INVESTMENTS

6 Months Ended

Jun. 30, 2012

INVESTMENTS

INVESTMENTS

5. 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, 2012
Bonds available for sale:
U.S. government and government sponsored entities	$	3,665	$	355	$	(3	)	$	4,017	$	-
Obligations of states, municipalities and political subdivisions		34,597		2,717		(60	)		37,254		(24	)
Non-U.S. governments		24,245		1,187		(51	)		25,381		-
Corporate debt		133,688		13,577		(937	)		146,328		109
Mortgage-backed, asset-backed and collateralized:
RMBS		32,453		1,920		(715	)		33,658		179
CMBS		8,931		535		(675	)		8,791		(167	)
CDO/ABS		7,211		667		(293	)		7,585		119
Total mortgage-backed, asset-backed and collateralized		48,595		3,122		(1,683	)		50,034		131
Total bonds available for sale(b)		244,790		20,958		(2,734	)		263,014		216
Equity securities available for sale:
Common stock		1,479		1,213		(41	)		2,651		-
Preferred stock		146		39		-			185		-
Mutual funds		108		4		(1	)		111		-
Total equity securities available for sale		1,733		1,256		(42	)		2,947		-
Other invested assets carried at fair value(c)		5,161		1,854		(143	)		6,872		-
Total	$	251,684	$	24,068	$	(2,919	)	$	272,833	$	216
December 31, 2011
Bonds available for sale:
U.S. government and government sponsored entities	$	5,661	$	418	$	(1	)	$	6,078	$	-
Obligations of states, municipalities and political subdivisions		35,017		2,554		(73	)		37,498		(28	)
Non-U.S. governments		24,843		994		(102	)		25,735		-
Corporate debt		134,699		11,844		(1,725	)		144,818		115
Mortgage-backed, asset-backed and collateralized:
RMBS		34,780		1,387		(1,563	)		34,604		(716	)
CMBS		8,449		470		(973	)		7,946		(276	)
CDO/ABS		7,321		454		(473	)		7,302		49
Total mortgage-backed, asset-backed and collateralized		50,550		2,311		(3,009	)		49,852		(943	)
Total bonds available for sale(b)		250,770		18,121		(4,910	)		263,981		(856	)
Equity securities available for sale:
Common stock		1,682		1,839		(100	)		3,421		-
Preferred stock		83		60		-			143		-
Mutual funds		55		6		(1	)		60		-
Total equity securities available for sale		1,820		1,905		(101	)		3,624		-
Other invested assets carried at fair value(c)		5,155		1,611		(269	)		6,497		-
Total	$	257,745	$	21,637	$	(5,280	)	$	274,102	$	(856	)

(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, 2012 and December 31, 2011, bonds available for sale held by AIG that were below investment grade or not rated totaled $27.4 billion and $24.2 billion, respectively.

(c)

Represents private equity and hedge fund investments carried at fair value for which unrealized gains and losses are required to be recognized in other comprehensive income.

Securities Available for Sale in a Loss Position

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:

	Less than 12 Months				12 Months or More				Total
(in millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
June 30, 2012
Bonds available for sale:
U.S. government and government sponsored entities	$	625	$	3	$	5	$	-	$	630	$	3
Obligations of states, municipalities and political subdivisions		627		5		338		55		965		60
Non-U.S. governments		1,134		24		424		27		1,558		51
Corporate debt		8,487		307		5,901		630		14,388		937
RMBS		3,098		163		3,296		552		6,394		715
CMBS		1,083		60		1,963		615		3,046		675
CDO/ABS		311		9		1,822		284		2,133		293
Total bonds available for sale		15,365		571		13,749		2,163		29,114		2,734
Equity securities available for sale:
Common stock		274		38		11		3		285		41
Preferred stock		2		-		-		-		2		-
Mutual funds		24		-		2		1		26		1
Total equity securities available for sale		300		38		13		4		313		42
Total	$	15,665	$	609	$	13,762	$	2,167	$	29,427	$	2,776
December 31, 2011
Bonds available for sale:
U.S. government and government sponsored entities	$	142	$	1	$	-	$	-	$	142	$	1
Obligations of states, municipalities and political subdivisions		174		1		669		72		843		73
Non-U.S. governments		3,992		67		424		35		4,416		102
Corporate debt		18,099		937		5,907		788		24,006		1,725
RMBS		10,624		714		4,148		849		14,772		1,563
CMBS		1,697		185		1,724		788		3,421		973
CDO/ABS		1,680		50		1,682		423		3,362		473
Total bonds available for sale		36,408		1,955		14,554		2,955		50,962		4,910
Equity securities available for sale:
Common stock		608		100		-		-		608		100
Preferred stock		6		-		-		-		6		-
Mutual funds		2		1		-		-		2		1
Total equity securities available for sale		616		101		-		-		616		101
Total	$	37,024	$	2,056	$	14,554	$	2,955	$	51,578	$	5,011

