10-Q 1 a2211130z10-q.htm 10-Q

Table of Contents

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 September 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 October 26, 2012, there were 1,476,304,497 shares outstanding of the registrant's common stock.

   


Table of Contents

AMERICAN INTERNATIONAL GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2012

TABLE OF CONTENTS

FORM 10-Q
   
   

Item Number

  Description   Page

  

PART I – FINANCIAL INFORMATION

  

Item 1

  Financial Statements   2

  Note 1. Basis of Presentation   8

  Note 2. Summary of Significant Accounting Policies   9

  Note 3. Segment Information   14

  Note 4. Fair Value Measurements   17

  Note 5. Investments   35

  Note 6. Lending Activities   41

  Note 7. Variable Interest Entities   42

  Note 8. Derivatives and Hedge Accounting   44

  Note 9. Contingencies, Commitments and Guarantees   50

  Note 10. Total Equity   63

  Note 11. Noncontrolling Interests   67

  Note 12. Earnings (Loss) Per Share   68

  Note 13. Employee Benefits   70

  Note 14. Income Taxes   71

  Note 15. Discontinued Operations   73

  Note 16. Information Provided in Connection with Outstanding Debt   75

Item 2

 

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

 
81

          • Cautionary Statement Regarding Forward-Looking Information   81

  Index to Management's Discussion and Analysis of Financial Condition and Results of Operations   82

          • Use of Non-GAAP Measures   83

          • Executive Overview   83

          • Results of Operations   94

          • Liquidity and Capital Resources   136

          • Investments   152

          • Enterprise Risk Management   167

          • Critical Accounting Estimates   174

          • Regulatory Environment   179

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   187

Item 4

  Mine Safety Disclosures   187

Item 6

  Exhibits   187

SIGNATURES

 
188

  


1


Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1. / FINANCIAL STATEMENTS

 


AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED BALANCE SHEET (unaudited)

 
   
   
 
   
(in millions, except for share data)
  September 30,
2012

  December 31,
2011

 
   

Assets:

             

Investments:

             

Fixed maturity securities:

             

Bonds available for sale, at fair value (amortized cost: 2012 – $246,690; 2011 – $250,770)

  $ 269,914   $ 263,981  

Bond trading securities, at fair value

    24,837     24,364  

Equity securities:

             

Common and preferred stock available for sale, at fair value (cost: 2012 – $1,676; 2011 – $1,820)

    3,021     3,624  

Common and preferred stock trading, at fair value

    98     125  

Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2012 – $130; 2011 – $107)

    19,330     19,489  

Flight equipment primarily under operating leases, net of accumulated depreciation

    34,932     35,539  

Other invested assets (portion measured at fair value: 2012 – $15,033; 2011 – $20,876)

    35,426     40,744  

Short-term investments (portion measured at fair value: 2012 – $7,300; 2011 – $5,913)

    22,557     22,572  
   

Total investments

    410,115     410,438  

Cash

    1,608     1,474  

Accrued investment income

    3,153     3,108  

Premiums and other receivables, net of allowance

    14,564     14,721  

Reinsurance assets, net of allowance

    27,066     27,211  

Current and deferred income taxes

    14,119     17,802  

Deferred policy acquisition costs

    8,204     8,937  

Derivative assets, at fair value

    3,456     4,499  

Other assets, including restricted cash of $2,293 in 2012 and $2,988 in 2011 (portion measured at fair value: 2012 – $698; 2011 – $0)

    11,698     12,782  

Separate account assets, at fair value

    56,740     51,388  
   

Total assets

  $ 550,723   $ 552,360  
   

Liabilities:

             

Liability for unpaid claims and claims adjustment expense

  $ 87,413   $ 91,145  

Unearned premiums

    24,418     23,465  

Future policy benefits for life and accident and health insurance contracts

    35,831     34,317  

Policyholder contract deposits (portion measured at fair value: 2012 – $1,308; 2011 – $918)                                   

    127,478     126,898  

Other policyholder funds

    6,303     6,691  

Derivative liabilities, at fair value

    4,314     4,733  

Other liabilities (portion measured at fair value: 2012 – $930; 2011 – $907)

    31,905     27,554  

Long-term debt (portion measured at fair value: 2012 – $8,835; 2011 – $10,766)

    73,748     75,253  

Separate account liabilities

    56,740     51,388  
   

Total liabilities

    448,150     441,444  
   

Contingencies, commitments and guarantees (see Note 9)

