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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

Commission File Number 1-8787

GRAPHIC

American International Group, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

  13-2592361
(I.R.S. Employer
Identification No.)

180 Maiden Lane, New York, New York
(Address of principal executive offices)

 

10038
(Zip Code)

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



    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 þ    No o

    Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ    No o

    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ

  Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting company o

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

    As of April 30, 2012, there were 1,794,014,435 shares outstanding of the registrant's common stock.

   



American International Group, Inc.

Table of Contents

 
Description
   
  Page Number
 

PART I – FINANCIAL INFORMATION

   

Item 1.

 

Financial Statements

  3

 

Note 1. Basis of Presentation and Significant Events

  8

 

Note 2. Summary of Significant Accounting Policies

  10

 

Note 3. Segment Information

  13

 

Note 4. Fair Value Measurements

  15

 

Note 5. Investments

  31

 

Note 6. Lending Activities

  38

 

Note 7. Variable Interest Entities

  39

 

Note 8. Derivatives and Hedge Accounting

  41

 

Note 9. Commitments, Contingencies and Guarantees

  47

 

Note 10. Total Equity and Earnings (Loss) Per Share

  66

 

Note 11. Employee Benefits

  72

 

Note 12. Income Taxes

  73

 

Note 13. Discontinued Operations

  74

 

Note 14. Information Provided in Connection with Outstanding Debt

  75

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 
82

 

Cautionary Statement Regarding Forward-Looking Information

  82

 

Use of Non-GAAP Measures

  83

 

Executive Overview

  83

 

Outlook

  85

 

Results of Operations

  94

 

Consolidated Results

  94

 

Segment Results

  98

 

Chartis Operations

  98

 

Liability for Unpaid Claims and Claims Adjustment Expense

  110

 

SunAmerica Operations

  115

 

Aircraft Leasing Operations

  120

 

Other Operations

  121

 

Consolidated Comprehensive Income (Loss)

  125

 

Capital Resources and Liquidity

  126

 

Overview

  126

 

Liquidity Adequacy Management

  127

 

Analysis of Sources and Uses of Cash

  128

 

Liquidity of Parent and Subsidiaries

  129

 

Debt

  135

 

Credit Facilities

  137

 

Contractual Obligations

  140

 

Off-Balance Sheet Arrangements and Commercial Commitments

  140

 

Investments

  141

 

Investment Strategies

  141

 

Impairments

  151

 

Enterprise Risk Management

  154

 

Overview

  154

 

Credit Risk Management

  154

 

Market Risk Management

  160

 

Critical Accounting Estimates

  161

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 
168

Item 4.

 

Controls and Procedures

  168

PART II – OTHER INFORMATION

   

Item 1.

 

Legal Proceedings

  169

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  169

Item 4.

 

Mine Safety Disclosures

  169

Item 6.

 

Exhibits

  169

Signatures

 
170
 

2            AIG 2012 Form 10-Q


Table of Contents


American International Group, Inc.

PART I – FINANCIAL INFORMATION

Item 1.    Financial Statements

Consolidated Balance Sheet (unaudited)

   
(in millions, except for share data)
  March 31,
2012

  December 31,
2011

 
   

Assets:

             

Investments:

             

Fixed maturity securities:

             

Bonds available for sale, at fair value (amortized cost: 2012 – $250,164; 2011 – $250,770)

  $ 266,362   $ 263,981  

Bond trading securities, at fair value

    24,481     24,364  

Equity securities:

             

Common and preferred stock available for sale, at fair value (cost: 2012 – $1,782; 2011 – $1,820)

    3,026     3,624  

Common and preferred stock trading, at fair value

    123     125  

Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2012 – $114; 2011 – $107)

    19,519     19,489  

Flight equipment primarily under operating leases, net of accumulated depreciation

    35,452     35,539  

Other invested assets (portion measured at fair value: 2012 – $17,094; 2011 – $20,876)

    37,209     40,744  

Short-term investments (portion measured at fair value: 2012 – $4,408; 2011 – $5,913)

    20,789     22,572  
   

Total investments

    406,961     410,438  

Cash

    1,315     1,474  

Accrued investment income

    3,165     3,108  

Premiums and other receivables, net of allowance

    15,648     14,721  

Reinsurance assets, net of allowance

    28,257     27,211  

Current and deferred income taxes

    15,955     17,802  

Deferred policy acquisition costs

    8,753     8,937  

Derivative assets, at fair value

    4,221     4,499  

Other assets, including restricted cash of $3,520 in 2012 and $2,988 in 2011

    14,103     12,782  

Separate account assets, at fair value

    56,025     51,388  
   

Total assets

  $ 554,403   $ 552,360  
   

Liabilities:

             

Liability for unpaid claims and claims adjustment expense

  $ 89,785   $ 91,145  

Unearned premiums

    25,034     23,465  

Future policy benefits for life and accident and health insurance contracts

    34,493     34,317  

Policyholder contract deposits (portion measured at fair value: 2012 – $782; 2011 – $918)

    126,376     126,898  

Other policyholder funds

    6,561     6,691  

Derivative liabilities, at fair value

    4,222     4,733  

Other liabilities (portion measured at fair value: 2012 – $1,516; 2011 – $907)

    31,346     27,554  

Long-term debt (portion measured at fair value: 2012 – $10,579; 2011 – $10,766)

    76,096     75,253  

Separate account liabilities

    56,025     51,388  
   

Total liabilities

    449,938     441,444  
   

Commitments, contingencies and guarantees (see Note 9)

             

Redeemable noncontrolling interests (see Note 1):

             

Nonvoting, callable, junior preferred interests held by Department of the Treasury

    -     8,427  

Other

    121     96  
   

Total redeemable noncontrolling interests

    121     8,523  
   

AIG shareholders' equity:

             

Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2012 – 1,906,614,552 and 2011 – 1,906,568,099

    4,766     4,766  

Treasury stock, at cost; 2012 – 113,167,239; 2011 – 9,746,617 shares of common stock

    (3,942 )   (942 )

Additional paid-in capital

    81,772     81,787  

Retained earnings

    13,982     10,774  

Accumulated other comprehensive income

    6,873     5,153  
   

Total AIG shareholders' equity

    103,451     101,538  

Non-redeemable noncontrolling interests

    893     855  
   

Total equity

    104,344     102,393  
   

Total liabilities and equity

  $ 554,403   $ 552,360  
   

See accompanying Notes to Consolidated Financial Statements, which include a summary of revisions to prior year balances in connection with a change in accounting principle.

AIG 2012 Form 10-Q            3


Table of Contents


American International Group, Inc.

Consolidated Statement of Operations (unaudited)

   
Three Months Ended March 31,
(dollars in millions, except per share data)
  2012
  2011
 
   

Revenues:

             

Premiums

  $ 9,461   $ 9,482  

Policy fees

    691     684  

Net investment income

    7,105     5,569  

Net realized capital losses:

             

Total other-than-temporary impairments on available for sale securities

    (168 )   (218 )

Portion of other-than-temporary impairments on available for sale fixed maturity securities recognized in Other comprehensive income

    (285 )   3  
   

Net other-than-temporary impairments on available for sale securities recognized in net income

    (453 )   (215 )

Other realized capital gains (losses)

    150     (433 )
   

Total net realized capital losses

    (303 )   (648 )

Aircraft leasing revenue

    1,156     1,156  

Other income

    333     1,196  
   

Total revenues

    18,443     17,439  
   

Benefits, claims and expenses:

             

Policyholder benefits and claims incurred

    7,102     8,959  

Interest credited to policyholder account balances

    1,069     1,106  

Amortization of deferred acquisition costs

    1,347     1,231  

Other acquisition and insurance expenses

    2,258     1,968  

Interest expense

    953     1,061  

Aircraft leasing expenses

    625     670  

Net loss on extinguishment of debt

    21     3,313  

Other expenses

    484     441  
   

Total benefits, claims and expenses

    13,859     18,749  
   

Income (loss) from continuing operations before income tax expense (benefit)

    4,584     (1,310 )
   

Income tax expense (benefit)

    1,148     (226 )
   

Income (loss) from continuing operations

    3,436     (1,084 )

Income from discontinued operations, net of income tax expense (benefit)

    13     2,585  
   

Net income

    3,449     1,501  
   

Less:

             

Net income from continuing operations attributable to noncontrolling interests:

             

Nonvoting, callable, junior and senior preferred interests

    208     252  

Other

    33     (55 )
   

Total net income from continuing operations attributable to noncontrolling interests

    241     197  

Net income from discontinued operations attributable to noncontrolling interests

    -     7  
   

Total net income attributable to noncontrolling interests

    241     204  
   

Net income attributable to AIG

  $ 3,208   $ 1,297  
   

Net income attributable to AIG common shareholders

  $ 3,208   $ 485  
   

Income per common share attributable to AIG common shareholders:

             

Basic:

             

Income (loss) from continuing operations

  $ 1.70   $ (1.34 )

Income from discontinued operations

  $ 0.01   $ 1.65  

Diluted:

             

Income (loss) from continuing operations

  $ 1.70   $ (1.34 )

Income from discontinued operations

  $ 0.01   $ 1.65  
   

Weighted average shares outstanding:

             

Basic

    1,875,972,970     1,557,748,353  

Diluted

    1,876,002,775     1,557,748,353  
   

See accompanying Notes to Consolidated Financial Statements, which include a summary of revisions to prior year balances in connection with a change in accounting principle.

4            AIG 2012 Form 10-Q


Table of Contents


American International Group, Inc.

Consolidated Statement of Comprehensive Income (unaudited)

   
Three Months Ended March 31,
(in millions)
  2012
  2011
 
   

Net income

  $ 3,449   $ 1,501  
   

Other comprehensive income (loss), net of tax

             

Change in unrealized appreciation of fixed maturity investments on which other-than-temporary credit impairments were taken

    613     396  

Change in unrealized appreciation (depreciation) of all other investments

    981     (807 )

Change in foreign currency translation adjustments

    91     (517 )

Change in net derivative gains arising from cash flow hedging activities

    22     13  

Change in retirement plan liabilities adjustment

    18     135  
   

Other comprehensive income (loss)

    1,725     (780 )
   

Comprehensive income

    5,174     721  

Comprehensive income attributable to noncontrolling nonvoting, callable, junior and senior preferred interests

    208     252  

Comprehensive income (loss) attributable to other noncontrolling interests

    38     (12 )
   

Total comprehensive income attributable to noncontrolling interests

    246     240  
   

Comprehensive income attributable to AIG

  $ 4,928   $ 481  
   

See accompanying Notes to Consolidated Financial Statements, which include a summary of revisions to prior year balances in connection with a change in accounting principle.

AIG 2012 Form 10-Q            5


Table of Contents


American International Group, Inc.

