Troubled Asset Relief Program
Third Quarter 2010 Update of Government Assistance Provided to AIG and Description of Recent Execution of Recapitalization Plan Gao ID: GAO-11-46 January 20, 2011Assistance provided by the Department of the Treasury (Treasury), under the Troubled Asset Relief Program (TARP), and the Board of Governors of the Federal Reserve System (Federal Reserve) to American International Group, Inc. (AIG) represents one of the federal government's largest investments in a private-sector institution since the financial crisis began in 2008. AIG is a holding company that, through its subsidiaries, engaged in a broad range of insurance and insurancerelated activities in the United States and abroad. As part of GAO's statutory oversight of TARP, this report updates a set of indicators GAO last reported in April 2010. Specifically, GAO discusses (1) trends in AIG's financial condition, (2) trends in the unwinding of AIG Financial Products (AIGFP) and the financial condition of AIG's insurance companies, and (3) the status of the government's exposure to AIG. To update the indicators, GAO primarily used available public filings as of September 30, 2010, and more current publicly available information; reviewed rating agencies' reports; and identified critical activities and discussed them with officials from Treasury, the Federal Reserve, and AIG. Treasury, the Federal Reserve, and AIG provided technical comments that GAO incorporated, as appropriate.
Largely due to the federal assistance Treasury and the Federal Reserve provided to AIG, as measured by several indicators, AIG's financial condition has generally remained relatively stable or showed signs of improvement since GAO's last report in April 2010. As of September 30, 2010, the outstanding balance of the Federal Reserve and Treasury assistance to AIG was $123.7 billion, down from $129.1 billion in December 2009. Overall, federal assistance appears to be facilitating a more orderly restructuring of the company. Several indicators show that AIGFP has continued to unwind its credit default swap positions and its portfolio of super senior credit default swaps. Several indicators on the status of AIG's insurance companies illustrate that its insurance operations are showing signs of recovery, but federal assistance has been a critical factor. In particular, in the first three quarters of 2010, additions to AIG life and retirement policyholder contract deposits exceeded withdrawals and the companies' pretax operating incomes, which increased slightly in 2009 remained positive. AIG's property/casualty companies have remained stabilized. AIG repaid some of its debt to the federal government, but a larger volume of activity involved exchanging AIG's debt on the revolving credit facility (facility) with the Federal Reserve Bank of New York (FRBNY) for federally owned preferred interests in AIG ($40 billion) and AIA Group Limited (AlA) and American Life Insurance Company (ALICO) special purpose vehicles (SPV) ($25 billion). As a result of this shift from debt to equity, which has occurred gradually, the authorized amount of the facility has decreased and the amount of preferred equity interests held in AIG and various SPVs for the government has increased. For example, as of September 30, 2010, the amount of assistance available to AIG through the facility had been reduced to $29.2 billion and the amount AIG owed the facility was reduced to $20.5 billion. Also, FRBNY'S preferred interests in the SPVs created to hold the shares of certain foreign life insurance companies--AIA and ALICO--have increased nearly $1 billion and the Series F stock held by Treasury has increased more than $2 billion since December 31, 2009. Upon the execution of the recapitalization plan on January 14, 2011, all of the government's assistance to AIG is now in the form of common stock and preferred interests. Consequently, the government's, and thus the taxpayer's, exposure to AIG increasingly is expected to be tied to the success of AIG, its ongoing performance, and its value as seen by investors of AIG's common stock. The sustainability of any positive trends in AIG's operations depends on how well AIG manages its business, and the government's ability to fully recoup the federal assistance will be determined by the long-term health of AIG and subject to uncertainty arising from the likelihood of future changes in general economic, regulatory, and market conditions. GAO will continue to monitor these issues in its future work.
GAO-11-46, Troubled Asset Relief Program: Third Quarter 2010 Update of Government Assistance Provided to AIG and Description of Recent Execution of Recapitalization Plan
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United States Government Accountability Office:
GAO:
Report to Congressional Addressees:
January 2011:
Troubled Asset Relief Program:
Third Quarter 2010 Update of Government Assistance Provided to AIG and
Description of Recent Execution of Recapitalization Plan:
GAO-11-46:
GAO Highlights:
Highlights of GAO-11-46, a report to congressional addressees.
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) represents one of the federal
government‘s largest investments in a private-sector institution since
the financial crisis began in 2008. AIG is a holding company that,
through its subsidiaries, engaged in a broad range of insurance and
insurance-related activities in the United States and abroad.
As part of GAO‘s statutory oversight of TARP, this report updates a
set of indicators GAO last reported in April 2010. Specifically, GAO
discusses (1) trends in AIG‘s financial condition, (2) trends in the
unwinding of AIG Financial Products (AIGFP) and the financial
condition of AIG‘s insurance companies, and (3) the status of the
government‘s exposure to AIG. To update the indicators, GAO primarily
used available public filings as of September 30, 2010, and more
current publicly available information; reviewed rating agencies‘
reports; and identified critical activities and discussed them with
officials from Treasury, the Federal Reserve, and AIG.
Treasury, the Federal Reserve, and AIG provided technical comments
that GAO incorporated, as appropriate.
What GAO Found:
Largely due to the federal assistance Treasury and the Federal Reserve
provided to AIG, as measured by several indicators, AIG‘s financial
condition has generally remained relatively stable or showed signs of
improvement since GAO‘s last report in April 2010. As of September 30,
2010, the outstanding balance of the Federal Reserve and Treasury
assistance to AIG was $123.7 billion, down from $129.1 billion in
December 2009 (see table). Overall, federal assistance appears to be
facilitating a more orderly restructuring of the company.
Several indicators show that AIGFP has continued to unwind its credit
default swap positions and its portfolio of super senior credit
default swaps. Several indicators on the status of AIG‘s insurance
companies illustrate that its insurance operations are showing signs
of recovery, but federal assistance has been a critical factor. In
particular, in the first three quarters of 2010, additions to AIG life
and retirement policyholder contract deposits exceeded withdrawals and
the companies‘ pretax operating incomes, which increased slightly in
2009 remained positive. AIG‘s property/casualty companies have
remained stabilized.
AIG repaid some of its debt to the federal government, but a larger
volume of activity involved exchanging AIG‘s debt on the revolving
credit facility (facility) with the Federal Reserve Bank of New York
(FRBNY) for federally owned preferred interests in AIG ($40 billion)
and AIA Group Limited (AlA) and American Life Insurance Company
(ALICO) special purpose vehicles (SPV) ($25 billion). As a result of
this shift from debt to equity, which has occurred gradually, the
authorized amount of the facility has decreased and the amount of
preferred equity interests held in AIG and various SPVs for the
government has increased. For example, as of September 30, 2010, the
amount of assistance available to AIG through the facility had been
reduced to $29.2 billion and the amount AIG owed the facility was
reduced to $20.5 billion. Also, FRBNY‘S preferred interests in the
SPVs created to hold the shares of certain foreign life insurance
companies”-AIA and ALICO-”have increased nearly $1 billion and the
Series F stock held by Treasury has increased more than $2 billion
since December 31, 2009. Upon the execution of the recapitalization
plan on January 14, 2011, all of the government‘s assistance to AIG is
now in the form of common stock and preferred interests. Consequently,
the government‘s, and thus the taxpayer‘s, exposure to AIG
increasingly is expected to be tied to the success of AIG, its ongoing
performance, and its value as seen by investors of AIG‘s common stock.
The sustainability of any positive trends in AIG‘s operations depends
on how well AIG manages its business, and the government‘s ability to
fully recoup the federal assistance will be determined by the long-
term health of AIG and subject to uncertainty arising from the
likelihood of future changes in general economic, regulatory, and
market conditions. GAO will continue to monitor these issues in its
future work.
Table: Overview of Federal Assistance Provided to AIG as of September
30, 2010:
Implemented:
Description of the federal assistance: Federal Reserve: FRBNY created
a revolving credit facility to provide 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 Treasury, which gives the trust an
approximately 79.75 percent voting interest in AIG;
Amount of assistance authorized: Debt: $29.175 billion[A];
Amount of assistance authorized: Equity: n/a;
Outstanding balance: $20.470 billion;
Sources to repay the government: On January 14, 2011, AIG announced
that it executed the signed recapitalization plan, which stated that
AIG is using the net cash proceeds from the recent AIA IPO and the
sale of ALICO to MetLife to repay the FRBNY revolving credit facility.
Description of the federal assistance: Federal Reserve: FRBNY created
a SPV”Maiden Lane II”to provide AIG liquidity by purchasing
residential mortgage-backed securities from AIG life insurance
companies. FRBNY provided a loan to Maiden Lane II for the purchases.
FRBNY also terminated its securities lending program with AIG, which
had provided additional liquidity associated with AIG‘s securities
lending program when it created Maiden Lane II;
Amount of assistance authorized: Debt: $22.5 billion;
Amount of assistance authorized: Equity: n/a;
Outstanding balance: $13.656 billion[B];
Sources to repay the government: Proceeds from asset sales in Maiden
Lane II will be used to repay the FRBNY loan.
Description of the federal assistance: Federal Reserve: FRBNY created
an SPV called Maiden Lane III to provide AIG liquidity by purchasing
collateralized debt obligations from AIGFP counterparties in
connection with the termination of credit default swaps. FRBNY again
provided a loan to the SPV for the purchases;
Amount of assistance authorized: Debt: $30 billion;
Amount of assistance authorized: Equity: n/a;
Outstanding balance: $14.638 billion[B];
Sources to repay the government: Proceeds from asset sales in Maiden
Lane III will be used to repay the FRBNY loan.
Description of the federal assistance: Federal Reserve: AIG created
two SPVs, one for AIA and one for ALICO, to hold the shares of certain
of its foreign life insurance businesses. On December 1, 2009, FRBNY
received preferred interests in the SPVs of $16 billion and $9
billion, respectively, in exchange for reducing debt AIG owed on the
revolving credit facility. The SPVs allowed AIG to strengthen its
balance sheet by reducing debt and increasing equity and also were
intended to facilitate dispositions to generate cash for repayment of
the federal assistance;
Amount of assistance authorized: Debt: n/a;
Amount of assistance authorized: Equity: $25 billion;
Outstanding balance: $25.955 billion;
Sources to repay the government: On November 1, 2010, AIG announced
the completion of an initial public offering of AIA on the Hong Kong
Stock Exchange that generated gross proceeds of $20.51 billion. Also,
on November 1, 2010, AIG announced that it had closed on the sale of
ALICO to MetLife for approximately $16.2 billion, of which $7.2
billion is in cash. The cash proceeds will allow AIG to fully repay
and close the revolving credit facility on closing of the
recapitalization plan.
Description of the federal assistance: Treasury: Treasury purchased
Series D cumulative preferred stock of AIG. AIG used the proceeds to
pay down part of the FRBNY revolving credit facility. Series D stock
was later exchanged for Series E noncumulative preferred stock. Unpaid
dividends on the Series D shares were added to the principal amount of
Series E stock that Treasury received;
Amount of assistance authorized: Debt: n/a;
Amount of assistance authorized: Equity: $40 billion;
Outstanding balance: $41.605 billion;
Sources to repay the government: Proceeds from dispositions of AIG
businesses and internal cash flows of AIG.
Description of the federal assistance: Treasury: 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 billion;
Outstanding balance: $7.378 billion[C];
Sources to repay the government: Proceeds from dispositions of AIG
businesses and internal cash flows of AIG.
Subtotals:
Amount of assistance authorized: Debt: $81.675 billion;
Amount of assistance authorized: Equity: $94.835 billion.
Total authorized (debt and equity):
Amount of assistance authorized: $176.510 billion[D].
Total outstanding assistance:
Outstanding balance: $123.702 billion.
Source: GAO analysis of AIG Securities and Exchange Commission
filings, Federal Reserve, and Treasury data.
[A] The borrowing limit on the revolving credit facility was initially
$85 billion, but was reduced to $60 billion in November 2008 and then
reduced again to $35 billion in December 2009. The facility was
reduced to $34.2 billion by March 31, 2010, to $33.728 billion by June
30, 2010, and to $29.175 billion by October 6, 2010; these reductions
were attributed to repayments from proceeds obtained from the sale of
various assets and businesses. The authorized and outstanding balances
as of September 30, 2010, shown above, include outstanding principal
and exclude accrued interest and fees of $6.182 billion. The AIG loan
balance reported in the H.4.1 reflects the outstanding principal
balance, capitalized interest, unamortized deferred commitment fees,
and the allowance for the loan restructuring, which was initially
recorded in July 2009.
[B] Government debt shown for Maiden Lane facilities as of September
29, 2010, are principal only and do not include accrued interest of
$408 million for Maiden Lane II and $499 million for Maiden Lane III.
[C] As of January 14, 2011, AIG had drawn down approximately $21
billion as part of the restructuring plan.
[D] The Federal Reserve and Treasury had made $182.3 billion in
assistance available as of December 31, 2009. This amount was
subsequently reduced to $176.5 billion.
[End of table]
View [hyperlink, http://www.gao.gov/products/GAO-11-46] 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 Improving AIG's Financial Condition:
AIGFP Has Continued to Unwind Its CDS Portfolio Positions and Reduce
Its Number of Full-Time Equivalent Employees:
AIG's Insurance Operations Have Continued to Show Signs of Recovery,
but Federal Aid to Life Insurance Companies Has Been Critical to Their
Progress:
The Federal Government's Exposure to AIG Has Declined and Its Ability
to Fully Recoup Its Assistance Will Be Determined by AIG's Long-term
Health and Market Conditions:
Agency Comments and Our Evaluation:
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: Underwriting 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 September 30, 2010:
Table 2: Amount of Outstanding Commercial Paper by Source, December
31, 2007, through September 30, 2010:
Table 3: Composition of U.S. Government Efforts to Assist AIG and the
Government's Approximate Remaining Exposures, as of September 30, 2010:
Table 4: AIG's Key Credit Ratings, March 31, 2009, through September
30, 2010:
Table 5: Summary of Rating Agencies' Ratings:
Table 6: Amounts of Available Corporate Liquidity, November 5, 2008,
through and October 27, 2010:
Table 7: Dispositions Closed and Agreements Announced but Not Yet
Closed, September 30, 2008, through November 30, 2010:
Figures:
Figure 1: AIG Corporate Available Liquidity and Companywide Debt
Projections, Third Quarter of 2008 through Third Quarter of 2010:
Figure 2: AIG Trends in and Main Components of Consolidated
Shareholders' Equity, Fourth Quarter of 2007 through Third Quarter of
2010:
Figure 3: Net Cash Flows and Changes in Cash from Operating,
Investing, and Financing Activities, from First Quarter of 2007
through Third Quarter of 2010:
Figure 4: Quarterly AIG Pretax Operating Income and Loss by Operating
Segment, First Quarter of 2008 through Fourth Quarter of 2009:
Figure 5: AIG Credit Default Swap Premiums on AIG, January 2007
through November 30, 2010:
Figure 6: Status of the Winding Down of AIG Financial Products Corp.,
Quarterly from September 30, 2008, through September 30, 2010:
Figure 7: Net Notional Amount, Fair Value of Derivative Liability, and
Unrealized Market Valuation Losses and Gains for AIGFP's Super Senior
(rated BBB or better) CDS Portfolio, Third Quarter of 2008 through
Third Quarter of 2010:
Figure 8: Total Gross and Net Notional Amounts of Multisector CDOs
Compared to Portions of Gross National Portfolio That Have Underlying
Assets That Were Rated Less than BBB, Third Quarter of 2008 through
Third Quarter of 2010:
Figure 9: Regulatory Capital for AIG Domestic Insurance Subsidiaries
and Primary Activities That Affected Regulatory Capital during 2009:
Figure 10: AIG Life and Retirement Services Additions and Withdrawals
from Policyholder Contract Deposits for AIG Life and Retirement
Services Including Annuities, Guaranteed Investment Contracts, and
Life Products, First Quarter of 2007 through Third Quarter of 2010:
Figure 11: AIG General Insurance Premiums Written by Division, First
Quarter of 2007 through Third Quarter of 2010:
Figure 12: Quarterly Statutory Underwriting Ratios of AIG (Domestic
and Foreign Property/Casualty Insurance Companies) Compared to
Averages for 15 Peers and AIG's Property/Casualty Investment Income
and Net Income as Percents of Premiums Earned, First Quarter 2007
through Third Quarter of 2010:
Figure 13: Debt and Equity Federal Assistance Provided to AIG Compared
with AIG's Book Value, December 2004 through September 30, 2010:
Figure 14: Proceeds from Dispositions by Quarter, September 30, 2008,
through November 30, 2010:
Figure 15: AIG, Its Subsidiaries, and Percentage Ownership by Parent
Company as of September 1, 2010:
Figure 16: Market Capitalization of AIG Outstanding Common Shares,
Including Trust-Owned Preferred C Shares That Are Convertible into
Approximately 79.75 Percent of AIG's Outstanding Common Shares,
December 2004 through September 2010:
Figure 17: AIG Domestic Insurance Subsidiaries: Capital and Surplus at
December 31, 2009, and September 30, 2010, and Primary Activities That
Affected It During the First 9 Months of 2010:
Figure 18: Key Quarterly Revenues and Expenses for AIG Domestic Life
Insurance and Retirement Services Companies for First Quarter of 2007
through Third Quarter of 2010:
Figure 19: Key Quarterly Revenues and Expenses for AIG, Life Insurance
and Retirement Services Companies for AIG Foreign Life Insurance and
Retirement Services Companies First Quarter of 2007 through Third
Quarter of 2010:
Figure 20: AIG Commercial Insurance Operating Ratios, First Quarter of
2007 through Third Quarter of 2010:
Figure 21: AIG Foreign General Insurance Operating Ratios, First
Quarter of 2007 through Third Quarter of 2010:
Figure 22: FRBNY Revolving Credit Facility Balance Owed and Total
Amount Available, October 2008 through December 1, 2010:
Figure 23: Amounts Owed and Portfolio Value of Maiden Lane II through
December 1, 2010:
Figure 24: Amounts Owed and Portfolio Value of Maiden Lane III through
December 1, 2010:
Abbreviations:
AIA: AIA Group Limited:
AIG: American International Group, Inc.
AIGFP: AIG Financial Products Corp.
ALICO: American Life Insurance Company:
CDO: collateralized debt obligation:
CDS: credit default swap:
CPFF: commercial paper funding facility:
DPW: direct premiums written:
EESA: Emergency Economic Stabilization Act of 2008:
Federal Reserve: Board of Governors of the Federal Reserve System:
FRBNY: Federal Reserve Bank of New York:
IPO: initial public offering:
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:
Treasury: Department of the Treasury:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
January 20, 2011:
Congressional Addressees:
Assistance provided to American International Group, Inc. (AIG)
represented one of the federal government's largest investments in a
private-sector institution since the financial crisis began in 2008.
AIG is a holding company that, through its subsidiaries, engages in a
broad range of insurance and insurance-related activities in the
United States and abroad, including general insurance, life insurance
and retirement services, financial services, and asset management. The
potential demise of this company in 2008 threatened to further disrupt
the already troubled financial markets. To minimize the likelihood of
such a scenario, the Board of Governors of the Federal Reserve System
(Federal Reserve) and, subsequently, the Department of the Treasury
(Treasury) deemed AIG to be systemically significant, opening the door
for these entities to provide extraordinary assistance to AIG. The
Federal Reserve, through its emergency powers under section 13(3) of
the Federal Reserve Act, and Treasury, through the Emergency Economic
Stabilization Act of 2008 (EESA), which authorized the Troubled Asset
Relief Program (TARP), collaborated to make available more than $180
billion in assistance to AIG.[Footnote 1] The assistance has been used
to strengthen AIG's financial condition and avert a failure of the
company and, in turn, further disruption of the financial markets.
While Treasury, the Federal Reserve Bank of New York (FRBNY), the AIG
Credit Facility Trust, AIG, and two special purpose vehicles (SPV)--
ALICO Holdings LLC and AIA Aurora LLC--recently signed a restructuring
agreement designed to enable AIG to more quickly repay the assistance,
Treasury's ability to recoup its investment depends on the long-term
health of AIG and a number of other factors.[Footnote 2]
Under our statutorily mandated responsibilities for providing timely
oversight of TARP, we are continuing to report on the federal
government's assistance to AIG.[Footnote 3] To help Congress monitor
the condition of AIG and the government's ability to recoup its
assistance to AIG, we have developed indicators to monitor trends in
AIG's operations and the status of repayments. Because government
assistance to AIG is a coordinated approach, in addition to providing
timely reporting of Treasury's assistance to AIG, we also are
monitoring the efforts of the Federal Reserve.[Footnote 4] In
September 2009 we issued a report on the status of government
assistance to AIG where we first reported on these indicators, which
we updated that report in April 2010.[Footnote 5] Since then, we have
continued to monitor the financial risk posed by AIG, its financial
condition, and the status of its repayment efforts.[Footnote 6] This
report provides an update on the AIG indicators primarily based on
AIG's latest available public filings as of September 30, 2010, and
other more current publicly available information where available.
Specifically, the report discusses (1) trends in AIG's financial
condition, (2) trends in the unwinding of AIG Financial Products
(AIGFP), (3) the financial condition and performance of AIG's
insurance companies, and (4) the status of the government's exposure
to AIG.
To conduct this work, we updated previously published indicators that
address several dimensions of AIG's business, including its credit
ratings, operating performance, capital, debt repayment, and liquidity
position. The data used to create the indicators are collected from
several sources, but most are based on publicly available information,
such as AIG's 10K and 10Q filings with the Securities and Exchange
Commission (SEC) and National Association of Insurance Commissioners
reports. We analyzed AIG's SEC filings, and any supplements for those
filings, through the third quarter of 2010. We also analyzed
information from Thomson Reuters Datastream and the National
Association of Insurance Commissioners. We obtained the most recent
ratings of AIG from credit rating agencies. We also analyzed data from
recent issues of the Federal Reserve weekly statistical releases H.4.1
and Treasury's Financial Position Paper 09-07. AIG also provided
updated information on its asset dispositions. We assessed the
reliability of the data and found that the data were sufficiently
reliable for our purposes.
To assess AIG's financial condition, we updated indicators of key AIG
credit ratings, its corporate debt and liquidity positions, trends in
shareholder equity, operating income and losses, and its credit
default swap (CDS) premiums. We also included a new indicator of AIG's
operating, investing, and financing cash flows. To assess the
unwinding of AIGFP, we updated our indicators on AIGFP's trading
positions and employee count and CDS portfolio.[Footnote 7] To assess
the financial condition of AIG's insurance companies, we reviewed the
regulatory capital of AIG's largest domestic property/casualty and
life insurance and retirement services companies, additions to and
withdrawals from policyholder contract deposits, revenues and expenses
for life insurance and retirement services, AIG general insurance
premiums written, and combined ratios. To determine the status of
AIG's repayment of its federal assistance, we updated the composition
of the government's direct and indirect assistance to AIG, FRBNY's
revolving credit facility balance, balances on the Maiden Lane
facilities, and AIG's divestitures and asset dispositions.[Footnote 8]
We report the balances of the federal debt and equity assistance as of
September 30, 2010, because our primary source for equity data--AIG's
10Q filing with SEC--is only available quarterly, and the 10Q report
containing more current data is not yet publicly available. We also
updated selected information to reflect the January 14, 2011, closing
of AIG's recapitalization plan. No single indicator provides a
definitive measure of AIG's progress, and the indicators in this
report should be considered collectively. We selected indicators that
appeared to track the most critical activities related to the goals
for federal assistance to AIG. Since our last report, we have
developed two new indicators of AIG's financial condition: one to
track the performance of AIG's insurance companies and one to track
federal assistance to AIG.
We conducted our work from May 2010 to January 2011 in accordance with
all sections of GAO's Quality Assurance Framework that are relevant to
our objectives. The framework requires that we plan and perform the
engagement to obtain sufficient and appropriate evidence to meet our
stated objectives and to discuss any limitations in our work. We
believe that the information and data obtained, and the analysis
conducted, provide a reasonable basis for any findings and conclusions.
Background:
AIG comprises approximately 400 companies and has operations in more
than 130 countries and jurisdictions worldwide. As of September 30,
2010, AIG had assets of $872 billion and revenues of $19.1 billion for
the three preceding months. The AIG companies are among the largest
domestic life insurers and domestic property/casualty insurers in the
United States, and they also comprise large foreign general insurance
and life insurance businesses. Appendix I illustrates the breadth of
AIG's operations and its subsidiaries.
AIG Operations:
Historically, AIG has issued commercial paper to help finance its
operations, but since the recent financial crisis, at the corporate
level, AIG has had to draw on other short-term funding sources.
[Footnote 9] For example, as of December 31, 2007, AIG reported having
$13.1 billion of commercial paper outstanding, and as of September 30,
2010, it had none outstanding. It also continues to be a participant
(although at declining levels) in the derivatives market through
AIGFP--a financial products subsidiary that engaged in a variety of
financial transactions, including standard and customized financial
products, which were a major source of AIG's liquidity problems. As of
September 30, 2010, AIG's total gross derivatives assets had a fair
value of $28.1 billion, of which $23.5 billion pertained to capital
markets, down from $34.5 billion and $32 billion, respectively, at the
end of 2009. Additionally, until 2008, AIG had maintained a large
securities lending program operated by its insurance subsidiaries. The
securities lending program allowed insurance companies, primarily
AIG's life insurance companies, to lend securities in return for cash
collateral that was invested in investments such as residential
mortgage-backed securities (RMBS). This program was the initial source
of AIG's liquidity problems in 2008.
Federal, state, and international authorities regulate AIG and its
subsidiaries. Until recently, the Office of Thrift Supervision was the
consolidated supervisor of AIG, which was a thrift holding company by
virtue of its ownership of the AIG Federal Savings Bank. As the
consolidated supervisor, the Office of Thrift Supervision was charged
with identifying systemic issues or weaknesses and helping ensure
compliance with regulations that govern permissible activities and
transactions.[Footnote 10] AIG's domestic, life, and property/casualty
insurance companies are regulated by the state insurance regulators in
the state in which these companies are domiciled.[Footnote 11] These
state agencies regulate the financial solvency and market conduct of
these companies, and they have the authority to approve or disapprove
certain transactions between an insurance company and its parent or
its parent's subsidiaries. These agencies also coordinate the
monitoring of companies' insurance lines 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 12] SIGTARP's reporting on
AIG's activities also has included reports that focused on federal
oversight of AIG compensation and efforts to limit AIG's payments to
its counterparties.[Footnote 13] The Congressional Oversight Panel,
which helps provide oversight of TARP, also issued a report in June
2010, which reviewed the government's actions precipitating its
assistance to AIG and identified several of its concerns with the
rescue of AIG.[Footnote 14] It concluded that while the government
averted a financial collapse, it put billions of taxpayer dollars at
risk, changed the marketplace, and adversely affected the confidence
of the American people in the market.
Federal Reserve and Treasury Provided Assistance to AIG to Limit
Systemic Risk to the Financial Markets:
In September 2008, the Federal Reserve, FRBNY, and Treasury determined
through analysis of information provided by AIG and insurance
regulators, as well as publicly available information, that market
events in September 2008 could cause AIG to fail, which would have
posed systemic risk to financial markets.[Footnote 15] Consequently,
the Federal Reserve and Treasury took steps to help ensure that AIG
obtained sufficient funds to continue to meet its obligations and
could complete an orderly sale of its operating assets and close its
investment positions in its securities lending program and AIGFP. The
federal government first provided assistance to AIG in September 2008
and subsequently modified and amended that assistance.
AIG's Financial Problems Mounted Rapidly in 2008:
From July through early September in 2008, AIG faced increasing
liquidity pressure following a downgrade in its credit ratings in May
2008 due in part to losses from its securities lending program. The
company was experiencing declines in the value and market liquidity of
the RMBS assets that comprised to collateral for its securities
lending operation and declining values of collateralized debt
obligations (CDO) against which AIGFP had written CDS protection.
[Footnote 16] These losses forced AIG to use an estimated $9.3 billion
of its cash reserves in July and August 2008 to repay securities
lending counterparties that terminated existing agreements and to post
additional collateral required by the trading counterparties of AIGFP.
AIG attempted to raise additional capital in the private market in
September 2008, but was unsuccessful. On September 15, 2008, the
rating agencies downgraded AIG's debt rating, which resulted in the
need for an additional $20 billion to fund its added collateral
demands and transaction termination payments. Following the credit
rating downgrade, an increasing number of counterparties refused to
transact with AIG for fear that it would fail. Also around this time,
the insurance regulators decided they would no longer allow AIG's
insurance subsidiaries to lend funds to the parent company under a
revolving credit facility that AIG maintained. Furthermore, the
insurance regulators demanded that any outstanding loans be repaid and
that the facility be terminated.
The Federal Reserve and Treasury Took a Variety of Steps to Assist AIG:
Because of increasing concerns that an AIG failure would have posed
systemic risk to financial markets, in 2008 and 2009 the federal
government agreed to make more than $182 billion of federal assistance
available to AIG. First, in September 2008, the Federal Reserve, with
the support of Treasury, authorized FRBNY to lend AIG up to $85
billion.[Footnote 17] The secured loan was set up as a revolving
credit facility that AIG could use as a reserve to meet its
obligations. This debt was subsequently restructured in November 2008
and March 2009. As of September 30, 2010, the amount of assistance to
available AIG through the FRBNY facility had declined by about $5.8
billion from December 31, 2009 because of mandatory prepayments that
reduced the amount available under the facility, lowering the amount
of federal assistance available to AIG to $176.5 billion.
In late 2008, AIG's mounting debt--the result of borrowing from the
revolving credit facility--led to concerns that its credit ratings
would be lowered, which would have caused its condition to deteriorate
further. In response, the Federal Reserve and Treasury restructured
AIG's debt in November 2008. Under the restructured terms, Treasury
purchased $40 billion in shares of AIG preferred stock (Series D) and
the cash from the sale was used to pay down a portion of AIG's
outstanding balance from the revolving credit facility. The limit on
the facility also was reduced to $60 billion, and other changes were
made. This restructuring was critical to helping AIG maintain its
credit ratings.
In March 2009, the Federal Reserve and Treasury announced plans to
further restructure AIG's assistance. According to the Federal
Reserve, debt owed by AIG on the revolving credit facility would be
reduced by $25 billion in exchange for FRBNY's receipt of preferred
equity interests totaling $25 billion in two SPVs. AIG created both
SPVs to hold the outstanding common stock of two life insurance
company subsidiaries--American Life Insurance Company (ALICO) and AIA
Group Limited (AIA). FRBNY's preferred interests, which were valued at
$25 billion in June 2010, are an undisclosed percentage of the fair
market value of ALICO and AIA as determined by FRBNY. On March 1,
2010, AIG announced that its board had approved the sale of AIA to
Prudential PLC. The ultimate disposition is discussed later in the
report.
Federal assistance to AIG also included FRBNY's creation of two new
facilities to purchase some of AIG's more troubled assets. AIG's
securities lending program continued to be one of the greatest ongoing
demands on its working capital, and on November 10, 2008, FRBNY
announced plans to create an RMBS facility--Maiden Lane II LLC--to
purchase RMBS assets from AIG's U.S. securities lending portfolio. The
Federal Reserve authorized FRBNY to lend up to $22.5 billion to Maiden
Lane II; AIG also acquired a subordinated, $1 billion interest in the
facility, which will absorb the first $1 billion of any losses. On
December 12, 2008, FRBNY extended a $19.5 billion loan to Maiden Lane
II to fund its portion of the purchase price of the securities. The
facility purchased $39.3 billion face value of the RMBS directly from
AIG subsidiaries (domestic life insurance companies). As of September
29, 2010, Maiden Lane II owed $14.1 billion in principal and interest
to FRBNY, down from $16 billion in December 2009.
In addition, on November 10, 2008, FRBNY announced plans to create a
separate facility--Maiden Lane III LLC--to purchase multisector CDOs
on which AIGFP had written CDS contracts.[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, 2008, and
December 18, 2008, FRBNY extended a total of $24.3 billion in loans to
Maiden Lane III; AIG also paid $5 billion for an equity interest in
Maiden Lane III and agreed to absorb the first $5 billion of any
losses. As of September 29, 2010, Maiden Lane III owed $15.1 billion
in principal and interest to FRBNY, down from $18.5 billion in
December 2009.
When the Maiden Lanes were created, FRBNY officials said that the
FRBNY loans to Maiden Lane II and Maiden Lane III were both expected
to be repaid with the proceeds from the interest and principal
payments or liquidation of the assets in the facilities. The repayment
is to occur through cash flows from the underlying securities as they
were paid off. Accordingly, the Federal Reserve did not set a date for
selling the assets; rather it has indicated that it is prepared to
hold the assets to maturity if necessary.