             

Redeemable noncontrolling interests (see Note 11):

             

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

        8,427  

Other

    159     96  
   

Total redeemable noncontrolling interests

    159     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 – 430,316,923; 2011 – 9,746,617 shares of common stock

    (13,925 )   (942 )

Additional paid-in capital

    81,768     81,787  

Retained earnings

    18,170     10,774  

Accumulated other comprehensive income

    10,887     5,153  
   

Total AIG shareholders' equity

    101,666     101,538  

Non-redeemable noncontrolling interests

    748     855  
   

Total equity

    102,414     102,393  
   

Total liabilities and equity

  $ 550,723   $ 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.

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AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF OPERATIONS (unaudited)

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

Revenues:

                         

Premiums

  $ 9,503   $ 9,829   $ 28,583   $ 29,209  

Policy fees

    691     658     2,056     2,024  

Net investment income

    4,650     128     16,236     10,161  

Net realized capital gains (losses):

                         

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

    (34 )   (493 )   (301 )   (892 )

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

    (36 )   71     (372 )   130  
   

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

    (70 )   (422 )   (673 )   (762 )

Other realized capital gains

    717     1,029     1,467     709  
   

Total net realized capital gains (losses)

    647     607     794     (53 )

Aircraft leasing revenue

    1,147     1,129     3,426     3,419  

Other income

    1,010     368     2,119     2,078  
   

Total revenues

    17,648     12,719     53,214     46,838  
   

Benefits, claims and expenses:

                         

Policyholder benefits and claims incurred

    7,991     8,333     22,862     25,378  

Interest credited to policyholder account balances

    1,191     1,146     3,324     3,366  

Amortization of deferred acquisition costs

    1,522     1,540     4,341     4,093  

Other acquisition and insurance expenses

    2,214     2,067     6,736     6,164  

Interest expense

    988     970     2,895     3,055  

Aircraft leasing expenses

    720     2,057     1,991     3,264  

Net loss on extinguishment of debt

            32     3,392  

Other expenses

    427     876     2,103     1,912  
   

Total benefits, claims and expenses

    15,053     16,989     44,284     50,624  
   

Income (loss) from continuing operations before income taxes

    2,595     (4,270 )   8,930     (3,786 )
   

Income taxes expense (benefit)

    735     (665 )   1,290     (1,187 )
   

Income (loss) from continuing operations

    1,860     (3,605 )   7,640     (2,599 )

Income (loss) from discontinued operations, net of income taxes

    1     (221 )   9     2,327  
   

Net income (loss)

    1,861     (3,826 )   7,649     (272 )
   

Less:

                         

Net income from continuing operations attributable to noncontrolling interests:

                         

Nonvoting, callable, junior and senior preferred interests

        145     208     538  

Other

    5     19     45     28  
   

Total net income from continuing operations attributable to noncontrolling interests

    5     164     253     566  

Net income (loss) from discontinued operations attributable to noncontrolling interests

                19  
   

Total net income attributable to noncontrolling interests

    5     164     253     585  
   

Net income (loss) attributable to AIG

  $ 1,856   $ (3,990 ) $ 7,396   $ (857 )
   

Net income (loss) attributable to AIG common shareholders

  $ 1,856   $ (3,990 ) $ 7,396   $ (1,669 )
   

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

                         

Basic:

                         

Income (loss) from continuing operations

  $ 1.13   $ (1.99 ) $ 4.21   $ (2.25 )

Income (loss) from discontinued operations

  $   $ (0.11 ) $   $ 1.30  

Diluted:

                         

Income (loss) from continuing operations

  $ 1.13   $ (1.99 ) $ 4.21   $ (2.25 )

Income (loss) from discontinued operations

  $   $ (0.11 ) $   $ 1.30  
   

Weighted average shares outstanding:

                         

Basic

    1,642,472,814     1,899,500,628     1,757,955,937     1,765,905,779  

Diluted

    1,642,502,251     1,899,500,628     1,757,984,154     1,765,905,779  
   

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.

