AIG Annual Report 2007

A M E R I C A N I N T E R N A T I O N A L G R O U P, I N C .
Annual Report

C O N T E N T S
Financial Highlights 1
Letter to Shareholders 2
AIG: What We See 11
AIG at a Glance 24
Review of Operations 26
Reconciliation in Accordance with Regulation G 42
Five Year Summary of Consolidated Operations 43
Five Year Summary of Selected Financial Information 44
Supplemental Financial Information 46
Board of Directors 50
Corporate Directory 51
Annual Report on Form 10-K
Inside
Shareholder Information Back Cover
A B O U T A I G
American International Group, Inc. (AIG), a world
leader in insurance and financial services, is the leading
international insurance organization, with operations
in more than 130 countries and jurisdictions.
AIG companies serve commercial, institutional and
individual customers through the most extensive
worldwide property-casualty and life insurance
networks of any insurer. In addition, AIG companies
are leading providers of retirement services, financial
services and asset management around the world.
AIG’s common stock is listed on the New York
Stock Exchange, as well as the stock exchanges in
Ireland and Tokyo.
A B O U T T H E C O V E R
AIG headquarters at 70 Pine Street is an Art Deco landmark
and the tallest skyscraper in Lower Manhattan.
In 1976, AIG purchased the 66-story building, which is
crowned with a glass-enclosed observatory that offers a
panoramic view of New York City and its surroundings.
Today, it is an icon of AIG’s global stature in the insurance
and financial services businesses.

AIG 2007 Annual Report 1
(in millions, except per share data and ratios) 2007 2006 % Change
Net income(a) $ 6,200 $ 14,048 (55.9)
Net realized capital gains (losses), net of tax (2,386) 33 —
Capital Markets other-than-temporary impairments, net of tax(b) (418) — —
FAS 133 gains (losses), net of tax (304) (1,424) —
Cumulative effect of an accounting change, net of tax — 34 —
Adjusted net income(c) 9,308 15,405 (39.6)
Net income, per common share—diluted 2.39 5.36 (55.4)
Adjusted net income, per common share—diluted(c) 3.58 5.88 (39.1)
Book value per common share 37.87 39.09 (3.1)
Revenues(d)(e)(f) $ 110,064 $ 113,387 (2.9)
Assets 1,060,505 979,410 8.3
Shareholders’ equity 95,801 101,677 (5.8)
General Insurance combined loss and expense ratio 90.33 89.06
General Insurance combined loss and expense ratio, excluding catastrophe losses 89.73 89.06
F I N A N C I A L H I G H L I G H T S
Net Income
(billions of dollars)
Revenues
Assets
Shareholders’ Equity
Book Value per Common Share
(dollars)
Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
(a) In 2007 and 2006, includes out of period increases (decreases) of $(399) million and $65 million, respectively.
(b)Represents Capital Markets other-than-temporary impairments on securities available for sale.
(c) In 2007 and 2006, includes out of period increases (decreases) of $(261) million and $85 million, respectively.
(d)In 2007 and 2006, includes other-than-temporary impairment charges of $4.7 billion and $944 million, respectively. Also in 2007 and 2006, includes gains (losses) of $(1.44) billion
and $(1.87) billion, respectively, from hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses.
(e) In 2006, includes a $730 million increase in revenue for out of period adjustments related to the accounting for UCITS.
(f) In 2007, includes an unrealized market valuation loss of $11.5 billion on AIGFP's super senior credit default swap portfolio.
8.1
9.8
10.5
14.0
6.2
3.07
3.73
3.99
5.36
2.39
675.6
801.0
853.0
979.4
1,060.5
69.2
79.7
86.3
101.7
95.8
26.54
30.69
33.24
39.09
37.87
79.6
97.8
108.8
113.4 110.1
Net Income per
Common Share—Diluted
(dollars)
2003 2004 2005 2006 2007
2003 2004 2005 2006 2007
2003 2004 2005 2006 2007
2003 2004 2005 2006 2007
2003 2004 2005 2006 2007
2003 2004 2005 2006 2007
(d)(e)(f)
(a)

2 AIG 2007 Annual Report
We remain confident
in our strategy to
leverage our financial
strength and global
franchise to continue
our growth in both
emerging and
developed markets.
Martin J. Sullivan
President and
Chief Executive Officer
A
fter a promising start, 2007 had a
disappointing conclusion, both in
terms of our results and share
price performance. The U.S. credit crisis,
recession fears and record-high oil prices
caused economic disruption and uncer-
tainty. In addition, some of our businesses
did not meet expectations. Nevertheless,
the fundamental strength of our core
operations is intact, and we made impor-
tant advances in key markets. We remain
confident in our strategy to leverage our
financial strength and global franchise
to continue our growth in both emerging
and developed markets. Although it
appears economic conditions will not be
any better in 2008, we continue to see
many opportunities to deliver quality
insurance and financial products and
services to customers around the world.
2007 Results
AIG reported net income of $6.20 bil-
lion, or $2.39 per diluted share for
2007, compared to $14.05 billion, or
$5.36 per diluted share for 2006.
Full year 2007 adjusted net income,
excluding the effect of economically
effective hedging activities that did not
qualify for hedge accounting treatment
under FAS 133, and the related
foreign exchange gains and losses, was
$9.31 billion, or $3.58 per diluted
share, compared to $15.41 billion, or
$5.88 per diluted share for 2006.
Included in 2007 net income and
adjusted net income was a charge of
$11.47 billion pretax ($7.46 billion after
tax) for unrealized market valuation
losses related to the AIG Financial
Products Corp. (AIGFP) super senior
credit default swap portfolio. Based upon
its most current analysis, AIG believes any
losses that are realized over time on the
super senior credit default swap portfolio
of AIGFP will not be material to AIG’s
D E A R F E L L O W S H A R E H O L D E R S :

BusinessWeek named AIG one
of the 100 Best Global Brands,
a testament to the brand’s growing
value in markets all over the world.
overall financial condition, although it is
possible that realized losses could be mate-
rial to AIG’s consolidated results of oper-
ations for an individual reporting period.
Full year results also include pretax net
realized capital losses of $3.59 billion.
Consolidated assets increased in 2007
to $1.061 trillion, up from $979.41 billion
in 2006. At year end, book value per share
stood at $37.87, down from $39.09
at the end of 2006. Shareholders’ equity
also declined to $95.80 billion from
$101.68 billion at the end of 2006. AIG
recorded total revenues during the year of
$110.06 billion, 2.9 percent below 2006
revenues. Revenues, shareholders’ equity
and book value per share were adversely
affected by realized capital losses and
the net unrealized market valuation loss
recorded by AIGFP.
2007 Highlights
We overcame the challenges of 2007 to
make progress on several fronts. We were
pleased when the China Insurance
Regulatory Commission approved our
application to establish a Wholly Owned
Foreign Enterprise (WOFE) under the
name AIG General Insurance Company
China Limited (AIG General). Soon
after, we opened a new AIG General
headquarters in Shanghai and consoli-
dated our Chinese general insurance
operations there to capture efficiencies
and provide a platform to establish new
branches in other areas of China. AIA
China continued to expand on the
provincial licenses granted in 2006,
opening 29 new sales and service centers
in 2007, for a total of 104 centers in 19
cities. In addition, AIG InvestmentsSM
received approval to set up a representative
office in Tianjin, our first operation in
China’s third-largest city.
In Korea, we obtained preliminary
approval from the Financial Supervisory
Service to offer mortgage reinsurance
through AIG United Guaranty Insurance
(Asia) Limited. We signed a memoran-
dum of understanding with the Bank
of Investment and Development of
Vietnam for the expansion of our business
cooperation agreement in that rapidly
growing country. The agreement will
allow us to expand beyond our existing
relationship in life insurance to include
a wide range of areas such as general
insurance, consumer finance, asset
management and banking services.
We are rapidly building a consumer
finance franchise in India to complement
our Tata AIG Life and General Insurance
partnership. In 2007, we established a
presence in housing finance and consumer
durable finance. In addition, we are
strengthening our presence in asset man-
agement and real estate development.
In the Middle East, American Life
Insurance Company (ALICO) received
a license to operate a retail life insurance
business in the Qatar Financial Centre.
ALICO is the first life insurance company
to receive an expanded license, which is
in addition to a wholesale life insurance
license first obtained in February 2007.
Our acquisition of the German
insurer Württembergische und Badische
Versicherungs-AG (WüBa) reaffirmed our
commitment to growth in the German
marketplace, and greatly enhanced
our insurance offerings to small and
midsize companies.
We advanced our strategy in the auto
insurance sector when we acquired the out-
standing shares of 21st Century Insurance
Group that we did not already own.
In 2007, AIG received approval from
the China Insurance Regulatory
Commission to establish a wholly
owned general insurance subsidiary
in China(pictured, Shanghai skyline).
The AIG Private Client Group’s
Wildfire Protection Unit®
uses the
latest fire-mitigation technology to
help protect policyholders’ proper-
ties in the western United States.

We then consolidated 21st Century with
AIG’s existing auto platform. The com-
bined operation, aigdirect.comSM
, is an
organization with the reach and expertise
needed to compete more effectively in
the U.S. auto insurance marketplace.
Through AIG-managed funds, we are
a leading investor in the infrastructure
business. In 2007, our investments in
P&O Ports North America, AMPORTS
and MTC Holdings were organized
under one management structure. We
believe the new entity, Ports America,
constitutes the largest and most experi-
enced independent port operator and
automotive import/export processor in
the United States.
In addition to these accomplishments,
we made good progress on several
other fronts.
Customer Focus—We devoted a
great deal of attention to our customers
as we broadened the implementation
of our “Deliver the Firm” strategy.
Specifically, we examined how to realign
the way AIG does business so we can
deploy our products and services in ways
that allow us to meet multiple needs
of customers around the world. For our
customers, it means more convenience,
more choices and even better services.
For our employees, it means broader
engagement with other AIG businesses
and colleagues. For our shareholders, it
means tapping the vast potential for new
growth and higher returns.
Capital Management—The imple-
mentation of our economic capital
model provides us with a tool to help us
allocate our capital efficiently. The tool
provides one of the metrics we will use
with increasing frequency to allocate cap-
ital to promising growth areas, judge per-
formance on a consistent basis across our
business segments and help us set com-
pensation policy. AIG’s capital position
is excellent and we have the flexibility to
take advantage of growth opportunities.
Innovation—Our reputation as an
industry innovator gained widespread
recognition when AIG Private Client
Group’s Wildfire Protection Unit acted
swiftly to protect client homes from rag-
ing wildfires in the western United States.
The unit’s response teams treated client
homes with a fire retardant in advance
of the flames, reducing losses and claims.
Meanwhile, AIG Product Development
maintained a steady flow of new products,
launching one every 14 days on average,
with individual businesses launching
even more. New offerings ranged from
Family Protector, an urban protection
package launched in South Africa, to AIG
Oilfield Services Insurance, a one-stop
coverage solution designed specifically
for independent oil and gas clients.
Building our Brand—We made sub-
stantial progress in 2007 in strengthening
worldwide recognition of the AIG brand.
Our success is attributable to greater
consistency in the implementation of
our brand and judicious investments
in brand advertising and sponsorship
opportunities. Our sponsorship of
the Manchester United Football Club
has helped tremendously to increase our
recognition worldwide, particularly in
key Asian markets. Of course, it has
helped build recognition in the United
Kingdom as well. The consolidation of
our New Hampshire and Landmark
businesses under the name AIG UK
Limited will allow us to further leverage
our Manchester United sponsorship.
In Australia and New Zealand, all of our
businesses now market under the AIG
brand name. We launched a vigorous
branding campaign in India to support
our business growth there. National
Union Fire Insurance Company of
Pittsburgh, Pa., now markets under the
name AIG Executive LiabilitySM
and
AIG VALIC, a leader in the K-12,
healthcare and higher education markets,
has re-branded as AIG Retirement. It was
gratifying to see the growing strength of
our brand recognized when BusinessWeek
magazine included AIG in its annual
list of the world’s top brands, ranking us
at 47, the highest rank of any insurer,
in our first-ever appearance on the list.
While we are proud of these successes,
we clearly need to improve in several areas.
There is no disputing the severity of the
U.S. residential mortgage crisis and the
dislocation in the credit markets, but
that cannot be an excuse for poor per-
formance. We need to reverse higher
losses and expenses and work through
product and distribution shortcomings in
several other businesses. Even though we
have made progress increasing the average
number of products sold per customer,
there is still room for improvement.
We devoted a great
deal of attention to
our customers as
we broadened the
implementation of
our “Deliver the
Firm”strategy.

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6
3
7
8 9
4
5
12
11
10
We are addressing these weaknesses
through operational and structural invest-
ments and improvements, and I can
assure you we are doing so with a sense
of urgency.
Vision and Values
While financial strength, quality assets
and a solid strategy are critical elements
of success, it is also important to synthe-
size those elements with a set of core
values that are shared by all employees.
In 2007, we engaged a sampling of
employees around the world and formal-
ized a vision and set of values for AIG
that will serve as our touchstone for
future progress:
Our Vision is to be the world’s
first-choice provider of insurance and
financial services.
Our Values are People, Customer
Focus, Performance, Integrity, Respect
and Entrepreneurship.
Our Vision and Values define and
unite us as an organization. You can read
more about our Vision and Values further
on in this report.
General Insurance
In the United States and abroad, AIG’s
General Insurance businesses write
substantially all lines of commercial
property-casualty insurance and various
personal lines. A combination of product
diversification, distribution strength and
underwriting discipline allowed the
General Insurance group to achieve higher
operating income despite decidedly
uneven market conditions.
The Domestic Brokerage Group
(DBG), which provides commercial
insurance products and services to a wide
range of businesses in the United States,
had a record year, with operating income
climbing 25 percent. DBG is the largest
property-casualty insurance organization
in the United States with market-leading
businesses such as AIG Executive
Liability, a premier provider of executive
and professional liability insurance;
Group Executive Committee
Martin J. Sullivan4
President and
Edmund S.W. Tse5
Senior Vice Chairman
Life Insurance
Steven J. Bensinger2
Executive Vice President
and Chief Financial Officer
Anastasia D. Kelly3
General Counsel and
Senior Regulatory
and Compliance Officer
Rodney O. Martin, Jr.11
Life Insurance
Kristian P. Moor10
Domestic General
Insurance
Win J. Neuger8
and Chief Investment
Officer
Nicholas C. Walsh6
Foreign General Insurance
Jay S. Wintrob12
Retirement Services
William N. Dooley9
Senior Vice President
Financial Services
Andrew J. Kaslow1
Senior Vice President and
Chief Human Resources
Officer
Brian T. Schreiber7
Strategic Planning

Lexington Insurance Company,
the leading U.S.-based excess and surplus
lines insurer; AIG Excess Casualty®
,
DBG’s leading commercial umbrella
provider; and AIG Environmental®
,
a pioneer in pollution and eco-friendly
liability coverages. AIG’s Domestic
Accident & Health Division, which
manages specialized accident and health
risks for consumer, commercial and
affinity group customers, and AIG
Worldsource, which provides innovative
global liability insurance solutions, as
well as HSB Group, Inc., a leading
worldwide provider of equipment break-
down and engineered lines insurance, all
performed well in 2007 due in part
to their execution of unique Deliver the
Firm strategies.
Integration costs and higher claims
activity adversely affected results in our
Domestic Personal Lines businesses.
However, consolidation and product
innovation will improve our market
position going forward. AIG Private
Client Group, which insures more than
one-third of the Forbes 400 Richest
Americans, achieved net written
premium growth in excess of 37percent.
The group is building on the growing
popularity of its Wildfire Protection Unit
with the deployment of its Hurricane
Protection Unit®
in coastal regions.
Transatlantic Holdings, Inc., a majority-
owned holding company of international
reinsurers, achieved record net income
partly due to higher premium volume
and favorable loss experience in its
property lines.
Significant home price deterioration
associated with the ongoing U.S. housing
crisis resulted in a challenging year for
the domestic mortgage insurance business
of United Guaranty Corporation (UGC).
We expect similar domestic market
conditions to last into 2009. Even so,
growth in international markets, togeth-
er with higher persistency that lifted
domestic first-lien renewal premiums,
produced solid growth in net premiums
written. With operations today in 15
countries, UGC is prudently pursuing
additional international opportunities in
promising markets such as Japan, India,
Australia and Germany.
In addition to the WOFE license it
received in China, AIG’s Foreign General
Insurance group also launched a new
operation in Oman and opened a new
branch in Qatar, strengthening its position
as the most extensive property-casualty
network in the world. Full year results
were adversely affected by the losses
from the June 2007 U.K. floods and
higher non-catastrophic losses; however,
underwriting results were excellent.
Foreign General continues to refine its
customized product range to meet the
requirements of a growing worldwide
middle class while developing products
for underserved markets.
Life Insurance & Retirement Services
AIG’s Life Insurance & Retirement
Services group carries on a long tradition
of excellence it has earned during many
years of industry leadership. In 2007, the
group had strong top line growth, and
momentum is building on the strength
of new and enhanced products, as well
as new distribution initiatives. However,
operating income decreased compared
to 2006, primarily due to higher net
realized capital losses in 2007.
Foreign Life operations devoted
significant management time and
resources to building our business in
China and India. Progress continues on
the merger of AIG Star Life Insurance
Co., Ltd., and AIG Edison Life Insurance
Company, which we hope to complete in
early 2009. We are encouraged by prom-
ising results from the introduction of new
variable annuity products. In addition,
further deregulation in the bank channel
and the privatization of Japan Post
Insurance Co., Ltd., are creating opportu-
nities to sell our products through vast
new distribution systems.
Ambassador Frank G. Wisner
Vice Chairman
External Affairs
Dr. Jacob A. Frenkel
Vice Chairman
Global Economic Strategies

AIG’s life insurance network is the
most extensive of any life insurance
organization. Our life businesses abroad
include market-leading companies such
as American International Assurance
Company, Limited, consistently rated
one of the most trusted brands in
Southeast Asia. ALICO operates in
more than 50 countries, with a strong
and growing presence in Japan, Europe,
the Middle East and Latin America.
The Philippine American Life and General
Insurance Company observed its 60th
anniversary and remains the premier
life insurer in the Philippines. Our
Taiwan life insurance unit, Nan Shan
Life Insurance Company, Ltd., once
again received recognition throughout
the year for its quality customer service.
In the United States, AIG American
General enhanced its position as a lead-
ing life insurer by introducing more than
25 new or revised products and riders in
2007. Its acquisition of direct marketer
Matrix Direct, Inc., helped the company
expand beyond its traditional distribution
methods. AIG American General contin-
ues to place significant emphasis on
cross-selling efforts by developing coordi-
nated offerings with AIG Investments,
DBG and AIG Retirement.
Domestic retirement services opera-
tions continue to address the growing
need for asset accumulation, protection
and guaranteed income solutions. AIG
Annuity Insurance Company, the largest
issuer of fixed annuities in the United
States, responded to difficult market con-
ditions by launching new products and
by expanding distribution. AIG VALIC,
now operating as AIG Retirement,
achieved double-digit deposit growth and
a steady increase in fee income and assets
under management. AIG SunAmerica,
a leader in variable annuities, achieved
record fee income and assets under man-
agement by responding to the demand
for “income for life” solutions. The
launch of the “Live Longer Retire
Stronger” national advertising campaign
boosted recognition of AIG’s retirement
services capabilities while supporting our
global branding initiative.
Financial Services
The Financial Services group recorded
an operating loss of $9.52 billion for 2007
primarily due to the unrealized market
valuation losses related to the AIGFP
super senior credit default swap portfolio.
We continue to believe that AIGFP
will not realize significant losses from
this derivative business, which insures
against the default of certain securities.
Since its creation, AIGFP has been a
strong performer and is an important
component of AIG’s diverse portfolio
of businesses.
We continue to see good potential
across all product segments of our
Financial Services group. Together,
they diversify our revenues and comple-
ment our core insurance operations.
AIG was named one of “The Global
100” most sustainable companies
at the World Economic Forum in
Davos, Switzerland. AIG is develop-
ing environmentally sustainable
properties, such as Spruce Peak at
Stowe, Vt.,developed by AIG Global
Real Estate.
AIG’s International Lease Finance
Corporation (ILFC) has the largest
aircraft fleet in the world, as
measured by fleet value, and is
the largest single customer to date
for the new Boeing 787 Dreamliner.
The launch of the“Live
Longer Retire Stronger”
national advertising
campaign boosted
recognition of AIG’s
retirement services
capabilities while
supporting our global
branding initiative.

International Lease Finance Corporation
(ILFC), for example, had an excellent
year with strong operating income.
A worldwide leader in aircraft leasing,
ILFC executed lease agreements covering
138 aircraft and became the largest single
customer to date for the new Boeing 787
Dreamliner. ILFC’s fleet of more than
900 modern, efficient passenger jets
is the largest in the world, as measured
by fleet value.
American General Finance, Inc.
(AGF), a major consumer finance organ-
ization in the United States, weathered
deteriorating market conditions with con-
servative lending practices and a branch
structure that allows it to stay in
close touch with customers and market
trends. AGF is in a position to oppor-
tunistically expand its business portfolio,
as it demonstrated in early 2008 when it
agreed to acquire a substantial portion
of the Equity One consumer branch loan
portfolio from Popular, Inc.
AIG Consumer Finance Group, Inc.
achieved record earnings in Poland and
expanded in key markets such as India,
Thailand and Mexico. The Imperial
A.I. Credit Companies maintained its
position as the largest financer of
insurance premiums in North America
and continued to grow its high-net-worth
life insurance business.
Asset Management
The Asset Management group provides a
wide variety of investment-related services
and investment products. Operating
income decreased in 2007 due to foreign
exchange, interest rate and credit related
mark-to-market losses and other-than-
temporary impairment charges on fixed
income investments. However, the group
grew unaffiliated client assets under man-
agement by 26 percent to $94.2 billion.
The group also manages AIG insurance
and asset management portfolios, which
exceeded $672.3 billion at year end. AIG
is the world’s seventh-largest asset manager,
with operations in 45 cities, including
new offices in Dubai and Kampala,
Uganda’s capital.
Formerly known as AIG Global
Investment Group, we re-branded our
institutional asset management function
AIG Investments, a name that succinctly
conveys the group’s core business and is
aligned with AIG’s global branding effort.
AIG Private Bank Ltd., continued
the expansion of its global wealth man-
agement business, opening AIG’s first
wealth management office in Taiwan.
AIG Private Bank also entered into a
joint venture agreement with Bank
Sarasin & Co. Ltd. to establish a new
Swiss bank with a goal of being a strong
player in Switzerland and all of Europe.
AIG Global Real Estate Investment Corp.
expanded its investment and development
platforms, increasing its equity under
management to more than $23 billion,
and adding new employees in strategic
markets such as the Middle East, India
and other countries throughout Asia.
Public Policy and
Corporate Responsibility
Terrorism is an unconventional risk due
to its unpredictability and the potential
severity of losses. So we applaud the
U.S. Congress and the White House for
extending the federal Terrorism Risk
Insurance Act as a backstop, which is
vital to a secure economy. On another
important policy front, we continued
our efforts to open global markets to our
insurance products, financial services
and investments. At the same time,
we are working to keep U.S. markets
open to foreign trade and investment,
which is so important to the health of
the world economy.
We recognize that our businesses
cannot succeed over the long term unless
we are mindful of the well-being of others.
In 2007, AIG significantly expanded its
corporate responsibility initiatives to make
a greater positive contribution to society
through both our core business activities
and our philanthropic programs.
AIG has a history of addressing soci-
ety’s challenges through business success.
Using the same tools that have helped AIG
companies prosper, we leverage our experi-
ence and global reach with organizations
such as ACCION International and
Pro Mujer to promote entrepreneurship,
innovation, diversity and empowerment.
A decade ago, AIG launched the first-ever
microinsurance program for a group of
local microlenders in Uganda. Today,
the AIG companies are developing
microinsurance markets in Africa, India,
Latin America and Southeast Asia, and
have helped some 2.5 million clients
in 12 countries.
A leader in environmental insurance,
AIG last year developed a suite of new
products to address client needs related
to alternative energy and limiting carbon
emissions. We also launched a program
that enables homeowners to rebuild their
property to green standards following
a covered loss.
We are working to keep
U.S. markets open
to foreign trade and
investment, which is so
important to the health
of the world economy.

We have also begun to address the
environmental impact of our own
operations. We conducted the first
global inventory of AIG’s greenhouse
gas emissions and began to develop a
mitigation plan, including the purchase of
carbon offsets. As a first step, we sponsored
a forum in Beijing for our corporate
clients, where we announced our intent
to fund agricultural projects in
rural China that reduce or sequester
greenhouse gas emissions.
We continue to support and participate
in the Carbon Disclosure Project, the U.S.
Climate Action Partnership and other
climate initiatives. In September, AIG
became an insurance-sector component
of the Dow Jones Sustainability Index
North America (DJSI North America).
Index components are selected according
to a systematic assessment that identifies
the leading sustainability-driven compa-
nies in each industry group.
Following the appointment of our
first Chief Diversity Officer early in 2007,
we took a number of actions to help
AIG realize the benefits of a more diverse
organization. We established diversity
steering committees at the business level
to complement our Corporate Executive
Steering Committee; implemented
training programs for existing employees;
and explored ways to improve how
we attract and mentor diverse job
candidates. We are also developing new
products to address the needs of diverse
clients, while increasing our supplier
diversity. We still have work to do,
but the actions we are taking today
will help AIG build its reputation as a
forward-thinking organization.
Stock Price and Dividends
As I mentioned at the outset, the perform-
ance of AIG’s stock in 2007 and into 2008
was disappointing. The price of an AIG
common share closed the year at $58.30,
18.6 percent below the close of 2006.
By comparison, the S&P 500 Stock Index
rose 3.5 percent in 2007.
The Board of Directors took several
steps during 2007 to demonstrate its
confidence in AIG’s ability to continue
to grow and generate excess capital.
In March, the Board approved a new
dividend policy, which provides that,
under ordinary circumstances, AIG plans
to increase its common stock dividend
by approximately 20 percent annually.
The new policy became effective in
May 2007, when the Board voted to
increase the quarterly cash dividend to
20 cents per share, a 21.2 percent increase
over the previous quarterly dividend
and the 22nd consecutive year
that AIG has increased its dividend.
Also in March, the Board expanded
AIG’s existing share repurchase program
by authorizing the repurchase of up to
$8 billion in common stock. In November,
we announced the Board’s decision to
authorize the repurchase of an additional
$8 billion in common stock. During 2007,
AIG repurchased more than 76 million
common shares. AIG does not expect to
purchase additional shares in the foresee-
able future, other than to meet commit-
ments that existed at December 31, 2007.
We believe this is a prudent decision in
light of the unsettled capital markets and
because it gives AIG maximum flexibility
to pursue growth opportunities that
may arise.
Board and Management Changes
Three directors who have made enormous
contributions to AIG will retire at the
annual meeting in May. It is impossible
to overstate the contribution Frank Zarb
made during his seven years on the
Board, particularly during his tenure as
interim Chairman. Frank’s clear judg-
ment and exceptional organizational and
leadership skills provided the support
management needed to work through
some of the most difficult challenges in
AIG’s 89-year history.
Marshall “Mickey” Cohen has been
a valuable contributor throughout his 16
years on the Board. As AIG has evolved,
the continuity of Mickey’s trusted
counsel has been a steady reference point.
As Chairman of the Board’s Compensation
and Management Resources Committee,
he has been at the forefront of
significant enhancements in AIG’s
compensation policies.
Steve Hammerman’s three years of
Board service coincided with a period of
important transition at AIG. As Chairman
of the Regulatory, Compliance and Legal
Committee, his wisdom and common-
sense approach guided AIG through
difficult regulatory issues. We are truly
grateful to all of these outstanding
individuals for their dedicated service.
The Board of Directors
took several steps during
2007 to demonstrate
its confidence in AIG’s
ability to continue
to grow and generate
excess capital.

In January 2008, the Board of Directors
elected Stephen F. Bollenbach a director.
Steve recently retired as Co-Chairman and
Chief Executive Officer of Hilton Hotels
Corporation, and possesses deep experience
in managing complex global businesses.
We look forward to his contributions.
2008 Outlook and Priorities
We harbor no illusions about the chal-
lenges ahead in 2008. The U.S. residential
housing market is expected to remain
weak throughout the year. Uncertainty
persists about credit markets and the U.S.
economy in general, and competition
is increasing in many of our markets.
However, while challenges limit some
opportunities, they create others.
These headwinds may require us to tack a
different course, but we expect to achieve
success nevertheless. Our five-year goal
is to grow adjusted earnings per share by
an average of 10 to 12 percent annually,
and a significant portion of management
compensation is linked to the achievement
of this goal.
We are confident that we have the
right strategies and resources to succeed.
AIG’s financial strength is formidable
by any measure, and our capital position
is solid. We have established, well-run
businesses in every corner of the globe.
We must remain disciplined in our
underwriting, refusing to chase rates down
in softening markets. We must continu-
ally enhance distribution and improve
cost efficiency. Yet, we will invest
where we need to invest, especially to
build out areas of infrastructure that
are critical to growth.
We will conduct our business respon-
sibly, working constructively with
regulators, minimizing our impact on
the environment and cultivating a
diverse workforce that acts in harmony
with our core values.
It is not enough simply to profit from
our transactions with customers; we want
them to manage risk effectively and to
succeed in their endeavors. It is not
enough to thrive in the markets where
It is not enough for our
shareholders merely to
earn a steady return;
we want you to earn
superior returns and to
be proud that you
invest in AIG.
we operate; we want those markets to
grow and produce wealth and opportuni-
ty for everyone in them. It is not enough
for our employees simply to earn a living;
we also want them to be personally
satisfied in the work they do. And it is
not enough for our shareholders merely to
earn a steady return; we want you to earn
superior returns and to be proud that
you invest in AIG.
AIG is a remarkable company, thanks
to the support of many. I would like to
thank the Board of Directors for its wise
counsel; our customers and business
partners for their loyalty; all of our
dedicated employees around the world,
who truly make AIG the great company
that it is; and you, our shareholders, for
your support and confidence in investing
in AIG.
Sincerely,
Martin J. Sullivan
President and Chief Executive Officer
March 14, 2008

W H A T W E S E E
The ability to see and seize opportunities in the markets
we serve has always differentiated AIG from its peers.
Where others may see little or no potential, we see new ways
to deliver solutions to our 74 million customers worldwide.
AIG has many strengths in markets around the world.
Our 116,000 employees and over 700,000 agents, brokers
and sales representatives strive to exceed client expectations
with market-leading products and services.
In the following pages, we share with you, our shareholders,
what we see and what we do every day to help our clients
achieve success—in both local and global markets.

The AIG Strategic Relationship
Group helped generate gross
premiums written of over
$350 million in insurance
business in 2007 by access-
ing AIG’s investment and other
non-insurance relationships.
One of the group’s long-
standing relationships is
with global growth equity
ﬁrm General Atlantic, which
was introduced by AIG
Investments. General Atlantic
sees AIG as a key insurance
partner and says our ability
to deliver a wide range
of products and capabilities
sets us apart.
By facilitating an introduction
to a Fortune 100 client, AIG
Executive Liability provided
AIG Investments with an
opportunity to demonstrate its
asset management capabilities
in the corporate pension
plan sponsor segment. After
an extensive due diligence
process, the client entrusted
AIG Investments with
$175 million to invest in its
International Small Cap
equity strategy, based on its
strong long-term performance
record and proven investment
process, as well as the
depth of experience of the
portfolio management team.
WE SEE OPPORTUNITIES TO INCREASE SHAREHOLDER VALUE BY LEVERAGING OUR CAPABILITIES TO
MAXIMIZE RELATIONSHIPS WITH EXISTING AND NEW CUSTOMERS. AIG’s enterprise-wide initiative
to “Deliver the Firm” gained momentum last year. Going beyond cross-selling, this key
strategy represents a fully integrated approach to the way we focus on the market.
It involves the level of customer service we provide…the type of customer information
we develop…the way we collaborate…the way we develop new products and services…
and the way our employees achieve a deeper knowledge of AIG’s full capabilities.
Deliver the Firm deﬁnes the entire AIG experience for our customers.

The Ofﬁce of the Customer
(OOC) contributes to AIG’s
Deliver the Firm strategy by
providing marketing and
technology support to AIG
businesses, including
best practices in up-selling,
cross-selling, retention
and referrals. In just one
example from commercial
lines, OOC capabilities were
used to develop and deliver
over 90 types of “marketing
opportunity alerts” in more
than 30 countries.
The Major Accounts Practice
within American International
Underwriters is focused
on giving corporations with
sales of over $500 million
broader access to the AIG
enterprise. Average products
per customer increased
from 3.63 to 4.12 in 2007—
equating to 1,866 new prod-
ucts for existing customers.
The cross-sell rate for the
top 100 accounts was
10 products per customer.

Economic liberalization,
technological advances,
capital market developments
and demographic changes
are driving forces in global
economic activity. Burgeoning
markets such as China, India,
Vietnam, Russia and Eastern
Europe, where AIG already
has a presence, will provide
long-term growth opportunities
for both commercial and
personal insurance lines as
these economies continue
to grow.
An aging global population
is placing unprecedented
demands on public pension
and healthcare services. This
demographic shift presents
great opportunities for AIG’s
Life Insurance & Retirement
Services businesses, as well
as Asset Management, to
provide products such as
supplemental medical
coverage, investment options
and retirement advice.

Around the world, the middle
class is growing and has
more disposable income for
housing, cars, life insurance,
consumer goods and travel.
This trend will continue to
increase demand for AIG’s
personal lines, travel insur-
ance, consumer lending
products and International
Lease Finance Corporation’s
modern aircraft.
Corporate responsibility for
social, environmental and
governance issues is a trend
that is accelerating, and
AIG has been proactive in
this area. We take pride
in providing solutions that
create long-term value for
our customers—such as
AIG Environmental’s
Sustain-a-BuildSM
Initiative,
which provides policyholders
with premium discounts
for properties certified under
the U.S. Green Building
Council’s Leadership in
Energy and Environmental
Design (LEED®) Green
Building Rating SystemTM
.
Increases in severe risks
continue to be a challenge for
all global businesses. At AIG,
our underwriting experience
and expertise enable us to
respond to potentially devas-
tating exposures our cus-
tomers face. For example,
in 2007 we formed AIG
Homeland Security SolutionsSM
to provide businesses with
access to insurance and risk
management products related
to terrorism incidents and
other catastrophic events.
WE SEE GROWING DEMAND FOR PRODUCTS AND SERVICES ARISING FROM EVOLVING ECONOMIC AND
DEMOGRAPHIC TRENDS. AIG has always been adept at staying ahead of important macro trends.
But what truly differentiates us is how we leverage our unique strengths to capitalize on
growth opportunities. AIG’s financial strength, worldwide footprint and diversified businesses
enable us to respond quickly and effectively to our customers. Fueled by our entrepreneurial
culture, the AIG franchise has an unequaled competitive advantage and growth platform.

Another rapidly emerging
market is Latin America,
where we see opportunities
for growing all of our lines
of insurance. The region’s
commercial and consumer
insurance sectors both
have high growth potential.
In Brazil, for example,
American Life Insurance
Company’s joint venture,
Unibanco AIG Seguros S.A.,
delivered strong revenue
growth in insurance, pension
and retirement products
in 2007.
Innovation and entrepreneurial
spirit are AIG hallmarks,
which we leverage to antici-
pate client needs and create
new products in developed
markets. AIG Europe (UK)
Limited, for example, identi-
fied an opportunity in the
directors and officers liability
market for smaller companies
listed on the London Stock
Exchange’s Alternative
Investment Market. Its award-
winning product has generated
significant new business and
strong broker interest.
Consumerism is gaining
ground in many Eastern
European countries. The
appetite for consumer goods
and upscale lifestyles offers
AIG more opportunities
to sell insurance products
and financial services.
For example, in Poland, AIG
Consumer Finance Group is
focused on growing its credit
card business and expanding
its branch-based system
for making personal loans.
AIG sees many opportunities
in India (pictured) from
changing lifestyles, a grow-
ing middle class with more
disposable income, a large
rural population receptive to
microinsurance and personal
insurance products, and a
fast-growing economy.
We see growth potential in
insurance, consumer finance,
real estate, asset manage-
ment, infrastructure
investments, mutual funds
and private equity.

AIG uses strategic acquisitions
to grow its business in market
segments around the world.
Through the acquisition of
WüBa, a German insurer that
serves small and midsize
enterprises via the broker
channel, we are better
positioned to cater to this
promising market with an
extensive array of products
and services.
WE SEE GROWTH OPPORTUNITIES IN EMERGING AND DEVELOPED MARKETS. As trade barriers fall
and more countries open their markets, AIG sees growth opportunities around the
world for its full range of products and services. The demand for insurance, retirement
services, consumer ﬁnance, private banking and asset management offerings is growing
in tandem with the emerging markets of Asia, Latin America, Eastern Europe and the
Middle East. In developed markets, AIG continues expanding with new and enhanced
products for consumers and businesses of all sizes, and with strategic acquisitions and
new lines of business.

The Manchester United spon-
sorship has brought significant
visibility to AIG’s businesses
around the world, particularly
in Asia, where the club counts
83 million fans. Capitalizing
on this unique opportunity
to reach a mass audience,
AIG companies executed
more than 250 campaigns
in 71 countries during the
sponsorship’s first year—
increasing excitement and
recognition of the AIG brand
among customers, producers
and employees.
For the first time, AIG made
BusinessWeek’s annual list of
the top 100 global brands in
2007, ranking 47th overall
and first among insurance
companies, with an estimated
$7.5 billion brand value.
AIG also ranked 30th on the
Barron’s 2007 survey of
“The World’s Most Respected
Companies,”again placing first
among insurance companies.
WE SEE THE VALUE OF A UNIFIED GLOBAL BRAND. 2007 was a landmark year for the AIG
brand, with the Manchester United Football Club sponsorship helping drive global
awareness and recognition to unprecedented levels. As more customers around the world
are exposed to the AIG brand, an opportunity exists to reinforce the consistency of our
identity and messages across global markets. Doing so not only generates significant
operational efficiencies and more effective selling throughout the organization, but also
creates an invaluable platform for more meaningful, extensive and lasting relationships
with our customers.

AIG enhanced its online
presence with the launch of
a new version of AIG.com,
which enables U.S.commer-
cial clients and brokers to
quickly access information
and conduct business from a
single website. The launch
marked the ﬁrst step in
globalizing AIG.com with a
consistent brand message
that reﬂects the breadth
and strength of our member
companies’ products around
the world.
A number of business units
in international markets also
underwent brand changes
to harness AIG’s worldwide
brand recognition. In Australia
and New Zealand, AIG’s
life businesses changed their
name from AIA to AIG Life.
In the United Kingdom,
ALICO introduced two new
brands—AIG Life and AIG
Life Wealth Management.
And in Taiwan, AIU is now
known as AIG General
Insurance (Taiwan) Co., Ltd.
To grow the strength of
the AIG global brand and more
clearly convey the products
and services they offer,
several U.S. business units
changed their names last
year. For example, National
Union was re-branded as AIG
Executive Liability, and
AIG Global Investment Group
as AIG Investments.

AIG demonstrated its commit-
ment to the environment
when it became the first
insurance organization
to join the U.S. Climate
Action Partnership last year.
This organization advocates
mandatory greenhouse gas
(GHG) emissions limits in
the United States. AIG also
formed a dedicated alternative
energy practice, as well as
an eco-practice focused on
climate change risks. And AIG
announced plans to fund
agricultural projects in China
to generate 310,000 metric
tons of carbon offset credits,
representing about half the
GHG emissions attributable
to our global operations.
Reflecting AIG’s core value
of entrepreneurship and
legacy as a microinsurance
pioneer, we continue to
help the world’s working
poor build businesses.
AIG member companies have
developed microinsurance
markets in Africa, India,
Latin America and Southeast
Asia—benefitting more than
2.5 million clients in 12
countries (pictured, owner of
a weaving business in Peru
and her family).
AIG’s goal is to make a differ-
ence with our philanthropic
contributions in partnership
with organizations that
promote entrepreneurship,
innovation, diversity and
empowerment around the
world. In 2007, AIG provided
significant support to
charitable organizations
that address the needs of
the communities where we
do business—empowering
women, promoting innovative
education programs and
providing opportunities for
diverse populations.
WE SEE THE CHANCE TO MAKE THE WORLD A MORE PROSPEROUS AND LIVABLE PLACE. One of the
main points in AIG’s Vision is to contribute to the growth of sustainable, prosperous
communities. We believe that corporate responsibility is essential to our long-term objective
of creating value for our shareholders and serving the interests of our clients. In 2007,
AIG took important steps to incorporate social, environmental and governance concerns
into our underwriting, risk management and investment decision making. We also grew
our philanthropic programs at both the corporate and local levels, leveraging our global
reach and relationships with partners in the community.

Since 2003, the AIG Disaster
Relief Fund (DRF)—funded by
donations from AIG and its
employees—has contributed
over $10 million to emer-
gency relief organizations.
In 2007, the DRF supported
rebuilding and reconstruction
efforts after the earthquake
in Peru, and responded to
the wildﬁres that burned
through southern California.
AIG also supports disaster
preparedness organizations
that focus on planned
and coordinated responses
to disasters.
AIG’s commitment to diversity
encompasses support for
historically disadvantaged
ethnic groups and women
around the world. AIG is also
recognized for reaching out
to people with disabilities.
In 2007, New York City Mayor
Michael R. Bloomberg
recognized AIG with the ADA
(Americans with Disabilities
Act) Employment Award for
its disability initiatives.

P E O P L E Our dedicated
people are the cornerstone of
AIG’s competitive advantage.
We have a unique global
franchise with a diversity
of cultures, languages, back-
grounds and experiences.
Valuing people means devel-
oping the talents and capa-
bilities of each individual;
recognizing and rewarding
excellence; and encouraging
and rewarding teamwork.
P E R F O R M A N C E We are
accountable for building
and preserving AIG’s ﬁnancial
strength. AIG’s franchise
has remarkable reach,
relationships and resources.
Our global footprint, diverse
distribution model, extensive
product range and ﬁnancial
strength make AIG uniquely
suited to serve customers
and communities around
the world.
C U S T O M E R F O C U S
Focusing on AIG’s 74 million
customers worldwide begins
with anticipating their
priorities—not only satisfying
current needs, but looking to
future needs and doing it
better than our competitors.
We strive to exceed our cus-
tomers’ expectations by deliv-
ering high-quality products
and services at a better value.

R E S P E C T Respect encom-
passes how we interact with
colleagues—seeing and
valuing each other as diverse
individuals. Our respect
transcends national borders
and is reflected in the
ways we honor the people,
history and culture of local
communities. Collaboration,
so critical in an organization
of our size and scope, is built
upon respect.
I N T E G R I T Y Integrity
means conducting every
aspect of AIG’s business with
honesty—meeting our com-
mitments to our customers,
colleagues, business partners
and shareholders. Our empha-
sis on improving compliance
demonstrates our dedication
to integrity and enhances
our reputation for strong
corporate governance. Integrity
is not only a core belief,
but a competitive necessity
in today’s marketplace.
E N T R E P R E N E U R S H I P
Entrepreneurship speaks to
AIG’s ability to capitalize on
unmet customer needs. AIG
has a long history of respon-
sible risk taking, innovation
and creative problem solving.
Entrepreneurship entails
championing new initiatives
with energy and urgency,
and recognizing the power
that can be unleashed if each
employee acts every day as
an owner of the firm.
WE SEE A CLEAR COURSE TOWARD BECOMING THE WORLD’S FIRST-CHOICE PROVIDER OF INSURANCE
AND FINANCIAL SERVICES. Around the globe—in locations as diverse as Hong Kong (pictured),
Stockholm, Los Angeles—AIG businesses and colleagues share a Vision and a set of
core Values that play a fundamental role in our company’s global growth and success.
Both distinctive and inclusive, the AIG Vision is: To be the world’s first-choice provider
of insurance and financial services. We will create unmatched value for our customers,
colleagues, business partners and shareholders as we contribute to the growth of sustainable,
prosperous communities. Our core Values are: People. Customer Focus. Performance.
Integrity. Respect. Entrepreneurship.

A I G A T A G L A N C E
United Guaranty Corporation
United Guaranty Corporation subsidiaries provide
residential mortgage guaranty insurance for first-
and second-lien mortgages, private education loan
default insurance, and other financial services to
financial institutions and mortgage investors.
Transatlantic Holdings, Inc.
Transatlantic Holdings, Inc. (TRH), is a majority-
owned subsidiary of AIG. TRH’s subsidiaries offer
reinsurance capacity on both a treaty and faculta-
tive basis worldwide—structuring programs for
a full range of property and casualty products,
with an emphasis on specialty risks.
Foreign General Insurance Group
The Foreign General Insurance Group comprises
AIG’s international property-casualty operations.
s American International Underwriters (AIU) is the
marketing unit for AIG’s overseas property-casualty
operations and the most extensive foreign network
of any insurance organization. Stretching across
Asia and the Pacific to Latin America, Europe,
Africa and the Middle East, AIU markets a full
range of property-casualty products to both
commercial and consumer clients.
s AIU Accident & Health Division is a leading
provider of accident, supplemental health and
travel insurance to international businesses
and consumers.
s AIU Commercial Lines Division is a market
leader in financial lines in Europe, surpassing
one billion dollars in premiums.
s AIU Personal Lines Division operates globally
to provide automobile, personal property
and extended warranty coverages. It also provides
products and services for the high-net-worth
segment, institutional and individual clients.
The General Insurance segment also includes
AIG Global Marine and Energy which serves the
global insurance, risk management and loss control
needs of marine and energy clients, including
renewable operations such as biofuel, hydroelectric,
geothermal, solar and wind.
Domestic Brokerage Group
The principal units of the Domestic Brokerage
Group (DBG) provide a wide range of commercial
and industrial coverages.
s AIG Executive Liability is the leading provider
of directors and officers, and employment
practices liability, and a premier underwriter of
professional liability, fidelity coverage, network
security insurance and fiduciary coverages.
Its products were previously marketed under
the National Union Fire Insurance Company
of Pittsburgh, Pa., brand.
s Lexington Insurance Company is the leading
U.S.-based excess and surplus lines carrier,
specializing in property, casualty, healthcare
and program risks.
s AIG Excess Casualty is the leading provider
of commercial umbrella and excess casualty
liability insurance.
s AIG Specialty Workers’ Compensation®
is a
market-leading workers’ compensation insurer
for small and midsize businesses.
s AIG Risk Management®
provides casualty risk
management products and services to large
commercial customers.
s AIG Environmental is the largest U.S. provider
of environmental liability coverages and services.
s AIG Worldsource provides global insurance
programs for U.S.- and Canadian-based
multinationals, as well as foreign companies with
operations in the United States and Canada.
s DBG also includes many specialty business units
that draw on the worldwide resources of AIG
companies to meet client needs in the aviation,
transportation and construction industries,
the small business sector and the accident and
health arena, as well as engineering services
through AIG Consultants, Inc.
s HSB Group, Inc., the parent company of The
Hartford Steam Boiler Inspection and Insurance
Company, HSB Engineering Insurance Limited,
and The Boiler Inspection and Insurance
Company of Canada, is a leading worldwide
provider of equipment breakdown and engineered
lines insurance.
Domestic Personal Lines
AIG’s growing Domestic Personal Lines opera-
tions provide automobile insurance through
aigdirect.com and AIG Agency AutoSM
, and offer
a broad range of coverages for high-net-worth
individuals through AIG Private Client Group.
AIG is among the top 10 writers of automobile
insurance, with historical growth rates exceeding
industry averages.
The businesses in AIG’s Financial Services Group
are leaders in the markets they serve.
s International Lease Finance Corporation (ILFC)
is AIG’s aircraft leasing business. With a fleet
of more than 900 planes, ILFC is a market leader
in the leasing and remarketing of new advanced
technology commercial jet aircraft worldwide.
ILFC is the largest single customer to date for
the new Boeing 787Dreamliner.
s Capital Markets operations are conducted through
AIG Financial Products Corp., which engages in
transactions, as principal, to provide clients with
risk management solutions and sophisticated
hedging and investment products in standard and
customized transactions involving commodities,
credit, currencies, energy, equities and rates.
Clients include top-tier corporations, financial
institutions, governments, agencies, institutional
investors and high-net-worth individuals
throughout the world.
s AIG’s consumer finance business consists of
American General Finance, Inc.(AGF) and AIG
Consumer Finance Group, Inc.(CFG). AGF is one
of the largest consumer finance organizations in the
United States, with a branch network in 45 states,
Puerto Rico and the U.S. Virgin Islands. AGF’s
primary market is in the United States, but it
continues to explore opportunities in interna-
tional markets. CFG, through its subsidiaries,
offers a broad range of consumer finance products,
primarily in emerging markets. As these markets
continue to attract investment, CFG’s businesses
have significant potential to expand operations
in developing countries around the world and
provide consumers with more products.
s Imperial A.I. Credit Companies, Inc., is the
largest insurance premium finance provider in
the United States.
General Insurance
AIG’s General Insurance operations include the largest U.S. underwriters of commercial
and industrial insurance, the most extensive international property-casualty network,
a personal lines business with an emphasis on auto insurance and high-net-worth clients,
a mortgage guaranty insurance operation and a leading international reinsurer. AIG’s
leadership is a result of its underwriting skill, innovative insurance solutions, financial
strength, superior service and responsive claims handling. The AIG claims operation
gives clients access to a vast worldwide network of dedicated experts and top legal firms.
Financial Services
AIG’s Financial Services businesses
specialize in aircraft and equipment leasing,
capital markets, consumer finance and
insurance premium finance.These busi-
nesses complement AIG’s core insurance
operations and achieve a competitive
advantage by capitalizing on opportunities
throughout AIG’s global network.

Foreign Life Insurance & Retirement Services
AIG’s Foreign Life Insurance & Retirement
Services operations are conducted principally
through the following market-leading companies:
s American International Assurance Company,
Limited (AIA), is AIG’s flagship life insurance
company for Southeast Asia and the leading life
insurer in the region. Its extensive network of
branches, subsidiaries and affiliates spans Australia,
Brunei, China, Guam, Hong Kong, India,
Indonesia, Macau, Malaysia, New Zealand,
Singapore, South Korea, Thailand and Vietnam.
s American Life Insurance Company (ALICO)
is among the largest international life insurance
companies in the world, with operations in more
than 50 countries. ALICO’s operations stretch
from Japan to Europe, the Middle East, Latin
America, South Asia and the Caribbean.
s AIG Star Life Insurance Co., Ltd., and AIG
Edison Life Insurance Company contribute to
AIG’s growing life insurance presence in Japan
through the sale of life, accident and health,
and retirement services products via agents,
brokers and bank partners.
s Nan Shan Life Insurance Company, Ltd., is
Taiwan’s second-largest life insurer in terms of
total premium.
s The Philippine American Life and General
Insurance Company (Philamlife) is the largest
and most profitable life insurance company in
the Philippines.
Domestic Life Insurance & Retirement Services
In the United States, AIG’s Domestic Life
Insurance & Retirement Services businesses offer
a comprehensive range of life insurance, annuity,
and accident and health products for financial
planning, estate planning and wealth transfer.
They use a full complement of distribution
channels, including banks, national and regional
brokerage firms, independent financial planning
firms, independent and national marketing
organizations, brokerage general agencies,
independent insurance producers and general
agents, and worksite specialists. The principal
operations include the following:
s AIG American General, one of the largest life
insurance organizations in the United States,
distributes a broad range of life insurance, annuity,
and accident and health products.
s AIG Annuity Insurance Company is the largest
issuer of fixed annuities in the United States
and the leading provider of annuities sold
through banks.
s AIG Retirement (formerly branded as AIG VALIC)
is the nation’s leading provider of group retirement
plans to K-12 education and the third largest to
healthcare and higher education institutions.
s AIG SunAmerica Retirement Markets is one
of the nation’s leading distributors of individual
variable annuities and income solutions.
Revenues by Major Business Segment*
General
Insurance
Life Insurance
& Retirement
Services
Financial
Services
Asset
Management
49.2
51.7
(1.3)
5.6
53.6
50.9
7.8
4.5
2006
2007
* Includes net realized capital gains (losses).
The businesses in AIG’s Asset Management
Group leverage AIG’s deep knowledge of markets
around the world and expertise in a wide range
of asset classes.
s AIG Investments manages equities, fixed income,
private equity, hedge fund of funds and real
estate investments for institutional, individual
and high-net-worth investors around the world.
AIG Investments ranks among the top seven
money managers in the world by institutional
assets under management.
s AIG Private Bank Ltd., AIG’s Zurich-based private
banking subsidiary, provides personalized private
banking and structured wealth management solu-
tions, including investment advisory and asset
management products to a worldwide clientele.
s AIG SunAmerica Asset Management Corp. manages
and/or administers retail mutual funds, as well
as the underlying assets in AIG SunAmerica
and AIG Retirement variable annuities sold to
individuals and institutional groups throughout
the United States.
s The AIG Advisor Group, Inc., broker-dealers
provide financial products, technology support
and business-building programs to independent
financial advisors serving the retirement
planning needs of clients in the United States.
Serving millions of customers around the world, AIG’s growing global Life Insurance busi-
nesses make up the most extensive network of any life insurer. Strategies for enhancing
growth focus on developing new markets, expanding distribution channels and broadening
product offerings. AIG has one of the premier Retirement Services businesses in the
United States and it also has an extensive international retirement services network—both
poised to meet the asset accumulation, protection and lifetime income needs of individuals
around the world.
Asset Management
AIG’s Asset Management businesses
include institutional and individual asset
management, broker-dealer services, private
banking and spread-based investment
programs, as well as the management of
AIG insurance invested assets.

R E V I E W O F O P E R A T I O N S —
G E N E R A L I N S U R A N C E
Domestic Brokerage Group
AIG’s Domestic Brokerage Group (DBG) is the largest U.S. com-
mercial property-casualty insurance organization. DBG companies
provide commercial insurance products and services to a wide range
of entities, from multinational and middle market companies to
small entrepreneurs and nonprofit organizations. Record operating
income in 2007 reflects DBG’s steadfast commitment to disciplined
underwriting and focus on profitability.
DBG’s principal operating subsidiaries include American Home
Assurance Company, National Union Fire Insurance Company of
Pittsburgh, Pa., and Lexington Insurance Company.
Many of DBG’s operating units have been writing commercial
insurance for decades. Capitalizing on its market advantages and key
business strategies, DBG is well-positioned to capture new opportu-
nities and continue leading the U.S. commercial insurance industry.
Diversification is a bedrock DBG characteristic that is reflected
in its products, distribution network, customer base, regional struc-
ture and employees. This balanced approach helps the organization
leverage growth opportunities even in the most challenging markets,
exercise flexibility in selecting customers and business segments that
offer the greatest potential, and expand a franchise that cannot easily
be replicated.
DBG companies hold high ratings for financial strength—an
increasingly important consideration for insurance brokers and
customers in placing their business. AIG Executive Liability has
been a leading executive and professional liability underwriter for
AIG’s General Insurance operations include the largest
U.S. underwriters of commercial and industrial insurance,
the most extensive international property-casualty network,
a personal lines business with an emphasis on auto insurance
and high-net-worth clients, a mortgage guaranty insurance
operation and an international reinsurance organization.
General Insurance Financial Results
(in millions, except ratios) 2007 2006
Gross premiums written $58,798 $56,280
Net premiums written 47,067 44,866
Underwriting profit 4,500 4,657
Net investment income 6,132 5,696
Operating income before net
realized capital gains 10,632 10,353
Net realized capital gains (losses) (106) 59
Operating income 10,526 10,412
Operating income before net realized
capital gains (losses), excluding
catastrophe losses 10,908 10,353
Consolidated net reserves for losses and
loss expenses 69,288 62,630
Combined ratio 90.33 89.06
Combined ratio, excluding
catastrophe losses 89.73 89.06
AIG Environmental designed an innovative insurance product to cover the
specific risks associated with the clean up of Fort Ord, previously a U.S. Army
base in California contaminated with munitions and explosives. The compre-
hensive solution enabled the Fort Ord Reuse Authority to enter into a contract
for munitions removal, leading to multimillion-dollar mixed-use development
plans covering over 3,500 acres.

Workers’ Compensation 16.5%
General Liability/Auto Liability 15.8%
Property 14.1%
Management/Professional Liability 11.2%
Commercial Umbrella/Excess 9.7%
Programs 4.7%
A&H Products 4.2%
Multinational P&C 4.1%
Environmental 2.9%
Boiler and Machinery 2.9%
Aviation 2.1%
All Other 11.8%
Domestic Brokerage Group—
Gross Premiums Written by Line of Business
Total = $31.8 billion
more than 40 years. It benefited from its strong financial position
as over 90 percent of its largest board and corporate customers
renewed contracts in 2007.
DBG companies are consistent, longstanding lead underwriters
in most lines of business in which they participate. This provides
them with an ability to anticipate emerging risks, which is a hallmark
of AIG Excess Casualty, DBG’s market-leading commercial umbrella
insurance provider. From this leadership position, AIG Excess
Casualty can quickly recognize developing liability trends and
respond with intelligent underwriting solutions.
Perhaps no attribute defines DBG better than innovation.
In 2007, DBG companies introduced an average of one new insurance
product or service every week, including several groundbreaking
products to address global warming risks. DBG’s Lexington
Insurance Company, the leading U.S.-based excess and surplus
lines insurer, introduced Upgrade To GreenSM
Residential to help
policyholders rebuild damaged homes to green standards using
ENERGY STAR®
or equivalent energy-efficient and environmentally
friendly materials. Lexington’s accumulated expertise in specialized
industries has also served as a foundation for product innovation
and risk solutions for such key sectors as healthcare, real estate,
higher education, agriculture and construction.
AIG pioneered pollution liability insurance 27 years ago, and
AIG Environmental is leading the way today with a new breed of
environmentally friendly insurance products. Its Sustain-a-BuildSM
coverage encourages environmentally responsible construction and
building projects through premium discounts for operations that
qualify for the U.S. Green Building Council’s Leadership in Energy
and Environmental Design (LEED®
) certification program.
Sustain-a-Build joins a portfolio of AIG Environmental products
focused on pollution remediation and contaminated property clean up.
DBG’s innovations have produced an extensive portfolio of
insurance products and services. And nowhere is the significance of
this range of offerings more evident than at AIG Risk Management
(AIGRM), a provider of risk management solutions for the largest
U.S. corporations. In 2007, AIGRM expanded its integrated insur-
ance program approach, comprising primary casualty, excess workers’
compensation, surety, risk financing and captive management
programs, in concert with loss control and claims services, to serve
new industries and market segments. The result is a significant
opportunity with construction, transportation, public entity, real
estate and midsize organizations that require a comprehensive way
to manage risk.
AIG’s Deliver the Firm strategy is ingrained in every DBG unit.
AIG Worldsource, which serves the needs of U.S. and Canadian
customers overseas and foreign businesses with risks in the United
States and Canada, is no exception. The unit is the primary facilitator
for delivery of AIG PassportSM
services. AIG Passport taps AIG’s
global network to provide multinational customers with local
insurance worldwide, while offering DBG a competitive edge in
an increasingly global liability environment.
AIG’s Domestic Accident & Health Division also demonstrates
DBG’s commitment to the Deliver the Firm strategy. With more
than 40 years of experience in managing specialized accident and
health risks for consumer, commercial and affinity group customers,
the division recorded excellent premium growth in 2007, in part
because it integrated products such as accidental death and accidental
medical coverages into policies offered by other DBG operating units,
a unified solution that appeals to many customers. The unit’s
growth also reflects its success in building strong direct marketing,
travel insurance, and school and student insurance businesses.
Several thousand independent insurance brokerage firms do
business with DBG every year. Expanding these relationships is a
business imperative well exemplified by AIG Specialty Workers’
Compensation, the nation’s leading private writer of this insurance to
midsize and small businesses. The unit’s Internet-based eComp plat-
form was enhanced in 2007 to offer greater quote-to-bind capabilities
and improved service. eComp ranks among the top e-commerce sites,
quoting an average of over $4 million in new business daily.
The mission of AIG Small Business®
is to be the insurer of choice
for the more than 25 million small businesses in the United States.
Using aggregation technologies and select distribution channels,
the unit is able to provide the full range of DBG’s specialty products,
opening the door to greater opportunities in this sector.
AIG Global Marine and Energy and AIG Aviation bring
extensive experience to some of the world’s most complex commer-
cial sectors. In 2007, AIG Global Marine and Energy, which serves
customers in the United States and internationally, launched an
Alternative Energy practice to deliver insurance, engineering and
financial resources to respond to risks posed by alternative and
renewable energy technologies and climate change.The Marine unit
also teamed with AIG Private Client Group to service the recreational
marine exposures of the nation’s high-net-worth individuals.
AIG Aviation weathered challenging market conditions by focusing
on intelligent risk selection and by delivering a broad range of AIG
products to this market.

DBG’s Claims operations and loss prevention services are just as
important to customers as its underwriting acumen. DBG enhanced
its claims processes and introduced technologies in 2007 to reduce
costs and enhance the customer service experience, as highlighted
by the launch of the Catastrophe Advantage ProgramSM
(CAP).
CAP applies sophisticated hurricane modeling technology to DBG’s
proprietary database of policyholders’ insured locations to secure
critical disaster resources before a hurricane makes landfall and
before these resources are engaged by others. The result is greater
efficiency in the management of catastrophe-related claims and
delivery of an invaluable service to customers.
HSB Group, Inc. (HSB), the parent company of The Hartford
Steam Boiler Inspection and Insurance Company, had excellent
operating results in 2007 as it reported strong growth in net premi-
ums written. In addition to equipment breakdown and engineered
lines insurance, HSB provides specialty coverages and loss prevention
services that become value-added components of other insurers’
commercial and personal lines insurance products.
Including HSB’s specialty insurance coverages as an essential ele-
ment of an overall policy allows for more affordable premiums and
better integrated protections than when the coverages are purchased
as standalone policies. This business model enables HSB to offer
an appealing value proposition to many insurance providers in the
United States and international markets. HSB’s integrated global
loss prevention model includes inspecting many pressure vessels at
the point of manufacture. This and other loss prevention initiatives
play an important role in HSB’s underwriting performance and help
deliver excellent returns on capital. In 2007, HSB conducted more
than 1.6 million on-site loss prevention inspections of equipment
and property-casualty risks.
AIG’s Domestic Personal Lines—aigdirect.com, AIG Agency Auto
and AIG Private Client Group—faced challenging economic and
market conditions in 2007. Operating income declined due to losses
from the California wildfires, unfavorable loss development from
discontinued lines and AIG Agency Auto, and increased costs
related to the acquisition of the minority interest in 21st Century.
Premium growth exceeded expected industry growth once again,
with strong growth from AIG Private Client Group and growth in
aigdirect.com outpacing declines in AIG Agency Auto.
In 2007, AIG acquired the remaining shares of 21st Century that
it did not previously own. The combination of AIG Direct and 21st
Century created aigdirect.com, a new private passenger auto-
mobile insurance brand.
The combined operation also made progress on plans to integrate
its infrastructure as it consolidated customer call centers and
improved efficiencies. The combination creates the fourth-largest
direct response writer of automobile insurance in the United States.
It will also help develop a strong brand identity in the private
passenger market, while creating a low-cost, customer-focused
platform for selling a wider range of AIG products to consumers.
AIG Agency Auto remained focused on improving profitability,
with competitive products, enhanced service offerings for agents
and customers, and lower costs through operational efficiencies.
It launched eRater, a new web-based quoting system for agents
now available in 24 states. AIG Agency Auto also improved the
timeliness and accuracy of policy billing information; enhanced
the efficiency and service capabilities of customer call centers;
and introduced processes and systems to support a faster, fairer
and consistent claims experience.
AIG Private Client Group continued its leadership position
in the market for high-net-worth individuals, achieving excellent
top line growth over the previous year. The unit continues to insure
more than one-third of the Forbes 400 Richest Americans. It expanded
the reach of its Hurricane Protection Unit—modeled after its acclaimed
Wildfire Protection Unit, which protects high-value residences—
aigdirect.com 59.2%
AIG Agency Auto 22.5%
AIG Private Client Group 18.3%
Personal Lines—Gross Premiums Written
Domestic Brokerage Group—Premiums Written
2003 2004 2005 2006 2007
19.9
28.6
30.0
31.6 31.8
30.5
22.8 23.1
24.3 24.1
Gross
Premiums
Written
Net
Premiums
Written
R E V I E W O F O P E R A T I O N S — G E N E R A L I N S U R A N C E , C O N T I N U E D

to all of coastal Florida and Suffolk County, New York. AIG
Private Client Group also offered admitted group excess coverage
targeted at wealth advisors and financial services companies; intro-
duced a risk management program, called Architectural Legacy, for
owners of historic homes; and streamlined processes for policy
issuance by providing agents with an easy-to-use online system.
The reach of the Wildfire Protection Unit also expanded to more
than 150 zip codes in the country.
The group also began operations overseas as it introduced yacht
insurance in the U.K. and established an office in Australia.
United Guaranty Corporation
The performance of United Guaranty Corporation (UGC) has a
high degree of correlation to the U.S. housing industry, which expe-
rienced significant home price deterioration in most markets in 2007.
Although UGC had taken steps beginning in 2006 to stem the adverse
impact on its business by changing credit underwriting standards,
product eligibility guidelines and portfolio caps, its second-lien
insurance business had a difficult year.
Reflecting its long-term strategy to diversify income sources,
UGC added new customers and products in the domestic private
education loan business; opened a business development office in
India; obtained licenses in Korea and Mexico; and began writing
mortgage insurance in Canada.
As mortgage lenders and investors return to higher quality mort-
gage lending and standard loan instruments, UGC is well-positioned
to take advantage of opportunities when the market emerges from
its current correction.
Transatlantic Holdings, Inc.
Transatlantic Holdings, Inc., AIG’s majority-owned reinsurance
organization, reported record highs in net income and operating
cash flow in 2007 as favorable loss experience in property lines
benefited results. Premiums also increased compared to the year-ago
period, largely because of recent underwriting initiatives in the
United States and overseas, and the strength of major foreign
currencies against the dollar.
Transatlantic’s long-term success is built on its financial strength,
global reach through a network of offices spanning six continents
and its enterprising group of reinsurance professionals worldwide.
To address the challenge of market pricing weakness in many regions
and lines of business,Transatlantic continues to focus on underwriting
discipline and is capitalizing on opportunities in less-saturated areas
in the global reinsurance marketplace.
AIG’s Foreign General Insurance business achieved growth in
commercial and consumer lines, driven by business from both
established and new distribution channels. Net premiums written
rose 14 percent to $13.05 billion.
AIG’s Foreign General and its marketing unit, American
International Underwriters (AIU), have a broad geographic scope
and portfolio mix, as well as a seasoned management team, to
serve clients in more than 80 countries around the world. In 2007,
AIU continued its strategy of expansion into the world’s most
promising emerging markets, while deepening its footprint in the
developed markets of Japan, continental Europe and the U.K./Ireland.
Its multidistribution strategy targeted commercial and consumer
In the summer of 2007, widespread flooding throughout the United Kingdom
resulted in nearly £3 billion in industry-wide insurance claims. Following the
floods, emergency response claims teams from AIG Europe (UK) Limited visited
affected policyholders within days to assess damage and expedite payments.

clients in markets worldwide through brokers, agents, direct marketing,
associations, bancassurance and other alternative channels.
For its commercial business, AIU strategically deployed dedicated
management teams to meet the needs of clients in all three core
segments—major, corporate and small-to-medium enterprises—
and to grow its business more efficiently.
On the consumer side, AIU expanded production in accident
and health by focusing on a “direct” customer relationship through
controlled business channels, and continued to deploy high-profit
personal lines products, such as personal property and warranty,
and other specialty personal products.
In Japan, AIU Insurance Company successfully continued to
penetrate the large commercial market in 2007. At year end, 203 of
the 500 largest Japanese companies were among its clients.
In China, AIU Insurance Company received approval from the
China Insurance Regulatory Commission to establish a foreign
enterprise. The new subsidiary, AIG General Insurance Company
China Limited, positions AIG to meet increasing demand, expand
general insurance capabilities, achieve operational and capital
efficiencies, and, with regulatory approval, secure a platform to
establish new branches in the country over time.
In 2007, the commercial lines division achieved steady growth
in China, despite severe competition and continuing rate erosion across
many of its businesses. Its liability line ranked first in the Shanghai
market among all insurers—domestic and foreign—in premium
production. The accident and health division, operational since 2004,
registered strong growth in 2007 and is the number one insurer
among domestic and foreign carriers in the Shanghai market.
In 2007, AIG’s joint venture in India, Tata AIG General
Insurance Company Limited, had good premium growth and loss
ratios below the industry average. The joint venture has developed
a number of innovative products with growth potential, including
cattle insurance in rural areas. It has also partnered with Spice Jet,
a local airline, to sell insurance to its passengers, becoming the first
private-sector company in India to forge such an agreement with
a domestic carrier.
AIU’s strong presence in Southeast Asia continued to grow in 2007.
AIG General Insurance (Vietnam) Company Limited introduced
its e-Marine service, a real-time, online certification system that
offers customers a simple and flexible way to declare shipments and
generate insurance policies. The first service of its kind in Vietnam,
e-Marine is now available to customers in Southeast Asia.
The acquisition of Central Insurance inTaiwan has enabled AIG
companies to become one of the largest general insurance businesses
with an extensive distribution network in the country. For the second
consecutive year, American Home Assurance Company Singapore
won the “Innovation of the Year” award at the Asia Industry Awards
for innovative payment methods and claims management processes
executed as part of its public housing fire insurance strategy.
In Australia, AIG celebrated 50 years of operation. In 2007,
AIG Australia entered the high-net-worth personal lines insurance
business with the establishment of the Australian arm of AIG’s
Private Client Group and registered good premium growth in
other lines of business, while riding out a soft market cycle.
In continental Europe, AIG acquired the German insurer
Württembergische und Badische Versicherungs-AG (WüBa) and
its subsidiaries to bolster its small and midsize company portfolio.
Executing on the Deliver the Firm initiative, AIG Europe Germany
assisted AIG Vie France (ALICO S.A.) with the launch of a new
branch, AIG Leben, which will offer life, and accident and health
products targeted to the mass consumer segment.
In 2007, in response to the European Union’s Environmental
Liability Directive, AIG Europe introduced Enviropro, an innovative
product which covers biodiversity damage in the region. AIG
Europe’s financial lines business reached the milestone of $1 billion
Property/Energy/Marine 24.3%
Accident and Health 18.4%
Specialty Lines 16.2%
Personal Lines 15.9%
Casualty 11.9%
Lloyd’s 5.7%
Aviation 3.0%
Other/Service Business 4.6%
Foreign General Insurance—
Gross Premiums Written by Division
R E V I E W O F O P E R A T I O N S — G E N E R A L I N S U R A N C E , C O N T I N U E D

in gross premiums written. It launched a “Blue Ocean” initiative,
focused on creating uncontested market space and capturing new
demand, to grow its business by developing new markets and
delivering new products.
Despite softening rates and intense competition in 2007, the
general insurance operations in the U.K./Ireland region delivered
good production growth. In 2007, AIG Europe (UK) Limited was
selected “Underwriter of the Year”at the British Insurance Awards
for its innovative and profitable strategies in directors and officers
liability coverage for companies trading on the London Stock
Exchange’s Alternative Investment Market. The acquisition of Direct
Travel Insurance Services Limited in 2007 will further complement
AIG’s accident and health insurance business in this region.
In Central Europe and the Commonwealth of Independent States,
AIU continued its steady growth in property, casualty and consumer
lines. It also introduced a directors and officers product for corporate
customers in key countries. In 2007, accident and health distribu-
tion channels were expanded, using innovative forms of delivery to
meet the growing market demand for insurance through corporate
sponsors, employers and airlines.
In the Middle East, Mediterranean and South Asia region,
AIG MEMSA Insurance Company Limited continued to grow by
launching a new operation in Oman and opened a new branch in
Qatar. AIG Travel achieved strong premium growth through partner-
ship relationships throughout the Middle East. AIG Greece recorded
strong premium growth, which was significantly higher than the
market average. It continued to grow its personal lines, small business
and financial lines businesses, while developing a new market in
specialized products, such as crisis management and environmental
insurance. AIG Sigorta A.S. in Turkey sharpened its market segmen-
tation strategy, focused on product innovation and customer service,
and further solidified its leadership positions in accident and health,
financial lines, liability and marine cargo insurance.
During 2007, AIG companies in Africa continued to grow their
business. AIG Kenya Insurance Company Limited, one of the
largest general insurance businesses in the country, received permis-
sion from the country’s insurance regulator to write microfinance
institutions (MFI) business. It actively focused on enrolling MFIs
and launched the Small Business Solutions insurance package
for small and midsize enterprises. AIG South Africa Limited grew
its business of insuring small and medium enterprises.
Executing its strategy of writing businesses that offer the greatest
growth potential and highest profit margins, AIU Latin America
Division (AIU LAD) had strong premium growth over the prior
year. The division’s strategic focus is on personal accident, warranty,
personal property and financial lines products. With more than
15 million clients, AIU LAD is one of the leading multinational
insurers in the region. While registering double-digit growth in
several commercial lines of business, the division also expanded
its consumer lines by diversifying product offerings, accelerating
automation and expanding distribution channels into bancassurance,
retail and direct marketing. In Brazil, Unibanco AIG Seguros S.A.
earned several accolades for market leadership, including
“The Insurance Company of the Year” award from a leading insur-
ance publication, Mercado de Seguros.
Foreign General Insurance—Premiums Written
2003 2004 2005 2006 2007
7.6
12.3
15.6
17.5
19.8
14.5
9.1
10.0
11.4
13.1
Gross
Premiums
Written
Net
Premiums
Written

L I F E I N S U R A N C E & R E T I R E M E N T S E R V I C E S
customers. Moreover, AIA has continued to diversify—from selling
traditional insurance products to nontraditional ones, such as
universal life, structured and investment linked products—in response
to the needs of customers.
In Vietnam, AIG and the Bank of Investment and Development
of Vietnam, the country’s leading state-owned commercial bank,
signed a memorandum of understanding to expand business coop-
eration and develop long-term initiatives in banking, insurance and
financial services in this important emerging market. AIA Vietnam
also launched its first universal life product, which has quickly
contributed about 25 percent of its new business.
AIA Thailand grew its network of agents to more than 76,000,
which is the largest in the country and a substantial generator of
new business. AIA Thailand has been actively expanding up country
to develop attractive business opportunities in that relatively
untapped region.
To provide specialized training to agents and enhance the quality
of customer service, AIA Singapore opened the AIA Financial
Health Check Academy. In support of AIG’s Manchester United
sponsorship, AIA Singapore issued the world’s first “First Day”
Commemorative Stamp cover validated by Singapore Post Limited.
AIA Malaysia was the first insurer in the country to launch a
comprehensive medical plan to cover policyholders up to age 100
and the first in the local industry to launch a needs-based selling
concept, called Financial Health Check.
In 2007, AIG Life Korea continued to hold the number one
position in fixed annuity products sold through banks—marking the
fourth consecutive year it has achieved this distinction. AIG Life Korea
also launched its first-ever variable annuity product.
The two life companies in Indonesia—AIA and AIG Life—consoli-
dated their business processing, back-office and customer service func-
tions for employee benefits under a single umbrella to bring greater
operational synergies and economies of scale. Successfully leveraging
AIG’s Manchester United sponsorship, AIG Life Indonesia imple-
mented a recruitment drive for new agents and expanded the bancas-
surance channel through the branch network of Bank Central Asia.
AIA Hong Kong focused on serving the growing affluent
segment for wealth management products and financial services
by complementing the agency force with wealth management
elites (WMEs), financial advisors who provide investment advice
and services. In 2007, selected WMEs participated in the Investment
Advisor project jointly conducted by AIA and AIG Wealth
Management Services. AIA also achieved the record of being the
first insurer in Hong Kong to have more than 1,000 agents qualify
for the Million Dollar Round Table, an international association
of life insurance and financial services professionals.
AIA China celebrated the 15th anniversary of its return to China
in 2007, when AIG was the first foreign insurance company to estab-
lish operations in Shanghai in 1992. In 2007, AIA China reached the
milestone of 30,000 agents, the largest agency force among foreign
life insurance companies in the country. It established 29 new sales and
service centers for a total of 104 centers in 19 cities in the country.
The underlying performance of AIG’s Life Insurance & Retirement
Services businesses provided further evidence that the continued
focus on multiple distribution initiatives to capitalize on its broad
product portfolio is gaining traction. Operating income growth in
this segment, however, was affected by unusual items in 2007 and
2006, as well as by market volatility.
For 76 years, American International Assurance Company,
Limited (AIA), has served the life insurance market in Asia,
and is a household name and a leading provider of insurance and
financial services. Its reputation and track record are second to
none, earning numerous industry accolades in 2007, ranging from
consumer confidence to service excellence, and from management
excellence to outstanding contributions to economic development.
In 2007, AIA forged significant strategic alliances to diversify
and grow its distribution capabilities, while at the same time
enhancing the agency channel, its core distribution franchise.
AIA has leveraged AIG’s Manchester United Football Club spon-
sorship to deepen the brand affinity with existing and prospective
Serving millions of customers around the world, AIG’s
growing global Life Insurance & Retirement Services busi-
nesses constitute the industry’s most extensive network.
Life Insurance & Retirement Services Financial Results
(in millions) 2007 2006
Premiums, deposits and other
considerations(a) $92,730 $81,007
Premiums and other considerations 33,627 30,766
Operating income before net
realized capital gains (losses) 10,584 10,033
Net realized capital gains (losses) (2,398) 88
Operating income 8,186 10,121
(a) Represents aggregate business activity during the respective periods presented on
a non-GAAP basis.
Life Insurance 56.0%
Individual Variable Annuities 20.4%
Personal Accident and Health 9.2%
Individual Fixed Annuities 7.9%
Group Life/Health 6.5%
Foreign Life Insurance & Retirement Services—Premiums,
Deposits and Other Considerations by Major Product

It grew new business premiums from bancassurance by 88 percent
year-on-year and set up a unit to advance banking relationships across
China through strategic partnerships. AIA China also worked with
Alibaba Group, China’s largest e-commerce provider, to jointly develop
insurance distribution through the e-business channel. It introduced
several new products and also launched new investment funds on its
investment linked products to provide more choices to customers
and better meet their needs.
India’s booming economy provided our joint venture Tata
AIG Life Insurance Company Limited with a strong platform for
continued expansion. During 2007, Tata AIG Life launched four
new products, including unit-linked and group retirement products.
The launch of a new advertising campaign helped extend brand
recognition for all AIG businesses in the country.
In 2007, AIA operations in both Australia and New Zealand
continued to diversify their distribution channels, expanding the
reach of the independent financial advisor, agency and institutional
business-to-business channels. AIA operations were re-branded
as AIG Life in both Australia and New Zealand to leverage the
AIG brand.
Operating in more than 50 countries that span from Japan
through Europe, the Middle East, South Asia, Latin America and
the Caribbean, American Life Insurance Company (ALICO) has
been a consistent contributor to the success of AIG Life Insurance &
Retirement Services. ALICO’s businesses offer traditional life,
accident and health, group employer and employee insurance for
large and small organizations, pensions and annuities.
In 2007, ALICO reported record growth in premiums, deposits
and other considerations. These results were achieved by introducing
new products through its distribution channels, especially from
direct agency sales, brokers, independent financial advisors and
group sales. It also continued to invest in existing agents, and built
additional agency and specialist sales forces.
ALICO’s largest country operation is in Japan, where it markets an
array of life, medical and annuity products through multiple distri-
bution channels, including independent and career agents, direct
marketing and banks. Despite challenging market conditions, ALICO
Japan reaffirmed its position as a leading life insurer, being the fifth
largest in total premium and sixth largest in total assets. With deregu-
lation in late 2007 permitting the sale of all life and medical insurance
products through bancassurance, Japan’s four largest banking groups
selected ALICO Japan’s products for sale to their customers.
ALICO’s Central and Eastern Europe operations had an excellent
year as Bulgaria, Cyprus, the Czech Republic, Hungary, Poland,
Romania, Slovakia, Ukraine and Russia all reported double-digit
revenue and operating income growth. Operations in most of the
countries in the region also increased their market share. ALICO’s
bancassurance company in Bulgaria, formed through a joint venture
with the National Bank of Greece, completed its first full year
of operations. ALICO also entered new business ventures in this
region, which included a private pension company in Romania.
In continental Western Europe, ALICO achieved record premium
and profit growth. This was achieved by direct life insurance sales via
sponsoring partners, direct sales to the public, credit life and growth
in the broker distribution channels. ALICO opened a new branch
in Germany to sell various life, and accident and sickness protec-
tion products. The U.K./Ireland region achieved strong growth in
premiums, deposits and other considerations. ALICO also continued
to focus on the region’s ultra-high-net-worth market and collaborated
with its partners to cross sell AIG’s broad range of products.
In December 2007, ALICO became the first life insurance company in Qatar to
receive an expanded license to operate a retail life business, having already
obtained a wholesale life insurance license (pictured, Qatar Financial Centre).

Celebrating its 60th year in 2007, The Philippine American Life
and General Insurance Company (Philamlife) continued its tradi-
tion of industry leadership, innovation and dedication to improving
the lives of Filipinos. Philamlife—the largest life insurance company
in the Philippines—was once again named a Platinum Trusted Brand
by Reader’s Digest Asia, making it the only financial institution in the
nation to receive this award for four consecutive years. Philamlife also
became the first company in the world to win the Life Office
Management Association’s Excellence in Education Award 13 times.
In 2007, Philamlife registered excellent new business growth.
The distribution reach of Philamlife for its products remains
unmatched in the country’s life insurance industry. Its network of
7,000 agents is the largest in the country. In addition, the company
focused on alternative distribution channels, including bancassur-
ance, telemarketing and direct marketing.
AIG International Retirement Services (AIGIRS) is committed
to leveraging AIG companies’ presence in local markets worldwide to
build a global retirement services business.
In Asia, an aging population and the concern of individuals
about the adequacy of corporate and government pensions to fund
retirements are driving the need for retirement savings, investment
and income-generating products. AIGIRS introduced an innovative
lifetime guaranteed minimum withdrawal benefit variable annuity
product in Japan and AIG’s first variable annuity product in Korea.
In Europe, AIGIRS benefited from strong sales of its fixed and
variable annuity products in key growth regions.
Operating through AIG’s various foreign life companies and
partners around the globe, the AIG Group Management Division
(GMD) provides group employee benefits, credit insurance, and
pension products and services to corporate customers in more than
80 countries. In 2007, each of GMD’s three core businesses had
strong premium growth. GMD also focused on high-growth new and
As America’s 79 million baby boomers approach retirement, they are creating
a dynamic market for financial services. AIG’s newest national advertising cam-
paign highlights its leadership position in retirement services. The campaign’s
central message resonates among consumers and financial advisors who serve
them: Americans are living longer, healthier lives and are seeking innovative
products and income solutions to ensure that they never outlive their money.
2003 2004 2005 2006 2007
30.0
17.9
23.1 24.2 26.6
22.0
45.2
51.1
56.4
67.5
(a) Represents aggregate business activity presented on a non-GAAP basis.
(b) Includes GAAP premiums and other Life Insurance revenue.
Premiums, Deposits
and Other
Considerations
Premiums and Other
Considerations
(a)
(b)
ALICO Middle East, headquartered in Dubai, continued to
enjoy steady premium and profit growth. It benefited from strong
local presence in the region’s 14 countries and a multiproduct,
multidistribution channel that includes agents, brokers, bancassur-
ance and direct marketing partners.
ALICO’s joint venture in Brazil, Unibanco AIG Seguros S.A.,
recorded strong, double-digit revenue growth. This was achieved
through continuing improvements to products with a focus on
mortality and health insurance, pension and retirement; more cross-
selling; and an expansion of the direct marketing channel.
In 2007, AIG Edison Life Insurance and AIG Star Life
Insurance in Japan made good progress toward completing the
integration of their operations, including moving their respective
headquarters to a single location in Tokyo. They continue to be on
track to emerge in 2009 as a single entity to be known as AIG Life.
This project is a growth strategy designed to merge two mid-tier
insurance companies into a bigger and stronger company that will
be better positioned to compete more effectively in the increasingly
competitive Japanese life insurance market.
Nan Shan Life Insurance Company, Ltd., in Taiwan has
earned the “Quadruple Crown Award” from Risk Management,
Insurance & Finance magazine for the “Most Renowned Company,”
“Best Insurance Company,” “Best Claim Service” and “Insurance
Company with the Best Agents.” It is the only insurance company
ever to win this award. Nan Shan has now won the “Best Agents”
award for 15 years in a row. In 2007, Nan Shan continued to achieve
success with the shift from traditional life to investment linked
product sales, which grew substantially over the prior year. Also in
2007, Nan Shan became the first insurance company to receive
permission from the Taiwan Financial Supervisory Commission
to enter the wealth management business. It also signed a strategic
partnership with SinoPac Holdings, a leading Taiwan-based
financial holding company providing banking and other financial
services with branch/representative offices in China, Southeast
Asia and the United States, to focus on retirement services and
asset management.
R E V I E W O F O P E R A T I O N S — L I F E I N S U R A N C E & R E T I R E M E N T S E R V I C E S , C O N T I N U E D

emerging markets for its services, including group employee benefits
in China, credit life in Poland and the Middle East, and pension
products through a new venture in Romania.
AIG’s Domestic Life Insurance & Retirement Services companies
maintained leadership positions in 2007 despite challenging condi-
tions in some markets. Life insurance, payout annuity and variable
annuity products delivered solid performances while fixed annuities
continued to face a difficult interest rate environment. These busi-
nesses are positioned extremely well to benefit from increasing
demand for products that serve the protection, accumulation and
income distribution needs of a growing customer base.
With more than 80 years of experience, AIG American General
is a leader among life insurance providers in the United States, with
a track record of delivering innovative solutions to meet emerging
consumer needs. The leading issuer of life insurance, as measured
by policy face value, it also ranks among the leaders in term life,
universal life, structured settlements and single premium immediate
annuity products.
In 2007, AIG American General introduced more than 25 new
or revised products and riders to meet the needs of both agents and
consumers. New or revised products contributed 88 percent of
individual life sales through independent distributors in 2006-2007.
It increased the competitiveness of its employer and association
benefit products by introducing five new group worksite and four
new dental products, and by establishing a relationship with the
Lance Armstrong Foundation to offer supplemental health insurance
products under the LIVESTRONGTM
brand. AIG American General
also acquired Matrix Direct, Inc., to expand its distribution of term
life products directly to the consumer marketplace.
AIG American General continued to emphasize operational
excellence and superior customer service as competitive advantages
in 2007. To improve the customer experience, AIG American General
implemented systems to capture and respond to customer feedback
at various “touch points” across the organization. In addition, it made
significant enhancements to the websites that support its agents,
making it easier for them to do business with AIG American General.
DALBAR Inc.’s WebMonitor recognized these improvements when
it ranked AIG American General’s independent agent website
among its top eight “Excellent” websites for financial professionals.
In 2007, AIG Annuity Insurance Company faced a difficult
sales environment for the fourth consecutive year as a flat yield curve
and extremely competitive bank certificate of deposit and money
market rates continued to challenge the fixed annuity market.
Nevertheless, AIG Annuity continued to launch new products,
while expanding distribution with new bank partners, including
one of the nation’s largest banks. It also maintained its historic share
of the bank fixed annuity market. AIG Annuity ranked as the largest
issuer of fixed annuities in the United States and, for the 11th con-
secutive year, the largest issuer of fixed annuities through the bank
channel. The key account management team helped AIG Annuity
strengthen existing client relationships and improve market share
at its largest bank partners.
Group Retirement Products 29.8%
Individual Fixed Annuities and Run off 22.0%
Payout Annuities 10.4%
Home Service 3.7%
(a)
Domestic Life Insurance & Retirement Services—Premiums,
Deposits and Other Considerations by Major Product
(a) Includes structured settlements, single premium immediate annuities and
terminal funding annuities.
2003 2004 2005 2006 2007
27.6
5.6 6.4 6.6 7.06.2
27.9
24.6 24.6 25.2
Premiums, Deposits
and Other
Considerations
Premiums and Other
Considerations
(b) Includes GAAP premiums and other GAAP Life Insurance revenue.
(a)
(b)
In 2007, AIG Retirement’s (formerly branded as AIG VALIC)
focus on increasing assets under management and expanding its
capabilities as a leader in both asset accumulation and the income
distribution phase of retirement led to a 10 percent increase in sales.
Productivity of its career financial advisors improved, reflecting the
launch of several new products designed to help the baby boomer
generation manage its accumulated wealth in retirement. To reflect its
expanded product and service capabilities, the marketing name was
changed to AIG Retirement, effective January 1, 2008.
Product development initiatives at AIG SunAmerica Retirement
Markets (AIG SunAmerica) kept pace with the growing demand
for innovative “income for life” solutions, resulting in record variable
annuity sales, fee income and assets under management in 2007.
It launched a new enhancement to its popular “MarketLock”
guaranteed minimum withdrawal benefit, called “MarketLock for
Life Plus,” which can guarantee an increase in future income
despite the volatility of equity market returns. AIG SunAmerica’s
multiyear effort to achieve service excellence earned the “DALBAR
Service Award,” which recognizes the highest tier of service quality
in the financial services industry.

F I N A N C I A L S E R V I C E S
In 2007, ILFC executed lease agreements covering 138 aircraft,
including 15 new customers, across Asia, North America, South
America, Europe and the Middle East. Additionally, to advance
AIG’s Deliver the Firm strategic initiative, ILFC provided multiple
referrals and contacts from its supplier and customer base to various
AIG companies worldwide.
Reflecting its longstanding commitment to offer the most fuel-
efficient, cost-effective and environmentally friendly aircraft available,
ILFC significantly increased its order base of new-generation aircraft.
ILFC ordered 50 additional new Boeing 787 Dreamliner aircraft for
a total firm order of 74 aircraft, with deliveries beginning in 2010.
This order has propelled ILFC as Boeing’s single largest customer
to date for the new 787 aircraft. ILFC also ordered 10 additional
Boeing 737-800 aircraft to meet growing customer demand.
Further, ILFC revised its original order for 16 Airbus A350s to
20 new A350XWB aircraft. First deliveries of the A350XWB are
scheduled for 2014.
AIG Financial Products Corp. (AIGFP) is at the forefront of
AIG’s global capital market activities. It acts as a principal in nearly
all of its transactions, providing corporate finance, financial risk
management and investment solutions to a wide array of counterpar-
ties, including banks and investment banks, pension funds, corpora-
tions, foundations and endowments, insurance companies, hedge
funds, money managers, high-net-worth individuals, municipali-
ties, sovereigns and supranational entities.
From offices in the world’s leading financial centers, AIGFP
focuses on a variety of over-the-counter derivative and structured
finance transactions, and has an established track record of develop-
ing innovative financial products involving rates, currencies, com-
modities, energy, credit and equities. This is consistent with AIGFP’s
Established in 1995, AIG Consumer Finance Group, Inc. (CFG) now has four
million customers worldwide, offering products that include personal loans, auto
loans, credit cards, sales finance and mortgages. 2007 was both a year of
organic growth and global expansion. CFG made several strategic acquisitions,
added branches and introduced products in many key markets, including
Poland, where the credit card business shows significant potential (pictured,
the Market Square in Kraków city center).
AIG’s Financial Services businesses specialize in aircraft and
equipment leasing, capital markets, consumer finance and
insurance premium finance. These businesses complement
AIG’s core insurance operations and achieve a competitive
advantage by capitalizing on opportunities throughout AIG’s
global network.
Financial Services Financial Results
Revenues
(a)(b)
$(1,309) $7,777
Operating income (loss) excluding FAS 133,
other-than-temporary impairments,
and net realized capital gains (losses)
(a)
(8,983) 2,338
FAS 133 gains (losses) 211 (1,822)
Other-than-temporary impairments
(c)
(643) —
Net realized capital gains (losses) (100) (133)
Total operating income (loss)
(a)
(9,515) 383
(a) In 2007, both revenues and operating income (loss) include an unrealized market
valuation loss of $11.5 billion on AIGFP’s super senior credit default swap portfolio and
an other-than-temporary impairment charge of $643 million on AIGFP’s available-for-sale
investment securities.
(b) Includes gains (losses) from hedging activities that did not qualify for hedge accounting
treatment under FAS 133 in 2007 and 2006, respectively; the effect was $104 million
and $(1.97) billion.
(c) Represents an other-than-temporary impairment charge on AIGFP’s available-for-sale
investment securities.
The excellent results of International Lease Finance Corporation
(ILFC) in 2007 reflect the strength of the airline industry on a
global basis and the underlying strong demand for ILFC’s aircraft.
Lease rates continued to increase throughout the year across ILFC’s
lease placements of new and used aircraft.

Europe 44.9%
Asia and the Pacific 26.8%
United States and Canada 11.7%
Africa/Middle East 11.5%
Latin America 5.1%
ILFC—Revenues by Region
strategy of focusing on products with higher margin opportunities
and moving away from markets where profit margins have narrowed.
A key attribute that differentiates AIGFP from its peers is its
ability to commit significant amounts of its own capital—depending
on the opportunity arising from a particular investment—at different
levels of a company’s debt and equity capital structure. AIGFP
has demonstrated this capability in its energy and infrastructure
investments, both as a single investor and in partnership with
other investors.
The firm is also a major investor in a wide array of debt and
equity securities. As an innovator in the commodity and commodity
index markets, AIGFP played an instrumental role in attracting the
investing public’s interest in commodities as an alternative asset class.
AIGFP is increasingly concentrating on developing enhanced
investment products as the demand for commodities continues to
grow in global markets.
As a result of the severe disruption in the U.S. residential mortgage
and credit markets that accelerated during the fourth quarter of 2007,
AIGFP recognized unrealized market valuation losses of more than
$11 billion on its credit default swap portfolio written principally on
the super senior tranches of multisector collateralized debt obligations.
Based upon its most current analysis, AIG believes any losses that are
realized over time on this super senior credit default swap portfolio
will not be material to AIG’s consolidated financial condition,
although it is possible that realized losses could be material to AIG’s
consolidated results of operations for an individual reporting period.
American General Finance, Inc. (AGF), one of the largest
consumer finance organizations in the United States, is a lender and
originator of real estate and non-real estate loans, and retail sales
finance receivables. The company has been lending for more than
80 years and serves approximately two million customers.
Disciplined underwriting, conservative lending standards and
a mortgage portfolio of primarily fixed-rate loans enabled AGF
to manage its residential mortgage credit risks well during 2007,
compared to many lenders that have now withdrawn from the market.
AGF has the experience to manage its business through credit cycles
and is well-positioned to take advantage of opportunities to meet
consumer borrowing needs. In January 2008, AGF announced
the acquisition of more than $1.49 billion of consumer finance
receivables from a bank-owned competitor.
In 2007, AGF also added 65 new offices, which brought its core
network to more than 1,600 branches in 45 states, Puerto Rico and
the U.S.Virgin Islands; extended its operations into the U.K.; grew
the number of retail merchant relationships to more than 31,000;
Financial Services Operating Income (Loss)(a)
2003 2004 2005 2006 2007
(b)
(a) Includes gains (losses) from hedging activities that do not qualify for hedge accounting
under FAS 133. In addition, fluctuations in operating income from period to period are
not unusual because of the transaction-oriented nature of Capital Markets operations.
(b) In 2007, operating income (loss) includes an unrealized market valuation loss of
$11.5 billion on AIGFP’s super senior credit default swap portfolio and an other-than-
temporary impairment charge of $643 million on AIGFP’s available-for-sale investment
securities.
1.3
2.1
4.4
0.4
(9.5)
and increased its total lending of non-real estate and branch-based
retail sales finance products.
In 2007, the AIG Consumer Finance Group, Inc. (CFG) loan
portfolio reached record levels, ending the year at $4.8 billion and
generating strong growth in revenues. However, the increase in rev-
enues was offset by increased expenses related to organic branch
expansion efforts, acquisitions, as well as product promotion and
development costs. The overall credit quality of the CFG loan port-
folio has remained stable despite the contraction in consumer credit
experienced in Taiwan, which impacted CFG’s credit card profits.
CFG achieved record earnings in Poland as receivables registered
high growth. Market strategy in Poland was focused on growing the
credit card business and expanding the personal loan branch system.
The personal branch system was also the driving force behind the
success in Mexico, where 22 new branches were opened. CFG oper-
ations in Argentina reported another year of strong receivables growth.
Two new acquisitions were completed in India, which provide a
platform for building a consumer finance franchise.
Additionally, the purchase of a branch-based consumer finance
business in Thailand positioned CFG to significantly expand its
distribution channels by adding approximately 130 up country
branches. CFG continues to research and explore opportunities
to expand its geographic presence in emerging and developing
countries throughout the world.
Imperial A.I. Credit Companies, Inc., the largest financer
of insurance premiums in North America, continued to grow its
high-net-worth life insurance financing business in 2007. It imple-
mented new marketing initiatives to grow the agent/broker
distribution partner network and differentiate its brand positioning
from competitors.
Among Imperial A.I. Credit’s major Deliver the Firm strategic
initiatives in 2007 were new account opportunities and cross-
introductions to regional agent/brokers through the Domestic
Brokerage Group and new loan business activities in excess of
$70 million from leads that came from AIG’s Office of the Customer.

A S S E T M A N A G E M E N T
Asset Management operating income declined in 2007, compared
to 2006, primarily due to net realized capital losses related to
foreign exchange, interest rate and credit-related mark-to-market
losses and other-than-temporary impairment charges on fixed
income investments, partially offset by a gain on the sale of a portion
of AIG’s investment in Blackstone Group, L.P., in connection with
its initial public offering.
AIG Investments, one of the world’s leading asset managers, saw
record growth in assets under management in 2007 to more than
$766 billion, including AIG and non-affiliated client assets, primarily
driven by a robust and diverse product lineup. Non-affiliated client
assets grew 26 percent to $94.2 billion from the year-earlier period.
Previously known as AIG Global Investment Group, AIG
Investments adopted its new name in 2007. The business’ brand
platform, Investor to Investor, remains unchanged, representing
AIG Investments’ alignment of interests with clients.
AIG Investments expanded its global presence in both developed
and emerging markets. With offices in 45 cities around the world,
the newest being in Dubai and Kampala, Uganda’s capital, it has
more than 2,500 employees serving the needs of institutional, high-
net-worth and individual clients in traditional and alternative asset
classes, and private banking.
Fundamental research, careful evaluation of the risk-reward
equation, a diversified portfolio of asset classes, prudent risk manage-
ment to preserve capital and disciplined investment for the long
term—values that conform to AIG’s overall business principles—
all distinguish AIG Investments in the marketplace.
A major thrust in 2007 was a continuation of AIG Investments’
sustainability initiative. The initiative recognizes the risks and
opportunities represented by environmental, social and governance
(ESG) factors, and consideration of these factors is now an integral
part of investment analysis across all asset classes.
New strategies and expanded capabilities brought a wider range
of opportunities across all asset classes to clients throughout the
Americas, Europe, Asia Pacific and, more recently, Australia. In 2007,
AIG Investments opened an asset management company in India
and launched three new mutual funds there. AIG Investments
India now joins three existing Asian companies serving individual
investors in China (AIG Huatai), the Philippines (Philam Asset
Management, Inc.) and Taiwan.
AIG Investments closed its largest private equity fund ever,
AIG Highstar Capital III, L.P., at $3.5 billion—nearly twice the
amount of its initial target. 2007 was a busy year for alternative
investments across the board, with three private equity fund closings,
including AIG Asian Opportunity Fund II, L.P.; AIG Private Equity
Portfolio IV, L.P.; AIG New Europe Fund II, L.P.; and significant
deal activity in the United States, Central and Eastern Europe,
Latin America, and Greater China and India. Rigorous focus on
risk management across the board helped the hedge fund of funds
avoid problems witnessed in the credit markets impacting many hedge
fund strategies. As a result, hedge fund strategies now total more than
$9 billion in affiliated and non-affiliated assets under management.
The listed equity business performed well in 2007. The Global
Emerging Markets strategy delivered strong long-term performance,
which led to several substantial mandates from new clients.
International equity products also delivered robust performance,
specifically the International Small Cap portfolio, which was closed
to new clients when assets reached capacity. A successor strategy,
International Small-Mid Cap, was subsequently launched in 2007.
AIG Investments’ focused approach to active risk management
addressed the ongoing turbulence in the credit markets and continues
to create opportunities. AIG Investments attracted more than $5.5
billion in new fixed income assets, as high yield, leveraged loans and
emerging market bonds, to name a few strategies, have performed
well over the long term.
During 2007, AIG Global Real Estate (AIGGRE) continued
to grow its global investment and development platforms. Equity
under management grew to more than $23 billion, and over
$4.3 billion has been raised to date for its fund business.
AIGGRE pursued and completed new transactions in emerging
markets, including Latin America, Eastern Europe, India and
other countries in Asia, and closed on a portfolio of 86 apartment
properties comprising nearly 17,000 units in the northeastern
United States, one of its largest real estate transactions. Excavation
also began for the International Finance Centre Seoul in South
Korea. This 5.4 million-square-foot mixed-use project features
many significant sustainable design elements, including co-generation,
rainwater harvesting and recharging stations for electric cars.
AIG’s Asset Management group manages institutional and
individual money, in addition to AIG insurance company
invested assets.These businesses include retail mutual funds,
broker-dealer services, private banking and spread-based
investment businesses.
Asset Management Financial Results
Revenues(a) $ 5,625 $4,543
Operating income excluding net realized
capital gains (losses) 2,164 1,663
Net realized capital gains (losses) (1,000) (125)
Total operating income 1,164 1,538
(a) Includes net realized capital gains (losses).
Alternative Investments 23.9%
Real Estate 23.2%
Fixed Income 22.2%
Private Banking 13.5%
Equities 10.1%
Securities Lending 3.3%
Other 3.8%
AIG Investments—Revenues*
*Includes AIG Investments, AIG Global Real Estate and AIG Private Bank; excludes
warehoused investments.

Asset Management Operating Income
2003 2004 2005 2006 2007
0.5
1.9
2.0
1.5
1.2
AIG Investments acquired a 94 percent stake in Bulgarian Telecommunications
Company from Viva Ventures Holding GmbH and certain minority shareholders
in 2007. The acquisition is one of the largest take-private transactions in Bulgaria,
and demonstrates AIG’s long-term commitment to investing in emerging Eastern
European markets.
AIGGRE was named “Developer of the Year”in the office
category by the Georgia chapter of the National Association of
Industrial and Office Properties, an award that acknowledged its
mixed-use Atlantic Station project in Atlanta and achievements in
environmental innovation and community involvement. In addition,
AIG Tower, a recent AIGGRE development in Hong Kong, was
recognized with the prestigious People’s Choice Award in the archi-
tecture category.
AIG Private Bank Ltd., based in Zurich, specializes in providing
comprehensive asset management and private banking services to
a worldwide clientele. The bank performed satisfactorily in 2007
while it continued to expand its global wealth management business.
It established an office in Taipei to provide wealth management
products and services in Taiwan through Nan Shan Life Insurance
Company’s agency force. AIG Private Bank also signed a joint venture
agreement with Bank Sarasin & Co. Limited to form a new Swiss
bank that will cater to retail banking customers of both entities.
AIG SunAmerica Asset Management Corp. (AIG SAAMCo)
manages and/or administers over $55 billion in retail mutual funds
and investment options in AIG SunAmerica and AIG Retirement
(formerly branded as AIG VALIC) variable annuities sold to individ-
uals and groups throughout the United States.
In 2007, AIG SunAmerica continued to demonstrate strong
investment performance across several asset classes, stemming from
its strategy to expand its internal portfolio manager investment team
and sub-advisory platform. It was recognized with strong rankings
in Barron’s “Fund Family Rankings” published in February 2008.
Delivering consistent performance across several investment disci-
plines is AIG SunAmerica’s primary focus as it expands its product
offerings to meet the needs of baby boomers nearing retirement.
AIG SAAMCo also continued to enhance its market positioning
with value-added programs, such as Retirement Income Strategy.
This comprehensive tool assists financial advisors nationwide in
helping clients plan for both accumulation and distribution of
assets in retirement.
The AIG Advisor Group, Inc., the nation’s largest independent
broker-dealer network, achieved record operating income, revenues
and assets under management in 2007. Assets under management
for fee-based advisors surpassed $40 billion, reflecting the network’s
success in responding to the growing need for professional money
management services. The AIG Advisor Group introduced a series of
innovative financial products developed by AIG member companies
for the nearly 8,000 affiliated financial advisors in the network,
including specialty risk management solutions for high-net-worth
clients and a comprehensive liability management program.
The broker-dealer network also implemented a strategic realign-
ment of its core business services to accelerate the delivery of
technology support, independent product research and business-
building programs. All of these initiatives are designed to strengthen
relationships between financial advisors and their clients.

