FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2008
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number 1-8787
American International Group,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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13-2592361
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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70 Pine Street, New York, New York
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10270
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(Address of principal executive
offices)
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(Zip Code)
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Registrants 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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do
not check if a
smaller
reporting company)
Indicate by check mark whether the registrant is a shell
company (as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of October 31, 2008, there were
2,689,938,313 shares outstanding of the registrants
common stock.
American International Group, Inc.
and Subsidiaries
Part I
FINANCIAL INFORMATION
ITEM
1. Financial Statements (unaudited)
CONSOLIDATED
BALANCE SHEET
(in
millions) (unaudited)
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September 30,
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December 31,
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2008
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2007
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Assets:
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Investments and Financial Services assets:
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Fixed maturity securities:
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Bonds available for sale, at fair value (amortized cost:
2008 $412,877; 2007 $393,170)
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$
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394,494
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$
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397,372
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Bonds held to maturity, at amortized cost (fair value:
2008 $0; 2007 $22,157)
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21,581
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Bond trading securities, at fair value
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7,552
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9,982
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Equity securities:
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Common stocks available for sale, at fair value (cost:
2008 $11,317; 2007 $12,588)
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11,459
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17,900
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Common and preferred stocks trading, at fair value
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20,674
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21,376
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Preferred stocks available for sale, at fair value (cost:
2008 $1,590; 2007 $2,600)
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1,464
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2,370
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Mortgage and other loans receivable, net of allowance
(2008 $90; 2007 $77) (held for sale:
2008 $26; 2007 $377) (amount measured at
fair value: 2008 $328)
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33,724
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33,727
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Financial Services assets:
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Flight equipment primarily under operating leases, net of
accumulated depreciation (2008 $11,812;
2007 $10,499)
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43,561
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41,984
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Securities available for sale, at fair value (cost:
2008 $2,568; 2007 $40,157)
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2,326
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40,305
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Trading securities, at fair value
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36,136
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4,197
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Spot commodities, at fair value
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34
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238
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Unrealized gain on swaps, options and forward transactions, at
fair value
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10,034
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12,318
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Trade receivables
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4,617
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672
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Securities purchased under agreements to resell, at fair value
in 2008
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12,100
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20,950
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Finance receivables, net of allowance (2008 $1,290;
2007 $878) (held for sale: 2008 $26;
2007 $233)
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32,590
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31,234
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Securities lending invested collateral, at fair value (cost:
2008 $41,336; 2007 $80,641)
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41,511
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75,662
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Other invested assets (amount measured at fair value:
2008 $21,528; 2007 $20,827)
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58,723
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58,823
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Short-term investments (amount measured at fair value:
2008 $22,590)
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52,484
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51,351
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Total Investments and Financial Services assets
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763,483
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842,042
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Cash
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18,570
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2,284
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Investment income due and accrued
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7,008
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6,587
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Premiums and insurance balances receivable, net of allowance
(2008 $582; 2007 $662)
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19,106
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18,395
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Reinsurance assets, net of allowance (2008 $471;
2007 $520)
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23,943
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23,103
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Current and deferred income taxes
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14,833
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Deferred policy acquisition costs
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48,182
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43,914
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Investments in partially owned companies
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591
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654
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Real estate and other fixed assets, net of accumulated
depreciation (2008 $5,814; 2007 $5,446)
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5,730
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5,518
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Separate and variable accounts, at fair value
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65,472
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78,684
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Goodwill
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10,334
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9,414
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Other assets, including prepaid commitment asset of $24,204 in
2008 (amount measured at fair value: 2008 $1,623;
2007 $4,152)
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44,985
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17,766
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Total assets
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$
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1,022,237
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$
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1,048,361
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See Accompanying Notes to Consolidated Financial
Statements.
1
American International Group, Inc.
and Subsidiaries
CONSOLIDATED
BALANCE
SHEET (continued)
(in
millions, except share data) (unaudited)
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September 30,
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December 31,
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2008
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2007
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Liabilities:
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Reserve for losses and loss expenses
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$
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90,877
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$
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85,500
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Unearned premiums
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28,448
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27,703
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Future policy benefits for life and accident and health
insurance contracts
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146,802
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136,387
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Policyholders contract deposits (amount measured at fair
value: 2008 $4,282; 2007 $295)
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259,792
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258,459
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Other policyholders funds
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13,940
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12,599
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Commissions, expenses and taxes payable
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5,577
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6,310
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Insurance balances payable
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5,428
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4,878
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Funds held by companies under reinsurance treaties
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2,462
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2,501
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Current and deferred income taxes
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3,823
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Financial Services liabilities:
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Securities sold under agreements to repurchase (amount measured
at fair value: 2008 $7,193)
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8,407
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8,331
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Trade payables
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3,094
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6,445
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Securities and spot commodities sold but not yet purchased, at
fair value
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2,566
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4,709
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Unrealized loss on swaps, options and forward transactions, at
fair value
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6,325
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14,817
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Trust deposits and deposits due to banks and other depositors
(amount measured at fair value: 2008 $215)
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5,946
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4,903
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Commercial paper and extendible commercial notes
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5,600
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13,114
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Federal Reserve Bank of New York credit facility
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62,960
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Other long-term borrowings (amount measured at fair value:
2008 $39,149)
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155,990
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162,935
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Separate and variable accounts
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65,472
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78,684
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Securities lending payable
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42,800
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81,965
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Minority interest
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11,713
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10,422
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Other liabilities (amount measured at fair value:
2008 $3,389; 2007 $3,262)
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26,756
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27,975
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Total liabilities
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950,955
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952,460
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Preferred shareholders equity in subsidiary
companies
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100
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100
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Commitments, contingencies and guarantees (See Note 7)
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Shareholders equity:
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Common stock, $2.50 par value; 5,000,000,000 shares
authorized; shares issued 2008 2,948,038,001;
2007 2,751,327,476
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|
7,370
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|
|
|
6,878
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Additional paid-in capital
|
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32,501
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2,848
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Payments advanced to purchase shares
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|
|
|
|
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(912
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)
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Retained earnings
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49,291
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89,029
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Accumulated other comprehensive income (loss)
|
|
|
(9,480
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)
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|
|
4,643
|
|
Treasury stock, at cost; 2008 258,123,304;
2007 221,743,421 shares of common stock
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|
|
(8,500
|
)
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|
|
(6,685
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)
|
|
|
Total shareholders equity
|
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|
71,182
|
|
|
|
95,801
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|
|
|
Total liabilities, preferred shareholders equity in
subsidiary companies and shareholders equity
|
|
$
|
1,022,237
|
|
|
$
|
1,048,361
|
|
|
|
See Accompanying Notes to Consolidated Financial
Statements.
2
American International Group, Inc.
and Subsidiaries
CONSOLIDATED
STATEMENT OF INCOME (LOSS)
(in
millions, except per share data) (unaudited)
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|
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Three Months
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Nine Months
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|
Ended
|
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|
Ended
|
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September 30,
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|
September 30,
|
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|
|
2008
|
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|
2007
|
|
|
2008
|
|
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2007
|
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Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Premiums and other considerations
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$
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21,082
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|
|
$
|
19,733
|
|
|
$
|
63,489
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|
|
$
|
58,908
|
|
Net investment income
|
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|
2,946
|
|
|
|
6,172
|
|
|
|
14,628
|
|
|
|
21,149
|
|
Net realized capital losses
|
|
|
(18,312
|
)
|
|
|
(864
|
)
|
|
|
(30,482
|
)
|
|
|
(962
|
)
|
Unrealized market valuation losses on AIGFP super senior credit
default swap portfolio
|
|
|
(7,054
|
)
|
|
|
(352
|
)
|
|
|
(21,726
|
)
|
|
|
(352
|
)
|
Other income
|
|
|
2,236
|
|
|
|
5,147
|
|
|
|
8,953
|
|
|
|
12,888
|
|
|
|
Total revenues
|
|
|
898
|
|
|
|
29,836
|
|
|
|
34,862
|
|
|
|
91,631
|
|
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred policy losses and benefits
|
|
|
17,189
|
|
|
|
15,595
|
|
|
|
51,521
|
|
|
|
47,962
|
|
Policy acquisition and other insurance expenses
|
|
|
6,919
|
|
|
|
5,357
|
|
|
|
18,560
|
|
|
|
15,508
|
|
Interest expense
|
|
|
2,297
|
|
|
|
1,232
|
|
|
|
4,902
|
|
|
|
3,425
|
|
Other expenses
|
|
|
2,678
|
|
|
|
2,773
|
|
|
|
8,084
|
|
|
|
7,357
|
|
|
|
Total benefits and expenses
|
|
|
29,083
|
|
|
|
24,957
|
|
|
|
83,067
|
|
|
|
74,252
|
|
|
|
Income (loss) before income taxes (benefits) and minority
interest
|
|
|
(28,185
|
)
|
|
|
4,879
|
|
|
|
(48,205
|
)
|
|
|
17,379
|
|
Income taxes (benefits)
|
|
|
(3,480
|
)
|
|
|
1,463
|
|
|
|
(10,374
|
)
|
|
|
4,868
|
|
|
|
Income (loss) before minority interest
|
|
|
(24,705
|
)
|
|
|
3,416
|
|
|
|
(37,831
|
)
|
|
|
12,511
|
|
|
|
Minority interest
|
|
|
237
|
|
|
|
(331
|
)
|
|
|
201
|
|
|
|
(1,019
|
)
|
|
|
Net income (loss)
|
|
$
|
(24,468
|
)
|
|
$
|
3,085
|
|
|
$
|
(37,630
|
)
|
|
$
|
11,492
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(9.05
|
)
|
|
$
|
1.20
|
|
|
$
|
(14.40
|
)
|
|
$
|
4.43
|
|
Diluted
|
|
$
|
(9.05
|
)
|
|
$
|
1.19
|
|
|
$
|
(14.40
|
)
|
|
$
|
4.40
|
|
|
|
Dividends declared per common share
|
|
$
|
--
|
|
|
$
|
0.200
|
|
|
$
|
0.420
|
|
|
$
|
0.565
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,703
|
|
|
|
2,576
|
|
|
|
2,613
|
|
|
|
2,596
|
|
Diluted
|
|
|
2,703
|
|
|
|
2,589
|
|
|
|
2,613
|
|
|
|
2,609
|
|
|
See Accompanying Notes to Consolidated Financial
Statements.
3
American International Group, Inc.
and Subsidiaries
CONSOLIDATED
STATEMENT OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2008
|
|
(in millions,
except share and per share data) (unaudited)
|
|
Amounts
|
|
|
Shares
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
6,878
|
|
|
|
2,751,327,476
|
|
Issuances
|
|
|
492
|
|
|
|
196,710,525
|
|
|
|
Balance, end of period
|
|
|
7,370
|
|
|
|
2,948,038,001
|
|
|
|
Additional paid-in capital:
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
2,848
|
|
|
|
|
|
Excess of proceeds over par value of common stock issued
|
|
|
6,851
|
|
|
|
|
|
Present value of future contract adjustment payments related to
issuance of equity units
|
|
|
(431
|
)
|
|
|
|
|
Consideration received for preferred stock not yet issued
|
|
|
23,000
|
|
|
|
|
|
Excess of cost over proceeds of common stock issued under stock
plans
|
|
|
(80
|
)
|
|
|
|
|
Other
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
32,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments advanced to purchase shares:
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
(912
|
)
|
|
|
|
|
Payments advanced
|
|
|
(1,000
|
)
|
|
|
|
|
Shares purchased
|
|
|
1,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings:
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
89,029
|
|
|
|
|
|
Cumulative effect of accounting changes, net of tax
|
|
|
(1,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance, beginning of period
|
|
|
88,026
|
|
|
|
|
|
Net loss
|
|
|
(37,630
|
)
|
|
|
|
|
Dividends to common shareholders ($0.42 per share)
|
|
|
(1,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
49,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Unrealized appreciation (depreciation) of investments, net of
tax:
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
4,375
|
|
|
|
|
|
Cumulative effect of accounting changes, net of tax
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance, beginning of period
|
|
|
4,270
|
|
|
|
|
|
Unrealized appreciation (depreciation) on investments, net of
reclassification adjustments
|
|
|
(20,874
|
)
|
|
|
|
|
Deferred income tax benefit
|
|
|
7,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
(9,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax:
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
880
|
|
|
|
|
|
Translation adjustment
|
|
|
(275
|
)
|
|
|
|
|
Deferred income tax expense
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative gains (losses) arising from cash flow hedging
activities, net of tax:
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
(87
|
)
|
|
|
|
|
Net deferred gains on cash flow hedges, net of reclassification
adjustments
|
|
|
2
|
|
|
|
|
|
Deferred income tax expense
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
(86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement plan liabilities adjustment, net of tax:
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
(525
|
)
|
|
|
|
|
Net actuarial loss
|
|
|
(47
|
)
|
|
|
|
|
Prior service credit
|
|
|
(9
|
)
|
|
|
|
|
Deferred income tax expense
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
(582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss), end of period
|
|
|
(9,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost:
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
(6,685
|
)
|
|
|
(221,743,421
|
)
|
Shares acquired
|
|
|
(1,912
|
)
|
|
|
(37,927,125
|
)
|
Issued under stock plans
|
|
|
24
|
|
|
|
1,545,316
|
|
Other
|
|
|
73
|
|
|
|
1,926
|
|
|
|
Balance, end of period
|
|
|
(8,500
|
)
|
|
|
(258,123,304
|
)
|
|
|
Total shareholders equity, end of period
|
|
$
|
71,182
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial
Statements.
4
American International Group, Inc.
and Subsidiaries
CONSOLIDATED
STATEMENT OF CASH FLOWS
(in
millions) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Summary:
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
2,182
|
|
|
$
|
27,549
|
|
Net cash provided by (used in) investing activities
|
|
|
(7,460
|
)
|
|
|
(65,862
|
)
|
Net cash provided by (used in) financing activities
|
|
|
21,559
|
|
|
|
38,964
|
|
Effect of exchange rate changes on cash
|
|
|
5
|
|
|
|
8
|
|
|
|
Change in cash
|
|
|
16,286
|
|
|
|
659
|
|
Cash at beginning of period
|
|
|
2,284
|
|
|
|
1,590
|
|
|
|
Cash at end of period
|
|
$
|
18,570
|
|
|
$
|
2,249
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(37,630
|
)
|
|
$
|
11,492
|
|
|
|
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Noncash revenues, expenses, gains and losses included in
income (loss):
|
|
|
|
|
|
|
|
|
Unrealized market valuation losses on AIGFP super senior credit
default swap portfolio
|
|
$
|
21,726
|
|
|
$
|
352
|
|
Net (gains) losses on sales of securities available for sale and
other assets
|
|
|
2
|
|
|
|
(1,110
|
)
|
Foreign exchange transaction (gains) losses
|
|
|
(1,409
|
)
|
|
|
1,214
|
|
Net unrealized (gains) losses on non-AIGFP derivatives and other
assets and liabilities
|
|
|
5,779
|
|
|
|
(103
|
)
|
Equity in (income) loss of partially owned companies and other
invested assets
|
|
|
2,000
|
|
|
|
(3,336
|
)
|
Amortization of deferred policy acquisition costs
|
|
|
10,645
|
|
|
|
9,115
|
|
Depreciation and other amortization
|
|
|
2,727
|
|
|
|
2,984
|
|
Provision for mortgage, other loans and finance receivables
|
|
|
955
|
|
|
|
391
|
|
Other-than-temporary impairments
|
|
|
32,246
|
|
|
|
1,413
|
|
Impairments of goodwill and other assets
|
|
|
632
|
|
|
|
|
|
Amortization of costs related to Federal Reserve Bank of New
York credit facility
|
|
|
802
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
General and life insurance reserves
|
|
|
14,834
|
|
|
|
12,127
|
|
Premiums and insurance balances receivable and
payable net
|
|
|
(396
|
)
|
|
|
515
|
|
Reinsurance assets
|
|
|
(863
|
)
|
|
|
561
|
|
Capitalization of deferred policy acquisition costs
|
|
|
(12,710
|
)
|
|
|
(11,684
|
)
|
Investment income due and accrued
|
|
|
(398
|
)
|
|
|
(538
|
)
|
Funds held under reinsurance treaties
|
|
|
(49
|
)
|
|
|
(166
|
)
|
Other policyholders funds
|
|
|
1,206
|
|
|
|
746
|
|
Income taxes receivable and payable net
|
|
|
(10,935
|
)
|
|
|
707
|
|
Commissions, expenses and taxes payable
|
|
|
155
|
|
|
|
1,110
|
|
Other assets and liabilities net
|
|
|
(1,084
|
)
|
|
|
1,674
|
|
Trade receivables and payables net
|
|
|
(7,297
|
)
|
|
|
(2,546
|
)
|
Trading securities
|
|
|
1,729
|
|
|
|
2,002
|
|
Spot commodities
|
|
|
204
|
|
|
|
105
|
|
Net unrealized (gain) loss on swaps, options and forward
transactions (net of collateral)
|
|
|
(28,191
|
)
|
|
|
1,707
|
|
Securities purchased under agreements to resell
|
|
|
8,831
|
|
|
|
(6,898
|
)
|
Securities sold under agreements to repurchase
|
|
|
41
|
|
|
|
3,686
|
|
Securities and spot commodities sold but not yet purchased
|
|
|
(2,154
|
)
|
|
|
660
|
|
Finance receivables and other loans held for sale
originations and purchases
|
|
|
(346
|
)
|
|
|
(4,735
|
)
|
Sales of finance receivables and other loans held
for sale
|
|
|
545
|
|
|
|
5,119
|
|
Other, net
|
|
|
585
|
|
|
|
985
|
|
|
|
Total adjustments
|
|
|
39,812
|
|
|
|
16,057
|
|
|
|
Net cash provided by operating activities
|
|
$
|
2,182
|
|
|
$
|
27,549
|
|
|
See Accompanying Notes to Consolidated Financial
Statements.
