FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2013

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

5. FAIR VALUE MEASUREMENTS

Fair Value Measurements on a Recurring Basis

We carry certain of our financial instruments at fair value. We define 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. You should read the following in conjunction with Note 6 to the Consolidated Financial Statements in the 2012 Annual Report for a complete discussion of our accounting policies and procedures regarding fair value measurements.

Assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are classified in accordance with a fair value hierarchy consisting of three "levels" based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:

•

Level 1:  Fair value measurements based on quoted prices (unadjusted) in active markets that AIG has the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. We do not adjust the quoted price for such instruments.

•

Level 2:  Fair value measurements based on inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

•

Level 3:  Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions as to the inputs a hypothetical market participant would use to value that asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In those 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 in its entirety.

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 observability of the inputs used:

June 30, 2013 (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	$	266	$	3,264	$	–	$	–		$	–		$	3,530
Obligations of states, municipalities and political subdivisions		–		31,783		945		–			–			32,728
Non-U.S. governments		562		23,047		20		–			–			23,629
Corporate debt		–		142,323		1,634		–			–			143,957
RMBS		–		23,288		13,694		–			–			36,982
CMBS		–		5,226		5,455		–			–			10,681
CDO/ABS		–		3,580		6,142		–			–			9,722
Total bonds available for sale		828		232,511		27,890		–			–			261,229
Bond trading securities:
U.S. government and government sponsored entities		164		5,897		–		–			–			6,061
Obligations of states, municipalities and political subdivisions		–		181		–		–			–			181
Non-U.S. governments		–		2		–		–			–			2
Corporate debt		–		1,098		–		–			–			1,098
RMBS		–		1,404		782		–			–			2,186
CMBS		–		881		820		–			–			1,701
CDO/ABS		–		3,588		8,972		–			–			12,560
Total bond trading securities		164		13,051		10,574		–			–			23,789
Equity securities available for sale:
Common stock		2,817		–		76		–			–			2,893
Preferred stock		–		33		48		–			–			81
Mutual funds		170		9		–		–			–			179
Total equity securities available for sale		2,987		42		124		–			–			3,153
Equity securities trading		676		82		–		–			–			758
Mortgage and other loans receivable		–		59		–		–			–			59
Other invested assets		11		2,221		5,639		–			–			7,871
Derivative assets:
Interest rate contracts		8		4,109		961		–			–			5,078
Foreign exchange contracts		–		117		–		–			–			117
Equity contracts		137		55		73		–			–			265
Commodity contracts		–		123		1		–			–			124
Credit contracts		–		–		56		–			–			56
Other contracts		–		1		36		–			–			37
Counterparty netting and cash collateral		–		–		–		(2,011	)		(861	)		(2,872	)
Total derivative assets		145		4,405		1,127		(2,011	)		(861	)		2,805
Short-term investments		215		5,884		–		–			–			6,099
Separate account assets		58,796		2,963		–		–			–			61,759
Other assets		–		582		–		–			–			582
Total	$	63,822	$	261,800	$	45,354	$	(2,011	)	$	(861	)	$	368,104
Liabilities:
Policyholder contract deposits	$	–	$	–	$	586	$	–		$	–		$	586
Derivative liabilities:
Interest rate contracts		–		4,359		182		–			–			4,541
Foreign exchange contracts		–		155		–		–			–			155
Equity contracts		–		104		3		–			–			107
Commodity contracts		–		127		–		–			–			127
Credit contracts		–		–		1,650		–			–			1,650
Other contracts		–		26		141		–			–			167
Counterparty netting and cash collateral		–		–		–		(2,011	)		(1,612	)		(3,623	)
Total derivative liabilities		–		4,771		1,976		(2,011	)		(1,612	)		3,124
Long-term debt		–		6,594		419		–			–			7,013
Other liabilities		116		751		–		–			–			867
Total	$	116	$	12,116	$	2,981	$	(2,011	)	$	(1,612	)	$	11,590