    At June 30, 2012, AIG held 4,970 and 244 individual fixed maturity and equity securities, respectively, that were in an unrealized loss position, of which 1,957 individual fixed maturity 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 June 30, 2012, 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, 2012 (in millions)
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	9,707	$	9,868	$	959	$	947
Due after one year through five years		55,077		57,759		6,685		6,440
Due after five years through ten years		70,238		76,246		5,578		5,219
Due after ten years		61,173		69,107		5,370		4,935
Mortgage-backed, asset-backed and collateralized		48,595		50,034		13,256		11,573
Total	$	244,790	$	263,014	$	31,848	$	29,114

    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,
	2012				2011				2012				2011
(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	$	875	$	23	$	662	$	38	$	1,365	$	39	$	850	$	93
Equity securities		14		1		43		6		465		4		148		8
Total	$	889	$	24	$	705	$	44	$	1,830	$	43	$	998	$	101

    For the three- and six-month periods ended June 30, 2012, the aggregate fair value of available for sale securities sold was $10.6 billion, $21.5 billion, respectively, which resulted in net realized capital gains of $0.9 billion and $1.8 billion, respectively. 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 $0.7 billion and $0.9 billion, respectively.

TRADING SECURITIES

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

	June 30, 2012					December 31, 2011
(in millions)	Fair Value		Percent of Total			Fair Value		Percent of Total
Fixed Maturities:
U.S. government and government sponsored entities	$	7,592		25	%	$	7,504		31	%
Non-U.S. governments		34		-			35		-
Corporate debt		1,060		3			816		3
State, territories and political subdivisions		236		1			257		1
Mortgage-backed, asset-backed and collateralized:
RMBS		1,448		5			1,648		7
CMBS		2,133		7			1,837		7
CDO/ABS and other collateralized*		10,271		33			5,282		22
Total mortgage-backed, asset-backed and collateralized		13,852		45			8,767		36
ML II		-		-			1,321		5
ML III		8,145		26			5,664		23
Total fixed maturities		30,919		100			24,364		99
Equity securities		103		-			125		1
Total	$	31,022		100	%	$	24,489		100	%

*

Includes securities with a fair value of approximately $5.0 billion purchased through the FRBNY's auction of ML III assets. Subsequent to June 30, 2012 and through July 31, 2012, AIG purchased additional securities with a fair value of approximately $2.1 billion in the additional auctions of ML III assets.

MAIDEN LANE III

    From inception and prior to June 30, 2012, AIG valued its investment in ML III using a discounted cash flow methodology that (i) used the estimated future cash flows and the fair value of the ML III assets, (ii) allocated the estimated future cash flows according to the ML III waterfall, and (iii) determined 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 were validated, to the extent possible, using market observable information for securities with similar asset pools, structure and terms. During the second quarter of 2012, the FRBNY sold an aggregate of approximately $27 billion face amount of certain assets of the ML III portfolio, and on June 14, 2012, the FRBNY announced its outstanding loan to ML III had been fully repaid with interest. As a result of these sales, AIG modified its methodology for estimating the fair value of its remaining interest in ML III at June 30, 2012 to incorporate the assumption of a current liquidation, which (i) uses the estimated fair value of the ML III assets and (ii) allocates the estimated asset fair value according to the ML III waterfall.

    In June and July 2012, AIG received payments of $77 million and $6.0 billion, respectively, which included AIG's original $5.0 billion equity interest in ML III and $1.1 billion in contractual and additional distributions. The FRBNY has continued to auction the remaining ML III assets and any additional proceeds from such sales will be allocated 67 percent to the FRBNY and 33 percent to AIG.

    AIG has participated as a purchaser in the FRBNY sales of ML III assets and may participate in future sales.

EVALUATING INVESTMENTS FOR OTHER-THAN-TEMPORARY IMPAIRMENTS

    For a discussion of AIG's policy for evaluating investments for other-than-temporary impairments, see Note 7 to the Consolidated Financial Statements in the 2011 Annual Report.

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, and includes structured, corporate, municipal and sovereign fixed maturity securities:

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2012			2011			2012			2011
Balance, beginning of period	$	6,464		$	6,540		$	6,504		$	6,786
Increases due to:
Credit impairments on new securities subject to impairment losses		35			33			172			85
Additional credit impairments on previously impaired securities		69			85			376			235
Reductions due to:
Credit impaired securities fully disposed for which there was no prior intent or requirement to sell		(248	)		(155	)		(518	)		(325	)
Accretion on securities previously impaired due to credit*		(231	)		(107	)		(453	)		(207	)
Hybrid securities with embedded credit derivatives reclassified to Bond trading securities		-			-			-			(179	)
Other		1			-			9			1
Balance, end of period	$	6,090		$	6,396		$	6,090		$	6,396

*

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.

