AIG carries certain of its financial instruments at fair value. AIG defines the fair value of a financial instrument as the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note 6 to the Consolidated Financial Statements in the 2011 Annual Report for a discussion of AIG's accounting policies and procedures regarding fair value measurements related to the following information.

Assets and liabilities recorded at fair value in the Consolidated Balance Sheet are measured and classified in accordance with a fair value hierarchy established in GAAP. The hierarchy consists of three "levels" based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:

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:

June 30, 2012 (in millions)	Level 1		Level 2		Level 3		Counterparty Netting^(a)			Cash Collateral^(b)			Total



Assets:
Bonds available for sale:
U.S. government and government sponsored entities	$	19	$	3,998	$	-	$	-		$	-		$	4,017
Obligations of states, municipalities and political subdivisions		-		36,241		1,013		-			-			37,254
Non-U.S. governments		833		24,535		13		-			-			25,381
Corporate debt		-		145,022		1,306		-			-			146,328
RMBS		-		23,170		10,488		-			-			33,658
CMBS		-		4,148		4,643		-			-			8,791
CDO/ABS		-		2,511		5,074		-			-			7,585

Total bonds available for sale		852		239,625		22,537		-			-			263,014

Bond trading securities:
U.S. government and government sponsored entities		800		6,792		-		-			-			7,592
Obligations of states, municipalities and political subdivisions		-		236		-		-			-			236
Non-U.S. governments		-		34		-		-			-			34
Corporate debt		-		1,057		3		-			-			1,060
RMBS		-		1,158		290		-			-			1,448
CMBS		-		1,676		457		-			-			2,133
CDO/ABS		-		3,769		14,647		-			-			18,416

Total bond trading securities		800		14,722		15,397		-			-			30,919

Equity securities available for sale:
Common stock		2,608		2		41		-			-			2,651
Preferred stock		-		46		139		-			-			185
Mutual funds		73		38		-		-			-			111

Total equity securities available for sale		2,681		86		180		-			-			2,947

Equity securities trading		23		80		-		-			-			103
Mortgage and other loans receivable		-		122		1		-			-			123
Other invested assets^(c)		7,747		1,619		7,049		-			-			16,415
Derivative assets:
Interest rate contracts		12		6,649		1,006		-			-			7,667
Foreign exchange contracts		-		53		-		-			-			53
Equity contracts		106		117		38		-			-			261
Commodity contracts		-		181		2		-			-			183
Credit contracts		-		-		64		-			-			64
Other contracts		-		164		68		-			-			232
Counterparty netting and cash collateral		-		-		-		(3,716	)		(991	)		(4,707	)

Total derivative assets		118		7,164		1,178		(3,716	)		(991	)		3,753

Short-term investments^(d)		371		6,988		-		-			-			7,359
Separate account assets		51,412		2,853		-		-			-			54,265
Other assets		-		700		-		-			-			700

Total	$	64,004	$	273,959	$	46,342	$	(3,716	)	$	(991	)	$	379,598

Liabilities:
Policyholder contract deposits	$	-	$	-	$	1,188	$	-		$	-		$	1,188
Derivative liabilities:
Interest rate contracts		-		6,663		245		-			-			6,908
Foreign exchange contracts		-		171		-		-			-			171
Equity contracts		2		234		10		-			-			246
Commodity contracts		-		185		-		-			-			185
Credit contracts^(e)		-		5		2,651		-			-			2,656
Other contracts		-		65		222		-			-			287
Counterparty netting and cash collateral		-		-		-		(3,716	)		(2,599	)		(6,315	)

Total derivative liabilities		2		7,323		3,128		(3,716	)		(2,599	)		4,138

Other long-term debt^(f)		-		8,997		407		-			-			9,404
Other liabilities^(g)		24		1,564		-		-			-			1,588

Total	$	26	$	17,884	$	4,723	$	(3,716	)	$	(2,599	)	$	16,318

December 31, 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	$	174	$	5,904	$	-	$	-		$	-		$	6,078
Obligations of states, municipalities and political subdivisions		-		36,538		960		-			-			37,498
Non-U.S. governments		259		25,467		9		-			-			25,735
Corporate debt		-		142,883		1,935		-			-			144,818
RMBS		-		23,727		10,877		-			-			34,604
CMBS		-		3,991		3,955		-			-			7,946
CDO/ABS		-		3,082		4,220		-			-			7,302

Total bonds available for sale		433		241,592		21,956		-			-			263,981

Bond trading securities:
U.S. government and government sponsored entities		100		7,404		-		-			-			7,504
Obligations of states, municipalities and political subdivisions		-		257		-		-			-			257
Non-U.S. governments		-		35		-		-			-			35
Corporate debt		-		809		7		-			-			816
RMBS		-		1,345		303		-			-			1,648
CMBS		-		1,283		554		-			-			1,837
CDO/ABS		-		3,835		8,432		-			-			12,267

Total bond trading securities		100		14,968		9,296		-			-			24,364

Equity securities available for sale:
Common stock		3,294		70		57		-			-			3,421
Preferred stock		-		44		99		-			-			143
Mutual funds		55		5		-		-			-			60