5
American International Group, Inc.
and Subsidiaries
CONSOLIDATED
STATEMENT OF CASH
FLOWS (continued)
(in
millions) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from (payments for)
|
|
|
|
|
|
|
|
|
Sales and maturities of fixed maturity securities available for
sale and hybrid investments
|
|
$
|
65,584
|
|
|
$
|
96,737
|
|
Sales of equity securities available for sale
|
|
|
8,117
|
|
|
|
6,700
|
|
Proceeds from fixed maturity securities held to maturity
|
|
|
126
|
|
|
|
175
|
|
Sales of trading securities
|
|
|
19,348
|
|
|
|
|
|
Sales of flight equipment
|
|
|
430
|
|
|
|
95
|
|
Sales or distributions of other invested assets
|
|
|
11,840
|
|
|
|
9,298
|
|
Payments received on mortgage and other loans receivable
|
|
|
4,809
|
|
|
|
4,170
|
|
Principal payments received on finance receivables held for
investment
|
|
|
9,731
|
|
|
|
9,554
|
|
Purchases of fixed maturity securities available for sale and
hybrid investments
|
|
|
(75,938
|
)
|
|
|
(108,879
|
)
|
Purchases of equity securities available for sale
|
|
|
(7,701
|
)
|
|
|
(8,438
|
)
|
Purchases of fixed maturity securities held to maturity
|
|
|
(88
|
)
|
|
|
(154
|
)
|
Purchases of trading securities
|
|
|
(20,488
|
)
|
|
|
|
|
Purchases of flight equipment (including progress payments)
|
|
|
(3,200
|
)
|
|
|
(3,925
|
)
|
Purchases of other invested assets
|
|
|
(16,030
|
)
|
|
|
(20,677
|
)
|
Mortgage and other loans receivable issued
|
|
|
(4,939
|
)
|
|
|
(7,354
|
)
|
Finance receivables held for investment originations
and purchases
|
|
|
(11,697
|
)
|
|
|
(11,394
|
)
|
Change in securities lending invested collateral
|
|
|
20,245
|
|
|
|
(18,723
|
)
|
Net additions to real estate, fixed assets, and other assets
|
|
|
(1,034
|
)
|
|
|
(1,004
|
)
|
Net change in short-term investments
|
|
|
(6,116
|
)
|
|
|
(11,764
|
)
|
Net change in non-AIGFP derivative assets and liabilities
|
|
|
(459
|
)
|
|
|
(279
|
)
|
|
|
Net cash used in investing activities
|
|
$
|
(7,460
|
)
|
|
$
|
(65,862
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from (payments for)
|
|
|
|
|
|
|
|
|
Policyholders contract deposits
|
|
$
|
46,446
|
|
|
$
|
45,766
|
|
Policyholders contract withdrawals
|
|
|
(42,381
|
)
|
|
|
(43,574
|
)
|
Change in other deposits
|
|
|
747
|
|
|
|
(446
|
)
|
Change in commercial paper and extendible commercial notes
|
|
|
(7,540
|
)
|
|
|
2,526
|
|
Other long-term borrowings issued
|
|
|
111,558
|
|
|
|
72,039
|
|
Federal Reserve Bank of New York credit facility borrowings
|
|
|
61,000
|
|
|
|
|
|
Repayments on other long-term borrowings
|
|
|
(114,051
|
)
|
|
|
(49,643
|
)
|
Change in securities lending payable
|
|
|
(39,127
|
)
|
|
|
18,156
|
|
Proceeds from common stock issued
|
|
|
7,343
|
|
|
|
|
|
Issuance of treasury stock
|
|
|
9
|
|
|
|
204
|
|
Payments advanced to purchase shares
|
|
|
(1,000
|
)
|
|
|
(5,000
|
)
|
Cash dividends paid to shareholders
|
|
|
(1,629
|
)
|
|
|
(1,372
|
)
|
Acquisition of treasury stock
|
|
|
|
|
|
|
(16
|
)
|
Other, net
|
|
|
184
|
|
|
|
324
|
|
|
|
Net cash provided by financing activities
|
|
$
|
21,559
|
|
|
$
|
38,964
|
|
|
Supplementary disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid (received) during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
4,953
|
|
|
$
|
6,190
|
|
Taxes
|
|
$
|
562
|
|
|
$
|
4,044
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Consideration received for preferred stock not yet issued
|
|
$
|
23,000
|
|
|
|
|
|
Interest credited to policyholder accounts included in financing
activities
|
|
$
|
5,737
|
|
|
$
|
7,553
|
|
Treasury stock acquired using payments advanced to purchase
shares
|
|
$
|
1,912
|
|
|
$
|
3,725
|
|
Present value of future contract adjustment payments related to
issuance of equity units
|
|
$
|
431
|
|
|
$
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
Debt assumed on acquisitions and warehoused investments
|
|
$
|
153
|
|
|
$
|
358
|
|
Liability related to purchase of additional interest in 21st
Century
|
|
$
|
|
|
|
$
|
759
|
|
|
See Accompanying Notes to Consolidated Financial
Statements.
6
American International Group, Inc.
and Subsidiaries
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(in
millions) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net income (loss)
|
|
$
|
(24,468
|
)
|
|
$
|
3,085
|
|
|
$
|
(37,630
|
)
|
|
$
|
11,492
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting changes
|
|
|
|
|
|
|
|
|
|
|
(162
|
)
|
|
|
|
|
Deferred income tax benefit on above changes
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
Unrealized (depreciation) appreciation of
investments net of reclassification adjustments
|
|
|
(6,620
|
)
|
|
|
(3,394
|
)
|
|
|
(20,874
|
)
|
|
|
(4,246
|
)
|
Deferred income tax benefit on above changes
|
|
|
2,678
|
|
|
|
941
|
|
|
|
7,491
|
|
|
|
1,081
|
|
Foreign currency translation adjustments
|
|
|
(1,383
|
)
|
|
|
619
|
|
|
|
(275
|
)
|
|
|
290
|
|
Deferred income tax benefit (expense) on above changes
|
|
|
(180
|
)
|
|
|
(109
|
)
|
|
|
(304
|
)
|
|
|
(74
|
)
|
Net derivative gains (losses) arising from cash flow hedging
activities net of reclassification adjustments
|
|
|
(9
|
)
|
|
|
(93
|
)
|
|
|
2
|
|
|
|
(31
|
)
|
Deferred income tax benefit on above changes
|
|
|
4
|
|
|
|
34
|
|
|
|
(1
|
)
|
|
|
39
|
|
Change in pension and postretirement unrecognized periodic
benefit
|
|
|
(69
|
)
|
|
|
17
|
|
|
|
(56
|
)
|
|
|
35
|
|
Deferred income tax benefit (expense) on above changes
|
|
|
2
|
|
|
|
(8
|
)
|
|
|
(1
|
)
|
|
|
(10
|
)
|
|
|
Other comprehensive income (loss)
|
|
|
(5,577
|
)
|
|
|
(1,993
|
)
|
|
|
(14,123
|
)
|
|
|
(2,916
|
)
|
|
|
Comprehensive income (loss)
|
|
$
|
(30,045
|
)
|
|
$
|
1,092
|
|
|
$
|
(51,753
|
)
|
|
$
|
8,576
|
|
|
See Accompanying Notes to Consolidated Financial
Statements.
7
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
|
|
1.
|
Summary
of Significant Accounting Policies
|
Basis of
Presentation
These unaudited condensed consolidated financial statements do
not include all disclosures required by accounting principles
generally accepted in the United States (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
of American International Group, Inc. (AIG) for the year ended
December 31, 2007 (2007 Annual Report on
Form 10-K).
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.
Going
Concern Considerations
During the third quarter of 2008, requirements to post
collateral in connection with AIGFPs credit default swap
(CDS) portfolio and other AIGFP transactions and to fund returns
of securities lending collateral placed stress on AIGs
liquidity. AIGs stock price declined from $22.76 on
September 8, 2008 to $4.76 on September 15, 2008. On
that date, AIGs long-term debt ratings were downgraded by
Standard & Poors, a division of The
McGraw-Hill
Companies, Inc. (S&P), Moodys Investors Service
(Moodys) and Fitch Ratings (Fitch), which triggered
additional requirements for liquidity. These and other events
severely limited AIGs access to debt and equity markets.
On September 22, 2008, AIG entered into an $85 billion
revolving credit agreement (the Fed Credit Agreement) with the
Federal Reserve Bank of New York (the NY Fed) and, pursuant to
the Fed Credit Agreement, AIG agreed to issue
100,000 shares of Series C Perpetual, Convertible,
Participating Preferred Stock (the Series C Preferred
Stock) to a trust for the benefit of the United States Treasury
(the Trust) (see Notes 4 and 5 to the Consolidated
Financial Statements). At September 30, 2008, amounts owed
under the facility created pursuant to the Fed Credit Agreement
(the Fed Facility) totaled $63 billion, including accrued
fees and interest.
Since September 30, 2008, AIG has borrowed additional
amounts under the Fed Facility and has announced plans to sell
assets and businesses to repay amounts owed in connection with
the Fed Credit Agreement. In addition, subsequent to
September 30, 2008, certain of AIGs domestic life
insurance subsidiaries entered into an agreement with the
NY Fed pursuant to which the NY Fed has borrowed, in
return for cash collateral, investment grade fixed maturity
securities from the insurance subsidiaries. As described in
Note 11 to the Consolidated Financial Statements, AIG
announced on November 10, 2008 that it had entered into an
agreement in principle as part of the Troubled Asset Relief
Program (TARP) pursuant to which the United States Treasury will
purchase from AIG $40 billion liquidation preference of
newly issued perpetual preferred stock and a
10-year
warrant exercisable for shares of AIG common stock equal to 2%
of the outstanding shares of common stock, and that the NY Fed
and AIG had agreed to amend the Fed Credit Agreement to reduce
the interest rate on outstanding borrowings and undrawn amounts,
extend the term from two years to five years, reduce the number
of shares of common stock of AIG to be issued upon conversion of
the Series C Preferred Stock held by the Trust so that the
governments overall interest will not exceed
79.9 percent and revise the total amount available under
the Fed Facility. In addition, four AIG affiliates are
participating in the NY Feds Commercial Paper Funding
Facility (CPFF). AIG also has announced its intention to enter
into other agreements with the NY Fed to limit AIGs future
liquidity exposures to the multi-sector credit default swap
portfolio and securities lending programs.
In assessing AIGs current financial position and
developing operating plans for the future, management has made
significant judgments and estimates with respect to the
potential financial and liquidity effects of AIGs risks
and uncertainties, including but not limited to:
the potential adverse effects on AIGs
businesses that could result if there are further downgrades by
rating agencies, including in particular, the uncertainty in
estimating, for the super senior credit default swaps, both the
number of counterparties who may elect to terminate under
contractual termination provisions and the amount that would be
required to be paid in the event of a downgrade;
the potential for continued declines in bond and
equity markets; and
the potential effect on AIG if the capital levels
of its regulated and unregulated subsidiaries prove inadequate
to support current business plans; and
the effect on AIGs businesses of continued
compliance with the covenants of the Fed Credit Agreement.
Based on the agreement in principle, managements plans to
stabilize AIGs businesses and dispose of its non-core
assets, and after consideration of the risks and uncertainties
to such plans, management believes that it will have adequate
liquidity to finance and operate AIGs businesses, execute
its disposition plan and repay its obligations for at least the
next twelve months.
It is possible that the actual outcome of one or more of
managements plans could be materially different, or that
one
8
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
|
|
1.
|
Summary
of Significant Accounting
Policies (continued)
|
or more of managements significant judgments or estimates
about the potential effects of the risks and uncertainties could
prove to be materially incorrect or that the agreements in
principle disclosed in Note 11 to the Consolidated
Financial Statements (and as discussed below) do not result in
completed transactions. If one or more of these possible
outcomes were realized, AIG may not have sufficient cash to meet
its obligations. If AIG needs funds in excess of amounts
available from the sources described below, AIG would need to
find additional financing and, if such additional financing were
to be unavailable, there could exist substantial doubt about
AIGs ability to continue as a going concern.
AIGs consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course
of business. These consolidated financial statements do not
include any adjustments relating to the recoverability and
classification of recorded assets nor relating to the amounts
and classification of liabilities that may be necessary should
we be unable to continue as a going concern.
Investment
Pricing
Certain of AIGs foreign subsidiaries included in the
consolidated financial statements report on a fiscal period
ended August 31. The effect on AIGs consolidated
financial condition and results of operations of all material
events occurring between August 31 and September 30
for all periods presented has been recorded. AIG determined the
significant and rapid world-wide market decline in
September 2008 to be an intervening event that had a
material effect on its consolidated financial position and
results of operations. AIG reflected this recent market decline
throughout its investment portfolio. Accordingly, AIG recorded
$1.3 billion ($845 million after tax) of hedge and
mutual fund investment losses in net investment income,
$1.1 billion ($910 million after tax) of other than
temporary impairment charges, and $5.4 billion
($3.2 billion after tax) of unrealized depreciation on
investments.
Revisions
and Reclassifications
During the third quarter of 2008, AIG began reporting interest
expense and other expenses separately on the consolidated
statement of income (loss). Interest expense represents interest
expense on short-term and long-term borrowings. Other expenses
represent all other expenses not separately disclosed on the
consolidated statement of income (loss). Prior period amounts
were revised to conform to the current period presentation.
In the second quarter of 2008, AIG determined that certain
accident and health contracts in its Foreign General Insurance
reporting unit, which were previously accounted for as short
duration contracts, should be treated as long duration insurance
products. Accordingly, the December 31, 2007 consolidated
balance sheet has been revised to reflect the reclassification
of $763 million of deferred direct response advertising
costs, previously reported in other assets, to deferred policy
acquisition costs (DAC). Additionally, $320 million has
been reclassified in the consolidated balance sheet as of
December 31, 2007 from unearned premiums to future policy
benefits for life and accident and health insurance contracts.
These revisions did not have a material effect on AIGs
consolidated income before income taxes, net income, or
shareholders equity for any period presented.
See Recent Accounting Standards Accounting Changes
below for a discussion of AIGs adoption of the Financial
Accounting Standards Board (FASB) Staff Position (FSP) FASB
Interpretation No. (FIN)
39-1,
Amendment of FASB Interpretation No. 39 (FSP
FIN 39-1).
Certain other reclassifications and format changes have been
made to prior period amounts to conform to the current period
presentation.
Fixed
Maturity Securities, Held to Maturity Change in
Intent
During the third quarter of 2008, AIG transferred all securities
previously classified as held to maturity to available for sale.
As a result of the continuing disruption in the credit markets
during the third quarter of 2008, AIG changed its intent to hold
to maturity certain tax-exempt municipal securities held by its
insurance subsidiaries, which comprised substantially all of
AIGs held to maturity securities. This change in intent
resulted from a change in certain subsidiaries investment
strategies to increase their allocations to taxable securities,
reflecting AIGs net operating loss position. As of
September 30, 2008, the securities had a carrying value of
$20.8 billion and a net unrealized loss of
$752 million. No securities previously classified as held
to maturity were sold during the third quarter.
Recent
Accounting Standards
Accounting
Changes
FAS 157
In September 2006, the FASB issued Statement of Financial
Accounting Standards (FAS) No. 157, Fair Value
Measurements (FAS 157). FAS 157 defines fair
value, establishes a framework for measuring fair value and
expands disclosure requirements regarding fair value
measurements but does not change existing guidance about whether
an asset or liability is
9
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
|
|
1.
|
Summary
of Significant Accounting
Policies (continued)
|
carried at fair value. FAS 157 nullifies the guidance in
Emerging Issues Task Force (EITF) Issue
No. 02-3,
Issues Involved in Accounting for Derivative Contracts
Held for Trading Purposes and Contracts Involved in Energy
Trading and Risk Management Activities,
(EITF 02-3)
that precluded the recognition of a trading profit at the
inception of a derivative contract unless the fair value of such
contract was obtained from a quoted market price or other
valuation technique incorporating observable market data.
FAS 157 also clarifies that an issuers credit
standing should be considered when measuring liabilities at fair
value. The fair value measurement and related disclosure
guidance in FAS 157 do not apply to fair value measurements
associated with AIGs share-based employee compensation
awards accounted for in accordance with FAS 123(R),
Share-Based Payment.
AIG adopted FAS 157 on January 1, 2008, its required
effective date. FAS 157 must be applied prospectively,
except for certain stand-alone derivatives and hybrid
instruments initially measured using the guidance in
EITF 02-3,
which must be applied as a cumulative effect accounting change
to retained earnings at January 1, 2008. The cumulative
effect, net of taxes, of adopting FAS 157 on AIGs
consolidated balance sheet was an increase in retained earnings
of $4 million.
The most significant effect of adopting FAS 157 on
AIGs consolidated results of operations for the three- and
nine-month periods ended September 30, 2008 related to
changes in fair value methodologies with respect to both
liabilities already carried at fair value, primarily hybrid
notes and derivatives, and newly elected liabilities measured at
fair value (see FAS 159 discussion below). Specifically,
the incorporation of AIGs own credit spreads and the
incorporation of explicit risk margins (embedded policy
derivatives at transition only) resulted in a increase in
pre-tax income of $2.4 billion ($1.5 billion after
tax) and an increase in pre-tax income of $5.0 billion
($3.2 billion after tax) for the three- and nine-month
periods ended September 30, 2008, respectively. The effects
of the changes in AIGs own credit spreads on pre-tax
income for AIG Financial Products Corp. and AIG Trading Group
Inc. and their respective subsidiaries (AIGFP) were increases of
$1.3 billion and $3.8 billion for the three- and
nine-month periods ended September 30, 2008, respectively.
The effect of the changes in counterparty credit spreads for
assets measured at fair value at AIGFP were decreases in pre-tax
income of $2.3 billion and $5.3 billion for the three-
and nine-month periods ended September 30, 2008,
respectively.
See Note 3 to the Consolidated Financial Statements for
additional FAS 157 disclosures.
FAS 159
In February 2007, the FASB issued FAS 159, The Fair
Value Option for Financial Assets and Financial
Liabilities (FAS 159). FAS 159 permits entities
to choose to measure at fair value many financial instruments
and certain other items that are not required to be measured at
fair value. Subsequent changes in fair value for designated
items are required to be reported in income. FAS 159 also
establishes presentation and disclosure requirements for similar
types of assets and liabilities measured at fair value.
FAS 159 permits the fair value option election on an
instrument-by-instrument
basis for eligible items existing at the adoption date and at
initial recognition of an asset or liability, or upon most
events that give rise to a new basis of accounting for that
instrument.
AIG adopted FAS 159 on January 1, 2008, its required
effective date. The adoption of FAS 159 with respect to
elections made in the Life Insurance & Retirement
Services segment resulted in an after-tax decrease to 2008
opening retained earnings of $559 million. The adoption of
FAS 159 with respect to elections made by AIGFP resulted in
an after-tax decrease to 2008 opening retained earnings of
$448 million. Included in this amount are net unrealized
gains of $105 million that were reclassified to retained
earnings from accumulated other comprehensive income (loss)
related to available for sale securities recorded in the
consolidated balance sheet at January 1, 2008 for which the
fair value option was elected.
See Note 3 to the Consolidated Financial Statements for
additional FAS 159 disclosures.
FAS 157
and FAS 159
The following
table summarizes the after-tax increase (decrease) from adopting
FAS 157 and FAS 159 on the opening shareholders
equity accounts at January 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1,
2008
|
|
|
|
Accumulated
|
|
|
|
|
|
Cumulative
|
|
|
|
Other
|
|
|
|
|
|
Effect of
|
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Accounting
|
|
(in
millions)
|
|
Income/(Loss)
|
|
|
Earnings
|
|
|
Changes
|
|
|
FAS 157
|
|
$
|
|
|
|
$
|
4
|
|
|
$
|
4
|
|
FAS 159
|
|
|
(105
|
)
|
|
|
(1,007
|
)
|
|
|
(1,112
|
)
|
|
|
Cumulative effect of accounting changes
|
|
$
|
(105
|
)
|
|
$
|
(1,003
|
)
|
|
$
|
(1,108
|
)
|
|
FSP
FIN 39-1
In April 2007, the FASB issued FSP
FIN 39-1,
which modifies FASB Interpretation (FIN) No. 39,
Offsetting of Amounts Related to Certain Contracts,
and permits companies to offset cash collateral receivables or
payables against derivative instruments under certain
circumstances. AIG adopted the provisions of FSP
FIN 39-1
effective January 1, 2008, which
10
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
|
|
1.
|
Summary
of Significant Accounting
Policies (continued)
|
requires retrospective application to all prior periods
presented. At September 30, 2008, the amounts of cash
collateral received and posted that were offset against net
derivative positions totaled $6.5 billion and
$33.1 billion, respectively. The cash collateral received
and paid related to AIGFP derivative instruments was previously
recorded in both trade payables and trade receivables. Cash
collateral received related to non-AIGFP derivative instruments
was previously recorded in other liabilities. Accordingly, the
derivative assets and liabilities at December 31, 2007 have
been reduced by $6.3 billion and $5.8 billion,
respectively, related to the netting of cash collateral.
