INVESTMENTS

3 Months Ended

Mar. 31, 2013

INVESTMENTS

INVESTMENTS

6. INVESTMENTS

Securities Available for Sale

The following table presents the amortized cost or cost and fair value of our 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)
March 31, 2013
Bonds available for sale:
U.S. government and government sponsored entities	$	3,194	$	303	$	(1	)	$	3,496	$	–
Obligations of states, municipalities and political subdivisions		32,683		2,473		(45	)		35,111		2
Non-U.S. governments		24,251		1,222		(98	)		25,375		–
Corporate debt		136,299		14,579		(572	)		150,306		107
Mortgage-backed, asset-backed and collateralized:
RMBS		32,568		3,777		(219	)		36,126		1,708
CMBS		9,841		785		(215	)		10,411		6
CDO/ABS		8,756		819		(149	)		9,426		63
Total mortgage-backed, asset-backed and collateralized		51,165		5,381		(583	)		55,963		1,777
Total bonds available for sale(b)		247,592		23,958		(1,299	)		270,251		1,886
Equity securities available for sale:
Common stock		1,382		1,559		(19	)		2,922		–
Preferred stock		55		27		–			82		–
Mutual funds		92		12		–			104		–
Total equity securities available for sale		1,529		1,598		(19	)		3,108		–
Total	$	249,121	$	25,556	$	(1,318	)	$	273,359	$	1,886
December 31, 2012
Bonds available for sale:
U.S. government and government sponsored entities	$	3,161	$	323	$	(1	)	$	3,483	$	–
Obligations of states, municipalities and political subdivisions		33,042		2,685		(22	)		35,705		2
Non-U.S. governments		25,449		1,395		(44	)		26,800		–
Corporate debt		135,728		15,848		(464	)		151,112		115
Mortgage-backed, asset-backed and collateralized:
RMBS		31,330		3,379		(317	)		34,392		1,330
CMBS		9,699		811		(376	)		10,134		(54	)
CDO/ABS		7,740		765		(172	)		8,333		57
Total mortgage-backed, asset-backed and collateralized		48,769		4,955		(865	)		52,859		1,333
Total bonds available for sale(b)		246,149		25,206		(1,396	)		269,959		1,450
Equity securities available for sale:
Common stock		1,492		1,574		(37	)		3,029		–
Preferred stock		55		23		–			78		–
Mutual funds		93		12		–			105		–
Total equity securities available for sale		1,640		1,609		(37	)		3,212		–
Total	$	247,789	$	26,815	$	(1,433	)	$	273,171	$	1,450

(a)     Represents the amount of other-than-temporary impairments 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 March 31, 2013 and December 31, 2012, bonds available for sale held by us that were below investment grade or not rated totaled $30.7 billion and $29.6 billion, respectively.

Securities Available for Sale in a Loss Position

The following table summarizes the fair value and gross unrealized losses on our available for sale securities in a loss position, 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
March 31, 2013
Bonds available for sale:
U.S. government and government sponsored entities	$	130	$	1	$	–	$	–	$	130	$	1
Obligations of states, municipalities and political subdivisions		1,146		38		71		7		1,217		45
Non-U.S. governments		2,812		77		216		21		3,028		98
Corporate debt		13,205		374		2,465		198		15,670		572
RMBS		1,771		14		1,290		205		3,061		219
CMBS		1,524		33		1,227		182		2,751		215
CDO/ABS		563		5		1,387		144		1,950		149
Total bonds available for sale		21,151		542		6,656		757		27,807		1,299
Equity securities available for sale:
Common stock		129		19		–		–		129		19
Total	$	21,280	$	561	$	6,656	$	757	$	27,936	$	1,318
December 31, 2012
Bonds available for sale:
U.S. government and government sponsored entities	$	153	$	1	$	–	$	–	$	153	$	1
Obligations of states, municipalities and political subdivisions		692		11		114		11		806		22
Non-U.S. governments		1,555		19		442		25		1,997		44
Corporate debt		8,483		201		3,229		263		11,712		464
RMBS		597		28		1,661		289		2,258		317
CMBS		406		11		1,595		365		2,001		376
CDO/ABS		391		1		1,510		171		1,901		172
Total bonds available for sale		12,277		272		8,551		1,124		20,828		1,396
Equity securities available for sale:
Common stock		247		36		18		1		265		37
Mutual funds		3		–		–		–		3		–
Total equity securities available for sale		250		36		18		1		268		37
Total	$	12,527	$	308	$	8,569	$	1,125	$	21,096	$	1,433