Consolidated Statement of Cash Flows (unaudited)

   
Three Months Ended March 31,
(in millions)
  2012
  2011
 
   

Cash flows from operating activities:

             

Net income

  $ 3,449   $ 1,501  

Income from discontinued operations

    (13 )   (2,585 )
   

Adjustments to reconcile net income to net cash used in operating activities:

             

Noncash revenues, expenses, gains and losses included in income:

             

Net (gains) losses on sales of securities available for sale and other assets

    (930 )   129  

Net losses on extinguishment of debt

    21     3,313  

Unrealized gains in earnings – net

    (3,630 )   (2,139 )

Equity in income from equity method investments, net of dividends or distributions

    (225 )   (482 )

Depreciation and other amortization

    1,720     1,852  

Impairments of assets

    741     445  

Changes in operating assets and liabilities:

             

General and life insurance reserves

    271     5,824  

Premiums and other receivables and payables – net

    (50 )   (676 )

Reinsurance assets and funds held under reinsurance treaties

    (1,059 )   (4,049 )

Capitalization of deferred policy acquisition costs

    (1,417 )   (1,337 )

Other policyholder funds

    (128 )   (104 )

Current and deferred income taxes – net

    1,050     (611 )

Trading securities

    (118 )   278  

Payment of FRBNY Credit Facility accrued compounded interest and fees

    -     (6,363 )

Other, net

    207     (1,538 )
   

Total adjustments

    (3,547 )   (5,458 )
   

Net cash used in operating activities – continuing operations

    (111 )   (6,542 )

Net cash provided by operating activities – discontinued operations

    -     1,230  
   

Net cash used in operating activities

    (111 )   (5,312 )
   

Cash flows from investing activities:

             

Proceeds from (payments for)

             

Sales of available for sale investments

    10,750     11,665  

Maturities of fixed maturity securities available for sale and hybrid investments

    4,865     4,305  

Sales of trading securities

    3,067     6,987  

Sales or distributions of other invested assets (including flight equipment)

    6,799     2,671  

Principal payments received on and sales of mortgage and other loans receivable

    715     759  

Purchases of available for sale investments

    (14,500 )   (19,456 )

Purchases of trading securities

    (379 )   (199 )

Purchases of other invested assets (including flight equipment)

    (1,720 )   (1,488 )

Mortgage and other loans receivable issued and purchased

    (794 )   (403 )

Net change in restricted cash

    (531 )   26,280  

Net change in short-term investments

    2,172     4,180  

Net change in derivative assets and liabilities other than AIGFP

    (136 )   79  

Other, net

    (122 )   32  
   

Net cash provided by investing activities – continuing operations

    10,186     35,412  

Net cash provided by investing activities – discontinued operations

    -     4,205  
   

Net cash provided by investing activities

    10,186     39,617  
   

Cash flows from financing activities:

             

Proceeds from (payments for)

             

Policyholder contract deposits

    3,510     4,804  

Policyholder contract withdrawals

    (3,930 )   (3,684 )

Federal Reserve Bank of New York credit facility repayments

    -     (14,622 )

Issuance of long-term debt

    4,769     183  

Repayments of long-term debt

    (4,264 )   (3,894 )

Proceeds from drawdown on the Department of the Treasury Commitment

    -     20,292  

Repayment of Department of the Treasury SPV Preferred Interests

    (8,636 )   (9,146 )

Repayment of Federal Reserve Bank of New York SPV Preferred Interests

    -     (26,432 )

Issuance of Common Stock

    -     723  

Purchase of Common Stock

    (3,000 )   -  

Acquisition of noncontrolling interest

    (14 )   (533 )

Other, net

    1,333     (539 )
   

Net cash used in financing activities – continuing operations

    (10,232 )   (32,848 )

Net cash used in financing activities – discontinued operations

    -     (1,637 )
   

Net cash used in financing activities

    (10,232 )   (34,485 )
   

Effect of exchange rate changes on cash

    (2 )   23  
   

Net decrease in cash

    (159 )   (157 )

Cash at beginning of period

    1,474     1,558  

Change in cash of businesses held for sale

    -     400  
   

Cash at end of period

  $ 1,315   $ 1,801  
   

See accompanying Notes to Consolidated Financial Statements, which include a summary of revisions to prior year balances in connection with a change in accounting principle.

6            AIG 2012 Form 10-Q


Table of Contents


American International Group, Inc.

Consolidated Statement of Equity (unaudited)

   
(in millions)
  Preferred
Stock

  Common
Stock

  Treasury
Stock

  Additional
Paid-in
Capital

  Retained
Earnings
(Accumulated
Deficit)

  Accumulated
Other
Comprehensive
Income

  Total AIG
Share-
holders'
Equity

  Non
redeemable
non-
controlling
Interests

  Total
Equity

 
   

Three Months Ended March 31, 2012

                                                       

Balance, beginning of year

  $ -   $ 4,766   $ (942 ) $ 81,787   $ 10,774   $ 5,153   $ 101,538   $ 855   $ 102,393  
   

Purchase of common stock

    -     -     (3,000 )   -     -     -     (3,000 )   -     (3,000 )

Net income attributable to AIG or other noncontrolling interests(a)

    -     -     -     -     3,208     -     3,208     23     3,231  

Other comprehensive income(b)

    -     -     -     -     -     1,720     1,720     3     1,723  

Deferred income taxes

    -     -     -     (7 )   -     -     (7 )   -     (7 )

Contributions from noncontrolling interests

    -     -     -     -     -     -     -     42     42  

Distributions to noncontrolling interests

    -     -     -     -     -     -     -     (14 )   (14 )

Other

    -     -     -     (8 )   -     -     (8 )   (16 )   (24 )
   

Balance, end of period

  $ -   $ 4,766   $ (3,942 ) $ 81,772   $ 13,982   $ 6,873   $ 103,451   $ 893   $ 104,344  
   

Three Months Ended March 31, 2011

                                                       

Balance, beginning of year

  $ 71,983   $ 368   $ (873 ) $ 9,683   $ (3,466 ) $ 7,624   $ 85,319   $ 27,920   $ 113,239  
   

Cumulative effect of change in accounting principle, net of tax

    -     -     -     -     (6,382 )   (81 )   (6,463 )   -     (6,463 )

Series F drawdown

    20,292     -     -     -     -     -     20,292     -     20,292  

Repurchase of SPV preferred interests in connection with Recapitalization

    -     -     -     -     -     -     -     (26,432 )   (26,432 )

Exchange of consideration for preferred stock in connection with Recapitalization

    (92,275 )   4,138     -     67,460     -     -     (20,677 )   -     (20,677 )

Settlement of equity unit stock purchase contract

    -     3     -     720     -     -     723     -     723  

Net income (loss) attributable to AIG or other noncontrolling interests(a)

    -     -     -     -     1,297     -     1,297     (57 )   1,240  

Net income attributable to noncontrolling nonvoting, callable, junior and senior preferred interests

    -     -     -     -     -     -     -     74     74  

Other comprehensive income (loss)(b)

    -     -     -     -     -     (816 )   (816 )   37     (779 )

Acquisition of noncontrolling interest

    -     -     -     (172 )   -     143     (29 )   (509 )   (538 )

Net decrease due to deconsolidation

    -     -     -     -     -     -     -     (109 )   (109 )

Contributions from noncontrolling interests

    -     -     -     -     -     -     -     5     5  

Distributions to noncontrolling interests

    -     -     -     -     -     -     -     (101 )   (101 )

Other

    -     (1 )   -     6     (4 )   -     1     (9 )   (8 )
   

Balance, end of period

  $ -   $ 4,508   $ (873 ) $ 77,697   $ (8,555 ) $ 6,870   $ 79,647   $ 819   $ 80,466  
   
(a)
Excludes gains of $218 million and $187 million for the three months ended March 31, 2012 and 2011, respectively, attributable to redeemable noncontrolling interests.

(b)
Excludes $2 million and $(1) million attributable to redeemable noncontrolling interests for the three months ended March 31, 2012 and 2011, respectively.

See accompanying Notes to Consolidated Financial Statements, which include a summary of revisions to prior year balances in connection with a change in accounting principle.

AIG 2012 Form 10-Q            7


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. BASIS OF PRESENTATION AND SIGNIFICANT EVENTS

    These unaudited condensed consolidated financial statements do not include all disclosures that are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) and should be read in conjunction with the audited consolidated financial statements and the related notes included in the Annual Report on Form 10-K of American International Group, Inc. (AIG) for the year ended December 31, 2011, as amended by Amendment No. 1 and Amendment No. 2 on Form 10-K/A filed on February 27, 2012 and March 30, 2012, respectively (collectively, the 2011 Annual Report on Form 10-K). The condensed consolidated financial information as of December 31, 2011 included herein has been derived from audited consolidated financial statements not included herein.

    Certain of AIG's foreign subsidiaries included in the consolidated financial statements report on different fiscal-period bases. The effect on AIG's consolidated financial condition and results of operations of all material events occurring at these subsidiaries through the date of each of the periods presented in these financial statements has been recorded.

    In the opinion of management, these consolidated financial statements contain the normal recurring adjustments necessary for a fair statement of the results presented herein. Interim period operating results may not be indicative of the operating results for a full year. AIG evaluated the need to recognize or disclose events that occurred subsequent to March 31, 2012 and prior to the issuance of AIG's financial statements. All material intercompany accounts and transactions have been eliminated.


REVISIONS TO PRIOR YEAR FINANCIAL STATEMENTS

    During the quarter ended March 31, 2012, AIG retroactively adopted a standard that changed its method of accounting for costs associated with acquiring or renewing insurance contracts. See Note 2 herein for additional details, including a summary of revisions to prior year financial statements.


USE OF ESTIMATES

    The preparation of financial statements requires the application of accounting policies that often involve a significant degree of judgment. AIG considers that its accounting policies that are most dependent on the application of estimates and assumptions are those relating to items considered by management in the determination of:

estimates with respect to income taxes, including the recoverability of deferred tax assets and the predictability of future tax planning strategies and operating profitability of the character necessary for their realization;

recoverability of assets, including deferred policy acquisition costs (DAC), flight equipment, and reinsurance;

insurance liabilities, including general insurance unpaid claims and claims adjustment expenses and future policy benefits for life and accident and health contracts;

estimated gross profits for investment-oriented products;

impairment charges, including other-than-temporary impairments on financial instruments and goodwill impairments;

liabilities for legal contingencies; and

fair value measurements of certain financial assets and liabilities, including credit default swaps (CDS) and AIG's equity interest in Maiden Lane III LLC (ML III).

8            AIG 2012 Form 10-Q


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, AIG's consolidated financial condition, results of operations and cash flows could be materially affected.