Total equity securities available for sale		3,349		119		156		-			-			3,624

Equity securities trading		43		82		-		-			-			125
Mortgage and other loans receivable		-		106		1		-			-			107
Other invested assets^(c)		12,549		1,709		6,618		-			-			20,876
Derivative assets:
Interest rate contracts		2		7,251		1,033		-			-			8,286
Foreign exchange contracts		-		143		2		-			-			145
Equity contracts		92		133		38		-			-			263
Commodity contracts		-		134		2		-			-			136
Credit contracts		-		-		89		-			-			89
Other contracts		29		462		250		-			-			741
Counterparty netting and cash collateral		-		-		-		(3,660	)		(1,501	)		(5,161	)

Total derivative assets		123		8,123		1,414		(3,660	)		(1,501	)		4,499

Short-term investments^(d)		2,309		3,604		-		-			-			5,913
Separate account assets		48,502		2,886		-		-			-			51,388

Total	$	67,408	$	273,189	$	39,441	$	(3,660	)	$	(1,501	)	$	374,877

December 31, 2011 (in millions)	Level 1		Level 2		Level 3		Counterparty Netting^(a)			Cash Collateral^(b)			Total



Liabilities:
Policyholder contract deposits	$	-	$	-	$	918	$	-		$	-		$	918
Derivative liabilities:
Interest rate contracts		-		6,661		248		-			-			6,909
Foreign exchange contracts		-		178		-		-			-			178
Equity contracts		-		198		10		-			-			208
Commodity contracts		-		146		-		-			-			146
Credit contracts^(e)		-		4		3,362		-			-			3,366
Other contracts		-		155		217		-			-			372
Counterparty netting and cash collateral		-		-		-		(3,660	)		(2,786	)		(6,446	)

Total derivative liabilities		-		7,342		3,837		(3,660	)		(2,786	)		4,733

Other long-term debt^(f)		-		10,258		508		-			-			10,766
Other liabilities^(g)		193		714		-		-			-			907

Total	$	193	$	18,314	$	5,263	$	(3,660	)	$	(2,786	)	$	17,324

(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 $1.6 billion and $115 million, respectively, at June 30, 2012 and $1.8 billion and $100 million, respectively, at December 31, 2011.
(c): Included in Level 1 are $7.7 billion and $12.4 billion at June 30, 2012 and December 31, 2011, respectively, of AIA ordinary shares publicly traded on the Hong Kong Stock Exchange. Approximately 3 percent of the fair value of the assets recorded as Level 3 relate to various private equity, real estate, hedge fund and fund-of-funds investments that are consolidated by AIG at both June 30, 2012 and December 31, 2011, respectively. AIG's ownership in these funds represented 64.2 percent, or $0.9 billion, of Level 3 assets at June 30, 2012 and 57.3 percent, or $0.7 billion, of Level 3 assets at December 31, 2011.
(d): Included in Level 2 is the fair value of securities purchased under agreements to resell of $0.7 billion and $0.1 billion at June 30, 2012 and December 31, 2011, respectively.
(e): Included in Level 3 is the fair value derivative liability of $2.5 billion and $3.2 billion at June 30, 2012 and December 31, 2011, respectively, on the super senior credit default swap portfolio.
(f): Includes Guaranteed Investment Agreements (GIAs), notes, bonds, loans and mortgages payable.
(g): Included in Level 2 is the fair value of securities sold under agreements to repurchase and securities and spot commodities sold but not yet purchased, of $1.5 billion and $45 million, respectively, at June 30, 2012. Included in Level 2 is the fair value 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, of $0.6 billion, $144 million and $6 million, respectively, at December 31, 2011.

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. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market. During the three- and six-month periods ended June 30, 2012, AIG transferred $136 million of securities issued by Non-U.S. government entities from Level 1 to Level 2, as they are no longer considered actively traded. AIG had no material transfers from Level 2 to Level 1 during the three- and six-month periods ended June 30, 2012.

The following tables present changes during the three-and six-month periods ended June 30, 2012 and 2011 in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) related to the Level 3 assets and liabilities that remained in the Consolidated Balance Sheet at June 30, 2012 and 2011:

(in millions)	Fair value Beginning of Period^(a)			Net Realized and Unrealized Gains (Losses) Included in Income			Accumulated Other Comprehensive Income (Loss)			Purchases, Sales, Issues and Settlements, Net			Gross Transfers in			Gross Transfers out			Fair value End of Period			Changes in Unrealized Gains (Losses) Included in Income on Instruments Held at End of Period



Three Months Ended June 30, 2012
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	1,054		$	31		$	(5	)	$	(63	)	$	45		$	(49	)	$	1,013		$	-
Non-U.S. governments		15			-			(7	)		-			5			-			13			-
Corporate debt		1,323			(1	)		(7	)		5			55			(69	)		1,306			-
RMBS		13,240			195			10			(616	)		7			(2,348	)		10,488			-
CMBS		4,173			2			14			492			12			(50	)		4,643			-
CDO/ABS		4,882			26			89			(91	)		168			-			5,074			-

Total bonds available for sale		24,687			253			94			(273	)		292			(2,516	)		22,537			-

Bond trading securities:
Corporate debt		5			-			-			(2	)		-			-			3			-
RMBS		314			(5	)		-			(19	)		-			-			290			(7	)
CMBS		433			16			-			13			4			(9	)		457			78
CDO/ABS		8,416			1,444			-			4,787			-			-			14,647			1,462