FSP
FAS 157-3
In October 2008, the FASB issued FSP
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active (FSP
FAS 157-3).
FSP
FAS 157-3
provides guidance clarifying certain aspects of FAS 157
with respect to the fair value measurements of a security when
the market for that security is inactive. AIG adopted this
guidance in the third quarter of 2008. The effects of adopting
FSP
FAS 157-3
on AIGs consolidated financial condition and results of
operations were not material.
Future
Application of Accounting Standards
FAS 141(R)
In December 2007, the FASB issued FAS 141 (revised 2007),
Business Combinations (FAS 141(R)).
FAS 141(R) changes the accounting for business combinations
in a number of ways, including broadening the transactions or
events that are considered business combinations; requiring an
acquirer to recognize 100 percent of the fair value of
assets acquired, liabilities assumed, and noncontrolling (i.e.,
minority) interests; recognizing contingent consideration
arrangements at their acquisition-date fair values with
subsequent changes in fair value generally reflected in income;
and recognizing preacquisition loss and gain contingencies at
their acquisition-date fair values, among other changes.
AIG is required to adopt FAS 141(R) for business
combinations for which the acquisition date is on or after
January 1, 2009. Early adoption is prohibited.
FAS 160
In December 2007, the FASB issued FAS 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(FAS 160). FAS 160 requires noncontrolling (i.e.,
minority) interests in partially owned consolidated subsidiaries
to be classified in the consolidated balance sheet as a separate
component of consolidated shareholders equity.
FAS 160 also establishes accounting rules for subsequent
acquisitions and sales of noncontrolling interests and provides
for how noncontrolling interests should be presented in the
consolidated statement of income. The noncontrolling
interests share of subsidiary income should be reported as
a part of consolidated net income with disclosure of the
attribution of consolidated net income to the controlling and
noncontrolling interests on the face of the consolidated
statement of income.
AIG is required to adopt FAS 160 on January 1, 2009
and early application is prohibited. FAS 160 must be
adopted prospectively, except that noncontrolling interests
should be reclassified from liabilities to a separate component
of shareholders equity and consolidated net income should
be recast to include net income attributable to both the
controlling and noncontrolling interests retrospectively. AIG is
currently assessing the effect that adopting FAS 160 will
have on its consolidated financial statements.
FAS 161
In March 2008, the FASB issued FAS 161, Disclosures
about Derivative Instruments and Hedging Activities
an amendment of FASB Statement No. 133
(FAS 161). FAS 161 requires enhanced disclosures about
(a) how and why AIG uses derivative instruments,
(b) how derivative instruments and related hedged items are
accounted for under FAS No. 133, Accounting for
Derivative Instruments and Hedging Activities
(FAS 133), and its related interpretations, and
(c) how derivative instruments and related hedged items
affect AIGs consolidated financial condition, results of
operations, and cash flows. FAS 161 is effective for AIG
beginning with financial statements issued in the first quarter
of 2009. Because FAS 161 only requires additional
disclosures about derivatives, it will have no effect on
AIGs consolidated financial condition, results of
operations or cash flows.
FAS 162
In May 2008, the FASB issued FAS 162, The Hierarchy
of Generally Accepted Accounting Principles
(FAS 162). FAS 162 identifies the sources of
accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements
presented in conformity with GAAP but does not change current
practices. FAS 162 will become effective on the
60th day following Securities and Exchange Commission (SEC)
approval of the Public Company Accounting Oversight Board
amendments to remove GAAP hierarchy from the auditing standards.
FAS 162 will have no effect on AIGs consolidated
financial condition, results of operations or cash flows.
FSP
FAS 140-3
In February 2008, the FASB issued FSP
No. FAS 140-3,
Accounting for Transfers of Financial Assets and
Repurchase
11
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
|
|
1.
|
Summary
of Significant Accounting
Policies (continued)
|
Financing Transactions (FSP
FAS 140-3).
FSP
FAS 140-3
requires an initial transfer of a financial asset and a
repurchase financing that was entered into contemporaneously
with or in contemplation of the initial transfer to be evaluated
as a linked transaction unless certain criteria are met. FSP
FAS 140-3
is effective for AIG beginning January 1, 2009 and will be
applied to new transactions entered into from that date forward.
Early adoption is prohibited. AIG is currently assessing the
effect that adopting FSP
FAS 140-3
will have on its consolidated financial statements but does not
believe the effect will be material.
FSP
FAS 133-1
and
FIN 45-4
In September 2008, the FASB issued FASB Staff Position
No. FAS 133-1
and
FIN 45-4,
Disclosures about Credit Derivatives and Certain
Guarantees: An amendment of FASB Statement No. 133 and FASB
Interpretation No. 45 (FSP). The FSP amends
FAS 133 to require additional disclosures by sellers of
credit derivatives, including derivatives embedded in a hybrid
instrument. The FSP also amends FIN No. 45,
Guarantors Accounting and Disclosure Requirement for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others, to require an additional disclosure about
the current status of the payment/performance risk of a
guarantee. The FSP is effective for AIG beginning with the
year-end 2008 financial statements. Because the FSP only
requires additional disclosures about credit derivatives and
guarantees, it will have no effect on AIGs consolidated
financial condition, results of operations or cash flows.
AIG identifies its operating segments by product line consistent
with its management structure. These segments are General
Insurance, Life Insurance & Retirement Services,
Financial Services, and Asset Management.
AIGs
operations by operating segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
Operating
Segments
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Total
revenues(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
$
|
10,808
|
|
|
$
|
12,758
|
|
|
$
|
35,854
|
|
|
$
|
38,589
|
|
Life Insurance & Retirement Services
|
|
|
(4,642
|
)
|
|
|
12,632
|
|
|
|
14,271
|
|
|
|
40,337
|
|
Financial Services
|
|
|
(5,851
|
)
|
|
|
2,785
|
|
|
|
(16,016
|
)
|
|
|
7,109
|
|
Asset Management
|
|
|
10
|
|
|
|
1,519
|
|
|
|
658
|
|
|
|
4,969
|
|
Other
|
|
|
451
|
|
|
|
13
|
|
|
|
531
|
|
|
|
407
|
|
Consolidation and eliminations
|
|
|
122
|
|
|
|
129
|
|
|
|
(436
|
)
|
|
|
220
|
|
|
|
Total
|
|
$
|
898
|
|
|
$
|
29,836
|
|
|
$
|
34,862
|
|
|
$
|
91,631
|
|
|
|
Operating
income
(loss)(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
$
|
(2,557
|
)
|
|
$
|
2,439
|
|
|
$
|
(393
|
)
|
|
$
|
8,511
|
|
Life Insurance & Retirement Services
|
|
|
(15,329
|
)
|
|
|
1,999
|
|
|
|
(19,561
|
)
|
|
|
6,900
|
|
Financial Services
|
|
|
(8,203
|
)
|
|
|
669
|
|
|
|
(22,880
|
)
|
|
|
1,008
|
|
Asset Management
|
|
|
(1,144
|
)
|
|
|
121
|
|
|
|
(2,709
|
)
|
|
|
1,806
|
|
Other(b)
|
|
|
(1,416
|
)
|
|
|
(627
|
)
|
|
|
(2,899
|
)
|
|
|
(1,557
|
)
|
Consolidation and eliminations
|
|
|
464
|
|
|
|
278
|
|
|
|
237
|
|
|
|
711
|
|
|
|
Total
|
|
$
|
(28,185
|
)
|
|
$
|
4,879
|
|
|
$
|
(48,205
|
)
|
|
$
|
17,379
|
|
|
|
|
|
(a) |
|
To better align financial
reporting with the manner in which AIGs chief operating
decision maker manages the business, beginning in the third
quarter of 2008, AIGs own credit risk valuation
adjustments on intercompany transactions are excluded from
segment revenues and operating income. |
(b) |
|
Includes AIG parent and other
operations that are not required to be reported separately. The
following table presents the operating loss for AIGs Other
category: |
12
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
|
|
2.
|
Segment
Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
Other
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity earnings in partially owned companies
|
|
$
|
(13
|
)
|
|
$
|
37
|
|
|
$
|
3
|
|
|
$
|
128
|
|
Interest expense on Fed Facility
|
|
|
(802
|
)
|
|
|
|
|
|
|
(802
|
)
|
|
|
|
|
Other interest expense
|
|
|
(571
|
)
|
|
|
(315
|
)
|
|
|
(1,391
|
)
|
|
|
(869
|
)
|
Unallocated corporate expenses
|
|
|
(154
|
)
|
|
|
(166
|
)
|
|
|
(529
|
)
|
|
|
(548
|
)
|
Net realized capital gains (losses)
|
|
|
139
|
|
|
|
(199
|
)
|
|
|
(96
|
)
|
|
|
(226
|
)
|
Other miscellaneous, net
|
|
|
(15
|
)
|
|
|
16
|
|
|
|
(84
|
)
|
|
|
(42
|
)
|
|
|
Total Other
|
|
$
|
(1,416
|
)
|
|
$
|
(627
|
)
|
|
$
|
(2,899
|
)
|
|
$
|
(1,557
|
)
|
|
AIGs
General Insurance operations by major internal reporting unit
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
General
Insurance
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Insurance
|
|
$
|
5,105
|
|
|
$
|
6,736
|
|
|
$
|
17,029
|
|
|
$
|
20,731
|
|
Transatlantic
|
|
|
961
|
|
|
|
1,088
|
|
|
|
3,183
|
|
|
|
3,253
|
|
Personal Lines
|
|
|
1,207
|
|
|
|
1,252
|
|
|
|
3,718
|
|
|
|
3,688
|
|
Mortgage Guaranty
|
|
|
300
|
|
|
|
267
|
|
|
|
911
|
|
|
|
772
|
|
Foreign General Insurance
|
|
|
3,224
|
|
|
|
3,413
|
|
|
|
10,991
|
|
|
|
10,150
|
|
Reclassifications and eliminations
|
|
|
11
|
|
|
|
2
|
|
|
|
22
|
|
|
|
(5
|
)
|
|
|
Total
|
|
$
|
10,808
|
|
|
$
|
12,758
|
|
|
$
|
35,854
|
|
|
$
|
38,589
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Insurance
|
|
$
|
(1,109
|
)
|
|
$
|
1,829
|
|
|
$
|
57
|
|
|
$
|
5,662
|
|
Transatlantic
|
|
|
(155
|
)
|
|
|
189
|
|
|
|
148
|
|
|
|
508
|
|
Personal Lines
|
|
|
23
|
|
|
|
28
|
|
|
|
47
|
|
|
|
252
|
|
Mortgage Guaranty
|
|
|
(1,118
|
)
|
|
|
(216
|
)
|
|
|
(1,990
|
)
|
|
|
(289
|
)
|
Foreign General Insurance
|
|
|
(209
|
)
|
|
|
607
|
|
|
|
1,323
|
|
|
|
2,383
|
|
Reclassifications and eliminations
|
|
|
11
|
|
|
|
2
|
|
|
|
22
|
|
|
|
(5
|
)
|
|
|
Total
|
|
$
|
(2,557
|
)
|
|
$
|
2,439
|
|
|
$
|
(393
|
)
|
|
$
|
8,511
|
|
|
AIGs Life
Insurance & Retirement Services operations by major
internal reporting unit were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
Life Insurance
& Retirement Services
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan and Other
|
|
$
|
2,566
|
|
|
$
|
4,315
|
|
|
$
|
11,831
|
|
|
$
|
13,948
|
|
Asia
|
|
|
1,812
|
|
|
|
4,695
|
|
|
|
10,664
|
|
|
|
14,205
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Life Insurance
|
|
|
(1,704
|
)
|
|
|
2,185
|
|
|
|
813
|
|
|
|
7,065
|
|
Domestic Retirement Services
|
|
|
(7,316
|
)
|
|
|
1,437
|
|
|
|
(9,037
|
)
|
|
|
5,119
|
|
|
|
Total
|
|
$
|
(4,642
|
)
|
|
$
|
12,632
|
|
|
$
|
14,271
|
|
|
$
|
40,337
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan and Other
|
|
$
|
(1,074
|
)
|
|
$
|
1,030
|
|
|
$
|
(14
|
)
|
|
$
|
2,753
|
|
Asia
|
|
|
(1,419
|
)
|
|
|
706
|
|
|
|
(971
|
)
|
|
|
1,921
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Life Insurance
|
|
|
(3,911
|
)
|
|
|
61
|
|
|
|
(5,786
|
)
|
|
|
774
|
|
Domestic Retirement Services
|
|
|
(8,925
|
)
|
|
|
202
|
|
|
|
(12,790
|
)
|
|
|
1,452
|
|
|
|
Total
|
|
$
|
(15,329
|
)
|
|
$
|
1,999
|
|
|
$
|
(19,561
|
)
|
|
$
|
6,900
|
|
|
13
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
|
|
2.
|
Segment
Information (continued)
|
AIGs
Financial Services operations by major internal reporting unit
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
Financial
Services
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Leasing
|
|
$
|
1,367
|
|
|
$
|
1,237
|
|
|
$
|
3,830
|
|
|
$
|
3,468
|
|
Capital Markets
|
|
|
(8,337
|
)
|
|
|
540
|
|
|
|
(23,168
|
)
|
|
|
701
|
|
Consumer Finance
|
|
|
1,029
|
|
|
|
940
|
|
|
|
2,988
|
|
|
|
2,696
|
|
Other, including intercompany adjustments
|
|
|
90
|
|
|
|
68
|
|
|
|
334
|
|
|
|
244
|
|
|
|
Total
|
|
$
|
(5,851
|
)
|
|
$
|
2,785
|
|
|
$
|
(16,016
|
)
|
|
$
|
7,109
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Leasing
|
|
$
|
366
|
|
|
$
|
254
|
|
|
$
|
921
|
|
|
$
|
625
|
|
Capital Markets
|
|
|
(8,073
|
)
|
|
|
370
|
|
|
|
(23,284
|
)
|
|
|
183
|
|
Consumer Finance
|
|
|
(474
|
)
|
|
|
69
|
|
|
|
(559
|
)
|
|
|
180
|
|
Other, including intercompany adjustments
|
|
|
(22
|
)
|
|
|
(24
|
)
|
|
|
42
|
|
|
|
20
|
|
|
|
Total
|
|
$
|
(8,203
|
)
|
|
$
|
669
|
|
|
$
|
(22,880
|
)
|
|
$
|
1,008
|
|
|
AIGs Asset
Management operations consist of a single internal reporting
unit.
|
|
3.
|
Fair
Value Measurements
|
Effective January 1, 2008 AIG adopted FAS 157 and
FAS 159, which specify measurement and disclosure standards
related to assets and liabilities measured at fair value. See
Note 1 to the Consolidated Financial Statements for
additional information.
The most significant effect of adopting FAS 157 on
AIGs results of operations for the three- and nine-month
periods ended September 30, 2008 related to changes in fair
value methodologies with respect to both liabilities already
carried at fair value, primarily hybrid notes and derivatives,
and newly elected liabilities measured at fair value (see
FAS 159 discussion below). Specifically, the incorporation
of AIGs own credit spreads and the incorporation of
explicit risk margins (embedded policy derivatives at transition
only) resulted in a increase of $2.4 billion to pre-tax
income ($1.5 billion after tax) and an increase of
$5.0 billion to pre-tax income ($3.2 billion after
tax) for the three- and nine-month periods ended
September 30, 2008, respectively, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Pre-Tax Increase
(Decrease)
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
Ended
September 30,
|
|
|
|
Ended
September 30,
|
|
|
|
Liabilities
Carried
|
|
Business Segment
|
(in
millions)
|
|
2008
|
|
|
|
2008
|
|
|
|
at Fair Value
|
|
Affected
|
|
|
Income statement caption:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital losses
|
|
$
|
1,074
|
|
|
|
$
|
1,325
|
|
|
|
Freestanding derivatives
|
|
All segments - excluding AIGFP
|
|
|
|
|
|
|
|
|
(155
|
)
|
|
|
Embedded policy derivatives
|
|
Life Insurance &
Retirement Services
|
Unrealized market valuation
losses on AIGFP
|
|
|
|
|
|
|
|
|
|
|
|
Super senior credit default
|
|
AIGFP
|
super senior credit default swap portfolio
|
|
|
98
|
|
|
|
|
207
|
|
|
|
swap portfolio
|
|
|
Other income
|
|
$
|
1,194
|
*
|
|
|
$
|
3,621
|
*
|
|
|
Notes, GIAs, derivatives,
|
|
AIGFP
|
|
|
|
|
|
|
|
|
|
|
|
|
other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pre-tax increase
|
|
$
|
2,366
|
|
|
|
$
|
4,998
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities already carried at fair value
|
|
$
|
2,550
|
|
|
|
$
|
3,904
|
|
|
|
|
|
|
Newly elected liabilities measured at fair value (FAS 159
elected)
|
|
|
(184
|
)
|
|
|
|
1,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pre-tax increase
|
|
$
|
2,366
|
|
|
|
$
|
4,998
|
|
|
|
|
|
|
|
|
|
* |
The effect of changes in AIGs own credit spreads on
pre-tax income for AIGFP was an increase of $1.3 billion
and $3.8 billion for the three- and nine-month periods
ended September 30, 2008, respectively. The effect of the
changes in counterparty credit spreads for assets measured at
fair value at AIGFP was a decrease in pre-tax income of
$2.3 billion and $5.3 billion for the three- and
nine-month periods ended September 30, 2008,
respectively.
|
Fair Value
Measurements on a Recurring Basis
AIG measures at fair value on a recurring basis financial
instruments in its trading and available for sale securities
portfolios, certain mortgage and other loans receivable, certain
spot commodities, derivative assets and liabilities, securities
purchased (sold) under agreements to resell (repurchase),
securities lending invested collateral, non-traded equity
investments and certain private limited partnerships and certain
hedge funds included in other invested assets, certain
short-term investments, separate and variable account assets,
certain policyholders contract deposits, securities and
spot commodities sold but not yet purchased, certain trust
deposits and deposits due to banks and other depositors, certain
long-term borrowings, and certain hybrid financial instruments
included in other liabilities. The fair value of a financial
instrument is the amount that would be received on sale of an
asset or paid to transfer a liability in an orderly
14
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
3. Fair
Value
Measurements (continued)
transaction between market participants at the measurement date.
The degree of judgment used in measuring the fair value of
financial instruments generally correlates with the level of
pricing observability. Financial instruments with quoted prices
in active markets generally have more pricing observability and
less judgment is used in measuring fair value. Conversely,
financial instruments traded in other-than-active markets or
that do not have quoted prices have less observability and are
measured at fair value using valuation models or other pricing
techniques that require more judgment. An active market is one
in which transactions for the asset or liability being valued
occur with sufficient frequency and volume to provide pricing
information on an ongoing basis. An other-than-active market is
one in which there are few transactions, the prices are not
current, price quotations vary substantially either over time or
among market makers, or in which little information is released
publicly for the asset or liability being valued. Pricing
observability is affected by a number of factors, including the
type of financial instrument, whether the financial instrument
is new to the market and not yet established, the
characteristics specific to the transaction and general market
conditions.
