed out more of its
outstanding trade positions, which refers to the number of AIGFP's
outstanding long and short derivative contracts. At September 30,
2008, it had 44,000 positions, and at December 31, 2009, the number
had declined to 16,100, down from 19,200 at the end of the previous
quarter.
* Second, because of the positions that have been closed out, the
gross notional value of derivatives positions outstanding--which is a
measure of the size of AIGFP's inventory of derivatives outstanding--
was reduced to $900 billion in December 2009, about half of the value
15 months earlier and $300 billion less than in the previous quarter.
* Third, the reduction in positions also has resulted in a marked
decrease in the number of AIGFP's businesses or risk books. In its
switch from a strategy of growth and profit maximization to risk
mitigation and unwinding, AIGFP reorganized its business into 22
separate risk books determined in part by the type of risk, which
falls into the following five groupings: (1) credit books, (2)
investment securities and liabilities books, (3) capital markets
books, (4) principal guaranty products, and (5) private equity and
strategic investment books. Initially, AIGFP focused on closing out
its riskiest books and, according to AIGFP, this goal has been
substantially accomplished. The number of books decreased from 22 to
15 from September 2008 to the end of the second quarter of 2009 and
had not changed as of December 2009.
* Finally, since September 2008, the number of AIGFP employees had
dropped by almost half to 237 as of the end of 2009. Staff may leave
for several reasons, such as the sale of businesses, closing offices,
or employee resignation, but the trend towards fewer staff is clear,
and together with the above indicators, the evidence shows that AIGFP
was much smaller at the end of 2009 than it was 15 months earlier.
Figure 5: Status of the Winding Down of AIG's Financial Products
Corporation, Quarterly from September 30, 2008, through December 31,
2009:
[Refer to PDF for image: illustrated table]
Approximate number of outstanding trade positions:
9/30/08: 44,000;
12/31/08: 35,000;
3/31/09: 28,000;
6/30/09: 22,500;
9/30/09: 19,200;
12/31/09: 16,100.
Gross notional of long and short derivatives positions outstanding
(dollars in trillions):
9/30/08: $1.8;
12/31/08: $1.6;
3/31/09: $1.5;
6/30/09: $1.3;
9/30/09: $1.2;
12/31/09: $0.9.
Number of businesses (risk books):
9/30/08: 22;
12/31/08: 21;
3/31/09: 17;
6/30/09: 15;
9/30/09: 15;
12/31/09: 15.
Number of employees:
9/30/08: 428;
12/31/08: 375;
3/31/09: 362;
6/30/09: 319;
9/30/09: 257;
12/31/09: 237.
Source: Testimony by Mr. Edward M. Liddy, Chairman and Chief Executive
Officer, AIG, before the House Financial Services Subcommittee on
Capital Markets, Insurance, and Government Sponsored Enterprises,
March 18, 2009; AIG Restructuring Update, May 7, 2009; and AIG.
Note: Due to Financial Accounting Standard 161, AIGFP changed its
methodology for computing the gross notional for March 2009 leading to
a slight increase of previously reported values. September and
December notionals were estimated and restated numbers were 2.0 and
1.8, respectively. The March number was 1.5.
[End of figure]
In September 2009 we reported that AIGFP officials believed that most
of the unwinding could be completed by the end of 2009. In February
2010, Federal Reserve and Treasury officials confirmed that AIGFP is
on track to close out its riskiest positions and that AIGPF will no
longer be in business by the end of 2010, although the company's
positions may not be entirely unwound by the end of the year.
According to these officials, positions that cannot practicably be
exited by year-end and trade positions for hedging AIG and subsidiary
debt (that are currently managed by AIGFP) will likely be managed
either centrally within AIG, by other AIG business units, or by third
parties. However, AIG noted that the winding down of AIGFP and its
portfolios remains linked to AIG's credit ratings and, as mentioned
earlier, these efforts could be adversely affected if AIG's credit
ratings were downgraded.
AIGFP Continues to Make Progress in Unwinding Its Investment Grade,
Super Senior Credit Default Swaps Portfolio:
Our indicators suggest that AIGFP continues to make progress in
unwinding its portfolio of credit default swaps written on investment
grade CDOs (those having a rating of BBB or higher from rating
agencies). This super senior CDS portfolio was written on the super
senior tranche of CDOs and had a net notional amount of approximately
$375 billion in the third quarter of 2008.[Footnote 32] The notional
amount denotes the size of the portfolio on which AIGFP wrote credit
protection. This is the maximum dollar-level exposure for the
portfolio taking into account offsetting positions, and it measures an
underlying quantity upon which payment obligations are computed. A
decrease in the net notional amount could indicate progress in
unwinding AIGFP's obligations. To measure this progress, we analyzed
the net notional amounts of AIGFP's super senior CDS portfolio, the
fair value of AIGFP's derivative liability, and the unrealized market
valuation loss or gain. The fair value of its derivative liability
represents the fair market valuation of AIGFP's liabilities in each
asset portfolio. The unrealized market valuation loss (or gain) tracks
the increase (or decrease) in this valuation from quarter to quarter.
As with the overall portfolio, a decrease in the net notional amount
could indicate progress in unwinding AIGFP's obligations. A decrease
in the fair value of derivative liability could result in a decrease
in the cost to AIGFP to transfer the respective derivatives to other
counterparties in any effort to reduce its liabilities (i.e., the risk
associated with the liabilities is viewed more favorably in the
marketplace and reflects increased willingness to hold the
liabilities). Therefore, such a decrease would be accompanied by
comparable unrealized market valuation gains.
The indicators suggest that AIGFP is in the process of liquidating its
CDS portfolio. The net notional amount of the portfolio and the fair
value of derivative liability are both decreasing, and the portfolio
has experienced modest unrealized gains as market conditions have
improved. This progress is evident across several of AIGFP's risk
books (see figure 6):
* AIGFP's regulatory capital CDS book: The regulatory capital book
represented derivatives written for European banks that allowed them
to reduce the amount of capital they needed to set aside to cover
potential losses on certain asset portfolios of residential mortgages
and corporate loans by buying protection against losses on underlying
assets.[Footnote 33] The net notional amount of this book dropped from
about $250 billion in the fall of 2008 to about $150 billion in the
fourth quarter of 2009, and the fair value of the liabilities fell
over the same period from $397 million to negative $116 million.
Though these CDS contracts continue to have a high net notional value
relative to the other types of products, AIGFP continues to believe
that these contracts will expire or be called by counterparties with
little to no cost to AIG. AIGFP does not plan to sell these contracts
but plans to let them expire because management believes that trying
to sell them would not be cost effective.[Footnote 34] This book also
has experienced unrealized market gains in the last three quarters of
2009.
* AIGFP's CDS on multi-sector CDO book: These CDOs represent the CDS
portfolio that, according to Federal Reserve officials, is a synthetic
long credit position and written on CDO transactions that generally
had underlying collateral of residential mortgage-backed securities,
commercial mortgage-backed securities, and CDO tranche securities.
There was a large drop in the net notional and fair values of the
multi-sector CDOs from the third quarter to the fourth quarter of
2008. The decrease largely resulted from federal assistance provided
through the purchase of the underlying assets in this category by
Maiden Lane III and subsequent termination of the related CDS. In the
fourth quarter of 2009, the net notional amount stood at about $7.9
billion and the fair value at $4.4 billion, both less than 15 percent
of their values in the third quarter of 2008. Also in the fourth
quarter of 2009, the book has seen unrealized gains for the second
time in a year.
* Corporate collateralized loan obligations and mezzanine tranches
books: This portfolio consists of CDS transactions primarily written
on portfolios of senior unsecured loans and mezzanine tranches, a
portfolio of CDS transactions written on obligations that were rated
less than investment grade (BBB or higher) at origination. AIGFP has
also shown progress in reducing the CDS portfolio related to its
corporate collateralized loan obligation portfolio. Unlike the
previous two risk books, the corporate collateralized loan obligation
book has had no unrealized market losses over the last year. The
mezzanine tranche book had unrealized gains in the first three
quarters of 2009 but a loss in the fourth quarter of 2009.
Figure 6: AIGFP: Net Notional Amount, Fair Value of Derivative
Liability, and Unrealized Market Valuation Losses and Gains for
AIGFP's Super Senior (rated BBB or better) Credit Default Swap
Portfolio, Third Quarter of 2008 through Fourth Quarter of 2009:
[Refer to PDF for image: 3 vertical bar graphs]
Net notional amount (Dollars in billions):
Regulatory capital[A], 2008 Q3: $249.95;
Regulatory capital[A], 2008 Q4: $234.45;
Regulatory capital[A], 2009 Q1: $192.55;
Regulatory capital[A], 2009 Q2: $177.47;
Regulatory capital[A], 2009 Q3: $171.70;
Regulatory capital[A], 2009 Q4: $150.05;
Multi-sector collateralized debt obligations[B], 2008 Q3: $71.64;
Multi-sector collateralized debt obligations[B], 2008 Q4: $12.56;
Multi-sector collateralized debt obligations[B], 2009 Q1: $11.98;
Multi-sector collateralized debt obligations[B], 2009 Q2: $9.15;
Multi-sector collateralized debt obligations[B], 2009 Q3: $8.17;
Multi-sector collateralized debt obligations[B], 2009 Q4: $7.93;
Corporate collateralized loan obligations[C], 2008 Q3: $50.68;
Corporate collateralized loan obligations[C], 2008 Q4: $50.55;
Corporate collateralized loan obligations[C], 2009 Q1: $49.60;
Corporate collateralized loan obligations[C], 2009 Q2: $40.94;
Corporate collateralized loan obligations[C], 2009 Q3: $22.58;
Corporate collateralized loan obligations[C], 2009 Q4: $22.08;
Mezzanine tranches[D], 2008 Q2: $5.01;
Mezzanine tranches[D], 2008 Q4: $4.70;
Mezzanine tranches[D], 2009 Q1: $4.22;
Mezzanine tranches[D], 2009 Q2: $3.50;
Mezzanine tranches[D], 2009 Q3: $3.50;
Mezzanine tranches[D], 2009 Q4: $3.48.
Fair value of derivative liability (Dollars in billions):
Regulatory capital[A], 2008 Q3: $0.40;
Regulatory capital[A], 2008 Q4: $0.38;
Regulatory capital[A], 2009 Q1: $0.39;
Regulatory capital[A], 2009 Q2: $0.05;
Regulatory capital[A], 2009 Q3: $0.03;
Regulatory capital[A], 2009 Q4: -$0.12;
Multi-sector collateralized debt obligations[B], 2008 Q3: $30.21;
Multi-sector collateralized debt obligations[B], 2008 Q4: $5.91;
Multi-sector collateralized debt obligations[B], 2009 Q1: $6.72;
Multi-sector collateralized debt obligations[B], 2009 Q2: $5.27;
Multi-sector collateralized debt obligations[B], 2009 Q3: $4.51;
Multi-sector collateralized debt obligations[B], 2009 Q4: $4.42;
Corporate collateralized loan obligations[C], 2008 Q3: $1.53;
Corporate collateralized loan obligations[C], 2008 Q4: $2.55;
Corporate collateralized loan obligations[C], 2009 Q1: $2.20;
Corporate collateralized loan obligations[C], 2009 Q2: $1.10;
Corporate collateralized loan obligations[C], 2009 Q3: $0.46;
Corporate collateralized loan obligations[C], 2009 Q4: $0.31;
Mezzanine tranches[D], 2008 Q2: $0.15;
Mezzanine tranches[D], 2008 Q4: $0.20;
Mezzanine tranches[D], 2009 Q1: $0.18;
Mezzanine tranches[D], 2009 Q2: $0.08;
Mezzanine tranches[D], 2009 Q3: $0.03;
Mezzanine tranches[D], 2009 Q4: $0.14.
Unrealized market valuation gain/loss (Dollars in millions):
Regulatory capital[A], 2008 Q3: -$272;
Regulatory capital[A], 2008 Q4: -$18;
Regulatory capital[A], 2009 Q1: -$14;
Regulatory capital[A], 2009 Q2: $23;
Regulatory capital[A], 2009 Q3: $16;
Regulatory capital[A], 2009 Q4: $147;
Multi-sector collateralized debt obligations[B], 2008 Q3: -$6,262;
Multi-sector collateralized debt obligations[B], 2008 Q4: -$5,832;
Multi-sector collateralized debt obligations[B], 2009 Q1: -$809;
Multi-sector collateralized debt obligations[B], 2009 Q2: -$284;
Multi-sector collateralized debt obligations[B], 2009 Q3: $332;
Multi-sector collateralized debt obligations[B], 2009 Q4: $92;
Corporate collateralized loan obligations[C], 2008 Q3: -$538;
Corporate collateralized loan obligations[C], 2008 Q4: $1,020;
Corporate collateralized loan obligations[C], 2009 Q1: $358;
Corporate collateralized loan obligations[C], 2009 Q2: $792;
Corporate collateralized loan obligations[C], 2009 Q3: $566;
Corporate collateralized loan obligations[C], 2009 Q4: $147;
Mezzanine tranches[D], 2008 Q2: $18;
Mezzanine tranches[D], 2008 Q4: $42;
Mezzanine tranches[D], 2009 Q1: $13;
Mezzanine tranches[D], 2009 Q2: $105;
Mezzanine tranches[D], 2009 Q3: $45;
Mezzanine tranches[D], 2009 Q4: -$111.
Source: GAO analysis of AIG SEC filings.
Note: The data for unrealized market valuation gains or losses
correspond to the indicated 3-month quarter. The unrealized market
valuation loss (gain) tracks the increase (decrease) in this valuation
from quarter to quarter. Also, clarifications have been made to the
presentation of this data in the prior report (GAO-09-975) in which
some losses were shown without brackets and gains with brackets.
[A] Regulatory capital represents the CDS portfolio sold to provide
regulatory capital relief to primarily European financial
institutions. In exchange for a periodic fee, these institutions
received credit protection for a portfolio of diversified loans, thus
reducing minimum capital requirements set by their regulators.
[B] Multi-sector collateralized debt obligations (CDOs) represent the
CDS portfolio sold primarily for arbitrage purposes and written on CDO
transactions that generally had underlying collateral of residential
mortgage-backed securities, commercial mortgage-backed securities, and
CDO tranche securities.
[C] The corporate collateralized loan obligations portfolio consists
of CDS transactions primarily written on portfolios of senior
unsecured loans.
[D] A tranche is a piece or portion of a structured deal, or one of
several related securities that are issued together but offer
different risk-reward characteristics. The mezzanine tranche is
subordinated to the senior tranche, but is senior to the equity
tranche. The senior tranche is the least risky tranche whereas the
equity tranche is the first loss and riskiest tranche.
[End of figure]
AIG Has Made Less Progress in Reducing the Noninvestment Grade Multi-
Sector CDO Portfolio than the Total Portfolio, with Little Change in
the Value of the Underlying Assets Since the First Quarter 2009:
Our indicator uses the gross notional amount to track the size of
AIGFP's multi-sector CDO portfolio and its composition with respect to
the credit quality of the underlying assets. Our indicator shows that
the gross notional amount of AIGFP's multi-sector CDO portfolio was
reduced significantly in the fourth quarter of 2008 with the purchase
of CDOs by Maiden Lane III and that since then AIG has continued to
reduce the gross notional amount. However, as the portfolio has been
unwinding, its underlying credit rating has declined but the longer
term trend is not yet clear. Tracking the credit rating of the
underlying assets (collateral) of the remaining holdings in AIGFP's
multi-sector CDO portfolio is an important indicator of whether AIG
might be required to post additional collateral in the future. If the
credit rating of these assets declines, AIG may be required to post
additional collateral. According to AIG, in most cases the underlying
assets for AIGFP's multi-sector CDS portfolio at inception were rated
at least BBB (by S&P) or Baa (by Moody's). As AIGFP unwinds, if
considerable portions of underlying assets of the remaining holdings
in the multi-sector CDO portfolio are downgraded below BBB ratings,
counterparties could require AIG to post additional collateral, which
would increase demands on AIG's operating cash flows and liquid assets
and slow the completion of the unwinding of AIGFP.
As shown in figure 7, the gross notional amount of AIGFP's multi-
sector CDOs and CDOs that had underlying assets rated less than BBB
decreased significantly. However, while the notional amount of the CDO
portfolio has continued to decrease, the amount with lower rated
underlying assets has increased slightly. The total gross notional
amount dropped from $108.5 billion to $25 billion in the fourth
quarter of 2008, primarily due to Maiden Lane III purchasing the CDOs
underlying AIGFP's CDS contracts. At the end of the fourth quarter of
2009, the overall notional amount of the CDOs had been reduced to
about $17.9 billion, illustrating that AIGFP has continued to unwind
this portfolio. The gross notional amount with underlying assets rated
less than BBB also decreased from $26.9 billion at the end of third
quarter of 2008 to $8 billion by the end of the fourth quarter of 2008
but has increased steadily since that time from about $10 billion to
just more than $11 billion by the end of 2009. Consequently, of the
remaining portfolio, the percentage with underlying assets rated less
than BBB has grown to 61.8 percent of the total portfolio as of the
end of the fourth quarter of 2009 as the notional amount of the multi-
sector CDOs has continued to be reduced. This change in portfolio
composition is largely because of the successful unwinding of
portfolio holdings that have underlying assets rated BBB or above even
though credit rating of the remaining portfolio has deteriorated since
the end of 2008.
