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



FORM 10-Q

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

For the quarterly period ended June 30, 2012

Commission File Number 1-8787

GRAPHIC

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.)

180 Maiden Lane, New York, New York
(Address of principal executive offices)

 

10038
(Zip Code)

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



    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 July 31, 2012, there were 1,728,479,651 shares outstanding of the registrant's common stock.

   



American International Group, Inc.

Table of Contents

 
Description
   
  Page Number
 

PART I – FINANCIAL INFORMATION

   

Item 1.

 

Financial Statements

  3

 

Note 1. Basis of Presentation and Significant Events

  8

 

Note 2. Summary of Significant Accounting Policies

  10

 

Note 3. Segment Information

  15

 

Note 4. Fair Value Measurements

  18

 

Note 5. Investments

  37

 

Note 6. Lending Activities

  44

 

Note 7. Variable Interest Entities

  45

 

Note 8. Derivatives and Hedge Accounting

  46

 

Note 9. Commitments, Contingencies and Guarantees

  52

 

Note 10. Total Equity and Earnings (Loss) Per Share

  67

 

Note 11. Employee Benefits

  74

 

Note 12. Income Taxes

  75

 

Note 13. Discontinued Operations

  76

 

Note 14. Information Provided in Connection with Outstanding Debt

  77

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 
85

 

Cautionary Statement Regarding Forward-Looking Information

  85

 

Use of Non-GAAP Measures

  86

 

Executive Overview

  86

 

Outlook

  89

 

Results of Operations

  99

 

Consolidated Results

  99

 

Segment Results

  104

 

Chartis Operations

  106

 

Liability for Unpaid Claims and Claims Adjustment Expense

  117

 

SunAmerica Operations

  124

 

Aircraft Leasing Operations

  130

 

Other Operations

  132

 

Consolidated Comprehensive Income (Loss)

  138

 

Capital Resources and Liquidity

  140

 

Overview

  140

 

Liquidity Adequacy Management

  141

 

Analysis of Sources and Uses of Cash

  142

 

Liquidity of Parent and Subsidiaries

  143

 

Credit Facilities

  149

 

Contingent Liquidity Facilities

  150

 

Contractual Obligations

  151

 

Off-Balance Sheet Arrangements and Commercial Commitments

  151

 

Debt

  152

 

Credit Ratings

  155

 

Investments

  156

 

Investment Strategies

  156

 

Investment Highlights

  156

 

Impairments

  166

 

Enterprise Risk Management

  171

 

Overview

  171

 

Credit Risk Management

  171

 

Market Risk Management

  177

 

Critical Accounting Estimates

  178

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 
184

Item 4.

 

Controls and Procedures

  184

PART II – OTHER INFORMATION

   

Item 1.

 

Legal Proceedings

  185

Item 1A.

 

Risk Factors

  185

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  186

Item 4.

 

Mine Safety Disclosures

  186

Item 6.

 

Exhibits

  186

Signatures

 
187
 

2            AIG 2012 Form 10-Q


Table of Contents


American International Group, Inc.

PART I – FINANCIAL INFORMATION

Item 1.   Financial Statements

Consolidated Balance Sheet (unaudited)

   
(in millions, except for share data)
  June 30, 2012
  December 31, 2011
 
   

Assets:

             

Investments:

             

Fixed maturity securities:

             

Bonds available for sale, at fair value (amortized cost: 2012 – $244,790; 2011 – $250,770)

  $ 263,014   $ 263,981  

Bond trading securities, at fair value

    30,919     24,364  

Equity securities:

             

Common and preferred stock available for sale, at fair value (cost: 2012 – $1,733; 2011 – $1,820)             

    2,947     3,624  

Common and preferred stock trading, at fair value

    103     125  

Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2012 – $123; 2011 – $107)

    19,387     19,489  

Flight equipment primarily under operating leases, net of accumulated depreciation

    35,095     35,539  

Other invested assets (portion measured at fair value: 2012 – $16,415; 2011 – $20,876)

    36,700     40,744  

Short-term investments (portion measured at fair value: 2012 – $7,359; 2011 – $5,913)

    24,365     22,572  
   

Total investments

    412,530     410,438  

Cash

    1,232     1,474  

Accrued investment income

    3,029     3,108  

Premiums and other receivables, net of allowance

    14,550     14,721  

Reinsurance assets, net of allowance

    27,539     27,211  

Current and deferred income taxes

    16,195     17,802  

Deferred policy acquisition costs

    8,565     8,937  

Derivative assets, at fair value

    3,753     4,499  

Other assets, including restricted cash of $3,253 in 2012 and $2,988 in 2011 (portion measured at fair value: 2012 – $700; 2011 – $0)

    13,725     12,782  

Separate account assets, at fair value

    54,265     51,388  
   

Total assets

  $ 555,383   $ 552,360  
   

Liabilities:

             

Liability for unpaid claims and claims adjustment expense

  $ 87,871   $ 91,145  

Unearned premiums

    24,458     23,465  

Future policy benefits for life and accident and health insurance contracts

    34,935     34,317  

Policyholder contract deposits (portion measured at fair value: 2012 – $1,188; 2011 – $918)

    126,954     126,898  

Other policyholder funds

    6,231     6,691  

Derivative liabilities, at fair value

    4,138     4,733  

Other liabilities (portion measured at fair value: 2012 – $1,588; 2011 – $907)

    36,993     27,554  

Long-term debt (portion measured at fair value: 2012 – $9,404; 2011 – $10,766)

    73,897     75,253  

Separate account liabilities

    54,265     51,388  
   

Total liabilities

    449,742     441,444  
   

Commitments, contingencies and guarantees (see Note 9)

             

Redeemable noncontrolling interests (see Note 1):

             

Nonvoting, callable, junior preferred interests held by Department of the Treasury

    -     8,427  

Other

    112     96  
   

Total redeemable noncontrolling interests

    112     8,523  
   

AIG shareholders' equity:

             

Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2012 – 1,906,612,666 and 2011 – 1,906,568,099

    4,766     4,766  

Treasury stock, at cost; 2012 – 178,142,848; 2011 – 9,746,617 shares of common stock

    (5,926 )   (942 )

Additional paid-in capital

    81,764     81,787  

Retained earnings

    16,314     10,774  

Accumulated other comprehensive income

    7,791     5,153  
   

Total AIG shareholders' equity

    104,709     101,538  

Non-redeemable noncontrolling interests

    820     855  
   

Total equity

    105,529     102,393  
   

Total liabilities and equity

  $ 555,383   $ 552,360  
   

See accompanying Notes to Consolidated Financial Statements, which include a summary of revisions to prior year balances in connection with a change in accounting principle.

AIG 2012 Form 10-Q            3


Table of Contents


American International Group, Inc.

Consolidated Statement of Operations (unaudited)

   
 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
(dollars in millions, except per share data)
  2012
  2011
  2012
  2011
 
   

Revenues:

                         

Premiums

  $ 9,619   $ 9,898   $ 19,080   $ 19,380  

Policy fees

    674     682     1,365     1,366  

Net investment income

    4,481     4,464     11,586     10,033  

Net realized capital gains (losses):

                         

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

    (99 )   (181 )   (267 )   (399 )

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

    (51 )   56     (336 )   59  
   

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

    (150 )   (125 )   (603 )   (340 )

Other realized capital gains (losses)

    547     200     750     (320 )
   

Total net realized capital gains (losses)

    397     75     147     (660 )

Aircraft leasing revenue

    1,123     1,134     2,279     2,290  

Other income

    829     427     1,109     1,710  
   

Total revenues

    17,123     16,680     35,566     34,119  
   

Benefits, claims and expenses:

                         

Policyholder benefits and claims incurred

    7,769     8,086     14,871     17,045  

Interest credited to policyholder account balances

    1,064     1,114     2,133     2,220  

Amortization of deferred acquisition costs

    1,472     1,322     2,819     2,553  

Other acquisition and insurance expenses

    2,264     2,129     4,522     4,097  

Interest expense

    954     1,001     1,907     2,085  

Aircraft leasing expenses

    646     578     1,271     1,207  

Net loss on extinguishment of debt

    11     79     32     3,392  

Other expenses

    1,192     577     1,676     1,036  
   

Total benefits, claims and expenses

    15,372     14,886     29,231     33,635  
   

Income from continuing operations before income tax expense (benefit)

    1,751     1,794     6,335     484  
   

Income tax expense (benefit)

    (593 )   (296 )   555     (522 )
   

Income from continuing operations

    2,344     2,090     5,780     1,006  

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

    (5 )   (37 )   8     2,548  
   

Net income

    2,339     2,053     5,788     3,554  
   

Less:

                         

Net income from continuing operations attributable to noncontrolling interests:

                         

Nonvoting, callable, junior and senior preferred interests

    -     141     208     393  

Other

    7     64     40     9  
   

Total net income from continuing operations attributable to noncontrolling interests

    7     205     248     402  

Net income from discontinued operations attributable to noncontrolling interests

    -     12     -     19  
   

Total net income attributable to noncontrolling interests

    7     217     248     421  
   

Net income attributable to AIG

  $ 2,332   $ 1,836   $ 5,540   $ 3,133  
   

Net income attributable to AIG common shareholders

  $ 2,332   $ 1,836   $ 5,540   $ 2,321  
   

Income per common share attributable to AIG common shareholders:

                         

Basic:

                         

Income (loss) from continuing operations

  $ 1.33   $ 1.03   $ 3.05   $ (0.12 )

Income (loss) from discontinued operations

  $ -   $ (0.03 ) $ -   $ 1.49  

Diluted:

                         

Income (loss) from continuing operations

  $ 1.33   $ 1.03   $ 3.05   $ (0.12 )

Income (loss) from discontinued operations

  $ -   $ (0.03 ) $ -   $ 1.49  
   

Weighted average shares outstanding:

                         

Basic

    1,756,689,067     1,836,713,069     1,816,331,019     1,698,001,301  

Diluted

    1,756,714,475     1,836,771,513     1,816,358,625     1,698,001,301  
   

See accompanying Notes to Consolidated Financial Statements, which include a summary of revisions to prior year balances in connection with a change in accounting principle.