December 31, 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	$	–	$	3,483	$	–	$	–		$	–		$	3,483
Obligations of states, municipalities and political subdivisions		–		34,681		1,024		–			–			35,705
Non-U.S. governments		1,004		25,782		14		–			–			26,800
Corporate debt		–		149,625		1,487		–			–			151,112
RMBS		–		22,730		11,662		–			–			34,392
CMBS		–		5,010		4,905		–			–			9,915
CDO/ABS		–		3,492		5,060		–			–			8,552
Total bonds available for sale		1,004		244,803		24,152		–			–			269,959
Bond trading securities:
U.S. government and government sponsored entities		266		6,528		–		–			–			6,794
Non-U.S. governments		–		2		–		–			–			2
Corporate debt		–		1,320		–		–			–			1,320
RMBS		–		1,331		396		–			–			1,727
CMBS		–		1,424		803		–			–			2,227
CDO/ABS		–		3,969		8,545		–			–			12,514
Total bond trading securities		266		14,574		9,744		–			–			24,584
Equity securities available for sale:
Common stock		3,002		3		24		–			–			3,029
Preferred stock		–		34		44		–			–			78
Mutual funds		83		22		–		–			–			105
Total equity securities available for sale		3,085		59		68		–			–			3,212
Equity securities trading		578		84		–		–			–			662
Mortgage and other loans receivable		–		134		–		–			–			134
Other invested assets		125		1,542		5,389		–			–			7,056
Derivative assets:
Interest rate contracts		2		5,521		956		–			–			6,479
Foreign exchange contracts		–		104		–		–			–			104
Equity contracts		104		63		54		–			–			221
Commodity contracts		–		144		1		–			–			145
Credit contracts		–		–		60		–			–			60
Other contracts		–		–		38		–			–			38
Counterparty netting and cash collateral		–		–		–		(2,467	)		(909	)		(3,376	)
Total derivative assets		106		5,832		1,109		(2,467	)		(909	)		3,671
Short-term investments		285		7,771		–		–			–			8,056
Separate account assets		54,430		2,907		–		–			–			57,337
Other assets		–		696		–		–			–			696
Total	$	59,879	$	278,402	$	40,462	$	(2,467	)	$	(909	)	$	375,367
Liabilities:
Policyholder contract deposits	$	–	$	–	$	1,257	$	–		$	–		$	1,257
Derivative liabilities:
Interest rate contracts		–		5,582		224		–			–			5,806
Foreign exchange contracts		–		174		–		–			–			174
Equity contracts		–		114		7		–			–			121
Commodity contracts		–		146		–		–			–			146
Credit contracts		–		–		2,051		–			–			2,051
Other contracts		–		6		200		–			–			206
Counterparty netting and cash collateral		–		–		–		(2,467	)		(1,976	)		(4,443	)
Total derivative liabilities		–		6,022		2,482		(2,467	)		(1,976	)		4,061
Long-term debt		–		7,711		344		–			–			8,055
Other liabilities		30		1,050		–		–			–			1,080
Total	$	30	$	14,783	$	4,083	$	(2,467	)	$	(1,976	)	$	14,453

(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 Condensed Consolidated Balance Sheets, and collateral received, not reflected in the Condensed Consolidated Balance Sheets, was $1.4 billion and $143 million, respectively, at June 30, 2013 and $1.9 billion and $299 million, respectively, at December 31, 2012.

Transfers of Level 1 and Level 2 Assets and Liabilities

Our 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, 2013, we transferred $318 million and $557 million of securities issued by Non-U.S. government entities from Level 1 to Level 2, respectively, as they are no longer considered actively traded. For similar reasons, during the six-month period ended June 30, 2013, we transferred $93 million of securities issued by the U.S. government and U.S. government-sponsored entities from Level 1 to Level 2. We had no material transfers from Level 1 to Level 2 for U.S. government and government-sponsored entities for the three-month period ended June 30, 2013. We had no material transfers from Level 2 to Level 1 during the three- and six-month periods ended June 30, 2013.