Figure 7: AIGFP: Total Gross Notional Amounts of Multi-Sector
Collateralized Debt Obligations Compared to Portions of Portfolio That
Has Underlying Assets that are Rated Less Than BBB, Third Quarter of
2008 through Fourth Quarter of 2009 (Dollars in millions):
[Refer to PDF for image: combination line and stacked vertical bar
graph]
2008, Q3;
Total multi-sector CDOs (including investment grade CDOs): $108,452;
Subprime residential mortgage-backed securities: $17,710;
Alt-A residential mortgage-backed securities: $3,329;
CDOs: $4,414;
Prime residential mortgage-backed securities: $716;
Commercial mortgage-backed securities: $683;
All other: $87.
2008, Q4;
Total multi-sector CDOs (including investment grade CDOs): $25,036;
Subprime residential mortgage-backed securities: $14,910;
Alt-A residential mortgage-backed securities: $651;
CDOs: $1,547;
Prime residential mortgage-backed securities: $128;
Commercial mortgage-backed securities: $666;
All other: $100.
2009, Q1;
Total multi-sector CDOs (including investment grade CDOs): $24,008;
Subprime residential mortgage-backed securities: $14,398;
Alt-A residential mortgage-backed securities: $2,687;
CDOs: $1,798;
Prime residential mortgage-backed securities: $142;
Commercial mortgage-backed securities: $1,001;
All other: $144.
2009, Q2;
Total multi-sector CDOs (including investment grade CDOs): $19,813;
Subprime residential mortgage-backed securities: $13,753;
Alt-A residential mortgage-backed securities: $2,661;
CDOs: $1,383;
Prime residential mortgage-backed securities: $1,183;
Commercial mortgage-backed securities: $1,224;
All other: $182.
2009, Q3;
Total multi-sector CDOs (including investment grade CDOs): $18,558;
Subprime residential mortgage-backed securities: $13,504;
Alt-A residential mortgage-backed securities: $2,695;
CDOs: $1,331;
Prime residential mortgage-backed securities: $1,731;
Commercial mortgage-backed securities: $1,409;
All other: $219.
2009, Q4;
Total multi-sector CDOs (including investment grade CDOs): $17,909;
Subprime residential mortgage-backed securities: $11,687;
Alt-A residential mortgage-backed securities: $2,677;
CDOs: $3,413;
Prime residential mortgage-backed securities: $1,793;
Commercial mortgage-backed securities: $1,284;
All other: $217.
Source: GAO analysis of AIG SEC filings.
[End of figure]
AIG's Insurance Operations Continue to Show Signs of Recovery, but
Federal Aid to Life Insurance Companies Has Been Critical to Their
Progress:
Given the importance of AIG's insurance operations to its long-term
financial health, we analyzed AIG's insurance operations by tracking
several indicators of both its property/casualty and life insurance
companies. We tracked the annual regulatory capital of AIG's insurance
subsidiaries. The most recent data show that in 2008 and 2009, AIG's
insurers maintained capital above regulatory minimums, but the recent
federal assistance was critical to the health of domestic life and
retirement companies. In particular, for AIG's life and retirement
services, our indicators of additions to and withdrawals from
policyholder contracts show that deposits are growing, and our
analysis of their revenues shows that for the year 2009 operating
income from these companies increased slightly, although dipping
somewhat in the third quarter. We analyzed AIG's property/casualty
companies by tracking their insurance premiums written, and the trends
also show slight increases. While the insurance companies generally
showed some growth, our last set of insurance indicators shows that in
the third quarter of 2009 these companies' costs of doing business
also increased.
AIG's Insurers Maintained Capital Levels Higher Than the Minimum Set
By NAIC, but the Domestic Life and Retirement Companies Needed Federal
Assistance to Maintain Capital Ratio:
The most recent data show that capital maintained by AIG's insurers
has exceeded NAIC minimums, and several of AIG's life and retirement
companies have benefited from federal assistance. This indicator of
AIG's capital--which will be updated annually as newer NAIC data
become available--is intended to monitor the capital of AIG insurers
that, if depleted by losses, could require additional capital
contributions through federal assistance (e.g., by AIG drawing on
FRBNY's Revolving Credit Facility or Treasury's Equity Facility). NAIC
requires that insurance companies hold a minimum amount of capital,
known as risk-based capital. According to NAIC, "a company reporting
total adjusted capital of 200 percent or more of minimum risk-based
capital (RBC) is a 'no action' level company; nothing needs to be done
by regulators."[Footnote 35] On the other hand, NAIC states that
"total adjusted capital of less than 70 percent triggers a mandatory
control that requires the regulator to take steps to place the insurer
under control." Moreover, a company's credit ratings are influenced
by, among other things, its ratio of total adjusted capital to its
authorized control level risk-based capital.[Footnote 36] Adverse
movements in the primary components of capital and shareholders'
equity may indicate weak performance by the company.
AIG's property/casualty insurers and domestic life insurance and
retirement services companies have maintained levels of capital higher
than the minimum requirement set by NAIC, as shown in figure 8. The
property/casualty companies and domestic life companies had adjusted
capital of at least 400 percent and 600 percent, respectively, of risk-
based capital at year end 2007, 2008, and 2009. However, the domestic
life companies were only able to maintain their capital ratios with
federal assistance. Specifically, according to Federal Reserve
officials, Maiden Lane II's direct purchase of $39.3 billion of RMBS
at fair value helped these companies reduce the risks that were
created by their securities lending activities in 2008. Further, AIG
used funds from the FRBNY Revolving Credit Facility to contribute
capital to these companies, primarily to make up for the losses in the
securities lending portfolio.[Footnote 37] In contrast, AIG's domestic
property/casualty companies have maintained levels of adjusted capital
in excess of requirements with virtually no direct federal assistance.
Because AIG companies report adjusted capital no more than once
annually in their year-end filings with NAIC, this indicator can be
updated only once a year after the calendar year-end data become
available. We determined that a proxy for quarterly tracking of the
adjusted capital is the capital and surplus that AIG reports in its
quarterly filings with NAIC because the same activities would affect
both measures. More information about this indicator and the results
for the first 9 months of 2009 is included in appendix V.
Figure 8: AIG Insurance Subsidiaries: Regulatory Capital at December
31, 2007; December 31, 2008; and December 31, 2009, and Primary
Activities That Affected Regulatory Capital During 2009 (dollars in
millions):
[Refer to PDF for image: illustrated table]
AIG‘s largest domestic property/casualty companies:
Adjusted capital, 12/31/08: $24,092;
Adjusted capital, 12/31/09: $25,295;
Authorized control level risk-based capital, 12/31/08: $5,966;
Authorized control level risk-based capital, 12/31/09: $5,464;
Primary activities that affected capital of AIG's largest domestic PC
and life insurance retirement services companies, 2009:
Net income or loss: $2,375;
Change in net realized cap gains and losses: -$1,348;
Change in net deferred income tax: $646;
Change in nonadmitted assets: -$1,010;
Aggregate write-ins for gains and losses in surplus: $459;
Investor capital contributions: 0;
Stockholder dividends[B]: 0.
Adjusted capital, 12/31/07: $26,598;
Adjusted capital, 12/31/08: $24,092;
Authorized control level risk-based capital, 12/31/07: $6,065;
Authorized control level risk-based capital, 12/31/08: $5,966;
Primary activities that affected capital of AIG's largest domestic PC
and life insurance retirement services companies, 2008:
Net income or loss: $2,327;
Change in net realized cap gains and losses: -$3,019;
Change in net deferred income tax: [Empty];
Change in nonadmitted assets: [Empty];
Aggregate write-ins for gains and losses in surplus: [Empty];
Investor capital contributions: $3,083;
Stockholder dividends[B]: -$4,623.
AIG‘s largest domestic life insurance/retirement services companies:
Adjusted capital, 12/31/08: $15,653;
Adjusted capital, 12/31/09: $16,537;
Authorized control level risk-based capital, 12/31/08: $2,474;
Authorized control level risk-based capital, 12/31/09: $1,951;
Primary activities that affected capital of AIG's largest domestic PC
and life insurance retirement services companies, 2009:
Net income or loss: $396;
Change in net realized cap gains and losses: -$1,296;
Change in net deferred income tax: -$7,091;
Change in nonadmitted assets: $6,770;
Aggregate write-ins for gains and losses in surplus: $1,439;
Investor capital contributions: 0;
Stockholder dividends[B]: 0.
Adjusted capital, 12/31/07: $20,040;
Adjusted capital, 12/31/08: $15,653;
Authorized control level risk-based capital, 12/31/07: $2,901;
Authorized control level risk-based capital, 12/31/08: $2,474;
Primary activities that affected capital of AIG's largest domestic PC
and life insurance retirement services companies, 2008:
Net income or loss: -$17,602;
Change in net realized cap gains and losses: -$24,214;
Change in net deferred income tax: N/A[A];
Change in nonadmitted assets: N/A[A];
Aggregate write-ins for gains and losses in surplus: N/A[A];
Investor capital contributions: $23,116;
Stockholder dividends[B]: -$52.
Source: AIG and GAO analysis of AIG financial statements filed with
NAIC.
[A] NAIC financial statements show unrealized capital losses
separately from net income.
[B] Includes dividends paid within AIG.
[End of figure]
Business at AIG's Life Insurance and Retirement Services Companies
Shows Deposits Improving in Relation to Withdrawals and Slight
Increases in Operating Income:
Deposits at AIG's life and retirement service companies have been
improving compared to withdrawals, and their operating income has
increased. We have identified two indicators to monitor AIG's life
insurance and retirement services companies. The first indicator
tracks the additions to AIG life and retirement policyholder contract
deposits and is intended to monitor for potential redemption "runs" by
AIG annuitants and policyholders. Additions to policyholder contract
deposits are amounts customers have paid to AIG to purchase a policy
or contract. Withdrawals represent redemptions or cancellations of
these instruments. Sharp increases in contract withdrawals or
reductions in contract deposits could indicate sharply increased
redemptions due to customer anxiety about AIG in particular or
insurance companies more broadly. Sharp increases in redemptions could
strain a company's liquidity position. The second indicator tracks the
capital gains and operating income of these companies and is intended
to monitor the profitability of AIG's life insurance and retirement
services companies. Operating income before capital gains or losses
provides an indication of the profitability of the company's
underwriting operations, while capital gains and losses relate to
investment activities and not directly to insurance underwriting.
Increases in operating income or reductions in net realized capital
losses could indicate improvements in the operations of AIG's life and
retirement services companies, including improvement in market
conditions, lower other-than-temporary impairments, and dissipating
effects of lower credit ratings and negative publicity related to the
AIG brand since September 2008.
As shown in figure 9, in the fourth quarter of 2008 AIG life and
retirement services saw a sharp decline in additions to policyholders'
contract deposits and a large spike in withdrawals, resulting in a gap
of more than $26 billion. Without more granular data, it is unclear
whether the withdrawals were driven by concerns about the condition of
AIG or by the overall economic downturn, which may have resulted in
policyholders cashing in policies for financial reasons. The excess of
withdrawals over deposits adversely impacted the liquidity position of
certain entities within this segment of AIG in late 2008. Conditions
started to improve in the first quarter of 2009, with a 77 percent
reduction in the gap between additions and withdrawals to about $6
billion, and that improvement continued through the third and fourth
quarters of 2009. The third quarter of 2009 was the first time since
the second quarter of 2008 that additions to AIG life and retirement
policyholder contract deposits have exceeded withdrawals, by just more
than $700 million. In the fourth quarter of 2009, withdrawals were $27
million more than deposits.
Figure 9: AIG Life and Retirement Services: Additions to and
Withdrawals from Policyholder Contract Deposits Including Annuities,
Guaranteed Investment Contracts, and Life Products, First Quarter of
2007 through Fourth Quarter of 2009 (Dollars in millions):
[Refer to PDF for image: vertical bar graph]
2007, Q1:
Additions to policyholder contract deposits: $14,001;
Withdrawals from policyholder contract deposits: $15,309.
2007, Q2:
Additions to policyholder contract deposits: $14,768;
Withdrawals from policyholder contract deposits: $14,070.
2007, Q3:
Additions to policyholder contract deposits: $16,997;
Withdrawals from policyholder contract deposits: $14,195.
2007, Q4:
Additions to policyholder contract deposits: $19,063;
Withdrawals from policyholder contract deposits: $15,101.
2008, Q1:
Additions to policyholder contract deposits: $16,439;
Withdrawals from policyholder contract deposits: $15,600.
2008, Q2:
Additions to policyholder contract deposits: $16,883;
Withdrawals from policyholder contract deposits: $12,326.
2008, Q3:
Additions to policyholder contract deposits: $13,124;
Withdrawals from policyholder contract deposits: $14,455.
2008, Q4:
Additions to policyholder contract deposits: $850;
Withdrawals from policyholder contract deposits: $27,364.
2009, Q1:
Additions to policyholder contract deposits: $6,988;
Withdrawals from policyholder contract deposits: $12,968.
2009, Q2:
Additions to policyholder contract deposits: $10,546;
Withdrawals from policyholder contract deposits: $13,401.
2009, Q3:
Additions to policyholder contract deposits: $8,601;
Withdrawals from policyholder contract deposits: $7,879.
20089, Q4:
Additions to policyholder contract deposits: $8,189;
Withdrawals from policyholder contract deposits: $8,216.
Source: GAO analysis of AIG SEC filings.
[End of figure]
A closer look at the revenues and expenses of these companies shows
that AIG's large operating losses in 2008 were not the result of their
underwriting activities but instead were primarily caused by losses
from their investment activities. For example, in the fourth quarter
of 2008, net realized capital losses of AIG's domestic life and
retirement services business accounted for $14.4 billion of its $15.2
billion in operating losses. Similarly, in that same quarter, AIG's
foreign life insurance companies had net realized capital losses of
$4.6 billion, which more than offset its operating income of $1.2
billion, resulting in an operating loss of $3.4 billion.[Footnote 38]
For the full year 2009, net realized capital losses were much less
than they were for 2008--$3.5 billion for the domestic companies and
$1.3 billion for foreign companies. Thus, the domestic companies
reported a smaller operating loss of $670 million and the foreign
companies reported operating income of about $1.3 billion (see
appendix VI).
AIG's Property/Casualty Companies Premiums Written Appear to Be
Stabilizing:
For the property/casualty commercial companies, dollar volumes of
premiums written trended downward throughout 2007 and 2008, but
beginning with the first quarter in 2009, they appeared to be
stabilizing. To monitor trends in business volume in a way that
includes the impact of AIG's financial troubles on its ongoing ability
to retain existing business and attract new business activity of AIG's
property/casualty companies, we developed the following indicator that
tracks the trends in quarterly premiums written by these companies
since the beginning of 2007. "Premiums written" is the dollar volume
of business in a particular period. This indicator is important
because AIG's property/casualty insurance businesses are expected to
remain among AIG's core businesses following its restructuring. Trends
in premiums written can also provide some indication of the success of
AIG's efforts to maintain business volume. For example, to retain and
attract business, AIG formed Chartis, Inc. from several of AIG's
property/casualty companies and rebranded (renamed) several other AIG
companies.[Footnote 39] However, the volume of premiums written
indicator is limited because it only measures a business's dollar
volume and does not break out dollar volume by new and existing
business. Therefore, the indicator cannot capture unit volume or the
mix of products that comprise the volume. Also, the indicator tracks
only AIG's business and does not compare AIG's business with that of
its peers in the property/casualty insurance industry. Such a
comparison would be important because property/casualty insurers as a
group are subject to market pressures that drive premium prices up and
down according to an industry-wide cycle characterized by hardening
and softening markets. For example, according to a fourth quarter 2009
survey of the Council of Independent Agents and Brokers, commercial
property/casualty premium rates were falling in the fourth quarter
2009 at about the same rate as in the third quarter.[Footnote 40]
According to the survey, low demand continued to put pressure on the
rates.
