Investments

6 Months Ended

Jun. 30, 2011

Investments

Investments

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)
June 30, 2011
Bonds available for sale:
	U.S. government and government sponsored entities		$	8,287	$	218	$	(28	)	$	8,477	$	-
	Obligations of states, municipalities and political subdivisions			37,752		1,760		(175	)		39,337		(30	)
	Non-U.S. governments			17,415		538		(98	)		17,855		-
	Corporate debt			129,770		9,333		(946	)		138,157		112
	Mortgage-backed, asset-backed and collateralized:
		RMBS		31,566		1,102		(1,258	)		31,410		(418	)
		CMBS		8,012		411		(693	)		7,730		33
		CDO/ABS		6,288		488		(382	)		6,394		94
	Total mortgage-backed, asset-backed and collateralized			45,866		2,001		(2,333	)		45,534		(291	)
Total bonds available for sale(b)				239,090		13,850		(3,580	)		249,360		(209	)
Equity securities available for sale:
	Common stock			1,609		2,355		(38	)		3,926		-
	Preferred stock			94		31		-			125		-
	Mutual funds			55		23		(1	)		77		-
Total equity securities available for sale				1,758		2,409		(39	)		4,128		-
Total(c)			$	240,848	$	16,259	$	(3,619	)	$	253,488	$	(209	)
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 June 30, 2011 and December 31, 2010, bonds available for sale held by AIG that were below investment grade or not rated totaled $21.3 billion and $18.6 billion, respectively.

(c)

Excludes $47.2 billion and $80.5 billion of available for sale securities at fair value from businesses held for sale at June 30, 2011 and December 31, 2010, respectively. See Note 4 herein.

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
June 30, 2011*
Bonds available for sale:
	U.S. government and government sponsored entities	$	2,266	$	28	$	-	$	-	$	2,266	$	28
	Obligations of states, municipalities and political subdivisions		3,890		86		640		89		4,530		175
	Non-U.S. governments		2,777		89		135		9		2,912		98
	Corporate debt		18,982		505		5,500		441		24,482		946
	RMBS		7,729		414		4,651		844		12,380		1,258
	CMBS		1,717		141		1,866		552		3,583		693
	CDO/ABS		775		24		1,976		358		2,751		382
Total bonds available for sale			38,136		1,287		14,768		2,293		52,904		3,580
Equity securities available for sale:
	Common stock		390		38		-		-		390		38
	Preferred stock		11		-		-		-		11		-
	Mutual funds		4		1		-		-		4		1
Total equity securities available for sale			405		39		-		-		405		39
Total		$	38,541	$	1,326	$	14,768	$	2,293	$	53,309	$	3,619
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.

    At June 30, 2011, AIG held 6,330 and 145 of individual fixed maturity and equity securities, respectively, that were in an unrealized loss position, of which 2,075 of individual securities were in a continuous unrealized loss position for longer than 12 months. AIG did not recognize in earnings the unrealized losses on these fixed maturity securities at June 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
June 30, 2011 (in millions)
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	9,925	$	10,112	$	1,357	$	1,331
Due after one year through five years		54,633		57,204		9,131		8,915
Due after five years through ten years		63,815		67,248		12,087		11,775
Due after ten years		64,851		69,262		12,862		12,169
Mortgage-backed, asset-backed and collateralized		45,866		45,534		21,047		18,714
Total	$	239,090	$	249,360	$	56,484	$	52,904

    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 June 30,								Six Months Ended June 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	$	662	$	38	$	189	$	55	$	850	$	93	$	570	$	97
Equity securities		43		6		88		23		148		8		293		30
Total	$	705	$	44	$	277	$	78	$	998	$	101	$	863	$	127

    For the three- and six-month periods ended June 30, 2011, the aggregate fair value of available for sale securities sold was $12.6 billion and $24.1 billion, respectively, which resulted in net realized capital gains of $661 million and $897 million, respectively.

Trading Securities

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

			June 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		$	7,037		26	%	$	6,902		21	%
	Non-U.S. governments			339		1			125		1
	Corporate debt			1,006		4			912		3
	State, territories and political subdivisions			296		1			316		1
	Mortgage-backed, asset-backed and collateralized:
		RMBS		1,827		7			1,928		6
		CMBS		2,209		8			2,078		6
		CDO/ABS and other collateralized		6,513		24			6,331		19
Total mortgage-backed, asset-backed and collateralized				10,549		39			10,337		31
ML II				1,353		5			1,279		4
ML III				6,388		23			6,311		19
Total fixed maturities				26,968		99			26,182		80
Equity securities:
	MetLife			-		-			6,494		20
	All other			164		1			158		-
Total equity securities				164		1			6,652		20
Total			$	27,132		100	%	$	32,834		100	%

Other Invested Assets — Equity Method Investments

    At June 30, 2011, AIG's equity method investments included a 33 percent interest in AIA, which AIG is accounting for under the fair value option and which had a carrying value of $13.7 billion, certain investment partnerships in which AIG holds in the aggregate a five percent or greater interest or less than a five percent interest but in which AIG had more than a minor influence over the operations of the investee, and certain other strategic investments.

Summarized Financial Information of AIA

The following is summarized financial information of AIA:

Six Months Ended May 31, 2011 (in millions)
Operating results:
Total revenues	$	8,212
Total expenses		(6,883	)
Net income	$	1,329

    Summarized financial information of AIA is presented for the period in which AIG held an equity method ownership interest. Information for the six-month period ended May 31, 2011 is presented above due to the unavailability of information for AIA for the three and six months ended June 30, 2011 at the time of filing this Quarterly Report.

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.

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 June 30,						Six Months Ended June 30,
(in millions)			2011			2010			2011			2010
Balance, beginning of period			$	6,540		$	7,273		$	6,786		$	7,803
	Increases due to:
		Credit impairments on new securities subject to impairment losses		33			153			85			290
		Additional credit impairments on previously impaired securities		85			343			235			811
	Reductions due to:
		Credit impaired securities fully disposed for which there was no prior intent or requirement to sell		(155	)		(176	)		(325	)		(563	)
		Credit impaired securities for which there is a current intent or anticipated requirement to sell		-			(2	)		-			(4	)
		Accretion on securities previously impaired due to credit(b)		(107	)		(91	)		(207	)		(186	)
		Hybrid securities with embedded credit derivatives reclassified to Bond trading securities		-			-			(179	)		-
	Other(c)			-			507			1			(144	)
Balance, end of period			$	6,396		$	8,007		$	6,396		$	8,007

(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

    During 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 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)	$	9,980
Cash flows expected to be collected*		7,507
Recorded investment in acquired securities		5,091

*

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

(in millions)	June 30, 2011
Outstanding principal balance	$	7,351
Amortized cost		5,008
Fair value		4,797

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

(in millions)		Three Months Ended June 30, 2011
Balance, beginning of period		$	-
	Newly purchased PCI securities		2,416
	Accretion		(77	)
	Effect of changes in interest rate indices		(8	)
	Net reclassification from (to) non-accretable difference, including effects of prepayments		(23	)
Balance, end of period		$	2,308