SIGNIFICANT EVENTS

    During the three months ended March 31, 2012, AIG executed significant transactions in the debt and equity capital markets as described below.

March 2012 Common Stock Offering by the Department of the Treasury and AIG Purchase of Shares

    On March 13, 2012, the United States Department of the Treasury (Department of the Treasury), as selling shareholder, completed a registered public offering (the Offering) of AIG Common Stock, par value $2.50 per share (AIG Common Stock), in which it sold approximately 207 million shares of AIG Common Stock for aggregate proceeds of approximately $6.0 billion. AIG purchased approximately 103 million shares of AIG Common Stock in the Offering for an aggregate purchase amount of approximately $3.0 billion. As a result of the Department of the Treasury's sale of AIG Common Stock and AIG's purchase of shares in the Offering, ownership by the Department of the Treasury was reduced from approximately 77 percent to approximately 70 percent of the AIG Common Stock outstanding after the completion of the Offering.

Sale of AIA Shares

    On March 7, 2012, AIG sold approximately 1.72 billion ordinary shares of AIA Group Limited (AIA) for gross proceeds of approximately $6.0 billion (the AIA Sale). As a result of the AIA Sale, AIG's retained interest in AIA decreased from approximately 33 percent to approximately 19 percent. At March 31, 2012 and December 31, 2011, the fair value of AIG's retained interest in AIA was approximately $8.2 billion and $12.4 billion, respectively.

Senior Notes Offering

    On March 22, 2012, AIG completed a registered offering of $750 million 3.000% Notes Due 2015 and $1.25 billion 3.800% Notes Due 2017 for the Matched Investment Program (MIP).

ILFC Debt Offerings

    In the first quarter of 2012, International Lease Finance Corporation (ILFC) raised approximately $2.4 billion through a combination of secured and unsecured financings.

Pay Down of Department of the Treasury's AIA SPV Preferred Interests in Full

    On March 7, 2012, AIG entered into an agreement with the Department of the Treasury to amend various agreements (the Amendment), whereby the special purpose vehicle that held AIG's remaining shares in AIA (the AIA SPV) was entitled to retain and distribute to AIG the net proceeds in excess of $5.6 billion received by the AIA SPV from the AIA Sale. In addition, the liens created by the agreements on (i) the equity interests in ILFC, (ii) the ordinary shares of AIA held by the AIA SPV subsequent to the closing of the AIA Sale and (iii) the common equity interests in the AIA SPV were released and such interests and AIA ordinary shares no longer constituted collateral securing the repayment of the liquidation preference of the Department of the Treasury's preferred interests in the AIA SPV (the AIA SPV Preferred Interests). The Amendment also required the AIA SPV and AM Holdings LLC (the ALICO SPV) to redeem their preferred participating return rights held by the Department of the Treasury before the release of the collateral. AIG contributed a portion of the net proceeds received by AIG in respect of its interest in Maiden Lane II LLC (ML II) to redeem these residual rights.

AIG 2012 Form 10-Q            9


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    On March 21, 2012, AIG entered into an agreement with the Department of the Treasury, pursuant to which the AIA SPV paid down in full the remaining liquidation preference of the AIA SPV Preferred Interests. As a result of the payment, the remaining liens on AIG assets supporting the paydown of these interests were released.


SUPPLEMENTARY DISCLOSURE OF CONSOLIDATED CASH FLOW INFORMATION

   
Three Months Ended March 31,
(in millions)
  2012
  2011
 
   

Cash paid during the period for:

             

Interest*

  $ 939   $ 5,796  

Taxes

  $ 97   $ 384  

Non-cash financing/investing activities:

             

Interest credited to policyholder contract deposits included in financing activities

  $ 1,100   $ 1,255  
   
*
2011 includes payment of FRBNY Credit Facility accrued compounded interest of $4.7 billion, before the facility was terminated on January 14, 2011 in connection with the series of integrated transactions to recapitalize AIG (the Recapitalization) with the Department of the Treasury, the Federal Reserve Bank of New York and the AIG Credit Facility Trust, including the repayment of all amounts owned under the Credit Agreement, dated as of September 22, 2008 (as amended, the FRBNY Credit Facility).


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

RECENT ACCOUNTING STANDARDS

    AIG adopted the following accounting standards on January 1, 2012:

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

    In October 2010, the Financial Accounting Standards Board (FASB) issued an accounting standard update that amends the accounting for costs incurred by insurance companies that can be capitalized in connection with acquiring or renewing insurance contracts. The standard clarifies how to determine whether the costs incurred in connection with the acquisition of new or renewal insurance contracts qualify as deferred policy acquisition costs. AIG adopted the standard retrospectively on January 1, 2012.

    Policy acquisition costs represent those costs that are incremental and directly related to the successful acquisition of new or renewal insurance contracts. AIG defers incremental costs that result directly from, and are essential to, the acquisition or renewal of an insurance contract. Such costs generally include agent or broker commissions and bonuses, premium taxes, and medical and inspection fees that would not have been incurred if the insurance contract had not been acquired or renewed. Each cost is analyzed to assess whether it is fully deferrable. AIG partially defers costs, including certain commissions, when it does not believe the entire cost is directly related to the acquisition or renewal of insurance contracts.

    AIG also defers a portion of employee total compensation and payroll-related fringe benefits directly related to time spent performing specific acquisition or renewal activities including costs associated with the time spent on underwriting, policy issuance and processing, and sales force contract selling. The amounts deferred are derived based on successful efforts for each distribution channel and/or cost center from which the cost originates.

    Advertising costs related to the issuance of insurance contracts that meet the direct-advertising criteria are deferred and amortized as part of deferred policy acquisition costs.

    The method AIG uses to amortize deferred policy acquisition costs for either short- or long-duration insurance contracts did not change as a result of the adoption of the standard.

10            AIG 2012 Form 10-Q


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    The adoption of the standard resulted in a reduction to beginning of period retained earnings for the earliest period presented and a decrease in the amount of capitalized costs in connection with the acquisition or renewal of insurance contracts. Accordingly, AIG revised its historical financial statements and accompanying notes to the financial statements for the changes in deferred policy acquisition costs and associated changes in acquisition expenses and income taxes for affected entities and segments, including divested entities presented in continuing and discontinued operations.

The following tables present amounts previously reported in 2011, the effect of the change due to the retrospective adoption of the standard, and the adjusted amounts that are reflected in AIG's consolidated financial statements.

   
December 31, 2011
(in millions)
  As Previously
Reported

  Effect of
Change

  As Currently
Reported

 
   

Balance Sheet:

                   

Current and deferred income taxes

  $ 16,084   $ 1,718   $ 17,802  

Deferred policy acquisition costs

    14,026     (5,089 )   8,937  

Other assets

    12,824     (42 )   12,782  
   

Total assets

    555,773     (3,413 )   552,360  
   

Retained earnings

    14,332     (3,558 )   10,774  

Accumulated other comprehensive income

    5,008     145     5,153  
   

Total AIG shareholders' equity

    104,951     (3,413 )   101,538  
   

 

   
Three Months Ended March 31, 2011
(dollars in millions, except per share data)
  As Previously
Reported

  Effect of
Change

  As Currently
Reported

 
   

Statement of Operations:

                   

Total net realized capital losses

  $ (651 ) $ 3   $ (648 )
   

Total revenues

    17,436     3     17,439  
   

Interest credited to policyholder account balances

    1,105     1     1,106  

Amortization of deferred acquisition costs

    1,716     (485 )   1,231  

Other acquisition and other insurance expenses

    1,551     417     1,968  
   

Total benefits, claims and expenses

    18,816     (67 )   18,749  
   

Income (loss) from continuing operations before income tax benefit

    (1,380 )   70     (1,310 )
   

Income tax benefit(a)

    (200 )   (26 )   (226 )
   

Income (loss) from continuing operations

    (1,180 )   96     (1,084 )

Income (loss) from discontinued operations, net of income tax expense(b)

    1,653     932     2,585  
   

Net income

    473     1,028     1,501  
   

Net income attributable to AIG

    269     1,028     1,297  
   

Net income (loss) attributable to AIG common shareholders

    (543 )   1,028     485  
   

Income (loss) per share attributable to AIG common shareholders:

                   

Basic:

                   

Income (loss) from continuing operations

  $ (1.41 ) $ 0.07   $ (1.34 )

Income from discontinued operations

  $ 1.06   $ 0.59   $ 1.65  

Diluted

                   

Income (loss) from continuing operations

  $ (1.41 ) $ 0.07   $ (1.34 )

Income from discontinued operations

  $ 1.06   $ 0.59   $ 1.65  
   
(a)
Includes a change in the deferred tax asset valuation allowance for the period.

AIG 2012 Form 10-Q            11


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(b)
Represents the effect on the gain on sale of AIG Star Life Insurance Co. Ltd. (AIG Star) and AIG Edison Life Insurance Company (AIG Edison), which were sold in the first quarter of 2011.

    Adoption of the standard did not affect the previously reported totals for net cash flows provided by (used in) operating, investing, or financing activities, but did affect the following components of net cash flows provided by (used in) operating activities.

   
Three Months Ended March 31, 2011
(in millions)
  As Previously
Reported

  Effect of
Change

  As Currently
Reported

 
   

Cash flows from operating activities:

                   

Net income

  $ 473   $ 1,028   $ 1,501  

Income from discontinued operations

    (1,653 )   (932 )   (2,585 )
   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

                   

Noncash revenues, expenses, gains and losses included in income (loss):

                   

Unrealized gains in earnings – net

    (2,136 )   (3 )   (2,139 )

Depreciation and other amortization

    2,336     (484 )   1,852  

Changes in operating assets and liabilities:

                   

Capitalization of deferred policy acquisition costs

    (1,754 )   417     (1,337 )

Current and deferred income taxes – net

    (585 )   (26 )   (611 )

Total adjustments

    (5,362 )   (96 )   (5,458 )
   

    For short-duration insurance contracts, starting in 2012, AIG has elected to include anticipated investment income in its determination of whether the deferred policy acquisition costs are recoverable. AIG believes the inclusion of anticipated investment income in the recoverability analysis is a preferable accounting policy, as it includes in the recoverability analysis the fact that there is a timing difference between when the premiums are collected and in turn invested and when the losses and related expenses are paid. This is considered a change in accounting principle that requires retrospective application to all periods presented. Because AIG historically has not recorded any premium deficiency on its short-duration insurance contracts even without the inclusion of anticipated investment income, there were no changes to the historical financial statements for the change in accounting principle.

Reconsideration of Effective Control for Repurchase Agreements

    In April 2011, the FASB issued an accounting standard that amends the criteria used to determine effective control for repurchase agreements and other similar arrangements such as securities lending transactions. The standard modifies the criteria for determining when these transactions would be accounted for as secured borrowings (i.e., financings) instead of sales of the securities.