As illustrated in figure 10, the dollar volumes of premiums written by
AIG's property/casualty commercial companies was trending down in 2007
and 2008 and stabilized somewhat in 2009. In the third quarter of
2009, these companies' commercial insurance premiums written exceeded
$5 billion for the first time since the third quarter of 2008 and were
higher than in the second quarter of 2009, a pattern not found when
comparing the third and second quarters of 2008 and 2007. However, by
the end of the fourth quarter of 2009 commercial premiums were just
above the level earned in the first quarter of 2009. Foreign general
insurance premiums written were also higher in the third quarter of
2009 than the second quarter, which did not occur in 2008. However, by
the end of the fourth quarter of 2009 foreign general insurance
premiums written had reached their lowest level since the fourth
quarter of 2008. AIG officials had noted that in the fourth quarter of
2008 and the first quarter of 2009, general insurance net premiums
written were also adversely affected by negative publicity surrounding
AIG's financial challenges in other areas. When commenting on the
fourth quarter 2009 financial results, AIG's president and chief
executive officer noted that AIG expects continued volatility in first
quarter of 2010, partly due to restructuring activities.
Figure 10: AIG General Insurance: Premiums Written by Division, First
Quarter of 2007 through Fourth Quarter of 2009 (Dollars in millions):
[Refer to PDF for image: multiple line graph]
2007 Q1:
Commercial insurance: $5,971;
Foreign general: $3,618;
Transatlantic Personal lines: $1,229;
Transatlantic Personal lines: $984;
Mortgage guaranty: $266.
2007 Q2:
Commercial insurance: $6,449;
Foreign general: $3,242;
Transatlantic Personal lines: $1,203;
Transatlantic Personal lines: $983;
Mortgage guaranty: $272.
2007 Q3:
Commercial insurance: $5,986;
Foreign general: $3,270;
Transatlantic Personal lines: $1,253;
Transatlantic Personal lines: $985;
Mortgage guaranty: $303.
2007 Q4:
Commercial insurance: $5,650;
Foreign general: $2,921;
Transatlantic Personal lines: $1,123;
Transatlantic Personal lines: $1,001;
Mortgage guaranty: $302.
2008 Q1:
Commercial insurance: $5,124;
Foreign general: $4,339;
Transatlantic Personal lines: $1,288;
Transatlantic Personal lines: $1,036;
Mortgage guaranty: $304.
2008 Q2:
Commercial insurance: $6,079;
Foreign general: $3,726;
Transatlantic Personal lines: $1,230;
Transatlantic Personal lines: $988;
Mortgage guaranty: $288.
2008 Q3:
Commercial insurance: $5,630;
Foreign general: $3,647;
Transatlantic Personal lines: $1,108;
Transatlantic Personal lines: $1,094;
Mortgage guaranty: $280.
2008 Q4:
Commercial insurance: $4,410;
Foreign general: $2,678;
Transatlantic Personal lines: $888;
Transatlantic Personal lines: $990;
Mortgage guaranty: $251.
2009 Q1:
Commercial insurance: $4,184;
Foreign general: $3,552;
Transatlantic Personal lines: $924;
Transatlantic Personal lines: $1,047;
Mortgage guaranty: $269.
2009 Q2:
Commercial insurance: $4,968;
Foreign general: $2,954.
2009 Q3:
Commercial insurance: $5,002;
Foreign general: $3,074.
2009 Q4:
Commercial insurance: $4,219;
Foreign general: $2,711.
Source: GAO analysis of AIG quarterly financial supplements.
Note: AIG intends to buy United Guaranty Corporation, AIG's mortgage
guaranty operations, from the recently established AIU Holdings
(Chartis, Inc.). Common shares of Transatlantic were sold during the
second quarter of 2009, reducing the aggregate ownership interest in
Transatlantic to 14 percent, and additional shares were sold in the
first quarter of 2010, leaving AIG owning 1 percent of the shares
outstanding, which AIG also expects to sell. The personal lines
companies were sold to a third party on July 1, 2009. Commercial
insurance will retain the private client business historically written
by the personal lines segment.
[End of figure]
The health of AIG's insurance companies can also be viewed from the
perspective of their operating profitability. For property/casualty
insurers, profitability can be measured using the combined ratio,
which is the sum of the loss ratio and the expense ratio. The loss
ratio measures claims costs plus claims adjustment expenses relative
to net earned premiums. A rising loss ratio indicates rising claims
costs relative to the premiums earned, which may be due to increased
claims losses, decreased premiums earned, or a combination of the two.
For example, a loss ratio of 77.3 percent indicates that 77.3 cents
out of every dollar in premiums earned are used for claims and claims-
related costs. The expense ratio measures the level of underwriting
administrative expenses relative to net premiums earned and is a
measure of underwriting efficiency. For example, an expense ratio of
22.4 percent indicates that 22.4 cents out of every dollar in premiums
earned are used for underwriting expenses.
The combined ratio is an overall measure of a property-casualty
insurer's underwriting profitability. Thus, a combined ratio of less
than 100 percent would indicate that an insurer's underwriting is
profitable and a ratio of more than 100 percent would reflect a loss.
AIG's combined ratios in both commercial and foreign general property-
casualty insurance businesses rose above 100 percent in the third
quarter of 2009 for the first time since the fourth quarter of 2008
and continued to rise in the fourth quarter of 2009, indicating that
claims and administrative costs were higher and rising faster than
premium earned and thus their insurance underwriting was not
profitable in these two most recent quarters (see appendix VII).
However, as discussed earlier, AIG's property/casualty insurance
segment was profitable in the third quarter of 2009 despite a combined
ratio above 100 percent because positive investment returns more than
offset underwriting losses.[Footnote 41] While our data cover only a 3-
year period, they suggest a pattern of loss and expense ratios rising
in the latter part of calendar years 2007, 2008, and 2009 for both
commercial and foreign general insurance. For commercial insurance the
combined ratio spiked in the fourth quarter of 2008, largely due to an
administrative charge (that also spiked the expense ratio) to
recognize permanent impairment of goodwill of previously acquired
businesses.[Footnote 42] The higher combined ratio was also partly due
to a higher loss ratio because of increased claims costs associated
with Hurricane Ike and other major catastrophes in 2008. The combined
ratio also rose in the fourth quarter of 2009, and this was largely
due to increased claims costs related to a reserve strengthening
charge. Ratios for foreign general insurance also were higher in the
first three quarters of 2009 than in the comparable quarters of 2008
and 2007. AIG officials said the foreign general loss ratio increased
during 2009 primarily because of higher claims generally related to
Directors and Officers insurance as well as professional liability
insurance (Errors and Omissions coverage) for financial institutions
at the time of the worldwide credit crisis, particularly in Europe.
They also said that the foreign general expense ratio increased
because AIG sold its Brazil operations, which resulted in decreased
net premiums earned in 2008, more competitive pricing in the insurance
markets in 2009, and higher levels of general operating expenses
primarily related to remediation/audit of general insurance (Chartis,
Inc.), pension costs, and post retirement liability costs.[Footnote 43]
While AIG Continues to Make Progress in Repaying Some of Its Federal
Assistance, the Government's Ability to Fully Recoup the Assistance
Will be Determined by AIG's Restructuring and Long-term Health:
We analyzed AIG's progress in repaying its federal assistance using
several indicators. We developed an analysis of the composition of the
federal assistance to show the amount of direct and indirect
assistance and the sources of that assistance. It shows that AIG is
continuing to repay its debt to the federal government, but much of
the recent progress reflects the several exchanges of debt that AIG
owed the FRBNY Revolving Credit Facility with various issues of
preferred equity. For example, we tracked the amount of assistance
available to AIG through the FRBNY Revolving Credit Facility and the
balance of the facility, and found that both were reduced in December
2009, largely due to a transaction in which the government received
$25 billion in preferred equity in the SPVs created to hold AIA and
ALICO equity in exchange for decreasing the balance in the Revolving
Credit Facility by an equal amount, as previously discussed. We also
tracked the Maiden Lane II and Maiden Lane III portfolios and found
that their values increased slightly in the fourth quarter of 2009
while the principal and interest owed to FRBNY continued to decline
throughout 2009. We also tracked AIG's book value (shareholders'
equity) and found that it has been increasing, but this occurred
because of the unprecedented steps taken by the Federal Reserve and
Treasury to assist AIG. In addition, we tracked AIG's divestiture of
businesses and found that in 2009 the company divested several of its
businesses, but that activity slowed significantly in the fourth
quarter of 2009.
While the Amount of Debt Owed to the Federal Government Has Continued
to Decline, the Amount of Preferred Equity Held by the Government Has
Increased:
AIG's debt to the federal government has been reduced, and a main
reason for this is the restructuring of the composition of government
assistance. This indicator identifies the various components of
federal assistance to AIG as of December 31, 2009, or the latest
available data. The U.S. government remains committed to making
available around $182 billion in assistance to AIG.[Footnote 44]
Changes in the amount and composition of the federal assistance may
provide insights about the overall condition of AIG and the extent of
its reliance on federal assistance.
Based on the information provided in table 3, as of December 31, 2009,
the government had authorized $182 billion in government assistance to
AIG. Although the government's current exposure of $129 billion is
less than the authorized amount, the exposure has increased by $8.4
billion since September 2009.[Footnote 45] As discussed earlier, the
federal government has provided various forms of assistance to AIG.
* First, in the form of debt owed by AIG to the government, the
government has loaned money to AIG directly through the FRBNY
Revolving Credit Facility. As of year-end 2009, $23.4 billion of
assistance was being provided directly to AIG via a secured loan
through the FRBNY Revolving Credit Facility.
* Second, in the form of equity shares owned by the government, the
government has a balance of $71.8 billion of AIG shares through a
combination of (1) Treasury's Series E noncumulative preferred stock,
(2) Treasury's Equity Capital Facility that is associated with the
fixed-rate Series F noncumulative perpetual preferred stock, and (3)
the preferred equity interest in the AIA and ALICO SPVs. This direct
government investment, which is now the primary form of federal
assistance to AIG, was the result of the November 2008 and March and
April 2009 restructurings, and most recently, the December 2009
transaction in which the Federal Reserve exchanged $25 billion of its
debt for $25 billion in preferred equity interest in AIA and ALICO
SPVs.[Footnote 46]
* Third, in the form of debt owed to the government on behalf of AIG,
the government has provided loans to Maiden Lane II and III--the SPVs
established by FRBNY--for the purpose of purchasing RMBS assets from
AIG's life insurance companies and AIGFP's CDS counterparties.
Currently, the government's exposure on those loans is $33.9 billion.
As a result of these restructurings, the government has increased its
preferred equity interest in AIG by acquiring preferred stock in
exchange for reducing a substantial portion of AIG's debt on the FRBNY
Revolving Credit Facility. Moreover, in February 2010 AIG said that it
was not going to pursue the life insurance securitization transaction--
originally AIG and FRBNY announced in March 2009, when the federal
assistance to AIG was restructured for a second time, that FRBNY would
loan SPVs up to $8.5 billion to acquire insurance policies of certain
AIG domestic life insurance subsidiaries. AIG had planned to use
proceeds from the sale of insurance policies to the SPV, which would
have repaid its FRBNY debt from the net cash flows they received from
the life insurance policies.
Table 3: Composition of U.S. Government Efforts to Assist AIG and the
Government's Approximate Remaining Exposures, as of December 31, 2009,
or latest available date as noted (Dollars in billions):
Direct AIG assistance:
Amount authorized:
Direct AIG assistance: AIG debt owed to government:
Direct AIG assistance: Government equity:
Other debt owed to government:
Indirect AIG assistance: Government equity:
Federal Reserve: Revolving Credit Facility;
Amount authorized: Federal Reserve: $35;
Direct AIG assistance: AIG debt owed to government: $23.435[A];
Direct AIG assistance: Government equity: N/A;
Indirect AIG assistance: Federal Reserve: N/A;
Indirect AIG assistance: Government equity: N/A;
Total government exposure: $23.435[A].
Federal Reserve: Maiden Lane II;
Amount authorized: Federal Reserve: $22.5;
Direct AIG assistance: AIG debt owed to government: N/A;
Direct AIG assistance: Government equity: N/A;
Indirect AIG assistance: Federal Reserve: $15.739[B];
Indirect AIG assistance: Government equity: N/A;
Total government exposure: $15.739.
Federal Reserve: Maiden Lane III;
Amount authorized: Federal Reserve: $30;
Direct AIG assistance: AIG debt owed to government: N/A;
Direct AIG assistance: Government equity: N/A;
Indirect AIG assistance: Federal Reserve: $18.159[B];
Indirect AIG assistance: Government equity: N/A;
Total government exposure: $18.159.
Federal Reserve: AIA and ALICO;
Amount authorized: Federal Reserve: $25;
Direct AIG assistance: AIG debt owed to government: N/A;
Direct AIG assistance: Government equity: $25[C];
Indirect AIG assistance: Federal Reserve: N/A;
Indirect AIG assistance: Government equity: N/A;
Total government exposure: $25.000.
Treasury: Series D and E;
Amount authorized: Federal Reserve: $40;
Direct AIG assistance: AIG debt owed to government: N/A;
Direct AIG assistance: Government equity: $41.605[D];
Indirect AIG assistance: Federal Reserve: N/A;
Indirect AIG assistance: Government equity: N/A;
Total government exposure: $41.605[D].
Treasury: Series F;
Amount authorized: Federal Reserve: $29.835;
Direct AIG assistance: AIG debt owed to government: N/A;
Direct AIG assistance: Government equity: $5.179;
Indirect AIG assistance: Federal Reserve: N/A;
Indirect AIG assistance: Government equity: N/A;
Total government exposure: $5.179.
Total direct assistance:
Direct AIG assistance: AIG debt owed to government: $23.435;
Direct AIG assistance: Government equity: $71.784;
Total government exposure: $95.219.
Total indirect assistance:
Indirect AIG assistance: Federal Reserve: $33.898;
Total government exposure: $33.898.
Total direct and indirect assistance to benefit AIG;
Amount authorized: $182.335;
Direct AIG assistance: AIG debt owed to government: $23.435;
Direct AIG assistance: Government equity: $71.784;
Indirect AIG assistance: Federal Reserve: $33.898;
Total government exposure: $129.117.
Source: GAO analysis of AIG SEC filings, and Federal Reserve
Statistical Release H.4.1.
Note: Analysis does not include AIG's government debt under the FRBNY
Commercial Paper Funding Facility of $4.739 billion at December 31,
2009. This facility expired for new issuances on February 1, 2010, and
will close upon maturity of all remaining commercial paper outstanding.
[A] FRBNY reduced the amount of the commitment fee on the revolving
credit facility by $500,000 to pay for the Series C stock.
[B] Values for the Maiden Lanes are as of December 30, 2009.
Government debt shown for Maiden Lane facilities do not include
accrued interest of $265 million for Maiden Lane II and $340 million
for Maiden Lane III.
[C] In March 2010 AIG reached agreements to sell AIA to Prudential PLC
and ALICO to Met Life. Combined proceeds are to be $31.5 billion in
cash plus $19.2 billion in equity securities. Cash proceeds and equity
securities when converted to cash are to be used to buy back the $25
billion in federal preferred equity interests and repay debt on the
revolving credit facility.
[D] When the Series E preferred shares were exchanged for Series D
preferred shares, $1.605 billion of accrued but unpaid dividends were
included in the liquidation preference of the federal government.
[End of table]
As of December 30, 2009, the amount of direct assistance available to
AIG through the FRBNY Revolving Credit Facility had dropped to $35
billion, and the amount AIG owed the facility had dropped to $23.4
billion (see appendix VIII). Key reasons for the drop in available
assistance and outstanding balance were the November 2008 and March
2009 restructurings of the government's assistance to the company from
debt to preferred equity. On November 25, 2008, AIG entered into an
agreement with Treasury whereby Treasury agreed to purchase $40
billion of fixed-rate cumulative preferred stock of AIG (Series D) and
received a warrant to purchase approximately 2 percent of the shares
of AIG's common stock.[Footnote 47] The proceeds of this sale were
used to pay down AIG's outstanding balance on the Revolving Credit
Facility by the same amount. This transaction left the government's
overall exposure unchanged, allowed AIG to reduce its debt outstanding
and increase the federal equity position by $40 billion, and also
involved a reduction of the borrowing limit on the credit facility
from $85 billion to $60 billion. More recently, in December 2009 the
outstanding balance and borrowing limit were further reduced when
FRBNY received preferred interests in the SPVs holding AIA and ALICO,
which was part of the March 2009 restructuring. In this transaction
the amount AIG owed on the facility was reduced by $25 billion and in
exchange, FRBNY acquired preferred equity interest in the SPVs of the
same amount, which, in effect, was an exchange of debt for equity.
Also, the borrowing limit was reduced from $60 billion to $35 billion.
In March 2010, AIG announced agreements to sell the AIA and ALICO SPVs
for total proceeds of $51 billion consisting of $31.5 billion in cash
and $19.2 billion in equity securities issued to AIG by the buyers.
According to AIG, it expects to close both sales later in 2010 and
plans to use the proceeds to repay federal assistance by redeeming the
preferred equity interests in the SPVs and paying down the Revolving
Credit Facility. Equity securities will be converted to cash as
conditions allow, which will be used to repay the federal assistance.
