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American
International
Group, Inc.
2008 Annual Report

Table of contents

  • Page 1
    American International Group, Inc. 2008 Annual Report

  • Page 2

  • Page 3
    ... exposed AIG's risk concentration in mortgage-backed securities. That concentration, combined with tumbling asset values and dysfunctional credit markets, led to a sudden and severe cash crisis. WHAT HAPPENED? Over the years, AIG built upon its premier global franchises in life and general insurance...

  • Page 4
    ... allow us time to benefit from future improvements in market and industry conditions. Under the new plan, the terms of the U.S. Treasury's preferred stock investment in AIG will be modified to make these preferred securities more closely resemble common equity, improving AIG's capital structure. The...

  • Page 5
    ... its Commercial Insurance Group, Foreign General unit, and other property and casualty operations, to be called AIU Holdings, Inc. The new holding company will have its own board of directors, management team and brand distinct from AIG. The name of the company is derived from American International...

  • Page 6
    ...say confidently that everyone at AIG will work as hard as we can to achieve the best possible outcome for our customers, employees, business partners, shareholders and the American taxpayers. Sincerely, Edward M. Liddy Chairman and Chief Executive Officer March 27, 2009 4 AIG 2008 Annual Report

  • Page 7
    ... Street, New York, New York (Address of principal executive offices) 10270 (Zip Code) Registrant's telephone number, including area code (212) 770-7000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, Par Value...

  • Page 8
    ...Market Risk ...Financial Statements and Supplementary Data ...Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . Controls and Procedures ...Other Information ...PART III Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security...

  • Page 9
    ...Business American International Group, Inc. (AIG), a Delaware corporation, is a holding company which, through its subsidiaries, is engaged in a broad range of insurance and insurance-related activities in the United States and abroad. AIG's primary activities include both General Insurance and Life...

  • Page 10
    ... 12, 2008, AIG's subsidiaries, International Lease Finance Corporation (ILFC) and American General Finance, Inc. (AGF), were unable to replace all of their maturing commercial paper with new issuances of commercial paper. As a result, AIG advanced loans to these subsidiaries to meet their commercial...

  • Page 11
    ...billion of fixed-rate cumulative perpetual serial preferred stock (Series D Preferred Stock) to the United States Department of the Treasury, terminated $62 billion of credit default swaps written by AIGFP and resolved and terminated its U.S. securities lending program. On March 2, 2009, AIG, the NY...

  • Page 12
    ...Financial Services International Lease Finance Corporation (ILFC) AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries American General Finance, Inc. (AGF) AIG Consumer Finance Group, Inc. (AIGCFG) Imperial A.I. Credit Companies (A.I. Credit) Asset Management AIG...

  • Page 13
    ...'s business in the United States and Canada is conducted through American Home, National Union, Lexington, HSB and certain other General Insurance company subsidiaries of AIG. During 2008, Commercial Insurance accounted for 47 percent of AIG's General Insurance net premiums written. Commercial...

  • Page 14
    ..., customs and needs. AIU operates in Asia, the Pacific Rim, Europe, the U.K., Africa, the Middle East and Latin America. During 2008, the Foreign General Insurance group accounted for 32 percent of AIG's General Insurance net premiums written. Discussion and Analysis of Consolidated Net Losses and...

  • Page 15
    American International Group, Inc., and Subsidiaries The liability for unpaid claims and claims adjustment expense (loss reserves) established with respect to foreign business are set and monitored in terms of the currency in which payment is expected to be made. Therefore, no assumption is ...

  • Page 16
    ... claims. See also Management's Discussion and Analysis of Financial Condition and Results of Operations - Operating Review - General Insurance Operations - Liability for unpaid claims and claims adjustment expense. 1998 1999 2000 2001 2002 2003 2004 (In millions) 2005 2006 2007 2008 Net Reserves...

  • Page 17
    ... claims. See also Management's Discussion and Analysis of Financial Condition and Results of Operations - Operating Review - General Insurance Operations - Liability for unpaid claims and claims adjustment expense. 1998 1999 2000 2001 2002 2003 2004 (In millions) 2005 2006 2007 2008 Net Reserves...

  • Page 18
    ...-oriented products throughout the world. Insurance-oriented products consist of individual and group life, payout annuities (including structured settlements), endowment and accident and health policies. Retirement savings products consist generally of fixed and variable annuities. 12 AIG 2008 Form...

  • Page 19
    ... Retirement Services operations comprised 20 percent of total Life Insurance & Retirement Services premiums and other considerations. Reinsurance AIG's General Insurance subsidiaries worldwide operate primarily by underwriting and accepting risks for their direct account and securing reinsurance...

  • Page 20
    ... Credit also contributes to Financial Services results principally by providing insurance premium financing for both AIG's policyholders and those of other insurers. Aircraft Leasing AIG's Aircraft Leasing operations are the operations of ILFC, which generates its revenues primarily from leasing new...

  • Page 21
    ... investment products and services globally to institutional investors, pension funds, AIG subsidiaries, AIG affiliates and high net worth investors. These products include traditional equity and fixed maturity securities, and a wide range of real estate, private banking and alternative asset classes...

  • Page 22
    ... internal controls, corporate initiatives, certain compensation plan expenses and the settlement costs more fully described in Note 14(a) to the Consolidated Financial Statements. Certain AIG subsidiaries provide insurance-related services such as adjusting claims and marketing specialized products...

  • Page 23
    ... policy, deposits of securities for the benefit of policyholders, requirements for acceptability of reinsurers, periodic examinations of the affairs of insurance companies, the form and content of reports of financial condition required to be filed, and reserves for unearned premiums, losses and...

  • Page 24
    American International Group, Inc., and Subsidiaries by several commercial banks in favor of certain AIG Property Casualty Group companies and funded trusts totalling $2.9 billion. Finally, AIG has agreed to contribute capital to the AIG Property Casualty Group companies that hold shares of ...

  • Page 25
    ... AIG in May 2007, Mr. Kaslow was a managing partner of QuanStar Group, LLC (an advisory services firm), and, from January 2002 until May 2004, Mr. Kaslow was Senior Executive Vice President of Human Resources for Vivendi Universal (an entertainment and telecommunications company). AIG 2008 Form...

  • Page 26
    ... - AIG Property Casualty Group Executive Vice President Executive Vice President - Foreign General Insurance Executive Vice President - Retirement Services Senior Vice President - Financial Services Senior Vice President and Chief Human Resources Officer Senior Vice President and Chief Risk Officer...

  • Page 27
    ... The NY Fed's proposed investment in two new holding companies for AIA and ALICO is unprecedented and it is possible that the terms of the exchange may change, perhaps materially. Business and Credit Environment AIG's businesses, results of operations and financial condition have been materially and...

  • Page 28
    ..., 2009, with all outstanding issuances under the program maturing by January 2010. Since mid-September 2008, AIG has had no access to funding in public markets. Certain of AIG's in-force and new business products in its life insurance businesses provide minimum benefit guarantees and crediting rates...

  • Page 29
    ... of the close of business on February 18, 2009, based on AIGFP's outstanding municipal GIAs, secured funding arrangements and financial derivative transactions (including AIGFP's super senior credit default swap portfolio) at that date, a one-notch downgrade of AIG's long-term senior debt ratings to...

  • Page 30
    ... meet AIG's needs. AIG's investments in certain securities, including certain fixed income securities and certain structured securities, direct private equities, limited partnerships, hedge funds, mortgage loans, flight equipment, finance receivables and real estate are illiquid. These asset classes...

  • Page 31
    ...to meet AIG's funding needs and additional financing may not be available or could be prohibitively expensive. Additional collateral calls, continued high surrenders of annuity and other policies, further downgrades in AIG's credit ratings or a further deterioration in AIGFP's remaining super senior...

  • Page 32
    American International Group, Inc., and Subsidiaries • continued declines in AIG asset values and deterioration in its businesses. Further, AIG may be unable to negotiate favorable terms in connection with asset sales, including with respect to price. As a result, AIG may need to modify its asset...

  • Page 33
    ... to prevent any change in control of AIG could also have an adverse effect on the market price of the common stock. The Trust may also, subject to the terms of the Trust Agreement and applicable securities laws, transfer all, or a portion of, the Series C Preferred Stock to another person or entity...

  • Page 34
    ... the credit markets could have on reported claims under D&O or professional liability coverages. For a further discussion of AIG's loss reserves see also Management's Discussion and Analysis of Financial Condition and Results of Operations - Segment Results - General Insurance Operations - Liability...

  • Page 35
    ... terms, in which case AIG would have to accept an increase in exposure risk, reduce the amount of business written by its subsidiaries or seek alternatives. Reinsurance subjects AIG to the credit risk of its reinsurers and may not be adequate to protect AIG against losses. Although reinsurance makes...

  • Page 36
    American International Group, Inc., and Subsidiaries Foreign Operations Foreign operations expose AIG to risks that may affect its operations, liquidity and financial condition. AIG provides insurance, investment and other financial products and services to both businesses and individuals in more ...

  • Page 37
    ... acquisition of new and renewal insurance and annuity contracts. When interest rates rise or customers lose confidence in a company, policy loans and policy surrenders and withdrawals of life insurance policies and annuity contracts may increase as policyholders seek to buy products with perceived...

  • Page 38
    American International Group, Inc., and Subsidiaries Operational risks of asset dispositions. AIG is exposed to various operational risks associated with the dispositions of subsidiaries and the resulting restructuring of AIG at the business and corporate levels. These risks include the ability to ...

  • Page 39
    American International Group, Inc., and Subsidiaries Item 2. Properties AIG and its subsidiaries operate from approximately 2,000 offices in the United States, 41 in Puerto Rico, 8 in Canada and numerous offices in over 100 foreign countries. The offices in Greensboro and Winston-Salem, North ...

  • Page 40
    American International Group, Inc., and Subsidiaries Part II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities AIG's common stock is listed on the New York Stock Exchange, as well as on the stock exchanges in Ireland and Tokyo. ...

  • Page 41
    ...total return of the S&P's 500 stock index (which includes AIG) and a peer group of companies consisting of nine insurance companies to which AIG compares its business and operations: ACE Limited, Aflac Incorporated, The Chubb Corporation, The Hartford Financial Services Group, Inc., Lincoln National...

  • Page 42
    ... 31, 2007 2006(a) 2005(a) (In millions, except per share data) 2004(a) Revenues(b)(c): Premiums and other considerations...$ 83,505 Net investment income ...12,222 Net realized capital gains (losses)...(55,484) Unrealized market valuation losses on AIGFP super senior credit default swap portfolio...

  • Page 43
    ... Financial Statements. (j) Includes borrowings of $6.8 billion, $6.6 billion and $1.7 billion for AIGFP, AIG Funding and ILFC, respectively, under the CPFF at December 31, 2008. See Note 1(ff) to the Consolidated Financial Statements for effects of adopting new accounting standards. AIG 2008 Form...

  • Page 44
    ...Shareholders' Equity ...Investments ...Investment Strategy...Portfolio Review ...Other-than-temporary impairments ...Unrealized gains and losses ...Risk Management ...Overview ...Corporate Risk Management ...Credit Risk Management ...Market Risk Management ...Operational Risk Management ...Insurance...

  • Page 45
    ... customers through an extensive propertycasualty and life insurance and retirement services network. AIG's Financial Services businesses include commercial aircraft and equipment leasing, capital markets operations and consumer finance, both in the United States and abroad. AIG also provides asset...