During the three- and six-month periods ended June 30, 2012, we transferred $135.9 million of investments in securities issued by Non-U.S. governments from Level 1 to Level 2, as they were no longer considered actively traded. We had no material transfers from Level 2 to Level 1 during the three- and six-month periods ended June 30, 2012.

Changes in Level 3 Recurring Fair Value Measurements

The following tables present changes during the three- and six-month periods ended June 30, 2013 and 2012 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 in the Condensed Consolidated Balance Sheets at June 30, 2013 and 2012:

(in millions)	Fair Value Beginning of Period(a)			Net Realized and Unrealized Gains (Losses) Included in Income			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, 2013
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	1,019		$	24		$	(145	)	$	69		$	–	$	(22	)	$	945		$	–
Non-U.S. governments		18			(1	)		–			4			–		(1	)		20			–
Corporate debt		1,449			–			(20	)		8			256		(59	)		1,634			–
RMBS		12,096			204			(144	)		1,529			9		–			13,694			–
CMBS		5,315			–			(121	)		263			7		(9	)		5,455			–
CDO/ABS		5,577			72			(76	)		381			198		(10	)		6,142			–
Total bonds available for sale		25,474			299			(506	)		2,254			470		(101	)		27,890			–
Bond trading securities:
RMBS		730			(12	)		–			64			–		–			782			(12	)
CMBS		776			(1	)		–			(41	)		93		(7	)		820			(16	)
CDO/ABS		8,842			569			–			(572	)		133		–			8,972			336
Total bond trading securities		10,348			556			–			(549	)		226		(7	)		10,574			308
Equity securities available for sale:
Common stock		22			(9	)		6			57			–		–			76			–
Preferred stock		49			–			(1	)		–			–		–			48			–
Total equity securities available for sale		71			(9	)		5			57			–		–			124			–
Other invested assets		5,467			108			23			42			218		(219	)		5,639			–
Total	$	41,360		$	954		$	(478	)	$	1,804		$	914	$	(327	)	$	44,227		$	308
Liabilities:
Policyholder contract deposits	$	(1,047	)	$	410		$	–		$	51		$	–	$	–		$	(586	)	$	637
Derivative liabilities, net:
Interest rate contracts		756			3			–			20			–		–			779			(7	)
Equity contracts		66			8			–			(6	)		2		–			70			(15	)
Commodity contracts		1			–			–			–			–		–			1			–
Credit contracts		(1,775	)		138			–			43			–		–			(1,594	)		(181	)
Other contracts		(139	)		13			8			13			–		–			(105	)		10
Total derivative liabilities, net		(1,091	)		162			8			70			2		–			(849	)		(193	)
Long-term debt(b)		(407	)		(15	)		–			3			–		–			(419	)		13
Total	$	(2,545	)	$	557		$	8		$	124		$	2	$	–		$	(1,854	)	$	457