Incorporation
of Credit Risk in Fair Value Measurements
|
|
|
AIGs Own Credit Risk. Fair value
measurements for AIGFPs debt, guaranteed investment
agreements (GIAs), and structured note liabilities incorporate
AIGs own credit risk by discounting cash flows at rates
that incorporate AIGs currently observable credit default
swap spreads and take into consideration collateral posted by
AIG with counterparties at the balance sheet date.
|
Fair value measurements for freestanding derivatives incorporate
AIGs own credit risk by determining the explicit cost for
each counterparty to protect against its net credit exposure to
AIG at the balance sheet date by reference to observable AIG
credit default swap spreads. A counterpartys net credit
exposure to AIG is determined based on master netting
agreements, which take into consideration all derivative
positions with AIG, as well as collateral posted by AIG with the
counterparty at the balance sheet date.
Fair value measurements for embedded policy derivatives and
policyholders contract deposits take into consideration
that policyholder liabilities are senior in priority to general
creditors of AIG and therefore are much less sensitive to
changes in AIG credit default swap or cash issuance spreads.
|
|
|
Counterparty Credit Risk. Fair value
measurements for freestanding derivatives incorporate
counterparty credit by determining the explicit cost for AIG to
protect against its net credit exposure to each counterparty at
the balance sheet date by reference to observable counterparty
credit default swap spreads. AIGs net credit exposure to a
counterparty is determined based on master netting agreements,
which take into consideration all derivative positions with the
counterparty, as well as collateral posted by the counterparty
at the balance sheet date.
|
Fair values for fixed maturity securities based on observable
market prices for identical or similar instruments implicitly
include the incorporation of counterparty credit risk. Fair
values for fixed maturity securities based on internal models
incorporate counterparty credit risk by using discount rates
that take into consideration cash issuance spreads for similar
instruments or other observable information.
Fixed
Maturity Securities Trading and Available for
Sale
AIG maximizes the use of observable inputs and minimizes the use
of unobservable inputs when measuring fair value. Whenever
available, AIG obtains quoted prices in active markets for
identical assets at the balance sheet date to measure at fair
value fixed maturity securities in its trading and available for
sale portfolios. Market price data generally is obtained from
exchange or dealer markets.
AIG estimates the fair value of fixed maturity securities not
traded in active markets, including securities purchased (sold)
under agreements to resell (repurchase), and mortgage and other
loans receivable for which AIG elected the fair value option, by
referring to traded securities with similar attributes, using
dealer quotations, a matrix pricing methodology, discounted cash
flow analyses or internal valuation models. This methodology
considers such factors as the issuers industry, the
securitys rating and tenor, its coupon rate, its position
in the capital structure of the issuer, yield curves, credit
curves, prepayment rates and other relevant factors. For fixed
maturity instruments that are not traded in active markets or
that are subject to transfer restrictions, valuations are
adjusted to reflect illiquidity
and/or
non-transferability, and such adjustments generally are based on
available market evidence. In the absence of such evidence,
managements best estimate is used.
Equity
Securities Traded in Active Markets Trading and
Available for Sale
AIG maximizes the use of observable inputs and minimizes the use
of unobservable inputs when measuring fair value. Whenever
available, AIG obtains quoted prices in active markets for
identical assets at the balance sheet date to measure at fair
value marketable equity securities in its trading and available
for sale portfolios. Market price data generally is obtained
from exchange or dealer markets.
15
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
3. Fair
Value
Measurements (continued)
Non-Traded
Equity Investments Other Invested Assets
AIG initially estimates the fair value of equity instruments not
traded in active markets by reference to the transaction price.
This valuation is adjusted only when changes to inputs and
assumptions are corroborated by evidence such as transactions in
similar instruments, completed or pending third-party
transactions in the underlying investment or comparable
entities, subsequent rounds of financing, recapitalizations and
other transactions across the capital structure, offerings in
the equity capital markets, and changes in financial ratios or
cash flows. For equity securities that are not traded in active
markets or that are subject to transfer restrictions, valuations
are adjusted to reflect illiquidity
and/or
non-transferability and such adjustments generally are based on
available market evidence. In the absence of such evidence,
managements best estimate is used.
Private
Limited Partnership and Hedge Fund Investments
Other Invested Assets
AIG initially estimates the fair value of investments in certain
private limited partnerships and certain hedge funds by
reference to the transaction price. Subsequently, AIG obtains
the fair value of these investments generally from net asset
value information provided by the general partner or manager of
the investments, the financial statements of which generally are
audited annually.
Separate
and Variable Account Assets
Separate and variable account assets are composed primarily of
registered and unregistered open-end mutual funds that generally
trade daily and are measured at fair value in the manner
discussed above for equity securities traded in active markets.
Freestanding
Derivatives
Derivative assets and liabilities can be exchange-traded or
traded over the counter (OTC). AIG generally values
exchange-traded derivatives using quoted prices in active
markets for identical derivatives at the balance sheet date.
OTC derivatives are valued using market transactions and other
market evidence whenever possible, including market-based inputs
to models, model calibration to market clearing transactions,
broker or dealer quotations or alternative pricing sources with
reasonable levels of price transparency. When models are used,
the selection of a particular model to value an OTC derivative
depends on the contractual terms of, and specific risks inherent
in, the instrument as well as the availability of pricing
information in the market. AIG generally uses similar models to
value similar instruments. Valuation models require a variety of
inputs, including contractual terms, market prices and rates,
yield curves, credit curves, measures of volatility, prepayment
rates and correlations of such inputs. For OTC derivatives that
trade in liquid markets, such as generic forwards, swaps and
options, model inputs can generally be corroborated by
observable market data by correlation or other means, and model
selection does not involve significant management judgment.
Certain OTC derivatives trade in less liquid markets with
limited pricing information, and the determination of fair value
for these derivatives is inherently more difficult. When AIG
does not have corroborating market evidence to support
significant model inputs and cannot verify the model to market
transactions, the transaction price is initially used as the
best estimate of fair value. Accordingly, when a pricing model
is used to value such an instrument, the model is adjusted so
the model value at inception equals the transaction price.
Subsequent to initial recognition, AIG updates valuation inputs
when corroborated by evidence such as similar market
transactions, third-party pricing services
and/or
broker or dealer quotations, or other empirical market data.
When appropriate, valuations are adjusted for various factors
such as liquidity, bid/offer spreads and credit considerations.
Such adjustments are generally based on available market
evidence. In the absence of such evidence, managements
best estimate is used.
With the adoption of FAS 157 on January 1, 2008,
AIGs own credit risk has been considered and is
incorporated into the fair value measurement of its freestanding
derivative liabilities.
Embedded
Policy Derivatives
The fair value of embedded policy derivatives contained in
certain variable annuity and equity-indexed annuity and life
contracts is measured based on actuarial and capital market
assumptions related to projected cash flows over the expected
lives of the contracts. These cash flow estimates primarily
include benefits and related fees assessed, when applicable, and
incorporate expectations about policyholder behavior. Estimates
of future policyholder behavior are subjective and based
primarily on AIGs historical experience. With respect to
embedded policy derivatives in AIGs variable annuity
contracts, because of the dynamic and complex nature of the
expected cash flows, risk neutral valuations are used.
Estimating the underlying cash flows for these products involves
many estimates and judgments, including those regarding expected
market rates of return, market volatility, correlations of
market index returns to funds, fund performance, discount rates
and policyholder behavior. With respect to embedded policy
derivatives in AIGs equity-indexed annuity and life
contracts, option pricing models are used to estimate fair
value, taking into account assumptions for future
16
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
3. Fair
Value
Measurements (continued)
equity index growth rates, volatility of the equity index,
future interest rates, and determinations on adjusting the
participation rate and the cap on equity indexed credited rates
in light of market conditions and policyholder behavior
assumptions. With the adoption of FAS 157, these
methodologies were not changed, with the exception of
incorporating an explicit risk margin to take into consideration
market participant estimates of projected cash flows and
policyholder behavior.
AIGFPs
Super Senior Credit Default Swap Portfolio
AIGFP values its credit default swaps written on the most senior
(super senior) risk layers of designated pools of debt
securities or loans using internal valuation models, third-party
prices and market indices. The principal market was determined
to be the market in which super senior credit default swaps of
this type and size would be transacted, or have been transacted,
with the greatest volume or level of activity. AIG has
determined that the principal market participants, therefore,
would consist of other large financial institutions who
participate in sophisticated over-the-counter derivatives
markets. The specific valuation methodologies vary based on the
nature of the referenced obligations and availability of market
prices.
The valuation of the super senior credit derivatives continues
to be challenging given the limitation on the availability of
market observable information due to the limited trading and
lack of price transparency in the structured finance market,
particularly during and since the fourth quarter of 2007. These
market conditions have increased the reliance on management
estimates and judgments in arriving at an estimate of fair value
for financial reporting purposes. Further, disparities in the
valuation methodologies employed by market participants when
assessing illiquid markets have increased the likelihood that
the various parties to these instruments may arrive at
significantly different estimates as to their fair values.
AIGFPs valuation methodologies for the super senior credit
default swap portfolio have evolved in response to the
deteriorating market conditions and the lack of sufficient
market observable information. AIG has sought to calibrate the
model to available market information and to review the
assumptions of the model on a regular basis.
In the case of credit default swaps written to facilitate
regulatory capital relief, AIGFP estimates the fair value of
these derivatives by considering observable market transactions.
The transactions with the most observability are the early
terminations of these transactions by counterparties. AIG
expects that the majority of these transactions will be
terminated within the next 6 to 18 months by AIGFPs
counterparties. AIGFP also considers other market data, to the
extent available.
AIGFP uses a modified version of the Binomial Expansion
Technique (BET) model to value its credit default swap portfolio
written on super senior tranches of multi-sector collateralized
debt obligations (CDOs) of asset-backed securities (ABS),
including maturity-shortening puts that allow the holders of the
securities issued by certain CDOs to treat the securities as
short-term eligible
2a-7
investments under the Investment Company Act of 1940
(2a-7 Puts).
The BET model uses the prices for the securities comprising the
portfolio of a CDO as an input and converts those prices to
credit spreads over current LIBOR-based interest rates. These
credit spreads are used to determine implied probabilities of
default and expected losses on the underlying securities. This
data is then aggregated and used to estimate the expected cash
flows of the super senior tranche of the CDO. The most
significant assumption used in the BET model is the pricing of
the individual securities within the CDO collateral pools. The
BET model also uses diversity scores, weighted average lives,
recovery rates and discount rates.
Prices for the individual securities held by a CDO are obtained
in most cases from the CDO collateral managers, to the extent
available. For the quarter ended September 30, 2008, CDO
collateral managers provided market prices for approximately
70 percent of the underlying securities. When a price for
an individual security is not provided by a CDO collateral
manager, AIGFP derives the price through a pricing matrix using
prices from CDO collateral managers for similar securities.
Matrix pricing is a mathematical technique used principally to
value debt securities without relying exclusively on quoted
prices for the specific securities, but rather by relying on the
relationship of the security to other benchmark quoted
securities. Substantially all of the CDO collateral managers who
provided prices used dealer prices for all or part of the
underlying securities, in some cases supplemented by third party
pricing services.
AIGFP also employs a Monte Carlo simulation to assist in
quantifying the effect on the valuation of the CDOs of the
unique aspects of the CDOs structure such as triggers that
divert cash flows to the most senior part of the capital
structure. The Monte Carlo simulation is used to determine
whether an underlying security defaults in a given simulation
scenario and, if it does, the securitys implied random
default time and expected loss. This information is used to
project cash flow streams and to determine the expected losses
of the portfolio.
In addition to calculating an estimate of the fair value of the
super senior CDO security referenced in the credit default swaps
using its internal model, AIGFP also considers the price
estimates for the super senior CDO securities provided by
17
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
3. Fair
Value
Measurements (continued)
third parties, including counterparties to these transactions,
to validate the results of the model and to determine the best
available estimate of fair value. In determining the fair value
of the super senior CDO security referenced in the credit
default swaps, AIGFP uses a consistent process which considers
all available pricing data points and eliminates the use of
outlying data points. When pricing data points are within a
reasonable range an averaging technique is applied.
In the case of credit default swaps written on portfolios of
investment-grade corporate debt, AIGFP estimates the fair value
of its obligations by comparing the contractual premium of each
contract to the current market levels of the senior tranches of
comparable credit indices, the iTraxx index for European
corporate issuances and the CDX index for U.S. corporate
issuances. These indices are considered to be reasonable proxies
for the referenced portfolios. In addition, AIGFP compares these
valuations to third party prices and makes adjustments as
necessary to arrive at the best available estimate of fair value.
AIGFP estimates the fair value of its obligations resulting from
credit default swaps written on collateralized loan obligations
to be equivalent to the par value less the current market value
of the referenced obligation. Accordingly, the value is
determined by obtaining third-party quotes on the underlying
super senior tranches referenced under the credit default swap
contract.
Policyholders
Contract Deposits
Policyholders contract deposits accounted for at fair
value beginning January 1, 2008 are measured using an
income approach by taking into consideration the following
factors:
|
|
|
Current policyholder account values and related surrender
charges;
|
|
|
The present value of estimated future cash inflows (policy fees)
and outflows (benefits and maintenance expenses) associated with
the product using risk neutral valuations, incorporating
expectations about policyholder behavior, market returns and
other factors; and
|
|
|
A risk margin that market participants would require for a
market return and the uncertainty inherent in the model inputs.
|
The change in fair value of these policyholders contract
deposits is recorded as incurred policy losses and benefits in
the consolidated statement of income (loss).
Fair Value
Measurements on a Non-Recurring Basis
AIG also measures the fair value of certain assets on a
non-recurring basis, generally quarterly, annually, or when
events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. These assets
include held to maturity securities (in periods prior to the
third quarter of 2008), cost and equity-method investments, life
settlement contracts, flight equipment, collateral securing
foreclosed loans and real estate and other fixed assets,
goodwill, and other intangible assets. AIG uses a variety of
techniques to measure the fair value of these assets when
appropriate, as described below:
|
|
|
Held to Maturity Securities, Cost and Equity-Method
Investments: When AIG determines that the carrying value of
these assets may not be recoverable, AIG records the assets at
fair value with the loss recognized in income. In such cases,
AIG measures the fair value of these assets using the techniques
discussed above for fixed maturities and equity securities.
During the third quarter of 2008, AIG transferred all securities
previously classified as held to maturity to the available for
sale category (see Note 1 for further discussion).
|
|
|
Life Settlement Contracts: AIG measures the
fair value of individual life settlement contracts (which are
included in other invested assets) whenever the carrying value
plus the undiscounted future costs that are expected to be
incurred to keep the life settlement contract in force exceed
the expected proceeds from the contract. In those situations,
the fair value is determined on a discounted cash flow basis,
incorporating current life expectancy assumptions. The discount
rate incorporates current information about market interest
rates, the credit exposure to the insurance company that issued
the life settlement contract and AIGs estimate of the risk
margin an investor in the contracts would require.
|
|
|
Flight Equipment Primarily Under Operating
Leases: When AIG determines the carrying value of
its commercial aircraft may not be recoverable, AIG records the
aircraft at fair value with the loss recognized in income. AIG
measures the fair value of its commercial aircraft using an
income approach based on the present value of all cash flows
from existing and projected lease payments (based on historical
experience and current expectations regarding market
participants) including net contingent rentals for the period
extending to the end of the aircrafts economic life in its
highest and best use configuration, plus its disposition value.
|
|
|
Collateral Securing Foreclosed Loans and Real Estate and
Other Fixed Assets: When AIG takes collateral in connection
with foreclosed loans, AIG generally bases its estimate
|
18
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
3. Fair
Value
Measurements (continued)
|
|
|
of fair value on the price that would be received in a current
transaction to sell the asset by itself.
|
|
|
|
Goodwill: AIG tests goodwill for impairment
whenever events or changes in circumstances indicate the
carrying amount of goodwill may not be recoverable, but at least
annually. When AIG determines goodwill may be impaired, AIG uses
techniques that consider market-based earnings multiples of the
units peer companies or discounted cash flow techniques
based on the price that could be received in a current
transaction to sell the asset assuming the asset would be used
with other assets as a group (in-use premise). See Fair Value
Measured on a Non-Recurring Basis below for additional
information.
|
|
|
Intangible Assets: AIG tests its intangible
assets for impairment whenever events or changes in
circumstances indicate the carrying amount of an intangible
asset may not be recoverable. AIG measures the fair value of
intangible assets based on an in-use premise that considers the
same factors used to estimate the fair value of its real estate
and other fixed assets under an in-use premise discussed above.
|
See Notes 1(c), (d), (e), (t), and (v) to Consolidated
Financial Statements included in the 2007 Annual Report on
Form 10-K
for additional information about how AIG tests various asset
classes for impairment.
Fair Value
Hierarchy
Beginning January 1, 2008, assets and liabilities recorded
at fair value in the consolidated balance sheet are measured and
classified in a hierarchy for disclosure purposes consisting of
three levels based on the observability of inputs
available in the marketplace used to measure the fair values as
discussed below:
|
|
|
Level 1: Fair value measurements that are
quoted prices (unadjusted) in active markets that AIG has the
ability to access for identical assets or liabilities. Market
price data generally is obtained from exchange or dealer
markets. AIG does not adjust the quoted price for such
instruments. Assets and liabilities measured at fair value on a
recurring basis and classified as Level 1 include certain
government and agency securities, actively traded listed common
stocks and derivative contracts, most separate account assets
and most mutual funds.
|
|
|
Level 2: Fair value measurements based on
inputs other than quoted prices included in Level 1 that
are observable for the asset or liability, either directly or
indirectly. Level 2 inputs include quoted prices for
similar assets and liabilities in active markets, and inputs
other than quoted prices that are observable for the asset or
liability, such as interest rates and yield curves that are
observable at commonly quoted intervals. Assets and liabilities
measured at fair value on a recurring basis and classified as
Level 2 generally include certain government securities,
most investment-grade and high-yield corporate bonds, certain
ABS, certain listed equities, state, municipal and provincial
obligations, hybrid securities, mutual fund and hedge fund
investments, derivative contracts, GIAs at AIGFP and physical
commodities.
|
|
|
Level 3: Fair value measurements based on
valuation techniques that use significant inputs that are
unobservable. These measurements include circumstances in which
there is little, if any, market activity for the asset or
liability. In certain cases, the inputs used to measure fair
value may fall into different levels of the fair value
hierarchy. In such cases, the level in the fair value hierarchy
within which the fair value measurement in its entirety falls is
determined based on the lowest level input that is significant
to the fair value measurement in its entirety. AIGs
assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment. In making
the assessment, AIG considers factors specific to the asset or
liability. Assets and liabilities measured at fair value on a
recurring basis and classified as Level 3 include certain
distressed ABS, structured credit products, certain derivative
contracts (including AIGFPs super senior credit default
swap portfolio), policyholders contract deposits carried
at fair value, private equity and real estate fund investments,
and direct private equity investments. AIGs
non-financial-instrument assets that are measured at fair value
on a non-recurring basis generally are classified as
Level 3.
