FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2013

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

5. FAIR VALUE MEASUREMENTS

Fair Value Measurements on a Recurring Basis

We carry certain of our financial instruments at fair value. We define 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. You should read the following in conjunction with Note 6 to the Consolidated Financial Statements in the 2012 Annual Report for a complete discussion of our accounting policies and procedures regarding fair value measurements.

Assets and liabilities recorded at fair value in the Condensed 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. Market price data generally is obtained from exchange or dealer markets. We do not adjust the quoted price for such instruments.

•

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, we must make certain assumptions as to the inputs a hypothetical market participant would use to value that asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In those cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

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:

March 31, 2013 (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	$	–	$	3,496	$	–	$	–		$	–		$	3,496
Obligations of states, municipalities and political subdivisions		–		34,092		1,019		–			–			35,111
Non-U.S. governments		690		24,667		18		–			–			25,375
Corporate debt		–		148,857		1,449		–			–			150,306
RMBS		–		24,030		12,096		–			–			36,126
CMBS		–		5,096		5,315		–			–			10,411
CDO/ABS		–		3,849		5,577		–			–			9,426
Total bonds available for sale		690		244,087		25,474		–			–			270,251
Bond trading securities:
U.S. government and government sponsored entities		174		6,165		–		–			–			6,339
Obligations of states, municipalities and political subdivisions		–		183		–		–			–			183
Non-U.S. governments		–		2		–		–			–			2
Corporate debt		–		1,138		–		–			–			1,138
RMBS		–		1,239		730		–			–			1,969
CMBS		–		1,143		776		–			–			1,919
CDO/ABS		–		3,463		8,842		–			–			12,305
Total bond trading securities		174		13,333		10,348		–			–			23,855
Equity securities available for sale:
Common stock		2,899		1		22		–			–			2,922
Preferred stock		–		33		49		–			–			82
Mutual funds		81		23		–		–			–			104
Total equity securities available for sale		2,980		57		71		–			–			3,108
Equity securities trading		614		82		–		–			–			696
Mortgage and other loans receivable		–		58		–		–			–			58
Other invested assets		129		1,721		5,467		–			–			7,317
Derivative assets:
Interest rate contracts		5		4,869		961		–			–			5,835
Foreign exchange contracts		–		81		–		–			–			81
Equity contracts		132		51		69		–			–			252
Commodity contracts		–		146		1		–			–			147
Credit contracts		–		–		59		–			–			59
Other contracts		–		–		38		–			–			38
Counterparty netting and cash collateral		–		–		–		(2,234	)		(888	)		(3,122	)
Total derivative assets		137		5,147		1,128		(2,234	)		(888	)		3,290
Short-term investments		218		6,194		–		–			–			6,412
Separate account assets		58,111		2,948		–		–			–			61,059
Other assets		–		694		–		–			–			694
Total	$	63,053	$	274,321	$	42,488	$	(2,234	)	$	(888	)	$	376,740
Liabilities:
Policyholder contract deposits	$	–	$	–	$	1,047	$	–		$	–		$	1,047
Derivative liabilities:
Interest rate contracts		–		5,190		205		–			–			5,395
Foreign exchange contracts		–		128		–		–			–			128
Equity contracts		–		109		3		–			–			112
Commodity contracts		–		148		–		–			–			148
Credit contracts		–		–		1,834		–			–			1,834
Other contracts		–		6		177		–			–			183
Counterparty netting and cash collateral		–		–		–		(2,234	)		(1,855	)		(4,089	)
Total derivative liabilities		–		5,581		2,219		(2,234	)		(1,855	)		3,711
Long-term debt		–		7,256		407		–			–			7,663
Other liabilities		5		919		–		–			–			924
Total	$	5	$	13,756	$	3,673	$	(2,234	)	$	(1,855	)	$	13,345