Total bond trading securities		9,168			1,455			-			4,779			4			(9	)		15,397			1,533

Equity securities available for sale:
Common stock		50			9			-			(19	)		1			-			41			-
Preferred stock		106			-			(31	)		61			3			-			139			-

Total equity securities available for sale		156			9			(31	)		42			4			-			180			-

Mortgage and other loans receivable		1			-			-			-			-			-			1			-
Other invested assets		7,186			(32	)		66			(68	)		18			(121	)		7,049			-

Total	$	41,198		$	1,685		$	129		$	4,480		$	318		$	(2,646	)	$	45,164		$	1,533

Liabilities:
Policyholder contract deposits	$	(782	)	$	(408	)	$	-		$	2		$	-		$	-		$	(1,188	)	$	244
Derivative liabilities, net:
Interest rate contracts		778			46			-			(63	)		-			-			761			10
Foreign exchange contracts		-			-			-			-			-			-			-			-
Equity contracts		40			(23	)		-			11			-			-			28			-
Commodity contracts		2			-			-			(2	)		-			2			2			(1	)
Credit contracts		(2,705	)		344			-			(226	)		-			-			(2,587	)		(122	)
Other contracts		(37	)		422			(7	)		(490	)		(42	)		-			(154	)		(15	)

Total derivative liabilities, net		(1,922	)		789			(7	)		(770	)		(42	)		2			(1,950	)		(128	)

Other long-term debt^(b)		(575	)		(268	)		-			22			-			414			(407	)		(25	)

Total	$	(3,279	)	$	113		$	(7	)	$	(746	)	$	(42	)	$	416		$	(3,545	)	$	91

(in millions)	Fair value Beginning of Period^(a)			Net Realized and Unrealized Gains (Losses) Included in Income			Accumulated Other Comprehensive Income (Loss)			Purchases, Sales, Issues and Settlements, Net			Gross Transfers in			Gross Transfers out			Fair value End of Period			Changes in Unrealized Gains (Losses) Included in Income on Instruments Held at End of Period



Six Months Ended June 30, 2012
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	960		$	32		$	11		$	37		$	45		$	(72	)	$	1,013		$	-
Non-U.S. governments		9			-			1			(2	)		5			-			13			-
Corporate debt		1,935			(17	)		69			2			346			(1,029	)		1,306			-
RMBS		10,877			125			803			710			355			(2,382	)		10,488			-
CMBS		3,955			(67	)		301			503			43			(92	)		4,643			-
CDO/ABS		4,220			40			266			(21	)		606			(37	)		5,074			-

Total bonds available for sale		21,956			113			1,451			1,229			1,400			(3,612	)		22,537			-

Bond trading securities:
Corporate debt		7			-			-			(4	)		-			-			3			-
RMBS		303			28			-			(38	)		-			(3	)		290			18
CMBS		554			49			-			(122	)		36			(60	)		457			83
CDO/ABS		8,432			3,065			-			3,150			-			-			14,647			2,816

Total bond trading securities		9,296			3,142			-			2,986			36			(63	)		15,397			2,917

Equity securities available for sale:
Common stock		57			23			(12	)		(33	)		6			-			41			-
Preferred stock		99			2			(23	)		69			3			(11	)		139			-

Total equity securities available for sale		156			25			(35	)		36			9			(11	)		180			-

Mortgage and other loans receivable		1			-			-			-			-			-			1			-
Other invested assets		6,618			(179	)		276			33			760			(459	)		7,049			-

Total	$	38,027		$	3,101		$	1,692		$	4,284		$	2,205		$	(4,145	)	$	45,164		$	2,917

Liabilities:
Policyholder contract deposits	$	(918	)	$	(269	)	$	-		$	(1	)	$	-		$	-		$	(1,188	)	$	101
Derivative liabilities, net:
Interest rate contracts		785			46			-			(70	)		-			-			761			(38	)
Foreign exchange contracts		2			-			-			(2	)		-			-			-			-
Equity contracts		28			(11	)		-			13			(2	)		-			28			-
Commodity contracts		2			-			-			(2	)		-			2			2			(3	)
Credit contracts		(3,273	)		201			-			485			-			-			(2,587	)		(642	)
Other contracts		33			12			2			(78	)		(123	)		-			(154	)		24

Total derivative liabilities, net		(2,423	)		248			2			346			(125	)		2			(1,950	)		(659	)

Other long-term debt^(b)		(508	)		(378	)		(77	)		136			-			420			(407	)		54

Total	$	(3,849	)	$	(399	)	$	(75	)	$	481		$	(125	)	$	422		$	(3,545	)	$	(504	)

(in millions)	Fair value Beginning of Period^(a)			Net Realized and Unrealized Gains (Losses) Included in Income			Accumulated Other Comprehensive Income (Loss)			Purchases, Sales, Issues and Settlements, Net			Gross Transfers In			Gross Transfers Out			Fair value End of Period			Changes in Unrealized Gains (Losses) Included in Income on Instruments Held at End of Period



