Edgar Filing: AMERICAN INTERNATIONAL GROUP INC

e10vq

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

Form 10-Q


(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended June 30, 2009
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File Number 1-8787

American International Group, Inc.

(Exact name of registrant as specified in its charter)


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

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o

(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 July 31, 2009, there were 134,575,809 shares outstanding of the registrant’s common stock.

TABLE OF CONTENTS


			Page
Description			Number

PART I — FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited)		3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		88
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		199
	Item 4.	Controls and Procedures		199

PART II — OTHER INFORMATION
	Item 1.	Legal Proceedings		200
	Item 1A.	Risk Factors		200
	Item 4.	Submission of Matters to a Vote of Security Holders		201
	Item 6.	Exhibits		202
SIGNATURE				203
EX-12
EX-31
EX-32

American International Group, Inc. and Subsidiaries

Part I — FINANCIAL INFORMATION


ITEM 1.	*Financial Statements (unaudited)*

Consolidated Balance Sheet


	June 30,		December 31,
	2009		2008
	(In millions)
	(Unaudited)

Assets:
Investments:
Fixed maturity securities:
Bonds available for sale, at fair value (amortized cost: 2009 — $372,480; 2008 — $373,600)	$	353,708	$	363,042
Bond trading securities, at fair value		31,359		37,248
Securities lending invested collateral, at fair value (cost: 2009 — $1,334; 2008 — $3,905)		1,108		3,844
Equity securities:
Common and preferred stock available for sale, at fair value (cost: 2009 — $7,030; 2008 — $8,381)		9,289		8,808
Common and preferred stock trading, at fair value		13,214		12,335
Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2009 — $99; 2008 — $131)		32,380		34,687
Finance receivables, net of allowance		25,342		30,949
Flight equipment primarily under operating leases, net of accumulated depreciation		44,692		43,395
Other invested assets (portion measured at fair value: 2009 — $15,739; 2008 — $19,196)		43,596		51,978
Securities purchased under agreements to resell, at fair value		4,481		3,960
Short-term investments (portion measured at fair value: 2009 — $24,726; 2008 — $19,316)		59,336		46,666

Total investments		618,505		636,912
Cash		5,802		8,642
Investment income due and accrued		5,530		5,999
Premiums and insurance balances receivable, net of allowance		17,382		17,330
Reinsurance assets, net of allowance		22,364		23,495
Trade receivables		817		1,901
Current and deferred income taxes		11,136		11,734
Deferred policy acquisition costs		44,176		45,782
Real estate and other fixed assets, net of accumulated depreciation		4,984		5,566
Unrealized gain on swaps, options and forward transactions, at fair value		11,239		13,773
Goodwill		6,439		6,952
Other assets, including prepaid commitment asset of $13,814 in 2009 and $15,458 in 2008 (portion measured at fair value: 2009 — $306; 2008 — $369)		28,570		31,190
Separate account assets, at fair value		53,468		51,142

Total assets	$	830,412	$	860,418

See Accompanying Notes to Consolidated Financial Statements.

American International Group, Inc. and Subsidiaries

Consolidated Balance Sheet — (Continued)


	June 30,			December 31,
	2009			2008
	(In millions, except
	share data)
	(Unaudited)

Liabilities:
Liability for unpaid claims and claims adjustment expense	$	82,088		$	89,258
Unearned premiums		23,371			25,735
Future policy benefits for life and accident and health insurance contracts		145,715			142,334
Policyholder contract deposits (portion measured at fair value: 2009 — $7,273; 2008 — $5,458)		218,433			226,700
Other policyholder funds		13,623			13,240
Commissions, expenses and taxes payable		5,203			5,436
Insurance balances payable		4,722			3,668
Funds held by companies under reinsurance treaties		2,106			2,133
Securities sold under agreements to repurchase (portion measured at fair value: 2009 — $2,716; 2008 — $4,508)		3,191			5,262
Trade payables		780			977
Securities and spot commodities sold but not yet purchased, at fair value		1,242			2,693
Unrealized loss on swaps, options and forward transactions, at fair value		4,876			6,238
Trust deposits and deposits due to banks and other depositors (portion measured at fair value: 2009 — $26; 2008 — $30)		2,687			4,498
Commercial paper and other short-term debt		197			613
Federal Reserve Bank of New York Commercial Paper Funding Facility (portion measured at fair value: 2009 — $6,233; 2008 — $6,802)		11,152			15,105
Federal Reserve Bank of New York credit facility		44,816			40,431
Other long-term debt (portion measured at fair value: 2009 — $16,153; 2008 — $16,595)		123,528			137,054
Securities lending payable		1,533			2,879
Other liabilities (portion measured at fair value: 2009 — $3,277; 2008 — $1,355)		24,476			22,296
Separate account liabilities		53,468			51,142

Total liabilities		767,207			797,692

Commitments, contingencies and guarantees (see Note 10)
Redeemable noncontrolling interest in partially owned consolidated subsidiaries		1,072			1,921
AIG shareholders’ equity:
Preferred stock, Series E; $5.00 par value and aggregate liquidation preference of $41,604,576,000; shares issued: 2009 — 400,000		2			—
Preferred stock, Series F; $5.00 par value and aggregate liquidation preference of $1,149,999,000; shares issued: 2009 — 300,000		1			—
Preferred stock, Series C; $5.00 par value and aggregate liquidation preference of $500,000; shares issued: 2009 — 100,000		1			—
Preferred stock, Series D; $5.00 par value and aggregate liquidation preference of $40,000,000,000; shares issued: 2009 — 0 and 2008 — 4,000,000		—			20
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2009 — 147,377,020; 2008 — 147,401,900		368			368
Treasury stock, at cost; 2009 — 12,807,642; 2008 — 12,918,446 shares of common stock		(8,314	)		(8,450	)
Additional paid-in capital		80,259			79,468
Accumulated deficit		(3,073	)		(12,368	)
Accumulated other comprehensive loss		(11,286	)		(6,328	)

Total AIG shareholders’ equity		57,958			52,710

Noncontrolling interest		4,175			8,095

Total equity		62,133			60,805

Total liabilities and equity	$	830,412		$	860,418

See Accompanying Notes to Consolidated Financial Statements.

American International Group, Inc. and Subsidiaries

Consolidated Statement of Income (Loss)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
	(Dollars in millions, except per share data)
	(Unaudited)

Revenues:
Premiums and other considerations	$	17,769		$	21,735		$	36,589		$	42,407
Net investment income		8,785			6,728			11,068			11,682
Net realized capital losses:
Total other-than-temporary impairments on available for sale securities		(1,190	)		(6,720	)		(5,051	)		(12,260	)
Portion of other-than-temporary impairments on available for sale fixed maturity securities recognized in Accumulated other comprehensive loss		369			—			369			—

Net other-than-temporary impairments on available for sale securities recognized in net income (loss)		(821	)		(6,720	)		(4,682	)		(12,260	)
Other realized capital gains (losses)		(478	)		639			281			90

Total net realized capital losses		(1,299	)		(6,081	)		(4,401	)		(12,170	)
Unrealized market valuation gains (losses) on AIGFP super senior credit default swap portfolio		636			(5,565	)		184			(14,672	)
Other income (loss)		3,634			3,116			6,543			6,717

Total revenues		29,525			19,933			49,983			33,964

Benefits, claims and expenses:
Policyholder benefits and claims incurred		17,273			18,450			33,316			34,332
Policy acquisition and other insurance expenses		5,694			6,029			10,988			11,641
Interest expense		2,600			1,333			5,445			2,605
Restructuring expenses and related asset impairment and other expenses		343			—			705			—
Other expenses		2,296			2,877			4,578			5,406

Total benefits, claims and expenses		28,206			28,689			55,032			53,984

Income (loss) before income tax expense (benefit)		1,319			(8,756	)		(5,049	)		(20,020	)
Income tax expense (benefit)		(526	)		(3,357	)		(1,761	)		(6,894	)

Net income (loss)		1,845			(5,399	)		(3,288	)		(13,126	)

Less: net income (loss) attributable to noncontrolling interest		23			(42	)		(757	)		36

Net income (loss) attributable to AIG	$	1,822		$	(5,357	)	$	(2,531	)	$	(13,162	)

Net income (loss) attributable to AIG common shareholders	$	311		$	(5,357	)	$	(3,826	)	$	(13,162	)
Income (loss) per common share attributable to AIG:
Basic	$	2.30		$	(41.13	)	$	(28.29	)	$	(102.24	)
Diluted	$	2.30		$	(41.13	)	$	(28.29	)	$	(102.24	)

Dividends declared per common share	$	—		$	4.42		$	—		$	8.33

Weighted average shares outstanding:
Basic		135,281,740			130,248,736			135,267,735			128,732,239
Diluted		135,336,440			130,248,736			135,267,735			128,732,239

See Accompanying Notes to Consolidated Financial Statements.

American International Group, Inc. and Subsidiaries

Consolidated Statement of Equity


Six Months Ended June 30, 2009	Amounts
	(In millions, except share and
	per share data)
	(Unaudited)

Preferred Stock, Series E:
Balance, beginning of period	$	—
Issuances		2

Balance, end of period		2

Preferred Stock, Series F:
Balance, beginning of period		—
Issuances		1

Balance, end of period		1

Preferred Stock, Series C:
Balance, beginning of period		—
Issuances		1

Balance, end of period		1

Preferred Stock, Series D:
Balance, beginning of period		20
Shares exchanged for Series E preferred stock		(20	)

Balance, end of period		—

Common stock:
Balance, beginning and end of period		368

Treasury stock, at cost:
Balance, beginning of period		(8,450	)
Shares issued under stock plans		136
Other		—

Balance, end of period		(8,314	)

Additional paid-in capital:
Balance, beginning of period		79,468
Excess of proceeds over par value of preferred stock issued		1,000
Reclassification of warrants upon change in accounting principle		(91	)
Excess of cost over proceeds of common stock issued under stock plans		(136	)
Other		18

Balance, end of period		80,259

Accumulated deficit:
Balance, beginning of period		(12,368	)
Cumulative effect of change in accounting principle		15

Adjusted balance, beginning of period		(12,353	)
Net loss attributable to AIG for the three months ended March 31, 2009		(4,353	)

Balance, March 31, 2009		(16,706	)
Cumulative effect of change in accounting principle as of April 1, 2009, net of tax		11,811

Adjusted balance, April 1, 2009		(4,895	)
Net income attributable to AIG for the three months ended June 30, 2009		1,822

Balance, end of period		(3,073	)

Accumulated other comprehensive loss:
Unrealized appreciation (depreciation) of fixed maturity investments on which other-than-temporary credit impairments were taken:
Balance, beginning of period, net of tax		(599	)
Cumulative effect of change in accounting principle as of April 1, 2009, net of tax		(2,537	)
Unrealized appreciation (depreciation) of investments, net of reclassification adjustments		1,111
Income tax benefit (expense)		(450	)

Balance, end of period, net of tax		(2,475	)

Unrealized appreciation (depreciation) of all other investments:
Balance, beginning of period, net of tax		(3,853	)
Cumulative effect of change in accounting principle as of April 1, 2009, net of tax		(6,811	)
Unrealized appreciation (depreciation) of investments, net of reclassification adjustments		5,496
Income tax benefit (expense)		(2,471	)

Balance, end of period, net of tax		(7,639	)

Foreign currency translation adjustments:
Balance, beginning of period, net of tax		(187	)
Translation adjustment		1,002
Income tax benefit (expense)		(409	)

Balance, end of period, net of tax		406

See Accompanying Notes to Consolidated Financial Statements.

