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    American International Group, Inc. 2012 Annual Report Bring on tomorrow


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    2012 – A historic year for AIG 2012 began with the U.S. Department of the Treasury (Treasury) owning approximately 77 percent of AIG common stock outstanding. By mid-December, Treasury had sold its remaining shares in the company, officially ending America’s financial support of AIG. Leading up to that historic event, AIG realigned and refocused its businesses and united under the AIG name. As a period of challenge has closed, we look to the future – to taking on challenges of our own choosing; to meeting those challenges; and to working together to see, build, and secure a better future. $182.3 billion $205 billion $22.7 billion Maximum authorized U.S. government Total amount returned to America by Positive return realized on America’s support to AIG during the height of the December 14, 2012, through asset sales investment in AIG financial crisis and other actions by AIG, the Federal Reserve, and Treasury


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    KEY FACTS & FIGURES 52,000+ Families that AIG helped stay in $65.7 billion $27.6 billion AIG’s revenues in 2012 Claims paid by AIG Property their homes in 2012 Casualty in 2012 18 million Americans who AIG helps plan for 98% Percent of Fortune 500 companies $6.7 million Donations made by AIG’s retirement AIG serves Matching Grants Program to match employees’ gifts to charitable organizations in 2012 OUR GLOBAL NETWORK Countries where AIG products are sold 1


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    ROBERT H. BENMOSCHE President and Chief Executive Officer We are committed to building on our successes and demonstrating what the new AIG can do. TO OUR SHAREHOLDERS, Over the past several years, the people of AIG have demon- ■ We said we would become a smaller, more focused strated that we keep our promises – to our customers around company. Today, I am very proud that the insurance the world, to the communities where we work and live, and to businesses that we identified in 2009 as core to the new America. AIG – property casualty, life and retirement, and mortgage guaranty – continue to thrive as we have sold When I joined AIG in August 2009, we were selling off valuable off other businesses, and streamlined our operations and assets for far less than their true value. Everywhere I turned, I support functions. We have become, truly, one AIG – and found great people who were committed to serving their clients rebranded our core insurance operations under the AIG and to doing the right thing – but who were becoming increas- name with a new, reinvigorated AIG logo. ingly demoralized as they witnessed their company being rapidly dismantled amid unprecedented public criticism levied at the ■ We said we would pay for performance. 2012 marks expense of their commitment to make things right. three years that we have adhered to comprehensive pay - for -performance processes and standards – ensuring that our It was clear that AIG was too big, too diverse, and not transpar- people are properly motivated and appropriately rewarded ent enough. As we identified the insurance businesses that formed for their efforts to balance profit, growth, and risk. the core of the company, and those that ultimately would need to be sold to help repay America, we realized we needed to ■ We said we would focus on the right growth opportunities. change in many ways to meet and exceed the expectations of We’ve forged a number of strategic partnerships, including our customers, our regulators, our investors, and each other. our investment in People's Insurance Company (Group) of China Limited, and our acquisitions of Woodbury Financial Only by reenergizing and empowering the people of AIG were Services, Inc. and Fuji Fire and Marine Insurance Co., Ltd. we able to envision a future worth working toward. ■ We said we would manage risk better. Now risk Fast-forward to the end of 2012 – a year that I know will go management is integrated across all of AIG and is a key down in AIG history as a pivotal year. We are deeply proud of element of how we make decisions and manage our the progress we’ve made and the promises we’ve kept: businesses. We also routinely conduct enterprise-wide stress ■ We said we would fully repay the $182.3 billion in financial tests under a range of worst -case scenarios to better manage support that America extended to us – plus a profit. By our financial resources in order to maintain our financial December 2012, the people of AIG had made good on strength. This risk management framework provides AIG that promise, returning more than $205 billion to America. management and our Board of Directors with insight and an That’s every penny, plus a profit of more than $22 billion. understanding of the major risk positions across AIG. 2


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    ■ We said we would return to profitability and recommit to While a new era for AIG has begun, our work is not done. focusing on customers. 2012 marks the third straight year We have more promises to keep. of full-year profits. Even with Storm Sandy – the second We are committed to building on our successes and demonstrat- largest catastrophic event for AIG in the U.S. – we earned ing what the new AIG can do. Every day, we are working to a profit in 2012. And we have realigned our Property reestablish AIG as the trusted partner of companies, families, and Casualty and Life and Retirement businesses to be more society. We are focused on expense reduction to cut costs, and streamlined and refocused on seamlessly serving our to strengthen our businesses; stronger businesses will improve our commercial and consumer customers. credit ratings and further increase investor interest in AIG. We are A closer look at our results in 2012 shows the benefit of the work focused on rolling out better technology and new operations plat- we’ve done and the progress we’ve made: forms to help leverage shared services to make us more efficient, which in turn will help us cut costs and streamline work processes. ■ AIG Property Casualty reported improved operating income We are committed to developing and retaining our best talent, and continued to experience positive pricing trends. With promoting diversity, and encouraging and empowering employ- $34.4 billion of net premiums written in 2012, AIG Property ees to work together. We are smarter than ever before, making Casualty is the number one U.S.-based commercial insurer in more informed decisions by using and analyzing the enormous the U.S. and Canada, the largest U.S.-based property amount of data we have across the company. casualty insurer in Europe, and the number one foreign property casualty insurer in Japan and China. That is the power of the new AIG and our promise for the future. ■ AIG Life and Retirement assets under management grew Yes, we have been met with challenges, but we have met those significantly in 2012. And, even with interest rates at challenges together – hitting every major milestone on our jour- continued historic lows, AIG Life and Retirement is a market ney. So when we say we are going to do something, you can leader delivering innovative, compelling retirement products have confidence that the people of AIG will get it done. that provide meaningful, long-term peace of mind to our Bring on tomorrow. customers while making sense for AIG. ■ United Guaranty reported new insurance written of $37.5 billion for 2012 compared to $18.8 billion in 2011, and has experienced improving credit trends. Robert H. Benmosche February 21, 2013 ■ Our investment portfolio performance improved through the use of yield enhancements within our risk appetite, including the purchases of securities acquired through the Federal Reserve Bank of New York’s auction of Maiden Lane III LLC assets. ■ Our balance sheet is stronger as a result of the issuance of unsecured notes and monetization of non-core assets – including our agreement to sell our largest non-core asset, International Lease Finance Corporation, our leading aircraft leasing business, and the sale of our remaining shares of AIA Group Limited. 3


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    ROBERT S. MILLER Non-Executive Chairman of the Board We have a past, we have a present, and – with thanks to AIG’s employees and America’s support – now we have a future. DEAR AIG SHAREHOLDER, When I said in my letter for AIG’s 2011 Annual Report that “time with representatives from the Fed to share perspectives. We will will tell” if the people of AIG had executed the largest turnaround continue to listen and respond to their questions, suggestions, in corporate history, it was with optimism that I believed it would and guidance. happen so quickly. The Board also sees firsthand AIG’s operations in action, as we Beyond its impressive exit of government ownership, AIG contin- schedule our meetings at various company locations around the ued to make sound business decisions in 2012, helping position world. In the days after Storm Sandy, I, along with a group of the company for a strong future by divesting non-core assets, Board members, went to AIG’s Operations & Systems facility in streamlining global operations under clear reporting lines, and Kuala Lumpur, where we were surrounded by IT professionals, a looking for smart opportunities to grow AIG’s business. Now the mobilized command center working seamlessly with its sister com- true measure of success will be what we can do together as we mand center in Fort Worth, Texas, and a team of AIG colleagues open a new chapter in 2013. working tirelessly to support our business operations in New Jersey and New York. While we need to continue to review and We believe the role of the Board of Directors is to fully under- strengthen our business continuity capabilities, AIG already has stand the business of AIG and, using that knowledge, to provide proven its ability to deal with disruption. The global reach of this true oversight and make informed decisions. company is impressive and invaluable in overcoming adversity With this belief in mind, we have been an engaged Board, with and seeking new opportunities. our sleeves rolled up, working independently and alongside And I see no more telling sign of AIG’s recovery than the decision management to better guide AIG’s future. We will continue to do to retire the Chartis and SunAmerica Financial Group names, whatever it takes, and we remain committed to implementing and again making AIG the go-to-market brand of our Property Casualty overseeing a set of guiding principles that act as AIG’s foundation. business, and renaming the life and retirement business AIG Life For example, at every Board of Directors meeting, we get and Retirement. Coupled with a refreshed logo and brand promise updates from AIG’s Enterprise Risk Management (ERM) function encouraging employees, clients, and partners to bring on the and review the results of stress tests that examine how AIG would challenges of tomorrow, we truly are looking to the future. be affected by any number of scenarios. I firmly believe that the A good Board of Directors should empower people to stretch work of the Board and the ERM team will help ensure that AIG and expand the limits of what is possible, and we will continue never again faces the kind of crisis we did in 2008. to work hard to help AIG reach its full potential. We cannot wait Another example is Federal Reserve (Fed) oversight. In 2012, to begin the next chapter in the AIG story. We have a past, we when U.S. government ownership of AIG fell below 50 percent, have a present, and – with thanks to AIG’s employees and Amer- the Fed became AIG’s global regulator. AIG has welcomed the ica’s support – now we have a future. This is the time to make the Fed’s presence, as it has served to strengthen us by holding our most of it. company to the highest standards. We feel strongly that it is im- portant to maintain a transparent relationship and open dialogue with the Fed – at the corporate level and at the Board level. Besides me, several key Board committee chairs meet regularly Robert S. Miller February 21, 2013 4


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    Financial Highlights Years Ended December 31, (dollars in millions, except per share data) 2012 2011 2010 Operating results: Total revenues $ 65,656 $ 59,812 $ 72,829 Net income attributable to AIG 3,438 20,622 10,058 After-tax operating income (loss) 6,635 2,086 (1,549 ) Earnings (loss) per share (EPS): Net income (loss) attributable to AIG 2.04 11.01 14.98 After-tax operating income (loss) attributable to AIG $ 3.93 $ 1.16 $ (11.34 ) Balance sheet: Total assets $ 548,633 $ 553,054 $ 675,573 Shareholders' equity 98,002 101,538 78,856 Book value per share (1) 66.38 53.53 43.20 Book value per share, excluding Accumulated other comprehensive income (AOCI)(1) $ 57.87 $ 50.11 $ 38.27 Key metrics: AIG Property Casualty combined ratio 108.6 108.8 116.8 AIG Property Casualty accident year combined ratio, as adjusted(2) 99.9 99.2 100.3 AIG Life and Retirement premiums, deposits and other considerations $ 20,994 $ 24,392 $ 19,505 (1) 2011 and 2010 adjusted to reflect reclassification of income taxes from Accumulated other comprehensive income to Additional paid-in capital. Book value per share in 2010 is presented on a pro forma basis as if to reflect completion of the recapitalization prior to January 2011. (2) Combined ratio presented excluding catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments and the impact of reserve discount. After-Tax Operating Total Assets Shareholders' Equity Book Value per Share Income (Loss) ($ in billions) ($ in billions) Excluding AOCI ($ in billions) $57.87 $6.6 $101.5 $675.6 $50.11 $98.0 $553.1 $548.6 $2.1 $38.27 $78.9 $(1.5) 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 5


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    UNITED Bring on tomorrow Together, we’re working to help see, build, and secure a better future for everyone. Bring on tomorrow Bring on one AIG Bring on teamwork As AIG’s brand promise, these three We have reunited our businesses under We know that even when the odds words are more than window dressing the AIG name because we believe are against you, when the right people to go along with our refreshed logo. that together we’re stronger. We are come together, with the right values They are a call to action, a rallying cry one AIG, and working together across and a lot of hard work, even the for our employees. We are a revitalized our company and with our partners, toughest challenges can be overcome. AIG, one team of approximately 63,000 our collective drive can surmount even We found these values echoed in the people helping clients in more than 130 the biggest obstacles. Our network tenacity, integrity, and international com- countries, with the drive and ambition to of unparalleled data and experience munity surrounding rugby. Now we’re solve the problems and innovate for the around the globe mean we can offer partnering with USA Rugby to sponsor future that our partners and customers our customers solutions that no one the Junior and Collegiate All-American will face. else can. teams, and we’re sponsoring the New Zealand Rugby Union and its legendary All Blacks – one of the most successful teams in sporting history. 6


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    ~63,000 AIG EMPLOYEES AROUND THE WORLD WORKING TOWARD A COMMON GOAL 7


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    TRUST Bring on tomorrow We promise to be there – because by supporting our customers, we enable them to be at their best, to realize their dreams, and to find success every day. Bring on keeping promises Bring on security Bring on rebuilding We keep our promises. That’s what We promise we will help build a better We promise our customers that we will be has gotten AIG to where we are today. future, whether for a growing company there for the unexpected. When tornadoes So when we made a promise from the or for a family of four. For example, destroyed schools in Kentucky in March beginning to fully repay the American Tata AIG has developed innovative 2012, we were there within days to give taxpayers’ investment in AIG, plus a microinsurance programs to help farmers the Kentucky School Boards Insurance positive return, we fully intended to in rural India track 350,000 head of Trust a $5 million check to help schools keep it. And we did, repaying the U.S. cattle – and protect their owners’ liveli- start rebuilding. When Storm Sandy hit government’s commitment to AIG – hoods. In Life and Retirement, our Quality the northeastern U.S. in October, many of and a positive return of more than of Life…Insurance offers affordable ways our employees in the region were directly $22 billion. to cover critical illness, long-term care, in its path. That didn’t stop us from helping disability, and life insurance needs. clients, setting up a mobile catastrophe SunAmerica Retirement Markets provides center in one of the hardest-hit areas, and guaranteed lifetime income – no matter paying out over $175 million to clients how long retirement lasts. within the first 30 days. 8


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    $115.1million AVERAGE CLAIMS PAID EACH DAY BY AIG PROPERTY CASUALTY IN 2012 9