Changes in amounts owed on the facility fluctuate weekly and could
increase or decrease depending on liquidity needs related to ongoing
operations and restructuring activities, such as more conversions of
debt to preferred equity.[Footnote 48]
We are also monitoring the status of the government's indirect
assistance to AIG through the Maiden Lane II and Maiden Lane III
facilities (see appendix VIII). FRBNY provided loans to the
facilities, giving Maiden Lane II capital to purchase residential
mortgage-backed securities from AIG's domestic life insurance
companies and Maiden Lane III capital to purchase multi-sector CDOs
from AIGFP's CDS counterparties. The Maiden Lane II and Maiden Lane
III portfolios were funded primarily by loans from FRBNY, which are
not debt on AIG's books. The loans and related expenses are to be
repaid from cash generated by investment yields, maturing assets, and
sales of assets in the facilities. Such cash is to be used to pay, in
this order, operating expenses of the LLC, principal due to FRBNY,
interest due to FRBNY, principal due to AIG, and interest due to AIG.
Any remaining funds are to be shared between FRBNY and AIG. In
addition to the FRBNY investments in the facilities, AIG invested $1
billion in Maiden Lane II and $5 billion in Maiden Lane III. The
portfolio values of the Maiden Lanes peaked in December 2008, with
Maiden Lane II declining through September 2009 but increasing in
December 2009. Similarly, the portfolio value of Maiden Lane III
declined in July 2009 and values fluctuated in September 2009 but had
increased by the end of the year.
The Federal Reserve said that it plans to hold on to the Maiden Lane
assets until they mature or increase in value to a point where the
Federal Reserve can maximize the amount of money recovered through
their sale. Our analysis shows that the assets have declined in value
since December 2008. Federal Reserve officials explained that the
Maiden Lane assets are amortizing and that the long term plan is for
the Maiden Lanes to sell off the portfolios' assets, which will be
used to fully repay the debt. The Federal Reserve officials noted that
the value of these assets as a percent of the outstanding loan balance
have improved between December 2008 and December 2009 and they believe
that the Maiden Lanes will continue to receive payments of principal
and interest on their portfolios before maturity or sale. As assets
mature, are sold, or pay interest, any portion remaining after paying
operating expenses of the Maiden Lanes goes toward the loan balance.
These payments will reduce the amount of principal owed by the Maiden
Lanes to FRBNY. As of December 30, 2009, proceeds from the Maiden
Lanes had been used to pay down $9.9 billion of the outstanding
principal.[Footnote 49]
AIG's Book Value (Shareholders' Equity) Is Increasing, Supported by
the Unprecedented Federal Assistance Provided to AIG in the Form of
Both Debt and Equity:
To assess the status of AIG's prospects for repayment of federal
assistance, we have added a new indicator to track AIG's book value
(shareholders' equity). A rise in book value could indicate improved
prospects for repayment. Conversely, a decrease could indicate
worsening prospects for repayment. The indicator monitors the amount
of federal assistance provided in the form of debt and equity to AIG
relative to AIG's book value. It provides annual snapshots of AIG's
book value over several years prior to the financial deterioration
that resulted in federal assistance, and from that point forward
compares the book value to the level of federal debt and equity
assistance provided but not yet repaid on a quarterly basis.
Figure 11 shows that AIG's shareholders' equity peaked in December
2006 at $101.7 billion and decreased to a low of $45.8 billion in
March 2009. Since then it has increased, and as of the end of December
2009, shareholders' equity had climbed to $69.8 billion, which is
about $30.1 billion less than the total federal assistance on AIG's
books either as debt owed or as preferred equity. However, as
discussed earlier, AIG's positive shareholders' equity currently is
entirely the result of federal assistance.
Figure 11: Debt and Equity Federal Assistance Provided to AIG Compared
to AIG's Book Value (Shareholder's Equity), December 2004 through
December 2009 and Partial Data as of March 31, 2010 (Dollars in
billions):
[Refer to PDF for image: stacked vertical bar graph]
December 2004:
AIG‘s consolidated shareholders‘ equity (assets minus liabilities or
book values): $79.7.
December 2005:
AIG‘s consolidated shareholders‘ equity (assets minus liabilities or
book values): $86.3.
December 2006:
AIG‘s consolidated shareholders‘ equity (assets minus liabilities or
book values): $101.7.
December 2007:
AIG‘s consolidated shareholders‘ equity (assets minus liabilities or
book values): $95.8.
June 2008:
AIG‘s consolidated shareholders‘ equity (assets minus liabilities or
book values): $78.2.
September 2008:
AIG‘s consolidated shareholders‘ equity (assets minus liabilities or
book values): $71.2;
Principal and interest owed to FRBNY on credit facility: $63.0.
December 2008:
AIG‘s consolidated shareholders‘ equity (assets minus liabilities or
book values): $63.0;
Principal and interest owed to FRBNY on credit facility: $40.4;
Federal liquidation preference in Series E Preferred Shares (replaced
Series D shares): $40.0;
Federal Reserve Commercial Paper Funding Facility: $15.1.
March 2009:
AIG‘s consolidated shareholders‘ equity (assets minus liabilities or
book values): $45.8;
Principal and interest owed to FRBNY on credit facility: $47.4;
Federal liquidation preference in Series E Preferred Shares (replaced
Series D shares): $41.6;
Federal Reserve Commercial Paper Funding Facility: $12.2.
June 2009:
AIG‘s consolidated shareholders‘ equity (assets minus liabilities or
book values): $58.0;
Principal and interest owed to FRBNY on credit facility: $44.8;
Federal liquidation preference in Series E Preferred Shares (replaced
Series D shares): $41.6;
Federal liquidation preference in Series F Preferred Shares: $1.2;
Federal Reserve Commercial Paper Funding Facility: $11.2.
September 2009:
AIG‘s consolidated shareholders‘ equity (assets minus liabilities or
book values): $72.7;
Principal and interest owed to FRBNY on credit facility: $41.0;
Federal liquidation preference in Series E Preferred Shares (replaced
Series D shares): $41.6;
Federal liquidation preference in Series F Preferred Shares: $3.2;
Federal Reserve Commercial Paper Funding Facility: $9.6.
December 2009:
AIG‘s consolidated shareholders‘ equity (assets minus liabilities or
book values): $69.8;
Principal and interest owed to FRBNY on credit facility: $23.4;
Federal liquidation preference in Series E Preferred Shares (replaced
Series D shares): $41.6;
Federal liquidation preference in Series F Preferred Shares: $5.2;
Federal liquidation preferences in AIA and ALICO: $25.0;
Federal Reserve Commercial Paper Funding Facility: $4.7.
March 2010:
Principal and interest owed to FRBNY on credit facility: $25.4;
Federal liquidation preferences in AIA and ALICO: $25.4.
Source: GAO analysis of AIG SEC filings.
Note: March 31, 2010, data was not yet available for all of the
factors in figure.
[End of figure]
AIG Divested Several Business Units in 2009 and Announced Two Major
Agreements in March 2010:
Part of AIG's restructuring plan is for the company to sell some of
its businesses. In 2009 the company divested several of its businesses
and in March 2010 announced agreements to sell AIA and ALICO. As AIG's
restructuring unfolds, the cash proceeds from such sales are available
to fund operations, reduce AIG's balance on the FRBNY Revolving Credit
Facility, and redeem preferred equity interests. In order to track the
progress of this activity, we have developed an indicator to
chronologically track divestitures (or dispositions) by AIG and the
terms of such transactions, including cash proceeds. Our indicator
groups the divestitures and the related proceeds by the quarters in
which the transactions closed.
Figure 12 shows aggregate proceeds from dispositions closed by quarter
from the quarter ending in December 31, 2008, through the quarter
ending in March 31, 2010, broken out by cash proceeds, noncash
proceeds, and proceeds with the cash portion not disclosed. AIG said
that it has used the cash proceeds from these sales to meet its
obligations, including the FRBNY Revolving Credit Facility; to cover
capital needs; and to provide loans to its subsidiaries. AIG also
reported that from January 2009 through March 31, 2010, it has entered
into other agreements that have not yet closed. These include
agreements announced in March 2010 to sell AIA and ALICO for combined
total proceeds of $51 billion that will be comprised of $31.8 billion
cash and $19.2 billion in equity securities. As noted above, and
according to Treasury officials, proceeds are expected to be used to
redeem federal preferred equity interests in AIA and ALICO and reduce
the outstanding balance in the Revolving Credit Facility.
Figure 12: Proceeds from Dispositions by Quarter, Second Quarter of
2008 through March 31, 2010 (Dollars in millions):
[Refer to PDF for image: stacked vertical bar graph]
9/30/08: 0.
12/31/08:
Proceeds with cash portion not disclosed: $820.
3/31/09:
Noncash proceeds: $76;
Cash proceeds: $739;
Proceeds with cash portion not disclosed: $43.
6/30/09:
Noncash proceeds: $550;
Cash proceeds: $1,755;
Proceeds with cash portion not disclosed: $1,136.
9/30/09:
Noncash proceeds: $200;
Cash proceeds: $2,441;
Proceeds with cash portion not disclosed: $1,900.
12/31/09:
Noncash proceeds: $557;
Cash proceeds: $70.
3/31/10:
Cash proceeds: $729.
Source: AIG and GAO analysis of AIG press releases and SEC filings.
[End of figure]
As of December 31, 2009, AIG disclosed that it had received $10.3
billion in total proceeds from sales, $5 billion of which was cash. It
also showed that proceeds were increasing each quarter through the
third quarter of 2009. In the last quarter of 2009, AIG closed on only
one sale, AIG Finance--Hong Kong, for $627 million. AIG officials told
us that in addition to this sale, AIG signed agreements on several
other transactions during this time period that had not yet closed.
The slow down in sales also may reflect the asset disposition strategy
of AIG's current president and chief executive officer, which has been
to hold assets in hopes for a higher return rather than to sell them
quickly.[Footnote 50]
The unprecedented steps taken by the Federal Reserve and Treasury to
assist AIG as a result of their determination that the company posed
systemic risk to the financial system have helped stabilize AIG's
operations. The federal assistance also appears to be facilitating a
more orderly restructuring of the company. Our panel of indicators
shows that, in general, the improvements AIG made in the second
quarter of 2009 continued into the third and fourth quarters. However,
the indicators also show that AIG continues to rely heavily on federal
assistance for its liquidity needs and its equity capital structure.
Federal assistance provided to AIG has gradually shifted from debt to
equity, with a reduction in the authorized amount of the FRBNY
Revolving Credit Facility and an increase in the amount of preferred
equity interests held in AIG and various special purpose vehicles for
the government. Consequently, the government's, and thus taxpayer's,
exposure to AIG is increasingly tied to the success of AIG, its
restructuring efforts, and its ongoing performance. However, the
sustainability of any positive trends in AIG's operations depends on
how well it manages its business in this current economic environment.
Similarly, the government's ability to fully recoup the federal
assistance will be determined by the long-term health of AIG, the
company's success in selling businesses as it restructures, and other
market factors such as the performance of the insurance sectors and
the credit derivatives markets that are beyond the control of AIG or
the government. We will continue to monitor these issues in our future
work.
Agency Comments and Our Evaluation:
We shared a copy of the draft of this report with the Federal Reserve,
Treasury, and AIG. They provided technical comments that are
incorporated, as appropriate.
We are sending copies of this report to the Congressional Oversight
Panel, Financial Stability Oversight Board, Special Inspector General
for TARP, interested congressional committees and members, Treasury,
the federal banking regulators, and others. The report also is
available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staffs have any questions concerning this report please
contact Orice Williams Brown at (202) 512-8678 or williamso@gao.gov.
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. GAO staff who
made major contributions to this report are listed in appendix X.
Signed by:
Gene L. Dodaro:
Acting Comptroller General of the U.S. Government Accountability
Office:
List of Congressional Committees:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate:
The Honorable Christopher J. Dodd:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Kent Conrad:
Chairman:
The Honorable Judd Gregg:
Ranking Member:
Committee on the Budget:
United States Senate:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable David R. Obey:
Chairman:
The Honorable Jerry Lewis:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable John M. Spratt, Jr.
Chairman:
The Honorable Paul Ryan Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Sander M. Levin Acting:
Chairman:
The Honorable Dave Camp Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: AIG Operations:
American International Group, Inc. (AIG) is a holding company that,
through its subsidiaries, is engaged in a broad range of insurance and
insurance-related activities in the United States and abroad. These
activities include general insurance, life insurance and retirement
services, financial services, and asset management. Figure 13, which
illustrates the AIG parent company and its subsidiaries that it
directly owns, conveys the complexity of the AIG organization. AIG's
subsidiaries are Chartis International, LLC; AIG Life Holdings
International, LLC; ALICO Holdings, LLC; Chartis Inc.; AIG Life
Holdings (United States), Inc.; AIG Capital Corporation; AIG Financial
Products Corp; and 10 other companies. AIG comprises approximately 400
companies and has operations in more than 130 countries and
jurisdictions worldwide. As of December 31, 2009, AIG had assets of
$847.6 billion and revenues of $96 billion for the 12 preceding
months. The AIG companies are among the largest domestic life insurers
and domestic property/casualty insurers in the United States, and
include large foreign general insurance and life insurance businesses.
Figure 13: AIG, Its Subsidiaries, and Percentage Ownership by Parent
Company as of February 28, 2010:
[Refer to PDF for image: organization chart]
AIG Credit Facility Trust (Series C preferred Stock 100%
Approx. 79.8% of voting shares):
Public shareholders (Common stock: Approx. 20.2% of voting shares).
Together, form:
American International Group, Inc.
Companies forming American International Group, Inc. includes the
following and their subsidiaries:
Chartis International, LLC 100%;
Chartis Overseas Limited 100%;
AIG Life Holdings (International) LLC 100%;
ALICO Holdings, LLC 100%;
Chartis Inc. 100%;
AIG Life Holdings (US), Inc. 100%;
AIG Global Services, Inc. 100%;
AIG Financial Products Corp. 100%;
AIG Capital Corporation 100%.
Source: AIG.
Notes from subsidiaries:
[A] 5.73 percent Steppe Securities, L.L.C. and 20.18 percent American
International Group, Inc.
[B] 10 percent American Life Insurance Company, and 9.40 percent
American Home Assurance Company.
[C] 4.99 percent Chartis Global Management Company Limited.
[D] 0.602 percent American International Underwriters (Guatemala), S.A.
[E] 0.01 percent Chartis Latin America Investments, LLC.
[F] 19.72 percent Chartis Overseas Association.
[G] 10 percent American Home Assurance Company; 11 percent National
Union Fire Insurance Company of Pittsburgh, PA.; and 12 percent New
Hampshire Insurance Company.
[H] 1.42 percent Chartis Luxembourg Financing Limited; 32.39 percent
Chartis Overseas Limited; and 2.28 percent Chartis Bermuda Limited.
[I] 8.68 percent Chartis Overseas Limited.
[J] 40 percent American International Reinsurance Company, Ltd.
[K] 1 percent American International Group, Inc., Federal Reserve Bank
of New York 100 percent interest with certain rights not customary of
preferred holders.
[L] 51 percent Rich Development Limited.
[M] 16 percent Chartis Insurance Hong Kong Limited.
[N] 3.45 percent Kapatiran Realty Corporation; 11.24 percent Perf
Realty Corporation; and 6.83 percent Philam Properties Corporation.
[O] 20 percent PT Asta Indah Abadi.
[P] Federal Reserve Bank of New York 100 percent interest with certain
rights not customary of preferred holders.
[Q] 0.01 percent International Technical and Advisory Services Limited.
[R] 10 percent International Technical and Advisory Services Limited.
[S] 50 percent American Life Insurance Company.
[T] 7.50 percent AIG Egypt Insurance Company S.A.E.
[U] 0.00001 percent International Technical and Advisory Services
Limited.
[V] 0.0005 percent International Technical and Advisory Services
Limited and 0.0005 percent Borderland Investments Limited.
[W] 1 percent Societatea de Asigurari AIG Romania SA and 1 percent
International Technical and Advisory Services Limited.
[X] 0.01 percent International Technical and Advisory Services Limited.
[Y] 5 percent American Life Insurance Company.
[Z] 2.77 percent Chartis Overseas Limited.
[AA] 90 American International Reinsurance Company, Limited.
[BB] 38.01 percent American Life Insurance Company.
[CC] 49 percent American Life Insurance Company.
[DD] 5.01 percent International Technical and Advisory Services
Limited.
[EE] 0.01 percent International Technical and Advisory Services
Limited.
[FF] 10.36 percent AIU Insurance Company; 2.58 percent Chartis
Overseas Limited; 7.73 percent Chartis Europe,S.A.; and 2.76 percent
American Home Assurance Company.
[GG] 75 percent American Life Insurance Company.
[HH] 10 percent Chartis Property Casualty Company; and 20 percent The
Insurance Company of the State of Pennsylvania.
[II] 10 percent Chartis Property Casualty Company; and 20 percent The
Insurance Company of the State of Pennsylvania.
