Edgar Filing: AMERICAN INTERNATIONAL GROUP INC

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2006
or

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

		For the transition period from to

Commission File Number 1-8787

American International Group, Inc.

(Exact name of registrant as specified in its charter)


Delaware		13-2592361
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

70 Pine Street, New York, New York (Address of principal executive offices)		10270 (Zip Code)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer 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

Applicable only to corporate issuers

As of October 31, 2006, there were 2,599,721,215 shares outstanding of the issuer’s common stock.

TABLE OF CONTENTS


			Page
Description			Number

PART I — FINANCIAL INFORMATION				1
	Item 1.	Financial Statements (unaudited)		1
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		94
	Item 4.	Controls and Procedures		94
PART II — OTHER INFORMATION				95
	Item 1A.	Risk Factors		95
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		95
	Item 6.	Exhibits		95
SIGNATURES				96
EX-12: STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
EX-31: CERTIFICATIONS
EX-32: CERTIFICATIONS

American International Group, Inc. and Subsidiaries

Part I – FINANCIAL INFORMATION

ITEM 1. Financial Statements (unaudited)

CONSOLIDATED BALANCE SHEET

(in millions) (unaudited)


				September 30,		December 31,
				2006		2005

Assets:
	Investments and financial services assets:
		Fixed maturities:
			Bonds available for sale, at market value (amortized cost: 2006 – $368,532; 2005 – $349,612) (includes hybrid financial instruments: 2006 – $407)	$	376,036	$	359,516
			Bonds held to maturity, at amortized cost (market value: 2006 – $22,148; 2005 – $22,047)		21,484		21,528
			Bond trading securities, at market value (cost: 2006 – $7,267; 2005 – $4,623)		7,238		4,636
		Equity securities:
			Common stocks available for sale, at market value (cost: 2006 – $10,125; 2005 – $10,125)		11,835		12,227
			Common and preferred stocks trading, at market value (cost: 2006 – $10,098; 2005 – $7,746)		11,528		8,959
			Preferred stocks available for sale, at market value (cost: 2006 – $2,450; 2005 – $2,282)		2,500		2,402
		Mortgage loans on real estate, net of allowance (2006 – $57; 2005 – $54)			16,842		14,300
		Policy loans			7,385		7,039
		Collateral and guaranteed loans, net of allowance (2006 – $7; 2005 – $10)			3,597		3,570
		Financial services assets:
			Flight equipment primarily under operating leases, net of accumulated depreciation (2006 – $8,480; 2005 – $7,419)		39,460		36,245
			Securities available for sale, at market value (cost: 2006 – $40,501; 2005 – $37,572)		41,232		37,511
			Trading securities, at market value		5,822		6,499
			Spot commodities		118		92
			Unrealized gain on swaps, options and forward transactions		20,235		18,695
			Trading assets		2,194		1,204
			Securities purchased under agreements to resell, at contract value		27,041		14,547
			Finance receivables, net of allowance (2006 – $679; 2005 – $670) (includes finance receivables held for sale: 2006 – $863; 2005 – $1,110)		28,634		27,995
		Securities lending collateral, at market value (which approximates cost)			71,388		59,471
		Other invested assets			32,777		27,267
		Short-term investments, at cost (which approximates market value)			22,716		15,342

			Total investments and financial services assets		750,062		679,045
	Cash				1,425		1,897
	Investment income due and accrued				6,202		5,727
	Premiums and insurance balances receivable, net of allowance (2006 – $881; 2005 – $1,011)				17,540		15,333
	Reinsurance assets, net of allowance (2006 – $447; 2005 – $992)				24,364		24,978
	Deferred policy acquisition costs				36,342		33,248
	Investments in partially owned companies				1,031		1,158
	Real estate and other fixed assets, net of accumulated depreciation (2006 – $5,424; 2005 – $4,990)				9,141		7,446
	Separate and variable accounts				70,652		63,797
	Goodwill				8,576		8,093
	Other assets				16,209		12,329

Total assets				$	941,544	$	853,051

See Accompanying Notes to Consolidated Financial Statements.

American International Group, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEET (continued)

(in millions, except share data) (unaudited)


			September 30,			December 31,
			2006			2005

Liabilities:
	Reserve for losses and loss expenses		$	79,863		$	77,169
	Unearned premiums			26,068			24,243
	Future policy benefits for life and accident and health insurance contracts			118,273			108,807
	Policyholders’ contract deposits			236,342			227,027
	Other policyholders’ funds			10,534			10,870
	Commissions, expenses and taxes payable			5,125			4,769
	Insurance balances payable			4,722			3,564
	Funds held by companies under reinsurance treaties			2,442			4,174
	Income taxes payable			8,497			6,288
	Financial services liabilities:
		Borrowings under obligations of guaranteed investment agreements		21,091			20,811
		Securities sold under agreements to repurchase, at contract value		15,071			11,047
		Trading liabilities		2,914			2,546
		Hybrid financial instrument liabilities, at fair value		8,150			–
		Securities and spot commodities sold but not yet purchased, at market value		5,645			5,975
		Unrealized loss on swaps, options and forward transactions		12,764			12,740
		Trust deposits and deposits due to banks and other depositors		4,813			4,877
		Commercial paper		8,814			6,514
		Notes, bonds, loans and mortgages payable		79,834			71,313
	Commercial paper			4,484			2,694
	Notes, bonds, loans and mortgages payable			13,350			7,126
	Liabilities connected to trust preferred stock			1,399			1,391
	Separate and variable accounts			70,652			63,797
	Securities lending payable			72,264			60,409
	Minority interest			6,290			5,124
	Other liabilities (includes hybrid financial instruments: 2006 – $70)			25,800			23,273

Total liabilities				845,201			766,548

Preferred shareholders’ equity in subsidiary companies				189			186

	Commitments and Contingent Liabilities (See Note 6)
Shareholders’ equity:
	Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued 2006 and 2005 – 2,751,327,476			6,878			6,878
	Additional paid-in capital			2,572			2,339
	Retained earnings			81,987			72,330
	Accumulated other comprehensive income (loss)			6,744			6,967
	Treasury stock, at cost; 2006 – 152,107,902; 2005 – 154,680,704 shares of common stock			(2,027	)		(2,197	)

Total shareholders’ equity				96,154			86,317

Total liabilities, preferred shareholders’ equity in subsidiary companies and shareholders’ equity			$	941,544		$	853,051

See Accompanying Notes to Consolidated Financial Statements.

American International Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF INCOME


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

			Three Months						Nine Months
			Ended September 30,						Ended September 30,

			2006			2005			2006			2005

Revenues:
	Premiums and other considerations		$	18,856		$	17,243		$	55,401		$	52,459
	Net investment income			6,263			5,654			18,002			16,213
	Realized capital gains (losses)			(87	)		77			(132	)		89
	Other income			4,167			3,434			9,930			12,752

	Total revenues			29,199			26,408			83,201			81,513

Benefits and expenses:
	Incurred policy losses and benefits			14,737			16,501			43,725			45,657
	Insurance acquisition and other operating expenses			8,161			7,360			23,141			20,959

	Total benefits and expenses			22,898			23,861			66,866			66,616

Income before income taxes, minority interest and cumulative effect of an accounting change				6,301			2,547			16,335			14,897

Income taxes				1,943			748			5,066			4,537

Income before minority interest and cumulative effect of an accounting change				4,358			1,799			11,269			10,360

Minority interest				(134	)		(54	)		(694	)		(327	)

Income before cumulative effect of an accounting change				4,224			1,745			10,575			10,033

Cumulative effect of an accounting change, net of tax				–			–			34			–

Net income			$	4,224		$	1,745		$	10,609		$	10,033

Earnings per common share:
	Basic
		Income before cumulative effect of an accounting change	$	1.62		$	0.67		$	4.06		$	3.86
		Cumulative effect of an accounting change, net of tax		–			–			0.01			–

		Net income	$	1.62		$	0.67		$	4.07		$	3.86

	Diluted
		Income before cumulative effect of an accounting change	$	1.61		$	0.66		$	4.03		$	3.82
		Cumulative effect of an accounting change, net of tax		–			–			0.01			–

		Net income	$	1.61		$	0.66		$	4.04		$	3.82

Dividends declared per common share			$	0.165		$	0.175		$	0.48		$	0.475

Average shares outstanding:
	Basic			2,607			2,597			2,607			2,597
	Diluted			2,626			2,624			2,625			2,624

See Accompanying Notes to Consolidated Financial Statements.

American International Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF CASH FLOWS


(in millions) (unaudited)

Nine Months Ended September 30,				2006			2005

Summary:
	Net cash provided by (used in) operating activities			$	6,004		$	20,190
	Net cash used in investing activities				(51,400	)		(52,577	)
	Net cash provided by financing activities				44,865			32,576
	Effect of exchange rate changes on cash				59			(90	)

	Change in cash				(472	)		99
	Cash at beginning of period				1,897			2,009

	Cash at end of period			$	1,425		$	2,108

Cash flows from operating activities:
	Net income			$	10,609		$	10,033

	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Noncash revenues, expenses, gains and losses included in income:
			Realized capital (gains) losses		394			296
			Foreign exchange transaction (gains) losses		845			(2,889	)
			Equity in income of partially owned companies and other invested assets		(2,655	)		(1,217	)
			Amortization of premium and discount on securities		100			357
			Depreciation expenses, principally flight equipment		1,743			1,311
			Provision for finance receivable losses		329			315
		Changes in operating assets and liabilities:
			General and life insurance reserves		10,507			17,257
			Premiums and insurance balances receivable and payable – net		(173	)		89
			Reinsurance assets		614			(2,163	)
			Deferred policy acquisition costs		(3,210	)		(2,351	)
			Investment income due and accrued		(475	)		(399	)
			Funds held under reinsurance treaties		(1,732	)		544
			Other policyholders’ funds		(510	)		613
			Income taxes payable		1,905			2,532
			Commissions, expenses and taxes payable		356			516
			Other assets and liabilities – net		(120	)		1,233
			Bonds, common and preferred stocks trading, at market value		(4,410	)		(3,532	)
			Trading assets and liabilities – net		(622	)		1,711
			Trading securities, at market value		677			(3,532	)
			Spot commodities		(26	)		82
			Net unrealized (gain) loss on swaps, options and forward transactions		(966	)		694
			Securities purchased under agreements to resell		(12,494	)		14,143
			Securities sold under agreements to repurchase		4,024			(12,887	)
			Securities and spot commodities sold but not yet purchased, at market value		(330	)		249
			Finance receivables held for sale – originations and purchases		(7,965	)		(9,111	)
			Sales of finance receivables – held for sale		7,888			8,409
			Other – net		1,701			(2,113	)

			Total adjustments		(4,605	)		10,157

Net cash provided by (used in) operating activities				$	6,004		$	20,190

See Accompanying Notes to Consolidated Financial Statements.

American International Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF CASH FLOWS (continued)


(in millions) (unaudited)

Nine Months Ended September 30,		2006			2005

Cash flows from investing activities:
Cost of bonds, at market sold		$	70,737		$	93,690
Cost of bonds, at market matured or redeemed			11,794			12,553
Cost of equity securities sold			8,891			9,271
Realized capital gains (losses)			(325	)		24
Sales of securities available for sale			4,300			4,913
Maturities of securities available for sale			974			2,190
Sales of flight equipment			380			376
Sales or distributions of other invested assets			11,591			7,480
Finance receivable principal payments received			9,131			8,842
Mortgage, policy, collateral and guaranteed loans payments received			3,081			2,715
Purchases of fixed maturity securities			(98,852	)		(130,547	)
Purchases of equity securities			(11,032	)		(10,947	)
Purchases of securities available for sale			(8,162	)		(12,992	)
Purchases of flight equipment			(4,860	)		(5,482	)
Purchases of other invested assets			(11,935	)		(8,874	)
Net additions to real estate and other assets			(1,405	)		(1,398	)
Finance receivables held for investment – originations and purchases			(9,947	)		(13,021	)
Mortgage, policy, collateral and guaranteed loans granted			(5,793	)		(3,941	)
Change in securities lending collateral			(11,917	)		(8,458	)
Change in short-term investments			(8,051	)		1,029

Net cash used in investing activities		$	(51,400	)	$	(52,577	)

Cash flows from financing activities:
Policyholders’ contract deposits			37,998			39,254
Policyholders’ contract withdrawals			(30,475	)		(26,562	)
Change in trust deposits and deposits due to banks and other depositors			(64	)		7
Change in commercial paper			3,216			21
Proceeds from notes, bonds, loans and mortgages payable, and hybrid financial instrument liabilities			40,345			43,791
Repayments on notes, bonds, loans and mortgages payable, and hybrid financial instrument liabilities			(16,851	)		(32,929	)
Proceeds from issuance of guaranteed investment agreements			9,411			9,743
Maturities of guaranteed investment agreements			(9,480	)		(8,059	)
Change in securities lending payable			11,855			8,458
Proceeds from issuance of common stock			94			44
Cash dividends paid to shareholders			(1,209	)		(1,031	)
Acquisition of treasury stock			(7	)		(170	)
Other – net			32			9

Net cash provided by financing activities		$	44,865		$	32,576

Supplementary disclosure of cash flow information:
Cash paid during the period for:
	Interest	$	4,254		$	3,587
	Taxes	$	3,252		$	2,031
Non-cash activity:
	Interest credited to policyholder accounts included in financing activities	$	7,253		$	7,074

See Accompanying Notes to Consolidated Financial Statements.

American International Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)


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

			Three Months						Nine Months
			Ended September 30,						Ended September 30,

			2006			2005			2006			2005

Net income			$	4,224		$	1,745		$	10,609		$	10,033

Other comprehensive income (loss):
	Unrealized appreciation (depreciation) of investments – net of reclassification adjustments			7,200			(2,493	)		(1,133	)		(211	)
		Deferred income tax benefit (expense) on above changes		(2,562	)		993			281			490
	Foreign currency translation adjustments			(115	)		222			955			(604	)
		Deferred income tax benefit (expense) on above changes		17			(379	)		(332	)		122
	Net derivative gains (losses) arising from cash flow hedging activities			4			(63	)		12			7
		Deferred income tax (expense) benefit on above changes		(1	)		90			(4	)		19
	Retirement plan liabilities adjustment, net of tax			—			(42	)		(2	)		(70	)

Other comprehensive income (loss)				4,543			(1,672	)		(223	)		(247	)

Comprehensive income (loss)			$	8,767		$	73		$	10,386		$	9,786

See Accompanying Notes to Consolidated Financial Statements.

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


1.	Financial Statement Presentation

These unaudited condensed consolidated financial statements do not include certain financial information required by U.S. generally accepted accounting principles (GAAP) for complete financial statements 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/A of American International Group, Inc. (AIG) for the year ended December 31, 2005 (2005 Annual Report on Form 10-K/A).

In the opinion of management, these consolidated financial statements contain the normal recurring adjustments necessary for a fair statement of the results presented herein. All material intercompany accounts and transactions have been eliminated. Certain accounts have been reclassified in the 2005 financial statements to conform to their 2006 presentation. See also Note 11 herein.

Information with respect to the three and nine months ended September 30, 2005 includes the effects of corrections and reclassifications made in conjunction with the Second Restatement. See also AIG’s 2005 Annual Report on Form 10-K/A.


2.	Segment Information

AIG identifies its reportable segments by product line consistent with its management structure. AIG’s major product and service groupings are general insurance, life insurance & retirement services, financial services and asset management. The following table summarizes the operations by major operating segment for the three and nine-month periods ended September 30, 2006 and 2005:


		Three Months						Nine Months
		Ended September 30,						Ended September 30,
Operating Segments
(in millions)		2006			2005			2006			2005

Revenues^(a):
	General Insurance^(b)(h)	$	12,615		$	11,192		$	36,438		$	33,816
	Life Insurance & Retirement Services^(c)(h)		12,356			11,760			36,819			35,086
	Financial Services^(d)		3,187			1,926			6,028			8,140
	Asset Management^(e)		1,238			1,355			4,098			3,951
	Other		(197	)		175			(182	)		520

Consolidated		$	29,199		$	26,408		$	83,201		$	81,513

Operating income (loss)^(a)(f)(i)(j):
	General Insurance^(h)	$	2,625		$	(137	)	$	7,819		$	3,390
	Life Insurance & Retirement Services^(g)(h)		2,448			2,248			7,424			6,787
	Financial Services^(g)		1,357			224			650			3,483
	Asset Management		341			568			1,613			1,682
	Other^(k)		(470	)		(356	)		(1,171	)		(445	)

Consolidated		$	6,301		$	2,547		$	16,335		$	14,897

(a)

Includes the effect of hedging activities that do not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. For the three-month periods ended September 30, 2006 and 2005, the effect was $165 million and $(353) million, respectively, in revenues and $165 million and $(345) million, respectively, in operating income. For the nine-month periods ended September 30, 2006 and 2005, the effect was $(1.13) billion and $2.21 billion, respectively, in revenues and $(1.13) billion and $2.28 billion, respectively, in operating income. These amounts result primarily from interest rate and foreign currency derivatives which are hedging available for sale securities and borrowings.


(b)	Represents the sum of General Insurance net premiums earned, net investment income and realized capital gains (losses).

(c)

Represents the sum of Life Insurance & Retirement Services GAAP premiums, net investment income and realized capital gains (losses). Included in realized capital gains (losses) is the effect of hedging activities that do not qualify for hedge accounting treatment under FAS 133 and foreign exchange gains (losses) of $(190) million and $(264) million in the three-month periods ended September 30, 2006 and 2005, respectively, and $145 million and $(447) million in the nine-month periods ended September 30, 2006 and 2005, respectively.


(d)	Represents interest, lease and finance charges.


(e)	Represents net investment income with respect to Guaranteed Investment Contracts (GICs) and management and advisory fees.


(f)	Represents income before income taxes, minority interest and cumulative effect of an accounting change.


(g)	Results of operations of AIG Credit Card Company (Taiwan) are shared equally by the Life Insurance & Retirement Services segment and the Financial Services segment. Additional allowances of $44 million were recorded in the first quarter of 2006, by each segment, for losses in these credit card operations.
(h)	Includes the effect of out of period adjustments related to the accounting for certain interests in unit investment trusts and other mutual funds (unit investment trusts). For the three and nine-month periods ended September 30, 2006 the effect was an increase of $92 million and $524 million, respectively, in both revenues and operating income for General Insurance and an increase of $24 million in both revenues and operating income for the three-month period ended September 30, 2006 and $245 million and $168 million in revenues and operating income, respectively, for the nine-month period ended September 30, 2006, for Life Insurance & Retirement Services.


(i)	Includes current year catastrophe related losses of $2.44 billion in both the third quarter and first nine months of 2005. There were no significant catastrophe related losses in the third quarter and first nine months of 2006.
(j)	Includes additional losses incurred and net reinstatement premiums related to prior year catastrophes of $28 million and $39 million in the three-month periods ended September 30, 2006 and 2005, respectively. Such losses and premiums were $87 million and $252 million in the nine-month periods ended September 30, 2006 and 2005, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


2.	Segment Information (continued)


(k)	The operating loss for the Other category is as follows:


		Three Months						Nine Months
		Ended September 30,						Ended September 30,

(in millions)		2006			2005			2006			2005

Operating income (loss):
	Equity earnings in unconsolidated subsidiaries*	$	48		$	(205	)	$	178		$	(109	)
	Compensation expense – SICO Plans		(14	)		(63	)		(104	)		(130	)
	Compensation expense – C.V. Starr tender offer		–			–			(54	)		–
	Interest expense		(227	)		(131	)		(633	)		(382	)
	Unallocated corporate expenses		(95	)		(92	)		(356	)		(287	)
	Realized capital gains (losses)		(197	)		175			(182	)		520
	Other miscellaneous, net		15			(40	)		(20	)		(57	)

Total Other		$	(470	)	$	(356	)	$	(1,171	)	$	(445	)

Includes current year catastrophe related losses from unconsolidated subsidiaries of $246 million for both the third quarter and first nine months of 2005. There were no significant catastrophe related losses in the third quarter and first nine months of 2006. Also includes unfavorable development from unconsolidated subsidiaries related to prior year catastrophe related losses of $1 million and $15 million for the first nine months of 2006 and 2005, respectively.

Each of the General Insurance sub-segments is comprised of groupings of major products and services as follows: Domestic Brokerage Group is comprised of domestic commercial insurance products and services; Transatlantic is comprised of reinsurance products and services sold to other general insurance and reinsurance companies; Personal Lines are comprised of general insurance products and services sold to individuals; Mortgage Guaranty is comprised of products insuring against losses arising under certain loan agreements; and Foreign General is comprised of general insurance products sold overseas.

The following table summarizes AIG’s General Insurance operations by major internal reporting unit for the three and nine-month periods ended September 30, 2006 and 2005:


		Three Months					Nine Months
		Ended					Ended
		September 30,					September 30,
General Insurance
(in millions)		2006		2005			2006		2005

Revenues^(a):
	Domestic Brokerage Group	$	7,196	$	6,282		$	20,356	$	18,812
	Transatlantic		1,004		944			3,035		2,874
	Personal Lines		1,214		1,235			3,652		3,615
	Mortgage Guaranty		226		146			636		488
	Foreign General		2,975		2,580			8,757		8,017
	Reclassifications and eliminations		–		5			2		10

Total General Insurance		$	12,615	$	11,192		$	36,438	$	33,816

Operating income (loss)^(b)(c):
	Domestic Brokerage Group	$	1,557		(283	)	$	4,448	$	1,235
	Transatlantic		143		(275	)		427		(62	)
	Personal Lines		133		18			352		229
	Mortgage Guaranty		85		72			301		285
	Foreign General^(a)		707		326			2,289		1,693
	Reclassifications and eliminations		–		5			2		10

Total General Insurance		$	2,625	$	(137	)	$	7,819	$	3,390


^(a)	Includes the effect of out of period adjustments related to the accounting for certain interests in unit investment trusts. For the three and nine-month periods ended September 30, 2006 the effect was an increase of $92 million and $524 million, respectively, in both revenues and operating income.

^(b)	Includes current year catastrophe related losses of $2.11 billion for both the three and nine-month periods ended September 30, 2005. There were no significant catastrophe related losses in the third quarter and first nine months of 2006.