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    COMMUNITY Bring on tomorrow We’re giving back to our communities – sharing resources and volunteering time to make tomorrow better around the world. Bring on giving back Bring on giving time Bring on doing more AIG employees are passionate people Our new Volunteer Time Off program For the past 24 years, AIG has held its – passionate about their work but also encourages employees to take their Winter Summit, combining business about their communities. We want to talents out of the office and into the sessions led by AIG Property Casualty help our people give to causes and community. Around the world, with ski and snowboarding races. Since organizations that matter – to them. employees are stepping up. In 2011, the event has also raised more To assist employees in supporting Singapore and Korea, employees than $1.5 million for Disabled Sports the causes they care most about, we worked with community outreach USA, whose Warfighter Sports Program launched a bigger and better Matching organizations to make and deliver offers sports rehabilitation for those Grants Program in 2012. It includes a meals to local low-income families. severely wounded in combat, and 2:1 match ratio for employee dona- In the Philippines, employees raised veterans from the program ski alongside tions of up to $5,000 to qualifying funds and donated essential goods event attendees. Our new Pro Bono Legal nonprofit organizations, making AIG’s to help victims of the August 2012 Program lets AIG’s legal experts share maximum donation under the Habagat floods. their expertise with nonprofit organiza- program $10,000. tions and those with limited means. 10


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    $10,000 MAXIMUM DONATION MADE BY AIG’S MATCHING GRANTS PROGRAM TO MATCH AN EMPLOYEE DONATION TO A CHARITABLE ORGANIZATION 11


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    BOARD OF DIRECTORS From left Arthur C. Martinez Morris W. Offit George L. Miles, Jr. Former Chairman of the Board, Chairman, Offit Capital Chairman Emeritus President, and Chief Executive Officer Founder and Former Chester Engineers, Inc. Sears, Roebuck and Co. Chief Executive Officer Former President and Chief Executive Officer OFFITBANK WQED Multimedia W. Don Cornwell Former Chairman of the Board Suzanne Nora Johnson Ronald A. Rittenmeyer and Chief Executive Officer Former Vice Chairman Chairman, President, and Granite Broadcasting Corporation The Goldman Sachs Group, Inc. Chief Executive Officer Expert Global Solutions, Inc. Henry S. Miller Robert S. Miller Former Chairman, Chief Executive Chairman Non-Executive Chairman of the Board Officer, and President Marblegate Asset Management, LLC American International Group, Inc. Electronic Data Systems Corporation Former Chairman and Managing Director Former Chief Executive Officer Miller Buckfire & Co., LLC Hawker Beechcraft, Inc. Douglas M. Steenland Former Executive Chairman Former President and Chief Executive Officer John H. Fitzpatrick Delphi Corporation Northwest Airlines Corporation Secretary General The Geneva Association Robert H. Benmosche Former Chief Financial Officer, President and Chief Executive Officer Head of the Life and Health Business Group, American International Group, Inc. and Head of Financial Services Swiss Re Christopher S. Lynch Former National Partner in Charge of Financial Services KPMG LLP 12


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    American International Group, Inc. Form 10-K 13


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    UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2012 Commission file number 1-8787 26OCT201220500047 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.) 180 Maiden Lane, New York, New York 10038 (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: See Exhibit 99.02 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 䡺 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 䡺 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 䡺 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 䡺 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. 䡺 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 䡺 Non-accelerated filer 䡺 Smaller reporting company 䡺 (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 䡺 No ፼ The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the registrant (based on the closing price of the registrant’s most recently completed second fiscal quarter) was approximately $21,463,000,000. As of February 15, 2013, there were outstanding 1,476,322,473 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 the Part III, Items 10, 11, 12, 13 and 14 2013 Annual Meeting of Shareholders


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    AMERICAN INTERNATIONAL GROUP, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2012 TABLE OF CONTENTS FORM 10-K Item Number Description Page ......................................................................................................................................................................................................... PART I ......................................................................................................................................................................................................... Item 1. Business 2 • AIG’s Global Insurance Operations 3 • A Review of Liability for Unpaid Claims and Claims Adjustment Expense 20 • Reinsurance Activities 23 • Generating Revenues: Investment Activities of Our Insurance Operations 24 • Regulation 24 • Our Competitive Environment 29 • Our Employees 29 • Directors and Executive Officers of AIG 30 • Available Information about AIG 31 Item 1A. Risk Factors 32 Item 1B. Unresolved Staff Comments 44 Item 2. Properties 44 Item 3. Legal Proceedings 44 Item 4. Mine Safety Disclosures 44 PART II ......................................................................................................................................................................................................... Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 45 Item 6. Selected Financial Data 48 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 52 • Cautionary Statement Regarding Forward-Looking Information 52 • Use of Non-GAAP Measures 54 • Executive Overview 56 • Results of Operations 68 • Liquidity and Capital Resources 120 • Regulation and Supervision 137 • Investments 138 • Enterprise Risk Management 155 • Critical Accounting Estimates 172 • Glossary 195 • Acronyms 199 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 200 Item 8. Financial Statements and Supplementary Data 201 Index to Financial Statements and Schedules 201 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 344 Item 9A. Controls and Procedures 344 PART III ......................................................................................................................................................................................................... Item 10. Directors, Executive Officers and Corporate Governance 345 Item 11. Executive Compensation 345 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 345 Item 13. Certain Relationships and Related Transactions, and Director Independence 345 Item 14. Principal Accounting Fees and Services 345 PART IV ......................................................................................................................................................................................................... Item 15. Exhibits, Financial Statement Schedules 346 SIGNATURES 347 ......................................................................................................................................................................................................... .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 1


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    PART I .............................................................................................................................................................................................. ITEM 1 / BUSINESS .............................................................................................................................................................................................. American International Group, Inc. (AIG) is a leading global insurance company. Founded in 1919, today we provide a wide range of property casualty insurance, life insurance, retirement products, mortgage insurance and other financial services to customers in more than 130 countries. Our diverse offerings include products and services that help businesses and individuals protect their assets, manage risks and provide for retirement security. AIG common stock is listed on the New York Stock Exchange and the Tokyo Stock Exchange. AIG’s key strengths include: World class insurance franchises that are leaders in their categories and are improving their operating performance; .............................................................................................................................................................................................. A diverse mix of businesses with a presence in most international markets; .............................................................................................................................................................................................. Effective capital management of the largest shareholders’ equity of any insurance company in the world*, supported by enhanced risk management; .............................................................................................................................................................................................. Execution of strategic objectives, such as the recent divestiture of non-core businesses and fulfillment of our commitment to repay the U.S. taxpayers; and .............................................................................................................................................................................................. Improved profitability, as demonstrated by three consecutive years of full-year profit. .............................................................................................................................................................................................. * At June 30, 2012, the latest date for which information was available for certain foreign insurance companies. .................................................................................................................................................................................................................................. 2 AIG 2012 Form 10-K


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    ITEM 1 / BUSINESS / AIG ..................................................................................................................................................................................... In this Annual Report on Form 10-K, unless otherwise mentioned or unless the context indicates otherwise, we use the terms ‘‘AIG,’’ the ‘‘Company,’’ ‘‘we,’’ ‘‘us’’ and ‘‘our’’ to refer to AIG, a Delaware corporation, and its consolidated subsidiaries. We use the term ‘‘AIG Parent’’ to refer solely to American International Group, Inc., and not to any of its consolidated subsidiaries. A reference summary of certain technical terms and acronyms used throughout this Annual Report on Form 10-K is available on pages 195-199. AIG’s Global Insurance Operations HOW WE GENERATE REVENUES AND PROFITABILITY .............................................................................................................................................................................................. We earn revenues primarily from insurance premiums, policy fees from universal life insurance and investment products, and income from investments. Our operating expenses consist of policyholder benefits and claims incurred, interest credited to policyholders, commissions and other costs of selling and servicing our products, and general business expenses. Our profitability is dependent on our ability to price and manage risk on insurance and annuity products, to manage our portfolio of investments effectively, and control costs through expense discipline. Commencing in the third quarter of 2012, the Chartis segment was renamed AIG Property Casualty and the SunAmerica segment was renamed AIG Life and Retirement, although certain existing brands will continue to be used in certain geographies and market segments. AIG Property Casualty AIG Life and Retirement AIG Property Casualty is a leading provider of AIG Life and Retirement is a premier provider of life insurance products for commercial, institutional and insurance and retirement services in the United States. It individual customers through one of the world’s most is among the largest life insurance and retirement far-reaching property casualty networks. AIG Property services businesses in the United States. With one of Casualty offers one of the industry’s most extensive the broadest distribution networks and most diverse ranges of products and services, through its diversified, product offerings in the industry, AIG Life and multichannel distribution network, benefitting from its Retirement helps to ensure financial and retirement strong capital position. security for more than 18 million customers. Other Operations Mortgage Guaranty (United Guaranty Corporation or UGC), is a leading provider of private residential mortgage guaranty insurance (MI). MI covers mortgage lenders for the first loss from mortgage defaults on high loan-to-value conventional first-lien mortgages. By providing this coverage to lenders, UGC enables mortgage lenders to remain competitive, while generating a sound and responsible book of business, and enables individuals to purchase a house with a lower down payment. Other operations also include Global Capital Markets, Direct Investment book, Retained Interests and Corporate & Other operations. On December 9, 2012, AIG announced an agreement to sell 80.1 percent of International Lease Finance Corporation (ILFC) with an option for the purchaser to buy an additional 9.9 percent stake. As a result, ILFC operating results, which were previously presented in the Aircraft Leasing segment, have been classified as discontinued operations in all periods, and associated assets and liabilities have been classified as held-for-sale at December 31, 2012. .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 3


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    ITEM 1 / BUSINESS / AIG ..................................................................................................................................................................................... AIG 2012 Revenue Sources ($ millions) Life Insurance 16% $9,509 Commercial Insurance AIG LIFE AND Other $23,609 Retirement 3% RETIREMENT 13% Services $1,769 AIG 29% $7,258 PROPERTY 41% CASUALTY Consumer Insurance 25% 69% 2% MORTGAGE $14,403 GUARANTY $867 15FEB201302432775 For financial information concerning our reportable segments, including geographic areas of operation and changes made in 2012, see Note 3 to the Consolidated Financial Statements. Prior periods have been revised to conform to the current period presentation for segment changes and discontinued operations. Restructuring and Rebuilding: AIG Moving Forward We have taken significant steps to position our company for future growth and in 2012 fully repaid governmental financial support of AIG. These amounts are discussed below in 2011-2012 Accomplishments. We have made substantial Federal Reserve Bank of New York progress in each of these four main priority areas during the We repaid the governmental support that we received in September 2008 and thereafter during the global economic crisis. This support included a past few years. Our efforts credit facility from the Federal Reserve Bank of New York (the FRBNY and have centered on protecting such credit facility, the FRBNY Credit Facility) and funding from the and enhancing the value of Department of the Treasury through the Troubled Asset Relief Program (TARP). After receiving this support, our Board of Directors and our key businesses, restoring management placed a strong focus on improving our businesses and AIG’s financial strength, pursued four main priorities: repaying U.S. taxpayers and • building AIG’s value by strengthening our international property and reducing risk. casualty and domestic life insurance and retirement businesses; • repaying support from the U.S. government, including through significant divestitures; • decreasing our operating costs; and • reducing risk by winding down our exposure to certain financial products and derivatives trading activities. .................................................................................................................................................................................................................................. 4 AIG 2012 Form 10-K


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    ITEM 1 / BUSINESS / AIG ..................................................................................................................................................................................... Department of the Treasury Through a series of transactions that closed on January 14, 2011 (the Recapitalization), we exchanged various forms of government support for AIG Common Stock, and the Department of the Treasury became AIG’s majority shareholder, with approximately 92 percent of outstanding AIG Common Stock at that time. The Department of the Treasury, as selling shareholder, sold all of its shares of AIG Common Stock through six registered public offerings completed in May 2011 and March, May, August, September and December 2012. We purchased approximately 421 million shares of AIG Common Stock in the first four of the 2012 offerings for approximately $13.0 billion. We did not purchase any shares in the May 2011 or December 2012 offerings. See Item 7. MD&A – Liquidity and Capital Resources and Notes 4, 17, 18, and 25 to the Consolidated Financial Statements for further discussion of the government support provided to AIG, the Recapitalization and significant asset dispositions. These and other key accomplishments are described in the following table: 2011 and 2012 Accomplishments AREA OF FOCUS ACTION RESULT COMPLETE • Completed Recapitalization in 2011 $67.7 bn • Department of the Treasury exited $51.6 bn* EXITED FROM REPAYMENT OF ownership of AIG through six offerings of GOVERNMENT GOVERNMENT AIG Common Stock in 2011 and 2012 OWNERSHIP SUPPORT CORE • Improved insurance operating income $1.6 bn in 2012 BUSINESS $1.0 bn in 2011 DEVELOPMENTS • Improved 2012 current accident year 3.5 points in loss ratio, excluding catastrophe losses 2012 and prior year development • Completed cash redeployment in 2011 • Strategic investments in People’s $0.7 bn in 2012 Insurance Company (Group) of China Limited (PICC), Woodbury Financial Services, Inc. and Service Net in 2012 FOCUSED PORTFOLIO OF NON-CORE ASSET • Remaining interests in Maiden Lane II $24.6 bn BUSINESSES DIVESTITURES LLC (ML II) and Maiden Lane III LLC (ML III) monetized and sold remaining interest in AIA Group Limited (AIA) in 2012 • Entered into agreement to sell up to 90% $4.2 bn (80.1%) of ILFC in 2012 • Sold AIG Star and AIG Edison, Nan Shan $16.6 bn and MetLife securities in 2011 STRENGTHEN • Cash distributions from subsidiaries in $5.2 bn and 2012 and 2011 $3.3 bn LIQUIDITY AND CAPITAL • Amended, extended and increased $4.0 bn syndicated, revolving four year INCREASED credit facility FINANCIAL $12.85 • Growth in book value per share from FLEXIBILITY 2011 to 2012 CAPITAL • AIG note offerings in 2011 and 2012 $3.8 bn and MARKETS $2.0 bn TRANSACTIONS • AIG Common Stock purchases in 2012 $13.0 bn • Sale of AIG Common Stock in 2011 $2.9 bn 19FEB201322181508 * AIG did not receive any proceeds from the sale of AIG Common Stock by the Department of the Treasury. The Department of the Treasury still owns ten-year warrants to purchase approximately 2.7 million shares of AIG Common Stock. .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 5