In March 2009, the Federal Reserve announced its intention to assist
AIG in the form of credit made under section 13(3) of the Federal
Reserve Act. FRBNY was authorized to make loans of up to an aggregate
amount of approximately $8.5 billion to SPVs to be established by
certain AIG domestic life insurance subsidiaries. As announced, the
SPVs were to repay the loans from the net cash flows they were to
receive from designated blocks of existing life insurance policies
issued by the insurance companies. The proceeds of the FRBNY loans
were to pay down an equivalent amount of outstanding debt under the
revolving credit facility. However, in February 2010, AIG announced
that it was no longer pursuing this life insurance securitization
transaction with FRBNY.
Treasury also has provided assistance to AIG. On November 10, 2008,
Treasury's Office of Financial Stability announced plans under TARP to
purchase $40 billion in AIG preferred shares. AIG entered into an
agreement with Treasury on November 25, 2008, whereby Treasury agreed
to purchase $40 billion of fixed-rate cumulative preferred stock of
AIG (Series D) and received a warrant to purchase approximately 2
percent of the shares of AIG's common stock.[Footnote 20] As
previously discussed, the proceeds of this sale were used to pay down
AIG's outstanding balance on the revolving credit facility.
On April 17, 2009, AIG and Treasury entered into an agreement in which
Treasury agreed to exchange its $40 billion of Series D cumulative
preferred stock for $41.6 billion of Series E fixed-rate noncumulative
preferred stock of AIG, allowing for a reduction in leverage and
dividend requirements. The $1.6 billion difference between the initial
aggregate liquidation preference of the Series E stock and the Series
D stock 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 September 30, 2010, AIG had drawn down about $7.4 billion of the
commitment, up from $5.2 billion in December 2009. Table 1 provides an
overview of the various forms of assistance, the purpose of each form
of assistance, the amounts authorized, the amounts loaned or used for
investments, and the outstanding balance as of September 30, 2010.
Table 1: U.S. Government Efforts to Assist AIG and the Government's
Remaining Exposure, as of September 30, 2010:
Description of the federal assistance: Federal Reserve: FRBNY created
a revolving credit facility to provide 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 Treasury, which gives the trust an
approximately 79.75 percent voting interest in AIG;
Amount of assistance authorized: Debt: $29.175 billion[A];
Amount of assistance authorized: Equity: n/a;
Outstanding balance: $20.470 billion;
Sources to repay the government: On January 14, 2011, AIG announced
that it executed the signed recapitalization plan, which stated that
AIG is using the net cash proceeds from the recent AIA IPO and the
sale of ALICO to MetLife to repay the FRBNY revolving credit facility.
Description of the federal assistance: Federal Reserve: FRBNY created
a SPV”Maiden Lane II”to provide AIG liquidity by purchasing
residential mortgage-backed securities from AIG life insurance
companies. FRBNY provided a loan to Maiden Lane II for the purchases.
FRBNY also terminated its securities lending program with AIG, which
had provided additional liquidity associated with AIG‘s securities
lending program when it created Maiden Lane II;
Amount of assistance authorized: Debt: $22.5 billion;
Amount of assistance authorized: Equity: n/a;
Outstanding balance: $13.656 billion[B];
Sources to repay the government: Proceeds from asset sales in Maiden
Lane II will be used to repay the FRBNY loan.
Description of the federal assistance: Federal Reserve: FRBNY created
an SPV called Maiden Lane III to provide AIG liquidity by purchasing
collateralized debt obligations from AIGFP counterparties in
connection with the termination of credit default swaps. FRBNY again
provided a loan to the SPV for the purchases;
Amount of assistance authorized: Debt: $30 billion;
Amount of assistance authorized: Equity: n/a;
Outstanding balance: $14.638 billion[B];
Sources to repay the government: Proceeds from asset sales in Maiden
Lane III will be used to repay the FRBNY loan.
Description of the federal assistance: Federal Reserve: AIG created
two SPVs, one for AIA and one for ALICO, to hold the shares of certain
of its foreign life insurance businesses. On December 1, 2009, FRBNY
received preferred interests in the SPVs of $16 billion and $9
billion, respectively, in exchange for reducing debt AIG owed on the
revolving credit facility. The SPVs allowed AIG to strengthen its
balance sheet by reducing debt and increasing equity and also were
intended to facilitate dispositions to generate cash for repayment of
the federal assistance;
Amount of assistance authorized: Debt: n/a;
Amount of assistance authorized: Equity: $25 billion;
Outstanding balance: $25.955 billion;
Sources to repay the government: On November 1, 2010, AIG announced
the completion of an initial public offering of AIA on the Hong Kong
Stock Exchange that generated gross proceeds of $20.51 billion. Also,
on November 1, 2010, AIG announced that it had closed on the sale of
ALICO to MetLife for approximately $16.2 billion, of which $7.2
billion is in cash. The cash proceeds will allow AIG to fully repay
and close the revolving credit facility on closing of the
recapitalization plan.
Description of the federal assistance: Treasury: Treasury purchased
Series D cumulative preferred stock of AIG. AIG used the proceeds to
pay down part of the FRBNY revolving credit facility. Series D stock
was later exchanged for Series E noncumulative preferred stock. Unpaid
dividends on the Series D shares were added to the principal amount of
Series E stock that Treasury received;
Amount of assistance authorized: Debt: n/a;
Amount of assistance authorized: Equity: $40 billion;
Outstanding balance: $41.605 billion;
Sources to repay the government: Proceeds from dispositions of AIG
businesses and internal cash flows of AIG.
Description of the federal assistance: Treasury: 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 billion;
Outstanding balance: $7.378 billion[C];
Sources to repay the government: Proceeds from dispositions of AIG
businesses and internal cash flows of AIG.
Subtotals:
Amount of assistance authorized: Debt: $81.675 billion;
Amount of assistance authorized: Equity: $94.835 billion.
Total authorized (debt and equity):
Amount of assistance authorized: $176.510 billion[D].
Total outstanding assistance:
Outstanding balance: $123.702 billion.
Source: GAO analysis of AIG Securities and Exchange Commission
filings, Federal Reserve, and Treasury data.
[A] The borrowing limit on the revolving credit facility was initially
$85 billion, but was reduced to $60 billion in November 2008 and then
reduced again to $35 billion in December 2009. The facility was
reduced to $34.2 billion by March 31, 2010, to $33.728 billion by June
30, 2010, and to $29.175 billion by October 6, 2010; these reductions
were attributed to repayments from proceeds obtained from the sale of
various assets and businesses. The authorized and outstanding balances
as of September 30, 2010, shown above, include outstanding principal
and exclude accrued interest and fees of $6.182 billion. The AIG loan
balance reported in the H.4.1 reflects the outstanding principal
balance, capitalized interest, unamortized deferred commitment fees,
and the allowance for the loan restructuring, which was initially
recorded in July 2009.
[B] Government debt shown for Maiden Lane facilities as of September
29, 2010, are principal only and do not include accrued interest of
$408 million for Maiden Lane II and $499 million for Maiden Lane III.
[C] As of January 14, 2011, AIG had drawn down approximately $21
billion as part of the restructuring plan.
[D] The Federal Reserve and Treasury had made $182.3 billion in
assistance available as of December 31, 2009. This amount was
subsequently reduced to $176.5 billion.
[End of table]
Federal Assistance Remains Key to Improving AIG's Financial Condition:
As of the third quarter of 2010, AIG's financial condition has
remained relatively stable or slightly improved as measured by several
indicators since we last reported on AIG's indicators in April 2010.
These include the strength of AIG's credit ratings; trends and levels
of available liquidity and sources for working capital; the level of
shareholders' equity and trends in operating income; and CDS premiums
on AIG, which is the going market price for credit protection on AIG.
This improvement is largely attributable to the assistance AIG has
received from the Federal Reserve and Treasury, not its ability to
access private sources of capital. Specifically, AIG's credit ratings
have remained fairly stable through the third quarter of 2010 in large
part because government support has continued to fill AIG's short-term
capital needs and allowed AIG to meet its payment obligations.
Similarly, AIG's level of available corporate liquidity has remained
fairly stable, although the FRBNY revolving credit facility and
Treasury's equity capital facility continue to be its primary sources
of working capital. While the company's long-term goal is to rely on
private sector sources of liquidity and its own operations instead of
the government, AIG remains heavily reliant on federal assistance to
meet its liquidity needs. Trends and the level of AIG's consolidated
shareholders' equity--generally, a company's total assets minus total
liabilities--improved in 2009 and remained fairly stable in the first
nine months of 2010. While federal assistance largely drove the
improvements, AIG's performance also has contributed to the
improvements in its equity position. While our new indicator of AIG's
cash flows shows that the company's net cash flows from operating,
investing, and financing activities have been improving, AIG remains
dependent on federal assistance for liquidity. The efforts of AIG,
FRBNY, and Treasury to restructure the composition of the federal
assistance have reduced AIG's debt and boosted its shareholders'
equity. However, whether AIG will return to positive retained
earnings, which should further increase shareholders' equity, remains
unclear. Further, measures of AIG's operating income and losses
illustrate that because of federal assistance, the large increasing
losses AIG experienced through 2008 slowed in 2009. AIG generated a
modest income in the second quarter of 2009 but experienced increasing
losses in the third and fourth quarters. However, these losses were
smaller than the operating losses experienced in 2008. During the
first three quarters of 2010 AIG generated income from continuing
operations that was more than offset by larger losses from
discontinued operations. Finally, trends in CDS premiums on AIG showed
that the downward-trending and stabilizing prices offered for credit
protection on AIG that began in May 2009 has continued through
November 2010.
AIG's Credit Ratings Remained Fairly Stable from December 2009 through
September 2010:
Ratings of AIG's debt and financial strength by various credit rating
agencies have either remained unchanged or improved slightly from
December 2009 through September 2010, primarily because federal
assistance has provided AIG with needed capital. Credit ratings
measure a company's ability to repay its obligations and directly
affect that company's cost of and ability to access unsecured
financing. If a company's ratings are downgraded, its borrowing costs
can increase, capital can be more difficult to raise, business
partners may terminate contracts or transactions, counterparties can
demand additional collateral, and operations can become more
constrained generally. Rating agencies can downgrade the company's key
credit ratings if they believe it is unable to meet its obligations.
In AIG's case, this could affect its ability to raise funds and could
increase the cost of financing its major insurance operations, and, in
turn, impede its restructuring efforts. A downgrade in AIG's credit
ratings also could result in downgrades on insurer financial strength
ratings for the AIG life and property/casualty companies, further
declines in credit limits, and counterparties demanding that AIG post
additional collateral. Collectively, these effects from a rating
downgrade could impede AIG's restructuring efforts and hamper any
plans to access traditional sources of private capital to replace the
public investments. Conversely, an upgrade in AIG's credit ratings
would indicate an improvement in its condition and possibly lead to
lower borrowing costs and facilitate corporate restructuring.
While some of AIG's key credit ratings declined in 2009 and early
2010, overall, they have remained unchanged or improved slightly since
December 2009.[Footnote 22] For example, from December 2009 to March
31, 2010, all four of the major rating agencies maintained the same
credit ratings for AIG's long-term and short-term debt due in large
part to Federal Reserve and Treasury support.[Footnote 23] Over this
same period, AM Best and Standard and Poor's (S&P) also maintained
their same ratings for the financial strength of AIG's property/
casualty and life insurance companies, while Moody's lowered their
life insurer ratings from "A1/developing" to "A1/negative." Also,
Fitch placed AIG's U.S. property/casualty companies on "rating watch
negative." This occurred in February 2010 because of its concerns
about AIG's reserve adequacy and the underlying profitability of its
casualty businesses. The downgrade followed AIG's disclosure of the
company's fourth quarter 2009 results, which included a $2.3 billion
pretax increase in reserves in its domestic property/casualty
companies for prior accident years. However, in early July 2010, Fitch
reviewed all of AIG's ratings, affirmed those ratings; revised the
rating outlook to "stable" from "evolving," removed the
property/casualty companies from "rating watch negative;" and
reassigned them as "stable outlook." Fitch's ratings of AIG have
remained unchanged since then. In April 2010, S&P affirmed its ratings
of AIG and maintained their negative outlook, reflecting its view of
the challenges AIG faces in sustaining the performance of its
insurance operations and capitalizing its life insurance businesses.
S&P's ratings also have remained unchanged. Moody's, however, as of
September 2010, placed AIG's short-term ratings on review for possible
downgrade. While contributing to stable ratings thus far, the level of
the federal assistance eventually may raise questions about AIG's
future prospects if the company is not able to raise capital from
private sources. The importance of AIG's forthcoming credit ratings is
underscored by the recent recapitalization and restructuring plan; one
of the conditions for recapitalization is that the financial condition
of AIG; the primary insurance companies of Chartis, Inc.; and the
primary insurance companies of SunAmerica Financial Group, taking into
account the recapitalization and the ratings profile of these
companies, are to be reasonably acceptable to FRBNY, Treasury, the AIG
Credit Facility Trust, and AIG. But there are no assurances that AIG
and its subsidiaries will meet this condition.
The general stability of AIG's long-term debt ratings has allowed the
company to avoid collateral and termination payments that could result
from a ratings downgrade because counterparties might demand such
payments at the sign of weakening financial strength. Similarly,
generally stable life-insurer financial strength ratings have helped
keep down both the surrender rate of domestic retirement services and
any pressure on the company to exit businesses that serve high net-
worth clients or businesses governed by trust contracts. Further,
generally stable financial strength ratings for property/casualty have
helped hold down any significant losses in net premiums written and
operating losses.
Federal Assistance Continues to Allow AIG to Maintain a Steady Level
of Liquid Assets and Debt Projections Remain Stable:
Since the fourth quarter of 2008, federal assistance has provided AIG
with a stable source of liquidity, and projections of debt also
remained fairly stable. Because a financially healthy business should
have adequate holdings of liquid assets to cover maturing debt, we use
three indicators to monitor AIG's corporate liquidity.[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 monitors the extent to which AIG has used commercial paper
to strengthen its liquidity position. The greater the portion of
current available liquidity provided by AIG's own operations, the less
reliant AIG will be on federal assistance.
As indicated in figure 1, by the third quarter of 2008, AIG's
corporate-level liquid assets (corporate liquidity) were becoming
insufficient to meet its companywide debt obligations, with much of
that debt--attributable to the Federal Reserve's revolving credit
facility--maturing in 2010. In the fourth quarter of 2008, AIG's
remaining available corporate liquidity reached a low of $26.7
billion, as AIG began utilizing its access to the commercial paper
funding facility (CPFF) by issuing commercial paper.[Footnote 25] In
that same quarter the Federal Reserve restructured the original
payment date for the credit facility. This restructuring reduced the
amount of maturing debt in the facility from $62.9 billion in the
third quarter of 2008 to $40.4 billion in the fourth quarter of 2008,
which occurred when proceeds from the issuance of the new Series D
preferred stock (new with the restructuring) to Treasury were used to
pay down a portion of the balance owed on the facility. The
restructuring also gave AIG more time to repay its debt to the
facility, moving the due date from 2010 to 2013.[Footnote 26] From the
fourth quarter of 2008 to the third quarter of 2009, AIG nearly
doubled its available corporate liquidity to about $50 billion because
of its access to the restructured FRBNY revolving credit facility and
CPFF.
Figure 1: AIG Corporate Available Liquidity and Companywide Debt
Projections, Third Quarter of 2008 through Third Quarter of 2010:
[Refer to PDF for image: illustrated table]
Dollars in millions.
Date: Q3 - 2008:
Corporate available liquidity (as of date): $33,420 (11/5/08);
Companywide debt maturing in:
2009: $28,057;
2010: $21,690 ($62,960 Federal Reserve facility (FRF));
2011: $14,517;
2012: $13,230;
2013: $10,756;
2014: [Empty];
Thereafter: $61,882.
Date: Q4 - 2008:
Corporate available liquidity (as of date): $26,653 (2/18/09);
Companywide debt maturing in:
2009: $21,581;
2010: $17,492;
2011: $15,212;
2012: $9,865;
2013: $8,861 ($40,431 FRF);
2014: [Empty];
Thereafter: $58,193.
Date: Q1 - 2009:
Corporate available liquidity (as of date): $49,620 (4/29/09);
Companywide debt maturing in:
2009: $17,741;
2010: $16,999;
2011: $15,080;
2012: $9,598;
2013: $8,430 ($47,405 FRF);
2014: $3,151;
Thereafter: $50,559.
Date: Q2 - 2009:
Corporate available liquidity (as of date): $52,585 (7/29/09);
Companywide debt maturing in:
2009: $13,809;
2010: $17,204;
2011: $15,355;
2012: $9,786;
2013: $8,575 ($44,816 FRF);
2014: $3,264;
Thereafter: $50,519.
Date: Q3 - 2009:
Corporate available liquidity (as of date): $50,160 (10/28/09);
Companywide debt maturing in:
2009: $7,643;
2010: $19,815;
2011: $16,413;
2012: $10,317;
2013: $8,957 ($41,009 FRF0;
2014: $3,461;
Thereafter: $50,574.
Date: Q4 - 2009:
Corporate available liquidity (as of date): $36,679 (2/17/10);
Companywide debt maturing in:
2009: $0;
2010: $19,432;
2011: $16,310;
2012: $10,289;
2013: $8,870 ($23,435 FRF);
2014: $3,370;
Thereafter: $49,886.
Date: Q1 - 2010:
Corporate available liquidity (as of date): $33,674 (4/28/10);
Companywide debt maturing in:
2009: $0;
2010: $13,495;
2011: $15,910;
2012: $10,029;
2013: $9,089 ($27,400 FTF);
2014: $3,464;
Thereafter: $53,442.
Date: Q2 - 2010:
Corporate available liquidity (as of date): $37,081 (7/28/10);
Companywide debt maturing in:
2009: $0;
2010: $8,720;
2011: $13,180;
2012: $12,029;
2013: $8,861 ($26,457 FRF);
2014: $3,379;
Thereafter: $57,378.
Date: Q3 - 2010:
Corporate available liquidity (as of date): $37,394 (10/27/10);
Companywide debt maturing in:
2009: $0;
2010: $4,283;
2011: $10,336;
2012: $9,808;
2013: $6,446 ($20,470 FRF);
2014: $4,208;
Thereafter: $53,899.
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]
By February 2010, the amount of corporate liquidity available to AIG
had fallen to $36.6 billion, largely because the borrowing limit on
the revolving credit facility was reduced in December 2009 by $25
billion (from $60 billion to $35 billion) as part of the transfer of
AIA and ALICO into two SPVs in which FRBNY received preferred
interests.[Footnote 27] Over this same period, the amount of company-
wide debt stabilized as well, due to restructuring and deleveraging
activity. From February to October 2010, the amount of corporate
available liquidity has remained relatively constant. These trends
suggest that since late 2008, the Federal Reserve's actions have been
critical for AIG's solvency. The amount of AIG debt to mature in 2014--
about $4.2 billion--will be about 35 percent lower than the $6.4
billion of debt to mature in 2013, the year in which the FRBNY
revolving credit facility expires.[Footnote 28]
Data disclosed by AIG indicate that since November 2008 the corporate
liquidity available to AIG essentially has been the undrawn portions
of three federally provided sources--the FRBNY revolving credit
facility, the CPFF, and Treasury's equity capital facility.[Footnote
29] Beginning in October 2008, AIG's primary source of funds shifted
from private sector sources to the FRBNY revolving credit facility and
the CPFF. This changed beginning in 2009 when the CPFF and AIG's
bilateral facilities and cash and short-term investments became
secondary sources of liquidity and Treasury's equity capital facility
became a primary source of funds for AIG. From February 2010 through
the third quarter of 2010, the only nonfederal sources of corporate
liquidity available to AIG have been cash and short-term investments,
and as of October 27, 2010, that amount was $515 million, a fraction
of the $36.9 billion available through the FRBNY and Treasury
facilities. However, the need for corporate level liquidity has
lessened as key AIG subsidiaries have stabilized or improved and
accessed the capital markets. And on November 30, 2010, AIG re-entered
the long-term debt market, issuing $2 billion in notes, the proceeds
of which, according to AIG, will be used for general corporate
purposes and to build liquidity for the AIG parent company in
anticipation of the termination of the FRBNY revolving credit
facility, which was terminated on January 14, 2011. Thus, federal
sources have substantially improved AIG's liquidity position relative
to what it would have been able to achieve on its own. See appendix
III for further discussion of AIG's available corporate liquidity.
Historically, AIG issued commercial paper to third parties to meet its
liquidity needs, but between October 2008 and March 2010 the company
relied on FRBNY's CPFF to purchase its commercial paper. Because
commercial paper typically is unsecured and issued by companies with
high credit ratings, AIG's ability to access the traditional
commercial paper market (independent of Federal Reserve programs)
would be a positive sign of its financial condition. As shown in table
2, AIG's commercial paper programs, which reflect the amount of
commercial paper AIG issued to third parties, were at a high of about
$13 billion in December 2007. By September 30, 2008, the balance had
dropped to $5.6 billion because of a general breakdown of the U.S.
commercial paper market and reluctance from market participants to
purchase or roll over AIG's commercial paper. Since September 2009,
these programs have not issued any new commercial paper and after June
30, 2010, no third parties held AIG's outstanding commercial paper.
According to AIG, all of its third-party commercial paper has matured,
and currently, neither the AIG parent company nor its subsidiaries
have access to third-party commercial paper funding. This funding
source had been replaced by commercial paper purchased by FRBNY's
CPFF, which AIG utilized until the facility expired on February 1,
2010. As a result of the facility closing, AIG's amount outstanding
with CPFF had decreased to $4.7 billion from a high of $15 billion one
year earlier, and as of September 30, 2010, AIG had no commercial
paper outstanding with CPFF. In September 2010, the AIG parent company
reported that it did not intend to access the commercial paper market.
Instead, AIG told us that upon the closing of its planned
recapitalization, it has access to at least $9.5 billion in liquidity,
which includes a bank facility, the right to drawdown approximately $2
billion on the Series G preferred stock, and other factors.[Footnote
30] However, through the third quarter of 2010, AIG continued to
depend on the FRBNY revolving credit facility and the Treasury equity
facility as its primary sources of liquidity.
Table 2: Amount of Outstanding Commercial Paper by Source, December
31, 2007, through September 30, 2010:
Dollars in millions:
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;
Mar. 31, 2010: $1,185;
June 30, 2010: $0;
Sept. 30, 2010: $0.
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;
Mar. 31, 2010: 0;
June 30, 2010: 0;
Sept. 30, 2010: 0.
Nightingale Finance LLC:
Dec. 31, 2007: n/a;
Sept. 30, 2008: n/a;
Dec. 31, 2008: n/a;
Mar. 31, 2009: n/a;
June 30, 2009: n/a;
Sept. 30, 2009: n/a;
Dec. 31, 2009: n/a;
Mar. 31, 2010: 1,100;
June 30, 2010: 0;
Sept. 30, 2010: 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;
Mar. 31, 2010: $2,285;
June 30, 2010: $0;
Sept. 30, 2010: $0.
Source: GAO analysis of AIG SEC filings.
Note: According to AIG, Nightingale Finance LLC is a structured
investment vehicle sponsored but not consolidated by AIGFP. Before
March 31, 2010, AIG had not consolidated the $1.1 billion of
outstanding commercial paper issued by its affiliate Nightingale
Finance LLC. AIG repaid CPFF on April 26, 2010, and repaid commercial
paper of Nightingale Finance LLC during the second quarter of 2010
through an increase in borrowings under the FRBNY revolving credit
facility.
[End of table]
Shareholders' Equity Improved in 2009 and Stabilized in the First Nine
Months of 2010:
In contrast to the downward trends in 2008, AIG's shareholders' equity
increased over the first three quarters of 2009 and its negative
retained earnings, also known as accumulated deficits, decreased by
nearly 85 percent. But since September 2009, AIG's shareholders'
equity has increased at a much slower rate and accumulated deficits
have increased. Rising accumulated deficits generally indicate
mounting losses, while decreasing accumulated deficits could indicate
a return to profitability. Shareholders' equity generally is
calculated by subtracting a company's total liabilities from its total
assets, and represents the company's ability to absorb negative shocks
and prevent failure due to insolvency. Capital raised by issuing and
selling common and preferred stock to investors, also known as paid-in
capital, is one source of shareholders' equity. Retained earnings,
which the company accumulates over time through its operations, are
another source.[Footnote 31]
As figure 2 shows, AIG's shareholders' equity declined from the fourth
quarter of 2007 through the first quarter of 2009, and more
significantly, the composition of its shareholders' equity changed
from mostly retained earnings in 2007 to completely paid-in capital by
the end of 2008, reflecting the importance of federal assistance to
its solvency. Over this period, AIG's shareholders' equity fell almost
52 percent, from $95.8 billion at the end of 2007 to $45.8 billion by
the end of the first quarter of 2009. However, shareholders' equity
rose in the second and third quarter of 2009 and increased to nearly
$81 billion at the end of the third quarter of 2010. From the last
quarter of 2007 through the last quarter of 2008, retained earnings
were the primary source of shareholders' equity ($89 billion of AIG's
$95.8 billion in shareholders' equity). However, retained earnings
declined throughout 2008, becoming cumulative deficits by the end of
2008 because of a net loss for the year of about $99.3 billion. At its
lowest point, in the first quarter of 2009, AIG reported a negative
balance of $16.7 billion in accumulated deficits, and shareholders'
equity fell to $45.8 billion. AIG's accumulated deficit improved to a
negative balance of $3.1 billion and $2.6 billion in the second and
third quarters of 2009, respectively, contributing to the increase in
shareholders' equity. However, in the fourth quarter of 2009, the
accumulated deficit increased to $11.5 billion, lowering shareholders'
equity. AIG's accumulated deficits continued to grow throughout the
first three quarters of 2010, amounting to negative $14.5 billion by
the end of the third quarter, primarily because of losses from
discontinued operations of $4.4 billion that more than offset $1.1
billion of income from continuing operations. Also as shown in figure
2, starting in the fourth quarter of 2008, paid-in capital became and
has remained the primary source of shareholders' equity because of the
federal assistance.
Figure 5: AIG Trends in and Main Components of Consolidated
Shareholders' Equity, Fourth Quarter of 2007 through Third Quarter of
2010:
[Refer to PDF for image: combined vertical bar and line graph]
Dollars in millions:
Date: 2007, Q4;
Retained earnings and accumulated deficits: $89,029;
Preferred and common stock and paid-in capital: $10,218;
Total shareholders‘ equity: $95,801.
Date: 2008, Q1;
Retained earnings and accumulated deficits: $79,732;
Preferred and common stock and paid-in capital: $10,308;
Total shareholders‘ equity: $79,703.
Date: 2008, Q2;
Retained earnings and accumulated deficits: $73,743;
Preferred and common stock and paid-in capital: $16,816;
Total shareholders‘ equity: $78,088.
Date: 2008, Q3;
Retained earnings and accumulated deficits: $49,291;
Preferred and common stock and paid-in capital: $39,871;
Total shareholders‘ equity: $71,182.
Date: 2008, Q4;
Retained earnings and accumulated deficits: -$12,368;
Preferred and common stock and paid-in capital: $79,836;
Total shareholders‘ equity: $52,710.
Date: 2009, Q1;
Retained earnings and accumulated deficits: -$16,706;
Preferred and common stock and paid-in capital: $79,686;
Total shareholders‘ equity: $45,759.
Date: 2009, Q2;
Retained earnings and accumulated deficits: -$3,073;
Preferred and common stock and paid-in capital: $80,627;
Total shareholders‘ equity: $57,958.
Date: 2009, Q3;
Retained earnings and accumulated deficits: -$2,618;
Preferred and common stock and paid-in capital: $82,678;
Total shareholders‘ equity: $72,712.
Date: 2009, Q4;
Retained earnings and accumulated deficits: -$11,491;
Preferred and common stock and paid-in capital: $76,496;
Total shareholders‘ equity: $69,824.
Date: 2010, Q1;
Retained earnings and accumulated deficits: -$9,871;
Preferred and common stock and paid-in capital: $78,693;
Total shareholders‘ equity: $75,001.
Date: 2010, Q2;
Retained earnings and accumulated deficits: -$12,120;
Preferred and common stock and paid-in capital: $78,634;
Total shareholders‘ equity: $75,470.
Date: 2010, Q3;
Retained earnings and accumulated deficits: -$14,486;
Preferred and common stock and paid-in capital: $78,201;
Total shareholders‘ equity: $80,842.
Source: GAO analysis of AIG SEC filings.
Note: Other components of total shareholders' equity are preferred
stock (Series C preferred stock and Series D cumulative preferred
stock), with the Series D preferred stock exchanged in April 2009 for
Series E noncumulative preferred stock, accumulated other
comprehensive losses, and Treasury stock. Drawdowns from the
approximately $30 billion committed under the Series F equity capital
facility will increase paid-in capital in the future by an equal
amount.
[End of figure]
Several federal actions caused fluctuations and changes in
shareholders' equity in 2008 and 2009. Federal government actions
significantly increased AIG's shareholders' equity. Between the third
and fourth quarters of 2008, the adjusted value of common and
preferred stock and paid-in capital increased from $39.9 billion to
$79.9 billion, of which almost $73 billion was paid-in capital that
could be attributed to two government actions:
* In September 2008, AIG, through a noncash transaction, added $23
billion to shareholders' equity as additional paid-in capital to
record the fair value of preferred shares (Series C) that were later
issued to obtain AIG's revolving credit facility established by FRBNY.
[Footnote 32]
* In November 2008, Treasury purchased $40 billion of cumulative
preferred shares (Series D) and received a warrant from AIG. AIG
recorded the transaction as additional paid-in capital repaid.
The value of the federal government's common equity interests in AIG
upon closing of the recapitalization and restructuring plan is tied to
the market value of AIG's common stock, and growth in value of the
government's equity stake depends on growth of the value of common
shares. The market value of AIG's common shares outstanding peaked in
December 2006 at $186.4 billion and by June 2008, as AIG's losses from
its derivatives businesses continued to mount, the shares' market
value declined to $71.1 billion (see appendix IV). During the last two
quarters of 2008, when the federal government initially provided
assistance to AIG, AIG shares further declined in value, falling to
$4.2 billion by the end of 2008. Since March 1, 2009, when the AIG
credit facility trust and AIG entered into the purchase agreement for
Series C preferred stock, AIG's common shares outstanding have
fluctuated between $2.7 billion and $5.9 billion, and as of September
2010 were valued at $5.3 billion. Over that same period, the values of
the government's preferred shares increased from $10.6 billion in
March 2009 to a peak of $23.5 billion in September 2009, and as of
September 2010 were valued at $20.8 billion.[Footnote 33] During the
first quarter of 2009, AIG's common shares fell roughly 36 percent,
underperforming the Thomson Reuters Insurance Index and the New York
Stock Exchange (NYSE) Composite Index, pushing the value of its common
stock below $3 billion.[Footnote 34] However, from the first quarter
to the end of the fourth quarter of 2009, AIG's stock price increased
by roughly 50 percent and outperformed both the NYSE Composite Index
and the Insurance Index, resulting in a market capitalization of about
$4.0 billion. AIG's common shares appreciated another 15 percent
during first two quarters of 2010, compared with gains of 7 percent
and losses of 10 percent for the Insurance Index and NYSE Composite
Index, respectively. As of the end of the second quarter of 2010 the
market capitalization of AIG's publicly traded common shares was $4.7
billion, and by the end of the third quarter of 2010 was roughly $5
billion. When the recapitalization plan closed on January 14, 2011,
the market capitalization of AIG's publicly traded common shares was
approximately $7.3 billion.
Net Cash Flows from AIG's Operating, Investing, and Financing
Activities Appear to be Stabilizing, but AIG Still Is Dependent on
Federal Assistance for Liquidity:
We have added a new indicator of cash flows and net changes in cash
using data from AIG's quarterly Consolidated Statements of Cash Flows.
This indicator tracks the cash flows and net changes in cash for AIG's
operating, financing, and investing activities.
* Operating activity cash flows indicate whether the company's core
businesses are profitable.
* Financing activity cash flows indicate the extent to which a company
uses the capital markets for equity and debt financing such as issuing
its stock, bonds, and commercial paper to investors and obtaining bank
loans and other forms of bank credit.
* Investing activity cash flows indicate the extent to which a company
invests in its production capacity and efficiency (capital
expenditures), acquires and divests businesses, and has financial
investments such as stocks and bonds.