^(c)	Includes additional losses incurred and net reinstatement premiums related to prior year catastrophes of $50 million and $39 million in the three-month periods ended September 30, 2006 and 2005, respectively. Such losses and premiums were $108 million and $237 million in the nine-month periods ended September 30, 2006 and 2005, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


2.	Segment Information (continued)

Life Insurance & Retirement Services is comprised of two major groupings of products and services: insurance-oriented products and services and retirement savings products and services. Substantially all of the retirement savings products are reported in the VALIC, AIG Annuity and AIG SunAmerica sub-segment.

The following table summarizes AIG’s Life Insurance & Retirement Services operations by major internal reporting unit for the three and nine-month periods ended September 30, 2006 and 2005:


			Three Months				Nine Months
			Ended				Ended
			September 30,				September 30,
Life Insurance & Retirement Services
(in millions)			2006		2005		2006		2005

Revenues:
	Foreign:
		AIA, AIRCO and Nan Shan^(a) (e)	$	3,998	$	3,640	$	12,515	$	11,564
		ALICO, AIG Star Life and AIG Edison Life^(b) (f)		4,137		3,955		11,884		11,083
		Philamlife and Other		127		133		404		390
	Domestic:
		AGLA and AG Life^(c)		2,259		2,291		6,848		6,793
		VALIC, AIG Annuity and AIG SunAmerica^(d)		1,835		1,741		5,168		5,256

Total Life Insurance & Retirement Services			$	12,356	$	11,760	$	36,819	$	35,086

Operating Income:
	Foreign:
		AIA, AIRCO and Nan Shan^(a) (e)	$	605	$	556	$	2,041	$	1,793
		ALICO, AIG Star Life and AIG Edison Life^(b) (f)		969		800		2,882		2,194
		Philamlife and Other		10		14		51		47
	Domestic:
		AGLA and AG Life^(c)		261		352		862		1,058
		VALIC, AIG Annuity and AIG SunAmerica^(d)		603		526		1,588		1,695

Total Life Insurance & Retirement Services			$	2,448	$	2,248	$	7,424	$	6,787

(a)

Represents the operations of American International Assurance Company, Limited together with American International Assurance Company (Bermuda) Limited (AIA), American International Reinsurance Company, Ltd. (AIRCO), and Nan Shan Life Insurance Company, Ltd. (Nan Shan). Revenues and operating income include realized capital gains (losses) of $(87) million and $(23) million for the three-month periods ended September 30, 2006 and 2005, respectively, and $111 million and $154 million for the nine-month periods ended September 30, 2006 and 2005, respectively. The effects of hedging activities that do not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses included in realized capital gains (losses) are losses of $102 million and $174 million for the three-month periods ended September 30, 2006 and 2005, respectively, and gains of $11 million and losses of $113 million for the nine-month periods ended September 30, 2006 and 2005, respectively. Includes $44 million in additional allowances for losses recorded in the first quarter of 2006 from AIG Credit Card Company (Taiwan).

(b)

Represents the operations of American Life Insurance Company (ALICO), AIG Star Life Insurance Co., Ltd. (AIG Star Life), and AIG Edison Life Insurance Company (AIG Edison Life). Revenues and operating income include realized capital gains of $65 million and $44 million for the three-month periods ended September 30, 2006 and 2005, respectively, and gains of $376 million and losses of $85 million for the nine-month periods ended September 30, 2006 and 2005, respectively. The effects of hedging activities that do not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses included in realized capital gains (losses) are gains of $28 million and losses of $102 million for the three-month periods ended September 30, 2006 and 2005, respectively, and gains of $184 million and losses of $365 million for the nine-month periods ended September 30, 2006 and 2005, respectively.

(c)

Includes the life operations of American General Life Insurance Company (AG Life), AIG Life Insurance Company and American International Life Assurance Company of New York. Also includes the operations of American General Life and Accident Insurance Company (AGLA). Revenues and operating income include realized capital gains (losses) of $(123) million and $41 million for the three-month periods ended September 30, 2006 and 2005, respectively, and losses of $190 million and $22 million for the nine-month periods ended September 30, 2006 and 2005, respectively. The effects of hedging activities that do not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses included in realized capital gains (losses) are losses of $104 million and gains of $122 million for the three-month periods ended September 30, 2006 and 2005, respectively, and gains of $11 million and $56 million for the nine-month periods ended September 30, 2006 and 2005, respectively.

(d)

“AIG SunAmerica” represents the annuity operations of AIG SunAmerica Life Assurance Company, as well as those of First SunAmerica Life Insurance Company and SunAmerica Life Insurance Company. Also includes the operations of The Variable Annuity Life Insurance Company (VALIC) and AIG Annuity Insurance Company (AIG Annuity). Revenues and operating income include realized capital losses of $24 million and $83 million for the three-month periods ended September 30, 2006 and 2005, respectively, and losses of $414 million and $71 million for the nine- month periods ended September 30, 2006 and 2005, respectively. The effects of hedging activities that do not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses included in realized capital gains (losses) are $0 and losses of $110 million for the three month periods ended September 30, 2006 and 2005, respectively, and losses of $36 million and $25 million for the nine-month periods ended September 30, 2006 and 2005, respectively.


(e)	Includes the effect of out of period adjustments related to the accounting for certain interests in unit investment trusts. For the three-month period ended September 30, 2006 the effect was an increase of $9 million in both revenues and operating income. For the nine-month period ended September 30, 2006 the effect was an increase of $230 million in revenues and $153 million in operating income.


(f)	Includes the effect of out of period adjustments related to the accounting for certain interests in unit investment trusts. For the three and nine-month periods ended September 30, 2006 the effect was an increase of $15 million in both revenues and operating income.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


2.	Segment Information (continued)

The following table summarizes AIG’s Financial Services operations by major internal reporting unit for the three and nine-month periods ended September 30, 2006 and 2005:


		Three Months					Nine Months
		Ended					Ended
		September 30,					September 30,
Financial Services
(in millions)		2006		2005			2006			2005

Revenues^(a):
	Aircraft Finance^(b)	$	1,060	$	943		$	3,067		$	2,661
	Capital Markets^(c)(d)		1,118		23			30			2,754
	Consumer Finance^(e)		970		940			2,833			2,664
	Other		39		20			98			61

Total Financial Services		$	3,187	$	1,926		$	6,028		$	8,140

Operating income (loss)^(a):
	Aircraft Finance	$	157	$	165		$	475		$	476
	Capital Markets^(d)		965		(150	)		(457	)		2,306
	Consumer Finance^(f)(g)		220		190			594			649
	Other		15		19			38			52

Total Financial Services		$	1,357	$	224		$	650		$	3,483


(a)	Includes the effect of hedging activities that do not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. For the three and nine-month periods ended September 30, 2005, the effect was $(10) million and $(59) million, respectively, in operating income for Aircraft Finance. During 2006, Aircraft Finance derivative gains and losses are reported as part of the Other category and not reported in Aircraft Finance operating income. For the three-month periods ended September 30, 2006 and 2005, the effect was $783 million and $(365) million in both revenues and operating income, respectively, for Capital Markets. For the nine-month periods ended September 30, 2006 and 2005, the effect was $(1.06) billion and $1.80 billion in both revenues and operating income, respectively, for Capital Markets. These amounts result primarily from interest rate and foreign currency derivatives which are hedging available for sale securities and borrowings.
(b)	Revenues are primarily aircraft lease rentals from International Lease Finance Corporation (ILFC).
(c)	Revenues, shown net of interest expense, are primarily from hedged financial positions entered into in connection with counterparty transactions and the effect of hedging activities that do not qualify for hedge accounting treatment under FAS 133 described in (a) above.
(d)	Certain transactions entered into by AIGFP generate tax credits and benefits which are included in income taxes in the consolidated statement of income. The amount of such tax credits and benefits for the three-month periods ended September 30, 2006 and 2005 are $3 million and $23 million, respectively. The amount of such tax credits and benefits for the nine-month periods ended September 30, 2006 and 2005 are $29 million and $63 million, respectively.
(e)	Revenues are primarily finance charges.


(f)	Includes $44 million in additional allowances for losses recorded in the first quarter of 2006 from AIG Credit Card Company (Taiwan).


(g)	Includes catastrophe related losses of $62 million recorded in the third quarter of 2005 resulting from hurricane Katrina, which were reduced by $22 million in the third quarter of 2006.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


2.	Segment Information (continued)

The following table summarizes AIG’s Asset Management revenues and operating income for the three and nine-month periods ended September 30, 2006 and 2005:


		Three Months				Nine Months
		Ended				Ended
		September 30,				September 30,
Asset Management
(in millions)		2006		2005		2006		2005

Revenues:
	Guaranteed Investment Contracts	$	845	$	908	$	2,517	$	2,707
	Institutional Asset Management		265		279		1,163		776
	Brokerage Services and Mutual Funds		71		67		217		192
	Other		57		101		201		276

Total Asset Management		$	1,238	$	1,355	$	4,098	$	3,951

Operating income:
	Guaranteed Investment Contracts^(a)	$	175	$	294	$	635	$	939
	Institutional Asset Management^(b)(c)		89		155		721		424
	Brokerage Services and Mutual Funds		23		20		67		50
	Other		54		99		190		269

Total Asset Management		$	341	$	568	$	1,613	$	1,682


(a)	Includes the effect of hedging activities that do not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. For the three and nine-month periods ended September 30, 2005, the effect was $18 million and $127 million, respectively, in operating income. During 2006, these derivative gains and losses are reported as part of the Other category, and not reported in Asset Management operating income.
(b)	Includes the full results of certain AIG managed private equity and real estate funds that are consolidated pursuant to FIN 46(R), “Consolidation of Variable Interest Entities”. Also includes $(3) million and $77 million for the three-month periods ended September 30, 2006 and 2005, respectively, and $207 million and $189 million for the nine-month periods ended September 30, 2006 and 2005, respectively, of third-party limited partner earnings offset in minority interest expense, which is not a component of operating income.

(c)

Includes the full results of certain AIG managed partnerships that are consolidated effective January 1, 2006 pursuant to EITF 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” For the three and nine-month periods ended September 30, 2006, operating income includes $47 million and $203 million, respectively, of third-party limited partner earnings offset in minority interest expense, which is not a component of operating income.


3.	Earnings Per Share

Earnings per share of AIG are based on the weighted average number of common shares outstanding during the period. See also Note 10 herein.

Computation of Earnings Per Share (EPS):


			Three Months						Nine Months
			Ended						Ended
			September 30,						September 30,

(in millions, except per share data)			2006			2005			2006			2005

Numerator for earnings per share:
Income before cumulative effect of an accounting change			$	4,224		$	1,745		$	10,575		$	10,033
Cumulative effect of an accounting change, net of tax				–			–			34			–

Net income applicable to common stock for basic EPS			$	4,224		$	1,745		$	10,609		$	10,033
Interest on contingently convertible bonds, net of tax ^(a)				2			3			8			8

Net income applicable to common stock for diluted EPS			$	4,226		$	1,748		$	10,617		$	10,041
Cumulative effect of an accounting change, net of tax				–			–			34			–

Income before cumulative effect of an accounting change applicable to common stock for diluted EPS			$	4,226		$	1,748		$	10,583		$	10,041

Denominator for earnings per share:
	Weighted-average shares outstanding used in the computation of EPS:
		Common stock issued		2,751			2,751			2,751			2,751
		Common stock in treasury		(153	)		(155	)		(153	)		(155	)
		Deferred shares		9			1			9			1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


3.	Earnings Per Share (continued)


	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,

(in millions, except per share data)	2006		2005		2006		2005

Weighted-average shares outstanding — basic		2,607		2,597		2,607		2,597
Incremental shares from potential common stock:
Weighted-average number of shares arising from outstanding employee stock plans (treasury stock method)^(b)		10		18		9		18
Contingently convertible bonds^(a)		9		9		9		9

Weighted-adjusted average shares outstanding — diluted ^(b)		2,626		2,624		2,625		2,624

Earnings per share:
Basic:
Income before cumulative effect of an accounting change	$	1.62	$	0.67	$	4.06	$	3.86
Cumulative effect of an accounting change, net of tax		–		–		0.01		–

Net Income	$	1.62	$	0.67	$	4.07	$	3.86

Diluted:
Income before cumulative effect of an accounting change	$	1.61	$	0.66	$	4.03	$	3.82
Cumulative effect on an accounting change, net of tax		–		–		0.01		–

Net income	$	1.61	$	0.66	$	4.04	$	3.82


(a)	Assumes conversion of contingently convertible bonds due to the adoption of EITF Issue No. 04-8 “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share.”
(b)	Certain share equivalents arising from employee stock plans were not included in the computation of diluted earnings per share where the exercise price of the options exceeded the average market price and would have been antidilutive. The number of share equivalents excluded were 14 million and 21 million for the first nine months of 2006 and 2005, respectively.

From time to time, AIG may buy shares of its common stock in the open market for general corporate purposes, including to satisfy its obligations under various employee benefit plans. At September 30, 2006 and December 31, 2005, an additional 36,542,700 shares could be purchased under the then current authorization by AIG’s Board of Directors. Although AIG has authorization to purchase additional shares, AIG has not repurchased shares in 2006. During the nine months ended September 30, 2005, AIG purchased in the open market 2,477,100 shares of its common stock, all of which were acquired in the first quarter.

The quarterly dividend rate per common share, commencing with the dividend declared in May 2006 and paid on September 15, 2006, is $0.165. The declared dividend amount of $0.175 for the three months ended September 30, 2005 includes a $0.025 increase to the amount previously declared in the second quarter of 2005 for payment in September 2005 as well as the $0.125 dividend declared in May 2005 for payment in September 2005.


4.	Benefits Provided by Starr International Company, Inc. and C.V. Starr & Co., Inc.

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

None of the costs of the various benefits provided under the SICO Plans has been paid by AIG, although AIG has recorded a charge to reported earnings for the deferred compensation amounts paid to AIG employees by SICO, with an offsetting amount credited to additional paid-in capital reflecting amounts deemed contributed by SICO. The SICO Plans provide that shares currently owned by SICO are set aside by SICO for the benefit of the participant and distributed upon retirement. The SICO Board of Directors currently may permit an early payout of units under certain circumstances. Prior to payout, the participant is not entitled to vote, dispose of or receive dividends with respect to such shares, and shares are subject to forfeiture under certain conditions, including but not limited to the participant’s voluntary termination of employment with AIG prior to normal retirement age. Under the SICO Plans, SICO’s Board of Directors may elect to pay a participant cash in lieu of shares of AIG common stock. Following notification from SICO to participants in the SICO Plans that it will settle specific future awards under the SICO Plans with shares rather than cash, AIG modified its accounting for the SICO Plans from variable to fixed measurement accounting, although variable accounting will continue to be applied where SICO makes cash pay-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


4.	Benefits Provided by Starr International Company, Inc. (continued)

ments pursuant to elections made prior to March 2005. AIG gave effect to this change in settlement method beginning on December 9, 2005, the date of SICO’s notice to participants in the SICO Plans. See also Note 6(b) “Commitments” herein.

Compensation expense with respect to the SICO Plans aggregated $14 million and $62 million for the three-month periods ended September 30, 2006 and 2005, respectively, and $104 million and $129 million for the nine-month periods ended September 30, 2006 and 2005, respectively. Compensation expense in the first quarter of 2006 included various out of period adjustments totaling $61 million, primarily relating to stock-splits and other miscellaneous items. See also Note 10 herein.

In January 2006, C.V. Starr & Co., Inc. (Starr) completed its tender offer to purchase Starr interests from AIG employees. In conjunction with AIG’s adoption of FAS 123R, Starr is considered to be an “economic interest holder” in AIG. As a result, compensation expense of $54 million recorded in the first quarter with respect to the Starr offer, was included in the first nine months of 2006.

As a result of its changing relationship with Starr and SICO, AIG has established new executive compensation plans to replace the SICO plans and investment opportunities previously provided by Starr. The replacement plans include both share-based plans and cash-based plans. In addition, these replacement plans generally include performance as well as service conditions. See also Note 10 herein.


5.	Ownership and Transactions With Related Parties

(a) Ownership: According to the Schedule 13D filed on May 26, 2006 by Starr, SICO, Edward E. Matthews, Maurice R. Greenberg, the Maurice R. and Corinne P. Greenberg Family Foundation, Inc., the Universal Foundation, Inc. and the Maurice R. and Corinne P. Greenberg Joint Tenancy Company, LLC, these reporting persons could be deemed to beneficially own 393,157,543 shares of common stock at that date. Based on the shares of common stock outstanding as of October 31, 2006, this ownership would represent approximately 15 percent of the voting stock of AIG. Although these reporting persons have made filings under Section 16 of the Securities Exchange Act of 1934, as amended (the Exchange Act), reporting sales of shares of common stock, no amendment to the Schedule 13D has been filed to report a change in ownership.

(b) Transactions with Related Parties: In the ordinary course of business during the first nine months of 2006, AIG and its subsidiaries paid commissions to Starr and its subsidiaries for the production and management of insurance business. As of July 25, 2006, none of the Starr agencies serve as agents for AIG companies. There were no significant receivables from/payables to related parties at September 30, 2006.


6.	Commitments, Contingencies and Guarantees

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

Litigation and Investigations

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

Although AIG regularly reviews the adequacy of the established reserve for losses and loss expenses, there can be no assurance that AIG’s ultimate loss reserves will not develop adversely and materially exceed AIG’s current loss reserves. Estimation of ultimate net losses, loss expenses and loss reserves is a complex process for long-tail casualty lines of business, which include excess and umbrella liability, directors and officers liability (D&O), professional liability, medical malpractice, workers compensation, general liability, products liability and related classes, as well as for asbestos and environmental exposures. Generally, actual historical loss development factors are used to project future loss development. However, there can be no assurance that future loss development patterns will be the same as in the past. Moreover, any deviation in loss cost trends or in loss development factors might not be discernible for an extended period of time subsequent to the recording of the initial loss reserve estimates for any accident year. Thus, there is the potential for reserves with respect to a number of years to be significantly affected by changes in loss cost trends or loss development factors that were relied upon in setting the reserves. These changes in loss trends or loss development factors could be attributable to changes in inflation, in labor and material costs or in the judicial environment, or in other social or economic phenomena affecting claims.

(b) AIG and certain of its subsidiaries have been named defendants in two putative class actions in state court in Alabama that arise out of the 1999 settlement of class and derivative litigation involving Caremark Rx, Inc. (Caremark). An excess policy issued by a subsidiary of AIG with respect to the 1999 litigation was expressly stated to be without limit of liability. In the current actions, plaintiffs allege that the judge approving the 1999 settlement was misled as to the extent of

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


6.	Commitments, Contingencies and Guarantees (continued)

available insurance coverage and would not have approved the settlement had he known of the existence and/or unlimited nature of the excess policy. They further allege that AIG, its subsidiaries, and Caremark are liable for fraud and suppression for misrepresenting and/or concealing the nature and extent of coverage. In their complaint, plaintiffs request compensatory damages for the 1999 class in the amount of $3.2 billion, plus punitive damages. AIG and its subsidiaries deny the allegations of fraud and suppression and have asserted, inter alia, that information concerning the excess policy was publicly disclosed months prior to the approval of the settlement. AIG and its subsidiaries further assert that the current claims are barred by the statute of limitations and that plaintiffs’ assertions that the statute was tolled cannot stand against the public disclosure of the excess coverage. Plaintiffs, in turn, have asserted that the disclosure was insufficient to inform them of the nature of the coverage and did not start the running of the statute of limitations. On January 28, 2005, the Alabama trial court determined that one of the current actions may proceed as a class action on behalf of the 1999 classes that were allegedly defrauded by the settlement. AIG, its subsidiaries, and Caremark sought appellate relief from the Alabama Supreme Court, which was granted in substantial part in August 2006. The matter is in the process of being remanded to the trial court to proceed with a class certification determination under the standards set by the Alabama Supreme Court. AIG cannot now estimate either the likelihood of its prevailing in these actions or the potential damages in the event liability is determined.

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

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

As a result of these settlements, AIG made payments or placed amounts in escrow in the first nine months of 2006 totaling approximately $1.64 billion, $225 million of which represented fines and penalties. Amounts held in escrow totaling $692 million, including interest thereon, are included in other assets and other liabilities at September 30, 2006. A substantial portion of the money will be available to resolve claims asserted in various regulatory and civil proceedings, including shareholder lawsuits.

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

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

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

Since October 19, 2004, AIG or its subsidiaries have been named as a defendant in eighteen complaints that were filed in federal court and two that were originally filed in state court (Massachusetts and Florida) and removed to federal court. These cases generally allege that AIG and its subsidiaries violated federal and various state antitrust laws, as well as federal RICO laws, various state deceptive and unfair practice laws and certain state laws governing fiduciary duties. The alleged basis of these claims is that there was a conspiracy between insurance companies and insurance brokers with regard to the use of contingent commission agreements, bidding practices, and other broker-related conduct concerning coverage in certain sectors of the insurance industry. The Judicial Panel on Multidistrict Litigation entered an

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


6.	Commitments, Contingencies and Guarantees (continued)

order on February 17, 2005, consolidating most of these cases and transferring them to the United States District Court for the District of New Jersey (District of New Jersey). The remainder of these cases have been transferred to the District of New Jersey. On August 15, 2005, the plaintiffs in the multidistrict litigation filed a Corrected First Consolidated Amended Commercial Class Action Complaint, which, in addition to the previously named AIG defendants, names new AIG subsidiaries as defendants. Also on August 15, 2005, AIG and two subsidiaries were named as defendants in a Corrected First Consolidated Amended Employee Benefits Class Action Complaint filed in the District of New Jersey, which asserts similar claims with respect to employee benefits insurance and a claim under ERISA on behalf of putative classes of employers and employees.

On November 29, 2005, the AIG defendants, along with other insurer defendants and the broker defendants filed motions to dismiss both the Commercial and Employee Benefits Complaints. On October 3, 2006, the Court reserved in part and denied in part the motions to dismiss. The Court denied the motions to dismiss the ERISA claims, but ordered an expedited discovery schedule, and the Court reserved on the state law claims. Plaintiffs have filed a motion for class certification in the consolidated action, in response to which defendants have filed an opposition. In addition, complaints were filed against AIG and several of its subsidiaries in Massachusetts and Florida state courts, which have both been stayed. In the Florida action, the plaintiff filed a petition for a writ of certiorari with the District Court of Appeals of the State of Florida, Fourth District with respect to the stay order which was granted on August 16, 2006. The Fourth District Court remanded to the trial court to reconsider whether a stay should be granted. On February 9, 2006, a complaint against AIG and several of its subsidiaries was filed in Texas state court, making claims similar to those in the federal cases above. On October 17, 2006, the court stayed the case until January 31, 2007.