    The standard removes from the assessment of effective control the requirement that the transferor have the ability to repurchase or redeem the financial assets on substantially agreed terms, even in the event of default by the transferee. The removal of this requirement makes the level of collateral received by the transferor in a repurchase agreement or similar arrangement irrelevant in determining whether the transaction should be accounted for as a sale. Consequently, more repurchase agreements, securities lending transactions and similar arrangements will be accounted for as secured borrowings.

    The guidance in the standard must be applied prospectively to transactions or modifications of existing transactions that occur on or after January 1, 2012. Under this standard, $1.2 billion in repurchase agreements (related to securities with a fair value of $1.8 billion) continued to be accounted for as sales as of March 31, 2012. Any modifications to these transactions that occur subsequent to adoption will result in an assessment of whether they should be accounted for as secured borrowings under the standard.

12            AIG 2012 Form 10-Q


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Common Fair Value Measurements and Disclosure Requirements in GAAP and IFRS

    In May 2011, the FASB issued an accounting standard that amended certain aspects of the fair value measurement guidance in GAAP, primarily to achieve the FASB's objective of a converged definition of fair value and substantially converged measurement and disclosure guidance with International Financial Reporting Standards (IFRS). The measurement and disclosure requirements under GAAP and IFRS are now generally consistent, with certain exceptions including the accounting for day one gains and losses, measuring the fair value of alternative investments using net asset value and certain disclosure requirements.

    The standard's fair value measurement and disclosure guidance applies to all companies that measure assets, liabilities, or instruments classified in shareholders' equity at fair value or provide fair value disclosures for items not recorded at fair value. While many of the amendments are not expected to significantly affect current practice, the guidance clarifies how a principal market is determined, addresses the fair value measurement of financial instruments with offsetting market or counterparty credit risks and the concept of valuation premise (i.e., in use or in exchange) and highest and best use, extends the prohibition on blockage factors to all three levels of the fair value hierarchy, and requires additional disclosures. The standard is effective for AIG for interim and annual periods beginning on January 1, 2012. The new disclosure requirements must be applied prospectively. The standard did not have any effect on AIG's consolidated financial condition, results of operations or cash flows. See Note 4 herein.

Presentation of Comprehensive Income

    In June 2011, the FASB issued an accounting standard that requires the presentation of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components, followed consecutively by a second statement that presents total other comprehensive income and its components. The standard did not have any effect on AIG's consolidated financial condition, results of operations or cash flows.

Testing Goodwill for Impairment

    In September 2011, the FASB issued an accounting standard that amends the approach to testing goodwill for impairment. The standard simplifies how entities test goodwill for impairment by permitting an entity to first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative, two-step goodwill impairment test. The standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of the standard did not affect AIG's consolidated financial condition, results of operations or cash flows.


3. SEGMENT INFORMATION

    AIG reports the results of its operations through three reportable segments: Chartis, SunAmerica Financial Group (SunAmerica) and Aircraft Leasing. AIG evaluates performance based on pre-tax income (loss), excluding results from discontinued operations, because AIG believes this provides more meaningful information on how its operations are performing.

    In order to align financial reporting with changes made during 2012 to the manner in which AIG's chief operating decision makers review the Chartis businesses to assess performance and make decisions about resources to be allocated, certain products previously reported in Commercial Insurance were reclassified to Consumer Insurance. These revisions did not affect the total Chartis reportable segment results previously reported.

AIG 2012 Form 10-Q            13


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following table presents AIG's operations by reportable segment:

   
 
  Reportable Segment    
   
   
   
 
 
   
   
  Consolidation
and
Eliminations

   
 
(in millions)
  Chartis
  SunAmerica
  Aircraft
Leasing*

  Other
Operations

  Total
  Consolidated
 
   

Three Months Ended March 31, 2012

                                           

Total revenues

  $ 9,798   $ 3,696   $ 1,154   $ 4,003   $ 18,651   $ (208 ) $ 18,443  

Pre-tax income (loss)

    910     862     120     2,736     4,628     (44 )   4,584  
   

Three Months Ended March 31, 2011

                                           

Total revenues

  $ 9,880   $ 3,839   $ 1,159   $ 2,732   $ 17,610   $ (171 ) $ 17,439  

Pre-tax income (loss)

    (374 )   967     120     (1,997 )   (1,284 )   (26 )   (1,310 )
   
*
AIG's Aircraft Leasing operations consist of a single operating segment.

The following table presents Chartis operations by operating segment:

   
(in millions)
  Commercial
Insurance

  Consumer
Insurance

  Other
  Total
Chartis

 
   

Three Months Ended March 31, 2012

                         

Total revenues

  $ 5,929   $ 3,612   $ 257   $ 9,798  

Pre-tax income

    565     234     111     910  
   

Three Months Ended March 31, 2011

                         

Total revenues

  $ 6,066   $ 3,434   $ 380   $ 9,880  

Pre-tax income (loss)

    (384 )   (255 )   265     (374 )
   

The following table presents SunAmerica operations by operating segment:

   
(in millions)
  Domestic
Life
Insurance

  Domestic
Retirement
Services

  Total
SunAmerica

 
   

Three Months Ended March 31, 2012

                   

Total revenues

  $ 2,159   $ 1,537   $ 3,696  

Pre-tax income

    488     374     862  
   

Three Months Ended March 31, 2011

                   

Total revenues

  $ 1,962   $ 1,877   $ 3,839  

Pre-tax income

    333     634     967  
   

The following table presents the components of AIG's Other operations:

   
(in millions)
  Mortgage
Guaranty

  Global
Capital
Markets

  Direct
Investment
Book

  Retained
Interests

  Corporate
& Other

  Consolidation
and
Eliminations

  Total
Other
Operations

 
   

Three Months Ended March 31, 2012

                                           

Total revenues

  $ 200   $ 160   $ 344   $ 3,047   $ 262   $ (10 ) $ 4,003  

Pre-tax income (loss)

    8     88     248     3,047     (658 )   3     2,736  
   

Three Months Ended March 31, 2011

                                           

Total revenues

  $ 238   $ 386   $ 463   $ 1,649   $ 11   $ (15 ) $ 2,732  

Pre-tax income (loss)

    8     290     410     1,649     (4,347 )   (7 )   (1,997 )
   

14            AIG 2012 Form 10-Q


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


4. FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS ON A RECURRING BASIS

    AIG carries certain of its financial instruments at fair value. AIG defines the fair value of a financial instrument as the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note 6 to the Consolidated Financial Statements in the 2011 Annual Report on Form 10-K for a discussion of AIG's accounting policies and procedures regarding fair value measurements related to the following information.

    Assets and liabilities recorded at fair value in the Consolidated Balance Sheet are measured and classified in accordance with a fair value hierarchy established in U.S. GAAP. The hierarchy consists of three "levels" based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:

Level 1:  Fair value measurements that are quoted prices (unadjusted) in active markets that AIG has the ability to access for identical assets or liabilities.

Level 2:  Fair value measurements based on inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3:  Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, AIG must make certain assumptions as to the inputs a hypothetical market participant would use to value that asset or liability.

AIG 2012 Form 10-Q            15


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS

The following table presents information about assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value measurement based on the levels of the inputs used:

   
March 31, 2012
(in millions)
  Level 1
  Level 2
  Level 3
  Counterparty
Netting
(a)
  Cash
Collateral
(b)
  Total
 
   

Assets:

                                     

Bonds available for sale:

                                     

U.S. government and government sponsored entities

  $ -   $ 4,786   $ -   $ -   $ -   $ 4,786  

Obligations of states, municipalities and political subdivisions

    -     36,628     1,054     -     -     37,682  

Non-U.S. governments

    396     25,711     15     -     -     26,122  

Corporate debt

    -     145,157     1,323     -     -     146,480  

RMBS

    -     21,811     13,240     -     -     35,051  

CMBS

    -     3,890     4,173     -     -     8,063  

CDO/ABS

    -     3,296     4,882     -     -     8,178  
   

Total bonds available for sale

    396     241,279     24,687     -     -     266,362  
   

Bond trading securities:

                                     

U.S. government and government sponsored entities

    505     6,951     -     -     -     7,456  

Obligations of states, municipalities and political subdivisions

    -     236     -     -     -     236  

Non-U.S. governments

    -     36     -     -     -     36  

Corporate debt

    -     1,088     5     -     -     1,093  

RMBS

    -     1,339     314     -     -     1,653  

CMBS

    -     1,280     433     -     -     1,713  

CDO/ABS

    -     3,878     8,416     -     -     12,294  
   

Total bond trading securities

    505     14,808     9,168     -     -     24,481  
   

Equity securities available for sale:

                                     

Common stock

    2,754     1     50     -     -     2,805  

Preferred stock

    -     48     106     -     -     154  

Mutual funds

    54     13     -     -     -     67  
   

Total equity securities available for sale

    2,808     62     156     -     -     3,026  
   

Equity securities trading

    38     85     -     -     -     123  

Mortgage and other loans receivable

    -     113     1     -     -     114  

Other invested assets(c)

    8,332     1,576     7,186     -     -     17,094  

Derivative assets:

                                     

Interest rate contracts

    2     6,510     1,015     -     -     7,527  

Foreign exchange contracts

    -     38     -     -     -     38  

Equity contracts

    110     128     48     -     -     286  

Commodity contracts

    -     153     2     -     -     155  

Credit contracts

    -     1     64     -     -     65  

Other contracts

    -     480     214     -     -     694  

Counterparty netting and cash collateral

    -     -     -     (3,264 )   (1,280 )   (4,544 )
   

Total derivative assets

    112     7,310     1,343     (3,264 )   (1,280 )   4,221  
   

Short-term investments(d)

    433     3,975     -     -     -     4,408  

Separate account assets

    53,210     2,815     -     -     -     56,025  

Other assets

    -     701     -     -     -     701  
   

Total

  $ 65,834   $ 272,724   $ 42,541   $ (3,264 ) $ (1,280 ) $ 376,555  
   

Liabilities:

                                     

Policyholder contract deposits

  $ -   $ -   $ 782   $ -   $ -   $ 782  

Derivative liabilities:

                                     

Interest rate contracts

    -     6,307     237     -     -     6,544  

Foreign exchange contracts

    -     165     -     -     -     165  

Equity contracts

    1     232     8     -     -     241  

Commodity contracts

    -     156     -     -     -     156  

Credit contracts(e)

    -     2     2,769     -     -     2,771  

Other contracts

    -     159     251     -     -     410  

Counterparty netting and cash collateral

    -     -     -     (3,264 )   (2,801 )   (6,065 )
   

Total derivative liabilities

    1     7,021     3,265     (3,264 )   (2,801 )   4,222  
   

Other long-term debt(f)