American International Group, Inc. and Subsidiaries

Consolidated Statement of Equity — (Continued)


Six Months Ended June 30, 2009	Amounts
	(In millions, except share and
	per share data)
	(Unaudited)

Net derivative gains (losses) arising from cash flow hedging activities:
Balance, beginning of period, net of tax		(191	)
Net gains (losses) on cash flow hedges, net of reclassification adjustments		71
Income tax benefit (expense)		(21	)

Balance, end of period, net of tax		(141	)

Retirement plan liabilities adjustment:
Balance, beginning of period, net of tax		(1,498	)
Net actuarial loss		97
Prior service credit		(6	)
Income tax benefit (expense)		(30	)

Balance, end of period, net of tax		(1,437	)

Accumulated other comprehensive loss, end of period, net of tax		(11,286	)

Total AIG shareholders’ equity, end of period		57,958

Noncontrolling interest:
Balance, beginning of period		8,095
Contributions from noncontrolling interest		475
Distributions to noncontrolling interest		(264	)
Net decrease due to deconsolidation		(3,306	)
Net income (loss) attributable to noncontrolling interest*		(935	)
Accumulated other comprehensive income		110

Balance, end of period		4,175

Total equity, end of period	$	62,133


*		A net gain of $178 million was recognized in the six-month period ended June 30, 2009 associated with redeemable noncontrolling interests (not reflected above)

See Accompanying Notes to Consolidated Financial Statements.

American International Group, Inc. and Subsidiaries

Consolidated Statement of Cash Flows


Six Months Ended June 30,	2009			2008
	(In millions)
	(Unaudited)

Summary:
Net cash provided by operating activities	$	8,036		$	16,128
Net cash provided by (used in) investing activities		7,534			(22,140	)
Net cash provided by (used in) financing activities		(18,441	)		5,912
Effect of exchange rate changes on cash		31			45

Change in cash		(2,840	)		(55	)
Cash at beginning of period		8,642			2,284

Cash at end of period	$	5,802		$	2,229

Cash flows from operating activities:
Net loss	$	(3,288	)	$	(13,126	)

Adjustments to reconcile net loss to net cash provided by operating activities:
Noncash revenues, expenses, gains and losses included in income (loss):
Unrealized market valuation (gains) losses on AIGFP super senior credit default swap portfolio		(184	)		14,672
Net gains on sales of securities available for sale and other assets		(868	)		(494	)
Net (gains) losses on sales of divested businesses		316			—
Foreign exchange transaction (gains) losses		413			857
Net unrealized (gains) losses on non-AIGFP derivatives and other assets and liabilities		(4,452	)		2,086
Equity in (income) loss from equity method investments, net of dividends or distributions		1,912			(151	)
Amortization of deferred policy acquisition costs		6,347			7,343
Depreciation and other amortization		1,454			1,799
Provision for mortgage, other loans and finance receivables		1,526			578
Other-than-temporary impairments		4,970			12,370
Impairments of goodwill and other assets		867			97
Amortization of costs and accrued interest and fees related to FRBNY credit facility		2,829			—
Changes in operating assets and liabilities:
General and life insurance reserves		2,027			9,748
Premiums and insurance balances receivable and payable — net		320			(1,104	)
Reinsurance assets		1,127			196
Capitalization of deferred policy acquisition costs		(6,406	)		(9,160	)
Investment income due and accrued		362			118
Funds held under reinsurance treaties		(1	)		(25	)
Other policyholder funds		320			851
Income taxes receivable and payable — net		(1,016	)		(6,960	)
Commissions, expenses and taxes payable		(165	)		52
Other assets and liabilities — net		813			1,426
Trade receivables and payables — net		888			(6,446	)
Trading securities		(31	)		930
Net unrealized (gains) losses on swaps, options and forward transactions (net of cash collateral)		1,473			(3,993	)
Securities purchased under agreements to resell		(521	)		4,353
Securities sold under agreements to repurchase		(2,106	)		1,237
Securities and spot commodities sold but not yet purchased		(1,451	)		(1,531	)
Finance receivables and other loans held for sale — originations and purchases		(52	)		(279	)
Sales of finance receivables and other loans — held for sale		49			477
Other, net		564			207

Total adjustments		11,324			29,254

Net cash provided by operating activities	$	8,036		$	16,128

See Accompanying Notes to Consolidated Financial Statements.

American International Group, Inc. and Subsidiaries

Consolidated Statement of Cash Flows — (Continued)


Six Months Ended June 30,	2009			2008
	(In millions)
	(Unaudited)
Cash flows from investing activities:
Proceeds from (payments for)
Sales of fixed maturity securities available for sale and hybrid investments	$	29,408		$	31,608
Maturities of fixed maturity securities available for sale and hybrid investments		10,110			10,418
Sales of equity securities available for sale		2,767			4,861
Maturities of fixed maturity securities held to maturity		—			33
Sales of trading securities		9,739			14,120
Sales of flight equipment		97			372
Sales or distributions of other invested assets		5,767			8,715
Sales of divested businesses, net		2,855			—
Principal payments received on mortgage and other loans receivable		3,861			3,457
Principal payments received on and sales of finance receivables held for investment		6,908			6,757
Purchases of fixed maturity securities available for sale and hybrid investments		(32,225	)		(47,114	)
Purchases of equity securities available for sale		(1,780	)		(5,808	)
Purchases of fixed maturity securities held to maturity		—			(88	)
Purchases of trading securities		(5,256	)		(9,244	)
Purchases of flight equipment (including progress payments)		(2,121	)		(2,950	)
Purchases of other invested assets		(3,741	)		(11,988	)
Mortgage and other loans receivable issued		(2,614	)		(3,340	)
Finance receivables held for investment — originations and purchases		(3,344	)		(8,778	)
Change in securities lending invested collateral		2,057			6,315
Net additions to real estate, fixed assets, and other assets		(252	)		(663	)
Net change in short-term investments		(14,369	)		(18,832	)
Net change in non-AIGFP derivative assets and liabilities		(304	)		186
Other, net		(29	)		(177	)

Net cash provided by (used in) investing activities	$	7,534		$	(22,140	)

Cash flows from financing activities:
Proceeds from (payments for)
Policyholder contract deposits	$	17,534		$	33,322
Policyholder contract withdrawals		(26,369	)		(27,926	)
Change in other deposits		182			682
Change in commercial paper and other short-term debt		(414	)		1,930
Change in Federal Reserve Bank of New York Commercial Paper Funding Facility borrowings		(4,118	)		—
Federal Reserve Bank of New York credit facility borrowings		15,700			—
Federal Reserve Bank of New York credit facility repayments		(12,500	)		—
Issuance of other long-term debt		2,558			55,685
Repayments on other long-term debt		(10,970	)		(56,645	)
Change in securities lending payable		(1,377	)		(6,919	)
Distributions to noncontrolling interest		(264	)		(193	)
Contributions from noncontrolling interest		463			543
Drawdown on the Department of the Treasury Commitment		1,150			—
Issuance of common stock		—			7,343
Issuance from treasury stock		—			11
Payments advanced to purchase shares		—			(1,000	)
Cash dividends paid to shareholders		—			(1,036	)
Other, net		(16	)		115

Net cash provided by (used in) financing activities	$	(18,441	)	$	5,912

Supplementary disclosure of cash flow information:
Cash paid (received) during the period for:
Interest	$	3,265		$	3,493
Taxes	$	(746	)	$	66
Non-cash financing/investing activities:
Interest credited to policyholder accounts included in financing activities	$	7,244		$	3,815
Treasury stock acquired using payments advanced to purchase shares	$	—		$	1,912
Present value of future contract adjustment payments related to issuance of equity units	$	—		$	431
Long-term debt reduction due to deconsolidations	$	1,102		$	—
Debt assumed on acquisitions and warehoused investments	$	—		$	153

See Accompanying Notes to Consolidated Financial Statements.

American International Group, Inc. and Subsidiaries

Consolidated Statement of Comprehensive Income (Loss)


	Three Months Ended						Six Months
	June 30,						Ended June 30,
	2009			2008			2009			2008
	(In millions)
	(Unaudited)

Net income (loss)	$	1,845		$	(5,399	)	$	(3,288	)	$	(13,126	)

Other comprehensive income (loss):
Cumulative effect of change in accounting principle		—			—			—			(162	)
Income tax benefit on above change in accounting principle		—			—			—			57
Unrealized appreciation (depreciation) of fixed maturity investments on which other-than-temporary credit impairments were taken		1,112			—			1,112			—
Income tax benefit (expense) on above changes		(450	)		—			(450	)		—
Unrealized appreciation (depreciation) of all other investments — net of reclassification adjustments		8,957			(3,737	)		5,585			(14,414	)
Income tax benefit (expense) on above changes		(3,863	)		1,065			(2,471	)		4,813
Foreign currency translation adjustments		1,936			(221	)		995			1,196
Income tax benefit (expense) on above changes		(618	)		127			(409	)		(124	)
Net derivative gains (losses) arising from cash flow hedging activities — net of reclassification adjustments		45			144			71			11
Income tax benefit (expense) on above changes		(48	)		(50	)		(21	)		(5	)
Change in retirement plan liabilities adjustment		33			7			91			13
Income tax benefit (expense) on above changes		(12	)		(5	)		(30	)		(3	)

Other comprehensive income (loss):		7,092			(2,670	)		4,473			(8,618	)

Comprehensive income (loss)		8,937			(8,069	)		1,185			(21,744	)
Comprehensive income (loss) attributable to noncontrolling interests		193			(80	)		(674	)		(36	)

Comprehensive income (loss) attributable to AIG	$	8,744		$	(7,989	)	$	1,859		$	(21,708	)

See Accompanying Notes to Consolidated Financial Statements.

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 consolidated financial statements and should be read in conjunction with the audited consolidated financial statements and the related notes included in the Form 8-K filed on June 29, 2009 (the 2008 Financial Statements).

In the opinion of management, these consolidated financial statements contain the normal recurring adjustments necessary for a fair statement of the results presented herein. AIG evaluated the need to disclose events that occurred subsequent to the balance sheet date through August 7, 2009, the date the financial statements were issued. All material intercompany accounts and transactions have been eliminated.