Generally, a healthy and growing company can generate cash internally
from operations, generate cash externally from financing activities,
and use this cash for growth in its operations or investments in
financial assets. This indicator shows that with the benefit of
federal assistance, AIG has resumed positive operating cash flows and
cash flows from investing and financing activities have improved,
though not quite at pre crisis levels of 2007.
As shown in figure 3, during the first three quarters of 2007, before
receiving federal assistance, AIG generated cash from its operating
activities indicating that it was profitable and generated cash
through its financing activities, which in turn indicated that it had
access to the capital markets. It also used cash in its investing
activities; however, during the latter part of 2008, AIG's operating
and financing cash flows deteriorated rapidly because of severe
operating and investment losses and reduced access to the capital
markets. Cash flows from investing activities moved from negative to
positive as AIG shifted to selling investment assets and businesses to
generate liquidity. However, cash generated from these activities was
insufficient for AIG to meet near-term liquidity needs that spiked
when rapidly deteriorating credit and capital markets and company
credit ratings triggered certain obligations on which creditors
demanded immediate payment. AIG obtained federal assistance to meet
these creditor demands.
Figure 3: Net Cash Flows and Changes in Cash from Operating,
Investing, and Financing Activities, from First Quarter of 2007
through Third Quarter of 2010:
[Refer to PDF for image: illustrated vertical bar graph]
Dollars in millions:
Date: 2007, Q1;
Net cash provided from financing activities: $8,216;
Net cash provided from operating activities: $9,930;
Net cash used from investing activities: -$18,024.
Date: 2007, Q2;
Net cash provided from financing activities: $14,731;
Net cash provided from operating activities: $7,501;
Net cash used from investing activities: -$22,290.
Date: 2007, Q3;
Net cash provided from financing activities: $16,017;
Net cash provided from operating activities: $10,118;
Net cash used from investing activities: -$25,548.
Date: 2007, Q4;
Net cash provided from operating activities: $7,622;
Net cash used from investing activities: -$1,972;
Net cash used from financing activities: -$5,657.
Date: 2008, Q1;
Net cash provided from investing activities: $3,637;
Net cash provided from operating activities: $8,299;
Net cash used from financing activities: -$11,789.
Date: 2008, Q2;
Net cash provided from financing activities: $17,701;
Net cash provided from operating activities: $7,829;
Net cash used from investing activities: -$25,777.
Date: 2008, Q3;
Net cash provided from investing activities: $14,194;
Net cash provided from financing activities: $17,427;
Net cash used from operating activities: -$15,240.
Date: 2008, Q4;
Net cash provided from investing activities: $55,430;
Net cash used from financing activities: -$65,258.
Date: 2009, Q1;
Net cash provided from operating activities: $3,998;
Net cash provided from operating activities: $558;
Net cash used from financing activities: -$8,998.
Date: 2009, Q2;
Net cash provided from investing activities: $6,976;
Net cash provided from operating activities: $4,038;
Net cash used from financing activities: -$9,443.
Date: 2009, Q3;
Net cash provided from investing activities: $1,615;
Net cash provided from operating activities: $3,938;
Net cash used from financing activities: -$6,562.
Date: 2009, Q4;
Net cash provided from operating activities: $6,610;
Net cash used from investing activities: -$3,371;
Net cash used from financing activities: -$3,994.
Date: 2010; Q1;
Net cash provided from operating activities: $3,195;
Net cash used from investing activities: -$4,516;
Net cash used from financing activities: -$266.
Date: 2010, Q2;
Net cash provided from operating activities: $6,576;
Net cash used from investing activities: -$4,261;
Net cash used from financing activities: -$1,551.
Date: 2010, Q3;
Net cash provided from operating activities: $5,344;
Net cash used from investing activities: -$1,460;
Net cash used from financing activities: -$4,245.
Source: GAO analysis of AIG SEC filings.
[End of figure]
Throughout 2009, AIG's cash flows began to stabilize. In particular,
quarterly operating cash flows returned to net positive. Net cash
flows from operating activities were around $4 billion for the first
three quarters of 2009 and rose to $6.6 billion in the fourth quarter.
Since the third quarter of 2008, quarterly financing cash flows have
been negative, reflecting the company's still limited access to the
private capital markets. Although the negative amounts have increased
over the first three quarters of 2010, they are much smaller than the
negative amounts recorded in the first three quarters of 2009.
Throughout 2009 and the first three quarters of 2010 the company has
had net cash inflows from operating activities and since the fourth
quarter of 2009, has returned to a precrisis condition of net cash
outflows from investing activities--the latter indicating that the
company is once again purchasing or expanding its base of income to
produce assets rather than selling them to raise cash. AIG reported in
its second quarter 2010 10Q that it primarily used its cash flows to
meet its debt obligations and the liquidity needs of its subsidiaries.
Because of the improving operating and financing cash flows and access
to federal assistance, AIG has not had to sell assets aggressively to
generate cash. Taken collectively, while the three cash flows show
signs of some stability through the third quarter of 2010, AIG
continues to rely on federal assistance to ensure that it can meet its
liquidity needs.
Income from AIG's Operations Began to Stabilize in 2009 with Federal
Assistance:
With the benefit of federal assistance, several of AIG's operating
segments continued to stabilize, producing income instead of losses.
To the extent that AIG's operating entities are profitable, they will
generate income that could improve AIG's ability to sell certain
businesses, retain others, and repay its federal assistance. If the
businesses operate at a loss, AIG could face greater risks in its
ability to repay the federal assistance and its ability to remain
viable. The following indicator tracks the operating income and losses
(before taxes) for AIG's insurance businesses and its major segments,
including asset management, financial services, and other services
that it expects to sell as part of the restructuring. Because AIG
realigned its operating segments in the first and second quarters of
2010 but has not publicly issued restated segment information for all
prior quarters covered in our indicator, we cannot update this
indicator beyond the fourth quarter of 2009. Thus our reporting on
this indicator will be limited.
As shown in figure 4, all of AIG's operating segments had operating
losses in the last two quarters of 2008, but by the first quarter of
2009 some of the segments had considerably smaller operating losses,
and other segments had operating income due in part to federal
assistance such as Maiden Lane II and Maiden Lane III. AIG's general
insurance segment (which includes AIG's domestic and foreign property/
casualty businesses) reported an operating loss in 2008, largely due
to operating losses from insurance underwriting, large net realized
capital losses, and reduced investment income in the second half of
the year. After three quarters with operating income in 2009 and
operating losses in the fourth quarter, this segment ended the year
with a relatively small operating profit for 2009. The improvement in
2009 relative to 2008 largely was due to reduced net realized capital
losses and increased investment income that more than offset larger
insurance underwriting losses. This is noteworthy because historically
the general insurance segment has generated the largest operating
income of all AIG segments. For example, operating income from this
segment accounted for more than half of AIG's total operating income
for 2006 and 2007 combined. Tracking the operating performance of this
segment also is important because AIG plans to retain its
property/casualty insurance businesses among its core operations after
the restructuring and divestitures of other businesses. As a result,
AIG's ability to redeem its preferred shares held by Treasury partly
will be contingent on the health of this segment.
Figure 4: Quarterly AIG Pretax Operating Income and Loss by Operating
Segment, First Quarter of 2008 through Fourth Quarter of 2009:
[Refer to PDF for image: vertical bar graph]
2008, Q1;
General insurance: $1.5 billion;
Life insurance and retirement services: -$2.0 billion;
Financial services: -$8.8 billion;
Other (net of consolidation and eliminations): -$1.9 billion;
Total income: -$11.21 billion.
2008, Q2;
General insurance: $1.2 billion;
Life insurance and retirement services: -$2.6 billion;
Financial services: -$5.9 billion;
Other (net of consolidation and eliminations): -$1.4 billion;
Total income: -$8.69 billion.
2008, Q3;
General insurance: -$1.3 billion;
Life insurance and retirement services: -$1.5 billion;
Financial services: -$8.2 billion;
Other (net of consolidation and eliminations): -$3.0 billion;
Total income: -$27.51 billion.
2008, Q4;
General insurance: -$3.9 billion;
Life insurance and retirement services: -$18.6 billion;
Financial services: -$17.9 billion;
Other (net of consolidation and eliminations): -$18.6 billion;
Total income: -$59.13 billion.
2009, Q1;
General insurance: $0.1 billion;
Life insurance and retirement services: -$1.4 billion;
Financial services: -$1.1 billion;
Other (net of consolidation and eliminations): -$3.8 billion;
Total income: -$6.21 billion.
2009, Q2;
General insurance: $1.0 billion;
Life insurance and retirement services: $0.7 billion;
Financial services: $0.1 billion;
Other (net of consolidation and eliminations): -$1.3 billion;
Total income: $0.52 billion.
2009, Q3;
General insurance: $0.7 billion;
Life insurance and retirement services: $0.7 billion;
Financial services: $1.4 billion;
Other (net of consolidation and eliminations): -$3.2 billion;
Total income: -$0.36 billion.
2009, Q4;
General insurance: -$1.6 billion;
Life insurance and retirement services: $2.0 billion;
Financial services: $0.1 billion;
Other (net of consolidation and eliminations): -$8.1 billion;
Total income: -$7.60 billion.
Source: GAO analysis of AIG SEC filings.
Notes: The insurance data include both investment and underwriting
performance.
The "other operations and consolidating adjustments" include
consolidations and eliminations, interest expense on the FRBNY
facility, restructuring costs, expenses of corporate staff not
attributable to specific reportable segments, corporate-level net
realized capital gains and losses, net gains and losses on sale of
divested businesses, results from noncore businesses that include
certain mortgage guaranty and asset-management operations, and equity
earnings in partly owned companies.
Because AIG restated its operating segments in each quarter of 2010
but has not publicly issued restated segment information for all prior
quarters covered in our indicator, we cannot further update this
indicator for analysis of levels and trends across multiple quarters
and years.
[End of figure]
Figure 4 also shows that AIG's life insurance and retirement services
segment incurred the largest operating losses of all of AIG's segments
during the last half of 2008. Its losses largely could be attributed
to net realized capital losses in the investment portfolios of
domestic and foreign life insurance businesses due to severe market
price declines in certain commercial mortgage-backed and other
securities. In 2009 the life insurance and retirement services segment
reported an operating profit compared to a loss in 2008, primarily
because net realized capital losses declined and investment results
improved. These improved investment results more than offset the
decline in premium revenues, the increase in claims and benefits, and
related expenses.
The financial services segment reported losses in 2008 that primarily
were attributed to unrealized market valuation losses from credit
valuation adjustments in AIGFP's portfolio of super senior credit
default swaps, and credit valuation adjustments on AIGFP assets and
liabilities (see figure 4). In 2009 financial services reported an
operating profit of $517 million, primarily because the combined
operating profit for AIGFP and Aircraft Leasing were greater than the
operating loss from consumer finance.
Finally, AIG's other operations reported losses in the fourth quarter
of 2008 that generally resulted from fees and interest expenses
associated with the FRBNY revolving credit facility, net realized
capital losses, and operating losses of asset management and mortgage
guaranty activities that are in this category as noncore businesses,
and the decline in the value of AIG's equity interest in Maiden Lane
III. In 2009, most of these factors also contributed to the operating
losses reported from AIG's other operations.
AIG Credit Default Swap Premiums Appear to Be Trending Toward
Precrisis Levels:
Dropping from their recent peak in May 2009, AIG CDS premiums have
decreased and appear to be trending toward precrisis levels. These
premiums, which are the price insured parties pay to purchase CDS
protection against AIG defaulting on senior unsecured debt, are
another indicator of AIG's financial strength. This indicator measures
what the market believes to be AIG's probability of default by
tracking prices (premiums, expressed in basis points) paid by an
insured party against a possible default on a senior unsecured bond
and the spreads between the 3-year and 5-year premiums.[Footnote 35]
This measure pertains to CDS prices on AIG and not AIGFP's CDS
inventory that the company is winding down; it is a composite of what
dealers would charge customers for CDS on AIG. Higher basis point
levels indicate a higher premium for a CDS contract. The higher the
CDS premiums, the greater the market's perception of credit risk
associated with AIG. Conversely, the lower the CDS premiums, the
greater its confidence in AIG's financial strength (the lower the
market's expectation that AIG will default).
AIG's CDS premiums have continued to decrease since May 2009 and as of
November 30, 2010, were similar to their level in June and August 2008
for the 3-year and 5-year CDS premiums (see figure 5). From May 2009
through March 2010, the CDS index for the insurance sector declined,
but not as much as the CDS premiums for AIG. From May through November
2010, AIG's CDS premiums moderated slightly. While the overall trend
is positive, whether this decline in the cost to protect against an
AIG default reflects confidence in the standalone creditworthiness of
AIG or whether the decline is due to the ongoing federal assistance to
AIG is unclear. As the Federal Reserve has noted, the premium on AIG's
CDS is based both on the market's assessment of the government's level
of commitment to assist AIG and AIG's financial strength.
Figure 5: AIG Credit Default Swap Premiums on AIG, January 2007
through November 30, 2010:
[Refer to PDF for image: multiple line graph]
Basis points:
January 2007:
5-year CDS: 6; (1/2/07: 9.2);
3-year CDS: 11.
February 2007:
5-year CDS: 6;
3-year CDS: 10.
March 2007:
5-year CDS: 7;
3-year CDS: 11.
April 2007:
5-year CDS: 9;
3-year CDS: 14.
May 2007:
5-year CDS: 8;
3-year CDS: 12.
June 2007:
5-year CDS: 7;
3-year CDS: 11.
July, 2007:
5-year CDS: 13;
3-year CDS: 14.
August 2007:
5-year CDS: 47;
3-year CDS: 64.
September 2007:
5-year CDS: 42;
3-year CDS: 52.
October 2007:
5-year CDS: 27;
3-year CDS: 35.
November 2007:
5-year CDS: 38;
3-year CDS: 62.
December 2007:
5-year CDS: 68;
3-year CDS: 76.
January 2008:
5-year CDS: 80;
3-year CDS: 69.
February 2008:
5-year CDS: 137.
3-year CDS: 118.
March 2008:
5-year CDS: 252;
3-year CDS: 195.
April 2008: 90;
3-year CDS: 177.
May 2008:
5-year CDS: 98;
3-year CDS: 88.
June 2008:
5-year CDS: 160;
3-year CDS: 152.
July 2008:
5-year CDS: 243;
3-year CDS: 230.
August 2008:
5-year CDS: 264;
3-year CDS: 254.
September 2008:
5-year CDS: 419 (9/16/08: 3,922);
3-year CDS: 373 (9/16/08: 3,500).
September 22, 2008: AIG entered FED Revolving Credit Facility.
October 2008:
5-year CDS: 1,634;
3-year CDS: 1,421.
November 2008:
5-year CDS: 2,799;
3-year CDS: 2,461.
November 2008: Treasury pays off $40 billion of Fed Facility for
Series D shares.
December 2008:
5-year CDS: 702;
3-year CDS: 666.
January 2009:
5-year CDS: 556;
3-year CDS: 535.
February 2009:
5-year CDS: 542;
3-year CDS: 499.
March 2009:
5-year CDS: 1,118;
3-year CDS: 1,015.
April 2009:
5-year CDS: 2,560;
3-year CDS: 2,136.
April 2009: More Fed assistance through Series F.
May 2009:
5-year CDS: 4,254 (5/4/09: 4,534);
3-year CDS: 3,648 (5/4/09: 3,683).
June 2009:
5-year CDS: 2,036;
3-year CDS: 1,704.
July 2009:
5-year CDS: 1,577;
3-year CDS: 1,411.
August 2009:
5-year CDS: 1,633;
3-year CDS: 1,475.
September 2009:
5-year CDS: 992;
3-year CDS: 940.
October 2009:
5-year CDS: 820;
3-year CDS: 811.
November 2009:
5-year CDS: 767;
3-year CDS: 757.
December 2009:
5-year CDS: 673;
3-year CDS: 699;
December 2009: Fed exchanges $25 billion of Fed Facility for equity in
AIA and ALICO.
January 2010:
5-year CDS: 558;
3-year CDS: 581.
February 2010:
5-year CDS: 542;
3-year CDS: 582.
March 2010:
5-year CDS: 378;
3-year CDS: 452.
March 2010: M Agreement to sell ALICO for $15.5 billion.
April 2010:
5-year CDS: 214;
3-year CDS: 279.
May 2010:
5-year CDS: 208;
3-year CDS: 274.
June 2010:
5-year CDS: 423;
3-year CDS: 479.
July 2010:
5-year CDS: 342;
3-year CDS: 410.
August 2010:
5-year CDS: 250;
3-year CDS: 309.
September 2010:
5-year CDS: 275;
3-year CDS: 337.
October 2010:
5-year CDS: 175;
3-year CDS: 247.
November 2010:
5-year CDS: 138 (11/30/10: 189).
3-year CDS: 206 (11/30/10: 265).
Source: GAO analysis of Thomson Reuters Datastream.
Note: CDS provide protection to the buyer of the CDS contract if the
assets covered by the contract go into default.
[Refer to PDF for image]
[End of figure]
AIGFP Has Continued to Unwind Its CDS Portfolio Positions and Reduce
Its Number of Full-Time Equivalent Employees:
The significant losses that AIGFP experienced from its derivatives
trading business and the strains these losses put on AIG's liquidity
in 2008 were critical factors contributing to AIG's financial crisis.
A key part of AIG's reorganization and divestiture strategy is closing
out or eliminating--also known as "unwinding"--these derivatives and
closing AIGFP, which according to AIG will not be done for a
significant amount of time. Since the fall of 2008, AIGFP has been
unwinding its derivatives portfolio by attempting to strike the most
efficient balance between eliminating its positions quickly and
mitigating portfolio losses. As discussed earlier, AIGFP had
underwritten CDS protection on CDOs to a range of counterparties. Most
of AIGFP's positions on its CDS contracts on multisector CDOs were
eliminated when Maiden Lane III purchased CDOs from AIGFP's CDS
counterparties late in 2008. With these purchases, the counterparties
agreed to terminate the CDS contracts, which eliminated the need for
AIG to post additional collateral as values of the CDOs continued to
fall and eased the stress on its financial condition. Since then,
AIGFP has been closing out the remainder of its derivatives portfolio.
To analyze AIGFP's progress, we monitored several groups of indicators
dating to at least September 2008. The four indicators we monitored--
number of outstanding derivatives trade positions, gross notional
amount of outstanding derivatives contracts, number of risk books, and
number of AIGFP employees--show different dimensions of the unwinding
process. Their trends suggest AIGFP has continued to make progress. We
also analyzed AIGFP's super senior CDS portfolio, in which the
underlying collateral of CDOs was rated investment-grade, and their
remaining multisector CDO portfolio, in which the underlying
collateral of CDOs was rated less than BBB. We found that while AIGFP
continues to make progress in unwinding its super senior portfolio, it
has made less progress since the fourth quarter of 2008 in closing out
CDOs with lower-rated underlying collateral. AIGFP asserts that this
result is consistent with its strategy of maintaining positions that
have potentially significant upside profit opportunity and very
limited potential liquidity risk. The multisector CDO portfolio
represents one such set of positions. This strategy, with respect to
the multisector CDO portfolio, has resulted in market valuation gains
of $940 million over the past five quarters.
AIGFP Has Continued to Unwind Its Operations:
Our indicators show that from September 2008 through September 2010,
AIGFP made significant progress in winding down its operations. A key
reason for AIG's financial problems was the strain on liquidity that
resulted from the performance of AIGFP's derivatives portfolios. The
values of the investment-grade CDOs protected by CDS contracts written
by AIG declined in the summer of 2008. In response to the declining
values, AIGFP had to make collateral payments to the CDS
counterparties. As we previously discussed, the federal government
created Maiden Lane III LLC to help eliminate the financial strain
arising from collateral payments. Maiden Lane III purchased $29.3
billion in CDOs from AIGFP's CDS counterparties. In turn, these
counterparties agreed to terminate the CDS contracts, because for the
counterparties, the risk of possible downgrades or defaults on the
CDOs had been eliminated by selling them to Maiden Lane III.
Therefore, the counterparties no longer needed the protection that
AIGFP's CDS contracts had provided. The strains on liquidity have
decreased as AIGFP has continued to eliminate its positions in CDS
contracts. Figure 6 illustrates several dimensions along which AIGFP
has reduced its size:
* First, since September 2008, AIGFP has closed out 87 percent of its
outstanding trade positions, which refers to 38,300 of AIGFP's
outstanding long and short derivative contracts. At September 30,
2008, it had 44,000 positions; by December 31, 2009, the number had
declined to 16,100; and as of September 30, 2010, the number had
declined to 10,200. The 10,200 trade positions include approximately
4,500 nonderivative asset and liability positions whose management was
transferred to AIG's asset management group and AIG's treasury.
According to AIG, from September 2008 through September 2010, the
number of counterparties has been reduced by about 74 percent, and the
number of trades dated more than 50 years has been reduced by 96
percent from 67 to 3.
* Second, because of the positions that have been closed out, the
gross notional value of derivatives positions outstanding--which is a
measure of the size of AIGFP's inventory of derivatives outstanding--
was reduced, to $506 billion as of September 30, 2010, down from $940
billion in December 2009, $1.2 trillion in the previous quarter, and
$2 trillion in September 2008.
* Third, the reduction in positions also has resulted in a marked
decrease in the number of AIGFP's businesses or risk books. In its
switch from a strategy of growth and profit maximization to risk
mitigation and unwinding, AIGFP reorganized its business into 22
separate risk books determined in part by the type of risk and placed
them in the following five groupings: (1) credit books, (2) investment
securities and liabilities books, (3) capital markets books, (4)
principal guaranty products, and (5) private equity and strategic
investment books. Initially, AIGFP focused on closing out its riskiest
positions across all risk books. AIG officials said that in certain
cases, some books were dominated by risky positions, so these entire
books were targeted. According to AIGFP and Federal Reserve officials,
this goal has been substantially accomplished. The number of books
decreased from 22 in September 2008 to 15 at the end of the second
quarter of 2009; to 13 by March 31, 2010; and to 12 as of September
30, 2010. The 12 books include 5 risk books related to the transfer of
the nonderivative asset and liability positions described above. AIG
reports that AIGFP's priority in 2010 has been to unwind complete
books.
* Finally, the number of AIGFP employees dropped most significantly--
from 428 to 257--between September 2008 and September 2009. Since that
time the pace has slowed and as of September 30, 2010, the number was
212.[Footnote 36] The 212 positions include 17 employees responsible
for managing AIGFP's cash assets that AIGFP transferred to AIG and 46
employees who report to both AIG and AIGFP. According to AIG, AIGFP
has closed its Tokyo and Hong Kong offices and its Banque AIG office
in London is expected to be taken over by AIG Asset Management in the
first quarter of 2011.
Figure 6: Status of the Winding Down of AIG Financial Products Corp.,
Quarterly from September 30, 2008, through September 30, 2010:
[Refer to PDF for image: illustrated vertical bar graph]
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;
3/31/10: 14,300;
6/30/10: 11,900;
9/30/10: 10.200.
Gross notional of long and short derivatives positions outstanding:
9/30/08: $2.0 trillion;
12/31/08: $1.8 trillion;
3/31/09: $1.52 trillion;
6/30/09: $1.33 trillion;
9/30/09: $1.16 trillion;
12/31/09: $0.94 trillion;
3/31/10: $0.76 trillion;
6/30/10: $0.60 trillion;
9/30/10: $0.50 trillion.
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;
3/31/10: 13;
6/30/10: 13;
9/30/10: 12.
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;
3/31/10: 233;
6/30/10: 226;
9/30/10: 212.
Source: GAO presentation of AIG corporate information.
Notes: Due to Financial Accounting Standard 161, AIGFP changed its
methodology for computing the gross notional for March 2009 leading to
a slight increase of previously reported values. September and
December 2008 notionals were estimated and restated numbers were 2 and
1.8, respectively. The March 2009 number was 1.5.
[End of figure]
AIGFP officials believed that most of the unwinding could be completed
by the end of 2009, but they later indicated that the vast majority of
the remaining positions would be unwound by the end of 2010. In
February 2010, Federal Reserve and Treasury officials said that AIGFP
was on track to close out its riskiest positions and that AIGFP no
longer would be in business by the end of 2010, although the company's
positions might not be entirely unwound by the end of the year. In
August 2010, Federal Reserve and AIG officials confirmed that,
according to the measures established by AIG, AIGFP had met their
targets to date and generally expected AIGFP to meet or exceed its
targets if current market conditions persisted. AIG reported in the
third quarter of 2010 that of AIGFP's remaining approximately 10,200
trade positions, the management of approximately 4,500 nonderivative
asset and liability positions was transferred to AIG's direct
investment business. AIG anticipates that the remaining derivatives
positions will continue to be reported as AIGFP under capital markets,
a component of AIG's financial services reporting segment.[Footnote
37] However, Federal Reserve and AIG noted that the winding down of
AIGFP and its portfolios remains linked to AIG's credit ratings and,
as mentioned earlier, these efforts could be affected adversely if
AIG's credit ratings were downgraded. In August 2010, the Federal
Reserve noted that the successful execution of AIG's plan to reduce
the size of its portfolios was subject to market conditions and
counterparties' willingness to transact with AIGFP. AIG reported in
September 2010, that it will take substantial time to wind-down AIGFP
because of the long-term duration of AIGFP's derivative contracts and
the complexity of AIGFP's portfolio.
AIGFP Has Continued to Make Progress in Unwinding Its Portfolio of
Investment-Grade, Super Senior Credit Default Swaps:
Our indicators suggest that AIGFP continued to make progress in
unwinding its portfolio of credit default swaps written on investment-
grade CDOs (those having a rating of BBB or higher from rating
agencies). This portfolio was written on the super senior tranche of
CDOs and had a net notional amount of approximately $375 billion in
the third quarter of 2008.[Footnote 38] The notional amount denotes
the size of the portfolio on which AIGFP wrote credit protection. This
is the maximum dollar-level exposure for the portfolio, taking into
account offsetting positions, and it measures an underlying quantity
upon which payment obligations are computed. A decrease in the net
notional amount could indicate progress in unwinding AIGFP's
obligations. To measure this progress, we analyzed the net notional
amounts of AIGFP's super senior CDS portfolio, the fair value of
AIGFP's derivative liability, and the unrealized market valuation loss
or gain. The fair value of its derivative liability represents the
fair market valuation of AIGFP's liabilities in each asset portfolio.
The unrealized market valuation gain (or loss) tracks the increase (or
decrease) in this valuation from quarter to quarter. As with the
overall portfolio, a decrease in the net notional amount could
indicate progress in unwinding AIGFP's obligations. A decrease in the
fair value of derivative liability could result in a decrease in the
cost to AIGFP to transfer the respective derivatives to other
counterparties in an effort to reduce its liabilities (i.e., the risk
associated with the liabilities is viewed more favorably in the
marketplace and reflects increased willingness to hold the
liabilities). Therefore, such a decrease would be accompanied by
comparable unrealized market valuation gains.
The indicators suggest that AIGFP has continued to liquidate its CDS
portfolio. The net notional amount of the portfolio is being reduced;
however, the portfolio has experienced a combination of unrealized
gains and losses. According to Federal Reserve officials, AIGFP
management has recognized that the size and risks of the remaining CDS
portfolios need to be further reduced and that AIG and AIGFP have been
developing an action plan to efficiently reduce these risks. AIG's
progress is evident across several of its risk books (see figure 7):
* AIGFP's regulatory capital CDS book. The regulatory capital book
represents derivatives written for European banks that allowed them to
reduce the amount of capital they needed to set aside to cover
potential losses on certain asset portfolios of residential mortgages
and corporate loans by buying protection against losses on underlying
assets.[Footnote 39] The net notional amount of this book dropped from
about $250 billion in the fall of 2008 to about $65.5 billion in the
third quarter of 2010, and the fair value of the CDS liability fell
over the same period from $397 million and shifted to an asset with a
fair value of $186 million. These CDS contracts continue to have a
high net notional amount relative to the other AIGFP products, and the
company continues to believe that these contracts will expire or be
called by counterparties with little to no cost to AIG. According to
the Federal Reserve, this portfolio has been downsized significantly
due to counterparties' willingness to exit trades at no cost to AIGFP.
AIGFP does not plan to sell these contracts but plans to let them
expire because management believes that, based on stress tests, trying
to sell them would not be cost-effective.[Footnote 40] This book also
has experienced minimal but mixed unrealized market gains and losses
in the first three quarters of 2010.
* AIGFP's CDS on multisector CDO book. These CDOs represent the CDS
portfolio that, according to Federal Reserve officials, is a synthetic
credit position and written on CDO transactions that generally had
underlying collateral of residential mortgage-backed securities,
commercial mortgage-backed securities, and CDO super senior tranche
securities.[Footnote 41] Federal assistance provided through the
purchase of the underlying assets in this category by Maiden Lane III
and subsequent termination of the related CDS led to a drop of more
than 80 percent in the net notional and fair values of the multisector
CDOs from the third quarter of 2008 in the fourth quarter of 2008--
$12.6 billion and $5.9 billion, respectively. As of the third quarter
of 2010, the net notional amount continued to show declines and had
dropped to $6.9 billion and, similarly, the fair value of the
derivative liability declined to $3.6 billion. Also, in the first
three quarters of 2010, multisector CDOs continued to show unrealized
market valuation gains.
* Corporate collateralized loan obligations and mezzanine tranche
books. This portfolio consists of CDS transactions primarily written
on portfolios of senior unsecured loans and mezzanine tranches, a
portfolio of CDS transactions written on obligations rated less than
investment-grade (investment-grade is rated BBB or higher) at
origination. The net notional amount of the corporate portfolio
continued to drop throughout the first three quarters of 2010, while
the amount for the mezzanine portfolio dropped in the first two
quarters but increased slightly in the most recent quarter. The fair
value of derivative liability for the corporate collateralized loan
obligation book portfolio, which fell significantly from the fourth
quarter of 2008 through the first quarter of 2010, has changed little
since then. Also, this corporate collateralized loan book had
unrealized market gains throughout 2009, followed by relatively small
losses over the first two quarters of 2010, and a small gain in the
third quarter of 2010. By comparison, the fair value of derivative
liability and the unrealized market valuations of the mezzanine
tranche book have changed little in 2010. AIG officials commented that
the smaller movement is consistent with a decrease in the size of the
portfolio (see figure 7).
Figure 7: Net Notional Amount, Fair Value of Derivative Liability, and
Unrealized Market Valuation Losses and Gains for AIGFP's Super Senior
(rated BBB or better) CDS Portfolio, Third Quarter of 2008 through
Third Quarter of 2010:
[Refer to PDF for image: 12 vertical bar graphs]
Regulatory capital[A]:
2008, Q3;
Net notional amount: $250 billion;
Fair value of derivative liability: $0.40 billion;
Unrealized market valuation gain or loss: -$272 million.
2008; Q4;
Net notional amount: $234.5 billion;
Fair value of derivative liability: $0.38 billion;
Unrealized market valuation gain or loss: -$18 million.
2009; Q1;
Net notional amount: $192.6 billion;
Fair value of derivative liability: $0.39 billion;
Unrealized market valuation gain or loss: -$14 million.
2009; Q2;
Net notional amount: $177.5 billion;
Fair value of derivative liability: $0.05 billion;
Unrealized market valuation gain or loss: $23 million.
2009; Q3;
Net notional amount: $171.7 billion;
Fair value of derivative liability: $0.03 billion;
Unrealized market valuation gain or loss: $16 million.
2009; Q4;
Net notional amount: $150.1 billion;
Fair value of derivative liability: -$0.12 billion;
Unrealized market valuation gain or loss: $147 million.
2010; Q1;
Net notional amount: $109.4 billion;
Fair value of derivative liability: -$0.16 billion;
Unrealized market valuation gain or loss: $39 million.
2010; Q2;
Net notional amount: $64.5 billion;
Fair value of derivative liability: -$0.14 billion;
Unrealized market valuation gain or loss: -$20 million.
2010; Q3;
Net notional amount: $65.5 billion;
Fair value of derivative liability: -$0.19 billion;
Unrealized market valuation gain or loss: $51 million.
Multisector collateralized debt obligations[B]:
2008, Q3;
Net notional amount: $71.6 billion;
Fair value of derivative liability: $30.21 billion;
Unrealized market valuation gain or loss: -$6.26 billion.
2008; Q4;
Net notional amount: $12.6 billion;
Fair value of derivative liability: $5.91 billion;
Unrealized market valuation gain or loss: -$5.83 billion.
2009; Q1;
Net notional amount: $12.0 billion;
Fair value of derivative liability: $6.72 billion;
Unrealized market valuation gain or loss: -$809 million.
