10-Q 1 a2198531z10-q.htm 10-Q

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 March 31, 2010

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
(State or other jurisdiction of
incorporation or organization)

  13-2592361
(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: Not applicable



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

    Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ    No o

    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ

  Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o

    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No þ

    As of April 30, 2010, there were 135,070,621 shares outstanding of the registrant's common stock.


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American International Group, Inc., and Subsidiaries

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American International Group, Inc., and Subsidiaries

Part I – FINANCIAL INFORMATION

ITEM 1.    Financial Statements (unaudited)

Consolidated Balance Sheet

   
(in millions)
  March 31,
2010

  December 31,
2009

 
   

Assets:

             
 

Investments:

             
   

Fixed maturity securities:

             
     

Bonds available for sale, at fair value (amortized cost: 2010 – $254,416; 2009 – $364,491)

  $ 256,870   $ 365,551  
     

Bond trading securities, at fair value

    26,365     31,243  
   

Equity securities:

             
     

Common and preferred stock available for sale, at fair value (cost: 2010 – $4,882; 2009 – $6,464)

    6,831     9,522  
     

Common and preferred stock trading, at fair value

    613     8,318  
   

Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2010 – $157; 2009 – $119)

    22,533     27,461  
   

Finance receivables, net of allowance

    18,912     20,327  
   

Flight equipment primarily under operating leases, net of accumulated depreciation

    43,258     44,091  
   

Other invested assets (portion measured at fair value: 2010 – $10,154; 2009 – $18,888)

    33,250     45,235  
   

Securities purchased under agreements to resell, at fair value

    1,615     2,154  
   

Short-term investments (portion measured at fair value: 2010 – $22,184; 2009 – $23,975)

    38,800     47,263  
   
     

Total investments

    449,047     601,165  
 

Cash

    2,133     4,400  
 

Accrued investment income

    3,467     5,152  
 

Premiums and other receivables, net of allowance

    18,718     16,549  
 

Reinsurance assets, net of allowance

    25,791     22,425  
 

Current and deferred income taxes

    6,805     4,108  
 

Deferred policy acquisition costs

    19,064     40,814  
 

Real estate and other fixed assets, net of accumulated depreciation

    3,259     4,142  
 

Unrealized gain on swaps, options and forward transactions, at fair value

    7,383     9,130  
 

Goodwill

    2,565     6,195  
 

Other assets, including prepaid commitment asset of $6,460 in 2010 and $7,099 in 2009 (portion measured at fair value: 2010 – $13; 2009 – $288)

    17,072     18,976  
 

Separate account assets, at fair value

    51,953     58,150  
 

Assets of businesses held for sale

    256,440     56,379  
   

Total assets

  $ 863,697   $ 847,585  
   

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc., and Subsidiaries


Consolidated Balance Sheet (Continued)

   
(in millions, except share data)
  March 31,
2010

  December 31,
2009

 
   

Liabilities:

             
 

Liability for unpaid claims and claims adjustment expense

  $ 86,489   $ 85,386  
 

Unearned premiums

    26,350     21,363  
 

Future policy benefits for life and accident and health insurance contracts

    47,752     116,001  
 

Policyholder contract deposits (portion measured at fair value: 2010 – $641; 2009 – $5,214)

    142,932     220,128  
 

Other policyholder funds

    7,493     13,252  
 

Commissions, expenses and taxes payable

    2,874     4,950  
 

Insurance balances payable

    4,004     4,393  
 

Funds held by companies under reinsurance treaties

    708     774  
 

Securities sold under agreements to repurchase (portion measured at fair value: 2010 – $3,418; 2009 – $3,221)

    3,418     3,505  
 

Securities and spot commodities sold but not yet purchased, at fair value

    458     1,030  
 

Unrealized loss on swaps, options and forward transactions, at fair value

    6,296     5,403  
 

Trust deposits and deposits due to banks and other depositors (portion measured at fair value: 2010 – $16; 2009 – $15)

    1,030     1,641  
 

Other liabilities

    21,015     22,503  
 

Federal Reserve Bank of New York Commercial Paper Funding Facility (portion measured at fair value: 2010 – $2,285; 2009 – $2,742)

    2,285     4,739  
 

Federal Reserve Bank of New York credit facility

    27,400     23,435  
 

Other long-term debt (portion measured at fair value: 2010 – $12,800; 2009 – $13,195)

    109,744     113,298  
 

Separate account liabilities

    51,953     58,150  
 

Liabilities of businesses held for sale

    217,837     48,599  
   

Total liabilities

    760,038     748,550  
   
 

Commitments, contingencies and guarantees (see Note 9)

             
 

Redeemable noncontrolling interests in partially owned consolidated subsidiaries (including $1,270 and $211 associated with businesses held for sale in 2010 and 2009, respectively)

    1,940     959  

AIG shareholders' equity:

             
 

Preferred stock

             
   

Series E; $5.00 par value; shares issued: 2010 and 2009 – 400,000, at aggregate liquidation value

    41,605     41,605  
   

Series F; $5.00 par value; shares issued: 2010 and 2009 – 300,000, aggregate liquidation value: 2010 – $7,543; 2009 – $5,344

    7,378     5,179  
   

Series C; $5.00 par value; shares issued: 2010 and 2009 – 100,000, aggregate liquidation value: 2010 and 2009 – $0.5

    23,000     23,000  
 

Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2010 – 141,605,834; 2009 – 141,732,263

    354     354  
 

Treasury stock, at cost; 2010 – 6,661,350; 2009 – 6,661,356 shares of common stock

    (874 )   (874 )
 

Additional paid-in capital

    6,356     6,358  
 

Accumulated deficit

    (9,871 )   (11,491 )
 

Accumulated other comprehensive income

    7,053     5,693  
   

Total AIG shareholders' equity

    75,001     69,824  
   

Noncontrolling interests:

             
 

Noncontrolling nonvoting, callable, junior and senior preferred interests held by Federal Reserve Bank of New York

    25,059     24,540  
 

Other (including $374 and $2,234 associated with businesses held for sale in 2010 and 2009, respectively)

    1,659     3,712  
   

Total noncontrolling interests

    26,718     28,252  
   

Total equity

    101,719     98,076  
   

Total liabilities and equity

  $ 863,697   $ 847,585  
   

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
March 31,
 
(dollars in millions, except per share data)
  2010
  2009
 
   

Revenues:

             
 

Premiums and other considerations

  $ 10,067   $ 12,841  
 

Net investment income

    4,836     915  
 

Net realized capital losses:

             
   

Total other-than-temporary impairments on available for sale securities

    (309 )   (3,672 )
   

Portion of other-than-temporary impairments on available for sale fixed maturity securities recognized in Accumulated other comprehensive loss

    (521 )   -  
   
   

Net other-than-temporary impairments on available for sale securities recognized in net income (loss)

    (830 )   (3,672 )
   

Other realized capital gains

    282     898  
   
     

Total net realized capital losses

    (548 )   (2,774 )
 

Unrealized market valuation gains (losses) on AIGFP super senior credit default swap portfolio

    119     (452 )
 

Other income

    1,856     2,785  
   

Total revenues

    16,330     13,315  
   

Benefits, claims and expenses:

             
 

Policyholder benefits and claims incurred

    8,519     11,353  
 

Policy acquisition and other insurance expenses

    3,262     3,576  
 

Interest expense

    1,734     2,587  
 

Restructuring expenses and related asset impairment and other expenses

    110     338  
 

Net loss (gain) on sale of divested businesses

    77     (262 )
 

Other expenses

    1,793     2,239  
   

Total benefits, claims and expenses

    15,495     19,831  
   

Income (loss) from continuing operations before income tax benefit

    835     (6,516 )

Income tax benefit

    (91 )   (1,303 )
   

Income (loss) from continuing operations

    926     (5,213 )

Income (loss) from discontinued operations, net of income tax expense (benefit) (See Note 3)

    1,173     80  
   

Net income (loss)

    2,099     (5,133 )
   

Less:

             

Net income (loss) from continuing operations attributable to noncontrolling interests:

             
 

Noncontrolling nonvoting, callable, junior and senior preferred interests held by Federal Reserve Bank of New York

    519     -  
 

Other

    129     (774 )
   

Total net income (loss) from continuing operations attributable to noncontrolling interests

    648     (774 )

Net loss from discontinued operations attributable to noncontrolling interests

    -     (6 )
   

Total net income (loss) attributable to noncontrolling interests

    648     (780 )
   

Net income (loss) attributable to AIG

  $ 1,451   $ (4,353 )
   

Net income (loss) attributable to AIG common shareholders

  $ 294   $ (5,365 )
   

Income (loss) per common share attributable to AIG:

             
 

Basic:

             
   

Income (loss) from continuing operations

  $ 0.41   $ (40.29 )
   

Income (loss) from discontinued operations

  $ 1.75   $ 0.62  
 

Diluted:

             
   

Income (loss) from continuing operations

  $ 0.41   $ (40.29 )
   

Income (loss) from discontinued operations

  $ 1.75   $ 0.62  
   

Weighted average shares outstanding:

             
 

Basic

    135,658,680     135,252,869  
 

Diluted

    135,724,939     135,252,869  
   

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc., and Subsidiaries

Consolidated Statement of Comprehensive Income (Loss)

   
 
  Three Months Ended
March 31,
 
(in millions)
  2010
  2009
 
   

Net income (loss)

  $ 2,099   $ (5,133 )
   

Other comprehensive income (loss):

             
 

Unrealized appreciation (depreciation) of fixed maturity investments on which other-than-temporary credit impairments were taken

    993     -  
   

Income tax benefit (expense) on above changes

    (220 )   -  
 

Unrealized appreciation (depreciation) of all other investments – net of reclassification adjustments

    2,531     (3,372 )
   

Income tax benefit (expense) on above changes

    (1,374 )   1,392  
 

Foreign currency translation adjustments

    (958 )   (941 )
   

Income tax benefit (expense) on above changes

    429     209  
 

Net derivative gains (losses) arising from cash flow hedging activities – net of reclassification adjustments

    24     26  
   

Income tax benefit (expense) on above changes

    (2 )   27  
 

Change in retirement plan liabilities adjustment

    77     58  
   

Income tax benefit (expense) on above changes

    (24 )   (18 )
   

Other comprehensive income (loss)

    1,476     (2,619 )
   

Comprehensive income (loss)

    3,575     (7,752 )

Comprehensive income (loss) attributable to noncontrolling interests

    (31 )   (867 )

Comprehensive income (loss) attributable to noncontrolling nonvoting, callable, junior and senior preferred interests held by Federal Reserve Bank of New York

    519     -  
   

Comprehensive income (loss) attributable to AIG

  $ 3,087   $ (6,885 )
   

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc., and Subsidiaries

Consolidated Statement of Cash Flows

   
 
  Three Months
Ended March 31,
 
(in millions)
  2010
  2009
 
   

Summary:

             
 

Net cash provided by (used in) operating activities

  $ 3,195   $ 3,770  
 

Net cash provided by (used in) investing activities

    (4,516 )   1,432  
 

Net cash provided by (used in) financing activities

    (266 )   (9,644 )
 

Effect of exchange rate changes on cash

    (42 )   (171 )
   
 

Change in cash

    (1,629 )   (4,613 )
 

Cash at beginning of period

    4,400     8,642  
 

Reclassification of assets held for sale

    (638 )   -  
   
 

Cash at end of period

    2,133     4,029  
   

Cash flows from operating activities:

             
 

Net income (loss)

  $ 2,099   $ (5,133 )
 

(Income) loss from discontinued operations

    (1,173 )   (80 )
   
 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

             
 

Noncash revenues, expenses, gains and losses included in income (loss):

             
   

Net (gains) losses on sales of securities available for sale and other assets

    (422 )   57  
   

Net (gains) losses on sales of divested businesses

    77     (262 )
   