[JJ] 35.12 percent New Hampshire Insurance Company; and 19 percent The
Insurance Company of the State of Pennsylvania.
[KK] 24.97 percent United Guaranty Residential Insurance Company of
North Carolina.
[LL] 0.001 percent United Guaranty Services, Inc.
[MM] 29 percent American General Life and Accident Insurance Company
and 1 percent Iris Energy Holding, L.P.
[NN] 49 percent American International Group, Inc.
[OO] 21 percent NF Fifty-One (Cayman) Limited.
[PP] 79 percent AIG Financial Products Corp.
[QQ] 10 percent AIG Matched Funding Corp.
[RR] 1 percent AIGFP Capital Preservation Corp.
[SS] 10 percent AIG Financial Products Corp.
[TT] 1 percent AIG Financial Products Corp.
[UU] 21 percent NF Thirty-nine Corp.
[VV] 79 percent AIG Financial Products Corp.
[WW] 17 percent AIGFP Pinestead Holdings Corp. and 15 percent NF Seven
(Cayman) Limited.
[XX] Although no AIG company owns an equity interest in Union Excess,
control over Union Excess may be implied through the timing and nature
of certain reinsurance commutations.
[End of figure]
[End of section]
Appendix II: AIG's Credit Ratings and an Overview of Definitions of
Credit Ratings:
Credit ratings measure a company's ability to repay its obligations
and directly affect that company's cost of and ability to access
unsecured financing. If a company's ratings are downgraded, its
borrowing costs can increase, capital can be more difficult to raise,
business partners may terminate contracts or transactions,
counterparties can demand additional collateral, and operations can
become more constrained generally. Rating agencies can downgrade the
company's key credit ratings if they believe the company is unable to
meet its obligations. In American International Group, Inc.'s (AIG)
case, this could affect its ability to raise funds and increase the
cost of financing its major insurance operations, and, in turn, impede
AIG's restructuring efforts. Conversely, an upgrade in AIG's credit
ratings would indicate an improvement in its condition and possibly
lead to lower borrowing costs and facilitate corporate restructuring.
As shown in table 4, AIG's key credit ratings have remained unchanged
since May 2009, primarily because federal assistance has provided AIG
with needed liquidity. For example, from March 31, 2009, to December
15, 2009, AM Best, Moody's, and Standard & Poor's (S&P) maintained the
same credit ratings for AIG's long-term debt and the financial
strength of its property/casualty and life insurance companies due in
large part to the Board of Governors of the Federal Reserve System and
the Department of the Treasury's support.[Footnote 51] While
contributing to stable ratings thus far, the scale of this assistance
eventually may raise questions about AIG's future prospects if the
company is not able to raise capital from private sources. For
example, because of the importance of the federal funds to AIG's
solvency, Fitch's lowered its ratings of AIG in several categories in
May 2009. However, Fitch's ratings have not changed since May 2009.
Table 4: Credit Ratings, as of March 31, 2009; May 15, 2009; and
December 15, 2009:
Debt: Long-term;
Potential consequences of a ratings downgrade: AIG Financial Products
Corporation (AIGFP) would have to post collateral and termination
payments. The total obligations depend on the market and other factors
at the time of the downgrade. For example:
* By close of business on May 22, 2009, a 1-notch, 2-notch, or 3-notch
downgrade from S&P and Moody's would have cost AIGFP $3.8 billion,
$6.8 billion, or $7.7 billion, respectively;
* By close of business on February 17, 2010, a 1-notch, 2-notch, or 3-
notch downgrade from S&P and Moody's would have cost AIG $1.8 billion,
$1.4 billion, or $0.3 billion, respectively.
Rating agency: S&P;
Credit rating[A]: Mar. 31, 2009: A-/negative[B];
Credit rating[A]: May 15, 2009: no change;
Credit rating[A]: Dec. 15, 2009: no change.
Rating agency: Moody's;
Credit rating[A]: Mar. 31, 2009: A3/negative[B];
Credit rating[A]: May 15, 2009: no change;
Credit rating[A]: Dec. 15, 2009: no change.
Rating agency: Fitch;
Credit rating[A]: Mar. 31, 2009: A;
Credit rating[A]: May 15, 2009: BBB/evolving;
Credit rating[A]: Dec. 15, 2009: no change.
Debt: Short-term;
Rating agency: S&P;
Credit rating[A]: Mar. 31, 2009: A-1 for AIG Funding, Curzon, and
Nightingale[B];
Credit rating[A]: May 15, 2009: no change;
Credit rating[A]: Dec. 15, 2009: no change;
Potential consequences of a ratings downgrade: AIG affiliates in
commercial paper programs (AIG Funding, Curzon Funding LLC, and
Nightingale LLC) could be ineligible for participation in the Federal
Reserve's Commercial Paper Funding Facility (CPFF). AIG's
International Lease Finance Corporation lost access to CPFF funds
after an S&P downgrade on January 21, 2009. The CPFF expired for new
issuances on February 1, 2010, and will close upon maturity of all
remaining commercial paper outstanding.
Rating agency: Moody's;
Credit rating[A]: Mar. 31, 2009: P-1 for AIG Funding[B];
Credit rating[A]: May 15, 2009: no change;
Credit rating[A]: Dec. 15, 2009: no change.
Rating agency: Fitch;
Credit rating[A]: Mar. 31, 2009: F1;
Credit rating[A]: May 15, 2009: no change;
Credit rating[A]: Dec. 15, 2009: no change.
Financial strength:
Potential consequences of a ratings downgrade: Further downgrades of
these ratings may prevent AIG's insurance companies from offering
products and services or result in increased policy cancellations or
termination of assumed reinsurance contracts. A downgrade in AIG's
credit ratings may result in a downgrade of the financial strength
ratings of AIG's insurance subsidiaries.
Financial strength: Life insurer;
Rating agency: AM Best;
Credit rating[A]: Mar. 31, 2009: A/negative[B];
Credit rating[A]: May 15, 2009: no change;
Credit rating[A]: Dec. 15, 2009: no change;
Potential consequences of a ratings downgrade: Domestic retirement
services would be severely affected by a high surrender rate and
further suspension of sales in some firms, and would suffer a
significant loss of wholesalers.
Rating agency: S&P;
Credit rating[A]: Mar. 31, 2009: A+/negative;
Credit rating[A]: May 15, 2009: no change;
Credit rating[A]: Dec. 15, 2009: no change;
Potential consequences of a ratings downgrade: New domestic life
business would be severely affected, in several instances forcing the
company to exit businesses that serve either the high-net-worth
marketplace or businesses that are governed by trust contracts. The
company would need to continue to dedicate key resources to retention
and management of existing relationships.
Rating agency: Moody's;
Credit rating[A]: Mar. 31, 2009: A1/developing;
Credit rating[A]: May 15, 2009: no change;
Credit rating[A]: Dec. 15, 2009: no change.
Rating agency: Fitch;
Credit rating[A]: Mar. 31, 2009: AA-;
Credit rating[A]: May 15, 2009: A-/evolving;
Credit rating[A]: Dec. 15, 2009: no change.
Life insurer; P&C insurer;
Rating agency: AM Best;
Credit rating[A]: Mar. 31, 2009: A/negative[A];
Credit rating[A]: May 15, 2009: no change;
Credit rating[A]: Dec. 15, 2009: no change;
Potential consequences of a ratings downgrade: AIG commercial
property/casualty businesses expect that a financial strength rating
downgrade would result in a loss of approximately 50 percent of the
net premiums written and operating losses for the domestic business.
For the foreign businesses, a downgrade could cause regulators to
further strengthen operational and capital requirements. Staff
retention could become a key issue, and premiums would deteriorate
significantly.
Rating agency: S&P;
Credit rating[A]: Mar. 31, 2009: A+/negative;
Credit rating[A]: May 15, 2009: no change;
Credit rating[A]: Dec. 15, 2009: no change.
Rating agency: Moody's;
Credit rating[A]: Mar. 31, 2009: Aa3/negative;
Credit rating[A]: May 15, 2009: no change;
Credit rating[A]: Dec. 15, 2009: no change.
Rating agency: Fitch;
Credit rating[A]: Mar. 31, 2009: AA-;
Credit rating[A]: May 15, 2009: A+/evolving;
Credit rating[A]: Dec. 15, 2009: no change.
Sources: AIG Securities and Exchange Commission (SEC) filings; S&P,
Fitch, Moody's, and AM Best press releases; and AIG.
[A] Credit ratings are explained in the appendix II.
[B] These are key ratings.
[End of table]
Moody's, S&P, and Fitch are three of the credit rating agencies that
assess the creditworthiness of AIG. Each of the rating agencies uses a
unique rating to denote the grade and quality of the bonds being
rated. Table 5 provides an overview of the ratings for Moody's, S&P,
and Fitch.
Table 5: Summary of Rating Agencies' Ratings:
Grade and Quality: Highest grade and quality;
Definitions: There is an extremely strong capacity to meet financial
commitments on the obligation and bonds have little investment risk;
Moody's[A]: Aaa;
S&P[B]: AAA;
Fitch[B]: AAA.
Grade and Quality: High grade and quality;
Definitions: 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;
Moody's[A]: Aa;
S&P[B]: AA;
Fitch[B]: AA.
Grade and Quality: Upper medium grade and quality;
Definitions: There is a strong capacity to meet financial commitment
on the obligation and the principal and interest are adequately
secured, but the bonds are more vulnerable to a changing economy;
Moody's[A]: A;
S&P[B]: A;
Fitch[B]: A.
Grade and Quality: Medium and lower medium grade;
Definitions: 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;
Moody's[A]: Baa;
S&P[B]: BBB;
Fitch[B]: BBB.
Grade and Quality: Noninvestment and speculative grades;
Definitions: There is little protection on these obligations and the
interest and principle may be in danger, where default may be likely;
Moody's[A]: Ba1 and below;
S&P[B]: BB+ and below;
Fitch[B]: BB+ and below.
Source: Moody's Investors Service, S&P's Ratings Services, and Fitch
Ratings.
[A] Moody's has numerical modifiers of 1, 2, and 3 in each rating
classification from Aa to B: "1" indicates that the issue ranks in the
higher end of the category, "2" indicates a mid-range ranking, and "3"
indicates that the issue ranks in the lower end of the category.
[B] S&P's Ratings Services and Fitch Ratings: Ratings from 'AA' to
'CCC' may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
[End of table]
[End of section]
Appendix III: Corporate Liquidity Available to AIG:
This indicator monitors the timing of potential future demand on
American International Group, Inc.'s (AIG) liquidity posed by its debt
obligations. These liquidity measures reflect AIG's ability to meet
its cash payment needs. A decrease in available liquidity, or an
increase in debt, could increase the risk of insolvency. Sources of
available liquidity provide an indication of how AIG obtains the funds
needed to meet its obligations. The greater the portion of current
available liquidity provided by AIG's own operations, the less reliant
they are on federal assistance.
As shown in table 6, in November 2008, the major source of AIG's
corporate available liquidity was the Federal Reserve Bank of New
York's (FRBNY) Revolving Credit Facility, with lesser amounts
available through the FRBNY Commercial Paper Funding Facility (CPFF)
and AIG's bilateral facilities. Overtime, AIG's primary source of
liquidity has shifted away from CPFF and AIG's bilateral facilities.
Starting in April 2009, AIG was obtaining the funds needed to meet its
obligations primarily from the Department of the Treasury's Equity
Facility, which remains its primary source of liquidity into 2010, as
well as from FRBNY's Revolving Credit Facility.
Table 6: Amounts of Available Corporate Liquidity at November 5, 2008;
February 18, 2009; April 29, 2009; July 29, 2009; October 28, 2009;
and February 17, 2010 (Dollars in millions):
FRBNY Revolving Credit Facility;
Nov. 5, 2008: $24,000;
Feb. 18, 2009: $24,800;
Apr. 29, 2009: $17,400;
July 29, 2009: 20,000;
Oct. 28, 2009: $18,300;
Feb. 17, 2010: $14,000.
Commercial paper under CPFF and syndicated and bilateral facilities;
Nov. 5, 2008: 5,600;
Feb. 18, 2009: 753;
Apr. 29, 2009: 1,940;
July 29, 2009: 3,493;
Oct. 28, 2009: 4,872;
Feb. 17, 2010: 0.
Unused bank syndicated and bilateral facilities;
Nov. 5, 2008: 3,820;
Feb. 18, 2009: 0;
Apr. 29, 2009: 0;
July 29, 2009: 0;
Oct. 28, 2009: 0;
Feb. 17, 2010: 0.
AIG Cash and short term investments;
Nov. 5, 2008: 0;
Feb. 18, 2009: 1,100;
Apr. 29, 2009: 445;
July 29, 2009: 407;
Oct. 28, 2009: 359;
Feb. 17, 2010: 287.
Treasury Equity Facility;
Nov. 5, 2008: 0;
Feb. 18, 2009: 0;
Apr. 29, 2009: 29,835;
July 29, 2009: 28,685;
Oct. 28, 2009: 26,629;
Feb. 17, 2010: 22,292.
Total;
Nov. 5, 2008: $33,420;
Feb. 18, 2009: $26,653;
Apr. 29, 2009: $49,620;
July 29, 2009: $52,585;
Oct. 28, 2009: $50,160;
Feb. 17, 2010: $36,579.
Source: GAO analysis of AIG SEC filings.
Note: The CPFF, which became operational in October 2008, provides a
liquidity backstop to U.S. issuers of commercial paper through an SPV
that purchases eligible three-month unsecured and asset-backed
commercial paper from eligible issuers using financing provided by
FRBNY. Its purpose is to enhance the liquidity of the commercial paper
market.
[End of table]
[End of section]
Appendix IV: Value of Preferred and Common Shares of AIG:
The value of the federal government's common equity investment in
American International Group, Inc. (AIG) is tied to the market value
of AIG's common shares. As a result, growth in value of the
government's preferred equity stake depends on further growth of the
value of common shares. As shown in figure 14, the market value of
AIG's common shares outstanding peaked in December 2006 at $186.4
billion and by June 2008, their market value had declined to $71.1
billion. During the last two quarters of 2008, when federal assistance
was initially provided to AIG, AIG shares further declined in value,
falling to $4.2 billion by the end of 2008. On March 1, 2009, the AIG
Credit Facility Trust and AIG entered into the Series C Preferred
Stock Purchase Agreement. The values of the Series C preferred shares
increased between March and September 2009 but fell in the fourth
quarter.[Footnote 52]
Figure 14: Market Capitalization (Value) of AIG Outstanding Common
Shares, Including Federally Owned Preferred C Shares That Are
Convertible Into 79.77 Percent AIG's Outstanding Common Shares,
December 2004 through December 2009 (Dollars in millions):
[Refer to PDF for image: vertical bar graph]
December 2004:
Market capitalization (value) of AIG‘s common shares outstanding:
$170.507.
December 2005:
Market capitalization (value) of AIG‘s common shares outstanding:
$177,169.
December 2006:
Market capitalization (value) of AIG‘s common shares outstanding:
$186,402.
December 2007:
Market capitalization (value) of AIG‘s common shares outstanding:
$147,475.
June 2008:
Market capitalization (value) of AIG‘s common shares outstanding:
$71,146.
September 2008:
Market capitalization (value) of AIG‘s common shares outstanding:
$8,957.
December 2008:
Market capitalization (value) of AIG‘s common shares outstanding:
$4,233.
March 2009:
Market capitalization (value) of AIG‘s common shares outstanding:
$2,691;
Value of preferred series C shares based on convertibility into 77.9%
of common shares: $10,642.
June 2009:
Market capitalization (value) of AIG‘s common shares outstanding:
$3,122;
Value of preferred series C shares based on convertibility into 77.9%
of common shares: $12,345.
September 2009:
Market capitalization (value) of AIG‘s common shares outstanding:
$5,937;
Value of preferred series C shares based on convertibility into 77.9%
of common shares: $23,472.
December 2009:
Market capitalization (value) of AIG‘s common shares outstanding:
$4,049;
Value of preferred series C shares based on convertibility into 77.9%
of common shares: $15,953.
Source: GAO analysis of AIG‘s SEC filings and Treasury Financial
Reporting Position Paper 09-07.
Note: The preferred Series C shares are in a trust for the benefit of
the Treasury and in this figure do not include a warrant that is
convertible into 2 percent of common shares. See GAO-09-975 for more
details on the trust.
[End of figure]
[End of section]
Appendix V: AIG Insurance Subsidiaries' Capital and Surplus:
Because information on adjusted capital and related activities is only
available annually in the year-end financial statements that American
International Group, Inc. (AIG) companies file with the National
Association of Insurance Commissioners (NAIC), we can only track it
once a year. To track adjusted capital more frequently, we developed
an indicator as a proxy that tracks capital and surplus as reported in
AIG's quarterly filings with NAIC and major activities that could
deplete capital and surplus, as well as adjusted capital. As
illustrated in figure 15, capital and surplus for the first 9 months
of 2009 increased for AIG's largest domestic property/casualty
companies and largest domestic life and retirement services companies,
and no major activities had an adverse effect large enough to deplete
capital and surplus. Similar to the results of the adjusted capital
indicator discussed in the report, these proxy results showed that
AIG's domestic property/casualty companies did not need additional
federal assistance during the first 9 months of 2009 to boost their
regulatory capital.