December 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	$	–	$	3,483	$	–	$	–		$	–		$	3,483
Obligations of states, municipalities and political subdivisions		–		34,681		1,024		–			–			35,705
Non-U.S. governments		1,004		25,782		14		–			–			26,800
Corporate debt		–		149,625		1,487		–			–			151,112
RMBS		–		22,730		11,662		–			–			34,392
CMBS		–		5,010		5,124		–			–			10,134
CDO/ABS		–		3,492		4,841		–			–			8,333
Total bonds available for sale		1,004		244,803		24,152		–			–			269,959
Bond trading securities:
U.S. government and government sponsored entities		266		6,528		–		–			–			6,794
Non-U.S. governments		–		2		–		–			–			2
Corporate debt		–		1,320		–		–			–			1,320
RMBS		–		1,331		396		–			–			1,727
CMBS		–		1,424		812		–			–			2,236
CDO/ABS		–		3,969		8,536		–			–			12,505
Total bond trading securities		266		14,574		9,744		–			–			24,584
Equity securities available for sale:
Common stock		3,002		3		24		–			–			3,029
Preferred stock		–		34		44		–			–			78
Mutual funds		83		22		–		–			–			105
Total equity securities available for sale		3,085		59		68		–			–			3,212
Equity securities trading		578		84		–		–			–			662
Mortgage and other loans receivable		–		134		–		–			–			134
Other invested assets		125		1,542		5,389		–			–			7,056
Derivative assets:
Interest rate contracts		2		5,521		956		–			–			6,479
Foreign exchange contracts		–		104		–		–			–			104
Equity contracts		104		63		54		–			–			221
Commodity contracts		–		144		1		–			–			145
Credit contracts		–		–		60		–			–			60
Other contracts		–		–		38		–			–			38
Counterparty netting and cash collateral		–		–		–		(2,467	)		(909	)		(3,376	)
Total derivative assets		106		5,832		1,109		(2,467	)		(909	)		3,671
Short-term investments		285		7,771		–		–			–			8,056
Separate account assets		54,430		2,907		–		–			–			57,337
Other assets		–		696		–		–			–			696
Total	$	59,879	$	278,402	$	40,462	$	(2,467	)	$	(909	)	$	375,367
Liabilities:
Policyholder contract deposits	$	–	$	–	$	1,257	$	–		$	–		$	1,257
Derivative liabilities:
Interest rate contracts		–		5,582		224		–			–			5,806
Foreign exchange contracts		–		174		–		–			–			174
Equity contracts		–		114		7		–			–			121
Commodity contracts		–		146		–		–			–			146
Credit contracts		–		–		2,051		–			–			2,051
Other contracts		–		6		200		–			–			206
Counterparty netting and cash collateral		–		–		–		(2,467	)		(1,976	)		(4,443	)
Total derivative liabilities		–		6,022		2,482		(2,467	)		(1,976	)		4,061
Long-term debt		–		7,711		344		–			–			8,055
Other liabilities		30		1,050		–		–			–			1,080
Total	$	30	$	14,783	$	4,083	$	(2,467	)	$	(1,976	)	$	14,453

(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 Condensed Consolidated Balance Sheet, and collateral received, not reflected in the Condensed Consolidated Balance Sheet, was $1.7 billion and $163 million, respectively, at March 31, 2013 and $1.9 billion and $299 million, respectively, at December 31, 2012.

Transfers of Level 1 and Level 2 Assets and Liabilities

Our 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 month period ended March 31, 2013, we transferred $239 million of securities issued by Non-U.S. government entities from Level 1 to Level 2, as they are no longer considered actively traded. For similar reasons, during the three month period ended March 31, 2013, we transferred $93 million of securities issued by the U.S. government and government-sponsored entities from Level 1 to Level 2. We had no material transfers from Level 2 to Level 1 during the three month period ended March 31, 2013.