    -     10,004     575     -     -     10,579  

Other liabilities(g)

    111     1,405     -     -     -     1,516  
   

Total

  $ 112   $ 18,430   $ 4,622   $ (3,264 ) $ (2,801 ) $ 17,099  
   

16            AIG 2012 Form 10-Q


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


   
December 31, 2011
(in millions)
  Level 1
  Level 2
  Level 3
  Counterparty
Netting
(a)
  Cash
Collateral
(b)
  Total
 
   

Assets:

                                     

Bonds available for sale:

                                     

U.S. government and government sponsored entities

  $ 174   $ 5,904   $ -   $ -   $ -   $ 6,078  

Obligations of states, municipalities and political subdivisions

    -     36,538     960     -     -     37,498  

Non-U.S. governments

    259     25,467     9     -     -     25,735  

Corporate debt

    -     142,883     1,935     -     -     144,818  

RMBS

    -     23,727     10,877     -     -     34,604  

CMBS

    -     3,991     3,955     -     -     7,946  

CDO/ABS

    -     3,082     4,220     -     -     7,302  
   

Total bonds available for sale

    433     241,592     21,956     -     -     263,981  
   

Bond trading securities:

                                     

U.S. government and government sponsored entities

    100     7,404     -     -     -     7,504  

Obligations of states, municipalities and political subdivisions

    -     257     -     -     -     257  

Non-U.S. governments

    -     35     -     -     -     35  

Corporate debt

    -     809     7     -     -     816  

RMBS

    -     1,345     303     -     -     1,648  

CMBS

    -     1,283     554     -     -     1,837  

CDO/ABS

    -     3,835     8,432     -     -     12,267  
   

Total bond trading securities

    100     14,968     9,296     -     -     24,364  
   

Equity securities available for sale:

                                     

Common stock

    3,294     70     57     -     -     3,421  

Preferred stock

    -     44     99     -     -     143  

Mutual funds

    55     5     -     -     -     60  
   

Total equity securities available for sale

    3,349     119     156     -     -     3,624  
   

Equity securities trading

    43     82     -     -     -     125  

Mortgage and other loans receivable

    -     106     1     -     -     107  

Other invested assets(c)

    12,549     1,709     6,618     -     -     20,876  

Derivative assets:

                                     

Interest rate contracts

    2     7,251     1,033     -     -     8,286  

Foreign exchange contracts

    -     143     2     -     -     145  

Equity contracts

    92     133     38     -     -     263  

Commodity contracts

    -     134     2     -     -     136  

Credit contracts

    -     -     89     -     -     89  

Other contracts

    29     462     250     -     -     741  

Counterparty netting and cash collateral

    -     -     -     (3,660 )   (1,501 )   (5,161 )
   

Total derivative assets

    123     8,123     1,414     (3,660 )   (1,501 )   4,499  
   

Short-term investments(d)

    2,309     3,604     -     -     -     5,913  

Separate account assets

    48,502     2,886     -     -     -     51,388  
   

Total

  $ 67,408   $ 273,189   $ 39,441   $ (3,660 ) $ (1,501 ) $ 374,877  
   

Liabilities:

                                     

Policyholder contract deposits

  $ -   $ -   $ 918   $ -   $ -   $ 918  

Derivative liabilities:

                                     

Interest rate contracts

    -     6,661     248     -     -     6,909  

Foreign exchange contracts

    -     178     -     -     -     178  

Equity contracts

    -     198     10     -     -     208  

Commodity contracts

    -     146     -     -     -     146  

Credit contracts(e)

    -     4     3,362     -     -     3,366  

Other contracts

    -     155     217     -     -     372  

Counterparty netting and cash collateral

    -     -     -     (3,660 )   (2,786 )   (6,446 )
   

Total derivative liabilities

    -     7,342     3,837     (3,660 )   (2,786 )   4,733  
   

Other long-term debt(f)

    -     10,258     508     -     -     10,766  

Other liabilities(g)

    193     714     -     -     -     907  
   

Total

  $ 193   $ 18,314   $ 5,263   $ (3,660 ) $ (2,786 ) $ 17,324  
   
(a)
Represents netting of derivative exposures covered by a qualifying master netting agreement.

(b)
Represents cash collateral posted and received. Securities collateral posted for derivative transactions that is reflected in Fixed maturity securities in the Consolidated Balance Sheet, and collateral received, not reflected in the Consolidated Balance Sheet, were $1.2 billion and $87 million, respectively, at March 31, 2012 and $1.8 billion and $100 million, respectively, at December 31, 2011.

(c)
Included in Level 1 are $8.2 billion and $12.4 billion at March 31, 2012 and December 31, 2011, respectively, of AIA shares publicly traded on the Hong Kong Stock Exchange. Approximately 3 percent of the fair value of the assets recorded as Level 3 relate to various private equity, real estate, hedge fund and fund-of-funds investments that are consolidated by AIG at both March 31, 2012 and December 31, 2011. AIG's ownership in these funds represented 63.6 percent, or $0.9 billion, of Level 3 assets at March 31, 2012 and 57.3 percent, or $0.8 billion, of Level 3 assets at December 31, 2011.

(d)
Included in Level 2 is the fair value of securities purchased under agreements to resell of $0.7 billion and $0.1 billion at March 31, 2012 and December 31, 2011, respectively.

(e)
Included in Level 3 is the fair value derivative liability of $2.6 billion and $3.2 billion at March 31, 2012 and December 31, 2011, respectively, on the super senior credit default swap portfolio.

(f)
Includes Guaranteed Investment Agreements (GIAs), notes, bonds, loans and mortgages payable.

(g)
Included in Level 2 is the fair value of securities sold under agreements to repurchase and securities and spot commodities sold but not yet purchased, of $1.4 billion and $53 million, respectively, at March 31, 2012. Included in Level 2 is the fair value of securities sold under agreements to repurchase, securities and

AIG 2012 Form 10-Q            17


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    spot commodities sold but not yet purchased and trust deposits and deposits due to banks and other depositors, of $0.6 billion, $144 million and $6 million, respectively, at December 31, 2011.


TRANSFERS OF LEVEL 1 AND LEVEL 2 ASSETS AND LIABILITIES


CHANGES IN LEVEL 3 RECURRING FAIR VALUE MEASUREMENTS

The following tables present changes during the three-month period ended March 31, 2012 and 2011 in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) recorded in the Consolidated Statement of Operations during those periods related to the Level 3 assets and liabilities that remained in the Consolidated Balance Sheet at March 31, 2012 and 2011:

   
(in millions)
  Fair value
Beginning
of Period
(a)
  Net
Realized and
Unrealized
Gains (Losses)
Included
in Income

  Accumulated
Other
Comprehensive
Income (Loss)

  Purchases,
Sales,
Issues and
Settlements,
Net

  Gross
Transfers
in

  Gross
Transfers
out

  Fair value
End of Period

  Changes in
Unrealized Gains
(Losses) Included
in Income on
Instruments Held
at End of Period

 
   

Three Months Ended March 31, 2012

                                                 

Assets:

                                                 

Bonds available for sale:

                                                 

Obligations of states, municipalities and political subdivisions

  $ 960   $ 1   $ 16   $ 100   $ -   $ (23 ) $ 1,054   $ -  

Non-U.S. governments

    9     -     8     (2 )   -     -     15     -  

Corporate debt

    1,935     (16 )   76     (3 )   291     (960 )   1,323     -  

RMBS

    10,877     (70 )   793     1,326     348     (34 )   13,240     -  

CMBS

    3,955     (69 )   287     11     31     (42 )   4,173     -  

CDO/ABS

    4,220     14     177     70     438     (37 )   4,882     -  
   

Total bonds available for sale

    21,956     (140 )   1,357     1,502     1,108     (1,096 )   24,687     -  
   

Bond trading securities:

                                                 

Corporate debt

    7     -     -     (2 )   -     -     5     -  

RMBS

    303     33     -     (19 )   -     (3 )   314     39  

CMBS

    554     33     -     (135 )   32     (51 )   433     85  

CDO/ABS

    8,432     1,621     -     (1,637 )   -     -     8,416     2,122  
   

Total bond trading securities

    9,296     1,687     -     (1,793 )   32     (54 )   9,168     2,246  
   

Equity securities available for sale:

                                                 

Common stock

    57     14     (12 )   (14 )   5     -     50     -  

Preferred stock

    99     2     8     8     -     (11 )   106     -  
   

Total equity securities available for sale

    156     16     (4 )   (6 )   5     (11 )   156     -  
   

Mortgage and other loans receivable

    1     -     -     -     -     -     1     -  

Other invested assets

    6,618     (147 )   210     101     742     (338 )   7,186     (4 )
   

Total

  $ 38,027   $ 1,416   $ 1,563   $ (196 ) $ 1,887   $ (1,499 ) $ 41,198   $ 2,242  
   

Liabilities:

                                                 

Policyholder contract deposits

  $ (918 ) $ 139   $ -   $ (3 ) $ -   $ -   $ (782 ) $ (144 )

Derivative liabilities, net:

                                                 

Interest rate contracts

    785     -     -     (7 )   -     -     778     (23 )

Foreign exchange contracts

    2     -     -     (2 )   -     -     -     -  

Equity contracts

    28     12     -     2     (2 )   -     40     10  

Commodity contracts

    2     -     -     -     -     -     2     -  

Credit contracts

    (3,273 )   (143 )   -     711     -     -     (2,705 )   (525 )

Other contracts

    33     (410 )   9     412     (81 )   -     (37 )   24  
   

Total derivative liabilities, net

    (2,423 )   (541 )   9     1,116     (83 )   -     (1,922 )   (514 )
   

Other long-term debt(b)

    (508 )   (110 )   (77 )   114     -     6     (575 )   (104 )
   

Total

  $ (3,849 ) $ (512 ) $ (68 ) $ 1,227   $ (83 ) $ 6   $ (3,279 ) $ (762 )
   

18            AIG 2012 Form 10-Q


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

   
(in millions)
  Fair value
Beginning
of Period
(a)
  Net
Realized and
Unrealized
Gains (Losses)
Included
in Income

  Accumulated
Other
Comprehensive
Income (Loss)

  Purchases,
Sales,
Issues and
Settlements,
Net

  Gross
Transfers
In

  Gross
Transfers
Out

  Fair value
End
of Period

  Changes in
Unrealized Gains
(Losses) Included
in Income on
Instruments Held
at End of Period

 
   

Three Months Ended March 31, 2011

                                                 

Assets:

                                                 

Bonds available for sale:

                                                 