Figure 15: AIG Insurance Subsidiaries: Capital and Surplus at December
31, 2008, and September 30, 2009, and Primary Activities That Affected
Them In the First Nine Months of 2009 (dollars in millions):
[Refer to PDF for image: illustrated table]
AIG‘s largest domestic property/casualty companies:
Capital and surplus, 12/31/08: $25,763;
Capital and surplus, 9/30/09: $26,787;
Primary activities that affected capital and surplus in the first nine
months of 2009:
Net income: $2,294;
Paid in capital: 0;
Unrealized capital losses[A]: -$1,329;
Net deferred income taxes: $541;
Change in nonadmitted assets: -$1,188;
Gains and losses write-ins in surplus: -$286.
AIG‘s largest domestic life insurance/retirement services companies:
Capital and surplus, 12/31/08: $14,595;
Capital and surplus, 9/30/09: $16,221;
Primary activities that affected capital and surplus in the first nine
months of 2009:
Net income: $166;
Paid in capital: $3;
Unrealized capital losses[A]: -$1,079;
Net deferred income taxes: -$144;
Change in nonadmitted assets: $785;
Gains and losses write-ins in surplus: $1,012.
Source: AIG and GAO analysis of AIG financial statements filed with
NAIC.
[A] NAIC financial statements show unrealized capital losses
separately from net income.
[End of figure]
[End of section]
Appendix VI: Revenues and Expense of AIG Life Insurance and Retirement
Services:
The losses or gains of life insurance and retirement services may
occur for several reasons. For example, operating income before
capital gains or losses provides an indication of the profitability of
a company's underwriting operations, while capital gains and losses
relate to investment activities not directly related to insurance
underwriting. Increases in operating income or reductions in net
realized capital losses could indicate improvements in the operations
of American International Group, Inc.'s (AIG) life and retirement
services companies, including improvement in market conditions, lower
other-than-temporary impairments, and dissipating effects of lower
credit ratings and negative publicity related to the AIG brand since
September 2008.
Figure 16 provides an indicator that can be used to examine the
reasons for the profitability or losses of AIG's life insurance and
retirement services. In 2008 the vast majority of losses incurred by
AIG were not the result of their underwriting activities but instead
were caused by losses in the investment portfolios of domestic and
foreign life insurance businesses due to severe market price declines
in certain commercial mortgage-backed securities and other securities.
In subsequent quarters in 2009, AIG's domestic life and retirement
services business realized income gains from operations partly because
of Maiden Lane II's purchase of residential mortgage-backed securities
from these companies, which helped prevent continued liquidity strains
on AIG.
Figure 16: AIG Life Insurance and Retirement Services: Key Quarterly
Revenues and Expenses, First Quarter of 2007 through Fourth Quarter of
2009 (Dollars in millions):
[Refer to PDF for image: vertical bar graph]
Key components of operating income: Premium income and other
considerations:
2007 Q1:
Domestic: $1,812;
Foreign: $6,613.
2007 Q2:
Domestic: $1,667;
Foreign: $,6503.
2007 Q3:
Domestic: $1,795;
Foreign: $6,505.
2007 Q4:
Domestic: $1,752;
Foreign: $6,980.
2008 Q1:
Domestic: $1,871;
Foreign: $7,447.
2008 Q2:
Domestic: $1,894;
Foreign: $7,691.
2008 Q3:
Domestic: $1,995;
Foreign: $7,359.
2008 Q4:
Domestic: $1,616;
Foreign: $7,422.
2009 Q1:
Domestic: $1,395;
Foreign: $6,940.
2009 Q2:
Domestic: $1,282;
Foreign: $6,837.
2009 Q3:
Domestic: $1,230;
Foreign: $6,622.
2009 Q4:
Domestic: $1,279;
Foreign: $6,201.
Key components of operating income: Interest and dividend income:
2007 Q1:
Domestic: $2,534;
Foreign: $2,009.
2007 Q2:
Domestic: $2,490;
Foreign: $2,180.
2007 Q3:
Domestic: $2,441;
Foreign: $2,342.
2007 Q4:
Domestic: $2,421;
Foreign: $2,306.
2008 Q1:
Domestic: $2,355;
Foreign: $2,379.
2008 Q2:
Domestic: $2,268;
Foreign: $2,556.
2008 Q3:
Domestic: $2,394;
Foreign: $2,777.
2008 Q4:
Domestic: $2,110;
Foreign: $2,371.
2009 Q1:
Domestic: $2,106;
Foreign: $2,206.
2009 Q2:
Domestic: $2,057;
Foreign: $2,234.
2009 Q3:
Domestic: $2,341;
Foreign: $2,317.
2009 Q4:
Domestic: $2,353;
Foreign: $1,861.
Key components of operating income: Policyholder benefits and claims
incurred:
2007 Q1:
Domestic: -$2,583;
Foreign: -$5,580.
2007 Q2:
Domestic: -$2,420;
Foreign: -$5,494.
2007 Q3:
Domestic: -$2,548;
Foreign: -$5,506.
2007 Q4:
Domestic: -$2,511;
Foreign: -v6,643.
2008 Q1:
Domestic: -$2,591;
Foreign: -$6,119.
2008 Q2:
Domestic: -$2,714;
Foreign: -$6,345.
2008 Q3:
Domestic: -$2,869;
Foreign: -$6,174.
2008 Q4:
Domestic: -$2,543;
Foreign: -$5,223.
2009 Q1:
Domestic: -$2,502;
Foreign: -$5,781.
2009 Q2:
Domestic: -$2,152;
Foreign: -$5,763.
2009 Q3:
Domestic: -$2,026;
Foreign: -$5,750.
2009 Q4:
Domestic: -$2,154;
Foreign: -$4,679.
Key components of operating income: Operating income before net realized
capital gains or losses:
2007 Q1:
Domestic: $1,018;
Foreign: $1,519.
2007 Q2:
Domestic: $1,263;
Foreign: $1,636.
2007 Q3:
Domestic: $892;
Foreign: $1,598.
2007 Q4:
Domestic: $1,027;
Foreign: $1,631.
2008 Q1:
Domestic: $1,081;
Foreign: $1,457.
2008 Q2:
Domestic: $927;
Foreign: $1,682.
2008 Q3:
Domestic: $50;
Foreign: $962.
2008 Q4:
Domestic: -$605;
Foreign: $1,347.
2009 Q1:
Domestic: -$128;
Foreign: $1,363.
2009 Q2:
Domestic: $268;
Foreign: $1,253.
2009 Q3:
Domestic: $1,077;
Foreign: $1,136.
2009 Q4:
Domestic: $1,086;
Foreign: $1,054.
Key components of operating income: Net realized capital losses or
gains:
2007 Q1:
Domestic: -$21;
Foreign: -$235.
2007 Q2:
Domestic: -$297;
Foreign: $18.
2007 Q3:
Domestic: -$629;
Foreign: $138.
2007 Q4:
Domestic: -$1,264;
Foreign: -$108.
2008 Q1:
Domestic: -$3,647;
Foreign: -$722.
2008 Q2:
Domestic: -$4,101;
Foreign: -$909.
2008 Q3:
Domestic: -$12,886;
Foreign: -$3,455.
2008 Q4:
Domestic: -$11,928;
Foreign: -$6,699.
2009 Q1:
Domestic: -$2,079;
Foreign: -$1,029.
2009 Q2:
Domestic: $189;
Foreign: $108.
2009 Q3:
Domestic: -$950;
Foreign: $18.
2009 Q4:
Domestic: -$364;
Foreign: $291.
Key components of operating income: Operating income or loss:
2007 Q1:
Domestic: $997;
Foreign: $1,284.
2007 Q2:
Domestic: $966;
Foreign: $1,654.
2007 Q3:
Domestic: $263;
Foreign: $1,736.
2007 Q4:
Domestic: -$237;
Foreign: $1,523.
2008 Q1:
Domestic: -$2,566;
Foreign: $735.
2008 Q2:
Domestic: -$3,174;
Foreign: $773.
2008 Q3:
Domestic: -$12,836;
Foreign: -$2,493.
2008 Q4:
Domestic: -$12,533;
Foreign: -$5,352.
2009 Q1:
Domestic: -$2,207;
Foreign: $334.
2009 Q2:
Domestic: $457;
Foreign: $1,361.
2009 Q3:
Domestic: $127;
Foreign: $1,154.
2009 Q4:
Domestic: $670;
Foreign: $1,345.
Source: GAO analysis of AIG‘s quarterly financial supplements.
[End of figure]
[End of section]
Appendix VII: Operating Ratios for AIG's Property/Casualty Companies:
The profitability of property/casualty insurers can be measured using
the combined ratio, which is the sum of the loss ratio and the expense
ratio. The loss ratio measures claims costs plus claims adjustment
expenses relative to net earned premiums. A rising loss ratio
indicates rising claims costs relative to the premiums, which may be
due to increased claims losses, decreased premiums revenue, or a
combination of the two. The expense ratio measures the level of
underwriting administrative expenses relative to net premiums earned
and is a measure of underwriting efficiency. The combined ratio is an
overall measure of a property-casualty insurer's underwriting
profitability. Thus, a combined ratio of less than 100 percent would
indicate that an insurer's underwriting is profitable, and a ratio of
above 100 percent would reflect an underwriting loss.
As shown in figure 17, the combined ratio for American International
Group, Inc.'s (AIG) commercial property-casualty insurance business
spiked in the fourth quarter of 2008, largely due to an administrative
charge to recognize impairment of goodwill of previously acquired
businesses. The higher combined ratio was also partly due to a higher
loss ratio because of increased claims costs associated with Hurricane
Ike and other major catastrophes in 2008. The combined ratio rose
above 100 percent in the last two quarters of 2009, indicating that
claims and administrative costs were higher and rising faster than
premium revenues and thus their insurance underwriting was not
profitable. The combined ratio's rise in the fourth quarter of 2009
was also largely due to increased claims costs that arose because of a
reserve strengthening charge AIG made to address unexpected losses in
excess casualty and excess workers' compensation, two long-tail lines
of business:
Figure 17: AIG Property/Casualty Insurance: AIG Commercial Insurance
Operating Ratios, First Quarter of 2007 through Fourth Quarter of 2009:
[Refer to PDF for image: multiple line graph]
2007 Q1:
Combined ratio: 86.74;
Loss ratio: 68.56;
Expense ratio: 18.18.
2007 Q2:
Combined ratio: 83.57;
Loss ratio: 66.29;
Expense ratio: 18.68.
2007 Q3:
Combined ratio: 82.84;
Loss ratio: 64.16;
Expense ratio: 18.68.
2007 Q4:
Combined ratio: 91.23;
Loss ratio: 73.47;
Expense ratio: 17.76.
2008 Q1:
Combined ratio: 96.32;
Loss ratio: 74.38;
Expense ratio: 21.94.
2008 Q2:
Combined ratio: 93.94;
Loss ratio: 74.63;
Expense ratio: 19.31.
2008 Q3:
Combined ratio: 108.96;
Loss ratio: 87.04;
Expense ratio: 21.92.
2008 Q4:
Combined ratio: 133.33;
Loss ratio: 90.20;
Expense ratio: 43.13.
2009 Q1:
Combined ratio: 100.40;
Loss ratio: 78.32;
Expense ratio: 22.08.
2009 Q2:
Combined ratio: 99.82;
Loss ratio: 79.83;
Expense ratio: 19.99.
2009 Q3:
Combined ratio: 106.36;
Loss ratio: 84.81;
Expense ratio: 21.55.
2009 Q4:
Combined ratio: 146.87;
Loss ratio: 121.39;
Expense ratio: 25.48.
Source: GAO analysis of AIG‘s financial statements filed with SEC and
quarterly financial supplements.
Note: Historical operating ratios for commercial insurance have been
revised to include Private Client Group and exclude HSB Group, Inc.
The underwriting expense for the fourth quarter of 2008 includes a
$1.2 billion charge for impairment to goodwill, increasing the expense
ratio by 22.50 points. Claims related to major catastrophes were $1.4
billion in 2008, including hurricane claims of $1.1 billion in the
third quarter of 2008. Conversely, claims related to major
catastrophes were $100 million in 2007.
[End of figure]
Combined ratios for foreign general insurance were lower in the first
three quarters of 2007 and 2008 than in comparable quarters of 2009
(see figure 18). AIG officials attributed the higher 2009 numbers to
several factors, including increased loss ratios due to higher claim
losses, particularly in Europe, and increased expense ratios because
of lower net premiums earned that resulted from the sale of its
Brazilian operations. In addition, insurance markets becoming more
competitive, and higher levels of general operating expenses primarily
related to remediation/audit of general insurance (Chartis, Inc.),
pension costs, and post retirement liability costs contributed to the
higher combined ratios in 2009. As with AIG's commercial insurance,
the combined ratio in its foreign general property-casualty insurance
business also rose above 100 percent in the last two quarters of 2009.
Figure 18: AIG Property/Casualty Insurance: AIG Foreign General
Insurance Operating Ratios, First Quarter of 2007 through Fourth
Quarter of 2009:
[Refer to PDF for image: multiple line graph]
2007 Q1:
Combined ratio: 79.22;
Loss ratio: 50.64;
Expense ratio: 28.58.
2007 Q2:
Combined ratio: 86.05;
Loss ratio: 52.13;
Expense ratio: 33.92.
2007 Q3:
Combined ratio: 90.17;
Loss ratio: 52.40;
Expense ratio: 37.77.
2007 Q4:
Combined ratio: 85.23;
Loss ratio: 47.31;
Expense ratio: 37.92.
2008 Q1:
Combined ratio: 83.41;
Loss ratio: 51.78;
Expense ratio: 31.63.
2008 Q2:
Combined ratio: 89.36;
Loss ratio: 53.65;
Expense ratio: 35.71.
2008 Q3:
Combined ratio: 97.19;
Loss ratio: 59.31;
Expense ratio: 37.88.
2008 Q4:
Combined ratio: 100.74;
Loss ratio: 57.99;
Expense ratio: 42.75.
2009 Q1:
Combined ratio: 90.25;
Loss ratio: 55.57;
Expense ratio: 34.68.
2009 Q2:
Combined ratio: 95.48;
Loss ratio: 54.91;
Expense ratio: 40.57.
2009 Q3:
Combined ratio: 103.38;
Loss ratio: 61.27;
Expense ratio: 42.11.
2009 Q4:
Combined ratio: 111.16;
Loss ratio: 65.52;
Expense ratio: 45.64.
Source: GAO analysis of AIG‘s financial statements filed with SEC and
quarterly financial supplements.
[End of figure]
[End of section]
Appendix VIII: Detail on AIG's Federal Assistance and the Repayment of
that Assistance:
The initial federal assistance to American International Group, Inc.
(AIG) was provided through the Federal Reserve Bank of New York's
(FRBNY) Revolving Credit Facility. This indicator tracks the borrowing
limit and the amount owed on the facility since it was implemented. As
shown in figure 19, as of December 30, 2009, the amount of direct
assistance available to AIG through the facility dropped to $35
billion, and the amount AIG owed the facility dropped to $23.4
billion. The decreases in available assistance and outstanding balance
were attributable to the November 2008 and December 2009 restructuring
of the government's assistance to the company from debt to preferred
equity. Changes in amounts owed on the facility fluctuate weekly and
could indicate increased liquidity needs related to restructuring
decisions. Lower balances could indicate decreased liquidity needs,
payments to the facility, and conversions to preferred equity stakes
in AIG.
Figure 19: FRBNY Revolving Credit Facility Balance Owed and Total
Amount Available, October 2008 through March 2010 (Dollars in
millions):
[Refer to PDF for image: multiple line graph]
October 2008:
Balance: $62,000 ($72,332 on 10/22/08);
Borrowing limit: $85,000.
November 2008:
Balance: $61,365;
Borrowing limit: $85,000.
December 2008:
Balance: $35,437;
Borrowing limit: $60,000.
January 2009:
Balance: $39,003;
Borrowing limit: $60,000.
February 2009:
Balance: $39,013;
Borrowing limit: $60,000.
March 2009:
Balance: $41,652;
Borrowing limit: $60,000.
April 2009:
Balance: $44,712;
Borrowing limit: $60,000.
May 2009:
Balance: $45,496;
Borrowing limit: $60,000.
June 2009:
Balance: $43,578;
Borrowing limit: $60,000.
July 2009:
Balance: $42,834;
Borrowing limit: $60,000.
August 2009:
Balance: $41,335;
Borrowing limit: $60,000.
September 2009:
Balance: $38,792;
Borrowing limit: $60,000.