Three Months Ended June 30, 2011
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	702		$	(1	)	$	23		$	62		$	17		$	(3	)	$	800		$	-
Non-U.S. governments		5			-			-			-			-			-			5			-
Corporate debt		1,235			-			15			305			307			(18	)		1,844			-
RMBS		6,868			79			(165	)		3,905			11			(6	)		10,692			-
CMBS		4,316			(7	)		(109	)		-			28			-			4,228			-
CDO/ABS		3,857			12			74			(382	)		374			(10	)		3,925			-

Total bonds available for sale		16,983			83			(162	)		3,890			737			(37	)		21,494			-

Bond trading securities:
Corporate debt		18			-			-			(9	)		-			-			9			-
RMBS		99			(2	)		(7	)		80			-			-			170			(7	)
CMBS		523			28			3			(18	)		80			(133	)		483			34
CDO/ABS		10,461			(877	)		4			(85	)		-			-			9,503			(881	)

Total bond trading securities		11,101			(851	)		-			(32	)		80			(133	)		10,165			(854	)

Equity securities available for sale:
Common stock		63			3			6			(12	)		2			(3	)		59			-
Preferred stock		63			(1	)		1			(1	)		2			-			64			-

Total equity securities available for sale		126			2			7			(13	)		4			(3	)		123			-

Equity securities trading		1			1			-			(1	)		-			-			1			1
Other invested assets		7,070			(17	)		126			(161	)		45			(18	)		7,045			-

Total	$	35,281		$	(782	)	$	(29	)	$	3,683		$	866		$	(191	)	$	38,828		$	(853	)

Liabilities:
Policyholder contract deposits	$	(369	)	$	(33	)	$	-		$	(4	)	$	-		$	-		$	(406	)	$	46
Derivative liabilities, net:
Interest rate contracts		619			138			-			(3	)		-			-			754			(14	)
Foreign exchange contracts		16			(12	)		-			-			-			-			4			1
Equity contracts		34			-			-			-			(7	)		7			34			(1	)
Commodity contracts		15			(1	)		-			(9	)		-			-			5			-
Credit contracts		(3,420	)		94			-			(6	)		-			-			(3,332	)		429
Other contracts		(6	)		(27	)		(51	)		(10	)		32			(7	)		(69	)		(114	)

Total derivatives liabilities, net		(2,742	)		192			(51	)		(28	)		25			-			(2,604	)		301

Other long-term debt^(b)		(996	)		(157	)		-			195			-			-			(958	)		(171	)

Total	$	(4,107	)	$	2		$	(51	)	$	163		$	25		$	-		$	(3,968	)	$	176

(in millions)	Fair value Beginning of Period^(a)			Net Realized and Unrealized Gains (Losses) Included in Income			Accumulated Other Comprehensive Income (Loss)			Purchases, Sales, Issues and Settlements, Net			Gross Transfers In			Gross Transfers Out			Fair value End of Period			Changes in Unrealized Gains (Losses) Included in Income on Instruments Held at End of Period



Six Months Ended June 30, 2011
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	609		$	(1	)	$	27		$	174		$	17		$	(26	)	$	800		$	-
Non-U.S. governments		5			-			-			-			-			-			5			-
Corporate debt		2,262			(3	)		22			272			533			(1,242	)		1,844			-
RMBS		6,367			(2	)		368			3,943			22			(6	)		10,692			-
CMBS		3,604			(34	)		555			72			53			(22	)		4,228			-
CDO/ABS		4,241			32			312			(837	)		446			(269	)		3,925			-

Total bonds available for sale		17,088			(8	)		1,284			3,624			1,071			(1,565	)		21,494			-

Bond trading securities:
Corporate debt		-			-			-			(9	)		18			-			9			-
RMBS		91			-			(7	)		86			-			-			170			(3	)
CMBS		506			66			3			(76	)		161			(177	)		483			68
CDO/ABS		9,431			153			9			(90	)		-			-			9,503			146

Total bond trading securities		10,028			219			5			(89	)		179			(177	)		10,165			211

Equity securities available for sale:
Common stock		61			18			4			(27	)		8			(5	)		59			-
Preferred stock		64			(3	)		1			-			2			-			64			-

Total equity securities available for sale		125			15			5			(27	)		10			(5	)		123			-

Equity securities trading		1			1			-			(1	)		-			-			1			1
Other invested assets		7,414			36			469			(511	)		45			(408	)		7,045			-

Total	$	34,656		$	263		$	1,763		$	2,996		$	1,305		$	(2,155	)	$	38,828		$	212

Liabilities:
Policyholder contract deposits	$	(445	)	$	46		$	-		$	(7	)	$	-		$	-		$	(406	)	$	(63	)
Derivative liabilities, net:
Interest rate contracts		732			22			-			-			-			-			754			(54	)
Foreign exchange contracts		16			(12	)		-			-			-			-			4			1
Equity contracts		22			(7	)		-			38			(7	)		(12	)		34			(7	)
Commodity contracts		23			2			-			(20	)		-			-			5			-
Credit contracts		(3,798	)		476			-			(10	)		-			-			(3,332	)		473
Other contracts		(112	)		(23	)		(26	)		40			32			20			(69	)		(66	)

Total derivatives liabilities, net		(3,117	)		458			(26	)		48			25			8			(2,604	)		347