In April and May 2005, amended complaints were filed in the consolidated derivative and securities cases, as well as in one of the ERISA lawsuits, pending in the Southern District of New York adding allegations concerning AIG’s accounting treatment for non-traditional insurance products.

In September 2005, a second amended complaint was filed in the consolidated securities cases adding allegations concerning AIG’s first restatement of its financial statements described in the 2005 Annual Report on Form 10-K (the “First Restatement”), and a new securities action complaint was filed in the Southern District of New York, asserting claims premised on the same allegations made in the consolidated cases. In April 2006, motions to dismiss were denied in the securities actions. AIG filed answers in both securities actions in June 2006, as did other defendants.

Also in September 2005, a class action complaint was filed to consolidate the ERISA cases pending in the Southern District of New York. Motions to dismiss in the consolidated action were filed in January 2006.

In April 2005, new derivative actions were filed in Delaware Chancery Court, and in July and August 2005, two new derivative actions were filed in the Southern District of New York asserting claims duplicative of the claims made in the consolidated derivative action.

In July 2005, a second amended complaint was filed in the consolidated derivative case in the Southern District of New York, expanding upon accounting-related allegations, based upon the First Restatement. In June 2005, the derivative cases in Delaware were consolidated and, in August 2005, an amended consolidated complaint was filed. AIG’s Board of Directors has appointed a special committee of independent directors to review the matters asserted in the derivative complaints. The courts have approved agreements staying the derivative cases pending in the Southern District of New York and in Delaware Chancery Court while the special committee of independent directors performs its work. In September 2005, a shareholder filed suit in Delaware Chancery Court seeking documents relating to some of the allegations made in the derivative suits. The court approved a stipulation dismissing that action on May 15, 2006.

On June 20, 2006, SICO filed suit in Delaware Chancery Court seeking the inspection of certain books and records of AIG. The Chancery court has dismissed the action with prejudice by agreement of the parties.

In late 2002, a derivative action was filed in Delaware Chancery Court in connection with AIG’s transactions with certain entities affiliated with Starr and SICO. In May 2005, the plaintiff filed an amended complaint which adds additional claims premised on allegations relating to insurance brokerage practices and AIG’s non-traditional insurance products. On February 16, 2006, the Delaware Chancery Court entered an order dismissing the litigation with prejudice with respect to AIG’s outside directors and dismissing the claims against the remaining AIG defendants without prejudice. In response to an order, dated July 5, 2006, dismissing certain of its claims, the plaintiff filed a second amended complaint on July 21, 2006, which adds additional claims against Starr. Defendants filed answers in September 2006.

AIG cannot predict the outcome of the matters described above or estimate the potential costs related to these matters and, accordingly, no reserve is being established in AIG’s financial statements at this time. In the opinion of AIG man-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


6.	Commitments, Contingencies and Guarantees (continued)

agement, AIG’s ultimate liability for the matters referred to above is not likely to have a material adverse effect on AIG’s consolidated financial condition, although it is possible that the effect would be material to AIG’s consolidated results of operations for an individual reporting period.

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

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

Commitments

(a) At September 30, 2006, ILFC had committed to purchase 268 new aircraft deliverable from 2006 through 2015 at an estimated aggregate purchase price of $19.2 billion and had options to purchase three new aircraft at an estimated aggregate purchase price of $453 million. ILFC will be required to find customers for any aircraft acquired, and it must arrange financing for portions of the purchase price of such equipment.

(b) On June 27, 2005, AIG entered into an agreement pursuant to which AIG agrees, subject to certain conditions, to make any payment that is not promptly paid with respect to the benefits accrued by certain employees of AIG and its subsidiaries under the SICO Plans (as defined in Note 4).

Contingencies

(a) On December 30, 2004, an arbitration panel issued its ruling in connection with a 1998 workers compensation quota share reinsurance agreement under which Superior National Insurance Company, among others, was reinsured by The United States Life Insurance Company in the City of New York (USLIFE), a subsidiary of American General Corporation. In its 2-1 ruling, the arbitration panel refused to rescind the contract as requested by USLIFE. Instead, the panel reformed the contract to reduce USLIFE’s participation by ten percent. USLIFE is pursuing certain reinsurance recoverables in connection with the contract. Further, the arbitration ruling established a second phase of arbitration for USLIFE to present its challenges to certain cessions to the contract. AIG holds a reserve of approximately $379 million related to this matter as of September 30, 2006.

(b) AIG generates income tax credits as a result of investing in synthetic fuel production. Tax credits generated from the production and sale of synthetic fuel under the Internal Revenue Code are subject to an annual phase-out provision that is based on the average wellhead price of domestic crude oil. The price range within which the tax credits are phased-out was originally established in 1980 and is adjusted annually for inflation. Depending on the price of domestic crude oil for a particular year, all or a portion of the tax credits generated in that year might be eliminated. Tax credits reflected in the income tax provision for the first nine months of 2006 have been reduced to reflect an estimated phase-out of the tax credits from 2006 synthetic fuel production based on the observed price of domestic crude oil. Since the phase-out of tax credits from 2006 synthetic fuel production will depend on the average wellhead price of domestic crude oil for the entire 2006 calendar year, it is not possible to determine the extent to which the 2006 tax credits actually will be phased-out. As a result, the actual level of tax credits from 2006 synthetic fuel production may be higher or lower than the current estimate. AIG evaluates the production levels of its synthetic fuel production facilities in light of the risk of phase-out of the associated tax credits. As a result of fluctuating domestic crude oil prices, AIG intends to evaluate and possibly adjust production levels in light of this risk for the remainder of 2006. Regardless of oil prices, the tax credits expire after 2007.

Guarantees

(a) AIG and certain of its subsidiaries become parties to derivative financial instruments with market risk resulting from both dealer and end user activities and to reduce currency, interest rate, equity and commodity exposures. These instruments are carried at their estimated fair values in the consolidated balance sheet. The vast majority of AIG’s derivative activity is transacted by AIGFP. (See also Note 20 of Notes to

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


6.	Commitments, Contingencies and Guarantees (continued)

Consolidated Financial Statements in AIG’s 2005 Annual Report on Form 10-K/A.)

(b) AIG has issued unconditional guarantees with respect to the prompt payment, when due, of all present and future payment obligations and liabilities of AIGFP arising from transactions entered into by AIGFP.

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


7.	Employee Benefits

The following table presents the components of the net periodic benefit costs with respect to pensions and postretirement benefits for the three and nine-month periods ended September 30, 2006 and 2005:


		Pensions									Postretirement

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

Three Months Ended September 30, 2006
	Components of net period benefit cost:
	Service cost	$	18		$	32		$	50		$	1	$	1		$	2
	Interest cost		9			41			50			1		3			4
	Expected return on assets		(7	)		(48	)		(55	)		–		–			–
	Amortization of prior service cost		(3	)		(1	)		(4	)		–		(2	)		(2	)
	Amortization of transitional liability		1			–			1			–		–			–
	Recognized actuarial loss		4			18			22			–		–			–

Net period benefit cost		$	22		$	42		$	64		$	2	$	2		$	4

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

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

Nine Months Ended September 30, 2006
	Components of net period benefit cost:
	Service cost	$	55		$	94		$	149		$	3	$	4		$	7
	Interest cost		26			122			148			2		8			10
	Expected return on assets		(21	)		(145	)		(166	)		–		–			–
	Amortization of prior service cost		(7	)		(2	)		(9	)		–		(5	)		(5	)
	Amortization of transitional liability		1			–			1			–		–			–
	Recognized actuarial loss		12			56			68			–		–			–

Net period benefit cost		$	66		$	125		$	191		$	5	$	7		$	12

Nine Months Ended September 30, 2005
	Components of net period benefit cost:
	Service cost	$	56		$	78		$	134		$	3	$	5		$	8
	Interest cost		24			111			135			1		11			12
	Expected return on assets		(16	)		(123	)		(139	)		–		–			–
	Amortization of prior service cost		(8	)		(2	)		(10	)		–		(5	)		(5	)
	Loss due to settlements		4			–			4			–		–			–
	Amortization of transition liability		1			–			1			–		–			–
	Recognized actuarial loss		17			49			66			–		2			2

Net period benefit cost		$	78		$	113		$	191		$	4	$	13		$	17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


8.	Recent Accounting Standards

Accounting Changes

At the March 2004 meeting, the Emerging Issue Task Force (EITF) reached a consensus with respect to Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” On September 30, 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) EITF No. 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” delaying the effective date of this guidance until the FASB has resolved certain implementation issues with respect to this guidance, but the disclosures remain effective. This FSP, retitled FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” replaces the measurement and recognition guidance set forth in Issue No. 03-1 and codifies certain existing guidance on impairment and accretion of income. AIG’s adoption of FSP FAS 115-1 on January 1, 2006 did not have a material effect on AIG’s consolidated financial condition or results of operations.

In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (FAS 123R). FAS 123R and its related interpretive guidance replaces FAS No. 123, “Accounting for Stock-Based Compensation” (FAS 123), supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and amends FAS 95, “Statement of Cash Flows.” FAS 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. On January 1, 2003, AIG adopted the recognition provisions of FAS 123. See also Note 10 herein. AIG adopted the provisions of the revised FAS 123R and its related interpretive guidance on January 1, 2006.

For its service-based awards under the 1999 Stock Option Plan, 2002 Stock Incentive Plan and 1996 Employee Stock Purchase Plan, AIG recognizes compensation on a straight-line basis over the scheduled vesting period. Unrecognized unvested compensation expense for stock option awards granted under APB 25 (i.e., before January 1, 2003) will be recognized from January 1, 2006 to the vesting date. However, for the SICO Plans, the AIG Deferred Compensation Profit Participant Plan and the AIG Partners Plan, which contain both performance and service conditions, AIG recognizes compensation utilizing a graded vesting expense attribution method. The effect of this approach is to recognize compensation cost over the requisite service period for each separately vesting tranche of the award.

AIG’s share-based plans generally provide for accelerated vesting after the participant turns 65 and retires. For awards granted after January 1, 2006, compensation expense is recognized ratably from the date of grant through the shorter of age 65 or the vesting period. The effect of this change is not material to AIG’s consolidated financial position or results of operations. Awards granted prior to January 1, 2006 will continue to be recognized over the vesting period with accelerated expense recognition upon an actual retirement. SICO compensation expense for participants retiring after age 65 had been reflected in prior years’ results consistent with vested status under the SICO Plans.

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

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

On June 29, 2005, FASB issued Statement 133 Implementation Issue No. B38, “Embedded Derivatives: Evaluation of Net Settlement with Respect to the Settlement of a Debt Instrument through Exercise of an Embedded Put Option or Call Option.” This implementation guidance relates to the potential settlement of the debtor’s obligation to the creditor that would occur upon exercise of the put option or call option, which meets the net settlement criterion in FAS 133. The effective date of the implementation guidance is January 1, 2006. The adop-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


8.	Recent Accounting Standards (continued)

tion of this guidance did not have a material effect on AIG’s consolidated financial condition or results of operations.

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

On February 16, 2006, the FASB issued FAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (FAS 155), an amendment of FAS 140 and FAS 133. FAS 155 allows AIG to include changes in fair value in earnings on an instrument-by-instrument basis for any hybrid financial instrument that contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under FAS 133. The election to measure the hybrid instrument at fair value is irrevocable at the acquisition or issuance date.

AIG elected to early adopt FAS 155 as of January 1, 2006, and apply FAS 155 fair value measurement to certain structured note liabilities and structured investments in AIG’s available for sale portfolio that existed at December 31, 2005. The effect of this adoption resulted in an $11 million after-tax ($18 million pre-tax) decrease to opening retained earnings as of January 1, 2006, representing the difference between the fair value of these hybrid financial instruments and the prior carrying value as of December 31, 2005. The effect of adoption on after-tax gross gains and losses was $218 million ($336 million pre-tax) and $229 million ($354 million pre-tax), respectively.

In connection with AIG’s early adoption of FAS 155, structured note liabilities of $8.1 billion, other structured liabilities in conjunction with equity derivative transactions of $70 million, and hybrid financial instruments of $407 million at September 30, 2006 are now carried at fair value. The effect on earnings for the three and nine-month periods ended September 30, 2006, for changes in the fair value of hybrid financial instruments, was a pre-tax gain of $79 million and a pre-tax loss of $44 million, respectively, and is reflected in Other income.

On March 27, 2006, the FASB issued FSP FTB 85-4-1, “Accounting for Life Settlement Contracts by Third-Party Investors” (FSP 85-4-1), an amendment of FTB 85-4, “Accounting for Purchases of Life Insurance.” Life settlements are designed to assist life insurance policyholders in monetizing the existing value of life insurance policies. FSP 85-4-1 allows AIG to measure life settlement contracts using either the investment method or fair value method. The election is made on an instrument-by-instrument basis and is irrevocable. AIG elected to early adopt FSP 85-4-1 as of January 1, 2006 using the investment method for pre-existing investments held at December 31, 2005. The effect of this adoption resulted in a $319 million after tax ($487 million pre-tax) increase to opening retained earnings.

On June 29, 2006, AIG restructured its ownership of life settlement contracts with no effect on the economic substance of these investments. At the same time, AIG paid $610 million to its former co-investors to acquire all the remaining interests in life settlement contracts held in previously non-consolidated trusts.

At September 30, 2006, the carrying value of AIG’s life settlement contracts was $1.21 billion, and is included in Other invested assets on the consolidated balance sheet. These investments are monitored for impairment on a contract by contract basis quarterly. During the three month period ended September 30, 2006, income recognized on life settlement contracts previously held in non-consolidated trusts was $5 million, and is included in net investment income on the consolidated statement of income. Such income totaled $18 million for the nine month period then ended. Further information regarding life settlement contracts as of September 30, 2006 is as follows:


(dollars in millions)

Remaining Life
Expectancy		Number of		Carrying		Face Value
of Insureds		Contracts		Value		(Death Benefits)

0 – 1 year			4	$	6	$	7
1 – 2 years			24		14		20
2 – 3 years			64		38		59
3 – 4 years			135		131		229
4 – 5 years			137		85		175
Thereafter			1,540		935		3,495

	Total		1,904	$	1,209	$	3,985

As of September 30, 2006, the anticipated life insurance premiums required to keep the life settlement contracts in force, payable in the ensuing twelve months ending September 30, 2007, and the four succeeding years ending September 30, 2011 are $84 million, $88 million, $93 million, $94 million, and $95 million, respectively.

On April 13, 2006, the FASB issued FSP FIN 46(R)-6, “Determining the Variability to be Considered in Applying FASB Interpretation No. 46(R)” (FIN 46(R)-6 or FSP). The FSP affects the identification of which entities are variable interest entities through a “by design” approach in identifying and measuring the variable interests of the variable interest entity and its primary beneficiary. The requirements became effective beginning in the third quarter of 2006 and are to be applied to all new variable interest entities with

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


8.	Recent Accounting Standards (continued)

which AIG becomes involved. The new requirements need not be applied to entities that have previously been analyzed under FIN 46(R) unless a reconsideration event occurs. The adoption of this guidance did not have a material effect on AIG’s consolidated financial condition or results of operations.

Future Application of Accounting Standards

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

On July 13, 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in income tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and additional disclosures. The effective date of this implementation guidance is January 1, 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. AIG is currently assessing the effect of implementing this guidance.

On September 13, 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 requires registrants to quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for registrants’ financial statements for fiscal years ending on or after November 15, 2006, with early application encouraged. The adoption of SAB 108 is not expected to have a material effect on AIG’s consolidated financial statements.

In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. AIG is currently assessing the effect of implementing this guidance.

In September 2006, the FASB issued FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (FAS No. 158). FAS No. 158 requires an employer to prospectively recognize the over funded or under funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. FAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end balance sheet, with limited exceptions. AIG is required to adopt this standard in its financial statements for the year ending December 31, 2006. The estimated cumulative effect, including deferred income taxes, on AIG’s consolidated balance sheet at December 31, 2006 as a result of the adoption of this standard is a net reduction in shareholders’ equity through a charge to Other comprehensive income of approximately $720 million, with a corresponding net decrease of approximately $350 million in total assets, and a net increase of approximately $370 million in total liabilities. The actual effect of the adoption at December 31, 2006 may differ from the above estimates due to changes in assumptions such as the discount rate, actuarial assumptions, the measurements of fair value of plan assets and the recognition of any additional minimum liabilities determined under the provisions of FAS 87 prior to the adoption of FAS 158. In addition, AIG is in the process of determining the realizability of additional deferred tax assets that would be generated by plans in foreign locations. Accordingly, the net after tax effect of the adoption of FAS 158 may change pending the outcome of this review during the fourth quarter.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


9.	Information Provided in Connection with Outstanding Debt

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

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

American General Corporation, as issuer:

Condensed Consolidating Balance Sheet

American

International

September 30, 2006

Group, Inc.

Other

Consolidated

(in millions)

Guarantor

AGC

Subsidiaries

Eliminations

AIG

Assets:

Invested assets

4,756

–

760,818

(15,512

)

750,062

Cash

–

1,397

–

1,425

Carrying value of subsidiaries and partially owned companies, at equity

103,611

26,913

5,608

(135,101

)

1,031

Other assets

3,806

2,646

184,638

(2,064

)

189,026

Total assets

112,201

29,559

952,461

(152,677

)

941,544

Liabilities:

Insurance liabilities

332

–

483,079

(42

)

483,369

Debt

10,816

2,096

138,942

(14,732

)

137,122

Other liabilities

4,899

3,826

218,867

(2,882

)

224,710

Total liabilities

16,047

5,922

840,888

(17,656

)

845,201

Preferred shareholders’ equity in subsidiary companies

–

189

–

189

Total shareholders’ equity

96,154

23,637

111,384

(135,021

)

96,154

Total liabilities, preferred shareholders’ equity in subsidiary companies and shareholders’ equity

112,201

29,559

952,461

(152,677

)

941,544


		American
		International
December 31, 2005		Group, Inc.				Other					Consolidated
(in millions)		Guarantor		AGC		Subsidiaries		Eliminations			AIG

Assets:
	Invested assets	$	1,392	$	–	$	691,349	$	(13,696	)	$	679,045
	Cash		190		–		1,707		–			1,897
	Carrying value of subsidiaries and partially owned companies, at equity		90,723		27,027		15,577		(132,169	)		1,158
	Other assets		2,768		2,577		166,933		(1,327	)		170,951

Total assets		$	95,073	$	29,604	$	875,566	$	(147,192	)	$	853,051

Liabilities:
	Insurance liabilities	$	408	$	–	$	460,271	$	(56	)	$	460,623
	Debt		4,607		2,087		115,212		(12,057	)		109,849
	Other liabilities		3,741		4,110		191,279		(3,054	)		196,076

Total liabilities			8,756		6,197		766,762		(15,167	)		766,548

Preferred shareholders’ equity in subsidiary companies			–		–		186		–			186
Total shareholders’ equity			86,317		23,407		108,618		(132,025	)		86,317

Total liabilities, preferred shareholders’ equity in subsidiary companies and shareholders’ equity		$	95,073	$	29,604	$	875,566	$	(147,192	)	$	853,051

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


9.	Information Provided in Connection with Outstanding Debt (continued)

Condensed Consolidating Statement of Income

American

International

Three Months Ended September 30, 2006

Group, Inc.

Other

Consolidated

(in millions)

Guarantor

AGC

Subsidiaries

Eliminations

AIG

Operating income (loss)

(215

)

(49

)

6,565

–

6,301

Equity in undistributed net income of consolidated subsidiaries

4,223

420

–

(4,643

)

–

Dividend income from consolidated subsidiaries

287

134

–

(421

)

–

Income taxes (benefits)

(17

)

1,889

–

1,943

Minority interest

–

(134

)

–

(134

)

Net income (loss)

4,224

522

4,542

(5,064

)

4,224


	American
	International
Three Months Ended September 30, 2005	Group, Inc.						Other						Consolidated
(in millions)	Guarantor			AGC			Subsidiaries			Eliminations			AIG

Operating income (loss)	$	(41	)	$	(54	)	$	2,642		$	–		$	2,547
Equity in undistributed net income of consolidated subsidiaries		1,857			615			–			(2,472	)		–
Dividend income from consolidated subsidiaries		223			–			–			(223	)		–
Income taxes (benefits)		294			(19	)		473			–			748
Minority interest		–			–			(54	)		–			(54	)

Net income (loss)	$	1,745		$	580		$	2,115		$	(2,695	)	$	1,745

American

International

Nine Months Ended September 30, 2006

Group, Inc.

Other

Consolidated

(in millions)

Guarantor

AGC

Subsidiaries

Eliminations

AIG

Operating income (loss)

(937

)

(135

)

17,407

–

16,335

Equity in undistributed net income of consolidated subsidiaries

10,990

1,088

–

(12,078

)

–

Dividend income from consolidated subsidiaries

854

592

–

(1,446

)

–

Income taxes (benefits)

332

(47

)

4,781

–

5,066

Minority interest

–

(694

)

–

(694

)

Cumulative effect of an accounting change, net of tax

–

Net income (loss)

10,609

1,592

11,932

(13,524

)

10,609


	American
	International
Nine Months Ended September 30, 2005	Group, Inc.		AGC			Other						Consolidated
(in millions)	Guarantor		Issuer			Subsidiaries			Eliminations			AIG

Operating income (loss)	$	99	$	(130	)	$	14,928		$	–		$	14,897
Equity in undistributed net income of consolidated subsidiaries		9,287		1,906			–			(11,193	)		–
Dividend income from consolidated subsidiaries		1,151		–			–			(1,151	)		–
Income taxes (benefits)		504		(45	)		4,078			–			4,537
Minority interest		–		–			(327	)		–			(327	)

Net income (loss)	$	10,033	$	1,821		$	10,523		$	(12,344	)	$	10,033

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


9.	Information Provided in Connection with Outstanding Debt (continued)

Condensed Consolidating Statements of Cash Flow

American

International

Nine Months Ended September 30, 2006

Group, Inc.