|
19
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
3. Fair
Value
Measurements (continued)
Assets and
Liabilities Measured at Fair Value on a Recurring
Basis
The following
table presents information about assets and liabilities measured
at fair value on a recurring basis at September 30, 2008,
and indicates the level of the fair value measurement based on
the levels of the inputs used:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
|
|
September 30,
|
|
(in
millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Netting(a)
|
|
|
2008
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale
|
|
$
|
891
|
|
|
$
|
375,021
|
|
|
$
|
18,582
|
|
|
$
|
|
|
|
$
|
394,494
|
|
Bond trading securities
|
|
|
|
|
|
|
7,355
|
|
|
|
197
|
|
|
|
|
|
|
|
7,552
|
|
Common stocks available for sale
|
|
|
11,113
|
|
|
|
271
|
|
|
|
75
|
|
|
|
|
|
|
|
11,459
|
|
Common and preferred stocks trading
|
|
|
19,751
|
|
|
|
922
|
|
|
|
1
|
|
|
|
|
|
|
|
20,674
|
|
Preferred stocks available for sale
|
|
|
1
|
|
|
|
1,393
|
|
|
|
70
|
|
|
|
|
|
|
|
1,464
|
|
Mortgage and other loans receivable
|
|
|
|
|
|
|
324
|
|
|
|
4
|
|
|
|
|
|
|
|
328
|
|
Financial Services assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
1
|
|
|
|
762
|
|
|
|
1,563
|
|
|
|
|
|
|
|
2,326
|
|
Trading securities
|
|
|
1,388
|
|
|
|
28,710
|
|
|
|
6,038
|
|
|
|
|
|
|
|
36,136
|
|
Spot commodities
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
Unrealized gain on swaps, options and forward transactions
|
|
|
|
|
|
|
54,108
|
|
|
|
3,307
|
|
|
|
(47,381
|
)
|
|
|
10,034
|
|
Securities purchased under agreements to resell
|
|
|
|
|
|
|
12,100
|
|
|
|
|
|
|
|
|
|
|
|
12,100
|
|
Securities
lending invested
collateral(b)
|
|
|
|
|
|
|
23,648
|
|
|
|
12,173
|
|
|
|
|
|
|
|
35,821
|
|
Other invested
assets(c)
|
|
|
2,334
|
|
|
|
7,406
|
|
|
|
11,788
|
|
|
|
|
|
|
|
21,528
|
|
Short-term investments
|
|
|
4,320
|
|
|
|
18,201
|
|
|
|
69
|
|
|
|
|
|
|
|
22,590
|
|
Separate and variable accounts
|
|
|
61,405
|
|
|
|
2,953
|
|
|
|
1,114
|
|
|
|
|
|
|
|
65,472
|
|
Other assets
|
|
|
110
|
|
|
|
3,057
|
|
|
|
354
|
|
|
|
(1,898
|
)
|
|
|
1,623
|
|
|
|
Total
|
|
$
|
101,314
|
|
|
$
|
536,265
|
|
|
$
|
55,335
|
|
|
$
|
(49,279
|
)
|
|
$
|
643,635
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders contract deposits
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,282
|
|
|
$
|
|
|
|
$
|
4,282
|
|
Other policyholders funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
|
|
|
|
7,143
|
|
|
|
50
|
|
|
|
|
|
|
|
7,193
|
|
Securities and spot commodities sold but not yet purchased
|
|
|
715
|
|
|
|
1,851
|
|
|
|
|
|
|
|
|
|
|
|
2,566
|
|
Unrealized
loss on swaps, options and forward
transactions(d)
|
|
|
|
|
|
|
47,066
|
|
|
|
34,949
|
|
|
|
(75,690
|
)
|
|
|
6,325
|
|
Trust deposits and deposits due to banks and other depositors
|
|
|
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
215
|
|
Other long-term borrowings
|
|
|
|
|
|
|
38,347
|
|
|
|
802
|
|
|
|
|
|
|
|
39,149
|
|
Other liabilities
|
|
|
7
|
|
|
|
3,501
|
|
|
|
60
|
|
|
|
(179
|
)
|
|
|
3,389
|
|
|
|
Total
|
|
$
|
722
|
|
|
$
|
98,123
|
|
|
$
|
40,143
|
|
|
$
|
(75,869
|
)
|
|
$
|
63,119
|
|
|
|
|
(a) |
Represents netting of derivative exposures covered by a
qualifying master netting agreement in accordance with
FIN 39 of $42.8 billion, offset by cash collateral posted
and received by AIG of $33.1 billion and $6.5 billion,
respectively.
|
|
|
(b) |
Amounts exclude short-term investments that are carried at
cost, which approximates fair value of $5.7 billion.
|
|
|
(c) |
Approximately 11 percent of the fair value of the assets
recorded as Level 3 relates to various private equity, real
estate, hedge fund and fund-of-funds investments. AIGs
ownership in these funds represented 27 percent, or $1.7 billion
of the Level 3 amount.
|
|
|
(d) |
Included in Level 3 is the fair value derivative
liability of $32.3 billion on AIGFP super senior credit
default swap portfolio.
|
At September 30, 2008, Level 3 assets were
5.4 percent of total assets, and Level 3 liabilities
were 4.2 percent of total liabilities.
20
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
3. Fair
Value
Measurements (continued)
The following
tables present changes during the three- and nine-month periods
ended September 30, 2008 in Level 3 assets and
liabilities measured at fair value on a recurring basis, and the
realized and unrealized gains (losses) recorded in income during
the three- and nine-month periods ended September 30, 2008
related to the Level 3 assets and liabilities that remained
in the consolidated balance sheet at September 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains
|
|
|
|
|
|
|
Realized and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) on
|
|
|
|
|
|
|
Unrealized
|
|
|
Accumulated
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
Instruments
|
|
|
|
Balance
|
|
|
Gains (Losses)
|
|
|
Other
|
|
|
Sales,
|
|
|
|
|
|
Balance at
|
|
|
Held at
|
|
|
|
Beginning of
|
|
|
Included
|
|
|
Comprehensive
|
|
|
Issuances and
|
|
|
Transfers
|
|
|
September 30,
|
|
|
September 30,
|
|
(in
millions)
|
|
Period(a)
|
|
|
in
Income(b)
|
|
|
Income (Loss)
|
|
|
Settlements-net
|
|
|
In (Out)
|
|
|
2008
|
|
|
2008
|
|
|
|
|
Three Months Ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale
|
|
$
|
18,480
|
|
|
$
|
(696
|
)
|
|
$
|
(255
|
)
|
|
$
|
(646
|
)
|
|
$
|
1,699
|
|
|
$
|
18,582
|
|
|
$
|
|
|
Bond trading securities
|
|
|
195
|
|
|
|
(11
|
)
|
|
|
(2
|
)
|
|
|
20
|
|
|
|
(5
|
)
|
|
|
197
|
|
|
|
(6
|
)
|
Common stocks available for sale
|
|
|
227
|
|
|
|
1
|
|
|
|
1
|
|
|
|
(196
|
)
|
|
|
42
|
|
|
|
75
|
|
|
|
|
|
Common and preferred stocks trading
|
|
|
5
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
5
|
|
|
|
(6
|
)
|
|
|
1
|
|
|
|
|
|
Preferred stocks available for sale
|
|
|
258
|
|
|
|
(7
|
)
|
|
|
(50
|
)
|
|
|
(9
|
)
|
|
|
(122
|
)
|
|
|
70
|
|
|
|
|
|
Mortgage and other loans receivable
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
Financial Services assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
372
|
|
|
|
(3
|
)
|
|
|
(180
|
)
|
|
|
1,341
|
|
|
|
33
|
|
|
|
1,563
|
|
|
|
|
|
Trading securities
|
|
|
3,680
|
|
|
|
(1,510
|
)
|
|
|
|
|
|
|
3,865
|
|
|
|
3
|
|
|
|
6,038
|
|
|
|
(919
|
)
|
Securities lending invested collateral
|
|
|
8,489
|
|
|
|
(2,091
|
)
|
|
|
829
|
|
|
|
(706
|
)
|
|
|
5,652
|
|
|
|
12,173
|
|
|
|
|
|
Other invested assets
|
|
|
11,868
|
|
|
|
77
|
|
|
|
(126
|
)
|
|
|
131
|
|
|
|
(162
|
)
|
|
|
11,788
|
|
|
|
293
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
Separate and variable accounts
|
|
|
1,178
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
1,114
|
|
|
|
(75
|
)
|
Other assets
|
|
|
334
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
343
|
|
|
|
(4
|
)
|
|
|
Total
|
|
$
|
45,090
|
|
|
$
|
(4,319
|
)
|
|
$
|
214
|
|
|
$
|
3,898
|
|
|
$
|
7,134
|
|
|
$
|
52,017
|
|
|
$
|
(711
|
)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders contract deposits
|
|
$
|
(4,179
|
)
|
|
$
|
113
|
|
|
$
|
43
|
|
|
$
|
(259
|
)
|
|
$
|
|
|
|
$
|
(4,282
|
)
|
|
$
|
235
|
|
Financial Services liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
(40
|
)
|
|
|
5
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
(50
|
)
|
|
|
(5
|
)
|
Unrealized loss on swaps, options and forward transactions, net
|
|
|
(26,674
|
)
|
|
|
(5,223
|
)
|
|
|
|
|
|
|
207
|
|
|
|
48
|
|
|
|
(31,642
|
)
|
|
|
(6,032
|
)
|
Other long-term borrowings
|
|
|
(2,689
|
)
|
|
|
1,030
|
|
|
|
|
|
|
|
630
|
|
|
|
227
|
|
|
|
(802
|
)
|
|
|
(500
|
)
|
Other liabilities
|
|
|
(25
|
)
|
|
|
(15
|
)
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
(9
|
)
|
|
|
(49
|
)
|
|
|
4
|
|
|
|
Total
|
|
$
|
(33,607
|
)
|
|
$
|
(4,090
|
)
|
|
$
|
41
|
|
|
$
|
565
|
|
|
$
|
266
|
|
|
$
|
(36,825
|
)
|
|
$
|
(6,298
|
)
|
|
Nine Months Ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale
|
|
$
|
18,786
|
|
|
$
|
(2,140
|
)
|
|
$
|
(805
|
)
|
|
$
|
(870
|
)
|
|
$
|
3,611
|
|
|
$
|
18,582
|
|
|
$
|
|
|
Bond trading securities
|
|
|
141
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
35
|
|
|
|
52
|
|
|
|
197
|
|
|
|
(16
|
)
|
Common stocks available for sale
|
|
|
224
|
|
|
|
(4
|
)
|
|
|
1
|
|
|
|
(185
|
)
|
|
|
39
|
|
|
|
75
|
|
|
|
|
|
Common and preferred stocks trading
|
|
|
30
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(14
|
)
|
|
|
(13
|
)
|
|
|
1
|
|
|
|
|
|
Preferred stocks available for sale
|
|
|
135
|
|
|
|
(9
|
)
|
|
|
(44
|
)
|
|
|
(76
|
)
|
|
|
64
|
|
|
|
70
|
|
|
|
|
|
Mortgage and other loans receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
Financial Services assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
285
|
|
|
|
(6
|
)
|
|
|
(172
|
)
|
|
|
1,423
|
|
|
|
33
|
|
|
|
1,563
|
|
|
|
|
|
Trading securities
|
|
|
4,422
|
|
|
|
(2,943
|
)
|
|
|
|
|
|
|
4,567
|
|
|
|
(8
|
)
|
|
|
6,038
|
|
|
|
(2,408
|
)
|
Securities lending invested collateral
|
|
|
11,353
|
|
|
|
(5,229
|
)
|
|
|
1,916
|
|
|
|
(1,524
|
)
|
|
|
5,657
|
|
|
|
12,173
|
|
|
|
|
|
Other invested assets
|
|
|
10,373
|
|
|
|
269
|
|
|
|
11
|
|
|
|
1,279
|
|
|
|
(144
|
)
|
|
|
11,788
|
|
|
|
862
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
Separate and variable accounts
|
|
|
1,003
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
1,114
|
|
|
|
(48
|
)
|
Other assets
|
|
|
141
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
206
|
|
|
|
|
|
|
|
343
|
|
|
|
(4
|
)
|
|
|
Total
|
|
$
|
46,893
|
|
|
$
|
(10,146
|
)
|
|
$
|
906
|
|
|
$
|
5,069
|
|
|
$
|
9,295
|
|
|
$
|
52,017
|
|
|
$
|
(1,614
|
)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders contract deposits
|
|
$
|
(3,674
|
)
|
|
$
|
56
|
|
|
$
|
(8
|
)
|
|
$
|
(656
|
)
|
|
$
|
|
|
|
$
|
(4,282
|
)
|
|
$
|
398
|
|
Financial Services liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
(208
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
(49
|
)
|
|
|
222
|
|
|
|
(50
|
)
|
|
|
(5
|
)
|
Unrealized loss on swaps, options and forward transactions, net
|
|
|
(11,718
|
)
|
|
|
(19,785
|
)
|
|
|
|
|
|
|
(222
|
)
|
|
|
83
|
|
|
|
(31,642
|
)
|
|
|
(20,631
|
)
|
Other long-term borrowings
|
|
|
(3,578
|
)
|
|
|
1,120
|
|
|
|
|
|
|
|
1,268
|
|
|
|
388
|
|
|
|
(802
|
)
|
|
|
(522
|
)
|
Other liabilities
|
|
|
(503
|
)
|
|
|
(70
|
)
|
|
|
(2
|
)
|
|
|
534
|
|
|
|
(8
|
)
|
|
|
(49
|
)
|
|
|
33
|
|
|
|
Total
|
|
$
|
(19,681
|
)
|
|
$
|
(18,694
|
)
|
|
$
|
(10
|
)
|
|
$
|
875
|
|
|
$
|
685
|
|
|
$
|
(36,825
|
)
|
|
$
|
(20,727
|
)
|
|
|
|
(a) |
Total Level 3 derivative exposures have been netted on these
tables for presentation purposes only.
|
21
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
3. Fair
Value
Measurements (continued)
|
|
(b) |
Net realized and unrealized gains and losses shown above are
reported in the consolidated statement of income (loss)
primarily as follows:
|
|
|
|
|
Major category of
Assets/Liabilities
|
|
Consolidated
Statement of Income (Loss) Line Items
|
|
|
Financial Services assets and liabilities
|
|
Other income
|
|
|
Unrealized market valuation losses on
AIGFP super senior credit default swap portfolio
|
|
|
Securities lending invested collateral
|
|
Net realized capital gains (losses)
|
|
|
Other invested assets
|
|
Net realized capital gains (losses)
|
|
|
Policyholders contract deposits
|
|
Incurred policy losses and benefits
|
|
|
Net realized capital gains (losses)
|
|
|
Both observable and unobservable inputs may be used to determine
the fair values of positions classified in Level 3 in the
tables above. As a result, the unrealized gains (losses) on
instruments held at September 30, 2008 may include
changes in fair value that were attributable to both observable
(e.g., changes in market interest rates) and unobservable inputs
(e.g., changes in unobservable long-dated volatilities).
AIG uses various hedging techniques to manage risks associated
with certain positions, including those classified within
Level 3. Such techniques may include the purchase or sale
of financial instruments that are classified within Level 1
and/or
Level 2. As a result, the realized and unrealized gains
(losses) for assets and liabilities classified within
Level 3 presented in the table above do not reflect the
related realized or unrealized gains (losses) on hedging
instruments that are classified within Level 1
and/or
Level 2.
Changes in the fair value of separate and variable account
assets are completely offset in the consolidated statement of
income (loss) by changes in separate and variable account
liabilities, which are not carried at fair value and therefore
not included in the tables above.
Fair Value
Measured on a Non-Recurring Basis
AIG measures the fair value of certain assets on a non-recurring
basis, generally quarterly, or when events or changes in
circumstances indicate that the carrying amount of the asset may
not be recoverable. These assets include goodwill, real estate
owned, real estate loans held for sale, and other intangible
assets.
Assets measured
at fair value on a non-recurring basis on which impairment
charges were recorded were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in
millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
2008
|
|
|
2008
|
|
|
|
|
Goodwill
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
432
|
|
|
$
|
477
|
|
Real estate owned
|
|
|
|
|
|
|
|
|
|
|
1,358
|
|
|
|
1,358
|
|
|
|
100
|
|
|
|
102
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
3,883
|
|
|
|
3,883
|
|
|
|
75
|
|
|
|
85
|
|
Other assets
|
|
|
|
|
|
|
7
|
|
|
|
190
|
|
|
|
197
|
|
|
|
2
|
|
|
|
53
|
|
|
Total
|
|
$
|
|
|
|
$
|
7
|
|
|
$
|
5,431
|
|
|
$
|
5,438
|
|
|
$
|
609
|
|
|
$
|
717
|
|
|
AIG recognized goodwill impairment charges of $432 million
and $477 million for the three and nine months ended
September 30, 2008, which were primarily related to the
domestic Consumer Finance and the Capital Markets businesses.
AIG recognized an impairment charge on certain investment real
estate and other real estate owned of $100 million and
$102 million for the three and nine months ended
September 30, 2008, respectively, which was included in
other income. As required by FAS 157, the fair value
disclosed in the table above is unadjusted for transaction
costs. The amounts recorded on the consolidated balance sheet
are net of transaction costs.
Fair Value
Option
FAS 159 permits a company to choose to measure at fair
value many financial instruments and certain other assets and
liabilities that are not required to be measured at fair value.
Subsequent changes in fair value for designated items are
required to be reported in income. Unrealized gains and losses
on financial instruments in AIGs insurance businesses and
in AIGFP for which the fair value option was elected under
FAS 159 are classified in incurred policy losses and
benefits and in other income, respectively, in the consolidated
statement of income (loss).