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AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (unaudited)

 
   
   
   
   
 
   
 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
(in millions)
  2012
  2011
  2012
  2011
 
   

Net income (loss)

  $ 1,861   $ (3,826 ) $ 7,649   $ (272 )
   

Other comprehensive income (loss), net of tax

                         

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

    497     (184 )   1,127     105  

Change in unrealized appreciation (depreciation) of all other investments

    2,331     (2,008 )   4,617     (954 )

Change in foreign currency translation adjustments

    240     (582 )   (96 )   (811 )

Change in net derivative gains (losses) arising from cash flow hedging activities

    2     (57 )   25     14  

Change in retirement plan liabilities adjustment

    29     (339 )   61     (190 )
   

Other comprehensive income (loss)

    3,099     (3,170 )   5,734     (1,836 )
   

Comprehensive income (loss)

    4,960     (6,996 )   13,383     (2,108 )

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

        145     208     538  

Comprehensive income (loss) attributable to other noncontrolling interests

    8     (87 )   45     (106 )
   

Total comprehensive income attributable to noncontrolling interests

    8     58     253     432  
   

Comprehensive income (loss) attributable to AIG

  $ 4,952   $ (7,054 ) $ 13,130   $ (2,540 )
   

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.

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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

 
   

Nine Months Ended September 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

            17     (15 )           2         2  

Purchase of common stock

            (13,000 )               (13,000 )       (13,000 )

Net income attributable to AIG or other noncontrolling interests*

                    7,396         7,396     40     7,436  

Other comprehensive income (loss)

                        5,734     5,734     (4 )   5,730  

Deferred income taxes

                (9 )           (9 )       (9 )

Contributions from noncontrolling interests

                                58     58  

Distributions to noncontrolling interests

                                (175 )   (175 )

Other

                5             5     (26 )   (21 )
   

Balance, end of period

  $   $ 4,766   $ (13,925 ) $ 81,768   $ 18,170   $ 10,887   $ 101,666   $ 748   $ 102,414  
   

Nine Months Ended September 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

        9         2,160             2,169         2,169  

Net income (loss) attributable to AIG or other noncontrolling interests*

                    (857 )       (857 )   51     (806 )

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

                                74     74  

Other comprehensive loss

                        (1,683 )   (1,683 )   (153 )   (1,836 )

Acquisition of noncontrolling interest

                (160 )       88     (72 )   (487 )   (559 )

Net decrease due to deconsolidation

                                (123 )   (123 )

Contributions from noncontrolling interests

                                93     93  

Distributions to noncontrolling interests

                                (127 )   (127 )

Other

        (1 )   1     (3 )           (3 )   (45 )   (48 )
   

Balance, end of period

  $   $ 4,764   $ (872 ) $ 81,776   $ (10,705 ) $ 5,948   $ 80,911   $ 771   $ 81,682  
   

*         Excludes gains of $213 million and $460 million for the nine months ended September 30, 2012 and 2011, respectively, attributable to redeemable noncontrolling interests. See Note 11.

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.

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AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

 
   
   
 
   
Nine Months Ended September 30,
(in millions)
  2012
  2011
 
   

Cash flows from operating activities:

             

Net income (loss)

  $ 7,649   $ (272 )

Income from discontinued operations

    (9 )   (2,327 )
   

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 on sales of securities available for sale and other assets

    (2,827 )   (1,131 )

Net losses on extinguishment of debt

    32     3,392  

Unrealized (gains) losses in earnings – net

    (4,578 )   714  

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

    (527 )   (840 )

Depreciation and other amortization

    5,541     5,618  

Impairments of assets

    1,371     3,052  

Changes in operating assets and liabilities:

             

General and life insurance reserves

    (1,119 )   4,190  

Premiums and other receivables and payables – net

    1,220     686  

Reinsurance assets and funds held under reinsurance treaties

    272     (4,258 )

Capitalization of deferred policy acquisition costs

    (4,260 )   (4,110 )

Current and deferred income taxes – net

    885     (1,829 )

Payment of FRBNY Credit Facility accrued compounded interest and fees

        (6,363 )

Other, net

    (811 )   (1,093 )
   

Total adjustments

    (4,801 )   (1,972 )
   

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

    2,839     (4,571 )

Net cash provided by operating activities – discontinued operations

        3,370  
   

Net cash provided by (used in) operating activities

    2,839     (1,201 )
   

Cash flows from investing activities:

             

Proceeds from (payments for)

             

Sales of available for sale and hybrid investments

    30,789     33,063  

Maturities of fixed maturity securities available for sale and hybrid investments