Other

Consolidated

(in millions)

Guarantor

AGC

Subsidiaries

AIG

Net cash (used in) provided by operating activities

(228

)

160

6,072

6,004

Cash flows from investing:

Invested assets disposed

2,681

–

117,873

120,554

Invested assets acquired

(5,554

)

–

(164,995

)

(170,549

)

Other

(2,374

)

(17

)

986

(1,405

)

Net cash used in investing activities

(5,247

)

(17

)

(46,136

)

(51,400

)

Cash flows from financing activities:

Change in debts

6,201

–

20,440

26,641

Other

(888

)

(143

)

19,255

18,224

Net cash (used in) provided by financing activities

5,313

(143

)

39,695

44,865

Effect of exchange rate changes on cash

–

Change in cash

(162

)

–

(310

)

(472

)

Cash at beginning of period

190

–

1,707

1,897

Cash at end of period

–

1,397

1,425


		American
		International
Nine Months Ended September 30, 2005		Group, Inc.						Other			Consolidated
(in millions)		Guarantor			AGC			Subsidiaries			AIG

Net cash provided by operating activities		$	1,487		$	685		$	18,018		$	20,190

Cash flows from investing:
	Invested assets disposed		124			–			142,959			143,083
	Invested assets acquired		(1,761	)		–			(192,501	)		(194,262	)
	Other		(305	)		(270	)		(823	)		(1,398	)

Net cash used in investing activities			(1,942	)		(270	)		(50,365	)		(52,577	)

Cash flows from financing activities:
	Change in debts		1,659			(299	)		11,207			12,567
	Other		(1,119	)		(116	)		21,244			20,009

Net cash (used in) provided by financing activities			540			(415	)		32,451			32,576

Effect of exchange rate changes on cash			–			–			(90	)		(90	)

Change in cash			85			–			14			99
Cash at beginning of period			17			–			1,992			2,009

Cash at end of period		$	102		$	–		$	2,006		$	2,108

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


9.	Information Provided in Connection with Outstanding Debt (continued)

(b) AIG Liquidity Corp. is a wholly owned subsidiary of AIG. AIG provides a full and unconditional guarantee of all obligations of AIG Liquidity Corp., which commenced operations in 2003.

AIG Liquidity Corp., as issuer:

Condensed Consolidating Balance Sheet

American

International

AIG

September 30, 2006

Group, Inc.

Liquidity

Other

Consolidated

(in millions)

Guarantor

Corp.

Subsidiaries

Eliminations

AIG

Assets:

Invested assets

4,756

760,818

(15,512

)

750,062

Cash

1,397

–

1,425

Carrying value of subsidiaries and partially owned companies, at equity

103,611

–

32,521

(135,101

)

1,031

Other assets

3,806

187,284

(2,064

)

189,026

Total assets

112,201

982,020

(152,677

)

941,544

Liabilities:

Insurance liabilities

332

–

483,079

(42

)

483,369

Debt

10,816

141,038

(14,732

)

137,122

Other liabilities

4,899

222,693

(2,882

)

224,710

Total liabilities

16,047

846,810

(17,656

)

845,201

Preferred shareholders’ equity in subsidiary companies

–

189

–

189

Total shareholders’ equity

96,154

135,021

(135,021

)

96,154

Total liabilities, preferred shareholders’ equity in subsidiary companies and shareholders’ equity

112,201

982,020

(152,677

)

941,544


*	Amounts significantly less than $1 million.


		American
		International		AIG
December 31, 2005		Group, Inc.		Liquidity		Other					Consolidated
(in millions)		Guarantor		Corp.		Subsidiaries		Eliminations			AIG

Assets:
	Invested assets	$	1,392	$	*	$	691,349	$	(13,696	)	$	679,045
	Cash		190		*		1,707		–			1,897
	Carrying value of subsidiaries and partially owned companies, at equity		90,723		–		42,604		(132,169	)		1,158
	Other assets		2,768		*		169,510		(1,327	)		170,951

Total assets		$	95,073	$	*	$	905,170	$	(147,192	)	$	853,051

Liabilities:
	Insurance liabilities	$	408	$	–	$	460,271	$	(56	)	$	460,623
	Debt		4,607		*		117,299		(12,057	)		109,849
	Other liabilities		3,741		*		195,389		(3,054	)		196,076

Total liabilities			8,756		*		772,959		(15,167	)		766,548

Preferred shareholders’ equity in subsidiary companies			–		–		186		–			186
Total shareholders’ equity			86,317		*		132,025		(132,025	)		86,317

Total liabilities, preferred shareholders’ equity in subsidiary companies and shareholders’ equity		$	95,073	$	*	$	905,170	$	(147,192	)	$	853,051


*	Amounts significantly less than $1 million.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


9.	Information Provided in Connection with Outstanding Debt (continued)

Condensed Consolidating Statement of Income

American

International

AIG

Three Months Ended September 30, 2006

Group, Inc.

Liquidity

Other

Consolidated

(in millions)

Guarantor

Corp.

Subsidiaries

Eliminations

AIG

Operating income (loss)

(215

)

6,516

–

6,301

Equity in undistributed net income of consolidated subsidiaries

4,223

–

420

(4,643

)

–

Dividend income from consolidated subsidiaries

287

–

134

(421

)

–

Income taxes

1,872

–

1,943

Minority interest

–

(134

)

–

(134

)

Net income (loss)

4,224

5,064

(5,064

)

4,224


*	Amounts significantly less than $1 million.


	American
	International			AIG
Three Months Ended September 30, 2005	Group, Inc.			Liquidity		Other						Consolidated
(in millions)	Guarantor			Corp.		Subsidiaries			Eliminations			AIG

Operating income	$	(41	)	$	*	$	2,588		$	–		$	2,547
Equity in undistributed net income of consolidated subsidiaries		1,857			–		615			(2,472	)		–
Dividend income from consolidated subsidiaries		223			–		–			(223	)		–
Income taxes		294			*		454			–			748
Minority interest		–			–		(54	)		–			(54	)

Net income (loss)	$	1,745		$	*	$	2,695		$	(2,695	)	$	1,745


*	Amounts significantly less than $1 million.

American

International

AIG

Nine Months Ended September 30, 2006

Group, Inc.

Liquidity

Other

Consolidated

(in millions)

Guarantor

Corp.

Subsidiaries

Eliminations

AIG

Operating income (loss)

(937

)

17,272

–

16,335

Equity in undistributed net income of consolidated subsidiaries

10,990

–

1,088

(12,078

)

–

Dividend income from consolidated subsidiaries

854

–

592

(1,446

)

–

Income taxes

332

4,734

–

5,066

Minority interest

–

(694

)

–

(694

)

Cumulative effect of an accounting change, net of tax

–

Net income (loss)

10,609

13,524

(13,524

)

10,609


*	Amounts significantly less than $1 million.


	American
	International		AIG
Nine Months Ended September 30, 2005	Group, Inc.		Liquidity		Other						Consolidated
(in millions)	Guarantor		Corp.		Subsidiaries			Eliminations			AIG

Operating income	$	99	$	*	$	14,798		$	–		$	14,897
Equity in undistributed net income of consolidated subsidiaries		9,287		–		1,906			(11,193	)		–
Dividend income from consolidated subsidiaries		1,151		–		–			(1,151	)		–
Income taxes		504		*		4,033			–			4,537
Minority interest		—		–		(327	)		–			(327	)

Net income (loss)	$	10,033	$	*	$	12,344		$	(12,344	)	$	10,033


*	Amounts significantly less than $1 million.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


9.	Information Provided in Connection with Outstanding Debt (continued)

Condensed Consolidating Statements of Cash Flow

American

International

AIG

Nine Months Ended September 30, 2006

Group, Inc.

Liquidity

Other

Consolidated

(in millions)

Guarantor

Corp.

Subsidiaries

AIG

Net cash (used in) provided by operating activities

(228

)

6,232

6,004

Cash flows from investing:

Invested assets disposed

2,681

–

117,873

120,554

Invested assets acquired

(5,554

)

–

(164,995

)

(170,549

)

Other

(2,374

)

969

(1,405

)

Net cash used in investing activities

(5,247

)

(46,153

)

(51,400

)

Cash flows from financing activities:

Change in debts

6,201

–

20,440

26,641

Other

(888

)

19,112

18,224

Net cash (used in) provided by financing activities

5,313

39,552

44,865

Effect of exchange rate changes on cash

–

Change in cash

(162

)

(310

)

(472

)

Cash at beginning of period

190

–

1,707

1,897

Cash at end of period

1,397

1,425


*	Amounts significantly less than $1 million.


		American
		International			AIG
Nine Months Ended September 30, 2005		Group, Inc.			Liquidity		Other			Consolidated
(in millions)		Guarantor			Corp.		Subsidiaries			AIG

Net cash (used in) provided by operating activities		$	1,487		$	*	$	18,703		$	20,190

Cash flows from investing:
	Invested assets disposed		124			–		142,959			143,083
	Invested assets acquired		(1,761	)		–		(192,501	)		(194,262	)
	Other		(305	)		*		(1,093	)		(1,398	)

Net cash used in investing activities			(1,942	)		*		(50,635	)		(52,577	)

Cash flows from financing activities:
	Change in debts		1,659			–		10,908			12,567
	Other		(1,119	)		*		21,128			20,009

Net cash (used in) provided by financing activities			540			*		32,036			32,576

Effect of exchange rate changes on cash			–			–		(90	)		(90	)

Change in cash			85			*		14			99
Cash at beginning of period			17			–		1,992			2,009

Cash at end of period		$	102		$	*	$	2,006		$	2,108


*	Amounts significantly less than $1 million.


10.	Stock Compensation Plans

At September 30, 2006, AIG employees could be awarded compensation pursuant to six different stock-based compensation plan arrangements: (i) AIG 1999 Stock Option Plan, as amended (1999 Plan); (ii) AIG 1996 Employee Stock Purchase Plan, as amended (1996 Plan); (iii) AIG 2002 Stock Incentive Plan, as amended (2002 Plan) under which AIG has issued time-vested restricted stock units (RSUs) and performance restricted stock units (Performance RSUs); (iv) SICO’s Deferred Compensation Profit Participation Plans (SICO Plans); (v) AIG’s 2005-2006 Deferred Compensation Profit Participation Plan (AIG DCPPP) and (vi) the AIG Partners Plan. The AIG DCPPP was adopted as a replacement for the SICO Plans for the 2005-2006 period, and the AIG Partners Plan replaces the AIG DCPPP. Stock-based compensation earned under the AIG DCPPP and the AIG Partners Plan is issued as awards under the 2002 Plan. AIG currently settles share option exercises and other share awards to participants through the issuance of shares it has previously acquired and holds in its treasury account, except for share awards made by SICO, which are settled by SICO.

At September 30, 2006, AIG’s non-employee directors received stock-based compensation in two forms, options granted pursuant to the 1999 Plan and grants of AIG common stock with delivery deferred until retirement from the Board, pursuant to the AIG Director Stock Plan, which was approved by the shareholders at the 2004 Annual Meeting of Shareholders.

From January 1, 2003 through December 31, 2005, AIG accounted for share-based payment transactions with employ-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


10.	Stock Compensation Plans (continued)

ees under FAS 123, “Accounting for Stock-Based Compensation.” Share-based employee compensation expense from option awards was not recognized in the statement of income in prior periods. Effective January 1, 2006, AIG adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123R “Share-Based Payments” (FAS 123R). FAS 123R requires that companies use a fair value method to value share-based payments and recognize the related compensation expense in net earnings. AIG adopted FAS 123R using the modified prospective application method, and accordingly, financial statement amounts for the prior periods presented have not been restated to reflect the fair value method of expensing share-based compensation under FAS 123R. The modified prospective application method provides for the recognition of the fair value with respect to share-based compensation for shares subscribed for or granted on or after January 1, 2006 and all previously granted but unvested awards as of January 1, 2006.

The adoption of FAS 123R resulted in share-based compensation expense of approximately $14 million during the first nine months of 2006, related to awards which were accounted for under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” AIG expects this expense to approximate $19 million for fiscal 2006. FAS 123R also requires AIG to estimate forfeitures in calculating the expense relating to share-based compensation, rather than recognizing these forfeitures and corresponding reductions in expense as they occur. The pre-tax cumulative effect of adoption, recognized as a reduction in stock-based compensation of $46 million, was recorded as a cumulative effect of an accounting change, net of tax, in the first quarter of 2006. FAS 123R requires AIG to reflect the cash savings resulting from excess tax benefits in its financial statements as cash flow from financing activities, rather than as cash flow from operating activities as in prior periods. The amount of this excess tax benefit for the three and nine-month periods ended September 30, 2006 was $3.9 million and $6.2 million, respectively.

The effect of the adoption of FAS 123R on the consolidated statements of income and cash flows was as follows:


	Three Months Ended September 30, 2006									Nine Months Ended September 30, 2006

							Including								Including
				Effect of			Effect of					Effect of			Effect of
	Pre-adoption of			Adoption of			Adoption of			Pre-adoption of		Adoption of			Adoption of
(in millions, except per share data)	FAS 123R			FAS 123R			FAS 123R			FAS 123R		FAS 123R			FAS 123R

Income before income taxes, minority interest and cumulative effect of an accounting change	$	6,306		$	(5	)	$	6,301		$	16,349	$	(14	)	$	16,335

Provision for income taxes	$	1,944		$	(1	)	$	1,943		$	5,068	$	(2	)	$	5,066

Income before minority interest and cumulative effect of an accounting change	$	4,362		$	(4	)	$	4,358		$	11,281	$	(12	)	$	11,269

Cumulative effect of an accounting change, net of tax	$	–		$	–		$	–		$	–	$	34		$	34

Net income	$	4,228		$	(4	)	$	4,224		$	10,587	$	22		$	10,609

Net cash provided by (used in) operating activities	$	(615	)	$	(4	)	$	(619	)	$	6,010	$	(6	)	$	6,004

Net cash provided by financing activities	$	16,922		$	4		$	16,926		$	44,859	$	6		$	44,865

Basic earnings per share	$	1.62		$	–		$	1.62		$	4.06	$	0.01		$	4.07

Diluted earnings per share	$	1.61		$	–		$	1.61		$	4.03	$	0.01		$	4.04

The following table presents share-based compensation expenses, including the cumulative effect of adoption of FAS 123R, included in AIG’s consolidated statement of income:


	Three Months Ended		Nine Months Ended
(in millions)	September 30, 2006		September 30, 2006

Share-based compensation expense before tax	$	66	$	277
Income tax benefit		14		42

After-tax share-based compensation expense	$	52	$	235

Included in share-based compensation expense of $277 million for the nine months ended September 30, 2006 was a one-time compensation cost of approximately $54 million related to the Starr tender offer and various out of period adjustments totalling $61 million, primarily relating to stock-splits and other miscellaneous items for the SICO plans, offset by a $46 million pre-tax adjustment for the cumulative effect of the adoption of FAS 123R. These items were recorded in the first quarter of 2006. See Note 4 herein for a discussion of the Starr tender offer and Note 8 herein for discussion of the prospective change to the accounting for retiree eligibility provisions.

If AIG had adopted the FAS 123 provisions for recognizing compensation expense commencing at the date of grant of the awards, the effect would not have been material to net income or basic or diluted earnings per share for the three and nine-month periods ended September 30, 2005.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


10.	Stock Compensation Plans (continued)

1999 Stock Option Plan

The 1999 Plan provides that options to purchase a maximum of 45,000,000 shares of common stock can be granted to certain key employees and members of the Board of Directors at prices not less than fair market value at the date of grant.

The 1999 Plan was approved by the shareholders at the 2000 Annual Meeting of Shareholders, with certain amendments approved at the 2003 Annual Meeting of Shareholders. The 1999 Plan superseded the 1991 employee stock option plan (the 1991 Plan), although outstanding options granted under the 1991 Plan continue in force until exercise or expiration. The maximum number of shares that may be granted to any employee in any one year under the 1999 Plan is 900,000. Options granted under the 1999 Plan generally vest over four years (25 percent vesting per year) and expire 10 years from the date of grant.

At September 30, 2006, there were 20,997,720 shares reserved for future grants under the 1999 Plan and 27,787,332 shares reserved for issuance under the 1999 and 1991 Plans.

Deferrals

During 2005, options with respect to 1,731,471 shares were exercised with delivery deferred. At December 31, 2005 optionees had made valid elections to defer delivery of 2,067,643 shares of AIG common stock upon exercise of options expiring during 2006. Of these elections, 1,780,027 shares were exercised and deferred in the third quarter of 2006. In addition, non-employee directors of AIG had made valid elections to defer delivery of 21,093 shares of AIG common stock upon exercise of options expiring during 2006.

Valuation Methodology

In 2004, AIG developed a binomial lattice model to calculate the fair value of stock option grants. In prior years, a Black-Scholes model was used. A more detailed description of the valuation methodology is provided below.

The following weighted average assumptions were used for stock options granted in the first nine months of 2006 and 2005:


	2006		2005

Expected annual dividend yield^(a)		0.71%		0.36%
Expected volatility^(b)		27.3%		34.4%
Risk-free interest rate^(c)		4.17%		3.87%
Expected term^(d)		7 years		7 years


(a)	The dividend yield is based on the dividend yield over the twelve month period prior to the grant date.
(b)	In 2006, expected volatility is the average of historical volatility (based on seven years of daily stock price changes) and the implied volatility of actively traded options on AIG shares and in 2005, expected volatility is the historical volatility based on five years of daily stock price changes.


(c)	The interest rate curves used in the valuation model were the U.S. Treasury STRIP rates with terms from 3 months to 10 years.


(d)	The contractual term of the option is generally 10 years with an expected term of 7 years calculated based on an analysis of historical employee exercise behavior and employee turnover (post-vesting terminations). The early exercise rate is a function of time elapsed since the grant. Fifteen years of historical data was used to estimate the early exercise rate.

Additional information with respect to AIG’s stock option plans at September 30, 2006, and changes for the nine months then ended, were as follows:


				Weighted Average
Options:	Shares			Exercise Price

Outstanding at beginning of year		52,545,425		$	54.84
Granted		123,500		$	64.55
Exercised		(1,617,411	)	$	34.02
Shares subject to deferred delivery		(1,780,027	)	$	15.80
Forfeited or expired		(1,167,789	)	$	69.77
Outstanding at end of period		48,103,698		$	56.65
Options exercisable at end of period		37,700,495		$	54.81
Weighted average fair value per share of options granted				$	21.11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


10.	Stock Compensation Plans (continued)

Information about stock options outstanding at September 30, 2006, is summarized as follows:


Options Outstanding									Options Exercisable

			Weighted								Weighted
			Average		Weighted						Average		Weighted
			Remaining		Average		Aggregate Intrinsic		Number		Remaining		Average		Aggregate
Range of	Number		Contractual		Exercise		Values		Exercisable		Contractual		Exercise		Intrinsic Values
Exercise Prices	Outstanding		Life		Price		(in millions)		(vested)		Life		Price		(in millions)

$11.28-$27.14		4,284,284		0.83	$	24.16	$	180		4,284,284		0.83	$	24.16	$	180
$30.44-$41.51		5,351,821		1.79		36.86		157		5,351,821		1.79		36.86		157
$43.31-$53.40		6,877,098		4.07		48.60		122		6,089,836		3.77		48.81		106
$54.11-$59.99		8,324,097		4.34		57.84		71		6,778,940		3.27		57.49		60
$60.13-$63.95		8,956,414		6.19		62.33		35		5,921,540		5.79		61.92		26
$64.01-$69.63		8,141,722		7.05		65.45		7		3,787,201		5.10		65.66		3
$70.35-$98.00		6,168,262		4.68		83.89		–		5,486,873		4.60		84.46		–

Total		48,103,698		4.55	$	56.65	$	572		37,700,495		3.64	$	54.81	$	532

Vested and expected-to-vest options as of September 30, 2006, included in the table above, totaled 44,125,436, with a weighted average exercise price of $56.01, a weighted average contractual life of 4.27 years and an aggregate intrinsic value of $553 million.

As of September 30, 2006, total unrecognized compensation cost (net of expected forfeitures) was $132 million and $3 million related to non-vested share-based compensation awards granted under the 1999 Plan and the 1996 Plan, respectively, with blended weighted average periods of 1.32 years and 0.41 years, respectively. The cost of awards outstanding under these plans at September 30, 2006 is expected to be recognized over approximately three years and one year, respectively, for the 1999 Plan and the 1996 Plan.

The intrinsic value of options exercised during the nine months ended September 30, 2006 was approximately $138 million. The fair value of options vesting for the nine months ended September 30, 2006 was approximately $63 million. AIG received $55 million and $28 million for the nine-month periods ended September 30, 2006 and 2005, respectively, from the exercise of stock options. AIG did not cash-settle any share-based payment awards for the nine-month periods ended September 30, 2006 and 2005. The tax benefits realized as a result of stock option exercises were $15 million for both the nine-month periods ended September 30, 2006 and 2005, respectively.

2002 Stock Incentive Plan

AIG’s 2002 Plan was adopted at the 2002 shareholders meeting and amended and restated by the AIG Board of Directors on September 18, 2002 (the 2002 Plan). The 2002 Plan provides that equity-based or equity-related awards with respect to shares of common stock can be issued to employees in any year up to a maximum of that number of shares equal to (a) 1,000,000 shares plus (b) the number of shares available but not issued in the prior calendar year. The maximum award that a grantee may receive under the 2002 Plan per year is rights with respect to 250,000 shares. For the nine-month periods ended September 30, 2006 and 2005, 3,919,170 RSUs, including performance RSUs, and 1,133,405 RSUs, respectively, were granted by AIG. There were 6,316,623 shares reserved for issuance in connection with future awards at September 30, 2006. Substantially all RSUs granted to date under the 2002 Plan other than performance RSUs granted under the Partners Plan vest on the fourth anniversary of the date of grant.

Director Stock Awards

The methodology used for valuing employee stock options is also used to value director stock options. Director stock options vest one year after the grant date, but are otherwise the same as employee stock options. Options with respect to 40,000 shares and 32,500 shares were granted during the nine months ended September 30, 2006 and 2005, respectively.

AIG also granted 10,750 shares and 4,625 shares, with delivery deferred, to directors for the nine-month periods ended September 30, 2006 and 2005, respectively, under the Director Stock Plan. At September 30, 2006, there were 74,250 shares reserved for future grants under the Director Stock Plan.