Other long-term debt^(b)		(982	)		(211	)		-			256			(21	)		-			(958	)		(198	)

Total	$	(4,544	)	$	293		$	(26	)	$	297		$	4		$	8		$	(3,968	)	$	86

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			Total



Three Months Ended June 30, 2012
Bonds available for sale	$	234		$	(9	)	$	28		$	253
Bond trading securities		1,290			-			165			1,455
Equity securities		-			9			-			9
Other invested assets		5			(41	)		4			(32	)
Policyholder contract deposits		-			(408	)		-			(408	)
Derivative liabilities, net		-			72			717			789
Other long-term debt		-			-			(268	)		(268	)

Three Months Ended June 30, 2011
Bonds available for sale	$	159		$	(80	)	$	4		$	83
Bond trading securities		(496	)		-			(355	)		(851	)
Equity securities		1			2			-			3
Other invested assets		(2	)		(37	)		22			(17	)
Policyholder contract deposits		-			(33	)		-			(33	)
Derivative liabilities, net		1			(90	)		281			192
Other long-term debt		-			-			(157	)		(157	)

Six Months Ended June 30, 2012
Bonds available for sale	$	465		$	(384	)	$	32		$	113
Bond trading securities		2,839			-			303			3,142
Equity securities		-			25			-			25
Other invested assets		(9	)		(173	)		3			(179	)
Policyholder contract deposits		-			(269	)		-			(269	)
Derivative liabilities, net		(1	)		61			188			248
Other long-term debt		-			-			(378	)		(378	)

Six Months Ended June 30, 2011
Bonds available for sale	$	240		$	(256	)	$	8		$	(8	)
Bond trading securities		505			-			(286	)		219
Equity securities		1			15			-			16
Other invested assets		44			(52	)		44			36
Policyholder contract deposits		-			46			-			46
Derivative liabilities, net		1			(145	)		602			458
Other long-term debt		-			-			(211	)		(211	)

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

(in millions)	Purchases		Sales			Settlements			Purchases, Sales, Issues and Settlements, Net^(a)



Three Months Ended June 30, 2012
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	97	$	(158	)	$	(2	)	$	(63	)
Non-U.S. governments		1		(1	)		-			-
Corporate debt		80		(52	)		(23	)		5
RMBS		198		(268	)		(546	)		(616	)
CMBS		596		(69	)		(35	)		492
CDO/ABS		203		-			(294	)		(91	)

Total bonds available for sale		1,175		(548	)		(900	)		(273	)

Bond trading securities:
Corporate debt		-		-			(2	)		(2	)
RMBS		-		-			(19	)		(19	)
CMBS		70		(49	)		(8	)		13
CDO/ABS^(b)		5,025		-			(238	)		4,787

Total bond trading securities		5,095		(49	)		(267	)		4,779

Equity securities		56		(19	)		5			42
Other invested assets		134		(29	)		(173	)		(68	)

Total assets	$	6,460	$	(645	)	$	(1,335	)	$	4,480

Liabilities:
Policyholder contract deposits	$	-	$	(8	)	$	10		$	2
Derivative liabilities, net		-		-			(770	)		(770	)
Other long-term debt^(c)		-		-			22			22

Total liabilities	$	-	$	(8	)	$	(738	)	$	(746	)

Three Months Ended June 30, 2011
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	63	$	-		$	(1	)	$	62
Non-U.S. governments		1		(1	)		-			-
Corporate debt		412		19			(126	)		305
RMBS		4,307		(9	)		(393	)		3,905
CMBS		99		(20	)		(79	)		-
CDO/ABS		196		-			(578	)		(382	)

Total bonds available for sale		5,078		(11	)		(1,177	)		3,890

Bond trading securities:
Corporate debt		-		-			(9	)		(9	)
RMBS		103		-			(23	)		80
CMBS		60		(49	)		(29	)		(18	)
CDO/ABS		141		(126	)		(100	)		(85	)

Total bond trading securities		304		(175	)		(161	)		(32	)

Equity securities		-		(8	)		(6	)		(14	)
Other invested assets		236		(146	)		(251	)		(161	)

Total assets	$	5,618	$	(340	)	$	(1,595	)	$	3,683

Liabilities:
Policyholder contract deposits	$	-	$	(10	)	$	6		$	(4	)
Derivative liabilities, net		-		-			(28	)		(28	)
Other long-term debt^(c)		-		-			195			195

Total liabilities	$	-	$	(10	)	$	173		$	163

(in millions)	Purchases		Sales			Settlements			Purchases, Sales, Issues and Settlements, Net^(a)



Six Months Ended June 30, 2012
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	205	$	(166	)	$	(2	)	$	37
Non-U.S. governments		1		(3	)		-			(2	)
Corporate debt		141		(53	)		(86	)		2
RMBS		2,110		(362	)		(1,038	)		710
CMBS		722		(133	)		(86	)		503
CDO/ABS		520		(4	)		(537	)		(21	)

Total bonds available for sale		3,699		(721	)		(1,749	)		1,229

Bond trading securities:
Corporate debt		-		-			(4	)		(4	)
RMBS		-		-			(38	)		(38	)
CMBS		183		(106	)		(199	)		(122	)
CDO/ABS^(b)		5,025		(310	)		(1,565	)		3,150