    16,623     15,021  

Sales of trading securities

    14,541     9,105  

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

    11,007     6,539  

Sales of divested businesses, net

        587  

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

    2,251     2,515  

Purchases of available for sale and hybrid investments

    (47,842 )   (69,598 )

Purchases of trading securities

    (2,871 )   (960 )

Purchases of other invested assets (including flight equipment)

    (4,871 )   (5,351 )

Mortgage and other loans receivable issued and purchased

    (2,110 )   (1,735 )

Net change in restricted cash

    695     26,408  

Net change in short-term investments

    1,141     15,410  

Net change in derivative assets and liabilities

    (118 )   982  

Other, net

    (77 )   (318 )
   

Net cash provided by investing activities – continuing operations

    19,158     31,668  

Net cash provided by investing activities – discontinued operations

        4,478  
   

Net cash provided by investing activities

    19,158     36,146  
   

Cash flows from financing activities:

             

Proceeds from (payments for)

             

Policyholder contract deposits

    10,092     13,907  

Policyholder contract withdrawals

    (10,426 )   (10,538 )

FRBNY credit facility repayments

        (14,622 )

Issuance of long-term debt

    7,985     6,297  

Repayments of long-term debt

    (9,847 )   (14,944 )

Proceeds from drawdown on the Department of the Treasury Commitment

        20,292  

Repayment of Department of the Treasury SPV Preferred Interests

    (8,636 )   (11,453 )

Repayment of FRBNY SPV Preferred Interests

        (26,432 )

Issuance of Common Stock

        5,055  

Purchase of Common Stock

    (13,000 )    

Acquisition of noncontrolling interest

    (175 )   (683 )

Other, net

    2,153     (381 )
   

Net cash used in financing activities – continuing operations

    (21,854 )   (33,502 )

Net cash used in financing activities – discontinued operations

        (1,942 )
   

Net cash used in financing activities

    (21,854 )   (35,444 )
   

Effect of exchange rate changes on cash

    (9 )   37  
   

Net increase (decrease) in cash

    134     (462 )

Cash at beginning of period

    1,474     1,558  

Change in cash of businesses held for sale

        446  
   

Cash at end of period

  $ 1,608   $ 1,542  
   

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.

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Supplementary Disclosure of Consolidated Cash Flow Information

 
   
   
 
   
Nine Months Ended September 30,
(in millions)
  2012
  2011
 
   

Cash paid during the period for:

             

Interest*

  $ 3,056   $ 7,952  

Taxes

  $ 403   $ 643  

Non-cash financing/investing activities:

             

Interest credited to policyholder contract deposits included in financing activities

  $ 3,375   $ 3,602  
   

*         2011 includes payment of accrued compounded interest of $4.7 billion under the Credit Agreement, dated as of September 22, 2008, as amended between AIG and the Federal Reserve Bank of New York (the FRBNY and, such credit agreement, 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 FRBNY and the AIG Credit Facility Trust, including the repayment of all amounts owed under the FRBNY Credit Facility.

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. BASIS OF PRESENTATION

 

American International Group, Inc. (AIG) is a leading international insurance organization serving customers in more than 130 countries. AIG companies serve commercial, institutional and individual customers through one of the most extensive worldwide property-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG Common Stock, par value $2.50 per share (AIG Common Stock), is listed on the New York Stock Exchange and the Tokyo Stock Exchange. The United States Department of the Treasury (Department of the Treasury) owned approximately 15.9 percent of AIG Common Stock outstanding as of September 30, 2012. See Note 10 herein for additional information on the Department of the Treasury's ownership of AIG Common Stock and the registered public offerings of AIG Common Stock initiated by the Department of the Treasury in 2012.

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 Forms 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 September 30, 2012 and prior to the issuance of these consolidated financial statements. All material intercompany accounts and transactions have been eliminated.

Revisions to Prior Year Financial Statements

 

On January 1, 2012, AIG retrospectively 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 the 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. Specifically, amounts attributable to derivative activity where AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (collectively, AIGFP) executed transactions with third parties on behalf of AIG subsidiaries have been reclassified from Other income 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 in accordance 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

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

application of estimates and assumptions to be those relating to items considered by management in the determination of:

income tax assets and liabilities, 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;

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

liabilities for legal contingencies; and

fair value measurements of certain financial assets and liabilities.

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.

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. 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.

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 intends to adopt the standard on its required effective date of January 1, 2013. 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 DAC. 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

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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.

