INVESTMENTS

9 Months Ended

Sep. 30, 2012

INVESTMENTS

INVESTMENTS

5. INVESTMENTS

Securities Available for Sale

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

(in millions)	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Other-Than- Temporary Impairments in AOCI(a)
September 30, 2012
Bonds available for sale:
U.S. government and government sponsored entities	$	4,049	$	359	$	–		$	4,408	$	–
Obligations of states, municipalities and political subdivisions		33,716		2,799		(51	)		36,464		(23	)
Non-U.S. governments		24,900		1,441		(43	)		26,298		–
Corporate debt		134,977		15,755		(592	)		150,140		125
Mortgage-backed, asset-backed and collateralized:
RMBS		32,343		3,231		(394	)		35,180		1,109
CMBS		9,258		738		(514	)		9,482		(112	)
CDO/ABS		7,447		737		(242	)		7,942		90
Total mortgage-backed, asset-backed and collateralized		49,048		4,706		(1,150	)		52,604		1,087
Total bonds available for sale(b)		246,690		25,060		(1,836	)		269,914		1,189
Equity securities available for sale:
Common stock		1,517		1,355		(50	)		2,822		–
Preferred stock		65		28		–			93		–
Mutual funds		94		12		–			106		–
Total equity securities available for sale		1,676		1,395		(50	)		3,021		–
Other invested assets carried at fair value(c)		6,491		1,756		(25	)		8,222		–
Total	$	254,857	$	28,211	$	(1,911	)	$	281,157	$	1,189
December 31, 2011
Bonds available for sale:
U.S. government and government sponsored entities	$	5,661	$	418	$	(1	)	$	6,078	$	–
Obligations of states, municipalities and political subdivisions		35,017		2,554		(73	)		37,498		(28	)
Non-U.S. governments		24,843		994		(102	)		25,735		–
Corporate debt		134,699		11,844		(1,725	)		144,818		115
Mortgage-backed, asset-backed and collateralized:
RMBS		34,780		1,387		(1,563	)		34,604		(716	)
CMBS		8,449		470		(973	)		7,946		(276	)
CDO/ABS		7,321		454		(473	)		7,302		49
Total mortgage-backed, asset-backed and collateralized		50,550		2,311		(3,009	)		49,852		(943	)
Total bonds available for sale(b)		250,770		18,121		(4,910	)		263,981		(856	)
Equity securities available for sale:
Common stock		1,682		1,839		(100	)		3,421		–
Preferred stock		83		60		–			143		–
Mutual funds		55		6		(1	)		60		–
Total equity securities available for sale		1,820		1,905		(101	)		3,624		–
Other invested assets carried at fair value(c)		5,155		1,611		(269	)		6,497		–
Total	$	257,745	$	21,637	$	(5,280	)	$	274,102	$	(856	)

(a)      Represents the amount of other-than-temporary impairment losses recognized in Accumulated other comprehensive income. Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

(b)      At September 30, 2012 and December 31, 2011, bonds available for sale held by AIG that were below investment grade or not rated totaled $28.9 billion and $24.2 billion, respectively.

(c)      Represents private equity and hedge fund investments carried at fair value for which unrealized gains and losses are required to be recognized in other comprehensive income.

Securities Available for Sale in a Loss Position

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

	Less than 12 Months				12 Months or More				Total
(in millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
September 30, 2012
Bonds available for sale:
U.S. government and government sponsored entities	$	68	$	–	$	–	$	–	$	68	$	–
Obligations of states, municipalities and political subdivisions		457		30		197		21		654		51
Non-U.S. governments		1,067		14		512		29		1,579		43
Corporate debt		6,383		168		5,121		424		11,504		592
RMBS		659		14		2,012		380		2,671		394
CMBS		193		28		1,786		486		1,979		514
CDO/ABS		143		3		1,779		239		1,922		242
Total bonds available for sale		8,970		257		11,407		1,579		20,377		1,836
Equity securities available for sale:
Common stock		313		45		37		5		350		50
Preferred stock		–		–		–		–		–		–
Mutual funds		4		–		1		–		5		–
Total equity securities available for sale		317		45		38		5		355		50
Total	$	9,287	$	302	$	11,445	$	1,584	$	20,732	$	1,886
December 31, 2011
Bonds available for sale:
U.S. government and government sponsored entities	$	142	$	1	$	–	$	–	$	142	$	1
Obligations of states, municipalities and political subdivisions		174		1		669		72		843		73
Non-U.S. governments		3,992		67		424		35		4,416		102
Corporate debt		18,099		937		5,907		788		24,006		1,725
RMBS		10,624		714		4,148		849		14,772		1,563
CMBS		1,697		185		1,724		788		3,421		973
CDO/ABS		1,680		50		1,682		423		3,362		473
Total bonds available for sale		36,408		1,955		14,554		2,955		50,962		4,910
Equity securities available for sale:
Common stock		608		100		–		–		608		100
Preferred stock		6		–		–		–		6		–
Mutual funds		2		1		–		–		2		1
Total equity securities available for sale		616		101		–		–		616		101
Total	$	37,024	$	2,056	$	14,554	$	2,955	$	51,578	$	5,011

