News about American International Group broke fast and furiouslylast week, with questions raised about its reserve adequacy, dealsclosed to reduce its debt to the government by $25 billion, and anannouncement that the company had buried the hatchet with itsformer chief executive, Maurice Greenberg.

An analyst's report concluding that the company will havean $11 billion reserve deficiency by the end of this year sentAIG's stock tumbling downward on Nov. 30.

Todd Bault, an analyst with Sanford C. Bernstein, reportedlyfound that AIG would come up short on reserves primarily for threelines of long-tail business–workers' compensation, generalliability and professional liability.

Mr. Bault declined to release his findings, which weredistributed confidentially to clients of his firm. But a copy wasleaked to CNBC, where David Faber reported that Mr. Bault'sconclusions resulted from an overall evaluation of the non-lifeinsurance industry's reserve adequacy, during which the analystcame across the surprising result about AIG's allegedly deficientproperty and casualty company reserves.

The report said the finding was "totally unexpected," accordingto Mr. Faber.

Mr. Bault reportedly suggested that if his analysis is correct,AIG will be faced with taking a reserve charge, which could lead toadditional actions by the U.S. government–the primary stakeholdersince the company's bailout in the face of AIG's economicdifficulties last year due to credit default swaps by its FinancialProducts unit.

The report went on to say that such a deficiency could open thedoors to AIG's competitors (mentioned as ACE, Travelers and CNA),which would seek to exploit the company's diminished financialposition, Mr. Faber said.

An AIG representative said the company was not commenting on thereport as this article went to press.

A.M. Best Company and Fitch declined to comment on any potentialreserve deficiencies raised in the Sanford C. Bernstein report.Standard & Poor's did not respond to a request for comment, anda representative for Moody's could not be reached for aresponse.

DEALS CLOSED

In other AIG news, besides reaching an agreement with Mr.Greenberg to settle any disputes with its former CEO (see story onpage 7), the company last week completed two previously announcedtransactions to reduce the debt it owes the Federal Reserve Bank ofNew York (FRBNY) by $25 billion.

However, AIG's positive statement about the move included acautionary note that the company still faces "continued volatility"ahead.

Its debt reduction announcement said the Federal Reserve Bankreduced the amount the company owed after taking preferred equityinterests in two newly formed life insurance subsidiaries.

The company said it is positioning American InternationalAssurance Company Ltd. (AIA) and American Life Insurance Company(ALICO) for initial public offerings or third-party sale, dependingon market conditions and regulatory approvals.

According to a company representative, Christina Pretto, thegovernment would have a liquidation preference stake of $16 billionin AIA and $9 billion in ALICO. The exact percentage of thegovernment's stake in the fair market value of the companies hasnot been disclosed, she said.

AIG said with the $25 billion debt reduction, AIG's outstandingprincipal balance under the credit facility set up by FRBNY is nowapproximately $17 billion, down from approximately $42 billion,excluding interest and fees. AIG added that the total amountavailable under the credit facility loan arrangement has been cutfrom $60 billion to $35 billion.

AIG Chief Executive Officer Robert Benmosche said in a statementthat the announcement "sends a clear message to taxpayers: AIGcontinues to make good on its commitment to pay the American peopleback. Moreover, these transactions position AIA and ALICO–twoterrific, unique international life insurance businesses–for thefuture."

Mr. Benmosche noted that AIG would take an incremental chargerelated to its prepaid commitment asset (the recorded value of thecredit facility on its balance sheet) in the fourth quarter inconnection with the reduction in the total amount available underthe FRBNY credit facility resulting from the closing of the AIA andALICO transactions.

The prepaid commitment asset was booked as $23 billion on Sept.16, 2008 to represent the value to AIG of the initial $85 billionof credit provided by the FRBNY in exchange for a 79.9 percenttaxpayer interest in the company.

Since the inception of the FRBNY credit facility and throughSept. 30, AIG has recognized a total of $11.7 billion ofamortization expense, and expects to recognize an additional amountof $5.7 billion in the fourth quarter, including $5.2 billion ofaccelerated amortization related to these transactions, the companysaid.

The charges, AIG explained, reflect the reduction of thecompany's debt from the initial amount of $85 billion to $35billion, as well as periodic amortization.

It was noted that after the FRBNY facility is fully repaid, thegovernment–with its preferred stock holding in the company–willcontinue to hold a preferred voting interest, now at approximately79.9 percent.

"We continue to focus on stabilizing and strengthening ourbusinesses, but expect continued volatility in reported results inthe coming quarters, due in part to charges related to ongoingrestructuring activities, such as the previously announced lossthat we expect to recognize in the upcoming quarter related to ourannounced agreement to sell our Taiwan-based life insurer NanShan," Mr. Benmosche said.

The AIA and ALICO transactions involve AIG contributing theequity of each to separate special purpose vehicles in exchange forinterests in the SPVs. Under the terms of the transactions, theFRBNY receives preferred interests with a liquidation preference inthe AIA SPV of $16 billion and in the ALICO SPV of $9 billion.

The liquidation preference of the preferred interests representsa percentage of the estimated fair market value of AIA andALICO.

AIG holds all of the common interests in the AIA and ALICO SPVs,and will benefit from the fair market value of AIA and ALICO inexcess of the value of the preferred interests as the SPVs monetizetheir stakes in these companies in the future.

Until AIG divests a majority of its common interests in AIA andALICO, AIA and ALICO will continue to be consolidated in AIG'sfinancial statements, the company noted.