22
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
The following table presents the gains or losses recorded
during the three- and nine-month periods ended
September 30, 2008 related to the eligible instruments for
which AIG elected the fair value option and the related
transition adjustment recorded as a decrease to opening
shareholders equity at January 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
Gain (Loss)
|
|
|
|
January 1,
|
|
|
Transition
|
|
|
January 1,
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
2008
|
|
|
Adjustment
|
|
|
2008
|
|
|
Ended
|
|
|
Ended
|
|
|
|
prior to
|
|
|
upon
|
|
|
after
|
|
|
September 30,
|
|
|
September 30,
|
|
(in
millions)
|
|
Adoption
|
|
|
Adoption
|
|
|
Adoption
|
|
|
2008
|
|
|
2008
|
|
|
|
|
Mortgage and other loans receivable
|
|
$
|
1,109
|
|
|
$
|
|
|
|
$
|
1,109
|
|
|
$
|
(74
|
)
|
|
$
|
5
|
|
Financial Services
assets(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities (formerly available for sale)
|
|
|
39,278
|
|
|
|
5
|
|
|
|
39,283
|
|
|
|
(3,886
|
)
|
|
|
(5,037
|
)
|
Securities purchased under agreements to resell
|
|
|
20,950
|
|
|
|
1
|
|
|
|
20,951
|
|
|
|
(180
|
)
|
|
|
395
|
|
Other invested assets
|
|
|
321
|
|
|
|
(1
|
)
|
|
|
320
|
|
|
|
(24
|
)
|
|
|
(12
|
)
|
Short-term investments
|
|
|
6,969
|
|
|
|
|
|
|
|
6,969
|
|
|
|
(2
|
)
|
|
|
65
|
|
Deferred policy acquisition costs
|
|
|
1,147
|
|
|
|
(1,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
435
|
|
|
|
(435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits for life, accident and health insurance
contracts
|
|
|
299
|
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders contract
deposits(b)
|
|
|
3,739
|
|
|
|
360
|
|
|
|
3,379
|
|
|
|
416
|
|
|
|
534
|
|
Financial Services
liabilities(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
6,750
|
|
|
|
(10
|
)
|
|
|
6,760
|
|
|
|
339
|
|
|
|
(77
|
)
|
Securities and spot commodities sold but not yet purchased
|
|
|
3,797
|
|
|
|
(10
|
)
|
|
|
3,807
|
|
|
|
157
|
|
|
|
144
|
|
Trust deposits and deposits due to banks and other depositors
|
|
|
216
|
|
|
|
(25
|
)
|
|
|
241
|
|
|
|
24
|
|
|
|
13
|
|
Long-term borrowings
|
|
|
57,968
|
|
|
|
(675
|
)
|
|
|
58,643
|
|
|
|
294
|
|
|
|
(97
|
)
|
Other liabilities
|
|
|
1,792
|
|
|
|
|
|
|
|
1,792
|
|
|
|
1,266
|
|
|
|
947
|
|
|
|
Total gain (loss) for the three- and nine-month periods ended
September 30, 2008
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,670
|
)
|
|
$
|
(3,120
|
)
|
Pre-tax cumulative effect of adopting the fair value option
|
|
|
|
|
|
|
(1,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in deferred tax liabilities
|
|
|
|
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adopting the fair value option
|
|
|
|
|
|
$
|
(1,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Effective January 1, 2008, AIGFP elected to apply the
fair value option under FAS 159 to all eligible assets and
liabilities (other than equity method investments, trade
receivables and trade payables) because electing the fair value
option allows AIGFP to more closely align its earnings with the
economics of its transactions by recognizing concurrently
through earnings the change in fair value of its derivatives and
the offsetting change in fair value of the assets and
liabilities being hedged as well as the manner in which the
business is evaluated by management. Substantially all of the
gain (loss) amounts shown above are reported in other income on
the consolidated statement of income (loss). In August 2008,
AIGFP modified prospectively this election as management
believes it is appropriate to exclude from the automatic
election securities purchased in connection with existing
structured credit transactions and their related funding
obligations. AIGFP will evaluate whether to elect the fair value
option on a case-by-case basis for securities purchased in
connection with existing structured credit transactions and
their related funding obligations.
|
(b)
|
AIG elected to apply the fair value option to certain single
premium variable life products in Japan and an investment-linked
life insurance product sold principally in Asia, both classified
within policyholders contract deposits in the consolidated
balance sheet. AIG elected the fair value option for these
liabilities to more closely align its accounting with the
economics of its transactions. For the investment-linked product
sold principally in Asia, the election more effectively aligns
changes in the fair value of assets with a commensurate change
in the fair value of policyholders liabilities. For the
single premium life products in Japan, the fair value option
election allows AIG to economically hedge the inherent market
risks associated with this business in an efficient and
effective manner through the use of derivative instruments. The
hedging program, which was completed in the third quarter of
2008, results in an accounting presentation for this business
that more closely reflects the underlying economics and the way
the business is managed, with the change in the fair value of
derivatives and underlying assets largely offsetting the change
in fair value of the policy liabilities. AIG did not elect the
fair value option for other liabilities classified in
policyholders contract deposits because other contracts do
not share the same contract features that created the disparity
between the accounting presentation and the economic
performance.
|
(c)
|
Not included in the table above were losses of
$9.6 billion and $23.2 billion for the three- and
nine-month periods ended September 30, 2008, respectively,
that were primarily due to changes in the fair value of
derivatives, trading securities and certain other invested
assets for which the fair value option under FAS 159 was not
elected. Included in these amounts were unrealized market
valuation losses of $7.1 billion and $21.7 billion for
the three- and nine-months periods ended September 30,
2008, respectively, related to AIGFPs super senior credit
default swap portfolio.
|
23
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
3. Fair
Value
Measurements (continued)
Interest income and expense and dividend income on assets and
liabilities elected under the fair value option are recognized
and classified in the consolidated statement of income (loss)
depending on the nature of the instrument and related market
conventions. For AIGFP related activity, interest, dividend
income, and interest expense are included in other income.
Otherwise, interest and dividend income are included in net
investment income in the consolidated statement of income
(loss). See Note 1(a) to the Consolidated Financial
Statements included in the 2007 Annual Report on
Form 10-K
for additional information about AIGs policies for
recognition, measurement, and disclosure of interest and
dividend income and interest expense.
During the three- and nine-month periods ended
September 30, 2008, AIG recognized a loss of
$184 million and a gain of $1.1 billion, respectively,
attributable to the observable effect of changes in credit
spreads on AIGs own liabilities for which the fair value
option was elected. AIG calculates the effect of these credit
spread changes using discounted cash flow techniques that
incorporate current market interest rates, AIGs observable
credit spreads on these liabilities and other factors that
mitigate the risk of nonperformance such as collateral posted.
The following
table presents the difference between fair values and the
aggregate contractual principal amounts of mortgage and other
loans receivable and long-term borrowings, for which the fair
value option was elected:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
Fair Value at
|
|
|
Amount
|
|
|
|
|
|
|
September 30,
|
|
|
Due Upon
|
|
|
|
|
(in
millions)
|
|
2008
|
|
|
Maturity
|
|
|
Difference
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and other loans receivable
|
|
$
|
328
|
|
|
$
|
378
|
|
|
$
|
(50
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
$
|
36,464
|
|
|
$
|
36,065
|
|
|
$
|
399
|
|
|
At September 30, 2008, there were no mortgage and other
loans receivable for which the fair value option was elected,
that were 90 days or more past due and in non-accrual
status.
|
|
4.
|
Revolving
Credit Agreement and Guarantee and Pledge Agreement between AIG
and the Federal Reserve Bank of New York
|
On September 22, 2008, AIG entered into the
$85 billion Fed Credit Agreement and a Guarantee and Pledge
Agreement (the Pledge Agreement) with the NY Fed.
The Fed Facility has a two-year term. Outstanding borrowings
bear interest at
3-month
LIBOR (not less than 3.5 percent per annum) plus
8.5 percent per annum. AIG incurred, in the form of an
increase in the outstanding loan balance under the Fed Credit
Agreement, a gross commitment fee of $1.7 billion, which
was paid in kind and was recognized as a prepaid commitment
asset. Pursuant to the Fed Credit Agreement, in consideration
for the NY Feds extension of credit under the Fed Facility
and the payment of $500,000, AIG agreed to issue
100,000 shares, liquidation preference $5.00 per share, of
the Series C Preferred Stock to the Trust. The
Series C Preferred Stock was not yet issued as of
September 30, 2008. Accordingly, additional paid-in capital
has been increased to reflect a prepaid commitment fee which
represents AIGs obligation to issue the Series C
Preferred Stock in the fourth quarter of 2008. The value of the
Series C Preferred Stock was also recognized as part of the
prepaid commitment asset. The total prepaid commitment fee asset
of $24.7 billion is being amortized as interest expense
through the term of the facility. AIG also incurs a commitment
fee on undrawn amounts at the rate of 8.5 percent per
annum, which is recognized as interest expense when incurred.
Interest and the commitment fees are payable in kind and
generally recognized through an increase in the outstanding
balance under the Fed Facility.
AIG is required to repay the Fed Facility primarily from
proceeds on sales of assets, including businesses. These
mandatory repayments permanently reduce the maximum amount
available to be borrowed under the Fed Facility. Additionally,
AIG is permitted to repay any portion of the amounts borrowed at
any time prior to the maturity of the Fed Facility, without
penalty. Voluntary repayments do not reduce the maximum amount
available to be borrowed.
The Fed Credit Agreement contains customary affirmative and
negative covenants, including a requirement to maintain a
minimum amount of liquidity and a requirement to use reasonable
efforts to cause the composition of the Board of Directors of
AIG to be satisfactory to the Trust within 10 days after
the establishment of the Trust. Borrowings under the Fed
Facility are conditioned, among other things, on the NY Fed
being satisfied with AIGs corporate governance and the
value of the collateral.
The Fed Facility is secured by a pledge of the capital stock and
assets of certain of AIGs subsidiaries, subject to
exclusions of certain property not permitted to be pledged under
AIG debt agreements and its Restated Certificate of
Incorporation, as well as exclusions of assets of regulated
subsidiaries, assets of foreign subsidiaries and assets of
special purpose vehicles. The exclusion of these assets from the
pledge assures that AIG has not pledged all or substantially all
of its assets to the NY Fed.
24
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
|
|
4.
|
Revolving
Credit Agreement and Guarantee and Pledge Agreement between AIG
and the Federal Reserve Bank of New
York (continued)
|
At September 30, 2008, the amount owed under the Fed
Facility totaled $63 billion, which included accrued fees
and interest of $2 billion added to the principal of cash
borrowings. The amount available to be borrowed under the Fed
Facility is not generally reduced for the amount of fees and
interest added to cash borrowings.
See Note 11 to the Consolidated Financial Statements,
regarding borrowings under the Fed Facility and amendments to
the Fed Credit Agreement subsequent to September 30, 2008.
|
|
5.
|
Shareholders
Equity and Earnings (Loss) Per Share
|
Shareholders
Equity
Series C
Perpetual, Convertible, Participating Preferred Stock
Pursuant to the Fed Credit Agreement, AIG agreed to issue
100,000 shares of Series C Preferred Stock to the
Trust in the fourth quarter of 2008.
Under the terms of the Fed Credit Agreement prior to its
amendment on November 9, 2008, the terms of the
Series C Preferred Stock were as follows: The Series C
Preferred Stock will have voting rights commensurate with an
approximately 79.9 percent holding of all outstanding
shares of common stock. Holders of the Series C Preferred
Stock will be entitled to participate in dividends paid on the
common stock, receiving up to 79.9 percent of the aggregate
amount of dividends paid on the shares of common stock then
outstanding. After the Series C Preferred Stock is issued,
AIG will be required to hold a special shareholders
meeting to amend its restated certificate of incorporation to
increase the number of authorized shares of common stock to
19 billion and to reduce the par value per share. The
holders of the common stock will be entitled to vote as a class
separate from the holders of the Series C Preferred Stock
on these changes to AIGs Restated Certificate of
Incorporation. If the increase in the number of authorized
shares and change in par value is approved, the Series C
Preferred Stock will become convertible into common stock. The
number of shares into which the Series C Preferred Stock
will be convertible is that which will result in a 79.9 percent
holding, after conversion, based upon the number of common
shares outstanding on the issue date of the Series C
Preferred Stock, plus the number of common shares that are
subsequently issued in settlement of Equity Units. Subject to
certain exceptions, while the United States Treasury
beneficially owns at least 50 percent of the Series C
Preferred Stock (or the shares into which the Series C
Preferred Stock is convertible), AIG will be prohibited from
issuing any capital stock, or any securities or instruments
convertible or exchangeable into, or exercisable for, capital
stock, without the Trusts consent. In addition, AIG is
required to enter into a registration rights agreement that will
provide demand registration rights for the Series C
Preferred Stock and will require AIG to apply for the listing on
the NYSE of the common stock underlying the Series C
Preferred Stock. As described in Note 11 to the
Consolidated Financial Statements, the November 9, 2008
agreement in principle provides that AIG will issue 10-year
warrants to the United States Treasury, and the number of shares
into which the Series C Preferred Stock will be convertible
will be reduced so as not to exceed 77.9 percent of the
outstanding shares of common stock.
AIG received the consideration in the form of the Fed Facility
for the Series C Preferred Stock in the third quarter of
2008 and recorded the fair value of the Series C Preferred
Stock, $23 billion, as an increase to additional paid-in
capital. The value, net of the $500,000 cash portion of the
consideration, was recognized as an addition to the prepaid
commitment fee asset associated with the Fed Facility.
The valuation of the consideration received for the
Series C Preferred Stock that AIG agreed to issue was
determined by AIG and was primarily based on the implied value
of 79.9 percent of AIG indicated by AIGs common stock
price after the terms of the Fed Credit Agreement were publicly
announced. Other valuation techniques were employed to
corroborate this value, taking into consideration both market
observable inputs, such as AIG credit spreads, and other inputs.
The following key assumptions were utilized in the valuation:
|
|
|
|
|
The valuation date for the Series C Preferred Stock was the
date at which consideration was received for the obligation to
issue the Series C Preferred Stock, that is, the date
borrowings were made available to AIG pursuant to the NY
Feds agreement to enter into the Fed Credit Agreement.
|
|
|
|
|
|
The Series C Preferred Stock will be economically
equivalent to the common stock, will have voting rights
commensurate with the common stock, and will be convertible into
shares of common stock.
|
|
|
|
|
|
The price of AIG common stock the day after the announcement of
the terms of the NY Feds agreement to enter into the Fed
Credit Agreement provided the most observable market evidence of
the valuation of AIG.
|
Basic and diluted EPS will be affected in any period in which
AIG has net income. The effect on basic EPS will be
25
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
computed using the two-class method, pursuant to which the
earnings of the period will be allocated between the preferred
shareholders and the common shareholders, determined on the same
basis as if all the earnings were distributed. Prior to any
partial conversion of the Series C Preferred Stock, this
will result in 79.9 percent of the earnings for the period
being allocated to the Series C Preferred Stock, directly
reducing the net income available for common shareholders.
Diluted EPS will be computed on the more dilutive of the
if-converted method and the two-class method. Under the
if-converted method, conversion of the Series C Preferred
Stock is assumed to have occurred as of the beginning of the
period, and the number of common shares that would be issued on
conversion is assumed to be the number of additional shares
outstanding for the period. Because AIG had losses for the
three- and nine-month periods ended September 30, 2008, the
Series C Preferred Stock was anti-dilutive to basic and
diluted EPS.
Dividends
The quarterly dividend per common share declared in May 2008 and
paid on September 19, 2008 was $0.22. Effective
September 23, 2008, AIGs Board of Directors suspended
the declaration of dividends on AIGs common stock.
Pursuant to the Fed Credit Agreement, AIG is restricted from
paying dividends on its common stock.
Share
Issuance and Repurchase
In February 2007, AIGs Board of Directors increased
AIGs share repurchase program by authorizing the purchase
of shares with an aggregate purchase price of $8 billion.
In November 2007, AIGs Board of Directors authorized the
purchase of an additional $8 billion in common stock. In
2007, AIG entered into structured share repurchase arrangements
providing for the purchase of shares over time with an aggregate
purchase price of $7 billion.
A total of 37,926,059 shares were purchased during the
first six months of 2008 to meet commitments that existed at
December 31, 2007. There were no repurchases during the
third quarter of 2008. At October 31, 2008, $9 billion
was available for purchases under the aggregate authorizations.
Pursuant to the Fed Credit Agreement, AIG is restricted from
repurchasing shares of its common stock.
In May 2008, AIG sold 196,710,525 shares of common stock at
a price per share of $38 for gross proceeds of
$7.47 billion and 78,400,000 equity units (the Equity
Units) at a price per unit of $75 for gross proceeds of
$5.88 billion. The Equity Units, the key terms of which are
summarized below, are recorded as long-term borrowings in the
consolidated balance sheet.
Equity
Units
Each Equity Unit has an initial stated amount of $75 and
consists of a stock purchase contract issued by AIG and,
initially, a 1/40th or 2.5 percent undivided
beneficial ownership interest in three series of junior
subordinated debentures
(Series B-1,
B-2 and B-3), each with a principal amount of $1,000.
Each stock purchase contract requires its holder to purchase,
and requires AIG to sell, a variable number of shares of AIG
common stock for $25 in cash on each of the following dates:
February 15, 2011, May 1, 2011 and August 1,
2011. The number of shares that AIG is obligated to deliver on
each stock purchase date is set forth in the chart below (where
the applicable market value is an average of the
trading prices of AIGs common stock over the
20-trading-day period ending on the third business day prior to
the relevant stock purchase date).
|
|
|
If the applicable market
|
|
|
value is:
|
|
then AIG is obligated to issue:
|
|
Greater than or equal to
$45.60
|
|
0.54823 shares per stock purchase contract
|
Between $45.60 and $38.00
|
|
Shares equal to $25 divided by the
applicable market value
|
Less than or equal to
$38.00
|
|
0.6579 shares per stock purchase contract
|
Basic earnings (loss) per share (EPS) will not be affected by
outstanding stock purchase contracts. Diluted EPS will be
determined considering the potential dilution from outstanding
stock purchase contracts using the treasury stock method, and
therefore diluted EPS will not be affected by outstanding stock
purchase contracts until the applicable market value exceeds
$45.60.
AIG is obligated to pay quarterly contract adjustment payments
to the holders of the stock purchase contracts, at an initial
annual rate of 2.7067 percent applied to the stated amount.
The present value of the contract adjustment payments,
$431 million, was recognized at inception as a liability (a
component of other liabilities), and was recorded as a reduction
to additional paid-in capital.
In addition to the stock purchase contracts, as part of the
Equity Units, AIG issued $1.96 billion of each of the
Series B-1,
B-2 and B-3 junior subordinated debentures, which initially pay
interest at rates of 5.67 percent, 5.82 percent and
5.89 percent, respectively. For accounting purposes, AIG
allocated the proceeds of the Equity Units between the stock
purchase contracts and the junior subordinated debentures on a
relative fair value basis. AIG determined that the fair value of
the stock purchase contract at issuance was zero, and therefore
all of the proceeds were allocated to the junior subordinated
debentures.
26
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
Share-based
Employee Compensation Plans
During the first quarter of 2008, AIG reviewed the vesting
schedules of its share-based employee compensation plans, and on
March 11, 2008, AIGs management and the Compensation
and Management Resources Committee of AIGs Board of
Directors determined that, to fulfill the objective of
attracting and retaining high quality personnel, the vesting
schedules of certain awards outstanding under these plans and
all awards made in the future under these plans should be
shortened.
For accounting purposes, a modification of the terms or
conditions of an equity award is treated as an exchange of the
original award for a new award. As a result of this
modification, the incremental compensation cost related to the
affected awards totaled $24 million and will, together with
the unamortized originally-measured compensation cost, be
amortized over shorter periods. AIG estimates the modifications
will increase the amortization of this cost by $106 million
and $46 million in 2008 and 2009, respectively, with a
related reduction in amortization expense of $128 million
in 2010 through 2013.
In the second quarter of 2008, reversals of previously accrued
costs related to certain performance-based compensation plans
were made, as performance to date was below the performance
thresholds set forth in those plans.
Earnings (Loss)
Per Share (EPS)
Basic EPS is based on the weighted average number of common
shares outstanding. Diluted EPS is based on those shares used in
basic EPS plus shares that would have been outstanding assuming
issuance of common shares for all dilutive potential common
shares outstanding.
The computation
of basic and diluted EPS was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
(in millions,
except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Numerator for EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(24,468
|
)
|
|
$
|
3,085
|
|
|
$
|
(37,630
|
)
|
|
$
|
11,492
|
|
|
|
Denominator for EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used in the computation of
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
2,948
|
|
|
|
2,751
|
|
|
|
2,850
|
|
|
|
2,751
|
|
Common stock in treasury
|
|
|
(259
|
)
|
|
|
(189
|
)
|
|
|
(251
|
)
|
|
|
(168
|
)
|
Deferred shares
|
|
|
14
|
|
|
|
14
|
|
|
|
14
|
|
|
|
13
|
|
|
|
Weighted average shares outstanding basic*
|
|
|
2,703
|
|
|
|
2,576
|
|
|
|
2,613
|
|
|
|
2,596
|
|
Incremental shares arising from awards outstanding under
share-based employee compensation plans*
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
13
|
|
|
|
Weighted average shares outstanding diluted*
|
|
|
2,703
|
|
|
|
2,589
|
|
|
|
2,613
|
|
|
|
2,609
|
|
|
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(9.05
|
)
|
|
$
|
1.20
|
|
|
$
|
(14.40
|
)
|
|
$
|
4.43
|
|
Diluted
|
|
$
|
(9.05
|
)
|
|
$
|
1.19
|
|
|
$
|
(14.40
|
)
|
|
$
|
4.40
|
|
|
|
|
* |
Calculated using the treasury stock
method. Certain potential common shares arising from
share-based employee compensation plans were not included in the
computation of diluted EPS because the effect would have been
anti-dilutive. The number of potential shares excluded was
7 million for the nine-month period ended
September 30, 2007. Additionally, the Preferred Stock to be
issued was not included in the computation of basic or diluted
EPS because the effect would have been anti-dilutive.
|
6. Ownership
According to the Schedule 13D/A filed on October 30,
2008, by C.V. Starr & Co., Inc. (Starr), Starr
International Company, Inc. (SICO), Edward E. Matthews, Maurice
R. Greenberg, the Maurice R. and Corinne P. Greenberg Family
Foundation, Inc., the Universal Foundation, Inc., the Maurice R.
and Corinne P. Greenberg Joint Tenancy Company, LLC and the C.V.