Unrealized (gains) losses in earnings – net

    591     (373 )
   

Equity in (income) loss from equity method investments, net of dividends or distributions

    (336 )   2,084  
   

Depreciation and other amortization

    2,529     3,050  
   

Provision for mortgage, other loans and finance receivables

    344     1,019  
   

Impairments of assets

    1,753     4,193  
   

Amortization of costs and accrued interest and fees related to FRBNY Credit Facility

    856     1,495  
 

Changes in operating assets and liabilities:

             
   

General and life insurance reserves

    2,323     (1,988 )
   

Premiums and other receivables and payables – net

    (1,002 )   (482 )
   

Reinsurance assets and funds held under reinsurance treaties

    (3,637 )   1,772  
   

Capitalization of deferred policy acquisition costs

    (1,914 )   (2,313 )
   

Other policyholder funds

    (63 )   (1 )
   

Current and deferred income taxes – net

    (954 )   (1,761 )
   

Other assets and liabilities – net

    (791 )   49  
   

Trading securities

    21     1,027  
   

Securities sold under agreements to repurchase, net of securities purchased under agreements to resell

    306     390  
   

Securities and spot commodities sold but not yet purchased

    (572 )   (1,528 )
   

Finance receivables and other loans held for sale – originations and purchases

    (5 )   (22 )
   

Sales of finance receivables and other loans – held for sale

    48     32  
   

Other, net

    267     371  
   
   

Total adjustments

    (581 )   6,809  
   

Net cash provided by (used in) operating activities – continuing operations

    345     1,596  

Net cash provided by (used in) operating activities – discontinued operations

    2,850     2,174  
   

Net cash provided by (used in) operating activities

  $ 3,195   $ 3,770  
   

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc., and Subsidiaries

Consolidated Statement of Cash Flows (Continued)

   
 
  Three Months
Ended March 31,
 
(in millions)
  2010
  2009
 
   

Cash flows from investing activities:

             

Proceeds from (payments for)

             
 

Sales of available for sale investments

  $ 7,893   $ 12,263  
 

Maturities of fixed maturity securities available for sale and hybrid investments

    3,340     3,592  
 

Sales of trading securities

    1,746     3,635  
 

Sales or distributions of other invested assets (including flight equipment)

    2,157     2,711  
 

Sales of divested businesses, net

    1,471     704  
 

Principal payments received on mortgage and other loans receivable

    938     1,010  
 

Principal payments received on and sales of finance receivables held for investment

    1,590     4,006  
 

Purchases of available for sale investments

    (15,847 )   (9,974 )
 

Purchases of trading securities

    (356 )   (2,829 )
 

Purchases of other invested assets (including flight equipment)

    (1,915 )   (2,228 )
 

Acquisition, net of cash acquired

    (139 )   -  
 

Mortgage and other loans receivable issued

    (303 )   (778 )
 

Finance receivables held for investment – originations and purchases

    (746 )   (1,855 )
 

Change in securities lending invested collateral

    -     969  
 

Net additions to real estate, fixed assets, and other assets

    (64 )   (101 )
 

Net change in short-term investments

    (1,043 )   (7,778 )
 

Net change in non-AIGFP derivative assets and liabilities

    (129 )   (48 )
 

Other, net

    (49 )   (63 )
   

Net cash provided by (used in) investing activities – continuing operations

    (1,456 )   3,236  

Net cash provided by (used in) investing activities – discontinued operations

    (3,060 )   (1,804 )
   

Net cash provided by (used in) investing activities

  $ (4,516 ) $ 1,432  
   

Cash flows from financing activities:

             

Proceeds from (payments for)

             
 

Policyholder contract deposits

  $ 4,394   $ 4,738  
 

Policyholder contract withdrawals

    (3,639 )   (8,316 )
 

Change in other deposits

    (122 )   49  
 

Change in commercial paper and other short-term debt

    -     (421 )
 

Change in Federal Reserve Bank of New York Commercial Paper Funding Facility borrowings

    (3,565 )   (2,945 )
 

Federal Reserve Bank of New York credit facility borrowings

    8,300     10,900  
 

Federal Reserve Bank of New York credit facility repayments

    (4,551 )   (4,600 )
 

Issuance of other long-term debt

    4,170     1,209  
 

Repayments on other long-term debt

    (7,143 )   (5,953 )
 

Change in securities lending payable

    -     (490 )
 

Drawdown on the Department of the Treasury Commitment

    2,199     -  
 

Other, net

    (462 )   (653 )
   

Net cash provided by (used in) financing activities – continuing operations

    (419 )   (6,482 )

Net cash provided by (used in) financing activities – discontinued operations

    153     (3,162 )
   

Net cash provided by (used in) financing activities

  $ (266 ) $ (9,644 )
   

Supplementary disclosure of cash flow information:

             

Cash (paid) received during the period for:

             
 

Interest

  $ (1,047 ) $ (1,466 )
 

Taxes

  $ (604 ) $ (179 )

Non-cash financing/investing activities:

             
 

Interest credited to policyholder contract deposits included in financing activities

  $ 2,086   $ 1,598  
 

Long-term debt reduction due to deconsolidations

  $ 829   $ -  
 

Debt assumed on consolidation of variable interest entities

  $ 2,591   $ -  
 

Debt assumed on acquisition

  $ 164   $ -  
   

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc., and Subsidiaries

Consolidated Statement of Equity

   
Three Months Ended March 31, 2010


(in millions)
  Preferred
Stock

  Common
Stock

  Treasury
Stock

  Additional
Paid-in
Capital

  Accumulated
Deficit

  Accumulated
Other
Comprehensive
Income (Loss)

  Total AIG
Share-
holders'
Equity

  Non-
controlling
Interests

  Total
Equity

 
   

Balance, beginning of year

  $ 69,784   $ 354   $ (874 ) $ 6,358   $ (11,491 ) $ 5,693   $ 69,824   $ 28,252   $ 98,076  
   

Series F drawdowns

    2,199     -     -     -     -     -     2,199     -     2,199  

Common stock issued under stock plans

    -     -     -     (5 )   -     -     (5 )   -     (5 )

Cumulative effect of change in accounting principle, net of tax

    -     -     -     -     169     (276 )   (107 )   -     (107 )

Net income(a)

    -     -     -     -     1,451     -     1,451     133     1,584  

Other comprehensive income (loss)(b)

    -     -     -     -     -     1,636     1,636     (165 )   1,471  

Net decrease due to deconsolidation

    -     -     -     -     -     -     -     (2,161 )   (2,161 )

Contributions from noncontrolling interest

    -     -     -     -     -     -     -     210     210  

Distributions to noncontrolling interests

    -     -     -     -     -     -     -     (87 )   (87 )

Net income (loss) attributable to noncontrolling nonvoting, callable, junior and senior preferred interests held by the Federal Reserve Bank of New York

    -     -     -     -     -     -     -     519     519  

Other

    -     -     -     3     -     -     3     17     20  
   

Balance, end of period

  $ 71,983   $ 354   $ (874 ) $ 6,356   $ (9,871 ) $ 7,053   $ 75,001   $ 26,718   $ 101,719  
   
(a)
Excludes $(4) million attributable to redeemable noncontrolling interests and Net income attributable to noncontrolling nonvoting, callable, junior and senior preferred interests held by the Federal Reserve Bank of New York of $519 million.

(b)
Excludes $5 million attributable to redeemable noncontrolling interests.

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc., and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

    These unaudited condensed consolidated financial statements do not include all disclosures required by accounting principles generally accepted in the United States (GAAP) for complete consolidated financial statements and should be read in conjunction with the audited consolidated financial statements and the related notes included in the Annual Report on Form 10-K of American International Group, Inc. (AIG) for the year ended December 31, 2009 (2009 Annual Report on Form 10-K).

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

Use of Estimates

    The preparation of financial statements in conformity with GAAP requires the application of accounting policies that often involve a significant degree of judgment. AIG considers its accounting policies that are most dependent on the application of estimates and assumptions, and therefore viewed as critical accounting estimates, are those relating to items considered by management in the determination of:

    AIG's ability to continue as a going concern;

    liability for general insurance unpaid claims and claims adjustment expenses;

    future policy benefits for life and accident and health contracts;

    recoverability of deferred policy acquisition costs (DAC);

    estimated gross profits for investment-oriented products;

    the allowance for finance receivable losses;

    flight equipment recoverability;

    other-than-temporary impairments;

    goodwill impairment;

    liabilities for legal contingencies;

    estimates with respect to income taxes, including recoverability of deferred tax assets;

    fair value measurements of certain financial assets and liabilities, including credit default swaps (CDS) and AIG's economic interest in Maiden Lane II LLC (ML II) and equity interest in Maiden Lane III LLC (ML III) (together, the Maiden Lane Interests);

    classification of entities as held-for-sale or as discontinued operations; and

    fair value of the assets and liabilities, including non-controlling interests, related to acquisitions.

    These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, AIG's consolidated financial condition, results of operations and cash flows would be materially affected.

Out of Period Adjustments

    For the three months ended March 31, 2010, AIG recorded out of period adjustments relating to prior years that decreased Net income attributable to AIG by $158 million, primarily related to the effect of recording

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impairments on certain consolidated investments held in the Institutional Asset Management operations, which affected the calculation of income taxes. While these adjustments were noteworthy for the quarter, after evaluating the quantitative and qualitative aspects of these corrections, AIG concluded that its prior period financial statements were not materially misstated and, therefore, no restatement was required.

    Had these and all previously reported out of period adjustments been recorded in their appropriate periods, the net loss attributable to AIG for the year ended December 31, 2009 would have increased by $604 million, from $10.9 billion to $11.5 billion.


Going Concern Considerations

    In the audited financial statements included in the 2009 Annual Report on Form 10-K, 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.

Liquidity of Parent and Subsidiaries

    AIG manages liquidity at both the parent and subsidiary levels. AIG Parent has not had access to its traditional sources of financing through the public debt markets. While no assurance can be given that AIG will be able to access its traditional sources of long-term or short-term financing through the public markets again, AIG periodically evaluates its ability to access the capital markets.

    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, certain of its regulated subsidiaries are restricted from making dividend payments, or advancing funds, to AIG. As a result, AIG has also been dependent on the Federal Reserve Bank of New York (FRBNY) Credit Facility (the FRBNY Credit Facility) provided by the FRBNY under the Credit Agreement, dated as of September 22, 2008 (as amended, the FRBNY Credit Agreement), between AIG and the FRBNY, and the FRBNY's Commercial Paper Funding Facility (CPFF), through April 26, 2010, as its primary sources of liquidity; and on the agreement by the United States Department of the Treasury (the Department of the Treasury) to provide up to $29.835 billion (Department of Treasury Commitment) in exchange for increases in the liquidation preference of the AIG Series F Fixed Rate Non-Cumulative Perpetual Preferred Stock, par value $5.00 per share (AIG Series F Preferred Stock), to support the capital needs of its insurance company subsidiaries. Primary uses of cash flow are debt service and subsidiary funding.

    During the first four months of 2010, International Lease Finance Corporation (ILFC) and American General Finance, Inc. (AGF) made substantial progress in addressing their liquidity needs. During March and April of 2010, ILFC significantly increased its liquidity position through a combination of new secured and unsecured debt issuances of approximately $4.0 billion and an extension of the maturity date of $2.16 billion of its $2.5 billion revolving credit facility from October 2011 to October 2012. Availability of $550 million of the approximately $4.0 billion of debt issuances and the extension of $2.16 billion of the revolving credit facility are subject to the satisfaction of certain collateralization milestones. In addition, in April 2010, ILFC signed an agreement to sell 53 aircraft with an aggregate book value of approximately $2.3 billion, which is expected to generate approximately $2.0 billion in gross proceeds during 2010. As of March 31, 2010, none of these aircraft met the criteria to be recorded as held-for-sale. During March and April of 2010, AGF significantly enhanced its liquidity position through the following actions: AGF received cash proceeds of more than $500 million from a $1.0 billion asset securitization in March 2010 and executed and drew down fully a $3.0 billion secured term loan transaction in April 2010. AGF used a portion of the proceeds from these transactions, cash on hand and proceeds from AIG's repayment of two demand promissory notes to repay all of its outstanding obligations under its $2.45 billion one-year term loans in March 2010 and its $2.125 billion five-year revolving credit facility in April 2010 (both of which were due in July 2010).

