10-Q/A
Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Form 10-Q/A

(Amendment No. 1)
     
(Mark One)
   
þ
  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
    For the quarterly period ended June 30, 2005
or
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
    For the transition period from           to

Commission File Number 1-8787


American International Group, Inc.

(Exact name of registrant as specified in its charter)
     
Delaware
  13-2592361
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
70 Pine Street, New York, New York
(Address of principal executive offices)
  10270
(Zip Code)

Registrant’s telephone number, including area code: (212) 770-7000

Former name, former address and former fiscal year, if changed since last report: None


     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ü                         No                

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.    Large accelerated filer  ü                       Accelerated filer                        Non-accelerated filer               

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.  Yes                          No ü               

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of June 30, 2005: 2,595,079,838.




Table of Contents

American International Group, Inc. and Subsidiaries

Explanatory Note

     Overview. This amendment to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005 (Second Quarter Form 10-Q/A) is being filed for purposes of amending Items 1, 2, 3 and 4 of Part I and Item 6 of Part II of the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005 (Second Quarter Form 10-Q) of American International Group, Inc. (AIG), which was originally filed on August 9, 2005, and provides information about the financial results for the three and six month periods ended June 30, 2005 and 2004 as restated for the restatements described in AIG’s Annual Report on Form 10-K for the year ended December 31, 2005 (2005 Annual Report on Form 10-K). Information in this Second Quarter Form 10-Q/A is generally stated as of June 30, 2005 and generally does not reflect any subsequent information or events other than the restatements, except that certain forward looking statements throughout this Second Quarter Form 10-Q/A have been revised to reflect events and developments subsequent to June 30, 2005. Information regarding subsequent periods with respect to AIG is contained in the 2005 Annual Report on Form 10-K and other filings with the Securities and Exchange Commission (SEC). This filing should be considered, and read, in conjunction with such filings.

     First Restatement. In connection with the preparation of AIG’s consolidated financial statements included in AIG’s Annual Report on Form 10-K for the year ended December 31, 2004 (2004 Annual Report on Form 10-K), AIG’s management initiated an internal review of its books and records, which was substantially expanded in mid-March 2005 with the oversight of the Audit Committee of the Board of Directors of AIG. The review spanned AIG’s major business units globally, and included a number of transactions from 2000 to 2004. As disclosed in the 2004 Annual Report on Form 10-K, as a result of the findings of the internal review, together with the results of investigations by outside counsel at the request of AIG’s Audit Committee and in consultation with PricewaterhouseCoopers LLP, AIG’s independent registered public accounting firm, AIG restated its consolidated financial statements for the years ended December 31, 2003, 2002, 2001 and 2000, the quarters ended March 31, June 30 and September 30, 2004 and 2003 and the quarter ended December 31, 2003 (the First Restatement).

     Second Restatement. As announced on November 9, 2005, AIG identified certain errors, the preponderance of which were identified during the remediation of the material weaknesses in internal control over financial reporting, principally relating to internal controls surrounding accounting for derivatives and related assets and liabilities under Statement of Financial Accounting Standards No. 133 — “Accounting for Derivative Instruments and Hedging Activities” (FAS 133), reconciliation of certain balance sheet accounts and income tax accounting. AIG also announced it was correcting errors that were identified since the First Restatement, including those relating to the accounting for certain payments received from aircraft and engine manufacturers by International Lease Finance Corporation (ILFC), which were originally corrected in AIG’s Form 10-Q for the quarter ended June 30, 2005 (Second Quarter Form 10-Q). The adjustments to correct the foregoing errors are referred to in this Second Quarter Form 10-Q/A as the Initial Adjustments.

     In connection with the remediation of material weaknesses in internal control over financial reporting referred to above, AIG identified certain additional errors, principally relating to internal control over reconciliation of certain balance sheet accounts in the Domestic Brokerage Group (DBG). As a result, AIG included further adjustments (the Additional Adjustments) in its restatement of the consolidated financial statements and financial statement schedules for the years ended December 31, 2004, 2003 and 2002, along with 2001 and 2000 for purposes of preparation of the Selected Consolidated Financial Data for 2001 and 2000, and quarterly financial information for 2004 and 2003 and in the restated consolidated financial statements included in this Second Quarter Form 10-Q/A. The Initial Adjustments and the Additional Adjustments are referred to herein as the Second Restatement. AIG’s quarterly report on Form 10-Q for the quarter ended September 30, 2005 (September 2005 Form 10-Q) will not be amended because the Additional Adjustments to the financial statements included therein are not material to those financial statements.

     The financial information that is included in this Second Quarter Form 10-Q/A has been restated as part of the First Restatement and the Second Restatement (the Restatements). Only restated financial information that is being presented for the first time in this Second Quarter Form 10-Q/A is identified herein as “Restated”. All previously presented, restated financial information is identified as such in the respective SEC filing in which the information was restated.

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American International Group, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEET

(in millions) (unaudited)


                       
June 30,
2005 December 31,
(Restated) 2004

Assets:
               
  Investments and financial services assets:                
    Fixed maturities:                
     
Bonds available for sale, at market value (amortized cost: 2005 – $342,520; 2004 – $329,838)
  $ 361,100     $ 344,399  
     
Bonds held to maturity, at amortized cost (market value: 2005 – $22,350; 2004 – $18,791)
    21,472       18,294  
     
Bond trading securities, at market value (cost: 2005 – $3,557; 2004 – $2,973)
    3,579       2,984  
    Equity securities:                
     
Common stocks available for sale, at market value (cost: 2005 – $9,419; 2004 – $8,424)
    11,003       9,772  
     
Common stocks trading, at market value (cost: 2005 – $6,671; 2004 – $5,651)
    7,074       5,894  
     
Preferred stocks, at market value (cost: 2005 – $2,335; 2004 – $2,017)
    2,444       2,040  
   
Mortgage loans on real estate, net of allowance (2005 – $57; 2004 – $65)
    14,251       13,146  
   
Policy loans
    7,100       7,035  
   
Collateral and guaranteed loans, net of allowance (2005 – $16; 2004 – $18)
    3,295       3,303  
    Financial services assets:                
     
Flight equipment primarily under operating leases, net of accumulated depreciation (2005 – $6,790; 2004 – $6,390)
    35,690       32,130  
     
Securities available for sale, at market value (cost: 2005 – $32,527; 2004 – $29,171)
    33,120       31,225  
     
Trading securities, at market value
    3,927       2,746  
     
Spot commodities
    454       534  
     
Unrealized gain on swaps, options and forward transactions
    21,388       22,670  
     
Trading assets
    2,055       3,433  
     
Securities purchased under agreements to resell, at contract value
    12,576       26,272  
     
Finance receivables, net of allowance (2005 – $584; 2004 – $571)
    26,763       23,574  
    Securities lending collateral, at market value (which approximates cost)     56,325       49,169  
    Other invested assets     26,311       23,559  
    Short-term investments, at cost (approximates market value)     17,465       16,102  

      Total investments and financial services assets     667,392       638,281  
  Cash     1,738       2,009  
  Investment income due and accrued     5,647       5,556  
 
Premiums and insurance balances receivable, net of allowance (2005 – $748; 2004 – $690)
    15,806       15,622  
  Reinsurance assets, net of allowance (2005 – $840; 2004 – $832)     19,476       19,613  
  Deferred policy acquisition costs     30,909       29,817  
  Investments in partially owned companies     1,389       1,495  
 
Real estate and other fixed assets, net of accumulated depreciation (2005 – $4,801; 2004 – $4,650)
    6,225       6,192  
  Separate and variable accounts     58,463       57,741  
  Goodwill     8,378       8,556  
  Income taxes receivable – current     772       138  
  Other assets     14,972       16,125  

Total assets
  $ 831,167     $ 801,145  

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEET (continued)

(in millions, except share data) (unaudited)


                     
June 30,
2005 December 31,
(Restated) 2004

Liabilities:
               
 
Reserve for losses and loss expenses
  $ 64,829     $ 61,878  
 
Reserve for unearned premiums
    24,435       23,400  
 
Future policy benefits for life and accident and health insurance contracts
    108,192       104,740  
 
Policyholders’ contract deposits
    225,619       216,474  
 
Other policyholders’ funds
    10,332       10,280  
 
Reserve for commissions, expenses and taxes
    4,748       4,629  
 
Insurance balances payable
    3,932       3,661  
 
Funds held by companies under reinsurance treaties
    3,780       3,404  
 
Deferred income taxes payable
    9,259       6,588  
 
Financial services liabilities:
               
   
Borrowings under obligations of guaranteed investment agreements
    20,799       18,919  
   
Securities sold under agreements to repurchase, at contract value
    10,497       23,581  
   
Trading liabilities
    2,236       2,503  
   
Securities and spot commodities sold but not yet purchased, at market value
    4,870       5,404  
   
Unrealized loss on swaps, options and forward transactions
    13,915       15,985  
   
Trust deposits and deposits due to banks and other depositors
    4,154       4,248  
   
Commercial paper
    8,980       6,724  
   
Notes, bonds, loans and mortgages payable
    63,077       61,296  
 
Commercial paper
    3,884       2,969  
 
Notes, bonds, loans and mortgages payable
    5,274       5,502  
 
Liabilities connected to trust preferred stock
    1,489       1,489  
 
Separate and variable accounts
    58,463       57,741  
 
Minority interest
    5,368       4,831  
 
Securities lending payable
    57,128       49,972  
 
Other liabilities
    27,098       25,055  

Total liabilities
    742,358       721,273  

Preferred shareholders’ equity in subsidiary companies
    196       199  

Commitments and Contingent Liabilities (See Note 7)
               
Shareholders’ equity:
               
 
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued 2005 – 2,751,327,476; 2004 – 2,751,327,476
    6,878       6,878  
 
Additional paid-in capital
    2,182       2,094  
 
Retained earnings
    70,985       63,468  
 
Accumulated other comprehensive income (loss)
    10,869       9,444  
 
Treasury stock, at cost; 2005 – 156,247,638; 2004 – 154,904,286 shares of common stock
    (2,301 )     (2,211 )

Total shareholders’ equity
    88,613       79,673  

Total liabilities, preferred shareholders’ equity in subsidiary companies and shareholders’ equity
    831,167     $ 801,145  

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF INCOME

                                     
(in millions, except per share data) (unaudited)

Six Months Three Months
Ended June 30, Ended June 30,


2005 2004 2005 2004
(Restated) (Restated)

Revenues:
                               
 
Premiums and other considerations
  $ 35,216     $ 32,154     $ 17,536     $ 16,175  
 
Net investment income
    10,559       9,141       5,227       4,541  
 
Realized capital gains (losses)
    12       3       (125 )     89  
 
Other revenues
    9,318       6,013       5,265       3,284  

 
Total revenues
    55,105       47,311       27,903       24,089  

Benefits and expenses:
                               
 
Incurred policy losses and benefits
    29,156       27,070       14,283       13,480  
 
Insurance acquisition and other operating expenses
    13,599       11,750       6,919       5,960  

 
Total benefits and expenses
    42,755       38,820       21,202       19,440  

Income before income taxes, minority interest and cumulative effect of an accounting change
    12,350       8,491       6,701       4,649  

Income taxes (benefits):
                               
 
Current
    1,983       2,437       1,015       1,092  
 
Deferred
    1,806       157       1,068       372  

      3,789       2,594       2,083       1,464  

Income before minority interest and cumulative effect of an accounting change
    8,561       5,897       4,618       3,185  

Minority interest
    (273 )     (175 )     (129 )     (105 )

Income before cumulative effect of an accounting change
    8,288       5,722       4,489       3,080  

Cumulative effect of an accounting change, net of tax
          (144 )            

Net income
  $ 8,288     $ 5,578     $ 4,489     $ 3,080  

Earnings per common share:
                               
 
Basic
                               
   
Income before cumulative effect of an accounting change
  $ 3.19     $ 2.20     $ 1.73     $ 1.19  
   
Cumulative effect of an accounting change, net of tax
          (0.06 )            
   
Net income
  $ 3.19     $ 2.14     $ 1.73     $ 1.19  

 
Diluted
                               
   
Income before cumulative effect of an accounting change
  $ 3.16     $ 2.17     $ 1.71     $ 1.17  
   
Cumulative effect of an accounting change, net of tax
          (0.06 )            
   
Net income
  $ 3.16     $ 2.11     $ 1.71     $ 1.17  

Dividends declared per common share
  $ 0.300     $ 0.140     $ 0.125     $ 0.075  

Average shares outstanding:
                               
 
Basic
    2,596       2,609       2,596       2,608  
 
Diluted
    2,623       2,641       2,623       2,640  

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF CASH FLOWS

                       
(in millions) (unaudited)

2005 2004
Six Months Ended June 30, (Restated) (Restated)

Summary:
               
 
Net cash provided by operating activities
  $ 13,817     $ 11,886  
 
Net cash used in investing activities
    (35,358 )     (50,707 )
 
Net cash provided by financing activities
    22,097       39,807  
 
Effect of exchange rate changes on cash
    (827 )     125  

 
Change in cash
    (271 )     1,111  
 
Cash at beginning of period
    2,009       922  

 
Cash at end of period
  $ 1,738     $ 2,033  

Cash flows from operating activities:
               
