Overview of Federal Assistance Provided

Ongoing instability in global credit markets and other issues have resulted  in over $182 billion in federal assistance being made available to AIG. Second, in November 2008, the Federal Reserve and Treasury announced  additional assistance to AIG and restructured its original assistance. To date, AIG has not drawn against this facility. Some of the assistance also places  restrictions on actions that AIG can take while it has loans outstanding to  the federal government or as long as the federal government has an  ownership interest in AIG assets, as well as restrictions on executive  compensation. Federal Efforts Have Focused on Maintaining and Monitoring AIG’s Solvency, but AIG Faces Challenges in Repaying Federal Assistance

Federal assistance to AIG has been focused on preventing systemic risk  from a potential AIG failure and monitoring its progress, but AIG faces  challenges in repaying the assistance. If the ultimate goal is  avoiding the failure of AIG, the Federal Reserve and Treasury have  achieved that goal in the short-term. Federal and State Monitoring Efforts Are Focused on AIG Solvency

We asked Treasury and the Federal Reserve how they were monitoring  AIG’s progress toward reaching the goals of the federal financial  assistance and AIG’s compliance with the restrictions placed upon it as a  condition of receiving the assistance. According to Treasury and Federal  Reserve officials, the agencies are working together to monitor AIG’s  solvency by reviewing the reports required by the terms of the financial  assistance, and the Federal Reserve is in contact daily with AIG officials  regarding AIG’s liquidity needs and their efforts to sell the company’s  assets. AIG Faces a Number of Challenges to Its Ability to Repay Its Federal Funds

AIG’s restructuring has hinged on efforts in three areas: (1) terminating its  CDS portfolio, (2) terminating its securities lending program, and (3)  selling assets. The federal assistance has allowed AIG to undertake restructuring efforts,  which continue. As of September 2008, AIG was to wind down the  operations of AIGFP and sell certain businesses. AIG’s ongoing financial problems have resulted in additional assistance  and restructuring of the terms of the original assistance, and AIG faces  numerous, significant challenges to its ability to repay federal assistance in  the future. However, damage to AIG’s reputation has made it difficult for its insurance  companies to maintain current business and write new business. Some of AIG’s Competitors Claim that AIG’s Commercial Insurance Pricing Is Out of Line With Its Risks but Other Insurance Industry Participants and Observers Disagree

We are examining the potential effect of federal assistance to AIG on the  insurance market, particularly AIG’s pricing practices within the  commercial property/casualty market. State insurance regulators, insurance brokers, and insurance buyers that  we have spoken to said that they have seen no indications that AIG’s  commercial property/casualty insurers are selling coverage at prices  inadequate to cover the risk involved:    State insurance regulators we spoke to said that they generally do not  closely watch commercial insurance rates because they may have been  largely deregulated by the states, as well as because of the highly  negotiated nature and complexity of many commercial lines of insurance. They also cited  instances where AIG Commercial Insurance has lost business because  other insurers’ prices were lower than theirs. Without knowing all the terms of an  individual policy, it could be difficult to determine the extent to which that  policy was priced adequately for the risk involved. In closing, the extent to which the assistance provided by the government  will achieve its goal of preventing systemic risk continues to unfold and  will be largely influenced by AIG’s success in meeting its ongoing  challenges in trying to restructure its operations. While we have found no evidence that federal assistance  has been provided directly to AIG’s property/casualty insurers, as has been  the case for AIG life insurers, AIG’s insurance companies have likely  received some indirect benefit to the extent that the property/casualty  insurers would have been adversely affected by a credit downgrade or  failure of the AIG parent. This is a work of the U.S. government and is not subject to copyright protection in the  United States.
Why GAO Did This Study

The Board of Governors of the Federal Reserve System (Federal Reserve) and the Department of the Treasury (Treasury) have made available over $182 billion in assistance to American International Group (AIG) to prevent its failure. However, questions have been raised about the goals of the assistance and how it is being monitored. Also, because AIG is generally known for its insurance operations, questions exist about the effect of the assistance on certain insurance markets. This statement provides preliminary findings on (1) the goals and monitoring of federal assistance to AIG and challenges to AIG's repayment of the assistance; and (2) the potential effects of the federal assistance on the U.S. commercial property/casualty insurance market. GAO's work on these issues is ongoing. To date, we have reviewed relevant documents on the assistance and ongoing operations of AIG, as well as documents issued by the Federal Reserve and Treasury. We also interviewed officials from these organizations as well as industry participants (competitors, brokers, and customers) and insurance regulators, among others.

What GAO Found

Federal financial assistance to AIG, both from the Federal Reserve and Federal Reserve Bank of New York through their authority to lend funds to critical nonbank institutions and from Treasury's Troubled Asset Relief Program (TARP), has focused on preventing systemic risk that could result from a rating downgrade or failure of AIG. The goal of the assistance and subsequent restructurings was to prevent systemic risk from the failure of AIG by allowing AIG to sell assets and restructure its operations in an orderly manner. The Federal Reserve has been monitoring AIG's operations since September, and Treasury has begun to more actively monitor AIG's operations as well. Although the ongoing federal assistance has prevented further downgrades in AIG's credit rating, AIG has had mixed success in fulfilling its other restructuring plans, such as terminating its securities lending program, selling assets, and unwinding its AIG Financial Products portfolio. For example, AIG has made efforts at selling certain business units and has begun an overall restructuring, but market and other conditions have prevented significant asset sales, and most restructuring efforts are still under way. AIG faces ongoing challenges from the continued overall economic deterioration and tight credit markets. AIG's ability to repay its obligations to the federal government has also been impaired by its deteriorating operations, inability to sell its assets and further declines in its assets. All of these issues will continue to adversely impact AIG's ability to repay its government assistance. As part of GAO's ongoing work related to the federal assistance provided to AIG, GAO is reviewing the potential impact of the assistance on the commercial property/casualty insurance market. Specifically, GAO is reviewing potential effects of the assistance on AIG's pricing practices. According to some of AIG's competitors, federal assistance to AIG has allowed AIG's commercial property/casualty insurance companies to offer coverage at prices that are inadequate for the risk involved. Conversely, state insurance regulators, insurance brokers, and insurance buyers said that while AIG may be pricing somewhat more aggressively than in the past in order to retain business in light of damage to the parent company's reputation, they did not see indications that this pricing was inadequate or out of line with previous AIG pricing practices. Moreover, some have noted that AIG has lost business because of the problems encountered by its parent company. As GAO evaluates these issues, it faces a number of challenges associated with determining the adequacy of commercial property/casualty premium rates, especially in the short term. These challenges include the unique, negotiated nature of many commercial insurance policies, the subjective assumptions involved in determining premiums, and the fact that for some lines of commercial insurance it can take several years to determine if premiums charged were adequate for the related losses.