At September 30, 2012, AIG held 3,444 and 254 individual fixed maturity and equity securities, respectively, that were in an unrealized loss position, of which 1,679 individual fixed maturity securities were in a continuous unrealized loss position for longer than 12 months. AIG did not recognize the unrealized losses in earnings on these fixed maturity securities at September 30, 2012, because management neither intends to sell the securities nor does it believe that it is more likely than not that it will be required to sell these securities before recovery of their amortized cost basis. Furthermore, management expects to recover the entire amortized cost basis of these securities. In performing this evaluation, management considered the recovery periods for securities in previous periods of broad market declines. For fixed maturity securities with significant declines, management performed fundamental credit analysis on a security-by-security basis, which included consideration of credit enhancements, expected defaults on underlying collateral, review of relevant industry analyst reports and forecasts and other available market data.

Contractual Maturities of Securities Available for Sale

The following table presents the amortized cost and fair value of fixed maturity securities available for sale by contractual maturity:

	Total Fixed Maturity Available for Sale Securities				Fixed Maturity Securities in a Loss Position
September 30, 2012 (in millions)
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	11,080	$	11,289	$	837	$	830
Due after one year through five years		54,288		57,505		4,143		4,009
Due after five years through ten years		70,835		78,191		4,058		3,845
Due after ten years		61,439		70,325		5,453		5,121
Mortgage-backed, asset-backed and collateralized		49,048		52,604		7,722		6,572
Total	$	246,690	$	269,914	$	22,213	$	20,377

Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.

The following table presents the gross realized gains and gross realized losses from sales or redemptions of AIG's available for sale securities:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2012				2011				2012				2011
(in millions)	Gross Realized Gains		Gross Realized Losses		Gross Realized Gains		Gross Realized Losses		Gross Realized Gains		Gross Realized Losses		Gross Realized Gains		Gross Realized Losses
Fixed maturity securities	$	943	$	82	$	612	$	11	$	2,308	$	121	$	1,462	$	104
Equity securities		38		22		30		10		503		26		178		18
Total	$	981	$	104	$	642	$	21	$	2,811	$	147	$	1,640	$	122

For the three- and nine-month periods ended September 30, 2012, the aggregate fair value of available for sale securities sold was $8.8 billion and $30.3 billion, respectively, which resulted in net realized capital gains of $0.9 billion, and $2.7 billion, respectively. For the three- and nine-month periods ended September 30, 2011, the aggregate fair value of available for sale securities sold was $9.0 billion and $33.1 billion, respectively, which resulted in net realized capital gains of $621 million and $1.5 billion, respectively.

Trading Securities

The following table presents the fair value of AIG's trading securities:

	September 30, 2012					December 31, 2011
(in millions)	Fair Value		Percent of Total			Fair Value		Percent of Total
Fixed maturities:
U.S. government and government sponsored entities	$	7,708		31	%	$	7,504		31	%
Non-U.S. governments		2		–			35		–
Corporate debt		1,318		5			816		3
State, territories and political subdivisions		81		–			257		1
Mortgage-backed, asset-backed and collateralized:
RMBS		1,471		6			1,648		7
CMBS		2,102		9			1,837		7
CDO/ABS and other collateralized*		12,147		49			5,282		22
Total mortgage-backed, asset-backed and collateralized		15,720		64			8,767		36
ML II		–		–			1,321		5
ML III		8		–			5,664		23
Total fixed maturities		24,837		100			24,364		99
Equity securities		98		–			125		1
Total	$	24,935		100	%	$	24,489		100	%

*         Includes securities with a fair value of approximately $7.1 billion purchased through the FRBNY's auction of ML III assets.

