Edgar Filing: AMERICAN INTERNATIONAL GROUP INC

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 September 30, 2012		Commission File Number 1-8787

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 October 26, 2012, there were 1,476,304,497 shares outstanding of the registrant's common stock.

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AMERICAN INTERNATIONAL GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2012

TABLE OF CONTENTS

FORM 10-Q

Item Number	Description	Page

PART I – FINANCIAL INFORMATION

Item 1	Financial Statements	2
	Note 1. Basis of Presentation	8
	Note 2. Summary of Significant Accounting Policies	9
	Note 3. Segment Information	14
	Note 4. Fair Value Measurements	17
	Note 5. Investments	35
	Note 6. Lending Activities	41
	Note 7. Variable Interest Entities	42
	Note 8. Derivatives and Hedge Accounting	44
	Note 9. Contingencies, Commitments and Guarantees	50
	Note 10. Total Equity	63
	Note 11. Noncontrolling Interests	67
	Note 12. Earnings (Loss) Per Share	68
	Note 13. Employee Benefits	70
	Note 14. Income Taxes	71
	Note 15. Discontinued Operations	73
	Note 16. Information Provided in Connection with Outstanding Debt	75
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	81
	• Cautionary Statement Regarding Forward-Looking Information	81
	Index to Management's Discussion and Analysis of Financial Condition and Results of Operations	82
	• Use of Non-GAAP Measures	83
	• Executive Overview	83
	• Results of Operations	94
	• Liquidity and Capital Resources	136
	• Investments	152
	• Enterprise Risk Management	167
	• Critical Accounting Estimates	174
	• Regulatory Environment	179
Item 3	Quantitative and Qualitative Disclosures About Market Risk	184
Item 4	Controls and Procedures	184
PART II – OTHER INFORMATION

Item 1	Legal Proceedings	185
Item 1A	Risk Factors	185
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	187
Item 4	Mine Safety Disclosures	187
Item 6	Exhibits	187
SIGNATURES		188

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PART I – FINANCIAL INFORMATION

ITEM 1. / FINANCIAL STATEMENTS

AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED BALANCE SHEET (unaudited)




(in millions, except for share data)	September 30, 2012			December 31, 2011

Assets:
Investments:
Fixed maturity securities:
Bonds available for sale, at fair value (amortized cost: 2012 – $246,690; 2011 – $250,770)	$	269,914		$	263,981
Bond trading securities, at fair value		24,837			24,364
Equity securities:
Common and preferred stock available for sale, at fair value (cost: 2012 – $1,676; 2011 – $1,820)		3,021			3,624
Common and preferred stock trading, at fair value		98			125
Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2012 – $130; 2011 – $107)		19,330			19,489
Flight equipment primarily under operating leases, net of accumulated depreciation		34,932			35,539
Other invested assets (portion measured at fair value: 2012 – $15,033; 2011 – $20,876)		35,426			40,744
Short-term investments (portion measured at fair value: 2012 – $7,300; 2011 – $5,913)		22,557			22,572

Total investments		410,115			410,438
Cash		1,608			1,474
Accrued investment income		3,153			3,108
Premiums and other receivables, net of allowance		14,564			14,721
Reinsurance assets, net of allowance		27,066			27,211
Current and deferred income taxes		14,119			17,802
Deferred policy acquisition costs		8,204			8,937
Derivative assets, at fair value		3,456			4,499
Other assets, including restricted cash of $2,293 in 2012 and $2,988 in 2011 (portion measured at fair value: 2012 – $698; 2011 – $0)		11,698			12,782
Separate account assets, at fair value		56,740			51,388

Total assets	$	550,723		$	552,360

Liabilities:
Liability for unpaid claims and claims adjustment expense	$	87,413		$	91,145
Unearned premiums		24,418			23,465
Future policy benefits for life and accident and health insurance contracts		35,831			34,317
Policyholder contract deposits (portion measured at fair value: 2012 – $1,308; 2011 – $918)		127,478			126,898
Other policyholder funds		6,303			6,691
Derivative liabilities, at fair value		4,314			4,733
Other liabilities (portion measured at fair value: 2012 – $930; 2011 – $907)		31,905			27,554
Long-term debt (portion measured at fair value: 2012 – $8,835; 2011 – $10,766)		73,748			75,253
Separate account liabilities		56,740			51,388

Total liabilities		448,150			441,444

Contingencies, commitments and guarantees (see Note 9)
Redeemable noncontrolling interests (see Note 11):
Nonvoting, callable, junior preferred interests held by Department of the Treasury		–			8,427
Other		159			96

Total redeemable noncontrolling interests		159			8,523

AIG shareholders' equity:
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2012 – 1,906,612,666 and 2011 – 1,906,568,099		4,766			4,766
Treasury stock, at cost; 2012 – 430,316,923; 2011 – 9,746,617 shares of common stock		(13,925	)		(942	)
Additional paid-in capital		81,768			81,787
Retained earnings		18,170			10,774
Accumulated other comprehensive income		10,887			5,153

Total AIG shareholders' equity		101,666			101,538
Non-redeemable noncontrolling interests		748			855

Total equity		102,414			102,393

Total liabilities and equity	$	550,723		$	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.