Obligations of states, municipalities and political subdivisions

  $ 609   $ -   $ 4   $ 112   $ -   $ (23 ) $ 702   $ -  

Non-U.S. governments

    5     -     -     -     -     -     5     -  

Corporate debt

    2,262     (3 )   7     (33 )   226     (1,224 )   1,235     -  

RMBS

    6,367     (81 )   533     38     11     -     6,868     -  

CMBS

    3,604     (27 )   664     72     25     (22 )   4,316     -  

CDO/ABS

    4,241     20     238     (455 )   72     (259 )   3,857     -  
   

Total bonds available for sale

    17,088     (91 )   1,446     (266 )   334     (1,528 )   16,983     -  
   

Bond trading securities:

                                                 

Corporate debt

    -     -     -     -     18     -     18     -  

RMBS

    91     2     -     6     -     -     99     2  

CMBS

    506     38     -     (58 )   81     (44 )   523     39  

CDO/ABS

    9,431     1,030     5     (5 )   -     -     10,461     1,027  
   

Total bond trading securities

    10,028     1,070     5     (57 )   99     (44 )   11,101     1,068  
   

Equity securities available for sale:

                                                 

Common stock

    61     15     (2 )   (15 )   6     (2 )   63     -  

Preferred stock

    64     (2 )   -     1     -     -     63     -  
   

Total equity securities available for sale

    125     13     (2 )   (14 )   6     (2 )   126     -  
   

Equity securities trading

    1     -     -     -     -     -     1     -  

Other invested assets

    7,414     53     343     (350 )   -     (390 )   7,070     (192 )
   

Total

  $ 34,656   $ 1,045   $ 1,792   $ (687 ) $ 439   $ (1,964 ) $ 35,281   $ 876  
   

Liabilities:

                                                 

Policyholder contract deposits

  $ (445 ) $ 79   $ -   $ (3 ) $ -   $ -   $ (369 ) $ (93 )

Derivative liabilities, net:

                                                 

Interest rate contracts

    732     (116 )   -     3     -     -     619     (25 )

Foreign exchange contracts

    16     -     -     -     -     -     16     -  

Equity contracts

    22     (7 )   -     38     -     (19 )   34     (7 )

Commodity contracts

    23     3     -     (11 )   -     -     15     2  

Credit contracts

    (3,798 )   382     -     (4 )   -     -     (3,420 )   381  

Other contracts

    (112 )   4     25     50     -     27     (6 )   (70 )
   

Total derivatives liabilities, net

    (3,117 )   266     25     76     -     8     (2,742 )   281  
   

Other long-term debt(b)

    (982 )   (54 )   -     61     (21 )   -     (996 )   (42 )
   

Total

  $ (4,544 ) $ 291   $ 25   $ 134   $ (21 ) $ 8   $ (4,107 ) $ 146  
   
(a)
Total Level 3 derivative exposures have been netted in these tables for presentation purposes only.

(b)
Includes GIAs, notes, bonds, loans and mortgages payable.


Net realized and unrealized gains and losses related to Level 3 items shown above are reported in the Consolidated Statement of Operations as follows:

   
(in millions)
  Net
Investment
Income

  Net Realized
Capital
Gains (Losses)

  Other
Income

  Total
 
   

Three Months Ended March 31, 2012

                         

Bonds available for sale

  $ 231   $ (375 ) $ 4   $ (140 )

Bond trading securities

    1,549     -     138     1,687  

Equity securities available for sale

    -     16     -     16  

Other invested assets

    (14 )   (132 )   (1 )   (147 )

Policyholder contract deposits

    -     139     -     139  

Derivative liabilities, net

    (1 )   19     (559 )   (541 )

Other long-term debt

    -     -     (110 )   (110 )
   

Three Months Ended March 31, 2011

                         

Bonds available for sale

  $ 81   $ (176 ) $ 4   $ (91 )

Bond trading securities

    1,001     -     69     1,070  

Equity securities available for sale

    -     13     -     13  

Other invested assets

    46     (15 )   22     53  

Policyholder contract deposits

    -     79     -     79  

Derivative liabilities, net

    -     (54 )   320     266  

Other long-term debt

    -     -     (54 )   (54 )
   

AIG 2012 Form 10-Q            19


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following table presents the gross components of purchases, sales, issues and settlements, net, shown above:

   
(in millions)
  Purchases
  Sales
  Settlements
  Purchases, Sales,
Issues and
Settlements, Net
(a)
 
   

Three Months Ended March 31, 2012

                         

Assets:

                         

Bonds available for sale:

                         

Obligations of states, municipalities and political subdivisions

  $ 108   $ (8 ) $ -   $ 100  

Non-U.S. governments

    -     (2 )   -     (2 )

Corporate debt

    61     (1 )   (63 )   (3 )

RMBS

    1,912     (94 )   (492 )   1,326  

CMBS

    126     (64 )   (51 )   11  

CDO/ABS

    317     (4 )   (243 )   70  
   

Total bonds available for sale

    2,524     (173 )   (849 )   1,502  
   

Bond trading securities:

                         

Corporate debt

    -     -     (2 )   (2 )

RMBS

    -     -     (19 )   (19 )

CMBS

    113     (57 )   (191 )   (135 )

CDO/ABS

    -     (310 )   (1,327 )   (1,637 )
   

Total bond trading securities

    113     (367 )   (1,539 )   (1,793 )
   

Equity securities available for sale:

                         

Common stock

    -     (14 )   -     (14 )

Preferred stock

    11     -     (3 )   8  
   

Total equity securities available for sale

    11     (14 )   (3 )   (6 )
   

Other invested assets

    266     (4 )   (161 )   101  
   

Total assets

  $ 2,914   $ (558 ) $ (2,552 ) $ (196 )
   

Liabilities:

                         

Policyholder contract deposits

  $ -   $ (6 ) $ 3   $ (3 )

Derivative liabilities, net:

                         

Interest rate contracts

    -     -     (7 )   (7 )

Foreign exchange contracts

    -     -     (2 )   (2 )

Equity contracts

    2     -     -     2  

Credit contracts

    -     -     711     711  

Other contracts

    -     -     412     412  
   

Total derivative liabilities, net

    2     -     1,114     1,116  
   

Other long-term debt(b)

    -     -     114     114  
   

Total liabilities

  $ 2   $ (6 ) $ 1,231   $ 1,227  
   

20            AIG 2012 Form 10-Q


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


   
(in millions)
  Purchases
  Sales
  Settlements
  Purchases, Sales,
Issues and
Settlements, Net
(a)
 
   

Three Months Ended March 31, 2011

                         

Assets:

                         

Bonds available for sale:

                         

Obligations of states, municipalities and political subdivisions

  $ 113   $ -   $ (1 ) $ 112  

Corporate debt

    8     (19 )   (22 )   (33 )

RMBS

    317     (13 )   (266 )   38  

CMBS

    142     -     (70 )   72  

CDO/ABS

    65     -     (520 )   (455 )
   

Total bonds available for sale

    645     (32 )   (879 )   (266 )
   

Bond trading securities:

                         

RMBS

    -     -     6     6  

CMBS

    -     (5 )   (53 )   (58 )

CDO/ABS

    3     -     (8 )   (5 )
   

Total bond trading securities

    3     (5 )   (55 )   (57 )
   

Equity securities available for sale:

                         

Common stock

    -     (15 )   -     (15 )

Preferred stock

    -     -     1     1  

Mutual funds

    -     -     -     -  
   

Total equity securities available for sale

    -     (15 )   1     (14 )
   

Other invested assets

    114     (12 )   (452 )   (350 )
   

Total assets

  $ 762   $ (64 ) $ (1,385 ) $ (687 )
   

Liabilities:

                         

Policyholder contract deposits

  $ -   $ (9 ) $ 6   $ (3 )

Derivative liabilities, net:

                         

Interest rate contracts

    -     -     3     3  

Equity contracts

    39     -     (1 )   38  

Commodity contracts

    -     -     (11 )   (11 )

Credit contracts

    -     -     (4 )   (4 )

Other contracts

    -     -     50     50  
   

Total derivative liabilities, net

    39     -     37     76  
   

Other long-term debt(b)

    -     -     61     61  
   

Total liabilities

  $ 39   $ (9 ) $ 104   $ 134  
   
(a)
There were no issues during the three-month periods ended March 31, 2012 and 2011.

(b)
Includes GIAs, notes, bonds, loans and mortgages payable.

    Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3 in the tables above. As a result, the unrealized gains (losses) on instruments held at March 31, 2012 and 2011 may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable inputs (e.g., changes in unobservable long-dated volatilities).

Transfers of Level 3 Assets and Liabilities

    AIG's policy is to record transfers of assets and liabilities into or out of Level 3 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. As a result, the Net

AIG 2012 Form 10-Q            21


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

realized and unrealized gains (losses) included in income or other comprehensive income and as shown in the table above excludes $58 million of net losses related to assets and liabilities transferred into Level 3 during the three-month period ended March 31, 2012, and includes $27 million of net gains related to assets and liabilities transferred out of Level 3 during the three-month period ended March 31, 2012.

Transfers of Level 3 Assets

    During the three-month period ended March 31, 2012, transfers into Level 3 included certain residential mortgage-backed securities (RMBS), asset-backed securities (ABS), private placement corporate debt and certain private equity funds and hedge funds. Transfers into Level 3 for certain RMBS and certain ABS were related to decreased observations of market transactions and price information for those securities. The transfers into Level 3 of investments in certain other RMBS were due to a decrease in market transparency, downward credit migration and an overall increase in price disparity for certain individual security types. Transfers into Level 3 for private placement corporate debt and certain other ABS were primarily the result of limited market pricing information that required AIG to determine fair value for these securities based on inputs that are adjusted to better reflect AIG's own assumptions regarding the characteristics of a specific security or associated market liquidity. Certain private equity fund and hedge fund investments were transferred into Level 3 due to these investments being carried at fair value and no longer being accounted for using the equity method of accounting, consistent with the changes to AIG's ownership and lack of ability to exercise significant influence over the respective investments. Other hedge fund investments were transferred into Level 3 as a result of limited market activity due to fund-imposed redemption restrictions.

    Assets are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data. This may be due to a significant increase in market activity for the asset, a specific event, one or more significant input(s) becoming observable or a long-term interest rate significant to a valuation becoming short-term and thus observable. In addition, transfers out of Level 3 also occur when investments are no longer carried at fair value as the result of a change in the applicable accounting methodology, given changes in the nature and extent of AIG's ownership interest. During the three-month period ended March 31, 2012, transfers out of Level 3 primarily related to investments in private placement corporate debt and certain private equity funds and hedge funds. Transfers out of Level 3 for private placement corporate debt were primarily the result of AIG using observable pricing information that appropriately reflects the fair value of those securities without the need for adjustment based on AIG's own assumptions regarding the characteristics of a specific security or the current liquidity in the market. Certain private equity funds and hedge funds were transferred out of Level 3, substantially all attributable to the hedge funds no longer being subject to fund-imposed redemption restrictions.

