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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

Commission File Number 1-8787

GRAPHIC

American International Group, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

  13-2592361
(I.R.S. Employer
Identification No.)

180 Maiden Lane, New York, New York
(Address of principal executive offices)

 

10038
(Zip Code)

Registrant's telephone number, including area code: (212) 770-7000



    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ    No o

    Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ    No o

    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ

  Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting company o

    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No þ

    As of October 31, 2011, there were 1,899,224,304 shares outstanding of the registrant's common stock.


Table of Contents


American International Group, Inc.

Table of Contents

 
Description
   
  Page Number
 

PART I – FINANCIAL INFORMATION

   
 

Item 1.

 

Financial Statements

  3
 

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  99
 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  201
 

Item 4.

 

Controls and Procedures

  201

PART II – OTHER INFORMATION

   
 

Item 1.

 

Legal Proceedings

  202
 

Item 6.

 

Exhibits

  202

Signatures

 
203
 

2


Table of Contents


American International Group, Inc.

PART I – FINANCIAL INFORMATION

Item 1.    Financial Statements

Consolidated Balance Sheet (unaudited)

   
(in millions, except for share data)
  September 30,
2011

  December 31,
2010

 
   

Assets:

             
 

Investments:

             
   

Fixed maturity securities:

             
     

Bonds available for sale, at fair value (amortized cost: 2011 – $246,390; 2010 – $220,669)

  $ 259,829   $ 228,302  
     

Bond trading securities, at fair value

    24,654     26,182  
   

Equity securities:

             
     

Common and preferred stock available for sale, at fair value (cost: 2011 – $1,790; 2010 – $2,571)

    3,209     4,581  
     

Common and preferred stock trading, at fair value

    148     6,652  
   

Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2011 – $104; 2010 – $143)

    19,279     20,237  
   

Flight equipment primarily under operating leases, net of accumulated depreciation

    35,758     38,510  
   

Other invested assets (portion measured at fair value: 2011 – $20,631; 2010 – $21,356)

    41,131     42,210  
   

Short-term investments (portion measured at fair value: 2011 – $7,536; 2010 – $23,860)

    29,098     43,738  
   
     

Total investments

    413,106     410,412  
 

Cash

    1,542     1,558  
 

Accrued investment income

    3,206     2,960  
 

Premiums and other receivables, net of allowance

    15,590     15,713  
 

Reinsurance assets, net of allowance

    30,411     25,810  
 

Deferred policy acquisition costs

    14,192     14,668  
 

Derivative assets, at fair value

    4,746     5,917  
 

Other assets, including restricted cash of $3,824 in 2011 and $30,232 in 2010 (portion measured at fair value: 2011 – $0; 2010 – $14)

    13,352     44,520  
 

Separate account assets, at fair value

    48,112     54,432  
 

Assets held for sale

    -     107,453  
   

Total assets

  $ 544,257   $ 683,443  
   

Liabilities:

             
 

Liability for unpaid claims and claims adjustment expense

  $ 93,782   $ 91,151  
 

Unearned premiums

    25,951     23,803  
 

Future policy benefits for life and accident and health insurance contracts

    33,600     31,268  
 

Policyholder contract deposits (portion measured at fair value: 2011 – $1,362; 2010 – $445)

    125,955     121,373  
 

Other policyholder funds

    6,655     6,758  
 

Current and deferred income taxes

    1,612     2,369  
 

Derivative liabilities, at fair value

    5,066     5,735  
 

Other liabilities (portion measured at fair value: 2011 – $1,268; 2010 – $2,619)

    29,925     29,108  
 

Federal Reserve Bank of New York credit facility (see Note 1)

    -     20,985  
 

Other long-term debt (portion measured at fair value: 2011 – $11,239; 2010 – $12,143)

    77,389     85,476  
 

Separate account liabilities

    48,112     54,432  
 

Liabilities held for sale

    -     97,312  
   

Total liabilities

    448,047     569,770  
   
 

Commitments, contingencies and guarantees (see Note 11)

             

Redeemable noncontrolling interests (see Notes 1 and 16):

             
 

Nonvoting, callable, junior preferred interests held by Department of the Treasury

    9,303     -  
 

Other

    105     434  
   

Total redeemable noncontrolling interests

    9,408     434  
   

AIG shareholders' equity (see Note 1):

             
 

Preferred stock

             
   

Series E; $5.00 par value; shares issued: 2011 – 0; 2010 – 400,000, at aggregate liquidation value

    -     41,605  
   

Series F; $5.00 par value; shares issued: 2011 – 0; 2010 – 300,000, aggregate liquidation value: $7,543

    -     7,378  
   

Series C; $5.00 par value; shares issued: 2011 – 0; 2010 – 100,000, aggregate liquidation value: $0.5

    -     23,000  
 

Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2011 – 1,905,882,207; 2010 – 147,124,067

    4,764     368  
 

Treasury stock, at cost; 2011 – 6,672,586; 2010 – 6,660,908 shares of common stock

    (872 )   (873 )
 

Additional paid-in capital

    81,776     9,683  
 

Accumulated deficit

    (5,466 )   (3,466 )
 

Accumulated other comprehensive income

    5,829     7,624  
   

Total AIG shareholders' equity

    86,031     85,319  
   

Non-redeemable noncontrolling interests (see Note 1):

             
 

Nonvoting, callable, junior and senior preferred interests held by Federal Reserve Bank of New York

    -     26,358  
 

Other (including $204 associated with businesses held for sale in 2010)

    771     1,562  
   

Total non-redeemable noncontrolling interests

    771     27,920  
   

Total equity

    86,802     113,239  
   

Total liabilities and equity

  $ 544,257   $ 683,443  
   

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc.

Consolidated Statement of Operations (unaudited)

   
 
  Three Months Ended September 30,   Nine Months Ended September 30,  
(dollars in millions, except per share data)
  2011
  2010
  2011
  2010
 
   

Revenues:

                         
 

Premiums

  $ 9,829   $ 11,966   $ 29,209   $ 33,953  
 

Policy fees

    658     673     2,024     1,978  
 

Net investment income

    128     5,231     10,161     15,472  
 

Net realized capital gains (losses):

                         
   

Total other-than-temporary impairments on available for sale securities

    (493 )   (459 )   (892 )   (1,397 )
   

Portion of other-than-temporary impairments on available for sale fixed maturity securities recognized in Accumulated other comprehensive income

    71     (345 )   130     (595 )
   
   

Net other-than-temporary impairments on available for sale securities recognized in net loss

    (422 )   (804 )   (762 )   (1,992 )
   

Other realized capital gains

    834     143     589     510  
   
     

Total net realized capital gains (losses)

    412     (661 )   (173 )   (1,482 )
 

Aircraft leasing revenue

    1,129     1,186     3,419     3,609  
 

Other income

    560     1,060     2,188     2,794  
   

Total revenues

    12,716     19,455     46,828     56,324  
   

Benefits, claims and expenses:

                         
 

Policyholder benefits and claims incurred

    8,333     10,050     25,378     27,386  
 

Interest credited to policyholder account balances

    1,134     1,125     3,349     3,361  
 

Amortization of deferred acquisition costs

    2,490     1,994     5,992     5,983  
 

Other acquisition and insurance expenses

    1,214     1,933     4,418     5,247  
 

Interest expense

    945     2,310     2,974     5,795  
 

Aircraft leasing expenses

    2,093     1,031     3,390     2,671  
 

Loss on extinguishment of debt (see Note 1)

    -     -     3,392     -  
 

Net (gain) loss on sale of properties and divested businesses

    2     (4 )   76     (126 )
 

Other expenses

    863     710     1,791     2,559  
   

Total benefits, claims and expenses

    17,074     19,149     50,760     52,876  
   

Income (loss) from continuing operations before income tax expense (benefit)

    (4,358 )   306     (3,932 )   3,448  
   

Income tax expense (benefit)

    (634 )   486     (1,122 )   1,044  
   

Income (loss) from continuing operations

    (3,724 )   (180 )   (2,810 )   2,404  

Income (loss) from discontinued operations, net of income tax expense (benefit) (see Note 4)

    (221 )   (1,833 )   1,395     (4,101 )
   

Net loss

    (3,945 )   (2,013 )   (1,415 )   (1,697 )
   

Less:

                         

Net income from continuing operations attributable to noncontrolling interests:

                         
   

Nonvoting, callable, junior and senior preferred interests

    145     388     538     1,415  
   

Other

    19     104     28     243  
   

Total net income from continuing operations attributable to noncontrolling interests

    164     492     566     1,658  

Net income from discontinued operations attributable to noncontrolling interests

    -     12     19     35  
   

Total net income attributable to noncontrolling interests

    164     504     585     1,693  
   

Net loss attributable to AIG

  $ (4,109 ) $ (2,517 ) $ (2,000 ) $ (3,390 )
   

Net loss attributable to AIG common shareholders

  $ (4,109 ) $ (2,517 ) $ (2,812 ) $ (686 )
   

Loss per common share attributable to AIG common shareholders:

                         
 

Basic:

                         
   

Income (loss) from continuing operations

  $ (2.05 ) $ (4.95 ) $ (2.37 ) $ 1.11  
   

Income (loss) from discontinued operations

  $ (0.11 ) $ (13.58 ) $ 0.78   $ (6.16 )
 

Diluted:

                         
   

Income (loss) from continuing operations

  $ (2.05 ) $ (4.95 ) $ (2.37 ) $ 1.11  
   

Income (loss) from discontinued operations

  $ (0.11 ) $ (13.58 ) $ 0.78   $ (6.16 )
   

Weighted average shares outstanding:

                         
 

Basic

    1,899,500,628     135,879,125     1,765,905,779     135,788,053  
 

Diluted

    1,899,500,628     135,879,125     1,765,905,779     135,855,328  
   

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc.

Consolidated Statement of Comprehensive Income (Loss) (unaudited)

   
 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
(in millions)
  2011
  2010
  2011
  2010
 
   

Net loss

  $ (3,945 ) $ (2,013 ) $ (1,415 ) $ (1,697 )
   

Other comprehensive income (loss), net of tax

                         
 

Change in unrealized appreciation (depreciation) of fixed maturity investments on which other-than-temporary credit impairments were taken

    (184 )   197     105     999  
 

Change in unrealized appreciation (depreciation) of all other investments

    (2,074 )   7,831     (959 )   12,156  
 

Change in foreign currency translation adjustments

    (716 )   876     (1,006 )   (150 )
 

Change in net derivative gains (losses) arising from cash flow hedging activities

    (57 )   2     14     63  
 

Change in retirement plan liabilities adjustment

    (339 )   (404 )   (190 )   (310 )
   

Other comprehensive income (loss)

    (3,370 )   8,502     (2,036 )   12,758  
   

Comprehensive income (loss)

    (7,315 )   6,489     (3,451 )   11,061  
 

Comprehensive income attributable to noncontrolling nonvoting, callable, junior and senior preferred interests

    145     388     538     1,415  
 

Comprehensive income (loss) attributable to other noncontrolling interests

    (87 )   379     (106 )   385  
   

Total comprehensive income attributable to noncontrolling interests

    58     767     432     1,800  
   

Comprehensive income (loss) attributable to AIG

  $ (7,373 ) $ 5,722   $ (3,883 ) $ 9,261  
   

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc.

Consolidated Statement of Cash Flows (unaudited)

   
Nine Months Ended September 30,
(in millions)
  2011
  2010
 
   

Cash flows from operating activities:

             
 

Net loss

  $ (1,415 ) $ (1,697 )
 

(Income) loss from discontinued operations

    (1,395 )   4,101  
   
 

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

             
 

Noncash revenues, expenses, gains and losses included in loss:

             
   

Net gains on sales of securities available for sale and other assets

    (1,207 )   (1,943 )
   

Net (gains) losses on sales of divested businesses

    76     (126 )
   

Loss on extinguishment of debt

    3,392     -  
   

Unrealized losses in earnings – net

    1,044     737  
   

Equity in income from equity method investments, net of dividends or distributions

    (1,042 )   (592 )
   

Depreciation and other amortization

    7,452     7,791  
   

Provision for mortgage and other loans receivable

    (12 )   376  
   

Impairments of assets

    3,052     3,775  
   

Amortization of costs and accrued interest and fees related to FRBNY Credit Facility

    48     2,762  
 

Changes in operating assets and liabilities:

             
   

General and life insurance reserves

    4,190     3,729  
   

Premiums and other receivables and payables – net

    686     (606 )
   

Reinsurance assets and funds held under reinsurance treaties

    (4,258 )   (2,124 )
   

Capitalization of deferred policy acquisition costs

    (5,856 )   (6,627 )
   

Other policyholder funds

    (267 )   339  
   

Current and deferred income taxes – net

    (1,764 )   260  
   

Trading securities

    197     542  
   

Payment of FRBNY Credit Facility accrued compounded interest and fees

    (6,363 )   -  
   

Other, net

    (1,011 )   (1,728 )
   
   

Total adjustments

    (1,643 )   6,565  
   

Net cash provided by (used in) operating activities – continuing operations

    (4,453 )   8,969  

Net cash provided by operating activities – discontinued operations

    3,370     6,146  
   

Net cash provided by (used in) operating activities

    (1,083 )   15,115  
   

Cash flows from investing activities:

             

Proceeds from (payments for)

             
 

Sales of available for sale investments

    33,063     33,951  
 

Maturities of fixed maturity securities available for sale and hybrid investments

    15,021     10,651  
 

Sales of trading securities

    9,105     5,080  
 

Sales or distributions of other invested assets (including flight equipment)

    6,539     7,609  
 

Sales of divested businesses, net

    587     1,903  
 

Principal payments received on and sales of mortgage and other loans receivable

    2,515     3,723  
 

Purchases of available for sale investments

    (69,598 )   (60,770 )
 

Purchases of trading securities

    (960 )   (2,285 )
 

Purchases of other invested assets (including flight equipment)

    (5,351 )   (6,265 )
 

Mortgage and other loans receivable issued and purchased

    (1,735 )   (2,295 )
 

Net change in restricted cash

    26,408     (339 )
 

Net change in short-term investments

    15,410     4,988  
 

Net change in derivative assets and liabilities other than AIGFP

    864     186  
 

Other, net

    (318 )   (400 )
   

Net cash provided by (used in) investing activities – continuing operations

    31,550     (4,263 )

Net cash provided by (used in) investing activities – discontinued operations

    4,478     (3,264 )
   

Net cash provided by (used in) investing activities

    36,028     (7,527 )
   

Cash flows from financing activities:

             

Proceeds from (payments for)

             
 

Policyholder contract deposits

    13,907     14,719  
 

Policyholder contract withdrawals

    (10,538 )   (11,120 )
 

Net change in short-term debt

    (234 )   (5,855 )
 

Federal Reserve Bank of New York credit facility borrowings

    -     14,900  
 

Federal Reserve Bank of New York credit facility repayments

    (14,622 )   (18,512 )
 

Issuance of other long-term debt

    6,297     9,683  
 

Repayments of other long-term debt

    (14,944 )   (10,481 )
 

Proceeds from drawdown on the Department of the Treasury Commitment

    20,292     2,199  
 

Repayment of Department of the Treasury SPV Preferred Interests

    (11,453 )   -  
 

Repayment of Federal Reserve Bank of New York SPV Preferred Interests

    (26,432 )   -  
 

Issuance of Common Stock

    5,055     -  
 

Acquisition of noncontrolling interest

    (683 )   -  
 

Other, net

    (147 )   (376 )
   

Net cash used in financing activities – continuing operations

    (33,502 )   (4,843 )

Net cash used in financing activities – discontinued operations

    (1,942 )   (3,929 )
   

Net cash used in financing activities

    (35,444 )   (8,772 )
   

Effect of exchange rate changes on cash

    37     (4 )
   

Net decrease in cash

    (462 )   (1,188 )

Cash at beginning of period

    1,558     4,400  

Change in cash of businesses held for sale

    446     (1,544 )
   

Cash at end of period

  $ 1,542   $ 1,668  
   

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc.

Consolidated Statement of Equity (unaudited)

   
Nine Months Ended
September 30, 2011


(in millions)
  Preferred
Stock

  Common
Stock

  Treasury
Stock

  Additional
Paid-in
Capital

  Accumulated
Deficit

  Accumulated
Other
Comprehensive
Income

  Total AIG
Share-
holders'
Equity

  Non-
redeemable
non-
controlling
Interests

  Total
Equity

 
   

Balance, beginning of year

  $ 71,983   $ 368   $ (873 ) $ 9,683   $ (3,466 ) $ 7,624   $ 85,319   $ 27,920   $ 113,239  
   

Series F drawdown

    20,292     -     -     -     -     -     20,292     -     20,292  

Repurchase of SPV preferred interests in connection with Recapitalization*

    -     -     -     -     -     -     -     (26,432 )   (26,432 )

Exchange of consideration for preferred stock in connection with Recapitalization*

    (92,275 )   4,138     -     67,460     -     -     (20,677 )   -     (20,677 )

Common stock issued

    -     250     -     2,636     -     -     2,886     -     2,886  

Settlement of equity unit stock purchase contracts

    -     9     -     2,160     -     -     2,169     -     2,169  

Net income (loss) attributable to AIG or other noncontrolling interests

    -     -     -     -     (2,000 )   -     (2,000 )   51     (1,949 )

Net loss attributable to noncontrolling nonvoting, callable, junior and senior preferred interests

    -     -     -     -     -     -     -     74     74  

Other comprehensive loss

    -     -     -     -     -     (1,883 )   (1,883 )   (153 )   (2,036 )

Acquisition of noncontrolling interest

    -     -     -     (160 )   -     88     (72 )   (487 )   (559 )

Net decrease due to deconsolidation

    -     -     -     -     -     -     -     (123 )   (123 )

Contributions from noncontrolling interests

    -     -     -     -     -     -     -     93     93  

Distributions to noncontrolling interests

    -     -     -     -     -     -     -     (127 )   (127 )

Other

    -     (1 )   1     (3 )   -     -     (3 )   (45 )   (48 )
   

Balance, end of period

  $ -   $ 4,764   $ (872 ) $ 81,776   $ (5,466 ) $ 5,829   $ 86,031   $ 771   $ 86,802  
   
*
See Notes 1 and 12 to Consolidated Financial Statements.

See Accompanying Notes to Consolidated Financial Statements.

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Basis of Presentation and Significant Events

    These unaudited condensed consolidated financial statements do not include all disclosures that are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) and should be read in conjunction with the audited consolidated financial statements and the related notes included in the Annual Report on Form 10-K of American International Group, Inc. (AIG) for the year ended December 31, 2010 (AIG's 2010 Annual Report on Form 10-K). The condensed consolidated financial information as of December 31, 2010 included herein has been derived from audited consolidated financial statements not included herein.

    Certain of AIG's foreign subsidiaries included in the consolidated financial statements report on different fiscal-period bases. The effect on AIG's consolidated financial condition and results of operations of all material events occurring at these subsidiaries through the date of each of the periods presented in these financial statements has been recorded.

    In the opinion of management, these consolidated financial statements contain the normal recurring adjustments necessary for a fair statement of the results presented herein. Interim period operating results may not be indicative of the operating results for a full year. AIG evaluated the need to recognize or disclose events that occurred subsequent to the balance sheet date. All material intercompany accounts and transactions have been eliminated.


Use of Estimates

    The preparation of financial statements in conformity with GAAP requires the application of accounting policies that often involve a significant degree of judgment. AIG considers that its accounting policies that are most dependent on the application of estimates and assumptions are those relating to items considered by management in the determination of:

    These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, AIG's consolidated financial condition, results of operations and cash flows could be materially affected.

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


Reclassifications and Segment Changes

Reclassifications

    Due to changes in the relative composition of AIG's remaining continuing operations as a result of the substantial completion of AIG's asset disposition plan, AIG began presenting separately the following line items on its Consolidated Statement of Operations beginning in the first quarter of 2011:

 
Current line item:
  Previously included in line item:
 
Policy fees(a)   Premiums and other considerations
Aircraft leasing revenues and Aircraft leasing expenses, respectively   Other income and Other expenses, respectively
Interest credited to policyholder account balances(b)   Policyholder benefits and claims incurred
Amortization of deferred acquisition costs   Policy acquisition and other insurance expenses
 
(a)
Represents fees recognized from universal life and investment-type products consisting of policy charges for the cost of insurance, policy administration charges, amortization of unearned revenue reserves and surrender charges.

(b)
Represents interest on account-value-based policyholder deposits consisting of amounts credited on non-equity-indexed account values, accretion to the host contract for equity indexed products, and net amortization of sales inducements.

Segment Changes

    In order to align financial reporting with changes made during 2011 to the manner in which AIG's chief operating decision makers review the businesses to assess performance and make decisions about resources to be allocated, AIG changed its segments in the third quarter of 2011. See Note 3 herein for additional information on AIG's segment changes.

    Prior period amounts were reclassified to conform to the current period presentation for the above items. Additionally, certain other reclassifications have been made to prior period amounts in the Consolidated Statement of Operations and Consolidated Balance Sheet to conform to the current period presentation.


Significant Events

    In 2011, AIG completed the Recapitalization (described below), executed transactions in the debt and equity capital markets and substantially completed its asset disposition plan.

Recapitalization

    On January 14, 2011 (the Closing), AIG completed a series of integrated transactions to recapitalize AIG (the Recapitalization) with the United States Department of the Treasury (the Department of the Treasury), the Federal Reserve Bank of New York (the FRBNY) and the AIG Credit Facility Trust (the Trust), including the repayment of all amounts owed under the Credit Agreement, dated as of September 22, 2008 (as amended, the FRBNY Credit Facility). AIG recognized a loss on extinguishment of debt in the first quarter of 2011, representing primarily accelerated amortization of the prepaid commitment fee asset resulting from the termination of the FRBNY Credit Facility at Closing.

Repayment and Termination of the FRBNY Credit Facility

    At the Closing, AIG repaid to the FRBNY approximately $21 billion in cash, representing complete repayment of all amounts owed under the FRBNY Credit Facility, and the FRBNY Credit Facility was terminated. The funds for the repayment came from the net cash proceeds from AIG's sale of 67 percent of the ordinary shares of AIA Group Limited (AIA) in its initial public offering and from AIG's sale of American Life Insurance Company (ALICO) in 2010. These funds were loaned to AIG in the form of secured limited recourse debt from the special purpose vehicles that held the proceeds of the AIA IPO and the ALICO sale (the AIA SPV and the ALICO SPV, respectively, and collectively, the SPVs). As of September 30, 2011, the loan from the ALICO SPV had been repaid. The loan from the AIA SPV is secured by pledges and any proceeds received from the sale by AIG and certain of its subsidiaries of, among other collateral, all or part of their equity interest in International Lease

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Finance Corporation (ILFC or the Designated Entity). Proceeds from the sales of the remaining ordinary shares of AIA held by the AIA SPV will be used to pay down the liquidation preference of the Department of the Treasury's AIA SPV Preferred Interests. Until their respective sales on February 1, 2011 and August 18, 2011, as further discussed in Sales of Divested Businesses below, AIG's Japan-based life insurance subsidiaries, AIG Star Life Insurance Company Ltd. (AIG Star) and AIG Edison Life Insurance Company (AIG Edison), and Nan Shan Life Insurance Company, Ltd. (Nan Shan) were also Designated Entities.

Repurchase and Exchange of SPV Preferred Interests

    At the Closing, AIG drew down approximately $20.3 billion (the Series F Closing Drawdown Amount) under the Department of the Treasury's commitment (the Department of the Treasury Commitment (Series F)) pursuant to the Securities Purchase Agreement, dated as of April 17, 2009 (the Series F SPA), between AIG and the Department of the Treasury relating to AIG's Series F Fixed Rate Non-Cumulative Perpetual Preferred Stock, par value $5.00 per share (the Series F Preferred Stock). The Series F Closing Drawdown Amount was the full amount remaining under the Department of the Treasury Commitment (Series F), less $2 billion that AIG designated to be available after the Closing for general corporate purposes under a commitment relating to AIG's Series G Cumulative Mandatory Convertible Preferred Stock, par value $5.00 per share (the Series G Preferred Stock), described below (the Series G Drawdown Right). The right of AIG to draw on the Department of the Treasury Commitment (Series F) (other than the Series G Drawdown Right) was terminated.

    AIG used the Series F Closing Drawdown Amount to repurchase all of the FRBNY's preferred interests in the SPVs (the SPV Preferred Interests). AIG transferred the SPV Preferred Interests to the Department of the Treasury as part of the consideration for the exchange of the Series F Preferred Stock (described below).

    The Department of the Treasury, so long as it holds SPV Preferred Interests, has the right, subject to existing contractual restrictions, to require AIG to dispose of the remaining AIA ordinary shares held by the AIA SPV. In addition, the consent of the Department of the Treasury, so long as it holds SPV Preferred Interests, will be required for AIG to take specified significant actions with respect to the Designated Entity, ILFC, including initial public offerings, sales, significant acquisitions or dispositions and incurrence of specified levels of indebtedness. If any SPV Preferred Interests are outstanding on May 1, 2013, the Department of the Treasury will have the right to compel the sale of all or a portion of ILFC, the Designated Entity, on terms that it will determine.

    As a result of these transactions, the SPV Preferred Interests are no longer considered permanent equity on AIG's Consolidated Balance Sheet, and are classified as Redeemable noncontrolling nonvoting, callable, junior preferred interests held by the Department of the Treasury.

Issuance and Cancellation of AIG's Series G Preferred Stock

    At the Closing, AIG and the Department of the Treasury amended and restated the Series F SPA to provide for the issuance of 20,000 shares of Series G Preferred Stock by AIG to the Department of the Treasury. The Series G Preferred Stock was issued with a liquidation preference of zero. Because the net proceeds to AIG from the completion of the registered public offering of AIG common stock, par value $2.50 per share (AIG Common Stock), in May 2011 (the May Common Stock Offering) (described below under May 2011 Common Stock Offering and Sale) of $2.9 billion exceeded the $2.0 billion Series G Drawdown Right, the Series G Drawdown Right was terminated and the Series G Preferred Stock was cancelled immediately thereafter.

Exchange of AIG's Series C, E and F Preferred Stock for AIG Common Stock and Series G Preferred Stock

    At the Closing:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    The issuance of AIG Common Stock to the Department of the Treasury as described above significantly affected the determination of net income attributable to common shareholders and the weighted average shares outstanding, both of which are used to compute earnings per share. See Note 12 herein for further discussion.

    AIG entered into a registration rights agreement (the Registration Rights Agreement) with the Department of the Treasury that granted the Department of the Treasury registration rights with respect to the shares of AIG Common Stock issued at the Closing. The May Common Stock Offering was conducted in accordance with the right of AIG under the Registration Rights Agreement to complete a registered primary offering of AIG Common Stock. Current rights of the Department of the Treasury under the Registration Rights Agreement include:

    AIG has the right to raise the greater of $2 billion and the amount of the projected deficit if the AIG Board of Directors determines, after consultation with the Department of the Treasury, that due to events affecting AIG's insurance subsidiaries, AIG Parent's reasonably projected aggregate liquidity (cash and cash equivalents and commitments of credit) will fall below $8 billion within 12 months of the date of such determination.

    Until the Department of the Treasury's ownership of AIG's voting securities falls below 33 percent, the Department of the Treasury will, subject to certain exceptions, have complete control over the terms, conditions and pricing of any offering in which it participates, including any primary offering by AIG. As a result, if AIG seeks to conduct an offering of its equity securities the Department of the Treasury may decide to participate in the offering, and to prevent AIG from selling any equity securities.

Issuance of Warrants to Purchase AIG Common Stock

    On January 19, 2011, as part of the Recapitalization, AIG issued to the holders of record of AIG Common Stock as of January 13, 2011, by means of a dividend, ten-year warrants to purchase a total of 74,997,778 shares of AIG Common Stock at an exercise price of $45.00 per share. AIG retained 67,650 of these warrants for tax withholding purposes. No warrants were issued to the Trust, the Department of the Treasury or the FRBNY.

May 2011 Common Stock Offering and Sale

    On May 27, 2011, AIG and the Department of the Treasury, as the selling shareholder, completed a registered public offering of AIG Common Stock. AIG issued and sold 100 million shares of AIG Common Stock for aggregate net proceeds of approximately $2.9 billion and the Department of the Treasury sold 200 million shares of AIG Common Stock. AIG did not receive any of the proceeds from the sale of the shares of AIG Common Stock by the Department of the Treasury. Of the net proceeds AIG received from this offering, $550 million is being used to fund the Consolidated 2004 Securities Litigation settlement (see Note 11 herein). As required by the Registration Rights Agreement, AIG paid the underwriting discount as well as certain expenses with respect to the shares sold by the Department of the Treasury. The balance of the net proceeds was used for general corporate purposes. As a result of the sale of AIG Common Stock in this offering, the Series G Drawdown Right was terminated, the Series G Preferred Stock was cancelled and the ownership by the Department of the Treasury

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was reduced from approximately 92 percent to approximately 77 percent of the AIG Common Stock outstanding after the completion of the offering.

September 2011 Debt Offering

    On September 13, 2011, AIG issued $1.2 billion of 4.250% Notes Due 2014 and $800 million of 4.875% Notes Due 2016. The proceeds are expected to be used to pay maturing notes issued by AIG to fund the Matched Investment Program (MIP).

Sales of Businesses

    On February 1, 2011, AIG completed the sale of AIG Star and AIG Edison to Prudential Financial, Inc., for $4.8 billion, consisting of $4.2 billion in cash and $0.6 billion in the assumption of third-party debt. Of the $4.2 billion in cash, AIG retained $2 billion to support the capital of Chartis, Inc. and its subsidiaries pursuant to an agreement with the Department of the Treasury, and caused the remaining amount to be applied to pay down a portion of liquidation preference of the Department of the Treasury's AIA SPV Preferred Interests. AIG recognized a pre-tax gain of $2.0 billion on the date of the sale which is reflected in Income (loss) from discontinued operations in the Consolidated Statement of Operations.

    On January 12, 2011, AIG entered into an agreement to sell its 97.57 percent interest in Nan Shan to a Taiwan-based consortium. The transaction closed on August 18, 2011 for net proceeds of $2.15 billion in cash. The net proceeds from the transaction were used to pay down a portion of the liquidation preference of the Department of the Treasury's AIA SPV Preferred Interests.

    See Note 4 herein for additional information on these transactions and Note 11 for discussion of indemnification provisions.

Sale of MetLife Securities

    On March 1, 2011, AIG entered into a Coordination Agreement among the ALICO SPV, AIG and MetLife, Inc. (MetLife) regarding a series of integrated transactions (the MetLife Disposition) whereby MetLife agreed to allow AIG to offer for sale the MetLife securities that AIG received when it sold ALICO to MetLife earlier than contemplated under the original terms of the ALICO sale (the ALICO Sale). The MetLife Disposition included (i) the sale of MetLife common stock, par value $0.01 per share, and the sale of common equity units of MetLife pursuant to two separate underwritten public offerings and (ii) the sale by the ALICO SPV of MetLife preferred stock to MetLife.

    In connection with the MetLife Disposition, on March 1, 2011, AIG and the ALICO SPV entered into a letter agreement with the Department of the Treasury pursuant to which AIG and the ALICO SPV received the consent of the Department of the Treasury to the MetLife Disposition. AIG completed the MetLife Disposition on March 8, 2011 for a total of $9.6 billion and used $6.6 billion of the proceeds to pay down all of the liquidation preference of the Department of the Treasury's ALICO SPV Preferred Interests and a portion of the liquidation preference of the Department of the Treasury's AIA SPV Preferred Interests. In the first quarter of 2011, AIG recognized a loss of $348 million, representing the decline in the value of the MetLife securities from December 31, 2010 through their disposition on March 8, 2011, due to market conditions prior to the MetLife Disposition. Of this amount, $191 million is reflected in Net realized capital gains (losses) and $157 million is reflected in Net investment income in the Consolidated Statement of Operations. The remaining proceeds were placed in escrow to secure indemnities provided to MetLife under the original terms of the ALICO stock purchase agreement as described in Note 11 herein.

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


Liquidity Assessment

    In assessing AIG's current financial flexibility and developing operating plans for the future, management has made significant judgments and estimates with respect to the potential financial and liquidity effects of AIG's risks and uncertainties, including but not limited to:

    AIG believes that it has sufficient liquidity to meet future liquidity requirements, including reasonably foreseeable contingencies and events.


Supplementary Disclosure of Consolidated Cash Flow Information

   
Nine Months Ended September 30,
(in millions)
  2011
  2010
 
   

Cash paid during the period for:

             
 

Interest*

  $ (7,952 ) $ (3,978 )
 

Taxes

  $ (643 ) $ (1,134 )

Non-cash financing/investing activities:

             
 

Interest credited to policyholder contract deposits included in financing activities

  $ 3,602   $ 6,768  
 

Debt assumed on consolidation of variable interest entities

  $ -   $ 2,591  
 

Debt assumed on acquisition

  $ -   $ 164  
   
*
2011 includes payment of FRBNY Credit Facility accrued compounded interest of $4.7 billion, before the facility was terminated on January 14, 2011 in connection with the Recapitalization.


2. Summary of Significant Accounting Policies

Recent Accounting Standards

Future Application of Accounting Standards

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

    In October 2010, the Financial Accounting Standards Board (FASB) issued an accounting standard update that amends the accounting for costs incurred by insurance companies that can be capitalized in connection with acquiring or renewing insurance contracts. The new standard clarifies how to determine whether the costs incurred in connection with the acquisition of new or renewal insurance contracts qualify as deferred acquisition costs. The new standard is effective for interim and annual periods beginning on January 1, 2012 with early adoption permitted. Prospective or retrospective application is also permitted.

    AIG elected not to adopt the standard earlier than required and has not yet determined whether it will adopt it prospectively or retrospectively. Upon adoption, retrospective application would result in a reduction to beginning retained earnings for the earliest period presented, while prospective application would result in higher amortization expense being recognized in the period of adoption and future periods relative to the retrospective method. The accounting standard update will result in a decrease in the amount of capitalized costs in connection with the acquisition or renewal of insurance contracts because AIG will only defer costs that are incremental and directly related to the successful acquisition of new or renewal business.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    AIG is currently assessing the effect of adoption of this new standard on its consolidated financial condition and results of operations. If this standard is adopted retrospectively on January 1, 2012, the range of the pre-tax effect of the reduction of deferred acquisition costs is expected to be between $4.6 billion and $5.1 billion.

Reconsideration of Effective Control for Repurchase Agreements

    In April 2011, the FASB issued an accounting standard update that amends the criteria used to determine effective control for repurchase agreements and other similar arrangements such as securities lending transactions. The new standard modifies the criteria for determining when these transactions would be accounted for as secured borrowings (i.e., financings) instead of sales of the securities.

    The new standard removes from the assessment of effective control the requirement that the transferor have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. The removal of this requirement makes the level of collateral received by the transferor in a repurchase agreement or similar arrangement irrelevant in determining whether the transaction should be accounted for as a sale. Consequently, more repurchase agreements, securities lending transactions and similar arrangements will be accounted for as secured borrowings.

    The guidance in the new standard must be applied prospectively to transactions or modifications of existing transactions that occur on or after January 1, 2012. Early adoption is prohibited. AIG is currently assessing the effect of adoption of this new standard on its consolidated financial condition, results of operations and cash flows.

Common Fair Value Measurements and Disclosure Requirements in GAAP and IFRS

    In May 2011, the FASB issued an accounting standard update that amends certain aspects of the fair value measurement guidance in GAAP, primarily to achieve the FASB's objective of a converged definition of fair value and substantially converged measurement and disclosure guidance with International Financial Reporting Standards (IFRS). Consequently, when the new standard becomes effective on January 1, 2012, GAAP and IFRS will be consistent, with certain exceptions including the accounting for day one gains and losses, measuring the fair value of alternative investments measured on a net asset value basis and certain disclosure requirements.

    The new standard's fair value guidance applies to all companies that measure assets, liabilities, or instruments classified in shareholders' equity at fair value or provide fair value disclosures for items not recorded at fair value. While many of the amendments to GAAP are not expected to significantly affect current practice, the guidance clarifies how a principal market is determined, addresses the fair value measurement of financial instruments with offsetting market or counterparty credit risks and the concept of valuation premise (i.e., in-use or in exchange) and highest and best use, extends the prohibition on blockage factors to all three levels of the fair value hierarchy, and requires additional disclosures.

    The new standard is effective for AIG for interim and annual periods beginning on January 1, 2012. If different fair value measurements result from applying the new standard, AIG will recognize the difference in the period of adoption as a change in estimate. The new disclosure requirements must be applied prospectively. In the period of adoption, AIG will disclose any changes in valuation techniques and related inputs resulting from application of the amendments and quantify the total effect, if material. AIG is assessing the effect of the new standard on its consolidated statements of financial condition, results of operations and cash flows.

Presentation of Comprehensive Income

    In June 2011, the FASB issued an accounting standard update that requires the presentation of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components, followed consecutively by a second statement that presents total other comprehensive income and its components. This presentation is effective January 1, 2012 and is required to be applied retrospectively.

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Accounting Standards Adopted During 2011

    AIG adopted the following accounting standards during the first nine months of 2011:

Consolidation of Investments in Separate Accounts

    In April 2010, the FASB issued an accounting standard that clarifies that an insurance company should not combine any investments held in separate account interests with its interest in the same investment held in its general account when assessing the investment for consolidation. Separate accounts represent funds for which investment income and investment gains and losses accrue directly to the policyholders who bear the investment risk. The standard also provides guidance on how an insurer should consolidate an investment fund when the insurer concludes that consolidation of an investment is required and the insurer's interest is through its general account in addition to any separate accounts. The new standard became effective for AIG on January 1, 2011. The adoption of this new standard did not have a material effect on AIG's consolidated financial condition, results of operations or cash flows.

Fair Value Measurements and Disclosures

    In January 2010, the FASB issued updated guidance that requires fair value disclosures about significant transfers between Level 1 and 2 measurement categories and separate presentation of purchases, sales, issuances, and settlements within the rollforward of Level 3 activity. Also, this updated fair value guidance clarifies the disclosure requirements about the level of disaggregation and valuation techniques and inputs. This new guidance was effective for AIG beginning on January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements within the rollforward of Level 3 activity, which were effective for AIG beginning on January 1, 2011. See Note 6 herein.

A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring

    In April 2011, the FASB issued an accounting standard update that amends the guidance for a creditor's evaluation of whether a restructuring is a troubled debt restructuring and requires additional disclosures about a creditor's troubled debt restructuring activities. The new standard clarifies the existing guidance on the two criteria used by creditors to determine whether a modification or restructuring is a troubled debt restructuring: (i) whether the creditor has granted a concession and (ii) whether the debtor is experiencing financial difficulties. The new standard became effective for AIG for interim and annual periods beginning on July 1, 2011. AIG is required to apply the guidance in the accounting standard retrospectively for all modifications and restructuring activities that have occurred since January 1, 2011. For receivables that are considered newly impaired under the guidance, AIG is required to measure the impairment of those receivables prospectively in the first period of adoption. In addition, AIG must begin providing the disclosures about troubled debt restructuring activities in the period of adoption. The adoption of this new standard did not have a material effect on AIG's consolidated financial condition, results of operations or cash flows. See Note 8 herein.


3. Segment Information

    AIG reports the results of its operations through three reportable segments: Chartis, SunAmerica Financial Group (SunAmerica) and Aircraft Leasing. AIG evaluates performance based on pre-tax income (loss), excluding results from discontinued operations and net (gains) losses on sales of divested businesses, because AIG believes this provides more meaningful information on how its operations are performing.

    In order to align financial reporting with changes made during 2011 to the manner in which AIG's chief operating decision makers review the businesses to assess performance and make decisions about resources to be allocated, the following changes were made to AIG's segment information:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    Prior periods have been revised to conform to the current period presentation for the above segment changes.


The following table presents AIG's operations by reportable segment:

   
 
  Reportable Segment    
   
   
   
 
 
   
   
  Consolidation
and
Eliminations

   
 
(in millions)
  Chartis
  SunAmerica
  Aircraft
Leasing
*
  Other
Operations

  Total
  Consolidated
 
   

Three Months Ended September 30, 2011

                                           
 

Total revenues

  $ 10,182   $ 3,582   $ 1,117   $ (2,433 ) $ 12,448   $ 268   $ 12,716  
 

Pre-tax income (loss)

    498     309     (1,329 )   (3,943 )   (4,465 )   107     (4,358 )
   

Three Months Ended September 30, 2010

                                           
 

Total revenues

  $ 9,397   $ 3,944   $ 1,190   $ 4,881   $ 19,412   $ 43   $ 19,455  
 

Pre-tax income (loss)

    865     998     (214 )   (1,568 )   81     225     306  
   

Nine Months Ended September 30, 2011

                                           
 

Total revenues

  $ 30,273   $ 11,317   $ 3,411   $ 1,864   $ 46,865   $ (37 ) $ 46,828  
 

Pre-tax income (loss)

    910     2,024     (1,122 )   (5,853 )   (4,041 )   109     (3,932 )
   

Nine Months Ended September 30, 2010

                                           
 

Total revenues

  $ 27,482   $ 10,147   $ 3,579   $ 15,655   $ 56,863   $ (539 ) $ 56,324  
 

Pre-tax income (loss)

    3,226     1,413     (122 )   (1,121 )   3,396     52     3,448  
   
*
AIG's Aircraft Leasing operations consist of a single operating segment.

The following table presents Chartis operations by operating segment:

   
(in millions)
  Commercial
Insurance

  Consumer
Insurance

  Other
  Total
Chartis

 
   

Three Months Ended September 30, 2011

                         
 

Total revenues

  $ 5,708   $ 3,322   $ 1,152   $ 10,182  
 

Pre-tax income (loss)

    (474 )   (45 )   1,017     498  
   

Three Months Ended September 30, 2010

                         
 

Total revenues

  $ 5,427   $ 3,148   $ 822   $ 9,397  
 

Pre-tax income

    65     147     653     865  
   

Nine Months Ended September 30, 2011

                         
 

Total revenues

  $ 16,819   $ 9,849   $ 3,605   $ 30,273  
 

Pre-tax income (loss)

    (1,869 )   (415 )   3,194     910  
   

Nine Months Ended September 30, 2010

                         
 

Total revenues

  $ 16,174   $ 7,730   $ 3,578   $ 27,482  
 

Pre-tax income (loss)

    (173 )   156     3,243     3,226  
   

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following table presents SunAmerica operations by operating segment:

   
(in millions)
  Domestic
Life
Insurance

  Domestic
Retirement
Services

  Total
SunAmerica

 
   

Three Months Ended September 30, 2011

                   
 

Total revenues

  $ 2,134   $ 1,448   $ 3,582  
 

Pre-tax income (loss)

    474     (165 )   309  
   

Three Months Ended September 30, 2010

                   
 

Total revenues

  $ 2,077   $ 1,867   $ 3,944  
 

Pre-tax income

    343     655     998  
   

Nine Months Ended September 30, 2011

                   
 

Total revenues

  $ 6,242   $ 5,075   $ 11,317  
 

Pre-tax income

    1,186     838     2,024  
   

Nine Months Ended September 30, 2010

                   
 

Total revenues

  $ 5,989   $ 4,158   $ 10,147  
 

Pre-tax income

    854     559     1,413  
   

    AIG Global Real Estate Investment Corp. and Institutional Asset Management, previously reported as components of the Direct Investment book and Asset Management operations, respectively, are now reported in Corporate & Other. Retained Interests represents the fair value gains or losses on the MetLife securities prior to sale, AIG's remaining interest in AIA ordinary shares, and the retained interest in ML III.

The following table presents the components of AIG's Other operations:

   
(in millions)
  Mortgage
Guaranty

  Global
Capital
Markets

  Direct
Investment
Book

  Retained
Interests

  Corporate
& Other

  Divested
Businesses

  Consolidation
and
Eliminations

  Total
Other
Operations

 
   

Three Months Ended September 30, 2011

                                                 
 

Total revenues

  $ 246   $ (130 ) $ 159   $ (3,246 ) $ 561   $ -   $ (23 ) $ (2,433 )
 

Pre-tax income (loss)

    (80 )   (187 )   103     (3,246 )   (523 )   -     (10 )   (3,943 )
   

Three Months Ended September 30, 2010

                                                 
 

Total revenues

  $ 252   $ 236   $ 33   $ 301   $ 8   $ 3,961   $ 90   $ 4,881  
 

Pre-tax income (loss)

    (127 )   145     (26 )   301     (2,620 )   637     122     (1,568 )
   

Nine Months Ended September 30, 2011

                                                 
 

Total revenues

  $ 716   $ 151   $ 758   $ (743 ) $ 1,030   $ -   $ (48 ) $ 1,864  
 

Pre-tax income (loss)

    (66 )   (66 )   586     (743 )   (5,538 )   -     (26 )   (5,853 )
   

Nine Months Ended September 30, 2010

                                                 
 

Total revenues

  $ 832   $ 149   $ 806   $ 1,410   $ 1,636   $ 10,616   $ 206   $ 15,655  
 

Pre-tax income (loss)

    214     (99 )   602     1,410     (5,656 )   2,037     371     (1,121 )
   

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4. Discontinued Operations and Held-for-Sale Classification

Discontinued Operations

AIG Star and AIG Edison Sale

    On September 30, 2010, AIG entered into a definitive agreement with Prudential Financial, Inc. for the sale of its Japan-based insurance subsidiaries, AIG Star and AIG Edison, for total consideration of $4.8 billion, including the assumption of certain outstanding debt totaling $0.6 billion owed by AIG Star and AIG Edison. The transaction closed on February 1, 2011 and AIG recognized a pre-tax gain of $2.0 billion on the sale that is reflected in Income (loss) from discontinued operations in the Consolidated Statement of Operations. In connection with the sale, AIG recorded a goodwill impairment charge of $1.3 billion in the third quarter of 2010.

Nan Shan Sale

    On January 12, 2011, AIG entered into an agreement to sell its 97.57 percent interest in Nan Shan to a Taiwan-based consortium. The transaction was consummated on August 18, 2011 for net proceeds of $2.15 billion in cash. AIG recorded a pre-tax gain of $69 million and a pre-tax loss of $976 million on the sale for the three and nine months ended September 30, 2011, respectively, largely offsetting Nan Shan operating results for the periods which are both reflected in Income (loss) from discontinued operations in the Consolidated Statement of Operations. The net proceeds from the transaction were used to pay down a portion of the liquidation preference of the Department of the Treasury's AIA SPV Preferred Interests.

    Results from discontinued operations for the three and nine months ended September 30, 2011 and 2010 primarily include the results of Nan Shan and results of AIG Star and AIG Edison through the dates of disposition, and settlements pursuant to indemnification provisions from prior dispositions. AIG has no continuing significant involvement with or significant continuing cash flows from these businesses. Results from discontinued operations for the nine months ended September 30, 2010 also include the results of ALICO and American General Finance, Inc. (AGF), which were sold during 2010. See Note 4 to the Consolidated Financial Statements in AIG's 2010 Annual Report on Form 10-K for discussion of these sales and Note 11 herein for a discussion of guarantees and indemnifications associated with sales of businesses.


The following table summarizes income (loss) from discontinued operations:

   
 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
(in millions)
  2011
  2010
  2011
  2010
 
   

Revenues:

                         
 

Premiums

  $ 915   $ 4,651   $ 5,012   $ 14,573  
 

Net investment income

    423     1,517     1,632     5,171  
 

Net realized capital gains (losses)

    (120 )   364     844     (63 )
 

Other income

    -     228     5     1,246  
   

Total revenues

    1,218     6,760     7,493     20,927  
   

Benefits, claims and expenses

    1,239     6,803     6,361     23,095  

Interest expense allocation

    -     369     2     407  
   

Income (loss) from discontinued operations

    (21 )   (412 )   1,130     (2,575 )
   

Gain (loss) on sales

    43     (1,970 )   945     (2,371 )
   

Income (loss) from discontinued operations, before tax expense (benefit)

    22     (2,382 )   2,075     (4,946 )
   

Income tax expense (benefit)

    243     (549 )   680     (845 )
   

Income (loss) from discontinued operations, net of income tax

  $ (221 ) $ (1,833 ) $ 1,395   $ (4,101 )
   

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Held-for-Sale Classification

    In the third quarter of 2011, AIG sold its remaining assets and liabilities that had been classified as held-for-sale. At December 31, 2010, held-for-sale assets and liabilities consisted of Nan Shan, AIG Star, and AIG Edison, and aircraft that remained to be sold under agreements for sale by ILFC.


The following table summarizes the components of assets and liabilities held for sale on the Consolidated Balance Sheet as of December 31, 2010:

   
(in millions)
  December 31,
2010

 
   

Assets:

       
 

Fixed maturity securities

  $ 77,905  
 

Equity securities

    4,488  
 

Mortgage and other loans receivable, net

    5,584  
 

Other invested assets

    4,167  
 

Short-term investments

    3,670  
 

Deferred policy acquisition costs and Other assets

    7,639  
 

Separate account assets

    3,745  
   

Assets of businesses held for sale

    107,198  
   

Flight equipment*

    255  
   

Total assets held for sale

  $ 107,453  
   

Liabilities:

       
 

Future policy benefits for life and accident and health insurance contracts

  $ 61,767  
 

Policyholder contract deposits

    26,847  
 

Other liabilities

    4,428  
 

Other long-term debt

    525  
 

Separate account liabilities

    3,745  
   

Total liabilities held for sale

  $ 97,312  
   
*
Represents nine aircraft that were under agreements for sale by ILFC at December 31, 2010.


5. Business Combination

    On March 31, 2010, AIG, through a Chartis International subsidiary, purchased additional voting shares in Fuji Fire & Marine Insurance Company Limited (Fuji), a publicly traded Japanese insurance company with property/casualty insurance operations and a life insurance subsidiary. The acquisition of the additional voting shares for $145 million increased Chartis International's total voting ownership interest in Fuji from 41.7 percent to 54.8 percent, which resulted in Chartis International obtaining control of Fuji. This acquisition was consistent with Chartis International's desire to increase its share in the substantial Japanese insurance market, which is undergoing significant consolidation, and to achieve cost savings from synergies.

    In March 2011, Chartis completed the acquisition of approximately 305 million shares of Fuji tendered in response to a public offer at an offer price of 146 Yen per share ($1.76 per share) for a purchase price of $538 million. In August 2011, Chartis acquired the remaining Fuji shares. As of September 30, 2011, Chartis owned 100 percent of Fuji's outstanding voting shares.

    The 2011 purchases were accounted for as equity transactions because AIG previously consolidated Fuji due to its controlling interest. Accordingly, the difference between the fair value of the total consideration paid of $560 million and the carrying value of the noncontrolling interest acquired of $486 million was recognized as a reduction of AIG's equity. There was no gain or loss recorded in the Consolidated Statement of Operations.

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6. Fair Value Measurements

Fair Value Measurements on a Recurring Basis

    AIG measures the following financial instruments at fair value on a recurring basis:

    The fair value of a financial instrument is the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between willing, able and knowledgeable market participants at the measurement date.

    The degree of judgment used in measuring the fair value of financial instruments generally inversely correlates with the level of observable valuation inputs. AIG maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, liquidity and general market conditions.


Fair Value Hierarchy

    Assets and liabilities recorded at fair value in the Consolidated Balance Sheet are measured and classified in a hierarchy for disclosure purposes consisting of three "levels" based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:

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    The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the levels noted above, and it is the observability of the inputs used that determines the appropriate level in the fair value hierarchy for the respective asset or liability.


Valuation Methodologies

Incorporation of Credit Risk in Fair Value Measurements

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    A CDS is a derivative contract that allows the transfer of third party credit risk from one party to the other. The buyer of the CDS pays an upfront and/or periodic premium to the seller. The seller's payment obligation is triggered by the occurrence of a credit event under a specified reference security and is determined by the loss on that specified reference security. The present value of the amount of the upfront and/or periodic premium therefore represents a market-based expectation of the likelihood that the specified reference party will fail to perform on the reference obligation, a key market observable indicator of non-performance risk (the CDS spread).

    Fair values for fixed maturity securities based on observable market prices for identical or similar instruments implicitly incorporate counterparty credit risk. Fair values for fixed maturity securities based on internal models incorporate counterparty credit risk by using discount rates that take into consideration cash issuance spreads for similar instruments or other observable information.

    The cost of credit protection is determined under a discounted present value approach considering the market levels for single name CDS spreads for each specific counterparty, the mid market value of the net exposure (reflecting the amount of protection required) and the weighted average life of the net exposure. CDS spreads are provided to AIG by an independent third party. AIG utilizes an interest rate based on the benchmark London Interbank Offered Rate (LIBOR) curve to derive its discount rates.

    While this approach does not explicitly consider all potential future behavior of the derivative transactions or potential future changes in valuation inputs, AIG believes this approach provides a reasonable estimate of the fair value of the assets and liabilities, including consideration of the impact of non-performance risk.

Fixed Maturity Securities — Trading and Available for Sale

    Whenever available, AIG obtains quoted prices in active markets for identical assets at the balance sheet date to measure fixed maturity securities at fair value in its trading and available for sale portfolios. Market price data is generally obtained from dealer markets.

    Management is responsible for the determination of the value of the investments carried at fair value and the supporting methodologies and assumptions. AIG employs independent third-party valuation service providers to gather, analyze, and interpret market information and derive fair value estimates based upon relevant methodologies and assumptions for individual instruments. When AIG's valuation service providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a price quote, which is generally non-binding, or by employing widely accepted valuation models.

    Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested under the terms of service agreements. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, benchmark yields, interest rate yield curves, credit spreads, currency rates, quoted prices for similar securities and other market- observable information, as applicable. The valuation models take into account, among other things, market observable information as of the measurement date as well as the specific attributes of the security being valued, including its term, interest rate, credit rating, industry sector, and when applicable, collateral quality and other security or issuer-specific information. When market transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased.

    AIG has processes designed to ensure that the values received or internally estimated are accurately recorded, that the data inputs and the valuation techniques utilized are appropriate and consistently applied and that the assumptions are reasonable and consistent with the objective of determining fair value. AIG assesses the reasonableness of individual security values received from valuation service providers through various analytical techniques. In addition, AIG may validate the reasonableness of fair values by comparing information obtained from AIG's valuation service providers to other third-party valuation sources for selected securities. AIG also

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validates prices for selected securities obtained from brokers through reviews by members of management who have relevant expertise and who are independent of those charged with executing investing transactions.

    The methodology above is relevant for all fixed maturity securities; following are discussions of certain procedures unique to specific classes of securities.

Fixed Maturity Securities issued by Government Entities

    For most debt securities issued by government entities, AIG obtains fair value information from independent third-party valuation service providers, as quoted prices in active markets are generally only available for limited debt securities issued by government entities. The fair values received from these valuation service providers may be based on a market approach using matrix pricing, which considers a security's relationship to other securities for which quoted prices in an active market may be available, or alternatively based on an income approach, which uses valuation techniques to convert future cash flows to a single present value amount.

Fixed Maturity Securities issued by Corporate Entities

    For most debt securities issued by corporate entities, AIG obtains fair value information from independent third-party valuation service providers. For certain corporate debt securities, AIG obtains fair value information from brokers. For those corporate debt instruments (for example, private placements) that are not traded in active markets or that are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and non-transferability, and such adjustments generally are based on available market evidence. In the absence of such evidence, management's best estimate is used.

RMBS, CMBS, CDOs and other ABS

    Independent third-party valuation service providers also provide fair value information for the majority of AIG investments in RMBS, CMBS, CDOs and other ABS. Where pricing is not available from valuation service providers, AIG obtains fair value information from brokers. Broker prices may be based on an income approach, which converts expected future cash flows to a single present value amount, with specific consideration of inputs relevant to structured securities, including ratings, collateral types, geographic concentrations, underlying loan vintages, loan delinquencies, and weighted average coupons and maturities. Broker prices may also be based on a market approach that considers recent transactions involving identical or similar securities. When the volume or level of market activity for an investment in RMBS, CMBS, CDOs or other ABS is limited, certain inputs used to determine fair value may not be observable in the market.

Maiden Lane II and Maiden Lane III

    At their inception, AIG's interests in ML II and ML III were valued and recorded at the transaction prices of $1 billion and $5 billion, respectively.

    Subsequently, 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 methodology used since inception and prior to March 31, 2011 for AIG's interest in ML II had used the same discounted cash flow methodology as for ML III. As a result of the announcement on March 31, 2011 by the FRBNY of its plan to begin selling the assets in the ML II portfolio over time through a competitive sales process, AIG modified its methodology for estimating the fair value of its interest in ML II to incorporate the assumption of a current liquidation, which (i) uses the estimated fair value of the ML II assets and (ii) allocates the estimated asset fair value according to the ML II waterfall.

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    AIG does not believe a change in the fair value methodology used for its interest in ML III is appropriate at this time based on current available information. Other methodologies employed or assumptions made in determining fair value for these investments could result in amounts that differ significantly from the amounts reported.

    Adjustments to the fair value of AIG's interest in ML II are recorded in the Consolidated Statement of Operations in Net investment income for SunAmerica's domestic life insurance companies. 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.

    As of September 30, 2011, AIG expects to receive cash flows (undiscounted) in excess of AIG's initial investment, and any accrued interest, on the Maiden Lane Interests after repayment of the first priority obligations owed to the FRBNY. The fair value of AIG's interest in ML II is most affected by the liquidation proceeds realized by the FRBNY from the sale of the collateral securities. A 10 percent change in the liquidation proceeds realized by the FRBNY would result in a change of approximately $157 million in the fair value of the ML II interest. 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. Changes in estimated future cash flows for ML III would be 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.

    The LIBOR interest rate curve changes are determined based on observable prices, interpolated or extrapolated to derive a LIBOR for a specific maturity term as necessary. The spreads over LIBOR for the Maiden Lane Interests (including collateral-specific credit and liquidity spreads) can change as a result of changes in market expectations about the future performance of these investments 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.

   
Nine Months Ended September 30, 2011
(in millions)
  Maiden Lane III
Fair Value Change

 
   

Discount Rates:

       
 

200 basis point increase

  $ (547 )
 

200 basis point decrease

    620  
 

400 basis point increase

    (1,031 )
 

400 basis point decrease

    1,325  
   

Estimated Future Cash Flows:

       
 

10% increase

    667  
 

10% decrease

    (673 )
 

20% increase

    1,325  
 

20% decrease

    (1,339 )
   

    If the FRBNY were to similarly announce a plan to liquidate the assets of ML III at their estimated fair values, the impact of the change in AIG's assumptions would be an increase in the fair value of AIG's interest in ML III by approximately $690 million at September 30, 2011.

    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. Because of these factors, the fair values of the Maiden Lane Interests are likely to vary, perhaps materially, from the amounts estimated.

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Equity Securities Traded in Active Markets — Trading and Available for Sale

    Whenever available, AIG obtains quoted prices in active markets for identical assets at the balance sheet date to measure at fair value marketable equity securities in its trading and available for sale portfolios or in Other invested assets. Market price data is generally obtained from exchange or dealer markets.

Direct Private Equity Investments — Other Invested Assets

    AIG initially estimates the fair value of direct private equity investments by reference to the transaction price. This valuation is adjusted for changes in inputs and assumptions that are corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity capital markets and/or changes in financial ratios or cash flows. For equity securities that are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability and such adjustments generally are based on available market evidence. In the absence of such evidence, management's best estimate is used.

Hedge Funds, Private Equity Funds and Other Investment Partnerships — Other Invested Assets

    AIG initially estimates the fair value of investments in certain hedge funds, private equity funds and other investment partnerships by reference to the transaction price. Subsequently, AIG generally obtains the fair value of these investments from net asset value information provided by the general partner or manager of the investments, the financial statements of which are generally audited annually. AIG considers observable market data and performs diligence procedures in validating the appropriateness of using the net asset value as a fair value measurement.

Separate Account Assets

    Separate account assets are composed primarily of registered and unregistered open-end mutual funds that generally trade daily and are measured at fair value in the manner discussed above for equity securities traded in active markets.

Short-term Investments

    For short-term investments that are measured at fair value, AIG obtains fair value information from independent third-party valuation service providers. The determination of fair value for these instruments is consistent with the process for fixed maturity securities, as discussed above.

Securities Purchased Under Agreements to Resell

    Securities purchased under agreements to resell are generally treated as collateralized financings. AIG reports certain securities purchased under agreements to resell in Short-term investments in the Consolidated Balance Sheet. AIG estimates the fair value of those receivables arising from securities purchased under agreements to resell that are measured at fair value using dealer price quotes, discounted cash flow analyses and/or internal valuation models. This methodology considers such factors as the coupon rate, yield curves, prepayment rates and other relevant factors.

Mortgage and Other Loans Receivable

    AIG estimates the fair value of mortgage and other loans receivable by using dealer quotations, discounted cash flow analyses and/or internal valuation models. The determination of fair value considers inputs such as interest rate, maturity, the borrower's creditworthiness, collateral, subordination, guarantees, past-due status, yield curves, credit curves, prepayment rates, market pricing for comparable loans and other relevant factors.

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Freestanding Derivatives

    Derivative assets and liabilities can be exchange-traded or traded over-the-counter (OTC). AIG generally values exchange-traded derivatives such as futures and options using quoted prices in active markets for identical derivatives at the balance sheet date.

    OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model to value an OTC derivative depends on the contractual terms of, and specific risks inherent in the instrument, as well as the availability of pricing information in the market. AIG generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be corroborated by observable market data by correlation or other means, and model selection does not involve significant management judgment.

    Certain OTC derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. When AIG does not have corroborating market evidence to support significant model inputs and cannot verify the model to market transactions, the transaction price may provide the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so the model value at inception equals the transaction price. AIG will update valuation inputs in these models only when corroborated by evidence such as similar market transactions, third party pricing services and/or broker or dealer quotations, or other empirical market data. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management's best estimate is used.

Embedded Policy Derivatives

    The fair value of embedded policy derivatives contained in certain variable annuity and equity-indexed annuity and life contracts is measured based on actuarial and capital market assumptions related to projected cash flows over the expected lives of the contracts. These cash flow estimates primarily include benefits and related fees assessed, when applicable, and incorporate expectations about policyholder behavior. Estimates of future policyholder behavior are subjective and based primarily on AIG's historical experience.

    Certain variable annuity and equity-indexed annuity and life contracts contain embedded policy derivatives that AIG bifurcates from the host contracts and accounts for separately at fair value, with changes in fair value recognized in earnings. AIG concluded these contracts contain (i) written option guarantees on minimum accumulation value, (ii) a series of written options that guarantee withdrawals from the highest anniversary value within a specific period or for life, or (iii) equity-indexed written options that meet the criteria of derivatives that must be bifurcated.

    With respect to embedded policy derivatives in AIG's variable annuity contracts, because of the dynamic and complex nature of the expected cash flows, risk neutral valuations are used. Estimating the underlying cash flows for these products involves many estimates and judgments, including those regarding expected market rates of return, market volatility, correlations of market index returns to funds, fund performance, discount rates and policyholder behavior. With respect to embedded policy derivatives in AIG's equity-indexed annuity and life contracts, option pricing models are used to estimate fair value, taking into account assumptions for future equity index growth rates, volatility of the equity index, future interest rates, and determinations on adjusting the participation rate and the cap on equity indexed credited rates in light of market conditions and policyholder behavior assumptions. These methodologies incorporate an explicit risk margin to take into consideration market participant estimates of projected cash flows and policyholder behavior.

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    Fair value measurements for embedded derivatives associated with variable annuity and equity-indexed annuity and life contracts incorporate AIG insurance subsidiaries' own risk of non-performance by reflecting a market participant's view of AIG insurance subsidiaries' claims paying ability. AIG therefore incorporates an additional spread to the interest rate swap curve to value the embedded policy derivatives.

AIGFP's Super Senior Credit Default Swap Portfolio

    Included in Global Capital Markets is the remaining derivatives portfolio of AIGFP. AIG values AIGFP's CDS transactions written on the super senior risk layers of designated pools of debt securities or loans using internal valuation models, third-party price estimates and market indices. The principal market was determined to be the market in which super senior credit default swaps of this type and size would be transacted, or have been transacted, with the greatest volume or level of activity. AIG has determined that the principal market participants, therefore, would consist of other large financial institutions who participate in sophisticated over-the-counter derivatives markets. The specific valuation methodologies vary based on the nature of the referenced obligations and availability of market prices.

    The valuation of the super senior credit derivatives is challenging given the limitation on the availability of market observable information due to the lack of trading and price transparency in certain structured finance markets. These market conditions have increased the reliance on management estimates and judgments in arriving at an estimate of fair value for financial reporting purposes. Further, disparities in the valuation methodologies employed by market participants and the varying judgments reached by such participants when assessing volatile markets have increased the likelihood that the various parties to these instruments may arrive at significantly different estimates as to their fair values.

    AIG's valuation methodologies for the super senior credit default swap portfolio have evolved over time in response to market conditions and the availability of market observable information. AIG has sought to calibrate the methodologies to available market information and to review the assumptions of the methodologies on a regular basis.

    Regulatory capital portfolio:  In the case of credit default swaps written to facilitate regulatory capital relief, AIG estimates the fair value of these derivatives by considering observable market transactions. The transactions with the most observability are the early terminations of these transactions by counterparties. AIG continues to reassess the expected maturity of the portfolio. AIGFP has not been required to make any payments as part of terminations of super senior regulatory capital CDSs initiated by counterparties. However, during the second quarter of 2011, AIGFP terminated mezzanine tranches related to certain terminated super senior regulatory capital trades and made payments which approximated their fair values at the time of termination.

    The regulatory benefit of these transactions for AIGFP's financial institution counterparties is generally derived from the capital regulations promulgated by the Basel Committee on Banking Supervision, known as Basel I. In December 2010, the Basel Committee on Banking Supervision finalized a new framework for international capital and liquidity standards known as Basel III, which, when fully implemented, may reduce or eliminate the regulatory benefits to certain counterparties and thus may impact the period of time that such counterparties are expected to hold the positions. In assessing the fair value of the regulatory capital CDS transactions, AIG also considers other market data to the extent relevant and available. For further discussion, see Note 10 herein.

    Multi-sector CDO portfolios:  AIG uses a modified version of the Binomial Expansion Technique (BET) model to value AIGFP's credit default swap portfolio written on super senior tranches of multi-sector CDOs of ABS. The BET model was developed in 1996 by a major rating agency to generate expected loss estimates for CDO tranches and derive a credit rating for those tranches, and remains widely used.

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    AIG has adapted the BET model to estimate the price of the super senior risk layer or tranche of the CDO. AIG modified the BET model to imply default probabilities from market prices for the underlying securities and not from rating agency assumptions. To generate the estimate, the model uses the price estimates for the securities comprising the portfolio of a CDO as an input and converts those estimates to credit spreads over current LIBOR-based interest rates. These credit spreads are used to determine implied probabilities of default and expected losses on the underlying securities. This data is then aggregated and used to estimate the expected cash flows of the super senior tranche of the CDO.

    Prices for the individual securities held by a CDO are obtained in most cases from the CDO collateral managers, to the extent available. CDO collateral managers provided market prices for 61.2 percent of the underlying securities used in the valuation at September 30, 2011. When a price for an individual security is not provided by a CDO collateral manager, AIG derives the price through a pricing matrix using prices from CDO collateral managers for similar securities. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the relationship of the security to other benchmark quoted securities. Substantially all of the CDO collateral managers who provided prices used dealer prices for all or part of the underlying securities, in some cases supplemented by third-party pricing services.

    The BET model also uses diversity scores, weighted average lives, recovery rates and discount rates. AIG employs a Monte Carlo simulation to assist in quantifying the effect on the valuation of the CDO of the unique aspects of the CDO's structure such as triggers that divert cash flows to the most senior part of the capital structure. The Monte Carlo simulation is used to determine whether an underlying security defaults in a given simulation scenario and, if it does, the security's implied random default time and expected loss. This information is used to project cash flow streams and to determine the expected losses of the portfolio.

    In addition to calculating an estimate of the fair value of the super senior CDO security referenced in the credit default swaps using its internal model, AIG also considers the price estimates for the super senior CDO securities provided by third parties, including counterparties to these transactions, to validate the results of the model and to determine the best available estimate of fair value. In determining the fair value of the super senior CDO security referenced in the credit default swaps, AIG uses a consistent process that considers all available pricing data points and eliminates the use of outlying data points. When pricing data points are within a reasonable range an averaging technique is applied.

    Corporate debt/Collateralized loan obligation (CLO) portfolios: In the case of credit default swaps written on portfolios of investment-grade corporate debt, AIG uses a mathematical model that produces results that are closely aligned with prices received from third parties. This methodology is widely used by other market participants and uses the current market credit spreads of the names in the portfolios along with the base correlations implied by the current market prices of comparable tranches of the relevant market traded credit indices as inputs. Given its unique attributes, one transaction, which had represented two percent of the total notional amount of the corporate debt portfolio as of the second quarter of 2011, was valued using third-party quotations. This transaction matured in the third quarter of 2011.