Starr & Co., Inc. Trust, these reporting persons could
be considered to beneficially own 278,430,935 shares or
approximately 10 percent of AIGs common stock at that
date. Although these reporting persons may have made filings
under Section 16 of 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 subsequent to
October 30, 2008.
|
|
7.
|
Commitments,
Contingencies and Guarantees
|
|
|
(a)
|
Litigation
and Investigations
|
AIG and its subsidiaries, in common with the insurance and
financial services industries in general, are subject to
litigation, including claims for punitive damages, in the normal
course of their business. At the current time, AIG cannot
predict the outcome of the matters described below, or estimate
any potential additional costs related to these matters, unless
otherwise indicated. In AIGs insurance operations,
27
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
|
|
7.
|
Commitments,
Contingencies and
Guarantees (continued)
|
litigation arising from claims settlement activities is
generally considered in the establishment of AIGs reserve
for losses and loss expenses. However, the potential for
increasing jury awards and settlements makes it difficult to
assess the ultimate outcome of such litigation.
Various federal, state and foreign regulatory and governmental
agencies are reviewing certain public disclosures, transactions
and practices of AIG and its subsidiaries in connection with
industry wide and other inquiries. These reviews include the
inquiries by the SEC and U.S. Department of Justice (DOJ),
previously confirmed by AIG, with respect to AIGs
valuation of and disclosures relating to the AIGFP super senior
credit default swap portfolio. AIG has cooperated, and will
continue to cooperate, in producing documents and other
information in response to subpoenas and other requests.
In connection with some of the SEC investigations, AIG
understands that some of its employees have received Wells
notices and it is possible that additional current and former
employees could receive similar notices in the future. 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.
Although AIG cannot currently quantify its ultimate liability
for the unresolved litigation and investigation matters referred
to below, it is possible that such liability could have a
material adverse effect on AIGs consolidated financial
condition, or consolidated results of operations for an
individual reporting period.
Litigation
Relating to AIGFPs Super Senior Credit Default Swap
Portfolio
Securities Actions Southern District of New
York. On May 21, 2008, a purported securities
fraud class action complaint was filed against AIG and certain
of its current and former officers and directors in the United
States District Court for the Southern District of New York (the
Southern District of New York). The complaint alleges that
defendants made statements during the period May 11, 2007
through May 9, 2008 in press releases, AIGs quarterly
and year-end filings and during conference calls with analysts
which were materially false and misleading and which
artificially inflated the price of AIGs stock. The alleged
false and misleading statements relate to, among other things,
unrealized market valuation losses on AIGFPs super senior
credit default swap portfolio as a result of severe credit
market disruption. The complaint alleges claims under
Sections 10(b) and 20(a) of the Exchange Act. Three
additional purported securities class action complaints were
subsequently filed in the Southern District of New York, all
containing similar allegations. One of the additional complaints
filed on June 19, 2008, alleges a purported class period of
November 10, 2006 through June 6, 2008. The Court has
not yet appointed a lead plaintiff in these actions.
On October 9, 2008, a purported securities class action
complaint was filed in the Southern District of New York on
behalf of purchasers of
7.70 percent Series A-5
Junior Subordinated Debentures in connection with AIGs
public offering on December 11, 2007 against AIG, certain
of its current and former officers and directors, and the
offering underwriters. The complaint alleges that defendants
made statements in AIGs registration statement, prospectus
and quarterly and year-end filings which were materially false
and misleading, in violation of Sections 11, 12(a) and 15
of the Securities Act of 1933. The claims are based generally on
the same allegations as the securities fraud class actions
described above. One additional purported securities class
action complaint was filed in the Southern District of New York
on October 24, 2008, containing identical allegations.
ERISA Actions Southern District of New
York. On June 25, 2008, the Company, certain
of its executive officers and directors, and unnamed members of
the Companys Retirement Board and Investment Committee
were named as defendants in two separate, though nearly
identical, actions filed in the Southern District of New York.
The actions purport to be brought as class actions on behalf of
all participants in or beneficiaries of certain pension plans
sponsored by AIG or its subsidiaries (the Plans) during the
period May 11, 2007 through the present and whose
participant accounts included investments in the Companys
common stock. Plaintiffs allege, among other things, that the
defendants breached their fiduciary responsibilities to Plan
participants and their beneficiaries under the Employee
Retirement Income Security Act of 1974, as amended (ERISA), by:
(i) failing to prudently and loyally manage the Plans and
the Plans assets; (ii) failing to provide complete
and accurate information to participants and beneficiaries about
the Company and the value of the Companys stock;
(iii) failing to monitor appointed Plan fiduciaries and to
provide them with complete and accurate information; and
(iv) breaching their duty to avoid conflicts of interest.
The alleged ERISA violations relate to, among other things, the
defendants purported failure to monitor
and/or
disclose unrealized market valuation losses on AIGFPs
super senior credit default swap portfolio as a result of severe
credit market disruption. Six additional purported ERISA class
action complaints were subsequently filed in the Southern
District of New York, each containing similar allegations. It is
anticipated that these actions will all be consolidated and that
28
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
|
|
7.
|
Commitments,
Contingencies and
Guarantees (continued)
|
the Court will then appoint a lead plaintiff in the consolidated
action.
Derivative Actions Southern District of New
York. On November 20, 2007, two purported
shareholder derivative actions were filed in the Southern
District of New York naming as defendants the then current
directors of AIG and certain senior officers of AIG and its
subsidiaries. Plaintiffs assert claims for breach of fiduciary
duty, waste of corporate assets and unjust enrichment, as well
as violations of Section 10(b) of the Exchange Act and
Rule 10b-5
promulgated thereunder, and Section 20(a) of the Exchange
Act, among other things, in connection with AIGs public
disclosures regarding its exposure to what the lawsuits describe
as the subprime market crisis. The actions were consolidated as
In re American International Group, Inc. 2007 Derivative
Litigation (the Consolidated 2007 Derivative Litigation). On
February 15, 2008, plaintiffs filed a consolidated amended
complaint alleging the same causes of action. On April 15,
2008, motions to dismiss the action were filed on behalf of all
defendants. The motions to dismiss are pending.
On August 8, 2008, a purported shareholder derivative
action was filed in the Southern District of New York asserting
claims on behalf of AIG based generally on the same allegations
as in the consolidated amended complaint in the Consolidated
2007 Derivative Litigation.
Derivative Action Supreme Court of New
York. On February 29, 2008, a purported
shareholder derivative complaint was filed in the Supreme Court
of Nassau County, asserting the same state law claims against
the same defendants as in the consolidated amended complaint in
the Consolidated 2007 Derivative Litigation. On May 19,
2008, defendants filed a motion to dismiss or to stay the
proceedings in light of the pending Consolidated 2007 Derivative
Litigation. The motion is pending.
Derivative Action Delaware Court of
Chancery. On September 17, 2008, a purported
shareholder derivative complaint was filed in the Court of
Chancery of Delaware naming as defendants certain directors and
senior officers of AIG and its subsidiaries and asserting claims
on behalf of AIG based generally on the same allegations as in
the consolidated amended complaint in the Consolidated 2007
Derivative Litigation.
Action by the Starr Foundation Supreme Court
of New York. On May 7, 2008, the Starr
Foundation filed a complaint in New York State Supreme Court
against AIG, AIGs former Chief Executive Officer, Martin
Sullivan, and AIGs then Chief Financial Officer, Steven
Bensinger, asserting a claim for common law fraud. The complaint
alleges that the defendants made materially misleading
statements and omissions concerning alleged multi-billion dollar
losses in AIGs portfolio of credit default swaps. The
complaint asserts that if the Starr Foundation had known the
truth about the alleged losses, it would have sold its remaining
shares of AIG stock. The complaint alleges that the Starr
Foundation has suffered damages of at least $300 million.
On May 30, 2008, a motion to dismiss the complaint was
filed on behalf of defendants. The motion to dismiss, which has
been converted by the court into a motion for summary judgment,
is still pending.
Litigation
Relating to the Credit Agreement with the NY Fed
On November 4, 2008, a purported class action was filed in
the Delaware Court of Chancery naming as defendants AIG,
Chairman and Chief Executive Officer, Edward M. Liddy, and
current and past AIG directors. Plaintiff alleges violations of
Delaware General Corporation Law Section 242(b)(2) and breaches
of fiduciary duty in connection with the Series C Preferred
Stock to be issued to the Trust created for the benefit of the
United States Treasury pursuant to the Fed Credit Agreement.
Plaintiff seeks an order declaring that the Series C
Preferred Stock is not convertible into common stock absent a
class vote by the holders of the common stock to amend the
Restated Certificate of Incorporation to increase the number of
authorized common shares and decrease the par value of the
common shares, an order declaring that AIGs directors are
breaching their fiduciary duties in not seeking alternative or
supplemental financing in advance of a stockholder vote on such
an amendment to the Restated Certificate of Incorporation, and
damages. During a conference with the Court on November 7,
2008, AIGs counsel stated that any amendment to the
Restated Certificate of Incorporation to increase the number of
authorized common shares or to decrease the par value of the
common shares would be the subject of a class vote by the
holders of the common stock, and plaintiffs counsel agreed
that the plaintiffs request for an order granting this
relief is moot.
2006
Regulatory Settlements and Related Matters
2006 Regulatory Settlements. In February
2006, AIG reached a resolution of claims and matters under
investigation with the DOJ, the SEC, the Office of the New York
Attorney General (NYAG) and the New York State Department of
Insurance (DOI). AIG recorded an after-tax charge of
$1.15 billion relating to these settlements in the fourth
quarter of 2005. The settlements resolved investigations
conducted by the SEC, NYAG and DOI 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. These settlements did not,
however, resolve
29
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
|
|
7.
|
Commitments,
Contingencies and
Guarantees (continued)
|
investigations by regulators from other states into insurance
brokerage practices related to contingent commissions and other
broker-related conduct, such as alleged bid rigging. Nor did the
settlements resolve any obligations that AIG may have to state
guarantee funds in connection with any of these matters.
As a result of these settlements, AIG made payments or placed
amounts in escrow in 2006 totaling approximately
$1.64 billion, $225 million of which represented fines
and penalties. Amounts held in escrow totaling approximately
$337 million, including interest thereon, are included in
other assets at September 30, 2008. At that date, all of
the funds were escrowed for settlement of claims resulting from
the underpayment by AIG of its residual market assessments for
workers compensation.
In addition to the escrowed funds, $800 million was
deposited into a fund under the supervision of the SEC as part
of the settlements to be available to resolve claims asserted
against AIG by investors, including the securities class action
shareholder lawsuits described below.
Also, as part of the settlements, AIG agreed to retain, for a
period of three years, an independent consultant to conduct a
review that will include, among other things, the adequacy of
AIGs internal control over financial reporting, the
policies, procedures and effectiveness of AIGs regulatory,
compliance and legal functions and the remediation plan that AIG
has implemented as a result of its own internal review.
Other Regulatory Settlements. AIGs 2006
regulatory settlements with the SEC, DOJ, NYAG and DOI did not
resolve investigations by regulators from other states into
insurance brokerage practices. AIG entered into agreements
effective January 29, 2008 with the Attorneys General of
the States of Florida, Hawaii, Maryland, Michigan, Oregon, Texas
and West Virginia; the Commonwealths of Massachusetts and
Pennsylvania; and the District of Columbia; as well as the
Florida Department of Financial Services and the Florida Office
of Insurance Regulation, relating to their respective industry
wide investigations into producer compensation and insurance
placement practices. The settlements call for total payments of
$12.5 million to be allocated among the ten jurisdictions
representing restitution to state agencies and reimbursement of
the costs of the investigation. During the term of the
settlement agreements, AIG will continue to maintain certain
producer compensation disclosure and ongoing compliance
initiatives. AIG will also continue to cooperate with the
industry wide investigations. The agreement with the Texas
Attorney General also settles allegations of anticompetitive
conduct relating to AIGs relationship with Allied World
Assurance Company and includes an additional settlement payment
of $500,000 related thereto.
AIG entered into an agreement effective March 13, 2008 with
the Pennsylvania Insurance Department relating to the
Departments investigation into the affairs of AIG and
certain of its Pennsylvania-domiciled insurance company
subsidiaries. The settlement calls for total payments of
approximately $13.5 million, of which approximately
$4.4 million was paid under previous settlement agreements.
During the term of the settlement agreement, AIG will provide
annual reinsurance reports, as well as maintain certain producer
compensation disclosure and ongoing compliance initiatives.
NAIC Examination of Workers Compensation Premium
Reporting. During 2006, the Settlement Review
Working Group of the National Association of Insurance
Commissioners (NAIC), under the direction of the states of
Indiana, Minnesota and Rhode Island, began an investigation into
AIGs reporting of workers compensation premiums. In
late 2007, the Settlement Review Working Group recommended that
a multi-state targeted market conduct examination focusing on
workers compensation insurance be commenced under the
direction of the NAICs Market Analysis Working Group. AIG
was informed of the multi-state targeted market conduct
examination in January 2008. AIG has been advised that the lead
states in the multi-state examination are Delaware, Florida,
Indiana, Massachusetts, Minnesota, New York, Pennsylvania, and
Rhode Island and that all other states (and the District of
Columbia) have agreed to participate. AIG has also been advised
that the examination will focus on both legacy issues and
AIGs current compliance with legal requirements applicable
to AIGs writing and reporting of workers
compensation insurance, but as of October 31, 2008 no
determinations had been made with respect to these issues.
Securities Action Southern District of New
York. Beginning in October 2004, a number of
putative securities fraud class action suits were filed in the
Southern District of New York against AIG and consolidated as In
re American International Group, Inc. Securities Litigation.
Subsequently, a separate, though similar, securities fraud
action was also brought against AIG by certain Florida pension
funds. The lead plaintiff in the class action is a group of
public retirement systems and pension funds benefiting Ohio
state employees, suing on behalf of themselves and all
purchasers of AIGs publicly traded securities between
October 28, 1999 and April 1, 2005. The named
defendants are AIG and a number of present and former AIG
officers and directors, as well as Starr, SICO, General
Reinsurance Corporation (General Re), and PricewaterhouseCoopers
LLP (PwC), among others. The lead plaintiff alleges, among other
things, that AIG: (1) concealed that it engaged in
anti-competitive conduct through alleged payment of contingent
commissions to brokers and participation in illegal bid-rigging;
(2) concealed that it used
30
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
|
|
7.
|
Commitments,
Contingencies and
Guarantees (continued)
|
income smoothing products and other techniques to
inflate its earnings; (3) concealed that it marketed and
sold income smoothing insurance products to other
companies; and (4) misled investors about the scope of
government investigations. In addition, the lead plaintiff
alleges that AIGs former Chief Executive Officer, Maurice
R. Greenberg, manipulated AIGs stock price. The lead
plaintiff asserts claims for violations of Sections 11 and
15 of the Securities Act of 1933, Section 10(b) of the
Exchange Act and
Rule 10b-5
promulgated thereunder, Section 20(a) of the Exchange Act,
and Section 20A of the Exchange Act. In April 2006, the
court denied the defendants motions to dismiss the second
amended class action complaint and the Florida complaint. In
December 2006, a third amended class action complaint was filed,
which does not differ substantially from the prior complaint.
Fact and class discovery is currently ongoing. On
February 20, 2008, the lead plaintiff filed a motion for
class certification. The class certification motion is pending.
ERISA Action Southern District of New
York. Between November 30, 2004 and
July 1, 2005, several ERISA actions were filed in the
Southern District of New York on behalf of purported class
participants and beneficiaries of three pension plans sponsored
by AIG or its subsidiaries. A consolidated complaint filed on
September 26, 2005 alleges a class period between
September 30, 2000 and May 31, 2005 and names as
defendants AIG, the members of AIGs Retirement Board and
the Administrative Boards of the plans at issue, and present or
former members of AIGs Board of Directors. The factual
allegations in the complaint are essentially identical to those
in the securities actions described above. The parties have
reached an agreement to settle this matter for an amount within
AIGs insurance coverage limits. On July 3, 2008, the
Court granted preliminary approval of the settlement, and at a
hearing on October 7, 2008 the Court issued an order
finally approving the settlement, dismissing the action with
prejudice. The deadline for filing an appeal from the approval
order is November 7, 2008.
Derivative Action Southern District of New
York. Between October 25, 2004 and
July 14, 2005, seven separate derivative actions were filed
in the Southern District of New York, five of which were
consolidated into a single action (the New York 2004/2005
Derivative Litigation). The complaint in this action contains
nearly the same types of allegations made in the securities
fraud action described above. The named defendants include
current and former officers and directors of AIG, as well as
Marsh & McLennan Companies, Inc. (Marsh), SICO, Starr,
ACE Limited and subsidiaries (ACE), General Re, PwC, and certain
employees or officers of these entity defendants. Plaintiffs
assert claims for breach of fiduciary duty, gross mismanagement,
waste of corporate assets, unjust enrichment, insider selling,
auditor breach of contract, auditor professional negligence and
disgorgement from AIGs former Chief Executive Officer,
Maurice R. Greenberg, and former Chief Financial Officer, Howard
I. Smith, of incentive-based compensation and AIG share proceeds
under Section 304 of the Sarbanes-Oxley Act, among others.
Plaintiffs seek, among other things, compensatory damages,
corporate governance reforms, and a voiding of the election of
certain AIG directors. AIGs Board of Directors has
appointed a special committee of independent directors (Special
Committee) to review the matters asserted in the operative
consolidated derivative complaint. The court has entered an
order staying this action pending resolution of the Delaware
2004/2005 Derivative Litigation discussed below. The court also
has entered an order that termination of certain named
defendants from the Delaware action applies to this action
without further order of the court. On October 17, 2007,
plaintiffs and those AIG officer and director defendants against
whom the shareholder plaintiffs in the Delaware action are no
longer pursuing claims filed a stipulation providing for all
claims in this action against such defendants to be dismissed
with prejudice. Former directors and officers Maurice R.
Greenberg and Howard I. Smith have asked the court to refrain
from so ordering this stipulation.
Derivative Actions Delaware Chancery
Court. From October 2004 to April 2005, AIG
shareholders filed five derivative complaints in the Delaware
Chancery Court. All of these derivative lawsuits were
consolidated into a single action as In re American
International Group, Inc. Consolidated Derivative Litigation
(the Delaware 2004/2005 Derivative Litigation). The amended
consolidated complaint named 43 defendants (not including
nominal defendant AIG) who, as in the New York 2004/2005
Derivative Litigation, were current and former officers and
directors of AIG, as well as other entities and certain of their
current and former employees and directors. The factual
allegations, legal claims and relief sought in this action are
similar to those alleged in the New York 2004/2005 Derivative
Litigation, except that the claims are only under state law. In
early 2007, the court approved an agreement that AIG be
realigned as plaintiff, and, on June 13, 2007, acting on
the direction of the Special Committee, AIG filed an amended
complaint against former directors and officers Maurice R.