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    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.

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

    Since September 2008, AIG has been working to protect and enhance the value of its key businesses, execute an orderly asset disposition plan, and position itself for the future. AIG continually reassesses this plan to maximize value while maintaining flexibility in managing its liquidity and capital, and expects to accomplish these objectives over a longer time frame than originally contemplated.

Sales of Businesses and Specific Asset Dispositions

AIA Sale

    As of March 1, 2010, AIG and AIA Aurora LLC, a special purpose vehicle formed by AIG and the FRBNY (AIA Holdings), entered into a definitive agreement (the AIA Share Purchase Agreement) with Prudential plc (Prudential) and Prudential Group Limited (formerly known as Petrohue (UK) Investments Limited), for the sale of AIA Group Limited (AIA) to Prudential Group Limited for approximately $35.5 billion, consisting of $25 billion in cash, approximately $5.5 billion in face value of ordinary shares in the capital of Prudential Group Limited, $3 billion in face value of mandatory convertible securities of Prudential Group Limited, and $2 billion in face value of preferred stock of Prudential (or at Prudential's election, Prudential Group Limited), subject to closing adjustments. The obligations of Prudential Group Limited under the AIA Share Purchase Agreement are guaranteed by Prudential.

    The cash portion of the proceeds from the sale will be paid to the FRBNY to redeem preferred interests with a liquidation preference of approximately $16 billion plus accrued but unpaid preferred returns held by the FRBNY in AIA Holdings, and, unless otherwise agreed with the FRBNY, to repay approximately $9 billion under the FRBNY Credit Facility. AIG intends to monetize the $10.5 billion in face value of Prudential securities over time, subject to market conditions, following the lapse of agreed-upon minimum holding periods. Unless otherwise agreed with the FRBNY, net cash proceeds from the monetization of these securities will be used to repay any outstanding debt under the FRBNY Credit Facility.

ALICO Sale

    As of March 7, 2010, AIG and ALICO Holdings LLC, a special purpose vehicle formed by AIG and the FRBNY (ALICO Holdings), entered into a definitive agreement (the ALICO Stock Purchase Agreement) with MetLife, Inc. (MetLife) for the sale of American Life Insurance Company (ALICO) by ALICO Holdings to MetLife, and the sale of Delaware American Life Insurance Company by AIG to MetLife, for approximately $15.5 billion, consisting of $6.8 billion in cash and the remainder in equity securities of MetLife, subject to closing adjustments.

    The cash portion of the proceeds from the sale will be paid to the FRBNY to reduce the liquidation preference of a portion of the preferred interests owned by the FRBNY in ALICO Holdings and ALICO Holdings will hold the remainder of the transaction consideration, consisting of 78,239,712 shares of MetLife common stock, 6,857,000 shares of newly issued participating preferred stock convertible into 68,570,000 shares of common stock upon the approval of MetLife shareholders, and 40,000,000 equity units of MetLife with an aggregate stated value of $3 billion. AIG intends to monetize these MetLife securities over time, subject to market conditions, following the lapse of agreed-upon minimum holding periods. Unless otherwise agreed with the FRBNY, net cash proceeds from the monetization of these securities will be used to reduce the liquidation preference of the preferred interests owned by the FRBNY in ALICO Holdings and thereafter to repay any outstanding debt under the FRBNY Credit Facility.

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    Dispositions of certain businesses will be subject to regulatory approval. Unless a waiver is obtained from the FRBNY, net proceeds from these dispositions, to the extent they do not represent capital of AIG's insurance subsidiaries required for regulatory or ratings purposes or are not to be utilized to redeem the preferred interests held by the FRBNY in AIA Holdings and ALICO Holdings, are contractually required to be applied toward the repayment of the FRBNY Credit Facility as mandatory prepayments.

    Since September 2008 and through April 28, 2010, AIG entered into agreements to sell or completed the sale of other operations and assets, excluding AIA, ALICO and the assets held by AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (collectively, AIGFP), that had aggregate assets and liabilities with carrying values of $95.5 billion and $77.5 billion, respectively, at March 31, 2010 or the date of sale. Of these amounts, pending transactions with aggregate assets and liabilities of $54.7 billion and $49.2 billion, respectively, at March 31, 2010 are expected to generate approximately $709 million of aggregate net cash proceeds that will be available to reduce the amount of the FRBNY Credit Facility, after taking into account taxes, transaction expenses, settlement of intercompany loan facilities, and capital required to be retained for regulatory or ratings purposes. Gains and losses recorded in connection with the dispositions of businesses include estimates that are subject to subsequent adjustment. Based on the transactions closed to date, AIG does not believe that such adjustments will be material to future consolidated results of operations or cash flows.

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

    the potential for declines in bond and equity markets;

    pending 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;

    AIG's highly leveraged capital structure;

    the effect of the provisions of the Troubled Asset Relief Program (TARP) Standards for Compensation and Corporate Governance and the Determination Memoranda issued by the Office of the Special Master for TARP Executive Compensation with respect to AIG's compensation practices and structures on AIG's ability to retain and motivate key employees or hire new employees;

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

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    the potential for regulatory actions in one or more countries, including possible actions resulting from the execution of management's plans for stabilization of AIG and repayment of AIG's obligations as they come due.

    Based on the U.S. government's continuing commitment, the already completed transactions and the other expected transactions with the FRBNY, management's plans and progress made to stabilize AIG's businesses and dispose of certain assets, and after consideration of the risks and uncertainties of such plans, management believes that it will 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 transactions with the FRBNY discussed above fail to achieve the desired objectives. If one or more of these possible outcomes is realized and third party financing is not available, AIG may need additional U.S. government support to meet its obligations as they come due. Under these adverse assumptions, without additional support from the U.S. government in the future there could exist substantial doubt about AIG's ability to continue as a going concern.

    In connection with making the going concern assessment and conclusion, management and the Board of Directors of AIG have confirmed in connection with the filing in February 2010 of the 2009 Annual Report on Form 10-K that "As first stated by the U.S. Treasury and the Federal Reserve in connection with the announcement of the AIG Restructuring Plan on March 2, 2009, the U.S. Government remains committed to continuing to work with AIG to maintain its ability 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 or relating to the amounts and classification of liabilities that may be necessary should AIG be unable to continue as a going concern.


Accounting Policies

Transfers of Financial Assets

    Securities purchased (sold) under agreements to resell (repurchase), at contract value: Securities purchased under agreements to resell and Securities sold under agreements to repurchase (other than those entered into by AIGFP) generally are accounted for as collateralized borrowing or lending transactions and are recorded at their contracted resale or repurchase amounts plus accrued interest. AIGFP carries such agreements at fair value based on market observable interest rates and credit spreads. AIG's policy is to take possession of or obtain a security interest in securities purchased under agreements to resell.

    When AIG does not obtain cash collateral sufficient to fund substantially all of the cost of purchasing identical replacement securities during the term of the contract, AIG accounts for the transaction as a sale of the security and reports the obligation to repurchase the security as a derivative contract. Where securities are carried in the available for sale category, AIG records a gain or loss in income. Where changes in fair value of securities are recognized through income, no additional gain or loss is recognized. The fair value of securities transferred under repurchase agreements accounted for as sales was $2.1 billion and $2.3 billion at March 31, 2010 and December 31, 2009, respectively, and the related cash collateral obtained was $1.7 billion and $1.5 billion at March 31, 2010 and December 31, 2009, respectively.

    AIG minimizes the risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and generally requiring additional collateral to be deposited with AIG when necessary.

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    Securities lending invested collateral, at fair value and Securities lending payable: In 2008, AIG exited the domestic securities lending program, and as of March 31, 2010, AIG had exited its foreign securities lending activities.


Recent Accounting Standards

Accounting Changes

    AIG adopted the following accounting standards during the first quarter of 2010:

Accounting for Transfers of Financial Assets

    In June 2009, the Financial Accounting Standards Board (FASB) issued an accounting standard addressing transfers of financial assets that removes the concept of a qualifying special-purpose entity (QSPE) from the FASB Accounting Standards Codification and removes the exception that exempted transferors from applying the consolidation rules to QSPEs. The new standard is effective for interim and annual periods beginning on January 1, 2010 for AIG. Earlier application is prohibited. The adoption of this standard increased both assets and liabilities by approximately $1.3 billion as a result of consolidating two previously unconsolidated QSPEs. The adoption of this new standard did not have a material effect on AIG's consolidated results of operations or cash flows.

Consolidation of Variable Interest Entities

    In June 2009, the FASB issued an accounting standard that amends the rules addressing consolidation of certain variable interest entities 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 has (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. The new standard also requires enhanced financial reporting by enterprises involved with variable interest entities.

    AIG adopted the new standard on January 1, 2010. The adoption of this standard resulted in an increase in excess of amounts previously recorded for assets, liabilities, redeemable noncontrolling interest, other noncontrolling interest and accumulated deficit of approximately $8.2 billion, $7.1 billion, $1.1 billion, $0.1 billion and $0.2 billion, respectively, and a net decrease in accumulated other comprehensive income of approximately $0.3 billion, as a result of consolidating previously unconsolidated VIEs.

    The following table describes the two methods applied by AIG and the amount and classification in the Consolidated Balance Sheet of the assets and liabilities consolidated as a result of the adoption:

   
 
  Transition Methods  
(in millions)
  Fair Value
Option

  Carrying
Value

 
   

Assets:

             
 

Bond trading securities, at fair value

  $ 1,239   $ 1,262  
 

Other invested assets

    -     480  
 

Mortgage and other loans receivable

    -     1,980  
 

Other asset accounts

    194     150  
 

Assets of businesses held for sale

    4,630     -  
   

Total Assets

  $ 6,063   $ 3,872  
   

Liabilities:

             
 

FRBNY commercial paper funding facility

  $ 1,088   $ -  
 

Other long-term debt

    -     1,533  
 

Other liability accounts

    1     31  
 

Liabilities of businesses held for sale

    4,525     -  
   

Total Liabilities

  $ 5,614   $ 1,564  
   

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The cumulative effect adjustment of electing the fair value option was not material to AIG's accumulated deficit.

    In February 2010, the FASB also issued an update to the aforementioned accounting standard that defers the revised consolidation rules for variable interest entities with attributes of, or similar to, an investment company or money market fund. The primary effect of this deferral for AIG is that AIG will continue to apply the consolidation rules in effect before the amended guidance discussed above for its interests in eligible entities, such as certain mutual funds.


Future Application of Accounting Standards

    In March 2010, the FASB issued an accounting standard that amends the scope for embedded credit derivative features related to the redistribution of credit risk in the form of subordination of one financial instrument to another in a securitization vehicle. The new standard clarifies how to determine which embedded credit derivative features, including those in collateralized debt obligations (CDOs), credit linked notes (CLNs) and synthetic CDOs and CLNs, are considered to be embedded derivatives that should not be analyzed for potential bifurcation and separate accounting. The new standard is effective for interim and annual periods beginning on July 1, 2010 for AIG. AIG is assessing the effect adopting this new standard will have on its consolidated financial condition, results of operations, and cash flows.