    AIG estimates the fair value of its obligations resulting from credit default swaps written on CLOs to be equivalent to the par value less the current market value of the referenced obligation. Accordingly, the value is determined by obtaining third-party quotations on the underlying super senior tranches referenced under the credit default swap contract.

Policyholder Contract Deposits

    Policyholder contract deposits accounted for at fair value are measured using an earnings approach by taking into consideration the following factors:

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    The change in fair value of these policyholder contract deposits is recorded as Policyholder benefits and claims incurred in the Consolidated Statement of Operations.

Other Long-Term Debt

    When fair value accounting has been elected, the fair value of non-structured liabilities is generally determined by using market prices from exchange or dealer markets, when available, or discounting expected cash flows using the appropriate discount rate for the applicable maturity. Such instruments are generally classified in Level 2 of the fair value hierarchy as substantially all inputs are readily observable. AIG determines the fair value of structured liabilities and hybrid financial instruments (where performance is linked to structured interest rates, inflation or currency risks) using the appropriate derivative valuation methodology (described above) given the nature of the embedded risk profile. Such instruments are classified in Level 2 or Level 3 depending on the observability of significant inputs to the model. In addition, adjustments are made to the valuations of both non-structured and structured liabilities to reflect AIG's own creditworthiness based on observable credit spreads of AIG.

Other Liabilities

    Other liabilities measured at fair value include certain securities sold under agreements to repurchase and certain securities and spot commodities sold but not yet purchased. Liabilities arising from securities sold under agreements to repurchase are generally treated as collateralized financings. For liabilities arising from securities sold under agreements to repurchase, AIG estimates the fair value by using dealer quotations, discounted cash flow analyses and/or internal valuation models. This methodology considers such factors as the coupon rate, yield curves, prepayment rates and other relevant factors. Fair values for securities sold but not yet purchased are based on current market prices. Fair values of spot commodities sold but not yet purchased are based on current market prices of reference spot futures contracts traded on exchanges. Certain liabilities arising from securities sold under agreements to repurchase, however, are treated as sales. The key distinction resulting in these agreements being accounted for as sales is a reduction in initial margins or a restriction in daily margin requirements in these agreements. The fair value of securities transferred under repurchase agreements accounted for as sales was $2.4 billion and $2.7 billion at September 30, 2011 and December 31, 2010, respectively.

29


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


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:

   
September 30, 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

  $ 28   $ 7,526   $ -   $ -   $ -   $ 7,554  
   

Obligations of states, municipalities and Political subdivisions

    1     38,481     908     -     -     39,390  
   

Non-U.S. governments

    702     18,947     5     -     -     19,654  
   

Corporate debt

    110     143,681     2,475     -     -     146,266  
   

RMBS

    -     22,150     10,408     -     -     32,558  
   

CMBS

    -     3,665     3,975     -     -     7,640  
   

CDO/ABS

    -     2,650     4,117     -     -     6,767  
   

Total bonds available for sale

    841     237,100     21,888     -     -     259,829  
   
 

Bond trading securities:

                                     
   

U.S. government and government sponsored entities

    162     7,395     -     -     -     7,557  
   

Obligations of states, municipalities and Political subdivisions

    -     257     -     -     -     257  
   

Non-U.S. governments

    -     36     -     -     -     36  
   

Corporate debt

    -     773     8     -     -     781  
   

RMBS

    -     1,383     332     -     -     1,715  
   

CMBS

    -     1,291     547     -     -     1,838  
   

CDO/ABS

    -     4,076     8,394     -     -     12,470  
   

Total bond trading securities

    162     15,211     9,281     -     -     24,654  
   
 

Equity securities available for sale:

                                     
   

Common stock

    2,966     6     56     -     -     3,028  
   

Preferred stock

    -     44     70     -     -     114  
   

Mutual funds

    56     11     -     -     -     67  
   

Total equity securities available for sale

    3,022     61     126     -     -     3,209  
   
 

Equity securities trading

    37     111     -     -     -     148  
 

Mortgage and other loans receivable

    -     104     -     -     -     104  
 

Other invested assets(c)

    11,670     1,777     7,184     -     -     20,631  
 

Derivative assets:

                                     
   

Interest rate contracts

    2     7,706     1,034     -     -     8,742  
   

Foreign exchange contracts

    -     165     -     -     -     165  
   

Equity contracts

    149     163     34     -     -     346  
   

Commodity contracts

    -     99     3     -     -     102  
   

Credit contracts

    -     -     91     -     -     91  
   

Other contracts

    35     472     284     -     -     791  
   

Counterparty netting and cash collateral

    -     -     -     (3,784 )   (1,707 )   (5,491 )
   

Total derivative assets

    186     8,605     1,446     (3,784 )   (1,707 )   4,746  
   
 

Short-term investments(d)

    1,484     6,052     -     -     -     7,536  
 

Separate account assets

    45,213     2,899     -     -     -     48,112  
   

Total

  $ 62,615   $ 271,920   $ 39,925   $ (3,784 ) $ (1,707 ) $ 368,969  
   

Liabilities:

                                     
 

Policyholder contract deposits

  $ -   $ -   $ 1,362   $ -   $ -   $ 1,362  
 

Derivative liabilities:

                                     
   

Interest rate contracts

    -     7,017     245     -     -     7,262  
   

Foreign exchange contracts

    -     189     -     -     -     189  
   

Equity contracts

    2     204     10     -     -     216  
   

Commodity contracts

    -     100     -     -     -     100  
   

Credit contracts(e)

    -     6     3,453     -     -     3,459  
   

Other contracts

    -     141     245     -     -     386  
   

Counterparty netting and cash collateral

    -     -     -     (3,784 )   (2,762 )   (6,546 )
   

Total derivative liabilities

    2     7,657     3,953     (3,784 )   (2,762 )   5,066  
   
 

Other long-term debt

    -     10,450     789     -     -     11,239  
 

Other liabilities(f)

    314     954     -     -     -     1,268  
   

Total

  $ 316   $ 19,061   $ 6,104   $ (3,784 ) $ (2,762 ) $ 18,935  
   

30


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


   
December 31, 2010
(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

  $ 142   $ 7,208   $ -   $ -   $ -   $ 7,350  
   

Obligations of states, municipalities and Political subdivisions

    4     46,007     609     -     -     46,620  
   

Non-U.S. governments

    719     14,620     5     -     -     15,344  
   

Corporate debt

    8     124,088     2,262     -     -     126,358  
   

RMBS

    -     13,441     6,367     -     -     19,808  
   

CMBS

    -     2,807     3,604     -     -     6,411  
   

CDO/ABS

    -     2,170     4,241     -     -     6,411  
   

Total bonds available for sale

    873     210,341     17,088     -     -     228,302  
   
 

Bond trading securities:

                                     
   

U.S. government and government sponsored entities

    339     6,563     -     -     -     6,902  
   

Obligations of states, municipalities and Political subdivisions

    -     316     -     -     -     316  
   

Non-U.S. governments

    -     125     -     -     -     125  
   

Corporate debt

    -     912     -     -     -     912  
   

RMBS

    -     1,837     91     -     -     1,928  
   

CMBS

    -     1,572     506     -     -     2,078  
   

CDO/ABS

    -     4,490     9,431     -     -     13,921  
   

Total bond trading securities

    339     15,815     10,028     -     -     26,182  
   
 

Equity securities available for sale:

                                     
   

Common stock

    3,577     61     61     -     -     3,699  
   

Preferred stock

    -     423     64     -     -     487  
   

Mutual funds

    316     79     -     -     -     395  
   

Total equity securities available for sale

    3,893     563     125     -     -     4,581  
   
 

Equity securities trading

    6,545     106     1     -     -     6,652  
 

Mortgage and other loans receivable

    -     143     -     -     -     143  
 

Other invested assets(c)

    12,281     1,661     7,414     -     -     21,356  
 

Derivative assets:

                                     
   

Interest rate contracts

    1     13,146     1,057     -     -     14,204  
   

Foreign exchange contracts

    14     172     16     -     -     202  
   

Equity contracts

    61     233     65     -     -     359  
   

Commodity contracts

    -     69     23     -     -     92  
   

Credit contracts

    -     2     377     -     -     379  
   

Other contracts

    8     923     144     -     -     1,075  
   

Counterparty netting and cash collateral

    -     -     -     (6,298 )   (4,096 )   (10,394 )
   

Total derivative assets

    84     14,545     1,682     (6,298 )   (4,096 )   5,917  
   
 

Short-term investments(d)

    5,401     18,459     -     -     -     23,860  
 

Separate account assets

    51,607     2,825     -     -     -     54,432  
 

Other assets

    -     14     -     -     -     14  
   

Total

  $ 81,023   $ 264,472   $ 36,338   $ (6,298 ) $ (4,096 ) $ 371,439  
   

Liabilities:

                                     
 

Policyholder contract deposits

  $ -   $ -   $ 445   $ -   $ -   $ 445  
 

Derivative liabilities:

                                     
   

Interest rate contracts

    -     9,387     325     -     -     9,712  
   

Foreign exchange contracts

    14     324     -     -     -     338  
   

Equity contracts

    -     286     43     -     -     329  
   

Commodity contracts

    -     68     -     -     -     68  
   

Credit contracts(e)

    -     5     4,175     -     -     4,180  
   

Other contracts

    -     52     256     -     -     308  
   

Counterparty netting and cash collateral

    -     -     -     (6,298 )   (2,902 )   (9,200 )
   

Total derivative liabilities

    14     10,122     4,799     (6,298 )   (2,902 )   5,735  
   
 

Other long-term debt

    -     11,161     982     -     -     12,143  
 

Other liabilities(f)

    391     2,228     -     -     -     2,619  
   

Total

  $ 405   $ 23,511   $ 6,226   $ (6,298 ) $ (2,902 ) $ 20,942  
   
(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 $2.0 billion and $101 million, respectively, at September 30, 2011 and $1.4 billion and $109 million, respectively, at December 31, 2010.
(c)
Included in Level 1 are $11.3 billion and $11.1 billion at September 30, 2011 and December 31, 2010, respectively, of AIA shares publicly traded on the Hong Kong Stock Exchange. Approximately 3 percent and 5 percent of the fair value of the assets recorded as Level 3 relates to various private equity, real estate, hedge fund and fund-of-funds investments that are consolidated by AIG at September 30, 2011 and December 31, 2010, respectively. AIG's ownership in these funds represented 57.8 percent, or $0.8 billion, of Level 3 assets at September 30, 2011 and 68.6 percent, or $1.3 billion, of Level 3 assets at December 31, 2010.
(d)
Included in Level 2 is the fair value of $0.3 billion and $1.6 billion at September 30, 2011 and December 31, 2010, respectively, of securities purchased under agreements to resell.
(e)
Included in Level 3 is the fair value derivative liability of $3.3 billion and $3.7 billion at September 30, 2011 and December 31, 2010, respectively, on the AIGFP super senior credit default swap portfolio.
(f)
Included in Level 2 is the fair value of $0.8 billion, $148 million and $7 million at September 30, 2011 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, respectively. Included in Level 2 is the fair value of $2.1 billion, $94 million and $15 million at December 31, 2010 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, respectively.

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


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. During the nine-month period ended September 30, 2011, AIG transferred certain assets from Level 1 to Level 2, including approximately $1.2 billion of investments in securities issued by the U.S. government that are no longer actively traded and approximately $528 million of investments in securities issued by Non-U.S. governments. AIG transferred approximately $1.1 billion of investments in securities issued by the U.S. government that are no longer actively traded and approximately $390 million of investments in securities issued by Non-U.S. governments from Level 1 to Level 2 during the three-month period ended September 30, 2011. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market. AIG had no significant transfers from Level 2 to Level 1 during the three-and nine-month periods ended September 30, 2011.


Changes in Level 3 Recurring Fair Value Measurements

The following tables present changes during the three- and nine-month periods ended September 30, 2011 and 2010 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 September 30, 2011 and 2010:

   
(in millions)
  Fair value
Beginning
of Period
(b)
  Net
Realized and
Unrealized
Gains (Losses)
Included
in Income

  Accumulated
Other
Comprehensive
Income

  Purchases,
Sales,
Issuances 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 September 30, 2011

                                                 

Assets:

                                                 
 

Bonds available for sale:

                                                 
   

Obligations of states, municipalities and political subdivisions

  $ 800   $ 1   $ 83   $ 74   $ -   $ (50 ) $ 908   $ -  
   

Non-U.S. governments

    5     -     (1 )   1     -     -     5     -  
   

Corporate debt

    1,844     13     (21 )   (56 )   1,170     (475 )   2,475     -  
   

RMBS

    10,692     (83 )   29     (437 )   254     (47 )   10,408     -  
   

CMBS

    4,228     (46 )   (293 )   134     16     (64 )   3,975     -  
   

CDO/ABS

    3,925     12     (131 )   220     329     (238 )   4,117     -  
   

Total bonds available for sale

    21,494     (103 )   (334 )   (64 )   1,769     (874 )   21,888     -  
   
 

Bond trading securities:

                                                 
   

Corporate debt

    9     -     -     (1 )   -     -     8     -  
   

RMBS

    170     (5 )   (1 )   168     -     -     332     (12 )
   

CMBS

    483     (31 )   (4 )   (16 )   115     -     547     (37 )
   

CDO/ABS

    9,503     (993 )   (9 )   (131 )   48     (24 )   8,394     (916 )(a)
   

Total bond trading securities

    10,165     (1,029 )   (14 )   20     163     (24 )   9,281     (965 )
   
 

Equity securities available for sale:

                                                 
   

Common stock

    59     9     (9 )   (11 )   10     (2 )   56     -  
   

Preferred stock

    64     2     2     -     2     -     70     -  
   

Total equity securities available for sale

    123     11     (7 )   (11 )   12     (2 )   126     -  
   
 

Equity securities trading

    1     (1 )   -     -     -     -     -     (1 )
 

Other invested assets

    7,045     (27 )   42     (54 )   205     (27 )   7,184     13  
   

Total

  $ 38,828   $ (1,149 ) $ (313 ) $ (109 ) $ 2,149   $ (927 ) $ 38,479   $ (953 )
   

Liabilities:

                                                 
 

Policyholder contract deposits

  $ (406 ) $ (928 ) $ -   $ (28 ) $ -   $ -   $ (1,362 ) $ 950  
 

Derivative liabilities, net:

                                                 
   

Interest rate contracts

    754     47     -     9     -     (21 )   789     (1 )
   

Foreign exchange contracts

    4     1     -     (5 )   -     -     -     (1 )
   

Equity contracts

    34     (10 )   -     -     -     -     24     (7 )
   

Commodity contracts

    5     (1 )   -     (1 )   -     -     3     (1 )
   

Credit contracts

    (3,332 )   (25 )   -     (5 )   -     -     (3,362 )   (27 )
   

Other contracts

    (69 )   32     (32 )   9     -     99     39     (21 )
   

Total derivative liabilities, net

    (2,604 )   44     (32 )   7     -     78     (2,507 )   (58 )
   
 

Other long-term debt

    (958 )   183     -     (14 )   -     -     (789 )   167  
   

Total

  $ (3,968 ) $ (701 ) $ (32 ) $ (35 ) $ -   $ 78   $ (4,658 ) $ 1,059  
   

32


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

   
(in millions)
  Fair value
Beginning
of Period
(b)
  Net
Realized and
Unrealized
Gains (Losses)
Included
in Income

  Accumulated
Other
Comprehensive
Income

  Purchases,
Sales,
Issuances 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

 
   

Nine Months Ended September 30, 2011

                                                 

Assets:

                                                 
 

Bonds available for sale:

                                                 
   

Obligations of states, municipalities and political subdivisions

  $ 609   $ -   $ 110   $ 248   $ 17   $ (76 ) $ 908   $ -  
   

Non-U.S. governments

    5     -     (1 )   1     -     -     5     -  
   

Corporate debt

    2,262     10     1     216     1,703     (1,717 )   2,475     -  
   

RMBS

    6,367     (85 )   397     3,506     276     (53 )   10,408     -  
   

CMBS

    3,604     (80 )   262     206     69     (86 )   3,975     -  
   

CDO/ABS

    4,241     44     181     (617 )   775     (507 )   4,117     -  
   

Total bonds available for sale

    17,088     (111 )   950     3,560     2,840     (2,439 )   21,888     -  
   
 

Bond trading securities:

                                                 
   

Corporate debt

    -     -     -     (10 )   18     -     8     -  
   

RMBS

    91     (5 )   (8 )   254     -     -     332     (15 )
   

CMBS

    506     35     (1 )   (92 )   276     (177 )   547     31  
   

CDO/ABS

    9,431     (840 )   -     (221 )   48     (24 )   8,394     (770 )(a)
   

Total bond trading securities

    10,028     (810 )   (9 )   (69 )   342     (201 )   9,281     (754 )
   
 

Equity securities available for sale:

                                                 
   

Common stock

    61     27     (5 )   (38 )   18     (7 )   56     -  
   

Preferred stock

    64     (1 )   3     -     4     -     70     -  
   

Total equity securities available for sale

    125     26     (2 )   (38 )   22     (7 )   126     -  
   
 

Equity securities trading

    1     -     -     (1 )   -     -     -     -  
 

Other invested assets

    7,414     9     511     (565 )   250     (435 )   7,184     142  
   

Total

  $ 34,656   $ (886 ) $ 1,450   $ 2,887   $ 3,454   $ (3,082 ) $ 38,479   $ (612 )
   

Liabilities:

                                                 
 

Policyholder contract deposits

  $ (445 ) $ (882 ) $ -   $ (35 ) $ -   $ -   $ (1,362 ) $ 887  
 

Derivative liabilities, net:

                                                 
   

Interest rate contracts

    732     69     -     9     -     (21 )   789     (55 )
   

Foreign exchange contracts

    16     (11 )   -     (5 )   -     -     -     -  
   

Equity contracts

    22     (17 )   -     38     (7 )   (12 )   24     (14 )
   

Commodity contracts

    23     1     -     (21 )   -     -     3     (1 )
   

Credit contracts

    (3,798 )   451     -     (15 )   -     -     (3,362 )   446  
   

Other contracts

    (112 )   9     (58 )   49     -     151     39     (87 )
   

Total derivative liabilities, net

    (3,117 )   502     (58 )   55     (7 )   118     (2,507 )   289  
   
 

Other long-term debt

    (982 )   (28 )   -     242     (21 )   -     (789 )   (31 )
   

Total

  $ (4,544 ) $ (408 ) $ (58 ) $ 262   $ (28 ) $ 118   $ (4,658 ) $ 1,145  
   

33


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

   
(in millions)
  Fair value
Beginning
of Period(b)

  Net
Realized and
Unrealized
Gains (Losses)
Included
in Income

  Accumulated
Other
Comprehensive
Income

  Purchases,
Sales,
Issuances and
Settlements,
Net

  Net
Transfers

  Activity of
Discontinued
Operations

  Fair value
End
of Period

  Changes in
Unrealized Gains
(Losses)
Included in
Income on
Instruments Held
at End of Period

 
   

Three Months Ended September 30, 2010

                                                 

Assets:

                                                 
 

Bonds available for sale:

                                                 
   

Obligations of states, municipalities and political subdivisions

  $ 1,086   $ (10 ) $ 37   $ (94 ) $ (131 ) $ -   $ 888   $ -  
   

Non-U.S. governments

    42     -     3     4     1     -     50     -  
   

Corporate debt

    3,167     (23 )   35     (58 )   (117 )   (116 )   2,888     -  
   

RMBS

    7,114     (285 )   609     (223 )   828     (8 )   8,035     -  
   

CMBS

    4,576     (185 )   612     (153 )   (391 )   (918 )   3,541     -  
   

CDO/ABS

    4,837     14     126     (354 )   (449 )   (211 )   3,963     -  
   

Total bonds available for sale

    20,822     (489 )   1,422     (878 )   (259 )   (1,253 )   19,365     -  
   
 

Bond trading securities:

                                                 
   

U.S. government and government sponsored entities

    -     -     -     -     -     -     -     -  
   

Non-U.S. governments

    7     -     -     16     (6 )   -     17     -  
   

Corporate debt

    103     7     -     (4 )   -     -     106     3  
   

RMBS

    5     (25 )   -     -     118     -     98     (31 )
   

CMBS

    226     36     -     3     -     -     265     29  
   

CDO/ABS

    8,523     496     -     114     1     -     9,134     495 (a)
   

Total bond trading securities

    8,864     514     -     129     113     -     9,620     496  
   
 

Equity securities available for sale:

                                                 
   

Common stock

    32     (1 )   9     7     7     1     55     -  
   

Preferred stock

    53     -     1     2     -     -     56     -  
   

Mutual funds

    20     -     1     (11 )   (8 )   -     2     -  
   

Total equity securities available for sale

    105     (1 )   11     (2 )   (1 )   1     113     -  
   
 

Equity securities trading

    1     -     -     -     -     -     1     -  
 

Other invested assets

    6,780     77     114     (6 )   1,390     (281 )   8,074     (67 )
 

Other assets

    -     -     -     -     -     -     -     -  
 

Separate account assets

    1     -     -     -     (1 )   -     -     -  
   

Total

  $ 36,573   $ 101   $ 1,547   $ (757 ) $ 1,242   $ (1,533 ) $ 37,173   $ 429  
   

Liabilities:

                                                 
 

Policyholder contract deposits

  $ (4,510 ) $ (60 ) $ -   $ (193 ) $ -   $ -   $ (4,763 ) $ 222  
 

Derivative liabilities, net:

                                                 
   

Interest rate contracts

    151     (520 )   1     903     98     -     633     185  
   

Foreign exchange contracts

    24     5     (2 )   2     -     (16 )   13     (4 )
   

Equity contracts

    -     34     -     (29 )   -     -     5     1  
   

Commodity contracts

    17     5     -     (2 )   -     -     20     (4 )
   

Credit contracts

    (4,583 )   208     -     98     (1 )   -     (4,278 )   (237 )
   

Other contracts

    (107 )   11     -     (16 )   8     -     (104 )   13  
   

Total derivatives liabilities, net

    (4,498 )   (257 )   (1 )   956     105     (16 )   (3,711 )   (46 )
   
 

Other long-term debt

    (954 )   (139 )   -     68     21     -     (1,004 )   177  
   

Total

  $ (9,962 ) $ (456 ) $ (1 ) $ 831   $ 126   $ (16 ) $ (9,478 ) $ 353  
   

34


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

   
(in millions)
  Fair value
Beginning
of Period(b)

  Net
Realized and
Unrealized
Gains (Losses)
Included
in Income

  Accumulated
Other
Comprehensive
Income

  Purchases,
Sales,
Issuances and
Settlements,
Net

  Net
Transfers

  Activity of
Discontinued
Operations

  Fair value
End
of Period

  Changes in
Unrealized Gains
(Losses)
Included in
Income on
Instruments Held
at End of Period

 
   

Nine Months Ended September 30, 2010

                                                 

Assets:

                                                 
 

Bonds available for sale:

                                                 
   

Obligations of states, municipalities and political subdivisions

  $ 613   $ (31 ) $ 24   $ 64   $ 218   $ -   $ 888   $ -  
   

Non-U.S. governments

    753     -     3     28     6     (740 )   50     -  
   

Corporate debt

    4,791     (33 )   137     (293 )   (1,505 )   (209 )   2,888     -  
   

RMBS

    6,654     (526 )   1,601     (529 )   878     (43 )   8,035     -  
   

CMBS

    4,939     (767 )   1,687     (307 )   56     (2,067 )   3,541     -  
   

CDO/ABS

    4,724     88     401     (514 )   (343 )   (393 )   3,963     -  
   

Total bonds available for sale

    22,474     (1,269 )   3,853     (1,551 )   (690 )   (3,452 )   19,365     -  
   
 

Bond trading securities:

                                                 
   

U.S. government and government sponsored entities

    16     -     -     -     -     (16 )   -     -  
   

Non-U.S. governments

    56     -     -     (35 )   2     (6 )   17     -  
   

Corporate debt

    121     (9 )   -     (4 )   -     (2 )   106     (8 )
   

RMBS

    4     (24 )   -     -     118     -     98     (26 )
   

CMBS

    325     96     -     (92 )   34     (98 )   265     146  
   

CDO/ABS

    6,865     2,287     -     (22 )   4     -     9,134     2,503 (a)
   

Total bond trading securities

    7,387     2,350     -     (153 )   158     (122 )   9,620     2,615  
   
 

Equity securities available for sale:

                                                 
   

Common stock

    35     (2 )   10     2     10     -     55     -  
   

Preferred stock

    54     (5 )   5     1     1     -     56     -  
   

Mutual funds

    6     -     -     (3 )   (1 )   -     2     -  
   

Total equity securities available for sale

    95     (7 )   15     -     10     -     113     -  
   
 

Equity securities trading

    8     -     -     -     -     (7 )   1     -  
 

Other invested assets

    6,910     62     493     (930 )   1,721     (182 )   8,074     (258 )
 

Other assets

    270     -     -     (270 )   -     -     -     -  
 

Separate account assets

    1     -     -     -     -     (1 )   -     -  
   

Total

  $ 37,145   $ 1,136   $ 4,361   $ (2,904 ) $ 1,199   $ (3,764 ) $ 37,173   $ 2,357  
   

Liabilities:

                                                 
 

Policyholder contract deposits

  $ (5,214 ) $ (684 ) $ -   $ (461 ) $ -   $ 1,596   $ (4,763 ) $ (378 )
 

Derivative liabilities, net:

                                                 
   

Interest rate contracts

    (1,469 )   13     -     1,098     991     -     633     236  
   

Foreign exchange contracts

    29     4     -     (1 )   -     (19 )   13     (7 )
   

Equity contracts

    74     (29 )   -     (60 )   20     -     5     2  
   

Commodity contracts

    22     -     -     (2 )   -     -     20     -  
   

Credit contracts

    (4,545 )   534     -     (265 )   (2 )   -     (4,278 )   (740 )
   

Other contracts

    (176 )   45     -     (3 )   23     7     (104 )   (12 )
   

Total derivatives liabilities, net

    (6,065 )   567     -     767     1,032     (12 )   (3,711 )   (521 )
   
 

Other long-term debt

    (881 )   (201 )   -     690     (612 )   -     (1,004 )   235  
   

Total

  $ (12,160 ) $ (318 ) $ -   $ 996   $ 420   $ 1,584   $ (9,478 ) $ (664 )
   
(a)
In 2011, AIG made revisions to the presentation to include income from ML III. The prior periods have been revised to conform to the current period presentation.

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

35


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


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

  Policyholder
Benefits and
Claims Incurred

  Total
 
   

Three Months Ended September 30, 2011

                               
 

Bonds available for sale

  $ 193   $ (300 ) $ 4   $ -   $ (103 )
 

Bond trading securities

    (1,333 )   4     300     -     (1,029 )
 

Equity securities available for sale

    -     11     -     -     11  
 

Equity securities trading

    (1 )   -     -     -     (1 )
 

Other invested assets

    (13 )   (29 )   15     -     (27 )
 

Policyholder contract deposits

    -     (928 )   -     -     (928 )
 

Derivative liabilities, net

    1     54     (11 )   -     44  
 

Other long-term debt

    -     -     183     -     183  
   

Three Months Ended September 30, 2010

                               
 

Bonds available for sale

  $ 90   $ (583 ) $ 4   $ -   $ (489 )
 

Bond trading securities

    449     -     65     -     514  
 

Equity securities available for sale

    -     (1 )   -     -     (1 )
 

Other invested assets

    113     (9 )   (27 )   -     77  
 

Policyholder contract deposits

    -     81     22     (163 )   (60 )
 

Derivative liabilities, net

    -     386     (643 )   -     (257 )
 

Other long-term debt

    -     -     (139 )   -     (139 )
   

Nine Months Ended September 30, 2011

                               
 

Bonds available for sale

  $ 433   $ (556 ) $ 12   $ -   $ (111 )
 

Bond trading securities

    (828 )   4     14     -     (810 )
 

Equity securities available for sale

    -     26     -     -     26  
 

Equity securities trading

    -     -     -     -     -  
 

Other invested assets

    31     (81 )   59     -     9  
 

Policyholder contract deposits

    -     (882 )   -     -     (882 )
 

Derivative liabilities, net

    2     7     493     -     502  
 

Other long-term debt

    -     -     (28 )   -     (28 )
   

Nine Months Ended September 30, 2010

                               
 

Bonds available for sale

  $ 242   $ (1,524 ) $ 13   $ -   $ (1,269 )
 

Bond trading securities

    1,806     -     544     -     2,350  
 

Equity securities available for sale

    -     (7 )   -     -     (7 )
 

Other invested assets

    361     (257 )   (42 )   -     62  
 

Policyholder contract deposits

    -     (616 )   62     (130 )   (684 )
 

Derivative liabilities, net

    -     385     182     -     567  
 

Other long-term debt

    -     -     (201 )   -     (201 )
   

36


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


The following table presents the gross components of purchases, sales, issuances and settlements, net, shown above:

   
(in millions)
  Purchases
  Sales
  Settlements
  Purchases, Sales,
Issuances and
Settlements, Net*

 
   

Three Months Ended September 30, 2011

                         

Assets:

                         
 

Bonds available for sale:

                         
   

Obligations of states, municipalities and political subdivisions

  $ 78   $ -   $ (4 ) $ 74  
   

Non-U.S. governments

    -     -     1     1  
   

Corporate debt

    58     (27 )   (87 )   (56 )
   

RMBS

    (11 )   -     (426 )   (437 )
   

CMBS

    178     -     (44 )   134  
   

CDO/ABS

    405     -     (185 )   220  
   

Total bonds available for sale

    708     (27 )   (745 )   (64 )
   
 

Bond trading securities:

                         
   

Corporate debt

    -     -     (1 )   (1 )
   

RMBS

    197     -     (29 )   168  
   

CMBS

    79     (90 )   (5 )   (16 )
   

CDO/ABS

    101     (93 )   (139 )   (131 )
   

Total bond trading securities

    377     (183 )   (174 )   20  
   
 

Equity securities available for sale:

                         
   

Common stock

    -     (8 )   (3 )   (11 )
   

Preferred stock

    -     -     -     -  
   

Total equity securities available for sale

    -     (8 )   (3 )   (11 )
   
 

Other invested assets

    156     (59 )   (151 )   (54 )
   

Total assets

  $ 1,241   $ (277 ) $ (1,073 ) $ (109 )
   

Liabilities:

                         
 

Policyholder contract deposits

  $ -   $ (32 ) $ 4   $ (28 )
 

Derivative liabilities, net:

                         
   

Interest rate contracts

    -     -     9     9  
   

Foreign exchange contracts

    -     -     (5 )   (5 )
   

Equity contracts

    1     -     (1 )   -  
   

Commodity contracts

    -     -     (1 )   (1 )
   

Credit contracts

    -     -     (5 )   (5 )
   

Other contracts

    -     -     9     9  
   

Total derivative liabilities, net

    1     -     6     7  
   

Other long-term debt

    -     -     (14 )   (14 )
   

Total liabilities

  $ 1   $ (32 ) $ (4 ) $ (35 )
   

37


Table of Contents


American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

   
(in millions)
  Purchases
  Sales
  Settlements
  Purchases, Sales,
Issuances and
Settlements, Net*

 
   

Nine Months Ended September 30, 2011

                         

Assets:

                         
 

Bonds available for sale:

                         
   

Obligations of states, municipalities and political subdivisions

  $ 254   $ -   $ (6 ) $ 248  
   

Non-U.S. governments

    1     (1 )   1     1  
   

Corporate debt

    478     (27 )   (235 )   216  
   

RMBS

    4,613     (22 )   (1,085 )   3,506  
   

CMBS

    419     (20 )   (193 )   206  
   

CDO/ABS

    666     -     (1,283 )   (617 )
   

Total bonds available for sale

    6,431     (70 )   (2,801 )   3,560  
   
 

Bond trading securities:

                         
   

Corporate debt

    -     -     (10 )   (10 )
   

RMBS

    300     -     (46 )   254  
   

CMBS

    139     (144 )   (87 )   (92 )
   

CDO/ABS

    245     (219 )   (247 )   (221 )
   

Total bond trading securities

    684     (363 )   (390 )   (69 )
   
 

Equity securities available for sale:

                         
   

Common stock

    -     (31 )   (7 )   (38 )
   

Preferred stock

    -     -     -     -  
   

Total equity securities available for sale

    -     (31 )   (7 )   (38 )
   
 

Equity securities trading

    -     -     (1 )   (1 )
 

Other invested assets

    506     (217 )   (854 )   (565 )
   

Total assets

  $ 7,621   $ (681 ) $ (4,053 ) $ 2,887  
   

Liabilities:

                         
 

Policyholder contract deposits

  $ -   $ (51 ) $ 16   $ (35 )
 

Derivative liabilities, net:

                         
   

Interest rate contracts

    -     -     9     9  
   

Foreign exchange contracts

    -     -     (5 )   (5 )
   

Equity contracts

    40     -     (2 )   38  
   

Commodity contracts

    -     -     (21 )   (21 )
   

Credit contracts

    -     -     (15 )   (15 )
   

Other contracts

    -     -     49     49  
   

Total derivative liabilities, net

    40     -     15     55  
   

Other long-term debt

    -     -     242     242  
   

Total liabilities

  $ 40   $ (51 ) $ 273   $ 262  
   
*
There were no issuances during the three- and nine-month periods ended September 30, 2011.

    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 September 30, 2011 and 2010 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 transfer assets and liabilities into Level 3 when a significant input cannot be corroborated with market observable data. This may include circumstances in which market activity has dramatically decreased

38


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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


and transparency to underlying inputs cannot be observed, current prices are not available and substantial price variances in quotations among market participants exist.

    In certain cases, the inputs used to measure the fair value may fall into different levels of the fair value hierarchy. In such 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. AIG's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, AIG considers factors specific to the asset or liability.

    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 $16 million and $48 million of net gains related to assets and liabilities transferred into Level 3 during the three- and nine-month periods ended September 30, 2011, respectively, and includes $38 million and $50 million of net gains related to assets and liabilities transferred out of Level 3 during the three- and nine-month periods ended September 30, 2011, respectively.

Transfers of Level 3 Assets

    During the three- and nine-month periods ended September 30, 2011, transfers into Level 3 included certain RMBS, CMBS, ABS, private placement corporate debt and certain investment partnerships. The transfers into Level 3 related to investments in certain RMBS, CMBS and certain ABS 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 AIG adjusting matrix pricing information downward to better reflect the additional risk premium associated with those securities that AIG believes was not captured in the matrix. Certain investment partnerships 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 investment partnerships transferred into Level 3 represented interests in hedge funds carried at fair value with 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 when a long-term interest rate significant to a valuation becomes short-term and thus observable. In addition, transfers out of Level 3 arise 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-and nine-month periods ended September 30, 2011, transfers out of Level 3 primarily related to investments in private placement corporate debt, investments in certain CMBS, ABS and certain investment partnerships. Transfers out of Level 3 for private placement corporate debt and for ABS were primarily the result of AIG using observable pricing information or a third party pricing quotation 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. Transfers out of Level 3 for certain CMBS and ABS investments were primarily due to increased observations of market transactions and price information for those securities. Certain investment partnerships were transferred out of Level 3 due to these investments no longer being carried at fair value, based on AIG's use of the equity method of accounting consistent with the changes to AIG's ownership and ability to exercise significant influence over the respective investments.

Transfers of Level 3 Liabilities

    During the three- and nine-month periods ended September 30, 2011, there were no significant transfers into Level 3 liabilities. As AIG presents carrying values of its derivative positions on a net basis in the table above,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


transfers out of Level 3 liabilities, which totaled approximately $99 million and $151 million for the three- and nine-month periods ended September 30, 2011, respectively, primarily related to certain derivative assets transferred into Level 3 because of the lack of observable inputs on certain forward commitments. Other transfers out of Level 3 liabilities were due to movement in market variables.

    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.


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.

   
 
   
  September 30, 2011   December 31, 2010  
(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   $ 3,399   $ 1,046   $ 3,137   $ 1,151  
 

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

   
190
   
60
   
172
   
67
 
 

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

   
490
   
105
   
325
   
42
 
 

Distressed

 

Securities of companies that are already in default, under bankruptcy protection, or troubled

   
223
   
64
   
258
   
67
 
 

Other

 

Real estate, energy, multi-strategy, mezzanine, and industry-focused strategies

   
272
   
110
   
373
   
147
 
   

Total private equity funds

       
4,574
   
1,385
   
4,265
   
1,474
 
   

Hedge funds:

                             
 

Event-driven

  Securities of companies undergoing material structural changes, including mergers, acquisitions and other reorganizations     839     2     1,310     2  
 

Long-short

 

Securities that the manager believes are undervalued, with corresponding short positions to hedge market risk

   
905
   
-
   
1,038
   
-
 
 

Relative value

 

Funds that seek to benefit from market inefficiencies and value discrepancies between related investments

   
115
   
-
   
230
   
-
 
 

Distressed

 

Securities of companies that are already in default, under bankruptcy protection or troubled

   
317
   
2
   
369
   
20
 
 

Other

 

Non-U.S. companies, futures and commodities, macro and multi-strategy and industry-focused strategies

   
703
   
-
   
708
   
-
 
   

Total hedge funds

       
2,879
   
4
   
3,655
   
22
 
   

Total

     
$

7,453
 
$

1,389
 
$

7,920

*

$

1,496
 
   
*
Includes investments of entities classified as held for sale of $415 million at December 31, 2010.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    At September 30, 2011, 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, 34 percent of the total above had expected remaining lives of less than three years, 52 percent between three and seven years and 14 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 September 30, 2011, hedge fund investments included above are redeemable monthly (12 percent), quarterly (53 percent), semi-annually (8 percent) and annually (27 percent), with redemption notices ranging from 1 day to 180 days. More than 78 percent require redemption notices of less than 90 days. Investments representing approximately 52 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 in 2008 and do not have stated end dates. The remaining restrictions, which have pre-defined end dates, are generally expected to be lifted by the end of 2012. The partial restrictions relate to certain hedge funds that hold at least one investment that the fund manager deems to be illiquid. In order to treat investors fairly and to accommodate subsequent subscription and redemption requests, the fund manager isolates these illiquid assets from the rest of the fund until the assets become liquid.


Fair Value Measurements on a Non-Recurring Basis

    AIG also measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include cost and equity method investments, life settlement contracts, flight equipment primarily under operating leases, collateral securing foreclosed loans and real estate and other fixed assets, goodwill and other intangible assets. AIG uses a variety of techniques to measure the fair value of these assets when appropriate, as described below:

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    See Notes 2(d), (f), (g) and (h) to the Consolidated Financial Statements in AIG's 2010 Annual Report on Form 10-K for additional information about 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
September 30,
  Nine Months Ended
September 30,
 
 
  Non-Recurring Basis  
(in millions)
  Level 1
  Level 2
  Level 3
  Total
  2011
  2010
  2011
  2010
 
   

September 30, 2011

                                                 
 

Investment real estate

  $ -   $ -   $ 525   $ 525   $ -   $ 21   $ 15   $ 551  
 

Other investments

    -     194     2,105     2,299     181     29     526     106  
 

Aircraft*

    -     -     1,501     1,501     1,518     465     1,676     872  
 

Other assets

    -     -     -     -     -     -     -     5  
   

Total

  $ -   $ 194   $ 4,131   $ 4,325   $ 1,699   $ 515   $ 2,217   $ 1,534  
   

December 31, 2010

                                                 
 

Investment real estate

  $ -   $ -   $ 1,588   $ 1,588                          
 

Other investments

    -     4     2,388     2,392                          
 

Aircraft

    -     -     4,224     4,224                          
 

Other assets

    -     -     2     2                          
                           

Total

  $ -   $ 4   $ 8,202   $ 8,206                          
                           
*
Aircraft impairment charges include fair value adjustments on aircraft.


Fair Value Option

    Under the fair value option, AIG may elect to measure at fair value financial assets and financial liabilities that are not otherwise required to be carried at fair value. Subsequent changes in fair value for designated items are reported in earnings.

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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 September 30,
  Gain (Loss) Nine Months
Ended September 30,
 
(in millions)
  2011
  2010
  2011
  2010
 
   

Assets:

                         
 

Mortgage and other loans receivable

  $ (3 ) $ 28   $ (2 ) $ 65  
 

Bonds and equity securities

    (138 )   1,644     1,299     2,248  
 

Trading – ML II interest

    (43 )   156     32     436  
 

Trading – ML III interest

    (931 )   301     (854 )   1,410  
 

Securities purchased under agreements to resell

    -     18     -     14  
 

Retained interest in AIA

    (2,315 )   -     268     -  
 

Short-term investments and other invested assets and Other assets

    12     4     40     (40 )
   

Liabilities:

                         
 

Policyholder contract deposits

    -     (163 )   -     (130 )
 

Debt

    (447 )   (1,228 )   (919 )   (2,329 )
 

Other liabilities

    84     (1 )   (91 )   1  
   

Total gain (loss)*

  $ (3,781 ) $ 759   $ (227 ) $ 1,675  
   
*
Excludes discontinued operations gains or losses on instruments that are required to be carried at fair value. For instruments required to be carried at fair value, AIG recognized losses of $102 million and gains of $2.1 billion for the three months ended September 30, 2011 and 2010, respectively, and gains of $819 million and $2.8 billion for the nine months ended September 30, 2011 and 2010, 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.

    Interest income and expense and dividend income on assets and liabilities elected under the fair value option are recognized and classified in the Consolidated Statement of Operations depending on the nature of the instrument and related market conventions. For Direct Investment book-related activity, interest, dividend income and interest expense are included in Other income. Otherwise, interest and dividend income are included in Net investment income in the Consolidated Statement of Operations. Gains and losses on AIG's Maiden Lane interests are recorded in Net investment income. See Note 2(a) to the Consolidated Financial Statements in AIG's 2010 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- and nine-month periods ended September 30, 2011, AIG recognized gains of $459 million and $475 million, respectively, and during the three- and nine-month periods ended September 30, 2010, AIG recognized losses of $342 million and $732 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.

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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:

   
 
  September 30, 2011   December 31, 2010  
(in millions)
  Fair
Value

  Outstanding
Principal
Amount

  Difference
  Fair Value
  Outstanding
Principal
Amount

  Difference
 
   

Assets:

                                     
 

Mortgage and other loans receivable

  $ 104   $ 161   $ (57 ) $ 143   $ 203   $ (60 )

Liabilities:

                                     
 

Long-term debt

  $ 10,394   $ 7,988   $ 2,406   $ 10,778   $ 8,977   $ 1,801  
   

    At September 30, 2011 and December 31, 2010, 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

    Information regarding the estimation of fair value for financial instruments not carried at fair value (excluding insurance contracts and lease contracts) is discussed below:

Mortgage and other loans receivable:  Fair values of loans on real estate and collateral loans were estimated for disclosure purposes using discounted cash flow calculations based upon discount rates that AIG believes market participants would use in determining the price that they would pay for such assets. For certain loans, AIG's current incremental lending rates for similar type loans is used as the discount rate, as it is believed that this rate approximates the rates that market participants would use. The fair values of policy loans were not estimated as AIG believes it would have to expend excessive costs for the benefits derived.

Other Invested Assets:  The majority of Other invested assets that are not measured at fair value represent investments in hedge funds, private equity funds and other investment partnerships for which AIG uses the equity method of accounting. The fair value of AIG's investment in these funds is measured based on AIG's share of the funds' reported net asset value.

Cash and short-term investments:  The carrying values of these assets approximate fair values because of the relatively short period of time between origination and expected realization, and their limited exposure to credit risk.

Policyholder contract deposits associated with investment-type contracts:  Fair values for policyholder contract deposits associated with investment-type contracts not accounted for at fair value were estimated for disclosure purposes using discounted cash flow calculations based upon interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. Where no similar contracts are being offered, the discount rate is the appropriate tenor swap rate (if available) or current risk-free interest rate consistent with the currency in which the cash flows are denominated.

Long-term debt:  Fair values of these obligations were determined for disclosure purposes by reference to quoted market prices, where available and appropriate, or discounted cash flow calculations based upon AIG's current market-observable implicit-credit-spread rates for similar types of borrowings with maturities consistent with those remaining for the debt being valued.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following table presents the carrying value and estimated fair value of AIG's financial instruments not measured at fair value:

   
 
  September 30, 2011   December 31, 2010  
(in millions)
  Carrying
Value

  Estimated
Fair
Value

  Carrying
Value

  Estimated
Fair
Value

 
   

Assets:

                         
 

Mortgage and other loans receivable

  $ 19,175   $ 20,132   $ 20,094   $ 20,285  
 

Other invested assets*

    19,332     17,927     19,472     18,864  
 

Short-term investments

    21,562     21,562     19,878     19,878  
 

Cash

    1,542     1,542     1,558     1,558  

Liabilities:

                         
 

Policyholder contract deposits associated with investment-type contracts

    117,302     123,150     102,585     112,710  
 

Long-term debt (including Federal Reserve Bank of New York credit facility)

    66,150     62,786     94,318     93,745  
   
*
Excludes aircraft asset investments held by non-Aircraft Leasing subsidiaries.


7. 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, 2011

                               

Bonds available for sale:

                               
 

U.S. government and government sponsored entities

  $ 7,123   $ 434   $ (3 ) $ 7,554   $ -  
 

Obligations of states, municipalities and political subdivisions

    36,921     2,558     (89 )   39,390     (29 )
 

Non-U.S. governments

    18,969     761     (76 )   19,654     -  
 

Corporate debt

    136,018     11,811     (1,563 )   146,266     94  
 

Mortgage-backed, asset-backed and collateralized:

                               
   

RMBS

    32,448     1,507     (1,397 )   32,558     (625 )
   

CMBS

    8,168     458     (986 )   7,640     (143 )
   

CDO/ABS

    6,743     498     (474 )   6,767     54  
   
 

Total mortgage-backed, asset-backed and collateralized

    47,359     2,463     (2,857 )   46,965     (714 )
   

Total bonds available for sale(b)

    246,390     18,027     (4,588 )   259,829     (649 )
   

Equity securities available for sale:

                               
 

Common stock

    1,652     1,444     (68 )   3,028     -  
 

Preferred stock

    83     31     -     114     -  
 

Mutual funds

    55     12     -     67     -  
   

Total equity securities available for sale

    1,790     1,487     (68 )   3,209     -  
   

Total

  $ 248,180   $ 19,514   $ (4,656 ) $ 263,038   $ (649 )
   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


   
(in millions)
  Amortized
Cost or
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Other-Than-
Temporary
Impairments
in AOCI
(a)
 
   

December 31, 2010

                               

Bonds available for sale:

                               
 

U.S. government and government sponsored entities

  $ 7,239   $ 184   $ (73 ) $ 7,350   $ -  
 

Obligations of states, municipalities and political subdivisions

    45,297     1,725     (402 )   46,620     2  
 

Non-U.S. governments

    14,780     639     (75 )   15,344     (28 )
 

Corporate debt

    118,729     8,827     (1,198 )   126,358     99  
 

Mortgage-backed, asset-backed and collateralized:

                               
   

RMBS

    20,661     700     (1,553 )   19,808     (648 )
   

CMBS

    7,320     240     (1,149 )   6,411     (218 )
   

CDO/ABS

    6,643     402     (634 )   6,411     32  
   
 

Total mortgage-backed, asset-backed and collateralized

    34,624     1,342     (3,336 )   32,630     (834 )
   

Total bonds available for sale(b)

    220,669     12,717     (5,084 )   228,302     (761 )
   

Equity securities available for sale:

                               
 

Common stock

    1,820     1,931     (52 )   3,699     -  
 

Preferred stock

    400     88     (1 )   487     -  
 

Mutual funds

    351     46     (2 )   395     -  
   

Total equity securities available for sale

    2,571     2,065     (55 )   4,581     -  
   

Total(c)

  $ 223,240   $ 14,782   $ (5,139 ) $ 232,883   $ (761 )
   
(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, 2011 and December 31, 2010, bonds available for sale held by AIG that were below investment grade or not rated totaled $20.9 billion and $18.6 billion, respectively.

(c)
Excludes $80.5 billion of available for sale securities at fair value from businesses held for sale. See Note 4 herein.

    During the third quarter of 2011, Chartis entered into financing transactions using municipal bonds to support statutory capital by generating taxable income. In these transactions, certain available for sale high grade municipal bonds were loaned to counterparties, primarily commercial banks and brokerage firms, who receive the tax-exempt income from the bonds. In return, the counterparties are required to pay Chartis an income stream equal to the bond coupon of the loaned securities, plus a fee. To secure their borrowing of the securities, counterparties are required to post liquid collateral (such as high quality fixed maturity securities and cash) equal to at least 102 percent of the fair value of the loaned securities to third-party custodians for Chartis' benefit in the event of default by the counterparties. The collateral is maintained in a third-party custody account and is trued-up daily based on daily fair value measurements from a third-party pricing source. Chartis is not permitted to sell, repledge or otherwise control the collateral unless an event of default occurs by the counterparties. At the termination of these transactions, Chartis and its counterparties are obligated to return the collateral maintained in the third-party custody account and the identical municipal bonds loaned, respectively. These transactions are accounted for as secured financing arrangements. Under these secured financing arrangements, securities available for sale with a fair value of $1.2 billion at September 30, 2011 were loaned to counterparties against collateral equal to at least 102 percent of the fair value of the loaned securities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Unrealized Losses on Securities Available for Sale

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:

   
 
  12 Months or Less   More than 12 Months   Total  
(in millions)
  Fair
Value

  Gross
Unrealized
Losses

  Fair
Value

  Gross
Unrealized
Losses

  Fair
Value

  Gross
Unrealized
Losses

 
   

September 30, 2011

                                     

Bonds available for sale:

                                     
 

U.S. government and government sponsored entities

  $ 314   $ 3   $ -   $ -   $ 314   $ 3  
 

Obligations of states, municipalities and political subdivisions

    635     6     667     83     1,302     89  
 

Non-U.S. governments

    3,271     63     148     13     3,419     76  
 

Corporate debt

    21,465     888     5,182     675     26,647     1,563  
 

RMBS

    7,019     558     4,094     839     11,113     1,397  
 

CMBS

    2,060     275     1,627     711     3,687     986  
 

CDO/ABS

    1,052     49     1,672     425     2,724     474  
   

Total bonds available for sale

    35,816     1,842     13,390     2,746     49,206     4,588  
   

Equity securities available for sale:

                                     
 

Common stock

    483     68     -     -     483     68  
 

Preferred stock

    13     -     -     -     13     -  
 

Mutual funds

    -     -     -     -     -     -  
   

Total equity securities available for sale

    496     68     -     -     496     68  
   

Total

  $ 36,312   $ 1,910   $ 13,390   $ 2,746   $ 49,702   $ 4,656  
   

December 31, 2010*

                                     

Bonds available for sale:

                                     
 

U.S. government and government sponsored entities

  $ 2,142   $ 73   $ -   $ -   $ 2,142   $ 73  
 

Obligations of states, municipalities and political subdivisions

    9,300     296     646     106     9,946     402  
 

Non-U.S. governments

    1,427     34     335     41     1,762     75  
 

Corporate debt

    18,246     579     7,343     619     25,589     1,198  
 

RMBS

    4,461     105     6,178     1,448     10,639     1,553  
 

CMBS

    462     19     3,014     1,130     3,476     1,149  
 

CDO/ABS

    996     48     2,603     586     3,599     634  
   

Total bonds available for sale

    37,034     1,154     20,119     3,930     57,153     5,084  
   

Equity securities available for sale:

                                     
 

Common stock

    576     52     -     -     576     52  
 

Preferred stock

    11     1     -     -     11     1  
 

Mutual funds

    65     2     -     -     65     2  
   

Total equity securities available for sale

    652     55     -     -     652     55  
   

Total

  $ 37,686   $ 1,209   $ 20,119   $ 3,930   $ 57,805   $ 5,139  
   
*
Excludes fixed maturity and equity securities of businesses held for sale. See Note 4 herein.

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    At September 30, 2011, AIG held 7,829 and 317 individual fixed maturity and equity securities, respectively, that were in an unrealized loss position, of which 1,904 of individual 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, 2011, 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, 2011


(in millions)
 
  Amortized
Cost

  Fair
Value

  Amortized
Cost

  Fair
Value

 
   

Due in one year or less

  $ 10,270   $ 10,375   $ 2,224   $ 2,201  

Due after one year through five years

    57,234     59,506     11,774     11,321  

Due after five years through ten years

    67,695     72,002     12,548     11,950  

Due after ten years

    63,832     70,981     6,867     6,210  

Mortgage-backed, asset-backed and collateralized

    47,359     46,965     20,381     17,524  
   

Total

  $ 246,390   $ 259,829   $ 53,794   $ 49,206  
   

    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,  
 
  2011   2010   2011   2010  
(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 maturities

  $ 612   $ 11   $ 879   $ 46   $ 1,462   $ 104   $ 1,449   $ 143  

Equity securities

    30     10     184     43     178     18     477     73  
   

Total

  $ 642   $ 21   $ 1,063   $ 89   $ 1,640   $ 122   $ 1,926   $ 216  
   

    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 $620 million and $1.5 billion, respectively.

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


Trading Securities

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

   
 
  September 30, 2011   December 31, 2010  
(in millions)
  Fair
Value

  Percent
of Total

  Fair
Value

  Percent
of Total

 
   

Fixed Maturities:

                         
 

U.S. government and government sponsored entities

  $ 7,557     31 % $ 6,902     21 %
 

Non-U.S. governments

    36     -     125     1  
 

Corporate debt

    781     3     912     3  
 

State, territories and political subdivisions

    257     1     316     1  
 

Mortgage-backed, asset-backed and collateralized:

                         
   

RMBS

    1,715     7     1,928     6  
   

CMBS

    1,838     7     2,078     6  
   

CDO/ABS and other collateralized

    5,704     23     6,331     19  
   

Total mortgage-backed, asset-backed and collateralized

    9,257     37     10,337     31  

ML II

    1,310     5     1,279     4  

ML III

    5,456     22     6,311     19  
   

Total fixed maturities

    24,654     99     26,182     80  

Equity securities:

                         
 

MetLife

    -     -     6,494     20  
 

All other

    148     1     158     -  
   

Total equity securities

    148     1     6,652     20  
   

Total

  $ 24,802     100 % $ 32,834     100 %
   


Evaluating Investments for Other-Than-Temporary Impairments

    For a discussion of AIG's policy for evaluating investments for other-than-temporary impairments, see pages 276 - 279 of Note 7 to the Consolidated Financial Statements in AIG's 2010 Annual Report on Form 10-K.

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Credit Impairments

The following table presents a rollforward of the credit impairments recognized in earnings for available for sale fixed maturity securities held by AIG(a):

   
 
  Three Months
Ended September 30,
  Nine Months
Ended September 30,
 
(in millions)
  2011
  2010
  2011
  2010
 
   

Balance, beginning of period

  $ 6,396   $ 8,007   $ 6,786   $ 7,803  
 

Increases due to:

                         
   

Credit impairments on new securities subject to impairment losses

    169     142     254     432  
   

Additional credit impairments on previously impaired securities

    222     278     457     1,088  
 

Reductions due to:

                         
   

Credit impaired securities fully disposed for which there was no prior intent or requirement to sell

    (133 )   (227 )   (458 )   (791 )
   

Credit impaired securities for which there is a current intent or anticipated requirement to sell

    -     (493 )   -     (498 )
   

Accretion on securities previously impaired due to credit(b)

    (148 )   (83 )   (355 )   (269 )
   

Hybrid securities with embedded credit derivatives reclassified to Bond trading securities

    -     (748 )   (179 )   (748 )
 

Other(c)

    -     (181 )   1     (322 )
   

Balance, end of period

  $ 6,506   $ 6,695   $ 6,506   $ 6,695  
   
(a)
Includes structured, corporate, municipal and sovereign fixed maturity securities.

(b)
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.

(c)
In 2010, primarily consists of activity associated with held for sale entities.

Purchased Credit Impaired (PCI) Securities

    Beginning in the second quarter of 2011, AIG purchased 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, including both principal and interest and considering the effects of prepayments, for these PCI securities. 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. 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. 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

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


for other-than-temporary impairment. Significant increases in undiscounted expected future cash flows for reasons other than interest rate changes are recognized prospectively as an adjustment 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)

  $ 10,824  

Cash flows expected to be collected*

    8,250  

Recorded investment in acquired securities

    5,562  
   
*
Represents undiscounted expected cash flows, including both principal and interest.

   
(in millions)
  September 30, 2011
 
   

Outstanding principal balance

  $ 7,755  

Amortized cost

    5,233  

Fair value

    4,894  
   


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

   
(in millions)
   
 
   

Three Months Ended September 30, 2011

       

Balance, June 30, 2011

  $ 2,276  
 

Newly purchased PCI securities

    306  
 

Accretion

    (119 )
 

Effect of changes in interest rate indices

    (46 )

Net reclassification from (to) non-accretable difference, including effects of prepayments

    (93 )
   

Balance, September 30, 2011

  $ 2,324  
   

Six Months Ended September 30, 2011

       

Balance, March 31, 2011

  $ -  
 

Newly purchased PCI securities

    2,688  
 

Accretion

    (194 )
 

Effect of changes in interest rate indices

    (54 )

Net reclassification from (to) non-accretable difference, including effects of prepayments

    (116 )
   

Balance, September 30, 2011

  $ 2,324  
   


8. Lending Activities

The following table presents the composition of Mortgage and other loans receivable:

   
(in millions)
  September 30,
2011

  December 31,
2010

 
   

Commercial mortgages

  $ 13,342   $ 13,571  

Life insurance policy loans

    3,064     3,133  

Commercial loans, other loans and notes receivable

    3,634     4,411  
   

Total mortgage and other loans receivable

    20,040     21,115  

Allowance for losses

    (761 )   (878 )
   

Mortgage and other loans receivable, net

  $ 19,279   $ 20,237  
   

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    Commercial mortgages primarily represent loans for office, retail and industrial properties, with exposures in California and New York representing the largest geographic concentrations (24 percent and 11 percent, respectively, at September 30, 2011). Over 98 percent and 97 percent of the commercial mortgages were current as to payments of principal and interest at September 30, 2011 and December 31, 2010, respectively.


The following table presents the credit quality indicators for commercial mortgage loans:

   
September 30, 2011

(dollars in millions)
  Number
of
Loans

  Class    
  Percent
of
Total

 
  Apartments
  Offices
  Retail
  Industrial
  Hotel
  Others
  Total
 
   

Credit Quality Indicator:

                                                       
 

In good standing

    1,045   $ 1,793   $ 4,602   $ 2,267   $ 1,938   $ 894   $ 1,284   $ 12,778     96 %
 

Restructured(a)

    12     49     185     -     4     -     68     306     2  
 

90 days or less delinquent

    2     1     11     -     -     -     -     12     -  
 

>90 days delinquent or in process of foreclosure

    20     43     124     -     2     -     77     246     2  
   

Total(b)

    1,079   $ 1,886   $ 4,922   $ 2,267   $ 1,944   $ 894   $ 1,429   $ 13,342     100 %
   

Valuation allowance

        $ 40   $ 152   $ 29   $ 75   $ 16   $ 37   $ 349     3 %
   
(a)
Loans that have been modified in troubled debt restructurings and are performing according to their restructured terms. See discussion of troubled debt restructurings below.

(b)
Does not reflect valuation allowances.


Methodology used to estimate the allowance for credit losses

    For commercial mortgage loans, impaired value is based on the fair value of underlying collateral, which is determined based on the expected net future cash flows of the collateral, less estimated costs to sell. An allowance is typically established for the difference between the impaired value of the loan and its current carrying amount. Additional allowance amounts are established for incurred but not specifically identified impairments, based on the analysis of internal risk ratings and current loan values. Internal risk ratings are assigned based on the consideration of risk factors including debt service coverage, loan-to-value ratio or the ratio of the loan balance to the estimated value of the property, property occupancy, profile of the borrower and of the major property tenants, economic trends in the market where the property is located, and condition of the property. These factors and the resulting risk ratings also provide a basis for determining the level of monitoring performed at both the individual loan and the portfolio level. When all or a portion of a commercial mortgage loan is deemed uncollectible, the uncollectible portion of the carrying value of the loan is charged off against the allowance.

    A significant majority of commercial mortgage loans in the portfolio are non-recourse loans and, accordingly, the only guarantees are for specific items that are exceptions to the non-recourse provisions. It is therefore extremely rare for AIG to have cause to enforce the provisions of a guarantee on a commercial real estate or mortgage loan.

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


The following table presents a rollforward of the changes in the allowance for losses on Mortgage and other loans receivable:

   
 
  2011   2010  
Nine Months Ended September 30,

(in millions)
 
  Commercial
Mortgages

  Other
Loans

  Total
  Commercial
Mortgages

  Other
Loans

  Total
 
   

Allowance, beginning of year

  $ 470   $ 408   $ 878   $ 432   $ 2,012   $ 2,444  
 

Loans charged off

    (40 )   (46 )   (86 )   (210 )   (103 )   (313 )
 

Recoveries of loans previously charged off

    36     -     36     -     12     12  
   
   

Net charge-offs

    (4 )   (46 )   (50 )   (210 )   (91 )   (301 )
 

Provision for loan losses

    (62 )   50     (12 )   278     39     317  
 

Other

    (55 )   -     (55 )   18     (48 )   (30 )
 

Reclassified to Assets of businesses held for sale

    -     -     -     (106 )   (1,421 )   (1,527 )
   

Allowance, end of period

  $ 349 * $ 412   $ 761   $ 412 * $ 491   $ 903  
   
*
Of the total, $105 million and $101 million relates to individually assessed credit losses on $570 million and $703 million of commercial mortgage loans as of September 30, 2011 and 2010, respectively


Troubled Debt Restructurings

    AIG modifies loans to optimize their returns and improve their collectability, among other things. When such a modification is undertaken with a borrower that is experiencing financial difficulty and the modification involves AIG granting a concession to the troubled debtor, the modification is deemed to be a troubled debt restructuring (TDR). AIG assesses whether a borrower is experiencing financial difficulty based on a variety of factors, including the borrower's current default on any of its outstanding debt, the probability of a default on any of its debt in the foreseeable future without the modification, the insufficiency of the borrower's forecasted cash flows to service any of its outstanding debt (including both principal and interest), and the borrower's inability to access alternative third-party financing at an interest rate that would be reflective of current market conditions for a non-troubled debtor. Concessions granted may include extended maturity dates, interest rate changes, principal forgiveness, payment deferrals and easing of loan covenants.

    As of September 30, 2011, there were no significant loans held by AIG that had been modified in a TDR during 2011.


9. Variable Interest Entities

    A variable interest entity (VIE) is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make significant decisions relating to the entity's operations through voting rights and do not substantively participate in the gains and losses of the entity. Consolidation of a VIE by its primary beneficiary is not based on majority voting interest, but is based on other criteria discussed below.

    While AIG enters into various arrangements with VIEs in the normal course of business, AIG's involvement with VIEs is primarily via its insurance companies as a passive investor in debt securities (rated and unrated) and equity interests issued by VIEs. In all instances, AIG consolidates the VIE when it determines it is the primary beneficiary. This analysis includes a review of the VIE's capital structure, contractual relationships and terms, nature of the VIE's operations and purpose, nature of the VIE's interests issued and AIG's involvements with the entity. AIG also evaluates the design of the VIE and the related risks the entity was designed to expose the variable interest holders to in evaluating consolidation.

    For VIEs with attributes consistent with that of an investment company or a money market fund, the primary beneficiary is the party or group of related parties that absorbs a majority of the expected losses of the VIE, receives the majority of the expected residual returns of the VIE, or both.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    For all other variable interest entities, the primary beneficiary is the entity that has both (1) the power to direct the activities of the VIE that most significantly affect the entity's economic performance and (2) the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. While also considering these factors, the consolidation conclusion depends on the breadth of AIG's decision-making ability and its ability to influence activities that significantly affect the economic performance of the VIE.


Exposure to Loss

    AIG's total off-balance sheet exposure associated with VIEs, primarily consisting of financial guarantees and commitments to real estate and investment funds, was $0.4 billion and $1.0 billion at September 30, 2011 and December 31, 2010, respectively.


The following table presents AIG's total assets, total liabilities and off-balance sheet exposure associated with its variable interests in consolidated VIEs:

   
 
  VIE Assets*   VIE Liabilities   Off-Balance Sheet Exposure  
(in billions)
  September 30,
2011

  December 31,
2010

  September 30,
2011

  December 31,
2010

  September 30,
2011

  December 31,
2010

 
   
 

AIA/ALICO SPVs

  $ 14.3   $ 48.6   $ 0.2   $ 0.9   $ -   $ -  
 

Real estate and investment funds

    1.7     3.8     0.7     1.2     0.1     0.1  
 

Commercial paper conduit

    0.6     0.5     0.3     0.2     -     -  
 

Affordable housing partnerships

    2.6     2.9     0.4     0.4     -     -  
 

Other

    4.3     4.7     1.7     2.1     -     -  
 

VIEs of businesses held for sale

    -     0.4     -     -     -     -  
   

Total

  $ 23.5   $ 60.9   $ 3.3   $ 4.8   $ 0.1   $ 0.1  
   
*
The assets of each VIE can be used only to settle specific obligations of that VIE.

    AIG calculates its maximum exposure to loss to be (i) the amount invested in the debt or equity of the VIE, (ii) the notional amount of VIE assets or liabilities where AIG has also provided credit protection to the VIE with the VIE as the referenced obligation, and (iii) other commitments and guarantees to the VIE. Interest holders in VIEs sponsored by AIG generally have recourse only to the assets and cash flows of the VIEs and do not have recourse to AIG, except in limited circumstances when AIG has provided a guarantee to the VIE's interest holders.

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


The following table presents total assets of unconsolidated VIEs in which AIG holds a variable interest, as well as AIG's maximum exposure to loss associated with these VIEs:

   
 
   
  Maximum Exposure to Loss  
(in billions)
  Total VIE
Assets

  On-Balance
Sheet

  Off-Balance
Sheet

  Total
 
   

September 30, 2011

                         
 

Real estate and investment funds

  $ 20.7   $ 2.3   $ 0.3   $ 2.6  
 

Affordable housing partnerships

    0.6     0.6     -     0.6  
 

Maiden Lane Interests

    27.9     6.8     -     6.8  
 

Other

    1.6     -     -     -  
   

Total

  $ 50.8   $ 9.7   $ 0.3   $ 10.0  
   

December 31, 2010

                         
 

Real estate and investment funds

  $ 18.5   $ 2.5   $ 0.3   $ 2.8  
 

Affordable housing partnerships

    0.6     0.6     -     0.6  
 

Maiden Lane Interests

    40.1     7.6     -     7.6  
 

Other

    1.6     0.1     0.5     0.6  
 

VIEs of businesses held for sale

    2.0     0.4     0.1     0.5  
   

Total

  $ 62.8   $ 11.2   $ 0.9   $ 12.1  
   


Balance Sheet Classification

AIG's interests in the assets and liabilities of consolidated and unconsolidated VIEs were classified in the Consolidated Balance Sheet as follows:

   
 
  Consolidated VIEs   Unconsolidated VIEs  
(in billions)
  September 30,
2011

  December 31,
2010

  September 30,
2011

  December 31,
2010

 
   

Assets:

                         
 

Available for sale securities

  $ 0.5   $ 3.3   $ -   $ -  
 

Trading securities

    1.5     8.1     6.8     7.7  
 

Mortgage and other loans receivable

    0.9     0.7     -     -  
 

Other invested assets

    16.8     18.3     2.9     3.1  
 

Other asset accounts

    3.8     30.1     -     0.1  
 

Assets held for sale

    -     0.4     -     0.3  
   

Total

  $ 23.5   $ 60.9   $ 9.7   $ 11.2  
   

Liabilities:

                         
 

Other long-term debt

  $ 2.0   $ 2.6   $ -   $ -  
 

Other liability accounts

    1.3     2.2     -     -  
   

Total

  $ 3.3   $ 4.8   $ -   $ -  
   

    See Notes 6, 7 and 11 to the Consolidated Financial Statements in AIG's 2010 Annual Report on Form 10-K for additional information on RMBS, CMBS, and other asset-backed securities.


10. Derivatives and Hedge Accounting

    AIG uses derivatives and other financial instruments as part of its financial risk management programs and as part of its investment operations. AIGFP had also transacted in derivatives as a dealer and had acted as an intermediary between the relevant AIG subsidiary and the counterparty. In a number of situations, AIG has replaced AIGFP with AIG Markets for purposes of acting as an intermediary between the AIG subsidiary and the third-party counterparty as part of the wind-down of AIGFP's portfolios.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

    Derivatives are financial arrangements among two or more parties with returns linked to or "derived" from some underlying equity, debt, commodity, or other asset, liability, or foreign exchange rate or other index or the occurrence of a specified payment event. Derivatives, with the exception of bifurcated embedded derivatives, are reflected in the Consolidated Balance Sheet in Derivative assets, at fair value and Derivative liabilities, at fair value. A bifurcated embedded derivative is recorded at fair value whereas the corresponding host contract is recorded on an amortized cost basis. A bifurcated embedded derivative is generally presented with the host contract in the Consolidated Balance Sheet.


