10-Q 1 y78668e10vq.htm FORM 10-Q e10vq
Table of Contents

 
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


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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.


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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.


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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.


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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.


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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.


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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.


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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.


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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.


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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.


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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


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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.


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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


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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).


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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.


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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


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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


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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


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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  
                                                         


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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     Expenses     Downs     Expenses(a)     Expenses     Expenses     Expenses  
    (In millions)  
 
Total amounts expected to be incurred(c)
  $ 207     $ 120     $ 72     $ 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.

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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 )
                                 


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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 )
                                 


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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.


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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


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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.


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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.


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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


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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.


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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).


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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  
                                                 


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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  
                                                 

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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  
                                                 

33


Table of Contents

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  
                                                         


34


Table of Contents

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  
                                                         

35


Table of Contents

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 )
                                                         

36


Table of Contents

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

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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:


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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).


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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 )      
Securities purchased under agreements to resell
    7       307       (9 )     575  
Other invested assets
    (2 )     2       (24