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AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF OPERATIONS (unaudited)




	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in millions, except per share data)	2012			2011			2012			2011

Revenues:
Premiums	$	9,503		$	9,829		$	28,583		$	29,209
Policy fees		691			658			2,056			2,024
Net investment income		4,650			128			16,236			10,161
Net realized capital gains (losses):
Total other-than-temporary impairments on available for sale securities		(34	)		(493	)		(301	)		(892	)
Portion of other-than-temporary impairments on available for sale fixed maturity securities recognized in Other comprehensive income (loss)		(36	)		71			(372	)		130

Net other-than-temporary impairments on available for sale securities recognized in net income (loss)		(70	)		(422	)		(673	)		(762	)
Other realized capital gains		717			1,029			1,467			709

Total net realized capital gains (losses)		647			607			794			(53	)
Aircraft leasing revenue		1,147			1,129			3,426			3,419
Other income		1,010			368			2,119			2,078

Total revenues		17,648			12,719			53,214			46,838

Benefits, claims and expenses:
Policyholder benefits and claims incurred		7,991			8,333			22,862			25,378
Interest credited to policyholder account balances		1,191			1,146			3,324			3,366
Amortization of deferred acquisition costs		1,522			1,540			4,341			4,093
Other acquisition and insurance expenses		2,214			2,067			6,736			6,164
Interest expense		988			970			2,895			3,055
Aircraft leasing expenses		720			2,057			1,991			3,264
Net loss on extinguishment of debt		–			–			32			3,392
Other expenses		427			876			2,103			1,912

Total benefits, claims and expenses		15,053			16,989			44,284			50,624

Income (loss) from continuing operations before income taxes		2,595			(4,270	)		8,930			(3,786	)

Income taxes expense (benefit)		735			(665	)		1,290			(1,187	)

Income (loss) from continuing operations		1,860			(3,605	)		7,640			(2,599	)
Income (loss) from discontinued operations, net of income taxes		1			(221	)		9			2,327

Net income (loss)		1,861			(3,826	)		7,649			(272	)

Less:
Net income from continuing operations attributable to noncontrolling interests:
Nonvoting, callable, junior and senior preferred interests		–			145			208			538
Other		5			19			45			28

Total net income from continuing operations attributable to noncontrolling interests		5			164			253			566
Net income (loss) from discontinued operations attributable to noncontrolling interests		–			–			–			19

Total net income attributable to noncontrolling interests		5			164			253			585

Net income (loss) attributable to AIG	$	1,856		$	(3,990	)	$	7,396		$	(857	)

Net income (loss) attributable to AIG common shareholders	$	1,856		$	(3,990	)	$	7,396		$	(1,669	)

Income (loss) per common share attributable to AIG common shareholders:
Basic:
Income (loss) from continuing operations	$	1.13		$	(1.99	)	$	4.21		$	(2.25	)
Income (loss) from discontinued operations	$	–		$	(0.11	)	$	–		$	1.30
Diluted:
Income (loss) from continuing operations	$	1.13		$	(1.99	)	$	4.21		$	(2.25	)
Income (loss) from discontinued operations	$	–		$	(0.11	)	$	–		$	1.30

Weighted average shares outstanding:
Basic		1,642,472,814			1,899,500,628			1,757,955,937			1,765,905,779
Diluted		1,642,502,251			1,899,500,628			1,757,984,154			1,765,905,779

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.

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AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (unaudited)




	Three Months Ended September 30,					Nine Months Ended September 30,
(in millions)	2012		2011			2012			2011

Net income (loss)	$	1,861	$	(3,826	)	$	7,649		$	(272	)

Other comprehensive income (loss), net of tax
Change in unrealized appreciation (depreciation) of fixed maturity investments on which other-than-temporary credit impairments were taken		497		(184	)		1,127			105
Change in unrealized appreciation (depreciation) of all other investments		2,331		(2,008	)		4,617			(954	)
Change in foreign currency translation adjustments		240		(582	)		(96	)		(811	)
Change in net derivative gains (losses) arising from cash flow hedging activities		2		(57	)		25			14
Change in retirement plan liabilities adjustment		29		(339	)		61			(190	)

Other comprehensive income (loss)		3,099		(3,170	)		5,734			(1,836	)

Comprehensive income (loss)		4,960		(6,996	)		13,383			(2,108	)
Comprehensive income attributable to noncontrolling nonvoting, callable, junior and senior preferred interests		–		145			208			538
Comprehensive income (loss) attributable to other noncontrolling interests		8		(87	)		45			(106	)

Total comprehensive income attributable to noncontrolling interests		8		58			253			432

Comprehensive income (loss) attributable to AIG	$	4,952	$	(7,054	)	$	13,130		$	(2,540	)

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.