4            AIG 2012 Form 10-Q


Table of Contents


American International Group, Inc.

Consolidated Statement of Comprehensive Income (unaudited)

   
 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
(in millions)
  2012
  2011
  2012
  2011
 
   

Net income

  $ 2,339   $ 2,053   $ 5,788   $ 3,554  
   

Other comprehensive income, net of tax

                         

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

    17     (107 )   630     289  

Change in unrealized appreciation of all other investments

    1,305     1,861     2,286     1,054  

Change in foreign currency translation adjustments

    (427 )   288     (336 )   (229 )

Change in net derivative gains arising from cash flow hedging activities

    1     58     23     71  

Change in retirement plan liabilities adjustment

    14     14     32     149  
   

Other comprehensive income

    910     2,114     2,635     1,334  
   

Comprehensive income

    3,249     4,167     8,423     4,888  

Comprehensive income attributable to noncontrolling nonvoting, callable, junior and senior preferred interests

    -     141     208     393  

Comprehensive income (loss) attributable to other noncontrolling interests

    (1 )   (7 )   37     (19 )
   

Total comprehensive income (loss) attributable to noncontrolling interests

    (1 )   134     245     374  
   

Comprehensive income attributable to AIG

  $ 3,250   $ 4,033   $ 8,178   $ 4,514  
   

See accompanying Notes to Consolidated Financial Statements, which include a summary of revisions to prior year balances in connection with a change in accounting principle.

AIG 2012 Form 10-Q            5


Table of Contents


American International Group, Inc.

Consolidated Statement of Cash Flows (unaudited)

   
Six Months Ended June 30,
(in millions)
  2012
  2011
 
   

Cash flows from operating activities:

             

Net income

  $ 5,788   $ 3,554  

Income from discontinued operations

    (8 )   (2,548 )
   

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

             

Noncash revenues, expenses, gains and losses included in income:

             

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

    (1,817 )   (539 )

Net losses on extinguishment of debt

    32     3,392  

Unrealized gains in earnings – net

    (4,088 )   (2,473 )

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

    (395 )   (795 )

Depreciation and other amortization

    3,574     3,585  

Impairments of assets

    1,085     889  

Changes in operating assets and liabilities:

             

General and life insurance reserves

    (639 )   5,604  

Premiums and other receivables and payables – net

    495     49  

Reinsurance assets and funds held under reinsurance treaties

    (365 )   (5,559 )

Capitalization of deferred policy acquisition costs

    (2,863 )   (2,661 )

Current and deferred income taxes – net

    349     (1,068 )

Payment of FRBNY Credit Facility accrued compounded interest and fees

    -     (6,363 )

Other, net

    484     (1,279 )
   

Total adjustments

    (4,148 )   (7,218 )
   

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

    1,632     (6,212 )

Net cash provided by operating activities – discontinued operations

    -     2,675  
   

Net cash provided by (used in) operating activities

    1,632     (3,537 )
   

Cash flows from investing activities:

             

Proceeds from (payments for)

             

Sales of available for sale and hybrid investments

    22,028     23,668  

Maturities of fixed maturity securities available for sale and hybrid investments

    10,805     9,846  

Sales of trading securities

    4,968     7,621  

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

    7,790     4,961  

Sales of divested businesses, net

    -     587  

Principal payments received on and sales of mortgage and other loans receivable

    1,384     1,706  

Purchases of available for sale and hybrid investments

    (28,993 )   (48,485 )

Purchases of trading securities

    (2,394 )   (688 )

Purchases of other invested assets (including flight equipment)

    (2,959 )   (3,260 )

Mortgage and other loans receivable issued and purchased

    (1,402 )   (1,026 )

Net change in restricted cash

    (265 )   26,480  

Net change in short-term investments

    (211 )   12,967  

Net change in derivative assets and liabilities

    278     390  

Other, net

    (158 )   33  
   

Net cash provided by investing activities – continuing operations

    10,871     34,800  

Net cash provided by investing activities – discontinued operations

    -     3,021  
   

Net cash provided by investing activities

    10,871     37,821  
   

Cash flows from financing activities:

             

Proceeds from (payments for)

             

Policyholder contract deposits

    6,809     9,530  

Policyholder contract withdrawals

    (7,077 )   (7,769 )

FRBNY credit facility repayments

    -     (14,622 )

Issuance of long-term debt

    6,776     3,021  

Repayments of long-term debt

    (8,155 )   (9,968 )

Proceeds from drawdown on the Department of the Treasury Commitment

    -     20,292  

Repayment of Department of the Treasury SPV Preferred Interests

    (8,636 )   (9,146 )

Repayment of FRBNY SPV Preferred Interests

    -     (26,432 )

Issuance of Common Stock

    -     4,332  

Purchase of Common Stock

    (5,000 )   -  

Acquisition of noncontrolling interest

    (100 )   (647 )

Other, net

    2,662     (373 )
   

Net cash used in financing activities – continuing operations

    (12,721 )   (31,782 )

Net cash used in financing activities – discontinued operations

    -     (1,932 )
   

Net cash used in financing activities

    (12,721 )   (33,714 )
   

Effect of exchange rate changes on cash

    (24 )   29  
   

Net increase (decrease) in cash

    (242 )   599  

Cash at beginning of period

    1,474     1,558  

Change in cash of businesses held for sale

    -     433  
   

Cash at end of period

  $ 1,232   $ 2,590  
   

See accompanying Notes to Consolidated Financial Statements, which include a summary of revisions to prior year balances in connection with a change in accounting principle.

6            AIG 2012 Form 10-Q


Table of Contents


American International Group, Inc.

Consolidated Statement of Equity (unaudited)

   
(in millions)
  Preferred
Stock

  Common
Stock

  Treasury
Stock

  Additional
Paid-in
Capital

  Retained
Earnings
(Accumulated
Deficit)

  Accumulated
Other
Comprehensive
Income

  Total AIG
Share-
holders'
Equity

  Non
redeemable
non-
controlling
Interests

  Total
Equity

 
   

Six Months Ended June 30, 2012

                                                       

Balance, beginning of year

  $ -   $ 4,766   $ (942 ) $ 81,787   $ 10,774   $ 5,153   $ 101,538   $ 855   $ 102,393  
   

Common stock issued under stock plans

                16     (15 )   -     -     1     -     1  

Purchase of common stock

    -     -     (5,000 )   -     -     -     (5,000 )   -     (5,000 )

Net income attributable to AIG or other noncontrolling interests*

    -     -     -     -     5,540     -     5,540     43     5,583  

Other comprehensive income (loss)

    -     -     -     -     -     2,638     2,638     (3 )   2,635  

Deferred income taxes

    -     -     -     (8 )   -     -     (8 )   -     (8 )

Contributions from noncontrolling interests

    -     -     -     -     -     -     -     46     46  

Distributions to noncontrolling interests

    -     -     -     -     -     -     -     (100 )   (100 )

Other

    -     -     -     -     -     -     -     (21 )   (21 )
   

Balance, end of period

  $ -   $ 4,766   $ (5,926 ) $ 81,764   $ 16,314   $ 7,791   $ 104,709   $ 820   $ 105,529  
   

Six Months Ended June 30, 2011

                                                       

Balance, beginning of year

  $ 71,983   $ 368   $ (873 ) $ 9,683   $ (3,466 ) $ 7,624   $ 85,319   $ 27,920   $ 113,239  
   

Cumulative effect of change in accounting principle, net of tax

    -     -     -     -     (6,382 )   (81 )   (6,463 )   -     (6,463 )

Series F drawdown

    20,292     -     -     -     -     -     20,292     -     20,292  

Repurchase of SPV preferred interests in connection with Recapitalization

    -     -     -     -     -     -     -     (26,432 )   (26,432 )

Exchange of consideration for preferred stock in connection with Recapitalization

    (92,275 )   4,138     -     67,460     -     -     (20,677 )   -     (20,677 )