Changes in Level 3 Recurring Fair Value Measurements

The following tables present changes during the three month periods ended March 31, 2013 and 2012 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 on the Condensed Consolidated Balance Sheet at March 31, 2013 and 2012:

(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
March 31, 2013
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	1,024		$	1		$	(5	)	$	136		$	–		$	(137	)	$	1,019		$	–
Non-U.S. governments		14			1			–			2			1			–			18			–
Corporate debt		1,487			(4	)		6			22			77			(139	)		1,449			–
RMBS		11,662			205			481			(262	)		10			–			12,096			–
CMBS		5,124			11			141			(75	)		154			(40	)		5,315			–
CDO/ABS		4,841			24			76			639			180			(183	)		5,577			–
Total bonds available for sale		24,152			238			699			462			422			(499	)		25,474			–
Bond trading securities:
RMBS		396			22			–			74			238			–			730			(17	)
CMBS		812			12			–			(99	)		159			(108	)		776			(25	)
CDO/ABS		8,536			284			–			(436	)		486			(28	)		8,842			82
Total bond trading securities		9,744			318			–			(461	)		883			(136	)		10,348			40
Equity securities available for sale:
Common stock		24			9			(1	)		(10	)		–			–			22			–
Preferred stock		44			–			5			–			–			–			49			–
Total equity securities available for sale		68			9			4			(10	)		–			–			71			–
Other invested assets		5,389			61			(13	)		(3	)		127			(94	)		5,467			–
Total	$	39,353		$	626		$	690		$	(12	)	$	1,432		$	(729	)	$	41,360		$	40
Liabilities:
Policyholder contract deposits	$	(1,257	)	$	205		$	–		$	5		$	–		$	–		$	(1,047	)	$	28
Derivative liabilities, net:
Interest rate contracts		732			11			–			13			–			–			756			(3	)
Equity contracts		47			28			–			(7	)		(2	)		–			66			(12	)
Commodity contracts		1			1			–			(1	)		–			–			1			–
Credit contracts		(1,991	)		175			–			41			–			–			(1,775	)		(214	)
Other contracts		(162	)		7			–			16			–			–			(139	)		13
Total derivative liabilities, net		(1,373	)		222			–			62			(2	)		–			(1,091	)		(216	)
Long-term debt(b)		(344	)		(80	)		–			19			(2	)		–			(407	)		8
Total	$	(2,974	)	$	347		$	–		$	86		$	(4	)	$	–		$	(2,545	)	$	(180	)

(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
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			–
Equity securities trading		1			–			–			–			–			–			1			–
Mortgage and other loans receivable		–			–			–			–			–			–			–			–
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 derivatives liabilities, net		(2,423	)		(541	)		9			1,116			(83	)		–			(1,922	)		(514	)
Long-term debt(b)		(508	)		(110	)		(77	)		114			–			6			(575	)		(104	)
Total	$	(3,849	)	$	(512	)	$	(68	)	$	1,227		$	(83	)	$	6		$	(3,279	)	$	(762	)

(a)  Total Level 3 derivative exposures have been netted in these tables for presentation purposes only.

(b)  Includes guaranteed investment agreements (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 Condensed Consolidated Statement of Income as follows:

(in millions)	Net Investment Income			Net Realized Capital Gains (Losses)			Other Income			Total
March 31, 2013
Bonds available for sale	$	210		$	7		$	21		$	238
Bond trading securities		33			–			285			318
Equity securities		–			9			–			9
Other invested assets		47			(7	)		21			61
Policyholder contract deposits		–			205			–			205
Derivative liabilities, net		–			22			200			222
Other long-term debt		–			–			(80	)		(80	)
March 31, 2012
Bonds available for sale	$	231		$	(375	)	$	4		$	(140	)
Bond trading securities		1,549			–			138			1,687
Equity securities		–			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	)

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

(in millions)	Purchases		Sales			Settlements			Purchases, Sales, Issues and Settlements, Net(a)
March 31, 2013
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	158	$	(22	)	$	–		$	136
Non-U.S. governments		3		–			(1	)		2
Corporate debt		97		–			(75	)		22
RMBS		603		(231	)		(634	)		(262	)
CMBS		373		(146	)		(302	)		(75	)
CDO/ABS		798		(159	)		–			639
Total bonds available for sale		2,032		(558	)		(1,012	)		462
Bond trading securities:
RMBS		105		–			(31	)		74
CMBS		19		(58	)		(60	)		(99	)
CDO/ABS		188		–			(624	)		(436	)
Total bond trading securities		312		(58	)		(715	)		(461	)
Equity securities		1		(10	)		(1	)		(10	)
Other invested assets		243		(30	)		(216	)		(3	)
Total assets	$	2,588	$	(656	)	$	(1,944	)	$	(12	)
Liabilities:
Policyholder contract deposits	$	–	$	(6	)	$	11		$	5
Derivative liabilities, net		3		(4	)		63			62
Other long-term debt(b)		–		–			19			19
Total liabilities	$	3	$	(10	)	$	93		$	86
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		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		2		–			1,114			1,116
Other long-term debt(b)		–		–			114			114
Total liabilities	$	2	$	(6	)	$	1,231		$	1,227

(a)  There were no issuances during the three month periods ended March 31, 2013 and 2012.