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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

Nine Months Ended September 30, 2012
Balance, beginning of year	$	–		$	4,766		$	(942	)	$	81,787		$	10,774		$	5,153		$	101,538		$	855		$	102,393

Common stock issued under stock plans		–			–			17			(15	)		–			–			2			–			2
Purchase of common stock		–			–			(13,000	)		–			–			–			(13,000	)		–			(13,000	)
Net income attributable to AIG or other noncontrolling interests*		–			–			–			–			7,396			–			7,396			40			7,436
Other comprehensive income (loss)		–			–			–			–			–			5,734			5,734			(4	)		5,730
Deferred income taxes		–			–			–			(9	)		–			–			(9	)		–			(9	)
Contributions from noncontrolling interests		–			–			–			–			–			–			–			58			58
Distributions to noncontrolling interests		–			–			–			–			–			–			–			(175	)		(175	)
Other		–			–			–			5			–			–			5			(26	)		(21	)

Balance, end of period	$	–		$	4,766		$	(13,925	)	$	81,768		$	18,170		$	10,887		$	101,666		$	748		$	102,414

Nine Months Ended September 30, 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	)
Common stock issued		–			250			–			2,636			–			–			2,886			–			2,886
Settlement of equity unit stock purchase contract		–			9			–			2,160			–			–			2,169			–			2,169
Net income (loss) attributable to AIG or other noncontrolling interests*		–			–			–			–			(857	)		–			(857	)		51			(806	)
Net income attributable to noncontrolling nonvoting, callable, junior and senior preferred interests		–			–			–			–			–			–			–			74			74
Other comprehensive loss		–			–			–			–			–			(1,683	)		(1,683	)		(153	)		(1,836	)
Acquisition of noncontrolling interest		–			–			–			(160	)		–			88			(72	)		(487	)		(559	)
Net decrease due to deconsolidation		–			–			–			–			–			–			–			(123	)		(123	)
Contributions from noncontrolling interests		–			–			–			–			–			–			–			93			93
Distributions to noncontrolling interests		–			–			–			–			–			–			–			(127	)		(127	)
Other		–			(1	)		1			(3	)		–			–			(3	)		(45	)		(48	)

Balance, end of period	$	–		$	4,764		$	(872	)	$	81,776		$	(10,705	)	$	5,948		$	80,911		$	771		$	81,682

* Excludes gains of $213 million and $460 million for the nine months ended September 30, 2012 and 2011, respectively, attributable to redeemable noncontrolling interests. See Note 11.

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.

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AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)




Nine Months Ended September 30, (in millions)	2012			2011

Cash flows from operating activities:
Net income (loss)	$	7,649		$	(272	)
Income from discontinued operations		(9	)		(2,327	)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Noncash revenues, expenses, gains and losses included in income (loss):
Net gains on sales of securities available for sale and other assets		(2,827	)		(1,131	)
Net losses on extinguishment of debt		32			3,392
Unrealized (gains) losses in earnings – net		(4,578	)		714
Equity in income from equity method investments, net of dividends or distributions		(527	)		(840	)
Depreciation and other amortization		5,541			5,618
Impairments of assets		1,371			3,052
Changes in operating assets and liabilities:
General and life insurance reserves		(1,119	)		4,190
Premiums and other receivables and payables – net		1,220			686
Reinsurance assets and funds held under reinsurance treaties		272			(4,258	)
Capitalization of deferred policy acquisition costs		(4,260	)		(4,110	)
Current and deferred income taxes – net		885			(1,829	)
Payment of FRBNY Credit Facility accrued compounded interest and fees		–			(6,363	)
Other, net		(811	)		(1,093	)

Total adjustments		(4,801	)		(1,972	)

Net cash provided by (used in) operating activities – continuing operations		2,839			(4,571	)
Net cash provided by operating activities – discontinued operations		–			3,370

Net cash provided by (used in) operating activities		2,839			(1,201	)