 
Net income
  $ 8,288     $ 5,578  

 
Adjustments to reconcile net income to net cash provided by operating activities:
               
   
Noncash revenues, expenses, gains and losses included in income:
               
   
Change in:
               
     
General and life insurance reserves
    7,562       10,357  
     
Premiums and insurance balances receivable and payable – net
    87       (1,159 )
     
Reinsurance assets
    137       213  
     
Deferred policy acquisition costs
    (1,267 )     (1,504 )
     
Investment income due and accrued
    (91 )     (378 )
     
Funds held under reinsurance treaties
    376       376  
     
Other policyholders’ funds
    52       415  
     
Current and deferred income taxes – net
    1,170       1,256  
     
Reserve for commissions, expenses and taxes
    119       (503 )
     
Other assets and liabilities – net
    (476 )     (456 )
     
Bonds and common stocks trading, at market value
    (1,775 )     (1,277 )
     
Trading assets and liabilities – net
    1,111       (341 )
     
Trading securities, at market value
    (1,181 )     (156 )
     
Spot commodities
    80       (440 )
     
Net unrealized (gain) loss on swaps, options and forward transactions
    (788 )     529  
     
Securities purchased under agreements to resell
    13,696       (2,490 )
     
Securities sold under agreements to repurchase
    (13,084 )     1,974  
     
Securities and spot commodities sold but not yet purchased, at market value
    (534 )     (434 )
   
Realized capital (gains) losses
    (12 )     (3 )
   
Equity in income of partially owned companies and other invested assets
    (899 )     (637 )
   
Amortization of premium and discount on securities
    187       115  
   
Depreciation expenses, principally flight equipment
    836       997  
   
Provision for finance receivable losses
    175       186  
   
Other – net
    48       (332 )

   
Total adjustments
    5,529       6,308  

Net cash provided by operating activities
  $ 13,817     $ 11,886  

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

                 
(in millions) (unaudited)

2005 2004
Six Months Ended June 30, (Restated) (Restated)

Cash flows from investing activities:
               
    Cost of bonds, at market sold
  $ 62,719     $ 63,968  
    Cost of bonds, at market matured or redeemed
    7,717       6,867  
    Cost of equity securities sold
    5,896       6,648  
    Realized capital gains (losses)
    12       3  
    Purchases of fixed maturities
    (86,153 )     (95,829 )
    Purchases of equity securities
    (7,151 )     (6,788 )
    Mortgage, policy and collateral loans granted
    (2,702 )     (875 )
    Repayments of mortgage, policy and collateral loans
    1,520       1,074  
    Sales of securities available for sale
    1,949       1,058  
    Maturities of securities available for sale
    2,451       2,097  
    Purchases of securities available for sale
    (7,350 )     (5,003 )
    Sales of flight equipment
    243       1,127  
    Purchases of flight equipment
    (4,243 )     (3,299 )
    Change in securities lending collateral
    (7,156 )     (16,698 )
    Net additions to real estate and other fixed assets
    (400 )     (337 )
    Sales or distributions of other invested assets
    5,835       4,581  
    Investments in other invested assets
    (7,169 )     (6,375 )
    Change in short-term investments
    1,992       1  
    Investments in partially owned companies
    (3 )     (1 )
    Finance receivable originations and purchases
    (23,778 )     (11,756 )
    Finance receivable principal payments received
    20,413       8,830  

Net cash used in investing activities
  $ (35,358 )   $ (50,707 )

Cash flows from financing activities:
               
    Receipts from policyholders’ contract deposits
  $ 26,038     $ 27,129  
    Withdrawals from policyholders’ contract deposits
    (17,032 )     (11,026 )
    Change in trust deposits and deposits due to banks and other depositors
    (94 )     210  
    Change in commercial paper
    3,171       2,712  
    Proceeds from notes, bonds, loans and mortgages payable
    25,645       14,837  
    Repayments on notes, bonds, loans and mortgages payable
    (23,903 )     (11,272 )
    Proceeds from guaranteed investment agreements
    6,760       4,318  
    Maturities of guaranteed investment agreements
    (4,880 )     (3,171 )
    Change in securities lending payable
    7,156       16,698  
    Proceeds from common stock issued
    36       90  
    Cash dividends to shareholders
    (641 )     (339 )
    Acquisition of treasury stock
    (168 )     (380 )
    Other – net
    9       1  

Net cash provided by financing activities
  $ 22,097     $ 39,807  

Supplementary information:
               
Taxes paid
  $ 1,466     $ 1,657  

Interest paid
  $ 2,649     $ 2,139  

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

                                     
(in millions) (unaudited)

Six Months Three Months
Ended June 30, Ended June 30,


2005 2005
(Restated) 2004 (Restated) 2004

Comprehensive income (loss):
                               
 
Net income
  $ 8,288     $ 5,578     $ 4,489     $ 3,080  

Other comprehensive income (loss):
                               
 
Unrealized appreciation (depreciation) of investments – net of reclassification adjustments
    2,282       (5,865 )     4,817       (10,411 )
   
Deferred income tax (expense) benefit on above changes
    (503 )     2,033       (1,759 )     3,469  
 
Foreign currency translation adjustments
    (826 )     120       (773 )     (182 )
   
Applicable income tax benefit (expense) on above changes
    501       (17 )     497       17  
 
Net derivative gains (losses) arising from cash flow hedging activities
    70       64       (80 )     43  
   
Deferred income tax (expense) benefit on above changes
    (71 )     (13 )     40       (16 )
 
Retirement plan liabilities adjustment, net of tax
    (28 )     (9 )     2       18  

Other comprehensive income (loss)
    1,425       (3,687 )     2,744       (7,062 )

Comprehensive income (loss)
  $ 9,713     $ 1,891     $ 7,233     $ (3,982 )

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 
  1.  Financial Statement Presentation

These statements are unaudited. In the opinion of management, adjustments including normal recurring accruals have been made for a fair statement of the results presented herein. Intercompany accounts and transactions have been eliminated. Certain accounts have been reclassified in the 2004 financial statements to conform to their 2005 presentation. For further information, refer to the Annual Report on Form 10-K of American International Group, Inc. (AIG) for the year ended December 31, 2005 (2005 Annual Report on Form 10-K).

     As more fully described in AIG’s 2004 Annual Report on Form 10-K for the year ended December 31, 2004, which was originally filed May 31, 2005 (2004 Annual Report on Form 10-K), and AIG’s Forms 10-Q/A for the quarterly periods ended March 31, 2004 and June 30, 2004, AIG restated the accounting for certain transactions and certain relationships for the quarters ended March 31, 2004 and June 30, 2004, as part of the restatement of its financial statements for the years ended December 31, 2003, 2002, 2001 and 2000, the quarters ended March 31, June 30 and September 30, 2004 and 2003 and the quarter ended December 31, 2003 (the First Restatement).

     As announced on November 9, 2005, AIG identified certain errors, the preponderance of which were identified during the remediation of the material weaknesses in internal control over financial reporting, principally relating to internal controls surrounding accounting for derivatives and related assets and liabilities under FAS 133, reconciliation of certain balance sheet accounts and income tax accounting. Due to the significance of these corrections, AIG restated its consolidated financial statements for the years ended December 31, 2004, 2003 and 2002, along with 2001 and 2000 for purposes of preparation of the Selected Consolidated Financial Data for 2001 and 2000, and quarterly financial information for 2004 and 2003 and the first three quarters of 2005 (the Second Restatement, and together with the First Restatement, the Restatements). As part of the Second Restatement, AIG also corrected errors that have been identified since the First Restatement, including those relating to the accounting for certain payments received from aircraft and engine manufacturers by International Lease Finance Corporation (ILFC), which were originally corrected as an out-of-period item in AIG’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (Second Quarter Form 10-Q).

 
  2.  Restatements of Previously Issued
Financial Statements

The following provides a description of the accounting adjustments included in the Restatements of AIG’s consolidated financial statements and the effect of the adjustments on AIG’s Consolidated Balance Sheet at June 30, 2005 and December 31, 2004 and its Consolidated Statement of Income for the three and six month periods ended June 30, 2005 and 2004 and Consolidated Statement of Cash Flows for the six months ended June 30, 2005 and 2004. All prior period amounts included in this report affected by the Restatements are presented on a restated basis.

(a) First Restatement

     In connection with the preparation of AIG’s consolidated financial statements included in AIG’s 2004 Annual Report on Form 10-K, AIG’s management initiated an internal review of its books and records, which was substantially expanded in mid-March 2005 with the oversight of the Audit Committee of the Board of Directors of AIG. The review spanned AIG’s major business units globally, and included a number of transactions from 2000 to 2004. As disclosed in the 2004 Annual Report on Form 10-K, as a result of the findings of the internal review, together with the results of investigations by outside counsel at the request of AIG’s Audit Committee and in consultation with PricewaterhouseCoopers LLP, AIG’s independent registered public accounting firm, AIG restated its consolidated financial statements and financial statement schedules for the years ended December 31, 2003, 2002, 2001 and 2000, the quarters ended March 31, June 30 and September 30, 2004 and 2003 and the quarter ended December 31, 2003 (the First Restatement).

     AIG disclosed in its 2004 Annual Report on Form 10-K that it had identified a number of material weaknesses in internal control over financial reporting, including controls over certain balance sheet reconciliations, controls over the accounting for certain derivative transactions and controls over income tax accounting. AIG has been and continues to be actively engaged in the implementation of remediation efforts to address all of these material weaknesses in internal control over financial reporting.

     See Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 2 of Notes to Consolidated Financial Statements in the 2004 Annual Report on Form 10-K for a discussion of the First Restatement and a reconciliation of previously reported amounts to the restated amounts for the years ended December 31, 2003, 2002, 2001 and 2000, and see below for reconciliation of such amounts for the three and six month periods ended June 30, 2004.

(b) Second Restatement

     As announced on November 9, 2005, AIG identified certain additional errors, the preponderance of which were identified during the remediation of the material weaknesses in internal control over financial reporting, principally relating to internal controls surrounding accounting for derivatives and related assets and liabilities under FAS 133, reconciliation of certain balance sheet accounts and income tax accounting.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  2.  Restatement of Previously Issued
Financial Statements 
(continued)

     AIG also announced it was correcting errors that were identified since the First Restatement, including those relating to the accounting for certain payments received from aircraft and engine manufacturers by ILFC, which were originally corrected in AIG’s Second Quarter Form 10-Q. The adjustments to correct the foregoing errors are referred to in this Second Quarter Form 10-Q/A as the Initial Adjustments.

     In connection with the remediation of material weaknesses in internal control over financial reporting referred to above, AIG identified certain additional errors, principally relating to internal controls over reconciliation of certain balance sheet accounts in DBG. As a result, AIG included further adjustments (the Additional Adjustments) in its restatement of the consolidated financial statements and financial statement schedules for the years ended December 31, 2004, 2003 and 2002, along with 2001 and 2000 for purposes of preparation of the Selected Consolidated Financial Data for 2001 and 2000, and quarterly financial information for 2004 and 2003 and is restating the first three quarters of 2005. The Initial Adjustments and the Additional Adjustments are referred to herein as the Second Restatement. AIG’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 will not be amended because the Additional Adjustments to the financial statements included therein are not material to those financial statements.

     Details of the Initial Adjustments in the Second Restatement. The accounting adjustments relate primarily to the categories described below.

Accounting for Derivatives (FAS 133 Hedge Accounting). During the third quarter of 2005, AIG identified and corrected additional errors identified during the remediation of the previously disclosed material weakness in internal controls surrounding accounting for derivatives and related assets and liabilities under FAS 133.

Included in the Initial Adjustments to correct AIG’s accounting for derivatives are adjustments correcting the errors in accounting for certain secured financings where AIGFP had sold an available-for-sale security and concurrently entered into a total return swap with a repurchase obligation. The Initial Adjustments for these errors increased both securities available for sale, at market value, and securities sold under agreements to repurchase, by approximately $2 billion as of December 31, 2004.
 
The Initial Adjustments to reflect appropriate GAAP accounting for these derivatives and related assets and liabilities, including related currency translation gains and losses, increased net income by approximately $241 million and $311 million and by approximately $465 million and $437 million for the three and six month periods ended June 30, 2005 and 2004, respectively, and increased total shareholders’ equity by approximately $367 million as of December 31, 2004.

Asset Realization — Domestic Brokerage Group (DBG) Issues. During the third quarter of 2005, AIG concluded that additional adjustments should be made to the value of certain DBG reserves and allowances for doubtful accounts for time periods prior to January 1, 2003, resulting in an after-tax reduction in total shareholders’ equity at December 31, 2004 of approximately $205 million. The adjustments had no effect on net income for the three and six month periods ended June 30, 2005 and 2004.
 
Income Tax Accounting. During the third quarter of 2005, AIG identified and corrected additional errors in its income tax accounting. The most significant adjustment resulted from AIG incorrectly recording the income tax benefit resulting from employee exercises of stock options as a reduction in income tax expense rather than as an increase in additional paid-in capital as required by GAAP. This adjustment has no effect on total shareholders’ equity. The effect of the income tax adjustments was to increase total tax expense by approximately $99 million and $135 million and by approximately $5 million and $10 million for the three and six month periods ended June 30, 2005 and 2004, respectively, and to increase total shareholders’ equity as of December 31, 2004 by approximately $131 million.
 