Transfers of Level 3 Liabilities

    As AIG presents carrying values of its derivative positions on a net basis in the table above, transfers into Level 3 liabilities, which totaled approximately $83 million during the three-month period ended March 31, 2012, primarily related to certain derivative assets transferred out of Level 3 because of the presence of observable inputs on certain forward commitments. Other transfers into Level 3 liabilities were due to movement in market variables. During the three-month period ended March 31, 2012, there were no significant transfers out of Level 3 liabilities.

    AIG uses various hedging techniques to manage risks associated with certain positions, including those classified within Level 3. Such techniques may include the purchase or sale of financial instruments that are classified within Level 1 and/or Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities classified within Level 3 presented in the table above do not reflect the related realized or unrealized gains (losses) on hedging instruments that are classified within Level 1 and/or Level 2.

22            AIG 2012 Form 10-Q


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


FAIR VALUE MEASUREMENTS ON A NON-RECURRING BASIS

    See Notes 2(c), (e), (f) and (g) to the Consolidated Financial Statements in the 2011 Annual Report on Form 10-K for additional information about how AIG measures the fair value of certain assets on a non-recurring basis and how AIG tests various asset classes for impairment.

The following table presents assets (held as of the dates presented, but excluding discontinued operations) measured at fair value on a non-recurring basis at the time of impairment and the related impairment charges recorded during the periods presented:

   
 
   
   
   
   
  Impairment Charges  
 
  Assets at Fair Value  
 
  Three Months Ended March 31,  
 
  Non-Recurring Basis  
(in millions)
  Level 1
  Level 2
  Level 3
  Total
  2012
  2011
 
   

March 31, 2012

                                     

Investment real estate

  $ -   $ -   $ -   $ -   $ -   $ 12  

Other investments

    -     -     1,621     1,621     93     106  

Aircraft*

    -     -     94     94     54     114  

Other assets

    -     -     18     18     8     -  
   

Total

  $ -   $ -   $ 1,733   $ 1,733   $ 155   $ 232  
   

December 31, 2011

                                     

Investment real estate

  $ -   $ -   $ 457   $ 457              

Other investments

    -     -     2,199     2,199              

Aircraft

    -     -     1,683     1,683              

Other assets

    -     -     4     4              
               

Total

  $ -   $ -   $ 4,343   $ 4,343              
               
*
Aircraft impairment charges include fair value adjustments on aircraft.

AIG 2012 Form 10-Q            23


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENTS

The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments, and includes only those instruments for which information about the inputs is reasonably available to AIG, such as data from pricing vendors and from internal valuation models. Because not all Level 3 instruments have input information reasonably available to AIG, balances shown below may not equal total amounts reported for such Level 3 assets and liabilities:

 
(in millions)
  Fair Value at
March 31,
2012

  Valuation
Technique

  Unobservable
Input
(a)
  Range/
(Weighted Average)
(a)
 

Assets:

                 

Corporate debt

  $ 685   Discounted cash flow   Yield(b)   2.37% - 11.08% (6.73%)

Residential mortgage backed securities

   
12,326
 
Discounted cash flow
 
Constant prepayment rate
(c)
 
0.00% - 16.89% (8.02%)

            Loss severity(c)   44.10% - 79.01% (61.56%)

            Constant default rate(c)   4.34% - 13.83% (9.09%)

            Yield(c)   4.09% - 11.80% (7.95%)

Certain CDO/ABS

   
1,961
 
Discounted cash flow
 
Constant prepayment rate
(c)
 
0.00% - 49.80% (18.55%)

            Loss severity(c)   0.00% - 19.46% (3.22%)

            Constant default rate(c)   0.00% - 2.29% (0.38%)

            Yield(c)   2.29% - 6.57% (4.43%)

Commercial mortgage backed securities

   
2,665
 
Discounted cash flow
 
Yield
(c)
 
0.00% - 24.52% (11.58%)

Maiden Lane III

   
6,916
 
Discounted cash flow
 
Yield
(b)
 
10.93%

CDO/ABS – Direct Investment book

   
1,579
 
Binomial Expansion
 
Recovery rates
(b)
 
3% - 65% (33%)

        Technique (BET)   Diversity score(b)   5 - 75 (10)

            Weighted average life(b)   1.40-9.65 years (4.60 years)
 

Liabilities :

                 

Policyholder contract deposits – GMWB

   
509
 
Discounted cash flow
 
Equity implied volatility
(b)
 
5.0% - 40.0%

            Base lapse rates(b)   1.0% - 40.0%

            Dynamic lapse rates(b)   0.2% - 60.0%

            Mortality rates(b)   0.5% - 40.0%

            Utilization rates(b)   0.5% - 25.0%

Derivative Liabilities – Credit contracts

   
1,822
 
BET
 
Recovery rates
(b)
 
3% - 37% (17%)

            Diversity score(b)   6 - 44 (13)

            Weighted average life(b)   5.27-9.65 years (6.41 years)
 
(a)
The unobservable inputs and ranges for the constant prepayment rate, loss severity and constant default rate relate to each of the individual underlying mortgage loans that comprise the entire portfolio of securities in the RMBS and CDO securitization vehicles and not necessarily to the securitization vehicle bonds (tranches) purchased by AIG. The ranges of these inputs do not directly correlate to changes in the fair values of the tranches purchased by AIG because there are other factors relevant to the specific tranches owned by AIG including, but not limited to, purchase price, position in the waterfall, senior versus subordinated position and attachment points.

(b)
Represents discount rates, estimates and assumptions that AIG believes would be used by market participants when valuing these assets and liabilities.

(c)
Information received from independent third-party valuation service providers.

    The ranges of reported inputs for Corporate debt, RMBS, CDO/ABS, and CMBS valued using a discounted cash flow technique consist of +/-one standard deviation in either direction from the value-weighted average. The

24            AIG 2012 Form 10-Q


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

preceding table does not give effect to AIG's risk management practices that might offset risks inherent in these investments.

Sensitivity to Changes in Unobservable Inputs

    AIG considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to AIG about the assumptions that market participants would use when pricing the asset or liability. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently of changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed above.

Corporate Debt

    Corporate debt securities included in Level 3 are primarily private placement issuances that are not traded in active markets or that are subject to transfer restrictions. Fair value measurements consider illiquidity and non-transferability. When observable price quotations are not available, fair value is determined based on discounted cash flow models using discount rates based on credit spreads, yields or price levels of publicly-traded debt of the issuer or other comparable securities, considering illiquidity and structure. The significant unobservable input used in the fair value measurement of corporate debt is the yield. The yield is affected by the market movements in credit spreads and U.S. Treasury yields. In addition, the migration in credit quality of a given security generally has a corresponding effect on the fair value measurement of the securities. For example, a downward migration of credit quality would increase spreads. Holding U.S. Treasury rates constant, an increase in corporate credit spreads would decrease the fair value of corporate debt.

RMBS and Certain CDO/ABS

    The significant unobservable inputs used in fair value measurements of residential mortgage backed securities and certain CDO/ABS valued by third-party valuation service providers are constant prepayment rates (CPR), constant default rates (CDR), and loss severity. Changes in any of the significant unobservable inputs may affect other inputs used in determining fair value. A change in the assumptions used for the probability of default will generally be accompanied by a corresponding change in the assumption used for the loss severity and an inverse change in the assumption used for prepayment rates. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship between the directional change of each input is not usually linear.

CMBS

    The significant unobservable input used in fair value measurements for commercial mortgage backed securities is the yield. Prepayment assumptions for each mortgage pool are factored into the yield. CMBS generally feature a lower degree of prepayment risk than RMBS because commercial mortgages generally contain a penalty for prepayment. Increases in the yield would decrease the fair value of CMBS.

Maiden Lane III

    Since inception, AIG's interest in ML III has been valued using a discounted cash flow methodology that (i) uses the estimated future cash flows and the fair value of the ML III assets, (ii) allocates the estimated future cash flows according to the ML III waterfall, and (iii) determines the discount rate to be applied to AIG's interest in ML III by reference to the discount rate implied by the estimated value of ML III assets and the estimated future cash flows of AIG's interest in the capital structure. Estimated cash flows and discount rates used in the

AIG 2012 Form 10-Q            25


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

valuations are validated, to the extent possible, using market observable information for securities with similar asset pools, structure and terms.

    The fair value of AIG's interest in ML III is most affected by changes in the discount rates and changes in the estimated future collateral cash flows used in the valuation. In general, an increase in the discount rate will lead to a decrease in the value of the portfolio and vice versa. The changes, however, are asymmetrical with decreases in discount rates having a more pronounced effect on the value of the ML III portfolio. Changes in estimated future cash flows for ML III are the result of changes in interest rates and their effect on the underlying floating rate securities as well as expectations of defaults, recoveries and prepayments on underlying loans. Changes in estimated future cash flows have an almost symmetrical and almost linear effect on the value of ML III.

    Interest rates are generally indexed to the London Interbank Offered Rate (LIBOR). LIBOR interest rate curve changes are determined based on observable prices, interpolated or extrapolated to derive a LIBOR curve for a specific maturity term as necessary. The spreads over LIBOR used to value the ML III interests can change as a result of changes in market expectations about the future performance of this investment as well as changes in the risk premium that market participants would demand at the time of the transactions.

Changes in the discount rate or the estimated future cash flows used in the valuation would alter AIG's estimate of the fair value of AIG's interest in ML III as shown in the table below.

   
Three Months Ended March 31, 2012
(in millions)
  Maiden Lane III
Fair Value Change

 
   

Discount Rates:

       

200 basis point increase

  $ (717 )

200 basis point decrease

    824  

400 basis point increase

    (1,346 )

400 basis point decrease

    1,777  
   

Estimated Future Cash Flows:

       

10% increase

    711  

10% decrease

    (720 )

20% increase

    1,415  

20% decrease

    (1,451 )
   

    AIG believes that the ranges of discount rates used in these analyses are reasonable on the basis of implied spread volatilities of similar collateral securities. The ranges of estimated future cash flows were determined on the basis of historical variability in the estimated cash flows. Therefore, the fair value of AIG's interest in ML III is likely to vary, perhaps materially, from the amounts estimated.

    On April 26, 2012, the FRBNY announced that it had sold $7.5 billion of certain assets of ML III pursuant to a competitive bid process that it conducted. If AIG had adopted a liquidation valuation methodology at March 31, 2012, the impact would have increased the fair value of AIG's interest in ML III by approximately $450 million.

    Because the announcement of the asset auction and the auction itself occurred after March 31, 2012, AIG believes a change in the fair value methodology used for its interest in ML III is not appropriate at March 31, 2012. Adjustments to the fair value of AIG's interest in ML III are recorded in the Consolidated Statement of Operations in Net investment income for AIG's Other operations.