Going Concern Considerations

In the 2008 Financial Statements, management disclosed the conditions and events that led management to conclude that AIG would have adequate liquidity to finance and operate AIG’s businesses, execute its asset disposition plan and repay its obligations for at least the next twelve months. On March 2, 2009, the United States government issued the following statement referring to the March 2009 agreements in principle and other transactions they expected to be undertaken with AIG (many of which were subsequently taken) to strengthen AIG’s capital position, enhance its liquidity, reduce its borrowing costs and facilitate its asset disposition program.

“The steps announced today provide tangible evidence of the U.S. government’s commitment to the orderly restructuring of AIG over time in the face of continuing market dislocations and economic deterioration. Orderly restructuring is essential to AIG’s repayment of the support it has received from U.S. taxpayers and to preserving financial stability. The U.S. government is committed to continuing to work with AIG to maintain its ability to meet its obligations as they come due.”

Liquidity of Parent and Subsidiaries

AIG manages liquidity at both the parent and subsidiary levels. Since the fourth quarter of 2008, AIG has not had access to its traditional sources of long-term or short-term financing through the public debt markets. Further, in light of the performance of AIG’s common stock, AIG does not expect to be able to issue equity securities for cash in the public markets in the foreseeable future.

Historically, AIG depended on dividends, distributions, and other payments from subsidiaries to fund payments on its obligations. In light of AIG’s current financial situation, many of its regulated subsidiaries are restricted from making dividend payments, or advancing funds, to AIG. As a result, AIG has been dependent on the facility (the FRBNY Facility) provided by the Federal Reserve Bank of New York (FRBNY) under the Credit Agreement, dated as of September 22, 2008 (as amended, the FRBNY Credit Agreement), between AIG and the FRBNY, the FRBNY’s Commercial Paper Funding Facility (CPFF) and other transactions with the FRBNY and the United States Department of the Treasury (the Department of the Treasury) as its primary sources of liquidity. Primary uses of cash flow are for debt service and subsidiary funding.

Certain subsidiaries also have been dependent on the FRBNY and the Department of the Treasury to meet collateral posting requirements, to make debt repayments as amounts come due, and to meet capital or liquidity requirements at the insurance companies (primarily in the Life Insurance & Retirement Services segment) and financial services operations.

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

Progress on Management’s Plans for Stabilization of AIG and Repayment of AIG’s Obligations as They Come Due

In the first six months of 2009, AIG took a number of steps to execute its plans to provide stability to its businesses and provide for the timely repayment of the FRBNY Facility.

Transactions with the FRBNY

FRBNY Credit Agreement Amendment

On April 17, 2009, AIG and the FRBNY entered into an Amendment No. 3 to the FRBNY Credit Agreement. The FRBNY Credit Agreement was amended, among other things, to remove the minimum 3.5 percent LIBOR borrowing rate floor.

AIA Purchase Agreement

On June 25, 2009, AIG and American International Reinsurance Company, Limited (AIRCO) entered into a Purchase Agreement (the AIA Purchase Agreement) with the FRBNY pursuant to which, among other things, (1) AIRCO will transfer (or cause to be transferred) 100 percent of the common stock of American International Assurance Company, Limited (AIA) to a newly-formed Delaware limited liability company (AIA LLC), (2) AIRCO and AIG will retain 100 percent of the common interests of AIA LLC and (3) the FRBNY will receive 100 percent of the preferred interests of AIA LLC. As consideration for the preferred interests in AIA LLC to be received by the FRBNY, there will be a reduction of $16 billion in the outstanding balance of the FRBNY Facility and the maximum amount available to be borrowed thereunder (provided the maximum amount available under the FRBNY Facility will not be less than $25 billion as a result of such reduction).

The common interests will entitle AIG and AIRCO to 100 percent of the voting power of AIA LLC, including the right to appoint the entire board of directors of AIA LLC. The preferred interests will entitle the FRBNY to veto rights over certain significant actions by AIA LLC and its subsidiaries and the right, subject to certain restrictions, to compel AIA LLC to take certain actions, including an initial public offering of the company or a sale of the company. The preferred interests received by the FRBNY will have a liquidation preference of $16 billion and will accrue a return of 5 percent per annum until September 22, 2013 and thereafter 9 percent per annum. Upon a liquidation or sale of AIA LLC, after payment is made for the liquidation preference and accrued dividends on the preferred interests and the initial value relating to the common interests, AIG is entitled to 99 percent of the remaining proceeds and the FRBNY is entitled to 1 percent.

The transactions contemplated by the AIA Purchase Agreement are subject to certain conditions, including regulatory approvals, the closing of the transactions contemplated by the ALICO Purchase Agreement (described below) and certain other conditions.

ALICO Purchase Agreement

On June 25, 2009, AIG entered into a Purchase Agreement (the ALICO Purchase Agreement) with the FRBNY pursuant to which, among other things, (1) AIG will transfer (or cause to be transferred) 100 percent of the common stock of American Life Insurance Company (ALICO) to a newly-formed Delaware limited liability company, ALICO Holdings LLC (ALICO LLC), (2) AIG will retain 100 percent of the common interests of ALICO LLC and (3) the FRBNY will receive 100 percent of the preferred interests of ALICO LLC. As consideration for the preferred interests in ALICO LLC to be received by the FRBNY, there will be a reduction of $9 billion in the outstanding balance of the FRBNY Facility and the maximum amount available to be borrowed thereunder (provided the maximum amount available under the FRBNY Facility will not be less than $25 billion as a result of such reduction).

The common interests will entitle AIG to 100 percent of the voting power of ALICO LLC, including the right to appoint the entire board of directors of ALICO LLC. The preferred interests will entitle the FRBNY to veto rights over certain significant actions by ALICO LLC and its subsidiaries and the right, subject to certain restrictions, to

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

compel ALICO LLC to take certain actions, including an initial public offering of the company or a sale of the company. The preferred interests received by the FRBNY will have a liquidation preference of $9 billion and will accrue a return of 5 percent per annum until September 22, 2013 and thereafter 9 percent per annum. Upon a liquidation or sale of ALICO LLC, after payment is made for the liquidation preference and accrued dividends on the preferred interests and the initial value of the common interests, AIG is entitled to 95 percent of the remaining proceeds and the FRBNY is entitled to 5 percent.

The transactions contemplated by the ALICO Purchase Agreement are subject to certain conditions, including regulatory approvals, the closing of the transactions contemplated by the AIA Purchase Agreement (described above) and certain other conditions.

Amortization of Prepaid Commitment Asset

Any permanent reduction in the FRBNY Facility will result in accelerated amortization of a portion of the prepaid commitment asset. Therefore, AIG anticipates that the consummation of each of the AIA Purchase Agreement and the ALICO Purchase Agreement will result in accelerated amortization of a portion of the prepaid commitment asset at the time that the senior interests are transferred to the FRBNY, currently expected to occur no earlier than the fourth quarter of 2009. Acceleration of the amortization will result in a pre-tax charge to earnings which could aggregate to approximately $5.0 billion.

Life Insurance Securitizations

On March 2, 2009, AIG and the Board of Governors of the Federal Reserve System announced their intent to enter into a transaction pursuant to which the FRBNY will purchase embedded value securitization notes issued by newly-formed special purpose vehicles to be repaid with the net cash flows from designated blocks of existing life insurance policies. The proceeds of the notes would be applied in settlement of a portion of the outstanding balance of the FRBNY Facility and would reduce the maximum amount to be borrowed thereunder (provided the maximum amount available under the FRBNY Facility will not be less than $25 billion as a result of such reduction). The amount of the FRBNY Facility reduction will be based on the proceeds received and will also result in accelerated amortization of a portion of the prepaid commitment asset. The special purpose vehicles are expected to be consolidated by AIG.

Sales of Businesses and Asset Dispositions

AIG has revised its asset disposition plans over the last nine months to take into account the deterioration of global market conditions. AIG’s current asset disposition plan is to maximize the value of its businesses over a longer time frame. AIG continually reassesses its disposition plans and may revise its disposition plans at any time and from time to time.

Dispositions of certain businesses will be subject to regulatory approval. Proceeds from these dispositions, to the extent they do not represent capital of AIG’s insurance subsidiaries required for regulatory or ratings purposes, are contractually required to be applied toward the repayment of the FRBNY Facility as mandatory prepayments.

During the first six months of 2009 and through July 31, 2009, AIG entered into agreements to sell or completed the sale of operations and assets, excluding AIGFP assets, that had aggregate assets and liabilities with carrying values of $31.2 billion and $23.8 billion, respectively, at June 30, 2009 or the date of sale or in the case of Transatlantic Holdings, Inc. (Transatlantic), deconsolidation. Aggregate net proceeds from these sale transactions, including proceeds applied to repay intercompany loan facilities, are expected to be approximately $8.0 billion. These transactions are expected to generate approximately $4.6 billion of aggregate net cash proceeds to repay outstanding borrowings and reduce the amount of FRBNY Facility, after taking into account taxes, transaction expenses and capital required to be retained for regulatory or ratings purposes. Gains and losses recorded in connection with the disposals of businesses include estimates that are subject to subsequent adjustment. Based on the transactions thus far, AIG does not believe that such adjustments will be material to future results of operations or cash flows.

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

Securitization Transaction

During the first six months of 2009, American General Finance, Inc. (AGF) received proceeds of $1.4 billion from real estate loan portfolio sales. In addition, on July 30, 2009, AGF issued mortgage-backed certificates in a private securitization transaction of certain AGF real estate loans and received initial cash proceeds of $967 million.

FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (FAS 144) requires that certain criteria be met in order for AIG to classify a business as held for sale. At June 30, 2009, the held for sale criteria in FAS 144 were not met for AIG’s significant businesses included in the asset disposition plan. AIG continues to evaluate the status of its asset sales with respect to these criteria.

Management’s Assessment and Conclusion

In assessing AIG’s 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 AIG’s risks and uncertainties, including but not limited to:


	•	the commitment of the FRBNY and the Department of the Treasury to the orderly restructuring of AIG and their commitment to continuing to work with AIG to maintain its ability to meet its obligations as they come due;

	•	the potential adverse effects on AIG’s businesses that could result if there are further downgrades by rating agencies, including in particular, the uncertainty of estimates relating to the derivative transactions of AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (collectively, AIGFP), such as estimates of 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 ability of AIG to complete the transactions contemplated by the AIA Purchase Agreement and the ALICO Purchase Agreement;

	•	the potential delays in asset dispositions and reduction in the anticipated proceeds therefrom;

	•	the potential for continued declines in bond and equity markets;

	•	the planned sales of significant subsidiaries;

	•	the potential effect on AIG if the capital levels of its regulated and unregulated subsidiaries prove inadequate to support current business plans;

	•	the effect on AIG’s businesses of continued compliance with the covenants of the FRBNY Credit Agreement and other agreements with the FRBNY and the Department of the Treasury;

	•	the effect of the provisions of the TARP Standards for Compensation and Corporate Governance on AIG’s ability to retain and motivate key employees;

	•	the potential loss of key personnel that could then reduce the value of AIG’s business and impair its ability to effect a successful asset disposition plan;

	•	the potential that AIG will be unable to complete the proposed life insurance securitizations and, even if completed, that this proposed transaction with the FRBNY does not achieve its desired objectives; and

	•	the potential regulatory actions in one or more countries, including possible actions resulting from the legal change in control as a result of the issuance of AIG’s Series C Perpetual, Convertible, Participating Preferred Stock (the AIG Series C Preferred Stock).