The following table presents the notional amounts and fair values of AIG's derivative instruments:

   
 
  September 30, 2011   December 31, 2010  
 
  Gross Derivative Assets   Gross Derivative Liabilities   Gross Derivative Assets   Gross Derivative Liabilities  
(in millions)
  Notional
Amount
(a)
  Fair
Value
(b)
  Notional
Amount
(a)
  Fair
Value
(b)
  Notional
Amount
(a)
  Fair
Value
(b)
  Notional
Amount
(a)
  Fair
Value
(b)
 
   

Derivatives designated as hedging instruments:

                                                 
 

Interest rate contracts(c)

  $ -   $ -   $ 511   $ 43   $ 1,471   $ 156   $ 626   $ 56  

Derivatives not designated as hedging instruments:

                                                 
 

Interest rate contracts(c)

    74,079     8,742     78,232     7,219     150,966     14,048     118,783     9,657  
 

Foreign exchange contracts

    7,006     165     4,073     189     2,495     203     4,105     338  
 

Equity contracts

    4,473     346     1,100     216     5,002     358     1,559     329  
 

Commodity contracts

    961     102     758     100     944     92     768     67  
 

Credit contracts

    957     91     28,235     3,459     2,046     379     62,715     4,180  
 

Other contracts(d)

    25,352     791     18,751     1,748     27,333     1,075     16,297     753  
   

Total derivatives not designated as hedging instruments

    112,828     10,237     131,149     12,931     188,786     16,155     204,227     15,324  
   

Total derivatives

  $ 112,828   $ 10,237   $ 131,660   $ 12,974   $ 190,257   $ 16,311   $ 204,853   $ 15,380  
   
(a)
Notional amount represents a standard of measurement of the volume of derivatives business of AIG. Notional amount is generally not a quantification of market risk or credit risk and is not recorded in the Consolidated Balance Sheet. Notional amounts generally represent those amounts used to calculate contractual cash flows to be exchanged and are not paid or received, except for certain contracts such as currency swaps and certain credit contracts. For credit contracts, notional amounts are net of all underlying subordination.

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

(c)
Includes cross currency swaps.

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

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The following table presents the fair values of derivative assets and liabilities in the Consolidated Balance Sheet:

   
 
  September 30, 2011   December 31, 2010  
 
  Derivative Assets   Derivative Liabilities(a)   Derivative Assets   Derivative Liabilities(b)  
(in millions)
  Notional
Amount

  Fair
Value

  Notional
Amount

  Fair
Value

  Notional
Amount

  Fair
Value

  Notional
Amount

  Fair
Value

 
   

AIGFP derivatives

  $ 90,573   $ 7,113   $ 98,978   $ 9,115   $ 168,033   $ 12,268   $ 173,226   $ 12,379  

All other derivatives(c)

    22,255     3,124     32,682     3,859     22,224     4,043     31,627     3,001  
   
 

Total derivatives, gross

  $ 112,828     10,237   $ 131,660     12,974   $ 190,257     16,311   $ 204,853     15,380  
   

Counterparty netting(d)

          (3,784 )         (3,784 )         (6,298 )         (6,298 )

Cash collateral(e)

          (1,707 )         (2,762 )         (4,096 )         (2,902 )
                                           
 

Total derivatives, net

          4,746           6,428           5,917           6,180  
                                           

Less: Bifurcated embedded derivatives

          -           1,362           -           445  
   

Total derivatives on consolidated balance sheet

        $ 4,746         $ 5,066         $ 5,917         $ 5,735  
   
(a)
Included in All other derivatives are bifurcated embedded derivatives, which are recorded in Policyholder contract deposits.

(b)
Included in All other derivatives are bifurcated embedded derivatives, which are recorded in Policyholder contract deposits, Bonds available for sale, at fair value, and Common and preferred stock, at fair value.

(c)
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 obligations.

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

(e)
Represents cash collateral posted and received.


Hedge Accounting

    AIG designated certain derivatives entered into by AIGFP and AIG Markets with third parties as either fair value or cash flow hedges of certain debt issued by AIG Parent and ILFC. The fair value hedges included (i) interest rate swaps that were designated as hedges of the change in the fair value of fixed rate debt attributable to changes in the benchmark interest rate and (ii) foreign currency swaps designated as hedges of the change in fair value of foreign currency denominated debt attributable to changes in foreign exchange rates and in certain cases also the benchmark interest rate. With respect to the cash flow hedges, (i) interest rate swaps were designated as hedges of the changes in cash flows on floating rate debt attributable to changes in the benchmark interest rate, and (ii) foreign currency swaps were designated as hedges of changes in cash flows on foreign currency denominated debt attributable to changes in the benchmark interest rate and foreign exchange rates.

    AIG assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Regression analysis is employed to assess the effectiveness of these hedges both on a prospective and retrospective basis. AIG does not utilize the shortcut method to assess hedge effectiveness. For net investment hedges, a qualitative methodology is utilized to assess hedge effectiveness.

    AIG uses foreign currency denominated debt as hedging instruments in net investment hedge relationships to mitigate the foreign exchange risk associated with AIG's non-U.S. dollar functional currency foreign subsidiaries. AIG assesses the hedge effectiveness and measures the amount of ineffectiveness for these hedge relationships based on changes in spot exchange rates. AIG records the change in the carrying amount of these investments related to the effective portion of the hedge in the foreign currency translation adjustment within Accumulated other comprehensive income. Simultaneously, the ineffective portion, if any, is recorded in earnings. If (i) the notional amount of the hedging debt matches the designated portion of the net investment and (ii) the hedging debt is denominated in the same currency as the functional currency of the hedged net investment, no ineffectiveness is recorded in earnings. For the three- and nine-month periods ended September 30, 2011, AIG

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recognized losses of $1 million and $36 million, respectively, and for the three- and nine-month periods ended September 30, 2010, AIG recognized gains (losses) of $(37) million and $22 million, respectively, included in Foreign currency translation adjustment in Accumulated other comprehensive income related to the net investment hedge relationships.


The following table presents the 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)
  2011
  2010
  2011
  2010
 
   

Interest rate contracts(a)(b):

                         
 

Gain (loss) recognized in earnings on derivatives

  $ -   $ 104   $ (3 ) $ 262  
 

Gain (loss) recognized in earnings on hedged items(c)

    39     (50 )   127     (119 )
 

Gain (loss) recognized in earnings for ineffective portion and amount excluded from effectiveness testing

    -     9     (1 )   39  
   
(a)
Gains and losses recognized in earnings on derivatives for the effective portion and hedged items are recorded in Other income. Gains and losses recognized in earnings on derivatives for the ineffective portion and amounts excluded from effectiveness testing are recorded in Net realized capital gains (losses) and Other income, respectively.

(b)
Includes $0 million and $8 million, respectively, for the three-month periods ended September 30, 2011 and 2010, and $(1) million and $32 million, respectively, for the nine-month periods ended September 30, 2011 and 2010 related to the ineffective portion. Includes $0 million and $0 million for the three-month periods ended September 30, 2011 and 2010 and $0 million and $7 million for the nine-month periods ended September 30, 2011 and 2010, for amounts excluded from effectiveness testing.

(c)
Includes $39 million and $45 million, respectively, for the three-month periods ended September 30, 2011 and 2010, and $125 million and $104 million, respectively, for the nine-month periods ended September 30, 2011 and 2010 representing the amortization of debt basis adjustment following the discontinuation of hedge accounting on certain positions.


The following table presents the 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)
  2011
  2010
  2011
  2010
 
   

Interest rate contracts(a):

                         
 

Loss recognized in OCI on derivatives

  $ (2 ) $ (66 ) $ (5 ) $ (25 )
 

Loss reclassified from Accumulated OCI into earnings(b)

    (15 )   (67 )   (49 )   (65 )
 

Gain (loss) recognized in earnings on derivatives for ineffective portion

    -     -     -     (6 )
   
(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, 2011, $19 million of the deferred net gain in Accumulated other comprehensive income is expected to be recognized in earnings during the next 12 months.

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Derivatives Not Designated as Hedging Instruments


The following table presents the 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)
  2011
  2010
  2011
  2010
 
   

By Derivative Type:

                         
 

Interest rate contracts(a)

  $ 523   $ 413   $ 270   $ 156  
 

Foreign exchange contracts

    84     (238 )   80     (125 )
 

Equity contracts

    416     (170 )   379     161  
 

Commodity contracts

    (1 )   9     6     (2 )
 

Credit contracts

    (83 )   213     218     662  
 

Other contracts(b)

    (741 )   164     (741 )   (430 )
   

Total

  $ 198   $ 391   $ 212   $ 422  
   

By Classification:

                         
 

Premiums

  $ 29   $ 22   $ 80   $ 62  
 

Net investment income

    2     12     6     21  
 

Net realized capital gains (losses)

    (355 )   723     (97 )   (674 )
 

Other income (losses)

    522     (366 )   223     1,013  
   

Total

  $ 198   $ 391   $ 212   $ 422  
   
(a)
Includes cross currency swaps.

(b)
Includes embedded derivative gains (losses) of $(812) million and $61 million for the three months ended September 30, 2011 and 2010, respectively; and embedded derivative gains (losses) of $(807) million and $618 million, respectively, for the nine months ended September 30, 2011 and 2010, respectively.


AIGFP Derivatives

    AIGFP enters into derivative transactions to mitigate market risk in its exposures (interest rates, currencies, commodities, credit and equities) arising from its transactions. In most cases, AIGFP did not hedge its exposures related to the credit default swaps it had written. As a dealer, AIGFP structured and entered into derivative transactions to meet the needs of counterparties who may have been seeking to hedge certain aspects of such counterparties' operations or obtain a desired financial exposure.

    AIGFP's derivative transactions involving interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying notional amounts. AIGFP typically became a principal in the exchange of interest payments between the parties and, therefore, is exposed to counterparty credit risk and may be exposed to loss, if counterparties default. Currency, commodity and equity swaps are similar to interest rate swaps but involve the exchange of specific currencies or cash flows based on the underlying commodity, equity securities or indices. Also, they may involve the exchange of notional amounts at the beginning and end of the transaction. Swaptions are options where the holder has the right but not the obligation to enter into a swap transaction or cancel an existing swap transaction.

    AIGFP follows a policy of minimizing interest rate, currency, commodity, and equity risks associated with investment securities by entering into offsetting positions, thereby offsetting a significant portion of the unrealized appreciation and depreciation. In addition, to reduce its credit risk, AIGFP has entered into credit derivative transactions with respect to $221 million of securities to economically hedge its credit risk.

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    The timing and the amount of cash flows relating to AIGFP's foreign exchange forwards and exchange traded futures and options contracts are determined by each of the respective contractual agreements.

    Futures and forward contracts are contracts that obligate the holder to sell or purchase foreign currencies, commodities or financial indices in which the seller/purchaser agrees to make/take delivery at a specified future date of a specified instrument, at a specified price or yield. Options are contracts that allow the holder of the option to purchase or sell the underlying commodity, currency or index at a specified price and within, or at, a specified period of time. As a writer of options, AIGFP generally receives an option premium and then manages the risk of any unfavorable change in the value of the underlying commodity, currency or index by entering into offsetting transactions with third-party market participants. Risks arise as a result of movements in current market prices from contracted prices, and the potential inability of the counterparties to meet their obligations under the contracts.

AIGFP Super Senior Credit Default Swaps

    AIGFP entered into credit default swap transactions with the intention of earning revenue on credit exposure. In the majority of AIGFP's credit default swap transactions, AIGFP sold credit protection on a designated portfolio of loans or debt securities. Generally, AIGFP provides such credit protection on a "second loss" basis, meaning that AIGFP would incur credit losses only after a shortfall of principal and/or interest, or other credit events, in respect of the protected loans and debt securities, exceeds a specified threshold amount or level of "first losses."

    Typically, the credit risk associated with a designated portfolio of loans or debt securities has been tranched into different layers of risk, which are then analyzed and rated by the credit rating agencies. At origination, there is usually an equity layer covering the first credit losses in respect of the portfolio up to a specified percentage of the total portfolio, and then successive layers ranging generally from a BBB-rated layer to one or more AAA-rated layers. A significant majority of AIGFP transactions that were rated by rating agencies had risk layers or tranches rated AAA at origination that are immediately junior to the threshold level above which AIGFP's payment obligation would generally arise. In transactions that were not rated, AIGFP applied equivalent risk criteria for setting the threshold level for its payment obligations. Therefore, the risk layer assumed by AIGFP with respect to the designated portfolio of loans or debt securities in these transactions is often called the "super senior" risk layer, defined as a layer of credit risk senior to one or more risk layers rated AAA by the credit rating agencies, or, if the transaction is not rated, structured to be the equivalent thereto.

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The following table presents the net notional amount, fair value of derivative (asset) liability and unrealized market valuation gain (loss) of the AIGFP super senior credit default swap portfolio, including credit default swaps written on mezzanine tranches of certain regulatory capital relief transactions, by asset class:

   
 
   
   
   
   
  Unrealized Market Valuation Gain (Loss)  
 
   
   
  Fair Value of
Derivative (Asset) Liability at
 
 
  Net Notional Amount   Three Months
Ended September 30,
  Nine Months
Ended September 30,
 
 
  September 30,
2011
(a)
  December 31,
2010
(a)
  September 30,
2011
(b)(c)
  December 31,
2010
(b)(c)
 
(in millions)
  2011(c)
  2010(c)
  2011(c)
  2010(c)
 
   

Regulatory Capital:

                                                 
 

Corporate loans

  $ 2,275   $ 5,193   $ -   $ -   $ -   $ -   $ -   $ -  
 

Prime residential mortgages(d)

    4,355     31,613     -     (190 )   -     45     6     71  
 

Other

    984     1,263     17     17     (10 )   6     -     (1 )
   
 

Total

    7,614     38,069     17     (173 )   (10 )   51     6     70  
   

Arbitrage:

                                                 
 

Multi-sector CDOs(e)

    5,667     6,689     3,106     3,484     47     117     230     516  
 

Corporate debt/CLOs(f)

    12,035     12,269     160     171     (33 )   8     11     (82 )
   
 

Total

    17,702     18,958     3,266     3,655     14     125     241     434  
   

Mezzanine tranches(d)(g)

    726     2,823     (12 )   198     (1 )   (24 )   (15 )   (72 )
   

Total

  $ 26,042   $ 59,850   $ 3,271   $ 3,680   $ 3   $ 152   $ 232   $ 432  
   
(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 $25 million and $(34) million in the three-month periods ended September 30, 2011 and 2010, respectively, and $27 million and $(124) million in the nine-month periods ended September 30, 2011 and 2010, respectively, representing the effect of changes in AIG's credit spreads on the valuation of the derivatives liabilities.

(d)
During the second quarter of 2011, AIGFP terminated two super senior prime residential mortgage transactions, with a combined net notional amount of $24.1 billion at March 31, 2011, that had previously been the subject of a collateral dispute. In addition, AIGFP terminated the vast majority of the related mezzanine tranches and the majority of the hedge transactions related to those mezzanine tranches, with a combined net notional amount of $2.2 billion. The transactions were terminated at values that approximated their collective fair values at the time of termination and, as a result, unrealized gains and losses were realized at termination.

(e)
During the nine-month period ended September 30, 2011, AIGFP liquidated one multi-sector super senior CDS transaction with a net notional amount of $188 million. The primary underlying collateral components, which consisted of individual ABS CDS transactions, were sold in an auction to counterparties, including AIGFP, at their approximate fair value at the time of the liquidation. AIGFP was the winning bidder on approximately $107 million of individual ABS CDS transactions, which are reported in written single name credit default swaps as of September 30, 2011. As a result, a $121 million loss, which was previously included in the fair value of the derivative liability as an unrealized market valuation loss, was realized. During the nine-month period ended September 30, 2011, AIGFP also paid $27 million to its counterparties with respect to multi-sector CDOs. Upon payment, a $27 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 $4.8 billion and $5.5 billion in net notional amount of credit default swaps written with cash settlement provisions at September 30, 2011 and December 31, 2010, respectively.

(f)
Corporate debt/CLOs include $1.3 billion in net notional amount of credit default swaps written on the super senior tranches of CLOs at both September 30, 2011 and December 31, 2010.

(g)
Net of offsetting purchased CDS of $272 million and $1.4 billion in net notional amount at September 30, 2011 and December 31, 2010, respectively.

    All outstanding CDS transactions for regulatory capital purposes and the majority of the arbitrage portfolio have cash-settled structures in respect of a basket of reference obligations, where AIGFP's payment obligations, other than for posting collateral, may be triggered by payment shortfalls, bankruptcy and certain other events such as write-downs of the value of underlying assets. For the remainder of the CDS transactions in respect of the arbitrage portfolio, AIGFP's payment obligations are triggered by the occurrence of a credit event under a single reference security, and performance is limited to a single payment by AIGFP in return for physical delivery by the counterparty of the reference security.

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    The expected weighted average maturity of AIGFP's super senior credit derivative portfolios as of September 30, 2011 was 1.0 years for the regulatory capital corporate loan portfolio, 0.5 years for the regulatory capital prime residential mortgage portfolio, 4.0 years for the regulatory capital other portfolio, 6.6 years for the multi-sector CDO arbitrage portfolio and 4.4 years for the corporate debt/CLO portfolio.

Regulatory Capital Portfolio

    The regulatory capital portfolio represents derivatives written for financial institutions in Europe, for the purpose of providing regulatory capital relief rather than for arbitrage purposes. In exchange for a periodic fee, the counterparties receive credit protection with respect to a portfolio of diversified loans they own, thus reducing their minimum capital requirements. These CDS transactions were structured with early termination rights for counterparties, allowing them to terminate these transactions at no cost to AIGFP at a certain period of time or upon a regulatory event such as certain changes to regulatory capital standards. During the nine-month period ended September 30, 2011, $26.0 billion in net notional amount was terminated or matured at no cost to AIGFP.

    The regulatory capital relief CDS transactions require cash settlement and, other than for collateral posting, AIGFP is required to make a payment in connection with a regulatory capital relief transaction only if realized credit losses in respect of the underlying portfolio exceed AIGFP's attachment point.

    All of the regulatory capital transactions directly or indirectly reference tranched pools of large numbers of whole loans that were originated by the financial institution (or its affiliates) receiving the credit protection, rather than structured securities containing loans originated by other third parties. In the vast majority of transactions, the loans are intended to be retained by the originating financial institution and in all cases the originating financial institution is the purchaser of the CDS, either directly or through an intermediary.

    The super senior tranches of these CDS transactions continue to be supported by high levels of subordination, which, in most instances, have increased since origination. The weighted average subordination supporting the prime residential mortgage and corporate loan referenced portfolios at September 30, 2011 were 35.53 percent and 27.11 percent, respectively. The highest realized losses to date in any single residential mortgage and corporate loan pool were 2.88 percent and 0.52 percent, respectively. Each of the corporate loan transactions consists of several hundred secured and unsecured loans diversified by industry and, in some instances, by country, and have per-issuer concentration limits. Both types of transactions generally allow some substitution and replenishment of loans, subject to defined constraints, as older loans mature or are prepaid. These replenishment rights generally expire within the first few years of the transaction, after which the proceeds of any prepaid or maturing loans are applied first to the super senior tranche (sequentially), thereby increasing the relative level of subordination supporting the balance of AIGFP's super senior CDS exposure.

    The regulatory benefit of these transactions for AIGFP's financial institution counterparties is generally derived from the capital regulations promulgated by the Basel Committee on Banking Supervision known as Basel I. In December 2010, the Basel Committee on Banking Supervision finalized a new framework for international capital and liquidity standards known as Basel III, which, when fully implemented, may reduce or eliminate the regulatory benefits to certain counterparties from these transactions and thus may impact the period of time that such counterparties are expected to hold the positions. In prior years, it had been expected that financial institution counterparties would complete a transition from Basel I to an intermediate standard known as Basel II, which could have had similar effects on the benefits of these transactions, at the end of 2009. Basel III has now superseded Basel II, but the details of its implementation by the various European Central Banking districts have not been finalized. Should certain counterparties continue to receive favorable regulatory capital benefits from these transactions, those counterparties may not exercise their options to terminate the transactions in the expected time frame. AIGFP continues to reassess the expected maturity of this portfolio. As of September 30, 2011, AIGFP estimated that the weighted average expected maturity of the portfolio was 0.99 years.

    Given the current performance of the underlying portfolios, the level of subordination and AIGFP's own assessment of the credit quality of the underlying portfolio, as well as the risk mitigants inherent in the transaction

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structures, AIGFP does not expect that it will be required to make payments pursuant to the contractual terms of those transactions providing regulatory relief.

Arbitrage Portfolio

    The arbitrage portfolio includes arbitrage-motivated transactions written on multi-sector CDOs or designated pools of investment grade senior unsecured corporate debt or CLOs.

    The outstanding multi-sector CDO portfolio at September 30, 2011 was written on CDO transactions (including synthetic CDOs) that generally held a concentration of RMBS, CMBS and inner CDO securities. At September 30, 2011, approximately $2.8 billion net notional amount (fair value liability of $1.7 billion) of this portfolio was written on super senior multi-sector CDOs that contain some level of subprime RMBS collateral, with a concentration in the 2005 and earlier vintages of subprime RMBS. AIGFP's portfolio also included both high grade and mezzanine CDOs.

    The majority of multi-sector CDO CDS transactions require cash settlement and, other than for collateral posting, AIGFP is required to make a payment in connection with such transactions only if realized credit losses in respect of the underlying portfolio exceed AIGFP's attachment point. As of September 30, 2011, only one transaction, with a net notional amount of $366 million, has breached its attachment point. AIGFP has paid a total of $96 million on this transaction, of which $27 million was paid in 2011. In the remainder of the portfolio, AIGFP's payment obligations are triggered by the occurrence of a credit event under a single reference security, and performance is limited to a single payment by AIGFP in return for physical delivery by the counterparty of the reference security.

    Included in the multi-sector CDO portfolio are maturity-shortening puts that allow the holders of the securities issued by certain CDOs to treat the securities as short-term 2a-7 eligible investments under the Investment Company Act of 1940 (2a-7 Puts). Holders of securities are required, in certain circumstances, to tender their securities to the issuer at par. If an issuer's remarketing agent is unable to resell the securities so tendered, AIGFP must purchase the securities at par so long as the security has not experienced a payment default and certain bankruptcy events with respect to the issuer of such security have not occurred. During 2010, AIGFP terminated all 2a-7 Puts in respect of notes held by holders other than AIGFP and its affiliates. AIGFP is not a party to any commitments to issue any additional 2a-7 Puts.

    The corporate arbitrage portfolio consists principally of CDS transactions written on portfolios of senior unsecured corporate obligations that were generally rated investment grade at inception of the CDS. These CDS transactions require cash settlement. Also, included in this portfolio are CDS transactions with a net notional amount of $1.3 billion written on the senior part of the capital structure of CLOs, which require physical settlement.

    Certain of the super senior credit default swaps provide the counterparties with an additional termination right if AIG's rating level falls to BBB or Baa2. At that level, counterparties to the CDS transactions with a net notional amount of $1.4 billion at September 30, 2011 have the right to terminate the transactions early. If counterparties exercise this right, the contracts provide for the counterparties to be compensated for the cost to replace the transactions, or an amount reasonably determined in good faith to estimate the losses the counterparties would incur as a result of the termination of the transactions.

    Because of long-term maturities of the CDS in the arbitrage portfolio, AIG is unable to make reasonable estimates of the periods during which any payments would be made. However, the net notional amount represents the maximum exposure to loss on the super senior credit default swap portfolio.

Collateral

    Most of AIGFP's super senior credit default swaps are subject to collateral posting provisions, which typically are governed by International Swaps and Derivatives Association, Inc. (ISDA) Master Agreements (Master Agreements) and related Credit Support Annexes (CSA). These provisions differ among counterparties and asset

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classes. AIGFP has received collateral calls from counterparties in respect of certain super senior credit default swaps, of which a large majority relate to multi-sector CDOs. To a lesser extent, AIGFP has also received collateral calls in respect of certain super senior credit default swaps entered into by counterparties for regulatory capital relief purposes and in respect of corporate arbitrage.

    The amount of future collateral posting requirements is a function of AIG's credit ratings, the rating of the reference obligations and the market value of the relevant reference obligations, with the latter being the most significant factor. While a high level of correlation exists between the amount of collateral posted and the valuation of these contracts in respect of the arbitrage portfolio, a similar relationship does not exist with respect to the regulatory capital portfolio given the nature of how the amount of collateral for these transactions is determined. AIGFP estimates the amount of potential future collateral postings associated with its super senior credit default swaps using various methodologies. The contingent liquidity requirements associated with such potential future collateral postings are incorporated into AIG's liquidity planning assumptions.

    At September 30, 2011 and December 31, 2010, the amounts of collateral postings with respect to AIGFP's super senior credit default swap portfolio (prior to offsets for other transactions) were $3.2 billion and $3.8 billion, respectively.

AIGFP Written Single Name Credit Default Swaps

    AIGFP has also entered into credit default swap contracts referencing single-name exposures written on corporate, index and asset-backed credits, with the intention of earning spread income on credit exposure. Some of these transactions were entered into as part of a long-short strategy allowing AIGFP to earn the net spread between CDS it wrote and ones it purchased. At September 30, 2011, the net notional amount of these written CDS contracts was $390 million, including ABS CDS transactions purchased by AIGFP from a liquidated multi-sector super senior CDS transaction. AIGFP has hedged these exposures by purchasing offsetting CDS contracts of $74 million in net notional amount. The net unhedged position of $316 million represents the maximum exposure to loss on these CDS contracts. The average maturity of the written CDS contracts is 19.36 years. At September 30, 2011, the fair value of derivative liability (which represents the carrying value) of the portfolio of CDS was $102 million.

    Upon a triggering event (e.g., a default) with respect to the underlying credit, AIGFP would normally have the option to settle the position through an auction process (cash settlement) or pay the notional amount of the contract to the counterparty in exchange for a bond issued by the underlying credit obligor (physical settlement).

    AIGFP wrote these CDS contracts under ISDA Master Agreements. The majority of these Master Agreements include CSAs that provide for collateral postings at various ratings and threshold levels. At September 30, 2011, AIGFP had posted $122 million of collateral under these contracts.

All Other Derivatives

    AIG's businesses other than AIGFP also use derivatives and other instruments as part of their financial risk management. Interest rate derivatives (such as interest rate swaps) are used to manage interest rate risk associated with embedded derivatives contained in insurance contract liabilities, fixed maturity securities, outstanding medium- and long-term notes as well as other interest rate sensitive assets and liabilities. Foreign exchange derivatives (principally foreign exchange forwards and options) are used to economically mitigate risk associated with non-U.S. dollar denominated debt, net capital exposures, and foreign currency transactions. Equity derivatives are used to mitigate financial risk embedded in certain insurance liabilities. The derivatives are effective economic hedges of the exposures that they are meant to offset.

    In addition to hedging activities, AIG also enters into derivative instruments with respect to investment operations, which include, among other things, credit default swaps and purchasing investments with embedded derivatives, such as equity linked notes and convertible bonds.

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Matched Investment Program Written Credit Default Swaps

    AIG's MIP operations, which are reported in AIG's Other operations category as part of the Direct Investment book, are currently in run-off. Through the MIP, AIG has entered into CDS contracts as a writer of protection, with the intention of earning spread income on credit exposure in an unfunded form. The portfolio of CDS contracts were single-name exposures and, at inception, were predominantly high-grade corporate credits.

    These contracts were written through AIG Markets, which then transacted directly with unaffiliated third parties under ISDA agreements. As of September 30, 2011, the notional amount of written CDS contracts was $1.2 billion with an average credit rating of BBB+. At that date, the average remaining maturity of the written CDS contracts was less than 1 year and the fair value of the derivative liability (which represents the carrying value) of the MIP's written CDS contracts was $18.6 million.

    The majority of the ISDA agreements include CSA provisions, which provide for collateral postings at various ratings and threshold levels. At September 30, 2011, less than $1 million of collateral was posted for CDS contracts related to the MIP. The notional amount represents the maximum exposure to loss on the written CDS contracts. However, because of the average investment grade rating and expected default recovery rates, actual losses are expected to be less.

    Upon a triggering event (e.g., a default) with respect to the underlying credit, AIG Markets would normally have the option to settle the position on behalf of the MIP through an auction process (cash settlement) or pay the notional amount of the contract to the counterparty in exchange for a bond issued by the underlying credit (physical settlement).

Credit Risk-Related Contingent Features

    AIG transacts in derivative transactions directly with unaffiliated third parties under ISDA agreements. Many of the ISDA agreements also include CSA provisions, which provide for collateral postings at various ratings and threshold levels. In addition, AIG attempts to reduce credit risk with certain counterparties by entering into agreements that enable collateral to be obtained from a counterparty on an upfront or contingent basis.

    The aggregate fair value of AIG's derivative instruments, including those of AIGFP, that contain credit risk-related contingent features that were in a net liability position at September 30, 2011, was approximately $5.1 billion. The aggregate fair value of assets posted as collateral under these contracts at September 30, 2011, was $5.5 billion.

    AIG estimates that at September 30, 2011, based on AIG's outstanding financial derivative transactions, including those of AIGFP at that date, a one-notch downgrade of AIG's long-term senior debt ratings to BBB+ by Standard & Poor's Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. (S&P), would permit counterparties to make additional collateral calls and permit the counterparties to elect early termination of contracts, resulting in a negligible amount of corresponding collateral postings and termination payments; a one-notch downgrade to Baa2 by Moody's Investors' Services, Inc. (Moody's) and an additional one-notch downgrade to BBB by S&P would result in approximately $290 million in additional collateral postings and termination payments and a further one-notch downgrade to Baa3 by Moody's and BBB- by S&P would result in approximately $193 million in additional collateral postings and termination payments. Additional collateral postings upon downgrade are estimated based on the factors in the individual collateral posting provisions of the CSA with each counterparty and current exposure as of September 30, 2011. Factors considered in estimating the termination payments upon downgrade include current market conditions, the complexity of the derivative transactions, historical termination experience and other observable market events such as bankruptcy and downgrade events that have occurred at other companies. Management's estimates are also based on the assumption that counterparties will terminate based on their net exposure to AIG. The actual termination payments could significantly differ from management's estimates given market conditions at the time of downgrade and the level of uncertainty in estimating both the number of counterparties who may elect to exercise their right to terminate and the payment that may be triggered in connection with any such exercise.

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Hybrid Securities with Embedded Credit Derivatives

AIG invests in hybrid securities (such as credit-linked notes). Upon the issuance of credit-linked notes, the cash received by the issuer is generally used to invest in highly rated securities in addition to entering into a derivative contract that exchanges the return on its highly-rated securities for the return on a separate portfolio of assets. The investments owned by the issuer serve as collateral for the derivative instrument written by the issuer. The return on the separate portfolio received by the issuer is used to pay the return owed on the credit-linked notes. These hybrid securities expose AIG to risks similar to the risks in RMBS, CMBS, CDOs and ABS, but such risk is derived from the separate portfolio rather than from direct mortgage or loan investments owned by the issuer. As with other investments in RMBS, CMBS, CDOs and other ABS, AIG invested in these hybrid securities with the intent of generating income, and not specifically to acquire exposure to embedded derivative risk. Similar to AIG's other investments in RMBS, CMBS, CDOs and ABS, AIG's investments in these hybrid securities are exposed to losses only up to the amount of AIG's initial investment in the hybrid security, as losses on the derivative contract will be paid via the collateral held by the entity that issues the hybrid security. Losses on the embedded derivative contracts may be triggered by events such as bankruptcy, failure to pay or restructuring associated with the obligations referenced by the derivative, and these losses in turn result in the reduction of the principal amount to be repaid to AIG and other investors in the hybrid securities. Other than AIG's initial investment in the hybrid securities, AIG has no further obligation to make payments on the embedded credit derivatives in the related hybrid securities.

    Effective July 1, 2010, AIG elected to account for its investments in these hybrid securities with embedded written credit derivatives at fair value, with changes in fair value recognized in Other realized capital gains. Through June 30, 2010, these hybrid securities had been accounted for as available for sale securities, and had been subject to other-than-temporary impairment accounting as applicable.

    AIG's investments in these hybrid securities are reported as Bond trading securities in the Consolidated Balance Sheet. The fair value of these hybrid securities was $119 million at September 30, 2011. These securities have a current par amount of $489 million and have remaining stated maturity dates that extend to 2056.


11. Commitments, Contingencies and Guarantees

    In the normal course of business, various commitments and contingent liabilities are entered into by AIG and certain of its subsidiaries. In addition, AIG guarantees various obligations of certain subsidiaries.

    Although AIG cannot currently quantify its ultimate liability for unresolved litigation and investigation matters including those referred to below, it is possible that such liability could have a material adverse effect on AIG's consolidated financial condition or its consolidated results of operations or consolidated cash flows for an individual reporting period.


(a) Litigation and Investigations

    Overview.    AIG and its subsidiaries, in common with the insurance and financial services industries in general, are subject to litigation, including claims for punitive damages, in the normal course of their business. In AIG's insurance operations (including UGC), litigation arising from claims settlement activities is generally considered in the establishment of AIG's liability for unpaid claims and claims adjustment expense. However, the potential for increasing jury awards and settlements makes it difficult to assess the ultimate outcome of such litigation. AIG is also subject to derivative, class action and other claims asserted by its shareholders and others alleging, among other things, breach of fiduciary duties by its directors and officers and violations of federal and state securities laws. In the case of any derivative action brought on behalf of AIG, any recovery would accrue to the benefit of AIG.

    Various regulatory and governmental agencies have been reviewing certain public disclosures, transactions and practices of AIG and its subsidiaries in connection with industry-wide and other inquiries into, among other

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matters, AIG's liquidity, compensation paid to certain employees, payments made to counterparties, and certain business practices and valuations of current and former operating insurance subsidiaries. AIG has cooperated, and will continue to cooperate, in producing documents and other information in response to subpoenas and other requests.

    The National Association of Insurance Commissioners Market Analysis Working Group, led by the states of Ohio and Iowa, is conducting a multi-state examination of certain accident and health products issued by National Union Fire Insurance Company of Pittsburgh, Pa. (National Union). The examination formally commenced in September 2010 after National Union, based on the identification of certain regulatory issues related to the conduct of its accident and health insurance business, including rate and form issues, producer licensing and appointment, and vendor management, requested that state regulators collectively conduct an examination of the regulatory issues in its business. In addition to Ohio and Iowa, the lead states in the multi-state examination are Minnesota, New Jersey and Pennsylvania, and currently a total of 38 states have agreed to participate in the examination. The examination is ongoing. An Interim Consent Order was entered into with Ohio on January 7, 2011, in which National Union agreed, on a nationwide basis, to cease marketing directly to individual bank customers accident/sickness policy forms that had been approved to be sold only as policies providing blanket coverage, and to certain related remediation and audit procedures. While AIG is in active discussions with the examiners regarding a regulatory settlement and corrective action plans to resolve the examination and regarding interim actions to correct and/or mitigate issues identified, AIG cannot predict what other regulatory action will result from resolving the multi-state examination. There can be no assurance that any regulatory action resulting from the market conduct issues identified will not have a material adverse effect on AIG's consolidated results of operations for an individual reporting period, the ongoing operations of the business being examined, or on similar business written by other AIG carriers. National Union and other AIG companies are also currently subject to civil litigation relating to the conduct of their accident and health business, and may be subject to additional litigation relating to the conduct of such business from time to time in the ordinary course.

AIG's Subprime Exposure, AIGFP Credit Default Swap Portfolio and Related Matters

    AIG, AIGFP and certain directors and officers of AIG, AIGFP and other AIG subsidiaries have been named in various actions relating to AIG's exposure to the U.S. residential subprime mortgage market, unrealized market valuation losses on AIGFP's super senior credit default swap portfolio, losses and liquidity constraints relating to AIG's securities lending program and related disclosure and other matters (Subprime Exposure Issues).

    Consolidated 2008 Securities Litigation.    Between May 21, 2008 and January 15, 2009, eight purported securities class action complaints were filed against AIG and certain directors and officers of AIG and AIGFP, AIG's outside auditors, and the underwriters of various securities offerings in the United States District Court for the Southern District of New York (the Southern District of New York), alleging claims under the Securities Exchange Act of 1934 (the Exchange Act) or claims under the Securities Act of 1933 (the Securities Act). On March 20, 2009, the Court consolidated all eight of the purported securities class actions as In re American International Group, Inc. 2008 Securities Litigation (the Consolidated 2008 Securities Litigation).

    On May 19, 2009, lead plaintiff in the Consolidated 2008 Securities Litigation filed a consolidated complaint on behalf of purchasers of AIG Common Stock during the alleged class period of March 16, 2006 through September 16, 2008, and on behalf of purchasers of various AIG securities offered pursuant to AIG's shelf registration statements. The consolidated complaint alleges that defendants made statements during the class period in press releases, AIG's quarterly and year-end filings, during conference calls, and in various registration statements and prospectuses in connection with the various offerings that were materially false and misleading and that artificially inflated the price of AIG Common Stock. The alleged false and misleading statements relate to, among other things, the Subprime Exposure Issues. The consolidated complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act and Sections 11, 12(a)(2), and 15 of the Securities Act. On August 5, 2009,

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defendants filed motions to dismiss the consolidated complaint, and on September 27, 2010 the Court denied the motions to dismiss.

    On November 24, 2010 and December 10, 2010, AIG and all other defendants filed answers to the consolidated complaint denying the material allegations therein and asserting their defenses.

    On April 1, 2011, the lead plaintiff in the Consolidated 2008 Securities Litigation filed a motion to certify a class of plaintiffs.

    As of October 31, 2011, plaintiffs have not specified an amount of alleged damages, discovery is ongoing and the Court has not determined if a class action is appropriate or the size or scope of any class. As a result, AIG is unable to reasonably estimate the possible loss or range of losses, if any, arising from the litigation.

    ERISA Actions — Southern District of New York.    Between June 25, 2008, and November 25, 2008, AIG, certain directors and officers of AIG, and members of AIG's Retirement Board and Investment Committee were named as defendants in eight purported class action complaints asserting claims on behalf of participants in certain pension plans sponsored by AIG or its subsidiaries. On March 19, 2009, the Court consolidated these eight actions as In re American International Group, Inc. ERISA Litigation II. On June 26, 2009, lead plaintiffs' counsel filed a consolidated amended complaint. The action purports to be brought as a class action under the Employee Retirement Income Security Act of 1974, as amended (ERISA), on behalf of all participants in or beneficiaries of certain benefit plans of AIG and its subsidiaries that offered shares of AIG Common Stock. In the consolidated amended complaint, plaintiffs allege, among other things, that the defendants breached their fiduciary responsibilities to plan participants and their beneficiaries under ERISA, by continuing to offer the AIG Stock Fund as an investment option in the plans after it allegedly became imprudent to do so. The alleged ERISA violations relate to, among other things, the defendants' purported failure to monitor and/or disclose certain matters, including the Subprime Exposure Issues. On September 18, 2009, defendants filed motions to dismiss the consolidated amended complaint.

    On March 31, 2011, the Court granted defendants' motions to dismiss with respect to one plan at issue, and denied defendants' motions to dismiss with respect to the other two plans at issue.

    On August 5, 2011, AIG and all other defendants filed answers to the consolidated complaint denying the material allegations therein and asserting their defenses.

    As of October 31, 2011, plaintiffs have not specified an amount of alleged damages, discovery has only recently commenced, and the Court has not determined if a class action is appropriate or the size or scope of any class. As a result, AIG is unable to reasonably estimate the possible loss or range of losses, if any, arising from the litigation.

    Consolidated 2007 Derivative Litigation.    On November 20, 2007 and August 6, 2008, purported shareholder derivative actions were filed in the Southern District of New York naming as defendants directors and officers of AIG and its subsidiaries and asserting claims on behalf of nominal defendant AIG. The actions have been consolidated as In re American International Group, Inc. 2007 Derivative Litigation (the Consolidated 2007 Derivative Litigation). On June 3, 2009, lead plaintiff filed a consolidated amended complaint naming additional directors and officers of AIG and its subsidiaries as defendants. As amended, the factual allegations include the Subprime Exposure Issues and AIG and AIGFP employee retention payments and related compensation issues. The claims asserted on behalf of nominal defendant AIG include breach of fiduciary duty, waste of corporate assets, unjust enrichment, contribution and violations of Sections 10(b) and 20(a) of the Exchange Act. On August 5 and 26, 2009, AIG and defendants filed motions to dismiss the consolidated amended complaint. On December 18, 2009, a separate action, previously commenced in the United States District Court for the Central District of California (Central District of California) and transferred to the Southern District of New York on June 5, 2009, was consolidated into the Consolidated 2007 Derivative Litigation and dismissed without prejudice to the pursuit of the claims in the Consolidated 2007 Derivative Litigation.

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    On March 30, 2010, the Court dismissed the action due to plaintiff's failure to make a pre-suit demand on AIG's Board of Directors. On March 17, 2011, the United States Court of Appeals for the Second Circuit (the Second Circuit) affirmed the Southern District of New York's dismissal of the Consolidated 2007 Derivative Litigation due to plaintiff's failure to make a pre-suit demand.

    On August 10, 2011 and August 15, 2011, the plaintiff that brought the Consolidated 2007 Derivative Litigation sent letters to AIG's Board of Directors (the Board) demanding that the Board cause AIG to pursue the claims asserted in the Consolidated 2007 Derivative Litigation. On September 13, 2011, the Board rejected the demand.

    Other Derivative Actions.    Separate purported derivative actions, alleging similar claims as the Consolidated 2007 Derivative Litigation, have been brought asserting claims on behalf of the nominal defendant AIG in various jurisdictions. These actions are described below:

    Southern District of New York.    On January 4, 2011, Wanda Mimms, a participant in the AIG Incentive Savings Plan (the Plan), filed a purported derivative action on behalf of the Plan in the United States District Court for the Southern District of New York against PricewaterhouseCoopers, LLP (PwC) and asserting a claim for professional malpractice in conducting audits of AIG's 2007 financial statements. The complaint, as amended on April 20, 2011, also asserts a claim for breach of fiduciary duty under ERISA against members of the Plan's Retirement Board for failing to pursue a claim for professional malpractice on behalf of the Plan against PwC. On July 6, 2011, the Plan and defendants filed motions to dismiss the amended complaint.

    As of October 31, 2011, plaintiff has not specified an amount of alleged damages and motions to dismiss are pending. As a result, AIG is unable to reasonably estimate the possible loss or range of losses, if any, arising from the litigation.

    Canadian Securities Class Action — Ontario Superior Court of Justice.    On November 12, 2008, an application was filed in the Ontario Superior Court of Justice for leave to bring a purported class action against AIG, AIGFP, certain directors and officers of AIG and Joseph Cassano, the former Chief Executive Officer of AIGFP, pursuant to the Ontario Securities Act. If the Court grants the application, a class plaintiff will be permitted to file a statement of claim against defendants. The proposed statement of claim would assert a class period of November 10, 2006 through September 16, 2008 (later amended to March 16, 2006 through September 16, 2008)

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and would allege that during this period defendants made false and misleading statements and omissions in quarterly and annual reports and during oral presentations in violation of the Ontario Securities Act.

    On April 17, 2009, defendants filed a motion record in support of their motion to stay or dismiss for lack of jurisdiction and forum non conveniens. On July 12, 2010, the Court adjourned a hearing on the motion pending a decision by the Supreme Court of Canada in another action with respect to similar issues raised in the action pending against AIG.

    In plaintiff's proposed statement of claim, plaintiff alleged general and special damages of $500 million, and punitive damages of $50 million plus prejudgment interest or such other sums as the Court finds appropriate. As of October 31, 2011, the Court has not determined whether it has jurisdiction or granted plaintiff's application to file a statement of claim and no discovery has occurred. As a result, AIG is unable to reasonably estimate the possible loss or range of losses, if any, arising from the litigation.

Other Litigation Related to AIGFP

    On September 30, 2009, Brookfield Asset Management, Inc. and Brysons International, Ltd. (together, Brookfield) filed a complaint against AIG and AIGFP in the Southern District of New York. Brookfield seeks a declaration that a 1990 interest rate swap agreement between Brookfield and AIGFP (guaranteed by AIG) terminated upon the occurrence of certain alleged events that Brookfield contends constituted defaults under the swap agreement's standard "bankruptcy" default provision. Brookfield claims that it is excused from all future payment obligations under the swap agreement on the basis of the purported termination. At September 30, 2011, the estimated present value of expected future cash flows discounted at LIBOR was $1.5 billion, which represents AIG's maximum contractual loss from the alleged termination of the contract. It is AIG's position that no termination event has occurred and that the swap agreement remains in effect. A determination that a termination event has occurred could result in AIG losing its entitlement to all future payments under the swap agreement and result in a loss to AIG of the full value at which AIG is carrying the swap agreement.

    A determination that AIG triggered a "bankruptcy" event of default under the swap agreement could also, depending on the Court's precise holding, affect other AIG or AIGFP agreements that contain the same or similar default provisions. Such a determination could also affect derivative agreements or other contracts between third parties, such as credit default swaps under which AIG is a reference credit, which could affect the trading price of AIG securities. During the third quarter of 2011, beneficiaries of certain previously repaid AIGFP guaranteed investment agreements brought an action against AIG Parent and AIGFP making "bankruptcy" event of default allegations similar to those made by Brookfield.

    On December 17, 2009 defendants filed a motion to dismiss. On September 28, 2010, the Court issued a decision granting defendants' motion in part and denying it in part, holding that the complaint: (i) failed to allege that an event of default had occurred based upon defendants' failure to pay or inability to pay debts as they became due; but, (ii) sufficiently alleged that an event of default had occurred based upon other sections of the swap agreement's "bankruptcy" default provision. On January 26, 2011, Brookfield filed an amended complaint that sought to reassert, on the basis of additional factual allegations, the claims that were dismissed from the initial complaint. On February 9, 2011, AIG filed a motion to dismiss the claim that Brookfield sought to reassert in its amended complaint. On August 1, 2011, AIG agreed to withdraw its motion to dismiss without prejudice in light of Brookfield's intent to file a second amended complaint, which Brookfield subsequently filed on September 15, 2011. On October 6, 2011, AIG informed the Court that, in light of the advanced stage of fact discovery in the case, it intends to defer seeking to dismiss Brookfield's claims until motions for summary judgment have been filed, when the discovery record can be considered. The deadline for AIG to answer the second amended complaint is November 8, 2011.

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Securities Lending Dispute with Transatlantic Holdings Inc.

    On May 24, 2010, Transatlantic Holdings, Inc. (Transatlantic) and two of its subsidiaries, Transatlantic Reinsurance Company and Trans Re Zurich Reinsurance Company Ltd. (collectively, Claimants), commenced an arbitration proceeding before the American Arbitration Association in New York against AIG and two of its subsidiaries (the AIG Respondents). Claimants allege breach of contract, breach of fiduciary duty, and common law fraud in connection with certain securities lending agency agreements between AIG's subsidiaries and Claimants. Claimants allege that AIG and its subsidiaries should be liable for the losses that Claimants purport to have suffered in connection with securities lending and investment activities, and seek damages of $350 million and other unspecified damages.

    On June 29, 2010, AIG brought a petition in the Supreme Court of the State of New York, seeking to enjoin the arbitration on the ground that AIG is not a party to the securities lending agency agreements with Claimants. On July 29, 2010, the parties agreed to resolve that petition by consolidating the arbitration commenced by Claimants with a separate arbitration, commenced by AIG on June 29, 2010, in which AIG is seeking damages of Euro 17.6 million ($23.6 million at the September 30, 2011 exchange rate) from Transatlantic for breach of a Master Separation Agreement among Transatlantic, AIG and one of its subsidiary companies.

    On September 13, 2010, the AIG Respondents submitted an answer to Claimants' claims asserting, among other things, that there was no breach of the securities lending agency agreements, and that Claimants' other allegations including purported breach of fiduciary duty and fraud are not meritorious. Transatlantic submitted an answer denying liability with respect to AIG's claim on September 13, 2010. The arbitration hearing is scheduled for March 2012.

    As of October 31, 2011, Transatlantic has increased its claimed damages to an amount of approximately $500 million. However, because of the stage of the proceeding, and the wide difference in damages sought by the parties, AIG is unable to reasonably estimate the possible loss, if any, arising from this arbitration.

Employment Litigation against AIG and AIG Global Real Estate Investment Corporation

    On December 9, 2009, AIG Global Real Estate Investment Corporation's (AIGGRE) former President, Kevin P. Fitzpatrick, several entities he controls, and various other single purpose entities (the SPEs) filed a complaint in the Supreme Court of the State of New York, New York County against AIG and AIGGRE (the Defendants). The case was removed to the Southern District of New York, and an amended complaint was filed on March 8, 2010. The amended complaint asserts that the Defendants violated fiduciary duties to Fitzpatrick and his controlled entities and breached Fitzpatrick's employment agreement and agreements of SPEs that purportedly entitled him to carried interest fees arising out of the sale or disposition of certain real estate. Fitzpatrick has also brought derivative claims on behalf of the SPEs, purporting to allege that the Defendants breached contractual and fiduciary duties in failing to fund the SPEs with various amounts allegedly due under the SPE agreements. Fitzpatrick has also requested injunctive relief, an accounting, and that a receiver be appointed to manage the affairs of the SPEs. He has further alleged that the SPEs are subject to a constructive trust. Fitzpatrick also has alleged a violation of ERISA relating to retirement benefits purportedly due. Fitzpatrick has claimed that he is currently owed damages totaling approximately $196 million, and that potential future amounts owed to him are approximately $78 million, for a total of approximately $274 million. Fitzpatrick further claims unspecified amounts of carried interest on certain additional real estate assets of AIG and its affiliates. He also seeks punitive damages for the alleged breaches of fiduciary duties. Defendants assert that Fitzpatrick has been paid all amounts currently due and owing pursuant to the various agreements through which he seeks recovery. As set forth above, the possible range of loss to AIG is $0 to $274 million, although Fitzpatrick claims that he is also entitled to additional unspecified amounts of carried interest and punitive damages.

    Defendants filed counterclaims against Fitzpatrick and a motion to dismiss. On September 28, 2010, the Court dismissed the Defendants' counterclaims, and denied Defendants' motion to dismiss. On March 14, 2011, both

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plaintiffs and defendants filed motions for partial summary judgment. Those motions are still pending, and no trial date has been set.

False Claims Act Complaint

    On February 25, 2010, a complaint was filed in the United States District Court for the Southern District of California by two individuals (Relators) seeking to assert claims on behalf of the United States against AIG and certain other defendants, including Goldman Sachs and Deutsche Bank, under the False Claims Act. Relators filed a First Amended Complaint on September 30, 2010, adding certain additional defendants, including Bank of America and Société Générale. The amended complaint alleges that defendants engaged in fraudulent business practices in respect of their activities in the over-the-counter market for collateralized debt obligations, and submitted false claims to the United States in connection with the FRBNY Credit Facility, the Maiden Lane Interests through, among other things, misrepresenting AIG's ability and intent to repay amounts drawn on the FRBNY Credit Facility, and misrepresenting the value of the securities that the Maiden Lane Interests acquired from AIG and certain of its counterparties. The complaint seeks unspecified damages pursuant to the False Claims Act in the amount of three times the damages allegedly sustained by the United States as well as interest, attorneys' fees, costs and expenses. The complaint and amended complaints were initially filed and maintained under seal while the United States considered whether to intervene in the action. On or about April 28, 2011, after the United States declined to intervene, the District Court lifted the seal, and Relators served the amended complaint on AIG on July 11, 2011.

    On October 14, 2011, the defendants filed motions to dismiss the amended complaint. The Relators have not specified in their amended complaint an amount of alleged damages. As a result, AIG is unable to reasonably estimate the possible loss or range of losses, if any, arising from the litigation.

2006 Regulatory Settlements and Related Regulatory Matters

    2006 Regulatory Settlements.    In February 2006, AIG reached a resolution of claims and matters under investigation with the United States Department of Justice (DOJ), the Securities and Exchange Commission (SEC), the Office of the New York Attorney General (NYAG) and the New York State Department of Insurance (DOI). The settlements resolved investigations conducted by the SEC, NYAG and DOI in connection with the accounting, financial reporting and insurance brokerage practices of AIG and its subsidiaries, as well as claims relating to the underpayment of certain workers' compensation premium taxes and other assessments. These settlements did not, however, resolve investigations by regulators from other states into insurance brokerage practices related to contingent commissions and other broker-related conduct, such as alleged bid rigging. Nor did the settlements resolve any obligations that AIG may have to state guarantee funds in connection with any of these matters.

    As a result of these settlements, AIG made payments or placed amounts in escrow in 2006 totaling approximately $1.64 billion, $225 million of which represented fines and penalties.

    In addition to the escrowed funds, $800 million was deposited into, and subsequently disbursed by, a fund under the supervision of the SEC, to resolve claims asserted against AIG by investors, including the securities class action and shareholder lawsuits described below. Amounts held in escrow totaling approximately $597 million, including interest thereon (the Workers' Compensation Fund), are included in Other assets at September 30, 2011, and are specifically designated to satisfy liabilities related to workers' compensation premium reporting issues.

    As of June 30, 2011, AIG had implemented all recommendations of the independent consultant that AIG agreed to retain as part of the settlements. However, some of the recommendations that were implemented have not yet been monitored by the independent consultant for six months, as required by the settlements. This has resulted in an extension of the retention of the independent consultant through December 31, 2011.

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    Other Regulatory Settlements.    AIG's 2006 regulatory settlements with the SEC, DOJ, NYAG and DOI did not resolve investigations by regulators from other states into insurance brokerage practices. AIG entered into agreements effective in early 2008 with the Attorneys General of the States of Florida, Hawaii, Maryland, Michigan, Oregon, Texas and West Virginia; the Commonwealths of Massachusetts and Pennsylvania; and the District of Columbia; as well as the Florida Department of Financial Services and the Florida Office of Insurance Regulation, relating to their respective industry-wide investigations into producer compensation and insurance placement practices. The settlements called for total payments of $26 million by AIG, of which $4.4 million was paid under previous settlement agreements. During the term of the settlement agreements, which run through early 2018, AIG will continue to maintain certain producer compensation disclosure and ongoing compliance initiatives. AIG will also continue to cooperate with the industry-wide investigations. On April 7, 2010, it was announced that AIG and the Ohio Attorney General entered into a settlement agreement to resolve the Ohio Attorney General's claim concerning producer compensation and insurance placement practices. AIG paid the Ohio Attorney General $9 million as part of that settlement.

    NAIC Examination of Workers' Compensation Premium Reporting.    During 2006, the Settlement Review Working Group of the National Association of Insurance Commissioners (NAIC), under the direction of the States of Indiana, Minnesota and Rhode Island, began an investigation into AIG's reporting of workers' compensation premiums. In late 2007, the Settlement Review Working Group recommended that a multi-state targeted market conduct examination focusing on workers' compensation insurance be commenced under the direction of the NAIC's Market Analysis Working Group. AIG was informed of the multi-state targeted market conduct examination in January 2008. The lead states in the multi-state examination are Delaware, Florida, Indiana, Massachusetts, Minnesota, New York, Pennsylvania, and Rhode Island. All other states (and the District of Columbia) have agreed to participate in the multi-state examination. The examination focused on legacy issues related to AIG's writing and reporting of workers' compensation insurance prior to 1996 and current compliance with legal requirements applicable to such business.

    On December 17, 2010, AIG and the lead states reached an agreement to settle all regulatory liabilities arising out of the subjects of the multistate examination. The regulatory settlement agreement, which has been agreed to by all 50 states and the District of Columbia, includes, among other terms, (i) AIG's payment of $100 million in regulatory fines and penalties; (ii) AIG's payment of $46.5 million in outstanding premium taxes; (iii) AIG's agreement to enter into a compliance plan describing agreed-upon specific steps and standards for evaluating AIG's ongoing compliance with state regulations governing the setting of workers' compensation insurance premium rates and the reporting of workers' compensation premiums; and (iv) AIG's agreement to pay up to $150 million in contingent fines in the event that AIG fails to comply substantially with the compliance plan requirements. The $146.5 million in fines, penalties and premium taxes have been funded out of the $597 million held in the Workers' Compensation Fund and placed into an escrow account pursuant to the terms of the regulatory settlement agreement. The regulatory settlement is contingent upon and will not become effective until, among other events: (i) a final, court-approved settlement is reached in all the lawsuits that comprise the Workers' Compensation Premium Reporting Litigation, discussed below, including the putative class action, except that such settlement need not resolve claims between AIG and the Liberty Mutual Group in order for the regulatory settlement to become effective and (ii) a settlement is reached and consummated between AIG and certain state insurance guaranty funds that may assert claims against AIG for underpayment of guaranty-fund assessments.

    AIG has established a reserve equal to the amounts payable under the proposed settlement.

Litigation Related to the Matters Underlying the 2006 Regulatory Settlements

    AIG and certain present and former directors and officers of AIG have been named in various actions related to the matters underlying the 2006 Regulatory Settlements. These actions are described below.

    The Consolidated 2004 Securities Litigation.    Beginning in October 2004, a number of putative securities fraud class action suits were filed in the Southern District of New York against AIG and consolidated as In re American

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International Group, Inc. Securities Litigation (the Consolidated 2004 Securities Litigation). Subsequently, a separate, though similar, securities fraud action was also brought against AIG by certain Florida pension funds. The lead plaintiff in the Consolidated 2004 Securities Litigation is a group of public retirement systems and pension funds benefiting Ohio state employees, suing on behalf of themselves and all purchasers of AIG's publicly traded securities between October 28, 1999 and April 1, 2005. The named defendants are AIG and a number of present and former AIG officers and directors, as well as C.V. Starr & Co., Inc. (Starr), Starr International Company, Inc. (SICO), General Reinsurance Corporation (General Re), and PwC, among others. The lead plaintiff alleges, among other things, that AIG: (i) concealed that it engaged in anti-competitive conduct through alleged payment of contingent commissions to brokers and participation in illegal bid-rigging; (ii) concealed that it used "income smoothing" products and other techniques to inflate its earnings; (iii) concealed that it marketed and sold "income smoothing" insurance products to other companies; and (iv) misled investors about the scope of government investigations. In addition, the lead plaintiff alleges that Maurice R. Greenberg, AIG's former Chief Executive Officer, manipulated AIG's stock price. The lead plaintiff asserts claims for violations of Sections 11 and 15 of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, and Sections 20(a) and Section 20A of the Exchange Act.

    In October 2009, the lead plaintiff advised the Court that it had entered into a settlement agreement with Greenberg, Howard I. Smith, AIG's former Chief Financial Officer, Christian M. Milton, Michael J. Castelli, SICO and Starr. At the lead plaintiff's request, the Court has entered an order dismissing all of the lead plaintiff's claims against these defendants "without prejudice" to any party. The settlement agreement between lead plaintiff and these defendants was filed with the Court on January 6, 2011.

    On February 22, 2010, the Court issued an opinion granting, in part, lead plaintiffs' motion for class certification. The Court rejected lead plaintiffs' request to include in the class purchasers of certain AIG bonds and declined to certify a class with respect to certain counts of the complaint and dismissed those claims for lack of standing. With respect to the remaining claims under the Exchange Act on behalf of putative class members who had purchased AIG Common Stock, the Court declined to certify a class as to certain defendants other than AIG and rejected lead plaintiffs' claims that class members could establish injury based on disclosures on two of the six dates lead plaintiffs had proposed, but certified a class consisting of all shareholders who purchased or otherwise acquired AIG Common Stock during the class period of October 28, 1999 to April 1, 2005, and who possessed that stock over one or more of the dates October 14, 2004, October 15, 2004, March 17, 2005 or April 1, 2005, as well as persons who held AIG Common Stock in two companies at the time they were acquired by AIG in exchange for AIG Common Stock, and were allegedly damaged thereby. In light of the class certification decision, on March 5, 2010, the Court denied as moot General Re's and lead plaintiffs' motion to certify their proposed settlement, and on March 18, 2010, PwC withdrew its motion to approve its proposed settlement with lead plaintiffs. Lead plaintiffs and AIG each filed petitions requesting permission to file an interlocutory appeal of the class certification decision. AIG, General Re, Richard Napier and Ronald Ferguson each filed opposition briefs to lead plaintiffs' petition.

    On May 17, 2010, PwC and lead plaintiffs jointly moved for final approval of their settlement as proposed prior to class certification. On November 30, 2010, the Court approved the settlement between lead plaintiffs and PwC. On December 13, 2010, four shareholders filed a notice of appeal of the final judgment.

    On June 23, 2010, General Re and lead plaintiffs jointly moved for preliminary approval of their settlement. On September 10, 2010, the Court issued an opinion denying the motion for preliminary approval and, on September 23, 2010, the Court dismissed the lead plaintiffs' causes of action with respect to General Re. On October 21, 2010, lead plaintiffs filed a notice of appeal of the Court's September 23, 2010 order dismissing the claims against the Gen Re defendants, as well as the March 4, 2010 order refusing to preliminarily approve a settlement with the Gen Re defendants, and the February 22, 2010 class certification order to the extent it denied class certification for the claims against the Gen Re defendants.

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    On June 28, 2010, the Second Circuit granted AIG's petition seeking permission to file an interlocutory appeal of the class certification decision, and denied the petition by lead plaintiffs. On September 1, 2010, AIG and lead plaintiffs entered into a stipulation to withdraw AIG's interlocutory appeal without prejudice to reinstate the appeal in the future, which has been endorsed by the Second Circuit. On August 5, 2011, AIG and lead plaintiffs entered into a stipulation to extend the time by which the appeal must be reinstated, which has been endorsed by the Second Circuit.

    On July 14, 2010, AIG approved the terms of a settlement (the Settlement) with lead plaintiffs. The Settlement is conditioned on, among other things, court approval and a minimum level of shareholder participation. Under the terms of the Settlement, if consummated, AIG will pay an aggregate of $725 million, $175 million of which is to be paid into escrow within ten days of preliminary court approval. AIG's obligation to fund the remainder of the settlement amount was conditioned on its having consummated one or more common stock offerings raising net proceeds of at least $550 million prior to final court approval.

    On July 20, 2010, at the joint request of AIG and lead plaintiffs, the District Court entered an order staying all deadlines in the case. On November 30, 2010, AIG and lead plaintiffs executed their agreement of settlement and compromise. On November 30, 2010, lead plaintiffs filed a motion for preliminary approval of the settlement with AIG. On May 27, 2011, AIG completed a registered public offering of 300 million shares of AIG Common Stock. The offering ensures that AIG's payment under the settlement will be in cash, not AIG Common Stock. On June 10, 2011, pursuant to the Court's direction, lead plaintiff filed amended shareholder notices reflecting the fact that AIG's payment would be in cash because of the completion of the public offering.

    On October 5, 2011, the District Court granted lead plaintiffs' motion for preliminary approval of the settlement between AIG and lead plaintiffs. Notices to class members of the settlement were mailed on October 14, 2011. Objections to the settlement and requests to be excluded from the settlement are due to the District Court by December 30, 2011. The District Court scheduled a hearing on January 31, 2012 to determine whether final approval of the settlement should be granted.

    As of September 30, 2011, AIG had accrued for the full amount of the Settlement.

    The Multi-District Litigation.    Commencing in 2004, policyholders brought multiple federal antitrust and Racketeer Influenced and Corrupt Organizations Act (RICO) class actions in jurisdictions across the nation against insurers and brokers, including AIG and a number of its subsidiaries, alleging that the insurers and brokers engaged in one or more broad conspiracies to allocate customers, steer business, and rig bids. These actions, including 24 complaints filed in different federal courts naming AIG or an AIG subsidiary as a defendant, were consolidated by the judicial panel on multi-district litigation and transferred to the United States District Court for the District of New Jersey (District of New Jersey) for coordinated pretrial proceedings. The consolidated actions have proceeded in that Court in two parallel actions, In re Insurance Brokerage Antitrust Litigation (the Commercial Complaint) and In re Employee Benefits Insurance Brokerage Antitrust Litigation (the Employee Benefits Complaint, and, together with the Commercial Complaint, the Multi-District Litigation).

    The plaintiffs in the Commercial Complaint are a group of corporations, individuals and public entities that contracted with the broker defendants for the provision of insurance brokerage services for a variety of insurance needs. The broker defendants are alleged to have placed insurance coverage on the plaintiffs' behalf with a number of insurance companies named as defendants, including AIG subsidiaries. The Commercial Complaint also named various brokers and other insurers as defendants (three of which have since settled). The Commercial Complaint alleges that defendants engaged in a number of overlapping "broker-centered" conspiracies to allocate customers through the payment of contingent commissions to brokers and through purported "bid-rigging" practices. It also alleges that the insurer and broker defendants participated in a "global" conspiracy not to disclose to policyholders the payment of contingent commissions. Plaintiffs assert that the defendants violated the Sherman Antitrust Act, RICO, and the antitrust laws of 48 states and the District of Columbia, and are liable under common law breach of fiduciary duty and unjust enrichment theories. Plaintiffs seek treble damages plus interest and attorneys' fees as a result of the alleged RICO and Sherman Antitrust Act violations.

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    The plaintiffs in the Employee Benefits Complaint are a group of individual employees and corporate and municipal employers alleging claims on behalf of two separate nationwide purported classes: an employee class and an employer class that acquired insurance products from the defendants from January 1, 1998 to December 31, 2004. The Employee Benefits Complaint names AIG, as well as various other brokers and insurers, as defendants. The activities alleged in the Employee Benefits Complaint, with certain exceptions, track the allegations of customer allocation through steering and bid-rigging made in the Commercial Complaint.

    The District Court, in connection with the Commercial and Employee Benefits Complaints, granted (without leave to amend) defendants' motions to dismiss the federal antitrust and RICO claims on August 31, 2007 and September 28, 2007, respectively. The Court declined to exercise supplemental jurisdiction over the state law claims in the Commercial Complaint and therefore dismissed it in its entirety. Plaintiffs appealed the dismissal of the Commercial Complaint to the United States Court of Appeals for the Third Circuit (the Third Circuit) on October 10, 2007. On January 14, 2008, the District Court granted summary judgment to defendants on plaintiffs' ERISA claims in the Employee Benefits Complaint. On February 12, 2008, plaintiffs filed a notice of appeal to the Third Circuit with respect to the dismissal of the antitrust and RICO claims in the Employee Benefits Complaint.

    On August 16, 2010, the Third Circuit affirmed the dismissal of the Employee Benefits Complaint in its entirety, affirmed in part and vacated in part the District Court's dismissal of the Commercial Complaint, and remanded the case for further proceedings consistent with the opinion. Specifically, the Third Circuit affirmed the dismissal of plaintiffs' broader antitrust and RICO claims, but the Court reversed the District Court's dismissal of alleged "Marsh-centered" antitrust and RICO claims based on allegations of bid-rigging involving excess casualty insurance. The Court remanded these Marsh-centered claims to the District Court for consideration as to whether plaintiffs had adequately pleaded them. Because the Third Circuit vacated in part the judgment dismissing the federal claims in the Commercial Complaint, the Third Circuit also vacated the District Court's dismissal of the state-law claims in the Commercial Complaint.

    On October 1, 2010, defendants named in the Commercial Complaint filed motions to dismiss the remaining remanded claims in the District of New Jersey. On March 18, 2011, AIG and certain other defendants announced that they had entered into a memorandum of understanding (MOU) with class plaintiffs to settle the claims asserted against them in the Commercial Complaint. As of May 20, 2011, the parties to the MOU and certain other defendants entered into a Stipulation of Settlement. Under the terms of the settlement, it is anticipated that AIG will pay $6.75 million of a total aggregate settlement amount of approximately $37 million. The settlement is conditioned on final court approval. Plaintiffs' attorneys' fees and litigation expenses, and the aggregate costs of notice and claims administration in connection with the settlement, would be paid from the settlement fund.

    On June 20, 2011, the Court "administratively terminated" without prejudice the various Defendants' pending motions to dismiss the proposed class plaintiffs' operative pleading indicating that those motions may be re-filed after adjudication of all issues related to the proposed class settlement and subject to the approval of the Magistrate Judge. On June 27, 2011, the Court preliminarily approved the class settlement. On June 30, 2011, AIG placed its portion of the total settlement payment into escrow. If the settlement does not receive final court approval, those funds will revert to AIG. A final fairness hearing was held on September 14, 2011. The Court has not yet ruled on the motion for final approval of the class settlement.

    A number of complaints making allegations similar to those in the Multi-District Litigation have been filed against AIG and other defendants in state and federal courts around the country. The defendants have thus far been successful in having the federal actions transferred to the District of New Jersey and consolidated into the Multi-District Litigation. These additional consolidated actions are still pending in the District of New Jersey, but are currently stayed. In one of those consolidated actions, Palm Tree Computer Systems, Inc. v. Ace USA (Palm Tree), which is brought by two named plaintiffs on behalf of a proposed class of insurance purchasers, the plaintiffs allege specifically with respect to their claim for breach of fiduciary duty against the insurer defendants that neither named plaintiff nor any member of the proposed class suffered damages "exceeding $74,999 each."