  • Page 46
    ... for loans of securities owned by AIG's insurance company subsidiaries. The cash was invested by AIG in fixed income securities, primarily residential mortgage-backed securities (RMBS), to earn a spread. During September 2008, borrowers began in increasing numbers to request a return of their...

  • Page 47
    ... 31, 2008, ML III had purchased from counterparties a total of $62.1 billion in par amount of CDO securities, and the associated credit default swaps had been terminated. Approximately $12.2 billion notional amount of AIG Financial Products Corp.'s CDS transactions referencing super senior multi...

  • Page 48
    ...employee benefit plans; • requires AIG and its Board of Directors to work in good faith with the Trust to ensure satisfactory corporate governance arrangements; • requires the following proposals to be presented to AIG's shareholders at AIG's 2009 Annual Meeting of Shareholders: • to amend AIG...

  • Page 49
    ... March 2, 2009, AIG, the NY Fed and the United States Department of the Treasury announced agreements in principle to modify the terms of the Fed Credit Agreement and the Series D Preferred Stock and to provide a $30 billion equity capital commitment facility. The United States Government has issued...

  • Page 50
    ... of AIG's voting securities at the time of such drawdown. The terms of the Series F Preferred Stock will be substantially similar to the Series E Preferred Stock, except that the Series F Preferred Stock will not be subject to a replacement capital covenant or the statement of intent. In connection...

  • Page 51
    ...AIG affiliates had issued $14 billion in commercial paper to the CPFF with the majority of maturities in April of 2009. If AIG's short-term ratings are downgraded, AIG Funding may lose access to the CPFF and would be required to find other sources to fund the maturing commercial paper. AIG 2008 Form...

  • Page 52
    ...a restructuring plan under which AIG's Life Insurance & Retirement Services operations and certain other businesses would be divested in whole or in part. Since that time, AIG has sold certain businesses and assets and has entered into contracts to sell others. However, global market conditions have...

  • Page 53
    ... fixed income and shorter duration asset and liability management for AIG's insurance company subsidiaries. The extraction of these asset management businesses will require the establishment of shared service arrangements between the remaining asset management businesses and those that are sold...

  • Page 54
    ...debt, AIG parent made interest payments totaling $1.5 billion, and made $27.2 billion in net capital contributions to subsidiaries. AIG paid $1.7 billion in dividends to shareholders in 2008, prior to the suspension of dividends in September 2008. AIG parent funds a portion of its short-term working...

  • Page 55
    ... of total fixed income investments at December 31, 2008. Given the size and liquidity profile of AIG's General Insurance investment portfolios, AIG believes that deviations from its projected claim experience do not constitute a significant liquidity risk. AIG's asset/liability management process...

  • Page 56
    .... AIG's asset/liability management process takes into account the expected maturity of investments and expected benefit payments and policy surrenders as well as the specific nature and risk profile of these liabilities. The Life Insurance & Retirement Services subsidiaries have been able to meet...

  • Page 57
    ... of 2008. Since November of 2008, AIGCFG subsidiaries have been able to retain significant deposit balances as a result of the lowered perceived risk, as well as depository insurance support provided by various regulatory authorities in countries in which AIGCFG units operate. AIG 2008 Form 10...

  • Page 58
    ... investments of AIG Global Real Estate and any liquidity mismatches in the SpreadBased Investment business. Requirements related to Institutional Asset Management are funded through general operating cash flows from management and performance fees, proceeds from events in underlying funds (capital...

  • Page 59
    American International Group, Inc., and Subsidiaries Debt Total debt was as follows: At December 31, 2008 2007 (In millions) Debt issued by AIG: Fed Facility (secured) ...Notes and bonds payable ...Junior subordinated debt ...Junior subordinated debt attributable to equity units ...Loans and ...

  • Page 60
    American International Group, Inc., and Subsidiaries At December 31, 2008 2007 (In millions) A.I. Credit(e) ...AIG Investments ...AIG Global Real Estate ...AIG SunAmerica ...ALICO ... ... - 1,300 4,545 5 - 5,850 64,660 613 15,105 177,485 321 1,636 5,096 186 3 7,242 67,881 13,114 - 162,935 $176,049...

  • Page 61
    American International Group, Inc., and Subsidiaries Long-Term Debt A roll forward of long-term debt, excluding debt of consolidated investments is as follows: Balance at December 31, 2007 for the year ended December 31, 2008 Other Maturities Effect of Foreign Non-Cash and Repayments Exchange ...

  • Page 62
    ... long-term debt on the consolidated balance sheet. The Equity Units consist of an ownership interest in AIG junior subordinated debentures and a stock purchase contract obligating the holder of an equity unit to purchase, and obligating AIG to sell, a variable number of shares of AIG common stock on...

  • Page 63
    ... International Group, Inc., and Subsidiaries ILFC has a similarly structured Export Credit Facility for up to a maximum of $3.6 billion for Airbus aircraft to be delivered through May 31, 2009. The facility becomes available as the various European Export Credit Agencies provide their guarantees...

  • Page 64
    ... American General Finance Corporation $ - - - July 2009 Yes 2,125 July 2010 No Total AGF ...$4,575 $ - (a) On October 5, 2008, Lehman Brothers Holdings Inc. (LBHI), the parent company of Lehman Brothers Bank, FSB (LBB), filed for bankruptcy protection. LBB is a lender under AIG's 364-Day...

  • Page 65
    ... payments that AIG could be required to make, depends on market conditions, the fair value of outstanding affected transactions and other factors prevailing at the time of the downgrade. For the impact of a downgrade in AIG's credit ratings, see Item 1A. Risk Factors - Credit Ratings. AIG 2008 Form...

  • Page 66
    ...of AIGFP's credit default swaps require AIGFP to provide credit protection on a designated portfolio of loans or debt securities. At December 31, 2008, the fair value derivative liability was $5.9 billion relating to AIGFP's super senior multi-sector CDO credit default swap portfolio, net of amounts...

  • Page 67
    ... to invest in limited partnerships, private equity, hedge funds and mutual funds and commitments to purchase and develop real estate in the United States and abroad. (d) Includes options to acquire aircraft. Excludes commitments with respect to pension plans. The annual pension contribution for 2009...

  • Page 68
    ...and net realized capital gains (losses). In addition, AIG's liquidity issues have affected certain operations through higher surrender activity, primarily in the U.S. domestic retirement fixed annuity business and foreign investment-oriented and retirement products in Japan and Asia. While surrender...

  • Page 69
    ...on real estate held for investment purposes. Liquidity issues at AIG parent and lower asset performance as a result of challenging market conditions have contributed to the loss of institutional and retail clients, as well as higher redemptions from some of AIG subsidiaries' managed hedge and mutual...

  • Page 70
    ... Increase/(Decrease) 2008 vs. 2007 2007 vs. 2006 Revenues: Premiums and other considerations ...Net investment income ...Net realized capital gains (losses) ...Unrealized market valuation losses on AIGFP super senior credit default swap portfolio ...Other income (loss) ...Total revenues ...Benefits...

  • Page 71
    American International Group, Inc., and Subsidiaries Years Ended December 31, 2008 2007 2006 (In millions, except per share data) Percentage Increase/(Decrease) 2008 vs. 2007 2007 vs. 2006 Current ...Deferred ...Total income tax expense (benefit) ...Income (loss) before minority interest and ...

  • Page 72
    ... in Japan and Asia; • losses related to AIG's economic interest in ML II and investment in ML III of approximately $1.1 billion in 2008; and • the effect of increased levels of short-term investments, for liquidity purposes. 2007 and 2006 Comparison Net investment income increased in 2007...

  • Page 73
    American International Group, Inc., and Subsidiaries Years Ended December 31, 2008 2007 2006 (In millions) Net Realized Capital Gains (Losses) Sales of fixed maturity securities ...Sales of equity securities ...Sales of real estate and other assets ...Other-than-temporary impairments: Severity* ...

  • Page 74
    ... Asset Management revenues reflecting lower carried interest and losses on sales of real estate investments. These decreases were partially offset by increased rental revenues for ILFC, driven by a larger aircraft fleet and higher lease rates. 2007 and 2006 Comparison Other Income increased in 2007...

  • Page 75
    ... in 2007 compared to 2006 primarily due costs associated with realigning certain legal entities through which Foreign General Insurance operates and the increased significance of Foreign General consumer lines business, which have higher acquisition costs. Life Insurance & Retirement Services...

  • Page 76
    ... Financial Statements for additional discussion regarding deferred tax asset realization. 2007 and 2006 Comparison The effective tax rate declined from 30.1 percent in 2006 to 16.3 percent in 2007, primarily due to the unrealized market valuation losses on AIGFP's super senior credit default swap...

  • Page 77
    ... Statements. Years Ended December 31, 2008 2007 2006 (In millions) Percentage Increase/(Decrease) 2008 vs. 2007 2007 vs. 2006 Total Revenues: General Insurance ...Life Insurance & Retirement Services...Financial Services ...Asset Management ...Other ...Consolidation and eliminations ...Total ...Net...

  • Page 78
    ...2008 2007 2006 (In millions, except ratios) Percentage Increase/(Decrease) 2008 vs. 2007 2007 vs. 2006 Net premiums written: AIG Property Casualty Group Commercial Insurance ...$21,099 Transatlantic ...4,108 Personal Lines ...4,514 Mortgage Guaranty...1,123 Foreign General Insurance ...14,390 Total...

  • Page 79
    ... ratios) Percentage Increase/(Decrease) 2008 vs. 2007 2007 vs. 2006 Net premiums earned: AIG Property Casualty Group Commercial Insurance ...$22,351 Transatlantic ...4,067 Personal Lines ...4,679 Mortgage Guaranty...1,038 Foreign General Insurance ...14,087 Total ...$46,222 Net investment income...

  • Page 80
    American International Group, Inc., and Subsidiaries Years Ended December 31, 2008 2007 2006 (In millions, except ratios) Percentage Increase/(Decrease) 2008 vs. 2007 2007 vs. 2006 Foreign General Insurance(a): Loss ratio ...Expense ratio ...Combined ratio ...Consolidated(a): Loss ratio ...Expense ...

  • Page 81
    ...10,412 Operating income (loss) ... $ 328 AIG transacts business in most major foreign currencies. The following table summarizes the effect of changes in foreign currency exchange rates on the growth of General Insurance net premiums written: Years Ended December 31, 2008 2007 Growth in original...

  • Page 82
    ... 2008 and 2007, respectively, accounting for an additional 1.6 point increase in the combined ratio. Commercial Insurance net premiums written declined in 2008 compared to 2007 primarily due to declines in premiums from workers' compensation and other casualty lines. Declines in other casualty lines...

  • Page 83
    ... internal control over certain balance sheet reconciliations that accounted for 2.1 points of the decline. The decline was partially offset by increases in operating expenses for marketing initiatives and operations. Mortgage Guaranty Results 2008 and 2007 Comparison Mortgage Guaranty operating loss...

  • Page 84
    ... of the increase in the loss ratio. Net premiums written increased in 2007 compared to 2006 primarily due to growth in the international markets, accounting for 58 percent of the increase in net premiums written. In addition, the increased use of mortgage insurance for credit enhancement as well...

  • Page 85
    ... 2008 2007 (In millions) Other liability occurrence ...Workers' compensation ...Other liability claims made ...International ...Auto liability ...Property ...Mortgage guaranty/credit...Reinsurance ...Products liability ...Medical malpractice ...Aircraft ...Accident and health ...Commercial multiple...

