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

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

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

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

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

DEALS CLOSED

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

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

Its debt reduction announcement said the Federal Reserve Bank reduced the amount the company owed after taking preferred equity interests in two newly formed life insurance subsidiaries.

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

According to a company representative, Christina Pretto, the government would have a liquidation preference stake of $16 billion in AIA and $9 billion in ALICO. The exact percentage of the government's stake in the fair market value of the companies has not been disclosed, she said.

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

AIG Chief Executive Officer Robert Benmosche said in a statement that the announcement "sends a clear message to taxpayers: AIG continues to make good on its commitment to pay the American people back. Moreover, these transactions position AIA and ALICO–two terrific, unique international life insurance businesses–for the future."

Mr. Benmosche noted that AIG would take an incremental charge related to its prepaid commitment asset (the recorded value of the credit facility on its balance sheet) in the fourth quarter in connection with the reduction in the total amount available under the FRBNY credit facility resulting from the closing of the AIA and ALICO transactions.

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

Since the inception of the FRBNY credit facility and through Sept. 30, AIG has recognized a total of $11.7 billion of amortization expense, and expects to recognize an additional amount of $5.7 billion in the fourth quarter, including $5.2 billion of accelerated amortization related to these transactions, the company said.

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

It was noted that after the FRBNY facility is fully repaid, the government–with its preferred stock holding in the company–will continue to hold a preferred voting interest, now at approximately 79.9 percent.

"We continue to focus on stabilizing and strengthening our businesses, but expect continued volatility in reported results in the coming quarters, due in part to charges related to ongoing restructuring activities, such as the previously announced loss that we expect to recognize in the upcoming quarter related to our announced agreement to sell our Taiwan-based life insurer Nan Shan," Mr. Benmosche said.

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

The liquidation preference of the preferred interests represents a percentage of the estimated fair market value of AIA and ALICO.

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 in excess of the value of the preferred interests as the SPVs monetize their stakes in these companies in the future.

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