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Plaintiffs do not specify damages as to other claims against the insurer defendants in the complaint. The plaintiffs in Palm Tree have not yet sought certification of the class, as that case has been stayed by the District Court of New Jersey. Because discovery has not been completed and the District Court has not determined if a class action is appropriate or the size or scope of any class, AIG is unable to reasonably estimate the possible loss or range of losses, if any, arising from the Palm Tree litigation. In another consolidated action, The Heritage Corp. of South Florida v. National Union Fire Ins. Co. (Heritage), an individual plaintiff alleges damages "in excess of $75,000." Because discovery has not been completed and a precise amount of damages has not been specified, AIG is unable to reasonably estimate the possible loss or range of losses, if any, arising from the Heritage litigation. For the remaining consolidated actions, as of October 24, 2011, plaintiffs have not specified an amount of alleged damages arising from these actions. AIG is therefore unable to reasonably estimate the possible loss or range of losses, if any, arising from these matters.

    In June 2011, the Court ordered counsel for each of the tag-along actions in the Multi-District Litigation (including the following cases where AIG is a defendant: Avery Dennison Corp. v. Marsh & McLennan Companies,  Inc.; Henley Management Co. v. Marsh Inc.; Heritage; and Palm Tree) to submit a letter to the Court within 30 days of the date of that order that outlines the effect the current proposed class settlement will have on their respective cases if finalized in due course. In July 2011, several plaintiffs submitted letters to the Court. Defendants submitted an omnibus response to the Court on August 19, 2011.

    On October 17, 2011, the Court conducted a conference and subsequently ordered that discovery and motion practice may proceed in all tag-along actions. The parties were ordered to submit a proposed scheduling order for discovery and any additional motion practice to the Court by October 31, 2011.

    The AIG defendants have also sought to have state court actions making similar allegations stayed pending resolution of the Multi-District Litigation proceeding. These efforts have generally been successful, although four cases have proceeded; one each in Florida and New Jersey state courts that have settled, and one each in Texas and Kansas state courts have proceeded (although discovery is stayed in both actions). In the Texas action, plaintiff filed its Fourth Amended Petition on July 13, 2009 and on August 14, 2009, defendants filed renewed special exceptions. Plaintiff in the Texas action alleges a "maximum" of $125 million in total damages (after trebling). Because the Court has not rendered a decision on defendants' renewed special exceptions and discovery has not been completed, AIG is unable to reasonably estimate the possible loss or range of losses, if any, arising from the Texas action. In the Kansas action, defendants are appealing to the Kansas Supreme Court the trial court's denial of defendants' motion to dismiss on statute of limitations grounds. In the Kansas action, the plaintiff alleges damages in an amount "greater than $75,000" for each of the three claims directed against AIG in the complaint. Because the Kansas Supreme Court has not decided the appeal of the trial court's denial of defendants' motion to dismiss, a precise amount of damages has not been specified and discovery has not been completed, AIG is unable to reasonably estimate the possible loss or range of losses, if any, from the Kansas action.

    Workers' Compensation Premium Reporting.    On May 24, 2007, the National Council on Compensation Insurance (NCCI), on behalf of the participating members of the National Workers' Compensation Reinsurance Pool (the NWCRP), filed a lawsuit in the United States District Court for the Northern District of Illinois (Northern District of Illinois) against AIG with respect to the underpayment by AIG of its residual market assessments for workers' compensation insurance. The complaint alleged claims for violations of RICO, breach of contract, fraud and related state law claims arising out of AIG's alleged underpayment of these assessments between 1970 and the present and sought damages purportedly in excess of $1 billion. On August 6, 2007, the Court denied AIG's motion seeking to dismiss or stay the complaint or, in the alternative, to transfer to the Southern District of New York. On December 26, 2007, the Court denied AIG's motion to dismiss the complaint.

    On March 17, 2008, AIG filed an amended answer, counterclaims and third-party claims against NCCI (in its capacity as attorney-in-fact for the NWCRP), the NWCRP, its board members, and certain of the other insurance companies that are members of the NWCRP alleging violations of RICO, as well as claims for conspiracy, fraud,

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and other state law claims. The counterclaim- defendants and third-party defendants filed motions to dismiss on June 9, 2008. On January 26, 2009, AIG filed a motion to dismiss all claims in the complaint for lack of subject-matter jurisdiction. On February 23, 2009, the Court issued a decision and order sustaining AIG's counterclaims and sustaining, in part, AIG's third-party claims. The Court also dismissed certain of AIG's third-party claims without prejudice.

    On April 13, 2009, third-party defendant Liberty Mutual Group (Liberty Mutual) filed third-party counterclaims against AIG, certain of its subsidiaries, and former AIG executives. On August 23, 2009, the Court granted AIG's motion to dismiss the NCCI complaint for lack of standing. On September 25, 2009, AIG filed its First Amended Complaint, reasserting its RICO claims against certain insurance companies that both underreported their workers' compensation premium and served on the NWCRP Board, and repleading its fraud and other state law claims. Defendants filed a motion to dismiss the First Amended Complaint on October 30, 2009. On October 8, 2009, Liberty Mutual filed an amended counterclaim against AIG. The amended counterclaim is substantially similar to the complaint initially filed by NCCI, but also seeks damages related to non-NWCRP states, guaranty funds, and special assessments, in addition to asserting claims for other violations of state law. The amended counterclaim also removes as defendants the former AIG executives. On October 30, 2009, AIG filed a motion to dismiss the Liberty amended counterclaim.

    On April 1, 2009, Safeco Insurance Company of America (Safeco) and Ohio Casualty Insurance Company (Ohio Casualty) filed a complaint in the Northern District of Illinois, on behalf of a purported class of all NWCRP participant members, against AIG and certain of its subsidiaries with respect to the underpayment by AIG of its residual market assessments for workers' compensation insurance. The complaint was styled as an "alternative complaint," should the Court grant AIG's motion to dismiss the NCCI lawsuit for lack of subject-matter jurisdiction. The allegations in the class action complaint are substantially similar to those filed by the NWCRP, but the complaint names former AIG executives as defendants and asserts a RICO claim against those executives. On August 28, 2009, the class action plaintiffs filed an amended complaint, removing the AIG executives as defendants. On October 30, 2009, AIG filed a motion to dismiss the amended complaint. On July 16, 2010, Safeco and Ohio Casualty filed their motion for class certification, which AIG opposed on October 8, 2010.

    On July 1, 2010, the Court ruled on the pending motions to dismiss that were directed at all parties' claims. With respect to the underreporting NWCRP companies' and board members' motion to dismiss AIG's first amended complaint, the Court denied the motion to dismiss all counts except AIG's claim for unjust enrichment, which it found to be precluded by the surviving claims for breach of contract. With respect to NCCI and the NWCRP's motion to dismiss AIG's first amended complaint, the Court denied the NCCI and the NWCRP's motions to dismiss AIG's claims for an equitable accounting and an action on an open, mutual, and current account. With respect to AIG's motions to dismiss Liberty's counterclaims and the class action complaint, the Court denied both motions, except that it dismissed the class claim for promissory estoppel. On July 30, 2010, the NWCRP filed a motion for reconsideration of the Court's ruling denying its motion to dismiss AIG's claims for an equitable accounting and an action on an open, mutual, and current account. The Court denied the NWCRP's motion for reconsideration on September 16, 2010. The plaintiffs filed a motion for class certification on July 16, 2010. AIG opposed the motion.

    On January 5, 2011, AIG executed a term sheet with a group of intervening plaintiffs, made up of seven participating members of the NWCRP that filed a motion to intervene in the class action for the purpose of settling the claims at issue on behalf of a settlement class. The proposed class-action settlement would require AIG to pay $450 million to satisfy all liabilities to the class members arising out of the workers' compensation premium reporting issues, a portion of which would be funded out of the remaining amount held in the Workers' Compensation Fund less any amounts previously withdrawn to satisfy AIG's regulatory settlement obligations, as addressed above. On January 13, 2011, their motion to intervene was granted. On January 19, 2011, the intervening class plaintiffs filed their Complaint in Intervention. On January 28, 2011, AIG and the intervening class plaintiffs entered into a settlement agreement embodying the terms set forth in the January 5, 2011 term sheet and filed a joint motion for certification of the settlement class and preliminary approval of the settlement.

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If approved by the Court (and such approval becomes final), the settlement agreement will resolve and dismiss with prejudice all claims that have been made or that could have been made in the consolidated litigations pending in the Northern District of Illinois arising out of workers' compensation premium reporting, including the class action, other than claims that are brought by any class member that opts out of the settlement. On April 29, 2011, Liberty Mutual filed papers in opposition to preliminary approval of the proposed settlement and in opposition to certification of a settlement class, in which it alleged AIG's actual exposure, should the class action continue through judgment, to be in excess of $3 billion. AIG disputes and will defend against this allegation. The Court held a hearing on the motions for class certification and preliminary approval of the proposed class-action settlement on June 21 and July 25, 2011.

    On August 1, 2011, the Court issued an opinion and order granting the motion for class certification and preliminarily approving the proposed class-action settlement, subject to certain minor modifications that the Court noted the parties already had agreed to make. The opinion and order became effective upon the entry of a separate Findings and Order Preliminarily Certifying a Settlement Class and Preliminarily Approving Proposed Settlement on August 5, 2011. Liberty Mutual sought leave from the United States Court of Appeals for the Seventh Circuit to appeal the August 5, 2011 class certification decision, which was denied on August 19, 2011. Notice of the settlement was issued to the class members on August 19, 2011 advising that any class member wishing to opt out of or object to the class action-settlement was required to do so by October 3, 2011. RLI Insurance Company and its affiliates, which were to receive less than one thousand dollars under the proposed settlement, sent the only purported opt-out notice. Liberty Mutual, including its subsidiaries Safeco and Ohio Casualty, and the Kemper group of insurance companies, through their affiliate Lumbermens Mutual Casualty, were the only two objectors. AIG and the settling class plaintiffs filed responses to the objectors' submissions on October 28, 2011. A final fairness hearing is scheduled for November 29, 2011.

    The $450 million settlement amount was funded in part from the approximately $191.5 million remaining in the Workers' Compensation Fund, after the transfer of the $146.5 million in fines, penalties, and premium taxes discussed in the NAIC Examination of Workers' Compensation Premium Reporting matter above into an escrow account pursuant to the regulatory settlement agreement. In the event that the proposed class action settlement is not approved, the litigation will resume. AIG has an accrued liability equal to the amounts payable under the settlement.

Litigation Matters Relating to AIG's Insurance Operations

    Caremark.    AIG and certain of its subsidiaries have been named defendants in two putative class actions in state court in Alabama that arise out of the 1999 settlement of class and derivative litigation involving Caremark Rx, Inc. (Caremark). The plaintiffs in the second-filed action intervened in the first-filed action, and the second-filed action was dismissed. An excess policy issued by a subsidiary of AIG with respect to the 1999 litigation was expressly stated to be without limit of liability. In the current actions, plaintiffs allege that the judge approving the 1999 settlement was misled as to the extent of available insurance coverage and would not have approved the settlement had he known of the existence and/or unlimited nature of the excess policy. They further allege that AIG, its subsidiaries, and Caremark are liable for fraud and suppression for misrepresenting and/or concealing the nature and extent of coverage. In addition, the intervenors originally alleged that various lawyers and law firms who represented parties in the underlying class and derivative litigation (the Lawyer Defendants) were also liable for fraud and suppression, misrepresentation, and breach of fiduciary duty.

    The complaints filed by the plaintiffs and the intervenors request compensatory damages for the 1999 class in the amount of $3.2 billion, plus punitive damages. AIG and its subsidiaries deny the allegations of fraud and suppression, assert that information concerning the excess policy was publicly disclosed months prior to the approval of the settlement, that the claims are barred by the statute of limitations, and that the statute cannot be tolled in light of the public disclosure of the excess coverage. The plaintiffs and intervenors, in turn, have asserted that the disclosure was insufficient to inform them of the nature of the coverage and did not start the running of the statute of limitations.

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    In November 2007, the trial court dismissed the intervenors' complaint against the Lawyer Defendants, and the Alabama Supreme Court affirmed that dismissal in September 2008. After the case was sent back down to the trial court, the intervenors retained additional counsel and filed an Amended Complaint in Intervention that named only Caremark and AIG and various subsidiaries as defendants, purported to bring claims against all defendants for deceit and conspiracy to deceive, and purported to bring a claim against AIG and its subsidiaries for aiding and abetting Caremark's alleged deception. The defendants moved to dismiss the Amended Complaint in Intervention, and the plaintiffs moved to disqualify all of the lawyers for the intervenors because, among other things, the newly retained firm had previously represented Caremark. The intervenors, in turn, moved to disqualify the lawyers for the plaintiffs in the first-filed action. The cross-motions to disqualify were withdrawn after the two sets of plaintiffs agreed that counsel for the original plaintiffs would act as lead counsel, and intervenors also withdrew their Amended Complaint in Intervention. The trial court approved all of the foregoing steps and, in April 2009, established a schedule for class action discovery that was to lead to a hearing on class certification in March 2010. The Court has since appointed a special master to oversee class action discovery and has directed the parties to submit a new discovery schedule after certain discovery disputes are resolved. Class discovery is ongoing, and no schedule for the class certification hearing has been set.

    As of October 31, 2011, the parties have not completed class action discovery, general discovery has not commenced, and the court has not determined if a class action is appropriate or the size or scope of any class. As a result, AIG is unable to reasonably estimate the possible loss or range of losses, if any, arising from the litigation.


(b) Commitments

Flight Equipment

    At September 30, 2011, ILFC had committed to purchase 235 new aircraft and one used aircraft deliverable from 2011 through 2019, at an estimated aggregate purchase price of approximately $17.5 billion. ILFC will be required to find lessees for any aircraft acquired and to arrange financing for a substantial portion of the purchase price.

    During 2011, ILFC entered into a contract for the purchase of 100 A320neo family narrowbody aircraft from Airbus with deliveries beginning in 2015 and canceled its previous purchase commitment for ten A380s. ILFC also has the right to purchase an additional 50 Airbus A320neo family narrowbody aircraft. In addition, ILFC signed a purchase agreement for 33 737-800 aircraft from Boeing with deliveries beginning in 2012.

Other Commitments

    In the normal course of business, AIG enters into commitments to invest in limited partnerships, private equities, hedge funds and mutual funds and to purchase and develop real estate in the U.S. and abroad. These commitments totaled $3.1 billion at September 30, 2011.


(c) Contingencies

Liability for unpaid claims and claims adjustment expense

    Although AIG regularly reviews the adequacy of the established Liability for unpaid claims and claims adjustment expense, there can be no assurance that AIG's ultimate Liability for unpaid claims and claims adjustment expense will not develop adversely and materially exceed AIG's current Liability for unpaid claims and claims adjustment expense. Estimation of ultimate net claims, claims adjustment expenses and Liability for unpaid claims and claims adjustment expense is a complex process for long-tail casualty lines of business, which include excess and umbrella liability, D&O, professional liability, medical malpractice, workers' compensation, general liability, products liability and related classes, as well as asbestos and environmental exposures. Generally, actual historical loss development factors are used to project future loss development. However, there can be no assurance that future loss development patterns will be the same as in the past. Moreover, any deviation in loss

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cost trends or in loss development factors might not be discernible for an extended period of time subsequent to the recording of the initial loss reserve estimates for any accident year. Thus, there is the potential for reserves with respect to a number of years to be significantly affected by changes in loss cost trends or loss development factors that were relied upon in setting the reserves. These changes in loss cost trends or loss development factors could be attributable to changes in inflation, in labor and material costs or in the judicial environment, or in other social or economic phenomena affecting claims.


(d) Guarantees

Subsidiaries

    AIG has issued unconditional guarantees with respect to the prompt payment, when due, of all present and future payment obligations and liabilities of AIGFP arising from transactions entered into by AIGFP.

    In connection with AIGFP's leasing business, AIGFP has issued, in a limited number of transactions, standby letters of credit or similar facilities to equity investors in an amount equal to the termination value owing to the equity investor by the lessee in the event of a lessee default (the equity termination value). The total amount outstanding at September 30, 2011 was $779 million. In those transactions, AIGFP has agreed to pay such amount if the lessee fails to pay. The amount payable by AIGFP is, in certain cases, partially offset by amounts payable under other instruments typically equal to the present value of a scheduled payment to be made by AIGFP. In the event that AIGFP is required to make a payment to the equity investor, the lessee is unconditionally obligated to reimburse AIGFP. To the extent that the equity investor is paid the equity termination value from the standby letter of credit and/or other sources, including payments by the lessee, AIGFP takes an assignment of the equity investor's rights under the lease of the underlying property. Because the obligations of the lessee under the lease transactions are generally economically defeased, lessee bankruptcy is the most likely circumstance in which AIGFP would be required to pay.

Asset Dispositions

General

    AIG is subject to financial guarantees and indemnity arrangements in connection with the completed sales of businesses pursuant to its asset disposition plan. The various arrangements may be triggered by, among other things, declines in asset values, the occurrence of specified business contingencies, the realization of contingent liabilities, developments in litigation or breaches of representations, warranties or covenants provided by AIG. These arrangements are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential obligation is subject to contractual limitations, while in other cases such limitations are not specified or are not applicable.

    AIG is unable to develop a reasonable estimate of the maximum potential payout under certain of these arrangements. Overall, AIG believes that it is unlikely it will have to make any material payments related to completed sales under these arrangements, and no material liabilities related to these arrangements have been recorded in the Consolidated Balance Sheet. See Notes 1 and 4 herein for additional information on sales of businesses and asset dispositions.

ALICO Sale

    Pursuant to the terms of the ALICO stock purchase agreement, AIG has agreed to provide MetLife with certain indemnities, the most significant of which include:

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    In connection with the above, at September 30, 2011, approximately $2.6 billion of proceeds from the ALICO Sale were on deposit in an escrow arrangement. The escrow arrangement consists of $3.0 billion of initial cash proceeds from the sale of MetLife securities received upon the completion of the ALICO Sale, less payments of approximately $300 million as described above, and approximately $97 million paid to MetLife from the escrow account during the third quarter of 2011 in connection with the indemnification for previously disclosed litigation relating to Italian internal fund suspensions. The amount required to be held in escrow declines to zero over a 30-month period ending in April 2013, with claims submitted related to the indemnifications reducing the amount that can be released to AIG. Escrow releases to AIG are generally required to be applied towards the reduction of the liquidation preference of the Department of the Treasury's AIA SPV Preferred Interests. See Note 16 herein.

AIG Star and AIG Edison Sale

    Pursuant to the terms of the AIG Star and AIG Edison stock purchase agreement, AIG has agreed to provide Prudential Financial, Inc. with certain indemnities, the most significant of which is indemnification related to breaches of general representations and warranties that exceed 4.1 billion Yen ($53 million at the September 30, 2011 exchange rate), with a maximum payout of 102 billion Yen ($1.3 billion at the September 30, 2011 exchange rate). Except for certain specified representations and warranties that may have a longer survival period, the indemnification extends until November 1, 2012.

    For additional information on AIG's guarantees, see Notes 9, 10 and 15 herein.


12. Total Equity and Earnings (Loss) Per Share

Shares Outstanding

The following table presents a rollforward of outstanding shares:

   
 
  Preferred Stock    
   
 
Nine Months Ended
September 30, 2011

  Common
Stock

  Treasury
Stock

 
  AIG Series E
  AIG Series F
  AIG Series C
  AIG Series G
 
   

Shares issued, beginning of year

    400,000     300,000     100,000     -     147,124,067     6,660,908  
 

Issuances

    -     -     -     20,000     100,113,761     -  
 

Settlement of equity unit stock purchase contracts

    -     -     -     -     3,606,417     -  
 

Shares exchanged

    (400,000 )   (300,000 )   (100,000 )   -     1,655,037,962     11,678  
 

Shares cancelled

    -     -     -     (20,000 )   -     -  
   

Shares issued, end of period

    -     -     -     -     1,905,882,207     6,672,586  
   

    See Note 1 herein for a discussion of the Recapitalization and the May 2011 Common Stock Offering and Sale.

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Equity Units

    In January, March and June 2011, AIG remarketed the three series of debentures included in the Equity Units. AIG purchased and retired all of the Series B-1, B-2 and B-3 Debentures representing $2.2 billion in aggregate principal and as a result, no Series B-1, B-2 or B-3 Debentures remain outstanding.

    During the nine months ended September 30, 2011, AIG issued approximately 3.6 million shares of AIG Common Stock in connection with the settlement of the stock purchase contracts underlying its Equity Units in three tranches, the third of which was completed in the third quarter of 2011.


Accumulated Other Comprehensive Income

The following table presents a rollforward of Accumulated other comprehensive income:

   
Nine Months Ended
September 30, 2011



(in millions)
  Unrealized Appreciation
(Depreciation) of Fixed
Maturity Investments
on Which Other-Than-
Temporary Credit
Impairments Were Taken

  Unrealized
Appreciation
(Depreciation)
of All Other
Investments

  Foreign
Currency
Translation
Adjustments

  Net Derivative
Gains (Losses)
Arising from
Cash Flow
Hedging
Activities

  Change in
Retirement
Plan
Liabilities
Adjustment

  Total
 
   

Balance, beginning of year, net of tax

  $ (659 ) $ 8,888   $ 298   $ (34 ) $ (869 ) $ 7,624  
   
 

Unrealized appreciation of
investments

    271     1,278     -     -     -     1,549  
 

Effect of unrealized investment appreciation on future policy benefits*

    -     (1,665 )   -     -     -     (1,665 )
 

Net changes in foreign currency translation adjustments

    -     -     (1,347 )   -     -     (1,347 )
 

Net gains on cash flow hedges

    -     -     -     45     -     45  
 

Net actuarial loss

    -     -     -     -     (667 )   (667 )
 

Prior service credit

    -     -     -     -     379     379  
 

Deferred tax asset (liability)

    (166 )   (572 )   341     (31 )   98     (330 )
   

Total other comprehensive income (loss)

    105     (959 )   (1,006 )   14     (190 )   (2,036 )

Acquisition of noncontrolling interest

    -     43     62     -     (17 )   88  

Noncontrolling interests

    3     (160 )   4     -     -     (153 )
   

Balance, end of period, net of tax

  $ (557 ) $ 8,132   $ (650 ) $ (20 ) $ (1,076 ) $ 5,829  
   
*
Represents the pre-tax adjustment to Accumulated other comprehensive income as a consequence of the recognition of additional policyholder benefit reserves of approximately $1.6 billion and a related reduction of deferred acquisition costs (DAC) of approximately $110 million. The adjustment to policyholder benefit reserves assumes that the unrealized appreciation on available for sale securities is actually realized and that the proceeds are reinvested at lower yields.


Noncontrolling interests

    In connection with the execution of its orderly asset disposition plan, as well as the repayment of the FRBNY Credit Facility, AIG transferred two of its wholly owned businesses, AIA and ALICO, to two newly created special purpose vehicles (SPVs) in exchange for all the common and preferred interests of those SPVs. On December 1, 2009, AIG transferred the preferred interests in the SPVs to the FRBNY in consideration for a $25 billion reduction of the outstanding loan balance and of the maximum amount of credit available under the FRBNY Credit Facility and amended the terms of the FRBNY Credit Facility. As part of the closing of the Recapitalization, the remaining preferred interests, with an aggregate liquidation preference of approximately $20.3 billion at January 14, 2011, were purchased from the FRBNY by AIG and transferred to the Department of the Treasury as part of the consideration for the exchange of the Series F Preferred Stock. Under the terms of the

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SPVs' limited liability company agreements, the SPVs generally may not distribute funds to AIG until the liquidation preferences and preferred returns on the preferred interests have been repaid in full and concurrent distributions have been made on certain participating returns attributable to the preferred interests.

    The common interests, which were retained by AIG, entitle AIG to 100 percent of the voting power of the SPVs. The voting power allows AIG to elect the boards of managers of the SPVs, who oversee the management and operation of the SPVs. Primarily due to the substantive participation rights of the preferred interests, the SPVs were determined to be variable interest entities. As the primary beneficiary of the SPVs, AIG consolidates the SPVs.

    The rights originally held by the FRBNY through its ownership of the preferred interests are now held by the Department of the Treasury. In connection with the Recapitalization, AIG agreed to cause the proceeds of certain asset dispositions to be used to redeem the remaining preferred interests.

    As a result of the closing of the Recapitalization on January 14, 2011, the SPV Preferred Interests held by the Department of the Treasury are not considered permanent equity on AIG's Consolidated Balance Sheet, and were classified as redeemable non-controlling interests. As part of the Recapitalization, AIG used approximately $6.1 billion of the cash proceeds from the sale of ALICO to pay down a portion of the liquidation preference of the SPV Preferred Interests. The SPV Preferred Interests were further reduced by approximately $11.5 billion using proceeds from the sale of AIG Star, AIG Edison, Nan Shan, and MetLife securities received in the sale of ALICO. During the first quarter of 2011, the liquidation preference of the Preferred Interests in the ALICO SPV was paid in full.


The following table presents a rollforward of non-controlling interests:

   
 
  Redeemable
Noncontrolling interests
  Non-redeemable
Noncontrolling interests
 
(in millions)
  Held by
Department
of Treasury

  Other
  Total
  Held by
FRBNY

  Other
  Total
 
   

Nine Months Ended September 30, 2011

                                     

Balance, beginning of year

  $ -   $ 434   $ 434   $ 26,358   $ 1,562   $ 27,920  
   
 

Repurchase of SPV preferred interests in connection with Recapitalization

    -     -     -     (26,432 )   -     (26,432 )
 

Exchange of consideration for preferred stock in connection with Recapitalization

    20,292     -     20,292     -     -     -  
 

Repayment to Department of the Treasury

    (11,453 )   -     (11,453 )   -     -     -  
 

Net distributions

    -     (16 )   (16 )   -     (34 )   (34 )
 

Consolidation (deconsolidation)

    -     (309 )   (309 )   -     (123 )   (123 )
 

Acquisition of noncontrolling interest

    -     -     -     -     (487 )   (487 )
 

Comprehensive income:

                                     
   

Net income (loss)

    464     (4 )   460     74     51     125  
   

Accumulated other comprehensive loss, net of tax:

                                     
     

Unrealized losses on investments

    -     -     -     -     (157 )   (157 )
     

Foreign currency translation adjustments

    -     -     -     -     4     4  
   
   

Total accumulated other comprehensive loss, net of
tax

    -     -     -     -     (153 )   (153 )
   
 

Total comprehensive income (loss)

    464     (4 )   460     74     (102 )   (28 )
   

Other

    -     -     -     -     (45 )   (45 )
   

Balance, end of period

  $ 9,303   $ 105   $ 9,408   $ -   $ 771   $ 771  
   

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  Redeemable
Noncontrolling interests
  Non-redeemable
Noncontrolling interests
 
(in millions)
  Held by
Department
of Treasury

  Other
  Total
  Held by
FRBNY

  Other
  Total
 
   

Nine Months Ended September 30, 2010

                                     

Balance, beginning of year

  $ -   $ 959   $ 959   $ 24,540   $ 3,712   $ 28,252  
   
 

Net contributions

    -     305     305     -     74     74  
 

Consolidation (deconsolidation)

    -     727     727     -     (2,261 )   (2,261 )
 

Comprehensive income:

                                     
   

Net income

    -     90     90     1,415     188     1,603  
   

Accumulated other comprehensive income, net of
tax:

                                     
     

Unrealized gains on investments

    -     10     10     -     104     104  
     

Foreign currency translation adjustments

    -     (5 )   (5 )   -     (2 )   (2 )
   
   

Total accumulated other comprehensive income, net of tax

    -     5     5     -     102     102  
   
 

Total comprehensive income

    -     95     95     1,415     290     1,705  
   

Other

    -     (59 )   (59 )   -     101     101  
   

Balance, end of period

  $ -   $ 2,027   $ 2,027   $ 25,955   $ 1,916   $ 27,871  
   


Earnings (Loss) Per Share (EPS)

    Basic and diluted earnings (loss) per share are based on the weighted average number of common shares outstanding, adjusted to reflect all stock dividends and stock splits. Diluted earnings per share is based on those shares used in basic EPS plus shares that would have been outstanding assuming issuance of common shares for all dilutive potential common shares outstanding, adjusted to reflect all stock dividends and stock splits. Basic earnings (loss) per share was not affected by outstanding stock purchase contracts. Diluted earnings per share is determined considering the potential dilution from outstanding stock purchase contracts using the treasury stock method and was not affected by the previously outstanding stock purchase contracts because they were not dilutive.

    In connection with the issuance of the Series C Preferred Stock, AIG applied the two-class method for calculating EPS. The two-class method is an earnings allocation method for computing EPS when a company's capital structure includes either two or more classes of common stock or common stock and participating securities. This method determines EPS based on dividends declared on common stock and participating securities (i.e., distributed earnings) as well as participation rights of participating securities in any undistributed earnings. The Series C Preferred Stock was retired as part of the Recapitalization on January 14, 2011.

    AIG applied the two-class method due to the participation rights of the Series C Preferred Stock through January 14, 2011. However, application of the two-class method had no effect on earnings per share for the nine months ended September 30, 2011 because AIG recognized a net loss attributable to AIG common shareholders from continuing operations, which is not applicable to participating stock for EPS, for the nine months ended September 30, 2011. Subsequent to January 14, 2011, AIG did not have any outstanding participating securities that subjected AIG to the two-class method.

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The following table presents the computation of basic and diluted EPS:

   
 
  Three Months Ended September 30,   Nine Months Ended September 30,  
(dollars in millions, except per share data)
  2011
  2010
  2011
  2010
 
   

Numerator for EPS:

                         
 

Income (loss) from continuing operations

  $ (3,724 ) $ (180 ) $ (2,810 ) $ 2,404  
 

Net income from continuing operations attributable to noncontrolling interests:

                         
   

Nonvoting, callable, junior and senior preferred interests

    145     388     538     1,415  
   

Other

    19     104     28     243  
   
 

Total net income from continuing operations attributable to noncontrolling interests

    164     492     566     1,658  
   
 

Net income (loss) attributable to AIG from continuing operations

    (3,888 )   (672 )   (3,376 )   746  
   
 

Income (loss) from discontinued operations

  $ (221 ) $ (1,833 ) $ 1,395   $ (4,101 )
 

Net income from discontinued operations attributable to noncontrolling interests

    -     12     19     35  
   
 

Net income (loss) attributable to AIG from discontinued operations

    (221 )   (1,845 )   1,376     (4,136 )
   
 

Deemed dividends

    -     -     (812 )   -  
 

(Income) loss allocated to the Series C Preferred Stock – continuing operations

    -     -     -     (595 )
   

Net income (loss) attributable to AIG common shareholders from continuing operations, applicable to common stock for EPS

    (3,888 )   (672 )   (4,188 )   151  
   
 

(Income) loss allocated to the Series C Preferred Stock – discontinued operations

    -     -     -     3,299  
   

Net income (loss) attributable to AIG common shareholders from discontinued operations, applicable to common stock for EPS

  $ (221 ) $ (1,845 ) $ 1,376   $ (837 )
   

Denominator for EPS:

                         
 

Weighted average shares outstanding – basic

    1,899,500,628     135,879,125     1,765,905,779     135,788,053  
 

Dilutive shares

    -     -     -     67,275  
   
 

Weighted average shares outstanding – diluted*

    1,899,500,628     135,879,125     1,765,905,779     135,855,328  
   

EPS attributable to AIG common shareholders:

                         

Basic:

                         
 

Income (loss) from continuing operations

  $ (2.05 ) $ (4.95 ) $ (2.37 ) $ 1.11  
 

Income (loss) from discontinued operations

  $ (0.11 ) $ (13.58 ) $ 0.78   $ (6.16 )

Diluted:

                         
 

Income (loss) from continuing operations

  $ (2.05 ) $ (4.95 ) $ (2.37 ) $ 1.11  
 

Income (loss) from discontinued operations

  $ (0.11 ) $ (13.58 ) $ 0.78   $ (6.16 )
   
*
Dilutive shares are calculated using the treasury stock method and include dilutive shares from share-based employee compensation plans, and the warrant issued to the Department of the Treasury on April 17, 2009 to purchase up to 150 shares of AIG Common Stock (Series F Warrant). The number of shares excluded from diluted shares outstanding were 79 million and 75 million for the three- and nine-month periods ended September 30, 2011 and 12 million for the three- and nine-month periods ended September 30, 2010, respectively, because the effect would have been anti-dilutive. Shares excluded for the three- and nine-month periods ended September 30, 2011 include 75 million and 70 million shares, respectively, representing the weighted average number of warrants to purchase AIG Common Stock that were issued to shareholders on January 19, 2011.

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    Deemed dividends represent the excess of (i) the fair value of the consideration transferred to the Department of the Treasury, which consists of 1,092,169,866 shares of AIG Common Stock, $20.2 billion of redeemable SPV Preferred Interests, and a liability for a commitment by AIG to pay the Department of the Treasury's costs to dispose of all of its shares, over (ii) the carrying value of the Series E and F Preferred Stock. The fair value of the AIG Common Stock issued for the Series C Preferred Stock over the carrying value of the Series C Preferred Stock is not a deemed dividend because the Series C Preferred Stock was contingently convertible into the 562,868,096 shares of AIG Common Stock for which it was exchanged. See Note 1 herein for further discussion.


13. Employee Benefits

The following table presents the components of net periodic benefit cost with respect to pensions and other postretirement benefits:

   
 
  Pension   Postretirement  
(in millions)
  Non-U.S.
Plans

  U.S.
Plans

  Total
  Non-U.S.
Plans

  U.S.
Plans

  Total
 
   

Three Months Ended September 30, 2011

                                     

Components of net periodic benefit cost:

                                     
 

Service cost

  $ 14   $ 40   $ 54   $ 1   $ 3   $ 4  
 

Interest cost

    9     54     63     1     3     4  
 

Expected return on assets

    (6 )   (64 )   (70 )   -     -     -  
 

Amortization of prior service credit

    (1 )   -     (1 )   -     -     -  
 

Amortization of net loss

    3     9     12     -     -     -  
 

Other

    6     -     6     -     -     -  
   

Net periodic benefit cost

  $ 25   $ 39   $ 64   $ 2   $ 6   $ 8  
   

Amount associated with discontinued operations

  $ 2   $ -   $ 2   $ 1   $ -   $ 1  
   

Three Months Ended September 30, 2010

                                     

Components of net periodic benefit cost:

                                     
 

Service cost

  $ 38   $ 35   $ 73   $ 2   $ 2   $ 4  
 

Interest cost

    15     54     69     1     4     5  
 

Expected return on assets

    (9 )   (64 )   (73 )   -     -     -  
 

Amortization of prior service credit

    (2 )   -     (2 )   -     -     -  
 

Amortization of net loss

    11     11     22     -     -     -  
 

Other

    1     -     1     -     -     -  
   

Net periodic benefit cost

  $ 54   $ 36     90   $ 3   $ 6   $ 9  
   

Amount associated with discontinued operations

  $ 32   $ 3     35   $ 1   $ -   $ 1  
   

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  Pension   Postretirement  
(in millions)
  Non-U.S.
Plans

  U.S.
Plans

  Total
  Non-U.S.
Plans

  U.S.
Plans

  Total
 
   

Nine Months Ended September 30, 2011

                                     

Components of net periodic benefit cost:

                                     
 

Service cost

  $ 52   $ 114   $ 166   $ 3   $ 7   $ 10  
 

Interest cost

    28     158     186     2     10     12  
 

Expected return on assets

    (19 )   (190 )   (209 )   -     -     -  
 

Amortization of prior service (credit) cost

    (3 )   1     (2 )   -     1     1  
 

Amortization of net loss

    12     30     42     -     -     -  
 

Other

    6     -     6     -     -     -  
   

Net periodic benefit cost

  $ 76   $ 113   $ 189   $ 5   $ 18   $ 23  
   

Amount associated with discontinued operations

  $ 13   $ -   $ 13   $ 2   $ -   $ 2  
   

Nine Months Ended September 30, 2010

                                     

Components of net periodic benefit cost:

                                     
 

Service cost

  $ 101   $ 106   $ 207   $ 6   $ 6   $ 12  
 

Interest cost

    44     162     206     3     12     15  
 

Expected return on assets

    (23 )   (192 )   (215 )   -     -     -  
 

Amortization of prior service (credit) cost

    (7 )   1     (6 )   -     -     -  
 

Amortization of net loss

    34     35     69     -     -     -  
 

Other

    2     -     2     -     -     -  
   

Net periodic benefit cost

  $ 151   $ 112     263   $ 9   $ 18   $ 27  
   

Amount associated with discontinued operations

  $ 96   $ 8     104   $ 2   $ 1   $ 3  
   


Impact of AIG Star, AIG Edison and Nan Shan Divestitures

    At December 31, 2010, AIG's projected benefit obligation and fair value of plan assets for its non-U.S. pension and postretirement plans were $2.0 billion and $954 million, respectively. These amounts have been reduced by approximately $804 million and $279 million for pension plans related to AIG Star and AIG Edison, respectively, which were assumed by the purchaser on February 1, 2011. In addition, the totals at December 31, 2010 were further reduced by approximately $103 million and $14 million for plans related to Nan Shan, which were assumed by the purchaser on August 18, 2011.

    At December 31, 2010, AIG estimated its 2011 annual pension expense and contributions would be $282 million and $144 million, respectively. Included in those totals were $58 million of pension expense and $56 million of contributions for AIG Star, AIG Edison and Nan Shan.

    For the nine-month period ended September 30, 2011, AIG contributed $88 million to its U.S. and non-U.S. pension plans and estimates it will contribute an additional $10 million for the remainder of 2011. These estimates are subject to change because contribution decisions are affected by various factors, including AIG's liquidity, market performance and management discretion.


Remeasurement of U.S. Pension and Postretirement Medical Plans

    In the third quarter of 2011, AIG announced that, effective April 1, 2012, the AIG Retirement and AIG Excess Plans would be converted to cash balance plans and the retiree medical employer subsidy for the AIG Postretirement Plan would be eliminated for certain employees. The affected plans were remeasured as of September 30, 2011, based on current assumptions, to determine the effect of these plan amendments. The remeasurement resulted in a net decrease to accumulated other comprehensive income of $590 million (pre-tax), primarily due to a decrease in the discount rate for the AIG Retirement Plan. The discount rate, which is derived

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


from the unadjusted Citigroup Pension Discount Curve, declined from 5.5 percent at December 31, 2010 to 4.5 percent at September 30, 2011.


14. Income Taxes

Interim Tax Calculation Method

    In the first quarter of 2011, AIG began using the estimated annual effective tax rate method in computing its interim tax provisions. The recent stabilization of operations and expected financial results allow AIG to estimate the annual effective tax rate to be applied to year-to-date income.

    From the third quarter of 2008 through December 31, 2010, the discrete-period method was used to compute the interim tax provisions due to the significant variations in the customary relationship between income tax expense and pre-tax accounting income.

    The estimated annual effective tax rates for the three- and nine-month periods ended September 30, 2011 exclude the tax effects of current year losses of the U.S. consolidated income tax group and, in Japan, Fuji. The related tax benefit with respect to these jurisdictions is currently projected to be offset by an increase in the valuation allowance prior to intraperiod tax allocation.

    Certain items, including losses in jurisdictions where no corresponding tax benefit is available, and those deemed to be unusual, infrequent or that cannot be reliably estimated, are excluded from the estimated annual effective tax rate. In these cases, the actual tax expense or benefit applicable to that item is treated discretely, and is reported in the same period as the related item. For the three- and nine-month periods ended September 30, 2011, the tax effects related to the U.S. consolidated income tax group and Fuji, foreign realized capital gains and losses, and divestiture gains or losses were treated as discrete items.


Interim Tax Expense (Benefit)

    For the three- and nine-month periods ended September 30, 2011, the effective tax rates on pretax loss from continuing operations were 14.5 and 28.5 percent, respectively. The tax benefit was primarily due to a decrease in the valuation allowance attributable to the anticipated inclusion of ALICO SPV within the U.S. consolidated income tax group, tax effects associated with tax exempt interest income, investments in partnerships, and effective settlements of certain uncertain tax positions, partially offset by an increase in the valuation allowance attributable to continuing operations.

    For the nine-month period ended September 30, 2011, AIG recorded an increase in the U.S. consolidated income tax group valuation allowance of $1.2 billion. The entire $1.2 billion increase in the valuation allowance was allocated to continuing operations. This allocation was based on the primacy of continuing operations, which requires a net increase in valuation allowance to be attributed to continuing operations to the extent of the related deferred tax benefit attributable to continuing operations. The amount allocated to continuing operations also included the decrease to the valuation allowance attributable to the anticipated inclusion of ALICO SPV within the U.S. consolidated income tax group.

    For the three- and nine-month periods ended September 30, 2010, the effective tax rates on pre-tax income from continuing operations were 158.8 percent and 30.3 percent, respectively. The effective tax rate for the three-month period ended September 30, 2010 attributable to continuing operations was primarily related to the effect of foreign operations, nondeductible losses, realized gains resulting from transfers of subsidiaries, and uncertain tax positions, partially offset by a net reduction of the valuation allowance and by the tax benefit associated with tax exempt interest. The effective tax rate for the nine-month period ended September 30, 2010 attributable to continuing operations was primarily related to the effect of foreign operations, nondeductible losses and realized gains resulting from transfers of subsidiaries, partially offset by the bargain purchase gain associated with the acquisition of Fuji, the tax benefits associated with tax exempt interest income, and a reduction in the valuation allowance.

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Assessment of Deferred Tax Asset Valuation Allowances

    The evaluation of the recoverability of the deferred tax asset and the need for a valuation allowance requires AIG to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.

    AIG's framework for assessing the recoverability of deferred tax assets weighs the sustainability of recent operating profitability, the predictability of future operating profitability of the character necessary to realize the deferred tax assets, and its emergence from cumulative losses in recent years. The framework requires AIG to consider all available evidence, including:

    AIG has had several favorable developments, including the completion of the Recapitalization in January 2011, the wind-down of AIGFP's portfolios, the sale of certain businesses, and its emergence from cumulative losses in recent years. AIG's U.S. consolidated income tax group, however, still needs to demonstrate sustainable operating profit. Based on the results of the third quarter of 2011, AIG's level of profitability in the fourth quarter of 2011 will be very important in demonstrating sustainable operating profit. AIG's ability to demonstrate sustainable operating profit, together with the recent emergence from cumulative losses as well as projections of sufficient future taxable income, would represent significant positive evidence. Depending on AIG's level of profitability and the characteristics of the deferred tax assets, it is possible that the valuation allowance could be released in large part in the fourth quarter of 2011, which would materially and favorably affect Net income and shareholders' equity in that period. At December 31, 2010, the valuation allowance for AIG's U.S. consolidated income tax group was $23.8 billion.


Tax Examinations and Litigation

    On March 29, 2011, the U.S. District Court, Southern District of New York, ruled on a motion for partial summary judgment that AIG filed on July 30, 2010 related to the disallowance of foreign tax credits associated with cross border financing transactions. The court denied AIG's motion with leave to renew following the completion of discovery regarding certain transactions referred to in AIG's motion, which AIG believes may be significant to the outcome of the action.


Accounting for Uncertainty in Income Taxes

    At September 30, 2011 and December 31, 2010, AIG's unrecognized tax benefits, excluding interest and penalties, were $4.5 billion and $5.3 billion, respectively. At September 30, 2011 and December 31, 2010, AIG's unrecognized tax benefits were $825 million and $1.7 billion, respectively, related to tax positions that if recognized would not affect the effective tax rate because they relate to the timing, rather than the permissibility, of the deduction. Accordingly, at September 30, 2011 and December 31, 2010, the amounts of unrecognized tax

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benefits that, if recognized, would favorably affect the effective tax rate were $3.7 billion and $3.6 billion, respectively.

    Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At September 30, 2011 and December 31, 2010, AIG accrued $857 million and $952 million, respectively, for the payment of interest (net of the federal benefit) and penalties. For the nine-month periods ended September 30, 2011 and 2010, AIG recognized $(58) million and $74 million, respectively, of income tax expense (benefit) for interest (net of the federal benefit) and penalties.

    Although it is reasonably possible that a change in the balance of unrecognized tax benefits may occur within the next twelve months, at this time it is not possible to estimate the range of the change due to the uncertainty of the potential outcomes.


15. Information Provided in Connection With Outstanding Debt

    The following condensed consolidating financial statements reflect the results of SunAmerica Financial Group, Inc. (SAFG, Inc.) formerly known as AIG Life Holdings (U.S.), Inc. (AIGLH), a holding company and a wholly owned subsidiary of AIG. AIG provides a full and unconditional guarantee of all outstanding debt of SAFG, Inc.

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Condensed Consolidating Balance Sheet

   
(in millions)
  American
International
Group, Inc.
(As Guarantor)

  SAFG, Inc.
  Other
Subsidiaries

  Reclassifications
and
Eliminations

  Consolidated
AIG

 
   

September 30, 2011

                               

Assets:

                               
   

Short-term investments

  $ 17,261   $ -   $ 17,142   $ (5,305 ) $ 29,098  
   

Other investments(a)

    6,597     -     480,385     (102,974 )   384,008  
   
 

Total investments

    23,858     -     497,527     (108,279 )   413,106  
 

Cash

    165     -     1,377     -     1,542  
 

Loans to subsidiaries(b)

    39,620     -     (39,620 )   -     -  
 

Debt issuance costs

    166     -     290     -     456  
 

Investment in consolidated subsidiaries(b)

    82,863     33,465     (2,652 )   (113,676 )   -  
 

Other assets, including current and deferred income taxes

    6,261     2,700     122,326     (2,134 )   129,153  
   

Total assets

  $ 152,933   $ 36,165   $ 579,248   $ (224,089 ) $ 544,257  
   

Liabilities:

                               
 

Insurance liabilities

  $ -   $ -   $ 286,242   $ (299 ) $ 285,943  
 

Other long-term debt

    38,358     1,638     138,725     (101,332 )   77,389  
 

Other liabilities, including intercompany balances(a)(c)

    15,437     3,381     75,219     (9,322 )   84,715  
 

Loans from subsidiaries(b)

    13,107     291     (13,398 )   -     -  
   

Total liabilities

    66,902     5,310     486,788     (110,953 )   448,047  
   

Redeemable noncontrolling interests (see Note 1):

                               

Nonvoting, callable, junior preferred interests held by Department of the Treasury

    -     -     -     9,303     9,303  

Other

    -     -     29     76     105  
   

Total redeemable noncontrolling interests

    -     -     29     9,379     9,408  
   

Total AIG shareholders' equity

    86,031     30,855     91,132     (121,987 )   86,031  

Other noncontrolling interests

    -     -     1,299     (528 )   771  
   

Total equity

    86,031     30,855     92,431     (122,515 )   86,802  
   

Total liabilities and equity

  $ 152,933   $ 36,165   $ 579,248   $ (224,089 ) $ 544,257  
   

December 31, 2010

                               

Assets:

                               
   

Short-term investments

  $ 5,602   $ -   $ 39,907   $ (1,771 ) $ 43,738  
   

Other investments(a)

    5,852     -     486,494     (125,672 )   366,674  
   
 

Total investments

    11,454     -     526,401     (127,443 )   410,412  
 

Cash

    49     -     1,509     -     1,558  
 

Loans to subsidiaries(b)

    61,630     -     (61,630 )   -     -  
 

Debt issuance costs, including prepaid commitment asset of $3,628

    3,838     -     241     -     4,079  
 

Investment in consolidated subsidiaries(b)

    93,511     33,354     (6,788 )   (120,077 )   -  
 

Other assets, including current and deferred income taxes

    7,852     2,717     150,157     (785 )   159,941  
 

Assets held for sale

    -     -     107,453     -     107,453  
   

Total assets

  $ 178,334   $ 36,071   $ 717,343   $ (248,305 ) $ 683,443  
   

Liabilities:

                               
 

Insurance liabilities

  $ -   $ -   $ 274,590   $ (237 ) $ 274,353  
 

Federal Reserve Bank of New York credit facility

    20,985     -     -     -     20,985  
 

Other long-term debt

    40,443     1,637     167,532     (124,136 )   85,476  
 

Other liabilities, including intercompany balances(a)(c)

    31,586     4,414     59,354     (3,710 )   91,644  
 

Loans from subsidiaries(b)

    1     379     (380 )   -     -  
 

Liabilities held for sale

    -     -     97,300     12     97,312  
   

Total liabilities

    93,015     6,430     598,396     (128,071 )   569,770  
   

Redeemable noncontrolling nonvoting, callable, junior preferred interests

    -     -     207     227     434  

Total AIG shareholders' equity

    85,319     29,641     117,641     (147,282 )   85,319  

Noncontrolling interests:

                               
 

Nonvoting, callable, junior and senior preferred interests held by Federal Reserve Bank of New York

    -     -     -     26,358     26,358  
 

Other

    -     -     1,099     463     1,562  
   

Total noncontrolling interests

    -     -     1,099     26,821     27,920  
   

Total equity

    85,319     29,641     118,740     (120,461 )   113,239  
   

Total liabilities and equity

  $ 178,334   $ 36,071   $ 717,343   $ (248,305 ) $ 683,443  
   
(a)
Includes intercompany derivative asset positions, which are reported at fair value before credit valuation adjustment.

(b)
Eliminated in consolidation.

(c)
For September 30, 2011 and December 31, 2010, includes intercompany tax payable of $9.9 billion and $28.1 billion, respectively, and intercompany derivative liabilities of $586 million and $150 million, respectively, for American International Group, Inc. (As Guarantor) and intercompany tax receivable of $108 million and $152 million, respectively, for SAFG, Inc.

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Condensed Consolidating Statement of Income (Loss)

   
(in millions)
  American
International
Group, Inc.
(As Guarantor)

  SAFG, Inc.
  Other
Subsidiaries

  Reclassifications
and
Eliminations

  Consolidated
AIG

 
   

Three Months Ended September 30, 2011

                               

Revenues:

                               
 

Equity in undistributed net income (loss) of consolidated subsidiaries(a)

  $ (3,436 ) $ (392 ) $ -   $ 3,828   $ -  
 

Dividend income from consolidated subsidiaries(a)

    775     -     -     (775 )   -  
 

Change in fair value of ML III

    (484 )   -     (447 )   -     (931 )
 

Other revenue(b)

    406     831     12,410     -     13,647  
   

Total revenues

    (2,739 )   439     11,963     3,053     12,716  
   

Expenses:

                               
 

Other interest expense

    712     64     169     -     945  
 

Other expense

    230     -     15,899     -     16,129  
   

Total expenses

    942     64     16,068     -     17,074  
   

Income (loss) from continuing operations before income tax expense (benefit)

    (3,681 )   375     (4,105 )   3,053     (4,358 )

Income tax expense (benefit)(c)

    223     (21 )   (836 )   -     (634 )
   

Income (loss) from continuing operations

    (3,904 )   396     (3,269 )   3,053     (3,724 )

Loss from discontinued operations

    (205 )   -     (16 )   -     (221 )
   

Net income (loss)

    (4,109 )   396     (3,285 )   3,053     (3,945 )

Less:

                               

Net income from continuing operations attributable to noncontrolling interests:

                               
   

Nonvoting, callable, junior and senior preferred interests

    -     -     -     145     145  
   

Other

    -     -     19     -     19  
   

Total income from continuing operations attributable to noncontrolling interests

    -     -     19     145     164  

Income (loss) from discontinued operations attributable to noncontrolling interests

    -     -     -     -     -  
   

Total net income attributable to noncontrolling interests

    -     -     19     145     164  
   

Net income (loss) attributable to AIG

  $ (4,109 ) $ 396   $ (3,304 ) $ 2,908   $ (4,109 )
   

Three Months Ended September 30, 2010

                               

Revenues:

                               
 

Equity in undistributed net income (loss) of consolidated subsidiaries(a)

  $ (1,688 ) $ 641   $ -   $ 1,047   $ -  
 

Dividend income from consolidated subsidiaries(a)

    523     -     -     (523 )   -  
 

Change in fair value of ML III

    -     -     301     -     301  
 

Other revenue(b)

    211     48     18,895     -     19,154  
   

Total revenues

    (954 )   689     19,196     524     19,455  
   

Expenses:

                               
 

Interest expense on FRBNY Credit Facility

    1,319     -     -     (20 )   1,299  
 

Other interest expense

    513     96     401     1     1,011  
 

Other expenses

    417     -     16,422     -     16,839  
   

Total expenses

    2,249     96     16,823     (19 )   19,149  
   

Income (loss) from continuing operations before income tax expense (benefit)

    (3,203 )   593     2,373     543     306  

Income tax expense (benefit)(c)

    (703 )   (15 )   1,204     -     486  
   

Income (loss) from continuing operations

    (2,500 )   608     1,169     543     (180 )

Loss from discontinued operations

    (17 )   -     (1,796 )   (20 )   (1,833 )
   

Net income (loss)

    (2,517 )   608     (627 )   523     (2,013 )

Less:

                               

Net income from continuing operations attributable to noncontrolling interests:

                               
   

Nonvoting, callable, junior and senior preferred interests

    -     -     -     388     388  
   

Other

    -     -     104     -     104  
   

Total income from continuing operations attributable to noncontrolling interests

    -     -     104     388     492  

Income from discontinued operations attributable to noncontrolling interests

    -     -     12     -     12  
   

Total net income attributable to noncontrolling interests

    -     -     116     388     504  
   

Net income (loss) attributable to AIG

  $ (2,517 ) $ 608   $ (743 ) $ 135   $ (2,517 )
   

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Condensed Consolidating Statement of Income (Loss) (Continued)

   
(in millions)
  American
International
Group, Inc.
(As Guarantor)

  SAFG, Inc.
  Other
Subsidiaries

  Reclassifications
and
Eliminations

  Consolidated
AIG

 
   

Nine Months Ended September 30, 2011

                               

Revenues:

                               
 

Equity in undistributed net income (loss) of consolidated subsidiaries(a)

  $ (2,652 ) $ 78   $ -   $ 2,574   $ -  
 

Dividend income from consolidated subsidiaries(a)

    5,199     -     -     (5,199 )   -  
 

Change in fair value of ML III

    (831 )   -     (23 )   -     (854 )
 

Other revenue(b)

    639     1,297     45,746     -     47,682  
   

Total revenues

    2,355     1,375     45,723     (2,625 )   46,828  
   

Expenses:

                               
 

Interest expense on FRBNY Credit Facility

    72     -     -     (2 )   70  
 

Other interest expense

    2,194     223     487     -     2,904  
 

Loss on extinguishment of debt

    3,331     -     61     -     3,392  
 

Other expense

    502     -     43,892     -     44,394  
   

Total expenses

    6,099     223     44,440     (2 )   50,760  
   

Income (loss) from continuing operations before income tax benefit

    (3,744 )   1,152     1,283     (2,623 )   (3,932 )

Income tax benefit(c)

    (810 )   (30 )   (282 )   -     (1,122 )
   

Income (loss) from continuing operations

    (2,934 )   1,182     1,565     (2,623 )   (2,810 )

Income (loss) from discontinued operations

    934     -     463     (2 )   1,395  
   

Net income (loss)

    (2,000 )   1,182     2,028     (2,625 )   (1,415 )

Less:

                               

Net income from continuing operations attributable to noncontrolling interests:

                               
   

Nonvoting, callable, junior and senior preferred interests

    -     -     -     538     538  
   

Other

    -     -     28     -     28  
   

Total income from continuing operations attributable to noncontrolling interests

    -     -     28     538     566  

Income from discontinued operations attributable to noncontrolling interests

    -     -     19     -     19  
   

Total net income attributable to noncontrolling interests

    -     -     47     538     585  
   

Net income (loss) attributable to AIG

  $ (2,000 ) $ 1,182   $ 1,981   $ (3,163 ) $ (2,000 )
   

Nine Months Ended September 30, 2010

                               

Revenues:

                               
 

Equity in undistributed net income (loss) of consolidated subsidiaries(a)

  $ (2,616 ) $ 1,120   $ -   $ 1,496   $ -  
 

Dividend income from consolidated subsidiaries(a)

    1,206     -     -     (1,206 )   -  
 

Change in fair value of ML III

    -     -     1,410     -     1,410  
 

Other revenue(b)

    2,130     148     52,636     -     54,914  
   

Total revenues

    720     1,268     54,046     290     56,324  
   

Expenses:

                               
 

Interest expense on FRBNY Credit Facility

    2,907     -     -     (61 )   2,846  
 

Other interest expense

    1,735     282     929     3     2,949  
 

Other expenses

    1,280     -     45,801     -     47,081  
   

Total expenses

    5,922     282     46,730     (58 )   52,876  
   

Income (loss) from continuing operations before income tax expense (benefit)

    (5,202 )   986     7,316     348     3,448  

Income tax expense (benefit)(c)

    (1,829 )   (42 )   2,915     -     1,044  
   

Income (loss) from continuing operations

    (3,373 )   1,028     4,401     348     2,404  

Loss from discontinued operations

    (17 )   -     (4,023 )   (61 )   (4,101 )
   

Net income (loss)

    (3,390 )   1,028     378     287     (1,697 )

Less:

                               

Net income from continuing operations attributable to noncontrolling interests:

                               
   

Nonvoting, callable, junior and senior preferred interests

    -     -     -     1,415     1,415  
   

Other

    -     -     243     -     243  
   

Total income from continuing operations attributable to noncontrolling interests

    -     -     243     1,415     1,658  

Income from discontinued operations attributable to noncontrolling interests

    -     -     35     -     35  
   

Total net income attributable to noncontrolling interests

    -     -     278     1,415     1,693  
   

Net income (loss) attributable to AIG

  $ (3,390 ) $ 1,028   $ 100   $ (1,128 ) $ (3,390 )
   
(a)
Eliminated in consolidation.

(b)
Includes interest income of $90 million and $840 million for the three-month periods ended September 30, 2011 and 2010, respectively, and $484 million and $2.5 billion for the nine-month periods ended September 30, 2011 and 2010, respectively, for American International Group, Inc. (As Guarantor).

(c)
Income taxes recorded by American International Group, Inc. (As Guarantor) include deferred tax expense attributable to foreign businesses sold and a valuation allowance to reduce the consolidated deferred tax asset to the amount more likely than not to be realized. See Note 14 herein for additional information.

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Condensed Consolidating Statement of Cash Flows

   
(in millions)
  American
International
Group, Inc.
(As Guarantor)

  SAFG, Inc.
  Other
Subsidiaries
and
Eliminations

  Consolidated
AIG

 
   

Nine Months Ended September 30, 2011

                         

Net cash (used in) provided by operating activities – continuing operations

  $ (4,473 ) $ 1,033   $ (1,013 ) $ (4,453 )

Net cash (used in) provided by operating activities – discontinued operations

    -     -     3,370     3,370  
   

Net cash (used in) provided by operating activities

    (4,473 )   1,033     2,357     (1,083 )
   

Cash flows from investing activities:

                         
 

Sales of investments

    2,425     -     63,818     66,243  
 

Sales of divested businesses, net

    1,075     -     (488 )   587  
 

Purchase of investments

    (8 )   -     (77,636 )   (77,644 )
 

Loans to subsidiaries – net

    4,031     -     (4,031 )   -  
 

Contributions to subsidiaries – net*

    (16,878 )   -     16,878     -  
 

Net change in restricted cash

    2,001     -     24,407     26,408  
 

Net change in short-term investments

    (9,892 )   -     25,302     15,410  
 

Other, net*

    1,165     -     (619 )   546  
   

Net cash (used in) provided by investing activities – continuing operations

    (16,081 )   -     47,631     31,550  

Net cash (used in) provided by investing activities – discontinued operations

    -     -     4,478     4,478  
   

Net cash (used in) provided by investing activities

    (16,081 )   -     52,109     36,028  
   

Cash flows from financing activities:

                         
 

Federal Reserve Bank of New York credit facility repayments

    (14,622 )   -     -     (14,622 )
 

Issuance of other long-term debt

    2,135     -     4,162     6,297  
 

Repayments on other long-term debt

    (4,450 )   -     (10,494 )   (14,944 )
 

Drawdown on the Department of the Treasury Commitment*

    20,292     -     -     20,292  
 

Issuance of Common Stock

    5,055     -     -     5,055  
 

Intercompany loans – net

    12,408     (1,033 )   (11,375 )   -  
 

Other, net*

    (148 )   -     (35,432 )   (35,580 )
   

Net cash (used in) provided by financing activities – continuing operations

    20,670     (1,033 )   (53,139 )   (33,502 )

Net cash (used in) provided by financing activities – discontinued operations

    -     -     (1,942 )   (1,942 )
   

Net cash (used in) provided by financing activities

    20,670     (1,033 )   (55,081 )   (35,444 )

Effect of exchange rate changes on cash

    -     -     37     37  
   

Change in cash

    116     -     (578 )   (462 )

Cash at beginning of period

    49     -     1,509     1,558  

Change in cash of businesses held for sale

    -     -     446     446  
   

Cash at end of period

  $ 165   $ -   $ 1,377   $ 1,542  
   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Condensed Consolidating Statement of Cash Flows (Continued)

   
(in millions)
  American
International
Group, Inc.
(As Guarantor)

  SAFG, Inc.
  Other
Subsidiaries
and
Eliminations

  Consolidated
AIG

 
   

Nine Months Ended September 30, 2010

                         

Net cash (used in) provided by operating activities – continuing operations

  $ (345 ) $ (178 ) $ 9,492   $ 8,969  

Net cash (used in) provided by operating activities – discontinued operations

    -     -     6,146     6,146  
   

Net cash (used in) provided by operating activities

    (345 )   (178 )   15,638     15,115  
   

Cash flows from investing activities:

                         
 

Sales of investments

    1,523     -     59,491     61,014  
 

Sales of divested businesses, net

    278     -     1,625     1,903  
 

Purchase of investments

    (52 )   -     (71,563 )   (71,615 )
 

Loans to subsidiaries – net

    2,381     -     (2,381 )   -  
 

Contributions to subsidiaries – net

    (2,590 )   -     2,590     -  
 

Net change in restricted cash

    (237 )   -     (102 )   (339 )
 

Net change in short-term investments

    (465 )   -     5,453     4,988  
 

Other, net

    (70 )   -     (144 )   (214 )
   

Net cash (used in) provided by investing activities – continuing operations

    768     -     (5,031 )   (4,263 )

Net cash (used in) provided by investing activities – discontinued operations

    -     -     (3,264 )   (3,264 )
   

Net cash (used in) provided by investing activities

    768     -     (8,295 )   (7,527 )
   

Cash flows from financing activities:

                         
 

Federal Reserve Bank of New York credit facility borrowings

    14,900     -     -     14,900  
 

Federal Reserve Bank of New York credit facility repayments

    (14,444 )   -     (4,068 )   (18,512 )
 

Issuance of other long-term debt

    -     -     9,683     9,683  
 

Repayments on other long-term debt

    (2,389 )   (500 )   (7,592 )   (10,481 )
 

Proceeds from drawdown on the Department of the Treasury Commitment

    2,199     -     -     2,199  
 

Repayment of Department of the Treasury SPV Preferred Interests

                         
 

Repayment of Federal Reserve Bank of New York SPV Preferred Interests

                         
 

Issuance of Common Stock

                         
 

Acquisition of noncontrolling interest

                         
 

Intercompany loans – net

    (670 )   676     (6 )   -  
 

Other, net

    (3 )   -     (2,629 )   (2,632 )
   

Net cash (used in) provided by financing activities – continuing operations

    (407 )   176     (4,612 )   (4,843 )

Net cash (used in) provided by financing activities – discontinued operations

    -     -     (3,929 )   (3,929 )
   

Net cash (used in) provided by financing activities

    (407 )   176     (8,541 )   (8,772 )
   

Effect of exchange rate changes on cash

    -     -     (4 )   (4 )
   

Change in cash

    16     (2 )   (1,202 )   (1,188 )

Cash at beginning of period

    57     2     4,341     4,400  

Change in cash of businesses held for sale

    -     -     (1,544 )   (1,544 )
   

Cash at end of period

  $ 73   $ -   $ 1,595   $ 1,668  
   
*
Includes activities related to the Recapitalization. See Note 12 herein.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Supplementary disclosure of cash flow information:

   
 
  American
International
Group, Inc.
(As Guarantor)

  SAFG, Inc.
  Other
Subsidiaries
and
Eliminations

  Consolidated
AIG

 
   

Cash (paid) received during the nine months ended September 30, 2011 for:

                         

Interest:

                         
 

Third party*

  $ (6,337 ) $ (96 ) $ (1,519 ) $ (7,952 )
 

Intercompany

    (258 )   (127 )   385     -  

Taxes:

                         
 

Income tax authorities

  $ 13   $ -   $ (656 ) $ (643 )
 

Intercompany

    (793 )   -     793     -  
   

Cash (paid) received during the nine months ended September 30, 2010 for:

                         

Interest:

                         
 

Third party

  $ (1,856 ) $ (146 ) $ (1,976 ) $ (3,978 )
 

Intercompany

    (1 )   (170 )   171     -  

Taxes:

                         
 

Income tax authorities

  $ (30 ) $ -   $ (1,104 ) $ (1,134 )
 

Intercompany

    736     -     (736 )   -  
   
*
Includes payment of FRBNY Credit Facility accrued compounded interest of $4.7 billion in the first quarter of 2011.

American International Group, Inc. (As Guarantor) supplementary disclosure of non-cash activities:

   
Nine Months Ended September 30,
(in millions)
  2011
  2010
 
   

Intercompany non-cash financing and investing activities:

             
 

Temporary paydown of FRBNY Credit Facility by subsidiary

  $ -   $ 4,068  
 

Return of capital and dividend received in the form of bond trading securities

    3,668     -  
 

Capital contributions to subsidiaries through forgiveness of loans

    -     2,200  
 

Intercompany loan receivable offset by intercompany payable

    18,284     -  
 

Intercompany loan settled through note assignment

    -     214  
 

Note received offset by intercompany payable

    -     25  
 

Loan receivable offset by intercompany payable

    -     460  
 

Other capital contributions – net

    412     68  
   

16. Subsequent Events

October 2011 Syndicated Credit and Contingent Liquidity Facilities

    On October 12, 2011, the previously outstanding AIG 364-Day Syndicated Facility, AIG 3-Year Syndicated Facility and Chartis letter of credit facility were terminated upon AIG entering into a $1.5 billion 364-Day Syndicated Facility and a $3.0 billion 4-Year Syndicated Facility. The new 4-Year Syndicated Facility provides for $1.5 billion of revolving loans and includes a $1.5 billion letter of credit sublimit. The $1.3 billion of previously issued letters of credit under the Chartis letter of credit facility were rolled into the letter of credit sublimit within the 4-Year Syndicated Facility, so that a total of $1.7 billion remains available under this facility, of which $0.2 billion is available for letters of credit. AIG expects that it may draw down on these facilities from time to time, and may use the proceeds for general corporate purposes.

    In October 2011, AIG entered into an additional contingent liquidity facility. Under this facility, AIG has the right, for a period of one year, to enter into put option agreements, with an aggregate notional amount of up to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


$500 million, with an unaffiliated international financial institution pursuant to which AIG has the right, for a period of five years, to issue up to $500 million in senior debt to the financial institution, at AIG's discretion.

October 2011 Exchange Offer

    On October 24, 2011, AIG commenced an unregistered offer to exchange its new Dollar Notes due November 15, 2037 (the New Dollar Notes) for its outstanding Series A-1 and Series A-6 Junior Subordinated Debentures, its new Euro Notes due November 15, 2017 (the New Euro Notes) for its outstanding Series A-3 Junior Subordinated Debentures and its new Sterling Notes due November 15, 2017 (the New Sterling Notes) for its outstanding Series A-2 and Series A-8 Junior Subordinated Debentures. The interest rates of the New Dollar Notes, New Euro Notes and New Sterling Notes have not been established, but will not exceed 7.35 percent, 7.35 percent and 7.25 percent per annum, respectively. The maximum aggregate principal amount of those junior subordinated debentures to be accepted in the exchange offer (converted, in the case of junior subordinated debentures denominated in Euro or Pounds Sterling, into Dollars at exchange rates of €1=$1.4319 and £1=$1.6510) is $2.5 billion, which maximum AIG reserves the right to increase, subject to applicable law. The offer has an early participation date of November 8, 2011 and an expiration date of November 22, 2011, unless extended by AIG. The early settlement date is expected to be November 15, 2011, and the final settlement date is expected to be November 23, 2011. The exchange offer is subject to certain conditions and AIG has reserved the right, subject to applicable law, to amend the terms of the exchange offer (including by increasing the maximum amount to be accepted) or to terminate the exchange offer. No assurance can be given that the exchange offer will be completed or, if completed, what the final terms of the exchange offer would be. The new notes to be issued in the exchange offer will be senior unsecured obligations of AIG.

ALICO Escrow Release

    On November 1, 2011, in accordance with the MetLife escrow agreement from the sale of ALICO, approximately $918 million was released to AIG. These proceeds were applied to pay down a portion of the liquidation preference of the Department of the Treasury's AIA SPV Preferred Interests. See Note 11 herein.