Employee Stock Purchase Plan

AIG’s 1996 Plan provides that eligible employees (those employed at least one year) may receive privileges to purchase up to an aggregate of 10,000,000 shares of AIG common stock, at a price equal to 85 percent of the fair market value on the date of the grant of the purchase privilege. Purchase privileges are granted quarterly and are limited to the number of whole shares that can be purchased on an annual basis by

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


10.	Stock Compensation Plans (continued)

an amount equal to the lesser of 10 percent of an employee’s annual salary or $10,000.

SICO Plans

The SICO Plans provide that shares of AIG common stock currently held by SICO are set aside for the benefit of the participant and distributed upon retirement. The SICO Board of Directors currently may permit an early payout of units under certain circumstances. Prior to payout, the participant is not entitled to vote, dispose of or receive dividends with respect to such shares, and shares are subject to forfeiture under certain conditions, including but not limited to the participant’s termination of employment with AIG prior to normal retirement age.

Historically, SICO’s Board of Directors could elect to pay a participant cash in lieu of shares of AIG common stock. On December 9, 2005, SICO notified participants that essentially all subsequent distributions would be made only in shares, and not cash. As of that date, AIG modified its accounting for the SICO Plans from variable to fixed measurement accounting. Variable measurement accounting is used for those few awards for which cash elections had been made prior to March 2005. The SICO Plans are also described in Note 4 herein.

Although none of the costs of the various benefits provided under the SICO Plans has been paid by AIG, AIG has recorded a charge to reported earnings for the deferred compensation amounts paid to AIG employees by SICO, with an offsetting amount credited to additional paid-in capital reflecting amounts deemed contributed by SICO.

As of December 9, 2005, there were 12,650,292 non-vested AIG shares under the SICO Plans with a weighted-average fair value per share of $61.92. As of September 30, 2006, there were 11,656,065 non-vested AIG shares under the SICO Plans with a weighted-average fair value per share of $61.90.

A significant portion of the awards under the SICO Plans vest upon retirement if the participant reaches age 65. The portion of the awards for which early payout is available vest on the applicable payout date.

AIG DCPPP

Effective September 21, 2005, AIG adopted the AIG DCPPP, which provides equity-based compensation to key AIG employees, including senior executive officers. The AIG DCPPP was modeled on the SICO Plans.

The AIG DCPPP contingently allocates a fixed number of shares to each participant if AIG’s cumulative adjusted earnings per share for 2005 and 2006 exceed that for 2003 and 2004. The performance period is September 21, 2005 to December 31, 2006. At the end of the performance period, common shares are contingently allocated. The service period and related vesting consists of three pre-retirement tranches and a final retirement tranche at age 65.

At September 30, 2006, there were units representing 4,643,722 shares granted to participants.

AIG Partners Plan

On June 26, 2006, AIG’s Compensation Committee approved two grants under the AIG Partners Plan. The first grant has a performance period which runs from January 1, 2006 through December 31, 2007. The second grant has a performance period which runs from January 1, 2007 through December 31, 2008. Both grants vest 50 percent on the fourth and sixth anniversaries of the first day of the related performance period. In addition, the Compensation Committee approved the performance metrics for the two grants prior to the date of grant. The measurement of the grants is deemed to have occurred on June 26, 2006 when there was mutual understanding of the key terms and conditions of the grants. Consistent with this treatment: a) 1,068,605 performance RSUs for the first grant and 2,488,865 performance RSUs for the second grant and b) unrecognized compensation of $55 million for the first grant and $138 million for the second grant are included in the related disclosure tables. Performance RSUs related to the first grant are excluded from AIG’s diluted shares calculation because an insufficient amount of time has elapsed to conclusively determine that the performance metric will be achieved at the end of the related performance period. Because the performance period for the second grant does not begin until January 1, 2007, compensation expense for the second grant is not included in AIG’s 2006 results and diluted shares calculation.

VALUATION

The fair value of each award granted under the 2002 Plan, the AIG DCPPP, the AIG Partners Plan, and the SICO Plans is based on the closing price of AIG stock on the date of grant.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


10.	Stock Compensation Plans (continued)

A summary of shares relating to outstanding awards unvested under the foregoing plans as of September 30, 2006, and changes during the nine months ended September 30, 2006 is presented below:

Number of Shares

Weighted Average Grant-Date Fair Value

AIG

AIG Partners

Total

SICO

AIG

AIG Partners

Total

SICO

2002 Plan

DCPPP

Plan

2002 Plan

Plans

2002 Plan

DCPPP

Plan

2002 Plan

Plans

Unvested at January 1, 2006

4,322,265

4,898,880

–

9,221,145

12,650,292

63.63

52.55

–

57.74

61.92

Granted

315,170

–

3,604,000

3,919,170

–

62.11

–

56.42

56.88

–

Vested

(5,080

)

–

(5,080

)

(653,486

)

64.25

–

64.25

64.55

Forfeited

(187,680

)

(255,158

)

(16,200

)

(459,038

)

(340,741

)

62.47

59.40

56.22

60.54

61.01

Unvested at September 30, 2006

4,444,675

4,643,722

3,587,800

12,676,197

11,656,065

63.57

52.17

56.42

57.37

61.90

At September 30, 2006, the total unrecognized compensation cost (net of expected forfeitures) related to non-vested share-based compensation awards granted under the 2002 Plan, the AIG DCPPP, the AIG Partners Plan and the SICO plans and the blended weighted-average period over which that cost is expected to be recognized is as follows:


		Unrecognized		Blended
		Compensation		Weighted-
		Cost		Average
		(in millions)		Period

2002 Plan		$	178		1.62 years
	AIG DCPPP	$	231		4.57 years
	AIG Partners Plan	$	195		2.56 years
Total 2002 Plan		$	604		3.05 years
SICO Plans		$	313		6.06 years

The total cost for awards outstanding as of September 30, 2006 under the 2002 Plan, the AIG DCPPP, the AIG Partners Plan, and the SICO Plans is expected to be recognized over approximately 4 years, 12 years, 6 years and 23 years, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

American International Group, Inc. and Subsidiaries


11.	Cash Flows

As part of its remediation activities during the third quarter of 2006, AIG determined that certain non-cash activities and adjustments, including the effects of changes in foreign exchange translation on assets and liabilities, previously were misclassified within the operating, investing and financing sections of the Consolidated Statement of Cash Flows. The more significant line items revised include the change in General and life insurance reserves and Deferred policy acquisition costs within operating activities; Purchases of fixed maturity securities within investing activities; and Proceeds from notes, bonds, loans and mortgages payable, and hybrid financial instrument liabilities within financing activities. After evaluating the effect of these items during the third quarter of 2006, AIG has revised the previous periods presented below to conform to the third quarter 2006 presentation:


(in millions)

	Six Months Ended			Three Months Ended			Year Ended			Nine Months Ended			Six Months Ended			Three Months Ended
	June 30, 2006			March 31, 2006			December 31, 2005			September 30, 2005			June 30, 2005			March 31, 2005

Cash flows from operating activities — As previously reported	$	6,978		$	3,066		$	25,138		$	20,865	*	$	13,817		$	(434	)
Revisions		(355	)		1,076			(52	)		(675	)		(2,163	)		(1,563	)

Cash flows from operating activities — As revised	$	6,623		$	4,142		$	25,086		$	20,190		$	11,654		$	(1,997	)

Cash flows from investing activities — As previously reported	$	(40,048	)	$	(19,937	)	$	(57,321	)	$	(47,391	)*	$	(35,358	)	$	(20,118	)
Revisions		5,682			1,724			(7,544	)		(5,186	)		(2,863	)		775

Cash flows from investing activities — As revised	$	(34,366	)	$	(18,213	)	$	(64,865	)	$	(52,577	)	$	(38,221	)	$	(19,343	)

Cash flows from financing activities — As previously reported	$	32,243		$	15,672		$	32,999		$	27,230	*	$	22,097		$	20,961
Revisions		(4,304	)		(2,273	)		6,831			5,346			4,275			725

Cash flows from financing activities — As revised	$	27,939		$	13,399		$	39,830		$	32,576		$	26,372		$	21,686

Effect of exchange rate changes on cash — As previously reported	$	1,070		$	550		$	(928	)	$	(605	)*	$	(827	)	$	(57	)
Revisions		(1,023	)		(527	)		765			515			751			63

Effect of exchange rate changes on cash — As revised	$	47		$	23		$	(163	)	$	(90	)	$	(76	)	$	6


*	Includes the effects of corrections and reclassifications made in conjunction with the Second Restatement. See also AIG’s 2005 Annual Report on Form 10-K/A.

There was no effect on ending cash balances.

American International Group, Inc. and Subsidiaries

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide the reader a narrative with respect to AIG’s operations, financial condition and liquidity and certain other significant matters.

INDEX


			Page

CAUTIONARY STATEMENT REGARDING PROJECTIONS AND OTHER INFORMATION ABOUT FUTURE EVENTS				33
OVERVIEW OF OPERATIONS AND BUSINESS RESULTS				34
	Consolidated Results			34
CRITICAL ACCOUNTING ESTIMATES				38
OPERATING REVIEW				39
	General Insurance Operations			39
		General Insurance Results		43
		Reinsurance		47
		Reserve for Losses and Loss Expenses		48
		Discounting of Reserves		49
		Quarterly Reserving Process		49
		Loss Reserving Process		52
		Asbestos and Environmental Reserves		52
	Life Insurance & Retirement Services Operations			53
		Life Insurance & Retirement Services Results		55
		Life Insurance & Retirement Services Underwriting and Investment Risk		62
	Invested Assets			66
	Insurance and Asset Management Invested Assets			67
		Credit Quality		69
		Valuation of Invested Assets		69
	Financial Services Operations			72
		Aircraft Finance		72
		Capital Markets		72
		Consumer Finance		73
		Financial Services Results		74
		Financial Services Invested Assets		77
	Asset Management Operations			79
		Asset Management Results		79
	Other Operations			80
CAPITAL RESOURCES				81
		Borrowings		81
		Contractual Obligations and Other Commercial Commitments		84
		Shareholders’ Equity		86
		Stock Purchase		86
		Dividends from Insurance Subsidiaries		86
		Regulation and Supervision		86
LIQUIDITY				87
SPECIAL PURPOSE VEHICLES AND OFF BALANCE SHEET ARRANGEMENTS				89
DERIVATIVES				89
MANAGING RISK				89
	Market Risk			89
	Catastrophe Exposures			92
RECENT ACCOUNTING STANDARDS				93

Cautionary Statement Regarding Projections and Other Information About Future Events

This Quarterly Report and other publicly available documents may include, and AIG’s officers and representatives may from time to time make, projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to management, operations, products and services, and assumptions underlying these projections and statements. These projections and statements are not historical facts but instead represent only AIG’s belief regarding future events, many of which, by their nature, are inherently uncertain and outside AIG’s control. These projections and statements may address, among other things, the status and potential future outcome of the current regulatory and civil proceedings against AIG and their potential effect on AIG’s businesses, financial position, results of operations, cash flows and liquidity, the effect of the credit rating downgrades on AIG’s businesses and competitive position, the unwinding and resolving of various relationships between AIG and Starr and SICO, and AIG’s strategy for growth, product development, market position, financial results and reserves. It is possible that AIG’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these projections and statements. Factors that could cause AIG’s actual results to differ, possibly materially, from those in the specific projections and statements are discussed throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in “Risk Factors” in Item 1A. of Part I of AIG’s 2005 Annual Report on Form 10-K, Item 1A. of Part II of AIG’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 and Item 1A. of Part II of this Quarterly Report. AIG is not under any obligation (and expressly disclaims any such obligations) to update or alter any projections or other statement, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise.

American International Group, Inc. and Subsidiaries

Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, AIG presents its operations in the way it believes will be most meaningful. Statutory loss ratios and combined ratios are presented in accordance with accounting principles prescribed by insurance regulatory authorities because these are standard measures of performance filed with insurance regulatory authorities and used for analysis in the insurance industry and thus allow more meaningful comparisons with AIG’s insurance competitors. AIG has also incorporated into this discussion a number of cross-references to additional information included throughout this Form 10-Q and its 2005 Annual Report on Form 10-K/A for the year ended December 31, 2005 (2005 Annual Report on Form 10-K/A) to assist readers seeking related information on a particular subject.

Overview of Operations and Business Results

AIG identifies its reportable segments by product line, consistent with its management structure. AIG’s major product and service groupings are General Insurance, Life Insurance & Retirement Services, Financial Services and Asset Management. AIG’s operations in 2006 are conducted by its subsidiaries principally through these segments. Through these segments, AIG provides insurance and investment products and services to both businesses and individuals in more than 130 countries and jurisdictions. This geographic, product and service diversification is one of AIG’s major strengths and sets it apart from its competitors. The Other category consists of items not allocated to AIG’s operating segments.

AIG’s subsidiaries serve commercial, institutional and individual customers through an extensive property-casualty and life insurance and retirement services network. In the United States, AIG companies are the largest underwriters of commercial and industrial insurance and one of the largest life insurance and retirement services operations as well. AIG’s Financial Services businesses include commercial aircraft and equipment leasing, capital markets operations and consumer finance, both in the United States and abroad. AIG also provides asset management services to institutions and individuals. As part of its spread-based business activities, AIG issues various debt instruments in the public and private markets.

AIG’s operating performance reflects implementation of various long-term strategies and defined goals in its various operating segments. A primary goal of AIG in managing its General Insurance operations is to achieve an underwriting profit. To achieve this goal, AIG must be disciplined in its risk selection and premiums must be adequate and terms and conditions appropriate to cover the risk accepted. AIG also believes in strict control of expenses.

A central focus of AIG operations in recent years is the development and expansion of new distribution channels. In 2005 and the first nine months of 2006, AIG expanded its distribution channels, which now include banks, credit card companies and television-media home shopping in many Asian countries. Examples of new distribution channels used both domestically and overseas include banks, affinity groups, direct response and e-commerce.

AIG patiently builds relationships in markets around the world where it sees long-term growth opportunities. For example, the fact that AIG has the only wholly-owned foreign life insurance operations in eight cities in China is the result of relationships developed over nearly 30 years. AIG’s more recent extensions of operations into India, Vietnam, Russia and other emerging markets reflect the same growth strategy. Moreover, AIG believes in investing in the economies and infrastructures of these countries and growing with them. When AIG companies enter a new jurisdiction, they typically offer both basic protection and savings products. As the economies evolve, AIG’s products evolve with them, to more sophisticated and investment-oriented models.

Growth for AIG may be generated both internally and through acquisitions which both fulfill strategic goals and offer adequate return on capital. Recently AIG acquired Travel Guard International, one of the nation’s leading providers of travel insurance programs and emergency travel assistance, and Central Insurance Co., Ltd., a leading general insurance company in Taiwan.

Consolidated Results

The following table summarizes AIG’s revenues, income before income taxes, minority interest and cumulative effect of an accounting change and net income for the three and nine-month periods ended September 30, 2006 and 2005:


	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,

(in millions)	2006		2005		2006		2005

Total revenues	$	29,199	$	26,408	$	83,201	$	81,513

Income before income taxes, minority interest and cumulative effect of an accounting change		6,301		2,547		16,335		14,897

Net income	$	4,224	$	1,745	$	10,609	$	10,033

Revenues in the third quarter and first nine months of 2006 increased 11 percent and 2 percent, respectively, largely as a result of the growth in net premiums earned and net investment income from global General Insurance operations and growth in Life Insurance & Retirement Services net investment income and GAAP premiums. Revenues in the Financial Services segment increased in the third quarter of 2006, but decreased for the first nine months of 2006 largely

American International Group, Inc. and Subsidiaries

as a result of hedging activities that do not qualify for hedge accounting treatment under FAS 133, the effects of which are reported in other income.

Income before income taxes, minority interest and cumulative effect of an accounting change in the three and nine-month periods ended September 30, 2006 increased 147 percent and 10 percent, respectively, with the significant increase primarily a reflection of the negative effect of $2.44 billion in catastrophe related losses incurred in the third quarter of 2005. The 2006 periods also included higher General Insurance and Life Insurance & Retirement Services operating income. Fluctuations in Financial Services operating income in all periods presented were driven by the transaction oriented nature of Capital Markets operations and the effects of hedging activities that do not qualify for hedge accounting treatment under FAS 133.

During the third quarter and nine months ended September 30, 2006, as part of its continuing remediation efforts, AIG recorded certain out of period and other adjustments. These adjustments collectively increased net income by $73 million in the third quarter of 2006 and decreased net income by $29 million for the first nine months of 2006. The third quarter adjustments included the following: an increase in realized capital gains relating to foreign exchange of $36 million ($23 million after tax); increases in bad debt expense of $225 million ($146 million after tax) and earned premiums of $99 million ($65 million after tax), both of which relate to balance sheet reconciliations; an increase in partnership income of $121 million ($79 million after tax), which relates to improved valuation information; a further increase in unit investment trust income of $116 million ($75 million after tax), as described below; and an increase in income tax expense of $39 million relating to AIG’s ongoing remediation of internal controls over income tax accounting. See also the discussion of AIG’s reportable segments in Management’s Discussion & Analysis of Financial Condition and Results of Operations.

During the second quarter of 2006, AIG identified and recorded an out of period adjustment related to the accounting for certain interests in unit investment trusts in accordance with FIN 46(R), “Consolidation of Variable Interest Entities” and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” These investments had previously been accounted for as available for sale securities, with changes in market values being reflected in other comprehensive income, net of deferred income taxes. Beginning with the second quarter of 2006, the changes in market values are included in AIG’s net investment income. During the second quarter of 2006, the adjustment decreased Unrealized appreciation (depreciation) of investments — net of reclassification adjustments, and the related Deferred income tax benefit (expense), in the Consolidated Statement of Comprehensive Income (Loss) by approximately $576 million and approximately $202 million, respectively, and increased Net investment income by $653 million, increased Incurred policy losses and benefits, related to certain participating policyholder funds, by $77 million, and increased Income taxes by $202 million in the Consolidated Statement of Income. There was no effect on Total shareholders’ equity as of September 30, 2006 or December 31, 2005.

In the second quarter of 2006, AIG also recorded other out of period adjustments of $85 million ($55 million after tax) of interest income related to interest earned on deposit contracts and $32 million ($21 million after tax) of expenses related to the remediation of a material weakness in controls over certain balance sheet reconciliations.

AIG also recorded other out of period adjustments in the first quarter of 2006 of $61 million (before and after tax) of expenses related to the SICO plans, $59 million ($38 million after tax) of expenses related to deferred advertising costs in General Insurance, a decrease of $300 million ($145 million after tax) in revenues related to the remediation of a material weakness in accounting for certain derivative transactions under FAS 133, and $126 million of income tax expense related to AIG’s remediation of a material weakness in controls over income tax accounting.

Results for the first nine months of 2006 were negatively affected by a one-time charge relating to the Starr tender offer ($54 million before and after tax) and an additional allowance for losses in AIG Credit Card Company (Taiwan) ($88 million before and after tax), both of which were recorded in first quarter of 2006.

The effective income tax rate increased from 28.0 percent for full year 2005 to 30.8 percent and 31.0 percent for the three and nine-month periods ended September 30, 2006, respectively, reflecting changes in the sources of foreign taxable income, the effect of the phase out of synfuel tax credits on the estimated full year tax rate and the aforementioned out of period adjustments.

American International Group, Inc. and Subsidiaries

The following table summarizes the operations of each principal segment for the three and nine-month periods ended September 30, 2006 and 2005. (See also Note 2 of Notes to Consolidated Financial Statements).


		Three Months						Nine Months
		Ended						Ended
		September 30,						September 30,

(in millions)		2006			2005			2006			2005

Revenues^(a):
	General Insurance^(b)(h)	$	12,615		$	11,192		$	36,438		$	33,816
	Life Insurance & Retirement Services^(c)(h)		12,356			11,760			36,819			35,086
	Financial Services^(d)		3,187			1,926			6,028			8,140
	Asset Management^(e)		1,238			1,355			4,098			3,951
	Other		(197	)		175			(182	)		520

Consolidated		$	29,199		$	26,408		$	83,201		$	81,513

Operating Income (loss)^(a)(f)(i)(j):
	General Insurance^(h)	$	2,625		$	(137	)	$	7,819		$	3,390
	Life Insurance & Retirement Services^(g)(h)		2,448			2,248			7,424			6,787
	Financial Services^(g)		1,357			224			650			3,483
	Asset Management		341			568			1,613			1,682
	Other^(k)		(470	)		(356	)		(1,171	)		(445	)

Consolidated		$	6,301		$	2,547		$	16,335		$	14,897


(a)	Includes the effect of hedging activities that do not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. For the three-month periods ended September 30, 2006 and 2005, the effect was $165 million and $(353) million, respectively, in revenues and $165 million and $(345) million, respectively, in operating income. For the nine-month periods ended September 30, 2006 and 2005, the effect was $(1.13) billion and $2.21 billion, respectively, in revenues and $(1.13) billion and $2.28 billion, respectively, in operating income. These amounts result primarily from interest rate and foreign currency derivatives which are hedging available for sale securities and borrowings.
(b)	Represents the sum of General Insurance net premiums earned, net investment income and realized capital gains (losses).


(c)	Represents the sum of Life Insurance & Retirement Services GAAP premiums, net investment income and realized capital gains (losses).


(d)	Represents interest, lease and finance charges.


(e)	Represents net investment income with respect to GICs and management and advisory fees.
(f)	Represents income before income taxes, minority interest and cumulative effect of an accounting change.


(g)	Results of operations of AIG Credit Card Company (Taiwan) are shared equally by the Life Insurance & Retirement Services segment and the Financial Services segment. Additional allowances of $44 million were recorded in the first quarter of 2006, by each segment, for losses in these credit card operations.

(h)

Includes the effect of out of period adjustments related to the accounting for certain interests in unit investment trusts. For the three and nine- month periods ended September 30, 2006 the effect was an increase of $92 million and $524 million in both revenues and operating income for General Insurance and an increase of $24 million in both revenues and operating income for the three-month period ended September 30, 2006 and $245 million and $168 million in revenues and operating income, respectively, for the nine-month period ended September 30, 2006, for Life Insurance & Retirement Services.


(i)	Includes current year catastrophe related losses of $2.44 billion in both the third quarter and first nine months of 2005. There were no significant catastrophe related losses in the third quarter and first nine months of 2006.


(j)	Includes additional losses incurred and net reinstatement premiums related to prior year catastrophes of $28 million and $39 million in the three- month periods ended September 30, 2006 and 2005, respectively. Such losses and premiums were $87 million and $252 million in the nine-month periods ended September 30, 2006 and 2005, respectively.

(k)

General Insurance

AIG’s General Insurance operations provide property and casualty products and services throughout the world. The increase in General Insurance operating income in the three and nine-month periods ended September 30, 2006 compared to the same periods of 2005 was primarily attributable to catastrophe related losses of $2.11 billion in the third quarter of 2005 and the improvement in underwriting results for the Domestic Brokerage Group (DBG). General Insurance operating income included adverse development in the first nine months of 2006 and 2005 from catastrophes in prior years and certain long-tail casualty lines, which were more than offset by favorable development in other lines. Operating income for the three and nine-month periods ended September 30, 2006 also increased due to the effect of the out of period adjustments related to the accounting for certain interests in unit investment trusts, partially offset by reconciliation adjustments.

Life Insurance & Retirement Services

AIG’s Life Insurance & Retirement Services operations provide insurance, financial and investment products throughout the world. Foreign operations provided approximately 65 percent and 61 percent of AIG’s Life Insurance & Retirement Services operating income for the three months ended September 30, 2006 and 2005, respectively, and 67 percent and 59 percent, respectively, for the first nine months of 2006 and 2005.

Life Insurance & Retirement Services operating income increased $200 million in the third quarter of 2006 from the same period of 2005. Results for the quarter were particularly strong in the Foreign Life operations that were helped by

American International Group, Inc. and Subsidiaries

higher investment returns and lower acquisition costs. Domestic Life and Retirement Services results improved over the prior year with growth in the in-force business and lower catastrophe and synfuel losses. Life Insurance & Retirement Services operating income included $12 million in catastrophe related losses in the third quarter of 2005. Realized capital losses included in revenues and operating income were $176 million in the third quarter of 2006 compared to realized capital losses of $16 million in the same period of 2005.

Life Insurance & Retirement Services operating income increased by 9 percent in the first nine months of 2006 when compared to the same period of 2005 due, in part, to the effect of an out of period adjustment related to the accounting for certain interests in unit investment trusts. Realized capital losses included in revenues and operating income were $117 million in the first nine months of 2006 compared to realized capital losses of $18 million in the same period of 2005.

Financial Services

AIG’s Financial Services subsidiaries engage in diversified activities including aircraft and equipment leasing, capital market transactions, consumer finance and insurance premium financing.

Financial Services operating income increased in the third quarter of 2006 and decreased in the first nine months of 2006 compared to the same periods of 2005 primarily due to the effects of hedging activities that do not qualify for hedge accounting treatment under FAS 133. Financial Services operating income in 2005 included catastrophe related losses of $62 million recorded in the third quarter of 2005 resulting from hurricane Katrina, which were reduced by $22 million in the third quarter of 2006. Fluctuations in revenues and operating income from quarter to quarter are not unusual because of the transaction-oriented nature of Capital Markets operations and the effect of not qualifying for hedge accounting treatment under FAS 133 for hedges on securities available for sale and borrowings.

Asset Management

AIG’s Asset Management operations include institutional and retail asset management and broker dealer services and AIG’s spread-based investment businesses. The AIG Matched Investment Program (MIP), which was launched in September of 2005, is replacing AIG’s GIC program as AIG’s principal spread-based investment activity.

Asset Management operating income decreased 40 percent for the third quarter of 2006 when compared to the same period of 2005 due to the continued run-off of GICs and decreased transaction-driven fees partially offset by growth in the asset management fees within Institutional Asset Management and income from AIG’s MIP. Gains and losses arising from the consolidation of certain variable interest entities and partnerships are included in operating income, but are offset in minority interest expense, which is not a component of operating income. Operating income decreased 4 percent in the first nine months of 2006 when compared to the same period of 2005, primarily due to the continued run-off of GIC balances combined with spread compression in the remaining GIC portfolio.

Capital Resources

At September 30, 2006, AIG had total consolidated shareholders’ equity of $96.15 billion and total consolidated borrowings of $137.1 billion. At that date, $122.1 billion of such borrowings were either not guaranteed by AIG or were AIGFP’s matched borrowings under obligations of guaranteed investment agreements (GIAs), liabilities connected to trust preferred stock, or matched notes and bonds payable.

AIG has not purchased any shares of its common stock under its existing common stock repurchase authorization during 2006.

Liquidity

At September 30, 2006, AIG’s consolidated invested assets included $24.14 billion in cash and short-term investments. Consolidated net cash provided from operating activities in the first nine months of 2006 amounted to $6.0 billion. AIG believes that its liquid assets, cash provided by operations and access to the capital markets will enable it to meet its anticipated cash requirements.

Outlook

The commercial property and casualty insurance industry has historically experienced cycles of price erosion followed by rate strengthening as a result of catastrophe or other significant losses that affect the overall capacity of the industry to provide coverage. Despite industry price erosion in some classes of general insurance, AIG expects to continue to identify profitable opportunities and build attractive new general insurance businesses as a result of AIG’s broad product line and extensive distribution networks. There can be no assurance, however, that price erosion will not become more widespread or that AIG’s profitability will not deteriorate from current levels in major commercial lines, as well as in personal lines and specialty coverages, such as mortgage guaranty, where the loss ratio is expected to increase due to softening in the U.S. housing market and the weakening performance of non-traditional mortgage products.

In December 2005, American International Underwriters Overseas, Ltd. (AIUO) received a license from the government of Vietnam to operate a wholly owned general insurance company in Vietnam. This license, the first general insurance license granted by Vietnam to a U.S.-based insurance organization, permits AIG to operate a general insurance company throughout Vietnam.

American International Group, Inc. and Subsidiaries

During the second quarter of 2006, the Canadian Parliament passed legislation that will allow UGC to begin writing business in Canada, the world’s second largest mortgage guaranty market, when provincial licenses are issued.

In China, applications for provincial expansion of AIG’s life insurance operations in Guangdong and Jiangsu and of general insurance operations in Guangdong were approved in April 2006. AIG’s wholly-owned life insurance operations in eight cities have now been structured into four regional management teams located in Shanghai, Beijing, Guangdong Province and Jiangsu Province. AIG’s operations are expanding resources in these regions with the opening of additional offices.

In Japan, earnings growth for AIG Star Life Insurance Co., Ltd. and AIG Edison Life Insurance Company reflects the runoff of the more profitable in-force business in comparison to new business currently being generated. In May 2006, AIG announced the merger of these companies, which is expected to enhance the combined entity’s ability to grow new business by expanding distribution and gaining efficiency of scale. In the fiscal year ended March 31, 2006, AIG’s life operations in Japan retained their position as the largest foreign life operation on a total premium basis. AIG has developed a leadership position in the distribution of annuities through banks in both Japan and Korea. Also, American Life Insurance Company (ALICO) has launched new life products to the Japan bank market after further deregulation of banks in December 2005. AIG is a leader in direct marketing through sponsors and in the broad market in Japan and Korea. AIG also is investing in expanding distribution channels with emphasis in India, Korea and Vietnam.

Domestically, AIG anticipates its Life Insurance & Retirement Services businesses to continue growing in 2006 through distribution channel expansion and new and enhanced products. The home service operation, which is expected to be a slow growth business, has not met business objectives, although its cash flow has been strong. Domestic group life/health results continue to be weak, resulting in ongoing restructuring activities which may result in the exiting of certain product lines. AIG Retirement Services individual fixed annuities business will continue to be challenged due to the interest rate environment and increased competition from bank products, while variable annuity products with living benefits will continue to be the product of consumer choice.

Globally, heightened regulatory scrutiny of financial services companies in many jurisdictions has the potential to affect future financial results through higher compliance costs or other charges. This is particularly true in Japan and Southeast Asia where financial institutions have received an increased number of remediation orders affecting consumer/policyholder rights over the last twelve months.

Changes in market conditions in the aircraft leasing business are not immediately apparent in operating results. Lease rates have firmed as a result of continued demand from the global commercial aviation market, especially in Asia. However, higher interest rates are expected to continue to compress lease margins. AIG’s Consumer Finance operations overseas were negatively affected in the first quarter of 2006 by industry-wide credit deterioration in the Taiwan credit card market. The operating results of AIG’s Consumer Finance operations in the U.S. could be affected by the residential housing market, interest rates and unemployment. Also, AIG continues to explore opportunities to expand its Consumer Finance operations into new foreign markets.

The GIC portfolio continues to run-off. The MIP has replaced the GIC program as AIG’s principal spread-based investment activity. Although the MIP is beginning to show positive operating income, because the asset mix under the MIP does not include the alternative investments utilized in the GIC program, AIG does not expect that the income growth in the MIP will offset the run-off in the GIC portfolio for the foreseeable future.

AIG has many promising growth initiatives underway around the world. Cooperative agreements such as those with PICC Property and Casualty Company Limited and various banks in the U.S., Japan and Korea are expected to expand distribution networks for AIG’s products and provide models for future growth.

Critical Accounting Estimates

AIG considers its most critical accounting estimates those with respect to reserves for losses and loss expenses, future policy benefits for life and accident and health contracts, deferred policy acquisition costs, estimated gross profits for investment-oriented products, fair value determinations for certain Capital Markets assets and liabilities, other-than-temporary declines in the value of investments and flight equipment recoverability. 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 results of operations would be directly affected.

Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, AIG’s critical accounting estimates are discussed in detail. The major categories for which assumptions are developed and used to establish each critical accounting estimate are highlighted below.

Reserves for Losses and Loss Expenses and Reinsurance Recoverable (General Insurance):


•	Loss trend factors: used to establish expected loss ratios for subsequent accident years based on premium rate adequacy and the projected loss ratio with respect to prior accident years.
•	Expected loss ratios for the latest accident year: for example, accident year 2005 for the year end 2005 loss reserve analysis. For low frequency, high severity classes

American International Group, Inc. and Subsidiaries


	such as excess casualty, expected loss ratios generally are utilized for at least the three most recent accident years.
•	Loss development factors: used to project the reported losses for each accident year to an ultimate amount.
•	Reinsurance recoverable on unpaid losses: the expected recoveries from reinsurers on losses that have not yet been reported and/or settled.

Future Policy Benefits for Life and Accident and Health Contracts (Life Insurance & Retirement Services):


•	Interest rates: which vary by geographical region, year of issuance and products.
•	Mortality, morbidity and surrender rates: based upon actual experience by geographical region modified to allow for variation in policy form.

Estimated Gross Profits (Life Insurance & Retirement Services):


•	Estimated gross profits to be realized over the estimated duration of the contracts (investment-oriented products) affect the carrying value of deferred policy acquisition costs under FAS 97. Estimated gross profits include investment income and gains and losses on investments less required interest, actual mortality and other expenses.

Deferred Policy Acquisition Costs (Life Insurance & Retirement Services):


•	Recoverability based on current and future expected profitability, which is affected by interest rates, foreign exchange rates, mortality experience, and policy persistency.

Deferred Policy Acquisition Costs (General Insurance):


•	Recoverability and eligibility based upon the current terms and profitability of the underlying insurance contracts.

Fair Value Determinations of Certain Assets and Liabilities (Financial Services – Capital Markets):


•	Valuation models: utilizing factors, such as market liquidity and current interest, foreign exchange and volatility rates.
•	AIG attempts to secure reliable and independent current market price data, such as published exchange rates from external subscription services such as Bloomberg or Reuters or third-party broker quotes for use in its model. When such prices are not available, AIG uses an internal methodology, which includes interpolation and extrapolation from verifiable prices from trades occurring on dates nearest to the dates of the transactions.

Other-Than-Temporary Declines in the Value of Investments:

A security is considered a candidate for other-than-temporary impairment based upon the following criteria:


•	Trading at a significant (25 percent or more) discount to par or amortized cost (if lower) for an extended period of time (nine months or longer).
•	The occurrence of a discrete credit event resulting in the debtor defaulting or seeking bankruptcy or insolvency protection or voluntary reorganization.
•	The probability of non-realization of a full recovery on its investment, irrespective of the occurrence of one of the foregoing events.

At each balance sheet date, AIG evaluates its securities holdings in an unrealized loss position. Where AIG does not intend to hold such securities until they have fully recovered their carrying value, based on the circumstances present at the date of evaluation, AIG records the unrealized loss in income. If events or circumstances change, such as unexpected changes in creditworthiness of the obligor, general interest rate environment, tax circumstances, liquidity events, and statutory capital management considerations among others, AIG revisits its intent to determine if a loss should be recorded in income. Further, if a loss is recognized from a sale subsequent to a balance sheet date pursuant to these changes in circumstances, the loss is recognized in the period in which the intent to hold the securities to recovery no longer exists.

Flight Equipment — Recoverability (Financial Services):


•	Expected undiscounted future net cash flows: based upon current lease rates, projected future lease rates and estimated terminal values of each aircraft based on third party information.

Operating Review

General Insurance Operations

AIG’s General Insurance subsidiaries are multiple line companies writing substantially all lines of property and casualty insurance both domestically and abroad.

Domestic General Insurance operations are comprised of DBG, which includes the operations of The Hartford Steam Boiler Inspection and Insurance Company (HSB); Transatlantic Holdings, Inc. (Transatlantic); Personal Lines, including 21st Century Insurance Group (21st Century); and United Guaranty Corporation (UGC).

AIG’s primary domestic division is DBG. DBG’s business in the United States and Canada is conducted through its General Insurance subsidiaries including American Home Assurance Company (American Home), National Union Fire Insurance Company of Pittsburgh, Pa. (National Union), Lexington Insurance Company (Lexington) and certain other General Insurance company subsidiaries of AIG.

DBG writes substantially all classes of business insurance, accepting such business mainly from insurance brokers. This provides DBG the opportunity to select specialized markets and retain underwriting control. Any licensed broker is able to submit business to DBG without the traditional agent-company contractual relationship, but such broker usually has no authority to commit DBG to accept a risk.

In addition to writing substantially all classes of business insurance, including large commercial or industrial property insurance, excess liability, inland marine, environmental,

American International Group, Inc. and Subsidiaries

workers compensation and excess and umbrella coverages, DBG offers many specialized forms of insurance such as aviation, accident and health, equipment breakdown, directors and officers liability (D&O), difference-in-conditions, kidnap-ransom, export credit and political risk, and various types of professional errors and omissions coverages. The AIG Risk Management operation provides insurance and risk management programs for large corporate customers. The AIG Risk Finance operation is a leading provider of customized structured insurance products. Also included in DBG are the operations of AIG Environmental, which focuses specifically on providing specialty products to clients with environmental exposures. Lexington writes surplus lines, those risks for which conventional insurance companies do not readily provide insurance coverage, either because of complexity or because the coverage does not lend itself to conventional contracts.

Certain of the products of the DBG companies include funding components or have been structured in a manner such that little or no insurance risk is actually transferred. Funds received in connection with these products are recorded as deposits, and are included in other liabilities, rather than as premium revenue. Amounts paid by AIG are recorded as reductions to the deposit liability rather than as incurred losses.

The AIG Worldsource Division introduces and coordinates AIG’s products and services to U.S.-based multinational clients and foreign corporations doing business in the U.S.

Transatlantic subsidiaries offer reinsurance capacity on both a treaty and facultative basis both in the U.S. and abroad. Transatlantic structures programs for a full range of property and casualty products with an emphasis on specialty risk.

AIG’s Personal Lines operations provide automobile insurance through AIG Direct, the mass marketing operation of AIG, Agency Auto Division and 21st Century, as well as a broad range of coverages for high net-worth individuals through the AIG Private Client Group.

The main business of the UGC subsidiaries is the issuance of residential mortgage guaranty insurance, both domestically and internationally, on conventional first lien mortgages for the purchase or refinance of one to four family residences. UGC subsidiaries also write second lien and private student loan guaranty insurance.

AIG’s Foreign General Insurance group accepts risks primarily underwritten through American International Underwriters (AIU), a marketing unit consisting of wholly owned agencies and insurance companies. The Foreign General Insurance group also includes business written by AIG’s foreign-based insurance subsidiaries. The Foreign General group uses various marketing methods and multiple distribution channels to write both commercial and consumer lines insurance with certain refinements for local laws, customs and needs. AIU operates in Asia, the Pacific Rim, the United Kingdom, Europe, Africa, the Middle East and Latin America.

As previously noted, AIG believes it should present and discuss its financial information in a manner most meaningful to its investors. Accordingly, in its General Insurance business, AIG uses certain regulatory measures, where AIG has determined these measurements to be useful and meaningful.

A critical discipline of a successful general insurance business is the objective to produce profit from underwriting activities exclusive of investment-related income. When underwriting is not profitable, premiums are inadequate to pay for insured losses and underwriting related expenses. In these situations, the addition of general insurance related investment income and realized capital gains may, however, enable a general insurance business to produce operating income. For these reasons, AIG views underwriting results to be critical in the overall evaluation of performance.

Statutory underwriting profit is derived by reducing net premiums earned by net losses and loss expenses incurred and net expenses incurred. Statutory accounting generally requires immediate expense recognition and ignores the matching of revenues and expenses as required by GAAP. That is, for statutory purposes, expenses are recognized immediately, not over the same period that the revenues are earned. Thus, statutory expenses exclude changes in deferred acquisition costs (DAC).

GAAP provides for the recognition of expenses at the same time revenues are earned, the accounting principle of matching. Therefore, acquisition expenses are deferred and amortized over the period the related net premiums written are earned. DAC is reviewed for recoverability, and such review requires management judgment. (See also “Critical Accounting Estimates” herein.)

AIG, along with most General Insurance companies, uses the loss ratio, the expense ratio and the combined ratio as measures of underwriting performance. The loss ratio is the sum of losses and loss expenses incurred divided by net premiums earned. The expense ratio is statutory underwriting expenses divided by net premiums written. The combined ratio is the sum of the loss ratio and the expense ratio. These ratios are relative measurements that describe, for every $100 of net premiums earned or written, the cost of losses and statutory expenses, respectively. The combined ratio presents the total cost per $100 of premium production. A combined ratio below 100 demonstrates underwriting profit; a combined ratio above 100 demonstrates underwriting loss.

Net premiums written are initially deferred and earned based upon the terms of the underlying policies. The net unearned premium reserve constitutes deferred revenues which are generally earned ratably over the policy period. Thus, the net unearned premium reserve is not fully recognized in income as net premiums earned until the end of the policy period.

The underwriting environment varies from country to country, as does the degree of litigation activity. Regulation, product type and competition have a direct effect on pricing and consequently on profitability as reflected in underwriting profit and statutory general insurance ratios.

American International Group, Inc. and Subsidiaries

General Insurance operating income is comprised of statutory underwriting results, changes in DAC, net investment income and realized capital gains and losses. Operating income, as well as net premiums written, net premiums earned, net investment income and realized capital gains (losses) and statutory ratios for the three and nine-month periods ended September 30, 2006 and 2005 were as follows:


			Three Months					Nine Months
			Ended					Ended
			September 30,					September 30,

(in millions, except ratios)			2006		2005			2006			2005

Net premiums written:
	Domestic General
		DBG	$	6,074	$	5,505		$	18,454		$	17,071
		Transatlantic		895		858			2,723			2,627
		Personal Lines		1,162		1,191			3,540			3,550
		Mortgage Guaranty		232		149			622			459
	Foreign General			2,861		2,609			8,774			8,039

Total			$	11,224	$	10,312		$	34,113		$	31,746

Net premiums earned:
	Domestic General
		DBG	$	6,290	$	5,613		$	17,889		$	16,773
		Transatlantic		895		844			2,712			2,594
		Personal Lines		1,158		1,182			3,484			3,459
		Mortgage Guaranty		191		114			536			397
	Foreign General^(a)			2,683		2,381			7,744			7,283

Total			$	11,217	$	10,134		$	32,365		$	30,506

Net investment income^(b):
	Domestic General
		DBG	$	880	$	589		$	2,438		$	1,803
		Transatlantic		107		87			317			256
		Personal Lines		56		54			168			160
		Mortgage Guaranty		35		32			103			91
		Intercompany adjustments and eliminations – net		1		1			1			1
	Foreign General			291		224			1,075			751

Total			$	1,370	$	987		$	4,102		$	3,062

Realized capital gains (losses)			$	28	$	71		$	(29	)	$	248

Operating Income (loss)^(b)(c)(d):
	Domestic General
		DBG	$	1,557	$	(283	)	$	4,448		$	1,235
		Transatlantic		143		(275	)		427			(62	)
		Personal Lines		133		18			352			229
		Mortgage Guaranty		85		72			301			285
	Foreign General^(e)			707		326			2,289			1,693
Reclassifications and Eliminations				–		5			2			10

Total			$	2,625	$	(137	)	$	7,819		$	3,390

Statutory underwriting profit (loss)^(c)(d)(g)
	Domestic General
		DBG	$	681	$	(1,001	)	$	1,904		$	(755	)
		Transatlantic		34		(380	)		97			(348	)
		Personal Lines		83		(40	)		176			45
		Mortgage Guaranty		48		43			191			195
	Foreign General^(e)			376		113			1,034			854

Total			$	1,222	$	(1,265	)	$	3,402		$	(9	)

Domestic General^(c)(d):
	Loss Ratio			66.85		97.13			68.49			83.15
	Expense Ratio			23.72		20.76			21.28			20.15

Combined Ratio				90.57		117.89			89.77			103.30

Foreign General^(c)(d):
	Loss Ratio^(a)			48.91		60.31			50.30			55.63
	Expense Ratio^(e)(f)			34.76		31.91			32.07			29.57

American International Group, Inc. and Subsidiaries

Three Months

Nine Months

Ended

September 30,

(in millions, except ratios)

2006

2005

2006

2005

Combined ratio

83.67

92.22

82.37

85.20

Consolidated^(c)(d):

Loss Ratio

62.56

88.48

64.14

76.58

Expense Ratio

26.54

23.58

24.05

22.53

Combined Ratio

89.10

112.06

88.19

99.11


(a)	Income statement accounts expressed in non-functional currencies are translated into U.S. dollars using average exchange rates.

(b)	Includes the effect of out of period adjustments related to the accounting for certain interests in unit investment trusts. For DBG, for the three and nine-month periods ended September 30, 2006 the effect was an increase of $70 million and $90 million, respectively, and for Foreign General, for the three and nine-month periods ended September 30, 2006, the effect was an increase of $22 million and $434 million, respectively.