2. Segment Information

    AIG reports the results of its operations through four reportable segments: General Insurance, Domestic Life Insurance & Retirement Services, Foreign Life Insurance & Retirement Services, and Financial Services. AIG evaluates performance based on pre-tax income (loss), excluding results from discontinued operations and net gains (losses) on sales of divested businesses, because AIG believes that this provides more meaningful information on how its operations are performing.

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

   
Three Months Ended March 31,
(in millions)
  2010
  2009
 
   

Total revenues:

             
 

General Insurance

  $ 8,849   $ 8,099  
 

Domestic Life Insurance & Retirement Services

    3,226     1,703  
 

Foreign Life Insurance & Retirement Services*

    1,075     763  
 

Financial Services

    1,508     1,265  
 

Other

    2,062     2,180  
 

Consolidation and eliminations

    (390 )   (695 )
   

Total revenues

    16,330     13,315  
   

Pre-tax income (loss) from continuing operations:

             
 

General Insurance

    1,016     102  
 

Domestic Life Insurance & Retirement Services

    327     (1,827 )
 

Foreign Life Insurance & Retirement Services*

    85     (128 )
 

Financial Services

    (439 )   (1,130 )
 

Other

    (294 )   (3,444 )
 

Consolidation and eliminations

    140     (89 )
   

Total pre-tax income (loss) from continuing operations

  $ 835   $ (6,516 )
   
*
As a result of the announced AIA and ALICO transactions, and their treatment as discontinued operations, Foreign Life Insurance & Retirement Services operations consist of a single operating segment. See Note 3 herein for information on these transactions.

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

   
Three Months Ended March 31,
(in millions)
  2010
  2009
 
   

General Insurance

             

Total revenues:

             
 

Commercial Insurance

  $ 5,403   $ 5,024  
 

Foreign General Insurance

    3,446     3,075  
   

Total revenues

  $ 8,849   $ 8,099  
   

Pre-tax income (loss):

             
 

Commercial Insurance

  $ 730   $ (224 )
 

Foreign General Insurance

    286     326  
   

Total pre-tax income (loss)

  $ 1,016   $ 102  
   

Domestic Life Insurance & Retirement Services

             

Total revenues:

             
 

Domestic Life Insurance

  $ 1,934   $ 1,526  
 

Domestic Retirement Services

    1,292     177  
   

Total revenues

  $ 3,226   $ 1,703  
   

Pre-tax income (loss):

             
 

Domestic Life Insurance

  $ 227   $ (298 )
 

Domestic Retirement Services

    100     (1,529 )
   

Total pre-tax income (loss)

  $ 327   $ (1,827 )
   

Financial Services

             

Total revenues:

             
 

Aircraft Leasing

  $ 882   $ 1,281  
 

Capital Markets

    (234 )   (969 )
 

Consumer Finance

    779     813  
 

Other, including intercompany adjustments

    81     140  
   

Total revenues

  $ 1,508   $ 1,265  
   

Pre-tax income (loss):

             
 

Aircraft Leasing

  $ (81 ) $ 316  
 

Capital Markets

    (298 )   (1,121 )
 

Consumer Finance

    (25 )   (306 )
 

Other, including intercompany adjustments

    (35 )   (19 )
   

Total pre-tax income (loss)

  $ (439 ) $ (1,130 )
   

Other

             

Total revenues:

             
 

Parent & Other

  $ 1,119   $ 105  
 

Mortgage Guaranty

    298     317  
 

Change in fair value of ML III

    751      
 

Noncore Asset Management

    (19 )   (239 )
 

Other noncore insurance

    (17 )   1,997  
 

Consolidation and eliminations

    (70 )   -  
   

Total revenues

  $ 2,062   $ 2,180  
   

Pre-tax income (loss):

             
 

Parent & Other

  $ (645 ) $ (2,057 )
 

Mortgage Guaranty

    96     (480 )
 

Change in fair value of ML III

    751      
 

Noncore Asset Management

    (463 )   (1,012 )
 

Other noncore insurance

    (33 )   105  
   

Total pre-tax income (loss)

  $ (294 ) $ (3,444 )
   

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3. Discontinued Operations and Held-for-Sale Classification

Discontinued Operations

    As discussed in Note 1 herein, during the first quarter of 2010, AIG entered into agreements to sell AIA and ALICO. Also, on October 12, 2009, AIG entered into an agreement to sell its 97.57 percent share of Nan Shan Life Insurance Company, Ltd. (Nan Shan) for approximately $2.15 billion. AIG expects each of these sales to close in 2010. These transactions met the criteria for held-for-sale and discontinued operations accounting.

    Accordingly, results of operations for these companies are included as discontinued operations in AIG's Consolidated Statement of Income (Loss) for all periods shown and their aggregated assets and liabilities are presented separately as single line items in the asset and liability sections of the Consolidated Balance Sheet at March 31, 2010 for AIA and ALICO and at March 31, 2010 and December 31, 2009 for Nan Shan. Each of these companies previously had been a component of the Foreign Life Insurance & Retirement Services reportable segment.

    Income (loss) from discontinued operations includes interest expense, including periodic amortization of the prepaid commitment fee asset, on debt to be assumed by the buyers of AIA and ALICO and on debt required to be repaid as a result of the disposition transactions associated with the FRBNY Credit Facility totaling $183 million and $258 million in the three months ended March 31, 2010 and 2009, respectively. The interest expense allocated to discontinued operations for the three-month periods ended March 31, 2010 and 2009 was based on the estimated funds of $8.6 billion committed to repay the FRBNY Credit Facility multiplied by the daily interest rate. The periodic amortization of the prepaid commitment fee allocated to discontinued operations was determined based on the ratio of funds committed to repay the FRBNY Credit Facility to the total outstanding available amount under the FRBNY Credit Facility.

A summary of income (loss) from discontinued operations is as follows:

   
Three Months Ended March 31,
(in millions)
  2010
  2009
 
   

Premiums and other considerations

  $ 6,525   $ 6,024  

Net investment income

    2,252     1,449  

Net realized capital gains (losses)

    63     (587 )
   
 

Total revenues

    8,840     6,886  

Income (loss) from discontinued operations

   
1,142
   
152
 

Loss on sale

    (106 )   (3 )
   

Income (loss) from discontinued operations, before income tax expense (benefit)

    1,036     149  
   

Income tax expense (benefit)

    (137 )   69  
   

Income (loss) from discontinued operations, net of tax

  $ 1,173   $ 80  
   

    Certain other sales completed during 2010 and 2009 were not classified as discontinued operations due to AIG's continued involvement or because associated assets, liabilities and results of operations were not material to AIG's consolidated financial position or results of operations.


Held-for-Sale Classification

    On September 5, 2009, AIG entered into an agreement to sell its investment advisory and third party asset management business for a $277 million cash payment at closing plus contingent consideration to be received over time. Prior to the closing of this transaction on March 26, 2010, these businesses were a component of the Noncore Asset Management business included within Other operations. This transaction met the criteria for held-for-sale accounting, and its assets and liabilities were included as single line items in the asset and liability sections of the Consolidated Balance Sheet at December 31, 2009. This transaction did not meet the criteria for

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discontinued operations accounting because of a significant continuation of activities between AIG and the business sold.

    On July 28, 2009, AIG entered into an agreement to combine its consumer finance business in Poland, conducted through AIG Bank Polska S.A., into the Polish consumer finance business of Santander Consumer Finance S.A. (SCB). In exchange, AIG will receive an equity interest in SCB. The closing is expected to occur in the second quarter of 2010. This transaction met the criteria for held-for-sale accounting and, as a result, its assets and liabilities are included as single line items in the asset and liability sections of the Consolidated Balance Sheet at March 31, 2010 and December 31, 2009. AIG Bank Polska is a component of the Financial Services reportable segment. This transaction did not meet the criteria for discontinued operations accounting because of AIG's retained equity interest in SCB.

A summary of assets and liabilities held for sale at March 31, 2010 and December 31, 2009 is as follows:

   
(in millions)
  March 31,
2010

  December 31,
2009

 
   

Assets:

             
 

Fixed maturity securities

  $ 163,336   $ 34,495  
 

Deferred policy acquisition costs

    24,204     3,322  
 

Equity securities

    15,366     2,947  
 

Other invested assets

    13,269     4,256  
 

Short-term investments

    13,170     3,501  
 

Separate account assets

    10,675     3,467  
 

Mortgage and other loans receivable, net

    9,096     3,997  
 

Goodwill

    3,457     25  
 

Other assets

    3,867     369  
   

Total Assets of businesses held for sale

  $ 256,440   $ 56,379  
   

Liabilities:

             
 

Future policy benefits for life and accident and health insurance contracts

  $ 108,812   $ 38,023  
 

Policyholder contract deposits

    79,312     3,133  
 

Separate account liabilities

    10,675     3,467  
 

Other liabilities

    19,038     3,976  
   

Total Liabilities of businesses held for sale

  $ 217,837   $ 48,599  
   


4. Business Combination

    On March 31, 2010, AIG, through a Chartis International subsidiary, purchased additional voting shares in Fuji Fire & Marine Insurance Company Limited (Fuji), a publicly traded Japanese insurance company with general insurance and some life insurance operations. The acquisition of the additional voting shares for $145 million increased Chartis' total voting ownership interest in Fuji from 41.7 percent to 54.8 percent, which resulted in Chartis International obtaining control of Fuji. This acquisition was made to maintain Chartis International's share in the substantial Japanese market, which is undergoing significant consolidation.

    The purchase was accounted for under the acquisition method. Chartis identified and estimated certain of the fair values of assets acquired, liabilities assumed, and noncontrolling interests of Fuji as of the acquisition date. Because the acquisition was completed on the last day of the quarter, Chartis has not obtained final appraisals of Fuji's insurance contracts, loans, certain real estate or intangible assets.

    Based on the estimated fair values assigned to the assets acquired, liabilities assumed and noncontrolling interests, Chartis recorded an unallocated purchase price of $581 million in Other liabilities in the Consolidated Balance Sheet. Chartis is in the process of reassessing the recognition and measurement of identifiable assets acquired, including the value of the business acquired and other intangibles, and liabilities assumed. Upon

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completion of the reassessment process, Chartis will adjust the fair value of the assets acquired and liabilities assumed for any significant differences to the provisional fair values. An adjustment to the purchase price allocation may also occur if new information on Fuji becomes known or discovered within one year from the acquisition date. To the extent an unallocated purchase price credit remains, AIG will record a bargain purchase gain. It is anticipated that any gain recognized will not be subject to U.S. or foreign income tax, because such gain would only be recognized for tax purposes upon sale of the Fuji shares.

The following table summarizes the estimated preliminary fair values of major classes of assets acquired and liabilities assumed and the unallocated purchase price at the date of acquisition:

   
(in millions)
  At March 31, 2010
 
   

Identifiable net assets:

       
 

Investments

  $ 10,121  
 

Cash

    6  
 

Premiums and other receivables

    889  
 

Reinsurance assets

    517  
 

Real estate and other fixed assets

    428  
 

Other assets

    108  
 

Liability for unpaid claims and claims adjustment expense

    (1,561 )
 

Unearned premiums

    (3,139 )
 

Future policy benefits for life and accident and health insurance contracts

    (1,934 )
 

Other policyholder funds

    (3,536 )
 

Other liabilities

    (460 )
   

Total preliminary identifiable net assets acquired

    1,439  
 

Less:

       
   

Cash consideration transferred

    145  
   

Fair value of the noncontrolling interest

    421  
   

Fair value of AIG's previous equity interest in Fuji

    292  
   
     

Unallocated purchase price

  $ 581  
   

    In accordance with the acquisition method of accounting, Chartis remeasured its equity interest in Fuji, held prior to the acquisition of the additional shares, to fair value which resulted in a gain of $47 million offset by a $72 million charge resulting from the reversal through income of Chartis' share of Fuji's accumulated other comprehensive income. The loss was recorded in Other realized capital gains (losses) in the Consolidated Statement of Income (Loss). The fair value of AIG's previous equity interest and the noncontrolling interest were based on the publicly-traded share price on the Tokyo Stock Exchange as of the acquisition date. The acquisition-related costs, consisting primarily of legal and transaction fees, were recorded in Other expenses in the Consolidated Statement of Income (Loss).