2009; Q2;
Net notional amount: $9.2 billion;
Fair value of derivative liability: $5.27 billion;
Unrealized market valuation gain or loss: -$284 million.
2009; Q3;
Net notional amount: $8.2 billion;
Fair value of derivative liability: $4.51 billion;
Unrealized market valuation gain or loss: $332 million.
2009; Q4;
Net notional amount: $7.9 billion;
Fair value of derivative liability: $4.42 billion;
Unrealized market valuation gain or loss: $92 million.
2010; Q1;
Net notional amount: $7.6 billion;
Fair value of derivative liability: $4.25 billion;
Unrealized market valuation gain or loss: $158 million.
2010; Q2;
Net notional amount: $6.8 billion;
Fair value of derivative liability: $3.78 billion;
Unrealized market valuation gain or loss: $241 million.
2010; Q3;
Net notional amount: $6.9 billion;
Fair value of derivative liability: $3.64 billion;
Unrealized market valuation gain or loss: $117 million.
Corporate collateralized loan obligations[C]:
2008, Q3;
Net notional amount: $50.7 billion;
Fair value of derivative liability: $1.53 billion;
Unrealized market valuation gain or loss: -$538 million.
2008; Q4;
Net notional amount: $50.5 billion;
Fair value of derivative liability: $2.55 billion;
Unrealized market valuation gain or loss: $1.02 billion.
2009; Q1;
Net notional amount: $49.6 billion;
Fair value of derivative liability: $2.20 billion;
Unrealized market valuation gain or loss: $358 million.
2009; Q2;
Net notional amount: $40.9 billion;
Fair value of derivative liability: $1.10 billion;
Unrealized market valuation gain or loss: $792 million.
2009; Q3;
Net notional amount: $22.6 billion;
Fair value of derivative liability: $0.46 billion;
Unrealized market valuation gain or loss: $566 million.
2009; Q4;
Net notional amount: $22.1 billion;
Fair value of derivative liability: $0.31 billion;
Unrealized market valuation gain or loss: $147 million.
2010; Q1;
Net notional amount: $16.4 billion;
Fair value of derivative liability: $0.31 billion;
Unrealized market valuation gain or loss: -$7 million.
2010; Q2;
Net notional amount: $1.57 billion;
Fair value of derivative liability: $0.39 billion;
Unrealized market valuation gain or loss: -$83 million.
2010; Q3;
Net notional amount: $12.5 billion;
Fair value of derivative liability: $0.31 billion;
Unrealized market valuation gain or loss: $8 million.
Mezzanine tranches[D]:
2008, Q3;
Net notional amount: $5.0 billion;
Fair value of derivative liability: $0.15 billion;
Unrealized market valuation gain or loss: $18 million.
2008; Q4;
Net notional amount: $4.7 billion;
Fair value of derivative liability: $0.20 billion;
Unrealized market valuation gain or loss: $42 million.
2009; Q1;
Net notional amount: $4.2 billion;
Fair value of derivative liability: $0.18 billion;
Unrealized market valuation gain or loss: $13 million.
2009; Q2;
Net notional amount: $3.5 billion;
Fair value of derivative liability: $0.08 billion;
Unrealized market valuation gain or loss: $105 million.
2009; Q3;
Net notional amount: $3.5 billion;
Fair value of derivative liability: $0.03 billion;
Unrealized market valuation gain or loss: $45 million.
2009; Q4;
Net notional amount: $3.5 billion;
Fair value of derivative liability: $0.14 billion;
Unrealized market valuation gain or loss: -$111 million.
2010; Q1;
Net notional amount: $3.1 billion;
Fair value of derivative liability: $0.21 billion;
Unrealized market valuation gain or loss: -$71 million.
2010; Q2;
Net notional amount: $2.6billion;
Fair value of derivative liability: $0.19 billion;
Unrealized market valuation gain or loss: $23 million.
2010; Q3;
Net notional amount: $2.9 billion;
Fair value of derivative liability: $0.22 billion;
Unrealized market valuation gain or loss: -$24 million.
[End of figure]
Figure 23: 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.
Source: GAO analysis of AIG SEC filings.
[A] Regulatory capital represents the CDS portfolio sold to provide
regulatory capital relief to primarily European financial
institutions. In exchange for a periodic fee, these institutions
received credit protection for a portfolio of diversified loans, thus
reducing minimum capital requirements set by their regulators.
[B] Multisector CDO represent the CDS portfolio sold primarily for
arbitrage purposes and written on CDO transactions that generally had
underlying collateral of residential mortgage-backed securities,
commercial mortgage-backed securities, and CDO tranche securities.
[C] The corporate collateralized loan obligations portfolio consists
of CDS transactions primarily written on portfolios of senior
unsecured loans.
[D] A tranche is a piece or portion of a structured deal, or one of
several related securities that are issued together but offer
different risk-reward characteristics. The mezzanine tranche is
subordinated to the senior tranche, but is senior to the equity
tranche. The senior tranche is the least-risky tranche, whereas the
equity tranche is the first loss and riskiest tranche.
[End of figure]
AIG's Multisector CDO Portfolio has Changed Significantly Since the
First Quarter 2009:
The gross notional amount of AIGFP's multisector CDO portfolio was
reduced significantly in the fourth quarter of 2008 with the purchase
of CDOs by Maiden Lane III, and since then, AIG has continued slowly
to reduce the gross notional amount. Our indicator uses the gross
notional amount to track the size of AIGFP's multisector CDO portfolio
and its composition with respect to the credit quality of the
underlying assets. However, as the portfolio has been unwinding, its
underlying credit rating has not improved while the longer-term trend
is not yet clear. According to AIG officials, the SEC filings about
the composition of the multisector CDOs on which it has written credit
default protection summarizes the gross transaction notional amount,
percentage of the total CDO collateral pools, ratings, and vintage
breakdown of collateral securities in the multisector CDOs, by asset-
backed securities category. However, the gross notional data does not
account for the attachment points of the specific transactions. When
taken into account, the gross notional of the underlying CDOs of $15.4
billion is reduced to a net notional exposure of $6.9 billion.
As shown in figure 8, the total gross notional amount of AIGFP's
multisector CDOs and of CDOs that had underlying assets rated less
than BBB were reduced considerably in the fourth quarter of 2008, but
reductions since then have been much smaller. The total gross notional
amount for the multisector CDOs was reduced from $108.5 billion to $25
billion during the fourth quarter of 2008, primarily due to Maiden
Lane III purchasing the CDOs underlying AIGFP's CDS contracts. The
gross notional for these CDOs has continued to be reduced each quarter
and as of the third quarter of 2010, had been reduced to about $15.4
billion as AIGFP has continued to unwind this portfolio. In contrast,
while the gross notional amount with underlying assets rated less than
BBB decreased from $26.9 billion at the end of the third quarter of
2008 to $8 billion in the following quarter, the amount increased
about $3 billion throughout 2009 to just more than $11 billion by the
end of 2009. However, in the first three quarters of 2010 the trend
reversed, and the gross notional for this portion of the portfolio was
reduced to $10.3 billion. Despite this drop, as of the end of the
third quarter of 2010, the underlying credit rating of the portfolio
has not improved, with more than 67 percent of the remaining CDO
portfolio comprising CDOs with underlying assets rated lower than BBB.
This change in portfolio composition largely resulted from the
successful unwinding of portfolio holdings that have underlying assets
rated at least BBB. According to AIG officials, the amount of future
collateral posting requirements of this portfolio is a function of
AIG's credit ratings, the ratings of the reference obligations, and
any further decline in the market value of the relevant reference
obligations, with the latter being the most significant factor. In
addition, the amount of collateral posting requirements is a function
of the collateral provisions in the specific credit support annexes,
which are legal documents that detail the terms of collateral for
derivative transactions. In the case of the multisector CDO portfolio,
a significant portion of the remaining positions are not subject to
additional collateral postings. AIGFP currently posts $3.1 billion
against the $6.9 billion of net notional exposure in the multisector
CDO portfolio.
Figure 8: Total Gross and Net Notional Amounts of Multisector CDOs
Compared to Portions of Gross National Portfolio That Have Underlying
Assets That Were Rated Less than BBB, Third Quarter of 2008 through
Third Quarter of 2010:
[Refer to PDF for image: stacked vertical bar and line graph]
2008, Q3
Net notional of multisector CDOs (including investment grade CDOs):
$71.6 billion;
Subordination below the super senior risk layer: $36.8 billion;
Subprime residential mortgage-backed securities: $17.7 billion;
Alt-A residential mortgage-backed securities: $3.33 billion;
CDOs: $4.41 billion;
Prime residential mortgage-backed securities: $716 million;
Commercial mortgage-backed securities: $683 million;
All other: $87 million;
Percentage of CDO collateral rated less than BBB: 24.8%.
2008, Q4
Net notional of multisector CDOs (including investment grade CDOs):
$12.56 billion;
Subordination below the super senior risk layer: $12.48 billion;
Subprime residential mortgage-backed securities: $4.91 billion;
Alt-A residential mortgage-backed securities: $651 million;
CDOs: $1.55 billion;
Prime residential mortgage-backed securities: $128 million;
Commercial mortgage-backed securities: $666 million;
All other: $100 million;
Percentage of CDO collateral rated less than BBB: 32.0%.
2009, Q1;
Net notional of multisector CDOs (including investment grade CDOs):
$11.98 billion;
Subordination below the super senior risk layer: $12.02 billion;
Subprime residential mortgage-backed securities: $4.40 billion;
Alt-A residential mortgage-backed securities: $2.69 billion;
CDOs: $1.80 billion;
Prime residential mortgage-backed securities: $142 million;
Commercial mortgage-backed securities: $1001 million;
All other: $144 million;
Percentage of CDO collateral rated less than BBB: 42.4%.
2009, Q2;
Net notional of multisector CDOs (including investment grade CDOs):
$9.15 billion;
Subordination below the super senior risk layer: $10.66 billion;
Subprime residential mortgage-backed securities: $3.75 billion;
Alt-A residential mortgage-backed securities: $2.66 billion;
CDOs: $1.38 billion;
Prime residential mortgage-backed securities: $1.18 billion;
Commercial mortgage-backed securities: $1.22 billion;
All other: $182 million;
Percentage of CDO collateral rated less than BBB: 52.5%.
2009, Q3;
Net notional of multisector CDOs (including investment grade CDOs):
$8.17 billion;
Subordination below the super senior risk layer: $10.38 billion;
Subprime residential mortgage-backed securities: $3.50 billion;
Alt-A residential mortgage-backed securities: $2.70 billion;
CDOs: $1.33 billion;
Prime residential mortgage-backed securities: $1.73 billion;
Commercial mortgage-backed securities: $1.41 billion;
All other: $219 million;
Percentage of CDO collateral rated less than BBB: 58.7%.
2009, Q4;
Net notional of multisector CDOs (including investment grade CDOs):
$7.93 billion;
Subordination below the super senior risk layer: $9.98 billion;
Subprime residential mortgage-backed securities: $3.41 billion;
Alt-A residential mortgage-backed securities: $2.68 billion;
CDOs: $1.28 billion;
Prime residential mortgage-backed securities: $1.69 billion;
Commercial mortgage-backed securities: $1.79 billion;
All other: $217 million;
Percentage of CDO collateral rated less than BBB: 61.8%.
2010, Q1;
Net notional of multisector CDOs (including investment grade CDOs):
$7.57 billion;
Subordination below the super senior risk layer: $9.19 billion;
Subprime residential mortgage-backed securities: $3.12 billion;
Alt-A residential mortgage-backed securities: $2.48 billion;
CDOs: $1.30 billion;
Prime residential mortgage-backed securities: $1.70 billion;
Commercial mortgage-backed securities: $1.91 billion;
All other: $273 million;
Percentage of CDO collateral rated less than BBB: 64.3%.
2010, Q2;
Net notional of multisector CDOs (including investment grade CDOs):
$6.8 billion;
Subordination below the super senior risk layer: $8.62 billion;
Subprime residential mortgage-backed securities: $2.90 billion;
Alt-A residential mortgage-backed securities: $2.45 billion;
CDOs: $1.22 billion;
Prime residential mortgage-backed securities: $1.61 billion;
Commercial mortgage-backed securities: $1.98 billion;
All other: $248 million;
Percentage of CDO collateral rated less than BBB: 67.4%.
2010, Q3;
Net notional of multisector CDOs (including investment grade CDOs):
$6.93 billion;
Subordination below the super senior risk layer: $8.43 billion;
Subprime residential mortgage-backed securities: $2.80 billion;
Alt-A residential mortgage-backed securities: $2.41 billion;
CDOs: $1.24 billion;
Prime residential mortgage-backed securities: $1.49 billion;
Commercial mortgage-backed securities: $2.08 billion;
All other: $332 million;
Percentage of CDO collateral rated less than BBB: 67.3%.
Source: GAO analysis of AIG SEC filings.
Note: Gross notional is equal to the net notional plus the
subordination amounts.
[End of figure]
AIG's Insurance Operations Have Continued to Show Signs of Recovery,
but Federal Aid to Life Insurance Companies Has Been Critical to Their
Progress:
Given the importance of AIG's insurance operations to its long-term
financial health, we analyzed AIG's insurance operations by tracking
several indicators of both its property/casualty and life insurance
companies. We tracked the annual regulatory capital of AIG's insurance
subsidiaries. The most recent data show that from 2008 through the
first half of 2010, AIG's insurers maintained capital above regulatory
minimums, but the recent federal assistance was critical to the health
of domestic life and retirement companies. In particular, our
indicators show that for AIG's life and retirement services, additions
to policyholder contracts exceeded withdrawals and operating income
for the domestic and foreign life insurance and retirement services
businesses declined in the first two quarters of 2010 compared to the
fourth quarter of 2009, but remained positive. We also analyzed AIG's
property/casualty companies by tracking their insurance premiums
written. While the pattern has been somewhat cyclical, overall trends
in volume of premiums written appear to have stabilized though not
fully recovered to the levels of 2007. Finally, while the insurance
companies generally showed some growth, our indicators show that the
property/casualty companies' underwriting was not profitable in the
first two quarters of 2010 although underwriting costs relative to
premiums earned in the first two quarters 2010 declined considerably
from the fourth quarter 2009. Underwriting costs relative to net
premiums earned for the international companies declined in the second
quarter of 2010 to the point where their underwriting again became
profitable.
AIG's Insurers Maintained Capital Levels Higher Than the Regulatory
Minimum, but the Domestic Life and Retirement Companies Needed Federal
Assistance to Maintain Capital Ratio:
The most recent data show that capital maintained by AIG's insurers
has exceeded National Association of Insurance Commissioners (NAIC)
minimums, and several of AIG's life and retirement companies have
benefited from federal assistance. This indicator of AIG's capital--
which we will update annually as newer NAIC data become available--is
intended to monitor the capital of AIG insurers that, if depleted by
losses, could require additional capital contributions through federal
assistance (for instance, by AIG drawing on FRBNY's revolving credit
facility or Treasury's equity capital facility). NAIC requires that
insurance companies hold a minimum amount of capital, known as risk-
based capital. According to NAIC, "a company reporting total adjusted
capital of 200 percent or more of minimum risk-based capital is a 'no
action' level company; nothing needs to be done by regulators."
[Footnote 42] 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 43] Adverse
movements in the primary components of capital and shareholders'
equity may indicate weak performance by the company.
As previously reported, AIG's property/casualty insurers and domestic
life insurance and retirement services companies have maintained
levels of capital higher than the minimum requirement set by NAIC, as
shown in figure 9. The property/casualty companies and domestic life
companies had adjusted capital of at least 400 percent and 600
percent, respectively, of risk-based capital at year end 2007, 2008,
and 2009. However, the domestic life companies only were able to
maintain their capital ratios with federal assistance. Specifically,
according to Federal Reserve officials, Maiden Lane II's direct
purchase of $39.3 billion of RMBS at fair value helped these companies
reduce the risks that were created by their securities lending
activities in 2008. Further, AIG used funds from the FRBNY revolving
credit facility to contribute capital to these companies, primarily to
make up for the losses in the securities lending portfolio.[Footnote
44] In contrast, AIG's domestic property/casualty companies have
maintained levels of adjusted capital in excess of requirements with
virtually no direct federal assistance. Because AIG companies report
adjusted capital no more than once annually in their year-end filings
with NAIC, this indicator can be updated only once a year after the
calendar year-end data become available. We determined that the
capital and surplus that AIG reports in its quarterly filings with
NAIC are proxy for quarterly tracking of the adjusted capital because
the same activities would affect both measures. More information about
this indicator and the results of a proxy indicator that we developed
for the first nine months of 2010 are included in appendix V.
Figure 9: Regulatory Capital for AIG Domestic Insurance Subsidiaries
and Primary Activities That Affected Regulatory Capital during 2009:
[Refer to PDF for image: illustrated vertical bar graph]
AIG‘s largest domestic property/casualty companies:
Adjusted capital: 12/31/08: $24.09 billion;
Adjusted capital: 12/31/09: $25.30 billion;
Authorized control level risk-based capital: 12/31/08: $5.97 billion;
Authorized control level risk-based capital: 12/31/09: $5.46 billion;
2009 Net income or loss: $2.37 billion;
2009 Investor capital contributions: $0;
2009 Stockholder dividends[B]: $0;
Other major activities that affected capital of AIG's largest domestic
PC and life insurance retirement services companies:
2009 Change in net realized cap gains and losses[A]: -$1.35 billion;
2009 Change in net deferred income tax: $646 million;
2009 Change in nonadmitted assets: -$1.01 billion;
2009 Aggregate write-ins for gains and losses in surplus: $459 million;
Adjusted capital: 12/31/07: $26.60 billion;
Adjusted capital: 12/31/08: $24.09 billion;
Authorized control level risk-based capital: 12/31/07: $6.06 billion;
Authorized control level risk-based capital: 12/31/08: $5.97 billion;
2008 Net income or loss: $2.33 billion;
2008 Investor capital contributions: $3.08 billion;
2008 Stockholder dividends[B]: -$4.62 billion;
Other major activities that affected capital of AIG's largest domestic
PC and life insurance retirement services companies:
2008 Change in net realized cap gains and losses[A]: -$3.02 billion;
2008 Change in net deferred income tax: n/a;
2008 Change in nonadmitted assets: n/a;
2008 Aggregate write-ins for gains and losses in surplus: n/a.
AIG‘s largest domestic life insurance and retirement services
companies:
Adjusted capital: 12/31/08: $15.66 billion;
Adjusted capital: 12/31/09: $16.54 billion;
Authorized control level risk-based capital: 12/31/08: $2.47 billion;
Authorized control level risk-based capital: 12/31/09: $1.95 billion;
2009 Net income or loss: $396 million;
2009 Investor capital contributions: $0;
2009 Stockholder dividends[B]: $0;
Other major activities that affected capital of AIG's largest domestic
PC and life insurance retirement services companies:
2009 Change in net realized cap gains and losses[A]: -$1.30 billion;
2009 Change in net deferred income tax: -$7.09 billion;
2009 Change in nonadmitted assets: $6.77 billion;
2009 Aggregate write-ins for gains and losses in surplus: $1.44
billion;
Adjusted capital: 12/31/07: $20.04 billion;
Adjusted capital: 12/31/08: $15.66 billion;
Authorized control level risk-based capital: 12/31/07: $2.90 billion;
Authorized control level risk-based capital: 12/31/08: $2.47 billion;
2008 Net income or loss: -$17.60 billion;
2008 Investor capital contributions: $23.12 billion;
2008 Stockholder dividends[B]: -$52 million;
Other major activities that affected capital of AIG's largest domestic
PC and life insurance retirement services companies:
2008 Change in net realized cap gains and losses[A]: -$24.21 billion;
2008 Change in net deferred income tax: n/a;
2008 Change in nonadmitted assets: n/a;
2008 Aggregate write-ins for gains and losses in surplus: n/a.
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 Has
Shown Deposits Recently Exceeding Withdrawals and Their Operating
Income Has Remained Positive:
Deposits at AIG's life and retirement service companies have been
improving compared with withdrawals, and their operating income has
remained positive. We use two indicators to monitor AIG's life
insurance and retirement services companies. The first indicator
tracks the additions to AIG life and retirement policyholder contract
deposits and is intended to monitor for potential redemption "runs" by
AIG annuitants and policyholders. Additions to policyholder contract
deposits are amounts customers have paid to AIG to purchase a policy
or contract. Withdrawals represent redemptions or cancellations of
these instruments. Sharp increases in contract withdrawals or
reductions in contract deposits could indicate sharply increased
redemptions due to customer anxiety about AIG in particular or
insurance companies more broadly. Sharp increases in redemptions could
strain a company's liquidity position. The second indicator tracks the
capital gains and operating income of these companies and is intended
to monitor the profitability of AIG's life insurance and retirement
services companies. Operating income before capital gains or losses
provides an indication of the profitability of the company's
underwriting operations, while capital gains and losses relate to
investment activities and not directly to insurance underwriting.
Increases in operating income or reductions in net realized capital
losses could indicate improvements in the operations of AIG's life and
retirement services companies, including improvement in market
conditions, lower other-than-temporary impairments, and dissipating
effects of lower credit ratings and negative publicity related to the
AIG brand since September 2008.
As shown in figure 10, in the fourth quarter of 2008 AIG life and
retirement services saw a sharp decline in additions to policyholders'
contract deposits and a large spike in withdrawals, resulting in a gap
of more than $26 billion. Without more granular data, it is unclear
whether the withdrawals were driven by concerns about the condition of
AIG or by the overall economic downturn, which may have resulted in
policyholders cashing in policies for financial reasons. The excess of
withdrawals over deposits adversely affected the liquidity position of
certain entities in this segment of AIG in late 2008. Conditions
started to improve in the first quarter of 2009, with a 77 percent
reduction in the gap between additions and withdrawals to about $6
billion, and that improvement continued through the third and fourth
quarters of 2009. The third quarter of 2009 was the first time since
the second quarter of 2008 that additions to AIG life and retirement
policyholder contract deposits exceeded withdrawals--by more than $700
million--but withdrawals again exceeded deposits in the fourth quarter
of 2009. In 2010, while the dollar volume of contract deposits and
withdrawals reported are lower because of businesses slated for sale
were shifted from continuing operations, contract deposits continued
to exceed withdrawals, by $755 million, $1.2 billion, and $1.6 billion
in the first, second, and third quarters, respectively.
Figure 10: AIG Life and Retirement Services Additions and Withdrawals
from Policyholder Contract Deposits for AIG Life and Retirement
Services Including Annuities, Guaranteed Investment Contracts, and
Life Products, First Quarter of 2007 through Third Quarter of 2010:
[Refer to PDF for image: vertical bar graph]
2007, Q1;
Additions to policyholder contract deposits: $14.001 billion;
Withdrawals from policyholder contract deposits: $15.309 billion.
2007, Q2;
Additions to policyholder contract deposits: $14.768 billion;
Withdrawals from policyholder contract deposits: $14.070 billion.
2007, Q3;
Additions to policyholder contract deposits: $16.997 billion;
Withdrawals from policyholder contract deposits: $14.195 billion.
2007, Q4;
Additions to policyholder contract deposits: $19.063 billion;
Withdrawals from policyholder contract deposits: $15.101 billion.
2008, Q1;
Additions to policyholder contract deposits: $16.439 billion;
Withdrawals from policyholder contract deposits: $15.600 billion.
2008, Q2;
Additions to policyholder contract deposits: $16.883 billion;
Withdrawals from policyholder contract deposits: $12.326 billion.
2008, Q3;
Additions to policyholder contract deposits: $13.124 billion;
Withdrawals from policyholder contract deposits: $14.455 billion.
2008, Q4;
Additions to policyholder contract deposits: $850 million;
Withdrawals from policyholder contract deposits: $27.364 billion.
2009, Q1;
Additions to policyholder contract deposits: $6.988 billion;
Withdrawals from policyholder contract deposits: $12.968 billion.
2009, Q2;
Additions to policyholder contract deposits: $10.546 billion;
Withdrawals from policyholder contract deposits: $13.401 billion.
2009, Q3;
Additions to policyholder contract deposits: $8.601 billion;
Withdrawals from policyholder contract deposits: $7.879 billion.
2000, Q4;
Additions to policyholder contract deposits: $8.189 billion;
Withdrawals from policyholder contract deposits: $8.216 billion.
2010, Q1;
Additions to policyholder contract deposits: $4.394 billion;
Withdrawals from policyholder contract deposits: $3.639 billion.
2010, Q2;
Additions to policyholder contract deposits: $6.412 billion;
Withdrawals from policyholder contract deposits: $5.177 billion.
2010, Q3;
Additions to policyholder contract deposits: $3.913 billion;
Withdrawals from policyholder contract deposits: $2.304 billion.
Source: GAO analysis of AIG SEC filings.
[End of figure]
A closer look at the revenues and expenses of these companies shows
that the companies suffered large operating losses in 2008 not because
of their underwriting activities but because of losses from their
investment activities (capital losses). Yet beginning in early 2009
and continuing into the first three quarters of 2010, their investment
losses have become smaller and thus their operating incomes have
become positive. For example, in the fourth quarter of 2008, net
realized capital losses of AIG's domestic life and retirement services
business accounted for $14.4 billion of its $15.2 billion in operating
losses. Similarly, in that same quarter, AIG's foreign life insurance
companies had net realized capital losses of $4.6 billion, which more
than offset their operating income of $1.2 billion, resulting in an
operating loss of $3.4 billion.[Footnote 45] For the full year 2009,
net realized capital losses were $3.2 billion for the domestic
companies and $0.6 billion for the foreign companies, much lower than
they were for 2008--$32.6 billion for the domestic companies and $11.8
billion for foreign companies. In turn, in 2009 the reported operating
income was $3.5 billion for domestic companies and $4.2 billion for
foreign companies, compared with operating losses of $31.1 billion for
domestic companies and $6.3 billion for the foreign companies in 2008.
The reported net realized capital losses for the domestic companies
were nearly $800 million in the first quarter of 2010 but the losses
gave way to a reported $20 million gain in the third quarter 2010. The
pretax operating net income increased over that same period, from $327
million to $998 million. Foreign companies reported realized capital
losses in the first quarter of 2010 of $61 million, but these were
followed by gains the next two quarters. Pretax operating income for
these companies in the first three quarters of 2010 fluctuated at
about $700 million and in the third quarter of 2010 was about half of
the amount of income in the last quarter of 2009 (see appendix VI).
AIG's Property/Casualty Companies Premiums Written Appear to Have
Remained Stable:
For the property/casualty commercial companies, dollar volumes of
premiums written trended downward throughout 2007 and 2008, but
started to stabilize in the first quarter in 2009 and this trend has
continued through the first three quarters of 2010. To monitor trends
in business volume in a way that includes the impact of AIG's
financial troubles on its ongoing ability to retain existing business
and attract new business activity to AIG's property/casualty
companies, we developed an indicator that tracks the trends in
quarterly premiums written by these companies since the beginning of
2007. "Premiums written" is the dollar volume of business in a
particular period. This indicator is important because AIG's
property/casualty insurance businesses are expected to remain among
AIG's core businesses following its restructuring. Trends in premiums
written also can provide some indication of the success of AIG's
efforts to maintain business volume. For example, to retain and
attract business, AIG formed Chartis, Inc. from several of AIG's
property/casualty companies and rebranded (renamed) several other AIG
companies.[Footnote 46] However, the indicator on volume of premiums
written is limited because it only measures a business's dollar volume
and does not break out dollar volume by new and existing business.
Therefore, the indicator cannot capture unit volume or the mix of
products that comprise the volume. Also, the indicator tracks only
AIG's business and does not compare AIG's business with that of its
peers in the property/casualty insurance industry. Such a comparison
would be important because property/casualty insurers as a group are
subject to market pressures that drive premium prices up and down
according to an industry-wide cycle characterized by hardening and
softening markets. For example, according to a fourth quarter 2009
survey of the Council of Independent Agents and Brokers, commercial
property/casualty premium rates were falling in the fourth quarter
2009 at about the same rate as in the third quarter.[Footnote 47]
According to the survey, low demand continued to put pressure on the
rates.
As illustrated in figure 11, quarterly dollar volumes of premiums
written by AIG's general insurance companies followed an annual
recurring pattern with highest volumes generally occurring in the
second and third quarters. For these companies, this pattern recurred
at declining levels in 2009 as premium volumes in each quarter were
lower than levels in same quarters of 2008, which were lower than
levels in the same quarters of 2007. Also, premium volumes in the
first three quarters of 2010 were below levels in the same quarters of
2009, but the rates at which they were declining moderated, indicating
that the trends may have stabilized. As for foreign general insurance,
such an annual recurring pattern and declines in premium volumes were
not as consistent or pronounced. Premium volumes in the first three
quarters of 2008 were higher than in the corresponding quarters of
2007. Then from the fourth quarter of 2008 through the third quarter
of 2009 premium volumes were lower than in the corresponding prior
year quarters before rebounding in the fourth quarter of 2009 to
slightly exceed the premium volume in the fourth quarter of 2008. This
trend continued into 2010 as premium volumes in the first three
quarters were higher than the same three quarters of 2009.
Figure 11: AIG General Insurance Premiums Written by Division, First
Quarter of 2007 through Third Quarter of 2010:
[Refer to PDF for image: multiple line graph]
2007, Q1;
Commercial insurance: $5.971 billion;
Foreign general: $3.618 billion;
Personal lines: $1.229 billion;
Transatlantic: $984 million;
Mortgage guaranty: $266 million.
2007, Q2;
Commercial insurance: $6.449 billion;
Foreign general: $3.242 billion;
Personal lines: $1.203 billion;
Transatlantic: $983 million;
Mortgage guaranty: $272 million.
2007, Q3;
Commercial insurance: $5.986 billion;
Foreign general: $3.270 billion;
Personal lines: $1.253 billion;
Transatlantic: $985 million;
Mortgage guaranty: $303 million.
2007, Q4;
Commercial insurance: $5.650 billion;
Foreign general: $2.921 billion;
Personal lines: $1.123 billion;
Transatlantic: $1.001 billion;
Mortgage guaranty: $302 million.
2008, Q1;
Commercial insurance: $5.124 billion;
Foreign general: $4.339 billion;
Personal lines: $1.288 billion;
Transatlantic: $1.036 billion;
Mortgage guaranty: $304 million.
2008, Q2;
Commercial insurance: $6.079 billion;
Foreign general: $3.726 billion;
Personal lines: $1.230 billion;
Transatlantic: $988 million;
Mortgage guaranty: $288 million.
2008, Q3;
Commercial insurance: $5.630 billion;
Foreign general: $3.647 billion;
Personal lines: $1.108 billion;
Transatlantic: $1.094 billion;
Mortgage guaranty: $280 million.
2008, Q4;
Commercial insurance: $4.410 billion;
Foreign general: $2.678 billion;
Personal lines: $888 million;
Transatlantic: $990 million;
Mortgage guaranty: $251 million.
2009, Q1;
Commercial insurance: $4.184 billion;
Foreign general: $3.552 billion;
Personal lines: $924 million;
Transatlantic: $1.047 billion;
Mortgage guaranty: $269 million.
2009, Q2;
Commercial insurance: $4.968 billion;
Foreign general: $2.954 billion.
2009, Q3;
Commercial insurance: $5.002 billion;
Foreign general: $3.074 billion.
2009, Q4;
Commercial insurance: $4.219 billion;
Foreign general: $2.711 billion.
2010, Q1;
Commercial insurance: $3.787 billion;
Foreign general: $3.857 billion.
2010, Q2;
Commercial insurance: $3.054 billion;
Foreign general: $4.738 billion.
2010, Q3;
Commercial insurance: $3.858 billion;
Foreign general: $4.740 billion.
[End of figure]
Figure 36: Note: Common shares of Transatlantic were sold during the
second quarter of 2009, reducing the aggregate ownership interest in
Transatlantic to 14 percent, and additional shares were sold in the
first quarter of 2010, leaving AIG owning 1 percent of the shares
outstanding, which AIG also expects to sell. The personal lines
companies were sold to a third party on July 1, 2009. Commercial
insurance will retain the private client business historically written
by the personal lines segment.
Source: GAO analysis of AIG quarterly financial supplements.