  • Page 86
    ... investment income. The following table classifies the components of the General Insurance net liability for unpaid claims and claims adjustment expense by business unit: At December 31, 2008 2007 (In millions) Commercial Insurance...Transatlantic ...Personal Lines ...Mortgage Guaranty ...Foreign...

  • Page 87
    ... adverse effect on AIG's consolidated results of operations for an individual reporting period. See Item 1A. Risk Factors - Casualty Insurance and Underwriting Reserves. The following table presents the reconciliation of net loss reserves: 2008 At December 31, 2007 (In millions) 2006 Net liability...

  • Page 88
    ... years (other than accretion of discount): Years Ended December 31, 2008 2007 2006 (In millions) Prior Accident Year Development by Reporting Unit: Commercial Insurance ...Personal Lines ...Mortgage Guaranty ...Foreign General Insurance ... ... $ (24) 65 177 (62) 156 (1) (37) $118 $(390) 7 (25...

  • Page 89
    ... favorable development from business written by Lexington Insurance Company, including healthcare, catastrophic casualty, casualty and program businesses. Financial Services divisions within Commercial Insurance, including D&O and related management liability business, contributed approximately $430...

  • Page 90
    ...excess casualty, workers' compensation, excess workers' compensation, and post-1986 environmental liability classes of business, all within Commercial Insurance, from asbestos reserves within Commercial Insurance and Foreign General Insurance, and from Transatlantic. Net Loss Development by Class of...

  • Page 91
    ... management liability classes of business were adverse in accident years 2002 and prior due to a variety of factors, including an increase in frequency and severity of corporate bankruptcies; the increase in the frequency of financial restatements; the sharp rise in market capitalization of publicly...

  • Page 92
    ... casualty classes. The other group is long-tail casualty classes of business which includes excess and umbrella liability, D&O, professional liability, medical malpractice, workers' compensation, general liability, products liability and related classes. Short-Tail Reserves For operations writing...

  • Page 93
    ...the effect of rate changes and other quantifiable factors on the loss ratio. For low-frequency, highseverity classes such as excess casualty, expected loss ratios generally are used for at least the three most recent accident years. • Loss development factors which are used to project the reported...

  • Page 94
    ..., the loss ratio for current business is changed to reflect the revised assumptions. A comprehensive annual loss reserve review is completed in the fourth quarter of each year for each AIG general insurance subsidiary. These reviews are conducted in full detail for each class of business for each...

  • Page 95
    ... AIG's reserves being applicable to lower frequency, higher severity commercial classes of business where average claim severity is volatile. Excess Casualty: AIG generally uses a combination of loss development methods and expected loss ratio methods for excess casualty classes. Expected loss ratio...

  • Page 96
    ... reported losses and increased reliance on expected loss ratio methods. AIG's actuaries generally do not utilize frequency/severity methods to test reserves for this business, due to significant changes and growth in AIG's general liability and products liability business over the years. 90 AIG 2008...

  • Page 97
    American International Group, Inc., and Subsidiaries Commercial Automobile Liability: AIG generally utilizes loss development methods for all but the most recent accident year for commercial automobile classes of business. Expected loss ratio methods are generally given significant weight only in ...

  • Page 98
    ... from changes in exchange rates over time. In testing the Foreign General Insurance reserves, AIG's actuaries segment the data by region, country or class of business as appropriate to determine an optimal balance between homogeneity and credibility. Loss Adjustment Expenses: AIG determines reserves...

  • Page 99
    ... cost trends from prior accident years since the early 1990s, including the potential effect of recent claims relating to the credit crisis, in AIG's judgment, it is reasonably likely that actual loss cost trends applicable to the year-end 2008 loss reserve review for these classes will range from...

  • Page 100
    ...year-end 2008 loss reserve review. If the loss development factor assumptions were changed by 3.6 percent and 9.4 percent, respectively, the net loss reserves for workers' compensation would decrease or increase by approximately $900 million and $2.4 billion, respectively. For this class of business...

  • Page 101
    American International Group, Inc., and Subsidiaries Asbestos and Environmental Reserves The estimation of loss reserves relating to asbestos and environmental claims on insurance policies written many years ago is subject to greater uncertainty than other types of claims due to inconsistent court ...

  • Page 102
    ... were focused around a report year projection of aggregate losses for both asbestos and environmental reserves. Additional tests such as market share analyses were also performed. Ground-up analyses take into account policyholder-specific and claim-specific information that has been gathered...

  • Page 103
    American International Group, Inc., and Subsidiaries • The increase in the volume of claims by currently unimpaired plaintiffs; • Claims filed under the non-aggregate premises or operations section of general liability policies; • The number of insureds seeking bankruptcy protection and the ...

  • Page 104
    ... - Asbestos and Environmental The following table presents AIG's survival ratios for asbestos and environmental claims at December 31, 2008, 2007 and 2006. The survival ratio is derived by dividing the current carried loss reserve by the average payments for the three most recent calendar years for...

  • Page 105
    ..., personal accident and health products, group products including pension, life and health, and fixed and variable annuities. The Foreign Life Insurance & Retirement Services products are sold through independent producers, career agents, financial institutions and direct marketing channels. AIG...

  • Page 106
    ...Premiums and Other Considerations Net Investment Income Net Realized Capital Gains (Losses) (In millions) Total Revenues Operating Income (Loss)* 2008 Japan and Other ...Asia...Total Foreign Life & Retirement Services ...Domestic Life Insurance ...Domestic Retirement Services ...Total ...2007 Japan...

  • Page 107
    ... Group, Inc., and Subsidiaries Premiums and Other Considerations Net Investment Income Net Realized Capital Gains (Losses) (In millions) Years Ended December 31, Total Revenues Operating Income (Loss)* Percentage Increase/(Decrease) 2007 vs. 2006: Japan and Other ...Asia...Total Foreign Life...

  • Page 108
    ... December 31, Premiums and Other Considerations Net Investment Income Net Realized Capital Gains (Losses) (In millions) Total Revenues Operating Income / (Loss) 2008 Life insurance ...Personal accident ...Group products ...Individual fixed annuities ...Individual variable annuities ...Total ... $17...

  • Page 109
    ... Net Investment Income Net Realized Capital Gains (Losses) (In millions) Operating Income / (Loss) Years Ended December 31, Total Revenues 2007 Life insurance ...Personal accident ...Group products ...Individual fixed annuities ...Individual variable annuities ...Total ...2006 Life insurance...

  • Page 110
    ... claims review in Japan. 2007 and 2006 Comparison Total revenues for Foreign Life Insurance & Retirement Services in 2007 increased compared to 2006, primarily due to higher premiums and other considerations and net investment income partially offset by net realized capital losses. Net investment...

  • Page 111
    ... new variable annuity product. In Japan, individual fixed annuity deposits increased in 2008 compared to 2007 due primarily to a favorable exchange rate environment for non-yen denominated products. However, AIG's liquidity issues and the planned disposition of AIG's Japan life operations negatively...

  • Page 112
    ... 31, Premiums and Other Considerations Net Investment Income Net Realized Capital Gains (Losses) (In millions) Total Revenues Operating Income (Loss)(a) 2008 Life insurance ...Home service ...Group life/health ...Payout annuities(b) ...Individual fixed and runoff annuities ...Total ...2007 Life...

  • Page 113
    ...Net Investment Income Net Realized Capital Gains (Losses) (In millions) Operating Income (Loss)(a) Years Ended December 31, Total Revenues Percentage Increase/(Decrease) 2007 vs. 2006: Life insurance ...Home service ...Group life/health ...Payout annuities ...Individual fixed and runoff annuities...

  • Page 114
    ... new and existing policyholders. Sales of group accident and health insurance represent annualized first year premium from new policies. Annuity sales represent deposits from new and existing policyholders. 2008 and 2007 Comparison Total Domestic Life Insurance sales and deposits increased in 2008...

  • Page 115
    ... 31, Premiums and Other Considerations Net Investment Income Net Realized Capital Gains (Losses) (In millions) Total Revenues Operating Income (Loss)(a) 2008 Group retirement products ...Individual fixed annuities ...Individual variable annuities ...Individual annuities - runoff(b) ...Total ...2007...

  • Page 116
    ... lending program in December 2008. See Investments - Securities Lending Activities. Both group retirement products and individual fixed annuities reported operating losses in 2008 compared to operating income in 2007 primarily as a result of increased net realized capital losses due to higher other...

  • Page 117
    ... improvement in individual fixed annuity deposits was due to a steepened yield curve, providing the opportunity to offer higher interest crediting rates than certificates of deposits and mutual fund money market rates available at the time. Both group retirement products and AIG 2008 Form 10-K 111

  • Page 118
    ... mutual funds of $6.3 billion and $8.2 billion in 2008 and 2007, respectively. Surrender rates increased for group retirement products and individual variable and fixed annuities in 2008 compared to 2007 primarily due to the AIG ratings downgrades and AIG's liquidity issues. 112 AIG 2008 Form...

  • Page 119
    American International Group, Inc., and Subsidiaries Deferred Policy Acquisition Costs and Sales Inducement Assets DAC for Life Insurance & Retirement Services products arises from the deferral of costs that vary with, and are directly related to, the acquisition of new or renewal business. Policy ...

  • Page 120
    American International Group, Inc., and Subsidiaries Years Ended December 31, DAC/VOBA 2008 SIA Total DAC/VOBA (In millions) 2007 SIA Total Domestic Life Insurance Balance at beginning of year ...Acquisition costs deferred ...Amortization (charged) or credited to operating income ...Change in ...

  • Page 121
    ... nature, timing and duration of any potential change in investment strategy implemented for Nan Shan. Financial Services Operations AIG's Financial Services subsidiaries engage in diversified activities including aircraft leasing, capital markets, and consumer finance and insurance premium finance...

  • Page 122
    ... aircraft fleet, higher lease rates and lower composite borrowing rates. 2007 and 2006 Comparison Financial Services reported an operating loss in 2007 compared to operating income in 2006 primarily due to an unrealized market valuation loss of $11.5 billion on AIGFP's super senior credit default...

  • Page 123
    ... revenue recognition between the derivatives and the hedged assets and liabilities. Capital Markets Results 2008 and 2007 Comparison AIGFP's operating loss increased in 2008 compared to 2007 primarily related to its super senior multi-sector CDO credit default swap portfolio and the effect of credit...

  • Page 124
    ... retention awards. 2007 and 2006 Comparison Capital Markets reported an operating loss in 2007 compared to operating income in 2006, primarily due to fourth quarter 2007 unrealized market valuation losses related to AIGFP's super senior credit default swap portfolio principally written on multi...

  • Page 125
    ... Brokerage Services and Mutual Funds businesses. Also included in Asset Management operations are the results of certain SunAmerica sponsored partnership investments. The revenues and operating income (loss) for this segment are affected by the general conditions in the equity and credit markets. In...

  • Page 126
    ...MIP. AIG will retain the businesses that manage the short duration asset and liability management and traditional fixed income investment services for the insurance companies. 2007 and 2006 Comparison Asset Management revenues increased in 2007 compared to 2006 primarily due to increased partnership...

  • Page 127
    ... International Group, Inc., and Subsidiaries Spread-Based Investment Business Results 2008 and 2007 Comparison The Spread-Based Investment business reported increased operating losses in 2008 compared to 2007 due to significantly higher net realized capital losses and lower partnership income. Net...

  • Page 128
    ... effective in hedging interest rate and foreign exchange risk, did not qualify for hedge accounting treatment and an additional $98 million due to credit default swap losses. The mark-to-market losses for 2007 were driven primarily by a decline in short-term interest rates, the decline in the value...