(in millions)	Fair Value Beginning of Period(a)			Net Realized and Unrealized Gains (Losses) Included in Income			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, 2013
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	1,024		$	25		$	(150	)	$	205		$	–		$	(159	)	$	945		$	–
Non-U.S. governments		14			–			–			6			1			(1	)		20			–
Corporate debt		1,487			(4	)		(14	)		30			332			(197	)		1,634			–
RMBS		11,662			408			339			1,266			19			–			13,694			–
CMBS		5,124			11			20			188			161			(49	)		5,455			–
CDO/ABS		4,841			97			–			1,020			379			(195	)		6,142			–
Total bonds available for sale		24,152			537			195			2,715			892			(601	)		27,890			–
Bond trading securities:
RMBS		396			10			–			138			238			–			782			(40	)
CMBS		812			11			–			(140	)		251			(114	)		820			(42	)
CDO/ABS		8,536			853			–			(1,009	)		620			(28	)		8,972			217
Total bond trading securities		9,744			874			–			(1,011	)		1,109			(142	)		10,574			135
Equity securities available for sale:
Common stock		24			–			5			47			–			–			76			–
Preferred stock		44			–			4			–			–			–			48			–
Total equity securities available for sale		68			–			9			47			–			–			124			–
Other invested assets		5,389			169			10			40			344			(313	)		5,639			–
Total	$	39,353		$	1,580		$	214		$	1,791		$	2,345		$	(1,056	)	$	44,227		$	135
Liabilities:
Policyholder contract deposits	$	(1,257	)	$	615		$	–		$	56		$	–		$	–		$	(586	)	$	664
Derivative liabilities, net:
Interest rate contracts		732			14			–			33			–			–			779			(9	)
Equity contracts		47			36			–			(14	)		1			–			70			(27	)
Commodity contracts		1			–			–			(1	)		–			1			1			1
Credit contracts		(1,991	)		313			–			84			–			–			(1,594	)		(396	)
Other contracts		(162	)		21			8			30			(2	)		–			(105	)		23
Total derivative liabilities, net		(1,373	)		384			8			132			(1	)		1			(849	)		(408	)
Long-term debt(b)		(344	)		(95	)		–			22			(2	)		–			(419	)		22
Total	$	(2,974	)	$	904		$	8		$	210		$	(3	)	$	1		$	(1,854	)	$	278

(in millions)	Fair Value Beginning of Period(a)			Net Realized and Unrealized Gains (Losses) Included in Income			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
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 derivatives liabilities, net		(1,922	)		789			(7	)		(770	)		(42	)		2			(1,950	)		(128	)
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			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 derivatives liabilities, net		(2,423	)		248			2			346			(125	)		2			(1,950	)		(659	)
Long-term debt(b)		(508	)		(378	)		(77	)		136			–			420			(407	)		54
Total	$	(3,849	)	$	(399	)	$	(75	)	$	481		$	(125	)	$	422		$	(3,545	)	$	(504	)

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

(b)  Includes guaranteed investment agreements (GIAs), notes, bonds, loans and mortgages payable.

Net realized and unrealized gains and losses related to Level 3 items shown above are reported in the Condensed Consolidated Statements of Income as follows:

(in millions)	Net Investment Income			Net Realized Capital Gains (Losses)			Other Income			Total
Three Months Ended June 30, 2013
Bonds available for sale	$	239		$	6		$	54		$	299
Bond trading securities		(5	)		–			561			556
Equity securities available for sale		–			(9	)		–			(9	)
Other invested assets		107			(22	)		23			108
Policyholder contract deposits		–			410			–			410
Derivative liabilities, net		15			(5	)		152			162
Long-term debt		–			–			(15	)		(15	)
Three Months Ended June 30, 2012
Bonds available for sale	$	234		$	(9	)	$	28		$	253
Bond trading securities		1,290			–			165			1,455
Equity securities available for sale		–			9			–			9
Other invested assets		5			(41	)		4			(32	)
Policyholder contract deposits		–			(408	)		–			(408	)
Derivative liabilities, net		–			72			717			789
Long-term debt		–			–			(268	)		(268	)
Six Months Ended June 30, 2013
Bonds available for sale	$	449		$	13		$	75		$	537
Bond trading securities		28			–			846			874
Equity securities available for sale		–			–			–			–
Other invested assets		154			(28	)		43			169
Policyholder contract deposits		–			615			–			615
Derivative liabilities, net		15			17			352			384
Long-term debt		–			–			(95	)		(95	)
Six Months Ended June 30, 2012
Bonds available for sale	$	465		$	(384	)	$	32		$	113
Bond trading securities		2,839			–			303			3,142
Equity securities available for sale		–			25			–			25
Other invested assets		(9	)		(173	)		3			(179	)
Policyholder contract deposits		–			(269	)		–			(269	)
Derivative liabilities, net		(1	)		61			188			248
Long-term debt		–			–			(378	)		(378	)