SAFG Litigation Settlement Proceeds

    In two separate agreements, SAFG Retirement Services, Inc., formerly known as AIG Retirement Services, Inc. (SAFG) has agreed to resolve all its remaining claims in the matter titled AIG Retirement Services, Inc. v. Altus Finance S.A. et al, pending in the Central District Court of California. In this lawsuit SAFG sought damages in connection with an acquisition in 1993 of 33 percent of the stock of New California Life Holdings, Inc. (NCLH), which owns the stock of Aurora National Life Insurance Company. SAFG alleged that the defendants wrongfully prevented it from acquiring all the stock of NCLH. Pursuant to the agreements, SAFG will record $213 million of income upon receipt of the settlement in the fourth quarter of 2011.

Common Stock Repurchase Authorization

    On November 3, 2011, the AIG Board of Directors authorized the repurchase of shares of AIG Common Stock with an aggregate purchase price of up to $1 billion from time to time in the open market, through derivative or automatic purchase contracts or otherwise. The timing of such purchases will depend on market conditions, AIG's financial condition, results of operations, liquidity and other factors.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Information

    This Quarterly Report on Form 10-Q and other publicly available documents may include, and officers and representatives of American International Group, Inc. (AIG) may from time to time make, projections, goals, assumptions and statements that may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These projections, goals, assumptions and statements are not historical facts but instead represent only AIG's belief regarding future events, many of which, by their nature, are inherently uncertain and outside AIG's control. These projections, goals, assumptions and statements include statements preceded by, followed by or including words such as "believe", anticipate", "expect", "intend", "plan", "view", "target" or "estimate". These projections, goals, assumptions and statements may address, among other things:

    It is possible that AIG's actual results and financial condition will differ, possibly materially, from the results and financial condition indicated in these projections, goals, assumptions and aspirational statements. Factors that could cause AIG's actual results to differ, possibly materially, from those in the specific projections, goals, assumptions and statements include:

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    AIG is not under any obligation and expressly disclaims any obligation to update or alter any projections, goals, assumptions or other statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise. Unless the context otherwise requires, the term "AIG" means AIG and its consolidated subsidiaries.

Use of Non-GAAP Measures

    Throughout this MD&A, AIG presents its operations in the way it believes will be most meaningful and representative of ongoing operations as well as most transparent. Certain of the measurements used by AIG management are "non-GAAP financial measures" under Securities and Exchange Commission (SEC) rules and regulations.

    AIG analyzes the operating performance of Chartis using underwriting profit (loss). Operating income (loss), which is before net realized capital gains (losses) and related deferred policy acquisition costs (DAC) and sales inducement asset (SIA) amortization and goodwill impairment charges, is utilized to report results for SunAmerica Financial Group (SunAmerica) operations. Management believes that these measures enhance the understanding of the underlying profitability of the ongoing operations of these businesses and allow for more meaningful comparisons with AIG's insurance competitors. Reconciliations of these measures to the most directly comparable measurement derived from accounting principles generally accepted in the United States (GAAP), pre-tax income, are included in Results of Operations.

Executive Overview

    This executive overview of management's discussion and analysis highlights selected information and may not contain all of the information that is important to readers of AIG's financial statements. This Quarterly Report on Form 10-Q should be read in its entirety, together with AIG's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, AIG's 2011 First Quarter Form 10-Q and AIG's 2010 Annual Report on Form 10-K, for a complete description of events, trends and uncertainties as well as the capital, liquidity, credit, operational and market risks and the critical accounting estimates affecting AIG and its subsidiaries.

    In order to align financial reporting with changes made during 2011 to the manner in which AIG's chief operating decision makers review the businesses to make decisions about resources to be allocated and to assess performance, changes were made to AIG's segment information. See Note 3 to the Consolidated Financial Statements for additional information. AIG now reports the results of its operations as follows:

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    Prior periods have been revised to conform to the current period presentation for the segment changes.

Financial Overview

    AIG's loss from continuing operations before income taxes was $4.4 billion for the three months ended September 30, 2011 compared to income of $0.3 billion for the same period in 2010 primarily driven by the following:

    Partially offsetting these declines was lower interest expense of $1.4 billion primarily resulting from the January 2011 repayment of the Credit Agreement, dated as of September 22, 2008 (as amended, the Federal Reserve Bank of New York (FRBNY) Credit Facility) and net realized capital gains in the 2011 period compared to net realized capital losses in 2010.

    In the first nine months of 2011, income from continuing operations before income taxes decreased $7.4 billion compared to the same period in 2010 and reflected the following:

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    Partially offsetting these declines were lower interest expense of $2.8 billion and a reduction in realized capital losses in 2011 compared to 2010.

    In the first nine months of 2011, AIG recorded income from discontinued operations net of taxes, of $1.4 billion, which included a pre-tax gain of $2.0 billion recorded in the first quarter of 2011 on the sale of AIG Star Life Insurance Co., Ltd. (AIG Star) and AIG Edison Life Insurance Company (AIG Edison) compared to a net loss of $4.1 billion in the same period in 2010, which included a goodwill impairment charge of $3.3 billion associated with the sale of ALICO.

    See Results of Operations — Consolidated Results and Segment Results for further discussion.

Restructuring Activity Overview

    AIG substantially completed its recapitalization plan (the Recapitalization) and its asset disposition plan with the following significant milestones in 2011:

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    See Notes 1, 4 and 12 to the Consolidated Financial Statements for additional information.

Other Developments

    On May 27, 2011, AIG and the Department of the Treasury, as the selling shareholder, completed a registered public offering of AIG Common Stock. AIG issued and sold 100 million shares of AIG Common Stock for aggregate net proceeds of approximately $2.9 billion and the Department of the Treasury sold 200 million shares of AIG Common Stock. AIG did not receive any of the proceeds from the sale of the shares of AIG Common Stock by the Department of the Treasury. A portion of the net proceeds AIG received from this offering, $550 million, is being used to fund a litigation settlement, and AIG intends to use the balance of the net proceeds for general corporate purposes.

    On June 17, 2011, Chartis completed a transaction with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc., under which the majority of Chartis' domestic asbestos liabilities were transferred to NICO. At the closing of this transaction, but effective as of January 1, 2011, Chartis ceded the bulk of its net asbestos liabilities to NICO under a retroactive reinsurance agreement with an aggregate limit of $3.5 billion. Chartis paid NICO approximately $1.67 billion as consideration for this cession and NICO assumed approximately $1.82 billion of net asbestos liabilities. As a result of this transaction, Chartis recorded a deferred gain of $150 million in the second quarter of 2011, which is being amortized into the Chartis results of operations over the settlement period of the underlying claims.

    On September 13, 2011, AIG received approximately $2.0 billion in proceeds from the issuance of senior unsecured notes. AIG expects to use the proceeds from the sale of these notes to pay maturing notes that were issued by AIG to fund the Matched Investment Program (MIP).

    On October 12, 2011, the previously outstanding AIG 364-Day Syndicated Facility, AIG 3-Year Syndicated Facility and Chartis letter of credit facility were terminated upon AIG entering into a $1.5 billion 364-Day Syndicated Facility and a $3.0 billion 4-Year Syndicated Facility. The new 4-Year Syndicated Facility provides for $1.5 billion of revolving loans and includes a $1.5 billion letter of credit sublimit. The $1.3 billion of previously issued letters of credit under the Chartis letter of credit facility were rolled into the letter of credit sublimit within the 4-Year Syndicated Facility, so that a total of $1.7 billion remains available under this facility, of which $0.2 billion is available for letters of credit. AIG expects that it may draw down on these facilities from time to time and may use the proceeds for general corporate purposes.

    See Capital Resources and Liquidity herein and Note 1 to the Consolidated Financial Statements for additional information on these transactions.

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Outlook

Priorities for 2011 and Beyond

    AIG is focused on the following priorities for the remainder of 2011 and beyond:

Chartis

    Given the recent global economic environment and current property and casualty market conditions, the remainder of 2011 and the first part of 2012 are expected to remain challenging, but improving trends in certain key indicators may offset some of the challenges. The weakness of ratable exposures (i.e., asset values, payrolls, and sales) experienced in 2009 and 2010 and its negative impact on the overall market premium base, as well as continued weakness in commercial insurance rates, were initially expected to continue through 2011. However, in the first nine months of 2011, Chartis has observed that the extent of ratable exposure weakness in the United States is beginning to abate. In addition, beginning in the second quarter of 2011 and continuing through the third quarter of 2011, Chartis has observed continuing positive pricing trends, particularly in its U.S. commercial business, for the first time since 2009. In certain growth economies such as Brazil, Turkey, India, and Asia Pacific countries, Chartis continues to expect improved growth.

Strategy

    Chartis continues to execute its strategy to grow its higher margin and less capital intensive lines of business, and to implement corrective actions on underperforming businesses. Management continues to review its underlying businesses to ensure that they meet overall performance measures, while seeking to reduce overall volatility.

    In 2011, Chartis determined that it would no longer write Excess Workers' Compensation business as an unsupported, stand-alone product. However, given its commitments to certain insureds to allow them to move their business to other insurance providers in an orderly manner, Chartis will continue to report modest net premium written activity over the next 12 months. Excess Workers' Compensation is also subject to premium audits (upon the expiration of underlying policies), and as a result premium audit activity is expected to continue through subsequent years.

    Additionally, during the third quarter of 2011, Chartis began to restructure renewals of certain Commercial Casualty loss sensitive programs from a retrospectively rated premium structure to a loss reimbursement deductible structure. The deductible structure reduces net premiums written and limits the variability around individual insured premium and claim adjustments when compared to retrospectively rated programs. This overall reduction in the premium and claims adjustment variability creates a corresponding reduction in the required capital needed to support this business. Management expects similar levels of declining net premium written trends in this class of business to continue through the second quarter of 2012.

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    The effect of these initiatives decreased net written premiums in the third quarter of 2011 by approximately $323 million. However, given the capital-intensive nature of these classes of business, Chartis expects that over time, these actions will improve its overall return on equity and cost of capital efficiency metrics.

    As discussed above, in 2011 Commercial Insurance has continued to experience a decrease in its net premiums written as it executes strategies to restructure certain loss-sensitive programs. To meet its profitability objectives, Commercial Insurance is focused on growing higher margin classes of business, including Financial Lines and Specialty coverages, such as Aerospace, and it is growing its business in regions of opportunity. Commercial Insurance is leveraging its significant geographic footprint and multinational capabilities to serve large and mid-sized businesses with cross-border operations. Chartis is also expanding its presence in the Growth Economies region (which primarily includes Asia Pacific, the Middle East and Latin America) to increase Financial, Casualty and Specialty lines of business, and given its new global organizational design, more effectively leverage underwriting and product best practices to enhance customer and channel management. In the U.S./Canada and Europe regions, Commercial Insurance expects to improve the quality of its portfolio. In the Far East region, management expects to leverage the additional distribution and customer base acquired in connection with the purchase of Fuji.

    Consumer Insurance expects continued growth in net premiums written in 2011 and 2012 as a result of its well-established franchises and operations, existing growth strategies in multiple distribution channels and its focus on countries in the Growth Economies region. By implementing selective pricing, underwriting and distribution strategies, net premiums written are expected to grow without increasing Chartis' overall catastrophe exposure. In the U.S. and Canada region, management has focused on expanding the Personal Lines business, such as coverages for the Private Client Group, which target high net worth and affluent customers. In the Far East region, management will continue to integrate Fuji operationally and benefit from the full-year effect of rate increases. In the Europe region, management has focused on maintaining pricing discipline and has observed modest growth. Consumer Insurance continues to grow steadily in the Growth Economies region across all lines of business as a result of growth in the gross domestic product of countries within this region and management's focused execution.

    Consumer Insurance generally carries higher acquisition costs than Commercial Insurance, and as a result, Chartis expects an overall increase in its expense ratio in 2011 and 2012 due to the change in the mix of business between Commercial Insurance and Consumer Insurance. Further, investment in the Growth Economies region is also expected to increase expenses in 2012. However, increases in these expenses are expected to generate business with favorable combined ratios and return on equity measures.

Catastrophes

    Thailand has suffered catastrophic flooding at the beginning of the fourth quarter of 2011 for which Chartis expects claims to be reported in the coming quarter. Chartis is currently analyzing its exposures and as of October 31, 2011 cannot yet quantify liabilities that may result from these events.

Asbestos Liabilities

    As part of Chartis' ongoing strategy to reduce its overall loss reserve development risk, on June 17, 2011, but with retroactive effect to January 1, 2011, Chartis completed a transaction with NICO, a subsidiary of Berkshire Hathaway, Inc., under which the bulk of Chartis' domestic asbestos liabilities were transferred to NICO. The transaction with NICO covers potentially volatile U.S.-related asbestos exposures. The transaction does not cover asbestos accounts that Chartis believes have already been reserved to their limit of liability or certain other ancillary asbestos exposure assumed by Chartis subsidiaries. The transfer was effected under a reinsurance agreement with an aggregate limit of $3.5 billion. Chartis paid NICO approximately $1.67 billion as consideration for this cession and NICO assumed approximately $1.82 billion of net asbestos liabilities. In connection with this transaction, Chartis recorded a deferred gain of $150 million in the second quarter of 2011, which is being amortized into the Chartis results of operations over the settlement period of the underlying claims.

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    Under GAAP, any future loss development on this retroactive reinsurance agreement will be reported in the period recognized through the results of operations. The corresponding recovery from NICO will be deferred, and consistent with the original deferred gain, amortized into the results of operations over the settlement period of the underlying claims.

Investments

    Consistent with AIG's worldwide insurance investment policy, Chartis places primary emphasis on investments in fixed maturity securities issued by corporations, municipalities and other governmental agencies, and to a lesser extent, common stocks, real estate hedge funds and other alternative investments.

    Domestically, fixed maturity securities held by the insurance companies included in Chartis historically have consisted primarily of tax-exempt municipal bonds, which provided attractive after-tax returns and limited credit risk. In order to better optimize its overall investment portfolio, including risk-return and tax objectives of Chartis, the domestic property and casualty companies have begun to shift investment allocations away from tax-exempt municipal bonds towards taxable instruments which meet the companies' liquidity, duration and credit quality objectives as well as current risk-return and tax objectives.

    Chartis makes determinations of other-than-temporary impairments based on the fundamental credit analyses of individual securities. For the Chartis other invested asset classes, more specifically life settlements contracts, impairments are evaluated on a contract-by-contract basis. During the second quarter of 2011, Chartis implemented an enhanced process in which updated medical information on individual insured lives is requested on a routine basis. In cases where updated information indicates that an individual's health has improved, an impairment loss may arise as a result of revised estimates of net cash flows from the related contract. Chartis also revised its valuation table, which it is using in estimating future net cash flows. This had the general effect of decreasing the projected net cash flows on a number of contracts. These changes resulted in an increase in the number of life settlement contracts identified as potentially impaired compared to previous analyses. As the overall book of business continues to mature and new medical information continues to become available regarding insureds, updated life expectancy assumptions may result in an increase in impairments relating to these assets. At September 30, 2011, Chartis held 5,998 life settlement contracts, included in Other invested assets, with a carrying value of $4.1 billion and a face value of $19.1 billion.

    Recently, a number of courts have addressed various life settlement related issues in their decisions. Chartis does not expect that the rulings in those cases will have a significant effect on its investment in life settlement contracts.

    In October 2010, the Financial Accounting Standards Board (FASB) issued an accounting standard update that amends the accounting for costs incurred by insurance companies that can be capitalized in connection with acquiring or renewing insurance contracts. The accounting standard update will result in a decrease in the amount of capitalized costs in connection with the acquisition or renewal of insurance contracts because AIG will only defer costs that are incremental and directly related to the successful acquisition of new or renewal business. AIG is currently assessing the effect of adoption of this new standard on its consolidated financial condition, results of operations and cash flows. See Note 2 to the Consolidated Financial Statements.

SunAmerica

    SunAmerica continues to pursue its goals of expanding the breadth and depth of its distribution relationships, introducing competitive new products and product riders, repositioning its excess cash and liquidity, maintaining a strong statutory surplus, pro-actively managing expenses and, subject to regulatory approval, increasing dividends paid to AIG Parent. SunAmerica made progress on all of these efforts during the first nine months of 2011, and expects this progress to continue for the remainder of the year.

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Annuities

    SunAmerica experienced an increase in its variable annuity sales as various distribution partners have resumed sales of SunAmerica's products during 2010 and 2011. SunAmerica's largest pre-financial-crisis variable annuity distribution partner resumed distribution of SunAmerica's products in mid-2011. As a result of broader distribution opportunities, SunAmerica expects variable annuity sales to continue to improve over 2010 levels.

    After a period of historic lows, interest rates generally increased at the longer part of the yield curve during the latter part of 2010 and through the first three months of 2011 before declining significantly in the third quarter of 2011. Changes in the interest rate environment affect the relative attractiveness of fixed annuities compared to alternative products. As a result, SunAmerica's fixed annuity sales declined sequentially from the second quarter of 2011. If the low interest rate environment continues, SunAmerica expects fixed annuities sales to decline from the levels experienced in the first six months of 2011.

Life Insurance

    SunAmerica's life insurance business continues to deepen its relationships with its retail independent distributors and expects new life insurance sales to continue to grow at or above industry averages. Additionally, the direct-to-consumer channel has proven to be a highly effective method for consumers to acquire certain types of less complex products. The direct platform provides opportunities to bring innovative product solutions to the market that take advantage of underwriting technologies. Career distribution is focused on agent retention and improving productivity.

Investments

    SunAmerica built up a large cash and short-term investment position in the first quarter of 2011 with the intention of purchasing all the assets in the ML II portfolio. With the FRBNY's decision in early 2011 to sell the MLII assets through a competitive sales process, SunAmerica began acquiring other fixed maturity investments, including certain securities from ML II. Beginning late in the first quarter of 2011, SunAmerica started investing its excess cash and liquid assets in longer-term higher-yielding securities to improve spreads, while actively managing credit and liquidity risks. SunAmerica made substantial progress commencing in the latter part of the first quarter of 2011 in reducing its cash and short-term investment position from $19.4 billion at December 31, 2010 to $3.8 billion at September 30, 2011.

    During 2011, SunAmerica sold approximately $9.6 billion of investments in order to support statutory capital and to generate capital gains to partially preserve the recoverability of the deferred tax assets relating to capital losses and reinvested the proceeds at generally lower rates. Additionally, during prolonged periods of low or declining interest rates, SunAmerica has to re-invest interest and principal payments from its investment portfolios in lower yielding securities. SunAmerica's annuity and universal life products have minimum guaranteed interest rates and other contractual provisions that allow crediting rates to be reset at pre-established intervals. As a result, continuation of the current low interest rate environment will put pressure on SunAmerica's interest spreads which may reduce future profitability. SunAmerica mitigates this risk through its asset-liability management process, product design elements, and crediting rate strategies. As indicated in the table below, approximately 41 percent of SunAmerica's annuity and universal life account values are currently at their minimum crediting rates as of September 30, 2011. Currently, these products have minimum guaranteed interest rates ranging from 1.0 percent to 5.5 percent with the higher rates representing older product designs.

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The following table presents account values and current crediting rates for SunAmerica's universal life product and fixed annuities:

   
September 30, 2011
  Current Crediting Rates  
(in millions)
  At Contractual
Minimum Guarantee

  1-50 Basis Points
Above Minimum
Guarantee

  More than 50 Basis
Points Above
Minimum Guarantee

  Total
 
   

Universal life insurance

  $ 4,004   $ 2,850   $ 3,475   $ 10,329  

Fixed annuities

    38,484     17,815     36,087     92,386  
   

Total

  $ 42,488   $ 20,665   $ 39,562   $ 102,715  
   

Percentage of total

    41 %   20 %   39 %   100 %
   

    In applying the equity method of accounting for SunAmerica's partnership investments, AIG consistently uses the most recently available financial information provided by the general partner or manager of each of these investments, which reports have historically been received one to three months prior to the end of AIG's reporting period. The equity markets in general incurred significant negative returns in the third quarter of 2011. Due to this lag in reporting, actual partnership results from the third quarter of 2011 for certain partnerships will be reported in AIG's fourth quarter 2011 operating results as financial data becomes available and are generally expected to reflect such negative returns.

    AIG is currently assessing the effect of adoption of the new standard that amends the accounting for costs incurred by insurance companies that can be capitalized in connection with acquiring or renewing insurance contracts on its consolidated financial condition and results of operations. See Note 2 to the Consolidated Financial Statements.

Aircraft Leasing

    ILFC continues to execute on its strategy to manage its fleet of aircraft by ordering new aircraft with high customer demand and through potential sales or part-outs of its older aircraft which cannot be economically leased to customers. As new and more fuel efficient aircraft enter the marketplace and negatively affect the demand for older aircraft, lease rates on older aircraft may deteriorate and ILFC may incur additional losses on sales or record impairment charges and fair value adjustments.

    On September 2, 2011, ILFC Holdings filed a registration statement on Form S-1 with the SEC for a proposed initial public offering. The number of shares to be offered, price range and timing for any offering have not been determined. The timing of any offering will depend on market conditions and no assurance can be given regarding terms or that any offering will be completed.

    On October 7, 2011, ILFC completed the acquisition of all the issued and outstanding shares of capital stock of AeroTurbine, Inc. (AeroTurbine) from AerCap, Inc. for an aggregate cash purchase price of $228 million. AeroTurbine is one of the world's largest providers of certified aircraft engines, aircraft and engine parts and supply chain solutions. In connection with the acquisition, ILFC also agreed to guarantee AeroTurbine's $425 million secured revolving credit facility, which had $269 million outstanding as of November 1, 2011 and matures on December 14, 2011.

Other Operations

Mortgage Guaranty

    UGC has continued to improve its new book of business through differentiated pricing and improved underwriting practices. In older books of business, primarily the 2005 to 2008 books, newly reported delinquencies continued to decline while increased claims severity and overturns on previously denied claims unfavorably affected results. UGC continued to deny claims and rescind coverage on loans (collectively referred to as rescissions) related to fraudulent or undocumented claims, underwriting guideline violations and other deviations

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from contractual terms, mostly with respect to the 2006 and 2007 vintage books of business. These policy violations resulted in loan rescissions totaling $584 million of claims on first-lien business during the first nine months of 2011 compared to $515 million during the same period in 2010. Although rescissions will continue to have a positive effect on UGC's financial results, higher levels of appeals and overturns resulting from additional resources deployed by lenders and mortgage servicers to address loan documentation issues have unfavorably affected results. While these items may increase volatility in the future, AIG believes it has provided appropriate reserves for currently delinquent loans after consideration of rescissions and overturns, consistent with industry practice.

    Foreclosure moratoriums as a result of state attorneys general investigations into lenders' foreclosure practices and new financial regulations initiated in 2010 have slowed the reporting of claims from foreclosures. UGC's assumptions regarding future foreclosures on current delinquencies take into consideration this trend. UGC expects that this trend may continue and may negatively affect UGC's future financial results. Final resolution of these issues is uncertain and UGC cannot reasonably estimate the ultimate financial impact that any resolution, individually or collectively may have on its future results of operations or financial condition.

    In March 2011, federal regulators, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), issued a proposed risk retention rule that included a definition of a Qualified Residential Mortgage (QRM) whereby a maximum loan-to-value ratio (LTV) of 80 percent would be required for a home purchase transaction. The LTV is calculated without imputing any benefit from private mortgage insurance coverage that may be purchased for that loan. The final regulations could adversely impact UGC's volume of domestic first-lien new insurance written, depending on the final definition of a QRM, the maximum LTV allowed and the benefit, if any, ascribed to private mortgage insurance.

Global Capital Markets

    The active wind-down of the AIGFP derivatives portfolio was completed by the end of the second quarter of 2011. The remaining AIGFP derivatives portfolio consists predominantly of transactions AIG believes are of low complexity, low risk, supportive of AIG's risk management objectives or not economically appropriate to unwind based on a cost versus benefit analysis, although the portfolio may experience periodic mark-to-market volatility.

Direct Investment Book

    MIP assets and liabilities and certain non-derivative assets and liabilities of AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (AIGFP) (collectively the Direct Investment book or DIB) are currently managed on a collective program basis to limit the need for additional liquidity from AIG Parent. Liquidity requirements for the DIB are satisfied by transferring cash between AIG Parent and AIGFP as needed. Program management is focused on reducing and managing liquidity requirements, including contingent liquidity requirements arising from collateral posting requirements, for both derivative and debt positions of the DIB. As part of this program management, AIG may from time to time access the capital markets, subject to market conditions.

Retained Interests

    Retained Interests may continue to experience volatility due to fair value gains or losses on the AIA ordinary shares and the retained interest in ML III.

Corporate & Other

    In 2011, AIG completed the Recapitalization, executed transactions in the debt and equity capital markets and substantially completed its asset disposition plan. It is expected that declines in interest expense and disposition activity costs will be at least partially offset in the short term by increases in other corporate expenses, primarily attributable to corporate initiatives and efforts to continue improving internal controls and financial and operating technology platforms.

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    On October 11, 2011, the Financial Stability Oversight Council (FSOC) published a second notice of proposed rulemaking and related interpretive guidance under the Dodd-Frank Act regarding the designation of non-bank systemically important financial institutions (SIFIs). The new proposal sets forth a three-stage determination process for designating non-bank SIFIs. In Stage 1, FSOC would apply a set of uniform quantitative thresholds to identify the nonbank financial companies that will be subject to further evaluation. Based on its financial condition as of September 30, 2011, AIG would meet the criteria in Stage 1 and would be subject to further evaluation by FSOC in the SIFI determination process. Because Stages 2 and 3 as proposed would involve qualitative judgment by FSOC, AIG cannot predict whether it would be designated as a non-bank SIFI under the proposed rule.

The remainder of this MD&A is organized as follows:

   
Index
  Page
 
   

Results of Operations

    111  
 

Consolidated Results

    111  
 

Segment Results

    116  
   

Chartis Operations

    117  
     

Liability for unpaid claims and claims adjustment expense

    130  
   

SunAmerica Operations

    135  
   

Aircraft Leasing Operations

    142  
   

Other Operations

    144  

Capital Resources and Liquidity

    150  

Investments

    163  
 

Investment Strategy

    163  
 

Other-Than-Temporary Impairments

    175  

Enterprise Risk Management

    180  

Critical Accounting Estimates

    185  
   

    AIG has incorporated into this discussion a number of cross-references to additional information included throughout this Quarterly Report on Form 10-Q to assist readers seeking additional information related to a particular subject.

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Results of Operations

Consolidated Results

The following table presents AIG's condensed consolidated results of operations:

   
 
  Three Months
Ended September 30,
   
  Nine Months
Ended September 30,
   
 
 
  Percentage
Change

  Percentage
Change

 
(in millions)
  2011
  2010
  2011
  2010
 
   

Revenues:

                                     
 

Premiums

  $ 9,829   $ 11,966     (18 )% $ 29,209   $ 33,953     (14 )%
 

Policy fees

    658     673     (2 )   2,024     1,978     2  
 

Net investment income

    128     5,231     (98 )   10,161     15,472     (34 )
 

Net realized capital gains (losses)

    412     (661 )   -     (173 )   (1,482 )   88  
 

Aircraft leasing revenue

    1,129     1,186     (5 )   3,419     3,609     (5 )
 

Other income

    560     1,060     (47 )   2,188     2,794     (22 )
   
 

Total revenues

    12,716     19,455     (35 )   46,828     56,324     (17 )
   

Benefits, claims and expenses:

                                     
 

Policyholder benefits and claims incurred

    8,333     10,050     (17 )   25,378     27,386     (7 )
 

Interest credited to policyholder account balances

    1,134     1,125     1     3,349     3,361     -  
 

Amortization of deferred acquisition costs

    2,490     1,994     25     5,992     5,983     -  
 

Other acquisition and insurance expenses

    1,214     1,933     (37 )   4,418     5,247     (16 )
 

Interest expense

    945     2,310     (59 )   2,974     5,795     (49 )
 

Aircraft leasing expenses

    2,093     1,031     103     3,390     2,671     27  
 

Loss on extinguishment of debt

    -     -     -     3,392     -     -  
 

Net (gain) loss on sale of properties and divested businesses

    2     (4 )   -     76     (126 )   -  
 

Other expenses

    863     710     22     1,791     2,559     (30 )
   
 

Total benefits, claims and expenses

    17,074     19,149     (11 )   50,760     52,876     (4 )
   

Income (loss) from continuing operations before income tax expense (benefit)

    (4,358 )   306     -     (3,932 )   3,448     -  

Income tax expense (benefit)

    (634 )   486     -     (1,122 )   1,044     -  
   

Income (loss) from continuing operations

    (3,724 )   (180 )   (1,969 )   (2,810 )   2,404     -  

Income (loss) from discontinued operations, net of income tax expense (benefit)

    (221 )   (1,833 )   88     1,395     (4,101 )   -  
   

Net loss

    (3,945 )   (2,013 )   (96 )   (1,415 )   (1,697 )   17  
   

Less: Net income attributable to noncontrolling interests

    164     504     (67 )   585     1,693     (65 )
   

Net loss attributable to AIG

  $ (4,109 ) $ (2,517 )   (63 )% $ (2,000 ) $ (3,390 )   41 %
   

    Significant fluctuations in line items for the three- and nine-month periods ended September 30, 2011 compared to the same periods in 2010 are discussed below.

Premiums

    Premiums decreased in the three- and nine-month periods ended September 30, 2011 compared to the same periods in 2010 reflecting declines of $2.5 billion and $7.4 billion, respectively, as a result of the deconsolidation of AIA in the fourth quarter of 2010. The decline in premiums for the nine-month period ended September 30, 2011 compared to the same period in 2010 was partially offset by growth in Chartis premiums, primarily resulting from the consolidation of Fuji commencing in the third quarter of 2010 and foreign exchange rates.

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Policy Fees

    Policy fees decreased slightly in the three-month period ended September 30, 2011 compared to the same period in 2010 primarily due to lower variable annuity fees on the separate account assets. This decrease is consistent with the decline in variable account assets as a result of declines in equity markets in the three month period ended September 30, 2011.

    Policy fees increased slightly for the nine-month period ended September 30, 2011 compared to the same period in 2010 primarily due to higher variable annuity fees on the separate account assets consistent with the growth in variable accounts assets as a result of positive equity market conditions in late 2010 and early 2011.

Net Investment Income

The following table summarizes the components of Net investment income:

   
 
  Three Months
Ended September 30,
   
  Nine Months
Ended September 30,
   
 
 
  Percentage
Change

  Percentage
Change

 
(in millions)
  2011
  2010
  2011
  2010
 
   

Fixed maturity securities, including short-term investments

  $ 3,024   $ 3,777     (20 )% $ 8,754   $ 10,975     (20 )%

ML II

    (43 )   156     -     32     436     (93 )

ML III

    (931 )   301     -     (854 )   1,410     -  

Change in fair value of AIA securities

    (2,315 )   -     -     268     -     -  

Change in the fair value of MetLife securities prior to the sale

    -     -     -     (157 )   -     -  

Other equity securities

    75     93     (19 )   156     252     (38 )

Interest on mortgage and other loans

    264     307     (14 )   794     974     (18 )

Partnerships

    144     155     (7 )   1,268     967     31  

Mutual funds

    (15 )   (3 )   (400 )   46     (5 )   -  

Real estate

    23     41     (44 )   75     98     (23 )

Other investments

    32     90     (64 )   153     380     (60 )
   

Total investment income before policyholder income and trading gains

    258     4,917     (95 )   10,535     15,487     (32 )

Policyholder investment income and trading gains

    -     385     -     -     311     -  
   

Total investment income

    258     5,302     (95 )   10,535     15,798     (33 )

Investment expenses

    130     71     83     374     326     15  
   

Net investment income

  $ 128   $ 5,231     (98 )% $ 10,161   $ 15,472     (34 )%
   

    For the three-month period ended September 30, 2011, Net investment income decreased substantially from the same period in 2010 due to the following:

    For the nine-month period ended September 30, 2011, Net investment income decreased due to the following:

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    These were partially offset by fair value gains on the AIA ordinary shares and higher income from partnership investments, particularly in the first six months of 2011.

Net Realized Capital Gains (Losses)

   
 
  Three Months
Ended September 30,
   
  Nine Months
Ended September 30,
   
 
 
  Percentage
Change

  Percentage
Change

 
(in millions)
  2011
  2010
  2011
  2010
 
   

Sales of fixed maturity securities

  $ 601   $ 833     (28 )% $ 1,358   $ 1,306     4 %

Sales of equity securities

    20     141     (86 )   160     404     (60 )

Other-than-temporary impairments:

                                     
 

Severity

    (25 )   (5 )   (400 )   (46 )   (54 )   15  
 

Change in intent

    (4 )   (340 )   99     (8 )   (361 )   98  
 

Foreign currency declines

    (8 )   (17 )   53     (13 )   (21 )   38  
 

Issuer-specific credit events

    (456 )   (461 )   1     (846 )   (1,833 )   54  
 

Adverse projected cash flows

    (3 )   (1 )   (200 )   (19 )   (2 )   (850 )

Provision for loan losses

    43     (88 )   -     7     (289 )   -  

Change in the fair value of MetLife securities prior to the sale

    -     -     -     (191 )   -     -  

Foreign exchange transactions

    611     (1,243 )   -     (426 )   262     -  

Derivative instruments

    (337 )   562     -     117     (835 )   -  

Other

    (30 )   (42 )   29     (266 )   (59 )   (351 )
   

Net realized capital gains (losses)

  $ 412   $ (661 )   - % $ (173 ) $ (1,482 )   88 %
   

    AIG recorded Net realized capital gains in the three-month period ended September 30, 2011 compared to Net realized capital losses in the same period of 2010 due to the following:

    These gains were partially offset by losses from derivative instruments not designated for hedge accounting compared to gains in the year-ago period resulting from the strengthening of the U.S. dollar against the Euro and British pound, as well as a decrease in interest rates.

    AIG recorded a decline in Net realized capital losses in the nine-month period ended September 30, 2011 compared to the same period in 2010 due to the following:

    These gains were partially offset by foreign exchange transaction losses incurred compared to gains in the same period last year primarily from the weakening of the U.S. dollar against the Swiss franc.

Aircraft Leasing Revenue

    Aircraft leasing revenue decreased slightly in the three- and nine-month periods ended September 30, 2011 compared to the same periods in 2010 due to a reduction in ILFC's average fleet size resulting from sales of aircraft and the impact of lower lease rates on used aircraft. For the three-month period ended September 30, 2011, ILFC had an average of 934 aircraft in its fleet, compared to 943 for the three-month period ended September 30, 2010. For the nine-month period ended September 30, 2011, ILFC had an average of 933 aircraft in its fleet, compared to 968 for the nine-month period ended September 30, 2010.

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Other Income

    The decline in Other income for the three-month period ended September 30, 2011 compared to the same period in 2010 was driven by unrealized market valuation adjustments on the AIGFP super senior credit default swap portfolio and credit default swap contracts referencing single-name exposures written on corporate, index and asset-backed credits.

    The decline in Other income for the nine-month period ended September 30, 2011 compared to the same period in 2010 was driven by credit valuation adjustments on Direct Investment book assets and liabilities as well as unrealized market valuation adjustments on the AIGFP super senior credit default swap portfolio and credit default swap contracts referencing single-name exposures written on corporate, index and asset-backed credits. This decline was partially offset by credit valuation adjustments on AIGFP's derivative assets and liabilities as well as lower levels of real estate investment impairment charges and gains on real estate asset divestments.

    For the first nine months of 2011, Other income was also impacted by the effect of deconsolidation of certain portfolio investments and the sale of AIG's third party asset management business in the first quarter of 2010. Additionally, the first nine months of 2010 also reflected a bargain purchase gain of $332 million recognized in the first quarter of 2010 related to the acquisition of Fuji. See Note 5 to the Consolidated Financial Statements.

    See Segment Results — Other Operations — Other Operations Results — Global Capital Markets Results and Critical Accounting Estimates — Level 3 Assets and Liabilities and Note 6 to the Consolidated Financial Statements.

Policyholder Benefits and Claims Incurred

    The declines in Policyholder benefits and claims incurred for the three and nine months ended September 30, 2011 reflected declines of $2.6 billion and $6.6 billion related to the deconsolidation of AIA. These declines were partially offset in the three and nine months ended September 30, 2011 by the effect of Chartis' consolidation of Fuji and increased catastrophe losses, including Hurricane Irene in the third quarter of 2011, the U.S. tornadoes in the second quarter of 2011, and the Tohoku Catastrophe in the first quarter of 2011.

Amortization of Deferred Acquisition Costs

    The increase in Amortization of deferred acquisition costs in the three- and nine-month periods ended September 30, 2011 compared to the same periods in 2010 resulted primarily from increases in amortization for SunAmerica related to weaker equity market conditions. Amortization also increased as a result of the consolidation of Fuji commencing in the third quarter of 2010, which was partially offset by the deconsolidation of AIA in the fourth quarter of 2010.

Other Acquisition and Insurance Expenses

    Other acquisition and insurance expenses decreased in the three- and nine-month periods ended September 30, 2011 compared to the same periods in 2010 as a result of the deconsolidation of AIA in the fourth quarter of 2010, partially offset by the consolidation of Fuji commencing in the third quarter of 2010.

Interest Expense

    Interest expense decreased in the three- and nine-month periods ended September 30, 2011 compared to the same periods in 2010 primarily as a result of the repayment and termination of the FRBNY Credit Facility on January 14, 2011. See Note 1 to the Consolidated Financial Statements for further discussion.

Aircraft Leasing Expenses

    During the three-month period ended September 30, 2011, ILFC recorded impairment charges, fair value adjustments and lease-related charges of $1.5 billion compared to charges of $465 million in the same period in 2010. During the nine-month period ended September 30, 2011, ILFC recorded impairment charges, fair value adjustments and lease-related charges of $1.7 billion compared to charges of $962 million in the same period in 2010. See Segment Results — Aircraft Leasing Operations — Aircraft Leasing Results for additional information.

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Loss on Extinguishment of Debt

    The loss on extinguishment of debt for the nine-month period ended September 30, 2011 includes:

Other Expenses

    Other expenses include expenses associated with Global Capital Markets, Direct Investment book and other corporate expenses. Other expenses increased in the three-month period ended September 30, 2011 compared to the same period in 2010, due to severance expenses and asset write-offs relating to infrastructure consolidation initiatives and an increase in the provision for legal contingencies. Other expenses decreased in the nine-month period ended September 30, 2011 compared to the same period in 2010 due to lower securities-related litigation charges and lower operating costs due to the effect of deconsolidation in 2010 of certain portfolio investments and the 2010 sale of AIG's third party asset management business.

Income Taxes

Interim Tax Calculation Method

    In the first quarter of 2011, AIG began using the estimated annual effective tax rate method in computing its interim tax provisions. The recent stabilization of operations and expected financial results allow AIG to estimate the annual effective tax rate to be applied to year-to-date income.

    From the third quarter of 2008 through December 31, 2010, the discrete-period method was used to compute the interim tax provisions due to the significant variations in the customary relationship between income tax expense and pre-tax accounting income.

    The estimated annual effective tax rates for the three- and nine-month periods ended September 30, 2011 exclude the tax effects of current year losses of the U.S. consolidated income tax group and, in Japan, Fuji. The related tax benefit with respect to these jurisdictions is currently projected to be offset by an increase in the valuation allowance prior to intraperiod tax allocation.

    Certain items, including losses in jurisdictions where no corresponding tax benefit is available, and those deemed to be unusual, infrequent or that cannot be reliably estimated, are excluded from the estimated annual effective tax rate. In these cases, the actual tax expense or benefit applicable to that item is treated discretely, and is reported in the same period as the related item. For the three- and nine-month periods ended September 30, 2011, the tax effects related to the U.S. consolidated income tax group and Fuji, foreign realized capital gains and losses, and divestiture gains or losses were treated as discrete items.


Interim Tax Expense (Benefit)

    For the three- and nine-month periods ended September 30, 2011, the effective tax rates on pretax loss from continuing operations were 14.5 and 28.5 percent, respectively. The tax benefit was primarily due to a decrease in the valuation allowance attributable to the anticipated inclusion of ALICO SPV within the U.S. consolidated income tax group, tax effects associated with tax exempt interest income, investments in partnerships, and effective settlements of certain uncertain tax positions, partially offset by an increase in the valuation allowance attributable to continuing operations.

    For the nine-month period ended September 30, 2011, AIG recorded an increase in the U.S. consolidated income tax group valuation allowance of $1.2 billion. The entire $1.2 billion increase in the valuation allowance

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was allocated to continuing operations. This allocation was based on the primacy of continuing operations, which requires a net increase in valuation allowance to be attributed to continuing operations to the extent of the related deferred tax benefit attributable to continuing operations. The amount allocated to continuing operations also included the decrease to the valuation allowance attributable to the anticipated inclusion of ALICO SPV within the U.S. consolidated income tax group.

    For the three- and nine-month periods ended September 30, 2010, the effective tax rates on pre-tax income from continuing operations were 158.8 percent and 30.3 percent, respectively. The effective tax rate for the three-month period ended September 30, 2010 attributable to continuing operations was primarily related to the effect of foreign operations, nondeductible losses, realized gains resulting from transfers of subsidiaries, and uncertain tax positions, partially offset by a net reduction of the valuation allowance and by the tax benefit associated with tax exempt interest. The effective tax rate for the nine-month period ended September 30, 2010 attributable to continuing operations was primarily related to the effect of foreign operations, nondeductible losses and realized gains resulting from transfers of subsidiaries, partially offset by the bargain purchase gain associated with the acquisition of Fuji, the tax benefits associated with tax exempt interest income, and a reduction in the valuation allowance.

    See Note 14 to the Consolidated Financial Statements for additional information.

Discontinued Operations

Income (loss) from Discontinued Operations consists of the following:

   
 
  Three Months
Ended September 30,
  Nine Months
Ended September 30,
 
(in millions)
  2011
  2010
  2011
  2010
 
   

Foreign life insurance businesses

  $ (21 ) $ (154 ) $ 1,133   $ (2,165 )

AGF

    -     (393 )   -     (144 )

Net gain (loss) on sale

    43     (1,970 )   945     (2,371 )

Consolidation adjustments

    -     154     (1 )   (209 )

Interest allocation

    -     (19 )   (2 )   (57 )
   

Income (loss) from discontinued operations

    22     (2,382 )   2,075     (4,946 )

Income tax expense (benefit)

    243     (549 )   680     (845 )
   

Income (loss) from discontinued operations, net of tax

  $ (221 ) $ (1,833 ) $ 1,395   $ (4,101 )
   

    Results from discontinued operations for the nine months ended September 30, 2011 include a pre-tax gain of $2.0 billion on the sale of AIG Star and AIG Edison. Results from discontinued operations for the nine months ended September 30, 2010 include a goodwill impairment charge of $3.3 billion related to goodwill that had been allocated to ALICO and a goodwill impairment charge of $1.3 billion for the three and nine months ended September 30, 2010 related to the sale of AIG Star and AIG Edison.

    See Note 4 to the Consolidated Financial Statements for further discussion.


Segment Results

    AIG presents and discusses its financial information in a manner it believes is most meaningful to its financial statement users. AIG analyzes the operating performance of Chartis, using underwriting profit (loss). AIG analyzes the operating performance of SunAmerica using Operating income (loss), which is before net realized capital gains (losses) and related DAC and SIA amortization and goodwill impairment charges. Results from discontinued operations and net gains (losses) on sales of divested businesses are excluded from these measures. AIG believes that these measures allow for a better assessment and enhanced understanding of the operating performance of each business by highlighting the results from ongoing operations and the underlying profitability of its businesses. When such measures are disclosed, reconciliations to GAAP pre-tax income are provided.

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The following table summarizes the operations of each reportable segment. See also Note 3 to the Consolidated Financial Statements.

   
 
  Three Months
Ended September 30,
   
  Nine Months
Ended September 30,
   
 
 
  Percentage
Change

  Percentage
Change

 
(in millions)
  2011
  2010
  2011
  2010
 
   

Total revenues:

                                     
 

Chartis

  $ 10,182   $ 9,397     8 % $ 30,273   $ 27,482     10 %
 

SunAmerica

    3,582     3,944     (9 )   11,317     10,147     12  
 

Aircraft Leasing

    1,117     1,190     (6 )   3,411     3,579     (5 )
   

Total reportable segments

    14,881     14,531     2     45,001     41,208     9  

Other Operations

    (2,433 )   4,881     -     1,864     15,655     (88 )

Consolidation and eliminations

    268     43     523     (37 )   (539 )   93  
   

Total

    12,716     19,455     (35 )   46,828     56,324     (17 )
   

Pre-tax income (loss):

                                     
 

Chartis

    498     865     (42 )   910     3,226     (72 )
 

SunAmerica

    309     998     (69 )   2,024     1,413     43  
 

Aircraft Leasing

    (1,329 )   (214 )   (521 )   (1,122 )   (122 )   (820 )
   

Total reportable segments

    (522 )   1,649     -     1,812     4,517     (60 )

Other Operations

    (3,943 )   (1,568 )   (151 )   (5,853 )   (1,121 )   (422 )

Consolidation and eliminations

    107     225     (52 )   109     52     110  
   

Total

  $ (4,358 ) $ 306     - % $ (3,932 ) $ 3,448     - %
   

Chartis Operations

    Chartis, AIG's property and casualty insurance operation, offers a broad range of commercial and consumer insurance products and services worldwide. During the third quarter of 2011, Chartis completed the previously announced reorganization of its operations. Under the new structure, Chartis now presents its financial information in two operating segments — Commercial Insurance and Consumer Insurance, as well as a Chartis Other category. Prior to the third quarter of 2011, Chartis presented its financial information in two primary operating segments, Chartis U.S. and Chartis International.

    Commercial Insurance — Distributed primarily through insurance brokers to businesses. Major lines of business include property, casualty, financial and specialty (including aerospace, environmental, marine, export credit and political risk coverages, and various product offerings to small and medium enterprises (SME)).

    Consumer Insurance — Primarily sells its products to individual consumers or groups of consumers through individual agents, brokers, and on a direct-to-consumer basis. Offerings within Consumer Insurance include accident & health (A&H), personal property and casualty lines, and life insurance.

    Complementing this structure, Chartis is organized into four principal regions: U.S. and Canada, Europe, Far East, and Growth Economies.

    Chartis Other consists primarily of certain run-off lines of business, including Excess Workers' Compensation and Asbestos, certain Chartis expenses relating to global initiatives, expense allocations from AIG Parent not attributable to the Commercial Insurance or Consumer Insurance operating segments, net investment income, realized capital gains and losses, bargain purchase gains relating to the purchase of Fuji and gains relating to the sale of properties.

    During 2011, as part of its on-going initiatives to reduce exposure to capital intensive long-tail lines, Chartis determined to cease writing Excess Workers' Compensation business as a stand-alone product. Based on this decision, Chartis further determined that this legacy line of business would be included in Chartis Other and not included in the ongoing Commercial Insurance operating results.

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Chartis Results

The following table presents Chartis results:

   
 
  Three Months
Ended September 30,
   
  Nine Months
Ended September 30,
   
 
 
  Percentage
Change

  Percentage
Change

 
(in millions)
  2011
  2010
  2011
  2010
 
   

Underwriting results:

                                     
 

Net premiums written

  $ 8,659   $ 8,598     1 % $ 26,992   $ 24,034     12 %
 

(Increase) decrease in unearned premiums

    384     (1 )   -     (265 )   (63 )   (321 )
   
 

Net premiums earned

    9,043     8,597     5     26,727     23,971     11  
 

Claims and claims adjustment expenses incurred

    6,838     6,109     12     21,274     17,143     24  
 

Underwriting expenses

    2,787     2,423     15     8,030     7,113     13  
   

Underwriting profit (loss)

    (582 )   65     -     (2,577 )   (285 )   (804 )
   

Investing and other results:

                                     
 

Net investment income

    1,024     1,007     2     3,345     3,191     5  
 

Net realized capital gains (losses)

    57     (207 )   -     143     (12 )   -  
 

Bargain purchase gain

    -     -     -     -     332     -  
 

Other income

    58     -     -     58     -     -  
 

Other expenses

    (59 )   -     -     (59 )   -     -  
   

Pre-tax income

  $ 498   $ 865     (42 )% $ 910   $ 3,226     (72 )%
   

    Underwriting profit is derived by reducing net premiums earned by claims and claims adjustment expenses incurred and underwriting expenses. Net premiums written are initially deferred and earned based upon the terms of the underlying policies for short duration contracts. The unearned premium reserve constitutes deferred revenues which are generally recognized in earnings ratably over the policy period. Net premiums written for long duration contracts are recognized when due from the policyholder. Net premiums written reflect the premiums retained after purchasing reinsurance protection.

    Chartis, along with most property and casualty insurance companies, uses the loss ratio, the expense ratio and the combined ratio as measures of underwriting performance. The loss ratio is the sum of claims and claims adjustment expenses divided by net premiums earned. The expense ratio is underwriting expenses, which consist of acquisition costs plus other insurance expenses, divided by net premiums earned. The combined ratio is a sum of the loss ratio and expense ratio. These ratios are relative measurements that describe, for every $100 of net premiums earned, the amount of claims, claims adjustment expenses, and other underwriting expenses that would be incurred. A combined ratio of less than 100 indicates an underwriting profit and over 100 indicates an underwriting loss.

    The underwriting environment varies from country to country, as does the degree of litigation activity, all of which affects such ratios. Regulation, product type and competition have a direct effect on pricing and consequently on profitability as reflected in underwriting profit and the combined ratio.

    Going forward, Chartis will continue to assess the performance of its operating segments based in part on underwriting income. However, Chartis is implementing a risk-adjusted profitability model which will serve as its primary business performance measure when it is fully deployed. Along with underwriting results, this model incorporates elements of capital allocations, costs of capital, and components of net investment income. When the model is fully deployed, components of net investment income will be included in each of the Chartis operating segments. As noted above, net investment income is included only in the Chartis Other category at this time. Chartis expects that its risk-adjusted profitability model will be fully deployed in the first quarter of 2012.

    For the nine-month period ended September 30, 2011, results reflect the effects of three quarters of Fuji operations while the corresponding 2010 period reflects the effects of Fuji for only one quarter. Chartis acquired

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control of Fuji on March 31, 2010. However, Fuji's financial information is reported on a one-quarter lag. As a result, Fuji's operating results were included in the Chartis results beginning on July 1, 2010.


Chartis Net Premiums Written

    Net premiums written are the sales revenue of an insurer, adjusted for reinsurance premiums assumed and ceded, during a given period. Net premiums earned are the revenue of an insurer for covering risk during a given period. Net premiums written are a measure of performance for a sales period while net premiums earned are a measure of performance for a coverage period. From the period in which the premiums are written until the period in which they are earned, the amount is part of the unearned premium reserve.


The following table presents Chartis net premiums written by major line of business:

   
 
  Three Months
Ended September 30,
   
  Nine Months
Ended September 30,
   
 
 
  Percentage
Change

  Percentage
Change

 
(in millions)
  2011
  2010
  2011
  2010
 
   

Commercial Insurance:

                                     
 

Casualty

  $ 2,396   $ 2,763     (13 )% $ 7,657   $ 7,638     - %
 

Property

    1,035     831     25     3,434     2,783     23  
 

Specialty

    878     787     12     2,709     2,538     7  
 

Financial lines

    984     954     3     3,159     2,981     6  
   

Total Commercial Insurance

    5,293     5,335     (1 )   16,959     15,940     6  
   

Consumer Insurance:

                                     
 

Accident & health

    1,584     1,451     9     4,606     4,127     12  
 

Personal lines

    1,603     1,625     (1 )   4,864     3,743     30  
 

Life insurance

    178     147     21     532     147     262  
   

Total Consumer Insurance

    3,365     3,223     4     10,002     8,017     25  
   

Other

    1     40     (98 )   31     77     (60 )
   

Total net premiums written

  $ 8,659   $ 8,598     1 % $ 26,992   $ 24,034     12 %
   

The following table presents the effect of the acquisition of Fuji on Chartis net premiums written:

   
 
  Three Months
Ended September 30,
  Nine Months
Ended September 30,
 
(in millions)
  2011
  2010
  2011
  2010
 
   

Chartis Net Premiums Written:

                         
 

Commercial Insurance, other than Fuji

  $ 5,249   $ 5,292   $ 16,719   $ 15,897  
 

Consumer Insurance, other than Fuji

    2,492     2,399     7,403     7,193  
   
 

Total net premiums written, other than Fuji

    7,741     7,691     24,122     23,090  
   

Fuji Commercial Insurance

    44     43     240     43  

Fuji Consumer Insurance

    873     824     2,600     824  
   
 

Total Fuji net premiums written

    917     867     2,840     867  
   

Total Commercial Insurance

    5,293     5,335     16,959     15,940  

Total Consumer Insurance

    3,365     3,223     10,002     8,017  

Total Other

    1     40     31     77  
   
 

Total net premiums written

  $ 8,659   $ 8,598   $ 26,992   $ 24,034  
   

    Overall, Chartis' net premiums written for the three-month period ended September 30, 2011 increased due in large part to the effect of foreign currency exchange rates (see table below).

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    Excluding the effects of foreign currency exchange rates, Commercial Insurance net premiums written were down. This decline is due in large part to certain management initiatives within Commercial Insurance designed to provide for a more effective use of capital, including:

    The effect of these actions decreased premiums in the three- and nine-month periods ended September 30, 2011 by approximately $323 million and $422 million, respectively. However, given the capital intensive nature of these classes of casualty business, Chartis expects that over time, these actions will improve its overall return on equity and cost of capital efficiency metrics.

    Partially offsetting these declines are increases in Property and Specialty net premiums written due primarily to increased property rates within the U.S. and Canada and Far East regions and higher new business and retention ratios.

    Growing the higher margin Consumer Insurance business continues to be a key Chartis strategy. Excluding the effects of foreign exchange, for the three months ended September 30, 2011, Consumer Insurance net premiums written declined. Where Consumer line programs do not meet internal performance or operating targets, management takes appropriate remedial actions, which included in the first quarter of 2011, the decision to de-emphasize two specific programs, resulting in expected declines within Consumer Insurance for both the three and nine months ended September 30, 2011 in the U.S. and Canada region.

    The nine-month period ended September 30, 2011 reflects net premiums written related to Fuji of $2.8 billion compared to $867 million in the same period of 2010. The nine-month period ended September 30, 2011 also reflects the effects of overall improvements in ratable exposures (i.e., asset values, payrolls and sales), general pricing improvement and retrospective premium adjustments on loss-sensitive contracts. Additionally, during 2010, Chartis entered into a three-year reinsurance agreement, secured through the issuance of catastrophe bonds, which provides protection from U.S. hurricanes and earthquakes and reduced 2010 net premiums written by approximately $104 million.


AIG transacts business in most major foreign currencies. The following table summarizes the effect of changes in foreign currency exchange rates on Chartis net premiums written:

   
 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2011 vs. 2010
  2011 vs. 2010
 
   

Increase (decrease) in original currency*

    (3.5 )%   9.1 %

Foreign exchange effect

    4.2     3.2  
   

Increase as reported in U.S. dollars

    0.7 %   12.3 %
   
*
Computed using a constant exchange rate for each period.

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Chartis Underwriting Ratios

The following table summarizes the Chartis combined ratios based on GAAP data and the impact of catastrophe losses, prior year development and related reinstatement premiums and premium adjustments on loss-sensitive contracts on the Chartis consolidated loss and combined ratios:

   
 
  Three Months Ended
September 30,
   
  Nine Months Ended
September 30,
   
 
 
  Increase/
(Decrease)

  Increase/
(Decrease)

 
 
  2011
  2010
  2011
  2010
 
   
 

Loss ratio

    75.6     71.1     4.5     79.6     71.5     8.1  
 

Catastrophe losses and reinstatement premiums

    (6.4 )   (0.9 )   (5.5 )   (10.6 )   (3.6 )   (7.0 )
 

Prior year development net of premium adjustments and including reserve discount

    (0.8 )   (2.1 )   1.3     (0.5 )   (0.3 )   (0.2 )
   

Loss ratio, as adjusted

    68.4     68.1     0.3     68.5     67.6     0.9  
   

Expense ratio

    30.8     28.2     2.6     30.0     29.7     0.3  
   

Combined ratio

    106.4     99.3     7.1     109.6     101.2     8.4  
 

Catastrophe losses and reinstatement premiums

    (6.4 )   (0.9 )   (5.5 )   (10.6 )   (3.6 )   (7.0 )
 

Prior year development net of premium adjustments and including reserve discount

    (0.8 )   (2.1 )   1.3     (0.5 )   (0.3 )   (0.2 )
   

Combined ratio, adjusted

    99.2     96.3     2.9     98.5     97.3     1.2  
   

Quarterly & Year-to-Date Loss Ratios

    The increase in the loss ratio in the three- and nine-month periods ended September 30, 2011 compared to the same periods in 2010 reflects the effect of increased catastrophe losses in those periods as shown in the table below.

    For the three-month period ended September 30, 2011, Chartis recorded net adverse prior year development of $62 million (net of additional premium adjustments of $25 million relating to loss-sensitive insurance contracts and including a reserve discount charge of $7 million). During the corresponding three-month period in 2010, Chartis recorded net adverse prior year loss development of $168 million (net of additional premium adjustments of $40 million relating to loss-sensitive contracts and including a reserve discount benefit of $153 million).

    For the three-month period ended September 30, 2011, the overall adjusted loss ratio increased primarily due to:

    These increases were partially offset by an improvement in the current accident year loss ratio within A&H class of business, largely reflecting the effects of underwriting improvement actions initiated within the Far East region.

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    For the nine-month period ended September 30, 2011, Chartis recorded net adverse prior year development of $85 million (net of additional premium adjustments of $153 million relating to loss-sensitive insurance contracts and including a reserve discount charge of $49 million) compared to $77 million (including returned premium adjustments of $18 million relating to loss-sensitive contracts and net of a reserve discount benefit of $153 million) in the corresponding 2010 period.

    In addition to the items noted above, for the nine-month period ended September 30, 2011, the overall adjusted loss ratio increased primarily due to an increase on losses in short tail lines.

The following table presents Chartis catastrophe losses by major event:

   
 
  2011   2010  
(in millions)
  Commercial
Insurance

  Consumer
Insurance

  Other
  Total
  Commercial
Insurance

  Consumer
Insurance

  Other
  Total
 
   

Three Months Ended September 30,

                                                 

Event:

                                                 
 

Hurricane Irene

  $ 305   $ 67   $ -   $ 372   $ -   $ -   $ -   $ -  
 

All other events*

    178     55     -     233     67     5     -     72  
   
   

Claims and claim expenses

    483     122     -     605     67     5     -     72  
   

Reinstatement premiums

    (31 )   -     -     (31 )   -     -     -     -  
   

Total catastrophe-related charges

  $ 452   $ 122   $ -   $ 574   $ 67   $ 5   $ -   $ 72  
   

Nine Months Ended September 30,

                                                 

Event:

                                                 
 

Tohoku Catastrophe

  $ 726   $ 546   $ -   $ 1,272   $ -   $ -   $ -   $ -  
 

New Zealand Christchurch earthquake (February 2011)

    300     6     -     306     -     -     -     -  
 

Chile earthquake

    -     -     -     -     291     3     -     294  
 

Midwest & Southeast U.S. tornadoes

    368     14     -     382     -     -     -     -  
 

Hurricane Irene

    305     67     -     372     -     -     -     -  
 

All other events*

    439     47     -     486     506     63     -     569  
   
   

Claims and claim expenses

    2,138     680     -     2,818     797     66     -     863  
   

Reinstatement premiums

    22     -     -     22     10     -     -     10  
   

Total catastrophe-related charges

  $ 2,160   $ 680   $ -   $ 2,840   $ 807   $ 66   $ -   $ 873  
   
*
Events shown in the above table are catastrophic events the net impact of which on Chartis is in excess of $200 million each. All other events includes two events in the three-month period and 12 events in the nine-month period ended September 30, 2011, that are considered catastrophic but the net impact of which remains below the $200 million itemization threshold.

Quarterly & Year-to-Date Expense Ratios

    The expense ratio increased for the three- and nine-month periods ended September 30, 2011 compared to the same periods in 2010, primarily due to the effects of foreign exchange, an increase in amortization of deferred acquisition costs for Fuji, changes in the mix of business and investment in strategic initiatives.

    Chartis recorded amortization of deferred acquisition costs for Fuji of $112 million for the three-month period ended September 30, 2011 compared to $25 million for the same period in 2010. The increase was due to the amortization of costs that were deferred beginning after the acquisition of Fuji in 2010.

    Management continues to execute on its strategy to grow its higher margin and less capital intensive lines of business. For the nine-month period ended September 30, 2011, Consumer Insurance represented 37 percent of the Chartis net premiums written compared to 33 percent in the comparable prior year period. Consumer Insurance generally has higher acquisition costs than Commercial Insurance, and as a result, the overall expense ratio increased due to the business mix change.

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    Chartis also increased investments in a number of strategic initiatives during 2011, including the implementation of improved regional governance and risk management capabilities, the implementation of global accounting and claims systems, preparation for Solvency II and certain other legal entity restructuring initiatives.


Commercial Insurance

    Commercial Insurance distributes its products through a network of agencies, independent retail and wholesale brokers, and branches. These products are categorized into four major lines of business:

Commercial Insurance Results

The following table presents Commercial Insurance results:

   
 
  Three Months
Ended September 30,
   
  Nine Months
Ended September 30,
   
 
 
  Percentage
Change

  Percentage
Change

 
(in millions)
  2011
  2010
  2011
  2010
 
   

Underwriting results:

                                     
 

Net premiums written

  $ 5,293   $ 5,335     (1 )% $ 16,959   $ 15,940     6 %
 

(Increase) decrease in unearned premiums

    415     92     351     (140 )   234     -  
   
 

Net premiums earned

    5,708     5,427     5     16,819     16,174     4  
 

Claims and claims adjustment expenses incurred

    4,668     4,030     16     14,416     12,287     17  
 

Underwriting expenses

    1,514     1,332     14     4,272     4,060     5  
   

Pre-tax income (loss)

  $ (474 ) $ 65      - % $ (1,869 ) $ (173 )   (980 )%
   

Commercial Insurance Net Premiums Written

    Commercial Insurance net premiums written decreased in the three-month period ended September 30, 2011 compared to the same period in 2010, primarily due to:

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    Offsetting these reductions were increases in the Property, Specialty and Financial lines of business. The increase in Property relates primarily to rate increases within the U.S. and Canada and Far East regions, which serves to increase premiums with no corresponding increase in loss exposure. Increases in Specialty and Financial lines reflect the effects of increases within the Growth Economies region and higher new business submission and premium retention levels. Chartis experienced an overall improving rate environment in the third quarter of 2011.

    For the nine months ended September 30, 2011, the overall increase in Commercial Insurance net premiums written is due to:

    Offsetting these increases was a $396 million decrease in net premiums written relating to the change of certain policy forms at renewal from retrospectively rated premium structures to a loss reimbursement deductible structures.

Commercial Insurance business is transacted in most major foreign currencies. The following table summarizes the effect of changes in foreign currency exchange rates on the growth of Commercial Insurance net premiums written:

   
 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2011 vs. 2010
  2011 vs. 2010
 
   

Increase (decrease) in original currency*

    (3.2 )%   5.0 %

Foreign exchange effect

    2.4     1.4  
   

Increase (decrease) as reported in U.S. dollars

    (0.8 )%   6.4 %
   
*
Computed using a constant exchange rate for each period.

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Commercial Insurance Underwriting Ratios

The following table presents the Commercial Insurance combined ratios based on GAAP data and the impact of catastrophe losses, prior year development and related reinstatement premiums and premium adjustments on loss-sensitive contracts on the Commercial Insurance consolidated loss and combined ratios:

   
 
  Three Months
Ended September 30,
   
  Nine Months
Ended September 30,
   
 
 
  Increase
(Decrease)

  Increase
(Decrease)

 
 
  2011
  2010
  2011
  2010
 
   
 

Loss ratio

    81.8     74.3     7.5     85.7     76.0     9.7  
 

Catastrophe losses and reinstatement premiums

    (8.1 )   (1.2 )   (6.9 )   (12.8 )   (5.0 )   (7.8 )
 

Prior year development net of premium adjustments and including reserve discount

    (0.3 )   (1.0 )   0.7     0.2     0.5     (0.3 )
   

Loss ratio, as adjusted

    73.4     72.1     1.3     73.1     71.5     1.6  
   

Expense ratio

    26.5     24.5     2.0     25.4     25.1     0.3  
   

Combined ratio

    108.3     98.8     9.5     111.1     101.1     10.0  
 

Catastrophe losses and reinstatement premiums

    (8.1 )   (1.2 )   (6.9 )   (12.8 )   (5.0 )   (7.8 )
 

Prior year development net of premium adjustments and including reserve discount

    (0.3 )   (1.0 )   0.7     0.2     0.5     (0.3 )
   

Combined ratio, as adjusted

    99.9     96.6     3.3     98.5     96.6     1.9  
   

Quarterly & Year-to-Date Loss Ratios

    The increase in the loss ratio in the three- and nine-month periods ended September 30, 2011 compared to the same periods in 2010 reflects the effect of increased catastrophe losses in those periods as shown in the table above.

    For the three-month period ended September 30, 2011, Commercial Insurance recorded net adverse prior year development of $15 million (net of additional premium adjustments of $25 million relating to loss-sensitive insurance contracts). During the corresponding period in 2010, Commercial Insurance recorded net adverse prior year loss development of $44 million (net of additional premium adjustments of $40 million relating to loss-sensitive contracts and including a reserve discount benefit of $100 million).

    For the nine-month period ended September 30, 2011, Commercial Insurance recorded net favorable prior year development of $54 million (net of additional premium adjustments of $153 million relating to loss-sensitive insurance contracts). During the corresponding period in 2010, Commercial Insurance recorded net favorable prior year loss development of $81 million (net of returned premium adjustments of $18 million relating to loss-sensitive contracts and including a reserve discount benefit of $100 million).

    For the three- and nine-month periods ended September 30, 2011, the overall adjusted loss ratio increased primarily due to an increase in the 2011 accident year loss ratio for the Specialty Workers' Compensation and Excess Casualty business (within the U.S. and Canada region) and the Primary Casualty and Professional Indemnity lines (within the Europe region) as a result of the current year loss ratios established in connection with the 2010 loss reserve study. In addition, for the nine months ended September 30, 2011, the overall adjusted loss ratio increased due to an increase in losses on short tail lines, most notably within Property lines.

    For a more detailed discussion of Net Prior Year Loss Development, see the Liability for Unpaid Claims and Claims Adjustment Expense section that follows.

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Quarterly & Year-to-Date Expense Ratios

    For the three- and nine-month periods ended September 30, 2011, the overall increase in the expense ratio is due to the effects of foreign exchange and an overall increase in certain acquisition expenses, most notably within Property Lines. In addition, the increase in expense ratio reflects the effects of continued enhancements to regional governance, risk management capabilities and investments within countries in the Growth Economies region.


Consumer Insurance

    Consumer Insurance distributes its products through agents and brokers, as well as through direct marketing, partner organizations and the internet. Consumer Insurance products are categorized into three major lines of business:

Consumer Insurance Results

The following table presents Consumer Insurance results:

   
 
  Three Months
Ended September 30,
   
  Nine Months
Ended September 30,
   
 
 
  Percentage
Change

  Percentage
Change

 
(in millions)
  2011
  2010
  2011
  2010
 
   

Underwriting results:

                                     
 

Net premiums written

  $ 3,365   $ 3,223     4 % $ 10,002   $ 8,017     25 %
 

Increase in unearned premiums

    (43 )   (75 )   43     (153 )   (287 )   47  
   
 

Net premiums earned

    3,322     3,148     6     9,849     7,730     27  
 

Claims and claims adjustment expenses incurred

    2,143     1,940     10     6,698     4,640     44  
 

Underwriting expenses

    1,224     1,061     15     3,566     2,934     22  
   

Pre-tax income (loss)

  $ (45 ) $ 147     - % $ (415 ) $ 156     - %
   

Consumer Insurance Net Premiums Written

    Growing the higher margin Consumer Insurance business continues to be a key Chartis strategy. Consumer Insurance net premiums written increased 4 percent in the three-month period ended September 30, 2011 compared to the same period in 2010, primarily due to the following:

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    In the nine months ended September 30, 2011, Consumer Insurance grew net premiums written by 25 percent. These results reflect the effects of three quarters of Fuji net premiums written while the corresponding 2010 period reflects the effects of Fuji for only one quarter.


Consumer Insurance business is transacted in most major foreign currencies. The following table summarizes the effect of changes in foreign currency exchange rates on the growth of Consumer Insurance net premiums written:

   
 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2011 vs. 2010
  2011 vs. 2010
 
   

Increase (decrease) in original currency(a)(b)

    (2.8 )%   18.0 %

Foreign exchange effect

    7.2     6.8  
   

Increase (decrease) as reported in U.S. dollars

    4.4 %   24.8 %
   
(a)
Computed using a constant exchange rate for each period.