(c)	Includes current year catastrophe related losses of $2.11 billion for both the three and nine-month periods ended September 30, 2005. There were no significant catastrophe related losses in the third quarter and first nine months of 2006.


(d)	Includes additional losses incurred and net reinstatement premiums related to prior year catastrophes of $50 million and $39 million, in the three-month periods ended September 30, 2006 and 2005, respectively. Such losses and premiums were $108 million and $237 million in the nine-month periods ended September 30, 2006 and 2005, respectively.


(e)	Includes the results of wholly owned Foreign General agencies.


(f)	Includes amortization of advertising costs.

(g)

Statutory underwriting profit (loss) is a measure that U.S. domiciled insurance companies are required to report to their regulatory authorities. The following table reconciles statutory underwriting profit (loss) to income before income taxes, minority interest and cumulative effect of an accounting change for the General Insurance segment for the three and nine-month periods ended September 30, 2006 and 2005.


	Domestic
	Brokerage						Personal			Mortgage			Foreign			Reclassifications
(in millions)	Group			Transatlantic			Lines			Guaranty			General			and Eliminations			Total

Three months ended September 30, 2006:
Statutory underwriting profit	$	681		$	34		$	83		$	48		$	376		$	–		$	1,222
Increase (decrease) in deferred acquisition costs		(30	)		–			(6	)		2			39			–			5
Net investment income		880			107			56			35			291			1			1,370
Realized capital gains (losses)		26			2			–			–			1			(1	)		28

Income before income taxes, minority interest and cumulative effect of an accounting change	$	1,557		$	143		$	133		$	85		$	707		$	–		$	2,625

Three months ended September 30, 2005:
Statutory underwriting profit (loss)	$	(1,001	)	$	(380	)	$	(40	)	$	43		$	113		$	–		$	(1,265	)
Increase (decrease) in deferred acquisition costs		49			5			5			(3	)		14			–			70
Net investment income		589			87			54			32			224			1			987
Realized capital gains (losses)		80			13			(1	)		–			(25	)		4			71

Income before income taxes, minority interest and cumulative effect of an accounting change	$	(283	)	$	(275	)	$	18		$	72		$	326		$	5		$	(137	)

Nine months ended September 30, 2006:
Statutory underwriting profit	$	1,904		$	97		$	176		$	191		$	1,034		$	–		$	3,402
Increase in deferred acquisition costs		77			7			8			10			242			–			344
Net investment income		2,438			317			168			103			1,075			1			4,102
Realized capital gains (losses)		29			6			–			(3	)		(62	)		1			(29	)

Income before income taxes, minority interest and cumulative effect of an accounting change	$	4,448		$	427		$	352		$	301		$	2,289		$	2		$	7,819

American International Group, Inc. and Subsidiaries


	Domestic
	Brokerage						Personal			Mortgage			Foreign			Reclassifications
(in millions)	Group			Transatlantic			Lines			Guaranty			General			and Eliminations		Total

Nine months ended September 30, 2005:
Statutory underwriting profit (loss)	$	(755	)	$	(348	)	$	45		$	195		$	854		$	–	$	(9	)
Increase (decrease) in deferred acquisition costs		(49	)		6			28			(1	)		105			–		89
Net investment income		1,803			256			160			91			751			1		3,062
Realized capital gains (losses)		236			24			(4	)		–			(17	)		9		248

Income before income taxes, minority interest and cumulative effect of an accounting change	$	1,235		$	(62	)	$	229		$	285		$	1,693		$	10	$	3,390

AIG transacts business in most major foreign currencies. The following table summarizes the effect of changes in foreign currency exchange rates on the growth of General Insurance net premiums written for the three and nine-month periods ended September 30, 2006:


	Three Months Ended			Nine Months Ended
	September 30, 2006			September 30, 2006

Growth in original currency		8.5	%		8.1	%
Foreign exchange effect		0.3			(0.6	)
Growth as reported in U.S. dollars		8.8	%		7.5	%

General Insurance Results

General Insurance operating income increased in the third quarter of 2006 compared to the same period in 2005 due primarily to the effects of the catastrophes in the third quarter of 2005. Other factors contributing to the increase were an improvement in statutory underwriting profit for DBG as a result of improved loss ratios for the current accident year compared to the loss ratios recorded in the third quarter of 2005 for accident year 2005, as well as growth in net investment income. The combined ratio improved to 89.1 during the third quarter of 2006, a reduction of 23.0 points from the same period in 2005, primarily due to an improvement in the loss ratio of 25.9 points. The reduction in catastrophe losses represented 20.0 points of the overall decrease. Net premiums written increased 9 percent in the third quarter of 2006 compared to the same period in 2005 as domestic property rates improved, submission activity increased in both property and non-property lines in the aftermath of the 2005 hurricanes and distribution channels within Foreign General expanded. Net premiums written for the third quarter of 2005 included a reduction of $258 million for reinstatement premiums related to catastrophes, accounting for approximately 3 percentage points of the 2006 increase in net premiums written compared to the third quarter of 2005. The increase in net premiums written was tempered by an increase in ceded reinsurance necessary to manage the increase in property exposures retained by AIG.

In the third quarter of 2006, certain adjustments were made in conjunction with the remediation of balance sheet account reconciliations which increased earned premiums by $99 million and increased bad debt expense by $225 million. These adjustments reflect continuing progress in AIG’s ongoing remediation efforts. The combined effect of these adjustments increased the expense ratio by 2.0 points and decreased the loss ratio by 0.6 points. Included in net investment income for the three and nine-month periods ended September 30, 2006 are $213 million and $645 million of out of period adjustments related to the accounting for certain investments in unit investment trusts and additional partnership income arising from improved valuations.

General Insurance operating income increased in the first nine months of 2006 compared to the same period of 2005 due to the reduction in catastrophe losses combined with the improvement in statutory underwriting profit for DBG as a result of improved loss ratios for the current accident year compared to the loss ratios recorded in the first nine months of 2005 for accident year 2005, as well as growth in net investment income. The combined ratio improved to 88.2, a reduction of 10.9 points from the first nine months of 2005, primarily due to an improvement in the loss ratio of 12.4 points. The reduction in catastrophe losses represented 6.7 points of the overall reduction. Net premiums written increased 7 percent as domestic property rates improved, submission activity increased in the aftermath of the 2005 hurricanes and the distribution channels within Foreign General expanded. Net premiums written for the first nine months of 2005 included a reduction of $258 million for reinstatement premiums related to catastrophes, accounting for approximately 1 percentage point of the 2006 increase in net premiums written compared to the first nine months of 2005.

Quarterly DBG Results

Operating income increased to $1.56 billion in the third quarter of 2006 compared to a loss of $283 million in the same period in 2005, an improvement of $1.84 billion.

The improvement is also reflected in the combined ratio, which declined to 90.0 in the third quarter of 2006 compared to 118.2 in the same period in 2005. The third quarter of

American International Group, Inc. and Subsidiaries

2005 included $1.37 billion of losses and net reinstatement premiums for major catastrophes, which increased the 2005 combined ratio by 24.3 points.

DBG’s net premiums written increased 10 percent in the third quarter of 2006 compared to the same period in 2005 as property rates improved and submission activity increased in the aftermath of the 2005 hurricanes. DBG attributes the increase in submissions to its strong distribution channels and overall financial strength in comparison to many insurers that experienced significant losses and reductions of surplus as a result of the hurricanes. Net premiums written for the third quarter of 2005 were reduced by $122 million due to reinstatement premiums related to catastrophes; net premiums written for the third quarter of 2006 were increased by $47 million due to the reversal of a reinsurance contract previously accounted for as reinsurance and now accounted for as a deposit, the overall effect of which was largely offset in losses and underwriting expenses. The combined effect of these two items contributed approximately 3 percentage points to the increase in net premiums written.

The loss ratio for the third quarter of 2006 declined to 66.9 compared to 99.4 for the same period in 2005, primarily due to the effects of the catastrophes in the third quarter of 2005. Lines of business that were not directly affected by the 2005 major catastrophes also improved primarily due to lower accident year loss ratios for the 2006 accident year compared to the loss ratios recorded in the third quarter of 2005 for accident year 2005. The improvement in accident year loss ratios for the third quarter of 2006 was partially offset by an increase of $21 million in the estimated ultimate losses related to prior year hurricanes compared to the same period of 2005 which included an increase of $39 million in losses related to prior year hurricanes. Reserve development on non-catastrophic prior year losses increased incurred losses by $40 million for the third quarter of 2006 compared to an increase of $190 million for the same period of 2005.

DBG’s expense ratio increased in the third quarter of 2006 to 23.1 compared to 18.8 in the same period of 2005. Net acquisition expenses as a percent of net premiums written increased by 0.5 in the third quarter of 2006 compared to the same period in 2005 due to an increase in premium assessments, partially offset by ceding commissions on quota share reinsurance programs added in 2006 to manage the level of property exposures retained by DBG. Other operating expense as a percent of net premiums written increased by 3.9 points primarily due to an increase in bad debt expense, due largely to a charge of $225 million relating to reconciliation remediation activities. Adjustments from AIG’s ongoing remediation activities described above also resulted in increases of $155 million and $191 million to earned premiums and net investment income, respectively, for a net increase in operating income of $121 million in the third quarter of 2006. Incurred losses did not change as a result of the above increase to earned premiums because the adjustment was isolated to the reconciliation of unearned premium balances.

The combined effect of the out of period and other adjustments in the third quarter of 2006 was a decrease in the DBG loss ratio of 1.7 points and an increase in the expense ratio of 3.7 points.

Year-to-date DBG Results

Operating income increased to $4.45 billion in the first nine months of 2006 compared to $1.24 billion in the same period in 2005, an improvement of $3.21 billion.

The improvement is also reflected in the combined ratio, which declined to 88.7 in the first nine months of 2006 compared to 104.2 in the same period in 2005. The first nine months of 2005 included $1.37 billion of losses and net reinstatement premiums for major catastrophes, which increased the 2005 combined ratio by 8.1 points.

DBG’s net premiums written increased 8 percent in the first nine months of 2006 compared to the same period of 2005 due to property rate increases as well as increases in submission activity in the aftermath of the 2005 hurricanes. Net premiums written for the first nine months of 2005 were reduced by $122 million due to reinstatement premiums related to catastrophes; net premiums written for the first nine months of 2006 were increased by $47 million due to the reversal of a reinsurance contract previously accounted for as reinsurance and now accounted for as a deposit, the overall effect of which was largely offset in losses and underwriting expenses. The combined effect of these two items contributed approximately 1 percentage point to the increase in net premiums written.

The loss ratio for the first nine months of 2006 declined to 69.0 compared to 85.7 for the same period in 2005, primarily due to the effects of the catastrophes in the first nine months of 2005. Lines of business that were not directly affected by the 2005 major catastrophes also improved, primarily due to lower accident year loss ratios for the 2006 accident year compared to the loss ratios recorded in the third quarter of 2005 for accident year 2005. In addition, year-to-date 2006 operating income included a $4 million reduction in the estimated ultimate losses related to prior year hurricanes compared to the same period of 2005, which included $157 million of increased losses related to prior year hurricanes. Favorable reserve development on non-catastrophic prior year losses totaled $25 million for the first nine months of 2006 compared to adverse development of $410 million for the same period of 2005. The 2006 development relates primarily to classes of business which did not require reserve strengthening in connection with AIG’s year-end 2005 reserve study.

DBG’s expense ratio increased to 19.8 percent in the first nine months of 2006 compared to 18.4 percent for the same pe-

American International Group, Inc. and Subsidiaries

riod in 2005. Net acquisition expenses as a percent of net premiums written declined 0.5 points in the first nine months of 2006 compared to the same period in 2005 despite the increase in premium assessments in the third quarter of 2006, reflecting an increase in lines of business such as property that have a lower commission rate, a modest decrease in overall commission rates and the new quota share reinsurance programs added in 2006 to manage the level of property exposures retained by DBG. Other operating expenses as a percent of net premiums written increased 1.3 points primarily due to an increase in bad debt expense, due largely to a charge of $225 million relating to reconciliation remediation activities.

Quarterly Transatlantic Results

Transatlantic’s net premiums written and net premiums earned in the third quarter of 2006 increased by 4 percent and 6 percent, respectively, when compared to the same period in 2005 primarily due to increases in domestic other liability, medical malpractice and accident and health net premiums written. These increases were partially offset by decreases in domestic property, principally homeowners, and international medical malpractice premiums. Third quarter 2006 operating income increased due largely to lower catastrophe losses and net ceded reinstatement premiums and increased net investment income.

Year-to-date Transatlantic Results

Transatlantic’s net premiums written and net premiums earned increased in the first nine months of 2006 by 4 percent and 5 percent, respectively, compared to the same period of 2005 due primarily to increases in domestic other liability, medical malpractice and accident and health net premiums written. These increases were offset, in part, by decreases in international premiums with the most significant decreases in the auto liability and property lines. Operating income increased in the first nine months of 2006 compared to the same period of 2005 due to lower catastrophe losses and net ceded reinstatement premiums, and increased net investment income.

Quarterly Personal Lines Results

Personal Lines net premiums written and net premiums earned decreased slightly in the third quarter of 2006 compared to the same period in 2005, as growth in the Private Client Group was offset by the run-off of the involuntary auto business and declines in the AIG Direct, Agency Auto and 21st Century divisions. Growth in the Private Client Group spans multiple products, with continued penetration into the high net worth market and strong brand and innovative loss prevention programs. The soft auto market, with flat to declining rates, is adversely affecting growth in the direct business of AIG Direct and 21st Century. 21st Century is experiencing solid performance outside of California, however, it is not outpacing the decline in California. Agency Auto growth is down due to pricing and underwriting pressure in certain markets. Operating income in the third quarter of 2006 increased from the same period in 2005 driven by an improved loss ratio. Operating income in 2005 included $62 million of hurricane Katrina losses and related reinstatement premiums whereas operating income in 2006 is benefiting from favorable development of prior period reserves.

Year-to-date Personal Lines Results

Personal Lines net premiums written decreased slightly in the first nine months of 2006 compared to the same period in 2005, with growth in the Private Client Group and Agency Auto divisions being offset by the run-off of the involuntary auto business and small declines in the AIG Direct and 21st Century divisions. Operating income increased for the first nine months of 2006 compared to the same period of 2005, driven primarily by a lower loss ratio. Operating income in 2005 included $62 million of hurricane Katrina losses and related reinstatement premiums whereas operating income in 2006 is benefiting from an absence of catastrophes and favorable prior year reserve development. The expense ratio has increased in 2006, compared to the year ago period, primarily due to investments in people and technology, national expansion efforts and lower response rates.

Quarterly UGC Results

Mortgage Guaranty net premiums written were up 56 percent for the third quarter of 2006 compared to the same period in 2005. All business segments contributed to the increase. Operating income for the three months ended September 30, 2005 was negatively affected by $29 million of ceded premiums for the domestic first lien business. Incurred losses were up compared to the third quarter of 2005 due to aging of the first lien portfolio and a slowing domestic housing market. Additionally, early loss development of alternative risk products and growth in insurance in–force in 2006 drove the increases in domestic second lien losses. Operating income for the third quarter of 2006 was up 18 percent compared to the prior period, with improvements in all business units.

Year-to-date UGC Results

Mortgage Guaranty net premiums written were up 36 percent for the first nine months of 2006 compared to the same period in 2005. All business units contributed to the increase. Operating income for the first nine months of 2005 was negatively affected by $29 million of ceded premiums for domestic first lien business. Incurred losses increased from the same period in 2005, due to aging of the first lien portfolio, a slowing domestic housing market, early loss development of alternative risk second lien product and growth in the domestic second lien insurance in–force. Operating income for the first nine months of 2006 increased by 6 percent over the prior year period.

American International Group, Inc. and Subsidiaries

Quarterly Foreign General Insurance Results

Foreign General Insurance net premiums written increased 10 percent (9 percent in original currency) in the third quarter of 2006 when compared to the same period in 2005. This increase is due to growth in both the commercial and consumer lines driven by new business, new distribution channels, including the acquisition of Central Insurance Co., Ltd. in Taiwan, and higher premiums for the Ascot Lloyd’s syndicate. Lower reinstatement premium costs, which in 2005 were unusually high due to hurricanes Katrina and Rita, contributed two percent to the increase in net premiums written. The personal accident business net premiums written increased in the third quarter of 2006 from a year ago, but an increase in loss frequency negatively affected operating income. The commercial lines net premiums written in Europe, the Far East and the United Kingdom increased from a year ago due to new business with a resulting increase in operating income compared to the third quarter of 2005. Operating income from energy lines, primarily in the United Kingdom, and the Ascot Lloyd’s syndicate both increased compared to the third quarter of 2005 due to increased net premiums written in 2006 and losses incurred in the third quarter of 2005 relating to catastrophe events.

The combined ratio for Foreign General Insurance for the third quarter of 2006 was 83.7, an improvement of 8.5 points from 92.2 in the comparable period of 2005. The Foreign General Insurance loss ratio decreased 11.4 points in the third quarter of 2006 compared to the same period of 2005. The results of 2006 benefited from lower current accident year losses and favorable loss development from prior accident years, excluding catastrophes, of $105 million, offset by $21 million of adverse loss development on the 2005 hurricanes and by $22 million of losses related to a typhoon in Japan during the third quarter of 2006. The results for 2005 included several catastrophic events, principally hurricanes Katrina and Rita. The Foreign General Insurance expense ratio increased 2.9 points in the third quarter of 2006 from the same period in 2005, principally due to higher commission costs, the increased significance of consumer lines of business, which have higher acquisition costs, accelerated amortization of advertising costs and premium reductions of $56 million relating to reconciliation remediation activities. Due to the current mix of business, AIG expects commission costs to continue to increase over the next quarter, principally for classes of business with historically lower than average loss ratios.

Year-to-date Foreign General Insurance Results

Foreign General Insurance net premiums written increased 9 percent (12 percent in original currency) in the first nine months of 2006 compared to the same period in 2005, reflecting growth in both the commercial and consumer lines. The personal accident business in the Far East region, the commercial lines business in both Europe and the United Kingdom, and the Ascot Lloyd’s syndicate all contributed to the growth in net premiums written. Operating income showed corresponding increases over the prior year, which included significant losses related to hurricanes Katrina and Rita.

The combined ratio for Foreign General Insurance for the first nine months of 2006 was 82.4, an improvement of 2.8 points from 2005. The Foreign General Insurance loss ratio decreased 5.3 points in the first nine months of 2006 from the same period of 2005 due to lower current accident year losses, favorable loss development from prior accident years and fewer catastrophes. The Foreign General Insurance expense ratio increased 2.5 points in the first nine months of 2006 from the same period in 2005 principally due to higher commission costs, the increased significance of consumer lines of business, which have higher acquisition costs and accelerated amortization of advertising costs.

Quarterly General Insurance Net Investment Income

General Insurance net investment income increased by $383 million in the third quarter of 2006, when compared to the same period of 2005 due to strong cash flows, including the effect of capital contributions from the parent, higher partnership income for DBG and the out of period adjustments relating to unit investment trust and partnership investments. Foreign General net investment income for the third quarter increased compared to the same period in 2005 due to strong cash flows, resulting from higher premium collections and reinsurance loss recoveries, as well as higher interest rates.

Year-to-date General Insurance Net Investment Income

General Insurance net investment income increased by $1.04 billion in the first nine months of 2006, when compared to the same period of 2005. The increase for the nine month period is principally due to the effects of out of period adjustments of $524 million related to the accounting for certain interests in unit investment trusts, $121 million of out of period adjustments for partnership income and a second quarter 2006 $85 million out of period adjustment related to interest earned on a DBG deposit contract. Foreign General Insurance net investment income increased in the nine-month period ended September 30, 2006 compared to the same period of 2005 due to the effects of the out of period adjustments, offset by a decline in partnership income. Foreign General partnership income in the first nine months of 2005 benefited from increases in market valuations due to increased initial public offering activity.

Realized capital gains and losses resulted from the ongoing investment management of the General Insurance portfolios within the overall objectives of the General Insurance operations. See the discussion on “Valuation of Invested Assets” herein.

American International Group, Inc. and Subsidiaries

Reinsurance

AIG is a major purchaser of reinsurance for its General Insurance operations. AIG insures risks globally, and its reinsurance programs must be coordinated in order to provide AIG the level of reinsurance protection that AIG desires. Reinsurance is an important risk management tool to manage transaction and insurance line risk retention at prudent levels set by management. AIG also purchases reinsurance to mitigate its catastrophic exposure. AIG is cognizant of the need to exercise good judgment in the selection and approval of both domestic and foreign companies participating in its reinsurance programs because one or more catastrophe losses could negatively affect AIG’s reinsurers and result in an inability of AIG to collect reinsurance recoverables. AIG’s reinsurance department evaluates catastrophic events and assesses the probability of occurrence and magnitude of catastrophic events through the use of state-of-the-art industry recognized program models, among other techniques. AIG supplements these models through continually monitoring the risk exposure of AIG’s worldwide General Insurance operations and adjusting such models accordingly. For a further discussion of catastrophe exposures, see “Managing Risk – Catastrophe Exposures.” Although reinsurance arrangements do not relieve AIG from its direct obligations to its insureds, an efficient and effective reinsurance program substantially limits AIG’s exposure to potentially significant losses. With respect to its property business, AIG has either renewed existing reinsurance coverage or purchased new coverage that, in the opinion of management, is adequate to limit AIG’s exposures. AIG continually evaluates the reinsurance markets and the relative attractiveness of various arrangements for coverage, including structures such as catastrophe bonds, insurance risk securitizations and “sidecar” and similar vehicles. Effective July 15, 2006, AIG’s Lexington Insurance Company (Lexington) and Concord Re Limited (Concord Re), a “sidecar” reinsurer that was established exclusively to reinsure Lexington, entered into a quota share reinsurance agreement covering the U.S. commercial property insurance business written by Lexington. Concord Re was capitalized with approximately $730 million through the issuance of equity securities and loans from third party investors. AIG and its subsidiaries invest in a wide variety of investment vehicles managed by third parties where AIG has no control over investment decisions. Accordingly, there can be no assurance that such vehicles do not, or will not, hold securities of Concord Re.