  • Page 129
    ...of AIG's ability to continue as a going concern, liability for general insurance unpaid claims and claims adjustment expenses, future policy benefits for life and accident and health contracts, recoverability of DAC, estimated gross profits for investment-oriented products, the allowance for finance...

  • Page 130
    ... - General Insurance Operations - Liability for Unpaid Claims and Claims Adjustment Expense. Future Policy Benefits for Life and Accident and Health Contracts (Life Insurance & Retirement Services): • Interest rates: which vary by geographical region, year of issuance and products. • Mortality...

  • Page 131
    ...and loss categories to existing finance receivable pools. Flight Equipment Recoverability (Financial Services): • Expected undiscounted future net cash flows: based upon current lease rates, projected future lease rates and estimated terminal values of each aircraft based on expectations of market...

  • Page 132
    ...in estimated fair values of reporting units in the Property and Casualty Group, Domestic Life Insurance and Domestic Retirement Services, Consumer Finance and Capital Markets businesses attributable to the uncertain economic environment during the 2008 fourth quarter. Management observed a narrowing...

  • Page 133
    ...expectation that strategies will be executed in 2009 to mitigate credit losses in the future on certain classes of invested assets, (iii) the carryforward periods for the net operating and capital loss and foreign tax credit carryforwards, (iv) the sources and timing of future taxable income, giving...

  • Page 134
    ... rates, and other market-observable information, as applicable. The valuation models take into account, among other things, market observable information as of the measurement date as well as the specific attributes of the security being valued including its term, interest rate, credit rating...

  • Page 135
    ...the price paid to acquire the asset. Subsequently, they are measured based on net asset value using information provided by the general partner or manager of these investments, the accounts of which generally are audited on an annual basis. AIG considers observable market data and performs diligence...

  • Page 136
    ...super senior credit default swap portfolio, including credit default swaps written on mezzanine tranches of certain regulatory capital relief transactions, by asset class were as follows: Net Notional Amount December 31, 2008(b) 2007(b) Fair Value Of Derivative Liability at December 31, 2008(c) 2007...

  • Page 137
    ... CDS of $2.0 billion and $2.7 billion in net notional amount at December 31, 2008 and 2007, respectively. The changes in the net notional amount of the AIGFP super senior credit default swap portfolio, including credit default swaps written on mezzanine tranches of certain regulatory capital...

  • Page 138
    ... funding source. General Contractual Terms AIGFP entered into CDS transactions in the ordinary course of its business. In the majority of AIGFP's credit derivative transactions, AIGFP sold credit protection on a designated portfolio of loans or debt securities. Generally, AIGFP provides such credit...

  • Page 139
    ... of corporate loans and prime residential mortgages) in net notional exposure of AIGFP's super senior credit default swap portfolio as of December 31, 2008 represented derivatives written for financial institutions, principally in Europe, for the purpose of providing regulatory capital relief...

  • Page 140
    ...in net notional amount with effective termination dates in 2009. The regulatory capital relief CDS transactions require cash settlement and, other than collateral posting, AIGFP is required to make a payment in connection with a regulatory capital relief transaction only if realized credit losses in...

  • Page 141
    American International Group, Inc., and Subsidiaries The following graph presents subordination level from highest to lowest and realized losses as a percent of gross notional amount for each regulatory capital relief super senior CDS transaction written on a diversified portfolio of corporate ...

  • Page 142
    ... in net notional exposure on AIG Financial Products Corp.'s super senior credit default swaps as of December 31, 2008 are arbitrage-motivated transactions written on multi-sector CDOs or designated pools of investment grade senior unsecured corporate debt or CLOs. While certain credit default swaps...

  • Page 143
    ... $2.5 billion to AIG Financial Products Corp. representing the amount by which collateral surrendered as part of the termination of the CDS exceeded the fair value of the CDS as of October 31, 2008. Among the multi-sector CDOs purchased by ML III are certain CDO securities with a net notional amount...

  • Page 144
    ... credit ratings on a stand-alone basis were predominantly A or lower at origination. The net notional amounts of the multi-sector CDOs on which AIGFP wrote protection on the super senior tranche, by settlement alternative, were as follows: December 31, 2008 December 31, 2007 (In millions) CDS...

  • Page 145
    ... that were generally rated investment grade at the inception of the CDS. These CDS transactions require cash settlement (see Triggers and Settlement Alternatives below). This portfolio also includes CDS with a net notional amount of $1.5 billion written on the senior part of the capital structure of...

  • Page 146
    American International Group, Inc., and Subsidiaries Gross Transaction Notional Amount (Dollars in millions) Percent of Total Ratings Baa AAA Aa A Ba ϽBa NR Total Non-United States ...Total ...Subordination ...Net Notional Amount ...Fair Value of Derivative Liability ... 25,505 $62,226 $13,...

  • Page 147
    ... no CDS net notional exposure with respect to CDOs that have experienced over-collateralization events of default at February 18, 2009. • In addition to subordination, cash flow diversion mechanics may provide further protection from losses for holders of the super senior CDO securities. Following...

  • Page 148
    ... Events. Certain of the super senior credit default swaps provide the counterparties with an additional termination right if AIG's rating level falls to BBB or Baa2. At that level, counterparties to the CDS transactions with the following net notional amounts at December 31, 2008, by portfolio, have...

  • Page 149
    American International Group, Inc., and Subsidiaries reasonably estimate the aggregate amount that it would be required to pay under the super senior credit default swaps in the event of any further downgrade. Certain super senior credit default swaps written for regulatory capital relief, with a ...

  • Page 150
    ... or present value of premiums to be earned by AIGFP. The amount of collateral postings by underlying mechanism as described above with respect to the regulatory capital relief portfolio (prior to consideration of transactions other than AIGFP's super senior credit default swap portfolio subject...

  • Page 151
    ... by deterioration in the market value of the reference obligations and the effects of the downgrade of AIG's ratings. The amount of collateral postings with respect to AIGFP's super senior credit default swap portfolio (prior to offsets for other transactions) were as follows: AIG 2008 Form 10-K 145

  • Page 152
    ... values its credit default swaps written on the super senior risk layers of designated pools of debt securities or loans using internal valuation models, third-party price estimates and market indices. The principal market was determined to be the market in which super senior credit default swaps...

  • Page 153
    ...collateral securities market prices instead of using rating-based historical probabilities of default. The BET model has certain limitations. A well known limitation of the BET model is that it can understate the expected losses for super senior tranches when default correlations are high. The model...

  • Page 154
    ... super senior credit default swap portfolio using AIGFP's fair value methodology: At December 31, Net Notional Amount Fair Value Derivative Liability 2008 2007 2008 2007 (In millions) BET model...Third-party price ...Average of BET model and third-party price ...Other ...European RMBS...Total...

  • Page 155
    ...billion in net notional amount of regulatory capital super senior CDS transactions with effective termination dates in 2009. AIGFP has not been required to make any payments as part of these terminations and in certain cases was paid a fee upon termination. AIGFP also considers other market data, to...

  • Page 156
    ..., from the modeled scenarios, and there can be no assurance that the unrealized market valuation loss related to the AIGFP super senior credit default swap portfolio will be consistent with any of the sensitivity analyses. On average for any quarterly period during the past year, prices for CDOs...

  • Page 157
    ... market credit indices and CDS maturity used to estimate the sensitivity for the credit default swap portfolio written on investment-grade corporate debt and the estimated increase (decrease) to fair value of derivative liability at December 31, 2008 corresponding to changes in these market credit...

  • Page 158
    ... Reflects the effects of employee stock transactions and the present value of future contract adjustment payments related to the issuance of Equity Units. Share Repurchases In February 2007, AIG's Board of Directors increased AIG's share repurchase program by authorizing the purchase of shares with...

  • Page 159
    ... 23, 2008, AIG's Board of Directors suspended the declaration of dividends on AIG's common stock. Pursuant to the Fed Credit Agreement, AIG is restricted from paying dividends on its common stock. See Note 15 to the Consolidated Financial Statements. Dividends from Insurance Subsidiaries Payments of...

  • Page 160
    ... of AIG's investments by segment: General Insurance Life Insurance & Retirement Services Financial Services Asset Management Other Total (In millions) At December 31, 2008 Fixed maturity securities: Bonds available for sale, at fair value ...Bond trading securities, at fair value ...Securities...

  • Page 161
    American International Group, Inc., and Subsidiaries Life Insurance & Retirement Services General Insurance Financial Services Asset Management Other Total (In millions) Equity securities: ...Common stocks available for sale, at fair value . Common and preferred stocks trading, at fair value ...

  • Page 162
    ...assets. Fixed maturity securities held by the insurance companies included in the AIG Property Casualty Group historically have consisted primarily of laddered holdings of tax-exempt municipal bonds, which provided attractive after-tax returns and limited credit risk. In light of AIG's net operating...

  • Page 163
    American International Group, Inc., and Subsidiaries Life Insurance & Retirement Services With respect to Life Insurance & Retirement Services, AIG uses asset-liability management as a tool worldwide in the life insurance business to influence the composition of the invested assets and appropriate ...

  • Page 164
    ... securities are purchased and sold as necessary to meet the risk management and business objectives of Capital Markets operations. Asset Management Asset Management invested assets include those supporting AIG's Spread-Based Investment Business, proprietary investments of AIG Global Real Estate...

  • Page 165
    ... funds. The MIP sold credit protection by issuing predominantly singlename investment grade corporate credit default swaps with the intent to earn spread income on credit exposure in an unfunded and leveraged form. AIG Global Real Estate maintains a proprietary investment portfolio of direct real...

  • Page 166
    ... sale corporate debt securities, other than those of AIGFP, were as follows: At December 31, 2008 2007 Financial institutions: Money Center /Global Bank Groups...Regional banks - other ...Life insurance ...Securities firms and other finance companies ...Insurance non-life ...Regional banks - North...

  • Page 167
    ... of AIG's total invested assets. On December 12, 2008, RMBS with an estimated fair value of $20.8 billion were sold to ML II in connection with AIG's termination of the U.S. securities lending program. In addition, AIG's insurance operations held investments with a fair value totaling $6.1 billion...

  • Page 168
    American International Group, Inc., and Subsidiaries the downgrades, $4.9 billion were AAA rated securities. In addition to the downgrades, as of February 19, 2009, the rating agencies had $951 million of RMBS on watch for downgrade. In 2008, AIG collected approximately $7.5 billion of principal ...

  • Page 169
    American International Group, Inc., and Subsidiaries Investments in CMBS The amortized cost of AIG's CMBS investments, other than those of AIGFP, at December 31, 2008, was as follows: Amortized Percent Cost of Total (In millions) CMBS (traditional) ...ReRemic/CRE CDO ...Agency ...Other ... ... $13...

  • Page 170
    ... 44 100% Total ... There have been disruptions in the commercial mortgage markets in general, and the CMBS market in particular, with credit default swaps indices and quoted prices of securities at levels consistent with a severe correction in lease rates, occupancy and fair value of properties. In...

  • Page 171
    ... sponsored entities ...Non-U.S. governments ...Corporate debt ...Mortgage-backed, asset-backed and collateralized ... ...$ 9,594 ...500 ...3,530 ...12,445 37% 2 13 48 100% Total...$26,069 The credit ratings of AIGFP's fixed maturity trading investments, at December 31, 2008, were as follows...

  • Page 172
    ... managed by AIG Investments for the benefit of certain of AIG's insurance companies. Under this program, securities were loaned to various financial institutions, primarily major banks and brokerage firms. Cash collateral was received and was invested in fixed maturity securities to earn a net...