(b)
Substantially all of the increase for the nine-month period was attributable to the Fuji acquisition.

Consumer Insurance Underwriting Ratios

The following table presents the Consumer Insurance combined ratios based on GAAP data and the impact of catastrophe losses, prior year development and related reinstatement premiums and premium adjustments on loss-sensitive contracts on the Consumer Insurance consolidated loss and combined ratios:

   
 
  Three Months
Ended September 30,
   
  Nine Months
Ended September 30,
   
 
 
  Increase
(Decrease)

  Increase
(Decrease)

 
 
  2011
  2010
  2011
  2010
 
   
 

Loss ratio

    64.5     61.6     2.9     68.0     60.0     8.0  
 

Catastrophe losses and reinstatement premium

    (3.7 )   (0.2 )   (3.5 )   (6.9 )   (0.9 )   (6.0 )
 

Prior year development net of premium adjustments and including reserve discount

    (0.9 )   0.3     (1.2 )   (0.6 )   0.4     (1.0 )
   

Loss ratio, as adjusted

    59.9     61.7     (1.8 )   60.5     59.5     1.0  
   

Expense ratio

    36.8     33.7     3.1     36.2     38.0     (1.8 )
   

Combined ratio

    101.3     95.3     6.0     104.2     98.0     6.2  
 

Catastrophe losses and reinstatement premium

    (3.7 )   (0.2 )   (3.5 )   (6.9 )   (0.9 )   (6.0 )
 

Prior year development net of premium adjustments and including reserve discount

    (0.9 )   0.3     (1.2 )   (0.6 )   0.4     (1.0 )
   

Combined ratio, as adjusted

    96.7     95.4     1.3     96.7     97.5     (0.8 )
   

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Quarterly & Year-to-Date Loss Ratios

    The increase in the loss ratio in the three- and nine-month periods ended September 30, 2011 compared to the same periods in 2010 reflects the effect of increased catastrophe losses in those periods as shown in the table above. For the three- and nine-month periods ended September 30, 2011, Consumer Insurance recorded net adverse prior year development of $30 million and $58 million, respectively, compared to favorable net development of $8 million and $30 million for the same respective periods of 2010.

    For a more detailed discussion of Net Prior Year Loss Development, see the Liability for Unpaid Claims and Claims Adjustment Expense section that follows.

Quarterly & Year-to-Date Expense Ratios

    The increase in the expense ratio in the three-month period ended September 30, 2011 compared to the same period in 2010 was primarily attributable to the acquisition of a controlling interest in Fuji during 2010. Substantially all of Fuji's business is part of Consumer Insurance. Chartis recorded amortization of deferred acquisition costs of $112 million for the three-month period ended September 30, 2011 compared to amortization of $25 million for the same period in 2010. The increase was due to the amortization of acquisition costs that were deferred beginning after the Fuji acquisition.

    The decrease in the expense ratio in the nine-month period ended September 30, 2011 compared to the same period in 2010 was primarily attributable to Fuji. For the nine-month period ended September 30, 2011, results reflect three quarters of Fuji operations, while the corresponding 2010 period reflects Fuji operations for one quarter. Fuji has a lower average expense ratio than the rest of the Consumer Insurance business, which resulted in the overall decrease in the expense ratio. In addition, the expense ratio decreased due to the benefit associated from the amortization of net intangible liabilities from the Fuji acquisition, which increased by $73 million in the nine-month period ended September 30, 2011 compared to the same period in 2010.


Chartis Other

    Chartis Other consists primarily of certain run-off lines of business, including Excess Workers' Compensation and Asbestos, certain Chartis expense relating to global corporate initiatives, expense allocations from AIG Parent not attributable to the Commercial Insurance or Consumer Insurance operating segments, net investment income, realized capital gains and losses, bargain purchase gains relating to the purchase of Fuji and gains relating to the sale of properties.

Chartis Other Results

The following table presents Chartis Other results:

   
 
  Three Months
Ended September 30,
   
  Nine Months
Ended September 30,
   
 
 
  Percentage
Change

  Percentage
Change

 
(in millions)
  2011
  2010
  2011
  2010
 
   

Underwriting results:

                                     
 

Net premiums written

  $ 1   $ 40     (98 )% $ 31   $ 77     (60 )%
 

(Increase) decrease in unearned premiums

    12     (18 )   -     28     (10 )   -  
   
 

Net premiums earned

    13     22     (41 )   59     67     (12 )
 

Claims and claims adjustment expenses incurred

    27     139     (81 )   160     216     (26 )
 

Underwriting expenses

    49     30     63     192     119     61  
   

Underwriting loss

    (63 )   (147 )   57     (293 )   (268 )   (9 )
   

Investing and other results:

                                     
 

Net investment income

    1,024     1,007     2     3,345     3,191     5  
 

Net realized capital gains (losses)

    57     (207 )   -     143     (12 )   -  
 

Bargain purchase gain

    -     -     -     -     332     -  
 

Other income

    58     -     -     58     -     -  
 

Other expenses

    (59 )   -     -     (59 )   -     -  
   

Pre-tax income

  $ 1,017   $ 653     56 % $ 3,194   $ 3,243     (2 )%
   

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    Given the run-off nature of the legacy lines of business and the nature of the expenses included in Chartis Other, management has determined that traditional underwriting measures of loss ratio, expense ratio and combined ratio do not provide an appropriate measure of underwriting performance as they do for its ongoing Commercial Insurance and Consumer Insurance operating segments. Therefore, underwriting ratios are not presented for the Chartis Other category.

    For both the three and nine months ended, September 30, 2011 compared to the same periods in 2010, the decline in both net premiums written and claims and claim adjustment expenses incurred reflect the effects of the run-off activities associated with the Excess Workers' Compensation and Asbestos operations. All of the net premiums written in the above table relate to Excess Workers' Compensation. The Excess Workers' Compensation line of business is subject to premium audits (upon the expiration of the underlying policy) and as a result Chartis Other will reflect the effects of premium audit activity through subsequent years.

    The overall increase in underwriting expenses relates to increases for strategic Chartis initiatives, including global accounting and claims system implementations, Solvency II and certain other legal entity restructuring initiatives.

    For the three months ended September 30, 2011, the increase in net investment income is due to increases in interest relating to fixed maturity securities due to the continued shift in investment allocations away from tax-exempt municipal bonds towards taxable instruments within the U.S. which meet overall liquidity, duration and quality objectives as well as current risk-return and tax objectives. In addition, the increase relates to redeployment of cash and short term instruments into to longer term, higher yield securities. This increase is partially offset by reduced gains on matured life settlement contracts.

    The increase in net investment income for the nine months ended September 30, 2011 was due, in part, to Fuji investment income, which has been consolidated in the Chartis results since July 1, 2010.

    For the three and nine months ended September 30, 2011 compared to the same periods in 2010, increases in net realized capital gains and losses are due to gains on the sales of fixed maturity securities (primarily municipal bonds) in connection with the aforementioned strategy to better align Chartis' investment allocations with current overall performance and tax objectives. In addition, the increase is due to foreign exchange transaction gains on derivative instruments not designated for hedge accounting, which were primarily the result of the strengthening of the Japanese Yen against the U.S. dollar. These gains were partially offset by other-than-temporary impairments recognized within other invested assets classes, including life settlement contracts and to a lesser extent residential mortgage-backed securities (RMBS) and equity investments held by Fuji.

    For the three and nine months ended September 30, 2011, other-than-temporary impairment charges of $36 million and $290 million, respectively, were recorded by Chartis related to life settlement contracts, including approximately $16 million and $35 million of impairments, respectively, associated with life insurance policies issued by SunAmerica life insurance companies that are eliminated at the AIG consolidated level.

    At September 30, 2011, the domestic operations of Chartis held 5,998 life settlement contracts, with a carrying value of $4.1 billion and face value of $19.1 billion, of which 155 contracts with a carrying value of $159 million and face value of approximately $503 million relate to life insurance policies issued by SunAmerica life insurance companies. Impairments of life settlement contracts are evaluated on a contract-by-contract basis and a contract is identified as potentially impaired if its undiscounted future net cash flows are less than the current carrying value of such contract. Potentially impaired contracts are impaired, and written down to fair value, when the carrying value of the contract is greater than the estimated fair value.

    During the second quarter of 2011, the domestic operations of Chartis began receiving updated medical information as a result of an enhanced process in which updated medical information on individual insured lives is requested on a routine basis. In cases where updated information indicates that an individual's health has

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improved, an impairment loss may arise as a result of revised estimates of net cash flows from the related contract. The domestic operations of Chartis also revised their valuation table during the second quarter, which they use in estimating future net cash flows. This had the general effect of decreasing the projected net cash flows on a number of contracts. In the second quarter of 2011, these changes resulted in an increase in the number of contracts identified as potentially impaired compared to previous analyses. Further, the domestic operations of Chartis refined their fair values based upon the availability of recent medical information.

    The bargain purchase gain of $332 million in 2010 was recognized in connection with the acquisition of Fuji.

    See Liability for Unpaid Claims and Claims Adjustment Expense — Asbestos and Environmental Reserves herein for further discussion.


Liability for Unpaid Claims and Claims Adjustment Expense

    The following discussion of the consolidated liability for unpaid claims and claims adjustment expenses (loss reserves) presents loss reserves for Chartis as well as the loss reserves pertaining to the Mortgage Guaranty reporting unit, which is reported in AIG's Other operations category.


The following table presents the components of the loss reserves by major lines of business on a statutory basis*:

   
(in millions)
  September 30,
2011

  December 31,
2010

 
   

Other liability occurrence

  $ 23,786   $ 23,583  

International

    18,726     16,583  

Workers' compensation

    17,550     17,683  

Other liability claims made

    11,606     11,446  

Property

    5,988     3,846  

Auto liability

    3,124     3,337  

Mortgage guaranty credit

    3,010     4,220  

Products liability

    2,429     2,377  

Medical malpractice

    1,702     1,754  

Accident and health

    1,583     1,444  

Commercial multiple peril

    1,134     1,006  

Aircraft

    1,022     1,149  

Fidelity/surety

    799     934  

Other

    1,323     1,789  
   

Total

  $ 93,782   $ 91,151  
   
*
Presented by lines of business pursuant to statutory reporting requirements as prescribed by the National Association of Insurance Commissioners.

    AIG's gross loss reserves represent the accumulation of estimates of ultimate losses, including estimates for IBNR and loss expenses. The methods used to determine loss reserve estimates and to establish the resulting reserves are continually reviewed and updated. Any adjustments resulting from this review are currently reflected in pre-tax income. Because loss reserve estimates are subject to the outcome of future events, changes in estimates are unavoidable given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase previous estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost are referred to as favorable development.

    The net loss reserves represent loss reserves reduced by reinsurance recoverables, net of an allowance for unrecoverable reinsurance and applicable discount for future investment income.

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The following table classifies the components of net loss reserves by business unit:

   
(in millions)
  September 30,
2011

  December 31,
2010

 
   

Chartis:

             
 

Commercial Insurance

  $ 59,168   $ 57,344  
 

Consumer Insurance

    5,853     5,030  
 

Other

    5,708     5,700  
   

Total Chartis

    70,729     68,074  
   

Other operations – Mortgage Guaranty

    2,972     3,433  
   

Net liability for unpaid claims and claims adjustment expense at end of period

  $ 73,701   $ 71,507  
   


Discounting of Reserves

    At September 30, 2011, net loss reserves reflect a loss reserve discount of $3.17 billion, including tabular and non-tabular calculations. The tabular workers' compensation discount is calculated using a 3.5 percent interest rate and the 1979 - 81 Decennial Mortality Table. The non-tabular workers' compensation discount is calculated separately for companies domiciled in New York and Pennsylvania, and follows the statutory regulations for each state. For New York companies, the discount is based on a five percent interest rate and the companies' own payout patterns. For Pennsylvania companies, the statute has specified discount factors for accident years 2001 and prior, which are based on a six percent interest rate and an industry payout pattern. For accident years 2002 and subsequent, the discount is based on the payout patterns and investment yields of the companies. Certain other asbestos business that was written by Chartis is discounted based on the investment yields of the companies and the payout pattern for this business. The discount is comprised of the following: $790 million — tabular discount for workers' compensation in the domestic operations of Chartis and $2.27 billion — non-tabular discount for workers' compensation in the domestic operations of Chartis; and $113 million — non-tabular discount for asbestos for Chartis.


Quarterly Reserving Process

    AIG believes that its net loss reserves are adequate to cover net losses and loss expenses as of September 30, 2011. While AIG regularly reviews the adequacy of established loss reserves, there can be no assurance that AIG's ultimate loss reserves will not develop adversely and materially exceed AIG's loss reserves as of September 30, 2011. In the opinion of management, such adverse development and resulting increase in reserves are not likely to have a material adverse effect on AIG's consolidated financial condition, although such events could have a material adverse effect on AIG's consolidated results of operations for an individual reporting period.

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The following table presents the rollforward of net loss reserves:

   
 
  Three Months
Ended September 30,
  Nine Months
Ended September 30,
 
(in millions)
  2011
  2010
  2011
  2010
 
   

Net liability for unpaid claims and claims adjustment expense at beginning of period

  $ 73,567   $ 67,423   $ 71,507   $ 67,899  

Foreign exchange effect

    (94 )   580     617     (635 )

Acquisitions*

    -     -     -     1,538  

Dispositions

    -     -     -     (84 )
   

Losses and loss expenses incurred :

                         
 

Current year

    6,762     5,945     20,965     17,482  
 

Prior years, other than accretion of discount

    130     387     222     (226 )
 

Prior years, accretion of discount

    89     (26 )   293     146  
   

Losses and loss expenses incurred

    6,981     6,306     21,480     17,402  
   

Losses and loss expenses paid

    6,753     6,683     19,903     18,492  
   

Reclassified to liabilities held for sale

    -     -     -     (2 )
   

Net liability for unpaid claims and claims adjustment expense at end of period

  $ 73,701   $ 67,626   $ 73,701   $ 67,626  
   
*
Represents the acquisition of Fuji on March 31, 2010.


The following tables summarize development, (favorable) or unfavorable, of incurred losses and loss expenses for prior years (other than accretion of discount):

   
 
  Three Months
Ended September 30,
  Nine Months
Ended September 30,
 
(in millions)
  2011
  2010
  2011
  2010
 
   

Prior Accident Year Development by Operating Segment:

                         

Chartis:

                         
 

Commercial Insurance

  $ 40   $ 184   $ 99   $ 1  
 

Consumer Insurance

    30     (8 )   58     (30 )
 

Other

    10     185     32     241  
   

Total Chartis

    80     361     189     212  

Other operations – Mortgage Guaranty

    50     26     33     (438 )
   

Prior years, other than accretion of discount

  $ 130   $ 387   $ 222   $ (226 )
   

 

   
 
  Calendar Year  
Nine Months Ended September 30,
(in millions)
 
  2011
  2010
 
   

Prior Accident Year Development by Accident Year:

             

Accident Year

             
 

2010

  $ 102        
 

2009

    143   $ (144 )
 

2008

    (65 )   (200 )
 

2007

    (29 )   (91 )
 

2006

    (247 )   (119 )
 

2005

    (106 )   (10 )
 

2004 and prior

    424     338  
   

Prior years, other than accretion of discount

  $ 222   $ (226 )
   

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    Offsetting the unfavorable development were related additional premiums on loss-sensitive business of $153 million in 2011. Returned premiums of $18 million offset the favorable development in 2010.

    In determining the loss development from prior accident years, AIG conducts analyses to determine the change in estimated ultimate loss for each accident year for each class of business. For example, if loss emergence for a class of business is different than expected for certain accident years, the actuaries examine the indicated effect such emergence would have on the reserves of that class of business. In some cases, the higher or lower than expected emergence may result in no clear change in the ultimate loss estimate for the accident years in question, and no adjustment would be made to the reserves for the class of business for prior accident years. In other cases, the higher or lower than expected emergence may result in a larger change, either favorable or unfavorable, than the difference between the actual and expected loss emergence. Such additional analyses were conducted for each class of business, as appropriate, in the nine-month period ended September 30, 2011 to determine the loss development from prior accident years for that period. As part of its reserving process, AIG also considers notices of claims received with respect to emerging and/or evolving issues, such as those related to the U.S. mortgage and housing market.

    See Chartis Results herein and Other Operations — Other Operations Results — Mortgage Guaranty for further discussion of net loss development.


Asbestos and Environmental Reserves

    The estimation of loss reserves relating to asbestos and environmental claims on insurance policies written many years ago is subject to greater uncertainty than other types of claims due to inconsistent court decisions as well as judicial interpretations and legislative actions that in some cases have tended to broaden coverage beyond the original intent of such policies and in others have expanded theories of liability.

    As described more fully in AIG's 2010 Annual Report on Form 10-K, AIG's reserves relating to asbestos and environmental claims reflect a comprehensive ground-up analysis. In the nine-month period ended September 30, 2011, a minor amount of incurred loss pertaining to the asbestos loss reserve discount and a minor adjustment to the environmental gross and net reserves are reflected in the table below.

    On June 17, 2011, Chartis completed a transaction with NICO, a subsidiary of Berkshire Hathaway, Inc., under which the majority of Chartis' domestic asbestos liabilities were transferred to NICO as part of Chartis' ongoing strategy to reduce its overall loss reserve development risk. The transaction with NICO covers potentially volatile U.S.-related asbestos exposures. The transaction does not cover asbestos accounts that Chartis believes have already been reserved to their limit of liability or certain other ancillary asbestos exposure assumed by Chartis subsidiaries.

    Upon the closing of this transaction, but effective as of January 1, 2011, Chartis ceded the bulk of its net asbestos liabilities to NICO under a retroactive reinsurance agreement with an aggregate limit of $3.5 billion. Chartis paid NICO approximately $1.67 billion as consideration for this cession and NICO assumed approximately $1.82 billion of net asbestos liabilities. As a result of this transaction, Chartis recorded a deferred gain of $150 million in the second quarter of 2011, which is being amortized into income over the settlement period of the underlying claims. The minor amount of incurred loss pertaining to the asbestos loss reserve discount noted above is primarily related to the reserves subject to the NICO reinsurance agreement.

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The following table provides a summary of reserve activity, including estimates for applicable IBNR, relating to asbestos and environmental claims separately and combined:

   
Nine Months Ended September 30,
  2011   2010  
(in millions)
  Gross
  Net
  Gross
  Net
 
   

Asbestos:

                         
 

Liability for unpaid claims and claims adjustment expense at beginning of year

  $ 5,526   $ 2,223   $ 3,236   $ 1,151  
 

Losses and loss expenses incurred*

    117     50     389     160  
 

Losses and loss expenses paid*

    (375 )   (181 )   (492 )   (180 )
 

Other changes

    -     168     -     -  
   

Liability for unpaid claims and claims adjustment expense at end of period

    5,268     2,260     3,133     1,131  
   

Reduction of net liabilities for unpaid claims and claims adjustment expense due to NICO transaction

    -     (1,696 )   -     -  

Liability for unpaid claims adjustment expense at end of period, reflecting NICO transaction

  $ 5,268   $ 564   $ 3,133   $ 1,131  
   

Environmental:

                         
 

Liability for unpaid claims and claims adjustment expense at beginning of year

  $ 240   $ 127   $ 338   $ 159  
 

Losses and loss expenses incurred*

    32     17     18     17  
 

Losses and loss expenses paid*

    (64 )   (33 )   (73 )   (33 )
   

Liability for unpaid claims and claims adjustment expense at end of period

    208     111     283     143  
   

Combined:

                         
 

Liability for unpaid claims and claims adjustment expense at beginning of year

  $ 5,766   $ 2,350   $ 3,574   $ 1,310  
 

Losses and loss expenses incurred*

    149     67     407     177  
 

Losses and loss expenses paid*

    (439 )   (214 )   (565 )   (213 )
 

Other changes

    -     168     -     -  
   

Liability for unpaid claims and claims adjustment expense at end of period

    5,476     2,371     3,416     1,274  
   

Reduction of net liabilities for unpaid claims and claims adjustment expense due to NICO transaction

    -     (1,696 )   -     -  

Liability for unpaid claims adjustment expense at end of period, reflecting NICO transaction

  $ 5,476   $ 675   $ 3,416   $ 1,274  
   
*
All amounts pertain to policies underwritten in prior years, primarily to policies issued in 1984 and prior years. Losses and loss expenses incurred do not reflect the effect of the NICO agreement.


The following table presents the estimate of the gross and net IBNR included in the Liability for unpaid claims and claims adjustment expense, relating to asbestos and environmental claims separately and combined:

   
Nine Months Ended September 30,
  2011   2010  
(in millions)
  Gross
  Net
  Gross
  Net
 
   

Asbestos

  $ 3,793   $ 1,760   $ 2,016   $ 842  

Environmental

    75     28     117     43  
   

Combined

  $ 3,868   $ 1,788   $ 2,133   $ 885  
   

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The following table presents a summary of asbestos and environmental claims count activity:

   
 
  2011   2010  
Nine Months Ended September 30,
 
  Asbestos
  Environmental
  Combined
  Asbestos
  Environmental
  Combined
 
   

Claims at beginning of year

    4,933     4,087     9,020     5,417     5,994     11,411  

Claims during year:

                                     
 

Opened

    105     131     236     322     291     613  
 

Settled

    (153 )   (61 )   (214 )   (215 )   (102 )   (317 )
 

Dismissed or otherwise resolved

    (308 )   (399 )   (707 )   (559 )   (1,959 )   (2,518 )
 

Other*

    841     -     841     -     -     -  
   

Claims at end of period

    5,418     3,758     9,176     4,965     4,224     9,189  
   
*
Represents an administrative change to the method of determining the number of open claims, which had no effect on carried reserves.

Survival Ratios — Asbestos and Environmental

    The following table presents AIG's survival ratios for asbestos and environmental claims at September 30, 2011 and 2010. The survival ratio is derived by dividing the current carried loss reserve by the average payments for the three most recent calendar years for these claims. Therefore, the survival ratio is a simplistic measure estimating the number of years it would be before the current ending loss reserves for these claims would be paid off using recent year average payments. In addition, AIG's survival ratio for asbestos claims was negatively affected by certain favorable settlements during 2008 and 2007. These settlements reduced gross and net asbestos survival ratios at September 30, 2010 by approximately 0.2 years and 0.6 years, respectively.

    Many factors, such as aggressive settlement procedures, mix of business and level of coverage provided, have a significant effect on the amount of asbestos and environmental reserves and payments and the resultant survival ratio. Moreover, as discussed above, the primary basis for AIG's determination of its reserves are not survival ratios, but instead the ground-up and top-down analysis. Thus, caution should be exercised in attempting to determine reserve adequacy for these claims based simply on this survival ratio.


The following table presents survival ratios for asbestos and environmental claims, separately and combined, which were based upon a three-year average payment:

   
 
  2011   2010  
Nine Months Ended September 30,
  Gross
  Net*
  Gross
  Net
 
   

Survival ratios:

                         
 

Asbestos

    8.9     10.0     4.9     4.6  
 

Environmental

    2.9     2.7     4.1     3.4  
 

Combined

    8.3     8.9     4.8     4.4  
   
*
Survival ratios are calculated consistent with the basis of presentation in the reserve activity table above, which excludes the effects of the NICO cession.

SunAmerica Operations

    SunAmerica offers a comprehensive suite of products and services to individuals and groups including term life, universal life, A&H products, fixed and variable deferred annuities, fixed payout annuities, mutual funds and financial planning. SunAmerica offers its products and services through a diverse, multi-channel distribution network that includes banks, national, regional and independent broker-dealers, affiliated financial advisors, independent marketing organizations, independent and career insurance agents, structured settlement brokers, benefit consultants and direct to-consumer platforms.

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American International Group, Inc.

    In managing SunAmerica, AIG analyzes the operating performance of each business using Operating income (loss), which is before net realized capital gains (losses) and related DAC and SIA amortization, and goodwill impairment charges. Operating income (loss) is not a substitute for pre-tax income determined in accordance with U.S. GAAP. However, AIG believes that the presentation of Operating income (loss) enhances the understanding of the underlying profitability of the ongoing operations of SunAmerica. The reconciliations to pre-tax income are provided in the tables that follow.


SunAmerica Results

The following table presents SunAmerica results:

   
 
  Three Months Ended September 30,    
  Nine Months Ended September 30,    
 
 
  Percentage
Change

  Percentage
Change

 
(in millions)
  2011
  2010
  2011
  2010
 
   

Domestic Life Insurance:

                                     

Revenue:

                                     
 

Premiums

  $ 591   $ 595     (1 )% $ 1,874   $ 1,920     (2 )%
 

Policy fees

    353     397     (11 )   1,095     1,140     (4 )
 

Net investment income

    954     1,105     (14 )   2,966     3,189     (7 )

Operating expenses:

                                     
 

Policyholder benefits and claims incurred

    1,067     1,041     2     3,290     3,247     1  
 

Interest credited to policyholder account balances

    217     212     2     636     631     1  
 

Amortization of deferred acquisition costs

    130     211     (38 )   390     528     (26 )
 

Policy acquisition and other expenses

    226     255     (11 )   714     720     (1 )
   

Operating income

    258     378     (32 )   905     1,123     (19 )
 

Net realized capital gains (losses)

    236     (20 )   -     307     (260 )   -  

Amortization of DAC, VOBA and SIA

                                     
   

related to net realized capital gains (losses)

    (20 )   (15 )   (33 )   (26 )   (9 )   (189 )
   

Pre-tax income

  $ 474   $ 343     38 % $ 1,186   $ 854     39 %
   

Domestic Retirement Services:

                                     

Revenue:

                                     
 

Policy fees

  $ 305   $ 276     11 % $ 929   $ 838     11 %
 

Net investment income

    1,341     1,551     (14 )   4,544     4,802     (5 )

Operating expenses:

                                     
 

Policyholder benefits and claims incurred

    123     (34 )   -     127     24     429  
 

Interest credited to policyholder account balances

    917     913     -     2,713     2,730     (1 )
 

Amortization of deferred acquisition costs

    230     75     207     613     381     61  
 

Policy acquisition and other expenses

    190     223     (15 )   595     623     (4 )
   

Operating income

    186     650     (71 )   1,425     1,882     (24 )
 

Net realized capital gains (losses)

    (198 )   40     -     (398 )   (1,482 )   73  

Benefit (amortization) of DAC, VOBA and SIA related to net realized capital gains (losses)

    (153 )   (35 )   (337 )   (189 )   159     -  
   

Pre-tax income (loss)

  $ (165 ) $ 655     - % $ 838   $ 559     50 %
   

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American International Group, Inc.


   
 
  Three Months Ended September 30,    
  Nine Months Ended September 30,    
 
 
  Percentage
Change

  Percentage
Change

 
(in millions)
  2011
  2010
  2011
  2010
 
   

Total SunAmerica:

                                     

Revenue:

                                     
 

Premiums

  $ 591   $ 595     (1 )% $ 1,874   $ 1,920     (2 )%
 

Policy fees

    658     673     (2 )   2,024     1,978     2  
 

Net investment income

    2,295     2,656     (14 )   7,510     7,991     (6 )

Operating expenses:

                                     
 

Policyholder benefits and claims incurred

    1,190     1,007     18     3,417     3,271     4  
 

Interest credited to policyholder account balances

    1,134     1,125     1     3,349     3,361     -  
 

Amortization of deferred acquisition costs

    360     286     26     1,003     909     10  
 

Policy acquisition and other expenses

    416     478     (13 )   1,309     1,343     (3 )
   

Operating income

    444     1,028     (57 )   2,330     3,005     (22 )
 

Net realized capital gains (losses)

    38     20     90     (91 )   (1,742 )   95  

Benefit (amortization) of DAC, VOBA and SIA related to net realized capital gains (losses)

    (173 )   (50 )   (246 )   (215 )   150     -  
   

Pre-tax income

  $ 309   $ 998     (69 )% $ 2,024   $ 1,413     43 %
   


Quarterly SunAmerica Results

    SunAmerica reported a decrease in operating income in the three-month period ended September 30, 2011 compared to the same period in 2010, reflecting the following:

    Pre-tax income for SunAmerica reflected $38 million of net realized capital gains in the three-month period ended September 30, 2011 compared to $20 million of net realized capital gains in the same period in 2010. The three-month period ended September 30, 2011 included a $227 million increase in fair value losses of embedded derivatives, net of economic hedges, compared to the same period in 2010, driven by declines in long- term interest rates and increased volatility in the equity markets. These losses were partially offset by foreign currency gains, net of hedges on guaranteed investment contract (GIC) reserves and decreases in the allowance for mortgage and bank loans. See Results of Operations — Net Realized Capital Gains (Losses).


Year-to-Date SunAmerica Results

    SunAmerica reported a decrease in operating income in the nine-month period ended September 30, 2011 compared to the same period in 2010, reflecting the following:

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American International Group, Inc.

    SunAmerica's life insurance companies have received industry-wide regulatory inquiries with respect to claims settlement practices and compliance with unclaimed property laws. SunAmerica has enhanced its claims practices to use information such as the Social Security Death Master File to determine when insureds have died, and thus increased its estimated reserves for IBNR death claims by approximately $100 million in the second quarter of 2011. This estimate did not change significantly in the third quarter of 2011. Prior to the second quarter of 2011, SunAmerica already had robust practices relating to insurance claims settlements and compliance with unclaimed property laws that are consistent with applicable legal requirements and historical industry standards.

    Pre-tax income for SunAmerica reflected a decline in net realized capital losses in the nine-month period ended September 30, 2011 compared to the same period in 2010 due principally to a $704 million decline in other-than-temporary impairments, a decline in fair value losses on derivatives primarily used to hedge the effect of interest rate and foreign exchange movements on GIC reserves, and declines in the allowance for mortgage loans. See Results of Operations — Net Realized Capital Gains (Losses).


Sales and Deposits

The following tables summarize SunAmerica Premiums, deposits and other considerations by product*:

   
 
  Three Months
Ended September 30,
   
  Nine Months
Ended September 30,
   
 
 
  Percentage
Change

  Percentage
Change

 
(in millions)
  2011
  2010
  2011
  2010
 
   

Premiums, deposits and other considerations Individual fixed annuity deposits

  $ 1,333   $ 896     49 % $ 5,502   $ 3,326     65 %
 

Group retirement product deposits

    1,982     1,580     25     5,389     4,790     13  
 

Life insurance

    1,092     1,148     (5 )   3,520     3,787     (7 )
 

Individual variable annuity deposits

    800     556     44     2,391     1,409     70  
 

Retail mutual funds

    522     236     121     1,261     767     64  
 

Individual annuities runoff

    17     22     (23 )   53     64     (17 )
   

Total premiums, deposits and other considerations

  $ 5,746   $ 4,438     29 % $ 18,116   $ 14,143     28 %
   
 

Retail

    62     54     15     182     156     17  
 

Institutional

    3     3         9     27     (67 )
   

Life insurance sales

  $ 65   $ 57     14 % $ 191   $ 183     4 %
   
*
Life insurance sales include periodic premiums from new business expected to be collected over a one-year period and single premiums and unscheduled deposits from new and existing policyholders. Annuity sales represent deposits from new and existing customers.


Premiums

    Premiums represent premiums received on traditional life insurance policies and deposits on life contingent payout annuities. Premiums, deposits and other considerations is a non-GAAP measure which includes life insurance premiums, deposits on annuity contracts and mutual funds.


The following table presents a reconciliation of premiums, deposits and other considerations to premiums:

   
 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
(in millions)
  2011
  2010
  2011
  2010
 
   

Premiums, deposits and other considerations

  $ 5,746   $ 4,438   $ 18,116   $ 14,143  

Deposits

    (5,172 )   (3,811 )   (16,284 )   (12,127 )

Other

    17     (32 )   42     (96 )
   

Premiums

  $ 591   $ 595   $ 1,874   $ 1,920  
   

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American International Group, Inc.

    Total premiums, deposits and other considerations increased in both the three- and nine-month periods ended September 30, 2011 as deposits from individual fixed annuities, individual variable annuities and retail mutual funds all showed significant increases.

    Group retirement deposits increased primarily due to an increase in individual rollover deposits. Individual fixed annuity deposits increased as certain bank distributors negotiated a lower commission in exchange for a higher rate offered to policyholders which made SunAmerica's individual fixed products more attractive. However, individual fixed annuity deposits were down sequentially from the three months ended June 30, 2011 primarily due to the low interest rate environment experienced during the third quarter. Variable annuity sales increased due to reinstatements at a number of key broker-dealers, and increased wholesaler productivity. Retail mutual funds increased as a result of increased sales due to a sales strategy surrounding cyclical investment themes. The decline in life insurance deposits was primarily driven by lower payout and deferred annuity sales and, for the nine months ended September 30, 2011, lower institutional life sales.

    Retail life insurance sales increased as product enhancements and efforts to re-engage independent distribution continue to produce results. Sales of large institutional life policies decreased from prior periods which included significant variable universal life sales.

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American International Group, Inc.



Domestic Retirement Services Sales and Deposits

The following table presents the account value rollforward for Domestic Retirement Services:

   
 
  Three Months Ended September 30,   Nine Months Ended September 30,  
(in millions)
  2011
  2010
  2011
  2010
 
   

Group retirement products

                         

Balance, beginning of year

  $ 71,133   $ 62,216   $ 68,365   $ 63,419  
 

Deposits – annuities

    1,611     1,232     4,205     3,759  
 

Deposits – mutual funds

    371     348     1,184     1,031  
   
 

Total deposits

    1,982     1,580     5,389     4,790  
 

Surrenders and other withdrawals

    (1,448 )   (1,411 )   (4,399 )   (4,827 )
 

Death benefits

    (86 )   (74 )   (259 )   (225 )
   
 

Net inflows (outflows)

    448     95     731     (262 )
 

Change in fair value of underlying investments, interest credited, net of fees

    (4,926 )   3,471     (2,441 )   2,625  
   

Balance, end of period

  $ 66,655   $ 65,782   $ 66,655   $ 65,782  
   

Individual fixed annuities

                         

Balance, beginning of year

  $ 50,994   $ 47,998   $ 48,489   $ 47,202  
 

Deposits

    1,333     896     5,502     3,326  
 

Surrenders and other withdrawals

    (833 )   (854 )   (2,586 )   (2,651 )
 

Death benefits

    (392 )   (371 )   (1,219 )   (1,133 )
   
 

Net inflows (outflows)

    108     (329 )   1,697     (458 )
 

Change in fair value of underlying investments, interest credited, net of fees

    446     478     1,362     1,403  
   

Balance, end of period

  $ 51,548   $ 48,147   $ 51,548   $ 48,147  
   

Individual variable annuities

                         

Balance, beginning of year

  $ 26,083   $ 23,318   $ 25,581   $ 24,637  
 

Deposits

    800     556     2,391     1,409  
 

Surrenders and other withdrawals

    (690 )   (610 )   (2,366 )   (1,971 )
 

Death benefits

    (119 )   (101 )   (344 )   (327 )
   
 

Net outflows

    (9 )   (155 )   (319 )   (889 )
 

Change in fair value of underlying investments, interest credited, net of fees

    (2,357 )   1,881     (1,545 )   1,296  
   

Balance, end of period

  $ 23,717   $ 25,044   $ 23,717   $ 25,044  
   

Total Domestic Retirement Services

                         

Balance, beginning of year

  $ 148,210   $ 133,532   $ 142,435   $ 135,258  
 

Deposits

    4,115     3,032     13,282     9,525  
 

Surrenders and other withdrawals

    (2,971 )   (2,875 )   (9,351 )   (9,449 )
 

Death benefits

    (597 )   (546 )   (1,822 )   (1,685 )
   
 

Net inflows (outflows)

    547     (389 )   2,109     (1,609 )
 

Change in fair value of underlying investments, interest credited, net of fees

    (6,837 )   5,830     (2,624 )   5,324  
   
 

Balance, end of period, excluding runoff

    141,920     138,973     141,920     138,973  
 

Individual annuities runoff

    4,311     4,486     4,311     4,486  
 

GIC runoff

    6,712     8,478     6,712     8,478  
 

Retail mutual funds

    5,718     5,832     5,718     5,832  
   

Balance, end of period

  $ 158,661   $ 157,769   $ 158,661   $ 157,769  
   

General and separate account reserves and mutual funds

                         
 

General account reserve

  $ 101,572   $ 97,944   $ 101,572   $ 97,944  
 

Separate account reserve

    42,808     45,605     42,808     45,605  
   

Total general and separate account reserves

    144,380     143,549     144,380     143,549  
 

Group retirement mutual funds

    8,563     8,388     8,563     8,388  
 

Retail mutual funds

    5,718     5,832     5,718     5,832  
   

Total reserves and mutual funds

  $ 158,661   $ 157,769   $ 158,661   $ 157,769  
   

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American International Group, Inc.

    Net flows improved in 2011 due to the impact of both the significant increase in deposits and favorable surrender experience in group retirement and individual fixed annuities. Surrender rates for individual fixed annuities have decreased in 2011 due to the low interest rate environment and the relative competitiveness of interest credited rates on the existing block of fixed annuities versus interest rates on alternative investment options available in the marketplace. SunAmerica has returned to a more normal level of group surrender activity that no longer reflects the negative AIG publicity associated with the events of 2008 and 2009.


The following table presents reserves by surrender charge category and surrender rates:

   
 
  2011   2010  
At September 30,
(in millions)
  Group
Retirement
Products
*
  Individual
Fixed
Annuities

  Individual
Variable
Annuities

  Group
Retirement
Products
*
  Individual
Fixed
Annuities

  Individual
Variable
Annuities

 
   
 

No surrender charge

  $ 51,798   $ 17,010   $ 9,333   $ 50,647   $ 13,272   $ 11,151  
 

0% - 2%

    1,007     2,981     4,147     1,157     3,585     3,943  
 

Greater than 2% - 4%

    1,189     4,893     1,785     1,762     5,014     1,854  
 

Greater than 4%

    3,226     23,578     7,440     2,926     23,135     6,959  
 

Non-Surrenderable

    872     3,086     1,012     902     3,141     1,137  
   
 

Total reserves

  $ 58,092   $ 51,548   $ 23,717   $ 57,394   $ 48,147   $ 25,044  
   

Surrender rates

    8.4 %   6.9 %   12.4 %   10.1 %   7.4 %   11.1 %
   
*
Excludes mutual funds of $8.6 billion and $8.4 billion at September 30, 2011 and 2010, respectively.


The following table summarizes the major components of the changes in SunAmerica DAC/VOBA:

   
Nine Months Ended September 30,
(in millions)
  2011
  2010
 
   

Balance, beginning of year

  $ 9,606   $ 11,098  
 

Acquisition costs deferred

    898     736  
 

Amortization expense*

    (1,187 )   (786 )
 

Change in unrealized losses on securities

    (673 )   (1,647 )
 

Other

    3     -  
   

Balance, end of period

  $ 8,647   $ 9,401  
   
*
Net of benefit of DAC and VOBA related to net realized capital losses.

    As SunAmerica operates in various markets, the estimated gross profits used to amortize DAC and VOBA are subject to differing market returns and interest rate environments in any single period. The combination of market returns and interest rates may lead to acceleration of amortization in some products and simultaneous deceleration of amortization in other products.

    DAC and VOBA for insurance-oriented, investment-oriented and retirement services products are reviewed for recoverability, which involves estimating the future profitability of current business. This review involves significant management judgment. If actual future profitability is substantially lower than estimated, SunAmerica's DAC and VOBA may be subject to an impairment charge and its results of operations could be significantly affected in future periods. SunAmerica also conducts a review for recognition of losses assuming that the unrealized gains included in other comprehensive income are actually realized and the proceeds are reinvested at lower yields. Under these circumstances investment returns may not be sufficient to meet policy obligations. Due to significant unrealized investment appreciation resulting from the low interest rate environment, SunAmerica recognized a pre-tax adjustment to accumulated other comprehensive income as a consequence of the recognition of additional policyholder benefit reserves of approximately $1.6 billion and a related reduction of deferred acquisition costs (DAC) of approximately $0.1 billion. The adjustment to policyholder benefit reserves assumes the unrealized appreciation on available-for-sale securities is actually realized and the proceeds are reinvested at lower yields.

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American International Group, Inc.

Aircraft Leasing Operations

    AIG's Aircraft Leasing operations are the operations of ILFC, which generates its revenues primarily from leasing new and used commercial jet aircraft to foreign and domestic airlines. Aircraft Leasing operations also include gains and losses that result from the remarketing of commercial jet aircraft for ILFC's own account, and remarketing and fleet management services for airlines and other aircraft fleet owners.


Aircraft Leasing Results

Aircraft Leasing results were as follows:

   
 
  Three Months Ended
September 30,
   
  Nine Months Ended
September 30,
   
 
 
  Percentage
Change

  Percentage
Change

 
(in millions)
  2011
  2010
  2011
  2010
 
   

Aircraft leasing revenues:

                                     
 

Rental revenue

  $ 1,117   $ 1,181     (5 )% $ 3,369   $ 3,575     (6 )%
 

Interest and other revenues

    12     5     NM     50     34     47  
   

Total aircraft leasing revenues

    1,129     1,186     (5 )   3,419     3,609     (5 )
   

Interest expense

    353     373     (5 )   1,082     1,030     5  

Loss on extinguishment of debt

    -     -     -     61     -     -  

Aircraft leasing expense:

                                     
 

Depreciation expense

    468     474     (1 )   1,380     1,448     (5 )
 

Impairments charges, fair value adjustments and lease-related charges

    1,518     465     NM     1,673     962     74  
 

Other expenses

    107     92     16     337     261     29  
   
 

Total aircraft leasing expense

    2,093     1,031     NM     3,390     2,671     27  
   

Operating loss

    (1,317 )   (218 )   NM     (1,114 )   (92 )   NM  
 

Net realized capital gains (losses)

    (12 )   4     -     (8 )   (30 )   73  
   

Pre-tax loss

  $ (1,329 ) $ (214 )   NM % $ (1,122 ) $ (122 )   NM %
   


Quarterly Aircraft Leasing Results

    Aircraft Leasing pre-tax loss increased in the three-month period ended September 30, 2011 compared to the same period in 2010 primarily due to higher impairment charges, fair value adjustments and lease-related charges recorded on aircraft, lower rental revenues as a result of a reduction in ILFC's average aircraft fleet size and lower lease rates on used aircraft. For the three-month period ended September 30, 2011, ILFC had an average of 934 aircraft in its fleet, compared to 943 for the three-month period ended September 30, 2010. During the third quarter of 2011, ILFC recorded impairment charges, fair value adjustments and lease-related charges of $1.5 billion compared to charges of $465 million in the same period in 2010.

    ILFC performs an annual analysis of the recoverability of each individual aircraft in its fleet during the third quarter ("Assessment"). As part of this process, ILFC updates all critical and significant assumptions used in the impairment analysis, including projected lease rates and terms, residual values, overhaul rental realization and aircraft holding periods. Management uses its judgment when determining assumptions used in the recoverability analysis, taking into consideration historical data, current macro-economic and industry trends and conditions, and any changes in management's intent for any aircraft. In monitoring the aircraft in ILFC's fleet for impairment charges on an on-going basis, ILFC consider facts and circumstances, including potential sales and part-outs that would require it to modify its assumptions used in its recoverability assessments and prepare revised recoverability assessments as necessary.

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    In the Assessment performed during the third quarter of 2011, ILFC considered recent developments including:

    In addition to these factors, ILFC considered its newly acquired end-of-life management capabilities from its acquisition of AeroTurbine, which ILFC finalized on October 7, 2011, and its impact on ILFC's strategy. While ILFC's overall business model has not changed, its expectation of how it may manage out-of-production aircraft, or aircraft that have been affected by new technology developments, changed due to the AeroTurbine acquisition. The acquisition of AeroTurbine provides ILFC with increased choices in managing the end-of-life of aircraft in its fleet and makes the part-out of an aircraft a more economically and commercially viable option by bringing the requisite capabilities in-house and eliminating the payment of commissions to third parties. Parting-out aircraft will also enable ILFC to retain more cash flows from an aircraft during the last cycle of its life by allowing ILFC to eliminate certain maintenance costs and realize higher net overhaul revenues.

    As part of the Assessment performed during the three months ended September 30, 2011, management performed a review of aircraft in its fleet that are currently out-of-production, or have been affected by new technology developments. The purpose of the review was to identify end-of-life options that are the most likely to occur on an individual aircraft basis in light of market conditions and the AeroTurbine acquisition. Most of the aircraft reviewed were in the second half of their estimated 25 year useful life. The current economic environment for these aircraft has been challenging and the outlook is expected to become more challenging due to the trends noted above. All of these factors contributed to management's conclusion that many of these aircraft would be disposed of prior to the end of their previously estimated useful life.

    The result of the Assessment based on ILFC's updated assumptions and management's change in its end-of-life strategy for older generation aircraft indicated that the book value of 95 aircraft were not fully recoverable and these aircraft were deemed impaired as of September 30, 2011. The aircraft impaired were primarily out-of-production aircraft, or aircraft that have been impacted by new technology developments, included in the aforementioned review. For the three-month period ended September 30, 2011, ILFC recorded impairment charges of $1.5 billion on the 95 impaired aircraft and two additional aircraft that it deemed more likely than not to be sold.


Year-to-Date Aircraft Leasing Results

    Aircraft Leasing pre-tax loss increased in the nine-month period ended September 30, 2011 compared to the same period in 2010 primarily due to higher impairment charges, fair value adjustments and lease-related charges recorded on aircraft, lower rental revenues as a result of a reduction in ILFC's average aircraft fleet size and lower lease rates on used aircraft. For the nine-month period ended September 30, 2011, ILFC had an average of 933 aircraft in its fleet, compared to 968 for the nine-month period ended September 30, 2010. As described above, during the nine-month period ended September 30, 2011, Aircraft Leasing recorded impairment charges, fair value adjustments and lease-related charges of $1.7 billion compared to charges of $962 million in the same period in 2010.

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Other Operations

    The components of AIG's Other operations were revised in the third quarter of 2011, primarily as a result of the reclassification of non-aircraft leasing operations from the Financial Services reportable segment as discussed in Note 3 to the Consolidated Financial Statements, as follows:

    AIG's Other operations include the following:

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Other Operations Results

The following table presents pre-tax income for AIG's Other operations:

   
 
  Three Months
Ended September 30,
   
  Nine Months
Ended September 30,
   
 
 
  Percentage
Change

  Percentage
Change

 
(in millions)
  2011
  2010
  2011
  2010
 
   
 

Mortgage Guaranty

  $ (80 ) $ (127 )   37 % $ (66 ) $ 214     - %
 

Global Capital Markets

    (187 )   145     -     (66 )   (99 )   33  
 

Direct Investment book

    103     (26 )   -     586     602     (3 )
 

Retained interests:

                                     
   

Change in the fair value of the MetLife securities prior to their sale

    -     -     -     (157 )   -     -  
   

Change in fair value of AIA securities

    (2,315 )   -     -     268     -     -  
   

Change in fair value of ML III

    (931 )   301     -     (854 )   1,410     -  
   

Corporate & Other:

                                     
 

Interest expense on FRBNY Credit Facility

    -     (1,319 )   -     (72 )   (2,907 )   98  
 

Other interest expense

    (498 )   (580 )   14     (1,545 )   (1,830 )   16  
 

Other corporate expenses

    (335 )   (215 )   (56 )   (403 )   (1,178 )   66  
 

Loss on extinguishment of debt

    -     -     -     (3,331 )   -     -  
 

Net realized capital gains (losses)

    312     (510 )   -     (111 )   133     -  
 

Net gain (loss) on sale of divested businesses

    (2 )   4     -     (76 )   126     -  
   

Total Corporate & Other

    (523 )   (2,620 )   80     (5,538 )   (5,656 )   2  
   
 

Divested businesses

    -     637     -     -     2,037     -  
 

Consolidation and eliminations

    (10 )   122     -     (26 )   371     -  
   

Total Other operations

  $ (3,943 ) $ (1,568 )   (151 )% $ (5,853 ) $ (1,121 )   (422 )%
   


Mortgage Guaranty

Quarterly Mortgage Guaranty Results

    UGC recorded a decline in pre-tax loss in the three-month period ended September 30, 2011 compared to the same period in 2010, primarily due to:

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    Partially offsetting these declines in expenses were declines in earned premiums from the second-lien, private student loan and international businesses resulting from these businesses being placed into runoff during the fourth quarter of 2008, partially offset by an increase in earned premiums from first-lien business.

    UGC, like other participants in the mortgage insurance industry, has made claims against various counterparties in relation to alleged underwriting failures, and received similar claims from counterparties. These claims and counter-claims allege breach of contract, breach of good faith and fraud, among other allegations. During the three-month period ended September 30, 2011, UGC accrued $22 million to pay for previously rescinded losses, certain legal fees and interest in connection with an adverse judgment. UGC has appealed the court's decision.

Year-to-Date Mortgage Guaranty Results

    UGC recorded a pre-tax loss in the nine-month period ended September 30, 2011 compared to a pre-tax income in the same period in 2010, primarily due to:

    Partially offsetting these declines was a reduction in underwriting expenses reflecting a $94 million accrual of estimated remedy losses in 2010 described above.

Risk-in-Force

The following table presents risk in force and delinquency ratio information for Mortgage Guaranty domestic business:

   
At September 30,
(dollars in billions)
  2011
  2010
 
   

Domestic first-lien:

             
 

Risk in force

  $ 25.1   $ 25.5  
 

60+ day delinquency ratio on primary loans(a)

    14.1 %   17.8 %

Domestic second-lien:

             
 

Risk in force(b)

  $ 1.6   $ 2.2  
   
(a)
Based on number of policies.

(b)
Represents the full amount of second-lien loans insured reduced for contractual aggregate loss limits on certain pools of loans, usually 10 percent of the full amount of loans insured in each pool. Certain second-lien pools have reinstatement provisions, which will expire as the loan balances are repaid.

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Global Capital Markets Operations

Quarterly Global Capital Markets Results

    Global Capital Markets reported a pre-tax loss in the three-month period ended September 30, 2011 compared to a pre-tax gain in the same period in 2010 primarily due to a decrease in unrealized market valuation gains related to the AIGFP super senior credit default swap portfolio and a shift from a gain position in 2010 to a loss position in 2011 on the AIGFP credit default swap contracts referencing single-name exposures written on corporate, index and asset-backed credits, which are not included in the AIGFP super senior credit default swap portfolio. During the three-month period ended September 30, 2011, AIGFP recorded an unrealized market valuation gain on its super senior credit default swap portfolio of $3 million compared to an unrealized market valuation gain of $152 million in the three-month period ended September 30, 2010. The decline in gains resulted primarily from CDS transactions written on multi-sector CDOs and CDS transactions in the corporate arbitrage portfolio driven by price decreases on the underlying assets (See Critical Accounting Estimates — Fair Value Measurements of Certain Financial Assets and Liabilities — Level 3 Assets and Liabilities for a discussion of the AIGFP super senior credit default swap portfolio). During the three-month period ended September 30, 2011, AIGFP recognized a loss of $19 million on credit default swap contracts referencing single-name exposures as compared to a gain of $108 million in the same period in 2010.

Year-to-Date Global Capital Markets Results

    Global Capital Markets reported a lower pre-tax loss in the nine-month period ended September 30, 2011 compared to the same period in 2010 primarily due to improvements related to the net effect of changes in credit spreads on the credit valuation adjustments of AIGFP's derivative assets and liabilities, partially offset by a decrease in unrealized market valuation gains related to the AIGFP super senior credit default swap portfolio. During the nine-month period ended September 30, 2011, AIGFP recognized a net credit valuation adjustment loss on derivative assets and liabilities of $71 million compared to a net credit valuation loss of $379 million in the same period in 2010. The valuation improvement represents a narrowing of corporate spreads. During the nine-month period ended September 30, 2011, AIGFP recorded an unrealized market valuation gain on its super senior credit default swap portfolio of $232 million compared to an unrealized market valuation gain of $432 million in the same period in 2010. The reduction in gains resulted primarily from CDS transactions written on multi-sector CDOs driven by price declines of the underlying assets. During the nine-month period ended September 30, 2011, AIGFP recognized a loss of $28 million on credit default swap contracts referencing single-name exposures as compared to a gain of $111 million in the same period in 2010.


Direct Investment Book Results

    The Direct Investment book reported pre-tax income in the three-month period ended September 30, 2011 compared to a pre-tax loss in the same period in 2010, primarily due to gains on the credit valuation adjustment on the non-derivative liabilities accounted for under the fair value option which more than offset negative credit valuation adjustments on the non-derivative asset portfolio. This net gain was partially offset by lower interest income in the MIP on a lower asset base due to asset sales in the fourth quarter of 2010 and the first quarter of 2011. For the nine-month period ended September 30, 2011 compared to the same period in 2010, the DIB pre-tax income decreased slightly due to lower net gains on credit valuation adjustments on non-derivative assets and liabilities accounted for under the fair value option, offset by significantly lower other-than-temporary impairments on fixed maturity securities.

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The following table presents credit valuation adjustment gains (losses) for the Direct Investment book (excluding intercompany transactions):

   
(in millions)
   
   
   
 

 

 
Counterparty Credit
Valuation Adjustment on Assets
  AIG's Own Credit
Valuation Adjustment on Liabilities
 

Three Months Ended September 30, 2011

                 

Bond trading securities

  $ (403 )

Notes and bonds payable

  $ 164  

Loans and other assets

    (1 )

Hybrid financial instrument liabilities

    186  

       

GIAs

    85  

       

Other liabilities

    23  

 

     

Decrease in assets

  $ (404 )

Decrease in liabilities

  $ 458  

 

     

Net pre-tax increase to Other income

  $ 54            
   

Three Months Ended September 30, 2010

                 

Bond trading securities

  $ 276  

Notes and bonds payable

  $ (96 )

Loans and other assets

    8  

Hybrid financial instrument liabilities

    (116 )

       

GIAs

    (114 )

       

Other liabilities

    (16 )

 

     

Increase in assets

  $ 284  

Increase in liabilities

  $ (342 )

 

     

Net pre-tax decrease to Other income

  $ (58 )          
   

 

   
(in millions)
   
   
   
 

 

 
Counterparty Credit
Valuation Adjustment on Assets
  AIG's Own Credit
Valuation Adjustment on Liabilities
 

Nine Months Ended September 30, 2011

                 

Bond trading securities

  $ (121 )

Notes and bonds payable

  $ 160  

Loans and other assets

    17  

Hybrid financial instrument liabilities

    178  

       

GIAs

    114  

       

Other liabilities

    22  

 

     

Decrease in assets

  $ (104 )

Decrease in liabilities

  $ 474  

 

     

Net pre-tax increase to Other income

  $ 370            
   

Nine Months Ended September 30, 2010

                 

Bond trading securities

  $ 1,346  

Notes and bonds payable

  $ (219 )

Loans and other assets

    53  

Hybrid financial instrument liabilities

    (280 )

       

GIAs

    (193 )

       

Other liabilities

    (40 )

 

     

Increase in assets

  $ 1,399  

Increase in liabilities

  $ (732 )

 

     

Net pre-tax increase to Other income

  $ 667            
   


Change in Fair Value of the MetLife Securities Prior to Sale

    AIG recognized a loss in the nine-month period ended September 30, 2011, representing the decline in the securities' value, due to market conditions, from December 31, 2010 through the date of their sale in the first quarter of 2011.

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Change in Fair Value of AIA Securities

    AIG recognized a loss in the three-month period ended September 30, 2011, representing a decline in the value of the AIA ordinary shares that offset almost the entire gain recognized on the shares during the strong equity markets in the first six months of 2011.


Change in Fair Value of ML III

    The loss attributable to AIG's interest in ML III for the three-month period ended September 30, 2011 was due to significant spread widening, reduced interest rates and changes in the timing of future estimated cash flows. The loss for the nine-month period ended September 30, 2011 was due to significant spread widening in the second and third quarters and reduced interest rates in the third quarter.


Corporate & Other

    Corporate & Other reported a decline in pre-tax losses in the three-month period ended September 30, 2011 compared to the same period in 2010 primarily due to:

    These improvements were partially offset by severance expenses and asset write-offs relating to infrastructure consolidation initiatives and an increase in the provision for legal contingencies.

    Corporate & Other reported a slight decline in pre-tax losses in the nine-month period ended September 30, 2011 compared to the same period in 2010 primarily due to:

    These improvements were mostly offset by a loss on extinguishment of debt of $3.3 billion in connection with the Recapitalization, primarily consisting of the accelerated amortization of the prepaid commitment fee asset resulting from the termination of the FRBNY Credit Facility and net realized capital losses recorded in the first nine months of 2011 compared to net realized capital gains in the same period in 2010.


Divested Businesses

    Divested businesses include the operating results of divested businesses that did not qualify for discontinued operations accounting through the date of their sale as well as certain non-core businesses currently in run-off. The Divested businesses results for the three and nine months ended September 30, 2010 primarily represent the historical results of AIA, which was deconsolidated in November 2010.

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Capital Resources and Liquidity

Overview

    AIG Parent's primary sources of liquidity are short-term investments and borrowing availability under syndicated credit and contingent liquidity facilities. Subject to market conditions, AIG expects to access the debt markets from time to time to meet its financing needs, which include the payment of maturing debt of AIG and its subsidiaries.

Liquidity Adequacy Management

    In 2010, AIG implemented a stress testing and liquidity framework to systematically assess AIG's aggregate exposure to its most significant risks. This framework is built on AIG's existing Enterprise Risk Management (ERM) stress testing methodology for both insurance and non-insurance operations. The scenarios are performed with a two-year time horizon and capital adequacy requirements consider both financial and insurance risks.

    AIG's insurance operations must comply with numerous constraints on their minimum capital positions. These constraints are guiding requirements for capital adequacy for individual businesses, based on capital assessments under rating agency, regulatory and business requirements. Using ERM's stress testing methodology, the capital impact of potential stresses is evaluated relative to the binding capital constraint of each business operation in order to determine AIG Parent's liquidity requirements to support the insurance operations and maintain their target capitalization levels. Added to this amount is the contingent liquidity required under stressed scenarios for non-insurance operations, including the AIGFP derivatives portfolio, the Direct Investment book and ILFC.

    AIG's consolidated risk target is to maintain a minimum liquidity buffer such that AIG Parent's liquidity requirements under the ERM stress scenarios do not exceed 80 percent of AIG Parent's overall liquidity sources over the specified two-year horizon. If the 80 percent minimum threshold is projected to be breached over this defined time horizon, AIG will take appropriate actions to further increase liquidity sources or reduce liquidity requirements to maintain the target threshold, although no assurance can be given that this can be achieved under then-prevailing market conditions.

    As a result of these ERM stress tests at September 30, 2011 and other considerations discussed in Note 1 to the Consolidated Financial Statements, AIG believes that it has sufficient liquidity at the AIG Parent level to satisfy future liquidity requirements and meet its obligations, including reasonably foreseeable contingencies or events.

    AIG has in place unconditional capital maintenance agreements (CMAs) with certain domestic Chartis and SunAmerica insurance companies. These CMAs are expected to continue to enhance AIG's capital management practices, and will help manage the flow of capital and funds between AIG Parent and its insurance company subsidiaries. AIG expects to enter into additional CMAs with certain other Chartis insurance companies as needed in the fourth quarter of 2011 and in 2012. For additional details regarding CMAs, see Liquidity of Parent and Subsidiaries — Chartis, and Liquidity of Parent and Subsidiaries — SunAmerica below.

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Analysis of Sources and Uses of Cash

The following table presents selected data from AIG's Consolidated Statement of Cash Flows:

   
Nine Months Ended September 30,
(in millions)
  2011
  2010
 
   

Summary:

             
 

Net cash provided by (used in) operating activities

  $ (1,083 ) $ 15,115  
 

Net cash provided by (used in) investing activities

    36,028     (7,527 )
 

Net cash used in financing activities

    (35,444 )   (8,772 )
 

Effect of exchange rate changes on cash

    37     (4 )
   

Decrease in cash

    (462 )   (1,188 )

Cash at beginning of year

    1,558     4,400  

Change in cash of businesses held for sale

    446     (1,544 )
   

Cash at end of period

  $ 1,542   $ 1,668  
   

    Net cash used in operating activities for the first nine months of 2011 reflects:

    The significant increase in cash provided by investing activities in the first nine months of 2011 was primarily attributable to:

    Net cash used in investing activities in the first nine months of 2010 primarily resulted from net purchases of fixed maturity securities, resulting from AIG's investment of cash generated from operating activities, and the redeployment of liquidity that had been accumulated by the insurance companies in 2008 and 2009.

    Net cash used in financing activities for the first nine months of 2011 primarily represents the repayment of the FRBNY Credit Facility and the $11.4 billion partial repayment of the SPV Preferred Interests in connection with the Recapitalization described in Note 1 to the Consolidated Financial Statements and use of proceeds received from the sales of foreign life insurance entities in 2011.

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Liquidity of Parent and Subsidiaries

AIG Parent

    The Recapitalization in January 2011 involved a series of integrated transactions which directly impacted AIG Parent's liquidity activities and position. These transactions included the repayment of the FRBNY Credit Facility, and the repurchase and exchange of the SPV Preferred Interests. These transactions are more fully described in Note 1 to the Consolidated Financial Statements and are excluded from the Sources of Liquidity and Uses of Liquidity discussions below.

    In addition, in the first nine months of 2011, several significant asset sales were completed, including the sale of AIG Star and AIG Edison in February 2011, the sale of MetLife securities in March 2011, and the sale of Nan Shan in August 2011. Proceeds from these sales primarily were used to pay down the Department of Treasury's SPV Interests. These transactions are more fully described in Notes 1 and 4 to the Consolidated Financial Statements and are excluded from the Sources and Uses discussion below.

    In May 2011, AIG and the Department of the Treasury, as selling shareholder, completed a registered public offering of AIG Common Stock. AIG issued and sold 100 million shares of AIG Common Stock for aggregate net proceeds of approximately $2.9 billion and the Department of the Treasury sold 200 million shares of AIG Common Stock. AIG did not receive any of the proceeds from the sale of the shares of AIG Common Stock by the Department of the Treasury. A portion of the net proceeds AIG received from this offering, $550 million, is being used to fund a litigation settlement, and AIG intends to use the balance of the net proceeds for general corporate purposes.

    On September 13, 2011, AIG received approximately $2.0 billion in proceeds from the issuance of senior unsecured notes. AIG expects to use the proceeds from the sale of these notes to pay maturing notes that were issued by AIG to fund the MIP.

Sources of Liquidity

    AIG Parent's primary sources of cash flow are dividends, distributions, and other payments from subsidiaries. In the first nine months of 2011, AIG Parent collected $2.2 billion in payments from subsidiaries, including $905 million in dividends from Chartis and repayment of intercompany loans of $1.1 billion from the SunAmerica companies. AIG also raised approximately $2.9 billion in net proceeds from the sale of AIG Common Stock and also raised approximately $2.0 billion in net proceeds from the issuance of senior unsecured notes; these items are discussed under Liquidity of Parent and Subsidiaries — AIG Parent above.

    AIG has established and maintains substantial sources of actual and contingent liquidity.


The following table presents AIG Parent's sources of liquidity. This does not include liquidity that is expected to result from cash flows from operations:

   
(in millions)
  As of
September 30, 2011

 
   

Cash(a)

  $ 165  

Short-term investments(b)

    11,468  

Available capacity under Syndicated Credit Facilities

    3,182  

Available capacity under Contingent Liquidity Facility

    500  
   

Total AIG Parent liquidity sources

  $ 15,315  
   
(a)
Excludes Cash and Short-term Investments held by AIGFP which are considered to be unrestricted and available for use by AIG Parent of $187 million at September 30, 2011.

(b)
Includes reverse repurchase agreements totaling $8.7 billion used to reduce unsecured exposures.

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    AIG's ability to borrow under the syndicated credit and contingent liquidity facilities is not contingent on its credit ratings. For further discussion of the terms and conditions relating to the bank credit facilities, see Credit Facilities below.

    In October 2011, AIG entered into an additional contingent liquidity facility. Under this facility, AIG has the right, for a period of one year, to enter into put option agreements, with an aggregate notional amount of up to $500 million, with an unaffiliated international financial institution pursuant to which AIG has the right, for a period of five years, to issue up to $500 million in senior debt to the financial institution, at AIG's discretion.

    For additional information on the existing contingent liquidity facility, see Debt below.

Uses of Liquidity

    AIG Parent's primary uses of cash flow are for debt service, operating expenses and subsidiary capital needs. In the first nine months of 2011, AIG Parent retired $4.4 billion of debt, including $2.2 billion of MIP obligations, and made interest payments totaling $1.7 billion. Approximately $5.4 billion of AIG Parent's cash and short-term investments balance is attributable to the MIP and is available to meet obligations of the DIB. See Liquidity of Parent and Subsidiaries — Other Operations — Direct Investment Book below for additional details.

    AIG Parent made $3.8 billion in net capital contributions to subsidiaries in the first nine months of 2011, of which $3.7 billion was contributed to Chartis in response to the reserve strengthening in the fourth quarter of 2010. This transaction was funded from the retention of $2 billion of net cash proceeds from the sale of AIG Star and AIG Edison (for which the Department of the Treasury provided a waiver permitting AIG to use such proceeds for this purpose instead of using the proceeds to pay down SPV Preferred Interests) and available cash at AIG Parent.

    AIG believes that it has sufficient liquidity at the AIG Parent level to satisfy future liquidity requirements and meet its obligations, including reasonably foreseeable contingencies or events. No assurance can be given, however, that AIG's cash needs will not exceed projected liquidity. Additional collateral calls, deterioration in investment portfolios or reserve strengthening affecting statutory surplus, higher surrenders of annuities and other policies, further downgrades in AIG's credit ratings, or catastrophic losses may result in significant additional cash needs, loss of some sources of liquidity or both. Regulatory and other legal restrictions could limit AIG's ability to transfer funds freely, either to or from its subsidiaries.


Chartis

    AIG currently expects that its Chartis subsidiaries will be able to continue to satisfy future liquidity requirements and meet their obligations, including reasonably foreseeable contingencies or events, through cash from operations and, to the extent necessary, asset dispositions. Chartis subsidiaries maintain substantial liquidity in the form of cash and short-term investments, totaling $9.0 billion as of September 30, 2011. Further, Chartis businesses maintain significant levels of investment-grade fixed maturity securities, including substantial holdings in government and corporate bonds, which Chartis could monetize in the event liquidity levels are deemed insufficient.

    In the first quarter of 2011, Chartis received a capital contribution of $3.7 billion in cash from AIG Parent following the reserve strengthening in the fourth quarter of 2010. Chartis used $1.8 billion of this amount to purchase certain assets from the DIB. Chartis subsequently returned capital of $2.2 billion to AIG Parent in the form of all of the outstanding stock of UGC in the first quarter of 2011. In the first nine months of 2011, Chartis paid dividends of $905 million to AIG Parent.

    One or more large catastrophes may require AIG to provide additional support to the affected Chartis operations. In addition, downgrades in AIG's credit ratings could put pressure on the insurer financial strength ratings of its subsidiaries, which could result in non-renewals or cancellations by policyholders and adversely affect the relevant subsidiary's ability to meet its own obligations, and require AIG to provide capital or liquidity support to the subsidiary. Increases in market interest rates may adversely affect the financial strength ratings of Chartis

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subsidiaries, as rating agency capital models may reduce the amount of available capital relative to required capital. Other potential events that could cause a liquidity strain include economic collapse of a nation or region significant to Chartis operations, nationalization, catastrophic terrorist acts, pandemics or other events causing economic or political upheaval.

    In February 2011, AIG entered into CMAs with certain Chartis domestic property and casualty insurance companies. Among other things, the CMAs provide that AIG will maintain the total adjusted capital of these Chartis insurance companies at or above a specified minimum percentage of the companies' projected total authorized control level Risk-Based Capital (RBC) (as defined by National Association of Insurance Commissioners (NAIC) guidelines). In addition, the CMAs also provide that if the total adjusted capital of these Chartis insurance companies is in excess of a specified minimum percentage of their respective total authorized control level RBCs (as reflected in the companies' quarterly or annual statutory financial statements), subject to board and regulatory approval(s), the companies would declare and pay ordinary dividends to their equity holders in amounts representing the excess over that required to maintain the specified minimum percentage.

    Chartis continues to identify cost effective opportunities to manage its capital allocation through the use of intercompany reinsurance.

    During September 2011, a $725 million letter of credit facility was put in place, under which Chartis and Ascot Corporate Name Limited (ACNL) acted as co-obligors. ACNL, a Chartis subsidiary and member of the Lloyd's of London insurance syndicate (Lloyd's), is required to provide capital to Lloyd's, known as Funds at Lloyds (FAL). Under the new facility, which supports the 2012 and 2013 years of account, the entire FAL requirement will be satisfied with a letter of credit in substitution for $552 million of FAL previously contributed through a $400 million letter of credit and $152 million in the form of cash and securities.