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    ITEM 1 / BUSINESS / AIG PROPERTY CASUALTY ..................................................................................................................................................................................... AIG Property Casualty Business Strategy Business Mix Shift: Grow in higher value lines of business and geographies. .............................................................................................................................................................................................. Underwriting Excellence: Enhance pricing and risk-selection tools through investments in data mining, science and technology. .............................................................................................................................................................................................. Claims Best Practices: Reduce loss costs through new claims technology, a more efficient and effective operating model and the use of data tools to better manage the economic drivers of losses. .............................................................................................................................................................................................. Operating Expense Discipline: Decrease recurring operating expenses by leveraging AIG’s scale and driving increased standardization. .............................................................................................................................................................................................. Capital Management: Efficiently allocate capital through the use of risk adjusted profit metrics, optimization of reinsurance and legal entity restructuring. .............................................................................................................................................................................................. .................................................................................................................................................................................................................................. 6 AIG 2012 Form 10-K


  • Page 24

    ITEM 1 / BUSINESS / AIG PROPERTY CASUALTY ..................................................................................................................................................................................... AIG Property Casualty Operating Segments – Products and Services AIG Property Casualty operating segments are organized into Commercial Insurance and Consumer Insurance. Run-off lines of business and operations not attributable to these operating segments are included in an Other operations category. Percent of 2012 Net premiums written by operating segment* CONSUMER COMMERCIAL INSURANCE INSURANCE 41% 59% 15FEB201302015798 * The operations reported as part of Other do not have meaningful levels of Net premiums written. Commercial Insurance Consumer Insurance Percent of 2012 Net premiums written by product line Percent of 2012 Net premiums written by product line (dollars in millions) (dollars in millions) Casualty $8,574 42% Property Personal Accident $4,191 21% Lines 51% 49% & Health $7,181 $6,969 18% 19% Financial Specialty Lines $3,576 $3,959 16FEB201301144436 16FEB201301144901 Commercial products: Consumer products: Casualty: IIncludes nclud dees genera ge general e al liability, liiabili bi ity, commercial commerc o e ial Accident & Health: Includes Includ dees voluntary voluntara y an a and d automobile a utomo o ob bili e liliability, iabili workers’ bi ity, w o kers or compensation, e ’ compensa o pe ation o ,eexcess xcess e sponsor-paid sponsor po o -pa paid personal id persona p e o al accaccidental a ide idental anand a d ssupplemental upplemen e e tal casualty cas a ualty an and a d cr crisis management a age e t iinsurance. isis managemen nsurance a e. CCasualty a ualty as hhealth ealth pro ea products p odducts ffor o iindividuals, or ndi diviid employees, duals, emp e ployees associations ee , assoc a o iations o also a o iincludes lso nclud es rrisk de management isk managemen a age e t an and a doother e ccustomized ther ustom o iize edd aand an doother ther organizations. e organ o o . IItt a ga iizations alsoo iincludes lso nclud es lilife de products ife pro p od ducts sstructured tructureed d programs p og a ffor o llarge or a ge corpora arge corporate o po ate ccustomers ustomers o e an and a d ((outside outsid ideeooff tthe U.S. he U market) .S. mara ket) as a wwell ell as a ab broad roa oad range a ge ooff multinational m ultina ationa o al compancompanies. o pa ies e . ttravel avel iinsurance ra nsurance a e proproducts p odducts an and a services d serv e ffor erviices o lleisure or eisure and e an a d business b e ttravelers. usiness ra avelers e . .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 7


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    ITEM 1 / BUSINESS / AIG PROPERTY CASUALTY ..................................................................................................................................................................................... Property: IIncludes nclud dees iindustrial ndustrial energy-related e e gy-re energ elateedd an a and d Personal: Includes Includde es automobile, automo o ob bili e, hhomeowners o eowners omeo e an a andd commercial commerc o property e ial proper p ope ty iinsurance nsurance a e proproducts, p od ducts, wwhich cover hiich co over e eextended xten e dded ed wwarranty a a ty iinsurance. arran a e. IItt a nsurance also lsoo iincludes nclud es iinsurance de nsurance a e exposures expos e tto po ures man-made o man a -ma ad de and e an a natural d na atura disasters, al di d isas e , iincluding a ters ncludi ding g ffor o hi or high-net-worth igh-ne o th iindividuals et-wor ndi diviidduals ((offered offere e ed d tthrough hro ough P Private riivate business b e iinterruption. usiness nterr e uption o . CClient liien e tGGroup), oup), iincluding ro ncludi ding gu umbrella, mbre ella, yyacht a ht an ac and a d ffine ine artt e ar a iinsurance, nsurance a e, anand a consumer d cons o umer specialty e spec pe ialty pro products, p ducts, ssuch od uch asa Specialty: Includes Includ dees aerospace a aerospace, e o pa e, en e environmental, viironmen o e tal, po p political oliiticaal iidentity id de entity ttheft heft an a and d cre eddiit car credit a d pro card p otec e tion protection. o . rrisk, isk, ttrade ra ad de credit, e cre diit, ssurety ed ure and ety an a marine d mar a inee iinsurance, nsurance and a e, an a d vvarious a ious pro ar p od duct o product ffer e ings offeringsg ffor o sma or all an small a and d meed diium ssized medium iize ed d Distribution: C Consumer o umer ons e Insurance Insurance a e pro p products od ducts are ae enterprises. e en terpr e p ises e . distributed d di istrib ibuteed primarily d pr p a ili y tthrough imar hro agents ough agen a and ge ts an a dbbrokers, ro okers e , as a w well ell a tthrough as hro direct ough di d irec e t marmarketing a keting and g an a partner d par pa tner organizations e organ o ga iizations o Financial: IIncludes nclud dees vvarious a ious forms ar forms o o off pro p professional ofess e ionao al liliability iabili bi ity a an andd tthrough hro ough tthe he iinternet. nterne e et. iinsurance, nsurance a e, iincluding ncludi ding g di d irec e tors o an directors a and do fficers e ((D&O), officers D&O) &O , ffidelity, ide id eliity, emp e ploymen employmente t prac p a tices e , ffiduciary practices, iduciar id a y liliability, iabili bi ity, ne etwor networkok sece urity, kid security, idnap ap an kidnap a d ransom and a o , an ransom, a and d errors e o an a andd omo issions omissionso iinsurance nsurance a e ((E&O). E&O) &O . Distribution: C Commercial o ommerc e ial IInsurance nsurance a e pro p products odducts are ae primarily p primar distributed a ili y di distrib ibuteedd tthrough hro ough a nenetwork etwor oko off iindependent nd deepen pe ddeent retail re and etaili an a dwwholesale holesa e ale b brokers ro okers e anand a dbbranches, ranc a hese , anand a d tthrough hro ough a iindependent an nd de epenpe d de agency ent agenc a ge y ne network. etwor o k. Other: C Consists o ists pr ons primarily p imar a ili y o of: f: rrun-off un-off lilines ines e ooff b business; usiness e ; opera o operations pe ations o ana anddeexpenses xpenses pe e nonot ot aattributable ttrib ibutabl b e tto o tthe he CCommercial o ommerce ial IInsurance nsurance a e or o CConsumer o umer ons e IInsurance nsurance operating a e opera o pe ating segments; g segmen eg e ts; uunallocated na alloca o ate ed net et iinvestment d ne nves e t iincome; e tmen ncome o e; nenet realized et rea ealiize ed capital d cap gains apital ga g ains and a an d llosses; o e ; an osses and a doother e iincome ther ncome o e an and a deexpense pe e iitems. xpense tems e . AIG Property Casualty conducts its business primarily through the following major operating companies: National N ationa o al U Union nion o Fi Fire ire e IInsurance nsurance a eC Company o pa y o ompan off Pi P Pittsburgh, ittsburg gh, P Pa.; a.;; N New ew HHampshire a p hiire amps e IInsurance nsurance a eC Company; o pa y;; A ompan American mer e ican a H Home o e ome Assurance Assurance a eC Company; o pa y;; L ompan Lexington exiing o IInsurance gton nsurance a eC Company; o pa y;; AIU ompan A IInsurance nsurance a eC Company; o pa y;; C ompan Chartis har Overseas a tis O verseas e ea LiLimited; imite ed Fuji; d; Fuji; ji; Chartis C har Singapore a tis S gapo e IInsurance, ingapore nsurance a e, P Pte, Ltd. te, L and td. an a AIG d AI A GEEurope urope Limited. ope Liimiteedd. A Look at AIG Property Casualty Global Footprint AIG Property Casualty has a significant international presence in both developed markets and growth economy nations. It distributes its products through three major geographic regions: • Americas: Includes the United States, Canada, Central America, South America, the Caribbean and Bermuda. • Asia Pacific: Includes Japan and other Asia Pacific nations, including China, Korea, Singapore, Vietnam, Thailand, Australia and Indonesia. • EMEA (Europe, Middle East and Africa): Includes the United Kingdom, Continental Europe, Russia, India, the Middle East and Africa. In 2012, 6 percent and 5 percent of AIG Property Casualty direct premiums were written in the states of California and New York, respectively, and 19 percent and 7 percent were written in Japan and the United Kingdom, respectively. No other state or foreign jurisdiction accounted for more than 5 percent of such premiums. On November 21, 2012, AIG, People’s Insurance Company (Group) of China Limited (PICC Group) and PICC Life Insurance Company Limited (PICC Life) entered into a non-binding term sheet with respect to the proposed establishment of a joint venture insurance agency company between AIG and PICC Life (the Joint Venture) which plans to distribute life insurance and other insurance products through a specialized agency force on a nationwide basis with a focus on major cities in China and to engage in reinsurance and other related business cooperation. AIG .................................................................................................................................................................................................................................. 8 AIG 2012 Form 10-K


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    ITEM 1 / BUSINESS / AIG PROPERTY CASUALTY ..................................................................................................................................................................................... Life and Retirement made an equity investment of approximately $0.5 billion in PICC Group. AIG’s participation in the Joint Venture will be managed by AIG Property Casualty. Total Net Premiums Written $34.4 bn Based on net premiums written in 2011, AIG Property Casualty is the largest U.S. commercial insurer in the U.S. and Canada, the largest U.S. based property casualty insurer in Europe, and the largest foreign property casualty insurer in Japan and China. In addition, AIG Property Casualty was first to market in many developing nations and is well positioned to enhance its businesses in countries such as China, India and Brazil. EMEA Europe $6.4 bn Middle East 19% Africa Americas U.S./Canada Bermuda Latin America and the Caribbean $17.6 bn Asia Pacific 51% Japan Other Asia Pacific nations $10.4 bn 30% 15FEB201317022769 Competition Operating in a highly competitive industry, AIG Property Casualty competes against approximately 3,300 stock companies, specialty insurance organizations, mutual companies and other underwriting organizations. In international markets, we compete for business with the foreign insurance operations of large U.S. insurers global insurance groups and local companies in specific market areas and product types. Insurance companies compete through a combination of risk acceptance criteria, product pricing, service and terms and conditions. AIG Property Casualty distinguishes itself in the insurance industry primarily based on its well-established brand, financial strength and large capital base, innovative products, expertise in providing specialized coverages and customer service. .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 9


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    ITEM 1 / BUSINESS / AIG PROPERTY CASUALTY ..................................................................................................................................................................................... AIG Property Casualty serves its business and individual customers on a global basis – from the largest multinational corporations to local businesses and individuals. Our clients benefit from our substantial underwriting expertise and long-term commitment to the markets and clients we serve. AIG Property Casualty Competitive Strengths and Challenges Diversification – breadth of customers served, products underwritten and distribution channels Global franchise – operating in more than 90 countries and jurisdictions Scale – facilitates risk diversification to optimize returns on capital Service – focused on customer needs, providing strong global claims, loss prevention and mitigation, engineering, underwriting and other related services Expertise – experienced employees complemented with new talent Financial strength – well capitalized, strong balance sheet Somewhat offsetting these strengths are the following challenges: Barriers to entry are high Regulatory changes in recent years created an increasingly complex environment that is affecting industry growth and profitability .................................................................................................................................................................................................................................. 10 AIG 2012 Form 10-K


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    ITEM 1 / BUSINESS / AIG LIFE AND RETIREMENT ..................................................................................................................................................................................... AIG Life and Retirement Business Strategy AIG Life and Retirement is focused on the following strategic initiatives: Grow Assets Under Management: Fully leverage a unified distribution organization to increase sales of profitable products across all channels. Capitalize on the growing demand for income solutions and AIG Life and Retirement’s capital base, risk controls, innovative product designs, expanded distribution initiatives and financial discipline to grow variable annuity business. Pursue selected institutional market opportunities where AIG Life and Retirement’s scale and capital base provide a competitive advantage. .............................................................................................................................................................................................. Increase Life Insurance In-Force: Develop innovative life offerings through consumer focused research that delivers superior, differentiated product solutions. Consolidate life insurance platforms, operations and systems to create a more efficient, cost-competitive and agile operating model. .............................................................................................................................................................................................. Enhance Return on Equity: Build on simplified legal entity structure to enhance financial strength and durability, capital efficiency and ease of doing business. Improve operational efficiencies, expense control and service through investments in technology and more productive use of existing resources and lower-cost operations centers. .............................................................................................................................................................................................. .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 11


