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American International Group 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-31
  4. Ex-32
  5. Ex-32
FORM 10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
     
(Mark One)
   
þ
  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
    For the quarterly period ended March 31, 2007
or
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
    For the transition period from           to
Commission File Number 1-8787
 
American International Group, Inc.
(Exact name of registrant as specified in its charter)
     
Delaware
  13-2592361
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
70 Pine Street, New York, New York   10270
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (212) 770-7000
Former name, former address and former fiscal year, if changed since last report: None
 
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ         No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer    þ Accelerated filer    o Non-accelerated filer    o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    o         No    þ
     As of April 30, 2007, there were 2,594,237,019 shares outstanding of the registrant’s common stock.
 
 


 

TABLE OF CONTENTS
                 
    Page
Description   Number
 
 PART I — FINANCIAL INFORMATION        
     Item 1.       1  
     Item 2.       28  
     Item 3.       70  
     Item 4.       70  
 PART II — OTHER INFORMATION        
     Item 2.       71  
     Item 6.       71  
 SIGNATURES     72  
 EX-12: STATEMENT RE COMPUTATION OF RATIOS
 EX-31: CERTIFICATIONS
 EX-32: CERTIFICATIONS


Table of Contents

American International Group, Inc. and Subsidiaries
Part I – FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
CONSOLIDATED BALANCE SHEET
(in millions) (unaudited)
 
                       
    March 31,   December 31,
    2007   2006
 
Assets:
               
  Investments and financial services assets:                
    Fixed maturities:                
     
Bonds available for sale, at fair value (amortized cost: 2007 – $380,104; 2006 – $377,698) (includes hybrid financial instruments: 2007 – $568; 2006 – $522)
  $ 390,141     $ 387,391  
     
Bonds held to maturity, at amortized cost (fair value: 2007 – $22,066; 2006 – $22,154)
    21,414       21,437  
     
Bond trading securities, at fair value (cost: 2007 – $8,883; 2006 – $9,016)
    8,845       9,037  
    Equity securities:                
     
Common stocks available for sale, at fair value (cost: 2007 – $10,791; 2006 – $10,662)
    14,457       13,262  
     
Common and preferred stocks trading, at fair value (cost: 2007 – $13,742; 2006 – $12,734)
    15,756       14,421  
     
Preferred stocks available for sale, at fair value (cost: 2007 – $2,625; 2006 – $2,485)
    2,703       2,539  
    Mortgage loans on real estate, net of allowance (2007 – $57; 2006 – $55)     18,228       17,067  
    Policy loans     7,521       7,501  
    Collateral and guaranteed loans, net of allowance (2007 – $7; 2006 – $9)     4,840       3,850  
    Financial services assets:                
     
Flight equipment primarily under operating leases, net of accumulated depreciation (2007 – $9,233; 2006 – $8,835)
    41,345       39,875  
     
Securities available for sale, at fair value (cost: 2007 – $46,313; 2006 – $45,912)
    47,643       47,205  
     
Trading securities, at fair value
    5,369       5,031  
     
Spot commodities
    73       220  
     
Unrealized gain on swaps, options and forward transactions
    16,547       19,252  
     
Trade receivables
    3,883       4,317  
     
Securities purchased under agreements to resell, at contract value
    31,775       31,853  
     
Finance receivables, net of allowance (2007 – $707; 2006 – $737) (includes finance receivables held for sale: 2007 – $983; 2006 – $1,124)
    29,508       29,573  
    Securities lending collateral, at fair value (which approximates cost)     74,827       69,306  
    Other invested assets     44,167       42,114  
    Short-term investments, at cost (approximates fair value)     25,866       25,249  
 
      Total investments and financial services assets     804,908       790,500  
  Cash     1,702       1,590  
  Investment income due and accrued     6,170       6,077  
 
Premiums and insurance balances receivable, net of allowance (2007 – $777; 2006 – $756)
    19,731       17,789  
  Reinsurance assets, net of allowance (2007 – $498; 2006 – $536)     23,130       23,355  
  Deferred policy acquisition costs     37,691       37,235  
  Investments in partially owned companies     1,179       1,101  
 
Real estate and other fixed assets, net of accumulated depreciation (2007 – $5,612; 2006 – $5,525)
    4,898       4,381  
  Separate and variable accounts     73,971       72,655  
  Goodwill     8,687       8,628  
  Other assets     17,680       16,103  
 
Total assets
  $ 999,747     $ 979,414  
 
See Accompanying Notes to Consolidated Financial Statements.

1


Table of Contents

American International Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET (continued)
(in millions, except share data) (unaudited)
 
                     
    March 31,   December 31,
    2007   2006
 
Liabilities:
               
 
Reserve for losses and loss expenses
  $ 81,135     $ 79,999  
 
Unearned premiums
    27,135       26,271  
 
Future policy benefits for life and accident and health insurance contracts
    123,806       122,230  
 
Policyholders’ contract deposits
    246,301       246,615  
 
Other policyholders’ funds
    8,476       8,281  
 
Commissions, expenses and taxes payable
    6,053       5,305  
 
Insurance balances payable
    4,537       3,789  
 
Funds held by companies under reinsurance treaties
    2,446       2,602  
 
Income taxes payable
    10,992       9,546  
 
Financial services liabilities:
               
   
Borrowings under obligations of guaranteed investment agreements
    19,771       20,664  
   
Securities sold under agreements to repurchase, at contract value
    17,581       19,677  
   
Trade payables
    7,546       6,174  
   
Hybrid financial instrument liabilities, at fair value
    8,459       8,856  
   
Securities and spot commodities sold but not yet purchased, at market value
    4,056       4,076  
   
Unrealized loss on swaps, options and forward transactions
    9,679       11,401  
   
Trust deposits and deposits due to banks and other depositors
    4,245       5,249  
   
Commercial paper
    9,228       8,208  
   
Notes, bonds, loans and mortgages payable
    91,186       87,602  
 
Commercial paper
    4,149       4,821  
 
Notes, bonds, loans and mortgages payable
    19,185       17,088  
 
Junior subordinated debt
    3,793        
 
Liabilities connected to trust preferred stock
    1,440       1,440  
 
Separate and variable accounts
    73,971       72,655  
 
Securities lending payable
    75,913       70,198  
 
Minority interest
    8,166       7,778  
 
Other liabilities (includes hybrid financial instruments: 2007 – $42; 2006 – $111)
    27,343       27,021  
 
Total liabilities
    896,592       877,546  
 
Preferred shareholders’ equity in subsidiary companies
    100       191  
 
 
Commitments and Contingent Liabilities (See Note 6)
               
Shareholders’ equity:
               
 
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued 2007 and 2006 – 2,751,327,476
    6,878       6,878  
 
Additional paid-in capital
    2,674       2,590  
 
Payments advanced to purchase shares
    (2,851 )      
 
Retained earnings
    88,493       84,996  
 
Accumulated other comprehensive income (loss)
    9,854       9,110  
 
Treasury stock, at cost; 2007 – 151,556,041; 2006 – 150,131,273 shares of common stock
    (1,993 )     (1,897 )
 
Total shareholders’ equity
    103,055       101,677  
 
Total liabilities, preferred shareholders’ equity in subsidiary companies and shareholders’ equity
  $ 999,747     $ 979,414  
 
See Accompanying Notes to Consolidated Financial Statements.

2


Table of Contents

American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
                     
(in millions, except per share data) (unaudited)
 
    Three Months
    Ended March 31,
     
    2007   2006
 
Revenues:
               
 
Premiums and other considerations
  $ 19,642     $ 18,270  
 
Net investment income
    7,124       5,971  
 
Realized capital gains (losses)
    (70 )     169  
 
Other income
    3,949       2,868  
 
 
Total revenues
    30,645       27,278  
 
Benefits and expenses:
               
 
Incurred policy losses and benefits
    16,146       15,089  
 
Insurance acquisition and other operating expenses
    8,327       7,396  
 
 
Total benefits and expenses
    24,473       22,485  
 
Income before income taxes, minority interest and cumulative effect of an accounting change
    6,172       4,793  
 
Income taxes
    1,726       1,435  
 
Income before minority interest and cumulative effect of an accounting change
    4,446       3,358  
 
Minority interest
    (316 )     (197 )
 
Income before cumulative effect of an accounting change
    4,130       3,161  
 
Cumulative effect of an accounting change, net of tax
          34  
 
Net income
  $ 4,130     $ 3,195  
 
Earnings per common share:
               
 
Basic
               
   
Income before cumulative effect of an accounting change
  $ 1.58     $ 1.21  
   
Cumulative effect of an accounting change, net of tax
          0.01  
 
   
Net income
  $ 1.58     $ 1.22  
 
 
Diluted
               
   
Income before cumulative effect of an accounting change
  $ 1.58     $ 1.21  
   
Cumulative effect of an accounting change, net of tax
          0.01  
 
   
Net income
  $ 1.58     $ 1.22  
 
Dividends declared per common share
  $ 0.165     $ 0.150  
 
Average shares outstanding:
               
 
Basic
    2,612       2,605  
 
Diluted
    2,621       2,624  
 
See Accompanying Notes to Consolidated Financial Statements.

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Table of Contents

American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
                     
(in millions) (unaudited)
 
    Three Months
    Ended March 31,
     
    2007   2006
 
Summary:
               
 
Net cash provided by operating activities
  $ 8,633     $ 3,848  
 
Net cash used in investing activities
    (16,863 )     (18,107 )
 
Net cash provided by financing activities
    8,352       13,587  
 
Effect of exchange rate changes on cash
    (10 )     23  
 
 
Change in cash
    112       (649 )
 
Cash at beginning of period
    1,590       1,897  
 
 
Cash at end of period
  $ 1,702     $ 1,248  
 
Cash flows from operating activities:
               
 
Net income
  $ 4,130     $ 3,195  
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
 
Noncash revenues, expenses, gains and losses included in income:
               
   
Net gains on sales of securities available for sale and other assets
    (250 )     (210 )
   
Foreign exchange transaction (gains) losses
    305       214  
   
Net unrealized (gains) losses on non-AIGFP derivative assets and liabilities
    61       (370 )
   
Equity in income of partially owned companies and other invested assets
    (1,329 )     (480 )
   
Amortization of deferred policy acquisition costs
    2,921       2,635  
   
Amortization of premium and discount on securities
    38       390  
   
Depreciation expenses, principally flight equipment
    646       554  
   
Provision for finance receivable losses
    87       160  
   
Impairment losses
    467       226  
 
Changes in operating assets and liabilities:
               
   
General and life insurance reserves
    4,190       4,483  
   
Premiums and insurance balances receivable and payable – net
    (1,192 )     (2,245 )
   
Reinsurance assets
    223       121  
   
Capitalization of deferred policy acquisition costs
    (3,750 )     (4,252 )
   
Investment income due and accrued
    (109 )     (6 )
   
Funds held under reinsurance treaties
    (158 )     21  
   
Other policyholders’ funds
    223       (459 )
   
Income taxes payable
    1,076       744  
   
Commissions, expenses and taxes payable
    661       170  
   
Other assets and liabilities – net
    774       (1,967 )
   
Bonds, common and preferred stocks trading, at fair value
    (1,260 )     (1,596 )
   
Trade receivables and payables – net
    1,805       (168 )
   
Trading securities, at fair value
    (337 )     149  
   
Spot commodities
    147       (138 )
   
Net unrealized (gain) loss on swaps, options and forward transactions
    962       2  
   
Securities purchased under agreements to resell
    78       2,302  
   
Securities sold under agreements to repurchase
    (2,100 )     (1,604 )
   
Securities and spot commodities sold but not yet purchased, at market value
    (20 )     454  
   
Finance receivables held for sale – originations and purchases
    (2,433 )     (2,267 )
   
Sales of finance receivables – held for sale
    2,573       2,671  
   
Other, net
    204       1,119  
 
   
Total adjustments
    4,503       653  
 
Net cash provided by operating activities
  $ 8,633     $ 3,848  
 
See Accompanying Notes to Consolidated Financial Statements.

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Table of Contents

American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
                   
(in millions) (unaudited)
 
    Three Months
    Ended March 31,
     
    2007   2006
 
Cash flows from investing activities:
               
Proceeds from (payments for)
               
    Sales and maturities of fixed maturity securities available for sale
  $ 30,145     $ 27,456  
    Sales of equity securities available for sale
    2,112       3,627  
    Proceeds from fixed maturity securities held to maturity
    18       9  
    Sales of flight equipment
    27       159  
    Sales or distributions of other invested assets
    2,698       2,352  
    Payments received on mortgage, policy, collateral and guaranteed loans
    658       168  
    Principal payments received on finance receivables held for investment
    3,349       3,076  
    Purchases of fixed maturity securities available for sale
    (34,273 )     (34,331 )
    Purchases of equity securities available for sale
    (2,436 )     (4,020 )
    Purchases of fixed maturity securities held to maturity
    (9 )     (16 )
    Purchases of flight equipment
    (1,917 )     (1,897 )
    Purchases of other invested assets
    (4,586 )     (3,320 )
    Acquisitions of new businesses, net of cash acquired
    (584 )      
    Mortgage, policy, collateral and guaranteed loans issued
    (2,326 )     (1,525 )
    Finance receivables held for investment – originations and purchases
    (3,409 )     (3,401 )
    Change in securities lending collateral
    (5,521 )     (3,496 )
    Net additions to real estate, fixed assets, and other assets
    (259 )     (248 )
    Net change in short-term investments
    (588 )     (2,676 )
    Net change in non-AIGFP derivative assets and liabilities
    38       (24 )
 
Net cash used in investing activities
  $ (16,863 )   $ (18,107 )
 
Cash flows from financing activities:
               
Proceeds from (payments for)
               
    Policyholders’ contract deposits
  $ 14,080     $ 13,469  
    Policyholders’ contract withdrawals
    (14,682 )     (10,191 )
    Change in other deposits
    (1,340 )     (427 )
    Change in commercial paper
    279       4,250  
    Notes, bonds, loans and mortgages payable, and hybrid financial instrument liabilities issued
    19,186       9,403  
    Repayments on notes, bonds, loans and mortgages payable, and hybrid financial instrument liabilities
    (14,549 )     (6,835 )
    Issuance of junior subordinated debt
    3,740        
    Issuance of guaranteed investment agreements
    979       3,546  
    Maturities of guaranteed investment agreements
    (1,775 )     (2,846 )
    Change in securities lending payable
    5,716       3,550  
    Issuance of treasury stock
    52       34  
    Payments advanced to purchase shares
    (3,000 )      
    Acquisition of treasury stock
    (16 )     (2 )
    Cash dividends paid to shareholders
    (430 )     (390 )
    Other, net
    112       26  
 
Net cash provided by financing activities
  $ 8,352     $ 13,587  
 
Supplementary disclosure of cash flow information:
               
Cash paid during the period for:
               
    Interest
  $ 1,901     $ 1,263  
    Taxes
  $ 640     $ 460  
Non-cash financing activities:
               
    Interest credited to policyholder accounts
  $ 2,879     $ 2,741  
 
Treasury stock acquired using payments advanced to purchase shares
  $ 149        
Non-cash investing activities:
               
 
Debt assumed on acquisitions
  $ 1,208        
 
See Accompanying Notes to Consolidated Financial Statements.