Total bond trading securities		5,208		(416	)		(1,806	)		2,986

Equity securities		67		(33	)		2			36
Other invested assets		400		(33	)		(334	)		33

Total assets	$	9,374	$	(1,203	)	$	(3,887	)	$	4,284

Liabilities:
Policyholder contract deposits	$	-	$	(14	)	$	13		$	(1	)
Derivative liabilities, net		2		-			344			346
Other long-term debt^(c)		-		-			136			136

Total liabilities	$	2	$	(14	)	$	493		$	481

Six Months Ended June 30, 2011
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	176	$	-		$	(2	)	$	174
Non-U.S. governments		1		(1	)		-			-
Corporate debt		420		-			(148	)		272
RMBS		4,624		(22	)		(659	)		3,943
CMBS		241		(20	)		(149	)		72
CDO/ABS		261		-			(1,098	)		(837	)

Total bonds available for sale		5,723		(43	)		(2,056	)		3,624

Bond trading securities:
Corporate debt		-		-			(9	)		(9	)
RMBS		103		-			(17	)		86
CMBS		60		(54	)		(82	)		(76	)
CDO/ABS		144		(126	)		(108	)		(90	)

Total bond trading securities		307		(180	)		(216	)		(89	)

Equity securities		-		(23	)		(5	)		(28	)
Other invested assets		350		(158	)		(703	)		(511	)

Total assets	$	6,380	$	(404	)	$	(2,980	)	$	2,996

Liabilities:
Policyholder contract deposits	$	-	$	(19	)	$	12		$	(7	)
Derivative liabilities, net		39		-			9			48
Other long-term debt^(c)		-		-			256			256

Total liabilities	$	39	$	(19	)	$	277		$	297

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 $11 million of net losses and $47 million of net gains related to assets and liabilities transferred into Level 3 during the three- and six-month periods ended June 30, 2012, respectively, and includes $30 million and $57 million of net gains related to assets and liabilities transferred out of Level 3 during the three- and six-month periods ended June 30, 2012, respectively.

During the three- and six-month periods ended June 30, 2012, transfers into Level 3 included certain residential mortgage-backed securities (RMBS), asset-backed securities (ABS), private placement corporate debt and certain private equity funds and hedge funds. Transfers into Level 3 for certain RMBS and certain ABS were related to decreased observations of market transactions and price information for those securities. The transfers into Level 3 of investments in certain other RMBS 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 limited market pricing information that required AIG to determine fair value for these securities based on inputs that are adjusted to better reflect AIG's own assumptions regarding the characteristics of a specific security or associated market liquidity. Certain private equity fund and hedge fund investments 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 influence over the respective investments. Other hedge fund investments were transferred into Level 3 as a result of limited market activity due to fund-imposed redemption restrictions.

Assets are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data. This may be due to a significant increase in market activity for the asset, a specific event, one or more significant input(s) becoming observable or a long-term interest rate significant to a valuation becoming short-term and thus observable. In addition, transfers out of Level 3 also occur when investments are no longer carried at fair value as the result of a change in the applicable accounting methodology, given changes in the nature and extent of AIG's ownership interest. During the three- and six-month periods ended June 30, 2012, transfers out of Level 3 primarily related to certain RMBS, investments in private placement corporate debt and private equity funds and hedge funds. Transfers out of Level 3 for certain RMBS were based on consideration of the market liquidity as well as related transparency of pricing and associated observable inputs for these investments. Transfers out of Level 3 for private placement corporate debt were primarily the result of AIG using observable pricing information that 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. The removal of fund-imposed redemption restrictions, as well as a fund investment no longer being carried at fair value, resulted in the transfer of hedge funds and private equity funds out of Level 3.

As AIG presents carrying values of its derivative positions on a net basis in the table above, transfers into Level 3 liabilities for the three- and six-month periods ended June 30, 2012, primarily related to certain derivative assets transferred out of Level 3 because of the presence of observable inputs on certain forward commitments and options. During the three- and six-month periods ended June 30, 2012, certain notes payable were transferred out of Level 3 because input parameters for the pricing of these liabilities became more observable as a result of market movements and portfolio aging. There were no significant transfers of derivative liabilities out of Level 3 liabilities.

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.

See Notes 2(c), (e), (f) and (g) to the Consolidated Financial Statements in the 2011 Annual Report for additional information about how AIG measures the fair value of certain assets on a non-recurring basis and how AIG tests various asset classes for impairment.