Common stock issued

    -     250     -     2,636     -     -     2,886     -     2,886  

Settlement of equity unit stock purchase contract

    -     6     -     1,440     -     -     1,446     -     1,446  

Net income attributable to AIG or other noncontrolling interests*

    -     -     -     -     3,133     -     3,133     22     3,155  

Net income attributable to noncontrolling nonvoting, callable, junior and senior preferred interests

    -     -     -     -     -     -     -     74     74  

Other comprehensive income (loss)

    -     -     -     -     -     1,381     1,381     (47 )   1,334  

Acquisition of noncontrolling interest

    -     -     -     (157 )   -     88     (69 )   (468 )   (537 )

Net decrease due to deconsolidation

    -     -     -     -     -     -     -     (6 )   (6 )

Contributions from noncontrolling interests

    -     -     -     -     -     -     -     42     42  

Distributions to noncontrolling interests

    -     -     -     -     -     -     -     (116 )   (116 )

Other

    -     (1 )   1     (6 )   (1 )   -     (7 )   (41 )   (48 )
   

Balance, end of period

  $ -   $ 4,761   $ (872 ) $ 81,056   $ (6,716 ) $ 9,012   $ 87,241   $ 948   $ 88,189  
   
*
Excludes gains of $205 million and $325 million for the six months ended June 30, 2012 and 2011, respectively, attributable to redeemable noncontrolling interests. See Note 10.

See accompanying Notes to Consolidated Financial Statements, which include a summary of revisions to prior year balances in connection with a change in accounting principle.

AIG 2012 Form 10-Q            7


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. BASIS OF PRESENTATION AND SIGNIFICANT EVENTS

    These unaudited condensed consolidated financial statements do not include all disclosures that are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) 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, 2011, as amended by Amendment No. 1 and Amendment No. 2 on Form 10-K/A filed on February 27, 2012 and March 30, 2012, respectively, and as updated by AIG's Current Report on Form 8-K filed on May 4, 2012 (collectively, the 2011 Annual Report). The condensed consolidated financial information as of December 31, 2011 included herein has been derived from audited consolidated financial statements in the 2011 Annual Report not included herein.

    Certain of AIG's foreign subsidiaries included in the consolidated financial statements report on different fiscal-period bases. The effect on AIG's consolidated financial condition and results of operations of all material events occurring at these subsidiaries through the date of each of the periods presented in these financial statements has been recorded.

    In the opinion of management, these consolidated financial statements contain the normal recurring adjustments necessary for a fair statement of the results presented herein. Interim period operating results may not be indicative of the operating results for a full year. AIG evaluated the need to recognize or disclose events that occurred subsequent to June 30, 2012 and prior to the issuance of these unaudited condensed consolidated financial statements. All material intercompany accounts and transactions have been eliminated.


REVISIONS TO PRIOR YEAR FINANCIAL STATEMENTS

    During the quarter ended March 31, 2012, AIG retroactively adopted a standard that changed its method of accounting for costs associated with acquiring or renewing insurance contracts. See Note 2 herein for additional details, including a summary of revisions to prior year financial statements.

    To align the presentation of Changes in fair value of derivatives with changes in the administration of AIG's derivatives portfolio, changes were made to the presentation within the Consolidated Statement of Operations and Consolidated Statement of Cash Flows for activity where Global Capital Markets executes transactions with third parties on behalf of AIG subsidiaries. Specifically, derivative activity where AIGFP is an intermediary for AIG subsidiaries, which historically has been reported in Other income, has been reclassified to Net realized capital gains (losses). Additionally, certain other items have been reclassified within the Consolidated Statement of Operations in the current period. Prior period amounts were reclassified to conform to the current period presentation.


USE OF ESTIMATES

    The preparation of financial statements 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 to be those relating to items considered by management in the determination of:

    estimates with respect to income taxes, including the recoverability of deferred tax assets and the predictability of future tax planning strategies and operating profitability of the character necessary for their realization;

    recoverability of assets, including deferred policy acquisition costs (DAC), flight equipment, and reinsurance;

    insurance liabilities, including general insurance unpaid claims and claims adjustment expenses and future policy benefits for life and accident and health contracts;

    estimated gross profits for investment-oriented products;

8            AIG 2012 Form 10-Q


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    impairment charges, including other-than-temporary impairments on financial instruments and goodwill impairments;

    liabilities for legal contingencies; and

    fair value measurements of certain financial assets and liabilities, including credit default swaps (CDS).

    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 could be materially affected.


SIGNIFICANT EVENTS

    During the six months ended June 30, 2012, AIG executed significant transactions in the debt and equity capital markets as described below.

Common Stock Offerings by the Department of the Treasury and AIG Purchases of Shares

    The United States Department of the Treasury (Department of the Treasury), as selling shareholder, completed registered public offerings of AIG common stock, par value $2.50 per share (AIG Common Stock) on March 13, 2012 (the March Offering) and May 10, 2012 (the May Offering).

    In the March Offering, the Department of the Treasury sold approximately 207 million shares of AIG Common Stock for aggregate proceeds of approximately $6.0 billion. AIG purchased approximately 103 million shares of AIG Common Stock in the March Offering at the initial public offering price of $29.00 per share for an aggregate purchase amount of approximately $3.0 billion.

    In the May Offering, the Department of the Treasury sold approximately 189 million shares of AIG Common Stock for aggregate proceeds of approximately $5.7 billion. AIG purchased approximately 66 million shares of AIG Common Stock in the May Offering at the initial public offering price of $30.50 per share for an aggregate purchase amount of approximately $2.0 billion.

    As a result of the Department of the Treasury's sale of AIG Common Stock and AIG's purchase of shares in these offerings, ownership by the Department of the Treasury was reduced from approximately 77 percent to approximately 61 percent of the AIG Common Stock outstanding after the completion of the May Offering.

Sale of AIA Shares

    On March 7, 2012, AIG sold approximately 1.72 billion ordinary shares of AIA Group Limited (AIA) for gross proceeds of approximately $6.0 billion (the AIA Sale). As a result of the AIA Sale, AIG's retained interest in AIA decreased from approximately 33 percent to approximately 19 percent. At June 30, 2012 and December 31, 2011, the fair value of AIG's retained interest in AIA was approximately $7.7 billion and $12.4 billion, respectively.

Senior Notes Offerings

    AIG completed the following registered notes offerings:

    On March 22, 2012, $750 million principal amount of 3.000% Notes Due 2015 and $1.25 billion principal amount of 3.800% Notes Due 2017 for the Matched Investment Program (MIP).

    On May 24, 2012, $750 million principal amount of 4.875% Notes Due 2022, and on June 29, 2012, an additional $750 million principal amount of such 4.875% Notes Due 2022.

AIG 2012 Form 10-Q            9


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

ILFC Debt Offerings

    In the first six months of 2012, International Lease Finance Corporation (ILFC) raised approximately $3.2 billion through a combination of secured and unsecured financings.

Pay Down of Department of the Treasury's AIA SPV Preferred Interests in Full

    On March 7, 2012, AIG entered into an agreement with the Department of the Treasury to amend various agreements (the Amendment), which enabled the special purpose vehicle that held AIG's remaining shares in AIA (the AIA SPV) to retain and distribute to AIG the net proceeds in excess of $5.6 billion received by the AIA SPV from the AIA Sale. In addition, the liens created by the agreements on (i) the equity interests in ILFC, (ii) the ordinary shares of AIA held by the AIA SPV subsequent to the closing of the AIA Sale and (iii) the common equity interests in the AIA SPV were released and such interests and AIA ordinary shares no longer constituted collateral securing the repayment of the liquidation preference of the Department of the Treasury's preferred interests in the AIA SPV (the AIA SPV Preferred Interests). The Amendment also required the AIA SPV and AM Holdings LLC (the ALICO SPV) to redeem their preferred participating return rights held in such SPVs by the Department of the Treasury before the release of the collateral. AIG contributed a portion of the net proceeds received by AIG in respect of its interest in Maiden Lane II LLC (ML II) to redeem these residual rights.

    On March 21, 2012, AIG entered into an agreement with the Department of the Treasury, pursuant to which the AIA SPV paid down in full the remaining liquidation preference of the AIA SPV Preferred Interests. As a result of the payment, the remaining liens on AIG assets supporting the paydown of these interests were released.


SUPPLEMENTARY DISCLOSURE OF CONSOLIDATED CASH FLOW INFORMATION

   
Six Months Ended June 30,
(in millions)
  2012
  2011
 
   

Cash paid during the period for:

             

Interest*

  $ 2,088   $ 7,081  

Taxes

  $ 206   $ 547  

Non-cash financing/investing activities:

             

Interest credited to policyholder contract deposits included in financing activities

  $ 2,186   $ 2,434  
   
*
2011 includes payment of accrued compounded interest of $4.7 billion under the Credit Agreement, dated as of September 22, 2008, as amended (the FRBNY Credit Facility), before the facility was terminated on January 14, 2011 in connection with the series of integrated transactions to recapitalize AIG (the Recapitalization) with the Department of the Treasury, the Federal Reserve Bank of New York and the AIG Credit Facility Trust, including the repayment of all amounts owed under the FRBNY Credit Facility.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

RECENT ACCOUNTING STANDARDS

Future Application of Accounting Standards

    In July 2012, the Financial Accounting Standards Board (FASB) issued an accounting standard that allows a company the option to first assess qualitatively whether it is more likely than not that an indefinite-lived intangible asset is impaired, therefore necessitating that it perform a quantitative impairment test. A company is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the company determines it is more likely than not the asset is impaired.

