DERIVATIVES AND HEDGE ACCOUNTING (Tables)

9 Months Ended

Sep. 30, 2012

DERIVATIVES AND HEDGE ACCOUNTING

Notional amounts and fair values of derivative instruments

	September 30, 2012								December 31, 2011
	Gross Derivative Assets				Gross Derivative Liabilities				Gross Derivative Assets				Gross Derivative Liabilities
(in millions)	Notional Amount		Fair Value(a)		Notional Amount		Fair Value(a)		Notional Amount		Fair Value(a)		Notional Amount		Fair Value(a)
Derivatives designated as hedging instruments:
Interest rate contracts(b)	$	–	$	–	$	366	$	24	$	–	$	–	$	481	$	38
Foreign exchange contracts		–		–		–		–		–		–		180		1
Derivatives not designated as hedging instruments:
Interest rate contracts(b)		66,896		7,285		68,939		6,522		72,660		8,286		73,248		6,870
Foreign exchange contracts		5,080		53		2,969		166		3,278		145		3,399		178
Equity contracts(c)		5,546		264		22,714		1,479		4,748		263		18,911		1,126
Commodity contracts		633		142		626		143		691		136		861		146
Credit contracts		167		60		17,618		2,349		407		89		25,857		3,366
Other contracts(d)		19,092		68		1,610		276		24,305		741		2,125		372
Total derivatives not designated as hedging instruments		97,414		7,872		114,476		10,935		106,089		9,660		124,401		12,058
Total derivatives	$	97,414	$	7,872	$	114,842	$	10,959	$	106,089	$	9,660	$	125,062	$	12,097

(a)     Fair value amounts are shown before the effects of counterparty netting adjustments and offsetting cash collateral.

(b)     Includes cross currency swaps.

(c)     Notional amount of derivative liabilities and fair values of derivative liabilities include $22 billion and $1.3 billion, respectively, at September 30, 2012, and $18.3 billion and $0.9 billion, respectively, at December 31, 2011, related to bifurcated embedded derivatives. A bifurcated embedded derivative is generally presented with the host contract in the Consolidated Balance Sheet.

(d)     Consist primarily of contracts with multiple underlying exposures.

Fair values of derivative assets and liabilities in the Consolidated Balance Sheet

	September 30, 2012										December 31, 2011
	Derivative Assets					Derivative Liabilities					Derivative Assets					Derivative Liabilities
(in millions)	Notional Amount		Fair Value			Notional Amount		Fair Value			Notional Amount		Fair Value			Notional Amount		Fair Value
Global Capital Markets derivatives	$	87,274	$	6,827		$	85,934	$	8,428		$	94,036	$	8,472		$	98,442	$	10,021
All other derivatives(a)		10,140		1,045			28,908		2,531			12,053		1,188			26,620		2,076
Total derivatives, gross	$	97,414		7,872		$	114,842		10,959		$	106,089		9,660		$	125,062		12,097
Counterparty netting(b)				(3,219	)				(3,219	)				(3,660	)				(3,660	)
Cash collateral(c)				(1,197	)				(2,118	)				(1,501	)				(2,786	)
Total derivatives, net				3,456					5,622					4,499					5,651
Less: Bifurcated embedded derivatives				–					1,308					–					918
Total derivatives on consolidated balance sheet			$	3,456				$	4,314				$	4,499				$	4,733

(a)     Represents derivatives used to hedge the foreign currency and interest rate risk associated with insurance and ILFC operations, as well as embedded derivatives included in insurance contracts. Liabilities include bifurcated embedded derivatives, which are recorded in Policyholder contract deposits.

(b)     Represents netting of derivative exposures covered by a qualifying master netting agreement.

(c)     Represents cash collateral posted and received.

Effect of AIG's derivative instruments in fair value hedging relationships in the Consolidated Statement of Operations

	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2012		2011		2012			2011
Interest rate contracts(a):
Loss recognized in earnings on derivatives	$	–	$	–	$	(2	)	$	(3	)
Gain recognized in earnings on hedged items(b)		19		39		99			127
Loss recognized in earnings for ineffective portion and amount excluded from effectiveness testing		–		–		–			(1	)

(a)     Gains and losses recognized in earnings for the ineffective portion and amounts excluded from effectiveness testing are recorded in Net realized capital gains (losses). Includes immaterial amounts related to foreign exchange contracts.

(b)     Includes $18 million and 39 million, for the three-month periods ended September 30, 2012 and 2011, respectively, and $97 million and $125 million, for the nine-month periods ended September 30, 2012 and 2011, respectively, representing the amortization of debt basis adjustment following the discontinuation of hedge accounting recorded in Other income and Net realized capital gains (losses).