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, 2013
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	150	$	(81	)	$	–		$	69
Non-U.S. governments		5		–			(1	)		4
Corporate debt		211		(114	)		(89	)		8
RMBS		2,110		–			(581	)		1,529
CMBS		320		(18	)		(39	)		263
CDO/ABS		673		–			(292	)		381
Total bonds available for sale		3,469		(213	)		(1,002	)		2,254
Bond trading securities:
RMBS		108		–			(44	)		64
CMBS		–		–			(41	)		(41	)
CDO/ABS		129		–			(701	)		(572	)
Total bond trading securities		237		–			(786	)		(549	)
Equity securities available for sale		58		(1	)		–			57
Other invested assets		205		(16	)		(147	)		42
Total assets	$	3,969	$	(230	)	$	(1,935	)	$	1,804
Liabilities:
Policyholder contract deposits	$	–	$	(6	)	$	57		$	51
Derivative liabilities, net		2		3			65			70
Long-term debt(b)		–		–			3			3
Total liabilities	$	2	$	(3	)	$	125		$	124
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		5,025		–			(238	)		4,787
Total bond trading securities		5,095		(49	)		(267	)		4,779
Equity securities available for sale		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	)
Long-term debt(b)		–		–			22			22
Total liabilities	$	–	$	(8	)	$	(738	)	$	(746	)

(in millions)	Purchases		Sales			Settlements			Purchases, Sales, Issues and Settlements, Net(a)
Six Months Ended June 30, 2013
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	308	$	(103	)	$	–		$	205
Non-U.S. governments		8		–			(2	)		6
Corporate debt		308		(114	)		(164	)		30
RMBS		2,712		(231	)		(1,215	)		1,266
CMBS		693		(164	)		(341	)		188
CDO/ABS		1,471		(159	)		(292	)		1,020
Total bonds available for sale		5,500		(771	)		(2,014	)		2,715
Bond trading securities:
RMBS		213		–			(75	)		138
CMBS		19		(58	)		(101	)		(140	)
CDO/ABS		318		–			(1,327	)		(1,009	)
Total bond trading securities		550		(58	)		(1,503	)		(1,011	)
Equity securities available for sale		59		(11	)		(1	)		47
Other invested assets		448		(46	)		(362	)		40
Total assets	$	6,557	$	(886	)	$	(3,880	)	$	1,791
Liabilities:
Policyholder contract deposits	$	–	$	(12	)	$	68		$	56
Derivative liabilities, net		5		(1	)		128			132
Long-term debt(b)		–		–			22			22
Total liabilities	$	5	$	(13	)	$	218		$	210
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		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(b)		–		–			136			136
Total liabilities	$	2	$	(14	)	$	493		$	481

(a)  There were no issuances during the three-and six-month periods ended June 30, 2013 and 2012.

(b)  Includes GIAs, notes, bonds, loans and mortgages payable.

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 June 30, 2013 and 2012 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

We 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 as shown in the table above excludes $17 million of net gains and $55 million of net losses related to assets and liabilities transferred into Level 3 during the three- and six-month periods ended June 30, 2013, respectively, and includes $10 million and $12 million of net gains related to assets and liabilities transferred out of Level 3 during the three- and six-month periods ended June 30, 2013, respectively.

Transfers of Level 3 Assets

During the three- and six-month periods ended June 30, 2013, transfers into Level 3 assets included certain investments in private placement corporate debt, residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDO)/asset-backed securities (ABS), and investments in hedge funds and private equity funds.

•

The transfers of investments in RMBS, CMBS and CDO and certain ABS into Level 3 assets were due to decreases in market transparency and liquidity for individual security types.

•

Transfers of private placement corporate debt and certain ABS into Level 3 assets were primarily the result of limited market pricing information that required us to determine fair value for these securities based on inputs that are adjusted to better reflect our own assumptions regarding the characteristics of a specific security or associated market liquidity.

•

Certain investments in hedge funds were transferred into Level 3 as a result of limited market activity due to fund-imposed redemption restrictions.