10            AIG 2012 Form 10-Q


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    The standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. A company can choose to early adopt the standard. AIG does not expect adoption of the standard to have a material effect on its consolidated financial condition, results of operations or cash flows.

Accounting Standards Adopted During 2012

    AIG adopted the following accounting standards on January 1, 2012:

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

    In October 2010, the FASB issued an accounting standard update that amends the accounting for costs incurred by insurance companies that can be capitalized in connection with acquiring or renewing insurance contracts. The standard clarifies how to determine whether the costs incurred in connection with the acquisition of new or renewal insurance contracts qualify as deferred policy acquisition costs. AIG adopted the standard retrospectively on January 1, 2012.

    Policy acquisition costs represent those costs that are incremental and directly related to the successful acquisition of new or renewal insurance contracts. AIG defers incremental costs that result directly from, and are essential to, the acquisition or renewal of an insurance contract. Such costs generally include agent or broker commissions and bonuses, premium taxes, and medical and inspection fees that would not have been incurred if the insurance contract had not been acquired or renewed. Each cost is analyzed to assess whether it is fully deferrable. AIG partially defers costs, including certain commissions, when it does not believe the entire cost is directly related to the acquisition or renewal of insurance contracts.

    AIG also defers a portion of employee total compensation and payroll-related fringe benefits directly related to time spent performing specific acquisition or renewal activities including costs associated with the time spent on underwriting, policy issuance and processing, and sales force contract selling. The amounts deferred are derived based on successful efforts for each distribution channel and/or cost center from which the cost originates.

    Advertising costs related to the issuance of insurance contracts that meet the direct-advertising criteria are deferred and amortized as part of deferred policy acquisition costs.

    The method AIG uses to amortize deferred policy acquisition costs for either short- or long-duration insurance contracts did not change as a result of the adoption of the standard.

    The adoption of the standard resulted in a reduction to beginning of period retained earnings for the earliest period presented and a decrease in the amount of capitalized costs in connection with the acquisition or renewal of insurance contracts. Accordingly, AIG revised its historical financial statements and accompanying notes to the consolidated financial statements for the changes in deferred policy acquisition costs and associated changes in acquisition expenses and income taxes for affected entities and segments, including divested entities presented in continuing and discontinued operations.

AIG 2012 Form 10-Q            11


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following tables present amounts previously reported in 2011, the effect of the change due to the retrospective adoption of the standard, and the adjusted amounts that are reflected in AIG's consolidated financial statements.

   
December 31, 2011
(in millions)
  As Previously
Reported

  Effect of
Change

  As Currently
Reported

 
   

Balance Sheet:

                   

Current and deferred income taxes

  $ 16,084   $ 1,718   $ 17,802  

Deferred policy acquisition costs

    14,026     (5,089 )   8,937  

Other assets

    12,824     (42 )   12,782  
   

Total assets

    555,773     (3,413 )   552,360  
   

Retained earnings

    14,332     (3,558 )   10,774  

Accumulated other comprehensive income

    5,008     145     5,153  
   

Total AIG shareholders' equity

    104,951     (3,413 )   101,538  
   

 

   
Three Months Ended June 30, 2011
(dollars in millions, except per share data)
  As Previously
Reported

  Effect of
Change

  As Currently
Reported

 
   

Statement of Operations:

                   

Total net realized capital gains(a)

  $ 71   $ 4   $ 75  
   

Total revenues

    16,676     4     16,680  
   

Interest credited to policyholder account balances

    1,110     4     1,114  

Amortization of deferred acquisition costs

    1,786     (464 )   1,322  

Other acquisition and other insurance expenses

    1,653     476     2,129  
   

Total benefits, claims and expenses

    14,870     16     14,886  
   

Income (loss) from continuing operations before income tax benefit

    1,806     (12 )   1,794  
   

Income tax benefit(b)

    (288 )   (8 )   (296 )
   

Income (loss) from continuing operations

    2,094     (4 )   2,090  

Income (loss) from discontinued operations, net of income tax expense(c)

    (37 )   -     (37 )
   

Net income

    2,057     (4 )   2,053  
   

Net income attributable to AIG

    1,840     (4 )   1,836  
   

Net income (loss) attributable to AIG common shareholders           

    1,840     (4 )   1,836  
   

Income (loss) per share attributable to AIG common shareholders:

                   

Basic:

                   

Income (loss) from continuing operations

  $ 1.03   $ -   $ 1.03  

Income (loss) from discontinued operations

  $ (0.03 ) $ -   $ (0.03 )

Diluted

                   

Income (loss) from continuing operations

  $ 1.03   $ -   $ 1.03  

Income (loss) from discontinued operations

  $ (0.03 ) $ -   $ (0.03 )
   

12            AIG 2012 Form 10-Q


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


   
Six Months Ended June 30, 2011
(dollars in millions, except per share data)
  As Previously
Reported

  Effect of
Change

  As Currently
Reported

 
   

Statement of Operations:

                   

Total net realized capital losses(a)

  $ (667 ) $ 7   $ (660 )
   

Total revenues

    34,112     7     34,119  
   

Interest credited to policyholder account balances

    2,215     5     2,220  

Amortization of deferred acquisition costs

    3,502     (949 )   2,553  

Other acquisition and other insurance expenses

    3,204     893     4,097  
   

Total benefits, claims and expenses

    33,686     (51 )   33,635  
   

Income (loss) from continuing operations before income tax benefit

    426     58     484  
   

Income tax benefit(b)

    (488 )   (34 )   (522 )
   

Income (loss) from continuing operations

    914     92     1,006  

Income (loss) from discontinued operations, net of income tax expense(c)

    1,616     932     2,548  
   

Net income

    2,530     1,024     3,554  
   

Net income attributable to AIG

    2,109     1,024     3,133  
   

Net income (loss) attributable to AIG common shareholders           

    1,297     1,024     2,321  
   

Income (loss) per share attributable to AIG common shareholders:

                   

Basic:

                   

Income (loss) from continuing operations

  $ (0.18 ) $ 0.06   $ (0.12 )

Income from discontinued operations

  $ 0.94   $ 0.55   $ 1.49  

Diluted

                   

Income (loss) from continuing operations

  $ (0.18 ) $ 0.06   $ (0.12 )

Income from discontinued operations

  $ 0.94   $ 0.55   $ 1.49  
   
(a)
Includes $5 million and $(82) million for the three and six months ended June 30, 2011, respectively, attributable to the effect of the reclassification of certain derivative activity discussed in Note 1 herein.

(b)
Includes a change in the deferred tax asset valuation allowance for the period.

(c)
Represents the results of Nan Shan Life Insurance Company, Ltd. (Nan Shan) and the results of AIG Star Life Insurance Co. Ltd. (AIG Star) and AIG Edison Life Insurance Company (AIG Edison) through the date of their disposition, and the gain on the sale of AIG Star and AIG Edison, which were sold in the first quarter of 2011.

AIG 2012 Form 10-Q            13


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    Adoption of the standard did not affect the previously reported totals for net cash flows provided by (used in) operating, investing, or financing activities, but did affect the following components of net cash flows provided by (used in) operating activities.

   
Six Months Ended June 30, 2011
(in millions)
  As Previously
Reported

  Effect of
Change

  As Currently
Reported

 
   

Cash flows from operating activities:

                   

Net income

  $ 2,530   $ 1,024   $ 3,554  

Income from discontinued operations

    (1,616 )   (932 )   (2,548 )
   

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

                   

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

                   

Unrealized gains in earnings – net*

    (2,466 )   (7 )   (2,473 )

Depreciation and other amortization

    4,529     (944 )   3,585  

Changes in operating assets and liabilities:

                   

Capitalization of deferred policy acquisition costs

    (3,554 )   893     (2,661 )

Current and deferred income taxes – net

    (1,034 )   (34 )   (1,068 )

Total adjustments

    (7,126 )   (92 )   (7,218 )
   
*
Includes $73 million for the six months ended June 30, 2011 attributable to the effect of the reclassification of certain derivative activity discussed in Note 1 herein.

    For short-duration insurance contracts, starting in 2012, AIG elected to include anticipated investment income in its determination of whether the deferred policy acquisition costs are recoverable. AIG believes the inclusion of anticipated investment income in the recoverability analysis is a preferable accounting policy because it includes in the recoverability analysis the fact that there is a timing difference between when the premiums are collected and in turn invested and when the losses and related expenses are paid. This is considered a change in accounting principle that required retrospective application to all periods presented. Because AIG historically has not recorded any premium deficiency on its short-duration insurance contracts even without the inclusion of anticipated investment income, there were no changes to the historical financial statements for the change in accounting principle.