[End of figure]
The health of AIG's insurance companies also can be viewed from the
perspective of their underwriting profitability. For property/
casualty insurers, underwriting profitability can be measured using
the combined ratio, which is the sum of the loss and the expense
ratios. The loss ratio measures claims costs plus claims adjustment
expenses relative to net earned premiums. A rising loss ratio
indicates rising claims costs relative to the premiums earned, which
may be due to increased claims losses, decreased premiums earned, or a
combination of the two. For example, a loss ratio of 77.3 percent
indicates that 77.3 cents of every dollar in premiums earned are used
for claims and claims-related costs. The expense ratio measures the
level of underwriting administrative expenses relative to net premiums
earned and is a measure of underwriting efficiency. For example, an
expense ratio of 22.4 percent indicates that 22.4 cents of every
dollar in premiums earned are used for underwriting expenses. The
combined ratio is an overall measure of a property-casualty insurer's
underwriting profitability. Thus, a combined ratio of less than 100
percent would indicate that an insurer's underwriting is profitable
and a ratio of more than 100 percent would indicate an underwriting
loss.
AIG's combined ratios in both commercial and foreign general
property/casualty insurance businesses were below 100 throughout 2007
and the first half of 2008. These ratios rose and exceeded 100 in the
second half of 2008 and repeated a similar pattern in 2009. However,
the loss ratios for AIG's commercial insurance rose significantly in
the third and fourth quarters of 2008. The combined ratio spiked in
the fourth quarter of 2008, largely due to an administrative charge
(that also spiked the expense ratio) to recognize permanent impairment
of goodwill of previously acquired businesses.[Footnote 48] The higher
combined ratio also was partly due to a higher loss ratio because of
increased claims costs associated with Hurricane Ike and other major
catastrophes in 2008. The combined ratio also rose in the fourth
quarter of 2009, largely due to increased claims costs related to a
reserve strengthening charge. The commercial insurance combined ratios
dropped significantly in the first quarter of 2010 and since then have
remained at just more than 100, indicating that its commercial
insurance underwriting was not profitable during these quarters. The
combined ratio for AIG's foreign general insurance fell in the second
quarter of 2010 to its lowest level in a year to 95.6, indicating that
for this segment of business, underwriting again became profitable.
AIG officials said the foreign general loss ratio increased during
2009 primarily because of higher claims generally related to directors
and officers insurance as well as professional liability insurance
(errors and omissions coverage) for financial institutions at the time
of the worldwide credit crisis, particularly in Europe.[Footnote 49]
They also said that the foreign general expense ratio increased
because AIG sold its Brazil operations, which resulted in decreased
net premiums earned in 2008, more competitive pricing in the insurance
markets in 2009, and higher levels of general operating expenses
primarily related to the remediation and audit of general insurance
(Chartis, Inc.), pension costs, and post-retirement liability costs.
[Footnote 50]
We also developed a new indicator to quarterly track AIG's
underwriting ratios compared with the average underwriting ratios of
its property/casualty insurance peers or competitors and AIG's
investment income and net income as percentages of premiums earned.
The indicator shows that in nearly every quarter since the first
quarter of 2008, AIG's property/casualty companies have not had
profitable underwriting but generally they have had positive net
income, largely because of their investment income. We analyzed the
distributions of 2009 direct premiums written (DPW) by lines of
business of 30 property/casualty companies that each had more than $1
billion in DPW for 2009.[Footnote 51] From these companies we defined
a "peer" of AIG as a company that generated more than 90 percent of
its DPW in lines that accounted for more than 60 percent of AIG's DPW.
We defined a nonpeer of AIG as a company that generated more than 80
percent of its DPW in lines that accounted for less than 40 percent of
AIG's DPW or more than 50 percent of its DPW in a single line that was
less than 20 percent of AIG's DPW.
The top panel of figure 12 compares AIG ratios to those of its peers.
Its combined ratios were usually higher than the average of its peers.
However, since the first quarter of 2008, the combined ratio for these
AIG companies exceeded 100 in all but two quarters (indicating AIG's
underwriting usually was not profitable), whereas the ratios for its
peers averaged less than 100 in all but three quarters, indicating
that their underwriting usually was profitable. The top panel of the
figure also indicates that while AIG's expense ratios (which measure
the level of underwriting administrative expenses relative to net
premiums earned) have been lower than the average of its peers in
every quarter, its loss ratios (which measure the level of claims
costs and loss adjustment expenses relative to net premiums earned)
have been higher than the average of its peers in every quarter.
[Footnote 52] The lower panels of the figure show that despite the
higher-than-peer average underwriting costs, AIG's property/casualty
companies had positive net income in all but 2 of the 15 quarters
presented and that the companies' investment income was a major factor.
Figure 12: Quarterly Statutory Underwriting Ratios of AIG (Domestic
and Foreign Property/Casualty Insurance Companies) Compared to
Averages for 15 Peers and AIG's Property/Casualty Investment Income
and Net Income as Percents of Premiums Earned, First Quarter 2007
through Third Quarter of 2010:
[Refer to PDF for image: 1 multiple line graph; 2 vertical bar graphs]
Quarterly statutory underwriting ratios of AIG compared to averages
for 15 property/casualty (PC) insurance peers:
2007, Q1;
Average combined ratio of 15 PC insurance peers: 89.5;
AIG‘s combined ratio: 85.5;
Average loss ratio of 15 PC insurance peers: 60.1;
AIG‘s loss ratio: 65.9;
Average expense ratio of 15 insurance peers: 29.5;
AIG‘s expense ratio: 19.6.
2007, Q2;
Average combined ratio of 15 PC insurance peers: 91.1;
AIG‘s combined ratio: 90;
Average loss ratio of 15 PC insurance peers: 61.6;
AIG‘s loss ratio: 70.1;
Average expense ratio of 15 insurance peers: 29.5;
AIG‘s expense ratio: 19.9.
2007, Q3;
Average combined ratio of 15 PC insurance peers: 93.4;
AIG‘s combined ratio: 90;
Average loss ratio of 15 PC insurance peers: 65.3;
AIG‘s loss ratio: 67.8;
Average expense ratio of 15 insurance peers: 28.1;
AIG‘s expense ratio: 22.2.
2007, Q4;
Average combined ratio of 15 PC insurance peers: 92.4;
AIG‘s combined ratio: 98.8;
Average loss ratio of 15 PC insurance peers: 62.1;
AIG‘s loss ratio: 75.9;
Average expense ratio of 15 insurance peers: 30.3;
AIG‘s expense ratio: 22.9.
2008, Q1;
Average combined ratio of 15 PC insurance peers: 96.3;
AIG‘s combined ratio: 100;
Average loss ratio of 15 PC insurance peers: 64.4;
AIG‘s loss ratio: 76.1;
Average expense ratio of 15 insurance peers: 31.9;
AIG‘s expense ratio: 23.9.
2008, Q2;
Average combined ratio of 15 PC insurance peers: 95.6;
AIG‘s combined ratio: 102.1;
Average loss ratio of 15 PC insurance peers: 66.3;
AIG‘s loss ratio: 81.3;
Average expense ratio of 15 insurance peers: 29.3;
AIG‘s expense ratio: 20.8.
2008, Q3;
Average combined ratio of 15 PC insurance peers: 109;
AIG‘s combined ratio: 113.4;
Average loss ratio of 15 PC insurance peers: 81.2;
AIG‘s loss ratio: 91.1;
Average expense ratio of 15 insurance peers: 27.8;
AIG‘s expense ratio: 22.3.
2008, Q4;
Average combined ratio of 15 PC insurance peers: 92.9;
AIG‘s combined ratio: 119.1;
Average loss ratio of 15 PC insurance peers: 61.6;
AIG‘s loss ratio: 89.4;
Average expense ratio of 15 insurance peers: 31.3;
AIG‘s expense ratio: 29.8.
2009, Q1;
Average combined ratio of 15 PC insurance peers: 96.8;
AIG‘s combined ratio: 104.2;
Average loss ratio of 15 PC insurance peers: 65.7;
AIG‘s loss ratio: 79.2;
Average expense ratio of 15 insurance peers: 31.2;
AIG‘s expense ratio: 25.
2009, Q2;
Average combined ratio of 15 PC insurance peers: 97.9;
AIG‘s combined ratio: 99;
Average loss ratio of 15 PC insurance peers: 67.8;
AIG‘s loss ratio: 76.7;
Average expense ratio of 15 insurance peers: 30.1;
AIG‘s expense ratio: 22.3.
2009, Q3;
Average combined ratio of 15 PC insurance peers: 99.1;
AIG‘s combined ratio: 105.8;
Average loss ratio of 15 PC insurance peers: 67.5;
AIG‘s loss ratio: 81.4;
Average expense ratio of 15 insurance peers: 31.6;
AIG‘s expense ratio: 24.4.
2009, Q4;
Average combined ratio of 15 PC insurance peers: 97.6;
AIG‘s combined ratio: 136.1;
Average loss ratio of 15 PC insurance peers: 64.2;
AIG‘s loss ratio: 110.3;
Average expense ratio of 15 insurance peers: 33.4;
AIG‘s expense ratio: 25.9.
2010, Q1;
Average combined ratio of 15 PC insurance peers: 100.5;
AIG‘s combined ratio: 113.1;
Average loss ratio of 15 PC insurance peers: 66.9;
AIG‘s loss ratio: 83.7;
Average expense ratio of 15 insurance peers: 33.6;
AIG‘s expense ratio: 29.4.
2010, Q2;
Average combined ratio of 15 PC insurance peers: 100.5;
AIG‘s combined ratio: 102.8;
Average loss ratio of 15 PC insurance peers: 68.1;
AIG‘s loss ratio: 76.9;
Average expense ratio of 15 insurance peers: 32.4;
AIG‘s expense ratio: 26.
2010, Q3;
Average combined ratio of 15 PC insurance peers: 99.7;
AIG‘s combined ratio: 107.8;
Average loss ratio of 15 PC insurance peers: 68.8;
AIG‘s loss ratio: 78.4;
Average expense ratio of 15 insurance peers: 30.9;
AIG‘s expense ratio: 29.4.
AIG‘s PC investment income as a percent of net premiums earned:
2007 Q1: 12%.
2007 Q2: 14.3%.
2007 Q3: 13.8%.
2007 Q4: 14.7%.
2008 Q1: 13.1%.
2008 Q2: 12.2%.
2008 Q3: 13%.
2008 Q4: 13.8%.
2009 Q1: 11.9%.
2009 Q2: 12.4%.
2009 Q3: 25.2%.
2009 Q4: 15%.
2010 Q1: 15.2%.
2010 Q2: 17.1%.
2010 Q3: 15%.
AIG‘s PC net income as a percent of net premiums earned:
2007 Q1: 18.4%.
2007 Q2: 17.3%.
2007 Q3: 18.7%.
2007 Q4: 22.4%.
2008 Q1: 6.9%.
2008 Q2: 13.2%.
2008 Q3: -19.7%.
2008 Q4: 7.9%.
2009 Q1: 10.5%.
2009 Q2: 13%.
2009 Q3: 22.6%.
2009 Q4: -10.5%.
2010 Q1: 12.2%.
2010 Q2: 16.3%.
2010 Q3: 2.4%.
Sources: GAO analysis of AIG and peers data per SNL Financial.
Note: We determined AIG's property/casualty peers for our analysis by
comparing various property/casualty companies' distribution of
premiums written in 2009 by their lines of business. Similar to AIG,
its peers have several lines of business. The 15 peers are ACE,
Alleghany, Allianz SE, American Financial, Arch Capital, Argo Group,
Chubb, C.N.A., Fairfax Financial, Hartford, Liberty Mutual, Markel,
Old Republic, Travelers, and WR Berkley. Other property/casualty
companies were not included in the peer group for this analysis. Most
of these companies either concentrated on the private auto insurance
business or home/farm owners insurance, neither of which is among
AIG's largest lines of business. These companies are Allstate;
Assurant, Inc.; Bank of America; Berkshire Hathaway (GEICO); Erie
Insurance Group; FM Global; Nationwide Mutual; Progressive; QBE
Insurance Group; State Farm Fire and Casualty; State Farm Mutual Auto
Insurance; Tokio Marine; United Services Automobile Association; White
Mountains; and Zurich Financial Services.
[End of figure]
The panels of figure 12 also show that for AIG's domestic and foreign
property/casualty insurance combined, underwriting for the segment was
not profitable in 10 of the 15 quarters spanning 2007 through the
third quarter of 2010, but returns from investments for these
companies more than offset the underwriting losses, making the segment
profitable overall.[Footnote 53] While our data cover just under 4
years, they suggest a pattern of loss and expense ratios rising in the
latter part of calendar years 2007, 2008, and 2009 for both commercial
and foreign general insurance. However, investment returns were high
enough for these general insurance divisions combined to remain
profitable in 2007, 2009, and the first three quarters of 2010, but
were not large enough to outweigh the nearly $4.4 billion in general
insurance investment losses in 2008.
The Federal Government's Exposure to AIG Has Declined and Its Ability
to Fully Recoup Its Assistance Will Be Determined by AIG's Long-term
Health and Market Conditions:
Our analysis of the composition of the federal assistance, including
the amount of direct and indirect assistance and the sources of that
assistance, shows that the federal exposure to AIG has declined since
we last reported, and while AIG, Treasury, FRBNY, the AIG Credit
Facility Trust, and the AIA and ALICO SPVs have executed a plan to
recapitalize AIG and restructure the federal assistance to AIG in the
hope of repaying the government's assistance, whether the federal
government, in particular Treasury, will fully recoup its assistance
may not be known for some time. As of September 30, 2010, total
authorized federal assistance was reduced from $182.3 billion as of
December 2009 to $176.5 billion, primarily because of a reduction in
the credit limit of the FRBNY revolving credit facility. For the same
time period, largely due to fluctuations in asset values, outstanding
federal assistance was reduced from $129.1 billion to $124.6 billion.
Specifically, the debt related to Maiden Lanes II and III owed to
FRBNY on behalf of AIG decreased from $33.9 billion to $28.3 billion
as of September 30, 2010. The values of the Maiden Lane II and Maiden
Lane III portfolios have continued to increase slightly from September
2009 through September 30, 2010, while the principal and interest owed
to FRBNY has declined. We also tracked AIG's book value (shareholders'
equity) as an indicator on the prospect of AIG's repayment and found
that it largely has stabilized through September 2010, due to the
unprecedented actions the Federal Reserve and Treasury have taken to
assist AIG. In addition, we tracked AIG's divestiture of businesses as
another indicator on the prospect of AIG's repayment. AIG is using the
net cash proceeds from the recent AIA initial public offering (IPO)
and the sale of ALICO to MetLife to repay the FRBNY revolving credit
facility. On January 14, 2011, AIG and relevant parties executed a
recapitalization and restructuring plan through which AIG repaid the
outstanding balance in FRBNY's revolving credit facility.
Nevertheless, the extent to which the government can recoup the
assistance to AIG depends on AIG's long-term health and is subject to
uncertainty arising from the likelihood of future changes in general
economic and market conditions.
Over the First Three Quarters of 2010, Total Government Exposure Has
Declined:
The government's exposure has decreased by about $4.5 billion since
December 2009 to $124.6 billion as of September 30, 2010 (see table
3).[Footnote 54] As discussed, the federal government has provided
various forms of direct and indirect assistance to AIG.
* First, in the form of debt owed by AIG to the government, the
government has loaned money to AIG directly through the FRBNY
revolving credit facility. As of September 30, 2010, about $20.5
billion of assistance was being provided directly to AIG via a secured
loan through the facility. This is less than 30 percent of the peak
balance of $72.3 billion reached in October 2008. According to AIG,
the company has drawn on the facility to address its short-term
liquidity needs as it has not been able to issue commercial paper at
the corporate level (see table 2) and because certain of its regulated
subsidiaries are restricted from making dividend payments, or
advancing funds, to AIG. However, as discussed earlier, an IPO for AIA
occurred in late October 2010 and ALICO was sold in November 2010 to
MetLife, generating cash proceeds to repay the facility, on closing of
the announced recapitalization plan, as discussed later.
* Second, in the form of equity shares owned by the government, the
government had a September 30, 2010, balance of $73.3 billion of AIG
shares through (1) Treasury's Series E noncumulative preferred stock,
(2) Treasury's equity capital facility that is associated with the
fixed-rate Series F noncumulative perpetual preferred stock, and (3)
FRBNY's preferred interests in the AIA and ALICO SPVs. This direct
government investment, which as of September 30, 2010, has grown by
more than $1.5 billion from $71.8 billion in December 2009, is the
primary form of federal assistance to AIG. It resulted from the
November 2008 and March and April 2009 restructurings and the December
2009 transaction in which the Federal Reserve exchanged $25 billion of
its debt for $25 billion in preferred interests in the AIA and ALICO
SPVs. On April 1, 2010, AIG announced that pursuant to the terms of
the Series E and F preferred stock agreements, which provide that
Treasury has the right to elect directors to AIG's board in the event
that AIG does not pay dividends on those series of preferred stock for
a total of four quarterly periods, Treasury elected two directors to
the AIG board of directors.
* Third, in the form of debt owed to the government on behalf of AIG,
FRBNY has provided loans to Maiden Lane II and III--the SPVs
established by FRBNY--for the purpose of purchasing RMBS assets from
AIG's life insurance companies and CDOs from AIGFP's CDS
counterparties, respectively. As of September 30, 2010, the
government's exposure (not including interest dividends and fees) on
those loans was $28.3 billion, down from $33.9 billion as of December
2009.
FRBNY acquired its preferred interests in the AIA and ALICO SPVs in
exchange for reducing a substantial portion of AIG's debt under the
FRBNY revolving credit facility. Moreover, in February 2010 AIG said
that it was not going to pursue a previously announced life insurance
securitization transaction. Specifically, AIG and FRBNY announced in
March 2009, when federal assistance to AIG was restructured for a
second time, that FRBNY would loan SPVs up to $8.5 billion to acquire
the rights to cash flows from insurance policies issued by certain AIG
domestic life insurance subsidiaries. AIG had planned to use proceeds
from the sale of insurance policy cash flows to the SPV to repay FRBNY
debt.
Table 3: Composition of U.S. Government Efforts to Assist AIG and the
Government's Approximate Remaining Exposures, as of September 30, 2010:
Federal Reserve:
Revolving Credit Facility:
Amount authorized: $29.175 billion;
Direct AIG assistance: AIG debt owed to government: $14.288 billion[A];
Direct AIG assistance: Government equity: n/a;
Indirect AIG assistance: Other debt owed to government: n/a;
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: $6.182 billion;
Total government exposure: $20.47 billion[A].
Maiden Lane II:
Amount authorized: $22.5 billion;
Direct AIG assistance: AIG debt owed to government: n/a;
Direct AIG assistance: Government equity: n/a;
Indirect AIG assistance: Other debt owed to government: $13.656
billion[B];
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: $0.408 billion;
Total government exposure: $14.064 billion.
Maiden Lane III:
Amount authorized: $30 billion;
Direct AIG assistance: AIG debt owed to government: n/a;
Direct AIG assistance: Government equity: n/a;
Indirect AIG assistance: Other debt owed to government: $14.638
billion[B];
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: $0.499 billion;
Total government exposure: $15.137 billion.
AIA and ALICO:
Amount authorized: $25 billion;
Direct AIG assistance: AIG debt owed to government: n/a;
Direct AIG assistance: Government equity: $25.955 billion[C];
Indirect AIG assistance: Other debt owed to government: n/a;
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: n/a;
Total government exposure: $25.955 billion.
Treasury:
Series D and E:
Amount authorized: $40 billion;
Direct AIG assistance: AIG debt owed to government: n/a;
Direct AIG assistance: Government equity: $40 billion[D];
Indirect AIG assistance: Other debt owed to government: n/a;
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: $1.605 billion;
Total government exposure: $41.605 billion[D].
Series F:
Amount authorized: $29.835 billion;
Direct AIG assistance: AIG debt owed to government: n/a;
Direct AIG assistance: Government equity: $7.378 billion[E];
Indirect AIG assistance: Other debt owed to government: n/a;
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: n/a;
Total government exposure: $7.378 billion[E].
Totals:
Total direct assistance:
Amount authorized: n/a;
Direct AIG assistance: AIG debt owed to government: $14.288 billion;
Direct AIG assistance: Government equity: $73.333 billion;
Indirect AIG assistance: Other debt owed to government: n/a;
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: $7.787 billion;
Total government exposure: $95.408 billion.
Total indirect assistance:
Amount authorized: n/a;
Direct AIG assistance: AIG debt owed to government: n/a;
Direct AIG assistance: Government equity: n/a;
Indirect AIG assistance: Other debt owed to government: $28.294
billion;
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: $0.907 billion;
Total government exposure: $29.201 billion.
Total direct and indirect assistance to benefit AIG:
Amount authorized: $176.51 billion;
Direct AIG assistance: AIG debt owed to government: $14.288 billion;
Direct AIG assistance: Government equity: $73.333 billion;
Indirect AIG assistance: Other debt owed to government: $28.294
billion;
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: $8.694 billion;
Total government exposure: $124.609 billion.
Sources: GAO analysis of AIG SEC filings, and Federal Reserve
Statistical Release H.4.1.
Note: Data are as of September 30, 2010, or latest available.
[A] FRBNY created a revolving credit facility to provide AIG a
revolving loan that AIG and its subsidiaries could use to enhance
their liquidity positions. In exchange for the facility and $0.5
million, a trust received Series C preferred stock for the benefit of
the Treasury, which gives the trust an approximately 79.75 percent
voting interest in AIG. FRBNY reduced the amount of the commitment fee
on the revolving credit facility by $500,000 to pay for the Series C
stock. The AIG loan balance reported in the H.4.1 reflects the
outstanding principal balance, capitalized interest, unamortized
deferred commitment fees, and the allowance for the loan
restructuring, which was initially recorded in July 2009. On January
14, 2011, AIG announced that it executed the recapitalization action
plan, which stated that AIG is using the net cash proceeds from the
recent AIA IPO and sale of the ALICO to Metlife to repay the FRBNY
revolving credit facility.
[B] FRBNY created an SPV--Maiden Lane II LLC--to alleviate liquidity
and capital pressures on AIG by purchasing RMBS from AIG U.S.
insurance subsidiaries, and another SPV called Maiden Lane III LLC to
alleviate liquidity and capital pressures on AIG by purchasing CDOs
from AIGFP's counterparties in connection with the termination of CDS.
Principal owed as of September 29, 2010, was $13.656 billion for
Maiden Lane II LLC and $14.638 billion for Maiden Lane III LLC.
[C] AIG created two SPVs to hold the shares of certain of its foreign
life insurance businesses (AIA and ALICO). In November 2010, the
company announced that it sold ALICO to MetLife for approximately
$16.2 billion (including approximately $7.2 billion in cash and the
remainder in MetLife securities) and in October 2010 it announced that
it had raised more than $20.5 billion in gross proceeds in the initial
public offering of two-thirds of the shares of AIA. On January 14,
2011, AIG announced that it executed the signed recapitalization plan,
which stated that the funds for repaying the FRBNY revolving credit
facility were to come from the net cash proceeds from the IPO of 67
percent of AIA and the sale of ALICO.
[D] Treasury purchased Series D cumulative preferred stock of AIG. AIG
used the proceeds to pay down part of the revolving credit facility.
Series D stock was later exchanged for Series E noncumulative
preferred stock. Unpaid dividends on the Series D shares were added to
the liquidation preference amount of Series E stock that Treasury
received. When the Series D preferred shares were exchanged for Series
E preferred shares, $1.605 billion of accrued but unpaid dividends
were included in the liquidation preference of the Series E preferred
stock. On January 14, 2011, AIG announced that it executed the signed
recapitalization plan, which stated that Treasury's shares of AIG's
Series E preferred stock were to be exchanged for approximately 924.5
million shares of AIG common stock.
[E] Treasury purchased Series F noncumulative preferred stock of AIG.
Treasury has committed to provide AIG with up to $29.835 billion
through an equity capital facility to meet its liquidity and capital
needs in exchange for an increase in the aggregate liquidation
preference of the Series F shares. On January 14, 2011, AIG announced
that it executed the signed recapitalization plan, which stated that
AIG was to draw down amounts remaining on the Series F preferred stock
and use them to repurchase all or a portion of FRBNY's preferred
interests in the AIA and ALICO SPVs. According to this plan, AIG and
Treasury were to amend and restate the Series F securities purchase
agreement to provide for the issuance of Series G preferred stock by
AIG to Treasury. According to the plan, AIG's right to draw on
Treasury's equity capital facility was to terminate with the closing
of the recapitalization. Treasury's shares of the Series F preferred
stock have been exchanged for (1) preferred interests in the AIA and
ALICO SPVs transferred to Treasury, (2) newly issued shares of Series
G preferred stock, and (3) approximately 167.6 million shares of AIG
common stock.
[End of table]
Due to restructuring and mandatory repayments from the sale of assets,
the borrowing limit on the amount of direct assistance available to
AIG through the FRBNY revolving credit facility has been lowered
several times since the facility was created, and the amount AIG owes
the facility also has been reduced (see appendix VIII). Initially,
FRBNY made $85 billion in assistance available to AIG. Both the
available assistance and, in turn, the outstanding balance were
reduced in November 2008 when the government first restructured its
assistance to the company from debt to preferred equity. On November
25, 2008, AIG entered into an agreement with Treasury whereby Treasury
agreed to purchase $40 billion of 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
55] 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 outstanding debt, and increased the federal equity
position by $40 billion. It also involved a reduction of the borrowing
limit on the credit facility from $85 billion to $60 billion.
The borrowing limit and outstanding balance were again reduced in
December 2009 when FRBNY received preferred interests in the AIA and
ALICO SPVs, which was part of the March 2009 restructuring. In this
transaction, the amount AIG owed on the facility was reduced by $25
billion and, in exchange, FRBNY acquired preferred interests in the
SPVs of the same amount. In effect, the transactions exchanged debt
for equity. Also, the borrowing limit on the credit facility was
reduced from $60 billion to $35 billion. To accelerate its efforts to
repay the revolving credit facility AIG announced in March 2009 that
it would generate proceeds of about $51 billion once pending
agreements to sell AIA and ALICO to Prudential PLC and MetLife,
respectively, were finalized. Later, AIG announced that it had
terminated its pending agreement to sell AIA to Prudential PLC. In
late October 2010 an IPO of two-thirds of the shares of AIA generated
$20.5 billion in cash, and in November 2010 ALICO was sold to MetLife
for $16.2 billion, including approximately $7.2 billion in cash and
the remainder in MetLife securities. According to the executed
recapitalization plan, the net cash proceeds from both transactions
were to be loaned by the SPVs to AIG to repay the revolving credit
facility.
The borrowing limit on the facility was reduced several more times in
2010 because of mandatory repayments from proceeds from sales of
assets and businesses. In addition, in August 2010 International Lease
Finance Corporation raised $3.9 billion by issuing senior secured debt
in the private market. Like an asset sale, this activity triggered a
mandatory prepayment under the FRBNY credit agreement with AIG. The
outstanding balance includes outstanding principal and capitalized
interest net of unamortized deferred commitment fees and allowance for
loan restructuring.[Footnote 56] 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 57]
We also are monitoring the status of the government's indirect
assistance to AIG through the Maiden Lane II and Maiden Lane III
facilities (see appendix VIII). FRBNY provided loans to the
facilities, giving Maiden Lane II capital to purchase RMBS from AIG's
domestic life insurance companies and Maiden Lane III capital to
purchase multisector CDOs from AIGFP's CDS counterparties. The Maiden
Lane II and Maiden Lane III portfolios were funded primarily by loans
from FRBNY, which are not debt on AIG's books. The loans and related
expenses are to be repaid from cash generated by investment yields,
maturing assets, and sales of assets in the facilities. Such cash is
to be used to pay, in this order, operating expenses of the LLC,
principal due to FRBNY, interest due to FRBNY, principal due to AIG,
and interest due to AIG. Any remaining funds are to be shared between
FRBNY and AIG. In addition to the FRBNY investments in the facilities,
AIG invested $1 billion in Maiden Lane II and $5 billion in Maiden
Lane III. For Maiden Lanes II and III, FRBNY debt and portfolio values
peaked at $43.9 billion and $48.2 billion, respectively, in December
2008. At that time, the combined portfolio value was $4.3 billion
higher than the combined FRBNY debt. Since then, and through September
29, 2010, the debt was reduced by $14.7 billion and the portfolio
value, which has fluctuated over time, by $9.3 billion. This indicated
that during that 21-month period, market prices of portfolio assets
overall had not deteriorated while the debt was being reduced by cash
flows generated by the portfolio from investment yields and asset
maturities. Thus, as of September 29, 2010, Maiden Lane II had a
portfolio value of $15.9 billion and Maiden Lane III had a portfolio
value of $23 billion against unpaid FRBNY debt of $14.1 billion and
$15.1 billion, respectively.
The Federal Reserve said that it plans to hold on to the Maiden Lane
assets until they mature or increase in value to a point where the
Federal Reserve can maximize the amount of money recovered through
their sale but added that it has the authority to change its portfolio
strategy at any time. Federal Reserve officials explained that the
Maiden Lane assets are amortizing and that the long-term plan is for
the Maiden Lanes to sell off the portfolios' assets, which will be
used to repay the debt. Federal Reserve officials also said that they
constantly evaluate opportunities to sell assets--while still meeting
their objective of maximizing long-term cash flows--and have been able
to sell a handful of assets across the two Maiden Lanes. They
clarified that their decision to sell an asset depends on an asset's
discounted expected future cash flows and weighting those cash flows
across scenarios by how likely they are to occur. The value of these
assets relative to the outstanding loan balance had improved since the
latter part of 2008 and the Maiden Lanes have continued to receive
payments of principal and interest on their portfolios. The officials
added that the assets in the Maiden Lanes are high-quality bonds and
thus they expect to continue receiving timely payments of interest and
principal on most bonds in the portfolio regardless of the holding
period. In their view, the risk is that these payments cease as the
underlying portfolio has substantially matured or defaulted prior to
the full repayment of outstanding principal.[Footnote 58] As assets
mature, are sold, or pay interest, any portion remaining after paying
operating expenses of the Maiden Lanes will go toward reducing the
loan balance. These payments will reduce the amount of principal owed
by the Maiden Lanes to FRBNY. As of September 30, 2010, proceeds from
the Maiden Lanes had been used to pay down $15.5 billion of the
outstanding principal.[Footnote 59]
AIG and Relevant Parties Executed the Five Transactions Provided in
the Master Transaction Agreement in the Closing of the
Recapitalization Plan:
In September 2010, AIG reached an agreement in principle for a
recapitalization to begin to repay its federal assistance. Most of the
plan hinged on the success of several transactions that involved a
restructuring of the government's assistance to AIG. On December 8,
2010, this agreement was superseded by a master transaction agreement
signed by AIG, FRBNY, Treasury, the AIG Credit Facility Trust (the
Trust), as well as the AIA and ALICO SPVs, and this plan was executed
on January 14, 2011. First, AIG repaid FRBNY in cash all the amounts
owed under the FRBNY revolving credit facility, which as of September
30, 2010, was approximately $20.5 billion, and the credit facility was
terminated. The funds for repayment came from loans to AIG from the
SPVs that held the net cash proceeds from the IPO of AIA and the sale
of ALICO. The net cash proceeds from the AIA IPO were approximately
$20.1 billion and from the ALICO sale to MetLife were approximately
$7.2 billion.
Second, AIG drew down an amount available under Treasury's equity
capital facility established pursuant to the Series F preferred stock
securities purchase, less an amount up to $2 billion. AIG used the
amount drawn down to repurchase all or a portion of FRBNY's preferred
interests in the AIA and ALICO SPVs and then transferred the
repurchased preferred interests to Treasury in partial consideration
for the Series F shares.[Footnote 60] In addition to the value
provided by the remaining equity stake in AIA and equity interests in
MetLife received as part of the ALICO sale, AIG used the proceeds from
the sales or dispositions of its interests in its Nan Shan Life
Insurance Company, Ltd.; AIG Star Life Insurance Co. Ltd.; AIG Edison
Life Insurance Company; International Lease Finance Corporation; and
Maiden Lane II LLC and Maiden Lane III LLC to repay the proceeds
loaned to AIG from the AIA and ALICO SPVs, providing funds that the
SPVs used to redeem any of the preferred interests in the SPVs that
remained outstanding after the closing.[Footnote 61] Any preferred
interests in the SPVs not transferred to Treasury at closing continue
to be held by FRBNY and would be senior to the preferred interests in
the SPVs transferred to Treasury. AIG has the right to designate up to
$2 billion of the remaining Series F preferred stock to a new Series G
cumulative mandatory convertible preferred stock for general corporate
purposes (this is discussed in more detail below).