Cash flows from investing activities:
Proceeds from (payments for)
Sales of available for sale and hybrid investments		30,789			33,063
Maturities of fixed maturity securities available for sale and hybrid investments		16,623			15,021
Sales of trading securities		14,541			9,105
Sales or distributions of other invested assets (including flight equipment)		11,007			6,539
Sales of divested businesses, net		–			587
Principal payments received on and sales of mortgage and other loans receivable		2,251			2,515
Purchases of available for sale and hybrid investments		(47,842	)		(69,598	)
Purchases of trading securities		(2,871	)		(960	)
Purchases of other invested assets (including flight equipment)		(4,871	)		(5,351	)
Mortgage and other loans receivable issued and purchased		(2,110	)		(1,735	)
Net change in restricted cash		695			26,408
Net change in short-term investments		1,141			15,410
Net change in derivative assets and liabilities		(118	)		982
Other, net		(77	)		(318	)

Net cash provided by investing activities – continuing operations		19,158			31,668
Net cash provided by investing activities – discontinued operations		–			4,478

Net cash provided by investing activities		19,158			36,146

Cash flows from financing activities:
Proceeds from (payments for)
Policyholder contract deposits		10,092			13,907
Policyholder contract withdrawals		(10,426	)		(10,538	)
FRBNY credit facility repayments		–			(14,622	)
Issuance of long-term debt		7,985			6,297
Repayments of long-term debt		(9,847	)		(14,944	)
Proceeds from drawdown on the Department of the Treasury Commitment		–			20,292
Repayment of Department of the Treasury SPV Preferred Interests		(8,636	)		(11,453	)
Repayment of FRBNY SPV Preferred Interests		–			(26,432	)
Issuance of Common Stock		–			5,055
Purchase of Common Stock		(13,000	)		–
Acquisition of noncontrolling interest		(175	)		(683	)
Other, net		2,153			(381	)

Net cash used in financing activities – continuing operations		(21,854	)		(33,502	)
Net cash used in financing activities – discontinued operations		–			(1,942	)

Net cash used in financing activities		(21,854	)		(35,444	)

Effect of exchange rate changes on cash		(9	)		37

Net increase (decrease) in cash		134			(462	)
Cash at beginning of period		1,474			1,558
Change in cash of businesses held for sale		–			446

Cash at end of period	$	1,608		$	1,542

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.

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Supplementary Disclosure of Consolidated Cash Flow Information




Nine Months Ended September 30, (in millions)	2012		2011

Cash paid during the period for:
Interest^*	$	3,056	$	7,952
Taxes	$	403	$	643
Non-cash financing/investing activities:
Interest credited to policyholder contract deposits included in financing activities	$	3,375	$	3,602

* 2011 includes payment of accrued compounded interest of $4.7 billion under the Credit Agreement, dated as of September 22, 2008, as amended between AIG and the Federal Reserve Bank of New York (the FRBNY and, such credit agreement, the FRBNY Credit Facility), 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 FRBNY and the AIG Credit Facility Trust, including the repayment of all amounts owed under the FRBNY Credit Facility.

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. BASIS OF PRESENTATION

American International Group, Inc. (AIG) is a leading international insurance organization serving customers in more than 130 countries. AIG companies serve commercial, institutional and individual customers through one of the most extensive worldwide property-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG Common Stock, par value $2.50 per share (AIG Common Stock), is listed on the New York Stock Exchange and the Tokyo Stock Exchange. The United States Department of the Treasury (Department of the Treasury) owned approximately 15.9 percent of AIG Common Stock outstanding as of September 30, 2012. See Note 10 herein for additional information on the Department of the Treasury's ownership of AIG Common Stock and the registered public offerings of AIG Common Stock initiated by the Department of the Treasury in 2012.

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 Forms 10-K/A filed on February 27, 2012 and March 30, 2012, respectively, and as updated by AIG's Current Report on Form 8-K filed on May 4, 2012 (collectively, the 2011 Annual Report). The condensed consolidated financial information as of December 31, 2011 included herein has been derived from audited consolidated financial statements in the 2011 Annual Report 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 September 30, 2012 and prior to the issuance of these consolidated financial statements. All material intercompany accounts and transactions have been eliminated.

Revisions to Prior Year Financial Statements

On January 1, 2012, AIG retrospectively 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.

To align the presentation of changes in the fair value of derivatives with changes in the administration of AIG's derivatives portfolio, changes were made to the presentation within the Consolidated Statement of Operations and Consolidated Statement of Cash Flows. Specifically, amounts attributable to derivative activity where AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (collectively, AIGFP) executed transactions with third parties on behalf of AIG subsidiaries have been reclassified from Other income to Net realized capital gains (losses). Additionally, certain other items have been reclassified within the Consolidated Statement of Operations in the current period. Prior period amounts were reclassified to conform to the current period presentation.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment. AIG considers its accounting policies that are most dependent on the

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

application of estimates and assumptions to be those relating to items considered by management in the determination of:

•: income tax assets and liabilities, 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 of financial instruments and goodwill impairments;
•: liabilities for legal contingencies; and
•: fair value measurements of certain financial assets and liabilities.