Based on the U.S. government’s continuing commitment, the recently completed transactions and the other expected transactions with the FRBNY, management’s plans to stabilize AIG’s businesses and dispose of certain noncore assets, and after consideration of the risks and uncertainties of such plans, management believes that it will

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

have adequate liquidity to finance and operate AIG’s businesses, execute its asset 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 management’s plans could be materially different, or that one or more of management’s significant judgments or estimates about the potential effects of these risks and uncertainties could prove to be materially incorrect or that the proposed transactions with the FRBNY discussed above are not consummated or fail to achieve their desired objectives. If one or more of these possible outcomes is realized, AIG may need additional U.S. government support to meet its obligations as they come due.

AIG’s 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 AIG be unable to continue as a going concern.

Out of Period Adjustments

In the three months ended June 30, 2009, AIG recorded out of period adjustments which reduced pre-tax income by approximately $250 million and decreased net income by approximately $60 million. The more significant decreases to pre-tax income related to life insurance deferred acquisition costs and general insurance balance sheet reconciliation adjustments. Net adjustments to income taxes increased the income tax benefit by approximately $99 million.

Recent Accounting Standards

Accounting Changes

AIG adopted the following accounting standards during the first six months of 2009:

FAS 141(R)

In December 2007, the Financial Accounting Standards Board (FASB) issued FAS No. 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 certain assets acquired, liabilities assumed, and noncontrolling (i.e., minority) interests; and recognizing contingent consideration arrangements at their acquisition-date fair values with subsequent changes in fair value generally reflected in income, among other changes.

AIG adopted FAS 141(R) for business combinations for which the acquisition date is on or after January 1, 2009. The adoption of FAS 141(R) did not have a material effect on AIG’s consolidated financial position, results of operations or cash flows at and for the three and six months ended June 30, 2009, but will affect the future accounting for business combinations, if any, as well as goodwill impairment assessments.

FAS 160

In December 2007, the FASB issued FAS No. 160, which requires noncontrolling (i.e., minority) interests in partially owned consolidated subsidiaries to be classified in the consolidated balance sheet as a separate component of equity, or in the mezzanine section of the balance sheet (between liabilities and equity), to the extent such interests do not qualify for “permanent equity” classification in accordance with Emerging Issues Task Force (EITF) Topic D-98, “Classification and Measurement of Redeemable Securities” (revised September 2008). FAS 160 also specifies the accounting for subsequent acquisitions and sales of noncontrolling interests and how noncontrolling interests should be presented in the consolidated statement of income (loss). The noncontrolling interests’ share of subsidiary income (loss) should be reported as a part of consolidated net income (loss) with disclosure of the attribution of consolidated net income (loss) to the controlling and noncontrolling interests on the face of the consolidated statement of income (loss).

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

AIG adopted FAS 160 on January 1, 2009. FAS 160 was adopted prospectively, except that the consolidated statement of income (loss) for the three and six months ended June 30, 2008 have been retrospectively recast to include net income (loss) attributable to both the controlling and noncontrolling interests. Of the $10.0 billion minority interest on the consolidated balance sheet at December 31, 2008, $1.9 billion was reclassified from minority interest liability to Redeemable noncontrolling interest in partially owned consolidated subsidiaries and $8.1 billion was reclassified to a separate component of total equity titled Noncontrolling interest. For the six months ended June 30, 2009, the noncontrolling interest balance declined by $1.4 billion related to the deconsolidation of Transatlantic in the second quarter of 2009 following the public offering of 29.9 million shares of Transatlantic common stock, after which AIG retained 13.9 percent of Transatlantic common stock outstanding. AIG also restructured certain relationships within the Institutional Asset Management business in the second quarter of 2009, resulting in a decline in goodwill of $476 million and noncontrolling interest of $1.9 billion due to deconsolidation of certain entities.

The following table provides a reconciliation of the beginning and ending balances of the components of total equity (excluding the effects of redeemable noncontrolling interests):


	Total AIG
	shareholders’			Noncontrolling
	equity			interest			Total equity
	(In millions)

Six Months Ended June 30, 2009
Balance, beginning of period	$	52,710		$	8,095		$	60,805
Cumulative effect of change in accounting principle, net of tax		2,478			—			2,478
Net income (loss)		(2,531	)		(935	)		(3,466	)
Contributions from noncontrolling interest		—			475			475
Distributions to noncontrolling interest		—			(264	)		(264	)
Net decrease due to deconsolidation		—			(3,306	)		(3,306	)
Accumulated other comprehensive income		4,390			110			4,500
Other		911			—			911

Balance, end of period	$	57,958		$	4,175		$	62,133

Six Months Ended June 30, 2008
Balance, beginning of period	$	95,801		$	8,472		$	104,273
Cumulative effect of change in accounting principle, net of tax		(1,108	)		—			(1,108	)
Net income (loss)		(13,162	)		133			(13,029	)
Contributions from noncontrolling interest		—			543			543
Distributions to noncontrolling interest		—			(193	)		(193	)
Accumulated other comprehensive income (loss)		(8,441	)		60			(8,381	)
Other		4,998			—			4,998

Balance, end of period	$	78,088		$	9,015		$	87,103

FAS 161

In March 2008, the FASB issued FAS No. 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 AIG’s consolidated financial condition, results of operations, and cash flows. AIG adopted FAS 161 on January 1, 2009. See Note 7 herein for related disclosures.

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

FAS 165

In May 2009, the FASB issued FAS No. 165, “Subsequent Events” (FAS 165). FAS 165 requires disclosure of the date through which a company evaluated the need to disclose events that occurred subsequent to the balance sheet date and whether that date represents the date the financial statements were issued or were available to be issued. AIG adopted FAS 165 for the period ended June 30, 2009. The adoption of FAS 165 did not affect AIG’s consolidated financial condition, results of operations or cash flows.

FSP FAS 140-3

In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase 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. AIG adopted FSP FAS 140-3 on January 1, 2009 for new transactions entered into from that date forward. The adoption of FSP FAS 140-3 did not have a material effect on AIG’s consolidated financial condition, results of operations or cash flows.

EITF 07-5

In June 2008, the FASB ratified the consensus reached by the EITF on Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (EITF 07-5). Following the January 1, 2009 effective date, instruments that are not indexed to the issuer’s stock would not qualify for an exception from derivative accounting provided in FAS 133 (which requires that an instrument is both indexed to the issuer’s own stock, and that it is classified in equity). AIG adopted EITF 07-5 on January 1, 2009. The adoption of EITF 07-5 resulted in a $15 million cumulative effect adjustment to opening Accumulated deficit and a $91 million reduction in Additional paid-in capital.

FSP FAS 107-1 and APB 28-1

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1). FSP FAS 107-1 amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” (FAS 107) to require disclosures about fair value of financial instruments (including methods and significant assumptions used) for interim reporting periods of publicly traded companies as well as in annual financial statements. The FSP also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information for interim reporting periods. AIG adopted FSP FAS 107-1 on April 1, 2009. See Note 4, Fair Value Measurements for these disclosures.

FSP FAS 115-2 and FAS 124-2

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP FAS 115-2). FSP FAS 115-2 requires a company to recognize the credit component of an other-than-temporary impairment of a fixed maturity security in income and the non-credit component in accumulated other comprehensive income when the company does not intend to sell the security or it is more likely than not that the company will not be required to sell the security prior to recovery. FSP FAS 115-2 also changes the threshold for determining when an other-than-temporary impairment has occurred on a fixed maturity security with respect to intent and ability to hold until recovery and requires additional disclosures in interim and annual reporting periods for fixed maturity and equity securities. FSP FAS 115-2 does not change the recognition of other-than-temporary impairment for equity securities. See Note 5, Investments for the expanded disclosures related to FSP FAS 115-2.

AIG adopted FSP FAS 115-2 on April 1, 2009 and recorded an after-tax cumulative effect adjustment to increase AIG shareholders’ equity by $2.5 billion as of April 1, 2009, consisting of a decrease in Accumulated deficit of $11.8 billion and an increase to Accumulated other comprehensive loss of $9.3 billion, net of tax. The net

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

increase in AIG’s shareholders’ equity was due to a reversal of a portion of the deferred tax asset valuation allowance for certain previous non-credit impairment charges directly attributable to the change in accounting principle (see Note 12 herein). The cumulative effect adjustment resulted in an increase of approximately $16 billion in the amortized cost of fixed maturity securities, which has the effect of significantly reducing the accretion of investment income over the remaining life of the underlying securities, beginning in the second quarter of 2009. The effect of the reduced investment income will be offset, in part, by a decrease in the amortization of deferred policy acquisition costs (DAC) and sales inducements assets (SIA).

Beginning in the second quarter of 2009, the adoption of FSP FAS 115-2 is expected to reduce the level of other-than-temporary impairment charges recorded in earnings for fixed maturity securities due to the following required changes in AIG’s accounting policy for other-than-temporary impairments (see Note 5 for a more detailed discussion of the changes in policy):


	•	Impairment charges for non-credit (i.e., severity) losses are no longer recognized;

	•	The amortized cost basis of credit impaired securities will be written down through a charge to earnings to the present value of expected cash flows, rather than to fair value; and

	•	For fixed maturity securities that are not deemed to be credit-impaired. AIG is no longer required to assert that it has the intent and ability to hold such securities to recovery to avoid an other-than-temporary impairment charge. Instead, an impairment charge through earnings is required only in situations where AIG has the intent to sell the fixed maturity security or it is more likely than not that AIG will be required to sell the security prior to recovery.

The components of the change in AIG shareholders’ equity at April 1, 2009 due to the adoption of FSP FAS 115-2 were as follows:


	(Increase)						Net Increase
	Decrease to			(Increase) Decrease			in AIG
	Accumulated			to Accumulated Other			Shareholders’
	Deficit			Comprehensive Loss			Equity
	(In billions)

Net effect of the increase in amortized cost of available for sale fixed maturity securities	$	16.1		$	(16.1	)	$	—
Net effect of related DAC, SIA and other insurance balances		(1.8	)		1.8			—
Net effect on deferred income tax assets		(2.5	)		5.0			2.5

Net increase in AIG shareholders’ equity	$	11.8		$	(9.3	)	$	2.5

FSP FAS 157-4

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4 provides guidance for estimating fair value in accordance with FAS No. 157, “Fair Value Measurements” (FAS 157), when the volume and level of activity for an asset or liability have significantly decreased and for identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 also requires extensive additional fair value disclosures. The adoption of FSP FAS 157-4 on April 1, 2009, did not have a material effect on AIG’s consolidated financial condition, results of operations or cash flows. See Note 4, Fair Value Measurements for the disclosures related to FSP FAS 157-4.