Reconsideration of Effective Control for Repurchase Agreements

    In April 2011, the FASB issued an accounting standard that amends the criteria used to determine effective control for repurchase agreements and other similar arrangements such as securities lending transactions. The standard modifies the criteria for determining when these transactions would be accounted for as secured borrowings (i.e., financings) instead of sales of the securities.

    The standard removes from the assessment of effective control the requirement that the transferor have the ability to repurchase or redeem the financial assets on substantially agreed terms, even in the event of default by the transferee. The removal of this requirement makes the level of collateral received by the transferor in a repurchase agreement or similar arrangement irrelevant in determining whether the transaction should be accounted for as a sale. Consequently, more repurchase agreements, securities lending transactions and similar arrangements will be accounted for as secured borrowings.

    The guidance in the standard must be applied prospectively to transactions or modifications of existing transactions that occur on or after January 1, 2012. Under this standard, $204 million in repurchase agreements (related to securities with a fair value of $259 million) continued to be accounted for as sales as of June 30, 2012. Any modifications to these transactions that occur subsequent to adoption will result in an assessment of whether they should be accounted for as secured borrowings under the standard. As of June 30, 2012, there were no such modifications subsequent to the adoption of the standard.

14            AIG 2012 Form 10-Q


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Common Fair Value Measurements and Disclosure Requirements in GAAP and IFRS

    In May 2011, the FASB issued an accounting standard that amended certain aspects of the fair value measurement guidance in GAAP, primarily to achieve the FASB's objective of a converged definition of fair value and substantially converged measurement and disclosure guidance with International Financial Reporting Standards (IFRS). The measurement and disclosure requirements under GAAP and IFRS are now generally consistent, with certain exceptions including the accounting for day one gains and losses, measuring the fair value of alternative investments using net asset value and certain disclosure requirements.

    The standard's fair value measurement and disclosure guidance applies to all companies that measure assets, liabilities, or instruments classified in shareholders' equity at fair value or provide fair value disclosures for items not recorded at fair value. The guidance clarifies existing guidance on the application of fair value measurements, changes certain principles or requirements for measuring fair value, and requires significant additional disclosures for Level 3 valuation inputs. The new disclosure requirements were applied prospectively. The standard became effective for AIG beginning on January 1, 2012. The standard did not have any effect on AIG's consolidated financial condition, results of operations or cash flows. See Note 4 herein.

Presentation of Comprehensive Income

    In June 2011, the FASB issued an accounting standard that requires the presentation of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components, followed consecutively by a second statement that presents total other comprehensive income and its components. The standard became effective beginning January 1, 2012 with retrospective application required. The standard did not have any effect on AIG's consolidated financial condition, results of operations or cash flows.

Testing Goodwill for Impairment

    In September 2011, the FASB issued an accounting standard that amends the approach to testing goodwill for impairment. The standard simplifies how entities test goodwill for impairment by permitting an entity to first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative, two-step goodwill impairment test. The standard became effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of the standard did not affect AIG's consolidated financial condition, results of operations or cash flows.


3. SEGMENT INFORMATION

    AIG reports the results of its operations through three reportable segments: Chartis, SunAmerica Financial Group (SunAmerica) and Aircraft Leasing. AIG evaluates performance based on pre-tax income (loss), excluding results from discontinued operations, because AIG believes this provides more meaningful information on how its operations are performing.

    Effective during the first quarter of 2012, in order to align financial reporting with the manner in which AIG's chief operating decision makers review the Chartis businesses to assess performance and make decisions about resources to be allocated, certain products previously reported in Commercial Insurance were reclassified to Consumer Insurance. These revisions did not affect the total Chartis reportable segment results previously reported.

AIG 2012 Form 10-Q            15


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

   
 
  Reportable Segment    
   
   
   
 
 
   
   
  Consolidation
and
Eliminations

   
 
(in millions)
  Chartis
  SunAmerica
  Aircraft
Leasing
*
  Other
Operations

  Total
  Consolidated
 
   

Three Months Ended June 30, 2012

                                           

Total revenues

  $ 10,020   $ 4,213   $ 1,121   $ 1,869   $ 17,223   $ (100 ) $ 17,123  

Pre-tax income (loss)

    961     777     86     (116 )   1,708     43     1,751  
   

Three Months Ended June 30, 2011

                                           

Total revenues

  $ 10,218   $ 3,896   $ 1,119   $ 1,565   $ 16,798   $ (118 ) $ 16,680  

Pre-tax income

    826     766     87     87     1,766     28     1,794  
   

Six Months Ended June 30, 2012

                                           

Total revenues

  $ 19,818   $ 7,909   $ 2,275   $ 5,872   $ 35,874   $ (308 ) $ 35,566  

Pre-tax income (loss)

    1,871     1,639     206     2,620     6,336     (1 )   6,335  
   

Six Months Ended June 30, 2011

                                           

Total revenues

  $ 20,098   $ 7,735   $ 2,260   $ 4,297   $ 34,390   $ (271 ) $ 34,119  

Pre-tax income (loss)

    452     1,733     207     (1,910 )   482     2     484  
   
*
AIG's Aircraft Leasing operations consist of a single operating segment.

The following table presents Chartis operations by operating segment:

   
(in millions)
  Commercial
Insurance

  Consumer
Insurance

  Other
  Total
Chartis

 
   

Three Months Ended June 30, 2012

                         

Total revenues

  $ 6,087   $ 3,564   $ 369   $ 10,020  

Pre-tax income

    594     192     175     961  
   

Three Months Ended June 30, 2011

                         

Total revenues

  $ 6,437   $ 3,482   $ 299   $ 10,218  

Pre-tax income

    629     59     138     826  
   

Six Months Ended June 30, 2012

                         

Total revenues

  $ 12,016   $ 7,176   $ 626   $ 19,818  

Pre-tax income

    1,159     426     286     1,871  
   

Six Months Ended June 30, 2011

                         

Total revenues

  $ 12,503   $ 6,916   $ 679   $ 20,098  

Pre-tax income (loss)

    245     (196 )   403     452  
   

16            AIG 2012 Form 10-Q


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following table presents SunAmerica operations by operating segment:

   
(in millions)
  Domestic
Life
Insurance

  Domestic
Retirement
Services

  Total
SunAmerica

 
   

Three Months Ended June 30, 2012

                   

Total revenues

  $ 2,484   $ 1,729   $ 4,213  

Pre-tax income

    673     104     777  
   

Three Months Ended June 30, 2011

                   

Total revenues

  $ 2,146   $ 1,750   $ 3,896  

Pre-tax income

    369     397     766  
   

Six Months Ended June 30, 2012

                   

Total revenues

  $ 4,643   $ 3,266   $ 7,909  

Pre-tax income

    1,161     478     1,639  
   

Six Months Ended June 30, 2011

                   

Total revenues

  $ 4,108   $ 3,627   $ 7,735  

Pre-tax income

    702     1,031     1,733  
   

The following table presents the components of AIG's Other operations:

   
(in millions)
  Mortgage
Guaranty

  Global
Capital
Markets

  Direct
Investment
Book

  Retained
Interests

  Corporate
& Other

  Consolidation
and
Eliminations

  Total
Other
Operations

 
   

Three Months Ended June 30, 2012

                                           

Total revenues

  $ 224   $ 10   $ 584   $ 813   $ 251   $ (13 ) $ 1,869  

Pre-tax income (loss)

    48     (25 )   485     813     (1,435 )   (2 )   (116 )
   

Three Months Ended June 30, 2011

                                           

Total revenues

  $ 232   $ (105 ) $ 136   $ 854   $ 458   $ (10 ) $ 1,565  

Pre-tax income (loss)

    6     (169 )   73     854     (668 )   (9 )   87  
   

Six Months Ended June 30, 2012

                                           

Total revenues

  $ 424   $ 170   $ 928   $ 3,860   $ 513   $ (23 ) $ 5,872  

Pre-tax income (loss)

    56     63     733     3,860     (2,093 )   1     2,620  
   

Six Months Ended June 30, 2011

                                           

Total revenues

  $ 470   $ 281   $ 599   $ 2,503   $ 469   $ (25 ) $ 4,297  

Pre-tax income (loss)

    14     121     483     2,503     (5,015 )   (16 )   (1,910 )
   

AIG 2012 Form 10-Q            17


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

4. FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS ON A RECURRING BASIS

    AIG carries certain of its financial instruments at fair value. AIG defines the fair value of a financial instrument as the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note 6 to the Consolidated Financial Statements in the 2011 Annual Report for a discussion of AIG's accounting policies and procedures regarding fair value measurements related to the following information.

    Assets and liabilities recorded at fair value in the Consolidated Balance Sheet are measured and classified in accordance with a fair value hierarchy established in GAAP. The hierarchy consists 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.