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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recent Accounting Standards

Future Application of Accounting Standards

In July 2012, the Financial Accounting Standards Board (FASB) issued an accounting standard that allows a company the option to first assess qualitatively whether it is more likely than not that an indefinite-lived intangible asset is impaired. A company is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the company determines it is more likely than not the asset is impaired.

The standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. A company can choose to early adopt the standard. AIG intends to adopt the standard on its required effective date of January 1, 2013. AIG does not expect adoption of the standard to have a material effect on its consolidated financial condition, results of operations or cash flows.

Accounting Standards Adopted During 2012

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

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In October 2010, the 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 DAC. 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

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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.

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 consolidated 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Three Months Ended September 30, 2011 (dollars in millions, except per share data)	As Previously Reported			Effect of Change			As Currently Reported



Statement of Operations:
Total net realized capital gains^(a)	$	604		$	3		$	607

Total revenues		12,716			3			12,719

Interest credited to policyholder account balances		1,134			12			1,146
Amortization of deferred acquisition costs		2,490			(950	)		1,540
Other acquisition and other insurance expenses		1,214			853			2,067

Total benefits, claims and expenses		17,074			(85	)		16,989

Loss from continuing operations before income tax benefit		(4,358	)		88			(4,270	)

Income tax benefit^(b)		(634	)		(31	)		(665	)

Loss from continuing operations		(3,724	)		119			(3,605	)
Loss from discontinued operations, net of income tax expense^(c)		(221	)		–			(221	)

Net loss		(3,945	)		119			(3,826	)

Net loss attributable to AIG		(4,109	)		119			(3,990	)

Net loss attributable to AIG common shareholders		(4,109	)		119			(3,990	)

Loss per share attributable to AIG common shareholders:
Basic:
Loss from continuing operations	$	(2.05	)	$	0.06		$	(1.99	)
Loss from discontinued operations	$	(0.11	)	$	–		$	(0.11	)
Diluted
Loss from continuing operations	$	(2.05	)	$	0.06		$	(1.99	)
Loss from discontinued operations	$	(0.11	)	$	–		$	(0.11	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Nine Months Ended September 30, 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^(a)	$	(63	)	$	10		$	(53	)

Total revenues		46,828			10			46,838

Interest credited to policyholder account balances		3,349			17			3,366
Amortization of deferred acquisition costs		5,992			(1,899	)		4,093
Other acquisition and other insurance expenses		4,418			1,746			6,164

Total benefits, claims and expenses		50,760			(136	)		50,624

Loss from continuing operations before income tax benefit		(3,932	)		146			(3,786	)

Income tax benefit^(b)		(1,122	)		(65	)		(1,187	)

Loss from continuing operations		(2,810	)		211			(2,599	)
Income from discontinued operations, net of income tax expense^(c)		1,395			932			2,327

Net loss		(1,415	)		1,143			(272	)

Net loss attributable to AIG		(2,000	)		1,143			(857	)

Net loss attributable to AIG common shareholders		(2,812	)		1,143			(1,669	)

Income (loss) per share attributable to AIG common shareholders:
Basic:
Loss from continuing operations	$	(2.37	)	$	0.12		$	(2.25	)
Income from discontinued operations	$	0.78		$	0.52		$	1.30
Diluted
Loss from continuing operations	$	(2.37	)	$	0.12		$	(2.25	)
Income from discontinued operations	$	0.78		$	0.52		$	1.30

(a) Includes $192 million and $110 million for the three and nine months ended September 30, 2011, respectively, attributable to the effect of the reclassification of certain derivative activity discussed in Note 1 herein.

(b) Includes a change in the deferred tax asset valuation allowance for each period.

(c) Represents the results of Nan Shan Life Insurance Company, Ltd. (Nan Shan) and the results of AIG Star Life Insurance Co. Ltd. (AIG Star) and AIG Edison Life Insurance Company (AIG Edison) through the date of their disposition, and the gain on the sale of AIG Star and AIG Edison, which were sold in the first quarter of 2011.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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.

Nine Months Ended September 30, 2011 (in millions)	As Previously Reported			Effect of Change			As Currently Reported



Cash flows from operating activities:
Net loss	$	(1,415	)	$	1,143		$	(272	)
(Income) from discontinued operations		(1,395	)		(932	)		(2,327	)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Noncash revenues, expenses, gains and losses included in income (loss):
Unrealized losses in earnings – net^*		724			(10	)		714
Depreciation and other amortization		7,500			(1,882	)		5,618
Changes in operating assets and liabilities:
Capitalization of deferred policy acquisition costs		(5,856	)		1,746			(4,110	)
Current and deferred income taxes – net		(1,764	)		(65	)		(1,829	)
Total adjustments		(1,761	)		(211	)		(1,972	)

* Includes $118 million for the nine months ended September 30, 2011 attributable to the effect of the reclassification of certain derivative activity discussed in Note 1 herein.

For short-duration insurance contracts, starting in 2012, AIG 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 because 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 required 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. As a consequence, 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, there are no repurchase agreements that continue to be accounted for as sales as of September 30, 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. As of September 30, 2012, there were no such modifications subsequent to the adoption of the standard.

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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. The guidance clarifies existing guidance on the application of fair value measurements, changes certain principles or requirements for measuring fair value, and requires significant additional disclosures for Level 3 valuation inputs. The new disclosure requirements were applied prospectively. The standard became effective beginning on January 1, 2012. 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 became effective beginning January 1, 2012 with retrospective application required. 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 became effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of the standard did not have any effect on AIG's consolidated financial condition, results of operations or cash flows.

3. SEGMENT INFORMATION

Commencing in the third quarter of 2012, the Chartis segment was renamed AIG Property Casualty and the SunAmerica segment was renamed AIG Life and Retirement, although certain existing brands will continue to be used.

AIG reports the results of its operations through three reportable segments: AIG Property Casualty, AIG Life and Retirement 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.

Effective during the first quarter of 2012, in order to align financial reporting with the manner in which AIG's chief operating decision makers review the AIG Property Casualty businesses to assess performance and make decisions about resources to be allocated, certain products previously reported in Commercial Insurance were reclassified to

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Consumer Insurance. These revisions did not affect the total AIG Property Casualty reportable segment results previously reported.

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

	Reportable Segment


	Reportable Segment										Consolidation and Eliminations
(in millions)	AIG Property Casualty		AIG Life and Retirement		Aircraft Leasing^*			Other Operations			Consolidation and Eliminations			Consolidated

Three Months Ended September 30, 2012
Total revenues	$	10,149	$	4,530	$	1,146		$	2,213		$	(390	)	$	17,648
Pre-tax income (loss)		949		889		40			891			(174	)		2,595

Three Months Ended September 30, 2011
Total revenues	$	10,185	$	3,582	$	1,106		$	(2,433	)	$	279		$	12,719
Pre-tax income (loss)		551		346		(1,329	)		(3,945	)		107			(4,270	)

Nine Months Ended September 30, 2012
Total revenues	$	29,967	$	12,439	$	3,421		$	8,085		$	(698	)	$	53,214
Pre-tax income (loss)		2,820		2,528		246			3,511			(175	)		8,930

Nine Months Ended September 30, 2011
Total revenues	$	30,283	$	11,317	$	3,366		$	1,864		$	8		$	46,838
Pre-tax income (loss)		1,003		2,079		(1,122	)		(5,855	)		109			(3,786	)

* AIG's Aircraft Leasing operations consist of a single operating segment.

The following table presents AIG Property Casualty operations by operating segment:

(in millions)	Commercial Insurance		Consumer Insurance			Other		Total AIG Property Casualty



Three Months Ended September 30, 2012
Total revenues	$	5,975	$	3,582		$	592	$	10,149
Pre-tax income		321		152			476		949

Three Months Ended September 30, 2011
Total revenues	$	6,402	$	3,523		$	260	$	10,185
Pre-tax income		405		21			125		551

Nine Months Ended September 30, 2012
Total revenues	$	17,991	$	10,758		$	1,218	$	29,967
Pre-tax income		1,480		578			762		2,820

Nine Months Ended September 30, 2011
Total revenues	$	18,905	$	10,439		$	939	$	30,283
Pre-tax income (loss)		650		(175	)		528		1,003

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following table presents AIG Life and Retirement operations by operating segment:

(in millions)	Life Insurance		Retirement Services			Total AIG Life and Retirement



Three Months Ended September 30, 2012
Total revenues	$	2,663	$	1,867		$	4,530
Pre-tax income		553		336			889

Three Months Ended September 30, 2011
Total revenues	$	2,134	$	1,448		$	3,582
Pre-tax income (loss)		472		(126	)		346

Nine Months Ended September 30, 2012
Total revenues	$	7,306	$	5,133		$	12,439
Pre-tax income		1,714		814			2,528

Nine Months Ended September 30, 2011
Total revenues	$	6,242	$	5,075		$	11,317
Pre-tax income		1,174		905			2,079

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 September 30, 2012
Total revenues	$	218		$	235		$	506	$	857		$	412		$	(15	)	$	2,213
Pre-tax income (loss)		6			190			406		857			(566	)		(2	)		891

Three Months Ended September 30, 2011
Total revenues	$	246		$	(130	)	$	159	$	(3,246	)	$	561		$	(23	)	$	(2,433	)
Pre-tax income (loss)		(82	)		(187	)		103		(3,246	)		(523	)		(10	)		(3,945	)

Nine Months Ended September 30, 2012
Total revenues	$	642		$	405		$	1,434	$	4,717		$	925		$	(38	)	$	8,085
Pre-tax income (loss)		62			253			1,139		4,717			(2,659	)		(1	)		3,511

Nine Months Ended September 30, 2011
Total revenues	$	716		$	151		$	758	$	(743	)	$	1,030		$	(48	)	$	1,864
Pre-tax income (loss)		(68	)		(66	)		586		(743	)		(5,538	)		(26	)		(5,855	)

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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 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 consisting 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.

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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 observability of the inputs used:





September 30, 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	$	28	$	4,380	$	–	$	–		$	–		$	4,408
Obligations of states, municipalities and political subdivisions		–		35,360		1,104		–			–			36,464
Non-U.S. governments		742		25,542		14		–			–			26,298
Corporate debt		–		148,528		1,612		–			–			150,140
RMBS		–		23,692		11,488		–			–			35,180
CMBS		–		4,469		5,013		–			–			9,482
CDO/ABS		–		3,293		4,649		–			–			7,942

Total bonds available for sale		770		245,264		23,880		–			–			269,914

Bond trading securities:
U.S. government and government sponsored entities		302		7,406		–		–			–			7,708
Obligations of states, municipalities and political subdivisions		–		81		–		–			–			81
Non-U.S. governments		–		2		–		–			–			2
Corporate debt		–		1,316		2		–			–			1,318
RMBS		–		1,101		370		–			–			1,471
CMBS		–		1,490		612		–			–			2,102
CDO/ABS		–		3,650		8,505		–			–			12,155

Total bond trading securities		302		15,046		9,489		–			–			24,837

Equity securities available for sale:
Common stock		2,781		1		40		–			–			2,822
Preferred stock		–		48		45		–			–			93
Mutual funds		86		20		–		–			–			106

Total equity securities available for sale		2,867		69		85		–			–			3,021

Equity securities trading		17		81		–		–			–			98
Mortgage and other loans receivable		–		129		1		–			–			130
Other invested assets(c)		6,257		1,706		7,070		–			–			15,033
Derivative assets:
Interest rate contracts		11		6,278		996		–			–			7,285
Foreign exchange contracts		–		53		–		–			–			53
Equity contracts		113		98		53		–			–			264
Commodity contracts		–		141		1		–			–			142
Credit contracts		–		1		59		–			–			60
Other contracts		–		11		57		–			–			68
Counterparty netting and cash collateral		–		–		–		(3,219	)		(1,197	)		(4,416	)

Total derivative assets		124		6,582		1,166		(3,219	)		(1,197	)		3,456

Short-term investments		592		6,708		–		–			–			7,300
Separate account assets		53,829		2,911		–		–			–			56,740
Other assets		–		698		–		–			–			698

Total	$	64,758	$	279,194	$	41,691	$	(3,219	)	$	(1,197	)	$	381,227

Liabilities:
Policyholder contract deposits	$	–	$	–	$	1,308	$	–		$	–		$	1,308
Derivative liabilities:
Interest rate contracts		–		6,303		243		–			–			6,546
Foreign exchange contracts		–		166		–		–			–			166
Equity contracts		2		159		10		–			–			171
Commodity contracts		–		143		–		–			–			143
Credit contracts(d)		–		–		2,349		–			–			2,349
Other contracts		–		26		250		–			–			276
Counterparty netting and cash collateral		–		–		–		(3,219	)		(2,118	)		(5,337	)

Total derivative liabilities		2		6,797		2,852		(3,219	)		(2,118	)		4,314

Other long-term debt(e)		–		8,428		407		–			–			8,835
Other liabilities		138		792		–		–			–			930

Total	$	140	$	16,017	$	4,567	$	(3,219	)	$	(2,118	)	$	15,387

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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		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(d)		–		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(e)		–		10,258		508		–			–			10,766
Other liabilities		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 $1.8 billion and $177 million, respectively, at September 30, 2012 and $1.8 billion and $100 million, respectively, at December 31, 2011.

(c) Included in Level 1 are $6.1 billion and $12.4 billion at September 30, 2012 and December 31, 2011, respectively, of AIA ordinary shares publicly traded on the Hong Kong Stock Exchange.

(d) Included in Level 3 is the fair value derivative liability of $2.3 billion and $3.2 billion at September 30, 2012 and December 31, 2011, respectively, on the super senior credit default swap portfolio.

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

Table of Contents

American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Transfers of Level 1 and Level 2 Assets and Liabilities

AIG's policy is to record transfers of assets and liabilities between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. Assets are transferred out of Level 1 when they are no longer transacted with sufficient frequency and volume in an active market. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market. During the three- and nine-month periods ended September 30, 2012, AIG transferred $148 million and $284 million of securities issued by Non-U.S. government entities from Level 1 to Level 2, respectively, as they are no longer considered actively traded. For similar reasons, during the three- and nine-month periods ended September 30, 2012, AIG transferred $743 million of securities issued by the U.S. government and government-sponsored entities from Level 1 to Level 2. AIG had no material transfers from Level 2 to Level 1 during the three- and nine-month periods ended September 30, 2012.

Changes in Level 3 Recurring Fair Value Measurements

The following tables present changes during the three-and nine-month periods ended September 30, 2012 and 2011 in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) related to the Level 3 assets and liabilities that remained in the Consolidated Balance Sheet at September 30, 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 September 30, 2012
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	1,013	$	16		$	–		$	102		$	25	$	(52	)	$	1,104	$	–
Non-U.S. governments		13		1			(1	)		2			–		(1	)		14		–
Corporate debt		1,306		10			35			94			233		(66	)		1,612		–
RMBS		10,488		197			1,029			(678	)		566		(114	)		11,488		–
CMBS		4,643		(17	)		271			115			1		–			5,013		–
CDO/ABS		5,074		87			82			(129	)		63		(528	)		4,649		–

Total bonds available for sale		22,537		294			1,416			(494	)		888		(761	)		23,880		–

Bond trading securities:
Corporate debt		3		–			–			(1	)		–		–			2		–
RMBS		290		40			–			(56	)		97		(1	)		370		12
CMBS		457		(3	)		–			1			157		–			612		(19	)
CDO/ABS		14,647		581			–			(6,780	)		57		–			8,505		427

Total bond trading securities		15,397		618			–			(6,836	)		311		(1	)		9,489		420

Equity securities available for sale:
Common stock		41		–			(1	)		–			–		–			40		–
Preferred stock		139		15			(12	)		(104	)		8		(1	)		45		–

Total equity securities available for sale		180		15			(13	)		(104	)		8		(1	)		85		–

Mortgage and other loans receivable		1		–			–			–			–		–			1		–
Other invested assets		7,049		22			8			(90	)		126		(45	)		7,070		–

Total	$	45,164	$	949		$	1,411		$	(7,524	)	$	1,333	$	(808	)	$	40,525	$	420

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



Liabilities:
Policyholder contract deposits	$	(1,188	)	$	(45	)	$	(72	)	$	(3	)	$	–		$	–		$	(1,308	)	$	279
Derivative liabilities, net:
Interest rate contracts		761			(55	)		–			47			–			–			753			11
Foreign exchange contracts		–			–			–			–			–			–			–			–
Equity contracts		28			18			–			(4	)		1			–			43			–
Commodity contracts		2			4			–			(3	)		–			(2	)		1			(1	)
Credit contracts		(2,587	)		208			–			89			–			–			(2,290	)		(360	)
Other contracts		(154	)		(122	)		(6	)		73			16			–			(193	)		14

Total derivative liabilities, net		(1,950	)		53			(6	)		202			17			(2	)		(1,686	)		(336	)

Other long-term debt(b)		(407	)		(27	)		–			61			(34	)		–			(407	)		170

Total	$	(3,545	)	$	(19	)	$	(78	)	$	260		$	(17	)	$	(2	)	$	(3,401	)	$	113

Nine Months Ended September 30, 2012
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	960		$	48		$	11		$	139		$	70		$	(124	)	$	1,104		$	–
Non-U.S. governments		9			1			–			–			5			(1	)		14			–
Corporate debt		1,935			(7	)		104			96			579			(1,095	)		1,612			–
RMBS		10,877			322			1,832			32			921			(2,496	)		11,488			–
CMBS		3,955			(84	)		572			618			44			(92	)		5,013			–
CDO/ABS		4,220			127			348			(150	)		669			(565	)		4,649			–

Total bonds available for sale		21,956			407			2,867			735			2,288			(4,373	)		23,880			–

Bond trading securities:
Corporate debt		7			–			–			(5	)		–			–			2			–
RMBS		303			68			–			(94	)		97			(4	)		370			18
CMBS		554			46			–			(121	)		193			(60	)		612			45
CDO/ABS		8,432			3,646			–			(3,630	)		57			–			8,505			2,635

Total bond trading securities		9,296			3,760			–			(3,850	)		347			(64	)		9,489			2,698

Equity securities available for sale:
Common stock		57			23			(13	)		(33	)		6			–			40			–
Preferred stock