•

Certain private equity 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 in our ownership and the lack of ability to exercise more than minor influence over the respective investments.

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 assets 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 our ownership interest.

During the three- and six-month periods ended June 30, 2013, transfers out of Level 3 assets primarily related to certain investments in municipal securities, private placement corporate debt, CMBS, CDO/ABS and investments in hedge funds.

•

Transfers of certain investments in municipal securities, CMBS and CDO/ABS out of Level 3 assets were based on consideration of market liquidity as well as related transparency of pricing and associated observable inputs for these investments.

•

Transfers of private placement corporate debt out of Level 3 assets were primarily the result of using observable pricing information that reflects the fair value of those securities without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market.

•

The removal or easing of fund-imposed redemption restrictions resulted in the transfer of certain hedge fund investments out of Level 3 assets.

Transfers of Level 3 Liabilities

There were no significant transfers of derivative or other liabilities into or out of Level 3 for the three- and six-month periods ended June 30, 2013.

We use 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.

Quantitative Information About Level 3 Fair Value Measurements

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 us, 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 us, balances shown below may not equal total amounts reported for such Level 3 assets and liabilities:

(in millions)	Fair Value at June 30, 2013		Valuation Technique	Unobservable Input(a)	Range (Weighted Average)(a)
Assets:
Corporate debt	$	1,090	Discounted cash flow	Yield(b)	4.09% – 10.93% (7.51%)
RMBS		12,119	Discounted cash flow	Constant prepayment rate(c)	0.00% – 9.85% (4.61%)
				Loss severity(c)	42.79% – 76.74% (59.76%)
				Constant default rate(c)	4.23% – 12.92% (8.57%)
				Yield(c)	2.88% – 7.41% (5.14%)
Certain CDO/ABS(d)		5,894	Discounted cash flow	Constant prepayment rate(c)	5.20% – 14.00% (9.40%)
				Loss severity(c)	42.20% – 64.60% (53.50%)
				Constant default rate(c)	3.20% – 15.80% (8.30%)
				Yield(c)	5.60% – 11.70% (9.50%)
Commercial mortgage backed securities		4,328	Discounted cash flow	Yield(b)	0.00% – 17.11% (6.83%)
CDO/ABS — Direct			Binomial Expansion	Recovery rate(b)	4.00% – 63.00% (21.00%)
Investment Book		487	Technique (BET)	Diversity score(b)	5 – 41 (14)
				Weighted average life(b)	1.21 – 10.10 years (5.26 years)
Liabilities:
Policyholder contract deposits — GMWB		586	Discounted cash flow	Equity implied volatility(b)	6.00% – 39.00%
				Base lapse rates(b)	1.00% – 40.00%
				Dynamic lapse rates(b)	0.20% – 60.00%
				Mortality rates(b)	0.50% – 40.00%
				Utilization rates(b)	0.50% – 25.00%
Derivative Liabilities — Credit contracts		1,190	BET	Recovery rates(b)	4.00% – 34.00% (17.00%)
				Diversity score(b)	9 – 37 (14)
				Weighted average life(b)	4.82 – 10.10 years (5.99 years)

(a)  The unobservable inputs and ranges for the constant prepayment rate, loss severity and constant default rate relate to each of the individual underlying mortgage loans that comprise the entire portfolio of securities in the RMBS and CDO securitization vehicles and not necessarily to the securitization vehicle bonds (tranches) purchased by us. The ranges of these inputs do not directly correlate to changes in the fair values of the tranches purchased by us because there are other factors relevant to the specific tranches owned by us including, but not limited to, purchase price, position in the waterfall, senior versus subordinated position and attachment points.

(b)  Represents discount rates, estimates and assumptions that we believe would be used by market participants when valuing these assets and liabilities.

(c)  Information received from independent third-party valuation service providers.

(d)  Yield was the only input available for $285 million of total fair value at June 30, 2013.

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

Sensitivity to Changes in Unobservable Inputs

We consider unobservable inputs to be those for which market data is not available and that are developed using the best information available to us 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. 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

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.