Maiden Lane III

The FRBNY completed the liquidation of ML III assets during the third quarter of 2012 and substantially all of the sales proceeds have been distributed in accordance with the priority of payments of the transaction. In the three-and nine-month periods ended September 30, 2012, AIG received total payments of approximately $8.47 billion and $8.54 billion, respectively, which included contractual and additional distributions and AIG's original $5.0 billion equity interest in ML III.

Through the nine months ended September 30, 2012, AIG purchased securities with a fair value of approximately $7.1 billion through the FRBNY's auction of ML III assets.

Evaluating Investments for Other-Than-Temporary Impairments

For a discussion of AIG's policy for evaluating investments for other-than-temporary impairments, see Note 7 to the Consolidated Financial Statements in the 2011 Annual Report.

Credit Impairments

The following table presents a rollforward of the cumulative credit loss component of other-than-temporary impairments recognized in earnings for available for sale fixed maturity securities held by AIG, and includes structured, corporate, municipal and sovereign fixed maturity securities:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2012			2011			2012			2011
Balance, beginning of period	$	6,090		$	6,396		$	6,504		$	6,786
Increases due to:
Credit impairments on new securities subject to impairment losses		–			169			172			254
Additional credit impairments on previously impaired securities		45			222			421			457
Reductions due to:
Credit impaired securities fully disposed for which there was no prior intent or requirement to sell		(297	)		(133	)		(815	)		(458	)
Credit impaired securities for which there is a current intent or anticipated requirement to sell		(5	)		–			(5	)		–
Accretion on securities previously impaired due to credit*		(215	)		(148	)		(668	)		(355	)
Hybrid securities with embedded credit derivatives reclassified to Bond trading securities		–			–			–			(179	)
Other		(3	)		–			6			1
Balance, end of period	$	5,615		$	6,506		$	5,615		$	6,506

*         Represents accretion recognized due to changes in cash flows expected to be collected over the remaining expected term of the credit impaired securities as well as the accretion due to the passage of time.

Purchased Credit Impaired (PCI) Securities

In the second quarter of 2011, AIG began purchasing certain RMBS securities that had experienced deterioration in credit quality since their issuance. Management determined, based on its expectations as to the timing and amount of cash flows expected to be received, that it was probable at acquisition that AIG would not collect all contractually required payments for these PCI securities, including both principal and interest and considering the effects of prepayments. At acquisition, the timing and amount of the undiscounted future cash flows expected to be received on each PCI security was determined based on management's best estimate using key assumptions, such as interest rates, default rates and prepayment speeds. At acquisition, the difference between the undiscounted expected future cash flows of the PCI securities and the recorded investment in the securities represents the initial accretable yield, which is to be accreted into net investment income over their remaining lives on a level-yield basis. Additionally, the difference between the contractually required payments on the PCI securities and the undiscounted expected future cash flows represents the non-accretable difference at acquisition. Over time, based on actual payments received and changes in estimates of undiscounted expected future cash flows, the accretable yield and the non-accretable difference can change, as discussed further below.

On a quarterly basis, the undiscounted expected future cash flows associated with PCI securities are re-evaluated based on updates to key assumptions. Declines in undiscounted expected future cash flows due to further credit deterioration as well as changes in the expected timing of the cash flows can result in the recognition of an other-than-temporary impairment charge, as PCI securities are subject to AIG's policy for evaluating investments for other-than-temporary impairment. Changes to undiscounted expected future cash flows due solely to the changes in the contractual benchmark interest rates on variable rate PCI securities will change the accretable yield prospectively. Significant increases in undiscounted expected future cash flows for reasons other than interest rate changes are recognized prospectively as adjustments to the accretable yield.

The following tables present information on AIG's PCI securities, which are included in bonds available for sale:

(in millions)	At Date of Acquisition
Contractually required payments (principal and interest)	$	18,315
Cash flows expected to be collected*		14,286
Recorded investment in acquired securities		9,128

*         Represents undiscounted expected cash flows, including both principal and interest.