AAA 38%
AA 28%
A 18%
BBB 11%
Lower 4%
Non-rated 1%
Consolidated Bond Portfolio Ratings*
*Excluding AIGFP.
AIG’s cash and invested assets totaled $862.49 billion at year-end 2007,
compared to $801.94 billion at year-end 2006, an increase of
7.6 percent. Of AIG’s total cash and invested assets, 15.0 percent
was derived from General Insurance operations, 54.5 percent from
Life Insurance & Retirement Services operations, 21.1 percent from
Financial Services operations, 8.4 percent from Asset Management
operations and 1.0 percent from other sources.
General Insurance net investment income grew 7.7 percent
in 2007 to $6.13 billion. Total General Insurance cash and invested
assets amounted to $129.79 billion at year end, an increase of
11.8 percent over year-end 2006. Life Insurance & Retirement
Services net investment income increased 11.6 percent to
$22.34 billion. Life Insurance & Retirement Services cash and
invested assets were $470.51 billion at year end, an increase of
9.7 percent over year-end 2006.
Asset Management cash and invested assets amounted to
$72.04 billion at year end. The majority of these assets relate to
guaranteed investment contracts (GICs) or obligations issued
pursuant to AIG’s Matched Investment Program (MIP). The GIC
portfolio continues to run off, and the MIP has replaced the GIC
program as AIG’s principal institutional spread-based investment
activity. The MIP program demonstrated good growth in 2007.
Investment strategies are tailored to the specific business needs of
each operating unit based on considerations that include the realities
of the local market, liability duration and cash flow characteristics,
rating agency and regulatory capital considerations, legal invest-
ment limitations, tax optimization, diversification and other risk
control considerations. Overall, these strategies are intended to
produce a reasonably stable and predictable return throughout the
economic cycle, without undue risk or volatility.
Domestic General Insurance portfolios consist principally of
highly rated tax-exempt municipal bonds, together with a modest—
about 15 percent—allocation to public and private equity, hedge fund
and other partnership investments. Foreign General Insurance assets
are primarily invested in a mix of high-quality taxable bonds, but also
include a modest allocation to public and private equities.
For Domestic Life Insurance & Retirement Services and Asset
Management companies, the portfolios consist principally of
investment grade corporate debt securities and highly rated mortgage-
backed and asset-backed securities. In addition, a small allocation—
normally about 10 percent—is made to other, more volatile but
potentially higher-yielding investments, including high-yield,
distressed and emerging market bonds; public and private equity
securities; hedge funds; real estate; and other investments having
equity-like risks and expected returns. The modestly higher
concentration of such higher risk assets in the Asset Management
segment reflects both the historical focus on such assets in
AIG SunAmerica’s portfolio, as well as the concentration of such
assets within AIG’s asset management business, reflecting both AIG’s
interest in sponsored investment products, as well as the impact of
consolidation of certain such products on AIG’s balance sheet.
Foreign Life Insurance & Retirement Services portfolios, other
than those that are dollar-denominated, are generally concentrated
in local sovereign and other high-quality (in the context of the local
market) bonds matched as nearly as possible to the liability charac-
teristics of the business. Due to the limited or nonexistent supply
of long-dated maturities in certain markets, as well as the very long
duration of traditional life products, asset durations tend to be
somewhat short in many non-U.S. jurisdictions relative to liability
durations. Exposure to corporate credit (other than those entities that
are government related) in non-dollar portfolios is limited outside of
Western Europe, due to the generally fewer number of corporate
issuers in many of the markets in which AIG operates, or, in the
case of Japan, due to the absence of a significant spread differential
between sovereign and high-quality non-sovereign debt.
As markets mature and corporate issuance of debt becomes more
common, the amount of corporate credit positions in non-Western
portfolios is expected to increase. In jurisdictions with limited long-
dated bond markets, equities are used to extend the effective duration
of investment portfolios. In addition, foreign exchange positions are
employed to diversify risk and enhance yield in certain markets with
very low domestic interest rate curves, such as Japan and Taiwan.
Such foreign exchange positions in both Taiwan and Japan consisted
predominantly of high-quality fixed income investments denomi-
nated in developed or newly industrialized currencies, as defined by
the International Monetary Fund and the World Bank.
Assets supporting GICs are invested similarly to other Domestic
Life Insurance & Retirement Services and Asset Management portfo-
lios, with particular attention given to aligning the maturity profile
of assets and liabilities. As the overall maturity profile is somewhat
shorter than that of traditional life products, heavier use is made of
asset-backed and floating rate investments.
For both Life Insurance & Retirement Services and General
Insurance companies, allocation to equities is intended to provide an
economic hedge against the potential risks associated with inflation
I N V E S T M E N T S

and changing interest rates, as well as the potential for superior
long-term performance in funding liabilities for which there are no,
or very limited, fixed income alternatives.
Financial Services cash and invested assets amounted to
$181.77 billion at year end, of which $102.10 billion, or
56.2 percent, related to Capital Markets operations. The majority
of Capital Markets assets represent the investment of proceeds from
the issuance of guaranteed investment agreements, notes and other
bonds in short- and medium-term securities of high credit quality.
Aircraft owned by ILFC for lease to commercial airlines around the
world is the other principal component of Financial Services cash
and invested assets. At year end, the net book value of the fleet
totaled $41.98 billion.
Within the fixed income credit portfolios, AIG Investments
conducts rigorous and thorough independent credit analyses, and
follows policies of extensive diversification and active management.
Portfolios of mortgage-backed securities and related asset classes are
actively managed to mitigate prepayment risk. In addition, in some
circumstances, derivatives are used to mitigate “tail” risk associated
with very rapid interest rate shifts.
The global appetite for risk assets changed significantly in 2007,
compared with the three preceding years, as growing concern about
the U.S. housing market’s valuation led to a sharp reduction in risk
appetite among investors for non-agency housing-related debt.
This risk aversion, in turn, pressured credit spreads generally, with
particular impact on financial institutions. Thus, while default levels
remained near historic lows, credit-oriented fixed income investments
generally underperformed treasury securities with similar durations.
Dislocation followed through into the equity markets, which
ended the year substantially lower than their October 2007 highs.
As 2008 began, the global sell-off in equities continued, and a
growing global perception of a slowdown in the U.S. economy led
to weaknesses in most global equity markets. In addition, transaction
volume fell sharply in private equity in the latter half of 2007, as both
risk appetites and availability of financing shrank dramatically.
Taxable Fixed Maturities 43%
Other Financial Services Assets 14%
Tax-exempt Fixed Maturities 7%
Cash and Other Short-Term Securities 6%
Flight Equipment 5%
Equity Securities 5%
Mortgage and Other Loans Receivable,
and Real Estate 4%
Other Investments 16%
Composition of Consolidated Cash and Invested Assets
at December 31, 2007
Life Insurance Percent
(in millions) General & Retirement Financial Asset of
December 31, 2007 Insurance Services Services Management Other Total Total
Cash and Invested Assets:
Fixed maturities $ 95,412 $304,111 $ 1,400 $28,012 $ — $ 428,935 49.7%
Equity securities 7,805 33,119 8 638 76 41,646 4.8
Mortgage and other loans receivable 13 24,851 1,365 7,442 56 33,727 3.9
Securities lending invested collateral 5,031 57,471 148 13,012 75,662 8.8
Other invested assets 11,895 19,015 3,663 17,261 6,989 58,823 6.8
Flight equipment — — 41,984 — — 41,984 4.9
Finance receivables — 5 31,229 — — 31,234 3.6
Trade receivables — — 6,467 — — 6,467 0.8
Unrealized gain (loss) on swaps, options and
forward transactions — — 17,134 — (692) 16,442 1.9
Securities available for sale — — 40,305 — — 40,305 4.7
Trading securities — — 4,197 — — 4,197 0.5
Securities purchased under agreements to resell — — 20,950 — — 20,950 2.4
Investment income due and accrued 1,431 4,728 29 401 (2) 6,587 0.8
Real estate 349 976 17 89 231 1,662 0.2
Other, including short-term investments,
cash and spot commodities 7,853 26,236 12,876 5,188 1,720 53,873 6.2
Total $129,789 $470,512 $181,772 $72,043 $8,378 $ 862,494 100.0%

American International Group, Inc. and Subsidiaries
R E C O N C I L I A T I O N I N A C C O R D A N C E W I T H R E G U L A T I O N G
Regulation G, promulgated by the Securities and Exchange Commission, requires a reconciliation of each non-GAAP financial measure used
in this Annual Report to the comparable GAAP figure. Such reconciliations are set forth below, in the Five Year Summary of Consolidated
Operations on page 43 and throughout this Annual Report. AIG presents its operations in the way it believes will be most meaningful and useful,
as well as most transparent, to the investing public and others who use AIG’s financial information in evaluating the performance of AIG.
(in millions, except ratios)
Years Ended December 31, 2007 2006 2005
General Insurance revenues:
Net premiums earned $ 45,682 $ 43,451 $ 40,809
Net investment income 6,132 5,696 4,031
Net realized capital gains (losses) (106) 59 334
Total $ 51,708 $ 49,206 $ 45,174
General Insurance operating income $ 10,526 $ 10,412 $ 2,315
Net realized capital gains (losses) (106) 59 334
General Insurance operating income excluding net realized capital gains (losses) 10,632 10,353 1,981
Current year catastrophe-related losses (276) — (2,888)
Change in estimate for asbestos and environmental reserves — (198) (873)
Reserve charge — — (1,824)
General Insurance operating income excluding net realized capital gains (losses),
current year catastrophe-related losses, change in estimate for
asbestos and environmental reserves, and reserve charge $10,908 $ 10,551 $ 7,566
General Insurance combined ratio 90.33 89.06 104.69
Current year catastrophe-related losses 0.60 — 7.06
Change in estimate for asbestos and environmental reserves — 0.46 2.14
Reserve charge — — 4.47
General Insurance combined ratio, excluding current year catastrophe-related losses,
change in estimate for asbestos and environmental reserves, and reserve charge 89.73 88.60 91.02
Life Insurance & Retirement Services revenues:
Premiums and other considerations $ 33,627 $ 30,766 $ 29,501
Net realized capital gains (losses) (2,398) 88 (158)
Total $ 53,570 $ 50,878 $ 48,020
Life Insurance & Retirement Services premiums:
Deposits and other considerations not included in revenues under GAAP 59,103 50,241 46,221
Premiums, deposits and other considerations $ 92,730 $ 81,007 $ 75,722
Life Insurance & Retirement Services operating income $ 8,186 $ 10,121 $ 8,965
Net realized capital gains (losses) (2,398) 88 (158)
Life Insurance & Retirement Services operating income
excluding net realized capital gains (losses) $ 10,584 $ 10,033 $ 9,123
Financial Services operating income (loss) $ (9,515) $ 383 $ 4,424
Net realized capital gains (losses) and Capital Markets other-than-temporary impairments (743) (133) 154
FAS 133 gains (losses) 211 (1,822) 2,014
Financial Services operating income (loss) excluding FAS 133 gains (losses),
net realized capital gains (losses) and Capital Markets other-than-temporary impairments $ (8,983) $ 2,338 $ 2,256
Asset Management operating income $ 1,164 $ 1,538 $ 1,963
Net realized capital gains (losses) (1,000) (125) 82
Asset Management operating income before net realized capital gains (losses) $ 2,164 $ 1,663 $ 1,881
Consolidated:
Net income $ 6,200 $ 14,048 $ 10,477
Net realized capital gains (losses) and Capital Markets
other-than-temporary impairment, net of tax (2,804) 33 201
FAS 133 gains (losses), excluding net realized capital gains (losses), net of tax (304) (1,424) 1,530
Cumulative effect of accounting changes, net of tax — 34 —
Adjusted net income $ 9,308 $ 15,405 $ 8,746

Compound
Annual
(in millions) Growth Rate
Years Ended December 31, 2007 2006(a)
2005(a)
2004(a)
2003(a)
2003–2007
General Insurance operations:
Gross premiums written $58,798 $ 56,280 $ 52,725 $ 52,046 $ 46,938 5.8%
Net premiums written 47,067 44,866 41,872 40,623 35,031 7.7
Net premiums earned 45,682 43,451 40,809 38,537 31,306 9.9
Underwriting profit (loss)(b)(c) 4,500 4,657 (2,050) (247) 1,975 22.9
Net investment income(d) 6,132 5,696 4,031 3,196 2,566 24.3
Operating income before net realized capital gains (losses) 10,632 10,353 1,981 2,949 4,541 23.7
Net realized capital gains (losses) (106) 59 334 228 (39) —
General Insurance operating income(b)(c)(d) 10,526 10,412 2,315 3,177 4,502 23.7
Life Insurance & Retirement Services operations:
Premiums and other considerations 33,627 30,766 29,501 28,167 23,568 9.3
Net investment income(d) 22,341 20,024 18,677 15,654 13,278 13.9
Operating income before net realized capital gains (losses) 10,584 10,033 9,123 7,923 6,608 12.5
Net realized capital gains (losses)(e) (2,398) 88 (158) 45 362 —
Life Insurance & Retirement Services operating income(d)(e) 8,186 10,121 8,965 7,968 6,970 4.1
Financial Services operating income (loss), excluding net realized
capital gains (losses)(f)(g) (8,983) 2,338 2,256 2,298 2,189 —
FAS 133 gains (losses) 211 (1,822) 2,014 (122) (1,010) —
Net realized capital gains (losses) (100) (133) 154 (45) 123 —
Capital Markets other-than-temporary impairments (643) — — — — —
Financial Services operating income (loss)(f)(g) (9,515) 383 4,424 2,131 1,302 —
Asset Management operating income,excluding
net realized capital gains (losses) 2,164 1,663 1,881 1,887 1,275 14.1
Net realized capital gains (losses) (1,000) (125) 82 60 (754) 7.3
Asset Management operating income 1,164 1,538 1,963 1,947 521 22.3
Other Operations before net realized capital gains (losses)(h) (1,731) (1,398) (3,034) (651) (915) —
Other Operations net realized capital gains (losses) (409) (37) 269 78 (473) —
Consolidation and elimination adjustments 722 668 311 195 — —
Income before income taxes, minority interest
and cumulative effect of accounting changes(d)(i) 8,943 21,687 15,213 14,845 11,907 (6.9)
Income taxes 1,455 6,537 4,258 4,407 3,556 —
Income before minority interest and cumulative
effect of accounting changes 7,488 15,150 10,955 10,438 8,351 (2.7)
Minority interest (1,288) (1,136) (478) (455) (252) —
Cumulative effect of accounting changes — 34 — (144) 9 —
Net income $ 6,200 $ 14,048 $ 10,477 $ 9,839 $ 8,108 (6.5)%
* Includes reconciliation of certain non-GAAP financial measures in accordance with SEC Regulation G.
(a) Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
(b)Includes current year catastrophe-related losses of $276 million, $2.89 billion and $1.05 billion in 2007, 2005 and 2004, respectively. There were no significant catastrophe-
related losses in 2006 or 2003.
(c) Operating income was reduced by fourth quarter charges of $1.8 billion and $850 million in 2005 and 2004, respectively, resulting from the annual review of General Insurance
reserves. In 2006, 2005 and 2004, changes in estimates for asbestos and environmental reserves were $198 million, $873 million and $850 million, respectively.
(d)In 2006, includes effect of out of period adjustments related to the accounting for certain interests in UCITS. The effect was an increase of $490 million in operating income for
General Insurance and an increase of $169 million in operating income for Life Insurance & Retirement Services.
(e) In 2007, 2006, 2005, 2004 and 2003, includes other-than-temporary impairment charges of $2.8 billion, $641 million, $425 million, $441 million and $1.2 billion, respectively.
(f) These amounts result primarily from interest rate and foreign currency derivatives that are effective economic hedges of investments and borrowings. These gains (losses) in 2007 include
a $380 million out of period charge to reverse net gains recognized on transfers of available-for-sale securities among legal entities consolidated within AIGFP. In 2006, includes an out
of period charge of $223 million related to the remediation of the material weakness in internal control over the accounting for certain derivative transactions under FAS 133. In the first
quarter of 2007, AIGFP began applying hedge accounting for certain of its interest rate swaps and foreign currency forward contracts, hedging its investments and borrowings.
(g) In 2007, includes an unrealized market valuation loss of $11.5 billion on AIGFP’s super senior credit default swap portfolio.
(h)In 2005, includes $1.6 billion of regulatory settlement costs.
(i) In 2007, 2006, 2005, 2004 and 2003, includes other-than-temporary impairment charges of $4.7 billion, $944 million, $598 million, $684 million and $1.5 billion, respectively. Also
includes gains (losses) from hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. In 2007,
2006, 2005, 2004 and 2003, the effect was $(1.44) billion, $(1.87) billion, $2.02 billion, $671 million and $(1.22) billion in operating income, respectively. These amounts result primarily
from interest rate and foreign currency derivatives that are effective economic hedges of investments and borrowings.
F I V E Y E A R S U M M A R Y O F C O N S O L I D A T E D O P E R A T I O N S*

Compound
Annual
(in millions, except ratios) Growth Rate
Years Ended/As of December 31, 2007 2006 2005 2004 2003 2003–2007
Balance Sheet Data:
Total cash and invested assets(a) $ 862,494 $801,941 $ 691,767 $ 649,825 $ 528,550 13.0%
Total assets 1,060,505 979,410 853,048 801,007 675,602 11.9
Total General Insurance reserves(b) 69,288 62,630 57,476 47,254 36,228 17.6
Total liabilities 964,604 877,542 766,545 721,135 606,180 12.3
Total shareholders’ equity 95,801 101,677 86,317 79,673 69,230 8.5
Income Statement Data:
Revenues(c)(d)(e) $ 110,064 $113,387 $ 108,781 $ 97,823 $ 79,601 8.4%
Net income 6,200 14,048 10,477 9,839 8,108 (6.5)
Loss ratio 65.63 64.56 81.09 78.78 73.06
Expense ratio 24.70 24.50 23.60 21.52 19.62
Combined ratio(f) 90.33 89.06 104.69 100.30 92.68
(a) Refer to the table on page 41 of this report for the composition of total cash and invested assets.
(b) Represents consolidated General Insurance net reserves for losses and loss expenses.
(c) 2007 revenues include an unrealized market valuation loss of $11.5 billion on AIGFP’s super senior credit default swap portfolio. See Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Invested Assets—Other-Than-Temporary Impairments.
(d) 2007, 2006, 2005, 2004 and 2003 include other-than-temporary impairment charges of $4.7 billion, $944 million, $598 million, $684 million and $1.5 billion, respectively. Also includes
gains (losses) from hedging that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. In 2007, 2006, 2005, 2004
and 2003, the effect on revenues was $(1.44) billion, $(1.87) billion, $2.02 billion, $385 million and $(1.50) billion, respectively. These amounts result primarily from interest rate
and foreign currency derivatives that are effective economic hedges of investments and borrowings.
(e) Represents the sum of General Insurance net premiums earned and net investment income; Life Insurance & Retirement Services premiums and other considerations, and net
investment income; Financial Services interest, net realized and unrealized gains (losses), and lease and ﬁnance charges; Asset Management investment income from spread-based
products and management, advisory and incentive fees; and net realized capital gains (losses).
(f) In 2007, 2006, 2005, 2004 and 2003, the combined ratios excluding catastrophe losses, reserve charges and the change in estimate for asbestos and environmental exposures,
were 89.73, 88.60, 91.02, 95.35 and 92.41, respectively.
F I V E Y E A R S U M M A R Y O F S E L E C T E D F I N A N C I A L I N F O R M A T I O N
2003 2004
(a)
2005
(b)
2006 2007
94.50
90.33
General Insurance Combined Loss and
Expense Ratio
(after dividend to policyholders)
* Industry represents U.S. stock companies,
2007 estimated.
Industry sources: Fox-Pitt, Kelton Inc. and Best’s
Aggregates & Averages.
A combined ratio of less than 100 reflects an
underwriting profit.
(a) 2004 includes a charge of $850 million attributable to
the change in estimate for asbestos and environmental
exposures and $850 million for the fourth quarter charge
resulting from the annual review of reserves.
(b) 2005 includes a charge of $873 million attributable to
the change in estimate for asbestos and environmental
exposures and $1.8 billion for the fourth quarter charge
resulting from the annual review of reserves.
AIG Industry*
85
100
110
105
95
90
85
90
95
100
105
110
2003 2004 2005 2006 2007
1.92
1.30
General Insurance Reserves For
Losses and Loss Expenses
(index factor)
2007 estimated.
Aggregates & Averages.
AIG Industry*
1.00
1.50
1.25
2.00
1.75
1.00
1.25
1.50
1.75
2.00
2003 2004 2005 2006 2007
1.34
1.14
General Insurance Net PremiumsWritten
(index factor)
2007 estimated.
Aggregates & Averages. 100
AIG Industry*
1.0
1.4
1.3
1.2
1.1
1.0
1.1
1.2
1.3

Compound
Annual
(in millions, except per share amounts and ratios) Growth Rate
Years Ended/As of December 31, 2007 2006 2005 2004 2003 2003–2007
Return on Equity (ROE):(a)
ROE, GAAP basis 6.09% 15.26% 12.34% 13.27% 12.54%
Per Common Share Data:
Net income
Basic $ 2.40 $ 5.39 $ 4.03 $ 3.77 $ 3.10 (6.2)%
Diluted 2.39 5.36 3.99 3.73 3.07 (6.1)
Cash dividend 0.77 .65 .63 .29 .24 33.8
Book value 37.87 39.09 33.24 30.69 26.54 9.3
Market price 58.30 71.66 68.23 65.67 66.28 (3.2)
Market capitalization at December 31(b) $147,475 $186,402 $ 177,169 $170,507 $172,888 (3.9)%
(a) Return on equity (ROE) is net income, expressed as a percentage of average shareholders’ equity.
(b) Market capitalization is based on the number of AIG shares outstanding multiplied by the closing price per share at December 31 on the New York Stock Exchange.
2003 2004 2005 2006 2007
172.9 170.5 177.2
186.4
147.5
Market Capitalization at December 31
(a) Before realized capital gains (losses).
(b) 2004 includes catastrophe losses of $1.05 billion,
and a $850 million charge attributable to the change
in estimate for asbestos and environmental exposures.
(c) 2005 includes current year catastrophe-related
losses of $2.89 billion, and a fourth quarter reserve
charge $1.82 billion.
6.66667
13.33334
2003 2004 2005 2006 2007
12.54
13.27
12.34
15.26
6.09
Return on Equity
(percent)
0.3
0.6
0.9
2003 2004 2005 2006 2007
0.24
0.29
0.63 0.65
0.77
Dividends Per Common Share
(dollars)

(in millions, except ratios)
Consolidated(a)
Years Ended December 31, 2007 2006
General Insurance Operating Results
Gross premiums written $ 58,798 $ 56,280
Net premiums written 47,067 44,866
Net premiums earned 45,682 43,451
Underwriting proﬁt (loss) 4,500 4,657
Operating income (loss) before net realized capital gains (losses) 10,632 10,353
Net realized capital gains (losses) (106) 59
Operating income (loss) $ 10,526 $ 10,412
Combined ratio 90.33 89.06
(a) Consolidated column may not equal the sum of individual group totals due to consolidating adjustments.
2007 2006
Net Percent Net Percent
(in millions) Premiums of Premiums of
Years Ended December 31, Written Total Written Total
General Insurance Net Premiums Written
Domestic Brokerage Group $ 24,112 51.3% $ 24,312 54.2%
Foreign General 13,051 27.7 11,401 25.4
Domestic Personal Lines 4,808 10.2 4,654 10.4
Transatlantic 3,953 8.4 3,633 8.1
Mortgage Guaranty (UGC) 1,143 2.4 866 1.9
Total $ 47,067 100.0% $ 44,866 100.0%
S U P P L E M E N T A L F I N A N C I A L I N F O R M A T I O N
Domestic Brokerage Group 51.3%
Foreign General 27.7%
Personal Lines 10.2%
Transatlantic 8.4%
Mortgage Guaranty 2.4%
General Insurance Net Premiums Written
General Insurance Premiums Written
2003 2004 2005 2006 2007
35.0
46.9
52.7
56.3
58.8
52.0
40.6 41.9
44.9
47.1
Gross
Premiums
Written
Net
Premiums
Written

Domestic Domestic Mortgage
Brokerage Group Personal Lines Guaranty (UGC) Transatlantic Foreign General
2007 2006 2007 2006 2007 2006 2007 2006 2007 2006
$31,759 $31,584 $5,025 $ 4,821 $1,374 $1,065 $ 4,284 $ 3,983 $19,778 $17,525
24,112 24,312 4,808 4,654 1,143 866 3,953 3,633 13,051 11,401
23,849 23,910 4,695 4,645 886 740 3,903 3,604 12,349 10,552
3,501 2,336 (162) 206 (792) 191 182 143 1,771 1,781
3,879 3,411 231 225 158 140 470 435 1,388 1,484
7,380 5,747 69 431 (634) 331 652 578 3,159 3,265
(75) 98 (2) 1 (3) (3) 9 11 (22) (37)
$ 7,305 $ 5,845 $ 67 $ 432 $ (637) $ 328 $ 661 $ 589 $ 3,137 $ 3,228
85.52 89.96 103.46 95.56 189.78 70.62 95.42 96.17 85.51 82.46
2007 2006
Percent Percent
(in millions) Underwriting of Underwriting of
Years Ended December 31, Profit (Loss) Total Profit (Loss) Total
General Insurance Underwriting Profit (Loss)
Domestic Brokerage Group $3,501 77.8% $ 2,336 50.2%
Foreign General 1,771 39.4 1,781 38.2
Domestic Personal Lines (162) (3.6) 206 4.4
Transatlantic 182 4.0 143 3.1
Mortgage Guaranty (UGC) (792) (17.6) 191 4.1
Total $4,500 100.0% $ 4,657 100.0%
2003 2004 2005 2006 2007
2.6
3.2
4.0
5.7
6.1
General Insurance Net Investment Income
General Insurance Operating Income(a)(b)(c)(d)
2003 2004 2005 2006 2007
(a) Includes net realized capital gains (losses).
(b) 2007, 2005 and 2004 include current year catastrophe-related losses of $276 million,
$2.89 billion and $1.05 billion, respectively. In 2006 and 2003, there were no
significant catastrophe-related losses.
(c) In 2005 and 2004, operating income was reduced by $1.8 billion and $850 million,
respectively, resulting from the annual fourth quarter review of General Insurance loss
and loss adjustment reserves.
(d) 2006, 2005 and 2004 include a change in estimate for asbestos and environmental
reserves of $198 million, $873 million and $850 million, respectively.
4.5
3.2
2.3
10.4 10.5

Premiums, Deposits and Premiums and Other
(in millions) Other Considerations(a) Considerations Revenues(b)
Years Ended December 31, 2007 2006 2007 2006 2007 2006
Domestic Life Insurance & Retirement Services by Major Product
Life Insurance $ 3,281 $ 3,034 $2,352 $ 2,127 $ 3,880 $ 3,504
Home service 938 957 767 790 1,407 1,420
Group life/health 854 999 842 995 1,042 1,208
Payout annuities(c) 2,612 2,465 1,820 1,582 2,973 2,586
Individual ﬁxed and run off annuities 420 641 55 49 529 603
Retirement Services
Group retirement products 7,531 6,825 446 386 2,726 2,665
Individual ﬁxed annuities 5,085 5,331 96 122 3,760 3,703
Individual variable annuities 4,472 4,266 627 531 793 733
Individual annuities—run off(d) 53 56 21 18 408 444
Total $ 25,246 $ 24,574 $7,026 $ 6,600 $17,518 $16,866
(a) Premiums, deposits and other considerations represent aggregate business activity presented on a non-GAAP basis.
(b) Excludes net realized capital gains (losses).
(c) Includes structured settlements, single premium immediate annuities and terminal funding annuities.
(d) Primarily represents run off annuity business sold through discontinued distribution relationships.
Payout Annuities 32.2%
Home Service 11.6%
Individual Annuities—Run off 5.2%
Domestic Life Insurance—Premiums, Deposits and Other
Considerations by Major Product
2007 Domestic Life Insurance Revenues by Major Product
Group Retirement Products 43.9%
Individual Annuities—Run off 0.3%
Domestic Retirement Services—Premiums, Deposits and Other
200
Total
Life Insurance & Retirement Services Operating Income*
2003 2004 2005 2006 2007
3.0
3.6
5.2
6.1 6.4
4.5
6.6
9.1
10.0
10.6
7.9
3.4
3.9
3.9
4.2
Domestic
Foreign
* Excludes net realized capital gains (losses).
2003 2004 2005 2006 2007
57.6
23.6
29.5 30.8 33.6
28.2
73.1 75.7
81.0
92.7
(b) Includes GAAP premiums and other Life Insurance revenue.
Premiums, Deposits
and Other
Considerations
Premiums and Other
Considerations
(a)
(b)

Premiums, Deposits and Premiums and Other
(in millions) Other Considerations(a) Considerations Revenues(b)
Years Ended December 31, 2007 2006 2007 2006 2007 2006
Foreign Life Insurance & Retirement Services by Major Product
Life insurance $37,754 $25,403 $ 16,630 $ 15,732 $ 24,103 $21,669
Personal accident and health 6,174 5,606 6,094 5,518 6,448 5,803
Group products 4,406 3,506 2,979 2,226 3,732 2,874
Retirement services
Individual ﬁxed annuities 5,352 6,998 438 400 2,721 2,427
Individual variable annuities 13,798 14,920 460 290 1,446 1,151
Total $67,484 $56,433 $ 26,601 $ 24,166 $ 38,450 $33,924
(a) Premiums, deposits and other considerations represent aggregate business activity presented on a non-GAAP basis.
(b) Excludes net realized capital gains (losses).
Personal Accident and Health 12.8%
Foreign Life Insurance—Premiums, Deposits and Other
Foreign Retirement Services—Premiums, Deposits and Other
2007 Domestic Life Insurance Revenues by Major Product
Life Insurance & Retirement Services Revenue*
2003 2004 2005 2006 2007
22.5
36.8
48.2
50.8
56.0
43.8
14.3
16.4
16.9
17.5
15.6
28.2
31.8 33.9
38.5 Domestic
Foreign
* Excludes net realized capital gains (losses).

B O A R D O F D I R E C T O R S
Left to Right:
Marshall A. Cohen
Counsel
Cassels Brock & Blackwell
Former President and
The Molson Companies Limited
Martin J. Sullivan
American International Group, Inc.
Robert B. Willumstad
Chairman of the Board of Directors
of American International Group, Inc.
Founder and Partner
Brysam Global Partners
Former President and
Chief Operating Officer
Citigroup Inc.
Frank G. Zarb
Senior Advisor and Managing Director
Hellman & Friedman LLC
Former Chairman and
National Association of Securities
Dealers, Inc. and
The Nasdaq Stock Market, Inc.
Left to Right:
Martin S. Feldstein
Professor of Economics
Harvard University
National Bureau of Economic Research
Stephen L. Hammerman
Retired Vice Chairman
Merrill Lynch & Co., Inc.
Former Deputy Police Commissioner
New York City Police Department
Fred H. Langhammer
Chairman, Global Affairs, and
Former Chief Executive Officer
The Estée Lauder Companies Inc.
Virginia M. Rometty
Global Business Services
IBM Corporation
Left to Right:
Stephen F. Bollenbach
Former Co-Chairman and
Hilton Hotels Corporation
Ellen V. Futter
President
American Museum of Natural History
James F. Orr, III
Chairman of the Board of Trustees
The Rockefeller Foundation
Edmund S.W. Tse
Senior Vice Chairman, Life Insurance
Left to Right:
George L. Miles, Jr.
WQED Multimedia
Richard C. Holbrooke
Vice Chairman
Perseus LLC
Former United States Ambassador to the
United Nations
Former Vice Chairman
Credit Suisse First Boston
Michael H. Sutton
Consultant
Former Chief Accountant of the
United States Securities and Exchange
Commission
Morris W. Offit
Chairman
Offit Capital Advisors LLC
Founder and Former
Chief Executive Officer, OFFITBANK

C O R P O R A T E D I R E C T O R Y
Corporate Officers
Ronald J. Anderson
Nicholas J. Ashooh
Communications
Robert W. Clyde
Chairman, President and CEO of
AIG Companies in Japan and Korea
Jerry M. de St. Paer
Finance
Frank H. Douglas
Casualty Actuary
L. Oakley Johnson
Corporate Affairs
Michael E. Roemer
Director of Internal Audit
Charles R. Schader
Claims
Kathleen E. Shannon
Senior Vice President,
Secretary and
Deputy General Counsel
Stephen West
Operations & Systems
Richard H. Booth
Vice President
Kathleen Chagnon
Vice President
Deputy General Counsel and
Chief Compliance Officer
Edward T. Cloonan
Vice President
Corporate Affairs
Stephen P. Collesano
Vice President
Research and Development
Charles H. Dangelo
Vice President and
Senior Reinsurance Officer
Keith L. Duckett
Vice President
Administration
Robert A. Gender
Vice President and Treasurer
Charlene M. Hamrah
Vice President and
Director of Investor Relations
Philip M. Jacobs
Vice President and
Director of Taxes
Robert P. Jacobson
Vice President
Strategic Planning
Eric N. Litzky
Vice President
Corporate Governance and
Special Counsel and
Secretary to the Board of Directors
Kevin B. McGinn
Vice President and
Chief Credit Officer
Richard P. Merski
Vice President
Corporate Affairs
Teri L. Watson
Vice President
Rating Agency Relations
Christopher D. Winans
Vice President
Media Relations
John T. Wooster, Jr.
Special Advisor
Communications
Executive Officers
Martin J. Sullivan
President and
Edmund S.W. Tse
Senior Vice Chairman
Life Insurance
Jacob A. Frenkel
Vice Chairman
Global Economic Strategies
Frank G. Wisner
Vice Chairman
External Affairs
Steven J. Bensinger
Executive Vice President and
Chief Financial Officer
Anastasia D. Kelly
General Counsel and
Senior Regulatory and
Compliance Officer
Rodney O. Martin, Jr.
Life Insurance
Kristian P. Moor
Domestic General Insurance
Win J. Neuger
Executive Vice President and
Chief Investment Officer
Robert M. Sandler
Nicholas C. Walsh
Jay S. Wintrob
Retirement Services
William N. Dooley
Financial Services
David L. Herzog
Comptroller
Andrew J. Kaslow
Chief Human Resources Officer
Robert E. Lewis
Chief Risk Officer
Brian T. Schreiber
Strategic Planning
John Q. Doyle
Kevin H. Kelley
Mark T. Willis
Joseph L. Boren
Vice President
David M. Hupp
Vice President
Robert S. Schimek
Vice President
Julio A. Portalatin
Alexander R. Baugh
Vice President
Hamilton C. Da Silva
Vice President
Jeffrey L. Hayman
Vice President
Raymond E. Lee
Vice President
Ralph W. Mucerino
Vice President
Global Energy
Michael L. Sherman
Vice President
Robert J. Thomas
Vice President
Nicholas S. Tyler
Vice President

Life Insurance &
Retirement Services
Bruce R. Abrams
Retirement Services
Frank Chan
Life Insurance
Matthew E. Winter
Life Insurance
Jose L. Cuisia, Jr.
Vice President
Life Insurance
Kevin T. Hogan
Vice President
Life Insurance
Joyce A. Phillips
Vice President
Life Insurance
Christopher J. Swift
Vice President
Life Insurance &
Retirement Services
Seiki Tokuni
Vice President
Life Insurance
Andreas Vassiliou
Vice President
Life Insurance
Gerald W. Wyndorf
Vice President
Life Insurance
Asset Management
Hans K. Danielsson
Investments
Richard W. Scott
Investments
Kevin P. Fitzpatrick
Vice President
Real Estate Investments
Steven Guterman
Vice President
Asset Management
Honorary Directors
Houghton Freeman
Stowe, Vermont
John I. Howell
Retired Chairman
J. Henry Schroder Bank
& Trust Company
Greenwich, Connecticut
Edward E. Matthews
Retired Senior Vice Chairman
New York, New York
John J. Roberts
New York, New York
Ernest E. Stempel
Hamilton, Bermuda
Thomas R. Tizzio
Retired Senior Vice Chairman
General Insurance
New York, New York
C O R P O R A T E D I R E C T O R Y, C O N T I N U E D
International Advisory Board
Dr. Henry A. Kissinger
Chairman
International Advisory Board
Former United States Secretary of State
Chairman, Kissinger Associates, Inc.
Abdlatif Al-Hamad
Director General and Chairman of
the Board of Directors
Arab Fund for Economic and
Social Development
Dr. Leszek Balcerowicz
Professor
Warsaw School of Economics
Chen Yuan
Governor
China Development Bank
William S. Cohen
Chairman and Chief Executive Ofﬁcer
The Cohen Group
Former United States
Secretary of Defense
Sir Richard Dearlove
Master of Pembroke College
Cambridge
Former Chief of the
British Intelligence Service
Carla A. Hills
Hills & Company
Former United States
Trade Representative
Dr. Otto Graf Lambsdorff
Former German Minister of Economics
Jacques de Larosiere
Advisor to the Chairman
BNP Paribas
Lee Hong-Koo
Chairman
Seoul Forum for International Affairs
Former Ambassador of
Korea to the United States
Erling S. Lorentzen
Chairman
Lorentzen Empreendimentos, S.A.
Yoshihiko Miyauchi
ORIX Corporation
Ambassador Khun Anand Panyarachun
Former Prime Minister of Thailand
Chairman of the Council of Trustees
Thailand Development Research
Institute
The Rt. Hon. Lord Christopher Patten
Chancellor of Oxford University
Moeen A. Qureshi
Chairman
EMP Global
Washington Sycip
Founder and Chairman
The SGV Group
Ratan N. Tata
Chairman
Tata Industries Limited

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
or
n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8787
American International Group, Inc.(Exact name of registrant as specified in its charter)
Delaware 13-2592361
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1027070 Pine Street, New York, New York
(Zip Code)(Address of principal executive offices)
Registrant’s telephone number, including area code (212) 770-7000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, Par Value $2.50 Per Share New York Stock Exchange
5.75% Series A-2 Junior Subordinated Debentures New York Stock Exchange
NIKKEI 225˛ Index Market Index Target-Term Securities˛
due January 5, 2011 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes n No ¥
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes n No ¥
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 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 ¥ No n
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. n
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. (Check one):
Large Accelerated Filer ¥ Accelerated Filer n Non-Accelerated Filer n Smaller Reporting Company n
(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 Exchange Act).
Yes n No ¥
The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the registrant computed
by reference to the price at which the common equity was last sold as of June 29, 2007 (the last business day of the
registrant’s most recently completed second fiscal quarter), was approximately $152,287,000,000.
As of January 31, 2008, there were outstanding 2,522,336,771 shares of Common Stock, $2.50 par value per share, of the
registrant.
Documents Incorporated by Reference:
Portions of the registrant’s definitive proxy statement filed or to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A involving the election of directors at the Annual Meeting of Shareholders of the registrant scheduled
to be held on May 14, 2008 are incorporated by reference in Part III of this Form 10-K.
AIG 2007 Form 10-K 1

Table of Contents
Index Page Index, continued Page
Part I Part III*
Item 1. Business 3 Item 10. Directors, Executive Officers
and Corporate Governance 205Item 1A. Risk Factors 16
Item 11. Executive Compensation 205Item 1B. Unresolved Staff Comments 19
Item 12. Security Ownership of CertainItem 2. Properties 20
Beneficial Owners and
Item 3. Legal Proceedings 20 Management and Related
Stockholder Matters 205Item 4. Submission of Matters to a
Vote of Security Holders 25 Item 13. Certain Relationships and
Related Transactions, andPart II
Director Independence 205
Item 5. Market for the Registrant’s
Item 14. Principal Accountant Fees andCommon Equity, Related
Services 205Stockholder Matters and Issuer
Purchases of Equity Securities 26 Part IV
Item 6. Selected Financial Data 28 Item 15.** Exhibits and Financial
Statement Schedules 205Item 7. Management’s Discussion and
Analysis of Financial Condition Signatures 206
and Results of Operations 29
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk 128
Item 8. Financial Statements and
Supplementary Data 128
Item 9. Changes in and Disagreements
With Accountants on Accounting
and Financial Disclosure 202
Item 9A. Controls and Procedures 202
Item 9B. Other Information 204
* Except for the information provided in Part I under the heading ‘‘Directors and Executive Officers of AIG,’’ Part III Items 10, 11, 12, 13 and 14 are
included in AIG’s Definitive Proxy Statement to be used in connection with AIG’s Annual Meeting of Shareholders scheduled to be held on May 14,
2008.
** Part IV, Item 15, Schedules, the Exhibit Index, and certain Exhibits were included in Form 10-K filed with the Securities and Exchange Commission but
have not been included herein. Copies may be obtained electronically through AIG’s website at www.aigcorporate.com or from the Director of Investor
Relations, American International Group, Inc.
2 AIG 2007 Form 10-K

Part I
Item 1.
Business
Financial ServicesAmerican International Group, Inc. (AIG), a Delaware corporation, is
a holding company which, through its subsidiaries, is engaged in a
International Lease Finance Corporation (ILFC)broad range of insurance and insurance-related activities in the
AIG Financial Products Corp. and AIG Trading Group Inc. andUnited States and abroad. AIG’s primary activities include both
their respective subsidiaries (collectively, AIGFP)General Insurance and Life Insurance & Retirement Services
American General Finance, Inc. (AGF)operations. Other significant activities include Financial Services
and Asset Management. The principal business units in each of AIG Consumer Finance Group, Inc. (AIGCFG)
AIG’s operating segments are as follows*: Imperial A.I. Credit Companies (A.I. Credit)
Asset ManagementGeneral Insurance
American Home Assurance Company (American Home) AIG SunAmerica Asset Management Corp. (SAAMCo)
National Union Fire Insurance Company of Pittsburgh, Pa. AIG Global Asset Management Holdings Corp. and its subsidiar-
(National Union) ies and affiliated companies (collectively, AIG Investments)
New Hampshire Insurance Company (New Hampshire)
AIG Private Bank Ltd. (AIG Private Bank)
Lexington Insurance Company (Lexington)
AIG Global Real Estate Investment Corp. (AIG Global Real Estate)
The Hartford Steam Boiler Inspection and Insurance Com-
pany (HSB)
Transatlantic Reinsurance Company At December 31, 2007, AIG and its subsidiaries had
United Guaranty Residential Insurance Company approximately 116,000 employees.
American International Underwriters Overseas, Ltd. (AIUO)
AIG’s Internet address for its corporate website is
AIU Insurance Company (AIUI) www.aigcorporate.com. AIG makes available free of charge, through
the Investor Information section of AIG’s corporate website, Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and Proxy Statements on Schedule 14A andDomestic:
amendments to those reports or statements filed or furnished
pursuant to Section 13(a), 14(a) or 15(d) of the SecuritiesAmerican General Life Insurance Company (AIG American
Exchange Act of 1934 (the Exchange Act) as soon as reasonablyGeneral)
practicable after such materials are electronically filed with, orAmerican General Life and Accident Insurance Company
furnished to, the Securities and Exchange Commission (SEC). AIG(AGLA)
also makes available on its corporate website copies of theThe United States Life Insurance Company in the City of New
charters for its Audit, Nominating and Corporate Governance andYork (USLIFE)
Compensation and Management Resources Committees, as well asThe Variable Annuity Life Insurance Company (VALIC)
its Corporate Governance Guidelines (which include Director Inde-
AIG Annuity Insurance Company (AIG Annuity)
pendence Standards), Director, Executive Officer and Senior Finan-
AIG SunAmerica Life Assurance Company (AIG SunAmerica)
cial Officer Code of Business Conduct and Ethics, Employee Code
Foreign: of Conduct and Related-Party Transactions Approval Policy. Except
for the documents specifically incorporated by reference into this
American Life Insurance Company (ALICO) Annual Report on Form 10-K, information contained on AIG’s
website or that can be accessed through its website is notAIG Star Life Insurance Co., Ltd. (AIG Star Life)
incorporated by reference into this Annual Report on Form 10-K.AIG Edison Life Insurance Company (AIG Edison Life)
American International Assurance Company, Limited, together Throughout this Annual Report on Form 10-K, AIG presents its
with American International Assurance Company (Bermuda) operations in the way it believes will be most meaningful, as well
Limited (AIA)
as most transparent. Certain of the measurements used by AIG
American International Reinsurance Company Limited (AIRCO) management are ‘‘non-GAAP financial measures’’ under SEC rules
Nan Shan Life Insurance Company, Ltd. (Nan Shan) and regulations. Statutory underwriting profit (loss) and combined
The Philippine American Life and General Insurance Company ratios are determined in accordance with accounting principles
(Philamlife) prescribed by insurance regulatory authorities. For an explanation
of why AIG management considers these ‘‘non-GAAP measures’’
useful to investors, see Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
*For information on AIG’s business segments, see Note 2 to
Consolidated Financial Statements.

The following table presents the general development of the business of AIG on a consolidated basis, the contributions
made to AIG’s consolidated revenues and operating income and the assets held, in the periods indicated, by its
General Insurance, Life Insurance & Retirement Services, Financial Services and Asset Management operations and
Other operations. For additional information, see Item 6. Selected Financial Data, Management’s Discussion and
Analysis of Financial Condition and Results of Operations and Notes 1 and 2 to Consolidated Financial Statements.
Years Ended December 31,
(in millions) 2007 2006(a)
2005(a)
2004(a)
2003(a)
Gross premiums written $ 58,798 $ 56,280 $ 52,725 $ 52,046 $ 46,938
Net premiums written 47,067 44,866 41,872 40,623 35,031
Net premiums earned 45,682 43,451 40,809 38,537 31,306
Net investment income(b)
6,132 5,696 4,031 3,196 2,566
Net realized capital gains (losses) (106) 59 334 228 (39)
Operating income(b)(c)(d)
10,526 10,412 2,315 3,177 4,502
Year-end identifiable assets 181,708 167,004 150,667 131,658 117,511
Statutory measures(e)
:
Statutory underwriting profit (loss)(c)(d)
4,073 4,408 (2,165) (564) 1,559
Loss ratio 65.6 64.6 81.1 78.8 73.1
Expense ratio 24.7 24.5 23.6 21.5 19.6
Combined ratio(d)
90.3 89.1 104.7 100.3 92.7
Premiums and other considerations 33,627 30,766 29,501 28,167 23,568
Net investment income(b)
22,341 20,024 18,677 15,654 13,278
Net realized capital gains (losses)(f)
(2,398) 88 (158) 45 362
Operating income(b)(f)
8,186 10,121 8,965 7,968 6,970
Gross insurance in force at end of year 2,312,045 2,070,600 1,852,833 1,858,094 1,583,031
Financial Services operations:
Interest, lease and finance charges(g)(h)
(1,209) 7,910 10,523 7,495 6,241
Net realized capital gains (losses) (100) (133) 154 (45) 123
Operating income (loss)(g)(h)
(9,515) 383 4,424 2,131 1,302
Asset Management operations:
Investment income from spread-based products
and management, advisory and incentive fees 6,625 4,668 4,500 4,179 3,379
Net realized capital gains (losses) (1,000) (125) 82 60 (754)
Operating income 1,164 1,538 1,963 1,947 521
Other operations:
Net realized capital gains (losses) 12 217 (71) (244) (134)
All other(i)
(1,430) (984) (2,383) (134) (1,254)
Consolidated:
Total revenues(j)(k)
110,064 113,387 108,781 97,823 79,601
Operating income(b)(j)(k)
8,943 21,687 15,213 14,845 11,907
Year-end total assets 1,060,505 979,410 853,048 801,007 675,602
(b) In 2006, includes the effect of out of period adjustments related to the accounting for certain interests in unit investment trusts (UCITS). The effect
was an increase of $490 million in both revenues and operating income for General Insurance and an increase of $240 million and $169 million in
revenues and operating income, respectively, for Life Insurance & Retirement Services.
(c) Includes current year catastrophe-related losses of $276 million, $2.89 billion and $1.05 billion in 2007, 2005 and 2004, respectively. There were no
significant catastrophe-related losses in 2006 or 2003.
(d) Operating income was reduced by fourth quarter charges of $1.8 billion and $850 million in 2005 and 2004, respectively, resulting from the annual
review of General Insurance loss and loss adjustment reserves. In 2006, 2005 and 2004, changes in estimates for asbestos and environmental
reserves were $198 million, $873 million and $850 million, respectively.
(e) Calculated on the basis under which the U.S.-domiciled general insurance companies are required to report such measurements to regulatory
authorities.

(f) In 2007, 2006, 2005, 2004 and 2003, includes other-than-temporary impairment charges of $2.8 billion, $641 million, $425 million, $441 million
and $1.2 billion. See Management’s Discussion and Analysis of Financial Condition and Results of Operations — Invested Assets — Other-than-
temporary impairments.
(g) Includes gains (losses) from hedging activities that did not qualify for hedge accounting treatment under Statement of Financial Accounting Standards
(FAS) No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities’’ (FAS 133), including the related foreign exchange gains and losses. In
2007, 2006, 2005, 2004 and 2003, respectively, the effect was $211 million, $(1.82) billion, $2.01 billion, $(122) million and $(1.01) billion in both
revenues and operating income for Capital Markets. These amounts result primarily from interest rate and foreign currency derivatives that are effective
economic hedges of investments and borrowings. These gains (losses) in 2007 include a $380 million out of period charge to reverse net gains
recognized on transfers of available for sale securities among legal entities consolidated within AIGFP. In 2006, includes an out of period charge of
$223 million related to the remediation of the material weakness in internal control over the accounting for certain derivative transactions under
FAS 133. In the ﬁrst quarter of 2007, AIGFP began applying hedge accounting for certain of its interest rate swaps and foreign currency forward
contracts hedging its investments and borrowings.
(h) In 2007, both revenues and operating income (loss) include an unrealized market valuation loss of $11.5 billion on AIGFP super senior credit default
swap portfolio and an other-than-temporary impairment charge of $643 million on AIGFP’s available for sale investment securities. See Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Invested Assets — Other-than-temporary impairments.
(i) In 2005, includes $1.6 billion of regulatory settlement costs as described under Item 3. Legal Proceedings.
(j) In 2007, 2006, 2005, 2004 and 2003, includes other-than-temporary impairment charges of $4.7 billion, $944 million, $598 million, $684 million and
$1.5 billion. Also includes gains (losses) from hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related
foreign exchange gains and losses. In 2007, 2006, 2005, 2004 and 2003, respectively, the effect was $(1.44) billion, $(1.87) billion, $2.02 billion,
$385 million and $(1.50) billion in revenues and $(1.44) billion, $(1.87) billion, $2.02 billion, $671 million and $(1.22) billion in operating income.
These amounts result primarily from interest rate and foreign currency derivatives that are effective economic hedges of investments and borrowings.
(k) Represents income before income taxes, minority interest and cumulative effect of accounting changes.

multinational clients and foreign corporations doing business inGeneral Insurance Operations
the U.S.
AIG’s General Insurance subsidiaries write substantially all lines of
commercial property and casualty insurance and various personal Reinsurance
lines both domestically and abroad. Domestic General Insurance
The subsidiaries of Transatlantic Holdings, Inc. (Transatlantic) offeroperations are comprised of the Domestic Brokerage Group
reinsurance on both a treaty and facultative basis to insurers in the(DBG), Reinsurance, Personal Lines and Mortgage Guaranty.
United States and abroad. Transatlantic structures programs for a fullAIG is diversified both in terms of classes of business and
range of property and casualty products with an emphasis ongeographic locations. In General Insurance, workers compensation
specialty risk. Transatlantic is a public company owned 59.0 percentbusiness is the largest class of business written and represented
by AIG and therefore is included in AIG’s consolidated financialapproximately 15 percent of net premiums written for the year ended
statements.December 31, 2007. During 2007, 10 percent and 7 percent of the
direct General Insurance premiums written (gross premiums less
Personal Linesreturn premiums and cancellations, excluding reinsurance assumed
and before deducting reinsurance ceded) were written in California
AIG’s Personal Lines operations provide automobile insurance
and New York, respectively. No other state or foreign country
through aigdirect.com, the newly formed operation resulting from
accounted for more than five percent of such premiums.
the 2007 combination of AIG Direct and 21st Century Insurance
The majority of AIG’s General Insurance business is in the
Group (21st Century) operations, and the Agency Auto Division, as
casualty classes, which tend to involve longer periods of time for
well as a broad range of coverages for high net worth individuals
the reporting and settling of claims. This may increase the risk
through the AIG Private Client Group.
and uncertainty with respect to AIG’s loss reserve development.
Mortgage Guaranty
DBG
The main business of the subsidiaries of United Guaranty
AIG’s primary Domestic General Insurance division is DBG. DBG’s
Corporation (UGC) is the issuance of residential mortgage guar-
business in the United States and Canada is conducted through
anty insurance, both domestically and internationally, that covers
American Home, National Union, Lexington, HSB and certain other
the first loss for credit defaults on high loan-to-value conventional
General Insurance company subsidiaries of AIG. During 2007,
first-lien mortgages for the purchase or refinance of one to four
DBG accounted for 51 percent of AIG’s General Insurance net
family residences. UGC subsidiaries also write second-lien and
premiums written.
private student loan guaranty insurance.
DBG writes substantially all classes of business insurance,
accepting such business mainly from insurance brokers. This
provides DBG the opportunity to select specialized markets and
retain underwriting control. Any licensed broker is able to submit AIG’s Foreign General Insurance group accepts risks primarily
business to DBG without the traditional agent-company contractual underwritten through American International Underwriters (AIU), a
relationship, but such broker usually has no authority to commit marketing unit consisting of wholly owned agencies and insurance
DBG to accept a risk. companies. The Foreign General Insurance group also includes
In addition to writing substantially all classes of business business written by AIG’s foreign-based insurance subsidiaries. The
insurance, including large commercial or industrial property insur- Foreign General Insurance group uses various marketing methods
ance, excess liability, inland marine, environmental, workers and multiple distribution channels to write both commercial and
compensation and excess and umbrella coverages, DBG offers consumer lines insurance with certain refinements for local laws,
many specialized forms of insurance such as aviation, accident customs and needs. AIU operates in Asia, the Pacific Rim, Europe,
and health, equipment breakdown, directors and officers liability the U.K., Africa, the Middle East and Latin America. During 2007,
(D&O), difference-in-conditions, kidnap-ransom, export credit and the Foreign General Insurance group accounted for 28 percent of
political risk, and various types of professional errors and AIG’s General Insurance net premiums written.
omissions coverages. Also included in DBG are the operations of
AIG Risk Management, which provides insurance and risk manage- Discussion and Analysis of Consolidated Net
ment programs for large corporate customers and is a leading Losses and Loss Expense Reserve Development
provider of customized structured insurance products, and AIG
The reserve for net losses and loss expenses represents the
Environmental, which focuses specifically on providing specialty
accumulation of estimates for reported losses (case basis
products to clients with environmental exposures. Lexington writes
reserves) and provisions for losses incurred but not reported
surplus lines for risks on which conventional insurance companies
(IBNR), both reduced by applicable reinsurance recoverable and
do not readily provide insurance coverage, either because of
the discount for future investment income, where permitted. Net
complexity or because the coverage does not lend itself to
losses and loss expenses are charged to income as incurred.
conventional contracts. The AIG Worldsource Division introduces
Loss reserves established with respect to foreign business are
and coordinates AIG’s products and services to U.S.-based
set and monitored in terms of the currency in which payment is
expected to be made. Therefore, no assumption is included for

changes in currency rates. See also Note 1(ff) to Consolidated $41.21 billion at December 31, 2007. This increase from the
Financial Statements. original estimate would generally result from a combination of a
Management reviews the adequacy of established loss number of factors, including reserves being settled for larger
reserves utilizing a number of analytical reserve development amounts than originally estimated. The original estimates will also
techniques. Through the use of these techniques, management is be increased or decreased as more information becomes known
able to monitor the adequacy of AIG’s established reserves and about the individual claims and overall claim frequency and
determine appropriate assumptions for inflation. Also, analysis of severity patterns. The redundancy (deficiency) depicted in the
emerging specific development patterns, such as case reserve table, for any particular calendar year, presents the aggregate
redundancies or deficiencies and IBNR emergence, allows man- change in estimates over the period of years subsequent to the
agement to determine any required adjustments. calendar year reflected at the top of the respective column
The ‘‘Analysis of Consolidated Losses and Loss Expense heading. For example, the redundancy of $672 million at Decem-
Reserve Development’’ table presents the development of net ber 31, 2007 related to December 31, 2006 net losses and loss
losses and loss expense reserves for calendar years 1997 expense reserves of $62.72 billion represents the cumulative
through 2007. Immediately following this table is a second table amount by which reserves in 2006 and prior years have
that presents all data on a basis that excludes asbestos and developed favorably during 2007.
environmental net losses and loss expense reserve development. The bottom of each table below presents the remaining
The opening reserves held are shown at the top of the table for undiscounted and discounted net loss reserve for each year. For
each year end date. The amount of loss reserve discount included example, in the table that excludes asbestos and environmental
in the opening reserve at each date is shown immediately below losses, for the 2002 year end, the remaining undiscounted
the reserves held for each year. The undiscounted reserve at reserves held as of December 31, 2007 are $13.57 billion, with
each date is thus the sum of the discount and the reserve held. a corresponding discounted net reserve of $12.57 billion.
The upper half of the table presents the cumulative amounts The reserves for net losses and loss expenses with respect to
paid during successive years related to the undiscounted opening Transatlantic and 21st Century are included only in consolidated
loss reserves. For example, in the table that excludes asbestos net losses and loss expenses commencing with the year ended
and environmental losses, with respect to the net losses and loss December 31, 1998, the year they were first consolidated in AIG’s
expense reserve of $24.83 billion as of December 31, 2000, by financial statements. Reserve development for these operations is
the end of 2007 (seven years later) $33.05 billion had actually included only for 1998 and subsequent periods. Thus, the
been paid in settlement of these net loss reserves. In addition, presentation for 1997 and prior year ends is not fully comparable
as reflected in the lower section of the table, the original to that for 1998 and subsequent years in the tables below.
undiscounted reserve of $26.12 billion was reestimated to be

Analysis of Consolidated Losses and Loss Expense Reserve Development
The following table presents for each calendar year the losses and loss expense reserves and the development thereof
including those with respect to asbestos and environmental claims. See also Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Operating Review — General Insurance Operations — Reserve for
Losses and Loss Expenses.
(in millions) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Net Reserves Held $ 20,901 $ 25,418 $ 25,636 $ 25,684 $ 26,005 $ 29,347 $ 36,228 $ 47,254 $ 57,476 $62,630 $69,288
Discount (in Reserves Held) 619 897 1,075 1,287 1,423 1,499 1,516 1,553 2,110 2,264 2,429
Net Reserves Held (Undiscounted) 21,520 26,315 26,711 26,971 27,428 30,846 37,744 48,807 59,586 64,894 71,717
Paid (Cumulative) as of:
One year later 5,607 7,205 8,266 9,709 11,007 10,775 12,163 14,910 15,326 14,862
Two years later 9,754 12,382 14,640 17,149 18,091 18,589 21,773 24,377 25,152
Three years later 12,939 16,599 19,901 21,930 23,881 25,513 28,763 31,296
Four years later 15,484 20,263 23,074 26,090 28,717 30,757 33,825
Five years later 17,637 22,303 25,829 29,473 32,685 34,627
Six years later 18,806 24,114 28,165 32,421 35,656
Seven years later 19,919 25,770 30,336 34,660
Eight years later 21,089 27,309 31,956
Nine years later 22,177 28,626
Ten years later 23,096
(in millions) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Net Reserves Held (undiscounted) $ 21,520 $ 26,315 $ 26,711 $ 26,971 $ 27,428 $ 30,846 $ 37,744 $ 48,807 $ 59,586 $64,894 $71,717
Undiscounted Liability as of:
One year later 21,563 25,897 26,358 26,979 31,112 32,913 40,931 53,486 59,533 64,238
Two years later 21,500 25,638 27,023 30,696 33,363 37,583 49,463 55,009 60,126
Four years later 21,485 28,021 31,192 36,210 45,203 48,427 52,964
Five years later 22,405 28,607 33,910 41,699 47,078 49,855
Six years later 22,720 30,632 38,087 43,543 48,273
Net Redundancy/(Deﬁciency) (6,584) (9,241) (13,506) (17,504) (20,845) (19,009) (15,220) (7,240) (540) 656
Remaining Reserves (Undiscounted) 5,008 6,930 8,261 9,815 12,617 15,228 19,139 24,751 34,974 49,376
Remaining Discount 418 499 591 705 851 1,005 1,155 1,319 1,563 1,937
Remaining Reserves 4,590 6,431 7,670 9,110 11,766 14,223 17,984 23,432 33,411 47,439
The following table presents the gross liability (before discount), reinsurance recoverable and net liability recorded at
each year end and the reestimation of these amounts as of December 31, 2007:
(in millions) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Gross Liability, End of Year $ 32,049 $ 36,973 $ 37,278 $ 39,222 $ 42,629 $ 48,173 $ 53,387 $ 63,431 $ 79,279 $82,263 $87,929
Reinsurance Recoverable, End of Year 10,529 10,658 10,567 12,251 15,201 17,327 15,643 14,624 19,693 17,369 16,212
Net Liability, End of Year 21,520 26,315 26,711 26,971 27,428 30,846 37,744 48,807 59,586 64,894 71,717
Reestimated Gross Liability 44,844 54,284 60,212 66,308 70,680 72,234 72,944 74,434 80,941 81,695
Reestimated Reinsurance Recoverable 16,740 18,729 19,995 21,833 22,407 22,379 19,980 18,386 20,816 17,457
Reestimated Net Liability 28,104 35,555 40,217 44,475 48,273 49,855 52,964 56,048 60,125 64,238
Cumulative Gross
Redundancy/(Deﬁciency) (12,795) (17,311) (22,934) (27,086) (28,051) (24,061) (19,557) (11,003) (1,662) 568

Analysis of Consolidated Losses and Loss Expense Reserve Development Excluding Asbestos and
Environmental Losses and Loss Expense Reserve Development
The following table presents for each calendar year the losses and loss expense reserves and the development thereof
excluding those with respect to asbestos and environmental claims. See also Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Operating Review — General Insurance Operations — Reserve for
Losses and Loss Expenses.
(in millions) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Net Reserves Held $20,113 $ 24,554 $ 24,745 $ 24,829 $ 25,286 $ 28,650 $ 35,559 $45,742 $55,227 $60,451 $67,597
Discount (in Reserves Held) 619 897 1,075 1,287 1,423 1,499 1,516 1,553 2,110 2,264 2,429
Net Reserves Held (Undiscounted) 20,732 25,451 25,820 26,116 26,709 30,149 37,075 47,295 57,336 62,715 70,026
Paid (Cumulative) as of:
One year later 5,467 7,084 8,195 9,515 10,861 10,632 11,999 14,718 15,047 14,356
Two years later 9,500 12,190 14,376 16,808 17,801 18,283 21,419 23,906 24,367
Four years later 14,972 19,732 22,521 25,445 28,080 29,987 32,686
Five years later 16,983 21,630 25,116 28,643 31,771 33,353
Six years later 18,014 23,282 27,266 31,315 34,238
(in millions) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Net Reserves Held (undiscounted) $20,732 $ 25,451 $ 25,820 $ 26,116 $ 26,709 $ 30,149 $ 37,075 $47,295 $57,336 $62,715 $70,026
Undiscounted Liability as of:
One year later 20,576 24,890 25,437 26,071 30,274 32,129 39,261 51,048 57,077 62,043
Two years later 20,385 24,602 26,053 29,670 32,438 35,803 46,865 52,364 57,653
Four years later 20,301 26,813 30,014 34,102 42,348 45,510 50,140
Five years later 21,104 27,314 31,738 38,655 44,018 46,925
Six years later 21,336 28,345 34,978 40,294 45,201
Net Redundancy/(Deﬁciency) (3,856) (6,662) (11,069) (15,097) (18,492) (16,776) (13,065) (6,090) (317) 672
Remaining Reserves (undiscounted) 3,386 5,281 6,610 8,162 10,963 13,572 17,454 23,065 33,286 47,687
Remaining Discount 418 499 591 705 851 1,005 1,155 1,319 1,563 1,937
Remaining Reserves 2,968 4,782 6,019 7,457 10,112 12,567 16,299 21,746 31,723 45,750
The following table presents the gross liability (before discount), reinsurance recoverable and net liability recorded at
each year end and the reestimation of these amounts as of December 31, 2007:
(in millions) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Gross Liability, End of Year $29,740 $ 34,474 $ 34,666 $ 36,777 $ 40,400 $ 46,036 $ 51,363 $59,790 $73,808 $77,111 $83,551
Reinsurance Recoverable, End of Year 9,008 9,023 8,846 10,661 13,691 15,887 14,288 12,495 16,472 14,396 13,525
Net Liability, End of Year 20,732 25,451 25,820 26,116 26,709 30,149 37,075 47,295 57,336 62,715 70,026
Reestimated Gross Liability 35,712 45,467 51,801 58,420 63,320 65,217 66,320 68,100 75,028 76,439
Reestimated Reinsurance Recoverable 11,124 13,354 14,912 17,207 18,119 18,292 16,180 14,715 17,375 14,396
Reestimated Net Liability 24,588 32,113 36,889 41,213 45,201 46,925 50,140 53,385 57,653 62,043
Cumulative Gross
Redundancy/(Deﬁciency) (5,972) (10,993) (17,135) (21,643) (22,920) (19,181) (14,957) (8,310) (1,220) 672

The reserve for losses and loss expenses as reported in AIG’s countries comprised 79 percent of Life Insurance & Retirement
consolidated balance sheet at December 31, 2007 differs from Services Premiums and other considerations and 76 percent of
the total reserve reported in the Annual Statements filed with Life Insurance & Retirement Services operating income in 2007.
state insurance departments and, where appropriate, with foreign The Foreign Life Insurance & Retirement Services companies
regulatory authorities. The differences at December 31, 2007 have over 285,000 full and part-time agents, as well as
relate primarily to reserves for certain foreign operations not independent producers, and sell their products largely to indige-
required to be reported in the United States for statutory nous persons in local and foreign currencies. In addition to the
reporting purposes. Further, statutory practices in the United agency outlets, these companies also distribute their products
States require reserves to be shown net of applicable reinsurance through direct marketing channels, such as mass marketing, and
recoverable. through brokers and other distribution outlets, such as financial
The reserve for gross losses and loss expenses is prior to institutions.
reinsurance and represents the accumulation for reported losses
and IBNR. Management reviews the adequacy of established Domestic Life Insurance & Retirement
gross loss reserves in the manner previously described for net Services
loss reserves.
AIG’s principal Domestic Life Insurance & Retirement Services
For further discussion regarding net reserves for losses and
operations include AGLA, AIG American General, AIG Annuity,
loss expenses, see Management’s Discussion and Analysis of
USLIFE, VALIC and AIG SunAmerica. These companies utilize
Financial Condition and Results of Operations — Operating Re-
multiple distribution channels including independent producers,
view — General Insurance Operations — Reserve for Losses and
brokerage, career agents and financial institutions to offer life
Loss Expenses.
insurance, annuity and accident and health products and services,
as well as financial and other investment products. The Domestic
Life Insurance & Retirement Services operations comprised
Operations
21 percent of total Life Insurance & Retirement Services Premi-
AIG’s Life Insurance & Retirement Services operations provide ums and other considerations and 24 percent of Life Insurance &
insurance, financial and investment-oriented products throughout Retirement Services operating income in 2007.
the world. Insurance-oriented products consist of individual and
group life, payout annuities (including structured settlements), Reinsurance
endowment and accident and health policies. Retirement savings
AIG’s General Insurance subsidiaries worldwide operate primarily
products consist generally of fixed and variable annuities.
by underwriting and accepting risks for their direct account and
securing reinsurance on that portion of the risk in excess of the
limit which they wish to retain. This operating policy differs from
In its Foreign Life Insurance & Retirement Services businesses, that of many insurance companies that will underwrite only up to
AIG operates principally through ALICO, AIG Star Life, AIG Edison their net retention limit, thereby requiring the broker or agent to
Life, AIA, Nan Shan and Philamlife. ALICO is incorporated in secure commitments from other underwriters for the remainder of
Delaware and all of its business is written outside of the United the gross risk amount.
States. ALICO has operations either directly or through subsidiar- Various AIG profit centers, including DBG, AIU and AIG Risk
ies in Europe, including the U.K., Latin America, the Caribbean, Finance, as well as certain Life Insurance subsidiaries, use AIRCO
the Middle East, South Asia and the Far East, with Japan being as a reinsurer for certain of their businesses. In Bermuda, AIRCO
the largest territory. ALICO also conducts life insurance business discounts reserves attributable to certain classes of business
through a joint venture in Brazil. AIA operates primarily in China assumed from other AIG subsidiaries.
(including Hong Kong), Singapore, Malaysia, Thailand, Korea, For a further discussion of reinsurance, see Item 1A. Risk
Australia, New Zealand, Vietnam, Indonesia and India. The Factors — Reinsurance; Management’s Discussion and Analysis of
operations in India are conducted through a joint venture, Tata AIG Financial Condition and Results of Operations — Risk Manage-
Life Insurance Company Limited. Nan Shan operates in Taiwan. ment — Reinsurance; and Note 5 to Consolidated Financial
Philamlife is the largest life insurer in the Philippines. AIG Star Statements.
Life and AIG Edison Life operate in Japan. Operations in foreign
10 AIG 2007 Form 10-K

Insurance Investment Operations
A significant portion of AIG’s General Insurance and Life Insurance & Retirement Services revenues are derived from AIG’s insurance
investment operations.
The following table summarizes the investment results of the insurance operations:
Annual Average Cash and Invested Assets
Cash Return on
(including Average Cash Return on
Years Ended December 31, short-term Invested and Invested Average Invested
(in millions) investments)(a)
Assets(a)
Total Assets(b)
Assets(c)
General Insurance:
2007 $ 5,874 $117,050 $122,924 5.0% 5.2%
2006 3,201 102,231 105,432 5.4 5.6
2005 2,450 86,211 88,661 4.5 4.7
2004 2,012 73,338 75,350 4.2 4.4
2003 1,818 59,855 61,673 4.2 4.3
Life Insurance & Retirement Services:
2007 $25,926 $423,473 $449,669 5.0% 5.3%
2006 13,698 392,348 406,046 4.9 5.1
2005 11,137 356,839 367,976 5.1 5.2
2004 7,737 309,627 317,364 4.9 5.1
2003 4,680 247,608 252,288 5.3 5.4
(a) Including investment income due and accrued and real estate. Also, includes collateral assets invested under the global securities lending program.
(b) Net investment income divided by the annual average sum of cash and invested assets.
(c) Net investment income divided by the annual average invested assets.
AIG’s worldwide insurance investment policy places primary Capital Markets
emphasis on investments in government and other high quality,
Capital Markets represents the operations of AIGFP, whichfixed income securities in all of its portfolios and, to a lesser
engages as principal in a wide variety of financial transactions,extent, investments in high yield bonds, common stocks, real
including standard and customized financial products involvingestate, hedge funds and partnerships, in order to enhance returns
commodities, credit, currencies, energy, equities and rates. Theon policyholders’ funds and generate net investment income. The
credit products include credit protection written through creditability to implement this policy is somewhat limited in certain
default swaps on super senior risk tranches of diversified pools ofterritories as there may be a lack of adequate long-term
loans and debt securities. AIGFP also invests in a diversifiedinvestments or investment restrictions may be imposed by the
portfolio of securities and principal investments and engages inlocal regulatory authorities.
borrowing activities that include issuing standard and structured
notes and other securities and entering into guaranteed invest-Financial Services Operations
ment agreements (GIAs).
AIG’s Financial Services subsidiaries engage in diversified activi-
ties including aircraft and equipment leasing, capital markets, Consumer Finance
consumer finance and insurance premium finance. Together, the
Consumer Finance operations include AGF as well as AIGCFG. AGFAircraft Leasing, Capital Markets and Consumer Finance opera-
provides a wide variety of consumer finance products, includingtions generate the majority of the revenues produced by the
real estate and non-real estate loans, retail sales finance andFinancial Services operations. A.I. Credit also contributes to
credit-related insurance to customers in the United States, theFinancial Services income principally by providing insurance
U.K., Puerto Rico and the U.S. Virgin Islands. AGF’s financepremium financing for both AIG’s policyholders and those of other
receivables are primarily sourced through its branches, althoughinsurers.
many of AGF’s real estate loans are sourced through its
centralized real estate operations, which include AGF’s mortgageAircraft Leasing
banking activities. AIGCFG, through its subsidiaries, is engaged in
Aircraft Leasing operations represent the operations of ILFC, which developing a multi-product consumer finance business with an
generates its revenues primarily from leasing new and used emphasis on emerging and developing markets.
commercial jet aircraft to foreign and domestic airlines. Revenues
also result from the remarketing of commercial jets for ILFC’s own Asset Management Operations
account, and remarketing and fleet management services for
AIG’s Asset Management operations comprise a wide variety ofairlines and financial institutions. See also Note 2 to Consolidated
investment-related services and investment products. These ser-Financial Statements.
AIG 2007 Form 10-K 11

vices and products are offered to individuals, pension funds and recovering its investment upon transfer or divestment. In the event
institutions globally through AIG’s Spread-Based Investment busi- that AIG is unable to transfer or otherwise divest its interest in
ness, Institutional Asset Management, and Brokerage Services the warehoused investment to third parties, AIG could be required
and Mutual Funds business. Also included in Asset Management to hold these investments indefinitely. In certain instances, the
operations are the results of certain SunAmerica sponsored consolidated warehoused investments are not wholly owned by
partnership investments. AIG. In such cases, AIG shares the risk associated with warehous-
ing the asset with the minority interest investors.
Spread-Based Investment Business
Brokerage Services and Mutual Funds
AIG’s Spread-Based Investment business includes the results of
AIG’s proprietary spread-based investment operations, the AIG’s Brokerage Services and Mutual Funds business, conducted
Matched Investment Program (MIP), which was launched in through AIG Advisor Group, Inc. and AIG SunAmerica Asset
September of 2005 to replace the Guaranteed Investment Management Corp., provides broker-dealer related services and
Contract (GIC) program, which is in runoff. The MIP is an mutual funds to retail investors, group trusts and corporate
investment strategy that involves investing in various asset accounts through an independent network of financial advisors.
classes with financing provided through third parties. This busi- AIG Advisor Group, Inc., a subsidiary of AIG Retirement Services,
ness uses various risk mitigating strategies designed to hedge Inc., is comprised of several broker-dealer entities that provide
interest rate and currency risk associated with underlying invest- these services to clients primarily in the U.S. marketplace. AIG
ments and related liabilities. SunAmerica Asset Management Corp. manages, advises and/or
administers retail mutual funds, as well as the underlying assets
of variable annuities sold by AIG SunAmerica and VALIC toInstitutional Asset Management
individuals and groups throughout the United States.
AIG’s Institutional Asset Management business, conducted
through AIG Investments, provides an array of investment prod-
Other Asset Management
ucts and services globally to institutional investors, pension
funds, AIG subsidiaries and high net worth investors. These Included in Other Asset Management is income or loss from
products include traditional equity and fixed income investments, certain AIG SunAmerica sponsored partnerships and partnership
and a wide range of alternative asset classes. These services investments. Partnership assets consist of investments in a
include investment advisory and subadvisory services, investment diversified portfolio of private equity funds, affordable housing
monitoring and investment transaction structuring. Within the fixed partnerships and hedge fund investments.
income and equity asset classes, AIG Investments offers various
forms of structured investments aimed at achieving superior Other Operations
returns or capital preservation. Within the alternative asset class,
Certain AIG subsidiaries provide insurance-related services such
AIG Investments offers hedge and private equity fund-of-funds,
as adjusting claims and marketing specialized products. Several
direct investments and distressed debt investments.
wholly owned foreign subsidiaries of AIG operating in countries or
AIG Global Real Estate provides a wide range of real estate
jurisdictions such as Ireland, Bermuda, Barbados and Gibraltar
investment and management services for AIG subsidiaries, as well
provide insurance and related administrative and back office
as for third-party institutional investors, high net worth investors
services to affiliated and unaffiliated insurance and reinsurance
and pension funds. Through a strategic network of local real
companies, including captive insurance companies unaffiliated
estate ventures, AIG Global Real Estate actively invests in and
with AIG.
develops office, industrial, multi-family residential, retail, hotel and
AIG has several other subsidiaries that engage in various
resort properties globally.
businesses. Mt. Mansfield Company, Inc. owns and operates the ski
AIG Private Bank offers banking, trading and investment
slopes, lifts, a school and an inn located in Stowe, Vermont. Also
management services to private clients and institutions globally.
reported in AIG’s Other operations are interest expense, expenses of
From time to time, AIG Investments acquires alternative
corporate staff not attributable to specific business segments,
investments, primarily consisting of direct controlling equity inter-
expenses related to efforts to improve internal controls, corporate
ests in private enterprises, with the intention of ‘‘warehousing’’
initiatives, certain compensation plan expenses and the settlement
such investments until the investment or economic benefit thereof
costs more fully described in Item 3. Legal Proceedings and
is transferred to a fund or other AIG-managed investment product.
Note 12(a) to Consolidated Financial Statements.
During the warehousing period, AIG bears the cost and risks
associated with carrying these investments and consolidates
Additional Investmentsthem on its balance sheet and records the operating results until
the investments are transferred, sold or otherwise divested. AIG’s significant investments in partially owned companies (which
Changes in market conditions may negatively affect the fair value are accounted for under the equity method) include a 25.4 per-
of these warehoused investments. Market conditions may impede cent interest in The Fuji Fire and Marine Insurance Co., Ltd., a
AIG from launching new investment products for which these general insurance company in Japan, a 26.0 percent interest in
warehoused assets are being held, which could result in AIG not Tata AIG Life Insurance Company, Ltd. and a 26.0 percent interest
12 AIG 2007 Form 10-K

in Tata AIG General Insurance Company, Ltd. in India. Substan- the financial activities permitted for financial holding companies under
tially all of AIG’s equity interest in Allied World Assurance the law or for multiple savings and loan holding companies. The
Holdings, Ltd. was sold by AIG in December 2007. For a GLBA, however, grandfathered the unrestricted authority for activities
discussion of AIG’s investments in partially owned companies, with respect to a unitary savings and loan holding company existing
see Note 1(s) to Consolidated Financial Statements. prior to May 4, 1999, so long as its savings association subsidiary
continues to be a qualified thrift lender under the HOLA. As a unitary
savings and loan holding company whose application was pending asLocations of Certain Assets
of May 4, 1999, AIG is grandfathered under the GLBA and generally
As of December 31, 2007, approximately 37 percent of the
is not restricted under existing laws as to the types of business
consolidated assets of AIG were located in foreign countries (other
activities in which it may engage, provided that AIG Federal Savings
than Canada), including $4.4 billion of cash and securities on
Bank continues to be a qualified thrift lender under the HOLA.
deposit with foreign regulatory authorities. Foreign operations and
Certain states require registration and periodic reporting by
assets held abroad may be adversely affected by political
insurance companies that are licensed in such states and are
developments in foreign countries, including tax changes, national-
controlled by other corporations. Applicable legislation typically
ization and changes in regulatory policy, as well as by conse-
requires periodic disclosure concerning the corporation that
quence of hostilities and unrest. The risks of such occurrences
controls the registered insurer and the other companies in the
and their overall effect upon AIG vary from country to country and
holding company system and prior approval of intercorporate
cannot easily be predicted. If expropriation or nationalization does
services and transfers of assets (including in some instances
occur, AIG’s policy is to take all appropriate measures to seek
payment of dividends by the insurance subsidiary) within the
recovery of such assets. Certain of the countries in which AIG’s
holding company system. AIG’s subsidiaries are registered under
business is conducted have currency restrictions which generally
such legislation in those states that have such requirements.
cause a delay in a company’s ability to repatriate assets and
AIG’s insurance subsidiaries, in common with other insurers, are
profits. See also Notes 1 and 2 to Consolidated Financial
subject to regulation and supervision by the states and by other
Statements and Item 1A. Risk Factors — Foreign Operations.
jurisdictions in which they do business. Within the United States, the
method of such regulation varies but generally has its source in
Regulation statutes that delegate regulatory and supervisory powers to an
insurance official. The regulation and supervision relate primarily toAIG’s operations around the world are subject to regulation by
approval of policy forms and rates, the standards of solvency thatmany different types of regulatory authorities, including insurance,
must be met and maintained, including risk-based capital, thesecurities, investment advisory, banking and thrift regulators in
licensing of insurers and their agents, the nature of and limitationsthe United States and abroad. The regulatory environment can
on investments, restrictions on the size of risks that may be insuredhave a significant effect on AIG and its business. AIG’s operations
under a single policy, deposits of securities for the benefit ofhave become more diverse and consumer-oriented, increasing the
policyholders, requirements for acceptability of reinsurers, periodicscope of regulatory supervision and the possibility of intervention.
examinations of the affairs of insurance companies, the form andAlthough AIG cannot predict the scope or effect of such regulation
content of reports of financial condition required to be filed, andon its business, AIG expects further regulation of its domestic
reserves for unearned premiums, losses and other purposes. Inconsumer finance operations as a result of the current disruption
general, such regulation is for the protection of policyholders ratherof the U.S. residential mortgage market. In addition, the investiga-
than the equity owners of these companies.tions into financial accounting practices that led to two restate-
AIG has taken various steps to enhance the capital positionsments of AIG’s consolidated financial statements have heightened
of the Domestic General Insurance companies. AIG entered intoregulatory scrutiny of AIG worldwide.
capital maintenance agreements with the Domestic GeneralIn 1999, AIG became a unitary thrift holding company within
Insurance companies that set forth procedures through which AIGthe meaning of the Home Owners’ Loan Act (HOLA) when the
will provide ongoing capital support. Also, in order to allow theOffice of Thrift Supervision (OTS) granted AIG approval to organize
Domestic General Insurance companies to record as an admittedAIG Federal Savings Bank. AIG is subject to OTS regulation,
asset at December 31, 2007 certain reinsurance ceded toexamination, supervision and reporting requirements. In addition,
non-U.S. reinsurers (which has the effect of increasing thethe OTS has enforcement authority over AIG and its subsidiaries.
statutory surplus of such Domestic General Insurance compa-Among other things, this permits the OTS to restrict or prohibit
nies), AIG obtained and entered into reimbursement agreementsactivities that are determined to be a serious risk to the financial
for approximately $1.8 billion of letters of credit issued by severalsafety, soundness or stability of AIG’s subsidiary savings associa-
commercial banks in favor of certain Domestic General Insurancetion, AIG Federal Savings Bank.
companies.Under prior law, a unitary savings and loan holding company, such
In the U.S., Risk-Based Capital (RBC) is designed to measureas AIG, was not restricted as to the types of business in which it
the adequacy of an insurer’s statutory surplus in relation to thecould engage, provided that its savings association subsidiary
risks inherent in its business. Thus, inadequately capitalizedcontinued to be a qualified thrift lender. The Gramm-Leach-Bliley Act
general and life insurance companies may be identified. Theof 1999 (GLBA) provides that no company may acquire control of an
U.S. RBC formula develops a risk-adjusted target level of statutoryOTS regulated institution after May 4, 1999 unless it engages only in
AIG 2007 Form 10-K 13

surplus by applying certain factors to various asset, premium and Competition
reserve items. Higher factors are applied to more risky items and
AIG’s Insurance, Financial Services and Asset Managementlower factors are applied to less risky items. Thus, the target level
businesses operate in highly competitive environments, bothof statutory surplus varies not only as a result of the insurer’s
domestically and overseas. Principal sources of competition aresize, but also based on the risk profile of the insurer’s operations.
insurance companies, banks, investment banks and other non-The RBC Model Law provides for four incremental levels of
bank financial institutions.regulatory attention for insurers whose surplus is below the
The insurance industry in particular is highly competitive.calculated RBC target. These levels of attention range in severity
Within the United States, AIG’s General Insurance subsidiariesfrom requiring the insurer to submit a plan for corrective action to
compete with approximately 3,400 other stock companies, spe-placing the insurer under regulatory control.
cialty insurance organizations, mutual companies and otherThe statutory surplus of each of AIG’s Domestic General
underwriting organizations. AIG’s subsidiaries offering Life Insur-Insurance and Life Insurance subsidiaries exceeded their RBC
ance & Retirement Services compete in the United States withtarget levels as of December 31, 2007.
approximately 2,100 life insurance companies and other partici-To the extent that any of AIG’s insurance entities would fall
pants in related financial services fields. Overseas, AIG subsidiar-below prescribed levels of statutory surplus, it would be AIG’s
ies compete for business with foreign insurance operations of theintention to provide appropriate capital or other types of support
larger U.S. insurers, global insurance groups and local companiesto that entity.
in particular areas in which they are active.A substantial portion of AIG’s General Insurance business and
a majority of its Life Insurance business is carried on in foreign
Directors and Executive Officers of AIGcountries. The degree of regulation and supervision in foreign
jurisdictions varies. Generally, AIG, as well as the underwriting All directors of AIG are elected for one-year terms at the annual
companies operating in such jurisdictions, must satisfy local meeting of shareholders. All executive officers are elected to one-
regulatory requirements. Licenses issued by foreign authorities to year terms, but serve at the pleasure of the Board of Directors.
AIG subsidiaries are subject to modification or revocation by such Except as hereinafter noted, each of the executive officers has,
authorities, and these subsidiaries could be prevented from for more than five years, occupied an executive position with AIG
conducting business in certain of the jurisdictions where they or companies that are now its subsidiaries. Other than the
currently operate. In the past, AIG has been allowed to modify its employment contracts between AIG and Messrs. Sullivan and
operations to conform with new licensing requirements in most Bensinger, there are no other arrangements or understandings
jurisdictions. between any executive officer and any other person pursuant to
In addition to licensing requirements, AIG’s foreign operations which the executive officer was elected to such position. From
are also regulated in various jurisdictions with respect to currency, January 2000 until joining AIG in May 2004, Dr. Frenkel served as
policy language and terms, advertising, amount and type of Chairman of Merrill Lynch International, Inc. Prior to joining AIG in
security deposits, amount and type of reserves, amount and type September 2006, Ms. Kelly served as Executive Vice President
of capital to be held, amount and type of local investment and the and General Counsel of MCI/WorldCom. Previously, she was
share of profits to be returned to policyholders on participating Senior Vice President and General Counsel of Sears, Roebuck and
policies. Some foreign countries regulate rates on various types of Co. from 1999 to 2003. From June 2004 until joining AIG in May
policies. Certain countries have established reinsurance institu- 2007, Mr. Kaslow was a managing partner of QuanStar Group,
tions, wholly or partially owned by the local government, to which LLC (an advisory services firm), and, from January 2002 until May
admitted insurers are obligated to cede a portion of their 2004, Mr. Kaslow was Senior Executive Vice President of Human
business on terms that may not always allow foreign insurers, Resources for Vivendi Universal (an entertainment and telecommu-
including AIG subsidiaries, full compensation. In some countries, nications company).
regulations governing constitution of technical reserves and
remittance balances may hinder remittance of profits and repatria-
tion of assets.
See Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Capital Resources and
Liquidity — Regulation and Supervision and Note 15 to Consoli-
dated Financial Statements.
14 AIG 2007 Form 10-K

Set forth below is information concerning the directors and executive officers of AIG as of February 28, 2008.
Served as
Director or
Name Title Age Officer Since
Stephen F. Bollenbach Director 65 2008
Marshall A. Cohen Director 72 1992
Martin S. Feldstein Director 68 1987
Ellen V. Futter Director 58 1999
Stephen L. Hammerman Director 69 2005
Richard C. Holbrooke Director 66 2001
Fred H. Langhammer Director 64 2006
George L. Miles, Jr. Director 66 2005
Morris W. Offit Director 71 2005
James F. Orr III Director 64 2006
Virginia M. Rometty Director 50 2006
Martin J. Sullivan Director, President and Chief Executive Officer 53 2002
Michael H. Sutton Director 67 2005
Edmund S. W. Tse Director, Senior Vice Chairman – Life Insurance 70 1996
Robert B. Willumstad Director and Chairman 62 2006
Frank G. Zarb Director 73 2001
Jacob A. Frenkel Vice Chairman – Global Economic Strategies 64 2004
Frank G. Wisner Vice Chairman – External Affairs 69 1997
Steven J. Bensinger Executive Vice President and Chief Financial Officer 53 2002
Anastasia D. Kelly Executive Vice President, General Counsel and Senior Regulatory
and Compliance Officer 58 2006
Rodney O. Martin, Jr. Executive Vice President – Life Insurance 55 2002
Kristian P. Moor Executive Vice President – Domestic General Insurance 48 1998
Win J. Neuger Executive Vice President and Chief Investment Officer 58 1995
Robert M. Sandler Executive Vice President – Domestic Personal Lines 65 1980
Nicholas C. Walsh Executive Vice President – Foreign General Insurance 57 2005
Jay S. Wintrob Executive Vice President – Retirement Services 50 1999
William N. Dooley Senior Vice President – Financial Services 55 1992
David L. Herzog Senior Vice President and Comptroller 48 2005
Andrew J. Kaslow Senior Vice President and Chief Human Resources Officer 57 2007
Robert E. Lewis Senior Vice President and Chief Risk Officer 56 1993
Brian T. Schreiber Senior Vice President – Strategic Planning 42 2002
AIG 2007 Form 10-K 15

against AIG related to these events and AIG may become subjectItem 1A.
to further litigation and regulatory or governmental scrutiny as aRisk Factors
result of these events.
Casualty Insurance Underwriting and Reserves
Risk ManagementCasualty insurance liabilities are difficult to predict and may
exceed the related reserves for losses and loss expenses. AIG is exposed to a number of significant risks, and AIG’s risk
Although AIG annually reviews the adequacy of the established management processes and controls may not be fully effective
reserve for losses and loss expenses, there can be no assurance in mitigating AIG’s risk exposures in all market conditions and
that AIG’s loss reserves will not develop adversely and have a to all types of risk. The major risks to which AIG is exposed
material effect on AIG’s results of operations. Estimation of include: credit risk, market risk, operational risk, liquidity risk and
ultimate net losses, loss expenses and loss reserves is a insurance risk. AIG has devoted significant resources to the
complex process for long-tail casualty lines of business, which development and implementation of risk management processes
include excess and umbrella liability, D&O, professional liability, and controls across AIG’s operations, including by establishing
medical malpractice, workers compensation, general liability, review and oversight committees to monitor risks, setting limits
products liability and related classes, as well as for asbestos and and identifying risk mitigating strategies and techniques. Nonethe-
environmental exposures. Generally, actual historical loss develop- less, these procedures may not be fully effective in mitigating risk
ment factors are used to project future loss development. exposure in all market conditions, some of which change rapidly
However, there can be no assurance that future loss development and severely. A failure of AIG’s risk management processes or the
patterns will be the same as in the past. Moreover, any deviation ineffectiveness of AIG’s risk mitigating strategies and techniques
in loss cost trends or in loss development factors might not be could adversely affect, perhaps materially, AIG’s consolidated
discernible for an extended period of time subsequent to the results of operations, liquidity or financial condition, result in
recording of the initial loss reserve estimates for any accident regulatory action or litigation or damage AIG’s reputation. See
year. Thus, there is the potential for reserves with respect to a Management’s Discussion and Analysis of Financial Condition and
number of years to be significantly affected by changes in loss Results of Operations — Risk Management.
cost trends or loss development factors that were relied upon in
setting the reserves. These changes in loss cost trends or loss
Liquidity
development factors could be attributable to changes in inflation
AIG’s liquidity could be impaired by an inability to access theor in the judicial environment, or in other social or economic
capital markets or by unforeseen significant outflows of cash.phenomena affecting claims, such as the effects that the recent
This situation may arise due to circumstances that AIG may bedisruption in the credit markets could have on reported claims
unable to control, such as a general market disruption or anunder D&O or professional liability coverages. See also Manage-
operational problem that affects third parties or AIG. In addition,ment’s Discussion and Analysis of Financial Condition and Results
this situation may arise due to circumstances specific to AIG,of Operations — Operating Review — General Insurance Opera-
such as a decline in its credit ratings. AIG depends on dividends,tions — Reserve for Losses and Loss Expenses.
distributions and other payments from its subsidiaries to fund
dividend payments and to fund payments on AIG’s obligations,
Credit Market Environment
including debt obligations. Regulatory and other legal restrictions
AIG’s businesses may continue to be adversely affected by the may limit AIG’s ability to transfer funds freely, either to or from its
current disruption in the global credit markets and repricing of subsidiaries. In particular, many of AIG’s subsidiaries, including
credit risk. During the second half of 2007, disruption in the AIG’s insurance subsidiaries, are subject to laws and regulations
global credit markets, coupled with the repricing of credit risk, and that authorize regulatory bodies to block or reduce the flow of
the U.S. housing market deterioration created increasingly difficult funds to the parent holding company, or that prohibit such
conditions in the financial markets. These conditions have transfers altogether in certain circumstances. These laws and
resulted in greater volatility, less liquidity, widening of credit regulations may hinder AIG’s ability to access funds that AIG may
spreads and a lack of price transparency in certain markets. need to make payments on its obligations. See also Item 1.
These conditions continue to adversely affect Mortgage Guar- Business — Regulation.
anty’s results of operations and the fair value of the AIGFP super
Some of AIG’s investments are relatively illiquid and would be
senior credit default swap portfolio and contribute to higher levels
difficult to sell, or to sell at acceptable prices, if AIG required
of finance receivables delinquencies at AGF and to the severe and
cash in amounts greater than its customary needs. AIG’s
rapid decline in the fair value of certain investment securities,
investments in certain securities, including certain structured securi-
particularly those backed by U.S. residential mortgage loans. It is
ties, direct private equities, limited partnerships, hedge funds,
difficult to predict how long these conditions will exist and how
mortgage loans, flight equipment, finance receivables and real estate
AIG’s markets, products and businesses will continue to be
are relatively illiquid. These asset classes represented approximately
adversely affected. Accordingly, these conditions could adversely
23 percent of the carrying value of AIG’s total cash and invested
affect AIG’s consolidated financial condition or results of opera-
assets as of December 31, 2007. In addition, the current disruption
tions in future periods. In addition, litigation and regulatory or
in the credit markets has affected the liquidity of other AIG portfolios
governmental investigations and inquiries have been commenced
16 AIG 2007 Form 10-K

including the residential mortgage-backed securities portfolio. If AIG outlook on ILFC’s corporate credit rating (AA-) to negative. A
requires significant amounts of cash on short notice in excess of negative ratings outlook by S&P indicates that a rating may
normal cash requirements or is required to post or return collateral in be lowered, but is not necessarily a precursor of a ratings
connection with its investment portfolio, derivative transactions or change.
securities lending activities, then AIG may have difficulty selling these ) Moody’s Investors Service (Moody’s) changed its rating
investments or terminating these transactions in a timely manner or outlook for AIG and its subsidiaries that have substantial
may be forced to sell or terminate them for less than what AIG might exposure to the U.S. subprime mortgage market or whose
otherwise have been able to, or both. Although AIGFP has no current ratings rely on significant explicit or implicit support from AIG
intent to do so, if AIGFP sells or closes out its derivative transactions to negative. Moody’s rates AIG ‘Aa2’ and nearly all of its
prior to maturity, the effect could be significant to AIG’s overall insurance subsidiaries either ‘Aa1’ or ‘Aa2’. A negative
liquidity. ratings outlook by Moody’s indicates that a rating may be
lowered, but is not necessarily a precursor of a ratings
AIG’s liquidity may be adversely affected by requirements to
change.
post collateral. Certain of the credit default swaps written by
) Fitch Ratings (Fitch) placed AIG’s and its subsidiaries’ long-
AIGFP contain collateral posting requirements. The amount of
term debt ratings (AA), including ILFC (A+) and AGF (A+), on
collateral required to be posted for most of these transactions is
Rating Watch Negative. Rating Watch Negative indicates that
determined based on the value of the security or loan referenced
a rating has been placed on active rating watch status. Fitch
in the documentation for the credit default swap. Continued
indicated that it expects to resolve the Rating Watch after it
declines in the values of these referenced securities or loans will
reviews AIG’s 2007 audited financial statements.
increase the amount of collateral AIGFP must post which could
) A.M. Best Company (A.M. Best) placed most of its financial
impair AIG’s liquidity.
strength and issuer credit ratings on AIG’s domestic Life
See also Management’s Discussion and Analysis of Financial
Insurance and Retirement Services (A++) and Domestic
Condition and Results of Operations — Capital Resources and
General Insurance subsidiaries (including Transatlantic) (A+),
Liquidity — Liquidity.
as well as AIG’s issuer credit rating (AA), under review with
negative implications. A.M. Best indicated that following a
Investment Concentration detailed review of AIG’s 2007 audited financial statements
Concentration of AIG’s investment portfolios in any particular and further discussion with AIG management, it will re-
segment of the economy may have adverse effects. Any evaluate the ‘‘under review’’ rating status.
concentration of AIG’s investment portfolios in any particular indus- Financial strength and credit ratings by the major ratings
try, group of related industries, asset classes, such as residential agencies are an important factor in establishing the competitive
mortgage-backed securities and other asset-backed securities, or position of insurance companies and other financial institutions
geographic sector could have an adverse effect on the investment and affect the availability and cost of borrowings. Financial
portfolios and consequently on AIG’s consolidated results of opera- strength ratings measure an insurance company’s ability to meet
tions or financial condition. While AIG seeks to mitigate this risk by its obligations to contract holders and policyholders, help to
having a broadly diversified portfolio, events or developments that maintain public confidence in a company’s products, facilitate
have a negative effect on any particular industry, asset class, group marketing of products and enhance a company’s competitive
of related industries or geographic region may have a greater adverse position. Credit ratings measure a company’s ability to repay its
effect on the investment portfolios to the extent that the portfolios obligations and directly affect the cost and availability to that
are concentrated. Further, AIG’s ability to sell assets relating to such company of unsecured financing. AIG’s ratings have historically
particular groups of related assets may be limited if other market provided it with a competitive advantage. However, a ratings
participants are seeking to sell at the same time. downgrade could adversely affect AIG’s business and its consoli-
dated results of operations in a number of ways, including:
Credit Ratings ) increasing AIG’s interest expense;
) reducing AIGFP’s ability to compete in the structured prod-
Ratings actions regarding AIG could adversely affect AIG’s
ucts and derivatives businesses;
business and its consolidated results of operations. Following
) reducing the competitive advantage of AIG’s insurance
AIG’s filing with the SEC on February 11, 2008 of a Current
subsidiaries, which may result in reduced product sales;
Report on Form 8-K regarding the valuation of AIGFP’s super
) adversely affecting relationships with agents and sales
senior credit default swap portfolio and reporting the conclusion
representatives;
by AIG’s independent auditors that AIG had a material weakness
) in the case of a downgrade of AGF or ILFC, increasing their
in internal control over financial reporting and oversight relating to
interest expense and reducing their ability to compete in
this valuation, the following credit rating actions were taken:
their respective businesses; and
) Standard & Poor’s, a division of The McGraw-Hill Companies,
) triggering the application of a termination provision in certain
Inc. (S&P) affirmed its ‘AA’ counterparty credit ratings on AIG
of AIG’s contracts, principally agreements entered into by
and its ‘AA+’ counterparty credit and financial strength
AIGFP and assumed reinsurance contracts entered into by
ratings on AIG’s core subsidiaries, but revised the rating
Transatlantic.
outlook to negative. In addition, S&P revised its rating
AIG 2007 Form 10-K 17

In the event of a downgrade of AIG, AIG would be required to the extent not mitigated by collateral or other credit enhance-
post additional collateral. It is estimated that, as of the close of ments. A reinsurer’s insolvency or inability or refusal to make
business on February 14, 2008, based on AIG’s outstanding timely payments under the terms of its agreements with the AIG
municipal GIAs and financial derivatives transactions as of such subsidiaries could have a material adverse effect on AIG’s results
date, a further downgrade of AIG’s long-term senior debt ratings of operations and liquidity. See also Management’s Discussion
to Aa3 by Moody’s or AA- by S&P would permit counterparties to and Analysis of Financial Condition and Results of Operations —
call for approximately $1.39 billion of additional collateral. Risk Management — Reinsurance.
Further, additional downgrades could result in requirements for
substantial additional collateral, which could have a material Adjustments to Life Insurance & Retirement
effect on how AIG manages its liquidity. For a further discussion Services Deferred Policy
of AIG’s credit ratings and the potential effect of posting collateral Acquisition Costs
on AIG’s liquidity, see Management’s Discussion and Analysis of
Interest rate fluctuations and other events may require AIG
Financial Condition and Results of Operations — Capital Re-
subsidiaries to accelerate the amortization of deferred policy
sources and Liquidity — Credit Ratings and — Liquidity.
acquisition costs (DAC) which could adversely affect AIG’s
consolidated financial condition or results of operations. DAC
Catastrophe Exposures
represents the costs that vary with and are related primarily to
The occurrence of catastrophic events could adversely affect the acquisition of new and renewal insurance and annuity
AIG’s consolidated financial condition or results of operations. contracts. When interest rates rise, policy loans and surrenders
The occurrence of events such as hurricanes, earthquakes, and withdrawals of life insurance policies and annuity contracts
pandemic disease, acts of terrorism and other catastrophes could may increase as policyholders seek to buy products with perceived
adversely affect AIG’s consolidated financial condition or results of higher returns, requiring AIG subsidiaries to accelerate the
operations, including by exposing AIG’s businesses to the amortization of DAC. To the extent such amortization exceeds
following: surrender or other charges earned upon surrender and withdraw-
) widespread claim costs associated with property, workers als of certain life insurance policies and annuity contracts, AIG’s
compensation, mortality and morbidity claims; results of operations could be negatively affected.
) loss resulting from the value of invested assets declining to DAC for both insurance-oriented and investment-oriented prod-
below the amount required to meet the policy and contract ucts as well as retirement services products is reviewed for
liabilities; and recoverability, which involves estimating the future profitability of
) loss resulting from actual policy experience emerging ad- current business. This review involves significant management
versely in comparison to the assumptions made in the judgment. If the actual emergence of future profitability were to be
product pricing related to mortality, morbidity, termination substantially lower than estimated, AIG could be required to
and expenses. accelerate its DAC amortization and such acceleration could
adversely affect AIG’s results of operations. See also Manage-
ment’s Discussion and Analysis of Financial Condition and ResultsReinsurance
of Operations — Critical Accounting Estimates and Notes 1 and 6
Reinsurance may not be available or affordable. AIG subsidiaries
to Consolidated Financial Statements.
are major purchasers of reinsurance and utilize reinsurance as
part of AIG’s overall risk management strategy. Reinsurance is an
Use of Estimates
important risk management tool to manage transaction and
insurance line risk retention, and to mitigate losses that may arise If actual experience differs from management’s estimates used
from catastrophes. Market conditions beyond AIG’s control deter- in the preparation of financial statements, AIG’s consolidated
mine the availability and cost of the reinsurance purchased by AIG results of operations or financial condition could be adversely
subsidiaries. For example, reinsurance may be more difficult to affected. The preparation of financial statements in conformity
obtain after a year with a large number of major catastrophes. with accounting principles generally accepted in the United States
Accordingly, AIG may be forced to incur additional expenses for requires the application of accounting policies that often involve a
reinsurance or may be unable to obtain sufficient reinsurance on significant degree of judgment. AIG considers that its accounting
acceptable terms, in which case AIG would have to accept an policies that are most dependent on the application of estimates
increase in exposure risk, reduce the amount of business written and assumptions, and therefore viewed as critical accounting
by its subsidiaries or seek alternatives. estimates, are those described in Management’s Discussion and
Analysis of Financial Condition and Results of Operations —
Reinsurance subjects AIG to the credit risk of its reinsurers and
Critical Accounting Estimates. These accounting estimates require
may not be adequate to protect AIG against losses. Although
the use of assumptions, some of which are highly uncertain at
reinsurance makes the reinsurer liable to the AIG subsidiary to
the time of estimation. For example, recent market volatility and
the extent the risk is ceded subject to the terms and conditions of
declines in liquidity have made it more difficult to value certain of
the reinsurance contracts in place, it does not relieve the AIG
AIG’s invested assets and the obligations and collateral relating to
subsidiary of the primary liability to its policyholders. Accordingly,
certain financial instruments issued or held by AIG, such as
AIG bears credit risk with respect to its subsidiaries’ reinsurers to
18 AIG 2007 Form 10-K