Manufacturers’ Payments Received by ILFC. In the course of the ILFC review of its application of FAS 133 in connection with AIG’s internal review, ILFC, in consultation with its independent registered public accounting firm, identified an error in its accounting for certain payments received from aircraft and engine manufacturers. Under arrangements with these manufacturers, in certain circumstances, the manufacturers established notional accounts for the benefit of ILFC to which amounts were credited by the manufacturers in connection with the purchase by and delivery to ILFC and the lease of aircraft. Amounts credited to the notional accounts were used at ILFC’s direction to protect ILFC from certain events, including loss when airline customers of ILFC defaulted on lease payment obligations, to provide lease subsidies and other incentives to ILFC’s airline customers in connection with leases of certain aircraft, and to reduce ILFC’s cost of aircraft purchased.

Historically, ILFC recorded as revenues gross lease receipts from lessees who had received lease subsidies from the notional accounts and amounts paid directly to ILFC from the notional accounts in connection with

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  2.  Restatement of Previously Issued
Financial Statements 
(continued)

lessee defaults. Amounts recorded as revenue at the time they were disbursed to ILFC or its lessees should have been recorded as a reduction of the purchase price of the aircraft at the time of delivery.

Although ILFC restated its financial statements for the years 2000 through 2004 and for the quarter ended March 31, 2005 to correct its accounting for the payments from aircraft and engine manufacturers described above, AIG had previously considered these adjustments not to be sufficiently material to require correction by restatement in AIG’s consolidated financial statements. The effect of the adjustments included in the Second Restatement relating to the manufacturers’ payments was to increase other revenues and net income by approximately $755 million and $334 million and by approximately $724 million and $322 million for the three and six month periods ended June 30, 2005, respectively, and decrease other revenues and net income by approximately $32 million and $14 million and by approximately $50 million and $18 million for the three and six month periods ended June 30, 2004, respectively.

     Details of Additional Adjustments in the Second Restatement. The accounting adjustments relate primarily to the categories described below.

Asset Realization and Revenue Recognition — Domestic Brokerage Group (DBG) Issues. During the remediation of material weaknesses in internal controls, AIG concluded that additional adjustments should be made to the value of certain DBG reserves and allowances for doubtful accounts, and revisions were necessary to the revenues previously recognized for certain long-tail environmental policies.

The Additional Adjustments to reflect the asset realization and revenue recognition revisions increased net income by approximately $14 million and $13 million and by approximately $18 million and $18 million for the three and six month periods ended June 30, 2005 and 2004, respectively, and decreased total shareholders’ equity by approximately $543 million and $534 million as of June 30, 2005 and December 31, 2004, respectively.

Accounting for Derivatives and Related Assets and Liabilities (FAS 133 Hedge Accounting). During the fourth quarter of 2005, AIG identified and corrected additional errors identified during the remediation of the previously disclosed material weaknesses in internal controls surrounding accounting for derivatives and related assets and liabilities under FAS 133.

The Additional Adjustments to reflect appropriate GAAP accounting for these derivatives which also included related currency translation gains and losses, decreased other revenue by approximately $13 million and increased other revenue by approximately $66 million and decreased other revenue by approximately $47 million and $73 million for the three and six month periods ended June 30, 2005 and 2004, respectively, and decreased net income by approximately $31 million and $20 million and by approximately $28 million and $42 million for the three and six month periods ended June 30, 2005 and 2004, respectively. The additional adjustments also decreased total shareholders’ equity by approximately $19 million and $65 million as of June 30, 2005 and December 31, 2004, respectively.

Income Tax Accounting. During the fourth quarter of 2005, AIG identified and corrected additional errors in its income tax accounting. The income tax adjustments decreased income tax expense and increased net income by approximately $22 million and $46 million and increased income tax expense and decreased net income by approximately $15 million and $28 million for the three and six month periods ended June 30, 2005 and 2004, respectively, and increased total shareholders’ equity by approximately $6 million and decreased total shareholders’ equity by approximately $98 million as of June 30, 2005 and December 31, 2004, respectively.
 
Statement of Cash Flows Classification of Certain Trading Securities. AIG identified and corrected the classification of certain trading securities activity from investing activities to operating activities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  2.  Restatement of Previously Issued
Financial Statements 
(continued)

The following tables present the previously reported and the restated Consolidated Balance Sheet, Consolidated Statement of Income, and Condensed Consolidated Statement of Cash Flows:

CONSOLIDATED BALANCE SHEET

                               
June 30, 2005

As Previously As
(in millions) (unaudited) Reported Restated December 31, 2004

Assets:
                       
  Investments and financial services assets:                        
    Fixed maturities:                        
     
Bonds available for sale, at market value
  $ 361,100     $ 361,100     $ 344,399  
     
Bonds held to maturity, at amortized cost
    21,472       21,472       18,294  
     
Bond trading securities, at market value
    3,579       3,579       2,984  
    Equity securities:                        
     
Common stocks available for sale, at market value
    11,148       11,003       9,772  
     
Common stocks trading, at market value
    7,074       7,074       5,894  
     
Preferred stocks, at market value
    2,444       2,444       2,040  
   
Mortgage loans on real estate, net of allowance
    14,251       14,251       13,146  
   
Policy loans
    7,100       7,100       7,035  
   
Collateral and guaranteed loans, net of allowance
    2,215       3,295       3,303  
    Financial services assets:                        
     
Flight equipment primarily under operating leases, net of accumulated depreciation
    35,689       35,690       32,130  
     
Securities available for sale, at market value
    33,056       33,120       31,225  
     
Trading securities, at market value
    4,318       3,927       2,746  
     
Spot commodities
    31       454       534  
     
Unrealized gain on swaps, options and forward transactions
    21,388       21,388       22,670  
     
Trading assets
    1,931       2,055       3,433  
     
Securities purchased under agreements to resell, at contract value
    12,576       12,576       26,272  
     
Finance receivables, net of allowance
    26,763       26,763       23,574  
   
Securities lending collateral, at market value (which approximates cost)
    57,128       56,325       49,169  
    Other invested assets     25,001       26,311       23,559  
    Short-term investments, at cost     17,465       17,465       16,102  

      Total investments and financial services assets     665,729       667,392       638,281  
  Cash     1,738       1,738       2,009  
  Investment income due and accrued     5,676       5,647       5,556  
 
Premiums and insurance balances receivable, net of allowance
    15,313       15,806       15,622  
  Reinsurance assets, net of allowance     19,824       19,476       19,613  
  Deferred policy acquisition costs     30,812       30,909       29,817  
  Investments in partially owned companies     1,310       1,389       1,495  
 
Real estate and other fixed assets, net of accumulated depreciation
    6,225       6,225       6,192  
  Separate and variable accounts     58,463       58,463       57,741  
  Goodwill     8,423       8,378       8,556  
  Income taxes receivable - current     924       772       138  
  Other assets     14,205       14,972       16,125  

Total assets
  $ 828,642     $ 831,167     $ 801,145  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  2.  Restatement of Previously Issued
Financial Statements 
(continued)

CONSOLIDATED BALANCE SHEET (continued)

                             
June 30, 2005

As Previously As
(in millions) (unaudited) Reported Restated December 31, 2004

Liabilities:
                       
 
Reserve for losses and loss expenses
  $ 65,327     $ 64,829     $ 61,878  
 
Reserve for unearned premiums
    24,077       24,435       23,400  
 
Future policy benefits for life and accident and health insurance contracts
    108,208       108,192       104,740  
 
Policyholders’ contract deposits
    225,839       225,619       216,474  
 
Other policyholders’ funds
    10,332       10,332       10,280  
 
Reserve for commissions, expenses and taxes
    4,754       4,748       4,629  
 
Insurance balances payable
    3,968       3,932       3,661  
 
Funds held by companies under reinsurance treaties
    3,780       3,780       3,404  
 
Deferred income taxes payable
    9,657       9,259       6,588  
 
Financial services liabilities:
                       
   
Borrowings under obligations of guaranteed investment agreements
    20,799       20,799       18,919  
   
Securities sold under agreements to repurchase, at contract value
    8,303       10,497       23,581  
   
Trading liabilities
    2,037       2,236       2,503  
   
Securities and spot commodities sold but not yet purchased, at market value
    4,343       4,870       5,404  
   
Unrealized loss on swaps, options and forward transactions
    15,447       13,915       15,985  
   
Trust deposits and deposits due to banks and other depositors
    4,154       4,154       4,248  
   
Commercial paper
    8,980       8,980       6,724  
   
Notes, bonds, loans and mortgages payable
    62,673       63,077       61,296  
 
Commercial paper
    3,884       3,884       2,969  
 
Notes, bonds, loans and mortgages payable
    5,274       5,274       5,502  
 
Liabilities connected to trust preferred stock
    1,489       1,489       1,489  
 
Separate and variable accounts
    58,463       58,463       57,741  
 
Minority interest
    5,119       5,368       4,831  
 
Securities lending payable
    57,128       57,128       49,972  
 
Other liabilities
    25,532       27,098       25,055  

Total liabilities
    739,567       742,358       721,273  

Preferred shareholders’ equity in subsidiary companies
    196       196       199  

Shareholders’ equity:
                       
 
Common stock
    6,878       6,878       6,878  
 
Additional paid-in capital
    2,069       2,182       2,094  
 
Retained earnings
    71,428       70,985       63,468  
 
Accumulated other comprehensive income (loss)
    10,805       10,869       9,444  
 
Treasury stock, at cost
    (2,301 )     (2,301 )     (2,211 )

Total shareholders’ equity
    88,879       88,613       79,673  

Total liabilities, preferred shareholders’ equity in subsidiary companies and shareholders’ equity
  $ 828,642     $ 831,167     $ 801,145  

12


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  2.  Restatement of Previously Issued
Financial Statements 
(continued)

CONSOLIDATED STATEMENT OF INCOME

                                                                     
For the For the For the For the
Six Months Ended Six Months Ended Three Months Ended Three Months Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004




(in millions, except per share data) As Previously As As Previously As
(unaudited) Reported Restated Reported Restated

Revenues:
                                                               
 
Premiums and other considerations
  $ 35,223     $ 35,216             $ 32,154     $ 17,541     $ 17,536             $ 16,175  
 
Net investment income
    10,490       10,559               9,141       5,198       5,227               4,541  
 
Realized capital gains (losses)
    333       12               3       245       (125 )             89  
 
Other revenues
    7,927       9,318               6,013       3,877       5,265               3,284  

 
Total revenues
    53,973       55,105               47,311       26,861       27,903               24,089  

Benefits and expenses:
                                                               
 
Incurred policy losses and benefits
    29,201       29,156               27,070       14,336       14,283               13,480  
 
Insurance acquisition and other operating expenses
    13,534       13,599               11,750       6,730       6,919               5,960  

 
Total benefits and expenses
    42,735       42,755               38,820       21,066       21,202               19,440  

Income before income taxes, minority interest and cumulative effect of an accounting change
    11,238       12,350               8,491       5,795       6,701               4,649  

Income taxes (benefits):
                                                               
 
Current
    1,777       1,983               2,437       790       1,015               1,092  
 
Deferred
    1,510       1,806               157       884       1,068               372  

      3,287       3,789               2,594       1,674       2,083               1,464  

Income before minority interest and cumulative effect of an accounting change
    7,951       8,561               5,897       4,121       4,618               3,185  

Minority interest
    (275 )     (273 )             (175 )     (129 )     (129 )             (105 )

Income before cumulative effect of an accounting change
    7,676       8,288               5,722       3,992       4,489               3,080  

Cumulative effect of an accounting change, net of tax
                        (144 )                          

Net income
  $ 7,676     $ 8,288             $ 5,578     $ 3,992     $ 4,489             $ 3,080  

Earnings per common share:
                                                               
 
Basic
                                                               
   
Income before cumulative effect of an accounting change
  $ 2.96     $ 3.19             $ 2.20     $ 1.54     $ 1.73             $ 1.19  
   
Cumulative effect of an accounting change, net of tax
                        (0.06 )                          
   
Net income
  $ 2.96     $ 3.19             $ 2.14     $ 1.54     $ 1.73             $ 1.19  

 
Diluted
                                                               
   
Income before cumulative effect of an accounting change
  $ 2.93     $ 3.16             $ 2.17     $ 1.53     $ 1.71             $ 1.17  
   
Cumulative effect of an accounting change, net of tax
                        (0.06 )                          
   
Net income
  $ 2.93     $ 3.16             $ 2.11     $ 1.53     $ 1.71             $ 1.17  

Dividends declared per common share
  $ 0.300     $ 0.300             $ 0.140     $ 0.125     $ 0.125             $ 0.075  

Average shares outstanding:
                                                               
 
Basic
    2,596       2,596               2,609       2,596       2,596               2,608  
 
Diluted
    2,623       2,623               2,641       2,623       2,623               2,640  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  2.  Restatement of Previously Issued
Financial Statements 
(continued)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

                         
Six Months Ended Six
June 30, 2005 Months

Ended
As Previously As June 30,
(in millions) (unaudited) Reported Restated 2004

Net cash provided by operating activities
  $ 13,605     $ 13,817     $ 11,886  
Net cash used in investing activities
    (29,244 )     (35,358 )     (50,707 )
Net cash provided by financing activities
    16,212       22,097       39,807  
Effect of exchange rate changes on cash
    (844 )     (827 )     125  