At March 31, 2013, we held 4,001 and 114 individual fixed maturity and equity securities, respectively, that were in an unrealized loss position, of which 931 individual fixed maturity securities were in a continuous unrealized loss position for longer than 12 months. We did not recognize the unrealized losses in earnings on these fixed maturity securities at March 31, 2013 because we neither intend to sell the securities nor do we believe that it is more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. Furthermore, we expect to recover the entire amortized cost basis of these securities. In performing this evaluation, we considered the recovery periods for securities in previous periods of broad market declines. For fixed maturity securities with significant declines, we performed fundamental credit analyses 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 Securities Available for Sale				Fixed Maturity Securities in a Loss Position Available for Sale
March 31, 2013 (in millions)
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	11,697	$	11,910	$	647	$	642
Due after one year through five years		51,101		54,428		3,516		3,441
Due after five years through ten years		72,503		79,391		6,958		6,800
Due after ten years		61,126		68,559		9,640		9,162
Mortgage-backed, asset-backed and collateralized		51,165		55,963		8,345		7,762
Total	$	247,592	$	270,251	$	29,106	$	27,807

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 our available for sale securities:

	Three Months Ended March 31,
	2013				2012
(in millions)	Gross Realized Gains		Gross Realized Losses		Gross Realized Gains		Gross Realized Losses
Fixed maturity securities	$	371	$	71	$	490	$	16
Equity securities		37		3		451		3
Total	$	408	$	74	$	941	$	19

For the three month periods ended March 31, 2013 and 2012, the aggregate fair value of available for sale securities sold was $7.0 billion and $10.9 billion, respectively, which resulted in net realized capital gains of $0.3 billion and $0.9 billion, respectively.

Trading Securities

The following table presents the fair value of our trading securities:

	March 31, 2013					December 31, 2012
(in millions)	Fair Value		Percent of Total			Fair Value		Percent of Total
Fixed maturity securities:
U.S. government and government sponsored entities	$	6,339		26	%	$	6,794		27	%
Obligations of states, territories and political subdivisions		183		1			–		–
Non-U.S. governments		2		–			2		–
Corporate debt		1,138		5			1,320		5
Mortgage-backed, asset-backed and collateralized:
RMBS		1,969		8			1,727		7
CMBS		1,919		8			2,236		9
CDO/ABS and other collateralized*		12,297		50			12,497		50
Total mortgage-backed, asset-backed and collateralized		16,185		66			16,460		66
Other		8		–			8		–
Total fixed maturity securities		23,855		98			24,584		98
Equity securities		696		2			662		2
Total	$	24,551		100	%	$	25,246		100	%

*     Includes $0.8 billion of U.S. Government agency backed ABS.

Net Investment Income

The following table presents the components of Net investment income:

Three Months Ended March 31, (in millions)	2013		2012
Fixed maturity securities, including short-term investments	$	3,045	$	3,104
Change in fair value of ML II		–		246
Change in fair value of ML III		–		1,252
Change in fair value of AIA securities including realized gain		–		1,795
Equity securities		37		11
Interest on mortgage and other loans		280		265
Alternative investments*		866		505
Real estate		31		26
Other investments		53		23
Total investment income		4,312		7,227
Investment expenses		148		122
Net investment income	$	4,164	$	7,105

*         Includes hedge funds, private equity funds, affordable housing partnerships and other investment partnerships.

Net Realized Capital Gains and Losses

The following table presents the components of Net realized capital gains (losses):

Three Months Ended March 31, (in millions)	2013			2012
Sales of fixed maturity securities	$	300		$	474
Sales of equity securities		34			448
Other-than-temporary impairments:
Severity		(2	)		(4	)
Change in intent		(3	)		(20	)
Foreign currency declines		–			(5	)
Issuer-specific credit events		(63	)		(586	)
Adverse projected cash flows		(6	)		(3	)
Provision for loan losses		(3	)		2
Foreign exchange transactions		329			(232	)
Derivative instruments		(271	)		(262	)
Other		(15	)		(63	)
Net realized capital gains (losses)	$	300		$	(251	)

Change in Unrealized Appreciation of Investments

The following table presents the components of the increase (decrease) in unrealized appreciation of our available for sale securities:

Three Months Ended March 31, (in millions)	2013			2012
Increase (decrease) in unrealized appreciation of investments:
Fixed maturities	$	(1,152	)	$	2,987
Equity securities		7			(560	)
Other investments		(48	)		284
Total Increase (decrease) in unrealized appreciation of investments	$	(1,193	)	$	2,711

Evaluating Investments for Other-Than-Temporary Impairments

For a discussion of our policy for evaluating investments for other-than-temporary impairments, see Note 7 to the Consolidated Financial Statements in the 2012 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 our available for sale fixed maturity securities, and includes structured, corporate, municipal and sovereign fixed maturity securities:

Three Months Ended March 31, (in millions)	2013			2012
Balance, beginning of period	$	5,164		$	6,504
Increases due to:
Credit impairments on new securities subject to impairment losses		17			137
Additional credit impairments on previously impaired securities		18			307
Reductions due to:
Credit impaired securities fully disposed for which there was no prior intent or requirement
to sell		(391	)		(270	)
Accretion on securities previously impaired due to credit*		(205	)		(222	)
Other		–			8
Balance, end of period	$	4,603		$	6,464

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

Purchased Credit Impaired (PCI) Securities

Since 2011, we have purchased certain RMBS securities that have experienced deterioration in credit quality since their issuance. We determined, based on our expectations as to the timing and amount of cash flows expected to be received, that it was probable at the date of acquisition that we would not collect all contractually required payments for these PCI securities, including both principal and interest after 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 our 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. The accretable yield and the non-accretable difference will change over time, based on actual payments received and changes in estimates of undiscounted expected future cash flows, which are 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 our 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 our PCI securities, which are included in bonds available for sale:

(in millions)	At Date of Acquisition
Contractually required payments (principal and interest)	$	19,807
Cash flows expected to be collected*		15,543
Recorded investment in acquired securities		10,011

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

(in millions)	March 31, 2013		December 31, 2012
Outstanding principal balance	$	12,257	$	11,791
Amortized cost		8,122		7,718
Fair value		9,551		8,823

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

	Three Months Ended March 31,
(in millions)	2013			2012
Balance, beginning of period	$	4,766		$	4,135
Newly purchased PCI securities		345			1,222
Disposals		(60	)		(47	)
Accretion		(160	)		(168	)
Effect of changes in interest rate indices		84			(28	)
Net reclassification from non-accretable difference, including effects of prepayments		139			32
Balance, end of period	$	5,114		$	5,146

Pledged Investments

Secured Financing and Similar Arrangements

We enter into financing transactions whereby certain securities are transferred to financial institutions in exchange for cash or other liquid collateral. Securities transferred by us under these financing transactions may be sold or repledged by the counterparties. As collateral for the securities transferred by us, counterparties transfer assets to us, 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 we receive fixed maturity securities as collateral, we do 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, we and our counterparties are obligated to return the collateral provided and the securities transferred, respectively. We treat these transactions as secured financing arrangements.

Secured financing transactions also include securities sold under agreements to repurchase (repurchase agreements), in which we transfer securities in exchange for cash, with an agreement by us to repurchase the same or substantially similar securities. In the majority of these repurchase agreements, the securities transferred by us may be sold or repledged by the counterparties. Repurchase agreements entered into by our Direct Investment book (DIB) are carried at fair value based on market-observable interest rates. All other repurchase agreements are recorded at their contracted repurchase amounts plus accrued interest.

The following table presents the fair value of securities pledged to counterparties under secured financing transactions:

(in millions)	March 31, 2013		December 31, 2012
Securities available for sale	$	5,289	$	8,180
Trading securities		2,809		2,985

We also enter into agreements in which securities are purchased by us 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. These agreements are recorded at their contracted resale amounts plus accrued interest, other than those that are accounted for at fair value. Such agreements entered into by the DIB are carried at fair value based on market observable interest rates. In all reverse repurchase transactions, we take possession of or obtain a security interest in the related securities, and we have the right to sell or repledge this collateral received.

The following table presents information on the fair value of securities pledged to us under reverse repurchase agreements:

(in millions)	March 31, 2013		December 31, 2012
Securities collateral pledged to us	$	10,974	$	11,039
Amount repledged by us		18		33

Insurance — Statutory and Other Deposits

Total carrying values of cash and securities deposited by our insurance subsidiaries under requirements of regulatory authorities or other insurance-related arrangements, including certain annuity-related obligations and certain reinsurance treaties, were $8.9 billion at both March 31, 2013 and December 31, 2012.

Other Pledges

Certain of our subsidiaries are members of Federal Home Loan Banks (FHLBs) and such membership requires the members to own stock in these FHLBs. These subsidiaries owned an aggregate of $60 million and $84 million of stock in FHLBs at March 31, 2013 and December 31, 2012, 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, our subsidiaries have pledged securities available for sale with a fair value of $76 million and $341 million at March 31, 2013 and December 31, 2012, respectively, associated with advances from the FHLBs.

Certain GIAs have provisions that require collateral to be posted or payments to be made by us upon a downgrade of our 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 we could be required to make, depend 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 $4.4 billion at both March 31, 2013 and December 31, 2012. 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