The following unaudited summarized pro forma consolidated income statement information assumes that the acquisition occurred as of January 1, 2009. The pro forma amounts are for comparative purposes only and may not necessarily reflect the results of operations which would have resulted had the acquisition been completed at the beginning of the applicable period and may not be indicative of the results that will be attained in the future.

   
Three Months Ended March 31,
(in millions)
  2010
  2009
 
   

Total revenues

  $ 17,327   $ 13,863  

Net income (loss)

    2,181     (5,416 )

Net income (loss) attributable to AIG

    1,471     (4,500 )
   

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5. Fair Value Measurements

Fair Value Measurements on a Recurring Basis

    AIG measures the following financial instruments at fair value on a recurring basis:

    trading and available for sale securities portfolios;

    certain mortgage and other loans receivable;

    derivative assets and liabilities;

    securities purchased/sold under agreements to resell/repurchase;

    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;

    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 willing, able and knowledgeable 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.


Fair Value Hierarchy

    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,

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      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 and agency securities, most investment-grade and high-yield corporate bonds, certain residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and collateralized debt obligations/asset backed securities (CDO/ABS), certain listed equities, state, municipal and provincial obligations, hybrid securities, mutual fund and hedge fund investments, certain derivative contracts, guaranteed investment agreements (GIAs) and CPFF 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 RMBS, CMBS and CDO/ABS, corporate debt, certain municipal and sovereign debt, 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:


Valuation Methodologies

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 or cash bond 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, when available. When not available, other directly or indirectly observable credit spreads are used to derive the best estimates of the counterparty spreads. AIG's net credit exposure to a counterparty is determined based on master netting agreements, which take into consideration all derivative positions with the counterparty, as well as collateral posted by the counterparty at the balance sheet date.

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    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).

    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.

    The cost of credit protection is determined under a discounted present value approach considering the market levels for single name CDS spreads for each specific counterparty, 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 an interest rate based on the benchmark London Interbank Offered Rate (LIBOR) curve to derive its discount rates.

    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 assets and liabilities, including consideration of the impact of non-performance risk.

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 is generally obtained from dealer markets.

    AIG estimates the fair value of fixed maturity securities not traded in active markets, including receivables (payables) arising from 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 and/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 certain fixed maturity instruments (for example, private placements) 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.

Maiden Lane II and Maiden Lane III

    At their inception, ML II and ML III were valued and recorded at the transaction prices of $1 billion and $5 billion, respectively. Subsequently, the Maiden Lane Interests are valued using a discounted cash flow methodology that uses the estimated future cash flows of the Maiden Lane assets. AIG applies model-determined market discount rates to its interests. These 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.

    The fair value methodology used assumes that the underlying collateral in the Maiden Lane Interests will continue to be held and generate cash flows into the foreseeable future and does not assume a current liquidation of the assets underlying the Maiden Lane Interests. Other methodologies employed or assumptions made in

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determining fair value for these investments could result in amounts that differ significantly from the amounts reported.

    Adjustments to the fair value of AIG's interest in ML II are recorded on the Consolidated Statement of Income (Loss) in Net investment income for AIG's Domestic Life Insurance companies. Adjustments to the fair value of AIG's interest in ML III are recorded on the Consolidated Statement of Income (Loss) in Net investment income and, beginning in the second quarter of 2009, were included in Other Noncore business results, reflecting the contribution to an AIG subsidiary. Prior to the second quarter of 2009, such amounts had been included in Other Parent company results. AIG's Maiden Lane Interests are included in bond trading securities, at fair value, on the Consolidated Balance Sheet.

    As of March 31, 2010, AIG expected to receive cash flows (undiscounted) in excess of AIG's initial investment, and any accrued interest, in the Maiden Lane Interests over the remaining life of the investments after repayment of the first priority obligations owed to the FRBNY. AIG's cash flow methodology considers the capital structure of the collateral securities and their expected credit losses from the underlying asset pools. 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 LIBOR interest rate curve changes are determined based on observable prices, interpolated or extrapolated to derive a LIBOR for a specific maturity term as necessary. 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.

Changes in the discount rate or the estimated future cash flows used in the valuation would alter AIG's estimate of the fair value of the Maiden Lane Interests as shown in the table below.

   
 
  Fair Value Change  
March 31, 2010
(in millions)
 
  Maiden Lane II
  Maiden Lane III
 
   

Discount Rates:

             
 

200 basis point increase

  $ (90 ) $ (659 )
 

200 basis point decrease

    101     769  
 

400 basis point increase

    (170 )   (1,225 )
 

400 basis point decrease

    215     1,672  
   

Estimated Future Cash Flows:

             
 

10% increase

    292     833  
 

10% decrease

    (296 )   (831 )
 

20% increase

    579     1,661  
 

20% decrease

    (588 )   (1,653 )
   

    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. Because of these factors, 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

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date to measure at fair value marketable equity securities in its trading and available for sale portfolios. Market price data is generally obtained from exchange or dealer markets.

Direct Private Equity Investments — Other Invested Assets

    AIG initially estimates the fair value of equity instruments not traded in active markets, which includes direct private equity investments, 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/or 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.

Hedge Funds, Private Equity Funds and Other Investment Partnerships — Other Invested Assets

    AIG initially estimates the fair value of investments in certain hedge funds, private equity funds and other investment partnerships by reference to the transaction price. Subsequently, AIG generally obtains the fair value of these investments 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

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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 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. These methodologies incorporate an explicit risk margin to take into consideration market participant estimates of projected cash flows and policyholder behavior.

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 is 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. 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 over time in response to market conditions and the availability of 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. AIGFP continues to reassess the expected maturity of the portfolio. AIGFP has not been required to make any payments as part of terminations initiated by counterparties. The regulatory benefit of these transactions for AIGFP's financial institution counterparties is generally derived from the terms of the Capital Accord of the Basel

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Committee on Banking Supervision (Basel I) that existed through the end of 2007 and which is in the process of being replaced by the Revised Framework for the International Convergence of Capital Measurement and Capital Standards issued by the Basel Committee on Banking Supervision (Basel II). It was expected that financial institution counterparties would have transitioned from Basel I to Basel II by the end of the two-year adoption period on December 31, 2009, after which they would have received little or no additional regulatory benefit from these CDS transactions, except in a small number of specific instances. However, the Basel Committee announced that it had agreed to keep in place the Basel I capital floors beyond the end of 2009, although it remains to be seen how this extension will be implemented by the various European Central Banking districts. Should certain counterparties continue to receive favorable regulatory capital benefits from these transactions, those counterparties may not exercise their options to terminate the transactions in the expected time frame. In assessing the fair value of the regulatory capital CDS transactions, AIGFP also considers other market data, to the extent relevant and available. For further discussion, see Note 8 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 2a-7 eligible 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 remains widely used.

    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.

    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 63.4 percent of the underlying securities used in the valuation at March 31, 2010. 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.

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    Corporate debt/Collateralized loan obligation (CLO) portfolios: In the case of credit default swaps written on portfolios of investment-grade corporate debt, AIGFP uses a mathematical model that produces results that are closely aligned with prices received from third parties. This methodology is widely used by other market participants and uses the current market credit spreads of the names in the portfolios along with the base correlations implied by the current market prices of comparable tranches of the relevant market traded credit indices as inputs. One transaction, representing one percent of the total notional amount of the corporate arbitrage transactions, is valued using third party quotes given its unique attributes.

    AIGFP estimates the fair value of its obligations resulting from credit default swaps written on 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 earnings 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).

Securities and spot commodities sold but not yet purchased

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

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 substantially 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

   
At March 31, 2010
(in millions)
  Level 1
  Level 2
  Level 3
  Counterparty
Netting
(a)
  Cash
Collateral
(b)
  Total
 
   

Assets:

                                     
 

Bonds available for sale:

                                     
   

U.S. government and government sponsored entities

  $ 100   $ 4,756   $ -   $ -   $ -   $ 4,856  
   

Obligations of states, municipalities and Political subdivisions

    320     50,885     948     -     -     52,153  
   

Non-U.S. governments

    197     23,615     5     -     -     23,817  
   

Corporate debt

    -     130,435     3,917     -     -     134,352  
   

Residential mortgage-backed securities (RMBS)

    -     20,387     6,832     -     -     27,219  
   

Commercial mortgage-backed securities (CMBS)

    -     3,549     4,396     -     -     7,945  
   

Collateralized Debt Obligations/Asset Backed Securities (CDO/ABS)

    -     1,952     4,576     -     -     6,528  
   

Total bonds available for sale

    617     235,579     20,674     -     -     256,870  
   
 

Bond trading securities:

                                     
   

U.S. government and government sponsored entities

    433     6,313     -     -     -     6,746  
   

Obligations of states, municipalities and Political subdivisions

    -     348     -     -     -     348  
   

Non-U.S. governments

    1     395     2     -     -     398  
   

Corporate debt

    -     1,658     7     -     -     1,665  
   

RMBS

    -     2,534     5     -     -     2,539  
   

CMBS

    -     2,282     294     -     -     2,576  
   

CDO/ABS

    -     4,198     7,895     -     -     12,093  
   

Total bond trading securities

    434     17,728     8,203     -     -     26,365  
   
 

Equity securities available for sale:

                                     
   

Common stock

    4,219     7     36     -     -     4,262  
   

Preferred stock

    -     685     52     -     -     737  
   

Mutual funds

    1,800     32     -     -     -     1,832  
   

Total equity securities available for sale

    6,019     724     88     -     -     6,831  
   
 

Equity securities trading:

                                     
   

Common stock

    416     95     1     -     -     512  
   

Mutual funds

    101     -     -     -     -     101  
   

Total equity securities trading

    517     95     1     -     -     613  
   
 

Mortgage and other loans receivable

    -     157     -     -     -     157  
 

Other invested assets(c)

    1,432     2,869     5,853     -     -     10,154  
 

Unrealized gain on swaps, options and forward transactions:

                                     
   

Interest rate contracts

    -     26,308     207     -     -     26,515  
   

Foreign exchange contracts

    -     393     32     -     -     425  
   

Equity contracts

    59     567     202     -     -     828  
   

Commodity contracts

    -     46     20     -     -     66  
   

Credit contracts

    -     3     556     -     -     559  
   

Other contracts

    4     562     72     -     -     638  
   

Counterparty netting and cash collateral

    -     -     -     (16,816 )   (4,832 )   (21,648 )
   

Total unrealized gain on swaps, options and forward transactions

    63     27,879     1,089     (16,816 )   (4,832 )   7,383  
   
 

Securities purchased under agreements to resell

    -     1,615     -     -     -     1,615  
 

Short-term investments

    3,986     18,198     -     -     -     22,184  
 

Separate account assets

    49,740     2,213     -     -     -     51,953  
 

Other assets

    -     13     -     -     -     13  
   

Total

  $ 62,808   $ 307,070   $ 35,908   $ (16,816 ) $ (4,832 ) $ 384,138  
   

Liabilities:

                                     
 

Policyholder contract deposits

  $ -   $ -   $ 641   $ -   $ -   $ 641  
 

Securities sold under agreements to repurchase

    -     3,418     -     -     -     3,418  
 

Securities and spot commodities sold but not yet purchased

    303     155     -     -     -     458  
 

Unrealized loss on swaps, options and forward transactions:

                                     
   

Interest rate contracts

    -     20,214     1,493     -     -     21,707  
   

Foreign exchange contracts

    -     702     3     -     -     705  
   

Equity contracts

    3     631     147     -     -     781  
   

Commodity contracts

    -     53     -     -     -     53  
   

Credit contracts(d)

    -     41     5,466     -     -     5,507  
   

Other contracts

    -     218     202     -     -     420  
   

Counterparty netting and cash collateral

    -     -     -     (16,816 )   (6,061 )   (22,877 )
   

Total unrealized loss on swaps, options and forward transactions

    3     21,859     7,311     (16,816 )   (6,061 )   6,296  
   
 

Trust deposits and deposits due to banks and other depositors

    -     16     -     -     -     16  
 

Federal Reserve Bank of New York Commercial Paper Funding Facility

    -     2,285     -     -     -     2,285  
 

Other long-term debt

    -     11,677     1,123     -     -     12,800  
   

Total

  $ 306   $ 39,410   $ 9,075   $ (16,816 ) $ (6,061 ) $ 25,914  
   

30


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American International Group, Inc., and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

   
At December 31, 2009
(in millions)
  Level 1
  Level 2
  Level 3
  Counterparty
Netting
(a)
  Cash
Collateral
(b)
  Total
 
   

Assets:

                                     
 

Bonds available for sale:

                                     
   

U.S. government and government sponsored entities

  $ 146   $ 5,077   $ -   $ -   $ -   $ 5,223  
   

Obligations of states, municipalities and Political subdivisions

    219     53,270     613     -     -     54,102  
   

Non-U.S. governments

    312     64,519     753     -     -     65,584  
   

Corporate debt

    10     187,337     4,791     -     -     192,138  
   

Residential mortgage-backed securities (RMBS)

    -     21,670     6,654     -     -     28,324  
   

Commercial mortgage-backed securities (CMBS)

    -     8,350     4,939     -     -     13,289  
   

Collateralized Debt Obligations/Asset Backed Securities (CDO/ABS)

    -     2,167     4,724     -     -     6,891  
   

Total bonds available for sale

    687     342,390     22,474     -     -     365,551  
   
 

Bond trading securities:

                                     
   

U.S. government and government sponsored entities

    394     6,317     16     -     -     6,727  
   

Obligations of states, municipalities and Political subdivisions

    -     371     -     -     -     371  
   

Non-U.S. governments

    2     1,363     56     -     -     1,421  
   

Corporate debt

    -     5,205     121     -     -     5,326  
   

RMBS

    -     3,671     4     -     -     3,675  
   

CMBS

    -     2,152     325     -     -     2,477  
   

CDO/ABS

    -     4,381     6,865     -     -     11,246  
   

Total bond trading securities

    396     23,460     7,387     -     -     31,243  
   
 

Equity securities available for sale:

                                     
   

Common stock

    7,254     9     35     -     -     7,298  
   

Preferred stock

    -     760     54     -     -     814  
   

Mutual funds

    1,348     56     6     -     -     1,410  
   

Total equity securities available for sale

    8,602     825     95     -     -     9,522  
   
 

Equity securities trading:

                                     
   

Common stock

    1,254     104     1     -     -     1,359  
   

Mutual funds

    6,460     492     7     -     -     6,959  
   

Total equity securities trading

    7,714     596     8     -     -     8,318  
   
 

Mortgage and other loans receivable

    -     119     -     -     -     119  
 

Other invested assets(c)

    3,322     8,656     6,910     -     -     18,888  
 

Unrealized gain on swaps, options and forward transactions

    123     32,617     1,761     (19,054 )   (6,317 )   9,130  
 

Securities purchased under agreements to resell

    -     2,154     -     -     -     2,154  
 

Short-term investments

    1,898     22,077     -     -     -     23,975  
 

Separate account assets

    56,165     1,984     1     -     -     58,150  
 

Other assets

    -     18     270     -     -     288  
   

Total

  $ 78,907   $ 434,896   $ 38,906   $ (19,054 ) $ (6,317 ) $ 527,338  
   

Liabilities:

                                     
 

Policyholder contract deposits

  $ -   $ -   $ 5,214   $ -   $ -   $ 5,214  
 

Securities sold under agreements to repurchase

    -     3,221     -     -     -     3,221  
 

Securities and spot commodities sold but not yet purchased

    159     871     -     -     -     1,030  
 

Unrealized loss on swaps, options and forward transactions(d)

    8     24,789     7,826     (19,054 )   (8,166 )   5,403  
 

Trust deposits and deposits due to banks and other depositors

    -     15     -     -     -     15  
 

Federal Reserve Bank of New York Commercial Paper Funding Facility

    -     2,742     -     -     -     2,742  
 

Other long-term debt

    -     12,314     881     -     -     13,195  
   

Total

  $ 167   $ 43,952   $ 13,921   $ (19,054 ) $ (8,166 ) $ 30,820  
   
(a)
Represents netting of derivative exposures covered by a qualifying master netting agreement.

(b)
Represents cash collateral posted and received. Securities collateral posted for derivative transactions that is reflected in Fixed maturity securities in the Consolidated Balance Sheet, and collateral received, not reflected in the Consolidated Balance Sheet, were $1.4 billion and $125 million, respectively, at March 31, 2010 and $1.6 billion and $289 million, respectively, at December 31, 2009.

(c)
Approximately 5 percent and 6 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 March 31, 2010 and December 31, 2009, respectively. AIG's ownership in these funds represented 51.7 percent, or $0.8 billion, of Level 3 assets at March 31, 2010 and 71.1 percent, or $1.6 billion, of Level 3 assets at December 31, 2009.

(d)
Included in Level 3 is the fair value derivative liability of $4.6 billion and $4.8 billion at March 31, 2010 and December 31, 2009, respectively, on the AIGFP super senior credit default swap portfolio.


Transfers of Level 1 and Level 2 Assets and Liabilities

    AIG had no significant transfers between Level 1 and Level 2 during the three-month period ended March 31, 2010.

31


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American International Group, Inc., and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


Changes in Level 3 Recurring Fair Value Measurements

The following tables present changes during the three-month periods ended March 31, 2010 and 2009 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 those periods related to the Level 3 assets and liabilities that remained on the Consolidated Balance Sheet at March 31, 2010 and 2009:

   
(in millions)
  Balance
Beginning
of Period
(a)
  Net
Realized and
Unrealized
Gains (Losses)
Included
in Income
(b)
  Accumulated
Other
Comprehensive
Income (Loss)

  Purchases,
Sales,
Issuances and
Settlements-Net

  Transfers(c)
  Activity of
Discontinued
Operations

  Reclassified
to Assets of
Businesses
Held
for Sale

  Balance
End
of Period

  Changes in
Unrealized Gains
(Losses) on
Instruments Held
at End of Period

 
   

Three Months Ended March 31, 2010

                                                       

Assets:

                                                       
 

Bonds available for sale:

                                                       
   

Obligations of states, municipalities and political subdivisions

  $ 613   $ (14 ) $ (7 ) $ 109   $ 257   $ (10 ) $ -   $ 948   $ -  
   

Non-U.S. governments

    753     -     -     -     -     35     (783 )   5     -  
   

Corporate debt

    4,791     (19 )   86     (67 )   (660 )   (47 )   (167 )   3,917     -  
   

RMBS

    6,654     (119 )   442     (142 )   31     (3 )   (31 )   6,832     -  
   

CMBS

    4,939     (480 )   816     (133 )   509     306     (1,561 )   4,396     -  
   

CDO/ABS

    4,724     21     234     (16 )   31     27     (445 )   4,576     -  
   

Total bonds available for sale

    22,474     (611 )   1,571     (249 )   168     308     (2,987 )   20,674     -  
   
 

Bond trading securities:

                                                       
   

U.S. government and government sponsored entities

    16     -     -     -     -     (16 )   -     -     -  
   

Non-U.S. governments

    56     -     -     (50 )   2     -     (6 )   2     -  
   

Corporate debt

    121     1     -     -     -     (5 )   (110 )   7     1  
   

RMBS

    4     1     -     -     -     -     -     5     1  
   

CMBS

    325     40     -     (7 )   34     2     (100 )   294     101  
   

CDO/ABS

    6,865     1,117     -     (87 )   -     20     (20 )   7,895     549  
   

Total bond trading securities

    7,387     1,159     -     (144 )   36     1     (236 )   8,203     652  
   
 

Equity securities available for sale:

                                                       
   

Common stock

    35     (2 )   5     1     -     -     (3 )   36     -  
   

Preferred stock

    54     (5 )   2     -     1     -     -     52     -  
   

Mutual funds

    6     -     -     -     -     -     (6 )   -     -  
   

Total equity securities available for sale

    95     (7 )   7     1     1     -     (9 )   88     -  
   
 

Equity securities trading:

                                                       
   

Common stock

    1     -     -     -     -     -     -     1     -  
   

Mutual funds

    7     -     -     -     -     (1 )   (6 )   -     -  
   

Total equity securities trading

    8     -     -     -     -     (1 )   (6 )   1     -  
   
 

Other invested assets

    6,910     (131 )   283     (926 )   (98 )   (3 )   (182 )   5,853     (28 )
 

Other assets

    270     -     -     (270 )   -     -     -     -     -  
 

Separate account assets

    1     -     -     -     -     -     (1 )   -     -  
   

Total

  $ 37,145   $ 410   $ 1,861   $ (1,588 ) $ 107   $ 305   $ (3,421 ) $ 34,819   $ 624  
   

Liabilities:

                                                       
 

Policyholder contract deposits

  $ (5,214 ) $ 152   $ -   $ (38 ) $ -   $ 32   $ 4,427   $ (641 ) $ (141 )
 

Unrealized loss on swaps, options and forward transactions, net:

                                                       
   

Interest rate contracts

    (1,469 )   98     -     96     (11 )   -     -     (1,286 )   (167 )
   

Foreign exchange contracts

    29     -     -     -     -     -     -     29     3  
   

Equity contracts

    74     (10 )   -     -     (9 )   -     -     55     (6 )
   

Commodity contracts

    22     (2 )   -     -     -     -     -     20     (2 )
   

Credit contracts

    (4,545 )   164     -     (529 )   -     -     -     (4,910 )   165  
   

Other contracts

    (176 )   41     -     (3 )   -     1     7     (130 )   (3 )
   

Total unrealized loss on swaps, options and forward transactions, net

    (6,065 )   291     -     (436 )   (20 )   1     7     (6,222 )   (10 )
   
 

Other long-term debt

    (881 )   (135 )   -     555     (662 )   -     -     (1,123 )   136  
   

Total

  $ (12,160 ) $ 308   $ -   $ 81   $ (682 ) $ 33   $ 4,434   $ (7,986 ) $ (15 )
   

32


Table of Contents


American International Group, Inc., and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

   
(in millions)
  Balance
Beginning
of Period
(a)
  Net
Realized and
Unrealized
Gains (Losses)
Included
in Income
(b)
  Accumulated
Other
Comprehensive
Income (Loss)

  Purchases,
Sales,
Issuances and
Settlements-Net

  Transfers(c)
  Activity of
Discontinued
Operations

  Balance
End
of Period

  Changes in
Unrealized Gains
(Losses) on
Instruments Held
at End of Period

 
   

Three Months Ended March 31, 2009

                                                 

Assets:

                                                 
 

Bonds available for sale

  $ 18,826   $ (1,019 ) $ 614   $ (898 ) $ 272   $ 58   $ 17,853   $ -  
 

Bond trading securities

    6,987     (2,544 )   -     (197 )   49     (15 )   4,280     (1,586 )
 

Common and preferred stock available for sale

    111     (3 )   -     (3 )   7     (12 )   100     -  
 

Common and preferred stock trading

    3     -     -     -     -     3     6     -  
 

Other invested assets

    11,168     (936 )   (687 )   252     (109 )   -     9,688     (980 )
 

Other assets

    325     6     -     (20 )   -     -     311     6  
 

Separate account assets

    830     -     -     1     -     (34 )   797     -  
   

Total

  $ 38,250   $ (4,496 ) $ (73 ) $ (865 ) $ 219   $ -   $ 33,035   $ (2,560 )
   

Liabilities:

                                                 
 

Policyholder contract deposits

  $ (5,458 ) $ 217   $ -   $ (19 ) $ -   $ (297 ) $ (5,557 ) $ 2,094  
 

Securities sold under agreements to repurchase

    (85 )   2     -     36     -     -     (47 )   (12 )
 

Unrealized loss on swaps, options and forward transactions, net

    (10,570 )   (1,312 )   -     277     (252 )   1     (11,856 )   (1,069 )
 

Other long-term debt

    (1,147 )   442     -     122     52     -     (531 )   (420 )
   

Total

  $ (17,260 ) $ (651 ) $ -   $ 416   $ (200 ) $ (296 ) $ (17,991 ) $ 593  
   
(a)
Total Level 3 derivative exposures have been netted in these tables for presentation purposes only.