AIG’s consolidated general reinsurance assets amounted to $22.99 billion at September 30, 2006 and resulted from AIG’s reinsurance arrangements. Thus, a credit exposure existed at September 30, 2006 with respect to reinsurance recoverable to the extent that any reinsurer may not be able to reimburse AIG under the terms of these reinsurance arrangements. AIG manages its credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound, and when necessary AIG holds substantial collateral in the form of funds, securities and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods on an individual reinsurer basis. At December 31, 2005, approximately 48 percent of the general reinsurance assets were from unauthorized reinsurers. Many of these balances were collateralized, permitting statutory recognition. Additionally, with the approval of its domiciliary insurance regulators, AIG posted approximately $1.5 billion of letters of credit issued by several commercial banks in favor of certain Domestic General Insurance companies to permit those companies statutory recognition of balances otherwise uncollateralized at December 31, 2005. The remaining 52 percent of the general reinsurance assets were from authorized reinsurers. The terms authorized and unauthorized pertain to regulatory categories, not creditworthiness. At December 31, 2005, approximately 88 percent of the balances with respect to authorized reinsurers are from reinsurers rated A (excellent) or better, as rated by A.M. Best, or A (strong) or better, as rated by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (S&P). These ratings are measures of financial strength. Through September 30, 2006, there has been no significant deterioration in the rating profile of AIG’s reinsurers representing more than five percent of AIG’s reinsurance assets as of December 31, 2005.

AIG maintains an allowance for estimated unrecoverable reinsurance. Although AIG has been largely successful in its previous recovery efforts, at September 30, 2006, AIG had an allowance for unrecoverable reinsurance approximating $447 million. The allowance was reduced substantially during 2006, as uncollectible amounts due from individual reinsurers were charged off against the allowance, primarily due to the balance sheet reconciliation remediation process; in addition, a portion of the allowance was reclassified to align it with the related receivable. The reduction for charge offs was partially offset by additional provisions totaling $92 million during the nine months ended September 30, 2006. At September 30, 2006, AIG had no significant reinsurance recoverables due from any individual reinsurer that was financially troubled (e.g., liquidated, insolvent, in receivership or otherwise subject to formal or informal regulatory restriction).

AIG’s Reinsurance Security Department conducts ongoing detailed assessments of the reinsurance markets and current and potential reinsurers, both foreign and domestic. Such assessments include, but are not limited to, identifying if a reinsurer is appropriately licensed and has sufficient financial capacity, and evaluating the local economic environment in which a foreign reinsurer operates. This department also reviews the nature of the risks ceded and the requirements for credit risk mitigants. For example, in AIG’s treaty reinsurance contracts, AIG includes provisions that frequently require a reinsurer to post collateral when a referenced event occurs.

American International Group, Inc. and Subsidiaries

Furthermore, AIG limits its unsecured exposure to reinsurers through the use of credit triggers, which include, but are not limited to, insurer financial strength rating downgrades, policyholder surplus declines at or below a certain predetermined level or a certain predetermined level of a reinsurance recoverable being reached. In addition, AIG’s Credit Risk Committee reviews the credit limits for and concentrations with any one reinsurer.

AIG enters into intercompany reinsurance transactions, primarily through American International Reinsurance Company, Ltd. (AIRCO), for its General Insurance and Life Insurance operations. AIG enters into these transactions as a sound and prudent business practice in order to maintain underwriting control and spread insurance risk among AIG’s various legal entities. All material intercompany transactions have been eliminated in consolidation. AIG generally obtains letters of credit in order to obtain statutory recognition of these intercompany reinsurance transactions. At September 30, 2006, approximately $3.7 billion of letters of credit were outstanding to cover intercompany reinsurance transactions with AIRCO or other General Insurance subsidiaries.

At September 30, 2006, consolidated general reinsurance assets of $22.99 billion include reinsurance recoverables for paid losses and loss expenses of $1.58 billion and $18.35 billion with respect to the ceded reserve for losses and loss expenses, including ceded losses incurred but not reported (IBNR) (ceded reserves) and $3.07 billion of ceded reserve for unearned premiums. The ceded reserve for losses and loss expenses represent the accumulation of estimates of ultimate ceded losses including provisions for ceded IBNR and loss expenses. The methods used to determine such estimates and to establish the resulting ceded reserves involve significant judgment in projecting the frequency and severity of losses over multiple years and are continually reviewed and updated by management. Any adjustments thereto are reflected in income currently. It is AIG’s belief that the ceded reserves for losses and loss expenses at September 30, 2006 were representative of the ultimate losses recoverable. In the future, as the ceded reserves continue to develop to ultimate amounts, the ultimate loss recoverable may be greater or less than the reserves currently ceded.

Reserve for Losses and Loss Expenses

The table below classifies as of September 30, 2006 and December 31, 2005 the components of the General Insurance gross reserve for losses and loss expenses (loss reserves) by major lines of business on a statutory Annual Statement basis^*:


(in millions)	September 30, 2006		December 31, 2005

Other liability occurrence	$	18,879	$	18,116
Other liability claims made		12,768		12,447
Workers compensation		12,751		11,630
Property		6,634		7,217
Auto liability		6,351		6,569
International		5,376		4,939
Reinsurance		3,419		2,886
Medical malpractice		2,200		2,363
Products liability		1,988		1,937
Accident and health		1,727		1,678
Aircraft		1,642		1,844
Commercial multiple peril		1,449		1,359
Fidelity/ surety		1,015		1,072
Other		3,664		3,112

Total	$	79,863	$	77,169


*	Presented by lines of business pursuant to statutory reporting requirements as prescribed by the National Association of Insurance Commissioners.

AIG’s gross reserve for losses and loss expenses represents the accumulation of estimates of ultimate losses, including IBNR and loss expenses. The methods used to determine loss reserve estimates and to establish the resulting reserves are continually reviewed and updated by management. Any adjustments resulting therefrom are reflected in operating income currently. Because loss reserve estimates are subject to the outcome of future events, changes in estimates are unavoidable given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase previous estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost are referred to as favorable development.

At September 30, 2006, General Insurance net loss reserves increased $4.04 billion from the prior year end to $61.51 billion. The net loss reserves represent loss reserves reduced by reinsurance recoverables, net of an allowance for unrecoverable reinsurance and applicable discount for future investment income. The table below classifies the components of the General Insurance net loss reserves by business unit as of September 30, 2006 and December 31, 2005.


(in millions)	September 30, 2006		December 31, 2005

DBG^(a)	$	43,383	$	40,782
Transatlantic		6,118		5,690
Personal Lines^(b)		2,486		2,578
Mortgage Guaranty		390		340
Foreign General^(c)		9,136		8,086

Total Net Loss Reserve	$	61,513	$	57,476


(a)	At September 30, 2006 and December 31, 2005, DBG loss reserves include approximately $3.50 billion and $3.77 billion, respectively, ($3.87 billion and $4.26 billion, respectively, before discount) related to

American International Group, Inc. and Subsidiaries


	business written by DBG but ceded to AIRCO and reported in AIRCO’s statutory filings. DBG loss reserves also include approximately $532 million and $407 million related to business included in AIUO’s statutory filings at September 30, 2006 and December 31, 2005, respectively.
(b)	At September 30, 2006 and December 31, 2005, Personal Lines loss reserves include $876 million and $878 million, respectively, related to business ceded to DBG and reported in DBG’s statutory filings.
(c)	At September 30, 2006 and December 31, 2005, Foreign General loss reserves include approximately $2.70 billion and $2.15 billion, respectively, related to business reported in DBG’s statutory filings.

The DBG net loss reserve of $43.38 billion is comprised principally of the business of AIG subsidiaries participating in the American Home/National Union pool (11 companies) and the surplus lines pool (Lexington, Starr Excess Liability Insurance Company and Landmark Insurance Company).

Beginning in 1998, DBG ceded a quota share percentage of its other liability occurrence and products liability occurrence business to AIRCO. The quota share percentage ceded was 40 percent in 1998, 65 percent in 1999, 75 percent in 2000 and 2001, 50 percent in 2002 and 2003, 40 percent in 2004, 35 percent in 2005 and 20 percent in 2006 and covered all business written in these years for these lines by participants in the American Home/National Union pool. In 1998 the cession reflected only the other liability occurrence business, but in 1999 and subsequent years included products liability occurrence. AIRCO’s loss reserves relating to these quota share cessions from DBG are recorded on a discounted basis. As of September 30, 2006, AIRCO carried a discount of approximately $370 million applicable to the $3.87 billion in undiscounted reserves it assumed from the American Home/National Union pool via this quota share cession. AIRCO also carries approximately $478 million in net loss reserves relating to Foreign General insurance business. These reserves are carried on an undiscounted basis.

Beginning in 1997, the Personal Lines division ceded a percentage of all business written by the companies participating in the personal lines pool to the American Home/National Union pool. As noted above, the total reserves carried by participants in the American Home/National Union pool relating to this cession amounted to $876 million as of September 30, 2006.

The companies participating in the American Home/National Union pool have maintained a participation in the business written by AIU for decades. As of September 30, 2006, these AIU reserves carried by participants in the American Home/National Union pool amounted to approximately $2.70 billion. The remaining Foreign General reserves are carried by AIUO, AIRCO, and other smaller AIG subsidiaries domiciled outside the United States. Statutory filings in the U.S. by AIG companies reflect all the business written by U.S. domiciled entities only, and therefore exclude business written by AIUO, AIRCO, and all other internationally domiciled subsidiaries. The total reserves carried at September 30, 2006 by AIUO and AIRCO were approximately $4.35 billion and $3.98 billion, respectively. AIRCO’s $3.98 billion in total general insurance reserves consist of approximately $3.50 billion from business assumed from the American Home/ National Union pool and an additional $478 million relating to Foreign General Insurance business.

Discounting of Reserves

At September 30, 2006, AIG’s overall General Insurance net loss reserves reflects a loss reserve discount of $2.11 billion, including tabular and non-tabular calculations. The tabular workers compensation discount is calculated using a 3.5 percent interest rate and the 1979-81 Decennial Mortality Table. The non-tabular workers compensation discount is calculated separately for companies domiciled in New York and Pennsylvania, and follows the statutory regulations for each state. For New York companies, the discount is based on a five percent interest rate and the companies’ own payout patterns. For Pennsylvania companies, the statute has specified discount factors for accident years 2001 and prior, which are based on a six percent interest rate and an industry payout pattern. For accident years 2002 and subsequent, the discount is based on the yield of U.S. Treasury securities ranging from one to twenty years and the company’s own payout pattern, with the future expected payment for each year using the interest rate associated with the corresponding Treasury security yield for that time period. The discount is comprised of the following: $512 million – tabular discount for workers compensation in DBG; $1.23 billion – non-tabular discount for workers compensation in DBG; and, $370 million – non-tabular discount for other liability occurrence and products liability occurrence in AIRCO. The total undiscounted workers compensation loss reserve carried by DBG is approximately $10.6 billion as of September 30, 2006. The other liability occurrence and products liability occurrence business in AIRCO that is assumed from DBG is discounted based on the yield of U.S. Treasury securities ranging from one to twenty years and the DBG payout pattern for this business. The undiscounted reserves assumed by AIRCO from DBG totaled approximately $3.87 billion at September 30, 2006.

Quarterly Reserving Process

It is management’s belief that the General Insurance net loss reserves are adequate to cover General Insurance net losses and loss expenses as of September 30, 2006. While AIG regularly reviews the adequacy of established loss reserves, there can be no assurance that AIG’s ultimate loss reserves will not develop adversely and materially exceed AIG’s loss reserves as of September 30, 2006. In the opinion of management, such adverse development and resulting increase in reserves is not likely to have a material adverse effect on AIG’s consolidated financial position, although it could have a material adverse effect on AIG’s consolidated results of operations for an individual reporting period.

American International Group, Inc. and Subsidiaries

The table below presents the reconciliation of General Insurance net loss reserves for the three and nine-month periods ended September 30, 2006 and 2005 as follows:


		Three Months						Nine Months
		Ended September 30,						Ended September 30,

*(in millions)*		2006			2005			2006			2005

Net reserve for losses and loss expenses at beginning of period		$	60,214		$	50,564		$	57,476		$	47,254
Foreign exchange effect			34			(33	)		521			(354	)
Acquisition^(a)			55			—			55			—

Losses and loss expenses incurred:
	Current year		6,957			8,626			20,710			22,697
	Prior years, other than accretion of discount^(b)		(41	)		244			(255	)		374
	Prior years, accretion of discount		101			97			303			291

Losses and loss expenses incurred			7,017			8,967			20,758			23,362

Losses and loss expenses paid			5,807			5,439			17,297			16,203

Net reserve for losses and loss expenses at end of period		$	61,513		$	54,059		$	61,513		$	54,059


(a)	Reflects the opening balance with respect to the acquisition of the Central Insurance Co., Ltd. in the third quarter of 2006.
(b)	Includes $24 million and $30 million in the three-month periods ended September 30, 2006 and 2005, respectively, for the general reinsurance operations of Transatlantic and $43 million and $39 million, respectively, of additional losses incurred resulting from 2005 and 2004 catastrophes. Includes $89 million and $120 million in the nine-month periods ended September 30, 2006 and 2005, respectively, for the general reinsurance operations of Transatlantic and $80 million and $157 million, respectively, of additional losses incurred resulting from 2005 and 2004 catastrophes. Transatlantic included $4 million and $24 million of prior years adverse catastrophe development in the three and nine months ended September 30, 2006, respectively.

The loss ratios recorded by AIG for the first nine months of 2006 take into account the results of the comprehensive reserve reviews that were completed in the fourth quarter of 2005. As explained more fully in the 2005 Annual Report on Form 10-K/A, AIG’s year-end 2005 reserve review reflected careful consideration of the reserve analyses prepared by AIG’s internal actuarial staff with the assistance of third party actuaries. In determining the appropriate loss ratios for accident year 2006 for each class of business, AIG gave appropriate consideration to the loss ratios resulting from the reserve analyses as well as all other relevant information including rate changes, expected changes in loss costs, changes in coverage, reinsurance or mix of business, and other factors that may affect the loss ratios.

In the first nine months of 2006, AIG enhanced its process of determining the quarterly loss development from prior accident years. In the first quarter of 2006, AIG began conducting additional analyses to determine the change in estimated ultimate loss for each accident year for each profit center. For example, if loss emergence for a profit center is different than expected for certain accident years in the quarter, the actuaries now take additional steps to examine the indicated effect such emergence would have on the reserves of that profit center. In some cases, the higher or lower than expected emergence may result in no clear change in the ultimate loss estimate for the accident years in question, and no adjustment would be made to the profit center’s reserves for prior accident years. In other cases, the higher or lower than expected emergence may result in a larger change, either favorable or unfavorable, than the difference between the actual and expected loss emergence. Such additional analyses were conducted for each profit center, as appropriate, in the first, second and third quarters of 2006 to determine the loss development from prior accident years for the first, second and third quarters of 2006. As part of its quarterly reserving process, AIG also considers notices of claims received with respect to emerging issues, such as those related to stock option backdating.

In the third quarter of 2006, net loss development from prior accident years was favorable by approximately $41 million, including approximately $43 million of adverse development pertaining to the major hurricanes in 2005 and 2004 and $24 million of adverse development pertaining to the general reinsurance operations of Transatlantic. Excluding catastrophes and Transatlantic, as well as accretion of discount of approximately $101 million, net loss development from prior accident years in the third quarter of 2006 was favorable by approximately $108 million. This overall favorable development of $108 million consisted of approximately $490 million of favorable development from accident years 2003 through 2005, partially offset by approximately $380 million of adverse development from accident years 2002 and prior. The $490 million of favorable development from accident years 2003 through 2005 included approximately $310 million from accident year 2005, $160 million from accident year 2004, and $20 million from accident year 2003. The adverse development from accident years 2002 and prior included approximately $130 million from accident year 1999, primarily due to two significant claims, with the balance spread across many accident years. Foreign General prior accident year reserves, excluding catastrophes, developed favorably by approximately $105 million in the quarter. DBG prior accident year reserves, excluding catastrophes, developed adversely by approximately $40 million. The overall development also included approximately $22 million of favorable development from Personal Lines and approximately $21 million of favorable development from UGC. The

American International Group, Inc. and Subsidiaries

favorable developments experienced in Foreign General included both short tail as well as longer tail classes of business.

In the first nine months of 2006, net loss development from prior accident years was favorable by approximately $255 million, including approximately $80 million of adverse development pertaining to the major hurricanes in 2004 and 2005 and $89 million of adverse development from the general reinsurance operations of Transatlantic. Excluding catastrophes and Transatlantic, as well as accretion of discount of approximately $303 million, net loss development from prior accident years in the first nine months of 2006 was favorable by approximately $424 million. This overall favorable development of $424 million consisted of approximately $1.23 billion of favorable development from accident years 2003 through 2005, partially offset by approximately $805 million of adverse development from accident years 2002 and prior. The $1.23 billion of favorable development from accident years 2003 through 2005 included approximately $550 million from accident year 2005, $450 million from accident year 2004, and $230 million from accident year 2003. The adverse developments from accident years 2002 and prior were widely spread among many accident years. The overall favorable development of $424 million included approximately $235 million from Foreign General, $80 million from Personal Lines, $85 million from UGC, and $25 million from DBG. For both the third quarter and the first nine months of 2006, most classes of business throughout AIG continued to experience favorable development for accident years 2003 through 2005. The adverse development from accident years 2002 and prior reflected developments from excess casualty, workers compensation, excess workers compensation, and post-1986 environmental liability classes of business, all within DBG.

As a result of the continued favorable experience for accident years 2003 through 2005, the expected loss ratios for accident year 2006 were improved for a number of casualty classes of business in the third quarter of 2006. For those classes of business where the expected loss ratio for accident year 2006 was adjusted in the third quarter, the revised loss ratio was generally applied to the cumulative 2006 net earned premium for the class. The overall effect on the third quarter results was approximately a $100 million improvement. This amount represents the application of the revised expected loss ratios to the net premiums earned reported for the first six months of 2006.

In the third quarter of 2005, net loss development from prior accident years was adverse by approximately $244 million, including approximately $39 million of adverse development pertaining to the major hurricanes from accident year 2004 and approximately $30 million of adverse development pertaining to the general reinsurance operations of Transatlantic. Excluding catastrophes and Transatlantic, as well as accretion of discount of approximately $97 million, net loss development from prior accident years in the third quarter of 2005 was adverse by approximately $175 million. In the third quarter of 2005, most classes of business experienced favorable development for accident years 2003 and 2004 and adverse development for accident years 2001 and prior. The overall development of $175 million consisted of approximately $350 million of adverse development from accident years 2001 and prior, partially offset by approximately $170 million of favorable development from accident year 2004 and $30 million of favorable development from accident year 2003. Accident year 2002 experienced adverse development for D&O and excess casualty, with an overall adverse development of approximately $20 million in the quarter. For all accident years combined, the D&O and excess casualty classes accounted for the vast majority of the $175 million overall adverse development in the quarter. The $175 million of overall adverse development, excluding catastrophes, was comprised of approximately $190 million of adverse development from DBG, $15 million of adverse development from Foreign General, and $15 million of favorable development from each of the Personal Lines and UGC segments.

In the first nine months of 2005, net loss development from prior accident years was adverse by approximately $375 million, including approximately $157 million of adverse development from the major hurricanes from accident year 2004 and approximately $120 million of adverse development from the general reinsurance operations of Transatlantic. Excluding catastrophes and Transatlantic, as well as accretion of discount of approximately $291 million, net loss development from prior accident years in the first nine months of 2005 was adverse by approximately $98 million. The overall development of $98 million consisted of approximately $1.13 billion of adverse development from accident years 2002 and prior, offset by approximately $740 million of favorable development from accident year 2004 and approximately $290 million of favorable development from accident year 2003. Most classes of business produced favorable development for accident years 2003 and 2004, and adverse development for accident years 2001 and prior. The majority of the adverse development from accident year 2002 and prior was attributable to the D&O and excess casualty classes of business. Accident year 2002 experienced favorable development for many classes of business. However, in total, accident year 2002 experienced approximately $50 million of adverse development primarily attributable to approximately $125 million of adverse development from the D&O class. The overall adverse development of $98 million for all prior accident years, excluding catastrophes, was comprised of approximately $410 million of adverse development from DBG, $190 million of favorable development from Foreign General, $60 million of favorable development from Personal Lines, and $62 million of favorable development from UGC.

American International Group, Inc. and Subsidiaries

Loss Reserving Process

The General Insurance loss reserves can generally be categorized into two distinct groups. One group is long-tail casualty lines of business which include excess and umbrella liability, D&O, professional liability, medical malpractice, workers compensation, general liability, products liability, and related classes. The other group is short-tail lines of business consisting principally of property lines, personal lines and certain classes of casualty lines. These lines of business and actuarial assumptions made in the review of these lines of business are described in the 2005 Annual Report on Form 10-K/A.

The process of determining the current loss ratio for each class or business segment is based on a variety of factors and is described in detail in AIG’s 2005 Annual Report on Form 10-K/A. AIG uses the process described above to update AIG’s reserves on a quarterly basis. AIG’s 2005 Annual Report on Form 10-K/A also includes a discussion and analysis of the volatility of AIG’s 2005 reserve estimates and a sensitivity analysis.

Asbestos and Environmental Reserves

The estimation of loss reserves relating to asbestos and environmental claims on insurance policies written many years ago is subject to greater uncertainty than other types of claims due to inconsistent court decisions as well as judicial interpretations and legislative actions that in some cases have tended to broaden coverage beyond the original intent of such policies and in others have expanded theories of liability.

As described more fully in the 2005 Annual Report on Form 10-K/A, AIG’s reserves relating to asbestos and environmental claims reflect the results of the comprehensive ground up analysis which was completed in the fourth quarter of 2005. AIG is in the process of updating its ground up analysis and expects to continue to do so on an annual basis. In the first nine months of 2006, AIG maintained the ultimate loss estimates for asbestos and environmental claims resulting from the recently completed reserve analyses. A minor amount of incurred loss emergence pertaining to asbestos was reflected in the first nine months of 2006, as depicted in the table that follows. This minor development is primarily attributable to the general reinsurance operations of Transatlantic.

A summary of reserve activity, including estimates for applicable IBNR, relating to asbestos and environmental claims separately and combined for the nine months ended September 30, 2006 and 2005 follows:

2006

2005