(in millions)	September 30, 2012		December 31, 2011
Outstanding principal balance	$	11,957	$	10,119
Amortized cost		7,743		7,006
Fair value		8,734		6,535

The following table presents activity for the accretable yield on PCI securities:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2012			2011			2012			2011
Balance, beginning of period	$	4,950		$	2,276		$	4,135		$	–
Newly purchased PCI securities		114			306			1,532			2,688
Disposals		(130	)		–			(298	)		–
Accretion		(165	)		(119	)		(510	)		(194	)
Effect of changes in interest rate indices		(39	)		(46	)		(200	)		(54	)
Net reclassification (to) from non-accretable difference, including effects of prepayments		53			(93	)		124			(116	)
Balance, end of period	$	4,783		$	2,324		$	4,783		$	2,324

Pledged Investments

Secured Financing and Similar Arrangements

AIG enters into financing transactions, whereby certain securities are transferred to financial institutions in exchange for cash or other liquid collateral. Securities transferred by AIG under these financing transactions may be sold or repledged by the counterparties. As collateral for the securities transferred by AIG, counterparties transfer assets, such as cash or high quality fixed maturity securities. Collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the transferred securities during the life of the transactions. Where AIG receives fixed maturity securities as collateral, AIG does not have the right to sell or repledge this collateral unless an event of default occurs by the counterparties. At the termination of the transactions, AIG and its counterparties are obligated to return the collateral provided and the securities transferred, respectively. These transactions are treated as secured financing arrangements by AIG.

Secured financing transactions also include securities sold under agreements to repurchase (repurchase agreements), in which AIG transfers securities in exchange for cash, with an agreement by AIG to repurchase the same or substantially similar securities. In the majority of these repurchase agreements, the securities transferred by AIG may be sold or repledged by the counterparties.

Under the secured financing transactions described above, securities available for sale with a fair value of $6.3 billion and $2.3 billion at September 30, 2012 and December 31, 2011, respectively, and trading securities with a fair value of $2.4 billion and $2.8 billion at September 30, 2012 and December 31, 2011, respectively, were pledged to counterparties.

Prior to January 1, 2012, in the case of repurchase agreements where AIG did not obtain collateral sufficient to fund substantially all of the cost of purchasing identical replacement securities during the term of the contract (generally less than 90 percent of the security value), AIG accounted for the transaction as a sale of the security and reported the obligation to repurchase the security as a derivative contract. Effective January 1, 2012, the level of collateral received by the transferor in a repurchase agreement or similar arrangement is no longer relevant in determining whether the transaction should be accounted for as a sale. There were no repurchase agreements accounted for as sales as of September 30, 2012. The fair value of securities transferred under repurchase agreements accounted for as sales was $ 2.1 billion at December 31, 2011.

AIG also enters into agreements in which securities are purchased by AIG under agreements to resell (reverse repurchase agreements), which are accounted for as secured financing transactions and reported as short-term investments or other assets, depending on their terms. For these transactions, AIG takes possession of or obtains a security interest in the related securities, and AIG has the right to sell or repledge this collateral received. The fair value of securities collateral pledged to AIG was $7.5 billion and $6.8 billion at September 30, 2012 and December 31, 2011, respectively, of which $1.7 billion and $122 million was repledged by AIG.

Insurance – Statutory and Other Deposits

Total carrying values of cash and securities deposited by AIG's insurance subsidiaries under requirements of regulatory authorities or other insurance-related arrangements, including certain annuity-related obligations and certain reinsurance agreements, were $9.0 billion and $9.8 billion at September 30, 2012 and December 31, 2011, respectively.

Other Pledges

Certain AIG subsidiaries are members of Federal Home Loan Banks (FHLBs), and such membership requires the members to own stock in these FHLBs. AIG subsidiaries owned an aggregate of $84 million and $77 million of stock in FHLBs at September 30, 2012 and December 31, 2011, respectively. To the extent an AIG subsidiary borrows from the FHLB, its ownership interest in the stock of FHLBs will be pledged to the FHLB. In addition, AIG subsidiaries have pledged securities available for sale with a fair value of $95 million at September 30, 2012, associated with advances from the FHLBs.

Certain GIAs have provisions that require collateral to be posted or payments to be made by AIG upon a downgrade of AIG's long-term debt ratings. The actual amount of collateral required to be posted to the counterparties in the event of such downgrades, and the aggregate amount of payments that AIG could be required to make, depends on market conditions, the fair value of outstanding affected transactions and other factors prevailing at and after the time of the downgrade. The fair value of securities pledged as collateral with respect to these obligations approximated $4.7 billion and $5.1 billion at September 30, 2012 and December 31, 2011, respectively. This collateral primarily consists of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.