  • Page 173
    ... sale, at each balance sheet date. The decision to sell any such fixed maturity security classified as available for sale reflects the judgment of AIG's management that the security sold is unlikely to provide, on a relative value basis, as attractive a return in the future as alternative securities...

  • Page 174
    American International Group, Inc., and Subsidiaries In addition to the above severity losses, AIG recorded other-than-temporary impairment charges in 2008, 2007 and 2006 related to: • securities that AIG does not intend to hold until recovery; • declines due to foreign exchange rates; • ...

  • Page 175
    American International Group, Inc., and Subsidiaries Other-than-temporary severity-related impairment charges by type of security and credit rating were as follows: Rating: RMBS CDO Financial CMBS Institutions (In millions) Other Securities Total December 31, 2008* Fixed Maturities: AAA ...$ 8,832...

  • Page 176
    ... by which fair value is less than cost at the balance sheet date. (c) For bonds, represents amortized cost. (d) The effect on net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will be charged to participating policyholder accounts, or...

  • Page 177
    ... should not be considered other than temporary. In 2008, unrealized losses related to investment grade bonds increased $10.6 billion ($6.9 billion after tax), reflecting the widening of credit spreads, partially offset by the effects of a decline in risk-free interest rates. AIG 2008 Form 10-K 171

  • Page 178
    ... to severe price declines and reduced liquidity of highly-rated asset-backed securities, including residential mortgage-backed securities and related collateralized debt obligations. Structured finance securities suffered the greatest valuation losses among fixed income asset classes, starting with...

  • Page 179
    ... Risk Governance AIG's major risks are addressed at the corporate level through Enterprise Risk Management (ERM), which is headed by AIG's Chief Risk Officer (CRO). ERM reports to the Chief Executive Officer and is responsible for assisting AIG's business leaders, executive management and Board...

  • Page 180
    ... AIG business unit located outside that country. AIG's credit risks are managed at the corporate level by the Credit Risk Management department (CRM) whose primary role is to support and supplement the work of the businesses and the CRC. CRM is headed by AIG's Chief Credit Officer (CCO), who reports...

  • Page 181
    ...rated. In addition, AIG reviews and manages its industry concentrations. AIG's single largest industry credit exposure is to the global financial institutions sector, comprised of banks, securities firms, life and non-life insurance companies, reinsurance companies, finance companies and government...

  • Page 182
    ... financial guarantor insurance companies, also known as "monoline insurers", which at December 31, 2008, provided AIG over $36 billion (carrying value) in financial support. The monoline insurers, many of which now have non-investment grade credit ratings, provide support predominantly in the United...

  • Page 183
    ... Equity and alternative investment prices. AIG's exposure to equity and alternative investment prices arises from direct investments in common stocks and mutual funds, from minimum benefit guarantees embedded in the structure of certain variable annuity and variable life insurance products and from...

  • Page 184
    American International Group, Inc., and Subsidiaries Insurance, Asset Management and Financial Services (excluding Capital Markets) Sensitivities The following table provides estimates of AIG's sensitivity to a yield curve upward shift, equity losses and foreign currency exchange rate losses at ...

  • Page 185
    ... 2009 and 2008, respectively, in excess of a per occurrence deductible of $1.5 billion. In addition, AIG purchased over $640 million in workers' compensation catastrophe reinsurance that was not purchased in 2008. For Life Insurance & Retirement Services, AIG's 2008 catastrophe program covers losses...

  • Page 186
    American International Group, Inc., and Subsidiaries $200 million for Japan and Taiwan only. No assurance can be given that AIG will be able to obtain this level of coverage in 2009. Reinsurance Recoverable General reinsurance recoverable assets are comprised of: • Balances due from reinsurers ...

  • Page 187
    ... business, product group, country, individual/group, correlation and catastrophic risk events); • compliance with financial reporting and capital and solvency targets; • extensive use of reinsurance, both internal and third-party; and • review and establishment of reserves. AIG closely manages...

  • Page 188
    ... exposures for Commercial Insurance Group, Personal Lines, Foreign General, HSB and 21st Century Insurance (21st Century). Transatlantic utilizes a different model, and its results are presented separately below. Significant Life and accident and health (A&H) exposures have been added to these...

  • Page 189
    American International Group, Inc., and Subsidiaries modeled amounts for these perils. Losses include loss adjustment expenses and the net values include reinstatement premiums. At December 31, 2008 Gross Net of 2009 Reinsurance Net After Income Tax (In millions) % of Consolidated Shareholders' ...

  • Page 190
    ... required to meet the obligations of the expected policy and contract liabilities and the necessary return on investments. AIG businesses manage these risks through product design, exposure limitations and the active management of the asset-liability relationship in their operations. The emergence...

  • Page 191
    ..., the Aircraft Leasing, Capital Markets and Consumer Finance operations generate the majority of the revenues produced by the Financial Services operations. A.I. Credit also contributes to Financial Services income principally by providing insurance premium financing for both AIG's policyholders and...

  • Page 192
    ...operates under established market risk limits based upon this VaR calculation. In addition, AIGFP back-tests its VaR. In the calculation of VaR for AIGFP, AIG uses the historical simulation methodology based on estimated changes to the value of all transactions under explicit changes in market rates...

  • Page 193
    ... of Level 3 Assets and Liabilities for a comprehensive discussion of AIGFP's super senior credit default swap portfolio. Aircraft Leasing AIG's Aircraft Leasing operations represent the operations of ILFC, which generates its revenues primarily from leasing new and used commercial jet aircraft to...

  • Page 194
    American International Group, Inc., and Subsidiaries Consumer Finance AIG's Consumer Finance operations in North America are principally conducted through AGF. AGF derives most of its revenues from finance charges assessed on real estate loans, secured and unsecured non-real estate loans and retail...

  • Page 195
    ...The risks in the Spread-Based Investment business are managed through exposure limitations, active management of the investment portfolios and close oversight of the asset-liability relationship. AIG Global Real Estate is exposed to the general conditions in global real estate markets and the credit...

  • Page 196
    ... of Operations. Item 8. Financial Statements and Supplementary Data American International Group, Inc. and Subsidiaries Index to Financial Statements and Schedules Page Report of Independent Registered Public Accounting Firm...Consolidated Balance Sheet at December 31, 2008 and 2007 ...Consolidated...

  • Page 197
    American International Group, Inc., and Subsidiaries Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of American International Group, Inc.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in ...

  • Page 198
    American International Group, Inc., and Subsidiaries Consolidated Balance Sheet December 31, 2008 2007 (In millions) Assets: Investments: Fixed maturity securities: Bonds available for sale, at fair value (amortized cost: 2008 - $373,600; 2007 - $433,327) ...Bonds held to maturity, at amortized ...

  • Page 199
    ... Group, Inc., and Subsidiaries Consolidated Balance Sheet - (Continued) December 31, 2008 2007 (In millions, except share data) Liabilities: Liability for unpaid claims and claims adjustment expense ...Unearned premiums...Future policy benefits for life and accident and health insurance contracts...

  • Page 200
    ... 2007 2006 (In millions, except per share data) Revenues: Premiums and other considerations ...Net investment income ...Net realized capital gains (losses) ...Unrealized market valuation losses on AIGFP super senior credit default swap portfolio ...Other income (loss)...Total revenues ...Benefits...

  • Page 201
    ... ...Payments advanced ...Shares purchased ...Balance, end of year ...Retained earnings (accumulated deficit): Balance, beginning of year ...Cumulative effect of change in accounting principles, net of tax ...Adjusted balance, beginning of year ...Net income (loss) ...Dividends to common shareholders...

  • Page 202
    American International Group, Inc., and Subsidiaries Consolidated Statement of Shareholders' Equity - (Continued) Years Ended December 31, Amounts 2008 2007 2006 2008 Shares 2007 2006 (In millions, except share and per share data) Foreign currency translation adjustments, net tax: Balance, ...

  • Page 203
    ... of New York credit facility ...Changes in operating assets and liabilities: General and life insurance reserves ...Premiums and insurance balances receivable and payable - net ...Reinsurance assets ...Capitalization of deferred policy acquisition costs ...Investment income due and accrued ...Funds...

  • Page 204
    ... invested assets ...Mortgage and other loans receivable issued ...Finance receivables held for investment - originations and purchases ...Change in securities lending invested collateral ...Net additions to real estate, fixed assets, and other assets ...Net change in short-term investments ...Net...

  • Page 205
    American International Group, Inc., and Subsidiaries Consolidated Statement of Comprehensive Income (Loss) Years Ended December 31, 2008 2007 2006 (In millions) Net income (loss) ...Other comprehensive income (loss): Cumulative effect of change in accounting principles ...Income tax benefit on ...

  • Page 206
    ...and accident and health insurance contracts and Policyholder contract deposits ...Variable Life and Annuity Contracts ...Debt Outstanding ...Commitments, Contingencies and Guarantees ...Shareholders' Equity and Earnings Per Share ...Statutory Financial Data ...Share-based Employee Compensation Plans...

  • Page 207
    ... with AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries' (collectively, AIGFP) credit default swap (CDS) portfolio and other AIGFP transactions and (ii) to fund returns of securities lending collateral placed stress on AIG's liquidity. AIG's stock price...

  • Page 208
    ... plan under which AIG's Life Insurance & Retirement Services operations and certain other businesses would be divested in whole or in part. Since that time, AIG has sold certain businesses and assets and has entered into contracts to sell others. However, global market conditions have 202 AIG 2008...

  • Page 209
    ... fixed income and shorter duration asset and liability management for AIG's insurance company subsidiaries. The extraction of these asset management businesses will require the establishment of shared service arrangements between the remaining asset management businesses and those that are sold...

  • Page 210
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) AIG continually evaluates overall market conditions, performance of businesses that are for sale, and market and business performance of competitors and likely bidders for the assets. This ...

  • Page 211
    ...statement of income (loss). AIG previously reported certain assets and liabilities of its Financial Services subsidiaries separately on its consolidated balance sheet. As of December 31, 2008, AIG has reclassified the balances previously reported in Financial Services - securities available for sale...

  • Page 212
    ...consolidated balance sheet as of December 31, 2007 from unearned premiums to future policy benefits for life and accident and health insurance contracts. These revisions did not have a material effect on AIG's net income (loss), or shareholders' equity for any period presented. See Recent Accounting...

  • Page 213
    ...and losses on flight equipment are recognized when flight equipment is sold and the risk of ownership of the equipment is passed to the new owner. Income from Asset Management operations is generally recognized as revenues as services are performed. Certain costs incurred in the sale of mutual funds...

  • Page 214
    ... held to meet long-term investment objectives and are accounted for as available for sale, carried at fair values and recorded on a trade-date basis. For AIG parent and its insurance subsidiaries, unrealized gains and losses on investments in trading securities are reported in Net investment income...

  • Page 215
    ... future cash flows may change based upon new information regarding the performance of the underlying collateral. (d) Securities Lending Invested Collateral, at Fair Value and Securities Lending Payable: AIG's insurance and asset management operations lend their securities and primarily take cash...

  • Page 216
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) quarter of 2008, in connection with certain securities lending transactions, AIG failed to obtain or maintain collateral sufficient to fund substantially all of the cost of purchasing ...

  • Page 217
    ... 2008, 2007, and 2006, respectively. Also included in Other invested assets are real estate held for investment, aircraft asset investments held by non-Financial Services subsidiaries and investments in life settlement contracts. See Note 5(h) herein for further information. (i) Securities Purchased...