Future Application of Accounting Standards

FSP FAS 132(R)-1

In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP FAS 132(R)-1). FSP FAS 132(R)-1 amends FAS 132(R) to require more detailed

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

disclosures about an employer’s plan assets, including the employer’s investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair values of plan assets. FSP FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. The adoption of FSP FAS 132(R)-1 will have no effect on AIG’s consolidated financial condition, results of operations or cash flows.

FAS 166

In June 2009, the FASB issued FAS 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140” (FAS 166). FAS 166 removes the concept of a qualifying special-purpose entity (QSPE) from FAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” and removes the exception from applying FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”, (FIN 46(R)) to QSPEs. FAS 166 is effective for interim and annual periods beginning on January 1, 2010 for AIG. Earlier application is prohibited. AIG is assessing the effect adopting FAS 166 will have on its consolidated financial condition, results of operations and cash flows.

FAS 167

In June 2009, FASB issued FAS 167, “Amendments to FASB Interpretation No. 46(R)” (FAS 167). FAS 167 amends the consolidation analysis with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly affect the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity, and enhances financial reporting by enterprises involved with variable interest entities. FAS 167 is effective for interim and annual periods beginning on January 1, 2010 for AIG. Earlier application is prohibited. AIG is assessing the effect adopting FAS 167 will have on its consolidated financial condition, results of operations, and cash flows.


2.	Restructuring

AIG is executing an organization-wide restructuring plan under which some of its operations are being divested, some will be held for later divestiture, some are being prepared for potential offerings to the public, and some will be retained.

Successful execution of the restructuring plan involves significant separation activities. Accordingly, AIG established retention programs for its key employees to maintain ongoing business operations and to facilitate the successful execution of the restructuring plan, although some payments have been delayed. Additionally, given the market disruption in the first quarter of 2008, AIGFP established a retention plan for its employees to manage and unwind its complex businesses. Other major activities include the separation of shared services, corporate functions, infrastructure and assets among business units.

In connection with its restructuring and separation activities, AIG expects to incur significant expenses, including legal, banking, accounting, consulting and other professional fees. In addition, AIG is contractually obligated to reimburse or advance certain professional fees and other expenses incurred by the FRBNY and the trustees of the AIG Credit Facility Trust, a trust established for the sole benefit of the United States Treasury (Trust).

Based on AIG’s announced plans, AIG has made estimates of these expenses, although for some restructuring and separation activities estimates cannot be reasonably made due to the evolving nature of the plans and the uncertain timing of the transactions involved. Future reimbursement or advancement payments to the FRBNY and the trustees cannot reasonably be estimated by AIG. Even for those expenses that have been estimated, actual expenses will vary depending on the identity of the ultimate purchasers of the divested entities or counterparties to transactions, the transactions and activities that ultimately are consummated or undertaken, and the ultimate time period over which these activities occur.

For those restructuring and separation expenses that have been incurred or can be reasonably estimated, the total expenses incurred and expected to be incurred are approximately $2.7 billion at June 30, 2009, as set forth in the table below. This amount excludes expenses that could not be reasonably estimated at June 30, 2009, as well as

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

any expenses (principally professional fees) that are expected to be capitalized. With respect to the FRBNY and the trustees of the Trust, this amount includes only actual reimbursement and advancement payments made through June 30, 2009.

Restructuring expenses and related asset impairment and other expenses by operating segment consisted of the following:


			Life Insurance
	General		& Retirement		Financial		Asset
	Insurance		Services		Services		Management		Other(a)		Total
	(In millions)

Three Months Ended June 30, 2009
Restructuring expenses	$	1	$	24	$	43	$	5	$	144	$	217
Separation expenses		42		36		31		5		12		126

Total	$	43	$	60	$	74	$	10	$	156	$	343

Six Months Ended June 30, 2009
Restructuring expenses	$	1	$	33	$	101	$	9	$	276	$	420
Separation expenses		73		82		82		16		32		285

Total	$	74	$	115	$	183	$	25	$	308	$	705

Cumulative amounts incurred since inception of restructuring plan	$	158	$	183	$	521	$	94	$	558	$	1,514

Total amounts expected to be incurred(b)	$	294	$	322	$	741	$	110	$	1,240	$	2,707


(a)		Primarily includes professional fees related to (i) disposition activities and (ii) AIG’s capital restructuring program with the FRBNY and the Department of the Treasury.

(b)		Includes cumulative amounts incurred and future amounts to be incurred that can be reasonably estimated at June 30, 2009.

A rollforward of the restructuring liability, reported in Other liabilities on AIG’s consolidated balance sheet, for the six months ended June 30, 2009, the cumulative amounts incurred since inception of restructuring plan, and the total amounts expected to be incurred are summarized as follows:


																			Total
				Contract			Asset			Other			Subtotal						Restructuring
Six Months Ended	Severance			Termination			Write-			Exit			Restructuring			Separation			and Separation
June 30, 2009	Expenses			Expenses			Downs			Expenses(a)			Expenses			Expenses			Expenses
	(In millions)

Liability balance, at beginning of year	$	77		$	27		$	—		$	87		$	191		$	284		$	475
Additional charges		47			29			21			258			355			330			685
Cash payments		(54	)		(21	)		—			(254	)		(329	)		(309	)		(638	)
Non-cash items(b)		(11	)		(3	)		(21	)		1			(34	)		3			(31	)
Changes in estimates		33			9			—			23			65			(45	)		20

Liability balance, end of period	$	92		$	41		$	—		$	115		$	248		$	263		$	511

Cumulative amounts incurred since inception of restructuring plan	$	169		$	65		$	72		$	421		$	727		$	787		$	1,514

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

Total

Contract

Asset

Other

Subtotal

Restructuring

Six Months Ended

Severance

Termination

Write-

Exit

Restructuring

Separation

and Separation

June 30, 2009

Expenses

Downs

Expenses(a)

Expenses

(In millions)

Total amounts expected to be incurred(c)

207

120

1,127

1,526

1,181

2,707


(a)		Primarily includes professional fees related to (i) disposition activities, (ii) AIG’s capital restructuring program with the FRBNY and the Department of the Treasury and (iii) unwinding most of AIGFP’s businesses and portfolios.

(b)		Primarily represents asset impairment charges, foreign currency translation and reclassification adjustments.

(c)		Includes cumulative amounts incurred and future amounts to be incurred that can be reasonably estimated at June 30, 2009.


3.	Segment Information

AIG identifies its operating segments by product line consistent with its management structure and evaluates their performance based on operating income (loss) before taxes. During the second quarter of 2009, AIG realigned its financial reporting structure to reflect the effects of its restructuring activities on how management views and manages its businesses. Consequently, beginning in the second quarter of 2009, the results for Transatlantic, Personal Lines (excluding the results of the Private Client Group), and Mortgage Guaranty, previously reported as part of the General Insurance operating segment, are now included in AIG’s Other operations. In addition, the historical results for HSB Group, Inc. (HSB) (which was sold on March 31, 2009), previously included within Commercial Insurance, are now included in AIG’s Other category. Prior period amounts have been revised to conform to the current presentation. As a result of dispositions, only Mortgage Guaranty is expected to report ongoing results of operations commencing in the third quarter of 2009.

AIG’s operating segments are General Insurance, Life Insurance & Retirement Services, Financial Services, and Asset Management.

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

AIG’s results by operating segment were as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
	(In millions)

Total revenues:
Operating segments:
General Insurance	$	8,847		$	10,120		$	16,974		$	19,738
Life Insurance & Retirement Services		14,997			10,161			23,854			18,913
Financial Services		2,155			(3,605	)		3,428			(10,165	)
Asset Management		452			797			751			648
Other		3,276			2,845			5,801			5,388
Consolidation and eliminations		(202	)		(385	)		(825	)		(558	)

Total revenues	$	29,525		$	19,933		$	49,983		$	33,964

Net realized capital gains (losses):
Operating segments:
General Insurance	$	(45	)	$	(493	)	$	(653	)	$	(739	)
Life Insurance & Retirement Services		297			(5,010	)		(2,811	)		(9,379	)
Financial Services		10			15			(24	)		(136	)
Asset Management		78			(464	)		(74	)		(1,869	)
Other		(1,639	)		(129	)		(839	)		(47	)

Total net realized capital gains (losses)	$	(1,299	)	$	(6,081	)	$	(4,401	)	$	(12,170	)

Operating income (loss):
Operating segments:
General Insurance	$	971		$	1,212		$	1,094		$	2,727
Life Insurance & Retirement Services		1,818			(2,401	)		(55	)		(4,232	)
Financial Services		(89	)		(5,905	)		(1,211	)		(14,677	)
Asset Management		(222	)		(314	)		(855	)		(1,565	)
Other		(1,337	)		(1,100	)		(3,809	)		(2,046	)
Consolidation and eliminations		178			(248	)		(213	)		(227	)

Total operating income (loss)	$	1,319		$	(8,756	)	$	(5,049	)	$	(20,020	)

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

AIG’s General Insurance results by major internal reporting unit were as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
General Insurance	2009		2008		2009		2008
	(In millions)

Total revenues:
Commercial Insurance	$	5,522	$	5,981	$	10,546	$	11,971
Foreign General Insurance		3,325		4,139		6,428		7,767

Total	$	8,847	$	10,120	$	16,974	$	19,738

Operating income (loss):
Commercial Insurance	$	583	$	416	$	359	$	1,195
Foreign General Insurance		388		796		735		1,532

Total	$	971	$	1,212	$	1,094	$	2,727

AIG’s Life Insurance & Retirement Services results by major internal reporting unit were as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
Life Insurance & Retirement Services	2009			2008			2009			2008
	(In millions)

Total revenues:
Foreign:
Japan and Other	$	4,634		$	5,369		$	7,877		$	9,265
Asia		6,771			4,575			11,220			8,852
Domestic:
Domestic Life Insurance		2,204			1,234			3,719			2,517
Domestic Retirement Services		1,388			(1,017	)		1,038			(1,721	)

Total	$	14,997		$	10,161		$	23,854		$	18,913

Operating income (loss):
Foreign:
Japan and Other	$	94		$	577		$	172		$	1,060
Asia		1,267			196			1,523			448
Domestic:
Domestic Life Insurance		559			(1,005	)		251			(1,875	)
Domestic Retirement Services		(102	)		(2,169	)		(2,001	)		(3,865	)

Total	$	1,818		$	(2,401	)	$	(55	)	$	(4,232	)

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

AIG’s Financial Services results by major internal reporting unit were as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
Financial Services	2009			2008			2009			2008
	(In millions)

Total revenues:
Aircraft Leasing	$	1,384		$	1,298		$	2,665		$	2,463
Capital Markets		(8	)		(6,088	)		(977	)		(14,831	)
Consumer Finance		565			1,028			1,386			1,959
Other, including intercompany adjustments		214			157			354			244

Total	$	2,155		$	(3,605	)	$	3,428		$	(10,165	)

Operating income (loss):
Aircraft Leasing	$	410		$	334		$	726		$	555
Capital Markets		(128	)		(6,284	)		(1,249	)		(15,211	)
Consumer Finance		(404	)		(33	)		(702	)		(85	)
Other, including intercompany adjustments		33			78			14			64

Total	$	(89	)	$	(5,905	)	$	(1,211	)	$	(14,677	)

AIG’s Asset Management operations consist of a single internal reporting unit.