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Table of Contents

American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
                     
(in millions) (unaudited)
 
    Three Months Ended
    March 31,
     
    2007   2006
 
Net income
  $ 4,130     $ 3,195  
 
Other comprehensive income (loss):
               
 
Unrealized (depreciation) appreciation of investments – net of reclassification adjustments
    1,309       (2,599 )
   
Deferred income tax benefit (expense) on above changes
    (458 )     1,100  
 
Foreign currency translation adjustments
    (165 )     550  
   
Deferred income tax benefit (expense) on above changes
    28       (290 )
 
Net derivative gains arising from cash flow hedging activities – net of reclassification adjustments
    1       4  
   
Deferred income tax expense on above changes
    27       13  
 
Change in pension and postretirement unrecognized periodic benefit (cost)
    3       (3 )
   
Deferred income tax benefit (expense) on above changes
    (1 )     (33 )
 
Other comprehensive income (loss)
    744       (1,258 )
 
Comprehensive income
  $ 4,874     $ 1,937  
 
See Accompanying Notes to Consolidated Financial Statements.

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Table of Contents

American International Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
  1.  Financial Statement Presentation
These unaudited condensed consolidated financial statements do not include certain financial information required by U.S. generally accepted accounting principles (GAAP) for complete financial statements and should be read in conjunction with the audited consolidated financial statements and the related notes included in the Annual Report on Form 10-K of American International Group, Inc. (AIG) for the year ended December 31, 2006 (2006 Annual Report on Form 10-K).
In the opinion of management, these consolidated financial statements contain the normal recurring adjustments necessary for a fair statement of the results presented herein. All material intercompany accounts and transactions have been eliminated.
Certain reclassifications and format changes have been made to prior period amounts to conform to the current period presentation.
  2.  Segment Information
AIG identifies its reportable segments by product line consistent with its management structure. These segments are General Insurance, Life Insurance & Retirement Services, Financial Services and Asset Management.
     In order to better align financial reporting with the manner in which AIG’s chief operating decision makers have managed their businesses, for the three months ended March 31, 2007, AIG realigned certain products among reportable segments and major internal reporting units. AIG also began reporting realized capital gains and losses for the Financial Services and Asset Management segments in the results of these segments. Historically, realized capital gains and losses were included in the Other category. There has been no change in AIG’s management structure or in its reportable segments. All prior period amounts presented in the tables below have been revised to conform to the current year’s presentation of these items.
The following table summarizes the operations by the major operating segments:
                   
    Three Months
    Ended March 31,
Operating Segments    
(in millions)   2007   2006
 
Revenues(a):
               
 
General Insurance(b)
  $ 12,903     $ 11,656  
 
Life Insurance & Retirement Services(c)
    13,682       12,850  
 
Financial Services(d)(e)
    2,201       1,666  
 
Asset Management(f)
    1,908       1,139  
 
Other
    102       90  
 
Consolidation and eliminations
    (151 )     (123 )
 
Consolidated
  $ 30,645     $ 27,278  
 
Operating income (loss)(a)(g):
               
 
General Insurance
  $ 3,096     $ 2,331  
 
Life Insurance & Retirement Services
    2,281       2,630  
 
Financial Services(e)
    292       (108 )
 
Asset Management
    994       449  
 
Other(h)
    (499 )     (509 )
 
Consolidation and eliminations
    8        
 
Consolidated
  $ 6,172     $ 4,793  
 
(a) Includes the effect of hedging activities that did not qualify for hedge accounting treatment under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (FAS 133) or for which hedge accounting was not applied, including the related foreign exchange gains and losses. For the first three months of 2007 and 2006, respectively, the effect was $(452) million and $(212) million in both revenues and operating income. These amounts result primarily from interest rate and foreign currency derivatives that are hedging investments and borrowings.
(b) Represents the sum of General Insurance net premiums earned, net investment income and realized capital gains (losses).
(c) Represents the sum of Life Insurance & Retirement Services premiums and other considerations, net investment income and realized capital gains (losses). Included in realized capital gains (losses) and operating income is the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133, which were $(123) million and $352 million for the first three months of 2007 and 2006, respectively, and the application of Statement of Financial Accounting Standards No. 52 “Foreign Currency Translation” (FAS 52), which were $123 million and $4 million for the first three months of 2007 and 2006, respectively.
(d) Represents interest, lease and finance charges.
(e) Includes the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133 or for which hedge accounting was not applied, including the related foreign exchange gains and losses. For the three months ended March 31, 2007 and 2006, respectively, the effect was $(160) million, and $(619) million in both revenues and operating income. These amounts result primarily from interest rate and foreign currency derivatives that are effective economic hedges of investments and borrowings. In the first quarter of 2007, AIG began applying hedge accounting for certain transactions, primarily in its Capital Markets operations.
(f) Represents net investment income with respect to spread-based products and management and advisory fees.
(g) Represents income before income taxes, minority interest and cumulative effect of an accounting change.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  2.  Segment Information (continued)
(h) Includes AIG parent and other operations which are not required to be reported separately. The following table presents the operating loss for AIG’s Other category:
                   
    Three Months
    Ended March 31,
     
(in millions)   2007   2006
 
Other operating income (loss):
               
 
Equity earnings in unconsolidated entities
  $ 41     $ 19  
 
Interest expense
    (252 )     (183 )
 
Unallocated corporate expenses
    (162 )     (184 )
 
Compensation expense — SICO Plans
    (10 )     (76 )
 
Compensation expense — Starr tender offer
          (54 )
 
Realized capital gains (losses)
    (78 )     (5 )
 
Other miscellaneous, net
    (38 )     (26 )
 
Total Other
  $ (499 )   $ (509 )
 
The following table summarizes AIG’s General Insurance operations by major internal reporting unit:
                   
    Three Months
    Ended March 31,
General Insurance    
(in millions)   2007   2006
 
Revenues:
               
 
Domestic Brokerage Group
  $ 7,091     $ 6,561  
 
Transatlantic
    1,096       1,016  
 
Personal Lines
    1,213       1,215  
 
Mortgage Guaranty
    248       198  
 
Foreign General
    3,262       2,664  
 
Reclassifications and eliminations
    (7 )     2  
 
Total General Insurance
  $ 12,903     $ 11,656  
 
Operating Income*:
               
 
Domestic Brokerage Group
  $ 1,929     $ 1,305  
 
Transatlantic
    151       141  
 
Personal Lines
    106       101  
 
Mortgage Guaranty
    8       109  
 
Foreign General
    909       673  
 
Reclassifications and eliminations
    (7 )     2  
 
Total General Insurance
  $ 3,096     $ 2,331  
 
* Includes additional losses incurred and net reinstatement premiums related to prior year catastrophes of $35 million and $99 million for the three months ended March 31, 2007 and 2006, respectively.
The following table summarizes AIG’s Life Insurance & Retirement Services operations by major internal reporting unit:
                     
    Three Months
    Ended March 31,
Life Insurance & Retirement Services    
(in millions)   2007   2006
 
Revenues:
               
 
Foreign:
               
   
Japan and Other
  $ 4,770     $ 4,264  
   
Asia
    4,491       4,460  
 
Domestic:
               
   
Domestic Life Insurance
    2,521       2,367  
   
Domestic Retirement Services
    1,900       1,759  
 
Total Life Insurance & Retirement Services
  $ 13,682     $ 12,850  
 
Operating Income:
               
 
Foreign:
               
   
Japan and Other
  $ 913     $ 978  
   
Asia
    371       708  
 
Domestic:
               
   
Domestic Life Insurance
    345       366  
   
Domestic Retirement Services
    652       578  
 
Total Life Insurance & Retirement Services
  $ 2,281     $ 2,630  
 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  2.  Segment Information (continued)
The following table summarizes AIG’s Financial Services operations by major internal reporting unit:
                   
    Three Months
    Ended March 31,
Financial Services    
(in millions)   2007   2006
 
Revenues:
               
 
Aircraft Leasing(a)
  $ 1,058     $ 1,012  
 
Capital Markets(b)(c)
    228       (300 )
 
Consumer Finance(d)(e)
    883       925  
 
Other, including intercompany adjustments
    32       29  
 
Total Financial Services
  $ 2,201     $ 1,666  
 
Operating income (loss):
               
 
Aircraft Leasing(a)
  $ 164     $ 176  
 
Capital Markets(b)(c)
    68       (470 )
 
Consumer Finance(d)(e)
    36       176  
 
Other, including intercompany adjustments
    24       10  
 
Total Financial Services
  $ 292     $ (108 )
 
(a)  Revenues are primarily aircraft lease rentals from International Lease Finance Corporation (ILFC). Both revenues and operating income include the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. For the three months ended March 31, 2007 and 2006, the effect was $(37) million and $45 million, respectively. These amounts result primarily from interest rate and foreign currency derivatives that are effective economic hedges of borrowings.
(b)  Revenues, shown net of interest expense of $1.1 billion and $639 million in the first three months of 2007 and 2006, respectively, were primarily from hedged financial positions entered into in connection with counterparty transactions. Both revenues and operating income include the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133 or for which hedge accounting was not applied, including the related foreign exchange gains and losses. For the three months ended March 31, 2007 and 2006, the effect was $(85) million and $(678) million, respectively.
(c)  Certain transactions entered into by AIGFP generate tax credits and benefits which are included in income taxes in the consolidated statement of income. The amounts of such tax credits and benefits for the three months ended March 31, 2007 and 2006 were $17 million and $18 million, respectively.
(d)  Revenues are primarily finance charges. Both revenues and operating income include the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. For the three months ended March 31, 2007 and 2006, the effect was $(36) million and $3 million, respectively. These amounts result primarily from interest rate and foreign currency derivatives that are effective economic hedges of borrowings.
(e)  The three months ended March 31, 2007 includes a pre-tax charge of $128 million ($83 million after tax) in connection with domestic consumer finance’s mortgage banking activities.
  3.  Shareholders’ Equity and Earnings Per Share (EPS)
Earnings Per Share
Basic EPS of AIG is calculated using the weighted average number of common shares outstanding. Diluted EPS is based on those shares used in basic EPS plus shares that would have been outstanding assuming issuance of common shares for all potentially dilutive common shares outstanding.
The following table presents the computation of basic and diluted EPS:
                     
    Three Months
    Ended March 31,
     
(in millions, except per share data)   2007   2006
 
Numerator for basic earnings per share:
               
Income before cumulative effect of an accounting change
  $ 4,130     $ 3,161  
Cumulative effect of an accounting change, net of tax
          34  
 
Net income applicable to common stock for basic EPS
  $ 4,130     $ 3,195  
Interest on contingently convertible bonds, net of tax (a)
          3  
 
Net income applicable to common stock for diluted EPS
  $ 4,130     $ 3,198  
Cumulative effect of an accounting change, net of tax
          (34 )
 
Income before cumulative effect of an accounting change applicable to common stock for diluted EPS
  $ 4,130     $ 3,164  
 
Denominator for earnings per share:
               
 
Weighted-average shares outstanding used in the computation of EPS:
               
   
Common stock issued
    2,751       2,751  
   
Common stock in treasury
    (150 )     (154 )
   
Deferred shares
    11       8  
 
Weighted-average shares outstanding – basic
    2,612       2,605  
Incremental shares from potential common stock:
               
 
Weighted-average number of shares arising from outstanding employee stock plans (treasury stock method) (b)
    9       10  
 
Contingently convertible bonds(a)
          9  
 
Weighted average shares outstanding – diluted(b)
    2,621       2,624  
 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  3.  Shareholders’ Equity and Earnings Per Share (EPS) (continued)
                   
    Three Months
    Ended March 31,
     
(in millions, except per share data)   2007   2006
 
Earnings per share:
               
Basic:
               
 
Income before cumulative effect of an accounting change
  $ 1.58     $ 1.21  
 
Cumulative effect of an accounting change, net of tax
          0.01  
 
Net income
  $ 1.58     $ 1.22  
 
Diluted:
               
 
Income before cumulative effect of an accounting change
  $ 1.58     $ 1.21  
 
Cumulative effect of an accounting change, net of tax
          0.01  
 
Net income
  $ 1.58     $ 1.22  
 
(a)  Assumes conversion of contingently convertible bonds due to the adoption of Emerging Issues Task Force Issue No. 04-8 “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share.”
(b)  Certain shares arising from employee stock plans were not included in the computation of diluted earnings per share where the exercise price of the options exceeded the average market price and would have been antidilutive. The number of shares excluded was 7 million for both the three months ended March 31, 2007 and 2006.
Shareholders’ Equity
     From time to time, AIG may buy shares of its common stock for general corporate purposes, including to satisfy its obligations under various employee benefit plans. At December 31, 2006, an additional 36,542,700 shares could be purchased under the then current authorization by AIG’s Board of Directors. In February 2007, AIG’s Board of Directors increased the repurchase program by authorizing the repurchase of shares with an aggregate purchase price of $8 billion. During March 2007, AIG made open market share repurchases and entered into a $3 billion structured share repurchase arrangement. A total of 2,470,499 shares were repurchased during March 2007. The portion of the payment advanced by AIG under the structured share repurchase arrangement that had not yet been utilized to repurchase shares at March 31, 2007, amounting to $2.85 billion, has been recorded as a component of shareholders’ equity under the caption Payments advanced to purchase shares. Purchases have continued since March 31, 2007, with an additional 6,643,052 shares purchased during April 2007, and purchases are anticipated to occur throughout 2007. All shares repurchased are recorded as treasury stock at cost.
     The quarterly dividend per common share, commencing with the dividend declared in May 2006 and paid on September 15, 2006, was $0.165.
The following table summarizes the changes in retained earnings:
                     
    Three Months
    Ended March 31,
     
(in millions)   2007   2006
 
Retained earnings:
               
 
Balance at beginning of year
  $ 84,996     $ 72,330  
   
Cumulative effect of accounting changes, net of tax
    (203 )     308  
 
Adjusted balance, beginning of year
    84,793       72,638  
   
Net income
    4,130       3,195  
   
Dividends to shareholders
    (430 )     (400 )
 