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

									Impairment Charges


	Assets at Fair Value								Impairment Charges
	Assets at Fair Value								Three Months Ended June 30,				Six Months Ended June 30,
	Non-Recurring Basis								Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	Level 1		Level 2		Level 3		Total		2012		2011		2012		2011

June 30, 2012
Investment real estate	$	-	$	-	$	331	$	331	$	-	$	3	$	-	$	15
Other investments		-		-		1,582		1,582		83		239		176		345
Aircraft*		-		-		161		161		75		44		129		158
Other assets		-		-		18		18		-		-		8		-

Total	$	-	$	-	$	2,092	$	2,092	$	158	$	286	$	313	$	518

December 31, 2011
Investment real estate	$	-	$	-	$	457	$	457
Other investments		-		-		2,199		2,199
Aircraft		-		-		1,683		1,683
Other assets		-		-		4		4

Total	$	-	$	-	$	4,343	$	4,343

The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments, and includes only those instruments for which information about the inputs is reasonably available to AIG, such as data from pricing vendors and from internal valuation models. Because input information with respect to certain Level 3 instruments may not be reasonably available to AIG, balances shown below may not equal total amounts reported for such Level 3 assets and liabilities:

(in millions)	Fair Value at June 30, 2012		Valuation Technique	Unobservable Input^(a)	Range (Weighted Average)^(a)



Assets:
Corporate debt	$	793	Discounted cash flow	Yield^(b)	2.54% - 17.40% (7.43%)
Residential mortgage backed securities		10,219	Discounted cash flow	Constant prepayment rate^(c)	0.00% - 10.57% (4.91%)
				Loss severity^(c)	42.97% - 79.60% (61.29%)
				Constant default rate^(c)	4.10% - 13.74% (8.92%)
				Yield^(c)	4.92% - 11.98% (8.45%)
Certain CDO/ABS		2,053	Discounted cash flow	Constant prepayment rate^(c)	0.00% - 47.15% (16.69%)
				Loss severity^(c)	0.00% - 7.52% (0.69%)
				Constant default rate^(c)	0.00% - 3.69% (0.29%)
				Yield^(c)	1.93% - 6.01% (3.97%)
Commercial mortgage backed securities		2,932	Discounted cash flow	Yield^(b)	0.00% - 23.66% (11.16%)
CDO/ABS – Direct
Investment book		1,508	Binomial Expansion	Recovery rate^(b)	3% - 65% (32%)
			Technique (BET)	Diversity score^(b)	5 - 48 (15)
				Weighted average life^(b)	1.25 - 9.64 years (4.56 years)

Liabilities:
Policyholder contract deposits – GMWB		893	Discounted cash flow	Equity implied volatility^(b)	6.0% - 40.0%
				Base lapse rates^(b)	1.0% - 40.0%
				Dynamic lapse rates^(b)	0.2% - 60.0%
				Mortality rates^(b)	0.5% - 40.0%
				Utilization rates^(b)	0.5%-25.0%
Derivative Liabilities – Credit contracts		1,787	BET	Recovery rates^(b)	3% - 36% (16%)
				Diversity score^(b)	7 - 31 (13)
				Weighted average life^(b)	5.08 - 9.19 years (6.08 years)

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

AIG considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to AIG about the assumptions that market participants would use when pricing the asset or liability. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The following is a general description of sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently of changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply.

Corporate debt securities included in Level 3 are primarily private placement issuances that are not traded in active markets or that are subject to transfer restrictions. Fair value measurements consider illiquidity and non-transferability. When observable price quotations are not available, fair value is determined based on discounted cash flow models using discount rates based on credit spreads, yields or price levels of publicly-traded debt of the issuer or other comparable securities, considering illiquidity and structure. The significant unobservable input used in the fair value measurement of corporate debt is the yield. The yield is affected by the market movements in credit spreads and U.S. Treasury yields. In addition, the migration in credit quality of a given security generally has a corresponding effect on the fair value measurement of the securities. For example, a downward migration of credit quality would increase spreads. Holding U.S. Treasury rates constant, an increase in corporate credit spreads would decrease the fair value of corporate debt.

The significant unobservable inputs used in fair value measurements of residential mortgage backed securities and certain CDO/ABS valued by third-party valuation service providers are constant prepayment rates (CPR), constant default rates (CDR), loss severity, and yield. A change in the assumptions used for the probability of default will generally be accompanied by a corresponding change in the assumption used for the loss severity and an inverse change in the assumption used for prepayment rates. In general, increases in yield, CPR, CDR, and loss severity, in isolation, would result in a decrease in the fair value measurement. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship between the directional change of each input is not usually linear.

The significant unobservable input used in fair value measurements for commercial mortgage backed securities is the yield. Prepayment assumptions for each mortgage pool are factored into the yield. CMBS generally feature a lower degree of prepayment risk than RMBS because commercial mortgages generally contain a penalty for prepayment. In general, increases in the yield would decrease the fair value of CMBS.

The significant unobservable inputs used for certain CDO/ABS securities valued using the BET are recovery rates, diversity score, and the weighted average life of the portfolio. An increase in recovery rates and diversity score will have a directionally similar corresponding impact on the fair value measurement of the portfolio. An increase in the weighted average life will decrease the fair value.

The significant unobservable inputs used for embedded derivatives in policyholder contract deposits measured at fair value, mainly guaranteed minimum withdrawal benefits (GMWB) for variable annuity products, are equity volatility, mortality rates, lapse rates and utilization rates. Mortality, lapse and utilization rates may vary significantly depending upon age groups and duration. In general, increases in volatilities and utilization rates will increase the fair value, while increases in lapse rates and mortality rates will decrease the fair value of the liability associated with the GMWB.

The significant unobservable inputs used for Derivatives liabilities — credit contracts are recovery rates, diversity scores, and the weighted average life of the portfolio. AIG non-performance risk is also considered in the measurement of the liability. See Note 6 to the Consolidated Financial Statements in the 2011 Annual Report for a discussion of AIG's accounting policies and procedures regarding incorporation of AIG's own credit risk in fair value measurements.

