avatar American International Group, Inc. Finance, Insurance, And Real Estate
  • Location: New York 
  • Founded:
  • Website:

Pages

  • Page 1

    American International Group, Inc. 2009 Annual Report


  • Page 2

    American International Group, Inc. (AIG) is a leading international insurance organization with operations in more than 130 countries and jurisdictions. AIG companies serve com- mercial, institutional, and individual customers through one of the most extensive worldwide property casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services around the world. AIG common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo.


  • Page 3

    Chairman’s Johnson, George Miles, and Morris Offit, represents a collective vote of confidence Message in the company, its many talented people, Harvey Golub and its strategy going forward, and a Non-Executive personal willingness to deal with one of Chairman of the Board the most complicated restructurings in business history. They have been working extraordinarily hard and will continue to do so under very challenging conditions. I thank them all for their support. During the year, Stephen Bollenbach, O n behalf of AIG’s Board of Martin Feldstein, James Orr, Virginia Directors, I am pleased to be Rometty, Michael Sutton, Edmund Tse, able to report to you that and Ed Liddy retired after a period of the company and the Board have time spent dealing with the liquidity crisis made substantial progress over the past and the initial work on the government year in addressing and resolving a number bailout. We thank them for their service. of the critical issues facing the company. Most notably, in 2008, Ed Liddy joined the In addition to the positive developments company as Chairman and Chief Execu- concerning AIG that Bob Benmosche tive Officer as a public service and did so discusses in his letter, including reorganiz- at the behest of the U.S. Department of ing and restructuring across the company, the Treasury. He worked tirelessly to put the Board has undertaken a number of together a strategic plan, large elements of measures to improve governance and over- which are in place today and represent a sight of the company, and put in place new solid foundation on which we are building. initiatives designed to increase the possibil- Ed deserves our thanks for a job well done ity of creating value for the shareholders under extreme public pressure and difficult after paying back the Federal Reserve circumstances. Bank of New York (FRBNY) and the U.S. The workload required of the Board is Department of the Treasury. as high as I’ve ever seen in any company AIG today has a Board with new, and is likely to continue for some time. very experienced people. It represents a Accordingly, we plan to add several new wealth of talent available to help AIG move directors to help. Sadly, I must also note forward. These new additions include the retirement of Dennis Dammerman for Laurette Koellner, retired President of personal health reasons. Dennis has been Boeing International; Christopher Lynch, an extraordinary director, and his wisdom former KPMG and knowledge have been invaluable to his Our goal is to fully repay the U.S. gov- National Partner in fellow directors. He has been a marvelous ernment for its financial assistance, Charge–Financial colleague, and we will all miss him. and move forward to help ensure our Services; Arthur The company has also strengthened its remaining businesses are thriving and Martinez, former senior management team, which now con- profitable as soon as is practicable. Chairman of the sists of both longtime, experienced AIG in- Board, President, siders as well as seasoned newcomers who and Chief Executive Officer of recognize the promise of our institution. Sears, Roebuck and Co.; Steve Miller, This team is focused on building successful former Chairman and CEO of Delphi businesses for AIG, creating value through Corporation; and Doug Steenland, former the sale of some businesses and strengthen- President and Chief Executive Officer of ing the company’s capital structure. Northwest Airlines Corporation; as well as Among the new leaders of our company Bob Benmosche and me. Their willingness is Peter Hancock, Executive Vice Presi- to serve on AIG’s Board, along with dent, Finance, Risk, and Investments. Peter Dennis Dammerman, Suzanne Nora AIG 2009 Annual Report 1


  • Page 4

    spent 20 years at J.P. Morgan, and is known repay the U.S. government for its financial for his expertise in finance and mortgage assistance, and move forward to help instruments. He now oversees Finance, ensure our remaining businesses are thriv- Risk, Audit, Investments, Strategic Plan- ing and profitable as soon as is practicable. ning, and AIG Financial Products Corp. Achieving these objectives will not Thomas Russo has joined us as Executive be simple or easy. First, we will need the Vice President, Legal, Compliance, Regu- continued backing of the government latory Affairs and Government Affairs, and for some time, and reasonable financial General Counsel. Tom, the former Chief market conditions within which we can Legal Officer of Lehman Brothers Hold- dispose of certain assets and recapitalize ings, is one of the most respected legal others. Most important, we must retain our minds and counselors in financial services. talented employees and the huge amount Sandra Kapell, Vice President and of intellectual capital they have created Global Head of Talent Strategy and over decades. To do that, we will need to Performance Systems, came from MetLife, have a compensation system that pays for where she implemented powerful per- performance, to be sure, but pays competi- formance management systems. Michael tively in amount and composition. Cowan, Senior Vice President and Chief The Board recognizes the extraordinary Administrative Officer, brings extensive commitment and effort AIG people have administrative experience from Merrill made during this most difficult period. Lynch and now has oversight responsibili- Like millions of others, many of our em- ties for AIG’s operations and systems, cor- ployees lost a substantial portion of their porate administration, and the separation life’s savings through no fault of their own office. Together with the many talented and have suffered the pain of watching a people who stayed through the crisis, these company in which they had great pride individuals bring additional experience and teeter on the edge of collapse. While insight that will greatly benefit AIG. we can’t lose sight of the lessons of the The Board has been intently focused recent past, our focus as a Board is to deal on working with the FRBNY and the with the hand we have been dealt, repay U.S. Department of the Treasury, as well the government, and build a new AIG. as dealing with the pay guidelines and To the extent we succeed, we will rebuild a restrictions imposed by the Special Master, company we can all be proud of, one once who has ultimate authority over a number again composed of industry-leading of major compensation decisions. While businesses that provide valuable products we can pay the vast majority of people and services to our customers, secure jobs competitively, on occasion, these restric- for our employees, and an attractive return tions and his decisions have yielded out- to our shareholders. This is the task we comes that make little business sense. For face, and with the strong leadership of Bob example, in some cases, we are prevented and his management team, as well as the from providing market competitive efforts of our entire employee group, I compensation to retain some of our own have great confidence that we will succeed. most experienced and best executives. This hurts the business and makes it harder to repay the taxpayers. All of our actions, as well as those of management, are aimed at restoring AIG Harvey Golub as a strong company with an effective February 26, 2010 governance system, solid businesses, and a risk profile and capital structure in which our customers, regulators, employees, shareholders, and other stakeholders can have confidence. Our goal is to fully 2 AIG 2009 Annual Report


  • Page 5

    To Our great organization built over many years. But nothing has impressed me more than Shareholders observing firsthand the skilled and dedi- Robert H. Benmosche cated employee base of this company. It is President and only because of their hard work, experi- Chief Executive Officer ence, and depth of knowledge that we have succeeded in stabilizing our businesses and setting the strategies for moving forward. It is these strategies and achievements that I want to discuss in this letter. Before doing so, however, let me review D uring this past year, AIG made our financial performance in 2009. We substantial progress in refocusing operated under very difficult economic and our major businesses on growth market conditions, particularly in the first and profitability, set in place the part of the year, and we are proud that framework for repaying U.S. taxpayers for we have started to recover. Business reten- their support of our company during its tion has improved. Employee retention has darkest days, and significantly wound down improved. And revenues have improved. and de-risked the AIG Financial Products Overall, we reported losses totaling Corp. (AIGFP) derivatives portfolio. We $10.9 billion in 2009, compared with also revised our employee compensation losses of $99.3 billion in 2008, a substantial programs in order to motivate and reward improvement. AIG’s cadre of Let me spend a minute explaining The fundamental purpose of our outstanding profes- $5.2 billion of the pre-tax losses we sus- company is to serve our clients profes- sionals, who will tained in the fourth quarter. When the Fed- sionally and fairly. We are also a form the center of eral Reserve Bank of New York (FRBNY) company that honors its obligations. our business success provided AIG with $85 billion in support going forward. We in September 2008, AIG was required to have significantly stabilized the company turn over a 79.9 percent ownership stake in over the past year. Now it is up to us to get the company to a trust established for the back to producing good business results. sole benefit of the U.S. Department of the The fundamental purpose of our Treasury. This ownership stake represented company is to serve our clients profession- in effect a pre-paid commitment fee that ally and fairly. We are also a company that AIG valued at $23 billion as an asset on honors its obligations. We have survived its balance sheet to be amortized over the our major crisis of the past few years and life of the facility. In the fourth quarter of are now on our way to regaining our stat- 2009, we accelerated the amortization ure as one of the world’s largest and most of $5.2 billion, pre-tax, of this asset in successful property casualty insurance op- connection with reducing the amount we erations, with strong could borrow from U.S. life and annuity Clearly, we will be a smaller and more the FRBNY by companies and sev- focused company than in the past. $25 billion. This eral other businesses The only way we can repay taxpayers reduction was that enhance our is to divest parts of the organization, achieved when we nucleus. Clearly, we and we are. placed two of our will be a smaller and international life more focused company than in the past. insurers in special purpose vehicles (SPVs) The only way we can repay taxpayers is to in which the FRBNY took preferred inter- divest parts of the organization, and we are. ests in exchange for reducing $25 billion of Over the course of my first seven the outstanding amount that AIG owed the months as AIG’s CEO, I have been impressed by many things about our worldwide business portfolio and the AIG 2009 Annual Report 3


  • Page 6

    FRBNY. This is the second time we have decades. The Chartis team is the best in reduced the amount we could borrow. Last the business, and has emerged from a very year, we reduced the original $85 billion to difficult period with its business intact and $60 billion, and recorded a similar acceler- as focused as ever on profitability. During ated amortization amount of $6.6 billion. 2009, Chartis executed the largest market- AIG’s foreign life insurance operations ing plan in its history, meeting with tens have always been one of the company’s of thousands of brokers and customers to crown jewels. By and large, they have reassure them of the financial stability and weathered the storm of the global financial operating strengths of the company. crisis in good shape, with strong earn- Chartis also integrated its domestic ings performance. In March 2010, AIG and foreign businesses to form, for the announced definitive agreements to sell first time, a truly global property casualty American International Assurance operation. The benefits of one global Company, Limited (AIA) to Prudential plc, franchise are already manifested through and American Life Insurance Company the enhanced service Chartis provides (ALICO) to MetLife, Inc., subject to regu- to customers transacting business across latory approvals. These agreements marked borders and around the world. critical milestones in our efforts to repay From an unmatched worldwide plat- taxpayers. We are on track to generate form, Chartis’ international businesses approximately $50.7 billion from these continue to seek out new opportunities in two transactions alone, consisting of ap- both established and emerging markets. proximately $31.5 billion in cash to repay This was clearly evident in Chartis’ recent the FRBNY, plus another approximately announcement that it will take a majority $19.2 billion in securities that we will stake in Fuji Fire and Marine Insurance sell over time to repay the government. Company, Ltd., which will make Chartis, In addition, both sales give AIG greater subject to regulatory approval, the fourth- flexibility to move forward with our largest insurance organization in Japan. restructuring and rebuilding efforts, and In the U.S., Chartis’ industry leadership focus on enhancing the value of our key is largely derived from its ability to un- insurance businesses. cover new markets and to create innovative Our plan calls for each of our major products and services that customers value. businesses to contribute to our future In 2009 alone, its U.S. businesses launched success, and our company-wide strategy is a new product or service every two weeks. focused on repaying We will continue that emphasis. Our plan calls for each of our major taxpayers, achiev- When I think about AIG’s life insur- businesses to contribute to our future ing growth, and ance and retirement services business, I see success, and our company-wide strat- balancing risks. The enormous growth opportunities that egy is focused on repaying taxpayers, risk diversification exist in the U.S. for our products. During achieving growth, and balancing risks. represented by our 2009, AIG’s Domestic Life and Retirement property casualty Services division was rebranded as operations (underwriting risk) and life and SunAmerica Financial Group, and now retirement services businesses (interest represents the fourth-largest life insur- rate risk, market risk, and mortality risk) ance organization in the United States, provides AIG with a stronger profile going with over $19 billion in premiums and forward. Let me give some examples. deposits and more than 16 million custom- Chartis, our worldwide property ers. SunAmerica Financial Group offers casualty insurance organization, is already a comprehensive suite of life insurance, one of the world’s largest insurers cover- retirement savings, and guaranteed ing commercial risks, large and small, income products through a multi-channel with a global network built up over many distribution network. SunAmerica has terrific opportunities associated with the aging baby boomer population. As members of this group approach age 65, they are dealing with 4 AIG 2009 Annual Report


  • Page 7

    uncertainty and are seeking more financial its resources to manage the large number guarantees about their future. In addition, of claims submitted by mortgage lenders to companies have cut back dramatically ensure appropriate loss mitigation. on traditional retirement plans and lifetime At AIG Star Life and AIG Edison Life benefits, and even on 401(k) plans. We in Japan, it became clear that we were are well-positioned to help relieve the not going to be able to realize an accept- tremendous burden able sale price that recognized full value Our strategy remains to exit the vast on these individu- for these established franchises. So our majority of the risk at AIGFP by the als, who can look to strategy changed, and we will work with end of 2010. Any remaining positions, insurance and an- these companies to streamline their opera- which will be largely de-risked and not nuity companies to tions and processing. We believe they will require active management, will either help them prepare continue to produce strong results, for, and manage, and that they will contribute positively to be managed by AIG or third parties. their retirement. AIG’s overall business portfolio. Our Advisor Group, which we decided to On AIGFP, I am pleased to report that retain, provides independent, face-to-face our employees continued to make substan- financial advice to thousand of clients, and tial progress in reducing and de-risking the plays a key role in our ability to provide portfolio—and in a very deliberate way. investment and life insurance products. AIGFP cut the number of positions in its I appreciate the patience and confidence of portfolio by 54 percent in 2009 to approxi- this group, which is excited to remain mately 16,000, and the notional amount of part of AIG. Our team at VALIC, another derivatives outstanding fell below $1 tril- part of SunAmerica Financial Group, acts lion from $2.7 trillion in 2008. All key risk as a leading provider of retirement measures are down significantly from last plan services to higher education, public year, and I expect continued progress in K-12 schools, and healthcare institutions. 2010. Our strategy remains to exit the vast VALIC performed well in 2009 and will majority of the risk at AIGFP by the end continue to play an important role going of 2010. Any remaining positions, which forward. American General, a provider of will be largely de-risked and not require life insurance for over 150 years, will con- active management, will either be managed tinue to help protect the hopes and dreams by AIG or third parties. of American families. Finally, Western International Lease Finance Corpora- National has helped Americans achieve tion (ILFC) is the international market financial security with innovative fixed leader in its field—leasing and remarketing annuity products for more than 50 years. commercial jet aircraft to airlines around We are very proud that Western National, the world. Its leasing portfolio consists one of the first insurance companies to of more than 1,000 aircraft. We remain develop fixed annuity products specifically confident in the future of ILFC as a market for sale through banks, successfully leader, and we are working with the ILFC regained its number one position in that Board to enhance its long-term poten- market in the third quarter of 2009. tial and meet its funding requirements. One of our specialty businesses that Likewise, American General Finance, Inc. has suffered through the financial crisis (AGF), which provides first lien mortgage is United Guaranty Corporation (UGC), and other consumer loans to the middle in- which provides residential mortgage come segment, is a well-run business, and guaranty insurance. The company tight- we continue to explore a variety of options ened underwriting guidelines in the fourth to protect its value and meet its obligations. quarter of 2008, resulting in a far superior Let me turn now to my priorities for risk profile on new business written in AIG going forward. I joined the company 2009. In addition, the company increased last August to succeed Ed Liddy. Ed did a terrific job under very difficult and often unfair circumstances to stabilize the com- pany, and develop and begin to implement AIG 2009 Annual Report 5


  • Page 8

    a plan to repay the government. He faced a Treasury and the FRBNY to reduce the variety of external forces that made it very debt that AIG owes the U.S. government, hard to accomplish those goals. None- improve AIG’s capital structure, and theless, by the time I joined, things were enhance the value of our businesses. These beginning to look better. It is my task to specific steps, which are discussed in accelerate this momentum and restore the detail in AIG’s 2009 Form 10-K, helped reputation of this world-class organization. give us the breathing room we needed to In taking on these responsibilities, I implement our strategies. regard my first priority to be empowering All of us at AIG consider repaying the our people. One thing I’ve learned in my U.S. government our top priority. While career is that people count. Too often we this may not occur in the very near term, underestimate the power of people and it is our goal and we believe it will happen. take them for granted. Our 96,000 em- But we are not going to sell our assets at ployees worldwide, approximately 35,000 fire-sale prices. When I first came on board of whom work in the U.S., are absolutely as AIG’s CEO in August, I held a series outstanding individuals. They represent an of meetings with our management and asset of immense value to AIG, and, absent employees throughout the company. I told their resilience and dedication, we would them that I was a builder, not a liquidator. surely not be where we are today. We I also noted that I believed AIG was too are developing and implementing com- big, too diverse, and not transparent pensation and reward programs that will enough, and that we were going to have to recognize their create more discrete businesses. This is the Our 96,000 employees worldwide, contributions. only way we can create fair value for what approximately 35,000 of whom work Compensation at are indisputably outstanding businesses, in the U.S., are absolutely outstanding AIG will reflect with strong, often unique franchises, dis- individuals. They represent an asset of on-the-job perfor- tribution networks, product offerings, and immense value to AIG, and, absent their mance, and we will experienced staff built up over many years. resilience and dedication, we would implement strong I am pleased to report to you that AIG’s performance man- employees have taken up the challenge surely not be where we are today. agement systems of making a better company with gusto. that will differentiate performance. This I am so impressed with their attitude and will include the ability to set goals and their willingness to roll up their sleeves measure results against them. Nothing and make things happen. We have a clear is more important to AIG’s success going strategy for the corporation overall and for forward. our principal businesses. Now we just have Over the last several quarters, we to execute with precision and a sharp focus have been able to report stabilization and on results. The last year and a half have improved operating results in a number of been very difficult for AIG. But we have to our key businesses. While these are wel- look forward, not backward. I am confident come events, we expect continued volatility that, with our outstanding team of employ- in coming quarters, partly due to ongoing ees, we will succeed. restructuring activities. We are working hard to execute our asset disposition plan as we remain sharply focused on business results. During 2009, we sold or entered into agreements to sell assets that are expected to generate approximately Robert H. Benmosche $5.6 billion of aggregate net cash proceeds. March 10, 2010 In March, we restructured our relation- ships with the U.S. Department of the 6 AIG 2009 Annual Report


  • Page 9

    UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) ፼ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2009 or  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 (I.R.S. Employer incorporation or organization) 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 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, Par Value $2.50 Per Share New York Stock Exchange 5.75% Series A-2 Junior Subordinated Debentures New York Stock Exchange 4.875% Series A-3 Junior Subordinated Debentures New York Stock Exchange 6.45% Series A-4 Junior Subordinated Debentures New York Stock Exchange 7.70% Series A-5 Junior Subordinated Debentures New York Stock Exchange Corporate Units (composed of stock purchase contracts and junior subordinated debentures) New York Stock Exchange NIKKEI 225 Index Market Index Target-Term Securities due January 5, 2011 NYSE Arca Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ፼ No  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No ፼ 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 ፼ No  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ፼ No  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer’’ and ‘‘smaller reporting company’’ in Rule 12b-2 of the Exchange Act. Large accelerated filer ፼ Accelerated filer  Non-accelerated filer  Smaller reporting company  (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No ፼ The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the registrant computed by reference to the price at which the common equity was last sold of $23.20 as of June 30, 2009 (the last business day of the registrant’s most recently completed second fiscal quarter), was approximately $2,794,000,000. As of January 29, 2010, there were outstanding 134,926,293 shares of Common Stock, $2.50 par value per share, of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Document of the Registrant Form 10-K Reference Locations Portions of the registrant’s definitive proxy statement for Part III, Items 10, 11, 12, 13 and 14 the 2010 Annual Meeting of Shareholders


  • Page 10

    American International Group, Inc., and Subsidiaries Table of Contents Index Page PART I Item 1. Business 3 Item 1A. Risk Factors 17 Item 1B. Unresolved Staff Comments 30 Item 2. Properties 30 Item 3. Legal Proceedings 30 Item 4. Submission of Matters to a Vote of Security Holders 30 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 31 Item 6. Selected Financial Data 33 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 190 Item 8. Financial Statements and Supplementary Data 191 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 346 Item 9A. Controls and Procedures 346 Item 9B. Other Information 347 PART III Item 10. Directors, Executive Officers and Corporate Governance 348 Item 11. Executive Compensation 348 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 348 Item 13. Certain Relationships and Related Transactions, and Director Independence 348 Item 14. Principal Accounting Fees and Services 348 PART IV Item 15.* Exhibits, Financial Statement Schedules 349 Signatures 350 * Part IV, Item 15, Schedules, the Exhibit Index, and certain Exhibits were included in the Form 10-K filed with the Securities and Exchange Commission but have not been included herein. Copies may be obtained electronically through AIG’s website at www.aigcorporate.com or from the Director of Investor Relations, American International Group, Inc. AIG 2009 Form 10-K 2


  • Page 11

    American International Group, Inc., and Subsidiaries Part I Item 1. Business American International Group, Inc. (AIG), a Delaware corporation, is a holding company which, through its subsidiaries, is engaged primarily in a broad range of insurance and insurance-related activities in the United States and abroad. Since September 2008, AIG has been working to protect and enhance the value of its key businesses, execute an orderly asset disposition plan, and position itself for the future. AIG has entered into several important transactions and relationships with the Federal Reserve Bank of New York (FRBNY), the AIG Credit Facility Trust (together with its trustees, acting in their capacity as trustees, the Trust) and the United States Department of the Treasury (the Department of the Treasury). As a result of these arrangements, AIG is controlled by the Trust, which was established for the sole benefit of the United States Treasury. AIG’s four reportable segments are as follows: • General Insurance; • Domestic Life Insurance & Retirement Services; • Foreign Life Insurance & Retirement Services; and • Financial Services. The principal business units in each of AIG’s reportable segments at year-end 2009 are shown below. For information on AIG’s reportable segments, including geographic areas of operation, and changes made in 2009, see Note 4 to the Consolidated Financial Statements. General Insurance Domestic Life Insurance & Retirement Services American Home Assurance Company (American Home) American General Life Insurance Company (American General) National Union Fire Insurance Company of Pittsburgh, Pa. American General Life and Accident Insurance Company (National Union) (AGLA) New Hampshire Insurance Company (New Hampshire) The United States Life Insurance Company in the City of New York (USLIFE) Lexington Insurance Company (Lexington) The Variable Annuity Life Insurance Company (VALIC) Chartis Overseas, Ltd. Western National Life Insurance Company (Western National) AIU Insurance Company (AIUI) SunAmerica Annuity and Life Assurance Company (SunAmerica Annuity) American International Reinsurance Company Limited (AIRCO) 3 AIG 2009 Form 10-K


  • Page 12

    American International Group, Inc., and Subsidiaries Foreign Life Insurance & Retirement Services Financial Services American Life Insurance Company (ALICO) International Lease Finance Corporation (ILFC) AIG Star Life Insurance Co., Ltd. (AIG Star Life) AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (AIGFP) AIG Edison Life Insurance Company (AIG Edison Life) American General Finance, Inc. (AGF) American International Assurance Company, Limited, AIG Consumer Finance Group, Inc. (AIGCFG) together with American International Assurance Company (Bermuda) Limited (AIA) The Philippine American Life and General Insurance AIG Credit Corp. (A.I. Credit) Company (Philamlife) Throughout this Annual Report on Form 10-K, AIG presents its operations in the way it believes will be most meaningful, as well as most transparent. Certain of the measurements used by AIG management are ‘‘non-GAAP financial measures’’ under SEC rules and regulations. Underwriting profit (loss) is utilized to report results for AIG’s General Insurance operations. Pre-tax income (loss) before net realized capital gains (losses) is utilized to report results for AIG’s life insurance and retirement services operations. For an explanation of why AIG management considers these ‘‘non-GAAP measures’’ useful to investors, see Management’s Discussion and Analysis of Financial Condition and Results of Operations. Following is additional information about AIG’s operations: General Insurance Operations AIG’s General Insurance subsidiaries are multiple line companies writing substantially all lines of property and casualty insurance both domestically and abroad and comprise the Commercial Insurance and the Foreign General Insurance operating segments. In July 2009, AIG’s General Insurance subsidiaries were rebranded as Chartis (Commercial Insurance operates as Chartis U.S. and Foreign General Insurance operates as Chartis International). Chartis Private Client Group (Private Client Group) is part of Chartis U.S. AIG is diversified both in terms of classes of business and geographic locations. In General Insurance, general and auto liability business is the largest class of business written and represented approximately 15 percent of net premiums written for the year ended December 31, 2009. During 2009, 8 percent, 6 percent and 6 percent of the direct General Insurance premiums written (gross premiums less return premiums and cancellations, excluding reinsurance assumed and before deducting reinsurance ceded) were written in the states of California, New York and Texas, respectively, and 11 percent and 9 percent were written in Japan and the United Kingdom, respectively. No other state or foreign country accounted for more than five percent of such premiums. The majority of AIG’s General Insurance business is in the casualty classes, which tend to involve longer periods of time for the reporting and settling of claims. This may increase the risk and uncertainty with respect to AIG’s loss reserve development. Commercial Insurance Commercial Insurance’s business in the United States and Canada is conducted through American Home, National Union, Lexington and certain other General Insurance company subsidiaries of AIG. Chartis U.S. writes substantially all classes of business insurance, accepting such business mainly from insurance brokers. This provides Chartis U.S. the opportunity to select specialized markets and retain underwriting control. Any licensed broker is able to submit business to Chartis U.S. without the traditional agent-company contractual relationship, but such broker usually has no authority to commit Chartis U.S. to accept a risk. In addition to writing substantially all classes of business insurance, including large commercial or industrial property insurance, excess liability, inland marine, environmental, workers’ compensation and excess and umbrella AIG 2009 Form 10-K 4


  • Page 13

    American International Group, Inc., and Subsidiaries coverages, Chartis U.S. offers many specialized forms of insurance such as aviation, accident and health, equipment breakdown, directors and officers liability (D&O), difference-in-conditions, kidnap-ransom, export credit and political risk, and various types of professional errors and omissions coverages. Also included in Chartis U.S. are the operations of Commercial Casualty, which provides insurance and risk management programs for large corporate customers and is a leading provider of customized structured insurance products, and Chartis Environmental, which focuses on providing specialty products to clients with environmental exposures. Lexington writes surplus lines for risks on which conventional insurance companies do not readily provide insurance coverage, either because of complexity or because the coverage does not lend itself to conventional contracts. The Chartis Worldsource Division introduces and coordinates AIG’s products and services to U.S.-based multinational clients and foreign corporations doing business in the U.S. Private Client Group provides a broad range of coverages for high net worth individuals. Foreign General Insurance Chartis International writes both commercial and consumer lines of insurance through a network of agencies, branches and foreign-based insurance subsidiaries. Chartis International uses various marketing methods and multiple distribution channels to write both commercial and consumer lines of insurance with certain refinements for local laws, customs and needs. Chartis International operates in Asia, the Pacific Rim, Europe, the U.K., Africa, the Middle East and Latin America. Discussion and Analysis of Consolidated Net Losses and Loss Expense Reserve Development The reserve for net losses and loss expenses represents the accumulation of estimates for reported losses (case basis reserves) and provisions for losses incurred but not reported (IBNR), both reduced by applicable reinsurance recoverable and the discount for future investment income, where permitted. Net losses and loss expenses are charged to income as incurred. The Liability for unpaid claims and claims adjustment expense (loss reserves) established with respect to foreign business is set and monitored in terms of the currency in which payment is expected to be made. Therefore, no assumption is included for changes in currency rates. See also Note 1(v) to the Consolidated Financial Statements. Management reviews the adequacy of established loss reserves utilizing a number of analytical reserve development techniques. Through the use of these techniques, management is able to monitor the adequacy of AIG’s established reserves and determine appropriate assumptions for inflation. Also, analysis of emerging specific development patterns, such as case reserve redundancies or deficiencies and IBNR emergence, allows management to determine any required adjustments. The ‘‘Analysis of Consolidated Losses and Loss Expense Reserve Development’’ table presents the development of net losses and loss expense reserves for calendar years 1999 through 2009. Immediately following this table is a second table that presents all data on a basis that excludes asbestos and environmental net losses and loss expense reserve development. The opening reserves held are shown at the top of the table for each year-end date. The amount of loss reserve discount included in the opening reserve at each date is shown immediately below the reserves held for each year. The undiscounted reserve at each date is thus the sum of the discount and the reserve held. The upper half of the table presents the cumulative amounts paid during successive years related to the undiscounted opening loss reserves. For example, in the table that excludes asbestos and environmental losses, with respect to the net losses and loss expense reserve of $28.65 billion at December 31, 2002, by the end of 2009 (seven years later) $39.64 billion had actually been paid in settlement of these net loss reserves. In addition, as reflected in the lower section of the table, the original undiscounted reserve of $30.15 billion was reestimated to be $50.79 billion at December 31, 2009. This increase from the original estimate generally results from a combination of a number of factors, including claims being settled for larger amounts than originally estimated. The original estimates will also be increased or decreased as more information becomes known about the individual claims and overall claim frequency and severity patterns. The redundancy (deficiency) depicted in the table, for any particular calendar year, presents the aggregate change in estimates over the period of years subsequent to the calendar year reflected at the top of the respective column heading. For example, the deficiency of $2.62 billion at December 31, 2009 related to December 31, 2008 net losses and loss expense reserves of $73.64 billion represents the cumulative amount by which reserves in 2008 and prior years have developed unfavorably during 2009. 5 AIG 2009 Form 10-K


  • Page 14

    American International Group, Inc., and Subsidiaries The bottom of each table below presents the remaining undiscounted and discounted net loss reserve for each year. For example, in the table that excludes asbestos and environmental losses, for the 2001 year-end, the remaining undiscounted reserves held at December 31, 2009 are $9.71 billion, with a corresponding discounted net reserve of $8.98 billion. Analysis of Consolidated Losses and Loss Expense Reserve Development The following table presents for each calendar year the losses and loss expense reserves and the development thereof including those with respect to asbestos and environmental claims. See also Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Segment Results — General Insurance Operations — Liability for unpaid claims and claims adjustment expense.* (in millions) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Net Reserves Held $25,636 $25,684 $26,005 $29,347 $36,228 $47,253 $57,476 $62,630 $69,288 $72,455 $67,899 Discount (in Reserves Held) 1,075 1,287 1,423 1,499 1,516 1,553 2,110 2,264 2,429 2,574 2,655 Net Reserves Held (Undiscounted) 26,711 26,971 27,428 30,846 37,744 48,806 59,586 64,894 71,717 75,029 70,554 Paid (Cumulative) as of: One year later 8,266 9,709 11,007 10,775 12,163 14,910 15,326 14,862 16,531 24,267 Two years later 14,640 17,149 18,091 18,589 21,773 24,377 25,152 24,388 31,791 Three years later 19,901 21,930 23,881 25,513 28,763 31,296 32,295 34,647 Four years later 23,074 26,090 28,717 30,757 33,825 36,804 40,380 Five years later 25,829 29,473 32,685 34,627 38,087 43,162 Six years later 28,165 32,421 35,656 37,778 42,924 Seven years later 30,336 34,660 38,116 41,493 Eight years later 31,956 36,497 41,055 Nine years later 33,489 38,943 Ten years later 35,359 (in millions) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Net Reserves Held (Undiscounted) $26,711 $26,971 $27,428 $30,846 $37,744 $48,806 $59,586 $64,894 $71,717 $75,029 $70,554 Undiscounted Liability as of: One year later 26,358 26,979 31,112 32,913 40,931 53,486 59,533 64,238 71,836 77,800 Two years later 27,023 30,696 33,363 37,583 49,463 55,009 60,126 64,764 74,318 Three years later 29,994 32,732 37,964 46,179 51,497 56,047 61,242 67,303 Four years later 31,192 36,210 45,203 48,427 52,964 57,618 63,872 Five years later 33,910 41,699 47,078 49,855 54,870 60,231 Six years later 38,087 43,543 48,273 51,560 57,300 Seven years later 39,597 44,475 49,803 53,917 Eight years later 40,217 45,767 52,034 Nine years later 41,168 47,682 Ten years later 42,727 Net Redundancy / (Deficiency) (16,016) (20,711) (24,606) (23,071) (19,556) (11,425) (4,286) (2,409) (2,601) (2,771) Remaining Reserves (Undiscounted) 7,368 8,739 10,979 12,424 14,376 17,069 23,492 32,656 42,527 53,533 Remaining Discount 511 609 723 856 988 1,124 1,309 1,552 1,893 2,261 Remaining Reserves 6,857 8,130 10,256 11,568 13,388 15,945 22,183 31,104 40,634 51,272 AIG 2009 Form 10-K 6


  • Page 15

    American International Group, Inc., and Subsidiaries The following table presents the gross liability (before discount), reinsurance recoverable and net liability recorded at each year end and the reestimation of these amounts as of December 31, 2009: (in millions) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Gross Liability, End of Year $37,278 $39,222 $42,629 $48,173 $53,388 $63,430 $79,279 $82,263 $87,929 $91,832 $88,041 Reinsurance Recoverable, End of Year 10,567 12,251 15,201 17,327 15,644 14,624 19,693 17,369 16,212 16,803 17,487 Net Liability, End of Year 26,711 26,971 27,428 30,846 37,744 48,806 59,586 64,894 71,717 75,029 70,554 Reestimated Gross Liability 64,160 71,146 76,143 77,873 78,829 79,883 86,444 86,462 92,086 94,932 Reestimated Reinsurance Recoverable 21,433 23,464 24,109 23,956 21,529 19,652 22,572 19,159 17,768 17,132 Reestimated Net Liability 42,727 47,682 52,034 53,917 57,300 60,231 63,872 67,303 74,318 77,800 Cumulative Gross Redundancy/(Deficiency) (26,882) (31,924) (33,514) (29,700) (25,441) (16,453) (7,165) (4,199) (4,157) (3,100) * During 2009, Transatlantic Holdings, Inc. (Transatlantic) was deconsolidated and 21st Century Insurance Group and Agency Auto Division (excluding AIG Private Client Group) (21st Century) and HSB Group, Inc. (HSB) were sold. Immediately preceding these sales, the loss and loss expense reserves for these entities totaled $9.7 billion. As a result of the sales and deconsolidation, these obligations ceased being the responsibility of AIG. The sales and deconsolidation are reflected in the table above as a reduction in December 31, 2009 net reserves of $9.7 billion and as a $8.6 billion increase in paid losses for the years 1999 through 2008 to reflect no impact on incurred losses for these periods. Analysis of Consolidated Losses and Loss Expense Reserve Development Excluding Asbestos and Environmental Losses and Loss Expense Reserve Development The following table presents for each calendar year the losses and loss expense reserves and the development thereof excluding those with respect to asbestos and environmental claims. See also Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Segment Results — General Insurance Operations — Liability for unpaid claims and claims adjustment expense.* (in millions) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Net Reserves Held $24,745 $24,829 $25,286 $28,651 $35,559 $45,742 $55,226 $60,451 $67,597 $71,062 $66,588 Discount (in Reserves Held) 1,075 1,287 1,423 1,499 1,516 1,553 2,110 2,264 2,429 2,574 2,655 Net Reserves Held (Undiscounted) 25,820 26,116 26,709 30,150 37,075 47,295 57,336 62,715 70,026 73,636 69,243 Paid (Cumulative) as of: One year later 8,195 9,515 10,861 10,632 11,999 14,718 15,047 14,356 16,183 24,028 Two years later 14,376 16,808 17,801 18,283 21,419 23,906 24,367 23,535 31,204 Three years later 19,490 21,447 23,430 25,021 28,129 30,320 31,163 33,555 Four years later 22,521 25,445 28,080 29,987 32,686 35,481 39,009 Five years later 25,116 28,643 31,771 33,353 36,601 41,600 Six years later 27,266 31,315 34,238 36,159 41,198 Seven years later 29,162 33,051 36,353 39,637 Eight years later 30,279 34,543 39,055 Nine years later 31,469 36,752 Ten years later 33,101 7 AIG 2009 Form 10-K


  • Page 16

    American International Group, Inc., and Subsidiaries (in millions) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Net Reserves Held (Undiscounted) $25,820 $26,116 $26,709 $30,150 $37,075 $47,295 $57,336 $62,715 $70,026 $73,636 $69,243 Undiscounted Liability as of: One year later 25,437 26,071 30,274 32,129 39,261 51,048 57,077 62,043 70,096 76,251 Two years later 26,053 29,670 32,438 35,803 46,865 52,364 57,653 62,521 72,423 Three years later 28,902 31,619 36,043 43,467 48,691 53,385 58,721 64,904 Four years later 30,014 34,102 42,348 45,510 50,140 54,908 61,195 Five years later 31,738 38,655 44,018 46,925 51,997 57,365 Six years later 34,978 40,294 45,201 48,584 54,272 Seven years later 36,283 41,213 46,685 50,786 Eight years later 36,889 42,459 48,761 Nine years later 37,795 44,219 Ten years later 39,199 Net Redundancy/(Deficiency) (13,379) (18,103) (22,052) (20,636) (17,197) (10,070) (3,859) (2,189) (2,397) (2,615) Remaining Reserves (Undiscounted) 6,098 7,467 9,706 11,149 13,074 15,765 22,186 31,349 41,219 52,223 Remaining Discount 511 609 723 856 988 1,124 1,309 1,552 1,893 2,261 Remaining Reserves 5,587 6,858 8,983 10,293 12,086 14,641 20,877 29,797 39,326 49,962 The following table presents the gross liability (before discount), reinsurance recoverable and net liability recorded at each year end and the reestimation of these amounts as of December 31, 2009: (in millions) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Gross Liability, End of Year $34,666 $36,777 $40,400 $46,036 $51,363 $59,790 $73,808 $77,111 $83,551 $87,973 $84,467 Reinsurance Recoverable, End of Year 8,846 10,661 13,691 15,886 14,288 12,495 16,472 14,396 13,525 14,337 15,224 Net Liability, End of Year 25,820 26,116 26,709 30,150 37,075 47,295 57,336 62,715 70,026 73,636 69,243 Reestimated Gross Liability 55,041 62,549 68,075 70,148 71,492 72,836 79,818 80,494 86,995 90,589 Reestimated Reinsurance Recoverable 15,842 18,330 19,314 19,362 17,220 15,471 18,623 15,590 14,572 14,338 Reestimated Net Liability 39,199 44,219 48,761 50,786 54,272 57,365 61,195 64,904 72,423 76,251 Cumulative Gross Redundancy/(Deficiency) (20,375) (25,772) (27,675) (24,112) (20,129) (13,046) (6,010) (3,383) (3,444) (2,616) * During 2009, Transatlantic was deconsolidated and 21st Century and HSB were sold. Immediately preceding these sales, the loss and loss expense reserves for these entities totaled $9.6 billion. As a result of the sales and deconsolidation, these obligations ceased being the responsibility of AIG. The sales and deconsolidation are reflected in the table above as a reduction in December 31, 2009 net reserves of $9.6 billion and as a $8.6 billion increase in paid losses for the years 1999 through 2008 to reflect no impact on incurred losses for these periods. The Liability for unpaid claims and claims adjustment expense as reported in AIG’s Consolidated Balance Sheet at December 31, 2009 differs from the total reserve reported in the Annual Statements filed with state insurance departments and, where appropriate, with foreign regulatory authorities. The differences at December 31, 2009 relate primarily to reserves for certain foreign operations not required to be reported in the United States for statutory reporting purposes. Further, statutory practices in the United States require reserves to be shown net of applicable reinsurance recoverable. The reserve for gross losses and loss expenses is prior to reinsurance and represents the accumulation for reported losses and IBNR. Management reviews the adequacy of established gross loss reserves in the manner previously described for net loss reserves. For further discussion regarding net reserves for losses and loss expenses, see Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Segment Results — General Insurance Operations — Liability for unpaid claims and claims adjustment expense. AIG 2009 Form 10-K 8


  • Page 17

    American International Group, Inc., and Subsidiaries Domestic Life Insurance & Retirement Services Operations AIG’s Domestic Life Insurance & Retirement Services segment, rebranded as SunAmerica Financial Group in December 2009, is comprised of several life insurance and retirement services businesses that market their products and services under the brands of American General, AGLA, VALIC, Western National, SunAmerica Retirement Markets, SunAmerica Mutual Funds, SunAmerica Affordable Housing Partners, FSC Securities, Royal Alliance and SagePoint Financial. The businesses offer a comprehensive suite of life insurance, retirement savings products and guaranteed income solutions through an established multi-channel distribution network that includes banks, national, regional and independent broker-dealers, career financial advisors, wholesale life brokers, insurance agents and a direct-to-consumer platform. AIG’s Domestic Life Insurance businesses offer a broad range of protection products, including individual term and universal life insurance and group life and health products. In addition, Domestic Life Insurance offers a variety of payout annuities, which include single premium immediate annuities, structured settlements and terminal funding annuities. Domestic Retirement Services businesses offer group retirement products and individual fixed and variable annuities. Certain previously acquired closed blocks and other fixed and variable annuity blocks that have been discontinued are reported as ‘‘runoff’’ annuities. Domestic Retirement Services also maintains a runoff block of Guaranteed Investment Contracts (GICs) that were written in (or issued to) the institutional market place prior to 2006. Results for certain brokerage service, mutual fund, GIC and other asset management activities previously reported in the Asset Management segment are now included in Domestic Life Insurance & Retirement Services. Foreign Life Insurance & Retirement Services Operations AIG’s Foreign Life Insurance & Retirement Services operations include insurance and investment-oriented products such as whole and term life, investment linked, universal life and endowments, personal accident and health products, group products, including pension, life and health, and fixed and variable annuities. The Foreign Life Insurance & Retirement Services products are sold through independent producers, career agents, financial institutions and direct marketing channels. AIG’s principal Foreign Life Insurance & Retirement Services operations include ALICO, AIG Star Life, AIG Edison Life, AIA and Philamlife ,which is now an AIA subsidiary. ALICO is incorporated in Delaware and all of its business is written outside the United States. ALICO has operations either directly or through subsidiaries in Europe, including the U.K., Latin America, the Caribbean, the Middle East, and Japan. AIA operates primarily in China (including Hong Kong), Singapore, Malaysia, Thailand, Korea, Australia, New Zealand, Vietnam, Indonesia and India. The operations in India are conducted through a joint venture, Tata AIG Life Insurance Company Limited. Philamlife is the largest life insurer in the Philippines. AIG Star Life and AIG Edison Life operate in Japan. On October 12, 2009, AIG entered into an agreement to sell its 97.57 percent share of Nan Shan Life Insurance Company, Ltd. (Nan Shan), for approximately $2.15 billion. As a result of this transaction, Nan Shan qualified as a discontinued operation and met the criteria for ‘‘held-for-sale’’ accounting in the fourth quarter of 2009. See Note 2 to the Consolidated Financial Statements for further discussion. Reinsurance Operations Chartis subsidiaries operate worldwide primarily by underwriting and accepting risks for their direct account and securing reinsurance on that portion of the risk in excess of the limit which they wish to retain. This operating policy differs from that of many insurance companies that will underwrite only up to their net retention limit, thereby requiring the broker or agent to secure commitments from other underwriters for the remainder of the gross risk amount. 9 AIG 2009 Form 10-K


  • Page 18

    American International Group, Inc., and Subsidiaries Various AIG classes of business, including Commercial Insurance, AIU and AIG Risk Finance, as well as certain life insurance subsidiaries, use AIRCO as a reinsurer for certain of their businesses. In Bermuda, AIRCO discounts reserves attributable to certain classes of general insurance business assumed from other AIG subsidiaries. For a further discussion of reinsurance, see Item 1A. Risk Factors — Reinsurance; Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Insurance Risk Management — Reinsurance. Insurance Investment Operations A significant portion of AIG’s General Insurance and Domestic and Foreign Life Insurance & Retirement Services revenues are derived from AIG’s insurance investment operations. The following table summarizes the investment results of AIG’s insurance operations, excluding the results of discontinued operations: Years Ended December 31, Annual Average Net Investment Pre-tax Return on (in millions) Investments(a) Income Average Investments(b) General Insurance: 2009 $ 89,236 $ 3,295 3.7% 2008 92,313 2,606 2.8 2007 96,207 5,348 5.6 Domestic Life Insurance & Retirement Services: 2009 $148,202 $ 9,553 6.4% 2008 196,515 9,134 4.6 2007 248,720 13,582 5.5 Foreign Life Insurance & Retirement Services: 2009 $182,183 $11,502 6.3% 2008 180,833 157 0.1 2007 182,216 10,184 5.6 (a) Includes real estate investments and collateral assets invested under the securities lending program. (b) Net investment income divided by the annual average investments. AIG’s worldwide insurance investment policy places primary emphasis on investments in government and fixed income securities in all of its portfolios and, to a lesser extent, investments in high-yield bonds, common stocks, real estate, hedge funds and other alternative investments, in order to enhance returns on policyholders’ funds and generate net investment income. The ability to implement this policy is somewhat limited in certain territories as there may be a lack of attractive long-term investment opportunities or investment restrictions may be imposed by the local regulatory authorities. Financial Services Operations AIG’s Financial Services subsidiaries engage in diversified activities including aircraft leasing, capital markets, consumer finance and insurance premium finance. Together, the Aircraft Leasing, Capital Markets and Consumer Finance operations generate the majority of the revenues produced by the Financial Services operations. A.I. Credit also contributes to Financial Services results principally by providing insurance premium financing for both AIG’s policyholders and those of other insurers. Aircraft Leasing AIG’s Aircraft Leasing operations are the operations of ILFC, which generates its revenues primarily from leasing new and used commercial jet aircraft to foreign and domestic airlines. Revenues also result from the remarketing of commercial jet aircraft for ILFC’s own account, and remarketing and fleet management services for airlines and financial institutions. AIG 2009 Form 10-K 10


  • Page 19

    American International Group, Inc., and Subsidiaries Capital Markets Capital Markets is comprised of the operations of AIGFP, which engaged as principal in a wide variety of financial transactions, including standard and customized financial products involving commodities, credit, currencies, energy, equities and interest rates. AIGFP also invests in a diversified portfolio of securities and principal investments and engages in borrowing activities that involve issuing standard and structured notes and other securities and entering into guaranteed investment agreements (GIAs). Due to the extreme market conditions experienced in 2008, the downgrades of AIG’s credit ratings by the rating agencies, as well as AIG’s intent to refocus on its core businesses, beginning in late 2008 and continuing through 2009 AIGFP has been unwinding its businesses and portfolios. See Management’s Discussion and Analysis of Financial Condition and Results of Operations — 2010 Business Outlook — Financial Services. Consumer Finance AIG’s Consumer Finance operations in North America are principally conducted through AGF. AGF derives most of its revenues from finance charges assessed on real estate loans, secured and unsecured non-real estate loans and retail sales finance receivables. AIG’s foreign consumer finance operations are principally conducted through AIGCFG. AIGCFG operates primarily in emerging and developing markets. During 2009, AIG divested most of the AIGCFG operations. As of December 31, 2009, AIGCFG had operations in Argentina, Taiwan, India, Colombia and Poland. The operations in Poland, at December 31, 2009, were under contract for sale and met the criteria for held for sale accounting in 2009. Other Operations AIG’s Other operations includes results from Parent & Other operations, after allocations to AIG’s business segments, results from noncore businesses and gains and losses on sales of divested businesses. Parent & Other AIG’s Parent & Other operations consists primarily of interest expense, restructuring costs, expenses of corporate staff not attributable to specific reportable segments, expenses related to efforts to improve internal controls, corporate initiatives, certain compensation plan expenses, corporate level net realized capital gains and losses, certain litigation related charges and net gains and losses on sale of divested businesses. Noncore Businesses Noncore businesses include results of certain businesses that have been divested or are being wound down or repositioned. Noncore Insurance Businesses Beginning in 2009, in order to better align financial reporting with the manner in which AIG’s chief operating decision makers review AIG’s businesses to make decisions about resources to be allocated and to assess performance, the results for United Guaranty Corporation (UGC), Transatlantic, 21st Century and HSB are included in AIG’s Other operations category. These amounts were previously reported as part of General Insurance operations. Prior period amounts have been revised to conform to the current presentation. As a result of the current year dispositions of 21st Century and HSB, and the deconsolidation of Transatlantic, only UGC is still reporting ongoing results of operations. See Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity — AIG’s Strategy for Stabilization and Repayment of its Obligations as They Come Due — Asset Disposition Plan — Sales of Businesses and Specific Asset Dispositions for further discussion. 11 AIG 2009 Form 10-K


  • Page 20

    American International Group, Inc., and Subsidiaries Mortgage Guaranty The main business of the subsidiaries of UGC is the issuance of residential mortgage guaranty insurance, both domestically and internationally, that covers the first loss for credit defaults on high loan-to-value first-lien mortgages for the purchase or refinance of one- to four-family residences. During 2008, UGC tightened underwriting guidelines and increased premium rates for its first-lien business, ceased insuring second-lien business as of September 30, 2008 and during the fourth quarter of 2008 ceased insuring new private student loan business and suspended insuring new business throughout its European operations. All of these actions were in response to the worsening conditions in the global housing markets and resulted in a significant decline in new business written during the second half of 2008 through 2009. Transatlantic On June 10, 2009, AIG closed the previously announced secondary public offering of 29.9 million shares of Transatlantic common stock owned directly and indirectly by AIG for aggregate gross proceeds of $1.1 billion. As of the close of the offering, AIG indirectly retained 13.9 percent of the Transatlantic common stock issued and outstanding. As of December 31, 2009, after confirmation from the New York Insurance Department that AIG is not considered to control Transatlantic, AIG no longer considers Transatlantic to be a related party. Noncore Asset Management Operations With the announced sale of AIG’s investment advisory and third party Institutional Asset Management business (excluding the Global Real Estate investment management business), AIG will no longer benefit from the management fee and carried interest cash flows from these businesses, but the sale will reduce operating costs related to AIG’s asset management activities. Asset Management is no longer considered a reportable segment, and the results for these Asset Management operations described below have been presented as a Noncore business in AIG’s Other operations category. Brokerage service commissions, other asset management fees, and investment income from GICs previously reported in the Asset Management segment are now included in the Domestic Life Insurance & Retirement Services segment. Results for prior periods have been revised accordingly. Matched Investment Program AIG’s Matched Investment Program (MIP) is a spread-based investment operation which invests primarily in fixed maturity securities (corporate and structured), loans and, to a lesser extent, single name credit default swaps. Due to the extreme market conditions experienced in 2008 and the downgrades of AIG’s credit ratings, the MIP is currently in run-off. No additional debt issuances are expected for the MIP for the foreseeable future. Institutional Asset Management Business AIG’s Institutional Asset Management business, conducted through AIG Global Asset Management Holdings Corp. and its subsidiaries and affiliated companies (collectively, AIG Investments), provides an array of investment products and services globally to institutional investors, pension funds, AIG subsidiaries, AIG affiliates and high net worth investors. These products include traditional equity and fixed maturity securities, and a wide range of real estate and alternative asset classes. Services include investment advisory and sub-advisory services, investment monitoring and transaction structuring. Within the equity and fixed maturity asset classes, AIG Investments offers various forms of structured investments. Within the alternative asset class, AIG Investments offers hedge and private equity funds and fund-of-funds, direct investments and distressed debt investments. AIG Global Real Estate Investment Corp. (AIG Global Real Estate) provides a wide range of real estate investment, development and management services for AIG subsidiaries, as well as for third-party institutional investors, pension funds and high net worth investors. AIG Global Real Estate also maintains a proprietary real estate investment portfolio through various joint venture platforms. On September 5, 2009, AIG entered into an agreement to sell its investment advisory and third party Institutional Asset Management businesses. This sale will exclude those asset management businesses providing traditional fixed AIG 2009 Form 10-K 12


  • Page 21

    American International Group, Inc., and Subsidiaries income asset and liability management for AIG’s insurance company subsidiaries and the AIG Global Real Estate investment management business, as well as proprietary real estate and private equity investments. AIG expects to continue relationships with the divested businesses for other investment management services used by its insurance company subsidiaries. Upon completion of the sale, AIG will no longer benefit from the management fee and carried interest cash flow from these businesses, but the sale will reduce operating costs related to AIG’s asset management activities. For additional information regarding the business of AIG on a consolidated basis, the contributions made to AIG’s consolidated revenues and pre-tax income and the assets held by General Insurance, Domestic Life Insurance & Retirement Services, Foreign Life Insurance & Retirement Services, Financial Services and the Other operations category, see Selected Financial Data, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes 1 and 4 to the Consolidated Financial Statements. Locations of Certain Assets As of December 31, 2009, approximately 44 percent of the consolidated assets of AIG were located in foreign countries (other than Canada), including $6.9 billion of cash and securities on deposit with foreign regulatory authorities. Foreign operations and assets held abroad may be adversely affected by political developments in foreign countries, including tax changes, nationalization and changes in regulatory policy, as well as by consequence of hostilities and unrest. The risks of such occurrences and their overall effect upon AIG vary from country to country and cannot easily be predicted. If expropriation or nationalization does occur, AIG’s policy is to take all appropriate measures to seek recovery of such assets. Certain of the countries in which AIG’s business is conducted have currency restrictions which generally cause a delay in a company’s ability to repatriate assets and profits. See also Item 1A. Risk Factors — Foreign Operations and Notes 1 and 4 to the Consolidated Financial Statements. Regulation AIG’s operations around the world are subject to regulation by many different types of regulatory authorities, including insurance, securities, investment advisory, banking and thrift regulators in the United States and abroad. AIG’s operations have become more diverse and consumer-oriented, increasing the scope of regulatory supervision and the possibility of intervention. In light of AIG’s liquidity problems beginning in the third quarter of 2008, AIG and its regulated subsidiaries have been subject to intense review and supervision around the world. Regulators have taken significant steps to protect the businesses of the entities they regulate. These steps have included: • restricting or prohibiting the payment of dividends to AIG parent and its subsidiaries; • restricting or prohibiting other payments to AIG parent and its subsidiaries; • requesting additional capital contributions from AIG parent; • requesting that intercompany reinsurance reserves be covered by assets locally; • restricting the business in which the subsidiaries may engage; • requiring pre-approval of all proposed transactions between the regulated subsidiaries and AIG parent or with any affiliate; and • requiring more frequent reporting, including with respect to capital and liquidity positions. These and other actions have made it challenging for AIG to continue to engage in business in the ordinary course. AIG does not expect these conditions to change significantly in the foreseeable future. In 1999, AIG became a unitary thrift holding company within the meaning of the Home Owners’ Loan Act (HOLA) when the Office of Thrift Supervision (OTS) granted AIG approval to organize AIG Federal Savings Bank. AIG is subject to OTS regulation, examination, supervision and reporting requirements. In addition, the OTS has enforcement authority over AIG and its subsidiaries. Among other things, this permits the OTS to restrict or prohibit 13 AIG 2009 Form 10-K


  • Page 22

    American International Group, Inc., and Subsidiaries activities that are determined to be a serious risk to the financial safety, soundness or stability of AIG’s subsidiary savings association, AIG Federal Savings Bank. Under prior law, a unitary savings and loan holding company, such as AIG, was not restricted as to the types of business in which it could engage, provided that its savings association subsidiary continued to be a qualified thrift lender. The Gramm-Leach-Bliley Act of 1999 (GLBA) provides that no company may acquire control of an OTS regulated institution after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies. The GLBA, however, grandfathered the unrestricted authority for activities with respect to a unitary savings and loan holding company existing prior to May 4, 1999, so long as its savings association subsidiary continues to be a qualified thrift lender under the HOLA. As a unitary savings and loan holding company whose application was pending as of May 4, 1999, AIG is grandfathered under the GLBA and generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that AIG Federal Savings Bank continues to be a qualified thrift lender under the HOLA. Certain states require registration and periodic reporting by insurance companies that are licensed in such states and are controlled by other corporations. Applicable legislation typically requires periodic disclosure concerning the corporation that controls the registered insurer and the other companies in the holding company system and prior approval of intercorporate services and transfers of assets (including in some instances payment of dividends by the insurance subsidiary) within the holding company system. AIG’s subsidiaries are registered under such legislation in those states that have such requirements. AIG’s insurance subsidiaries, in common with other insurers, are subject to regulation and supervision by the states and by other jurisdictions in which they do business. Within the United States, the method of such regulation varies but generally has its source in statutes that delegate regulatory and supervisory powers to an insurance official. The regulation and supervision relate primarily to approval of policy forms and rates, the standards of solvency that must be met and maintained, including risk-based capital, the licensing of insurers and their agents, the nature of and limitations on investments, restrictions on the size of risks that may be insured under a single policy, deposits of securities for the benefit of policyholders, requirements for acceptability of reinsurers, periodic examinations of the affairs of insurance companies, the form and content of reports of financial condition required to be filed, and reserves for unearned premiums, losses and other purposes. In general, such regulation is for the protection of policyholders rather than the equity owners of these companies. AIG has taken various steps to enhance the capital positions of the Chartis U.S. companies. AIG entered into capital maintenance agreements with these companies that set forth procedures through which AIG has provided, and expects to continue to provide, capital support. Also, in order to allow the Chartis companies to record as an admitted asset at December 31, 2009 certain reinsurance ceded to non-U.S. reinsurers (which has the effect of maintaining the level of the statutory surplus of such companies), AIG obtained and entered into reimbursement agreements for approximately $1.5 billion of letters of credit issued by several commercial banks in favor of certain Chartis companies and funded trusts totaling $2.8 billion. In the U.S., the Risk-Based Capital (RBC) formula is designed to measure the adequacy of an insurer’s statutory surplus in relation to the risks inherent in its business. Thus, inadequately capitalized general and life insurance companies may be identified. The U.S. RBC formula develops a risk-adjusted target level of statutory surplus by applying certain factors to various asset, premium and reserve items. Higher factors are applied to more risky items and lower factors are applied to less risky items. Thus, the target level of statutory surplus varies not only as a result of the insurer’s size, but also based on the risk profile of the insurer’s operations. The RBC Model Law provides for four incremental levels of regulatory attention for insurers whose surplus is below the calculated RBC target. These levels of attention range in severity from requiring the insurer to submit a plan for corrective action to placing the insurer under regulatory control. The statutory surplus of each of the U.S.-based life and property and casualty insurance subsidiaries exceeded their RBC minimum required levels as of December 31, 2009. AIG 2009 Form 10-K 14


  • Page 23

    American International Group, Inc., and Subsidiaries To the extent that any of AIG’s insurance entities would fall below prescribed levels of statutory surplus, it would be AIG’s intention, subject to FRBNY approval, to provide appropriate capital or other types of support to that entity. A substantial portion of AIG’s general insurance business and a majority of its life insurance business is conducted in foreign countries. The degree of regulation and supervision in foreign jurisdictions varies. Generally, AIG, as well as the underwriting companies operating in such jurisdictions, must satisfy local regulatory requirements. Licenses issued by foreign authorities to AIG subsidiaries are subject to modification or revocation by such authorities, and these subsidiaries could be prevented from conducting business in certain of the jurisdictions where they currently operate. In addition to licensing requirements, AIG’s foreign operations are also regulated in various jurisdictions with respect to currency, policy language and terms, advertising, amount and type of security deposits, amount and type of reserves, amount and type of capital to be held, amount and type of local investment and the share of profits to be returned to policyholders on participating policies. Some foreign countries regulate rates on various types of policies. Certain countries have established reinsurance institutions, wholly or partially owned by the local government, to which admitted insurers are obligated to cede a portion of their business on terms that may not always allow foreign insurers, including AIG subsidiaries, full compensation. In some countries, regulations governing constitution of technical reserves and remittance balances may hinder remittance of profits and repatriation of assets. See Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity — Regulation and Supervision and Note 17 to Consolidated Financial Statements. Competition AIG’s businesses operate in highly competitive environments, both domestically and overseas. Principal sources of competition are insurance companies, banks, investment banks and other non-bank financial institutions. The insurance industry in particular is highly competitive. Within the United States, Chartis subsidiaries compete with approximately 3,300 other stock companies, specialty insurance organizations, mutual companies and other underwriting organizations. AIG’s Domestic Life Insurance & Retirement Services subsidiaries compete in the United States with approximately 1,900 life insurance companies and other participants in related financial services fields. Overseas, AIG’s subsidiaries compete for business with the foreign insurance operations of large U.S. insurers and with global insurance groups and local companies in particular areas in which they are active. As a result of the reduction of the credit ratings of AIG and its subsidiaries, uncertainty relating to AIG’s financial condition and AIG’s asset disposition plan, AIG’s businesses have faced and continue to face intense competition to retain existing customers and to maintain business with existing customers and counterparties at historical levels. Further, AIG has been and continues to be at a significant disadvantage in certain markets in soliciting new customers. Although surrender rates have begun to stabilize, AIG expects these difficult conditions to continue for the foreseeable future. Competition is also intense for key employees. The announced asset dispositions, limitations placed by the American Recovery and Reinvestment Act of 2009 and the Special Master for Troubled Asset Relief Program (TARP) Executive Compensation on compensation arrangements and programs, decline in AIG’s common stock price and uncertainty surrounding AIG’s financial condition have adversely affected AIG’s ability to retain and motivate key employees and to attract new employees. It is unclear whether, for the foreseeable future, AIG will be able to create a compensation structure that permits AIG to retain and motivate key employees. For a further discussion of the risks relating to retaining existing customers, soliciting new customers and retaining key employees, see item 1A. Risk Factors. Other Information about AIG At December 31, 2009, AIG and its subsidiaries had approximately 96,000 employees. 15 AIG 2009 Form 10-K


  • Page 24

    American International Group, Inc., and Subsidiaries AIG’s Internet address for its corporate website is www.aigcorporate.com. AIG makes available free of charge, through the Investor Information section of AIG’s corporate website, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Proxy Statements on Schedule 14A and amendments to those reports or statements filed or furnished pursuant to Sections 13(a), 14(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). AIG also makes available on its corporate website copies of the charters for its Audit, Nominating and Corporate Governance and Compensation and Management Resources Committees, as well as its Corporate Governance Guidelines (which include Director Independence Standards), Director, Executive Officer and Senior Financial Officer Code of Business Conduct and Ethics, Employee Code of Conduct and Related-Party Transactions Approval Policy. Except for the documents specifically incorporated by reference into this Annual Report on Form 10-K, information contained on AIG’s website or that can be accessed through its website is not incorporated by reference into this Annual Report on Form 10-K. Directors and Executive Officers of AIG All directors of AIG are elected for one-year terms at the annual meeting of shareholders. In addition, the terms of each of the AIG Series E Fixed Rate Non-Cumulative Perpetual Preferred Stock, par value $5.00 per share, (AIG Series E Preferred Stock) and the AIG Series F Fixed Rate Non-Cumulative Perpetual Preferred Stock, par value $5.00 per share, (AIG Series F Preferred Stock) provide for the election of the greater of two additional directors or up to 20 percent of the total number of AIG directors (rounded up after giving effect to the election) upon a failure of AIG to make four quarterly dividend payments, whether or not consecutive. These preferred directors would be elected by a majority of the votes cast by the holder of the AIG Series E Preferred Stock and the AIG Series F Preferred Stock, voting together as a single class. If elected, such preferred directors would hold office until the next annual meeting (or special meeting called to elect directors) or until all dividends payable on all outstanding shares of the AIG Series E Preferred Stock and the AIG Series F Preferred Stock have been declared and paid in full for four consecutive quarters. As of February 17, 2010, the holder of the AIG Series E Preferred Stock and the AIG Series F Preferred Stock had not elected any directors pursuant to the provision, although AIG had failed to make four quarterly dividend payments. All executive officers are elected to one-year terms, but serve at the pleasure of the Board of Directors. Except as hereinafter noted, each of the executive officers has, for more than five years, occupied an executive position with AIG or companies that are now its subsidiaries. There are no arrangements or understandings between any executive officer and any other person pursuant to which the executive officer was elected to such position. Prior to joining AIG in August 2009, Mr. Benmosche served as a member of the Board of Directors of Credit Suisse Group since 2002. Mr. Benmosche was former Chairman, President, and Chief Executive Officer of MetLife, a leading provider of insurance and other financial services. Earlier in his career he served as Executive Vice President for PaineWebber, Inc. Mr. Hancock served as Vice Chairman of Key Corp. from January 2008 until joining AIG in February 2010. Mr. Hancock was Managing Director of Trinsum Group, Inc., an asset management and strategic advisory firm from 2007 to January 2008 and President and Co-Founder of Integrated Finance Limited, an asset management and strategic advisory firm from 2002 to 2007. Mr. Russo was Senior Counsel at Patton Boggs LLP prior to joining AIG in February 2010. Mr. Russo served as Executive Vice President and Chief Legal Officer of Lehman Brothers Holdings Inc. for more than five years prior to December 2008. Mr. Wilson spent 18 years with AXA Asia Pacific Holdings Limited, a leading provider of life insurance, wealth management and advice businesses in the Asia- Pacific region, where he held a number of senior management positions until joining AIA as Deputy President in December 2006. In 2007, he was promoted to President and Chief Operating Officer of AIA, and in May 2009 he became Chief Executive Officer and President of AIA Group Limited. AIG 2009 Form 10-K 16


  • Page 25

    American International Group, Inc., and Subsidiaries Set forth below is information concerning the directors and executive officers of AIG as of February 25, 2010. Served as Director or Name Title Age Officer Since Robert H. Benmosche Director and Chief Executive Officer 65 2009 Dennis D. Dammerman Director 64 2008 Harvey Golub Director and Chairman of the Board of Directors 70 2009 Laurette T. Koellner Director 55 2009 Christopher S. Lynch Director 52 2009 Arthur C. Martinez Director 70 2009 George L. Miles, Jr. Director 68 2005 Robert S. Miller Director 68 2009 Suzanne Nora Johnson Director 52 2008 Morris W. Offit Director 73 2005 Douglas M. Steenland Director 58 2009 Peter D. Hancock Executive Vice President — Finance, Risk and Investments 51 2010 David L. Herzog Executive Vice President and Chief Financial Officer 50 2005 Rodney O. Martin, Jr. Executive Vice President — Life Insurance 57 2002 Kristian P. Moor Executive Vice President — Domestic General Insurance 50 1998 Thomas A. Russo Executive Vice President — Legal, Compliance, Regulatory Affairs, Government Affairs and General Counsel 66 2010 Nicholas C. Walsh Executive Vice President — Foreign General Insurance 59 2005 Mark A. Wilson Executive Vice President — Life Insurance 43 2010 Jay S. Wintrob Executive Vice President — Domestic Life and Retirement Services 52 1999 William N. Dooley Senior Vice President — Financial Services 57 1992 Jeffrey J. Hurd Senior Vice President — Human Resources and Communications 43 2010 Robert E. Lewis Senior Vice President and Chief Risk Officer 58 1993 Monika M. Machon Senior Vice President and Chief Investment Officer 49 2009 Brian T. Schreiber Senior Vice President — Strategic Planning 44 2002 Item 1A. Risk Factors AIG has been significantly and adversely affected by the market turmoil in late 2008 and early 2009, and, despite the recovery in the markets in mid and late 2009, is subject to significant risks, as discussed below. Many of these risks are interrelated and occur under similar business and economic conditions, and the occurrence of certain of them may in turn cause the emergence, or exacerbate the effect, of others. Such a combination could materially increase the severity of the impact on AIG. As a result, should certain of these risks emerge, AIG may need additional support from the U.S. government. Without additional support from the U.S. government, in the future there could exist substantial doubt about AIG’s ability to continue as a going concern. See Management’s Discussion and Analysis of Financial Condition and Results of Operations — Consideration of AIG’s Ability to Continue as a Going Concern and Note 1 to the Consolidated Financial Statements for a further discussion. Since September 2008, AIG has been working to protect and enhance the value of its key businesses, to execute an orderly asset disposition plan and to position itself for the future, with the primary goal of enabling it to repay U.S. taxpayers for the support it has received. AIG’s efforts have been and continue to be subject to risks, the most significant of which are the following: Execution of Restructuring Plan A number of factors outside AIG’s control could impair AIG’s ability to implement its asset disposition plan, which is a critical component of AIG’s plan to repay U.S. taxpayers for the support provided under the Credit Facility (FRBNY Credit Facility) provided by the FRBNY under the Credit Agreement, dated as of September 22, 2008 (as amended, the FRBNY 17 AIG 2009 Form 10-K


  • Page 26

    American International Group, Inc., and Subsidiaries Credit Agreement), and the TARP preferred stock issued to the Department of the Treasury. AIG’s asset disposition plan could be adversely affected by an inability to complete asset dispositions due to, among other things: • an inability of purchasers to obtain funding; • a general unwillingness of potential buyers to commit capital; • an adverse change in interest rates and borrowing costs; and • declines in AIG asset values and deterioration in its businesses. Further, AIG may be unable to negotiate favorable terms in connection with asset sales, including with respect to price. As a result, AIG may need to modify its asset disposition plan to sell additional or different assets. As part of its restructuring efforts, AIG may need to materially alter its capital structure. In connection with its restructuring efforts, AIG may need to materially alter its current capital structure. This could include the issuance of additional shares of AIG common stock, par value $2.50 per share (AIG Common Stock) or other equity securities that may dilute, perhaps significantly, the current holders of AIG Common Stock. The complexity of executing AIG’s asset disposition plan, combined with the challenges of operating AIG’s businesses in the current environment, could place further stress on AIG’s internal controls, increase AIG’s costs and divert the attention of AIG management and employees from their normal duties. The execution of AIG’s asset disposition plan has introduced a large number of complex and non-standard transactions which are placing a strain on existing resources, systems and communication channels. Furthermore, AIG’s employees are operating in an environment where the frequency and uncertainty of developments could decrease the attention devoted to internal controls over financial reporting. Although AIG is taking steps to mitigate these risks, including through the use of third party consultants and advance planning, it is possible that these risks could delay AIG from preparing timely financial statements and making required filings in a timely manner, and otherwise adversely affect AIG’s internal controls over financial reporting. The restructuring of AIG’s businesses is a complex undertaking requiring the creation of standalone infrastructure and systems at certain subsidiaries. The duplication of infrastructure and systems will continue to increase AIG’s costs. Highly Leveraged Capital Structure AIG has a highly leveraged capital structure and has significant preferred stock outstanding. As of December 31, 2009, AIG had approximately $141.5 billion of consolidated indebtedness, including $23.4 billion and $4.7 billion outstanding under the FRBNY Credit Facility (all of which is secured indebtedness) and the FRBNY Commercial Paper Funding Facility (CPFF), respectively. In addition, as of the same date, AIG had $41.6 billion and $5.3 billion aggregate liquidation preference of AIG Series E Preferred Stock and AIG Series F Preferred Stock, respectively. The market capitalization of the AIG Common Stock was $4.0 billion as of December 31, 2009 and $3.6 billion at February 17, 2010. This highly leveraged capital structure may have several important consequences on AIG’s future operations, including, but not limited to: • The obligations of AIG under the AIG Series E Preferred Stock and AIG Series F Preferred Stock are significantly in excess of the market capitalization of the AIG Common Stock, and, in the event of a liquidation, dissolution or winding up of AIG, all of these preferred stock obligations would have to be paid before any payment could be made on the AIG Common Stock. Moreover, AIG may make further drawdowns on the commitment of the Department of the Treasury under the AIG Series F Preferred Stock (the Department of the Treasury Commitment) and thereby increase its preferred stock obligations. • AIG does not anticipate paying dividends on the AIG Common Stock in the foreseeable future. • The trading market for the AIG Common Stock has been extremely volatile and this volatility may continue for the foreseeable future. AIG 2009 Form 10-K 18


  • Page 27

    American International Group, Inc., and Subsidiaries Liquidity AIG parent’s ability to access funds from its subsidiaries is limited. As a holding company, AIG parent depends on dividends, distributions and other payments from its subsidiaries to fund payments due on AIG’s obligations, including its outstanding debt. Further, the majority of AIG’s investments are held by its regulated subsidiaries. In light of AIG’s current financial situation and the retained deficit resulting from the losses recorded in recent quarters, certain of AIG’s regulated subsidiaries have been restricted from making dividend payments, or advancing funds, to AIG, and AIG expects these restrictions to continue. In the case of subsidiaries not currently subject to these restrictions, these subsidiaries may be limited in their ability to make dividend payments or advance funds to AIG in the future because of the need to support their own capital levels. In addition, in connection with the execution of the purchase agreement between AIG and AIRCO and the FRBNY, dated June 25, 2009 (AIA Purchase Agreement), and the purchase agreement between AIG and the FRBNY, dated June 25, 2009 (ALICO Purchase Agreement), on December 1, 2009, AIG, the FRBNY and each special purpose vehicle (SPV) entered into limited liability company agreements, which set forth the terms and conditions of the respective parties’ ownership and governance rights in each SPV. Under the terms of these agreements, the AIA SPV and the ALICO SPV may only distribute funds to AIG parent (prior to the payment of the preferred returns and liquidation preferences on the preferred interests in each respective SPV and, in the case of the AIA SPV, a payment of 1 percent of the net income of the AIA SPV to the holders of the preferred interests in the AIA SPV for all fiscal years prior to payment of the preferred return and liquidation preference) in an aggregate amount not to exceed $200 million and $400 million, respectively, per fiscal year. These factors may hinder AIG’s ability to access funds that AIG parent may need to make payments on its obligations, including those arising from day-to-day business activities. AIG parent’s ability to support its subsidiaries is limited. Historically, AIG has provided capital and liquidity to its subsidiaries to maintain regulatory capital ratios, comply with rating agency requirements and meet unexpected cash flow obligations. More recently, AIG has relied on the FRBNY Credit Facility and the Department of the Treasury Commitment to meet these needs, given AIG’s inability to access its traditional sources of liquidity, including the public debt markets, since the third quarter of 2008. AIG’s current limited access to liquidity may reduce or prevent AIG from providing support to its subsidiaries. If AIG is unable to provide support to a subsidiary having an immediate capital or liquidity need, the subsidiary could become insolvent or, in the case of an insurance subsidiary or other regulated entity, could be seized by its regulator. Certain of the investments held by AIG’s subsidiaries are illiquid and/or are difficult to sell, or to sell in significant amounts or at acceptable prices, to generate cash to meet their needs. AIG’s subsidiaries’ investments in certain securities, including certain fixed income securities and certain structured securities, private equity securities, investment partnerships, mortgage loans, flight equipment, finance receivables and real estate are illiquid or may not be disposed of quickly. These asset classes represented approximately 23 percent of the carrying value of AIG’s total consolidated cash and invested assets at December 31, 2009. In addition, the steep decline in the U.S. real estate market and tight credit markets have materially adversely affected the liquidity of other AIG securities portfolios, including its residential and commercial mortgage-related securities and investment portfolios. In the event additional liquidity is required by one or more AIG subsidiaries beyond what can be provided through cash generated by operations or the sale or monetization of their more liquid assets, it may be difficult to generate additional liquidity by selling, pledging or otherwise monetizing the less liquid investments described above. Credit and Financial Strength Ratings Adverse ratings actions regarding AIG’s long-term debt ratings by the major rating agencies would require AIG to post a substantial amount of additional collateral payments pursuant to, and/or permit the termination of, derivative transactions to which AIGFP is a party, which could further adversely affect AIG’s business and its consolidated results of operations, financial condition and liquidity. Additional obligations to post collateral or the costs of assignment, termination or obtaining alternative credit could significantly reduce the amounts then available under the FRBNY Credit Facility and the Department of the Treasury Commitment. Credit ratings estimate a company’s ability to meet its obligations and may 19 AIG 2009 Form 10-K


  • Page 28

    American International Group, Inc., and Subsidiaries directly affect the cost and availability to that company of unsecured financing. In the event of a further downgrade of AIG’s long-term senior debt ratings, AIGFP would be required to post additional collateral, and certain of AIGFP’s counterparties would be permitted to elect early termination of contracts. For a further discussion of AIG’s liquidity, see Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity — Liquidity. It is estimated that as of the close of business on February 17, 2010, based on AIG’s outstanding financial derivative transactions, including those of AIGFP at that date, a one-notch downgrade of AIG’s long-term senior debt ratings to Baa1 by Moody’s Investors Service (Moody’s) and BBB+ by Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. (S&P), would permit counterparties to make additional collateral calls and permit the counterparties to elect early termination of contracts, resulting in up to approximately $1.8 billion of corresponding collateral postings and termination payments; a two-notch downgrade to Baa2 by Moody’s and BBB by S&P would result in approximately $1.4 billion in additional collateral postings and termination payments above the one-notch downgrade amount; and a three-notch downgrade to Baa3 by Moody’s and BBB- by S&P would result in approximately $0.3 billion in additional collateral postings and termination payments above the two-notch downgrade amount. Additional collateral postings upon downgrade are estimated based on the factors in the individual collateral posting provisions of the Credit Support Annex (CSA) with each counterparty and current exposure as of February 17, 2010. Factors considered in estimating the termination payments upon downgrade include current market conditions, the complexity of the derivative transactions, historical termination experience and other observable market events such as bankruptcy and downgrade events that have occurred at other companies. The actual termination payments could significantly differ from management’s estimates given market conditions at the time of downgrade and the level of uncertainty in estimating both the number of counterparties who may elect to exercise their right to terminate and the payment that may be triggered in connection with any such exercise. Adverse rating actions could result in further reductions in credit limits extended to AIG and in a decline in the number of counterparties willing to transact with AIG or its subsidiaries. To appropriately manage risk, AIG needs trading counterparties willing to extend sufficient credit limits to purchase and sell securities, commodities and other assets, as well as to conduct hedging activities. To the extent that counterparties are unwilling to trade with or to extend adequate credit limits to AIG or its subsidiaries, AIG could be exposed to open positions or other unhedged risks, resulting in increased volatility of results and increased losses. A downgrade in the Insurer Financial Strength ratings of AIG’s insurance companies could prevent the companies from writing new business and retaining customers and business. Insurer Financial Strength ratings are an important factor in establishing the competitive position of insurance companies. Insurer Financial Strength ratings measure an insurance company’s ability to meet its obligations to contract holders and policyholders, help maintain public confidence in a company’s products, facilitate marketing of products and enhance a company’s competitive position. Further downgrades of the Insurer Financial Strength ratings of AIG’s insurance companies may prevent these companies from offering products and services or result in increased policy cancellations or termination of assumed reinsurance contracts. Moreover, a downgrade in AIG’s credit ratings may, under credit rating agency policies concerning the relationship between parent and subsidiary ratings, result in a downgrade of the Insurer Financial Strength ratings of AIG’s insurance subsidiaries. FRBNY Credit Facility The FRBNY Credit Agreement requires AIG to devote significant resources to debt repayment for the foreseeable future, thereby significantly reducing capital available for other purposes. AIG is required to repay the five-year FRBNY Credit Facility primarily using the proceeds from sales of assets, including businesses. Unless otherwise agreed by the FRBNY, the amount available under the FRBNY Credit Facility is generally permanently reduced by the amount of the net cash proceeds from asset dispositions. AIG’s significant obligations require it to dedicate all of its net cash proceeds from asset dispositions and a considerable portion of its cash flows from operations to the repayment of the FRBNY Credit Facility, thereby AIG 2009 Form 10-K 20


  • Page 29

    American International Group, Inc., and Subsidiaries reducing the funds available for investment in its businesses. Moreover, because AIG’s debt service obligations are very high, AIG may be more vulnerable to competitive pressures and have less flexibility to plan for or respond to changing business and economic conditions. AIG must sell or otherwise dispose of significant assets to service the debt under the FRBNY Credit Facility. AIG must make asset dispositions to repay the borrowings under the FRBNY Credit Facility. A continued delay or inability to effect these dispositions at acceptable prices and on acceptable terms could result in AIG being unable to repay the FRBNY Credit Facility by its maturity date. If AIG is not able to repay the FRBNY Credit Facility from the proceeds of asset dispositions and cannot otherwise repay the FRBNY Credit Facility in accordance with its terms, an event of default would result. In such an event, the FRBNY could enforce its security interest in AIG’s pledged collateral. In addition, an event of default or declaration of acceleration under the FRBNY Credit Agreement could also result in an event of default under other agreements. In such an event, AIG would likely not have sufficient liquid assets to meet its obligations under such agreements and could become insolvent. Borrowings available to AIG under the FRBNY Credit Facility and drawdowns under the Department of the Treasury Commitment may not be sufficient to meet AIG’s funding needs and additional financing may not be available or could be prohibitively expensive. The inability of AGF or ILFC to raise sufficient liquidity to meet their obligations without support from AIG, additional collateral calls, deterioration in investment portfolios affecting statutory surplus, high surrenders of annuity and other policies, further downgrades in AIG’s credit ratings, catastrophe losses or reserve strengthening, or a further deterioration in AIGFP’s remaining super senior credit default swap portfolio could cause AIG to require additional funding in excess of the borrowings available under the FRBNY Credit Facility and available drawdowns on the Department of the Treasury Commitment. In that event, AIG would be required to find additional financing and new financing sources. Such financing could be difficult, if not impossible, to obtain and, if available, very expensive, and additional funding from the FRBNY, the Department of the Treasury or other government sources may not be available. If AIG is unable to obtain sufficient financing to meet its capital needs, AIG could become insolvent. The FRBNY Credit Agreement includes financial and other covenants that impose restrictions on AIG’s financial and business operations. The FRBNY Credit Agreement requires AIG to maintain a minimum aggregate liquidity level and restricts AIG’s ability to make certain capital expenditures. The FRBNY Credit Agreement also restricts the ability of AIG parent and its restricted subsidiaries to incur additional indebtedness, incur liens, merge, consolidate, sell assets, enter into hedging transactions outside the normal course of business, or pay dividends. These covenants could restrict AIG’s business and thereby adversely affect AIG’s results of operations. Moreover, if AIG fails to comply with the covenants in the FRBNY Credit Agreement and is unable to obtain a waiver or amendment, an event of default would result. If an event of default were to occur, the FRBNY could, among other things, declare outstanding borrowings under the FRBNY Credit Agreement immediately due and payable and enforce its security interest in AIG’s pledged collateral. In addition, an event of default or declaration of acceleration under the FRBNY Credit Agreement could also result in an event of default under AIG’s other agreements. In such an event, AIG would likely not have sufficient liquid assets to meet its obligations under such agreements and could become insolvent. Controlling Shareholder The AIG Credit Facility Trust, a trust for the sole benefit of the United States Treasury, which is overseen by three trustees, holds a controlling interest in AIG. AIG’s interests and those of AIG’s minority shareholders may not be the same as those of the Trust or the United States Treasury. In accordance with the FRBNY Credit Agreement, in early March 2009, AIG issued 100,000 shares of the AIG Series C Perpetual, Convertible, Participating Preferred Stock, par value $5.00 per share (AIG Series C Preferred Stock) to the Trust, a trust for the sole benefit of the United States Treasury 21 AIG 2009 Form 10-K


  • Page 30

    American International Group, Inc., and Subsidiaries established under the AIG Credit Facility Trust Agreement dated as of January 16, 2009 (as it may be amended from time to time, the Trust Agreement). The AIG Series C Preferred Stock is entitled to: • participate in any dividends paid on AIG’s Common Stock, with the payments attributable to the AIG Series C Preferred Stock being approximately 79.8 percent of the aggregate dividends paid on AIG’s Common Stock, treating the AIG Series C Preferred Stock as converted; and • to the extent permitted by law, vote with AIG’s Common Stock on all matters submitted to AIG’s shareholders and hold approximately 79.8 percent of the aggregate voting power of AIG’s Common Stock, treating the AIG Series C Preferred Stock as converted. The AIG Series C Preferred Stock will remain outstanding even if the FRBNY Credit Facility is repaid in full or otherwise terminates. In addition, upon shareholder approval and the filing with the Delaware Secretary of State of certain amendments to AIG’s Amended and Restated Certificate of Incorporation, the Trust will be able to convert at its option all or a portion of the AIG Series C Preferred Stock into shares of AIG’s Common Stock. As a result of its ownership of the AIG Series C Preferred Stock, the Trust is able, subject to the terms of the Trust Agreement and the AIG Series C Preferred Stock, to elect all of AIG’s directors and will be able, to the extent permitted by law, to control the vote on substantially all matters, including: • approval of mergers or other business combinations; • a sale of all or substantially all of AIG’s assets; • issuance of any additional common stock or other equity securities; and • other matters that might be favorable to the United States Treasury, but not to AIG’s other shareholders. Moreover, the Trust’s ability to cause or prevent a change in control of AIG could also have an adverse effect on the market price of AIG’s Common Stock. The Trust may also, subject to the terms of the Trust Agreement and applicable securities laws, transfer all, or a portion of, the AIG Series C Preferred Stock to another person or entity and, in the event of such a transfer, that person or entity could become the controlling shareholder. Possible future sales of AIG Series C Preferred Stock or common stock by the Trust could adversely affect the market for AIG Common Stock. Pursuant to the AIG Series C Preferred Stock Purchase Agreement, dated as of March 1, 2009 (the AIG Series C Preferred Stock Purchase Agreement), between the Trust and AIG, AIG has agreed to file a shelf registration statement that will allow the Trust to publicly sell AIG Series C Preferred Stock or any shares of AIG’s Common Stock it receives upon conversion of the AIG Series C Preferred Stock. In addition, the Trust could sell AIG Series C Preferred Stock or shares of AIG’s Common Stock without registration under certain circumstances, such as in a private transaction. Although AIG can make no prediction as to the effect, if any, that such sales would have on the market price of AIG’s Common Stock, sales of substantial amounts of AIG Series C Preferred Stock or AIG’s Common Stock, or the perception that such sales could occur, could adversely affect the market price of AIG’s Common Stock. If the Trust sells or transfers shares of AIG Series C Preferred Stock or AIG’s Common Stock as a block, another person or entity could become AIG’s controlling shareholder. Market Conditions AIG’s businesses, consolidated results of operations and financial condition have been and may continue to be materially and adversely affected by market conditions. AIG’s businesses are highly dependent on the business environment in which they operate. In 2008 and through early 2009, the significant deterioration in worldwide economic conditions materially and adversely affected AIG’s businesses. The global financial crisis resulted in a serious lack of liquidity, highly volatile markets, a steep depreciation in asset values across all classes, an erosion of investor and public confidence, a widening of credit spreads, a lack of price transparency in many markets and the collapse or merger of several prominent financial institutions. Difficult economic conditions also resulted in increased unemployment and a severe decline in business activity across a wide range of industries and regions. While the markets and the business AIG 2009 Form 10-K 22


  • Page 31

    American International Group, Inc., and Subsidiaries environment have generally stabilized and improved in mid and late 2009, asset values for many asset classes have not returned to previous levels and business, and financial and economic conditions, particularly unemployment levels, lending activities and the housing markets, continue to be negatively affected. There can be no assurance that the conditions supporting the recent recovery will continue in the near or long term. If they do not, AIG may be negatively affected in a number of ways, including: • declines in the valuation and performance of its investment portfolio; • unrealized market valuation losses on its super senior credit default swap portfolio; • an inability to implement its asset disposition program, as discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity — AIG’s Strategy for Stabilization and Repayment of its Obligations as They Come Due — Asset Disposition Plan; • increased credit losses; • impairments of goodwill and other long-lived assets; • an increase in the valuation allowance relating to its deferred tax asset; • a decline in new business levels; • an increase in policy surrenders and cancellations; • a writeoff of deferred policy acquisition costs (DAC); and • the ability of current or potential contractual counterparties to execute transactions that are part of AIG’s asset disposition plans. Reputational Harm Adverse publicity and public reaction to events concerning AIG has had and may continue to have a material adverse effect on AIG. Since September 2008, AIG has been the subject of intense scrutiny and extensive comment by the global news media and segments of the public at large in the communities that AIG serves. At times, there has been strong criticism of actions taken by AIG, its management and its employees and of transactions in which AIG has engaged. In a few instances, such as the public reaction over the payment of retention awards to AIGFP employees, this criticism has included harassment of individual AIG employees and public protest affecting AIG facilities. This scrutiny and extensive commentary have adversely affected AIG by damaging AIG’s business, reputation and brand among current and potential customers, agents and other distributors of AIG products and services, thereby reducing sales of AIG products and services, and resulting in an increase in AIG policyholder surrenders and non-renewals of AIG policies. This scrutiny and commentary have also undermined employee morale and AIG’s ability to motivate and retain its employees. If this level of criticism continues or increases, AIG’s business may be further adversely affected and its ability to retain and motivate employees further harmed. Employees The limitations on incentive compensation contained in the American Recovery and Reinvestment Act of 2009, and the restrictions placed on compensation by the Special Master for TARP Executive Compensation, may adversely affect AIG’s ability to retain and motivate its highest performing employees. The American Recovery and Reinvestment Act of 2009 (Recovery Act) contains restrictions on bonus and other incentive compensation payable to the five executives named in a company’s proxy statement and the next twenty highest paid employees of companies receiving TARP funds. Pursuant to the Recovery Act, the Office of the Special Master for TARP Executive Compensation (Special Master) issued Determination Memorandum with respect to AIG’s named executive officers (except for the Chief Executive Officer) and twenty highest paid employees, and reviewed AIG’s compensation arrangements for its next 75 most highly compensated employees and issued a Determination Memorandum on their compensation structures, which 23 AIG 2009 Form 10-K


  • Page 32

    American International Group, Inc., and Subsidiaries placed significant new restrictions on their compensation as well. Historically, AIG has embraced a pay-for-performance philosophy. Based on the limitations placed on incentive compensation by the Determination Memoranda issued by the Special Master, it is unclear whether, for the foreseeable future, AIG will be able to create a compensation structure that permits AIG to retain and motivate its most senior and most highly compensated employees and other high performing employees who become subject to the purview of the Special Master. An inability of AIG to retain and motivate its highest performing employees may affect its ability to stabilize its businesses, execute its asset disposition and restructuring activities and prepare and make required filings in a timely manner with the SEC and other federal, state and foreign regulators. A loss of key AIGFP employees could prevent an orderly wind-down of AIGFP’s businesses and portfolios, lead to potentially significant losses and could adversely affect AIG’s internal control over financial reporting. In light of, among other things, the negative publicity surrounding the retention payments to AIGFP employees, a number of key employees have left AIGFP. Moreover, substantially all of the last installment of the AIGFP retention awards has been paid. Going forward, the lack of further retention incentives may adversely affect AIG’s ability to retain AIGFP personnel to complete the process of unwinding AIGFP’s businesses. While AIGFP continues to wind down its business in an orderly manner, the loss of additional key employees could adversely affect AIG’s ability to effectively wind down AIGFP and AIG’s internal control over financial reporting, notwithstanding the additional consulting resources retained at AIGFP during 2009. Although AIG views the large-market risk books at AIGFP as generally well hedged, except for credit risk, maintaining the hedges requires continuous monitoring and adjustment. If AIGFP loses the key employees who are familiar with and know how to hedge these positions, gaps in hedging could result in significant losses to AIGFP. AIG relies upon the knowledge and experience of the AIGFP employees involved in the financial reporting process for the effective and timely preparation of required filings and financial statements and operation of internal controls. In addition, AIGFP’s portfolios contain a significant number of complex transactions that are difficult to understand and manage. It would not be practical to replace all the key AIGFP traders and risk managers who oversee these complex transactions if these employees were to leave AIGFP. Personal knowledge of these trades and the unique systems at AIGFP is critical to an effective wind-down of AIGFP’s businesses and portfolios. Furthermore, in the current economic environment, any perceived disruption in AIGFP’s ability to conduct business, such as one that would result from the departure of these key employees, could cause parties to limit or cease trading with AIGFP, which would further adversely affect AIGFP’s ability to cost-effectively hedge its positions and its effort to wind down its businesses and portfolios. Because of the decline in the value of equity awards previously granted to employees, and the uncertainty surrounding AIG’s asset disposition program, AIG may be unable to retain key employees. AIG relies upon the knowledge and talent of its employees to successfully conduct business. The decline in AIG’s Common Stock price has dramatically reduced the value of equity awards previously granted to its key employees. Also, the announcement of proposed asset dispositions has resulted in competitors seeking to hire AIG’s key employees. Retention programs have assisted AIG in keeping key employees, but there can be no assurance that newly adopted compensation programs will provide similar retentive benefits. A loss of key employees could reduce the value of AIG’s businesses and impair its ability to effect a successful restructuring plan. A loss of key employees in AIG’s financial reporting process could prevent AIG from making required filings and preparing financial statements on a timely basis and otherwise could adversely affect its internal controls. AIG relies upon the knowledge and experience of the employees involved in the financial reporting process for the effective and timely preparation of required filings and financial statements and operation of internal controls. If these employees depart, AIG may not be able to replace them with individuals having comparable knowledge and experience. Retention programs have assisted AIG in keeping key employees, but there can be no assurance that newly adopted compensation programs will provide similar retentive benefits. Conflicts of interest may arise as AIG implements its asset disposition plan. AIG relies on certain key employees to operate its businesses during the asset disposition period, to provide information to prospective buyers and to maximize the value of businesses to be divested. The successful completion of the asset disposition plan could be adversely affected by any conflict of interests arising as a result of the asset disposition process between AIG, which is generally interested in maximizing the proceeds from an asset disposition, and its employees, who may be focused on obtaining employment from the acquiror. AIG 2009 Form 10-K 24


  • Page 33

    American International Group, Inc., and Subsidiaries Employee error and misconduct may be difficult to detect and prevent and may result in significant losses. Losses may result from, among other things, fraud, errors, failure to document transactions properly or to obtain proper internal authorization or failure to comply with regulatory requirements, both generally, and during the asset disposition process. There have been a number of highly publicized cases involving fraud or other misconduct by employees in the financial services industry in recent years, and AIG runs the risk that employee misconduct could occur. It is not always possible to deter or prevent employee misconduct, and the controls that AIG has in place to prevent and detect this activity may not be effective in all cases. This risk may be heightened by AIG’s asset disposition program since employees who perceive that they will lose their jobs may engage in intentional misconduct or simply fail to comply with AIG’s reporting requirements. Policyholder Behavior AIG’s policyholders and agents and other distributors of AIG’s insurance products have expressed significant concerns in the wake of announcements by AIG of adverse financial results. Many of AIG’s businesses depend upon the financial stability (both actual and perceived) of AIG parent. Concerns that AIG or its subsidiaries may not be able to meet their obligations have negatively affected AIG’s businesses in many ways, including: • requests by customers to withdraw funds from AIG under annuity and certain life insurance contracts; • a refusal by independent agents, brokers and banks to continue to offer AIG products and services; • a refusal of counterparties, customers or vendors to continue to do business with AIG; and • requests by customers and other parties to terminate existing contractual relationships. Continued economic uncertainty, additional adverse results or a lack of confidence in AIG and AIG’s businesses may cause AIG customers, agents and other distributors to cease or reduce their dealings with AIG, turn to competitors or shift to products that generate less income for AIG. Although AIG has announced its intent to refocus its business and certain AIG subsidiaries are rebranding themselves in an attempt to overcome a perception of instability, AIG cannot be sure that such efforts will be successful in attracting or maintaining clients. Concentration of Investments and Exposures Concentration of AIG’s investment portfolios in any particular segment of the economy may have adverse effects. AIG’s results of operations have been adversely affected and may continue to be adversely affected by a concentration in residential mortgage-backed, commercial mortgage-backed and other asset-backed securities and commercial mortgage loans. AIG also has significant exposures to financial institutions and, in particular, to money center and global banks. These types of concentrations in AIG’s investment portfolios could have an adverse effect on the value of these portfolios and consequently on AIG’s consolidated results of operations and financial condition. While AIG seeks to mitigate this risk by having a broadly diversified portfolio, events or developments that have a negative effect on any particular industry, asset class, group of related industries or geographic region may have a greater adverse effect on the investment portfolios to the extent that the portfolios are concentrated. Furthermore, AIG’s ability to sell assets relating to such particular groups of related assets may be limited if other market participants are seeking to sell at the same time. Concentration of AIG’s insurance and other risk exposures may have adverse effects. AIG seeks to manage the risks to which it is exposed as a result of the insurance policies, derivatives and other obligations that it undertakes to customers and counterparties by monitoring the diversification of its exposures by exposure type, industry, geographic region, counterparty and otherwise and by using reinsurance, hedging and other arrangements to limit or offset exposures that exceed the limits it wishes to retain. In certain circumstances, or with respect to certain exposures, such risk management arrangements may not be available on acceptable terms, or AIG’s exposure in absolute terms may be so large that even slightly adverse experience compared to AIG’s expectations may cause a material adverse effect on AIG’s consolidated financial condition or results of operations. Casualty Insurance Underwriting and Reserves Casualty insurance liabilities are difficult to predict and may exceed the related reserves for losses and loss expenses. Although AIG regularly reviews the adequacy of the established Liability for unpaid claims and claims adjustment 25 AIG 2009 Form 10-K


  • Page 34

    American International Group, Inc., and Subsidiaries expense and conducts an extensive analysis of its reserves at each year end, there can be no assurance that AIG’s loss reserves will not develop adversely and have a material adverse effect on AIG’s results of operations. For example, in the fourth quarter of 2009, AIG’s general insurance operations recorded a $2.3 billion reserve strengthening charge. 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, D&O, professional liability, medical malpractice, workers’ compensation, general liability, products liability and related classes, as well as for asbestos 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 or in the judicial environment, or in other social or economic phenomena affecting claims, such as the effects that the recent disruption in the credit markets could have on reported claims under D&O or professional liability coverages. For a further discussion of AIG’s loss reserves, including the fourth quarter 2009 charge relating to an increase in the net loss and loss adjustment reserves, see Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Segment Results — General Insurance Operations — Liability for unpaid claims and claims adjustment expense. Risk Management AIG is exposed to a number of significant risks, and AIG’s risk management policies, processes and controls may not be effective in mitigating AIG’s risk exposures in all market conditions and to all types of risk. The major risks to which AIG is exposed include credit risk, market risk, including credit spread risk, operational risk, liquidity risk and insurance risk. AIG’s risk management policies, tools and processes have in the past been ineffective and could be ineffective in the future as well. A failure of AIG’s risk management could materially and adversely affect AIG’s consolidated results of operations, liquidity or financial condition, result in regulatory action or litigation or further damage AIG’s reputation. For a further discussion of AIG’s risk management process and controls, see Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management. Operational risks of asset dispositions. AIG is exposed to various operational risks associated with the dispositions of subsidiaries and the resulting restructuring of AIG at the business and corporate levels. These risks include the ability to deconsolidate systems and processes of divested operations without adversely affecting AIG, the ability of AIG to fulfill its obligations under any transition separation agreements agreed upon with buyers, the ability of AIG to downsize the corporation as dispositions are accomplished and the ability of AIG to continue to provide services previously performed by divested entities. AIGFP wind-down risks. An orderly and successful wind-down of AIGFP’s businesses and portfolios is subject to numerous risks, including market conditions, counterparty willingness to transact or terminate transactions with AIGFP and the retention of key personnel. An orderly and successful wind-down will also depend on the stability of AIG’s credit ratings. Further downgrades of AIG’s credit ratings likely would have an adverse effect on the wind-down of AIGFP’s businesses and portfolios. Regulatory Capital Credit Default Swap Portfolio A deterioration in the credit markets may cause AIG to recognize unrealized market valuation losses in AIGFP’s regulatory capital super senior credit default swap portfolio in future periods which could have a material adverse effect on AIG’s consolidated financial condition or consolidated results of operations. Moreover, depending on how the extension of the Basel I capital floors is implemented, the period of time that AIGFP remains at risk for such deterioration could be significantly longer than anticipated by AIGFP. A total of $150.0 billion in net notional amount of the super senior credit default swap (CDS) portfolio of AIGFP as of December 31, 2009, represented derivatives written for financial institutions, principally in Europe, which AIG understands to have been originally written primarily for the purpose of providing regulatory capital relief rather than AIG 2009 Form 10-K 26


  • Page 35

    American International Group, Inc., and Subsidiaries for arbitrage purposes. The net fair value of the net derivative asset for these CDS transactions was $116 million at December 31, 2009. The regulatory benefit of these transactions for AIGFP’s financial institution counterparties is generally derived from the terms of the Capital Accord of the Basel Committee on Banking Supervision (Basel I) that existed through the end of 2007 and which is in the process of being replaced by the Revised Framework for the International Convergence of Capital Measurement and Capital Standards issued by the Basel Committee on Banking Supervision (Basel II). It was originally expected that financial institution counterparties would have transitioned from Basel I to Basel II by the end of the two-year adoption period on December 31, 2009, after which they would have received little or no additional regulatory capital benefit from these CDS transactions, except in a small number of specific instances. However, the Basel Committee recently announced that it has agreed to keep in place the Basel I capital floors beyond the end of 2009, although it remains to be seen how this extension will be implemented by the various European Central Banking districts. Should certain counterparties continue to receive favorable regulatory capital benefits from these transactions, those counterparties may not exercise their options to terminate the transactions in the expected time frame. AIGFP continues to reassess the expected maturity of this portfolio. As of December 31, 2009, AIGFP estimated that the weighted average expected maturity of the portfolio was 1.35 years. The nature of the information provided or otherwise available to AIGFP with respect to the underlying assets in each regulatory capital CDS transaction is not consistent across all transactions. Furthermore, in a majority of corporate loan transactions and all of the residential mortgage transactions, the pools are blind, meaning that the identities of obligors are not disclosed to AIGFP. In addition, although AIGFP receives periodic reports on the underlying asset pools, virtually all of the regulatory capital CDS transactions contain confidentiality restrictions that preclude AIGFP’s public disclosure of information relating to the underlying referenced assets. AIGFP analyzes the information regarding the performance and credit quality of the underlying pools of assets required to make its own risk assessment and to determine any changes in credit quality with respect to such pools of assets. While much of this information received by AIGFP cannot be aggregated in a comparable way for disclosure purposes because of the confidentiality restrictions and the inconsistency of the information, it does provide a sufficient basis for AIGFP to evaluate the risks of the portfolio and to determine a reasonable estimate of fair value. Given the current performance of the underlying portfolios, the level of subordination and AIGFP’s own assessment of the credit quality of the underlying portfolio, as well as the risk mitigants inherent in the transaction structures, AIGFP does not expect that it will be required to make payments pursuant to the contractual terms of those transactions providing regulatory capital relief. AIGFP will continue to assess the valuation of this portfolio and monitor developments in the marketplace. Given the potential for further significant deterioration in the credit markets and the risk that AIGFP’s expectations with respect to the termination of these transactions by its counterparties may not materialize, there can be no assurance that AIG will not recognize unrealized market valuation losses from this portfolio in future periods. Depending on how the extension of the Basel I capital floors is implemented, AIG could also remain at risk for a significantly longer period of time than originally anticipated. Moreover, given the size of the credit exposure, a decline in the fair value of this portfolio could have a material adverse effect on AIG’s consolidated results of operations for an individual reporting period or to AIG’s consolidated financial condition. Adjustments to Deferred Policy Acquisition Costs for Life Insurance and Retirement Services Companies Interest rate fluctuations, increased surrenders, investment returns and other events may require AIG subsidiaries to accelerate the amortization of deferred policy acquisition costs (DAC) which could adversely affect AIG’s consolidated financial condition or results of operations. DAC represents the costs that vary with and are related primarily to the acquisition of new and renewal insurance and annuity contracts. When interest rates rise or customers lose confidence in a company, policy loans and policy surrenders and withdrawals of life insurance policies and annuity contracts may increase as policyholders seek to buy products with perceived higher returns or more stability, requiring AIG subsidiaries to accelerate the amortization of DAC. To the extent such amortization exceeds surrender or other charges earned upon surrender and withdrawals of certain life insurance policies and annuity contracts, AIG’s results of operations could be negatively affected. 27 AIG 2009 Form 10-K


  • Page 36

    American International Group, Inc., and Subsidiaries DAC for both insurance-oriented and investment-oriented products, as well as retirement services products is reviewed for recoverability, which involves estimating the future profitability of current business. This review involves significant management judgment. If the actual emergence of future profitability were to be substantially lower than estimated, AIG could be required to accelerate its DAC amortization and such acceleration could adversely affect AIG’s results of operations. For a further discussion of DAC, see Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates and Notes 1 and 9 to the Consolidated Financial Statements. Catastrophe Exposures The occurrence of catastrophic events could adversely affect AIG’s consolidated financial condition or results of operations. The occurrence of events such as hurricanes, earthquakes, pandemic disease, acts of terrorism and other catastrophes could adversely affect AIG’s consolidated financial condition or results of operations, including by exposing AIG’s businesses to the following: • widespread claim costs associated with property, workers’ compensation, mortality and morbidity claims; • loss resulting from the value of invested assets declining to below the amount required to meet policy and contract liabilities; and • loss resulting from actual policy experience emerging adversely in comparison to the assumptions made in the product pricing related to mortality, morbidity, termination and expenses. Reinsurance Reinsurance may not be available or affordable. AIG subsidiaries are major purchasers of reinsurance and utilize reinsurance as part of AIG’s overall risk management strategy. Reinsurance is an important risk management tool to manage transaction and insurance line risk retention and to mitigate losses that may arise from catastrophes. Market conditions beyond AIG’s control determine the availability and cost of the reinsurance purchased by AIG subsidiaries. For example, reinsurance may be more difficult to obtain after a year with a large number of major catastrophes. Accordingly, AIG may be forced to incur additional expenses for reinsurance or may be unable to obtain sufficient reinsurance on acceptable terms, in which case AIG would have to accept an increase in exposure risk, reduce the amount of business written by its subsidiaries or seek alternatives. Reinsurance subjects AIG to the credit risk of its reinsurers and may not be adequate to protect AIG against losses. Although reinsurance makes the reinsurer liable to the AIG subsidiary to the extent the risk is ceded, it does not relieve the AIG subsidiary of the primary liability to its policyholders. Accordingly, AIG bears credit risk with respect to its subsidiaries’ reinsurers to the extent not mitigated by collateral or other credit enhancements. A reinsurer’s insolvency or inability or refusal to make timely payments under the terms of its agreements with the AIG subsidiaries could have a material adverse effect on AIG’s results of operations and liquidity. For additional information on AIG’s reinsurance, see Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Insurance Risk Management — Reinsurance. Regulation AIG is subject to extensive regulation in the jurisdictions in which it conducts its businesses, and recent regulatory actions have made it challenging for AIG to continue to engage in business in the ordinary course. AIG’s operations around the world are subject to regulation by different types of regulatory authorities, including insurance, securities, investment advisory, banking and thrift regulators in the United States and abroad. AIG’s operations have become more diverse and consumer-oriented, increasing the scope of regulatory supervision and the possibility of intervention. In light of AIG’s liquidity issues beginning in the third quarter of 2008, AIG and its regulated subsidiaries have been subject to intense review and supervision around the world. Regulators have taken significant steps to protect the businesses of the entities they regulate. These steps have included: • restricting or prohibiting the payment of dividends to AIG parent and its subsidiaries; • restricting or prohibiting other payments to AIG parent and its subsidiaries; AIG 2009 Form 10-K 28


  • Page 37

    American International Group, Inc., and Subsidiaries • requesting additional capital contributions from AIG parent; • requesting that intercompany reinsurance reserves be covered by assets locally; • restricting the business in which the subsidiaries may engage; • requiring pre-approval of all proposed transactions between the regulated subsidiaries and AIG parent or any affiliate; and • requiring more frequent reporting, including with respect to capital and liquidity positions. These and other actions have made it challenging for AIG to continue to maintain focus on its businesses and engage in business in the ordinary course. AIG does not expect these conditions to change in the foreseeable future. Requirements of the USA PATRIOT Act, the Office of Foreign Assets Control, and similar laws that apply to AIG may expose AIG to significant penalties. The operations of certain of AIG’s subsidiaries are subject to laws and regulations, including the USA PATRIOT Act of 2001, which requires companies to know certain information about their clients and to monitor their transactions for suspicious activities. In addition, the Department of the Treasury’s Office of Foreign Assets Control administers regulations requiring U.S. persons to refrain from doing business, or allowing their clients to do business through them, with certain organizations or individuals on a prohibited list maintained by the U.S. government or with certain countries. The United Kingdom, the European Union and other jurisdictions maintain similar laws and regulations. Although AIG has instituted compliance programs to address these requirements, there are inherent risks in global transactions such as those engaged in by AIG and its subsidiaries. Proposed regulations may affect AIG’s operations, financial condition and ability to compete effectively. Legislators and regulators have recently put forward various proposals that may impact the profitability of certain of AIG’s businesses or even its ability to conduct certain businesses at all, including proposals relating to restrictions on the type of activities in which financial institutions are permitted to engage and the size of financial institutions, and proposals to impose additional taxes on a limited subset of financial institutions and insurance companies (either based on size, activities, geography, government support or other criteria). It is unclear how these and other such proposals would apply to AIG or its competitors or how they could impact AIG’s consolidated results of operations, financial condition, and ability to compete effectively. Foreign Operations Foreign operations expose AIG to risks that may affect its operations, liquidity and financial condition. AIG provides insurance, investment and other financial products and services to both businesses and individuals in more than 130 countries and jurisdictions. A substantial portion of AIG’s General Insurance business and all of its Foreign Life Insurance & Retirement Services business is conducted outside the United States. Operations outside the United States, particularly those in developing nations, may be affected by regional economic downturns, changes in foreign currency exchange rates, political upheaval, nationalization and other restrictive government actions, which could also affect other AIG operations. The degree of regulation and supervision in foreign jurisdictions varies. Generally, AIG, as well as its subsidiaries operating in such jurisdictions, must satisfy local regulatory requirements. Licenses issued by foreign authorities to AIG subsidiaries are subject to modification and revocation. Thus, AIG’s insurance subsidiaries could be prevented from conducting future business in certain of the jurisdictions where they currently operate. Adverse actions from any single country could adversely affect AIG’s results of operations, liquidity and financial condition depending on the magnitude of the event and AIG’s financial exposure at that time in that country. Legal Proceedings Significant legal proceedings may adversely affect AIG’s results of operations. AIG is party to numerous legal proceedings, including securities class actions and regulatory or governmental investigations. Due to the nature of the litigation, the lack of precise damage claims and the type of claims made against AIG, AIG cannot currently quantify its ultimate or maximum liability for these actions. It is possible that developments in these unresolved matters could have a material adverse effect on AIG’s consolidated financial condition or consolidated results of operations for an 29 AIG 2009 Form 10-K


  • Page 38

    American International Group, Inc., and Subsidiaries individual reporting period. For a discussion of these unresolved matters, see Note 15 to the Consolidated Financial Statements. Use of Estimates If actual experience differs from management’s estimates used in the preparation of financial statements, AIG’s consolidated results of operations or financial condition could be adversely affected. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the application of accounting policies that often involve a significant degree of judgment. AIG considers that its accounting policies that are most dependent on the application of estimates and assumptions, and therefore viewed as critical accounting estimates, are those described in Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates. These accounting estimates require the use of assumptions, some of which are highly uncertain at the time of estimation. Additionally, the recoverability of deferred tax assets depends primarily on AIG achieving its estimated values for all or a portion of AIA and ALICO, as well as certain other transactions. The failure to receive the estimated values or to effect such transactions could result in AIG recording a charge resulting in a reduction, possibly material, of the net deferred tax asset. Further, such transactions could result in a goodwill or other long-lived asset impairment charge. These estimates, by their nature, are based on judgment and current facts and circumstances. Therefore, actual results could differ from these estimates, possibly in the near term, and could have a material effect on the consolidated financial statements. Aircraft Suppliers There are limited suppliers of aircraft and engines. The supply of jet transport aircraft, which ILFC purchases and leases, is dominated by two airframe manufacturers, Boeing and Airbus, and a limited number of engine manufacturers. As a result, ILFC is dependent on the manufacturers’ success in remaining financially stable, producing aircraft and related components which meet the airlines’ demands, both in type and quantity, and fulfilling their contractual obligations to ILFC. Competition between the manufacturers for market share is intense and may lead to instances of deep discounting for certain aircraft types that could negatively affect ILFC’s competitive pricing. Item 1B. Unresolved Staff Comments There are no material unresolved written comments that were received from the SEC staff 180 days or more before the end of AIG’s fiscal year relating to AIG’s periodic or current reports under the Exchange Act. Item 2. Properties AIG and its subsidiaries operate from approximately 1,730 offices in the United States, 54 in Puerto Rico, 7 in Canada and numerous offices in over 100 foreign countries. The offices in Greensboro and Winston-Salem, North Carolina; Amarillo, Ft. Worth and Houston, Texas; Wilmington, Delaware; San Juan, Puerto Rico; Livingston, New Jersey; Terre Haute and Evansville, Indiana; Nashville, Tennessee; Stevens Point, Wisconsin; Barstow and Riverside, California; 175 Water Street in New York, New York; and offices in more than 30 foreign countries and jurisdictions including Bermuda, Chile, Hong Kong, the Philippines, Japan, the U.K., Singapore, Malaysia, Taiwan and Thailand are located in buildings owned by AIG and its subsidiaries. The remainder of the office space utilized by AIG and its subsidiaries is leased. Item 3. Legal Proceedings For a discussion of legal proceedings, see Note 15(a) to the Consolidated Financial Statements, which is incorporated herein by reference. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of 2009. AIG 2009 Form 10-K 30


  • Page 39

    American International Group, Inc., and Subsidiaries Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities AIG Common Stock is listed on the New York Stock Exchange, as well as on the stock exchanges in Ireland and Tokyo. The following table presents the high and low closing sale prices on the New York Stock Exchange Composite Tape and the dividends paid per share of AIG Common Stock for each quarter of 2009 and 2008, in all cases, as adjusted for the reverse common stock split: 2009 2008 Dividends Dividends High Low Paid High Low Paid First quarter $34.80 $ 7.00 $ - $1,186.40 $796.00 $4.00 Second quarter 40.20 21.00 - 980.80 529.20 4.00 Third quarter 50.23 9.48 - 602.00 41.00 4.40 Fourth quarter 45.90 28.06 - 80.00 27.00 - The approximate number of record holders of common stock as of January 29, 2010 was 56,028. Under the FRBNY Credit Facility, AIG is restricted from paying dividends on the AIG Common Stock. Morever, pursuant to terms of each of the AIG Series E Preferred Stock and AIG Series F Preferred Stock, AIG is not able to declare or pay any cash dividends on the AIG Common Stock or on any AIG preferred stock ranking junior to such series of preferred stock for any period until dividends on each of the AIG Series E Preferred Stock and AIG Series F Preferred Stock have been paid for such period. AIG has not paid dividends on the AIG Series E Preferred Stock and AIG Series F Preferred Stock outstanding in 2009 and no dividends have been paid on the AIG Common Stock since the third quarter of 2008. In addition, AIG did not pay any dividends on the AIG Series D Preferred Stock while it was outstanding. For a discussion of certain restrictions on the payment of dividends to AIG by some of its insurance subsidiaries, see Item 1A. Risk Factors — Liquidity — AIG parent’s ability to access funds from its subsidiaries is limited, and Note 16 to the Consolidated Financial Statements. AIG’s table of equity compensation plans previously approved by security holders and equity compensation plans not previously approved by security holders will be included in the definitive proxy statement for AIG’s 2010 Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the close of AIG’s fiscal year pursuant to Regulation 14A. 31 AIG 2009 Form 10-K


  • Page 40

    American International Group, Inc., and Subsidiaries Performance Graph The following Performance Graph compares the cumulative total shareholder return on AIG Common Stock for a five-year period (December 31, 2004 to December 31, 2009) with the cumulative total return of the S&P’s 500 stock index (which includes AIG) and a peer group of companies consisting of nine insurance companies to which AIG compares its business and operations: ACE Limited, Aflac Incorporated, The Chubb Corporation, The Hartford Financial Services Group, Inc., Lincoln National Corporation, MetLife, Inc., Prudential Financial, Inc., The Travelers Companies, Inc. and XL Capital Ltd. FIVE-YEAR CUMULATIVE TOTAL SHAREHOLDER RETURNS Value of $100 Invested on December 31, 2004 $250 $200 $150 $100 $50 $0 2004 2005 2006 2007 2008 2009 Years Ending AMERICAN INTERNATIONAL GROUP S&P 500 INDEX PEER GROUP 20FEB201019253760 As of December 31, 2004 2005 2006 2007 2008 2009 AIG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100.00 $104.85 $111.19 $ 91.47 $ 2.66 $ 2.54 S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00 104.91 121.48 128.16 80.74 102.11 Peer Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00 122.98 142.29 148.63 86.00 100.36 AIG 2009 Form 10-K 32


  • Page 41

    American International Group, Inc., and Subsidiaries Item 6. Selected Financial Data The Selected Consolidated Financial Data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying notes included elsewhere herein. Years Ended December 31, (in millions, except per share data) 2009(a) 2008(a) 2007(a) 2006(a) 2005(a) Revenues(b): Premiums and other considerations $ 64,702 $ 78,564 $ 74,753 $ 69,565 $ 65,588 Net investment income 25,239 11,433 30,051 27,612 24,480 Net realized capital gains (losses) (6,854) (52,705) (3,501) 62 601 Unrealized market valuation gains (losses) on AIGFP super senior credit default swap portfolio 1,418 (28,602) (11,472) - - Other income 11,499 (1,794) 13,801 9,687 12,060 Total revenues 96,004 6,896 103,632 106,926 102,729 Benefits, claims and expenses: Policyholder benefits and claims incurred 61,436 58,839 62,452 57,052 60,834 Policy acquisition and other insurance expenses(c) 20,674 26,284 19,819 19,003 17,310 Interest expense(d) 15,369 17,007 4,751 3,657 2,572 Restructuring expenses and related asset impairment and other expenses 1,386 804 - - - Net loss on sale of divested businesses 1,271 - - - - Other expenses(c) 9,516 10,490 8,476 6,224 7,143 Total benefits, claims and expenses 109,652 113,424 95,498 85,936 87,859 Income (loss) from continuing operations before income tax expense (benefit) and cumulative effect of change in accounting principles(b)(e)(f) (13,648) (106,528) 8,134 20,990 14,870 Income tax expense (benefit)(g) (1,878) (8,894) 1,267 6,368 4,224 Income (loss) from continuing operations before cumulative effect of change in accounting principles (11,770) (97,634) 6,867 14,622 10,646 Income (loss) from discontinued operations, net of tax (543) (2,753) 621 528 309 Net income (loss) (12,313) (100,387) 7,488 15,150 10,955 Net income (loss) attributable to AIG (10,949) (99,289) 6,200 14,048 10,477 Earnings per common share attributable to AIG: Basic Income (loss) from continuing operations before cumulative effect of change in accounting principles (86.30) (737.12) 43.40 103.60 78.43 Income (loss) from discontinued operations (4.18) (19.73) 4.58 3.87 2.26 Cumulative effect of change in accounting principles, net of tax - - - 0.26 - Net income (loss) attributable to AIG (90.48) (756.85) 47.98 107.73 80.69 Diluted Income (loss) before cumulative effect of change in accounting principles (86.30) (737.12) 43.17 103.07 77.63 Income (loss) from discontinued operations (4.18) (19.73) 4.56 3.85 2.23 Cumulative effect of change in accounting principles, net of tax - - - 0.26 - Net income (loss) attributable to AIG (90.48) (756.85) 47.73 107.18 79.86 Dividends declared per common share - 8.40 15.40 13.00 12.60 Year-end balance sheet data: Total investments 601,165 636,912 829,468 767,812 665,166 Total assets 847,585 860,418 1,048,361 979,414 851,847 Commercial paper and other short-term debt(h) 4,739 15,718 13,114 13,028 9,208 Long-term debt(i) 136,733 177,485 162,935 135,650 100,641 Total AIG shareholders’ equity 69,824 52,710 95,801 101,677 86,317 Total equity $ 98,076 $ 60,805 $ 104,273 $107,037 $ 90,076 33 AIG 2009 Form 10-K


  • Page 42

    American International Group, Inc., and Subsidiaries (a) Certain reclassifications have been made to prior period amounts to conform to the current period presentation. See Note 1 to the Consolidated Financial Statements. (b) In 2009, 2008, 2007, 2006, and 2005, includes other-than-temporary impairment charges on investments of $7.8 billion, $48.6 billion, $4.6 billion, $912 million, and $572 million, respectively. Also 2009, 2008, 2007, 2006 and 2005 results include gains (losses) from hedging activities that did not qualify for hedge accounting treatment, including the related foreign exchange gains and losses, of $1.2 billion, $(3.7) billion, $(1.4) billion, $(1.9) billion, and $2.4 billion, respectively, in revenues and in income from continuing operations before income tax expense. These amounts result primarily from interest rate and foreign currency derivatives that are effective economic hedges of investments and borrowings. (c) Includes goodwill impairment charges of $81 million and $3.3 billion, respectively, in Policy acquisition and other insurance expenses and $612 million and $791 million, respectively, in Other expenses for 2009 and 2008. (d) In 2009 and 2008, includes $10.4 billion and $11.4 billion, respectively, of interest expense on the FRBNY Credit Facility which was comprised of $8.4 billion and $9.3 billion, respectively, of amortization on the prepaid commitment fee asset associated with the FRBNY Credit Facility and $2.0 billion and $2.1 billion, respectively, of accrued compounding interest. (e) Includes catastrophe-related losses of $53 million in 2009, $1.8 billion in 2008, $276 million in 2007, and $3.28 billion in 2005. (f) Reduced by fourth quarter charges of $2.3 billion in 2009 and $1.8 billion in 2005 related to the annual review of General Insurance loss and loss adjustment reserves. In 2006 and 2005, includes charges related to changes in estimates for asbestos and environmental reserves of $198 million, and $873 million, respectively. (g) In 2008, includes a $20.6 billion valuation allowance to reduce AIG’s deferred tax asset to an amount AIG believes is more likely than not to be realized, and a $4.8 billion deferred tax expense attributable to the potential sale of foreign businesses. In 2009, includes a $2.9 billion valuation allowance to reduce AIG’s deferred tax asset to an amount AIG believes is more likely than not to be realized. (h) Includes borrowings of $2.7 billion and $2.0 billion for AIGFP (through Curzon Funding LLC, AIGFP’s asset-backed commercial paper conduit) and AIG Funding, respectively, under the CPFF at December 31, 2009 and $6.8 billion, $6.6 billion and $1.7 billion for AIGFP (through Curzon Funding LLC), AIG Funding and ILFC, respectively, at December 31, 2008. (i) Includes that portion of long-term debt maturing in less than one year. See Note 14 to the Consolidated Financial Statements. See Note 1(y) to the Consolidated Financial Statements for effects of adopting new accounting standards. AIG 2009 Form 10-K 34


  • Page 43

    American International Group, Inc., and Subsidiaries Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. Underwriting profit (loss) is utilized to report results for AIG’s General Insurance operations and pre-tax income (loss) before net realized capital gains (losses) is utilized to report result for AIG’s life insurance and retirement services operations as these measures enhance the understanding of the underlying profitability of the ongoing operations of these businesses and allow for more meaningful comparisons with AIG’s insurance competitors. AIG has also incorporated into this discussion a number of cross-references to additional information included throughout this Annual Report on Form 10-K to assist readers seeking additional information related to a particular subject. Index Page Cautionary Statement Regarding Forward-Looking Information 35 Executive Overview 36 Consideration of AIG’s Ability to Continue as a Going Concern 43 Capital Resources and Liquidity 43 Liquidity 43 Results of Operations 62 Consolidated Results 63 Segment Results 72 General Insurance Operations 72 Liability for Unpaid Claims and Claims Adjustment Expense 79 Domestic Life Insurance & Retirement Services Operations 101 Foreign Life Insurance & Retirement Services Operations 107 Financial Services Operations 111 Other Operations 116 Critical Accounting Estimates 121 Investments 155 Investment Strategy 156 Other-Than-Temporary Impairments 167 Risk Management 172 Overview 172 Corporate Risk Governance 173 Credit Risk Management 174 Market Risk Management 177 Operational Risk Management 179 Insurance Risk Management 180 Segment Risk Management 182 Insurance Operations 182 Financial Services 186 Noncore Asset Management Operations 190 Cautionary Statement Regarding Forward-Looking Information This Annual Report on Form 10-K and other publicly available documents may include, and AIG’s officers and representatives may from time to time make, projections and statements which may constitute ‘‘forward-looking statements’’ within the meaning of the Private Securities Litigation Reform Act of 1995. 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 outcome of the completed transactions with the Federal Reserve Bank of New York (FRBNY) and the United States Department of the Treasury (Department of the Treasury); 35 AIG 2009 Form 10-K


  • Page 44

    American International Group, Inc., and Subsidiaries • the number, size, terms, cost, proceeds and timing of dispositions and their potential effect on AIG’s businesses, financial condition, results of operations, cash flows and liquidity (and AIG at any time and from time to time may change its plans with respect to the sale of one or more businesses); • AIG’s long-term business mix which will depend on the outcome of AIG’s asset disposition program; • AIG’s exposures to subprime mortgages, monoline insurers and the residential and commercial real estate markets; • the separation of AIG’s businesses from AIG parent company; • AIG’s ability to retain and motivate its employees; and • AIG’s strategy for customer retention, growth, product development, market position, financial results and reserves. It is possible that AIG’s actual results and financial condition will 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 include: • a failure to close transactions contemplated in AIG’s restructuring plan; • developments in global credit markets; and • such other factors as discussed throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 1A. Risk Factors of this Annual Report on Form 10-K. AIG is not under any obligation (and expressly disclaims any obligation) 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. Executive Overview AIG reports the results of its operations through four reportable segments: General Insurance, Domestic Life Insurance & Retirement Services, Foreign Life Insurance & Retirement Services, and Financial Services. AIG evaluates performance based on pre-tax income (loss), excluding results from discontinued operations and net gains (losses) on sales of divested businesses because AIG believes that this provides more meaningful information on how its operations are performing. • General Insurance – branded as Chartis in July 2009, is comprised of multiple line companies writing substantially all lines of property and casualty insurance and various personal lines both domestically and abroad. • Domestic Life Insurance & Retirement Services – branded as SunAmerica Financial Group in December 2009, AIG’s Domestic Life Insurance businesses offer a broad range of protection products, including individual term and universal life insurance, and group life and health products. In addition, Domestic Life Insurance offers a variety of payout annuities, which include single premium immediate annuities, structured settlements and terminal funding annuities. Domestic Retirement Services businesses offer group retirement products and individual fixed and variable annuities. Certain previously acquired closed blocks and other fixed and variable annuity blocks that have been discontinued are reported as ‘‘runoff’’ annuities. Domestic Retirement Services also maintains a runoff block of Guaranteed Investment Contracts (GICs) that were written in (or issued to) the institutional market place prior to 2006. • Foreign Life Insurance & Retirement Services – provides insurance and investment-oriented products such as whole and term life, investment linked, universal life and endowments, personal accident and health products, group products including pension, life and health, and fixed and variable annuities. • Financial Services – engages in diversified activities, including commercial aircraft and equipment leasing, capital markets operations, consumer finance and insurance premium financing, both in the United States and abroad. AIG 2009 Form 10-K 36


  • Page 45

    American International Group, Inc., and Subsidiaries With the announced sale of AIG’s investment advisory and third party Institutional Asset Management business (excluding the Global Real Estate investment management business), AIG will no longer benefit from the management fee and carried interest cash flows from these businesses, but the sale will reduce operating costs related to AIG’s asset management activities. Asset Management is no longer considered a reportable segment, and the results for the Institutional Asset Management businesses and the Matched Investment Program (MIP), which is in run-off, are presented as a Noncore business in AIG’s Other operations category. In addition, results for certain brokerage service, mutual fund, GIC and other asset management activities previously reported in the Asset Management segment are now included in the Domestic Life Insurance & Retirement Services segment. Results for prior periods have been revised accordingly. AIG has entered into several important transactions and relationships with the FRBNY, the AIG Credit Facility Trust (together with its trustees, acting in their capacity as trustees, the Trust) and the Department of the Treasury. As a result of these arrangements, AIG is controlled by the Trust, which was established for the sole benefit of the United States Treasury. Since September 2008, AIG has been working to protect and enhance the value of its key businesses, execute an orderly asset disposition plan, and position itself for the future. The discussion that follows should be read in conjunction with the Consolidated Financial Statements and accompanying notes included elsewhere herein. Priorities for 2010 AIG is focused on the following priorities for 2010: • continued stabilization and strengthening of AIG’s businesses; • realize additional progress in restructuring and asset disposition initiatives to enable repayment of amounts outstanding under the FRBNY Credit Facility provided by the FRBNY under the Credit Agreement, dated as of September 22, 2008 (as amended, the FRBNY Credit Agreement), between AIG and the FRBNY; • execute plans to realize value from dispositions of interests in American International Assurance Company, Ltd. (AIA) and American Life Insurance Company (ALICO); • further wind-down of AIG’s exposure to certain financial products and derivatives trading activities; and • address funding needs of International Lease Finance Corporation (ILFC) and American General Finance, Inc. (AGF) and explore alternative restructuring opportunities. 2009 Financial Overview Global financial markets continued their recovery in the second half of 2009, as investors returned to equity and bond markets. This optimism, not yet accompanied by a robust economic recovery, produced a strong rally in bond, equity and commodity markets. Cash accumulated by investors in 2008 and early 2009 continued to flow out of short-term money market accounts and into higher yielding assets, creating investment demand in excess of available new supply in many sectors. While securitized mortgage products participated to a degree in the rally, particularly in desirable tranches of well-collateralized transactions, the commercial mortgage and equity real estate sectors continue to lag. The improved market environment noted above contributed to the substantial reduction in the loss from continuing operations before income taxes, which declined to $13.6 billion in 2009 compared to $106.5 billion in 2008. The following significant drivers also contributed to this improvement: • the 2008 period included non-credit impairments (i.e., severity losses) throughout the year that are no longer required for fixed maturity securities due to the adoption of the new other-than-temporary impairments accounting standard commencing in the second quarter of 2009. Additionally, other-than-temporary 37 AIG 2009 Form 10-K


  • Page 46

    American International Group, Inc., and Subsidiaries impairments declined from the 2008 period due to improved market conditions. See Note 6 to the Consolidated Financial Statements; and Investments — Other-Than-Temporary Impairments; • unrealized market valuation gains of $1.4 billion in 2009 related to AIGFP’s super senior credit default swap portfolio compared to unrealized market valuation losses of $28.6 billion in 2008 due to the substantial decline in outstanding net notional amount resulting from the termination of contracts in the fourth quarter of 2008 associated with the Maiden Lane III transaction (ML III) as well as the narrowing of corporate credit spreads. See Note 6 to the Consolidated Financial Statements; and • a $3.4 billion decline in goodwill impairment charges. Additionally, the net loss in 2009 decreased due to $25.4 billion of deferred tax expense recorded in 2008 associated with the potential sale of foreign businesses and valuation allowances. Fourth Quarter 2009 Net Loss AIG incurred a net loss attributable to AIG of $8.9 billion during the fourth quarter of 2009. This loss resulted primarily from the following: • total FRBNY interest and amortization expense of $6.2 billion ($4.0 billion after tax), including accelerated amortization of $5.2 billion ($3.4 billion after tax) in connection with the $25 billion reduction in outstanding balance and maximum lending commitment under the FRBNY Credit Facility as a result of the issuance of preferred interests; • a loss recognized on the pending sale of Nan Shan of $2.8 billion ($1.5 billion after tax), reported in discontinued operations; • increases in Commercial Insurance loss reserves on certain long-tail casualty classes of business totaling $2.3 billion ($1.5 billion net of tax); and • a valuation allowance change of $2.7 billion for tax benefits not presently recognizable, including those shown above. For a complete discussion of financial results, see Consolidated Results and Segment Results. 2010 Business Outlook During 2009, AIG took steps to prepare AIA and ALICO for possible divestiture in initial public offerings or by third party sale, depending on market conditions and subject to customary regulatory approvals. In furtherance of that goal, the Hong Kong Stock Exchange was chosen as the listing venue for any initial public offering of AIA, and AIG has been in discussions with a third party regarding the potential sale of ALICO. The final determination on divestiture strategies for these companies remains subject to AIG Board approval and market conditions. A sale of ALICO, which is a component of the Japan & Other reporting unit, would require AIG to assess whether any of the $4.7 billion of goodwill associated with the reporting unit was impaired. See Critical Accounting Estimates — Goodwill Impairment for a discussion of management’s approach to testing goodwill for impairment. AIG’s strategy going forward is to focus on its leading global general insurance business and its domestic and certain foreign life insurance and retirement services businesses, while at the same time addressing liquidity and risk issues within the Financial Services segment. AIG has completed several transactions with the FRBNY and continues to execute its plans for repaying the FRBNY Credit Facility. AIG has incurred, and may continue to incur, significant additional restructuring-related charges, such as additional accelerated amortization expense related to the prepaid commitment asset and additional material write-offs of deferred taxes, goodwill and other long-lived assets. Continued difficult market conditions have caused a decline in the value of certain private equity and real estate assets held for investment purposes, resulting in impairment charges. The persistence of the troubled global economy driven by tight credit markets and high unemployment will likely continue to adversely affect pre-tax income in future AIG 2009 Form 10-K 38


  • Page 47

    American International Group, Inc., and Subsidiaries periods. Management continues to assess value declines and the permanence of such declines. These market conditions have also adversely affected the ability to pay or refinance maturing debt obligations in the private equity and real estate portfolios. On June 10, 2009, the Department of the Treasury issued regulations implementing the compensation limits of the American Recovery and Reinvestment Act of 2009. These regulations restrict the amount of bonus and other incentive compensation that a company receiving TARP funds may pay to certain employees. For AIG these limits apply to the five executives named in AIG’s proxy statement and the next twenty highest paid employees of AIG (the Top 25). The regulations also created the Office of Special Master for TARP Executive Compensation (Special Master), which is responsible for interpreting and applying the compensation regulations. AIG is required to obtain the Special Master’s approval of the compensation of the Top 25, and the compensation structure of AIG’s executive officers and AIG’s next 26 to 100 most highly compensated employees and executive officers (the Top 100). The Special Master has issued Determination Memoranda covering the Top 25 and Top 100. These Determination Memoranda place significant new conditions on the compensation of these employees, and the conditions in the Determination Memoranda may impair AIG’s ability to retain and motivate them. See Item 1A. Risk Factors — Employees for a further discussion of this risk. General Insurance Given current insurance capital levels and the relatively benign 2009 catastrophe season, the overall expectation is that both property and casualty market pricing will continue to decline in 2010. While rate change has become more stable in recent quarters, Chartis does not expect this trend to continue in 2010. In addition, overall economic conditions have decreased the volume of ratable exposures (i.e., asset values, payrolls and sales), which has had a corresponding negative impact on overall market premium base. Given these factors, AIG expects organic modest gross and net premium growth in 2010, driven by growth in Foreign General Insurance. In 2010, Chartis expects to continue to execute capital management initiatives begun in 2009 by enhancing its Enterprise Risk Management function; developing broad-based risk appetite guidelines for its operating units; and executing underwriting and reinsurance strategies to improve capital ratios, increase return on equity by line of business and reduce exposure to certain businesses where inadequate pricing and increased loss trends may exist. Chartis U.S. expects overall gross written premiums to remain consistent with 2009 levels. However, its business mix is expected to continue to change, reflecting capital management initiatives. Net written premiums may decline as Chartis U.S. modifies its reinsurance program to be consistent with its capital management initiatives. Gross written premiums for Chartis International are expected to grow more substantially in 2010, due in large part to its existing presence in emerging markets and its anticipated increased stake in The Fuji Fire & Marine Insurance Company Limited which would require consolidation of its operations into AIG. Domestic Life Insurance & Retirement Services AIG expects sales and deposits to gradually recover in 2010-2011 as market conditions improve, AIG ratings remain stable, negative AIG publicity subsides, rebranding efforts take hold and distribution is reinstated at additional financial institutions. Domestic Life Insurance & Retirement Services companies maintained higher liquidity in 2008 and 2009 which negatively affected net investment income results. As such cash balances are reinvested into longer term securities in 2010-2011, AIG expects investment yields to gradually improve. Foreign Life Insurance & Retirement Services AIG expects that sales of foreign life investment-oriented products will continue to be lower than historic levels due to the lingering negative effects of AIG events on third party financial institution distribution networks, primarily in Japan and the U.K. and that sales of risk-based insurance products will continue to improve, particularly in Asia. 39 AIG 2009 Form 10-K


  • Page 48

    American International Group, Inc., and Subsidiaries AIA and ALICO have experienced improved operating conditions and are expected to continue to improve as the rebranding initiatives and revitalization of their agency and direct marketing distribution networks continues. Financial Services Capital Markets AIGFP continued unwinding its businesses and portfolios during 2009, and these activities are expected to continue in 2010. During 2009, AIGFP reduced the notional amount of its derivative portfolio by 41 percent, from $1.6 trillion at December 31, 2008 to $940.7 billion at December 31, 2009. AIGFP reduced the number of its outstanding trade positions by approximately 18,900, from approximately 35,000 at December 31, 2008 to approximately 16,100 at December 31, 2009. In connection with these activities, AIGFP has disaggregated its portfolio of existing transactions into a number of separate ‘‘books’’ and has developed a plan for addressing each book, including assessing each book’s risks, risk mitigation options, monitoring metrics and certain implications of various potential outcomes. Each plan has been reviewed by a steering committee whose membership includes senior executives of AIG. The plans are subject to change as efforts progress and as conditions in the financial markets evolve, and they contemplate, depending on the book in question, alternative strategies, including sales, assignments or other transfers of positions, terminations of positions, and/or run-offs of positions in accordance with existing terms. Execution of these plans is overseen by a transaction approval process involving senior members of AIGFP’s and AIG’s respective management groups as specific actions entail greater liquidity and financial consequences. Successful execution of these plans is subject, to varying degrees depending on the transactions of a given book, to market conditions and, in many circumstances, counterparty negotiation and agreement. As a consequence of its wind-down strategy, AIGFP is entering into new derivative transactions only to hedge its current portfolio, reduce risk and hedge the currency, interest rate and other market risks associated with its affiliated businesses. AIGFP has already reduced the size of certain portions of its portfolio, including effecting a substantial reduction in credit derivative transactions in respect of multi-sector collateralized debt obligations (CDOs) in connection with ML III, a sale of its commodity index business, termination and sale of its activities as a foreign exchange prime broker, and sale and other disposition of its energy/infrastructure investment portfolio. Due to the long-term duration of many of AIGFP’s derivative contracts and to the complexity of AIGFP’s portfolio, AIG expects that an orderly wind-down will take a substantial period of time. The cost of executing the wind-down will depend on many factors, many of which are not within AIGFP’s control, including market conditions, AIGFP’s access to markets via market counterparties, the availability of liquidity and the potential implications of further rating downgrades. In addition, the Determination Memorandum issued by the Special Master places significant new restrictions on the compensation of AIGFP employees included in the Top 25 and Top 100 and may impair AIGFP’s ability to retain these employees and negatively impact the wind-down of AIGFP’s business. ILFC Given the current market conditions and ILFC’s current limited access to unsecured debt markets, new aircraft purchases may be limited for the foreseeable future. In addition, these market conditions are creating downward pressures that are slowing the growth of ILFC’s operating margins. ILFC is currently seeking secured financing and is exploring sales of aircraft portfolios to investors to meet its financial and operating obligations. These secured financings will increase ILFC’s composite interest rate, which will put further downward pressure on its operating margins, and any aircraft sales would likely result in a loss, which, depending on the size and composition of the portfolio, could be significant. In addition, sales of large portfolios of aircraft will likely increase the average age of ILFC’s fleet and impact future operating margins. If ILFC’s sources of liquidity are not sufficient to meet its contractual obligations as they become due over the next twelve months, ILFC will seek additional funding from AIG, which funding would be subject to AIG receiving the consent of the FRBNY. AIG 2009 Form 10-K 40


  • Page 49

    American International Group, Inc., and Subsidiaries AGF Since the events of September 2008, AGF’s traditional borrowing sources, including its ability to issue unsecured debt in the capital markets, have remained unavailable, and AGF does not expect them to become available in the near future. AGF’s liquidity concerns, dependency on AIG, results of its operations and the uncertainty regarding the availability of support from AIG have negatively impacted its credit ratings. In addition to finance receivable collections, AGF is exploring additional initiatives to meet its financial and operating obligations. These initiatives include additional on-balance sheet securitizations, portfolio sales, and expense reductions. During 2009, AGF closed 200 branch offices, reduced retail sales financing operations, reduced its number of employees by approximately 1,400 through reductions in force and attrition, and sold $1.9 billion of finance receivables held for sale. In July 2009, AGF securitized $1.9 billion of real estate loans and received $967 million in cash proceeds. If AGF’s sources of liquidity are not sufficient to meet its contractual obligations as they become due over the next twelve months, AGF will seek additional funding from AIG, which funding would be subject to AIG receiving the consent of the FRBNY. Significant Events in 2009 Consummation of the AIA and ALICO SPV Transactions On December 1, 2009, AIG and the FRBNY completed two transactions pursuant to which AIG transferred to the FRBNY noncontrolling, nonvoting, callable, preferred equity interests (Preferred Interests) in two newly-formed special purpose vehicles (SPVs) in exchange for a $25 billion reduction of the balance outstanding and the maximum credit available under the FRBNY Credit Facility, which resulted in $5.2 billion of accelerated amortization of a portion of the prepaid commitment asset. Each SPV has (directly or indirectly) as its only asset 100 percent of the common stock of an operating subsidiary (AIA in one case and ALICO in the other). AIG owns all of the voting common equity interests of each SPV. AIG’s purpose for entering into these agreements was to position AIA and ALICO for initial public offerings or third-party sale, depending on market conditions and subject to customary regulatory approvals. An equally important objective of the transactions was to enhance AIG’s capitalization consistent with rating agency requirements in order to complete its restructuring plan and repay the support it has received from the FRBNY and the Department of the Treasury. The Preferred Interests are redeemable at the option of AIG and are transferable at the FRBNY’s discretion. In the event the board of managers of either SPV initiates a public offering, liquidation or winding up or a voluntary sale, the proceeds must be distributed to the Preferred Interests until the Preferred Interests’ redemption value has been paid. The redemption value of the Preferred Interests is the liquidation preference, which includes any undistributed preferred returns through the redemption date, and the amount of distributions that the Preferred Interests would receive in the event of a 100 percent distribution to all the common and Preferred Interest holders at the redemption date. The Preferred Interests entitle the FRBNY to veto rights over certain significant actions by the SPVs and provide the FRBNY with certain rights including the right to compel the SPVs to use their best efforts to take certain actions, including an initial public offering or a sale of the SPVs or the businesses held by the SPVs. After December 1, 2010, and prior thereto with the concurrence of the trustees of Trust, the FRBNY can compel the holders of the common interests to sell those interests should the FRBNY decide to sell its preferred interests. Following an initial public offering, the FRBNY will have the right to exchange its Preferred Interests for common shares of the publicly-traded entity. The Preferred Interests in the AIA SPV have an initial liquidation preference of $16 billion and have the right to a preferred return of five percent per year compounded quarterly through September 22, 2013 and nine percent thereafter. If the preferred return is not distributed, the amount is added to the Preferred Interests’ liquidation preference. The AIA Preferred Interests participate in one percent of net income after the preferred return. The AIA Preferred Interests are also entitled to a one percent participation right of any residual value after (i) the AIA preferred return, (ii) the participation right of one percent of AIA’s net income, (iii) the liquidation preference on all Preferred Interests has been paid and (iv) the holders of the common interests (currently AIG) have received, 41 AIG 2009 Form 10-K


  • Page 50

    American International Group, Inc., and Subsidiaries including any ordinary course distributions, the sum of (i) $9 billion and (ii) the amount of any additional capital contributions other than the initial capital contribution. AIG is entitled to receive 99 percent of the remaining residual value from the disposition of AIA by the SPV. The Preferred Interests in the ALICO SPV consist of senior and junior preferred interests with liquidation preferences of $1 billion and $8 billion, respectively. The junior and senior preferred interests have a preferred return of five percent per year compounded quarterly through September 22, 2013 and nine percent thereafter. If the preferred return is not distributed, the amount is added to the Preferred Interests’ liquidation preference. The junior preferred interests participate in five percent of any residual value after the liquidation preference and the preferred return for the then-current quarter on the senior and junior preferred interests have been paid and the holders of the common interests (currently AIG) have received, including any ordinary course distributions, the sum of (i) $6 billion and (ii) the amount of any additional capital contributions other than the initial capital contribution. The senior preferred interests do not have a participating return. AIG is entitled to receive 95 percent of the remaining residual value from the disposition of ALICO by the SPV. See Note 16 to the Consolidated Financial Statements for further discussion. Exchange of AIG Series D Preferred Stock for AIG Series E Preferred Stock On April 17, 2009, AIG entered into a Securities Exchange Agreement (the AIG Series E Exchange Agreement) with the Department of the Treasury pursuant to which, among other things, the Department of the Treasury exchanged 4,000,000 shares of AIG’s Series D Fixed Rate Cumulative Perpetual Preferred Stock, par value $5.00 per share (AIG Series D Preferred Stock), for 400,000 shares of AIG’s Series E Fixed Rate Non-Cumulative Perpetual Preferred Stock, par value $5.00 per share (AIG Series E Preferred Stock). See Note 16 to the Consolidated Financial Statements for further discussion. Department of the Treasury Commitment On April 17, 2009, AIG entered into a Securities Purchase Agreement with the Department of the Treasury, pursuant to which (i) AIG issued to the Department of the Treasury (a) 300,000 shares of AIG Series F Preferred Stock, and (b) the warrant (AIG Series F Warrant) to purchase 150 shares of AIG common stock, par value $2.50 per share, and (ii) the Department of the Treasury agreed to provide up to $29.835 billion (the Department of the Treasury Commitment) in exchange for increases in the liquidation preference of the AIG Series F Preferred Stock. See Note 16 to the Consolidated Financial Statements for further discussion. Modification of FRBNY Credit Facility On April 17, 2009, AIG and the Board of Governors of the Federal Reserve System entered into an Amendment No. 3 to the FRBNY Credit Agreement. The FRBNY Credit Agreement was amended, among other things, to remove the minimum 3.5 percent LIBOR borrowing rate floor, and permit the issuance by AIG of the AIG Series E Preferred Stock, the AIG Series F Preferred Stock and the AIG Series F Warrant to the Department of the Treasury. On December 1, 2009, AIG and the FRBNY entered into an Amendment No. 4 to the FRBNY Credit Agreement in order to, among other things: • provide for the consummation of the AIA and ALICO transactions with the FRBNY; and • reduce the outstanding balance of the FRBNY Credit Agreement and the maximum amount available to be borrowed thereunder by $25 billion. Issuance of AIG Series C Preferred Stock On March 4, 2009, AIG issued to the Trust 100,000 shares of AIG’s Series C Perpetual, Convertible, Participating Preferred Stock, par value $5.00 per share (AIG Series C Preferred Stock), pursuant to the Series C Perpetual, Convertible, Participating Preferred Stock Purchase Agreement, dated as of March 1, 2009 (the AIG Series C Purchase Agreement), between the Trust and AIG, for an aggregate purchase price of $500,000, with an AIG 2009 Form 10-K 42

  • View More

Get the full picture and Receive alerts on lawsuits, news articles, publications and more!