Third, AIG and Treasury amended and restated the securities purchase
agreement related to the Series F preferred stock so that AIG could
issue to Treasury Series G preferred stock at closing, and AIG's right
to draw on the Series F preferred stock was terminated. AIG's right to
draw on the Series G preferred stock is subject to terms and
conditions substantially similar to those in the agreement. According
to Treasury officials, the terms of the Series G stock would make it
punitive for AIG to draw on the stock for financing. Indeed, according
to the agreement, dividends on the Series G preferred stock would be
payable on a cumulative basis at a rate per annum of 5 percent,
compounded quarterly. In addition, Treasury and AIG officials said
that if AIG did not repay its draw on this facility within a year,
then Treasury's Series G preferred stock would be converted to common
stock at the lesser of 29.29 percent and 80 percent of the average
volume weighted average price over the 30 trading days commencing
immediately after the date the common stock trades without the right
to receive warrants in connection with the recapitalization.[Footnote
62]
Fourth, the various preferred stock held by the Trust and Treasury
were exchanged for common stock. The exchanges included the following:
1. The Trust's shares of AIG's Series C perpetual, convertible,
participating preferred stock were exchanged for approximately 562.9
million shares of AIG common stock, which are now held by Treasury;
2. Treasury's shares of AIG's Series E fixed rate noncumulative
preferred stock were exchanged for approximately 924.5 million shares
of AIG common stock; and:
3. Treasury's shares of the Series F preferred stock were exchanged
for preferred interests in the AIA and ALICO SPVs transferred to
Treasury, newly issued shares of Series G preferred stock, and
approximately 167.6 million shares of AIG common stock.
Treasury now holds approximately 1.655 billion shares of AIG common
stock, representing approximately 92.1 percent of the AIG common stock
that would be outstanding as of the closing.
Fifth, AIG issued to holders of AIG common stock, by means of a
dividend, 10-year warrants to purchase up to 75 million shares of AIG
common stock at an exercise price of $45 per share.[Footnote 63]
According to Treasury officials, the warrants were issued to address
the AIG board of directors' desire to compensate existing shareholders
for the dilutive effect of the recapitalization plan.
Implementation of the recapitalization plan began on January 6, 2011,
when AIG's Board of Directors conditionally declared a dividend in the
form of warrants to purchase shares of AIG's common stock to the
holders of AIG common stock subject to the condition that the parties
to the recapitalization plan determined as of January 12 and closed on
January 14. On January 12, AIG announced that this condition had been
satisfied. It proceeded with the distribution of the warrants, which
were 10-year warrants to purchase up to 75 million shares of AIG
common stock. The warrants were issued on January 19, 2011, to AIG's
common shareholders of record as of January 13, 2011. Each warrant
entitles the holder to purchase one share of AIG common stock, par
value $2.50 per share (AIG common stock), at $45 per share. With these
exchanges completed, Treasury now owns approximately 92 percent of the
common stock of AIG. Treasury also owns new Series G preferred shares,
which AIG may draw for general corporate purposes, and preferred
interests in the AIA and ALICO SPVs. AIG expects that over time,
Treasury will sell its shares of AIG common stock.
With Continued Federal Debt and Equity Assistance, AIG's Book Value
Remained Generally Stable over the First Nine Months of 2010:
To assess AIG's prospects of repaying federal assistance, we developed
an indicator to track AIG's book value (shareholders' equity). A rise
in book value could indicate improved prospects for repayment.
Conversely, a decrease could indicate worsening prospects for
repayment. The indicator monitors the amount of federal assistance
provided in the form of debt and equity to AIG relative to AIG's book
value. It tracks AIG's book value annually over several years before
the financial deterioration that resulted in federal assistance, and
from that point forward compares the book value with the level of
federal debt and equity assistance provided but not yet repaid on a
quarterly basis.
Figure 13 shows that AIG's shareholders' equity peaked in December
2006 at $101.7 billion and bottomed at $45.8 billion in March 2009. It
climbed to $72.7 billion in September 2009, and has fluctuated more
modestly since then. As of September 30, 2010, shareholders' equity
was at $80.8 billion, compared to $95.4 billion of total federal
assistance on AIG's books either as debt owed or as preferred equity.
However, as discussed earlier, as of the third quarter 2010, AIG's
shareholders' equity currently is positive, which is entirely the
result of federal assistance.
Figure 13: Debt and Equity Federal Assistance Provided to AIG Compared
with AIG's Book Value, December 2004 through September 30, 2010:
[Refer to PDF for image: stacked vertical bar graph]
December 2004;
Book value: AIG‘s consolidated shareholders‘ equity (assets minus
liabilities or book values): $79.7 billion.
December 2005;
Book value: AIG‘s consolidated shareholders‘ equity (assets minus
liabilities or book values): $8.6 billion.
December 2006;
Book value: AIG‘s consolidated shareholders‘ equity (assets minus
liabilities or book values): $101.7 billion.
December 2007;
Book value: AIG‘s consolidated shareholders‘ equity (assets minus
liabilities or book values): $95.8 billion.
June 2008;
Book value: AIG‘s consolidated shareholders‘ equity (assets minus
liabilities or book values): $78.1 billion.
September 2008;
Book value: AIG‘s consolidated shareholders‘ equity (assets minus
liabilities or book values): $71.2 billion;
Debt and federal assistance:
Treasury liquidation preference in Series F Preferred Shares: $63.0
billion.
December 2008;
Book value: AIG‘s consolidated shareholders‘ equity (assets minus
liabilities or book values): $52.7 billion;
Debt and federal assistance:
Treasury liquidation preference in Series E Preferred Shares (replaced
Series D shares): $40.0 billion;
Treasury liquidation preference in Series F Preferred Shares: $40.4
billion;
Federal Reserve Commercial Paper Funding Facility: $15.1 billion.
March 2009;
Book value: AIG‘s consolidated shareholders‘ equity (assets minus
liabilities or book values): $45.8 billion;
Debt and federal assistance:
Treasury liquidation preference in Series E Preferred Shares (replaced
Series D shares): $41.6 billion;
Treasury liquidation preference in Series F Preferred Shares: $47.4
billion;
Federal Reserve Commercial Paper Funding Facility: $12.2 billion;.
June 2009;
Book value: AIG‘s consolidated shareholders‘ equity (assets minus
liabilities or book values): $58.0 billion;
Debt and federal assistance:
Treasury liquidation preference in Series E Preferred Shares (replaced
Series D shares): $41.6 billion;
Principal and interest owed to FRBNY on credit facility: $1.2 billion;
Treasury liquidation preference in Series F Preferred Shares: $44.8
billion;
Federal Reserve Commercial Paper Funding Facility: $11.2 billion.
September 2009;
Book value: AIG‘s consolidated shareholders‘ equity (assets minus
liabilities or book values): $72.7 billion;
Debt and federal assistance:
Treasury liquidation preference in Series E Preferred Shares (replaced
Series D shares): $41.6 billion;
Principal and interest owed to FRBNY on credit facility: $3.2 billion;
Treasury liquidation preference in Series F Preferred Shares: $41.0
billion;
Federal Reserve Commercial Paper Funding Facility: $9.6 billion.
December 2009;
Book value: AIG‘s consolidated shareholders‘ equity (assets minus
liabilities or book values): $69.8 billion;
Debt and federal assistance:
Treasury liquidation preference in Series E Preferred Shares (replaced
Series D shares): $41.6 billion;
Principal and interest owed to FRBNY on credit facility: $5.2 billion;
FRBNY liquidation preferences in AIA and ALICO SPUs: $24.5 billion;
Treasury liquidation preference in Series F Preferred Shares: $23.4
billion;
Federal Reserve Commercial Paper Funding Facility: $4.7 billion.
March 2010;
Book value: AIG‘s consolidated shareholders‘ equity (assets minus
liabilities or book values): $75.0 billion;
Debt and federal assistance:
Treasury liquidation preference in Series E Preferred Shares (replaced
Series D shares): $41.6 billion;
Principal and interest owed to FRBNY on credit facility: $7.4 billion;
FRBNY liquidation preferences in AIA and ALICO SPUs: $25.1 billion;
Treasury liquidation preference in Series F Preferred Shares: $27.4
billion;
Federal Reserve Commercial Paper Funding Facility: $2.3 billion.
June 2010;
Book value: AIG‘s consolidated shareholders‘ equity (assets minus
liabilities or book values): $75.5 billion;
Debt and federal assistance:
Treasury liquidation preference in Series E Preferred Shares (replaced
Series D shares): $41.6 billion;
Principal and interest owed to FRBNY on credit facility: $7.4 billion;
FRBNY liquidation preferences in AIA and ALICO SPUs: $25.6 billion;
Treasury liquidation preference in Series F Preferred Shares: $26.5
billion.
September 2010;
Book value: AIG‘s consolidated shareholders‘ equity (assets minus
liabilities or book values): $80.8 billion;
Debt and federal assistance:
Treasury liquidation preference in Series E Preferred Shares (replaced
Series D shares): $41.6 billion;
Principal and interest owed to FRBNY on credit facility: $7.4 billion;
FRBNY liquidation preferences in AIA and ALICO SPUs: $26.0 billion;
Treasury liquidation preference in Series F Preferred Shares: $20.5
billion.
Source: GAO analysis of AIG SEC filings.
[End of figure]
AIG Has Implemented Major Divestitures:
Part of AIG's plan has been for the company to restructure itself into
a smaller company by selling some of its businesses, and that has
included major recent divestitures. In 2009 the company divested
several of its businesses and in the Fall of 2010, AIG sold ALICO and
completed an IPO of AIA, two insurance companies that were major
subsidiaries of AIG. According to Federal Reserve officials, the
proceeds from the AIA and ALICO transactions were to be held in an
escrow-type account and would not be used to pay either the FRBNY
credit facility or the preferred interests in the AIA and ALICO SPVs
until all of the closing conditions of the restructuring plan were
met. Cash proceeds from certain other asset sales will be available to
fund operations and redeem preferred interests. To track the progress
of this activity, we developed an indicator to chronologically track
divestitures (or dispositions) by AIG and the terms of such
transactions, including cash proceeds. Our indicator groups the
divestitures and the related proceeds by the quarters in which the
transactions closed.
Figure 14 shows aggregate proceeds from dispositions closed by quarter
from the third quarter of 2008 through the third quarter of 2010, and
as of November 30, 2010, broken out by cash proceeds, noncash
proceeds, and proceeds with the cash portion not disclosed (figure
does not include the AIA IPO, which is not a disposition). AIG said
that it has used the cash proceeds from these sales to meet its
obligations, including the credit facility; to cover capital needs;
and to provide loans to its subsidiaries. As of November 30, 2010, AIG
disclosed that it had received about $27.2 billion in total proceeds
from sales, $12.9 billion of which was cash. Figure 14 shows that
proceeds were increasing each quarter through the third quarter of
2009. In the last quarter of 2009, AIG closed on the sale of AIG
Finance-Hong Kong for $627 million. AIG officials told us that in
addition to this sale, AIG signed agreements on several other
transactions during this period that had not yet closed. The slowdown
in sales also may have reflected the asset-disposition strategy of
AIG's current president and chief executive officer, which has been to
hold assets in hopes for better terms at a later date rather than to
sell them quickly.[Footnote 64]
Figure 14: Proceeds from Dispositions by Quarter, September 30, 2008,
through November 30, 2010:
[Refer to PDF for image: stacked vertical bar graph]
Date: 9/30/08;
Proceeds not separated by cash and noncash in public disclosures: None;
Cash proceeds: None;
Noncash proceeds: None.
Date: 12/31/08;
Proceeds not separated by cash and noncash in public disclosures: $820
million;
Cash proceeds: None;
Noncash proceeds: None.
Date: 3/31/09;
Proceeds not separated by cash and noncash in public disclosures: $43
million;
Cash proceeds: $739 million;
Noncash proceeds: $76 million.
Date: 6/30/09;
Proceeds not separated by cash and noncash in public disclosures:
$1.136 billion;
Cash proceeds: $1.755 billion;
Noncash proceeds: $550 million.
Date: 9/30/09;
Proceeds not separated by cash and noncash in public disclosures: $1.9
billion;
Cash proceeds: $2.441 billion;
Noncash proceeds: $200 million.
Date: 12/31/09;
Proceeds not separated by cash and noncash in public disclosures: None;
Cash proceeds: $70 million;
Noncash proceeds: $557 million.
Date: 3/31/10;
Proceeds not separated by cash and noncash in public disclosures: None;
Cash proceeds: $729 million;
Noncash proceeds: None.
Date: 6/30/10;
Proceeds not separated by cash and noncash in public disclosures: None;
Cash proceeds: None;
Noncash proceeds: None;
Date: 9/30/10;
Proceeds not separated by cash and noncash in public disclosures: None;
Cash proceeds: None;
Noncash proceeds: None;
Date: 11/30/10;
Proceeds not separated by cash and noncash in public disclosures: None;
Cash proceeds: $7.2 million;
Noncash proceeds: $9.0 billion.
Sources: AIG and GAO analysis of AIG press releases and SEC filings.
[End of figure]
Most recently, AIG has reported significant progress in disposing of
two of its major assets. On March 8, 2010, AIG announced that its
board had agreed to sell ALICO to MetLife, and the sale subsequently
was closed in November 2010 for $16.2 billion, which is reflected in
the figure above. In March 2010, AIG also announced that its board had
approved the sale of AIA to Prudential PLC, but subsequently this sale
was terminated and AIA was positioned for an IPO. The IPO occurred in
late October 2010 and generated $20.5 billion, which is not reflected
in the figure above since the transaction was not a sale. On the
closing of the recapitalization plan, the net cash proceeds from the
sale of ALICO and the AIA IPO were used to repay the FRBNY revolving
credit facility.[Footnote 65] AIG, Treasury, FRBNY, and the AIG Credit
Facility Trust see these transactions as critical for AIG to repay its
federal assistance.
The unprecedented steps the Federal Reserve and Treasury have taken to
assist AIG as a result of their determination that the company posed
systemic risk to the financial system have helped stabilize AIG's
operations. The federal assistance, including the most recent
recapitalization and restructuring plan, also appears to be
facilitating a more orderly restructuring of the company. Our panel of
indicators shows that, in general, the improvements AIG made in 2009
continued into the first three quarters of 2010. However, the
indicators also show that AIG has continued to rely heavily on federal
assistance for its liquidity needs and equity capital structure.
Since the beginning of our monitoring effort, federal assistance
provided to AIG gradually has shifted from debt to equity, with a
reduction in the authorized amount of the FRBNY revolving credit
facility and an increase in the amount of preferred equity interests
held in AIG and various SPVs for the government. With the January 14,
2011, completion of the restructuring plan, all of the government's
assistance to AIG is now in the form of common stock and preferred
interests. Consequently, the government's, and thus the taxpayer's,
exposure to AIG increasingly is expected to be tied to the success of
AIG, its ongoing performance, and its value as seen by investors in
AIG's stock. The sustainability of any positive trends in AIG's
operations will depend on how well it manages its business in the
current economic environment. Similarly, the government's ability to
fully recoup its assistance will be determined by the long-term health
of AIG and other market factors such as the performance of the
insurance sectors and the credit derivatives markets that are beyond
the control of AIG or the government. We will continue to monitor
these issues in our future work.
Agency Comments and Our Evaluation:
We shared a copy of the draft of this report with the Federal Reserve,
Treasury, and AIG. They provided technical comments, which we
incorporated as appropriate.
We are sending copies of this report to interested congressional
committees and members, the Congressional Oversight Panel, Financial
Stability Oversight Board, Special Inspector General for TARP,
Treasury, the federal banking regulators, and others. The report also
is available at no charge on the GAO Web site at [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:
Orice Williams Brown:
Director, Financial Markets and Community Investment:
List of Congressional Addressees:
The Honorable Max Baucus:
The Honorable Thad Cochran:
The Honorable Kent Conrad:
The Honorable Orrin Hatch:
The Honorable Daniel K. Inouye:
The Honorable Tim Johnson:
The Honorable Jeff Sessions:
The Honorable Richard C. Shelby:
United States Senate:
The Honorable Hal Rogers:
Chairman:
The Honorable Norm Dicks:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable Paul Ryan:
Chairman:
The Honorable Chris Van Hollen:
Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Spencer Bachus:
Chairman:
The Honorable Barney Frank:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Dave Camp:
Chairman:
The Honorable Sander M. Levin:
Ranking Member Committee on Ways and Means:
House of Representative:
[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 15, which
illustrates the AIG parent company and subsidiaries that it directly
owns, conveys the complexity of the AIG organization. AIG's
subsidiaries are Chartis International, LLC; AIG Life Holdings
International, LLC; ALICO Holdings, LLC; Chartis Inc.; AIG Life
Holdings (United States), Inc.; AIG Capital Corporation; AIG Financial
Products Corp; and 10 other companies. AIG comprises approximately 400
companies and has operations in more than 130 countries and
jurisdictions worldwide. As of September 30, 2010, AIG had assets of
$872 billion and revenues of $19.1 billion for the 3 preceding months.
The AIG companies are among the largest domestic life insurers and
domestic property/casualty insurers in the United States, and include
large foreign general insurance and life insurance businesses.
According to AIG, there have been no material changes in their
organization chart as of September 1, 2010.
Figure 15: AIG, Its Subsidiaries, and Percentage Ownership by Parent
Company as of September 1, 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 AIG and the Federal Reserve Bank of New York has 100
percent interest with certain rights not customary of preferred
holders.
[L] 51 percent Rich Development Limited.
[M] 16 percent Chartis Insurance Hong Kong Limited.
[N] 3.45 percent Kapatiran Realty Corporation, 11.24 percent Perf
Realty Corporation, and 6.83 percent Philam Properties Corporation.
[O] 20 percent PT Asta Indah Abadi.
[P] Federal Reserve Bank of New York has 100 percent interest with
certain rights not customary of preferred holders.
[Q] 0.01 percent International Technical and Advisory Services Limited.
[R] 10 percent International Technical and Advisory Services Limited.
[S] 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 remained largely
unchanged since May 2009, primarily because federal assistance has
provided AIG with needed liquidity. For example, from March 31, 2009,
to December 15, 2009, AM Best, Moody's, and Standard & Poor's (S&P)
maintained the same credit ratings for AIG's long-term debt and the
financial strength of its property/casualty and life insurance
companies due in large part to support that the Board of Governors of
the Federal Reserve System (Federal Reserve) and the Department of the
Treasury provided.[Footnote 66] While contributing to stable ratings
thus far, the scale of this assistance eventually may raise questions
about AIG's future prospects if the company is not able to raise
capital from private sources. For example, because of the importance
of the federal funds to AIG's solvency, Fitch's lowered its ratings of
AIG in several categories in May 2009. Months later, in February 2010,
Fitch placed AIG's U.S. property/casualty companies on "rating watch
negative," but in early July 2010, Fitch reviewed all of AIG's
ratings, affirmed those ratings, and revised the rating outlook to
"stable" from "evolving." It removed the property/casualty companies
from "rating watch negative" and reassigned them as "stable outlook."
Fitch's ratings of AIG have remained unchanged since then. And in
April 2010, S&P reported that AIG made solid progress in its overall
restructuring plan and in stabilizing its insurance operations. S&P
affirmed its ratings of AIG and maintained their negative outlook,
reflecting S&P's view of the challenges AIG faces in sustaining
performance of its insurance operations and capitalizing its life
insurance businesses. S&P's ratings too have remained unchanged.
Table 4: AIG's Key Credit Ratings, March 31, 2009, through September
30, 2010:
Debt: Long-term:
Rating agency: S&P;
Mar. 31, 2009: A-/negative[A];
May 15, 2009: no change;
Dec. 15, 2009: no change;
Mar. 31, 2010: no change;
July 31, 2010: no change;
Sep. 30, 2010: no change;
Potential consequences of future downgrade: AIG Financial Products
Corp. would have to post collateral and termination payments. The
total obligations depend on the market and other factors at the time
of the downgrade. For example:
* At September 30, 2010, a one-notch, two-notch, or three-notch
downgrade from S&P and Moody's would have cost AIG up to $1.2 billion,
$2.4 billion, and $2.6 billion, respectively, in cumulative additional
collateral postings and termination payments;
* At June 30, 2010, a one-notch, two-notch, or three-notch downgrade
from S&P and Moody's would have cost AIG up to $1.7 billion, $3
billion, and $3.2 billion, respectively, in cumulative additional
collateral postings and termination payments.
Rating agency: Moody's;
Mar. 31, 2009: A3/negative[A];
May 15, 2009: no change;
Dec. 15, 2009: no change;
Mar. 31, 2010: no change;
July 31, 2010: no change;
Sep. 30, 2010: no change;
Potential consequences of future downgrade: see above.
Rating agency: Fitch;
Mar. 31, 2009: A;
May 15, 2009: BBB/evolving;
Dec. 15, 2009: no change;
Mar. 31, 2010: no change;
July 31, 2010: BBB/stable;
Sep. 30, 2010: no change;
Potential consequences of future downgrade: see above.
Debt: Short-term:
Rating agency: S&P;
Mar. 31, 2009: A-1 for AIG Funding, Curzon, and Nightingale[A];
May 15, 2009: no change;
Dec. 15, 2009: no change;
Mar. 31, 2010: no change;
July 31, 2010: no change;
Sep. 30, 2010: no change;
Potential consequences of future downgrade: AIG affiliates in
commercial paper programs (AIG Funding, Curzon Funding LLC, and
Nightingale LLC) could have been ineligible for participation in the
Federal Reserve's Commercial Paper Funding Facility (CPFF).[B].
Rating agency: Moody's;
Mar. 31, 2009: P-1 for AIG funding[A];
May 15, 2009: no change;
Dec. 15, 2009: no change;
Mar. 31, 2010: no change;
July 31, 2010: no change;
Sep. 30, 2010: on review for possible downgrade;
Potential consequences of future downgrade: see above.
Rating agency: Fitch;
Mar. 31, 2009: F1;
May 15, 2009: no change;
Dec. 15, 2009: no change;
Mar. 31, 2010: no change;
July 31, 2010: no change;
Sep. 30, 2010: no change;
Potential consequences of future downgrade: see above.
Financial strength:
Potential consequences of future downgrade: Further downgrades of
these ratings may prevent AIG's insurance companies from offering
products and services or result in increased policy cancellations or
termination of assumed reinsurance contracts. A downgrade in AIG's
credit ratings may result in a downgrade of the financial strength
ratings of AIG's insurance subsidiaries.
Life insurer:
Rating agency: AM Best;
Mar. 31, 2009: A/negative[A];
May 15, 2009: no change;
Dec. 15, 2009: no change;
Mar. 31, 2010: no change;
July 31, 2010: no change;
Sep. 30, 2010: no change;
Potential consequences of future 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. Domestic life new business would be
severely affected, in several instances forcing the company to exit
businesses that serve either the high-net-worth marketplace or
businesses that are governed by trust contracts. The company would
need to continue to dedicate key resources to retention and management
of existing relationships. A.M. Best commented on September 30, 2010,
that its ratings of the AIG holding company and its subsidiaries were
not changed by the announcement of a plan for AIG to exit government
ownership.
Rating agency: S&P;
Mar. 31, 2009: A+/negative;
May 15, 2009: no change;
Dec. 15, 2009: no change;
Mar. 31, 2010: no change;
July 31, 2010: no change;
Sep. 30, 2010: no change;
Potential consequences of future downgrade: see above.
Rating agency: Moody's;
Mar. 31, 2009: A1/developing;
May 15, 2009: no change;
Dec. 15, 2009: no change;
Mar. 31, 2010: A1/negative;
July 31, 2010: no change;
Sep. 30, 2010: no change;
Potential consequences of future downgrade: see above.
Rating agency: Fitch;
Mar. 31, 2009: AA-;
May 15, 2009: A-/evolving;
Dec. 15, 2009: no change;
Mar. 31, 2010: No change;
July 31, 2010: A-/stable;
Sep. 30, 2010: no change;
Potential consequences of future downgrade: see above.
Property/casualty insurer:
Rating agency: AM Best;
Mar. 31, 2009: A/negative[A];
May 15, 2009: no change;
Dec. 15, 2009: no change;
Mar. 31, 2010: no change;
July 31, 2010: no change;
Sep. 30, 2010: no change;
Potential consequences of future 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. A.M. Best commented on September 30, 2010, that its
ratings of the AIG holding company and its subsidiaries were not
changed by the announcement of a plan for AIG to exit government
ownership.
Rating agency: S&P;
Mar. 31, 2009: A+/negative;
May 15, 2009: no change;
Dec. 15, 2009: no change;
Mar. 31, 2010: no change;
July 31, 2010: no change;
Sep. 30, 2010: no change;
Potential consequences of future downgrade: see above.
Rating agency: Moody's;
Mar. 31, 2009: Aa3/negative;
May 15, 2009: no change;
Dec. 15, 2009: no change;
Mar. 31, 2010: no change;
July 31, 2010: no change;
Sep. 30, 2010: no change;
Potential consequences of future downgrade: see above.
Rating agency: Fitch;
Mar. 31, 2009: AA-;
May 15, 2009: A+/evolving;
Dec. 15, 2009: no change;
Mar. 31, 2010: placed rating on rating watch - negative;
July 31, 2010: A+/stable;
Sep. 30, 2010: no change;
Potential consequences of future downgrade: see above.
Sources: AIG Securities and Exchange Commission filings; S&P, Fitch,
Moody's, and AM Best; and AIG.
[A] These are key ratings.
[B] AIG's International Lease Finance Corporation lost access to CPFF
funds after an S&P downgrade on Jan. 21, 2009. CPFF expired for new
issuances on February 1, 2010, and as of June 30, 2010, AIG had no
commercial paper outstanding with the CPFF.
[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, in cases in which default may
be likely;
Moody's[A]: Ba1 and below;
S&P[B]: BB+ and below;
Fitch[B]: BB+ and below.
Sources: Moody's Investors Service, S&P's Ratings Services, and Fitch
Ratings.
[A] Moody's has numerical modifiers of 1, 2, and 3 in each rating
classification from Aa to B: "1" indicates that the issue ranks in the
higher end of the category, "2" indicates a midrange ranking, and "3"
indicates that the issue ranks in the lower end of the category.
[B] S&P's Ratings Services and Fitch Ratings: Ratings from 'AA' to
'CCC' may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
[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
it is on federal assistance.
As shown in table 6, in November 2008, the major source of AIG's
corporate available liquidity was the Federal Reserve Bank of New
York's (FRBNY) revolving credit facility, with lesser amounts
available through the FRBNY commercial paper funding facility (CPFF)
and AIG's bilateral facilities. Prior to October 2008, AIG's corporate
liquidity was available through the private sector, but that month,
AIG looked to other sources for its corporate liquidity, namely
FRBNY's credit facility and the new CPFF. In November 2008, these two
sources became AIG's primary sources of liquidity. Throughout 2009 and
into 2010, FRBNY's credit facility remained a primary source of
liquidity, but CPFF and AIG's bilateral facilities and cash and short-
term investments became secondary sources of liquidity. Starting in
April 2009, AIG was obtaining the funds needed to meet its obligations
primarily from the Department of the Treasury's equity capital
facility, which remains its primary source of liquidity into 2010, as
well as from FRBNY's credit facility.
Table 6: Amounts of Available Corporate Liquidity, November 5, 2008,
through and October 27, 2010:
FRBNY revolving credit facility:
Nov. 5, 2008: $24.0 billion;
Feb. 18, 2009: $24.8 billion;
Apr. 29, 2009: $17.4 billion;
Jul. 29, 2009: 20.0 billion;
Oct. 28, 2009: $18.3 billion;
Feb. 17, 2010: $14.0 billion;
Apr. 28, 2010: $11.0 billion;
Jul. 28, 2010: $14.4 billion;
Oct. 27,: 2010: $14.6 billion.
Commercial paper under CPFF and syndicated and bilateral facilities:
Nov. 5, 2008: $5.600 billion;
Feb. 18, 2009: $753 million;
Apr. 29, 2009: $1.940 billion;
Jul. 29, 2009: $3.493 billion;
Oct. 28, 2009: $4.872 billion;
Feb. 17, 2010: 0;
Apr. 28, 2010: 0;
Jul. 28, 2010: 0;
Oct. 27, 2010: 0.
Unused bank syndicated and bilateral facilities:
Nov. 5, 2008: $3.820 billion;
Feb. 18, 2009: 0;
Apr. 29, 2009: 0;
Jul. 29, 2009: 0;
Oct. 28, 2009: 0;
Feb. 17, 2010: 0;
Apr. 28, 2010: 0;
Jul. 28, 2010: 0;
Oct. 27, 2010: 0.
AIG cash and short-term investments:
Nov. 5, 2008: 0;
Feb. 18, 2009: $1.100 billion;
Apr. 29, 2009: $445 million;
Jul. 29, 2009: $407 million;
Oct. 28, 2009: $359 million;
Feb. 17, 2010: $287 million;
Apr. 28, 2010: $375 million;
Jul. 28, 2010: $409 million;
Oct. 27, 2010: $515 million.
Treasury equity capital facility:
Nov. 5, 2008: n/a;
Feb. 18, 2009: n/a;
Apr. 29, 2009: $29.835 billion;
Jul. 29, 2009: $28.685 billion;
Oct. 28, 2009: $26.629 billion;
Feb. 17, 2010: $22.292 billion;
Apr. 28, 2010: $22.292 billion;
Jul. 28, 2010: $22.292 billion;
Oct. 27, 2010: $22.292 billion.
Total:
Nov. 5, 2008: $33.420 billion;
Feb. 18, 2009: $26.653 billion;
Apr. 29, 2009: $49.620 billion;
Jul. 29, 2009: $52.585 billion;
Oct. 28, 2009: $50.160 billion;
Feb. 17, 2010: $36.579 billion;
Apr. 28, 2010: $33.674 billion;
Jul. 28, 2010: $37.081 billion;
Oct. 27, 2010: $37.394 billion.
Source: GAO analysis of AIG Security and Exchange Commission filings.
Note: CPFF, a Federal Reserve emergency facility that became
operational in October 2008 and closed in February 2010, provided a
liquidity backstop to U.S. issuers of commercial paper through a
special purpose vehicles that purchased eligible 3-month unsecured and
asset-backed commercial paper from eligible issuers using financing
provided by FRBNY. Its purpose was to enhance the liquidity of the
commercial paper market.
[End of table]
[End of section]
Appendix IV: Value of Preferred and Common Shares of AIG:
The value of the federal government's equity investments in American
International Group, Inc. (AIG) is tied to the market value of AIG's
common shares. As a result, growth in value of the government's common
and preferred equity stakes depends on growth in the value of common
shares. As shown in figure 16, the market value of AIG's common shares
outstanding peaked in December 2006 at $186.4 billion and by June
2008, the market value had declined to $71.1 billion. During the last
two quarters of 2008, when federal assistance was initially provided
to AIG, AIG shares further declined in value, to $4.2 billion by the
end of 2008.
From March 1, 2009, when the AIG credit facility trust and AIG entered
into a purchase agreement for Series C preferred stock, through
September 30, 2010, the value of AIG's common shares outstanding have
fluctuated between $2.7 billion and $5.9 billion, and as of September
2010 were valued at $5.3 billion. The value of the Series C preferred
shares is part of the federal government's equity investment in AIG,
and under the terms of the Series C preferred stock issuance, the
preferred stock is convertible into AIG's common stock. The value of
the federal government's Series C preferred shares is based on the
value of common shares outstanding. The value of both increased
between March and September 2009 when the share price of AIG common
stock rose but fell in the fourth quarter of that year when the share
price declined.[Footnote 67] Since the fourth quarter of 2009, the
government's equity interest has increased from just under $16 billion
to almost $20.8 billion.
Figure 16: Market Capitalization of AIG Outstanding Common Shares,
Including Trust-Owned Preferred C Shares That Are Convertible into
Approximately 79.75 Percent of AIG's Outstanding Common Shares,
December 2004 through September 2010:
[Refer to PDF for image: vertical bar graph]
December 2004:
Market capitalization (value) of AIG‘s common shares outstanding:
$170.507 billion;
NYSE closing share price of AIG common stock (restated for 1/20
reverse split): $1,249.38.
December 2005:
Market capitalization (value) of AIG‘s common shares outstanding:
$177.169 billion;
NYSE closing share price of AIG common stock (restated for 1/20
reverse split): $1,309.66.
December 2006:
Market capitalization (value) of AIG‘s common shares outstanding:
$186.402 billion;
NYSE closing share price of AIG common stock (restated for 1/20
reverse split): $1,388.91.
December 2007:
Market capitalization (value) of AIG‘s common shares outstanding:
$147.475 billion;
NYSE closing share price of AIG common stock (restated for 1/20
reverse split): $1,142.90.