Change in cash
    (271 )     (271 )     1,111  
Cash at beginning of period
    2,009       2,009       922  

Cash at end of period
  $ 1,738     $ 1,738     $ 2,033  

The following two tables reflect the effect of the aforementioned adjustments on each component of revenue:

                                               
For the Six Months Ended June 30, 2005 Premiums and Net Investment Realized Capital Other Total
(in millions) (unaudited) Other Considerations Income Gains (Losses) Revenues Revenues

As Previously Reported
  $ 35,223     $ 10,490     $ 333     $ 7,927     $ 53,973  
Initial Adjustments in the Second Restatement:
                                       
 
Accounting for Derivatives (FAS 133 Hedge Accounting)
          9       (202 )     597       404  
 
Manufacturers Payment Received by ILFC
                      724       724  
 
All Other Adjustments — Net
    3       68       6       3       80  

     
Total Initial Adjustments in the Second Restatement
    3       77       (196 )     1,324       1,208  

Revenues, as Restated in the Initial Adjustments
    35,226       10,567       137       9,251       55,181  

Additional Adjustments in the Second Restatement:
                                       
 
Asset Realization:
                                       
   
Domestic Brokerage Group (DBG) Issues
    (8 )     36                   28  
 
All Other Adjustments — Net
    (2 )     (44 )     (125 )     67       (104 )

     
Total Additional Adjustments in the Second Restatement
    (10 )     (8 )     (125 )     67       (76 )

Revenues, as Restated in the Second Restatement
  $ 35,216     $ 10,559     $ 12     $ 9,318     $ 55,105  

14


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  2.  Restatement of Previously Issued
Financial Statements 
(continued)
                                               
For the Six Months Ended June 30, 2004 Premiums and Net Investment Realized Capital Other Total
(in millions) (unaudited) Other Considerations Income Gains (Losses) Revenues Revenues

As Previously Reported
  $ 32,460     $ 9,376     $ (60 )   $ 5,670     $ 47,446  
Adjustments in the First Restatement:
                                       
 
Risk Transfer:
                                       
   
Union Excess
    193       130       (24 )           299  
   
Other Risk Transfer
    (126 )     (4 )                 (130 )
 
Net Investment Income:
                                       
   
Covered Calls
          19       41             60  
   
Synthetic Fuel Investment
          (135 )           (98 )     (233 )
   
Hedge Fund Accounting
          24             (17 )     7  
   
Muni Tender Option Bond Program
          40       19             59  
   
DBG/AIG Capital Corporation Intercompany Dividend
          (50 )                 (50 )
 
“Top Level” Adjustments and Other Directed Entries (other than loss reserves)
    69       (190 )     43       38       (40 )
 
Conversion of Underwriting Losses to Capital Losses
                92             92  
 
Asset Realization:
                                       
   
Other Than Temporary Declines
                40             40  
 
Other GAAP Corrections:
                                       
   
Accounting for Derivatives (FAS 133 Hedge Accounting)
                (83 )     (234 )     (317 )
   
Foreign Currency Translation (FAS 52)
                (27 )           (27 )
   
Life Settlements
    (375 )     (72 )                 (447 )
   
Commutations
    3                         3  
   
Dollar Roll Transactions
                (67 )           (67 )
 
All Other Adjustments — Net
    (46 )     (72 )           303       185  

     
Total Adjustments in the First Restatement
    (282 )     (310 )     34       (8 )     (566 )

As Adjusted in the First Restatement
    32,178       9,066       (26 )     5,662       46,880  

Initial Adjustments in the Second Restatement:
                                       
 
Accounting for Derivatives (FAS 133 Hedge Accounting)
                27       443       470  
 
Manufacturers Payments Received by ILFC
                      (50 )     (50 )
 
All Other Adjustments — Net
    3       (4 )           5       4  

     
Total Initial Adjustments in the Second Restatement
    3       (4 )     27       398       424  

Revenues, as Restated in the Initial Adjustments
    32,181       9,062       1       6,060       47,304  

Additional Adjustments in the Second Restatement:
                                       
 
Asset Realization:
                                       
   
Domestic Brokerage Group (DBG) Issues
    (34 )     77                   43  
 
All Other Adjustments — Net
    7       2       2       (47 )     (36 )

     
Total Additional Adjustments in the Second Restatement
    (27 )     79       2       (47 )     7  

Revenues, as Restated in the Second Restatement
  $ 32,154     $ 9,141     $ 3     $ 6,013     $ 47,311  

15


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  2.  Restatement of Previously Issued
Financial Statements 
(continued)

The following two tables reflect the effect of the aforementioned adjustments on each component of Benefits and Expenses:

                               
For the Six Months Ended June 30, 2005 Incurred Policy Insurance Acquisition and Total Benefits
(in millions) (unaudited) Losses and Benefits Other Operating Expenses and Expenses

As Previously Reported
  $ 29,201     $ 13,534     $ 42,735  
Initial Adjustments in the Second Restatement:
                       
 
Accounting for Derivatives (FAS 133 Hedge Accounting)
          (116 )     (116 )
 
Manufacturers Payments Received by ILFC
          228       228  
 
All Other Adjustments — Net
    (39 )     (61 )     (100 )

     
Total Initial Adjustments in the Second Restatement
    (39 )     51       12  

Revenues, as Restated in the Initial Adjustments
    29,162       13,585       42,747  

Additional Adjustments in the Second Restatement:
                       
 
Asset Realization:
                       
   
Domestic Brokerage Group (DBG) Issues
    (6 )     12       6  
 
All Other Adjustments — Net
          2       2  

     
Total Additional Adjustments in the Second Restatement
    (6 )     14       8  

Revenues, as Restated in the Second Restatement
  $ 29,156     $ 13,599     $ 42,755  

16


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  2.  Restatement of Previously Issued
Financial Statements 
(continued)
                               
For the Six Months Ended June 30, 2004 Incurred Policy Insurance Acquisition and Total Benefits
(in millions) (unaudited) Losses and Benefits Other Operating Expenses and Expenses

As Previously Reported
  $ 27,275     $ 11,491     $ 38,766  
Adjustments in the First Restatement:
                       
 
Risk Transfer:
                       
   
Union Excess
    335       24       359  
   
Other Risk Transfer
    (68 )     (24 )     (92 )
 
Loss Reserves
    90             90  
 
Net Investment Income:
                       
   
DBG/AIG Capital Corporation Intercompany Dividend
          (50 )     (50 )
 
“Top Level” Adjustments and Other Directed
Entries (other than loss reserves)
    30       (133 )     (103 )
 
Conversion of Underwriting Losses to Capital Losses
          (2 )     (2 )
 
Asset Realization:
                       
   
Domestic Brokerage Group (DBG) Issues
          14       14  
 
Other GAAP Corrections:
                       
   
Accounting for Derivatives (FAS 133 Hedge Accounting)
          11       11  
   
Foreign Currency Translation (FAS 52)
          (6 )     (6 )
   
Life Settlements
    (345 )           (345 )
   
Deferred Acquisition Costs (DAC)
    (130 )     155       25  
   
SICO Deferred Compensation
          28       28  
   
Commutations
    3             3  
 
All Other Adjustments — Net
    (89 )     359       270  

     
Total Adjustments in the First Restatement
    (174 )     376       202  

As Adjusted in the First Restatement
    27,101       11,867       38,968  

Initial Adjustments in the Second Restatement:
                       
 
Accounting for Derivatives (FAS 133 Hedge Accounting)
          (155 )     (155 )
 
Manufacturers Payments Received by ILFC
          (22 )     (22 )
 
All Other Adjustments — Net
    6       6       12  

     
Total Initial Adjustments in the Second Restatement
    6       (171 )     (165 )

Benefits and Expenses, as Restated in the Initial Adjustments
    27,107       11,696       38,803  

Additional Adjustments in the Second Restatement:
                       
 
Asset Realization:
                       
   
Domestic Brokerage Group (DBG) Issues
    (36 )     51       15  
 
All Other Adjustments — Net
    (1 )     3       2  

     
Total Additional Adjustments in the Second Restatement
    (37 )     54       17  

Benefits and Expenses, as Restated in the Second Restatement
  $ 27,070     $ 11,750     $ 38,820  

17


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  2.  Restatement of Previously Issued
Financial Statements 
(continued)

The following table reflects the effect of the aforementioned adjustments on income taxes:

                       
For the Six Months Ended June 30,
(in millions) (unaudited) 2005 2004

Income Taxes, as Previously Reported
  $ 3,287     $ 2,757  
Adjustments in the First Restatement:
               
 
Risk Transfer:
               
   
Union Excess
          (21 )
   
Other Risk Transfer
          (15 )
 
Loss Reserves
          (32 )
 
Net Investment Income:
               
   
Covered Calls
          21  
   
Synthetic Fuel Investment
          (233 )
   
“Top Level” Adjustments and Other Directed Entries (other than loss reserves)
          22  
 
Asset Realization:
               
   
Domestic Brokerage Group (DBG) Issues
          17  
   
Other Than Temporary Declines
          14  
 
Other GAAP Corrections:
               
   
Accounting for Derivatives (FAS 133 Hedge Accounting)
          (115 )
   
Accounting for Deferred Taxes
          (14 )
   
Foreign Currency Translation (FAS 52)
          (9 )
   
Life Settlements
          (36 )
   
Deferred Acquisition Costs (DAC)
          (7 )
 
All Other Adjustments — Net
          38  

     
Total Adjustments in the First Restatement
          (370 )

Income Taxes, as Adjusted in the First Restatement
    3,287       2,387  

Initial Adjustments in the Second Restatement:
               
 
Income Tax Accounting
    135       10  
 
All Other Adjustments — Net
    431       176  

     
Total Initial Adjustments in the Second Restatement
    566       186  

Income Taxes, as Restated in the Initial Adjustments
    3,853       2,573  

Additional Adjustments in the Second Restatement:
               
 
Income Tax Accounting
    (46 )     28  
 
All Other Adjustments — Net
    (18 )     (7 )

     
Total Additional Adjustments in the Second Restatement
    (64 )     21  

Income Taxes, as Restated in the Second Restatement
  $ 3,789     $ 2,594  

18


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  2.  Restatement of Previously Issued
Financial Statements 
(continued)

The following two tables reflect the effect of the aforementioned adjustments on each component of revenue:

                                               
For the Three Months Ended June 30, 2005 Premiums and Net Investment Realized Capital Other Total
(in millions) (unaudited) Other Considerations Income Gains (Losses) Revenues Revenues

As Previously Reported
  $ 17,541     $ 5,198     $ 245     $ 3,877     $ 26,861  
Initial Adjustments in the Second Restatement:
                                       
 
Accounting for Derivatives (FAS 133 Hedge Accounting)
          5       (305 )     645       345  
 
Manufacturers Payments Received by ILFC
                      755       755  
 
All Other Adjustments — Net
    3       15       6             24  

     
Total Initial Adjustments in the Second Restatement
    3       20       (299 )     1,400       1,124  

Revenues, as Restated in the Initial Adjustments
    17,544       5,218       (54 )     5,277       27,985  

Additional Adjustments in the Second Restatement:
                                       
 
Asset Realization:
                                       
   
Domestic Brokerage Group (DBG) Issues
    (7 )     34                   27  
 
All Other Adjustments — Net
    (1 )     (25 )     (71 )     (12 )     (109 )

     
Total Additional Adjustments in the Second Restatement
    (8 )     9       (71 )     (12 )     (82 )

Revenues, as Restated in the Second Restatement
  $ 17,536     $ 5,227     $ (125 )   $ 5,265     $ 27,903  

19


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  2.  Restatement of Previously Issued
Financial Statements 
(continued)
                                               
Premiums and Net Realized
For the Three Months Ended June 30, 2004 Other Investment Capital Other Total
(in millions) (unaudited) Considerations Income Gains (Losses) Revenues Revenues

As Previously Reported
  $ 16,321     $ 4,656     $ (143 )   $ 2,975     $ 23,809  
Adjustments in the First Restatement:
                                       
 
Risk Transfer:
                                       
   
Union Excess
    96       65       (12 )           149  
   
Other Risk Transfer
    (77 )     (2 )                 (79 )
 
Net Investment Income:
                                       
   
Covered Calls
          9       23             32  
   
Synthetic Fuel Investment
          (74 )           (44 )     (118 )
   
Hedge Fund Accounting
          11                   11  
   
Muni Tender Option Bond Program
          19       11             30  
   
DBG/AIG Capital Corporation Intercompany Dividend
          (25 )                 (25 )
 
“Top Level” Adjustments and Other Directed Entries (other than loss reserves)
    25       (91 )     21       26       (19 )
 
Conversion of Underwriting Losses to Capital Losses
                19             19  
 
Other GAAP Corrections:
                                       
   
Accounting for Derivatives (FAS 133 Hedge Accounting)
                (2 )     (154 )     (156 )
   
Foreign Currency Translation (FAS 52)
                47             47  
   
Life Settlements
    (179 )     (33 )                 (212 )
   
Commutations
    43                         43  
   
Dollar Roll Transactions
                (105 )           (105 )
 