4.	Fair Value Measurements

Effective January 1, 2008, AIG adopted FAS 157 and FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (FAS 159), which specify measurement and disclosure standards related to assets and liabilities measured at fair value.

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 policyholder contract deposits, securities and spot commodities sold but not yet purchased, certain trust deposits and deposits due to banks and other depositors, certain CPFF and other commercial paper, certain long-term debt, and certain hybrid financial instruments included in other liabilities. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly 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.

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

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 asset-backed securities (ABS), certain listed equities, state, municipal and provincial obligations, hybrid securities, mutual fund and hedge fund investments, derivative contracts, guaranteed investment agreements (GIAs) and commercial paper at AIGFP, other long-term debt 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. AIG’s 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 AIGFP’s super senior credit default swap portfolio), policyholder contract deposits carried at fair value, private equity and real estate fund investments, and direct private equity investments. AIG’s non-financial-instrument assets that are measured at fair value on a non-recurring basis generally are classified as Level 3.

The following is a description of the valuation methodologies used for instruments carried at fair value:

Incorporation of Credit Risk in Fair Value Measurements


	•	AIG’s Own Credit Risk. Fair value measurements for AIGFP’s debt, GIAs, structured note liabilities and freestanding derivatives incorporate AIG’s 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 counterparty’s net credit exposure to AIG is determined based on master netting agreements, when applicable, which take into consideration all 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 policyholder 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. AIG’s net credit exposure to a counterparty is determined based on master netting agreements, which take into

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)


		consideration all derivative positions with the counterparty, as well as collateral posted by the counterparty at the balance sheet date.

The cost of credit protection is determined under a discounted present value approach considering the market levels for credit default swap (CDS) spreads, the mid market value of the net exposure (reflecting the amount of protection required) and the weighted average life of the net exposure. CDS spreads are provided to AIG by an independent third-party. AIG utilizes a LIBOR-based interest rate curve to derive its discount rates.

A CDS is a derivative contract that allows the transfer of third-party credit risk from one party to the other. The buyer of the CDS pays an upfront and/or annual premium to the seller. The seller’s payment obligation is triggered by the occurrence of a credit event under a specified reference security and is determined by the loss on that specified reference security. The present value of the amount of the annual and/or upfront premium therefore represents a market based expectation of the likelihood that the specified reference party will fail to perform on the reference obligation, a key market observable indicator of non-performance risk (the CDS spread).

While this approach does not explicitly consider all potential future behavior of the derivative transactions or potential future changes in valuation inputs, AIG believes this approach provides a reasonable estimate of the fair value of the derivate assets and liabilities, including consideration of the impact of non-performance risk.

Fair values for fixed maturity securities based on observable market prices for identical or similar instruments implicitly incorporate 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 issuer’s industry, the security’s 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, management’s best estimate is used.

ML II and ML III

At their inception, AIG’s economic interest in Maiden Lane II LLC (ML II) and equity interest in Maiden Lane III LLC (ML III) (together, Maiden Lane Interests), which are included in Bond trading securities, at fair value, on the consolidated balance sheet, were valued and recorded at the transaction prices of $1 billion and $5 billion, respectively. Subsequently, Maiden Lane Interests are valued using a discounted cash flow methodology that uses the estimated future cash flows of the assets to which the Maiden Lane Interests are entitled and the discount rates applicable to such interests as derived from the fair value of the entire asset pool. The implicit discount rates are calibrated to the changes in the estimated asset values for the underlying assets commensurate with AIG’s interests in the capital structure of the respective entities. Estimated cash flows and discount rates used in the valuations are validated, to the extent possible, using market observable information for securities with similar asset pools, structure and terms.

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

The fair value methodology used assumes that the underlying collateral in ML II and ML III will continue to be held and generate cash flows into the foreseeable future and does not assume a current liquidation of the assets of ML II and ML III. Other methodologies employed or assumptions made in determining fair value for these investments could result in amounts that differ significantly from the amounts reported.

Valuation Sensitivity: The fair values of the Maiden Lane Interests are most affected by changes in the discount rates and changes in the underlying estimated future collateral cash flow assumptions used in the valuation model.

The benchmark London Interbank Offered Rate (LIBOR) interest rate curve changes are determined by macroeconomic considerations and financial sector credit spreads. The spreads over LIBOR for the Maiden Lane Interests (including collateral-specific credit and liquidity spreads) can change as a result of changes in market expectations about the future performance of these investments as well as changes in the risk premium that market participants would demand at the time of the transactions.

Changes in estimated future cash flows would primarily be the result of changes in expectations for defaults, recoveries, and prepayments on underlying loans.

Increases in the discount rate or decreases in estimated future cash flows used in the valuation would decrease AIG’s estimate of the fair value of the Maiden Lane Interests as shown in the table below.


	Fair Value Change
Six Months Ended June 30, 2009	Maiden Lane II			Maiden Lane III
	(In millions)

Discount Rates
200 basis point increase	$	(52	)	$	(453	)
400 basis point increase		(97	)		(837	)

Estimated Future Cash Flows
10% decrease		(218	)		(660	)
20% decrease		(370	)		(1,323	)

AIG believes that the ranges of discount rates used in these analyses are reasonable based on implied spread volatilities of similar collateral securities and implied volatilities of LIBOR interest rates. The ranges of estimated future cash flows were determined based on variability in estimated future cash flows implied by cumulative loss estimates for similar instruments. The fair values of the Maiden Lane Interests are likely to vary, perhaps materially, from the amount estimated.

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.

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 for changes in inputs and assumptions which 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, management’s best estimate is used.

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

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 are generally audited annually. AIG considers observable market data and performs diligence procedures in validating the appropriateness of using the net asset value as a fair value measurement.

Separate Account Assets

Separate 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, management’s best estimate is used.

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 AIG’s historical experience. With respect to embedded policy derivatives in AIG’s 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 AIG’s equity-indexed annuity and life contracts, option pricing models are used to

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

estimate fair value, taking into account assumptions for future 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. The valuation technique used to measure the fair value of certain variable annuity guarantees was modified during 2008, primarily with respect to the development of long-dated equity volatility assumptions and the discount rates applied to certain projected benefit payments.

AIGFP’s Super Senior Credit Default Swap Portfolio

AIGFP values its CDS transactions written on the super senior risk layers of designated pools of debt securities or loans using internal valuation models, third-party price estimates 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 lack of trading and price transparency in the structured finance market, particularly during and since the second half 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 and the varying judgments reached by such participants when assessing volatile markets have increased the likelihood that the various parties to these instruments may arrive at significantly different estimates as to their fair values.

AIGFP’s 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 methodologies to available market information and to review the assumptions of the methodologies on a regular basis.

Regulatory capital portfolio: 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 counterparties in the remaining CDS transactions will terminate the vast majority of transactions with AIGFP within the next 9 months. AIGFP also considers other market data, to the extent relevant and available. See also Note 7 herein.

Multi-sector CDO portfolios: 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 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 was developed in 1996 by a major rating agency to generate expected loss estimates for CDO tranches and derive a credit rating for those tranches, and has been widely used ever since.

AIGFP has adapted the BET model to estimate the price of the super senior risk layer or tranche of the CDO. AIG modified the BET model to imply default probabilities from market prices for the underlying securities and not from rating agency assumptions. To generate the estimate, the model uses the price estimates for the securities comprising the portfolio of a CDO as an input and converts those estimates 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.

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

Prices for the individual securities held by a CDO are obtained in most cases from the CDO collateral managers, to the extent available. CDO collateral managers provided market prices for 59.0 percent of the underlying securities used in the valuation at June 30, 2009. 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.

The BET model also uses diversity scores, weighted average lives, recovery rates and discount rates.

AIGFP employs a Monte Carlo simulation to assist in quantifying the effect on the valuation of the CDO of the unique aspects of the CDO’s 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 security’s 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 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.

Corporate debt/CLO portfolios: 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 reasonable proxies for the referenced portfolios. In addition, AIGFP compares these valuations to third-party prices and makes adjustments as necessary to determine 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 (CLOs) 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.

Policyholder Contract Deposits

Policyholder contract deposits accounted for at fair value 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 policyholder contract deposits is recorded as Policyholder benefits and claims incurred in the Consolidated Statement of Income (loss).

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

Spot commodities and Securities and spot commodities sold but not yet purchased

Fair values of spot commodities and spot commodities sold but not yet purchased are based on current market prices of reference spot futures contracts traded on exchanges. Fair values for securities sold but not yet purchased are based on current market prices.

Other long-term debt

When fair value accounting has been elected, the fair value of non-structured liabilities is generally determined by using market prices from exchange or dealer markets, when available, or discounting expected cash flows using the appropriate discount rate for the applicable maturity. The discount rate is based on an implicit rate determined with the use of observable CDS market spreads to determine the risk of non-performance for AIG. Such instruments are generally classified in Level 2 of the fair value hierarchy as all inputs are readily observable. AIG determines the fair value of structured liabilities (where performance is linked to structured interest rates, inflation or currency risks) and hybrid financial instruments (performance linked to risks other than interest rates, inflation or currency risks) using the appropriate derivative valuation methodology (described above) given the nature of the embedded risk profile. Such instruments are classified in Level 2 or Level 3 depending on the observability of significant inputs to the model. In addition, adjustments are made to the valuations of both non-structured and structured liabilities to reflect AIG’s own credit worthiness based on observable credit spreads of AIG.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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


							Counterparty		Cash
	Level 1		Level 2		Level 3		Netting(a)		Collateral(b)		Total
	(In millions)

At June 30, 2009
Assets:
Bonds available for sale:
U.S. government and government sponsored entities	$	388	$	4,044	$	2	$	—	$	—	$	4,434
Obligations of states, municipalities and political subdivisions		39		54,519		802		—		—		55,360
Non-U.S. governments		439		72,214		628		—		—		73,281
Corporate debt		74		170,074		6,022		—		—		176,170
Residential mortgage-backed securities (RMBS)		—		22,412		5,637		—		—		28,049
Commercial mortgage-backed securities (CMBS)		—		9,072		2,187		—		—		11,259
Collateralized Debt Obligations/Asset Backed Securities (CDO/ABS)		—		1,859		3,296		—		—		5,155