  • Page 218
    ... Assets: Reinsurance assets include the balances due from reinsurance and insurance companies under the terms of AIG's reinsurance agreements for paid and unpaid losses and loss expenses, ceded unearned premiums and ceded future policy benefits for life and accident and health insurance contracts...

  • Page 219
    ... on real estate and other fixed assets was $5.8 billion and $5.4 billion at December 31, 2008 and 2007, respectively. (q) Unrealized Gain and Unrealized Loss on Swaps, Options and Forward Transactions: Interest rate, currency, equity and commodity swaps (including AIGFP's super senior credit default...

  • Page 220
    ... income was $483 million, $395 million and $359 million, for the years ended 2008, 2007 and 2006, respectively. Also during 2008, AIG determined that certain accident and health contracts in its Foreign General Insurance reporting unit, which were previously accounted for as short duration contracts...

  • Page 221
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) (v) Future Policy Benefits for Life and Accident and Health Contracts and Policyholder Contract Deposits: The liability for future policy benefits and policyholder contract deposits are ...

  • Page 222
    ... other comprehensive income (loss), net of any related taxes, in consolidated shareholders' equity. Functional currencies are generally the currencies of the local operating environment. Income statement accounts expressed in functional currencies are translated using average exchange rates during...

  • Page 223
    ...million, net of tax, to the opening balance of retained earnings on the date of adoption. This adoption reflected changes in unamortized DAC, VOBA, deferred sales inducement assets, unearned revenue liabilities and future policy benefits for life and accident and health insurance contracts resulting...

  • Page 224
    ... that give rise to a new basis of accounting for that instrument. AIG adopted FAS 159 on January 1, 2008, its required effective date. The adoption of FAS 159 with respect to elections made in the Life Insurance & Retirement Services segment resulted in an after-tax decrease to 2008 opening retained...

  • Page 225
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) FAS 157 and FAS 159 The following table summarizes the after-tax increase (decrease) from adopting FAS 157 and FAS 159 on the opening shareholders' equity accounts: Accumulated Other ...

  • Page 226
    ... on AIG's consolidated financial condition and results of operations were not material. Future Application of Accounting Standards FAS 141(R) In December 2007, the FASB issued FAS 141 (revised 2007), "Business Combinations" (FAS 141(R)). FAS 141(R) changes the accounting for business combinations in...

  • Page 227
    ... market disruption in the first quarter of 2008, AIGFP established a retention plan for its employees to manage and unwind its complex businesses. Other major activities include the separation of shared services, infrastructure and assets among business units and corporate functions. AIG 2008 Form...

  • Page 228
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) At December 31, 2008, AIG cannot determine the expected date of completion or reliably estimate the total aggregate expenses expected to be incurred for all AIG's restructuring and ...

  • Page 229
    ... United States Life Insurance Company in the City of New York (USLIFE), American General Life and Accident Insurance Company (AGLA and, collectively with AG Life and USLIFE, the Domestic Life Insurance internal reporting unit), AIG Annuity Insurance Company (AIG Annuity), The Variable AIG 2008 Form...

  • Page 230
    .... A.I. Credit also contributes to Financial Services income principally by providing insurance premium financing for both AIG's policyholders and those of other insurers. AIG's Aircraft Leasing operations represent the operations of ILFC, which generates its revenues primarily from leasing new and...

  • Page 231
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) AIG's operations by operating segment were as follows: Operating Segments Life Insurance & General Retirement Financial Asset Insurance Services Services Management Other (In millions) 2008...

  • Page 232
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) AIG's General Insurance operations by major internal reporting unit were as follows: General Insurance Foreign Total Consolidation Total Commercial Personal Mortgage General Reportable and ...

  • Page 233
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) AIG's Life Insurance & Retirement Services operations by major internal reporting unit were as follows: Life Insurance & Retirement Services Foreign Life Insurance & Retirement Services ...

  • Page 234
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) AIG's Financial Services operations by major internal reporting unit were as follows: Financial Services Aircraft Leasing Capital Markets Consumer Finance Other (In millions) Total ...

  • Page 235
    ... insurance operations in Canada of $1.4 billion, $1.3 billion and $1.1 billion in 2008, 2007 and 2006, respectively. Revenues are generally recorded based on the geographic location of the reporting unit. (b) ILFC derives more than 90 percent of its revenue from foreign-operated airlines. AIG 2008...

  • Page 236
    ... AIGFP Life Insurance & Retirement Services Unrealized market valuation losses on AIGFP super senior credit default swap portfolio ...Other income ... 185 1,209 AIGFP Super senior credit default swap portfolio Notes, GIAs, AIGFP derivatives, other liabilities Net pre-tax increase ...Liabilities...

  • Page 237
    ...structured credit products, certain derivative contracts (including AIGFP's super senior credit default swap portfolio), policyholder contract deposits carried at fair value, private equity and real estate fund investments, and direct private equity investments. AIG's non-financial-instrument assets...

  • Page 238
    ... quoted prices in active markets for identical assets at the balance sheet date to measure at fair value fixed maturity securities in its trading and available for sale portfolios. Market price data generally is obtained from exchange or dealer markets. AIG estimates the fair value of fixed maturity...

  • Page 239
    ... price. Subsequently, AIG obtains the fair value of these investments generally from net asset value information provided by the general partner or manager of the investments, the financial statements of which generally are audited annually. AIG considers observable market data and performs...

  • Page 240
    ... discount rates applied to certain projected benefit payments. AIGFP's Super Senior Credit Default Swap Portfolio AIGFP values its credit default swaps written on the super senior risk layers of designated pools of debt securities or loans using internal valuation models, third-party price estimates...

  • Page 241
    ... derive a credit rating for those tranches, and has been widely used ever since. AIGFP has adapted the BET model to estimate the price of the super senior risk layer or tranche of the CDO. AIG modified the BET model to imply default probabilities from market prices for the underlying securities and...

  • Page 242
    ... a market return and the uncertainty inherent in the model inputs. The change in fair value of these policyholder contract deposits is recorded as policyholder benefits and claims incurred in the consolidated statement of income (loss). Spot commodities and Securities and spot commodities sold but...

  • Page 243
    ...Securities purchased under agreements to resell...- 3,960 - Short-term investments ...3,247 16,069 - Separate account assets ...47,902 2,410 830 Other assets ...- 44 325 Total ...$72,901 $499,018 $42,115 Liabilities: Policyholder contract deposits ...$ - Other policyholder funds ...- Securities sold...

  • Page 244
    ... and preferred stocks trading ...Mortgage and other loans receivable ...Other invested assets . . Short-term investments ...Other assets ...Separate account assets ...Total ...Liabilities: Policyholder contract deposits ...Securities sold under agreements to repurchase ...Unrealized loss on swaps...

  • Page 245
    ... invested collateral Other invested assets Policyholder contract deposits • Other income • Unrealized market valuation losses on AIGFP super senior credit default swap portfolio • Net realized capital gains (losses) • Net realized capital gains (losses) • Policyholder benefits and claims...

  • Page 246
    ... 31, 2008, the carrying value of remaining goodwill in the General Insurance, Life Insurance & Retirement Services and Asset Management operating segments totaled $1.3 billion, $4.4 billion and $1.3 billion, respectively. AIG recognized an impairment charge on certain investment real estate and...

  • Page 247
    ...related funding obligations. (b) AIG elected to apply the fair value option to certain single premium variable life products in Japan and an investment-linked life insurance product sold principally in Asia, both classified within policyholder contract deposits in the consolidated balance sheet. AIG...

  • Page 248
    ... ended December 31, 2008, related to AIGFP's super senior credit default swap portfolio. Interest income and expense and dividend income on assets and liabilities elected under the fair value option are recognized and classified in the consolidated statement of income (loss) depending on the nature...

  • Page 249
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) AIG believes market participants would use in determining the price they would pay for such assets. For certain loans, AIG's current incremental lending rates for similar type loans is used...

  • Page 250
    ...) 2007 Fair Value Assets: Fixed maturities ...Equity securities ...Mortgage and other loans receivable ...Finance receivables, net of allowance ...Other invested assets(b) ...Securities purchased under agreements to resell ...Short-term investments ...Cash ...Unrealized gain on swaps, options...

  • Page 251
    ... of net investment income follows: Years Ended December 31, 2008 2007 2006 (In millions) Fixed maturities, including short-term investments...Equity securities...Interest on mortgage and other loans...Partnerships ...Mutual funds ...Trading account losses ...Other investments* ...Total investment...

  • Page 252
    ... unrealized appreciation of AIG's available for sale investments were as follows: Years Ended December 31, 2008 2007 2006 (In millions) Net realized capital gains (losses): Sales of fixed maturities...$ (5,266) Sales of equity securities ...(119) Sales of real estate and other assets ...1,239 Other...

  • Page 253
    ... 2008, 2007 and 2006 related to: • securities that AIG does not intend to hold until recovery; • declines due to foreign exchange rates; • issuer-specific credit events; • certain structured securities impaired under Emerging Issues Task Force Issue No. 99-20, "Recognition of Interest Income...

  • Page 254
    ... primarily of corporate debt, mortgage-backed, asset-backed and collateralized securities. At December 31, 2008, the fair value of these securities was $26.1 billion. At December 31, 2008 and 2007, fixed maturities held by AIG that were below investment grade or not rated totaled $19.4 billion...

  • Page 255
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) The amortized cost and fair values of AIG's available for sale fixed maturity securities, by contractual maturity were as follows. Actual maturities may differ from contractual maturities ...

  • Page 256
    ... Corp. (the AIG Agent), another AIG subsidiary, entered into an Asset Purchase Agreement (the Asset Purchase Agreement) with Maiden Lane II LLC (ML II), a Delaware limited liability company whose sole member is the NY Fed. Pursuant to the Asset Purchase Agreement, the life insurance companies sold...

  • Page 257
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) trading securities, with changes in fair value reported as a component of Net investment income. See Note 4 for further discussion of AIG's fair value methodology. The life insurance ...

  • Page 258
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) (h) Other Invested Assets: Other invested assets were as follows: At December 31, 2008 2007 (In millions) Partnerships(a) ...Mutual funds ...Investment real estate(b) ...Aircraft asset ...

  • Page 259
    ...Total finance receivables ...Allowance for losses ...Finance receivables, net ... Finance receivables held for sale were $960 million and $233 million at December 31, 2008 and 2007, respectively. 7. Reinsurance In the ordinary course of business, AIG's General Insurance and Life Insurance companies...

  • Page 260
    ...: As Net of Reported Reinsurance (In millions) December 31, 2008 Liability for unpaid claims and claims adjustment expense ...$ (89,258) Future policy benefits for life and accident and health insurance contracts ...(142,334) Reserve for unearned premiums ...(25,735) Reinsurance assets* ...22...

  • Page 261
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) General Insurance premiums written and earned were as follows: Years Ended December 31, 2008 2007 2006 (In millions) Premiums written: Direct ...Assumed ...Ceded ...Total ...Premiums ...

  • Page 262
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) rated third-party reinsurers are utilized to manage net amounts at risk in excess of retention limits. AIG's Domestic Life Insurance companies also cede excess, non-economic reserves ...

  • Page 263
    ... for investment, persistency, mortality and morbidity assumptions. The DAC amortization charged to income includes the increase or decrease of amortization for FAS 97-related realized capital gains (losses), primarily in the Domestic Retirement Services business. In 2008, 2007 and 2006, the rate of...

  • Page 264
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) The following table presents AIG's total assets, total liabilities and off-balance sheet exposure associated with its significant variable interests in consolidated VIEs: At December 31, ...

  • Page 265
    ... or limited liability company structure. The VIE's activities consist of the development or redevelopment of commercial and residential real estate. AIG's involvement varies from being a passive equity investor or finance provider to actively managing the activities of the VIE. AIG 2008 Form 10...

  • Page 266
    ... are not material to AIG's consolidated financial statements. Certain AIG insurance companies also invest in these CDOs and CLOs. AIG combines variable interests (e.g. management, performance fees and debt or equity securities) held through its various operating subsidiaries in evaluating the need...

  • Page 267
    ... In 2007, AIGFP sponsored Nightingale Finance LLC, its only structured investment vehicle (SIV), that invests in variable rate, investment-grade debt securities, the majority of which are asset-backed securities. AIGFP has an obligation to support the SIV by purchasing commercial paper or providing...

  • Page 268
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) The fair values of derivative assets and liabilities on the consolidated balances sheet were as follows: At December 31, Derivative Assets Derivative Liabilities 2008 2007 2008 2007 (In ...

  • Page 269
    ... interest rate risk on certain of its interest bearing financial assets and liabilities. In these hedging relationships, AIG hedged its fixed rate available for sale securities and fixed rate borrowings. AIGFP also designated foreign currency forward contracts as fair value hedges for changes in...

  • Page 270
    ... In 2008 and 2007, AIG designated certain AIGFP derivatives as either fair value or cash flow hedges of certain debt issued by AIG, Inc. (including MIP), ILFC and AGF. The fair value hedges included (i) interest rate swaps that were designated as hedges of the change in the fair value of fixed rate...

  • Page 271
    ...super senior credit default swap portfolio, including credit default swaps written on mezzanine tranches of certain regulatory capital relief transactions, by asset class were as follows: Net Notional Amount December 31, 2008(b) 2007(b) Fair Value Of Derivative Liability at December 31, 2008(c) 2007...

  • Page 272
    ...to a single payment by AIGFP in return for physical delivery by the counterparty of the reference security. A total of $234.4 billion (consisting of corporate loans and prime residential mortgages) in net notional exposure of AIGFP's super senior credit default swap portfolio as of December 31, 2008...

  • Page 273
    ... net notional of $1.5 billion written on the senior part of the capital structure of CLOs, which require cash settlement upon the occurrence of a credit event. Certain of the super senior credit default swaps provide the counterparties with an additional termination right if AIG's rating level falls...

  • Page 274
    ... into credit default swap contracts referencing single-name exposures written on corporate, index, and asset-backed credits, with the intention of earning spread income on credit exposure in an unfunded form. Some of these transactions were entered into as part of a long short strategy allowing...

  • Page 275
    ... exposure to loss on the written CDS contracts. However, due to the average investment grade rating and expected default recovery rates, actual losses are expected to be less. AIG Investments, as investment manager for MIP, manages the credit exposure through its corporate credit risk process. Upon...

  • Page 276
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) 11. Liability for unpaid claims and claims adjustment expense and Future policy benefits for life and accident and health insurance contracts and policyholder contract deposits The ...

  • Page 277
    ... 31, 2008 2007 (In millions) Future policy benefits: Long duration contracts ...$141,623 Short duration contracts ...711 Total ...$142,334 Policyholder contract deposits: Annuities...Guaranteed investment contracts ...Universal life products ...Variable products ...Corporate life products ...Other...

  • Page 278
    ... investment units plus any liability for guaranteed minimum death or withdrawal benefits. Certain products are subject to experience adjustments. These include group life and group medical products, credit life contracts, accident and health insurance contracts/riders attached to life policies and...

  • Page 279
    ... 31, 2007 Account value(a) ...$ 66 Amount at risk(b) ...5 Average attained age of contract holders by product ...38 - 69 years Range of guaranteed minimum return rates ...(a) Included in Policyholder contract deposits in the consolidated balance sheet. (b) Represents the amount of death benefit...

  • Page 280
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) • For domestic contracts, the discount rate ranged from 3.25 percent to 11 percent. For foreign contracts, the discount rate ranged from 1.6 percent to seven percent. In addition to GMDB,...

  • Page 281
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) Maturities of long-term debt, excluding borrowings of consolidated investments, are as follows: Total 2009 At December 31, 2008 2010 2011 2012 (In millions) 2013 Thereafter AIG: Fed ...

  • Page 282
    ... to Consolidated Financial Statements - (Continued) (a) Represents structured notes issued AIGFP that are accounted for at fair value. (b) AIG does not guarantee these borrowings. (c) Reflects future minimum payment for ILFC's borrowing under Export Credit Facilities. AIG (Parent Company) (i) Fed...

  • Page 283
    ... long-term debt on the consolidated balance sheet. The Equity Units consist of an ownership interest in AIG junior subordinated debentures and a stock purchase contract obligating the holder of an equity unit to purchase, and obligating AIG to sell, a variable number of shares of AIG common stock on...

  • Page 284
    ...year borrowings depending on the delivery date of the aircraft. The debt is collateralized by a pledge of the shares of a subsidiary of ILFC, which holds title to the aircraft financed under the facility. This facility was guaranteed by various European Export Credit Agencies. 278 AIG 2008 Form 10-K

  • Page 285
    ...'s October 3, 2008 downgrade of ILFC's long-term debt rating to Baa1, ILFC received notice from the security trustees of the facilities to segregate into separate accounts security deposits and maintenance reserves related to aircraft funded under the facility. ILFC had 90 days from the date of the...

  • Page 286
    ... Carried at fair value. (d) On January 21, 2009, S&P downgraded ILFC's short-term credit rating and, as a result, ILFC lost access to the CPFF. At December 31, 2008, AIG did not guarantee the commercial paper of any of its subsidiaries other than AIG Funding. Commercial Paper Funding Facility AIG is...

  • Page 287
    ... reporting period. Litigation Relating to AIGFP's Super Senior Credit Default Swap Portfolio Securities Actions - Southern District of New York. On May 21, 2008, a purported securities fraud class action complaint was filed against AIG and certain of its current and former officers and directors...

  • Page 288
    ... 20, 2007, two purported shareholder derivative actions were filed in the Southern District of New York naming as defendants the then current directors of AIG and certain senior officers of AIG and its subsidiaries. Plaintiffs assert claims for breach of fiduciary duty, waste of corporate assets and...

  • Page 289
    ... benefit. Action by the Starr Foundation - Supreme Court of New York. On May 7, 2008, the Starr Foundation filed a complaint in New York State Supreme Court against AIG, AIG's former Chief Executive Officer, Martin Sullivan, and AIG's then Chief Financial Officer, Steven Bensinger, asserting a claim...

  • Page 290
    ...the SEC, NYAG and DOI in connection with the accounting, financial reporting and insurance brokerage practices of AIG and its subsidiaries, as well as claims relating to the underpayment of certain workers' compensation premium taxes and other assessments. These settlements did not, however, resolve...

  • Page 291
    ...reporting of workers' compensation premiums. In late 2007, the Settlement Review Working Group recommended that a multi-state targeted market conduct examination focusing on workers' compensation insurance be commenced under the direction of the NAIC's Market Analysis Working Group. AIG was informed...

  • Page 292
    ... stay discovery pending the resolution of claims against AIG in the New York consolidated securities action. On April 11, 2008, the shareholder plaintiffs filed the First Amended Combined Complaint, which added claims against former AIG directors and officers Maurice Greenberg, Edward Matthews, and...

  • Page 293
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) former employees of AIG without prejudice for lack of personal jurisdiction. The shareholder plaintiffs have appealed the dismissal of PwC. The motions to dismiss filed by the remaining ...

  • Page 294
    ... 10, 2009. Action Relating to Workers' Compensation Premium Reporting - Minnesota. On February 16, 2006, the Attorney General of the State of Minnesota filed a complaint against AIG with respect to claims by the Minnesota Department of Revenue and the Minnesota Special Compensation Fund, alleging...

  • Page 295
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) and reports to Minnesota agencies and regulators, unlawfully reducing AIG's contributions and payments to Minnesota and certain state funds relating to its workers' compensation premiums. ...

  • Page 296
    ... to purchase 168 new aircraft deliverable from 2009 through 2019 at an estimated aggregate purchase price of $16.7 billion. ILFC will be required to find customers for any aircraft acquired, and it must arrange financing for portions of the purchase price of such equipment. 290 AIG 2008 Form 10...

  • Page 297
    ... to certain conditions, to make any payment that is not promptly paid with respect to the benefits accrued by certain employees of AIG and its subsidiaries under the SICO Plans in (c) below under Benefits Provided by Starr International Company, Inc. and C.V. Starr & Co., Inc. AIG 2008 Form 10-K 291

  • Page 298
    ...and Board of Directors of SICO, a private holding company whose principal asset is AIG common stock, decided that a portion of the capital value of SICO should be used to provide an incentive plan for the current and succeeding managements of all American International companies, including AIG. None...

  • Page 299
    ... pay the deferred compensation under the plan. In December 2008, AIG terminated the plan for current employees and ceased to permit new deferrals into the plan. 15. Shareholders' Equity and Earnings (Loss) Per Share AIG parent depends on its subsidiaries for cash flow in the form of loans, advances...

  • Page 300
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) AIG's common stock price immediately after the terms of the Fed Credit Agreement were publicly announced. Other valuation techniques were employed to corroborate this value, which ...

  • Page 301
    ...and 2006, respectively. Effective September 23, 2008, AIG's Board of Directors suspended the declaration of dividends on AIG's common stock. Pursuant to the Fed Credit Agreement, AIG is restricted from paying dividends on its common stock. In addition, pursuant to the terms of the Series D Preferred...

  • Page 302
    ... 31, 2008 2007 2006 (In millions, except per share data) Numerator for EPS: Income (loss) before cumulative effect of change in accounting principles ...Cumulative effect of change in accounting principles, net of tax...Dividends on Series D Preferred Stock ...Net income (loss) applicable to common...

  • Page 303
    ... 31, 2008, 2007 and 2006, respectively. 16. Statutory Financial Data Statutory surplus and net income (loss) for General Insurance and Life Insurance & Retirement Services operations in accordance with statutory accounting practices were as follows: Years Ended December 31, 2008 2007 2006 (In...

  • Page 304
    ... local country filing basis. (b) Includes realized capital gains and losses and taxes. (c) Includes catastrophe losses, net of tax, of $1.15 billion and $177 million in 2008 and 2007. AIG's insurance subsidiaries file financial statements prepared in accordance with statutory accounting practices...

  • Page 305
    ...May 16, 2007, non-employee directors receive deferred stock units (DSUs) under the 2007 Plan with delivery deferred until retirement from the Board. Effective January 1, 2006, AIG adopted the fair value recognition provisions of FAS 123R for share-based compensation awarded to employees and recorded...

  • Page 306
    ... Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) The following weighted-average assumptions were used for stock options granted: 2008 2007 2006 Expected Expected Risk-free Expected annual dividend yield(a) ...volatility(b) ...interest rate(c) ...term...

  • Page 307
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) Employee Stock Purchase Plan AIG's 1996 Plan provides that eligible employees (those employed at least one year) may receive privileges to purchase up to an aggregate of 10,000,000 shares ...

  • Page 308
    ... applicable payout date. AIG DCPPP The AIG DCPPP provides share-based compensation to key AIG employees, including senior executive officers. The AIG DCPPP contingently allocated a fixed number of time-vested RSUs to each participant if AIG's cumulative adjusted earnings per share in 2005 and 2006...

  • Page 309
    ... under the Additional information with respect to AIG's stock option plans table above. DSUs are reported under Non-Employee Director Stock Awards. For the AIG DCPPP, includes all incremental shares granted or to be granted. The total unrecognized compensation cost (net of expected forfeitures...

  • Page 310
    ... employees under the AIG U.S. retirement plan as a result of federal tax limitations on compensation and benefits payable and the Supplemental Executive Retirement Plan, which provides additional retirement benefits to designated executives. Under the Supplemental Plan, an annual benefit accrues...

  • Page 311
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) Pension As of or for the Year Ended December 31, 2008 Non-U.S. Plans(b) 2008 2007 Postretirement(a) U.S. Plans(c) Non-U.S. Plans U.S. Plans 2008 2007 2008 2007 2008 2007 (In millions) ...

  • Page 312
    ... other comprehensive income for net loss, prior service credit and transition obligation that will be amortized into net periodic benefit cost over the next fiscal year will be less than $2 million in the aggregate. The annual pension expense in 2009 for the AIG U.S. Retirement Plan is expected...

  • Page 313
    ... Financial Statements - (Continued) Assumptions The weighted average assumptions used to determine the benefit obligations are as follows: December 31, 2008 Pension Non-U.S. Plans U.S. Plans Postretirement Non-U.S. Plans U.S. Plans Discount rate ...Rate of compensation increase ...December 31, 2007...

  • Page 314
    ... similarly invested in equity, debt and other investments to maximize the long-term return on assets for a given level of risk. Other investments for both the U.S. and Non-U.S. plans includes cash, insurance contracts, real estate, private equity, related party group annuity 308 AIG 2008 Form 10-K

  • Page 315
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) and hedge funds asset classes. The related party group annuity is with US Life, an AIG affiliate, and totaled approximately $36 million and $38 million at December 31, 2008 and 2007, ...

  • Page 316
    ... Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) AIG of up to seven percent of annual salary depending on the employees' years of service. Pre-tax expense associated with this plan was $124 million, $114 million and $104 million in 2008, 2007 and 2006...

  • Page 317
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) The U.S. federal income tax rate was 35 percent for 2008, 2007 and 2006. Actual tax expense on income loss differs from the statutory amount computed by applying the federal income tax rate...

  • Page 318
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) December 31, 2008 2007 (In millions) Deferred tax liabilities: Deferred policy acquisition costs ...Flight equipment, fixed assets and intangible assets ...Investments in foreign ...

  • Page 319
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) On March 2, 2009, AIG, the NY Fed and the United States Department of the Treasury announced agreements in principle to modify the terms of the Fed Facility and the Series D Preferred Stock...

  • Page 320
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) transactions. AIG has paid the assessed tax plus interest and penalties for 1997 and has filed a claim for refund. On February 26, 2009, AIG filed suit for a refund in the United States ...

  • Page 321
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) Listed below are the tax years that remain subject to examination by major tax jurisdictions: At December 31, 2008 Major Tax Jurisdictions Open Tax Years United States ...France ...Hong ...

  • Page 322
    ... financial statements reflect the results of AIG Life Holdings (US), Inc. (AIGLH), formerly known as American General Corporation, a holding company and a wholly owned subsidiary of AIG. AIG provides a full and unconditional guarantee of all outstanding debt of AIGLH. In addition, AIG Liquidity Corp...

  • Page 323
    ......Loans to subsidiaries(b) ...Cash ...Investment in consolidated subsidiaries(b) ...Debt issuance costs, including prepaid commitment asset of $15,458 in 2008 . . Other assets ...Total assets ...Liabilities: Insurance liabilities...Federal Reserve Bank of New York credit facility ...Other long-term...

  • Page 324
    ... Financial Statements - (Continued) Condensed Consolidating Statement of Income (Loss) American International Group, Inc. As Guarantor Other Subsidiaries (In millions) Consolidated AIG AIGLH Eliminations Year Ended December 31, 2008 Operating income (loss) ...Equity in undistributed net income...

  • Page 325
    ...Statements of Cash Flows American International Group, Inc. As Guarantor Other AIGLH Subsidiaries (In millions) Consolidated AIG Year Ended December 31, 2008 Net cash provided by (used in) operating activities ...Cash flows from investing: Funding to establish Maiden Lane III LLC ...Invested assets...

  • Page 326
    ...in investing activities ...Cash flows from financing activities: Issuance of long-term debt ...Repayments of long-term debt ...Payments advanced to purchase shares ...Cash dividends paid to shareholders ...Other...Net cash provided by (used in) financing activities ...Effect of exchange rate changes...

  • Page 327
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) Supplementary disclosure of cash flow information: Years Ended December 31, 2008 2007 (In millions) Intercompany non-cash financing/investing activities: Settlement of repurchase agreement...

  • Page 328
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) Modification to Series D Preferred Stock On March 2, 2009, AIG and the United States Department of the Treasury announced their agreement in principle to enter into a transaction pursuant ...

  • Page 329
    American International Group, Inc., and Subsidiaries Notes to Consolidated Financial Statements - (Continued) Facility reduction will be based on the proceeds received. The SPVs are expected to be consolidated by AIG. These transfers are subject to agreement on definitive terms and regulatory ...

  • Page 330
    ... reporting. AIG's internal control over financial reporting is a process, under the supervision of AIG's Chief Executive Officer and Chief Financial Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of AIG's financial statements...

  • Page 331
    ...of remediation was reviewed with the Audit Committee who was advised of issues encountered and key decisions reached by AIG management. As of December 31, 2007, AIG did not maintain effective controls over the fair value valuation of the AIGFP super senior credit default swap portfolio and oversight...

  • Page 332
    ...Governance Except for the information provided in Part I under the heading "Directors and Executive Officers of AIG", information required by Item 10 of this Form 10-K is incorporated by reference from the definitive proxy statement for AIG's 2009 Annual Meeting of Shareholders, which will be filed...

  • Page 333
    ...has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on the 2nd of March, 2009. AMERICAN INTERNATIONAL GROUP, INC. By /s/ EDWARD M. LIDDY (Edward M. Liddy, Chairman and Chief Executive Officer) KNOWALL PERSONS BY THESE PRESENTS...

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    American International Group, Inc., and Subsidiaries Signature Title /s/ JAMES F. ORR III (James F. Orr III) Director /s/ VIRGINIA M. ROMETTY (Virginia M. Rometty) /s/ MICHAEL H. SUTTON (Michael H. Sutton) Director Director /s/ EDMUND S.W. TSE (Edmund S.W. Tse) Director 328 AIG 2008 Form ...

  • Page 335
    American International Group, Inc., and Subsidiaries Exhibit 12 Computation of Ratios of Earnings to Fixed Charges 2008 Years Ended December 31, 2007 2006 2005 (In millions, except ratios) 2004 Income (loss) before income taxes, minority interest and cumulative effect of change in accounting ...

  • Page 336
    ... Finance Company, Canada ...AIG Rail Services, Inc...AIG Finance Holdings, Inc...AIG Finance (Hong Kong) Limited ...AIG Global Asset Management Holdings Corp...AIG Asset Management Services, Inc...AIG Capital Partners, Inc...AIG Equity Sales Corp...AIG Global Investment Corp...AIG Global Real Estate...

  • Page 337
    ... Services, Inc...AIG Global Investment (Luxembourg) S.A... Delaware Luxembourg 100 100 AIG Financial Products Corp...AIG Matched Funding Corp...Banque AIG S.A... Delaware Delaware France 100 100 90(7) AIG Funding, Inc... Delaware 100 AIG Global Trade & Political Risk Insurance Company ... New...

  • Page 338
    ... Corporation ...American General Life Companies, LLC ...The Variable Annuity Life Insurance Company ...AIG Retirement Services Company ...American General Property Insurance Company ...American General Property Insurance Company of Florida ...American International Life Assurance Company of New York...

  • Page 339
    ... Commercial Insurance Company of Canada ...AIG Risk Management, Inc...American Home Assurance Company ...AIG General Insurance (Malaysia) Berhad ...AIG Hawaii Insurance Company, Inc...American Pacific Insurance Company, Inc...American International Realty Corp...Pine Street Real Estate Holdings Corp...

  • Page 340
    American International Group, Inc., and Subsidiaries Percentage of Voting Securities held by Immediate Parent(1) As of December 31, 2008 Jurisdiction of Incorporation or Organization Audubon Insurance Company ...Agency Management Corporation ...The Gulf Agency, Inc...Audubon Indemnity Company ......

  • Page 341
    American International Group, Inc., and Subsidiaries Percentage of Voting Securities held by Immediate Parent(1) As of December 31, 2008 Jurisdiction of Incorporation or Organization AIG United Guaranty Re Limited ...United Guaranty Insurance Company ...United Guaranty Mortgage Insurance Company ...

  • Page 342
    American International Group, Inc., and Subsidiaries Percentage of Voting Securities held by Immediate Parent(1) As of December 31, 2008 Jurisdiction of Incorporation or Organization AIG Retirement Services, Inc...SunAmerica Life Insurance Company...AIG SunAmerica Life Assurance Company...AIG ...

  • Page 343
    American International Group, Inc., and Subsidiaries Percentage of Voting Securities held by Immediate Parent(1) As of December 31, 2008 Jurisdiction of Incorporation or Organization AIU Africa Holdings, Inc...AIG Kenya Insurance Company Limited...AIU Insurance Company ...AIG General Insurance ...

  • Page 344
    American International Group, Inc., and Subsidiaries Percentage of Voting Securities held by Immediate Parent(1) As of December 31, 2008 Jurisdiction of Incorporation or Organization American Life Insurance Company ...AIG Life Bulgaria Zhivotozastrahovatelno Druzhestvo AD ...ALICO, S.A...First ...

  • Page 345
    American International Group, Inc., and Subsidiaries (6) Also owned 32.77 percent by National Union Fire Insurance Company of Pittsburgh, Pa. (7) Also owned 10 percent by AIG Matched Funding Corp. (8) Also owned 10 percent by a subsidiary of American Life Insurance Company. (9) Also owned by 11 ...

  • Page 346
    ...of American International Group, Inc. of our report dated March 2, 2009, relating to the financial statements, financial statement schedules, and the effectiveness of internal control over financial reporting, which appears in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP New York...

  • Page 347
    ... information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 2, 2009 /s/ Edward M. Liddy Edward M. Liddy Chairman and Chief Executive Officer AIG 2008 Form...

  • Page 348
    ... fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 2, 2009 /s/ David L. Herzog David L. Herzog Executive Vice President and Chief Financial Officer 342 AIG 2008 Form 10-K

  • Page 349
    ... connection with this Annual Report on Form 10-K of American International Group, Inc. (the "Company") for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward M. Liddy, Chairman and Chief Executive Officer of the Company...

  • Page 350
    ...connection with this Annual Report on Form 10-K of American International Group, Inc. (the "Company") for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David L. Herzog, Executive Vice President and Chief Financial Officer...

  • Page 351
    ..., were filed as exhibits to AIG's Annual Report on Form 10-K and are included herein. NYSE CERTIFICATION American International Group, Inc. 70 Pine Street New York, New York 10270 (212) 770-6293 INVESTOR HELP DESK (212) 770-6580 TRANSFER AGENT AND REGISTRAR The Chief Executive Officer of AIG made...

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    American International Group, Inc. 70 Pine Street New York, NY 10270 www.aig.com