  • Page 29

    ITEM 1 / BUSINESS / AIG LIFE AND RETIREMENT ..................................................................................................................................................................................... Operating Segments AIG Life and Retirement currently has two operating segments: Life Insurance focuses on life insurance and related protection products and Retirement Services focuses on investment, retirement savings and income solution products. On April 12, 2012, AIG Life and Retirement announced several key organizational structure and management changes intended to better serve the organization’s distribution partners and customers. Key aspects of the new structure are distinct product divisions, shared annuity and life operations platforms and a unified all-channel distribution organization with access to all AIG Life and Retirement products. AIG Life and Retirement expects to modify its presentation of results to reflect its new structure when the reporting changes are implemented in the first quarter of 2013 and conform all prior periods’ presentations to reflect the new structure. The new structure will include two operating segments – Retail and Institutional. Retail product lines will include life insurance and accident and health (A&H), fixed annuities, variable annuities and income solutions, brokerage services and retail mutual funds. Institutional product lines will include group retirement, group benefits and institutional markets. The institutional markets product line will consist of stable value wrap products, structured settlement and terminal funding annuities, private placement variable life and annuities, guaranteed investment contracts and corporate and bank-owned life insurance. Additionally, AIG Life and Retirement completed the merger of six life insurance operating legal entities into American General Life Insurance Company effective December 31, 2012. This merger facilitates capital and dividend planning while creating operating efficiencies and making it easier for producers and customers to do business with AIG Life and Retirement. AIG Life and Retirement will continue to market products and services under its existing brands. AIG Life and Retirement Operating Segments – Products and Services Percent of 2012 total revenue by operating segment (dollars in millions) RETIREMENT LIFE SERVICES INSURANCE $7,258 $9,509 43% 57% 15FEB201302015240 .................................................................................................................................................................................................................................. 12 AIG 2012 Form 10-K


  • Page 30

    ITEM 1 / BUSINESS / AIG LIFE AND RETIREMENT ..................................................................................................................................................................................... Life Insurance Retirement Services Percent of 2012 Premiums, Deposits and other Percent of 2012 Premiums, Deposits and other considerations by line of business considerations by line of business (dollars in millions) (dollars in millions) Other* Institutional Variable $320 products annuities 6% $775 $4,561 Fixed 29% annuities Group 15% $1,495 benefits 10% $680 13% Group 17% Brokerage Life insurance retirement 44% services and retail mutual 66% and A&H products funds products $7,028 15FEB201317380803 $3,354 15FEB201317380936 $2,723 * Other includes fixed, equity indexed and runoff annuities. Products include a full line of life insurance, deferred Products and services focus on investment, retirement and payout annuities, A&H products, worksite and group savings and income solution products. benefits. AIG Life and Retirement is one of the largest life insurance organizations in the United States and is a leader in today’s financial services marketplace. AIG Life and Retirement holds leadership positions in both retail and institutional markets: • Long-standing leadership position in fixed annuity sales through banks and other financial institutions • Innovator in guaranteed income solutions and a top provider of variable annuities • Industry-leading life and accident and health products • Broad range of retail mutual fund offerings • One of the largest independent broker-dealer networks in the country • Leading retirement plan provider in K-12 schools, higher education, healthcare, government and other nonprofit entities • Institutional Markets offerings, including leadership position in structured settlement annuities • Extensive lineup of group benefits offered in worksites and through affinity organizations .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 13


  • Page 31

    ITEM 1 / BUSINESS / AIG LIFE AND RETIREMENT ..................................................................................................................................................................................... Life Insurance Retirement Services The Life Insurance operating segment offers a broad The Retirement Services operating segment provides range of protection and mortality-based products. These investment, retirement and income solutions products products are marketed under four principal brands – and services. These products and services are American General, AGLA, AIG Direct and AIG Benefit marketed through a variety of brands described below. Solutions. Group Retirement: P Products ro odducts are a e mar marketed a keteeddu under ndde er the the Life Insurance and A&H: P Primary rimara y pro p products od ducts include includ de e Variable Var a iablbe A Annuity nnuiity Life Liife Insurance Insurance a eC Company o pa y (VALIC) ompan (VALI A C) tterm e erm lilife ife iinsurance, nsurance a e, u universal e al lilife niiversa ife iinsurance nsurancea e an and a dAA&H A&&H brand b ran a d an and a d iinclude nclud de e ffixed iixe ed and d an a d vvariable a iabl ar group b e gro g annuities, oup ann a uiities e , p pro odducts. Li products. ife iinsurance Life nsurance a e an a anddA A&&H pro A&H p odducts are products ae g grooup m group utual ffunds, mutual unds, an a and d gro g oup a group dministraatiive an administrative a and d d di istrib ibute distributed ed d tthrough hroough iindependent nddeepen pe d de ent mar a keting marketing g organ o ga iizations organizationso comp o pliiance compliancea e serv erviices services.e . VALI A C career VALIC a ee ffinancial inanc a ial a dviisors advisorso a an and d iindependent nd deepen pe d deent iinsurance nsurance a e agena ge ts u agents ndde under er tthe he A mer e ican American a a an and d iindependent ndde epen pe d de ent ffinancial inanca ial a dviisors o pro advisors p oviid de providee re etiremen e e t retirement G e e al b enera General ran a d. C brand. a ee agen areer Career a ge ts di agents d istrib ibute Li distribute ife IInsurance Life nsurance a e p lan a par plan p a ticipan pa ts wi participants ith enro with e ollmen e t ssupport enrollment uppor ppo t an a and d a an and dA A&H &H pro p odducts u products nd de under er tthe he A GLA AGLA Ab rana d. A brand. mere ican American a compre o p ehens comprehensivee iive ffinancial inanc a ial p lann a ing planning g serv erviices e . services. G e e al an enera General a anddA GLA AGLA A wi ill con will o tinue tto continue o ffocus o us on oc o iinnovative nnoovatiive p pro odduct d product deevelopmen op e t an development a and dd de eliiver e ing delivering g di differen e e tiate differentiated ed d Fixed Annuities: P Products ro odducts area e pr p primarily imara ili y mar marketed a kete ed d product p pro odduct so solutions o tto olutions producers o pro p odducers e an and a d ccustomers. ustomers o e . AI AIG A G uunder nd de er tthe he WWestern e tern es e N National ationa o al bbrand ran a d an and a d iinclude nclud dee ssingle inggle Direct D Di irec e t (f (formerly o e ly kknown ormer noown as a M Matrix atriix DiDirect) D e t) iis irec proprietary s a propr p op ietar ay aand an d fflexible lexiibl premium b e prem p e iium d deferred deeferre e ed d ffixed iixe ed annuities. d ann a uiities e .WWestern e tern es e direct-to-consumer d di irec e t-to-cons o umer e didistributor d istrib ibutor o o off tterm e erm lilife ife iinsurance nsurance a e an and a d NNational ationa o al ma maintains aintains iits ts lleading eadi ea g iindustry ding ndustry pos position p o iin o ition n tthe he A&H A& A &H proproducts. p odducts. bank b a k di an distribution d istrib o cchannel ibution hanne a el b byyddesigning deesigng ing g proproducts p odducts iinn cooperation coopera oope ation o wiwith banks ith ba ks an an and a dooffering ffer e ing g an a e efficient fficien e t anand a d Institutional: P Products ro od ducts prprimarily p imar a ili y iinclude nclud de e sstructured tructure edd fflexible lexiibl be a administration dministraation o p platform. latform o . settlement se ettlemen e e t an and a d tterminal e ina erm al ffunding undi ding annuities, g ann a e , ffixed uiities iixe ed d papayout p ayout annuities, a ann uiities e , prprivate p iivate p placement a e e t vvariable lacemen a iabl ar annuities b e ann a uiities e an and a d Variable Annuities: Products Proodducts are a e mar marketed a kete eddu under nddeer tthe he vvariable a iabl ar b e lilife ife iinsurance, nsurance a e, corpora o po ate-owne corporate-owned ed d lilife ife iinsurance, nsurance a e, S unAmer SunAmerica e icaaR etiremen e e tM Retirement a kets (S ar Markets AR ) b ARM (SARM) ran a d an brand a andd are ae b a k-owne an bank-owned edd lilife ife iinsurance, nsurance a e, an a andd sstable tabl b e vvalue alue w rap wrapap de d esigne g ed designed d ttoo pro p oviid de provide e ccustomers ustomers o e wi ith re with etiremen e e t iincome. retirement ncome o e. p proodducts. Th products. e e pro ese These p odducts are products a e mar a kete marketed ed du nd under de er tthe he C ustomers o e ma Customers mayay cchoose hoose oo e among a o g a wi id de wide e range a ge o off vvariable a iabl ar be American A mer e ican a G General e e al b enera brand ran a d tthrough hro ough iindependent ndde epenpe d deent mar marketing a keting g a ann annuities uiities e o offering ffer e ingg di ddiverse iverse e e iinvestment nvese tmene t op o options ptions o an a andd organizations o organ ga iizationso an and a d sstructured tructure ed settlement d se ettlemen e e tb brokers. ro okerse . product p pro duct ffeatures, od eatures ea e , iincluding ncludi ding g sstock toc and o k an a d ffixed iixe edd iincome ncome o e IInstitutional nstitutiona o al M Markets a kets has ar a a di has disciplined d iscipliine edd anand a opportunistic d oppor o ppo tunistic portfolios, p por o tfoliios o ,g guaranteed uaran a a tee eeddddeath de ea ath b benefits be ene and efits an a d vvarious a ious ar approach app oa h tto approac growth o gro g owth iin n tthese hese e e proproduct p duct lilines. od ines e . guaranteed g uaran a a tee eed retirement d re e e t iincome etiremen ncome o e so solutions. olutions o .V Variable a iabl ar be annuity a ann products uiity pro p odducts are a e didistributed d istrib ibute d tthrough ed hroough b banks a ks an an and a d Group Benefits: IIn n 2012 2012, 0 , AIA AIG G LifeLiife and a dR an Retirement etiremen e e t an a and d na national, ationa o al, regregional egiona o al and a d iindependent an nd deepen pe ddeent broker-dealer brooker e -ddeea aler e ffirms. irms. A AI AIG GP roper ope ty C Property a ualty com as Casualty o bibine combined edd ttheir heir U .S. gro U.S. g oup group benefits be b ene efits bbusinesses usinesses e e an and a operate d opera o pe ate as a AI AIG A GB Benefits e efits ene Brokerage Services: IIncludes ncludde es the the operations ope ations opera o of of Advisor Adviisor Ad o Solutions. S olutions o . Thi This business is b usiness e wi will continue ill cono tinue tto market o mara ket a wi wide id dee Group, G oup, which ro whiich isis one o e of of tthe he llargest a ge t ne arges networks etworo ks o off range a ge o off iinsurance nsurance a e an and a dbbenefits beene efits pro products p ducts ffor od o emp or employees e ployeesee iindependent nd deepen pe d deent ffinancial inanc a ial a advisors o iin dviisors n tthe he UU.S. .S. BBrands ran a ds ((both bo b employer oth emp e ployere papaid p aid and id an a d vvoluntary) oluntar a y) anand a da affinity groups. ffinity gro g oupsp . iinclude nclud de Royal eR Alliance, oyal Alli A iance a e, S SagePoint, agePoint, F age FSC SC S Securities e urities ec e anand a d Primary P rimar product a y pro p od duct o offerings ffer g iinclude e ings nclud dee lilife ife iinsurance, nsurance a e, WWoodbury oodb oo Financial, dbury Fiinanc a ial, w which hiich wwe acquired e acq a quiired iin ed nNNovember oveme b be er accidental a acc ide id ental d death, deeaath, bbusiness e ttravel usiness ra avel acc accident, a ide id disability ent, di disaabili bi ity 0 ffor 2012 o $ or $48 48 m million i ion illi after o a fter e p purchase urchase a e prprice p iceeaadjustments. djustmen dj e ts. iincome, ncome o e, me medical ed diica excess al e e ((stop xcess op lloss), stop o ), d oss dental, de vision ental, vi ision o an and a d worksite w o ksite u or universal e al lilife, niiversa critical ife, critica iillness al ill ness e an and a accident. d acc a ide id ent. Retail Mutual Funds: Includes Includ dees the the mutual mutual ffund und an a andd related re elate ed administration dadministra ation and o an a servicing d serv erviicing operations g opera ope ations o o off SunAmerica S unAmere ica aAAsset sse Management. et M a age e t. anagemen AIG Life and Retirement conducts its business primarily through three major insurance operating companies: American General Life Insurance Company, The Variable Annuity Life Insurance Company and The United States Life Insurance Company in the City of New York. .................................................................................................................................................................................................................................. 14 AIG 2012 Form 10-K


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    ITEM 1 / BUSINESS / AIG LIFE AND RETIREMENT ..................................................................................................................................................................................... AIG Life and Retirement 2012 Premiums and Premiums, Deposits and Other Considerations Premiums represent amounts received on traditional life insurance policies, group benefit policies and deposits on life contingent payout annuities. Premiums, deposits and other considerations is a non-GAAP measure that includes life insurance premiums and deposits on annuity contracts and mutual funds. See Item 7. MD&A – Result of Operations – AIG Life and Retirement Operations – Premiums for a reconciliation of premiums, deposits and other considerations to premiums. A Look at AIG Life and Retirement AIG Life and Retirement 2012 Sales by Distribution Channel (dollars in millions) VALIC financial advisors $684 33% AIG Direct & other $70 3% 29% Broker dealers AGLA $589 career 5% agents $88 4% Advisor 2% 13% 11% group $48 43% Affiliated 57% Non-Affiliated Benefit Independent brokers Banks marketing $77 $259 organizations $236 15FEB201302020659 Represents life and group A&H premiums from new policies expected to be collected over a one-year period plus 10 percent of life unscheduled deposits, single premiums and annuity deposits from new and existing customers. .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 15