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, quoted prices for identical or similar assets or liabilities in markets that are not active, 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.

Level 3:  Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, AIG must make certain assumptions as to the inputs a hypothetical market participant would use to value that asset or liability.

18            AIG 2012 Form 10-Q


Table of Contents


American International Group, Inc.

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:

   
June 30, 2012
(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

  $ 19   $ 3,998   $ -   $ -   $ -   $ 4,017  

Obligations of states, municipalities and political subdivisions

    -     36,241     1,013     -     -     37,254  

Non-U.S. governments             

    833     24,535     13     -     -     25,381  

Corporate debt

    -     145,022     1,306     -     -     146,328  

RMBS

    -     23,170     10,488     -     -     33,658  

CMBS

    -     4,148     4,643     -     -     8,791  

CDO/ABS

    -     2,511     5,074     -     -     7,585  
   

Total bonds available for sale

    852     239,625     22,537     -     -     263,014  
   

Bond trading securities:

                                     

U.S. government and government sponsored entities

    800     6,792     -     -     -     7,592  

Obligations of states, municipalities and political subdivisions

    -     236     -     -     -     236  

Non-U.S. governments             

    -     34     -     -     -     34  

Corporate debt

    -     1,057     3     -     -     1,060  

RMBS

    -     1,158     290     -     -     1,448  

CMBS

    -     1,676     457     -     -     2,133  

CDO/ABS

    -     3,769     14,647     -     -     18,416  
   

Total bond trading securities

    800     14,722     15,397     -     -     30,919  
   

Equity securities available for sale:

                                     

Common stock

    2,608     2     41     -     -     2,651  

Preferred stock

    -     46     139     -     -     185  

Mutual funds

    73     38     -     -     -     111  
   

Total equity securities available for sale

    2,681     86     180     -     -     2,947  
   

Equity securities trading             

    23     80     -     -     -     103  

Mortgage and other loans receivable

    -     122     1     -     -     123  

Other invested assets(c)

    7,747     1,619     7,049     -     -     16,415  

Derivative assets:

                                     

Interest rate contracts

    12     6,649     1,006     -     -     7,667  

Foreign exchange contracts

    -     53     -     -     -     53  

Equity contracts

    106     117     38     -     -     261  

Commodity contracts

    -     181     2     -     -     183  

Credit contracts

    -     -     64     -     -     64  

Other contracts

    -     164     68     -     -     232  

Counterparty netting and cash collateral

    -     -     -     (3,716 )   (991 )   (4,707 )
   

Total derivative assets

    118     7,164     1,178     (3,716 )   (991 )   3,753  
   

Short-term investments(d)             

    371     6,988     -     -     -     7,359  

Separate account assets

    51,412     2,853     -     -     -     54,265  

Other assets

    -     700     -     -     -     700  
   

Total

  $ 64,004   $ 273,959   $ 46,342   $ (3,716 ) $ (991 ) $ 379,598  
   

Liabilities:

                                     

Policyholder contract deposits

  $ -   $ -   $ 1,188   $ -   $ -   $ 1,188  

Derivative liabilities:

                                     

Interest rate contracts

    -     6,663     245     -     -     6,908  

Foreign exchange contracts

    -     171     -     -     -     171  

Equity contracts

    2     234     10     -     -     246  

Commodity contracts

    -     185     -     -     -     185  

Credit contracts(e)

    -     5     2,651     -     -     2,656  

Other contracts

    -     65     222     -     -     287  

Counterparty netting and cash collateral

    -     -     -     (3,716 )   (2,599 )   (6,315 )
   

Total derivative liabilities

    2     7,323     3,128     (3,716 )   (2,599 )   4,138  
   

Other long-term debt(f)

    -     8,997     407     -     -     9,404  

Other liabilities(g)

    24     1,564     -     -     -     1,588  
   

Total

  $ 26   $ 17,884   $ 4,723   $ (3,716 ) $ (2,599 ) $ 16,318  
   

AIG 2012 Form 10-Q            19


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

   
December 31, 2011
(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

  $ 174   $ 5,904   $ -   $ -   $ -   $ 6,078  

Obligations of states, municipalities and
political subdivisions

    -     36,538     960     -     -     37,498  

Non-U.S. governments

    259     25,467     9     -     -     25,735  

Corporate debt

    -     142,883     1,935     -     -     144,818  

RMBS

    -     23,727     10,877     -     -     34,604  

CMBS

    -     3,991     3,955     -     -     7,946  

CDO/ABS

    -     3,082     4,220     -     -     7,302  
   

Total bonds available for sale

    433     241,592     21,956     -     -     263,981  
   

Bond trading securities:

                                     

U.S. government and government sponsored entities

    100     7,404     -     -     -     7,504  

Obligations of states, municipalities and political subdivisions

    -     257     -     -     -     257  

Non-U.S. governments

    -     35     -     -     -     35  

Corporate debt

    -     809     7     -     -     816  

RMBS

    -     1,345     303     -     -     1,648  

CMBS

    -     1,283     554     -     -     1,837  

CDO/ABS

    -     3,835     8,432     -     -     12,267  
   

Total bond trading securities

    100     14,968     9,296     -     -     24,364  
   

Equity securities available for sale:

                                     

Common stock

    3,294     70     57     -     -     3,421  

Preferred stock

    -     44     99     -     -     143  

Mutual funds

    55     5     -     -     -     60  
   

Total equity securities available for sale

    3,349     119     156     -     -     3,624  
   

Equity securities trading

    43     82     -     -     -     125  

Mortgage and other loans receivable

    -     106     1     -     -     107  

Other invested assets(c)

    12,549     1,709     6,618     -     -     20,876  

Derivative assets:

                                     

Interest rate contracts

    2     7,251     1,033     -     -     8,286  

Foreign exchange contracts

    -     143     2     -     -     145  

Equity contracts

    92     133     38     -     -     263  

Commodity contracts

    -     134     2     -     -     136  

Credit contracts

    -     -     89     -     -     89  

Other contracts

    29     462     250     -     -     741  

Counterparty netting and cash collateral

    -     -     -     (3,660 )   (1,501 )   (5,161 )
   

Total derivative assets

    123     8,123     1,414     (3,660 )   (1,501 )   4,499  
   

Short-term investments(d)

    2,309     3,604     -     -     -     5,913  

Separate account assets

    48,502     2,886     -     -     -     51,388  
   

Total

  $ 67,408   $ 273,189   $ 39,441   $ (3,660 ) $ (1,501 ) $ 374,877  
   

20            AIG 2012 Form 10-Q


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

   
December 31, 2011
(in millions)
  Level 1
  Level 2
  Level 3
  Counterparty
Netting
(a)
  Cash
Collateral
(b)
  Total
 
   

Liabilities:

                                     

Policyholder contract deposits

  $ -   $ -   $ 918   $ -   $ -   $ 918  

Derivative liabilities:

                                     

Interest rate contracts

    -     6,661     248     -     -     6,909  

Foreign exchange contracts

    -     178     -     -     -     178  

Equity contracts

    -     198     10     -     -     208  

Commodity contracts

    -     146     -     -     -     146  

Credit contracts(e)

    -     4     3,362     -     -     3,366  

Other contracts

    -     155     217     -     -     372  

Counterparty netting and cash collateral

    -     -     -     (3,660 )   (2,786 )   (6,446 )
   

Total derivative liabilities

    -     7,342     3,837     (3,660 )   (2,786 )   4,733  
   

Other long-term debt(f)

    -     10,258     508     -     -     10,766  

Other liabilities(g)

    193     714     -     -     -     907  
   

Total

  $ 193   $ 18,314   $ 5,263   $ (3,660 ) $ (2,786 ) $ 17,324  
   
(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 $1.6 billion and $115 million, respectively, at June 30, 2012 and $1.8 billion and $100 million, respectively, at December 31, 2011.

(c)
Included in Level 1 are $7.7 billion and $12.4 billion at June 30, 2012 and December 31, 2011, respectively, of AIA ordinary shares publicly traded on the Hong Kong Stock Exchange. Approximately 3 percent of the fair value of the assets recorded as Level 3 relate to various private equity, real estate, hedge fund and fund-of-funds investments that are consolidated by AIG at both June 30, 2012 and December 31, 2011, respectively. AIG's ownership in these funds represented 64.2 percent, or $0.9 billion, of Level 3 assets at June 30, 2012 and 57.3 percent, or $0.7 billion, of Level 3 assets at December 31, 2011.

(d)
Included in Level 2 is the fair value of securities purchased under agreements to resell of $0.7 billion and $0.1 billion at June 30, 2012 and December 31, 2011, respectively.

(e)
Included in Level 3 is the fair value derivative liability of $2.5 billion and $3.2 billion at June 30, 2012 and December 31, 2011, respectively, on the super senior credit default swap portfolio.

(f)
Includes Guaranteed Investment Agreements (GIAs), notes, bonds, loans and mortgages payable.