AIGFP’s super senior credit default swap portfolio. To the extent Significant regulatory action against AIG could have material
actual experience differs from the assumptions used, AIG’s adverse financial effects, cause significant reputational harm or
consolidated results of operations or financial condition would be harm business prospects. New laws or regulations or changes in
directly affected, perhaps materially. the enforcement of existing laws or regulations applicable to
clients may also adversely affect AIG and its businesses.
Legal Proceedings
A Material Weakness
Significant legal proceedings may adversely affect AIG’s results
of operations. AIG is party to numerous legal proceedings and A material weakness in internal control over financial reporting
regulatory or governmental investigations. It is possible that the and oversight relating to the AIGFP valuation of its super senior
effect of these unresolved matters could be material to AIG’s credit default swap portfolio could adversely affect the accuracy
consolidated results of operations for an individual reporting or timing of future regulatory filings. AIG’s management has
period. For a discussion of these unresolved matters, see Item 3. concluded that a material weakness relating to the internal control
Legal Proceedings. over financial reporting and oversight relating to the fair value
valuation of the AIGFP super senior credit default swap portfolio
existed as of December 31, 2007. Until remediated, thisForeign Operations
weakness could adversely affect the accuracy or timing of futureForeign operations expose AIG to risks that may affect its
filings with the SEC and other regulatory authorities. A discussionoperations, liquidity and financial condition. AIG provides insur-
of this material weakness and AIG’s remediation efforts can beance, investment and other financial products and services to
found in Item 9A. Controls and Procedures — Management’sboth businesses and individuals in more than 130 countries and
Report on Internal Control Over Financial Reporting.jurisdictions. A substantial portion of AIG’s General Insurance
business and a majority of its Life Insurance & Retirement
Employee Error and MisconductServices business is conducted outside the United States.
Operations outside of the United States, particularly those in Employee error and misconduct may be difficult to detect and
developing nations, may be affected by regional economic down- prevent and may result in significant losses. Losses may result
turns, changes in foreign currency exchange rates, political from, among other things, fraud, errors, failure to document
upheaval, nationalization and other restrictive government actions, transactions properly or to obtain proper internal authorization or
which could also affect other AIG operations. failure to comply with regulatory requirements.
The degree of regulation and supervision in foreign jurisdic- There have been a number of highly publicized cases involving
tions varies. Generally, AIG, as well as its subsidiaries operating fraud or other misconduct by employees in the financial services
in such jurisdictions, must satisfy local regulatory requirements. industry in recent years, and AIG runs the risk that employee
Licenses issued by foreign authorities to AIG subsidiaries are misconduct could occur. It is not always possible to deter or prevent
subject to modification and revocation. Thus, AIG’s insurance employee misconduct and the controls that AIG has in place to
subsidiaries could be prevented from conducting future business prevent and detect this activity may not be effective in all cases.
in certain of the jurisdictions where they currently operate.
Adverse actions from any single country could adversely affect Aircraft Suppliers
AIG’s results of operations, liquidity and financial condition
There are limited suppliers of aircraft and engines. The supply ofdepending on the magnitude of the event and AIG’s net financial
jet transport aircraft, which ILFC purchases and leases, isexposure at that time in that country.
dominated by two airframe manufacturers, Boeing and Airbus, and
a limited number of engine manufacturers. As a result, ILFC isRegulation
dependent on the manufacturers’ success in remaining financially
AIG is subject to extensive regulation in the jurisdictions in which it stable, producing aircraft and related components which meet the
conducts its businesses. AIG’s operations around the world are airlines’ demands, both in type and quantity, and fulfilling their
subject to regulation by different types of regulatory authorities, contractual obligations to ILFC. Competition between the manufac-
including insurance, securities, investment advisory, banking and turers for market share is intense and may lead to instances of
thrift regulators in the United States and abroad. AIG’s operations deep discounting for certain aircraft types and could negatively
have become more diverse and consumer-oriented, increasing the affect ILFC’s competitive pricing.
scope of regulatory supervision and the possibility of intervention. In
particular, AIG’s consumer lending business is subject to a broad Item 1B.
array of laws and regulations governing lending practices and Unresolved Staff Comments
permissible loan terms, and AIG would expect increased regulatory
There are no material unresolved written comments that wereoversight relating to this business.
received from the SEC staff 180 days or more before the end ofThe regulatory environment could have a significant effect on
AIG’s fiscal year relating to AIG’s periodic or current reports underAIG and its businesses. Among other things, AIG could be fined,
the Exchange Act.prohibited from engaging in some of its business activities or
subject to limitations or conditions on its business activities.
AIG 2007 Form 10-K 19

ants’’) are also liable for fraud and suppression, misrepresenta-Item 2.
tion, and breach of fiduciary duty. The complaints filed by theProperties
plaintiffs and the intervenor-plaintiffs request compensatory dam-
AIG and its subsidiaries operate from approximately 2,100 offices ages for the 1999 class in the amount of $3.2 billion, plus
in the United States, 6 offices in Canada and numerous offices in punitive damages. AIG and its subsidiaries deny the allegations of
approximately 100 foreign countries. The offices in Greensboro fraud and suppression and have asserted that information
and Winston-Salem, North Carolina; Springfield, Illinois; Amarillo, concerning the excess policy was publicly disclosed months prior
Ft. Worth, Houston and Lewisville, Texas; Wilmington, Delaware; to the approval of the settlement. AIG and its subsidiaries further
San Juan, Puerto Rico; Tampa, Florida; Livingston, New Jersey; assert that the current claims are barred by the statute of
Evansville, Indiana; Nashville, Tennessee; 70 Pine Street, 72 Wall limitations and that plaintiffs’ assertions that the statute was
Street and 175 Water Street in New York, New York; and offices in tolled cannot stand against the public disclosure of the excess
more than 30 foreign countries and jurisdictions including Ber- coverage. The plaintiffs and intervenor-plaintiffs, in turn, have
muda, Chile, Hong Kong, the Philippines, Japan, the U.K., asserted that the disclosure was insufficient to inform them of
Singapore, Malaysia, Switzerland, Taiwan and Thailand are located the nature of the coverage and did not start the running of the
in buildings owned by AIG and its subsidiaries. The remainder of statute of limitations. On November 26, 2007, the trial court
the office space utilized by AIG subsidiaries is leased. issued an order that dismissed the intervenors’ complaint against
the Lawyer Defendants and entered a final judgment in favor of
Item 3. the Lawyer Defendants. The intervenors are appealing the dismis-
Legal Proceedings sal of the Lawyer Defendants and have requested a stay of all
trial court proceedings pending the appeal. If the motion to stay isGeneral
granted, no further proceedings at the trial court level will occur
AIG and its subsidiaries, in common with the insurance industry in until the appeal is resolved. If the motion to stay is denied, the
general, are subject to litigation, including claims for punitive next step will be to proceed with class discovery so that the trial
damages, in the normal course of their business. See also court can determine, under standards mandated by the Alabama
Note 12(a) to Consolidated Financial Statements, as well as the Supreme Court, whether the action should proceed as a class
discussion and analysis of Reserve for Losses and Loss Ex- action. AIG cannot reasonably estimate either the likelihood of its
penses under Operating Review — General Insurance Operations prevailing in these actions or the potential damages in the event
in Management’s Discussion and Analysis of Financial Condition liability is determined.
and Results of Operations.
Litigation Arising from Insurance Operations — Gunderson. A
Litigation Arising from Operations. AIG and its subsidiaries, in subsidiary of AIG has been named as a defendant in a putative
common with the insurance and financial services industries in class action lawsuit in the 14th Judicial District Court for the
general, are subject to litigation, including claims for punitive State of Louisiana (Gunderson). The Gunderson complaint alleges
damages, in the normal course of their business. In AIG’s failure to comply with certain provisions of the Louisiana Any
insurance operations, litigation arising from claims settlement Willing Provider Act (the Act) relating to discounts taken by
activities is generally considered in the establishment of AIG’s defendants on bills submitted by Louisiana medical providers and
reserve for losses and loss expenses. However, the potential for hospitals that provided treatment or services to workers compen-
increasing jury awards and settlements makes it difficult to sation claimants and seeks monetary penalties and injunctive
assess the ultimate outcome of such litigation. relief. On July 20, 2006, the court denied defendants’ motion for
summary judgment and granted plaintiffs’ partial motion forLitigation Arising from Insurance Operations — Caremark. AIG
summary judgment, holding that the AIG subsidiary was a ‘‘groupand certain of its subsidiaries have been named defendants in
purchaser’’ and, therefore, potentially subject to liability under thetwo putative class actions in state court in Alabama that arise out
Act. On November 28, 2006, the court issued an order certifyingof the 1999 settlement of class and derivative litigation involving
a class of providers and hospitals. In an unrelated action alsoCaremark Rx, Inc. (Caremark). The plaintiffs in the second-filed
arising under the Act, a Louisiana appellate court ruled that theaction have intervened in the first-filed action, and the second-filed
district court lacked jurisdiction to adjudicate the claims at issue.action has been dismissed. An excess policy issued by a
In response, defendants in Gunderson filed an exception for lacksubsidiary of AIG with respect to the 1999 litigation was expressly
of subject matter jurisdiction. On January 19, 2007, the courtstated to be without limit of liability. In the current actions,
denied the motion, holding that it has jurisdiction over the putativeplaintiffs allege that the judge approving the 1999 settlement was
class claims. The AIG subsidiary appealed the class certificationmisled as to the extent of available insurance coverage and would
and jurisdictional rulings. While the appeal was pending, the AIGnot have approved the settlement had he known of the existence
subsidiary settled the lawsuit. On January 25, 2008, plaintiffsand/or unlimited nature of the excess policy. They further allege
and the AIG subsidiary agreed to resolve the lawsuit on a class-that AIG, its subsidiaries, and Caremark are liable for fraud and
wide basis for approximately $29 million. The court has prelimina-suppression for misrepresenting and/or concealing the nature and
rily approved the settlement and will hold a final approval hearingextent of coverage. In addition, the intervenor-plaintiffs allege that
on May 29, 2008. In the event that the settlement is not finallyvarious lawyers and law firms who represented parties in the
approved, AIG believes that it has meritorious defenses tounderlying class and derivative litigation (the ‘‘Lawyer Defend-
20 AIG 2007 Form 10-K

plaintiffs’ claims and expects that the ultimate resolution of this The National Association of Insurance Commissioners has
matter will not have a material adverse effect on AIG’s consoli- formed a Market Analysis Working Group directed by the State of
dated financial condition or results of operations for any period. Indiana, which has commenced its own investigation into the
underreporting of workers compensation premiums. In early 2008,
2006 Regulatory Settlements. In February 2006, AIG reached a
AIG was informed that the Market Analysis Working Group had
resolution of claims and matters under investigation with the
been disbanded in favor of a multi-state targeted market conduct
United States Department of Justice (DOJ), the Securities and
exam focusing on worker’s compensation insurance.
Exchange Commission (SEC), the Office of the New York Attorney
The remaining escrowed funds, which amounted to $17 million
General (NYAG) and the New York State Department of Insurance
at December 31, 2007, are set aside for settlements for certain
(DOI). AIG recorded an after-tax charge of $1.15 billion relating to
specified AIG policyholders. As of February 20, 2008, eligible
these settlements in the fourth quarter of 2005.
policyholders entitled to receive approximately $359 million (or
The settlements resolved investigations conducted by the SEC,
95 percent) of the excess casualty fund had opted to receive
NYAG and DOI in connection with the accounting, financial
settlement payments in exchange for releasing AIG and its
reporting and insurance brokerage practices of AIG and its
subsidiaries from liability relating to certain insurance brokerage
subsidiaries, as well as claims relating to the underpayment of
practices. Amounts remaining in the excess casualty fund may be
certain workers compensation premium taxes and other assess-
used by AIG to settle claims from other policyholders relating to
ments. These settlements did not, however, resolve investigations
such practices through February 29, 2008 (originally set for
by regulators from other states into insurance brokerage practices
January 31, 2008 and later extended), after which they will be
related to contingent commissions and other broker-related con-
distributed pro rata to participating policyholders.
duct, such as alleged bid rigging. Nor did the settlements resolve
In addition to the escrowed funds, $800 million was deposited
any obligations that AIG may have to state guarantee funds in
into a fund under the supervision of the SEC as part of the
connection with any of these matters.
settlements to be available to resolve claims asserted against AIG
As a result of these settlements, AIG made payments or
by investors, including the shareholder lawsuits described herein.
placed amounts in escrow in 2006 totaling approximately
Also, as part of the settlements, AIG agreed to retain, for a
$1.64 billion, $225 million of which represented fines and
period of three years, an independent consultant to conduct a
penalties. Amounts held in escrow totaling $347 million, including
review that will include, among other things, the adequacy of AIG’s
interest thereon, are included in other assets at December 31,
internal control over financial reporting, the policies, procedures
2007. At that date, approximately $330 million of the funds were
and effectiveness of AIG’s regulatory, compliance and legal
escrowed for settlement of claims resulting from the underpay-
functions and the remediation plan that AIG has implemented as
ment by AIG of its residual market assessments for workers
a result of its own internal review.
compensation. On May 24, 2007, The National Workers Compen-
Other than as described above, at the current time, AIG cannot
sation Reinsurance Pool, on behalf of its participant members,
predict the outcome of the matters described above, or estimate
filed a lawsuit against AIG with respect to the underpayment of
any potential additional costs related to these matters.
such assessments. On August 6, 2007, the court denied AIG’s
motion seeking to dismiss or stay the complaint or in the
Private Litigationalternative, to transfer to the Southern District of New York. On
December 26, 2007, the court denied AIG’s motion to dismiss Securities Actions. Beginning in October 2004, a number of
the complaint. AIG filed its answer on January 22, 2008. On putative securities fraud class action suits were filed against AIG
February 5, 2008, following agreement of the parties, the court and consolidated as In re American International Group, Inc.
entered an order staying all proceedings through March 3, 2008. Securities Litigation. Subsequently, a separate, though similar,
In addition, a similar lawsuit filed by the Minnesota Workers securities fraud action was also brought against AIG by certain
Compensation Reinsurance Association and the Minnesota Work- Florida pension funds. The lead plaintiff in the class action is a
ers Compensation Insurers Association is pending. On August 6, group of public retirement systems and pension funds benefiting
2007, AIG moved to dismiss the complaint and that motion is Ohio state employees, suing on behalf of themselves and all
under review. A purported class action was filed in South Carolina purchasers of AIG’s publicly traded securities between Octo-
Federal Court on January 25, 2008 against AIG and certain of its ber 28, 1999 and April 1, 2005. The named defendants are AIG
subsidiaries, on behalf of a class of employers that obtained and a number of present and former AIG officers and directors, as
workers compensation insurance from AIG companies and alleg- well as C.V. Starr & Co., Inc. (Starr), Starr International Company,
edly paid inflated premiums as a result of AIG’s alleged underre- Inc. (SICO), General Reinsurance Corporation, and Price-
porting of workers compensation premiums. AIG cannot currently waterhouseCoopers LLP (PwC), among others. The lead plaintiff
estimate whether the amount ultimately required to settle these alleges, among other things, that AIG: (1) concealed that it
claims will exceed the funds escrowed or otherwise accrued for engaged in anti-competitive conduct through alleged payment of
this purpose. contingent commissions to brokers and participation in illegal bid-
AIG has settled litigation that was filed by the Minnesota rigging; (2) concealed that it used ‘‘income smoothing’’ products
Attorney General with respect to claims by the Minnesota and other techniques to inflate its earnings; (3) concealed that it
Department of Revenue and the Minnesota Special Compensation marketed and sold ‘‘income smoothing’’ insurance products to
Fund. other companies; and (4) misled investors about the scope of
AIG 2007 Form 10-K 21

government investigations. In addition, the lead plaintiff alleges regarding its exposure to what the lawsuits describe as the
that AIG’s former Chief Executive Officer manipulated AIG’s stock subprime market crisis. The actions were consolidated as In re
price. The lead plaintiff asserts claims for violations of Sec- American International Group, Inc. 2007 Derivative Litigation. On
tions 11 and 15 of the Securities Act of 1933, Section 10(b) of February 15, 2008, plaintiffs filed a consolidated amended
the Exchange Act, and Rule 10b-5 promulgated thereunder, complaint alleging the same causes of action.
Section 20(a) of the Exchange Act, and Section 20A of the
Between October 25, 2004 and July 14, 2005, seven separate
Exchange Act. In April 2006, the court denied the defendants’
derivative actions were filed in the Southern District of New York,
motions to dismiss the second amended class action complaint
five of which were consolidated into a single action. The New York
and the Florida complaint. In December 2006, a third amended
derivative complaint contains nearly the same types of allegations
class action complaint was filed, which does not differ substan-
made in the securities fraud and ERISA actions described above.
tially from the prior complaint. Fact and class discovery is
The named defendants include current and former officers and
currently ongoing. On February 20, 2008, the lead plaintiff filed a
directors of AIG, as well as Marsh & McLennan Companies, Inc.
motion for class certification.
(Marsh), SICO, Starr, ACE Limited and subsidiaries (ACE), General
ERISA Action. Between November 30, 2004 and July 1, 2005, Reinsurance Corporation, PwC, and certain employees or officers
several Employee Retirement Income Security Act of 1974 of these entity defendants. Plaintiffs assert claims for breach of
(ERISA) actions were filed on behalf of purported class of fiduciary duty, gross mismanagement, waste of corporate assets,
participants and beneficiaries of three pension plans sponsored unjust enrichment, insider selling, auditor breach of contract,
by AIG or its subsidiaries. A consolidated complaint filed on auditor professional negligence and disgorgement from AIG’s
September 26, 2005 alleges a class period between Septem- former Chief Executive Officer and Chief Financial Officer of
ber 30, 2000 and May 31, 2005 and names as defendants AIG, incentive-based compensation and AIG share proceeds under
the members of AIG’s Retirement Board and the Administrative Section 304 of the Sarbanes-Oxley Act, among others. Plaintiffs
Boards of the plans at issue, and four present or former members seek, among other things, compensatory damages, corporate
of AIG’s Board of Directors. The factual allegations in the governance reforms, and a voiding of the election of certain AIG
complaint are essentially identical to those in the securities directors. AIG’s Board of Directors has appointed a special
actions described above. The parties have reached an agreement committee of independent directors (special committee) to review
in principle to settle this matter for an amount within AIG’s the matters asserted in the operative consolidated derivative
insurance coverage limits. complaint. The court has entered an order staying the derivative
case in the Southern District of New York pending resolution of
Securities Action — Oregon State Court. On February 27, 2008,
the consolidated derivative action in the Delaware Chancery Court
The State of Oregon, by and through the Oregon State Treasurer,
(discussed below). The court also has entered an order that
and the Oregon Public Employee Retirement Board, on behalf of
termination of certain named defendants from the Delaware
the Oregon Public Employee Retirement Fund, filed a lawsuit
derivative action applies to the New York derivative action without
against American International Group, Inc. for damages arising out
further order of the court. On October 17, 2007, plaintiffs and
of plaintiffs’ purchase of AIG common stock at prices that
those AIG officer and director defendants against whom the
allegedly were inflated. Plaintiffs allege, among other things, that
shareholder plaintiffs in the Delaware action are no longer
AIG: (1) made false and misleading statements concerning its
pursuing claims filed a stipulation providing for all claims in the
accounting for a $500 million transaction with General Re;
New York action against such defendants to be dismissed with
(2) concealed that it marketed and misrepresented its control over
prejudice. Former directors and officers Maurice R. Greenberg and
off-shore entities in order to improve financial results; (3) improp-
Howard I. Smith have asked the court to refrain from so ordering
erly accounted for underwriting losses as investment losses in
this stipulation.
connection with transactions involving CAPCO Reinsurance Com-
pany, Ltd. and Union Excess; (4) misled investors about the scope Derivative Actions — Delaware Chancery Court. From October
of government investigations; and (5) engaged in market manipu- 2004 to April 2005, AIG shareholders filed five derivative
lation through its then Chairman and CEO Maurice R. Greenberg. complaints in the Delaware Chancery Court. All of these derivative
The complaint asserts claims for violations of Oregon Securities lawsuits were consolidated into a single action as In re American
Law, and seeks compensatory damages in an amount in excess International Group, Inc. Consolidated Derivative Litigation. The
of $15 million, and prejudgement interest and costs and fees. amended consolidated complaint named 43 defendants (not
including nominal defendant AIG) who, like the New York consoli-
Derivative Actions — Southern District of New York. On November
dated derivative litigation, were current and former officers and
20, 2007, two purported shareholder derivative actions were filed
directors of AIG, as well as other entities and certain of their
in the Southern District of New York naming as defendants the
current and former employees and directors. The factual allega-
then-current directors of AIG and certain senior officers of AIG and
tions, legal claims and relief sought in the Delaware action are
its subsidiaries. Plaintiffs assert claims for breach of fiduciary
similar to those alleged in the New York derivative actions, except
duty, waste of corporate assets and unjust enrichment, as well as
that shareholder plaintiffs in the Delaware derivative action assert
violations of Section 10(b) of the Exchange Act and Rule 10b-5
claims only under state law. Earlier in 2007, the Court approved
promulgated thereunder, and Section 20(a) of the Exchange Act,
an agreement that AIG be realigned as plaintiff, and, on June 13,
among other things, in connection with AIG’s public disclosures
22 AIG 2007 Form 10-K

2007, acting on the direction of the special committee, AIG filed fees. SICO is no longer named as a defendant. On April 20,
an amended complaint against former directors and officers 2007, the individual defendants and Starr filed a motion seeking
Maurice R. Greenberg and Howard I. Smith, alleging breach of leave of the Court to assert a cross-claim against AIG and a third-
fiduciary duty and indemnification. Also on June 13, 2007, the party complaint against PwC and the directors previously dis-
special committee filed a motion to terminate the litigation as to missed from the action, as well as certain other AIG officers and
certain defendants, while taking no action as to others. Defend- employees. On June 13, 2007, the Court denied the individual
ants Greenberg and Smith filed answers to AIG’s complaint and defendants’ motion to file a third-party complaint, but granted the
brought third-party complaints against certain current and former proposed cross-claim against AIG. On June 27, 2007, Starr filed
AIG directors and officers, PwC and Regulatory Insurance Ser- its cross-claim against AIG, alleging one count that includes
vices, Inc. On September 28, 2007, AIG and the shareholder contribution, unjust enrichment and setoff. AIG has filed an
plaintiffs filed a combined amended complaint in which AIG answer and moved to dismiss Starr’s cross-claim to the extent it
continued to assert claims against defendants Greenberg and seeks affirmative relief, as opposed to a reduction in the
Smith and took no position as to the claims asserted by the judgment amount. On November 15, 2007, the court granted
shareholder plaintiffs in the remainder of the combined amended AIG’s motion to dismiss the cross-claim by Starr to the extent that
complaint. In that pleading, the shareholder plaintiffs are no it sought affirmative relief from AIG. On November 21, 2007,
longer pursuing claims against certain AIG officers and directors. shareholder plaintiffs submitted a motion for leave to file their
In November 2007, the shareholder plaintiffs moved to sever their Third Amended Complaint in order to add Thomas Tizzio as a
claims to a separate action. AIG joined the motion to the extent defendant. On February 14, 2008, the court granted this motion
that, among other things, the claims against defendants Green- and allowed Mr. Tizzio until April 2008 to take additional
berg and Smith would remain in prosecution in the pending action. discovery. Document discovery and depositions are otherwise
In addition, a number of parties, including AIG, filed motions to complete.
stay discovery. On February 12, 2008, the court granted AIG’s
Policyholder Actions. After the NYAG filed its complaint against
motion to stay discovery pending the resolution of claims against
insurance broker Marsh, policyholders brought multiple federal
AIG in the New York consolidated securities action. The court also
antitrust and Racketeer Influenced and Corrupt Organizations Act
denied plaintiff’s motion to sever and directed the parties to
(RICO) class actions in jurisdictions across the nation against
coordinate a briefing schedule for the motions to dismiss.
insurers and brokers, including AIG and a number of its subsidiaries,
A separate derivative lawsuit was filed in December 2002 in
alleging that the insurers and brokers engaged in a broad conspiracy
the Delaware Chancery Court against twenty directors and
to allocate customers, steer business, and rig bids. These actions,
executives of AIG as well as against AIG as a nominal defendant
including 24 complaints filed in different federal courts naming AIG or
that alleges, among other things, that the directors of AIG
an AIG subsidiary as a defendant, were consolidated by the judicial
breached the fiduciary duties of loyalty and care by approving the
panel on multi-district litigation and transferred to the United States
payment of commissions to Starr and of rental and service fees
District Court for the District of New Jersey for coordinated pretrial
to SICO and the executives breached their duty of loyalty by
proceedings. The consolidated actions have proceeded in that court
causing AIG to enter into contracts with Starr and SICO and their
in two parallel actions, In re Insurance Brokerage Antitrust Litigation
fiduciary duties by usurping AIG’s corporate opportunity. The
(the First Commercial Complaint) and In re Employee Benefit
complaint further alleges that the Starr agencies did not provide
Insurance Brokerage Antitrust Litigation (the First Employee Benefits
any services that AIG was not capable of providing itself, and that
Complaint, and, together with the First Commercial Complaint, the
the diversion of commissions to these entities was solely for the
multi-district litigation).
benefit of Starr’s owners. The complaint also alleged that the
The plaintiffs in the First Commercial Complaint are nineteen
service fees and rental payments made to SICO and its
corporations, individuals and public entities that contracted with the
subsidiaries were improper. Under the terms of a stipulation
broker defendants for the provision of insurance brokerage services
approved by the Court on February 16, 2006, the claims against
for a variety of insurance needs. The broker defendants are alleged
the outside independent directors were dismissed with prejudice,
to have placed insurance coverage on the plaintiffs’ behalf with a
while the claims against the other directors were dismissed
number of insurance companies named as defendants, including AIG
without prejudice. On October 31, 2005, defendants Greenberg,
subsidiaries. The First Commercial Complaint also named ten brokers
Matthews, Smith, SICO and Starr filed motions to dismiss the
and fourteen other insurers as defendants (two of which have since
amended complaint. In an opinion dated June 21, 2006, the
settled). The First Commercial Complaint alleges that defendants
Court denied defendants’ motion to dismiss, except with respect
engaged in a widespread conspiracy to allocate customers through
to plaintiff’s challenge to payments made to Starr before
‘‘bid-rigging’’ and ‘‘steering’’ practices. The First Commercial Com-
January 1, 2000. On July 21, 2006, plaintiff filed its second
plaint also alleges that the insurer defendants permitted brokers to
amended complaint, which alleges that, between January 1, 2000
place business with AIG subsidiaries through wholesale in-
and May 31, 2005, individual defendants breached their duty of
termediaries affiliated with or owned by those same brokers rather
loyalty by causing AIG to enter into contracts with Starr and SICO
than placing the business with AIG subsidiaries directly. Finally, the
and breached their fiduciary duties by usurping AIG’s corporate
First Commercial Complaint alleges that the insurer defendants
opportunity. Starr is charged with aiding and abetting breaches of
entered into agreements with broker defendants that tied insurance
fiduciary duty and unjust enrichment for its acceptance of the
placements to reinsurance placements in order to provide additional
AIG 2007 Form 10-K 23

compensation to each broker. Plaintiffs assert that the defendants and In re Employee Benefit Insurance Brokerage Antitrust Litiga-
violated the Sherman Antitrust Act, RICO, the antitrust laws of 48 tion (the Second Employee Benefits Complaint) along with revised
states and the District of Columbia, and are liable under common law particularized statements in both actions on May 22, 2007. The
breach of fiduciary duty and unjust enrichment theories. Plaintiffs allegations in the Second Commercial Complaint and the Second
seek treble damages plus interest and attorneys’ fees as a result of Employee Benefits Complaint are substantially similar to the
the alleged RICO and Sherman Antitrust Act violations. allegations in the First Commercial Complaint and First Employee
The plaintiffs in the First Employee Benefits Complaint are nine Benefits Complaint, respectively. The complaints also attempt to
individual employees and corporate and municipal employers add several new parties and delete others; the Second Commer-
alleging claims on behalf of two separate nationwide purported cial Complaint adds two new plaintiffs and twenty seven new
classes: an employee class and an employer class that acquired defendants (including three new AIG defendants), and the Second
insurance products from the defendants from August 26, 1994 to Employee Benefits Complaint adds eight new plaintiffs and nine
the date of any class certification. The First Employee Benefits new defendants (including two new AIG defendants). The defend-
Complaint names AIG, as well as eleven brokers and five other ants filed motions to dismiss the amended complaints and to
insurers, as defendants. The activities alleged in the First strike the newly added parties. The Court granted (without leave
Employee Benefits Complaint, with certain exceptions, track the to amend) defendants’ motions to dismiss the federal antitrust
allegations of contingent commissions, bid-rigging and tying made and RICO claims on August 31, 2007 and September 28, 2007,
in the First Commercial Complaint. respectively. The Court declined to exercise supplemental jurisdic-
On October 3, 2006, Judge Hochberg of the District of New tion over the state law claims in the Second Commercial
Jersey reserved in part and denied in part motions filed by the Complaint and therefore dismissed it in its entirety. On Janu-
insurer defendants and broker defendants to dismiss the multi- ary 14, 2008, the court granted defendants’ motion for summary
district litigation. The Court also ordered the plaintiffs in both judgment on the ERISA claims in the Second Employee Benefits
actions to file supplemental statements of particularity to elabo- Complaint and subsequently dismissed the remaining state law
rate on the allegations in their complaints. Plaintiffs filed their claims without prejudice, thereby dismissing the Second Employee
supplemental statements on October 25, 2006, and the AIG Benefits Complaint in its entirety. On February 12, 2008, plaintiffs
defendants, along with other insurer and broker defendants in the filed a notice of appeal to the United States Court of Appeals for
two consolidated actions, filed renewed motions to dismiss on the Third Circuit with respect to the dismissal of the Second
November 30, 2006. On February 16, 2007, the case was Employee Benefits Complaint. Plaintiffs previously appealed the
transferred to Judge Garrett E. Brown, Chief Judge of the District dismissal of the Second Commercial Complaint to the United
of New Jersey. On April 5, 2007, Chief Judge Brown granted the States Court of Appeals for the Third Circuit on October 10, 2007.
defendants’ renewed motions to dismiss the First Commercial Several similar actions that were consolidated before Chief Judge
Complaint and First Employee Benefits Complaint with respect to Brown are still pending in the District Court. Those actions are
the antitrust and RICO claims. The claims were dismissed without currently stayed pending a decision by the court on whether they
prejudice and the plaintiffs were given 30 days, later extended to will proceed during the appeal of the dismissal of the Second
45 days, to file amended complaints. On April 11, 2007, the Commercial Complaint and the Second Employee Benefits
Court stayed all proceedings, including all discovery, that are part Complaint.
of the multi-district litigation until any renewed motions to dismiss On August 24, 2007, the Ohio Attorney General filed a
the amended complaints are resolved. complaint in the Ohio Court of Common Pleas against AIG and a
A number of complaints making allegations similar to those in number of its subsidiaries, as well as several other broker and
the First Commercial Complaint have been filed against AIG and insurer defendants, asserting violation of Ohio’s antitrust laws.
other defendants in state and federal courts around the country. The complaint, which is similar to the Second Commercial
The defendants have thus far been successful in having the Complaint, alleges that AIG and the other broker and insurer
federal actions transferred to the District of New Jersey and defendants conspired to allocate customers, divide markets, and
consolidated into the multi-district litigation. The AIG defendants restrain competition in commercial lines of casualty insurance
have also sought to have state court actions making similar sold through the broker defendant. The complaint seeks treble
allegations stayed pending resolution of the multi-district litigation damages on behalf of Ohio public purchasers of commercial
proceeding. In one state court action pending in Florida, the trial casualty insurance, disgorgement on behalf of both public and
court recently decided not to grant an additional stay, but instead private purchasers of commercial casualty insurance, as well as a
to allow the case to proceed. Defendants filed their motions to $500 per day penalty for each day of conspiratorial conduct. AIG,
dismiss, and on September 24, 2007, the court denied the along with other co-defendants, moved to dismiss the complaint
motions with respect to the state antitrust, RICO, and common on November 16, 2007. Discovery is stayed in the case pending
law claims and granted the motions with respect to both the a ruling on the motion to dismiss or until May 15, 2008,
Florida insurance bad faith claim against AIG (with prejudice) and whichever occurs first.
the punitive damages claim (without prejudice). Discovery in this
SICO. In July, 2005, SICO filed a complaint against AIG in the
action is ongoing.
Southern District of New York, claiming that AIG had refused to
Plaintiffs filed amended complaints in both In re Insurance
provide SICO access to certain artwork and asked the court to
Brokerage Antitrust Litigation (the Second Commercial Complaint)
order AIG immediately to release the property to SICO. AIG filed
24 AIG 2007 Form 10-K

an answer denying SICO’s allegations and setting forth defenses Effect on AIG
to SICO’s claims. In addition, AIG filed counterclaims asserting
In the opinion of AIG management, AIG’s ultimate liability for thebreach of contract, unjust enrichment, conversion, breach of
unresolved litigation and investigation matters referred to above isfiduciary duty, a constructive trust and declaratory judgment,
not likely to have a material adverse effect on AIG’s consolidatedrelating to SICO’s breach of its commitment to use its AIG shares
financial condition, although it is possible that the effect would beonly for the benefit of AIG and AIG employees. Fact and expert
material to AIG’s consolidated results of operations for andiscovery has been concluded and SICO’s motion for summary
individual reporting period.judgment is pending.
Regulatory Investigations. Regulators from several states have Item 4.
commenced investigations into insurance brokerage practices Submission of Matters to a Vote of Security
related to contingent commissions and other industry wide Holders
practices as well as other broker-related conduct, such as alleged
There were no matters submitted to a vote of security holdersbid-rigging. In addition, various federal, state and foreign regula-
during the fourth quarter of 2007.tory and governmental agencies are reviewing certain transactions
and practices of AIG and its subsidiaries in connection with
industry wide and other inquiries. AIG has cooperated, and will
continue to cooperate, in producing documents and other informa-
tion in response to subpoenas and other requests. On Janu-
ary 29, 2008, AIG reached settlement agreements with nine
states and the District of Columbia. The settlement agreements
call for AIG to pay a total of $12.5 million to be allocated among
the ten jurisdictions and also require AIG to continue to maintain
certain producer compensation disclosure and ongoing compliance
initiatives. AIG will also continue to cooperate with these states in
their ongoing investigations. AIG has not admitted liability under
the settlement agreements and continues to deny the allegations.
Nevertheless, AIG agreed to settle in order to avoid the expense
and uncertainty of protracted litigation. The settlement agree-
ments, which remain subject to court approvals, were reached
with the Attorneys General of the States of Florida, Hawaii,
Maryland, Michigan, Oregon, Texas and West Virginia, the Com-
monwealths of Massachusetts and Pennsylvania, and the District
of Columbia, the Florida Department of Financial Services, and
the Florida Office of Insurance Regulation. The agreement with the
Texas Attorney General also settles allegations of anticompetitive
conduct relating to AIG’s relationship with Allied World Assurance
Company and includes an additional settlement payment of
$500,000 related thereto.
Wells Notices. AIG understands that some of its employees have
received Wells notices in connection with previously disclosed SEC
investigations of certain of AIG’s transactions or accounting
practices. Under SEC procedures, a Wells notice is an indication
that the SEC staff has made a preliminary decision to recommend
enforcement action that provides recipients with an opportunity to
respond to the SEC staff before a formal recommendation is
finalized. It is possible that additional current and former
employees could receive similar notices in the future as the
regulatory investigations proceed.
AIG 2007 Form 10-K 25

Part II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
AIG’s common stock is listed on the New York Stock Exchange, as well as on the stock exchanges in Paris and Tokyo.
The following table presents the high and low closing sales prices and the dividends paid per share of AIG’s common
stock on the New York Stock Exchange Composite Tape, for each quarter of 2007 and 2006:
2007 2006
Dividends Dividends
High Low Paid High Low Paid
First quarter $72.15 $66.77 $0.165 $70.83 $65.35 $0.150
Second quarter 72.65 66.49 0.165 66.54 58.67 0.150
Third quarter 70.44 61.64 0.200 66.48 57.76 0.165
Fourth quarter 70.11 51.33 0.200 72.81 66.30 0.165
The approximate number of holders of common stock as of January 31, 2008, based upon the number of record holders, was 56,500.
Subject to the dividend preference of any of AIG’s serial preferred stock that may be outstanding, the holders of shares of common
stock are entitled to receive such dividends as may be declared by AIG’s Board of Directors from funds legally available therefor.
In February 2007, AIG’s Board of Directors adopted a new dividend policy, which took effect with the dividend that was declared in the
second quarter of 2007. Under ordinary circumstances, AIG’s plan is to increase its common stock dividend by approximately
20 percent annually. The payment of any dividend, however, is at the discretion of AIG’s Board of Directors, and the future payment of
dividends will depend on various factors, including the performance of AIG’s businesses, AIG’s consolidated financial condition, results
of operations and liquidity and the existence of investment opportunities.
For a discussion of certain restrictions on the payment of dividends to AIG by some of its insurance subsidiaries, see Note 14 to
Consolidated Financial Statements.
The following table summarizes AIG’s stock repurchases for the three-month period ended December 31, 2007:
Maximum Number
Total Number of Shares that
of Shares May Yet Be
Total Number Purchased as Part Purchased Under the
of Shares Average Price of Publicly Announced Plans or Programs
Period Purchased(a)(b)
Paid per Share Plans or Programs at End of Month(b)
October 1 - 31, 2007 13,964,098 $66.12 13,964,098
November 1 - 30, 2007 5,709,067 61.56 5,709,067
December 1 - 31, 2007 1,584,199 55.58 1,584,199
Total 21,257,364 $64.11 21,257,364
(a) Reflects date of delivery. Does not include 49,583 shares delivered or attested to in satisfaction of the exercise price by holders of AIG employee
stock options exercised during the three months ended December 31, 2007 or 23,300 shares purchased by ILFC to satisfy obligations under employee
benefit plans.
(b) In February 2007, AIG’s Board of Directors increased AIG’s share repurchase program by authorizing the repurchase of shares with an aggregate
purchase price of $8 billion. In November 2007, AIG’s Board of Directors authorized the repurchase of an additional $8 billion in common stock. A
balance of $10.9 billion remained for purchases under the program as of December 31, 2007, although $912 million of that amount has been
advanced by AIG to purchase shares under the program and an additional $1 billion was required to be advanced in January 2008 to meet
commitments that existed at December 31, 2007.
AIG does not expect to purchase additional shares under its share repurchase program for the foreseeable future, other than to meet
commitments that existed at December 31, 2007.
AIG’s table of equity compensation plans previously approved by security holders and equity compensation plans not previously approved
by security holders will be included in AIG’s Definitive Proxy Statement in connection with its 2008 Annual Meeting of Shareholders,
which will be filed with the SEC within 120 days of AIG’s fiscal year end.
26 AIG 2007 Form 10-K

insurance companies to which AIG compares its business andPerformance Graph
operations: ACE Limited, Aﬂac Incorporated, The Chubb Corpora-The following Performance Graph compares the cumulative total
tion, The Hartford Financial Services Group, Inc., Lincoln Nationalshareholder return on AIG common stock for a ﬁve-year period
Corporation, MetLife, Inc., Prudential Financial, Inc., The Travelers(December 31, 2002 to December 31, 2007) with the cumulative
Companies, Inc. (formerly The St. Paul Travelers Companies, Inc.)total return of the Standard & Poor’s 500 stock index (which
and XL Capital Ltd.includes AIG) and a peer group of companies consisting of nine
FIVE-YEAR CUMULATIVE TOTAL SHAREHOLDER RETURNS
Value of $100 Invested on December 31, 2002
$0
$50
$100
$150
$200
$250
2002 2003 2004 2005 2006 2007
Years Ending
AMERICAN INTERNATIONAL GROUP S&P 500 INDEX PEER GROUP
As of December 31,
2002 2003 2004 2005 2006 2007
AIG $100.00 $115.02 $114.43 $119.98 $127.24 $104.67
S&P 500 100.00 128.68 142.69 149.70 173.34 182.86
Peer Group 100.00 126.10 145.73 179.22 207.37 216.60
AIG 2007 Form 10-K 27

Item 6.
Selected Financial Data
Selected Consolidated Financial Data
The Selected Consolidated Financial Data should be read in conjunction with Management’s Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated financial statements and accompanying notes
included elsewhere herein.
(in millions, except per share data) 2007 2006(a)
2005(a)
2004(a)
2003(a)
Revenues(b)(c)(d)
:
Premiums and other considerations $ 79,302 $ 74,213 $ 70,310 $ 66,704 $ 54,874
Net investment income 28,619 26,070 22,584 19,007 16,024
Net realized capital gains (losses) (3,592) 106 341 44 (442)
Unrealized market valuation losses on AIGFP super senior credit
default swap portfolio (11,472) — — — —
Other income 17,207 12,998 15,546 12,068 9,145
Total revenues 110,064 113,387 108,781 97,823 79,601
Benefits and expenses:
Incurred policy losses and benefits 66,115 60,287 64,100 58,600 46,362
Insurance acquisition and other operating expenses 35,006 31,413 29,468 24,378 21,332
Total benefits and expenses 101,121 91,700 93,568 82,978 67,694
Income before income taxes, minority interest and cumulative effect
of accounting changes(b)(c)(d)(e)(f)
8,943 21,687 15,213 14,845 11,907
Income taxes 1,455 6,537 4,258 4,407 3,556
Income before minority interest and cumulative effect of accounting
changes 7,488 15,150 10,955 10,438 8,351
Minority interest (1,288) (1,136) (478) (455) (252)
Income before cumulative effect of accounting changes 6,200 14,014 10,477 9,983 8,099
Cumulative effect of accounting changes, net of tax — 34 — (144) 9
Net income 6,200 14,048 10,477 9,839 8,108
Earnings per common share:
Basic
Income before cumulative effect of accounting changes 2.40 5.38 4.03 3.83 3.10
Cumulative effect of accounting changes, net of tax — 0.01 — (0.06) —
Net income 2.40 5.39 4.03 3.77 3.10
Diluted
Income before cumulative effect of accounting changes 2.39 5.35 3.99 3.79 3.07
Cumulative effect of accounting changes, net of tax — 0.01 — (0.06) —
Net income 2.39 5.36 3.99 3.73 3.07
Dividends declared per common share 0.77 0.65 0.63 0.29 0.24
Year-end balance sheet data:
Total assets 1,060,505 979,410 853,048 801,007 675,602
Long-term borrowings(g)
162,935 135,316 100,314 86,653 73,881
Commercial paper and extendible commercial notes 13,114 13,363 9,535 10,246 6,468
Total liabilities 964,604 877,542 766,545 721,135 606,180
Shareholders’ equity $ 95,801 $101,677 $ 86,317 $ 79,673 $ 69,230
(b) In 2007, 2006, 2005, 2004 and 2003, includes other-than-temporary impairment charges of $4.7 billion, $944 million, $598 million, $684 million
and $1.5 billion, respectively. Also includes gains (losses) from hedging activities that did not qualify for hedge accounting treatment under FAS 133,
including the related foreign exchange gains and losses. In 2007, 2006, 2005, 2004 and 2003, respectively, the effect was $(1.44) billion,
$(1.87) billion, $2.02 billion, $385 million and $(1.50) billion in revenues and $(1.44) billion, $(1.87) billion, $2.02 billion, $671 million and
$(1.22) billion in operating income. These amounts result primarily from interest rate and foreign currency derivatives that are effective economic
hedges of investments and borrowings. These gains (losses) in 2007 include a $380 million out of period charge to reverse net gains recognized on
transfers of available for sale securities among legal entities consolidated within AIGFP. The gains (losses) in 2006 include an out of period charge of
$223 million related to the remediation of the material weakness in internal control over the accounting for certain derivative transactions under FAS
133. In the first quarter of 2007, AIG began applying hedge accounting for certain transactions, primarily in its Capital Markets operations. In the
second quarter of 2007, AGF and ILFC began applying hedge accounting to most of their derivatives hedging interest rate and foreign exchange risks
associated with their floating rate and foreign currency denominated borrowings.
(c) In 2006, includes the effect of out of period adjustments related to the accounting for UCITS. The effect was an increase of $490 million in both
revenues and operating income for General Insurance and an increase of $240 million and $169 million in revenues and operating income,
respectively, for Life Insurance & Retirement Services.
(d) In 2007, includes an unrealized market valuation loss of $11.5 billion on AIGFP’s super senior credit default swap portfolio and an other-than-temporary
impairment charge of $643 million on AIGFP’s available for sale investment securities reported in other income.
(e) Includes current year catastrophe-related losses of $276 million in 2007, $3.28 billion in 2005 and $1.16 billion in 2004. There were no significant
catastrophe-related losses in 2006 and 2003.
(f) Reduced by fourth quarter charges of $1.8 billion and $850 million in 2005 and 2004, respectively, related to the annual review of General Insurance
loss and loss adjustment reserves. In 2006, 2005 and 2004, changes in estimates for asbestos and environmental reserves were $198 million,
$873 million and $850 million, respectively.
(g) Includes that portion of long-term debt maturing in less than one year. See also Note 11 to Consolidated Financial Statements.
28 AIG 2007 Form 10-K

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
presented in accordance with accounting principles prescribed byItem 7.
insurance regulatory authorities because these are standardManagement’s Discussion and Analysis of
measures of performance used in the insurance industry and thusFinancial Condition and Results of Operations
allow more meaningful comparisons with AIG’s insurance competi-
Throughout this Management’s Discussion and Analysis of Finan- tors. AIG has also incorporated into this discussion a number of
cial Condition and Results of Operations, AIG presents its cross-references to additional information included throughout this
operations in the way it believes will be most meaningful. Annual Report on Form 10-K to assist readers seeking additional
Statutory underwriting proﬁt (loss) and combined ratios are information related to a particular subject.
Index Page Page
Cautionary Statement Regarding Invested Assets 101
Projections and Other Information About Investment Strategy 102
Future Events 29 Valuation of Invested Assets 108
Portfolio Review 109Overview of Operations and Business Results 30
Other-than-temporary impairments 109Outlook 30
Unrealized gains and losses 111Consolidated Results 34
Segment Results 36 Risk Management 112
Capital Resources 37 Overview 112
Liquidity 38 Corporate Risk Management 112
Credit Risk Management 113Critical Accounting Estimates 38
Market Risk Management 115
Operating Review 40 Operational Risk Management 116
General Insurance Operations 40 Insurance Risk Management 116
General Insurance Results 41 Segment Risk Management 118
Reserve for Losses and Loss Expenses 47 Insurance Operations 118
Life Insurance & Retirement Services Operations 62 Financial Services 121
Life Insurance & Retirement Services Results 63 Asset Management 126
Deferred Policy Acquisition Costs and Sales
Economic Capital 126Inducement Assets 78
Financial Services Operations 81 Recent Accounting Standards 127
Asset Management Operations 86
Other Operations 88
Capital Resources and Liquidity 88
Borrowings 89
Shareholders’ Equity 97
Liquidity 99
Cautionary Statement Regarding Projections and Other Information About Future Events
This Annual Report on Form 10-K and other publicly available documents may include, and AIG’s officers and representatives may from time
to time make, projections concerning financial information and statements concerning future economic performance and events, plans and
objectives relating to management, operations, products and services, and assumptions underlying these projections and statements.
These projections and statements are not historical facts but instead represent only AIG’s belief regarding future events, many of which, by
their nature, are inherently uncertain and outside AIG’s control. These projections and statements may address, among other things, the
status and potential future outcome of the current regulatory and civil proceedings against AIG and their potential effect on AIG’s
businesses, financial condition, results of operations, cash flows and liquidity, AIG’s exposures to subprime mortgages, monoline insurers
and the residential real estate market and AIG’s strategy for growth, product development, market position, financial results and reserves.
It is possible that AIG’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial
condition indicated in these projections and statements. Factors that could cause AIG’s actual results to differ, possibly materially, from
those in the specific projections and statements are discussed throughout this Management’s Discussion and Analysis of Financial
Condition and Results of Operations and in Item 1A. Risk Factors of this Annual Report on Form 10-K. AIG is not under any obligation (and
expressly disclaims any such obligations) to update or alter any projection or other statement, whether written or oral, that may be made
from time to time, whether as a result of new information, future events or otherwise.
AIG 2007 Form 10-K 29

Financial Condition and Results of Operations Continued
AIG patiently builds relationships in markets around the worldOverview of Operations and Business Results
where it sees long-term growth opportunities. For example, the
AIG identifies its reportable segments by product or service line, fact that AIG has the only wholly owned foreign life insurance
consistent with its management structure. AIG’s major product operations in China, operating in 19 cities, is the result of
and service groupings are General Insurance, Life Insurance & relationships developed over nearly 30 years. AIG’s more recent
Retirement Services, Financial Services and Asset Management. extensions of operations into India, Vietnam, Russia and other
Through these operating segments, AIG provides insurance, emerging markets reflect the same growth strategy. Moreover, AIG
financial and investment products and services to both busi- believes in investing in the economies and infrastructures of
nesses and individuals in more than 130 countries and jurisdic- these countries and growing with them. When AIG companies
tions. This geographic, product and service diversification is one enter a new jurisdiction, they typically offer basic protection and
of AIG’s major strengths and sets it apart from its competitors. savings products. As the economies evolve, AIG’s products evolve
AIG’s Other category consists of items not allocated to AIG’s with them, to more sophisticated and investment-oriented models.
operating segments. Growth for AIG may be generated internally as well as through
AIG’s subsidiaries serve commercial, institutional and individ- acquisitions which both fulfill strategic goals and offer adequate
ual customers through an extensive property-casualty and life return on capital. In October 2007, AIG expanded its Foreign
insurance and retirement services network. In the United States, General Insurance operations in Germany through the acquisition
AIG companies are the largest underwriters of commercial and of Württembergische und Badische Versicherungs-AG (WüBa). In
industrial insurance and are among the largest life insurance and January 2007, American General Finance, Inc. (AGF) expanded its
retirement services operations as well. AIG’s Financial Services operations into the U.K. through the acquisition of Ocean Finance
businesses include commercial aircraft and equipment leasing, and Mortgages Limited, a finance broker for home owner loans in
capital markets operations and consumer finance, both in the the U.K.
United States and abroad. AIG also provides asset management
services to institutions and individuals. As part of its Spread- Outlook
Based Investment activities, and to finance its operations, AIG
General Trendsissues various debt instruments in the public and private markets.
AIG’s operating performance reflects implementation of various
In mid-2007, the U.S. residential mortgage market began to
long-term strategies and defined goals in its various operating
experience serious disruption due to credit quality deterioration in
segments. A primary goal of AIG in managing its General
a significant portion of loans originated, particularly to non-prime
Insurance operations is to achieve an underwriting profit. To
and subprime borrowers; evolving changes in the regulatory
achieve this goal, AIG must be disciplined in its risk selection,
environment; a slower residential housing market; increased cost
and premiums must be adequate and terms and conditions
of borrowings for mortgage participants; and illiquid credit
appropriate to cover the risks accepted and expenses incurred.
markets.
AIG has commenced a realignment to simplify its Foreign
AIG participates in the U.S. residential mortgage market in
General Insurance operations, many of which were historically
several ways: AGF originates principally first-lien mortgage loans
conducted through branches of U.S. companies. On October 8,
and to a lesser extent second-lien mortgage loans to buyers and
2007, AIU Insurance Company announced the conversion of its
owners of residential housing; United Guaranty Corporation (UGC)
existing China branches into AIG General Insurance Company
provides first loss mortgage guaranty insurance for high loan-to-
China Limited, the first non-Chinese owned general insurance
value first- and second-lien residential mortgages; AIG insurance
company established in China. This subsidiary assumed the
and financial services subsidiaries invest in mortgage-backed
existing business portfolio, assets and liabilities of the China
securities and CDOs, in which the underlying collateral is
branches. On October 15, 2007, AIG General Insurance (Taiwan)
composed in whole or in part of residential mortgage loans; and
Co., Ltd. (AIGGI Taiwan) announced the completion of its merger
AIGFP provides credit protection through credit default swaps on
with AIU Insurance Company Taiwan Branch. On December 1,
certain super senior tranches of collateralized debt obligations
2007, Landmark Insurance Company Limited, a U.K. subsidiary,
(CDOs), a significant majority of which have AAA underlying or
assumed all of the insurance liabilities of the U.K. branch of New
subordinate layers.
Hampshire Insurance Company and changed its name to AIG U.K.
Disruption in the U.S. residential mortgage market may also
Ltd. On January 1, 2008, AIU Insurance Company ceased
increase claim activity in the financial institution segment of AIG’s
participating in the Domestic General Insurance pooling arrange-
D&O and professional liability classes of business. However,
ment. These ongoing simplification efforts are expected to result
based on its review of information currently available, AIG believes
in better utilization of capital and a lower effective tax rate.
overall loss activity for the broader D&O and professional liability
A central focus of AIG operations in recent years has been the
classes is likely to remain within or near the levels observed
development and expansion of distribution channels. In 2007, AIG
during the last several years, which include losses related to
continued to expand its distribution channels, which now include
stock options backdating as well as to the U.S. residential
banks, credit card companies, television-media home shopping,
mortgage market.
affinity groups, direct response, worksite marketing and
The operating results of AIG’s consumer finance and mortgage
e-commerce.
guaranty operations in the United States have been and are likely
30 AIG 2007 Form 10-K

to continue to be adversely affected by the factors referred to Workers compensation remains under considerable pricing
above. The downward cycle in the U.S. housing market is not pressure, as statutory rates continue to decline. Rates for
expected to improve until residential inventories return to a more aviation, excess casualty, D&O and certain other lines of
normal level and the mortgage credit market stabilizes. AIG insurance also continue to decline due to competitive pressures.
expects that this downward cycle will continue to adversely affect Rates for commercial property lines are also declining following
UGC’s operating results for the foreseeable future and will result another year of relatively low catastrophe losses. Further price
in a significant operating loss for UGC in 2008. AIG also incurred erosion is expected in 2008 for the commercial lines; AIG seeks
substantial unrealized market valuation losses in 2007, particu- to mitigate the decline by constantly seeking out profitable
larly in the fourth quarter, on AIGFP’s super senior credit default opportunities across its diverse product lines and distribution
swap portfolio and substantial other-than-temporary impairment networks while maintaining a commitment to underwriting disci-
charges on AIG’s Insurance and Financial Services available for pline. There can be no assurance that price erosion will not
sale securities. The results from AIG’s operations with exposure become more widespread or that AIG’s profitability will not
to the U.S. residential mortgage market will be highly dependent deteriorate from current levels in major commercial lines.
on future market conditions. Continuing market deterioration will In Foreign General Insurance, opportunities for growth exist in
cause AIG to report additional unrealized market valuation losses the consumer lines due to increased demand in emerging markets
and impairment charges. and the trend toward privatization of health insurance. In commer-
The ongoing effect of the downward cycle in the U.S. housing cial lines, the late 2007 acquisition of WüBa enhances AIG’s
market on AIG’s other operations, investment portfolio and overall insurance offerings to small and medium sized companies in
consolidated financial condition could be material if the market Europe.
disruption continues and expands beyond the residential mort- Through operations in Bahrain designed to comply with Islamic
gage markets, although AIG seeks to mitigate the risks to its law, AIG is tapping into a growing market. Islamic insurance,
business by disciplined underwriting and active risk management. called Takaful, is an alternative to conventional insurance based
Globally, heightened regulatory scrutiny of financial services on the concept of mutual assistance through pooling of resources.
companies in many jurisdictions has the potential to affect future The Personal Lines automobile marketplace remains challeng-
financial results through higher compliance costs. This is particu- ing with rates declining steadily, increased spending on commis-
larly true in the United States, where Federal and state authorities sions and advertising and favorable liability frequency trends
have commenced various investigations of the financial services slowing, while severity in both liability and physical damage are
industry, and in Japan and Southeast Asia, where financial expected to increase. In addition to the deteriorating underwriting
institutions have received remediation orders affecting consumer cycle, a generally weakening economy leads to slower growth in
and policyholder rights. automobile insurance exposure units and values. The Personal
In certain quarters, AIG’s returns from partnerships and other Lines business is focused on consolidation and improving opera-
alternative investments were particularly strong, driven by tional efficiencies to reduce costs, as well as enhancing rating
favorable equity market performance and credit conditions. These algorithms and creating a new aigdirect.com brand, as a result of
returns may vary from period to period and AIG believes that the the 2007 combination of AIG Direct and 21st Century Insurance
particularly strong performance in certain prior periods is not Group (21st Century) operations, to support growth. The high net
indicative of the returns to be expected from this asset class in worth market continues to provide opportunities for growth as a
future periods. result of AIG’s innovative products and services specifically
AIG has recorded out of period adjustments in the last two designed for that market.
years due to the remediation of control deficiencies. As AIG Losses caused by catastrophes can fluctuate widely from year
continues its remediation activities, AIG expects to continue to to year, making comparisons of results more difficult. With
incur expenses related to these activities and to record additional respect to catastrophe losses, AIG believes that it has taken
out of period adjustments, although all known errors have been appropriate steps, such as careful exposure selection and
corrected. adequate reinsurance coverage, to reduce the effect of possible
future losses. The occurrence of one or more catastrophic events
of higher than anticipated frequency or severity, such as aGeneral Insurance
terrorist attack, earthquake or hurricane, that causes insured
The commercial property and casualty insurance industry has
losses, however, could have a material adverse effect on AIG’s
historically experienced cycles of price erosion followed by rate
results of operations, liquidity or financial condition.
strengthening as a result of catastrophes or other significant
losses that affect the overall capacity of the industry to provide
coverage. As premium rates decline, AIG will generally experience
higher current accident year loss ratios, as the written premiums Disruption in the U.S. residential mortgage and credit markets
are earned. Despite industry price erosion in commercial lines, had a significant adverse effect on Life Insurance & Retirement
AIG expects to continue to identify profitable opportunities and Services operating results in 2007 and will continue to be a key
build attractive new general insurance businesses as a result of factor in 2008 and beyond, especially in the U.S.-based opera-
AIG’s broad product line and extensive distribution networks in the tions. The volatility in operating results will be further magnified by
United States and abroad. the continuing market shift to variable products with living benefits
AIG 2007 Form 10-K 31

and the adoption of FAS No. 157, ‘‘Fair Value Measurements’’ distribution opportunities and operational efficiencies pending
(FAS 157). Life Insurance & Retirement Services elected the fair regulatory approval.
value option under FAS No. 159, ‘‘The Fair Value Option for Full deregulation of banks in Japan with respect to insurance
Financial Assets and Financial Liabilities’’ (FAS 159), for two product sales became effective in December 2007, and AIG
products beginning January 1, 2008 - a closed block of single expects that it will be able to leverage its existing bank
premium variable life business in Japan and an investment-linked relationships and innovative product expertise to expand sales of
life insurance product sold principally in Asia. After adoption on both life and accident and health products in 2008. Deregulation
January 1, 2008, subsequent changes in fair value for these of Japan Post is also expected to provide additional growth
products will be reported in operating income. The adoption of opportunities during 2008 and beyond.
FAS 159 for these products is expected to result in a decrease to Although the Japanese Yen strengthened in the fourth quarter
opening 2008 retained earnings of approximately $600 million. of 2007, historical volatility of Japanese Yen-dollar exchange rates
For a description of these accounting standards, see Note 1 to has resulted in higher than normal surrenders, and if that trend
Consolidated Financial Statements. returns, an acceleration of the amortization of deferred policy
Life Insurance & Retirement Services uses various derivative acquisition costs could occur.
instruments to hedge cash flows related to certain foreign Outside of Japan, ALICO continues to execute its strategy of
currencies and fixed income related instruments. Although these diversifying distribution channels and developing new products. In
derivatives are purchased to mitigate the economic effect of particular, ALICO’s Central and Eastern European operations
movements in foreign exchange rates and interest rates, reported performed well and demographic and economic conditions in
earnings may be volatile due to certain hedges not qualifying for these countries provide excellent opportunities for continued
hedge accounting under FAS 133. The change in fair value of growth.
derivative instruments is reported in net realized capital gains AIG’s operations in China continue to expand, but AIG expects
(losses). Life Insurance & Retirement Services engages in hedging competition in China to remain strong. AIG’s success in China will
programs that use derivatives and other instruments to hedge the depend on its ability to execute its growth strategy. Key growth
guaranteed living benefits associated with variable products. strategies in 2008 include expansion of sales and service
Nevertheless, short-term market movements will vary from long- centers, increased bank distribution and entering into strategic
term expectations underlying the product pricing assumptions and alliances with key partners. In Southeast Asia, AIG’s operations
may cause volatility in reported earnings. The inclusion of risk are focused on growing market share and profits in Singapore,
margins in the valuation of embedded derivatives under FAS 157 Malaysia, Thailand and Hong Kong with products focused on the
will increase earnings volatility as differences emerge between the life savings-oriented consumer along with high net worth consum-
change in fair value of embedded derivatives and the change in ers through the newly formed Wealth Management Group.
fair value of hedging instruments. As variable products with Domestically, AIG plans to continue expansion of its Life
guaranteed living benefits continue to grow, the reported earnings Insurance & Retirement Services businesses through direct
volatility associated with these programs will likely increase. marketing and independent agent distribution channels. The aging
Life Insurance & Retirement Services may continue to experi- population in the United States provides a growth opportunity for
ence volatility in net realized capital gains (losses) due to other- a variety of products, including longevity, guaranteed income and
than-temporary impairment writedowns of the fair value of invest- supplemental accident and health products. Certain other demo-
ments, primarily related to the significant disruption in the graphic groups that have traditionally been underserved provide
residential mortgage and credit markets and foreign currency additional growth opportunities. The Domestic Life Insurance
related losses. operations showed positive momentum in the second half of 2007
In Japan, given AIG’s multi-channel, multi-product strategy, AIG resulting from new products and expanded distribution. Domestic
expects its Life Insurance & Retirement Services operations to group life/health operations continue to face competitors with
exceed industry growth in the long term, although downward greater scale in group benefits.
pressure on earnings growth rates is anticipated due to the The fixed annuities business experienced a difficult year as
difficult market conditions. Market conditions remain challenging surrenders increased in 2007 due to both an increasing number
as a result of increased competition due to new market entrants, of policies coming out of their surrender charge period and
the increasing financial strength of the domestic companies as increased competition from bank deposit products. While surren-
the economy has recovered, the effect of additional regulatory ders are expected to continue to be higher than normal, the
oversight, changes to the tax deductibility of insurance premiums current interest rate environment should provide opportunities for
and the regulatory claims review which has negatively affected improvements in net flows during 2008. AIG believes that
consumer perceptions of the industry. While the market shift to improvement in net flows in the individual variable annuity market
variable products with living benefits will constrain fixed annuity will be driven by variable annuity products with living benefits while
sales, AIG is positioned to grow annuity sales overall with its the group retirement products will continue to experience a shift
annuity products designed to meet the needs of consumers in a from group annuities to lower margin mutual fund products.
range of market conditions. In addition, AIG expects that the Since the beginning of 2000, the yield available on Taiwanese
planned integration of AIG Star Life and AIG Edison Life, which is 10-year government bonds dropped from approximately 6 percent
anticipated to be completed in 2009, will provide enhanced to less than 3 percent at December 31, 2007. Yields on most
32 AIG 2007 Form 10-K

other invested assets have correspondingly dropped over the next 12 to 18 months by AIGFP’s counterparties as they
same period. New regulatory capital requirements being devel- implement models compliant with the new Basel II Accord. As of
oped in Taiwan, combined with growth opportunities in bancas- February 26, 2008, $54 billion in notional exposures have either
surance and variable annuities with living benefits, may potentially been terminated or are in the process of being terminated. AIGFP
create a need for capital contributions in 2008 and beyond to was not required to make any payments as part of these
support local solvency requirements. terminations and in certain cases was paid a fee upon termina-
tion. In light of this experience to date and after other comprehen-
sive analyses, AIG did not recognize an unrealized marketFinancial Services
valuation adjustment for this regulatory capital relief portfolio for
Within Financial Services, demand for International Lease Finance
the year ended December 31, 2007. AIG will continue to assess
Corporation (ILFC’s) modern, fuel efficient aircraft remains strong,
the valuation of this portfolio and monitor developments in the
and ILFC plans to increase its fleet by purchasing 73 aircraft in
marketplace. There can be no assurance that AIG will not
2008. However, ILFC’s margins may be adversely affected by
recognize unrealized market valuation losses from this portfolio in
increases in interest rates. AIG Financial Products Corp. and AIG
future periods. These transactions contributed approximately
Trading Group Inc. and their respective subsidiaries (collectively,
$210 million to AIGFP’s revenues in 2007. If AIGFP is not
AIGFP) expect opportunities for growth across their product
successful in replacing the revenues generated by these transac-
segments, but AIGFP is a transaction-oriented business, and its
tions, AIGFP’s operating results could be materially adversely
operating results will depend to a significant extent on actual
affected. For additional information on the AIGFP super senior
transaction flow, which is affected by market conditions and other
credit default swap portfolio, see Risk Management — Segment
variables outside its control. AIG continues to explore opportuni-
Risk Management — Financial Services — Capital Markets Deriva-
ties to expand its Consumer Finance operations into new
tive Transactions and Note 8 to Consolidated Financial
domestic and foreign markets.
Statements.
The ongoing disruption in the U.S. residential mortgage and
In March 2007, the U.S. Treasury Department published
credit markets and the recent downgrades of residential mortgage-
proposed regulations that, had they been adopted in 2007, would
backed securities and CDO securities by rating agencies continue
have had the effect of limiting the ability of AIG to claim foreign
to adversely affect the fair value of the super senior credit default
tax credits with respect to certain transactions entered into by
swap portfolio written by AIGFP. AIG expects that continuing
AIGFP. AIGFP is no longer a participant in those transactions and
limitations on the availability of market observable data will affect
therefore, the proposed regulations, if adopted in their current
AIG’s determinations of the fair value of these derivatives,
form in 2008 or subsequent years, would not be expected to have
including by preventing AIG, for the foreseeable future, from
any material effect on AIG’s ability to claim foreign tax credits.
recognizing the beneficial effect of the differential between credit
Effective January 1, 2008, AIGFP elected to apply the fair
spreads used to price a credit default swap and spreads implied
value option to all eligible assets and liabilities, other than equity
from prices of the CDO bonds referenced by such swap. The fair
method investments. The adoption of FAS 159 with respect to
value of these derivatives is expected to continue to fluctuate,
elections made by AIGFP is currently being evaluated for the effect
perhaps materially, in response to changing market conditions,
of recently issued draft guidance by the FASB, anticipated to be
and AIG’s estimates of the value of AIGFP’s super senior credit
issued in final form in early 2008, and its potential effect on
derivative portfolio at future dates could therefore be materially
AIG’s consolidated financial statements.
different from current estimates. AIG continues to believe that the
unrealized market valuation losses recorded on the AIGFP super
Asset Management
senior credit default swap portfolio are not indicative of the losses
AIGFP may realize over time. Under the terms of most of these In the Spread-Based Investment business, the Guaranteed Invest-
credit derivatives, losses to AIG would generally result from the ment Contract (GIC) portfolio continues to run off and was
credit impairment of the referenced CDO bonds that AIG would replaced by the Matched Investment Program (MIP). The results
acquire in satisfying its swap obligations. Based upon its most from domestic GICs and the MIP have been adversely affected by
current analyses, AIG believes that any credit impairment losses the ongoing disruption in the credit markets, the weakening
realized over time by AIGFP will not be material to AIG’s U.S. dollar and declining interest rates. The MIP is exposed to
consolidated financial condition, although it is possible that such credit and market risk in the form of investments in, among other
realized losses could be material to AIG’s consolidated results of asset classes, U.S. residential mortgage-backed securities, asset-
operations for an individual reporting period. Except to the extent backed securities, commercial mortgage-backed securities and
of any such credit impairment losses, AIG expects the unrealized single name corporate credit default swaps entered into by the
market valuation losses to reverse over the remaining life of the MIP. In addition, earnings volatility for the MIP may arise from
super senior credit default swap portfolio. investments in bank loans that are held for future collateralized
Approximately $379 billion of the $527 billion in notional loan obligations to be managed by AIG Investments. The value of
exposure on AIGFP’s super senior credit default swap portfolio as the investments may fluctuate materially from period to period due
of December 31, 2007 were written to facilitate regulatory capital to market movements, which may result in realized and unrealized
relief for financial institutions primarily in Europe. AIG expects that net losses. Although it is difficult to estimate future movements in
the majority of these transactions will be terminated within the these markets, effective hedges exist to mitigate the effect of
AIG 2007 Form 10-K 33

interest rate and foreign currency exchange rate disruptions. each fund’s performance as of the balance sheet date. Future
Reported results may be volatile due to certain hedges not fund performance may negatively affect previously recognized
qualifying for hedge accounting treatment. carried interest.
In the Institutional Asset Management business, carried inter-
For a description of important factors that may affect the
est, computed in accordance with each fund’s governing agree-
operations and initiatives described above, see Item 1A. Risk
ment, is based on the investment’s performance over the life of
Factors.
each fund. Unrealized carried interest is recognized based on
Consolidated Results
The following table summarizes AIG’s consolidated revenues, income before income taxes, minority interest and
cumulative effect of accounting changes and net income for the years ended December 31, 2007, 2006 and 2005:
Percentage Increase/(Decrease)Years Ended December 31,
(in millions) 2007 2006 2005 2007 vs. 2006 2006 vs. 2005
Total revenues $110,064 $113,387 $108,781 (3)% 4%
Income before income taxes, minority interest and
cumulative effect of accounting changes 8,943 21,687 15,213 (59) 43
Net income $ 6,200 $ 14,048 $ 10,477 (56)% 34%
Income before income taxes, minority interest and cumulativeEffect of Credit Market Events in the Fourth Quarter of
effect of accounting changes declined in 2007 due to the losses2007
described above, partially offset by the favorable effects in 2007
AIG reported a net loss of $8.4 billion before tax ($5.2 billion
of the application of hedge accounting under Statement of
after tax) in the fourth quarter of 2007 as a result of severe
Financial Accounting Standards No. 133, ‘‘Accounting for Deriva-
credit market disruption. Contributing to this loss was an
tive Instruments and Hedging Activities’’ (FAS 133). In 2007,
$11.5 billion pre-tax charge for the unrealized market valuation
AIGFP applied hedge accounting to certain of its interest rate
loss on AIGFP’s super senior credit default swap portfolio. Net
swaps and foreign currency forward contracts hedging its invest-
realized capital losses totaled $2.6 billion before tax in the fourth
ments and borrowings. As a result, AIGFP recognized in earnings
quarter of 2007, arising primarily from other-than-temporary
the change in the fair value of the hedged items attributable to
impairment charges in AIG’s investment portfolio, with an addi-
the hedged risks, substantially offsetting the gains and losses on
tional $643 million impairment charge related to Financial Ser-
the derivatives designated as hedges. In 2006, AIGFP did not
vices securities available for sale reported in other income. Also
apply hedge accounting to any of its assets and liabilities.
contributing to the operating loss for the fourth quarter was an
operating loss of $348 million before tax from Mortgage Guaranty
2006 and 2005 Comparison
from continued deterioration in the U.S. residential housing
The increase in revenues in 2006 compared to 2005 wasmarket.
primarily attributable to the growth in Premiums and other
considerations and Net investment income in the General Insur-2007 and 2006 Comparison
ance and Life Insurance & Retirement Services segments.
AIG’s consolidated revenues decreased in 2007 compared to
Revenues in the Financial Services segment declined as a result
2006 as growth in Premiums and other considerations and Net
of the effect of hedging activities for AIGFP that did not qualify for
investment income in the General Insurance and Life Insurance &
hedge accounting treatment under FAS 133, decreasing revenues
Retirement Services segments were more than offset by higher
by $1.8 billion in 2006 and increasing revenues by $2.0 billion in
Net realized capital losses compared to 2006 and an unrealized
2005.
market valuation loss of $11.5 billion on AIGFP’s super senior
Income before income taxes, minority interest and cumulative
credit default swap portfolio recorded in other income. Net
effect of accounting changes increased in 2006 compared to
realized capital losses of $3.6 billion in 2007 included other-than-
2005, reflecting higher General Insurance and Life Insurance &
temporary impairment charges of the fair value of investments of
Retirement Services operating income. These increases were
$4.1 billion, primarily related to the significant disruption in the
partially offset by lower Financial Services operating income
residential mortgage and credit markets, and foreign currency
reflecting the effects of hedging activities that did not qualify for
related losses of $500 million. Similarly, AIG recorded in other
hedge accounting treatment under FAS 133. Results in 2005
income, other-than-temporary impairment charges of $643 million
reflected the negative effect of $3.3 billion (pre-tax) in catastro-
related to its Financial Services securities available for sale
phe-related losses incurred that year. Net income in 2005 also
reported in other income. Total other-than-temporary impairment
reflected the charges related to regulatory settlements, as
charges in 2006 were $944 million. See Invested Assets — Other-
described in Item 3. Legal Proceedings, and the fourth quarter
than-temporary impairments herein.
34 AIG 2007 Form 10-K

charge resulting from the annual review of General Insurance loss tax) of expenses related to deferred advertising costs; and
and loss adjustment reserves. $125 million ($116 million after tax) of additional expense,
primarily related to other remediation activities.
Results in 2006 were also negatively affected by a one-timeRemediation
charge relating to the C.V. Starr & Co., Inc. (Starr) tender offer
Throughout 2007 and 2006, as part of its continuing remediation
($54 million before and after tax) and an additional allowance for
efforts, AIG recorded out of period adjustments which are detailed
losses in AIG Credit Card Company (Taiwan) ($88 million before
below. In addition, certain revisions were made to the Consoli-
and after tax), both of which were recorded in first quarter of
dated Statement of Cash Flows.
2006.
2007 Adjustments
Cash Flows
During 2007, out of period adjustments collectively decreased pre-
As part of its ongoing remediation activities, AIG has made
tax operating income by $372 million ($399 million after tax). The
certain revisions to the Consolidated Statement of Cash Flows,
adjustments were comprised of a charge of $380 million
primarily relating to the effect of reclassifying certain policyhold-
($247 million after tax) to reverse net gains on transfers of
ers’ account balances, the elimination of certain intercompany
investment securities among legal entities consolidated within
balances and revisions related to separate account assets.
AIGFP and a corresponding increase to accumulated other compre-
Accordingly, AIG revised the previous periods presented to
hensive income (loss); $156 million of additional income tax
conform to the revised presentation. See Note 24 to Consolidated
expense related to the successful remediation of the material
Financial Statements for further information.
weakness in internal control over income tax accounting;
$142 million ($92 million after tax) of additional expense related
Income Taxes
to insurance reserves and DAC in connection with improvements
in internal control over financial reporting and consolidation The effective tax rate declined from 30.1 percent in 2006 to
processes; $42 million ($29 million after tax) of additional 16.3 percent in 2007, primarily due to the unrealized market
expense, primarily related to other remediation activities; and valuation losses on AIGFP’s super senior credit default swap
$192 million ($125 million after tax) of net realized capital gains portfolio and other-than-temporary impairment charges. These
related to foreign exchange. losses, which are taxed at a U.S. tax rate of 35 percent and are
included in the calculation of income tax expense, reduced AIG’s
overall effective tax rate. In addition, other tax benefits, including2006 Adjustments
tax exempt interest and effects of foreign operations are propor-
During 2006, out of period adjustments collectively increased pre-
tionately larger in 2007 than in 2006 due to the decline in pre-tax
tax operating income by $313 million ($65 million after tax). The
income in 2007. Furthermore, tax deductions taken in 2007 for
adjustments were comprised of $773 million ($428 million after
SICO compensation plans for which the expense had been
tax) of additional investment income related to the accounting for
recognized in prior years also reduced the effective tax rate in
certain interests in unit investment trusts (UCITS); $300 million
2007. AIG has now completed its claims for tax refunds
($145 million after tax) of charges primarily related to the
attributable to adjustments made for 2004 and prior financial
remediation of the material weakness in internal control over the
statements. Refund claims for tax years 1991-1996 were filed
accounting for certain derivative transactions under FAS 133;
with the Internal Revenue Service in June 2007. Claims for tax
$58 million of additional income tax expense related to the
years 1997-2004 will be filed before September 2008.
remediation of the material weakness in internal control over
AIG expects to receive cash tax benefits in 2008 as a result of
income tax accounting; $85 million ($55 million after tax) of
the unrealized market valuation losses on AIGFP’s super senior
interest income related to interest earned on deposit contracts;
credit default swap portfolio, whether AIG is in a regular or
$61 million (before and after tax) of expenses related to the Starr
alternative minimum tax position.
International Company, Inc. (SICO) Deferred Compensation Profit
Participation Plans (SICO Plans); $59 million ($38 million after
AIG 2007 Form 10-K 35

The following table summarizes the net effect of catastrophe-related losses for the years ended December 31, 2007
and 2005. There were no significant catastrophe-related losses for the year ended December 31, 2006.
Pretax $276 $3,280*
Net of tax and minority interest $177 $2,109
* Includes $312 million in catastrophe-related losses from partially owned companies.
Segment Results
The following table summarizes AIG’s operations by reporting segment for the years ended December 31, 2007, 2006
and 2005. See also Note 2 to Consolidated Financial Statements.
Percentage Increase/(Decrease)
(in millions) 2007 2006(a)
2005(a)
2007 vs. 2006 2006 vs. 2005
Revenues(b)
:
General Insurance(c)
$ 51,708 $ 49,206 $ 45,174 5% 9%
Life Insurance & Retirement Services(c)(d)
53,570 50,878 48,020 5 6
Financial Services(e)(f)
(1,309) 7,777 10,677 — (27)
Asset Management 5,625 4,543 4,582 24 (1)
Other 457 483 344 (5) 40
Consolidation and eliminations 13 500 (16) (97) —
Total $110,064 $113,387 $108,781 (3)% 4%
Operating Income (loss)(b)(g)
:
General Insurance(c)
$ 10,526 $ 10,412 $ 2,315 1% 350%
Life Insurance & Retirement Services(c)(d)
8,186 10,121 8,965 (19) 13
Financial Services(e)(f)
(9,515) 383 4,424 — (91)
Asset Management 1,164 1,538 1,963 (24) (22)
Other(h)
(2,140) (1,435) (2,765) — —
Consolidation and eliminations 722 668 311 8 115
Total $ 8,943 $ 21,687 $ 15,213 (59)% 43%
(b) In 2007, 2006 and 2005, includes other-than-temporary impairment charges of $4.7 billion, $944 million and $598 million, respectively. Also includes
gains (losses) from hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains
and losses. In 2007, 2006, and 2005, respectively, the effect was $(1.44) billion, $(1.87) billion and $2.02 billion in both revenues and operating
income. These amounts result primarily from interest rate and foreign currency derivatives that are effective economic hedges of investments and
borrowings. These gains (losses) in 2007 include a $380 million out of period charge to reverse net gains recognized on transfers of available for sale
securities among legal entities consolidated within AIGFP. The gains (losses) in 2006 include an out of period charge of $223 million related to the
remediation of the material weakness in internal control over the accounting for certain derivative transactions under FAS 133.
(c) In 2006, includes the effect of out of period adjustments related to the accounting for UCITS. In 2006, the effect was an increase of $490 million in
both revenues and operating income for General Insurance and an increase of $240 million and $169 million in revenues and operating income,
respectively, for Life Insurance & Retirement Services.
(d) In 2007, 2006 and 2005, includes other-than-temporary impairment charges of $2.8 billion, $641 million and $425 million, respectively, for Life
Insurance & Retirement Services.
(e) Includes gains (losses) from hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign
exchange gains and losses. In 2007, 2006 and 2005, respectively, the effect was $104 million, $(1.97) billion, and $2.19 billion in both revenues
and operating income. These amounts result primarily from interest rate and foreign currency derivatives that are effective economic hedges of
investments and borrowings. The years ended December 31, 2007 and 2006 include out of period charges of $380 million and $223 million,
respectively, as discussed in footnote (b). In the first quarter of 2007, AIG began applying hedge accounting for certain transactions, primarily in its
Capital Markets operations. In the second quarter of 2007, AGF and ILFC began applying hedge accounting to most of their derivatives hedging interest
rate and foreign exchange risks associated with their floating rate and foreign currency denominated borrowings.
(f) In 2007, both revenues and operating income (loss) include an unrealized market valuation loss of $11.5 billion on AIGFP’s super senior credit default
swap portfolio and an other-than-temporary impairment charge of $643 million on AIGFP’s available for sale investment securities recorded in other
income.
(g) Includes current year catastrophe-related losses of $276 million in 2007 and $3.28 billion in 2005. There were no significant catastrophe-related
losses in 2006.
(h) In 2005, includes current year catastrophe-related losses from unconsolidated entities of $312 million.
36 AIG 2007 Form 10-K

Operating income for ILFC increased in 2007 compared toGeneral Insurance
2006, driven to a large extent by a larger aircraft fleet, higher
AIG’s General Insurance operations provide property and casualty
lease rates and higher utilization.
products and services throughout the world. Revenues in the
In 2007, AIGFP began applying hedge accounting under
General Insurance segment represent net premiums earned, net
FAS 133 to certain of its interest rate swaps and foreign currency
investment income and net realized capital gains (losses). The
forward contracts that hedge its investments and borrowings and
increase in General Insurance operating income in 2007 com-
AGF and ILFC began applying hedge accounting to most of their
pared to 2006 was driven by strength in the Domestic Brokerage
derivatives that hedge floating rate and foreign currency denomi-
Group (DBG), partially offset by operating losses from the
nated borrowings. Prior to 2007, hedge accounting was not
Mortgage Guaranty business and a decrease in Personal Lines
applied to any of AIG’s derivatives and related assets and
operating income.
liabilities. Accordingly, revenues and operating income were
exposed to volatility resulting from differences in the timing of
Life Insurance & Retirement Services revenue recognition between the derivatives and the hedged
assets and liabilities.AIG’s Life Insurance & Retirement Services operations provide
insurance, financial and investment-oriented products throughout
Asset Managementthe world. Revenues in the Life Insurance & Retirement Services
operations represent premiums and other considerations, net
AIG’s Asset Management operations include institutional and retail
investment income and net realized capital gains (losses). Foreign
asset management, broker-dealer services and spread-based
operations contributed approximately 76 percent, 68 percent and
investment businesses. Revenues in the Asset Management
59 percent of AIG’s Life Insurance & Retirement Services
segment represent investment income with respect to spread-
operating income in 2007, 2006 and 2005, respectively.
based products and management, advisory and incentive fees.
Life Insurance & Retirement Services operating income de-
Asset Management operating income decreased in 2007
clined in 2007 compared to 2006 primarily due to higher net
compared to 2006, due to realized capital losses on interest rate
realized capital losses in 2007. In addition, operating income in
and foreign currency hedge positions not qualifying for hedge
2007 was negatively affected by charges related to remediation
accounting and other-than-temporary impairment charges on fixed
activity in Asia; an industry wide regulatory claims review in Japan;
income investments due primarily to disruptions in the U.S. credit
the effect of Statement of Position 05-1, ‘‘Accounting by Insur-
markets. These decreases were partially offset by higher partner-
ance Enterprises for Deferred Acquisition Costs in Connection with
ship income from the Spread-Based Investment business, in-
Modifications or Exchanges of Insurance Contracts’’ (SOP 05-1),
creased gains on real estate investments and a gain on the sale
which was adopted in 2007; and investment losses where a
of a portion of AIG’s investment in Blackstone Group, L.P. in
FAS 115 trading election was made (trading account).
connection with its initial public offering.
Financial Services
Capital Resources
At December 31, 2007, AIG had total consolidated shareholders’ties including aircraft and equipment leasing, capital markets,
equity of $95.8 billion and total consolidated borrowings ofconsumer finance and insurance premium finance. Revenues in
$176.0 billion. At that date, $67.9 billion of such borrowings werethe Financial Services segment include interest, realized and
subsidiary borrowings not guaranteed by AIG.unrealized gains and losses, including the unrealized market
In 2007, AIG issued an aggregate of $5.6 billion of juniorvaluation losses on AIGFP’s super senior credit default swap
subordinated debentures in five series of securities. Substantiallyportfolio, lease and finance charges.
all of the proceeds from these sales, net of expenses, were usedFinancial Services reported an operating loss in 2007 com-
to repurchase shares of AIG’s common stock. A total ofpared to operating income in 2006, primarily due to an unrealized
76,361,209 shares were repurchased during 2007.market valuation loss of $11.5 billion on AIGFP’s super senior
In February 2007, AIG’s Board of Directors increased AIG’scredit default swap portfolio, an other-than-temporary impairment
share repurchase program by authorizing the repurchase of sharescharge of $643 million on AIGFP’s investment portfolio of CDOs of
with an aggregate purchase price of $8 billion. In November 2007,asset-backed securities (ABS) and a decline in operating income
AIG’s Board of Directors authorized the repurchase of an addi-for AGF. AGF’s operating income declined in 2007 compared to
tional $8 billion in common stock. At February 15, 2008,2006 due to reduced residential mortgage origination volume,
$10.25 billion was available for repurchase under the aggregatelower revenues from its mortgage banking activities and increases
authorization. AIG did not purchase shares of its common stockin the provision for finance receivable losses. In 2007, AGF’s
under its common stock repurchase authorization during 2006.mortgage banking operations recorded a pre-tax charge of
AIG does not expect to purchase additional shares under its share$178 million, representing the estimated cost of implementing the
repurchase program for the foreseeable future, other than pursu-Supervisory Agreement entered into with the Office of Thrift
ant to commitments that existed at December 31, 2007.Supervision (OTS), which is discussed in the Consumer Finance
results of operations section.
AIG 2007 Form 10-K 37

excess casualty, expected loss ratios generally are utilized forLiquidity
at least the three most recent accident years.
AIG manages liquidity at both the subsidiary and parent company ( Loss development factors: used to project the reported losses
levels. At December 31, 2007, AIG’s consolidated invested for each accident year to an ultimate amount.
assets, primarily held by its subsidiaries, included $65.6 billion in ( Reinsurance recoverable on unpaid losses: the expected recov-
cash and short-term investments. Consolidated net cash provided eries from reinsurers on losses that have not yet been
from operating activities in 2007 amounted to $35.2 billion. At reported and/or settled.
both the subsidiary and parent company level, liquidity manage-
Future Policy Benefits for Life and Accident and Health Contractsment activities are intended to preserve and enhance funding
(Life Insurance & Retirement Services):stability, flexibility, and diversity through a wide range of potential
operating environments and market conditions. AIG’s primary ( Interest rates: which vary by geographical region, year of
sources of cash flow are dividends and other payments from its issuance and products.
regulated and unregulated subsidiaries, as well as issuances of ( Mortality, morbidity and surrender rates: based upon actual
debt securities. Primary uses of cash flow are for debt service, experience by geographical region modified to allow for variation
subsidiary funding, shareholder dividend payments and common in policy form, risk classification and distribution channel.
stock repurchases. As a result of disruption in the credit markets
Deferred Policy Acquisition Costs (Life Insurance & Retirement
during 2007, AIG took steps to enhance the liquidity of its
Services):
portfolios, including increasing the liquidity of the collateral in the
( Recoverability: based on current and future expected profitabil-
securities lending program. Management believes that AIG’s liquid
ity, which is affected by interest rates, foreign exchange rates,
assets, cash provided by operations and access to the capital
mortality experience and policy persistency.
markets will enable it to meet its anticipated cash requirements,
including the funding of increased dividends under AIG’s new Deferred Policy Acquisition Costs (General Insurance):
dividend policy. ( Recoverability: based upon the current terms and profitability of
the underlying insurance contracts.
Critical Accounting Estimates
Estimated Gross Profits (Life Insurance & Retirement Services):
The preparation of financial statements in conformity with account- ( Estimated gross profits: to be realized over the estimated
ing principles generally accepted in the United States of America duration of the contracts (investment-oriented products) affect
requires the application of accounting policies that often involve a the carrying value of DAC, unearned revenue liability and
significant degree of judgment. AIG considers that its accounting associated amortization patterns under FAS 97, ‘‘Accounting
policies that are most dependent on the application of estimates and Reporting by Insurance Enterprises for Certain Long-
and assumptions, and therefore viewed as critical accounting Duration Contracts and for Realized Gains and Losses from the
estimates, to be those relating to reserves for losses and loss Sale of Investments’’ (FAS 97); and Sales Inducement Assets
expenses, future policy benefits for life and accident and health under American Institute of Certified Public Accountants (AICPA)
contracts, recoverability of DAC, estimated gross profits for Statement of Position (SOP) 03-1, ‘‘Accounting and Reporting
investment-oriented products, fair value measurements of certain by Insurance Enterprises for Certain Nontraditional Long-Dura-
financial assets and liabilities, other-than-temporary impairments, tion Contracts and for Separate Accounts’’ (SOP 03-1). Esti-
the allowance for finance receivable losses and flight equipment mated gross profits include investment income and gains and
recoverability. These accounting estimates require the use of losses on investments less required interest, actual mortality
assumptions about matters, some of which are highly uncertain at and other expenses.
the time of estimation. To the extent actual experience differs
Fair Value Measurements of Financial Instruments:
from the assumptions used, AIG’s results of operations would be
AIG measures financial instruments in its trading and available
directly affected.
for sale securities portfolios, together with securities sold but not
Throughout this Management’s Discussion and Analysis of
yet purchased, certain hybrid financial instruments, and derivative
Financial Condition and Results of Operations, AIG’s critical
assets and liabilities at fair value. The fair value of a financial
accounting estimates are discussed in detail. The major catego-
instrument is the amount that would be received to sell an asset
ries for which assumptions are developed and used to establish
or paid to transfer a liability in an orderly transaction between
each critical accounting estimate are highlighted below.
market participants at the measurement date.
Reserves for Losses and Loss Expenses (General Insurance): The degree of judgment used in measuring the fair value of
financial instruments generally correlates with the level of pricing( Loss trend factors: used to establish expected loss ratios for
observability. Financial instruments with quoted prices in activesubsequent accident years based on premium rate adequacy
markets generally have more pricing observability and lessand the projected loss ratio with respect to prior accident
judgment is used in measuring fair value. Conversely, financialyears.
instruments traded in other than active markets or that do not( Expected loss ratios for the latest accident year: in this case,
have quoted prices have less observability and are measured ataccident year 2007 for the year-end 2007 loss reserve
fair value using valuation models or other pricing techniques thatanalysis. For low-frequency, high-severity classes such as
38 AIG 2007 Form 10-K

require more judgment. Pricing observability is affected by a in, the instrument as well as the availability of pricing information
number of factors, including the type of financial instrument, in the market. AIG generally uses similar models to value similar
whether the financial instrument is new to the market and not yet instruments. Valuation models require a variety of inputs, includ-
established, the characteristics specific to the transaction and ing contractual terms, market prices and rates, yield curves, credit
general market conditions. curves, measures of volatility, prepayment rates and correlations
AIG maximizes the use of observable inputs and minimizes the of such inputs. For OTC derivatives that trade in liquid markets,
use of unobservable inputs when measuring fair value. AIG such as generic forwards, swaps and options, model inputs can
obtains market price data to value financial instruments whenever generally be verified and model selection does not involve
such information is available. Market price data generally is significant management judgment.
obtained from market exchanges or dealer quotations. The types Certain OTC derivatives trade in less liquid markets with
of instruments valued based on market price data include G-7 limited pricing information, and the determination of fair value for
government and agency securities, equities listed in active these derivatives is inherently more difficult. When AIG does not
markets, investments in publicly traded mutual funds with quoted have corroborating market evidence to support significant model
market prices and listed derivatives. inputs and cannot verify the model to market transactions,
AIG estimates the fair value of fixed income instruments not transaction price is initially used as the best estimate of fair
traded in active markets by referring to traded securities with value. Accordingly, when a pricing model is used to value such an
similar attributes and using a matrix pricing methodology. This instrument, the model is adjusted so that the model value at
methodology considers such factors as the issuer’s industry, the inception equals the transaction price. Subsequent to initial
security’s rating and tenor, its coupon rate, its position in the recognition, AIG updates valuation inputs when corroborated by
capital structure of the issuer, and other relevant factors. The evidence such as similar market transactions, third-party pricing
types of fixed income instruments not traded in active markets services and/or broker or dealer quotations, or other empirical
include non-G-7 government securities, municipal bonds, certain market data. When appropriate, valuations are adjusted for
hybrid financial instruments, most investment-grade and high-yield various factors such as liquidity, bid/offer spreads and credit
corporate bonds, and most mortgage- and asset-backed products. considerations. Such adjustments are generally based on availa-
AIG initially estimates the fair value of equity instruments not ble market evidence. In the absence of such evidence, manage-
traded in active markets by reference to the transaction price. ment’s best estimate is used.
This valuation is adjusted only when changes to inputs and AIGFP employs a modified version of the Binomial Expansion
assumptions are corroborated by evidence such as transactions in Technique (BET) model to value its super senior credit default
similar instruments, completed or pending third-party transactions swap portfolio, including maturity-shortening puts that allow the
in the underlying investment or comparable entities, subsequent holders of the notes issued by certain multi-sector CDOs to treat
rounds of financing, recapitalizations and other transactions the notes as short-term eligible 2a-7 investments under the
across the capital structure, offerings in the equity capital Investment Company Act of 1940 (2a-7 Puts). The BET model
markets, and changes in financial ratios or cash flows. utilizes default probabilities derived from credit spreads implied
For equity and fixed income instruments that are not traded in from market prices for the individual securities included in the
active markets or that are subject to transfer restrictions, underlying collateral pools securing the CDOs, as well as diversity
valuations are adjusted to reflect illiquidity and/or non-transferabil- scores, weighted average lives, recovery rates and discount rates.
ity, and such adjustments generally are based on available market The determination of some of these inputs requires the use of
evidence. In the absence of such evidence, management’s best judgment and estimates, particularly in the absence of market
estimate is used. observable data. AIGFP also employs a Monte Carlo simulation to
AIG obtains the fair value of its investments in limited assist in quantifying the effect on the valuation of the CDOs of
partnerships and hedge funds from information provided by the the unique aspects of the CDO’s structure such as triggers that
general partner or manager of the investments, the financial divert cash flows to the most senior part of the capital structure.
statements of which generally are audited annually. In the final determination of fair value, AIGFP also considers the
Derivative assets and liabilities can be exchange-traded or price estimates for the super senior CDO notes provided by third
traded over the counter (OTC). AIG generally values exchange- parties, including counterparties to these transactions, and
traded derivatives within portfolios using models that calibrate to makes adjustments when deemed necessary. See also Risk
market clearing levels and eliminate timing differences between Management, Segment Risk Management, Financial Services —
the closing price of the exchange-traded derivatives and their Capital Markets Derivative Transactions and Note 8 to Consoli-
underlying instruments. dated Financial Statements.
OTC derivatives are valued using market transactions and other
Other-Than-Temporary Impairments:
market evidence whenever possible, including market-based inputs
AIG evaluates its investments for impairment such that a securityto models, model calibration to market clearing transactions,
is considered a candidate for other-than-temporary impairment if itbroker or dealer quotations or alternative pricing sources with
meets any of the following criteria:reasonable levels of price transparency. When models are used,
( Trading at a significant (25 percent or more) discount to par,the selection of a particular model to value an OTC derivative
amortized cost (if lower) or cost for an extended period of timedepends on the contractual terms of, and specific risks inherent
(nine consecutive months or longer);
AIG 2007 Form 10-K 39

( The occurrence of a discrete credit event resulting in (i) the Flight Equipment Recoverability (Financial Services):
issuer defaulting on a material outstanding obligation; (ii) the ( Expected undiscounted future net cash flows: based upon
issuer seeking protection from creditors under the bankruptcy current lease rates, projected future lease rates and estimated
laws or any similar laws intended for court supervised terminal values of each aircraft based on third-party
reorganization of insolvent enterprises; or (iii) the issuer information.
proposing a voluntary reorganization pursuant to which credi-
tors are asked to exchange their claims for cash or securities Operating Review
having a fair value substantially lower than par value of their
General Insurance Operationsclaims; or
( AIG may not realize a full recovery on its investment, AIG’s General Insurance subsidiaries write substantially all lines of
regardless of the occurrence of one of the foregoing events. commercial property and casualty insurance and various personal
The above criteria also consider circumstances of a rapid and lines both domestically and abroad.
severe market valuation decline, such as that experienced in As previously noted, AIG believes it should present and discuss
current credit markets, in which AIG could not reasonably assert its financial information in a manner most meaningful to its
that the recovery period would be temporary (severity losses). financial statement users. Accordingly, in its General Insurance
In light of the recent significant disruption in the U.S. residential business, AIG uses certain regulatory measures, where AIG has
mortgage and credit markets, particularly in the fourth quarter, determined these measurements to be useful and meaningful.
AIG has recognized an other-than-temporary impairment charge A critical discipline of a successful general insurance business
(severity loss) of $2.2 billion (including $643 million related to is the objective to produce profit from underwriting activities
AIGFP’s available for sale investment securities recorded in other taking into account costs of capital. AIG views underwriting results
income), primarily from certain residential mortgage-backed securi- to be critical in the overall evaluation of performance.
ties and other structured securities. Even while retaining their Statutory underwriting profit is derived by reducing net premi-
investment grade ratings, such securities were priced at a severe ums earned by net losses and loss expenses incurred and net
discount to cost. Notwithstanding AIG’s intent and ability to hold expenses incurred. Statutory accounting generally requires imme-
such securities indefinitely, and despite structures which indicate diate expense recognition and ignores the matching of revenues
that a substantial amount of the securities should continue to and expenses as required by GAAP. That is, for statutory
perform in accordance with their original terms, AIG concluded purposes, expenses (including acquisition costs) are recognized
that it could not reasonably assert that the recovery period would immediately, not over the same period that the revenues are
be temporary. earned. Thus, statutory expenses exclude changes in DAC.
At each balance sheet date, AIG evaluates its securities GAAP provides for the recognition of certain acquisition
holdings with unrealized losses. When AIG does not intend to hold expenses at the same time revenues are earned, the accounting
such securities until they have recovered their cost basis, AIG principle of matching. Therefore, acquisition expenses are de-
records the unrealized loss in income. If a loss is recognized from ferred and amortized over the period the related net premiums
a sale subsequent to a balance sheet date pursuant to changes written are earned. DAC is reviewed for recoverability, and such
in circumstances, the loss is recognized in the period in which the review requires management judgment. The most comparable
intent to hold the securities to recovery no longer existed. GAAP measure to statutory underwriting profit is income before
In periods subsequent to the recognition of an other-than- income taxes, minority interest and cumulative effect of an
temporary impairment charge for fixed maturity securities, which is accounting change. A table reconciling statutory underwriting profit
not credit or foreign exchange related, AIG generally accretes into to income before income taxes, minority interest and cumulative
income the discount or amortizes the reduced premium resulting effect of an accounting change is contained in footnote (d) to the
from the reduction in cost basis over the remaining life of the following table. See also Critical Accounting Estimates herein and
security. Notes 1 and 6 to Consolidated Financial Statements.
AIG, along with most general insurance companies, uses theAllowance for Finance Receivable Losses (Financial Services):
loss ratio, the expense ratio and the combined ratio as measures( Historical defaults and delinquency experience: utilizing factors,
of underwriting performance. The loss ratio is the sum of losses
such as delinquency ratio, allowance ratio, charge-off ratio, and
and loss expenses incurred divided by net premiums earned. The
charge-off coverage.
expense ratio is statutory underwriting expenses divided by net( Portfolio characteristics: portfolio composition and considera-
premiums written. These ratios are relative measurements that
tion of the recent changes to underwriting criteria and portfolio
describe, for every $100 of net premiums earned or written, the
seasoning.
cost of losses and statutory expenses, respectively. The com-( External factors: consideration of current economic conditions,
bined ratio is the sum of the loss ratio and the expense ratio. The
including levels of unemployment and personal bankruptcies.
combined ratio presents the total cost per $100 of premium( Migration analysis: empirical technique measuring historical
production. A combined ratio below 100 demonstrates underwrit-
movement of similar finance receivables through various levels
ing profit; a combined ratio above 100 demonstrates underwriting
of repayment, delinquency, and loss categories to existing
loss.
finance receivable pools.
40 AIG 2007 Form 10-K

Net premiums written are initially deferred and earned based The underwriting environment varies from country to country,
upon the terms of the underlying policies. The net unearned as does the degree of litigation activity. Regulation, product type
premium reserve constitutes deferred revenues which are gener- and competition have a direct effect on pricing and consequently
ally earned ratably over the policy period. Thus, the net unearned on profitability as reflected in underwriting profit and statutory
premium reserve is not fully recognized in income as net general insurance ratios.
premiums earned until the end of the policy period.
General Insurance Results
General Insurance operating income is comprised of statutory underwriting profit (loss), changes in DAC, net
investment income and net realized capital gains and losses. Operating income, as well as net premiums written, net
premiums earned, net investment income and net realized capital gains (losses) and statutory ratios in 2007, 2006
and 2005 were as follows:
(in millions, except ratios) 2007 2006 2005 2007 vs. 2006 2006 vs. 2005
Net premiums written:
DBG $24,112 $24,312 $ 23,104 (1)% 5%
Transatlantic 3,953 3,633 3,466 9 5
Personal Lines 4,808 4,654 4,653 3 —
Mortgage Guaranty 1,143 866 628 32 38
Foreign General Insurance 13,051 11,401 10,021 14 14
Total $47,067 $44,866 $ 41,872 5% 7%
Net premiums earned:
DBG $23,849 $23,910 $ 22,567 —% 6%
Transatlantic 3,903 3,604 3,385 8 6
Personal Lines 4,695 4,645 4,634 1 —
Mortgage Guaranty 886 740 533 20 39
Foreign General Insurance 12,349 10,552 9,690 17 9
Total $45,682 $43,451 $ 40,809 5% 6%
Net investment income(a)
:
DBG $ 3,879 $ 3,411 $ 2,403 14% 42%
Transatlantic 470 435 343 8 27
Personal Lines 231 225 217 3 4
Mortgage Guaranty 158 140 123 13 14
Intercompany adjustments and eliminations — net 6 1 1 500 —
Foreign General Insurance 1,388 1,484 944 (6) 57
Total $ 6,132 $ 5,696 $ 4,031 8% 41%
Net realized capital gains (losses) $ (106) $ 59 $ 334 —% —%
Operating income (loss)(a)(b)
:
DBG $ 7,305 $ 5,845 $ (820) 25% —%
Transatlantic 661 589 (39) 12 —
Personal Lines 67 432 195 (84) 122
Mortgage Guaranty (637) 328 363 — (10)
Foreign General Insurance 3,137 3,228 2,601 (3) 24
Reclassifications and eliminations (7) (10) 15 — —
Total $10,526 $10,412 $ 2,315 1% 350%
AIG 2007 Form 10-K 41

(in millions, except ratios) 2007 2006 2005 2007 vs. 2006 2006 vs. 2005
Statutory underwriting proﬁt (loss)(b)(d)
:
DBG $3,404 $2,322 $(3,403) 47% —%
Transatlantic 165 129 (434) 28 —
Personal Lines (191) 204 (38) — —
Mortgage Guaranty (849) 188 249 — (24)
Foreign General Insurance 1,544 1,565 1,461 (1) 7
Total $4,073 $4,408 $(2,165) (8)% —%
Domestic General Insurance(b)
:
Loss ratio 71.2 69.6 90.1
Expense ratio 20.8 21.4 21.0
Combined ratio 92.0 91.0 111.1
Foreign General Insurance(b)
:
Loss ratio 50.6 48.9 52.0
Expense ratio(c)
34.9 33.6 31.8
Consolidated(b)
:
Loss ratio 65.6 64.6 81.1
Expense ratio 24.7 24.5 23.6
(a) Includes the effect of out-of-period adjustments related to the accounting for UCITS in 2006. For DBG, the effect was an increase of $66 million, and
for Foreign General Insurance, the effect was an increase of $424 million.
(b) Catastrophe-related losses increased the consolidated General Insurance combined ratio in 2007 and 2005 by 0.60 points and 7.06 points,
respectively. There were no signiﬁcant catastrophe-related losses in 2006. Catastrophe-related losses in 2007 and 2005 by reporting unit were as
follows:
2007 2005
Insurance Net Insurance Net
Related Reinstatement Related Reinstatement
(in millions) Losses Premium Cost Losses Premium Cost
Reporting Unit:
DBG $113 $(13) $1,811 $136
Transatlantic 11 (1) 463 45
Personal Lines 61 14 112 2
Mortgage Guaranty — — 10 —
Foreign General Insurance 90 1 229 80
Total $275 $ 1 $2,625 $263
(c) Includes amortization of advertising costs.
(d) Statutory underwriting profit (loss) is a measure that U.S. domiciled insurance companies are required to report to their regulatory authorities. The following
table reconciles statutory underwriting profit (loss) to operating income for General Insurance for the years ended December 31, 2007, 2006 and 2005:
42 AIG 2007 Form 10-K