Balance, end of period
  $ 88,493     $ 75,433  
 
  4.  Benefits Provided by Starr
International Company, Inc.
and C.V. Starr & Co., Inc.
Starr International Company, Inc. (SICO) has provided a series of two-year Deferred Compensation Profit Participation Plans (SICO Plans) to certain AIG employees. The SICO Plans came into being in 1975 when the voting shareholders 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 of the costs of the various benefits provided under the SICO Plans has been paid by AIG, although AIG has recorded a charge to reported earnings for the deferred compensation amounts paid to AIG employees by SICO, with an offsetting amount credited to additional paid-in capital reflecting amounts deemed contributed by SICO. The SICO Plans provide that shares currently owned by SICO are set aside by SICO for the benefit of the participant and distributed upon retirement. The SICO Board of Directors currently

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
may permit an early payout of units under certain circumstances. Prior to payout, the participant is not entitled to vote, dispose of or receive dividends with respect to such shares, and shares are subject to forfeiture under certain conditions, including but not limited to the participant’s voluntary termination of employment with AIG prior to normal retirement age. Under the SICO Plans, SICO’s Board of Directors may elect to pay a participant cash in lieu of shares of AIG common stock. Following notification from SICO to participants in the SICO Plans that it will settle specific future awards under the SICO Plans with shares rather than cash, AIG modified its accounting for the SICO Plans from variable to fixed measurement accounting. AIG gave effect to this change in settlement method beginning on December 9, 2005, the date of SICO’s notice to participants in the SICO Plans. See also Note 6(b) “Commitments” herein.
     In January 2006, C.V. Starr & Co., Inc. (Starr) completed its tender offer to purchase Starr interests from AIG employees. In conjunction with AIG’s adoption of FAS 123R, Starr is considered to be an “economic interest holder” in AIG. As a result, compensation expense of $54 million was included in the first three months of 2006 with respect to the Starr tender offer.
     Compensation expense with respect to the SICO Plans aggregated $10 million and $76 million for the first three months of 2007 and 2006, respectively. Compensation expense in 2006 included various out of period adjustments totaling $61 million, primarily relating to stock splits and other miscellaneous items for the SICO plans.
  5.  Ownership
According to the Schedule 13D filed on March 20, 2007 by Starr, SICO, Edward E. Matthews, Maurice R. Greenberg, the Maurice R. and Corinne P. Greenberg Family Foundation, Inc., the Universal Foundation, Inc., the Maurice R. and Corinne P. Greenberg Joint Tenancy Company, LLC and the C.V. Starr & Co., Inc. Trust, these reporting persons could be deemed to beneficially own 354,987,261 shares of AIG’s common stock at that date. Based on the shares of AIG’s common stock outstanding as of April 30, 2007, this ownership would represent approximately 14 percent of the voting stock of AIG. Although these reporting persons have made filings under Section 16 of the Exchange Act, reporting sales of shares of common stock, no amendment to the Schedule 13D has been filed to report a change in ownership subsequent to March 20, 2007.
  6.  Commitments, Contingencies and Guarantees
In the normal course of business, various commitments and contingent liabilities are entered into by AIG and certain of its subsidiaries. In addition, AIG guarantees various obligations of certain subsidiaries.
(a) Litigation and Investigations
Litigation Arising from Operations. AIG and its subsidiaries, in common with the insurance and financial services industries in general, are subject to litigation, including claims for punitive damages, in the normal course of their business. In AIG’s insurance operations, litigation arising from claims settlement activities is generally considered in the establishment of AIG’s reserve for losses and loss expenses. However, in certain circumstances, AIG provides disclosure because of the size or nature of the potential liability to AIG. The potential for increasing jury awards and settlements makes it difficult to assess the ultimate outcome of such litigation.
     Litigation Arising from Insurance Operations — Caremark. AIG and certain of its subsidiaries have been named defendants in two putative class actions in state court in Alabama that arise out of the 1999 settlement of class and derivative litigation involving Caremark Rx, Inc. (Caremark). The plaintiffs in the second-filed action have intervened in the first-filed action, and the second-filed action has been dismissed. An excess policy issued by a subsidiary of AIG with respect to the 1999 litigation was expressly stated to be without limit of liability. In the current actions, plaintiffs allege that the judge approving the 1999 settlement was misled as to the extent of available insurance coverage and would not have approved the settlement had he known of the existence and/or unlimited nature of the excess policy. They further allege that AIG, its subsidiaries, and Caremark are liable for fraud and suppression for misrepresenting and/or concealing the nature and extent of coverage. In their complaint, plaintiffs request compensatory damages for the 1999 class in the amount of $3.2 billion, plus punitive damages. AIG and its subsidiaries deny the allegations of fraud and suppression and have asserted, inter alia, that information concerning the excess policy was publicly disclosed months prior to the approval of the settlement. AIG and its subsidiaries further assert that the current claims are barred by the statute of limitations and that plaintiffs’ assertions that the statute was tolled cannot stand against the public disclosure of the excess coverage. Plaintiffs, in turn, have asserted that the disclosure was insufficient to inform them of the nature of the coverage and did not start the running of the statute of limitations. The trial court is currently considering, under standards mandated by the Alabama Supreme Court, whether a class action can be certified and whether the defendants in the case brought by the intervenors should be dismissed. AIG cannot reasonably estimate either the likelihood of its prevailing in these actions or the potential damages in the event liability is determined.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  6.  Commitments, Contingencies and Guarantees (continued)
     Litigation Arising from Insurance Operations — Gunderson. A subsidiary of AIG has been named as a defendant in a putative class action lawsuit in the 14th Judicial District Court for the State of Louisiana. The Gunderson complaint alleges failure to comply with certain provisions of the Louisiana Any Willing Provider Act (the Act) relating to discounts taken by defendants on bills submitted by Louisiana medical providers and hospitals that provided treatment or services to workers compensation claimants and seeks monetary penalties and injunctive relief. On July 20, 2006, the court denied defendants’ motion for summary judgment and granted plaintiffs’ partial motion for summary judgment, holding that the AIG subsidiary was a “group purchaser” and, therefore, potentially subject to liability under the Act. On November 28, 2006, the court issued an order certifying a class of providers and hospitals. In an unrelated action also arising under the Act, a Louisiana appellate court ruled that the district court lacked jurisdiction to adjudicate the claims at issue. In response, defendants in Gunderson filed an exception for lack of subject matter jurisdiction. On January 19, 2007, the court denied the motion, holding that it has jurisdiction over the putative class claims. The AIG subsidiary is appealing the class certification ruling and is seeking an appeal from the jurisdictional ruling. While AIG believes that it has meritorious defenses to plaintiffs’ claims, it cannot currently estimate the likelihood of prevailing in this action or reasonably estimate the likely damages, if any.
     2006 Regulatory Settlements. In February 2006, AIG reached a resolution of claims and matters under investigation with the United States Department of Justice (DOJ), SEC, the Office of the New York Attorney General (NYAG) and the New York State Department of Insurance (DOI). AIG recorded an after-tax charge of $1.15 billion relating to these settlements in the fourth quarter of 2005.
     The settlements resolved investigations conducted by 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 investigations by regulators from other states into insurance brokerage practices related to contingent commissions and other broker-related conduct, such as alleged bid rigging. Nor did the settlements resolve any obligations that AIG may have to state guarantee funds in connection with any of these matters.
     As a result of these settlements, AIG made payments or placed amounts in escrow in 2006 totaling approximately $1.64 billion, $225 million of which represented fines and penalties. Amounts held in escrow totaling $380 million, including interest thereon, are included in other assets at March 31, 2007. At that date, approximately $317 million of the funds were escrowed for settlement of claims resulting from the underpayment by AIG of its residual market assessments for workers compensation. The National Workers Compensation Reinsurance Pool on behalf of its participant members and various states have communicated to AIG that they may assert claims with respect to the underpayment of such assessments. In addition, the National Association of Insurance Commissioners has formed a Settlement Review Working Group, which has commenced its own investigation into the underpayment of such assessments, directed by the State of Indiana. AIG cannot currently estimate whether the amount ultimately required to settle these claims will exceed the funds escrowed for this purpose.
     The remaining escrowed funds, which amounted to $63 million at March 31, 2007, are set aside for settlements with certain AIG policyholders specified in the settlements who claimed to have been harmed by AIG’s insurance brokerage practices. During the first three months of 2007, approximately $323 million was paid out from escrow in exchange for releasing AIG and its subsidiaries from any alleged liability relating to such brokerage practices. Any funds remaining at the end of the escrow period will be used to resolve claims asserted by policyholders relating to such insurance brokerage practices, including those described in Private Litigation below.
     In addition to the escrowed funds, $800 million was deposited into a fund under the supervision of the SEC as part of the settlements to be available to resolve claims asserted against AIG by investors including, the shareholder lawsuits described herein.
     At the current time, AIG cannot predict the outcome of the matters described above, or estimate any potential additional cost related to these matters.
     Also, as part of the settlements, AIG has agreed to retain, for a period of three years, an independent consultant who will conduct a review that will include, among other things, the adequacy of AIG’s internal control over financial reporting, the policies, procedures and effectiveness of AIG’s regulatory, compliance and legal functions and the remediation plan that AIG has implemented as a result of its own internal review.
Private Litigation
Securities Actions. Beginning in October 2004, a number of putative securities fraud class action suits were filed against AIG and consolidated as In re American International Group, Inc. Securities Litigation. Subsequently, a separate, though similar, securities fraud action was also brought against AIG by certain Florida pension funds. The lead plain-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  6.  Commitments, Contingencies and Guarantees (continued)
tiff in the class action is a group of public retirement systems and pension funds benefiting Ohio state employees, suing on behalf of themselves and all purchasers of AIG’s publicly traded securities between October 28, 1999 and April 1, 2005. The named defendants are AIG and a number of present and former AIG officers and directors, as well as Starr, SICO, General Reinsurance Corporation, and PricewaterhouseCoopers LLP (PwC), among others. The lead plaintiff alleges, among other things, that AIG: (1) concealed that it engaged in anti-competitive conduct through alleged payment of contingent commissions to brokers and participation in illegal bid-rigging; (2) concealed that it used “income smoothing” products and other techniques to inflate its earnings; (3) concealed that it marketed and sold “income smoothing” insurance products to other companies; and (4) misled investors about the scope of government investigations. In addition, the lead plaintiff alleges that AIG’s former Chief Executive Officer manipulated AIG’s stock price. The lead plaintiff asserts claims for violations of Sections 11 and 15 of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, Section 20(a) of the Exchange Act, and Section 20A of the Exchange Act. In April 2006, the court denied the defendants’ motions to dismiss the second amended class action complaint and the Florida complaint. In December 2006, a third amended class action complaint was filed, which does not differ substantially from the prior complaint. Fact and class discovery is currently ongoing.
     ERISA Action. Between November 30, 2004 and July 1, 2005, several ERISA actions were filed on behalf of purported class of participants and beneficiaries of three pension plans sponsored by AIG or its subsidiaries. A consolidated complaint filed on September 26, 2005 alleges a class period between September 30, 2000 and May 31, 2005 and names as defendants AIG, the members of AIG’s Retirement Board and the Administrative Boards of the plans at issue, and four present or former members of AIG’s Board of Directors. The factual allegations in the complaint are essentially identical to those in the securities actions described above. Plaintiffs allege that defendants violated duties under ERISA by allowing the plans to offer AIG stock as a permitted investment, when defendants allegedly knew it was not a prudent investment, and by failing to provide participants with accurate information about AIG stock. AIG’s motion to dismiss was denied by order dated December 12, 2006. Discovery will be consolidated with proceedings in the securities actions.
     Derivative Actions — Southern District of New York. Between October 25, 2004 and July 14, 2005, seven separate derivative actions were filed in the Southern District of New York, five of which were consolidated into a single action. The New York derivative complaint contains nearly the same types of allegations made in the securities fraud and ERISA actions described above. The named defendants include current and former officers and directors of AIG, as well as Marsh & McLennan Companies, Inc. (Marsh), SICO, Starr, ACE Limited and subsidiaries (ACE), General Reinsurance Corporation, PwC, and certain employees or officers of these entity defendants. Plaintiffs assert claims for breach of fiduciary duty, gross mismanagement, waste of corporate assets, unjust enrichment, insider selling, auditor breach of contract, auditor professional negligence and disgorgement from AIG’s former Chief Executive Officer and Chief Financial Officer of incentive-based compensation and AIG share proceeds under Section 304 of the Sarbanes-Oxley Act, among others. Plaintiffs seek, among other things, compensatory damages, corporate governance reforms, and a voiding of the election of certain AIG directors. AIG’s Board of Directors has appointed a special committee of independent directors (special committee) to review the matters asserted in the operative consolidated derivative complaint. The court has approved an agreement staying the derivative case pending in the Southern District of New York. The current stay extends until July 13, 2007.
     Derivative Actions — Delaware Chancery Court. From October 2004 to April 2005, AIG shareholders filed five derivative complaints in the Delaware Chancery Court. All of these derivative lawsuits have been consolidated into a single action. The amended consolidated complaint names 43 defendants (not including nominal defendant AIG) who, like the New York consolidated derivative litigation, are current and former officers and directors of AIG, as well as other entities and certain of their current and former employees and directors. The factual allegations, legal claims and relief sought in Delaware action are similar to those alleged in the New York derivative actions, except that plaintiffs in the Delaware derivative action assert claims only under state law. The court has approved an agreement that AIG be realigned as plaintiff. AIG has until June 13, 2007 to file an amended complaint, and the special committee has until June 13, 2007 to file a motion to terminate the litigation with respect to certain defendants.
     An additional derivative lawsuit was filed in the Delaware Chancery Court in December 2002 against twenty directors and executives of AIG as well as against AIG as a nominal defendant, alleges, among other things, that the directors of AIG breached the fiduciary duties of loyalty and care by approving the payment of commissions to Starr and of rental and service fees to SICO and the executives breached their duty of loyalty by causing AIG to enter into contracts with Starr and SICO and their fiduciary duties by usurping AIG’s corporate opportunity. The complaint further alleges that the Starr agencies did not provide any services that AIG