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  
   

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

   
Three Months Ended September 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)

  $ 604   $ 3   $ 607  
   

Total revenues

    12,716     3     12,719  
   

Interest credited to policyholder account balances

    1,134     12     1,146  

Amortization of deferred acquisition costs

    2,490     (950 )   1,540  

Other acquisition and other insurance expenses

    1,214     853     2,067  
   

Total benefits, claims and expenses

    17,074     (85 )   16,989  
   

Loss from continuing operations before income tax benefit

    (4,358 )   88     (4,270 )
   

Income tax benefit(b)

    (634 )   (31 )   (665 )
   

Loss from continuing operations

    (3,724 )   119     (3,605 )

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

    (221 )       (221 )
   

Net loss

    (3,945 )   119     (3,826 )
   

Net loss attributable to AIG

    (4,109 )   119     (3,990 )
   

Net loss attributable to AIG common shareholders

    (4,109 )   119     (3,990 )
   

Loss per share attributable to AIG common shareholders:

                   

Basic:

                   

Loss from continuing operations

  $ (2.05 ) $ 0.06   $ (1.99 )

Loss from discontinued operations

  $ (0.11 ) $   $ (0.11 )

Diluted

                   

Loss from continuing operations

  $ (2.05 ) $ 0.06   $ (1.99 )

Loss from discontinued operations

  $ (0.11 ) $   $ (0.11 )
   

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

   
Nine Months Ended September 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)

  $ (63 ) $ 10   $ (53 )
   

Total revenues

    46,828     10     46,838  
   

Interest credited to policyholder account balances

    3,349     17     3,366  

Amortization of deferred acquisition costs

    5,992     (1,899 )   4,093  

Other acquisition and other insurance expenses

    4,418     1,746     6,164  
   

Total benefits, claims and expenses

    50,760     (136 )   50,624  
   

Loss from continuing operations before income tax benefit

    (3,932 )   146     (3,786 )
   

Income tax benefit(b)

    (1,122 )   (65 )   (1,187 )
   

Loss from continuing operations

    (2,810 )   211     (2,599 )

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

    1,395     932     2,327  
   

Net loss

    (1,415 )   1,143     (272 )
   

Net loss attributable to AIG

    (2,000 )   1,143     (857 )
   

Net loss attributable to AIG common shareholders

    (2,812 )   1,143     (1,669 )
   

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

                   

Basic:

                   

Loss from continuing operations

  $ (2.37 ) $ 0.12   $ (2.25 )

Income from discontinued operations

  $ 0.78   $ 0.52   $ 1.30  

Diluted

                   

Loss from continuing operations

  $ (2.37 ) $ 0.12   $ (2.25 )

Income from discontinued operations

  $ 0.78   $ 0.52   $ 1.30  
   

(a)     Includes $192 million and $110 million for the three and nine months ended September 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 each 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.

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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.

   
Nine Months Ended September 30, 2011
(in millions)
  As Previously
Reported

  Effect of
Change

  As Currently
Reported

 
   

Cash flows from operating activities:

                   

Net loss

  $ (1,415 ) $ 1,143   $ (272 )

(Income) from discontinued operations

    (1,395 )   (932 )   (2,327 )
   

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

                   

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

                   

Unrealized losses in earnings – net*

    724     (10 )   714  

Depreciation and other amortization

    7,500     (1,882 )   5,618  

Changes in operating assets and liabilities:

                   

Capitalization of deferred policy acquisition costs

    (5,856 )   1,746     (4,110 )

Current and deferred income taxes – net

    (1,764 )   (65 )   (1,829 )

Total adjustments

    (1,761 )   (211 )   (1,972 )
   

*         Includes $118 million for the nine months ended September 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. As a consequence, 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, there are no repurchase agreements that continue to be accounted for as sales as of September 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 September 30, 2012, there were no such modifications subsequent to the adoption of the standard.

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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 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 have any effect on AIG's consolidated financial condition, results of operations or cash flows.

3. SEGMENT INFORMATION

 

Commencing in the third quarter of 2012, the Chartis segment was renamed AIG Property Casualty and the SunAmerica segment was renamed AIG Life and Retirement, although certain existing brands will continue to be used.

AIG reports the results of its operations through three reportable segments: AIG Property Casualty, AIG Life and Retirement 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 AIG Property Casualty businesses to assess performance and make decisions about resources to be allocated, certain products previously reported in Commercial Insurance were reclassified to

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Consumer Insurance. These revisions did not affect the total AIG Property Casualty reportable segment results previously reported.

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

   
 
  Reportable Segment    
   
   
 
 
   
  Consolidation
and
Eliminations

   
 
(in millions)
  AIG Property
Casualty

  AIG Life and
Retirement

  Aircraft
Leasing*

  Other
Operations

  Consolidated
 
   

Three Months Ended September 30, 2012

                                     

Total revenues                              

  $ 10,149   $ 4,530   $ 1,146   $ 2,213   $ (390 ) $ 17,648  

Pre-tax income (loss)                              

    949     889     40     891     (174 )   2,595  
   

Three Months Ended September 30, 2011

                                     

Total revenues

  $ 10,185   $ 3,582   $ 1,106   $ (2,433 ) $ 279   $ 12,719  

Pre-tax income (loss)

    551     346     (1,329 )   (3,945 )   107     (4,270 )
   

Nine Months Ended September 30, 2012

                                     

Total revenues                              

  $ 29,967   $ 12,439   $ 3,421   $ 8,085   $ (698 ) $ 53,214  

Pre-tax income (loss)                              

    2,820     2,528     246     3,511     (175 )   8,930  
   

Nine Months Ended September 30, 2011

                                     

Total revenues

  $ 30,283   $ 11,317   $ 3,366   $ 1,864   $ 8   $ 46,838  

Pre-tax income (loss)

    1,003     2,079     (1,122 )   (5,855 )   109     (3,786 )
   

*         AIG's Aircraft Leasing operations consist of a single operating segment.

The following table presents AIG Property Casualty operations by operating segment:

   
(in millions)
  Commercial
Insurance

  Consumer
Insurance

  Other
  Total AIG
Property
Casualty

 
   

Three Months Ended September 30, 2012

                         

Total revenues

  $ 5,975   $ 3,582   $ 592   $ 10,149  

Pre-tax income

    321     152     476     949  
   

Three Months Ended September 30, 2011

                         

Total revenues

  $ 6,402   $ 3,523   $ 260   $ 10,185  

Pre-tax income

    405     21     125     551  
   

Nine Months Ended September 30, 2012

                         

Total revenues

  $ 17,991   $ 10,758   $ 1,218   $ 29,967  

Pre-tax income

    1,480     578     762     2,820  
   

Nine Months Ended September 30, 2011

                         

Total revenues

  $ 18,905   $ 10,439   $ 939   $ 30,283  

Pre-tax income (loss)

    650     (175 )   528     1,003  
   

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following table presents AIG Life and Retirement operations by operating segment:

   
(in millions)
  Life
Insurance

  Retirement
Services

  Total
AIG Life and
Retirement

 
   

Three Months Ended September 30, 2012

                   

Total revenues

  $ 2,663   $ 1,867   $ 4,530  

Pre-tax income

    553     336     889  
   

Three Months Ended September 30, 2011

                   

Total revenues

  $ 2,134   $ 1,448   $ 3,582  

Pre-tax income (loss)

    472     (126 )   346  
   

Nine Months Ended September 30, 2012

                   

Total revenues

  $ 7,306   $ 5,133   $ 12,439  

Pre-tax income

    1,714     814     2,528  
   

Nine Months Ended September 30, 2011

                   

Total revenues

  $ 6,242   $ 5,075   $ 11,317  

Pre-tax income

    1,174     905     2,079  
   

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 September 30, 2012

                                           

Total revenues

  $ 218   $ 235   $ 506   $ 857   $ 412   $ (15 ) $ 2,213  

Pre-tax income (loss)

    6     190     406     857     (566 )   (2 )   891  
   

Three Months Ended September 30, 2011

                                           

Total revenues

  $ 246   $ (130 ) $ 159   $ (3,246 ) $ 561   $ (23 ) $ (2,433 )

Pre-tax income (loss)

    (82 )   (187 )   103     (3,246 )   (523 )   (10 )   (3,945 )
   

Nine Months Ended September 30, 2012

                                           

Total revenues

  $ 642   $ 405   $ 1,434   $ 4,717   $ 925   $ (38 ) $ 8,085  

Pre-tax income (loss)

    62     253     1,139     4,717     (2,659 )   (1 )   3,511  
   

Nine Months Ended September 30, 2011

                                           

Total revenues

  $ 716   $ 151   $ 758   $ (743 ) $ 1,030   $ (48 ) $ 1,864  

Pre-tax income (loss)

    (68 )   (66 )   586     (743 )   (5,538 )   (26 )   (5,855 )
   

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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 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.

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.

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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 observability of the inputs used:

   

                                     
 
 
September 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

  $ 28   $ 4,380   $   $   $   $ 4,408  

Obligations of states, municipalities and political subdivisions

        35,360     1,104             36,464  

Non-U.S. governments

    742     25,542     14             26,298  

Corporate debt

        148,528     1,612             150,140  

RMBS

        23,692     11,488             35,180  

CMBS

        4,469     5,013             9,482  

CDO/ABS

        3,293     4,649             7,942  
   

Total bonds available for sale

    770     245,264     23,880             269,914  
   

Bond trading securities:

                                     

U.S. government and government sponsored entities

    302     7,406                 7,708  

Obligations of states, municipalities and political subdivisions

        81                 81  

Non-U.S. governments

        2                 2  

Corporate debt

        1,316     2             1,318  

RMBS

        1,101     370             1,471  

CMBS

        1,490     612             2,102  

CDO/ABS

        3,650     8,505             12,155  
   

Total bond trading securities

    302     15,046     9,489             24,837  
   

Equity securities available for sale:

                                     

Common stock

    2,781     1     40             2,822  

Preferred stock

        48     45             93  

Mutual funds

    86     20                 106  
   

Total equity securities available for sale

    2,867     69     85             3,021  
   

Equity securities trading

    17     81                 98  

Mortgage and other loans receivable

        129     1             130  

Other invested assets(c)

    6,257     1,706     7,070             15,033  

Derivative assets:

                                     

Interest rate contracts

    11     6,278     996             7,285  

Foreign exchange contracts

        53                 53  

Equity contracts

    113     98     53             264  

Commodity contracts

        141     1             142  

Credit contracts

        1     59             60  

Other contracts

        11     57             68  

Counterparty netting and cash collateral

                (3,219 )   (1,197 )   (4,416 )
   

Total derivative assets

    124     6,582     1,166     (3,219 )   (1,197 )   3,456  
   

Short-term investments

    592     6,708                 7,300  

Separate account assets

    53,829     2,911                 56,740  

Other assets

        698                 698  
   

Total

  $ 64,758   $ 279,194   $ 41,691   $ (3,219 ) $ (1,197 ) $ 381,227  
   

Liabilities:

                                     

Policyholder contract deposits

  $   $   $ 1,308   $   $   $ 1,308  

Derivative liabilities:

                                     

Interest rate contracts

        6,303     243             6,546  

Foreign exchange contracts

        166                 166  

Equity contracts

    2     159     10             171  

Commodity contracts

        143                 143  

Credit contracts(d)

            2,349             2,349  

Other contracts

        26     250             276  

Counterparty netting and cash collateral

                (3,219 )   (2,118 )   (5,337 )
   

Total derivative liabilities

    2     6,797     2,852     (3,219 )   (2,118 )   4,314  
   

Other long-term debt(e)

        8,428     407             8,835  

Other liabilities

    138     792                 930  
   

Total

  $ 140   $ 16,017   $ 4,567   $ (3,219 ) $ (2,118 ) $ 15,387  
   

18


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

    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  
   

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(d)

        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(e)

        10,258     508             10,766  

Other liabilities

    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 $1.8 billion and $177 million, respectively, at September 30, 2012 and $1.8 billion and $100 million, respectively, at December 31, 2011.

(c)      Included in Level 1 are $6.1 billion and $12.4 billion at September 30, 2012 and December 31, 2011, respectively, of AIA ordinary shares publicly traded on the Hong Kong Stock Exchange.

(d)      Included in Level 3 is the fair value derivative liability of $2.3 billion and $3.2 billion at September 30, 2012 and December 31, 2011, respectively, on the super senior credit default swap portfolio.

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

19


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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 nine-month periods ended September 30, 2012, AIG transferred $148 million and $284 million of securities issued by Non-U.S. government entities from Level 1 to Level 2, respectively, as they are no longer considered actively traded. For similar reasons, during the three- and nine-month periods ended September 30, 2012, AIG transferred $743 million of securities issued by the U.S. government and government-sponsored entities from Level 1 to Level 2. AIG had no material transfers from Level 2 to Level 1 during the three- and nine-month periods ended September 30, 2012.

Changes in Level 3 Recurring Fair Value Measurements

 

The following tables present changes during the three-and nine-month periods ended September 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 September 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 September 30, 2012

                                                 

Assets:

                                                 

Bonds available for sale:

                                                 

Obligations of states, municipalities and political subdivisions             

  $ 1,013   $ 16   $   $ 102   $ 25   $ (52 ) $ 1,104   $  

Non-U.S. governments

    13     1     (1 )   2         (1 )   14      

Corporate debt

    1,306     10     35     94     233     (66 )   1,612      

RMBS

    10,488     197     1,029     (678 )   566     (114 )   11,488      

CMBS

    4,643     (17 )   271     115     1         5,013      

CDO/ABS

    5,074     87     82     (129 )   63     (528 )   4,649      
   

Total bonds available for sale

    22,537     294     1,416     (494 )   888     (761 )   23,880      
   

Bond trading securities:

                                                 

Corporate debt

    3             (1 )           2      

RMBS

    290     40         (56 )   97     (1 )   370     12  

CMBS

    457     (3 )       1     157         612     (19 )

CDO/ABS

    14,647     581         (6,780 )   57         8,505     427  
   

Total bond trading securities

    15,397     618         (6,836 )   311     (1 )   9,489     420  
   

Equity securities available for sale:             

                                                 

Common stock

    41         (1 )               40      

Preferred stock

    139     15     (12 )   (104 )   8     (1 )   45      
   

Total equity securities available for sale

    180     15     (13 )   (104 )   8     (1 )   85      
   

Mortgage and other loans receivable

    1                         1      

Other invested assets

    7,049     22     8     (90 )   126     (45 )   7,070      
   

Total

  $ 45,164   $ 949   $ 1,411   $ (7,524 ) $ 1,333   $ (808 ) $ 40,525   $ 420  
   

20


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

 
   

Liabilities:

                                                 

Policyholder contract deposits

  $ (1,188 ) $ (45 ) $ (72 ) $ (3 ) $   $   $ (1,308 ) $ 279  

Derivative liabilities, net:

                                                 

Interest rate contracts

    761     (55 )       47             753     11  

Foreign exchange contracts

                                 

Equity contracts

    28     18         (4 )   1         43      

Commodity contracts

    2     4         (3 )       (2 )   1     (1 )

Credit contracts

    (2,587 )   208         89             (2,290 )   (360 )

Other contracts

    (154 )   (122 )   (6 )   73     16         (193 )   14  
   

Total derivative liabilities, net

    (1,950 )   53     (6 )   202     17     (2 )   (1,686 )   (336 )
   

Other long-term debt(b)

    (407 )   (27 )       61     (34 )       (407 )   170  
   

Total

  $ (3,545 ) $ (19 ) $ (78 ) $ 260   $ (17 ) $ (2 ) $ (3,401 ) $ 113  
   

Nine Months Ended September 30, 2012

                                                 

Assets:

                                                 

Bonds available for sale:

                                                 

Obligations of states, municipalities and political subdivisions             

  $ 960   $ 48   $ 11   $ 139   $ 70   $ (124 ) $ 1,104   $  

Non-U.S. governments

    9     1             5     (1 )   14      

Corporate debt

    1,935     (7 )   104     96     579     (1,095 )   1,612      

RMBS

    10,877     322     1,832     32     921     (2,496 )   11,488      

CMBS

    3,955     (84 )   572     618     44     (92 )   5,013      

CDO/ABS

    4,220     127     348     (150 )   669     (565 )   4,649      
   

Total bonds available for sale

    21,956     407     2,867     735     2,288     (4,373 )   23,880      
   

Bond trading securities:

                                                 

Corporate debt

    7             (5 )           2      

RMBS

    303     68         (94 )   97     (4 )   370     18  

CMBS

    554     46         (121 )   193     (60 )   612     45  

CDO/ABS

    8,432     3,646         (3,630 )   57         8,505     2,635  
   

Total bond trading securities

    9,296     3,760         (3,850 )   347     (64 )   9,489     2,698  
   

Equity securities available for sale:             

                                                 

Common stock

    57     23     (13 )   (33 )   6         40      

Preferred stock

    99     17     (35 )   (35 )   11   &