June 2008:
Market capitalization (value) of AIG‘s common shares outstanding:
$71.146 billion;
NYSE closing share price of AIG common stock (restated for 1/20
reverse split): $523.90.
September 2008:
Market capitalization (value) of AIG‘s common shares outstanding:
$8.957 billion;
NYSE closing share price of AIG common stock: $66.60.
December 2008:
Market capitalization (value) of AIG‘s common shares outstanding:
$4.223 billion;
NYSE closing share price of AIG common stock: $31.40.
March 2009:
Market capitalization (value) of AIG‘s common shares outstanding:
$2.691 billion;
Value of preferred series C shares based on convertibility into AIG
common shares: $10.642 billion;
NYSE closing share price of AIG common stock: $20.00.
June 2009:
Market capitalization (value) of AIG‘s common shares outstanding:
$3.122 billion;
Value of preferred series C shares based on convertibility into AIG
common shares: $12.345 billion;
NYSE closing share price of AIG common stock: $23.20.
September 2009:
Market capitalization (value) of AIG‘s common shares outstanding:
$5.937 billion;
Value of preferred series C shares based on convertibility into AIG
common shares: $23.472 billion;
NYSE closing share price of AIG common stock: $44.11.
December 2009:
Market capitalization (value) of AIG‘s common shares outstanding:
$4.049 billion;
Value of preferred series C shares based on convertibility into AIG
common shares: $15.953 billion;
NYSE closing share price of AIG common stock: $29.98.
March 2010:
Market capitalization (value) of AIG‘s common shares outstanding:
$4.607 billion;
Value of preferred series C shares based on convertibility into AIG
common shares: $18.166 billion;
NYSE closing share price of AIG common stock: $34.14.
June 2010:
Market capitalization (value) of AIG‘s common shares outstanding:
$4.653 billion;
Value of preferred series C shares based on convertibility into AIG
common shares: $18.326 billion;
NYSE closing share price of AIG common stock: $34.44.
September 2010:
Market capitalization (value) of AIG‘s common shares outstanding:
$5.283 billion;
Value of preferred series C shares based on convertibility into AIG
common shares: $20.806 billion;
NYSE closing share price of AIG common stock: $39.10.
Source: GAO analysis of AIG‘s SEC filings and Treasury Financial
Reporting Position Paper 09-07.
Note: The preferred Series C shares are in a trust for the benefit of
the Treasury and in this figure do not include a warrant held by
Treasury that is convertible into 2 percent of common shares. See GAO-
09-975 for more details on the trust.
[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 a
proxy indicator that tracks capital and surplus as reported in AIG's
quarterly filings with NAIC and major activities that could deplete
capital and surplus, as well as adjusted capital. As illustrated in
figure 17, capital and surplus for the first nine months of 2010 has
changed little for AIG's largest domestic property/casualty companies
and increased more than 12 percent for AIG's largest domestic life and
retirement services companies, and no major activities had an adverse
effect large enough to deplete capital and surplus. Similar to the
findings in our previous update and in the results of the adjusted
capital indicator discussed in the report, these proxy results showed
that AIG's largest domestic property/casualty companies and largest
domestic life and retirement services companies did not need federal
assistance during the first nine months of 2010 to boost their
regulatory capital.
Figure 17: AIG Domestic Insurance Subsidiaries: Capital and Surplus at
December 31, 2009, and September 30, 2010, and Primary Activities That
Affected It During the First 9 Months of 2010:
[Refer to PDF for image: illustrated vertical bar graph]
AIG‘s largest domestic property/casualty companies:
Capital and surplus: 12/31/09: $26.973 billion;
Capital and surplus: 9/30/10: $27.209 billion;
Primary activities that affected capital and surplus in the first nine
months of 2010:
Net income: $1.398 billion;
Change in unrealized capital gains[A]: $118 million;
Deferred income taxes: -$73 million;
Change in nonadmitted assets: $687 million;
Change in asset valuation reserve: n/a[B];
Stockholder dividends: n/a[B].
AIG‘s largest domestic life insurance and retirement services
companies:
Capital and surplus: 12/31/09: $15.595 billion;
Capital and surplus: 9/30/10: $17.520 billion;
Primary activities that affected capital and surplus in the first nine
months of 2010:
Net income: $83 million;
Change in unrealized capital gains[A]: 1.490 billion;
Deferred income taxes: -$1.660 billion;
Change in nonadmitted assets: $2.581 billion.
Change in asset valuation reserve: -$480 million.
Stockholder dividends: -$75 million.
Sources: AIG and GAO analysis of AIG financial statements filed with
NAIC.
[A] NAIC financial statements show unrealized capital gains separately
from net income.
[B] Dollar amount is either zero or too small to constitute a major
activity. Also other categories were excluded that had larger, but
minor dollars of activity.
[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.
Figures 18 and 19 provide an indicator that can be used to track the
profitability of AIG's life insurance and retirement services. In
2008, the vast majority of losses incurred by AIG were not the result
of their underwriting activities, but instead were caused by losses in
the investment portfolios of domestic and foreign life insurance
businesses. As we have previously discussed, this was due to severe
market price declines in certain commercial mortgage-backed securities
and other securities. In subsequent quarters in 2009, AIG's domestic
life and retirement services business realized income gains from
operations. This was partly because of Maiden Lane II's purchase of
residential mortgage-backed securities from these companies, which
helped prevent continued liquidity strains on AIG. Most recently, as
shown in figure 18, the reported net realized capital losses for the
domestic companies were nearly $800 million in the first quarter of
2010 but AIG reported a $20 million gain in the third quarter 2010.
Pretax operating net income increased over that same period, from $327
million to $998 million.
Figure 18: Key Quarterly Revenues and Expenses for AIG Domestic Life
Insurance and Retirement Services Companies for First Quarter of 2007
through Third Quarter of 2010:
[Refer to PDF for image: vertical bar graph]
Key components of operating income:
Premium income and other considerations and fee income:
2007 Q1: $1.812 billion;
2007 Q2: $1.667 billion;
2007 Q3: $1.795 billion;
2007 Q4: $1.752 billion;
2008 Q1: $1.871 billion;
2008 Q2: $1.894 billion;
2008 Q3: $1.995 billion;
2008 Q4: $1.616 billion;
2009 Q1: $1.395 billion;
2009 Q2: $1.282 billion;
2009 Q3: $1.230 billion;
2009 Q4: $.1279 billion;
2010 Q1: $1.315 billion;
2010 Q2: $1.315 billion;
2010 Q3: $1.268 billion.
Interest and dividend income:
2007 Q1: $2.534 billion;
2007 Q2: $2.490 billion;
2007 Q3: $2.441 billion;
2007 Q4: $2.421 billion;
2008 Q1: $2.355 billion;
2008 Q2: $2.268 billion;
2008 Q3: $2.394 billion;
2008 Q4: $2.110 billion;
2009 Q1: $2.106 billion;
2009 Q2: $2.057 billion;
2009 Q3: $2.341 billion;
2009 Q4: $2.353 billion;
2010 Q1: $2.476 billion;
2010 Q2: $2.408 billion;
2010 Q3: $2.517 billion.
Policyholder benefits and claims incurred:
2007 Q1: -$2.583 billion;
2007 Q2: -$2.420 billion;
2007 Q3: -$2.548 billion;
2007 Q4: -$2.511 billion;
2008 Q1: -$2.591 billion;
2008 Q2: -$2.714 billion;
2008 Q3: -$2.869 billion;
2008 Q4: -$2.543 billion;
2009 Q1: -$2.502 billion;
2009 Q2: -$2.152 billion;
2009 Q3: -$2.026 billion;
2009 Q4: -$2.154 billion;
2010 Q1: -$2.203 billion;
2010 Q2: -$2.297 billion;
2010 Q3: -$2.132 billion.
Operating income before net realized capital gains or losses:
2007 Q1: $1.018 billion;
2007 Q2: $1.263 billion;
2007 Q3: $892 million;
2007 Q4: $1.027 billion;
2008 Q1: $1.081 billion;
2008 Q2: $927 million;
2008 Q3: $50 million;
2008 Q4: -$605 million;
2009 Q1: -$128 million;
2009 Q2: $268 million;
2009 Q3: $1.077 billion;
2009 Q4: $1.086 billion;
2010 Q1: $1.123 billion;
2010 Q2: $1.054 billion;
2010 Q3: $978 million.
Net realized capital losses or gains:
2007 Q1: -$21 million;
2007 Q2: -$297 million;
2007 Q3: -$629 million;
2007 Q4: -$1.264 billion;
2008 Q1: -$3.647 billion;
2008 Q2: -$4.101 billion;
2008 Q3: -$12.886 billion;
2008 Q4: -$11.928 billion;
2009 Q1: -$2.079 billion;
2009 Q2: $189 million;
2009 Q3: -$950 million;
2009 Q4: -$364 million;
2010 Q1: -$796 million;
2010 Q2: -$966 million;
2010 Q3: $20 million.
Pretax operating income or loss:
2007 Q1: $997 million;
2007 Q2: $966 million;
2007 Q3: $263 million;
2007 Q4: -$237 million;
2008 Q1: -$2.566 billion;
2008 Q2: -$3.174 billion;
2008 Q3: -$12.836 billion;
2008 Q4: -$12.533v;
2009 Q1: -$2.207 billion;
2009 Q2: $457 million;
2009 Q3: $127 million;
2009 Q4: $670 million;
2010 Q1: $327 million;
2010 Q2: $88 million;
2010 Q3: $998 million.
Source: GAO analysis of AIG‘s quarterly financial supplements.
Note: As reported, the data do not reflect prior period restatements
after December 31, 2009.
[End of figure]
As shown in figure 19, foreign companies reported realized capital
losses in the first quarter of 2010 of $61 million, but these were
followed by gains the next two quarters. Pretax operating income for
these companies in the first three quarters of 2010, while
fluctuating, at about $700 million is about half of what it was at the
end of 2009. Overall, after accounting for policyholder operating
income and a mix of realized capital gains and losses both the
domestic and foreign life companies reported positive pretax operating
income for the first three quarters of 2010. Whether these positive
results can continue is unclear.
Figure 19: Key Quarterly Revenues and Expenses for AIG, Life Insurance
and Retirement Services Companies for AIG Foreign Life Insurance and
Retirement Services Companies First Quarter of 2007 through Third
Quarter of 2010:
[Refer to PDF for image: vertical bar graph]
Key components of operating income:
Premium income and other considerations and fee income:
2007 Q1: $6.613 billion;
2007 Q2: $6.503 billion;
2007 Q3: $6.505 billion;
2007 Q4: $6.980 billion;
2008 Q1: $7.447 billion;
2008 Q2: $7.691 billion;
2008 Q3: $7.359 billion;
2008 Q4: $7.422 billion;
2009 Q1: $6.940 billion;
2009 Q2: $6.837 billion;
2009 Q3: $6.622 billion;
2009 Q4: $6.201 billion;
2010 Q1: $3.234 billion;
2010 Q2: $3.377 billion;
2010 Q3: $2.559 billion.
Interest and dividend income:
2007 Q1: $2.009 billion;
2007 Q2: $2.180 billion;
2007 Q3: $2.342 billion;
2007 Q4: $2.306 billion;
2008 Q1: $2.379 billion;
2008 Q2: $2.556 billion;
2008 Q3: $2.777 billion;
2008 Q4: $2.371 billion;
2009 Q1: $2.206 billion;
2009 Q2: $2.234 billion;
2009 Q3: $2.317 billion;
2009 Q4: $1.861 billion;
2010 Q1: $1.115 billion;
2010 Q2: $1.221 billion;
2010 Q3: $836 million.
Policyholder benefits and claims incurred:
2007 Q1: -$5.580 billion;
2007 Q2: -$5.494 billion;
2007 Q3: -$5.506 billion;
2007 Q4: -$6.643 billion;
2008 Q1: -$6.119 billion;
2008 Q2: -$6.345 billion;
2008 Q3: -$6.174 billion;
2008 Q4: -$5.223 billion;
2009 Q1: -$5.781 billion;
2009 Q2: -$5.763 billion;
2009 Q3: -$5.750 billion;
2009 Q4: -$4.679 billion;
2010 Q1: -$2.647 billion;
2010 Q2: -$2.808 billion;
2010 Q3: -$2.629 billion.
Operating income before net realized capital gains or losses:
2007 Q1: $1.519 billion;
2007 Q2: $1.636 billion;
2007 Q3: $1.598 billion;
2007 Q4: $1.631 billion;
2008 Q1: $1.457 billion;
2008 Q2: $1.682 billion;
2008 Q3: $962 million;
2008 Q4: $1.347 billion;
2009 Q1: $1.363 billion;
2009 Q2: $1.253 billion;
2009 Q3: $1.136 billion;
2009 Q4: $1.054 billion;
2010 Q1: $782 million;
2010 Q2: $820 million;
2010 Q3: $534 million.
Net realized capital losses or gains:
2007 Q1: -$235 million;
2007 Q2: $18 million;
2007 Q3: $138 million;
2007 Q4: -$108 million;
2008 Q1: -$722 million;
2008 Q2: -$909 million;
2008 Q3: -$3.455 billion;
2008 Q4: -$6.699 billion;
2009 Q1: -$1.029 billion;
2009 Q2: $108 million;
2009 Q3: $18 million;
2009 Q4: $291 million;
2010 Q1: -$61 million;
2010 Q2: $20 million;
2010 Q3: $157 million.
Pretax operating income or loss:
2007 Q1: $1.284 billion;
2007 Q2: $1.654 billion;
2007 Q3: $1.736 billion;
2007 Q4: $1.523 billion;
2008 Q1: $735 million;
2008 Q2: $773 million;
2008 Q3: -$2.493 billion;
2008 Q4: -$5.352 billion;
2009 Q1: $334 million;
2009 Q2: $1.361 billion;
2009 Q3: $1.154 billion;
2009 Q4: $1.345 billion;
2010 Q1: $721 million;
2010 Q2: $840 million;
2010 Q3: $691 million.
Source: GAO analysis of AIG‘s quarterly financial supplements.
Note: As reported, the data do not reflect prior period restatements
after December 31, 2009.
[End of figure]
[End of section]
Appendix VII: Underwriting Ratios for AIG's Property/Casualty
Companies:
The underwriting profitability of property/casualty insurers can be
measured using the combined ratio, which is the sum of the loss and
the expense ratios. The loss ratio measures claims costs plus claims
adjustment expenses relative to net earned premiums. A rising loss
ratio indicates rising claims costs relative to the premiums, which
may be due to increased claims losses, decreased premiums revenue, or
a combination of the two. The expense ratio measures the level of
underwriting administrative expenses relative to net premiums earned
and is a measure of underwriting efficiency. The combined ratio is an
overall measure of a property/casualty insurer's underwriting
profitability. Thus, a combined ratio of less than 100 percent would
indicate that an insurer's underwriting is profitable, and a ratio of
more than 100 percent would reflect an underwriting loss.
As shown in figure 20, the combined ratio for American International
Group, Inc.'s (AIG) commercial property/casualty insurance business
spiked in the fourth quarter of 2008, largely due to an administrative
charge to recognize impairment of goodwill of previously acquired
businesses. The higher combined ratio also was partly due to a higher
loss ratio because of increased claims costs associated with Hurricane
Ike and other major catastrophes in 2008. The combined ratio rose to
more than 100 percent in the last two quarters of 2009, indicating
that claims and administrative costs were higher and rising faster
than premium revenues and thus AIG's insurance underwriting was not
profitable. The combined ratio's rise in the fourth quarter of 2009
also largely was due to increased claims costs that arose because of a
reserve strengthening charge AIG made to address unexpected losses in
excess casualty and excess workers' compensation, two "long-tail"
lines of business (that is, claims arose years after premiums were
collected and were higher than reserve estimates). In the first
quarter of 2010 the ratio dropped significantly to just more than 102,
and has changed little in the two subsequent quarters.
Figure 20: AIG Commercial Insurance Operating Ratios, First Quarter of
2007 through Third Quarter of 2010:
[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: 17.28.
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: 90.2;
Expense ratio: 43.13.
2009 Q1;
Combined ratio: 100.4;
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.
2010 Q1;
Combined ratio: 102.43;
Loss ratio: 76.15;
Expense ratio: 26.28.
2010 Q2;
Combined ratio: 106.5;
Loss ratio: 82.2;
Expense ratio: 24.3.
2010 Q3;
Combined ratio: 101.7;
Loss ratio: 79.7;
Expense ratio: 22.0.
Sources: GAO analysis of AIG‘s financial statements filed with SEC and
quarterly financial supplements.
Note: Historical operating ratios for commercial insurance have been
revised to include Private Client Group and exclude HSB Group, Inc.
The loss ratio for the fourth quarter of 2009 includes a $2.3 billion
increase in the reserve for prior years' adverse loss development. The
underwriting expense for the fourth quarter of 2008 includes a $1.2
billion charge for impairment to goodwill, increasing the expense
ratio by 22.5 points. Claims related to major catastrophes were $1.4
billion in 2008, including hurricane claims of $1.1 billion in the
third quarter of 2008. Conversely, claims related to major
catastrophes were $100 million in 2007.
[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,
and the ratios dropped to less than 100 in the second and third
quarters of 2010 (see figure 21). AIG officials attributed the higher
2009 numbers to several factors, including increased loss ratios due
to higher claim losses, particularly in Europe, and increased expense
ratios because of lower net premiums earned that resulted from the
sale of their Brazilian operations. In addition, insurance markets
becoming more competitive, and higher levels of general operating
expenses primarily related to remediation/audit of general insurance
(Chartis, Inc.), pension costs, and postretirement liability costs
contributed to the higher combined ratios in 2009. As with AIG's
commercial insurance, the combined ratio in its foreign general
property/casualty insurance business rose to more than 100 percent in
the last two quarters of 2009. In the first quarter of 2010 the ratio
dropped to 102.6, and as of the second quarter 2010, the ratio had
fallen to its lowest level in a year to 95.6, indicating that for this
line of business, underwriting again became profitable, and changed
little in the third quarter of 2010.
Figure 21: AIG Foreign General Insurance Operating Ratios, First
Quarter of 2007 through Third Quarter of 2010:
[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: 39.92.
2007 Q3;
Combined ratio: 90.17;
Loss ratio: 52.4;
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: 25.71.
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.
2010 Q1;
Combined ratio: 102.63;
Loss ratio: 64.47;
Expense ratio: 38.16.
2010 Q2;
Combined ratio: 95.6;
Loss ratio: 57.5;
Expense ratio: 38.1.
2010 Q3;
Combined ratio: 96.3;
Loss ratio: 60.9;
Expense ratio: 35.4.
Sources: 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 in October 2008 through the Federal Reserve Bank of
New York's (FRBNY) revolving credit facility. This facility was fully
repaid and closed as part of the recapitalization plan that was
executed on January 14, 2011, as discussed above. This indicator
tracks the borrowing limit and the amount owed on the facility since
the initial borrowing. As shown in figure 22, as of December 30, 2009,
the amount of direct assistance available to AIG through the facility
was reduced to $35 billion and the amount AIG owed the facility was
reduced to $23.4 billion. The decreases in available assistance and
outstanding balance were attributable to the November 2008 and
December 2009 restructuring of the government's assistance to the
company from debt to preferred equity. The amount available again was
reduced in March 2010 to $34.2 billion and several times thereafter
because of AIG repayments from proceeds obtained from sales of various
assets. By December 1, 2010, the amount available had been reduced to
$28.8 billion, because of mandatory repayments that reduced the amount
available under the facility. The amount available was determined by
reference to principal outstanding, excluding capitalized interest and
fees.[Footnote 68] As of December 1, 2010, the amount of assistance to
AIG through the FRBNY credit facility had been reduced to $21.3
billion. Changes in amounts owed on the facility fluctuated weekly and
could have been related to increased or decreased liquidity needs of
AIG's operations or payments by AIG on the facility, or could have
resulted from restructuring decisions such as the conversion of a
portion of the facility to preferred equity stakes in AIG.
Figure 22: FRBNY Revolving Credit Facility Balance Owed and Total
Amount Available, October 2008 through December 1, 2010:
[Refer to PDF for image: multiple line graph]
October 2008:
Borrowing limit (until 11/26/08): $85.0 billion;
Amount owed: $62.000 billion;
Amount owed: $70.299 billion;
Amount owed: $69.816 billion;
Amount owed: $72.332 billion (10/22/08);
Amount owed: $65.848 billion.
November 2008:
Borrowing limit (until 11/26/08): $85.0 billion;
Revolving credit ceiling (after 11/26/08): 60.0 billion;
Amount owed: $61.365 billion;
Amount owed: $63.381 billion;
Amount owed: $66.897 billion;
Amount owed: $35.430 billion.
December 2008:
Revolving credit ceiling: $60.0 billion;
Amount owed: $35.437 billion;
Amount owed: $36.643 billion;
Amount owed: $44.347 billion;
Amount owed: $40.018 billion;
Amount owed: $38.924 billion.
January 2009:
Revolving credit ceiling: $60.0 billion;
Amount owed: $39.003 billion;
Amount owed: $39.124 billion;
Amount owed: $38.445 billion;
Amount owed: $38.336 billion.
February 2009:
Revolving credit ceiling: $60.0 billion;
Amount owed: $39.013 billion;
Amount owed: $37.677 billion;
Amount owed: $37.355 billion;
Amount owed: $38.046 billion.
March 2009:
Revolving credit ceiling: $60.0 billion;
Amount owed: $41.652 billion;
Amount owed: $42.344 billion;
Amount owed: $43.579 billion;
Amount owed: $43.614 billion.
April 2009:
Revolving credit ceiling: $60.0 billion;
Amount owed: $44.712 billion;
Amount owed: $45.571 billion;
Amount owed: $45.106 billion;
Amount owed: $44.983 billion;
Amount owed: $44.489 billion.
May 2009:
Revolving credit ceiling: $60.0 billion;
Amount owed: $45.496 billion;
Amount owed: $45.702 billion;
Amount owed: $45.708 billion;
Amount owed: $44.157 billion.
June 2009:
Revolving credit ceiling: $60.0 billion;
Amount owed: $43.578 billion;
Amount owed: $43.498 billion;
Amount owed: $42.904 billion;
Amount owed: $42.596 billion.
July 2009:
Revolving credit ceiling: $60.0 billion;
Amount owed: $42.834 billion;
Amount owed: $43.762 billion;
Amount owed: $42.871 billion;
Amount owed: $43.277 billion;
Amount owed: $42.196 billion.
August 2009:
Revolving credit ceiling: $60.0 billion;
Amount owed: $41.335 billion;
Amount owed: $40.675 billion;
Amount owed: $39.214 billion;
Amount owed: $39.153 billion.
September 2009:
Revolving credit ceiling: $60.0 billion;
Amount owed: $38.792 billion;
Amount owed: $39.132 billion;
Amount owed: $39.171 billion;
Amount owed: $38.810 billion;
Amount owed: $38.743 billion.
October 2009:
Revolving credit ceiling: $60.0 billion;
Amount owed: $39.882 billion;
Amount owed: $40.921 billion;
Amount owed: $41.161 billion;
Amount owed: $44.800 billion.
November 2009:
Revolving credit ceiling: $60.0 billion;
Amount owed: $44.539 billion;
Amount owed: $43.979 billion;
Amount owed: $44.918 billion;
Amount owed: $45.063 billion.
December 2009:
Revolving credit ceiling: $35.0 billion;
Amount owed: $20.660 billion;
Amount owed: $21.097 billion;
Amount owed: $19.933 billion;
Amount owed: $20.470 billion;
Amount owed: $22.033 billion.
January 2010:
Revolving credit ceiling: $35.0 billion;
Amount owed: $22.215 billion;
Amount owed: $22.252 billion;
Amount owed: $23.389 billion;
Amount owed: $25.825 billion.
February 2010:
Revolving credit ceiling: $35.0 billion;
Amount owed: $25.662 billion;
Amount owed: $25.499 billion;
Amount owed: $25.535 billion;
Amount owed: $25.272 billion.
March 2010:
Revolving credit ceiling: $35.0 billion;
Amount owed: $25.109 billion;
Amount owed: $24.845 billion;
Amount owed: $24.982 billion;
Amount owed: $25.259 billion;
Amount owed: $25.377 billion.
April 2010:
Revolving credit ceiling: $34.156 billion;
Amount owed: $25.388 billion;
Amount owed: $25.299 billion;
Amount owed: $24.811 billion;
Amount owed: $26.983 billion.
May 2010:
Revolving credit ceiling: $34.156 billion;
Amount owed: $27.097 billion;
Amount owed: $26.382 billion;
Amount owed: $26.296 billion;
Amount owed: $26.110 billion.
June 2010:
Revolving credit ceiling: $34.156 billion;
Amount owed: $26.624 billion;
Amount owed: $26.619 billion;
Amount owed: $26.033 billion;
Amount owed: $25.147 billion;
Revolving credit ceiling: $33.728 billion;
Amount owed: $24.676 billion.
July 2010:
Revolving credit ceiling: $33.728 billion;
Amount owed: $24.560 billion;
Amount owed: $24.674 billion;
Amount owed: $23.888 billion;
Amount owed: $23.449 billion.
August 2010:
Revolving credit ceiling: $33.728 billion;
Amount owed: $23.661 billion;
Amount owed: $23.674 billion;
Revolving credit ceiling: $33.627 billion;
Amount owed: $23.487 billion;
Revolving credit ceiling: $29.672 billion;
Amount owed: $19.444 billion.
September 2010:
Revolving credit ceiling: $29.672 billion;
Amount owed: $20.057 billion;
Amount owed: $19.869 billion;
Amount owed: $19.882 billion;
Amount owed: $19.665 billion;
Amount owed: $18.904 billion.
October 2010:
Revolving credit ceiling: $29.175 billion;
Amount owed: $20.001 billion;
Amount owed: $20.014 billion;
Amount owed: $19.326 billion;
Amount owed: $19.220 billion.
November 2010:
Revolving credit ceiling: v29.175 billion;
Amount owed: $19.530 billion;
Amount owed: $19.685 billion;
Amount owed: $20.014 billion;
Amount owed: $19.916 billion.
December 2010:
Revolving credit ceiling: $29.175 billion;
Amount owed: $21.326 billion.
Sources: GAO analysis of Federal Reserve Statistical Release H.4.1 and
Federal Reserve data.
Note: The Federal Reserve H.4.1 data that we used does not breakout
principal from accrued interest and fees. Thus the available credit is
actually larger by the amount of accrued interest and fees. Interest
and fee data are found in AIG's 10Q and 10K reports.
[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 exposure that is
related to financial assistance provided to AIG. The Maiden Lane II
and Maiden Lane III portfolios are funded primarily by loans from
FRBNY, which are not debt on AIG's books. The loans and related
expenses are to be repaid from cash generated by investment yields,
maturing assets, and sales of assets in the facilities. In addition to
the FRBNY investments in the facilities, AIG invested $1 billion in
Maiden Lane II and $5 billion in Maiden Lane III.
FRBNY provided a loan to Maiden Lane II to purchase residential
mortgage-backed securities from AIG's domestic life insurance
companies. As shown in figure 23, the portfolio value of Maiden Lane
II peaked at $20 billion in December 2008 and was $14.8 billion at its
lowest point at the end of September 2009. As of December 1, 2010, the
portfolio value had risen to $16.3 billion. As the assets of Maiden
Lane II have matured, proceeds have been used to reduce debt
(principal and interest) of the facility from a maximum of $19.5
billion in December 2008 to $13.7 billion on December 1, 2010, which
is about $2.6 billion less than the facility's portfolio value as of
that same date.
Figure 23: Amounts Owed and Portfolio Value of Maiden Lane II through
December 1, 2010:
[Refer to PDF for image: vertical bar graph]
Date: 12/17/08;
Principal and interest owed to FRBNY: $19.5 billion;
Portfolio value: $20.0 billion;
Principal and interest owed to AIG: $1.0 billion.
Date: 12/24/08;
Principal and interest owed to FRBNY: $19.5 billion;
Portfolio value: $20.0 billion;
Principal and interest owed to AIG: $1.0 billion.
Date: 3/25/09;
Principal and interest owed to FRBNY: $18.6 billion;
Portfolio value: $18.4 billion;
Principal and interest owed to AIG: $1.0 billion.
Date: 7/1/09;
Principal and interest owed to FRBNY: $17.7 billion;
Portfolio value: $16.0 billion;
Principal and interest owed to AIG: $1.0 billion.
Date: 9/2/09;
Principal and interest owed to FRBNY: $17.1 billion;
Portfolio value: $14.9 billion;
Principal and interest owed to AIG: $1.0 billion.
Date: 9/30/09;
Principal and interest owed to FRBNY: $16.8 billion;
Portfolio value: $14.8 billion;
Principal and interest owed to AIG: $1 billion.
Date: 12/30/09;
Principal and interest owed to FRBNY: $16 billion;
Portfolio value: $15.7 billion;
Principal and interest owed to AIG: $1 billion.
Date: 3/31/10;
Principal and interest owed to FRBNY: $15.3 billion;
Portfolio value: $15.4 billion;
Principal and interest owed to AIG: $1 billion.
Date: 6/30/10;
Principal and interest owed to FRBNY: $14.7 billion;
Portfolio value: $15.8 billion;
Principal and interest owed to AIG: $1.1 billion.
Date: 9/29/10;
Principal and interest owed to FRBNY: $14.1 billion;
Portfolio value: $15.9 billion;
Principal and interest owed to AIG: $1.1 billion.
Date: 12/1/10;
Principal and interest owed to FRBNY: $13.7 billion;
Portfolio value: $16.3 billion;
Principal and interest owed to AIG: $1.1 billion.
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
multisector collateralized debt obligations from counterparties to AIG
Financial Product Corporation's credit default swaps. As shown in
figure 24, the portfolio value of Maiden Lane III was $28.2 billion in
December 2008, dropped to $22.7 billion one year later, and has
remained fairly stable since, amounting to $23.4 billion as of
December 1, 2010. By contrast, the level of debt has continued to be
reduced since December 2008, and as of December 1, 2010, stood at
$14.5 billion, an average quarterly reduction of about $1.1 billion
dollars since September 30, 2009. Also since September 30, 2009, the
excess in value of the remaining portfolio over the remaining FRBNY
debt increased from about $0.7 billion to about $8.9 billion.
Figure 24: Amounts Owed and Portfolio Value of Maiden Lane III through
December 1, 2010:
[Refer to PDF for image: vertical bar graph]
Date: 12/17/08;
Principal and interest owed to FRBNY: $15.2 billion;
Portfolio value: $19.7 billion;
Principal and interest owed to AIG: $5 billion.
Date: 12/24/08;
Principal and interest owed to FRBNY: $24.4 billion;
Portfolio value: $28.2 billion;
Principal and interest owed to AIG: $5 billion.
Date: 3/25/09;
Principal and interest owed to FRBNY: $24.2 billion;
Portfolio value: $27.6 billion;
Principal and interest owed to AIG: $5.1 billion.
Date: 7/1/09;
Principal and interest owed to FRBNY: $22.6 billion;
Portfolio value: $20.2 billion;
Principal and interest owed to AIG: $5.1 billion.
Date: 9/2/09;
Principal and interest owed to FRBNY: $20.5 billion;
Portfolio value: $20 billion;
Principal and interest owed to AIG: $5.1 billion.
Date: 9/30/09;
Principal and interest owed to FRBNY: $19.9 billion;
Portfolio value: $20.6 billion;
Principal and interest owed to AIG: $5.2 billion.
Date: 12/30/09;
Principal and interest owed to FRBNY: $18.5 billion;
Portfolio value: $22.7 billion;
Principal and interest owed to AIG: $5.2 billion.
Date: 3/31/10;
Principal and interest owed to FRBNY: $17.3 billion;
Portfolio value: $22.2 billion;
Principal and interest owed to AIG: $5.2 billion.
Date: 6/30/10;
Principal and interest owed to FRBNY: $16.3 billion;
Portfolio value: $23.2 billion;
Principal and interest owed to AIG: $5.3 billion.
Date: 9/29/10;
Principal and interest owed to FRBNY: $15.1 billion;
Portfolio value: $23 billion;
Principal and interest owed to AIG: $5.3 billion.
Date: 12/1/10;
Principal and interest owed to FRBNY: $14.5 billion;
Portfolio value: $23.4 billion;
Principal and interest owed to AIG: $5.4 billion.