(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, 2013 and 2012 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

We 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 $72 million of net losses related to assets and liabilities transferred into Level 3 during the three month period ended March 31, 2013, and includes $2 million of net gains related to assets and liabilities transferred out of Level 3 during the three month period ended March 31, 2013.

Transfers of Level 3 Assets

During the three month period ended March 31, 2013, transfers into Level 3 assets included certain residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralized debt obligation (CDO)/asset-backed securities (ABS), and investments in certain hedge funds.

•

The transfers of investments in certain RMBS, CMBS and CDO/ABS into Level 3 assets were due to decreases in market transparency and liquidity for certain individual security types.

•

Certain 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 assets 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 our ownership interest.

During the three month period ended March 31, 2013, transfers out of Level 3 assets primarily related to certain investments in municipal securities, private placement corporate debt, CMBS, CDO/ABS and hedge funds.

•

Transfers of certain investments in municipal securities, CMBS and CDO/ABS out of Level 3 assets were based on consideration of market liquidity as well as related transparency of pricing and associated observable inputs for these investments.

•

Transfers of private placement corporate debt out of Level 3 assets were primarily the result of using observable pricing information that reflects the fair value of those securities without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market.

•

The removal of fund-imposed redemption restrictions resulted in the transfer of certain hedge fund investments out of Level 3 assets.

Transfers of Level 3 Liabilities

There were no significant transfers of derivative or other liabilities into or out of Level 3 for the three month period ended March 31, 2013.

We use 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.

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 us, such as data from pricing vendors and from internal valuation models. Because input information with respect to certain Level 3 instruments may not be reasonably available to us, balances shown below may not equal total amounts reported for such Level 3 assets and liabilities:

(in millions)	Fair Value at March 31, 2013		Valuation Technique	Unobservable Input(a)	Range (Weighted Average)(a)
Assets:
Corporate debt	$	796	Discounted cash flow	Yield(b)	2.81% – 9.59% (6.20%)
RMBS		11,241	Discounted cash flow	Constant prepayment rate(c)	0.00% – 10.34% (4.84%)
				Loss severity(c)	41.70% – 79.63% (60.66%)
				Constant default rate(c)	4.04% – 13.20% (8.62%)
				Yield(c)	2.18% – 7.66% (4.92%)
Certain CDO/ABS(d)		5,869	Discounted cash flow	Constant prepayment rate(c)	4.08% – 7.78% (5.93%)
				Loss severity(c)	56.61% – 67.23% (61.93%)
				Constant default rate(c)	6.42% – 14.10% (10.41%)
				Yield(c)	7.04% – 10.52% (8.78%)
Commercial mortgage backed securities		3,948	Discounted cash flow	Yield(b)	0.00% – 17.12% (6.92%)
CDO/ABS — Direct			Binomial Expansion	Recovery rate(b)	4% – 63% (27%)
Investment Book		997	Technique (BET)	Diversity score(b)	4 – 42 (14)
				Weighted average life(b)	1.28 – 9.76 years (4.99 years)
Liabilities:
Policyholder contract deposits — GMWB		1,047	Discounted cash flow	Equity implied volatility(b)	6.0% – 39.0%
				Base lapse rates(b)	1.00% – 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		1,324	BET	Recovery rates(b)	4% – 36% (18%)
				Diversity score(b)	9 – 41 (13)
				Weighted average life(b)	5.05 – 9.72 years (5.93 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 us. The ranges of these inputs do not directly correlate to changes in the fair values of the tranches purchased by us because there are other factors relevant to the specific tranches owned by us 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 we believe would be used by market participants when valuing these assets and liabilities.