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    ITEM 1 / BUSINESS / AIG LIFE AND RETIREMENT ..................................................................................................................................................................................... AIG Life and Retirement’s Diversified Distribution Network Affiliated Nonaffiliated VALIC career financial advisors O Over ver e 11,200 ,200 00 Banks N Nearly ea ly 600 ear 600 b banks a ks an an a and d 69 6 69,000 9,000 ffinancial inanc a ial ffinancial inanc a ial a advisors dviisors o serv serving erviing g tthe he w worksites o ksites or e o off iinstitution nstitution o agen a agents ge ts educational, ed e duca ationa o al, no not-for-profit ot-for o -pro p ofit an a andd go governmental vernmen e e tal organizations o organ ga iizations o Independent marketing organizations Relationships R elations o hiips p wi with ith o over ver e 11,700 ,700 iindependent nd de epen pe ddeent mar marketing a keting g AGLA career agents O Over ver e 33,100 ,100 00 agen a agents ge ts ffocused o use oc edd on o o organ organizations ga iizations o an a anddb brokerage ro okerage e age genera ge general e al agenc a agencies ge ies e the the b broad roa oad m middle idd e mar iddl market a ket p pro providing oviidi ding g access a e tto oo over ver e 1150,000 50,000 lilicensed icense e ed d independent iind de epen pe ddeent agen a agents ge ts Advisor Group O Over ver e 66,000 ,000 iindependent nd deepen pe dde ent ffinancial inanc a ial advisors ad adviisors o Broker dealers A Access ccess e tto ooover ver e 120 120,000 0,000 lilicensed icense e ed d ffinancial inanc a ial pro p professionals ofess e iona o als AIG Direct A leading lea eadi ding g direct-to-consumer direc di e t-to-cons o umer e di d distributor istrib ibutor o ooff lilife ife an a and dAA& A&H &H pro p products od ducts Benefit brokers IInclude ncludde e cons consultants, o ultan a ts, brokers, bro okers e , third thiird p par party a ty a administrators dministra ators o ana andd genera ge general e al agen a agents ge ts Competition and Customer Marketing Strengths AIG Life and Retirement competes against approximately 1,800 providers of life insurance and retirement savings products, including other large, well-established life insurance companies and other financial services companies. Life insurance companies compete through a combination of risk-acceptance (underwriting) criteria, product pricing, service, and terms and conditions. Retirement services companies also compete through crediting rates and through offering guaranteed benefits features. AIG Life and Retirement competes in the life insurance and retirement savings businesses primarily based on its well-established brands, innovative products, extensive distribution network, customer service and strong financial ratings. AIG Life and Retirement helps ensure financial and retirement security for more than 18 million customers. .................................................................................................................................................................................................................................. 16 AIG 2012 Form 10-K


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    ITEM 1 / BUSINESS / AIG LIFE AND RETIREMENT ..................................................................................................................................................................................... AIG Life and Retirement Competitive Strengths • Leading life insurance and retirement brands • Diversified product mix • Broad multi-channel distribution network • Financial strength AIG Life and Retirement is an established leader with well-regarded brands in the markets it serves. AIG Life and Retirement has the scale and breadth of product knowledge to deliver effective solutions across a range of markets. AIG Life and Retirement has an expansive product suite including life insurance, accident and health, annuity, mutual fund, group retirement, group benefit and institutional products as well as other solutions to help provide a secure future for our customers. AIG Life and Retirement’s distribution footprint covers a broad expanse of the U.S. market. AIG Life and Retirement products are sold by over 300,000 financial professionals across an extensive and growing multichannel network of financial advisors and insurance agents that spans both affiliated and non-affiliated partners. AIG Life and Retirement’s financial profile is strong and stable, giving customers confidence in AIG Life and Retirement’s ability to meet financial obligations associated with its retirement and insurance products. Somewhat offsetting these strengths are regulatory changes in recent years, which have created an increasingly complex environment that is affecting industry growth and profitability. .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 17


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    ITEM 1 / BUSINESS / OTHER OPERATIONS ..................................................................................................................................................................................... Other Operations Mortgage Guaranty (United Guaranty Corporation or UGC) offers private residential mortgage guaranty insurance, which protects mortgage lenders and investors from loss due to borrower default and loan foreclosure. With over 1,100 employees, United Guaranty currently insures over one million mortgage loans in the United States and has operations in nine other countries. In 2012, United Guaranty generated more than $37 billion in new insurance written, which represents the original principal balance of the insured mortgages, becoming the leading provider of private mortgage insurance in the United States and is the highest rated private mortgage insurance company in the U.S. Mortgage Guaranty Business Strategy Risk Selection: Ensure the high quality of our business through a continuous focus on risk selection and risk based pricing using a proprietary, multi-variant risk evaluation model and disciplined underwriting approach. .............................................................................................................................................................................................. Innovation: Focus on innovation through the development and enhancement of products, technology, and processes, addressing the needs of stakeholders in the mortgage system. .............................................................................................................................................................................................. Ease of Use: Eliminate complexity in the mortgage insurance system to create growth without sacrificing disciplined risk selection and management. .............................................................................................................................................................................................. Expense Management: Streamline our processes through the use of technology and shared services to more quickly react to the changing dynamics of the mortgage industry. .............................................................................................................................................................................................. Mortgage Guaranty Insurance Products and Services: United Guaranty provides an array of products and services including first-lien mortgage guaranty insurance in a range of premium payment plans. United Guaranty’s primary product is private mortgage insurance. The coverage we provide – which is called mortgage guaranty insurance, mortgage insurance, or simply ‘‘MI’’ – enables borrowers to purchase a house with a modest down payment. This is because MI protects lenders against the increased risk of borrower default related to high loan-to-value (LTV) mortgages – those with less than 20 percent equity. In short, MI lets lenders provide more mortgage loans to more people. Homeowner Support: United Guaranty also works with homeowners who are behind on their mortgage payments to identify ways to retain their home. As a liaison between the borrower and the mortgage servicer, United Guaranty provides the added support to qualified homeowners to help them avoid foreclosure. .................................................................................................................................................................................................................................. 18 AIG 2012 Form 10-K


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    ITEM 1 / BUSINESS / OTHER OPERATIONS ..................................................................................................................................................................................... A Look at Mortgage Guaranty Mortgage Guaranty Distribution Channels • National Mortgage Bankers • Community Banks • Money Center Banks • State Housing Finance Agencies • Regional Mortgage Lenders • Builder-owned Mortgage Lenders • Credit Unions • Internet-sourced lenders Mortgage Guaranty Competition and Competitive Strengths United Guaranty competes with six private providers of mortgage insurance, both well-established and new entrants to the industry, and The Federal Housing Administration, which is the largest provider of mortgage insurance in the United States. The United Guaranty brand has 50 years of history and is well regarded in the industry. We differentiate ourselves through our financial strength, our risk based pricing strategy, which provides for lower premiums for lower risk mortgages, our innovative products and our rigorous approach to risk management. Despite these strengths there are potential challenges arising in the mortgage market from increasingly complex regulations relating to mortgage originations as well as uncertainty in the government’s involvement in the domestic residential housing finance system in the future. These challenges may have an adverse impact on our business. Other operations also include: Global Capital Markets (GCM) consist of the operations of AIG Markets, Inc. (AIG Markets) and the remaining derivatives portfolio of AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (collectively AIGFP). AIG Markets acts as the derivatives intermediary between AIG and its subsidiaries and third parties to provide hedging services. The AIGFP portfolio continues to be wound down and is managed consistent with AIG’s risk management objectives. Although the portfolio may experience periodic fair value volatility, it consists predominantly of transactions that AIG believes are of low complexity, low risk or currently not economically appropriate to unwind based on a cost versus benefit analysis. Direct Investment Book (DIB) consists of a portfolio of assets and liabilities held directly by AIG Parent in the Matched Investment Program (MIP) and certain subsidiaries not related to AIG’s core insurance operations (including certain non-derivative assets and liabilities of AIGFP). The management of the DIB portfolio is focused on an orderly wind down to maximize returns consistent with AIG’s risk management objectives. Certain non-derivative assets and liabilities of the DIB are accounted for under the fair value option and thus operating results are subject to periodic market volatility. Retained Interests includes the fair value gains or losses, prior to their sale, of the AIA ordinary shares retained following the AIA initial public offering and the MetLife, Inc. (MetLife) securities that were received as consideration from the sale of American Life Insurance Company (ALICO) and the fair value gains or losses, prior to the FRBNY liquidation of ML III assets, on the retained interest in ML III. .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 19


  • Page 37

    ITEM 1 / BUSINESS / OTHER OPERATIONS ..................................................................................................................................................................................... Corporate & Other Operations consist primarily of interest expense, intercompany interest income that is eliminated in consolidation, expenses of corporate staff not attributable to specific reportable segments, certain expenses related to internal controls and the financial and operating platforms, corporate initiatives, certain compensation plan expenses, corporate level net realized capital gains and losses, certain litigation-related charges and credits, the results of AIG’s real estate investment operations and net gains and losses on sale of divested businesses and properties that did not meet the criteria for discontinued operations accounting treatment. Divested Businesses We have divested a number of businesses since 2009 in connection with our strategies to focus on core businesses, repay governmental support, and improve our financial flexibility and risk management. Divested businesses include the historical results of divested entities that did not meet the criteria for discontinued operations accounting treatment. Divested businesses include the historical results of AIA through October 29, 2010 and AIG’s remaining consumer finance business, discussed below. In the third quarter of 2010, AIG completed an initial public offering of ordinary shares of AIA. Upon completion of this initial public offering, AIG owned approximately 33 percent of the outstanding shares of AIA. Because of this ownership position in AIA, as well as AIG’s prior representation on the AIA board of directors, AIA was not presented as a discontinued operation. Discontinued Operations consist of entities that were sold, or are being sold, that met specific accounting criteria discussed in Note 4 to the Consolidated Financial Statements. On December 9, 2012, AIG entered into an agreement to sell 80.1 percent of ILFC for approximately $4.2 billion in cash, with an option for the purchaser to buy an additional 9.9 percent stake. The sale is expected to be consummated in 2013. The operating results for ILFC are reflected as a discontinued operation in all periods presented and its assets and liabilities have been classified as held for sale at December 31, 2012. On August 18, 2011, AIG closed the sale of Nan Shan Life Insurance Company, Ltd. (Nan Shan). On February 1, 2011, AIG closed the sale of AIG Star Life Insurance Co., Ltd. (AIG Star) and AIG Edison Life Insurance Company (AIG Edison). The operating results for Nan Shan, AIG Star and AIG Edison through the dates of their respective sales are reflected as discontinued operations in all periods prior to 2012. In the fourth quarter of 2010, AIG closed the sales of ALICO and American General Finance, Inc. (AGF). Periods prior to 2011 reflect ALICO and AGF as discontinued operations. Additionally, following the classification of AGF as a discontinued operation in the third quarter of 2010, AIG’s remaining consumer finance business, which is primarily conducted through the AIG Federal Savings Bank and the Consumer Finance Group in Poland, is now reported in AIG’s Other operations category as part of Corporate & Other. A REVIEW OF LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE .............................................................................................................................................................................................. The liability for unpaid claims and claims adjustment expenses represents the accumulation of estimates for unpaid reported claims and claims that have been incurred but not reported (IBNR) for our AIG Property Casualty subsidiaries and Mortgage Guaranty. Unpaid claims and claims adjustment expenses are also referred to as unpaid loss and loss adjustment expenses, or just loss reserves. We recognized as assets the portion of this liability that will be recovered from reinsurers. Reserves are discounted for future expected investment income, where permitted, in accordance with U.S. GAAP. .................................................................................................................................................................................................................................. 20 AIG 2012 Form 10-K


  • Page 38

    ITEM 1 / BUSINESS ..................................................................................................................................................................................... The Loss Reserve Development Process The process of establishing the liability for unpaid losses and loss adjustment expenses is complex and imprecise because it must take into consideration many variables that are subject to the outcome of future events. As a result, informed subjective estimates and judgments about our ultimate exposure to losses are an integral component of our loss reserving process. We use a number of techniques to analyze the adequacy of the Because reserve estimates established net liability for unpaid claims and claims adjustment expense (net loss reserves). Using these analytical techniques, we monitor the are subject to the outcome of adequacy of AIG’s established reserves and determine appropriate future events, changes in assumptions for inflation and other factors influencing loss costs. Our analysis also takes into account emerging specific development patterns, prior year estimates are such as case reserve redundancies or deficiencies and IBNR emergence. unavoidable in the insurance We also consider specific factors that may impact losses, such as industry. These changes in changing trends in medical costs, unemployment levels and other economic indicators, as well as changes in legislation and social attitudes estimates are sometimes that may affect decisions to file claims or the magnitude of court awards. referred to as ‘‘loss See Item 7. MD&A – Critical Accounting Estimates for a description of our loss reserving process. development’’ or ‘‘reserve development.’’ A significant portion of AIG Property Casualty’s business is in the U.S. commercial casualty class, which tends to involve longer periods of time for the reporting and settlement of claims and may increase the risk and uncertainty with respect to our loss reserve development. Analysis of Consolidated Loss Reserve Development The ‘‘Analysis of Consolidated Loss Reserve Development’’ table shown on page 22 presents the development of prior year net loss reserves for calendar years 2002 through 2012 for each balance sheet in that period. The information in the table is presented in accordance with reporting requirements of the Securities and Exchange Commission (SEC). This table should be interpreted with care by those not familiar with its format or those who are familiar with other loss development analyses arranged in an accident year or underwriting year basis rather than the balance sheet, as shown below. See Note 13 to the Consolidated Financial Statements. The top row of the table shows Net Reserves Held (the net liability for unpaid claims and claims adjustment expenses) at each balance sheet date, net of discount. This liability represents the estimated amount of losses and loss adjustment expenses for claims arising in all years prior to the balance sheet date that were unpaid as of that balance sheet date, including estimates for IBNR claims. The amount of loss reserve discount included in the net reserves at each date is shown immediately below the net reserves held. The undiscounted reserve at each date is equal to the sum of the discount and the net reserves held. For example, Net Reserves Held (Undiscounted) was $30.8 billion at December 31, 2002. The next section of the table shows the original Net Undiscounted Reserves re-estimated over 10 years. This re-estimation takes into consideration a number of factors, including changes in the estimated frequency of reported claims, effects of significant judgments, the emergence of latent exposures, and changes in medical cost trends. For example, the original undiscounted reserve of $30.8 billion at December 31, 2002, was re-estimated to $58.0 billion at December 31, 2012. The amount of the development related to losses settled or re-estimated in 2012, but incurred in 2009, is included in the cumulative development amount for years 2009, 2010 and 2011. Any increase or decrease in the estimate is reflected in operating results in the period in which the estimate is changed. .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 21