RMBS and Certain CDO/ABS

The significant unobservable inputs used in fair value measurements of RMBS 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.

CMBS

The significant unobservable input used in fair value measurements for CMBS 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.

CDO/ABS — Direct Investment book

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 of the portfolio. An increase in the weighted average life will decrease the fair value.

Policyholder contract deposits

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 implied volatility, base and dynamic lapse rates, mortality rates and utilization rates. Mortality, lapse and utilization rates may vary significantly depending upon age groups and duration. In general, increases in volatility and utilization rates will increase the fair value of the liability associated with GMWB, while increases in lapse rates and mortality rates will decrease the fair value of the liability.

Derivative liabilities — credit contracts

The significant unobservable inputs used for Derivatives liabilities — credit contracts are recovery rates, diversity scores, and the weighted average life of the portfolio. Our non-performance risk is also considered in the measurement of those liabilities. See Note 6 to the Consolidated Financial Statements in the 2012 Annual Report for a discussion of our accounting policies and procedures regarding incorporation of our 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 increase 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 our 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 basis, we use the net asset value per share as a practical expedient to measure fair value.

		June 30, 2013				December 31, 2012
(in millions)	Investment Category Includes	Fair Value Using Net Asset Value Per Share (or its equivalent)		Unfunded Commitments		Fair Value Using Net Asset Value Per Share (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	$	2,671	$	630	$	2,529	$	669
Real Estate / Infrastructure	Investments in real estate properties and infrastructure positions, including power plants and other energy generating facilities		286		40		251		52
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		144		14		157		16
Distressed	Securities of companies that are already in default, under bankruptcy protection, or troubled		191		41		184		36
Other	Includes multi-strategy and mezzanine strategies		126		182		112		100
Total private equity funds			3,418		907		3,233		873
Hedge funds:
Event-driven	Securities of companies undergoing material structural changes, including mergers, acquisitions and other reorganizations		908		2		788		2
Long-short	Securities that the manager believes are undervalued, with corresponding short positions to hedge market risk		1,492		–		1,318		–
Macro	Investments that take long and short positions in financial instruments based on a top-down view of certain economic and capital market conditions		480		–		320		–
Distressed	Securities of companies that are already in default, under bankruptcy protection or troubled		460		20		316		–
Emerging markets	Investments in the financial markets of developing countries		221		–		–		–
Other	Includes multi-strategy and relative value strategies		45		–		66		–
Total hedge funds			3,606		22		2,808		2
Total		$	7,024	$	929	$	6,041	$	875

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, 2013, assuming average original expected lives of 10 years for the funds, 65 percent of the total fair value using net asset value or its equivalent above would have expected remaining lives of less than three years, 33 percent between three and seven years and 2 percent between seven and 10 years.

Under contractual terms, hedge fund investments included above are redeemable monthly (16 percent), quarterly (39 percent), semi-annually (23 percent) and annually (22 percent), with redemption notices ranging from one day to 180 days. At June 30, 2013, however, investments representing approximately 74 percent of the total fair 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, which may have been put in place at a fund's inception or thereafter, have pre-defined end dates and are generally expected to be lifted by the end of 2015. The restrictions that do not have stated end dates were primarily put in place prior to 2009. The partial restrictions relate to certain hedge funds that hold at least one investment that the fund manager deems to be illiquid.

Fair Value Option

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)	2013			2012			2013			2012
Assets:
Mortgage and other loans receivable	$	1		$	9		$	2		$	31
Bonds and equity securities		256			263			632			907
Trading — ML II interest		–			–			–			246
Trading — ML III interest		–			1,306			–			2,558
Retained interest in AIA		–			(493	)		–			1,302
Alternative Investments(a)		122			–			206			–
Other, including Short-term investments		2			9			5			13
Liabilities:
Long-term debt(b)		313			(218	)		322			(664	)
Other liabilities		(2	)		26			(6	)		(22	)
Total gain (loss)(c)	$	692		$	902		$	1,161		$	4,371

(a)  Includes hedge funds, private equity funds, affordable housing partnerships and other investment partnerships.