All Other Adjustments — Net
    (33 )     (44 )           156       79  

     
Total Adjustments in the First Restatement
    (125 )     (165 )     2       (16 )     (304 )

As Adjusted in the First Restatement
    16,196       4,491       (141 )     2,959       23,505  

Initial Adjustments in the Second Restatement:
                                       
 
Accounting for Derivatives (FAS 133 Hedge Accounting)
                222       390       612  
 
Manufacturers Payments Received by ILFC
                      (32 )     (32 )
 
All Other Adjustments — Net
    1       (2 )           2       1  

     
Total Initial Adjustments in the Second Restatement
    1       (2 )     222       360       581  

Revenues, as Restated in the Initial Adjustments
    16,197       4,489       81       3,319       24,086  

Additional Adjustments in the Second Restatement:
                                       
 
Asset Realization:
                                       
   
Domestic Brokerage Group (DBG) Issues
    (27 )     51                   24  
 
All Other Adjustments — Net
    5       1       8       (35 )     (21 )

     
Total Additional Adjustments in the Second Restatement
    (22 )     52       8       (35 )     3  

Revenues, as Restated in the Second Restatement
  $ 16,175     $ 4,541     $ 89     $ 3,284     $ 24,089  

20


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  2.  Restatement of Previously Issued
Financial Statements 
(continued)

The following two tables reflect the effect of the aforementioned adjustments on each component of Benefits and Expenses:

                               
For the Three Months Ended June 30, 2005 Incurred Policy Insurance Acquisition and Total Benefits
(in millions) (unaudited) Losses and Benefits Other Operating Expenses and Expenses

As Previously Reported
  $ 14,336     $ 6,730     $ 21,066  
Initial Adjustments in the Second Restatement:
                       
 
Accounting for Derivatives (FAS 133 Hedge Accounting)
          (51 )     (51 )
 
Manufacturers Payments Received by ILFC
          240       240  
 
All Other Adjustments — Net
    (42 )     (12 )     (54 )

     
Total Initial Adjustments in the Second Restatement
    (42 )     177       135  

Benefits and Expenses, as Restated in the Initial Adjustments
    14,294       6,907       21,201  

Additional Adjustments in the Second Restatement:
                       
 
Asset Realization:
                       
   
Domestic Brokerage Group (DBG) Issues
    (7 )     11       4  
 
All Other Adjustments — Net
    (4 )     1       (3 )

     
Total Additional Adjustments in the Second Restatement
    (11 )     12       1  

Benefits and Expenses, as Restated in the Second Restatement
  $ 14,283     $ 6,919     $ 21,202  

                               
For the Three Months Ended June 30, 2004 Incurred Policy Insurance Acquisition and Total Benefits
(in millions) (unaudited) Losses and Benefits Other Operating Expenses and Expenses

As Previously Reported
  $ 13,541     $ 5,879     $ 19,420  
Adjustments in the First Restatement:
                       
 
Risk Transfer:
                       
   
Union Excess
    167       12       179  
   
Other Risk Transfer
    (21 )     (8 )     (29 )
 
Loss Reserves
    30             30  
 
Net Investment Income:
                       
   
DBG/AIG Capital Corporation Intercompany Dividend
          (25 )     (25 )
 
“Top Level” Adjustments and Other Directed
Entries (other than loss reserves)
    5       (65 )     (60 )
 
Conversion of Underwriting Losses to Capital Losses
          (1 )     (1 )
 
Asset Realization:
                       
   
Domestic Brokerage Group (DBG) Issues
          (33 )     (33 )
 
Other GAAP Corrections:
                       
   
Accounting for Derivatives (FAS 133 Hedge Accounting)
          31       31  
   
Foreign Currency Translation (FAS 52)
          (8 )     (8 )
   
Life Settlements
    (165 )           (165 )
   
Deferred Acquisition Costs (DAC)
    (56 )     50       (6 )
   
SICO Deferred Compensation
          14       14  
   
Commutations
    43             43  
 
All Other Adjustments — Net
    (40 )     182       142  

     
Total Adjustments in the First Restatement
    (37 )     149       112  

As Adjusted in the First Restatement
    13,504       6,028       19,532  

Initial Adjustments in the Second Restatement:
                       
 
Accounting for Derivatives (FAS 133 Hedge Accounting)
          (89 )     (89 )
 
Manufacturers Payments Received by ILFC
          (11 )     (11 )
 
All Other Adjustments — Net
    4       5       9  

     
Total Initial Adjustments in the Second Restatement
    4       (95 )     (91 )

Benefits and Expenses, as Restated in the Initial Adjustments
    13,508       5,933       19,441  

Additional Adjustments in the Second Restatement:
                       
 
Asset Realization:
                       
   
Domestic Brokerage Group (DBG) Issues
    (29 )     25       (4 )
 
All Other Adjustments — Net
    1       2       3  

     
Total Additional Adjustments in the Second Restatement
    (28 )     27       (1 )

Benefits and Expenses, as Restated in the Second Restatement
  $ 13,480     $ 5,960     $ 19,440  

21


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  2.  Restatement of Previously Issued
Financial Statements 
(continued)

The following table reflects the effect of the aforementioned adjustments on income taxes:

                       
For the Three Months Ended June 30,
(in millions) (unaudited) 2005 2004

Income Taxes, as Previously Reported
  $ 1,674     $ 1,401  
Adjustments in the First Restatement:
               
 
Risk Transfer:
               
   
Union Excess
          (10 )
   
Other Risk Transfer
          (17 )
 
Loss Reserves
          (11 )
 
Net Investment Income:
               
   
Covered Calls
          11  
   
Synthetic Fuel Investment
          (118 )
   
“Top Level” Adjustments and Other Directed Entries (other than loss reserves)
          14  
 
Asset Realization:
               
   
Domestic Brokerage Group (DBG) Issues
          12  
 
Other GAAP Corrections:
               
   
Accounting for Derivatives (FAS 133 Hedge Accounting)
          (66 )
   
Accounting for Deferred Taxes
          (10 )
   
Foreign Currency Translation (FAS 52)
          17  
   
Life Settlements
          (16 )
   
Deferred Acquisition Costs (DAC)
          2  
 
All Other Adjustments — Net
          9  

     
Total Adjustments in the First Restatement
          (183 )

Income Taxes, as Adjusted in the First Restatement
    1,674       1,218  

Initial Adjustments in the Second Restatement:
               
 
Income Tax Accounting
    99       5  
 
All Other Adjustments — Net
    366       227  

     
Total Initial Adjustments in the Second Restatement
    465       232  

Income Taxes, as Restated in the Initial Adjustments
    2,139       1,450  

Additional Adjustments in the Second Restatement:
               
 
Income Tax Accounting
    (22 )     15  
 
All Other Adjustments — Net
    (34 )     (1 )

     
Total Additional Adjustments in the Second Restatement
    (56 )     14  

Income Taxes, as Restated in the Second Restatement
  $ 2,083     $ 1,464  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
 
  3.  Segment Information

The following table summarizes the operations by major operating segment for the six months and quarter ended June 30, 2005 and 2004:

                                   
Six Months Three Months
Ended June 30, Ended June 30,


Operating Segments 2005 2004 2005 2004
(in millions) (unaudited) (Restated) (Restated) (Restated) (Restated)

Revenues(a):
                               
 
General Insurance(b)
  $ 22,624     $ 20,331     $ 11,405     $ 10,234  
 
Life Insurance & Retirement Services(c)
    23,292       21,280       11,517       10,795  
 
Financial Services(d)
    6,214       3,473       3,778       1,659  
 
Asset Management(e)
    2,596       2,254       1,219       1,204  
 
Other
    379       (27 )     (16 )     197  

Consolidated
  $ 55,105     $ 47,311     $ 27,903     $ 24,089  

Operating income(a)(f):
                               
 
General Insurance
  $ 3,527     $ 2,914     $ 1,885     $ 1,472  
 
Life Insurance & Retirement Services
    4,505       4,068       2,324       2,319  
 
Financial Services
    3,259       899       2,214       315  
 
Asset Management
    1,114       965       524       529  
 
Other(g)
    (55 )     (355 )     (246 )     14  

Consolidated
  $ 12,350     $ 8,491     $ 6,701     $ 4,649  

(a)  Revenues and operating income reflect changes in market or estimated fair value associated with hedging activities that do not qualify for hedge accounting pursuant to FAS 133.
(b)  Represents the sum of General Insurance net premiums earned, net investment income and realized capital gains (losses).
(c)  Represents the sum of Life Insurance & Retirement Services GAAP premiums, net investment income and realized capital gains (losses).
(d)  Represents interest, lease and finance charges.
(e)  Represents management and advisory fees and net investment income with respect to guaranteed investment contracts (GICs).
(f)  Represents income before income taxes, minority interest and cumulative effect of an accounting change.
(g)  Represents other income (deductions) – net and other realized capital gains (losses).

The following table summarizes AIG’s General Insurance operations by major internal reporting unit for the six months and quarter ended June 30, 2005 and 2004:

                                   
Six Months Three Months
Ended June 30, Ended June 30,


General Insurance 2005 2004 2005 2004
(in millions) (unaudited) (Restated) (Restated) (Restated) (Restated)

Revenues:
                               
 
Domestic Brokerage Group
  $ 12,530     $ 11,108     $ 6,241     $ 5,577  
 
Transatlantic
    1,930       1,944       948       971  
 
Personal Lines
    2,380       2,197       1,209       1,109  
 
Mortgage Guaranty
    342       319       173       157  
 
Foreign General
    5,437       4,747       2,835       2,410  
 
Reclassifications, Eliminations and Other
    5       16       (1 )     10  

Total General Insurance
  $ 22,624     $ 20,331     $ 11,405     $ 10,234  

Operating Income:
                               
 
Domestic Brokerage Group 
  $ 1,518 (a)(b)   $ 1,126     $ 805 (b)   $ 570  
 
Transatlantic
    213       231       99       114  
 
Personal Lines
    211       195       102       99  
 
Mortgage Guaranty
    213       212       109       116  
 
Foreign General
    1,367       1,134       771       563  
 
Reclassifications, Eliminations and Other
    5       16       (1 )     10  

Total General Insurance
  $ 3,527     $ 2,914     $ 1,885     $ 1,472  

(a)  Includes $118 million of additional losses incurred resulting from increased labor and material costs related to the 2004 Florida hurricanes.
(b)  Includes $100 million accrual in the second quarter of 2005 to cover current estimate of the liability relating to policies of workers compensation insurance written between 1985 and 1996.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  3.  Segment Information (continued)

The following table summarizes AIG’s Life Insurance & Retirement Services operations by major internal reporting unit for the six months and quarter ended June 30, 2005 and 2004:

                                     
Six Months Three Months
Ended June 30, Ended June 30,


Life Insurance & Retirement Services 2005 2004 2005 2004
(in millions) (unaudited) (Restated) (Restated) (Restated) (Restated)

Revenues(a):
                               
 
Foreign:
                               
   
AIA, AIRCO and Nan Shan(b)
  $ 7,924     $ 7,526     $ 3,858     $ 3,751  
   
ALICO, AIG Star Life and AIG Edison Life(c)
    7,128       5,925       3,609       3,160  
   
Philamlife and Other
    257       229       127       112  
 
Domestic:
                               
   
AGLA and AG Life(d)
    4,502       4,431       2,114       2,309  
   
VALIC, AIG Annuity and AIG SunAmerica(e)
    3,481       3,169       1,809       1,463  

Total Life Insurance & Retirement Services
  $ 23,292     $ 21,280     $ 11,517     $ 10,795  

Operating Income:
                               
 
Foreign:
                               
   
AIA, AIRCO and Nan Shan(b)
  $ 1,237     $ 1,239     $ 649     $ 712  
   
ALICO, AIG Star Life and AIG Edison Life(c)
    1,394       1,073       798       793  
   
Philamlife and Other
    33       43       17       15  
 
Domestic:
                               
   
AGLA and AG Life(d)
    706       733       240       450  
   
VALIC, AIG Annuity and AIG SunAmerica(e)
    1,135       980       620       349  

Total Life Insurance & Retirement Services
  $ 4,505     $ 4,068     $ 2,324     $ 2,319  

(a)  Represents the sum of Life Insurance & Retirement Services GAAP premiums, net investment income and realized capital gains (losses).
(b)  Represents the operations of American International Assurance Company, Limited together with American International Assurance Company (Bermuda) Limited (AIA), American International Reinsurance Company, Ltd. (AIRCO), and Nan Shan Life Insurance Company, Ltd. (Nan Shan).
(c)  Represents the operations of American Life Insurance Company (ALICO), AIG Star Life Insurance Co., Ltd. (AIG Star Life), and AIG Edison Life Insurance Company (AIG Edison Life).
(d)  AG Life includes the life operations of AIG Life Insurance Company and American International Life Assurance Company of New York. Also includes the operations of American General Life and Accident Insurance Company (AGLA).
(e)  “AIG SunAmerica” represents the annuity operations of AIG SunAmerica Life Assurance Company, as well as those of First SunAmerica Life Insurance Company and SunAmerica Life Insurance Company. Also includes the operations of The Variable Annuity Life Insurance Company (VALIC) and AIG Annuity Insurance Company (AIG Annuity).