October 2009:
Balance: $39,882;
Borrowing limit: $60,000.
November 2009:
Balance: $44,539;
Borrowing limit: $60,000.
December 2009:
Balance: $20,660;
Borrowing limit: $35,000.
January 2010:
Balance: $22,215;
Borrowing limit: $35,000.
February 2010:
Balance: $25,662;
Borrowing limit: $35,000.
March 2010:
Balance: $25,109 ($25,377 on 3/31/10);
Borrowing limit: $35,000.
Sources: GAO analysis of Federal Reserve Statistical Release H.4.1 and
Federal Reserve.
[End of figure]
We also developed two indicators to monitor the status of the
government's indirect assistance to AIG through Maiden Lane II and
Maiden Lane III. By monitoring the principal and interest owed on
these facilities, we can track FRBNY's ongoing indirect exposure to
AIG. The Maiden Lane II and Maiden Lane III portfolios are funded
primarily by loans from FRBNY, which are not debt on AIG's books. The
loans and related expenses are to be repaid from cash generated by
investment yields, maturing assets, and sales of assets in the
facilities. In addition to the FRBNY investments in the facilities,
AIG invested $1 billion in Maiden Lane II and $5 billion in Maiden
Lane III.
FRBNY provided a loan to Maiden Lane II to purchase residential
mortgage-backed securities from AIG's domestic life insurance
companies. As shown in figure 20, the portfolio value of Maiden Lane
II peaked at $20 billion in December 2008 and was $14.8 billion at the
end of September 2009. The level of debt (principal and interest) for
the facility has been reduced from a maximum of $19.5 billion to its
level in December 2009 of $16 billion.
Figure 20: Amounts Owed and Portfolio Value of Maiden Lane II (Dollars
in billions):
[Refer to PDF for image: multiple vertical bar graph]
12/17/08:
Principal and interest owed to FRBNY: $19.5;
Portfolio value: $20.0;
Principal and interest owed to AIG: $1.0.
12/24/09:
Principal and interest owed to FRBNY: $19.5;
Portfolio value: $20.0;
Principal and interest owed to AIG: $1.0.
3/25/09:
Principal and interest owed to FRBNY: $18.6;
Portfolio value: $18.4;
Principal and interest owed to AIG: $1.0.
7/1/09:
Principal and interest owed to FRBNY: $17.7;
Portfolio value: $16.1;
Principal and interest owed to AIG: $1.0.
9/2/09:
Principal and interest owed to FRBNY: $17.1;
Portfolio value: $14.9;
Principal and interest owed to AIG: $1.0.
9/30/09:
Principal and interest owed to FRBNY: $16.8;
Portfolio value: $14.8;
Principal and interest owed to AIG: $1.0.
12/30/09:
Principal and interest owed to FRBNY: $16.0;
Portfolio value: $15.7;
Principal and interest owed to AIG: $1.0.
3/31/10:
Principal and interest owed to FRBNY: $15.3;
Portfolio value: $15.4;
Principal and interest owed to AIG: $1.0.
Source: GAO analysis of weekly Federal Reserve Statistical Release
H.4.1.
[End of figure]
FRBNY also provided loans to Maiden Lane III so it could purchase
multi-sector collateralized debt obligations from AIGFP's credit
default swaps counterparties. As shown in figure 21, the portfolio
value of Maiden Lane III peaked at $28.2 billion in December 2008 and
declined to $20.2 billion just more than 6 months later in July 2009.
The level of debt has continued to be reduced since December 2008, and
as of March 31, 2010, it stood at $17.3 billion, which is 29 percent
less than the amount owed at December 24, 2008.
Figure 21: Amounts Owed and Portfolio Value of Maiden Lane III:
[Refer to PDF for image: multiple vertical bar graph]
12/17/08:
Principal and interest owed to FRBNY: $15.2;
Portfolio value: $19.7;
Principal and interest owed to AIG: $5.0.
12/24/09:
Principal and interest owed to FRBNY: $24.4;
Portfolio value: $28.2;
Principal and interest owed to AIG: $5.0.
3/25/09:
Principal and interest owed to FRBNY: $24.2;
Portfolio value: $27.6;
Principal and interest owed to AIG: $5.1.
7/1/09:
Principal and interest owed to FRBNY: $22.6;
Portfolio value: $20.2;
Principal and interest owed to AIG: $5.1.
9/2/09:
Principal and interest owed to FRBNY: $20.5;
Portfolio value: $20.9;
Principal and interest owed to AIG: $5.1.
9/30/09:
Principal and interest owed to FRBNY: $19.9;
Portfolio value: $20.6;
Principal and interest owed to AIG: $5.2.
12/30/09:
Principal and interest owed to FRBNY: $18.5;
Portfolio value: $22.7;
Principal and interest owed to AIG: $5.2.
3/31/10:
Principal and interest owed to FRBNY: $17.3;
Portfolio value: $22.2;
Principal and interest owed to AIG: $5.2.
Source: GAO analysis of weekly Federal Reserve Statistical Release
H.4.1.
[End of figure]
[End of section]
Appendix IX: Disposition of AIG Assets:
Part of American International Group, Inc.'s (AIG) strategy to raise
money for repaying the federal government is to sell several of its
assets. This indicator tracks sales or dispositions that have been
closed and agreements of pending dispositions that have been publicly
announced but have not yet closed. As table 5 shows, AIG sold
increasingly more of its assets each quarter, from the last quarter of
2008 when it sold one asset for $820 billion, to the third quarter of
2009 when it sold 12 of its assets for a disclosed value of more than
$4.5 billion (the proceeds for most of the sales that quarter were not
publicly disclosed). In the last quarter of 2009, AIG sold only one
asset--AIG Finance-Hong Kong--for $627 million. AIG officials told us
that in addition to the sale of this asset, AIG signed sales
agreements for several other transactions during this time period that
had not yet closed. As of December 31, 2009, AIG disclosed that it had
received $10.3 billion in total proceeds from sales, $5 billion of
which was cash. Most recently, AIG has announced that it has entered
into agreements to sell American International Assurance Company, Ltd
(AIA) and American Life Insurance Company (ALICO) for a combined $51
billion.
Table 7: Dispositions Closed and Agreements Announced but not yet
Closed, Second Quarter of 2008 through March 31, 2010 (Dollars in
millions):
Dispositions closed in quarter ending: September 30, 2008:
Total proceeds: N/A.
Dispositions closed in quarter ending: December 31, 2008:
Unibanco JV; Total proceeds: $820.
Dispositions closed in quarter ending: March 31, 2009;
AIG Financial Products Energy Commodity Hedges (all cash) (part of
investment assets disposition below);
Philam Savings Bank: Total proceeds: $43.
Hartford Steam Boiler ($739 million cash): Total proceeds: $815.
Spanish Solar Park (part of investment assets disposition below).
Dispositions closed in quarter ending: June 30, 2009:
AIG Life Insurance Company of Canada (all cash); Total proceeds: $263.
Commodity Business (all cash); Total proceeds: 15.
AIG Retail Bank and AIG Card (Thailand) ($45 million cash); Total
proceeds: $540.
AIG Private Bank ($253 million cash); Total proceeds: $308.
Darag; Total proceeds: N/D.
Real estate in Tokyo (all cash); Total proceeds: $1,179.
Transatlantic Holdings; Total proceeds: $1,136.
Dispositions closed in quarter ending: September 30, $2009:
21st Century Insurance Group ($1.7 billion cash); Total proceeds:
$1,900.
CFG China; Total proceeds: N/D.
Consumer finance operations in Mexico; Total proceeds: N/D.
A.I. Credit Life (all cash); Total proceeds: $741.
Investment assets--energy and infrastructure; Total proceeds: $1,900.
AIG Credit Card Co (Taiwan); Total proceeds: N/D.
CFG Thailand; Total proceeds: N/D.
AIG Systems Solution; Total proceeds: N/D.
Philam Plans; Total proceeds: N/D.
Philam Care; Total proceeds: N/D.
72 Wall Street (Manhattan office tower); Total proceeds: N/D.
Consumer finance operations in Russia; Total proceeds: N/D.
Dispositions closed in quarter ending: December 31, 2009:
AIG Finance-Hong Kong ($70 million cash); Total proceeds: $627.
Dispositions closed in quarter ending: March 31, 2010:
Transatlantic Holdings, Inc.; Total proceeds: $452.
Portion of its asset management business; Total proceeds: $277.
Total proceeds on dispositions closed:
Total proceeds: $11,016.
Total known cash proceeds on closed dispositions with terms disclosed:
Total proceeds: $5,734.
Disposition agreements announced but not yet closed at March 31, 2010:
Consumer finance operations in Argentina; Total proceeds: N/D.
Consumer finance operations in Colombia; Total proceeds: N/D.
Consumer finance business in Poland; Total proceeds: N/D.
Nan Shan; Total proceeds: $2,150.
UGC International Canada; Total proceeds: N/D.
UGC International Israel; Total proceeds: N/D.
AIA ($25 billion cash, $8.5 billion equity linked securities $2.0
billion preferred stock in Prudential PLC); Total proceeds: $35,500.
ALICO ($6.8 billion cash, $8.7 billion stock in Met Life); Total
proceeds: $15,500.
Source: AIG and GAO analysis of AIG press releases and SEC filings.
Note: N/D means not disclosed.
[End of table]
[End of section]
Appendix X: GAO Contact and Staff Acknowledgments:
GAO Contact:
Orice Williams Brown, (202) 512-8678 or williamso@gao.gov:
Staff Acknowledgments:
In addition to the contacts named above, Karen Tremba (Assistant
Director); Farah Angersola, Tania Calhoun, Rachel DeMarcus, Lawrance
Evans, John Forrester, Marc Molino, Jennifer Schwartz, Jeremy Sebest,
and Melvin Thomas made important contributions to this report.
[End of section]
Glossary of Terms:
Adjusted Basis:
The net cost of an asset or security that is used to compute the gains
or loss on that asset or security. It is calculated by starting with
the original cost of an asset or security, then adding the value of
any improvements, legal fees, and assessments and subtracting the
value of any accumulated depreciation, amortization, and other losses.
Asset:
An item owned by an individual, corporation, or government that
provides a benefit, has economic value, and could be converted into
cash. For businesses, an asset generates cash flow and may include,
for example, accounts receivable and inventory. Assets are listed on a
company's balance sheet.
Book:
A trader's record or inventory of long (buy) and short (sell)
positions on securities it is holding and on orders that have been
placed. A book may hold few or several positions and a trader may have
several books, which are variously organized, such as by types of
product or risk.
Capital:
The value of cash, goods, and other financial resources used by a
business to generate income or make an investment. Companies can raise
capital from investors by selling stocks and bonds. Capital is often
used to measure the financial strength of a company.
Capital Market:
The market for long-term funds where securities such as common stock,
preferred stock, and bonds are traded. Both the primary market for new
issues and the secondary market for existing securities are part of
the capital market.
Claims (Adjustment) Expenses:
Costs of adjusting a claim that include attorneys fees and
investigation expenses.
Collateral:
Properties or other assets pledged by a borrower to secure credit from
a lender. If the borrower does not pay back or defaults on the loan,
the lender may seize the collateral.
Collateralized Debt Obligations (CDO):
Securities backed by a pool of bonds, loans, or other assets. In a
basic CDO, a pool of bonds, loans, or other assets are pooled and
securities are then issued in different tranches (or slices) that vary
in risk and return.
Combined Ratio:
A common measure of the performance of the daily operations of an
insurance company. The ratio is calculated by adding the amount of
incurred losses and the amount of expenses incurred by the company and
dividing that combined amount by the earned premium generated during
the same period. The ratio describes the related cost of losses and
expenses for every $100 of earned premiums. A ratio below 100 percent
generally indicates that the company is making underwriting profit
while a ratio above 100 percent generally means that it is paying out
more money in claims that it is receiving from premiums.
Commercial Paper:
An unsecured obligation with maturities ranging from 2 to 270 days
issued by banks, corporations, and other borrowers with high credit
ratings to finance short-term credit needs, such as operating expenses
and account receivables. Commercial paper is a low-cost alternative to
bank loans. Issuing commercial paper allows a company to raise large
amounts of funds quickly without the need to register with the
Securities and Exchange Commission by either selling them directly to
an investor or to a dealer who then sells them to a large and varied
pool of institutional buyers.
Credit Default Swap (CDS):
CDS are bilateral contracts that are sold over the counter and
transfer credit risks from one party to another. The seller, who is
offering credit protection, agrees, in return for a periodic fee, to
compensate the buyer, who is buying credit protection, if a specified
credit event, such as default, occurs.
Derivative:
A financial instrument, traded on-or off-exchange, the price of which
directly depends on the value of one or more underlying commodities.
Derivatives involve the trading of rights or obligations on the basis
of the underlying product, but they do not directly transfer property.
Directors and Officer Liability Insurance:
Provides coverage when a director or officer of a company commits a
negligent act or misleading statement that results in the company
being sued.
Equity:
Ownership interest in a business in the form of common stock or
preferred stock.
Errors and Omissions Liability Insurance (or Coverage):
Insurance protection to various professions for negligent acts or
omissions resulting in bodily injury, property damage or liability to
a client.
Expense Ratio:
The ratio of underwriting expenses to net premiums earned. It is a
measure of underwriting efficiency, where an increase in the ratio
represents increased expenses relative to premiums. The underwriting
expenses include the amortization of deferred policy acquisition costs
(commissions, taxes, licenses and fees, and other underwriting
expenses amortized over the policy term), and insurance operating
costs and expenses. For example, a 22.4 expense ratio indicates that
22.4 cents out of every dollar in premiums earned are used for
underwriting expenses.
Fair Value:
An estimated value of an asset or liability that is reasonable to all
willing parties involved in a transaction taking into account market
conditions other than liquidation. The fair value of derivative
liability, for example, represents the fair market valuation of the
liabilities in a portfolio of derivatives. In this example, the fair
value provides an indicator of the dollar amount the market thinks the
trader of the portfolio would need to pay to eliminate its liabilities.
Goodwill (and Goodwill Impairment):
Goodwill occurs when a company buys another entity and pays more than
the market value of all assets on the entity's books. A company will
pay more because of intangibles--such trademarks and copyrights--on
the books at historical cost and other factors--such as human capital,
brand name, and client base--that accounting conventions do not
capture on the books. If the company later determines that the entity
has lost value and recovery is not a realistic expectation it might
decide record the lost value as an impairment.
Liability:
A business's financial obligation that must be made to satisfy the
contractual terms of such an obligation. A current liability, such as
accounts payable or wages, is a debt that is payable within 1 year,
while a long-term liability, such as leases and bond repayments, are
payable over a longer period.
Liquidity:
Measure of the extent to which a business has cash to meet its
immediate and short-term obligations. Liquidity is also measured in
terms of a company's ability to borrow money to meet short-term
demands for funds.
Loss Ratio:
The ratio of claims and claims adjustment expenses incurred to net
earned premiums. For example, a 77.3 loss ratio indicates that 77.3
cents out of every dollar in premiums earned are used to adjust and
pay claims.
Mezzanine Tranche:
A tranche is a piece or portion of a structured deal, or one of
several related securities that are issued together but offer
different risk-reward characteristics The mezzanine tranche is
subordinated to the senior tranche, but is senior to the equity
tranche. The senior tranche is the least risky tranche whereas the
equity tranche is the first loss and riskiest tranche.
Mortgage-Backed Securities:
Securities or debt obligations that represent claims to the cash flows
from pools of mortgage loans, such as mortgages on residential
property. These securities are issued by Ginnie Mae, Fannie Mae, and
Freddie Mac, as well as private institutions, such as brokerage firms
and banks.
Notional Amount (Gross and Net):
The amount upon which payments between parties to certain types of
derivatives contracts are based. The gross notional amount is not
exchanged between the parties, but instead represents the underlying
quantity upon which payment obligations are computed. The net notional
amount represents the maximum dollar level exposure for the portfolio.
Paid-in Capital:
Paid-in capital is funds provided by investors in exchange for common
or preferred stock. Paid-in capital represents the funds raised by the
business from equity, and not from ongoing operations.
Preferred Stock (Cumulative, Noncumulative, etc):
A class of ownership in a corporation or stock that has
characteristics of both common stock and debt. Preferred shareholders
receive their dividends before common stockholders, but they generally
do not have the voting rights available to common stockholders.
Retained Earnings:
A calculation of the accumulated earnings of a corporation minus cash
dividends since inception.
Reverse Stock Split:
A proportionate decrease in the number of shares held by stockholders
that a company generally institutes to increase the market price per
share of its stock. In a 1 for 10 stock split stockholders would own 1
share for every 10 shares that they owned before the reverse split.
Risk-Based Capital (Insurance):
The amount of required capital that an insurance company must maintain
based on the inherent risks in the insurer's operations. Authorized
control level risk-based capital is the level at which an insurance
commissioner can first take control of an insurance company.
Secured/Unsecured Debt:
Secured debt is debt backed or secured by a pledge of collateral.