SunAmerica

    Management considers the sources of liquidity for SunAmerica subsidiaries adequate to satisfy future liquidity requirements and meet foreseeable liquidity requirements, including reasonably foreseeable contingencies or events. The SunAmerica companies continue to maintain substantial liquidity in the form of cash and short-term investments, totaling $3.8 billion as of September 30, 2011. These subsidiaries generally have been lengthening their maturity profile by purchasing investment grade fixed maturity securities in order to reduce the levels of cash, cash equivalents and other short-term instruments that had been maintained during 2009 and 2010. In the first nine months of 2011, the SunAmerica life insurance companies paid dividends and surplus note interest totaling approximately $1.7 billion to their respective holding companies, of which $1.1 billion was used to provide liquidity to AIG Parent through the repayment of intercompany loans.

    The most significant potential liquidity requirements of the SunAmerica companies are the funding of product surrenders, withdrawals and maturities. Given the size and liquidity profile of SunAmerica's investment portfolios, AIG believes that deviations from projected claim or surrender experience would not constitute a significant liquidity risk. As part of SunAmerica's risk management framework, it is evaluating and will deploy programs to enhance its liquidity position and facilitate SunAmerica's ability to maintain a fully invested asset portfolio. Such programs may include securities lending programs structured to increase liquidity and membership in Federal Home Loan Banks. Securities lending programs may be beneficial from a tax perspective as well.

    In March 2011, AIG entered into CMAs with certain SunAmerica insurance companies. Among other things, the CMAs provide that AIG will maintain the total adjusted capital of these SunAmerica insurance companies at or above a specified minimum percentage of the companies' projected company action level RBCs (as defined by NAIC guidelines). In addition, the CMAs also provide that if the total adjusted capital of these SunAmerica insurance companies is in excess of a specified minimum percentage of their respective total company action level RBCs (as reflected in the companies' quarterly or annual statutory financial statements), subject to board and regulatory approval(s), the companies would declare and pay ordinary dividends to their equity holders in amounts representing the excess over that required to maintain the specified minimum percentage.

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Aircraft Leasing

    On September 2, 2011, ILFC Holdings filed a registration statement on Form S-1 with the SEC for a proposed initial public offering. The number of shares to be offered, price range and timing for any offering have not been determined. The timing of any offering will depend on market conditions and no assurance can be given regarding terms or that an offering will be completed. All proceeds from any offering will go to the selling shareholder and are required to be used to pay down a portion of the liquidation preference of the Department of the Treasury's AIA SPV Preferred Interests.

    ILFC's sources of liquidity include existing cash and short-term investments of $882 million, future cash flows from operations, debt issuances and aircraft sales, subject to market and other conditions. Uses of liquidity for ILFC primarily consist of aircraft purchases and debt repayments. In 2011, ILFC improved its liquidity position by entering into an unsecured $2.0 billion three-year revolving credit facility and a secured $1.5 billion term loan facility. In addition, on May 24, 2011, ILFC issued $2.25 billion aggregate principal amount of senior unsecured notes, with $1.0 billion maturing in 2016 and $1.25 billion maturing in 2019. On June 17, 2011, ILFC completed tender offers for the purchase of approximately $1.67 billion aggregate principal amount of notes with maturity dates in 2012 and 2013 for total cash consideration, including accrued interest, of approximately $1.75 billion. ILFC recorded a $61 million loss on the extinguishment of debt during the second quarter of 2011.

    See Debt — Debt Maturities — ILFC for further details on ILFC's outstanding debt.


Other Operations

Mortgage Guaranty

    AIG currently expects that its UGC subsidiaries will be able to continue to satisfy future liquidity requirements and meet their obligations, including reasonably foreseeable contingencies or events, through cash from operations and, to the extent necessary, asset dispositions. UGC subsidiaries maintain substantial liquidity in the form of cash and short-term investments, totaling $1.0 billion as of September 30, 2011. Further, UGC businesses maintain significant levels of investment-grade fixed maturity securities, including substantial holdings in municipal and corporate bonds ($3.0 billion in the aggregate at September 30, 2011), which UGC could monetize in the event liquidity levels are insufficient.

Global Capital Markets

AIG Markets

    AIG Markets acts as the derivatives intermediary between AIG companies and third parties and executes its derivative trades (interest rate and foreign exchange swaps and forwards) under ISDA agreements. The agreements with third parties typically require collateral postings. Many of AIG Markets' transactions with AIG and its subsidiaries also include collateral posting requirements. However, generally, no collateral is called under these contracts unless it is needed to satisfy posting requirements with third parties. Cash collateral posted by AIG Markets to third parties was $206 million and $2 million at September 30, 2011 and December 31, 2010, respectively. Cash collateral obtained by AIG Markets from third parties was $682 million and $1.1 billion at September 30, 2011 and December 31, 2010, respectively.

AIGFP

    AIGFP continues to rely upon AIG Parent to meet most of its collateral and other liquidity requirements in connection with its remaining derivatives portfolio.

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The following table presents a rollforward of the amount of collateral posted by AIGFP:

   
(in millions)
  Collateral
Posted as of
December 31, 2010

  Additional
Postings,
Netted by
Counterparty

  Collateral
Returned by
Counterparties

  Collateral
Posted as of
September 30, 2011

 
   

Super senior credit default swap (CDS) portfolio

  $ 3,786   $ 375   $ 969   $ 3,192  

All other derivatives

    1,335     1,600     815     2,120  
   

Total

  $ 5,121   $ 1,975   $ 1,784   $ 5,312  
   

    Collateral obtained by AIGFP from third parties was $590 million and $2.3 billion at September 30, 2011 and December 31, 2010, respectively.


The following table presents the net notional amount and number of outstanding trade positions in AIGFP's portfolios:

   
(dollars in billions)
  September 30,
2011

  December 31,
2010

  Percentage
Decrease

 
   

Net notional amount(a)

  $ 190   $ 341     (44 )%

Super senior CDS contracts (included in net notional amount above)

    26     60     (57 )

Outstanding trade positions(b)

    2,100     3,900     (46 )
   
(a)
Excludes $12.6 billion and $11.5 billion of intercompany derivatives at September 30, 2011 and December 31, 2010, respectively.

(b)
Excludes approximately 4,800 non-derivative trade positions that were transferred to Direct Investment book in 2010.

    The active wind-down of the AIGFP derivatives portfolio was completed by the end of the second quarter of 2011. The remaining AIGFP derivatives portfolio consists predominantly of transactions AIG believes are of low complexity, low risk, supportive of AIG's risk management objectives or not economically appropriate to unwind based on a cost versus benefit analysis, although the portfolio may experience periodic mark-to-market volatility.

Direct Investment Book

    AIG's existing CDS contracts for the MIP under ISDA agreements may require collateral postings at various ratings and threshold levels.

    While a significant portion of the DIB's liquidity requirements are supported by existing liquidity sources or maturing investments, mismatches in the timing of cash inflows and outflows may require assets to be sold to satisfy liquidity requirements. Depending on market conditions and the ability to sell assets if required, proceeds from asset sales may not be sufficient to satisfy the full amount required. Management believes that sufficient liquidity is maintained by the DIB to meet near-term liquidity requirements. Any additional liquidity shortfalls would need to be funded by AIG Parent. The amount of collateral posted by the DIB for collateralized guaranteed investment agreements (GIAs) as of September 30, 2011 and December 31, 2010 was $5.2 billion and $5.7 billion, respectively.

    During the first nine months of 2011, $1.8 billion of assets held by the DIB were sold to certain Chartis subsidiaries. In addition, during the first nine months of 2011, AIG assigned approximately 52 percent of AIG's interest in ML III to the DIB, subject to liens on those interests as set forth in the Master Transaction Agreement dated December 8, 2010, among AIG Parent, AM Holdings LLC (formerly known as ALICO Holdings LLC), AIA Aurora LLC, the FRBNY, the Department of the Treasury, and the Trust.

    In the third quarter of 2011, AIG issued $2.0 billion aggregate principal amount of senior unsecured notes, $1.2 billion of 4.250% Notes Due 2014 and $800 million of 4.875% Notes Due 2016. The proceeds from the sale of these notes are expected to be used to pay maturing MIP debt and the notes are included within "MIP notes payable" in the debt outstanding table below.

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Debt

Debt Maturities

The following table summarizes maturing debt at September 30, 2011 of AIG and its subsidiaries for the next four quarters:

   
(in millions)
  Fourth
Quarter
2011

  First
Quarter
2012

  Second
Quarter
2012

  Third
Quarter
2012

  Total
 
   

ILFC

  $ 174   $ 1,052   $ 594   $ 774   $ 2,594  

Borrowings supported by assets (DIB)

    1,476     1,363     1,997     211     5,047  

General borrowings

    649     27     -     -     676  

Other

    1     1     1     1     4  
   

Total

  $ 2,300   $ 2,443   $ 2,592   $ 986   $ 8,321  
   

    AIG's plans for meeting these maturing obligations are as follows:

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The following table provides the rollforward of AIG's total debt outstanding:

   
Nine Months Ended September 30, 2011
(in millions)
  Balance at
December 31,
2010

  Issuances
  Maturities
and
Repayments

  Effect of
Foreign
Exchange

  Other
Changes

  Balance at
September 30,
2011

 
   

Debt issued or guaranteed by AIG:

                                     

General borrowings:

                                     
 

FRBNY Credit Facility

  $ 20,985   $ -   $ (20,985 )(a) $ -   $ -   $ -  
 

Notes and bonds payable

    11,511     -     -     42     -     11,553  
 

Junior subordinated debt(b)

    11,740     -     -     18     1     11,759  
 

Junior subordinated debt attributable to equity units

    2,169     -     (2,169 )(c)   -     -     -  
 

Loans and mortgages payable

    218     150     (154 )   13     3     230  
 

SunAmerica Financial Group, Inc. (SAFG, Inc.) notes and bonds payable

    298     -     -     -     -     298  
 

Liabilities connected to trust preferred stock

    1,339     -     -     -     -     1,339  
   
 

Total general borrowings

    48,260     150     (23,308 )   73     4     25,179  
   

Borrowings supported by assets:

                                     
 

MIP notes payable

    11,318     1,985     (2,172 )   258     (106 )   11,283  
 

Series AIGFP matched notes and bonds payable

    3,981     -     (91 )   -     (17 )   3,873  
 

GIAs, at fair value

    8,212     498     (1,433 )   -     1,003 (d)   8,280  
 

Notes and bonds payable, at fair value

    3,253     27     (738 )   -     (102 )(d)   2,440  
 

Loans and mortgages payable, at fair value

    678     -     (175 )   -     16 (d)   519  
   

Total borrowings supported by assets

    27,442     2,510     (4,609 )   258     794     26,395  
   

Total debt issued or guaranteed by AIG

    75,702     2,660     (27,917 )   331     798     51,574  
   

Debt not guaranteed by AIG:

                                     

ILFC:

                                     
 

Notes and bonds payable, ECA facility, bank financings and other secured financings(e)

    26,700     3,416     (7,850 )   105     11     22,382  
 

Junior subordinated debt

    999     -     -     -     -     999  
   
 

Total ILFC debt

    27,699     3,416     (7,850 )   105     11     23,381  
   

Other subsidiaries

    446     -     (52 )   8     -     402  
   

Debt of consolidated investments(f)

    2,614     221     (404 )   (8 )   (391 )   2,032  
   

Total debt not guaranteed by AIG

    30,759     3,637     (8,306 )   105     (380 )   25,815  
   

Total debt

  $ 106,461   $ 6,297   $ (36,223 ) $ 436   $ 418   $ 77,389  
   
(a)
Terminated on January 14, 2011 in connection with the Recapitalization. Includes $6.4 billion of paid in kind interest and fees. See Note 1 to the Consolidated Financial Statements.

(b)
See Note 16 to the Consolidated Financial Statements for a discussion of the junior subordinated debt exchange offer.

(c)
Represents remarketing of debentures related to Equity Units.

(d)
Primarily represents adjustments to the fair value of debt.

(e)
Includes $8.9 billion of secured financings, of which $101 million are non-recourse to ILFC.

(f)
At September 30, 2011, includes debt of consolidated investments held through AIG Global Real Estate Investment Corp., AIG Credit Corp. and SunAmerica of $1.7 billion, $240 million and $88 million, respectively.

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The following table summarizes maturities of long-term debt, excluding borrowings of consolidated investments:

   
 
   
   
  Year Ending  
September 30, 2011
   
  Remainder
of 2011

 
(in millions)
  Total
  2012
  2013
  2014
  2015
  2016
  Thereafter
 
   

General borrowings:

                                                 
 

Notes and bonds payable

  $ 11,553   $ 649   $ 27   $ 1,468   $ 500   $ 998   $ 1,754   $ 6,157  
 

Junior subordinated debt(a)

    11,759     -     -     -     -     -     -     11,759  
 

Loans and mortgages payable

    230     -     156     -     -     2     -     72  
 

SAFG, Inc. notes and bonds payable

    298     -     -     -     -     -     -     298  
 

Liabilities connected to trust preferred stock

    1,339     -     -     -     -     -     -     1,339  
   

Total general borrowings

    25,179     649     183     1,468     500     1,000     1,754     19,625  
   

Borrowings supported by assets:

                                                 
 

MIP notes payable

    11,283     1,001     2,309     879     1,605     413     1,515     3,561  

Series AIGFP matched notes and bonds payable

    3,873     16     50     3     -     -     -     3,804  
 

GIAs, at fair value

    8,280     213     355     414     661     598     301     5,738  
 

Notes and bonds payable, at fair value

    2,440     242     792     158     58     194     326     670  
 

Loans and mortgages payable, at fair value

    519     4     223     89     67     -     -     136  
   

Total borrowings supported by assets

    26,395     1,476     3,729     1,543     2,391     1,205     2,142     13,909  
   

ILFC(b):

                                                 
 

Notes and bonds payable

    12,970     21     2,018     3,421     1,040     1,260     1,000     4,210  
 

Junior subordinated debt

    999     -     -     -     -     -     -     999  
 

ECA Facility(c)

    2,411     76     429     429     424     336     258     459  
 

Bank financings and other secured financings

    7,001     77     559     133     1,503     877     1,953     1,899  
   

Total ILFC

    23,381     174     3,006     3,983     2,967     2,473     3,211     7,567  
   

Other subsidiaries

    402     1     3     3     4     23     6     362  
   

Total

  $ 75,357   $ 2,300   $ 6,921   $ 6,997   $ 5,862   $ 4,701   $ 7,113   $ 41,463  
   
(a)
The junior subordinated debt exchange offer will not affect maturity dates on this table. See Note 16 to the Consolidated Financial Statements.

(b)
AIG does not guarantee these borrowings.

(c)
Reflects future minimum payment for ILFC's borrowings under the 2004 Export Credit Agency (ECA) Facility.


Credit Facilities

    AIG relies on credit facilities as potential sources of liquidity for general corporate purposes. Currently, AIG and ILFC maintain committed, revolving credit facilities, including a facility that provides for the issuance of letters of credit, summarized in the following table for general corporate purposes and for letter of credit issuance. AIG intends to replace or extend these credit facilities on or prior to their expiration, although no assurance can be given that these facilities will be replaced on favorable terms or at all. One of the facilities, as noted below, contains a "term-out option" allowing for the conversion by the borrower of any outstanding loans at expiration into one-year term loans. All facilities, except for the ILFC five-year syndicated credit facility maturing October 2012, are unsecured.

 
October 15, 2011
(in millions)
Facility
  Size
  Borrower(s)
  Available
Amount

  Expiration
  One-Year
Term-Out
Option

  Effective
Date

 

AIG:

                           
 

364-Day Syndicated Facility

  $ 1,500   AIG   $ 1,500   October 2012   Yes   10/12/2011
 

4-Year Syndicated Facility

    3,000   AIG     1,700   October 2015   No   10/12/2011
 

Total AIG

  $ 4,500       $ 3,200            
 

ILFC:

                           
 

5-Year Syndicated Facility

  $ 457   ILFC   $ -   October 2012   No   10/13/2006
 

3-Year Syndicated Facility

    2,000   ILFC     2,000   January 2014   No   1/31/2011
 

Total ILFC

  $ 2,457       $ 2,000            
 

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    On October 12, 2011, the previously outstanding AIG 364-Day Syndicated Facility, AIG 3-Year Syndicated Facility and Chartis letter of credit facility were terminated upon AIG entering into a $1.5 billion 364-Day Syndicated Facility and a $3.0 billion 4-Year Syndicated Facility. The new 4-Year Syndicated Facility provides for $1.5 billion of revolving loans and includes a $1.5 billion letter of credit sublimit. The $1.3 billion of previously issued letters of credit under the Chartis letter of credit facility were rolled into the letter of credit sublimit within the 4-Year Syndicated Facility, so that a total of $1.7 billion remains available under this facility, of which $0.2 billion is available for letters of credit. AIG expects that it may draw down on these facilities from time to time, and may use the proceeds for general corporate purposes.

    AIG's ability to borrow under these facilities is conditioned on the satisfaction of certain legal, operating, administrative and financial covenants and other requirements contained in the facilities, including covenants relating to AIG's maintenance of a specified total consolidated net worth, total consolidated debt to total consolidated capitalization and total priority debt (defined as debt of AIG's subsidiaries and secured debt of AIG) to total consolidated capitalization. Failure to satisfy these and other requirements contained in the credit facilities would restrict AIG's access to the facilities and, consequently, could have a material adverse effect on AIG's financial condition, results of operations and liquidity.

    ILFC's three-year credit facility which became effective January 31, 2011 contains customary events of default and restrictive financial covenants that require ILFC to maintain a minimum fixed charge coverage ratio, a minimum consolidated tangible net worth, and a maximum ratio of consolidated debt to consolidated tangible net worth. Prior to April 16, 2010, ILFC had a $2.5 billion five-year syndicated facility which was scheduled to expire in October 2011. On April 16, 2010, ILFC amended and extended the maturity date of $2.16 billion of its $2.5 billion revolving credit facility from October 2011 to October 2012. Upon effectiveness of these amendments, the previously unsecured bank debt became secured by the equity interest in certain of ILFC's non-restricted subsidiaries, which hold a pool of aircraft with an appraised value of not less than 133 percent of the principal amount of the outstanding loans. During 2010 and the first three quarters of 2011, ILFC paid down $1.97 billion on the $2.5 billion revolving credit facility. In October 2011, ILFC paid off the non-extended portion of the facility in the amount of $73 million, bringing the revolving credit facility size down to $457 million. The amended facility prohibits ILFC from re-borrowing amounts repaid under this facility for any reason; therefore, the size of the outstanding revolving credit facility is $457 million.


Credit Ratings

    The cost and availability of unsecured financing for AIG and its subsidiaries are generally dependent on their short- and long-term debt ratings. The following table presents the credit ratings of AIG and certain of its subsidiaries as of October 28, 2011. In parentheses, following the initial occurrence in the table of each rating, is an indication of that rating's relative rank within the agency's rating categories. That ranking refers only to the generic or major rating category and not to the modifiers appended to the rating by the rating agencies to denote relative position within such generic or major category.

 
 
  Short-Term Debt   Senior Long-Term Debt
 
  Moody's
  S&P
  Moody's(a)
  S&P(b)
  Fitch(c)
 

AIG

  P-2 (2nd of 3)   A-2 (2nd of 8)   Baa 1 (4th of 9)   A- (3rd of 8)   BBB (4th of 9)

  Stable Outlook       Stable Outlook   Stable Outlook   Stable Outlook
 

AIG Financial Products Corp.(d)

  P-2   A-2   Baa 1   A-   -

  Stable Outlook       Stable Outlook   Stable Outlook    
 

AIG Funding, Inc.(d)

  P-2   A-2   -   -   -

  Stable Outlook                
 

ILFC

  Not prime   -   B1 (6th of 9)   BBB- (4th of 8)   BB (5th of 9)

  Positive Outlook       Positive Outlook   Stable Outlook   Stable Outlook
 
(a)
Moody's appends numerical modifiers 1, 2 and 3 to the generic rating categories to show relative position within the rating categories.

(b)
S&P ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

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(c)
Fitch ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

(d)
AIG guarantees all obligations of AIG Financial Products Corp. and AIG Funding, Inc.

    These credit ratings are current opinions of the rating agencies. As such, they may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. Ratings may also be withdrawn at AIG management's request. This discussion of ratings is not a complete list of ratings of AIG and its subsidiaries.

    "Ratings triggers" have been defined by one independent rating agency to include clauses or agreements the outcome of which depends upon the level of ratings maintained by one or more rating agencies. "Ratings triggers" generally relate to events that (i) could result in the termination or limitation of credit availability, or require accelerated repayment, (ii) could result in the termination of business contracts or (iii) could require a company to post collateral for the benefit of counterparties.

    A significant portion of the GIAs, structured financing arrangements and financial derivative transactions have provisions that require collateral to be posted upon a downgrade of AIG's long-term debt ratings or, with the consent of the counterparties, assignment or repayment of the positions or arrangement of a substitute guarantee of AIG's obligations by an obligor with higher debt ratings. Furthermore, certain downgrades of AIG's long-term senior debt ratings would permit either AIG or the counterparties to elect early termination of contracts.

    The actual amount of collateral required to be posted to counterparties in the event of such downgrades, or 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 the time of the downgrade. For a discussion of the effects of downgrades in the financial strength ratings of AIG's insurance companies or AIG's credit ratings, see Part II, Item 1A. Risk Factors in AIG's 2010 Annual Report on Form 10-K and Note 10 to the Consolidated Financial Statements.

Contractual Obligations

The following table summarizes contractual obligations in total, and by remaining maturity:

   
 
   
  Payments due by Period  
September 30, 2011

(in millions)
   
 
  Total
Payments

  Remainder
of 2011

  2012 -
2013

  2014 -
2015

  2016
  Thereafter
 
   

Loss reserves

  $ 93,782   $ 6,096   $ 32,636   $ 17,940   $ 5,824   $ 31,286  

Insurance and investment contract liabilities

    237,245     11,826     29,105     25,256     11,845     159,213  

Aircraft purchase commitments

    17,517     82     1,746     4,184     3,098     8,407  

Borrowings

    75,357     2,300     13,918     10,563     7,113     41,463  

Interest payments on borrowings

    44,092     1,085     7,827     6,635     2,865     25,680  

Other long-term obligations(a)

    171     28     34     11     -     98  
   

Total(b)

  $ 468,164   $ 21,417   $ 85,266   $ 64,589   $ 30,745   $ 266,147  
   
(a)
Primarily includes contracts to purchase future services and other capital expenditures.

(b)
Does not reflect unrecognized tax benefits of $4.5 billion, the timing of which is uncertain. In addition, the majority of AIGFP's credit default swaps require AIGFP to provide credit protection on a designated portfolio of loans or debt securities. At September 30, 2011, the fair value derivative liability was $3.1 billion, relating to AIGFP's super senior multi-sector CDO credit default swap portfolio, realized in extinguishing derivative obligations. Due to the long-term maturities of these credit default swaps, AIG is unable to make reasonable estimates of the periods during which any payments would be made. However, at September 30, 2011 AIGFP had posted collateral of $2.7 billion with respect to these swaps.

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Off-Balance Sheet Arrangements and Commercial Commitments

The following table summarizes off-balance sheet arrangements and commercial commitments in total, and by remaining maturity:

   
 
   
  Amount of Commitment Expiration  
September 30, 2011

(in millions)
   
 
  Total Amounts
Committed

  Remainder
of 2011

  2012 -
2013

  2014 -
2015

  2016
  Thereafter
 
   

Guarantees:

                                     
 

Liquidity facilities(a)

  $ 663   $ -   $ 562   $ -   $ -   $ 101  
 

Standby letters of credit

    778     754     14     9     1     -  
 

Guarantees of indebtedness

    170     -     -     -     -     170  
 

All other guarantees(b)

    551     22     176     197     40     116  

Commitments:

                                     
 

Investment commitments(c)

    3,105     2,232     699     98     74     2  
 

Commitments to extend credit

    705     615     46     43     -     1  
 

Letters of credit

    1,486     1,466     20     -     -     -  
 

Other commercial commitments(d)

    747     53     -     -     -     694  
   

Total(e)

  $ 8,205   $ 5,142   $ 1,517   $ 347   $ 115   $ 1,084  
   
(a)
Primarily represents liquidity facilities provided in connection with certain municipal swap transactions and collateralized bond obligations.

(b)
Includes residual value guarantees associated with aircraft and SunAmerica construction guarantees connected to affordable housing investments. Excludes potential amounts attributable to indemnifications included in asset sales agreements. See Note 11 to the Consolidated Financial Statements.

(c)
Includes commitments to invest in limited partnerships, private equity, hedge funds and mutual funds and commitments to purchase and develop real estate in the United States and abroad. The commitments to invest in limited partnerships and other funds are called at the discretion of each fund, as needed for funding new investments or expenses of the fund. The expiration of these commitments is estimated in the table above based on the expected life cycle of the related fund, consistent with past trends of requirements for funding. Investors under these commitments are primarily insurance and real estate subsidiaries.

(d)
Excludes commitments with respect to pension plans. The remaining pension contribution for 2011 is expected to be approximately $10 million for U.S. and non-U.S. plans.

(e)
Does not include guarantees, capital maintenance agreements or other support arrangements among AIG consolidated entities.


Securities Financing

    The fair value of securities transferred under repurchase agreements accounted for as sales was $2.4 billion and $2.7 billion at September 30, 2011 and December 31, 2010, respectively, and the related cash collateral obtained was $1.8 billion and $2.1 billion at September 30, 2011 and December 31, 2010, respectively.


Dividend Restrictions

    See Note 18 to the Consolidated Financial Statements in AIG's 2010 Annual Report on Form 10-K for discussion of restrictions on payments of dividends by AIG subsidiaries.


Arrangements with Variable Interest Entities

    While AIG enters into various arrangements with variable interest entities (VIEs) in the normal course of business, AIG's involvement with VIEs is primarily as a passive investor in fixed maturities (rated and unrated) and equity interests issued by VIEs. AIG consolidates a VIE when it is the primary beneficiary of the entity. For a further discussion of AIG's involvement with VIEs, see Note 9 to the Consolidated Financial Statements.

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Investments

Investment Strategy

    AIG's investment strategies are tailored to the specific business needs of each operating unit. The investment objectives are driven by the business model for each of the businesses: general insurance, life insurance, retirement services and the Direct Investment book. The primary objectives are generation of investment income, preservation of capital, liquidity management and growth of surplus to support the insurance products.

    At the local operating unit level, investment strategies are based on considerations that include the local market, liability duration and cash flow characteristics, rating agency and regulatory capital considerations, legal investment limitations, tax optimization and diversification.

    The majority of assets backing insurance liabilities at AIG consist of intermediate and long duration fixed maturity securities. In the case of life insurance and retirement services companies, as well as in the Direct Investment book, the fundamental investment strategy is, as nearly as is practicable, to match the duration characteristics of the liabilities with assets of comparable duration. Domestically, fixed maturity securities held by the insurance companies included in Chartis historically have consisted primarily of laddered holdings of tax-exempt municipal bonds, which provided attractive after-tax returns and limited credit risk. In order to meet the current risk-return and tax objectives of Chartis, the domestic property and casualty companies have begun to shift investment allocations away from tax-exempt municipal bonds towards taxable instruments which meet the companies' liquidity, duration and credit quality objectives as well as current risk-return and tax objectives. Outside of the U.S., fixed maturity securities held by Chartis companies consist primarily of intermediate duration high-grade securities.

    The market price of fixed maturity securities reflects numerous components, including interest rate environment, credit spread, embedded optionality (such as call features), liquidity, structural complexity, foreign exchange risk and other credit and non-credit factors. However, in most circumstances, pricing is most sensitive to interest rates, such that the market price declines as interest rates rise, and increases as interest rates fall. This effect is more pronounced for longer duration securities.

    AIG accounts for the vast majority of the invested assets held by its insurance companies at fair value. However, with limited exceptions (primarily with respect to separate account products on AIG's Consolidated Balance Sheet), AIG does not modify the fair value of its insurance liabilities for changes in interest rates, even though rising interest rates have the effect of reducing the fair value of such liabilities, and falling interest rates have the opposite effect. This results in the recording of changes in unrealized gains (losses) on securities in Accumulated other comprehensive income resulting from changes in interest rates without any correlative, inverse changes in gains (losses) on AIG's liabilities. Because AIG's asset duration in certain low-yield currencies, particularly Japan, is shorter than its liability duration, AIG views increasing interest rates in these countries as economically advantageous, notwithstanding the effect that higher rates have on the market value of its fixed maturity portfolio.

    At September 30, 2011, approximately 88 percent of the fixed maturity securities were held by domestic entities. Approximately 24 percent of such securities were rated AAA by one or more of the principal rating agencies. Approximately 12 percent were below investment grade or not rated. AIG's investment decision process relies primarily on internally generated fundamental analysis and internal risk ratings. Third-party rating services' ratings and opinions provide one source of independent perspective for consideration in the internal analysis.

    A significant portion of the foreign fixed maturity portfolio is rated by Moody's, S&P or similar foreign rating services. Rating services are not available in all overseas locations. AIG's Credit Risk Committee closely reviews the credit quality of the foreign portfolio's non-rated fixed maturity securities. At September 30, 2011, approximately 29 percent of the foreign fixed maturity investments were either rated AAA or, on the basis of AIG's internal analysis, were equivalent from a credit standpoint to securities so rated. Approximately 3 percent were below investment grade or not rated at that date. Approximately 40 percent of the foreign fixed maturity portfolio are sovereign fixed maturity securities supporting policy liabilities in the country of issuance.

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Investment Highlights

    The third quarter of 2011 gave rise to elevated levels of volatility in the capital markets both domestically and globally. Ten-year U.S. Treasuries dropped to historic lows, commodities declined from their previous highs, and equity markets experienced their worst performance since the first quarter of 2009. As a result, AIG experienced significantly lower net investment income in the third quarter of 2011 compared to the same period in 2010.

    An overview of noteworthy investment activities during the third quarter of 2011 is provided below:

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    The credit ratings in the table below and in subsequent tables reflect (a) the ratings on AIG's fixed maturity investments at September 30, 2011 by one or more of the major rating agencies or by the National Association of Insurance Commissioners (NAIC) Securities Valuations Office (SVO) (over 99 percent of total fixed maturity investments), or (b) AIG's equivalent internal ratings where the investments have not been rated by any of the major rating agencies or the NAIC. The "Non-rated" category in those tables consists of fixed maturity investments that have not been rated by any of the major rating agencies, the NAIC or AIG, and represents primarily AIG's interest in ML III.

    See Enterprise Risk Management for a discussion of credit risks associated with Investments.

The following table presents the credit ratings of AIG's fixed maturity investments based on fair value:

   
 
  September 30,
2011

  December 31,
2010

 
   

Rating:

             
 

AAA*

    25 %   24 %
 

AA

    19     22  
 

A

    22     21  
 

BBB

    23     22  
 

Below investment grade

    8     7  
 

Non-rated

    3     4  
   

Total

    100 %   100 %
   
*
In the table above, U.S. Government and US Government-sponsored fixed maturity securities are included in AAA, based on the majority view of rating agencies and AIG's internal analysis and rating.

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Investments by Segment

The following tables summarize the composition of AIG's investments by reportable segment:

   
 
  Reportable Segment    
   
 
(in millions)
  Chartis
  SunAmerica
  Aircraft
Leasing

  Other
Operations

  Total
 
   

September 30, 2011

                               

Fixed maturity securities:

                               
 

Bonds available for sale, at fair value

  $ 101,367   $ 153,146   $ -   $ 5,316   $ 259,829  
 

Bond trading securities, at fair value

    97     1,573     -     22,984     24,654  

Equity securities:

                               
 

Common and preferred stock available for sale, at fair value

    2,579     179     1     450     3,209  
 

Common and preferred stock trading, at fair value

    -     -     -     148     148  

Mortgage and other loans receivable, net of allowance

    551     16,497     73     2,158     19,279  

Flight equipment primarily under operating leases, net of accumulated depreciation

    -     -     35,758     -     35,758  

Other invested assets

    12,986     13,038     -     15,107 (c)   41,131  

Short-term investments

    8,302     3,359     868     16,569     29,098  
   

Total investments(a)

    125,882     187,792     36,700     62,732     413,106  

Cash

    731     444     14     353     1,542  
   

Total invested assets

  $ 126,613   $ 188,236   $ 36,714   $ 63,085   $ 414,648  
   

December 31, 2010

                               

Fixed maturity securities:

                               
 

Bonds available for sale, at fair value

  $ 88,904   $ 128,347   $ -   $ 11,051   $ 228,302  
 

Bond trading securities, at fair value

    -     1,307     -     24,875     26,182  

Equity securities:

                               
 

Common and preferred stock available for sale, at fair value

    3,827     218     2     534     4,581  
 

Common and preferred stock trading, at fair value

    -     1     -     6,651     6,652  

Mortgage and other loans receivable, net of allowance

    690     16,727     134     2,686     20,237  

Flight equipment primarily under operating leases, net of accumulated depreciation

    -     -     38,510     -     38,510  

Other invested assets

    13,743     13,069     -     15,398 (c)   42,210  

Short-term investments

    11,799     19,160     3,058     9,721     43,738  
   

Total investments(a)

    118,963     178,829     41,704     70,916     410,412  

Cash

    572     270     9     707     1,558  
   

Total invested assets(b)

  $ 119,535   $ 179,099   $ 41,713   $ 71,623   $ 411,970  
   
(a)
At September 30, 2011, approximately 87 percent and 13 percent of investments were held by domestic and foreign entities, respectively, compared to approximately 85 percent and 15 percent, respectively, at December 31, 2010.

(b)
Total invested assets of businesses held for sale amounted to $96.3 billion and are excluded. See Note 4 to the Consolidated Financial Statements.

(c)
Includes $11.4 billion and $11.1 billion of AIA ordinary shares at September 30, 2011 and December 31, 2010, respectively.

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Available for Sale Investments

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, 2011

                               

Bonds available for sale:

                               
 

U.S. government and government sponsored entities

  $ 7,123   $ 434   $ (3 ) $ 7,554   $ -  
 

Obligations of states, municipalities and political subdivisions

    36,921     2,558     (89 )   39,390     (29 )
 

Non-U.S. governments

    18,969     761     (76 )   19,654     -  
 

Corporate debt

    136,018     11,811     (1,563 )   146,266     94  
 

Mortgage-backed, asset-backed and collateralized:

                               
   

RMBS

    32,448     1,507     (1,397 )   32,558     (625 )
   

CMBS

    8,168     458     (986 )   7,640     (143 )
   

CDO/ABS

    6,743     498     (474 )   6,767     54  
   
 

Total mortgage-backed, asset-backed and collateralized

    47,359     2,463     (2,857 )   46,965     (714 )
   

Total bonds available for sale(b)

    246,390     18,027     (4,588 )   259,829     (649 )
   

Equity securities available for sale:

                               
 

Common stock

    1,652     1,444     (68 )   3,028     -  
 

Preferred stock

    83     31     -     114     -  
 

Mutual funds

    55     12     -     67     -  
   

Total equity securities available for sale

    1,790     1,487     (68 )   3,209     -  
   

Total

  $ 248,180   $ 19,514   $ (4,656 ) $ 263,038   $ (649 )
   

December 31, 2010

                               

Bonds available for sale:

                               
 

U.S. government and government sponsored entities

  $ 7,239   $ 184   $ (73 ) $ 7,350   $ -  
 

Obligations of states, municipalities and political subdivisions

    45,297     1,725     (402 )   46,620     2  
 

Non-U.S. governments

    14,780     639     (75 )   15,344     (28 )
 

Corporate debt

    118,729     8,827     (1,198 )   126,358     99  
 

Mortgage-backed, asset-backed and collateralized:

                               
   

RMBS

    20,661     700     (1,553 )   19,808     (648 )
   

CMBS

    7,320     240     (1,149 )   6,411     (218 )
   

CDO/ABS

    6,643     402     (634 )   6,411     32  
   
 

Total mortgage-backed, asset-backed and collateralized

    34,624     1,342     (3,336 )   32,630     (834 )
   

Total bonds available for sale(b)

    220,669     12,717     (5,084 )   228,302     (761 )
   

Equity securities available for sale:

                               
 

Common stock

    1,820     1,931     (52 )   3,699     -  
 

Preferred stock

    400     88     (1 )   487     -  
 

Mutual funds

    351     46     (2 )   395     -  
   

Total equity securities available for sale

    2,571     2,065     (55 )   4,581     -  
   

Total(c)

  $ 223,240   $ 14,782   $ (5,139 ) $ 232,883   $ (761 )
   
(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, 2011 and December 31, 2010, bonds available for sale held by AIG that were below investment grade or not rated totaled $20.9 billion and $18.6 billion, respectively.

(c)
Excludes $80.5 billion of available for sale securities at fair value from businesses held for sale. See Note 4 herein.

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The following table presents the fair value of AIG's available for sale U.S. municipal bond portfolio by state and type:

   
September 30, 2011

(in millions)
  State
General
Obligation

  Local
General
Obligation

  Revenue
  Total
Fair
Value

 
   

State:

                         
 

California

  $ 557   $ 1,272   $ 3,500   $ 5,329  
 

Texas

    248     2,819     2,260     5,327  
 

New York

    1     884     4,045     4,930  
 

Washington

    687     363     949     1,999  
 

Massachusetts

    953     10     934     1,897  
 

Florida

    578     9     1,216     1,803  
 

Illinois

    172     682     697     1,551  
 

Georgia

    644     103     491     1,238  
 

Virginia

    88     250     833     1,171  
 

Arizona

    -     161     865     1,026  
 

Ohio

    264     213     514     991  
 

Pennsylvania

    558     100     247     905  
 

New Jersey

    11     3     739     753  
 

All Other

    2,326     1,723     6,360     10,409  
   

Total(a)(b)

  $ 7,087   $ 8,592   $ 23,650   $ 39,329  
   
(a)
Excludes certain university and not-for-profit entities that issue in the corporate debt market. Includes industrial revenue bonds.

(b)
Includes $5.6 billion of pre-refunded municipal bonds.

    At September 30, 2011, the U.S. municipal bond portfolio was composed primarily of essential service revenue bonds and high-quality tax-backed bonds with 97 percent of the portfolio rated A or higher.

The following table presents the industry categories of AIG's available for sale corporate debt securities based on amortized cost:

   
Industry Category
  September 30,
2011

  December 31,
2010
(a)
 
   

Financial institutions:

             
 

Money Center/Global Bank Groups

    12 %   12 %
 

Regional banks – other

    3     3  
 

Life insurance

    4     4  
 

Securities firms and other finance companies

    1     2  
 

Insurance non-life

    1     4  
 

Regional banks – North America

    2     2  
 

Other financial institutions

    7     5  

Utilities

    16     16  

Communications

    8     8  

Consumer noncyclical

    10     8  

Capital goods

    6     6  

Energy

    7     6  

Consumer cyclical

    6     8  

Other

    17     16  
   

Total(b)

    100 %   100 %
   
(a)
Excludes corporate debt of businesses held for sale.

(b)
At September 30, 2011 and December 31, 2010, approximately 95 percent and 93 percent, respectively, of these investments were rated investment grade.

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Investments in RMBS

The following table presents AIG's RMBS investments by year of vintage:

   
 
  September 30, 2011   December 31, 2010  
(in millions)
  Amortized
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Percent of
Amortized
Cost

  Amortized
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Percent of
Amortized
Cost

 
   

Total RMBS*

                                                             
 

2011

  $ 7,101   $ 323   $ (1 ) $ 7,423     22 % $ -   $ -   $ -   $ -     - %
 

2010

    4,238     157     (1 )   4,394     13     4,157     11     (53 )   4,115     20  
 

2009

    733     23     -     756     2     881     9     (3 )   887     4  
 

2008

    774     57     -     831     2     937     39     (2 )   974     5  
 

2007

    4,669     137     (271 )   4,535     15     2,836     114     (213 )   2,737     14  
 

2006 and prior

    14,933     810     (1,124 )   14,619     46     11,850     527     (1,282 )   11,095     57  
   

Total RMBS

  $ 32,448   $ 1,507   $ (1,397 ) $ 32,558     100 % $ 20,661   $ 700   $ (1,553 ) $ 19,808     100 %
   

Agency

                                                             
 

2011

  $ 6,101   $ 323   $ (1 ) $ 6,423     38 % $ -   $ -   $ -   $ -     - %
 

2010

    4,166     156     (1 )   4,321     26     4,067     10     (52 )   4,025     40  
 

2009

    658     22     -     680     4     784     9     (3 )   790     8  
 

2008

    774     57     -     831     5     937     39     (2 )   974     9  
 

2007

    618     45     -     663     4     526     36     (2 )   560     5  
 

2006 and prior

    3,627     509     -     4,136     23     3,825     357     (1 )   4,181     38  
   

Total Agency

  $ 15,944   $ 1,112   $ (2 ) $ 17,054     100 % $ 10,139   $ 451   $ (60 ) $ 10,530     100 %
   

Alt-A

                                                             
 

2011

  $ -   $ -   $ -   $ -     - % $ -   $ -   $ -   $ -     - %
 

2010

    65     1     -     66     1     70     1     (1 )   70     2  
 

2009

    -     -     -     -     -     -     -     -     -     -  
 

2008

    -     -     -     -     -     -     -     -     -     -  
 

2007

    1,799     45     (171 )   1,673     29     1,004     39     (76 )   967     28  
 

2006 and prior

    4,312     91     (394 )   4,009     70     2,449     41     (380 )   2,110     70  
   

Total Alt-A

  $ 6,176   $ 137   $ (565 ) $ 5,748     100 % $ 3,523   $ 81   $ (457 ) $ 3,147     100 %
   

Subprime

                                                             
 

2011

  $ -   $ -   $ -   $ -     - % $ -   $ -   $ -   $ -     - %
 

2010

    -     -     -     -     -     -     -     -     -     -  
 

2009

    -     -     -     -     -     -     -     -     -     -  
 

2008

    -     -     -     -     -     44     -     -     44     3  
 

2007

    78     14     (10 )   82     4     111     19     (5 )   125     9  
 

2006 and prior

    1,735     24     (351 )   1,408     96     1,104     16     (317 )   803     88  
   

Total Subprime

  $ 1,813   $ 38   $ (361 ) $ 1,490     100 % $ 1,259   $ 35   $ (322 ) $ 972     100 %
   

Prime non-agency

                                                             
 

2011

  $ 1,000   $ -   $ -   $ 1,000     12 % $ -   $ -   $ -   $ -     - %
 

2010

    7     -     -     7     -     20     -     (1 )   19     -  
 

2009

    75     1     -     76     1     97     -     -     97     2  
 

2008

    -     -     -     -     -     -     -     -     -     -  
 

2007

    2,028     23     (67 )   1,984     25     1,097     19     (71 )   1,045     21  
 

2006 and prior

    4,967     146     (311 )   4,802     62     4,010     96     (483 )   3,623     77  
   

Total Prime non-agency

  $ 8,077   $ 170   $ (378 ) $ 7,869     100 % $ 5,224   $ 115   $ (555 ) $ 4,784     100 %
   

Total Other Housing Related

  $ 438   $ 50   $ (91 ) $ 397     100 % $ 516   $ 18   $ (159 ) $ 375     100 %
   
*
Includes foreign and jumbo RMBS-related securities.

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The following table presents AIG's RMBS investments by credit rating:

   
 
  September 30, 2011   December 31, 2010  
(in millions)
  Amortized
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Percent of
Amortized
Cost

  Amortized
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Percent of
Amortized
Cost

 
   

Rating:

                                                             

Total RMBS

                                                             
 

AAA

  $ 19,082   $ 1,144   $ (95 ) $ 20,131     59 % $ 13,009   $ 477   $ (277 ) $ 13,209     63 %
 

AA

    1,153     44     (177 )   1,020     3     1,265     46     (274 )   1,037     6  
 

A

    563     7     (102 )   468     2     548     2     (144 )   406     3  
 

BBB

    624     9     (95 )   538     2     610     5     (113 )   502     3  
 

Below investment grade(b)

    11,026     303     (928 )   10,401     34     5,209     170     (744 )   4,635     25  
 

Non-rated

    -     -     -     -     -     20     -     (1 )   19     -  
   

Total RMBS(a)

  $ 32,448   $ 1,507   $ (1,397 ) $ 32,558     100 % $ 20,661   $ 700   $ (1,553 ) $ 19,808     100 %
   

Agency RMBS – AAA

  $ 15,944   $ 1,112   $ (2 ) $ 17,054     100 % $ 10,139   $ 451   $ (60 ) $ 10,530     100 %
   

Alt-A RMBS

                                                             
 

AAA

  $ 753   $ 9   $ (30 ) $ 732     12 % $ 862   $ 1   $ (63 ) $ 800     24 %
 

AA

    379     29     (37 )   371     6     462     30     (89 )   403     13  
 

A

    202     3     (30 )   175     3     148     1     (41 )   108     4  
 

BBB

    143     -     (26 )   117     3     102     1     (15 )   88     3  
 

Below investment grade(b)

    4,699     96     (442 )   4,353     76     1,949     48     (249 )   1,748     56  
 

Non-rated

    -     -     -     -     -     -     -     -     -     -  
   

Total Alt-A

  $ 6,176   $ 137   $ (565 ) $ 5,748     100 % $ 3,523   $ 81   $ (457 ) $ 3,147     100 %
   

Subprime RMBS

                                                             
 

AAA

  $ 405   $ 2   $ (31 ) $ 376     22 % $ 417   $ -   $ (63 ) $ 354     33 %
 

AA

    236     11     (59 )   188     13     259     15     (67 )   207     21  
 

A

    35     -     (18 )   17     2     108     1     (33 )   76     9  
 

BBB

    96     -     (26 )   70     5     78     -     (23 )   55     6  
 

Below investment grade(b)

    1,041     25     (227 )   839     58     397     19     (136 )   280     31  
 

Non-rated

    -     -     -     -     -     -     -     -     -     -  
   

Total Subprime

  $ 1,813   $ 38   $ (361 ) $ 1,490     100 % $ 1,259   $ 35   $ (322 ) $ 972     100 %
   

Prime non-agency

                                                             
 

AAA

  $ 1,955   $ 19   $ (33 ) $ 1,941     24 % $ 1,564   $ 24   $ (89 ) $ 1,499     30 %
 

AA

    500     4     (65 )   439     6     502     1     (103 )   400     10  
 

A

    272     4     (33 )   243     3     221     -     (40 )   181     4  
 

BBB

    305     9     (21 )   293     4     338     4     (44 )   298     7  
 

Below investment grade(b)

    5,045     134     (226 )   4,953     63     2,579     86     (278 )   2,387     49  
 

Non-rated

    -     -     -     -     -     20     -     (1 )   19     -  
   

Total prime non-agency

  $ 8,077   $ 170   $ (378 ) $ 7,869     100 % $ 5,224   $ 115   $ (555 ) $ 4,784     100 %
   

Total Other Housing Related

  $ 438   $ 50   $ (91 ) $ 397     100 % $ 516   $ 18   $ (159 ) $ 375     100 %
   
(a)
The weighted average expected life is 5 years and 6 years at September 30, 2011 and December 31, 2010, respectively.

(b)
Commencing in the second quarter of 2011, AIG purchased certain RMBS securities that had experienced deterioration in credit quality since their origination. See Note 7 to the Consolidated Financial Statements, Investments – Purchased Credit Impaired (PCI) Securities, for additional discussion.

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    AIG's underwriting practices for investing in RMBS, other asset-backed securities and CDOs take into consideration the quality of the originator, the manager, the servicer, security credit ratings, underlying characteristics of the mortgages, borrower characteristics, and the level of credit enhancement in the transaction.

Investments in CMBS

The following table presents the amortized cost, gross unrealized gains (losses) and fair value of AIG's CMBS investments:

   
 
  September 30, 2011   December 31, 2010  
(in millions)
  Amortized
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Percent of
Amortized
Cost

  Amortized
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Percent of
Amortized
Cost

 
   

CMBS (traditional)

  $ 6,647   $ 299   $ (848 ) $ 6,098     81 % $ 6,428   $ 204   $ (919 ) $ 5,713     88 %

ReRemic/CRE CDO

    383     29     (129 )   283     5     508     23     (219 )   312     7  

Agency

    1,056     130     -     1,186     13     297     13     (1 )   309     4  

Other

    82     -     (9 )   73     1     87     -     (10 )   77     1  
   

Total

  $ 8,168   $ 458   $ (986 ) $ 7,640     100 % $ 7,320   $ 240   $ (1,149 ) $ 6,411     100 %
   

The following table presents AIG's CMBS investments by year of vintage:

   
 
  September 30, 2011   December 31, 2010  
(in millions)
  Amortized
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Percent of
Amortized
Cost

  Amortized
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Percent of
Amortized
Cost

 
   

Year:

                                                             
 

2011

  $ 1,166   $ 101   $ (2 ) $ 1,265     14 % $ -   $ -   $ -   $ -      - %
 

2010

    276     18     (3 )   291     3     86     -     -     86     1  
 

2009

    42     2     -     44     1     42     1     -     43     1  
 

2008

    217     -     (16 )   201     3     217     8     (1 )   224     3  
 

2007

    2,072     146     (433 )   1,785     25     2,205     118     (484 )   1,839     30  
 

2006 and prior

    4,395     191     (532 )   4,054     54     4,770     113     (664 )   4,219     65  
   

Total

  $ 8,168   $ 458   $ (986 ) $ 7,640     100 % $ 7,320   $ 240   $ (1,149 ) $ 6,411     100 %
   


The following table presents AIG's CMBS investments by credit rating:

   
 
  September 30, 2011   December 31, 2010  
(in millions)
  Amortized
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Percent of
Amortized
Cost

  Amortized
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Percent of
Amortized
Cost

 
   

Rating:

                                                             
 

AAA

  $ 3,318   $ 247   $ (10 ) $ 3,555     41 % $ 2,416   $ 88   $ (21 ) $ 2,483     33 %
 

AA

    715     9     (55 )   669     9     772     7     (94 )   685     11  
 

A

    1,012     16     (80 )   948     12     1,061     18     (100 )   979     14  
 

BBB

    699     9     (100 )   608     9     1,140     12     (302 )   850     16  
 

Below investment grade

    2,412     176     (741 )   1,847     29     1,931     115     (632 )   1,414     26  
 

Non-rated

    12     1     -     13     -     -     -     -     -     -  
   

Total

  $ 8,168   $ 458   $ (986 ) $ 7,640     100 % $ 7,320   $ 240   $ (1,149 ) $ 6,411     100 %
   

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The following table presents the percentage of AIG's CMBS investments by geographic region based on amortized cost:

   
 
  September 30,
2011

  December 31,
2010

 
   

Geographic region:

             
 

New York

    15 %   17 %
 

California

    10     12  
 

Texas

    6     6  
 

Florida

    5     6  
 

Virginia

    3     3  
 

Illinois

    3     3  
 

New Jersey

    2     3  
 

Georgia

    2     3  
 

Maryland

    2     2  
 

Pennsylvania

    2     2  
 

Nevada

    2     2  
 

Washington

    2     2  
 

All Other*

    46     39  
   

Total

    100 %   100 %
   
*
Includes Non-U.S. locations.

The following table presents the percentage of AIG's CMBS investments by industry based on amortized cost:

   
 
  September 30,
2011

  December 31,
2010

 
   

Industry:

             
 

Office

    27 %   34 %
 

Multi-family*

    25     17  
 

Retail

    25     27  
 

Lodging

    9     8  
 

Industrial

    7     6  
 

Other

    7     8  
   

Total

    100 %   100 %
   
*
Includes Agency-backed CMBS.

    Although the market value of CMBS holdings has remained stable during the first nine months of 2011, the portfolio continues to be below amortized cost. The majority of AIG's investments in CMBS are in tranches that contain substantial protection features through collateral subordination. As indicated in the tables, downgrades have occurred on many CMBS holdings. The majority of CMBS holdings are traditional conduit transactions, broadly diversified across property types and geographical areas.

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Investments in CDOs

The following table presents AIG's CDO investments by collateral type:

   
 
  September 30, 2011   December 31, 2010  
(in millions)
  Amortized
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Percent of
Amortized
Cost

  Amortized
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Percent of
Amortized
Cost

 
   

Collateral Type:

                                                             
 

Bank loans (CLO)

  $ 1,913   $ 60   $ (284 ) $ 1,689     85 % $ 1,697   $ 62   $ (321 ) $ 1,438     76 %
 

Synthetic investment grade

    16     79     -     95     1     78     102     (2 )   178     4  
 

Other

    285     167     (19 )   433     13     433     151     (52 )   532     19  
 

Subprime ABS

    16     4     (8 )   12     1     24     2     (12 )   14     1  
   

Total

  $ 2,230   $ 310   $ (311 ) $ 2,229     100 % $ 2,232   $ 317   $ (387 ) $ 2,162     100 %
   

The following table presents AIG's CDO investments by credit rating:

   
 
  September 30, 2011   December 31, 2010  
(in millions)
  Amortized
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Percent of
Amortized
Cost

  Amortized
Cost

  Gross
Unrealized
Gains

  Gross
Unrealized
Losses

  Fair
Value

  Percent of
Amortized
Cost

 
   

Rating:

                                                             
 

AAA

  $ 57   $ -   $ (1 ) $ 56     2 % $ 27   $ -   $ (2 ) $ 25     1 %
 

AA

    289     12     (16 )   285     13     133     1     (13 )   121     6  
 

A

    941     4     (129 )   816     42     558     17     (99 )   476     25  
 

BBB

    593     18     (127 )   484     27     787     21     (181 )   627     35  
 

Below investment grade

    350     276     (38 )   588     16     727     277     (92 )   912     33  
 

Non-rated

    -     -     -     -     -     -     1     -     1     -  
   

Total

  $ 2,230   $ 310   $ (311 ) $ 2,229     100 % $ 2,232   $ 317   $ (387 ) $ 2,162     100 %
   


Commercial Mortgage Loans

    At September 30, 2011, AIG had direct commercial mortgage loan exposure of $13.3 billion. At that date, over 98 percent of the loans were current.

The following table presents the commercial mortgage loan exposure by state and class of loan:

   
September 30, 2011

(dollars in millions)
  Number
of
Loans

  Class    
  Percent
of
Total

 
  Apartments
  Offices
  Retails
  Industrials
  Hotels
  Others
  Total
 
   

State:

                                                       
 

California

    167   $ 110   $ 1,202   $ 258   $ 875   $ 367   $ 418   $ 3,230     24 %
 

New York

    70     265     853     172     68     43     81     1,482     11  
 

New Jersey

    60     612     318     284     8     -     71     1,293     10  
 

Florida

    98     51     294     244     104     21     210     924     7  
 

Texas

    60     56     338     118     224     81     24     841     6  
 

Pennsylvania

    61     111     101     145     123     17     14     511     4  
 

Ohio

    57     163     45     93     62     39     12     414     3  
 

Maryland

    23     25     193     165     14     4     4     405     3  
 

Colorado

    21     11     211     1     -     27     59     309     2  
 

Arizona

    12     83     55     59     9     -     86     292     2  
 

Other states

    374     397     1,312     728     457     295     406     3,595     27  

Foreign

    76     2     -     -     -     -     44     46     1  
   

Total*

    1,079   $ 1,886   $ 4,922   $ 2,267   $ 1,944   $ 894   $ 1,429   $ 13,342     100 %
   
*
Excludes portfolio valuation losses.

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American International Group, Inc.


Impairments

The following table presents investment impairments by type:

   
 
  Three Months
Ended September 30,
  Nine Months
Ended September 30,
 
(in millions)
  2011
  2010
  2011
  2010
 
   
 

Fixed maturities, available for sale

  $ 401   $ 764   $ 729   $ 1,887  
 

Equity securities, available for sale

    21     46     43     113  
 

Partnerships and hedge funds

    74     14     160     271  
   

Subtotal

  $ 496   $ 824   $ 932   $ 2,271  
   
 

Life settlement contracts

    20     17     255     43  
 

Real estate*

    1     29     28     598  
   

Total

  $ 517   $ 870   $ 1,215   $ 2,912  
   
*
Real estate impairment is recorded in Other income.

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Other-Than-Temporary Impairments

The following tables present other-than-temporary impairment charges in earnings, excluding impairments on life settlement contracts and real estate shown above.

Other-than-temporary impairment by segment and type of impairment:

   
 
  Reportable Segment    
   
 
(in millions)
  Chartis
  SunAmerica
  Aircraft
Leasing

  Other
Operations

  Total
 
   

Three Months Ended September 30, 2011

                               

Impairment Type:

                               
 

Severity

  $ 23   $ 2   $ -   $ -   $ 25  
 

Change in intent

    1     3     -     -     4  
 

Foreign currency declines

    8     -     -     -     8  
 

Issuer-specific credit events

    82     367     -     7     456  
 

Adverse projected cash flows

    1     2     -     -     3  
   

Total

  $ 115   $ 374   $ -   $ 7   $ 496  
   

Three Months Ended September 30, 2010

                               

Impairment Type:

                               
 

Severity

  $ 1   $ 4   $ -   $ -   $ 5  
 

Change in intent

    312     15     -     13     340  
 

Foreign currency declines

    12     -     -     5     17  
 

Issuer-specific credit events

    12     337     -     112     461  
 

Adverse projected cash flows

    -     1     -     -     1  
   

Total

  $ 337   $ 357   $ -   $ 130   $ 824  
   

Nine Months Ended September 30, 2011

                               

Impairment Type:

                               
 

Severity

  $ 42   $ 4   $ -   $ -   $ 46  
 

Change in intent

    1     7     -     -     8  
 

Foreign currency declines

    13     -     -     -     13  
 

Issuer-specific credit events

    119     701     -     26     846  
 

Adverse projected cash flows

    2     17     -     -     19  
   

Total

  $ 177   $ 729   $ -   $ 26   $ 932  
   

Nine Months Ended September 30, 2010

                               

Impairment Type:

                               
 

Severity

  $ 22   $ 13   $ -   $ 19   $ 54  
 

Change in intent

    313     30     -     18     361  
 

Foreign currency declines

    15     -     -     6     21  
 

Issuer-specific credit events

    129     1,389     -     315     1,833  
 

Adverse projected cash flows

    -     1     -     1     2  
   

Total

  $ 479   $ 1,433   $ -   $ 359   $ 2,271  
   

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Other-than-temporary impairment charges by type of security and type of impairment:

   
(in millions)
  RMBS
  CDO/ABS
  CMBS
  Other Fixed
Maturity

  Equities/Other
Invested Assets*

  Total
 
   

Three Months Ended September 30, 2011

                                     

Impairment Type:

                                     
 

Severity

  $ -   $ -   $ -   $ -   $ 25   $ 25  
 

Change in intent

    -     -     -     3     1     4  
 

Foreign currency declines

    -     -     -     8     -     8  
 

Issuer-specific credit events

    323     6     58     -     69     456  
 

Adverse projected cash flows

    3     -     -     -     -     3  
   

Total

  $ 326   $ 6   $ 58   $ 11   $ 95   $ 496  
   

Three Months Ended September 30, 2010

                                     

Impairment Type:

                                     
 

Severity

  $ -   $ -   $ -   $ -   $ 5   $ 5  
 

Change in intent

    210     -     99     18     13     340  
 

Foreign currency declines

    -     1     -     15     1     17  
 

Issuer-specific credit events

    270     11     98     41     41     461  
 

Adverse projected cash flows

    1     -     -     -     -     1  
   

Total

  $ 481   $ 12   $ 197   $ 74   $ 60   $ 824  
   

Nine Months Ended September 30, 2011

                                     

Impairment Type:

                                     
 

Severity

  $ -   $ -   $ -   $ -   $ 46   $ 46  
 

Change in intent

    -     -     -     5     3     8  
 

Foreign currency declines

    -     -     -     13     -     13  
 

Issuer-specific credit events

    549     17     115     11     154     846  
 

Adverse projected cash flows

    19     -     -     -     -     19  
   

Total

  $ 568   $ 17   $ 115   $ 29   $ 203   $ 932  
   

Nine Months Ended September 30, 2010

                                     

Impairment Type:

                                     
 

Severity

  $ -   $ -   $ -   $ -   $ 54   $ 54  
 

Change in intent

    210     -     99     36     16     361  
 

Foreign currency declines

    -     2     -     18     1     21  
 

Issuer-specific credit events

    717     19     705     79     313     1,833  
 

Adverse projected cash flows

    2     -     -     -     -     2  
   

Total

  $ 929   $ 21   $ 804   $ 133   $ 384   $ 2,271  
   
*
Includes other-than-temporary impairment charges on partnership investments and direct private equity investments.

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Other-than-temporary impairment charges by type of security and credit rating:

   
(in millions)
  RMBS
  CDO/ABS
  CMBS
  Other
Fixed
Maturity

  Equities/Other
Invested Assets*

  Total
 
   

Three Months Ended September 30, 2011

                                     

Rating:

                                     
 

AAA

  $ 8   $ -   $ -   $ 1   $ -   $ 9  
 

AA

    4     -     -     1     -     5  
 

A

    2     -     -     7     -     9  
 

BBB

    2     3     -     1     -     6  
 

Below investment grade

    310     3     58     1     -     372  
 

Non-rated

    -     -     -     -     95     95  
   

Total

  $ 326   $ 6   $ 58   $ 11   $ 95   $ 496  
   

Three Months Ended September 30, 2010

                                     

Rating:

                                     
 

AAA

  $ 22   $ -   $ -   $ 10   $ -   $ 32  
 

AA

    8     -     -     -     -     8  
 

A

    14     -     -     2     2     18  
 

BBB

    12     2     10     12     4     40  
 

Below investment grade

    425     10     187     41     3     666  
 

Non-rated

    -     -     -     9     51     60  
   

Total

  $ 481   $ 12   $ 197   $ 74   $ 60   $ 824  
   

Nine Months Ended September 30, 2011

                                     

Rating:

                                     
 

AAA

  $ 20   $ -   $ -   $ 3   $ -   $ 23  
 

AA

    37     -     -     4     -     41  
 

A

    13     -     -     7     -     20  
 

BBB

    11     7     9     1     -     28  
 

Below investment grade

    486     10     106     13     -     615  
 

Non-rated

    1     -     -     1     203     205  
   

Total

  $ 568   $ 17   $ 115   $ 29   $ 203   $ 932  
   

Nine Months Ended September 30, 2010

                                     

Rating:

                                     
 

AAA

  $ 24   $ -   $ -   $ 17   $ -   $ 41  
 

AA

    19     1     2     -     -     22  
 

A

    46     -     13     5     7     71  
 

BBB

    45     2     54     15     4     120  
 

Below investment grade

    795     15     735     83     6     1,634  
 

Non-rated

    -     3     -     13     367     383  
   

Total

  $ 929   $ 21   $ 804   $ 133   $ 384   $ 2,271  
   
*
Includes other-than-temporary impairment charges on partnership investments and direct private equity investments.

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    Notwithstanding AIG's intent and ability to hold its securities which suffered severity losses until they had recovered their cost or amortized cost basis, and despite structures that indicated, at the time, that a substantial amount of the securities should have continued to perform in accordance with original terms, AIG concluded, at the time, that it could not reasonably assert that the impairment would be temporary.

    Determinations of other-than-temporary impairments are based on fundamental credit analyses of individual securities without regard to rating agency ratings. Based on this analysis, AIG expects to receive cash flows sufficient to cover the amortized cost of all below investment grade securities for which credit losses were not recognized.

    AIG recorded other-than-temporary impairment charges in the three- and nine-month periods ended September 30, 2011 and 2010 related to:

    With respect to the issuer-specific credit events shown above, no other-than-temporary impairment charge with respect to any one single credit was significant to AIG's consolidated financial condition or results of operations, and no individual other-than-temporary impairment charge exceeded 0.07 percent and 0.10 percent of Total equity in the nine-month periods ended September 30, 2011 and 2010, respectively.

    In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities that is not foreign exchange related, AIG generally prospectively accretes into earnings the difference between the new amortized cost and the expected undiscounted recovery value over the remaining expected holding period of the security. The amounts of accretion recognized in earnings were $141 million and $94 million for the three-month periods ended September 30, 2011 and 2010, respectively, and $355 million and $315 million for the nine-month periods ended September 30, 2011 and 2010, respectively. For a discussion of AIG's other-than-temporary impairment accounting policy, see Note 7 to the Consolidated Financial Statements in AIG's 2010 Annual Report on Form 10-K.

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An aging of the pre-tax unrealized losses of fixed maturity and equity securities, distributed as a percentage of cost relative to unrealized loss (the extent by which the fair value is less than amortized cost or cost), including the number of respective items was as follows:

 

 
September 30, 2011
  Less Than or Equal to 20% of Cost(b)
  Greater Than 20% to 50% of Cost(b)
  Greater Than 50% of Cost(b)
  Total
 

 

 
Aging(a)
(dollars in millions)
  Cost(c)
  Unrealized
Loss

  Items(e)
  Cost(c)
  Unrealized
Loss

  Items(e)
  Cost(c)
  Unrealized
Loss

  Items(e)
  Cost(c)
  Unrealized
Loss
(d)
  Items(e)
 

 

 

Investment grade bonds

                                                                         
 

0 - 6 months

  $ 23,971   $ 719     3,620   $ 163   $ 39     12   $ 1   $ -     3   $ 24,135   $ 758     3,635  
 

7 - 12 months

    3,796     143     507     191     52     18     1     -     3     3,988     195     528  
 

> 12 months

    7,961     600     906     2,168     616     279     369     198     55     10,498     1,414     1,240  
   

Total

  $ 35,728   $ 1,462     5,033   $ 2,522   $ 707     309   $ 371   $ 198     61   $ 38,621   $ 2,367     5,403  
   

Below investment

                                                                         
 

grade bonds

                                                                         
 

0 - 6 months

  $ 7,789   $ 489     1,465   $ 1,099   $ 288     150   $ 34   $ 24     26   $ 8,922   $ 801     1,641  
 

7 - 12 months

    465     41     82     149     47     24     -     -     15     614     88     121  
 

> 12 months

    2,937     292     360     2,284     794     221     416     246     83     5,637     1,332     664  
   

Total

  $ 11,191   $ 822     1,907   $ 3,532   $ 1,129     395   $ 450   $ 270     124   $ 15,173   $ 2,221     2,426  
   

Total bonds

                                                                         
 

0 - 6 months

  $ 31,760   $ 1,208     5,085   $ 1,262   $ 327     162   $ 35   $ 24     29   $ 33,057   $ 1,559     5,276  
 

7 - 12 months

    4,261     184     589     340     99     42     1     -     18     4,602     283     649  
 

> 12 months

    10,898     892     1,266     4,452     1,410     500     785     444     138     16,135     2,746     1,904  
   

Total(e)

  $ 46,919   $ 2,284     6,940   $ 6,054   $ 1,836     704   $ 821   $ 468     185   $ 53,794   $ 4,588     7,829  
   

Equity securities

                                                                         
 

0 - 6 months

  $ 435   $ 37     226   $ 65   $ 21     76   $ -   $ -     -   $ 500   $ 58     302  
 

7-12 months

    35     3     10     29     7     5     -     -     -     64     10     15  
 

> 12 months

    -     -     -     -     -     -     -     -     -     -     -     -  
   

Total

  $ 470   $ 40     236   $ 94   $ 28     81   $ -   $ -     -   $ 564   $ 68     317  

                                                                         

 

 
(a)
Represents the number of consecutive months that fair value has been less than cost by any amount.

(b)
Represents the percentage by which fair value is less than cost at September 30, 2011.

(c)
For bonds, represents amortized cost.

(d)
The effect on Net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will result in current decreases in the amortization of certain DAC.

(e)
Item count is by CUSIP by subsidiary.

    For the nine-month period ended September 30, 2011, net unrealized gains related to fixed maturity and equity securities increased by $5.2 billion primarily resulting from the narrowing of credit spreads.

    As of September 30, 2011, the majority of AIG's fixed maturity investments in an unrealized loss position of more than 50 percent for more than 12 months consisted of the unrealized loss of $444 million related to CMBS and RMBS securities originally rated investment grade that are floating rate or that have low fixed coupons relative to current market yields. A total of 55 securities with an amortized cost of $369 million and a net unrealized loss of $198 million are still investment grade. As part of its credit evaluation procedures applied to these and other securities, AIG considers the nature of both the specific securities and the market conditions for those securities. For most security types supported by real estate-related assets, current market yields continue to be higher than the yields were at the respective issuance dates of the securities. This is largely due to investors demanding additional yield premium for securities whose performance is closely linked to the commercial and residential real estate sectors. In addition, for floating rate securities, persistently low LIBOR levels continue to make these securities less attractive.

    AIG believes that the lack of demand for commercial and residential real estate collateral-based securities, low contractual coupons and interest rate spreads, and the deterioration in the level of collateral support due to real estate market conditions are the primary reasons for these securities trading at significant price discounts. Based on its analysis, and taking into account the level of subordination below these securities, AIG continues to believe

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that the expected cash flows from these securities will be sufficient to recover the amortized cost of its investment. AIG continues to monitor these positions for potential credit impairments that could result from further deterioration in commercial and residential real estate fundamentals.

    See also Note 7 to the Consolidated Financial Statements for further discussion of AIG's investment portfolio.