(b)
Net realized and unrealized gains and losses related to Level 3 items 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

 
(c)
Transfers for the three months ended March 31, 2010 are comprised of gross transfers into Level 3 assets and liabilities of $2.0 billion and gross transfers out of Level 3 assets and liabilities of $1.2 billion. AIG's policy is to record transfers of assets and liabilities into or out of Level 3 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. As a result, the Net realized and unrealized gains (losses) included in income or other comprehensive income and as shown in the table above exclude $6.6 million of net losses related to assets and liabilities transferred into Level 3 during the period, and include $33 million of net gains related to assets and liabilities transferred out of Level 3 during the period.

33


Table of Contents


American International Group, Inc., and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    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 March 31, 2010 and March 31, 2009 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).

    Transfers of Level 3 Assets and Liabilities

    AIG's policy is to transfer assets and liabilities into Level 3 when a significant input cannot be corroborated with market observable data. This may include: circumstances in which market activity has dramatically decreased and transparency to underlying inputs cannot be observed, current prices are not available, and substantial price variances in quotations among market participants exist.

    In certain cases, the inputs used to measure the 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. 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.

    During the three-month period ended March 31, 2010, AIG transferred into Level 3 approximately $1.2 billion of assets, consisting of certain ABS, CMBS and RMBS, as well as private placement corporate debt and certain municipal bonds related to SunAmerica Affordable Housing partnerships. A majority of the transfers into Level 3 related to investments in ABS, RMBS and CMBS and was due to a decrease in market transparency and downward credit migration in these securities. Transfers into Level 3 for private placement corporate debt are primarily the result of AIG overriding third party matrix pricing information downward to better reflect the additional risk premium associated with those securities that AIG believes was not captured in the matrix. Certain municipal bonds were transferred into Level 3 based on limited market activity for the particular issuances and related limitations on observable inputs for their valuation.

    Assets are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data. This may be due to a significant increase in market activity for the asset, a specific event, one or more significant input(s) becoming observable, or when a long-term interest rate significant to a valuation becomes short-term and thus observable. During the three-month period ended March 31, 2010, AIG transferred approximately $1.1 billion of assets out of Level 3. These transfers out of Level 3 are primarily related to investments in private placement corporate debt, as well as investments in certain ABS and RMBS. Transfers out of Level 3 for private placement corporate debt and for ABS were primarily the result of AIG using observable pricing information or a third party pricing quote that appropriately reflects the fair value of those securities, without the need for adjustment based on AIG's own assumptions regarding the characteristics of a specific security or the current liquidity in the market. Transfers out of Level 3 for RMBS investments were primarily due to increased usage of pricing from valuation service providers that were reflective of market activity, where previously an internally adjusted price had been used.

    During the three-month period ended March 31, 2010, AIG transferred into Level 3 approximately $710 million of liabilities related to term notes and hybrid term notes, primarily due to an unobservable credit linked component comprising a significant amount of the valuations. The remaining $64 million transfer in was due to movement in market variables. A majority of the transfers out of Level 3 liabilities, which totaled $92 million, were due to recognition of the cash flow variability on interest rate and cross currency swaps with securitization vehicles. Other transfers out of Level 3 liabilities were due to movement in market variables.

    AIG uses various hedging techniques to manage risks associated with certain positions, including those classified within Level 3. Such techniques may include the purchase or sale of financial instruments that are classified within Level 1 and/or Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities classified within Level 3 presented in the table above do not reflect the related realized or unrealized gains (losses) on hedging instruments that are classified within Level 1 and/or Level 2.

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Investments in certain entities carried at fair value using net asset value per share

The following table includes information related to AIG's investments in certain other invested assets, including private equity funds, hedge funds and other alternative investments that calculate net asset value per share (or its equivalent). For these investments, which are measured at fair value on a recurring or non-recurring basis, AIG uses the net asset value per share as a practical expedient for fair value.

   
 
   
  March 31, 2010(a)   December 31, 2009  
(in millions)
  Investment Category Includes
  Fair Value
Using Net
Asset Value

  Unfunded
Commitments

  Fair Value
Using Net
Asset Value

  Unfunded
Commitments

 
   

Investment Category

                             

Private equity funds:

                             
 

Leveraged buyout

  Debt and/or equity investments made as part of a transaction in which assets of mature companies are acquired from the current shareholders, typically with the use of financial leverage.   $ 2,538   $ 1,532   $ 3,166   $ 1,553  
 

Non-U.S.

 

Investments that focus primarily on Asian and European based buyouts, expansion capital, special situations, turnarounds, venture capital, mezzanine and distressed opportunities strategies.

   
360
   
105
   
543
   
103
 
 

Venture capital

 

Early-stage, high-potential, growth companies expected to generate a return through an eventual realization event, such as an initial public offering or sale of the company.

   
281
   
47
   
427
   
48
 
 

Fund of funds

 

Funds that invest in other funds, which invest in various diversified strategies

   
794
   
166
   
616
   
40
 
 

Distressed

 

Securities of companies that are already in default, under bankruptcy protection, or troubled.

   
215
   
94
   
238
   
91
 
 

Other

 

Real estate, energy, multi-strategy, mezzanine, and industry-focused strategies.

   
230
   
130
   
223
   
117
 
   

Total private equity funds

        4,418     2,074     5,213     1,952  
   

Hedge funds:

                             
 

Event-driven

  Securities of companies undergoing material structural changes, including. mergers, acquisitions, and other reorganizations.     718     -     1,373     -  
 

Long-short

 

Securities the manager believes are undervalued, with corresponding short positions to hedge market risk.

   
352
   
-
   
825
   
-
 
 

Fund of funds

 

Funds that invest in other funds, which invest in various diversified strategies.

   
290
   
-
   
304
   
-
 
 

Relative value

 

Simultaneous long and short positions in closely related markets.

   
9
   
-
   
286
   
-
 
 

Distressed

 

Securities of companies that are already in default, under bankruptcy protection, or troubled.

   
297
   
-
   
272
   
-
 
 

Other

 

Non-U.S. companies, futures and commodities, and multi-strategy and industry-focused strategies.

   
225
   
-
   
394
   
-
 
   

Total hedge funds

        1,891     -     3,454     -  
   

Global real estate funds

  U.S. and Non-U.S. commercial real estate.     899     87     929     64  
   

Total

      $ 7,208 (b) $ 2,161   $ 9,596 (b) $ 2,016  
   
(a)
Due to the sale of the investment advisory business, certain partnerships and hedge funds are no longer carried at net asset value per share.

(b)
Includes investments of entities classified as held for sale of approximately $0.1 billion and $1.1 billion at March 31, 2010 and December 31, 2009, respectively.

    At March 31, 2010, private equity fund investments included above are not redeemable during the lives of the funds, and have expected remaining lives that extend in some cases more than 10 years. At that date, 43 percent of the total above have expected remaining lives of less than three years, 35 percent between 3 and 7 years, and

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22 percent between 7 and 10 years. Expected lives are based upon legal maturity, which can be extended at the general manager's discretion, typically in one year increments.

    At March 31, 2010, hedge fund investments included above are redeemable monthly (11 percent), quarterly (34 percent), semi-annually (11 percent) and annually (44 percent), with redemption notices ranging from 1 day to 180 days. More than 77 percent require redemption notices of less than 90 days. Investments representing approximately 14 percent of the value of the hedge fund investments cannot be redeemed because the investments include restrictions that do not allow for redemptions within a pre-defined timeframe. These restrictions expire no later than December 31, 2012. Funds that equate to 62 percent of the total value of hedge funds hold at least one investment that the general manager deems to be illiquid. In order to treat investors fairly and to accommodate subsequent subscription and redemption requests, the general manager isolates these illiquid assets from the rest of the fund until the assets become liquid.

    At March 31, 2010, global real estate fund investments included above are not redeemable during the lives of the funds, and have expected remaining lives that extend in some cases more than 10 years. Twelve percent of these funds have expected remaining lives of less than three years, 69 percent between 3 and 7 years, and 19 percent between 7 and 10 years. Expected lives are based upon legal maturity, which can be extended at the general manager's discretion, typically in one year increments.


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 earnings. In such cases, AIG measures the fair value of these assets using the techniques discussed in Valuation Methodologies, above, for Other invested assets.

    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 earnings. AIG measures the fair value of its commercial aircraft using an earnings 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.

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    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.

    Finance Receivables:

    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.

    Businesses Held for Sale:  When AIG determines that a business qualifies as held for sale and AIG's carrying amount is greater than the sale price less cost to sell, AIG records an impairment loss for the difference.

The following table presents assets measured at fair value on a non-recurring basis on which impairment charges were recorded, and the related impairment charges:

   
 
  Assets at Fair Value   Impairment Charges  
 
  Non-Recurring Basis   Three Months
Ended March 31,
 
(in millions)
  Level 1
  Level 2
  Level 3
  Total
  2010
  2009
 
   

At March 31, 2010

                                     
 

Investment real estate

  $ -   $ -   $ 2,804   $ 2,804   $ 284   $ 158  
 

Other investments

    -     -     757     757     73     290  
 

Aircraft

    -     -     1,881     1,881     347     -  
 

Other assets

    -     -     173     173     18     72  
   

Total

  $ -   $ -   $ 5,615   $ 5,615   $ 722   $ 520  
   

At December 31, 2009

                                     
 

Investment real estate

  $ -   $ -   $ 3,148   $ 3,148              
 

Finance receivables

    -     -     694     694              
 

Other investments

    99     -     1,005     1,104              
 

Aircraft

    -     -     62     62              
 

Other assets

    -     85     227     312              
               

Total

  $ 99   $ 85   $ 5,136   $ 5,320              
               

    The fair value disclosed in the table above is unadjusted for transaction costs. The amounts recorded on the consolidated balance sheet are net of transaction costs.

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Fair Value Option

    AIG may 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 earnings. Unrealized gains and losses on financial instruments in AIG's insurance businesses and in AIGFP for which the fair value option was elected are classified in Other income in the Consolidated Statement of Income (Loss).