(g)
Included in Level 2 is the fair value of securities sold under agreements to repurchase and securities and spot commodities sold but not yet purchased, of $1.5 billion and $45 million, respectively, at June 30, 2012. Included in Level 2 is the fair value of securities sold under agreements to repurchase, securities and spot commodities sold but not yet purchased and trust deposits and deposits due to banks and other depositors, of $0.6 billion, $144 million and $6 million, respectively, at December 31, 2011.


TRANSFERS OF LEVEL 1 AND LEVEL 2 ASSETS AND LIABILITIES

    AIG's policy is to record transfers of assets and liabilities between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. Assets are transferred out of Level 1 when they are no longer transacted with sufficient frequency and volume in an active market. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market. During the three- and six-month periods ended June 30, 2012, AIG transferred $136 million of securities issued by Non-U.S. government entities from Level 1 to Level 2, as they are no longer considered actively traded. AIG had no material transfers from Level 2 to Level 1 during the three- and six-month periods ended June 30, 2012.

AIG 2012 Form 10-Q            21


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


CHANGES IN LEVEL 3 RECURRING FAIR VALUE MEASUREMENTS

The following tables present changes during the three-and six-month periods ended June 30, 2012 and 2011 in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) related to the Level 3 assets and liabilities that remained in the Consolidated Balance Sheet at June 30, 2012 and 2011:

   
(in millions)
  Fair value
Beginning
of Period
(a)
  Net
Realized and
Unrealized
Gains (Losses)
Included
in Income

  Accumulated
Other
Comprehensive
Income (Loss)

  Purchases,
Sales,
Issues and
Settlements,
Net

  Gross
Transfers
in

  Gross
Transfers
out

  Fair value
End of Period

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

 
   

Three Months Ended June 30, 2012

                                                 

Assets:

                                                 

Bonds available for sale:              

                                                 

Obligations of states, municipalities and political subdivisions                     

  $ 1,054   $ 31   $ (5 ) $ (63 ) $ 45   $ (49 ) $ 1,013   $ -  

Non-U.S. governments              

    15     -     (7 )   -     5     -     13     -  

Corporate debt                     

    1,323     (1 )   (7 )   5     55     (69 )   1,306     -  

RMBS

    13,240     195     10     (616 )   7     (2,348 )   10,488     -  

CMBS

    4,173     2     14     492     12     (50 )   4,643     -  

CDO/ABS

    4,882     26     89     (91 )   168     -     5,074     -  
   

Total bonds available for sale

    24,687     253     94     (273 )   292     (2,516 )   22,537     -  
   

Bond trading securities:

                                                 

Corporate debt

    5     -     -     (2 )   -     -     3     -  

RMBS

    314     (5 )   -     (19 )   -     -     290     (7 )

CMBS

    433     16     -     13     4     (9 )   457     78  

CDO/ABS

    8,416     1,444     -     4,787     -     -     14,647     1,462  
   

Total bond trading securities

    9,168     1,455     -     4,779     4     (9 )   15,397     1,533  
   

Equity securities available for sale:

                                                 

Common stock

    50     9     -     (19 )   1     -     41     -  

Preferred stock                     

    106     -     (31 )   61     3     -     139     -  
   

Total equity securities available for sale

    156     9     (31 )   42     4     -     180     -  
   

Mortgage and other loans receivable

    1     -     -     -     -     -     1     -  

Other invested assets              

    7,186     (32 )   66     (68 )   18     (121 )   7,049     -  
   

Total

  $ 41,198   $ 1,685   $ 129   $ 4,480   $ 318   $ (2,646 ) $ 45,164   $ 1,533  
   

Liabilities:

                                                 

Policyholder contract deposits

  $ (782 ) $ (408 ) $ -   $ 2   $ -   $ -   $ (1,188 ) $ 244  

Derivative liabilities, net:

                                                 

Interest rate contracts              

    778     46     -     (63 )   -     -     761     10  

Foreign exchange contracts              

    -     -     -     -     -     -     -     -  

Equity contracts

    40     (23 )   -     11     -     -     28     -  

Commodity contracts              

    2     -     -     (2 )   -     2     2     (1 )

Credit contracts

    (2,705 )   344     -     (226 )   -     -     (2,587 )   (122 )

Other contracts

    (37 )   422     (7 )   (490 )   (42 )   -     (154 )   (15 )
   

Total derivative liabilities, net

    (1,922 )   789     (7 )   (770 )   (42 )   2     (1,950 )   (128 )
   

Other long-term debt(b)

    (575 )   (268 )   -     22     -     414     (407 )   (25 )
   

Total

  $ (3,279 ) $ 113   $ (7 ) $ (746 ) $ (42 ) $ 416   $ (3,545 ) $ 91  
   

22            AIG 2012 Form 10-Q


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

   
(in millions)
  Fair value
Beginning
of Period
(a)
  Net
Realized and
Unrealized
Gains (Losses)
Included
in Income

  Accumulated
Other
Comprehensive
Income (Loss)

  Purchases,
Sales,
Issues and
Settlements,
Net

  Gross
Transfers
in

  Gross
Transfers
out

  Fair value
End of Period

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

 
   

Six Months Ended June 30, 2012

                                                 

Assets:

                                                 

Bonds available for sale:              

                                                 

Obligations of states, municipalities and political subdivisions                     

  $ 960   $ 32   $ 11   $ 37   $ 45   $ (72 ) $ 1,013   $ -  

Non-U.S. governments              

    9     -     1     (2 )   5     -     13     -  

Corporate debt                     

    1,935     (17 )   69     2     346     (1,029 )   1,306     -  

RMBS

    10,877     125     803     710     355     (2,382 )   10,488     -  

CMBS

    3,955     (67 )   301     503     43     (92 )   4,643     -  

CDO/ABS

    4,220     40     266     (21 )   606     (37 )   5,074     -  
   

Total bonds available for sale

    21,956     113     1,451     1,229     1,400     (3,612 )   22,537     -  
   

Bond trading securities:

                                                 

Corporate debt

    7     -     -     (4 )   -     -     3     -  

RMBS

    303     28     -     (38 )   -     (3 )   290     18  

CMBS

    554     49     -     (122 )   36     (60 )   457     83  

CDO/ABS

    8,432     3,065     -     3,150     -     -     14,647     2,816  
   

Total bond trading securities

    9,296     3,142     -     2,986     36     (63 )   15,397     2,917  
   

Equity securities available for sale:

                                                 

Common stock

    57     23     (12 )   (33 )   6     -     41     -  

Preferred stock                     

    99     2     (23 )   69     3     (11 )   139     -  
   

Total equity securities available for sale

    156     25     (35 )   36     9     (11 )   180     -  
   

Mortgage and other loans receivable

    1     -     -     -     -     -     1     -  

Other invested assets              

    6,618     (179 )   276     33     760     (459 )   7,049     -  
   

Total

  $ 38,027   $ 3,101   $ 1,692   $ 4,284   $ 2,205   $ (4,145 ) $ 45,164   $ 2,917  
   

Liabilities:

                                                 

Policyholder contract deposits

  $ (918 ) $ (269 ) $ -   $ (1 ) $ -   $ -   $ (1,188 ) $ 101  

Derivative liabilities, net:

                                                 

Interest rate contracts              

    785     46     -     (70 )   -     -     761     (38 )

Foreign exchange contracts              

    2     -     -     (2 )   -     -     -     -  

Equity contracts

    28     (11 )   -     13     (2 )   -     28     -  

Commodity contracts              

    2     -     -     (2 )   -     2     2     (3 )

Credit contracts

    (3,273 )   201     -     485     -     -     (2,587 )   (642 )

Other contracts

    33     12     2     (78 )   (123 )   -     (154 )   24  
   

Total derivative liabilities, net

    (2,423 )   248     2     346     (125 )   2     (1,950 )   (659 )
   

Other long-term debt(b)

    (508 )   (378 )   (77 )   136     -     420     (407 )   54  
   

Total

  $ (3,849 ) $ (399 ) $ (75 ) $ 481   $ (125 ) $ 422   $ (3,545 ) $ (504 )
   

AIG 2012 Form 10-Q            23


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


   
(in millions)
  Fair value
Beginning
of Period
(a)
  Net
Realized and
Unrealized
Gains (Losses)
Included
in Income

  Accumulated
Other
Comprehensive
Income (Loss)

  Purchases,
Sales,
Issues and
Settlements,
Net

  Gross
Transfers
In

  Gross
Transfers
Out

  Fair value
End
of Period

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

 
   

Three Months Ended June 30, 2011

                                                 

Assets:

                                                 

Bonds available for sale:              

                                                 

Obligations of states, municipalities and political subdivisions                     

  $ 702   $ (1 ) $ 23   $ 62   $ 17   $ (3 ) $ 800   $ -  

Non-U.S. governments              

    5     -     -     -     -     -     5     -  

Corporate debt                     

    1,235     -     15     305     307     (18 )   1,844     -  

RMBS

    6,868     79     (165 )   3,905     11     (6 )   10,692     -  

CMBS

    4,316     (7 )   (109 )   -     28     -     4,228     -  

CDO/ABS

    3,857     12     74     (382 )   374     (10 )   3,925     -  
   

Total bonds available for sale

    16,983     83     (162 )   3,890     737     (37 )   21,494     -  
   

Bond trading securities:

                                                 

Corporate debt                     

    18     -     -     (9 )   -     -     9     -  

RMBS

    99     (2 )   (7 )   80     -     -     170     (7 )

CMBS

    523     28     3     (18 )   80     (133 )   483     34  

CDO/ABS

    10,461     (877 )   4     (85 )   -     -     9,503     (881 )
   

Total bond trading securities

    11,101     (851 )   -     (32 )   80     (133 )   10,165     (854 )
   

Equity securities available for sale:

                                                 

Common stock                     

    63     3     6     (12 )   2     (3 )   59     -  

Preferred stock                     

    63     (1 )   1     (1 )   2     -     64     -  
   

Total equity securities available for sale

    126     2     7     (13 )   4     (3 )   123     -  
   

Equity securities trading              

    1     1     -     (1 )   -     -     1     1  

Other invested assets

    7,070     (17 )   126     (161 )   45     (18 )   7,045     -  
   

Total

  $ 35,281   $ (782 ) $ (29 ) $ 3,683   $ 866   $ (191 ) $ 38,828   $ (853 )
   

Liabilities:

                                                 

Policyholder contract deposits

  $ (369 ) $ (33 ) $ -   $ (4 ) $ -   $ -   $ (406 ) $ 46  

Derivative liabilities, net:

                                                 

Interest rate contracts              

    619     138     -     (3 )   -     -     754     (14 )

Foreign exchange contracts

    16     (12 )   -     -     -     -     4     1  

Equity contracts

    34     -     -     -     (7 )   7     34     (1 )

Commodity contracts

    15     (1 )   -     (9 )   -     -     5     -  

Credit contracts

    (3,420 )   94     -     (6 )   -     -     (3,332 )   429  

Other contracts

    (6 )   (27 )   (51 )   (10 )   32     (7 )   (69 )   (114 )
   

Total derivatives liabilities, net

    (2,742 )   192     (51 )   (28 )   25     -     (2,604 )   301  
   

Other long-term debt(b)

    (996 )   (157 )   -     195     -     -     (958 )   (171 )
   

Total

  $ (4,107 ) $ 2   $ (51 ) $ 163   $ 25   $ -   $ (3,968 ) $ 176  
   

24            AIG 2012 Form 10-Q


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

   
(in millions)
  Fair value
Beginning
of Period
(a)
  Net
Realized and
Unrealized
Gains (Losses)
Included
in Income

  Accumulated
Other
Comprehensive
Income (Loss)

  Purchases,
Sales,
Issues and
Settlements,
Net

  Gross
Transfers
In

  Gross
Transfers
Out

  Fair value
End
of Period

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

 
   

Six Months Ended June 30, 2011

                                                 

Assets:

                                                 

Bonds available for sale:              

                                                 

Obligations of states, municipalities and political subdivisions                     

  $ 609   $ (1 ) $ 27   $ 174   $ 17   $ (26 ) $ 800   $ -  

Non-U.S. governments              

    5     -     -     -     -     -     5     -  

Corporate debt                     

    2,262     (3 )   22     272     533     (1,242 )   1,844     -  

RMBS

    6,367     (2 )   368     3,943     22     (6 )   10,692     -  

CMBS

    3,604     (34 )   555     72     53     (22 )   4,228     -  

CDO/ABS

    4,241     32     312     (837 )   446     (269 )   3,925     -  
   

Total bonds available for sale

    17,088     (8 )   1,284     3,624     1,071     (1,565 )   21,494     -  
   

Bond trading securities:

                                                 

Corporate debt                     

    -     -     -     (9 )   18     -     9     -  

RMBS

    91     -     (7 )   86     -     -     170     (3 )

CMBS

    506     66     3     (76 )   161     (177 )   483     68  

CDO/ABS

    9,431     153     9     (90 )   -     -     9,503     146  
   

Total bond trading securities

    10,028     219     5     (89 )   179     (177 )   10,165     211  
   

Equity securities available for sale:

                                                 

Common stock

    61     18     4     (27 )   8     (5 )   59     -  

Preferred stock                     

    64     (3 )   1     -     2     -     64     -  
   

Total equity securities available for sale

    125     15     5     (27 )   10     (5 )   123     -  
   

Equity securities trading              

    1     1     -     (1 )   -     -     1     1  

Other invested assets              

    7,414     36     469     (511 )   45     (408 )   7,045     -  
   

Total

  $ 34,656   $ 263   $ 1,763   $ 2,996   $ 1,305   $ (2,155 ) $ 38,828   $ 212  
   

Liabilities:

                                                 

Policyholder contract deposits

  $ (445 ) $ 46   $ -   $ (7 ) $ -   $ -   $ (406 ) $ (63 )

Derivative liabilities, net:

                                                 

Interest rate contracts              

    732     22     -     -     -     -     754     (54 )

Foreign exchange contracts

    16     (12 )   -     -     -     -     4     1  

Equity contracts

    22     (7 )   -     38     (7 )   (12 )   34     (7 )

Commodity contracts

    23     2     -     (20 )   -     -     5     -  

Credit contracts

    (3,798 )   476     -     (10 )   -     -     (3,332 )   473  

Other contracts

    (112 )   (23 )   (26 )   40     32     20     (69 )   (66 )
   

Total derivatives liabilities, net

    (3,117 )   458     (26 )   48     25     8     (2,604 )   347  
   

Other long-term debt(b)

    (982 )   (211 )   -     256     (21 )   -     (958 )   (198 )
   

Total

  $ (4,544 ) $ 293   $ (26 ) $ 297   $ 4   $ 8   $ (3,968 ) $ 86  
   
(a)
Total Level 3 derivative exposures have been netted in these tables for presentation purposes only.

(b)
Includes GIAs, notes, bonds, loans and mortgages payable.

AIG 2012 Form 10-Q            25


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


Net realized and unrealized gains and losses related to Level 3 items shown above are reported in the Consolidated Statement of Operations as follows:

   
(in millions)
  Net
Investment
Income

  Net Realized
Capital
Gains (Losses)

  Other
Income

  Total
 
   

Three Months Ended June 30, 2012

                         

Bonds available for sale

  $ 234   $ (9 ) $ 28   $ 253  

Bond trading securities

    1,290     -     165     1,455  

Equity securities

    -     9     -     9  

Other invested assets

    5     (41 )   4     (32 )

Policyholder contract deposits

    -     (408 )   -     (408 )

Derivative liabilities, net

    -     72     717     789  

Other long-term debt

    -     -     (268 )   (268 )
   

Three Months Ended June 30, 2011

                         

Bonds available for sale

  $ 159   $ (80 ) $ 4   $ 83  

Bond trading securities

    (496 )   -     (355 )   (851 )

Equity securities

    1     2     -     3  

Other invested assets

    (2 )   (37 )   22     (17 )

Policyholder contract deposits

    -     (33 )   -     (33 )

Derivative liabilities, net

    1     (90 )   281     192  

Other long-term debt

    -     -     (157 )   (157 )
   

Six Months Ended June 30, 2012

                         

Bonds available for sale

  $ 465   $ (384 ) $ 32   $ 113  

Bond trading securities

    2,839     -     303     3,142  

Equity securities

    -     25     -     25  

Other invested assets

    (9 )   (173 )   3     (179 )

Policyholder contract deposits

    -     (269 )   -     (269 )

Derivative liabilities, net

    (1 )   61     188     248  

Other long-term debt

    -     -     (378 )   (378 )
   

Six Months Ended June 30, 2011

                         

Bonds available for sale

  $ 240   $ (256 ) $ 8   $ (8 )

Bond trading securities

    505     -     (286 )   219  

Equity securities

    1     15     -     16  

Other invested assets

    44     (52 )   44     36  

Policyholder contract deposits

    -     46     -     46  

Derivative liabilities, net

    1     (145 )   602     458  

Other long-term debt

    -     -     (211 )   (211 )
   

26            AIG 2012 Form 10-Q


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following tables present the gross components of purchases, sales, issues and settlements, net, shown above:

   
(in millions)
  Purchases
  Sales
  Settlements
  Purchases, Sales,
Issues and
Settlements, Net
(a)
 
   

Three Months Ended June 30, 2012

                         

Assets:

                         

Bonds available for sale:

                         

Obligations of states, municipalities and political subdivisions

  $ 97   $ (158 ) $ (2 ) $ (63 )

Non-U.S. governments

    1     (1 )   -     -  

Corporate debt

    80     (52 )   (23 )   5  

RMBS

    198     (268 )   (546 )   (616 )

CMBS

    596     (69 )   (35 )   492  

CDO/ABS

    203     -     (294 )   (91 )
   

Total bonds available for sale

    1,175     (548 )   (900 )   (273 )
   

Bond trading securities:

                         

Corporate debt

    -     -