(c)     Information received from independent third-party valuation service providers.

(d)     Yield was the only input available for $297 million of total fair value at March 31, 2013.

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

Sensitivity to Changes in Unobservable Inputs

We consider unobservable inputs to be those for which market data is not available and that are developed using the best information available to us 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 following is a general description of sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements. 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. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply.

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 RMBS and certain CDO/ABS valued by third-party valuation service providers are constant prepayment rates (CPR), constant default rates (CDR), loss severity, and yield. 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. In general, increases in yield, CPR, CDR, and loss severity, in isolation, would result in a decrease in the fair value measurement. 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 CMBS 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. In general, increases in the yield would decrease the fair value of CMBS.

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 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. Mortality, lapse and utilization rates may vary significantly depending upon age groups and duration. In general, increases in volatility and utilization rates will increase the fair value of the liability associated with GMWB, while increases in lapse rates and mortality rates will decrease the fair value of the liability.

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. Our non-performance risk is also considered in the measurement of those liabilities. See Note 6 to the Consolidated Financial Statements in the 2012 Annual Report for a discussion of our accounting policies and procedures regarding incorporation of our 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 our 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 basis, we use the net asset value per share as a practical expedient to measure fair value.

		March 31, 2013				December 31, 2012
(in millions)	Investment Category Includes	Fair Value Using Net Asset Value Per Share (or its equivalent)		Unfunded Commitments		Fair Value Using Net Asset Value Per Share (or its equivalent)		Unfunded Commitments
Investment Category
Private equity funds:
Leveraged buyout	Debt and/or equity investments made as part	$	2,487	$	646	$	2,529	$	669
	of a transaction in which assets of mature
	companies are acquired from the current
	shareholders, typically with the use of
	financial leverage
Real Estate /	Investments in real estate properties and		263		51		251		52
Infrastructure	infrastructure positions, including power plants
	and other energy generating facilities
Venture capital	Early-stage, high-potential, growth companies		150		16		157		16
	expected to generate a return through an
	eventual realization event, such as an initial
	public offering or sale of the company
Distressed	Securities of companies that are already in		185		39		184		36
	default, under bankruptcy protection, or
	troubled
Other	Includes multi-strategy and mezzanine		123		184		112		100
	strategies
Total private equity			3,208		936		3,233		873
funds
Hedge funds:
Event-driven	Securities of companies undergoing material		899		2		788		2
	structural changes, including mergers,
	acquisitions and other reorganizations
Long-short	Securities that the manager believes are		1,405		–		1,318		–
	undervalued, with corresponding short
	positions to hedge market risk
Macro	Investments that take long and short		470		–		320		–
	positions in financial instruments based on
	a top-down view of certain economic and
	capital market conditions
Distressed	Securities of companies that are already in		342		–		316		–
	default, under bankruptcy protection or
	troubled
Other	Includes multi-strategy and relative value		55		–		66		–
	strategies
Total hedge funds			3,171		2		2,808		2
Total		$	6,379	$	938	$	6,041	$	875

Private equity fund investments included above are not redeemable, as distributions from the funds will be received when underlying investments of the funds are liquidated. Private equity funds are generally expected to have 10-year lives at their inception, but these lives may be extended at the fund manager's discretion, typically in one or two-year increments. At March 31, 2013, assuming average original expected lives of 10 years for the funds, 63 percent of the total fair value using net asset value or its equivalent above would have expected remaining lives of less than three years, 35 percent between three and seven years and 2 percent between seven and 10 years.