CDO/ABS – Direct Investment book

    The significant unobservable inputs used for certain CDO/ABS securities valued using the BET are recovery rates, diversity score, and the weighted average life of the portfolio. An increase in recovery rates and diversity score will have a directionally similar corresponding impact on the fair value measurement of the portfolio. An increase in the weighted average life will decrease the fair value.

26            AIG 2012 Form 10-Q


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Policyholder contract deposits

    The significant unobservable inputs used for embedded derivatives in policyholder contract deposits measured at fair value, mainly guaranteed minimum withdrawal benefits (GMWB) for variable annuity products, are equity volatility, mortality rates, lapse rates and utilization rates. In general, increases in volatilities and utilization rates will increase the fair value, while increases in lapse rates and mortality rates will decrease the fair value of the liability associated with the GMWB.

Derivative liabilities – credit contracts

    The significant unobservable inputs used for Derivatives liabilities – credit contracts are recovery rates, diversity scores, and the weighted average life of the portfolio. AIG non-performance risk is also considered in the measurement of the liability. See Note 6 to the Consolidated Financial Statements in the 2011 Annual Report on Form 10-K for a discussion of AIG's accounting policies and procedures regarding incorporation of AIG's own credit risk in fair value measurements.

    An increase in recovery rates and diversity score will decrease the fair value of the liability. An increase in the weighted average life will have a directionally similar corresponding effect on the fair value measurement of the liability.

AIG 2012 Form 10-Q            27


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


INVESTMENTS IN CERTAIN ENTITIES CARRIED AT FAIR VALUE USING NET ASSET VALUE PER SHARE

The following table includes information related to AIG's investments in certain other invested assets, including private equity funds, hedge funds and other alternative investments that calculate net asset value per share (or its equivalent). For these investments, which are measured at fair value on a recurring or non-recurring basis, AIG uses the net asset value per share as a practical expedient to measure fair value.

   
 
   
  March 31, 2012   December 31, 2011  
(in millions)
  Investment Category Includes
  Fair Value
Using Net
Asset Value

  Unfunded
Commitments

  Fair Value
Using Net
Asset Value

  Unfunded
Commitments

 
   

Investment Category

                             

Private equity funds:

                             

Leveraged buyout

  Debt and/or equity investments made as part of a transaction in which assets of mature companies are acquired from the current shareholders, typically with the use of financial leverage   $ 3,244   $ 900   $ 3,185   $ 945  

Non-U.S.

 

Investments that focus primarily on Asian and European based buyouts, expansion capital, special situations, turnarounds, venture capital, mezzanine and distressed opportunities strategies

   
171
   
54
   
165
   
57
 

Venture capital

 

Early-stage, high-potential, growth companies expected to generate a return through an eventual realization event, such as an initial public offering or sale of the company

   
301
   
37
   
316
   
39
 

Distressed

 

Securities of companies that are already in default, under bankruptcy protection, or troubled

   
189
   
38
   
182
   
42
 

Other

 

Real estate, energy, multi-strategy, mezzanine, and industry-focused strategies

   
372
   
150
   
252
   
98
 
   

Total private equity funds

       
4,277
   
1,179
   
4,100
   
1,181
 
   

Hedge funds:

                             

Event-driven

  Securities of companies undergoing material structural changes, including mergers, acquisitions and other reorganizations     872     2     774     2  

Long-short

 

Securities that the manager believes are undervalued, with corresponding short positions to hedge market risk

   
1,097
   
-
   
927
   
-
 

Relative value

 

Funds that seek to benefit from market inefficiencies and value discrepancies between related investments

   
48
   
-
   
52
   
-
 

Distressed

 

Securities of companies that are already in default, under bankruptcy protection or troubled

   
289
   
-
   
272
   
10
 

Other

 

Non-U.S. companies, futures and commodities, macro and multi-strategy and industry-focused strategies

   
736
   
-
   
748
   
-
 
   

Total hedge funds

       
3,042
   
2
   
2,773
   
12
 
   

Total

     
$

7,319
 
$

1,181
 
$

6,873
 
$

1,193
 
   

    At March 31, 2012, private equity fund investments included above are not redeemable during the lives of the funds and have expected remaining lives that extend in some cases more than 10 years. At that date, 44 percent of the total above had expected remaining lives of less than three years, 54 percent between three and seven years and 2 percent between seven and 10 years. Expected lives are based upon legal maturity, which can be extended at the fund manager's discretion, typically in one-year increments.

    At March 31, 2012, hedge fund investments included above are redeemable monthly (10 percent), quarterly (35 percent), semi-annually (25 percent) and annually (30 percent), with redemption notices ranging from 1 day to 180 days. More than 62 percent of these hedge fund investments require redemption notices of less than 90 days. Investments representing approximately 55 percent of the value of the hedge fund investments cannot be redeemed, either in whole or in part, because the investments include various restrictions. The majority of these restrictions were put in place prior to 2009 and do not have stated end dates. The restrictions that have

28            AIG 2012 Form 10-Q


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

pre-defined end dates are generally expected to be lifted by the end of 2015. The partial restrictions relate to certain hedge funds that hold at least one investment that the fund manager deems to be illiquid.


FAIR VALUE OPTION

The following table presents the gains or losses recorded related to the eligible instruments for which AIG elected the fair value option:

   
Three Months Ended March 31,
  Gain (Loss)  
(in millions)
  2012
  2011
 
   

Assets:

             

Mortgage and other loans receivable

  $ 22   $ (5 )

Bonds and equity securities

    644     902  

Trading – ML II interest

    246     251  

Trading – ML III interest

    1,252     744  

Retained interest in AIA

    1,795     1,062  

Short-term investments and other invested assets and Other assets

    4     16  
   

Liabilities:

             

Other long-term debt(a)

    (446 )   (44 )

Other liabilities

    (48 )   (112 )
   

Total gain(b)

  $ 3,469   $ 2,814  
   
(a)
Includes GIAs, notes, bonds, loans and mortgages payable.

(b)
Excludes discontinued operation gains or losses on instruments that were required to be carried at fair value in 2011. For instruments required to be carried at fair value, AIG recognized gains of $0.6 billion and $1.0 billion for the three months ended March 31, 2012 and 2011, respectively, that were primarily due to changes in the fair value of derivatives, trading securities and certain other invested assets for which the fair value option was not elected.

    See Note 2(a) to the Consolidated Financial Statements in the 2011 Annual Report on Form 10-K for additional information about AIG's policies for recognition, measurement, and disclosure of interest and dividend income and interest expense.

    During the three-month periods ended March 31, 2012 and 2011, AIG recognized losses of $558 million and $41 million, respectively, attributable to the observable effect of changes in credit spreads on AIG's own liabilities for which the fair value option was elected. AIG calculates the effect of these credit spread changes using discounted cash flow techniques that incorporate current market interest rates, AIG's observable credit spreads on these liabilities and other factors that mitigate the risk of nonperformance such as cash collateral posted.

The following table presents the difference between fair values and the aggregate contractual principal amounts of mortgage and other loans receivable and long-term borrowings for which the fair value option was elected:

   
 
  March 31, 2012   December 31, 2011  
(in millions)
  Fair
Value

  Outstanding
Principal
Amount

  Difference
  Fair Value
  Outstanding
Principal
Amount

  Difference
 
   

Assets:

                                     

Mortgage and other loans receivable

  $ 114   $ 139   $ (25 ) $ 107   $ 150   $ (43 )

Liabilities:

                                     

Other long-term debt*

  $ 10,580   $ 8,330   $ 2,250   $ 10,766   $ 8,624   $ 2,142  
   
*
Includes GIAs, notes, bonds, loans and mortgages payable.

    At March 31, 2012 and December 31, 2011, there were no significant mortgage or other loans receivable for which the fair value option was elected that were 90 days or more past due and in non-accrual status.

AIG 2012 Form 10-Q            29


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


FAIR VALUE INFORMATION ABOUT FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE

The following table presents the carrying value and estimated fair value of AIG's financial instruments not measured at fair value and indicates the level of the estimated fair value measurement based on the levels of the inputs used:

   
 
  Estimated Fair Value    
 
 
  Carrying
Value

 
(in millions)
  Level 1
  Level 2
  Level 3
  Total
 
   

March 31, 2012

                               

Assets:

                               

Mortgage and other loans receivable

  $ -   $ 668   $ 20,290   $ 20,958   $ 19,405  

Other invested assets

    -     462     4,098     4,560     4,864  

Short-term investments

    -     14,351     -     14,351     16,381  

Cash

    1,315     -     -     1,315     1,315  

Liabilities:

                               

Policyholder contract deposits associated with investment-type contracts

    -     281     123,597     123,878     107,019  

Other liabilities

    -     -     476     476     476  

Long-term debt

    14,991     49,523     2,700     67,214     65,517  
   

December 31, 2011

                               

Assets:

                               

Mortgage and other loans receivable

                    $ 20,494   $ 19,382  

Other invested assets

                      3,390     4,701  

Short-term investments

                      16,657     16,659  

Cash

                      1,474     1,474  

Liabilities:

                               

Policyholder contract deposits associated

                               

with investment-type contracts

                      122,125     106,950  

Long-term debt

                      61,295     64,487  
   

30            AIG 2012 Form 10-Q


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


5. INVESTMENTS


SECURITIES AVAILABLE FOR SALE

The following table presents the amortized cost or cost and fair value of AIG's available for sale securities:

   
(in millions)
  Amortized
Cost or
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Other-Than-
Temporary
Impairments
in AOCI
(a)
 
   

March 31, 2012

                               

Bonds available for sale:

                               

U.S. government and government sponsored entities

  $ 4,456   $ 332   $ (2 ) $ 4,786   $ -  

Obligations of states, municipalities and political subdivisions

    35,096     2,657     (71 )   37,682     (25 )

Non-U.S. governments

    25,106     1,066     (50 )   26,122     -  

Corporate debt

    135,350     12,040     (910 )   146,480     134  

Mortgage-backed, asset-backed and collateralized:

                               

RMBS

    33,956     1,865     (770 )   35,051     191  

CMBS

    8,274     470     (681 )   8,063     (151 )

CDO/ABS

    7,926     568     (316 )   8,178     103  
   

Total mortgage-backed, asset-backed and collateralized

    50,156     2,903     (1,767 )   51,292     143  
   

Total bonds available for sale(b)

    250,164     18,998     (2,800 )   266,362     252  
   

Equity securities available for sale:

                               

Common stock

    1,636     1,268     (99 )   2,805     -  

Preferred stock

    87     67     -     154     -  

Mutual funds

    59     8     -     67     -  
   

Total equity securities available for sale

    1,782     1,343     (99 )