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  3.  Segment Information (continued)

The following table summarizes AIG’s Financial Services operations by major internal reporting unit for the six months and quarter ended June 30, 2005 and 2004:

                                   
Six Months Three Months
Ended June 30, Ended June 30,
Financial Services

(in millions) 2005 2004 2005 2004
(unaudited) (Restated) (Restated) (Restated) (Restated)

Revenues(a):
                               
 
Aircraft Finance(b)
  $ 1,718     $ 1,512     $ 891     $ 778  
 
Capital Markets(c)(d)
    2,731       492       1,975       131  
 
Consumer Finance(e)
    1,724       1,416       891       723  
 
Other
    41       53       21       27  

Total Financial Services
  $ 6,214     $ 3,473     $ 3,778     $ 1,659  

Operating income(loss)(a):                        
 
Aircraft Finance
  $ 311     $ 303     $ 124     $ 131  
 
Capital Markets(d)
    2,456       177       1,836       (37 )
 
Consumer Finance
    479       385       248       202  
 
Other
    13       34       6       19  

Total Financial Services
  $ 3,259     $ 899     $ 2,214     $ 315  

(a)  Includes the effect of hedging activities that do not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. For the first six months and second quarter ended June 30, 2005 and 2004, the effect was $(49) million and $(64) million, and $(11) million and $(31) million, respectively, in operating income for Aircraft Finance and $2.16 billion and $1.70 billion, and $(151) million and $(234) million in both revenues and operating income, respectively, for Capital Markets (AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries).
(b)  Revenues were primarily from ILFC aircraft lease rentals.
(c)  Revenues, shown net of interest expense, are primarily from hedging activities that do not qualify for hedge accounting treatment under FAS 133 described in (a) above.
(d)  Certain transactions entered into by AIGFP generate tax credits and benefits which are included in income taxes on the consolidated statement of income. The amount of such tax credits and benefits for the first six months and second quarter ended June 30, 2005 and 2004 are $40 million and $21 million, and $64 million and $29 million, respectively.
(e)  Revenues were primarily finance charges.

The following table summarizes AIG’s Asset Management revenues and operating income for the six months and quarter ended June 30, 2005 and 2004:

                                   
Six Months Three Months
Ended June 30, Ended June 30,
Asset Management

(in millions) 2005 2004 2005 2004
(unaudited) (Restated) (Restated) (Restated) (Restated)

Revenues:
                               
 
Guaranteed investment contracts
  $ 1,799     $ 1,517     $ 903     $ 780  
 
Institutional Asset Management
    497       481       178       294  
 
Brokerage Services and Mutual Funds
    125       123       62       62  
 
Other
    175       133       76       68  

Total Asset Management
  $ 2,596     $ 2,254     $ 1,219     $ 1,204  

Operating income:
                               
 
Guaranteed investment contracts(a)
  $ 645     $ 654     $ 326     $ 359  
 
Institutional Asset Management(b)
    269       146       108       87  
 
Brokerage Services and Mutual Funds
    30       37       17       17  
 
Other
    170       128       73       66  

Total Asset Management
  $ 1,114     $ 965     $ 524     $ 529  

(a)  The effect of hedging activities that do not qualify for hedge accounting treatment under FAS 133 was $109 million and $151 million for the first six months of 2005 and 2004, respectively, and $47 million and $87 million for the second quarter of 2005 and 2004, respectively.
(b)  Includes the results of certain AIG managed private equity and real estate funds that are consolidated effective December 31, 2003 pursuant to FIN46R, “Consolidation of Variable Interest Entities”. For the first six months and second quarter ended June 30, 2005 and 2004, operating income includes $112 million and $37 million, and $32 million and $28 million, respectively, of third-party limited partner earnings offset as an expense in Minority interest.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
 
  4.  Earnings Per Share

Earnings per share of AIG are based on the weighted average number of common shares outstanding during the period.

Computation of Earnings Per Share:

                                   
Six Months Three Months
Ended June 30, Ended June 30,


2005 2004 2005 2004
(in millions, except per share data) (unaudited) (Restated) (Restated) (Restated) (Restated)

Numerator for basic earnings per share:
                               
Income before cumulative effect of an accounting change
  $ 8,288     $ 5,722     $ 4,489     $ 3,080  
Cumulative effect of an accounting change, net of tax
          (144 )            

Net income applicable to common stock
  $ 8,288     $ 5,578     $ 4,489     $ 3,080  

Denominator for basic earnings per share:
                               
Average shares outstanding used in the computation of per share earnings:
                               
 
Common stock issued
    2,752       2,752       2,752       2,752  
 
Common stock in treasury
    (156 )     (143 )     (156 )     (144 )

Average shares outstanding – basic
    2,596       2,609       2,596       2,608  

Numerator for diluted earnings per share:
                               
Income before cumulative effect of an accounting change
  $ 8,288     $ 5,722     $ 4,489     $ 3,080  
Cumulative effect of an accounting change, net of tax
          (144 )            

Net income applicable to common stock
    8,288       5,578       4,489       3,080  

Interest on contingently convertible bonds, net of tax(a)
    5       6       2       3  

Adjusted net income applicable to common stock(a)
  $ 8,293     $ 5,584     $ 4,491     $ 3,083  

Denominator for diluted earnings per share:
                               
Average shares outstanding
    2,596       2,609       2,596       2,608  
Incremental shares from potential common stock:
                               
Average number of shares arising from outstanding employee stock plans (treasury stock method)(b)
    18       23       18       23  
Contingently convertible bonds(a)
    9       9       9       9  

Adjusted average shares outstanding – diluted(a)
    2,623       2,641       2,623       2,640  

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  4.  Earnings Per Share (continued)
                                 
Six Months Three Months
Ended June 30, Ended June 30,


2005 2004 2005 2004
(in millions, except per share data) (unaudited) (Restated) (Restated) (Restated) (Restated)

Earnings per share:
                               
Basic:
                               
Income before cumulative effect of an accounting change
  $ 3.19     $ 2.20     $ 1.73     $ 1.19  
Cumulative effect of an accounting change, net of tax
          (0.06 )            
Net income
  $ 3.19     $ 2.14     $ 1.73     $ 1.19  

Diluted:
                               
Income before cumulative effect of an accounting change
  $ 3.16     $ 2.17     $ 1.71     $ 1.17  
Cumulative effect of an accounting change, net of tax
          (0.06 )            
Net income
  $ 3.16     $ 2.11     $ 1.71     $ 1.17  

(a)  Assumes conversion of contingently convertible bonds due to the adoption of EITF Issue No. 04-8 “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share.”
(b)  Certain shares issuable pursuant to employee stock plans were not included in the computation of diluted earnings per share where the exercise price of the options exceeded the average market price and would have been antidilutive. The number of shares excluded were 23 million and 8 million for the first six months of 2005 and 2004, respectively.

     Pursuant to Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment to FASB Statement No. 123” (FAS 148), AIG adopted the “Prospective Method” of accounting for stock-based employee compensation effective January 1, 2003. FAS 148 also requires that AIG disclose the effect of stock-based compensation expense that would have been recognized if the fair value based method had been applied to all the awards vesting in the current period.

     The effect with respect to stock-based compensation expense that would have been recognized if the fair value based method had been applied to all the awards vesting was approximately $0.01 per share for the first six months of 2005 and 2004, and less than $0.005 per share for the second quarter of 2005 and 2004.

     The quarterly dividend rate per common share, commencing with the dividend paid March 18, 2005 is $0.125.

 
  5.  Benefits Provided by Starr International Company, Inc.

Starr International Company, Inc. (SICO) has provided a series of two-year Deferred Compensation Profit Participation Plans (SICO Plans) to certain AIG employees. The SICO Plans came into being in 1975 when the voting shareholders and Board of Directors of SICO, a private holding company whose principal asset is AIG common stock, decided that a portion of the capital value of SICO should be used to provide an incentive plan for the current and succeeding managements of all American International companies, including AIG.

     Participation in the SICO Plans by any person, and the amount of such participation, was at the sole discretion of SICO’s Board of Directors. None of the costs of the various benefits provided under the SICO Plans have been paid by AIG, although AIG has recorded a charge to reported earnings for the deferred compensation amounts paid to AIG employees by SICO, with an offsetting entry to additional paid-in capital reflecting amounts deemed contributed by SICO. The SICO Plans provide that shares currently owned by SICO may be set aside by SICO for the benefit of the participant and distributed upon retirement. The SICO Board of Directors may permit an early payout under certain circumstances. Prior to payout, the participant is not entitled to vote, dispose of or receive dividends with respect to such shares, and shares are subject to forfeiture under certain conditions, including but not limited to the participant’s voluntary termination of employment with AIG prior to normal retirement age. In addition, SICO’s Board of Directors may elect to pay a participant cash in lieu of shares of AIG common stock. See also Note 7(f) herein.

     SICO has also provided certain personal benefits to AIG employees. The cost of such benefits, primarily attributable to personal use of corporate aircraft, has not been included in compensation expense.

     Compensation expense with respect to the SICO Plans aggregated $67 million and $28 million for the six months ended June 30, 2005 and 2004, respectively.

 
  6.  Ownership and Transactions With Related Parties

(a) Ownership: C.V. Starr & Co., Inc. (Starr), a private holding company, The Starr Foundation, and SICO, a private holding company, owned in the aggregate approximately 16 percent of the voting stock of AIG at June 30, 2005. Five directors of AIG served as directors of Starr and SICO as of December 31, 2004. Since June 8, 2005, no director of AIG has served as a director of Starr or SICO.

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  6.  Ownership and Transactions With Related Parties (continued)

     (b) Transactions with Related Parties: During the ordinary course of business, AIG and its subsidiaries pay commissions to Starr and its subsidiaries for the production and management of insurance business. There are no significant receivables from/payables to related parties at June 30, 2005.

 
  7.  Commitments and Contingent Liabilities

In the normal course of business, various commitments and contingent liabilities are entered into by AIG and certain of its subsidiaries. In addition, AIG guarantees various obligations of certain subsidiaries.

     (a) AIG and certain of its subsidiaries become parties to derivative financial instruments with market risk resulting from both dealer and end user activities and to reduce currency, interest rate, equity and commodity exposures. These instruments are carried at their estimated fair values in the consolidated balance sheet. The vast majority of AIG’s derivative activity is transacted by AIG’s Capital Markets operations, comprised of AIG Financial Products Corp. and AIG Trading Group Inc. and their subsidiaries (AIGFP). See also Note 20 in AIG’s 2005 Annual Report on Form 10-K.

     (b) Securities sold, but not yet purchased and spot commodities sold but not yet purchased represent obligations of AIGFP to deliver specified securities and spot commodities at their contracted prices. AIGFP records a liability to repurchase the securities and spot commodities in the market at prevailing prices.

     AIG has issued unconditional guarantees with respect to the prompt payment, when due, of all present and future payment obligations and liabilities of AIGFP arising from transactions entered into by AIGFP. Revenues for the six months ended June 30, 2005 and 2004 from Capital Markets operations were $2.73 billion and $492 million, respectively.

     (c) At June 30, 2005, ILFC had committed to purchase 310 new and used aircraft deliverable from 2005 through 2010 at an estimated aggregate purchase price of $20.2 billion and had options to purchase 12 new aircraft deliverable through 2009 at an estimated aggregate purchase price of $988 million. ILFC will be required to find customers for any aircraft acquired, and it must arrange financing for portions of the purchase price of such equipment.

     (d) AIG and its subsidiaries, in common with the insurance industry in general, are subject to litigation, including claims for punitive damages, in the normal course of their business. The recent trend of increasing jury awards and settlements makes it difficult to assess the ultimate outcome of such litigation.

     AIG continues to receive claims asserting injuries from toxic waste, hazardous substances, and other environmental pollutants and alleged damages to cover the cleanup costs of hazardous waste dump sites (hereinafter collectively referred to as environmental claims) and indemnity claims asserting injuries from asbestos. Estimation of asbestos and environmental claims loss reserves is a difficult process, as these claims, which emanate from policies written in 1984 and prior years, cannot be estimated by conventional reserving techniques. Asbestos and environmental claims development is affected by factors such as inconsistent court resolutions, the broadening of the intent of policies and scope of coverage and increasing number of new claims. AIG, together with other industry members, has and will continue to litigate the broadening judicial interpretation of policy coverage and the liability issues. If the courts continue in the future to expand the intent of the policies and the scope of the coverage, as they have in the past, additional liabilities would emerge for amounts in excess of reserves held. This emergence cannot now be reasonably estimated, but could have a material effect on AIG’s future operating results. The reserves carried for these claims at June 30, 2005 ($3.41 billion gross; $1.45 billion net) are believed to be adequate as these reserves are based on known facts and current law.

     (e) SAI Deferred Compensation Holdings, Inc., a wholly-owned subsidiary of AIG, has established a deferred compensation plan for registered representatives of certain AIG subsidiaries, pursuant to which participants have the opportunity to invest deferred commissions and fees on a notional basis. The value of the deferred compensation fluctuates with the value of the deferred investment alternatives chosen. AIG has provided a full and unconditional guarantee of the obligations of SAI Deferred Compensation Holdings, Inc. to pay the deferred compensation under the plan.