  • Page 39

    ITEM 1 / BUSINESS ..................................................................................................................................................................................... The middle of the table shows Net Redundancy/(Deficiency). This is the aggregate change in estimates over the period of years covered by the table. For example, the net loss reserve deficiency of $27.1 billion for 2002 is the difference between the original undiscounted reserve of $30.8 billion at December 31, 2002 and the $58.0 billion of re-estimated reserves at December 31, 2012. The net redundancy/(deficiency) amounts are cumulative; in other words, the amount shown in the 2011 column includes the amount shown in the 2010 column, and so on. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it generally is not appropriate to extrapolate future development based on this table. The bottom portion of the table shows the Paid (Cumulative) amounts during successive years related to the undiscounted loss reserves. For example, as of December 31, 2012, AIG had paid a total of $47.9 billion of the $58.0 billion in re-estimated reserves for 2002, resulting in Remaining Reserves (Undiscounted) of $10.1 billion for 2002. Also included in this section are the Remaining Reserves (Undiscounted) and the Remaining Discount for each year. The following table presents loss reserves and the related loss development 2002 through 2012 and consolidated gross liability (before discount), reinsurance recoverable and net liability recorded for each calendar year, and the re-estimation of these amounts as of December 31, 2012.(a) (in millions) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Net Reserves Held(b) $ 29,347 $ 36,228 $ 47,253 $ 57,476 $62,630 $ 69,288 $ 72,455 $67,899 $71,507 $70,825 $68,782 Discount (in Reserves Held) 1,499 1,516 1,553 2,110 2,264 2,429 2,574 2,655 3,217 3,183 3,246 Net Reserves Held (Undiscounted) 30,846 37,744 48,806 59,586 64,894 71,717 75,029 70,554 74,724 74,008 $72,028 Net undiscounted Reserve re-estimated as of: One year later 32,913 40,931 53,486 59,533 64,238 71,836 77,800 74,736 74,919 74,429 Two years later 37,583 49,463 55,009 60,126 64,764 74,318 82,043 74,529 75,502 Three years later 46,179 51,497 56,047 61,242 67,303 78,275 81,719 75,187 Four years later 48,427 52,964 57,618 63,872 70,733 78,245 82,422 Five years later 49,855 54,870 60,231 67,102 70,876 79,098 Six years later 51,560 57,300 63,348 67,518 71,572 Seven years later 53,917 60,283 63,928 68,233 Eight years later 56,827 60,879 64,532 Nine years later 57,410 61,449 Ten years later 57,967 Net Deficiency on net reserves held (27,121) (23,705) (15,726) (8,647) (6,678) (7,381) (7,393) (4,633) (778) (421) Net Deficiency related to A&E (4,042) (3,970) (2,965) (2,036) (1,827) (1,809) (1,759) (1,607) (106) (76) Net Deficiency excluding A&E (23,079) (19,735) (12,761) (6,611) (4,851) (5,572) (5,634) (3,026) (672) (345) Paid (Cumulative) as of: One year later 10,775 12,163 14,910 15,326 14,862 16,531 24,267 15,919 17,661 19,235 Two years later 18,589 21,773 24,377 25,152 24,388 31,791 36,164 28,428 30,620 Three years later 25,513 28,763 31,296 32,295 34,647 40,401 46,856 38,183 Four years later 30,757 33,825 36,804 40,380 40,447 48,520 53,616 Five years later 34,627 38,087 43,162 44,473 46,474 53,593 Six years later 37,778 42,924 46,330 49,552 50,391 Seven years later 41,493 45,215 50,462 52,243 Eight years later 43,312 48,866 52,214 Nine years later 46,622 50,292 Ten years later 47,856 Remaining Reserves (Undiscounted) 10,111 11,157 12,318 15,990 21,181 25,505 28,806 37,004 44,882 55,194 Remaining Discount 876 993 1,087 1,203 1,362 1,589 1,869 2,203 2,535 2,899 Remaining Reserves $ 9,235 $ 10,164 $ 11,231 $ 14,787 $19,819 $ 23,916 $ 26,937 $34,801 $42,347 $52,295 Net Liability, End of Year $ 30,846 $ 37,744 $ 48,806 $ 59,586 $64,894 $ 71,717 $ 75,030 $70,554 $74,724 $74,008 $72,028 Reinsurance Recoverable, End of Year 17,327 15,644 14,624 19,693 17,369 16,212 16,803 17,487 19,644 20,320 19,209 Gross Liability, End of Year 48,173 53,388 63,430 79,279 82,263 87,929 91,833 88,041 94,368 94,328 $91,237 Re-estimated Net Liability 57,967 61,449 64,532 68,233 71,572 79,098 82,422 75,187 75,502 74,429 Re-estimated Reinsurance Recoverable 25,535 23,131 21,249 24,093 20,528 19,135 18,480 18,371 16,861 20,395 Re-estimated Gross Liability 83,502 84,580 85,781 92,326 92,100 98,233 100,902 93,558 92,363 94,824 Cumulative Gross Redundancy/(Deficiency) $(35,329) $(31,192) $(22,351) $(13,047) $ (9,837) $(10,304) $ (9,069) $ (5,517) $ 2,005 $ (496) (a) During 2009, we deconsolidated Transatlantic Holdings, Inc. and sold 21st Century Insurance Group and HSB Group, Inc. 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 an $8.6 billion increase in paid losses for the years 2000 through 2008 to remove the reserves for these divested entities from the ending balance. (b) The increase in Net Reserves Held from 2009 to 2010 is partially due to the $1.7 billion in Net Reserves Held by Fuji, which was acquired in 2010. The decrease in 2011 is due to the cession of asbestos reserves described in Item 7. MD&A – Results of Operations – Segment Results – AIG Property Casualty Operations – Liability for Unpaid Claims and Claims Adjustment Expense – Asbestos and Environmental Reserves. .................................................................................................................................................................................................................................. 22 AIG 2012 Form 10-K


  • Page 40

    ITEM 1 / BUSINESS ..................................................................................................................................................................................... The Liability for unpaid claims and claims adjustment expense as reported in AIG’s Consolidated Balance Sheet at December 31, 2012 differs from the total reserve reported in the annual statements filed with state insurance departments and, where applicable, with foreign regulatory authorities primarily for the following reasons: • Reserves for certain foreign operations are not required or permitted to be reported in the United States for statutory reporting purposes, including contingency reserves for catastrophic events; • Statutory practices in the United States require reserves to be shown net of applicable reinsurance recoverable; and • Unlike statutory financial statements, AIG’s consolidated Liability for unpaid claims and claims adjustment expense excludes the effect of intercompany transactions. Gross loss reserves are calculated without reduction for reinsurance recoverables and represent the accumulation of estimates for reported losses and IBNR. We review the adequacy of established gross loss reserves in the manner previously described for net loss reserves. A reconciliation of activity in the Liability for unpaid claims and claims adjustment expense is included in Note 13 to the Consolidated Financial Statements. REINSURANCE ACTIVITIES .............................................................................................................................................................................................. AIG subsidiaries operate worldwide primarily by underwriting and accepting risks for their direct account on a gross basis and reinsuring a portion of the exposure on either an individual risk or an aggregate basis to the extent those risks exceed the desired retention level. In addition, as a condition of certain direct underwriting transactions, we are required by clients, agents or regulation to cede all or a portion of risks to specified reinsurance entities, such as captives, other insurers, local reinsurers and compulsory pools. In 2012, AIG Property Casualty adopted a new ceded reinsurance framework and strategy to improve the efficiency of our legal entity capital management and support our global product line risk and profitability objectives. Reinsurance is also used to manage overall capital adequacy and mitigate the effects of certain events such as natural and man-made catastrophes. As a result of adopting the new framework and strategy, many individual reinsurance contracts were consolidated into more efficient global programs and reinsurance ceded to third parties in support of risk and capital management objectives has decreased in 2012. There are many different forms of reinsurance agreements and different markets that may be used to achieve our risk and profitability objectives. We continually evaluate the reinsurance markets and the relative attractiveness of various arrangements that may be used to achieve our risk and profitability objectives. The form of reinsurance that we may choose from time to time will generally depend on whether we are seeking (i) proportional reinsurance, whereby we cede a specified percentage of premium and losses to reinsurers, or non-proportional or excess of loss reinsurance, whereby we cede all or a specified portion of losses in excess of a specified amount on a per risk, per occurrence (including catastrophe reinsurance) or aggregate basis and (ii) treaties that cover a defined book of policies, or facultative placements that cover an individual policy. Reinsurance markets include: • Traditional local and global reinsurance markets including in the United States, Bermuda, London and Europe, accessed directly and through reinsurance intermediaries; • Capital markets through investors in ILS and collateralized reinsurance transactions, such as catastrophe bonds, ‘‘sidecars’’ (special purpose entities that allow investors to take on the risk of a book of business from an insurance company in exchange for a premium) and similar vehicles; and • Other insurers which engage in both direct and assumed reinsurance and/or engage in swaps. Reinsurance arrangements do not relieve the AIG subsidiaries from their direct obligations to insureds. However, an effective reinsurance program substantially mitigates our exposure to potentially significant losses. See Item 7. MD&A – Enterprise Risk Management – Insurance Operations Risks – AIG Property Casualty Key Insurance Risks – Reinsurance Recoverables for a summary of significant reinsurers. .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 23


  • Page 41

    ITEM 1 / BUSINESS ..................................................................................................................................................................................... GENERATING REVENUES: INVESTMENT ACTIVITIES OF OUR INSURANCE OPERATIONS .............................................................................................................................................................................................. AIG Property Casualty and AIG Life and Retirement generally receive We generate significant premiums and deposits well in advance of paying covered claims or benefits. In the intervening periods, we invest these premiums and revenues in our AIG Property deposits to generate net investment income and fee income that is Casualty and AIG Life and available to pay claims or benefits. As a result, we generate significant revenues from insurance investment activities. Retirement operations from investment activities. AIG’s worldwide insurance investment policy places primary emphasis on investments in fixed maturity securities of corporations, municipal bonds and government issuances in all of its portfolios, and, to a lesser extent, investments in high-yield bonds, common stock, real estate, hedge funds and other alternative investments. The majority of assets backing insurance liabilities at AIG consist of intermediate and long duration fixed maturity securities. AIG Property Casualty – Fixed maturity securities held by the insurance companies included in AIG Property Casualty domestic operations historically have consisted primarily of laddered holdings of tax-exempt municipal bonds. These tax-exempt municipal bonds provided attractive after-tax returns and limited credit risk. To meet our domestic operations’ current risk-return and tax objectives, our domestic property and casualty companies have begun to shift investment allocations away from tax-exempt municipal bonds towards taxable instruments. Any taxable instruments must meet our liquidity, duration and quality objectives as well as current risk-return and tax objectives. Fixed maturity securities held by AIG Property Casualty international operations consist primarily of intermediate duration high-grade securities, primarily in the markets being served. In addition, AIG Property Casualty has redeployed cash in excess of operating needs and short-term investments into longer-term, higher-yielding securities. AIG Life and Retirement – Our investment strategy is to generally match the duration of our liabilities with assets of comparable duration. AIG Life and Retirement also invests in a diversified portfolio of private equity funds, hedge funds and affordable housing partnerships. Although these types of investments are subject to periodic earnings volatility, through December 31, 2012, they have achieved total returns in excess of AIG Life and Retirement’s base portfolio yield. AIG Life and Retirement expects that these alternative investments will continue to outperform the base portfolio yield over the long term. 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) AIG Property Casualty: 2012 $ 120,166 $ 4,820 4.0% 2011 113,405 4,348 3.8 2010 100,583 4,392 4.4 AIG Life and Retirement: 2012 $ 190,983 $ 10,718 5.6% 2011 172,846 9,882 5.7 2010 154,167 10,768 7.0 (a) Includes real estate investments and excludes cash and short-term investments. (b) Net investment income divided by the annual average investments. REGULATION .............................................................................................................................................................................................. Our operations around the world are subject to regulation by many different types of regulatory authorities, including banking, insurance, securities and investment advisory regulators in the United States and abroad. The insurance .................................................................................................................................................................................................................................. 24 AIG 2012 Form 10-K


  • Page 42

    ITEM 1 / BUSINESS ..................................................................................................................................................................................... and financial services industries generally have been subject to heightened regulatory scrutiny and supervision in recent years. Federal Reserve Supervision .............................................................................................................................................................................................. We are a savings and loan holding company (SLHC) within the meaning of the Home Owners’ Loan Act (HOLA) and are regulated and subject to the examination, supervision and enforcement authority and reporting requirements of the Board of Governors of the Federal Reserve System (FRB). Because we were grandfathered as a unitary SLHC within the meaning of HOLA when we organized AIG Federal Savings Bank and became an SLHC in 1999, we generally are not restricted under existing laws as to the types of business activities in which we may engage, as long as AIG Federal Savings Bank continues to be a qualified thrift lender. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) has effected comprehensive changes to the regulation of financial services in the United States and subjects us to substantial additional federal regulation. The FRB supervises and regulates SLHCs, and the Office of the Comptroller of the Currency (OCC) supervises and regulates federal savings associations, such as AIG Federal Savings Bank. Dodd-Frank directs existing and newly-created government agencies and oversight bodies to promulgate regulations implementing the law, an ongoing process that has begun and is anticipated to continue over the next few years. Changes mandated by Dodd-Frank include directing the FRB to promulgate minimum capital requirements for SLHCs. The FRB, OCC and Federal Deposit Insurance Corporation (FDIC) have proposed revised minimum leverage and risk-based capital requirements that would apply to all bank holding companies and SLHCs, as well as to insured depository institutions, such as AIG Federal Savings Bank. As required by Dodd-Frank, the FRB has also proposed enhanced prudential standards for large bank holding companies and non-bank systemically important financial institutions (SIFIs) and has stated its intention to propose enhanced prudential standards for SLHCs pursuant to HOLA. We cannot predict whether the capital regulations will be adopted as proposed or what enhanced prudential standards the FRB will promulgate for SLHCs, either generally or as applicable to insurance businesses. Further, we cannot predict how the FRB will exercise general supervisory authority over us, although the FRB could, as a prudential matter, for example, limit our ability to pay dividends, purchase shares of AIG Common Stock or acquire or enter into other businesses. We cannot predict with certainty the requirements of the regulations ultimately adopted or how or whether Dodd-Frank and such regulations will affect the financial markets generally, impact our businesses, results of operations, cash flows or financial condition, or require us to raise additional capital or result in a downgrade of our credit ratings. Furthermore, Dodd-Frank requires SIFIs to be subject to regulation, examination and supervision by the FRB (including minimum leverage and risk-based capital requirements). Nonbank SIFIs will be designated by the Financial Stability Oversight Council (Council) created by Dodd-Frank. If we are designated as a SIFI, we will be regulated by the FRB both in that capacity and in our capacity as an SLHC. The regulations applicable to SIFIs and to SLHCs, when all have been adopted as final rules, may differ materially from each other. In October 2012, we received a notice that we are under consideration by the Council for a proposed determination that we are a SIFI. The notice stated that we will be reviewed in Stage 3 of the SIFI determination process described in the Council’s interpretive guidance for nonbank financial company determinations. If we are designated as a SIFI, we would also be subject to additional regulatory requirements, including heightened prudential standards. For a description of those standards as currently proposed and a discussion of the potential effects on us if we are designated as a SIFI, see Item 1A. Risk Factors – Regulation. As part of its general prudential supervisory powers, the FRB has the authority to limit our ability to conduct activities that would otherwise be permissible for us to engage in if we do not satisfy certain requirements. Directive 2002/87/EC (the Directive) issued by the European Parliament provides that certain financial conglomerates with regulated entities in the European Union, such as AIG, are subject to supplementary supervision. Pursuant to the Directive, the Commission Bancaire, the French banking regulator, was appointed as our supervisory coordinator. We have been in discussions with, and have provided information to, the Autorité de Contrôle Prudentiel (formerly, the Commission Bancaire) and the UK Financial Services Authority regarding the possibility of proposing another of our existing regulators as our equivalent supervisor. .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 25


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    ITEM 1 / BUSINESS ..................................................................................................................................................................................... Capital Requirements .............................................................................................................................................................................................. Section 171 of Dodd-Frank (the Collins Amendment) subjects SLHCs to capital requirements that must be no less stringent than the requirements generally applicable to insured depository institutions or quantitatively lower than the requirements in effect for insured depository institutions as of July 21, 2010. The regulatory capital requirements currently applicable to insured depository institutions, such as AIG Federal Savings Bank, are computed in accordance with the U.S. federal banking agencies’ generally applicable risk-based capital requirements, which are based on accords established by the Basel Committee on Banking Supervision (Basel Committee). These accords have evolved over time, and are referred to as Basel I, Basel II and Basel III. In June 2012, the federal banking agencies issued proposed rules that would revise and replace current regulatory capital rules for banking organizations, including SLHCs. We are still considering the full impact of the proposed capital rules and the FRB and the other federal banking agencies have not adopted final rules. In addition, the FRB has announced that the rules will not be effective as of January 1, 2013, as originally proposed, but has not provided a revised effective date. Also in June 2012, the FRB and the other federal banking agencies issued revised final rules that modify their market risk regulatory capital requirements for banking institutions with significant trading activities. These modifications are designed to address the adjustments to the market risk regulatory capital framework that were announced by the Basel Committee in June 2010 (referred to as ‘‘Basel II.5’’) and the prohibition on the use of external credit ratings, as required by Dodd-Frank. These changes become effective for banking institutions in 2013 and will likely become effective for us when capital requirements for SLHCs are implemented. These changes will result in increased regulatory capital requirements for market risk. We are still considering the full impact of these capital requirements. Volcker Rule .............................................................................................................................................................................................. In July 2012, Section 619 of Dodd-Frank, referred to as the ‘‘Volcker Rule,’’ became effective, although the final rule implementing Section 619 has not yet been released. Under the proposed rule released in October 2011, if we continue to be regulated as an SLHC due to our control of AIG Federal Savings Bank, or control another insured depository institution, we and our affiliates would be considered banking entities for purposes of the rule and, after the rule’s conformance date of July 21, 2014, would be prohibited from ‘‘proprietary trading’’ and sponsoring or investing in ‘‘covered funds,’’ subject to the rule’s exceptions. Even if we are no longer regulated as an SLHC or no longer control an insured depository institution, we could be subject to restrictions on these activities if we are designated as a SIFI, as Dodd-Frank authorizes the FRB to subject SIFIs to capital requirements, quantitative limits or other restrictions if they engage in activities prohibited for banking entities under the Volcker Rule. The Volcker Rule, as proposed, contains an exemption for proprietary trading by insurance companies for their general account, but the final breadth and scope of this exemption is uncertain. Other Effects of Dodd-Frank .............................................................................................................................................................................................. In addition, Dodd-Frank will also have the following effects on us: • If we are designated as a SIFI, the FRB could (i) limit our ability to merge with, acquire, consolidate with, or become affiliated with another company, to offer specified financial products or to terminate specified activities; (ii) impose conditions on how we conduct our activities or (iii) with approval of the Council, and a determination that the foregoing actions are inadequate to mitigate a threat to U.S. financial stability, require us to sell or otherwise transfer assets or off-balance-sheet items to unaffiliated entities. • If we are designated as a SIFI, we will be required to provide to regulators an annual plan for our rapid and orderly resolution in the event of material financial distress or failure, which must, among other things, ensure that AIG Federal Savings Bank is adequately protected from risks arising from our other entities and meet several specific standards, including requiring a detailed resolution strategy and analyses of our material entities, organizational structure, interconnections and interdependencies, and management information systems, among other elements. .................................................................................................................................................................................................................................. 26 AIG 2012 Form 10-K


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    ITEM 1 / BUSINESS ..................................................................................................................................................................................... • The Council may recommend that state insurance regulators or other regulators apply new or heightened standards and safeguards for activities or practices that we and other insurers or other financial services companies engage in. • Title II of Dodd-Frank provides that a financial company whose largest United States subsidiary is an insurer (such as us) may be subject to a special liquidation process outside the federal bankruptcy code. That process is to be administered by the FDIC upon a coordinated determination by the Secretary of the Treasury, the director of the Federal Insurance Office and the FRB, in consultation with the FDIC, that such a financial company is in default or in danger of default and presents a systemic risk to U.S. financial stability. • Dodd-Frank establishes a new framework for regulation of the over-the-counter (OTC) derivatives markets – including the imposition of margin and collateral requirements, centralized clearing and reporting/record keeping requirements – that could affect various activities of AIG and its insurance subsidiaries. • Dodd-Frank mandated a study to determine whether stable value contracts should be included in the definition of ‘‘swap.’’ If that study concludes that stable value contracts are swaps, Dodd-Frank authorizes certain federal regulators to determine whether an exemption from the definition of a swap is appropriate and in the public interest. Certain of our affiliates are in or may participate in the stable value contract business. We cannot predict what regulations might emanate from the aforementioned study or be promulgated applicable to this business in the future. • Dodd-Frank established a Federal Insurance Office (FIO) within the Department of the Treasury headed by a director appointed by the Secretary of the Treasury. While not having a general supervisory or regulatory authority over the business of insurance, the director of this office performs various functions with respect to insurance (other than health insurance), including serving as a non-voting member of the Council and participating in the Council’s decisions regarding insurers, potentially including AIG, to be designated as a SIFI. The director is also required to conduct a study on how to modernize and improve the system of insurance regulation in the United States, including by increased national uniformity through either a federal charter or effective action by the states. The FIO may also recommend enhanced regulations to state insurance regulatory bodies. • Dodd-Frank established the Consumer Financial Protection Bureau (CFPB) as an independent agency within the FRB to regulate consumer financial products and services offered primarily for personal, family or household purposes. Insurance products and services are not within the CFPB’s general jurisdiction, although the U.S. Department of Housing and Urban Development has since transferred authority to the CFPB to investigate mortgage insurance practices. Broker-dealers and investment advisers are not subject to the CFPB’s jurisdiction when acting in their registered capacity. • Title XIV of Dodd-Frank also restricts certain terms for mortgage loans, such as loan fees, prepayment fees and other charges, and imposes certain duties on a lender to ensure that a borrower can afford to repay the loan. Dodd-Frank imposes various assessments on financial companies, including, as applicable to us, ex-post assessments to provide funds necessary to repay any borrowing and to cover the costs of any special resolution of a financial company conducted under Title II (although the regulatory authority would have to take account of the amounts paid by us into state guaranty funds). We cannot predict whether these actions will become effective or the effect they may have on the financial markets or on our business, results of operations, cash flows, financial condition and credit ratings. However, it is possible that such effect could be materially adverse. See Item 1A. Risk Factors – Regulation for additional information. Other Regulatory Developments .............................................................................................................................................................................................. In addition to the adoption of Dodd-Frank in the United States, regulators and lawmakers around the world are actively reviewing the causes of the financial crisis and taking steps to avoid similar problems in the future. The Financial Stability Board (FSB), consisting of representatives of national financial authorities of the G20 nations, has issued a series of frameworks and recommendations intended to produce significant changes in how financial companies, particularly SIFIs, should be regulated. These frameworks and recommendations address such issues as financial group supervision, capital and solvency standards, systemic economic risk, corporate governance including compensation, and a host of related issues associated with responses to the financial crisis. The FSB has directed the International Association of Insurance Supervisors (the IAIS, headquartered in Basel, Switzerland) to create .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 27


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    ITEM 1 / BUSINESS ..................................................................................................................................................................................... standards relative to these areas and incorporate them within that body’s Insurance Core Principles. IAIS Insurance Core Principles form the baseline threshold for how countries’ financial services regulatory efforts are measured relative to the insurance sector. That measurement is made by periodic Financial Sector Assessment Program (FSAP) reviews conducted by the World Bank and the International Monetary Fund and the reports thereon spur the development of country-specific additional or amended regulatory changes. Lawmakers and regulatory authorities in a number of jurisdictions in which our subsidiaries conduct business have already begun implementing legislative and regulatory changes consistent with these recommendations, including proposals governing consolidated regulation of insurance holdings companies by the Financial Services Agency in Japan, financial and banking regulation adopted in France and compensation regulations proposed or adopted by the financial regulators in Germany and the United Kingdom Financial Services Authority. Legislation in the European Union could also affect our international insurance operations. The Solvency II Directive (2009/138/EEC) (Solvency II), which was adopted on November 25, 2009 and is expected to become effective in January 2014, reforms the insurance industry’s solvency framework, including minimum capital and solvency requirements, governance requirements, risk management and public reporting standards. The impact on us will depend on whether the U.S. insurance regulatory regime is deemed ‘‘equivalent’’ to Solvency II; if the U.S. insurance regulatory regime is not equivalent, then we, along with other insurance companies, could be required to be supervised under Solvency II standards. Whether the U.S. insurance regulatory regime will be deemed ‘‘equivalent’’ is still under consideration by European authorities and remains uncertain, so we are not currently able to predict the impact of Solvency II. We expect that the regulations applicable to us and our regulated entities will continue to evolve for the foreseeable future. Regulation of Insurance Subsidiaries .............................................................................................................................................................................................. 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 intercompany services and transfers of assets, including in some instances payment of dividends by the insurance subsidiary, within the holding company system. Our subsidiaries are registered under such legislation in those states that have such requirements. Our insurance subsidiaries 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 the financial condition of the insurers and their corporate conduct and market conduct activities. This includes approval of policy forms and rates, the standards of solvency that must be met and maintained, including with respect to 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. 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. Virtually every state has adopted, in substantial part, the RBC Model Law promulgated by the National Association of Insurance Commissioners (NAIC), which allows states to act upon the results of RBC calculations, and provides for four incremental levels of regulatory action regarding insurers whose RBC calculations fall below specific thresholds. Those levels of action range from the requirement to submit a plan describing how an insurer would regain a calculated RBC ratio above the respective threshold through a mandatory regulatory takeover of the company. The action thresholds are based on RBC levels that are calculated so that a company subject to such actions is solvent but its future solvency is in doubt without some type of corrective action. The RBC formula computes a risk-adjusted surplus level by applying discrete factors to various asset, premium and reserve items. These factors are developed to be risk-sensitive so that higher factors are applied to items exposed to greater risk. The statutory surplus of each of our U.S.-based life and property and casualty insurance subsidiaries exceeded RBC minimum required levels as of December 31, 2012. .................................................................................................................................................................................................................................. 28 AIG 2012 Form 10-K


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    ITEM 1 / BUSINESS ..................................................................................................................................................................................... If any of our insurance entities fell below prescribed levels of statutory surplus, it would be our intention to provide appropriate capital or other types of support to that entity, under formal support agreements or capital maintenance agreements (CMAs) or otherwise. For additional details regarding CMAs that we have entered into with our insurance subsidiaries, see Item 7. MD&A – Liquidity and Capital Resources – Liquidity and Capital Resources of AIG Parent and Subsidiaries – AIG Property Casualty and – AIG Life and Retirement. The National Association of Insurance Commissioners (NAIC) has undertaken the Solvency Modernization Initiative (SMI) which focuses on a review of insurance solvency regulations throughout the U.S. financial regulatory system and is expected to lead to a set of long-term solvency modernization goals. SMI is broad in scope, but the NAIC has stated that its focus will include the U.S. solvency framework, group solvency issues, capital requirements, international accounting and regulatory standards, reinsurance and corporate governance. A substantial portion of AIG Property Casualty’s business is conducted in foreign countries. The degree of regulation and supervision in foreign jurisdictions varies. Generally, we must satisfy local regulatory requirements, licenses issued by foreign authorities to our subsidiaries are subject to modification or revocation by such authorities, and therefore these subsidiaries could be prevented from conducting business in certain of the jurisdictions where they currently operate. In addition to licensing requirements, our 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 our 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 Item 7. MD&A – Liquidity and Capital Resources – Regulation and Supervision and Note 20 to the Consolidated Financial Statements. OUR COMPETITIVE ENVIRONMENT .............................................................................................................................................................................................. AIG’s businesses operate in a highly competitive global environment. Principal sources of competition are insurance companies, banks, and other non-bank financial institutions. AIG considers its principal competitors to be other large multinational insurance organizations. We describe our competitive strengths, our strategies to retain existing customers and attract new customers within each of our operating business segment descriptions. OUR EMPLOYEES .............................................................................................................................................................................................. At December 31, 2012, AIG and its subsidiaries had approximately 63,000 employees. We believe that our relations with our employees are satisfactory. AIG LIFE AND RETIREMENT AIG Property 12,000 Casualty Domestic AIG 15,000 PROPERTY 6,000 OTHER OPERATIONS* CASUALTY 45,000 AIG Property 30,000 Casualty International 15FEB201315344305 * Includes approximately 500 employees of ILFC, which was held for sale at December 31, 2012. .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 29


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    ITEM 1 / BUSINESS ..................................................................................................................................................................................... DIRECTORS AND EXECUTIVE OFFICERS OF AIG .............................................................................................................................................................................................. Information concerning the directors and executive officers of AIG as of February 21, 2013 is set forth below. Served as Director or Name Title Age Officer Since Robert H. Benmosche Director, President and Chief Executive Officer 68 2009 W. Don Cornwell Director 65 2011 John H. Fitzpatrick Director 56 2011 Christopher S. Lynch Director 55 2009 Arthur C. Martinez Director 73 2009 George L. Miles, Jr. Director 71 2005 Henry S. Miller Director 67 2010 Robert S. Miller Chairman 71 2009 Suzanne Nora Johnson Director 55 2008 Morris W. Offit Director 76 2005 Ronald A. Rittenmeyer Director 65 2010 Douglas M. Steenland Director 61 2009 Michael R. Cowan Executive Vice President and Chief Administrative Officer 59 2011 William N. Dooley Executive Vice President – Investments 59 1992 Peter D. Hancock Executive Vice President – Property and Casualty Insurance 54 2010 David L. Herzog Executive Vice President and Chief Financial Officer 53 2005 Jeffrey J. Hurd Executive Vice President – Human Resources and 46 2010 Communications Thomas A. Russo Executive Vice President and General Counsel 69 2010 Siddhartha Sankaran Executive Vice President and Chief Risk Officer 35 2010 Brian T. Schreiber Executive Vice President and Treasurer 47 2002 Jay S. Wintrob Executive Vice President – Life and Retirement 55 1999 Charles S. Shamieh Senior Vice President and Chief Corporate Actuary 46 2011 All directors of AIG are elected for one-year terms at the annual meeting of shareholders. All executive officers are elected to one-year terms, but serve at the pleasure of the Board of Directors. Except for the following individuals below, 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. Robert Benmosche joined AIG as Chief Executive Officer in August 2009. Previously, he served as Chairman and Chief Executive Officer of MetLife, Inc. from September 1998 to February 2006 (Chairman until April 2006). He served as President of MetLife, Inc. from September 1999 to June 2004, President and Chief Operating Officer from November 1997 to June 1998, and Executive Vice President from September 1995 to October 1997. Mr. Benmosche has served as a member of the Board of Directors of Credit Suisse Group since 2002. Michael R. Cowan joined AIG as Senior Vice President and Chief Administrative Officer in January 2010. Prior to joining AIG, he was at Merrill Lynch where he had served as Senior Vice President, Global Corporate Services, since 1998. Mr. Cowan began his career at Merrill Lynch in 1986 as a Financial Manager and later served as Chief Administrative Officer for Europe, the Middle East and Africa. He was also Chief Financial Officer and a member of the Executive Management Committee for the Global Private Client business, including Merrill Lynch Asset Management. Thomas Russo joined AIG as Executive Vice President – Legal, Compliance, Regulatory Affairs and Government Affairs and General Counsel in February 2010. Prior to joining AIG, Mr. Russo was with the law firm of Patton Boggs, LLP, where he served as Senior Counsel. Prior to that, he was Chief Legal Officer of Lehman Brothers Holdings, Inc. Before joining Lehman Brothers in 1993, he was a partner at the law firm of Cadwalader, Wickersham & Taft and a member of its Management Committee. .................................................................................................................................................................................................................................. 30 AIG 2012 Form 10-K


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    ITEM 1 / BUSINESS ..................................................................................................................................................................................... Peter Hancock joined AIG in February 2010 as Executive Vice President of Finance and Risk. Prior to joining AIG, Mr. Hancock served as Vice Chairman of KeyCorp, responsible for Key National Banking. Prior to KeyCorp, he served as Managing Director of Trinsum Group, Inc. Prior to that position, Mr. Hancock was at JP Morgan for 20 years, eventually serving as head of its fixed income division and ultimately Chief Financial Officer. Siddartha Sankaran joined AIG in December 2010 as Senior Vice President and Chief Risk Officer. Prior to that, he was a partner in the Finance and Risk practice of Oliver Wyman Financial Services and served as Canadian Market Manager since 2006. Charles S. Shamieh joined AIG in 2007 as Executive Director of Enterprise Risk Management. In January 2011, Mr. Shamieh was elected to his current position of Senior Vice President and Corporate Chief Actuary. Prior to joining AIG, Mr. Shamieh was Group Chief Risk Officer for Munich Re Group and a Member of the Group Committee of Munich Re’s Board of Management since 2006. AVAILABLE INFORMATION ABOUT AIG .............................................................................................................................................................................................. Our corporate website is www.aig.com. We make available free of charge, through the Investor Information section of our corporate website, the following reports (and related amendments as filed with the SEC) as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC: • Annual Reports on Form 10-K • Quarterly Reports on Form 10-Q • Current Reports on Form 8-K • Proxy Statements on Schedule 14A, as well as other filings with the SEC Also available on our corporate website: • Charters for Board Committees: Audit, Nominating and Corporate Governance, Compensation and Management Resources, Finance and Risk Management, and Regulatory, Compliance and Public Policy Committees • Corporate Governance Guidelines (which include Director Independence Standards) • Director, Executive Officer and Senior Financial Officer Code of Business Conduct and Ethics (we will post on our website any amendment or waiver to this Code within the time period required by the SEC) • Employee Code of Conduct • Related-Party Transactions Approval Policy Except for the documents specifically incorporated by reference into this Annual Report on Form 10-K, information contained on our website or that can be accessed through our website is not incorporated by reference into this Annual Report on Form 10-K. Reference to our website is made as an inactive textual reference. .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 31


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    ITEM 1A / RISK FACTORS ..................................................................................................................................................................................... ITEM 1A / RISK FACTORS .............................................................................................................................................................................................. Investing in AIG involves risk. In deciding whether to invest in AIG, you should carefully consider the following risk factors. Any of these risk factors could have a significant or material adverse effect on our businesses, results of operations, financial condition or liquidity. They could also cause significant fluctuations and volatility in the trading price of our securities. Readers should not consider any descriptions of these factors to be a complete set of all potential risks that could affect AIG. These factors should be considered carefully together with the other information contained in this report and the other reports and materials filed by us with the Securities and Exchange Commission (SEC). Further, many of these risks are interrelated and could 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 of these risks on our results of operations, liquidity and financial condition. MARKET CONDITIONS .............................................................................................................................................................................................. Difficult conditions in the global capital markets and the economy may materially and adversely affect our businesses, results of operations, financial condition and liquidity. Our businesses are highly dependent on the economic environment, both in the U.S. and around the world. Concerns over continued high domestic unemployment, weakness in the U.S. housing and commercial real estate markets, the ability of the U.S. government to rein in the U.S. deficit, address the federal debt ceiling and reduce spending, and the European Union’s ability to resolve its debt crisis, among other issues, have contributed to increased volatility and reduced expectations for the economy and the markets in the near term. Extreme prolonged market events, such as the global financial crisis during 2008 and 2009, have at times led, and could in the future lead, to a lack of liquidity, highly volatile markets, a steep depreciation in asset values across all classes, an erosion of investor and public confidence, and a widening of credit spreads. Difficult economic conditions could also result in increased unemployment and a severe decline in business across a wide range of industries and regions. These market and economic factors could have a material adverse effect on our businesses, results of operations, financial condition and liquidity. Under difficult economic conditions, we could experience reduced demand for our financial and insurance products and an elevated incidence of claims and lapses or surrenders of policies. Contract holders may choose to defer or cease paying insurance premiums. Other ways in which we could be negatively affected by economic conditions, include, but are not limited to: • declines in the valuation and performance of our investment portfolio, including declines attributable to rapid increases in rates; • increased credit losses; • declines in the value of other assets; • impairments of goodwill and other long-lived assets; • additional statutory capital requirements; • limitations on our ability to recover deferred tax assets; • a decline in new business levels and renewals; • a decline in insured values caused by a decrease in activity at client organizations; • an increase in liability for future policy benefits due to loss recognition on certain long-duration insurance contracts; • higher borrowing costs and more limited availability of credit; • an increase in policy surrenders and cancellations; and • a write-off of deferred policy acquisition costs (DAC). Sustained low interest rates may materially and adversely affect our profitability. Sustained low interest rates can negatively affect the performance of our investment securities and reduce the level of investment income earned on our investment portfolios. If a low interest rate environment persists, we may experience slower investment .................................................................................................................................................................................................................................. 32 AIG 2012 Form 10-K


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    ITEM 1A / RISK FACTORS ..................................................................................................................................................................................... income growth and we may not be able to fully mitigate the interest rate risk of our assets relative to our liabilities. Continued low interest rates could impair our ability to earn the returns assumed in the pricing and the reserving for our products at the time they were sold and issued. INVESTMENT PORTFOLIO, CONCENTRATION OF INVESTMENTS, INSURANCE AND OTHER EXPOSURES .............................................................................................................................................................................................. The performance and value of our investment portfolio are subject to a number of risks and uncertainties, including changes in interest rates. Interest rates are highly sensitive to many factors, including monetary policies, domestic and international economic and political issues and other factors beyond our control. Changes in monetary policy or other factors may cause interest rates to rise, which would adversely affect the value of the fixed income securities that we hold and could adversely affect our ability to sell these securities. In addition, the evaluation of available-for-sale securities for other-than-temporary impairments, which may occur if interest rates rise, is a quantitative and qualitative process that is subject to significant management judgment. Our investment portfolio is concentrated in certain segments of the economy. Our results of operations and financial condition have been adversely affected by the degree of concentration in our investment portfolio in the past, and this may occur again in the future. We have concentrations in residential mortgage-backed, commercial mortgage-backed and other asset-backed securities and commercial mortgage loans. We also have significant exposures to financial institutions and, in particular, to money center and global banks; U.S. state and local government issuers and authorities; and Eurozone financial institutions and governments and corporations. Events or developments that have a negative effect on any particular industry, asset class, group of related industries or geographic region may adversely affect our investments that are concentrated in such segments. Our ability to sell assets concentrated in such areas may be limited if other market participants are selling similar assets at the same time. Concentration of our insurance and other risk exposures may have adverse effects. We may be exposed to risks as a result of concentrations in our insurance policies, derivatives and other obligations that we undertake for customers and counterparties. We manage these concentration risks by monitoring the accumulation of our exposures by factors such as exposure type, industry, geographic region, counterparty and other factors. We also use reinsurance, hedging and other arrangements to limit or offset exposures that exceed the limits we wish to retain. In certain circumstances, however, these risk management arrangements may not be available on acceptable terms or may prove to be ineffective for certain exposures. Also, our exposure may be so large that even a slightly adverse experience compared to our expectations may have a material adverse effect on our consolidated results of operations or financial condition, or result in additional statutory capital requirements for our subsidiaries. RESERVES AND EXPOSURES .............................................................................................................................................................................................. Our consolidated results of operations, liquidity and financial condition are subject to the effects of catastrophic events. Events such as hurricanes, windstorms, flooding, earthquakes, pandemic disease, acts of terrorism and other catastrophes have adversely affected our business in the past and could do so in the future. Such events could expose us to: • widespread claim costs associated with property, workers’ compensation, business interruption and mortality and morbidity claims; • loss resulting from a decline in the value of our invested assets • limitations on our ability to recover deferred tax assets; • loss resulting from actual policy experience that is adverse compared to the assumptions made in the product pricing; and • significant interruptions to our systems and operations. For a sensitivity analysis of our exposure to certain catastrophes, see Item 7. MD&A – Enterprise Risk Management – Insurance Operations Risks – AIG Property Casualty Key Insurance Risks – Catastrophe Exposures. Insurance liabilities are difficult to predict and may exceed the related reserves for losses and loss expenses. We regularly review the adequacy of the established Liability for unpaid claims and claims adjustment .................................................................................................................................................................................................................................. AIG 2012 Form 10-K 33

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