Total bonds available for sale	$	940	$	334,194	$	18,574	$	—	$	—	$	353,708

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)


							Counterparty			Cash
	Level 1		Level 2		Level 3		Netting(a)			Collateral(b)			Total
	(In millions)

Bond trading securities:
U.S. government and government sponsored entities	$	770	$	7,545	$	11	$	—		$	—		$	8,326
Obligations of states, municipalities and political subdivisions		—		111		—		—			—			111
Non-U.S. governments		7		1,246		5		—			—			1,258
Corporate debt		—		6,713		214		—			—			6,927
RMBS		—		3,721		3		—			—			3,724
CMBS		—		1,825		37		—			—			1,862
CDO/ABS		—		4,160		4,991		—			—			9,151

Total bond trading securities	$	777	$	25,321	$	5,261	$	—		$	—		$	31,359

Securities lending invested collateral:(c)
Corporate debt	$	—	$	239	$	134	$	—		$	—		$	373
RMBS		—		292		22		—			—			314
CMBS		—		92		—		—			—			92
CDO/ABS		—		148		82		—			—			230

Total securities lending invested collateral	$	—	$	771	$	238	$	—		$	—		$	1,009

Equity securities available for sale:
Common stocks	$	6,750	$	455	$	33	$	—		$	—		$	7,238
Preferred stocks		—		774		48		—			—			822
Mutual funds		1,171		57		1		—			—			1,229

Total equity securities available for sale	$	7,921	$	1,286	$	82	$	—		$	—		$	9,289

Equity securities trading:
Common stocks	$	1,083	$	105	$	1	$	—		$	—		$	1,189
Mutual funds		11,310		699		16		—			—			12,025

Total equity securities trading	$	12,393	$	804	$	17	$	—		$	—		$	13,214

Mortgage and other loans receivable		—		99		—		—			—			99
Other invested assets(d)		2,222		5,099		8,418		—			—			15,739
Unrealized gain on swaps, options and forward transactions		100		44,994		2,193		(30,381	)		(5,667	)		11,239
Securities purchased under agreements to resell		—		4,481		—		—			—			4,481
Short-term investments		4,075		20,648		3		—			—			24,726
Separate account assets		50,550		2,002		916		—			—			53,468
Other assets		—		18		288		—			—			306

Total	$	78,978	$	439,717	$	35,990	$	(30,381	)	$	(5,667	)	$	518,637

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)


							Counterparty			Cash
	Level 1		Level 2		Level 3		Netting(a)			Collateral(b)			Total
	(In millions)

Liabilities:
Policyholder contract deposits	$	—	$	—	$	7,273	$	—		$	—		$	7,273
Securities sold under agreements to repurchase		—		2,716		—		—			—			2,716
Securities and spot commodities sold but not yet purchased		321		921		—		—			—			1,242
Unrealized loss on swaps, options and forward transactions(e)		8		37,308		11,137		(30,381	)		(13,196	)		4,876
Trust deposits and deposits due to banks and other depositors		—		26		—		—			—			26
Federal Reserve Bank of New York Commercial Paper Funding Facility		—		6,233		—		—			—			6,233
Other long-term debt		—		15,486		667		—			—			16,153
Other liabilities		—		3,277		—		—			—			3,277

Total	$	329	$	65,967	$	19,077	$	(30,381	)	$	(13,196	)	$	41,796

At December 31, 2008
Assets:
Bonds available for sale	$	414	$	344,237	$	18,391	$	—		$	—		$	363,042
Bond trading securities		781		29,480		6,987		—			—			37,248
Securities lending invested collateral(c)		—		2,966		435		—			—			3,401
Common and preferred stock available for sale		7,282		1,415		111		—			—			8,808
Common and preferred stock trading		11,199		1,133		3		—			—			12,335
Mortgage and other loans receivable		—		131		—		—			—			131
Other invested assets(d)		1,853		6,175		11,168		—			—			19,196
Unrealized gain on swaps, options and forward transactions		223		90,998		3,865		(74,217	)		(7,096	)		13,773
Securities purchased under agreements to resell		—		3,960		—		—			—			3,960
Short-term investments		3,247		16,069		—		—			—			19,316
Separate account assets		47,902		2,410		830		—			—			51,142
Other assets		—		44		325		—			—			369

Total	$	72,901	$	499,018	$	42,115	$	(74,217	)	$	(7,096	)	$	532,721

Liabilities:
Policyholder contract deposits	$	—	$	—	$	5,458	$	—		$	—		$	5,458
Securities sold under agreements to repurchase		—		4,423		85		—			—			4,508
Securities and spot commodities sold but not yet purchased		1,124		1,569		—		—			—			2,693
Unrealized loss on swaps, options and forward transactions(e)		1		85,255		14,435		(74,217	)		(19,236	)		6,238
Trust deposits and deposits due to banks and other depositors		—		30		—		—			—			30
Federal Reserve Bank of New York Commercial Paper Funding Facility		—		6,802		—		—			—			6,802
Other long-term debt		—		15,448		1,147		—			—			16,595
Other liabilities		—		1,355		—		—			—			1,355

Total	$	1,125	$	114,882	$	21,125	$	(74,217	)	$	(19,236	)	$	43,679

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)


(a)		Represents netting of derivative exposures covered by a qualifying master netting agreement in accordance with FASB Interpretation (FIN) 39, “Offsetting of Amounts Related to Certain Contracts.”

(b)		Represents cash collateral posted and received. Securities collateral posted that is reflected in Fixed maturity securities in the Consolidated Balance Sheet, and collateral received, not reflected in the Consolidated Balance Sheet, amounted to $6.4 billion and $609 million, respectively, at June 30, 2009 and $4.2 billion and $1.6 billion, respectively, at December 31, 2008.

(c)		Amounts exclude short-term investments that are carried at cost, which approximates fair value of $99 million and $442 million at June 30, 2009 and December 31, 2008, respectively.

(d)		Approximately 12 percent and 15 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 that are consolidated by AIG at June 30, 2009 and December 31, 2008, respectively. AIG’s ownership in these funds represented 37.7 percent, or $1.6 billion, of the Level 3 amount at June 30, 2009 and 27.6 percent, or $1.7 billion, of the Level 3 amount at December 31, 2008.

(e)		Included in Level 3 is the fair value derivative liability of $6.5 billion and $9.0 billion at June 30, 2009 and December 31, 2008, respectively, on the AIGFP super senior credit default swap portfolio.

At June 30, 2009, Level 3 assets were 4.3 percent of total assets, and Level 3 liabilities were 2.5 percent of total liabilities. At December 31, 2008, Level 3 assets were 4.9 percent of total assets, and Level 3 liabilities were 2.6 percent of total liabilities.

The following tables present changes during the three- and six-month periods ended June 30, 2009 and 2008 in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) recorded in the Consolidated Statement of Income (Loss), during the three- and six-month periods ended June 30, 2009 and 2008 related to the Level 3 assets and liabilities that remained on the Consolidated Balance Sheet at June 30, 2009 and 2008:


																	Changes in
			Net														Unrealized
			Realized and														Gains
			Unrealized			Accumulated			Purchases,								(Losses) on
	Balance		Gains (Losses)			Other			Sales,						Balance		Instruments
	Beginning		Included			Comprehensive			Issuances and			Transfer			End		Held at
	of Period(a)		in Income(b)			Loss			Settlements-Net			In (Out)			of Period		End of Period
	(In millions)

Three Months Ended June 30, 2009
Assets:
Bonds available for sale:
U.S. government and government sponsored entities	$	2	$	—		$	—		$	(7	)	$	7		$	2	$	—
Obligations of states, municipalities and political subdivisions		630		2			(46	)		206			10			802		—
Non-U.S. governments		562		(2	)		37			32			(1	)		628		—
Corporate debt		5,619		(20	)		493			(281	)		211			6,022		—
RMBS		5,834		29			(19	)		(209	)		2			5,637		—
CMBS		1,562		28			(23	)		(60	)		680			2,187		—
CDO/ABS		3,246		25			153			(143	)		15			3,296		—

Total bonds available for sale		17,455		62			595			(462	)		924			18,574		—

Bond trading securities:
U.S. government and government sponsored entities		11		—			—			—			—			11		—
Non-U.S. governments		—		—			—			—			5			5		—
Corporate debt		214		—			—			—			—			214		—
RMBS		2		1			—			—			—			3		1
CMBS		36		2			—			(1	)		—			37		1
CDO/ABS		4,017		1,394			—			(420	)		—			4,991		453

Total bond trading securities		4,280		1,397			—			(421	)		5			5,261		455

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)


																			Changes in
				Net															Unrealized
				Realized and															Gains
				Unrealized			Accumulated			Purchases,									(Losses) on
	Balance			Gains (Losses)			Other			Sales,						Balance			Instruments
	Beginning			Included			Comprehensive			Issuances and			Transfer			End			Held at
	of Period(a)			in Income(b)			Loss			Settlements-Net			In (Out)			of Period			End of Period
	(In millions)

Securities lending invested collateral:
Corporate debt		307			—			14			(107	)		(80	)		134			—
RMBS		—			—			23			(1	)		—			22			—
CDO/ABS		91			—			(9	)		—			—			82			—

Total securities lending invested collateral		398			—			28			(108	)		(80	)		238			—

Equity securities available for sale:
Common stocks		45			(21	)		11			—			(2	)		33			—
Preferred stocks		54			(4	)		(2	)		(1	)		1			48			—
Mutual funds		1			—			—			—			—			1			—

Total equity securities available for sale		100			(25	)		9			(1	)		(1	)		82			—

Equity securities trading:
Common stocks		1			—			—			—			—			1			—
Mutual funds		5			—			—			—			11			16			—

Total equity securities trading		6			—			—			—			11			17			—

Other invested assets		9,688			(393	)		(1,586	)		576			133			8,418			(860	)
Short-term investments		—			—			—			—			3			3			—
Other assets		311			(15	)		—			(8	)		—			288			(8	)
Separate account assets		797			134			—			(15	)		—			916			134

Total	$	33,035		$	1,160		$	(954	)	$	(439	)	$	995		$	33,797		$	(279	)

Liabilities:
Policyholder contract deposits	$	(5,557	)	$	(1,656	)	$	(45	)	$	(155	)	$	140		$	(7,273	)	$	1,335
Securities sold under agreements to repurchase		(47	)		1			—			46			—			—			—
Unrealized loss on swaps, options and forward transactions, net		(11,856	)		1,016			(4	)		2,341			(441	)		(8,944	)		3,678
Other long-term debt		(531	)		(189	)		—			12			41			(667	)		242