     (f) On June 27, 2005, AIG entered into agreements pursuant to which AIG agrees, subject to certain conditions, to (i) make any payment that is not promptly paid with respect to the benefits accrued by certain employees of AIG and its subsidiaries under the SICO Plans (as defined in Note 5) and (ii) make any payment to the extent not promptly paid by Starr with respect to amounts that become payable to certain employees of AIG and its subsidiaries who are also stockholders of Starr after the giving of a notice of repurchase or redemption under Starr’s organizational documents. In January 2006, Starr announced that it had completed its tender offer to purchase interests in Starr and that all eligible shareholders had tendered their shares. As a result of completion of the tender offer, no executive currently holds any Starr interests.

     (g) AIG and certain of its subsidiaries have been named defendants in two putative class actions in state court in Alabama that arise out of the 1999 settlement of class and deriva-

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  7.  Commitments and Contingent Liabilities (continued)

tive litigation involving Caremark Rx, Inc. (Caremark). An excess policy issued by a subsidiary of AIG with respect to the 1999 litigation was expressly stated to be without limit of liability. In the current actions, plaintiffs allege that the judge approving the 1999 settlement was misled as to the extent of available insurance coverage and would not have approved the settlement had he known of the existence and/or unlimited nature of the excess policy. They further allege that AIG, its subsidiaries, and Caremark are liable for fraud and suppression for misrepresenting and/or concealing the nature and extent of coverage. In their complaint, plaintiffs request compensatory damages for the 1999 class in the amount of $3.2 billion, plus punitive damages. AIG and its subsidiaries deny the allegations of fraud and suppression and have asserted, inter alia, that information concerning the excess policy was publicly disclosed months prior to the approval of the settlement. AIG and its subsidiaries further assert that the current claims are barred by the statute of limitations and that plaintiffs’ assertions that the statute was tolled cannot stand against the public disclosure of the excess coverage. Plaintiffs, in turn, have asserted that the disclosure was insufficient to inform them of the nature of the coverage and did not start the running of the statute of limitations. On January 28, 2005, the Alabama trial court determined that one of the current actions may proceed as a class action on behalf of the 1999 classes that were allegedly defrauded by the settlement. AIG, its subsidiaries, and Caremark are seeking appellate relief from the Alabama Supreme Court. AIG cannot now estimate either the likelihood of its prevailing in these actions or the potential damages in the event liability is determined.

     (h) On December 30, 2004, an arbitration panel issued its ruling in connection with a 1998 workers compensation quota share reinsurance agreement under which Superior National Insurance Company, among others, was reinsured by The United States Life Insurance Company in the City of New York (USLIFE), a subsidiary of American General Corporation. In its 2-1 ruling the arbitration panel refused to rescind the contract as requested by USLIFE. Instead, the panel reformed the contract to reduce USLIFE’s participation by ten percent. USLIFE disagrees with the ruling and is pursuing all appropriate legal remedies. USLIFE has certain reinsurance recoverables in connection with the contract and the arbitration ruling established a second phase of arbitration in which USLIFE will present its challenges to cessions to the contract.

     AIG recorded approximately a $178 million pre-tax charge in the fourth quarter of 2004 related to this matter and holds a reserve of approximately $353 million as of June 30, 2005.

     (i) Regulators from several states have commenced investigations into insurance brokerage practices related to contingent commissions and other broker-related conduct, such as alleged bid rigging. Various parties, including insureds and shareholders, have also asserted putative class action and other claims against AIG or its subsidiaries alleging, among other things, violations of the antitrust and federal securities laws, and AIG expects that additional claims may be made.

     In February 2006, AIG reached a resolution of claims and matters under investigation with the United States Department of Justice (DOJ), the Securities and Exchange Commission (SEC), the Office of the New York Attorney General (NYAG) and the New York State Department of Insurance (DOI). The settlements resolved outstanding litigation filed by the SEC, NYAG and DOI against AIG and concluded negotiations with these authorities and the DOJ in connection with the accounting, financial reporting and insurance brokerage practices of AIG and its subsidiaries, as well as claims relating to the underpayment of certain workers compensation premium taxes and other assessments. The 2005 financial statements include a fourth quarter after-tax charge of $1.15 billion to record the settlements.

     As a result of these settlements, AIG made payments totaling approximately $1.64 billion, $225 million of which represented fines and penalties. A substantial portion of the money will be available to resolve claims asserted in various regulatory and civil proceedings, including shareholder lawsuits.

     Also, as part of the settlements, AIG has agreed to retain for a period of three years an independent consultant who will conduct a review that will include the adequacy of AIG’s internal control over financial reporting and the remediation plan that AIG has implemented as a result of its own internal review.

     Various federal and state regulatory agencies are reviewing certain other transactions and practices of AIG and its subsidiaries in connection with industry-wide and other inquiries. AIG has cooperated, and will continue to cooperate, in producing documents and other information in response to the subpoenas.

     A number of lawsuits have been filed regarding the subject matter of the investigations of insurance brokerage practices, including derivative actions, individual actions and class actions under the federal securities laws, Racketeer Influenced and Corrupt Organizations Act (RICO), Employee Retirement Income Security Act (ERISA) and state common and corporate laws in both federal and state courts, including the United States District Court for the Southern District of New York (Southern District of New York), in the Commonwealth of Massachusetts Superior Court and in Delaware Chancery Court. All of these actions generally allege that AIG and its subsidiaries violated the law by allegedly concealing a

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  7.  Commitments and Contingent Liabilities (continued)

scheme to “rig bids” and “steer” business between insurance companies and insurance brokers.

     Since October 19, 2004, AIG or its subsidiaries have been named as a defendant in fifteen complaints that were filed in federal court and two that were originally filed in state court (Massachusetts and Florida) and removed to federal court. These cases generally allege that AIG and its subsidiaries violated federal and various state antitrust laws, as well as federal RICO laws, various state deceptive and unfair practice laws and certain state laws governing fiduciary duties. The alleged basis of these claims is that there was a conspiracy between insurance companies and insurance brokers with regard to the use of contingent commission agreements, bidding practices, and other broker-related conduct concerning coverage in certain sectors of the insurance industry. The Judicial Panel on Multidistrict Litigation entered an order on February 17, 2005, consolidating most of these cases and transferring them to the United States District Court for the District of New Jersey (District of New Jersey). The remainder of these cases have been transferred to the District of New Jersey. On August 15, 2005, the plaintiffs in the multidistrict litigation filed a Corrected First Consolidated Amended Commercial Class Action Complaint, which, in addition to the previously named AIG defendants, names new AIG subsidiaries as defendants. Also on August 15, 2005, AIG and two subsidiaries were named as defendants in a Corrected First Consolidated Amended Employee Benefits Class Action Complaint filed in the District of New Jersey, which asserts similar claims with respect to employee benefits insurance and a claim under ERISA on behalf of putative classes of employers and employees. On November 29, 2005, the AIG defendants, along with other insurer defendants and the broker defendants filed motions to dismiss both the Commercial and Employee Benefits Complaints. Plaintiffs have filed a motion for class certification in the consolidated action. In addition, complaints were filed against AIG and several of its subsidiaries in Massachusetts and Florida state courts, which have both been stayed. In the Florida action, the plaintiff has filed a petition for a writ of certiorari with the District Court of Appeals of the State of Florida, Fourth District with respect to the stay order. On February 9, 2006, a complaint against AIG and several of its subsidiaries was filed in Texas state court, making claims similar to those in the federal cases above.

     In April and May 2005, amended complaints were filed in the consolidated derivative and securities cases, as well as in one of the ERISA lawsuits, pending in the Southern District of New York adding allegations concerning AIG’s accounting treatment for non-traditional insurance products. In September 2005, a second amended complaint was filed in the consolidated securities cases adding allegations concerning AIG’s First Restatement. Also in September 2005, a new securities action complaint was filed in the Southern District of New York, asserting claims premised on the same allegations made in the consolidated cases. Motions to dismiss have been filed in the securities actions. In September 2005, a consolidated complaint was filed in the ERISA case pending in the Southern District of New York. Motions to dismiss have been filed in that ERISA case. Also in April 2005, new derivative actions were filed in Delaware Chancery Court, and in July and August 2005, two new derivative actions were filed in the Southern District of New York asserting claims duplicative of the claims made in the consolidated derivative action.

     In July 2005, a second amended complaint was filed in the consolidated derivative case in the Southern District of New York, expanding upon accounting-related allegations, based upon the First Restatement and, in August 2005, an amended consolidated complaint was filed. In June 2005, the derivative cases in Delaware were consolidated. AIG’s Board of Directors has appointed a special committee of independent directors to review the matters asserted in the derivative complaints. The courts have approved agreements staying the derivative cases pending in the Southern District of New York and in Delaware Chancery Court while the special committee of independent directors performs its work. In September 2005, a shareholder filed suit in Delaware Chancery Court seeking documents relating to some of the allegations made in the derivative suits. AIG filed a motion to dismiss in October 2005.

     In late 2002, a derivative action was filed in Delaware Chancery Court in connection with AIG’s transactions with certain entities affiliated with Starr and SICO. In May 2005, the plaintiff filed an amended complaint which adds additional claims premised on allegations relating to insurance brokerage practices and AIG’s non-traditional insurance products. Plaintiffs in that case have agreed to dismiss newly added allegations unrelated to transactions with entities affiliated with Starr and SICO without prejudice to pursuit of these claims in the separate derivative actions described above. On February 16, 2006, the Delaware Chancery Court entered an order dismissing the litigation with prejudice with respect to AIG’s outside directors and dismissing the claims against the remaining AIG defendants without prejudice.

     AIG cannot predict the outcome of the matters described above or estimate the potential costs related to these matters and, accordingly, no reserve is being established in AIG’s financial statements at this time. In the opinion of AIG management, AIG’s ultimate liability for the matters referred to above is not likely to have a material adverse effect on AIG’s consolidated financial condition, although it is possible that the effect would be material to AIG’s consolidated results of operations for an individual reporting period.

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  7.  Commitments and Contingent Liabilities (continued)

     (j) On July 8, 2005, SICO filed a complaint against AIG in the United States District Court for the Southern District of New York. The complaint alleges that AIG is in the possession of items, including artwork, which SICO claims it owns, and seeks an order causing AIG to release those items as well as actual, consequential, punitive and exemplary damages. On September 27, 2005, AIG filed its answer to SICO’s complaint denying SICO’s allegations and asserting counter-claims for breach of contract, unjust enrichment, conversion and breach of fiduciary duty relating to SICO’s breach of its commitment to use its AIG shares for the benefit of AIG and its employees. On October 17, 2005, SICO replied to AIG’s counter-claims and additionally sought a judgment declaring that SICO is neither a control person nor an affiliate of AIG for purposes of Schedule 13D under the Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule 144 under the Securities Act of 1933, as amended (the Securities Act), respectively. AIG responded to the SICO claims and sought a dismissal of SICO’s claims on November 7, 2005.

     (k) AIG subsidiaries own interests in certain limited liability companies (LLCs) which invest in coal synthetic fuel production facilities. The sale of coal synthetic fuel produced by these facilities generates income tax credits. One of the conditions a taxpayer must meet to qualify for coal synfuel tax credits is that the synfuel production facility must have been “placed in service” before July 1, 1998. On July 1, 2005 Internal Revenue Service (IRS) field agents issued notices of proposed adjustment to the LLCs proposing to disallow all of the credits taken by the LLCs during the years 2001 through 2003. The IRS field agents subsequently conceded that one of the facilities was timely placed in service, but they contend that none of the other underlying production facilities were placed in service by the statutory deadline. On October 3, 2005, IRS field agents issued 60-day letters to the LLC’s proposing to disallow the tax credits taken with respect to synfuel sales by the remaining five production facilities. By letters dated February 17, 2006, the IRS field agents have advised the LLCs that they have, after further review, concluded that all six production facilities were placed in service before July 1, 1998 and that they will withdraw the 60-day letters issued to the LLCs.

     Tax credits generated from the production and sale of synthetic fuel under section 29 of the Internal Revenue Code are subject to an annual phase-out provision that is based on the average wellhead price of domestic crude oil. The price range within which the tax credits are phased-out was originally established in 1980 and is adjusted annually for inflation. Depending on the price of domestic crude oil for a particular year, all or a portion of the tax credits generated in that year might be eliminated. Although AIG cannot predict the future price of domestic crude oil for years 2006 and 2007 (the final year the tax credits are available), AIG does not expect the phase-out provision to affect tax credits generated in 2005. AIG has also entered into hedges designed to mitigate a portion of its future exposure to a sustained high price of oil. However, no assurance can be given as to the effectiveness of the hedging in actually reducing such exposure or whether such hedging will continue.

     (l) AIG understands that some of its employees have received Wells notices in connection with previously disclosed SEC investigations of certain of AIG’s transactions or accounting practices. Under SEC procedures, a Wells notice is an indication that the SEC staff has made a preliminary decision to recommend enforcement action that provides recipients with an opportunity to respond to the SEC staff before a formal recommendation is finalized. AIG anticipates that additional current and former employees could receive similar notices in the future as the regulatory investigations proceed.

     (m) As a result of pending actions against AIG arising out of the liability of certain Domestic Brokerage Group (DBG) companies for taxes, assessments, and surcharges for policies of workers compensation insurance written between 1985 and 1996, AIG established a reserve in the second quarter of 2005 of $100 million (including interest) to cover estimated liabilities to various states, guarantee funds, and residual market facilities (and the members thereof) relating to these actions.

     (n) In August 2005, the Bureau of Labor Insurance in Taiwan began to levy a monthly administrative penalty against Nan Shan for not providing its agency leaders a choice between alternative government pension plans. Nan Shan has reached an agreement with the agency union and the ultimate liability is not material to AIG’s consolidated financial condition or results of operations.

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American International Group, Inc. and Subsidiaries

  8.  Employee Benefits

The following table presents the components of the net periodic benefit costs with respect to pensions and other benefits for the six months and second quarter ended June 30, 2005 and 2004:

                                                   
Pensions Postretirement


Non-U.S. U.S. Non-U.S. U.S.
(in millions) Plans Plans Total Plans Plans Total

Six Months Ended June 30, 2005
                                               
 
Components of net period benefit cost:
                                               
 
Service cost
  $ 37     $ 52     $ 89     $ 2     $ 3     $ 5  
 
Interest cost
    16       74       90       1       7       8  
 
Expected return on assets
    (11 )     (82 )     (93 )                  
 
Amortization of prior service cost
    (5 )     (2 )     (7 )           (3 )     (3 )
 
FAS 88 loss due to settlements
    3             3                    
 
Amortization of transition liability
    1             1                    
 
Recognized actuarial loss
    11       33       44             1       1  

Net period benefit cost
  $ 52     $ 75     $ 127     $ 3     $ 8     $ 11  

Three Months Ended June 30, 2005
                                               
 
Components of net period benefit cost:
                                               
 
Service cost
  $ 19     $ 26     $ 45     $ 1     $ 2     $ 3  
 
Interest cost
    8       37       45             4       4  
 
Expected return on assets
    (5 )     (41 )     (46 )                  
 
Amortization of prior service cost
    (3 )           (3 )           (2 )     (2 )
 
FAS 88 loss due to settlements
    1             1                    
 
Recognized actuarial loss
    6       16       22             1       1  

Net period benefit cost
  $ 26     $ 38     $ 64     $ 1     $ 5     $ 6  

Six Months Ended June 30, 2004
                                               
 
Components of net period benefit cost:
                                               
 
Service cost
  $ 30     $ 46     $ 76     $     $ 2     $ 2  
 
Interest cost
    16       80       96             8       8  
 
Expected return on assets
    (10 )     (86 )     (96 )                  
 
Amortization of prior service cost
    (1 )     2       1             (3 )     (3 )
 
Amortization of transitional liability
    1             1                    
 
Recognized actuarial loss
    10       28       38             1       1  

Net period benefit cost
  $ 46     $ 70     $ 116     $     $ 8     $ 8  

Three Months Ended June 30, 2004
                                               
 
Components of net period benefit cost:
                                               
 
Service cost
  $ 15     $ 23     $ 38     $     $ 1     $ 1  
 
Interest cost
    8       40       48             4       4  
 
Expected return on assets
    (5 )     (43 )     (48 )                  
 
Amortization of prior service cost
          1       1             (2 )     (2 )
 
Amortization of transitional liability
                                   
 
Recognized actuarial loss
    5       14       19             1       1  

Net period benefit cost
  $ 23     $ 35     $ 58     $     $ 4     $ 4  

 
  9.  Recent Accounting Standards

At the March 2004 meeting, the Emerging Issue Task Force (EITF) reached a consensus with respect to Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” On September 30, 2004, the FASB issued FASB Staff Position (FSP) EITF No. 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” delaying the effective date of this guidance until the FASB has resolved certain implementation issues with respect to this guidance, but the disclosures remain effective. This FSP, retitled FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” replaces the measurement and recognition guidance set forth in Issue No. 03-1 and codifies certain existing guidance on impairment. Adoption of FSP FAS 115-1 is not expected to have a material effect on AIG’s financial condition or results of operations.

     At the September 2004 meeting, the EITF reached a consensus with respect to Issue No. 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share.” This Issue addresses when the dilutive effect of contingently convertible debt (Co-Cos) with a market price trigger should be included in diluted earnings per share (EPS). The adoption of Issue No. 04-8 did not have a material effect on AIG’s diluted EPS.

     In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (FAS 123R). FAS 123R and its related interpretive guidance replaces FAS No. 123, “Accounting for Stock-Based Compensation” (FAS 123), and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” FAS 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. On January 1, 2003, AIG adopted the recognition provisions of FAS 123. In April 2005, the Securities

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  9.  Recent Accounting Standards (continued)

and Exchange Commission (SEC) delayed the effective date for FAS 123R until the first fiscal year beginning after June 15, 2005. As a result, AIG expects to adopt the provisions of the revised FAS 123R and its related interpretive guidance in the first quarter of 2006. For its service-based awards (1999 Stock Option Plan, 2002 Stock Incentive Plan, and 1999 Employee Stock Purchase Plan), AIG recognizes compensation on a straight-line basis over the scheduled vesting period. Upon adoption of FAS 123R, AIG will recognize compensation expense to the scheduled retirement date for employees near retirement. AIG does not expect the effect of this change to be material to AIG’s results of operations. Consistent with the requirements of FAS 123R, AIG will recognize the unvested portion of its APB 25 awards as compensation expense over the remaining vesting period.

     In December 2005 and January 2006, Starr made tender offers to AIG employees holding Starr common and preferred stock. In conjunction with AIG’s adoption of FAS 123R, Starr is considered to be an “economic interest holder” in AIG. As a result, AIG expects to include the compensation expense related to the 2006 tender offer in its consolidated financial statements for the first quarter of 2006.

     AIG is currently assessing the effect of FAS 123R and believes the effect will not be material to AIG’s financial condition or results of operations.

     On December 16, 2004, the FASB issued Statement No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29” (FAS 153). FAS 153 amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” The amendments made by FAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have “commercial substance.” Previously, APB Opinion No. 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The provisions in FAS 153 are effective for nonmonetary asset exchanges beginning July 1, 2005. The adoption of FAS 153 did not have a material effect on AIG’s financial condition or results of operations.

     In March 2005, the FASB issued FSP FIN46R-5 “Implicit Variable Interests under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities” (FSP FIN46R-5) to address whether a reporting enterprise has an implicit variable interest in a variable interest entity (VIE) or potential VIE when specific conditions exist. Although implicit variable interests are mentioned in FIN46(R), the term is not defined and only one example is provided. This FSP FIN46R-5 offers additional guidance, stating that implicit variable interests are implied financial interests in an entity that change with changes in the fair value of the entity’s net assets exclusive of variable interests. An implicit variable interest acts the same as an explicit variable interest except it involves the absorbing and/or receiving of variability indirectly from the entity (rather than directly). The identification of an implicit variable interest is a matter of judgment that depends on the relevant facts and circumstances. FSP FIN46R-5 is effective for the second quarter of 2005. The adoption of FSP FIN 46R-5 did not have a material effect on AIG’s financial condition or results of operations.

     On June 1, 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections” (FAS 154). FAS 154 replaces APB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” FAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. FAS 154 also provides that a correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors beginning January 1, 2006.

     At the June 2005 meeting, the Emerging Issues Task Force (EITF) reached a consensus with respect to Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” The Issue addresses what rights held by the limited partner(s) preclude consolidation in circumstances in which the sole general partner would consolidate the limited partnership in accordance with generally accepted accounting principles absent the existence of the rights held by the limited partner(s). Based on that consensus, the EITF also agreed to amend the consensus in Issue No. 96-16, “Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholders Have Certain Approval or Veto Rights.” The guidance in this Issue is effective after June 29, 2005 for general partners of all new limited partnerships formed and for existing limited partnerships for which the partnership agreements are modified. For general partners in all other limited partnerships, the guidance in this Issue is effective beginning January 1, 2006. The effect of the adoption of this EITF Issue on existing partnerships that were modified and new partnerships entered into after June 29, 2005, was not material to AIG’s financial condition or results of operations. For all other partnerships, AIG is currently assessing the effect of adopting this EITF Issue.

     On June 29, 2005, FASB issued Statement 133 Implementation Issue No. B38, “Embedded Derivatives: Evalua-

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  9.  Recent Accounting Standards (continued)

tion of Net Settlement with Respect to the Settlement of a Debt Instrument through Exercise of an Embedded Put Option or Call Option.” This implementation guidance relates to the potential settlement of the debtor’s obligation to the creditor that would occur upon exercise of the put option or call option, which meets the net settlement criterion in FAS 133 paragraph 9(a). The effective date of the implementation guidance is January 1, 2006. AIG is currently assessing the effect of implementing this guidance.

     On June 29, 2005, FASB issued Statement 133 Implementation Issue No. B39, “Application of Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor.” The conditions in FAS 133 paragraph 13(b) do not apply to an embedded call option in a hybrid instrument containing a debt host contract if the right to accelerate the settlement of the debt can be exercised only by the debtor (issuer/borrower). This guidance does not apply to other embedded derivative features that may be present in the same hybrid instrument. The effective date of the implementation guidance is January 1, 2006. AIG is currently assessing the effect of implementing this guidance.

     On September 19, 2005, FASB issued Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts.” SOP 05-1 provides guidance on accounting for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in FASB Statement No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.” The SOP defines an internal replacement as a modification in product benefits, features, rights, or coverage that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. The effective date of the implementation guidance is January 1, 2007. AIG is currently assessing the effect of implementing this guidance.

     On February 16, 2006, the FASB issued FAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (FAS 155), an amendment of FAS 140 and FAS 133. FAS 155 permits the Company to elect to measure any hybrid financial instrument at fair value (with changes in fair value recognized in earnings) if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under FAS 133. The election to measure the hybrid instrument at fair value is made on an instrument-by-instrument basis and is irrevocable. FAS 155 will be effective for all instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of AIG’s fiscal year that begins after September 15, 2006, with earlier adoption permitted as of the beginning of 2006, provided that financial statements for any interim period of that fiscal year have not been issued. AIG has elected to early adopt FAS 155 as of January 1, 2006. This change in accounting will not have a material effect on AIG’s results of operations or financial condition.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  10.  Information Provided in Connection with Outstanding Debt

The following condensed consolidating financial statements are provided in compliance with Regulation S-X of the Securities and Exchange Commission.

(a) American General Corporation (AGC) is a holding company and a wholly owned subsidiary of AIG. AIG provides a full and unconditional guarantee of all outstanding debt of AGC.

American General Corporation:

Condensed Consolidating Balance Sheet

                                           
American
International
June 30, 2005 (Restated) Group, Inc. AGC Other Consolidated
(in millions) (unaudited) Guarantor Issuer Subsidiaries Eliminations AIG

Assets:
                                       
 
Invested assets
  $ 863     $     $ 679,841     $ (13,312 )   $ 667,392  
 
Cash
    71             1,667             1,738  
 
Carrying value of subsidiaries and partially owned companies, at equity
    91,285       27,755       5,912       (123,563 )     1,389  
 
Other assets
    2,949       2,817       155,351       (469 )     160,648  

Total assets
  $ 95,168     $ 30,572     $ 842,771     $ (137,344 )   $ 831,167  

Liabilities:
                                       
 
Insurance liabilities
  $ 384     $     $ 445,547     $ (64 )   $ 445,867  
 
Debt
    3,655       2,184       110,381       (12,717 )     103,503  
 
Other liabilities
    2,516       4,629       186,993       (1,150 )     192,988  

Total liabilities
    6,555       6,813       742,921       (13,931 )     742,358  

Preferred shareholders’ equity in subsidiary companies
                196             196  
Total shareholders’ equity
    88,613       23,759       99,654       (123,413 )     88,613  

Total liabilities, preferred shareholders’ equity in subsidiary companies and shareholders’ equity
  $ 95,168     $ 30,572     $ 842,771     $ (137,344 )   $ 831,167  

                                           
American
International
December 31, 2004 Group, Inc. AGC Other Consolidated
(in millions) (unaudited) Guarantor Issuer Subsidiaries Eliminations AIG

Assets:
                                       
 
Invested assets
  $ 1,027     $     $ 650,238     $ (12,984 )   $ 638,281  
 
Cash
    17             1,992             2,009  
 
Carrying value of subsidiaries and partially owned companies, at equity
    80,966       26,179       12,763       (118,413 )     1,495  
 
Other assets
    2,786       2,546       154,417       (389 )     159,360  

Total assets
  $ 84,796     $ 28,725     $ 819,410     $ (131,786 )   $ 801,145  

Liabilities:
                                       
 
Insurance liabilities
  $ 405     $     $ 428,130     $ (69 )   $ 428,466  
 
Debt
    3,647       2,482       103,027       (12,257 )     96,899  
 
Other liabilities
    1,071       4,076       191,967       (1,206 )     195,908  

Total liabilities
    5,123       6,558       723,124       (13,532 )     721,273  

Preferred shareholders’ equity in subsidiary companies
                199             199  
Total shareholders’ equity
    79,673       22,167       96,087       (118,254 )     79,673  

Total liabilities, preferred shareholders’ equity in subsidiary companies and shareholders’ equity
  $ 84,796     $ 28,725     $ 819,410     $ (131,786 )   $ 801,145  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
American International Group, Inc. and Subsidiaries
  10.  Information Provided in Connection with Outstanding Debt (continued)

Condensed Consolidating Statement of Income