Effect of AIG's derivative instruments in cash flow hedging relationships in the Consolidated Statement of Operations

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2012			2011			2012			2011
Interest rate contracts(a):
Loss recognized in OCI on derivatives	$	(1	)	$	(2	)	$	(2	)	$	(5	)
Loss reclassified from Accumulated OCI into earnings(b)		(4	)		(15	)		(13	)		(49	)

(a)     Gains and losses reclassified from Accumulated other comprehensive income are recorded in Other income. Gains or losses recognized in earnings on derivatives for the ineffective portion are recorded in Net realized capital gains (losses).

(b)     The effective portion of the change in fair value of a derivative qualifying as a cash flow hedge is recorded in Accumulated other comprehensive income until earnings are affected by the variability of cash flows in the hedged item. At September 30, 2012, $15 million of the deferred net loss in Accumulated other comprehensive income is expected to be recognized in earnings during the next 12 months.

Effect of AIG's derivative instruments not designated as hedging instruments in the Consolidated Statement of Operations

	Gains (Losses) Recognized in Earnings
	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2012			2011			2012			2011
By Derivative Type:
Interest rate contracts(a)	$	(220	)	$	523		$	(208	)	$	270
Foreign exchange contracts		(93	)		84			(3	)		80
Equity contracts(b)		(206	)		416			(601	)		379
Commodity contracts		2			(1	)		–			6
Credit contracts		200			(83	)		414			218
Other contracts		(4	)		(741	)		(56	)		(741	)
Total	$	(321	)	$	198		$	(454	)	$	212
By Classification:
Policy fees	$	42		$	29		$	115		$	80
Net investment income		–			2			1			6
Net realized capital gains (losses)		(183	)		(163	)		(843	)		13
Other income (losses)		(180	)		330			273			113
Total	$	(321	)	$	198		$	(454	)	$	212

(a)     Includes cross currency swaps.

(b)     Includes embedded derivative losses of $75 million and $812 million for the three-month periods ended September 30, 2012 and 2011, respectively, and embedded derivatives losses of $268 million and $807 million, for the nine-month periods ended September 30, 2012 and 2011, respectively.

Net notional amount, fair value of derivative (asset) liability and unrealized market valuation gain (loss)

									Unrealized Market Valuation Gain (Loss)(c)
					Fair Value of Derivative (Asset) Liability at(b)(c)
	Net Notional Amount(a)								Three Months Ended September 30,					Nine Months Ended September 30,
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
(in millions)									2012		2011			2012		2011
Regulatory Capital:
Corporate loans	$	898	$	1,830	$	–	$	–	$	–	$	–		$	–	$	–
Prime residential mortgages		139		3,653		–		–		–		–			–		6
Other		–		887		–		9		6		(10	)		9		–
Total		1,037		6,370		–		9		6		(10	)		9		6
Arbitrage:
Multi-sector CDOs(d)		4,363		5,476		2,183		3,077		142		47			336		230
Corporate debt/CLOs(e)		11,707		11,784		74		127		42		(33	)		53		11
Total		16,070		17,260		2,257		3,204		184		14			389		241
Mezzanine tranches		–		989		–		10		14		(1	)		3		(15	)
Total	$	17,107	$	24,619	$	2,257	$	3,223	$	204	$	3		$	401	$	232

(a)     Net notional amounts presented are net of all structural subordination below the covered tranches.

(b)     Fair value amounts are shown before the effects of counterparty netting adjustments and offsetting cash collateral.

(c)     Includes credit valuation adjustment gains (losses) of $(12) million and $25 million in the three-month periods ended September 30, 2012 and 2011, respectively, and $(36) million and $27 million in the nine-month periods ended September 30, 2012 and 2011, respectively, representing the effect of changes in AIG's credit spreads on the valuation of the derivatives liabilities.

(d)     During the nine-month period ended September 30, 2012, a super senior CDS transaction with a net notional amount of $470 million was terminated at approximately its fair value at the time of termination. As a result, a $416 million loss, which was previously included in the fair value derivative liability as an unrealized market valuation loss, was realized. During the nine-month period ended September 30, 2012, $142 million was paid to counterparties with respect to multi-sector CDOs. Upon payment, a $142 million loss, which was previously included in the fair value of the derivative liability as an unrealized market valuation loss, was realized. Multi-sector CDOs also include $3.7 billion and $4.6 billion in net notional amount of credit default swaps written with cash settlement provisions at September 30, 2012 and December 31, 2011, respectively.

(e)     Corporate debt/CLOs include $1.2 billion in net notional amount of credit default swaps written on the super senior tranches of CLOs at both September 30, 2012 and December 31, 2011.