Domestic Foreign
Brokerage Personal Mortgage General Reclassifications
(in millions) Group Transatlantic Lines Guaranty Insurance and Eliminations Total
2007:
Statutory underwriting profit (loss) $ 3,404 $ 165 $(191) $(849) $1,544 $ — $ 4,073
Increase in DAC 97 17 29 57 227 — 427
Net investment income 3,879 470 231 158 1,388 6 6,132
Net realized capital gains (losses) (75) 9 (2) (3) (22) (13) (106)
Operating income (loss) $ 7,305 $ 661 $ 67 $(637) $3,137 $ (7) $10,526
2006:
Statutory underwriting profit (loss) $ 2,322 $ 129 $ 204 $ 188 $1,565 $ — $ 4,408
Increase in DAC 14 14 2 3 216 — 249
Net investment income 3,411 435 225 140 1,484 1 5,696
Net realized capital gains (losses) 98 11 1 (3) (37) (11) 59
Operating income (loss) $ 5,845 $ 589 $ 432 $ 328 $3,228 $(10) $10,412
2005:
Statutory underwriting profit (loss) $(3,403) $(434) $ (38) $ 249 $1,461 $ — $ (2,165)
Increase (decrease) in DAC (21) 14 19 (8) 111 — 115
Net investment income 2,403 343 217 123 944 1 4,031
Net realized capital gains (losses) 201 38 (3) (1) 85 14 334
Operating income (loss) $ (820) $ (39) $ 195 $ 363 $2,601 $ 15 $ 2,315
from both established and new distribution channels, and theAIG transacts business in most major foreign currencies.
effect of changes in foreign currency exchange rates as well asThe following table summarizes the effect of changes in
growth in Mortgage Guaranty, primarily from internationalforeign currency exchange rates on the growth of General
business.Insurance net premiums written for the years ended
General Insurance net investment income increased in 2007December 31, 2007 and 2006:
by $436 million. Interest and dividend income increased $714 mil-
2007 2006
lion in 2007 compared to 2006 as fixed maturities and equity
Growth in original currency* 3.5% 7.4% securities increased by $11.6 billion and the average yield
Foreign exchange effect 1.4 (0.2) increased 10 basis points. Income from partnership investments
increased $159 million in 2007 compared to 2006, primarily dueGrowth as reported in U.S. dollars 4.9% 7.2%
to improved returns on underlying investments and higher levels of* Computed using a constant exchange rate for each period.
invested assets. Investment expenses in 2007 declined $60 mil-
lion compared to 2006, primarily due to decreased interest2007 and 2006 Comparison
expense on deposit liabilities. These increases to net investment
General Insurance operating income increased in 2007 compared income were partially offset by $490 million of income from an
to 2006 due to growth in net investment income, partially offset by out of period UCITS adjustment recorded in 2006. Net realized
a decline in underwriting profit and Net realized capital losses. The capital losses in 2007 include other-than-temporary impairment
2007 combined ratio increased to 90.3, an increase of 1.2 points charges of $276 million compared to $77 million in 2006. See
compared to 2006, primarily due to an increase in the loss ratio of also Capital Resources and Liquidity and Invested Assets herein.
1.0 points. The loss ratio for accident year 2007 recorded in 2007 In order to better align financial reporting with the manner in
was 2.3 points higher than the loss ratio recorded in 2006 for which AIG’s chief operating decision makers manage their busi-
accident year 2006. Increases in Mortgage Guaranty losses nesses, commencing in 2007, the foreign aviation business,
accounted for a 2.1 point increase in the 2007 accident year loss which was historically reported in DBG, is now reported as part of
ratio. The downward cycle in the U.S. housing market is not Foreign General Insurance, and the oil rig and marine businesses,
expected to improve until residential inventories return to a more which were historically reported in Foreign General Insurance, are
normal level, and AIG expects that this downward cycle will continue now reported as part of DBG. Prior period amounts have been
to adversely affect Mortgage Guaranty’s loss ratios for the revised to conform to the current presentation.
foreseeable future. The higher accident year loss ratio was partially
offset by favorable development on prior years, which reduced 2006 and 2005 Comparison
incurred losses by $606 million and $53 million in 2007 and
General Insurance operating income increased in 2006 compared2006, respectively. Additional favorable loss development of
to 2005 due to growth in net premiums, a reduction in both$50 million (recognized in consolidation and related to certain
asbestos settlements) reduced overall incurred losses.
General Insurance net premiums written increased in 2007
compared to 2006, reflecting growth in Foreign General Insurance
AIG 2007 Form 10-K 43

catastrophe losses and prior accident year development, and premiums increased to 24 percent in 2007 compared to 23 per-
growth in Net investment income. The combined ratio improved to cent in 2006, primarily due to additional reinsurance for property
89.1, a reduction of 15.6 points from 2005, including an risks to manage catastrophe exposures.
improvement in the loss ratio of 16.5 points. The reduction in DBG’s expense ratio decreased to 18.7 in 2007 compared to
catastrophe losses represented 6.9 points and the reduction in 19.8 in 2006, primarily due to the 2006 charge related to the
prior year adverse development represented 11.5 points of the remediation of the material weakness in internal control over
overall reduction. Net premiums written increased $3.0 billion or certain balance sheet reconciliations that accounted for
7 percent in 2006 compared to 2005. Domestic General 2.1 points of the decline. The decline was partially offset by
Insurance accounted for $1.6 billion of the increase as property increases in operating expenses for marketing initiatives and
rates improved and submission activity increased due to the operations.
strength of AIG’s capacity, commitment to difficult markets and DBG’s net investment income increased in 2007 compared to
diverse product offerings. Foreign General Insurance contributed 2006, as interest income increased $384 million in 2007, on
$1.4 billion to the increase in net premiums written. In 2005, growth in the bond portfolio resulting from investment of operating
Domestic General Insurance net premiums written increased by cash flows. Income from partnership investments increased
$300 million and Foreign General Insurance net premiums written $159 million in 2007 compared to 2006, primarily due to
decreased by the same amount as a result of the commutation of improved returns on the underlying investments. Other investment
the Richmond reinsurance contract. The commutation partially income declined $163 million in 2007 compared to 2006,
offset the increase in Domestic General Insurance net premiums primarily due to out of period adjustments of $194 million
written in 2006 compared to 2005 and increased Foreign General recorded in 2006. DBG recorded net realized capital losses in
Insurance net premiums written in 2006 compared to 2005. 2007 compared to net realized capital gains in 2006 primarily due
In 2006, certain adjustments were made in conjunction with to other-than-temporary impairment charges of $213 million in
the remediation of the material weakness relating to balance 2007 compared to $73 million in 2006.
sheet account reconciliations which increased earned premiums
by $189 million and increased other expenses by $415 million. 2006 and 2005 Comparison
The combined effect of these adjustments increased the expense
DBG’s operating income was $5.85 billion in 2006 compared to a
ratio by 0.9 points and decreased the loss ratio by 0.3 points.
loss of $820 million in 2005, an improvement of $6.67 billion.
General Insurance net investment income increased $1.67 bil-
The improvement is also reflected in the combined ratio, which
lion in 2006 to $5.7 billion on higher levels of invested assets,
declined to 89.9 in 2006 compared to 114.6 in 2005 primarily
strong cash flows, slightly higher yields and increased partnership
due to an improvement in the loss ratio of 24.9 points. The
income, and included increases from out of period adjustments of
reduction in prior year adverse development and the reduction in
$490 million related to the accounting for certain interests in
catastrophe losses and related reinstatement premiums ac-
UCITS, $43 million related to partnership income and $85 million
counted for 20.7 points and 8.3 points, respectively, of the
related to interest earned on a DBG deposit contract. See also
improvement.
Capital Resources and Liquidity — Liquidity and Invested Assets
DBG’s net premiums written increased in 2006 compared to
herein.
2005 as property rates improved and submission activity in-
creased due to the strength of AIG’s capacity, commitment to
DBG Results
difficult markets and diverse product offerings. Net premiums
2007 and 2006 Comparison written in 2005 were reduced by $136 million due to reinstate-
ment premiums related to catastrophes, offset by increases ofDBG’s operating income increased in 2007 compared to 2006
$300 million for the Richmond commutation and $147 millionprimarily due to growth in both net investment income and
related to an accrual for workers compensation premiums forunderwriting profit. The improvement is also reflected in the
payroll not yet reported by insured employers. The combinedcombined ratio, which declined 4.5 points in 2007 compared to
effect of these items reduced the growth rate for net premiums2006, primarily due to an improvement in the loss ratio of
written by 1.3 percent.3.3 points. Catastrophe-related losses increased the 2007 loss
The loss ratio in 2006 declined 24.9 points to 70.2. The 2005ratio by 0.4 points. The loss ratio for accident year 2007 recorded
loss ratio was negatively affected by catastrophe-related losses ofin 2007 was 0.9 points lower than the loss ratio recorded in 2006
$1.8 billion and related reinstatement premiums of $136 million.for accident year 2006. The loss ratio for accident year 2006 has
Adverse development on reserves for loss and loss adjustmentimproved in each quarter since September 30, 2006. As a result,
expenses declined to $175 million in 2006 compared to $4.9 bil-the 2007 accident year loss ratio is 2.8 points higher than the
lion in 2005, accounting for 20.7 points of the decrease in the2006 accident year loss ratio, reflecting reductions in 2006
loss ratio.accident year losses recorded through December 31, 2007. Prior
DBG’s expense ratio increased to 19.8 in 2006 compared toyear development reduced incurred losses by $390 million in 2007
19.5 in 2005, primarily due to an increase in other expenses thatand increased incurred losses by $175 million in 2006, accounting
amounted to $498 million in 2006 (including out of periodfor 2.4 points of the improvement in the loss ratio.
charges of $356 million) compared to $372 million in 2005. ThisDBG’s net premiums written declined in 2007 compared to
increase added 0.4 points to the expense ratio.2006 as ceded premiums as a percentage of gross written
44 AIG 2007 Form 10-K

DBG’s net investment income increased by $1.0 billion in Net premiums written increased in 2007 compared to 2006
2006 compared to 2005, as interest income increased $482 mil- due to continued growth in the Private Client Group and increased
lion on growth in the bond portfolio resulting from investment of new business production in the aigdirect.com business partially
operating cash flows and capital contributions. Partnership income offset by a reduction in the Agency Auto business.
increased from 2005 due to improved performance of the On September 27, 2007, AIG completed its previously an-
underlying investments, including initial public offering activity. Net nounced acquisition of 21st Century, paying $759 million to
investment income in 2006 included increases relating to out of acquire the remaining 39.2 percent of the shares of 21st Century
period adjustments of $109 million for the accounting for UCITS that it did not previously own. As a result of the acquisition, the
and partnerships and $85 million related to interest earned on a AIG Direct and 21st Century operations have been combined as
deposit contract that did not exist in the prior year. aigdirect.com.
Under the purchase method of accounting, the assets and
liabilities of 21st Century that were acquired were adjusted toTransatlantic Results
their estimated fair values as of the date of the acquisition, and2007 and 2006 Comparison
goodwill of $342 million was recorded. A customer relationship
Transatlantic’s net premiums written and net premiums earned intangible asset, initially valued at $119 million, was also
increased in 2007 compared to 2006 due to increases in both established.
domestic and international operations. The increase in statutory
underwriting profit in 2007 compared to 2006 reflects improved 2006 and 2005 Comparison
underwriting results in Domestic operations. Operating income
Personal Lines operating income increased $237 million in 2006increased in 2007 compared to 2006 due principally to increased
compared to 2005 reflecting a reduction in the loss ratio of 5.8net investment income and improved underwriting results.
points. Favorable development on prior accident years reduced
incurred losses by $111 million in 2006 compared to an increase2006 and 2005 Comparison
of $14 million in 2005, accounting for 2.7 points of the decrease
Transatlantic’s net premiums written and net premiums earned in the loss ratio. The 2005 catastrophe-related losses of
increased in 2006 compared to 2005 due primarily to increased $112 million added 2.4 points to the loss ratio. The loss ratio for
writings in domestic operations. Operating income increased in the 2006 accident year improved 0.7 points primarily due to the
2006 compared to 2005 due largely to lower catastrophe losses termination of The Robert Plan relationship effective Decem-
and net ceded reinstatement premiums, and increased net ber 31, 2005 and growth in the Private Client Group. The
investment income. improvement in the loss ratio was partially offset by an increase
in the expense ratio of 0.6 points primarily due to investments in
Personal Lines Results people and technology, national expansion efforts and lower
response rates. Net premiums written were flat in 2006 compared2007 and 2006 Comparison
to 2005, with growth in the Private Client Group and Agency Auto
Personal Lines operating income in 2007 decreased by $365 mil- divisions offset by termination of The Robert Plan relationship.
lion compared to 2006, largely due to an increase in incurred Growth in the Private Client Group spans multiple products, with a
losses from a number of sources, leading to an overall increase in continued penetration of the high net worth market, strong brand
the loss ratio of 6.8 points. Prior year net adverse reserve promotion and innovative loss prevention programs.
development contributed 2.5 points of this increase in the loss
ratio, as Personal Lines experienced $7 million in net adverse
Mortgage Guaranty Results
development (including $64 million in adverse development from
2007 and 2006 Comparisonbusinesses placed in runoff), compared to $111 million of
favorable development in 2006. An additional 1.6 point increase
Mortgage Guaranty’s operating loss in 2007 was $637 million
in the loss ratio resulted from $61 million of losses and
compared to operating income of $328 million in 2006 as the
$14 million of reinstatement premiums due to the California
deteriorating U.S. residential housing market adversely affected
wildfires. In addition, an increase in the loss ratio recorded in
losses incurred for both the domestic first- and second-lien
2007 for accident year 2007 compared to the loss ratio recorded
businesses. Domestic first- and second-lien losses incurred
in 2006 for accident year 2006 of 2.7 points resulted, in part,
increased 362 percent and 346 percent respectively, compared to
from an increased frequency of large losses in the Private Client
2006, resulting in loss ratios of 122.0 and 357.0, respectively, in
Group and average automobile premiums declining faster than
2007. Increases in domestic losses incurred resulted in an overall
loss trends.
loss ratio of 168.6 in 2007 compared to 47.2 in 2006. Prior year
Operating income also declined due to increased expenses.
development reduced incurred losses in 2007 by $25 million
The expense ratio increased 1.1 points in 2007 compared to
compared to a reduction of $115 million in 2006, which
2006, primarily due to $63 million of transaction and integration
accounted for 12.7 points of the increase in the loss ratio.
costs associated with the 2007 acquisition of the minority interest
Net premiums written increased in 2007 compared to 2006
in 21st Century.
primarily due to growth in the international markets, accounting for
19 percent of the increase in net premiums written. In addition
AIG 2007 Form 10-K 45

the increased use of mortgage insurance for credit enhancement written for commercial lines increased due to new business in the
as well as better persistency resulted in an increase in domestic U.K. and Europe and decreases in the use of reinsurance,
first-lien premiums. UGC has taken steps to strengthen its partially offset by declines in premium rates. Growth in consumer
underwriting guidelines and increase rates. It also discontinued lines in Latin America, Asia and Europe also contributed to the
new production for certain programs in the second-lien business increase. Net premiums written for the Lloyd’s syndicate Ascot
beginning in the fourth quarter of 2006. However, UGC will (Ascot) and Aviation declined due to rate decreases and increased
continue to receive renewal premiums on that portfolio for the life market competition.
of the loans, estimated to be three to five years, and will continue The 2007 loss ratio increased a total of 1.7 points compared
to be exposed to possible losses from future defaults. to 2006. Losses of $90 million from the June 2007 U.K. floods
The expense ratio in 2007 was 21.2, down from 23.4 in 2006 added 0.7 points to the loss ratio and higher severe but non-
as premium growth offset the effect of increased expenses catastrophic losses and higher loss frequency for personal
related to UGC’s international expansion and the employment of accident business in Japan and personal lines business in Asia
additional operational resources in the second-lien business. and Latin America added 1.6 points to the loss ratio. Partially
UGC domestic mortgage risk in force totaled $29.8 billion as offsetting these increases was favorable loss development on
of December 31, 2007 and the 60-day delinquency ratio was prior accident years of $286 million in 2007 compared to
3.7 percent (based on number of policies, consistent with $183 million in 2006, which decreased the loss ratio by 0.6
mortgage industry practice) compared to domestic mortgage risk points.
in force of $24.9 billion and a delinquency ratio of 2.1 percent at The 2007 expense ratio increased 1.3 points compared to
December 31, 2006. Approximately 81 percent of the domestic 2006. This increase reflected the cost of realigning certain legal
mortgage risk is secured by first-lien, owner-occupied properties. entities through which Foreign General Insurance operates and the
increased significance of consumer lines of business, which have
higher acquisition costs. These factors contributed 0.7 points to2006 and 2005 Comparison
the 2007 expense ratio. AIG expects the expense ratio to
Mortgage Guaranty operating income declined in 2006 from 2005
increase in 2008 due to the continued cost of realigning certain
due primarily to unfavorable loss experience on third-party
legal entities through which Foreign General Insurance operates.
originated second-lien business with a credit quality lower than
Net investment income decreased in 2007 compared to 2006
typical for UGC and a softening U.S. housing market. This
as the 2006 period included the out of period UCITS adjustments,
increased Mortgage Guaranty’s consolidated loss ratio in 2006 to
which more than offset increases resulting from higher interest
47.2 compared to 26.0 in 2005. The writing of this second-lien
rates, increased cash flows and mutual fund income. Mutual fund
coverage, which began in 2005, was discontinued as of year end
income was $93 million higher than 2006 reflecting improved
2006. Losses in the second-lien business have been mitigated by
performance in the equity markets in 2007. Partnership income
a policy year aggregate limitation provision that is typically
was essentially unchanged.
established for each lender.
Net premiums written increased due to growth in the domestic
second-lien and international businesses as well as improved
persistency in the domestic first-lien business. The expense ratio Foreign General Insurance operating income increased in 2006
remained flat as premium growth covered increased expenses compared to 2005 due to out of period UCITS adjustments in
related to expansion internationally and continued investment in 2006, the absence of significant catastrophe-related losses in
risk management resources. 2006, rate increases and lower current accident year losses by
Ascot on its U.S. book of business and lower asbestos and
environmental reserve increases. These increases were partiallyForeign General Insurance Results
offset by lower favorable loss development from prior accident
years and adverse loss development on the 2005 hurricanes.
Statutory underwriting profit increased $104 million in 2006Foreign General Insurance operating income decreased in 2007
compared to 2005. Catastrophes in 2005 resulted in losses ofcompared to 2006, due primarily to decreases in Net investment
$229 million and reinstatement premiums of $80 million.income and statutory underwriting profit. Net investment income
Net premiums written increased 14 percent (15 percent inin 2006 included income of $424 million from out of period UCITS
original currency) in 2006 compared to 2005, reflecting growth inadjustments. Statutory underwriting profit decreased due to
both commercial and consumer lines driven by new business fromlosses from the June 2007 U.K. floods, an increase in severe but
both established and new distribution channels, including a whollynon-catastrophic losses and higher frequency of non-severe losses
owned insurance company in Vietnam and Central Insurance Co.,compared to 2006, partially offset by higher favorable loss
Ltd. in Taiwan. Ascot also contributed to the growth in netdevelopment on prior accident years.
premiums written as a result of rate increases on itsNet premiums written increased 14 percent (10 percent in
U.S. business. Consumer lines in Latin America and commercialoriginal currency) in 2007 compared to 2006, reflecting growth in
lines in Europe, including the U.K., also contributed to thecommercial and consumer lines driven by new business from both
increase. Net premiums written in 2005 were reduced byestablished and new distribution channels, including Central
reinstatement premiums related to catastrophes and a portfolioInsurance Co. Ltd. in Taiwan acquired in late 2006. Net premiums
46 AIG 2007 Form 10-K

transfer of unearned premium reserves to DBG related to the estimates and to establish the resulting reserves are continually
Richmond commutation, accounting for 4 percent of the increase reviewed and updated by management. Any adjustments resulting
in 2006 compared to 2005. therefrom are reflected in operating income currently. Because
The loss ratio decreased 3.1 points in 2006 compared to loss reserve estimates are subject to the outcome of future
2005, as the absence of significant catastrophes in 2006 events, changes in estimates are unavoidable given that loss
resulted in a decrease in the loss ratio of 2.8 points. The loss trends vary and time is often required for changes in trends to be
ratio also decreased due to rate increases and lower current year recognized and confirmed. Reserve changes that increase previ-
losses by Ascot on its U.S. book of business and lower asbestos ous estimates of ultimate cost are referred to as unfavorable or
and environmental reserve increases. These declines were par- adverse development or reserve strengthening. Reserve changes
tially offset by lower favorable loss development from prior that decrease previous estimates of ultimate cost are referred to
accident years and adverse development on 2005 hurricanes. as favorable development.
The expense ratio increased 1.8 points in 2006 compared to Estimates for mortgage guaranty insurance losses and loss
2005 due to a $59 million out of period adjustment for adjustment expense reserves are based on notices of mortgage
amortization of deferred advertising costs and a premium reduc- loan delinquencies and estimates of delinquencies that have been
tion of $61 million related to reconciliation remediation activities, incurred but have not been reported by loan servicers, based
in aggregate accounting for 0.7 points of the increase in the upon historical reporting trends. Mortgage Guaranty establishes
expense ratio. The expense ratio also increased due to growth in reserves using a percentage of the contractual liability (for each
consumer business lines, which have higher acquisition expenses delinquent loan reported) that is based upon past experience
but historically lower loss ratios. regarding certain loan factors such as age of the delinquency,
Net investment income increased $540 million in 2006 dollar amount of the loan and type of mortgage loan. Because
compared to 2005 primarily due to a $424 million out of period mortgage delinquencies and claims payments are affected prima-
UCITS adjustment. rily by macroeconomic events, such as changes in home price
appreciation, interest rates and unemployment, the determination
of the ultimate loss cost requires a high degree of judgment. AIGReserve for Losses and Loss Expenses
believes it has provided appropriate reserves for currently delin-
The following table presents the components of the
quent loans. Consistent with industry practice, AIG does not
General Insurance gross reserve for losses and loss
establish a reserve for loans that are not currently delinquent, but
expenses (loss reserves) as of December 31, 2007 and
that may become delinquent in future periods.
2006 by major lines of business on a statutory Annual
At December 31, 2007, General Insurance net loss reserves
Statement basis(a)
:
increased $6.66 billion from 2006 to $69.29 billion. The net loss
(in millions) 2007 2006(b)
reserves represent loss reserves reduced by reinsurance recover-
able, net of an allowance for unrecoverable reinsurance andOther liability occurrence $20,580 $19,327
applicable discount for future investment income.Workers compensation 15,568 13,612
Other liability claims made 13,878 12,513 The following table classifies the components of the
Auto liability 6,068 6,070 General Insurance net loss reserve by business unit as of
International 7,036 6,006 December 31, 2007 and 2006:
Property 4,274 5,499
(in millions) 2007 2006Reinsurance 3,127 2,979
Medical malpractice 2,361 2,347 DBG(a)
$47,392 $44,119
Products liability 2,416 2,239 Transatlantic 6,900 6,207
Accident and health 1,818 1,693 Personal Lines(b)
2,417 2,440
Commercial multiple peril 1,900 1,651 Mortgage Guaranty 1,339 460
Aircraft 1,623 1,629 Foreign General Insurance(c)
11,240 9,404
Fidelity/surety 1,222 1,148
Total Net Loss Reserve $69,288 $62,630
Mortgage Guaranty/Credit 1,426 567
Other 2,203 2,719 (a) At December 31, 2007 and 2006, respectively, DBG loss reserves
include approximately $3.13 billion and $3.33 billion ($3.34 billion and
Total $85,500 $79,999
$3.66 billion, respectively, before discount), related to business written
by DBG but ceded to AIRCO and reported in AIRCO’s statutory filings.(a) Presented by lines of business pursuant to statutory reporting
DBG loss reserves also include approximately $590 million andrequirements as prescribed by the National Association of Insurance
$535 million related to business included in AIUO’s statutory filings atCommissioners.
December 31, 2007 and 2006, respectively.
(b) Allocations among various lines were revised based on the 2007
(b) At December 31, 2007 and 2006, respectively, Personal Lines losspresentation.
reserves include $894 million and $861 million related to business
ceded to DBG and reported in DBG’s statutory filings.AIG’s gross reserve for losses and loss expenses represents
(c) At December 31, 2007 and 2006, respectively, Foreign Generalthe accumulation of estimates of ultimate losses, including
Insurance loss reserves include approximately $3.02 billion and
estimates for incurred but not yet reported reserves (IBNR) and
$2.75 billion related to business reported in DBG’s statutory filings.
loss expenses. The methods used to determine loss reserve
AIG 2007 Form 10-K 47

The DBG net loss reserve of $47.4 billion is comprised sation discount is calculated using a 3.5 percent interest rate and
principally of the business of AIG subsidiaries participating in the the 1979-81 Decennial Mortality Table. The non-tabular workers
American Home Assurance Company (American Home)/National compensation discount is calculated separately for companies
Union Fire Insurance Company of Pittsburgh, Pa. (National Union) domiciled in New York and Pennsylvania, and follows the statutory
pool (10 companies) and the surplus lines pool (Lexington, AIG regulations for each state. For New York companies, the discount
Excess Liability Insurance Company and Landmark Insurance is based on a five percent interest rate and the companies’ own
Company). payout patterns. For Pennsylvania companies, the statute has
DBG cedes a quota share percentage of its other liability specified discount factors for accident years 2001 and prior,
occurrence and products liability occurrence business to AIRCO. which are based on a six percent interest rate and an industry
The quota share percentage ceded was 15 percent in 2007 and payout pattern. For accident years 2002 and subsequent, the
20 percent in 2006 and covered all business written in these discount is based on the yield of U.S. Treasury securities ranging
years for these lines by participants in the American Home/ from one to twenty years and the company’s own payout pattern,
National Union pool. AIRCO’s loss reserves relating to these with the future expected payment for each year using the interest
quota share cessions from DBG are recorded on a discounted rate associated with the corresponding Treasury security yield for
basis. As of December 31, 2007, AIRCO carried a discount of that time period. The discount is comprised of the following:
approximately $210 million applicable to the $3.34 billion in $794 million — tabular discount for workers compensation in
undiscounted reserves it assumed from the American Home/ DBG; $1.42 billion — non-tabular discount for workers compensa-
National Union pool via this quota share cession. AIRCO also tion in DBG; and, $210 million — non-tabular discount for other
carries approximately $540 million in net loss reserves relating to liability occurrence and products liability occurrence in AIRCO. The
Foreign General Insurance business. These reserves are carried total undiscounted workers compensation loss reserve carried by
on an undiscounted basis. DBG is approximately $13.3 billion as of December 31, 2007.
The companies participating in the American Home/National The other liability occurrence and products liability occurrence
Union pool have maintained a participation in the business written business in AIRCO that is assumed from DBG is discounted based
by AIU for decades. As of December 31, 2007, these AIU on the yield of U.S. Treasury securities ranging from one to twenty
reserves carried by participants in the American Home/National years and the DBG payout pattern for this business. The
Union pool totaled approximately $3.02 billion. The remaining undiscounted reserves assumed by AIRCO from DBG totaled
Foreign General Insurance reserves are carried by AIUO, AIRCO, approximately $3.34 billion at December 31, 2007.
and other smaller AIG subsidiaries domiciled outside the United
States. Statutory filings in the United States by AIG companies Results of the Reserving Process
reflect all the business written by U.S. domiciled entities only, and
Management believes that the General Insurance net loss
therefore exclude business written by AIUO, AIRCO, and all other
reserves are adequate to cover General Insurance net losses and
internationally domiciled subsidiaries. The total reserves carried at
loss expenses as of December 31, 2007. While AIG regularly
December 31, 2007 by AIUO and AIRCO were approximately
reviews the adequacy of established loss reserves, there can be
$5.16 billion and $3.67 billion, respectively. AIRCO’s $3.67 billion
no assurance that AIG’s ultimate loss reserves will not develop
in total general insurance reserves consist of approximately
adversely and materially exceed AIG’s loss reserves as of
$3.13 billion from business assumed from the American Home/
December 31, 2007. In the opinion of management, such adverse
National Union pool and an additional $540 million relating to
development and resulting increase in reserves is not likely to
Foreign General Insurance business.
have a material adverse effect on AIG’s consolidated financial
condition, although it could have a material adverse effect on
Discounting of Reserves
AIG’s consolidated results of operations for an individual reporting
At December 31, 2007, AIG’s overall General Insurance net loss period. See also Item 1A. Risk Factors — Casualty Insurance and
reserves reflect a loss reserve discount of $2.43 billion, including Underwriting Reserves.
tabular and non-tabular calculations. The tabular workers compen-
48 AIG 2007 Form 10-K

The following table presents the reconciliation of net loss
(in millions) 2007 2006 2005
reserves for 2007, 2006 and 2005 as follows:
Prior Accident Year
(in millions) 2007 2006 2005 Development by Major
Class of Business:Net reserve for losses
Excess casualty (DBG) $ 73 $ 102 $1,191and loss expenses at
D&O and relatedbeginning of year $62,630 $57,476 $47,254
management liability (DBG) (305) (20) 1,627Foreign exchange effect 955 741 (628)
Excess workersAcquisitions(a)
317 55 —
compensation (DBG) (14) 74 983
Losses and loss Reinsurance (Transatlantic) 88 181 269
expenses incurred: Asbestos and environmental
Current year 30,261 27,805 28,426 (primarily DBG) 18 208 930
Prior years, other than All other, net (516) (598) (320)
accretion of discount (656) (53) 4,680(b)
Prior years, other thanPrior years, accretion of
accretion of discount $ (656) $ (53) $4,680discount 327 300 (15)
Losses and loss
expenses incurred 29,932 28,052 33,091 Calendar YearAccident Year
(in millions) 2007 2006 2005Losses and loss
expenses paid:
Prior Accident Year Development
Current year 9,684 8,368 7,331
by Accident Year:Prior years 14,862 15,326 14,910
2006 $(1,248)
Losses and loss
2005 (446) $(1,576)
expenses paid 24,546 23,694 22,241
2004 (428) (511) $(3,853)
Net reserve for losses 2003 37 (212) (63)
and loss expenses at 2002 234 373 1,360
end of year $69,288 $62,630 $57,476
2001 263 29 1,749
2000 321 338 1,323(a) Reflects the opening balance with respect to the acquisitions of WüBa
and the Central Insurance Co., Ltd. in 2007 and 2006, respectively. 1999 47 382 944
(b) Includes fourth quarter charge of $1.8 billion. 1998 154 41 605
1997 & Prior 410 1,083 2,615
The following tables summarize development, (favorable) or Prior years, other than accretion
unfavorable, of incurred losses and loss expenses for prior of discount $ (656) $ (53) $ 4,680
years (other than accretion of discount):
In determining the loss development from prior accident years,
(in millions) 2007 2006 2005 AIG conducts analyses to determine the change in estimated
ultimate loss for each accident year for each profit center. ForPrior Accident Year
Development by Reporting example, if loss emergence for a profit center is different than
Unit: expected for certain accident years, the actuaries examine the
DBG $(390) $ 175 $4,878 indicated effect such emergence would have on the reserves of
Personal Lines 7 (111) 14
that profit center. In some cases, the higher or lower than
UGC (25) (115) (103)
expected emergence may result in no clear change in the ultimateForeign General Insurance (286) (183) (378)
loss estimate for the accident years in question, and no
Sub total (694) (234) 4,411
adjustment would be made to the profit center’s reserves for prior
Transatlantic 88 181 269
accident years. In other cases, the higher or lower than expectedAsbestos settlements* (50) — —
emergence may result in a larger change, either favorable or
Prior years, other than
unfavorable, than the difference between the actual and expectedaccretion of discount $(656) $ (53) $4,680
loss emergence. Such additional analyses were conducted for
* Represents the effect of settlements of certain asbestos liabilities.
each profit center, as appropriate, in 2007 to determine the loss
development from prior accident years for 2007. As part of its
reserving process, AIG also considers notices of claims received
with respect to emerging issues, such as those related to the
U.S. mortgage and housing market.
The loss ratios recorded by AIG in 2006 took into account the
results of the comprehensive reserve reviews that were completed
in the fourth quarter of 2005. AIG’s year-end 2005 reserve review
reflected careful consideration of the reserve analyses prepared
by AIG’s internal actuarial staff with the assistance of third-party
AIG 2007 Form 10-K 49

actuaries. In determining the appropriate loss ratios for accident lion of favorable development from accident years 2003 through
year 2006 for each class of business, AIG gave consideration to 2005, partially offset by approximately $2.25 billion of adverse
the loss ratios resulting from the 2005 reserve analyses as well development from accident years 2002 and prior. In 2006, most
as all other relevant information including rate changes, expected classes of AIG’s business continued to experience favorable
changes in loss costs, changes in coverage, reinsurance or mix of development for accident years 2003 through 2005. The adverse
business, and other factors that may affect the loss ratios. development from accident years 2002 and prior reflected
development from excess casualty, workers compensation, excess
workers compensation, and post-1986 environmental liability2007 Net Loss Development
classes of business, all within DBG, from asbestos reserves
In 2007, net loss development from prior accident years was
within DBG and Foreign General Insurance, and from Transatlantic.
favorable by approximately $656 million, including approximately
$88 million of adverse development from Transatlantic; and
2005 Net Loss Development
excluding approximately $327 million from accretion of loss
reserve discount. Excluding Transatlantic, as well as accretion of In 2005, net loss development from prior accident years was
discount, net loss development in 2007 from prior accident years adverse by approximately $4.68 billion, including approximately
was favorable by approximately $744 million. The overall favorable $269 million from Transatlantic. This $4.68 billion adverse
development of $656 million consisted of approximately $2.12 bil- development in 2005 was comprised of approximately $8.60 bil-
lion of favorable development from accident years 2004 through lion for the 2002 and prior accident years, partially offset by
2006, partially offset by approximately $1.43 billion of adverse favorable development for accident years 2003 and 2004 for
development from accident years 2002 and prior and $37 million most classes of business, with the notable exception of D&O. The
of adverse development from accident year 2003. In 2007, most adverse loss development for 2002 and prior accident years was
classes of AIG’s business continued to experience favorable attributable to approximately $4.0 billion of development from the
development for accident years 2004 through 2006. The majority D&O and related management liability classes of business,
of the adverse development from accident years 2002 and prior excess casualty, and excess workers compensation, and to
was related to development from excess casualty and primary approximately $900 million of adverse development from asbes-
workers compensation business within DBG and from Transatlan- tos and environmental claims. The remaining portion of the
tic. The development from accident year 2003 was primarily adverse development from 2002 and prior accident years included
related to adverse development from excess casualty and primary approximately $520 million related to Transatlantic with the
workers compensation business within DBG offset by favorable balance spread across many other classes of business. Most
development from most other classes of business. The overall classes of business produced favorable development for accident
favorable development of $656 million includes approximately years 2003 and 2004, and adverse development for accident
$305 million pertaining to the D&O and related management years 2001 and prior.
liability classes of business within DBG, consisting of approxi-
mately $335 million of favorable development from accident years Net Loss Development by Class of Business
2003 through 2006, partially offset by approximately $30 million
The following is a discussion of the primary reasons for the
of adverse development from accident years 2002 and prior. The
development in 2007, 2006 and 2005 for those classes of
overall favorable development of $656 million also includes
business that experienced significant prior accident year develop-
approximately $300 million of adverse development from primary
ments during the three-year period. See Asbestos and Environ-
workers compensation business within DBG. See Volatility of
mental Reserves below for a further discussion of asbestos and
Reserve Estimates and Sensitivity Analyses below.
environmental reserves and developments.
2006 Net Loss Development Excess Casualty: Excess Casualty reserves experienced signifi-
cant adverse loss development in 2005, but there was only a
In 2006, net loss development from prior accident years was
relatively minor amount of adverse development in 2006 and
favorable by approximately $53 million, including approximately
2007. The adverse development for all periods shown related
$198 million in net adverse development from asbestos and
principally to accident years 2002 and prior, and resulted from
environmental reserves resulting from the updated ground up
significant loss cost increases due to both frequency and severity
analysis of these exposures in the fourth quarter of 2006;
of claims. The increase in loss costs resulted primarily from
approximately $103 million of adverse development pertaining to
medical inflation, which increased the economic loss component
the major hurricanes in 2004 and 2005; and $181 million of
of tort claims, advances in medical care, which extended the life
adverse development from Transatlantic; and excluding approxi-
span of severely injured claimants, and larger jury verdicts, which
mately $300 million from accretion of loss reserve discount.
increased the value of severe tort claims. An additional factor
Excluding the fourth quarter asbestos and environmental reserve
affecting AIG’s excess casualty experience in recent years has
increase, catastrophes and Transatlantic, as well as accretion of
been the accelerated exhaustion of underlying primary policies for
discount, net loss development in 2006 from prior accident years
homebuilders. This has led to increased construction defect-
was favorable by approximately $535 million. The overall favorable
related claims activity on AIG’s excess policies. Many excess
development of $53 million consisted of approximately $2.30 bil-
casualty policies were written on a multi-year basis in the late
50 AIG 2007 Form 10-K

1990s, which limited AIG’s ability to respond to emerging market opment in 2005, but experienced slightly favorable development in
trends as rapidly as would otherwise be the case. In subsequent 2006 and more significantly favorable development in 2007. The
years, AIG responded to these emerging trends by increasing adverse development in 2005 related principally to accident years
rates and implementing numerous policy form and coverage 2002 and prior. This adverse development resulted from signifi-
changes. This led to a significant improvement in experience cant loss cost escalation due to a variety of factors, including the
beginning with accident year 2001. In 2007, a significant portion following: the increase in frequency and severity of corporate
of the adverse development from accident years 2002 and prior bankruptcies; the increase in frequency of financial statement
also related to other latent exposures, including pharmaceutical restatements; the sharp rise in market capitalization of publicly
and product aggregate-related exposures as well as the construc- traded companies; and the increase in the number of initial public
tion defect exposures noted above. AIG’s exposure to these latent offerings, which led to an unprecedented number of IPO alloca-
exposures was sharply reduced after 2002 due to significant tion/laddering suits in 2001. In addition, extensive utilization of
changes in policy terms and conditions as well as underwriting multi-year policies during this period limited AIG’s ability to
guidelines. respond to emerging trends as rapidly as would otherwise be the
For the year-end 2005 loss reserve review, AIG’s actuaries case. AIG experienced significant adverse loss development during
responded to the continuing adverse development by further the period 2002 through 2005 as a result of these issues. AIG
increasing the loss development factors applicable to accident responded to this development with rate increases and policy
years 1999 and subsequent by approximately 5 percent. In form and coverage changes to better contain future loss costs in
addition, to more accurately estimate losses for construction this class of business.
defect-related claims, a separate review was performed by AIG For the year-end 2005 loss reserve review, AIG’s actuaries
claims staff for accounts with significant exposure to these responded to the continuing adverse development by further
claims. increasing the loss development factor assumptions. The loss
For the year-end 2006 loss reserve review, AIG claims staff development factors applicable to 1997 and subsequent accident
updated the separate review for accounts with significant expo- years were increased by approximately 4 percent. In addition,
sure to construction defect-related claims in order to assist the AIG’s actuaries began to give greater weight to loss development
actuaries in determining the proper reserve for this exposure. methods for accident years 2002 and 2003, in order to more fully
AIG’s actuaries determined that no significant changes in the respond to the recent loss experience. AIG’s claims staff also
assumptions were required. Prior accident year loss development conducted a series of ground-up claim projections covering all
in 2006 was adverse by approximately $100 million, a relatively open claims for this business through accident year 2004. AIG’s
minor amount for this class of business. However, AIG continued actuaries benchmarked the loss reserve indications for all
to experience adverse development for this class for accident accident years through 2004 to these claim projections.
years prior to 2003. For the year-end 2006 loss reserve review, AIG’s actuaries
For the year-end 2007 loss reserve review, AIG claims staff determined that no significant changes in the assumptions were
updated its review of accounts with significant exposure to required. Prior accident year loss development in 2006 was
construction defect-related claims. AIG’s actuaries determined favorable by approximately $20 million, an insignificant amount for
that no significant changes in the assumptions were required. these classes. AIG’s actuaries continued to benchmark the loss
Prior accident year loss developments in 2007 were adverse by reserve indications to the ground-up claim projections provided by
approximately $75 million, a minor amount for this class of AIG claims staff for this class of business. For the year-end 2006
business. However, AIG continued to experience adverse develop- loss reserve review, the ground-up claim projections included all
ment in this class for accident years 2002 and prior, amounting accident years through 2005.
to approximately $450 million in 2007. In addition, loss reserves For the year-end 2007 loss reserve review, AIG’s actuaries
developed adversely for accident year 2003 by approximately determined that no significant changes in the assumptions were
$100 million in 2007 for this class. The loss ratio for accident required. Prior accident year reserve development in 2007 was
year 2003 remains very favorable for this class and has been favorable by approximately $305 million, due primarily to favorable
relatively stable over the past several years. Favorable develop- development from accident years 2004 and 2005, and to a lesser
ments in 2007 for accident years 2004 through 2006 largely extent 2003 and 2006. AIG’s actuaries continued to benchmark
offset the adverse developments from accident years 2003 and the loss reserve indications to the ground-up claim projections
prior. A significant portion of the adverse development from provided by AIG claims staff for this class of business. For the
accident years 2002 and prior related to the latent exposures year-end 2007 loss reserve review, the ground-up claim projec-
described above. tions included all accident years through 2006, and included
Loss reserves pertaining to the excess casualty class of stock options backdating-related exposures from accident year
business are generally included in the other liability occurrence 2006. Accident year 2006 reserves developed favorably notwith-
line of business, with a small portion of the excess casualty standing the effect of claims relating to stock options backdating,
reserves included in the other liability claims made line of which totaled approximately $300 million. Further, AIG is closely
business, as presented in the table above. monitoring claims activity in accident year 2007 relating to the
U.S. residential mortgage market, consistent with the manner in
D&O and Related Management Liability Classes of Business:
which claims relating to stock options backdating were monitored
These classes of business experienced significant adverse devel-
AIG 2007 Form 10-K 51

in 2006, and believes that its reserves as of December 31, 2007 required. Prior accident year development in 2007 was favorable
are adequate for its D&O and related management liability classes by approximately $15 million, an insignificant amount for this
of business. class.
Loss reserves pertaining to D&O and related management
liability classes of business are included in the other liability Overview of Loss Reserving Process
claims made line of business, as presented in the table above.
The General Insurance loss reserves can generally be categorized
Excess Workers Compensation: This class of business exper- into two distinct groups. One group is short-tail classes of
ienced significant adverse development in 2005, a relatively minor business consisting principally of property, personal lines and
amount of adverse development in 2006, and a minor amount of certain casualty classes. The other group is long-tail casualty
favorable development in 2007. The adverse development in classes of business which includes excess and umbrella liability,
2005 related to 2002 and prior accident years. This adverse D&O, professional liability, medical malpractice, workers compen-
development resulted primarily from significant loss cost in- sation, general liability, products liability, and related classes.
creases, primarily attributable to rapidly increasing medical infla-
tion and advances in medical care, which increased the cost of Short-Tail Reserves
covered medical care and extended the life span of severely
For operations writing short-tail coverages, such as property
injured workers. The effect of these factors on excess workers
coverages, the process of recording quarterly loss reserves is
compensation claims experience is leveraged, as frequency is
generally geared toward maintaining an appropriate reserve for the
increased by the rising number of claims that reach the excess
outstanding exposure, rather than determining an expected loss
layers.
ratio for current business. For example, the IBNR reserve required
In response to the significantly adverse loss development in
for a class of property business might be expected to approximate
2005, an additional study was conducted for the 2005 year-end
20 percent of the latest year’s earned premiums, and this level of
actuarial reserve analysis for DBG pertaining to the selection of
reserve would generally be maintained regardless of the loss ratio
loss development factors for this class of business. Claims for
emerging in the current quarter. The 20 percent factor would be
excess workers compensation exhibit an exceptionally long-tail of
adjusted to reflect changes in rate levels, loss reporting patterns,
loss development, running for decades from the date the loss is
known exposure to unreported losses, or other factors affecting
incurred. Thus, the adequacy of loss reserves for this class is
the particular class of business.
sensitive to the estimated loss development factors, as such
factors may be applied to many years of loss experience. In order
Long-Tail Reserves
to better estimate the tail development for this class, AIG claims
staff conducted a claim-by-claim projection of the expected Estimation of ultimate net losses and loss expenses (net losses)
ultimate paid loss for each open claim for 1998 and prior for long-tail casualty classes of business is a complex process
accident years as these are the primary years from which the tail and depends on a number of factors, including the class and
factors are derived. The objective of the study was to provide a volume of business involved. Experience in the more recent
benchmark against which loss development factors in the tail accident years of long-tail casualty classes of business shows
could be evaluated. The resulting loss development factors utilized limited statistical credibility in reported net losses because a
by the actuaries in the year-end 2005 study reflected an increase relatively low proportion of net losses would be reported claims
of approximately 18 percent from the factors used in the prior and expenses and an even smaller percentage would be net
year study without the benefit of the claims benchmark. In losses paid. Therefore, IBNR would constitute a relatively high
addition, the loss cost trend assumption for excess workers proportion of net losses.
compensation was increased from approximately 2.5 percent to AIG’s carried net long-tail loss reserves are tested using loss
6 percent for the 2005 study. trend factors that AIG considers appropriate for each class of
For the year-end 2006 loss reserve review, AIG claims staff business. A variety of actuarial methods and assumptions is
updated the claim-by-claim projection for each open claim for normally employed to estimate net losses for long-tail casualty
accident years 1999 and prior. These updated claims projections classes of businesses. These methods ordinarily involve the use
were utilized by the actuaries as a benchmark for loss develop- of loss trend factors intended to reflect the annual growth in loss
ment factors in the year-end 2006 study. AIG’s actuaries costs from one accident year to the next. For the majority of long-
determined that no significant changes in the assumptions were tail casualty classes of business, net loss trend factors approxi-
required. Prior accident year development in 2006 was adverse by mated five percent. Loss trend factors reflect many items
approximately $70 million, a relatively minor amount for this including changes in claims handling, exposure and policy forms,
class. current and future estimates of monetary inflation and social
For the year-end 2007 loss reserve review, AIG claims staff inflation and increases in litigation and awards. These factors are
again updated the claim-by-claim projection for each open claim periodically reviewed and adjusted, as appropriate, to reflect
for accident years 2000 and prior. These updated claims emerging trends which are based upon past loss experience.
projections were utilized by the actuaries as a benchmark for loss Thus, many factors are implicitly considered in estimating the year
development factors in the year-end 2007 study. AIG’s actuaries to year growth in loss costs.
determined that no significant changes in the assumptions were
52 AIG 2007 Form 10-K

A number of actuarial assumptions are generally made in the suggests that the initially determined loss ratio is no longer
review of reserves for each class of business. For longer tail appropriate, the loss ratio for current business is changed to
classes of business, actuarial assumptions generally are made reflect the revised assumptions.
with respect to the following: A comprehensive annual loss reserve review is completed in
( Loss trend factors which are used to establish expected loss the fourth quarter of each year for each AIG general insurance
ratios for subsequent accident years based on the projected subsidiary. These reviews are conducted in full detail for each
loss ratio for prior accident years. class of business for each subsidiary, and thus consist of
( Expected loss ratios for the latest accident year (i.e., accident hundreds of individual analyses. The purpose of these reviews is
year 2007 for the year-end 2007 loss reserve analysis) and, in to confirm the appropriateness of the reserves carried by each of
some cases for accident years prior to the latest accident year. the individual subsidiaries, and therefore of AIG’s overall carried
The expected loss ratio generally reflects the projected loss reserves. The reserve analysis for each class of business is
ratio from prior accident years, adjusted for the loss trend (see performed by the actuarial personnel who are most familiar with
above) and the effect of rate changes and other quantifiable that class of business. In completing these detailed actuarial
factors on the loss ratio. For low-frequency, high-severity reserve analyses, the actuaries are required to make numerous
classes such as excess casualty, expected loss ratios generally assumptions, including the selection of loss development factors
are used for at least the three most recent accident years. and loss cost trend factors. They are also required to determine
( Loss development factors which are used to project the and select the most appropriate actuarial methods to employ for
reported losses for each accident year to an ultimate basis. each business class. Additionally, they must determine the
Generally, the actual loss development factors observed from appropriate segmentation of data from which the adequacy of the
prior accident years would be used as a basis to determine the reserves can be most accurately tested. In the course of these
loss development factors for the subsequent accident years. detailed reserve reviews a point estimate of the loss reserve is
AIG records quarterly changes in loss reserves for each of its determined. The sum of these point estimates for each class of
many General Insurance classes of business. The overall change business for each subsidiary provides an overall actuarial point
in AIG’s loss reserves is based on the sum of these classes of estimate of the loss reserve for that subsidiary. The ultimate
business changes. For most long-tail classes of business, the process by which the actual carried reserves are determined
process of recording quarterly loss reserve changes involves considers both the actuarial point estimate and numerous other
determining the estimated current loss ratio for each class of internal and external factors including a qualitative assessment of
coverage. This loss ratio is multiplied by the current quarter’s net inflation and other economic conditions in the United States and
earned premium for that class of coverage to determine the abroad, changes in the legal, regulatory, judicial and social
current accident quarter’s total estimated net incurred loss and environment, underlying policy pricing, terms and conditions, and
loss expense. The change in loss reserves for the quarter for claims handling. Loss reserve development can also be affected
each class is thus the difference between the net incurred loss by commutations of assumed and ceded reinsurance agreements.
and loss expense, estimated as described above, and the net
paid losses and loss expenses in the quarter. Also any change in Actuarial Methods for Major Classes of Business
estimated ultimate losses from prior accident years, either
In testing the reserves for each class of business, a determina-
positive or negative, is reflected in the loss reserve for the current
tion is made by AIG’s actuaries as to the most appropriate
quarter.
actuarial methods. This determination is based on a variety of
factors including the nature of the claims associated with the
Details of the Loss Reserving Process
class of business, such as frequency or severity. Other factors
The process of determining the current loss ratio for each class of considered include the loss development characteristics associ-
business is based on a variety of factors. These include, but are ated with the claims, the volume of claim data available for the
not limited to, the following considerations: prior accident year and applicable class, and the applicability of various actuarial methods
policy year loss ratios; rate changes; changes in coverage, to the class. In addition to determining the actuarial methods, the
reinsurance, or mix of business; and actual and anticipated actuaries determine the appropriate loss reserve groupings of
changes in external factors affecting results, such as trends in data. For example, AIG writes a great number of unique sub-
loss costs or in the legal and claims environment. The current classes of professional liability. For pricing or other purposes, it is
loss ratio for each class of business reflects input from actuarial, appropriate to evaluate the profitability of each subclass individu-
underwriting and claims staff and is intended to represent ally. However, for purposes of estimating the loss reserves for
management’s best estimate of the current loss ratio after professional liability, it is appropriate to combine the subclasses
reflecting all of the factors described above. At the close of each into larger groups. The greater degree of credibility in the claims
quarter, the assumptions underlying the loss ratios are reviewed experience of the larger groups may outweigh the greater degree
to determine if the loss ratios based thereon remain appropriate. of homogeneity of the individual subclasses. This determination of
This process includes a review of the actual claims experience in data segmentation and actuarial methods is carefully considered
the quarter, actual rate changes achieved, actual changes in for each class of business. The segmentation and actuarial
coverage, reinsurance or mix of business, and changes in certain methods chosen are those which together are expected to
other factors that may affect the loss ratio. When this review produce the most accurate estimate of the loss reserves.
AIG 2007 Form 10-K 53

Actuarial methods used by AIG for most long-tail casualty A key advantage of loss development methods is that they
classes of business include loss development methods and respond quickly to any actual changes in loss costs for the class
expected loss ratio methods, including ‘‘Bornhuetter Ferguson’’ of business. Therefore, if loss experience is unexpectedly deterio-
methods described below. Other methods considered include rating or improving, the loss development method gives full
frequency/severity methods, although these are generally used by credibility to the changing experience. Expected loss ratio meth-
AIG more for pricing analysis than for loss reserve analysis. Loss ods would be slower to respond to the change, as they would
development methods utilize the actual loss development patterns continue to give more weight to the expected loss ratio, until
from prior accident years to project the reported losses to an enough evidence emerged for the expected loss ratio to be
ultimate basis for subsequent accident years. Loss development modified to reflect the changing loss experience. On the other
methods generally are most appropriate for classes of business hand, loss development methods have the disadvantage of
which exhibit a stable pattern of loss development from one overreacting to changes in reported losses if in fact the loss
accident year to the next, and for which the components of the experience is not credible. For example, the presence or absence
classes have similar development characteristics. For example, of large losses at the early stages of loss development could
property exposures would generally not be combined into the cause the loss development method to overreact to the favorable
same class as casualty exposures, and primary casualty expo- or unfavorable experience by assuming it will continue at later
sures would generally not be combined into the same class as stages of development. In these instances, expected loss ratio
excess casualty exposures. Expected loss ratio methods are methods such as ‘‘Bornhuetter Ferguson’’ have the advantage of
generally utilized by AIG where the reported loss data lacks properly recognizing large losses without extrapolating unusual
sufficient credibility to utilize loss development methods, such as large loss activity onto the unreported portion of the losses for
for new classes of business or for long-tail classes at early stages the accident year. AIG’s loss reserve reviews for long-tail classes
of loss development. typically utilize a combination of both loss development and
Expected loss ratio methods rely on the application of an expected loss ratio methods. Loss development methods are
expected loss ratio to the earned premium for the class of generally given more weight for accident years and classes of
business to determine the loss reserves. For example, an business where the loss experience is highly credible. Expected
expected loss ratio of 70 percent applied to an earned premium loss ratio methods are given more weight where the reported loss
base of $10 million for a class of business would generate an experience is less credible, or is driven more by large losses.
ultimate loss estimate of $7 million. Subtracting any reported paid Expected loss ratio methods require sufficient information to
losses and loss expense would result in the indicated loss determine the appropriate expected loss ratio. This information
reserve for this class. ‘‘Bornhuetter Ferguson’’ methods are generally includes the actual loss ratios for prior accident years,
expected loss ratio methods for which the expected loss ratio is and rate changes as well as underwriting or other changes which
applied only to the expected unreported portion of the losses. For would affect the loss ratio. Further, an estimate of the loss cost
example, for a long-tail class of business for which only 10 per- trend or loss ratio trend is required in order to allow for the effect
cent of the losses are expected to be reported at the end of the of inflation and other factors which may increase or otherwise
accident year, the expected loss ratio would be applied to the change the loss costs from one accident year to the next.
90 percent of the losses still unreported. The actual reported Frequency/severity methods generally rely on the determination
losses at the end of the accident year would be added to of an ultimate number of claims and an average severity for each
determine the total ultimate loss estimate for the accident year. claim for each accident year. Multiplying the estimated ultimate
Subtracting the reported paid losses and loss expenses would number of claims for each accident year by the expected average
result in the indicated loss reserve. In the example above, the severity of each claim produces the estimated ultimate loss for
expected loss ratio of 70 percent would be multiplied by the accident year. Frequency/severity methods generally require a
90 percent. The result of 63 percent would be applied to the sufficient volume of claims in order for the average severity to be
earned premium of $10 million resulting in an estimated unre- predictable. Average severity for subsequent accident years is
ported loss of $6.3 million. Actual reported losses would be generally determined by applying an estimated annual loss cost
added to arrive at the total ultimate losses. If the reported losses trend to the estimated average claim severity from prior accident
were $1 million, the ultimate loss estimate under the ‘‘Bornhuet- years. Frequency/severity methods have the advantage that
ter Ferguson’’ method would be $7.3 million versus the $7 million ultimate claim counts can generally be estimated more quickly
amount under the expected loss ratio method described above. and accurately than can ultimate losses. Thus, if the average
Thus, the ‘‘Bornhuetter Ferguson’’ method gives partial credibility claim severity can be accurately estimated, these methods can
to the actual loss experience to date for the class of business. more quickly respond to changes in loss experience than other
Loss development methods generally give full credibility to the methods. However, for average severity to be predictable, the
reported loss experience to date. In the example above, loss class of business must consist of homogeneous types of claims
development methods would typically indicate an ultimate loss for which loss severity trends from one year to the next are
estimate of $10 million, as the reported losses of $1 million reasonably consistent. Generally these methods work best for
would be estimated to reflect only 10 percent of the ultimate high frequency, low severity classes of business such as personal
losses. auto. AIG also utilizes these methods in pricing subclasses of
professional liability. However, AIG does not generally utilize
54 AIG 2007 Form 10-K

frequency/severity methods to test loss reserves, due to the relatively consistent loss development from one accident year to
general nature of AIG’s reserves being applicable to lower the next. AIG is a leading writer of workers compensation, and
frequency, higher severity commercial classes of business where thus has sufficient volume of claims experience to utilize
average claim severity is volatile. development methods. AIG does not believe frequency/severity
methods are as appropriate, due to significant growth and
Excess Casualty: AIG generally uses a combination of loss
changes in AIG’s workers compensation business over the years.
development methods and expected loss ratio methods for excess
AIG generally segregates California business from other business
casualty classes. Expected loss ratio methods are generally
in evaluating workers compensation reserves. Certain classes of
utilized for at least the three latest accident years, due to the
workers compensation, such as construction, are also evaluated
relatively low credibility of the reported losses. The loss experi-
separately. Additionally, AIG writes a number of very large
ence is generally reviewed separately for lead umbrella classes
accounts which include workers compensation coverage. These
and for other excess classes, due to the relatively shorter tail for
accounts are generally priced by AIG actuaries, and to the extent
lead umbrella business. Automobile-related claims are generally
appropriate, the indicated losses based on the pricing analysis
reviewed separately from non-auto claims, due to the shorter tail
may be utilized to record the initial estimated loss reserves for
nature of the automobile related claims. The expected loss ratios
these accounts.
utilized for recent accident years are based on the projected
ultimate loss ratios of prior years, adjusted for rate changes, Excess Workers Compensation: AIG generally utilizes a combina-
estimated loss cost trends and all other changes that can be tion of loss development methods and expected loss ratio
quantified. The estimated loss cost trend utilized in the year-end methods. Loss development methods are given the greater weight
2007 reviews averaged approximately five percent for excess for mature accident years such as 2001 and prior. Expected loss
casualty classes. Frequency/severity methods are generally not ratio methods are given the greater weight for the more recent
utilized as the vast majority of reported claims do not result in a accident years. Excess workers compensation is an extremely
claim payment. In addition, the average severity varies significantly long-tail class of business, with loss emergence extending for
from accident year to accident year due to large losses which decades. Therefore there is limited credibility in the reported
characterize this class of business, as well as changing propor- losses for many of the more recent accident years. Beginning with
tions of claims which do not result in a claim payment. the year-end 2005 loss reserve review, AIG’s actuaries began to
utilize claims projections provided by AIG claims staff to help
D&O: AIG generally utilizes a combination of loss development
determine the loss development factors for this class of business.
methods and expected loss ratio methods for D&O and related
management liability classes of business. Expected loss ratio General Liability: AIG generally uses a combination of loss
methods are given more weight in the two most recent accident development methods and expected loss ratio methods for
years, whereas loss development methods are given more weight primary general liability or products liability classes. For certain
in more mature accident years. Beginning with the year-end 2005 classes of business with sufficient loss volume, loss development
loss reserve review, AIG’s actuaries began to utilize claim methods may be given significant weight for all but the most
projections provided by AIG claims staff as a benchmark for recent one or two accident years, whereas for smaller or more
determining the indicated ultimate losses for accident years 2004 volatile classes of business, loss development methods may be
and prior. For the year end 2007 loss reserve review, claims given limited weight for the five or more most recent accident
projections for accident years 2006 and prior were utilized. In years. Expected loss ratio methods would be utilized for the more
prior years, AIG’s actuaries had utilized these claims projections recent accident years for these classes. The loss experience for
as a benchmark for profitability studies for major classes of D&O primary general liability business is generally reviewed at a level
and related management liability business. The track record of that is believed to provide the most appropriate data for reserve
these claims projections has indicated a very low margin of error, analysis. For example, primary claims made business is generally
thus providing support for their usage as a benchmark in segregated from business written on an occurrence policy form.
determining the estimated loss reserve. These classes of busi- Additionally, certain subclasses, such as construction, are gener-
ness reflect claims made coverage, and losses are characterized ally reviewed separately from business in other subclasses. Due
by low frequency and high severity. Thus, the claim projections to the fairly long-tail nature of general liability business, and the
can produce an accurate overall indicator of the ultimate loss many subclasses that are reviewed individually, there is less
exposure for these classes by identifying and estimating all large credibility in the reported losses and increased reliance on
losses. Frequency/severity methods are generally not utilized for expected loss ratio methods. AIG’s actuaries generally do not
these classes as the overall losses are driven by large losses utilize frequency/severity methods to test reserves for this
more than by claim frequency. Severity trends have varied business, due to significant changes and growth in AIG’s general
significantly from accident year to accident year. liability and products liability business over the years.
Workers Compensation: AIG generally utilizes loss development Commercial Automobile Liability: AIG generally utilizes loss devel-
methods for all but the most recent accident year. Expected loss opment methods for all but the most recent accident year for
ratio methods generally are given significant weight only in the commercial automobile classes of business. Expected loss ratio
most recent accident year. Workers compensation claims are methods are generally given significant weight only in the most
generally characterized by high frequency, low severity, and recent accident year. Frequency/severity methods are generally
AIG 2007 Form 10-K 55

not utilized due to significant changes and growth in this business Aviation: AIG generally uses a combination of loss development
over the years. methods and expected loss ratio methods for aviation exposures.
Aviation claims are not very long-tail in nature; however, they are
Healthcare: AIG generally uses a combination of loss development
driven by claim severity. Thus a combination of both development
methods and expected loss ratio methods for healthcare classes
and expected loss ratio methods are used for all but the latest
of business. The largest component of the healthcare business
accident year to determine the loss reserves. Expected loss ratio
consists of coverage written for hospitals and other healthcare
methods are used to determine the loss reserves for the latest
facilities. Reserves for excess coverage are tested separately
accident year. Frequency/severity methods are not employed due
from those for primary coverage. For primary coverages, loss
to the high severity nature of the claims and different mix of
development methods are generally given the majority of the
claims from year to year.
weight for all but the latest three accident years, and are given
some weight for all years other than the latest accident year. For Personal Auto (Domestic): AIG generally utilizes frequency/severity
excess coverages, expected loss methods are generally given all methods and loss development methods for domestic personal
the weight for the latest three accident years, and are also given auto classes. For many classes of business, greater reliance is
considerable weight for accident years prior to the latest three placed on frequency/severity methods as claim counts emerge
years. For other classes of healthcare coverage, an analogous quickly for personal auto and allow for more immediate analysis of
weighting between loss development and expected loss ratio resulting loss trends and comparisons to industry and other
methods is utilized. The weights assigned to each method are diagnostic metrics.
those which are believed to result in the best combination of
Fidelity/Surety: AIG generally uses loss development methods for
responsiveness and stability. Frequency/severity methods are
fidelity exposures for all but the latest accident year. Expected
sometimes utilized for pricing certain healthcare accounts or
loss ratio methods are also given weight for the more recent
business. However, in testing loss reserves the business is
accident years, and for the latest accident year they may be given
generally combined into larger groupings to enhance the credibility
100 percent weight. For surety exposures, AIG generally uses the
of the loss experience. The frequency/severity methods that are
same method as for short-tail classes.
applicable in pricing may not be appropriate for reserve testing
and thus frequency/severity methods are not generally employed Mortgage Guaranty: AIG tests mortgage guaranty reserves using
in AIG’s healthcare reserve analyses. loss development methods, supplemented by an internal claim
analysis by actuaries and staff who specialize in the mortgage
Professional Liability: AIG generally uses a combination of loss
guaranty business. The claim analysis projects ultimate losses for
development methods and expected loss ratio methods for
claims within each of several categories of delinquency based on
professional liability classes of business. Loss development
actual historical experience and is essentially a frequency/severity
methods are used for the more mature accident years. Greater
analysis for each category of delinquency. Additional reserve tests
weight is given to expected loss ratio methods in the more recent
using ‘‘Bornhuetter Ferguson’’ methods are also employed, as
accident years. Reserves are tested separately for claims made
well as tests measuring losses as a percent of risk in force.
classes and classes written on occurrence policy forms. Further
Reserves are reviewed separately for each class of business to
segmentations are made in a manner believed to provide an
consider the loss development characteristics associated with the
appropriate balance between credibility and homogeneity of the
claims, the volume of claim data available for the applicable class
data. Frequency/severity methods are used in pricing and profit-
and the applicability of various actuarial methods to the class.
ability analyses for some classes of professional liability; however,
for loss reserve testing, the need to enhance credibility generally Short-Tail Classes: AIG generally uses either loss development
results in classes that are not sufficiently homogenous to utilize methods or IBNR factor methods to set reserves for short-tail
frequency/severity methods. classes such as property coverages. Where a factor is used, it
generally represents a percent of earned premium or other
Catastrophic Casualty: AIG utilizes expected loss ratio methods
exposure measure. The factor is determined based on prior
for all accident years for catastrophic casualty business. This
accident year experience. For example, the IBNR for a class of
class of business consists of casualty or financial lines coverage
property coverage might be expected to approximate 20 percent
which attaches in excess of very high attachment points; thus the
of the latest year’s earned premium. The factor is continually
claims experience is marked by very low frequency and high
reevaluated in light of emerging claim experience as well as rate
severity. Because of the limited number of claims, loss develop-
changes or other factors that could affect the adequacy of the
ment methods are not utilized. The expected loss ratios and loss
IBNR factor being employed.
development assumptions utilized are based upon the results of
prior accident years for this business as well as for similar International: Business written by AIG’s Foreign General Insurance
classes of business written above lower attachment points. The sub-segment includes both long-tail and short-tail classes of
business is generally written on a claims made basis. AIG utilizes business. For long-tail classes of business, the actuarial methods
ground-up claim projections provided by AIG claims staff to assist utilized would be analogous to those described above. However,
in developing the appropriate reserve. the majority of business written by Foreign General Insurance is
short-tail, high frequency and low severity in nature. For this
business, loss development methods are generally employed to
56 AIG 2007 Form 10-K

test the loss reserves. AIG maintains a data base of detailed position of using alternative loss trend or loss development factor
historical premium and loss transactions in original currency for assumptions rather than those actually used in determining AIG’s
business written by Foreign General Insurance, thereby allowing best estimates in the year-end loss reserve analyses in 2007.
AIG actuaries to determine the current reserves without any The analysis addresses each major class of business for which a
distortion from changes in exchange rates over time. In testing material deviation to AIG’s overall reserve position is believed
the Foreign General Insurance reserves, AIG’s actuaries segment reasonably possible, and uses what AIG believes is a reasonably
the data by region, country or class of business as appropriate to likely range of potential deviation for each class. There can be no
determine an optimal balance between homogeneity and assurance, however, that actual reserve development will be
credibility. consistent with either the original or the adjusted loss trend or
loss development factor assumptions, or that other assumptions
Loss Adjustment Expenses: AIG determines reserves for legal
made in the reserving process will not materially affect reserve
defense and cost containment loss adjustment expenses for each
development for a particular class of business.
class of business by one or more actuarial methods. The methods
generally include development methods analogous to those de- Excess Casualty: For the excess casualty class of business, the
scribed for loss development methods. The developments could assumed loss cost trend was approximately five percent. After
be based on either the paid loss adjustment expenses or the ratio evaluating the historical loss cost trends from prior accident years
of paid loss adjustment expenses to paid losses, or both. Other since the early 1990s, in AIG’s judgment, it is reasonably likely
methods include the utilization of expected ultimate ratios of paid that actual loss cost trends applicable to the year-end 2007 loss
loss expense to paid losses, based on actual experience from reserve review for excess casualty will range from negative five
prior accident years or from similar classes of business. AIG percent to positive 15 percent, or approximately ten percent lower
generally determines reserves for adjuster loss adjustment ex- or higher than the assumption actually utilized in the year-end
penses based on calendar year ratios of adjuster expenses paid 2007 reserve review. A ten percent change in the assumed loss
to losses paid for the particular class of business. AIG generally cost trend for excess casualty would cause approximately a
determines reserves for other unallocated loss adjustment ex- $2.4 billion increase or a $1.6 billion decrease in the net loss
penses based on the ratio of the calendar year expenses paid to and loss expense reserve for this class of business. It should be
overall losses paid. This determination is generally done for all emphasized that the ten percent deviations are not considered
classes of business combined, and reflects costs of home office the highest possible deviations that might be expected, but rather
claim overhead as a percent of losses paid. what is considered by AIG to reflect a reasonably likely range of
potential deviation. Actual loss cost trends in the early 1990s
Catastrophes: Special analyses are conducted by AIG in response
were negative for several years, including amounts below the
to major catastrophes in order to estimate AIG’s gross and net
negative five percent cited above, whereas actual loss cost trends
loss and loss expense liability from the events. These analyses
in the late 1990s ran well into the double digits for several years,
may include a combination of approaches, including modeling
including amounts greater than the 15 percent cited above. Thus,
estimates, ground up claim analysis, loss evaluation reports from
there can be no assurance that loss trends will not deviate by
on-site field adjusters, and market share estimates.
more than ten percent. The loss cost trend assumption is critical
AIG’s loss reserve analyses do not calculate a range of loss
for the excess casualty class of business due the long-tail nature
reserve estimates. Because a large portion of the loss reserves
of the claims and therefore is applied across many accident
from AIG’s General Insurance business relates to longer-tail
years.
casualty classes of business driven by severity rather than
For the excess casualty class of business, the assumed loss
frequency of claims, such as excess casualty and D&O, develop-
development factors are also a key assumption. After evaluating
ing a range around loss reserve estimates would not be
the historical loss development factors from prior accident years
meaningful. Using the reserving methodologies described above,
since the early 1990s, in AIG’s judgment, it is reasonably likely
AIG’s actuaries determine their best estimate of the required
that actual loss development factors will range from approximately
reserve and advise Management of that amount. AIG then adjusts
3.5 percent below those actually utilized in the year-end 2007
its aggregate carried reserves as necessary so that the actual
reserve review to approximately 6.5 percent above those factors
carried reserves as of December 31 reflect this best estimate.
actually utilized. If the loss development factor assumptions were
changed by 3.5 percent and 6.5 percent, respectively, the net
Volatility of Reserve Estimates and Sensitivity Analyses
loss reserves for the excess casualty class would decrease by
approximately $600 million under the lower assumptions orAs described above, AIG uses numerous assumptions in determin-
increase by approximately $1.0 billion under the higher assump-ing its best estimate of reserves for each class of business. The
tions. Generally, actual historical loss development factors areimportance of any specific assumption can vary by both class of
used to project future loss development. However there can be nobusiness and accident year. If actual experience differs from key
assurance that future loss development patterns will be the sameassumptions used in establishing reserves, there is potential for
as in the past, or that they will not deviate by more than thesignificant variation in the development of loss reserves, particu-
amounts illustrated above. Moreover, as excess casualty is a long-larly for long-tail casualty classes of business such as excess
tail class of business, any deviation in loss cost trends or in losscasualty, D&O or workers compensation. Set forth below is a
development factors might not be discernible for an extendedsensitivity analysis that estimates the effect on the loss reserve
AIG 2007 Form 10-K 57

period of time subsequent to the recording of the initial loss loss development patterns will be the same as in the past, or that
reserve estimates for any accident year. Thus, there is the they will not deviate by more than the 6 percent or 3.5 percent
potential for the reserves with respect to a number of accident amounts.
years to be significantly affected by changes in the loss cost
Excess Workers Compensation: For excess workers compensation
trends or loss development factors that were initially relied upon
business, loss costs were trended at six percent per annum. After
in setting the reserves. These changes in loss trends or loss
reviewing actual industry loss trends for the past ten years, in
development factors could be attributable to changes in inflation
AIG’s judgment, it is reasonably likely that actual loss cost trends
or in the judicial environment, or in other social or economic
applicable to the year-end 2007 loss reserve review for excess
conditions affecting claims. Thus, there is the potential for
workers compensation will range five percent lower or higher than
variations greater than the amounts cited above, either positively
this estimated loss trend. A five percent change in the assumed
or negatively.
loss cost trend would cause approximately a $425 million
D&O and Related Management Liability Classes of Business: For increase or a $275 million decrease in the net loss reserves for
D&O and related management liability classes of business, the this business. It should be emphasized that the actual loss cost
assumed loss cost trend was approximately four percent. After trend could vary significantly from this assumption, and there can
evaluating the historical loss cost trends from prior accident years be no assurance that actual loss costs will not deviate, perhaps
since the early 1990s, in AIG’s judgment, it is reasonably likely materially, by greater than five percent.
that actual loss cost trends applicable to the year-end 2007 loss For excess workers compensation business, the assumed loss
reserve review for these classes will range from negative development factors are a critical assumption. Excess workers
11 percent to positive 19 percent, or approximately 15 percent compensation is an extremely long-tail class of business, with a
lower or higher than the assumption actually utilized in the year- much greater than normal uncertainty as to the appropriate loss
end 2007 reserve review. A 15 percent change in the assumed development factors for the tail of the loss development. After
loss cost trend for these classes would cause approximately a evaluating the historical loss development factors for prior
$550 million increase or a $500 million decrease in the net loss accident years since the 1980s, in AIG’s judgment, it is
and loss expense reserves for these classes of business. It reasonably likely that actual loss development factors will range
should be emphasized that the 15 percent deviations are not approximately 15 percent lower or higher than those factors
considered the highest possible deviations that might be ex- actually utilized in the year-end 2007 loss reserve review for
pected, but rather what is considered by AIG to reflect a excess workers compensation. If the loss development factor
reasonably likely range of potential deviation. Actual loss cost assumptions were changed by 15 percent, the net loss reserves
trends for these classes in the early 1990s were negative for for excess workers compensation would increase or decrease by
several years, including amounts below the negative 11 percent approximately $600 million. Given the exceptionally long-tail for
cited above, whereas actual loss cost trends in the late 1990s this class of business, there is the potential for actual deviations
ran at nearly 50 percent per year for several years, vastly in the loss development tail to exceed the deviations assumed,
exceeding the 19 percent figure cited above. Because the D&O perhaps materially.
class of business has exhibited highly volatile loss trends from
Primary Workers Compensation: For primary workers compensa-
one accident year to the next, there is the possibility of an
tion, the loss cost trend assumption is not believed to be material
exceptionally high deviation.
with respect to AIG’s loss reserves. This is primarily because
For D&O and related management liability classes of business,
AIG’s actuaries are generally able to use loss development
the assumed loss development factors are also an important
projections for all but the most recent accident year’s reserves,
assumption but less critical than for excess casualty. Because
so there is limited need to rely on loss cost trend assumptions for
these classes are written on a claims made basis, the loss
primary workers compensation business.
reporting and development tail is much shorter than for excess
However, for primary workers compensation business the loss
casualty. However, the high severity nature of the claims does
development factor assumptions are important. Generally, AIG’s
create the potential for significant deviations in loss development
actual historical workers compensation loss development factors
patterns from one year to the next. After evaluating the historical
would be expected to provide a reasonably accurate predictor of
loss development factors for these classes of business for
future loss development. However, workers compensation is a
accident years since the early 1990s, in AIG’s judgment, it is
long-tail class of business, and AIG’s business reflects a very
reasonably likely that actual loss development factors will range
significant volume of losses particularly in recent accident years
approximately 6 percent lower to 3.5 percent higher than those
due to growth of the business. After evaluating the actual
factors actually utilized in the year-end 2007 loss reserve review
historical loss developments since the 1980s for this business, in
for these classes. If the loss development factor assumptions
AIG’s judgment, it is reasonably likely that actual loss develop-
were changed by 6 percent and 3.5 percent, respectively, the net
ment factors will fall within the range of approximately 3.5 percent
loss reserves for these classes would be estimated to decrease
below to 8.25 percent above those actually utilized in the year-end
or increase by approximately $250 million and $125 million,
2007 loss reserve review. If the loss development factor
respectively. As noted above for excess casualty, actual historical
assumptions were changed by 3.5 percent and 8.25 percent,
loss development factors are generally used to project future loss
respectively, the net loss reserves for workers compensation
development. However, there can be no assurance that future
58 AIG 2007 Form 10-K

would decrease or increase by approximately $800 million and Estimation of asbestos and environmental claims loss
reserves is a subjective process and reserves for asbestos and$1.9 billion, respectively. It should be noted that loss emergence
environmental claims cannot be estimated using conventionalin 2006 and 2007 for this class was higher than historical
reserving techniques such as those that rely on historical accidentaverages, resulting in an increase in loss reserves for prior
year loss development factors. The methods used to determineaccident years. During 2007, reserves from prior accident years
asbestos and environmental loss estimates and to establish thedeveloped adversely by approximately $300 million for AIG’s
resulting reserves are continually reviewed and updated byprimary workers compensation business. AIG relies on longer term
management.averages of historical loss development patterns in setting loss
Significant factors which affect the trends that influence thereserves; thus if loss emergence in subsequent years continues
asbestos and environmental claims estimation process are the
at the levels observed in 2006 and 2007 there could be
court resolutions and judicial interpretations which broaden the
additional adverse development for this class of business that
intent of the policies and scope of coverage. The current case law
could be more significant than the amount observed in 2007.
can be characterized as still evolving, and there is little likelihood
However, AIG believes it is too soon to ascertain if this increased
that any firm direction will develop in the near future. Additionally,
emergence represents a new trend in the pattern of loss
the exposures for cleanup costs of hazardous waste dump sites
development. For this class of business, there can be no involve issues such as allocation of responsibility among poten-
assurance that actual deviations from the expected loss develop- tially responsible parties and the government’s refusal to release
ment factors will not exceed the deviations assumed, perhaps parties from liability.
materially. Due to this uncertainty, it is not possible to determine the
future development of asbestos and environmental claims withOther Casualty Classes of Business: For casualty business other
the same degree of reliability as with other types of claims. Such
than the classes discussed above, there is generally some
future development will be affected by the extent to which courts
potential for deviation in both the loss cost trend and loss
continue to expand the intent of the policies and the scope of the
development factor assumptions. However, the effect of such
coverage, as they have in the past, as well as by the changes in
deviations is expected to be less material when compared to the
Superfund and waste dump site coverage and liability issues. If
effect on the classes cited above.
the asbestos and environmental reserves develop deficiently,
such deficiency would have an adverse effect on AIG’s future
Asbestos and Environmental Reserves results of operations.
With respect to known asbestos and environmental claims, AIGThe estimation of loss reserves relating to asbestos and
established over a decade ago specialized toxic tort and environ-environmental claims on insurance policies written many years
mental claims units, which investigate and adjust all suchago is subject to greater uncertainty than other types of claims
asbestos and environmental claims. These units evaluate thesedue to inconsistent court decisions as well as judicial interpreta-
asbestos and environmental claims utilizing a claim-by-claimtions and legislative actions that in some cases have tended to
approach that involves a detailed review of individual policy termsbroaden coverage beyond the original intent of such policies and
and exposures. Because each policyholder presents differentin others have expanded theories of liability. The insurance
liability and coverage issues, AIG generally evaluates exposure onindustry as a whole is engaged in extensive litigation over these
a policy-by-policy basis, considering a variety of factors such ascoverage and liability issues and is thus confronted with a
known facts, current law, jurisdiction, policy language and othercontinuing uncertainty in its efforts to quantify these exposures.
factors that are unique to each policy. Quantitative techniquesAIG continues to receive claims asserting injuries and dam-
have to be supplemented by subjective considerations, includingages from toxic waste, hazardous substances, and other environ-
management judgment. Each claim is reviewed at least semi-mental pollutants and alleged claims to cover the cleanup costs
annually utilizing the aforementioned approach and adjusted asof hazardous waste dump sites, referred to collectively as
necessary to reflect the current information.environmental claims, and indemnity claims asserting injuries
In both the specialized and dedicated asbestos and environ-from asbestos.
mental claims units, AIG actively manages and pursues earlyThe vast majority of these asbestos and environmental claims
resolution with respect to these claims in an attempt to mitigateemanate from policies written in 1984 and prior years. Commenc-
its exposure to the unpredictable development of these claims.ing in 1985, standard policies contained an absolute exclusion for
AIG attempts to mitigate its known long-tail environmental expo-pollution-related damage and an absolute asbestos exclusion was
sures by utilizing a combination of proactive claim-resolutionalso implemented. The current environmental policies that AIG
techniques, including policy buybacks, complete environmentalunderwrites on a claims-made basis have been excluded from the
releases, compromise settlements, and, where indicated,analysis herein.
litigation.The majority of AIG’s exposures for asbestos and environmen-
With respect to asbestos claims handling, AIG’s specializedtal claims are excess casualty coverages, not primary coverages.
claims staff operates to mitigate losses through proactive han-Thus, the litigation costs are treated in the same manner as
dling, supervision and resolution of asbestos cases. Thus, whileindemnity amounts. That is, litigation expenses are included within
AIG has resolved all claims with respect to miners and majorthe limits of the liability AIG incurs. Individual significant claim
manufacturers (Tier One), its claims staff continues to operateliabilities, where future litigation costs are reasonably determina-
under the same proactive philosophy to resolve claims involvingble, are established on a case-by-case basis.
accounts with products containing asbestos (Tier Two), products
AIG 2007 Form 10-K 59

containing small amounts of asbestos, companies in the distribu- For asbestos, these tests project the losses expected to be
tion process, and parties with remote, ill-defined involvement in reported over the next nineteen years, i.e., from 2008 through
asbestos (Tiers Three and Four). Through its commitment to 2026, based on the actual losses reported through 2007 and the
appropriate staffing, training, and management oversight of asbes- expected future loss emergence for these claims. Three scenarios
tos cases, AIG seeks to mitigate its exposure to these claims. were tested, with a series of assumptions ranging from more
To determine the appropriate loss reserve as of December 31, optimistic to more conservative. In the first scenario, all carried
2007 for its asbestos and environmental exposures, AIG per- asbestos case reserves are assumed to be within ten percent of
formed a series of top-down and ground-up reserve analyses. In their ultimate settlement value. The second scenario relies on an
order to ensure it had the most comprehensive analysis possible, actuarial projection of report year development for asbestos
AIG engaged a third-party actuary to assist in a review of these claims reported from 1993 to the present to estimate case
exposures, including ground-up estimates for asbestos reserves reserve adequacy as of year-end 2007. The third scenario relies
consistent with the 2005 and 2006 reviews as well as a top-down on an actuarial projection of report year claims for asbestos but
report year projection for environmental reserves. Prior to 2005, reflects claims reported from 1989 to the present to estimate
AIG’s reserve analyses for asbestos and environmental exposures case reserve adequacy as of year-end 2007. Based on the results
was focused around a report year projection of aggregate losses of the prior report years for each of the three scenarios described
for both asbestos and environmental reserves. Additional tests above, the report year approach then projects forward to the year
such as market share analyses were also performed. Ground-up 2026 the expected future report year losses, based on AIG’s
analyses take into account policyholder-specific and claim-specific estimate of reasonable loss trend assumptions. These calcula-
information that has been gathered over many years from a tions are performed on losses gross of reinsurance. The IBNR
variety of sources. Ground-up studies can thus more accurately (including a provision for development of reported claims) on a
assess the exposure to AIG’s layers of coverage for each net basis is based on applying a factor reflecting the expected
policyholder, and hence for all policyholders in the aggregate, ratio of net losses to gross losses for future loss emergence.
provided a sufficient sample of the policyholders can be modeled For environmental claims, an analogous series of fre-
in this manner. quency/severity tests are produced. Environmental claims from
In order to ensure its ground-up analysis was comprehensive, future report years, (i.e., IBNR) are projected out nine years, i.e.,
AIG staff produced the information required at policy and claim through the year 2016.
level detail for nearly 1,000 asbestos defendants. This repre- At year-end 2007, AIG considered a number of factors and
sented over 95 percent of all accounts for which AIG had received recent experience in addition to the results of the respective top-
any claim notice of any amount pertaining to asbestos exposure. down and ground-up analyses performed for asbestos and
AIG did not set any minimum thresholds, such as amount of case environmental reserves. AIG considered the significant uncertainty
reserve outstanding, or paid losses to date, that would have that remains as to AIG’s ultimate liability relating to asbestos and
served to reduce the sample size and hence the comprehensive- environmental claims. This uncertainty is due to several factors
ness of the ground-up analysis. The results of the ground-up including:
analysis for each significant account were examined by AIG’s ( The long latency period between asbestos exposure and
claims staff for reasonableness, for consistency with policy disease manifestation and the resulting potential for involve-
coverage terms, and any claim settlement terms applicable. ment of multiple policy periods for individual claims;
Adjustments were incorporated accordingly. The results from the ( The increase in the volume of claims by currently unimpaired
universe of modeled accounts, which as noted above reflects the plaintiffs;
vast majority of AIG’s known exposures, were then utilized to ( Claims filed under the non-aggregate premises or operations
estimate the ultimate losses from accounts or exposures that section of general liability policies;
could not be modeled and to determine an appropriate provision ( The number of insureds seeking bankruptcy protection and the
for unreported claims. effect of prepackaged bankruptcies;
AIG conducted a comprehensive analysis of reinsurance ( Diverging legal interpretations; and
recoverability to establish the appropriate asbestos and environ- ( With respect to environmental claims, the difficulty in estimat-
mental reserve net of reinsurance. AIG determined the amount of ing the allocation of remediation cost among various parties.
reinsurance that would be ceded to insolvent reinsurers or to After carefully considering the results of the ground-up analy-
commuted reinsurance contracts for both reported claims and for sis, which AIG updates on an annual basis, as well as all of the
IBNR. These amounts were then deducted from the indicated above factors, including the recent report year experience, AIG
amount of reinsurance recoverable. The year-end 2007 analysis increased its gross asbestos reserves by $75 million, all of which
reflected an update to the comprehensive analysis of reinsurance was reinsured, resulting in no increase to net reserves. Addition-
recoverability that was first completed in 2005 and updated in ally, during 2007 a reduction in estimated reinsurance recover-
2006. All asbestos accounts for which there was a significant able, partially offset by several large favorable asbestos
change in estimated losses in the 2007 review were analyzed to settlements, resulted in a minor amount of adverse incurred loss
determine the appropriate reserve net of reinsurance. development.
AIG also completed a top-down report year projection of its Based on the environmental top-down report year analysis
indicated asbestos and environmental loss reserves. These performed in the fourth quarter of 2007, a minor increase in both
projections consist of a series of tests performed separately for gross and net reserves was recognized, resulting in the relatively
asbestos and for environmental exposures. minor amount of development shown in the table below.
60 AIG 2007 Form 10-K

A summary of reserve activity, including estimates for applicable IBNR, relating to asbestos and environmental claims
separately and combined at December 31, 2007, 2006 and 2005 appears in the table below. The vast majority of such
claims arise from policies written in 1984 and prior years. The current environmental policies that AIG underwrites on a
claims-made basis have been excluded from the table below.
2007 2006 2005
(in millions) Gross Net Gross(e)
Net Gross(e)
Net
Asbestos:
Reserve for losses and loss expenses at beginning of year $4,523 $1,889 $4,501 $1,840 $2,622 $1,060
Losses and loss expenses incurred(a)
96 5 572 267 2,206(b)
903(b)
Losses and loss expenses paid(a)
(755) (440) (550) (218) (327) (123)
Reserve for losses and loss expenses at end of year $3,864 $1,454 $4,523 $1,889 $4,501 $1,840
Environmental:
Reserve for losses and loss expenses at beginning of year $ 629 $ 290 $ 969 $ 410 $1,018 $ 451
10 13 (231) (59) 47(c)
27(c)
(124) (66) (109) (61) (96) (68)
Reserve for losses and loss expenses at end of year $ 515 $ 237 $ 629 $ 290 $ 969 $ 410
Combined:
Reserve for losses and loss expenses at beginning of year $5,152 $2,179 $5,470 $2,250 $3,640 $1,511
106 18 341 208 2,253(d)
930(d)
(879) (506) (659) (279) (423) (191)
Reserve for losses and loss expenses at end of year $4,379 $1,691 $5,152 $2,179 $5,470 $2,250
(a) All amounts pertain to policies underwritten in prior years, primarily to policies issued in 1984 and prior.
(b) Includes increases to gross losses and loss expense reserves of $2.0 billion and increases to net losses and loss expense reserves of $843 million
for the fourth quarter of 2005.
(c) Includes increases to gross losses and loss expense reserves of $56 million and increases to net losses and loss expense reserves of $30 million for
the fourth quarter of 2005.
(d) Includes increases to gross losses and loss expense reserves of $2.0 billion and increases to net losses and loss expense reserves of $873 million
for the fourth quarter of 2005.
(e) Gross amounts were revised from the previous presentation to reflect the inclusion of certain reserves not previously identified as asbestos and
environmental related. This revision had no effect on net reserves.
The gross and net IBNR included in the reserve for losses and loss expenses, relating to asbestos and environmental
claims separately and combined, at December 31, 2007, 2006 and 2005 were estimated as follows:
2007 2006 2005
(in millions) Gross Net Gross*
Net Gross*
Net
Asbestos $2,701 $1,145 $3,270 $1,469 $3,458 $1,465
Environmental 325 131 378 173 625 266
Combined $3,026 $1,276 $3,648 $1,642 $4,083 $1,731
* Gross amounts were revised from the previous presentation to reflect the inclusion of certain reserves not previously identified as asbestos and
environmental related. This revision had no effect on net reserves.
A summary of asbestos and environmental claims count activity for the years ended December 31, 2007, 2006 and
2005 was as follows:
2007 2006 2005
Asbestos Environmental Combined Asbestos Environmental Combined Asbestos Environmental Combined
Claims at beginning of year 6,878 9,442 16,320 7,293 9,873 17,166 7,575 8,216 15,791
Claims during year:
Opened 656 937 1,593 643 1,383 2,026 854 5,253 6,107
Settled (150) (179) (329) (150) (155) (305) (67) (219) (286)
Dismissed or otherwise
resolved (821) (2,548) (3,369) (908) (1,659) (2,567) (1,069) (3,377) (4,446)
Claims at end of year 6,563 7,652 14,215 6,878 9,442 16,320 7,293 9,873 17,166
AIG 2007 Form 10-K 61

Survival Ratios — Asbestos and Environmental and term life, investment linked, universal life and endowments,
personal accident and health products, group products includingThe table below presents AIG’s survival ratios for asbestos and
pension, life and health, and fixed and variable annuities. Theenvironmental claims at December 31, 2007, 2006 and 2005.
Foreign Life Insurance & Retirement Services products are soldThe survival ratio is derived by dividing the current carried loss
through independent producers, career agents, financial institu-reserve by the average payments for the three most recent
tions and direct marketing channels.calendar years for these claims. Therefore, the survival ratio is a
AIG’s Domestic Life Insurance operations offer a broad rangesimplistic measure estimating the number of years it would be
of protection products, such as individual life insurance and groupbefore the current ending loss reserves for these claims would be
life and health products, including disability income products andpaid off using recent year average payments. The December 31,
payout annuities, which include single premium immediate annui-2007 survival ratio is lower than the ratio at December 31, 2006
ties, structured settlements and terminal funding annuities. Thebecause the more recent periods included in the rolling average
Domestic Life Insurance products are sold through independentreflect higher claims payments. In addition, AIG’s survival ratio for
producers, career agents and financial institutions and directasbestos claims was negatively affected by the favorable settle-
marketing channels. Home service operations include an array ofments described above, which reduced gross and net asbestos
life insurance, accident and health and annuity products soldsurvival ratios at December 31, 2007 by approximately 1.3 years
primarily through career agents.and 2.6 years, respectively. Many factors, such as aggressive
AIG’s Domestic Retirement Services operations include groupsettlement procedures, mix of business and level of coverage
retirement products, individual fixed and variable annuities soldprovided, have a significant effect on the amount of asbestos and
through banks, broker-dealers and exclusive sales representa-environmental reserves and payments and the resultant survival
tives, and annuity runoff operations, which include previouslyratio. Moreover, as discussed above, the primary basis for AIG’s
acquired ‘‘closed blocks’’ and other fixed and variable annuitiesdetermination of its reserves is not survival ratios, but instead
largely sold through distribution relationships that have beenthe ground-up and top-down analysis. Thus, caution should be
discontinued.exercised in attempting to determine reserve adequacy for these
In order to better align financial reporting with the manner inclaims based simply on this survival ratio.
which AIG’s chief operating decision makers manage their busi-
AIG’s survival ratios for asbestos and environmental
nesses, commencing in 2007, revenues and operating income
claims, separately and combined were based upon a
related to foreign investment-type contracts, which were histori-
three-year average payment. These ratios for the years
cally reported as a component of the Asset Management
ended December 31, 2007, 2006 and 2005 were as
segment, are now reported as part of Foreign Life Insurance &
follows:
Retirement Services. Prior period amounts have been revised to
Gross*
Net conform to the current presentation.
AIG’s Life Insurance & Retirement Services reports its opera-2007
Survival ratios: tions through the following major internal reporting units and legal
Asbestos 7.1 5.6 entities:
Environmental 4.7 3.7
Combined 6.7 5.2
2006
Japan and OtherSurvival ratios:
Asbestos 11.8 12.9 ( American Life Insurance Company (ALICO)
Environmental 5.6 4.5 ( AIG Star Life Insurance Co., Ltd. (AIG Star Life)
Combined 10.4 10.3
( AIG Edison Life Insurance Company (AIG Edison Life)
2005
AsiaSurvival ratios:
Asbestos 16.0 19.8 ( American International Assurance Company, Limited, to-
Environmental 7.2 6.2 gether with American International Assurance Company
Combined 13.1 14.2
(Bermuda) Limited (AIA)
* Gross amounts for 2006 and 2005 were revised from the previous ( Nan Shan Life Insurance Company, Ltd. (Nan Shan)
presentation to reflect the inclusion of certain reserves not previously ( American International Reinsurance Company Limited
identified as asbestos and environmental related. This revision had no
(AIRCO)effect on net reserves.
( The Philippine American Life and General Insurance Com-
pany (Philamlife)Life Insurance & Retirement Services
Operations
Domestic Life Insurance
AIG’s Life Insurance & Retirement Services operations offer a ( American General Life Insurance Company (AIG American
wide range of insurance and retirement savings products both General)
domestically and abroad. ( The United States Life Insurance Company in the City of New
AIG’s Foreign Life Insurance & Retirement Services operations York (USLIFE)
include insurance and investment-oriented products such as whole
62 AIG 2007 Form 10-K

( American General Life and Accident Insurance Company (AGLA)
Domestic Retirement Services
( The Variable Annuity Life Insurance Company (VALIC) ( AIG SunAmerica Life Assurance Company (AIG SunAmerica)
( AIG Annuity Insurance Company (AIG Annuity)
Life Insurance & Retirement Services Results
Life Insurance & Retirement Services results for 2007, 2006 and 2005 were as follows:
Premiums Net Net Realized
and Other Investment Capital Gains Total Operating
(in millions) Considerations Income (Losses) Revenues Income
2007
Foreign Life Insurance & Retirement Services $26,601 $11,849 $ (187) $38,263 $ 6,197
Domestic Life Insurance 5,836 3,995 (803) 9,028 642
Domestic Retirement Services 1,190 6,497 (1,408) 6,279 1,347
Total $33,627 $22,341 $(2,398) $53,570 $ 8,186
2006
Foreign Life Insurance & Retirement Services* $24,166 $ 9,758 $ 707 $34,631 $ 6,881
Domestic Life Insurance 5,543 3,778 (215) 9,106 917
Domestic Retirement Services 1,057 6,488 (404) 7,141 2,323
Total $30,766 $20,024 $ 88 $50,878 $10,121
2005
Foreign Life Insurance & Retirement Services $23,117 $ 8,718 $ 84 $31,919 $ 5,306
Domestic Life Insurance 5,447 3,733 35 9,215 1,495
Domestic Retirement Services 937 6,226 (277) 6,886 2,164
Total $29,501 $18,677 $ (158) $48,020 $ 8,965
Percentage Increase/(Decrease) 2007 vs. 2006:
Foreign Life Insurance & Retirement Services 10% 21% —% 10% (10)%
Domestic Life Insurance 5 6 — (1) (30)
Domestic Retirement Services 13 — — (12) (42)
Total 9% 12% —% 5% (19)%
Foreign Life Insurance & Retirement Services 5% 12% —% 8% 30%
Domestic Life Insurance 2 1 — (1) (39)
Domestic Retirement Services 13 4 — 4 7
Total 4% 7% —% 6% 13%
* Included an out of period UCITS adjustment which increased net investment income by $240 million and operating income by $169 million.
losses resulting from other-than-temporary impairment charges ofThe following table presents the gross insurance in force
$2.8 billion and losses on derivative instruments not qualifying forfor Life Insurance & Retirement Services at December 31,
hedge accounting treatment of $381 million compared to an other-2007, 2006 and 2005:
than-temporary impairment charge of $641 million and gains on
(in millions) 2007 2006 2005
derivative instruments of $268 million in 2006. In addition, net
Foreign*
$1,327,251 $1,162,699 $1,027,682 investment income and certain products were negatively affected
Domestic 984,794 907,901 825,151
by the volatile markets. Life Insurance & Retirement Services
Total $2,312,045 $2,070,600 $1,852,833 continued its ongoing project to increase standardization of AIG’s
actuarial systems and processes throughout the world. Significant* Includes increases (decreases) of $55.1 billion, $41.5 billion and
$(76.5) billion related to changes in foreign exchange rates at progress was made on these initiatives, with only a minimal effect
December 31, 2007, 2006 and 2005, respectively. on operating income in this segment. Premiums and other
considerations increased in 2007 compared to 2006 despite a
2007 and 2006 Comparison very competitive marketplace and a relatively flat yield curve for
most of the year.The severe credit market disruption was a key driver of operating
results in 2007 principally due to significant net realized capital
AIG 2007 Form 10-K 63

Life Insurance & Retirement Services total revenues in 2007 enhancements and conversions, resulted in a net increase to
reflect growth in premiums and other considerations compared to operating income of $19 million during 2007. However, this net
2006 due principally to strong life insurance production in the increase resulted from a number of items that had varying effects
Foreign Life Insurance & Retirement Services operations, a on the results of operations of certain operating units and lines of
growing block of U.K. single premium investment-oriented products business. These adjustments resulted in an increase of $183 mil-
and higher policyholder charges related to universal life and sales lion in operating income for Foreign Life Insurance & Retirement
of payout annuities in the Domestic Life Insurance operations. Services and decreases in operating income of $52 million and
Overall growth in premiums and other considerations was damp- $112 million for Domestic Life Insurance and Domestic Retire-
ened by a continuing shift to interest sensitive products and the ment Services, respectively. In addition, the related adjustments
suspension of new sales on certain products in Japan resulting significantly affected both acquisition costs and incurred policy
from an industry wide review by the tax authorities. Net invest- losses and benefits in the Consolidated Statement of Income.
ment income increased in 2007 compared to 2006 due to higher Operating income in 2006 included an increase of $169 mil-
partnership and mutual fund income as well as higher policyholder lion for an out of period adjustment related to the accounting for
investment income and trading gains and losses (together, UCITS and an increase of $163 million for an out-of-period
policyholder trading gains). Policyholder trading gains are offset by adjustment related to corrections of par policyholder dividend
a charge to incurred policy losses and benefits expense. Policy- reserves and allocations between participating and non-participat-
holder trading gains increased due to higher levels of assets and ing accounts, both of which were related to remediation efforts. In
generally reflect the trend in equity markets. Policyholder trading addition, operating income in 2006 included charges to Domestic
gains were $2.9 billion in 2007 compared to $2.0 billion in 2006. Life Insurance operations of $125 million for the adverse Superior
Net investment income in 2006 included an increase of $240 mil- National arbitration ruling, $66 million related to the exit of the
lion for an out of period adjustment related to the accounting for domestic financial institutions credit life business and $55 million
UCITS. related to other litigation.
Operating income in 2007 was significantly adversely affected
by net realized capital losses which totaled $2.4 billion, net of an 2006 and 2005 Comparison
out-of-period adjustment of $158 million related to foreign ex-
Life Insurance & Retirement Services revenues in 2006 increased
change remediation activities, compared to net realized capital
compared to 2005. Growth in premiums and other considerations
gains of $88 million in 2006. Other factors affecting operating
was dampened by the effect of foreign exchange, most notably by
income include trading account losses of $150 million in the U.K.
the weakening Japanese Yen. Net investment income was higher
associated with certain investment-linked products, the adverse
in 2006 compared to 2005 due to higher partnership and mutual
effect of $108 million related to SOP 05-1, which was adopted in
fund income, which in 2006 included a positive out-of-period
2007, additional claim expense of $67 million relating to an
adjustment of $240 million related to the accounting for UCITS.
industry wide regulatory review of claims in Japan (compared to
Operating income grew by $1.2 billion from 2005, reflecting higher
additional claim expense of $26 million in 2006) and a $118 mil-
revenues, including net realized capital gains, and out-of-period
lion charge related to remediation activities in Asia. Incurred
reductions of policy benefits expense of $163 million in 2006
policyholder benefits increased $36 million in 2007 related to a
resulting from corrections of par policyholder dividend reserves
closed block of Japanese business with guaranteed benefits.
and allocations between participating and non-participating ac-
Partially offsetting these factors was a $52 million recovery in
counts, both of which were related to remediation efforts. In
2007 related to the Superior National arbitration. SOP 05-1
addition, operating income in 2006 included charges for Domestic
generally requires DAC related to group contracts to be amortized
Life Insurance of $125 million for the adverse Superior National
over a shorter duration than in prior periods and also requires
arbitration ruling, $66 million related to the exit of the domestic
that DAC be expensed at the time an individual policy is
financial institutions credit life business and $55 million related to
terminated or lapses, even if reinstated shortly thereafter. The
other litigation.
effect of SOP 05-1 was most significant to the group products line
in the Domestic Life Insurance operations.
Changes in actuarial estimates, including DAC unlockings and
refinements to estimates resulting from actuarial valuation system
64 AIG 2007 Form 10-K

Foreign Life Insurance & Retirement Services Results
Foreign Life Insurance & Retirement Services results on a sub-product basis for 2007, 2006 and 2005 were as follows:
Premiums and Net Net Realized
Other Investment Capital Gains Total Operating
2007
Life insurance $ 16,630 $ 7,473 $ 85 $24,188 $ 3,898
Personal accident 6,094 354 (3) 6,445 1,457
Group products 2,979 753 (76) 3,656 263
Individual fixed annuities 438 2,283 (171) 2,550 548
Individual variable annuities 460 986 (22) 1,424 31
Total $ 26,601 $11,849 $ (187) $38,263 $ 6,197
2006
Life insurance(a)
$ 15,732 $ 5,937 $ 574 $22,243 $ 4,247
Personal accident 5,518 285 55 5,858 1,459
Group products 2,226 648 47 2,921 450
Individual fixed annuities 400 2,027 31 2,458 580
Individual variable annuities 290 861 — 1,151 145
Total $ 24,166 $ 9,758 $ 707 $34,631 $ 6,881
2005
Life insurance $ 15,643 $ 4,884 $ 94 $20,621 $ 3,195
Group products 1,925 613 (9) 2,529 322
Individual variable annuities 186 1,238 — 1,424 99
Total $ 23,117 $ 8,718 $ 84 $31,919 $ 5,306
Life insurance 6% 26% (85)% 9% (8)%
Personal accident 10 24 — 10 —
Group products 34 16 — 25 (42)
Individual fixed annuities 10 13 — 4 (6)
Individual variable annuities 59 15 — 24 (79)
Total 10% 21% —% 10% (10)%
Life insurance 1% 22% —% 8% 33%
Personal accident 10 12 — 12 13
Group products 16 6 — 16 40
Individual fixed annuities 11 17 7 16 46
Individual variable annuities 56 (30) — (19) 46
Total 5% 12% —% 8% 30%
(a) Includes the effect of an out of period UCITS adjustment in 2006, which increased net investment income by $237 million and operating income by
$166 million.
AIG transacts business in most major foreign currencies and considerations for the years ended December 31, 2007 and
therefore premiums and other considerations reported in 2006:
U.S. dollars vary by volume and from changes in foreign currency
2007 2006
translation rates. The following table summarizes the effect of
Growth in original currency* 7.6% 6.5%changes in foreign currency exchange rates on the growth of the
Foreign exchange effect 2.5 (2.0)Foreign Life Insurance & Retirement Services premiums and other
Growth as reported in U.S. dollars 10.1% 4.5%
* Computed using a constant exchange rate each period.
AIG 2007 Form 10-K 65

Japan and Other Results
Japan and Other results on a sub-product basis for 2007, 2006 and 2005 were as follows:
2007
Life insurance $ 4,999 $2,113 $ (92) $ 7,020 $1,193
Group products 2,318 626 1 2,945 250
Individual variable annuities 459 980 (21) 1,418 30
Total $12,387 $6,083 $(294) $18,176 $3,044
2006
Life insurance (a)
$ 4,783 $1,749 $ 316 $ 6,848 $1,731
Personal accident 3,957 162 49 4,168 1,122
Group products 1,740 541 13 2,294 272
Individual variable annuities 289 857 — 1,146 143
Total $11,106 $5,239 $ 406 $16,751 $3,821
2005
Life insurance $ 4,864 $1,828 $ (52) $ 6,640 $1,288
Group products 1,473 535 (34) 1,974 191
Individual variable annuities 186 1,234 — 1,420 100
Total $10,603 $5,406 $ (72) $15,937 $3,020
Life insurance 5% 21% —% 3% (31)%
Personal accident 7 26 — 6 (5)
Group products 33 16 (92) 28 (8)
Individual fixed annuities 15 12 — 3 (10)
Individual variable annuities 59 14 — 24 (79)
Total 12% 16% —% 9% (20)%
Life insurance (2)% (4)% —% 3% 34%
Group products 18 1 — 16 42
Individual fixed annuities 15 15 (3) 15 42
Individual variable annuities 55 (31) — (19) 43
Total 5% (3)% —% 5% 27%
(a) Includes the effect of an out of period UCITS adjustment in 2006, which increased both net investment income and operating income by $29 million.
2007 and 2006 Comparison estimates, trading account losses of $150 million in the U.K.
associated with certain investment-linked products, $67 million of
Total revenues for Japan and Other in 2007 increased compared
additional claim expense related to the industry wide regulatory
to 2006, primarily due to higher premiums and other considera-
review of claims in Japan and increased incurred policyholder
tions and net investment income partially offset by net realized
benefits of $36 million related to a closed block of Japanese
capital losses. Net investment income increased in 2007 com-
business with guaranteed benefits. These decreases were partially
pared to 2006 due to higher levels of assets under management
offset by the positive effect of foreign exchange rates.
and higher policyholder trading gains partially offset by lower
Life insurance premiums and other considerations increased
partnership and mutual fund income. Operating income decreased
moderately in 2007 compared to 2006. In Japan, single premium
in 2007 compared to 2006 due principally to net realized capital
sales of U.S. dollar denominated interest sensitive whole life
losses, a $187 million charge related to changes in actuarial
66 AIG 2007 Form 10-K

products remained strong. First year premium sales declined, surrender charges from U.S. dollar products in Japan where a
however, due to the suspension in April 2007 of increasing term weak Japanese Yen makes it attractive for certain policyholders to
products pending completion of an industry wide review by the lock-in foreign exchange gains in excess of surrender charges.
National Tax Authority. Although the review was completed with the Surrender charges were $151 million and $98 million in 2007
issue of a draft paper for comment in December 2007, the and 2006, respectively. Net investment income increased due to
product remains suspended pending finalization of the report. In higher average investment yields and higher levels of assets
Europe, growth in premiums and other considerations was driven under management. Operating income declined in 2007 compared
by the growing block of U.K. single premium investment-oriented to 2006 due to realized capital losses in 2007 versus realized
products and the positive effect of foreign exchange rates. The capital gains in 2006.
growth in net investment income was due to growth in underlying Individual variable annuity deposits in 2007 declined compared
invested assets and higher partnership income. Life insurance to 2006 due to the effect of tax law changes in Europe that
operating income declined in 2007 compared to 2006 due to net reduced tax benefits to policyholders, and lower sales in Japan
realized capital losses, compared to net realized capital gains in due to increased competition and the introduction of a new law
2006. In addition, 2007 operating income was negatively affected that increased sales compliance and customer suitability require-
by a $115 million charge related to changes in actuarial ments. Variable annuity sales in Japan began to improve in the
estimates, higher incurred policyholder benefits of $36 million fourth quarter of 2007 as a new product, launched mid-year in
related to a closed block of Japanese business with guaranteed 2007, gained acceptance and banks became more comfortable
benefits and $23 million of additional claim expense related to with the new law. The fees generated from the higher levels of
the claims review in Japan. Operating income in 2006 included assets under management increased premiums and other consid-
the effect of an out of period UCITS adjustment, which increased erations in 2007 compared to 2006. Net investment income
both net investment income and operating income by $29 million. increased due to higher policyholder trading gains in 2007
Personal accident premiums and other considerations grew compared to 2006. Operating income declined in 2007 compared
modestly as strong growth in Europe was offset by lower growth in to 2006 primarily due to $150 million of trading account losses
Japan, particularly from the direct marketing distribution channel. on certain investment-linked products in the U.K. and net realized
Net investment income increased in 2007 compared to 2006 capital losses.
primarily due to growth in invested assets. Operating income
declined in 2007 compared to 2006 due to a net realized capital 2006 and 2005 Comparison
loss, a $42 million charge related to changes in actuarial
Total revenues for Japan and Other increased in 2006 compared
estimates, $42 million of additional claim expense related to the
to 2005. Premiums and other considerations growth rates were
claims review in Japan and $20 million of additional expenses
dampened by the effect of foreign exchange, most notably by the
related to SOP 05-1.
weakening of the Japanese Yen. Net investment income in 2006
Group products premiums and other considerations in 2007
declined compared to 2005 due to lower policyholder trading
increased significantly compared to 2006 primarily due to the
gains in the individual variable annuity line. Total revenues in
growing credit business in Europe. Net investment income
2006 increased compared to 2005 due to realized capital gains
increased in 2007 compared to 2006, primarily due to higher
relating primarily to derivative instruments for transactions that did
assets under management related to the Brazil pension business.
not qualify for hedge accounting treatment under FAS 133.
Operating income in 2007 declined compared to 2006 primarily
Operating income in 2006 increased compared to 2005 due to
due to $19 million of additional expenses related to SOP 05-1
growth in the underlying retirement services businesses and
and lower net realized capital gains.
realized capital gains of $406 million. Operating income in 2006
Individual fixed annuity deposits improved in 2007 primarily
included the effect of an out of period UCITS adjustment which
due to sales in the U.K. and were partially offset by declining
increased net investment income and operating income by
sales in Japan due to the effect of a weak Japanese Yen for most
$32 million. Operating income in 2006 was negatively affected by
of the year as well as the market shift to variable annuity
the weakening of the Japanese Yen against the U.S. dollar and
products. Assets under management, however, continued to grow.
the continued runoff of the older, higher margin in-force busi-
Individual fixed annuities premiums and other considerations
nesses of AIG Star Life and AIG Edison Life.
growth reflects a shift to front-end load products and higher
AIG 2007 Form 10-K 67

Asia Results
Asia results on a sub-product basis for 2007, 2006 and 2005 were as follows:
Premiums Net Net Realized Operating
and Other Investment Capital Gains Total Income
(in millions) Considerations Income (Losses) Revenues (Loss)
2007
Life insurance $ 11,631 $5,360 $ 177 $17,168 $ 2,705
Personal accident 1,869 150 (2) 2,017 386
Group products 661 127 (77) 711 13
Individual variable annuities 1 6 (1) 6 1
Total $ 14,214 $5,766 $ 107 $20,087 $ 3,153
2006
Life insurance(a)
$ 10,949 $4,188 $ 258 $15,395 $ 2,516
Personal accident 1,561 123 6 1,690 337
Group products 486 107 34 627 178
Individual variable annuities 1 4 — 5 2
Total $ 13,060 $4,519 $ 301 $17,880 $ 3,060
2005
Life insurance $ 10,779 $3,056 $ 146 $13,981 $ 1,907
Personal accident 1,214 118 (15) 1,317 241
Group products 452 78 25 555 131
Individual fixed annuities 69 56 — 125 8
Individual variable annuities — 4 — 4 (1)
Total $ 12,514 $3,312 $ 156 $15,982 $ 2,286
Life insurance 6% 28% (31)% 12% 8%
Group products 36 19 — 13 (93)
Individual fixed annuities (17) 27 233 13 78
Individual variable annuities — 50 — 20 (50)
Total 9% 28% (64)% 12% 3%
Life insurance 2% 37% 77% 10% 32%
Group products 8 37 36 13 36
Individual fixed annuities (9) 73 — 30 238
Individual variable annuities — — — 25 —
Total 4% 36% 93% 12% 34%
(a) Includes the effect of an out of period UCITS adjustment in 2006, which increased net investment income and operating income by $208 million and
$137 million, respectively.
2007 and 2006 Comparison income grew due to higher policyholder trading gains, higher
partnership and unit investment trust income and growth in
Total revenues in Asia in 2007 increased compared to 2006
underlying invested assets. Net realized capital gains in 2007
primarily due to higher premiums and other considerations and
were lower compared to 2006 due to an increase in other-than-
net investment income, partially offset by lower net realized
temporary impairment charges and the change in fair value of
capital gains. Premiums and other considerations increased in
derivatives that do not qualify for hedge accounting treatment
2007 compared to 2006, notwithstanding a continued trend
under FAS 133, partially offset by a positive out-of-period
toward investment-oriented products where only a portion of policy
adjustment of $158 million related to foreign exchange remedia-
charges are reported as premiums. Sales of investment-oriented
tion activities. Operating income in 2007 increased compared to
life products have been particularly strong in Hong Kong, Korea
2006. Operating income in 2007 included a $370 million positive
and Singapore and more recently in Taiwan. Net investment
effect of changes in actuarial estimates along with higher
68 AIG 2007 Form 10-K

partnership and UCITS income, partially offset by lower net and sales. However, operating income declined in 2007 compared
realized capital gains and a $118 million charge related to to 2006, primarily due to net realized capital losses resulting from
remediation activity. Operating income in 2006 included an other-than-temporary impairment charges, a $29 million charge
increase of $137 million from an out of period adjustment related related to remediation activity and higher DAC amortization
to UCITS. In addition, operating income in 2006 included the expense.
positive effect of out of period reductions in participating Individual fixed annuities total revenues grew in 2007 com-
policyholder dividend reserves of $163 million, primarily as a pared to 2006 due primarily to higher net investment income and
result of tax remediation adjustments and a correction to expense increased net realized capital gains. Deposits in 2007 declined
allocations between participating and non-participating accounts. compared to 2006 due to increased competition and a market
Life insurance premiums and other considerations in 2007 shift to variable life products, particularly in Korea.
reflected a moderate increase compared to 2006, benefiting from
improved sales in Thailand and the favorable effect of foreign 2006 and 2005 Comparison
exchange rates, partially offset by the shift in product mix from
Revenues for Asia grew in 2006 compared to 2005. Premiums
traditional life insurance products to investment-oriented products.
and other considerations in 2006 were negatively affected by the
Net investment income grew in 2007 compared to 2006 due
trend towards investment-oriented products as only a portion of
primarily to higher policyholder trading gains, the growth in the
the policy charges collected are reported as premiums. Net
underlying invested assets and higher partnership income. Operat-
investment income in 2006 grew compared to 2005 due to higher
ing income increased in 2007 compared to 2006 due to a
policyholder trading gains. Net realized capital gains were signifi-
$322 million positive effect of changes in actuarial estimates,
cantly higher in 2006 compared to 2005 relating primarily to
partially offset by an $86 million charge related to remediation
derivative instruments for transactions that do not qualify for
activity. Operating income in 2006 included the effect of the out
hedge accounting treatment under FAS 133. Revenues and
of period UCITS adjustment and reduction in participating policy-
operating income in 2006 included increases of $208 million and
holder dividend reserves discussed above.
$137 million, respectively, from out of period adjustments related
Personal accident revenues grew in 2007 compared to 2006
to UCITS. In addition, operating income in 2006 increased due to
primarily due to higher premiums and other considerations,
a $163 million out of period adjustment related to participating
particularly in Korea and Taiwan. Operating income reflects the
policyholder dividend reserves primarily as a result of tax
combined effect of premium growth and stable loss ratios and a
remediation adjustments and a correction to expense allocations
$51 million positive effect related to changes in actuarial
between participating and non-participating accounts.
estimates in 2007.
Group products premiums and other considerations grew in
2007 compared to 2006 due to higher pension management fees
Domestic Life Insurance Results
Domestic Life Insurance results, presented on a sub-product basis for 2007, 2006 and 2005, were as follows:
Premiums and Net Net Realized Operating
Other Investment Capital Gains Total Income
2007
Life insurance $ 2,352 $1,528 $ (584) $ 3,296 $226
Home service 767 640 (100) 1,307 216
Group life/health 842 200 (16) 1,026 67
Payout annuities(a)
1,820 1,153 (67) 2,906 74
Individual fixed and runoff annuities 55 474 (36) 493 59
Total $ 5,836 $3,995 $ (803) $ 9,028 $642
2006
Life insurance $ 2,127 $1,377 $ (83) $ 3,421 $654
Home service 790 630 (38) 1,382 282
Group life/health 995 213 (8) 1,200 (159)
Payout annuities(a)
1,582 1,004 (51) 2,535 76
Total $ 5,543 $3,778 $ (215) $ 9,106 $917
AIG 2007 Form 10-K 69

Premiums and Net Net Realized Operating
Other Investment Capital Gains Total Income
2005
Life insurance $ 2,041 $1,352 $ 98 $ 3,491 $ 874
Home service 801 605 (2) 1,404 282
Group life/health 1,079 201 (1) 1,279 69
Payout annuities(a)
1,473 912 (34) 2,351 128
Total $ 5,447 $3,733 $ 35 $ 9,215 $ 1,495
Life insurance 11% 11% —% (4)% (65)%
Home service (3) 2 — (5) (23)
Group life/health (15) (6) — (15) —
Payout annuities 15 15 — 15 (3)
Individual fixed and runoff annuities 12 (14) — (13) (8)
Total 5% 6% —% (1)% (30)%
Life insurance 4% 2% —% (2)% (25)%
Home service (1) 4 — (2) —
Group life/health (8) 6 — (6) —
Payout annuities 7 10 — 8 (41)
Individual fixed and runoff annuities (8) (16) — (18) (55)
Total 2% 1% —% (1)% (39)%
(a) Premiums and other considerations include structured settlements, single premium immediate annuities and terminal funding annuities.
2007 and 2006 Comparison benefits due to additional reinsurance recoveries associated with
Superior National.
Total Domestic Life Insurance revenues in 2007 decreased
Life insurance premiums and other considerations increased in
compared to 2006 primarily due to higher net realized capital
2007 compared to 2006 driven by growth in life insurance
losses, partially offset by higher premiums and other considera-
business in force and increased policyholder charges related to
tions and net investment income. Domestic Life Insurance
universal life and whole life products. Net investment income in
premiums and other considerations increased in 2007 compared
2007 compared to 2006 increased due to higher partnership
to 2006 primarily due to the growth in life insurance business in
income, higher call and tender income and positive changes from
force and payout annuity premiums, which were partially offset by
foreign denominated emerging market bonds. Life insurance
a decline in group life/health premiums due to exiting the financial
operating income decreased in 2007 compared to 2006 primarily
institutions credit life business at the end of 2006. Domestic Life
due to higher net realized capital losses and higher mortality in
Insurance operating income decreased in 2007 compared to
2007, although mortality is still within expected ranges. In
2006, primarily due to higher net realized capital losses which
addition, operating income in 2007 included a $25 million
consisted of losses related to sales of securities, other-than-
increase in reserves related to changes in actuarial estimates and
temporary impairment writedowns of fixed income securities as
an $11 million increase in DAC amortization related to SOP 05-1.
well as derivative losses. The higher net realized capital losses in
Home service premiums and other considerations declined in
2007 were partially offset by increases in premiums and other
2007 compared to 2006 as the reduction in premiums in force
considerations and net investment income, and an improvement
from normal lapses and maturities exceeded sales growth. Net
in group life/health results compared to 2006, which included a
investment income in 2007 increased slightly compared to 2006
$125 million charge related to the Superior National workers
due to higher partnership income and positive changes from
compensation arbitration, a $66 million loss related to the exit
foreign denominated emerging market bonds. Home service
from the financial institutions credit life business and a $55 mil-
operating income decreased largely due to higher net realized
lion charge related to litigation reserves. Changes in actuarial
capital losses and an $11 million increase in DAC amortization
estimates, including DAC unlockings and refinements in estimates
related to SOP 05-1, partially offset by continued improvement in
resulting from actuarial valuation system enhancements, resulted
profit margins.
in a net decrease in operating income of $52 million in 2007.
Group life/health premiums and other considerations in 2007
Operating income in 2007 was also negatively affected by a
declined compared to 2006, primarily due to the exit from the
$67 million increase in DAC amortization related to SOP 05-1,
financial institutions credit life business at the end of 2006 and
which was partially offset by a $52 million decrease in policy
tightened pricing and underwriting in the group employer product
70 AIG 2007 Form 10-K

lines. Group life/health operating income increased in 2007 $30 million of increased amortization due to DAC unlocking to
compared to 2006. Operating income in 2007 included a reflect lower in-force amounts.
$52 million decrease in policy benefits from additional reinsurance
recoveries associated with Superior National, offset by an in- 2006 and 2005 Comparison
crease of $45 million in DAC amortization related to SOP 05-1.
Premiums and other considerations for Domestic Life Insurance
The operating loss in 2006 included a $125 million charge
increased in 2006 compared to 2005 and were primarily driven by
resulting from the loss of the Superior National arbitration, a
growth in the life insurance business in-force and payout annuity
$66 million loss related to exiting the financial institutions credit
premiums, partially offset by declining in-force business in the
business and a $25 million charge for litigation reserves.
home service and group life/health lines. Domestic Life Insurance
Payout annuities premiums and other considerations increased
operating income declined in 2006 compared to 2005 due to net
in 2007 compared to 2006 reflecting increased sales of struc-
realized capital losses and several significant transactions de-
tured settlements and terminal funding annuities. Net investment
scribed below in 2006, partially offset by continued growth in life
income increased in 2007 reflecting growth in insurance reserves
insurance and payout annuity business. Operating income in 2006
and an increase in call and tender income on fixed income
included a $125 million charge resulting from the loss of the
securities. Payout annuities operating income decreased slightly in
Superior National arbitration and a $66 million loss related to
2007 as growth in the business was more than offset by higher
exiting the financial institutions credit business both within the
net realized capital losses and by a $30 million out of period
group life/health business. In addition, Domestic Life Insurance
adjustment to increase group annuity reserves for payout annui-
operating income was negatively affected by $55 million in
ties. Operating income in 2006 included a $24 million increase in
litigation accruals, an increase in reserves of $24 million related
reserves as various methodologies and assumptions were en-
to various methodologies and assumptions which were enhanced
hanced for payout annuity reserves.
in the payout annuity business and a DAC unlocking charge of
Individual fixed and runoff annuities net investment income and
$30 million in the individual fixed and runoff annuities line to
operating income decreased in 2007 compared to 2006 reflecting
reflect lower in-force amounts.
declining insurance reserves. Operating income in 2006 included
The following table reflects Domestic Life Insurance periodic premium sales by product for 2007, 2006 and 2005:
(in millions) 2007 2006 2005 2007 vs. 2006 2006 vs. 2005
Periodic Premium Sales By Product*:
Universal life $230 $334 $271 (31)% 23%
Variable universal life 55 56 44 (2) 27
Term life 219 240 229 (9) 5
Whole life/other 9 13 10 (31) 30
Total $513 $643 $554 (20)% 16%
* Periodic premium represents premium from new business expected to be collected over a one-year period.
2007 and 2006 Comparison 2006 and 2005 Comparison
Domestic Life Insurance periodic premium sales declined in Domestic Life Insurance periodic premium sales increased in
2007 compared to 2006 primarily as a result of the repricing of 2006 compared to 2005 primarily reflecting growth in the
certain universal life and term products and the tightening of independent distribution platform. During the second half of 2006,
underwriting standards during the second half of 2006. In the certain universal life products were re-priced and underwriting
second half of 2007, AIG experienced positive sales growth in standards were tightened.
indexed universal life products and the sale of a large private
placement variable universal life case.
AIG 2007 Form 10-K 71

Domestic Retirement Services Results
Domestic Retirement Services results, presented on a sub-product basis for 2007, 2006 and 2005 were as follows:
2007
Group retirement products $ 446 $2,280 $ (451) $ 2,275 $ 696
Individual variable annuities 627 166 (45) 748 122
Individual annuities — runoff* 21 387 (83) 325 (1)
Total $ 1,190 $6,497 $ (1,408) $ 6,279 $ 1,347
2006
Group retirement products $ 386 $2,279 $ (144) $ 2,521 $ 1,017
Individual fixed annuities 122 3,581 (257) 3,446 1,036
Individual variable annuities 531 202 5 738 193
Individual annuities — runoff* 18 426 (8) 436 77
Total $ 1,057 $6,488 $ (404) $ 7,141 $ 2,323
2005
Group retirement products $ 351 $2,233 $ (67) $ 2,517 $ 1,055
Individual variable annuities 467 217 4 688 189
Individual annuities — runoff* 22 430 — 452 62
Total $ 937 $6,226 $ (277) $ 6,886 $ 2,164
Group retirement products 16% —% —% (10)% (32)%
Individual fixed annuities (21) 2 — (15) (49)
Individual variable annuities 18 (18) — 1 (37)
Individual annuities — runoff 17 (9) — (25) —
Total 13% —% —% (12)% (42)%
Group retirement products 10% 2% —% —% (4)%
Individual fixed annuities 26 7 — 7 21
Individual variable annuities 14 (7) 25 7 2
Individual annuities — runoff (18) (1) — (4) 24
Total 13% 4% —% 4% 7%
* Primarily represents runoff annuity business sold through discontinued distribution relationships.
2007 and 2006 Comparison realized capital losses due to higher other-than-temporary impair-
ment charges and an increase in DAC amortization related to both
Total revenues and operating income for Domestic Retirement
an increase in surrenders and to policy changes adding guaran-
Services declined in 2007 compared to 2006 primarily due to
teed minimum withdrawal benefit riders to existing contracts.
increased net realized capital losses. Net realized capital losses
Operating income was also negatively affected in 2007 by an
for Domestic Retirement Services increased due to higher other-
$18 million adjustment, primarily reflecting changes in actuarial
than-temporary impairment charges of $1.2 billion in 2007
estimates from the conversion to a new valuation system. These
compared to $368 million in 2006 and sales to reposition assets
were partially offset by higher variable annuity fees which resulted
in certain investment portfolios for both group retirement products
from an increase in separate account assets compared to 2006.
and individual fixed annuities, as well as from changes in the
Individual fixed annuities operating income in 2007 decreased
value of certain individual variable annuity product guarantees and
compared to 2006 as a result of net realized capital losses due
related hedges associated with living benefit features. Changes in
to higher other-than-temporary impairment charges partially offset
actuarial estimates, including DAC unlockings and refinements to
by increases in partnership income. The decline in operating
estimates resulting from actuarial valuation system enhance-
income also reflected higher DAC amortization and sales induce-
ments, resulted in a net decrease to operating income of
ment costs related to increased surrenders and a $33 million
$112 million in 2007.
charge reflecting changes in actuarial estimates from the conver-
Group retirement products operating income in 2007 de-
creased compared to 2006 primarily as a result of increased net
72 AIG 2007 Form 10-K

sion to a new valuation system, as well as unlocking future
assumptions and experience updates.
Individual fixed annuitiesIndividual variable annuities operating income decreased in
Balance at beginning of year $ 52,685 $ 53,3312007 compared to 2006 largely due to an increase in DAC
Deposits 5,085 5,331amortization and sales inducement costs related to a $61 million
Surrenders and other withdrawals (7,565) (6,379)adjustment reflecting changes in actuarial estimates. Net realized
Death benefits (1,667) (1,649)capital losses increased due to changes in the value of certain
Net inflows (outflows) (4,147) (2,697)annuity product guarantees and related hedges associated with
Change in fair value of underlyingliving benefit features and higher other-than-temporary impairment
investments, interest credited,charges.
net of fees 1,970 2,051
2006 and 2005 Comparison Balance at end of year $ 50,508 $ 52,685
Individual variable annuitiesTotal Domestic Retirement Services operating income increased in
Balance at beginning of year $ 31,093 $ 28,2672006 compared to 2005 principally due to higher partnership and
Deposits 4,472 4,266yield enhancement income in the individual fixed annuity product
Surrenders and other withdrawals (4,158) (3,894)line. Group retirement products total revenues were flat in 2006
Death benefits (497) (486)as improvements in partnership income and variable annuity fees
Net inflows (outflows) (183) (114)were offset by increased net realized capital losses. The flat
Change in fair value of underlyingrevenues, coupled with higher amortization of deferred acquisition
investments, interest credited,costs related to internal replacements of existing contracts into
net of fees 2,198 2,940new contracts, resulted in a decrease in group retirement
operating income. Individual variable annuity total revenues in- Balance at end of year $ 33,108 $ 31,093
creased in 2006, primarily driven by higher variable annuity fees
Total Domestic Retirement Services
resulting from an increase in assets under management. Partially
Balance at beginning of year $148,135 $140,910
offsetting these higher fees was an increase in DAC amortization Deposits 17,088 16,422
resulting from increased surrender activity in the first half of Surrenders and other withdrawals (18,274) (16,379)
2006. In 2006, the individual annuities-runoff operating income Death benefits (2,426) (2,387)
increased, even though the underlying reserves decreased due to
Net inflows (outflows) (3,612) (2,344)
increased net spreads as a result of higher investment yields
Change in fair value of underlying
partially offset by increased realized capital losses.
investments, interest credited,
net of fees 7,202 9,569The following table presents the account value roll
forward for Domestic Retirement Services by product for Balance at end of year, excluding
2007 and 2006: runoff 151,725 148,135
Individual annuities runoff 5,690 6,326
Balance at end of year $157,415 $154,461
Group retirement products
General and separate accountBalance at beginning of year $64,357 $59,312
reserves and mutual fundsDeposits — annuities 5,898 5,464
General account reserve $ 88,801 $ 92,070Deposits — mutual funds 1,633 1,361
Separate account reserve 60,461 55,988
Total Deposits 7,531 6,825
Total general and separate accountSurrenders and other withdrawals (6,551) (6,106)
reserves 149,262 148,058Death benefits (262) (252)
Group retirement mutual funds 8,153 6,403
Net inflows (outflows) 718 467
Total reserves and mutual funds $157,415 $154,461Change in fair value of underlying
investments, interest credited,
net of fees 3,034 4,578 2007 and 2006 Comparison
Balance at end of year $68,109 $64,357
Domestic Retirement Services deposits increased in 2007 com-
pared to 2006 primarily reflecting higher deposits in group
retirement products and individual variable annuities, partially
offset by a decrease in individual fixed annuities. Group retirement
deposits increased 10 percent in 2007 compared to 2006 as a
result of an increased focus on sales management and acquiring
outside deposits. Mutual funds deposits increased 20 percent
while group annuity deposits increased 8 percent. Over time,
AIG 2007 Form 10-K 73

growth in lower margin mutual fund products relative to annuity Surrender rates increased for individual fixed annuities, while
products will result in a gradual reduction in overall profit margins group retirement surrender rates decreased slightly in 2007
of this business. Individual fixed annuity sales continued to face compared to 2006. Although group retirement surrenders in-
increased competition from bank deposit products and money creased compared to 2006, the surrender rate decreased slightly
market funds offering very competitive short-term rates in the as a result of a 6 percent increase in reserves. The increase in
current yield curve environment, and as a result deposits the surrender rate for individual fixed annuities continues to be
decreased 5 percent in 2007 compared to 2006. Individual driven by a relatively flat yield curve and the general aging of the
variable annuity deposits increased 5 percent in 2007 compared in-force block; however, less than 23 percent of the individual
to 2006 despite the discontinuation of a major bank proprietary fixed annuity reserves as of December 31, 2007 were available
product. for surrender without charge. Individual variable annuities surren-
Domestic Retirement Services surrenders and other withdraw- der rates were slightly lower in 2007 compared to 2006.
als increased in 2007 compared to 2006. The increase primarily An increase in the level of surrenders in any of these
reflects higher surrenders in both group retirement products and businesses or in the individual fixed annuities runoff block could
individual fixed annuities. Group retirement surrenders increased accelerate the amortization of DAC and negatively affect fee
as a result of both normal maturing of the business and higher income earned on assets under management.
large group surrenders in 2007 compared to 2006. Individual Higher surrenders in the group retirement and individual fixed
fixed annuity surrenders and withdrawals increased in 2007 due annuity blocks, offset somewhat by increased deposits in group
to both an increasing number of policies coming out of their retirement, resulted in negative net flows in 2007. The continua-
surrender charge period and increased competition from bank tion of the current interest rate and competitive environment
deposit products. AIG expects this trend to continue into 2008 as would prolong this trend.
a significant amount of business comes out of its surrender
charge period.
The following table presents Domestic Retirement Ser-
vices reserves by surrender charge category and surren-
der rates as of December 31, 2007 and 2006:
Group Individual Individual
2007 Retirement Fixed Variable
(in millions) Products* Annuities Annuities
No surrender charge $49,770 $11,316 $13,014
0% – 2% 3,284 3,534 5,381
Greater than 2% – 4% 3,757 7,310 5,133
Greater than 4% 2,280 24,956 9,492
Non-Surrenderable 865 3,392 88
Total Reserves $59,956 $50,508 $33,108
Surrender rates 9.8% 14.6% 12.8%
Group Individual Individual
2006 Retirement Fixed Variable
(in millions) Products* Annuities Annuities
No surrender charge $42,741 $10,187 $11,467
0% – 2% 6,921 4,503 4,869
Greater than 2% – 4% 4,573 6,422 4,830
Greater than 4% 2,842 28,109 9,836
Non-Surrenderable 877 3,464 91
Total Reserves $57,954 $52,685 $31,093
Surrender rates 9.9% 12.0% 13.3%
* Excludes mutual funds of $8.2 billion and $6.4 billion in 2007 and
2006, respectively.
74 AIG 2007 Form 10-K

Life Insurance & Retirement Services Net Investment Income and Net Realized Capital Gains (Losses)
The following table summarizes the components of net investment income for the years ended December 31, 2007,
2006 and 2005:
(in millions) 2007 2006 2005
Foreign Life Insurance & Retirement Services:
Fixed maturities, including short-term investments $ 7,846 $ 6,820 $6,059
Equity securities 135 80 51
Interest on mortgage and other loans 466 454 447
Partnership income 128 94 57
Unit investment trusts(a)
439 259 4
Other(b)
275 301 357
Total investment income before policyholder income and trading gains 9,289 8,008 6,975
Policyholder investment income and trading gains (c)
2,899 2,017 2,021
Total investment income 12,188 10,025 8,996
Investment expenses 339 267 278
Net investment income $11,849 $ 9,758 $8,718
Domestic Life Insurance:
Equity securities (4) (6) (3)
Partnership income — excluding Synfuels 123 80 135
Partnership loss — Synfuels (101) (107) (143)
Unit investment trusts 3 5 —
Other(b)
77 67 (4)
Policyholder investment income and trading gains(c)
4 — —
Net investment income $ 3,995 $ 3,778 $3,733
Domestic Retirement Services:
Partnership income 572 425 224
Other(b)
42 (18) 60
Net investment income $ 6,497 $ 6,488 $6,226
AIG 2007 Form 10-K 75

(in millions) 2007 2006 2005
Total:
Fixed maturities, including short-term investments $16,750 $15,909 $15,119
Interest on mortgage and other loans 1,423 1,252 1,175
Partnership income — excluding Synfuels 823 599 416
Partnership loss — Synfuels (101) (107) (143)
Unit investment trusts(a)
442 264 4
Other(b)
394 350 413
Policyholder investment income and trading gains(c)
2,903 2,017 2,021
Net investment income(d)
$22,341 $20,024 $18,677
(a) Includes the effect of an out of period UCITS adjustment in 2006, which increased net investment income by $240 million and operating income by
$169 million.
(b) Includes real estate income, income on non-partnership invested assets, securities lending and Foreign Life Insurance & Retirement Services’ equal
share of the results of AIG Credit Card Company (Taiwan).
(c) Relates principally to assets held in various trading securities accounts that do not qualify for separate account treatment under SOP 03-1. These
amounts are principally offset by an equal change included in incurred policy losses and benefits.
(d) Includes call and tender income.
2007 and 2006 Comparison AIG generates income tax credits as a result of investing in
synthetic fuel production (synfuels) related to the partnership
Net investment income increased $2.3 billion, or 12 percent in
income (loss) shown in the above table and records those
2007 compared to 2006 as the invested asset base grew for
benefits separately from segment operating results in its consoli-
fixed maturities, equity securities and mortgage and other loans.
dated provision for income taxes. The amounts of those income
In addition, yield enhancement activity increased compared to
tax credits were $84 million, $127 million and $203 million for
2006. Net investment income from UCITS in 2006 included a
2007, 2006 and 2005, respectively. These tax credits will no
$240 million out of period increase. Policyholder trading gains in-
longer be generated after December 31, 2007. Synfuel production
creased in 2007 compared to 2006 principally due to an increase
has ceased and the investments have been fully written off as of
in assets under management, partially offset by trading account
December 31, 2007.
losses of $150 million on certain investment-linked products in
the U.K. Net investment income for certain operations include
investments in structured notes linked to emerging market
sovereign debt that incorporates both interest rate risk and Net investment income increased 7 percent in 2006 compared to
currency risk. These investments generated income of $45 million 2005 as income from fixed maturities, equity securities and
in 2007 compared to losses of $8 million in 2006. In addition, mortgage and other loans income rose as the underlying invested
period to period comparisons of investment income for some asset base grew. Net investment income in 2006 also included
investment activities, particularly partnership income, are affected the out of period increase relating to UCITS of $240 million.
by yield enhancement activity. See Invested Assets for further
information.
76 AIG 2007 Form 10-K

The following table summarizes net realized capital gains (losses) for Life Insurance & Retirement Services by major
category for the years ended December 31, 2007, 2006 and 2005:
(in millions) 2007 2006 2005
Foreign Life Insurance & Retirement Services:
Sales of fixed maturities $ (187) $(209) $ 191
Sales of equity securities 697 459 281
Other:
Other-than-temporary impairments(a)
(1,026) (81) (39)
Foreign exchange transactions(b)
435 106 40
Derivatives instruments (135) 276 (599)
Other(c)
29 156 210
Total Foreign Life Insurance & Retirement Services $ (187) $ 707 $ 84
Domestic Life Insurance:
Sales of fixed maturities $ (114) $ (33) $ 65
Other:
(585) (192) (119)
Foreign exchange transactions 11 (6) 11
Derivatives instruments (186) 25 65
Other 66 (26) (5)
Total Domestic Life Insurance $ (803) $(215) $ 35
Domestic Retirement Services:
Sales of fixed maturities $ (192) $ 1 $(106)
Other:
(1,187) (368) (267)
Foreign exchange transactions 27 (13) —
Derivatives instruments (60) (33) (12)
Other (25) (22) (7)
Total Domestic Retirement Services $ (1,408) $(404) $(277)
Total:
Other:
(2,798) (641) (425)
Foreign exchange transactions(b)
473 87 51
Derivatives instruments (381) 268 (546)
Other(c)
70 108 198
Total $ (2,398) $ 88 $(158)
(a) See Invested Assets — Other-than-temporary impairments for additional information.
(b) Includes a positive out-of-period adjustment of $158 million in 2007 related to foreign exchange remediation activities.
(c) Includes gains (losses) of $(16) million, $88 million and $109 million in 2007, 2006 and 2005, respectively, allocated to participating policyholders.
2007 and 2006 Comparison U.S. dollar against local currencies, and impairments due, in part,
to the recent volatility in the securities markets. Net realized
Net realized capital gains (losses) include normal portfolio capital losses in the Foreign Life Insurance & Retirement Services
transactions as well as derivative gains (losses) for transactions operations in 2007 included losses of $135 million related to
that did not qualify for hedge accounting treatment under FAS derivatives that did not qualify for hedge accounting treatment
133, foreign exchange gains and losses and other-than-temporary under FAS 133 compared to a gain of $276 million in 2006.
impairments. In 2007, Life Insurance & Retirement Services Derivatives in the Foreign Life Insurance & Retirement Services
operations recorded $2.8 billion of other-than-temporary impair- operations are primarily used to economically hedge cash flows
ment charges compared to $641 million in 2006. For Foreign Life related to U.S. dollar bonds back to the respective currency of the
Insurance & Retirement Services operations, these losses were country, principally in Taiwan, Thailand and Singapore. The
related to both the decline in value of U.S. dollar bonds held in corresponding foreign exchange gain or loss with respect to the
Thailand and Singapore, which reflects the depreciation of the economically hedged bond is deferred in accumulated other
AIG 2007 Form 10-K 77

comprehensive income until the bond is sold or deemed to be Deferred Policy Acquisition Costs and Sales Inducement
other-than-temporarily impaired. Assets
For the Domestic Life Insurance and Domestic Retirement
DAC for Life Insurance & Retirement Services products arises
Services operations, the higher net realized capital losses
from the deferral of costs that vary with, and are directly related
resulted principally from other-than-temporary impairment charges
to, the acquisition of new or renewal business. Policy acquisition
of $1.8 billion in 2007 compared to $560 million in 2006 and
costs for life insurance products are generally deferred and
from the sale of securities in 2007 to reposition assets in certain
amortized over the premium paying period in accordance with
investment portfolios. Net realized capital losses in the Domestic
FAS 60. Policy acquisition costs that relate to universal life and
Life Insurance operations in 2007 included losses of $186 million
investment-type products are deferred and amortized, with interest
related to derivatives that did not qualify for hedge accounting
in relation to the incidence of estimated gross profits to be
treatment under FAS 133 compared to a gain of $25 million in
realized over the estimated lives of the contracts in accordance
2006. Derivatives in the Domestic Life Insurance operations
with FAS 97. Value of Business Acquired (VOBA) is determined at
include affiliated interest rate swaps used to economically hedge
the time of acquisition and is reported on the consolidated
cash flows on bonds and option contracts used to economically
balance sheet with DAC and amortized over the life of the
hedge cash flows on indexed annuity and universal life products.
business, similar to DAC. AIG offers sales inducements to
The corresponding gain or loss with respect to the economically
contract holders (bonus interest) on certain annuity and invest-
hedged bond is deferred in accumulated other comprehensive
ment contracts. Sales inducements are recognized as part of the
income until the bond is sold, matures or deemed to be other-
liability for policyholders contract deposits on the consolidated
than-temporarily impaired. See Invested Assets — Valuation of
balance sheet and are amortized over the life of the contract
Invested Assets — Portfolio Review herein.
similar to DAC. Total deferred acquisition and sales inducement
costs increased $549 million in 2007 compared to 2006 primarily
due to higher production in the Foreign Life Insurance operations
Net realized capital gains (losses) in 2006 improved $246 million partially offset by lower Domestic Life Insurance & Retirement
compared to 2005 primarily due to gains on derivative instru- Services sales. Total amortization expense decreased $328 mil-
ments primarily used to economically hedge cash flows that did lion compared to 2006. Annualized amortization expense levels in
not qualify for hedge accounting treatment under FAS 133 and 2007 and 2006 were approximately 10 percent and 13 percent,
related primarily to the Foreign Life Insurance & Retirement respectively, of the opening DAC balance. The decline in amortiza-
Services operations. tion expense levels relates to changes in actuarial estimates,
which is substantially offset by related adjustments to incurred
policy losses and benefits.
78 AIG 2007 Form 10-K

The following table summarizes the major components of the changes in DAC/Value of Business Acquired (VOBA) and
Sales Inducement Assets (SIA) for 2007 and 2006:
2007 2006
(in millions) DAC/VOBA SIA Total DAC/VOBA SIA Total
Balance at beginning of year $21,153 $ 404 $21,557 $17,638 $ 192 $17,830
Acquisition costs deferred 5,640 241 5,881 4,991 112 5,103
Amortization (charged) or credited to operating income:
Related to net realized capital gains (losses) 117 1 118 5 (3) 2
Related to unlocking future assumptions (17) (2) (19) 102 2 104
All other amortization(a)
(1,979) 11 (1,968) (2,399) (4) (2,403)
Change in unrealized gains (losses) on securities 301 16 317 (132) (6) (138)
Increase due to foreign exchange 831 10 841 948 13 961
Other(b)
129 — 129 — 98 98
Balance at end of year(a)
$26,175 $ 681 $26,856 $21,153 $ 404 $21,557
Domestic Life Insurance
Balance at beginning of year $ 6,006 $ 46 $ 6,052 $ 5,184 $ 31 $ 5,215
Acquisition costs deferred 895 15 910 1,115 18 1,133
Related to net realized capital gains (losses) 13 — 13 23 — 23
Related to unlocking future assumptions 6 (1) 5 (42) (1) (43)
(671) (7) (678) (671) (2) (673)
Change in unrealized gains (losses) on securities 162 — 162 398 — 398
Increase (decrease) due to foreign exchange 85 — 85 (1) — (1)
Other(b)
(64) — (64) — — —
Balance at end of year $ 6,432 $ 53 $ 6,485 $ 6,006 $ 46 $ 6,052
Domestic Retirement Services
Balance at beginning of year $ 5,651 $ 887 $ 6,538 $ 5,284 $ 871 $ 6,155
Acquisition costs deferred 741 201 942 717 231 948
Related to net realized capital gains (losses) 161 41 202 62 19 81
Related to unlocking future assumptions (7) (18) (25) (3) — (3)
(990) (174) (1,164) (789) (143) (932)
Change in unrealized gains (losses) on securities 282 54 336 380 (91) 289
Balance at end of year $ 5,838 $ 991 $ 6,829 $ 5,651 $ 887 $ 6,538
Total Life Insurance & Retirement Services
Balance at beginning of year $32,810 $1,337 $34,147 $28,106 $1,094 $29,200
Acquisition costs deferred 7,276 457 7,733 6,823 361 7,184
Related to net realized capital gains (losses) 291 42 333 90 16 106
Related to unlocking future assumptions (18) (21) (39) 57 1 58
(3,640) (170) (3,810) (3,859) (149) (4,008)
Change in unrealized gains (losses) on securities 745 70 815 646 (97) 549
Increase due to foreign exchange 916 10 926 947 13 960
Other(b)
65 — 65 — 98 98
Balance at end of year $38,445 $1,725 $40,170 $32,810 $1,337 $34,147
(a) In 2007, Foreign Life Insurance & Retirement Services includes lower amortization of $836 million related to changes in actuarial estimates, mostly
offset in incurred policy losses and benefits. Domestic Retirement Services includes a higher amortization of $104 million related to changes in
actuarial estimates.
(b) In 2007, includes $(118) million for the cumulative effect of adoption of SOP 05-1 and $189 million related to balance sheet reclassifications. In
2006, primarily represents a balance sheet reclassification.
Because AIG operates in various global markets, the estimated DAC, VOBA and SIA for insurance-oriented, investment-oriented
gross profits used to amortize DAC, VOBA and sales inducements and retirement services products are reviewed for recoverability,
can be subject to differing market returns and interest rate which involves estimating the future profitability of current busi-
environments in any single period. The combination of market ness. This review involves significant management judgment. If
returns and interest rates may lead to acceleration of amortization actual future profitability is substantially lower than estimated,
in some products and regions and simultaneous deceleration of AIG’s DAC, VOBA and SIA may be subject to an impairment charge
amortization in other products and regions.
AIG 2007 Form 10-K 79

and AIG’s results of operations could be significantly affected in actuarial estimates, including unlockings, resulted in a net
such future periods. increase to operating income of $19 million during 2007.
However, this net increase resulted from a number of items that
had varying effects on the results of operations of certainFuture Policy Benefit Reserves
operating units and lines of business. These adjustments resulted
Periodically, the net benefit reserves (policy benefit reserves less
in an increase of $183 million in operating income for Foreign Life
DAC) established for Life Insurance & Retirement Services
Insurance & Retirement Services and decreases in operating
companies are tested to ensure that, including consideration of
income of $52 million and $112 million for Domestic Life
future expected premium payments, they are adequate to provide
Insurance and Domestic Retirement Services, respectively. In
for future policyholder benefit obligations. The assumptions used
addition, the related adjustments significantly affected both
to perform the tests are current best-estimate assumptions as to
acquisition costs and incurred policy losses and benefits in the
policyholder mortality, morbidity, terminations, company mainte-
Consolidated Statement of Income due to reclassifications be-
nance expenses and invested asset returns. For long duration
tween DAC and future policy benefits reserves.
traditional business, a ‘‘lock-in’’ principle applies, whereby the
assumptions used to calculate the benefit reserves and DAC are
Taiwan
set when a policy is issued and do not change with changes in
actual experience. These assumptions include margins for ad- Beginning in 2000, the yield available on Taiwanese 10-year
verse deviation in the event that actual experience might deviate government bonds dropped from approximately 6 percent to
from these assumptions. For business in-force outside of North 2.6 percent at December 31, 2007. Yields on most other
America, 45 percent of total policyholder benefit liabilities at invested assets have correspondingly dropped over the same
December 31, 2007 resulted from traditional business where the period. Current sales are focused on products such as:
lock-in principle applies. In most foreign locations, various guaran- ( variable separate account products which do not contain
tees are embedded in policies in force that may remain applicable interest rate guarantees,
for many decades into the future. ( participating products which contain very low implied interest
As experience changes over time, the best-estimate assump- rate guarantees, and
tions are updated to reflect the observed changes. Because of the ( accident and health policies and riders.
long-term nature of many of AIG’s liabilities subject to the lock-in
In developing the reserve adequacy analysis for Nan Shan,principle, small changes in certain of the assumptions may cause
several key best estimate assumptions have been made:large changes in the degree of reserve adequacy. In particular,
( Observed historical mortality improvement trends have beenchanges in estimates of future invested asset return assumptions
projected to 2014;have a large effect on the degree of reserve adequacy.
( Morbidity, expense and termination rates have been updated toDuring 2007, Life Insurance & Retirement Services continued
reflect recent experience;its ongoing project to increase standardization of AIG’s actuarial
( Taiwan government bond rates are expected to remain atsystems and processes throughout the world. In particular, there
current levels for 10 years and gradually increase to bestis an initiative within the Domestic Life Insurance & Retirement
estimate assumptions of a market consensus view of long-termServices operations to consolidate the numerous actuarial valua-
interest rate expectations;tion systems onto common platforms. This initiative began in
( Foreign assets are assumed to comprise 35 percent of2006 and will continue into 2008. In the Foreign Life Insurance
invested assets, resulting in a composite long-term investmentoperations, actuarial reserves for certain blocks of business have
assumption of approximately 4.9 percent; andbeen computed outside of the primary actuarial valuation systems
( The currently permitted practice of offsetting positive mortalityand/or used methodologies that approximate amounts that would
experience with negative interest margins, thus eliminating thehave been reported had these blocks of business been included
need for mortality dividends, will continue.in the primary actuarial valuation systems.
During 2007, Life Insurance & Retirement Services completed
Future results of the reserve adequacy tests will involve
various system migrations, implemented more robust models for
significant management judgment as to mortality, morbidity,
certain blocks of business and refined its method of approxima-
expense and termination rates and investment yields. Adverse
tion on any remaining blocks of business. The majority of these
changes in these assumptions could accelerate DAC amortization
actions occurred in the fourth quarter of 2007 and any resulting
and necessitate reserve strengthening.
changes in actuarial estimates were recorded in the fourth
quarter of 2007 results of operations. The above changes in
80 AIG 2007 Form 10-K

Financial Services Operations
AIG’s Financial Services subsidiaries engage in diversified activities including aircraft and equipment leasing, capital markets, consumer
finance and insurance premium finance.
Financial Services Results
Financial Services results were as follows:
(in millions) 2007 2006 2005 2007 vs. 2006 2006 vs. 2005
Revenues:
Aircraft Leasing(a)
$ 4,694 $4,082 $ 3,668 15% 11%
Capital Markets(b)
(9,979) (186) 3,260 — —
Consumer Finance(c)
3,655 3,587 3,563 2 1
Other, including intercompany adjustments 321 294 186 9 58
Total $ (1,309) $7,777 $10,677 —% (27)%
Operating income (loss):
Aircraft Leasing(a)
$ 873 $ 578 $ 769 51% (25)%
Capital Markets(b)
(10,557) (873) 2,661 — —
Consumer Finance(c)
171 668 922 (74) (28)
Other, including intercompany adjustments (2) 10 72 — (86)
Total $ (9,515) $ 383 $ 4,424 —% (91)%
(a) Both revenues and operating income include gains (losses) from hedging activities that did not qualify for hedge accounting treatment under FAS 133,
including the related foreign exchange gains and losses. In 2007, 2006 and 2005, the effect was $(37) million, $(73) million and $93 million,
respectively. These amounts result primarily from interest rate and foreign currency derivatives that are effective economic hedges of borrowings. In the
second quarter of 2007, ILFC began applying hedge accounting to most of its derivatives hedging interest rate and foreign exchange risks associated
with its floating rate and foreign currency denominated borrowings.
(b) Revenues, shown net of interest expense of $4.6 billion, $3.2 billion and $3.0 billion in 2007, 2006 and 2005, respectively, were primarily from
hedged financial positions entered into in connection with counterparty transactions. Both revenues and operating income include gains (losses) from
hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. In 2007,
2006 and 2005, the effect was $211 million, $(1.8) billion and $2.0 billion, respectively. The year ended December 31, 2007 includes a $380 million
out of period charge to reverse net gains recognized on transfers of available for sale securities among legal entities consolidated within AIGFP. The
year ended December 31, 2006 includes an out of period charge of $223 million related to the remediation of the material weakness in internal
control over the accounting for certain derivative transactions under FAS 133. In the first quarter of 2007, AIGFP began applying hedge accounting for
certain of its interest rate swaps and foreign currency forward contracts hedging its investments and borrowings. In 2007, both revenues and operating
income (loss) include an unrealized market valuation loss of $11.5 billion on AIGFP’s super senior credit default swap portfolio and an other-than-
temporary impairment charge of $643 million on AIGFP’s available for sale investment securities recorded in other income.
(c) Both revenues and operating income include gains (losses) from hedging activities that did not qualify for hedge accounting treatment under FAS 133,
second quarter of 2007, AGF began applying hedge accounting to most of its derivatives hedging interest rate and foreign exchange risks associated
with its floating rate and foreign currency denominated borrowings. In 2007, includes a pre-tax charge of $178 million in connection with domestic
consumer finance’s mortgage banking activities.
2007 and 2006 Comparison In 2007, AIGFP began applying hedge accounting under
FAS 133 to certain of its interest rate swaps and foreign currency
Financial Services reported an operating loss in 2007 compared
forward contracts that hedge its investments and borrowings and
to operating income in 2006 primarily due to an unrealized market
AGF and ILFC began applying hedge accounting to most of their
valuation loss of $11.5 billion on AIGFP’s super senior credit
derivatives that hedge floating rate and foreign currency denomi-
default swap portfolio, an other-than-temporary impairment charge
nated borrowings. Prior to 2007, hedge accounting was not
on AIGFP’s available for sale investment securities recorded in
applied to any of AIG’s derivatives and related assets and
other income, and a decline in operating income for AGF. AGF’s
liabilities. Accordingly, revenues and operating income were
operating income declined in 2007 compared to 2006, due to
exposed to volatility resulting from differences in the timing of
reduced residential mortgage origination volumes, lower revenues
revenue recognition between the derivatives and the hedged
from its mortgage banking activities and increases in the
assets and liabilities.
provision for finance receivable losses. In 2007, AGF’s mortgage
The year ended December 31, 2007 included an out of period
banking operations also recorded a pre-tax charge of $178 mil-
charge of $380 million to reverse net gains recognized on
lion, representing the estimated cost of implementing the Supervi-
transfers of available for sale securities among legal entities
sory Agreement entered into with the OTS.
consolidated within AIGFP. The year ended December 31, 2006
ILFC generated strong operating income growth in 2007
included out of period charges of $223 million related to the
compared to 2006, driven to a large extent by a larger aircraft
remediation of the material weakness in internal control over
fleet, higher lease rates and higher utilization.
accounting for certain derivative transactions under FAS 133.
AIG 2007 Form 10-K 81

In order to better align financial reporting with the manner in Flight equipment marketing revenues decreased by $40 million
which AIG’s chief operating decision makers manage their busi- compared to 2006 due to fewer aircraft sales. Depreciation
nesses, beginning in 2007, net realized capital gains and losses, expense increased by $166 million, or 11 percent, in line with the
including derivative gains and losses and foreign exchange increase in the size of the aircraft fleet. Interest expense
transaction gains and losses for Financial Services entities other increased by $176 million, or 12 percent, driven by additional
than AIGFP, which were historically reported as a component of borrowings to fund aircraft purchases and the rising cost of funds.
AIG’s Other category, are now reported in Financial Services In 2007 and 2006, the losses from hedging activities that did not
revenues and operating income. Prior period amounts have been qualify for hedge accounting treatment under FAS 133, including
revised to conform to the current presentation. the related foreign exchange gains and losses, were $37 million
and $73 million, respectively, in both revenues and operating
income. During 2006, ILFC recorded charges to income related to2006 and 2005 Comparison
a tax settlement in Australia, increased credit reserves and
Financial Services operating income decreased in 2006 compared
increased lease accruals, all of which totaled $37 million.
to 2005, due primarily to the effect of hedging activities that did
not qualify for hedge accounting treatment under FAS 133.
ILFC’s operating income decreased in 2006 compared to 2005.Aircraft Leasing
Rental revenues increased by $536 million or 16 percent, driven
Aircraft Leasing operations represent the operations of ILFC, which
by a larger aircraft fleet, increased utilization and higher lease
generates its revenues primarily from leasing new and used
rates. During 2006, ILFC’s fleet subject to operating leases
commercial jet aircraft to foreign and domestic airlines. Revenues
increased by 78 airplanes to a total of 824. The increase in rental
also result from the remarketing of commercial aircraft for ILFC’s own
revenues was offset in part by increases in depreciation expense
account, and remarketing and fleet management services for airlines
and interest expense, charges related to bankrupt airlines, as well
and financial institutions. ILFC finances its aircraft purchases
as the settlement of a tax dispute in Australia related to the
primarily through the issuance of debt instruments. ILFC economically
restructuring of ownership of aircraft. Depreciation expense in-
hedges part of its floating rate and substantially all of its foreign
creased by $200 million, or 14 percent, in line with the increase
currency denominated debt using interest rate and foreign currency
in the size of the aircraft fleet. Interest expense increased by
derivatives. Starting in the second quarter of 2007, ILFC began
$317 million, or 28 percent, driven by rising cost of funds, a
applying hedge accounting to most of its derivatives. All of ILFC’s
weaker U.S. dollar against the Euro and the British Pound and
derivatives are effective economic hedges; however, since hedge
additional borrowings funding aircraft purchases. As noted above,
accounting under FAS 133 was not applied prior to April 2, 2007, the
ILFC’s interest expense did not reflect the benefit of hedging
benefits of using derivatives to hedge these exposures are not
these exposures. In 2006 and 2005, the effect from hedging
reflected in ILFC’s 2006 corporate borrowing rate. The composite
activities that did not qualify for hedge accounting treatment under
borrowing rates at December 31, 2007 and 2006 were 5.16 percent
FAS 133, including the related foreign exchange gains and losses,
and 5.17 percent, respectively.
was a $73 million loss and a $93 million gain, respectively, in
both revenues and operating income.
ILFC typically contracts to re-lease aircraft before the end of
the existing lease term. For aircraft returned before the end of the
Capital Markets
lease term, ILFC has generally been able to re-lease such aircraft
Capital Markets represents the operations of AIGFP, whichwithin two to six months of their return. As a lessor, ILFC
engages as principal in a wide variety of financial transactions,considers an aircraft ‘‘idle’’ or ‘‘off lease’’ when the aircraft is not
including standard and customized financial products involvingsubject to a signed lease agreement or signed letter of intent.
commodities, credit, currencies, energy, equities and rates. TheILFC had no aircraft off lease at December 31, 2007, and all new
credit products include credit protection written through creditaircraft scheduled for delivery through 2008 have been leased.
default swaps on super senior risk tranches of diversified pools of
loans and debt securities. AIGFP also invests in a diversifiedAircraft Leasing Results
portfolio of securities and principal investments and engages in
borrowing activities involving the issuance of standard and
structured notes and other securities, and entering into guaran-ILFC’s operating income increased in 2007 compared to 2006.
teed investment agreements (GIAs).Rental revenues increased by $596 million or 15 percent, driven
As Capital Markets is a transaction-oriented operation, currentby a larger aircraft fleet and higher lease rates. As of Decem-
and past revenues and operating results may not provide a basisber 31, 2007, 900 aircraft in ILFC’s fleet were subject to
for predicting future performance. AIG’s Capital Markets opera-operating leases compared to 824 aircraft as of December 31,
tions derive a significant portion of their revenues from hedged2006. During 2007, ILFC realized income of $31 million from the
financial positions entered into in connection with counterpartysale of its rights against bankrupt airlines. The increase in
transactions. AIGFP also participates as a dealer in a wide varietyrevenues was partially offset by reduced flight equipment market-
of financial derivatives transactions. Revenues and operatinging revenues and increases in depreciation and interest expense.
82 AIG 2007 Form 10-K

income of the Capital Markets operations and the percentage The unrealized market valuation losses related to AIGFP’s
change in these amounts for any given period are significantly super senior credit default swap portfolio, the preponderance of
affected by the number, size and profitability of transactions which relates to credit derivatives written on multi-sector CDO
entered into during that period relative to those entered into super senior tranches, were as follows:
during the prior period. Generally, the realization of transaction
Three months ended Year ended
revenues as measured by the receipt of funds is not a significant (in millions) December 31, 2007 December 31, 2007
reporting event as the gain or loss on AIGFP’s trading transactions
Multi-sector CDO $10,894 $11,246
is currently reflected in operating income as the fair values change
Corporate Debt/CLOs 226 226
from period to period.
Total $11,120 $11,472AIGFP’s products generally require sophisticated models and
significant management assumptions to determine fair values and, Included in AIGFP’s net operating loss was a net unrealized
particularly during times of market disruption, the absence of market valuation gain of $401 million on certain credit default
observable market data can result in fair values at any given swaps and embedded credit derivatives in credit-linked notes in
balance sheet date which are not indicative of the ultimate 2007. In these transactions, AIGFP purchased protection at the
settlement values of the products. AAA- to BBB-rated risk layers on portfolios of reference obligations
Beginning in 2007, AIGFP applied hedge accounting under that include multi-sector CDO obligations.
FAS 133 to certain of its interest rate swaps and foreign currency During the fourth quarter of 2007, certain of AIGFP’s available
forward contracts hedging its investments and borrowings. As a for sale investments in super senior and AAA-rated bonds issued
result, AIGFP recognized in earnings the change in the fair value by multi-sector CDOs experienced severe declines in their fair
on the hedged items attributable to the hedged risks substantially value. As a result, AIGFP recorded an other-than-temporary
offsetting the gains and losses on the derivatives designated as impairment charge in other income of $643 million. Notwithstand-
hedges. Prior to 2007, AIGFP did not apply hedge accounting ing AIG’s intent and ability to hold such securities until they
under FAS 133 to any of its derivatives or related assets and recover in value, and despite structures which indicate that a
liabilities. For further information on the effect of FAS 133 on substantial amount of the securities should continue to perform in
AIGFP’s business, see Risk Management — Segment Risk Man- accordance with their original terms, AIG concluded that it could
agement — Financial Services — Capital Markets Derivative Trans- not reasonably assert that the recovery period would be tempo-
actions and Note 8 to Consolidated Financial Statements. rary. See also Invested Assets — Financial Services Invested
Effective January 1, 2008, AIGFP elected to apply the fair Assets and Note 3 to Consolidated Financial Statements.
value option to all eligible assets and liabilities, other than equity The change in fair value of AIGFP’s credit default swaps that
method investments. Electing the fair value option will allow AIGFP reference CDOs and the decline in fair value of its investments in
to more closely align its earnings with the economics of its CDOs were caused by the significant widening in spreads in the
transactions by recognizing the change in fair value on its fourth quarter on asset-backed securities, principally those related
derivatives and the offsetting change in fair value of the assets to U.S. residential mortgages, the severe liquidity crisis affecting
and liabilities being hedged concurrently through earnings. The the structured finance markets and the effects of rating agency
adoption of FAS 159 with respect to elections made by AIGFP is downgrades on those securities. AIG continues to believe that
currently being evaluated for the effect of recently issued draft these unrealized market valuation losses are not indicative of the
guidance by the FASB, anticipated to be issued in final form in losses AIGFP may realize over time on this portfolio. Based upon
early 2008, and its potential effect on AIG’s consolidated financial its most current analyses, AIG believes that any credit impairment
statements. losses realized over time by AIGFP will not be material to AIG’s
consolidated financial condition, although it is possible that such
Capital Markets Results realized losses could be material to AIG’s consolidated results of
operations for an individual reporting period.
In addition, in 2007 AIGFP recognized a net gain of $211 mil-
Capital Markets reported an operating loss in 2007 compared to lion related to hedging activities that did not qualify for hedge
operating income in 2006, primarily due to fourth quarter 2007 accounting treatment under FAS 133, compared to a net loss of
unrealized market valuation losses related to AIGFP’s super senior $1.82 billion in 2006.
credit default swap portfolio principally written on multi-sector The year ended December 31, 2007 included an out of period
CDOs and an other-than-temporary impairment charge on AIGFP’s charge of $380 million to reverse net gains recognized in previous
investment portfolio of CDOs of ABS. These losses were partially periods on transfers of available for sale securities among legal
offset by the effect of applying hedge accounting to certain entities consolidated within AIGFP, and a $166 million reduction in
hedging activities beginning in 2007, as described below, and net fair value at March 31, 2007 of certain derivatives that were an
unrealized market gains related to certain credit default swaps integral part of, and economically hedge, the structured transac-
purchased against the AAA to BBB-rated risk layers on portfolios tions that were potentially affected by the proposed regulations
of reference obligations. AIGFP experienced higher transaction flow issued by the U.S. Treasury Department discussed above in
in 2007 in its rate and currency products which contributed to its Overview of Operations and Business Results — Outlook. The net
revenues. loss on AIGFP’s derivatives recognized in 2006 included an out of
AIG 2007 Form 10-K 83

period charge of $223 million related to the remediation of the Financial market conditions in 2006 were characterized by a
material weakness in internal control over accounting for certain general flattening of interest rate yield curves across fixed income
derivative transactions under FAS 133. The net loss also reflects markets globally, tightening of credit spreads, higher equity
the effect of increases in U.S. interest rates and a weakening of valuations and a weaker U.S. dollar.
the U.S. dollar on derivatives hedging AIGFP’s assets and
liabilities. Consumer Finance
Financial market conditions in 2007 were characterized by
AIG’s Consumer Finance operations in North America are princi-
increases in global interest rates, widening of credit spreads,
pally conducted through AGF. AGF derives a substantial portion of
higher equity valuations and a slightly weaker U.S. dollar.
its revenues from finance charges assessed on outstanding real
The most significant component of Capital Markets operating
estate loans, secured and unsecured non-real estate loans and
expenses is compensation, which was approximately $423 mil-
retail sales finance receivables and credit-related insurance.
lion, $544 million and $481 million in 2007, 2006 and 2005,
AGF’s finance receivables are primarily sourced through its
respectively. The amount of compensation was not affected by
branches, although many of AGF’s real estate loans are sourced
gains and losses arising from derivatives not qualifying for hedge
through its centralized real estate operations, which include AGF’s
accounting treatment under FAS 133. In light of the unrealized
mortgage banking activities. The majority of the real estate loans
market valuation loss related to the AIGFP super senior credit
originated by AGF’s mortgage banking subsidiary are originated
default swap portfolio, to retain and motivate the affected AIGFP
through broker relationships and are sold to investors on a
employees, a special incentive plan relating to 2007 was
servicing-released basis. Beginning in July 2003, AGF’s mortgage
established. Under this plan, certain AIGFP employees were
banking subsidiaries originated and sold loans through a services
granted cash awards vesting over two years and payable in 2013.
arrangement with AIG Federal Savings Bank (AIG Bank), a federally
The expense related to these awards will be recognized ratably
chartered thrift and non-subsidiary of AGF. The services relation-
over the vesting period, beginning in 2008.
ship was terminated in the first quarter of 2006. Since terminat-
AIG elected to early adopt FAS 155, ‘‘Accounting for Certain
ing the services relationship with AIG Bank, AGF’s mortgage
Hybrid Financial Instruments’’ (FAS 155) in 2006. AIGFP elected
banking subsidiaries have originated these non-conforming real
to apply the fair value option permitted by FAS 155 to its
estate loans using their own state licenses.
structured notes and other financial liabilities containing embed-
On June 7, 2007, AIG’s domestic consumer finance opera-
ded derivatives outstanding as of January 1, 2006. The cumula-
tions, consisting of AIG Bank, AGF’s mortgage banking subsidiary
tive effect of the adoption of FAS 155 on these instruments at
Wilmington Finance, Inc. (WFI) and AGF, entered into a Supervi-
January 1, 2006 was a pre-tax loss of $29 million. AIGFP
sory Agreement with the OTS. The Supervisory Agreement per-
recognized a loss of $351 million in 2007 and a loss of
tains to certain mortgage loans originated in the name of AIG
$287 million in 2006 on hybrid financial instruments for which it
Bank from July 2003 through early May 2006 pursuant to the
applied the fair value option under FAS 155. These amounts were
services agreement between WFI and AIG Bank, which was
largely offset by gains and losses on economic hedge positions
terminated in the first quarter of 2006. Pursuant to the terms of
also reflected in AIGFP’s operating income or loss.
the Supervisory Agreement, AIG Bank, WFI and AGF have
implemented a financial remediation program whereby certain
borrowers may be provided loans on more affordable terms
Capital Markets reported an operating loss in 2006 compared to and/or reimbursed for certain fees. Pursuant to the requirements
operating income in 2005. Improved results, primarily from of the Supervisory Agreement, the services of an external
increased transaction flow in AIGFP’s credit, commodity index, consultant have been engaged to monitor, evaluate and periodi-
energy and equity products, were more than offset by the loss cally report to the OTS on compliance with the remediation
resulting from the effect of derivatives not qualifying for hedge program. The Supervisory Agreement will remain in effect until
accounting treatment under FAS 133. This loss was $1.82 billion terminated, modified, or suspended in writing by the OTS. Failure
in 2006 compared to a gain of $2.01 billion in 2005, a decrease to comply with the terms of the Agreement could result in the
of $3.83 billion. A large part of the net loss on AIGFP’s initiation of formal enforcement action by the OTS. Separately, the
derivatives recognized in 2006 was due to the weakening of the domestic consumer finance operations also committed to donate
U.S. dollar, primarily against the British Pound and Euro, resulting $15 million over a three-year period to certain not-for-profit
in a decrease in the fair value of the foreign currency derivatives organizations to support their efforts to promote financial literacy
hedging AIGFP’s available for sale securities. The majority of the and credit counseling.
net gain on AIGFP’s derivatives in 2005 was due to the Management’s best estimate of the cost of implementing the
strengthening of the U.S. dollar, primarily against the British financial remediation plan contemplated by the Supervisory Agree-
Pound and Euro, which increased the fair value of the foreign ment, including the $15 million donation, was $178 million which
currency derivatives hedging available for sale securities. To a was recorded in 2007. The actual cost of implementing the
lesser extent, the net gain in 2005 was due to the decrease in financial remediation plan may differ from this estimate.
long-term U.S. interest rates, which increased the fair value of AIG’s foreign consumer finance operations are principally
derivatives hedging AIGFP’s assets and liabilities. conducted through AIG Consumer Finance Group, Inc. (AIGCFG).
AIGCFG operates primarily in emerging and developing markets.
84 AIG 2007 Form 10-K

AIGCFG has operations in Argentina, China, Hong Kong, Mexico, AGF’s net finance receivables totaled $25.5 billion at Decem-
Philippines, Poland, Taiwan and Thailand and began operations in ber 31, 2007, an increase of approximately $1.2 billion compared
India in 2007 through the acquisition of a majority interest in a to December 31, 2006, including $19.5 billion of real estate
sales finance lending operation and the acquisition of a mortgage secured loans, most of which were underwritten with full income
lending operation. In addition, in 2007, AIGCFG expanded its verification. The increase in the net finance receivables resulted in
distribution channels in Thailand by acquiring an 80 percent a similar increase in revenues generated from these assets.
interest in a company with a network of over 130 branches for Although real estate loan originations declined in 2007, the
secured consumer lending. AIGCFG is continuously exploring softening of home price appreciation (reducing the equity custom-
expansion opportunities in its existing operations as well as new ers may be able to extract from their homes by refinancing)
geographic locations throughout the world. contributed to an increase in non-real estate loans of 11 percent
Certain of the AIGCFG operations are partly or wholly owned by at December 31, 2007 compared to December 31, 2006. Retail
life insurance subsidiaries of AIG. Accordingly, the financial results sales finance receivables also increased 13 percent compared to
of those companies are allocated between Financial Services and December 31, 2006 due to increased marketing efforts and
Life Insurance & Retirement Services according to their ownership customer demand. AGF’s centralized real estate operations fi-
percentages. While products vary by market, the businesses nance receivables were essentially unchanged while branch
generally provide credit cards, unsecured and secured non-real business segment finance receivables increased by 8 percent
estate loans, term deposits, savings accounts, retail sales finance during 2007.
and real estate loans. AIGCFG originates finance receivables AGF’s allowance for finance receivable losses as a percentage
through its branches and direct solicitation. AIGCFG also of outstanding receivables was 2.36 percent at December 31,
originates finance receivables indirectly through relationships with 2007 compared to 2.01 percent at December 31, 2006.
retailers, auto dealers, and independent agents. Revenues from the foreign consumer finance operations in-
creased by 29 percent in 2007 compared to 2006. Loan growth,
particularly in Poland, Thailand and Latin America, was theConsumer Finance Results
primary driver of the increased revenues. The increase in2007 and 2006 Comparison
revenues was more than offset by higher expenses associated
Consumer Finance operating income decreased in 2007 compared with branch expansions, acquisition activities and product promo-
to 2006. Operating income from the domestic consumer finance tion campaigns. Operating income in 2006 reflects AIGCFG’s
operations, which include the operations of AGF and AIG Bank, $47 million share of the allowance for losses related to industry-
decreased by $509 million, or 77 percent, in 2007 compared to wide credit deterioration in the Taiwan credit card market.
2006. In 2007, domestic results were adversely affected by the
weakening housing market and tighter underwriting guidelines, 2006 and 2005 Comparison
which resulted in lower originations of real estate loans as well as
Consumer Finance operating income decreased in 2006 comparedthe $178 million charge discussed above.
to 2005. Operating income from domestic consumer financeAGF’s revenues decreased $95 million or 3 percent during
operations declined by $193 million, or 23 percent as a result of2007 compared to 2006. Revenues from AGF’s mortgage banking
decreased originations and purchases of real estate loans andactivities decreased $389 million during 2007 compared to 2006,
margin compression resulting from increased interest rates andwhich includes the charges relating to the Supervisory Agreement.
flattened yield curves. The foreign operations operating incomeThe decrease in revenues also reflects a significantly reduced
decreased primarily due to the credit deterioration in the Taiwanorigination volume, lower yields based on market conditions,
credit card market.tighter underwriting guidelines, reduced margins on loans sold
Domestically, the U.S. housing market deteriorated throughoutand higher warranty reserves, which cover obligations to repur-
2006 and as a result, the real estate loan portfolio decreasedchase loans sold to third-party investors should there be a first
slightly during 2006 due to lower refinancing activity. This lowerpayment default or breach of representations and warranties.
refinancing activity also caused a significant decrease in origina-AGF’s revenues in 2007 also included a recovery of $65 million
tions and whole loan sales in AGF’s mortgage banking operation,from a favorable out of court settlement.
which resulted in a substantial reduction of revenue and operatingAGF’s operating income decreased in 2007 compared to 2006,
income compared to the prior year. However, softening homedue to reduced residential mortgage origination volumes, lower
prices (reducing the equity customers are able to extract fromrevenues from its mortgage banking activities and increases in
their homes when refinancing) and higher mortgage rates contrib-the provision for finance receivable losses. AGF’s interest expense
uted to customers utilizing non-real estate loans, which increasedincreased by $81 million or seven percent as its borrowing rate
10 percent compared to 2005. Retail sales finance receivablesincreased in 2007 compared to 2006. During 2007, AGF recorded
also increased 23 percent due to increased marketing efforts anda net loss of $28 million on its derivatives that did not qualify for
customer demand. Higher revenue resulting from portfolio growthhedge accounting under FAS 133, including the related foreign
was more than offset by higher interest expense. AGF’s short-exchange losses, compared to a net loss of $89 million in 2006.
term borrowing rates were 5.14 percent in 2006 compared toCommencing in the second quarter of 2007, AGF began applying
3.58 percent in 2005. AGF’s long-term borrowing rates werehedge accounting.
5.05 percent in 2006 compared to 4.41 percent in 2005. During
AIG 2007 Form 10-K 85

2006, AGF recorded a net loss of $89 million on its derivatives allowance for losses related to industrywide credit deterioration in
that did not qualify for hedge accounting under FAS 133, including the Taiwan credit card market, increased cost of funds, and higher
the related foreign exchange losses, compared to a net gain of operating expenses in connection with expansion into new
$69 million in 2005. AGF’s net charge-off ratio improved to markets and distribution channels and new product promotions,
0.95 percent in 2006 from 1.19 percent in 2005. The improve- resulting in lower operating income in 2006 compared to 2005.
ment in the net charge-off ratio in 2006 was primarily due to
positive economic fundamentals. The U.S. economy continued to Asset Management Operations
expand during the year, and the unemployment rate remained low,
AIG’s Asset Management operations comprise a wide variety of
which improved the credit quality of AGF’s portfolio. AGF’s
investment-related services and investment products. Such ser-
delinquency ratio remained relatively low, although it increased to
vices and products are offered to individuals, pension funds and
2.06 percent at December 31, 2006 from 1.93 percent at
institutions (including AIG subsidiaries) globally through AIG’s
December 31, 2005. AGF reduced the hurricane Katrina portion of
Spread-Based Investment business, Institutional Asset Manage-
its allowance for finance receivable losses to $15 million at
ment and Brokerage Services and Mutual Funds businesses. Also
December 31, 2006 after the reevaluation of its remaining
included in Asset Management operations are the results of
estimated losses. AGF’s allowance ratio was 2.01 percent at
certain SunAmerica sponsored partnership investments.
December 31, 2006 compared to 2.20 percent at December 31,
The revenues and operating income for this segment are
2005.
affected by the general conditions in the equity and credit
Revenues from the foreign consumer finance operations in-
markets. In addition, net realized gains and performance fees are
creased by approximately 13 percent in 2006 compared to 2005.
contingent upon various fund closings, maturity levels and market
Loan growth, particularly in Poland and Argentina, was the primary
conditions.
driver behind the higher revenues. Higher revenues were more
than offset, however, by AIGCFG’s $47 million share of the
Asset Management Results
Asset Management results were as follows:
(in millions) 2007 2006 2005 2007 vs. 2006 2006 vs. 2005
Revenues:
Spread-Based Investment business $2,023 $2,713 $2,973 (25)% (9)%
Institutional Asset Management* 2,900 1,240 1,026 134 21
Brokerage Services and Mutual Funds 322 293 257 10 14
Other Asset Management 380 297 326 28 (9)
Total $5,625 $4,543 $4,582 24% (1)%
Operating income:
Spread-Based Investment business $ (89) $ 732 $1,194 —% (39)%
Institutional Asset Management* 784 438 387 79 13
Brokerage Services and Mutual Funds 100 87 66 15 32
Other Asset Management 369 281 316 31 (11)
Total $1,164 $1,538 $1,963 (24)% (22)%
* Includes the effect of consolidating the revenues and operating loss of warehoused investments totaling $778 million and $164 million, respectively, in
2007, a portion of which is offset in minority interest expense.
creases were higher partnership income, increased gains on real2007 and 2006 Comparison
estate investments and a gain on the sale of a portion of AIG’s
Asset Management revenues increased in 2007 compared to
investment in Blackstone Group, L.P. in connection with its initial
2006 primarily due to increased partnership income, management
public offering.
fees, carried interest and the effect of consolidating several
In order to better align financial reporting with the manner in
warehoused investments. AIG consolidates the operating results
of warehoused investments until such time as they are sold or
nesses, beginning in 2007, net realized capital gains and losses,
otherwise divested.
and foreign exchange transaction gains and losses, which were
Asset Management operating income decreased in 2007
previously reported as part of AIG’s Other category, are now
compared to 2006, due to foreign exchange, interest rate and
included in Asset Management revenues and operating income. In
credit-related mark to market losses and other-than-temporary
addition, revenues and operating income related to foreign
impairment charges on fixed income investments. These other-
investment-type contracts, which were historically reported as a
than-temporary impairment charges were due primarily to changes
component of the Spread-Based Investment business, are now
in market liquidity and spreads. Partially offsetting these de-
86 AIG 2007 Form 10-K

reported in the Life Insurance & Retirement Services segment. partnership income associated with the GIC. In addition to other-
Also, commencing in 2007, the effect of consolidating managed than-temporary impairments, unrealized losses on fixed income
partnerships and funds, which were historically reported as a investments were driven by widening credit spreads, partially
component of the Institutional Asset Management business, are offset by gains due to falling interest rates. These unrealized
now reported in the Consolidation and eliminations category. Prior losses are recorded in Accumulated other comprehensive income
period amounts have been revised to conform to the current (loss).
presentation. During 2007, AIG has issued the equivalent of $8.1 billion of
securities to fund the MIP in the Euromarkets and the U.S. public
and private markets compared to $5.3 billion issued in 2006. At2006 and 2005 Comparison
December 31, 2007, total issuances were $13.4 billion.
Asset Management operating income decreased in 2006 compared
The following table illustrates the anticipated runoff of theto 2005 as a decline in Spread-Based Investment operating income
domestic GIC portfolio at December 31, 2007:was partially offset by higher Institutional Asset Management
operating income.
Less Than 1-3 3+
-5 Over Five
(in billions) One Year Years Years Years Total
Spread-Based Investment Business Results
Domestic GICs $9.4 $6.4 $2.7 $6.8 $25.3
2006 and 2005 ComparisonThe Spread-Based Investment business reported an operating
loss in 2007 compared to operating income in 2006 due to Operating income related to the Spread-Based Investment busi-
foreign exchange, interest rate and credit-related mark to market ness declined in 2006 compared to 2005 due primarily to the
losses and other-than-temporary impairment charges on fixed continued runoff of GIC balances and spread compression related
income investments, partially offset by increased partnership to increases in short-term interest rates. A significant portion of
income. In 2007, the GIC program incurred foreign exchange the remaining GIC portfolio consists of floating rate obligations.
losses of $526 million on foreign-denominated GIC reserves. AIG has entered into hedges to manage against increases in
Partially offsetting these losses were $269 million of net mark to short-term interest rates. AIG believes these hedges are economi-
market gains on derivative positions. These net gains included cally effective, but they did not qualify for hedge accounting
mark to market gains on foreign exchange derivatives used to treatment. The decline in operating income was partially offset by
economically hedge the effect of foreign exchange rate move- improved partnership income, particularly during the fourth quar-
ments on foreign-denominated GIC reserves and mark to market ter of 2006.
losses on interest rate hedges that did not qualify for hedge
accounting treatment. Institutional Asset Management Results
The MIP experienced mark to market losses of $193 million
due to interest rate and foreign exchange derivative positions that,
while partially effective in hedging interest rate and foreign Operating income for Institutional Asset Management increased in
exchange risk, did not qualify for hedge accounting treatment and 2007 compared to 2006 reflecting increased carried interest
an additional $98 million due to credit default swap losses. The revenues driven by higher valuations of portfolio investments that
MIP credit default swaps are comprised of single-name high-grade are generally associated with improved performance in the equity
corporate exposures. AIG enters into hedging arrangements to markets. The increase also reflects a $398 million gain from the
mitigate the effect of changes in currency and interest rates sale of a portion of AIG’s investment in Blackstone Group, L.P. in
associated with the fixed and floating rate and foreign currency connection with its initial public offering. Also contributing to this
denominated obligations issued under these programs. Some of increase were higher base management fees driven by higher
these hedging relationships qualify for hedge accounting treat- levels of third-party assets under management. Partially offsetting
ment, while others do not. Commencing in the first quarter of these increases were the operating losses from warehousing
2007, AIG applied hedge accounting to certain derivative transac- activities. The consolidated warehoused private equity investments
tions related to the MIP. Income or loss from these hedges not are not wholly owned by AIG and thus, a significant portion of the
qualifying for hedge accounting treatment are classified as net effect of consolidating these operating losses is offset in minority
realized capital gains (losses) in AIG’s Consolidated Statement of interest, which is not a component of operating income.
Income. The mark to market losses for 2007 were driven primarily AIG’s unaffiliated client assets under management, including
by a decline in short-term interest rates, the decline in the value retail mutual funds and institutional accounts, increased 26
of the U.S. dollar and widening credit spreads. percent to $94.2 billion at December 31, 2007 compared to
Also contributing to the operating loss were other-than-tempo- December 31, 2006. Additionally, AIG Investments successfully
rary impairment charges on various fixed income investments held launched several new private equity and real estate funds in
in the GIC and MIP portfolios of approximately $836 million as a 2007, which provide both a base management fee and the
result of movements in credit spreads and decreased market opportunity for future incentive fees.
liquidity. See Invested Assets — Other-than-temporary impair- While unaffiliated client assets under management and the
ments. These losses were partially offset by an increase in resulting management fees continue to increase, the growth in
AIG 2007 Form 10-K 87

operating income has trailed the growth in revenues due to the from increased borrowings, higher unallocated corporate expenses
additional costs associated with warehousing activities as well as and foreign exchange losses on foreign-denominated debt, a
the costs associated with sales and infrastructure enhancements. portion of which was economically hedged but did not qualify for
The sales and infrastructure enhancements are associated with hedge accounting treatment under FAS 133. In addition, Net
AIG’s planned expansion of marketing and distribution capabilities, realized capital gains (losses) in 2007 included an other-than-
combined with technology and operational infrastructure-related temporary impairment charge of $144 million related to an
improvements. investment in a partially owned company and foreign exchange
losses of $221 million on unhedged debt.
The operating loss in 2006 for AIG’s Other category included2006 and 2005 Comparison
an out of period charge of $61 million related to the SICO Plans
Operating income related to Institutional Asset Management
and a one-time charge related to the Starr tender offer of
increased in 2006 compared to 2005, primarily due to realized
$54 million. For a further discussion of these items, see Note 19
gains on real estate transactions as well as increased manage-
to Consolidated Financial Statements.
ment fees. AIG’s unaffiliated client assets under management,
In 2007, no compensation cost was recognized, and compen-
including both retail mutual funds and institutional accounts,
sation cost recognized in 2006 was reversed, with respect to
increased 21 percent from year-end 2005 to $75 billion, resulting
awards under the Partners Plan because the performance
in higher management fee income. Partially offsetting this growth
threshold was not met. The amounts earned under the AIG
were lower carried interest on private equity investments, and
Partners Plan will be determined by the Compensation Committee
higher expenses related to the planned expansion of marketing
in the first quarter of 2008.
and distribution capabilities, combined with technology and opera-
In order to better align financial reporting with the manner in
tional infrastructure-related enhancements.
nesses, beginning in 2007, derivative gains and losses and
Other Operations foreign exchange transaction gains and losses for Asset Manage-
ment and Financial Services entities (other than AIGFP) are nowThe operating loss of AIG’s Other category for the years
included in Asset Management and Financial Services revenuesended December 31, 2007, 2006 and 2005 was as
and operating income. These amounts were previously reportedfollows:
as part of AIG’s Other category. Prior period amounts have been
revised to conform to the current presentation.(in millions) 2007 2006 2005
Other Operating Income (Loss):
2006 and 2005 ComparisonEquity earnings in partially
owned companies $ 157 $ 193 $ (124)
Operating loss for AIG’s Other category declined in 2006 com-
Interest expense (1,223) (859) (541)
pared to 2005, reflecting the regulatory settlement costs ofUnallocated corporate
$1.6 billion in 2005, as described under Item 3. Legal Proceed-expenses* (560) (517) (413)
Compensation expense — ings, offset by increased interest expense in 2006 as a result of
SICO Plans (39) (108) (205) increased borrowings by the parent holding company and realized
Compensation expense — capital losses of $37 million. These declines were partially offset
Starr tender offer — (54) —
by increased equity earnings in certain partially owned companies.
Net realized capital gains
(losses) (409) (37) 269
Capital Resources and LiquidityRegulatory settlement costs — — (1,644)
Other miscellaneous, net (66) (53) (107)
At December 31, 2007, AIG had total consolidated shareholders’
Total Other $(2,140) $(1,435) $(2,765) equity of $95.8 billion and total consolidated borrowings of
* Includes expenses of corporate staff not attributable to specific $176.0 billion. At that date, $67.9 billion of such borrowings were
business segments, expenses related to efforts to improve internal
subsidiary borrowings not guaranteed by AIG.
controls, corporate initiatives and certain compensation plan expenses.
In 2007, AIG issued an aggregate of $5.6 billion of junior
subordinated debentures in five series of securities. Substantially
all of the proceeds from these sales, net of expenses, are being
The operating loss of AIG’s Other category increased in 2007 used to purchase shares of AIG’s common stock. A total of
compared to 2006 reflecting higher interest expense that resulted 76,361,209 shares were purchased during 2007.
88 AIG 2007 Form 10-K

Borrowings
Total borrowings at December 31, 2007 and 2006 were as follows:
Borrowings issued by AIG:
Notes and bonds payable $ 14,588 $ 8,915
Junior subordinated debt 5,809 —
Loans and mortgages payable 729 841
MIP matched notes and bonds payable 14,267 5,468
Series AIGFP matched notes and bonds payable 874 72
Total AIG borrowings 36,267 15,296
Borrowings guaranteed by AIG:
AIGFP
GIAs 19,908 20,664
Notes and bonds payable 36,676 37,528
Loans and mortgages payable 1,384 —
Hybrid ﬁnancial instrument liabilities(a)
7,479 8,856
Total AIGFP borrowings 65,447 67,048
AIG Funding, Inc. commercial paper 4,222 4,821
AIGLH notes and bonds payable 797 797
Liabilities connected to trust preferred stock 1,435 1,440
Total borrowings issued or guaranteed by AIG 108,168 89,402
Borrowings not guaranteed by AIG:
ILFC
Commercial paper 4,483 2,747
Junior subordinated debt 999 999
Notes and bonds payable(b)
25,737 25,592
Total ILFC borrowings 31,219 29,338
AGF
Commercial paper and extendible commercial notes 3,801 4,662
Junior subordinated debt 349 —
Total AGF borrowings 26,519 23,923
AIGCFG
Commercial paper 287 227
Loans and mortgages payable 1,839 1,453
Total AIGCFG borrowings 2,126 1,680
AIG Finance Taiwan Limited commercial paper — 26
Other subsidiaries 775 672
Borrowings of consolidated investments:
A.I. Credit(c)
321 880
AIG Investments(d)
1,636 193
AIG Global Real Estate Investment(d)
5,096 2,307
AIG SunAmerica 186 203
ALICO 3 55
Total borrowings of consolidated investments 7,242 3,638
Total borrowings not guaranteed by AIG 67,881 59,277
Consolidated:
Total commercial paper and extendible commercial notes $ 13,114 $ 13,363
Total long-term borrowings 162,935 135,316
Total borrowings $176,049 $148,679
(a) Represents structured notes issued by AIGFP that are accounted for using the fair value option.
(b) Includes borrowings under Export Credit Facility of $2.5 billion and $2.7 billion at December 31, 2007 and 2006, respectively.
(c) Represents commercial paper issued by a variable interest entity secured by receivables of A.I. Credit.
(d) In 2007, increases in borrowings compared to 2006 were principally attributable to warehousing activities.
AIG 2007 Form 10-K 89

At December 31, 2007 and 2006, AIG’s net borrowings amounted to $20.3 billion and $15.4 billion, respectively, as
follows:
AIG’s total borrowings $176,049 $148,679
Less:
Junior subordinated debt 5,809 —
Liabilities connected to trust preferred stock 1,435 1,440
MIP matched notes and bonds payable 14,267 5,468
Series AIGFP matched notes and bonds payable 874 72
AIGFP
GIAs 19,908 20,664
Loans and mortgages payable 1,384 —
Hybrid financial instrument liabilities* 7,479 8,856
Borrowings not guaranteed by AIG 67,881 59,277
AIG’s net borrowings $ 20,336 $ 15,374
* Represents structured notes issued by AIGFP that are accounted for at fair value.
A roll forward of long-term borrowings, excluding borrowings of consolidated investments, for the year ended
December 31, 2007 is as follows:
Balance at Maturities Effect of Balance at
December 31, and Foreign Other December 31,
(in millions) 2006 Issuances Repayments Exchange Changes 2007
AIG
Notes and bonds payable $ 8,915 $ 5,591 $ (165) $ 122 $ 125 $ 14,588
Junior subordinated debt — 5,590 — 218 1 5,809
Loans and mortgages payable 841 600 (724) 12 — 729
MIP matched notes and bonds payable 5,468 8,092 — (4) 711 14,267
Series AIGFP matched notes and bonds payable 72 810 (10) — 2 874
AIGFP
GIAs 20,664 8,830 (10,172) 43 543 19,908
Notes and bonds payable and hybrid financial
instrument liabilities 46,384 50,854 (53,540) 321 136 44,155
Loans and mortgages payable — 1,388 (9) 9 (4) 1,384
AIGLH notes and bonds payable 797 — — — — 797
Liabilities connected to trust preferred stock 1,440 — — — (5) 1,435
ILFC notes and bonds payable 25,592 3,783 (3,938) 295 5 25,737
ILFC junior subordinated debt 999 — — — — 999
AGF notes and bonds payable 19,261 7,481 (4,824) 255 196 22,369
AGF junior subordinated debt — 349 — — — 349
AIGCFG loans and mortgages payable 1,453 3,941 (3,647) 98 (6) 1,839
Other subsidiaries 672 189 (189) 3 100 775
Total $132,558 $97,498 $(77,218) $1,372 $1,804 $156,014
under the medium-term note program, of which $3.2 billion wasAIG (Parent Company)
used for AIG’s general corporate purposes, $873 million was used
AIG intends to continue its customary practice of issuing debt
by AIGFP (referred to as ‘‘Series AIGFP’’ in the preceding tables)
securities from time to time to meet its financing needs and those
and $3.2 billion was used to fund the MIP. The maturity dates of
of certain of its subsidiaries for general corporate purposes, as
these notes range from 2008 to 2052. To the extent deemed
well as for the MIP. As of December 31, 2007, AIG had up to
appropriate, AIG may enter into swap transactions to manage its
$17.5 billion of debt securities, preferred stock and other
effective borrowing rates with respect to these notes.
securities, and up to $12.0 billion of common stock, registered
AIG also maintains a Euro medium-term note program under
and available for issuance under its universal shelf registration
which an aggregate nominal amount of up to $20.0 billion of
statement.
senior notes may be outstanding at any one time. As of
AIG maintains a medium-term note program under its shelf
December 31, 2007, the equivalent of $12.7 billion of notes were
registration statement. As of December 31, 2007, approximately
outstanding under the program, of which $9.8 billion were used to
$7.3 billion principal amount of senior notes were outstanding
fund the MIP and the remainder was used for AIG’s general
90 AIG 2007 Form 10-K

corporate purposes. The aggregate amount outstanding includes obligations of AIGFP under AIGFP’s notes and bonds and GIA
$1.1 billion loss resulting from foreign exchange translation into borrowings. See Liquidity herein and Note 8 to Consolidated
U.S. dollars, of which $332 million loss relates to notes issued by Financial Statements.
AIG for general corporate purposes and $726 million loss relates AIGFP has a Euro medium-term note program under which an
to notes issued to fund the MIP. AIG has economically hedged the aggregate nominal amount of up to $20.0 billion of notes may be
currency exposure arising from its foreign currency denominated outstanding at any one time. As of December 31, 2007,
notes. $6.2 billion of notes were outstanding under the program. The
During 2007, AIG issued in Rule 144A offerings an aggregate notes issued under this program are guaranteed by AIG and are
of $3.0 billion principal amount of senior notes, of which included in AIGFP’s notes and bonds payable in the table of total
$650 million was used to fund the MIP and $2.3 billion was used borrowings.
for AIG’s general corporate purposes.
AIG maintains a shelf registration statement in Japan, providing AIG Funding
for the issuance of up to Japanese Yen 300 billion principal
AIG Funding, Inc. (AIG Funding) issues commercial paper that is
amount of senior notes, of which the equivalent of $450 million
guaranteed by AIG in order to help fulfill the short-term cash
was outstanding as of December 31, 2007 and was used for
requirements of AIG and its subsidiaries. The issuance of AIG
AIG’s general corporate purposes. AIG also maintains an Austra-
Funding’s commercial paper, including the guarantee by AIG, is
lian dollar debt program under which senior notes with an
subject to the approval of AIG’s Board of Directors or the Finance
aggregate principal amount of up to 5 billion Australian dollars
Committee of the Board if it exceeds certain pre-approved limits.
may be outstanding at any one time. Although as of Decem-
As backup for the commercial paper program and for other
ber 31, 2007 there were no outstanding notes under the
general corporate purposes, AIG and AIG Funding maintain
Australian program, AIG intends to use the program opportunisti-
revolving credit facilities, which, as of December 31, 2007, had
cally to fund the MIP or for AIG’s general corporate purposes.
an aggregate of $9.3 billion available to be drawn and which are
During 2007, AIG issued an aggregate of $5.6 billion of junior
summarized below under Revolving Credit Facilities.
subordinated debentures in five series of securities. Substantially
all of the proceeds from these sales, net of expenses, are being
ILFCused to repurchase shares of AIG’s common stock. In connection
with each series of junior subordinated debentures, AIG entered ILFC fulfills its short-term cash requirements through operating
into a Replacement Capital Covenant (RCC) for the benefit of the cash flows and the issuance of commercial paper. The issuance
holders of AIG’s 6.25 percent senior notes due 2036. The RCCs of commercial paper is subject to the approval of ILFC’s Board of
provide that AIG will not repay, redeem, or purchase the Directors and is not guaranteed by AIG. ILFC maintains syndicated
applicable series of junior subordinated debentures on or before a revolving credit facilities which, as of December 31, 2007, totaled
specified date, unless AIG has received qualifying proceeds from $6.5 billion and which are summarized below under Revolving
the sale of replacement capital securities. Credit Facilities. These facilities are used as back up for ILFC’s
In October 2007, AIG borrowed a total of $500 million on an maturing debt and other obligations.
unsecured basis pursuant to a loan agreement with a third-party As a well-known seasoned issuer, ILFC has filed an automatic
bank. The entire amount of the loan remained outstanding at shelf registration statement with the SEC allowing ILFC immediate
December 31, 2007 and matures in October 2008. access to the U.S. public debt markets. At December 31, 2007,
AIG began applying hedge accounting for certain AIG parent $4.7 billion of debt securities had been issued under this
transactions in the first quarter of 2007. registration statement and $5.9 billion had been issued under a
prior registration statement. In addition, ILFC has a Euro medium-
AIGFP term note program for $7.0 billion, under which $3.8 billion in
notes were outstanding at December 31, 2007. Notes issued
AIGFP uses the proceeds from the issuance of notes and bonds
under the Euro medium-term note program are included in ILFC
and GIA borrowings, as well as the issuance of Series AIGFP
notes and bonds payable in the preceding table of borrowings.
notes by AIG, to invest in a diversified portfolio of securities and
The cumulative foreign exchange adjustment loss for the foreign
derivative transactions. The borrowings may also be temporarily
currency denominated debt resulting from the effect of hedging
invested in securities purchased under agreements to resell.
activities that did not qualify for hedge accounting treatment under
AIGFP’s notes and bonds include structured debt instruments
FAS 133 was $969 million at December 31, 2007 and $733 mil-
whose payment terms are linked to one or more financial or other
lion at December 31, 2006. ILFC has substantially eliminated the
indices (such as an equity index or commodity index or another
currency exposure arising from foreign currency denominated
measure that is not considered to be clearly and closely related to
notes by economically hedging the portion of the note exposure
the debt instrument). These notes contain embedded derivatives
not already offset by Euro-denominated operating lease payments.
that otherwise would be required to be accounted for separately
ILFC had a $4.3 billion Export Credit Facility for use in
under FAS 133. Upon AIG’s early adoption of FAS 155, AIGFP
connection with the purchase of approximately 75 aircraft deliv-
elected the fair value option for these notes. The notes that are
ered through 2001. This facility was guaranteed by various
accounted for using the fair value option are reported separately
European Export Credit Agencies. The interest rate varies from
under hybrid financial instrument liabilities. AIG guarantees the
AIG 2007 Form 10-K 91

5.75 percent to 5.90 percent on these amortizing ten-year corporate purposes and to provide backup for AGF’s commercial
borrowings depending on the delivery date of the aircraft. At paper programs.
December 31, 2007, ILFC had $664 million outstanding under In January 2007, AGF issued junior subordinated debentures in
this facility. The debt is collateralized by a pledge of the shares of an aggregate principal amount of $350 million that mature in
a subsidiary of ILFC, which holds title to the aircraft financed January 2067. The debentures underlie a series of trust preferred
under the facility. securities sold by a trust sponsored by AGF in a Rule 144A/
In May 2004, ILFC entered into a similarly structured Export Regulation S offering. AGF can redeem the debentures at par
Credit Facility for up to a maximum of $2.6 billion for Airbus beginning in January 2017.
aircraft to be delivered through May 31, 2005. The facility was As of December 31, 2007, notes and bonds aggregating
subsequently increased to $3.6 billion and extended to include $22.4 billion were outstanding with maturity dates ranging from
aircraft to be delivered through May 31, 2008. The facility 2008 to 2031 at interest rates ranging from 1.94 percent to
becomes available as the various European Export Credit Agen- 8.45 percent. To the extent deemed appropriate, AGF may enter
cies provide their guarantees for aircraft based on a nine-month into swap transactions to manage its effective borrowing rates
forward-looking calendar, and the interest rate is determined with respect to these notes and bonds. As a well-known seasoned
through a bid process. At December 31, 2007, ILFC had issuer, AGF filed an automatic shelf registration statement with
$1.9 billion outstanding under this facility. Borrowings with the SEC allowing AGF immediate access to the U.S. public debt
respect to these facilities are included in ILFC’s notes and bonds markets. At December 31, 2007, AGF had remaining corporate
payable in the preceding table of borrowings. The debt is authorization to issue up to $8.1 billion of debt securities under
collateralized by a pledge of shares of a subsidiary of ILFC, which its shelf registration statements.
holds title to the aircraft financed under the facility. AGF’s funding sources include a medium-term note program,
From time to time, ILFC enters into funded financing agree- private placement debt, retail note issuances, bank financing and
ments. As of December 31, 2007, ILFC had a total of $1.1 billion securitizations of finance receivables that AGF accounts for as on-
outstanding, which has varying maturities through February 2012. balance-sheet secured financings. In addition, AGF has become an
The interest rates are LIBOR-based, with spreads ranging from established issuer of long-term debt in the international capital
0.30 percent to 1.625 percent. markets.
The proceeds of ILFC’s debt financing are primarily used to In addition to debt refinancing activities, proceeds from the
purchase flight equipment, including progress payments during the collection of finance receivables are used to fund cash needs
construction phase. The primary sources for the repayment of this including the payment of principal and interest on AGF’s debt. AIG
debt and the interest expense thereon are the cash flow from does not guarantee any of the debt obligations of AGF. See also
operations, proceeds from the sale of flight equipment and the Liquidity.
rollover and refinancing of the prior debt. AIG does not guarantee
the debt obligations of ILFC. See also Liquidity herein. AIGCFG
AIGCFG has a variety of funding mechanisms for its various
AGF
markets, including retail and wholesale deposits, short and long-
AGF fulfills most of its short-term cash borrowing requirements term bank loans, securitizations and intercompany subordinated
through the issuance of commercial paper. The issuance of debt. AIG Credit Card Company (Taiwan), a consumer finance
commercial paper is subject to the approval of AGF’s Board of business in Taiwan, and AIG Retail Bank PLC, a full service
Directors and is not guaranteed by AIG. AGF maintains committed consumer bank in Thailand, have issued commercial paper for the
syndicated revolving credit facilities which, as of December 31, funding of their respective operations. AIG does not guarantee any
2007, totaled $4.8 billion and which are summarized below under borrowings for AIGCFG businesses, including this commercial
Revolving Credit Facilities. The facilities can be used for general paper.
92 AIG 2007 Form 10-K

credit facilities on or prior to their expiration. Some of theRevolving Credit Facilities
facilities, as noted below, contain a ‘‘term-out option’’ allowing forAIG, ILFC and AGF maintain committed, unsecured revolving credit
the conversion by the borrower of any outstanding loans atfacilities listed on the table below in order to support their
expiration into one-year term loans.respective commercial paper programs and for general corporate
purposes. AIG, ILFC and AGF expect to replace or extend these
As of December 31, 2007
One-Year
(in millions) Available Term-Out
Facility Size Borrower(s) Amount Expiration Option
AIG:
364-Day Syndicated Facility $ 2,125 AIG/AIG Funding(a)
$2,125 July 2008 Yes
AIG Capital Corporation(a)
5-Year Syndicated Facility 1,625 AIG/AIG Funding(a)
1,625 July 2011 No
AIG Capital Corporation(a)
364-Day Bilateral Facility(b)
3,200 AIG/AIG Funding 210 December 2008 Yes
364-Day Intercompany Facility(c)
5,335 AIG 5,335 September 2008 Yes
Total AIG $12,285 $9,295
ILFC:
5-Year Syndicated Facility $ 2,500 ILFC $2,500 October 2011 No
5-Year Syndicated Facility 2,000 ILFC 2,000 October 2010 No
5-Year Syndicated Facility 2,000 ILFC 2,000 October 2009 No
Total ILFC $ 6,500 $6,500
AGF:
364-Day Syndicated Facility $ 2,625 American General Finance Corporation $2,625 July 2008 Yes
American General Finance, Inc.(d)
5-Year Syndicated Facility 2,125 American General Finance Corporation 2,125 July 2010 No
Total AGF $ 4,750 $4,750
(a) Guaranteed by AIG.
(b) This facility can be drawn in the form of loans or letters of credit. All drawn amounts shown above are in the form of letters of credit.
(c) Subsidiaries of AIG are the lenders on this facility.
(d) American General Finance, Inc. is an eligible borrower for up to $400 million only.
Credit Ratings
The cost and availability of unsecured financing for AIG and its subsidiaries are generally dependent on their short- and long-term debt
ratings. The following table presents the credit ratings of AIG and certain of its subsidiaries as of February 15, 2008. In parentheses,
following the initial occurrence in the table of each rating, is an indication of that rating’s relative rank within the agency’s rating
categories. That ranking refers only to the generic or major rating category and not to the modifiers appended to the rating by the rating
agencies to denote relative position within such generic or major category.
Short-term Debt Senior Long-term Debt
Moody’s S&P Fitch Moody’s(a)
S&P(b)
Fitch(c)
AIG P-1 (1st of 3) A-1+ (1st of 6) F1+ (1st of 5) Aa2(e)
(2nd of 9) AA (2nd of 8)(f)
AA (2nd of 9)(h)
AIG Financial Products Corp.(d)
P-1 A-1+ — Aa2(e)
AA(f)
—
AIG Funding, Inc.(d)
P-1 A-1+ F1+ — — —
ILFC P-1 A-1+ F1 (1st of 5) A1 (3rd of 9) AA- (2nd of 8)(g)
A+ (3rd of 9)(h)
American General Finance
Corporation P-1 A-1 (1st of 6) F1 A1 A+ (3rd of 8) A+(h)
American General Finance, Inc. P-1 A-1 F1 — — A+(h)
(a) Moody’s Investors Service (Moody’s) appends numerical modifiers 1, 2 and 3 to the generic rating categories to show relative position within rating categories.
(b) Standard & Poor’s, a division of the McGraw-Hill Companies (S&P) ratings may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
(c) Fitch Ratings (Fitch) ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
(d) AIG guarantees all obligations of AIG Financial Products Corp. and AIG Funding, Inc.
(e) Negative rating outlook on Senior Unsecured Debt Ratings. A negative outlook by Moody’s indicates that a rating may be lowered but is not necessarily
a precursor of a ratings change.
(f) Negative rating outlook on Counterparty Credit Ratings. A negative outlook by S&P indicates that a rating may be lowered but is not necessarily a
precursor of a ratings change.
(g) Negative rating outlook on Corporate Credit Rating. A negative outlook by S&P indicates that a rating may be lowered but is not necessarily a precursor
of a ratings change.
(h) Issuer Default and Senior Unsecured Debt Ratings on Rating Watch Negative. Rating Watch Negative indicates that a rating has been placed on active
rating watch status.
AIG 2007 Form 10-K 93

These credit ratings are current opinions of the rating agen- downgrades could also trigger the application of termination
cies. As such, they may be changed, suspended or withdrawn at provisions in certain of AIG’s contracts, principally agreements
any time by the rating agencies as a result of changes in, or entered into by AIGFP and assumed reinsurance contracts entered
unavailability of, information or based on other circumstances. into by Transatlantic.
Ratings may also be withdrawn at AIG management’s request. It is estimated that, as of the close of business on Febru-
This discussion of ratings is not a complete list of ratings of AIG ary 14, 2008, based on AIGFP’s outstanding municipal GIAs and
and its subsidiaries. financial derivatives transactions as of such date, a downgrade of
‘‘Ratings triggers’’ have been defined by one independent AIG’s long-term senior debt ratings to ‘Aa3’ by Moody’s or ‘AA – ’
rating agency to include clauses or agreements the outcome of by S&P would permit counterparties to call for approximately
which depends upon the level of ratings maintained by one or $1.39 billion of collateral. Further, additional downgrades could
more rating agencies. ‘‘Ratings triggers’’ generally relate to events result in requirements for substantial additional collateral, which
which (i) could result in the termination or limitation of credit could have a material effect on how AIGFP manages its liquidity.
availability, or require accelerated repayment, (ii) could result in The actual amount of additional collateral that AIGFP would be
the termination of business contracts or (iii) could require a required to post to counterparties in the event of such down-
company to post collateral for the benefit of counterparties. grades depends on market conditions, the fair value of the
AIG believes that any of its own or its subsidiaries’ contractual outstanding affected transactions and other factors prevailing at
obligations that are subject to ‘‘ratings triggers’’ or financial the time of the downgrade. Additional obligations to post collateral
covenants relating to ‘‘ratings triggers’’ would not have a material would increase the demand on AIGFP’s liquidity.
adverse effect on its financial condition or liquidity. Ratings
94 AIG 2007 Form 10-K

Contractual Obligations
Contractual obligations in total, and by remaining maturity at December 31, 2007 were as follows:
Payments due by Period
Total Less Than 1-3 3+
-5 Over Five
(in millions) Payments One Year Years Years Years
Borrowings(a)
$ 156,014 $ 43,891 $ 32,261 $26,032 $ 53,830
Interest payments on borrowings 83,551 5,326 8,899 7,073 62,253
Loss reserves(b)
85,500 23,513 26,078 12,397 23,512
Insurance and investment contract liabilities(c)
645,583 32,359 42,768 42,282 528,174
GIC liabilities(d)
29,797 9,266 8,052 3,458 9,021
Aircraft purchase commitments 20,104 4,174 3,852 2,095 9,983
Operating leases 4,426 747 1,041 693 1,945
Other purchase obligations(e)
1,091 1,056 35 — —
Total(f)
$1,026,066 $120,332 $122,986 $94,030 $688,718
(a) Excludes commercial paper and borrowings incurred by consolidated investments and includes hybrid financial instrument liabilities recorded at fair value.
(b) Represents future loss and loss adjustment expense payments estimated based on historical loss development payment patterns. Due to the
significance of the assumptions used, the periodic amounts presented could be materially different from actual required payments.
(c) Insurance and investment contract liabilities include various investment-type products with contractually scheduled maturities, including periodic payments
of a term certain nature. Insurance and investment contract liabilities also include benefit and claim liabilities, of which a significant portion represents
policies and contracts that do not have stated contractual maturity dates and may not result in any future payment obligations. For these policies and
contracts (i) AIG is currently not making payments until the occurrence of an insurable event, such as death or disability, (ii) payments are conditional on
survivorship, or (iii) payment may occur due to a surrender or other non-scheduled event out of AIG’s control. AIG has made significant assumptions to
determine the estimated undiscounted cash flows of these contractual policy benefits, which assumptions include mortality, morbidity, future lapse rates,
expenses, investment returns and interest crediting rates, offset by expected future deposits and premium on in-force policies. Due to the significance of
the assumptions used, the periodic amounts presented could be materially different from actual required payments. The amounts presented in this table
are undiscounted and therefore exceed the future policy benefits and policyholder contract deposits included in the balance sheet.
(d) Represents guaranteed maturities under GICs.
(e) Includes a $1.0 billion commitment to purchase shares under AIG’s share repurchase program which was paid in January 2008 and options to acquire
aircraft.
(f) Does not reflect unrecognized tax benefits of $1.3 billion, the timing of which is uncertain. However, it is reasonably possible that $50 million to
$150 million may become payable during 2008. See Note 21 to Consolidated Financial Statements for a discussion on unrecognized tax benefits.
Off Balance Sheet Arrangements and Commercial Commitments
Off Balance Sheet Arrangements and Commercial Commitments in total, and by remaining maturity at December 31,
2007 were as follows:
Amount of Commitment Expiration
Less
Total Amounts Than 1-3 3+
-5 Over Five
(in millions) Committed One Year Years Years Years
Guarantees:
Liquidity facilities(a)
$ 2,495 $ 8 $ 8 $1,503 $ 976
Standby letters of credit 1,713 1,485 42 38 148
Construction guarantees(b)
687 — — — 687
Guarantees of indebtedness 1,124 106 83 500 435
All other guarantees 767 249 8 35 475
Commitments:
Investment commitments(c)
9,071 3,527 3,604 1,684 256
Commitments to extend credit 1,325 496 591 238 —
Letters of credit 1,196 910 6 121 159
Investment protection agreements(d)
11,991 3,088 2,094 855 5,954
Maturity shortening puts(e)
2,333 1,234 1,099 — —
Other commercial commitments 1,269 114 111 83 961
Total(f)
$33,971 $11,217 $7,646 $5,057 $10,051
(a) Primarily liquidity facilities provided in connection with certain municipal swap transactions and collateralized bond obligations.
(b) Primarily AIG SunAmerica construction guarantees connected to affordable housing investments.
(c) Includes commitments to invest in limited partnerships, private equity, hedge funds and mutual funds and commitments to purchase and develop real
estate in the United States and abroad.
(d) Written generally with respect to investments in hedge funds and funds of hedge funds.
(e) Represents obligations under 2a-7 Puts to purchase certain multi-sector CDOs at pre-determined contractual prices.
(f) Excludes commitments with respect to pension plans. The annual pension contribution for 2008 is expected to be approximately $118 million for U.S.
and non-U.S. plans.
AIG 2007 Form 10-K 95

(ii) receives a majority of the VIE’s expected residual returns; orArrangements with Variable Interest Entities
(iii) both. For a further discussion of AIG’s involvement with VIEs,
AIG enters into various off-balance-sheet (unconsolidated) arrange-
see Note 7 of Notes to Consolidated Financial Statements.
ments with variable interest entities (VIEs) in the normal course of
A significant portion of AIG’s overall exposure to VIEs results
business. AIG’s involvement with VIEs ranges from being a
from AIG Investment’s real estate and investment funds.
passive investor to designing and structuring, warehousing and
In certain instances, AIG Investments acts as the collateral
managing the collateral of VIEs. AIG engages in transactions with
manager or general partner of an investment fund, private equity
VIEs as part of its investment activities to obtain funding and to
fund or hedge fund. Such entities are typically registered invest-
facilitate client needs. AIG purchases debt securities (rated and
ment companies or qualify for the specialized investment company
unrated) and equity interests issued by VIEs, makes loans and
accounting in accordance with the AICPA Investment Company
provides other credit support to VIEs, enters into insurance,
Audit and Accounting Guide. For investment partnerships, hedge
reinsurance and derivative transactions and leasing arrangements
funds and private equity funds, AIG acts as the general partner or
with VIEs, and acts as the warehouse agent and collateral
manager of the fund and is responsible for carrying out the
manager for VIEs.
investment mandate of the VIE. Often, AIG’s insurance operations
Under FIN 46(R), AIG consolidates a VIE when it is the primary
participate in these AIG managed structures as a passive investor
beneficiary of the entity. The primary beneficiary is the party that
in the debt or equity issued by the VIE. Typically, AIG does not
either (i) absorbs a majority of the VIE’s expected losses;
provide any guarantees to the investors in the VIE.
The following table summarizes, by investment activity, AIG’s involvement with VIEs. Maximum exposure to loss, as detailed in the
table below, is considered to be the notional amount of credit lines, guarantees and other credit support, and liquidity facilities,
notional amounts of credit default swaps and certain total return swaps, and the amount invested in the debt or equity issued by the
VIEs.
Primary Significant Variable
Beneficiary Interest Holder*
Maximum
Total Exposure
Total Assets Assets to Loss
As of December 31,
(in billions) 2007 2006 2007 2007
Description
Real estate and investment funds $21.7 $6.1 $139.0 $18.5
Tax planning VIEs 0.5 1.4 12.1 6.3
CLOs/CDOs/CBOs 0.4 — 107.8 9.7
Affordable housing partnerships 2.7 — 0.9 0.9
Other 1.7 1.6 15.3 9.2
Total $27.0 $9.1 $275.1 $44.6
* Includes $2.4 billion of assets held in an unconsolidated SIV sponsored by AIGFP in 2007. As of December 31, 2007, AIGFP’s invested assets included
$1.7 billion of securities purchased under agreements to resell, commercial paper and medium-term and capital notes issued by this entity.
Following is additional information concerning AIG’s involve- ranging from AAA to unrated. AIGFP’s portfolio of multi-sector
ment with collateralized debt obligations and its structured CDOs and, to a lesser extent, certain AIG insurance subsidiaries’
investment vehicle. direct investments in CDOs, have experienced some downgrades
within their asset portfolios. AIG does not expect that it will have
to consolidate any of these structures.Collateralized Debt Obligations
These CDOs typically are funded with commercial paper,
In the normal course of its asset management operations, AIG
medium and long-term financing and equity with ratings that range
manages or sponsors CDOs which issue debt and equity interests
from AAA to unrated. AIG has no obligation to purchase, and has
sold to third party investors. AIG’s subsidiaries also invest in the
not purchased, any commercial paper issued by these CDOs or
debt and equity securities issued by these CDOs as part of their
provided any support to these CDOs in obtaining financing, and
normal investment activities. AIG also invests in and manages
does not intend to do so. However, AIGFP has written the 2a-7
CDOs sponsored by third parties, warehouses assets prior to the
Puts which are included as part of its multi-sector credit default
establishment of and sale of the warehoused assets to a CDO,
swap portfolio. Under the terms of these securities the holders
enters into derivative contracts with CDOs, including credit default
are permitted or required, in certain circumstances, on a regular
swaps, and acts as an asset manager to CDOs.
basis to tender their securities to the issuers at par. If an issuer’s
Categories of assets owned by these CDOs include residential
remarketing agent is unable to resell the securities so tendered
and commercial mortgage and other asset-backed securities,
within the maximum interest rate spread range specified in the
corporate loans, high-yield and high-grade loans and bonds, and
terms of the securities, AIGFP must purchase the securities at par
credit default contracts, among other assets, that have ratings
as long as the securities have not experienced a default. During
96 AIG 2007 Form 10-K

2007, AIGFP purchased securities with a principal amount of Shareholders’ Equity
approximately $754 million in connection with these obligations.
The changes in AIG’s consolidated shareholders’ equityIn respect of certain of the 2a-7 Puts, AIGFP has contracted with
during 2007 and 2006 follows:third parties to provide liquidity for the securities if they are put to
AIGFP for up to a three-year period. Such liquidity facilities totaled (in millions) 2007 2006
approximately $3 billion at December 31, 2007. As of Febru-
Beginning of year $101,677 $ 86,317
ary 26, 2008, AIGFP has not utilized these liquidity facilities. At
Net income 6,200 14,048
December 31, 2007, AIGFP had approximately $6.5 billion of
Unrealized appreciation (depreciation)
notional exposure on these 2a-7 Puts.
of investments, net of tax (5,708) 1,735
Cumulative translation adjustment,
Structured Investment Vehicle net of tax 1,185 936
Dividends to shareholders (1,964) (1,690)AIGFP sponsors one unconsolidated SIV that invests in variable
Payments advanced to purchaserate, investment-grade debt securities with a weighted average
shares, net (912) —
remaining life of four years at December 31, 2007. Assets of the
Share purchases (5,104) —
SIV totaled $2.4 billion at December 31, 2007. Approximately
Other* 427 331
$31.9 million of these assets have been downgraded one notch
End of year $ 95,801 $101,677from Aa3/AA– to A1/A+ by Moody’s and S&P, respectively, since
the purchase of these assets by the SIV. The SIV funds its assets * Reflects the effects of employee stock transactions and cumulative
effect of accounting changes.by issuing secured financing, commercial paper, and medium-term
notes that had a weighted-average remaining life of less than six
As indicated in the table above, a significant portion of the
months at December 31, 2007. The mismatch between the
2007 decrease in AIG’s consolidated equity during 2007 was the
weighted average remaining life of the SIV’s assets and liabilities
result of share purchases, substantially all of which were funded
has been removed through the funding support from AIGFP
from the issuance of hybrid debt securities. The effect of these
described in the next paragraph. The SIV also issued approxi-
transactions was to replace high cost equity securities (common
mately $300 million of capital notes originally rated Baa2 and
stock) with cost efficient hybrid securities, a substantial portion of
BBB by Moody’s and S&P, respectively, and subsequently down-
which is treated as equity capital for the purpose of rating agency
graded in 2007 to B3 and BB– (credit watch negative), respec-
leverage calculations.
tively, of which AIGFP owns 12 percent.
AIG has in the past reinvested most of its unrestricted
At December 31, 2007, AIGFP had $1.7 billion of balance
earnings in its operations and believes such continued reinvest-
sheet exposure to this SIV representing investments in securities
ment in the future will be adequate to meet any foreseeable
purchased under agreements to resell, commercial paper, and
capital needs. However, AIG may choose from time to time to
medium-term and capital notes. During the credit market disrup-
raise additional funds through the issuance of additional
tions during the last half of 2007, the SIV experienced difficulty
securities.
attracting purchasers for its commercial paper and medium-term
In February 2007, AIG’s Board of Directors adopted a new
notes. In January 2008, AIGFP agreed to provide funding support
dividend policy, which took effect with the dividend declared in the
to the SIV, as necessary, to allow the SIV to redeem its
second quarter of 2007, providing that under ordinary circum-
commercial paper and medium-term notes as they become due.
stances, AIG’s plan will be to increase its common stock dividend
Moody’s affirmed the SIV’s senior debt ratings of Aaa. S&P
by approximately 20 percent annually. The payment of any
affirmed the SIV’s long term issuer credit rating of AAA with a
dividend, however, is at the discretion of AIG’s Board of Directors,
negative outlook and downgraded its capital notes from BB– to
and the future payment of dividends will depend on various
CCC– and this rating remains on credit watch negative. AIG does
factors, including the performance of AIG’s businesses, AIG’s
not believe its management of, and current or future investments
consolidated financial position, results of operations and liquidity
in, the SIV could have any effect on AIG’s debt ratings under any
and the existence of investment opportunities.
circumstances.
Share Repurchases
From time to time, AIG may buy shares of its common stock for
general corporate purposes, including to satisfy its obligations
under various employee benefit plans. In February 2007, AIG’s
Board of Directors increased AIG’s share repurchase program by
authorizing the purchase of shares with an aggregate purchase
price of $8 billion. In November 2007, AIG’s Board of Directors
authorized the purchase of an additional $8 billion in common
stock. From March through December 31, 2007, AIG entered into
structured share repurchase arrangements providing for the
purchase of shares over time with an aggregate purchase price of
AIG 2007 Form 10-K 97

$7 billion, including a $1.0 billion commitment entered into in carried at amortized cost, assets and liabilities are presented net
December 2007 but not funded until January 2008. of reinsurance, policyholder liabilities are valued using more
A total of 76,361,209 shares were purchased during 2007. conservative assumptions and certain assets are non-admitted.
The portion of the payments advanced by AIG under the In connection with the filing of the 2005 statutory financial
structured share repurchase arrangements that had not yet been statements for AIG’s Domestic General Insurance companies, AIG
utilized to repurchase shares at December 31, 2007, amounting agreed with the relevant state insurance regulators on the
to $912 million, has been recorded as a component of sharehold- statutory accounting treatment of various items. The regulatory
ers’ equity under the caption, Payments advanced to purchase authorities have also permitted certain of the domestic and
shares. Purchases have continued subsequent to December 31, foreign insurance subsidiaries to support the carrying value of
2007, with an additional 12,196,187 shares purchased from their investments in certain non-insurance and foreign insurance
January 1 through February 15, 2008. All shares purchased are subsidiaries by utilizing the AIG audited consolidated financial
recorded as treasury stock at cost. statements to satisfy the requirement that the U.S. GAAP-basis
At February 15, 2008, $10.25 billion was available for equity of such entities be audited. In addition, the regulatory
purchases under the aggregate authorization. AIG does not expect authorities have permitted the Domestic General Insurance com-
to purchase additional shares under its share repurchase program panies to utilize audited financial statements prepared on a basis
for the foreseeable future, other than to meet commitments that of accounting other than U.S. GAAP to value investments in joint
existed at December 31, 2007. ventures, limited partnerships and hedge funds. AIG has received
similar permitted practices authorizations from insurance regula-
tory authorities in connection with the 2007 and 2006 statutoryDividends from Insurance Subsidiaries
financial statements. These permitted practices did not affect the
Payments of dividends to AIG by its insurance subsidiaries are
Domestic General Insurance companies’ compliance with mini-
subject to certain restrictions imposed by regulatory authorities.
mum regulatory capital requirements.
With respect to AIG’s domestic insurance subsidiaries, the
Statutory capital of each company continued to exceed
payment of any dividend requires formal notice to the insurance
minimum company action level requirements following the adjust-
department in which the particular insurance subsidiary is
ments, but AIG nonetheless contributed an additional $750 million
domiciled. Under the laws of many states, an insurer may pay a
of capital into American Home effective September 30, 2005 and
dividend without prior approval of the insurance regulator when
contributed a further $2.25 billion of capital in February 2006 for
the amount of the dividend is below certain regulatory thresholds.
a total of approximately $3 billion of capital into Domestic General
Other foreign jurisdictions, notably Bermuda, Japan, Hong Kong,
Insurance subsidiaries effective December 31, 2005. To enhance
Taiwan, the U.K., Thailand and Singapore, may restrict the ability
their current capital positions, AIG suspended dividends from the
of AIG’s foreign insurance subsidiaries to pay dividends. Largely
DBG companies from the fourth quarter 2005 through 2006,
as a result of these restrictions, approximately 81 percent of the
dividend payments resumed in the first quarter of 2007. AIG
aggregate equity of AIG’s consolidated subsidiaries was restricted
believes it has the capital resources and liquidity to fund any
from immediate transfer to AIG parent at December 31, 2007.
necessary statutory capital contributions.
See Regulation and Supervision herein. AIG cannot predict how
As discussed under Item 3. Legal Proceedings, various regula-
recent regulatory investigations may affect the ability of its
tors have commenced investigations into certain insurance busi-
regulated subsidiaries to pay dividends. To AIG’s knowledge, no
ness practices. In addition, the OTS and other regulators routinely
AIG company is currently on any regulatory or similar ‘‘watch list’’
conduct examinations of AIG and its subsidiaries, including AIG’s
with regard to solvency. See also Liquidity herein, Note 12 to
consumer finance operations. AIG cannot predict the ultimate
Consolidated Financial Statements and Item 1A. Risk Factors —
effect that these investigations and examinations, or any addi-
Liquidity.
tional regulation arising therefrom, might have on its business.
Federal, state or local legislation may affect AIG’s ability to
Regulation and Supervision operate and expand its various financial services businesses, and
changes in the current laws, regulations or interpretations thereofAIG’s insurance subsidiaries, in common with other insurers, are
may have a material adverse effect on these businesses.subject to regulation and supervision by the states and jurisdic-
AIG’s U.S. operations are negatively affected under guaranteetions in which they do business. In the United States, the NAIC
fund assessment laws which exist in most states. As a result ofhas developed Risk-Based Capital (RBC) requirements. RBC
operating in a state which has guarantee fund assessment laws,relates an individual insurance company’s statutory surplus to the
a solvent insurance company may be assessed for certainrisk inherent in its overall operations.
obligations arising from the insolvencies of other insuranceAIG’s insurance subsidiaries file financial statements prepared
companies which operated in that state. AIG generally recordsin accordance with statutory accounting practices prescribed or
these assessments upon notice. Additionally, certain statespermitted by domestic and foreign insurance regulatory authori-
permit at least a portion of the assessed amount to be used as aties. The principal differences between statutory financial state-
credit against a company’s future premium tax liabilities. There-ments and financial statements prepared in accordance with
fore, the ultimate net assessment cannot reasonably be esti-U.S. GAAP for domestic companies are that statutory financial
mated. The guarantee fund assessments net of credits recognizedstatements do not reflect DAC, some bond portfolios may be
98 AIG 2007 Form 10-K

in 2007, 2006 and 2005, respectively, were $87 million, meet its anticipated cash requirements, including the funding of
$97 million and $124 million. increased dividends under AIG’s current dividend policy. See also
AIG is also required to participate in various involuntary pools Item 1A. Risk Factors — Liquidity and Risk Management herein.
(principally workers compensation business) which provide insur-
ance coverage for those not able to obtain such coverage in the Insurance Operations
voluntary markets. This participation is also recorded upon
Insurance operating cash flow is derived from two sources,
notification, as these amounts cannot reasonably be estimated.
underwriting operations and investment operations. Cash flow
A substantial portion of AIG’s General Insurance business and
from underwriting operations includes collections of periodic
a majority of its Life Insurance & Retirement Services business
premiums and policyholders’ contract deposits, and paid loss
are conducted in foreign countries. The degree of regulation and
recoveries, less reinsurance premiums, losses, benefits, and
supervision in foreign jurisdictions varies. Generally, AIG, as well
acquisition and operating expenses. Generally, there is a time lag
as the underwriting companies operating in such jurisdictions,
from when premiums are collected and losses and benefits are
must satisfy local regulatory requirements. Licenses issued by
paid. Investment cash flow is primarily derived from interest and
foreign authorities to AIG subsidiaries are subject to modification
dividends received and includes realized capital gains net of
and revocation. Thus, AIG’s insurance subsidiaries could be
realized capital losses.
prevented from conducting future business in certain of the
Liquid assets include cash and short-term investments, fixed
jurisdictions where they currently operate. AIG’s international
maturities that are not designated as held to maturity, and publicly
operations include operations in various developing nations. Both
traded equity securities. At December 31, 2007 and 2006, AIG’s
current and future foreign operations could be adversely affected
insurance operations had liquid assets of $476.1 billion and
by unfavorable political developments up to and including national-
$428.4 billion, respectively. The portion of liquid assets comprised
ization of AIG’s operations without compensation. Adverse effects
of cash and short-term investments was $45.5 billion and
resulting from any one country may affect AIG’s results of
$19.9 billion at December 31, 2007 and 2006, respectively. At
operations, liquidity and financial condition depending on the
December 31, 2007, $380.9 billion, or 95 percent of the fixed
magnitude of the event and AIG’s net financial exposure at that
maturity investments that were not designated as held to maturity
time in that country.
in AIG’s insurance company general account portfolios were rated
Foreign insurance operations are individually subject to local
investment grade. Given the size and liquidity profile of AIG’s
solvency margin requirements that require maintenance of ade-
investment portfolios, AIG believes that deviations from its pro-
quate capitalization, which AIG complies with by country. In
jected claim experience do not constitute a significant liquidity risk.
addition, certain foreign locations, notably Japan, have estab-
AIG’s asset/liability management process takes into account the
lished regulations that can result in guarantee fund assessments.
expected maturity of investments and expected benefit payments
These have not had a material effect on AIG’s financial condition
and policy surrenders as well as the specific nature and risk profile
or results of operations.
of these liabilities. Historically, there has been no significant
variation between the expected maturities of AIG’s investments and
Liquidity
the payment of claims.
AIG manages liquidity at both the subsidiary and parent company See also Operating Review — General Insurance Operations —
levels. At December 31, 2007, AIG’s consolidated invested General Insurance Net Investment Income and Life Insurance &
assets included $65.6 billion in cash and short-term investments. Retirement Services Operations — Life Insurance & Retirement
Consolidated net cash provided from operating activities in 2007 Services Net Investment Income and Realized Capital Gains
amounted to $35.2 billion. At both the subsidiary and parent (Losses) herein.
company level, liquidity management activities are intended to
preserve and enhance funding stability, flexibility, and diversity General Insurance
through a wide range of potential operating environments and
General Insurance operating cash flow is derived from underwriting
market conditions.
and investment activities. With respect to General Insurance
As a result of market disruption in the credit markets, AIG took
operations, if paid losses accelerated beyond AIG’s ability to fund
steps to enhance the liquidity of its portfolios. Cash and short-
such paid losses from current operating cash flows, AIG might
term investments increased in all of AIG’s major operating
need to liquidate a portion of its General Insurance investment
segments. In addition, AIG created an interdisciplinary Liquidity
portfolio and/or arrange for financing. A liquidity strain could
Risk Committee to measure, monitor, control and aggregate
result from the occurrence of several significant catastrophic
liquidity risks across AIG. While this Committee’s responsibilities
events in a relatively short period of time. Additional strain on
are broad, the Committee’s initial focus is on portfolios with
liquidity could occur if the investments liquidated to fund such
shorter-term contractual liabilities, such as securities lending in
paid losses were sold into a depressed market place and/or
the United States and retail deposit-like products in the United
reinsurance recoverable on such paid losses became uncollectible
Kingdom.
or collateral supporting such reinsurance recoverable significantly
Management believes that AIG’s liquid assets, cash provided
decreased in value.
by operations and access to the capital markets will enable it to
AIG 2007 Form 10-K 99

Life Insurance & Retirement Services no liquidity demands with respect to these warehoused invest-
ments. To the extent adverse market conditions prevent AIG
Life Insurance & Retirement Services operating cash flow is
Investments from transferring or otherwise divesting these ware-
derived from underwriting and investment activities. If a substan-
housed investments, repayment of the temporary equity funding
tial portion of the Life Insurance & Retirement Services operations
provided by AIG would be delayed until the investment is
bond portfolio diminished significantly in value and/or defaulted,
transferred or otherwise divested.
AIG might need to liquidate other portions of its Life Insurance &
AIG Investments incurs expenses associated with cash out-
Retirement Services investment portfolio and/or arrange financ-
flows from the operation of its business, including costs related to
ing. Possible events causing such a liquidity strain could include
portfolio management and related back and middle office costs.
economic collapse of a nation or region in which Life Insurance &
In addition, cash is used in association with investment warehous-
Retirement Services operations exist, nationalization, catastrophic
ing activities wherein AIG Investments funds and temporarily holds
terrorist acts, or other economic or political upheaval. In addition,
an investment until transferred, sold or otherwise divested.
a significant rise in interest rates in a particular region or regions
Cash needs for the Spread-Based Investment business are
leading to a major increase in policyholder surrenders could also
principally the result of GIC maturities. Significant blocks of the
create a liquidity strain.
GIC portfolio will mature over the next five years. AIG utilizes
asset liability matching to control liquidity risks associated with
Financial Services
this business. In addition, AIG believes that its products incorpo-
rate certain restrictions which encourage persistency, limiting theAIG’s major Financial Services operating subsidiaries consist of
magnitude of unforeseen early surrenders in the GIC portfolio.AIGFP, ILFC, AGF and AIGCFG. Sources of funds considered in
Liquidity for Asset Management operations can be affected bymeeting the liquidity needs of AIGFP’s operations include GIAs,
significant credit or geopolitical events that might cause a delay inissuance of long- and short-term debt, proceeds from maturities,
fund closings, securitizations or an inability of AIG’s clients tosales of securities available for sale and securities and spot
fund their capital commitments.commodities leased or sold under repurchase agreements. ILFC,
AGF and AIGCFG utilize the commercial paper markets, bank loans
AIG (Parent Company)and bank credit facilities as sources of liquidity. ILFC and AGF
also fund in the domestic and international capital markets
The liquidity of the parent company is principally derived from its
without reliance on any guarantee from AIG. An additional source
subsidiaries. The primary sources of cash flow are dividends and
of liquidity for ILFC is the use of export credit facilities. AIGCFG
other payments from its regulated and unregulated subsidiaries,
also uses wholesale and retail bank deposits as sources of funds.
as well as issuance of debt securities. Primary uses of cash flow
On occasion, AIG has provided equity capital to ILFC, AGF and
are for debt service, subsidiary funding, shareholder dividend
AIGCFG and provides intercompany loans to AIGCFG.
payments and common stock repurchases. In 2007, AIG parent
Financial Services liquidity could be impaired by an inability to
collected $4.9 billion in dividends and other payments from
access the capital markets or by collateral calls. The credit default
subsidiaries (primarily from insurance company subsidiaries),
swaps written by AIGFP on super senior tranches of multi-sector
issued $11.7 billion of debt and retired $865 million of debt,
CDOs require, in most cases, physical settlement following an
excluding MIP and Series AIGFP debt. AIG parent also advanced
event constituting a failure to pay in respect of the underlying
$6 billion for structured share repurchase arrangements. Exclud-
super senior CDO securities. The majority of the other credit
ing MIP and Series AIGFP debt, AIG parent made interest
default swaps are cash settled, whereby AIGFP would be required
payments totaling $550 million, made $5.90 billion in capital
upon an event constituting a failure to pay in respect of the
contributions to subsidiaries, and paid $1.93 billion in dividends
underlying super senior CDO securities to make cash payments to
to shareholders in 2007. In February 2008, AIG contributed
the counterparty equal to any actual losses that attach to the
approximately $445 million in the form of forgiveness of Federal
super senior risk layer, rather than to purchase the reference
income tax recoverables to certain domestic general insurance
obligation. Additionally, certain of the credit default swaps are
subsidiaries and $500 million to certain domestic life insurance
subject to collateral call provisions. In the case of such swaps
subsidiaries, both effective December 31, 2007.
written on CDOs, the amount of the collateral to be posted is
AIG parent funds its short-term working capital needs through
determined based on the value of the CDO securities referenced
commercial paper issued by AIG Funding. As of December 31,
in the documentation for the credit default swaps.
2007, AIG Funding had $4.2 billion of commercial paper outstand-
ing with an average maturity of 29 days. As additional liquidity,
Asset Management
AIG parent and AIG Funding maintain committed revolving credit
facilities that, as of December 31, 2007, had an aggregate ofAsset Management’s sources of funds include cash flows from
$9.3 billion available to be drawn, and which are summarizedinvestment management fees, carried interest and returns on
above under Revolving Credit Facilities.various investments. These investments are financed through the
At the parent company level, liquidity management activitiesissuance of AIG debt in the MIP, the issuance of GICs and funding
are conducted in a manner intended to preserve and enhancefrom AIG. From time to time, AIG Investments utilizes temporary
funding stability, flexibility, and diversity through the full range ofdebt funding from AIG primarily to acquire warehoused invest-
ments. Subsequent to the initial investment, there are generally
100 AIG 2007 Form 10-K

potential operating environments and market conditions. Assess- situation may arise due to circumstances that AIG may be unable
ing liquidity risk involves forecasting of cash inflows and outflows to control, such as a general market disruption or an operational
on both a short- and long-term basis. Corporate Treasury is problem that affects third parties or AIG. Regulatory and other
responsible for formulating the parent company’s liquidity and legal restrictions may limit AIG’s ability to transfer funds freely,
contingency planning efforts, as well as for execution of AIG’s either to or from its subsidiaries. In particular, many of AIG’s
specific funding activities. Through active liquidity management, subsidiaries, including its insurance subsidiaries, are subject to
AIG seeks to retain stable, reliable and cost-effective funding laws and regulations that authorize regulatory bodies to block or
sources. In addition to current liquidity requirements, factors reduce the flow of funds to the parent holding company, or that
which affect funding decisions include market conditions, prevail- prohibit such transfers altogether in certain circumstances. These
ing interest rates and the desired maturity profile of liabilities. The laws and regulations may hinder AIG’s ability to access funds that
objectives of contingency planning are to ensure maintenance of it may need to make payments on its obligations. Because of the
appropriate liquidity during normal and stressed periods, to wide geographic profile of AIG’s regulated subsidiaries, manage-
measure and project funding requirements during periods of ment believes that these cash flows represent a diversified source
stress, and to manage access to funding sources. Diversification of liquidity for AIG. For a further discussion of the regulatory
of funding sources is an important element of AIG’s liquidity risk environment in which AIG subsidiaries operate and other issues
management approach. affecting AIG’s liquidity, see Item 1A. Risk Factors.
AIG’s liquidity could be impaired by an inability to access the
capital markets or by unforeseen significant outflows of cash. This
Invested Assets
The following tables summarize the composition of AIG’s invested assets by segment:
Life
Insurance &
General Retirement Financial Asset
(in millions) Insurance Services Services Management Other Total
2007
Fixed maturities:
Bonds available for sale, at fair value $ 74,057 $294,162 $ 1,400 $27,753 $ — $397,372
Bonds held to maturity, at amortized cost 21,355 1 — 225 — 21,581
Bond trading securities, at fair value — 9,948 — 34 — 9,982
Equity securities:
Common stocks available for sale, at fair value 5,599 11,616 — 609 76 17,900
Common and preferred stocks trading, at fair value 321 21,026 — 29 — 21,376
Preferred stocks available for sale, at fair value 1,885 477 8 — — 2,370
Mortgage and other loans receivable, net of allowance 13 24,851 1,365 7,442 56 33,727
Financial services assets:
Flight equipment primarily under operating leases, net of
accumulated depreciation — — 41,984 — — 41,984
Securities available for sale, at fair value — — 40,305 — — 40,305
Trading securities, at fair value — — 4,197 — — 4,197
Spot commodities — — 238 — — 238
Unrealized gain on swaps, options and forward transactions — — 17,134 — (692) 16,442
Trade receivables — — 6,467 — — 6,467
Securities purchased under agreements to resell, at
contract value — — 20,950 — — 20,950
Finance receivables, net of allowance — 5 31,229 — — 31,234
Securities lending invested collateral, at fair value 5,031 57,471 148 13,012 — 75,662
Other invested assets 11,895 19,015 3,663 17,261 6,989 58,823
Short-term investments, at cost 7,356 25,236 12,249 4,919 1,591 51,351
Total investments and financial services assets as shown on
the balance sheet 127,512 463,808 181,337 71,284 8,020 851,961
Cash 497 1,000 389 269 129 2,284
Investment income due and accrued 1,431 4,728 29 401 (2) 6,587
Real estate, net of accumulated depreciation 349 976 17 89 231 1,662
Total invested assets*
$129,789 $470,512 $181,772 $72,043 $8,378 $862,494
* At December 31, 2007, approximately 65 percent and 35 percent of invested assets were held in domestic and foreign investments, respectively.
AIG 2007 Form 10-K 101

Life
Insurance &
2006
Fixed maturities:
Bonds available for sale, at fair value $ 67,994 $288,018 $ 1,357 $29,500 $ — $386,869
Bonds held to maturity, at amortized cost 21,437 — — — — 21,437
Bond trading securities, at fair value 1 10,835 — — — 10,836
Equity securities:
Common stocks available for sale, at fair value 4,245 8,705 — 226 80 13,256
Common stocks trading, at fair value 350 14,505 — — — 14,855
Preferred stocks available for sale, at fair value 1,884 650 5 — — 2,539
Mortgage and other loans receivable, net of allowance 17 21,043 2,398 4,884 76 28,418
Flight equipment primarily under operating leases, net of
accumulated depreciation — — 39,875 — — 39,875
Securities available for sale, at fair value — — 47,205 — — 47,205
Trading securities, at fair value — — 5,031 — — 5,031
Spot commodities — — 220 — — 220
Unrealized gain on swaps, options and forward transactions — — 19,607 — (355) 19,252
Trade receivables — — 4,317 — — 4,317
Securities purchased under agreements to resell, at
contract value — — 30,291 — — 30,291
Finance receivables, net of allowance — — 29,573 — — 29,573
Securities lending invested collateral, at fair value 5,376 50,099 76 13,755 — 69,306
Other invested assets 9,207 13,962 2,212 13,198 3,532 42,111
Short-term investments, at cost 3,281 15,192 2,807 6,198 5 27,483
Total investments and financial services assets as shown on
the balance sheet 113,792 423,009 184,974 67,761 3,338 792,874
Cash 334 740 390 118 8 1,590
Investment income due and accrued 1,363 4,378 23 326 1 6,091
Real estate, net of accumulated depreciation 570 698 17 75 26 1,386
Total invested assets(a)(b)
$116,059 $428,825 $185,404 $68,280 $3,373 $801,941
(a) Certain reclassifications and format changes have been made to prior period amounts to conform to the current period presentation.
(b) At December 31, 2006, approximately 68 percent and 32 percent of invested assets were held in domestic and foreign investments, respectively.
products. At the local operating unit level, the strategies areInvestment Strategy
based on considerations that include the local market, liability
duration and cash flow characteristics, rating agency and regula-AIG’s investment strategies are tailored to the specific business
tory capital considerations, legal investment limitations, taxneeds of each operating unit. The investment objectives are driven
optimization and diversification. In addition to local risk manage-by the business model for each of the businesses: General
ment considerations, AIG’s corporate risk management guidelinesInsurance, Life Insurance, Retirement Services and Asset Manage-
impose limitations on concentrations to promote diversification byment’s Spread-Based Investment business. The primary objectives
industry, asset class and geographic sector.are in terms of preservation of capital, growth of surplus and
generation of investment income to support the insurance
102 AIG 2007 Form 10-K

The amortized cost or cost and estimated fair value of AIG’s available for sale and held to maturity securities at
December 31, 2007 and 2006 were as follows:
December 31, 2007* December 31, 2006
Amortized Gross Gross Amortized Gross Gross
Cost or Unrealized Unrealized Fair Cost or Unrealized Unrealized Fair
(in millions) Cost Gains Losses Value Cost Gains Losses Value
Available for sale:*
U.S. government and government
sponsored entities $ 7,956 $ 333 $ 37 $ 8,252 $ 7,667 $ 221 $ 140 $ 7,748
Obligations of states, municipalities
and political subdivisions 46,087 927 160 46,854 59,785 1,056 210 60,631
Non-U.S. governments 67,023 3,920 743 70,200 62,860 5,461 437 67,884
Corporate debt 239,822 6,216 4,518 241,520 257,383 7,443 2,536 262,290
Mortgage-backed, asset-backed and
collateralized 140,982 1,221 7,703 134,500 104,687 502 362 104,827
Total bonds $501,870 $12,617 $13,161 $501,326 $492,382 $14,683 $3,685 $503,380
Equity securities 15,188 5,545 463 20,270 13,147 2,807 159 15,795
Total $517,058 $18,162 $13,624 $521,596 $505,529 $17,490 $3,844 $519,175
Held to maturity:*
Bonds — Obligations of states,
municipalities and political
subdivisions $ 21,581 $ 609 $ 33 $ 22,157 $ 21,437 $ 731 $ 14 $ 22,154
* At December 31, 2007 and 2006, fixed maturities held by AIG that were below investment grade or not rated totaled $27.0 billion and $26.6 billion,
respectively.
AIG’s held to maturity and available for sale fixed maturity securities so rated. Approximately five percent were below invest-
investments totaled $523.5 billion at December 31, 2007, ment grade or not rated at that date. A large portion (approxi-
compared to $525.5 billion at December 31, 2006. At Decem- mately one third) of the foreign fixed income portfolio is sovereign
ber 31, 2007, approximately 63 percent of the fixed maturities fixed maturity securities supporting the policy liabilities in the
investments were in domestic portfolios. Approximately 53 per- country of issuance.
cent of such domestic securities were rated AAA by one or more
of the principal rating agencies. Approximately five percent were The credit ratings of AIG’s fixed maturity investments, other
below investment grade or not rated. AIG’s investment decision than those of AIGFP, at December 31, 2007 and 2006 were as
process relies primarily on internally generated fundamental follows:
analysis and internal risk ratings. Third party rating services’
Rating 2007 2006
ratings and opinions provide one source of independent perspec-
tives for consideration in the internal analysis. AAA 38% 37%
A significant portion of the foreign fixed income portfolio is AA 28 26
rated by Moody’s, S&P or similar foreign rating services. Rating A 18 20
services are not available in all overseas locations. The Credit
BBB 11 12
Risk Committee (CRC) closely reviews the credit quality of the
Below investment grade 4 4
foreign portfolio’s non-rated fixed income investments. At Decem-
Non-rated 1 1ber 31, 2007, approximately 19 percent of the foreign fixed
income investments were either rated AAA or, on the basis of Total 100% 100%
AIG’s internal analysis, were equivalent from a credit standpoint to
AIG 2007 Form 10-K 103

The industry categories of AIG’s available for sale corporate debt
securities at December 31, 2007 were as follows:
Industry Category Percentage
Industrials 47%
Financial Institutions 42
Utilities/Other 11
Total* 100%
* At December 31, 2007 approximately 95% of these investments were
rated investment grade.
The amortized cost, gross unrealized gains (losses) and fair value of AIG’s investments in mortgage-backed, asset-
backed and collateralized securities at December 31, 2007 were as follows:
December 31, 2007
Gross Gross
Amortized Unrealized Unrealized Fair
(in millions) Cost Gains Losses Value
AIG, excluding AIGFP:
RMBS $ 89,851 $ 433 $5,504 $ 84,780
CMBS 23,918 237 1,156 22,999
CDO/ABS 10,844 196 593 10,447
Subtotal, excluding AIGFP 124,613 866 7,253 118,226
Total AIGFP investments in mortgage-backed, asset-backed and collateralized securities 16,369 355 450 16,274
Total $140,982 $1,221 $7,703 $134,500
Investments in Residential Mortgage-Backed Securities
As part of its strategy to diversify its investments, AIG invests in various types of securities, including residential mortgage-backed
securities (RMBS).
The amortized cost, gross unrealized gains (losses) and estimated fair value of AIG’s investments in RMBS securities,
other than those of AIGFP, at December 31, 2007 were as follows:
December 31, 2007
Gross Gross
Amortized Unrealized Unrealized Percent
(in millions) Cost Gains Losses Fair Value of Total
Residential mortgage-backed securities:
U.S. agencies $14,575 $320 $ 70 $14,825 17%
Prime non-agency(a)
21,552 72 550 21,074 25
Alt-A 25,349 17 1,620 23,746 28
Other housing-related(b)
4,301 2 357 3,946 5
Subprime 24,074 22 2,907 21,189 25
Total $89,851 $433 $ 5,504 $84,780 100%
(a) Includes foreign and jumbo RMBS-related securities.
(b) Primarily wrapped second-lien.
AIG’s operations, other than AIGFP, held investments in RMBS by one or more of the principal rating agencies. AIG’s investments
with an estimated fair value of $84.8 billion at December 31, rated BBB or below totaled $621 million, or less than 0.1 percent
2007, or approximately 10 percent of AIG’s total invested assets. of AIG’s total invested assets at December 31, 2007. As of
In addition, AIG’s insurance operations held investments with a February 25, 2008, $3.6 billion of AIG’s RMBS backed primarily
fair value totaling $4.0 billion in CDOs, of which $58 million by subprime collateral had been downgraded as a result of rating
included some level of subprime exposure. AIG’s RMBS invest- agency actions since January 1, 2008, and $6 million of such
ments are predominantly in highly-rated tranches that contain investments had been upgraded. Subsequent to December 31,
substantial protection features through collateral subordination. At 2007, rating agencies have placed on watch for downgrade a
December 31, 2007, approximately 92 percent of these invest- majority of 2006 and 2007 vintage AAA-rated subprime RMBS in
ments were rated AAA, and approximately 6 percent were rated AA the market. For AIG, $9.7 billion was on watch for downgrade.
104 AIG 2007 Form 10-K

The fair value of AIG’s RMBS investments, other than those of AIGFP, at December 31, 2007 by year of vintage and
credit rating were as follows:
Year of Vintage
(in millions) Prior 2003 2004 2005 2006 2007 Total
Rating:
AAA $4,053 $6,202 $7,070 $16,011 $25,392 $18,937 $77,665
AA 63 785 555 1,092 2,117 512 5,124
A 46 242 345 480 248 138 1,499
BBB and below — 53 74 214 114 37 492
Total $4,162 $7,282 $8,044 $17,797 $27,871 $19,624 $84,780
The fair value of AIG’s Alt-A investments included in the RMBS investments above, other than those of AIGFP, at
December 31, 2007 by year of vintage and credit rating were as follows:
Year of Vintage
Rating:
AAA $208 $623 $ 960 $4,899 $9,301 $6,512 $22,503
AA 23 199 150 391 117 11 891
A 1 37 51 137 48 6 280
BBB and below — 11 19 36 6 — 72
Total $232 $870 $1,180 $5,463 $9,472 $6,529 $23,746
The fair value of AIG’s subprime RMBS investments, other than those of AIGFP, at December 31, 2007 by year of
vintage and credit rating were as follows:
Year of Vintage
Rating:
AAA $127 $362 $557 $5,403 $7,926 $4,081 $18,456
AA 6 35 116 277 1,562 357 2,353
A 10 82 100 120 34 26 372
BBB and below — — — 8 — — 8
Total $143 $479 $773 $5,808 $9,522 $4,464 $21,189
AIG’s underwriting practices for investing in RMBS, other asset- provide attractive risk-adjusted after-tax returns. These high quality
backed securities and CDOs take into consideration the quality of municipal investments have an average rating of AA.
the originator, the manager, the servicer, security credit ratings, Fixed income assets held in Foreign General Insurance are of
underlying characteristics of the mortgages, borrower characteris- high quality and short to intermediate duration, averaging
tics, and the level of credit enhancement in the transaction. AIG’s 3.6 years compared to 7.0 years for those in Domestic General
strategy is typically to invest in securities rated AA or better and Insurance.
create diversification across multiple underlying asset classes. While invested assets backing reserves are invested in
conventional fixed income securities in Domestic General Insur-
ance, a modest portion of surplus is allocated to large capitaliza-General Insurance Invested Assets
tion, high-dividend, public equity strategies and to alternative
investments, including private equity and hedge funds. TheseIn AIG’s General Insurance business, the duration of liabilities for
investments have provided a combination of added diversificationlong-tail casualty lines is greater than other lines. As differentiated
and attractive long-term returns.from the Life Insurance & Retirement Services companies, the
General Insurance invested assets grew by $13.7 billion, or 12focus is not on asset-liability matching, but on preservation of
percent, during 2007 as bond holdings grew by $6 billion. Listedcapital and growth of surplus.
equity holdings grew by $1.3 billion.Fixed income holdings of the Domestic General Insurance
companies are comprised primarily of tax-exempt securities, which
AIG 2007 Form 10-K 105

maximum allowable percentage under current local regulation. TheLife Insurance & Retirement Services Invested
majority of Nan Shan’s in-force policy portfolio is traditional lifeAssets
and endowment insurance products with implicit interest rate
guarantees. New business with lower interest rate guarantees areWith respect to Life Insurance & Retirement Services, AIG uses
gradually reducing the overall interest requirements, but assetasset-liability management as a tool worldwide in the life insur-
portfolio yields have declined faster due to the prolonged lowance business to influence the composition of the invested assets
interest rate environment. As a result, although the investmentand appropriate marketing strategies. AIG’s objective is to
margins for a large block of in-force policies are negative, themaintain a matched asset-liability structure. However, in certain
block remains profitable overall because the mortality andmarkets, the absence of long-dated fixed income investment
expense margins presently exceed the negative investmentinstruments may preclude a matched asset-liability position. In
spread. In response to the low interest rate environment and theaddition, AIG may occasionally determine that it is economically
volatile exchange rate of the Taiwanese dollar, Nan Shan isadvantageous to be temporarily in an unmatched position. To the
emphasizing new products with lower implied guarantees, includ-extent that AIG has maintained a matched asset-liability structure,
ing participating endowments and investment-linked products.the economic effect of interest rate fluctuations is partially
Although the risks of a continued low interest rate environmentmitigated.
coupled with a volatile Taiwanese dollar could increase netAIG’s investment strategy for the Life Insurance & Retirement
liabilities and require additional capital to maintain adequate localServices segment is to produce cash flows greater than maturing
solvency margins, Nan Shan currently believes it has adequateinsurance liabilities. AIG actively manages the asset-liability rela-
resources to meet all future policy obligations.tionship in its foreign operations, even though certain territories
AIG actively manages the asset-liability relationship in itslack qualified long-term investments or certain local regulatory
domestic operations. This relationship is more easily managedauthorities may impose investment restrictions. For example, in
through the availability of qualified long-term investments.several Southeast Asian countries, the duration of investments is
A number of guaranteed benefits, such as living benefits orshorter than the effective maturity of the related policy liabilities.
guaranteed minimum death benefits, are offered on certainTherefore, there is risk that the reinvestment of the proceeds at
variable life and variable annuity products. AIG manages itsthe maturity of the initial investments may be at a yield below that
exposure resulting from these long-term guarantees throughof the interest required for the accretion of the policy liabilities.
reinsurance or capital market hedging instruments.Additionally, there exists a future investment risk associated with
AIG invests in equities for various reasons, including diversify-certain policies currently in-force which will have premium receipts
ing its overall exposure to interest rate risk. Available for salein the future. That is, the investment of these future premium
bonds and equity securities are subject to declines in fair value.receipts may be at a yield below that required to meet future
Such declines in fair value are presented in unrealized apprecia-policy liabilities.
tion or depreciation of investments, net of taxes, as a componentAIG actively manages the interest rate assumptions and
of Accumulated other comprehensive income. Declines that arecrediting rates used for its new and in force business. Business
determined to be other-than-temporary are reflected in income instrategies continue to evolve to maintain profitability of the overall
the period in which the intent to hold the securities to recovery nobusiness. In some countries, new products are being introduced
longer exists. See Valuation of Invested Assets herein. Generally,with minimal investment guarantees, resulting in a shift toward
insurance regulations restrict the types of assets in which aninvestment-linked savings products and away from traditional
insurance company may invest. When permitted by regulatorysavings products with higher guarantees.
authorities and when deemed necessary to protect insuranceThe investment of insurance cash flows and reinvestment of
assets, including invested assets, from adverse movements inthe proceeds of matured securities and coupons requires active
foreign currency exchange rates, interest rates and equity prices,management of investment yields while maintaining satisfactory
AIG and its insurance subsidiaries may enter into derivativeinvestment quality and liquidity.
transactions as end users to hedge their exposures. For a furtherAIG may use alternative investments, including equities, real
discussion of AIG’s use of derivatives, see Risk Management —estate and foreign currency denominated fixed income instru-
Credit Risk Management — Derivatives herein.ments in certain foreign jurisdictions where interest rates remain
In certain jurisdictions, significant regulatory and/or foreignlow and there are limited long-dated bond markets to extend the
governmental barriers exist which may not permit the immediateduration or increase the yield of the investment portfolio to more
free flow of funds between insurance subsidiaries or from theclosely match the requirements of the policyholder liabilities and
insurance subsidiaries to AIG parent. For a discussion of theseDAC recoverability. This strategy has been effectively used in
restrictions, see Item 1. Business — Regulation.Japan and more recently by Nan Shan in Taiwan. In Japan, foreign
Life Insurance & Retirement Services invested assets grew byassets, excluding those matched to foreign liabilities, were
$41.7 billion, or 10 percent, during 2007 as bond holdings grewapproximately 31 percent of statutory assets, which is below the
by $5.3 billion, and listed equity holdings grew by $9.3 billion, ormaximum allowable percentage under current local regulation.
39 percent.Foreign assets comprised approximately 33 percent of Nan
Shan’s invested assets at December 31, 2007, slightly below the
106 AIG 2007 Form 10-K

options, forwards and futures. AIGFP’s super senior credit defaultFinancial Services Invested Assets
swaps include structural protection to help minimize risk. For a
Financial Services Securities
further discussion on the use of derivatives by Capital Markets,
Financial Services securities available for sale of $40.3 billion at see Operating Review — Financial Services Operations — Capital
December 31, 2007 is predominantly a diversified portfolio of Markets and Risk Management — Derivatives herein and Note 8
high-grade fixed income securities where the individual securities to Consolidated Financial Statements.
have varying degrees of credit risk. At December 31, 2007, the AIGFP owns inventories in certain commodities in which it
average credit rating of this portfolio was in the AA+ category or trades, and may reduce the exposure to market risk through the
the equivalent thereto as determined through rating agencies or use of swaps, forwards, futures, and option contracts. Physical
internal review. AIGFP has also entered into credit derivative commodities held in AIGFP’s wholly owned broker-dealer subsidi-
transactions to economically hedge its credit risk associated with ary are recorded at fair value. All other commodities are recorded
$82 million of these securities. Securities deemed below invest- at the lower of cost or fair value.
ment grade at December 31, 2007 totalled $797 million in fair Trading securities, at fair value, and securities and spot
value, representing two percent of Financial Services securities commodities sold but not yet purchased, at fair value, are marked
available for sale. There have been no significant downgrades of to fair value daily with the unrealized gain or loss recognized in
these securities through February 15, 2008. income. These trading securities are purchased and sold as
AIGFP’s management objective is to minimize interest rate, necessary to meet the risk management and business objectives
currency, commodity and equity risks associated with its securi- of Capital Markets operations.
ties available for sale. When AIGFP purchases a security for its
The gross unrealized gains and gross unrealized losses of
securities available for sale investment portfolio, it simultaneously
Capital Markets operations included in Financial Services
enters into an offsetting hedge such that the payment terms of
assets and liabilities at December 31, 2007 were as
the hedging transaction offset the payment terms of the invest-
follows:
ment security. This achieves the economic result of converting the
Gross Grossreturn on the underlying security to U.S. dollar LIBOR plus or
Unrealized Unrealized
minus a spread based on the underlying profit on each security on (in millions) Gains Losses
the initial trade date. The market risk associated with such
Securities available for sale, at fair value $939 $777
hedges is managed on a portfolio basis.
Unrealized gain/loss on swaps, options
Because hedge accounting treatment was not applied in 2006, and forward transactions* $17,134 $22,982
the unrealized gains and losses on the derivative transactions with
* These amounts are also presented as the respective balance sheetunaffiliated third parties were reflected in operating income. The
amounts.
unrealized gains and losses on the underlying securities available for
sale resulting from changes in interest rates and currency rates and
ILFCcommodity and equity prices were included in accumulated other
comprehensive income (loss), or in operating income, as appropriate. The cash used for the purchase of flight equipment is derived
When a security is sold, the realized gain or loss with respect to this primarily from the proceeds of ILFC’s debt financings. The primary
security is included in operating income. sources for the repayment of this debt and the related interest
Securities purchased under agreements to resell are treated expense are ILFC’s cash flow from operations, proceeds from the
as collateralized financing transactions. AIGFP takes possession sale of flight equipment and the rollover and refinancing of the
of or obtains a security interest in securities purchased under prior debt. During 2007, ILFC acquired flight equipment costing
agreements to resell. $4.7 billion. For a further discussion of ILFC’s borrowings, see
Operating Review — Financial Services Operations — Aircraft Leas-
Capital Markets ing and Capital Resources and Liquidity — Borrowings herein.
At December 31, 2007, ILFC had committed to purchase 234
AIGFP uses the proceeds from the issuance of notes and bonds
new aircraft deliverable from 2008 through 2017 for an estimated
and GIAs to invest in a diversified portfolio of securities, including
aggregate purchase price of $20.1 billion. As of February 22,
securities available for sale, and derivative transactions. The
2008, ILFC has entered into leases for all of the new aircraft to
funds may also be invested in securities purchased under
be delivered in 2008, and for 65 of 161 of the new aircraft to be
agreements to resell. The proceeds from the disposal of the
delivered subsequent to 2008. ILFC will be required to find
aforementioned securities available for sale and securities pur-
customers for any aircraft currently on order and any aircraft to be
chased under agreements to resell are used to fund the maturing
ordered, and it must arrange financing for portions of the
GIAs or other AIGFP financings, or to invest in new assets. For a
purchase price of such equipment. ILFC has been successful to
further discussion of AIGFP’s borrowings, see Capital Resources
date both in placing its new aircraft on lease or under sales
and Liquidity — Borrowings herein.
contract and obtaining adequate financing, but there can be no
Capital Markets derivative transactions are carried at fair
assurance that such success will continue in future environments.
value. AIGFP reduces its economic risk exposure through similarly
valued offsetting transactions including swaps, trading securities,
AIG 2007 Form 10-K 107

short-term investments. These increases were primarily driven byAsset Management Invested Assets
continued growth of the MIP and the growth of AIG’s Institutional
Asset Management invested assets are primarily comprised of Asset Management business. These increases were partially
assets supporting AIG’s Spread-Based Investment business, offset by the decrease in assets associated with the runoff of the
which includes AIG’s MIP and domestic GIC programs. domestic GIC program.
The Spread-Based Investment business strategy is to generate
spread income from investments yielding returns greater than Securities Lending Activities
AIG’s cost of funds. The asset-liability relationship is actively
AIG’s securities lending program is a centrally managed programmanaged. The goal of the MIP investment strategy is to capture a
facilitated by AIG Investments primarily for the benefit of certain ofspread between income earned on investments and the funding
AIG’s Insurance companies. Securities are loaned to variouscosts of the program while mitigating interest rate and foreign
financial institutions, primarily major banks and brokerage firms.currency exchange rate risk. The invested assets are predomi-
Cash collateral equal to 102 percent of the fair value of thenantly fixed income securities and include U.S. residential mort-
loaned securities is received. The cash collateral is invested ingage-backed securities, asset-backed securities and commercial
highly-rated fixed income securities to earn a net spread.mortgage-backed securities. In addition, the MIP sold credit
AIG’s liability to the borrower for collateral received was $82.0protection by issuing single-name high-grade corporate credit
billion and the fair value of the collateral reinvested was $75.7default swaps in 2007.
billion as of December 31, 2007. In addition to the investedAsset Management invested assets grew by $3.8 billion during
collateral, the securities on loan as well as all of the assets of2007. The growth in invested assets was primarily attributable to
the participating companies are generally available to satisfy thegrowth in other invested assets and mortgage and other loans
liability for collateral received.receivable partially offset by a decrease in bond holdings, and
The composition of the securities lending invested collateral by credit rating at December 31, 2007 was as follows:
BBB/Not Short-
(in millions) AAA AA A Rated Term Total
Corporate debt $ 1,191 $ 9,341 $3,448 $160 $ — $14,140
Mortgage-backed, asset-backed and collateralized 47,180 2,226 22 82 49,510
Cash and short-term investments — — — — 12,012 12,012
Total $48,371 $11,567 $3,470 $242 $12,012 $75,662
Participation in the securities lending program by reporting unit at investments was $5.0 billion as of December 31, 2007. During
December 31, 2007 was as follows: 2007, AIG incurred net realized losses of $1.0 billion on this
Percent portfolio, predominantly related to other-than-temporary
Participation
impairments.
Domestic Life Insurance and Retirement Services 79%
Foreign Life Insurance 10
Valuation of Invested AssetsDomestic General Insurance 3
Foreign General Insurance 4 Traded Securities
Asset Management 4
The valuation of AIG’s investment portfolio involves obtaining aTotal 100%
fair value for each security. The source for the fair value is
On December 31, 2007, $11.4 billion (or 13.7 percent) of the
generally from market exchanges or dealer quotations, with the
liabilities were one-day tenor. These one-day tenor loans do not
exception of nontraded securities.
have a contractual end date but are terminable by either party on
demand. The balance of the liabilities contractually mature within
Nontraded Securities
three months; however, the maturing loans are frequently renewed
and rolled over to extended dates. Collateral held for this program AIG considers nontraded securities to mean certain fixed income
at December 31, 2007 included interest bearing cash equivalents investments, certain structured securities, direct private equities,
with overnight maturities of $12.0 billion. limited partnerships, and hedge funds.
Liquidity in the securities pool is managed based upon The aggregate carrying value of AIG’s nontraded securities at
historical experience regarding volatility of daily, weekly and December 31, 2007 was approximately $70 billion. The methodol-
biweekly loan balances. Despite the current environment, the ogy used to estimate fair value of nontraded fixed income
program has not experienced a significant decrease in loan investments is by reference to traded securities with similar
balances. attributes and using a matrix pricing methodology. This methodol-
In addition, the invested securities are carried at fair value with ogy takes into account such factors as the issuer’s industry, the
unrealized gains and losses recorded in accumulated other security’s rating and tenor, its coupon rate, its position in the
comprehensive income (loss) while net realized gains and losses capital structure of the issuer, and other relevant factors.
are recorded in earnings. The net unrealized loss on the
108 AIG 2007 Form 10-K

For certain structured securities, the carrying value is based AIG evaluates its investments for impairments in valuation. The
on an estimate of the security’s future cash flows pursuant to the determination that a security has incurred an other-than-temporary
requirements of Emerging Issues Task Force Issue No. 99-20, impairment in value and the amount of any loss recognition
‘‘Recognition of Interest Income and Impairment on Purchased requires the judgment of AIG’s management and a regular review
and Retained Beneficial Interests in Securitized Financial Assets.’’ of its investments. See Note 1(c) to Consolidated Financial
Hedge funds and limited partnerships in which AIG holds in the Statements for further information on AIG’s policy.
aggregate less than a five percent interest are carried at fair Once a security has been identified as other-than-temporarily
value. impaired, the amount of such impairment is determined by
With respect to hedge funds and limited partnerships in which reference to that security’s contemporaneous fair value and
AIG holds in the aggregate a five percent or greater interest, or recorded as a charge to earnings.
less than a five percent interest but where AIG has more than a In light of the recent significant disruption in the
minor influence over the operations of the investee, AIG accounts U.S. residential mortgage and credit markets, particularly in the
for these investments using the equity method. fourth quarter, AIG has recognized an other-than-temporary impair-
AIG obtains the fair value of its investments in limited ment charge (severity loss) of $2.2 billion (including $643 million
partnerships and hedge funds from information provided by the related to AIGFP’s available for sale investment securities re-
general partner or manager of these investments, the accounts of corded in other income), primarily with respect to certain residen-
which generally are audited on an annual basis. tial mortgage-backed securities and other structured securities.
Each of these investment categories is regularly tested to Even while retaining their investment grade ratings, such securi-
determine if impairment in value exists. Various valuation tech- ties were priced at a significant discount to cost. Notwithstanding
niques are used with respect to each category in this AIG’s intent and ability to hold such securities indefinitely, and
determination. despite structures which indicate that a substantial amount of the
For a discussion of accounting policies related to changes in securities should continue to perform in accordance with original
fair value of invested assets, see Note 1 to Consolidated terms, AIG concluded that it could not reasonably assert that the
Financial Statements. recovery period would be temporary.
As a result of AIG’s periodic evaluation of its securities for
other-than-temporary impairments in value, AIG recorded other-Portfolio Review
than-temporary impairment charges of $4.7 billion (including $643
Other-Than-Temporary Impairments
million related to AIGFP recorded on other income), $944 million
and $598 million in 2007, 2006 and 2005, respectively.AIG assesses its ability to hold any fixed maturity security in an
In addition to the above severity losses, AIG recorded other-unrealized loss position to its recovery, including fixed maturity
than-temporary impairment charges in 2007, 2006 and 2005securities classified as available for sale, at each balance sheet
related to:date. The decision to sell any such fixed maturity security
( securities which AIG does not intend to hold until recovery;classified as available for sale reflects the judgment of AIG’s
( declines due to foreign exchange;management that the security sold is unlikely to provide, on a
( issuer-specific credit events;relative value basis, as attractive a return in the future as
( certain structured securities impaired under EITF No. 99-20;alternative securities entailing comparable risks. With respect to
anddistressed securities, the sale decision reflects management’s
( other impairments, including equity securities and partnershipjudgment that the risk-discounted anticipated ultimate recovery is
investments.less than the value achievable on sale.
Net realized capital gains (losses) for the years ended December 31, 2007, 2006 and 2005 were as follows:
(in millions) 2007 2006 2005
Sales of equity securities 1,087 813 643
Sales of real estate and other assets 619 303 88
Other-than-temporary impairments (4,072) (944) (598)
Foreign exchange transactions (643) (382) 701
Derivative instruments (115) 698 (865)
Total $(3,592) $ 106 $ 341
AIGFP other-than-temporary impairments* $ (643) $ — $ —
* Reported as part of other income.
AIG 2007 Form 10-K 109

Other-than-temporary impairment charges for the years ended December 31, 2007, 2006 and 2005 were as follows:
(in millions) 2007 2006 2005
Impairment type:
Severity* $2,200 $ — $ —
Lack of intent to hold to recovery 1,054 619 335
Foreign currency declines 500 — —
Issuer-specific credit events 515 279 257
Adverse projected cash flows on structured securities (EITF 99-20) 446 46 6
Total $4,715 $944 $598
* Includes $643 million related to AIGFP reported in other income.
Other-than-temporary impairment charges for the year ended December 31, 2007 by Reporting Segment were as follows:
Life
Insurance &
Impairment Type:
Severity $ 71 $1,070 $643 $416 $ — $2,200
Lack of intent to hold to recovery 91 885 7 71 — 1,054
Foreign currency declines — 500 — — — 500
Issuer-specific credit events 113 177 — 69 156 515
Adverse projected cash flows on structured securities 1 166 — 279 — 446
Total $276 $2,798 $650 $835 $156 $4,715
Other-than-temporary severity-related impairment charges for the year ended December 31, 2007 were as follows:
Rating: RMBS CDO CMBS Other Securities Total
AAA $ 168 $621 $ — $ — $ 789
AA 870 53 6 — 929
A 66 32 77 — 175
BBB and below 28 — 52 — 80
Nonrated — — — 227 227
Total $1,132 $706 $135 $227 $2,200
No other-than-temporary impairment charge with respect to any U.S. loan exposure. At that date, none of the U.S. loans were in
one single credit was significant to AIG’s consolidated financial default or delinquent by 90 days or more. The remaining
condition or results of operations, and no individual other-than- commercial mortgage loans are secured predominantly by proper-
temporary impairment charge exceeded two percent of consoli- ties in Japan. In addition, at December 31, 2007, AIG had
dated net income in 2007. approximately $2.0 billion in residential mortgage loans in
In periods subsequent to the recognition of an other-than- jurisdictions outside the United States, primarily backed by
temporary impairment charge for fixed maturity securities, which is properties in Taiwan and Thailand.
not credit or foreign exchange related, AIG generally accretes into At December 31, 2007, AIG owned $23.9 billion in cost basis
income the discount or amortizes the reduced premium resulting of CMBS. Approximately 78 percent of such holdings were rated
from the reduction in cost basis over the remaining life of the ‘‘AAA’’, approximately 98 percent were rated ‘‘A’’ or higher, and
security. less than 2 percent were rated ‘‘BBB’’ or below. At December 31,
2007, all such securities were current in the payment of principal
and interest and none had default rates on underlying collateral atCommercial Mortgage Loan Exposure
levels viewed by AIG as likely to result in the loss of principal or
At December 31, 2007, AIG had direct commercial mortgage loan
interest.
exposure of $17.1 billion, with $16.3 billion representing
110 AIG 2007 Form 10-K

There have been disruptions in the commercial mortgage adversely affected by market perceptions that underlying mortgage
markets in general, and the CMBS market in particular, with credit defaults will increase. As a result, AIG recognized $135 million of
default swaps indices and quoted prices of securities at levels other-than-temporary impairment charges on CMBS trading at a
consistent with a severe correction in lease rates, occupancy and severe discount to cost, despite the absence of any deterioration
fair value of properties. In addition, spreads in the primary in performance of the underlying credits, because AIG concluded
mortgage market have widened significantly. While this capital that it could not reasonably assert that the recovery period was
market stress has not to date been reflected in the performance temporary. At this time, AIG anticipates full recovery of principal
of commercial mortgage securitization in the form of increased and interest on the securities to which such other-than-temporary
defaults in underlying mortgage pools, pricing of CMBS has been impairment charges were recorded.
An aging of the pre-tax unrealized losses of fixed maturity and equity securities, distributed as a percentage of cost
relative to unrealized loss (the extent by which the fair value is less than amortized cost or cost), including the number
of respective items, was as follows at December 31, 2007:
Less than or equal to Greater than 20% to Greater than 50%
20% of Cost(e)
50% of Cost(e)
of Cost(e)
Total
Aging(d)
Unrealized Unrealized Unrealized Unrealized
(dollars in millions) Cost(a)
Loss Items Cost(a)
Loss Items Cost(a)
Loss Items Cost(a)
Loss(b)
Items
Investment
grade bonds
0-6 months $124,681 $ 5,099 16,539 $ 2,588 $ 681 633 $ $ $127,269 $ 5,780 17,172
7-12 months 53,515 3,078 7,174 3,219 859 1,110 — — — 56,734 3,937 8,284
H12 months 63,146 2,966 9,598 699 180 119 63,845 3,146 9,717
Total $241,342 $11,143 33,311 $ 6,506 $1,720 1,862 $ — $ — — $247,848 $12,863 35,173
Below
investment
grade bonds
0-6 months $ 5,909 $ 147 1,611 $ 68 $ 18 24 $ — $ — — $ 5,977 $ 165 1,635
7-12 months 782 45 246 47 8 14 — — — 829 53 260
H12 months 1,222 61 204 70 19 9 — — — 1,292 80 213
Total $ 7,913 $ 253 2,061 $ 185 $ 45 47 $ — $ — — $ 8,098 $ 298 2,108
Total bonds
0-6 months $130,590 $ 5,246 18,150 $ 2,656 $ 699 657 $ — $ — — $133,246 $ 5,945 18,807
7-12 months 54,297 3,123 7,420 3,266 867 1,124 — — — 57,563 3,990 8,544
H12 months 64,368 3,027 9,802 769 199 128 — — — 65,137 3,226 9,930
Total(c)
$249,255 $11,396 35,372 $ 6,691 $1,765 1,909 $ — $ — — $255,946 $13,161 37,281
Equity securities
0-6 months $ 3,603 $ 297 2,051 $ 262 $ 69 39 $ $ $ 3,865 $ 366 2,090
7-12 months 283 33 181 285 64 36 568 97 217
H12 months — — — — — — — — — — — —
Total $ 3,886 $ 330 2,232 $ 547 $ 133 75 $ — $ — — $ 4,433 $ 463 2,307
(a) For bonds, represents amortized cost.
(b) The effect on net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will be charged to
participating policyholder accounts, or realization will result in current decreases in the amortization of certain DAC.
(c) Includes securities lending invested collateral.
(d) Represents the number of continuous months that fair value has been less than cost by any amount.
(e) Represents the percentage by which fair value is less than cost at the balance sheet date.
2007, aggregate pre-tax unrealized gains for fixed maturity andUnrealized gains and losses
equity securities were $18.1 billion ($11.8 billion after tax).
At December 31, 2007, the fair value of AIG’s fixed maturity and
At December 31, 2007, the aggregate pre-tax gross unrealized
equity securities aggregated $587.1 billion. At December 31,
losses on fixed maturity and equity securities were $13.6 billion
AIG 2007 Form 10-K 111

($8.9 billion after tax). Additional information about these securi- ( Market risk — the potential loss arising from adverse fluctua-
ties is as follows: tions in interest rates, foreign currencies, equity and commod-
( These securities were valued, in the aggregate, at approxi- ity prices, and their levels of volatility.
mately 95 percent of their current amortized cost. ( Operational risk — the potential loss resulting from inadequate
( Less than three percent of these securities were valued at less or failed internal processes, people, and systems, or from
than 20 percent of their current cost, or amortized cost. external events.
( Less than four percent of the fixed income securities had ( Liquidity risk — the potential inability to meet all payment
issuer credit ratings which were below investment grade. obligations when they become due.
AIG did not consider these securities in an unrealized loss ( General insurance risk — the potential loss resulting from
position to be other-than-temporarily impaired at December 31, inadequate premiums, insufficient reserves and catastrophic
2007, as management has the intent and ability to hold these exposures.
investments until they recover their cost basis. AIG believes the ( Life insurance risk — the potential loss resulting from experi-
securities will generally continue to perform in accordance with ence deviating from expectations for mortality, morbidity and
the original terms, notwithstanding the present price declines. termination rates in the insurance-oriented products and insuffi-
At December 31, 2007, unrealized losses for fixed maturity cient cash flows to cover contract liabilities in the retirement
securities and equity securities did not reflect any significant savings products.
industry concentrations. AIG senior management establishes the framework, principles
In 2007, unrealized losses related to investment grade bonds and guidelines for risk management. The primary focus of risk
increased $9.3 billion ($6.1 billion after tax), reflecting the management is to assess the risk of AIG incurring economic
widening of credit spreads, partially offset by the effects of a losses from the risk categories outlined above. The business
decline in risk-free interest rates. executives are responsible for establishing and implementing risk
management processes and responding to the individual needs
The amortized cost and fair value of fixed maturity
and issues within their business, including risk concentrations
securities available for sale in an unrealized loss position
within their respective businesses with appropriate oversight by
at December 31, 2007, by contractual maturity, is shown
Enterprise Risk Management (ERM).
below:
(in millions) Amortized Cost Fair Value Corporate Risk Management
Due in one year or less $ 9,408 $ 9,300
AIG’s major risks are addressed at the corporate level throughDue after one year through five years 36,032 35,267
ERM, which is headed by AIG’s Chief Risk Officer (CRO). ERM isDue after five years through ten years 54,198 52,394
Due after ten years 56,557 53,578 responsible for assisting AIG’s business leaders, executive man-
agement and the Board of Directors to identify, assess, quantify,
collateralized 99,751 92,246
manage and mitigate the risks incurred by AIG. Through the CRO,
Total $255,946 $242,785
ERM reports to AIG’s Chief Financial Officer, various senior
For the year ended December 31, 2007, the pre-tax realized management committees and the Board of Directors through the
losses incurred with respect to the sale of fixed maturities and Finance and Audit Committees.
equity securities were $1.3 billion. The aggregate fair value of An important goal of ERM is to ensure that once appropriate
securities sold was $38.0 billion, which was approximately governance, authorities, procedures and policies have been
94 percent of amortized cost. The average period of time that established, aggregated risks do not result in inappropriate
securities sold at a loss during 2007 were trading continuously at concentrations. Senior management defines the policies, has
a price below book value was approximately five months. See Risk established general operating parameters for its global busi-
Management — Investments herein for an additional discussion of nesses and has established various oversight committees to
investment risks associated with AIG’s investment portfolio. monitor the risks attendant to its businesses:
( The Financial Risk Committee (FRC) oversees AIG’s market risk
Risk Management exposures to interest rates, foreign exchange and fair values of
shares, partnership interests, real estate and other equityOverview
investments and provides strategic direction for AIG’s asset-
AIG believes that strong risk management practices and a sound liability management. The FRC meets monthly and acts as a
internal control environment are fundamental to its continued central mechanism for AIG senior management to review
success and profitable growth. Failure to manage risk properly comprehensive information on AIG’s financial exposures and to
exposes AIG to significant losses, regulatory issues and a exercise broad control over these exposures. There are two
damaged reputation. subcommittees of the FRC.
The major risks to which AIG is exposed include the following: ( The Foreign Exchange Committee monitors trends in foreign
( Credit risk — the potential loss arising from an obligor’s exchange rates, reviews AIG’s foreign exchange exposures,
inability or unwillingness to meet its obligations to AIG. and provides recommendations on foreign currency asset
allocation and remittance hedging.
112 AIG 2007 Form 10-K

( The Liquidity Risk Committee is responsible for liquidity in some cases, insuring, causing the value of the assets to
policy and implementation at AIG Parent and exercises decline or insured risks to rise; and (ii) as cross-border risk where
oversight and control of liquidity policies at each AIG entity. a country (sovereign government risk) or one or more non-
See Capital Resources and Liquidity herein. sovereign obligors within a country are unable to repay an
( The CRC is responsible for the following: obligation or are unable to provide foreign exchange to service a
( approving credit risk policies and procedures for use credit or equity exposure incurred by another AIG business unit
throughout AIG; located outside that country.
( delegating credit authority to business unit credit officers AIG’s credit risks are managed at the corporate level by the
and select business unit managers; Credit Risk Management department (CRM) whose primary role is
( approving transaction requests and limits for corporate, to support and supplement the work of the CRC. CRM is headed
sovereign and cross-border credit exposures that exceed the by AIG’s Chief Credit Officer (CCO), who reports to AIG’s CRO.
delegated authorities; AIG’s CCO is primarily responsible for the development and
( establishing and maintaining AIG’s risk rating process for maintenance of credit risk policies and procedures approved by
corporate, financial and sovereign obligors; and the CRC. In discharging this function CRM has the following
( conducting regular reviews of credit risk exposures in the responsibilities:
portfolios of all credit-incurring business units. ( Manage the approval process for all requests for credit limits,
( The Derivatives Committee (DC) reviews any proposed deriva- program limits and transactions.
tive transaction or program not otherwise managed by AIGFP. ( Approve delegated credit authorities to CRM credit executives
The DC examines, among other things, the nature and purpose and business unit credit officers.
of the derivative transaction, its potential credit exposure, if ( Aggregate globally all credit exposure data by counterparty,
any, and the estimated benefits. country and industry and report risk concentrations regularly to
( The CSFTC has the authority and responsibility to review and the CRC and the Finance Committee of the Board of Directors.
approve any proposed CSFT. A CSFT is any transaction or ( Administer regular in-depth portfolio credit reviews of all
product that may involve a heightened legal, regulatory, investment, derivative and credit-incurring business units and
accounting or reputational risk that is developed, marketed or recommend any corrective actions where required.
proposed by AIG or a third party. The CSFTC provides guidance ( Develop methodologies for quantification and assessment of
to and monitors the activities of transaction review committees credit risks, including the establishment and maintenance of
(TRCs) which have been established in all major business AIG’s internal risk rating process.
units. TRCs have the responsibility to identify, review and refer ( Approve appropriate credit reserves and methodologies at the
CSFTs to the CSFTC. business unit and enterprise levels.
AIG closely monitors and controls its company-wide credit risk
concentrations and attempts to avoid unwanted or excessive riskCredit Risk Management
accumulations, whether funded or unfunded. To minimize the level
AIG devotes considerable resources, expertise and controls to
of credit risk in certain circumstances, AIG may require third-party
managing its direct and indirect credit exposures, such as
guarantees, collateral, such as letters of credit or trust account
investments, deposits, loans, reinsurance recoverables and
deposits or reinsurance. These guarantees, letters of credit and
leases, as well as counterparty risk in derivatives activities,
reinsurance recoverables are also treated as credit exposure and
cessions of insurance risk to reinsurers and customers and credit
are added to AIG’s risk concentration exposure data.
risk assumed through credit derivatives written and financial
AIG defines its aggregate credit exposures to a counterparty as
guarantees. Credit risk is defined as the risk that AIG’s customers
the sum of its fixed maturities, loans, finance leases, derivatives
or counterparties are unable or unwilling to repay their contractual
(mark to market), deposits (in the case of financial institutions)
obligations when they become due. Credit risk may also be
and the specified credit equivalent exposure to certain insurance
manifested: (i) through the downgrading of credit ratings of
products which embody credit risk.
counterparties whose credit instruments AIG may be holding, or,
AIG 2007 Form 10-K 113

The following table presents AIG’s largest credit exposures at December 31, 2007 as a percentage of total shareholders’ equity:
Credit Exposure
as a Percentage of Total
Category Risk Rating(a)
Shareholders’ Equity
Investment Grade:
10 largest combined A+ (weighted 84.8%
average)(b)
Single largest non-sovereign (financial institution) AA– 8.4
Single largest corporate AAA 5.4
Single largest sovereign A 15.7
Non-Investment Grade:
Single largest sovereign BB– 1.8
Single largest non-sovereign B+ 0.5
(a) Risk rating is based on external ratings, or equivalent, based on AIG’s internal risk rating process.
(b) Six of the ten largest credit exposures are to highly-rated financial institutions and three are to investment-grade rated sovereigns; none is rated lower
than BBB+ or its equivalent.
AIG closely controls its aggregate cross-border exposures to senior tranches of CDOs. In addition, AIG Investments invests
avoid excessive concentrations in any one country or regional directly in commercial real estate properties and provides real
group of countries. AIG defines its cross-border exposure to estate commercial mortgage loans.
include both cross-border credit exposures and its large cross- Some of AIG’s exposures are insured (‘‘wrapped’’) by financial
border investments in its own international subsidiaries. Ten guarantor insurance companies, also known as ‘‘monoline insur-
countries had cross-border exposures in excess of 10 percent of ers’’, which at December 31, 2007, provide AIG over $44 billion
total shareholders’ equity; seven are AAA-rated and three are (carrying value) in financial support. The monoline insurers include
AA-rated. MBIA, Ambac, FGIC, and others and provide support predomi-
In addition, AIG closely monitors its industry concentrations, nantly in the United States. AIG does not rely on the monoline
the risks of which are often mitigated by the breadth and scope of insurance as its principal source of repayment when evaluating
AIG’s international operations. securities for purchase. All investment securities are evaluated
( AIG’s single largest industry credit exposure is to the highly- primarily based on the underlying cash flow generation capacities
rated global financial institutions sector, accounting for 87 per- of the issuer or cash flow characteristics of the security.
cent of total shareholders’ equity at December 31, 2007. Approximately 96 percent of the monoline protection is
( Excluding the U.S. residential and commercial mortgage sec- provided on AIG Investments’ fixed maturities exposures, of which
tors, AIG’s other industry credit concentrations in excess of municipal securities represent 74 percent of assets insured,
10 percent of total shareholders’ equity at December 31, 2007 substantially all of which had underlying credit ratings of ‘‘A’’ or
are to the following industries (in descending order by approxi- higher. AIG considers that the monoline wrap for such securities is
mate size): of limited support, as the default rate on single A and higher
– Electric and water utilities; rated municipal bonds has historically been negligible. However,
– Oil and gas; AIG anticipates that the failure of one or more monoline insurers
– European regional financial institutions; may cause price volatility and other disruption in the municipal
– Global telecommunications companies; bond market, as market participants adjust to the absence of
– Global life insurance carriers; monoline credit support. AIG maintains a credit staff to evaluate
– U.S.-based regional financial institutions; its municipal bond holdings, and does not rely on monoline
– Global securities firms and exchanges; and insurers in evaluating securities for its municipal bond portfolios.
– Global reinsurance firms. Approximately four percent of AIG’s monoline insurance sup-
AIG participates in the U.S. residential and commercial ports AIGFP investment exposures.
mortgage markets through AGF, which originates principally first- For the non-municipal assets in the AIG Investments portfolio,
lien mortgage loans and, to a lesser extent, second-lien mortgage at December 31, 2007, AIG owned $9.5 billion in cost basis or
loans to buyers and owners of residential housing; UGC which $8.8 billion in fair value of various types of asset-backed
provides first loss mortgage guaranty insurance for high loan-to- securities wrapped by one or more of the monoline insurers.
value first- and second-lien residential mortgages; AIG Investments Based on internal analysis, approximately $6.7 billion in cost
which invests in mortgage-backed securities and collateralized basis represented holdings with underlying ratings estimated at
debt obligations, on behalf of AIG insurance and financial services BBB or higher. AIG has generally viewed the monoline credit
subsidiaries, in which the underlying collateral comprises residen- support on these securities as significant only to ‘‘tail’’ risk, that
tial or commercial mortgage loans; and AIGFP which invests in is, the risk that as pools of underlying assets amortize, the
highly rated tranches of RMBS, CMBS and CDOs and provides remaining assets, or ‘‘tail’’, may suffer from adverse selection on
credit protection through credit default swaps on certain super prepayments or from a lack of adequate risk diversification. While
114 AIG 2007 Form 10-K

these securities initially had underlying investment grade ratings, capital. Similar to the income statement, AIG’s overall balance
poor pool performance has in some cases resulted in current sheet is net long foreign currencies and net short U.S. dollars.
ratings of below investment grade. The amount of ultimate loss
exposure of these securities to the monoline insurers is a The table below provides an estimate of the sensitivity of
function of the ultimate performance of the collateral pools and shareholders’ equity and net income to 10 percent changes in
cannot be reliably estimated. AIG believes that monoline insurers the value of the U.S. dollar relative to foreign currencies as of
are currently providing payment support on approximately December 31, 2007, assuming a tax rate of 35 percent:
$380 million of such securities.
U.S. dollar up U.S. dollar down
The CRC reviews quarterly concentration reports in all catego- (in millions) 10 percent 10 percent
ries listed above as well as credit trends by risk ratings. The CRC
Shareholders’ equity $(466) $466
may adjust limits to provide reasonable assurance that AIG does Net income $(220) $220
not incur excessive levels of credit risk and that AIG’s credit risk
AIG analyzes market risk using various statistical techniquesprofile is properly calibrated across business units.
including Value at Risk (VaR). VaR is a summary statistical
measure that uses the estimated volatility and correlation ofMarket Risk Management
market factors to calculate the maximum loss that could occur
AIG is exposed to market risks, primarily within its insurance and over a defined period of time with a specified level of statistical
capital markets businesses. These asset-liability exposures are confidence. VaR measures not only the size of individual expo-
predominantly structural in nature, and not the result of specula- sures but also the interaction between different market expo-
tive positioning to take advantage of short-term market opportuni- sures, thereby providing a portfolio approach to measuring market
ties. The Market Risk Management department (MRM), which risk. Similar VaR methodologies are used to determine capital
reports to the CRO, is responsible for control and oversight of requirements for market risk within AIG’s economic capital
market risks in all aspects of AIG’s financial services, insurance, framework.
and investment activities.
Insurance, Asset Management and Non-Trading Financial Services
AIG’s market exposures arise from the following:
VaR( AIG is a globally diversified enterprise with capital deployed in a
variety of currencies. Capital deployed in AIG’s overseas AIG performs one comprehensive VaR analysis across all of its
businesses, when converted into U.S. dollars for financial non-trading businesses, and a separate VaR analysis for its
reporting purposes, constitutes a ‘‘long foreign currency/short trading business at AIGFP. The comprehensive VaR is categorized
U.S. dollar’’ market exposure on AIG’s balance sheet. Similarly, by AIG business segment (General Insurance, Life Insurance &
overseas earnings denominated in foreign currency also repre- Retirement Services, Financial Services and Asset Management)
sent a ‘‘long foreign currency/short U.S. dollar’’ market and also by market risk factor (interest rate, currency and equity).
exposure on AIG’s income statement. AIG’s market risk VaR calculations include exposures to bench-
( Much of AIG’s domestic capital is invested in U.S. fixed income mark Treasury or swap interest rates, but do not include
or equity securities, leading to exposures to U.S. yields and exposures to credit-based factors such as credit spreads. AIG’s
equity markets. credit exposures within its invested assets and credit derivative
( Several of AIG’s Foreign Life Insurance subsidiaries operate in portfolios are discussed in Credit Risk Management — Financial
developing markets where maturities on longer-term life insur- Services herein.
ance liabilities exceed the maximum maturities of available For the insurance segments, assets included are invested
local currency assets. assets (excluding direct holdings of real estate) and liabilities
As a globally diversified enterprise, AIG is exposed to a variety included are reserve for losses and loss expenses, reserve for
of foreign currency risks. AIG earns a significant portion of its unearned premiums, future policy benefits for life and accident
income from operations conducted in foreign currencies which and health insurance contracts and other policyholders’ funds. For
must be translated into U.S. dollars for consolidated reporting financial services companies, loans and leases represent the
purposes. Consequently, exchange rate fluctuations can cause majority of assets represented in the VaR calculation, while bonds
volatility in AIG’s reported earnings. When the U.S. dollar weakens and notes issued represent the majority of liabilities.
against other currencies, AIG’s earnings increase. When the AIG calculated the VaR with respect to net fair values as of
U.S. dollar strengthens against other currencies, AIG’s earnings December 31, 2007 and 2006. The VaR number represents the
decline. maximum potential loss as of those dates that could be incurred
The sensitivity of AIG’s consolidated shareholders’ equity to with a 95 percent confidence (i.e., only five percent of historical
foreign exchange volatility is more complex. AIG has significant scenarios show losses greater than the VaR figure) within a one-
capital committed overseas, which rises in value on AIG’s month holding period. AIG uses the historical simulation methodol-
consolidated balance sheet when the U.S. dollar weakens. AIG ogy that entails repricing all assets and liabilities under explicit
also has significant U.S. dollar asset holdings overseas, which changes in market rates within a specific historical time period.
offset the foreign exchange exposure arising from AIG’s overseas AIG uses the most recent three years of historical market
information for interest rates, foreign exchange rates, and equity
AIG 2007 Form 10-K 115

index prices. For each scenario, each transaction was repriced.
Segment and AIG-wide scenario values are then calculated by
netting the values of all the underlying assets and liabilities.
The following table presents the period-end, average, high and low VaRs on a diversified basis and of each component of market risk
for AIG’s non-trading businesses. The diversified VaR is usually smaller than the sum of its components due to correlation effects.
2007 2006
For the Year Ended For the Year Ended
December 31, December 31,
(in millions) As of December 31 Average High Low As of December 31 Average High Low
Total AIG Non-Trading Market Risk:
Diversified $5,593 $5,316 $5,619 $5,073 $5,073 $5,209 $5,783 $4,852
Interest rate 4,383 4,600 4,757 4,383 4,577 4,962 5,765 4,498
Currency 785 729 785 685 686 641 707 509
Equity 2,627 2,183 2,627 1,873 1,873 1,754 1,873 1,650
General Insurance:
Diversified $1,363 $1,637 $1,892 $1,363 $1,717 $1,697 $1,776 $1,617
Interest rate 1,117 1,492 1,792 1,117 1,541 1,635 1,717 1,541
Currency 255 222 255 205 212 162 212 119
Equity 835 659 835 573 573 551 573 535
Life Insurance & Retirement
Services:
Diversified $5,180 $4,848 $5,180 $4,574 $4,574 $4,672 $5,224 $4,307
Interest rate 4,405 4,465 4,611 4,287 4,471 4,563 5,060 4,229
Currency 649 621 678 568 568 538 592 459
Equity 1,810 1,512 1,810 1,293 1,293 1,228 1,299 1,133
Non-Trading Financial Services:
Diversified $ 99 $ 117 $ 170 $ 85 $ 125 $ 165 $ 252 $ 125
Interest rate 95 116 168 76 127 166 249 127
Currency 13 12 13 11 11 8 11 7
Equity 1 1 1 1 1 1 2 1
Asset Management:
Diversified $ 38 $ 49 $ 74 $ 26 $ 64 $ 144 $ 190 $ 64
Interest rate 32 45 72 22 63 145 192 63
Currency 2 3 5 2 3 4 7 3
Equity 13 11 13 8 8 9 13 8
AIG’s total non-trading VaR increased from $5.1 billion at Each business unit is responsible for implementing the
December 31, 2006 to $5.6 billion at December 31, 2007, components of AIG’s operational risk management program to
primarily due to higher exposures to U.S. equity risk. The higher ensure that effective operational risk management practices are
contribution of U.S. equity risk during 2007 was driven by a utilized throughout AIG.
combination of three factors: Upon full implementation, the program will consist of a risk
( increased U.S. equity investment allocation in the General and control self assessment (RCSA) process, risk event data
Insurance and Life Insurance & Retirement Services segments, analysis, key risk indicators and governance. To date, AIG has
( increased volatility in U.S. equity prices, and developed the methodology for performing a combined operational
( rising correlations between U.S. equities and AIG’s structural risk and compliance RCSA in each of AIG’s key business units.
duration exposures in Asia.
Interest rate and foreign exchange volatilities generally moder- Insurance Risk Management
ated during 2007. Reinsurance
AIG uses reinsurance programs for its insurance risks as follows:Operational Risk Management
( facultative to cover large individual exposures;
AIG’s corporate-level Operational Risk Management department ( quota share treaties to cover specific books of business;
(ORM) oversees AIG’s operational risk management practices. The ( excess of loss treaties to cover large losses;
Director of ORM reports to the CRO. ORM is responsible for ( excess or surplus automatic treaties to cover individual life
establishing the framework, principles and guidelines for opera- risks in excess of stated per-life retention limits; and
tional risk management. ORM also manages compliance with the ( catastrophe treaties to cover specific catastrophes including
requirements of the Sarbanes-Oxley Act of 2002. earthquake, windstorm and flood.
116 AIG 2007 Form 10-K

AIG’s Reinsurance Security Department (RSD) conducts peri- For 2008, AIG purchased a U.S. catastrophe coverage of
odic detailed assessments of the financial status and condition of approximately $1.1 billion in excess of a per occurrence deducti-
current and potential reinsurers, both foreign and domestic. The ble of $1.5 billion. For Life Insurance & Retirement Services,
RSD monitors both the nature of the risks ceded to the reinsurers AIG’s 2008 catastrophe program covers losses of $250 million in
and the aggregation of total reinsurance recoverables ceded to excess of $200 million for Japan and Taiwan only.
reinsurers. Such assessments may include, but are not limited to,
identifying if a reinsurer is appropriately licensed and has Reinsurance Recoverable
sufficient financial capacity, and evaluating the local economic
General reinsurance recoverable assets are comprised of:
environment in which a foreign reinsurer operates.
( balances due from reinsurers for indemnity losses and loss
The RSD reviews the nature of the risks ceded to reinsurers
expenses billed to, but not yet collected from, reinsurers (Paid
and the need for credit risk mitigants. For example, in AIG’s treaty
Losses Recoverable);
reinsurance contracts, AIG frequently includes provisions that
( ultimate ceded reserves for indemnity losses and expenses
require a reinsurer to post collateral when a referenced event
includes reserves for claims reported but not yet paid and
occurs. Furthermore, AIG limits its unsecured exposure to reinsur-
estimates for IBNR (collectively, Ceded Loss Reserves); and
ers through the use of credit triggers, which include, but are not
( Ceded Reserves for Unearned Premiums.
limited to, insurer financial strength rating downgrades, declines in
At December 31, 2007, general reinsurance assets of
policyholders surplus below predetermined levels, decreases in
$21.5 billion include Paid Losses Recoverable of $1.8 billion and
the NAIC risk-based capital (RBC) ratio or reaching maximum limits
Ceded Loss Reserves of $16.2 billion, and $4.0 billion of Ceded
of reinsurance recoverables. In addition, AIG’s CRC reviews all
Reserves for Unearned Premiums. The methods used to estimate
reinsurer exposures and credit limits and approves most large
IBNR and to establish the resulting ultimate losses involve
reinsurer credit limits that represent actual or potential credit
projecting the frequency and severity of losses over multiple years
concentrations. AIG believes that no exposure to a single
and are continually reviewed and updated by management. Any
reinsurer represents an inappropriate concentration of risk to AIG,
adjustments are reflected in income currently. It is AIG’s belief
nor is AIG’s business substantially dependent upon any single
that the ceded reserves for losses and loss expenses at
reinsurance contract.
December 31, 2007 were representative of the ultimate losses
AIG enters into intercompany reinsurance transactions for its
recoverable. Actual losses may differ from the reserves currently
General Insurance and Life Insurance & Retirement Services
ceded.
operations. AIG enters into these transactions as a sound and
AIG manages the credit risk in its reinsurance relationships by
prudent business practice in order to maintain underwriting
transacting with reinsurers that it considers financially sound, and
control and spread insurance risk among AIG’s various legal
when necessary AIG requires reinsurers to post substantial
entities and to leverage economies of scale with external
collateral in the form of funds, securities and/or irrevocable
reinsurers. When required for statutory recognition, AIG obtains
letters of credit. This collateral can be drawn on for amounts that
letters of credit from third-party financial institutions to collateral-
remain unpaid beyond specified time periods on an individual
ize these intercompany transactions. At December 31, 2007,
reinsurer basis. At December 31, 2007, approximately 55 percent
approximately $8.8 billion of letters of credit were outstanding to
of the general reinsurance assets were from unauthorized reinsur-
cover intercompany reinsurance transactions between
ers. The terms authorized and unauthorized pertain to regulatory
subsidiaries.
categories, not creditworthiness. More than 50 percent of these
Although reinsurance arrangements do not relieve AIG subsidi-
balances were collateralized, permitting statutory recognition.
aries from their direct obligations to insureds, an efficient and
Additionally, with the approval of insurance regulators, AIG posted
effective reinsurance program substantially mitigates AIG’s expo-
approximately $1.8 billion of letters of credit issued by commer-
sure to potentially significant losses. AIG continually evaluates the
cial banks in favor of certain Domestic General Insurance
reinsurance markets and the relative attractiveness of various
companies to permit those companies statutory recognition of
arrangements for coverage, including structures such as catastro-
balances otherwise uncollateralized at December 31, 2007. The
phe bonds, insurance risk securitizations, ‘‘sidecars’’ and similar
remaining 45 percent of the general reinsurance assets were from
vehicles.
authorized reinsurers. At December 31, 2007, approximately
Based on this ongoing evaluation and other factors, effective
87 percent of the balances with respect to authorized reinsurers
December 31, 2007, Lexington and Concord Re Limited agreed to
are from reinsurers rated A (excellent) or better, as rated by A.M.
commute their quota share reinsurance agreement covering
Best, or A (strong) or better, as rated by S&P. These ratings are
U.S. commercial property insurance business written by Lexington
measures of financial strength.
on a risk attaching basis. This agreement was effective in July
2006 and was due to expire on January 15, 2008.
AIG 2007 Form 10-K 117

The following table provides information for each reinsurer representing in excess of five percent of AIG’s reinsurance assets at
December 31, 2007:
Gross Percent of Uncollateralized
A.M. General General General
S&P Best Reinsurance Reinsurance Collateral Reinsurance
(in millions) Rating(a)
Rating(a)
Assets Assets, Net Held(b)
Assets
Reinsurer:
Swiss Reinsurance Group AA- A+ $1,818 8.5% $372 $1,446
Berkshire Hathaway Insurance Group AAA A++ $1,618 7.5% $212 $1,406
Munich Reinsurance Group AA- A+ $1,200 5.6% $430 $ 770
Lloyd’s Syndicates — Lloyd’s of London(c)
A+ A $1,089 5.1% $113 $ 976
(a) Rating designations as of February 19, 2008.
(b) Excludes collateral held in excess of applicable treaty balances.
(c) Excludes Equitas gross reinsurance assets that are unrated, which are less than five percent of AIG’s general reinsurance assets.
AIG maintains an allowance for estimated unrecoverable cient cash flows to cover contract liabilities in the retirement
reinsurance of $520 million. At December 31, 2007, AIG had no savings-oriented products. Risks are managed through product
significant reinsurance recoverables due from any individual design, sound medical underwriting, external traditional reinsur-
reinsurer that was financially troubled (i.e., liquidated, insolvent, in ance programs and external catastrophe reinsurance programs.
receivership or otherwise subject to formal or informal regulatory AIG is a major purchaser of reinsurance for its insurance
restriction). operations. The use of reinsurance facilitates insurance risk
management (retention, volatility, concentrations) and capital
planning locally (branch and subsidiary). AIG may purchaseSegment Risk Management
reinsurance on a pooling basis. Pooling of AIG’s reinsurance risks
Other than as described above, AIG manages its business risk
enables AIG to purchase reinsurance more efficiently at a
oversight activities through its business segments.
consolidated level, manage global counterparty risk and relation-
ships and manage global catastrophe risks, both for the General
Insurance Operations Insurance and Life Insurance & Retirement Services businesses.
AIG’s multiple insurance businesses conducted on a global basis
General Insuranceexpose AIG to a wide variety of risks with different time horizons.
These risks are managed throughout the organization, both
In General Insurance, underwriting risks are managed through the
centrally and locally, through a number of procedures, including:
application approval process, exposure limitations as well as
(i) pre-launch approval of product design, development and
through exclusions, coverage limits and reinsurance. The risks
distribution; (ii) underwriting approval processes and authorities;
covered by AIG are managed through limits on delegated under-
(iii) exposure limits with ongoing monitoring; (iv) modeling and
writing authority, the use of sound underwriting practices, pricing
reporting of aggregations and limit concentrations at multiple
procedures and the use of actuarial analysis as part of the
levels (policy, line of business, product group, country, individ-
determination of overall adequacy of provisions for insurance
ual/group, correlation and catastrophic risk events);
contract liabilities.
(v) compliance with financial reporting and capital and solvency
A primary goal of AIG in managing its General Insurance
targets; (vi) extensive use of reinsurance, both internal and third-
operations is to achieve an underwriting profit. To achieve this
party; and (vii) review and establishment of reserves.
goal, AIG must be disciplined in its risk selection, and premiums
AIG closely manages insurance risk by overseeing and control-
must be adequate and terms and conditions appropriate to cover
ling the nature and geographic location of the risks in each line of
the risk accepted.
business underwritten, the terms and conditions of the underwrit-
ing and the premiums charged for taking on the risk. Concentra- Catastrophe Exposures
tions of risk are analyzed using various modeling techniques and
The nature of AIG’s business exposes it to various catastrophicinclude, but are not limited to, wind, flood, earthquake, terrorism
events in which multiple losses across multiple lines of businessand accident.
can occur in any calendar year. In order to control this exposure,AIG has two major categories of insurance risks as follows:
AIG uses a combination of techniques, including setting aggregate( General Insurance — risks covered include property, casualty,
limits in key business units, monitoring and modeling accumulatedfidelity/surety, management liability and mortgage insurance.
exposures, and purchasing catastrophe reinsurance to supple-Risks in the general insurance segment are managed through
ment its other reinsurance protections.aggregations and limitations of concentrations at multiple levels:
Natural disasters such as hurricanes, earthquakes and otherpolicy, line of business, correlation and catastrophic risk events.
catastrophes have the potential to adversely affect AIG’s operat-( Life Insurance & Retirement Services — risks include mortality
ing results. Other risks, such as an outbreak of a pandemicand morbidity in the insurance-oriented products and insuffi-
disease, such as the Avian Influenza A Virus (H5N1), could
118 AIG 2007 Form 10-K

adversely affect AIG’s business and operating results to an extent AIG has revised the catastrophe exposure disclosures
that may be only partially offset by reinsurance programs. presented below from those included in the 2006 Annual Report
AIG evaluates catastrophic events and assesses the probability on Form 10-K to reflect more recent data, as well as reinsurance
of occurrence and magnitude of catastrophic events through the programs in place as of January 31, 2008. The modeled results
use of industry recognized models, among other techniques. AIG provided in the table below were based on the aggregate
updates these models by periodically monitoring the exposure to exceedence probability (AEP) losses which represent total prop-
risks of AIG’s worldwide General Insurance operations and erty, workers compensation, life insurance, and A&H losses that
adjusting such models accordingly. Following is an overview of may occur in any single year from one or more natural events. The
modeled losses associated with the more significant natural life insurance and A&H data include exposures for United States,
perils, which includes exposures for DBG, Personal Lines, Foreign Japan, and Taiwan earthquakes. These represent the largest
General (other than Ascot), and The Hartford Steam Boiler share of life insurance and A&H exposures to earthquake. A&H
Inspection and Insurance Company. Transatlantic and Ascot utilize losses were modeled using December 2006 data, and life
a different model, and their combined results are presented insurance losses were modeled using March 2006 data. Modeled
separately below. Significant life insurance and accident and life insurance results using more recent data will be available by
health (A&H) exposures have been added to these results as well. May 2008. However, management does not believe that changes
The modeled results assume that all reinsurers fulfill their in the life insurance and A&H exposures will materially increase
obligations to AIG in accordance with their terms. AIG’s overall exposures. The updated property exposures were
It is important to recognize that there is no standard generally modeled with exposure data as of June 2007. Lexington
methodology to project the possible losses from total property commercial lines exposure, which represents the largest share of
and workers compensation exposures. Further, there are no the modeled losses, was based on data as of October 2007. All
industry standard assumptions to be utilized in projecting these reinsurance program structures, including both domestic and
losses. The use of different methodologies and assumptions international structures, have also been updated. The values
could materially change the projected losses. Therefore, these provided are based on 100-year return period losses, which have
modeled losses may not be comparable to estimates made by a one percent likelihood of being exceeded in any single year.
other companies. Thus, the model projects that there is a one percent probability
These estimates are inherently uncertain and may not reflect that AIG could incur in any year losses in excess of the modeled
AIG’s maximum exposures to these events. It is highly likely that amounts for these perils. Losses include loss adjustment ex-
AIG’s losses will vary, perhaps significantly, from these estimates. penses and the net values include reinstatement premiums.
Net After % of Consolidated
Net of 2008 Income Shareholders’ Equity at
(in millions) Gross Reinsurance Tax December 31, 2007
Natural Peril:
Earthquake $5,625 $3,397 $2,208 2.3%
Tropical Cyclone* $5,802 $3,430 $2,230 2.3%
* Includes hurricanes, typhoons and other wind-related events.
Gross earthquake and tropical cyclone modeled losses in- AIG could incur from this type of an event in these regions. The
creased $1.9 billion and $1.0 billion, respectively, while net losses associated with the RDSs are included in the table below.
losses increased $923 million and $234 million, respectively. The
Single event modeled property and workers compensation lossesearthquake probable maximum loss for 2007 now includes AIG’s
to AIG’s worldwide portfolio of risk for key geographic areas arelife insurance and A&H exposures that were previously not
set forth below. Gross values represent AIG’s liability after theincluded. These changes also reflect overall increased exposure,
application of policy limits and deductibles, and net valueschanges in the Lexington quota share program, the inclusion of
represent losses after reinsurance is applied and include reinsur-loss adjustment expenses, and changes in corporate catastrophe
ance reinstatement premiums. Both gross and net lossesstructure.
include loss adjustment expenses.In addition to the return period loss, AIG evaluates potential
single event earthquake and hurricane losses that may be Net of 2008
incurred. The single events utilized are a subset of potential (in millions) Gross Reinsurance
events identified and utilized by Lloyd’s (as described in Lloyd’s Natural Peril:
Realistic Disaster Scenarios, Scenario Specifications, April 2006) San Francisco Earthquake $6,236 $3,809
and referred to as Realistic Disaster Scenarios (RDSs). The Miami Hurricane 5,829 3,280
Northeast Hurricane 5,287 3,739purpose of this analysis is to utilize these RDSs to provide a
Los Angeles Earthquake 5,375 3,297reference frame and place into context the model results.
Gulf Coast Hurricane 3,730 2,088
However, it is important to note that the specific events used for
Japanese Earthquake 1,109 406
this analysis do not necessarily represent the worst case loss that European Windstorm 252 89
Japanese Typhoon 177 103
AIG 2007 Form 10-K 119

AIG also monitors key international property risks utilizing actively monitors and controls its aggregate accumulated exposure
modeled statistical return period losses. Based on these simula- within the parameters of the protection provided by the TRIA.
tions, the 100-year return period loss for Japanese Earthquake is
$510 million gross, and $170 million net, the 100-year return Life Insurance & Retirement Services
period loss for European Windstorm is $448 million gross, and
In Life Insurance & Retirement Services, the primary risks are the
$154 million net, and the 100-year return period loss for
following:
Japanese Typhoon is $340 million gross, and $212 million net.
( underwriting, which represents the exposure to loss resulting
The losses provided above do not include Transatlantic and
from the actual policy experience emerging adversely in
Ascot. The combined earthquake and tropical cyclone 100-year
comparison to the assumptions made in the product pricing
return period modeled losses for Ascot and Transatlantic together
associated with mortality, morbidity, termination and expenses;
are estimated to be $1.0 billion, on a gross basis, $749 million,
and
net of reinsurance.
( investment risk which represents the exposure to loss resulting
ACTUAL RESULTS IN ANY PERIOD ARE LIKELY TO VARY, from the cash flows from the invested assets being less than
PERHAPS MATERIALLY, FROM THE MODELED SCENARIOS, AND the cash flows required to meet the obligations of the expected
THE OCCURRENCE OF ONE OR MORE SEVERE EVENTS COULD policy and contract liabilities and the necessary return on
HAVE A MATERIAL ADVERSE EFFECT ON AIG’S FINANCIAL CONDI- investments.
TION, RESULTS OF OPERATIONS AND LIQUIDITY. AIG businesses manage these risks through exposure limita-
tions and the active management of the asset-liability relationship
Measures Implemented to Control Hurricane and Earthquake
in their operations. The emergence of significant adverse experi-
Catastrophic Risk
ence would require an adjustment to DAC and benefit reserves
Catastrophic risk from the earthquake and hurricane perils is that could have a material adverse effect on AIG’s consolidated
proactively managed through reinsurance programs, and aggregate results of operations for a particular period.
accumulation monitoring. Catastrophe reinsurance is purchased by AIG’s Foreign Life Insurance & Retirement Services companies
AIG from financially sound reinsurers. Recoveries under this generally limit their maximum underwriting exposure on life
program, along with other non-catastrophic reinsurance protec- insurance of a single life to approximately $1.7 million of
tions, are reflected in the net values provided in the tables above. coverage. AIG’s Domestic Life Insurance & Retirement Services
In addition to catastrophic reinsurance programs, hurricane and companies limit their maximum underwriting exposure on life
earthquake exposures are controlled by periodically monitoring insurance of a single life to $15 million of coverage in certain
aggregate exposures. The aggregate exposures are calculated by circumstances by using yearly renewable term reinsurance. In Life
compiling total liability within AIG defined hurricane and earth- Insurance & Retirement Services, the reinsurance programs
quake catastrophe risk zones and therefore represent the maxi- provide risk mitigation per policy, per individual life for life and
mum that could be lost in any individual zone. These aggregate group covers and for catastrophic risk events.
accumulations are tracked over time in order to monitor both long-
and short-term trends. AIG’s major property writers, Lexington and Pandemic Influenza
AIG Private Client Group, have also implemented catastrophe-
The potential for a pandemic influenza outbreak has received
related underwriting procedures and manage their books at an
much recent attention. While outbreaks of the Avian Flu continue
account level. Lexington individually models most accounts prior to
to occur among poultry or wild birds in a number of countries in
binding in order to specifically quantify catastrophic risk for each
Asia, Europe, including the U.K., and Africa, transmission to
account.
humans has been rare to date. If the virus mutates to a form that
Terrorism can be transmitted from human to human, it has the potential to
spread rapidly worldwide. If such an outbreak were to take place,
Exposure to loss from terrorist attack is controlled by limiting the
early quarantine and vaccination could be critical to containment.
aggregate accumulation of workers compensation and property
The contagion and mortality rates of any mutated H5N1 virus
insurance that is underwritten within defined target locations.
that can be transmitted from human to human are highly
Modeling is used to provide projections of probable maximum loss
speculative. AIG continues to monitor the developing facts. A
by target location based upon the actual exposures of AIG
significant global outbreak could have a material adverse effect on
policyholders.
Life Insurance & Retirement Services operating results and
Terrorism risk is monitored to manage AIG’s exposure. AIG
liquidity from increased mortality and morbidity rates. AIG contin-
shares its exposures to terrorism risks under the Terrorism Risk
ues to analyze its exposure to this serious threat and has
Insurance Act, which was recently extended through December 31,
engaged an external risk management firm to model loss
2014 by the Terrorism Risk Insurance Program Reauthorization Act
scenarios associated with an outbreak of Avian Flu. For a ‘‘mild’’
of 2007 (TRIA). During 2007, AIG’s deductible under TRIA was
scenario, AIG estimates its after-tax net losses under its life
approximately $4.0 billion, with a 15 percent share of certified
insurance policies due to Avian Flu at approximately 2 percent of
terrorism losses in excess of the deductible. As of January 1,
consolidated shareholders’ equity as of December 31, 2007. This
2008, the deductible increased to $4.2 billion, with a 15 percent
estimate was calculated over a 3-year period, although the
share of certified terrorism losses in excess of the deductible. AIG
120 AIG 2007 Form 10-K

majority of the losses would be incurred in the first year. The In addition, AIGFP utilizes various credit enhancements, includ-
modeled losses calculated were based on 2006 policy data ing letters of credit, guarantees, collateral, credit triggers, credit
representing approximately 92 percent of AIG’s individual life, derivatives and margin agreements to reduce the credit risk
group life and credit life books of business, net of reinsurance. relating to its outstanding financial derivative transactions. AIGFP
This estimate does not include claims that could be made under requires credit enhancements in connection with specific transac-
other policies, such as business interruption or general liability tions based on, among other things, the creditworthiness of the
policies, and does not reflect estimates for losses resulting from counterparties, and the transaction’s size and maturity. Further-
disruption of AIG’s own business operations or asset losses that more, AIGFP generally seeks to enter into agreements that have
may arise out of such a pandemic. The model used to generate the benefit of set-off and close-out netting provisions. These
this estimate has only recently been developed. The reasonable- provisions provide that, in the case of an early termination of a
ness of the model and its underlying assumptions cannot readily transaction, AIGFP can setoff its receivables from a counterparty
be verified by reference to comparable historical events. As a against its payables to the same counterparty arising out of all
result, AIG’s actual losses from a pandemic influenza outbreak covered transactions. As a result, where a legally enforceable
are likely to vary significantly from those predicted by the model. netting agreement exists, the fair value of the transaction with the
counterparty represents the net sum of estimated positive fair
values. The fair value of AIGFP’s interest rate, currency, commod-Financial Services
ity and equity swaps, options, swaptions, and forward commit-
ments, futures, and forward contracts approximated
ties including aircraft and equipment leasing, capital markets,
$17.13 billion at December 31, 2007 and $19.61 billion at
consumer finance and insurance premium finance.
December 31, 2006. Where applicable, these amounts have been
determined in accordance with the respective master netting
Capital Markets
agreements.
AIGFP evaluates the counterparty credit quality by reference toThe Capital Markets operations of AIG are conducted primarily
ratings from rating agencies or, where such ratings are notthrough AIGFP, which engages as principal in standard and
available, by internal analysis consistent with the risk ratingcustomized interest rate, currency, equity, commodity, energy and
policies of the CRC. In addition, AIGFP’s credit approval processcredit products with top-tier corporations, financial institutions,
involves pre-set counterparty and country credit exposure limitsgovernments, agencies, institutional investors and high-net-worth
and, for particularly credit-intensive transactions, requires approvalindividuals throughout the world.
from the CRC. AIG estimates that the average credit rating ofThe senior management of AIG defines the policies and
Capital Markets derivatives counterparties, measured by referenceestablishes general operating parameters for Capital Markets
to the fair value of its derivative portfolio as a whole, is equivalentoperations. AIG’s senior management has established various
to the AA rating category.oversight committees to monitor on an ongoing basis the various
financial market, operational and credit risk attendant to the
Capital Markets operations. The senior management of AIGFP
At December 31, 2007 and 2006, the fair value of Capital Markets
reports the results of its operations to and reviews future
derivatives portfolios by counterparty credit rating was as follows:
strategies with AIG’s senior management.
(in millions) 2007 2006AIGFP actively manages its exposures to limit potential eco-
nomic losses, while maximizing the rewards afforded by these Rating:
business opportunities even though some products or derivatives AAA $ 5,069 $ 5,465
may result in operating income volatility. In doing so, AIGFP must AA 5,166 8,321
continually manage a variety of exposures including credit, market, A 4,796 3,690
liquidity, operational and legal risks. BBB 1,801 2,032
Below investment grade 302 99
Derivative Transactions Total $17,134 $19,607
A counterparty may default on any obligation to AIG, including a
derivative contract. Credit risk is a consequence of extending Credit Derivatives
credit and/or carrying trading and investment positions. Credit risk
AIGFP enters into credit derivative transactions in the ordinaryexists for a derivative contract when that contract has a positive
course of its business. The majority of AIGFP’s credit derivativesfair value to AIG. The maximum potential exposure will increase or
require AIGFP to provide credit protection on a designateddecrease during the life of the derivative commitments as a
portfolio of loans or debt securities. AIGFP provides such creditfunction of maturity and market conditions. To help manage this
protection on a ‘‘second loss’’ basis, under which AIGFP’srisk, AIGFP’s credit department operates within the guidelines set
payment obligations arise only after credit losses in the desig-by the CRC. Transactions which fall outside these pre-established
nated portfolio exceed a specified threshold amount or level ofguidelines require the specific approval of the CRC. It is also
‘‘first losses.’’ The threshold amount of credit losses that mustAIG’s policy to establish reserves for potential credit impairment
be realized before AIGFP has any payment obligation is negotiatedwhen necessary.
AIG 2007 Form 10-K 121

by AIGFP for each transaction to provide that the likelihood of any not required to make any payments as part of these terminations
payment obligation by AIGFP under each transaction is remote, and in certain cases was paid a fee upon termination. In light of
even in severe recessionary market scenarios. The underwriting this experience to date and after other comprehensive analyses,
process for these derivatives included assumptions of severely AIG did not recognize an unrealized market valuation adjustment
stressed recessionary market scenarios to minimize the likelihood for this regulatory capital relief portfolio for the year ended
of realized losses under these obligations. December 31, 2007. AIG will continue to assess the valuation of
In certain cases, the credit risk associated with a designated this portfolio and monitor developments in the marketplace. There
portfolio is tranched into different layers of risk, which are then can be no assurance that AIG will not recognize unrealized market
analyzed and rated by the credit rating agencies. Typically, there valuation losses from this portfolio in future periods. In addition
will be an equity layer covering the first credit losses in respect of to writing credit protection on the super senior risk layer on
the portfolio up to a specified percentage of the total portfolio, designated portfolios of loans or debt securities, AIGFP also wrote
and then successive layers ranging from generally a BBB-rated protection on tranches below the super senior risk layer. At
layer to one or more AAA-rated layers. In transactions that are December 31, 2007 the notional amount of the credit default
rated with respect to the risk layer or tranche that is immediately swaps in the regulatory capital relief portfolio written on tranches
junior to the threshold level above which AIGFP’s payment below the super senior risk layer was $5.8 billion, with an
obligation would generally arise, a significant majority are rated estimated fair value of $(25) million.
AAA by the rating agencies. In transactions that are not rated, AIGFP has also written credit protection on the super senior
AIGFP applies the same risk criteria for setting the threshold level risk layer of diversified portfolios of investment grade corporate
for its payment obligations. Therefore, the risk layer assumed by debt, collateralized loan obligations (CLOs) and multi-sector CDOs.
AIGFP with respect to the designated portfolio in these transac- AIGFP is at risk only on the super senior portion related to a
tions is often called the ‘‘super senior’’ risk layer, defined as the diversified portfolio referenced to loans or debt securities. The
layer of credit risk senior to a risk layer that has been rated AAA super senior risk portion is the last tranche to suffer losses after
by the credit rating agencies, or if the transaction is not rated, significant subordination. Credit losses would have to erode all
equivalent thereto. tranches junior to the super senior tranche before AIGFP would
suffer any realized losses. The subordination level required for
At December 31, 2007 the notional amounts and unrealized market
each transaction is determined based on internal modeling and
valuation loss of the super senior credit default swap portfolio by
analysis of the pool of underlying assets and is not dependent on
asset classes were as follows:
ratings determined by the rating agencies. While the credit default
swaps written on corporate debt obligations are cash settled, theNotional Unrealized Market
Amount Valuation Loss majority of the credit default swaps written on CDOs and CLOs
(in billions) (in millions)
require physical settlement. Under a physical settlement arrange-
Corporate loans(a)
$230 $ — ment, AIGFP would be required to purchase the referenced super
Prime residential mortgages(a)
149 — senior security at par in the event of a non-payment on that
Corporate Debt/CLOs 70 226 security.
Multi-sector CDO(b)
78 11,246 Certain of these credit derivatives are subject to collateral
Total $527 $11,472 posting provisions. These provisions differ among counterparties
and asset classes. In the case of most of the multi-sector CDO(a) Predominantly represent transactions written to facilitate regulatory
capital relief. transactions, the amount of collateral required is determined
(b) Approximately $61.4 billion in notional amount of the multi-sector CDO
based on the change in value of the underlying cash security that
pools include some exposure to U.S. subprime mortgages.
represents the super senior risk layer subject to credit protection,
Approximately $379 billion (consisting of the corporate loans
and not the change in value of the super senior credit derivative.
and prime residential mortgages) of the $527 billion in notional
AIGFP is indirectly exposed to U.S. residential mortgage
exposure of AIGFP’s super senior credit default swap portfolio as
subprime collateral in the CDO portfolios, the majority of which is
of December 31, 2007 represents derivatives written for financial
from 2004 and 2005 vintages. However, certain of the CDOs on
institutions, principally in Europe, for the purpose of providing
which AIGFP provided credit protection permit the collateral
them with regulatory capital relief rather than risk mitigation. In
manager to substitute collateral during the reinvestment period,
exchange for a minimum guaranteed fee, the counterparties
subject to certain restrictions. As a result, in certain transactions,
receive credit protection in respect of diversified loan portfolios
U.S. residential mortgage subprime collateral of 2006 and 2007
they own, thus improving their regulatory capital position. These
vintages has been added to the collateral pools. At December 31,
derivatives are generally expected to terminate at no additional
2007, U.S. residential mortgage subprime collateral of 2006 and
cost to the counterparty upon the counterparty’s adoption of
2007 vintages comprised approximately 4.9 percent of the total
models compliant with the Basel II Accord. AIG expects that the
collateral pools underlying the entire portfolio of CDOs with credit
majority of these transactions will be terminated within the next
protection.
12 to 18 months by AIGFP’s counterparties as they implement
AIGFP has written 2a-7 Puts in connection with certain multi-
models compliant with the new Basel II Accord. As of Febru-
sector CDOs that allow the holders of the securities to treat the
ary 26, 2008, $54 billion in notional exposures have either been
securities as eligible short-term 2a-7 investments under the
terminated or are in the process of being terminated. AIGFP was
122 AIG 2007 Form 10-K

Investment Company Act of 1940. Holders of securities are AIGFP obtained prices on these securities from the CDO collateral
permitted, in certain circumstances, to tender their securities to managers.
the issuers at par. If an issuer’s remarketing agent is unable to The BET model also utilizes diversity scores, weighted average
resell the securities so tendered, AIGFP must purchase the lives, recovery rates and discount rates. The determination of
securities at par as long as the security has not experienced a some of these inputs require the use of judgment and estimates,
default. During 2007, AIGFP repurchased securities with a princi- particularly in the absence of market observable data. AIGFP also
pal amount of approximately $754 million pursuant to these employed a Monte Carlo simulation to assist in quantifying the
obligations. In certain transactions, AIGFP has contracted with effect on valuation of the CDO of the unique features of the
third parties to provide liquidity for the securities if they are put to CDO’s structure such as triggers that divert cash flows to the
AIGFP for up to a three-year period. Such liquidity facilities totaled most senior level of the capital structure.
approximately $3 billion at December 31, 2007. As of Febru- The credit default swaps written by AIGFP cover only the failure
ary 26, 2008, AIGFP has not utilized these liquidity facilities. At of payment on the super senior CDO security. AIGFP does not own
December 31, 2007, AIGFP had approximately $6.5 billion of the securities in the CDO collateral pool. The credit spreads
notional exposure on 2a-7 Puts, included as part of the multi- implied from the market prices of the securities in the CDO
sector CDO portfolio discussed herein. collateral pool incorporate the risk of default (credit risk), the
As of January 31, 2008, a significant majority of AIGFP’s super market’s price for liquidity risk and in distressed markets, the risk
senior exposures continued to have tranches below AIGFP’s aversion costs. Spreads on credit derivatives tend to be narrower
attachment point that have been explicitly rated AAA or, in AIGFP’s because, unlike in the case of investing in a bond, there is no
judgment, would have been rated AAA had they been rated. need to fund the position (except when an actual credit event
AIGFP’s portfolio of credit default swaps undergoes regular occurs). In times of illiquidity, the difference between spreads on
monitoring, modeling and analysis and contains protection through cash securities and derivative instruments (the ‘‘negative basis’’)
collateral subordination. may be even wider for high quality assets. AIGFP was unable to
AIGFP accounts for its credit default swaps in accordance with reliably verify this negative basis due to the accelerating severe
FAS 133 ‘‘Accounting For Derivative Instruments and Hedging dislocation, illiquidity and lack of trading in the asset backed
Activities’’ and Emerging Issues Task Force 02-3, ‘‘Issues Involved securities market during the fourth quarter of 2007 and early
in Accounting for Derivative Contracts Held for Trading Purposes 2008. The valuations produced by the BET model therefore
and Contracts Involved in Energy Trading and Risk Management represent the valuations of the underlying super senior CDO cash
Activities’’ (EITF 02-3). In accordance with EITF 02-3, AIGFP does securities with no recognition of the effect of the basis differential
not recognize income in earnings at the inception of each on that valuation.
transaction because the inputs to value these instruments are not AIGFP also considered the valuation of the super senior CDO
derivable from observable market data. securities provided by third parties, including counterparties to
The valuation of the super senior credit derivatives has these transactions, and made adjustments as necessary.
become increasingly challenging given the limitation on the As described above, AIGFP uses numerous assumptions in
availability of market observable information due to the lack of determining its best estimate of the fair value of the super senior
trading and price transparency in the structured finance market, credit default swap portfolio. The most significant assumption
particularly in the fourth quarter of 2007. These market condi- utilized in developing the estimate is the pricing of the securities
tions have increased the reliance on management estimates and within the CDO collateral pools. If the actual pricing of the
judgments in arriving at an estimate of fair value for financial securities within the collateral pools differs from the pricing used
reporting purposes. Further, disparities in the valuation methodol- in estimating the fair value of the super senior credit default swap
ogies employed by market participants and the varying judgments portfolio, there is potential for significant variation in the fair value
reached by such participants when assessing volatile markets has estimate. A decrease by five points (for example, from 87 cents
increased the likelihood that the various parties to these per dollar to 82 cents per dollar) in the aggregate price of the
instruments may arrive at significantly different estimates as to securities would cause an additional unrealized market valuation
their fair values. loss of approximately $3.7 billion, while an increase in the
AIGFP’s valuation methodologies for the super senior credit aggregate price of the securities by five points (for example, from
default swap portfolio have evolved in response to the deteriorat- 90 cents per dollar to 95 cents per dollar) would reduce the
ing market conditions and the lack of sufficient market observable unrealized market valuation loss by approximately $3 billion. The
information. AIG has sought to calibrate the model to market effect on the unrealized market valuation loss is not proportional
information and to review the assumptions of the model on a to the change in the aggregate price of the securities.
regular basis. In the case of credit default swaps written on investment grade
AIGFP employs a modified version of the BET model to value its corporate debt and CLOs, AIGFP estimated the value of its
super senior credit default swap portfolio, including the 2a-7 Puts. obligations by reference to the relevant market indices or third
The BET model utilizes default probabilities derived from credit party quotes on the underlying super senior tranches where
spreads implied from market prices for the individual securities available.
included in the underlying collateral pools securing the CDOs. AIGFP monitors the underlying portfolios to determine whether
the credit loss experience for any particular portfolio has caused
AIG 2007 Form 10-K 123

the likelihood of AIGFP having a payment obligation under the through the structures of the CDO. No benefit was taken in these
transaction to be greater than super senior risk. stress tests for cash flow diversion features, recoveries upon
As of February 26, 2008, AIGFP had received collateral calls default or other risk mitigant benefits. Based on these analyses
from counterparties in respect of certain super senior credit and stress tests, AIG believes that any losses realized over time
default swaps (including those entered into by counterparties for by AIGFP as a result of meeting its obligations under these
regulatory capital relief purposes and those in respect of derivatives will not be material to AIG’s consolidated financial
corporate debt/CLOs). AIG is aware that valuation estimates made condition, although it is possible that such realized losses could
by certain of the counterparties with respect to certain super be material to AIG’s consolidated results of operations for an
senior credit default swaps or the underlying reference CDO individual reporting period.
securities, for purposes of determining the amount of collateral
required to be posted by AIGFP in connection with such instru- Capital Markets Trading VaR
ments, differ significantly from AIGFP’s estimates. AIGFP has been
AIGFP attempts to minimize risk in benchmark interest rates,
able to successfully resolve some of the differences, including in
equities, commodities and foreign exchange. Market exposures in
certain cases entering into compromise collateral arrangements,
option implied volatilities, correlations and basis risks are also
some of which are for specified periods of time. AIGFP is also in
minimized over time but those are the main types of market risks
discussions with other counterparties to resolve such valuation
that AIGFP manages.
differences. As of February 26, 2008, AIGFP had posted collateral
AIGFP’s minimal reliance on market risk driven revenue is
(or had received collateral, where offsetting exposures on other
reflected in its VaR. AIGFP’s VaR calculation is based on the
transactions resulted in the counterparty posting to AIGFP) based
interest rate, equity, commodity and foreign exchange risk arising
on exposures, calculated in respect of super senior default swaps,
from its portfolio. Credit-related factors, such as credit spreads or
in an aggregate amount of approximately $5.3 billion. Valuation
credit default, are not included in AIGFP’s VaR calculation.
estimates made by counterparties for collateral purposes were
Because the market risk with respect to securities available for
considered in the determination of the fair value estimates of
sale, at market, is substantially hedged, segregation of the
AIGFP’s super senior credit default swap portfolio.
financial instruments into trading and other than trading was not
Both AIG’s ERM department and AIGFP have conducted risk
deemed necessary. AIGFP operates under established market risk
analyses of the super senior multi-sector CDO credit default swap
limits based upon this VaR calculation. In addition, AIGFP
portfolio of AIGFP. There is currently no probable and reasonably
backtests its VaR.
estimable realized loss in this portfolio at December 31, 2007.
In the calculation of VaR for AIGFP, AIG uses the historical
AIG’s analyses have been conducted to assess the risk of
simulation methodology based on estimated changes to the value
incurring net realized losses over the remaining life of the
of all transactions under explicit changes in market rates and
portfolio. In addition to analyses of each individual risk in the
prices within a specific historical time period. AIGFP attempts to
portfolio, AIG conducted certain ratings-based stress tests, which
secure reliable and independent current market prices, such as
centered around scenarios of further stress on the portfolio
published exchange prices, external subscription services such as
resulting from downgrades by the rating agencies from current
Bloomberg or Reuters, or third-party or broker quotes. When such
levels on the underlying collateral in the CDO structures supported
prices are not available, AIGFP uses an internal methodology
by AIGFP’s credit default swaps. These rating actions would be
which includes extrapolation from observable and verifiable prices
prompted by factors such as the worsening beyond current
nearest to the dates of the transactions. Historically, actual
estimates of delinquency and residential housing price deteriora-
results have not deviated from these models in any material
tion in the underlying assets in the collateral securities of the
respect.
CDO structures. The results of these stress tests indicated
AIGFP reports its VaR level using a 95 percent confidence
possible realized losses on a static basis, since the assumptions
interval and a one-day holding period, facilitating risk comparison
of losses in these stress tests assumed immediate realization of
with AIGFP’s trading peers and reflecting the fact that market risks
loss. Actual realized losses would only be experienced over time
can be actively assumed and offset in AIGFP’s trading portfolio.
given the timing of losses incurred in the underlying portfolios and
the timing of breaches of the subordination afforded to AIGFP
124 AIG 2007 Form 10-K

The following table presents the year-end, average, high, and low VaRs* on a diversified basis and of each component of market risk
for Capital Markets operations for the years 2007 and 2006. The diversified VaR is usually smaller than the sum of its components
due to correlation effects.
For the Year Ended For the Year Ended
December 31, 2007 December 31, 2006
(in millions) As of December 31 Average High Low As of December 31 Average High Low
Total AIG trading market risk:
Diversified $5 $5 $8 $4 $4 $4 $7 $3
Interest rate 3 2 3 2 2 2 3 1
Currency 1 1 2 1 1 1 3 1
Equity 3 3 5 2 3 3 4 2
Commodity 3 3 7 2 5 3 5 2
* The VaR calculation has been changed from a 3-year time series to a 5-year time series. The December 31, 2006 VaR reflects this change.
Aircraft Leasing or 2005. ILFC has been able to re-lease the aircraft without
diminution in lease rates that would result in an impairment under
AIG’s Aircraft Leasing operations represent the operations of ILFC,
FAS 144.
which generates its revenues primarily from leasing new and used
commercial jet aircraft to foreign and domestic airlines and
Consumer Finance
companies associated with the airline industry. Risks inherent in
this business, and which are managed at the business unit level, AIG’s Consumer Finance operations provide a wide variety of
include the following: consumer finance products, including real estate and other
( the risk that there will be no market for the aircraft acquired; consumer loans, credit card loans, retail sales finance and credit-
( the risk that aircraft cannot be placed with lessees; related insurance to customers both domestically and overseas,
( the risk of nonperformance by lessees; and particularly in emerging markets. Consumer Finance operations
( the risk that aircraft and related assets cannot be disposed of include AGF as well as AIGCFG. AGF provides a wide variety of
at the time and in a manner desired. consumer finance products, including real estate loans, non-real
The airline industry is sensitive to changes in economic estate loans, retail sales finance and credit-related insurance to
conditions and is cyclical and highly competitive. Airlines and customers in the United States, the U.K., Puerto Rico and the
related companies may be affected by political or economic U.S. Virgin Islands. AIGCFG, through its subsidiaries, is engaged
instability, terrorist activities, changes in national policy, competi- in developing a multi-product consumer finance business with an
tive pressures on certain air carriers, fuel prices and shortages, emphasis on emerging markets.
labor stoppages, insurance costs, recessions, world health issues Many of AGF’s borrowers are non-prime or subprime. The real
and other political or economic events adversely affecting world or estate loans are comprised principally of first-lien mortgages on
regional trading markets. residential real estate generally having a maximum term of
ILFC’s revenues and operating income may be adversely 360 months, and are considered non-conforming. The real estate
affected by the volatile competitive environment in which its loans may be closed-end accounts or open-end home equity lines
customers operate. ILFC is exposed to operating loss and liquidity of credit and are principally fixed rate products. AGF does not
strain through nonperformance of aircraft lessees, through owning offer mortgage products with borrower payment options that allow
aircraft which it is unable to sell or re-lease at acceptable rates at for negative amortization of the principal balance. The secured
lease expiration and, in part, through committing to purchase non-real estate loans are secured by consumer goods, automo-
aircraft which it is unable to lease. biles or other personal property. Both secured and unsecured non-
ILFC manages the risk of nonperformance by its lessees with real estate loans and retail sales finance receivables generally
security deposit requirements, repossession rights, overhaul re- have a maximum term of 60 months.
quirements and close monitoring of industry conditions through its Current economic conditions, such as interest rate and
marketing force. Approximately 90 percent of ILFC’s fleet is leased employment levels, can have a direct effect on the borrowers’
to non-U.S. carriers, and the fleet, comprised of the most efficient ability to repay these loans. AGF manages the credit risk inherent
aircraft in the airline industry, continues to be in high demand in its portfolio by using credit scoring models at the time of credit
from such carriers. applications, established underwriting criteria, and, in certain
Management formally reviews regularly, and no less frequently cases, individual loan reviews. AGF monitors the quality of the
than quarterly, issues affecting ILFC’s fleet, including events and finance receivables portfolio and determines the appropriate level
circumstances that may cause impairment of aircraft values. of the allowance for losses through its Credit Strategy and Policy
Management evaluates aircraft in the fleet as necessary based on Committee. This Committee bases its conclusions on quantitative
these events and circumstances in accordance with Statement of analyses, qualitative factors, current economic conditions and
Financial Accounting Standards No. 144, ‘‘Accounting for the trends, and each Committee member’s experience in the con-
Impairment or Disposal of Long-Lived Assets’’ (FAS 144). ILFC has sumer finance industry.
not recognized any impairment related to its fleet in 2007, 2006
AIG 2007 Form 10-K 125

Through 2007, the overall credit quality of AGF’s finance AIG Global Real Estate is exposed to the general conditions in
receivables portfolio deteriorated modestly primarily due to nega- global real estate markets and the credit markets. Such exposure
tive economic fundamentals, a higher proportion of non-real can subject Asset Management to delays in real estate property
estate loans and retail sales finance loans and the aging of the development and sales, additional carrying costs and in turn
real estate loan portfolio. As of December 31, 2007, the 60-day affect operating results within the segment. These risks are
delinquency rate for the entire portfolio increased by 78 basis mitigated through the underwriting process, transaction and
points to 2.84 percent compared to 2006, while the 60-day contract terms and conditions and portfolio diversification by type
delinquency rate for the real estate loans increased by 88 basis of project, sponsor, real estate market and country. AIG’s
points to 2.64 percent. In 2007, AGF’s net charge-off rate exposure to real estate investments is monitored on an ongoing
increased to 1.16 percent compared to 0.95 percent in 2006, basis by the Asset Management Real Estate Investment
which reflected $6 million of non-recurring recoveries. Further Committee.
weakening in the U.S. housing market or the overall U.S. economy Asset Management is also exposed to market risk with respect
may adversely affect the credit quality of AGF’s finance to the warehoused investing activities of AIG Investments. During
receivables. the warehousing period, AIG bears the cost and risks associated
AIGCFG monitors the quality of its finance receivable portfolio with carrying these investments and consolidates them on its
and determines the appropriate level of the allowance for losses balance sheet and records the operating results until the
through several internal committees. These committees base their investments are transferred, sold or otherwise divested. Changes
conclusions on quantitative analysis, qualitative factors, current in market conditions may negatively affect the fair value of these
economic conditions and trends, political and regulatory implica- warehoused investments. Market conditions may impede AIG from
tions, competition and the judgment of the committees’ members. launching new investment products for which these warehoused
AIG’s Consumer Finance operations are exposed to credit risk assets are being held, which could result in AIG not recovering its
and risk of loss resulting from adverse fluctuations in interest investment upon transfer or divestment. In the event that AIG is
rates and payment defaults. Credit loss exposure is managed unable to transfer or otherwise divest its interest in the
through a combination of underwriting controls, mix of finance warehoused investment to third parties, AIG could be required to
receivables, collateral and collection efficiency. Large product hold these investments indefinitely.
programs are subject to CRC approval.
Over half of the finance receivables are real estate loans which Economic Capital
are collateralized by the related properties. With respect to credit
Since mid-2005, AIG has been developing a firm-wide economic
losses, the allowance for losses is maintained at a level
capital model to improve decision making and to enhance
considered adequate to absorb anticipated credit losses existing
shareholder value. Economic Capital is the amount of capital the
in that portfolio as of the balance sheet date.
organization, its segments, profit centers, products or transac-
tions require to cover potential, unexpected losses within a
Asset Management
confidence level consistent with the risk appetite and risk
AIG’s Asset Management operations are exposed to various forms tolerances specified by management. The Economic Capital
of credit, market and operational risks. Asset Management requirement can then be compared with the Economic Capital
complies with AIG’s corporate risk management guidelines and resources available to AIG.
framework and is subject to periodic reviews by the CRC. In The Economic Capital requirement is driven by exposures to
addition, transactions are referred to the Asset Management risks and interrelationships among various types of risks. As a
investment committees for approval of investment decisions. global leader in insurance and financial services, AIG is exposed
The majority of the credit and market risk exposures within to various risks including underwriting, financial and operational
Asset Management results from the Spread-Based Investment risks. The Economic Capital initiative has modeled these risks into
business and the investment activities of AIG Global Real Estate. five major categories: property & casualty insurance risk, life
In the Spread-Based Investment businesses, GIC and MIP, the insurance risk, market risk, credit risk and operational risk. Within
primary risk is investment risk, which represents the exposure to each risk category, there are sub-risks that have been modeled in
loss resulting from the cash flows from the invested assets being greater detail. The Economic Capital initiative also analyzes the
less than the cash flows required to meet the obligations of the interrelationships among various types of risk, aggregate exposure
liabilities and the necessary return on investments. Credit risk is accumulation and concentration, and includes diversification bene-
also a significant component of the investment strategy for these fits within and across risk categories and business segments.
businesses. Market risk is taken in the form of duration and A primary objective of the Economic Capital initiative is to
convexity risk. While AIG generally maintains a matched asset- develop a comprehensive framework to discuss capital and
liability relationship, it may occasionally determine that it is performance on a risk-adjusted basis internally with AIG manage-
economically advantageous to be in an unmatched duration ment and externally with the investment community, credit
position. The risks in the spread-based businesses are managed providers, regulators and rating agencies. Economic Capital analy-
through exposure limitations, active management of the invest- sis provides a framework to validate AIG’s capital adequacy, to
ment portfolios and close oversight of the asset-liability measure more precisely capital efficiency at various levels
relationship. throughout the organization, to allocate capital consistently among
126 AIG 2007 Form 10-K

AIG’s businesses, to quantify the specific areas of diversification businesses, segments, geographies and product lines. Commenc-
benefits and to assess relative economic value added by a ing in 2008, the economic value added for each of AIG’s business
business, product or transaction to AIG as a whole. The Economic segments will be considered as an element, alongside other
Capital initiative will also provide necessary and relevant analyses existing measures, in the evaluation of senior management
and inputs in developing a more efficient capital structure. Other performance. The capital planning and allocation process will
key areas of Economic Capital applications include strategic continue to be enhanced by incorporating the regulatory, rating
decision-making for mergers, acquisitions and divestitures, risk agency and economic capital requirements for business segments
accumulation and concentration, risk retention, reinsurance and as well as the assessment of the mobility of excess economic
hedging strategies and product development and pricing. capital.
During 2006, AIG developed a methodology framework that
incorporates financial services industry best practices, maintains Recent Accounting Standards
consistency with regulatory frameworks and reflects AIG’s distinct Accounting Changes
global business and management strategies. By utilizing stochas-
tic simulation techniques, where appropriate, AIG enhanced In September 2005, the American Institute of Certified Public
existing models or developed new ones through a collaborative Accountants (AICPA) issued Statement of Position 05-1, ‘‘Account-
effort among business executives, actuaries, finance specialists ing by Insurance Enterprises for Deferred Acquisition Costs in
and risk professionals. The initial assessments provided useful Connection with Modifications or Exchanges of Insurance
insight into the overall capital strength of AIG and its segments. Contracts.’’
Throughout 2007, AIG’s focus has been on a wide range of In February 2006, the Financial Accounting Standards Board
business applications of the model together with the continued (FASB) issued FAS 155, ‘‘Accounting for Certain Hybrid Financial
enhancement of the granularity of the model. Key methodology Instruments — an amendment of FAS 140 and FAS 133.’’
enhancements introduced during 2007 include capital fungibility In July 2006, the FASB issued FASB Interpretation No. 48,
and diversification among legal entities, business units and ‘‘Accounting for Uncertainty in Income Taxes — an interpretation of
geographic regions, consistent economic scenarios in developed FASB Statement No. 109.’’
and developing markets, and extensive catastrophic scenario In July 2006, the FASB issued FASB Staff Position
analysis and stress testing. Furthermore, AIG enhanced its (FSP) No. 13-2, ‘‘Accounting for a Change or Projected Change in
comprehensive set of risk governance structures to support the the Timing of Cash Flows Relating to Income Taxes Generated by
model’s inputs, assumptions and methodologies. Finally, AIG has a Leveraged Lease Transaction.’’
engaged a panel of independent experts to provide further In September 2006, the FASB issued FAS No. 157, ‘‘Fair Value
assurance to AIG’s senior management, business segment execu- Measurements.’’
tives and external constituents as to the validity of the model and In September 2006, the FASB issued FAS 158, ‘‘Employers’
its results for business segments and for AIG in the aggregate. Accounting for Defined Benefit Pension and Other Postretirement
Besides model enhancements and firm-wide capital strength Plans — an amendment of FASB Statements No. 87, 88, 106 and
analysis, during 2007 AIG also incorporated its Economic Capital 132R.’’
model and analysis into a number of specific business issues and In February 2007, the FASB issued FAS No. 159, ‘‘The Fair
in developing new business strategies. For example, economic Value Option for Financial Assets and Financial Liabilities.’’
capital analysis is being incorporated into the assessment phase In June 2007, the AICPA issued Statement of Position
for mergers, acquisitions and divestures, and in the development No. 07-1, ‘‘Clarification of the Scope of the Audit and Accounting
of capital markets solutions. In the reinsurance area, economic Guide ’Audits of Investment Companies’ and Accounting by Parent
capital considerations are fundamental to the development of Companies and Equity Method Investors for Investments in
optimal risk retention and reinsurance strategies and management Investment Companies.’’ (Indefinitely deferred by the FASB)
of credit exposures to reinsurance counterparties. In the Life In December 2007, the FASB issued FAS No. 141 (revised
Insurance & Retirement Services segment, the Economic Capital 2007), ‘‘Business Combinations.’’
model has been used for product development, pricing and In December 2007, the FASB issued FAS No. 160, ‘‘Noncon-
hedging strategies for living benefits in the variable annuity trolling Interests in Consolidated Financial Statements, an amend-
business. For life insurance products in Asian markets, enhanced ment of ARB No. 51.’’
asset-liability management strategies have been formulated for
For further discussion of these recent accounting standards
long duration liability structures and low interest rate environ-
and their application to AIG, see Note 1(hh) to Consolidated
ments in certain markets using the technology developed for AIG’s
Financial Statements.
Economic Capital model.
In 2008, AIG plans to extend the model’s application by
building on the work performed in 2007 for a wider range of
AIG 2007 Form 10-K 127

Item 7A.
Quantitative and Qualitative Disclosures About
Market Risk
Included in Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
Item 8.
Financial Statements and Supplementary Data
American International Group, Inc. and Subsidiaries Index to
Financial Statements and Schedules
Page
Report of Independent Registered Public Schedules:*
Accounting Firm 129 I – Summary of Investments — Other Than
Consolidated Balance Sheet at December 31, Investments in Related Parties at
2007 and 2006 130 December 31, 2007
Consolidated Statement of Income for the years II – Condensed Financial Information of
ended December 31, 2007, 2006 and Registrant at December 31, 2007 and
2005 132 2006 and for the years ended
Consolidated Statement of Shareholders’ Equity December 31, 2007, 2006 and 2005
for the years ended December 31, 2007, III – Supplementary Insurance Information at
2006 and 2005 133 December 31, 2007, 2006 and 2005 and
Consolidated Statement of Cash Flows for the for the years then ended
years ended December 31, 2007, 2006 IV – Reinsurance at December 31, 2007, 2006
and 2005 134 and 2005 and for the years then ended
Consolidated Statement of Comprehensive V – Valuation and Qualifying Accounts at
Income for the years ended December 31, December 31, 2007, 2006 and 2005 and
2007, 2006 and 2005 136 for the years then ended
Notes to Consolidated Financial Statements 137
* Schedules listed were included in the Form 10-K ﬁled with the Securities and Exchange Commission but have not been included herein. Copies may be
obtained electronically through AIG’s website at www.aigcorporate.com or from the Director of Investor Relations, American International Group, Inc.
128 AIG 2007 Form 10-K

Report of Independent Registered Public Accounting Firm
statements, assessing the accounting principles used and signifi-To the Board of Directors and Shareholders of American
cant estimates made by management, and evaluating the overallInternational Group, Inc.:
financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internalIn our opinion, the consolidated financial statements listed in the
control over financial reporting, assessing the risk that a materialaccompanying index present fairly, in all material respects, the
weakness exists, and testing and evaluating the design andfinancial position of American International Group, Inc. and its
operating effectiveness of internal control based on the assessedsubsidiaries (AIG) at December 31, 2007 and 2006, and the
risk. Our audits also included performing such other proceduresresults of their operations and their cash flows for each of the
as we considered necessary in the circumstances. We believethree years in the period ended December 31, 2007 in conformity
that our audits provide a reasonable basis for our opinions.with accounting principles generally accepted in the United States
As described in Note 1 to the consolidated financial state-of America. In addition, in our opinion, the financial statement
ments, as of January 1, 2007, AIG changed the manner in whichschedules listed in the accompanying index present fairly, in all
it accounts for internal replacements of certain insurance andmaterial respects, the information set forth therein when read in
investment contracts, uncertainty in income taxes, and changes orconjunction with the related consolidated financial statements.
projected changes in the timing of cash flows relating to incomeAlso in our opinion, AIG did not maintain, in all material respects,
taxes generated by leveraged lease transactions.effective internal control over financial reporting as of Decem-
As described in Notes 1 and 17 to the consolidated financialber 31, 2007, based on criteria established in Internal Control —
statements, AIG changed its accounting for certain hybrid financialIntegrated Framework issued by the Committee of Sponsoring
instruments, life settlement contracts and share based compensa-Organizations of the Treadway Commission (COSO) because a
tion as of January 1, 2006, and certain employee benefit plansmaterial weakness in internal control over financial reporting
as of December 31, 2006.related to the AIGFP super senior credit default swap portfolio
A company’s internal control over financial reporting is avaluation process and oversight thereof existed as of that date. A
process designed to provide reasonable assurance regarding thematerial weakness is a deficiency, or a combination of deficien-
reliability of financial reporting and the preparation of financialcies, in internal control over financial reporting, such that there is
statements for external purposes in accordance with generallya reasonable possibility that a material misstatement of the
accepted accounting principles. A company’s internal control overannual or interim financial statements will not be prevented or
financial reporting includes those policies and procedures thatdetected on a timely basis. The material weakness referred to
(i) pertain to the maintenance of records that, in reasonableabove is described in Management’s Report on Internal Control
detail, accurately and fairly reflect the transactions and disposi-Over Financial Reporting appearing under Item 9A. We considered
tions of the assets of the company; (ii) provide reasonablethis material weakness in determining the nature, timing, and
assurance that transactions are recorded as necessary to permitextent of audit tests applied in our audit of the 2007 consolidated
preparation of financial statements in accordance with generallyfinancial statements, and our opinion regarding the effectiveness
accepted accounting principles, and that receipts and expendi-of AIG’s internal control over financial reporting does not affect
tures of the company are being made only in accordance withour opinion on those consolidated financial statements. AIG’s
authorizations of management and directors of the company; andmanagement is responsible for these financial statements and
(iii) provide reasonable assurance regarding prevention or timelyfinancial statement schedules, for maintaining effective internal
detection of unauthorized acquisition, use, or disposition of thecontrol over financial reporting and for its assessment of the
company’s assets that could have a material effect on theeffectiveness of internal control over financial reporting, included
financial statements.in management’s report referred to above. Our responsibility is to
Because of its inherent limitations, internal control overexpress opinions on these financial statements, on the financial
financial reporting may not prevent or detect misstatements. Also,statement schedules, and on AIG’s internal control over financial
projections of any evaluation of effectiveness to future periods arereporting based on our integrated audits. We conducted our audits
subject to the risk that controls may become inadequate becausein accordance with the standards of the Public Company Account-
of changes in conditions, or that the degree of compliance withing Oversight Board (United States). Those standards require that
the policies or procedures may deteriorate.we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material
misstatement and whether effective internal control over financial
PricewaterhouseCoopers LLP
reporting was maintained in all material respects. Our audits of
New York, New York
the financial statements included examining, on a test basis,
February 28, 2008
evidence supporting the amounts and disclosures in the financial
AIG 2007 Form 10-K 129

Consolidated Balance Sheet
December 31,
Assets:
Investments and financial services assets:
Fixed maturities:
Bonds available for sale, at fair value (amortized cost: 2007 — $393,170; 2006 — $377,163) $ 397,372 $386,869
Bonds held to maturity, at amortized cost (fair value: 2007 — $22,157; 2006 — $22,154) 21,581 21,437
Bond trading securities, at fair value (includes hybrid financial instruments: 2007 — $555;
2006 — $522) 9,982 10,836
Equity securities:
Common stocks available for sale, at fair value (cost: 2007 — $12,588; 2006 — $10,662) 17,900 13,256
Common and preferred stocks trading, at fair value 21,376 14,855
Preferred stocks available for sale, at fair value (cost: 2007 — $2,600; 2006 — $2,485) 2,370 2,539
Mortgage and other loans receivable, net of allowance (2007 — $77; 2006 — $64) (includes loans
held for sale: 2007 — $399) 33,727 28,418
Flight equipment primarily under operating leases, net of accumulated depreciation (2007 —
$10,499; 2006 — $8,835) 41,984 39,875
Securities available for sale, at fair value (cost: 2007 — $40,157; 2006 — $45,912) 40,305 47,205
Trading securities, at fair value 4,197 5,031
Spot commodities 238 220
Unrealized gain on swaps, options and forward transactions 16,442 19,252
Trade receivables 6,467 4,317
Securities purchased under agreements to resell, at contract value 20,950 30,291
Finance receivables, net of allowance (2007 — $878; 2006 — $737) (includes finance receivables
held for sale: 2007 — $233; 2006 — $1,124) 31,234 29,573
Securities lending invested collateral, at fair value (cost: 2007 — $80,641; 2006 — $69,306) 75,662 69,306
Other invested assets 58,823 42,111
Short-term investments, at cost (approximates fair value) 51,351 27,483
Total investments and financial services assets 851,961 792,874
Cash 2,284 1,590
Investment income due and accrued 6,587 6,091
Premiums and insurance balances receivable, net of allowance (2007 — $662; 2006 — $756) 18,395 17,789
Reinsurance assets, net of allowance (2007 — $520; 2006 — $536) 23,103 23,355
Deferred policy acquisition costs 43,150 37,235
Investments in partially owned companies 654 1,101
Real estate and other fixed assets, net of accumulated depreciation (2007 — $5,446; 2006 — $4,940) 5,518 4,381
Separate and variable accounts 78,684 70,277
Goodwill 9,414 8,628
Other assets 20,755 16,089
Total assets $1,060,505 $979,410
See Accompanying Notes to Consolidated Financial Statements.
130 AIG 2007 Form 10-K

Consolidated Balance Sheet Continued
December 31,
(in millions, except share data) 2007 2006
Liabilities:
Reserve for losses and loss expenses $ 85,500 $ 79,999
Unearned premiums 28,022 26,271
Future policy beneﬁts for life and accident and health insurance contracts 136,068 121,004
Policyholders’ contract deposits 258,459 248,264
Other policyholders’ funds 12,599 10,986
Commissions, expenses and taxes payable 6,310 5,305
Insurance balances payable 4,878 3,789
Funds held by companies under reinsurance treaties 2,501 2,602
Income taxes payable 3,823 9,546
Financial services liabilities:
Securities sold under agreements to repurchase, at contract value 8,331 19,677
Trade payables 10,568 6,174
Securities and spot commodities sold but not yet purchased, at fair value 4,709 4,076
Unrealized loss on swaps, options and forward transactions 20,613 11,401
Trust deposits and deposits due to banks and other depositors 4,903 5,249
Long-term borrowings 162,935 135,316
Separate and variable accounts 78,684 70,277
Securities lending payable 81,965 70,198
Minority interest 10,422 7,778
Other liabilities (includes hybrid ﬁnancial instruments at fair value: 2007 — $47; 2006 — $111) 30,200 26,267
Total liabilities 964,604 877,542
Preferred shareholders’ equity in subsidiary companies 100 191
Commitments, Contingencies and Guarantees (See Note 12)
Shareholders’ equity:
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued 2007 and 2006 —
2,751,327,476 6,878 6,878
Additional paid-in capital 2,848 2,590
Payments advanced to purchase shares (912) —
Retained earnings 89,029 84,996
Accumulated other comprehensive income (loss) 4,643 9,110
Treasury stock, at cost; 2007 — 221,743,421; 2006 — 150,131,273 shares of common stock
(including 119,293,487 and 119,278,644 shares, respectively, held by subsidiaries) (6,685) (1,897)
Total shareholders’ equity 95,801 101,677
Total liabilities, preferred shareholders’ equity in subsidiary companies and shareholders’ equity $1,060,505 $979,410
AIG 2007 Form 10-K 131

Consolidated Statement of Income
(in millions, except per share data) 2007 2006 2005
Revenues:
Net realized capital gains (losses) (3,592) 106 341
Unrealized market valuation losses on
AIGFP super senior credit default swap portfolio (11,472) — —
Other income 17,207 12,998 15,546
Total revenues 110,064 113,387 108,781
Benefits and expenses:
Incurred policy losses and benefits 66,115 60,287 64,100
Insurance acquisition and other operating expenses 35,006 31,413 29,468
Total benefits and expenses 101,121 91,700 93,568
Income before income taxes, minority interest and cumulative effect of
accounting changes 8,943 21,687 15,213
Income taxes (benefits):
Current 3,219 5,489 2,587
Deferred (1,764) 1,048 1,671
Total income taxes 1,455 6,537 4,258
Income before minority interest and cumulative effect of accounting changes 7,488 15,150 10,955
Minority interest (1,288) (1,136) (478)
Income before cumulative effect of accounting changes 6,200 14,014 10,477
Cumulative effect of accounting changes, net of tax — 34 —
Net income $ 6,200 $ 14,048 $ 10,477
Earnings per common share:
Basic
Income before cumulative effect of accounting changes $2.40 $5.38 $4.03
Cumulative effect of accounting changes, net of tax — 0.01 —
Net income $2.40 $5.39 $4.03
Diluted
Income before cumulative effect of accounting changes $2.39 $5.35 $3.99
Cumulative effect of accounting changes, net of tax — 0.01 —
Net income $2.39 $5.36 $3.99
Average shares outstanding:
Basic 2,585 2,608 2,597
Diluted 2,598 2,623 2,627
132 AIG 2007 Form 10-K

Consolidated Statement of Shareholders’ Equity
Amounts SharesYears Ended December 31,
(in millions, except share and per share data) 2007 2006 2005 2007 2006 2005
Common stock:
Balance, beginning and end of year $ 6,878 $ 6,878 $ 6,878 2,751,327,476 2,751,327,476 2,751,327,476
Additional paid-in capital:
Balance, beginning of year 2,590 2,339 2,094
Excess of cost over proceeds
of common stock issued under stock
plans (98) (128) (91)
Other 356 379 336
Balance, end of year 2,848 2,590 2,339
Payments advanced to purchase shares:
Balance, beginning of year — — —
Payments advanced (6,000) — —
Shares purchased 5,088 — —
Balance, end of year (912) — —
Retained earnings:
Cumulative effect of accounting
changes, net of tax (203) 308 —
Adjusted balance, beginning of year 84,793 72,638 63,468
Net income 6,200 14,048 10,477
Dividends to common shareholders
($0.77,$0.65 and $0.63 per share,
respectively) (1,964) (1,690) (1,615)
Accumulated other comprehensive
income (loss):
Unrealized appreciation (depreciation) of
investments, net of tax:
Unrealized appreciation
(depreciation) of investments, net of
reclassification adjustments (8,046) 2,574 (3,577)
Income tax benefit (expense) 2,338 (839) 1,599
Foreign currency translation adjustments,
net of tax:
Balance, beginning of year (305) (1,241) (701)
Translation adjustment 1,325 1,283 (926)
Income tax benefit (expense) (140) (347) 386
Balance, end of year 880 (305) (1,241)
Net derivative gains (losses) arising from
cash flow hedging activities:
Balance, beginning of year (27) (25) (53)
Net deferred gains on cash flow
hedges, net of reclassification
adjustments (133) 13 35
Deferred income tax expense 73 (15) (7)
Balance, end of year (87) (27) (25)
Retirement plan liabilities adjustment, net
of taxes:
Balance, beginning of year (641) (115) (128)
Net actuarial loss 197 — —
Prior service credit (24) — —
Minimum pension liability adjustment — 80 81
Deferred income tax benefit (expense) (57) (74) (68)
Adjustment to initially apply FAS 158,
net of tax — (532) —
Balance, end of year (525) (641) (115)
Accumulated other comprehensive income
(loss), end of year 4,643 9,110 6,967
Treasury stock, at cost:
Balance, beginning of year (1,897) (2,197) (2,211) (150,131,273) (154,680,704) (154,904,286)
Cost of shares acquired (5,104) (20) (176) (76,519,859) (288,365) (2,654,272)
Issued under stock plans 305 291 173 4,958,345 4,579,913 2,625,227
Other 11 29 17 (50,634) 257,883 252,627
Balance, end of year (6,685) (1,897) (2,197) (221,743,421) (150,131,273) (154,680,704)
Total shareholders’ equity, end of year $95,801 $101,677 $86,317
AIG 2007 Form 10-K 133

Consolidated Statement of Cash Flows
(in millions) 2007 2006 2005
Summary:
Net cash provided by operating activities $ 35,171 $ 6,287 $ 23,413
Net cash used in investing activities (68,007) (67,952) (61,459)
Net cash provided by financing activities 33,480 61,244 38,097
Effect of exchange rate changes on cash 50 114 (163)
Change in cash 694 (307) (112)
Cash at beginning of year 1,590 1,897 2,009
Cash at end of year $ 2,284 $ 1,590 $ 1,897
Cash flows from operating activities:
Net income $ 6,200 $ 14,048 $ 10,477
Adjustments to reconcile net income to net cash provided by operating activities:
Noncash revenues, expenses, gains and losses included in income:
Unrealized market valuation losses on AIGFP super senior credit default swap portfolio 11,472 — —
Net gains on sales of securities available for sale and other assets (1,349) (763) (1,218)
Foreign exchange transaction (gains) losses (104) 1,795 (3,330)
Net unrealized (gains) losses on non-AIGFP derivative assets and liabilities 116 (713) 878
Equity in income of partially owned companies and other invested assets (4,760) (3,990) (1,421)
Amortization of deferred policy acquisition costs 11,602 11,578 10,693
Amortization of premium and discount on securities and long-term borrowings 580 699 207
Depreciation expenses, principally flight equipment 2,790 2,374 2,200
Provision for finance receivable losses 646 495 435
Other-than-temporary impairments 4,715 944 598
Changes in operating assets and liabilities:
General and life insurance reserves 16,242 12,930 27,045
Premiums and insurance balances receivable and payable — net (207) (1,214) 192
Reinsurance assets 923 1,665 (5,365)
Capitalization of deferred policy acquisition costs (15,846) (15,363) (14,454)
Investment income due and accrued (401) (249) (171)
Funds held under reinsurance treaties (151) (1,612) 770
Other policyholders’ funds 1,374 (498) 811
Income taxes payable (3,709) 2,003 1,543
Commissions, expenses and taxes payable 989 408 140
Other assets and liabilities — net 3,657 (77) 2,863
Bonds, common and preferred stocks trading (3,667) (9,147) (5,581)
Trade receivables and payables — net 2,243 (197) 2,272
Trading securities 835 1,339 (3,753)
Spot commodities (18) (128) 442
Net unrealized (gain) loss on swaps, options and forward transactions 1,413 (1,482) 934
Securities purchased under agreements to resell 9,341 (16,568) 9,953
Securities sold under agreements to repurchase (11,391) 9,552 (12,534)
Securities and spot commodities sold but not yet purchased 633 (1,899) 571
Finance receivables and other loans held for sale — originations and purchases (5,145) (10,786) (13,070)
Sales of finance receivables and other loans — held for sale 5,671 10,602 12,821
Other, net 477 541 (1,535)
Total adjustments 28,971 (7,761) 12,936
Net cash provided by operating activities $ 35,171 $ 6,287 $ 23,413
134 AIG 2007 Form 10-K

Consolidated Statement of Cash Flows Continued
(in millions) 2007 2006 2005
Cash flows from investing activities:
Proceeds from (payments for)
Sales and maturities of fixed maturity securities available for sale and hybrid investments $ 132,320 $ 112,894 $ 140,076
Sales of equity securities available for sale 9,616 12,475 11,661
Proceeds from fixed maturity securities held to maturity 295 205 46
Sales of flight equipment 303 697 573
Sales or distributions of other invested assets 14,109 14,084 14,899
Payments received on mortgage and other loans receivable 9,062 5,165 3,679
Principal payments received on finance receivables held for investment 12,553 12,586 12,461
Purchases of fixed maturity securities available for sale and hybrid investments (139,184) (146,465) (175,657)
Purchases of equity securities available for sale (10,933) (14,482) (13,273)
Purchases of fixed maturity securities held to maturity (266) (197) (3,333)
Purchases of flight equipment (4,772) (6,009) (6,193)
Purchases of other invested assets (25,327) (16,040) (15,059)
Acquisitions, net of cash acquired (1,361) — —
Mortgage and other loans receivable issued (12,439) (7,438) (5,310)
Finance receivables held for investment — originations and purchases (15,271) (13,830) (17,276)
Change in securities lending invested collateral (12,303) (9,835) (10,301)
Net additions to real estate, fixed assets, and other assets (870) (1,097) (941)
Net change in short-term investments (23,484) (10,620) 1,801
Net change in non-AIGFP derivative assets and liabilities (55) (45) 688
Net cash used in investing activities $ (68,007) $ (67,952) $ (61,459)
Cash flows from financing activities:
Proceeds from (payments for)
Policyholders’ contract deposits $ 64,829 57,197 51,699
Policyholders’ contract withdrawals (58,675) (43,413) (36,339)
Change in other deposits (182) 1,269 (957)
Change in commercial paper and extendible commercial notes (338) 2,960 (702)
Long-term borrowings issued 103,210 71,028 67,061
Repayments on long-term borrowings (79,738) (36,489) (51,402)
Change in securities lending payable 11,757 9,789 10,437
Redemption of subsidiary company preferred stock — — (100)
Issuance of treasury stock 206 163 82
Payments advanced to purchase treasury stock (6,000) — —
Cash dividends paid to shareholders (1,881) (1,638) (1,421)
Acquisition of treasury stock (16) (20) (176)
Other, net 308 398 (85)
Net cash provided by financing activities $ 33,480 $ 61,244 $ 38,097
Supplementary disclosure of cash flow information:
Cash paid during the period for:
Interest $ 8,818 $ 6,539 $ 4,883
Taxes $ 5,163 $ 4,693 $ 2,593
Non-cash financing activities:
Interest credited to policyholder accounts included in financing activities $ 11,628 $ 10,746 $ 9,782
Treasury stock acquired using payments advanced to purchase shares $ 5,088 $ — $ —
Non-cash investing activities:
Debt assumed on acquisitions and warehoused investments $ 791 $ — $ —
See accompanying Notes to Consolidated Financial Statements.
AIG 2007 Form 10-K 135

Consolidated Statement of Comprehensive Income
(in millions) 2007 2006 2005
Net income $ 6,200 $14,048 $10,477
Other comprehensive income (loss):
Unrealized (depreciation) appreciation of investments — net of reclassification adjustments (8,046) 2,574 (3,577)
Deferred income tax benefit (expense) on above changes 2,338 (839) 1,599
Foreign currency translation adjustments 1,325 1,283 (926)
Deferred income tax benefit (expense) on above changes (140) (347) 386
Net derivative gains arising from cash flow hedging activities — net of reclassification
adjustments (133) 13 35
Deferred income tax expense on above changes 73 (15) (7)
Change in pension and postretirement unrecognized periodic benefit (cost) 173 80 81
Deferred income tax benefit (expense) on above changes (57) (74) (68)
Other comprehensive income (loss) (4,467) 2,675 (2,477)
Comprehensive income (loss) $ 1,733 $16,723 $ 8,000
136 AIG 2007 Form 10-K

Index of Notes to Consolidated Financial Statements
Page
Note 1. Summary of Significant Accounting Policies 138
Note 2. Segment Information 147
Note 3. Investments 153
Note 4. Lending Activities 156
Note 5. Reinsurance 157
Note 6. Deferred Policy Acquisition Costs 159
Note 7. Variable Interest Entities 159
Note 8. Derivatives and Hedge Accounting 162
Note 9. Reserve for Losses and Loss Expenses and Future Life Policy Benefits and Policyholders’ Contract Deposits 166
Note 10. Variable Life and Annuity Contracts 167
Note 11. Debt Outstanding 170
Note 12. Commitments, Contingencies and Guarantees 173
Note 13. Preferred Shareholders’ Equity in Subsidiary Companies 180
Note 14. Shareholders’ Equity and Earnings Per Share 180
Note 15. Statutory Financial Data 182
Note 16. Fair Value of Financial Instruments 182
Note 17. Share-based Employee Compensation Plans 184
Note 18. Employee Benefits 188
Note 19. Benefits Provided by Starr International Company, Inc. and C.V. Starr & Co., Inc. 193
Note 20. Ownership and Transactions with Related Parties 193
Note 21. Federal Income Taxes 194
Note 22. Quarterly Financial Information (Unaudited) 197
Note 23. Information Provided in Connection With Outstanding Debt 198
Note 24. Cash Flows 201
AIG 2007 Form 10-K 137

Notes to Consolidated Financial Statements
Certain Nontraditional Long-Duration Contracts and for Separate1. Summary of Significant Accounting Policies
Accounts’’ (SOP 03-1) should have been reported as general
Basis of Presentation account assets. Accordingly, the December 31, 2006 consolidated
balance sheet has been revised to reflect the transfer of $2.4 bil-The consolidated financial statements include the accounts of
lion of assets from separate account assets to general accountAIG, its controlled subsidiaries, and variable interest entities in
assets, and the same amount of liabilities from separate accountwhich AIG is the primary beneficiary. Entities that AIG does not
liabilities to policyholders’ contract deposits. This revision had noconsolidate but in which it holds 20 percent to 50 percent of the
effect on consolidated income before income taxes, net income, orvoting rights and/or has the ability to exercise significant influence
shareholders’ equity for any period presented.are accounted for under the equity method.
Certain reclassifications and format changes have been madeCertain of AIG’s foreign subsidiaries included in the consolidated
to prior period amounts to conform to the current periodfinancial statements report on a fiscal year ending November 30.
presentation.The effect on AIG’s consolidated financial condition and results of
operations of all material events occurring between November 30 Out-of-Period Adjustments
and December 31 for all periods presented has been recorded.
During 2007 and 2006, AIG recorded the effects of certain out-of-The accompanying consolidated financial statements have
period adjustments, which (decreased) increased net income bybeen prepared in accordance with U.S. generally accepted
$(399) million and $65 million, respectively. During 2007, out-of-accounting principles (GAAP). All material intercompany accounts
period adjustments collectively decreased pre-tax operating in-and transactions have been eliminated.
come by $372 million ($399 million after tax). The adjustments
Description of Business were comprised of a charge of $380 million ($247 million after
tax) to reverse net gains on transfers of investment securitiesSee Note 2 herein for a description of AIG’s businesses.
among legal entities consolidated within AIGFP and a correspond-
Use of Estimates ing increase to accumulated other comprehensive income (loss);
$156 million of additional income tax expense related to theThe preparation of financial statements in conformity with GAAP
successful remediation of the material weakness in internalrequires management to make estimates and assumptions that
control over income tax accounting; $142 million ($92 millionaffect the reported amounts of assets and liabilities, the
after tax) of additional expense related to insurance reserves anddisclosure of contingent assets and liabilities at the date of the
DAC in connection with improvements in its internal control overfinancial statements and the reported amounts of revenues and
financial reporting and consolidation processes; $42 millionexpenses during the reporting periods. Actual results could differ,
($29 million after tax) of additional expense, primarily related topossibly materially, from those estimates.
other remediation activities; and $192 million ($125 million afterAIG considers its most critical accounting estimates to be
tax) of net realized capital gains related to foreign exchange.those with respect to reserves for losses and loss expenses,
future policy benefits for life and accident and health contracts, Accounting Policies
estimated gross profits for investment-oriented products, recover-
(a) Revenue Recognition and Expenses:ability of deferred policy acquisition costs (DAC), fair value
measurements of certain assets and liabilities, including the Premiums and Other Considerations: Premiums for short duration
super senior credit default swaps written by AIGFP, other-than- contracts and considerations received from retailers in connection
temporary impairments in the value of investments, the allowance with the sale of extended service contracts are earned primarily on a
for finance receivable losses and flight equipment recoverability. pro rata basis over the term of the related coverage. The reserve for
During the second half of 2007, disruption in the global credit unearned premiums includes the portion of premiums written and
markets, coupled with the repricing of credit risk, and the other considerations relating to the unexpired terms of coverage.
U.S. housing market deterioration, particularly in the fourth Premiums for long duration insurance products and life
quarter, created increasingly difficult conditions in the financial contingent annuities are recognized as revenues when due.
markets. These conditions have resulted in greater volatility, less Estimates for premiums due but not yet collected are accrued.
liquidity, widening of credit spreads and a lack of price trans- Consideration for universal life and investment-type products
parency in certain markets and have made it more difficult to consists of policy charges for the cost of insurance, administra-
value certain of AIG’s invested assets and the obligations and tion, and surrenders during the period. Policy charges collected
collateral relating to certain financial instruments issued or held with respect to future services are deferred and recognized in a
by AIG, such as AIGFP’s super senior credit default swap portfolio. manner similar to DAC related to such products.
Revisions and Reclassifications Net Investment Income: Net investment income represents in-
come primarily from the following sources in AIG’s insuranceIn 2007, AIG determined that certain products that were historically
operations:reported as separate account assets under American Institute of
( Interest income and related expenses, including amortization ofCertified Public Accountants (AICPA) Statement of Position
premiums and accretion of discounts on bonds with changes in(SOP) 03-1, ‘‘Accounting and Reporting by Insurance Enterprises for
138 AIG 2007 Form 10-K

( Changes in the fair value of derivatives (excluding the super1. Summary of Significant Accounting Policies
senior credit default swap portfolio). In certain instances, noContinued
initial gain or loss is recognized in accordance with Emerging
the timing and the amount of expected principal and interest
Issues Task Force Issue (EITF) 02-3, ‘‘Issues Involved in
cash flows reflected in the yield, as applicable.
Accounting for Derivative Contracts Held for Trading Purposes( Dividend income and distributions from common and preferred
and Contracts Involved in Energy Trading and Risk Management
stock and other investments when receivable.
Activities’’ (EITF 02-3). The initial gain or loss is recognized in( Realized and unrealized gains and losses from investments in
income over the life of the transaction or when observable
trading securities accounted for at fair value.
market data becomes available.( Earnings from hedge funds and limited partnership investments
( Realized and unrealized gains and losses from trading securi-
accounted for under the equity method.
ties and spot commodities sold but not yet purchased, futures( The difference between the carrying amount of a life settle-
and hybrid financial instruments.
ment contract and the life insurance proceeds of the underlying
( Realized gains and losses from the sale of available for sale
life insurance policy recorded in income upon the death of the
securities and investments in private equities, joint ventures,
insured.
limited partnerships and other investments.
Realized Capital Gains (Losses): Realized capital gains and losses ( Exchange gains and losses resulting from foreign currency
are determined by specific identification. The realized capital gains transactions.
and losses are generated primarily from the following sources: ( Reductions to the cost basis of securities available for sale for
( Sales of fixed maturity securities and equity securities (except other-than-temporary impairments.
trading securities accounted for at fair value), real estate, ( Earnings from hedge funds and limited partnership investments
investments in joint ventures and limited partnerships and accounted for under the equity method.
other types of investments. Finance charges on consumer loans are recognized as revenue
( Reductions to the cost basis of fixed maturity securities and using the interest method. Revenue ceases to be accrued when
equity securities (except trading securities accounted for at fair contractual payments are not received for four consecutive
value) and other invested assets for other-than-temporary months for loans and retail sales contracts, and for six months for
impairments. revolving retail accounts and private label receivables. Extension
( Changes in fair value of derivatives that are not involved in fees, late charges, and prepayment penalties are recognized as
qualifying hedging activities. revenue when received.
( Exchange gains and losses resulting from foreign currency
Incurred Policy Losses and Benefits: Incurred policy losses for
transactions.
short duration insurance contracts consist of the estimated
Other Income: Other income includes income from flight equip- ultimate cost of settling claims incurred within the reporting
ment, Asset Management operations, the operations of AIGFP and period, including incurred but not reported claims, plus the
finance charges on consumer loans. changes in estimates of current and prior period losses resulting
Income from flight equipment under operating leases is from the continuous review process. Benefits for long duration
recognized over the life of the lease as rentals become receivable insurance contracts consist of benefits paid and changes in future
under the provisions of the lease or, in the case of leases with policy benefits liabilities. Benefits for universal life and investment-
varying payments, under the straight-line method over the noncan- type products primarily consist of interest credited to policy
celable term of the lease. In certain cases, leases provide for account balances and benefit payments made in excess of policy
additional payments contingent on usage. Rental income is account balances.
recognized at the time such usage occurs less a provision for
(b) Income Taxes: Deferred tax assets and liabilities are
future contractual aircraft maintenance. Gains and losses on flight
recorded for the effects of temporary differences between the tax
equipment are recognized when flight equipment is sold and the
basis of an asset or liability and its reported amount in the
risk of ownership of the equipment is passed to the new owner.
consolidated financial statements. AIG assesses its ability to
Income from Asset Management operations is generally recog-
realize deferred tax assets primarily based on the earnings
nized as revenues as services are performed. Certain costs
history, the future earnings potential, the reversal of taxable
incurred in the sale of mutual funds are deferred and subse-
temporary differences, and the tax planning strategies available to
quently amortized.
the legal entities when recognizing deferred tax assets in
Income from the operations of AIGFP included in other income
accordance with Statement of Financial Accounting Standards No.
consists of the following:
(FAS) 109, ‘‘Accounting for Income Taxes’’ (FAS 109). See( Interest income and related expenses, including amortization of
Note 21 herein for a further discussion of income taxes.
premiums and accretion of discounts on bonds with changes in
the timing and the amount of expected principal and interest (c) Investments in Fixed Maturities and Equity Securities:
cash flows reflected in the yield, as applicable. Bonds held to maturity are principally owned by insurance
( Dividend income and distributions from common and preferred subsidiaries and are carried at amortized cost when AIG has the
stock and other investments when receivable. ability and positive intent to hold these securities until maturity.
AIG 2007 Form 10-K 139

Notes to Consolidated Financial Statements Continued
circumstances, the loss is recognized in the period in which the1. Summary of Significant Accounting Policies
intent to hold the securities to recovery no longer existed.Continued
In periods subsequent to the recognition of an other-than-
When AIG does not have the positive intent to hold bonds until
temporary impairment charge for fixed maturity securities, which is
maturity, these securities are classified as available for sale or as
not credit or foreign exchange related, AIG generally accretes the
trading and are carried at fair value.
discount or amortizes the reduced premium resulting from the
Premiums and discounts arising from the purchase of bonds
reduction in cost basis over the remaining life of the security.
classified as held to maturity or available for sale are treated as
For certain investments in beneficial interests in securitized
yield adjustments over their estimated lives, until maturity, or call
financial assets of less than high quality with contractual cash
date, if applicable.
flows, including asset-backed securities, EITF 99-20, ‘‘Recognition
Common and preferred stocks are carried at fair value.
of Interest Income and Impairment on Purchased Beneficial
AIG also enters into dollar roll agreements. These are
Interests and Beneficial Interests that Continued to Be Held by a
agreements to sell mortgage-backed securities and to repurchase
Transferor in Securitized Financial Assets’’ requires periodic
substantially similar securities at a specified price and date in the
updates of AIG’s best estimate of cash flows over the life of the
future. At December 31, 2007 and 2006, there were no dollar roll
security. If the fair value of an investment in beneficial interests in
agreements outstanding.
a securitized financial asset is less than its cost or amortized
For AIG’s insurance subsidiaries, unrealized gains and losses
cost and there has been a decrease in the present value of the
on investments in trading securities are reported in Net invest-
estimated cash flows since the last revised estimate, considering
ment income. Unrealized gains and losses from available for sale
both their timing and amount, an other-than-temporary impairment
investments in equity and fixed maturity securities are reported as
charge is recognized. Interest income is recognized based on
a separate component of Accumulated other comprehensive
changes in the timing and the amount of expected principal and
income (loss), net of deferred income taxes, in consolidated
interest cash flows reflected in the yield.
shareholders’ equity. Investments in fixed maturities and equity
AIG also considers its intent and ability to retain a temporarily
securities are recorded on a trade-date basis.
depressed security until recovery. Estimating future cash flows is
AIG evaluates its investments for other-than-temporary impair-
a quantitative and qualitative process that incorporates informa-
ment. The determination that a security has incurred an other-
tion received from third-party sources along with certain internal
than-temporary impairment in value and the amount of any loss
assumptions and judgments regarding the future performance of
recognized requires the judgment of AIG’s management and a
the underlying collateral. In addition, projections of expected
continual review of its investments.
future cash flows may change based upon new information
AIG evaluates its investments for other-than-temporary impair-
regarding the performance of the underlying collateral.
ment such that a security is considered a candidate for other-than-
temporary impairment if it meets any of the following criteria: (d) Mortgage and Other Loans Receivable — net: Mort-
( Trading at a significant (25 percent or more) discount to par, gage and other loans receivable includes mortgage loans on real
amortized cost (if lower) or cost for an extended period of time estate, policy loans and collateral, commercial and guaranteed
(nine consecutive months or longer); loans. Mortgage loans on real estate and collateral, commercial
( The occurrence of a discrete credit event resulting in (i) the and guaranteed loans are carried at unpaid principal balances
issuer defaulting on a material outstanding obligation; (ii) the less credit allowances and plus or minus adjustments for the
issuer seeking protection from creditors under the bankruptcy accretion or amortization of discount or premium. Interest income
laws or any similar laws intended for court supervised on such loans is accrued as earned.
reorganization of insolvent enterprises; or (iii) the issuer Impairment of mortgage loans on real estate and collateral
proposing a voluntary reorganization pursuant to which credi- and commercial loans is based on certain risk factors and when
tors are asked to exchange their claims for cash or securities collection of all amounts due under the contractual terms is not
having a fair value substantially lower than par value of their probable. This impairment is generally measured based on the
claims; or present value of expected future cash flows discounted at the
( AIG may not realize a full recovery on its investment regardless loan’s effective interest rate subject to the fair value of underlying
of the occurrence of one of the foregoing events. collateral. Interest income on such impaired loans is recognized
The above criteria also consider circumstances of a rapid and as cash is received.
severe market valuation decline, such as that experienced in Policy loans are carried at unpaid principal amount. There is no
current credit markets, in which AIG could not reasonably assert allowance for policy loans because these loans serve to reduce
that the recovery period would be temporary. the death benefit paid when the death claim is made and the
At each balance sheet date, AIG evaluates its securities balances are effectively collateralized by the cash surrender value
holdings with unrealized losses. When AIG does not intend to hold of the policy.
such securities until they have recovered their cost basis, based
(e) Financial Services — Flight Equipment: Flight equipment
on the circumstances at the date of evaluation, AIG records the
is stated at cost, net of accumulated depreciation. Major
unrealized loss in income. If a loss is recognized from a sale
additions, modifications and interest are capitalized. Normal
subsequent to a balance sheet date pursuant to changes in
maintenance and repairs, airframe and engine overhauls and
140 AIG 2007 Form 10-K

through the use of forwards, futures and option contracts. Lower1. Summary of Significant Accounting Policies
of cost or fair value reductions in commodity positions andContinued
unrealized gains and losses in related derivatives are reflected in
compliance with return conditions of flight equipment on lease are
Other income.
provided by and paid for by the lessee. Under the provisions of
most leases for certain airframe and engine overhauls, the lessee (i) Financial Services — Unrealized Gain and Unrealized
is reimbursed for certain costs incurred up to but not exceeding Loss on Swaps, Options and Forward Transactions: Inter-
contingent rentals paid to AIG by the lessee. AIG provides a est rate, currency, equity and commodity swaps (including AIGFP’s
charge to income for such reimbursements based on the expected super senior credit default swap portfolio), swaptions, options and
reimbursements during the life of the lease. For passenger forward transactions are accounted for as derivatives recorded on
aircraft, depreciation is generally computed on the straight-line a trade-date basis, and carried at fair value. Unrealized gains and
basis to a residual value of approximately 15 percent of the cost losses are reflected in income, when appropriate. In certain
of the asset over its estimated useful life of 25 years. For instances, when income is not recognized at inception of the
freighter aircraft, depreciation is computed on the straight-line contract under EITF 02-3, income is recognized over the life of the
basis to a zero residual value over its useful life of 35 years. At contract and as observable market data becomes available.
December 31, 2007, ILFC had twelve freighter aircraft in its fleet.
(j) Financial Services — Trade Receivables and Trade Pay-Aircraft in the fleet are evaluated for impairment in accordance
ables: Trade receivables and Trade payables include option
with FAS 144. FAS 144 requires long-lived assets to be evaluated
premiums paid and received and receivables from and payables to
for impairment whenever events or changes in circumstances
counterparties that relate to unrealized gains and losses on
indicate the carrying amount of an asset may not be recoverable.
futures, forwards, and options and balances due from and due to
Recoverability of assets is measured by comparing the carrying
clearing brokers and exchanges.
amount of an asset to future undiscounted net cash flows
expected to be generated by the asset. These evaluations for (k) Financial Services — Securities Purchased (Sold)
impairment are significantly affected by estimates of future net Under Agreements to Resell (Repurchase), at contract
cash flows and other factors that involve uncertainty. value: Securities purchased under agreements to resell and
When assets are retired or disposed of, the cost and Securities sold under agreements to repurchase are accounted for
associated accumulated depreciation are removed from the as collateralized borrowing or lending transactions and are
related accounts and the difference, net of proceeds, is recorded recorded at their contracted resale or repurchase amounts, plus
as a gain or loss in Other income. accrued interest. AIG’s policy is to take possession of or obtain a
security interest in securities purchased under agreements to
(f) Financial Services — Securities Available for Sale, at
resell.
fair value: These securities are held to meet long-term invest-
AIG minimizes the credit risk that counterparties to transac-
ment objectives and are accounted for as available for sale,
tions might be unable to fulfill their contractual obligations by
carried at fair values and recorded on a trade-date basis. This
monitoring customer credit exposure and collateral value and
portfolio is hedged using interest rate, foreign exchange, commod-
generally requiring additional collateral to be deposited with AIG
ity and equity derivatives. The market risk associated with such
when necessary.
hedges is managed on a portfolio basis, with third-party hedging
transactions executed as necessary. Because hedge accounting (l) Financial Services — Finance Receivables: Finance re-
treatment is not achieved in accordance with FAS 133, ‘‘Account- ceivables, which are reported net of unearned finance charges,
ing for Derivative Instruments and Hedging Activities’’ (FAS 133), are held for both investment purposes and for sale. Finance
the unrealized gains and losses on these securities resulting from receivables held for investment purposes are carried at amortized
changes in interest rates, currency rates and equity prices are cost, which includes accrued finance charges on interest bearing
recorded in Accumulated other comprehensive income (loss) in finance receivables, unamortized deferred origination costs, and
consolidated shareholders’ equity while the unrealized gains and unamortized net premiums and discounts on purchased finance
losses on the hedging instruments are reflected in Other income. receivables. The allowance for finance receivable losses is
established through the provision for finance receivable losses
(g) Financial Services — Trading Securities, at fair value:
charged to expense and is maintained at a level considered
Trading securities are held to meet short-term investment objec-
adequate to absorb estimated credit losses in the portfolio. The
tives and to economically hedge other securities. Trading securi-
portfolio is periodically evaluated on a pooled basis and factors
ties are recorded on a trade-date basis and carried at fair value.
such as economic conditions, portfolio composition, and loss and
Realized and unrealized gains and losses are reflected in Other
delinquency experience are considered in the evaluation of the
income.
allowance.
(h) Financial Services — Spot Commodities: Spot commodi- Direct costs of originating finance receivables, net of
ties held in AIGFP’s wholly owned broker-dealer subsidiary are nonrefundable points and fees, are deferred and included in the
recorded at fair value. All other commodities are recorded at the carrying amount of the related receivables. The amount deferred
lower of cost or fair value. Spot commodities are recorded on a is amortized to income as an adjustment to finance charge
trade-date basis. The exposure to market risk may be reduced revenues using the interest method.
AIG 2007 Form 10-K 141

(p) Cash: Cash represents cash on hand and non-interest1. Summary of Significant Accounting Policies
bearing demand deposits.Continued
Finance receivables originated and intended for sale in the (q) Reinsurance Assets: Reinsurance assets include the bal-
secondary market are carried at the lower of cost or fair value, as ances due from reinsurance and insurance companies under the
determined by aggregate outstanding commitments from investors terms of AIG’s reinsurance agreements for paid and unpaid losses
or current investor yield requirements. American General Finance, and loss expenses, ceded unearned premiums and ceded future
Inc. (AGF) recognizes net unrealized losses through a valuation policy benefits for life and accident and health insurance contracts
allowance by charges to income. and benefits paid and unpaid. Amounts related to paid and unpaid
losses and benefits and loss expenses with respect to these
(m) Securities Lending Invested Collateral, at Fair Value
reinsurance agreements are substantially collateralized.
and Securities Lending Payable: AIG’s insurance and asset
management operations lend their securities and primarily take (r) Deferred Policy Acquisition Costs:
cash as collateral with respect to the securities lent. Invested Policy acquisition costs represent those costs, including com-
collateral consists of interest-bearing cash equivalents and floating missions, premium taxes and other underwriting expenses that
rate bonds, whose changes in fair value are recorded as a vary with and are primarily related to the acquisition of new
separate component of Accumulated other comprehensive income business.
(loss), net of deferred income taxes. The invested collateral is
General Insurance: Policy acquisition costs are deferred andevaluated for other-than-temporary impairment by applying the
amortized over the period in which the related premiums writtensame criteria used for investments in fixed maturities. Income
are earned. DAC is grouped consistent with the manner in whichearned on invested collateral, net of interest payable to the
the insurance contracts are acquired, serviced and measured forcollateral provider, is recorded in Net investment income.
profitability and is reviewed for recoverability based on theThe fair value of securities pledged under securities lending
profitability of the underlying insurance contracts. Investmentarrangements was $76 billion and $69 billion at December 31,
income is not anticipated in assessing the recoverability of DAC.2007 and 2006, respectively. These securities are included in
bonds available for sale in AIG’s consolidated balance sheet. Life Insurance & Retirement Services: Policy acquisition costs for
traditional life insurance products are generally deferred and(n) Other Invested Assets: Other invested assets consist
amortized over the premium paying period in accordance withprimarily of investments by AIG’s insurance operations in hedge
FAS 60, ‘‘Accounting and Reporting by Insurance Enterprises’’funds, private equity and limited partnerships.
(FAS 60). Policy acquisition costs and policy issuance costsHedge funds and limited partnerships in which AIG’s insurance
related to universal life, participating life, and investment-typeoperations hold in the aggregate less than a five percent interest
products (investment-oriented products) are deferred and amor-are reported at fair value. The change in fair value is recognized
tized, with interest, in relation to the incidence of estimated grossas a component of Accumulated other comprehensive income
profits to be realized over the estimated lives of the contracts in(loss).
accordance with FAS 97, ‘‘Accounting and Reporting by InsuranceWith respect to hedge funds and limited partnerships in which
Enterprises for Certain Long-Duration Contracts and for RealizedAIG holds in the aggregate a five percent or greater interest or
Gains and Losses from the Sale of Investments’’ (FAS 97).less than a five percent interest but in which AIG has more than a
Estimated gross profits are composed of net interest income, netminor influence over the operations of the investee, AIG’s carrying
realized investment gains and losses, fees, surrender charges,value is its share of the net asset value of the funds or the
expenses, and mortality and morbidity gains and losses. Ifpartnerships. The changes in such net asset values, accounted
estimated gross profits change significantly, DAC is recalculatedfor under the equity method, are recorded in Net investment
using the new assumptions. Any resulting adjustment is includedincome.
in income as an adjustment to DAC. DAC is grouped consistentIn applying the equity method of accounting, AIG consistently
with the manner in which the insurance contracts are acquired,uses the most recently available financial information provided by
serviced and measured for profitability and is reviewed forthe general partner or manager of each of these investments,
recoverability based on the current and projected future profitabil-which is one to three months prior to the end of AIG’s reporting
ity of the underlying insurance contracts.period. The financial statements of these investees are generally
The DAC for investment-oriented products is also adjusted withaudited on an annual basis.
respect to estimated gross profits as a result of changes in theAlso included in Other invested assets are real estate held for
net unrealized gains or losses on fixed maturity and equityinvestment, aircraft asset investments held by non-financial
securities available for sale. Because fixed maturity and equityservices subsidiaries and investments in life settlement contracts.
securities available for sale are carried at aggregate fair value, anSee Note 3(g) herein for further information.
adjustment is made to DAC equal to the change in amortization
(o) Short-term Investments: Short-term investments consist that would have been recorded if such securities had been sold at
of interest-bearing cash equivalents, time deposits, and invest- their stated aggregate fair value and the proceeds reinvested at
ments with original maturities within one year from the date of current yields. The change in this adjustment, net of tax, is
purchase, such as commercial paper. included with the change in net unrealized gains/losses on fixed
142 AIG 2007 Form 10-K

(v) Goodwill: Goodwill is the excess of cost over the fair value1. Summary of Significant Accounting Policies
of identifiable net assets acquired. Goodwill is reviewed forContinued
impairment on an annual basis, or more frequently if circum-
maturity and equity securities available for sale that is credited or
stances indicate that a possible impairment has occurred. The
charged directly to Accumulated other comprehensive income
assessment of impairment involves a two-step process whereby
(loss). Value of Business Acquired (VOBA) is determined at the
an initial assessment for potential impairment is performed,
time of acquisition and is reported in the consolidated balance
followed by a measurement of the amount of impairment, if any.
sheet with DAC. This value is based on the present value of future
Impairment testing is performed using the fair value approach,
pre-tax profits discounted at yields applicable at the time of
which requires the use of estimates and judgment, at the
purchase. For products accounted for under FAS 60, VOBA is
‘‘reporting unit’’ level. A reporting unit is the operating segment,
amortized over the life of the business similar to that for DAC
or a business that is one level below the operating segment if
based on the assumptions at purchase. For products accounted
discrete financial information is prepared and regularly reviewed by
for under FAS 97, VOBA is amortized in relation to the estimated
management at that level. The determination of a reporting unit’s
gross profits to date for each period. As of December 31, 2007
fair value is based on management’s best estimate, which
and 2006, there had been no impairments of VOBA.
generally considers the market-based earning multiples of the
(s) Investments in Partially Owned Companies: Invest- unit’s peer companies or expected future cash flows. If the
ments in partially owned companies represents investments carrying value of a reporting unit exceeds its fair value, an
entered into for strategic purposes and not solely for capital impairment is recognized as a charge against income equal to the
appreciation or for income generation. These investments are excess of the carrying value of goodwill over its fair value. No
accounted for under the equity method. All other equity method impairments were recorded in 2007, 2006 or 2005. Changes in
investments are reported in Other invested assets. At Decem- the carrying amount of goodwill result from business acquisitions,
ber 31, 2007, AIG’s significant investments in partially owned the payment of contingent consideration, foreign currency transla-
companies included its 26.0 percent interest in Tata AIG Life tion adjustments and purchase price adjustments.
Insurance Company, Ltd., its 26.0 percent interest in Tata AIG
(w) Other Assets: Other assets consist of prepaid expenses,
General Insurance Company, Ltd. and its 25.4 percent interest in
including deferred advertising costs, sales inducement assets,
The Fuji Fire and Marine Insurance Co., Ltd. Dividends received
non-AIGFP derivatives assets carried at fair value, deposits, other
from unconsolidated entities in which AIG’s ownership interest is
deferred charges and other intangible assets.
less than 50 percent were $30 million, $28 million and
Certain direct response advertising costs are deferred and
$146 million for the years ended December 31, 2007, 2006 and
amortized over the expected future benefit period in accordance
2005, respectively. The undistributed earnings of unconsolidated
with SOP 93-7, ‘‘Reporting on Advertising Costs.’’ When AIG can
entities in which AIG’s ownership interest is less than 50 percent
demonstrate that its customers have responded specifically to
were $266 million, $300 million and $179 million at Decem-
direct-response advertising, the primary purpose of which is to
ber 31, 2007, 2006 and 2005, respectively.
elicit sales to customers, and when it can be shown such
(t) Real Estate and Other Fixed Assets: The costs of advertising results in probable future economic benefits, the
buildings and furniture and equipment are depreciated principally advertising costs are capitalized. Deferred advertising costs are
on the straight-line basis over their estimated useful lives amortized on a cost-pool-by-cost-pool basis over the expected
(maximum of 40 years for buildings and ten years for furniture and future economic benefit period and are reviewed regularly for
equipment). Expenditures for maintenance and repairs are recoverability. Deferred advertising costs totaled $1.35 billion and
charged to income as incurred; expenditures for betterments are $1.05 billion at December 31, 2007 and 2006, respectively. The
capitalized and depreciated. AIG periodically assesses the carrying amount of expense amortized into income was $395 million,
value of its real estate for purposes of determining any asset $359 million and $272 million, for the years ended 2007, 2006,
impairment. and 2005, respectively.
Also included in Real Estate and Other Fixed Assets are AIG offers sales inducements, which include enhanced credit-
capitalized software costs, which represent costs directly related ing rates or bonus payments to contract holders (bonus interest)
to obtaining, developing or upgrading internal use software. Such on certain annuity and investment contract products. Sales
costs are capitalized and amortized using the straight-line method inducements provided to the contractholder are recognized as part
over a period generally not exceeding five years. of the liability for policyholders’ contract deposits in the consoli-
dated balance sheet. Such amounts are deferred and amortized
(u) Separate and Variable Accounts: Separate and variable
over the life of the contract using the same methodology and
accounts represent funds for which investment income and
assumptions used to amortize DAC. To qualify for such accounting
investment gains and losses accrue directly to the policyholders
treatment, the bonus interest must be explicitly identified in the
who bear the investment risk. Each account has specific invest-
contract at inception, and AIG must demonstrate that such
ment objectives, and the assets are carried at fair value. The
amounts are incremental to amounts AIG credits on similar
assets of each account are legally segregated and are not subject
contracts without bonus interest, and are higher than the
to claims that arise out of any other business of AIG. The
contract’s expected ongoing crediting rates for periods after the
liabilities for these accounts are equal to the account assets.
bonus period. The deferred bonus interest and other deferred
AIG 2007 Form 10-K 143

unamortized discounts or premiums. See Note 11 herein for1. Summary of Significant Accounting Policies
additional information.Continued
Long-term borrowings also include liabilities connected to trust
sales inducement assets totaled $1.7 billion and $1.3 billion at
preferred stock principally related to outstanding securities issued
December 31, 2007 and 2006, respectively. The amortization
by AIG Life Holdings (US), Inc. (AIGLH), a wholly owned subsidiary
expense associated with these assets is reported within Incurred
of AIG. Cash distributions on such preferred stock are accounted
policy losses and benefits expense in the consolidated statement
for as interest expense.
of income. Such amortization expense totaled $149 million,
$132 million and $127 million for the years ended December 31, (cc) Other Liabilities: Other liabilities consist of other funds on
2007, 2006 and 2005, respectively. deposit, non-AIGFP free-standing derivatives liabilities carried at
See Note 8 herein for a discussion of derivatives. fair value, and other payables. See Note 8 herein for a discussion
of derivatives. AIG has entered into certain insurance and
(x) Reserve for Losses and Loss Expenses: Losses and
reinsurance contracts, primarily in its General Insurance segment,
loss expenses are charged to income as incurred. The reserve for
that do not contain sufficient insurance risk to be accounted for
losses and loss expenses represents the accumulation of esti-
as insurance or reinsurance. Accordingly, the premiums received
mates for unpaid reported losses and includes provisions for
on such contracts, after deduction for certain related expenses,
losses incurred but not reported. The methods of determining
are recorded as deposits within Other liabilities in the consoli-
such estimates and establishing resulting reserves, including
dated balance sheet. Net proceeds of these deposits are invested
amounts relating to allowances for estimated unrecoverable
and generate net investment income. As amounts are paid,
reinsurance, are reviewed and updated. If the estimate of
consistent with the underlying contracts, the deposit liability is
reserves is determined to be inadequate or redundant, the
reduced.
increase or decrease is reflected in income. AIG discounts its loss
reserves relating to workers compensation business written by its (dd) Contingent Liabilities: Amounts are accrued for the reso-
U.S. domiciled subsidiaries as permitted by the domiciliary lution of claims that have either been asserted or are deemed
statutory regulatory authorities. probable of assertion if, in the opinion of management, it is both
probable that a liability has been incurred and the amount of the
(y) Future Policy Benefits for Life and Accident and
liability can be reasonably estimated. In many cases, it is not
Health Contracts and Policyholders’ Contract Deposits:
possible to determine whether a liability has been incurred or to
The liability for future policy benefits and policyholders’ contract
estimate the ultimate or minimum amount of that liability until
deposits are established using assumptions described in Note 9
years after the contingency arises, in which case, no accrual is
herein. Future policy benefits for life and accident and health
made until that time.
insurance contracts include provisions for future dividends to
participating policyholders, accrued in accordance with all applica- (ee) Preferred Shareholders’ Equity in Subsidiary Compa-
ble regulatory or contractual provisions. Policyholders’ contract nies: Preferred shareholders’ equity in subsidiary companies
deposits include AIG’s liability for certain guarantee benefits relates principally to outstanding preferred stock or interest of
accounted for as embedded derivatives at fair value in accordance ILFC, a wholly owned subsidiary of AIG. Cash distributions on such
with FAS 133. preferred stock or interest are accounted for as interest expense.
(z) Other Policyholders’ Funds: Other policyholders’ funds are (ff) Foreign Currency: Financial statement accounts expressed
reported at cost and include any policyholders’ funds on deposit in foreign currencies are translated into U.S. dollars in accordance
that encompass premium deposits and similar items. with FAS 52, ‘‘Foreign Currency Translation’’ (FAS 52). Under
FAS 52, functional currency assets and liabilities are translated
(aa) Financial Services — Securities and Spot Commodi-
into U.S. dollars generally using rates of exchange prevailing at
ties Sold but not yet Purchased, at Fair Value: Securities
the balance sheet date of each respective subsidiary and the
and spot commodities sold but not yet purchased represent sales
related translation adjustments are recorded as a separate
of securities and spot commodities not owned at the time of sale.
component of Accumulated other comprehensive income (loss),
The obligations arising from such transactions are recorded on a
net of any related taxes, in consolidated shareholders’ equity.
trade-date basis and carried at fair value. Also included are
Functional currencies are generally the currencies of the local
obligations under gold leases, which are accounted for as a debt
operating environment. Income statement accounts expressed in
host with an embedded gold derivative.
functional currencies are translated using average exchange rates
(bb) Commercial Paper and Extendible Commercial Notes during the period. The adjustments resulting from translation of
and Long-Term Borrowings: AIG’s funding is principally ob- financial statements of foreign entities operating in highly inflation-
tained from medium and long-term borrowings and commercial ary economies are recorded in income. Exchange gains and
paper. Commercial paper, when issued at a discount, is recorded losses resulting from foreign currency transactions are recorded in
at the proceeds received and accreted to its par value. Extendible income.
commercial notes are issued by AGF with initial maturities of up to
(gg) Earnings per Share: Basic earnings per share is based
90 days, which AGF may extend to 390 days. Long-term
on the weighted average number of common shares outstanding,
borrowings are carried at the principal amount borrowed, net of
adjusted to reflect all stock dividends and stock splits. Diluted
144 AIG 2007 Form 10-K

representing the difference between the fair value of these hybrid1. Summary of Significant Accounting Policies
financial instruments and the prior carrying value as of Decem-Continued
ber 31, 2005. The effect of adoption on after-tax gross gains and
earnings per share is based on those shares used in basic
losses was $218 million ($336 million pre-tax) and $229 million
earnings per share plus shares that would have been outstanding
($354 million pre-tax), respectively.
assuming issuance of common shares for all dilutive potential
In connection with AIG’s early adoption of FAS 155, structured
common shares outstanding, adjusted to reflect all stock divi-
note liabilities of $8.9 billion, other structured liabilities in
dends and stock splits.
conjunction with equity derivative transactions of $111 million,
(hh) Recent Accounting Standards: and hybrid financial instruments of $522 million at December 31,
2006 are now carried at fair value. The effect on earnings for
Accounting Changes
2006, for changes in the fair value of hybrid financial instruments,
was a pre-tax loss of $313 million, of which $287 million wasSOP 05-1
reflected in Other income and was largely offset by gains on
In September 2005, the AICPA issued SOP 05-1, ‘‘Accounting by
economic hedge positions which were also reflected in operating
Insurance Enterprises for Deferred Acquisition Costs in Connection
income, and $26 million was reflected in Net investment income.
with Modifications or Exchanges of Insurance Contracts’’ (SOP 05-
1). SOP 05-1 provides guidance on accounting for internal
FAS 158
replacements of insurance and investment contracts other than
those specifically described in FAS 97. SOP 05-1 defines an In September 2006, the FASB issued FAS 158, ‘‘Employers’
internal replacement as a modification in product benefits, Accounting for Defined Benefit Pension and Other Postretirement
features, rights, or coverage that occurs by the exchange of a Plans — an amendment of FASB Statements No. 87, 88, 106 and
contract for a new contract, or by amendment, endorsement, or 132R’’ (FAS 158). FAS 158 requires AIG to prospectively recognize
rider to a contract, or by the election of a feature or coverage the overfunded or underfunded status of defined benefit postretire-
within a contract. Internal replacements that result in a substan- ment plans as an asset or liability in AIG’s consolidated balance
tially changed contract are accounted for as a termination and a sheet and to recognize changes in that funded status in the year in
replacement contract. which the changes occur through Other comprehensive income. FAS
SOP 05-1 became effective on January 1, 2007 and generally 158 also requires AIG to measure the funded status of plans as of
affects the accounting for internal replacements occurring after the date of its year-end balance sheet, with limited exceptions. AIG
that date. In the first quarter of 2007, AIG recorded a cumulative adopted FAS 158 for the year ended December 31, 2006. The
effect reduction of $82 million, net of tax, to the opening balance cumulative effect, net of deferred income taxes, on AIG’s consoli-
of retained earnings on the date of adoption. This adoption dated balance sheet at December 31, 2006 was a net reduction in
reflected changes in unamortized DAC, VOBA, deferred sales shareholders’ equity through a charge to Accumulated other
inducement assets, unearned revenue liabilities and future policy comprehensive income (loss) of $532 million, with a corresponding
benefits for life and accident and health insurance contracts net decrease of $538 million in total assets, and a net decrease of
resulting from a shorter expected life related to certain group life $6 million in total liabilities. See Note 18 herein for additional
and health insurance contracts and the effect on the gross profits information on the adoption of FAS 158.
of investment-oriented products related to previously anticipated
future internal replacements. This cumulative effect adjustment FIN 48
affected only the Life Insurance & Retirement Services segment.
In July 2006, the FASB issued FASB Interpretation No. (FIN) 48,
FAS 155 ‘‘Accounting for Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109’’ (FIN 48), which clarifies the accounting
In February, 2006, the Financial Accounting Standards Board
for uncertainty in income tax positions. FIN 48 prescribes a
(FASB) issued FAS 155, ‘‘Accounting for Certain Hybrid Financial
recognition threshold and measurement attribute for the financial
Instruments — an amendment of FAS 140 and FAS 133’’ (FAS
statement recognition and measurement of an income tax position
155). FAS 155 allows AIG to include changes in fair value in
taken or expected to be taken in a tax return. FIN 48 also
earnings on an instrument-by-instrument basis for any hybrid
provides guidance on derecognition, classification, interest and
financial instrument that contains an embedded derivative that
penalties, accounting in interim periods, and additional disclo-
would otherwise be required to be bifurcated and accounted for
sures. AIG adopted FIN 48 on January 1, 2007. Upon adoption,
separately under FAS 133. The election to measure the hybrid
AIG recognized a $71 million increase in the liability for unrecog-
instrument at fair value is irrevocable at the acquisition or
nized tax benefits, which was accounted for as a decrease to
issuance date.
opening retained earnings as of January 1, 2007. See Note 21
AIG elected to early adopt FAS 155 as of January 1, 2006, and
for additional FIN 48 disclosures.
apply FAS 155 fair value measurement to certain structured note
liabilities and structured investments in AIG’s available for sale
FSP 13-2
portfolio that existed at December 31, 2005. The effect of this
adoption resulted in an $11 million after-tax ($18 million pre-tax) In July 2006, the FASB issued FASB Staff Position
decrease to opening retained earnings as of January 1, 2006, No. (FSP) FAS 13-2, ‘‘Accounting for a Change or Projected
AIG 2007 Form 10-K 145

also establishes presentation and disclosure requirements for1. Summary of Significant Accounting Policies
similar types of assets and liabilities measured at fair value.Continued
FAS 159 permits the fair value option election on an instru-
Change in the Timing of Cash Flows Relating to Income Taxes
ment-by-instrument basis for eligible items existing at the adoption
Generated by a Leveraged Lease Transaction’’ (FSP 13-2). FSP
date and at initial recognition of an asset or liability or upon an
13-2 addresses how a change or projected change in the timing of
event that gives rise to a new basis of accounting for that
cash flows relating to income taxes generated by a leveraged
instrument.
lease transaction affects the accounting for the lease by the
AIG adopted FAS 159 on January 1, 2008, its required
lessor, and directs that the tax assumptions be consistent with
effective date. The adoption of FAS 159 with respect to elections
any FIN 48 uncertain tax position related to the lease. AIG
made in the Life Insurance & Retirement Services segment is
adopted FSP 13-2 on January 1, 2007. Upon adoption, AIG
expected to result in a decrease to opening 2008 retained
recorded a $50 million decrease in the opening balance of
earnings of approximately $600 million. The adoption of FAS 159
retained earnings, net of tax, to reflect the cumulative effect of
with respect to elections made by AIGFP is currently being
this change in accounting.
evaluated for the effect of recently issued draft guidance by the
As a result of adopting SOP 05-1, FIN 48 and FSP 13-2, AIG FASB, anticipated to be issued in final form in early 2008, and its
recorded a total decrease to opening retained earnings of potential effect on AIG’s consolidated financial statements.
$203 million as of January 1, 2007.
SOP 07-1
Future Application of Accounting Standards In June 2007, the AICPA issued SOP No. 07-1 (SOP 07-1),
‘‘Clarification of the Scope of the Audit and Accounting Guide ‘AuditsFAS 157
of Investment Companies’ and Accounting by Parent Companies and
In September 2006, the FASB issued FAS 157, ‘‘Fair Value Equity Method Investors for Investments in Investment Companies.’’
Measurements’’ (FAS 157). FAS 157 defines fair value, estab- SOP 07-1 amends the guidance for whether an entity may apply the
lishes a framework for measuring fair value and expands disclo- Audit and Accounting Guide, ‘‘Audits of Investment Companies’’ (the
sure requirements regarding fair value measurements but does Guide). In February 2008, the FASB issued an FSP indefinitely
not change existing guidance about whether an instrument is deferring the effective date of SOP 07-1.
carried at fair value. FAS 157 nullifies the guidance in EITF 02-3
that precluded the recognition of a trading profit at the inception FAS 141(R)
of a derivative contract unless the fair value of such contract was
In December 2007, the FASB issued FAS 141 (revised 2007),obtained from a quoted market price or other valuation technique
‘‘Business Combinations’’ (FAS 141(R)). FAS 141(R) changes theincorporating observable market data. FAS 157 also clarifies that
accounting for business combinations in a number of ways,an issuer’s credit standing should be considered when measuring
including broadening the transactions or events that are consid-liabilities at fair value.
ered business combinations, requiring an acquirer to recognizeAIG adopted FAS 157 on January 1, 2008, its required
100 percent of the fair values of assets acquired, liabilitieseffective date. FAS 157 must be applied prospectively, except that
assumed, and noncontrolling interests in acquisitions of less thanthe difference between the carrying amount and fair value of a
a 100 percent controlling interest when the acquisition constitutesstand-alone derivative or hybrid instrument measured using the
a change in control of the acquired entity, recognizing contingentguidance in EITF 02-3 on recognition of a trading profit at the
consideration arrangements at their acquisition-date fair valuesinception of a derivative, is to be applied as a cumulative-effect
with subsequent changes in fair value generally reflected inadjustment to opening retained earnings on January 1, 2008. The
income, and recognizing preacquisition loss and gain contingen-adoption of FAS 157 was not material to AIG’s financial condition.
cies at their acquisition-date fair values, among other changes.However, the adoption of FAS 157 is expected to affect first
FAS 141(R) is required to be adopted for business combina-quarter 2008 earnings, due to changes in the valuation methodol-
tions for which the acquisition date is on or after the beginning ofogy for hybrid financial instrument and derivative liabilities (both
the first annual reporting period beginning on or after Decem-freestanding and embedded) currently carried at fair value. These
ber 15, 2008 (January 1, 2009 for AIG). Early adoption ismethodology changes primarily include the incorporation of AIG’s
prohibited. AIG is evaluating the effect FAS 141(R) will have on itsown credit risk and the inclusion of explicit risk margins, where
consolidated financial statements.appropriate.
FAS 159 FAS 160
In February 2007, the FASB issued FAS 159, ‘‘The Fair Value In December 2007, the FASB issued FAS 160, ‘‘Noncontrolling
Option for Financial Assets and Financial Liabilities’’ (FAS 159). Interests in Consolidated Financial Statements, an amendment of
FAS 159 permits entities to choose to measure at fair value many ARB No. 51’’ (FAS 160). FAS 160 requires noncontrolling (i.e.,
financial instruments and certain other items that are not required minority) interests in partially owned consolidated subsidiaries to
to be measured at fair value. Subsequent changes in fair value for be classified in the consolidated balance sheet as a separate
designated items are required to be reported in income. FAS 159 component of consolidated shareholders’ equity. FAS 160 also
146 AIG 2007 Form 10-K

business written by AIG’s foreign-based insurance subsidiaries.1. Summary of Significant Accounting Policies
The Foreign General Insurance group uses various marketingContinued
methods to write both business and consumer lines insurance
establishes accounting rules for subsequent acquisitions and
with certain refinements for local laws, customs and needs. AIU
sales of noncontrolling interests and how noncontrolling interests
operates in Asia, the Pacific Rim, Europe, including the United
should be presented in the consolidated statement of income.
Kingdom, Africa, the Middle East and Latin America.
The noncontrolling interests’ share of subsidiary income should
Each of the General Insurance sub-segments is comprised of
be reported as a part of consolidated net income with disclosure
groupings of major products and services as follows: DBG is
of the attribution of consolidated net income to the controlling and
comprised of domestic commercial insurance products and ser-
noncontrolling interests on the face of the consolidated statement
vices; Transatlantic is comprised of reinsurance products and
of income.
services sold to other general insurance companies; Personal
FAS 160 is required to be adopted in the first annual reporting
Lines is comprised of general insurance products and services
period beginning on or after December 15, 2008 (January 1,
sold to individuals; Mortgage Guaranty is comprised of products
2009 for AIG) and earlier application is prohibited. FAS 160 must
insuring against losses arising under certain loan agreements;
be adopted prospectively, except that noncontrolling interests
and Foreign General is comprised of general insurance products
should be reclassified from liabilities to a separate component of
sold overseas.
shareholders’ equity and consolidated net income should be
recast to include net income attributable to both the controlling Life Insurance & Retirement Services: AIG’s Life Insurance &
and noncontrolling interests retrospectively. Had AIG adopted Retirement Services subsidiaries offer a wide range of insurance
FAS 160 at December 31, 2007, AIG would have reclassified and retirement savings products both domestically and abroad.
$10.4 billion of minority (i.e., noncontrolling) interests from Insurance-oriented products consist of individual and group life,
liabilities to Shareholders’ equity. payout annuities (including structured settlements), endowment
and accident and health policies. Retirement savings products
2. Segment Information consist generally of fixed and variable annuities. Revenues in the
Life Insurance & Retirement Services segment represent Life
AIG identifies its reportable segments by product line consistent
Insurance & Retirement Services Premiums and other considera-
with its management structure. These segments and their respec-
tions, Net investment income and Net realized capital gains
tive operations are as follows:
(losses).
AIG’s principal Foreign Life Insurance & Retirement ServicesGeneral Insurance: AIG’s General Insurance subsidiaries write
operations are American Life Insurance Company (ALICO), Ameri-substantially all lines of commercial property and casualty
can International Assurance Company, Limited, together withinsurance and various personal lines both domestically and
American International Assurance Company (Bermuda) Limitedabroad. Revenues in the General Insurance segment represent
(AIA), Nan Shan Life Insurance Company, Ltd. (Nan Shan), TheGeneral Insurance net Premiums and other considerations earned,
Philippine American Life and General Insurance Company (Philam-Net investment income and Net realized capital gains (losses).
life), AIG Edison Life Insurance Company (AIG Edison Life) and AIGAIG’s principal General Insurance operations are as follows:
Star Life Insurance Co. Ltd. (AIG Star Life).Domestic Brokerage Group (DBG) writes substantially all
AIG’s principal Domestic Life Insurance & Retirement Servicesclasses of business insurance in the U.S. and Canada, accepting
operations are American General Life Insurance Company (AGsuch business mainly from insurance brokers.
Life), The United States Life Insurance Company in the City ofTransatlantic Holdings, Inc. (Transatlantic) subsidiaries offer
New York (USLIFE), American General Life and Accident Insurancereinsurance on both a treaty and facultative basis to insurers in
Company (AGLA and, collectively with AG Life and USLIFE, thethe U.S. and abroad. Transatlantic structures programs for a full
Domestic Life Insurance internal reporting unit), AIG Annuityrange of property and casualty products with an emphasis on
Insurance Company (AIG Annuity), The Variable Annuity Lifespecialty risks.
Insurance Company (VALIC) and AIG Retirement Services, Inc (AIGAIG’s Personal Lines operations provide automobile insurance
SunAmerica and, collectively with AIG Annuity and VALIC, thethrough aigdirect.com, the newly formed operation resulting from
Domestic Retirement Services internal reporting unit).the merger of AIG Direct and 21st Century Insurance Group (21st
American International Reinsurance Company (AIRCO) actsCentury), and the Agency Auto Division, as well as a broad range
primarily as an internal reinsurance company for AIG’s insuranceof coverages for high net worth individuals through the AIG Private
operations.Client Group.
Life Insurance & Retirement Services is comprised of twoMortgage Guaranty operations provide residential mortgage
major groupings of products and services: insurance-orientedguaranty insurance that covers the first loss for credit defaults on
products and services and retirement savings products andhigh loan-to-value conventional first- and second-lien mortgages for
services.the purchase or refinance of one to four family residences.
AIG’s Foreign General Insurance group accepts risks primarily
Financial Services: AIG’s Financial Services subsidiaries engage
underwritten through American International Underwriters (AIU), a
in diversified activities including aircraft and equipment leasing,
marketing unit consisting of wholly owned agencies and insurance
companies. The Foreign General Insurance group also includes
AIG 2007 Form 10-K 147

include issuing standard and structured notes and other securities2. Segment Information
and entering into guaranteed investment agreements (GIAs).Continued
Consumer Finance operations include American General Fi-
capital markets, consumer finance and insurance premium
nance Inc. (AGF) as well as AIG Consumer Finance Group Inc.
finance.
(AIGCFG). AGF and AIGCFG provide a wide variety of consumer
AIG’s Aircraft Leasing operations represent the operations of
finance products, including non-conforming real estate mortgages,
International Lease Finance Corporation (ILFC), which generates
consumer loans, retail sales finance and credit-related insurance
its revenues primarily from leasing new and used commercial jet
to customers both domestically and overseas, particularly in
aircraft to domestic and foreign airlines. Revenues also result
emerging and developing markets.
from the remarketing of commercial jets for its own account, and
remarketing and fleet management services for airlines and for Asset Management: AIG’s Asset Management operations com-
financial institutions. prise a wide variety of investment-related services and investment
Capital Markets represents the operations of AIGFP, which products. Such services and products are offered to individuals,
engages as principal in a wide variety of financial transactions, pension funds and institutions globally through AIG’s Spread-
including standard and customized financial products involving Based Investment business, Institutional Asset Management, and
commodities, credit, currencies, energy, equities and rates and Brokerage Services and Mutual Funds business. Revenues in the
provides credit protection through credit default swaps on certain Asset Management segment represent investment income with
super senior tranches of collateralized debt obligations (CDOs). respect to spread-based products and management, advisory and
AIGFP also invests in a diversified portfolio of securities and incentive fees.
principal investments and engages in borrowing activities that
148 AIG 2007 Form 10-K

2. Segment Information
Continued
The following table summarizes AIG’s operations by reporting segment for the years ended December 31, 2007, 2006
and 2005:
Operating Segments
Life
Insurance Consolidation
General & Retirement Financial Asset and
(in millions) Insurance Services(a)
Services(a)
Management(a)
Other(a)(b)
Total Eliminations(a)
Consolidated
2007
Total revenues(c)(d)(e)
$ 51,708 $ 53,570 $ (1,309) $ 5,625 $ 457 $ 110,051 $ 13 $ 110,064
Interest expense 29 128 7,794 567 1,170 9,688 — 9,688
Operating income (loss)
before minority interest(d)(e)
10,526 8,186 (9,515) 1,164 (2,140) 8,221 722 8,943
Income taxes (benefits) 2,393 1,494 (3,260) 334 537 1,498 (43) 1,455
Depreciation expense 300 392 1,831 88 179 2,790 — 2,790
Capital expenditures 354 532 4,569 3,557 271 9,283 — 9,283
Year-end identifiable assets 181,708 615,386 203,894 77,274 126,874 1,205,136 (144,631) 1,060,505
2006
Total revenues(c)(d)
$ 49,206 $ 50,878 $ 7,777 $ 4,543 $ 483 $ 112,887 $ 500 $ 113,387
Interest expense 23 74 6,005 105 744 6,951 — 6,951
before minority interest(d)
10,412 10,121 383 1,538 (1,435) 21,019 668 21,687
Income taxes (benefits) 2,351 2,892 (26) 575 719 6,511 26 6,537
Capital expenditures 375 711 6,278 835 244 8,443 — 8,443
Year-end identifiable assets 167,004 550,957 202,485 78,275 107,517 1,106,238 (126,828) 979,410
2005
Total revenues(c)(d)
$ 45,174 $ 48,020 $ 10,677 $ 4,582 $ 344 $ 108,797 $ (16) $ 108,781
Interest expense 7 83 5,164 11 408 5,673 — 5,673
before minority interest(d)
2,315 8,965 4,424 1,963 (2,765)(f)
14,902 311 15,213
Income taxes (benefits) 169 2,407 1,418 723 (587) 4,130 128 4,258
Capital expenditures 417 590 6,300 25 194 7,526 — 7,526
Year-end identifiable assets 150,667 489,331 161,919 69,584 94,047 965,548 (112,500) 853,048
(a) Beginning in 2007, revenues and operating income related to certain foreign investment contracts, which were historically reported as a component of
the Asset Management segment, are now reported in the Life Insurance & Retirement Services segment, net realized capital gains and losses;
including derivative gains and losses and foreign exchange transaction gains and losses for Financial Services entities other than AIGFP and Asset
Management entities, which were previously reported as part of AIG’s Other category, are now included in Asset Management and Financial Services
revenues and operating income; and revenues and operating income related to consolidated managed partnerships and funds, which were historically
reported in the Asset Management segment, are now being reported in Consolidation and eliminations. All prior periods have been revised to conform
to the current presentation.
(b) Includes AIG Parent and other operations that are not required to be reported separately. The following table presents the operating loss for AIG’s
Other category for the years ended December 31, 2007, 2006 and 2005:
For the Years Ended December 31,
(in millions) 2007 2006 2005
Operating income (loss):
Equity earnings in partially owned companies* $ 157 $ 193 $ (124)
Interest expense (1,223) (859) (541)
Unallocated corporate expenses (560) (517) (413)
Compensation expense — SICO Plans (39) (108) (205)
Compensation expense — Starr tender offer — (54) —
Net realized capital gains (losses) (409) (37) 269
Regulatory settlement costs — — (1,644)
Other miscellaneous, net (66) (53) (107)
Total Other $ (2,140) $ (1,435) $ (2,765)
* Includes current year catastrophe-related losses from unconsolidated entities of $312 million in 2005. There were no significant catastrophe-related
losses from unconsolidated entities in 2007 and 2006.
AIG 2007 Form 10-K 149

Continued
(c) Represents the sum of General Insurance net premiums earned, Life Insurance & Retirement Services premiums and other considerations, net
investment income, Financial Services interest, lease and ﬁnance charges, Asset Management investment income from spread-based products and
management, advisory and incentive fees, and realized capital gains (losses).
(d) In 2007, 2006 and 2005, includes other-than-temporary impairment charges of $4.7 billion, $944 million and $598 million, respectively.
(e) Both revenues and operating income (loss) include an unrealized market valuation loss of $11.5 billion on AIGFP’s super senior credit default swap
portfolio and an other-than-temporary impairment charge of $643 million on AIGFP’s available for sale investment securities reported in other income.
(f) Includes settlement costs of $1.64 billion as described in Note 12(a) Litigation and Investigations herein.
The following table summarizes AIG’s General Insurance operations by major internal reporting unit for the years ended
December 31, 2007, 2006 and 2005:
General Insurance
Domestic Foreign Total Consolidation Total
Brokerage Personal Mortgage General Reportable and General
(in millions) Group Transatlantic Lines Guaranty Insurance Segment Eliminations Insurance
2007
Total revenues $ 27,653 $ 4,382 $4,924 $1,041 $13,715 $ 51,715 $ (7) $ 51,708
Losses & loss expenses incurred 15,948 2,638 3,660 1,493 6,243 29,982 — 29,982
Underwriting expenses 4,400 1,083 1,197 185 4,335 11,200 — 11,200
Operating income (loss)(a)
7,305 661 67 (637) 3,137 10,533 (7) 10,526
Depreciation expense 97 2 70 6 125 300 — 300
Capital expenditures 93 4 81 21 155 354 — 354
2006
Total revenues(b)
$ 27,419 $ 4,050 $4,871 $ 877 $11,999 $ 49,216 $ (10) $ 49,206
Losses & loss expenses incurred 16,779 2,463 3,306 349 5,155 28,052 — 28,052
Underwriting expenses 4,795 998 1,133 200 3,616 10,742 — 10,742
Operating income(a)(b)
5,845 589 432 328 3,228 10,422 (10) 10,412
2005
Total revenues $ 25,171 $ 3,766 $4,848 $ 655 $10,719 $ 45,159 $ 15 $ 45,174
Losses & loss expenses incurred 21,466 2,877 3,566 139 5,043 33,091 — 33,091
Underwriting expenses 4,525 928 1,087 153 3,075 9,768 — 9,768
Operating income (loss)(a)(c)
(820)(d)
(39) 195 363 2,601 2,300 15 2,315
(a) Catastrophe-related losses in 2007 and 2005 by reporting unit were as follows. There were no signiﬁcant catastrophe-related losses in 2006.
2007 2005
Insurance Net
Related Reinstatement Insurance Net Reinstatement
(in millions) Losses Premium Cost Related Losses Premium Cost
Reporting Unit:
DBG $113 $ (13) $1,811 $136
Transatlantic 11 (1) 463 45
Personal Lines 61 14 112 2
Mortgage Guaranty — — 10 —
Foreign General Insurance 90 1 229 80
Total $275 $ 1 $2,625 $263
(b) Includes the effect of out of period adjustments related to the accounting for certain interests in unit investment trusts (UCITS). For DBG, the effect
was an increase of $66 million in both revenues and operating income and for Foreign General Insurance, the effect was an increase of $424 million in
both revenues and operating income.
(c) Includes the fourth quarter 2005 increase in net reserves of approximately $1.8 billion resulting from the annual review of General Insurance loss and
loss adjustment reserves.
(d) Includes $291 million of expenses related to changes in estimates for uncollectible reinsurance and other premium balances, and $100 million of
accrued expenses in connection with certain workers compensation insurance policies written between 1985 and 1996.
150 AIG 2007 Form 10-K

Continued
The following table summarizes AIG’s Life Insurance & Retirement Services operations by major internal reporting unit
for the years ended December 31, 2007, 2006 and 2005:
Total Life
Domestic Domestic Total Consolidation Insurance &
Japan Life Retirement Reportable and Retirement
(in millions) and Other Asia Insurance Services Segment Eliminations Services
2007
Total revenues(a)(b)
:
Insurance-oriented products $ 14,393 $ 19,896 $ 8,535 $ — $ 42,824 $ — $ 42,824
Retirement savings products 3,783 191 493 6,279 10,746 — 10,746
Total revenues 18,176 20,087 9,028 6,279 53,570 — 53,570
Operating income(a)(b)
3,044 3,153 642 1,347 8,186 — 8,186
Depreciation expense 110 84 85 113 392 — 392
Capital expenditures 166 232 53 81 532 — 532
Year-end identiﬁable assets 177,413 132,521 108,908 203,441 622,283 (6,897) 615,386
2006
Total revenues(a)(c)
:
Total revenues 16,751 17,880 9,106 7,141 50,878 — 50,878
Operating income(a)(c)
3,821 3,060 917 2,323 10,121 — 10,121
2005
Total revenues(a)
:
Total revenues 15,937 15,982 9,215 6,886 48,020 — 48,020
Operating income(a)
3,020 2,286 1,495 2,164 8,965 — 8,965
(a) In 2007, 2006 and 2005, includes other-than-temporary impairment charges of $2.8 billion, $641 million and $425 million, respectively.
(b) Includes a positive out-of-period adjustment of $158 million related to foreign exchange remediation activities.
(c) Includes the effect of out-of-period adjustments related to the accounting for UCITS in 2006, which increased revenues by $240 million and operating
income by $169 million.
AIG 2007 Form 10-K 151

Continued
The following table summarizes AIG’s Financial Services operations by major internal reporting unit for the years ended
December 31, 2007, 2006 and 2005:
Financial Services
Total Consolidation Total
Aircraft Capital Consumer Reportable and Financial
(in millions) Leasing(a)
Markets(b)
Finance(c)
Other Segment Elimination Services
2007
Total revenues(d)(e)(f)(g)
$ 4,694 $ (9,979) $ 3,655 $ 1,471 $ (159) $ (1,150) $ (1,309)
Interest expense(e)
1,650 4,644 1,437 63 7,794 — 7,794
Operating income (loss)(e)(f)(g)
873 (10,557) 171 (2) (9,515) — (9,515)
Depreciation expense 1,751 24 41 15 1,831 — 1,831
Capital expenditures 4,164 21 62 322 4,569 — 4,569
2006
Total revenues(d)(e)
$ 4,082 $ (186) $ 3,587 $ 320 $ 7,803 $ (26) $ 7,777
Interest expense(e)
1,442 3,215 1,303 108 6,068 (63) 6,005
Operating income (loss) 578 (873) 668 10 383 — 383
2005
Total revenues(d)(e)
$ 3,668 $ 3,260 $ 3,563 $ 206 $ 10,697 $ (20) $ 10,677
Interest expense(e)
1,125 3,033 1,005 201 5,364 (200) 5,164
Operating income 769 2,661 922 72 4,424 — 4,424
(a) Both revenues and operating income include gains (losses) from hedging activities that did not qualify for hedge accounting treatment under FAS 133,
second quarter of 2007, ILFC began applying hedge accounting to most of its derivatives hedging interest rate and foreign exchange risks associated
(b) Both revenues and operating income include gains (losses) from hedging activities that did not qualify for hedge accounting treatment under FAS 133,
including the related foreign exchange gains and losses. In 2007, 2006 and 2005, the effect was $211 million, $(1.82) billion and $2.01 billion,
respectively. The year ended December 31, 2007 includes a $380 million out of period charge to reverse net gains recognized on transfers of available
for sale securities among legal entities consolidated within AIGFP. The year ended December 31, 2006 includes an out of period charge of $223 million
related to the remediation of the material weakness in internal control over the accounting for certain derivative transactions under FAS 133. In the first
quarter of 2007, AIGFP began applying hedge accounting for certain of its interest rate swaps and foreign currency forward contracts hedging its
investments and borrowings.
(c) Both revenues and operating income include gains (losses) from hedging activities that did not qualify for hedge accounting treatment under FAS 133,
second quarter of 2007, AGF began applying hedge accounting to most of its derivatives hedging interest rate and foreign exchange risks associated
(d) Represents primarily the sum of aircraft lease rentals from ILFC, AIGFP hedged financial positions entered into in connection with counterparty
transactions, the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange
gains and losses, and finance charges from consumer finance operations.
(e) Interest expense for the Capital Markets business is included in Revenues above and in Other income in the consolidated statement of income.
(f) Both revenues and operating income (loss) include an unrealized market valuation loss of $11.5 billion on AIGFP’s super senior credit default swap
portfolio and an other-than-temporary impairment charge of $643 million on AIGFP’s available for sale investment securities reported in other income.
(g) Includes a pre-tax charge of $178 million in connection with domestic consumer finance’s mortgage banking activities.
152 AIG 2007 Form 10-K

Continued
A substantial portion of AIG’s operations is conducted in countries other than the United States and Canada. The
following table summarizes AIG’s operations by major geographic segment. Allocations have been made on the basis of
the location of operations and assets.
Geographic Segments
Other
(in millions) Domestic(a)
Far East Foreign Consolidated
2007
Total revenues $46,402 $36,512 $27,150 $110,064
Real estate and other fixed assets, net of accumulated depreciation 3,202 1,404 912 5,518
Flight equipment primarily under operating leases, net of accumulated depreciation(b)
41,984 — — 41,984
2006
Total revenues $57,984 $33,883 $21,520 $113,387
Real estate and other fixed assets, net of accumulated depreciation 2,432 1,082 867 4,381
39,875 — — 39,875
2005
Total revenues $59,858 $32,076 $16,847 $108,781
Real estate and other fixed assets, net of accumulated depreciation 1,905 929 807 3,641
36,245 — — 36,245
(a) Including revenues from insurance operations in Canada of $1.3 billion, $1.1 billion and $968 million in 2007, 2006 and 2005, respectively.
(b) Approximately 90 percent of ILFC’s fleet is operated by foreign airlines.
(b) Net Investment Income: An analysis of net investment3. Investments
income follows:
(a) Statutory Deposits: Cash and securities with carrying Years Ended December 31,
(in millions) 2007 2006 2005values of $13.6 billion and $14.8 billion were deposited by AIG’s
insurance subsidiaries under requirements of regulatory authori- Fixed maturities(a)
$22,330 $20,393 $18,690
ties at December 31, 2007 and 2006, respectively. Equities 2,361 1,733 1,716
Interest on mortgage and
other loans 1,423 1,253 1,177
Partnerships 1,986 1,596 1,056
Mutual funds 650 845 4
Other invested assets(b)
941 1,293 820
Investment expenses 1,072 1,043 879
Net investment income $28,619 $26,070 $22,584
(a) Includes short-term investments.
(b) Includes net investment income from securities lending activities,
representing interest earned on securities lending invested collateral
offset by interest expense on securities lending payable.
AIG 2007 Form 10-K 153

3. Investments
Continued
(c) Net Realized Gains and Losses:
The Net realized capital gains (losses) and increase (decrease) in unrealized appreciation of AIG’s available for sale
investments were as follows:
(in millions) 2007 2006 2005
Net realized capital gains (losses):
Sales of fixed maturities $ (468) $ (382) $ 372
Sales of equity securities 1,087 813 643
Sales of real estate and other assets 619 303 88
Other-than-temporary impairments (4,072) (944) (598)
Foreign exchange transactions (643) (382) 701
Derivative instruments (115) 698 (865)
Total $(3,592) $ 106 $ 341
Increase (decrease) in unrealized appreciation of investments:
Fixed maturities $(5,504) $ (198) $(4,656)
Equity securities 2,440 432 850
Other investments (3,842) 986 2,138
AIGFP investments (1,140) 1,354 (1,909)
Increase (decrease) in unrealized appreciation $(8,046) $2,574 $(3,577)
Net unrealized gains (losses) included in the consolidated statement of income from investment securities classified as trading
securities in 2007, 2006 and 2005 were $1.1 billion, $938 million and $1.1 billion, respectively.
The gross realized gains and gross realized losses from sales of AIG’s available for sale securities were as follows:
2007 2006 2005
Gross Gross Gross Gross Gross Gross
Realized Realized Realized Realized Realized Realized
(in millions) Gains Losses Gains Losses Gains Losses
Fixed maturities $ 680 $ 1,148 $ 711 $1,093 $1,586 $1,214
Equity securities 1,368 291 1,111 320 930 354
Preferred stocks 10 — 22 — 101 34
Total $2,058 $ 1,439 $1,844 $1,413 $2,617 $1,602
(d) Fair Value of Investment Securities:
The amortized cost or cost and estimated fair value of AIG’s available for sale and held to maturity securities at
December 31, 2007 and 2006 were as follows:
December 31, 2007* December 31, 2006
Amortized Gross Gross Amortized Gross Gross
Cost or Unrealized Unrealized Fair Cost or Unrealized Unrealized Fair
(in millions) Cost Gains Losses Value Cost Gains Losses Value
Available for sale:*
U.S. government and government
sponsored entities $ 7,956 $ 333 $ 37 $ 8,252 $ 7,667 $ 221 $ 140 $ 7,748
Obligations of states, municipalities
and political subdivisions 46,087 927 160 46,854 59,785 1,056 210 60,631
Non-U.S. governments 67,023 3,920 743 70,200 62,860 5,461 437 67,884
Corporate debt 239,822 6,216 4,518 241,520 257,383 7,443 2,536 262,290
collateralized 140,982 1,221 7,703 134,500 104,687 502 362 104,827
Total bonds $501,870 $12,617 $13,161 $501,326 $492,382 $14,683 $3,685 $503,380
Equity securities 15,188 5,545 463 20,270 13,147 2,807 159 15,795
Total $517,058 $18,162 $13,624 $521,596 $505,529 $17,490 $3,844 $519,175
Held to maturity:*
Bonds — Obligations of states,
municipalities and political
subdivisions $21,581 $609 $33 $22,157 $21,437 $731 $14 $22,154
* At December 31, 2007 and 2006, fixed maturities held by AIG that were below investment grade or not rated totaled $27.0 billion and $26.6 billion,
respectively.
154 AIG 2007 Form 10-K

3. Investments
Continued
The following table presents the amortized cost and estimated fair values of AIG’s available for sale and held to
maturity fixed maturity securities at December 31, 2007, by contractual maturity. Actual maturities may differ from
contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without
call or prepayment penalties.
Available for Sale Held to Maturity
Amortized Amortized
(in millions) Cost Fair Value Cost Fair Value
Due in one year or less $ 25,844 $ 25,994 $ 72 $ 69
Due after one year through five years 95,494 97,466 284 277
Due after five years through ten years 121,961 123,196 1,511 1,547
Due after ten years 117,589 120,170 19,714 20,264
Mortgage-backed, asset-backed and collateralized 140,982 134,500 — —
Total available for sale $501,870 $501,326 $21,581 $22,157
AIG’s available for sale securities are recorded on the consolidated balance sheet at December 31, 2007 and 2006 as
follows:
Fair Value
Bonds available for sale $397,372 $386,869
Common stocks available for sale 17,900 13,256
Preferred stocks available for sale 2,370 2,539
Financial Services securities available for sale 40,305 47,205
Securities lending invested collateral 63,649 69,306
Total $521,596 $519,175
(e) Non-Income Producing Invested Assets: At December 31, 2007, non-income producing invested assets were insignificant.
(f) Gross Unrealized Losses and Estimated Fair Values on Investments:
The following table summarizes the cost basis and gross unrealized losses on AIG’s available for sale securities,
aggregated by major investment category and length of time that individual securities have been in a continuous
unrealized loss position, at December 31, 2007 and 2006:
12 Months or less More than 12 Months Total
Unrealized Unrealized Unrealized
(in millions) Cost(a)
Losses Cost(a)
Losses Cost(a)
Losses
2007
Bonds(b)
$190,809 $ 9,935 $65,137 $3,226 $255,946 $13,161
Equity securities 4,433 463 — — 4,433 463
Total $195,242 $10,398 $65,137 $3,226 $260,379 $13,624
2006
Bonds(b)
$ 69,656 $ 1,257 $84,040 $2,428 $153,696 $ 3,685
Equity securities 2,734 159 — — 2,734 159
Total $ 72,390 $ 1,416 $84,040 $2,428 $156,430 $ 3,844
(a) For bonds, represents amortized cost.
(b) Primarily relates to the corporate debt category.
At December 31, 2007, AIG held 37,281 and 2,307 of AIG recorded other-than-temporary impairment charges of $4.7
individual bond and stock investments, respectively, that were in billion (including $643 million related to AIGFP recorded in Other
an unrealized loss position, of which 9,930 individual investments income), $944 million and $598 million in 2007, 2006 and 2005,
were in an unrealized loss position for a continuous 12 months or respectively. See Note 1(c) herein for AIG’s other-than-temporary
longer. impairment accounting policy.
AIG 2007 Form 10-K 155

was $1.6 billion, and is included in Other invested assets in the3. Investments
consolidated balance sheet. These investments are monitored forContinued
impairment on a contract by contract basis quarterly. During
(g) Other Invested Assets:
2007, income recognized on life settlement contracts previously
held in non-consolidated trusts was $32 million, and is included inOther invested assets at December 31, 2007 and 2006
net investment income in the consolidated statement of income.consisted of the following:
At December 31, Further information regarding life settlement contracts at
December 31, 2007 is as follows:
Partnerships(a)
$28,938 $21,657 (dollars in millions)
Mutual funds 4,891 4,892 Remaining Life
Expectancy of Number of Carrying Face ValueInvestment real estate(b)
9,877 5,694
Insureds Contracts Value (Death Beneﬁts)Aircraft asset investments(c)
1,689 1,784
Life settlement contracts(d)
1,627 1,090 0 – 1 year 11 $ 7 $ 9
Consolidated managed partnerships 1 – 2 years 34 34 47
and funds(e)
6,614 2,923 2 – 3 years 79 61 98
All other investments 5,187 4,071 3 – 4 years 151 111 210
4 – 5 years 176 130 277Other invested assets $58,823 $42,111
Thereafter 2,181 1,284 5,400
(a) Includes private equity partnerships and hedge funds.
Total 2,632 $1,627 $6,041
(b) Net of accumulated depreciation of $548 million and $585 million in
2007 and 2006, respectively.
At December 31, 2007, the anticipated life insurance premi-
(c) Consist primarily of Life Insurance & Retirement Services investments
ums required to keep the life settlement contracts in force,in aircraft equipment.
payable in the ensuing twelve months ending December 31, 2008
(d) See paragraph (h) below for additional information.
and the four succeeding years ending December 31, 2012 are
(e) Represents AIG managed partnerships and funds that are consolidated.
$132 million, $141 million, $149 million, $146 million, and
$152 million, respectively.At December 31, 2007 and 2006, $7.2 billion and $5.3 billion
In June 2006, AIG restructured its ownership of life settlementof Other invested assets related to available for sale investments
contracts with no effect on the economic substance of thesecarried at fair value, with unrealized gains and losses recorded in
investments. At the same time, AIG paid $610 million to itsof Accumulated other comprehensive income (loss), net of
former co-investors to acquire all the remaining interests in lifedeferred taxes, with almost all of the remaining investments being
settlement contracts held in previously non-consolidated trusts.accounted for on the equity method of accounting. All of the
The life insurers for a small portion of AIG’s consolidated lifeinvestments are subject to impairment testing (see Note 1(c)
settlement contracts include AIG subsidiaries. As a result,herein). The gross unrealized loss on the investments accounted
amounts related to life insurance issued by AIG subsidiaries arefor as available for sale at December 31, 2007 was $621 million,
eliminated in consolidation.the majority of which represents investments that have been in a
continuous unrealized loss position for less than 12 months.
(h) Investments in Life Settlement Contracts: At Decem-
ber 31, 2007, the carrying value of AIG’s life settlement contracts
4. Lending activities
Mortgages and other loans receivable at December 31, 2007 and 2006 are comprised of the following:
Mortgages – commercial $17,105 $15,219
Mortgages – residential* 2,153 1,903
Life insurance policy loans 8,099 7,501
Collateral, guaranteed, and other commercial loans 6,447 3,859
Total mortgage and other loans receivable 33,804 28,482
Allowance for losses (77) (64)
Mortgage and other loans receivable, net $33,727 $28,418
* Primarily consists of foreign mortgage loans.
156 AIG 2007 Form 10-K

4. Lending activities
Continued
Finance receivables, net of unearned finance charges, were as follows:
Real estate loans $20,023 $20,321
Non-real estate loans 5,447 4,506
Retail sales finance 3,659 3,092
Credit card loans 1,566 1,413
Other loans 1,417 978
Total finance receivables 32,112 30,310
Allowance for losses (878) (737)
Finance receivables, net $31,234 $29,573
ment (retention, volatility, concentrations) and capital planning5. Reinsurance
locally (branch and subsidiary). It also allows AIG to pool its
In the ordinary course of business, AIG’s General Insurance and insurance risks and purchase reinsurance more efficiently at a
Life Insurance companies place reinsurance with other insurance consolidated level, manage global counterparty risk and relation-
companies in order to provide greater diversification of AIG’s ships and manage global life catastrophe risks.
business and limit the potential for losses arising from large
risks. In addition, AIG’s General Insurance subsidiaries assume General Reinsurance
reinsurance from other insurance companies.
General reinsurance is effected under reinsurance treaties and by
Supplemental information for gross loss and benefit negotiation on individual risks. Certain of these reinsurance
reserves net of ceded reinsurance at December 31, 2007 arrangements consist of excess of loss contracts which protect
and 2006 follows: AIG against losses over stipulated amounts. Ceded premiums are
considered prepaid reinsurance premiums and are recognized asAs Net of
(in millions) Reported Reinsurance a reduction of premiums earned over the contract period in
proportion to the protection received. Amounts recoverable from2007
general reinsurers are estimated in a manner consistent with theReserve for losses and loss expenses $ (85,500) $ (69,288)
Future policy benefits for life and claims liabilities associated with the reinsurance and presented
accident and health insurance as a component of reinsurance assets. Assumed reinsurance
contracts (136,068) (134,461) premiums are earned primarily on a pro-rata basis over the terms
Reserve for unearned premiums (28,022) (24,029) of the reinsurance contracts. For both ceded and assumed
Reinsurance assets* 21,811 —
reinsurance, risk transfer requirements must be met in order for
2006 reinsurance accounting to apply. If risk transfer requirements are
Reserve for losses and loss expenses $ (79,999) $ (62,630) not met, the contract is accounted for as a deposit, resulting in
Future policy benefits for life and the recognition of cash flows under the contract through a deposit
accident and health insurance asset or liability and not as revenue or expense. To meet risk
contracts (121,004) (119,430)
transfer requirements, a reinsurance contract must include both
Reserve for unearned premiums (26,271) (22,759)
insurance risk, consisting of both underwriting and timing risk,
Reinsurance assets* 22,456 —
and a reasonable possibility of a significant loss for the assuming
* Represents gross reinsurance assets, excluding allowances and reinsur- entity. Similar risk transfer criteria are used to determine whether
ance recoverable on paid losses.
directly written insurance contracts should be accounted for as
insurance or as a deposit.AIRCO acts primarily as an internal reinsurance company for
AIG’s insurance operations. This facilitates insurance risk manage-
AIG 2007 Form 10-K 157

Life Insurance assumed represented less than 0.1 percent,5. Reinsurance
0.1 percent and 0.8 percent of gross Life Insurance in force atContinued
December 31, 2007, 2006 and 2005, respectively, and Life
General Insurance premiums written and earned were
Insurance & Retirement Services premiums assumed represented
comprised of the following:
0.1 percent, 0.1 percent and 0.3 percent of gross premiums and
Years Ended December 31, other considerations for the years ended December 31, 2007,
(in millions) 2007 2006 2005
2006 and 2005, respectively.
Premiums written: AIG’s Domestic Life Insurance & Retirement Services opera-
Direct $ 52,055 $ 49,609 $ 46,689 tions utilize internal and third-party reinsurance relationships to
Assumed 6,743 6,671 6,036 manage insurance risks and to facilitate capital management
Ceded (11,731) (11,414) (10,853) strategies. Pools of highly-rated third-party reinsurers are utilized
to manage net amounts at risk in excess of retention limits. AIG’sTotal $ 47,067 $ 44,866 $ 41,872
Domestic Life Insurance companies also cede excess, non-
Premiums earned:
economic reserves carried on a statutory-basis only on certain
Direct $ 50,403 $ 47,973 $ 45,794
term and universal life insurance policies and certain fixed
Assumed 6,530 6,449 5,921
annuities to an offshore affiliate.Ceded (11,251) (10,971) (10,906)
AIG generally obtains letters of credit in order to obtain
Total $ 45,682 $ 43,451 $ 40,809
statutory recognition of its intercompany reinsurance transactions.
For this purpose, AIG has a $2.5 billion syndicated letter of credit
For the years ended December 31, 2007, 2006 and 2005,
facility outstanding at December 31, 2007, all of which relates to
reinsurance recoveries, which reduced loss and loss expenses
life intercompany reinsurance transactions.
incurred, amounted to $9.0 billion, $8.3 billion and $20.7 billion,
AIG is also a party to a 364-day bilateral revolving credit facility
respectively.
for an aggregate amount of $3.2 billion. The facility can be drawn
in the form of letters of credit with terms of up to eight years. At
Life Reinsurance
December 31, 2007, approximately $3.0 billion principal amount
of letters of credit are outstanding under this facility, of whichLife reinsurance is effected principally under yearly renewable
approximately $2.1 billion relates to life intercompany reinsuranceterm treaties. The premiums with respect to these treaties are
transactions. AIG has also obtained approximately $377 million ofconsidered prepaid reinsurance premiums and are recognized as
letters of credit on a bilateral basis.a reduction of premiums earned over the contract period in
proportion to the protection provided. Amounts recoverable from
Reinsurance Securitylife reinsurers are estimated in a manner consistent with the
assumptions used for the underlying policy benefits and are
AIG’s third-party reinsurance arrangements do not relieve AIG from
presented as a component of reinsurance assets.
its direct obligation to its insureds. Thus, a credit exposure exists
with respect to both general and life reinsurance ceded to theLife Insurance & Retirement Services premiums were
extent that any reinsurer fails to meet the obligations assumedcomprised of the following:
under any reinsurance agreement. AIG holds substantial collateral
as security under related reinsurance agreements in the form of(in millions) 2007 2006 2005
funds, securities, and/or letters of credit. A provision has been
Gross premiums $34,585 $32,247 $30,818
recorded for estimated unrecoverable reinsurance. AIG has been
Ceded premiums (1,778) (1,481) (1,317)
largely successful in prior recovery efforts.
Premiums $32,807 $30,766 $29,501 AIG evaluates the financial condition of its reinsurers and
establishes limits per reinsurer through AIG’s Credit Risk Commit-
Life Insurance recoveries, which reduced death and other tee. AIG believes that no exposure to a single reinsurer repre-
benefits, approximated $1.1 billion, $806 million and $770 mil- sents an inappropriate concentration of risk to AIG, nor is AIG’s
lion, respectively, for the years ended December 31, 2007, 2006 business substantially dependent upon any single reinsurer.
and 2005.
Life Insurance in-force ceded to other insurance
companies was as follows:
At December 31,
(in millions) 2007 2006 2005
Life Insurance in force
ceded $402,654 $408,970 $365,082
158 AIG 2007 Form 10-K

6. Deferred Policy Acquisition Costs
The following reflects the policy acquisition costs deferred for amortization against future income and the related
amortization charged to income for General Insurance and Life Insurance & Retirement Services operations:
(in millions) 2007 2006 2005
Balance at beginning of year $ 4,355 $ 4,048 $ 3,998
Acquisition costs deferred 8,661 8,115 7,480
Amortization expense (8,235) (7,866) (7,365)
Increase (decrease) due to foreign exchange and other (138) 58 (65)
Balance at end of year $ 4,643 $ 4,355 $ 4,048
Balance at beginning of year $32,810 $28,106 $25,080
Acquisition costs deferred 7,276 6,823 6,513
Amortization expense(a)
(3,367) (3,712) (3,328)
Change in net unrealized gains (losses) on securities 745 646 977
Increase (decrease) due to foreign exchange 916 947 (1,136)
Other(b)
65 — —
Subtotal $38,445 $32,810 $28,106
Consolidation and eliminations 62 70 —
Balance at end of year(c)
$38,507 $32,880 $28,106
Total deferred policy acquisition costs $43,150 $37,235 $32,154
(a) In 2007, amortization expense was reduced by $733 million related to changes in actuarial estimates, which was mostly offset in incurred policy
losses and benefits.
(b) In 2007, includes the cumulative effect of the adoption of SOP 05-1 of $(118) million and a balance sheet reclassification of $189 million.
(c) Includes $5 million and $(720) million at December 31, 2007 and 2006, respectively, related to the effect of net unrealized gains and losses on
available for sale securities.
Included in the above table is the VOBA, an intangible asset interest or do not have sufficient equity that is at risk which would
recorded during purchase accounting, which is amortized in a allow the entity to finance its activities without additional subordi-
manner similar to DAC. Amortization of VOBA was $213 million, nated financial support. FIN 46R recognizes that consolidation
$239 million and $291 million in 2007, 2006 and 2005, based on majority voting interest should not apply to certain types
respectively, while the unamortized balance was $1.86 billion, of entities that are defined as VIEs. A VIE is consolidated by its
$1.98 billion and $2.14 billion at December 31, 2007, 2006 and primary beneficiary, which is the party that absorbs a majority of
2005, respectively. The percentage of the unamortized balance of the expected losses or a majority of the expected residual returns
VOBA at 2007 expected to be amortized in 2008 through 2012 by of the VIE, or both.
year is: 11.7 percent, 10.2 percent, 8.4 percent, 6.6 percent and AIG, in the normal course of business, is involved with various
5.9 percent, respectively, with 57.2 percent being amortized after VIEs. In some cases, AIG has participated to varying degrees in
five years. These projections are based on current estimates for the design of the entity. AIG’s involvement in VIEs varies from
investment, persistency, mortality and morbidity assumptions. The being a passive investor to managing and structuring the activities
DAC amortization charged to income includes the increase or of the VIE. AIG engages in transactions with VIEs to manage its
decrease of amortization for FAS 97-related realized capital gains investment needs, obtain funding as well as facilitate client needs
(losses), primarily in the Domestic Retirement Services business. through a global network of operating subsidiaries comprising AIG
In 2007, 2006 and 2005, the rate of amortization expense Global Asset Management Holdings Corp. and its subsidiaries and
decreased by $291 million, $90 million and $46 million, affiliated companies (collectively, AIG Investments) and AIGFP. AIG
respectively. purchases debt securities (rated and unrated) and equity interests
There were no impairments of DAC or VOBA for the years issued by VIEs, makes loans and provides other credit support to
ended December 31, 2007, 2006 and 2005. VIEs, enters into insurance and reinsurance transactions with
VIEs, enters into leasing arrangements with VIEs, enters into
derivative transactions with VIEs through AIGFP and acts as the7. Variable Interest Entities
collateral manager of VIEs through AIG Investments and AIGFP.
FIN 46R, ‘‘Consolidation of Variable Interest Entities’’ clarifies the
Obligations to outside interest holders in VIEs consolidated by AIG
consolidation accounting for certain entities in which equity
are reported as liabilities in the consolidated financial statements.
investors do not have the characteristics of a controlling financial
These interest holders generally have recourse only to the assets
AIG 2007 Form 10-K 159

Entities for which AIG is the primary beneficiary and consoli-7. Variable Interest Entities
dates or in which AIG has a significant variable interest areContinued
described below.
and cash flows of the VIEs and do not have recourse to AIG,
except when AIG has provided a guarantee to the VIE’s interest
Asset Managementholders.
AIG determines whether an entity is a VIE, who the variable In certain instances, AIG Investments acts as the collateral
interest holders are, and which party is the primary beneficiary of manager or general partner of an investment fund, collateralized
the VIE by performing an analysis of the design of the VIE that debt obligation (CDO), collateralized loan obligation (CLO), private
includes a review of, among other factors, its capital structure, equity fund or hedge fund. Such entities are typically registered
contractual relationships and terms, nature of the entity’s opera- investment companies or qualify for the specialized investment
tions and purpose, nature of the entity’s interests issued, AIG’s company accounting in accordance with the AICPA Audit and
interests in the entity which either create or absorb variability and Accounting Guide - Investment Companies. In CDO and CLO trans-
related party relationships. AIG consolidates a VIE when all of actions, AIG establishes a trust or other special purpose entity
AIG’s interests in the VIE, when combined, absorb a majority of that purchases a portfolio of assets such as bank loans,
the expected losses or a majority of the expected residual returns corporate debt, or non-performing credits and issues trust
of the VIE, or both. Assets held by VIEs which are currently certificates or debt securities that represent interests in the
consolidated because AIG is primary beneficiary (except for those portfolio of assets. These transactions can be cash-based or
VIEs where AIG also owns a majority voting interest), approxi- synthetic and are actively or passively managed. For investment
mated $27.0 billion and $9.1 billion at December 31, 2007 and partnerships, hedge funds and private equity funds, AIG acts as
2006, respectively. These consolidated assets are reflected in the general partner or manager of the fund and is responsible for
AIG’s consolidated balance sheet as Investments and financial carrying out the investment mandate of the VIE. Often, AIG’s
services assets. insurance operations participate in these AIG managed structures
In addition to the VIEs that are consolidated in accordance with as a passive investor in the debt or equity issued by the VIE.
FIN 46R, the Company has significant variable interests in certain Typically, AIG does not provide any guarantees to the investors in
other VIEs that are not consolidated because the Company is not the VIE.
the primary beneficiary. AIG applies quantitative and qualitative AIG Investments is an investor in various real estate invest-
measures in identifying whether it is a primary beneficiary of a VIE ments. These investments are typically with unaffiliated third-party
and whether it holds a significant variable interest in a VIE. developers via a partnership or limited liability company structure.
For all VIEs in which it has a significant variable interest, Some of these entities are VIEs. The activities of these VIEs
including those in which it is the primary beneficiary, AIG principally consist of the development or redevelopment of all
reconsiders if it is the current primary beneficiary whenever a major types of commercial (retail, office, industrial, logistics
VIE’s governing documents or contractual arrangements are parks, mixed use, etc.) and residential real estate. AIG’s involve-
changed in a manner that reallocates between the primary ment varies from being a passive equity investor to actively
beneficiary and other unrelated parties, the obligation to absorb managing the activities of the VIE.
expected losses or right to receive expected residual returns. It In addition to changes in a VIE’s governing documentation or
also reconsiders its role as primary beneficiary when it sells or capitalization structure, AIG reconsiders its decision with respect
otherwise disposes of all or part of its variable interests in a VIE to whether it is the primary beneficiary for these VIEs, when AIG
or when it acquires additional variable interests in a VIE. AIG does purchases, or when a VIE sells or otherwise disposes of, variable
not reconsider whether it is a primary beneficiary solely as the interests in the CDO, CLO, investment, partnership, hedge fund or
result of operating losses incurred by an entity. Assets of VIEs private equity fund to other unrelated parties.
where AIG has a significant variable interest and does not
consolidate the VIE because AIG is not the primary beneficiary, SunAmerica Affordable Housing Partnerships
approximated $275.1 billion at December 31, 2007. AIG’s
SunAmerica Affordable Housing Partners, Inc. (SAAHP) organizesmaximum exposure to loss from its involvement with these
limited partnerships (investment partnerships) that are consideredconsolidated VIEs approximated $44.6 billion at December 31,
to be VIEs, and that are consolidated by AIG when AIG has2007. For this purpose, maximum loss is considered to be the
determined that it is the primary beneficiary. The investmentnotional amount of credit lines, guarantees and other credit
partnerships invest as limited partners in operating partnershipssupport, and liquidity facilities, the notional amounts of credit
that develop and operate affordable housing qualifying for federaldefault swaps and certain total return swaps, and the amount
tax credits and a few market rate properties across the Unitedinvested in the debt or equity issued by the VIEs.
States. The general partners in the operating partnerships are
almost exclusively unaffiliated third-party developers. AIG does not
normally consolidate an operating partnership if the general
partner is an unaffiliated person. Through approximately
1,200 partnerships, SAAHP has invested in developments with
approximately 157,000 apartment units nationwide, and has
160 AIG 2007 Form 10-K

addition, AIG reviews all changes in such VIEs’ governing documen-7. Variable Interest Entities
tation or capitalization structures as part of the determination ofContinued
whether there is a change in the VIEs’ primary beneficiaries.
syndicated over $7 billion in partnership equity since 1991 to
AIGFP is the primary beneficiary of an asset-backed commercial
other investors who will receive, among other benefits, tax credits
paper conduit with which it entered into several total return swaps
under certain sections of the Internal Revenue Code. AIG
covering all the conduit’s assets that absorb the majority of the
Retirement Services, Inc. functions as the general partner in
expected losses of the entity. The assets of the conduit serve as
certain investment partnerships and acts both as a credit
collateral for the conduit’s obligations. AIGFP is also the primary
enhancer in certain transactions, through differing structures with
beneficiary of several structured financing transactions in which
respect to funding development costs for the operating partner-
AIGFP holds the first loss position either by investing in the equity
ships, and as guarantor that investors will receive the tax benefits
of the VIE or implicitly through a lending or derivative arrangement.
projected at the time of syndication. AIG Retirement Services, Inc.
These VIEs are subject to the reconsideration event reviews noted
consolidates these investment partnerships as a result of the
above.
guarantee provided to the investors. As part of their incentive
In certain instances, AIGFP enters into liquidity facilities with
compensation, certain key SAAHP employees have been awarded
various SPEs when AIGFP provides liquidity to the SPE in the form
residual cash flow interests in the partnerships, subject to certain
of a guarantee, derivative, or a letter of credit and does not
vesting requirements. The operating income of SAAHP is reported,
consolidate the VIE. AIGFP also executes various swap and option
along with other SunAmerica partnership income, as a component
transactions with VIEs. Such contractual arrangements are done in
of AIG’s Asset Management segment.
the ordinary course of business. Typically, interest rate derivatives
such as interest rate swaps and options executed with VIEs are
Insurance Investments not deemed to be variable interests or significant variable
interests because the underlying is an observable market interestAs part of its investment activities, AIG’s insurance operations
rate and AIGFP as the derivative counterparty to the VIE is seniorinvest in obligations which include debt and equity securities and
to the debt and equity holders.interests issued by VIEs. These investments include investments
In 2007, AIGFP sponsored its only structured investmentin AIG sponsored and non-sponsored investment funds, hedge
vehicle (SIV) which invests in variable rate, investment-grade debtfunds, private equity funds, and structured financing arrange-
securities. The SIV is a VIE because is does not have sufficientments. The investments in these VIEs allow AIG’s insurance
equity to operate without subordinated capital notes which serveentities to purchase assets permitted by insurance regulations
as equity though they are legally debt instruments. The capitalwhile maximizing their return on these assets. AIG’s insurance
notes absorb losses prior to the senior debt. Based on the sale ofoperations typically are not involved in the design or establish-
more than 88 percent of its capital notes to unrelated third-partyment of the VIE, nor do they actively participate in the manage-
investors and the continued holding by those investors of theirment of the VIE.
capital notes, AIGFP is not the primary beneficiary of the SIV.
In addition to changes in a VIE’s governing documentation or
AIGFP reviews its primary beneficiary position when the governing
capitalization structure, AIG reconsiders its position as to whether
document or capital structure changes or the amount of senior or
it is the primary beneficiary as the result of investments in these
capital note holdings change. Based on a change in the governing
VIEs when AIG purchases or sells VIE issued debt and equity
documents under which AIGFP committed to provide short-term
interests to other unrelated parties.
funding to the SIV, as necessary, a quantitative analysis per-
formed under FIN 46R as of December 31, 2007 showed that
AIGFP AIGFP is not the primary beneficiary. This outcome is a result of
the high credit quality of the assets and the fact that 85 percentThe variable interests that AIGFP may hold in VIEs include debt
of credit losses, if any, would be shared by other capital notesecurities, equity interests, loans, derivative instruments and
holders. At December 31, 2007 assets of this unconsolidated SIVother credit support arrangements. Transactions associated with
totaled $2.4 billion. AIGFP’s invested assets at December 31,VIEs include an asset-backed commercial paper conduit, asset
2007 included $1.7 billion of securities purchased under agree-securitizations, collateralized debt obligations, investment vehicles
ments to resell and commercial paper and medium-term andand other structured financial transactions. AIGFP engages in
capital notes issued by this entity.these transactions to facilitate client needs for investment
AIGFP has entered into transactions with VIEs that are used, inpurposes and to obtain funding.
part, to provide tax planning strategies to investors and/or AIGFPAIGFP invests in preferred securities issued by VIEs. Additionally,
through an enhanced yield investment security. These structuresAIGFP establishes VIEs that issue preferred interests to third
typically provide financing to AIGFP and/or the investor atparties and uses the proceeds to provide financing to AIGFP
enhanced rates. AIGFP may be either the primary beneficiary ofsubsidiaries. In certain instances, AIGFP consolidates these VIEs.
and consolidate the VIE, or may be a significant variable interestConsistent with FIN 46R requirements, AIGFP reviews any changes
holder in the VIE.in its holdings of a VIEs preferred stock investment as part of its
reconsideration review to determine a VIE’s primary beneficiary. In
AIG 2007 Form 10-K 161

The change in fair value of the derivative that qualifies under8. Derivatives and Hedge Accounting
the requirements of FAS 133 as a fair value hedge is recorded in
AIG uses derivatives and other financial instruments as part of its current period earnings along with the gain or loss on the hedged
financial risk management programs and as part of its investment item for the hedged risk. For interest rate hedges, the adjust-
operations. AIGFP also transacts in derivatives as a dealer. ments to the carrying value of the hedged items are amortized
Derivatives, as defined in FAS 133, are financial arrangements into income using the effective yield method over the remaining
among two or more parties with returns linked to or ‘‘derived’’ life of the hedged item. Amounts excluded from the assessment
from some underlying equity, debt, commodity or other asset, of hedge effectiveness are recognized in current period earnings.
liability, or foreign exchange rate or other index or the occurrence For the year ended December 31, 2007, AIGFP recognized net
of a specified payment event. Derivative payments may be based losses of $0.7 million in earnings, representing hedge ineffective-
on interest rates, exchange rates, prices of certain securities, ness, and also recognized net losses of $456 million related to the
commodities, or financial or commodity indices or other variables. portion of the hedging instruments excluded from the assessment
Unless subject to a scope exclusion, AIG carries all derivatives of hedge effectiveness.
on the consolidated balance sheet at fair value. The changes in AIGFP’s derivative transactions involving interest rate swap
fair value of the derivative transactions of AIGFP are presented as transactions generally involve the exchange of fixed and floating
a component of AIG’s operating income. rate interest payment obligations without the exchange of the
underlying notional amounts. AIGFP typically becomes a principal
AIGFP in the exchange of interest payments between the parties and,
therefore, is exposed to counterparty credit risk and may beAIGFP, in the ordinary course of operations and as principal,
exposed to loss, if counterparties default. Currency, commodity,structures and enters into derivative transactions to meet the
and equity swaps are similar to interest rate swaps, but involveneeds of counterparties who may be seeking to hedge certain
the exchange of specific currencies or cashflows based on theaspects of such counterparties’ operations or obtain a desired
underlying commodity, equity securities or indices. Also, they mayfinancial exposure. In most cases AIGFP does not hedge its
involve the exchange of notional amounts at the beginning andexposures related to the credit default swaps it has written. AIGFP
end of the transaction. Swaptions are options where the holderalso enters into derivative transactions to mitigate risk in its
has the right but not the obligation to enter into a swapexposures (interest rates, currencies, commodities, credit and
transaction or cancel an existing swap transaction. At Decem-equities) arising from such transactions. Such instruments are
ber 31, 2007, the aggregate notional amount of AIGFP’s outstand-carried at market or fair value, whichever is appropriate, and are
ing swap transactions approximated $2,133 billion, primarilyreflected on the balance sheet in ‘‘Unrealized gain on swaps,
related to interest rate swaps of approximately $1,167 billion.options and forward transactions’’ and ‘‘Unrealized loss on
AIGFP follows a policy of minimizing interest rate, currency,swaps, options and forward contracts.’’
commodity, and equity risks associated with securities availableBeginning in 2007, AIGFP designated certain interest rate
for sale by entering into internal offsetting positions, on a securityswaps as fair value hedges of the benchmark interest rate risk on
by security basis within its derivatives portfolio, thereby offsettingcertain of its interest bearing financial assets and liabilities. In
a significant portion of the unrealized appreciation and deprecia-these hedging relationships, AIG is hedging its fixed rate available
tion. In addition, to reduce its credit risk, AIGFP has entered intofor sale securities and fixed rate borrowings. AIGFP also desig-
credit derivative transactions with respect to $82 million ofnated foreign currency forward contracts as fair value hedges for
securities available for sale to economically hedge its credit risk.changes in spot foreign exchange rates of the non-U.S. dollar
As previously discussed, these economic offsets did not meet thedenominated available for sale debt securities. Under these
hedge accounting requirements of FAS 133 and, therefore, arestrategies, all or portions of individual or multiple derivatives may
recorded in Other income in the Consolidated Statement ofbe designated against a single hedged item.
Income.At inception of each hedging relationship, AIGFP performs and
Notional amount represents a standard of measurement of thedocuments its prospective assessments of hedge effectiveness to
volume of swaps business of Capital Markets operations. Notionaldemonstrate that the hedge is expected to be highly effective. For
amount is not a quantification of market risk or credit risk and ishedges of interest rate risk, AIGFP uses regression to demonstrate
not recorded on the consolidated balance sheet. Notionalthe hedge is highly effective, while it uses the periodic dollar offset
amounts generally represent those amounts used to calculatemethod for its foreign currency hedges. AIGFP uses the periodic
contractual cash flows to be exchanged and are not paid ordollar offset method to assess whether its hedging relationships
received, except for certain contracts such as currency swaps.were highly effective on a retrospective basis. The prospective and
The timing and the amount of cash flows relating to Capitalretrospective assessments are updated on a daily basis. The
Markets foreign exchange forwards and exchange traded futurespassage of time component of the hedging instruments and the
and options contracts are determined by each of the respectiveforward points on foreign currency hedges are excluded from the
contractual agreements.assessment of hedge effectiveness and measurement of hedge
ineffectiveness. AIGFP does not utilize the shortcut, matched terms
or equivalent methods to assess hedge effectiveness.
162 AIG 2007 Form 10-K

8. Derivatives and Hedge Accounting
Continued
The following table presents the notional amounts by remaining maturity of Capital Markets’ interest rate, credit
default and currency swaps and swaptions derivatives portfolio at December 31, 2007 and 2006:
Remaining Life of Notional Amount*
One Two Through Six Through After Ten Total Total
(in millions) Year Five Years Ten Years Years 2007 2006
Interest rate swaps $441,801 $ 554,917 $156,634 $14,112 $1,167,464 $1,058,279
Credit default swaps 184,924 286,069 85,792 5,028 561,813 483,648
Currency swaps 38,384 135,187 41,675 9,029 224,275 218,091
Swaptions, equity and commodity swaps 57,709 62,849 35,270 23,139 178,967 180,040
Total $722,818 $1,039,022 $319,371 $51,308 $2,132,519 $1,940,058
* Notional amount is not representative of either market risk or credit risk and is not recorded in the consolidated balance sheet.
Futures and forward contracts are contracts that obligate the receives an option premium and then manages the risk of any
holder to sell or purchase foreign currencies, commodities or unfavorable change in the value of the underlying commodity,
financial indices in which the seller/purchaser agrees to currency or index by entering into offsetting transactions with
make/take delivery at a specified future date of a specified third-party market participants. Risks arise as a result of
instrument, at a specified price or yield. Options are contracts that movements in current market prices from contracted prices, and
allow the holder of the option to purchase or sell the underlying the potential inability of the counterparties to meet their obliga-
commodity, currency or index at a specified price and within, or at, tions under the contracts.
a specified period of time. As a writer of options, AIGFP generally
The following table presents Capital Markets futures, forward and option contracts portfolio by maturity and type of
derivative at December 31, 2007 and 2006:
Remaining Life
One Two Through Six Through After Ten Total Total
(in millions) Year Five Years Ten Years Years 2007 2006
Exchange traded futures and options contracts
contractual amount $ 27,588 $1,359 $ — $ — $ 28,947 $ 27,271
Over the counter forward contracts contractual
amount 485,332 5,864 1,850 — 493,046 492,913
Total $512,920 $7,223 $1,850 $ — $521,993 $520,184
AIGFP Credit Default Swaps analyzed and rated by the credit rating agencies. Typically, there
will be an equity layer covering the first credit losses in respect of
AIGFP enters into credit derivative transactions in the ordinary
the portfolio up to a specified percentage of the total portfolio,
course of its business. The majority of AIGFP’s credit derivatives
and then successive layers ranging from generally a BBB-rated
require AIGFP to provide credit protection on a designated
layer to one or more AAA-rated layers. In transactions that are
portfolio of loans or debt securities. AIGFP provides such credit
rated with respect to the risk layer or tranche that is immediately
protection on a ‘‘second loss’’ basis, under which AIGFP’s
junior to the threshold level above which AIGFP’s payment
payment obligations arise only after credit losses in the desig-
obligation would generally arise, a significant majority are rated
nated portfolio exceed a specified threshold amount or level of
AAA by the rating agencies. In transactions that are not rated,
‘‘first losses.’’ The threshold amount of credit losses that must
AIGFP applies the same risk criteria for setting the threshold level
be realized before AIGFP has any payment obligation is negotiated
for its payment obligations. Therefore, the risk layer assumed by
by AIGFP for each transaction to provide that the likelihood of any
AIGFP with respect to the designated portfolio in these transac-
payment obligation by AIGFP under each transaction is remote.
tions is often called the ‘‘super senior’’ risk layer, defined as the
The underwriting process for these derivatives included assump-
layer of credit risk senior to a risk layer that has been rated AAA
tions of severely stressed recessionary market scenarios to
by the credit rating agencies, or if the transaction is not rated,
minimize the likelihood of realized losses under these obligations.
equivalent thereto.
In certain cases, the credit risk associated with a designated
portfolio is tranched into different layers of risk, which are then
AIG 2007 Form 10-K 163

suffer losses after significant subordination. Credit losses would8. Derivatives and Hedge Accounting
have to erode all tranches junior to the super senior trancheContinued
before AIGFP would suffer any realized losses. The subordination
At December 31, 2007 and 2006, the notional amounts
level required for each transaction is determined based on
and unrealized market valuation loss of the super senior
internal modeling and analysis of the pool of underlying assets
credit default swap portfolio by asset classes were as
and is not dependent on ratings determined by the rating
follows:
agencies. While the credit default swaps written on corporate debt
obligations are cash settled, the majority of the credit defaultNotional Unrealized Market
Amount Valuation Loss swaps written on CDOs and CLOs require physical settlement.
(in billions) (in millions)
Under a physical settlement arrangement, AIGFP would be re-
Corporate loans(a)
$230 $ — quired to purchase the referenced super senior note obligation at
Prime residential mortgages(a)
149 — par in the event of a non-payment on that security.
Corporate Debt/CLOs 70 226 Certain of these credit derivatives are subject to collateral
Multi-sector CDO(b)
78 11,246 posting provisions. These provisions differ among counterparties
Total $527 $11,472 and asset classes. In the case of most of the multi-sector CDO
transactions, the amount of collateral required is determined(a) Predominantly represent transactions written to facilitate regulatory
capital relief. based on the change in value of the underlying cash security that
(b) Approximately $61.4 billion, in notional amount, of the multi-sector
represents the super senior risk layer subject to credit protection,
CDO pools includes some exposure to U.S. subprime mortgages.
and not the change in value of the super senior credit derivative.
Approximately $379 billion of the $527 billion in notional AIGFP is indirectly exposed to U.S. residential mortgage
exposure of AIGFP’s super senior credit default swap portfolio as subprime collateral in the CDO portfolios, the majority of which is
of December 31, 2007 represents derivatives written for financial from 2004 and 2005 vintages. However, certain of the CDOs on
institutions, principally in Europe, for the purpose of providing which AIGFP provided credit protection permit the collateral
them with regulatory capital relief rather than risk mitigation. In manager to substitute collateral during the reinvestment period,
exchange for a minimum guaranteed fee, the counterparties subject to certain restrictions. As a result, in certain transactions,
receive credit protection in respect of portfolios of various debt U.S. residential mortgage subprime collateral of 2006 and 2007
securities or loans they own, thus improving their regulatory vintages has been added to the collateral pools. At December 31,
capital position. These derivatives are generally expected to 2007, U.S. residential mortgage subprime collateral of 2006 and
terminate at no additional cost to the counterparty upon the 2007 vintages comprised approximately 4.9 percent of the total
counterparty’s adoption of models compliant with the Basel II collateral pools underlying the entire portfolio of CDOs with credit
Accord. AIG expects that the majority of these transactions will protection.
terminate within the next 12 to 18 months. As of February 26, AIGFP has written maturity-shortening puts that allow the
2008, approximately $54 billion in notional exposures have either holders of the securities issued by certain multi-sector CDOs to
been terminated or are in the process of being terminated. AIGFP treat the securities as eligible short-term 2a-7 investments under
was not required to make any payments as part of these the Investment Company Act of 1940 (2a-7 Puts). Holders of
terminations and in certain cases was paid a fee upon termina- securities are permitted, in certain circumstances, to tender their
tion. In light of this experience to date and after other comprehen- securities to the issuers at par. If an issuer’s remarketing agent
sive analyses, AIG did not recognize an unrealized market is unable to resell the securities so tendered, AIGFP must
valuation adjustment for this regulatory capital relief portfolio for purchase the securities at par as long as the securities have not
the year ended December 31, 2007. AIG will continue to assess experienced a default. During 2007, AIGFP repurchased securities
the valuation of this portfolio and monitor developments in the with a principal amount of approximately $754 million pursuant to
marketplace. There can be no assurance that AIG will not these obligations. In certain transactions, AIGFP has contracted
recognize unrealized market valuation losses from this portfolio in with third parties to provide liquidity for the notes if they are put
future periods. In addition to writing credit protection on the super to AIGFP for up to a three-year period. Such liquidity facilities
senior risk layer on designated portfolios of loans or debt totaled approximately $3 billion at December 31, 2007. As of
securities, AIGFP also wrote protection on tranches below the February 26, 2008, AIGFP has not utilized these liquidity facilities.
super senior risk layer. At December 31, 2007 the notional At December 31, 2007, AIGFP had approximately $6.5 billion of
amount of the credit default swaps in the regulatory capital relief notional exposure on 2a-7 Puts, included as part of the multi-
portfolio written on tranches below the super senior risk layer was sector CDO portfolio discussed herein.
$5.8 billion, with an estimated fair value of $(25) million.
As of January 31, 2008, a significant majority of AIGFP’s super
AIGFP has also written credit protection on the super senior
senior exposures continued to have tranches below AIGFP’s
risk layer of diversified portfolios of investment grade corporate
attachment point that have been explicitly rated AAA or, in AIGFP’s
debt, collateralized loan obligations (CLOs) and multi-sector CDOs.
judgment, would have been rated AAA had they been rated.
AIGFP is at risk only on the super senior portion related to a
AIGFP’s portfolio of credit default swaps undergoes regular
diversified portfolio of credits referenced to loans or debt
monitoring, modeling and analysis and contains protection through
securities. The super senior risk portion is the last tranche to
collateral subordination.
164 AIG 2007 Form 10-K

may be even wider for high quality assets. AIGFP was unable to8. Derivatives and Hedge Accounting
reliably verify this negative basis due to the accelerating severeContinued
dislocation, illiquidity and lack of trading in the asset backed
AIGFP accounts for its credit default swaps in accordance with
securities market during the fourth quarter of 2007 and early
FAS 133 ‘‘Accounting For Derivative Instruments and Hedging
2008. The valuations produced by the BET model therefore
Activities’’ and Emerging Issues Task Force 02-3, ‘‘Issues Involved
represent the valuations of the underlying super senior CDO cash
in Accounting for Derivative Contracts Held for Trading Purposes
securities with no recognition of the effect of the basis differential
and Contracts Involved in Energy Trading and Risk Management
on that valuation.
Activities’’ (EITF 02-3). In accordance with EITF 02-3, AIGFP does
AIGFP also considered the valuation of the super senior CDO
not recognize income in earnings at the inception of each
securities provided by third parties, including counterparties to
transaction because the inputs to value these instruments are not
these transactions, and made adjustments as necessary.
derivable from observable market data.
As described above, AIGFP uses numerous assumptions in
The valuation of the super senior credit derivatives has
determining its best estimate of the fair value of the super senior
become increasingly challenging given the limitation on the
credit default swap portfolio. The most significant assumption
availability of market observable information due to the lack of
utilized in developing the estimate is the pricing of the securities
trading and price transparency in the structured finance market,
within the CDO collateral pools. If the actual pricing of the
particularly in the fourth quarter of 2007. These market condi-
securities within the collateral pools differs from the pricing used
tions have increased the reliance on management estimates and
in estimating the fair value of the super senior credit default swap
judgments in arriving at an estimate of fair value for financial
portfolio, there is potential for significant variation in the fair value
reporting purposes. Further, disparities in the valuation methodol-
estimate.
ogies employed by market participants and the varying judgments
In the case of credit default swaps written on investment grade
reached by such participants when assessing volatile markets has
corporate debt and CLOs, AIGFP estimated the value of its
increased the likelihood that the various parties to these
obligations by reference to the relevant market indices or third
instruments may arrive at significantly different estimates as to
party quotes on the underlying super senior tranches where
their fair values.
available.
AIGFP’s valuation methodologies for the super senior credit
AIGFP monitors the underlying portfolios to determine whether
default swap portfolio have evolved in response to the deteriorat-
the credit loss experience for any particular portfolio has caused
ing market conditions and the lack of sufficient market observable
the likelihood of AIGFP having a payment obligation under the
information. AIG has sought to calibrate the model to market
transaction to be greater than super senior risk.
information and to review the assumptions of the model on a
regular basis.
Other Derivative Users
AIGFP employs a modified version of the BET model to value its
super senior credit default swap portfolio, including the 2a-7 Puts. AIG and its subsidiaries (other than AIGFP) also use derivatives
The BET model utilizes default probabilities derived from credit and other instruments as part of their financial risk management
spreads implied from market prices for the individual securities programs. Interest rate derivatives (such as interest rate swaps)
included in the underlying collateral pools securing the CDOs. are used to manage interest rate risk associated with investments
AIGFP obtained prices on these securities from the CDO collateral in fixed income securities, commercial paper issuances, medium-
managers. and long-term note offerings, and other interest rate sensitive
The BET model also utilizes diversity scores, weighted average assets and liabilities. In addition, foreign exchange derivatives
lives, recovery rates and discount rates. The determination of (principally cross currency swaps, forwards and options) are used
some of these inputs require the use of judgment and estimates, to economically mitigate risk associated with non-U.S. dollar
particularly in the absence of market observable data. AIGFP also denominated debt, net capital exposures and foreign exchange
employed a Monte Carlo simulation to assist in quantifying the transactions. The derivatives are effective economic hedges of the
effect on valuation of the CDO of the unique features of the exposures they are meant to offset.
CDO’s structure such as triggers that divert cash flows to the In 2007, AIG and its subsidiaries other than AIGFP designated
most senior level of the capital structure. certain derivatives as either fair value or cash flow hedges of their
The credit default swaps written by AIGFP cover only the failure debt. The fair value hedges included (i) interest rate swaps that
of payment on the super senior CDO security. AIGFP does not own were designated as hedges of the change in the fair value of fixed
the securities in the CDO collateral pool. The credit spreads rate debt attributable to changes in the benchmark interest rate
implied from the market prices of the securities in the CDO and (ii) foreign currency swaps designated as hedges of the
collateral pool incorporate the risk of default (credit risk), the change in fair value of foreign currency denominated debt
market’s price for liquidity risk and in distressed markets, the risk attributable to changes in foreign exchange rates and/or the
aversion costs. Spreads on credit derivatives tend to be narrower benchmark interest rate. With respect to the cash flow hedges,
because, unlike in the case of investing in a bond, there is no (i) interest rate swaps were designated as hedges of the changes
need to fund the position (except when an actual credit event in cash flows on floating rate debt attributable to changes in the
occurs). In times of illiquidity, the difference between spreads on benchmark interest rate, and (ii) foreign currency swaps were
cash securities and derivative instruments (the ‘‘negative basis’’) designated as hedges of changes in cash flows on foreign
AIG 2007 Form 10-K 165

instruments are not clearly and closely related to those of the8. Derivatives and Hedge Accounting
remaining components of the financial instrument; (ii) the contractContinued
that embodies both the embedded derivative instrument and the
currency denominated debt attributable to changes in the bench-
host contract is not remeasured at fair value; and (iii) a separate
mark interest rate and foreign exchange rates.
instrument with the same terms as the embedded instrument
AIG assesses, both at the hedge’s inception and on an
meets the definition of a derivative under FAS 133.
ongoing basis, whether the derivatives used in hedging transac-
tions are highly effective in offsetting changes in fair values or
9. Reserve for Losses and Loss Expenses andcash flows of hedged items. Regression analysis is employed to
Future Life Policy Benefits and Policyholders’assess the effectiveness of these hedges both on a prospective
Contract Depositsand retrospective basis. AIG does not utilize the shortcut,
matched terms or equivalent methods to assess hedge The following analysis provides a reconciliation of the
effectiveness. activity in the reserve for losses and loss expenses:
The change in fair value of derivatives designated and effective
as fair value hedges along with the gain or loss on the hedged (in millions) 2007 2006 2005
item are recorded in current period earnings. Upon discontinuation
At beginning of year:
of hedge accounting, the cumulative adjustment to the carrying
Reserve for losses and loss
value of the hedged item resulting from changes in the benchmark
expenses $79,999 $ 77,169 $ 61,878
interest rate or exchange rate is amortized into income using the
Reinsurance recoverable (17,369) (19,693) (14,624)
effective yield method over the remaining life of the hedged item.
Total 62,630 57,476 47,254Amounts excluded from the assessment of hedge effectiveness
Foreign exchange effect 955 741 (628)are recognized in current period earnings. During the year ended
Acquisitions(a)
317 55 —December 31, 2007, AIG recognized a loss of $1 million in
earnings related to the ineffective portion of the hedging instru- Losses and loss expenses
ments. During the year ended December 31, 2007, AIG also incurred:
recognized gains of $3 million related to the change in the Current year 30,261 27,805 28,426
hedging instruments forward points excluded from the assess- Prior years, other than
ment of hedge effectiveness. accretion of discount (656) (53) 4,680(b)
Prior years, accretion ofThe effective portion of the change in fair value of a derivative
discount 327 300 (15)qualifying as a cash flow hedge is recorded in Accumulated other
comprehensive income (loss), until earnings are affected by the Total 29,932 28,052 33,091
variability of cash flows in the hedged item. The ineffective portion
Losses and loss expenses
of these hedges is recorded in net realized capital gains (losses).
paid:
During the year ended December 31, 2007, AIG recognized gains
Current year 9,684 8,368 7,331
of $1 million in earnings representing hedge ineffectiveness. At
Prior years 14,862 15,326 14,910
December 31, 2007, $36 million of the deferred net loss in
Total 24,546 23,694 22,241Accumulated other comprehensive income is expected to be
recognized in earnings during the next 12 months. All components At end of year:
Net reserve for losses andof the derivatives’ gains and losses were included in the
loss expenses 69,288 62,630 57,476assessment of hedge effectiveness. There were no instances of
Reinsurance recoverable 16,212 17,369 19,693the discontinuation of hedge accounting in 2007.
In addition to hedging activities, AIG also uses derivative Total $85,500 $ 79,999 $ 77,169
instruments with respect to investment operations, which include,
(a) Reflects the opening balance with respect to the acquisition of WüBa
among other things, credit default swaps, and purchasing invest-
and the Central Insurance Co., Ltd. in 2007 and 2006, respectively.
ments with embedded derivatives, such as equity linked notes and
(b) Includes a fourth quarter charge of $1.8 billion resulting from the
convertible bonds. All changes in the fair value of these annual review of General Insurance loss and loss adjustment reserves.
derivatives are recorded in earnings. AIG bifurcates an embedded
derivative where: (i) the economic characteristics of the embedded
166 AIG 2007 Form 10-K

including bonuses, 13.0 percent. Less than 1.0 percent of the9. Reserve for Losses and Loss Expenses and
liabilities are credited at a rate greater than 9.0 percent.Future Life Policy Benefits and Policyholders’
Current declared interest rates are generally guaranteed toContract Deposits
remain in effect for a period of one year though some areContinued
guaranteed for longer periods. Withdrawal charges generally
The analysis of the future policy benefits and policyholders’
range from zero percent to 20.0 percent grading to zero over a
contract deposits liabilities follows:
period of zero to 19 years.
( Domestically, guaranteed investment contracts (GICs) haveAt December 31,
(in millions) 2007 2006 market value withdrawal provisions for any funds withdrawn
other than benefit responsive payments. Interest rates creditedFuture policy benefits:
generally range from 2.8 percent to 9.0 percent. The vastLong duration contracts $135,202 $120,138
majority of these GICs mature within five years.Short duration contracts 866 866
( Interest rates on corporate life insurance products are
Total $136,068 $121,004
guaranteed at 4.0 percent and the weighted average rate
Policyholders’ contract deposits: credited in 2007 was 5.2 percent.
Annuities $140,444 $141,826 ( The universal life funds have credited interest rates of
Guaranteed investment contracts 25,321 33,054 1.0 percent to 7.0 percent and guarantees ranging from
Universal life products 27,114 22,497 1.0 percent to 5.5 percent depending on the year of issue.
Variable products 46,407 34,821 Additionally, universal life funds are subject to surrender
Corporate life products 2,124 2,083 charges that amount to 12.0 percent of the aggregate fund
Other investment contracts 17,049 13,983
balance grading to zero over a period not longer than 20 years.
Total $258,459 $248,264 ( For variable products and investment contracts, policy values
are expressed in terms of investment units. Each unit is linked
Long duration contract liabilities included in future policy to an asset portfolio. The value of a unit increases or
benefits, as presented in the preceding table, result primarily from decreases based on the value of the linked asset portfolio. The
life products. Short duration contract liabilities are primarily current liability at any time is the sum of the current unit value
accident and health products. The liability for future life policy of all investment units plus any liability for guaranteed
benefits has been established based upon the following minimum death or withdrawal benefits.
assumptions: Certain products are subject to experience adjustments. These
include group life and group medical products, credit life( Interest rates (exclusive of immediate/terminal funding
contracts, accident and health insurance contracts/ridersannuities), which vary by territory, year of issuance and
attached to life policies and, to a limited extent, reinsuranceproducts, range from 1.0 percent to 12.5 percent within the
agreements with other direct insurers. Ultimate premiums fromfirst 20 years. Interest rates on immediate/terminal funding
these contracts are estimated and recognized as revenue, and theannuities are at a maximum of 11.5 percent and grade to not
unearned portions of the premiums recorded as liabilities.greater than 6.0 percent.
Experience adjustments vary according to the type of contract and( Mortality and surrender rates are based upon actual experience
the territory in which the policy is in force and are subject to localby geographical area modified to allow for variations in policy
regulatory guidance.form. The weighted average lapse rate, including surrenders,
for individual and group life approximated 5.7 percent.
10. Variable Life and Annuity Contracts( The portions of current and prior net income and of current
unrealized appreciation of investments that can inure to the AIG follows American Institute of Certified Public Accountants
benefit of AIG are restricted in some cases by the insurance Statement of Position 03-1 (SOP 03-1), which requires recognition
contracts and by the local insurance regulations of the of a liability for guaranteed minimum death benefits and other
jurisdictions in which the policies are in force. living benefits related to variable annuity and variable life
( Participating life business represented approximately contracts as well as certain disclosures for these products.
12 percent of the gross insurance in force at December 31, AIG reports variable contracts through separate and variable
2007 and 25 percent of gross premiums and other accounts when investment income and investment gains and
considerations in 2007. The amount of annual dividends to be losses accrue directly to, and investment risk is borne by, the
paid is determined locally by the boards of directors. Provisions contract holder (traditional variable annuities), and the separate
for future dividend payments are computed by jurisdiction, account qualifies for separate account treatment under SOP 03-1.
reflecting local regulations. In some foreign jurisdictions, separate accounts are not legally
insulated from general account creditors and therefore do notThe liability for policyholders’ contract deposits has been
qualify for separate account treatment under SOP 03-1. In suchestablished based on the following assumptions:
cases, the variable contracts are reported as general account
( Interest rates credited on deferred annuities, which vary by contracts even though the policyholder bears the risks associated
territory and year of issuance, range from 1.4 percent to, with the performance of the assets. AIG also reports variable
AIG 2007 Form 10-K 167

The vast majority of AIG’s exposure on guarantees made10. Variable Life and Annuity Contracts
to variable contract holders arises from GMDB. DetailsContinued
concerning AIG’s GMDB exposures at December 31,annuity and life contracts through separate and variable accounts,
2007 and 2006 are as follows:or general accounts when not qualified for separate account
reporting, when AIG contractually guarantees to the contract Net Deposits
Plus a Minimum Highest Contractholder (variable contracts with guarantees) either (a) total deposits
(dollars in billions) Return Value Attained
made to the contract less any partial withdrawals plus a minimum
2007return (and in minor instances, no minimum returns) (Net
Account value(a)
$66 $17Deposits Plus a Minimum Return) or (b) the highest contract value
Amount at risk(b)
5 1attained, typically on any anniversary date minus any subsequent
Average attained age ofwithdrawals following the contract anniversary (Highest Contract
contract holders by product 38-69 years 55-72 years
Value Attained). These guarantees include benefits that are
Range of guaranteedpayable in the event of death, annuitization, or, in other instances,
minimum return rates 3-10%at specified dates during the accumulation period. Such benefits
are referred to as guaranteed minimum death benefits (GMDB), 2006
guaranteed minimum income benefits (GMIB), guaranteed mini- Account value(a)
$64 $15
mum withdrawal benefits (GMWB) and guaranteed minimum Amount at risk(b)
6 1
account value benefits (GMAV). For AIG, GMDB is by far the most Average attained age of
widely offered benefit. contract holders by product 38-70 years 56-71 years
The assets supporting the variable portion of both traditional Range of guaranteed
variable annuities and variable contracts with guarantees are minimum return rates 0-10%
carried at fair value and reported as Separate and variable
(a) Included in Policyholders’ contract deposits in the consolidated balance
account assets with an equivalent summary total reported as
sheet.
Separate and variable account liabilities when the separate
(b) Represents the amount of death benefit currently in excess of Account
account qualifies for separate account treatment under SOP 03-1. value.
Assets for separate accounts that do not qualify for separate
The following summarizes GMDB liabilities for guaranteesaccount treatment are reported as trading account assets, and
on variable contracts reflected in the general account.liabilities are included in the respective policyholder liability
account of the general account. Amounts assessed against the (in millions) 2007 2006
contract holders for mortality, administrative, and other services
Balance at January 1 $406 $442
are included in revenue and changes in liabilities for minimum
Reserve increase 111 35
guarantees are included in incurred policy losses and benefits in
Benefits paid (54) (71)
the consolidated statement of income. Separate and variable
Balance at December 31 $463 $406account net investment income, net investment gains and losses,
and the related liability changes are offset within the same line
The GMDB liability is determined each period end by estimating
item in the consolidated statement of income for those accounts
the expected value of death benefits in excess of the projected
that qualify for separate account treatment under SOP 03-1. Net
account balance and recognizing the excess ratably over the
investment income and gains and losses on trading accounts for
accumulation period based on total expected assessments. AIG
contracts that do not qualify for separate account treatment under
regularly evaluates estimates used and adjusts the additional
SOP 03-1 are reported in net investment income and are
liability balance, with a related charge or credit to benefit
principally offset by amounts reported in incurred policy losses
expense, if actual experience or other evidence suggests that
and benefits.
earlier assumptions should be revised.
The following assumptions and methodology were used to
determine the GMDB liability at December 31, 2007:
( Data used was up to 1,000 stochastically generated invest-
ment performance scenarios.
( Mean investment performance assumptions ranged from
three percent to approximately ten percent depending on the
block of business.
( Volatility assumptions ranged from eight percent to 23 percent
depending on the block of business.
( Mortality was assumed at between 50 percent and 102 per-
cent of various life and annuity mortality tables.
( For domestic contracts, lapse rates vary by contract type and
duration and ranged from zero percent to 40 percent. For
168 AIG 2007 Form 10-K

annuitization and recognizing the excess ratably over the accumu-10. Variable Life and Annuity Contracts
lation period based on total expected assessments. AIG periodi-Continued
cally evaluates estimates used and adjusts the additional liability
Japan, lapse rates ranged from zero percent to 20 percent
balance, with a related charge or credit to beneﬁt expense, if
depending on the type of contract.
actual experience or other evidence suggests that earlier assump-( For domestic contracts, the discount rate ranged from 3.25 per-
tions should be revised.
cent to 11 percent. For Japan, the discount rate ranged from
AIG contracts currently include a minimal amount of GMAV and
two percent to seven percent.
GMWB. GMAV and GMWB are considered to be embedded
In addition to GMDB, AIG’s contracts currently include to a derivatives and are recognized at fair value through earnings. AIG
lesser extent GMIB. The GMIB liability is determined each period enters into derivative contracts to economically hedge a portion of
end by estimating the expected value of the annuitization beneﬁts the exposure that arises from GMAV and GMWB.
in excess of the projected account balance at the date of
AIG 2007 Form 10-K 169

11. Debt Outstanding
At December 31, 2007 and 2006, AIG’s total borrowings were as follows:
Total long-term borrowings $162,935 $135,316
Total borrowings $176,049 $148,679
Maturities of Long-term borrowings at December 31, 2007, excluding borrowings of consolidated investments, are as
follows:
(in millions) Total 2008 2009 2010 2011 2012 Thereafter
AIG:
Notes and bonds payable $ 14,588 $ 1,591 $ 1,441 $ 1,349 $ 450 $ 27 $ 9,730
Junior subordinated debt 5,809 — — — — — 5,809
Loans and mortgages payable 729 627 — — — — 102
MIP matched notes and bonds payable 14,267 200 1,218 2,309 3,188 2,039 5,313
Series AIGFP matched notes and bonds payable 874 65 77 32 25 56 619
Total AIG 36,267 2,483 2,736 3,690 3,663 2,122 21,573
AIGFP:
GIAs 19,908 6,370 1,831 1,127 581 660 9,339
Notes and bonds payable 36,676 23,670 4,522 431 403 3,885 3,765
Loans and mortgages payable 1,384 — — — — 160 1,224
Hybrid financial instrument liabilities(a)
7,479 1,581 425 1,739 693 332 2,709
Total AIGFP 65,447 31,621 6,778 3,297 1,677 5,037 17,037
AIGLH notes and bonds payable 797 — — 499 — — 298
Liabilities connected to trust preferred stock 1,435 — — — — — 1,435
ILFC(b)
:
Notes and bonds payable 22,111 4,065 2,978 3,808 4,021 3,531 3,708
Junior subordinated debt 999 — — — — — 999
Export credit facility(c)
2,542 522 470 356 266 237 691
Bank financings 1,084 25 471 103 160 325 —
Total ILFC 26,736 4,612 3,919 4,267 4,447 4,093 5,398
AGF(b)
:
Notes and bonds payable 22,369 4,085 4,108 2,200 2,902 2,073 7,001
Junior subordinated debt 349 — — — — — 349
Total AGF 22,718 4,085 4,108 2,200 2,902 2,073 7,350
AIGCFG Loans and mortgages payable(b)
1,839 1,000 542 225 11 7 54
Other subsidiaries(b)
775 90 — — — — 685
Total $156,014 $43,891 $18,083 $14,178 $12,700 $13,332 $53,830
(a) Represents structured notes issued by AIGFP that are accounted for at fair value.
(b) AIG does not guarantee these borrowings.
(c) Reflects future minimum payment for ILFC’s borrowing under Export Credit Facilities.
170 AIG 2007 Form 10-K

was outstanding at December 31, 2007, and was used for AIG’s11. Debt Outstanding
general corporate purposes.Continued
(ii) Junior subordinated debt: During 2007, AIG issued an aggre-
(a) Commercial Paper: gate of $5.6 billion of junior subordinated debentures in five
series of securities. Substantially all of the proceeds from these
At December 31, 2007, the commercial paper issued and
sales, net of expenses, are being used to repurchase shares of
outstanding was as follows:
AIG’s common stock. In connection with each series of junior
Unamortized Weighted Weighted subordinated debentures, AIG entered into a Replacement Capital
Net Discount Average Average Covenant (RCC) for the benefit of the holders of AIG’s 6.25 per-
(dollars in Book and Accrued Face Interest Maturity
cent senior notes due 2036. The RCCs provide that AIG will notmillions) Value Interest Amount Rate in Days
repay, redeem, or purchase the applicable series of junior
ILFC $ 4,483 $16 $ 4,499 4.63% 28
subordinated debentures on or before a specified date, unless AIG
AGF 3,607 10 3,617 4.85 25
has received qualifying proceeds from the sale of replacementAIG Funding 4,222 15 4,237 4.81 29
capital securities.AIGCC —
Taiwan(a)
151 — 151 2.81 42 (c) AIGFP Borrowings:
AIGF —
(i) Borrowings under Obligations of Guaranteed Investment Agree-Thailand(a)
136 1 137 3.36 50
ments: Borrowings under obligations of guaranteed investment
Total(b)
$12,599 $42 $12,641 — —
agreements (GIAs), which are guaranteed by AIG, are recorded at
(a) Issued in local currencies at prevailing local interest rates. the amount outstanding under each contract. Obligations may be
(b) Excludes $321 million of borrowings of consolidated investments and called at various times prior to maturity at the option of the
$194 million of extendible commercial notes.
counterparty. Interest rates on these borrowings are primarily
fixed, vary by maturity, and range up to 9.8 percent.At December 31, 2007, AIG did not guarantee the commercial
Funds received from GIA borrowings are invested in a diversi-paper of any of its subsidiaries other than AIG Funding.
fied portfolio of securities and derivative transactions. At Decem-
(b) AIG Borrowings: ber 31, 2007, the fair value of securities pledged as collateral
with respect to these obligations approximated $14.5 billion.(i) Notes and bonds issued by AIG: AIG maintains a medium-term
note program under its shelf registration statement. At Decem- (ii) Notes and Bonds issued by AIGFP:
ber 31, 2007, approximately $7.3 billion principal amount of
At December 31, 2007, AIGFP’s notes and bonds out-senior notes were outstanding under the medium-term note
standing, the proceeds of which are invested in aprogram, of which $3.2 billion was used for AIG’s general
diversified portfolio of securities and derivative transac-corporate purposes, $873 million was used by AIGFP and
tions, were as follows:$3.2 billion was used to fund the Matched Investment Program
(MIP). The maturity dates of these notes range from 2008 to Range of U.S. Dollar
Maturities Range of Carrying2052. To the extent deemed appropriate, AIG may enter into swap
(dollars in millions) Currency Interest Rates Value
transactions to manage its effective borrowing rates with respect
to these notes. 2008 - 2054 U.S. dollar 0.26 - 9.00% $ 29,490
2008 - 2049 Euro 1.25 - 6.53 8,819AIG also maintains a Euro medium-term note program under
2008 - 2012 United Kingdom pound 4.67 - 6.31 3,936which an aggregate nominal amount of up to $20.0 billion of
2008 - 2037 Japanese Yen 0.01 - 2.9 2,025senior notes may be outstanding at any one time. At Decem-
2008 - 2024 Swiss francs 0.25 512ber 31, 2007, the equivalent of $12.7 billion of notes were
2008 New Zealand dollar 8.35 386outstanding under the program, of which $9.8 billion were used to
2009 - 2017 Australian dollar 1.14 - 2.65 177fund the MIP and the remainder was used for AIG’s general
2008 - 2017 Other 4.39 - 4.95 194corporate purposes. The aggregate amount outstanding includes a
Total $ 45,539$1.1 billion loss resulting from foreign exchange translation into
U.S. dollars, of which a $332 million loss relates to notes issued
AIGFP economically hedges its notes and bonds. AIG guaran-by AIG for general corporate purposes and a $726 million loss
tees all of AIGFP’s debt.relates to notes issued to fund the MIP.
During 2007, AIG issued in Rule 144A offerings an aggregate
(iii) Hybrid financial instrument liabilities: AIGFP’s notes and
of $3.0 billion principal amount of senior notes, of which
bonds include structured debt instruments whose payment terms
$650 million was used to fund the MIP and $2.3 billion was used
are linked to one or more financial or other indices (such as an
for AIG’s general corporate purposes.
equity index or commodity index or another measure that is not
AIG maintains a shelf registration statement in Japan, providing
considered to be clearly and closely related to the debt instru-
for the issuance of up to Japanese Yen 300 billion principal
ment). These notes contain embedded derivatives that otherwise
amount of senior notes, of which the equivalent of $450 million
AIG 2007 Form 10-K 171

$969 million at December 31, 2007 and $733 million at Decem-11. Debt Outstanding
ber 31, 2006. ILFC has substantially eliminated the currencyContinued
exposure arising from foreign currency denominated notes by
would be required to be accounted for separately under FAS 133.
economically hedging the portion of the note exposure not already
Upon AIG’s early adoption of FAS 155, AIGFP elected the fair
offset by Euro-denominated operating lease payments.
value option for these notes. The notes that are accounted for
using the fair value option are reported separately under hybrid (ii) Junior subordinated debt: In December 2005, ILFC issued two
financial instrument liabilities at fair value. tranches of junior subordinated debt totaling $1.0 billion to underlie
trust preferred securities issued by a trust sponsored by ILFC. Both
(d) AIGLH Borrowings: At December 31, 2007, AIGLH notes
tranches mature on December 21, 2065, but each tranche has a
aggregating $797 million were outstanding with maturity dates
different call option. The $600 million tranche has a call date of
ranging from 2010 to 2029 at interest rates from 6.625 percent
December 21, 2010 and the $400 million tranche has a call date
to 7.50 percent. AIG guarantees the notes and bonds of AIGLH.
of December 21, 2015. The note with the 2010 call date has a
(e) Liabilities Connected to Trust Preferred Stock: AIGLH fixed interest rate of 5.90 percent for the first five years. The note
issued Junior Subordinated Debentures (liabilities) to certain with the 2015 call date has a fixed interest rate of 6.25 percent for
trusts established by AIGLH, which represent the sole assets of the first ten years. Both tranches have interest rate adjustments if
the trusts. The trusts have no independent operations. The trusts the call option is not exercised. The new interest rate is a floating
issued mandatory redeemable preferred stock to investors. The quarterly reset rate based on the initial credit spread plus the
interest terms and payment dates of the liabilities correspond to highest of (i) 3 month LIBOR, (ii) 10-year constant maturity treasury
those of the preferred stock. AIGLH’s obligations with respect to and (iii) 30-year constant maturity treasury.
the liabilities and related agreements, when taken together, (iii) Export credit facility: ILFC had a $4.3 billion Export Credit
constitute a full and unconditional guarantee by AIGLH of Facility (ECA) for use in connection with the purchase of
payments due on the preferred securities. AIG guarantees the approximately 75 aircraft delivered through 2001. This facility was
obligations of AIGLH with respect to these liabilities and related guaranteed by various European Export Credit Agencies. The
agreements. The liabilities are redeemable, under certain condi- interest rate varies from 5.75 percent to 5.90 percent on these
tions, at the option of AIGLH on a proportionate basis. amortizing ten-year borrowings depending on the delivery date of
At December 31, 2007, the preferred stock outstanding the aircraft. At December 31, 2007, ILFC had $664 million
consisted of $300 million liquidation value of 8.5 percent outstanding under this facility. The debt is collateralized by a
preferred stock issued by American General Capital II in June pledge of the shares of a subsidiary of ILFC, which holds title to
2000, $500 million liquidation value of 8.125 percent preferred the aircraft financed under the facility.
stock issued by American General Institutional Capital B in March In May 2004, ILFC entered into a similarly structured ECA for
1997, and $500 million liquidation value of 7.57 percent up to a maximum of $2.6 billion for Airbus aircraft to be delivered
preferred stock issued by American General Institutional Capital A through May 31, 2005. The facility was subsequently increased to
in December 1996. $3.6 billion and extended to include aircraft to be delivered
(f) ILFC Borrowings: through May 31, 2008. The facility becomes available as the
various European Export Credit Agencies provide their guarantees(i) Notes and Bonds issued by ILFC: At December 31, 2007,
for aircraft based on a six-month forward-looking calendar, and thenotes aggregating $23.1 billion were outstanding, consisting of
interest rate is determined through a bid process. At Decem-$10.8 billion of term notes, $11.3 billion of medium-term notes
ber 31, 2007, ILFC had $1.9 billion outstanding under this facility.with maturities ranging from 2008 to 2014 and interest rates
ranging from 2.75 percent to 5.75 percent and $1.0 billion of (iv) Bank Financings: From time to time, ILFC enters into various
junior subordinated debt as discussed below. Notes aggregating bank financings. At December 31, 2007, the total funded amount
$5.3 billion are at floating interest rates and the remainder are at was $1.1 billion. The financings mature through 2012. AIG does
fixed rates. To the extent deemed appropriate, ILFC may enter into not guarantee any of the debt obligations of ILFC.
swap transactions to manage its effective borrowing rates with
(g) AGF Borrowings:respect to these notes.
As a well-known seasoned issuer, ILFC has filed an automatic (i) Notes and bonds issued by AGF: At December 31, 2007,
shelf registration statement with the SEC allowing ILFC immediate notes and bonds aggregating $22.4 billion were outstanding with
access to the U.S. public debt markets. At December 31, 2007, maturity dates ranging from 2008 to 2031 at interest rates
$4.7 billion of debt securities had been issued under this registration ranging from 1.94 percent to 8.45 percent. To the extent deemed
statement and $5.9 billion had been issued under a prior registration appropriate, AGF may enter into swap transactions to manage its
statement. In addition, ILFC has a Euro medium term note program effective borrowing rates with respect to these notes.
for $7.0 billion, under which $3.8 billion in notes were outstanding at As a well-known seasoned issuer, AGF has filed an automatic
December 31, 2007. Notes issued under the Euro medium-term note shelf registration statement with the SEC allowing AGF immediate
program are included in ILFC notes and bonds payable in the access to the U.S. public debt markets.
preceding table of borrowings. The cumulative foreign exchange AGF uses the proceeds from the issuance of notes and bonds
adjustment loss for the foreign currency denominated debt was for the funding of its finance receivables.
172 AIG 2007 Form 10-K

of the 1999 settlement of class and derivative litigation involving11. Debt Outstanding
Caremark Rx, Inc. (Caremark). The plaintiffs in the second-filedContinued
action have intervened in the first-filed action, and the second-filed
(ii) Junior subordinated debt: In January 2007, AGF issued junior
action has been dismissed. An excess policy issued by a
subordinated debentures in an aggregate principal amount of
subsidiary of AIG with respect to the 1999 litigation was expressly
$350 million that mature in January 2067. The debentures
stated to be without limit of liability. In the current actions,
underlie a series of trust preferred securities sold by a trust
plaintiffs allege that the judge approving the 1999 settlement was
sponsored by AGF in a Rule 144A/Regulation S offering. AGF can
misled as to the extent of available insurance coverage and would
redeem the debentures at par beginning in January 2017.
not have approved the settlement had he known of the existence
AIG does not guarantee any of the debt obligations of AGF. and/or unlimited nature of the excess policy. They further allege
that AIG, its subsidiaries, and Caremark are liable for fraud and
(h) Other Notes, Bonds, Loans and Mortgages Payable at
suppression for misrepresenting and/or concealing the nature and
December 31, 2007, consisted of the following:
extent of coverage. In addition, the intervenor-plaintiffs allege that
various lawyers and law firms who represented parties in theUncollateralized Collateralized
Notes/Bonds/Loans Loans and underlying class and derivative litigation (the ‘‘Lawyer Defend-
(in millions) Payable Mortgages Payable
ants’’) are also liable for fraud and suppression, misrepresenta-
AIGCFG $1,839 $ — tion, and breach of fiduciary duty. The complaints filed by the
AIG 729 —
plaintiffs and the intervenor-plaintiffs request compensatory dam-
Other subsidiaries 600 175
ages for the 1999 class in the amount of $3.2 billion, plus
Total $3,168 $175
punitive damages. AIG and its subsidiaries deny the allegations of
fraud and suppression and have asserted that information(i) Interest Expense for All Indebtedness: Total interest
concerning the excess policy was publicly disclosed months priorexpense for all indebtedness, net of capitalized interest, aggre-
to the approval of the settlement. AIG and its subsidiaries furthergated $9.69 billion in 2007, $6.95 billion in 2006 and $5.7 bil-
assert that the current claims are barred by the statute oflion in 2005. Capitalized interest was $37 million in 2007,
limitations and that plaintiffs’ assertions that the statute was$59 million in 2006 and $64 million in 2005. Cash distributions
tolled cannot stand against the public disclosure of the excesson the preferred shareholders’ equity in subsidiary companies of
coverage. The plaintiffs and intervenor-plaintiffs, in turn, haveILFC and liabilities connected to trust preferred stock of AIGLH
asserted that the disclosure was insufficient to inform them ofsubsidiaries are accounted for as interest expense in the
the nature of the coverage and did not start the running of theconsolidated statement of income. The cash distributions for ILFC
statute of limitations. On November 26, 2007, the trial courtwere approximately $5 million for each of the years ended
issued an order that dismissed the intervenors’ complaint againstDecember 31, 2007, 2006 and 2005. The cash distributions for
the Lawyer Defendants and entered a final judgment in favor ofAIGLH subsidiaries were approximately $107 million, $107 million
the Lawyer Defendants. The intervenors are appealing the dismis-and $112 million for the years ended December 31, 2007, 2006
sal of the Lawyer Defendants and have requested a stay of alland 2005, respectively.
trial court proceedings pending the appeal. If the motion to stay is
granted, no further proceedings at the trial court level will occur12. Commitments, Contingencies and
until the appeal is resolved. If the motion to stay is denied, theGuarantees
next step will be to proceed with class discovery so that the trial
In the normal course of business, various commitments and court can determine, under standards mandated by the Alabama
contingent liabilities are entered into by AIG and certain of its Supreme Court, whether the action should proceed as a class
subsidiaries. In addition, AIG guarantees various obligations of action. AIG cannot reasonably estimate either the likelihood of its
certain subsidiaries. prevailing in these actions or the potential damages in the event
liability is determined.
(a) Litigation and Investigations
Litigation Arising from Insurance Operations — Gunderson. A
Litigation Arising from Operations. AIG and its subsidiaries, in subsidiary of AIG has been named as a defendant in a putative
common with the insurance and financial services industries in class action lawsuit in the 14th Judicial District Court for the
general, are subject to litigation, including claims for punitive State of Louisiana. The Gunderson complaint alleges failure to
damages, in the normal course of their business. In AIG’s comply with certain provisions of the Louisiana Any Willing
insurance operations, litigation arising from claims settlement Provider Act (the Act) relating to discounts taken by defendants on
activities is generally considered in the establishment of AIG’s bills submitted by Louisiana medical providers and hospitals that
reserve for losses and loss expenses. However, the potential for provided treatment or services to workers compensation claim-
increasing jury awards and settlements makes it difficult to ants and seeks monetary penalties and injunctive relief. On
assess the ultimate outcome of such litigation. July 20, 2006, the court denied defendants’ motion for summary
Litigation Arising from Insurance Operations — Caremark. AIG judgment and granted plaintiffs’ partial motion for summary
and certain of its subsidiaries have been named defendants in judgment, holding that the AIG subsidiary was a ‘‘group pur-
two putative class actions in state court in Alabama that arise out chaser’’ and, therefore, potentially subject to liability under the
AIG 2007 Form 10-K 173

February 5, 2008, following agreement of the parties, the court12. Commitments, Contingencies and
entered an order staying all proceedings through March 3, 2008.Guarantees
In addition, a similar lawsuit filed by the Minnesota WorkersContinued
Compensation Reinsurance Association and the Minnesota Work-
Act. On November 28, 2006, the court issued an order certifying
ers Compensation Insurers Association is pending. On August 6,
a class of providers and hospitals. In an unrelated action also
2007, AIG moved to dismiss the complaint and that motion is sub
arising under the Act, a Louisiana appellate court ruled that the
judice. A purported class action was filed in South Carolina
district court lacked jurisdiction to adjudicate the claims at issue.
Federal Court on January 25, 2008 against AIG and certain of its
In response, defendants in Gunderson filed an exception for lack
subsidiaries, on behalf of a class of employers that obtained
of subject matter jurisdiction. On January 19, 2007, the court
workers compensation insurance from AIG companies and alleg-
denied the motion, holding that it has jurisdiction over the putative
edly paid inflated premiums as a result of AIG’s alleged underre-
class claims. The AIG subsidiary has appealed the class certifica-
porting of workers compensation premiums. AIG cannot currently
tion and jurisdictional rulings. While the appeal was pending, the
estimate whether the amount ultimately required to settle these
AIG subsidiary settled the lawsuit. On January 25, 2008, plaintiffs
claims will exceed the funds escrowed or otherwise accrued for
and the AIG subsidiary agreed to resolve the lawsuit on a class-
this purpose. AIG has settled litigation that was filed by the
wide basis for approximately $29 million. The court has prelimina-
Minnesota Attorney General with respect to claims by the
rily approved the settlement and will hold a final approval hearing
Minnesota Department of Revenue and the Minnesota Special
on May 29, 2008. In the event that the settlement is not finally
Compensation Fund.
approved, AIG believes that it has meritorious defenses to
The National Association of Insurance Commissioners has
plaintiffs’ claims and expects that the ultimate resolution of this
formed a Market Analysis Working Group directed by the State of
matter will not have a material adverse effect on AIG’s consoli-
Indiana, which has commenced its own investigation into the
dated financial condition or results of operations for any period.
underreporting of workers compensation premium. In early 2008,
2006 Regulatory Settlements. In February 2006, AIG reached
AIG was informed that the Market Analysis Working Group had
a resolution of claims and matters under investigation with the
been disbanded in favor of a multi-state targeted market conduct
United States Department of Justice (DOJ), the Securities and
exam focusing on worker’s compensation insurance.
Exchange Commission (SEC), the Office of the New York Attorney
The remaining escrowed funds, which amounted to $17 million
General (NYAG) and the New York State Department of Insurance
at December 31, 2007, are set aside for settlements for certain
(DOI). AIG recorded an after-tax charge of $1.15 billion relating to
specified AIG policyholders. As of February 20, 2008, eligible
these settlements in the fourth quarter of 2005.
policyholders entitled to receive approximately $359 million (or
The settlements resolved investigations conducted by the SEC,
95 percent) of the excess casualty fund had opted to receive
NYAG and DOI in connection with the accounting, financial
settlement payments in exchange for releasing AIG and its
reporting and insurance brokerage practices of AIG and its
subsidiaries from liability relating to certain insurance brokerage
subsidiaries, as well as claims relating to the underpayment of
practices. Amounts remaining in the excess casualty fund may be
certain workers compensation premium taxes and other assess-
used by AIG to settle claims from other policyholders relating to
ments. These settlements did not, however, resolve investigations
such practices through February 29, 2008 (originally set for
by regulators from other states into insurance brokerage practices
January 31, 2008 and later extended), after which they will be
related to contingent commissions and other broker-related con-
distributed pro rata to participating policyholders.
duct, such as alleged bid rigging. Nor did the settlements resolve
In addition to the escrowed funds, $800 million was deposited
any obligations that AIG may have to state guarantee funds in
into a fund under the supervision of the SEC as part of the
connection with any of these matters.
settlements to be available to resolve claims asserted against AIG
As a result of these settlements, AIG made payments or
by investors, including the shareholder lawsuits described herein.
placed amounts in escrow in 2006 totaling approximately
Also, as part of the settlements, AIG agreed to retain, for a
$1.64 billion, $225 million of which represented fines and
period of three years, an independent consultant to conduct a
penalties. Amounts held in escrow totaling $347 million, including
review that will include, among other things, the adequacy of AIG’s
interest thereon, are included in other assets at December 31,
internal control over financial reporting, the policies, procedures
2007. At that date, approximately $330 million of the funds were
and effectiveness of AIG’s regulatory, compliance and legal
escrowed for settlement of claims resulting from the underpay-
functions and the remediation plan that AIG has implemented as
ment by AIG of its residual market assessments for workers
a result of its own internal review.
compensation. On May 24, 2007, The National Workers Compen-
Other than as described above, at the current time, AIG cannot
sation Reinsurance Pool, on behalf of its participant members,
predict the outcome of the matters described above, or estimate
filed a lawsuit against AIG with respect to the underpayment of
any potential additional costs related to these matters.
such assessments. On August 6, 2007, the court denied AIG’s
motion seeking to dismiss or stay the complaint based on
Private Litigation
Colorado River abstention or forum non conveniens, or in the
Securities Actions. Beginning in October 2004, a number of
alternative, to transfer to the Southern District of New York. On
putative securities fraud class action suits were filed against AIG
December 26, 2007, the court denied AIG’s motion to dismiss
and consolidated as In re American International Group, Inc.
the complaint. AIG filed its answer on January 22, 2008. On
174 AIG 2007 Form 10-K

General Re; (2) concealed that it marketed and misrepresented its12. Commitments, Contingencies and
control over off-shore entities in order to improve financial results;Guarantees
(3) improperly accounted for underwriting losses as investmentContinued
losses in connection with transactions involving CAPCO Reinsur-
Securities Litigation. Subsequently, a separate, though similar,
ance Company, Ltd. and Union Excess; (4) misled investors about
securities fraud action was also brought against AIG by certain
the scope of government investigations; and (5) engaged in
Florida pension funds. The lead plaintiff in the class action is a
market manipulation through its then Chairman and CEO Mau-
group of public retirement systems and pension funds benefiting
rice R. Greenburg. The complaint asserts claims for violations of
Ohio state employees, suing on behalf of themselves and all
Oregon Securities Law, and seeks compensatory damages in an
purchasers of AIG’s publicly traded securities between Octo-
amount in excess of $15 million, and prejudgment interest and
ber 28, 1999 and April 1, 2005. The named defendants are AIG
costs and fees.
and a number of present and former AIG officers and directors, as
Derivative Actions — Southern District of New York. On
well as Starr, SICO, General Reinsurance Corporation, and
November 20, 2007, two purported shareholder derivative actions
PricewaterhouseCoopers LLP (PwC), among others. The lead
were filed in the Southern District of New York naming as
plaintiff alleges, among other things, that AIG: (1) concealed that
defendants the current directors of AIG and certain senior officers
it engaged in anti-competitive conduct through alleged payment of
of AIG and its subsidiaries. Plaintiffs assert claims for breach of
contingent commissions to brokers and participation in illegal bid-
fiduciary duty, waste of corporate assets and unjust enrichment,
rigging; (2) concealed that it used ‘‘income smoothing’’ products
as well as violations of Section 10(b) of the Exchange Act and
and other techniques to inflate its earnings; (3) concealed that it
Rule 10b-5 promulgated thereunder, and Section 20(a) of the
marketed and sold ‘‘income smoothing’’ insurance products to
Exchange Act, among other things, in connection with AIG’s public
other companies; and (4) misled investors about the scope of
disclosures regarding its exposure to what the lawsuits describe
government investigations. In addition, the lead plaintiff alleges
as the subprime market crisis. The actions were consolidated as
that AIG’s former Chief Executive Officer manipulated AIG’s stock
In re American International Group, Inc. 2007 Derivative Litigation.
price. The lead plaintiff asserts claims for violations of
On February 15, 2008, plaintiffs filed a consolidated amended
Sections 11 and 15 of the Securities Act of 1933, Section 10(b)
complaint alleging the same causes of action. AIG may become
of the Exchange Act, and Rule 10b-5 promulgated thereunder,
subject to litigation with respect to these or similar issues.
Section 20(a) of the Exchange Act, and Section 20A of the
Between October 25, 2004 and July 14, 2005, seven separate
Exchange Act. In April 2006, the court denied the defendants’
derivative actions were filed in the Southern District of New York,
motions to dismiss the second amended class action complaint
five of which were consolidated into a single action. The New York
and the Florida complaint. In December 2006, a third amended
derivative complaint contains nearly the same types of allegations
class action complaint was filed, which does not differ substan-
made in the securities fr

AIG Annual Report 2007

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