Unsecured debt is not backed by any such pledge of collateral.
Securitization:
The process of pooling debt obligations and dividing that pool into
portions (called tranches) that can be sold as securities in the
secondary market--a market where investors purchase securities or
assets from other investors. Financial institutions use securitization
to transfer the credit risk of the assets they originate from their
balance sheets to those of the investors who purchased the securities.
Shareholders' Equity:
Total assets minus total liabilities of a company, as found on a
company's balance sheet. Shareholders' equity is also known as owner's
equity, net worth, or book value. The two sources for shareholders'
equity are money that was originally invested in the company, along
with additional investments made thereafter, and retained earnings.
Soft Market:
A market in which supply exceeds demand resulting in a lowering of
prices in that market. This is commonly referred to as a buyer's
market as buyers hold much of the power in negotiating prices.
Solvency:
Minimum standard of financial health for an insurance company, where
assets exceed liabilities. In general, a solvent company is able to
pay its debt obligations as they come due.
Special Purpose Vehicle:
A legal entity, such as a limited partnership that a company creates
to carry out some specific financial purpose or activity. Special
purpose vehicles can be used for a variety of purposes such as to
securitize loans in order to help spread the credit and interest rate
risk of their portfolios over a number of investors.
Trading Position:
The amount of a security or commodity owned by an investor or a dealer.
Tranche:
A tranche is a portion or class of a security. A security may have
several tranches, each with different risks and rates of return, among
other differences.
Treasury Stock:
previously issued shares of a company that the company has purchased
back from investors.
Unrealized Gains and Losses:
A profit or loss on an investment that has not been sold. That is, an
unrealized profit or loss occurs when the current price of a security
which is still owned by the holder is higher or lower than the price
the holder paid for it.
Warrant:
An options contract on an underlying asset that is in the form of a
transferable security. A warrant gives the holder the right to
purchase a specified amount of the issuer's securities in the future
at a specific price.
[End of section]
Footnotes:
[1] The Emergency Economic Stabilization Act of 2008 (the act), Pub.
L. No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C. §§ 5201
et seq. The act originally authorized Treasury to purchase or
guarantee up to $700 billion in troubled assets. The Helping Families
Save Their Homes Act of 2009, Pub. L. No. 111-22, Div. A, 123 Stat.
1632 (2009), amended the act to reduce the maximum allowable amount of
outstanding troubled assets under the act by almost $1.3 billion, from
$700 billion to $698.741 billion.
[2] GAO is required to report at least every 60 days on findings
resulting from, among other things, oversight of TARP's performance in
meeting the purposes of the act, the financial condition and internal
controls of TARP, the characteristics of both asset purchases and the
disposition of assets acquired, TARP's efficiency in using the funds
appropriated for the program's operation, and TARP's compliance with
applicable laws and regulations. 12 U.S.C. § 5226(a).
[3] Our ability to review the Federal Reserve's assistance was
clarified by the Helping Families Save Their Homes Act of 2009,
enacted on May 20, 2009, which provided GAO authority to audit Federal
Reserve actions taken under section 13(3) of the Federal Reserve Act
"with respect to a single and specific partnership or corporation."
Among other things, this amendment provides GAO with authority to
audit Federal Reserve actions taken with respect to three entities
also assisted under TARP--Citigroup, Inc.; AIG; and Bank of America
Corporation. This amendment also gave GAO the authority to access
information from entities participating in TARP programs, such as AIG,
for purposes of reviewing the performance of TARP.
[4] GAO, Troubled Asset Relief Program: Status of Government
Assistance to AIG, [hyperlink, http://www.gao.gov/products/GAO-09-975]
(Washington, D.C.: Sept. 21, 2009). For our previous testimony on the
assistance provided to AIG, see GAO, Federal Financial Assistance:
Preliminary Observations on Assistance Provided to AIG, [hyperlink,
http://www.gao.gov/products/GAO-09-490T] (Washington, D.C.: Mar. 18,
2009).
[5] GAO has recently been asked by Chairman Towns and Representative
Cummings, House Committee on Oversight and Government Reform, and
Ranking Member Bachus, House Committee on Financial Services, to
undertake a review of the Federal Reserve's actions concerning its
assistance to AIG. This report predates those requests and does not
attempt to answer questions raised in either request.
[6] CDS are bilateral contracts that are sold over the counter and
transfer credit risks from one party to another. The seller, who is
offering credit protection, agrees, in return for a periodic fee, to
compensate the buyer if a specified credit event, such as default,
occurs.
[7] FRBNY created Maiden Lane II as a special purpose vehicle to
provide AIG liquidity through its purchase of residential mortgage-
backed securities from AIG life insurance companies. FRBNY provided a
loan to the special purpose vehicle for the purchases. It also
terminated a previously established securities lending program with
AIG. FRBNY also created Maiden Lane III as a special purpose vehicle
to provide AIG liquidity through its purchase of collateralized debt
obligations from AIG Financial Products' counterparties in connection
with termination of credit default swaps. FRBNY again provided a loan
to the special purpose vehicle for the purchases. See [hyperlink,
http://www.gao.gov/products/GAO-09-975] (starting on page 30) for more
discussion on FRBNY's creation of these special purpose vehicles.
[8] Commercial paper refers to short-term promissory notes that are
issued primarily by corporations to finance their short-term credit
needs.
[9] For more information on the role of consolidated supervisors, see
GAO, Financial Market Regulation: Agencies Engaged in Consolidated
Supervision Can Strengthen Performance Measurement and Collaboration,
[hyperlink, http://www.gao.gov/products/GAO-07-154] (Washington, D.C.:
Mar. 15, 2007).
[10] The primary state insurance regulators include New York,
Pennsylvania, and Texas.
[11] SIGTARP: Office of the Inspector General for the Troubled Asset
Relief Program, Quarterly Report to Congress, January 30, 2010; Office
of the Inspector General for the Troubled Asset Relief Program,
Quarterly Report to Congress, October 21, 2009; Office of the
Inspector General for the Troubled Asset Relief Program, Quarterly
Report to Congress, July 21, 2009; Office of the Inspector General for
the Troubled Asset Relief Program, Quarterly Report to Congress, April
21, 2009; and Office of the Inspector General for the Troubled Asset
Relief Program, Initial Report to the Congress, February 6, 2009.
[12] SIGTARP: Office of the Inspector General for the Troubled Asset
Relief Program, Extent of Federal Agencies' Oversight of AIG
Compensation Varied, and Important Challenges Remain, October 14,
2009, and Office of the Inspector General for the Troubled Asset
Relief Program, Factors Affecting Efforts to Limit Payments to AIG
Counterparties, November 17, 2009.
[13] As we said in our March 2009 testimony on credit default swaps,
there is no single definition for systemic risk. Traditionally,
systemic risk was viewed as the risk that the failure of one large
institution would cause other institutions to fail. This micro-level
definition is one way to think about systemic risk. Recent events have
illustrated a more macro-level definition: the risk that an event
could broadly affect the financial system rather than just one or a
few institutions. See GAO, Systemic Risk: Regulatory Oversight and
Recent Initiatives to Address Risk Posed by Credit Default Swaps,
[hyperlink, http://www.gao.gov/products/GAO-09-397T] (Washington,
D.C.: Mar. 5, 2009).
[14] CDOs are securities backed by a pool of bonds, loans, or other
assets.
[15] The Federal Reserve announced that, as a condition of
establishing the initial $85 billion credit facility, a trust
established for the sole benefit of the U.S. Treasury would become the
majority equity investor in AIG. This was achieved through the
establishment of an independent trust to manage Treasury's beneficial
interest in preferred shares (Series C) of AIG. When the trust
agreement was executed in January 2009, the Series C stock was
convertible into approximately 77.9 percent of the issued and
outstanding shares of common stock of AIG.
[16] According to AIG, cash proceeds from the sale will allow AIG to
buy back all of FRBNY's preferred equity interest in AIA and repay
part of the FRBNY Revolving Credit Facility.
[17] According to AIG, cash proceeds from the sale will allow AIG to
reduce part of FRBNY's preferred equity interest in ALICO. Over time,
the MetLife securities in the ALICO SPV will be sold and the funds
will be used to FRBNY's remaining preferred interests in ALICO and,
subsequently, repay AIG's debt on the FRBNY Revolving Credit Facility.
[18] A multi-sector CDO is a CDO backed by a combination of corporate
bonds, loans, asset-backed securities, or mortgage-backed securities.
[19] AIGFP sold CDS on multi-sector CDOs. As a result, to unwind these
contracts, Maiden Lane III was created to purchase the CDOs from AIG's
CDS counterparties. In exchange for purchasing the underlying assets,
the counterparties agreed to terminate the CDS contracts, thereby
eliminating the need for AIG to post additional collateral as the
value of the CDOs fell.
[20] Cumulative preferred stock is a form of capital stock in which
holders of preferred stock receive dividends before holders of common
stock, and dividends that have been omitted in the past must be paid
to preferred shareholders before common shareholders can receive
dividends.
[21] The securities purchase agreement indicates that the amount of
$29.835 billion is equal to $30 billion minus $165 million in
retention payments made by AIGFP; AIG Trading Group, Inc.; and their
respective subsidiaries to their employees in March 2009.
[22] See appendix II for a detailed listing of AIG's historical and
current credit ratings and an explanation of the meaning of the
various credit ratings.
[23] AIG's long-term debt was rated at A-/Negative (S&P) and A3/
Negative (Moody's), and its short-term debt was rated at A-1 (S&P) and
P-1 (Moody's). While these ratings are described using slightly
different terminology, they tend to show relative consistency in the
strength of AIG's debt.
[24] Liquid assets--such as accounts receivable, cash on hand,
Treasury Bills, and certificates of deposits--are assets that can be
converted easily and quickly to cash.
[25] The amount of maturing debt was reduced when the amount
authorized on the facility was reduced from the original $85 billion
to $60 billion.
[26] In this transaction, FRBNY received preferred equity valued at
$25 billion, and in exchange the debt AIG owed to the FRBNY Revolving
Credit Facility was lowered by an equivalent amount.
[27] Other capital included payments advanced to purchase shares, the
cost of Treasury stock, and accumulated other comprehensive income or
loss as originally reported. Our computations adjusted the value of
AIG's common stock and paid-in capital for the retroactive effect of
the July 2009 reverse stock split.
[28] This amount was based on the fair value of common shares into
which the preferred Series C would be convertible on September 16,
2008, which was the date on which AIG received FRBNY's commitment. AIG
also recorded this amount as a prepaid commitment fee for the $85
billion credit facility to be treated as an asset to be amortized as
interest expense over the 5-year term of the FRBNY facility. The only
cash involved in this transaction was $500,000 that FRBNY paid by
reducing the commitment fee it charged AIG for the Series C preferred
shares. Through June 30, 2009, $10.2 billion of this asset was
amortized through the accumulated deficit and thus reduced
shareholders equity. For more detail on Series C preferred shares, see
[hyperlink, http://www.gao.gov/products/GAO-09-975].
[29] As previously discussed, the federal equity investment includes
federally owned Series C preferred shares that are convertible into
79.77 percent of total outstanding common shares. Under the terms of
the Series C preferred stock issuance, the preferred stock is
convertible into AIG's common stock. The conversion formula provides
that the trust will receive 79.77 percent of AIG's common stock less
the percentage of common stock that may be acquired by or for the
benefit of Treasury as a result of warrants or other convertible
preferred stock held by Treasury. Treasury received a warrant to
purchase 2,690,088 shares of AIG Common Stock in connection with its
purchase of Series D preferred stock, and an additional warrant to
purchase AIG common stock in connection with its purchase of Series F
preferred stock. Proceeds from the sale of the trust stock will be
deposited in the U.S. Treasury General Fund.
[30] The Insurance Index is a stock price index maintained by Thomson
Reuters comprised of insurance companies that conduct a variety of
insurance activities. As a result the index is a good proxy for the
stock market performance for the insurance sector. The NYSE Composite
Index is designed to measure the performance of all common stocks
listed on the NYSE and therefore, provides a measure of overall stock
market performance.
[31] A basis point is a common measure used in quoting yield on bills,
notes, and bonds and represents 1/100 of a percent of yield.
[32] A tranche is a portion or class of a security. A security may
have several tranches, each with different risks and rates of return,
among other differences.
[33] In exchange for a periodic fee, these institutions received
credit protection for a portfolio of diversified loans, thus reducing
minimum capital requirements set by their regulators.
[34] According to AIG, the schedule by which they expected these
positions to be called or terminated has slowed as the Basel Committee
on Banking Supervision of the Bank for International Settlements has
suggested a delay in the implementation of certain Basel II
provisions, which could affect capital requirements and cause the
banks to delay the termination of these transactions in the expected
time frame.
[35] "Total adjusted capital" is a company's actual amount of capital
and surplus; it refers to a company's capital base.
[36] The authorized control level risk-based capital is the level at
which an insurance commissioner can seize or first take control of an
insurance company.
[37] As discussed earlier, FRBNY created Maiden Lane II, an SPV, to
provide AIG liquidity through its purchase of residential mortgage-
backed securities from AIG life insurance companies. FRBNY provided a
loan to the SPV for the purchases. It also terminated a previously
established securities lending program with AIG.
[38] The life insurance and retirement services segment losses
associated with investment activity through its securities lending
program accounted for a significant portion of AIG's losses in the
fourth quarter of 2008. Appendix VI describes the revenues and
expenses of AIG's life and retirement services programs in more detail.
[39] In July 2009, AIG announced that it had formed an SPV into which
it would contribute the equity of AIU Holdings--which included AIG's
commercial insurance, foreign general insurance, and private client
group operations--and would be called Chartis, Inc.
[40] The Council of Insurance Agents and Brokers' Quarterly Commercial
P/C Market Index Survey, fourth quarter 2009, January 22, 2010.
[41] Investment returns are not considered part of underwriting and
thus are not included in the ratios.
[42] Goodwill occurs when a company buys another entity and pays more
than the market value of all assets on the entity's books. A company
will pay more because of intangibles such trademarks and copyrights on
the books at historical cost and other factors--such as human capital,
brand name, and client base--that accounting conventions do not
capture on the books. If the company later determines that the entity
has lost value and recovery is not a realistic expectation it might
decide record the lost value as an impairment.
[43] For a more detailed discussion of the condition of AIG's
insurance operations, see appendix VII.
[44] This amount does not include AIG's use of the Federal Reserve's
Commercial Paper Funding Facility.
[45] See table 5 in [hyperlink,
http://www.gao.gov/products/GAO-09-975].
[46] In March 2010, AIG announced the pending sale of AIA for about
$35.5 billion. AIG expects to use approximately $16 billion in
proceeds to redeem FRBNY's preferred interests in AIA and use
approximately $9 billion to repay the FRBNY Revolving Credit Facility.
In addition, AIG announced that its board had approved the sale of AIA
to Prudential PLC by the end of 2010 for approximately $25 billion in
cash and $10.5 billion in equity securities, pending approval by
regulators and stockholders. AIG intends to sell for cash the $10.5
billion in face value of Prudential securities over time. According to
AIG, all net cash proceeds from the monetization of these securities
will be used to repay any outstanding debt under the FRBNY Credit
Facility. More recently, on April 1, 2010, AIG announced that per the
terms of the Series E and F preferred stock agreements, since AIG did
not pay dividends on those series of preferred stock for four
quarterly periods, Treasury appointed two directors to the AIG board
of directors.
[47] As discussed in the background section of this report, on April
17, 2009, AIG and Treasury entered into an agreement in which Treasury
agreed to exchange its $40 billion of Series D cumulative preferred
stock for $41.6 billion of Series E fixed-rate noncumulative preferred
stock in AIG. The $1.6 billion difference between the initial
aggregate liquidation preference of the Series D stock and the
aggregate liquidation preference of the Series E stock represents a
compounding of accumulated but unpaid dividends owed by AIG to
Treasury on the Series D stock.
[48] See appendix VIII for additional details about amounts owed under
FRBNY's Revolving Credit Facility.
[49] For additional trends information on Maiden Lane II, see appendix
VIII.
[50] For a list of dispositions, see appendix IX.
[51] 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.
[52] The federal equity investment includes federally-owned Series C
preferred shares that are convertible into 79.77 percent of total
outstanding common shares. Under the terms of the Series C preferred
stock issuance, the preferred stock is convertible into AIG's common
stock. The conversion formula provides that the trust will receive
79.77 percent of AIG's common stock less the percentage of common
stock that may be acquired by or for the benefit of Treasury as a
result of warrants or other convertible preferred stock held by
Treasury. Treasury received a warrant to purchase 2,690,088 shares of
AIG Common Stock in connection with its purchase of Series D preferred
stock, and an additional warrant to purchase AIG common stock in
connection with its purchase of Series F preferred stock. Proceeds
from the sale of the trust stock will be deposited in the U.S.
Treasury General Fund.
[End of section]
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