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 has been to sell some of its
assets. This indicator tracks sales or dispositions that have been
closed and agreements of pending dispositions that have been publicly
announced but not yet closed. As table 7 shows, AIG sold increasingly
more of its assets each quarter, from the last quarter of 2008 when it
sold one asset for $820 million, to the third quarter of 2009 when it
sold 12 assets for a disclosed value of more than $4.5 billion (the
proceeds for most of the sales that quarter were not publicly
disclosed). In the last quarter of 2009, AIG sold only one asset--AIG
Finance-Hong Kong--for $627 million. As of November 30, 2010, AIG
disclosed that it had received $27.2 billion in total proceeds from
sales, $16.2 billion of which was from the sale of American Life
Insurance Company (ALICO) to MetLife. Also, of the total proceeds,
$12.9 billion was cash, including $7.2 billion from the sale of ALICO.
In the first quarter of 2010, AIG announced that it sold three assets,
two of which had combined reported cash proceeds of $729 million, and
one had proceeds that were not disclosed. The company also announced
two new sales in the second quarter of 2010 of undisclosed amounts and
no new sales the following quarter. However, in November 2010 AIG
reported selling a portion of its American General Finance business.
It also sold ALICO to MetLife. In addition, in October 2010, there was
an initial public offering for AIA that generated $20.5 billion (this
transaction is not listed in the following table since it is not an
asset sale). On closing of the recapitalization plan, AIG expected the
net cash proceeds from the ALICO sale and the AIA IPO to be sufficient
to repay the FRBNY revolving credit facility.
Table 7: Dispositions Closed and Agreements Announced but Not Yet
Closed, September 30, 2008, through November 30, 2010:
Dollars in millions:
Dispositions closed in quarter ending: September 30, 2008:
n/a;
Dispositions closed in quarter ending: December 31, 2008:
Unibanco JV:
Total proceeds: $820 million.
Dispositions closed in quarter ending: March 31, 2009:
AIG Financial Products Energy Commodity Hedges (all cash) (part of
investment assets disposition below):
Total proceeds: [Empty].
Philam Savings Bank:
Total proceeds: $43 million.
Hartford Steam Boiler ($739 million cash):
Total proceeds: $815 million.
Spanish Solar Park (part of investment assets disposition below):
Total proceeds: [Empty].
Dispositions closed in quarter ending: June 30, 2009:
AIG Life Insurance Company of Canada (all cash);
Total proceeds: $263 million.
Commodity Business (all cash);
Total proceeds: $15 million.
AIG Retail Bank and AIG Card (Thailand) ($45 million cash);
Total proceeds: $540 million.
AIG Private Bank ($253 million cash);
Total proceeds: $308 million.
Darag;
Total proceeds: n/d.
Real estate in Tokyo (all cash);
Total proceeds: $1.179 billion.
Transatlantic Holdings;
Total proceeds: $1.136 billion.
Dispositions closed in quarter ending: September 30, 2009:
21st Century Insurance Group ($1.7 billion cash);
Total proceeds: $1.900 billion.
CFG China;
Total proceeds: n/d.
Consumer finance operations in Mexico;
Total proceeds: n/d.
A.I. Credit Life (all cash);
Total proceeds: $741 million.
Investment assets--energy and infrastructure;
Total proceeds: $1.900 billion.
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 million.
Dispositions closed in quarter ending: March 31, 2010:
Transatlantic Holdings, Inc. (secondary stock offering for cash);
Total proceeds: $452 million.
Portion of its asset management business (all cash);
Total proceeds: $277 million.
Consumer finance operations in Colombia;
Total proceeds: n/d.
Dispositions closed in quarter ending: June 30, 2010:
Consumer finance operations in Argentina;
Total proceeds: n/d.
Consumer finance business in Poland;
Total proceeds: n/d.
Dispositions closed in quarter ending: September 30, 2010:
No dispositions closed.
Dispositions closed in quarter ending: October 1-November 30, 2010:
ALICO ($7.2 billion cash, $9 billion stock in MetLife);
Total proceeds: $16.200 billion.
80 percent of American General Finance Inc.;
Total proceeds: n/d.
Total proceeds on dispositions closed;
Total proceeds: $27.216 billion.
Total disclosed cash proceeds terms disclosed;
Total proceeds: $12.934 billion.
Disposition agreements announced but not yet closed as of November 30,
2010:
UGC International Canada;
Total proceeds: n/d.
UGC International Israel;
Total proceeds: n/d.
ILFC portfolio of 53 aircraft;
Total proceeds: $1.987 billion.
AIG Star and AIG Edison Life Insurance Companies ($4.2 billion cash);
Total proceeds: $4.80 billion.
Sources: AIG and GAO analysis of AIG press releases and Securities and
Exchange Commission filings.
Notes: N/d means not disclosed.
On January 12, 2011, AIG announced an agreement to sell its 97.57
percent interest in Nan Shan Life Insurance Company, Ltd. to Ruen Chen
Investment Co., Ltd. of Taiwan for $2.16 billion in cash.
[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); Tania Calhoun, Rachel DeMarcus, Lawrance Evans, John
Forrester, Marc Molino, Barbara Roesmann, Jennifer Schwartz, 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 holds and orders placed. A book may hold
few or several positions and a trader may have several books, which
are variously organized, such as by types of product or risk.
Capital:
The value of cash, goods, and other financial resources a business
uses to generate income or make an investment. Companies can raise
capital from investors by selling stocks and bonds. Capital is often
used to measure the financial strength of a company.
Capital Market:
The market for long-term funds in which securities such as common
stock, preferred stock, and bonds are traded. Both the primary market
for new issues and the secondary market for existing securities are
part of the capital market.
Claims (Adjustment) Expenses:
Costs of adjusting a claim that include attorneys' fees and
investigation expenses.
Collateral:
Properties or other assets pledged by a borrower to secure credit from
a lender. If the borrower does not pay back or defaults on the loan,
the lender may seize the collateral.
Collateralized Debt Obligation:
Securities backed by a pool of bonds, loans, or other assets. In a
basic collateralized debt obligation, a pool of bonds, loans, or other
assets are pooled and securities then are issued in different tranches
(see "tranche" and "mezzanine tranche") that vary in risk and return.
Combined Ratio:
This ratio is a common measure of the performance of the daily
operations of an insurance company. It is calculated by adding the
amount of incurred losses and the amount of expenses incurred by the
company and dividing that combined amount by the earned premium
generated during the same period. The ratio describes the related cost
of losses and expenses for every $100 of earned premiums. A ratio of
less than 100 percent generally indicates that the company is making
underwriting profit while a ratio of more than 100 percent generally
means that it is paying out more money in claims that it is receiving
from premiums.
Commercial Paper:
An unsecured obligation with maturities ranging from 2 to 270 days
issued by banks, corporations, and other borrowers with high credit
ratings to finance short-term credit needs, such as operating expenses
and account receivables. Commercial paper is a low-cost alternative to
bank loans. Issuing commercial paper allows a company to raise large
amounts of funds quickly without the need to register with the
Securities and Exchange Commission, either by selling them directly to
an investor or to a dealer who then sells them to a large and varied
pool of institutional buyers.
Credit Default Swap:
Bilateral contracts that are sold over the counter and transfer credit
risks from one party to another. In return for a periodic fee, the
seller (who is offering credit protection) agrees to compensate the
buyer (who is buying credit protection) if a specified credit event,
such as default, occurs.
Derivative:
A financial instrument, traded on-or off-exchange, the price of which
directly depends on the value of one or more underlying commodities.
Derivatives involve the trading of rights or obligations on the basis
of the underlying product, but they do not directly transfer property.
Directors and Officer Liability Insurance:
Provides coverage when a director or officer of a company commits a
negligent act or misleading statement that results in the company
being sued.
Equity:
Ownership interest in a business in the form of common stock or
preferred stock.
Errors and Omissions Liability Insurance (or Coverage):
Insurance protection to various professions for negligent acts or
omissions resulting in bodily injury, property damage, or liability to
a client.
Expense Ratio:
The ratio of underwriting expenses to net premiums earned. It is a
measure of underwriting efficiency, in which an increase in the ratio
represents increased expenses relative to premiums. The underwriting
expenses include the amortization of deferred policy acquisition costs
(commissions, taxes, licenses and fees, and other underwriting
expenses amortized over the policy term), and insurance operating
costs and expenses. For example, a 22.4 expense ratio indicates that
22.4 cents out of every dollar in premiums earned are used for
underwriting expenses.
Fair Value:
An estimated value of an asset or liability that is reasonable to all
willing parties involved in a transaction taking into account market
conditions other than liquidation. For example, the fair value of
derivative liability represents the fair market valuation of the
liabilities in a portfolio of derivatives. In this example, the fair
value provides an indicator of the dollar amount the market thinks the
trader of the portfolio would need to pay to eliminate its liabilities.
Goodwill (and Goodwill Impairment):
Goodwill occurs when a company buys another entity and pays more than
the market value of all assets on the entity's books. A company will
pay more because of intangibles--such trademarks and copyrights--on
the books at historical cost and other factors--such as human capital,
brand name, and client base--that accounting conventions do not
capture on the books. If the company later determines that the entity
has lost value and recovery is not a realistic expectation it might
decide record the lost value as an impairment.
Liability:
A business's financial obligation that must be made to satisfy the
contractual terms of such an obligation. Current liabilities, such as
accounts payable or wages, are debts payable within 1 year, while long-
term liabilities, such as leases and bond repayments, are payable over
a longer period.
Liquidity:
Measure of the extent to which a business has cash to meet its
immediate and short-term obligations. Liquidity also is measured in
terms of a company's ability to borrow money to meet short-term
demands for funds.
Loss Ratio:
The ratio of claims and claims adjustment expenses incurred to net
earned premiums. For example, a 77.3 loss ratio indicates that 77.3
cents out of every dollar in premiums earned are used to adjust and
pay claims.
Mezzanine Tranche:
A tranche is a piece or portion of a structured deal, or one of
several related securities that are issued together but offer
different risk-reward characteristics. The mezzanine tranche is
subordinated to the senior tranche, but is senior to the equity
tranche. The senior tranche is the least-risky tranche whereas the
equity tranche is the first loss and riskiest tranche.
Mortgage-Backed Securities:
Securities or debt obligations that represent claims to the cash flows
from pools of mortgage loans, such as mortgages on residential
property. These securities are issued by Ginnie Mae, Fannie Mae, and
Freddie Mac, as well as private institutions, such as brokerage firms
and banks.
Notional Amount (Gross and Net):
The amount upon which payments between parties to certain types of
derivatives contracts are based. The gross notional amount is not
exchanged between the parties, but instead represents the underlying
quantity upon which payment obligations are computed. The net notional
amount represents the maximum dollar level exposure for the portfolio.
Paid-in Capital:
Funds provided by investors in exchange for common or preferred stock.
Paid-in capital represents the funds raised by the business from
equity, and not from ongoing operations.
Preferred Stock (Cumulative, Noncumulative, etc.):
A class of ownership in a corporation or stock that has
characteristics of both common stock and debt. Preferred shareholders
receive their dividends before common stockholders, but they generally
do not have the voting rights available to common stockholders.
Retained Earnings:
A calculation of the accumulated earnings of a corporation minus cash
dividends since inception.
Reverse Stock Split:
A proportionate decrease in the number of shares held by stockholders
that a company generally institutes to increase the market price per
share of its stock. In a 1-for-10 stock split stockholders would own 1
share for every 10 shares that they owned before the reverse split.
Risk-based Capital (Insurance):
The amount of required capital that an insurance company must maintain
based on the inherent risks in the insurer's operations. Authorized
control level risk-based capital is the level at which an insurance
commissioner can first take control of an insurance company.
Secured:
Secured debt is backed or secured by a pledge of collateral.
Securitization:
The process of pooling debt obligations and dividing that pool into
portions (called tranches) that can be sold as securities in the
secondary market--a market in which investors purchase securities or
assets from other investors. Financial institutions use securitization
to transfer the credit risk of the assets they originate from their
balance sheets to those of the investors who purchased the securities.
Shareholders' Equity:
Total assets minus total liabilities of a company, as found on a
company's balance sheet. Shareholders' equity is also known as owner's
equity, net worth, or book value. The two sources for shareholders'
equity are money that originally was invested in the company, along
with additional investments made thereafter, and retained earnings.
Soft Market:
A market in which supply exceeds demand resulting in a lowering of
prices in that market. Also refers to a buyer's market, as buyers hold
much of the power in negotiating prices.
Solvency:
Minimum standard of financial health for an insurance company, in
which assets exceed liabilities. In general, a solvent company is able
to pay its debt obligations as they come due.
Special Purpose Vehicle:
A legal entity, such as a limited partnership that a company creates
to carry out some specific financial purpose or activity. Special
purpose vehicles can be used for purposes such as securitizing loans
to help spread the credit and interest rate risk of their portfolios
over a number of investors.
Trading Position:
The amount of a security or commodity owned by an investor or a dealer.
Tranche:
A tranche is a portion or class of a security. A security may have
several tranches, each with different risks and rates of return, among
other differences.
Treasury Stock:
Previously issued shares of a company that the company has repurchased
from investors.
Unrealized Gains and Losses:
A profit or loss on an investment that has not been sold. That is, an
unrealized profit or loss occurs when the current price of a security
that still is owned by the holder is higher or lower than the price
the holder paid for it.
Unsecured Debt:
Unsecured debt is not backed by any pledge of collateral.
Warrant:
An options contract on an underlying asset that is in the form of a
transferable security. A warrant gives the holder the right to
purchase a specified amount of the issuer's securities in the future
at a specific price.
[End of section]
Footnotes:
[1] EESA, Pub. L. No. 110-343, 122 Stat. 3765 (2008), codified at 12
U.S.C. §§ 5201 et seq. The act originally authorized Treasury to
purchase or guarantee up to $700 billion in troubled assets. The
Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-22,
Div. A, 123 Stat. 1632 (2009), amended EESA to reduce the maximum
allowable amount of outstanding troubled assets under the act by
almost $1.3 billion, from $700 billion to $698.741 billion. While the
Secretary of the Treasury extended the authority provided under EESA
through October 3, 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act), Pub. L. No. 111-203, 124
Stat. 1376 (2010), enacted on July 21, 2010, (1) reduced Treasury's
authority to purchase or insure troubled assets to $475 billion and
(2) prohibited Treasury from using its authority, under EESA to incur
any additional obligations for a program or initiative unless the
program or initiative already had begun before June 25, 2010.
[2] For the signed agreement, see AIG's 8K filing dated December 8,
2010.
[3] We must report at least every 60 days on findings resulting from
oversight of TARP's performance in meeting the purposes of EESA, the
financial condition and internal controls of TARP, the characteristics
of both asset purchases and the disposition of assets acquired, TARP's
efficiency in using the funds appropriated for the program's
operation, TARP's compliance with applicable laws and regulations, and
other matters. 12 U.S.C. § 5226(a).
[4] Our ability to review the Federal Reserve's assistance was
clarified by the Helping Families Save Their Homes Act of 2009,
enacted on May 20, 2009, which provided us authority to audit Federal
Reserve actions taken under section 13(3) of the Federal Reserve Act
"with respect to a single and specific partnership or corporation."
Among other things, this amendment provides us with authority to audit
Federal Reserve actions taken with respect to three entities also
assisted under TARP--Citigroup, Inc.; AIG; and the Bank of America
Corporation. It also gives us the authority to access information from
entities participating in TARP programs, such as AIG, for purposes of
reviewing the performance of TARP. Section 1109 of the Dodd-Frank Act
provided us authority to review various aspects of Federal Reserve
facilities initiated in response to the financial crisis. This related
work is underway and we will issue a future report on the results.
[5] See GAO, Troubled Asset Relief Program: Status of Government
Assistance to AIG, [hyperlink, http://www.gao.gov/products/GAO-09-975]
(Washington, D.C.: Sep. 21, 2009). For our previous testimony on the
assistance provided to AIG, see Troubled Asset Relief Program: Update
of Government Assistance Provided to AIG, [hyperlink,
http://www.gao.gov/products/GAO-10-475] (Washington, D.C.: Apr. 27,
2010) and 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).
[6] Representatives Towns and Cummings, House Committee on Oversight
and Government Reform, and Representative Bachus, House Committee on
Financial Services, asked us to review certain Federal Reserve actions
relating to its assistance to AIG. We will address questions raised by
these requests in a future report.
[7] CDS are bilateral contracts that are sold over the counter and
transfer credit risks from one party to another. The seller, who is
offering credit protection, agrees to compensate the buyer in return
for a periodic fee if a specified credit event, such as default,
occurs.
[8] FRBNY created Maiden Lane II as an SPV to provide AIG liquidity
through its purchase of residential mortgage-backed securities from
AIG life insurance companies. FRBNY provided a loan to the SPV for the
purchases. It also terminated a previously established securities
lending program with AIG. FRBNY also created Maiden Lane III as an SPV
to provide AIG liquidity through its purchase of collateralized debt
obligations from AIGFP's counterparties in connection with termination
of CDS. FRBNY again provided a loan to the SPV for the purchases. See
[hyperlink, http://www.gao.gov/products/GAO-09-975] (starting on page
30) for more discussion on FRBNY's creation of these SPVs.
[9] Commercial paper refers to short-term promissory notes that are
issued primarily by corporations to finance their short-term credit
needs.
[10] For more information on the role of consolidated supervisors, see
GAO, Financial Market Regulation: Agencies Engaged in Consolidated
Supervision Can Strengthen Performance Measurement and Collaboration,
[hyperlink, http://www.gao.gov/products/GAO-07-154] (Washington, D.C.:
Mar. 15, 2007).
[11] The primary state insurance regulators include New York,
Pennsylvania, and Texas.
[12] SIGTARP: Office of the Special Inspector General for the Troubled
Asset Relief Program: Quarterly Report to Congress (Oct. 26, 2010);
Quarterly Report to Congress (July 21, 2010); Quarterly Report to
Congress (Apr. 20, 2010); Quarterly Report to Congress (Jan. 30,
2010); Quarterly Report to Congress (Oct. 21, 2009); Quarterly Report
to Congress (July 21, 2009); Quarterly Report to Congress (Apr. 21,
2009); and Initial Report to the Congress (Feb. 6, 2009).
[13] SIGTARP: Office of the Inspector General for the Troubled Asset
Relief Program, Extent of Federal Agencies' Oversight of AIG
Compensation Varied, and Important Challenges Remain (Oct. 14, 2009);
and Factors Affecting Efforts to Limit Payments to AIG Counterparties
(Nov. 17, 2009).
[14] Congressional Oversight Panel, June Oversight Report: The AIG
Rescue, Its Impact on Markets, and the Government's Exit Strategy
(Washington, D.C., June 10, 2010). Specifically, the panel was
concerned that (1) the government did not exhaust its options before
committing $85 billion in assistance to AIG; (2) the assistance
distorted the marketplace; (3) some banks displayed a conflict in
interest by acting at various times as advisors to, potential rescuers
of, and counterparties with AIG; (4) AIG may not repay taxpayers for
the assistance they provided; and (5) the AIG bailout may be seen as
setting a precedent by implicitly guaranteeing "too big to fail" firms.
[15] In our March 2009 testimony on credit default swaps, we noted
that no single definition for systemic risk exists. Traditionally,
systemic risk was viewed as the risk that the failure of one large
institution would cause other institutions to fail. This micro-level
definition is one way to think about systemic risk. Recent events have
illustrated a more macro-level definition: the risk that an event
could broadly affect the financial system rather than just one or a
few institutions. See GAO, Systemic Risk: Regulatory Oversight and
Recent Initiatives to Address Risk Posed by Credit Default Swaps,
[hyperlink, http://www.gao.gov/products/GAO-09-397T] (Washington,
D.C.: Mar. 5, 2009).
[16] CDOs are securities backed by a pool of bonds, loans, or other
assets.
[17] The Federal Reserve announced that, as a condition of
establishing the initial $85 billion credit facility, a trust
established for the sole benefit of the U.S. Treasury would become the
majority equity investor in AIG. The independent trust would manage
the Treasury's beneficial interest in preferred shares (Series C) of
AIG. The Series C stock is convertible into approximately 79.75
percent of the issued and outstanding shares of common stock of AIG.
[18] A multisector CDO is a CDO backed by a combination of corporate
bonds, loans, asset-backed securities, or mortgage-backed securities.
[19] AIGFP sold CDS on multisector CDOs. As a result, to unwind these
contracts, Maiden Lane III was created to purchase the CDOs from AIG's
CDS counterparties. In exchange for purchasing the underlying assets,
the counterparties agreed to terminate the CDS contracts, thereby
eliminating the need for AIG to post additional collateral as the
value of the CDOs fell.
[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] CPFF, a Federal Reserve emergency facility that became
operational in October 2008 and closed in February 2010, provided a
liquidity backstop to U.S. issuers of commercial paper through an SPV
that purchased eligible 3-month unsecured and asset-backed commercial
paper from eligible issuers using financing provided by FRBNY. Its
purpose was to enhance the liquidity of the commercial paper market.
[26] The amount of maturing debt was reduced when the amount
authorized on the facility was reduced from the original $85 billion
to $60 billion.
[27] In this transaction, FRBNY received preferred interests valued at
$25 billion, and in exchange the debt AIG owed to the FRBNY revolving
credit facility was lowered by an equivalent amount.
[28] On September 30, 2010, AIG, Treasury, FRBNY, and the AIG Credit
Facility Trust agreed in principle to a plan that would recapitalize
AIG and in the process require that AIG repay the FRBNY revolving
credit facility.
[29] On April 17, 2009, Treasury provided a $29.835 billion equity
capital facility to AIG whereby AIG issued to Treasury 300,000 shares
of fixed-rate noncumulative perpetual preferred stock (Series F) and a
warrant to purchase up to 3,000 shares of AIG common stock. The
facility was intended to strengthen AIG's capital levels and improve
its leverage.
[30] Series G preferred stock is discussed in more detail later in
this report.
[31] Other capital included payments advanced to purchase shares, the
cost of Treasury stock, and accumulated other comprehensive income or
loss as originally reported. Our computations adjusted the value of
AIG's common stock and paid-in capital for the retroactive effect of
the July 2009 reverse stock split.
[32] This amount was based on the fair value of common shares into
which the preferred Series C would be convertible on September 16,
2008; the date AIG received FRBNY's commitment. AIG also recorded this
amount as a prepaid commitment fee for the $85 billion credit facility
to be treated as an asset to be amortized as interest expense over the
5-year term of the FRBNY facility. The only cash involved in this
transaction was $500,000 that FRBNY paid to AIG for issuing the Series
C preferred shares by reducing the commitment fee FRBNY charged AIG
for the facility by an equivalent amount. Through June 30, 2009, $10.2
billion of this asset was amortized through the accumulated deficit
and thus reduced shareholders equity. For more information on Series C
preferred shares, see [hyperlink,
http://www.gao.gov/products/GAO-09-975].
[33] As previously discussed, the federal equity investment includes
Series C preferred shares that are convertible into approximately
79.75 percent of total outstanding common shares. Under the terms of
the Series C preferred stock issuance, AIG agreed to issue preferred
stock convertible into AIG's common stock to a trust created on behalf
of the U.S. Treasury (the AIG Credit Facility Trust). This independent
trust was established to manage the U.S. Treasury's beneficial
interest in Series C preferred shares. The conversion formula provides
that the trust will receive approximately 79.75 percent of AIG's
common stock less the percentage of common stock that may be acquired
by or for the benefit of Treasury as a result of warrants or other
convertible preferred stock held by Treasury. Treasury received a
warrant to purchase 2,690,088 shares of AIG common stock in connection
with its purchase of Series D preferred stock, and an additional
warrant to purchase AIG common stock in connection with its purchase
of Series F preferred stock. Proceeds from the sale of the trust stock
will be deposited in the U.S. Treasury general fund.
[34] Thomson Reuters maintains the Insurance Index, a stock price
index comprising of insurance companies that conduct a variety of
insurance activities. As a result the index is a good proxy for the
stock market performance for the insurance sector. The NYSE Composite
Index is designed to measure the performance of all common stocks
listed on NYSE and, therefore, provides a measure of overall stock
market performance.
[35] A basis point is a common measure used in quoting yield on bills,
notes, and bonds and represents 1/100 of a percent of yield.
[36] AIGFP staff may leave for several reasons, such as the sale of
businesses, closure of offices, or resignation.
[37] Through the third quarter of 2010, AIG has reported on its
operations through four reporting segments--general insurance,
domestic life insurance and retirement services, foreign life
insurance and retirement services, and financial services. The
financial services segment includes commercial aircraft and equipment
leasing, capital markets operations, consumer finance and insurance
premium financing, both in the United States and abroad.
[38] A tranche is a portion or class of a security. A security may
have several tranches, each with different risks and rates of return,
among other differences.
[39] In exchange for a periodic fee, these institutions received
credit protection for a portfolio of diversified loans, thus reducing
minimum capital requirements set by their regulators.
[40] According to AIG, AIGFP has not been required to make any
payments as part of terminations initiated by counterparties. The
regulatory benefit of these transactions for the counterparties is
generally derived from the terms of Basel I that existed through the
end of 2007, which was replaced by Basel II. As financial institution
counterparties transitioned to Basel II, AIG expects them to receive
little or no additional regulatory benefit from these CDS
transactions, except in a small number of specific instances.
According to AIG, the schedule by which these positions are called or
terminated has slowed. This development likely has been impacted by
changes in capital standards that have been recently proposed by the
Basel Committee, which when implemented are expected to have various
degrees of impact on global financial institutions, including the
AIGFP counterparties.
[41] According to AIG, the outstanding multisector CDO portfolio at
June 30, 2010, was written on CDO transactions, including synthetic
CDOs. Synthetic CDOs are backed by credit derivatives such as CDS or
options contracts instead of assets such as bonds or mortgage backed
securities.
[42] "Total adjusted capital" is a company's actual amount of capital
and surplus; it refers to a company's capital base.
[43] The authorized control level risk-based capital is the level at
which an insurance commissioner can seize or first take control of an
insurance company.
[44] As discussed earlier, FRBNY created Maiden Lane II, an SPV, to
provide AIG liquidity through its purchase of RMBS from AIG life
insurance companies. FRBNY provided a loan to the SPV for the
purchases. It also terminated a previously established securities
lending program with AIG.
[45] The life insurance and retirement services segment losses
associated with investment activity through the segment's securities
lending program accounted for a significant portion of AIG's losses in
the fourth quarter of 2008. Appendix VI describes the revenues and
expenses of AIG's life and retirement services programs in more detail.
[46] In July 2009, AIG announced that it had formed an SPV into which
it would contribute the equity of AIU Holdings--which included AIG's
commercial insurance, foreign general insurance, and private client
group operations--and would be called Chartis, Inc.
[47] The Council of Insurance Agents and Brokers' Quarterly Commercial
P/C Market Index Survey, fourth quarter 2009 (Jan. 22, 2010).
[48] A company records goodwill on its books when it buys another
entity and pays more than the market value of all assets on the
entity's books. A company will pay more because of intangibles such
trademarks and copyrights on the books at historical cost and other
factors--such as human capital, brand name, and client base--that
accounting conventions do not capture on the books. If the company
later determines that the entity has lost value and recovery is not a
realistic expectation it might write-down that lost value as an
impairment.
[49] Errors and omissions insurance is a liability insurance that
protects professionals and companies against claims by clients for
actual or alleged negligent actions and other errors and omissions in
the performance of contracted services. Directors and officers
insurance protects a company's directors and officers from liability
arising from actions relating to the duties they perform as it relates
to the company.
[50] For a more detailed discussion of the condition of AIG's
insurance operations, see appendix VII.
[51] We reviewed 30 property/casualty companies and identified 15 of
these companies as AIG's property/casualty insurance peers based on
the similarities we found in the distributions of their premiums
written in 2009 by lines of business. As did AIG, these companies
wrote premiums in several property/casualty lines of insurance. The
companies are ACE, Alleghany, Allianz SE, American Financial, Arch
Capital, Argo Group, Chubb, C.N.A., Fairfax Financial, Hartford
Financial Services, Liberty Mutual, Markel, Old Republic, Travelers,
and WR Berkley. Other property/casualty insurers not identified as
peers were mostly companies concentrated in private auto insurance or
home or farm owners insurance and other lines of insurance that were
not major lines for AIG. These companies are Allstate; Assurant, Inc.;
Bank of America; Berkshire Hathaway (GEICO); Erie Insurance Group; FM
Global; Nationwide Mutual; Progressive; QBE Insurance Group; State
Farm Fire and Casualty; State Farm Mutual Auto Insurance; Tokio
Marine; United Services Automobile Association; White Mountains; and
Zurich Financial Services.
[52] Historical operating ratios for commercial insurance have been
revised to include Private Client Group and exclude HSB Group, Inc.
The loss ratio for the fourth quarter of 2009 includes a $2.3 billion
increase in the reserve for prior years' adverse loss development. The
underwriting expense for the fourth quarter of 2008 includes a $1.2
billion charge for impairment to goodwill, increasing the expense
ratio by 22.5 points. Claims related to major catastrophes were $1.4
billion in 2008, including hurricane claims of $1.1 billion in the
third quarter of 2008. Conversely, claims related to major
catastrophes were $100 million in 2007.
[53] Investment returns are not considered part of underwriting and
thus are not included in the ratios.
[54] See table 5 in [hyperlink,
http://www.gao.gov/products/GAO-09-975].
[55] On April 17, 2009, AIG and Treasury entered into an agreement in
which Treasury agreed to exchange its $40 billion of Series D
cumulative preferred stock for $41.6 billion of Series E fixed-rate
noncumulative preferred stock in AIG. The $1.6 billion difference
between the initial aggregate liquidation preference of the Series D
stock and the aggregate liquidation preference of the Series E stock
represents a compounding of accumulated but unpaid dividends owed by
AIG to Treasury on the Series D stock.
[56] Balance includes accrued interest and fees of $6.182 billion as
of September 30, 2010.
[57] See appendix VIII for additional details about amounts owed under
FRBNY's revolving credit facility.
[58] Federal Reserve officials added that BlackRock, its investment
manager for the Maiden Lanes, currently produces moderate and extreme
stress case scenarios to evaluate the potential risk to their
outstanding loans if either significant downside shock were to occur.
As of June 30, 2010, they said that BlackRock projected full repayment
of interest and principal on the FRBNY loans to Maiden Lane II and III
under the moderate and extreme stress scenarios.
[59] For additional trends information on Maiden Lane II, see appendix
VIII.
[60] In connection with the issuance of the Series E and F preferred
stocks and as a participant in TARP, AIG had agreed to a number of
covenants with Treasury related to corporate governance, executive
compensation, political activity, and other matters. These covenants
will continue to apply after the closing. Also, AIG will agree to
provide Treasury and FRBNY with certain control and information rights.
[61] On January 12, 2011, AIG announced an agreement to sell its 97.57
percent interest in Nan Shan Life Insurance Company, Ltd. to Ruen Chen
Investment Co., Ltd. of Taiwan for $2.16 billion in cash.
[62] AIG may not directly redeem the Series G preferred stock while
FRBNY continues to hold any preferred interests in the AIA and ALICO
SPVs, but AIG will have the right to use cash to repurchase a
corresponding amount of the preferred interests in the SPVs from
FRBNY, which will then be transferred to Treasury to reduce the
aggregate liquidation preference of the Series G preferred stock. If
FRBNY no longer holds preferred interests in the AIA and ALICO SPVs,
AIG may redeem in cash the Series G preferred stock, at the
liquidation preference plus accrued and unpaid dividends.
[63] Exercise price is the price at which the option holder may buy or
sell the underlying asset.
[64] For a list of dispositions, see appendix IX.
[65] The cash proceeds will be lent by the SPVs to the parent company
in the form of secured nonrecourse loans and the loan proceeds will
then be used to repay the facility. Also, at the time of repayment and
termination of the credit agreement, any remaining unamortized prepaid
commitment fee asset, which approximated $4.3 billion at September 30,
2010, will be written off through a charge to earnings.
[66] 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.
[67] While not currently convertible because of the pending
implementation of the AIG recapitalization plan, the federal equity
investment includes Series C preferred shares owned by the Trust that
are convertible into approximately 79.75 percent of total outstanding
common shares. The conversion formula provides that the trust will
receive 79.9 percent of AIG's common stock less the percentage of
common stock that may be acquired by or for the benefit of the
Treasury as a result of warrants or other convertible preferred stock
held by Treasury. Treasury received a warrant to purchase 2,690,088
shares of AIG Common Stock in connection with its purchase of Series D
preferred stock (now Series E), and an additional warrant to purchase
AIG common stock in connection with its purchase of Series F preferred
stock. Proceeds from the sale of the trust stock will be deposited in
the U.S. Treasury general fund.
[68] Balance outstanding includes accrued interest and fees of $6.182
billion through September 30, 2010.
[End of section]
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