An increase in recovery rates and diversity score will decrease the fair value of the liability. An increase in the weighted average life will have a directionally similar corresponding effect on the fair value measurement of the liability.

INVESTMENTS IN CERTAIN ENTITIES CARRIED AT FAIR VALUE USING NET ASSET VALUE PER SHARE

The following table includes information related to 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.

		June 30, 2012				December 31, 2011


(in millions)	Investment Category Includes	Fair Value Using Net Asset Value or its equivalent		Unfunded Commitments		Fair Value Using Net Asset Value or its equivalent		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	$	3,281	$	882	$	3,185	$	945
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		177		46		165		57
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		315		34		316		39
Distressed	Securities of companies that are already in default, under bankruptcy protection, or troubled		185		37		182		42
Other	Real estate, energy, multi-strategy, mezzanine, and industry-focused strategies		367		140		252		98

Total private equity funds			4,325		1,139		4,100		1,181

Hedge funds:
Event-driven	Securities of companies undergoing material structural changes, including mergers, acquisitions and other reorganizations		901		2		774		2
Long-short	Securities that the manager believes are undervalued, with corresponding short positions to hedge market risk		1,043		-		927		-
Macro	Investments that take long and short positions in financial instruments based on a top-down view of certain economic and capital market conditions		178		-		173		-
Distressed	Securities of companies that are already in default, under bankruptcy protection or troubled		293		-		272		10
Other	Non-U.S. companies, futures and commodities, relative value, and multi-strategy and industry-focused strategies		577		-		627		-

Total hedge funds			2,992		2		2,773		12

Total		$	7,317	$	1,141	$	6,873	$	1,193

Private equity fund investments included above are not redeemable, as distributions from the funds will be received when underlying investments of the funds are liquidated. Private equity funds are generally expected to have 10 year lives at their inception but these lives may be extended at the fund manager's discretion, typically in one or two year increments. At June 30, 2012, assuming average original expected lives of 10 years for the funds, 43 percent of the total fair value using net asset value or its equivalent above would have expected remaining lives of less than three years, 55 percent between three and seven years and 2 percent between seven and 10 years.

At June 30, 2012, hedge fund investments included above are redeemable monthly (12 percent), quarterly (33 percent), semi-annually (26 percent) and annually (29 percent), with redemption notices ranging from one day to 180 days. More than 61 percent of these hedge fund investments 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 prior to 2009 and do not have stated end dates. The restrictions that have pre-defined end dates are generally expected to be lifted by the end of 2015. The partial restrictions relate to certain hedge funds that hold at least one investment that the fund manager deems to be illiquid.

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 June 30,						Gain (Loss) Six Months Ended June 30,


(in millions)	2012			2011			2012			2011

Assets:
Mortgage and other loans receivable	$	9		$	6		$	31		$	1
Bonds and equity securities		263			481			907			1,437
Trading – ML II interest		-			(176	)		246			75
Trading – ML III interest		1,306			(667	)		2,558			77
Retained interest in AIA		(493	)		1,521			1,302			2,583
Short-term investments and other invested assets and Other assets		9			12			13			28

Liabilities:
Other long-term debt^(a)		(218	)		(451	)		(664	)		(556	)
Other liabilities		26			(63	)		(22	)		(175	)

Total gain^(b)	$	902		$	663		$	4,371		$	3,470

See Note 2(a) to the Consolidated Financial Statements in the 2011 Annual Report for additional information about AIG's policies for recognition, measurement, and disclosure of interest and dividend income and interest expense.

AIG recognized gains (losses) attributable to the observable effect of changes in credit spreads on AIG's own liabilities for which the fair value option was elected of $63 million of gain and $495 million of loss during the three- and six-month periods ended June 30, 2012, respectively, and $57 million and $16 million during the three-and six-month periods ended June 30, 2011, respectively. 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.

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:

At June 30, 2012 and December 31, 2011, 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

The following table presents the carrying value and estimated fair value of AIG's financial instruments not measured at fair value and indicates the level of the estimated fair value measurement based on the levels of the inputs used:

	Estimated Fair Value


	Estimated Fair Value								Carrying Value
(in millions)	Level 1		Level 2		Level 3		Total		Carrying Value

June 30, 2012
Assets:
Mortgage and other loans receivable	$	-	$	542	$	20,434	$	20,976	$	19,265
Other invested assets		-		601		3,037		3,638		4,889
Short-term investments		-		17,007		-		17,007		17,006
Cash		1,232		-		-		1,232		1,232
Liabilities:
Policyholder contract deposits associated with investment-type contracts		-		182		126,390		126,572		107,401
Other liabilities		-		-		3,438		3,438		3,442
Long-term debt		17,369		47,253		2,301		66,923		64,493

December 31, 2011
Assets:
Mortgage and other loans receivable							$	20,494	$	19,382
Other invested assets								3,390		4,701
Short-term investments								16,657		16,659
Cash								1,474		1,474
Liabilities:
Policyholder contract deposits associated with investment-type contracts								122,125		106,950
Other liabilities								896		896
Long-term debt								61,295		64,487