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  6.  Commitments, Contingencies and Guarantees (continued)
was not capable of providing itself, and that the diversion of commissions to these entities was solely for the benefit of Starr’s owners. The complaint also alleged that the service fees and rental payments made to SICO and its subsidiaries were improper. Under the terms of a stipulation approved by the Court on February 16, 2006, the claims against the outside independent directors were dismissed with prejudice, while the claims against the other directors were dismissed without prejudice. On October 31, 2005, Messrs. Greenberg, Matthews and Smith, SICO and Starr filed motions to dismiss the amended complaint. In an opinion dated June 21, 2006, the Court denied defendants’ motion to dismiss, except with respect to plaintiff’s challenge to payments made to Starr before January 1, 2000. On July 21, 2006, plaintiff filed its second amended complaint, which alleges that, between January 1, 2000 and May 31, 2005, individual defendants breached their duty of loyalty by causing AIG to enter into contracts with Starr and SICO and breached their fiduciary duties by usurping AIG’s corporate opportunity. Starr is charged with aiding and abetting breaches of fiduciary duty and unjust enrichment for its acceptance of the fees. SICO is no longer named as a defendant. On April 20, 2007, the individual defendants and Starr filed a motion seeking leave of the Court to assert a cross-claim against AIG and a third-party complaint against PwC and the directors previously dismissed from the action, as well as certain other AIG officers and employees. Discovery is currently ongoing.
     Policyholder Actions. After the NYAG filed its complaint against insurance broker Marsh, policyholders brought multiple federal antitrust and Racketeer Influenced and Corrupt Organizations Act (RICO) class actions in jurisdictions across the nation against insurers and brokers, including AIG and a number of its subsidiaries, alleging that the insurers and brokers engaged in a broad conspiracy to allocate customers, steer business, and rig bids. These actions, including 18 complaints filed in different federal courts naming AIG or an AIG subsidiary as a defendant, were consolidated by the judicial panel on multi-district litigation and transferred to the United States District Court for the District of New Jersey for coordinated pretrial proceedings. The consolidated actions have proceeded in that court in two parallel actions, In re Insurance Brokerage Antitrust Litigation (the Commercial Complaint) and In re Employee Benefit Insurance Brokerage Antitrust Litigation (the Employee Benefits Complaint, and together with the Commercial Complaint, the multi-district litigation).
     The plaintiffs in the Commercial Complaint are nineteen corporations, individuals and public entities that contracted with the broker defendants for the provision of insurance brokerage services for a variety of insurance needs. The broker defendants are alleged to have placed insurance coverage on the plaintiffs’ behalf with a number of insurance companies named as defendants, including AIG subsidiaries. The Commercial Complaint also named ten brokers and fourteen other insurers (one of which has since settled) as defendants. The Commercial Complaint alleges that defendants engaged in a widespread conspiracy to allocate customers through “bid-rigging” and “steering” practices. The Commercial Complaint also alleges that the insurer defendants permitted brokers to place business with AIG subsidiaries through wholesale intermediaries affiliated with or owned by those same brokers rather than placing the business with AIG subsidiaries directly. Finally, the Commercial Complaint alleges that the insurer defendants entered into agreements with broker defendants that tied insurance placements to reinsurance placements in order to provide additional compensation to each broker. Plaintiffs assert that the defendants violated the Sherman Antitrust Act, RICO, the antitrust laws of 48 states and the District of Columbia, and are liable under common law breach of fiduciary duty and unjust enrichment theories. Plaintiffs seek treble damages plus interest and attorneys’ fees as a result of the alleged RICO and Sherman Act violations.
     The plaintiffs in the Employee Benefits Complaint are nine individual employees and corporate and municipal employers alleging claims on behalf of two separate nationwide purported classes: an employee class and an employer class that acquired insurance products from the defendants from August 26, 1994 to the date of any class certification. The Employee Benefits Complaint names AIG, as well as eleven brokers and five other insurers, as defendants. The activities alleged in the Employee Benefits Complaint, with certain exceptions, track the allegations of contingent commissions, bid-rigging and tying made in the Commercial Complaint.
     On October 3, 2006, Judge Hochberg of the District of New Jersey reserved in part and denied in part motions filed by the insurer defendants and broker defendants to dismiss the multi-district litigation. The Court also ordered the plaintiffs in both actions to file supplemental statements of particularity to elaborate on the allegations in their complaints. Plaintiffs filed their supplemental statements on October 25, 2006, and the AIG defendants, along with other insurer and broker defendants in the two consolidated actions, filed renewed motions to dismiss on November 30, 2006. On February 16, 2007, the case was transferred to Judge Garrett E. Brown, Chief Judge of the District of New Jersey. On April 5, 2007, Chief Judge Brown granted the defendants’ renewed motions to dismiss the Commercial Complaint and Employee Benefits Complaint with respect to the antitrust and RICO claims. The claims were dismissed without prejudice and the plaintiffs were given 30 days, later extended to 45 days, to file amended complaints. On April 11, 2007, the Court stayed all proceedings, including all discovery, that are part of the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  6.  Commitments, Contingencies and Guarantees (continued)
multi-district litigation until any renewed motions to dismiss the amended complaints are resolved.
     A number of complaints making allegations similar to those in the Commercial Complaint have been filed against AIG and other defendants in state and federal courts around the country. The defendants have thus far been successful in having the federal actions transferred to the District of New Jersey and consolidated into the multi-district litigation. The AIG defendants have also sought to have state court actions making similar allegations stayed pending resolution of the multi-district litigation proceeding. In one state court action pending in Florida, the trial court recently decided not to grant an additional stay, but instead to allow the case to proceed.
     Litigation Relating to 21st Century. Shortly after the announcement in late January 2007 of AIG’s offer to acquire the outstanding shares of 21st Century not already owned by AIG and its subsidiaries, two related class actions were filed in the Superior Court of California, Los Angeles County, against AIG, 21st Century, and the individual members of 21st Century’s Board of Directors, two of whom are current executive officers of AIG. The actions were filed purportedly on behalf of the minority shareholders of 21st Century and assert breaches of fiduciary duty in connection with the AIG proposal. The complaints allege that the proposed per share price is unfair and seek preliminary and permanent injunctive relief to enjoin the consummation of the proposed transaction.
     SICO. In July, 2005, SICO filed a complaint against AIG in the Southern District of New York, claiming that AIG had refused to provide SICO access to certain artwork and asked the court to order AIG immediately to release the property to SICO. AIG filed an answer denying SICO’s allegations and setting forth defenses to SICO’s claims. In addition, AIG filed counterclaims asserting breach of contract, unjust enrichment, conversion, breach of fiduciary duty, a constructive trust and declaratory judgment, relating to SICO’s breach of its commitment to use its AIG shares only for the benefit of AIG and AIG employees. Fact and expert discovery has been substantially concluded and briefing on SICO’s motion for summary judgment is underway.
     Regulatory Investigations. Regulators from several states have commenced investigations into insurance brokerage practices related to contingent commissions and other industry-wide practices as well as other broker-related conduct, such as alleged bid-rigging. In addition, various federal and state regulatory agencies are reviewing certain transactions and practices of AIG and its subsidiaries in connection with industry-wide and other inquiries. AIG has cooperated, and will continue to cooperate, in producing documents and other information in response to subpoenas and other requests.
     Wells Notices. AIG understands that some of its employees have received Wells notices in connection with previously disclosed SEC investigations of certain of AIG’s transactions or accounting practices. Under SEC procedures, a Wells notice is an indication that the SEC staff has made a preliminary decision to recommend enforcement action that provides recipients with an opportunity to respond to the SEC staff before a formal recommendation is finalized. It is possible that additional current and former employees could receive similar notices in the future as the regulatory investigations proceed.
Effect on AIG
In the opinion of AIG management, AIG’s ultimate liability for the unresolved litigation and investigation matters referred to above is not likely to have a material adverse effect on AIG’s consolidated financial condition, although it is possible that the effect would be material to AIG’s consolidated results of operations for an individual reporting period.
(b) Commitments
Flight Equipment
At March 31, 2007, ILFC had committed to purchase 224 new aircraft deliverable from 2007 through 2015 at an estimated aggregate purchase price of $17.2 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.
Other Commitments
On June 27, 2005, AIG entered into an agreement pursuant to which AIG agrees, subject 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 (as discussed in Note 4 herein).
(c) Contingencies
Loss Reserves
Although AIG regularly reviews the adequacy of the established reserve for losses and loss expenses, there can be no assurance that AIG’s ultimate loss reserves will not develop adversely and materially exceed AIG’s current loss reserves. Estimation of ultimate net losses, loss expenses and loss reserves is a complex process for long-tail casualty lines of business, which include excess and umbrella liability, directors and officers liability (D&O), professional liability, medical malpractice, workers compensation, general liability, products liability and related classes, as well as for asbestos

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  6.  Commitments, Contingencies and Guarantees (continued)
and environmental exposures. Generally, actual historical loss development factors are used to project future loss development. However, there can be no assurance that future loss development patterns will be the same as in the past. Moreover, any deviation in loss cost trends or in loss development factors might not be discernible for an extended period of time subsequent to the recording of the initial loss reserve estimates for any accident year. Thus, there is the potential for reserves with respect to a number of years to be significantly affected by changes in loss cost trends or loss development factors that were relied upon in setting the reserves. These changes in loss cost trends or loss development factors could be attributable to changes in inflation, in labor and material costs or in the judicial environment, or in other social or economic phenomena affecting claims.
     Synthetic Fuel Tax Credits. AIG generates income tax credits as a result of investing in synthetic fuel production. Tax credits generated from the production and sale of synthetic fuel under the Internal Revenue Code are subject to an annual phase-out provision that is based on the average wellhead price of domestic crude oil. The price range within which the tax credits are phased-out was originally established in 1980 and is adjusted annually for inflation. Depending on the price of domestic crude oil for a particular year, all or a portion of the tax credits generated in that year might be eliminated. AIG evaluates the production levels of its synthetic fuel production facilities in light of the risk of phase-out of the associated tax credits. As a result of fluctuating domestic crude oil prices, AIG evaluates and adjusts production levels when appropriate in light of this risk. Regardless of oil prices, the tax credits expire after 2007.
(d) Guarantees
AIG and certain of its subsidiaries become parties to derivative financial instruments with market risk resulting from both dealer and end-user activities and to reduce currency, interest rate, equity and commodity exposures. These instruments are carried at their estimated fair values in the consolidated balance sheet. The vast majority of AIG’s derivative activity is transacted by AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (collectively, AIGFP). See Note 19 of AIG’s 2006 Annual Report on Form 10-K.
     AIG has issued unconditional guarantees with respect to the prompt payment, when due, of all present and future payment obligations and liabilities of AIGFP arising from transactions entered into by AIGFP.
     SAI Deferred Compensation Holdings, Inc., a wholly owned subsidiary of AIG, has established a deferred compensation plan for registered representatives of certain AIG subsidiaries, pursuant to which participants have the opportunity to invest deferred commissions and fees on a notional basis. The value of the deferred compensation fluctuates with the value of the deferred investment alternatives chosen. AIG has provided a full and unconditional guarantee of the obligations of SAI Deferred Compensation Holdings, Inc. to pay the deferred compensation under the plan.
  7.  Employee Benefits
The following table presents the components of the net periodic benefit costs with respect to pensions and other postretirement benefits:
                                                   
    Pensions   Postretirement
         
    Non-U.S.   U.S.       Non-U.S.   U.S.    
(in millions)   Plans   Plans   Total   Plans   Plans   Total
 
Three Months Ended March 31, 2007
                                               
 
Components of net periodic benefit cost:
                                               
 
Service cost
  $ 23     $ 30     $ 53     $ 1     $ 2     $ 3  
 
Interest cost
    12       45       57       1       4       5  
 
Expected return on assets
    (9 )     (53 )     (62 )                  
 
Amortization of prior service cost
    (2 )     (1 )     (3 )                  
 
Amortization of net loss
    2       9       11                    
 
Net periodic benefit cost
  $ 26     $ 30     $ 56     $ 2     $ 6     $ 8  
 
Three Months Ended March 31, 2006
                                               
 
Components of net periodic benefit cost:
                                               
 
Service cost
  $ 19     $ 31     $ 50     $ 1     $ 1     $ 2  
 
Interest cost
    9       40       49       1       3       4  
 
Expected return on assets
    (7 )     (48 )     (55 )                  
 
Amortization of prior service cost
    (2 )     (1 )     (3 )           (2 )     (2 )
 
Recognized actuarial loss
    4       19       23                    
 
Net periodic benefit cost
  $ 23     $ 41     $ 64     $ 2     $ 2     $ 4  
 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  8.  Recent Accounting Standards
Accounting Changes
SOP 05-1
On September 19, 2005, the AICPA issued Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (SOP 05-1). SOP 05-1 provides guidance on accounting for internal replacements of insurance and investment contracts other than those specifically described in FAS 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments” (FAS 97). SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverage that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Internal replacements that result in a substantially changed contract are accounted for as a termination.
     The provisions of SOP 05-1 became effective as of January 1, 2007. On the date of adoption, AIG recorded a cumulative effect reduction of $82 million, net of tax, to the opening balance of retained earnings to reflect changes in unamortized DAC, value of business acquired, deferred sales inducement assets, unearned revenue liabilities and future policy benefits for life and accident and health insurance contracts. This adjustment primarily reflects a shorter expected life related to certain group life and health insurance contracts and the effect on the gross profits of investment-oriented products related to previously anticipated future internal replacements. This cumulative effect adjustment affected only the Life Insurance & Retirement Services segment.
FIN 48
     On July 13, 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in income tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and additional disclosures. AIG adopted the provisions of FIN 48 on January 1, 2007. As a result of the adoption of FIN 48, AIG recognized a $71 million increase in the liability for unrecognized tax benefits, which was accounted for as a decrease to opening retained earnings as of January 1, 2007.
     As of the date of adoption and after recognizing the effect of the increase in the liability noted above, the total amount of AIG’s unrecognized tax benefit, excluding interest and penalties, is $1.138 billion. Included in this balance are $407 million of tax positions, the disallowance of which would not affect the annual effective income tax rate. Accordingly, the amount of unrecognized tax benefit that, if recognized, would favorably affect the effective tax rate is $731 million.
     Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At January 1, 2007, AIG had accrued $176 million for the payment of interest (net of the federal benefit) and penalties. At March 31, 2007, there has been no material change in the amount of unrecognized tax benefits and related interest and penalties.
     Interest income related to potential tax benefits emanating from prior restatements has not been recognized because this amount is not currently estimable. In addition, certain tax benefits emanating from compensation deductions have not been recognized because of existing uncertainty with respect to the documentation supporting these tax benefits.
     AIG continually evaluates proposed adjustments by taxing authorities. At March 31, 2007, such proposed adjustments would not result in a material change to its consolidated financial condition. However, AIG believes that it is reasonably possible that the balance of the unrecognized tax benefits could decrease by $0 to $150 million by the end of 2007 due to settlements or expiration of statutes.
Listed below are the tax years that remain subject to examination by major tax jurisdiction:
         
 
Major Tax Jurisdictions   Open Tax Years
 
United States
    1991-2006  
Hong Kong
    1997-2006  
Malaysia
    1999-2006  
Singapore
    1993-2006  
Thailand
    2001-2006  
Taiwan
    2000-2006  
Japan
    2000-2006  
United Kingdom
    2003-2006  
France
    2003-2006  
Korea
    2001-2006  
 
FSP 13-2
     On July 13, 2006, the FASB issued FASB Staff Position (FSP) No. 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” (FSP 13-2). FSP 13-2 addresses how a change or projected change in the timing of cash flows relating to income taxes generated

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  8.  Recent Accounting Standards (continued)
by a leveraged lease transaction affects the accounting for the lease by the lessor, and directs that the tax assumptions be consistent with any FIN 48 uncertain tax position related to the lease. FSP 13-2 is effective for fiscal years beginning after December 15, 2006. Upon adoption, AIG recorded a $50 million decrease in the opening balance of retained earnings, net of tax, as of January 1, 2007 to reflect the cumulative effect of this change in accounting. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations in 2007.
     As a result of the adoptions of SOP 05-1, FIN 48 and FSP 13-2, AIG recorded a total decrease to opening retained earnings of $203 million.
Future Application of Accounting Standards
FAS 157
     In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 is effective January 1, 2008. AIG is currently assessing the effect of implementing this guidance.
FAS 159
     In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (FAS 159). FAS 159 permits entities to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. Subsequent changes in fair value for designated items will be required to be reported in earnings in the current period. FAS 159 also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value. FAS 159 is effective January 1, 2008. AIG is currently assessing the effect of implementing this guidance, which depends on the nature and extent of items elected to be measured at fair value upon initial application of the standard on January 1, 2008.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  9.  Information Provided in Connection with Outstanding Debt
The following condensed consolidating financial statements are provided in compliance with Regulation S-X of the Securities and Exchange Commission.
(a) American General Corporation (AGC) is a holding company and a wholly owned subsidiary of AIG. AIG provides a full and unconditional guarantee of all outstanding debt of AGC.
American General Corporation:
Condensed Consolidating Balance Sheet
                                           
 
    American    
    International    
    Group, Inc.       Other       Consolidated
    (As Guarantor)   AGC   Subsidiaries   Eliminations   AIG
(in millions)                    
 
March 31, 2007
                                       
Assets:
                                       
 
Investments and financial services assets
  $ 10,529     $     $ 813,303     $ (18,924 )   $ 804,908  
 
Cash
    47             1,655             1,702  
 
Carrying value of subsidiaries and partially owned companies, at equity
    113,412       28,145       9,396       (149,774 )     1,179  
 
Other assets
    4,693       2,669       186,519       (1,923 )     191,958  
 
Total assets
  $ 128,681     $ 30,814     $ 1,010,873     $ (170,621 )   $ 999,747  
 
Liabilities:
                                       
 
Insurance liabilities
  $ 16     $     $ 499,951     $ (78 )   $ 499,889  
 
Debt
    21,354       2,136       150,907       (17,186 )     157,211  
 
Other liabilities
    4,256       3,239       235,176       (3,179 )     239,492  
 
Total liabilities
    25,626       5,375       886,034       (20,443 )     896,592  
 
Preferred shareholders’ equity in subsidiary companies
                100             100  
Total shareholders’ equity
    103,055       25,439       124,739       (150,178 )     103,055  
 
Total liabilities, preferred shareholders’ equity in subsidiary companies and shareholders’ equity
  $ 128,681     $ 30,814     $ 1,010,873     $ (170,621 )   $ 999,747  
 
                                           
December 31, 2006
                                       
Assets:
                                       
 
Investments and financial services assets
  $ 7,346     $     $ 797,976     $ (14,822 )   $ 790,500  
 
Cash
    76             1,514             1,590  
 
Carrying value of subsidiaries and partially owned companies, at equity
    109,125       27,967       8,436       (144,427 )     1,101  
 
Other assets
    3,989       2,622       181,561       (1,949 )     186,223  
 
Total assets
  $ 120,536     $ 30,589     $ 989,487     $ (161,198 )   $ 979,414  
 
Liabilities:
                                       
 
Insurance liabilities
  $ 21     $     $ 495,135     $ (64 )   $ 495,092  
 
Debt
    15,157       2,136       146,206       (14,820 )     148,679  
 
Other liabilities
    3,681       3,508       228,068       (1,482 )     233,775  
 
Total liabilities
    18,859       5,644       869,409       (16,366 )     877,546  
 
Preferred shareholders’ equity in subsidiary companies
                191             191  
Total shareholders’ equity
    101,677       24,945       119,887       (144,832 )     101,677  
 
Total liabilities, preferred shareholders’ equity in subsidiary companies and shareholders’ equity
  $ 120,536     $ 30,589     $ 989,487     $ (161,198 )   $ 979,414  
 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  9.  Information Provided in Connection with Outstanding Debt (continued)
Condensed Consolidating Statement of Income
                                         
 
    American    
    International    
    Group, Inc.       Other       Consolidated
(in millions)   (As Guarantor)   AGC   Subsidiaries   Eliminations   AIG
 
Three Months Ended March 31, 2007
                                       
Operating income (loss)
  $ (261 )   $ (73 )   $ 6,506     $     $ 6,172  
Equity in undistributed net income of consolidated subsidiaries
    3,244       151             (3,395 )      
Dividend income from consolidated subsidiaries
    1,286       440             (1,726 )      
Income taxes
    139       8       1,579             1,726  
Minority interest
                (316 )           (316 )
 
Net income (loss)
  $ 4,130     $ 510     $ 4,611     $ (5,121 )   $ 4,130  
 
Three Months Ended March 31, 2006
                                       
Operating income (loss)
  $ (286 )   $ (38 )   $ 5,117     $     $ 4,793  
Equity in undistributed net income of consolidated subsidiaries
    3,260       359             (3,619 )      
Dividend income from consolidated subsidiaries
    187       304             (491 )      
Income taxes (benefits)
          (13 )     1,448             1,435  
Minority interest
                (197 )           (197 )
Cumulative effect of an accounting change, net of tax
    34                         34  
 
Net income (loss)
  $ 3,195     $ 638     $ 3,472     $ (4,110 )   $ 3,195  
 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  9.  Information Provided in Connection with Outstanding Debt (continued)
Condensed Consolidating Statement of Cash Flow
                                   
 
    American    
    International    
    Group, Inc.       Other   Consolidated
(in millions)   (As Guarantor)   AGC   Subsidiaries   AIG
 
Three Months Ended March 31, 2007
                               
Net cash provided by operating activities
  $ 261     $ 48     $ 8,324     $ 8,633  
 
Cash flows from investing:
                               
 
Invested assets disposed
    170             38,875       39,045  
 
Invested assets acquired
    (3,520 )           (52,129 )     (55,649 )
 
Other
    349             (608 )     (259 )
 
Net cash used in investing activities
    (3,001 )           (13,862 )     (16,863 )
 
Cash flows from financing activities:
                               
 
Issuance of debt
    6,831             17,353       24,184  
 
Repayments of debt
    (728 )           (15,596 )     (16,324 )
 
Payments advanced to purchase shares
    (3,000 )                 (3,000 )
 
Cash dividends paid to shareholders
    (430 )                 (430 )
 
Other
    38       (48 )     3,932       3,922  
 
Net cash provided by (used in) financing activities
    2,711       (48 )     5,689       8,352  
 
Effect of exchange rate changes on cash
                (10 )     (10 )
 
Change in cash
    (29 )           141       112  
Cash at beginning of period
    76             1,514       1,590  
 
Cash at end of period
  $ 47     $     $ 1,655     $ 1,702  
 
                                   
Three Months Ended March 31, 2006
                               
Net cash (used in) provided by operating activities
  $ (956 )   $ 45     $ 4,759     $ 3,848  
 
Cash flows from investing:
                               
 
Invested assets disposed
    1,269             35,578       36,847  
 
Invested assets acquired
                (54,706 )     (54,706 )
 
Other
    (2,283 )           2,035       (248 )
 
Net cash used in investing activities
    (1,014 )           (17,093 )     (18,107 )
 
Cash flows from financing activities:
                               
 
Issuance of debt
    2,407             14,792       17,199  
 
Repayments of debt
    (145 )     (1 )     (9,535 )     (9,681 )
 
Cash dividends paid to shareholders
    (390 )                 (390 )
 
Other
    33       (44 )     6,470       6,459  
 
Net cash provided by (used in) financing activities
    1,905       (45 )     11,727       13,587  
 
Effect of exchange rate changes on cash
                23       23  
 
Change in cash
    (65 )           (584 )     (649 )
Cash at beginning of period
    190             1,707       1,897  
 
Cash at end of period
  $ 125     $     $ 1,123     $ 1,248  
 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  9.  Information Provided in Connection with Outstanding Debt (continued)
(b) AIG Liquidity Corp. is a wholly owned subsidiary of AIG. AIG provides a full and unconditional guarantee of all obligations of AIG Liquidity Corp.
AIG Liquidity Corp.:
Condensed Consolidating Balance Sheet
                                           
 
    American    
    International   AIG    
    Group, Inc.   Liquidity   Other       Consolidated
(in millions)   (As Guarantor)   Corp.   Subsidiaries   Eliminations   AIG
 
March 31, 2007
                                       
Assets:
                                       
 
Investments and financial services assets
  $ 10,529     $ *     $ 813,303     $ (18,924 )   $ 804,908  
 
Cash
    47       *       1,655             1,702  
 
Carrying value of subsidiaries and partially owned companies, at equity
    113,412             37,541       (149,774 )     1,179  
 
Other assets
    4,693       *       189,188       (1,923 )     191,958  
 
Total assets
  $ 128,681     $ *     $ 1,041,687     $ (170,621 )   $ 999,747  
 
Liabilities:
                                       
 
Insurance liabilities
  $ 16     $     $ 499,951     $ (78 )   $ 499,889  
 
Debt
    21,354       *       153,043       (17,186 )     157,211  
 
Other liabilities
    4,256       *       238,415       (3,179 )     239,492  
 
Total liabilities
    25,626       *       891,409       (20,443 )     896,592  
 
Preferred shareholders’ equity in subsidiary companies
                100             100  
Total shareholders’ equity
    103,055       *       150,178       (150,178 )     103,055  
 
Total liabilities, preferred shareholders’ equity in subsidiary companies and shareholders’ equity
  $ 128,681     $ *     $ 1,041,687     $ (170,621 )   $ 999,747  
 
                                           
December 31, 2006:
                                       
Assets:
                                       
 
Investments and financial services assets
  $ 7,346     $ *     $ 797,976     $ (14,822 )   $ 790,500  
 
Cash
    76       *       1,514             1,590  
 
Carrying value of subsidiaries and partially owned companies, at equity
    109,125             36,403       (144,427 )     1,101  
 
Other assets
    3,989       *       184,183       (1,949 )     186,223  
 
Total assets
  $ 120,536     $ *     $ 1,020,076     $ (161,198 )   $ 979,414  
 
Liabilities:
                                       
 
Insurance liabilities
  $ 21     $     $ 495,135     $ (64 )   $ 495,092  
 
Debt
    15,157       *       148,342       (14,820 )     148,679  
 
Other liabilities
    3,681       *       231,576       (1,482 )     233,775  
 
Total liabilities
    18,859       *       875,053       (16,366 )     877,546  
 
Preferred shareholders’ equity in subsidiary companies
                191             191  
Total shareholders’ equity
    101,677       *       144,832       (144,832 )     101,677  
 
Total liabilities, preferred shareholders’ equity in subsidiary companies and shareholders’ equity
  $ 120,536     $ *     $ 1,020,076     $ (161,198 )   $ 979,414  
 
* Amounts significantly less than $1 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  9.  Information Provided in Connection with Outstanding Debt (continued)
Condensed Consolidating Statement of Income
                                         
 
    American    
    International   AIG    
    Group, Inc.   Liquidity   Other       Consolidated
(in millions)   (As Guarantor)   Corp.   Subsidiaries   Eliminations   AIG
 
Three Months Ended March 31, 2007
                                       
Operating income (loss)
  $ (261 )   $ *     $ 6,433     $     $ 6,172  
Equity in undistributed net income of consolidated subsidiaries
    3,244             151       (3,395 )      
Dividend income from consolidated subsidiaries
    1,286             440       (1,726 )      
Income taxes
    139       *       1,587             1,726  
Minority interest
                (316 )           (316 )
 
Net income (loss)
  $ 4,130     $ *     $ 5,121     $ (5,121 )   $ 4,130  
 
Three Months Ended March 31, 2006
                                       
Operating income (loss)
  $ (286 )   $ *     $ 5,079     $     $ 4,793  
Equity in undistributed net income of consolidated subsidiaries
    3,260             359       (3,619 )      
Dividend income from consolidated subsidiaries
    187             304       (491 )      
Income taxes
          *       1,435             1,435  
Minority interest
                (197 )           (197 )
Cumulative effect of an accounting change, net of tax
    34                         34  
 
Net income (loss)
  $ 3,195     $ *     $ 4,110     $ (4,110 )   $ 3,195  
 
* Amounts significantly less than $1 million.

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  9.  Information Provided in Connection with Outstanding Debt (continued)
Condensed Consolidating Statement of Cash Flow
                                   
 
    American    
    International   AIG    
    Group, Inc.   Liquidity   Other   Consolidated
(in millions)   (As Guarantor)   Corp.   Subsidiaries   AIG
 
Three Months Ended March 31, 2007
                               
Net cash provided by operating activities
  $ 261     $ *     $ 8,372     $ 8,633  
 
Cash flows from investing:
                               
 
Invested assets disposed
    170             38,875       39,045  
 
Invested assets acquired
    (3,520 )           (52,129 )     (55,649 )
 
Other
    349       *       (608 )     (259 )
 
Net cash used in investing activities
    (3,001 )     *       (13,862 )     (16,863 )
 
Cash flows from financing activities:
                               
 
Issuance of debt
    6,831             17,353       24,184  
 
Repayments of debt
    (728 )           (15,596 )     (16,324 )
 
Payments advanced to purchase shares
    (3,000 )                 (3,000 )
 
Cash dividends paid to shareholders
    (430 )                 (430 )
 
Other
    38       *       3,884       3,922  
 
Net cash provided by financing activities
    2,711       *       5,641       8,352  
 
Effect of exchange rate changes on cash
                (10 )     (10 )
 
Change in cash
    (29 )     *       141       112  
Cash at beginning of period
    76             1,514       1,590  
 
Cash at end of period
  $ 47     $ *     $ 1,655     $ 1,702  
 
                                   
Three Months Ended March 31, 2006
                               
Net cash (used in) provided by operating activities
  $ (956 )   $ *     $ 4,804     $ 3,848  
 
Cash flows from investing:
                               
 
Invested assets disposed
    1,269             35,578       36,847  
 
Invested assets acquired
                (54,706 )     (54,706 )
 
Other
    (2,283 )     *       2,035       (248 )
 
Net cash used in investing activities
    (1,014 )     *       (17,093 )     (18,107 )
 
Cash flows from financing activities:
                               
 
Issuance of debt
    2,407             14,792       17,199  
 
Repayments of debt
    (145 )           (9,536 )     (9,681 )
 
Cash dividends paid to shareholders
    (390 )                 (390 )
 
Other
    33       *       6,426       6,459  
 
Net cash provided by financing activities
    1,905       *       11,682       13,587  
 
Effect of exchange rate changes on cash
                23       23  
 
Change in cash
    (65 )     *       (584 )     (649 )
Cash at beginning of period
    190             1,707       1,897  
 
Cash at end of period
  $ 125     $ *     $ 1,123     $ 1,248  
 
* Amounts significantly less than $1 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  10.  Derivatives and Hedge Accounting
Derivatives, as defined in FAS 133, are financial arrangements among two or more parties with returns linked to or “derived” from some underlying equity, debt, commodity or other asset, liability, or foreign exchange rate or other index or the occurence of a specified payment event. Derivative payments may be based on interest rates, exchange rates, prices of certain securities, commodities, or financial or commodity indices or other variables. Collateral is required on certain transactions based on the creditworthiness of the counterparty.
     Unless subject to a scope exclusion, AIG carries all derivatives on the Consolidated Balance Sheet at fair value. The changes in fair value of the derivative transactions of AIGFP are presented as a component of AIG’s operating income. Gains or losses on derivative transactions for AIG other than those of AIGFP, and only the effective portion of those held as cash flow hedges, are presented in realized capital gains (losses). However, in certain instances, when significant inputs into model valuations are not supported by observable market data, income is not recognized at inception under EITF 02-03, and instead income is recognized over the life of the contract when those inputs become sufficiently observable.
     AIG also uses derivatives and other instruments as part of its financial risk management programs. AIG applies hedge accounting to certain derivative instruments used to hedge interest rate and foreign exchange risk arising from assets, liabilities, and forecasted transactions. These derivative financial instruments are included in Other assets or Other liabilities for derivative activities of AIG other than those of AIGFP, and in Unrealized gain or loss on swaps, options and forward transactions for those of AIGFP.
     AIG designates the derivative as: (i) a hedge of the changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value” hedge); (ii) a hedge of a forecasted transaction, or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); or (iii) a hedge of a net investment in a foreign operation (“net investment” hedge). Fair value and cash flow hedges may involve hedges of foreign currencies exposure (“foreign currency” hedge).
     The change in fair value of a derivative that qualifies under the requirements of FAS 133 as a fair value hedge is recorded in current period earnings, along with the gain or loss on the hedged item attributable to the risk being hedged. The effective portion of the change in the fair value of a derivative that qualifies under the requirements of FAS 133 as a cash flow hedge is recorded in Accumulated other comprehensive income (loss), until earnings are affected by the variability of cash flows in the hedged item. The effective portion of the change in the fair value of a derivative that qualifies under the requirements of FAS 133 as a net investment hedge is recorded in the foreign currency translation adjustments account reported within Accumulated other comprehensive income (loss). Changes in the fair value of the hedging instrument measured as ineffectiveness are reported in current period earnings. AIG had no hedges that were designated as net investment hedges at March 31, 2007.
     AIG performs and documents an initial prospective assessment of hedge effectiveness to demonstrate that the hedge is expected to be highly effective in future periods. Subsequently, on a regular basis, AIG performs a prospective hedge effectiveness assessment to demonstrate the continued expectation that the hedge will be highly effective in future periods and a retrospective hedge effectiveness assessment to demonstrate that the hedge was effective in the most recent period. AIG does not utilize the short cut method or equivalent methods for its ongoing assessment of hedge effectiveness.
     Upon the discontinuance of hedge accounting, the derivatives are carried on the Consolidated Balance Sheet at fair value, with changes in fair value recognized currently in earnings. The carrying value of the hedged recognized asset or liability under a fair value hedge is no longer adjusted for changes in its fair value due to the hedged risk, and the cumulative adjustment to its carrying value is amortized into income over the remaining life of the hedged item. Provided the hedged forecasted transaction is still probable of occurrence, the changes in fair value of derivatives recorded in Other comprehensive income (loss) related to discontinued cash flow hedges are released into the Consolidated Statement of Income when AIG’s earnings are affected by the variability in cash flows of the hedged item.
     Upon the discontinuance of hedge accounting because it is no longer probable that the forecasted transactions will occur by the end of the specified time period or the hedged item no longer meets the definition of a firm commitment, the derivatives continue to be carried on the Consolidated Balance Sheet at fair value, with changes in fair value recognized currently in earnings. Any asset or liability associated with a recognized firm commitment is derecognized from

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  10.  Derivatives and Hedge Accounting (continued)
the Consolidated Balance Sheet and recorded currently in earnings. Deferred gains and losses of a derivative recorded in Other comprehensive income (loss) pursuant to the cash flow hedge of a forecasted transaction are recognized immediately in earnings. AIG had no hedges for firm commitments or forecasted transactions at March 31, 2007.
     For the first three months of 2007, the preponderance of the derivative transactions that were designated for hedge accounting were at AIGFP. AIGFP designated interest rate swaps as fair value hedges of the benchmark interest rate risk on its interest bearing financial assets and liabilities, and in particular, on its fixed rate available for sale debt securities and fixed rate borrowings. AIGFP also designated its foreign currency forwards as hedging its foreign currency denominated available for sale debt securities for changes in spot foreign exchange rates. AIG designated interest rate swaps and cross currency swaps as either fair value or cash flow hedges of certain of the borrowings of AIG parent.
Fair Value Hedges
AIG designates and accounts for the following as fair value hedges when they have met the requirements of FAS 133: (i) interest rate swaps to hedge issued fixed rate debt against changes in fair value due to changes in the benchmark interest rate; (ii) foreign currency swaps to hedge issued foreign currency debt against changes in fair value due to changes in the benchmark interest rate and/ or spot foreign exchange rates; (iii) interest rate swaps to hedge fixed rate investments including available for sale debt securities against changes in fair value due to changes in the benchmark interest rate; and (iv) foreign currency forwards to hedge foreign currency investment securities classified as available for sale against changes in fair value due to changes in the spot foreign exchange rates.
     During the three months ended March 31, 2007, AIG recognized a net gain of $2 million in Other income related to the ineffective portion of its hedging instruments, and a net loss of $54 million in Other income related to the portion of the hedging instruments related to the passage of time excluded from the assessment of hedge ineffectiveness. The amount recognized in Realized gains and losses for hedge ineffectiveness and the change in the hedging instrument’s forward points excluded from the assessment of hedge ineffectiveness during the three months ended March 31, 2007 were each less than $1 million.
Cash Flow Hedges
AIG designates and accounts for the following as cash flow hedges, when they have met the requirements of FAS 133: (i) interest rate swaps to hedge issued floating rate debt against changes in its cash flows attributable to changes in the benchmark interest rate; (ii) foreign currency swaps to hedge issued foreign currency fixed rate debt against changes in its cash flows attributable to changes in the forward foreign exchange rates; and (iii) foreign currency swaps to hedge issued foreign currency floating rate debt against changes in its cash flows attributable to changes in the benchmark interest rate and spot foreign exchange rates.
     The portion of the gain or loss in the fair value of a derivative instrument in a cash flow hedge that represents hedge ineffectiveness is recognized immediately in current period earnings. The amounts recognized during the three months ended March 31, 2007 were less than $1 million. There were no amounts recognized in 2006. All components of each derivative’s gain or loss were included in the assessment of hedge ineffectiveness.
     At March 31, 2007, $2 million of the deferred net gain (loss) on derivative instruments in Accumulated other comprehensive income (loss) is expected to be reclassified to earnings during the 12 months ending March 31, 2008. For the first three months ended March 31, 2007, there were no instances in which AIG reclassified amounts from Other comprehensive income to earnings as a result of a discontinuance of a cash flow hedge because it was probable the original forecasted transaction would not occur at the end of the specified time period.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
American International Group, Inc. and Subsidiaries
  11.  Cash Flows 
As part of its remediation activities during 2006, AIG determined that certain non-cash activities and adjustments, including the effects of changes in foreign exchange translation on assets and liabilities, previously were misclassified within the operating, investing and financing sections of the Consolidated Statement of Cash flows. The more significant line items revised include the change in General and life insurance reserves and DAC within operating activities; Purchases of fixed maturity securities within investing activities; and Proceeds from notes, bonds, loans and mortgages payable, and hybrid financial instrument liabilities within financing activities. After evaluating the effect of these items during the third quarter of 2006, AIG revised the previous periods presented in its September 30, 2006 consolidated financial statements included in that quarter’s Form 10-Q to conform to the 2006 presentation.
     Subsequent to that revision, additional revisions were made, primarily relating to certain elements of realized capital gains and the effect of reclassifying certain policyholders’ account balances from Other policyholder funds to Policyholders’ contract deposits.
The effect of these revisions on the Consolidated Statement of Cash flows for the three months ended March 31, 2006 is presented below:
                                           
    Originally   Revisions   As Revised        
    Reported   Third Quarter   Third Quarter   Additional    
    March 31, 2006   2006   2006   Revisions   As Revised
(in millions)                    
 
For the three months ended March 31, 2006
                                       
 
Cash flows from operating activities
  $ 3,066     $ 1,076     $ 4,142     $ (294 )   $ 3,848  
 
 
Cash flows from investing activities
    (19,937 )     1,724       (18,213 )     106       (18,107 )
 
 
Cash flows from financing activities
    15,672       (2,273 )     13,399       188       13,587  
 
 
Effect of exchange rate changes on cash
    550       (527 )     23             23  
 

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American International Group, Inc. and Subsidiaries
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide the reader a narrative with respect to AIG’s operations, financial condition and liquidity and certain other significant matters.
INDEX
             
    Page
 
    28  
    29  
      29  
      30  
      30  
      31  
      32  
    32  
    33  
      33  
        34  
        37  
      41  
        42  
        50  
      51  
        52  
        52  
        53  
        53  
      55  
   
Asset Management Results
    56  
      57  
 CAPITAL RESOURCES AND LIQUIDITY     57  
      57  
      64  
      65  
 INVESTED ASSETS     65  
 RISK MANAGEMENT     69  
      69  
      70  
Cautionary Statement Regarding Projections and Other Information About Future Events
This Quarterly Report on Form 10-Q and other publicly available documents may include, and AIG’s officers and representatives may from time to time make, projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to management, operations, products and services, and assumptions underlying these projections and statements. These projections and statements are not historical facts but instead represent only AIG’s belief regarding future events, many of which, by their nature, are inherently uncertain and outside AIG’s control. These projections and statements may address, among other things, the status and potential future outcome of the current regulatory and civil proceedings against AIG and their potential effect on AIG’s businesses, financial position, results of operations, cash flows and liquidity, the effect of credit rating changes on AIG’s businesses and competitive position, the unwinding and resolving of various relationships between AIG and SICO and AIG’s strategy for growth, product development, market position, financial results and reserves. It is possible that AIG’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these projections and statements. Factors that could cause AIG’s actual results to differ, possibly materially, from those in the specific projections and statements are discussed throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 1A. Risk Factors of AIG’s Annual Report on Form 10-K for the year ended December 31, 2006 (2006 Annual Report on Form 10-K). AIG is not under any obligation (and expressly disclaims any such obligations) to update or alter any projection or other statement, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise.

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Table of Contents

American International Group, Inc. and Subsidiaries
In addition to reviewing AIG’s results for the first three months of 2007, this Management’s Discussion and Analysis supplements and updates the information and discussion included in the 2006 Annual Report on Form 10-K. Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, AIG presents its operations in the way it believes will be most meaningful. Statutory loss ratios and combined ratios are presented in accordance with accounting principles prescribed by insurance regulatory authorities because these are standard measures of performance filed with insurance regulatory authorities and used for analysis in the insurance industry and thus allow more meaningful comparisons with AIG’s insurance competitors. AIG has also incorporated into this discussion cross-references to additional information included in this Quarterly Report on Form 10-Q and in its 2006 Annual Report on Form 10-K to assist readers seeking related information on a particular subject.
Overview of Operations
and Business Results
AIG identifies its reportable segments by product or service line, consistent with its management structure. AIG’s segments are General Insurance, Life Insurance & Retirement Services, Financial Services and Asset Management. AIG’s operations in 2007 and 2006 were conducted by its subsidiaries through these segments. Through these segments, AIG provides insurance, financial and investment products and services to both businesses and individuals in more than 130 countries and jurisdictions. This geographic, product and service diversification is one of AIG’s major strengths and sets it apart from its competitors. AIG’s Other category consists of items not allocated to AIG’s operating segments.
     AIG’s subsidiaries serve commercial, institutional and individual customers through an extensive property-casualty and life insurance and retirement services network. In the United States, AIG companies are the largest underwriters of commercial and industrial insurance and are among the largest life insurance and retirement services operations as well. 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 management services to institutions and individuals. As part of its spread-based business activities, AIG issues various debt instruments in the public and private markets.
Outlook
The commercial property and casualty insurance industry has historically experienced cycles of price erosion followed by rate strengthening as a result of catastrophes or other significant losses that affect the overall capacity of the industry to provide coverage. Despite industry price erosion in commercial lines, AIG expects to continue to identify profitable opportunities and build attractive new general insurance businesses as a result of AIG’s broad product line and extensive distribution networks in the U.S. and abroad. Workers compensation remains under considerable pricing pressure, as statutory rates continue to decline. Rates for excess casualty, D&O and certain other lines of insurance also continue to decline due to competitive pressures. There can be no assurance that price erosion will not become more widespread or that AIG’s profitability will not deteriorate from current levels in major commercial lines; however, AIG seeks to mitigate this risk by constantly seeking out profitable opportunities across its diverse product lines and distribution networks.
     In Japan, the National Tax Authority in cooperation with the Life Insurance Association of Japan is reviewing the tax treatment for increasing term life insurance, which may affect the amount of premiums that qualify as tax deductions for business owners. As a result of this review, AIG’s life insurance companies in Japan suspended the sale of increasing term life insurance and other corporate tax products from early April 2007. This action will have an adverse effect on life insurance sales. AIG companies in Japan have taken several measures aimed at increasing sales of other products in the Japanese market, especially sales of U.S. dollar life insurance products.
     In March 2007, the U.S. Treasury Department published proposed new regulations that, if adopted in their current form, would limit the ability of U.S. taxpayers to claim foreign tax credits in certain circumstances under the Internal Revenue Code. Should the proposed regulations be adopted in their current form, they would limit AIG’s ability to claim foreign tax credits in connection with certain structured transactions entered into by AIGFP, resulting in a material adverse effect on AIGFP’s operating results.
     The operating results of AIG’s consumer finance operations in the United States may be affected by further deterioration in the credit quality of loans originated to non-prime borrowers, the evolving changes in the regulatory environment and a slower residential housing market.
     See also Management’s Discussion and Analysis of Financial Condition and Results of Operations — Outlook in the 2006 Annual Report on Form 10-K.

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Table of Contents

American International Group, Inc. and Subsidiaries
Consolidated Results
The following table summarizes AIG’s consolidated revenues, income before income taxes, minority interest and cumulative effect of an accounting change and net income:
                         
 
    Three Months    
    Ended March 31,   Percentage
        Increase/
(in millions)   2007   2006   (Decrease)
 
Total revenues
  $ 30,645     $ 27,278       12 %
 
Income before income taxes, minority interest and cumulative effect of an accounting change
    6,172       4,793       29  
 
Net income
  $ 4,130     $ 3,195       29 %
 
     Revenues for the first three months of 2007 increased from the same period of 2006 as revenues grew in each of AIG’s operating segments.
     AIG’s income before income taxes, minority interest and cumulative effect of an accounting change increased in the first three months of 2007 compared to the same period of 2006 as growth in the General Insurance, Financial Services and Asset Management segments were partially offset by a decline in the Life Insurance & Retirement Services segment. Financial Services results reflect the reinstitution of hedge accounting in the Capital Markets operation.
     During the first quarter of 2007, AIG recorded certain out of period adjustments. These adjustments collectively decreased pre-tax operating income by $192 million and net income by $254 million. The adjustments are comprised principally of a $129 million increase to tax expense related to the remediation of the material weakness in controls over income tax accounting, and $130 million in pre-tax charges and write-offs related to other remediation activities ($97 million after tax).
     The effective tax rate decreased from 29.9 percent for the first three months of 2006 to 28.0 percent for the first three months of 2007, primarily due to the recognition of $175 million of tax benefits associated with the SICO Plans for which the compensation expense had been recognized in prior years.
     Results for the first three months of 2006 were negatively affected by the compensation expense relating to the Starr tender offer ($54 million before and after tax) and an additional allowance for losses in AIG Credit Card Company (Taiwan) ($88 million before tax and $57 million after tax). Results in the first three months of 2006 were also negatively affected by certain out of period adjustments of $61 million (before and after tax) of expenses related to the SICO Plans, $59 million ($38 million after tax) of expenses related to deferred advertising costs in General Insurance, a decrease of $300 million ($145 million after tax) in revenues related to the remediation of the 2006 material weakness in accounting for certain derivative transactions under FAS 133, and a $126 million of income tax expense as part of the ongoing remediation of the material weakness in controls over income tax accounting.
Segment Results
The following table summarizes the operations of each principal segment. (See also Note 2 of Notes to Consolidated Financial Statements.)
                           
 
    Three Months    
    Ended March 31,   Percentage
        Increase/
(in millions)   2007   2006   (Decrease)
 
Revenues(a):
                       
 
General Insurance(b)
  $ 12,903     $ 11,656       11 %
 
Life Insurance & Retirement Services(c)
    13,682       12,850       6  
 
Financial Services(d)(e)
    2,201       1,666       32  
 
Asset Management(f)
    1,908       1,139       68  
 
Other
    102       90       13  
 
Consolidation and eliminations
    (151 )     (123 )      
 
Consolidated
  $ 30,645     $ 27,278       12 %
 
Operating income (loss)(a)(g):
                       
 
General Insurance
  $ 3,096     $ 2,331       33 %
 
Life Insurance & Retirement Services
    2,281       2,630       (13 )
 
Financial Services(e)
    292       (108 )      
 
Asset Management
    994       449       121  
 
Other
    (499 )     (509 )      
 
Consolidation and eliminations
    8              
 
Consolidated
  $ 6,172     $ 4,793       29 %
 
(a) Includes the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133 or for which hedge accounting was not applied, including the related foreign exchange gains and losses. For the first three months of 2007 and 2006, respectively, the effect was $(452) million and $(212) million in revenues and operating income. These amounts result primarily from interest rate and foreign currency derivatives that are hedging investments and borrowings.
(b) Represents the sum of General Insurance net premiums earned, net investment income and realized capital gains (losses).
(c) Represents the sum of Life Insurance & Retirement Services premiums and other considerations, net investment income and realized capital gains (losses). Included in realized capital gains (losses) and operating income is the effect of hedging activities that did not qualify for hedge accounting treatment under

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FAS 133 which were $(123) million and $352 million for the first three months of 2007 and 2006, respectively, and the application of FAS 52, which were $123 million and $4 million for the first three months of 2007 and 2006, respectively.
(d) Represents interest, lease and finance charges.
(e) Includes the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133 or for which hedge accounting was not applied, including the related foreign exchange gains and losses. For the three months ended March 31, 2007 and 2006, respectively, the effect was $(160) million, and $(619) million in both revenues and operating income. These amounts result primarily from interest rate and foreign currency derivatives that are effective economic hedges of investments and borrowings. In the first quarter of 2007, AIG began applying hedge accounting for certain transactions, primarily in its Capital Markets operations.
(f) Represents net investment income with respect to spread-based products and management and advisory fees.
(g) Represents income before income taxes, minority interest and cumulative effect of an accounting change.
General Insurance
AIG’s General Insurance operations provide property and casualty products and services throughout the world. The increase in General Insurance operating income in the first three months of 2007 compared to the same period of 2006 was primarily attributable to improved underwriting results for DBG and higher net investment income.
Life Insurance & Retirement Services
AIG’s Life Insurance & Retirement Services operations provide insurance, financial and investment products throughout the world. Foreign operations provided approximately 56 percent and 64 percent of AIG’s Life Insurance & Retirement Services operating income for the first three months of 2007 and 2006, respectively. This decline resulted principally from realized capital losses in the first three months of 2007.
     Life Insurance & Retirement Services total revenues increased in the first three months of 2007 compared to the same period of 2006, reflecting growth in premiums and net investment income partially offset by decreased realized capital gains (losses). Operating income decreased in the first three months of 2007 compared to the same period of 2006 due to realized capital gains (losses). Realized capital losses included in revenues and operating income were $256 million in the first three months of 2007 compared to realized capital gains of $216 million in the same period of 2006. Foreign Life operations’ results for 2007 also included an out of period charge of $50 million related to balance sheet reconciliation remediation, a $37 million charge for additional claim expense resulting from a continuing industry-wide regulatory review of claims in Japan and a $10 million charge related to the adoption of SOP 05-1. Domestic Life Insurance operating income declined from the prior year primarily due to a $22 million charge related to the adoption of SOP 05-1 along with lower realized capital gains. Domestic Retirement Services operating results increased in the first three months of 2007 compared to the same period of 2006 due to higher premiums and other considerations along with lower realized capital losses.
Financial Services
AIG’s Financial Services subsidiaries engage in diversified activities including aircraft and equipment leasing, capital markets, consumer finance and insurance premium finance.
     Financial Services operating income increased in the first three months of 2007 compared to the same period of 2006 primarily due to differences in the accounting treatment for hedging activities. In the first three months of 2007, AIGFP applied hedge accounting to certain of its interest rate swaps and foreign currency forward contracts hedging its investments and borrowings. As a result, AIGFP was able to recognize in earnings the change in the fair value on the hedged items attributable to the hedged risks offsetting the gains and losses on the derivatives designated as hedges. In 2006, AIGFP did not apply hedge accounting under FAS 133 to any of its derivatives or related assets and liabilities.
     In the first three months of 2007, the domestic consumer finance operations recorded a pre-tax charge of $128 million in connection with its mortgage banking activities.
Asset Management
AIG’s Asset Management operations include institutional and retail asset management, broker-dealer services and institutional spread-based investment businesses. The Matched Investment Program (MIP) has replaced the GIC program as AIG’s principal institutional spread-based investment activity.
     Asset Management operating income increased in the first three months of 2007 compared to the same period of 2006 due primarily to growth in the Spread-Based Investment and Institutional Asset Management businesses. Other revenues and operating income for Asset Management also increased from a year ago due to higher income from partnerships. Gains and losses arising from the consolidation of certain partnerships, private equity investments and real estate funds are included in operating income, but are offset in minority interest expense, which is not a component of operating income.
Capital Resources
In March 2007, AIG issued $3.7 billion of junior subordinated debentures in three series of securities. The proceeds from the sales are being used to repurchase shares of AIG’s common stock.
     At March 31, 2007, AIG had total consolidated shareholders’ equity of $103.1 billion and total consolidated borrowings of $157.2 billion. At that date, $140.3 billion of such borrowings were not guaranteed by AIG, were matched borrowings by AIG Parent or AIGFP, or represented junior subordinated debt or liabilities connected to trust preferred stock.

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     In February 2007, AIG’s Board of Directors increased its share repurchase program by authorizing the repurchase of shares with an aggregate purchase price of $8 billion. Share repurchases during 2007 are described under Capital Resources and Liquidity — Share Repurchases and in Item 2. of Part II of this Quarterly Report on Form 10-Q.
Liquidity
AIG manages liquidity at both the subsidiary and parent company levels. At March 31, 2007, AIG’s consolidated invested assets, primarily held by its subsidiaries, included $27.6 billion in cash and short-term investments. Consolidated net cash provided from operating activities in the first three months of 2007 amounted to $8.6 billion. Management believes that AIG’s liquid assets, cash provided by operations and access to the capital markets will enable it to meet its anticipated cash requirements, including the funding of increased dividends under AIG’s new dividend policy and repurchases of common stock.
Critical Accounting Estimates
AIG considers its most critical accounting estimates to be those relating to reserves for losses and loss expenses, future policy benefits for life and accident and health contracts, recoverability of DAC, estimated gross profits for investment-oriented products, fair value determinations for certain Capital Markets assets and liabilities, other-than-temporary declines in the value of investments and flight equipment recoverability. These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, AIG’s results of operations would be directly affected.
     Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, AIG’s critical accounting estimates are discussed in detail. The major categories for which assumptions are developed and used to establish each critical accounting estimate are highlighted below.
Reserves for Losses and Loss Expenses
(General Insurance):
Loss trend factors: used to establish expected loss ratios for subsequent accident years based on premium rate adequacy and the projected loss ratio with respect to prior accident years.
Expected loss ratios for the latest accident year: in this case, accident year 2006 for the year-end 2006 loss reserve analysis. For low-frequency, high-severity classes such as excess casualty, expected loss ratios generally are utilized for at least the three most recent accident years.
Loss development factors: used to project the reported losses for each accident year to an ultimate amount.
Reinsurance recoverable on unpaid losses: the expected recoveries from reinsurers on losses that have not yet been reported and/or settled.
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, morbidity and surrender rates: based upon actual experience by geographical region modified to allow for variation in policy form, risk classification and distribution channel.
Estimated Gross Profits (Life Insurance & Retirement Services):
Estimated gross profits: to be realized over the estimated duration of the contracts (investment-oriented products) affect the carrying value of DAC, unearned revenue liability and associated amortization patterns under FAS 97 and Sales Inducement Assets under Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (SOP 03-1). Estimated gross profits include investment income and gains and losses on investments less required interest, actual mortality and other expenses.
Deferred Policy Acquisition Costs (Life Insurance & Retirement Services):
Recoverability: based on current and future expected profitability, which is affected by interest rates, foreign exchange rates, mortality experience, and policy persistency.
Deferred Policy Acquisition Costs (General Insurance):
Recoverability and eligibility: based upon the current terms and profitability of the underlying insurance contracts.
Fair Value Determinations Of Certain Assets And Liabilities (Financial Services):
Valuation models: utilizing factors, such as market liquidity and current interest, foreign exchange and volatility rates.
Market price data: AIG attempts to secure reliable and independent current market price data, such as published exchange rates from external subscription services such as Bloomberg or Reuters or third-party broker quotes for use in its models. When such data is not available, AIG uses an internal methodology, which includes interpolation and extrapolation from verifiable recent prices.

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Other-Than-Temporary Declines In The Value Of Investments:
A security is considered a candidate for other-than-temporary impairment if it meets any of the following criteria:
Trading at a significant (25 percent or more) discount to par or amortized cost (if lower) for an extended period of time (nine months or longer);
The occurrence of a discrete credit event resulting in the debtor defaulting or seeking bankruptcy or insolvency protection or voluntary reorganization; or
The probability of non-realization of a full recovery on its investment, irrespective of the occurrence of one of the foregoing events.
     At each balance sheet date, AIG evaluates its securities holdings in an unrealized loss position. Where AIG does not intend to hold such securities until they have fully recovered their carrying value, based on the circumstances present at the date of evaluation, AIG records the unrealized loss in income. If events or circumstances change, such as unexpected changes in the creditworthiness of the obligor, unanticipated changes in interest rates, tax laws, statutory capital positions and unforeseen liquidity events, among others, AIG revisits its intent. Further, if a loss is recognized from a sale subsequent to a balance sheet date pursuant to these unexpected changes in circumstances, the loss is recognized in the period in which the intent to hold the securities to recovery no longer existed.
     In periods subsequent to the recognition of an other-than-temporary impairment loss for debt securities, AIG amortizes the discount or reduced premium over the remaining life of the security in a prospective manner based on the amount and timing of estimated future cash flows.
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 third party information.
Operating Review
General Insurance Operations
AIG’s General Insurance subsidiaries are multiple line companies writing substantially all lines of property and casualty insurance and various personal lines both domestically and abroad.
     Domestic General Insurance operations are comprised of DBG, Reinsurance, Personal Lines and Mortgage Guaranty businesses.
     DBG writes substantially all classes of business insurance, accepting such business mainly from insurance brokers. This provides DBG the opportunity to select specialized markets and retain underwriting control. Any licensed broker is able to submit business to DBG without the traditional agent-company contractual relationship, but such broker usually has no authority to commit DBG to accept a risk.
     Transatlantic subsidiaries offer reinsurance capacity on both a treaty and facultative basis both in the U.S. and abroad. Transatlantic structures programs for a full range of property and casualty products with an emphasis on specialty risk.
     AIG’s Personal Lines operations provide automobile insurance through AIG Direct, a mass marketing operation, the Agency Auto Division and 21st Century, as well as a broad range of coverages for high net-worth individuals through the AIG Private Client Group.
     The main business of the UGC subsidiaries is the issuance of residential mortgage guaranty insurance on conventional first lien mortgages for the purchase or refinance of one to four family residences. UGC subsidiaries also write second-lien and private student loan guaranty insurance.
     AIG’s Foreign General Insurance group accepts risks primarily underwritten through American International Underwriters (AIU), a marketing unit consisting of wholly owned agencies and insurance companies. The Foreign General Insurance group also includes business written by AIG’s foreign-based insurance subsidiaries.

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General Insurance Results
General Insurance operating income is comprised of statutory underwriting results, changes in DAC, net investment income and realized capital gains and losses. Operating income, as well as net premiums written, net premiums earned, net investment income and realized capital gains (losses) and statutory ratios were as follows:
________________________________________________________________________________
                             
    Three Months    
    Ended March 31,   Percentage
        Increase/
(in millions, except ratios)   2007   2006   (Decrease)
 
Net premiums written:
                       
 
Domestic General
                       
   
DBG
  $ 6,009     $ 5,860       3 %
   
Transatlantic
    984       914       8  
   
Personal Lines
    1,229       1,198       3  
   
Mortgage Guaranty
    266       197       35  
 
Foreign General(a)
    3,618       3,086       17  
 
Total
  $ 12,106     $ 11,255       8 %
 
Net premiums earned:
                       
 
Domestic General
                       
   
DBG
  $ 5,981     $ 5,769       4 %
   
Transatlantic
    965       908       6  
   
Personal Lines
    1,155       1,159        
   
Mortgage Guaranty
    210       166       27  
 
Foreign General(a)
    2,908       2,468       18  
 
Total
  $ 11,219     $ 10,470       7 %
 
Net investment income:
                       
 
Domestic General
                       
   
DBG
  $ 1,033     $ 745       39 %
   
Transatlantic
    116       102       14  
   
Personal Lines
    57       57        
   
Mortgage Guaranty
    37       32       16  
 
Foreign General
    319       182       75  
Reclassifications and Eliminations
    1              
 
Total
  $ 1,563     $ 1,118       40 %
 
Realized capital gains (losses)
  $ 121     $ 68       78 %
 
Operating Income(b):
                       
 
Domestic General
                       
   
DBG
  $ 1,929     $ 1,305       48 %
   
Transatlantic
    151       141       7  
   
Personal Lines
    106       101       5  
   
Mortgage Guaranty
    8       109       (93 )
 
Foreign General(c)
    909       673       35  
Reclassifications and Eliminations
    (7 )     2        
 
Total
  $ 3,096     $ 2,331       33 %
 
Statutory underwriting profit (loss)(b)(e):
                       
 
Domestic General
                       
   
DBG
  $ 784     $ 484       62 %
   
Transatlantic
    16       30       (47 )
   
Personal Lines
    33       40       (18 )
   
Mortgage Guaranty
    (42 )     70        
 
Foreign General(c)
    402       333       21  
 
Total
  $ 1,193     $ 957       25 %
 
Domestic General(b):
                       
 
Loss Ratio
    68.9       71.5          
 
Expense Ratio
    21.1       20.3          
       
Combined Ratio
    90.0       91.8          
       
Foreign General(b):
                       
 
Loss Ratio(a)
    50.6       50.7          
 
Expense Ratio(c)(d)
    28.6       28.6          
       
Combined ratio
    79.2       79.3          
       
Consolidated(c):
                       
 
Loss Ratio
    64.2       66.7          
 
Expense Ratio
    23.3       22.5          
       
Combined Ratio
    87.5       89.2          
       
(a)  Income statement accounts expressed in non-functional currencies are translated into U.S. dollars using average exchange rates.
(b)  Includes additional losses incurred and net reinstatement premiums related to prior year catastrophes of $35 million and $99 million in the first three months of 2007 and 2006, respectively.
(c)  Includes the results of wholly owned Foreign General agencies.
(d)  Includes amortization of advertising costs.

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(e)  Statutory underwriting profit (loss) is a measure that U.S. domiciled insurance companies are required to report to their regulatory authorities. The following table reconciles statutory underwriting profit (loss) to operating income for General Insurance:
________________________________________________________________________________
                                                           
    Domestic                        
    Brokerage       Personal   Mortgage   Foreign   Reclassifications    
(in millions)   Group   Transatlantic   Lines   Guaranty   General   and Eliminations   Total
 
Three Months Ended March 31, 2007:
                                                       
 
Statutory underwriting profit (loss)
  $ 784     $ 16     $ 33     $ (42 )   $ 402     $     $ 1,193  
 
Increase (decrease) in DAC
    35       4       15       12       153             219  
 
Net investment income
    1,033       116       57       37       319       1       1,563  
 
Realized capital gains (losses)
    77       15       1       1       35       (8 )     121  
 
Operating income (loss)
  $ 1,929     $ 151     $ 106     $ 8     $ 909     $ (7 )   $ 3,096  
 
Three Months Ended March 31, 2006:
                                                       
 
Statutory underwriting profit (loss)
  $ 484     $ 30     $ 40     $ 70     $ 333     $     $ 957  
 
Increase (decrease) in DAC
    29       3       5       7       144             188  
 
Net investment income
    745       102       57       32       182             1,118  
 
Realized capital gains (losses)
    47       6       (1 )           14       2       68  
 
Operating income (loss)
  $ 1,305     $ 141     $ 101     $ 109     $ 673     $ 2     $ 2,331  
 
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:
________________________________________________________________________________
                 
    Three Months
    Ended March 31,
     
    2007   2006
 
Growth in original currency*
    6.2 %     6.0 %
Foreign exchange effect
    1.4       (1.7 )
 
Growth as reported in U.S. dollars
    7.6 %     4.3 %
 
Computed using a constant exchange rate throughout each period.
General Insurance operating income increased in the first three months of 2007 compared to the same period of 2006 due to growth in net premiums, a reduction in incurred losses and growth in net investment income. The combined ratio improved to 87.5, a reduction of 1.7 points from 2006, including an improvement in the loss ratio of 2.5 points. Prior year development reduced incurred losses by $131 million in the first three months of 2007, compared to an increase of $35 million in the first three months of 2006, representing 1.5 points of the overall reduction. The loss ratio for accident year 2007 recorded in the first quarter of 2007 was 1.0 point lower than the loss ratio recorded in the first quarter of 2006 for accident year 2006, despite an increase in Mortgage Guaranty losses in the 2007 period. The downward cycle in the U.S. housing market is not expected to improve until residential inventories return to a more normal level, and AIG expects that this downward cycle will continue to adversely affect UGC’s loss ratios for the foreseeable future. Domestic General net premiums written increased as submission activity increased due to the strength of AIG’s capacity, commitment during challenging market conditions and diverse product offerings. Foreign General also contributed to the increase in net premiums written, reflecting growth from both established and new distribution channels.
     General Insurance net investment income increased in the first three months of 2007 to $1.6 billion. Interest and dividend income increased $195 million for the first three months of 2007 compared to the same period of 2006 as fixed maturities and equity securities increased by $13.9 billion and the yield remained consistent at 4.6 percent. Income from partnership investments increased $182 million for the first three months of 2007 compared to the year ago period, primarily due to improved returns on underlying investments and higher levels of invested assets, which increased by $900 million. See also Capital Resources and Liquidity — Liquidity and Invested Assets herein.
     In order to better align financial reporting with the manner in which AIG’s chief operating decision makers have managed their businesses, for the three months ended March 31, 2007, the foreign aviation business, which was historically reported in DBG, is now being reported as part of Foreign General and the oil rig and marine businesses, which were historically reported in Foreign General, are now being reported as part of DBG. Prior period amounts have been revised to conform to the current presentation.
DBG Results
DBG’s operating income increased in the first three months of 2007 compared to the first three months of 2006. The improvement is also reflected in the combined ratio, which declined 4.6 points in the first three months of 2007 compared to the first three months of 2006 primarily due to an improvement in the loss ratio of 5.3 points. The loss ratio for accident year 2007 recorded in the first quarter of 2007 was

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2.5 points lower than the loss ratio recorded in the first quarter of 2006 for accident year 2006. Prior year development reduced incurred losses by $87 million in the first three months of 2007 compared to an increase of $74 million in the first three months of 2006, accounting for 2.7 points of the improvement.
     DBG’s net premiums written increased 3 percent in the first three months of 2007 compared to the same period of 2006 due to the strength of AIG’s capacity, commitment during challenging market conditions, diverse product offerings and the acquisition of TravelGuard, which markets accident and health products. Ceded premiums as a percentage of gross written premiums increased to 24 percent in the first three months of 2007 compared to 22 percent in the first three months of 2006, primarily due to additional reinsurance for property risks to manage catastrophe exposures.
     DBG’s expense ratio increased to 19.2 in the first three months of 2007 compared to 18.5 in the same period of 2006, primarily due to changes in the mix of business towards products with lower loss ratios and higher expense ratios.
     DBG’s net investment income increased in the first three months of 2007 compared to the same period of 2006, as interest income increased $120 million on growth in the bond portfolio resulting from investment of operating cash flows and capital contributions. Income from partnership investments increased $155 million in the first three months of 2007 compared to the same period of 2006, primarily due to improved returns on the underlying investments.
Transatlantic Results
Transatlantic’s net premiums written and net premiums earned increased in the first three months of 2007 compared to the same period of 2006 due primarily to increased writings in domestic operations. Underwriting results were adversely affected by European windstorm losses, only partially offset by lower adverse development for the first three months of 2007 compared to the same period in 2006, resulting in an overall decline in statutory underwriting profit for the 2007 period. Operating income, however, increased in the first three months of 2007 compared to the same period of 2006 as increased net investment income and realized capital gains more than offset the decline in underwriting results.
Personal Lines Results
The modest increase in Personal Lines operating income in the first three months of 2007 compared to the same period of 2006 reflects a reduction in the loss ratio of 1.6 points. Favorable development of prior accident years reduced incurred losses by $29 million in the first three months of 2007 compared to a decrease of $19 million in the same period of 2006, accounting for 0.9 points of the decrease in the loss ratio. The loss ratio for the first three months of 2007 also improved 0.7 points compared to the same period in 2006, primarily due to favorable loss trends and growth in the Private Client Group, partially offset by increased losses in 21st Century. The improvement in the loss ratio was partially offset by an increase in the expense ratio of 1.4 points, primarily due to increased acquisition expenses by 21st Century along with growth in the Private Client Group, investments in human resources and technology, and lower average premiums.
     The increase in net premiums written was driven by continued growth in the Private Client Group. 21st Century and AIG Direct net premiums written grew modestly at 3.6 percent and 2.4 percent, respectively, while Agency Auto declined 8.4 percent.
Mortgage Guaranty Results
The significant decline in Mortgage Guaranty operating income in the first quarter of 2007 compared to the same period in 2006 was due primarily to unfavorable loss experience in both the domestic first and second-lien businesses as a result of the continued softening in the U.S. housing market. Losses on UGC’s subprime business were not significant. However the third-party originated second-lien product continued to perform poorly, resulting in $61 million of losses incurred in the first quarter of 2007. UGC’s consolidated loss ratio for the quarter was 92.2 compared to a loss ratio of 30.4 for the same period in 2006. Prior year development increased incurred losses by $31 million in the first three months of 2007 compared to a reduction of $12 million in the first three months of 2006, accounting for 22 points of the increase in the loss ratio. The downward cycle in the U.S. housing market is not expected to improve until residential inventories return to a more normal level, and AIG expects that this downward cycle will continue to adversely affect UGC’s operating results for the foreseeable future.
     Net premiums written increased 35 percent in the first quarter of 2007 compared to the first quarter of 2006 as growth in the European markets resulted in a 189 percent increase in international premiums. In addition, second-lien premiums increased 49 percent due to higher renewal premiums on the domestic second-lien business. Although UGC discontinued accepting new business for the poorly performing third-party originated second-lien product in the fourth quarter of 2006, UGC will continue to receive renewal premiums on the existing portfolio for the life of the loans, estimated to be three to five years. The expense ratio of 21.7 in the first quarter of 2007 declined from 22.7 in the year ago quarter as premium growth offset expenses related to UGC’s international expansion and additional operational resources in the second-lien and private education loan businesses.

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American International Group, Inc. and Subsidiaries
Foreign General Insurance Results
Foreign General’s operating income increased in the first three months of 2007 compared to the same period of 2006 due to increases in net investment income and statutory underwriting profit and the effect of changes in the exchange rates of the Euro and Sterling.
     Net premiums written increased 17 percent (13 percent in original currency) in the first three months of 2007 compared to the same period of 2006, reflecting growth in commercial and consumer lines driven by new business from both established and new distribution channels, including a wholly owned insurance company in Vietnam and Central Insurance Co., Ltd. in Taiwan, and by greater retention of commercial lines accounts on renewal. Consumer lines in Latin America and commercial lines in Europe, the Far East and the U.K., also contributed to the increase. Net premiums written by the Lloyd’s syndicate Ascot were essentially unchanged from the same period in 2006 as increased premiums due to rate increases were offset by decreased premiums due to loss of market share and higher reinsurance costs.
     The loss ratio in the first three months of 2007 was essentially flat compared to the first quarter of 2006. Favorable loss development from prior accident years was relatively consistent in both periods. The 2007 loss ratio was negatively affected by an increase in personal accident losses in the Far East and an increase in severe but non-catastrophic losses, which were more than offset by reduced adverse development relating to the 2005 hurricanes.
     The expense ratio was unchanged in the first three months of 2007 compared to the same period of 2006. The 2006 expense ratio reflected an out of period adjustment for amortization of deferred advertising costs which increased the first quarter 2006 expense ratio by 1.7 points. The comparable increase in the expense ratio in 2007 resulted from growth in certain commercial lines, which have higher acquisition expenses but historically lower loss ratios. AIG expects the expense ratio to increase during the remainder of 2007 as the consumer lines of business, which have higher acquisition costs, increase in significance as a component of net premiums written.
     Net investment income increased in the first three months of 2007 compared to the same period of 2006 due to higher interest and dividend income of $56 million as a result of increased cash flows, higher interest rates and the compounding of previously earned and reinvested interest income. Net investment income also reflects increased equity mutual fund income of $52 million related to certain interests in unit investment trusts that AIG began recognizing in the second quarter of 2006, as well as increased equity partnership income.
Reserve for Losses and Loss Expenses
The following table presents the components of the General Insurance gross reserve for losses and loss expenses (loss reserves) as of March 31, 2007 and December 31, 2006 by major line of business on a statutory Annual Statement basis(a):
                 
 
    March 31,    
    2007   December 31,
(in millions)       2006(b)
 
Other liability occurrence
  $ 19,763     $ 19,327  
Workers compensation
    14,265       13,612  
Other liability claims made