Purchased Credit Impaired (PCI) Securities

    In the second quarter of 2011, AIG began purchasing 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 adjustments 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)	$	18,469
Cash flows expected to be collected*		14,304
Recorded investment in acquired securities		9,144

*

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

(in millions)	June 30, 2012		December 31, 2011
Outstanding principal balance		$        12,519	$	10,119
Amortized cost		7,978		7,006
Fair value		8,041		6,535

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

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2012			2011			2012			2011
Balance, beginning of period	$	5,146		$	-		$	4,135		$	-
Newly purchased PCI securities		196			2,416			1,418			2,416
Disposals		(121	)		-			(168	)		-
Accretion		(177	)		(77	)		(345	)		(77	)
Effect of changes in interest rate indices		(133	)		(8	)		(161	)		(8	)
Net reclassification (to) from non-accretable difference, including effects of prepayments		39			(23	)		71			(23	)
Balance, end of period	$	4,950		$	2,308		$	4,950		$	2,308

PLEDGED INVESTMENTS

Secured Financing and Similar Arrangements

    AIG enters into financing transactions, whereby certain securities are transferred to financial institutions in exchange for cash or other liquid collateral. Securities transferred by AIG under these financing transactions may be sold or repledged by the counterparties. As collateral for the securities transferred by AIG, counterparties transfer assets, such as cash or high quality fixed maturity securities. Collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the transferred securities during the life of the transactions. Where AIG receives fixed maturity securities as collateral, AIG does not have the right to sell or repledge this collateral unless an event of default occurs by the counterparties. At the termination of the transactions, AIG and its counterparties are obligated to return the collateral provided and the securities transferred, respectively. These transactions are treated as secured financing arrangements by AIG.

    Secured financing transactions also include securities sold under agreements to repurchase (repurchase agreements), in which AIG transfers securities in exchange for cash, with an agreement by AIG to repurchase the same or substantially similar securities. In the majority of these repurchase agreements, the securities transferred by AIG may be sold or repledged by the counterparties.

    Under the secured financing transactions described above, securities available for sale with a fair value of $7.2 billion and $2.3 billion at June 30, 2012 and December 31, 2011, respectively, and trading securities with a fair value of $3.5 billion and $2.8 billion at June 30, 2012 and December 31, 2011, respectively, were pledged to counterparties.

    Prior to January 1, 2012, in the case of repurchase agreements where AIG did not obtain collateral sufficient to fund substantially all of the cost of purchasing identical replacement securities during the term of the contract (generally less than 90 percent of the security value), AIG accounted for the transaction as a sale of the security and reported the obligation to repurchase the security as a derivative contract. Effective January 1, 2012, the level of collateral received by the transferor in a repurchase agreement or similar arrangement is no longer relevant in determining whether the transaction should be accounted for as a sale. The fair value of securities transferred under repurchase agreements accounted for as sales was $259 million and $2.1 billion at June 30, 2012 and December 31, 2011, respectively.

    AIG also enters into agreements in which securities are purchased by AIG under agreements to resell (reverse repurchase agreements), which are accounted for as secured financing transactions and reported as short-term investments or other assets, depending on their terms. For these transactions, AIG takes possession of or obtains a security interest in the related securities, and AIG has the right to sell or repledge this collateral received. The fair value of securities collateral pledged to AIG was $6.9 billion and $6.8 billion at June 30, 2012 and December 31, 2011, respectively, of which $1.5 billion and $122 million was repledged by AIG.

Insurance – Statutory and Other Deposits

    Total carrying values of cash and securities deposited by AIG's insurance subsidiaries under requirements of regulatory authorities or other insurance-related arrangements, including certain annuity-related obligations and certain reinsurance agreements, were $8.9 billion and $9.8 billion at June 30, 2012 and December 31, 2011, respectively.

Other Pledges

    Certain AIG subsidiaries are members of Federal Home Loan Banks (FHLBs), and such membership requires the members to own stock in these FHLBs. AIG subsidiaries owned an aggregate of $83 million and $77 million of stock in FHLBs at June 30, 2012 and December 31, 2011, respectively. To the extent an AIG subsidiary borrows from the FHLB, its ownership interest in the stock of FHLBs will be pledged to the FHLB. In addition, AIG subsidiaries have pledged securities available for sale with a fair value of $93 million at June 30, 2012, associated with advances from the FHLBs.

    Certain GIAs have provisions that require collateral to be posted by AIG upon a downgrade of AIG's long-term debt ratings. The actual amount of collateral required to be posted to the counterparties in the event of such downgrades, and the aggregate amount of payments that AIG could be required to make, depends on market conditions, the fair value of outstanding affected transactions and other factors prevailing at and after the time of the downgrade. The fair value of securities pledged as collateral with respect to these obligations approximated $5.0 billion and $5.1 billion at June 30, 2012 and December 31, 2011, respectively. This collateral primarily consists of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.