The following table presents the gains or losses recorded during the three-month periods ended March 31, 2010 and 2009 related to the eligible instruments for which AIG elected the fair value option:

   
 
  Gain (Loss) Three Months Ended March 31,  
(in millions)
  2010
  2009
 
   

Assets:

             
 

Mortgage and other loans receivable

  $ 40   $ (47 )
 

Trading securities

    1,437     (1,671 )
 

Trading – Maiden Lane Interests

    911     (2,194 )
 

Securities purchased under agreements to resell

    (4 )   (16 )
 

Other invested assets

    (10 )   (22 )
 

Short-term investments

    -     (2 )
   

Liabilities:

             
 

Securities sold under agreements to repurchase

    52     121  
 

Securities and spot commodities sold but not yet purchased

    (18 )   (34 )
 

Trust deposits and deposits due to banks and other depositors

    -     11  
 

Debt

    (485 )   2,587  
 

Other liabilities

    -     138  
   

Total gain (loss)(a)(b)

  $ 1,923   $ (1,129 )
   
(a)
Excludes businesses held for sale in the Consolidated Balance Sheet.

(b)
Not included in the table above were gains of $13 million and $1.4 billion for the three-month periods ended March 31, 2010 and 2009, respectively, that were primarily due to changes in the fair value of derivatives, trading securities and certain other invested assets for which the fair value option was not elected. Included in these amounts were unrealized market valuation gains of $119 million and unrealized market valuation losses of $452 million for the three-month periods ended March 31, 2010 and 2009, respectively, related to AIGFP's super senior credit default swap portfolio.

    Interest income and expense and dividend income on assets and liabilities elected under the fair value option are recognized and classified in the Consolidated Statement of Income (Loss) depending on the nature of the instrument and related market conventions. For AIGFP related activity, interest, dividend income, and interest expense are included in Other income. Otherwise, interest and dividend income are included in Net investment income in the Consolidated Statement of Income (Loss). See Note 1(a) to the Consolidated Financial Statements in the 2009 Annual Report on Form 10-K for additional information about AIG's policies for recognition, measurement, and disclosure of interest and dividend income and interest expense.

    During the three-month periods ended March 31, 2010 and 2009, AIG recognized a loss of $378 million and a gain of $1.2 billion, respectively, attributable to the observable effect of changes in credit spreads on AIG's own liabilities for which the fair value option was elected. AIG calculates the effect of these credit spread changes using discounted cash flow techniques that incorporate current market interest rates, AIG's observable credit spreads on these liabilities and other factors that mitigate the risk of nonperformance such as collateral posted.

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The following table presents the difference between fair values and the aggregate contractual principal amounts of mortgage and other loans receivable and long-term borrowings, for which the fair value option was elected:

   
 
  At March 31, 2010   At December 31, 2009  
(in millions)
  Fair
Value

  Outstanding
Principal Amount

  Difference
  Fair
Value

  Outstanding
Principal Amount

  Difference
 
   

Assets:

                                     
 

Mortgage and other loans receivable

  $ 157   $ 258   $ (101 ) $ 119   $ 253   $ (134 )

Liabilities:

                                     
 

Long-term debt

  $ 11,094   $ 9,755   $ 1,339   $ 11,308   $ 10,111   $ 1,197  
   

    At March 31, 2010 and December 31, 2009, there were no significant mortgage or other loans receivable for which the fair value option was elected that were 90 days or more past due and in non-accrual status.


Fair Value Information about Financial Instruments Not Measured at Fair Value

    Information regarding the estimation of fair value for financial instruments not carried at fair value (excluding insurance contracts and lease contracts) is discussed below:

    Mortgage and other loans receivable:  Fair values of loans on real estate and collateral loans were estimated for disclosure purposes using discounted cash flow calculations based upon discount rates that AIG believes market participants would use in determining the price they would pay for such assets. For certain loans, AIG's current incremental lending rates for similar type loans is used as the discount rate, as it is believed that this rate approximates the rates market participants would use. The fair values of policy loans were not estimated as AIG believes it would have to expend excessive costs for the benefits derived.

    Finance receivables:  Fair values of net finance receivables, less allowance for finance receivable losses, were estimated for disclosure purposes using projected cash flows, computed by category of finance receivable, discounted at the weighted average interest rates offered for similar finance receivables at the balance sheet date. Cash flows were projected based on contractual payment terms adjusted for delinquencies and estimates of losses. The fair value estimates do not reflect the underlying customer relationships or the related distribution systems.

    Cash, short-term investments, trade receivables, trade payables, securities purchased (sold) under agreements to resell (repurchase), and commercial paper and other short-term debt:  The carrying values of these assets and liabilities approximate fair values because of the relatively short period of time between origination and expected realization.

    Policyholder contract deposits associated with investment-type contracts:  Fair values for policyholder contract deposits associated with investment-type contracts not accounted for at fair value were estimated for disclosure purposes using discounted cash flow calculations based upon interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. Where no similar contracts are being offered, the discount rate is the appropriate tenor swap rates (if available) or current risk-free interest rates consistent with the currency in which the cash flows are denominated.

    Trust deposits and deposits due to banks and other depositors:  The fair values of certificates of deposit which mature in more than one year are estimated for disclosure purposes using discounted cash flow calculations based upon interest rates currently offered for deposits with similar maturities. For demand deposits and certificates of deposit which mature in less than one year, carrying values approximate fair value.

    Long-term debt:  Fair values of these obligations were determined for disclosure purposes by reference to quoted market prices, where available and appropriate, or discounted cash flow calculations based upon

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      AIG's current market-observable implicit-credit-spread rates for similar types of borrowings with maturities consistent with those remaining for the debt being valued.

The following table presents the carrying value and estimated fair value of AIG's financial instruments:

   
 
  March 31, 2010   December 31, 2009  
(in millions)
  Carrying Value
  Fair Value
  Carrying Value
  Fair Value
 
   

Assets:

                         
 

Fixed maturities

  $ 283,235   $ 283,235   $ 396,794   $ 396,794  
 

Equity securities

    7,444     7,444     17,840     17,840  
 

Mortgage and other loans receivable

    22,533     21,536     27,461     25,957  
 

Finance receivables, net of allowance

    18,912     17,234     20,327     18,974  
 

Other invested assets*

    31,784     30,776     43,737     42,474  
 

Securities purchased under agreements to resell

    1,615     1,615     2,154     2,154  
 

Short-term investments

    38,800     38,800     47,263     47,263  
 

Cash

    2,133     2,133     4,400     4,400  
 

Unrealized gain on swaps, options and forward transactions

    7,383     7,383     9,130     9,130  

Liabilities:

                         
 

Policyholder contract deposits associated with investment-type contracts

    108,096     115,581     168,846     175,612  
 

Securities sold under agreements to repurchase

    3,418     3,418     3,505     3,505  
 

Securities and spot commodities sold but not yet purchased

    458     458     1,030     1,030  
 

Unrealized loss on swaps, options and forward transactions

    6,296     6,296     5,403     5,403  
 

Trust deposits and deposits due to banks and other depositors

    1,030     1,030     1,641     1,641  
 

Federal Reserve Bank of New York Commercial Paper Funding Facility

    2,285     2,285     4,739     4,739  
 

Federal Reserve Bank of New York credit facility

    27,400     27,916     23,435     23,390  
 

Other long-term debt

    109,744     108,707     113,298     94,458  
   
*
Excludes aircraft asset investments held by non-Financial Services subsidiaries.

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6. Investments

Securities Available for Sale

The following table presents the amortized cost or cost and fair value of AIG's available for sale securities:

   
(in millions)
  Amortized
Cost or
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Other-Than-
Temporary
Impairments
in AOCI
(a)
 
   

March 31, 2010

                               

Bonds available for sale:

                               
 

U.S. government and government sponsored entities

  $ 4,777   $ 106   $ (27 ) $ 4,856   $ -  
 

Obligations of states, municipalities and political subdivisions

    50,427     2,018     (292 )   52,153     -  
 

Non-U.S. governments

    23,305     725     (213 )   23,817     (1 )
 

Corporate debt

    127,707     8,507     (1,862 )   134,352     14  
 

Mortgage-backed, asset-backed and collateralized:

                               
   

RMBS

    30,089     1,027     (3,897 )   27,219     (1,595 )
   

CMBS

    10,869     256     (3,180 )   7,945     (451 )
   

CDO/ABS

    7,242     324     (1,038 )   6,528     64  
   
 

Total mortgage-backed, asset-backed and collateralized

    48,200     1,607     (8,115 )   41,692     (1,982 )
   

Total bonds available for sale(b)

    254,416     12,963     (10,509 )   256,870     (1,969 )

Equity securities available for sale:

                               
 

Common stock

    2,511     1,770     (19 )   4,262     -  
 

Preferred stock

    635     103     (1 )   737     -  
 

Mutual funds

    1,736     102     (6 )   1,832     -  
   

Total equity securities available for sale

    4,882     1,975     (26 )   6,831     -  
   

Total(c)

  $ 259,298   $ 14,938   $ (10,535 ) $ 263,701   $ (1,969 )
   

December 31, 2009

                               

Bonds available for sale:

                               
 

U.S. government and government sponsored entities

  $ 5,098   $ 174   $ (49 ) $ 5,223   $ -  
 

Obligations of states, municipalities and political subdivisions

    52,324     2,163     (385 )   54,102     -  
 

Non-U.S. governments

    63,080     3,153     (649 )   65,584     (1 )
 

Corporate debt

    185,188     10,826     (3,876 )   192,138     119  
 

Mortgage-backed, asset-backed and collateralized:

                               
   

RMBS

    32,173     991     (4,840 )   28,324     (2,121 )
   

CMBS

    18,717     195     (5,623 )   13,289     (739 )
   

CDO/ABS

    7,911     284     (1,304 )   6,891     (63 )
   
 

Total mortgage-backed, asset-backed and collateralized

    58,801     1,470     (11,767 )   48,504     (2,923 )
   

Total bonds available for sale(b)

    364,491     17,786     (16,726 )   365,551     (2,805 )

Equity securities available for sale:

                               
 

Common stock

    4,460     2,913     (75 )   7,298     -  
 

Preferred stock

    740     94     (20 )   814     -  
 

Mutual funds

    1,264     182     (36 )   1,410     -  
   

Total equity securities available for sale

    6,464     3,189     (131 )   9,522     -  
   

Total(c)

  $ 370,955   $ 20,975   $ (16,857 ) $ 375,073   $ (2,805 )
   
(a)
Represents the amount of other-than-temporary impairment losses recognized in Accumulated other comprehensive income, which, starting on April 1, 2009, were not included in earnings. Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

(b)
At March 31, 2010 and December 31, 2009, bonds available for sale held by AIG that were below investment grade or not rated totaled $18.2 billion and $24.5 billion, respectively.

(c)
Excludes $163.0 billion and $36.1 billion of available for sale investments at fair value from businesses held for sale at March 31, 2010 and December 31, 2009, respectively. See Note 3 herein.

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Table of Contents


American International Group, Inc., and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Unrealized losses on Securities Available for Sale

The following table summarizes the fair value and gross unrealized losses on AIG's available for sale securities, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position:

   
 
  12 Months or Less   More than 12 Months   Total  
(in millions)
  Fair
Value

  Gross
Unrealized
Losses

  Fair
Value

  Gross
Unrealized
Losses

  Fair
Value

  Gross
Unrealized
Losses

 
   

March 31, 2010*

                                     

Bonds available for sale:

                                     
 

U.S. government and government sponsored entities

  $ 2,088   $ 21   $ 123   $ 6   $ 2,211   $ 27  
 

Obligations of states, municipalities and political subdivisions

    4,885     100     3,003     192     7,888     292  
 

Non-U.S. governments

    3,851     110     824     103     4,675     213  
 

Corporate debt

    16,165     640     13,341     1,222     29,506     1,862  
 

RMBS

    4,876     1,609     7,572     2,288     12,448     3,897  
 

CMBS

    1,854     1,224     3,428     1,956     5,282     3,180  
 

CDO/ABS

    1,441     379     2,443     659     3,884     1,038  
   

Total bonds available for sale

    35,160     4,083     30,734     6,426     65,894     10,509  

Equity securities available for sale: