FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2012

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

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 on Form 10-K 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 U.S. 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.

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:

March 31, 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	$	-	$	4,786	$	-	$	-		$	-		$	4,786
Obligations of states, municipalities and political subdivisions		-		36,628		1,054		-			-			37,682
Non-U.S. governments		396		25,711		15		-			-			26,122
Corporate debt		-		145,157		1,323		-			-			146,480
RMBS		-		21,811		13,240		-			-			35,051
CMBS		-		3,890		4,173		-			-			8,063
CDO/ABS		-		3,296		4,882		-			-			8,178
Total bonds available for sale		396		241,279		24,687		-			-			266,362
Bond trading securities:
U.S. government and government sponsored entities		505		6,951		-		-			-			7,456
Obligations of states, municipalities and political subdivisions		-		236		-		-			-			236
Non-U.S. governments		-		36		-		-			-			36
Corporate debt		-		1,088		5		-			-			1,093
RMBS		-		1,339		314		-			-			1,653
CMBS		-		1,280		433		-			-			1,713
CDO/ABS		-		3,878		8,416		-			-			12,294
Total bond trading securities		505		14,808		9,168		-			-			24,481
Equity securities available for sale:
Common stock		2,754		1		50		-			-			2,805
Preferred stock		-		48		106		-			-			154
Mutual funds		54		13		-		-			-			67
Total equity securities available for sale		2,808		62		156		-			-			3,026
Equity securities trading		38		85		-		-			-			123
Mortgage and other loans receivable		-		113		1		-			-			114
Other invested assets(c)		8,332		1,576		7,186		-			-			17,094
Derivative assets:
Interest rate contracts		2		6,510		1,015		-			-			7,527
Foreign exchange contracts		-		38		-		-			-			38
Equity contracts		110		128		48		-			-			286
Commodity contracts		-		153		2		-			-			155
Credit contracts		-		1		64		-			-			65
Other contracts		-		480		214		-			-			694
Counterparty netting and cash collateral		-		-		-		(3,264	)		(1,280	)		(4,544	)
Total derivative assets		112		7,310		1,343		(3,264	)		(1,280	)		4,221
Short-term investments(d)		433		3,975		-		-			-			4,408
Separate account assets		53,210		2,815		-		-			-			56,025
Other assets		-		701		-		-			-			701
Total	$	65,834	$	272,724	$	42,541	$	(3,264	)	$	(1,280	)	$	376,555
Liabilities:
Policyholder contract deposits	$	-	$	-	$	782	$	-		$	-		$	782
Derivative liabilities:
Interest rate contracts		-		6,307		237		-			-			6,544
Foreign exchange contracts		-		165		-		-			-			165
Equity contracts		1		232		8		-			-			241
Commodity contracts		-		156		-		-			-			156
Credit contracts(e)		-		2		2,769		-			-			2,771
Other contracts		-		159		251		-			-			410
Counterparty netting and cash collateral		-		-		-		(3,264	)		(2,801	)		(6,065	)
Total derivative liabilities		1		7,021		3,265		(3,264	)		(2,801	)		4,222
Other long-term debt(f)		-		10,004		575		-			-			10,579
Other liabilities(g)		111		1,405		-		-			-			1,516
Total	$	112	$	18,430	$	4,622	$	(3,264	)	$	(2,801	)	$	17,099

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
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 $1.2 billion and $87 million, respectively, at March 31, 2012 and $1.8 billion and $100 million, respectively, at December 31, 2011.

(c)

Included in Level 1 are $8.2 billion and $12.4 billion at March 31, 2012 and December 31, 2011, respectively, of AIA 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 March 31, 2012 and December 31, 2011. AIG's ownership in these funds represented 63.6 percent, or $0.9 billion, of Level 3 assets at March 31, 2012 and 57.3 percent, or $0.8 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 March 31, 2012 and December 31, 2011, respectively.

(e)

Included in Level 3 is the fair value derivative liability of $2.6 billion and $3.2 billion at March 31, 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 $1.4 billion and $53 million, respectively, at March 31, 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. AIG had no material transfers between Level 1 and Level 2 during the three-month period ended March 31, 2012.

CHANGES IN LEVEL 3 RECURRING FAIR VALUE MEASUREMENTS

The following tables present changes during the three-month period ended March 31, 2012 and 2011 in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) recorded in the Consolidated Statement of Operations during those periods related to the Level 3 assets and liabilities that remained in the Consolidated Balance Sheet at March 31, 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 March 31, 2012
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	960		$	1		$	16		$	100		$	-		$	(23	)	$	1,054		$	-
Non-U.S. governments		9			-			8			(2	)		-			-			15			-
Corporate debt		1,935			(16	)		76			(3	)		291			(960	)		1,323			-
RMBS		10,877			(70	)		793			1,326			348			(34	)		13,240			-
CMBS		3,955			(69	)		287			11			31			(42	)		4,173			-
CDO/ABS		4,220			14			177			70			438			(37	)		4,882			-
Total bonds available for sale		21,956			(140	)		1,357			1,502			1,108			(1,096	)		24,687			-
Bond trading securities:
Corporate debt		7			-			-			(2	)		-			-			5			-
RMBS		303			33			-			(19	)		-			(3	)		314			39
CMBS		554			33			-			(135	)		32			(51	)		433			85
CDO/ABS		8,432			1,621			-			(1,637	)		-			-			8,416			2,122
Total bond trading securities		9,296			1,687			-			(1,793	)		32			(54	)		9,168			2,246
Equity securities available for sale:
Common stock		57			14			(12	)		(14	)		5			-			50			-
Preferred stock		99			2			8			8			-			(11	)		106			-
Total equity securities available for sale		156			16			(4	)		(6	)		5			(11	)		156			-
Mortgage and other loans receivable		1			-			-			-			-			-			1			-
Other invested assets		6,618			(147	)		210			101			742			(338	)		7,186			(4	)
Total	$	38,027		$	1,416		$	1,563		$	(196	)	$	1,887		$	(1,499	)	$	41,198		$	2,242
Liabilities:
Policyholder contract deposits	$	(918	)	$	139		$	-		$	(3	)	$	-		$	-		$	(782	)	$	(144	)
Derivative liabilities, net:
Interest rate contracts		785			-			-			(7	)		-			-			778			(23	)
Foreign exchange contracts		2			-			-			(2	)		-			-			-			-
Equity contracts		28			12			-			2			(2	)		-			40			10
Commodity contracts		2			-			-			-			-			-			2			-
Credit contracts		(3,273	)		(143	)		-			711			-			-			(2,705	)		(525	)
Other contracts		33			(410	)		9			412			(81	)		-			(37	)		24
Total derivative liabilities, net		(2,423	)		(541	)		9			1,116			(83	)		-			(1,922	)		(514	)
Other long-term debt(b)		(508	)		(110	)		(77	)		114			-			6			(575	)		(104	)
Total	$	(3,849	)	$	(512	)	$	(68	)	$	1,227		$	(83	)	$	6		$	(3,279	)	$	(762	)

(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 March 31, 2011
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	609		$	-		$	4		$	112		$	-		$	(23	)	$	702		$	-
Non-U.S. governments		5			-			-			-			-			-			5			-
Corporate debt		2,262			(3	)		7			(33	)		226			(1,224	)		1,235			-
RMBS		6,367			(81	)		533			38			11			-			6,868			-
CMBS		3,604			(27	)		664			72			25			(22	)		4,316			-
CDO/ABS		4,241			20			238			(455	)		72			(259	)		3,857			-
Total bonds available for sale		17,088			(91	)		1,446			(266	)		334			(1,528	)		16,983			-
Bond trading securities:
Corporate debt		-			-			-			-			18			-			18			-
RMBS		91			2			-			6			-			-			99			2
CMBS		506			38			-			(58	)		81			(44	)		523			39
CDO/ABS		9,431			1,030			5			(5	)		-			-			10,461			1,027
Total bond trading securities		10,028			1,070			5			(57	)		99			(44	)		11,101			1,068
Equity securities available for sale:
Common stock		61			15			(2	)		(15	)		6			(2	)		63			-
Preferred stock		64			(2	)		-			1			-			-			63			-
Total equity securities available for sale		125			13			(2	)		(14	)		6			(2	)		126			-
Equity securities trading		1			-			-			-			-			-			1			-
Other invested assets		7,414			53			343			(350	)		-			(390	)		7,070			(192	)
Total	$	34,656		$	1,045		$	1,792		$	(687	)	$	439		$	(1,964	)	$	35,281		$	876
Liabilities:
Policyholder contract deposits	$	(445	)	$	79		$	-		$	(3	)	$	-		$	-		$	(369	)	$	(93	)
Derivative liabilities, net:
Interest rate contracts		732			(116	)		-			3			-			-			619			(25	)
Foreign exchange contracts		16			-			-			-			-			-			16			-
Equity contracts		22			(7	)		-			38			-			(19	)		34			(7	)
Commodity contracts		23			3			-			(11	)		-			-			15			2
Credit contracts		(3,798	)		382			-			(4	)		-			-			(3,420	)		381
Other contracts		(112	)		4			25			50			-			27			(6	)		(70	)
Total derivatives liabilities, net		(3,117	)		266			25			76			-			8			(2,742	)		281
Other long-term debt(b)		(982	)		(54	)		-			61			(21	)		-			(996	)		(42	)
Total	$	(4,544	)	$	291		$	25		$	134		$	(21	)	$	8		$	(4,107	)	$	146

(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.

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 March 31, 2012
Bonds available for sale	$	231		$	(375	)	$	4		$	(140	)
Bond trading securities		1,549			-			138			1,687
Equity securities available for sale		-			16			-			16
Other invested assets		(14	)		(132	)		(1	)		(147	)
Policyholder contract deposits		-			139			-			139
Derivative liabilities, net		(1	)		19			(559	)		(541	)
Other long-term debt		-			-			(110	)		(110	)
Three Months Ended March 31, 2011
Bonds available for sale	$	81		$	(176	)	$	4		$	(91	)
Bond trading securities		1,001			-			69			1,070
Equity securities available for sale		-			13			-			13
Other invested assets		46			(15	)		22			53
Policyholder contract deposits		-			79			-			79
Derivative liabilities, net		-			(54	)		320			266
Other long-term debt		-			-			(54	)		(54	)

The following table presents 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 March 31, 2012
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	108	$	(8	)	$	-		$	100
Non-U.S. governments		-		(2	)		-			(2	)
Corporate debt		61		(1	)		(63	)		(3	)
RMBS		1,912		(94	)		(492	)		1,326
CMBS		126		(64	)		(51	)		11
CDO/ABS		317		(4	)		(243	)		70
Total bonds available for sale		2,524		(173	)		(849	)		1,502
Bond trading securities:
Corporate debt		-		-			(2	)		(2	)
RMBS		-		-			(19	)		(19	)
CMBS		113		(57	)		(191	)		(135	)
CDO/ABS		-		(310	)		(1,327	)		(1,637	)
Total bond trading securities		113		(367	)		(1,539	)		(1,793	)
Equity securities available for sale:
Common stock		-		(14	)		-			(14	)
Preferred stock		11		-			(3	)		8
Total equity securities available for sale		11		(14	)		(3	)		(6	)
Other invested assets		266		(4	)		(161	)		101
Total assets	$	2,914	$	(558	)	$	(2,552	)	$	(196	)
Liabilities:
Policyholder contract deposits	$	-	$	(6	)	$	3		$	(3	)
Derivative liabilities, net:
Interest rate contracts		-		-			(7	)		(7	)
Foreign exchange contracts		-		-			(2	)		(2	)
Equity contracts		2		-			-			2
Credit contracts		-		-			711			711
Other contracts		-		-			412			412
Total derivative liabilities, net		2		-			1,114			1,116
Other long-term debt(b)		-		-			114			114
Total liabilities	$	2	$	(6	)	$	1,231		$	1,227

(in millions)	Purchases		Sales			Settlements			Purchases, Sales, Issues and Settlements, Net(a)
Three Months Ended March 31, 2011
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	113	$	-		$	(1	)	$	112
Corporate debt		8		(19	)		(22	)		(33	)
RMBS		317		(13	)		(266	)		38
CMBS		142		-			(70	)		72
CDO/ABS		65		-			(520	)		(455	)
Total bonds available for sale		645		(32	)		(879	)		(266	)
Bond trading securities:
RMBS		-		-			6			6
CMBS		-		(5	)		(53	)		(58	)
CDO/ABS		3		-			(8	)		(5	)
Total bond trading securities		3		(5	)		(55	)		(57	)
Equity securities available for sale:
Common stock		-		(15	)		-			(15	)
Preferred stock		-		-			1			1
Mutual funds		-		-			-			-
Total equity securities available for sale		-		(15	)		1			(14	)
Other invested assets		114		(12	)		(452	)		(350	)
Total assets	$	762	$	(64	)	$	(1,385	)	$	(687	)
Liabilities:
Policyholder contract deposits	$	-	$	(9	)	$	6		$	(3	)
Derivative liabilities, net:
Interest rate contracts		-		-			3			3
Equity contracts		39		-			(1	)		38
Commodity contracts		-		-			(11	)		(11	)
Credit contracts		-		-			(4	)		(4	)
Other contracts		-		-			50			50
Total derivative liabilities, net		39		-			37			76
Other long-term debt(b)		-		-			61			61
Total liabilities	$	39	$	(9	)	$	104		$	134

(a)

There were no issues during the three-month periods ended March 31, 2012 and 2011.

(b)

Includes GIAs, notes, bonds, loans and mortgages payable.

    Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3 in the tables above. As a result, the unrealized gains (losses) on instruments held at March 31, 2012 and 2011 may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable inputs (e.g., changes in unobservable long-dated volatilities).

Transfers of Level 3 Assets and Liabilities

    AIG's policy is to record transfers of assets and liabilities into or out of Level 3 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. As a result, the Net realized and unrealized gains (losses) included in income or other comprehensive income and as shown in the table above excludes $58 million of net losses related to assets and liabilities transferred into Level 3 during the three-month period ended March 31, 2012, and includes $27 million of net gains related to assets and liabilities transferred out of Level 3 during the three-month period ended March 31, 2012.

Transfers of Level 3 Assets

    During the three-month period ended March 31, 2012, transfers into Level 3 included certain residential mortgage-backed securities (RMBS), asset-backed securities (ABS), private placement corporate debt and certain private equity funds and hedge funds. Transfers into Level 3 for certain RMBS and certain ABS were related to decreased observations of market transactions and price information for those securities. The transfers into Level 3 of investments in certain other RMBS were due to a decrease in market transparency, downward credit migration and an overall increase in price disparity for certain individual security types. Transfers into Level 3 for private placement corporate debt and certain other ABS were primarily the result of limited market pricing information that required AIG to determine fair value for these securities based on inputs that are adjusted to better reflect AIG's own assumptions regarding the characteristics of a specific security or associated market liquidity. Certain private equity fund and hedge fund investments were transferred into Level 3 due to these investments being carried at fair value and no longer being accounted for using the equity method of accounting, consistent with the changes to AIG's ownership and lack of ability to exercise significant influence over the respective investments. Other hedge fund investments were transferred into Level 3 as a result of limited market activity due to fund-imposed redemption restrictions.

    Assets are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data. This may be due to a significant increase in market activity for the asset, a specific event, one or more significant input(s) becoming observable or a long-term interest rate significant to a valuation becoming short-term and thus observable. In addition, transfers out of Level 3 also occur when investments are no longer carried at fair value as the result of a change in the applicable accounting methodology, given changes in the nature and extent of AIG's ownership interest. During the three-month period ended March 31, 2012, transfers out of Level 3 primarily related to investments in private placement corporate debt and certain private equity funds and hedge funds. Transfers out of Level 3 for private placement corporate debt were primarily the result of AIG using observable pricing information that appropriately reflects the fair value of those securities without the need for adjustment based on AIG's own assumptions regarding the characteristics of a specific security or the current liquidity in the market. Certain private equity funds and hedge funds were transferred out of Level 3, substantially all attributable to the hedge funds no longer being subject to fund-imposed redemption restrictions.

Transfers of Level 3 Liabilities

    As AIG presents carrying values of its derivative positions on a net basis in the table above, transfers into Level 3 liabilities, which totaled approximately $83 million during the three-month period ended March 31, 2012, primarily related to certain derivative assets transferred out of Level 3 because of the presence of observable inputs on certain forward commitments. Other transfers into Level 3 liabilities were due to movement in market variables. During the three-month period ended March 31, 2012, there were no significant transfers out of Level 3 liabilities.

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

FAIR VALUE MEASUREMENTS ON A NON-RECURRING BASIS

    See Notes 2(c), (e), (f) and (g) to the Consolidated Financial Statements in the 2011 Annual Report on Form 10-K for additional information about how AIG measures the fair value of certain assets on a non-recurring basis and how AIG tests various asset classes for impairment.

The following table presents assets (held as of the dates presented, but excluding discontinued operations) measured at fair value on a non-recurring basis at the time of impairment and the related impairment charges recorded during the periods presented:

									Impairment Charges
	Assets at Fair Value
									Three Months Ended March 31,
	Non-Recurring Basis
(in millions)	Level 1		Level 2		Level 3		Total		2012		2011
March 31, 2012
Investment real estate	$	-	$	-	$	-	$	-	$	-	$	12
Other investments		-		-		1,621		1,621		93		106
Aircraft*		-		-		94		94		54		114
Other assets		-		-		18		18		8		-
Total	$	-	$	-	$	1,733	$	1,733	$	155	$	232
December 31, 2011
Investment real estate	$	-	$	-	$	457	$	457
Other investments		-		-		2,199		2,199
Aircraft		-		-		1,683		1,683
Other assets		-		-		4		4
Total	$	-	$	-	$	4,343	$	4,343

*

Aircraft impairment charges include fair value adjustments on aircraft.

QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENTS

The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments, and includes only those instruments for which information about the inputs is reasonably available to AIG, such as data from pricing vendors and from internal valuation models. Because not all Level 3 instruments have input information reasonably available to AIG, balances shown below may not equal total amounts reported for such Level 3 assets and liabilities:

(in millions)	Fair Value at March 31, 2012		Valuation Technique	Unobservable Input(a)	Range/ (Weighted Average)(a)
Assets:
Corporate debt	$	685	Discounted cash flow	Yield(b)	2.37% - 11.08% (6.73%)
Residential mortgage backed securities		12,326	Discounted cash flow	Constant prepayment rate(c)	0.00% - 16.89% (8.02%)
				Loss severity(c)	44.10% - 79.01% (61.56%)
				Constant default rate(c)	4.34% - 13.83% (9.09%)
				Yield(c)	4.09% - 11.80% (7.95%)
Certain CDO/ABS		1,961	Discounted cash flow	Constant prepayment rate(c)	0.00% - 49.80% (18.55%)
				Loss severity(c)	0.00% - 19.46% (3.22%)
				Constant default rate(c)	0.00% - 2.29% (0.38%)
				Yield(c)	2.29% - 6.57% (4.43%)
Commercial mortgage backed securities		2,665	Discounted cash flow	Yield(c)	0.00% - 24.52% (11.58%)
Maiden Lane III		6,916	Discounted cash flow	Yield(b)	10.93%
CDO/ABS – Direct Investment book		1,579	Binomial Expansion	Recovery rates(b)	3% - 65% (33%)
			Technique (BET)	Diversity score(b)	5 - 75 (10)
				Weighted average life(b)	1.40-9.65 years (4.60 years)
Liabilities :
Policyholder contract deposits – GMWB		509	Discounted cash flow	Equity implied volatility(b)	5.0% - 40.0%
				Base lapse rates(b)	1.0% - 40.0%
				Dynamic lapse rates(b)	0.2% - 60.0%
				Mortality rates(b)	0.5% - 40.0%
				Utilization rates(b)	0.5% - 25.0%
Derivative Liabilities – Credit contracts		1,822	BET	Recovery rates(b)	3% - 37% (17%)
				Diversity score(b)	6 - 44 (13)
				Weighted average life(b)	5.27-9.65 years (6.41 years)

(a)

The unobservable inputs and ranges for the constant prepayment rate, loss severity and constant default rate relate to each of the individual underlying mortgage loans that comprise the entire portfolio of securities in the RMBS and CDO securitization vehicles and not necessarily to the securitization vehicle bonds (tranches) purchased by AIG. The ranges of these inputs do not directly correlate to changes in the fair values of the tranches purchased by AIG because there are other factors relevant to the specific tranches owned by AIG including, but not limited to, purchase price, position in the waterfall, senior versus subordinated position and attachment points.

(b)

Represents discount rates, estimates and assumptions that AIG believes would be used by market participants when valuing these assets and liabilities.

(c)

Information received from independent third-party valuation service providers.

    The ranges of reported inputs for Corporate debt, RMBS, CDO/ABS, and CMBS valued using a discounted cash flow technique consist of +/-one standard deviation in either direction from the value-weighted average. The preceding table does not give effect to AIG's risk management practices that might offset risks inherent in these investments.

Sensitivity to Changes in Unobservable Inputs

    AIG considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to AIG about the assumptions that market participants would use when pricing the asset or liability. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently of changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed above.

Corporate Debt

    Corporate debt securities included in Level 3 are primarily private placement issuances that are not traded in active markets or that are subject to transfer restrictions. Fair value measurements consider illiquidity and non-transferability. When observable price quotations are not available, fair value is determined based on discounted cash flow models using discount rates based on credit spreads, yields or price levels of publicly-traded debt of the issuer or other comparable securities, considering illiquidity and structure. The significant unobservable input used in the fair value measurement of corporate debt is the yield. The yield is affected by the market movements in credit spreads and U.S. Treasury yields. In addition, the migration in credit quality of a given security generally has a corresponding effect on the fair value measurement of the securities. For example, a downward migration of credit quality would increase spreads. Holding U.S. Treasury rates constant, an increase in corporate credit spreads would decrease the fair value of corporate debt.

RMBS and Certain CDO/ABS

    The significant unobservable inputs used in fair value measurements of residential mortgage backed securities and certain CDO/ABS valued by third-party valuation service providers are constant prepayment rates (CPR), constant default rates (CDR), and loss severity. Changes in any of the significant unobservable inputs may affect other inputs used in determining fair value. A change in the assumptions used for the probability of default will generally be accompanied by a corresponding change in the assumption used for the loss severity and an inverse change in the assumption used for prepayment rates. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship between the directional change of each input is not usually linear.

CMBS

    The significant unobservable input used in fair value measurements for commercial mortgage backed securities is the yield. Prepayment assumptions for each mortgage pool are factored into the yield. CMBS generally feature a lower degree of prepayment risk than RMBS because commercial mortgages generally contain a penalty for prepayment. Increases in the yield would decrease the fair value of CMBS.

Maiden Lane III

    Since inception, AIG's interest in ML III has been valued using a discounted cash flow methodology that (i) uses the estimated future cash flows and the fair value of the ML III assets, (ii) allocates the estimated future cash flows according to the ML III waterfall, and (iii) determines the discount rate to be applied to AIG's interest in ML III by reference to the discount rate implied by the estimated value of ML III assets and the estimated future cash flows of AIG's interest in the capital structure. Estimated cash flows and discount rates used in the valuations are validated, to the extent possible, using market observable information for securities with similar asset pools, structure and terms.

    The fair value of AIG's interest in ML III is most affected by changes in the discount rates and changes in the estimated future collateral cash flows used in the valuation. In general, an increase in the discount rate will lead to a decrease in the value of the portfolio and vice versa. The changes, however, are asymmetrical with decreases in discount rates having a more pronounced effect on the value of the ML III portfolio. Changes in estimated future cash flows for ML III are the result of changes in interest rates and their effect on the underlying floating rate securities as well as expectations of defaults, recoveries and prepayments on underlying loans. Changes in estimated future cash flows have an almost symmetrical and almost linear effect on the value of ML III.

    Interest rates are generally indexed to the London Interbank Offered Rate (LIBOR). LIBOR interest rate curve changes are determined based on observable prices, interpolated or extrapolated to derive a LIBOR curve for a specific maturity term as necessary. The spreads over LIBOR used to value the ML III interests can change as a result of changes in market expectations about the future performance of this investment as well as changes in the risk premium that market participants would demand at the time of the transactions.

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

Three Months Ended March 31, 2012 (in millions)	Maiden Lane III Fair Value Change
Discount Rates:
200 basis point increase	$	(717	)
200 basis point decrease		824
400 basis point increase		(1,346	)
400 basis point decrease		1,777
Estimated Future Cash Flows:
10% increase		711
10% decrease		(720	)
20% increase		1,415
20% decrease		(1,451	)

    AIG believes that the ranges of discount rates used in these analyses are reasonable on the basis of implied spread volatilities of similar collateral securities. The ranges of estimated future cash flows were determined on the basis of historical variability in the estimated cash flows. Therefore, the fair value of AIG's interest in ML III is likely to vary, perhaps materially, from the amounts estimated.

    On April 26, 2012, the FRBNY announced that it had sold $7.5 billion of certain assets of ML III pursuant to a competitive bid process that it conducted. If AIG had adopted a liquidation valuation methodology at March 31, 2012, the impact would have increased the fair value of AIG's interest in ML III by approximately $450 million.

    Because the announcement of the asset auction and the auction itself occurred after March 31, 2012, AIG believes a change in the fair value methodology used for its interest in ML III is not appropriate at March 31, 2012. Adjustments to the fair value of AIG's interest in ML III are recorded in the Consolidated Statement of Operations in Net investment income for AIG's Other operations.

CDO/ABS – Direct Investment book

    The significant unobservable inputs used for certain CDO/ABS securities valued using the BET are recovery rates, diversity score, and the weighted average life of the portfolio. An increase in recovery rates and diversity score will have a directionally similar corresponding impact on the fair value measurement of the portfolio. An increase in the weighted average life will decrease the fair value.

Policyholder contract deposits

    The significant unobservable inputs used for embedded derivatives in policyholder contract deposits measured at fair value, mainly guaranteed minimum withdrawal benefits (GMWB) for variable annuity products, are equity volatility, mortality rates, lapse rates and utilization rates. In general, increases in volatilities and utilization rates will increase the fair value, while increases in lapse rates and mortality rates will decrease the fair value of the liability associated with the GMWB.

Derivative liabilities – credit contracts

    The significant unobservable inputs used for Derivatives liabilities – credit contracts are recovery rates, diversity scores, and the weighted average life of the portfolio. AIG non-performance risk is also considered in the measurement of the liability. See Note 6 to the Consolidated Financial Statements in the 2011 Annual Report on Form 10-K for a discussion of AIG's accounting policies and procedures regarding incorporation of AIG's own credit risk in fair value measurements.

    An increase in recovery rates and diversity score will decrease the fair value of the liability. An increase in the weighted average life will have a directionally similar corresponding effect on the fair value measurement of the liability.

INVESTMENTS IN CERTAIN ENTITIES CARRIED AT FAIR VALUE USING NET ASSET VALUE PER SHARE

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

		March 31, 2012				December 31, 2011
(in millions)	Investment Category Includes	Fair Value Using Net Asset Value		Unfunded Commitments		Fair Value Using Net Asset Value		Unfunded Commitments
Investment Category
Private equity funds:
Leveraged buyout	Debt and/or equity investments made as part of a transaction in which assets of mature companies are acquired from the current shareholders, typically with the use of financial leverage	$	3,244	$	900	$	3,185	$	945
Non-U.S.	Investments that focus primarily on Asian and European based buyouts, expansion capital, special situations, turnarounds, venture capital, mezzanine and distressed opportunities strategies		171		54		165		57
Venture capital	Early-stage, high-potential, growth companies expected to generate a return through an eventual realization event, such as an initial public offering or sale of the company		301		37		316		39
Distressed	Securities of companies that are already in default, under bankruptcy protection, or troubled		189		38		182		42
Other	Real estate, energy, multi-strategy, mezzanine, and industry-focused strategies		372		150		252		98
Total private equity funds			4,277		1,179		4,100		1,181
Hedge funds:
Event-driven	Securities of companies undergoing material structural changes, including mergers, acquisitions and other reorganizations		872		2		774		2
Long-short	Securities that the manager believes are undervalued, with corresponding short positions to hedge market risk		1,097		-		927		-
Relative value	Funds that seek to benefit from market inefficiencies and value discrepancies between related investments		48		-		52		-
Distressed	Securities of companies that are already in default, under bankruptcy protection or troubled		289		-		272		10
Other	Non-U.S. companies, futures and commodities, macro and multi-strategy and industry-focused strategies		736		-		748		-
Total hedge funds			3,042		2		2,773		12
Total		$	7,319	$	1,181	$	6,873	$	1,193

    At March 31, 2012, private equity fund investments included above are not redeemable during the lives of the funds and have expected remaining lives that extend in some cases more than 10 years. At that date, 44 percent of the total above had expected remaining lives of less than three years, 54 percent between three and seven years and 2 percent between seven and 10 years. Expected lives are based upon legal maturity, which can be extended at the fund manager's discretion, typically in one-year increments.

    At March 31, 2012, hedge fund investments included above are redeemable monthly (10 percent), quarterly (35 percent), semi-annually (25 percent) and annually (30 percent), with redemption notices ranging from 1 day to 180 days. More than 62 percent of these hedge fund investments require redemption notices of less than 90 days. Investments representing approximately 55 percent of the value of the hedge fund investments cannot be redeemed, either in whole or in part, because the investments include various restrictions. The majority of these restrictions were put in place prior to 2009 and do not have stated end dates. The restrictions that have pre-defined end dates are generally expected to be lifted by the end of 2015. The partial restrictions relate to certain hedge funds that hold at least one investment that the fund manager deems to be illiquid.

FAIR VALUE OPTION

The following table presents the gains or losses recorded related to the eligible instruments for which AIG elected the fair value option:

Three Months Ended March 31,	Gain (Loss)
(in millions)	2012			2011
Assets:
Mortgage and other loans receivable	$	22		$	(5	)
Bonds and equity securities		644			902
Trading – ML II interest		246			251
Trading – ML III interest		1,252			744
Retained interest in AIA		1,795			1,062
Short-term investments and other invested assets and Other assets		4			16
Liabilities:
Other long-term debt(a)		(446	)		(44	)
Other liabilities		(48	)		(112	)
Total gain(b)	$	3,469		$	2,814

(a)

Includes GIAs, notes, bonds, loans and mortgages payable.

(b)

Excludes discontinued operation gains or losses on instruments that were required to be carried at fair value in 2011. For instruments required to be carried at fair value, AIG recognized gains of $0.6 billion and $1.0 billion for the three months ended March 31, 2012 and 2011, respectively, that were primarily due to changes in the fair value of derivatives, trading securities and certain other invested assets for which the fair value option was not elected.

    See Note 2(a) to the Consolidated Financial Statements in the 2011 Annual Report on Form 10-K for additional information about AIG's policies for recognition, measurement, and disclosure of interest and dividend income and interest expense.

    During the three-month periods ended March 31, 2012 and 2011, AIG recognized losses of $558 million and $41 million, respectively, attributable to the observable effect of changes in credit spreads on AIG's own liabilities for which the fair value option was elected. AIG calculates the effect of these credit spread changes using discounted cash flow techniques that incorporate current market interest rates, AIG's observable credit spreads on these liabilities and other factors that mitigate the risk of nonperformance such as cash collateral posted.

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

	March 31, 2012							December 31, 2011
(in millions)	Fair Value		Outstanding Principal Amount		Difference			Fair Value		Outstanding Principal Amount		Difference
Assets:
Mortgage and other loans receivable	$	114	$	139	$	(25	)	$	107	$	150	$	(43	)
Liabilities:
Other long-term debt*	$	10,580	$	8,330	$	2,250		$	10,766	$	8,624	$	2,142

*

Includes GIAs, notes, bonds, loans and mortgages payable.

    At March 31, 2012 and December 31, 2011, there were no significant mortgage or other loans receivable for which the fair value option was elected that were 90 days or more past due and in non-accrual status.

FAIR VALUE INFORMATION ABOUT FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE

The following table presents the carrying value and estimated fair value of AIG's financial instruments not measured at fair value and indicates the level of the estimated fair value measurement based on the levels of the inputs used:

	Estimated Fair Value
									Carrying Value
(in millions)	Level 1		Level 2		Level 3		Total
March 31, 2012
Assets:
Mortgage and other loans receivable	$	-	$	668	$	20,290	$	20,958	$	19,405
Other invested assets		-		462		4,098		4,560		4,864
Short-term investments		-		14,351		-		14,351		16,381
Cash		1,315		-		-		1,315		1,315
Liabilities:
Policyholder contract deposits associated with investment-type contracts		-		281		123,597		123,878		107,019
Other liabilities		-		-		476		476		476
Long-term debt		14,991		49,523		2,700		67,214		65,517
December 31, 2011
Assets:
Mortgage and other loans receivable							$	20,494	$	19,382
Other invested assets								3,390		4,701
Short-term investments								16,657		16,659
Cash								1,474		1,474
Liabilities:
Policyholder contract deposits associated
with investment-type contracts								122,125		106,950
Long-term debt								61,295		64,487