Greenberg and Howard I. Smith, alleging breach of fiduciary duty
and indemnification. Also on June 13, 2007, the Special
Committee filed a motion to terminate the litigation as to
certain defendants, while taking no action as to others.
Defendants Greenberg and Smith filed answers to AIGs
complaint and brought third-party complaints against certain
current and former AIG directors and officers, PwC and
Regulatory Insurance Services, Inc. On September 28, 2007,
AIG and the shareholder plaintiffs filed a combined amended
complaint in which AIG continued to assert claims
31
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
|
|
7.
|
Commitments,
Contingencies and
Guarantees (continued)
|
against defendants Greenberg and Smith and took no position as
to the claims asserted by the shareholder plaintiffs in the
remainder of the combined amended complaint. In that pleading,
the shareholder plaintiffs are no longer pursuing claims against
certain AIG officers and directors. On February 12, 2008,
the court granted AIGs motion to stay discovery pending
the resolution of claims against AIG in the New York
consolidated securities action. The court also directed the
parties to coordinate a briefing schedule for the motions to
dismiss. On April 11, 2008, the shareholder plaintiffs
filed the First Amended Combined Complaint, which added claims
against former AIG directors and officers Maurice Greenberg,
Edward Matthews, and Thomas Tizzio for breach of fiduciary duty
based on alleged bid-rigging in the municipal derivatives
market. On June 13, 2008, certain defendants filed motions
to dismiss the shareholder plaintiffs portions of the
complaint. The motions to dismiss are pending.
AIG is also named as a defendant in a derivative action in the
Delaware Chancery Court brought by shareholders of Marsh. On
July 10, 2008, shareholder plaintiffs filed a second
consolidated amended complaint, which contains claims against
AIG for aiding and abetting a breach of fiduciary duty and
contribution and indemnification in connection with alleged
bid-rigging and steering practices in the commercial insurance
market that are the subject of the Policyholder Antitrust and
RICO Actions described below.
Policyholder Antitrust and RICO
Actions. Commencing in 2004, policyholders brought
multiple federal antitrust and Racketeer Influenced and Corrupt
Organizations Act (RICO) class actions in jurisdictions across
the nation against insurers and brokers, including AIG and a
number of its subsidiaries, alleging that the insurers and
brokers engaged in a broad conspiracy to allocate customers,
steer business, and rig bids. These actions, including 24
complaints filed in different federal courts naming AIG or an
AIG subsidiary as a defendant, were consolidated by the judicial
panel on multi-district litigation and transferred to the United
States District Court for the District of New Jersey (District
of New Jersey) for coordinated pretrial proceedings. The
consolidated actions have proceeded in that court in two
parallel actions, In re Insurance Brokerage Antitrust Litigation
(the Commercial Complaint) and In re Employee Benefit Insurance
Brokerage Antitrust Litigation (the Employee Benefits Complaint,
and, together with the Commercial Complaint, the Multi-district
Litigation).
The plaintiffs in the Commercial Complaint are a group of
corporations, individuals and public entities that contracted
with the broker defendants for the provision of insurance
brokerage services for a variety of insurance needs. The broker
defendants are alleged to have placed insurance coverage on the
plaintiffs behalf with a number of insurance companies
named as defendants, including AIG subsidiaries. The Commercial
Complaint also named various brokers and other insurers as
defendants (three of which have since settled). The Commercial
Complaint alleges, among other things, that defendants engaged
in a widespread conspiracy to allocate customers through
bid-rigging and steering practices. Plaintiffs assert that the
defendants violated the Sherman Antitrust Act, RICO, and the
antitrust laws of 48 states and the District of Columbia,
and are liable under common law breach of fiduciary duty and
unjust enrichment theories. Plaintiffs seek treble damages plus
interest and attorneys fees as a result of the alleged
RICO and Sherman Antitrust Act violations.
The plaintiffs in the Employee Benefits Complaint are a group of
individual employees and corporate and municipal employers
alleging claims on behalf of two separate nationwide purported
classes: an employee class and an employer class that acquired
insurance products from the defendants from August 26, 1994
to the date of any class certification. The Employee Benefits
Complaint names AIG, as well as various other brokers and
insurers, as defendants. The activities alleged in the Employee
Benefits Complaint, with certain exceptions, track the
allegations made in the Commercial Complaint.
The Court in connection with the Commercial Complaint granted
(without leave to amend) defendants motions to dismiss the
federal antitrust and RICO claims on August 31, 2007 and
September 28, 2007, respectively. The court declined to
exercise supplemental jurisdiction over the state law claims in
the Commercial Complaint and therefore dismissed it in its
entirety. On January 14, 2008, the court granted
defendants motion for summary judgment on the ERISA claims
in the Employee Benefits Complaint and subsequently dismissed
the remaining state law claims without prejudice, thereby
dismissing the Employee Benefits Complaint in its entirety. On
February 12, 2008, plaintiffs filed a notice of appeal to
the United States Court of Appeals for the Third Circuit with
respect to the dismissal of the Employee Benefits Complaint.
Plaintiffs previously appealed the dismissal of the Commercial
Complaint to the United States Court of Appeals for the Third
Circuit on October 10, 2007. Both appeals are pending.
A number of complaints making allegations similar to those in
the Multi-district Litigation have been filed against AIG and
other defendants in state and federal courts around the country.
The defendants have thus far been successful in having the
federal actions transferred to the District of New Jersey and
consolidated into the Multi-district Litigation. These
additional consolidated actions are still pending in the
District of New Jersey, but are currently stayed pending
32
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
|
|
7.
|
Commitments,
Contingencies and
Guarantees (continued)
|
a decision by the court on whether they will proceed during the
appeal of the dismissal of the Multi-district Litigation. On
August 20, 2008, the District Court, however, granted
plaintiffs motion to lift the stay in one tag-along matter
and suggested that the case be remanded to the transferor court,
and on September 17, 2008, the Judicial Panel on
Multidistrict Litigation filed a Conditional Transfer Order with
respect to this matter. The AIG defendants have also sought to
have state court actions making similar allegations stayed
pending resolution of the Multi-district Litigation proceeding.
These efforts have generally been successful, although
plaintiffs in one case pending in Texas state court have moved
to re-open discovery; a hearing on that motion was held on
April 9, 2008. The court subsequently issued an order
deferring a ruling on the motion until the Court holds a hearing
on defendants Special Exceptions. A hearing date has not
yet been set. AIG has recently settled several of the various
federal and state actions alleging claims similar to those in
the Multi-district Litigation, including a state court action
pending in Florida in which discovery had been allowed to
proceed.
Ohio Attorney General Action Ohio Court of
Common Pleas. On August 24, 2007, the Ohio
Attorney General filed a complaint in the Ohio Court of Common
Pleas against AIG and a number of its subsidiaries, as well as
several other broker and insurer defendants, asserting violation
of Ohios antitrust laws. The complaint, which is similar
to the Commercial Complaint, alleges that AIG and the other
broker and insurer defendants conspired to allocate customers,
divide markets, and restrain competition in commercial lines of
casualty insurance sold through the broker defendant. The
complaint seeks treble damages on behalf of Ohio public
purchasers of commercial casualty insurance, disgorgement on
behalf of both public and private purchasers of commercial
casualty insurance, as well as a $500 per day penalty for each
day of conspiratorial conduct. AIG, along with other
co-defendants, moved to dismiss the complaint on
November 16, 2007. On June 30, 2008, the Court denied
defendants motion to dismiss. On August 18, 2008,
defendants filed their answers to the complaint. Discovery is
ongoing.
Action Relating to Workers Compensation Premium
Reporting Northern District of
Illinois. On May 24, 2007, the National
Workers Compensation Reinsurance Pool (the NWCRP), on behalf of
its participant members, filed a lawsuit in the United States
District Court for the Northern District of Illinois against AIG
with respect to the underpayment by AIG of its residual market
assessments for workers compensation. The complaint alleges
claims for violations of RICO, breach of contract, fraud and
related state law claims arising out of AIGs alleged
underpayment of these assessments between 1970 and the present
and seeks damages purportedly in excess of $1 billion. On
August 6, 2007, the court denied AIGs motion seeking
to dismiss or stay the complaint or, in the alternative, to
transfer to the Southern District of New York. On
December 26, 2007, the court denied AIGs motion to
dismiss the complaint. On March 17, 2008, AIG filed an
amended answer, counterclaims and third-party claims against the
National Council on Compensation Insurance (in its capacity as
attorney-in-fact for the NWCRP), the NWCRP, its board members,
and certain of the other insurance companies that are members of
the NWCRP alleging violations of RICO, as well as claims for
conspiracy, fraud, and other state law claims. The
counterclaim-and third-party defendants filed motions to dismiss
on June 9, 2008. The motions are scheduled for decision on
November 20, 2008. Discovery is currently ongoing while the
motions are pending.
Action Relating to Workers Compensation Premium
Reporting Minnesota. On
February 16, 2006, the Attorney General of the State of
Minnesota filed a complaint against AIG with respect to claims
by the Minnesota Department of Revenue and the Minnesota Special
Compensation Fund, alleging that AIG made false statements and
reports to Minnesota agencies and regulators, unlawfully
reducing AIGs contributions and payments to Minnesota and
certain state funds relating to its workers compensation
premiums. While AIG settled that litigation in December 2007, a
similar lawsuit was filed by the Minnesota Workers Compensation
Reinsurance Association and the Minnesota Workers Compensation
Insurers Association in the United States District Court for the
District of Minnesota. On March 28, 2008, the court granted
AIGs motion to dismiss the case in its entirety. On
April 25, 2008, plaintiffs appealed to the United States
Court of Appeals for the Eighth Circuit and also filed a new
complaint making similar allegations in Minnesota state court.
On April 30, 2008, substantially identical claims were also
filed in Minnesota state court by the Minnesota Insurance
Guaranty Association and Minnesota Assigned Risk Plan. On
September 11, 2008, the parties to both actions entered
into a settlement, resulting in the dismissal of all claims
against AIG. In exchange for the dismissal and a broad release
of claims, the financial terms of the settlement provided for
AIGs payment of $21.5 million to plaintiffs and
waiver of its right to collect $3.5 million in payments due
from the plaintiffs.
Action Relating to Workers Compensation Premium
Reporting District of South Carolina. A
purported class action was also filed in the United States
District Court for the District of South Carolina on
January 25, 2008 against AIG and certain of its
subsidiaries, on behalf of a class of employers that obtained
workers compensation insurance from AIG companies and
allegedly paid inflated premiums as a result of AIGs
alleged underreporting of workers
33
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
|
|
7.
|
Commitments,
Contingencies and
Guarantees (continued)
|
compensation premiums. An amended complaint was filed on
March 24, 2008, and AIG filed a motion to dismiss the
amended complaint on April 21, 2008. On July 8, 2008,
the court granted AIGs motion to dismiss all claims
without prejudice and granted plaintiff leave to refile subject
to certain conditions. Plaintiffs filed their second amended
complaint on July 22, 2008. AIG moved to dismiss the second
amended complaint on August 22, 2008. Discovery is stayed
pending resolution of the motion to dismiss.
Litigation
Relating to SICO and Starr
SICO Action. In July, 2005 SICO filed a
complaint against AIG in the Southern District of New York,
claiming that AIG had refused to provide SICO access to certain
artwork, and asking the court to order AIG immediately to
release the property to SICO. AIG filed an answer denying
SICOs allegations and setting forth defenses to
SICOs claims. In addition, AIG filed counterclaims
asserting breach of contract, unjust enrichment, conversion,
breach of fiduciary duty, a constructive trust and declaratory
judgment, relating to SICOs breach of its commitment to
use its AIG shares only for the benefit of AIG and AIG
employees. On June 23, 2008, the Court denied in part and
granted in part SICOs motion for summary judgment,
and on July 31, 2008 the parties submitted a joint
pre-trial order. Trial is scheduled to commence on March 2,
2009.
Derivative Action Relating to Starr and
SICO. On December 31, 2002, a derivative
lawsuit was filed in the Delaware Chancery Court against twenty
directors and executives of AIG as well as against AIG as a
nominal defendant that alleges, among other things, that the
directors of AIG breached the fiduciary duties of loyalty and
care by approving the payment of commissions to insurance
managing general agencies owned by Starr and of rental and
service fees to SICO and the executives breached their duty of
loyalty by causing AIG to enter into contracts with Starr and
SICO and their fiduciary duties by usurping AIGs corporate
opportunities. The complaint further alleges that the Starr
agencies did not provide any services that AIG was not capable
of providing itself, and that the diversion of commissions to
these entities was solely for the benefit of Starrs
owners. The complaint also alleges that the service fees and
rental payments made to SICO and its subsidiaries were improper.
Under the terms of a stipulation approved by the Court on
February 16, 2006, the claims against the outside
independent directors were dismissed with prejudice, while the
claims against the other directors were dismissed without
prejudice. In an opinion dated June 21, 2006, the Court
denied defendants motion to dismiss, except with respect
to plaintiffs challenge to payments made to Starr before
January 1, 2000. On July 21, 2006, plaintiff filed its
second amended complaint, which alleges that, between
January 1, 2000 and May 31, 2005, individual
defendants breached their duty of loyalty by causing AIG to
enter into contracts with Starr and SICO and breached their
fiduciary duties by usurping AIGs corporate opportunity.
Starr is charged with aiding and abetting breaches of fiduciary
duty and unjust enrichment for its acceptance of the fees. SICO
is no longer named as a defendant. On June 27, 2007, Starr
filed a cross-claim against AIG, alleging one count that
includes contribution, unjust enrichment and setoff. On
November 15, 2007, the Court granted AIGs motion to
dismiss the cross-claim by Starr to the extent that it sought
affirmative relief from AIG. On February 14, 2008, the
Court granted a motion to add former AIG officer Thomas Tizzio
as a defendant. As a result, the remaining defendants in the
case are AIG (the nominal defendant), Starr and former directors
and officers Maurice Greenberg, Howard Smith, Edward Matthews
and Thomas Tizzio. On September 30, 2008, the parties filed
a stipulation of settlement, and the court scheduled a
settlement hearing for December 17, 2008. Pursuant to the
settlement, defendants have agreed to payment of
$115 million to AIG, net of attorneys fees and costs,
in exchange for receipt of a broad release of claims relating to
the allegations in the complaint.
Litigation
Matters Relating to AIGs General Insurance
Operations
Caremark. 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). The plaintiffs in the second-filed action have
intervened in the first-filed action, and the second-filed
action has been dismissed. An excess policy issued by a
subsidiary of AIG with respect to the 1999 litigation was
expressly stated to be without limit of liability. In the
current actions, plaintiffs allege that the judge approving the
1999 settlement was misled as to the extent of available
insurance coverage and would not have approved the settlement
had he known of the existence
and/or
unlimited nature of the excess policy. They further allege that
AIG, its subsidiaries, and Caremark are liable for fraud and
suppression for misrepresenting
and/or
concealing the nature and extent of coverage. In addition, the
intervenor-plaintiffs allege that various lawyers and law firms
who represented parties in the underlying class and derivative
litigation (the Lawyer Defendants) are also liable for fraud and
suppression, misrepresentation, and breach of fiduciary duty.
The complaints filed by the plaintiffs and the
intervenor-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 that information concerning the
excess policy was publicly disclosed months prior to the
approval
34
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
|
|
7.
|
Commitments,
Contingencies and
Guarantees (continued)
|
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. The plaintiffs and intervenor-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 November 26, 2007, the
trial court issued an order that dismissed the intervenors
complaint against the Lawyer Defendants and entered a final
judgment in favor of the Lawyer Defendants. The matter was
stayed pending appeal to the Alabama Supreme Court. In September
2008 the Alabama Supreme Court affirmed the trial courts
dismissal of the Lawyer Defendants. It is anticipated that the
next steps will be class discovery and a hearing on class
certification. AIG cannot reasonably estimate either the
likelihood of its prevailing in these actions or the potential
damages in the event liability is determined.
Flight
Equipment
At September 30, 2008, International Lease Finance
Corporation (ILFC) had committed to purchase 174 new aircraft
deliverable from 2008 through 2019 at an estimated aggregate
purchase price of $16.9 billion. 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.
ILFC has ordered 74 Boeing 787 aircraft with the first aircraft
now scheduled to be delivered in late 2011. Boeing has made
several announcements concerning the delays in the deliveries of
the 787s. Boeing has informed ILFC that its 787 deliveries will
be delayed, on average, an excess of 27 months per
aircraft. Such delays will span across ILFCs entire order,
with the original contracted deliveries running from 2010
through 2017. ILFC expects further delays on its future Boeing
aircraft deliveries resulting from the recent labor strike.
Other
Commitments
In the normal course of business, AIG enters into commitments to
invest in limited partnerships, private equities, hedge funds
and mutual funds and to purchase and develop real estate in the
U.S. and abroad. These commitments totaled
$8.4 billion at September 30, 2008.
On June 27, 2005, AIG entered into an agreement pursuant to
which AIG agreed, 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 discussed below under Benefits Provided
by Starr International Company, Inc. and C.V. Starr &
Co., Inc.).
Loss
Reserves
Although AIG regularly reviews the adequacy of the established
reserve for losses and loss expenses, there can be no assurance
that AIGs ultimate loss reserves will not develop
adversely and materially exceed AIGs 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, 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 cost 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.
Deferred
Tax Assets
AIGs determination of the realizability of deferred tax
assets requires estimates of future taxable income. Such
estimates could change in the near term, perhaps materially,
which may require AIG to adjust its valuation allowance. Such
adjustment, either positive or negative, could be material to
AIGs consolidated financial condition or its results of
operations. See Note 9 to the Consolidated Financial
Statements.
Benefits
Provided by Starr International Company, Inc. and C.V.
Starr & Co., Inc.
SICO has provided a series of two-year Deferred Compensation
Profit Participation Plans (SICO Plans) to certain AIG
employees. The SICO Plans were created 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
35
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
|
|
7.
|
Commitments,
Contingencies and
Guarantees (continued)
|
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
considered to be 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 participants voluntary termination of employment
with AIG prior to normal retirement age. Under the SICO Plans,
SICOs 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. AIG
gave effect to this change in settlement method beginning on
December 9, 2005, the date of SICOs notice to
participants in the SICO Plans.
AIG and certain of its subsidiaries are parties to derivative
financial instruments with market risk resulting from both
dealer and end-user activities to reduce currency, interest
rate, equity and commodity exposures. These instruments are
carried at their fair value in the consolidated balance sheet.
The majority of AIGs derivative activity is transacted by
AIGFP. See Note 8 to the Consolidated Financial Statements
included in the 2007 Annual Report on
Form 10-K.
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.
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.
See also Note 11 to the Consolidated Financial Statements
for information on the termination of selected AIG voluntary
non-qualified deferred compensation plans.
36
American International Group, Inc.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
The components of
the net periodic benefit cost with respect to pensions and other
postretirement benefits were as follows:
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Pensions
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Postretirement
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Non-U.S.
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U.S.
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Non-U.S.
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U.S.
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(in millions)
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Plans
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Plans
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Total
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Plans
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Plans
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Total
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Three Months Ended September 30, 2008
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Components of net periodic benefit cost:
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Service cost
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$
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34
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