Enterprise Risk Management

    For a complete discussion of AIG's risk management program, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Risk Management in AIG's 2010 Annual Report on Form 10-K.


Credit Risk Management

    AIG defines its aggregate credit exposures to a counterparty as the sum of its fixed maturity securities, equity securities, loans, finance leases, reinsurance recoverables, derivatives (mark-to-market and potential future exposure), deposits, reverse repurchase agreements, repurchase agreements, collateral extended to counterparties, commercial bank letters of credit received as collateral, guarantees, and the specified credit equivalent exposures to certain insurance products which embody credit risk. Therefore, AIG's reported credit exposures to a counterparty reflect available for sale and held-to-maturity investments, trading securities, derivative exposures, insurance credit and any other counterparty credit exposures.

    AIG's single largest credit exposure, the U.S. Government, was 36 percent of Total equity at September 30, 2011 compared to 22 percent at December 31, 2010. The increase reflects the effects of the Recapitalization on Total equity as well as increased exposure to the U.S. Government, including primarily credit exposure to the U.S. Treasury and its agencies and to the direct and guaranteed exposures to U.S. government-sponsored entities, primarily the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Based on AIG's internal risk ratings, at September 30, 2011, AIG's largest below investment grade-rated credit exposure was 0.5 percent of Total equity, compared to 0.6 percent at December 31, 2010.

    AIG's single largest industry credit exposure was to the global financial institutions sector, which includes banks and finance companies, securities firms, and insurance and reinsurance companies. As of September 30, 2011, credit exposure to this sector was $105 billion, or 121 percent of Total equity compared to 119 percent at December 31, 2010. At September 30, 2011, $100 billion or 95 percent of these financial institution credit exposures were considered investment grade based on AIG's internal ratings and $5 billion or 5 percent non-investment grade. Aggregate credit exposure to the ten largest below investment grade financial institutions was $2 billion at September 30, 2011.

    Of this $105 billion of credit exposure to the financial institution sector, AIG's aggregate credit exposure to fixed maturity securities of the financial institution sector amounted to $41 billion. Short-term bank deposit placements, reverse repos, repos and commercial paper issued by financial institutions (primarily commercial banks), operating account balances with banks and bank-issued commercial letters of credit supporting insurance credit exposures were $21 billion of the total exposure, or 20 percent, to global financial institutions at September 30, 2011. The remaining credit exposures to this sector were primarily related to reinsurance recoverables, ordinary shares of AIA, collateral extended to counterparties mostly pursuant to derivative transactions, derivatives, and captive risk management exposure.

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    Among AIG's financial institution exposures, aggregate credit exposures to United Kingdom- and European-based banks totaled $27.9 billion at September 30, 2011, of which $27.3 billion were considered investment grade based on AIG's internal ratings. Aggregate below investment grade-rated credit exposures to European banks were $552 million at September 30, 2011.

    AIG's credit exposures to banks domiciled in the Euro-Zone countries totaled $11.7 billion, of which $5.8 billion were fixed maturity securities. Credit exposures to banks based in the five countries of the Euro-Zone periphery totaled $2 billion, of which $1.2 billion were fixed maturity securities. Credit exposures to banks based in France totaled $2.2 billion, of which $933 million were fixed maturity securities. AIG's credit exposures were predominantly to the largest banks in these countries.

The following table presents AIG's aggregate credit exposures to banks in the United Kingdom and Europe:

   
September 30, 2011


(in millions)
  Fixed
Maturity
Securities
(a)
  Cash and
Short-Term
Investments
(b)
  Other(c)
  Total
 
   

Euro-zone countries:

                         
 

Netherlands

  $ 2,202   $ 818   $ 930   $ 3,950  
 

Germany

    957     708     1,000     2,665  
 

France

    933     507     791     2,231  
 

Spain

    779     190     126     1,095  
 

Italy

    293     67     341     701  
 

Belgium

    228     1     164     393  
 

Ireland

    137     58     30     225  
 

Greece

    -     1     -     1  
 

Portugal

    -     -     -     -  
 

Other Euro-zone

    226     213     5     444  
   

Total Euro-zone

  $ 5,755   $ 2,563   $ 3,387   $ 11,705  
   

Remainder of Europe

                         
 

United Kingdom

  $ 4,607   $ 2,383   $ 2,580   $ 9,570  
 

Switzerland

    1,053     921     597     2,571  
 

Sweden

    722     1,306     50     2,078  
 

Other remainder of Europe

    508     1,420     41     1,969  
   

Total remainder of Europe

  $ 6,890   $ 6,030   $ 3,268   $ 16,188  
   

Total

  $ 12,645   $ 8,593   $ 6,655   $ 27,893  
   
(a)
Fixed maturity securities primarily includes available for sale and trading securities reported at fair value and single name CDS at notional contract amounts.

(b)
Cash and short-term investments include bank deposit placements, operating accounts, securities purchased under agreements to resell and collateral posted to counterparties against structured products. Credit equivalent exposure to securities purchased under agreements to resell was $94 million (notional value of $3.3 billion).

(c)
Other primarily consists of commercial letters of credit supporting insurance credit exposures ($1.7 billion), captive programs in the United Kingdom and the Netherlands ($1.8 billion) and derivative transactions at fair value ($1.3 billion).

    Out of a total of $5.8 billion of fixed maturity securities of banks in the Euro-Zone countries, AIG's subordinated debt holdings and Tier 1 and preference share securities in these banks totaled $1.5 billion and $612 million, respectively, at September 30, 2011. These exposures were predominantly to the largest banks in those countries.

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The following table presents further detail on AIG's fixed maturity security exposure to banks in the United Kingdom and Europe:

   
September 30, 2011
  Fixed Maturity Securities(a)  
(in millions)
  Secured/
Government
(b)
  Senior
  Subordinated
  Tier 1
  Total
 
   

Euro-zone countries:

                               
 

Netherlands

  $ 592   $ 1,078   $ 377   $ 155   $ 2,202  
 

Germany

    115     359     334     149     957  
 

France

    181     238     334     180     933  
 

Spain

    161     199     312     107     779  
 

Italy

    74     110     109     -     293  
 

Belgium

    51     130     26     21     228  
 

Ireland

    48     89     -     -     137  
 

Other Euro-zone

    121     105     -     -     226  
   

Total Euro-zone

  $ 1,343   $ 2,308   $ 1,492   $ 612   $ 5,755  
   

Remainder of Europe

                               
 

United Kingdom

  $ 306   $ 1,633   $ 2,180   $ 488   $ 4,607  
 

Switzerland

    30     692     308     23     1,053  
 

Sweden

    198     325     112     87     722  
 

Other remainder of Europe

    394     62     16     36     508  
   

Total remainder of Europe

  $ 928   $ 2,712   $ 2,616   $ 634   $ 6,890  
   

Total

  $ 2,271   $ 5,020   $ 4,108   $ 1,246   $ 12,645  
   
(a)
Fixed maturity securities primarily includes available for sale and trading securities reported at fair value and single name CDS at notional contract value.

(b)
Secured/government primarily includes covered bonds and securities issued by government-sponsored entities or debt guaranteed by a government.

    AIG also had credit exposures to several European governments whose ratings have been downgraded or placed under review in recent months by one or more of the major rating agencies. These downgrades occurred mostly in countries in the European periphery (Spain, Italy and Portugal) where AIG's credit exposures totaled $415 million at September 30, 2011. The downgrades primarily reflect the large government budget deficits and rising government debt-to-GDP ratios of these sovereigns. These credit exposures primarily included available for sale and trading securities (at fair value) issued by these governments. AIG had no direct or guaranteed credit exposure to the governments of Greece or Ireland.

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The following table presents AIG's aggregate (gross and net) credit exposures to governments in the Euro-Zone and other non-U.S. government concentrations:

   
(in millions)
  September 30,
2011

  December 31,
2010*

 
   

Euro-zone countries:

             
 

Germany

  $ 1,958   $ 1,102  
 

France

    1,171     1,134  
 

Netherlands

    436     341  
 

Spain

    294     257  
 

Austria

    197     156  
 

Belgium

    163     246  
 

Italy

    114     448  
 

Finland

    88     34  
 

Portugal

    7     6  
 

Ireland

    -     -  
 

Greece

    -     -  
 

Other Euro-zone

    -     -  
   

Total Euro-zone

    4,428     3,724  
   

Other concentrations:

             
 

Japan

    8,807     7,366  
 

Canada

    3,118     1,081  
 

United Kingdom

    1,612     1,182  
 

Australia

    854     937  
 

Norway

    669     508  
 

Sweden

    510     316  
 

Mexico

    473     424  
 

Qatar

    363     305  
 

Denmark

    283     277  
 

Saudi Arabia

    275     231  
 

Other

    4,305     3,551  
   

Total other concentrations

    21,269     16,178  
   

Total

  $ 25,697   $ 19,902  
   
*
For comparative purposes, December 31, 2010 figures have been adjusted to reflect the divestitures of AIG Star, AIG Edison, and Nan Shan, which occurred in 2011.

    AIG believes that its combined credit risk exposures to sovereign governments and financial institutions in the Euro-zone are manageable risks given the type of exposure and the quality and size of the issuers.

    AIG also monitors its aggregate cross-border exposures by country and regional group of countries. AIG includes in its cross-border exposures both aggregated cross-border credit exposures to unrelated third parties and its cross-border investments in its own international subsidiaries. Ten countries had cross-border exposures in excess of 10 percent of Total equity at September 30, 2011 compared to eight such countries in December 31, 2010. Based on AIG's internal risk ratings, at September 30, 2011, six countries were rated AAA, two were rated AA, and two were rated A. The two largest cross-border exposures were to the United Kingdom and Hong Kong.

    AIG also has a risk concentration, primarily through the investment portfolios of its insurance companies, in the U.S. municipal sector. A majority of these securities were held in available for sale portfolios of AIG's domestic property casualty insurance companies. AIG had $881 million of additional exposure to the municipal sector outside of its insurance company portfolios at September 30, 2011, compared to $974 million at December 31, 2010. These exposures consisted of AIGFP derivatives and trading securities (at fair value) and exposure related to other insurance and financial services operations.

    See also Investments herein for further information.

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    AIG's Credit Risk Management Department reviews quarterly concentration reports in all categories listed above as well as credit trends by risk ratings. AIG Credit Risk Management periodically adjusts limits to provide reasonable assurance that AIG does not incur excessive levels of credit risk and that AIG's credit risk profile is properly calibrated across business units.

Market Risk Management

Insurance and Aircraft Leasing Sensitivities

The following table provides estimates of AIG's sensitivity to changes in yield curves, equity prices and foreign currency exchange rates:

   
 
  Exposure    
  Effect  
(dollars in millions)
  September 30,
2011

  December 31, 2010*
  Sensitivity Factor
  September 30,
2011

  December 31,
2010

 
   

Yield sensitive assets

  $ 331,300   $ 308,900  

100 bps parallel increase in all yield curves

  $ (15,200 ) $ (13,400 )

Equity and alternative investments exposure

  $ 39,000   $ 46,400  

20% decline in stock prices and value of alternative investments

  $ (7,800 ) $ (9,300 )

Foreign currency exchange rates net exposure

  $ 5,300   $ 3,400  

10% depreciation of all foreign currency exchange rates against the U.S. dollar

  $ (530 ) $ (340 )
   
*
All figures and periods have been adjusted to reflect the divestitures of AIG Star, AIG Edison, and Nan Shan, which occurred in 2011.

    Exposures for yield curves include assets that are directly sensitive to yield curve movements, such as fixed maturity securities, loans, finance receivables and short-term investments (excluding consolidated separate account assets). Exposures for equity and alternative investment prices include investments in common stocks, preferred stocks, mutual funds, hedge funds, private equity funds, commercial real estate and real estate funds (excluding consolidated separate account assets and consolidated managed partnerships and funds). Exposures to foreign currency exchange rates reflect AIG's consolidated non-U.S. dollar net capital investments on a GAAP basis.

Total yield sensitive assets increased 7.3 percent or $22.4 billion at September 30, 2011 compared to December 31, 2010, primarily due to an increase in fixed income assets of $33.9 billion. This increase was partially offset by a decrease in cash and other assets of $11.5 billion.

Total equity and alternative investments exposure decreased 16.0 percent or $7.4 billion compared to December 31, 2010, primarily due to: AIG's sale of MetLife equity securities ($6.5 billion); a decrease in mutual fund value ($1.3 billion); a decrease in common equity securities ($1.4 billion); and a decrease in real estate investment ($0.3 billion). The decrease was partially offset by an increase in partnership value ($1.0 billion) and an increase in all other equity investments ($1.1 billion).

The 55.9 percent or $1.89 billion increase in foreign currency exchange rates net exposure at September 30, 2011, compared to December 31, 2010, includes: $944 million from certain foreign-denominated equity holdings; goodwill translation adjustment of $832 million; and a change in all other currencies of $119 million.

    The above sensitivities of a 100 basis point increase in yield curves, a 20 percent decline in equities and alternative assets, and a 10 percent depreciation of all foreign currency exchange rates against the U.S. dollar were chosen solely for illustrative purposes. The selection of these specific events should not be construed as a prediction, but only as a demonstration of the potential effects of such events. These scenarios should not be construed as the only risks AIG faces; these events are shown as an indication of several possible losses AIG could experience. In addition, losses from these and other risks could be materially higher than illustrated. The sensitivity factors are the same as those used in AIG's 2010 Annual Report on Form 10-K.

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Critical Accounting Estimates

    The preparation of financial statements in conformity with GAAP requires the application of accounting policies that often involve a significant degree of judgment. AIG considers its accounting policies that are most dependent on the application of estimates and assumptions, and therefore viewed as critical accounting estimates, to be those relating to items considered by management in the determination of:

estimates with respect to income taxes, including recoverability of the deferred tax asset and the predictability of future operating profitability of the character necessary to realize the deferred tax asset;

recoverability of assets, including deferred policy acquisition costs (DAC) and flight equipment;

fair value measurements of certain financial assets and liabilities, including CDS and AIG's economic interest in ML II and equity interest in ML III;

insurance liabilities, including general insurance unpaid claims and claims adjustment expenses and future policy benefits for life and accident and health contracts;

estimated gross profits for investment-oriented products;

impairment charges, including other-than-temporary impairments on financial instruments and goodwill impairments; and

liabilities for legal contingencies;

    These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, AIG's financial condition and results of operations would be directly affected. Following is a discussion of updates to Critical Accounting Estimates during 2011. For a complete discussion of AIG's critical accounting estimates, see AIG's 2010 Annual Report on Form 10-K.


Recoverability of Deferred Tax Asset:

    The evaluation of the recoverability of the deferred tax asset and the need for a valuation allowance requires AIG to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.

    AIG's framework for assessing the recoverability of deferred tax assets weighs the sustainability of recent operating profitability, the predictability of future operating profitability of the character necessary to realize the deferred tax assets, and its emergence from cumulative losses in recent years. The framework requires AIG to consider all available evidence, including:

the sustainability of recent operating profitability of the AIG subsidiaries in various tax jurisdictions;

the predictability of future operating profitability of the character necessary to realize the deferred tax assets;

the nature, frequency, and severity of cumulative financial reporting losses in recent years;

the carryforward periods for the net operating loss, capital loss and foreign tax credit carryforwards;

the recognition of the gains and losses on business dispositions;

prudent and feasible tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax assets; and

the effect of reversing taxable temporary differences.

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    AIG has had several favorable developments, including the completion of the Recapitalization in January 2011, the wind-down of AIGFP's portfolios, the sale of certain businesses, and its emergence from cumulative losses in recent years. AIG's U.S. consolidated income tax group, however, still needs to demonstrate sustainable operating profit. Based on the results of the third quarter of 2011, AIG's level of profitability in the fourth quarter of 2011 will be very important in demonstrating sustainable operating profit. AIG's ability to demonstrate sustainable operating profit, together with the recent emergence from cumulative losses as well as projections of sufficient future taxable income, would represent significant positive evidence. Depending on AIG's level of profitability and the characteristics of the deferred tax assets, it is possible that the valuation allowance could be released in large part in the fourth quarter of 2011, which would materially and favorably affect Net income and shareholders' equity in that period. At December 31, 2010, the valuation allowance for AIG's U.S. consolidated income tax group was $23.8 billion.


Deferred Policy Acquisition Costs - Short Duration (general insurance):

    Recoverability of DAC is based on the current terms and profitability of the underlying insurance contracts. Policy acquisition costs are deferred and amortized over the period in which the related premiums written are earned, generally 12 months. DAC is grouped consistent with the manner in which the insurance contracts are acquired, serviced and measured for profitability and is reviewed for recoverability based on the profitability of the underlying insurance contracts. AIG assesses the recoverability of its DAC on an annual basis or more frequently if circumstances indicate an impairment may have occurred. This assessment is performed by comparing recorded unearned premium to the sum of expected claims, claims adjustment expenses and maintenance costs, unamortized DAC and anticipated maintenance costs. If the sum of these costs exceeds the amount of recorded unearned premium, the excess is recognized as an offset against the asset established for DAC. This offset is referred to as a premium deficiency charge. Investment income is not anticipated in assessing the recoverability of DAC. Increases in expected claims and claims adjustment expenses can have a significant impact on the likelihood and amount of a premium deficiency charge. Management tested the recoverability of DAC and determined that recorded unearned premiums of its Chartis domestic and international operations exceeded the sum of these costs at September 30, 2011, by one percent and 20 percent, respectively, and, therefore, the DAC of these operations was considered to be recoverable. DAC for Chartis domestic and international operations amounted to $1.7 billion and $1.9 billion, respectively, at September 30, 2011. See Note 2 to the Consolidated Financial Statements.


Goodwill:

    Goodwill is the excess of the cost of an acquired business over the fair value of the identifiable net assets of the acquired business. Goodwill is tested for impairment annually, or more frequently if circumstances indicate an impairment may have occurred.

    The impairment assessment involves a two-step process in which an initial assessment for potential impairment is performed and, if potential impairment is present, the amount of impairment is measured (if any) and recorded. Impairment is tested at the reporting unit level.

    Management initially assesses the potential for impairment by estimating the fair value of each of AIG's reporting units and comparing the estimated fair values with the carrying amounts of those reporting units, including allocated goodwill. The estimate of a reporting unit's fair value may be based on one or a combination of approaches including market-based earning multiples of the unit's peer companies, discounted expected future cash flows, external appraisals or, in the case of reporting units being considered for sale, third-party indications of fair value, if available. Management considers one or more of these estimates when determining the fair value of a reporting unit to be used in the impairment test.

    If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value of a reporting unit exceeds its estimated fair value, goodwill associated with that reporting unit potentially is impaired. The amount of impairment, if any, is measured as the excess of the carrying value of goodwill over the estimated fair value of the goodwill. The estimated fair value of the goodwill is measured as the excess of the fair

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value of the reporting unit over the amounts that would be assigned to the reporting unit's assets and liabilities in a hypothetical business combination. An impairment charge is recognized in earnings to the extent of the excess.

    During the third quarter of 2011, Chartis finalized its reorganization, operating design and related segment reporting changes. In connection with this reorganization, total goodwill of $1.4 billion was allocated between Commercial Insurance and Consumer Insurance based on their relative fair values as of September 30, 2011. Management tested the allocated goodwill for impairment and determined that the fair values of the Commercial Insurance and Consumer Insurance reporting units exceeded book value at September 30, 2011 and therefore the goodwill of these reporting units was considered not impaired.

    AIG will continue to monitor overall competitive, business and economic conditions, and other events or circumstances, including Chartis operating results that might result in an impairment of goodwill in the future.


Fair Value Measurements of Certain Financial Assets and Liabilities:

Overview

The following table presents the fair value of fixed maturity and equity securities by source of value determination:

   
September 30, 2011
(in billions)
  Fair
Value

  Percent
of Total

 
   

Fair value based on external sources(a)

  $ 260     90 %

Fair value based on internal sources

    28     10  
   

Total fixed maturity and equity securities(b)

  $ 288     100 %
   
(a)
Includes $22.5 billion for which the primary source is broker quotes.

(b)
Includes available for sale and trading securities.

    See Note 6 to the Consolidated Financial Statements for more detailed information about AIG's accounting policies for the incorporation of credit risk in fair value measurements and the measurement of fair value of financial assets and financial liabilities.

Level 3 Assets and Liabilities

    Assets and liabilities recorded at fair value in the Consolidated Balance Sheet are classified in a hierarchy for disclosure purposes consisting of three "levels" based on the observability of inputs available in the marketplace used to measure the fair value. See Note 6 to the Consolidated Financial Statements for additional information about the three levels of observability.

    At September 30, 2011, AIG classified $39.9 billion and $6.1 billion of assets and liabilities, respectively, measured at fair value on a recurring basis as Level 3. This represented 7.3 percent and 1.4 percent of the total assets and liabilities, respectively, at September 30, 2011. At December 31, 2010, AIG classified $36.3 billion and $6.2 billion of assets and liabilities, respectively, measured at fair value on a recurring basis as Level 3. This represented 5.3 percent and 1.1 percent of the total assets and liabilities, respectively, at December 31, 2010. Level 3 fair value measurements are based on valuation techniques that use at least one significant input that is unobservable. These measurements are made under circumstances in which there is little, if any, market activity for the asset or liability. AIG's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment.

    See Note 6 to the Consolidated Financial Statements for discussion of transfers of Level 3 assets and liabilities.

    AIGFP's Super Senior Credit Default Swap Portfolio:    AIGFP wrote credit protection on the super senior risk layer of collateralized loan obligations (CLOs), multi-sector CDOs and diversified portfolios of corporate debt, and prime residential mortgages. In these transactions, AIGFP is at risk of credit performance on the super senior

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risk layer related to such assets. To a lesser extent, AIGFP also wrote protection on tranches below the super senior risk layer, primarily in respect of regulatory capital relief transactions.

The following table presents the net notional amount, fair value of derivative (asset) liability and unrealized market valuation gain (loss) of the AIGFP super senior credit default swap portfolio, including credit default swaps written on mezzanine tranches of certain regulatory capital relief transactions, by asset class:

   
 
   
   
   
   
  Unrealized Market
Valuation Gain (Loss)
 
 
   
   
  Fair Value of
Derivative (Asset)
Liability at
 
 
  Net Notional Amount   Three Months
Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  September 30,
2011
(a)
  December 31,
2010
(a)
  September 30,
2011
(b)(c)
  December 31,
2010
(b)(c)
 
(in millions)
  2011(c)
  2010(c)
  2011(c)
  2010(c)
 
   

Regulatory Capital:

                                                 
 

Corporate loans

  $ 2,275   $ 5,193   $ -   $ -   $ -   $ -   $ -   $ -  
 

Prime residential mortgages(d)

    4,355     31,613     -     (190 )   -     45     6     71  
 

Other

    984     1,263     17     17     (10 )   6     -     (1 )
   
 

Total

    7,614     38,069     17     (173 )   (10 )   51     6     70  
   

Arbitrage:

                                                 
 

Multi-sector CDOs(e)

    5,667     6,689     3,106     3,484     47     117     230     516  
 

Corporate debt/CLOs(f)

    12,035     12,269     160     171     (33 )   8     11     (82 )
   
 

Total

    17,702     18,958     3,266     3,655     14     125     241     434  
   

Mezzanine tranches(d)(g)

    726     2,823     (12 )   198     (1 )   (24 )   (15 )   (72 )
   

Total

  $ 26,042   $ 59,850   $ 3,271   $ 3,680   $ 3   $ 152   $ 232   $ 432  
   
(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 $25 million and $(34) million in the three-month periods ended September 30, 2011 and 2010, respectively, and $27 million and $(124) million in the nine-month periods ended September 30, 2011 and 2010, respectively, representing the effect of changes in AIG's credit spreads on the valuation of the derivatives liabilities.

(d)
During the second quarter of 2011, AIGFP terminated two super senior prime residential mortgage transactions, with a combined net notional amount of $24.1 billion at March 31, 2011, that had previously been the subject of a collateral dispute. In addition, AIGFP terminated the vast majority of the related mezzanine tranches and the majority of the hedge transactions related to those mezzanine tranches, with a combined net notional amount of $2.2 billion. The transactions were terminated at values that approximated their collective fair values at the time of termination and, as a result, unrealized gains and losses were realized at termination.

(e)
During the nine-month period ended September 30, 2011, AIGFP liquidated one multi-sector super senior CDS transaction with a net notional amount of $188 million. The primary underlying collateral components, which consisted of individual ABS CDS transactions, were sold in an auction to counterparties, including AIGFP, at their approximate fair value at the time of the liquidation. AIGFP was the winning bidder on approximately $107 million of individual ABS CDS transactions, which are reported in written single name credit default swaps as of September 30, 2011. As a result, a $121 million loss, which was previously included in the fair value of the derivative liability as an unrealized market valuation loss, was realized. During the nine-month period ended September 30, 2011, AIGFP also paid $27 million to its counterparties with respect to multi-sector CDOs. Upon payment, a $27 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 $4.8 billion and $5.5 billion in net notional amount of credit default swaps written with cash settlement provisions at September 30, 2011 and December 31, 2010, respectively.

(f)
Corporate debt/CLOs include $1.3 billion in net notional amount of credit default swaps written on the super senior tranches of CLOs at both September 30, 2011 and December 31, 2010.

(g)
Net of offsetting purchased CDS of $272 million and $1.4 billion in net notional amount at September 30, 2011 and December 31, 2010, respectively.

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The following table presents changes in the net notional amount of the AIGFP super senior credit default swap portfolio, including credit default swaps written on mezzanine tranches of certain regulatory capital relief transactions:

   
(in millions)
  Net Notional
Amount
December 31,
2010
(a)
  Terminations
  Maturities
  Effect of
Foreign
Exchange
Rates
(b)
  Amortization,
net of
Replenishments

  Net Notional
Amount
September 30,
2011(a)

 
   

Regulatory Capital:

                                     
 

Corporate loans

  $ 5,193   $ (1,425 ) $ -   $ 89   $ (1,582 ) $ 2,275  
 

Prime residential mortgages

    31,613     (24,606 )   -     2,195     (4,847 )   4,355  
 

Other

    1,263     -     -     9     (288 )   984  
   
 

Total

    38,069     (26,031 )   -     2,293     (6,717 )   7,614  
   

Arbitrage:

                                     
 

Multi-sector CDOs(c)

    6,689     (188 )   (4 )   38     (868 )   5,667  
 

Corporate debt/CLOs(d)

    12,269     -     (232 )   30     (32 )   12,035  
   
 

Total

    18,958     (188 )   (236 )   68     (900 )   17,702  
   

Mezzanine tranches(e)

    2,823     (2,029 )   (203 )   141     (6 )   726  
   

Total

  $ 59,850   $ (28,248 ) $ (439 ) $ 2,502   $ (7,623 ) $ 26,042  
   
(a)
Net notional amounts presented are net of all structural subordination below the covered tranches.

(b)
Relates to the weakening of the U.S. dollar, primarily against the Euro and the British Pound.

(c)
Multi-sector CDOs include $4.8 billion and $5.5 billion in net notional amount of credit default swaps written with cash settlement provisions at September 30, 2011 and December 31, 2010, respectively.

(d)
Corporate debt/CLOs include $1.3 billion in net notional amount of credit default swaps written on the super senior tranches of CLOs at both September 30, 2011 and December 31, 2010.

(e)
Net of offsetting purchased CDS of $272 million and $1.4 billion in net notional amount at September 30, 2011 and December 31, 2010, respectively.


The following table presents summary statistics for the AIGFP super senior credit default swaps at September 30, 2011 and totals for September 30, 2011 and December 31, 2010:

 

 
 
   
   
   
   
  Arbitrage Portfolio   Total  
 
  Regulatory Capital Portfolio    
   
   
   
   
   
 
 
   
  Prime
Residential
Mortgages

   
   
  Corporate
Debt/
CLOs

  Multi-
Sector
CDOs w/
Subprime

  Multi-Sector
CDOs w/No
Subprime

   
   
   
 
 
  Corporate
Loans

   
   
   
  September 30,
2011

  December 31,
2010

 
Category
  Other
  Subtotal
  Subtotal
 

 

 

Gross Transaction Notional Amount (in millions)

  $ 3,121   $ 6,771   $ 1,159   $ 11,051   $ 17,531   $ 4,866   $ 4,909   $ 27,306   $ 38,357   $ 78,305  

Net Notional Amount (in millions)

  $ 2,275   $ 4,355   $ 984   $ 7,614   $ 12,035   $ 2,786   $ 2,881   $ 17,702   $ 25,316   $ 57,027  

Number of Transactions

    3     7     1     11     14     8     5     27     38     46  

Weighted Average Subordination (%)

    27.11 %   35.53 %   15.11 %   31.01 %   24.08 %   29.38 %   27.67 %   25.67 %   27.21 %   20.16 %

Weighted Average Number of loans/Transaction

    4,182     26,779     1,547     17,752     122     131     118                    

Weighted Average Expected Maturity (Years)

    0.98     0.48     4.03     0.99     4.42     6.72     6.28                    

                                                             

 

 

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Regulatory Capital Portfolio

    During the nine-month period ended September 30, 2011, $26.0 billion in net notional amount of regulatory capital CDSs were terminated or matured at no cost to AIGFP. AIGFP continues to reassess the expected maturity of this portfolio. As of September 30, 2011, AIGFP estimated that the weighted average expected maturity of the portfolio was 0.99 years. AIGFP has not been required to make any payments as part of terminations of super senior regulatory capital CDSs initiated by counterparties. However, during the second quarter of 2011, AIGFP terminated mezzanine tranches related to certain terminated super senior regulatory capital trades and made payments which approximated their fair values at the time of termination. The regulatory benefit of these transactions for AIGFP's financial institution counterparties was generally derived from Basel I. In December 2010, the Basel Committee on Banking Supervision finalized Basel III, which, when fully implemented, may reduce or eliminate the regulatory benefits to certain counterparties for these transactions, and this may reduce the period of time that such counterparties are expected to hold the positions. In prior years, it had been expected that financial institution counterparties would complete a transition from Basel I to an intermediate standard known as Basel II, which could have had similar effects on the benefits of these transactions, at the end of 2009. Basel III has now superseded Basel II, but the details of its implementation by the various European Central Banking districts have not been finalized. Should certain counterparties continue to receive favorable regulatory capital benefits from these transactions, those counterparties may not exercise their options to terminate the transactions in the expected time frame.

    The weighted average expected maturity of the Regulatory Capital Portfolio decreased as of September 30, 2011 by approximately 2.2 years from December 31, 2010 due to the termination of two transactions that had a longer than average weighted average maturity. Because the remaining counterparties continue to have a right to terminate the transaction early, AIGFP has extended the expected maturity dates by one year, which is based on how long AIGFP believes the relevant rules under Basel I will remain effective. These counterparties in the Corporate Loan and Prime Residential Mortgage portfolios continue to receive favorable regulatory capital benefits under Basel I rules and, thus, AIG continues to categorize them as Regulatory Capital transactions.

    During the second quarter of 2011, AIGFP terminated two super senior prime residential mortgage transactions, with a combined net notional amount of $24.1 billion at March 31, 2011, that had previously been the subject of a collateral dispute. In addition, AIGFP terminated the vast majority of the related mezzanine tranches and the majority of the hedge transactions related to those mezzanine tranches, with a combined net notional amount of $2.2 billion. These transactions were terminated at values that approximated their collective fair value at the time of termination.

    During the third quarter of 2011, hedge transactions with a net notional amount of $427 million were terminated at values that approximated their fair value at the time of termination. The terminations had a positive net cash flow effect on AIG due to the return of previously posted collateral.

    In light of early termination experience to date and after analyses of other market data, to the extent deemed relevant and available, AIG determined that there was no unrealized market valuation adjustment for any of the transactions in this regulatory capital relief portfolio for 2011 other than for transactions where AIGFP believes the counterparty is no longer using the transaction to obtain regulatory capital relief as discussed above. Although AIGFP believes the value of contractual fees receivable on these transactions through maturity exceeds the economic benefits of any potential payments to the counterparties, the counterparties' early termination rights, and AIGFP's expectation that such rights will be exercised, preclude the recognition of a derivative asset for these transactions.

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The following table presents, for each of the regulatory capital CDS transactions in the corporate loan portfolio, the gross transaction notional amount, net notional amount, attachment points, inception to date realized losses and percent non-investment grade:

   
(dollars in millions)

CDS

  Gross Transaction
Notional Amount at
September 30, 2011

  Net Notional
Amount at
September 30,
2011

  Attachment Point
at Inception
(a)
  Attachment
Point at
September 30,
2011
(a)
  Realized Losses
through
September 30,
2011
(b)
  Percent
Non-investment Grade
at September 30,
2011
(c)
 
   

1

  $ 171   $ 75     10.03 %   56.00 %   0.52 %   42.77 %

2

    816     579     10.00 %   29.02 %   0.20 %   38.45 %

3

    2,134     1,621     13.26 %   24.06 %   0.00 %   68.32 %
       

Total

  $ 3,121   $ 2,275                          

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(a)
Expressed as a percentage of gross transaction notional amount of the referenced obligations. As a result of participation ratios, replenishment rights and partial terminations, the attachment point may not always be computed by dividing net notional amount by gross transaction notional amount.

(b)
Represents realized losses incurred by the transaction (defaulted amounts less amounts recovered) from inception through September 30, 2011 expressed as a percentage of the initial gross transaction notional amount.

(c)
Represents non-investment grade obligations in the underlying pools of corporate loans expressed as a percentage of gross transaction notional amount.


The following table presents, for each of the regulatory capital CDS transactions in the prime residential mortgage portfolio, the gross transaction notional amount, net notional amount, attachment points, and inception to date realized losses:

   
(dollars in millions)

CDS

  Gross Transaction
Notional Amount at
September 30, 2011

  Net Notional
Amount at
September 30,
2011

  Attachment Point
at Inception
(a)
  Attachment Point at
September 30, 2011
(a)
  Realized Losses
through
September 30,
2011
(b)
 
   

1

  $ 314   $ 108     17.01 %   63.63 %   2.88 %

2

    162     26     18.48 %   83.25 %   2.32 %

3

    176     86     16.81 %   51.04 %   1.89 %

4

    239     154     13.19 %   35.50 %   0.59 %

5(c)

    1,204     849     7.95 %   29.35 %   0.05 %

6

    1,795     1,311     12.40 %   26.93 %   0.00 %

7

    2,881     1,821     11.50 %   36.78 %   0.00 %
       

Total

  $ 6,771   $ 4,355                    

 

 

 

 

 

 

 

 

 

 

 
(a)
Expressed as a percentage of gross transaction notional amount of the referenced obligations. As a result of participation ratios, replenishment rights and partial terminations, the attachment point may not always be computed by dividing net notional amount by gross transaction notional amount.

(b)
Represents realized losses incurred by the transaction (defaulted amounts less amounts recovered) from inception through September 30, 2011 expressed as a percentage of the initial gross transaction notional amount.

(c)
Delinquency information is not provided to AIGFP for the underlying pools of residential mortgages of this transaction. However, information with respect to principal amount outstanding, defaults, recoveries, remaining term, property use, geography, interest rates, and ratings of the underlying junior tranches are provided to AIGFP for such referenced pools.

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    All of the regulatory capital CDS transactions directly or indirectly reference tranched pools of large numbers of whole loans that were originated by the financial institution (or its affiliates) receiving the credit protection, rather than structured securities containing loans originated by other third parties. In the vast majority of transactions, the loans are intended to be retained by the originating financial institution and in all cases the originating financial institution is the purchaser of the CDS, either directly or through an intermediary.

    As further discussed below, AIGFP receives information monthly or quarterly regarding the performance and credit quality of the underlying referenced assets. AIGFP also obtains other information, such as ratings of the tranches below the super senior risk layer. The nature of the information provided or otherwise available to AIGFP with respect to the underlying assets in each regulatory capital CDS transaction is not consistent across all transactions. Furthermore, in all corporate loan and residential mortgage transactions, the pools are blind, meaning that the identities of the obligors are not disclosed to AIGFP. In addition, although AIGFP receives periodic reports on the underlying asset pools, virtually all of the regulatory capital CDS transactions contain confidentiality restrictions that preclude AIGFP's public disclosure of information relating to the underlying referenced assets. The originating financial institutions, calculation agents or trustees (each a Report Provider) provide periodic reports on all underlying referenced assets as described below, including for those within the blind pools. While much of this information received by AIGFP cannot be aggregated in a comparable way for disclosure purposes because of the confidentiality restrictions and the inconsistency of the information, it does provide a sufficient basis for AIGFP to evaluate the risks of the portfolio and to determine a reasonable estimate of fair value.

    For regulatory capital CDS transactions written on underlying pools of corporate loans, AIGFP receives monthly or quarterly updates from one or more Report Providers for each such referenced pool detailing, with respect to the corporate loans comprising such pool, the principal amount outstanding and defaults. In all of these reports, AIGFP also receives information on recoveries and realized losses. AIGFP also receives quarterly stratification tables for each pool incorporating geography, industry and, when not publicly rated, the counterparty's assessment of the credit quality of the underlying corporate loans.

    Ratings from independent ratings agencies for the underlying assets of the corporate loan portfolio are not universally available, but AIGFP estimates the ratings for the assets not rated by independent agencies by mapping the information obtained from the Report Providers to rating agency criteria. The "Percent Non-Investment Grade" information in the table above is provided as an indication of the nature of loans underlying the transactions, not necessarily as an indicator of relative risk of the CDS transactions, which is determined by the individual transaction structures. All of the remaining corporate loan transactions are written on Small and Medium Enterprise (SME) loan balances, which tend to be rated lower than loans to large, well-established enterprises. However, the greater number of loans and the smaller average size of the SME loans mitigate the risk profile of the pools. In addition, the transaction structures reflect AIGFP's assessment of the loan collateral arrangements, expected recovery values and reserve accounts in determining the level of subordination required to minimize the risk of loss. The percentage of non-investment grade obligations in the underlying pools of corporate loans varies considerably. One pool containing the highest percentage of non-investment grade obligations, which is the only transaction with a pool of non-investment grade percentages greater than 45 percent, is comprised solely of granular SME loan pools which benefit from collateral arrangements made by the originating financial institutions and from work out of recoveries by the originating financial institutions. The number of loans in this pool is 5,701. This large number of SME loans increases the predictability of the expected loss and lessens the probability that discrete events will have a meaningful impact on the results of the overall pool. This transaction benefits from a tranche junior to it which was still rated AAA by at least two rating agencies at September 30, 2011. Two other pools, with a total net notional amount of $654 million, have non-investment grade percentages less than 45 percent, with a weighted average remaining life to maturity of 3.2 years. These pools have weighted average realized losses of 0.29 percent from inception through September 30, 2011 and have current weighted average attachment points of 33.69 percent. Approximately 5.73 percent of the assets underlying the corporate loan transactions are in default. The percentage of assets in default by transaction was available for all transactions and ranged from 3.63 percent to 16.38 percent.

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    For regulatory capital CDS transactions written on underlying pools of residential mortgages, AIGFP receives quarterly reports for each such referenced pool detailing, with respect to the residential mortgages comprising such pool, the aggregate principal amount outstanding, defaults and realized losses. These reports include additional information on delinquencies for the large majority of the transactions and recoveries for substantially all transactions. AIGFP also receives quarterly stratification tables for each pool incorporating geography for the underlying residential mortgages. The stratification tables also include information on remaining term, property use and interest rates for a large majority of the transactions.

    Delinquency information for the mortgages underlying the residential mortgage transactions was available on 82.22 percent of the total gross transaction notional amount and mortgages delinquent more than 30 days ranged from 0.19 percent to 2.20 percent, averaging 0.44 percent. Except for one transaction, which comprised less than 5.00 percent of the total gross transaction notional amount, the average default rate (expressed as a percentage of gross transaction notional amount) was 0.95 percent and the default rates ranged from 0.00 percent to 6.53 percent. The default rate on this one transaction was 23.10 percent with a subordination level of 63.63 percent.

    For all regulatory capital transactions, where the rating agencies directly rate the junior tranches of the pools, AIGFP monitors the rating agencies' releases for any affirmations or changes in such ratings, as well as any changes in rating methodologies or assumptions used by the rating agencies to the extent available. The tables below show the percentage of regulatory capital CDS transactions where there is an immediately junior tranche that is rated and the average rating of that tranche across all rated transactions.

    AIGFP analyzes the information regarding the performance and credit quality of the underlying pools of assets to make its own risk assessment and to determine any changes in credit quality with respect to such pools of assets. This analysis includes a review of changes in pool balances, subordination levels, delinquencies, realized losses and expected performance under more adverse credit conditions. Using data provided by the Report Providers and information available from rating agencies, governments and other public sources that relate to macroeconomic trends and loan performance, AIGFP is able to analyze the expected performance of the overall portfolio because of the large number of loans that comprise the collateral pools.

    Given the current performance of the underlying portfolios, the level of subordination and AIGFP's own assessment of the credit quality, as well as the risk mitigants inherent in the transaction structures, AIGFP does not expect that it will be required to make payments pursuant to the contractual terms of those transactions providing regulatory relief. Further, AIGFP expects that counterparties will continue to terminate these transactions prior to their maturity.

The following table presents the AIGFP Regulatory Capital CDS transactions in the Corporate loans portfolio by geographic location:

                                             

 

 
   
   
   
   
  Weighted Average Maturity (Years)    
  Ratings of Junior Tranches(c)
September 30, 2011


Exposure Portfolio
  Net
Notional
Amount
(in millions)

   
  Current
Average
Attachment
Point
(a)
  Realized
Losses through
September 30,
2011
(b)
   
  Percent
of Total

  To First
Call

  To
Maturity

  Number of
Transactions

  Percent
Rated

  Average
Rating

 

Germany

  $ 2,275     100 %   27.11 %   0.11 % 0.98   7.93   3     100 % A+

 

(a)
Expressed as a percentage of gross transaction notional amount of the referenced obligations.

(b)
Represents realized losses incurred by the transaction (defaulted amounts less amounts recovered) from inception through September 30, 2011 expressed as a percentage of the initial gross transaction notional amount.

(c)
Represents the weighted average ratings, when available, of the tranches immediately junior to AIGFP super senior tranche. The percentage rated represents the percentage of net notional amount where there exists a rated tranche immediately junior to AIGFP super senior tranche.

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The following table presents the AIGFP Regulatory Capital CDS transactions in the Prime residential mortgage portfolio summarized by geographic location:

                                             

 

 
   
   
   
   
  Weighted Average
Maturity (Years)
   
  Ratings of Junior Tranches(c)
September 30, 2011



  Net
Notional
Amount
(in millions)

   
  Current
Average
Attachment
Point
(a)
  Realized
Losses through
September 30,
2011
(b)
   
  Percent
of Total

  To First
Call

  To
Maturity

  Number of
Transactions

  Percent
Rated

  Average
Rating

 

Country:

                                             
 

France

  $ 849     19.50 %   29.35 %   0.05 % 0.22   27.22   1     100 % AAA
 

Germany

    1,685     38.69     36.97 %   1.02 % 0.73   37.97   5     100   AAA
 

Sweden

    1,821     41.81     36.78 %   0.00 % 0.34   28.34   1     100   AAA

 

Total

  $ 4,355     100.00 %   35.53 %   0.37 % 0.48   31.96   7     100 % AAA

 

(a)
Expressed as a percentage of gross transaction notional amount of the referenced obligations.

(b)
Represents realized losses incurred by the transaction (defaulted amounts less amounts recovered) from inception through September 30, 2011 expressed as a percentage of the initial gross transaction notional amount.

(c)
Represents the weighted average ratings, when available, of the tranches immediately junior to AIGFP super senior tranche. The percentage rated represents the percentage of net notional amount where there exists a rated tranche immediately junior to AIGFP super senior tranche.


Arbitrage Portfolio

    A portion of the AIGFP super senior credit default swaps as of September 30, 2011 are arbitrage-motivated transactions written on multi- sector CDOs or designated pools of investment grade senior unsecured corporate debt or CLOs.


Multi-Sector CDOs

The following table summarizes gross transaction notional amount of the multi-sector CDOs on which AIGFP wrote protection on the super senior tranche, subordination below the super senior risk layer, net notional amount and fair value of derivative liability by underlying collateral type:

   
September 30, 2011


(in millions)
  Gross
Transaction
Notional
Amount
(a)
  Subordination
Below the
Super Senior
Risk Layer

  Net
Notional
Amount

  Fair Value
of Derivative
Liability

 
   

High grade with subprime collateral

  $ 2,693   $ 1,402   $ 1,291   $ 558  

High grade with no subprime collateral

    3,370     1,285     2,085     805  
   
 

Total high grade(b)

    6,063     2,687     3,376     1,363  
   

Mezzanine with subprime collateral

    2,173     678     1,495     1,108  

Mezzanine with no subprime collateral

    1,539     743     796     635  
   
 

Total mezzanine(c)

    3,712     1,421     2,291     1,743  
   

Total

  $ 9,775   $ 4,108   $ 5,667   $ 3,106  
   
(a)
Total outstanding principal amount of securities held by a CDO.

(b)
"High grade" refers to transactions in which the underlying collateral credit ratings on a stand-alone basis were predominantly AA or higher at origination.

(c)
"Mezzanine" refers to transactions in which the underlying collateral credit ratings on a stand-alone basis were predominantly A or lower at origination.

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The following table summarizes net notional amounts of the remaining multi-sector CDOs on which AIGFP wrote CDS protection on the super senior tranche, by settlement alternative and currency:

   
(in millions)
  September 30,
2011

  December 31,
2010

 
   

CDS transactions with cash settlement provisions

             
 

U.S. dollar-denominated

  $ 3,579   $ 4,010  
 

Euro-denominated

    1,204     1,475  
   
 

Total CDS transactions with cash settlement provisions

    4,783     5,485  
   

CDS transactions with physical settlement provisions

             
 

U.S. dollar-denominated

    3     68  
 

Euro-denominated

    881     1,136  
   
 

Total CDS transactions with physical settlement provisions

    884     1,204  
   

Total

  $ 5,667   $ 6,689  
   

The following table summarizes changes in the fair values of the derivative liability of the AIGFP super senior multi-sector CDO credit default swap portfolio:

   
(in millions)
  Nine Months Ended
September 30, 2011

  Year Ended
December 31, 2010

 
   

Fair value of derivative liability, beginning of year

  $ 3,484   $ 4,418  
 

Unrealized market valuation gain

    (230 )   (663 )
 

Other terminations and realized losses

    (148 )   (271 )
   

Fair value of derivative liability, end of period

  $ 3,106   $ 3,484  
   

The following table presents, for each multi-sector CDO that is a reference obligation in a CDS written by AIGFP, the gross and net notional amounts, attachment points and percentage of gross notional amount rated less than B-/B-3:

   
(dollars in millions)


CDO
  Gross Transaction
Notional Amount at
September 30, 2011

  Net Notional
Amount at
September 30, 2011

  Attachment
Point at
Inception
(a)
  Attachment
Point at
September 30, 2011
(a)
  Percentage of Gross
Notional Amount Rated
Less than B-/B-3 at
September 30, 2011

 
   

1

  $ 891   $ 411     40.00 %   53.92 %   72.23 %

2

    645     326     53.00 %   49.50 %   73.64 %

3

    893     470     53.00 %   47.39 %   97.36 %

4

    955     274     76.00 %   71.29 %   86.46 %

5

    653     3     10.83 %   0.00 %   32.47 %

6

    745     374     12.27 %   7.17 %   9.20 %

7

    757     508     25.24 %   27.99 %   9.41 %

8

    1,084     1,014     10.00 %   6.44 %   44.70 %

9

    1,869     1,204     16.50 %   18.75 %   4.72 %

10

    283     154     32.00 %   45.33 %   100.00 %

11

    366     366     24.49 %   0.00% (b)   74.35 %

12

    418     382     32.90 %   8.55 %   99.27 %

13

    216     181     34.51 %   15.94 %   97.12 %
       

Total

  $ 9,775   $ 5,667                    

 

 

 

 

 

 

 

 

 

 

 
(a)
Expressed as a percentage of gross transaction notional amount of the referenced obligations. As a result of participation ratios, replenishment rights and partial terminations, the attachment point may not always be computed by dividing net notional amount by gross transaction notional amount.

(b)
AIGFP began making payments on realized losses in excess of the attachment point on this trade in 2010.

    In a number of instances, the level of subordination with respect to individual CDOs has increased since inception relative to the overall size of the CDO. While the super senior tranches are amortizing, subordinate

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layers have not been reduced by realized losses to date. Such losses are expected to emerge in the future. At inception, substantially all of the underlying assets were rated B-/B3 or higher and in most cases at least BBB or Baa. Thus, the percentage of gross notional amount rated less than B-/B3 represents a deterioration in the credit quality of the underlying assets.

The following table summarizes the gross transaction notional amount, percentage of the total CDO collateral pools and ratings and vintage breakdown of collateral securities in the multi-sector CDOs, by asset-backed securities (ABS) category:

   

September 30, 2011
(in millions)

                                                                         
   
 
  Gross
Transaction
Notional
Amount

   
  Ratings    
   
   
   
 
 
  Percent
of Total

   
   
   
   
 
ABS Category
  AAA
  AA
  A
  BBB
  BB
  <BB
  NR
  2008
  2007
  2006
  2005+P
 
   

RMBS Prime

  $ 143     1.46 %   0.07 %   0.02 %   0.04 %   0.35 %   0.09 %   0.89 %   0.00%     0.00 %   0.13 %   0.16 %   1.17 %
   

RMBS Alt-A

    522     5.34 %   0.07 %   0.10 %   0.10 %   0.23 %   0.10 %   4.74 %   0.00%     0.00 %   0.05 %   1.91 %   3.38 %
   

RMBS Subprime

    2,507     25.65 %   0.46 %   0.40 %   0.40 %   0.75 %   0.82 %   22.82 %   0.00%     0.00 %   1.39 %   2.44 %   21.82 %
   

CMBS

    2,882     29.48 %   0.86 %   0.73 %   3.44 %   2.47 %   2.20 %   19.33 %   0.45%     0.16 %   2.78 %   12.77 %   13.77 %
   

CDO

    1,313     13.43 %   0.44 %   1.00 %   1.10 %   1.10 %   1.01 %   8.60 %   0.18%     0.00 %   0.65 %   2.90 %   9.88 %
   

Other

    2,408     24.64 %   3.43 %   4.86 %   8.07 %   4.14 %   1.67 %   2.30 %   0.17%     0.83 %   1.47 %   7.57 %   14.77 %
   

Total

  $ 9,775     100.00 %   5.33 %   7.11 %   13.15 %   9.04 %   5.89 %   58.68 %   0.80%     0.99 %   6.47 %   27.75 %   64.79 %
   


Corporate Debt/CLOs

    The corporate arbitrage portfolio consists principally of CDS written on portfolios of corporate obligations that were generally rated investment grade at the inception of the CDS. These CDS transactions require cash settlement. This portfolio also includes CDS with a net notional amount of $1.3 billion written on the senior part of the capital structure of CLOs, which require physical settlement.

The following table summarizes gross transaction notional amount of CDS transactions written on portfolios of corporate obligations, percentage of the total referenced portfolios, and ratings by industry sector, in addition to the subordinations below the super senior risk layer, AIGFP's net notional amounts and fair value of derivative liability:

   
 
   
   
 
Ratings
 
September 30, 2011
(in millions)
  Gross Transaction
Notional Amount

  Percent
of Total

  Aa
  A
  Baa
  Ba
  <Ba
  NR
 

 

 

Industry Sector

                                                 

United States

                                                 
 

Industrial

  $ 6,025     34.4 %   0.2 %   3.4 %   16.5 %   3.9 %   6.7 %   3.7 %
 

Financial

    1,603     9.1 %   0.1 %   2.1 %   4.1 %   0.0 %   1.7 %   1.1 %
 

Utilities

    441     2.5 %   0.0 %   0.1 %   1.5 %   0.0 %   0.2 %   0.7 %
 

Other

    18     0.1 %   0.0 %   0.0 %   0.0 %   0.0 %   0.0 %   0.1 %
   
   

Total United States

    8,087     46.1 %   0.3 %   5.6 %   22.1 %   3.9 %   8.6 %   5.6 %
   

Non-United States

                                                 
 

Industrial

    7,880     44.9 %   0.0 %   4.0 %   9.8 %   3.9 %   3.5 %   23.7 %
 

Financial

    783     4.5 %   0.2 %   1.6 %   1.7 %   0.1 %   0.2 %   0.7 %
 

Government

    440     2.5 %   0.0 %   0.8 %   0.8 %   0.6 %   0.0 %   0.3 %
 

Utilities

    208     1.2 %   0.0 %   0.1 %   0.0 %   0.2 %   0.3 %   0.6 %
 

Other

    133     0.8 %   0.0 %   0.6 %   0.0 %   0.0 %   0.0 %   0.2 %
   
   

Total Non-United States

    9,444     53.9 %   0.2 %   7.1 %   12.3 %   4.8 %   4.0 %   25.5 %
   

Total gross transaction notional amount

    17,531     100.0 %   0.5 %   12.7 %   34.4 %   8.7 %   12.6 %   31.1 %

 

 

 

 

 

 

 

Subordination

    5,496                                            
                                             

Net Notional Amount

  $ 12,035                                            

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value of Derivative Liability

  $ 160                                            

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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The following table presents, for each of the corporate debt and CLO CDS transactions, the net notional amounts, attachment points and inception to date defaults:

   
(dollars in millions)


CDS
  Type
  Net Notional Amount at
September 30, 2011

  Attachment Point
at Inception
(a)
  Attachment Point
at September 30, 2011
(a)
  Defaults through
September 30, 2011
(b)
 
   

1

  Corporate Debt   $ 1,554     21.76 %   18.94 %   6.16 %

2

  Corporate Debt     5,292     22.00 %   20.23 %   3.76 %

3

  Corporate Debt     987     22.14 %   20.21 %   3.61 %

4

  Corporate Debt     982     20.80 %   18.16 %   5.26 %

5

  Corporate Debt     640     24.00 %   22.42 %   4.46 %

6

  Corporate Debt     1,286     24.00 %   22.32 %   4.63 %

7

  CLO     101     35.85 %   48.85 %   3.79 %

8

  CLO     126     43.76 %   44.16 %   0.51 %

9

  CLO     189     44.20 %   48.88 %   0.00 %

10

  CLO     77     44.20 %   48.88 %   0.00 %

11

  CLO     144     44.20 %   48.88 %   0.00 %

12

  CLO     160     31.76 %   30.88 %   3.29 %

13

  CLO     363     30.40 %   29.04 %   0.00 %

14

  CLO     134     31.23 %   27.64 %   0.54 %
       

Total

      $ 12,035                    

 

 

 

 

 

 

 

 

 

 

 
(a)
Expressed as a percentage of gross transaction notional amount of the referenced obligations.

(b)
Represents defaults (assets that are technically defaulted but for which the losses have not yet been realized) from inception through September 30, 2011 expressed as a percentage of the gross transaction notional amount at September 30, 2011.


Collateral

    Most of the AIGFP credit default swaps are subject to collateral posting provisions. These provisions differ among counterparties and asset classes. Although AIGFP has collateral posting obligations associated with both regulatory capital relief transactions and arbitrage transactions, the large majority of these obligations to date have been associated with arbitrage transactions in respect of multi-sector CDOs.


Regulatory Capital Relief Transactions

    As of September 30, 2011, 76.1 percent of the AIGFP regulatory capital relief transactions (measured by net notional amount) were subject to CSAs linked to AIG's credit rating and 23.9 percent of the regulatory capital relief transactions were not subject to collateral posting provisions. In general, each regulatory capital relief transaction is subject to a stand-alone Master Agreement or similar agreement, under which the aggregate exposure is calculated with reference to only a single transaction.

    The underlying mechanism that determines the amount of collateral to be posted varies by counterparty and there is no standard formula. The varied mechanisms resulted from individual negotiations with different counterparties. The following is a brief description of the primary mechanisms that are currently being employed to determine the amount of collateral posting for this portfolio.

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The following table presents the amount of collateral postings by underlying mechanism as described above with respect to the regulatory capital relief portfolio (prior to consideration of transactions other than the AIGFP super senior credit default swaps subject to the same Master Agreements) as of the periods ended:

   
(in millions)
  September 30, 2011
  December 31, 2010
 
   

Reference to market indices

  $ 23   $ 19  

Expected loss models

    3     -  

Negotiated amount

    -     217  
   

Total

  $ 26   $ 236  
   


Arbitrage Portfolio — Multi-Sector CDOs

    In the CDS transactions with physical settlement provisions, in respect of multi-sector CDOs, the standard CSA provisions for the calculation of exposure have been modified, with the exposure amount determined pursuant to an agreed formula that is based on the difference between the net notional amount of such transaction and the market value of the relevant underlying CDO security, rather than the replacement value of the transaction. As of any date, the "market value" of the relevant CDO security is the price at which a marketplace participant would be willing to purchase such CDO security in a market transaction on such date, while the "replacement value of the transaction" is the cost on such date of entering into a credit default swap transaction with substantially the same terms on the same referenced obligation (e.g., the CDO security). In cases where a formula is utilized, a transaction-specific threshold is generally factored into the calculation of exposure, which reduces the amount of collateral required to be posted. These thresholds typically vary based on the credit ratings of AIG and/or the reference obligations, with greater posting obligations arising in the context of lower ratings. For the large majority of counterparties to these transactions, the Master Agreement and CSA cover non-CDS transactions (e.g., interest rate and cross currency swap transactions) as well as CDS transactions. As a result, the amount of collateral to be posted by AIGFP in relation to the CDS transactions will be added to or offset by the amount, if any, of the exposure AIG has to the counterparty on the non-CDS transactions.


Arbitrage Portfolio — Corporate Debt/CLOs

    All of the AIGFP corporate arbitrage-CLO transactions are subject to CSAs. These transactions are treated the same way as other transactions subject to the same Master Agreement and CSA, with the calculation of collateral in accordance with the standard CSA procedures outlined above.

    The vast majority of corporate debt transactions, and all such transactions maturing after 2011, are no longer subject to future collateral postings. In exchange for an upfront payment to an intermediary counterparty, AIGFP has eliminated all future obligations to post collateral on corporate debt transactions that mature after 2011.


Collateral Calls

    AIGFP has received collateral calls from counterparties in respect of certain super senior credit default swaps, of which a large majority relate to multi-sector CDOs. To a lesser extent, AIGFP has also received collateral calls in respect of certain super senior credit default swaps entered into by counterparties for regulatory capital relief purposes and in respect of corporate arbitrage.

    From time to time, valuation methodologies used and estimates made by counterparties with respect to certain super senior credit default swaps or the underlying reference CDO securities, for purposes of determining the amount of collateral required to be posted by AIGFP in connection with such instruments, have resulted in estimates that differ, at times significantly, from AIGFP's estimates. In almost all cases, AIGFP has been able to

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successfully resolve the differences or otherwise reach an accommodation with respect to collateral posting levels, including in certain cases by entering into compromise collateral arrangements. Due to the ongoing nature of collateral arrangements, AIGFP regularly is engaged in discussions with one or more counterparties in respect of these differences. Valuation estimates made by counterparties for collateral purposes are, like any other third-party valuation, considered in the determination of the fair value estimates of the AIGFP super senior credit default swap portfolio.

The following table presents the amount of collateral postings with respect to the AIGFP super senior credit default swap portfolio (prior to offsets for other transactions) as of the periods ended:

   
(in millions)
  September 30, 2011
  December 31, 2010
 
   

Regulatory capital

  $ 26   $ 236  

Arbitrage – multi-sector CDO

    2,667     3,013  

Arbitrage – corporate

    499     537  
   

Total

  $ 3,192   $ 3,786  
   

    The amount of future collateral posting requirements is a function of AIG's credit ratings, the rating of the reference obligations and the market value of the relevant reference obligations, with the latter being the most significant factor. While a high level of correlation exists between the amount of collateral posted and the valuation of these contracts in respect of the arbitrage portfolio, a similar relationship does not exist with respect to the regulatory capital portfolio given the nature of how the amount of collateral for these transactions is determined. AIGFP estimates the amount of potential future collateral postings associated with its super senior credit default swaps using various methodologies. The contingent liquidity requirements associated with such potential future collateral postings are incorporated into AIG's liquidity planning assumptions.


Valuation Sensitivity — Arbitrage Portfolio

Multi-Sector CDOs

    AIG utilizes sensitivity analyses that estimate the effects of using alternative pricing and other key inputs on AIG's calculation of the unrealized market valuation loss related to the AIGFP super senior credit default swap portfolio. While AIG believes that the ranges used in these analyses are reasonable, given the current difficult market conditions, AIG is unable to predict which of the scenarios is most likely to occur. As recent experience demonstrates, actual results in any period are likely to vary, perhaps materially, from the modeled scenarios, and there can be no assurance that the unrealized market valuation loss related to the AIGFP super senior credit default swap portfolio will be consistent with any of the sensitivity analyses. On average, prices for CDOs decreased during 2011. Further, it is difficult to extrapolate future experience based on current market conditions.

    For the purposes of estimating sensitivities for the super senior multi-sector CDO credit default swap portfolio, the change in valuation derived using the BET model is used to estimate the change in the fair value of the derivative liability. Out of the total $5.7 billion net notional amount of CDS written on multi-sector CDOs outstanding at September 30, 2011, a BET value is available for $3.6 billion net notional amount. No BET value is determined for $2.1 billion of CDS written on European multi-sector CDOs as prices on the underlying securities held by the CDOs are not provided by collateral managers; instead these CDS are valued using counterparty prices. Therefore, sensitivities disclosed below apply only to the net notional amount of $3.6 billion.

    The most significant assumption used in the BET model is the estimated price of the securities within the CDO collateral pools. If the actual price of the securities within the collateral pools differs from the price used in estimating the fair value of the super senior credit default swap portfolio, there is potential for material variation in the fair value estimate. Any further declines in the value of the underlying collateral securities held by a CDO will similarly affect the value of the super senior CDO securities. While the models attempt to predict changes in the prices of underlying collateral securities held within a CDO, the changes are subject to actual market

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conditions which have proved to be highly volatile, especially given current market conditions. AIG cannot predict reasonably likely changes in the prices of the underlying collateral securities held within a CDO at this time.

The following table presents key inputs used in the BET model, and the potential increase (decrease) to the fair value of the derivative liability by ABS category at September 30, 2011 corresponding to changes in these key inputs:

                                                     

 

 
 
   
   
   
   
   
   
   
   
   
 
 
   
   
  Increase (Decrease) to Fair Value of Derivative Liability  
 
  Average
Inputs Used at
September 30, 2011

   
 
(dollars in millions)
  Change
  Entire
Portfolio

  RMBS
Prime

  RMBS
Alt-A

  RMBS
Subprime

  CMBS
  CDOs
  Other
 

 

 

Bond prices

    32 points   Increase of 5 points   $ (246 ) $ (6 ) $ (18 ) $ (99 ) $ (89 ) $ (23 ) $ (11 )

        Decrease of 5 points     234     6     18     96     84     15     15  
   

Weighted

        Increase of 1 year     26     -     1     21     3     1     -  
 

average life

    6.65 years   Decrease of 1 year     (56 )   (1 )   (1 )   (42 )   (8 )   (3 )   (1 )
   

Recovery rates

    15%   Increase of 10%     (33 )   -     (4 )   (14 )   (12 )   (1 )   (2 )

        Decrease of 10%     23     -     3     14     5     1     -  
   

Diversity score(a)

    12   Increase of 5     (6 )                                    

        Decrease of 5     18                                      
   

Discount curve(b)

    N/A   Increase of 100bps     19                                      
   
(a)
The diversity score is an input at the CDO level. A calculation of sensitivity to this input by type of security is not possible.

(b)
The discount curve is an input at the CDO level. A calculation of sensitivity to this input by type of security is not possible. Furthermore, for this input it is not possible to disclose a weighted average input as a discount curve consists of a series of data points.

    These results are calculated by stressing a particular assumption independently of changes in any other assumption. No assurance can be given that the actual levels of the key inputs will not exceed, perhaps significantly, the ranges assumed by AIGFP for purposes of the above analysis. No assumption should be made that results calculated from the use of other changes in these key inputs can be interpolated or extrapolated from the results set forth above.


Corporate Debt

The following table represents the relevant market credit inputs used to estimate the sensitivity for the credit default swap portfolio written on investment-grade corporate debt and the estimated increase (decrease) in fair value of derivative liability at September 30, 2011 corresponding to changes in these market credit inputs:

   
Input Used at September 30, 2011
(in millions)
  Increase (Decrease) in
Fair Value of Derivative Liability

 
   

Credit spreads for all names

       
 

Effect of an increase by 10 basis points

  $ 19  
 

Effect of a decrease by 10 basis points

  $ (20 )

All base correlations

       
 

Effect of an increase by 1%

  $ 5  
 

Effect of a decrease by 1%

  $ (5 )

Assumed recovery rate

       
 

Effect of an increase by 1%

  $ (5 )
 

Effect of a decrease by 1%

  $ 5  
   

    These results are calculated by stressing a particular assumption independently of changes in any other assumption. No assurance can be given that the actual levels of the key inputs will not exceed, perhaps significantly, the ranges assumed by AIGFP for purposes of the above analysis. No assumption should be made that results calculated from the use of other changes in these key inputs can be interpolated or extrapolated from the results set forth above.

    Other derivatives.    Valuation models that incorporate unobservable inputs initially are calibrated to the transaction price. Subsequent valuations are based on observable inputs to the valuation model (e.g., interest rates, credit spreads, volatilities, etc.). Model inputs are changed only when corroborated by observable market data.

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk

    Included in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 4.    Controls and Procedures

    In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was carried out by AIG's management, with the participation of AIG's Chief Executive Officer and Chief Financial Officer, of the effectiveness of AIG's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)). Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on that evaluation, AIG's Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2011, AIG's disclosure controls and procedures were effective.

    There has been no change in AIG's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, AIG's internal control over financial reporting.

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American International Group, Inc.

PART II – OTHER INFORMATION

Item 1.    Legal Proceedings

    For a discussion of legal proceedings, see Note 11(a) to the Consolidated Financial Statements, which is incorporated herein by reference.

Item 6.    Exhibits

    See accompanying Exhibit Index.

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American International Group, Inc.

SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    AMERICAN INTERNATIONAL GROUP, INC.
    (Registrant)           

 

 

/s/ DAVID L. HERZOG

David L. Herzog
Executive Vice President
Chief Financial Officer
Principal Financial Officer

 

 

/s/ JOSEPH D. COOK

Joseph D. Cook
Vice President
Controller
Principal Accounting Officer

Dated: November 3, 2011

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American International Group, Inc.

EXHIBIT INDEX

 
Exhibit
Number

  Description
  Location
 
  4   Instruments defining the rights of security holders, including indentures    

 

 

 

(1) Eleventh Supplemental Indenture, dated as of September 13, 2011, between AIG and The Bank of New York Mellon, as Trustee

 

Incorporated by reference to Exhibit 4.1 to AIG's Current Report on Form 8-K filed with the SEC on September 13, 2011 (File No. 1-8787).

 

 

 

(2) Twelfth Supplemental Indenture, dated as of September 13, 2011, between AIG and The Bank of New York Mellon, as Trustee

 

Incorporated by reference to Exhibit 4.2 to AIG's Current Report on Form 8-K filed with the SEC on September 13, 2011 (File No. 1-8787).

 

 

 

(3) Form of the 2014 Notes (included in Exhibit 4(1))

 

 

 

 

 

(4) Form of the 2016 Notes (included in Exhibit 4(2))

 

 

 

10

 

Material Contracts

 

 

 

 

 

(1) Four-Year Credit Agreement, dated as of October 12, 2011, among AIG, the subsidiary borrowers party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and each Several L/C Agent party thereto.

 

Incorporated by reference to Exhibit 10.1 to AIG's Current Report on Form 8-K filed with the SEC on October 13, 2011 (File No. 1-8787).

 

 

 

(2) 364-Day Credit Agreement, dated as of October 12, 2011, among AIG, the subsidiary borrowers party thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent.

 

Incorporated by reference to Exhibit 10.2 to AIG's Current Report on Form 8-K filed with the SEC on October 13, 2011 (File No. 1-8787).

 

11

 

Statement re: Computation of Per Share Earnings

 

Included in Note 12 to the Consolidated Financial Statements.

 

12

 

Computation of Ratios of Earnings to Fixed Charges

 

Filed herewith.

 

31

 

Rule 13a-14(a)/15d-14(a) Certifications*

 

Filed herewith.

 

32

 

Section 1350 Certifications*

 

Filed herewith.

 

101

 

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheet as of September 30, 2011 and December 31, 2010, (ii) the Consolidated Statement of Operations for the three and nine months ended September 30, 2011 and 2010, (iii) the Consolidated Statement of Equity for the nine months ended September 30, 2011, (iv) the Consolidated Statement of Cash Flows for the nine months ended September 30, 2011 and 2010, (v) the Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2011 and 2010 and (vi) the Notes to the Consolidated Financial Statements.**

 

Filed herewith.

 
*
This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

**
As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

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