At March 31, 2013, hedge fund investments included above are redeemable monthly (15 percent), quarterly (37 percent), semi-annually (26 percent) and annually (22 percent), with redemption notices ranging from one day to 180 days. More than 65 percent of these hedge fund investments require redemption notices of less than 90 days. Investments representing approximately 77 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 have pre-defined end dates and are generally expected to be lifted by the end of 2015. The restrictions that do not have stated end dates were primarily put in place prior to 2009. 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:

	Gain (Loss)
Three Months Ended March 31, (in millions)
	2013			2012
Assets:
Mortgage and other loans receivable	$	1		$	22
Bonds and equity securities		376			644
Trading — ML II interest		–			246
Trading — ML III interest		–			1,252
Retained interest in AIA		–			1,795
Alternative Investments(a)		84			2
Other, including Short-term investments		3			2
Liabilities:
Long-term debt(b)		9			(446	)
Other liabilities		(4	)		(48	)
Total gain (loss)(c)	$	469		$	3,469

(a)     Includes hedge funds, private equity funds, affordable housing partnerships and other investment partnerships.

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

(c)     Excludes discontinued operation gains or losses on instruments that were required to be carried at fair value. For instruments required to be carried at fair value, AIG recognized losses of $1 million for the three months ended March 31, 2013, and gains of $0.6 billion for the three months ended March 31, 2012, that were primarily due to changes in the fair value of derivatives, trading securities and certain other invested assets.

See Notes 6 and 7 to the Consolidated Financial Statements in the 2012 Annual Report for additional information about AIG's policies for electing the fair value option and for recognizing, measuring, and disclosing interest and dividend income and interest expense.

During the three month periods ended March 31, 2013 and 2012, we recognized losses of $34 million and $558 million, respectively, attributable to the observable effect of changes in credit spreads on our own liabilities for which the fair value option was elected. We calculate the effect of these credit spread changes using discounted cash flow techniques that incorporate current market interest rates, our 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, 2013						December 31, 2012
(in millions)	Fair Value		Outstanding Principal Amount		Difference		Fair Value		Outstanding Principal Amount		Difference
Assets:
Mortgage and other loans receivable	$	58	$	58	$	–	$	134	$	141	$	(7	)
Liabilities:
Long-term debt*	$	7,663	$	5,727	$	1,936	$	8,055	$	5,705	$	2,350

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

There were no mortgage or other loans receivable for which the fair value option was elected that were 90 days or more past due or in non-accrual status at March 31, 2013 and December 31, 2012.

FAIR VALUE MEASUREMENTS ON A NON-RECURRING BASIS

The following table presents assets measured at fair value on a non-recurring basis at the time of impairment and the related impairment charges recorded during the periods presented:

	Assets at Fair Value								Impairment Charges
	Non-Recurring Basis								March 31,
(in millions)	Level 1		Level 2		Level 3		Total		2013		2012
March 31, 2013
Alternative investments	$	–	$	–	$	1,843	$	1,843	$	79	$	93
Other assets		–		8		7		15		13		8
Total	$	–	$	8	$	1,850	$	1,858	$	92	$	101
December 31, 2012
Alternative investments	$	–	$	–	$	2,062	$	2,062
Other assets		–		3		18		21
Total	$	–	$	3	$	2,080	$	2,083

FAIR VALUE INFORMATION ABOUT FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE

The following table presents the carrying value and estimated fair value of our financial instruments not measured at fair value and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the observability of the inputs used:

	Estimated Fair Value
									Carrying Value
(in millions)	Level 1		Level 2		Level 3		Total
March 31, 2013
Assets:
Mortgage and other loans receivable	$	–	$	572	$	20,147	$	20,719	$	19,430
Other invested assets		–		57		3,746		3,803		4,927
Short-term investments		–		16,924		–		16,924		16,924
Cash		1,227		–		–		1,227		1,227
Liabilities:
Policyholder contract deposits associated with investment-type contracts		–		233		122,844		123,077		105,680
Other liabilities		–		4,239		1,626		5,865		5,866
Long-term debt		–		40,991		1,957		42,948		37,603
December 31, 2012
Assets:
Mortgage and other loans receivable	$	–	$	823	$	19,396	$	20,219	$	19,348
Other invested assets		–		237		3,521		3,758		4,932
Short-term investments		–		20,752		–		20,752		20,752
Cash		1,151		–				1,151		1,151
Liabilities:
Policyholder contract deposits associated
with investment-type contracts		–		245		123,860		124,105		105,979
Other liabilities		–		3,981		818		4,799		4,800
Long-term debt		–		43,966		1,925		45,891		40,445