(b)  Includes GIAs, notes, bonds, loans and mortgages payable.

(c)  Excludes discontinued operations.

*     We are required to carry other instruments such as derivatives, trading securities and certain other invested assets at fair value with changes in fair value recorded through Net income. We recognized gains of $606 million and $605 million for the three-and six-month periods ended June 30, 2013, respectively, and losses of $13 million and gains of $554 million for the three-and six-month periods ended June 30, 2012, respectively, related to these financial instruments.

See Notes 6 and 7 to the Consolidated Financial Statements in the 2012 Annual Report for additional information about AIG's policies for electing the fair value option and for recognizing, measuring, and disclosing interest and dividend income and interest expense.

We recognized gains of $19 million and losses of $15 million during the three- and six-month periods ended June 30, 2013, respectively, and gains of $63 million and losses of $495 million during the three- and six-month periods ended June 30, 2012, respectively, attributable to the observable effect of changes in credit spreads on our own liabilities for which the fair value option was elected. We calculate the effect of these credit spread changes using discounted cash flow techniques that incorporate current market interest rates, our 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 debt for which the fair value option was elected:

	June 30, 2013						December 31, 2012
(in millions)	Fair Value		Outstanding Principal Amount		Difference		Fair Value		Outstanding Principal Amount		Difference
Assets:
Mortgage and other loans receivable	$	59	$	58	$	1	$	134	$	141	$	(7	)
Liabilities:
Long-term debt*	$	7,013	$	5,297	$	1,716	$	8,055	$	5,705	$	2,350

*     Includes GIAs, notes, bonds, loans and mortgages payable.

There were no mortgage or other loans receivable for which the fair value option was elected that were 90 days or more past due or in non-accrual status at June 30, 2013 and December 31, 2012.

FAIR VALUE MEASUREMENTS ON A NON-RECURRING BASIS

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:

	Assets at Fair Value								Impairment Charges
	Non-Recurring Basis								Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	Level 1		Level 2		Level 3		Total		2013		2012		2013		2012
June 30, 2013
Alternative investments	$	–	$	–	$	1,774	$	1,774	$	80	$	83	$	159	$	176
Other assets		–		9		59		68		11		–		24		8
Total	$	–	$	9	$	1,833	$	1,842	$	91	$	83	$	183	$	184
December 31, 2012
Alternative investments	$	–	$	–	$	2,062	$	2,062
Other assets		–		3		18		21
Total	$	–	$	3	$	2,080	$	2,083

FAIR VALUE INFORMATION ABOUT FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE

The following table presents the carrying value and estimated fair value of our financial instruments not measured at fair value and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the observability of the inputs used:

	Estimated Fair Value								Carrying
(in millions)	Level 1		Level 2		Level 3		Total		Value
June 30, 2013
Assets:
Mortgage and other loans receivable	$	–	$	522	$	19,846	$	20,368	$	19,798
Other invested assets		–		63		3,583		3,646		4,862
Short-term investments		–		14,116		–		14,116		14,116
Cash		1,762		–		–		1,762		1,762
Liabilities:
Policyholder contract deposits associated with investment-type contracts		–		157		118,328		118,485		103,391
Other liabilities		–		5,319		752		6,071		6,074
Long-term debt		–		37,385		1,983		39,368		35,601
December 31, 2012
Assets:
Mortgage and other loans receivable	$	–	$	823	$	19,396	$	20,219	$	19,348
Other invested assets		–		237		3,521		3,758		4,932
Short-term investments		–		20,752		–		20,752		20,752
Cash		1,151		–				1,151		1,151
Liabilities:
Policyholder contract deposits associated with investment-type contracts		–		245		123,860		124,105		105,979
Other liabilities		–		3,981		818		4,799		4,800
Long-term debt		–		43,966		1,925		45,891		40,445