Total	$	(17,991	)	$	(828	)	$	(49	)	$	2,244		$	(260	)	$	(16,884	)	$	5,255

Six Months Ended June 30, 2009
Assets:
Bonds available for sale:
U.S. government and government sponsored entities	$	2		$	—		$	—		$	—		$	—		$	2		$	—
Obligations of states, municipalities and political subdivisions		861			(13	)		(43	)		(12	)		9			802			—
Non-U.S. governments		601			(1	)		17			23			(12	)		628			—
Corporate debt		5,872			(45	)		712			(593	)		76			6,022			—
RMBS		6,108			(538	)		472			(266	)		(139	)		5,637			—
CMBS		1,663			172			(198	)		(212	)		762			2,187			—
CDO/ABS		3,284			(412	)		66			(299	)		657			3,296			—

Total bonds available for sale		18,391			(837	)		1,026			(1,359	)		1,353			18,574			—

Bond trading securities:
U.S. government and government sponsored entities		17			(6	)		—			—			—			11			4
Non-U.S. governments		—			—			—			—			5			5			—
Corporate debt		261			(31	)		—			(65	)		49			214			(3	)
RMBS		8			(5	)		—			—			—			3			(4	)
CMBS		45			(6	)		—			(2	)		—			37			(6	)
CDO/ABS		6,656			(1,114	)		—			(551	)		—			4,991			634

Total bond trading securities		6,987			(1,162	)		—			(618	)		54			5,261			625

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)


																			Changes in
				Net															Unrealized
				Realized and															Gains
				Unrealized			Accumulated			Purchases,									(Losses) on
	Balance			Gains (Losses)			Other			Sales,						Balance			Instruments
	Beginning			Included			Comprehensive			Issuances and			Transfer			End			Held at
	of Period(a)			in Income(b)			Loss			Settlements-Net			In (Out)			of Period			End of Period
	(In millions)

Securities lending invested collateral:
Corporate debt		231			—			6			67			(170	)		134			—
RMBS		48			—			5			(31	)		—			22			—
CDO/ABS		156			—			(25	)		(10	)		(39	)		82			—

Total Securities lending invested collateral		435			—			(14	)		26			(209	)		238			—

Equity securities available for sale:
Common stocks		55			(21	)		7			—			(8	)		33			—
Preferred stocks		54			(6	)		(4	)		(1	)		5			48			—
Mutual funds		2			—			(1	)		—			—			1			—

Total equity securities available for sale		111			(27	)		2			(1	)		(3	)		82			—

Equity securities trading:
Common stocks		1			—			—			—			—			1			—
Mutual funds		2			—			—			—			14			16			—

Total equity securities trading		3			—			—			—			14			17			—

Other invested assets		11,168			(1,327	)		(2,339	)		892			24			8,418			(1,164	)
Short-term investments		—			—			—			—			3			3			—
Other assets		325			(9	)		—			(28	)		—			288			(8	)
Separate account assets		830			113			—			(27	)		—			916			114

Total	$	38,250		$	(3,249	)	$	(1,325	)	$	(1,115	)	$	1,236		$	33,797		$	(433	)

Liabilities:
Policyholder contract deposits	$	(5,458	)	$	(1,501	)	$	(183	)	$	(271	)	$	140		$	(7,273	)	$	1,563
Securities sold under agreements to repurchase		(85	)		4			—			81			—			—			—
Unrealized loss on swaps, options and forward transactions, net		(10,570	)		(307	)		4			2,622			(693	)		(8,944	)		3,185
Other long-term debt		(1,147	)		253			—			134			93			(667	)		(176	)

Total	$	(17,260	)	$	(1,551	)	$	(179	)	$	2,566		$	(460	)	$	(16,884	)	$	4,572

Three Months Ended June 30, 2008
Assets:
Bonds available for sale	$	17,492		$	(682	)	$	(56	)	$	43		$	2,055		$	18,852		$	—
Bond trading securities		3,535			(467	)		2			728			77			3,875			(354	)
Securities lending invested collateral		9,622			(1,346	)		908			(590	)		(105	)		8,489			—
Common and preferred stock available for sale		384			(6	)		5			(74	)		176			485			—
Common and preferred stock trading		25			(1	)		1			(13	)		(7	)		5			—
Mortgage and other loans receivable		—			—			—			—			4			4			—
Other invested assets		11,348			(153	)		70			533			70			11,868			166
Other assets		337			(6	)		—			3			—			334			(6	)
Separate account assets		1,065			(3	)		—			116			—			1,178			(4	)

Total	$	43,808		$	(2,664	)	$	930		$	746		$	2,270		$	45,090		$	(198	)

Liabilities:
Policyholder contract deposits	$	(4,118	)	$	129		$	13		$	(203	)	$	—		$	(4,179	)	$	62
Securities sold under agreements to repurchase		(220	)		(3	)		—			(39	)		222			(40	)		1
Unrealized loss on swaps, options and forward transactions, net		(20,860	)		(5,679	)		—			(240	)		105			(26,674	)		(5,496	)
Other long-term debt		(2,838	)		(25	)		—			182			(8	)		(2,689	)		(12	)
Other liabilities		(74	)		32			(1	)		17			1			(25	)		52

Total	$	(28,110	)	$	(5,546	)	$	12		$	(283	)	$	320		$	(33,607	)	$	(5,393	)

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)


																			Changes in
				Net															Unrealized
				Realized and															Gains
				Unrealized			Accumulated			Purchases,									(Losses) on
	Balance			Gains (Losses)			Other			Sales,						Balance			Instruments
	Beginning			Included			Comprehensive			Issuances and			Transfer			End			Held at
	of Period(a)			in Income(b)			Loss			Settlements-Net			In (Out)			of Period			End of Period
	(In millions)

Six Months Ended June 30, 2008
Assets:
Bonds available for sale	$	19,071		$	(1,447	)	$	(542	)	$	(142	)	$	1,912		$	18,852		$	—
Bond trading securities		4,563			(1,453	)		2			717			46			3,875			(1,243	)
Securities lending invested collateral		11,353			(3,138	)		1,087			(818	)		5			8,489			—
Common and preferred stock available for sale		359			(7	)		6			(56	)		183			485			—
Common and preferred stock trading		30			(1	)		2			(19	)		(7	)		5			—
Mortgage and other loans receivable		—			—			—			—			4			4			—
Other invested assets		10,373			192			137			1,148			18			11,868			818
Other assets		141			—			—			193			—			334			—
Separate account assets		1,003			27			—			148			—			1,178			27

Total	$	46,893		$	(5,827	)	$	692		$	1,171		$	2,161		$	45,090		$	(398	)

Liabilities:
Policyholder contract deposits	$	(3,674	)	$	(57	)	$	(51	)	$	(397	)	$	—		$	(4,179	)	$	(221	)
Securities sold under agreements to repurchase		(208	)		(20	)		—			(34	)		222			(40	)		1
Unrealized loss on swaps, options and forward transactions, net		(11,718	)		(14,562	)		—			(429	)		35			(26,674	)		(14,693	)
Other long-term debt		(3,578	)		90			—			638			161			(2,689	)		—
Other liabilities		(503	)		(55	)		—			532			1			(25	)		28

Total	$	(19,681	)	$	(14,604	)	$	(51	)	$	310		$	419		$	(33,607	)	$	(14,885	)


(a)		Total Level 3 derivative exposures have been netted on these tables for presentation purposes only.

(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

Bonds available for sale		• Net realized capital gains (losses)
Bond trading securities		• Net investment income
		• Other income
Other invested assets		• Net realized capital gains (losses)
		• Other income
Policyholder contract deposits		• Policyholder benefits and claims incurred
		• Net realized capital gains (losses)
Unrealized loss on swaps, options and forward transactions, net		• Unrealized market valuation gains (losses) on AIGFP super senior credit default swap portfolio
		• Net realized capital gains (losses)
		• Other income

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 June 30, 2009 and 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

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)

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 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 cost and equity-method investments, life settlement contracts, flight equipment primarily under operating leases, 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:


	•	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 in Fair Value Measurements on a Recurring Basis — Fair Value Hierarchy, above, for fixed maturities and equity securities.

	•	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 AIG’s 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 aircraft’s 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 of fair value on the price that would be received in a current transaction to sell the asset by itself, by reference to observable transactions for similar assets.

	•	Goodwill: AIG tests goodwill annually for impairment or more frequently whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. When AIG determines goodwill may be impaired, AIG uses techniques including market-based earning multiples of peer companies, discounted expected future cash flows, appraisals, or, in the case of reporting units being considered for sale, third-party indications of fair value of the reporting unit, if available, to determine the amount of any impairment.

	•	Long-Lived Assets: AIG tests its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of a long-lived asset may not be recoverable. AIG measures the fair value of long-lived 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.

	•	Finance Receivables Held for Sale:

American International Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (continued)


	•	Originated as held for sale — AIG determines the fair value of finance receivables originated as held for sale by reference to available market indicators such as current investor yield requirements, outstanding forward sale commitments, or negotiations with prospective purchasers, if any.

	•	Originated as held for investment — AIG determines the fair value of finance receivables originated as held for investment based on negotiations with prospective purchasers, if any, or by using projected cash flows discounted at the weighted average interest rates offered in the marketplace for similar finance receivables. Cash flows are projected based on contractual payment terms, adjusted for delinquencies and estimates of prepayments and credit-related losses.

Assets measured at fair value on a non-recurring basis on which impairment charges were recorded, and the related impairment charges, were as follows:


									Impairment Charges
									Three Months				Six Months
	Assets at Fair Value								Ended				Ended
	Non-Recurring Basis								June 30,				June 30,
	Level 1		Level 2		Level 3		Total		2009		2008		2009		2008
	(In millions)

At June 30, 2009
Goodwill	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	45
Real estate owned		—		—		3,278		3,278		341		22		499		22
Finance receivables		—		—		754		754		79		15		79		15
Other investments		—		—		716		716		77		—		369		—
Aircraft		—		—		24		24		16		—		16		—
Other assets		—		108		187		295		39		13		111		13

Total	$	—	$	108	$	4,959	$	5,067	$	552	$	50	$	1,074	$	95

At December 31, 2008
Real estate owned	$	—	$	—	$	1,379	$	1,379
Other investments		15		—		3,122		3,137
Other assets		—		29		1,160		1,189

Total	$	15	$	29	$	5,661	$	5,705

During 2009, AIG recognized impairment charges primarily attributable to certain investment real estate and other long-lived assets, which were included in Other income.

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 AIG’s insurance businesses and in AIGFP for which the fair value option was elected under FAS 159 are classified in Policyholder benefit and claims incurred and in Other income, respectively, in the Consolidated Statement of Income (Loss).

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 six-month periods ended June 30, 2009 and 2008 related to the eligible instruments for which AIG elected the fair value option:


	Gain (Loss)					Gain (Loss)
	Three Months					Six Months
	Ended June 30,					Ended June 30,
	2009		2008			2009			2008
			(In millions)

Mortgage and other loans receivable	$	18	$	11		$	(29	)	$	79
Trading securities		1,402		(718	)		(269	)		(1,151	)
Trading — ML II and ML III		885		—			(1,316	)		—

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents