AIG Annual Reports and Proxy Statements2006 Form 10-K

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, 2006
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.)
70 Pine Street, New York, New York 10270
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (212) 770-7000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, Par Value $2.50 Per Share New York Stock Exchange, Inc.
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, or a non-accelerated filer.
See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ¥ Accelerated Filer n Non-Accelerated Filer n
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 30, 2006 (the last business day of the registrant’s
most recently completed second fiscal quarter), was approximately $130,207,300,000.
As of January 31, 2007, there were outstanding 2,601,583,676 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 16, 2007 are incorporated by reference in Part III of this Form 10-K.
Form 10-K 2006 AIG 1

American International Group, Inc. and Subsidiaries
Table of Contents
Index Page Index, continued Page
Part I Part III*
Item 1. Business 3 Item 10. Directors, Executive Officers
and Corporate Governance 180Item 1A. Risk Factors 15
Item 11. Executive Compensation 180Item 1B. Unresolved Staff Comments 18
Item 12. Security Ownership of CertainItem 2. Properties 18
Beneficial Owners and
Item 3. Legal Proceedings 18 Management and Related
Stockholder Matters 180Item 4. Submission of Matters to a
Vote of Security Holders 21 Item 13. Certain Relationships and
Related Transactions, andPart II
Director Independence 180
Item 5. Market for the Registrant’s
Item 14. Principal Accountant Fees andCommon Equity, Related
Services 180Stockholder Matters and Issuer
Purchases of Equity Securities 22 Part IV
Item 6. Selected Financial Data 24 Item 15.** Exhibits and Financial
Statement Schedules 180Item 7. Management’s Discussion and
Analysis of Financial Condition Signatures 181
and Results of Operations 25
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk 99
Item 8. Financial Statements and
Supplementary Data 99
Item 9. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure 177
Item 9A. Controls and Procedures 177
Item 9B. Other Information 179
* 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 16,
2007.
** 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 2006 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. and
United 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 AIG Consumer Finance Group, Inc. (AIGCFG)
and Asset Management. The principal business units in each of
Imperial A.I. Credit Companies
AIG’s segments are as follows*:
Asset Management
General Insurance
AIG SunAmerica Asset Management Corp. (SAAMCo)
American Home Assurance Company (American Home)
AIG Global Asset Management Holdings Corp. and itsNational Union Fire Insurance Company of Pittsburgh, Pa.
subsidiaries and affiliated companies (collectively, AIGGIG)(National Union)
New Hampshire Insurance Company (New Hampshire)
Lexington Insurance Company (Lexington) At December 31, 2006, AIG and its subsidiaries had
The Hartford Steam Boiler Inspection and Insurance Com- approximately 106,000 employees.
pany (HSB)
AIG’s Internet address for its corporate website is
Transatlantic Reinsurance Company
www.aigcorporate.com. AIG makes available free of charge, through
United Guaranty Residential Insurance Company
the Investor Information section of AIG’s corporate website, Annual
American International Underwriters Overseas, Ltd. (AIUO) Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and Proxy Statements on Schedule 14A andLife Insurance & Retirement Services
amendments to those reports or statements filed or furnished
Domestic: pursuant to Section 13(a), 14(a) or 15(d) of the Securities
American General Life Insurance Company (AIG American Exchange Act of 1934 (the Exchange Act) as soon as reasonably
General) practicable after such materials are electronically filed with, or
American 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 the
The United States Life Insurance Company in the City of New charters for its Audit, Nominating and Corporate Governance and
York (USLIFE) Compensation Committees, as well as its Corporate Governance
The Variable Annuity Life Insurance Company (VALIC) Guidelines (which include Director Independence Standards), Direc-
tor, Executive Officer and Senior Financial Officer Code of BusinessAIG Annuity Insurance Company (AIG Annuity)
Conduct and Ethics, Employee Code of Conduct and Related-PartySunAmerica Life Insurance Company (SunAmerica Life)
Transactions Approval Policy. Except for the documents specificallyAIG SunAmerica Life Assurance Company
incorporated by reference into this Annual Report on Form 10-K,
Foreign: information contained on AIG’s website or that can be accessed
American Life Insurance Company (ALICO) through its website is not incorporated by reference into this
AIG Star Life Insurance Co., Ltd. (AIG Star Life) Annual Report on Form 10-K.
AIG Edison Life Insurance Company (AIG Edison Life)
Throughout this Annual Report on Form 10-K, AIG presents its
American International Assurance Company, Limited, together operations in the way it believes will be most meaningful, as well
with American International Assurance Company (Bermuda)
as most transparent. Certain of the measurements used by AIG
Limited (AIA)
management are ‘‘non-GAAP financial measures’’ under SEC rules
American International Reinsurance Company Limited (AIRCO)
and regulations. Statutory underwriting profit (loss) and combined
Nan Shan Life Insurance Company, Ltd. (Nan Shan) ratios are determined in accordance with accounting principles
The Philippine American Life and General Insurance Company prescribed by insurance regulatory authorities. For an explanation
(Philamlife) 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 of Notes
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 realized capital gains (losses). 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 of Notes to Consolidated
Financial Statements.
Years Ended December 31,
(in millions) 2006 2005 2004 2003 2002
General Insurance operations:
Gross premiums written $ 56,280 $ 52,725 $ 52,046 $ 46,938 $ 36,678
Net premiums written 44,866 41,872 40,623 35,031 26,718
Net premiums earned 43,451 40,809 38,537 31,306 23,595
Net investment income(a)
5,696 4,031 3,196 2,566 2,350
Realized capital gains (losses) 59 334 228 (39) (345)
Operating income(a)(b)(c)(d)
10,412 2,315 3,177 4,502 923
Identifiable assets 167,004 150,667 131,658 117,511 105,891
Statutory measures(e)
:
Statutory underwriting profit (loss)(b)(c)(d)
4,408 (2,165) (564) 1,559 (1,843)
Loss ratio 64.6 81.1 78.8 73.1 83.1
Expense ratio 24.5 23.6 21.5 19.6 21.8
Combined ratio(d)
89.1 104.7 100.3 92.7 104.9
Life Insurance & Retirement Services operations:
GAAP premiums 30,636 29,400 28,088 23,496 20,694
Net investment income(a)
19,439 18,134 15,269 12,942 11,243
Realized capital gains (losses)(f)
88 (158) 45 362 (295)
Operating income(a)
10,032 8,904 7,925 6,929 5,258
Insurance in-force at end of year(g)
2,070,600 1,852,833 1,858,094 1,583,031 1,298,592
Financial Services operations:
Interest, lease and finance charges(h)
8,010 10,525 7,495 6,242 6,822
Operating income(h)
524 4,276 2,180 1,182 2,125
Asset Management operations:
Net investment income from spread-based
products and advisory and management fees 5,814 5,325 4,714 3,651 3,467
Operating income 2,346 2,253 2,125 1,316 1,125
Other operations:
Realized capital gains (losses) (41) 165 (229) (765) (1,013)
All other(i)
(1,586) (2,700) (333) (1,257) (610)
Revenues(j)(k)
113,194 108,905 97,666 79,421 66,171
Total operating income(a)(j)(l)
21,687 15,213 14,845 11,907 7,808
Total assets 979,414 853,051 801,007 675,602 561,131
(a) Includes the effect of out of period adjustments related to the accounting for certain interests in unit investment trusts and other mutual funds (unit
investment trusts). For 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.
(b) Includes current year catastrophe-related losses of $2.89 billion and $1.05 billion in 2005 and 2004, respectively. There were no significant
catastrophe-related losses in 2006.
(c) Includes additional losses incurred and net reinstatement premiums related to prior year catastrophes of $199 million and $277 million in 2006 and
2005, respectively.
(d) Operating income was reduced by fourth quarter charges of $1.8 billion, $850 million and $2.1 billion for 2005, 2004 and 2002, 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 insurance companies are required to report such measurements to regulatory authorities.

(f) Includes the effect of hedging activities that did not qualify for hedge accounting treatment under Statement of Financial Accounting Standards
No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities’’ (FAS 133) and the application of Statement of Financial Accounting Standards
No. 52, ‘‘Foreign Currency Translation’’ (FAS 52). For 2006, 2005, 2004, 2003 and 2002, respectively, the amounts included are $355 million,
$(495) million, $(140) million, $78 million and $(91) million.
(g) 2005 includes the effect of the non-renewal of a single large group life case of $36 billion. Also, the foreign in-force is translated to U.S. dollars at the
appropriate balance sheet exchange rate in each period.
(h) Includes the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains
and losses. For 2006, 2005, 2004, 2003 and 2002, respectively, the effect was $(1.82) billion, $2.01 billion, $(122) million, $(1.01) billion and
$220 million in both revenues and operating income for Capital Markets. These amounts result primarily from interest rate and foreign currency
derivatives that are economically hedging available for sale securities and borrowings. For 2004, 2003 and 2002, respectively, the effect was
$(27) million, $49 million and $20 million in operating income for Aircraft Leasing. In 2006 and 2005, Aircraft Leasing derivative gains and losses
were reported as part of AIG’s Other category, and were not reported in Aircraft Leasing operating income.
(i) Includes $1.6 billion of regulatory settlement costs in 2005 as described under Item 3. Legal Proceedings.
(j) Includes the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains
and losses. For 2006, 2005, 2004, 2003 and 2002, respectively, the effect was $(1.86) billion, $2.02 billion, $385 million, $(1.50) billion and
$(216) million in revenues and $(1.86) billion, $2.02 billion, $671 million, $(1.22) billion and $(58) million in operating income. These amounts result
primarily from interest rate and foreign currency derivatives that are hedging available for sale securities and borrowings.
(k) Represents the sum of General Insurance net premiums earned, Life Insurance & Retirement Services GAAP premiums, net investment income,
Financial Services interest, lease and ﬁnance charges, Asset Management net investment income from spread-based products and advisory and
management fees, and realized capital gains (losses).
(l) Represents income before income taxes, minority interest and cumulative effect of accounting changes.

and services to U.S.-based multinational clients and foreignGeneral Insurance Operations
corporations doing business in the U.S.
AIG’s General Insurance subsidiaries are multiple line companies Certain of the products of the DBG companies include funding
writing substantially all lines of commercial property and casualty components or have been structured so that little or no insurance
insurance and various personal lines both domestically and risk is actually transferred. Funds received in connection with
abroad. Domestic General Insurance operations are comprised of these products are recorded as deposits and included in other
the Domestic Brokerage Group (DBG), Reinsurance, Personal liabilities, rather than premiums and incurred losses.
Lines, and Mortgage Guaranty.
AIG is diversified both in terms of classes of business and Reinsurance
geographic locations. In General Insurance, workers compensation
The subsidiaries of Transatlantic Holdings, Inc. (Transatlantic) offerbusiness is the largest class of business written and represented
reinsurance on both a treaty and facultative basis to insurers in theapproximately 15 percent of net premiums written for the year ended
U.S. and abroad. Transatlantic structures programs for a full range ofDecember 31, 2006. During 2006, 8 percent and 7 percent of the
property and casualty products with an emphasis on specialty risk.direct General Insurance premiums written (gross premiums less
Transatlantic is a public company owned 59.2 percent by AIG andreturn premiums and cancellations, excluding reinsurance assumed
therefore is included in AIG’s consolidated financial statements.and before deducting reinsurance ceded) were written in California
and New York, respectively. No other state accounted for more
Personal Linesthan five percent of such premiums.
The majority of AIG’s General Insurance business is in the
AIG’s Personal Lines operations provide automobile insurance
casualty classes, which tend to involve longer periods of time for
through AIG Direct, a mass marketing operation, the Agency Auto
the reporting and settling of claims. This may increase the risk
Division and 21st Century Insurance Group (21st Century), as well
and uncertainty with respect to AIG’s loss reserve development.
as a broad range of coverages for high net-worth individuals
through the AIG Private Client Group. 21st Century is a public
DBG company owned 61.9 percent by AIG and therefore is included in
AIG’s consolidated financial statements. During the first quarter ofAIG’s primary Domestic General Insurance division is DBG. DBG’s
2007, AIG offered to acquire the outstanding shares of 21stbusiness in the United States and Canada is conducted through
Century not already owned by AIG and its subsidiaries.American Home, National Union, Lexington, HSB and certain other
General Insurance company subsidiaries of AIG. During 2006,
Mortgage GuarantyDBG accounted for 54 percent of AIG’s General Insurance net
premiums written.
The main business of the subsidiaries of United Guaranty
DBG writes substantially all classes of business insurance,
Corporation (UGC) is the issuance of residential mortgage guar-
accepting such business mainly from insurance brokers. This
anty insurance, both domestically and internationally, on conven-
provides DBG the opportunity to select specialized markets and
tional first lien mortgages for the purchase or refinance of one to
retain underwriting control. Any licensed broker is able to submit
four family residences. UGC subsidiaries also write second lien
business to DBG without the traditional agent-company contractual
and private student loan guaranty insurance.
relationship, but such broker usually has no authority to commit
DBG to accept a risk.
Foreign General Insurance
In addition to writing substantially all classes of business
insurance, including large commercial or industrial property insur- AIG’s Foreign General Insurance group accepts risks primarily
ance, excess liability, inland marine, environmental, workers underwritten through American International Underwriters (AIU), a
compensation and excess and umbrella coverages, DBG offers marketing unit consisting of wholly owned agencies and insurance
many specialized forms of insurance such as aviation, accident companies. The Foreign General Insurance group also includes
and health, equipment breakdown, directors and officers liability business written by AIG’s foreign-based insurance subsidiaries. The
(D&O), difference-in-conditions, kidnap-ransom, export credit and Foreign General Insurance group uses various marketing methods
political risk, and various types of professional errors and and multiple distribution channels to write both commercial and
omissions coverages. The AIG Risk Management operation pro- consumer lines insurance with certain refinements for local laws,
vides insurance and risk management programs for large corpo- customs and needs. AIU operates in Asia, the Pacific Rim, Europe,
rate customers. The AIG Risk Finance operation is a leading including the U.K., Africa, the Middle East and Latin America. During
provider of customized structured insurance products. Also in- 2006, the Foreign General Insurance group accounted for 25 per-
cluded in DBG are the operations of AIG Environmental, which cent of AIG’s General Insurance net premiums written.
focuses specifically on providing specialty products to clients with
environmental exposures. Lexington writes surplus lines for risks Discussion and Analysis of Consolidated Net
which conventional insurance companies do not readily provide Losses and Loss Expense Reserve Development
insurance coverage, either because of complexity or because the
The reserve for net losses and loss expenses represents the
coverage does not lend itself to conventional contracts. The AIG
accumulation of estimates for reported losses (case basis
Worldsource Division introduces and coordinates AIG’s products
reserves) and provisions for losses incurred but not reported

(IBNR), both reduced by applicable reinsurance recoverable and been paid in settlement of these net loss reserves. In addition,
the discount for future investment income, where permitted. as reflected in the lower section of the table, the original
Losses and loss expenses are charged to income as incurred. undiscounted reserve of $25.82 billion was reestimated to be
Loss reserves established with respect to foreign business are $36.28 billion at December 31, 2006. This increase from the
set and monitored in terms of the respective local or functional original estimate would generally result from a combination of a
currency. Therefore, no assumption is included for changes in number of factors, including reserves being settled for larger
currency rates. See also Note 1(b) of Notes to Consolidated amounts than originally estimated. The original estimates will also
Financial Statements. be increased or decreased as more information becomes known
Management reviews the adequacy of established loss about the individual claims and overall claim frequency and
reserves through the utilization of a number of analytical reserve severity patterns. The redundancy (deficiency) depicted in the
development techniques. Through the use of these techniques, table, for any particular calendar year, presents the aggregate
management is able to monitor the adequacy of AIG’s established change in estimates over the period of years subsequent to the
reserves and determine appropriate assumptions for inflation. calendar year reflected at the top of the respective column
Also, analysis of emerging specific development patterns, such as heading. For example, the redundancy of $259 million at Decem-
case reserve redundancies or deficiencies and IBNR emergence, ber 31, 2006 related to December 31, 2005 net losses and loss
allows management to determine any required adjustments. expense reserves of $57.34 billion represents the cumulative
The ‘‘Analysis of Consolidated Losses and Loss Expense amount by which reserves for 2005 and prior years have
Reserve Development’’ table presents the development of net developed favorably during 2006.
losses and loss expense reserves for calendar years 1996 The bottom of each table below presents the remaining
through 2006. Immediately following this table is a second table undiscounted and discounted net loss reserve for each year. For
that presents all data on a basis that excludes asbestos and example, in the table that excludes asbestos and environmental
environmental net losses and loss expense reserve development. losses, for the 2001 year end, the remaining undiscounted
The opening reserves held are shown at the top of the table for reserves held as of December 31, 2006 are $12.25 billion, with
each year end date. The amount of loss reserve discount included a corresponding discounted net reserve of $11.35 billion.
in the opening reserve at each date is shown immediately below The reserves for net losses and loss expenses with respect to
the reserves held for each year. The undiscounted reserve at Transatlantic and 21st Century are included only in consolidated
each date is thus the sum of the discount and the reserve held. net losses and loss expenses commencing with the year ended
The upper half of the table presents the cumulative amounts December 31, 1998, the year they were first consolidated in AIG’s
paid during successive years related to the undiscounted opening financial statements. Reserve development for these operations is
loss reserves. For example, in the table that excludes asbestos included only for 1998 and subsequent periods. Thus, the
and environmental losses, with respect to the net losses and loss presentation for 1997 and prior year ends is not fully comparable
expense reserve of $24.75 billion as of December 31, 1999, by to that for 1998 and subsequent years in the tables below.
the end of 2006 (seven years later) $29.16 billion had actually

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
(in millions) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Net Reserves Held $20,496 $20,901 $25,418 $25,636 $25,684 $26,005 $29,347 $36,228 $47,254 $57,476 $62,630
Discount (in Reserves Held) 393 619 897 1,075 1,287 1,423 1,499 1,516 1,553 2,110 2,264
Net Reserves Held
(Undiscounted) 20,889 21,520 26,315 26,711 26,971 27,428 30,846 37,744 48,807 59,586 64,894
Paid (Cumulative) as of:
One year later 5,712 5,607 7,205 8,266 9,709 11,007 10,775 12,163 14,910 15,326
Two years later 9,244 9,754 12,382 14,640 17,149 18,091 18,589 21,773 24,377
Three years later 11,943 12,939 16,599 19,901 21,930 23,881 25,513 28,763
Four years later 14,152 15,484 20,263 23,074 26,090 28,717 30,757
Five years later 16,077 17,637 22,303 25,829 29,473 32,685
Six years later 17,551 18,806 24,114 28,165 32,421
Seven years later 18,415 19,919 25,770 30,336
Eight years later 19,200 21,089 27,309
Nine years later 20,105 22,177
Ten years later 20,972
(in millions) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Net Reserves Held
(undiscounted) $20,889 $21,520 $26,315 $ 26,711 $ 26,971 $ 27,428 $ 30,846 $ 37,744 $48,807 $59,586 $64,894
Undiscounted Liability as
of:
One year later 20,795 21,563 25,897 26,358 26,979 31,112 32,913 40,931 53,486 59,533
Two years later 20,877 21,500 25,638 27,023 30,696 33,363 37,583 49,463 55,009
Four years later 20,776 21,485 28,021 31,192 36,210 45,203 48,427
Five years later 20,917 22,405 28,607 33,910 41,699 47,078
Six years later 21,469 22,720 30,632 38,087 43,543
Net
Redundancy/(Deﬁciency) (5,202) (6,245) (8,671) (12,886) (16,572) (19,650) (17,581) (13,753) (6,202) 53
Remaining Reserves
(Undiscounted) 5,119 5,588 7,677 9,261 11,122 14,393 17,670 22,734 30,632 44,207
Remaining Discount 360 427 517 623 748 894 1,079 1,265 1,484 1,809
Remaining Reserves 4,759 5,161 7,160 8,638 10,374 13,499 16,591 21,469 29,148 42,398
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, 2006.
(in millions) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Gross Liability, End of
Year $32,605 $ 32,049 $ 36,973 $ 37,278 $ 39,222 $ 42,629 $ 48,173 $ 53,387 $63,431 $79,279 $82,263
Reinsurance Recoverable,
End of Year 11,716 10,529 10,658 10,567 12,251 15,201 17,327 15,643 14,624 19,693 17,369
Net Liability, End of Year 20,889 21,520 26,315 26,711 26,971 27,428 30,846 37,744 48,807 59,586 64,894
Reestimated Gross
Liability 41,685 43,993 53,004 58,320 63,768 67,554 68,657 69,007 70,895 78,946
Reestimated Reinsurance
Recoverable 15,594 16,227 18,018 18,723 20,224 20,476 20,229 17,511 15,886 19,413
Reestimated Net Liability 26,091 27,766 34,986 39,597 43,544 47,078 48,428 51,496 55,009 59,533
Cumulative Gross

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.
(in millions) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Net Reserves Held $19,753 $20,113 $24,554 $24,745 $24,829 $25,286 $28,650 $35,559 $45,742 $55,227 $60,451
Discount (in Reserves
Held) 393 619 897 1,075 1,287 1,423 1,499 1,516 1,553 2,110 2,264
Net Reserves Held
(Undiscounted) 20,146 20,732 25,451 25,820 26,116 26,709 30,149 37,075 47,295 57,336 62,715
Paid (Cumulative) as of:
One year later 5,603 5,467 7,084 8,195 9,515 10,861 10,632 11,999 14,718 15,047
Two years later 8,996 9,500 12,190 14,376 16,808 17,801 18,283 21,419 23,906
Four years later 13,724 14,972 19,732 22,521 25,445 28,080 29,987
Five years later 15,460 16,983 21,630 25,116 28,643 31,771
Six years later 16,792 18,014 23,282 27,266 31,315
(in millions) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Net Reserves Held
(undiscounted) $20,146 $20,732 $25,451 $ 25,820 $ 26,116 $ 26,709 $ 30,149 $ 37,075 $47,295 $57,336 $62,715
Undiscounted Liability as
of:
One year later 19,904 20,576 24,890 25,437 26,071 30,274 32,129 39,261 51,048 57,077
Two years later 19,788 20,385 24,602 26,053 29,670 32,438 35,803 46,865 52,364
Four years later 19,530 20,301 26,813 30,014 34,102 42,348 45,510
Five years later 19,633 21,104 27,314 31,738 38,655 44,018
Six years later 20,070 21,336 28,345 34,978 40,294
Net
Remaining Reserves
(undiscounted) 3,015 3,482 5,539 7,121 8,979 12,247 15,523 20,562 28,458 42,030
Remaining Discount 360 427 517 623 748 894 1,079 1,265 1,484 1,809
Remaining Reserves 2,655 3,055 5,022 6,498 8,231 11,353 14,444 19,297 26,974 40,221
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, 2006.
(in millions) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Gross Liability, End of
Year $30,302 $29,740 $34,474 $ 34,666 $ 36,777 $ 40,400 $ 46,036 $ 51,363 $59,897 $73,912 $77,211
Reinsurance
Recoverable,
End of Year 10,156 9,008 9,023 8,846 10,661 13,691 15,887 14,288 12,602 16,576 14,495
Net Liability, End of Year 20,146 20,732 25,451 25,820 26,116 26,709 30,149 37,075 47,295 57,336 62,715
Reestimated Gross
Liability 32,186 34,940 44,281 50,004 55,974 60,289 61,735 62,488 64,772 73,241
Reestimated
Reinsurance
Recoverable 9,699 10,679 12,725 13,722 15,680 16,270 16,225 13,797 12,409 16,164
Reestimated Net Liability 22,487 24,261 31,556 36,282 40,294 44,019 45,510 48,691 52,363 57,077
Cumulative Gross

The reserve for losses and loss expenses as reported in AIG’s independent producers, and sell their products largely to indige-
consolidated balance sheet at December 31, 2006 differs from nous persons in local and foreign currencies. In addition to the
the total reserve reported in the Annual Statements filed with agency outlets, these companies also distribute their products
state insurance departments and, where appropriate, with foreign through direct marketing channels, such as mass marketing, and
regulatory authorities. The differences at December 31, 2006 through brokers and other distribution outlets, such as financial
relate primarily to reserves for certain foreign operations not institutions.
required to be reported in the United States for statutory Life insurance products such as whole life and endowment
reporting purposes. Further, statutory practices in the United continue to be significant in the overseas companies, especially in
States require reserves to be shown net of applicable reinsurance Southeast Asia, while a mixture of life insurance, accident and
recoverable. health and retirement services products are sold in Japan.
The reserve for gross losses and loss expenses is prior to AIG also has subsidiary operations in Canada, Egypt, Mexico,
reinsurance and represents the accumulation for reported losses Poland, Switzerland, Russia and Puerto Rico, and conducts life
and IBNR. Management reviews the adequacy of established insurance business through a joint venture in Brazil and in certain
gross loss reserves in the manner previously described for net countries in Central and South America.
loss reserves.
For further discussion regarding net reserves for losses and Domestic Life Insurance & Retirement
loss expenses, see Management’s Discussion and Analysis of Services
Financial Condition and Results of Operations — Operating Re-
AIG’s principal domestic Life Insurance & Retirement Services
view — General Insurance Operations — Reserve for Losses and
operations include AGLA, AIG American General, AIG Annuity,
Loss Expenses.
USLIFE, VALIC and SunAmerica Life. These companies utilize
multiple distribution channels including independent producers,
Life Insurance & Retirement Services
brokerage, career agents and banks to offer life insurance,
Operations
annuity and accident and health products and services, as well as
AIG’s Life Insurance & Retirement Services subsidiaries offer a financial and other investment products. The domestic Life
wide range of insurance and retirement savings products both Insurance & Retirement Services operations comprised 22 per-
domestically and abroad. Insurance-oriented products consist of cent of total Life Insurance & Retirement Services GAAP premi-
individual and group life, payout annuities (including structured ums and 32 percent of Life Insurance & Retirement Services
settlements), endowment and accident and health policies. Retire- operating income in 2006.
ment savings products consist generally of fixed and variable
annuities. Reinsurance
There was no significant adverse effect on AIG’s Life Insur-
AIG’s General Insurance subsidiaries worldwide operate primarily
ance & Retirement Services results of operations from economic
by underwriting and accepting risks for their direct account and
conditions in any one state, country or geographic region for the
securing reinsurance on that portion of the risk in excess of the
year ended December 31, 2006.
limit which they wish to retain. This operating policy differs from
that of many insurance companies that will underwrite only up to
Foreign Life Insurance & Retirement Services their net retention limit, thereby requiring the broker or agent to
In its Life Insurance & Retirement Services businesses, AIG secure commitments from other underwriters for the remainder of
operates overseas principally through ALICO, AIG Star Life, AIG the gross risk amount.
Edison Life, AIA, AIRCO, Nan Shan and Philamlife. ALICO is Various AIG profit centers, including DBG, AIU, AIG Reinsurance
incorporated in Delaware and all of its business is written outside Advisors, Inc. and AIG Risk Finance, as well as certain Foreign
of the United States. ALICO has operations either directly or Life subsidiaries, use AIRCO as a reinsurer for certain of their
through subsidiaries in Europe, including the U.K., Latin America, businesses, and AIRCO also receives premiums from offshore
the Caribbean, the Middle East, South Asia and the Far East, with captives of AIG clients. In accordance with permitted accounting
Japan being the largest territory. AIA operates primarily in China practices in Bermuda, AIRCO discounts reserves attributable to
(including Hong Kong), Singapore, Malaysia, Thailand, Korea, certain classes of business assumed from other AIG subsidiaries.
Australia, New Zealand, Vietnam, Indonesia, and India. The For a further discussion of reinsurance, see Item 1A. Risk
operations in India are conducted through a joint venture, Tata AIG Factors — Reinsurance, Management’s Discussion and Analysis of
Life Insurance Company Limited. Nan Shan operates in Taiwan. Financial Condition and Results of Operations — Risk Manage-
Philamlife is the largest life insurer in the Philippines. AIG Star ment — Reinsurance and Note 5 of Notes to Consolidated
Life and AIG Edison Life operate in Japan. Operations in foreign Financial Statements.
countries comprised 78 percent of Life Insurance & Retirement
Services GAAP premiums and 68 percent of Life Insurance & Insurance Investment Operations
Retirement Services operating income in 2006.
A significant portion of AIG’s General Insurance and Life Insur-
The Foreign Life Insurance & Retirement Services companies
ance & Retirement Services revenues are derived from AIG’s
have over 270,000 full and part-time agents, as well as
10 AIG 2006 Form 10-K

insurance investment operations, which are summarized in the
following table.
The following table summarizes the investment results of the insurance operations.
Annual Average Cash and Invested Assets
Cash
(including Return on Return on
Years Ended December 31, short-term Invested Average Cash Average
(in millions) investments) Assets(a)(b)
Total and Assets(c)
Assets(d)
General Insurance:
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
2002 1,537 47,477 49,014 4.8 5.0
Life Insurance & Retirement Services:
2006 $7,205 $384,724 $391,929 5.0% 5.1%
2005 6,180 352,250 358,430 5.1 5.1
2004 5,089 307,659 312,748 4.9 5.0
2003 4,680 247,608 252,288 5.1 5.2
2002 3,919 199,750 203,669 5.5 5.6
(a) Including investment income due and accrued and real estate.
(b) Includes collateral assets invested under the securities lending program.
(c) Net investment income divided by the annual average sum of cash and invested assets.
(d) 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,
The Capital Markets operations of AIG are conducted primarilyfixed income securities in all of its portfolios and, to a lesser
through AIGFP, which engages as principal in standard andextent, investments in high yield bonds, common stocks, real
customized interest rate, currency, equity, commodity, energy andestate, hedge funds and partnerships, in order to enhance returns
credit products with top-tier corporations, financial institutions,on policyholders’ funds and generate net investment income. The
governments, agencies, institutional investors, and high-net-worthability to implement this policy is somewhat limited in certain
individuals throughout the world. AIGFP also invests in a diversi-territories as there may be a lack of adequate long-term
fied portfolio of securities and principal investments and engagesinvestments or investment restrictions may be imposed by the
in borrowing activities that include issuing standard and structuredlocal regulatory authorities.
notes and other securities and entering into guaranteed invest-
ment agreements (GIAs). See also Note 2 of Notes to Consoli-Financial Services Operations
dated Financial Statements.
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. Imperial A.I. Credit Companies also
credit-related insurance to customers in the United States, Puertocontribute to Financial Services income. This operation engages
Rico, and the U.S. Virgin Islands. AIGCFG, through its subsidiaries,principally in insurance premium financing for both AIG’s custom-
is engaged in developing a multi-product consumer financeers and those of other insurers.
business with an emphasis on emerging markets.
Aircraft Leasing
Asset Management Operations
AIG’s Aircraft Leasing operations represent the operations of ILFC,
AIG’s Asset Management operations comprise a wide variety ofwhich generates its revenues primarily from leasing new and used
investment-related services and investment products, includingcommercial jet aircraft to foreign and domestic airlines. Revenues
institutional and retail asset management, broker-dealer servicesalso result from the remarketing of commercial jets for its own
and institutional spread-based investment business. Such ser-account, and remarketing and fleet management services for
vices and products are offered to individuals and institutions bothairlines and for financial institutions. See also Note 2 of Notes to
domestically and overseas. Asset Management’s spread-basedConsolidated Financial Statements.
Form 10-K 2006 AIG 11

investment business includes the results of AIG’s proprietary developments in foreign countries, including such possibilities as
institutional spread-based investment operation, the Matched tax changes, nationalization, and changes in regulatory policy, as
Investment Program (MIP), which was launched in September of well as by consequence of hostilities and unrest. The risks of
2005 and replaced the GIC program. such occurrences and their overall effect upon AIG vary from
AIG’s principal Asset Management operations are conducted country to country and cannot easily be predicted. If expropriation
through certain subsidiaries of AIG Retirement Services, Inc., or nationalization does occur, AIG’s policy is to take all appropri-
including SAAMCo and the AIG Advisor Group broker dealers (AIG ate measures to seek recovery of such assets. Certain of the
SunAmerica); and through AIGGIG, including AIG Global Investment countries in which AIG’s business is conducted have currency
Corp., AIG Global Real Estate and AIG Private Bank. AIG restrictions which generally cause a delay in a company’s ability to
SunAmerica sells and manages mutual funds and provides repatriate assets and profits. See also Notes 1 and 2 of Notes to
financial advisory services through independent-contractor regis- Consolidated Financial Statements and Item 1A. Risk Factors —
tered representatives. AIGGIG manages invested assets on a Foreign Operations.
global basis for AIG subsidiaries and affiliates, as well as third-
party institutional, retail, and private banking clients. AIGGIG Regulation
offers equity, fixed income and alternative investment funds and
AIG’s operations around the world are subject to regulation by
provides securities lending and custodial services and numerous
many different types of regulatory authorities, including insurance,
forms of structured investment products across all asset classes.
securities, investment advisory, banking and thrift regulators in
Each of these subsidiary operations receives fees for investment
the United States and abroad. The regulatory environment can
products and services provided.
have a significant effect on AIG and its business. AIG’s operations
have become more diverse and consumer-oriented, increasing the
Other Operations
scope of regulatory supervision and the possibility of intervention.
Certain other AIG subsidiaries provide insurance-related services In addition, the investigations into financial accounting practices
such as adjusting claims and marketing specialized products. that led to two restatements of AIG’s consolidated financial
Several wholly owned foreign subsidiaries of AIG operating in statements have heightened regulatory scrutiny of AIG worldwide.
countries or jurisdictions such as Ireland, Bermuda, Barbados and In 1999, AIG became a unitary thrift holding company within
Gibraltar provide insurance and related administrative and back the meaning of the Home Owners’ Loan Act (HOLA) when the
office services to a variety of affiliated and unaffiliated insurance Office of Thrift Supervision (OTS) granted AIG approval to organize
and reinsurance companies, including captive insurance compa- AIG Federal Savings Bank. AIG is subject to OTS regulation,
nies unaffiliated with AIG. examination, supervision and reporting requirements. In addition,
AIG also has several other subsidiaries which engage in the OTS has enforcement authority over AIG and its subsidiaries.
various businesses. Mt. Mansfield Company, Inc. owns and Among other things, this permits the OTS to restrict or prohibit
operates the ski slopes, lifts, school and an inn located at Stowe, activities that are determined to be a serious risk to the financial
Vermont. Also included in AIG’s Other operations are unallocated safety, soundness or stability of AIG’s subsidiary savings associa-
corporate expenses, including interest expense and the settle- tion, AIG Federal Savings Bank.
ment costs more fully described in Item 3. Legal Proceedings and Under prior law, a unitary savings and loan holding company,
Note 12(a) of Notes to Consolidated Financial Statements. such as AIG, was not restricted as to the types of business in
which it could engage, provided that its savings association
subsidiary continued to be a qualified thrift lender. The Gramm-Additional Investments
Leach-Bliley Act of 1999 (GLBA) provides that no company may
AIG’s significant investments in partially owned companies (which
acquire control of an OTS regulated institution after May 4, 1999
are accounted for under the equity method) include a 19.4 per-
unless it engages only in the financial activities permitted for
cent interest in Allied World Assurance Holdings, Ltd. (AWAC), a
financial holding companies under the law or for multiple savings
property-casualty insurance holding company, a 24.5 percent
and loan holding companies. The GLBA, however, grandfathered
interest in The Fuji Fire and Marine Insurance Co., Ltd., a general
the unrestricted authority for activities with respect to a unitary
insurance company, a 26 percent interest in Tata AIG Life
savings and loan holding company existing prior to May 4, 1999,
Insurance Company, Ltd. and a 26 percent interest in Tata AIG
so long as its savings association subsidiary continues to be a
General Insurance Company, Ltd. For a discussion of AIG’s
qualified thrift lender under the HOLA. As a unitary savings and
investments in partially owned companies, see Note 1(u) of Notes
loan holding company whose application was pending as of
to Consolidated Financial Statements.
May 4, 1999, AIG is grandfathered under the GLBA and generally
is not restricted under existing laws as to the types of business
Locations of Certain Assets activities in which it may engage, provided that AIG Federal
Savings Bank continues to be a qualified thrift lender under theAs of December 31, 2006, approximately 37 percent of the
HOLA.consolidated assets of AIG were located in foreign countries (other
Certain states require registration and periodic reporting bythan Canada), including $6.5 billion of cash and securities on
insurance companies that are licensed in such states and aredeposit with foreign regulatory authorities. Foreign operations and
controlled by other corporations. Applicable legislation typicallyassets held abroad may be adversely affected by political
12 AIG 2006 Form 10-K

requires periodic disclosure concerning the corporation that mately $2 billion of letters of credit issued by several commercial
controls the registered insurer and the other companies in the banks in favor of certain Domestic General Insurance companies.
holding company system and prior approval of intercorporate Risk-Based Capital (RBC) is designed to measure the adequacy
services and transfers of assets (including in some instances of an insurer’s statutory surplus in relation to the risks inherent in
payment of dividends by the insurance subsidiary) within the its business. Thus, inadequately capitalized general and life
holding company system. AIG’s subsidiaries are registered under insurance companies may be identified.
such legislation in those states that have such requirements. The RBC formula develops a risk-adjusted target level of
AIG’s insurance subsidiaries, in common with other insurers, statutory surplus by applying certain factors to various asset,
are subject to regulation and supervision by the states and by premium and reserve items. Higher factors are applied to more
other jurisdictions in which they do business. Within the United risky items and lower factors are applied to less risky items. Thus,
States, the method of such regulation varies but generally has its the target level of statutory surplus varies not only as a result of
source in statutes that delegate regulatory and supervisory the insurer’s size, but also based on the risk profile of the
powers to an insurance official. The regulation and supervision insurer’s operations.
relate primarily to approval of policy forms and rates, the The RBC Model Law provides for four incremental levels of
standards of solvency that must be met and maintained, including regulatory attention for insurers whose surplus is below the
risk-based capital measurements, the licensing of insurers and calculated RBC target. These levels of attention range in severity
their agents, the nature of and limitations on investments, from requiring the insurer to submit a plan for corrective action to
restrictions on the size of risks that may be insured under a placing the insurer under regulatory control.
single policy, deposits of securities for the benefit of policyhold- The statutory surplus of each of AIG’s Domestic General and
ers, requirements for acceptability of reinsurers, periodic examina- Life Insurance subsidiaries exceeded their RBC target levels as of
tions of the affairs of insurance companies, the form and content December 31, 2006.
of reports of financial condition required to be filed, and reserves To the extent that any of AIG’s insurance entities would fall
for unearned premiums, losses and other purposes. In general, below prescribed levels of statutory surplus, it would be AIG’s
such regulation is for the protection of policyholders rather than intention to infuse necessary capital to support that entity.
the equity owners of these companies. A substantial portion of AIG’s General Insurance business and
In preparing both its 2004 and 2005 audited statutory a majority of its Life Insurance business is carried on in foreign
financial statements for its Domestic General Insurance compa- countries. The degree of regulation and supervision in foreign
nies, AIG agreed with the relevant regulatory agencies on the jurisdictions varies. Generally, AIG, as well as the underwriting
statutory accounting treatment of the various items requiring companies operating in such jurisdictions, must satisfy local
adjustment or restatement. These adjustments and restatements regulatory requirements. Licenses issued by foreign authorities to
reduced previously reported General Insurance statutory surplus AIG subsidiaries are subject to modification or revocation by such
at December 31, 2004 by approximately $3.5 billion to approxi- authorities, and AIU or other AIG subsidiaries could be prevented
mately $20.6 billion. from conducting business in certain of the jurisdictions where they
With respect to the 2005 audited statutory financial state- currently operate. In the past, AIU has been allowed to modify its
ments, the state regulators permitted the Domestic General operations to conform with new licensing requirements in most
Insurance companies to record a $724 million reduction to jurisdictions.
opening statutory surplus as of January 1, 2005. In addition to licensing requirements, AIG’s foreign operations
AIG has taken various steps to enhance the capital positions are also regulated in various jurisdictions with respect to currency,
of the Domestic General Insurance companies. AIG entered into policy language and terms, amount and type of security deposits,
capital maintenance agreements with the Domestic General amount and type of reserves, amount and type of local invest-
Insurance companies that set forth procedures through which AIG ment and the share of profits to be returned to policyholders on
will provide ongoing capital support. Dividends from the Domestic participating policies. Some foreign countries regulate rates on
General Insurance companies were suspended from fourth quarter various types of policies. Certain countries have established
2005 through 2006, but AIG expects that dividend payments will reinsurance institutions, wholly or partially owned by the local
resume in the first quarter of 2007. AIG contributed an additional government, to which admitted insurers are obligated to cede a
$750 million of capital into American Home effective Septem- portion of their business on terms that may not always allow
ber 30, 2005, and contributed a further $2.25 billion of capital in foreign insurers, including AIG subsidiaries, full compensation. In
February 2006 for a total of approximately $3 billion of capital some countries, regulations governing constitution of technical
into Domestic General Insurance subsidiaries effective Decem- reserves and remittance balances may hinder remittance of profits
ber 31, 2005. Furthermore, in order to allow the Domestic and repatriation of assets.
General Insurance companies to record as an admitted asset at See also Management’s Discussion and Analysis of Financial
December 31, 2006 certain reinsurance ceded to non-U.S. Condition and Results of Operations — Capital Resources and
reinsurers (which has the effect of increasing the statutory Liquidity — Regulation and Supervision and Note 11 of Notes to
surplus of such Domestic General Insurance companies), AIG Consolidated Financial Statements.
obtained and entered into reimbursement agreements for approxi-
Form 10-K 2006 AIG 13

Competition Directors and Executive Officers of AIG
AIG’s Insurance, Financial Services and Asset Management Set forth below is information concerning the directors and
businesses operate in highly competitive environments, both executive officers of AIG. All directors are elected for one-year
domestically and overseas. Principal sources of competition are terms at the annual meeting of shareholders. All executive officers
insurance companies, banks, investment banks and other non- are elected to one-year terms, but serve at the pleasure of the
bank financial institutions. Board of Directors.
The insurance industry in particular is highly competitive. Except as hereinafter noted, each of the executive officers has,
Within the United States, AIG’s General Insurance subsidiaries for more than five years, occupied an executive position with AIG or
compete with approximately 3,100 other stock companies, spe- companies that are now its subsidiaries. Other than the employ-
cialty insurance organizations, mutual companies and other ment contracts between AIG and Messrs. Sullivan and Bensinger,
underwriting organizations. AIG’s subsidiaries offering Life Insur- there are no other arrangements or understandings between any
ance & Retirement Services compete in the United States with executive officer and any other person pursuant to which the
approximately 2,000 life insurance companies and other partici- executive officer was elected to such position. From January 2000
pants in related financial services fields. Overseas, AIG subsidiar- until joining AIG in May 2004, Dr. Frenkel served as Chairman of
ies compete for business with foreign insurance operations of the Merrill Lynch International, Inc. Prior to joining AIG in September
larger U.S. insurers, global insurance groups, and local companies 2002, Mr. Bensinger was Executive Vice President and Chief
in particular areas in which they are active. Financial Officer of Combined Specialty Group, Inc. (a division of
AIG’s strong ratings have historically provided a competitive Aon Corporation) commencing in March 2002, and served as
advantage. For a discussion of the possible adverse effects on Executive Vice President of Trenwick Group, Ltd. from October 1999
AIG’s competitive position as a result of a ratings downgrade, see through December 2001. Prior to joining AIG in September 2006,
Item 1A. Risk Factors — AIG’s Credit Ratings. Ms. Kelly served as Executive Vice President and General Counsel
of MCI/WorldCom. Previously, she was Senior Vice President and
General Counsel of Sears, Roebuck and Co. from 1999 to 2003.
Served as
Director or
Name Title Age Officer Since
Marshall A. Cohen Director 71 1992
Martin S. Feldstein Director 67 1987
Ellen V. Futter Director 57 1999
Stephen L. Hammerman Director 68 2005
Richard C. Holbrooke Director 65 2001
Fred H. Langhammer Director 63 2006
George L. Miles, Jr. Director 65 2005
Morris W. Offit Director 70 2005
James F. Orr III Director 63 2006
Virginia M. Rometty Director 49 2006
Martin J. Sullivan Director, President and Chief Executive Officer 52 2002
Michael H. Sutton Director 66 2005
Edmund S. W. Tse Director, Senior Vice Chairman – Life Insurance 69 1996
Robert B. Willumstad Director and Chairman 61 2006
Frank G. Zarb Director 72 2001
Jacob A. Frenkel Vice Chairman – Global Economic Strategies 63 2004
Frank G. Wisner Vice Chairman – External Affairs 68 1997
Steven J. Bensinger Executive Vice President and Chief Financial Officer 52 2002
Anastasia D. Kelly Executive Vice President, General Counsel and Senior Regulatory
and Compliance Officer 57 2006
Rodney O. Martin, Jr. Executive Vice President – Life Insurance 54 2002
Kristian P. Moor Executive Vice President – Domestic General Insurance 47 1998
Win J. Neuger Executive Vice President and Chief Investment Officer 57 1995
Robert M. Sandler Executive Vice President – Domestic Personal Lines 64 1980
Nicholas C. Walsh Executive Vice President – Foreign General Insurance 56 2005
Jay S. Wintrob Executive Vice President – Retirement Services 49 1999
William N. Dooley Senior Vice President – Financial Services 54 1992
David L. Herzog Senior Vice President and Comptroller 47 2005
Robert E. Lewis Senior Vice President and Chief Risk Officer 55 1993
Brian T. Schreiber Senior Vice President – Strategic Planning 41 2002
14 AIG 2006 Form 10-K

accelerate its DAC amortization and such acceleration couldItem 1A.
adversely affect AIG’s results of operations. See also Manage-Risk Factors
ment’s Discussion and Analysis of Financial Condition and Results
Casualty Insurance Underwriting and Reserves of Operations — Critical Accounting Estimates and Notes 1 and 4
of Notes to Consolidated Financial Statements.Casualty insurance liabilities are difficult to predict and may
exceed the related reserves for losses and loss expenses.
ReinsuranceAlthough AIG annually reviews the adequacy of the established
reserve for losses and loss expenses, there can be no assurance Reinsurance may not be available or affordable. AIG subsidiaries
that AIG’s ultimate loss reserves will not develop adversely and are major purchasers of reinsurance and utilize reinsurance as
materially exceed AIG’s current loss reserves. Estimation of part of AIG’s overall risk management strategy. Reinsurance is an
ultimate net losses, loss expenses and loss reserves is a important risk management tool to manage transaction and
complex process for long-tail casualty lines of business, which insurance line risk retention, and to mitigate losses that may arise
include excess and umbrella liability, D&O, professional liability, from catastrophes. Market conditions beyond AIG’s control deter-
medical malpractice, workers compensation, general liability, mine the availability and cost of the reinsurance purchased by AIG
products liability and related classes, as well as for asbestos and subsidiaries. For example, reinsurance may be more difficult to
environmental exposures. Generally, actual historical loss develop- obtain after a year with a large number of major catastrophes.
ment factors are used to project future loss development. Accordingly, AIG may be forced to incur additional expenses for
However, there can be no assurance that future loss development reinsurance or may be unable to obtain sufficient reinsurance on
patterns will be the same as in the past. Moreover, any deviation acceptable terms, in which case AIG would have to accept an
in loss cost trends or in loss development factors might not be increase in exposure risk, reduce the amount of business written
discernible for an extended period of time subsequent to the by its subsidiaries or seek alternatives.
recording of the initial loss reserve estimates for any accident
Reinsurance subjects AIG to the credit risk of its reinsurers andyear. Thus, there is the potential for reserves with respect to a
may not be adequate to protect AIG against losses. Althoughnumber of years to be significantly affected by changes in loss
reinsurance makes the reinsurer liable to the AIG subsidiary tocost trends or loss development factors that were relied upon in
the extent the risk is ceded, it does not relieve the AIG subsidiarysetting the reserves. These changes in loss cost trends or loss
of the primary liability to its policyholders. Accordingly, AIG bearsdevelopment factors could be attributable to changes in inflation
credit risk with respect to its subsidiaries’ reinsurers. A rein-or in the judicial environment, or in other social or economic
surer’s insolvency or inability or refusal to make timely paymentsphenomena affecting claims. See also Management’s Discussion
under the terms of its agreements with the AIG subsidiaries couldand Analysis of Financial Condition and Results of Operations —
have a material adverse effect on AIG’s results of operations andOperating Review — General Insurance Operations — Reserve for
liquidity. See also Management’s Discussion and Analysis ofLosses and Loss Expenses.
Financial Condition and Results of Operations — Risk Manage-
ment — Reinsurance.Adjustments to Life Insurance & Retirement
Services Deferred Policy
A Material WeaknessAcquisition Costs
The remaining material weakness in AIG’s internal control overInterest rate fluctuations and other events may require AIG
financial reporting relating to income tax accounting couldsubsidiaries to accelerate the amortization of deferred policy
affect the accuracy or timing of future regulatory filings. As ofacquisition costs (DAC) which could adversely affect AIG’s
December 31, 2006, AIG’s management concluded that theconsolidated financial condition or results of operations. DAC
material weakness relating to the controls over income taxrepresents the costs that vary with and are related primarily to
accounting was not fully remediated. Remediation of this materialthe acquisition of new and renewal insurance and annuity
weakness is ongoing. Until remediated, this weakness couldcontracts. When interest rates rise, policy loans and surrenders
affect the accuracy or timing of future filings with the SEC andand withdrawals of life insurance policies and annuity contracts
other regulatory authorities. See also Item 9A. Controls andmay increase as policyholders seek to buy products with per-
Procedures — Management’s Report on Internal Control Overceived higher returns, requiring AIG subsidiaries to accelerate the
Financial Reporting.amortization of DAC. To the extent such amortization exceeds
surrender or other charges earned upon surrender and withdraw-
Catastrophe Exposuresals of certain life insurance policies and annuity contracts, AIG’s
results of operations could be negatively affected.
The occurrence of catastrophic events could adversely affect
DAC for both insurance-oriented and investment-oriented prod-
AIG’s consolidated financial condition or results of operations.
ucts as well as retirement services products is reviewed for
The occurrence of events such as hurricanes, earthquakes,
recoverability, which involves estimating the future profitability of
pandemic disease, acts of terrorism and other catastrophes could
current business. This review involves significant management
adversely affect AIG’s consolidated financial condition or results of
judgment. If the actual emergence of future profitability were to be
substantially lower than estimated, AIG could be required to
Form 10-K 2006 AIG 15

operations, including by exposing AIG’s businesses to the the United States may be affected by regional economic down-
following: turns, changes in foreign currency exchange rates, political
) widespread claim costs associated with property, workers upheaval, nationalization and other restrictive government actions,
compensation, mortality and morbidity claims; which could also affect other AIG operations.
) loss resulting from the cash flows from invested assets The degree of regulation and supervision in foreign jurisdic-
being less than the cash flows required to meet the policy tions varies. Generally, AIG, as well as the underwriting compa-
and contract liabilities; or nies operating in such jurisdictions, must satisfy local regulatory
) loss resulting from the actual policy experience adversely requirements. Licenses issued by foreign authorities to AIG
emerging in comparison to the assumptions made in the subsidiaries are subject to modification and revocation. Thus,
product pricing associated with mortality, morbidity, termina- AIG’s insurance subsidiaries could be prevented from conducting
tion and expenses. future business in certain of the jurisdictions where they currently
operate. AIG’s international operations include operations in
various developing nations. Both current and future foreignLegal Proceedings
operations could be adversely affected by unfavorable political
Significant legal proceedings adversely affected AIG’s results of
developments including tax changes, regulatory restrictions and
operations in 2005. As a result of the settlements discussed
nationalization of AIG’s operations without compensation. Adverse
below under Item 3. Legal Proceedings, AIG recorded an after-tax
actions from any one country may adversely affect AIG’s results of
charge of approximately $1.15 billion in the fourth quarter of
operations, liquidity and financial condition depending on the
2005. AIG is party to numerous other legal proceedings and
magnitude of the event and AIG’s net financial exposure at that
regulatory investigations. It is possible that the effect of the
time in that country.
unresolved matters could be material to AIG’s consolidated
results of operations for an individual reporting period. For a
Information Technology
discussion of these unresolved matters, see Item 3. Legal
Proceedings. A failure in AIG’s operational systems or infrastructure or those
of third parties could disrupt business, damage AIG’s reputation
and cause losses. AIG’s operations rely on the secure processing,Regulation
storage and transmission of confidential and other information in
AIG is subject to extensive regulation in the jurisdictions in
its computer systems and networks. AIG’s business depends on
which it conducts its businesses. AIG’s operations around the
effective information systems and the integrity and timeliness of
world are subject to regulation by different types of regulatory
the data it uses to run its business. AIG’s ability to adequately
authorities, including insurance, securities, investment advisory,
price its products and services, establish reserves, provide
banking and thrift regulators in the United States and abroad.
effective and efficient service to its customers, and to timely and
AIG’s operations have become more diverse and consumer-
accurately report its financial results also depends significantly on
oriented, increasing the scope of regulatory supervision and the
the integrity of the data in its information systems. Although AIG
possibility of intervention. In particular, AIG’s consumer lending
takes protective measures and endeavors to modify them as
business is subject to a broad array of laws and regulations
circumstances warrant, its computer systems, software and
governing lending practices and permissible loan terms, and AIG
networks may be vulnerable to unauthorized access, computer
would expect increased regulatory oversight relating to this
viruses or other malicious code and other events that could have
business.
security consequences. If one or more of such events occur, this
The regulatory environment could have a significant effect on
potentially could jeopardize AIG’s or its clients’ or counterparties’
AIG and its businesses. Among other things, AIG could be fined,
confidential and other information processed and stored in, and
prohibited from engaging in some of its business activities or
transmitted through, its computer systems and networks, or
subject to limitations or conditions on its business activities.
otherwise cause interruptions or malfunctions in AIG’s, its
Significant regulatory action against AIG could have material
clients’, its counterparties’ or third parties’ operations, which
adverse financial effects, cause significant reputational harm, or
could result in significant losses or reputational damage. AIG may
harm business prospects. New laws or regulations or changes in
be required to expend significant additional resources to modify
the enforcement of existing laws or regulations applicable to
its protective measures or to investigate and remediate vulnerabil-
clients may also adversely affect AIG and its businesses.
ities or other exposures, and AIG may be subject to litigation and
financial losses that are either not insured against or not fully
Foreign Operations covered by insurance maintained.
Foreign operations expose AIG to risks that may affect its Despite the contingency plans and facilities AIG has in place, its
operations, liquidity and financial condition. AIG provides insur- ability to conduct business may be adversely affected by a disruption
ance and investment products and services to both businesses of the infrastructure that supports AIG’s business in the communities
and individuals in more than 130 countries and jurisdictions. A in which it is located. This may include a disruption involving
substantial portion of AIG’s General Insurance business and a electrical, communications, transportation or other services used by
majority of its Life Insurance & Retirement Services businesses AIG. These disruptions may occur, for example, as a result of events
are conducted outside the United States. Operations outside of that affect only the buildings occupied by AIG or as a result of events
16 AIG 2006 Form 10-K

with a broader effect on the cities where those buildings are located. S&P would permit counterparties to call for approximately $864
If a disruption occurs in one location and AIG’s employees in that million of additional collateral. Further, additional downgrades
location are unable to occupy its offices and conduct business or could result in requirements for substantial additional collateral,
communicate with or travel to other locations, AIG’s ability to service which could have a material effect on how AIG manages its
and interact with its clients may suffer and it may not be able to liquidity. For a further discussion of AIG’s credit ratings and the
successfully implement contingency plans that depend on communi- potential effect of posting collateral on AIG’s liquidity, see
cation or travel. Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Capital Resources and Liquidity — Credit
Ratings and — Liquidity.AIG’s Credit Ratings
Financial strength and credit ratings by major ratings agencies
Liquidity
are an important factor in establishing the competitive position of
Liquidity risk represents the potential inability of AIG to meet allinsurance companies and other financial institutions and affect
payment obligations when they become due. AIG’s liquidity couldthe availability and cost of borrowings. Any ratings downgrade may
be impaired by an inability to access the capital markets or bylessen AIG’s ability to compete in certain businesses and may
unforeseen significant outflows of cash. This situation may ariseincrease AIG’s interest expense. Financial strength ratings measure
due to circumstances that AIG may be unable to control, such as aan insurance company’s ability to meet its obligations to contract
general market disruption or an operational problem that affectsholders and policyholders, help to maintain public confidence in a
third parties or AIG. AIG depends on dividends, distributions andcompany’s products, facilitate marketing of products and enhance a
other payments from its subsidiaries to fund dividend payments andcompany’s competitive position. Credit ratings measure a com-
to fund payments on AIG’s obligations, including debt obligations.pany’s ability to repay its obligations and directly affect the cost
Regulatory and other legal restrictions may limit AIG’s ability toand availability to that company of unsecured financing. Historically,
transfer funds freely, either to or from its subsidiaries. In particular,AIG’s credit and financial strength ratings have provided AIG a
many of AIG’s subsidiaries, including AIG’s insurance subsidiaries,competitive advantage.
are subject to laws and regulations that authorize regulatory bodiesFrom March through June of 2005, the major rating agencies
to block or reduce the flow of funds to the parent holding company,downgraded the ratings of AIG and its insurance subsidiaries in a
or that prohibit such transfers altogether in certain circumstances.series of actions. Many of the ratings were put on negative watch
These laws and regulations may hinder AIG’s ability to access fundsor negative outlook, which indicates a potential downgrade. Since
that AIG may need to make payments on its obligations. See alsothen, however, the agencies have affirmed the ratings of AIG and
Item 1. Business — Regulation.all of its subsidiaries with a stable outlook, which indicates that
the rating is not likely to change in the near term, except that S&P Some of AIG’s investments are relatively illiquid. AIG’s invest-
maintains a negative outlook on Transatlantic and on the senior ments in certain fixed income investments, certain structured
long-term debt rating of ILFC. securities, direct private equities, limited partnerships, hedge
A downgrade of the credit or financial strength ratings of AIG or funds and real estate are relatively illiquid. These asset classes
its subsidiaries could adversely affect AIG’s business and its represented nine percent of the carrying value of AIG’s total cash
consolidated results of operations in a number of ways, including: and invested assets as of December 31, 2006. If AIG requires
) increasing AIG’s interest expense; significant amounts of cash on short notice in excess of normal
) reducing AIGFP’s ability to compete in the structured prod- cash requirements, AIG may have difficulty selling these invest-
ucts and derivatives businesses; ments in a timely manner or be forced to sell them for less than
) reducing the competitive advantage of AIG’s insurance what AIG might otherwise have been able to, or both.
subsidiaries, which may result in reduced product sales Concentration of AIG’s investment portfolios in any particular
and/or lower prices; segment of the economy may have adverse effects. The
) adversely affecting relationships with agents and sales concentration of AIG’s investment portfolios in any particular
representatives; and industry, group of related industries or geographic sector could
) in the case of a downgrade of AGF or ILFC, increasing their have an adverse effect on the investment portfolios and conse-
interest expense and reducing their ability to compete in quently on AIG’s results of operations and financial position. While
their respective businesses. AIG seeks to mitigate this risk by having a broadly diversified
As a result of the downgrades in 2005 discussed above, AIG portfolio, events or developments that have a negative effect on
was required to post approximately $1.16 billion of collateral with any particular industry, group of related industries or geographic
counterparties to municipal guaranteed investment contracts and region may have a greater adverse effect on the investment
financial derivatives transactions. In the event of a further portfolios to the extent that the portfolios are concentrated rather
downgrade, AIG would be required to post additional collateral. It than diversified. Further, AIG’s ability to sell assets relating to
is estimated that, as of the close of business on February 15, such particular industry, group of related industries or geographic
2007, based on AIG’s outstanding municipal GIAs and financial region may be limited if other market participants are seeking to
derivatives transactions as of such date, a further downgrade of sell at the same time.
AIG’s long-term senior debt ratings to Aa3 by Moody’s or AA- by
Form 10-K 2006 AIG 17

See also Management’s Discussion and Analysis of Financial stable, producing aircraft and related components which meet the
Condition and Results of Operations — Capital Resources and airlines’ demands, both in type and quantity, and fulfilling their
Liquidity — Liquidity. contractual obligations to ILFC. Competition between the manufac-
turers for market share is intense and may lead to instances of
deep discounting for certain aircraft types and may negativelyThe Relationships Between AIG and
affect ILFC’s competitive pricing.the Starr Entities
The relationships between AIG and the Starr entities may take
Item 1B.
an extended period of time to unwind and/or resolve, and the
Unresolved Staff Comments
consequences of such resolution are uncertain. During 2006,
AIG unwound and resolved its most significant relationships with There are no material unresolved written comments that were
C.V. Starr & Co, Inc. (Starr) and began unwinding and resolving received from the SEC staff 180 days or more before the end of
various relationships with Starr International Company, Inc. (SICO). AIG’s fiscal year relating to AIG’s periodic or current reports under
AIG cannot predict what its future relationship with Starr and SICO the Exchange Act.
will be.
The agency relationships between AIG subsidiaries and Starr Item 2.
have been terminated and litigation with Starr has been resolved, Properties
but there can be no assurance that AIG will compete successfully
AIG and its subsidiaries operate from approximately 2,300 offices
for the business previously produced by the Starr agencies. In
in the United States, 6 offices in Canada and numerous offices in
January 2006, Starr announced that it had completed its tender
approximately 100 foreign countries. The offices in Greensboro
offers to purchase interests in Starr and that all eligible
and Winston-Salem, North Carolina; Springfield, Illinois; Amarillo,
shareholders had tendered their shares. As a result of completion
Ft. Worth and Houston, Texas; Wilmington, Delaware; San Juan,
of the tender offers, no AIG executive currently holds any Starr
Puerto Rico; Tampa, Florida; Livingston, New Jersey; Evansville,
interest.
Indiana; Nashville, Tennessee; 70 Pine Street, 72 Wall Street and
AIG has entered into agreements pursuant to which AIG
175 Water Street in New York, New York; and offices in more than
agrees, subject to certain conditions, to assure AIG’s current
30 foreign countries and jurisdictions including Bermuda, Chile,
employees that all payments are made under a series of two-year
Hong Kong, the Philippines, Japan, United Kingdom, Singapore,
Deferred Compensation Profit Participation Plans provided by SICO
Malaysia, Switzerland, Taiwan and Thailand are located in build-
(SICO Plans). For a further discussion of the SICO plans, see
ings owned by AIG and its subsidiaries. The remainder of the
Note 16 of Notes to Consolidated Financial Statements. Neverthe-
office space utilized by AIG subsidiaries is leased.
less, there can be no assurance that AIG will be able to
effectively address the consequences for its executives of the
Item 3.unwinding of their participation in the SICO plans and programs.
Legal ProceedingsFinally, litigation between AIG and SICO remains pending, and the
timing, terms and effect on AIG of any resolution cannot currently General
be predicted. See also Item 3. Legal Proceedings.
AIG and its subsidiaries, in common with the insurance industry in
general, are subject to litigation, including claims for punitive
Employee Error and Misconduct
damages, in the normal course of their business. See also
Employee error and misconduct may be difficult to detect and Note 12(a) of Notes to Consolidated Financial Statements, as well
prevent and may result in significant losses. Losses may result as the discussion and analysis of Consolidated Net Losses and
from, among other things, fraud, errors, failure to document Loss Expense Reserve Development and Management’s Discus-
transactions properly or to obtain proper internal authorization or sion and Analysis of Financial Condition and Results of Operations
failure to comply with regulatory requirements. herein.
There have been a number of highly publicized cases involving
fraud or other misconduct by employees in the financial services 2006 Regulatory Settlements
industry in recent years, and AIG runs the risk that employee
In February 2006, AIG reached a final settlement with the SEC,misconduct could occur. It is not always possible to deter or
the United States Department of Justice (DOJ), the Office of theprevent employee misconduct and the precautions AIG takes to
New York Attorney General (NYAG) and the New York Stateprevent and detect this activity may not be effective in all cases.
Department of Insurance (DOI). The settlements resolved investi-
gations conducted by the SEC, NYAG and DOI in connection with
Aircraft Suppliers
the accounting, financial reporting and insurance brokerage prac-
There are limited suppliers of aircraft and engines. The supply of tices of AIG and its subsidiaries, as well as claims relating to the
jet transport aircraft, which ILFC purchases and leases, is underpayment of certain workers compensation premium taxes
dominated by two airframe manufacturers, Boeing and Airbus, and and other assessments. The 2005 financial statements included
a limited number of engine manufacturers. As a result, ILFC is in this Annual Report on Form 10-K include a fourth quarter after-
dependent on the manufacturers’ success in remaining financially tax charge of $1.15 billion relating to the settlements.
18 AIG 2006 Form 10-K

As part of the settlement with the SEC, the SEC filed a civil record keeping provisions of those laws. AIG, without admitting or
complaint, alleging that from 2000 until 2005, AIG materially denying the allegations in the SEC complaint, consented to the
falsified its financial statements through a variety of transactions issuance of a final judgment permanently enjoining it and its
and entities in order to strengthen the appearance of its financial employees and related persons from violating certain provisions
results to analysts and investors. AIG, without admitting or of the Exchange Act, Exchange Act rules and the Securities Act,
denying the allegations in the SEC complaint, consented to the ordering disgorgement of fees it received in the PNC transactions
issuance of a final judgment on February 9, 2006: and providing for AIG to establish a transaction review committee
(a) permanently restraining and enjoining AIG from violating to review the appropriateness of certain future transactions and
Section 17(a) of the Securities Act of 1933 (Securities Act) and to retain an independent consultant to examine certain transac-
Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) and Rules 10b-5, tions entered into between 2000 and 2004 and review the
12b-20, 13a-1, 13a-13 and 13b2-1 of the Exchange Act; policies and procedures of the transaction review committee. AIG
(b) ordering AIG to pay disgorgement in the amount of $700 mil- expects that the review by the independent consultant of transac-
lion; and (c) ordering AIG to pay a civil penalty in the amount of tions entered into by AIG during the 2000 to 2004 period will be
$100 million. The $800 million was deposited into a fund under completed during 2007.
the supervision of the SEC to be available to resolve claims The settlement with the DOJ consists of separate agreements
asserted against AIG by investors, including the shareholder with AIG and AIGFP and a criminal complaint alleging violations of
lawsuits described below. federal securities laws filed against, and deferred prosecution
In February 2006, AIG and the DOJ entered into a letter agreement with, a wholly owned subsidiary of AIGFP. Under the
agreement whereby AIG agreed to cooperate with the DOJ in the terms of the settlement, AIGFP paid a penalty of $80 million. On
DOJ’s ongoing criminal investigation of violations of federal January 17, 2006, the court approved an order dismissing the
criminal law in connection with misstatements in periodic financial complaint with prejudice.
reports that AIG filed with the SEC between 2000 and 2004
relating to certain transactions, accepted responsibility for certain Regulatory Investigations
of its actions and those of its employees relating to these
Regulators from several states have commenced investigations
transactions, and paid $25 million in penalties.
into insurance brokerage practices related to contingent commis-
In February 2006, AIG entered into agreements with the NYAG
sions and other industry-wide practices as well as other broker-
and the DOI, resolving claims under New York’s Martin Act and
related conduct, such as alleged bid rigging.
insurance laws. Under the agreements, $375 million was paid into
In addition, various federal and state regulatory agencies are
a fund under the supervision of the NYAG and the DOI to be
reviewing certain other transactions and practices of AIG and its
available principally to pay certain insureds who purchased AIG
subsidiaries in connection with industry-wide and other inquiries.
excess casualty policies through Marsh & McLennan Companies,
AIG has cooperated, and will continue to cooperate, with all these
Inc. or Marsh Inc. (Marsh). In addition, a fund of approximately
investigations, including by producing documents and other infor-
$343 million was created to pay obligations resulting from the
mation in response to subpoenas.
underpayment by AIG of its workers compensation premium taxes
and related fees and assessments. In addition, AIG paid a
Pending Private Litigation$100 million fine to the State of New York.
As part of these settlements, AIG has agreed to retain, for a Securities Actions. Beginning in October 2004, a number of
period of three years, an independent consultant who will conduct putative securities fraud class action suits were filed against AIG
a review that will include, among other things, the adequacy of and consolidated as In re American International Group, Inc.
AIG’s internal controls over financial reporting, the policies, Securities Litigation. Subsequently, a separate, though similar,
procedures and effectiveness of AIG’s regulatory, compliance and securities fraud action was also brought against AIG by certain
legal functions, and the remediation plan that AIG has imple- Florida pension funds. The lead plaintiff in the class action is a
mented as a result of its own internal review. group of public retirement systems and pension funds benefiting
Ohio state employees, suing on behalf of themselves and all
PNC Settlement purchasers of AIG’s publicly traded securities between Octo-
ber 28, 1999 and April 1, 2005. The named defendants are AIG
In November 2004, AIG and AIGFP reached a final settlement with
and a number of present and former AIG officers and directors, as
the SEC, the Fraud Section of the DOJ and the United States
well as Starr, SICO, General Reinsurance Corporation and Price-
Attorney for the Southern District of Indiana with respect to issues
waterhouseCoopers LLP (PwC), among others. The lead plaintiff
arising from certain structured transactions entered into with
alleges, among other things, that AIG: (1) concealed that it
Brightpoint, Inc. and The PNC Financial Services Group, Inc.
engaged in anti-competitive conduct through alleged payment of
(PNC), the marketing of transactions similar to the PNC transac-
contingent commissions to brokers and participation in illegal bid-
tions and related matters.
rigging; (2) concealed that it used ‘‘income smoothing’’ products
As part of the settlement, the SEC filed against AIG a civil
and other techniques to inflate its earnings; (3) concealed that it
complaint, based on the conduct of AIG primarily through AIGFP,
marketed and sold ‘‘income smoothing’’ insurance products to
alleging violations of certain antifraud provisions of the federal
other companies; and (4) misled investors about the scope of
securities laws and aiding and abetting violations of reporting and
Form 10-K 2006 AIG 19

government investigations. In addition, the lead plaintiff alleges Derivative Actions — Delaware Chancery Court. From October
that AIG’s former Chief Executive Officer manipulated AIG’s stock 2004 to April 2005, AIG shareholders filed five derivative
price. The lead plaintiff asserts claims for violations of Sec- complaints in the Delaware Chancery Court. All of these derivative
tions 11 and 15 of the Securities Act, Section 10(b) of the lawsuits have been consolidated into a single action. The
Exchange Act, and Rule 10b-5 promulgated thereunder, Sec- amended consolidated complaint names 43 defendants (not
tion 20(a) of the Exchange Act, and Section 20A of the Exchange including nominal defendant AIG) who, like the New York consoli-
Act. In April 2006, the court denied the defendants’ motions to dated derivative litigation, are current and former officers and
dismiss the second amended class action complaint and the directors of AIG, as well as other entities and certain of their
Florida complaint. In December 2006, a third amended class current and former employees and directors. The factual allega-
action complaint was filed, which does not differ substantially tions, legal claims and relief sought in the Delaware action are
from the prior complaint. Fact and class discovery is currently similar to those alleged in the New York derivative actions, except
ongoing. that plaintiffs in the Delaware derivative action assert claims only
ERISA Action. Between November 30, 2004 and July 1, 2005, under state law. The court has approved agreements staying the
several Employee Retirement Income Security Act of 1974 (ERISA) derivative case pending in the Delaware Chancery Court while the
actions were filed on behalf of a purported class of participants special committee performs its work. The current stay extends
and beneficiaries of three pension plans sponsored by AIG or its until March 14, 2007.
subsidiaries. A consolidated complaint filed on September 26, An additional derivative lawsuit, filed in the Delaware Chancery
2005 alleges a class period between September 30, 2000 and Court in December 2002 against twenty directors and executives
May 31, 2005 and names as defendants AIG, the members of of AIG as well as against AIG as a nominal defendant, alleges,
AIG’s Retirement Board and the Administrative Boards of the among other things, that the directors of AIG breached the
plans at issue, and four present or former members of AIG’s fiduciary duties of loyalty and care by approving the payment of
Board of Directors. The factual allegations in the complaint are commissions to Starr and of rental and service fees to SICO and
essentially identical to those in the securities actions described the executives breached their duty of loyalty by causing AIG to
above. Plaintiffs allege that defendants violated duties under enter into contracts with Starr and SICO and their fiduciary duties
ERISA by allowing the plans to offer AIG stock as a permitted by usurping AIG’s corporate opportunity. The complaint further
investment, when defendants allegedly knew it was not a prudent alleges that the Starr agencies did not provide any services that
investment, and by failing to provide participants with accurate AIG was not capable of providing itself, and that the diversion of
information about AIG stock. AIG’s motion to dismiss was denied commissions to these entities was solely for the benefit of Starr’s
on December 12, 2006. Discovery will be consolidated with owners. The complaint also alleged that the service fees and
proceedings in the securities actions. rental payments made to SICO and its subsidiaries were improper.
Derivative Actions — Southern District of New York. Between Under the terms of a stipulation approved by the Court on
October 25, 2004 and July 14, 2005, seven separate derivative February 16, 2006, the claims against the outside independent
actions were filed in the Southern District of New York, five of which directors were dismissed with prejudice, while the claims against
were consolidated into a single action. The New York derivative the other directors were dismissed without prejudice. On Octo-
complaint contains nearly the same types of allegations made in ber 31, 2005, Messrs. Greenberg, Matthews and Smith, SICO and
the securities fraud and ERISA actions described above. The named Starr filed motions to dismiss the amended complaint. In an
defendants include current and former officers and directors of AIG, opinion dated June 21, 2006, the Court denied defendants’
as well as Marsh, SICO, Starr, ACE Limited and subsidiaries (ACE), motion to dismiss, except with respect to plaintiff’s challenge to
General Reinsurance Corporation, PwC, and certain employees or payments made to Starr before January 1, 2000. On July 21,
officers of these entity defendants. Plaintiffs assert claims for 2006, plaintiff filed its second amended complaint, which alleges
breach of fiduciary duty, gross mismanagement, waste of corporate that, between January 1, 2000 and May 31, 2005, individual
assets, unjust enrichment, insider selling, auditor breach of defendants breached their duty of loyalty by causing AIG to enter
contract, auditor professional negligence and disgorgement from into contracts with Starr and SICO and breached their fiduciary
AIG’s former Chief Executive Officer and Chief Financial Officer of duties by usurping AIG’s corporate opportunity. Starr is charged
incentive-based compensation and AIG share proceeds under with aiding and abetting breaches of fiduciary duty and unjust
Section 304 of the Sarbanes-Oxley Act, among others. Plaintiffs enrichment for its acceptance of the fees. SICO is no longer
seek, among other things, compensatory damages, corporate named as a defendant. Discovery is currently ongoing.
governance reforms, and a voiding of the election of certain AIG Policyholder Actions. After the NYAG filed its complaint against
directors. AIG’s Board of Directors has appointed a special insurance broker Marsh, policyholders brought multiple federal
committee of independent directors (special committee) to review antitrust and the Racketeer Influenced and Corrupt Organizations
the matters asserted in the operative consolidated derivative Act (RICO) class actions in jurisdictions across the nation against
complaint. The court has approved agreements staying the deriva- insurers and brokers, including AIG and a number of its subsidiar-
tive case pending in the Southern District of New York while the ies, alleging that the insurers and brokers engaged in a broad
special committee performs its work. The current stay extends until conspiracy to allocate customers, steer business, and rig bids.
March 14, 2007. These actions, including 18 complaints filed in different federal
courts naming AIG or an AIG subsidiary as a defendant, were
20 AIG 2006 Form 10-K

consolidated by the judicial panel on multi-district litigation and Brown of the District of New Jersey transferred the multi-district
transferred to the United States District Court for the District of litigation to himself. Oral argument on the renewed motions to
New Jersey for coordinated pretrial proceedings. The consolidated dismiss has been scheduled before Chief Judge Brown on
actions have proceeded in that court in two parallel actions, In re March 1, 2007. Fact discovery in the multi-district litigation is
Insurance Brokerage Antitrust Litigation (the Commercial Com- ongoing.
plaint) and In re Employee Benefit Insurance Brokerage Antitrust A number of complaints making allegations similar to those in
Litigation (the Employee Benefits Complaint, and together with the the Commercial Complaint have been filed against AIG and other
Commercial Complaint, the multi-district litigation). defendants in state and federal courts around the country. The
The plaintiffs in the Commercial Complaint are nineteen defendants have thus far been successful in having the federal
corporations, individuals and public entities that contracted with actions transferred to the District of New Jersey and consolidated
the broker defendants for the provision of insurance brokerage into the multi-district litigation. The defendants have also sought
services for a variety of insurance needs. The broker defendants to have state court actions making similar allegations stayed
are alleged to have placed insurance coverage on the plaintiffs’ pending resolution of the multi-district litigation. In one state court
behalf with a number of insurance companies named as defend- action pending in Florida, the trial court recently decided not to
ants, including AIG subsidiaries. The Commercial Complaint also grant an additional stay, but instead to allow the case to proceed.
named ten brokers and fourteen other insurers (one of which has Litigation Relating to 21st Century. Shortly after the announce-
since settled) as defendants. The Commercial Complaint alleges ment in late January 2007 of AIG’s offer to acquire the
that defendants engaged in a widespread conspiracy to allocate outstanding shares of 21st Century not already owned by AIG and
customers through ‘‘bid-rigging’’ and ‘‘steering’’ practices. The its subsidiaries, two related class actions were filed in the
Commercial Complaint also alleges that the insurer defendants Superior Court of California, Los Angeles County against AIG,
permitted brokers to place business with AIG subsidiaries through 21st Century and the individual members of 21st Century’s Board
wholesale intermediaries affiliated with or owned by those same of Directors, two of whom are current executive officers of AIG.
brokers rather than placing the business with AIG subsidiaries The actions were filed purportedly on behalf of the minority
directly. Finally, the Commercial Complaint alleges that the insurer shareholders of 21st Century and assert breaches of fiduciary
defendants entered into agreements with broker defendants that duty in connection with the AIG proposal. The complaints allege
tied insurance placements to reinsurance placements in order to that the proposed per share price is unfair and seek preliminary
provide additional compensation to each broker. Plaintiffs assert and permanent injunctive relief to enjoin the consummation of the
that the defendants violated the Sherman Antitrust Act, RICO, the proposed transaction.
antitrust laws of 48 states and the District of Columbia, and are SICO. In July, 2005, SICO filed a complaint against AIG in the
liable under common law breach of fiduciary duty and unjust Southern District of New York, claiming that AIG had refused to
enrichment theories. Plaintiffs seek treble damages plus interest provide SICO access to certain artwork and asked the court to
and attorneys’ fees as a result of the alleged RICO and Sherman order AIG immediately to release the property to SICO. AIG filed
Act violations. an answer denying SICO’s allegations and setting forth defenses
The plaintiffs in the Employee Benefits Complaint are nine to SICO’s claims. In addition, AIG filed counterclaims asserting
individual employees and corporate and municipal employers breach of contract, unjust enrichment, conversion, breach of
alleging claims on behalf of two separate nationwide purported fiduciary duty, a constructive trust and declaratory judgment,
classes: an employee class and an employer class that acquired relating to SICO’s breach of its commitment to use its AIG shares
insurance products from the defendants from August 26, 1994 to only for the benefit of AIG and AIG employees. Fact and expert
the date of any class certification. The Employee Benefits discovery has been substantially concluded and briefing on SICO’s
Complaint names AIG, as well as eleven brokers and five other motion for summary judgment is underway.
insurers, as defendants. The activities alleged in the Employee
Benefits Complaint, with certain exceptions, track the allegations Effect on AIG
of contingent commissions, bid-rigging and tying made in the
In the opinion of AIG management, AIG’s ultimate liability for the
Commercial Complaint.
unresolved matters referred to above is not likely to have a
On October 3, 2006, Judge Hochberg of the District of New
material adverse effect on AIG’s consolidated financial condition,
Jersey reserved in part and denied in part motions filed by the
although it is possible that the effect would be material to AIG’s
insurer defendants and broker defendants to dismiss the multi-
consolidated results of operations for an individual reporting
district litigation. The Court also ordered the plaintiffs in both
period.
actions to file supplemental statements of particularity to elabo-
rate on the allegations in their complaints. Plaintiffs filed their
Item 4.supplemental statements on October 25, 2006, and the AIG
Submission of Matters to a Vote of Securitydefendants, along with other insurer and broker defendants in the
Holderstwo consolidated actions, filed renewed motions to dismiss on
November 30, 2006. Briefing has been completed on the renewed There were no matters submitted to a vote of security holders
motions to dismiss, as well as plaintiffs’ motion for class during the fourth quarter of 2006.
certification in both cases. On February 16, 2007, Chief Judge
Form 10-K 2006 AIG 21

Part II
For a discussion of certain restrictions on the payment ofItem 5.
dividends to AIG by some of its insurance subsidiaries, seeMarket for the Registrant’s Common Equity,
Note 11 of Notes to Consolidated Financial Statements.Related Stockholder Matters and Issuer
Purchases of Equity Securities The following table summarizes AIG’s stock repurchases
for the three-month period ended December 31, 2006:AIG’s common stock is listed on the New York Stock Exchange, as
well as on the stock exchanges in London, Paris, Switzerland and Maximum
Tokyo. Number of
Total Shares
Number of that MayThe following table presents the high and low closing
Shares Yet Be
sales prices and the dividends paid per share of AIG’s Purchased Purchased
common stock on the New York Stock Exchange Compos- Average as Part of Under the
Price Publicly Plans orite Tape, for each quarter of 2006 and 2005. Total Number Paid Announced Programs
of Shares per Plans or at End of
2006 2005
Period Purchased(a)(b)
Share Programs Month(b)
Dividends Dividends
High Low Paid High Low Paid October 1 - 31, 2006 — $ — — 36,542,700
November 1 - 30,
First quarter $70.83 $65.35 $0.150 $73.46 $54.18 $0.125
2006 — — — 36,542,700
Second
December 1 - 31,
quarter 66.54 58.67 0.150 58.94 49.91 0.125
2006 — — — 36,542,700
Third quarter 66.48 57.76 0.165 63.73 56.00 0.150
Total — $ — —Fourth
quarter 72.81 66.30 0.165 64.40 60.43 0.150
(a) Does not include 165,190 shares delivered or attested to in satisfac-
tion of the exercise price by holders of AIG employee stock optionsThe approximate number of holders of common stock as of
exercised during the three months ended December 31, 2006 or
January 31, 2007, based upon the number of record holders, was 17,000 shares purchased by ILFC to satisfy obligations under em-
58,000. ployee benefit plans.
Subject to the dividend preference of any of AIG’s serial (b) On July 19, 2002, AIG announced that its Board of Directors had
authorized the open market purchase of up to 10 million shares ofpreferred stock that may be outstanding, the holders of shares of
common stock. On February 13, 2003, AIG announced that its Boardcommon stock are entitled to receive such dividends as may be
of Directors had expanded the existing program through the authoriza-
declared by AIG’s Board of Directors from funds legally available tion of an additional 50 million shares. The purchase program has no
therefor. set expiration or termination date. In February 2007, AIG’s Board of
Directors increased the repurchase program by authorizing the repur-In February 2007, AIG’s Board of Directors adopted a new
chase of shares with an aggregate purchase price of $8 billion.
dividend policy, to take effect with the dividend to be declared in
the second quarter of 2007, providing that under ordinary AIG’s table of equity compensation plans previously approved
circumstances, AIG’s plan will be to increase its common stock by security holders and equity compensation plans not previously
dividend by approximately 20 percent annually. The payment of approved by security holders will be included in AIG’s Definitive
any dividend, however, is at the discretion of AIG’s Board of Proxy Statement in connection with its 2007 Annual Meeting of
Directors, and the future payment of dividends will depend on Shareholders, which will be filed with the SEC within 120 days of
various factors, including the performance of AIG’s businesses, AIG’s fiscal year end.
AIG’s consolidated financial position, results of operations and
liquidity and the existence of investment opportunities.
22 AIG 2006 Form 10-K

companies comprised of The Allstate Corporation, The ChubbPerformance Graph
Corporation, CNA Financial Corporation, The Hartford Financial
The following Performance Graph compares the cumulative total
Services Group, Inc., Lincoln National Corporation, MetLife, Inc.,
shareholder return on AIG common stock for a five-year period
Prudential Financial, Inc. and The Travelers Companies, Inc. (the
(December 31, 2001 to December 31, 2006) with the cumulative
Old Peer Group), to which AIG compared itself in the Performance
total return of the Standard & Poor’s 500 stock index (which
Graph included in its Definitive Proxy Statement in connection with
includes AIG) and a peer group of companies (the New Peer
AIG’s 2006 Annual Meeting of Shareholders. ACE Limited, Aflac
Group) consisting of nine insurance companies to which AIG
Incorporated, and XL Capital Ltd have been added to the New
compares its business and operations: ACE Limited, Aflac Incorpo-
Peer Group to reflect their status as significant competitors of
rated, The Chubb Corporation, The Hartford Financial Services
AIG’s business. The Allstate Corporation and CNA Financial
Group, Inc., Lincoln National Corporation, MetLife, Inc., Prudential
Corporation have been excluded because AIG no longer believes
Financial, Inc., The Travelers Companies, Inc. (formerly The
these companies to be comparable to AIG in its overall business
St. Paul Travelers Companies, Inc.) and XL Capital Ltd. The
and operations. Dividend reinvestment has been assumed and
Performance Graph also compares the cumulative total share-
returns have been weighted to reflect relative stock market
holder return on AIG common stock to the return of a group of
capitalization.
FIVE-YEAR CUMULATIVE TOTAL SHAREHOLDER RETURNS
Value of $100 Invested on December 31, 2001
$0
$50
$100
$150
$200
$250
2001 2002 2003 2004 2005 2006
Years Ending
AMERICAN INTERNATIONAL GROUP S&P 500 INDEX NEW PEER GROUP OLD PEER GROUP
2001 2002 2003 2004 2005 2006
AIG $100.00 $73.07 $ 84.04 $ 83.61 $ 87.67 $ 92.97
S&P 500 100.00 77.90 100.25 111.15 116.61 135.03
New Peer Group 100.00 86.49 109.07 126.05 155.01 179.36
Old Peer Group 100.00 88.84 111.14 134.80 164.51 196.58
Form 10-K 2006 AIG 23

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) 2006 2005 2004 2003 2002
Revenues(a)(b)(c)
:
Premiums and other considerations $ 74,083 $ 70,209 $ 66,625 $ 54,802 $ 44,289
Net investment income 25,292 22,165 18,465 15,508 13,593
Realized capital gains (losses) 106 341 44 (442) (1,653)
Other income 13,713 16,190 12,532 9,553 9,942
Total revenues 113,194 108,905 97,666 79,421 66,171
Benefits and expenses:
Incurred policy losses and benefits 59,706 63,558 58,212 46,034 40,005
Insurance acquisition and other operating expenses 31,801 30,134 24,609 21,480 18,358
Total benefits and expenses 91,507 93,692 82,821 67,514 58,363
Income before income taxes, minority interest and cumulative
effect of accounting changes(b)(c)(d)(e)
21,687 15,213 14,845 11,907 7,808
Income taxes 6,537 4,258 4,407 3,556 1,919
Income before minority interest and cumulative effect of
accounting changes 15,150 10,955 10,438 8,351 5,889
Minority interest (1,136) (478) (455) (252) (160)
Income before cumulative effect of accounting changes 14,014 10,477 9,983 8,099 5,729
Cumulative effect of accounting changes, net of tax 34 — (144) 9 —
Net income 14,048 10,477 9,839 8,108 5,729
Earnings per common share:
Basic
Income before cumulative effect of accounting changes 5.38 4.03 3.83 3.10 2.20
Cumulative effect of accounting changes, net of tax 0.01 — (0.06) — —
Net income 5.39 4.03 3.77 3.10 2.20
Diluted
Income before cumulative effect of accounting changes 5.35 3.99 3.79 3.07 2.17
Cumulative effect of accounting changes, net of tax 0.01 — (0.06) — —
Net income 5.36 3.99 3.73 3.07 2.17
Dividends declared per common share 0.65 0.63 0.29 0.24 0.18
Total assets 979,414 853,051 801,007 675,602 561,131
Long-term debt and commercial paper(f)
Guaranteed by AIG 17,126 10,425 8,498 7,469 7,144
Liabilities connected to trust preferred stock 1,440 1,391 1,489 1,682 —
Matched/not guaranteed by AIG 130,113 98,033 86,912 71,198 63,866
Total liabilities 877,546 766,548 721,135 606,180 500,696
Shareholders’ equity $101,677 $ 86,317 $ 79,673 $ 69,230 $ 58,303
(a) Represents the sum of General Insurance net premiums earned, Life Insurance & Retirement Services GAAP premiums and net investment income,
(b) Includes the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains
and losses. For 2006, 2005, 2004, 2003 and 2002, respectively, the effect was $(1.86) billion, $2.02 billion, $385 million, $(1.50) billion and
$(216) million in revenues and $(1.86) billion, $2.02 billion, $671 million, $(1.22) billion and $(58) million in operating income. These amounts result
primarily from interest rate and foreign currency derivatives that are economically hedging available for sale securities and borrowings.
(c) Includes the effect of out of period adjustments related to the accounting for certain interests in unit investment trusts. For 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) Includes current year catastrophe-related losses of $3.28 billion in 2005 and $1.16 billion in 2004. There were no significant catastrophe-related
losses in 2006.
(e) Operating income was reduced by fourth quarter charges of $1.8 billion, $850 million and $2.1 billion for 2005, 2004 and 2002, 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.
(f) Including that portion of long-term debt maturing in less than one year. See also Note 9 of Notes to Consolidated Financial Statements.
24 AIG 2006 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.
Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide the reader
a narrative explanation of AIG’s operations, financial condition and liquidity and certain other significant matters.
Index Page Page
Cautionary Statement Regarding Asset Management Operations 67
Projections and Other Information About Other Operations 68
Future Events 25 Capital Resources and Liquidity 69
Overview of Operations and Business Results 26 Borrowings 69
Outlook 26 Shareholders’ Equity 76
Consolidated Results 27 Liquidity 77
Segment Results 29 Invested Assets 79
Capital Resources 30
Risk Management 86Liquidity 30
Overview 86
Critical Accounting Estimates 30 Corporate Risk Management 86
Operating Review 31 Credit Risk Management 87
General Insurance Operations 31 Market Risk Management 88
General Insurance Results 32 Operational Risk Management 89
Reserve for Losses and Loss Expenses 37 Insurance Risk Management 90
Life Insurance & Retirement Services Segment Risk Management 91
Operations 51 Insurance Operations 91
Life Insurance & Retirement Services Results 52 Financial Services 94
Deferred Policy Acquisition Costs Asset Management 97
Financial Services Operations 63 Economic Capital 97
Financial Services Results 63
Recent Accounting Standards 98Aircraft Leasing 63
Capital Markets 64
Consumer Finance 65
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 position, results of operations, cash flows and liquidity, the effect of credit rating changes on AIG’s businesses and
competitive position, the unwinding and resolving of various relationships between AIG and SICO and AIG’s strategy for growth, product
development, market position, financial results and reserves. It is possible that AIG’s actual results and financial condition may differ,
possibly materially, from the anticipated results and financial condition indicated in these projections and statements. Factors that could
cause AIG’s actual results to differ, possibly materially, from those in the specific projections and statements are discussed throughout this
Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 1A. Risk Factors of 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.
Form 10-K 2006 AIG 25

Financial Condition and Results of Operations Continued
quired Central Insurance Co., Ltd., a leading general insuranceOverview of Operations and Business Results
company in Taiwan.
AIG identifies its reportable segments by product or service line,
consistent with its management structure. AIG’s major product Outlook
and service groupings are General Insurance, Life Insurance &
The commercial property and casualty insurance industry has
Retirement Services, Financial Services and Asset Management.
historically experienced cycles of price erosion followed by rate
AIG’s operations in 2006 were conducted by its subsidiaries
strengthening as a result of catastrophe or other significant
through these segments. Through these segments, AIG provides
losses that affect the overall capacity of the industry to provide
insurance, financial and investment products and services to both
coverage. Despite industry price erosion in commercial lines, AIG
businesses and individuals in more than 130 countries and
expects to continue to identify profitable opportunities and build
jurisdictions. This geographic, product and service diversification
attractive new general insurance businesses as a result of AIG’s
is one of AIG’s major strengths and sets it apart from its
broad product line and extensive distribution networks in the U.S.
competitors. AIG’s Other category consists of items not allocated
and abroad. Workers compensation remains under considerable
to AIG’s operating segments.
pricing pressure, as statutory rates continue to decline. Rates for
AIG’s subsidiaries serve commercial, institutional and individ-
D&O insurance also continue to decline due to competitive
ual customers through an extensive property-casualty and life
pressures. There can be no assurance that price erosion will not
insurance and retirement services network. In the United States,
become more widespread or that AIG’s profitability will not
AIG companies are the largest underwriters of commercial and
deteriorate from current levels in major commercial lines, as well
industrial insurance and are among the largest life insurance and
as in personal lines and specialty coverages, such as mortgage
retirement services operations as well. AIG’s Financial Services
guaranty, where the loss ratio has increased due to softening in
businesses include commercial aircraft and equipment leasing,
the U.S. housing market and the weakening performance of non-
capital markets operations and consumer finance, both in the
traditional mortgage products. In Foreign General, opportunities
United States and abroad. AIG also provides asset management
for growth exist in the consumer lines due to increased demand in
services to institutions and individuals. As part of its spread-
emerging markets and the trend toward privatization of health
based business activities, AIG issues various debt instruments in
insurance. Growth in the Personal Lines marketplace remains
the public and private markets.
challenged from flat renewal pricing, consumer price shopping and
AIG’s operating performance reflects implementation of various
increased advertising spending by market leaders. However, the
long-term strategies and defined goals in its various operating
high net worth market continues to provide opportunities for
segments. A primary goal of AIG in managing its General
growth as a result of AIG’s innovative products and services
Insurance operations is to achieve an underwriting profit. To
specifically designed for that market. AIG expects that the
achieve this goal, AIG must be disciplined in its risk selection,
acquisition of the remaining interest in 21st Century will enhance
and premiums must be adequate and terms and conditions
AIG’s ability to grow the Personal Lines business while gaining
appropriate to cover the risks accepted and expenses incurred.
efficiencies of scale.
Expense efficiency is also a primary goal of AIG.
Losses caused by catastrophes can fluctuate widely from year
A central focus of AIG operations in recent years has been the
to year, making comparisons of results more difficult. With
development and expansion of distribution channels. In 2006, AIG
respect to catastrophe losses, AIG believes that it has taken
continued to expand its distribution channels, which now include
appropriate steps, such as careful exposure selection and
banks, credit card companies, television-media home shopping,
adequate reinsurance coverage, to reduce the effect of possible
affinity groups, direct response, worksite marketing and
future losses. The occurrence of one or more catastrophic events
e-commerce.
of unanticipated frequency or severity, such as a terrorist attack,
AIG patiently builds relationships in markets around the world
earthquake or hurricane, that causes insured losses, however,
where it sees long-term growth opportunities. For example, the
could have a material adverse effect on AIG’s results of
fact that AIG has the only wholly owned foreign life insurance
operations, liquidity or financial condition.
operations in eleven cities in China is the result of relationships
AIG’s operations in China continue to expand, but AIG expects
developed over nearly 30 years. AIG’s more recent extensions of
competition in China to remain strong and AIG’s success in China
operations into India, Vietnam, Russia and other emerging
will depend on its ability to execute its growth strategy.
markets reflect the same growth strategy. Moreover, AIG believes
In India, AIG expects to grow all segments, both organically
in investing in the economies and infrastructures of these
and through acquisitions and joint ventures.
countries and growing with them. When AIG companies enter a
In Japan, AIG expects its Life Insurance & Retirement Services
new jurisdiction, they typically offer both basic protection and
earnings growth may be challenged by increased competition in
savings products. As the economies evolve, AIG’s products evolve
light of a new industry-wide mortality table, the continued runoff
with them, to more sophisticated and investment-oriented models.
of the older, higher-margin in-force business of AIG Star Life and
Growth for AIG may be generated internally as well as through
AIG Edison Life and lower consumer demand for certain accident
acquisitions which both fulfill strategic goals and offer adequate
and health products in light of tax law changes. The flat yield
return on capital. During 2006, AIG acquired Travel Guard
curve and declining Yen foreign exchange environment may
International, one of the nation’s leading providers of travel
continue to constrain certain fixed annuity production. To leverage
insurance programs and emergency travel assistance, and ac-
26 AIG 2006 Form 10-K

AIG’s leadership position in the distribution of annuities through variable annuity markets. The group annuity market is undergoing
banks in Japan, ALICO launched new life products in this a transition from group annuities to mutual fund products that
distribution channel. Although ALICO’s direct marketing activities have lower profit margins.
in Japan could experience a contraction while it re-positions its Globally, heightened regulatory scrutiny of financial services
brand and products in a very competitive market, AIG expects that companies in many jurisdictions has the potential to affect future
further deregulation will provide additional growth opportunities. In financial results through higher compliance costs. This is particu-
addition, AIG expects that the planned integration of AIG Star Life larly true in Japan and Southeast Asia where financial institutions
and AIG Edison Life will provide enhanced distribution opportuni- have received remediation orders affecting consumer and policy-
ties and scale economies with an anticipated completion date of holder rights.
2009. Within Financial Services, demand for ILFC’s modern, fuel
AIG is a leader in direct marketing through sponsors and in the efficient aircraft remains strong, and ILFC plans to increase its
broad market in Japan and Korea, and AIG is investing in fleet by purchasing 83 aircraft in 2007. However, ILFC’s margins
expanding distribution channels in India, Korea and Vietnam. may be adversely affected by further increases in interest rates.
Through new operations in Bahrain designed to comply with AIGFP expects opportunities for growth across its product seg-
Islamic law, AIG is tapping into a growing market. Islamic ments, but AIGFP is a transaction-oriented business, and its
insurance, called Takaful, is an alternative to conventional insur- operating results will depend to a significant extent on actual
ance based on the concept of mutual assistance through pooling transaction flow, which can be affected by market conditions and
of resources. other variables outside its control. AIG continues to explore
Domestically, AIG plans to continue expansion of its Life opportunities to expand its Consumer Finance operations into new
Insurance & Retirement Services businesses through direct foreign markets. Consumer Finance operations overseas were
marketing and independent agent distribution channels. The aging negatively affected in 2006 by industry-wide credit deterioration in
population in the U.S. provides a growth opportunity for a variety the Taiwan credit card market, however, and operating results in
of products, including longevity, guaranteed income and supple- the U.S. could be affected by the residential housing market,
mental accident and health products. Certain other demographic interest rates and unemployment.
groups that have traditionally been underserved provide additional The GIC portfolio, which is reported within the Asset Manage-
growth opportunities. The home service operation, a slow growth ment segment, continues to run off and the MIP has replaced the
business, has not met business objectives, although its cash flow GIC program as AIG’s principal institutional spread-based invest-
has been steady. Domestic group life/health operations continue ment activity. The MIP program is expected to continue to grow in
to face competitors with greater scale in group benefits. At the 2007. Because the asset mix under the MIP does not include the
end of 2006, AIG exited the financial institutions credit life alternative investments utilized in the GIC program, however, AIG
business in the U.S. as a result of competition from bank does not expect that the income growth in the MIP will offset the
products and low profit margins. The individual fixed annuities runoff in the GIC portfolio for the foreseeable future.
business will continue to be challenged due to the interest rate For a description of important factors that may affect the
environment and increased competition from bank products, while operations and initiatives described above, see Item 1A. Risk
lower margin variable annuity products with living benefits will Factors.
continue to be the product of consumer choice in the individual
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, 2006, 2005 and 2004:
(in millions) 2006 2005 2004
Total revenues $113,194 $108,905 $97,666
Income before income taxes, minority interest and cumulative effect of accounting changes 21,687 15,213 14,845
Net income $ 14,048 $ 10,477 $ 9,839
FAS 133, decreasing revenues by $1.8 billion in 2006 and2006 and 2005 Comparison
increasing revenues by $2.01 billion in 2005.The 4 percent growth in revenues in 2006 was primarily
Income before income taxes, minority interest and cumulativeattributable to the growth in net premiums earned and net
effect of accounting changes increased 43 percent in 2006investment income from General Insurance operations and growth
compared to 2005, reflecting higher General Insurance and Lifein Life Insurance & Retirement Services GAAP premiums and net
Insurance & Retirement Services operating income. These in-investment income. Revenues in the Financial Services segment
creases were partially offset by lower Financial Services operatingdeclined as a result of the effect of hedging activities for AIGFP
income reflecting the effects of hedging activities that did notthat did not qualify for hedge accounting treatment under
qualify for hedge accounting treatment under FAS 133. Results in
Form 10-K 2006 AIG 27

2005 reflected the negative effect of $3.28 billion (pre-tax) in stemming from deferred tax adjustments in Foreign Life of
catastrophe-related losses incurred that year. Net income in 2005 $190 million ($124 million after tax), an increase in insurance
also reflected the charges related to regulatory settlements, as operating expenses of $61 million ($40 million after tax) within
described in Item 3. Legal Proceedings, and the fourth quarter Foreign Life for corrections of expense allocations to certain par
charge resulting from the annual review of General Insurance loss fund accounts, and a $79 million ($51 million after tax) charge
and loss adjustment reserves. related to purchases of life insurance policies for AIG’s life
settlements portfolio that were issued by AIG subsidiaries.
During 2006, AIG identified and recorded out of period2005 and 2004 Comparison
adjustments related to the accounting for certain interests in unit
Revenues grew 12 percent in 2005 compared to 2004 primarily
investment trusts in accordance with FIN 46(R), ‘‘Consolidation of
due to the growth in net premiums earned from General Insurance
Variable Interest Entities’’ and APB Opinion No. 18, ‘‘The Equity
operations as well as growth in both General Insurance and Life
Method of Accounting for Investments in Common Stock.’’ These
Insurance & Retirement Services net investment income and Life
investments had previously been accounted for as available for
Insurance & Retirement Services GAAP premiums. Hedging activi-
sale securities, with changes in market values being reflected in
ties for AIGFP that did not qualify for hedge accounting treatment
other comprehensive income, net of deferred income taxes.
under FAS 133 caused an increase in Financial Services revenues
Beginning with the second quarter of 2006, the changes in
of $2.01 billion in 2005 and a decrease of $122 million in 2004.
market values are included in net investment income. The
AIG’s income before income taxes, minority interest and
adjustments decreased unrealized appreciation (depreciation) of
cumulative effect of accounting changes increased 2 percent in
investments — net of reclassification adjustments, and the related
2005 compared to 2004. Life Insurance & Retirement Services,
deferred income tax benefit (expense), in the Consolidated
Financial Services and Asset Management operating income gains
Statement of Comprehensive Income (Loss) by approximately
accounted for the increase over 2004 in both pretax income and
$659 million and approximately $231 million, respectively, and
net income. Offsetting these gains was the effect of the charges
increased net investment income by $844 million, increased
related to regulatory settlements.
Incurred policy losses and benefits (related to certain participating
policyholder funds) by $71 million, increased Income taxes by
Remediation and Other Items $231 million and increased minority interest expense by $114
million in the Consolidated Statement of Income. There was noThroughout 2006, as part of its continuing remediation efforts,
effect on Total shareholders’ equity at December 31, 2006 orAIG recorded out of period adjustments. The net effect of out of
December 31, 2005.period adjustments relating to prior years increased 2006 net income
Results for 2006 were negatively affected by a one-timeby $65 million. The more significant adjustments included increases
charge relating to the Starr tender offer ($54 million before andin unit investment trust income of $773 million ($428 million after
after tax) and an additional allowance for losses in AIG Credittax) (more fully described below) and other expenses of $356 million
Card Company (Taiwan) ($94 million before and after tax).($231 million after tax), and a decrease in revenues for certain
The effective income tax rate increased from 28.0 percent forderivative transactions of $300 million ($145 million after tax).
2005 to 30.1 percent for 2006, reflecting changes in the sourcesDuring the fourth quarter, as part of its ongoing remediation
of foreign taxable income, the effect of the phase out of synfuelefforts, AIG recorded out of period adjustments. These adjust-
tax credits, the effect of consolidating certain limited partnershipsments collectively increased net income in the fourth quarter by
and a reduction in the proportion of total income derived from tax$56 million but were offset by fourth quarter charges to expense
exempt income, which was partially offset by the aforementionedwithin Domestic Life for the adverse ruling in the Superior National
out of period income tax adjustments.arbitration of $125 million ($81 million after tax) and a charge of
There were no significant catastrophe-related losses for the$66 million ($43 million after tax) in connection with the exit of
year ended December 31, 2006.the financial institutions credit life business. The more significant
out of period adjustments included the following: a decrease in
The following table summarizes the net effect of
income tax expense of $181 million relating to AIG’s ongoing
catastrophe-related losses for the years ended
remediation of internal controls over income tax accounting, an
December 31, 2005 and 2004.
increase in other expenses of $167 million ($109 million after
(in millions) 2005 2004tax) relating to AIG’s remediation of internal controls over
reconciliation of certain balance sheet accounts, an increase in Pretax* $3,280 $1,155
incurred policy losses and benefits of $103 million ($67 million
Net of tax and minority interest 2,109 729
after tax) in Domestic General Insurance for corrections of certain
* Includes $312 million and $96 million in catastrophe-related losses fromreserves for losses and loss expenses, a reduction in incurred
partially owned companies in 2005 and 2004, respectively.
policy benefits in the Foreign Life participating policyholder fund
28 AIG 2006 Form 10-K

Segment Results (h) Includes consolidation and elimination adjustments which increased
revenues and operating income by $296 million and $74 million,
The following table summarizes the operations of each respectively, in 2006.
principal segment for the years ended December 31, (i) Represents income before income taxes, minority interest, and cumula-
tive effect of accounting changes.2006, 2005 and 2004. See also Note 2 of Notes to
Consolidated Financial Statements. (j) Includes current year catastrophe-related losses of $3.28 billion and
$1.16 billion in 2005 and 2004, respectively. There were no significant
(in millions) 2006 2005 2004 catastrophe-related losses in 2006. Includes additional losses incurred
and net reinstatement premiums related to prior year catastrophes of
Revenues(a)
: $165 million and $292 million in 2006 and 2005, respectively.
General Insurance(b)(c)
$ 49,206 $ 45,174 $41,961
(k) Includes current year catastrophe-related losses from unconsolidated
Life Insurance & subsidiaries of $312 million and $96 million in 2005 and 2004. There
Retirement Services(c)(d)
50,163 47,376 43,402 were no significant catastrophe-related losses in 2006.
Financial Services(e)(f)
8,010 10,525 7,495
General InsuranceAsset Management(g)
5,814 5,325 4,714
Other(h)
1 505 94
AIG’s General Insurance operations provide property and casualty
Total $113,194 $108,905 $97,666 products and services throughout the world. The increase in
General Insurance operating income in 2006 compared to 2005Operating Income(a)(i)(j)
:
was primarily attributable to an improvement in underwritingGeneral Insurance(c)
$ 10,412 $ 2,315 $ 3,177
Life Insurance & results for DBG, including the absence of catastrophe-related
Retirement Services(c)
10,032 8,904 7,925 losses, which amounted to $2.89 billion in 2005. Operating
Financial Services(f)
524 4,276 2,180 income for 2006 also reflected higher net investment income,
Asset Management 2,346 2,253 2,125 including the effect of the out of period adjustments related to the
Other(h)(k)
(1,627) (2,535) (562) accounting for certain interests in unit investment trusts.
Total $ 21,687 $ 15,213 $14,845
(a) Includes the effect of hedging activities that did not qualify for hedge
accounting treatment under FAS 133, including the related foreign AIG’s Life Insurance & Retirement Services operations provide
exchange gains and losses. For 2006, 2005 and 2004, respectively, insurance, financial and investment products throughout the world.
the effect was $(1.86) billion, $2.02 billion and $385 million in
Foreign operations contributed approximately 68 percent, 59 per-revenues and $(1.86) billion, $2.02 billion and $671 million in
cent and 61 percent of AIG’s Life Insurance & Retirementoperating income. These amounts result primarily from interest rate
and foreign currency derivatives that are hedging available for sale Services operating income in 2006, 2005 and 2004, respectively.
securities and borrowings. Life Insurance & Retirement Services operating income in-
(b) Represents the sum of General Insurance net premiums earned, net creased 13 percent in 2006 compared to 2005 on higher GAAP
investment income and realized capital gains (losses).
premiums and an increase in net investment income. Net
(c) Includes the effect of out of period adjustments related to the
investment income in 2006 included the effect of an out of periodaccounting for certain interests in unit investment trusts. For 2006, the
adjustment related to the accounting for certain interests in uniteffect was an increase of $490 million in both revenues and operating
income for General Insurance and an increase of $240 million and investment trusts. Realized capital gains included in revenues and
$169 million in revenues and operating income, respectively, for Life operating income were $88 million in 2006 compared to realized
Insurance & Retirement Services.
capital losses of $158 million in 2005. Results for 2006 were
(d) Represents the sum of Life Insurance & Retirement Services GAAP
particularly strong in the Foreign Life operations that were helpedpremiums, net investment income and realized capital gains (losses).
by increased net investment income, higher realized gains andIncluded in realized capital gains (losses) and operating income is the
effect of hedging activities that did not qualify for hedge accounting lower acquisition costs. Domestic Life Insurance & Retirement
treatment under FAS 133 and the application of FAS 52, of $355 mil-
Services operating income declined from the prior year on lower
lion, $(495) million and $(140) million for 2006, 2005 and 2004,
realized gains, the charge discussed above relating to therespectively.
Superior National arbitration and the exiting of the financial(e) Represents interest, lease and finance charges.
institutions credit insurance business.(f) Includes the effect of hedging activities that did not qualify for hedge
accounting treatment under FAS 133, including the related foreign
Financial Servicesexchange gains and losses. For 2006, 2005 and 2004, respectively,
the effect was $(1.82) billion, $2.01 billion, and $(122) million in both
AIG’s Financial Services subsidiaries engage in diversified activi-revenues and operating income for Capital Markets. These amounts
result primarily from interest rate and foreign currency derivatives that ties including aircraft and equipment leasing, capital markets,
are economically hedging available for sale securities and borrowings. consumer finance and insurance premium finance.
For 2004, the effect was $(27) million in operating income for Aircraft
Financial Services operating income decreased in 2006 com-Leasing. During 2006 and 2005, Aircraft Leasing derivative gains and
pared to 2005 primarily due to the effects of hedging activitieslosses were reported as part of AIG’s Other category, and were not
reported in Aircraft Leasing operating income. that did not qualify for hedge accounting treatment under
(g) Represents net investment income with respect to spread-based FAS 133. AIG is reinstituting hedge accounting in the first quarter
products and management and advisory fees.
of 2007 for AIGFP. In addition to the effects of FAS 133,
fluctuations in revenues and operating income from period to
Form 10-K 2006 AIG 29

period are not unusual because of the transaction-oriented nature Critical Accounting Estimates
of Capital Markets operations.
AIG considers its most critical accounting estimates to be those
relating to reserves for losses and loss expenses, future policyAsset Management
benefits for life and accident and health contracts, recoverability
AIG’s Asset Management operations include institutional and retail of DAC, estimated gross profits for investment-oriented products,
asset management, broker-dealer services and institutional fair value determinations for certain Capital Markets assets and
spread-based investment businesses. The MIP has replaced the liabilities, other-than-temporary declines in the value of invest-
GIC program as AIG’s principal spread-based investment activity. ments and flight equipment recoverability. These accounting
Asset Management operating income increased 4 percent in estimates require the use of assumptions about matters, some of
2006 compared to 2005 due primarily to growth in asset which are highly uncertain at the time of estimation. To the extent
management fees within Institutional Asset Management and actual experience differs from the assumptions used, AIG’s
income from the MIP. These increases were partially offset by the results of operations would be directly affected.
continued runoff of GIC balances, spread compression in the Throughout this Management’s Discussion and Analysis of
remaining GIC portfolio as well as decreased performance-based Financial Condition and Results of Operations, AIG’s critical
fees. Gains and losses arising from the consolidation of certain accounting estimates are discussed in detail. The major catego-
variable interest entities (VIEs) and partnerships are included in ries for which assumptions are developed and used to establish
operating income, but are offset in minority interest expense, each critical accounting estimate are highlighted below. For a
which is not a component of operating income. discussion regarding the significant accounting policies relating to
these estimates, see Note 1 of Notes to Consolidated Financial
Capital Resources Statements.
At December 31, 2006, AIG had total consolidated shareholders’
Reserves for Losses and Loss Expenses (General Insurance):
equity of $101.68 billion and total consolidated borrowings of
( Loss trend factors: used to establish expected loss ratios for$148.68 billion. At that date, $131.55 billion of such borrowings
subsequent accident years based on premium rate adequacywere not guaranteed by AIG, were matched borrowings by AIG or
and the projected loss ratio with respect to prior accidentAIGFP, or represented liabilities connected to trust preferred
years.stock.
( Expected loss ratios for the latest accident year: in this case,AIG did not purchase shares of its common stock under its
accident year 2006 for the year end 2006 loss reservecommon stock repurchase authorization during 2006. In February
analysis. For low-frequency, high-severity classes such as2007, AIG’s Board of Directors increased the repurchase program
excess casualty, expected loss ratios generally are utilized forby authorizing the repurchase of shares with an aggregate
at least the three most recent accident years.purchase price of $8 billion.
( Loss development factors: used to project the reported lossesIn 2007, AIG expects to issue capital securities in one or more
for each accident year to an ultimate amount.series. The proceeds will be used to repurchase shares of
( Reinsurance recoverable on unpaid losses: the expected recov-common stock or to otherwise improve the efficiency of AIG’s
eries from reinsurers on losses that have not yet beencapital structure.
reported and/or settled.
Liquidity
Future Policy Benefits for Life and Accident and Health Contracts
AIG manages liquidity at both the subsidiary and parent company (Life Insurance & Retirement Services):
levels. At December 31, 2006, AIG’s consolidated invested
( Interest rates: which vary by geographical region, year of
assets, primarily held by its subsidiaries, included $26.8 billion in
issuance and products.
cash and short-term investments. Consolidated net cash provided
( Mortality, morbidity and surrender rates: based upon actual
from operating activities in 2006 amounted to $6.8 billion. At the
experience by geographical region modified to allow for variation
parent company level, liquidity management activities are con-
in policy form, risk classification and distribution channel.
ducted in a manner to preserve and enhance funding stability,
flexibility, and diversity through the full range of potential operating
Estimated Gross Profits (Life Insurance & Retirement Services):environments and market conditions. AIG’s primary sources of
( Estimated gross profits: to be realized over the estimatedcash flow are dividends and other payments from its regulated
duration of the contracts (investment-oriented products) affectand unregulated subsidiaries, as well as issuances of debt
the carrying value of DAC, unearned revenue liability andsecurities. Primary uses of cash flow are for debt service,
associated amortization patterns under FAS 97 and Salessubsidiary funding and shareholder dividend payments. Manage-
Inducement Assets under SOP 03-1. Estimated gross profitsment believes that AIG’s liquid assets, cash provided by opera-
include investment income and gains and losses on invest-tions and access to the capital markets will enable it to meet its
ments less required interest, actual mortality and otheranticipated cash requirements, including the funding of increased
expenses.dividends under AIG’s new dividend policy and repurchases of
common stock.
30 AIG 2006 Form 10-K

Deferred Policy Acquisition Costs (Life Insurance & Retirement Flight Equipment — Recoverability (Financial Services):
Services): ( Expected undiscounted future net cash flows: based upon
( Recoverability: based on current and future expected profitabil- current lease rates, projected future lease rates and estimated
ity, which is affected by interest rates, foreign exchange rates, terminal values of each aircraft based on third party
mortality experience, and policy persistency. information.
Deferred Policy Acquisition Costs (General Insurance): Operating Review
( Recoverability and eligibility: based upon the current terms and General Insurance Operations
profitability of the underlying insurance contracts.
AIG’s General Insurance subsidiaries are multiple line companies
writing substantially all lines of commercial property and casualtyFair Value Determinations Of Certain Assets And Liabilities
insurance and various personal lines both domestically and(Financial Services):
abroad.
( Valuation models: utilizing factors, such as market liquidity and
As previously noted, AIG believes it should present and discuss
current interest, foreign exchange and volatility rates.
its financial information in a manner most meaningful to its
( Market price data: AIG attempts to secure reliable and
financial statement users. Accordingly, in its General Insurance
independent current market price data, such as published
business, AIG uses certain regulatory measures, where AIG has
exchange rates from external subscription services such as
determined these measurements to be useful and meaningful.
Bloomberg or Reuters or third-party broker quotes for use in its
A critical discipline of a successful general insurance business
models. When such data is not available, AIG uses an internal
is the objective to produce profit from underwriting activities
methodology, which includes interpolation and extrapolation
exclusive of investment-related income. When underwriting is not
from verifiable prices from trades occurring on dates nearest to
profitable, premiums are inadequate to pay for insured losses and
the dates of the transactions.
underwriting related expenses. In these situations, the addition of
general insurance related investment income and realized capital
Other-Than-Temporary Declines In The Value Of Investments:
gains may, however, enable a general insurance business to
A security is considered a candidate for other-than-temporary produce operating income. For these reasons, AIG views underwrit-
impairment if it meets any of the following criteria: ing results to be critical in the overall evaluation of performance.
( Trading at a significant (25 percent or more) discount to par or See also Liquidity herein.
amortized cost (if lower) for an extended period of time (nine Statutory underwriting profit is derived by reducing net premi-
months or longer); ums earned by net losses and loss expenses incurred and net
( The occurrence of a discrete credit event resulting in the debtor expenses incurred. Statutory accounting generally requires imme-
defaulting or seeking bankruptcy or insolvency protection or diate expense recognition and ignores the matching of revenues
voluntary reorganization; or and expenses as required by GAAP. That is, for statutory
( The probability of non-realization of a full recovery on its purposes, expenses (including acquisition costs) are recognized
investment, irrespective of the occurrence of one of the immediately, not over the same period that the revenues are
foregoing events. earned. Thus, statutory expenses exclude changes in DAC.
At each balance sheet date, AIG evaluates its securities GAAP provides for the recognition of expenses at the same
holdings in an unrealized loss position. Where AIG does not intend time revenues are earned, the accounting principle of matching.
to hold such securities until they have fully recovered their Therefore, acquisition expenses are deferred and amortized over
carrying value, based on the circumstances present at the date of the period the related net premiums written are earned. DAC is
evaluation, AIG records the unrealized loss in income. If events or reviewed for recoverability, and such review requires management
circumstances change, such as unexpected changes in the judgment. The most comparable GAAP measure to statutory
creditworthiness of the obligor, unanticipated changes in interest underwriting profit is income before income taxes, minority
rates, tax laws, statutory capital positions and unforeseen liquidity interest and cumulative effect of an accounting change. A table
events, among others, AIG revisits its intent. Further, if a loss is reconciling statutory underwriting profit to income before income
recognized from a sale subsequent to a balance sheet date taxes, minority interest and cumulative effect of an accounting
pursuant to these unexpected changes in circumstances, the loss change is contained in footnote (g) to the following table. See also
is recognized in the period in which the intent to hold the Critical Accounting Estimates herein and Notes 1 and 4 of Notes
securities to recovery no longer existed. to Consolidated Financial Statements.
In periods subsequent to the recognition of an other-than- AIG, along with most general insurance companies, uses the
temporary impairment loss for debt securities, AIG amortizes the loss ratio, the expense ratio and the combined ratio as measures
discount or reduced premium over the remaining life of the of underwriting performance. The loss ratio is the sum of losses
security in a prospective manner based on the amount and timing and loss expenses incurred divided by net premiums earned. The
of estimated future cash flows. expense ratio is statutory underwriting expenses divided by net
premiums written. These ratios are relative measurements that
describe, for every $100 of net premiums earned or written, the
Form 10-K 2006 AIG 31

cost of losses and statutory expenses, respectively. The com- ally earned ratably over the policy period. Thus, the net unearned
bined ratio is the sum of the loss ratio and the expense ratio. The premium reserve is not fully recognized in income as net
combined ratio presents the total cost per $100 of premium premiums earned until the end of the policy period.
production. A combined ratio below 100 demonstrates underwrit- The underwriting environment varies from country to country,
ing profit; a combined ratio above 100 demonstrates underwriting as does the degree of litigation activity. Regulation, product type
loss. and competition have a direct effect on pricing and consequently
Net premiums written are initially deferred and earned based on profitability as reflected in underwriting profit and statutory
upon the terms of the underlying policies. The net unearned general insurance ratios.
premium reserve constitutes deferred revenues which are gener-
General Insurance Results
General Insurance operating income is comprised of statutory underwriting results, changes in DAC, net investment
income and realized capital gains and losses. Operating income, as well as net premiums written, net premiums
earned, net investment income and realized capital gains (losses) and statutory ratios for 2006, 2005 and 2004 were
as follows:
(in millions, except ratios) 2006 2005 2004
Net premiums written:
Domestic General
DBG $24,345 $23,128 $22,506
Transatlantic 3,633 3,466 3,749
Personal Lines 4,654 4,653 4,354
Mortgage Guaranty 866 628 607
Foreign General(a)
11,368 9,997 9,407
Total $44,866 $41,872 $40,623
Net premiums earned:
Domestic General
DBG $23,936 $22,602 $21,215
Transatlantic 3,604 3,385 3,661
Personal Lines 4,645 4,634 4,291
Foreign General(a)
10,526 9,655 8,831
Total $43,451 $40,809 $38,537
Net investment income(b)
:
Domestic General
DBG $ 3,411 $ 2,403 $ 1,965
Transatlantic 435 343 307
Personal Lines 225 217 186
Intercompany adjustments and eliminations — net 1 1 —
Foreign General 1,484 944 618
Total $ 5,696 $ 4,031 $ 3,196
Realized capital gains (losses) $ 59 $ 334 $ 228
Operating income (loss)(b)(c)(d)
:
Domestic General
DBG $ 5,985 $ (646) $ 777
Transatlantic 589 (39) 282
Personal Lines 432 195 357
Foreign General(e)
3,088 2,427 1,344
Reclassifications and eliminations (10) 15 18
Total $10,412 $ 2,315 $ 3,177
Statutory underwriting profit (loss)(c)(d)(g)
:
Domestic General
DBG $ 2,450 $ (3,227) $ (1,500)
Transatlantic 129 (434) (77)
Personal Lines 204 (38) 136
Foreign General(e)
1,437 1,285 643
Total $ 4,408 $ (2,165) $ (564)
(continued)
32 AIG 2006 Form 10-K

(in millions, except ratios) 2006 2005 2004
Domestic General(c)(d)
:
Loss ratio 69.1 89.6 83.9
Expense ratio 21.5 21.0 19.2
Combined ratio 90.6 110.6 103.1
Foreign General(c)(d)
:
Loss ratio(a)
50.5 53.7 61.6
Expense ratio(e)(f)
33.2 31.9 29.2
Consolidated(c)(d)
:
Loss ratio 64.6 81.1 78.8
Expense ratio 24.5 23.6 21.5
(a) Income statement accounts expressed in non-functional currencies are translated into U.S. dollars using average exchange rates.
(b) Includes the effect of out of period adjustments related to the accounting for certain interests in unit investment trusts in 2006. For DBG, the effect
was an increase of $66 million, and for Foreign General, the effect was an increase of $424 million.
(c) Catastrophe-related losses increased the consolidated General Insurance combined ratio for 2005 and 2004 by 7.06 points and 2.74 points,
respectively. There were no significant catastrophe-related losses in 2006. Catastrophe-related losses for 2005 and 2004 by reporting unit were as
follows:
2005 2004
Insurance Net Insurance Net
Related Reinstatement Related Reinstatement
(in millions) Losses Premium Cost Losses Premium Cost
Reporting Unit:
DBG $1,747 $122 $ 582 $ —
Transatlantic 463 45 215 —
Personal Lines 112 2 25 —
Mortgage Guaranty 10 — — —
Foreign General 293 94 232 —
Total $2,625 $263 $1,054 $ —
(d) Includes additional losses incurred and net reinstatement premiums related to prior year catastrophes of $199 million and $277 million, in 2006 and 2005,
respectively.
(e) Includes the results of wholly owned Foreign General agencies.
(f) Includes amortization of advertising costs.
(g) 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, 2006, 2005
and 2004:
Domestic
Brokerage Personal Mortgage Foreign Reclassifications
(in millions) Group Transatlantic Lines Guaranty General and Eliminations Total
2006:
Statutory underwriting profit (loss) $ 2,450 $ 129 $204 $188 $1,437 $ — $ 4,408
Increase (decrease) in DAC 26 14 2 3 204 — 249
Net investment income 3,411 435 225 140 1,484 1 5,696
Realized capital gains (losses) 98 11 1 (3) (37) (11) 59
Operating income (loss) $ 5,985 $ 589 $432 $328 $3,088 $(10) $10,412
2005:
Statutory underwriting profit (loss) $(3,227) $(434) $ (38) $249 $1,285 $ — $ (2,165)
Increase (decrease) in DAC (23) 14 19 (8) 113 — 115
Net investment income 2,403 343 217 123 944 1 4,031
Realized capital gains (losses) 201 38 (3) (1) 85 14 334
Operating income (loss) $ (646) $ (39) $195 $363 $2,427 $ 15 $ 2,315
2004:
Statutory underwriting profit (loss) $(1,500) $ (77) $136 $234 $ 643 $ — $ (564)
Increase (decrease) in DAC 160 30 24 44 59 — 317
Net investment income 1,965 307 186 120 618 — 3,196
Realized capital gains (losses) 152 22 11 1 24 18 228
Operating income (loss) $ 777 $ 282 $357 $399 $1,344 $ 18 $ 3,177
Form 10-K 2006 AIG 33

quarter 2005 increase in reserves and changes in estimatesAIG transacts business in most major foreign currencies.
related to remediation of the material weakness in reconciliationThe following table summarizes the effect of changes in
of balance sheet accounts. Catastrophe-related losses wereforeign currency exchange rates on the growth of General
$2.89 billion and $1.05 billion in 2005 and 2004, respectively.Insurance net premiums written for the years ended
These decreases in operating income were partially offset byDecember 31, 2006 and 2005.
strong growth in statutory underwriting profit and increases in net
2006 2005
investment income. General Insurance operating income in 2004
Growth in original currency* 7.4% 2.6% also included a $232 million charge reflecting a change in
Foreign exchange effect (0.2) 0.5 estimate for salvage and subrogation recoveries.
General Insurance net investment income grew in 2005Growth as reported in U.S. dollars 7.2% 3.1%
compared to 2004 due to strong cash flows, higher interest rates* Computed using a constant exchange rate for each period.
and increased partnership income. See also Capital Resources
and Liquidity — Liquidity herein and Note 8 of Notes to2006 and 2005 Comparison
Consolidated Financial Statements.
General Insurance operating income increased in 2006 compared
to 2005 due to growth in net premiums, a reduction in both DBG Results
catastrophe losses and prior accident year development, and
2006 and 2005 Comparison
growth in net investment income. The combined ratio improved to
89.1, a reduction of 15.6 points from 2005, including an DBG’s operating income increased to $5.99 billion in 2006
improvement in the loss ratio of 16.5 points. The reduction in compared to a loss of $646 million in 2005, an improvement of
catastrophe losses represented 6.9 points and the reduction in $6.63 billion. The improvement is also reflected in the combined
prior year adverse development represented 11.5 points of the ratio, which declined to 89.4 in 2006 compared to 113.8 in 2005
overall reduction. Net premiums written increased $3.0 billion or primarily due to an improvement in the loss ratio of 24.9 points.
7 percent in 2006 compared to 2005. Domestic General accounted The reduction in prior year adverse development and the reduction
for $1.6 billion of the increase as property rates improved and in catastrophe losses and related reinstatement premiums ac-
submission activity increased due to the strength of AIG’s capacity, counted for 21.0 points and 8.2 points, respectively, of the
commitment to difficult markets and diverse product offerings. improvement.
Foreign General contributed $1.4 billion to the increase in net DBG’s net premiums written increased 5 percent in 2006
premiums written. In 2005, Domestic General net premiums written compared to 2005 as property rates improved and submission
increased by $300 million and Foreign General net premiums activity increased due to the strength of AIG’s capacity, commit-
written decreased by the same amount as a result of the ment to difficult markets and diverse product offerings. Net
commutation of the Richmond reinsurance contract. The commuta- premiums written in 2005 were reduced by $122 million due to
tion partially offset the increase in Domestic General net premiums reinstatement premiums related to catastrophes, offset by in-
written in 2006 compared to 2005 and increased Foreign General creases of $300 million for the Richmond commutation and
net premiums written in 2006 compared to 2005. $147 million related to an accrual for workers compensation
In 2006, certain adjustments were made in conjunction with premiums for payroll not yet reported by insured employers. The
the remediation of the material weakness relating to balance combined effect of these items reduced the growth rate for net
sheet account reconciliations which increased earned premiums premiums written by 1.5 percent.
by $189 million and increased other expenses by $415 million. The loss ratio for 2006 declined 24.9 points to 69.4. The
These adjustments reflect continuing progress in AIG’s ongoing 2005 loss ratio was negatively affected by catastrophe-related
remediation efforts. The combined effect of these adjustments losses of $1.7 billion and related reinstatement premiums of
increased the expense ratio by 0.9 points and decreased the loss $122 million. Adverse development on reserves for loss and loss
ratio by 0.3 points. adjustment expenses declined to $110 million in 2006 compared
General Insurance net investment income increased $1.67 bil- to $4.9 billion in 2005, accounting for 21.0 points of the
lion in 2006 to $5.7 billion on higher levels of invested assets, decrease in the loss ratio.
strong cash flows, slightly higher yields and increased partnership DBG’s expense ratio increased to 20.0 in 2006 compared to
income, and included increases from out of period adjustments of 19.5 in 2005, primarily due to an increase in other expenses that
$490 million related to the accounting for certain interests in unit amounted to $498 million in 2006 (including out of period
investment trusts, $43 million related to partnership income and charges of $356 million) compared to $372 million in 2005. This
$85 million related to interest earned on a DBG deposit contract. increase added 0.4 points to the expense ratio. Overall al-
See also Capital Resources and Liquidity — Liquidity and Invested lowances decreased, however, due to charge-offs against previ-
Assets herein. ously established allowances resulting from AIG’s remediation
activities.
DBG’s net investment income increased by $1.0 billion in2005 and 2004 Comparison
2006 compared to 2005, as interest income increased $482 mil-
General Insurance operating income in 2005 decreased from
lion on growth in the bond portfolio resulting from investment of
2004 due to higher catastrophe-related losses and the fourth
operating cash flows and capital contributions. Partnership income
34 AIG 2006 Form 10-K

increased from 2005 due to improved performance of the Personal Lines Results
underlying investments, including initial public offering activity. Net 2006 and 2005 Comparison
investment income in 2006 included increases relating to out of
Personal Lines operating income increased $237 million in 2006period adjustments of $109 million for the accounting for certain
compared to 2005 reflecting a reduction in the loss ratio ofinvestments in unit investment trusts and partnerships and
5.8 points. Favorable development on prior accident years re-$85 million related to interest earned on a deposit contract that
duced incurred losses by $111 million in 2006 compared to andid not exist in the prior year.
increase of $14 million in 2005, accounting for 2.7 points of the
decrease in the loss ratio. The 2005 catastrophe-related losses of2005 and 2004 Comparison
$112 million added 2.4 points to the loss ratio. The loss ratio for
DBG’s net premiums written increased modestly in 2005 compared the 2006 accident year improved 0.7 points primarily due to the
to 2004, reflecting generally improving renewal retention rates and termination of The Robert Plan relationship effective Decem-
a modest change in the mix of business towards smaller accounts ber 31, 2005 and growth in the Private Client Group. The
for which DBG purchases less reinsurance. DBG also continued to improvement in the loss ratio was partially offset by an increase
expand its relationships with a larger number and broader range of in the expense ratio of 0.6 points primarily due to investments in
brokers. DBG saw improvement in domestic property rates as well people and technology, national expansion efforts and lower
as increases in submission activity in the aftermath of the 2005 response rates. Net premiums written were flat in 2006 compared
hurricanes. DBG attributes the increase in submissions to its to 2005, with growth in the Private Client Group and Agency Auto
overall financial strength in comparison to many insurers that divisions offset by termination of The Robert Plan relationship.
experienced significant losses and reductions of surplus as a result Growth in the Private Client Group spans multiple products, with a
of the hurricanes. continued penetration of the high net worth market, strong brand
The DBG loss ratio increased in 2005 from 2004 principally as promotion and innovative loss prevention programs.
a result of adverse loss development, higher catastrophe-related
losses and $197 million of losses incurred in 2005 resulting from 2005 and 2004 Comparison
the 2004 catastrophes.
Personal Lines net premiums written and net premiums earned forThe DBG expense ratio increased in 2005 from 2004,
2005 increased compared to 2004 as a result of strong growth inprincipally due to an increase in net commissions resulting from
the Private Client Group and Agency Auto divisions due tothe replacement of certain ceded quota share reinsurance, for
increased agent/broker appointments, greater market penetrationwhich DBG earns a ceding commission, with excess-of-loss
and enhanced product offerings. AIG direct premiums in 2005reinsurance, which generally does not include a ceding commis-
were down slightly from 2004 due to aggressive re-underwriting ofsion. Increases in other underwriting expenses reflect a change in
the previously acquired GE business and the discontinuation ofestimates for salvage and subrogation recoveries.
underwriting homeowners business. Involuntary auto premiumsDBG’s net investment income increased in 2005 compared to
were down in 2005 due to the decline in the assigned risk2004 due to strong cash flows, higher interest rates and
marketplace. Statutory underwriting profit declined in 2005 as aincreased partnership income.
result of hurricane losses and related expenses, reserve strength-
ening, an increase in Agency Auto’s current accident year physicalTransatlantic Results
damage loss ratio, and expenses incurred related to terminating
AIG’s relationship with The Robert Plan effective December 31,
2005.Transatlantic’s net premiums written and net premiums earned
increased in 2006 by 5 percent and 6 percent, respectively,
compared to 2005 due primarily to increased writings in domestic Mortgage Guaranty Results
operations. Operating income increased in 2006 compared to 2006 and 2005 Comparison
2005 due largely to lower catastrophe losses and net ceded
UGC’s operating income declined $35 million in 2006, down 10reinstatement premiums, and increased net investment income.
percent from 2005 due primarily to unfavorable loss experience
on third-party originated second lien business with a credit quality2005 and 2004 Comparison
lower than typical for UGC and a softening U.S. housing market.
Transatlantic’s net premiums written and net premiums earned for This increased UGC’s consolidated loss ratio for 2006 to 47.2
2005 decreased compared to 2004, principally due to competitive compared to 26.0 in 2005. The writing of this second lien
market conditions and increased ceding company retentions in coverage, which began in 2005, was discontinued as of year end
certain classes of business, largely resulting from Transatlantic’s 2006. Losses in the second lien business have been mitigated by
domestic operations. Operating income decreased principally as a a policy year aggregate limitation provision that is typically
result of the increased level of catastrophe losses. established for each lender.
Net premiums written increased 38 percent from growth in the
domestic second lien and international businesses as well as
improved persistency in the domestic first lien business. The
Form 10-K 2006 AIG 35

expense ratio remained flat as premium growth covered increased development from prior accident years and adverse development
expenses related to expansion internationally and continued on 2005 hurricanes.
investment in risk management resources. UGC had approximately The expense ratio increased 1.3 points in 2006 compared to
$27 billion of guaranty risk in force at December 31, 2006. 2005. Underwriting expenses for 2006 increased $59 million due
to an out of period adjustment for amortization of deferred
advertising costs and premiums were reduced by $61 million due2005 and 2004 Comparison
to reconciliation remediation activities, in aggregate accounting for
UGC’s net premiums written were up slightly for 2005 compared
0.7 points of the increase in the expense ratio. The expense ratio
to 2004 as strong growth in the international and domestic
also increased due to growth in consumer business lines, which
second lien businesses was mostly offset by lower persistency in
have higher acquisition expenses but historically lower loss ratios.
domestic first lien residential renewal premiums. Statutory under-
The expense ratio for 2005 increased by 1.2 points due to the
writing profit rose from 2004 due to lower contract underwriting
decline in net premiums written from reinstatement premiums
expenses and favorable loss development.
related to catastrophes and the portfolio transfer of the Richmond
unearned premium reserves. Due to the current mix of business,
Foreign General Insurance Results
AIG expects the expense ratio to continue to increase during
2007, principally for classes of business with historically lower2006 and 2005 Comparison
than average loss ratios.
Foreign General’s operating income increased $661 million or Net investment income increased $540 million or 57 percent
27 percent in 2006 compared to 2005 due to out of period in 2006 compared to 2005 primarily due to a $424 million out of
adjustments related to the accounting for interests in unit period adjustment related to the accounting for interests in unit
investment trusts, the absence of significant catastrophe-related investment trusts.
losses in 2006, rate increases and lower current accident year
losses by the Lloyd’s syndicate Ascot (Ascot) on its U.S. book of
business and lower asbestos and environmental reserve in-
Foreign General operating income increased 81 percent in 2005creases. Partially offsetting these increases in operating income
compared to 2004 due primarily to favorable loss developmentwere lower favorable loss development from prior accident years
from prior accident years and increased net investment income.and adverse loss development on the 2005 hurricanes. Statutory
Net premiums written increased 6 percent (4 percent inunderwriting profit increased $152 million in 2006 compared to
original currency) in 2005 compared to 2004 as a result of new2005. Catastrophes in 2005 resulted in losses of $293 million
business as well as new distribution channels such as theand reinstatement premiums of $94 million.
February 2005 purchase of the insurance portfolio of the Royal &Net premiums written increased $1.4 billion or 14 percent
Sun Alliance branch operations in Japan. The personal accident(15 percent in original currency) in 2006 compared to 2005,
business in the Far East and the personal lines operations inreflecting growth in both commercial and consumer lines driven by
Latin America also contributed to the growth. Partially offsettingnew business from both established and new distribution chan-
these increases was the portfolio transfer of Richmond’snels, including a wholly owned insurance company in Vietnam and
unearned premium reserves to DBG, which reduced net premiumsCentral Insurance Co., Ltd. in Taiwan. Ascot also contributed to
in 2005 and reinstatement premiums related to catastrophes.the growth in net premiums written as a result of rate increases
The 2005 combined ratio of 85.6 decreased 5.3 points fromon its U.S. business. Consumer lines in Latin America and
2004. The loss ratio decreased 8.0 points in 2005 from 2004.commercial lines in Europe, including the U.K., also contributed
The loss ratio decreased 4.7 points due to favorable lossto the increase. Net premiums written for 2005 were reduced by
development from prior accident years, excluding catastrophes,reinstatement premiums related to catastrophes and a portfolio
and 2.3 points related to a 2004 loss reserve restatementtransfer of unearned premium reserves to DBG related to the
adjustment. The loss ratio increased 0.9 points due to higherRichmond commutation, accounting for 3 percent of the increase
catastrophe losses in 2005 related to hurricanes. The expensein 2006 compared to 2005.
ratio increased 2.7 points in 2005 from 2004 principally due toThe 2006 combined ratio declined to 83.7, a decrease of
the portfolio transfer of Richmond’s unearned premium reserves1.9 points from 2005. The 2005 catastrophes added 3.5 points
to DBG in 2005, loyalty business initiatives in the consumerto the 2005 loss ratio. The expense ratio in 2006 increased by
business lines, which have higher acquisition costs, and also due1.3 points as a result of increased amortization of deferred
to reinstatement premiums.advertising costs and a continued change in the business mix
Foreign General net investment income increased $326 milliontowards products with higher acquisition costs but historically
in 2005 compared to 2004 on increased partnership income,lower loss ratios. The loss ratio decreased 3.2 points in 2006 as
reflecting increases in market valuations of infrastructure fundthe absence of significant catastrophes in 2006 resulted in a
investments in Africa, Asia, China, Eastern Europe and India.decrease of 3.5 points, rate increases and lower current year
Additionally, net investment income was positively affected bylosses by Ascot on its U.S. book of business accounted for
positive cash flows, higher interest rates and the compounding of1.3 points of the decrease and lower asbestos and environmental
previously earned and reinvested net investment income. Cashreserve increases accounted for 1.2 points of the decrease.
flow was lower in 2005 compared to 2004 due to payments forThese declines were partially offset by lower favorable loss
36 AIG 2006 Form 10-K

catastrophe-related losses incurred in 2005 and 2004 and for the The following table classifies the components of the
purchase of the Royal & Sun Alliance branch operations. General Insurance net loss reserves by business unit as
of December 31, 2006 and 2005.
Reserve for Losses and Loss Expenses
(in millions) 2006 2005
The following table presents the components of the DBG(a)
$43,998 $40,782
General Insurance gross reserve for losses and loss Transatlantic 6,207 5,690
expenses (loss reserves) as of December 31, 2006 and Personal Lines(b)
2,440 2,578
2005 by major lines of business on a statutory Annual Mortgage Guaranty 460 340
Statement basis*: Foreign General(c)
9,525 8,086
Total Net Loss Reserve $62,630 $57,476(in millions) 2006 2005
Other liability occurrence $19,156 $18,116 (a) At December 31, 2006 and 2005, respectively, DBG loss reserves
include approximately $3.33 billion and $3.77 billion ($3.66 billion andWorkers compensation 13,465 11,630
$4.26 billion, respectively, before discount), related to business written
Other liability claims made 12,394 12,447
by DBG but ceded to AIRCO and reported in AIRCO’s statutory filings.
Property 6,663 7,217 DBG loss reserves also include approximately $535 million and
Auto liability 5,931 6,569 $407 million related to business included in AIUO’s statutory filings at
December 31, 2006 and 2005, respectively.International 5,810 4,939
Reinsurance 2,960 2,886 (b) At December 31, 2006 and 2005, respectively, Personal Lines loss
reserves include $861 million and $878 million related to businessMedical malpractice 2,308 2,363
ceded to DBG and reported in DBG’s statutory filings.
Products liability 2,168 1,937
(c) At December 31, 2006 and 2005, respectively, Foreign General lossAccident and health 1,649 1,678
reserves include approximately $2.87 billion and $2.15 billion related
Commercial multiple peril 1,621 1,359 to business reported in DBG’s statutory filings.
Aircraft 1,562 1,844
The DBG net loss reserve of $44.0 billion is comprisedFidelity/surety 1,127 1,072
Other 3,185 3,112 principally of the business of AIG subsidiaries participating in the
American Home/National Union pool (11 companies) and theTotal $79,999 $77,169
surplus lines pool (Lexington, Starr Excess Liability Insurance
* Presented by lines of business pursuant to statutory reporting require- Company and Landmark Insurance Company).
ments as prescribed by the National Association of Insurance Commis-
Beginning in 1998, DBG ceded a quota share percentage of itssioners (NAIC).
other liability occurrence and products liability occurrence busi-
AIG’s gross reserve for losses and loss expenses represents ness to AIRCO. The quota share percentage ceded was 40 per-
the accumulation of estimates of ultimate losses, including IBNR cent in 1998, 65 percent in 1999, 75 percent in 2000 and 2001,
and loss expenses. The methods used to determine loss reserve 50 percent in 2002 and 2003, 40 percent in 2004, 35 percent in
estimates and to establish the resulting reserves are continually 2005 and 20 percent in 2006 and covered all business written in
reviewed and updated by management. Any adjustments resulting these years for these lines by participants in the American Home/
therefrom are reflected in operating income currently. Because National Union pool. In 1998 the cession reflected only the other
loss reserve estimates are subject to the outcome of future liability occurrence business, but in 1999 and subsequent years
events, changes in estimates are unavoidable given that loss included products liability occurrence. AIRCO’s loss reserves
trends vary and time is often required for changes in trends to be relating to these quota share cessions from DBG are recorded on
recognized and confirmed. Reserve changes that increase previ- a discounted basis. As of year-end 2006, AIRCO carried a
ous estimates of ultimate cost are referred to as unfavorable or discount of approximately $330 million applicable to the $3.66
adverse development or reserve strengthening. Reserve changes billion in undiscounted reserves it assumed from the American
that decrease previous estimates of ultimate cost are referred to Home/National Union pool via this quota share cession. AIRCO
as favorable development. also carries approximately $467 million in net loss reserves
At December 31, 2006, General Insurance net loss reserves relating to Foreign General insurance business. These reserves
increased $5.15 billion from 2005 to $62.63 billion. The net loss are carried on an undiscounted basis.
reserves represent loss reserves reduced by reinsurance recover- Beginning in 1997, the Personal Lines division ceded a
ables, net of an allowance for unrecoverable reinsurance and percentage of all business written by the companies participating
applicable discount for future investment income. in the personal lines pool to the American Home/National Union
pool. As noted above, the total reserves carried by participants in
the American Home/National Union pool relating to this cession
amounted to $861 million as of year-end 2006.
The companies participating in the American Home/National
Union pool have maintained a participation in the business written
by AIU for decades. As of year-end 2006, these AIU reserves
carried by participants in the American Home/National Union pool
amounted to approximately $2.87 billion. The remaining Foreign
Form 10-K 2006 AIG 37

General reserves are carried by AIUO, AIRCO, and other smaller development and resulting increase in reserves is not likely to
AIG subsidiaries domiciled outside the United States. Statutory have a material adverse effect on AIG’s consolidated financial
filings in the U.S. by AIG companies reflect all the business condition, although it could have a material adverse effect on
written by U.S. domiciled entities only, and therefore exclude AIG’s consolidated results of operations for an individual reporting
business written by AIUO, AIRCO, and all other internationally period. See also Item 1A. Risk Factors — Casualty Insurance and
domiciled subsidiaries. The total reserves carried at year-end Underwriting Reserves.
2006 by AIUO and AIRCO were approximately $4.57 billion and
The following table presents the reconciliation of net loss
$3.80 billion, respectively. AIRCO’s $3.80 billion in total general
reserves for 2006, 2005 and 2004 as follows:
insurance reserves consists of approximately $3.33 billion from
(in millions) 2006 2005 2004business assumed from the American Home/National Union pool
and an additional $467 million relating to Foreign General Net reserve for losses
Insurance business. and loss expenses at
beginning of year $57,476 $47,254 $36,228
Foreign exchange effect 741 (628) 524Discounting of Reserves
Acquisition(a)
55 — —
At December 31, 2006, AIG’s overall General Insurance net loss Losses and loss
reserves reflect a loss reserve discount of $2.26 billion, including expenses incurred:
tabular and non-tabular calculations. The tabular workers compen- Current year 27,805 28,426 26,793
Prior years, other thansation discount is calculated using a 3.5 percent interest rate and
accretion of discount (53) 4,680(b)
3,187(c)
the 1979-81 Decennial Mortality Table. The non-tabular workers
Prior years, accretion ofcompensation discount is calculated separately for companies
discount 300 (15) 377
domiciled in New York and Pennsylvania, and follows the statutory
Losses and lossregulations for each state. For New York companies, the discount
expenses incurred 28,052 33,091 30,357
is based on a five percent interest rate and the companies’ own
Losses and losspayout patterns. For Pennsylvania companies, the statute has
expenses paid:
specified discount factors for accident years 2001 and prior,
Current year 8,368 7,331 7,692
which are based on a six percent interest rate and an industry Prior years 15,326 14,910 12,163
payout pattern. For accident years 2002 and subsequent, the
Losses and loss
discount is based on the yield of U.S. Treasury securities ranging
expenses paid 23,694 22,241 19,855
from one to twenty years and the company’s own payout pattern,
Net reserve for losses
with the future expected payment for each year using the interest
and loss expenses at
rate associated with the corresponding Treasury security yield for end of year $62,630 $57,476 $47,254
that time period. The discount is comprised of the following: $662
(a) Reflects the opening balance with respect to the acquisition of themillion — tabular discount for workers compensation in DBG;
Central Insurance Co., Ltd. in the third quarter of 2006.
$1.27 billion — non-tabular discount for workers compensation in
(b) Includes fourth quarter charge of $1.8 billion.
DBG; and, $330 million — non-tabular discount for other liability
(c) Includes fourth quarter charge of $850 million attributable to the
occurrence and products liability occurrence in AIRCO. The total
change in estimate for asbestos and environmental exposures.
undiscounted workers compensation loss reserve carried by DBG
The following tables summarize development, (favorable) oris approximately $11.5 billion as of year-end 2006. The other
unfavorable, of incurred losses and loss expenses for priorliability occurrence and products liability occurrence business in
years (other than accretion of discount):AIRCO that is assumed from DBG is discounted based on the
yield of U.S. Treasury securities ranging from one to twenty years (in millions) 2006 2005 2004
and the DBG payout pattern for this business. The undiscounted
Prior Accident Year
reserves assumed by AIRCO from DBG totaled approximately
Development by Reporting
$3.66 billion at December 31, 2006. Unit:
DBG $ 110 $4,871 $2,857
Results of 2006 Reserving Process Personal Lines (111) 14 75
UGC (115) (103) (102)
Management believes that the General Insurance net loss Foreign General (118) (371) 40
reserves are adequate to cover General Insurance net losses and
Sub total (234) 4,411 2,870
loss expenses as of December 31, 2006. While AIG regularly Transatlantic 181 269 317
reviews the adequacy of established loss reserves, there can be
Prior years, other than
no assurance that AIG’s ultimate loss reserves will not develop accretion of discount $ (53) $4,680 $3,187
adversely and materially exceed AIG’s loss reserves as of
December 31, 2006. In the opinion of management, such adverse
38 AIG 2006 Form 10-K

question, and no adjustment would be made to the profit center’s
(in millions) 2006 2005 2004
reserves for prior accident years. In other cases, the higher or lower
Prior Accident Year than expected emergence may result in a larger change, either
Development by Major favorable or unfavorable, than the difference between the actual and
Class of Business: expected loss emergence. Such additional analyses were conducted
Excess casualty (DBG) $ 102 $ 1,191 $ 1,240 for each profit center, as appropriate, in the first, second and third
D&O and related quarters of 2006 to determine the loss development from prior
management liability accident years for the first, second and third quarters of 2006. As
(DBG) (20) 1,627 930
part of its quarterly reserving process, AIG also considers notices of
Excess workers
claims received with respect to emerging issues, such as those
compensation (DBG) 74 983 279
related to stock option backdating. In the fourth quarter of 2006, a
Reinsurance (Transatlantic) 181 269 317
comprehensive loss reserve review was completed for each AIG
Asbestos and environmental
general insurance subsidiary. The prior accident year loss reserve
(primarily DBG) 208 930 1,006
development shown in the tables above for 2006 reflects the resultsAll other, net (598) (320) (585)
of these comprehensive reviews, including the effect of actual loss
Prior years, other than
emergence in the fourth quarter of 2006.
accretion of discount $ (53) $ 4,680 $ 3,187
In 2006, net loss development from prior accident years was
favorable by approximately $53 million, including approximately
Calendar Year $198 million in net adverse development from asbestos and
(in millions) 2006 2005 2004 environmental reserves resulting from the updated ground up
analysis of these exposures in the fourth quarter of 2006;Prior Accident Year
approximately $103 million of adverse development pertaining toDevelopment by
the major hurricanes in 2004 and 2005; and $181 million ofAccident Year:
adverse development from the general reinsurance operations of2005 $(1,576)
Transatlantic; and excluding approximately $300 million from2004 (511) $(3,853)
accretion of loss reserve discount. Excluding the fourth quarter2003 (212) (63) $(1,483)
asbestos and environmental reserve increase, catastrophes and2002 373 1,360 69
Transatlantic, as well as accretion of discount, net loss develop-2001 29 1,749 1,123
2000 338 1,323 760 ment in 2006 from prior accident years was favorable by
1999 382 944 693 approximately $535 million. The overall favorable development of
1998 41 605 536 $53 million consisted of approximately $2.30 billion of favorable
1997 197 281 174 development from accident years 2003 through 2005, partially
1996 & Prior 886 2,334 1,315 offset by approximately $2.25 billion of adverse development from
accident years 2002 and prior. For 2006, most classes of AIG’sPrior years, other than
business continued to experience favorable development foraccretion of discount $ (53) $ 4,680 $ 3,187
accident years 2003 through 2005. The adverse development
The loss ratios recorded by AIG for 2006 took into account the
from accident years 2002 and prior reﬂected development from
results of the comprehensive reserve reviews that were completed
excess casualty, workers compensation, excess workers compen-
in the fourth quarter of 2005. AIG’s year-end 2005 reserve review
sation, and post-1986 environmental liability classes of business,
reﬂected careful consideration of the reserve analyses prepared
all within DBG, from asbestos reserves within DBG and Foreign
by AIG’s internal actuarial staff with the assistance of third party
General, and from Transatlantic.
actuaries. In determining the appropriate loss ratios for accident
For 2005, net loss development from prior accident years was
year 2006 for each class of business, AIG gave consideration to
adverse by approximately $4.68 billion, including approximately
the loss ratios resulting from the 2005 reserve analyses as well
$269 million from the general reinsurance operations of Transat-
as all other relevant information including rate changes, expected
lantic. This $4.68 billion adverse development in 2005 was
changes in loss costs, changes in coverage, reinsurance or mix of
comprised of approximately $8.60 billion for the 2002 and prior
business, and other factors that may affect the loss ratios.
accident years, partially offset by favorable development for
In 2006, AIG enhanced its process of determining the quarterly
accident years 2003 and 2004 for most classes of business, with
loss development from prior accident years. In the first quarter of
the notable exception of D&O. The adverse loss development for
2006, AIG began conducting additional analyses to determine the
2002 and prior accident years was attributable to approximately
change in estimated ultimate loss for each accident year for each
$4.0 billion of development from the D&O and related manage-
profit center. For example, if loss emergence for a profit center is
ment liability classes of business, excess casualty, and excess
different than expected for certain accident years, the actuaries now
workers compensation, and to approximately $900 million of
take additional steps to examine the indicated effect such emer-
adverse development from asbestos and environmental claims.
gence would have on the reserves of that profit center. In some
The remaining portion of the adverse development from 2002 and
cases, the higher or lower than expected emergence may result in no
clear change in the ultimate loss estimate for the accident years in
Form 10-K 2006 AIG 39

prior accident years included approximately $520 million related account the higher ultimate loss ratios for accident years 2001
to Transatlantic with the balance spread across many other and prior.
classes of business. Most classes of business produced For the year-end 2005 loss reserve review, AIG’s actuaries
favorable development for accident years 2003 and 2004, and responded to the continuing adverse development by further
adverse development for accident years 2001 and prior. increasing the loss development factors applicable to accident
For 2004, AIG’s overall net loss reserve development from years 1999 and subsequent by approximately 5 percent. In
prior accident years was an increase of approximately $3.19 bil- addition, to more accurately estimate losses for construction
lion, including approximately $317 million from the general defect-related claims, a separate review was performed by AIG
reinsurance operations of Transatlantic and excluding approxi- claims staff for accounts with significant exposure to these
mately $377 million from accretion of loss reserve discount. This claims.
$3.19 billion adverse development in 2004 was comprised of For the year-end 2006 loss reserve review, AIG claims staff
approximately $4.67 billion of adverse development for the 2002 updated the separate review for accounts with significant expo-
and prior accident years, partially offset by approximately sure to construction defect-related claims in order to assist the
$1.48 billion of favorable development for accident year 2003. actuaries in determining the proper reserve for this exposure.
The adverse development for the 2002 and prior accident years AIG’s actuaries determined that no significant changes in the
was primarily attributable to excess casualty, D&O and related assumptions were required. Prior accident year loss development
management liability classes, and asbestos and environmental in 2006 was adverse by approximately $100 million, a relatively
reserves, all within DBG, and also to Transatlantic. Most classes minor amount for this class of business. However, AIG continues
of business throughout AIG produced favorable development for to experience adverse development for this class for accident
accident year 2003. years prior to 2003.
The following is a discussion of the primary reasons for the Loss reserves pertaining to the excess casualty class of
development in 2006, 2005 and 2004 for those classes of business are generally included in the Other liability occurrence
business that experienced significant prior accident year develop- line of business, with a small portion of the excess casualty
ments during the three-year period. See Asbestos and Environ- reserves included in the Other liability claims made line of
mental Reserves below for a further discussion of asbestos and business, as presented in the table on page 37.
environmental reserves and developments.
D&O and Related Management Liability Classes of Business:
Excess Casualty: Excess Casualty reserves experienced signifi- These classes of business experienced significant adverse devel-
cant adverse loss development in 2004 and 2005, but in 2006 opment in 2004 and 2005, but experienced slightly favorable
there was only a relatively minor amount of adverse development. development in 2006. The adverse development in 2004 and
The adverse development for all periods shown related principally 2005 related principally to accident years 2002 and prior. This
to accident years 2000 and prior, and to a lesser extent 2001, adverse development resulted from significant loss cost escala-
and resulted from significant loss cost increases due to both tion due to a variety of factors, including the following: the
frequency and severity of claims. The increase in loss costs increase in frequency and severity of corporate bankruptcies; the
resulted primarily from medical inflation, which increased the increase in frequency of financial statement restatements; the
economic loss component of tort claims, advances in medical sharp rise in market capitalization of publicly traded companies;
care, which extended the life span of severely injured claimants, and the increase in the number of initial public offerings, which
and larger jury verdicts, which increased the value of severe tort led to an unprecedented number of IPO allocation/laddering suits
claims. An additional factor affecting AIG’s excess casualty in 2001. In addition, extensive utilization of multi-year policies
experience in recent years has been the accelerated exhaustion of during this period limited AIG’s ability to respond to emerging
underlying primary policies for homebuilders. This has led to trends as rapidly as would otherwise be the case. AIG exper-
increased construction defect-related claims activity on AIG’s ienced significant adverse loss development since 2002 as a
excess policies. Many excess casualty policies were written on a result of these issues. AIG responded to this development with
multi-year basis in the late 1990s, which limited AIG’s ability to rate increases and policy form and coverage changes to better
respond to emerging market trends as rapidly as would otherwise contain future loss costs in this class of business.
be the case. In subsequent years, AIG responded to these In the year-end 2004 loss reserve review, AIG’s actuaries
emerging trends by increasing rates and implementing numerous responded to the adverse development for D&O and related
policy form and coverage changes. This led to a significant management liability classes by increasing the loss development
improvement in experience beginning with accident year 2001. factor assumptions. The development factors applicable to accident
In the year-end 2004 loss reserve review, AIG’s actuaries years 1997 and subsequent were increased by approximately
responded to the adverse development for excess casualty by 5 percent in the year-end 2004 reserve study. In addition, the
increasing the loss development factor assumptions. In the year- expected loss ratios for accident years 2002 and subsequent were
end 2004 reserve study, the development factors applicable to increased to take into account the higher ultimate loss ratios for
accident years 1998 and subsequent were increased by approxi- accident years 2001 and prior. The loss ratios for the older
mately 12 percent. In addition, the expected loss ratios for accident years increased due to the combination of higher than
accident years 2002 and subsequent were increased to take into expected loss development in the year and the increase in the loss
development factor assumptions.
40 AIG 2006 Form 10-K

For the year-end 2005 loss reserve review, AIG’s actuaries assumption for excess workers compensation was increased from
responded to the continuing adverse development by further approximately 2.5 percent to 6 percent for the 2005 study.
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 claim-by-claim projection for each open claim for
years were increased by approximately 4 percent. In addition, accident years 1999 and prior. These updated claims projections
AIG’s actuaries began to give greater weight to loss development were utilized by the actuaries as a benchmark for loss develop-
methods for accident years 2002 and 2003, in order to more fully ment factors in the year-end 2006 study. AIG’s actuaries
respond to the recent loss experience. AIG’s claims staff also determined that no significant changes in the assumptions were
conducted a series of ground-up claim projections covering all required. Prior accident year development in 2006 was adverse by
open claims for this business through accident year 2004. AIG’s approximately $70 million, a relatively minor amount for this
actuaries benchmarked the loss reserve indications for all class.
accident years through 2004 to these claim projections.
For the year-end 2006 loss reserve review, AIG’s actuaries Overview of Loss Reserving Process
determined that no significant changes in the assumptions were
The General Insurance loss reserves can generally be categorized
required. Prior accident year loss development in 2006 was
into two distinct groups. One group is short-tail classes of
favorable by approximately $20 million, an insignificant amount for
business consisting principally of property, personal lines and
these classes. AIG’s actuaries continued to benchmark the loss
certain casualty classes. The other group is long-tail casualty
reserve indications to the ground up claim projections provided by
classes of business which includes excess and umbrella liability,
AIG claims staff for this class of business. For the year-end 2006
D&O, professional liability, medical malpractice, workers compen-
loss reserve review, the ground up claim projections included all
sation, general liability, products liability, and related classes.
accident years through 2005.
Loss reserves pertaining to D&O and related management
Short-Tail Reserves
liability classes of business are included in the Other liability
claims made line of business, as presented in the table on For operations writing short-tail coverages, such as property
page 37. coverages, the process of recording quarterly loss reserves is
generally geared toward maintaining an appropriate reserve for the
Excess Workers Compensation: This class of business exper-
outstanding exposure, rather than determining an expected loss
ienced significant adverse development in 2005, and a relatively
ratio for current business. For example, the IBNR reserve required
minor amount of adverse development in 2006. The adverse
for a class of property business might be expected to approximate
development in 2005 related to 2002 and prior accident years.
20 percent of the latest year’s earned premiums, and this level of
This adverse development resulted primarily from significant loss
reserve would generally be maintained regardless of the loss ratio
cost increases, primarily attributable to rapidly increasing medical
emerging in the current quarter. The 20 percent factor would be
inflation and advances in medical care, which increased the cost
adjusted to reflect changes in rate levels, loss reporting patterns,
of covered medical care and extended the life span of severely
known exposure to unreported losses, or other factors affecting
injured workers. The effect of these factors on excess workers
the particular class of business.
compensation claims experience is leveraged, as frequency is
increased by the rising number of claims that reach the excess
Long-Tail Reserves
layers.
In response to the significantly adverse loss development in Estimation of ultimate net losses and loss expenses (net losses)
2005, an additional study was conducted for the 2005 year-end for long-tail casualty classes of business is a complex process
actuarial reserve analysis for DBG pertaining to the selection of and depends on a number of factors, including the class and
loss development factors for this class of business. Claims for volume of business involved. Experience in the more recent
excess workers compensation exhibit an exceptionally long-tail of accident years of long-tail casualty classes of business shows
loss development, running for decades from the date the loss is limited statistical credibility in reported net losses because a
incurred. Thus, the adequacy of loss reserves for this class is relatively low proportion of net losses would be reported claims
sensitive to the estimated loss development factors, as such and expenses and an even smaller percentage would be net
factors may be applied to many years of loss experience. In order losses paid. Therefore, IBNR would constitute a relatively high
to better estimate the tail development for this class, AIG claims proportion of net losses.
staff conducted a claim-by-claim projection of the expected ultimate AIG’s carried net long-tail loss reserves are tested using loss
paid loss for each open claim for 1998 and prior accident years as trend factors that AIG considers appropriate for each class of
these are the primary years from which the tail factors are derived. business. A variety of actuarial methods and assumptions is
The objective of the study was to provide a benchmark against normally employed to estimate net losses for long-tail casualty
which loss development factors in the tail could be evaluated. The classes of businesses. These methods ordinarily involve the use
resulting loss development factors utilized by the actuaries in the of loss trend factors intended to reflect the annual growth in loss
year-end 2005 study reflected an increase of approximately 18 per- costs from one accident year to the next. For the majority of long-
cent from the factors used in the prior year study without the tail casualty classes of business, net loss trend factors approxi-
benefit of the claims benchmark. In addition, the loss cost trend mated five percent. Loss trend factors reflect many items
Form 10-K 2006 AIG 41

including changes in claims handling, exposure and policy forms, reflecting all of the factors described above. At the close of each
current and future estimates of monetary inflation and social quarter, the assumptions underlying the loss ratios are reviewed
inflation and increases in litigation and awards. These factors are to determine if the loss ratios based thereon remain appropriate.
periodically reviewed and adjusted, as appropriate, to reflect This process includes a review of the actual claims experience in
emerging trends which are based upon past loss experience. the quarter, actual rate changes achieved, actual changes in
Thus, many factors are implicitly considered in estimating the year coverage, reinsurance or mix of business, and changes in certain
to year growth in loss costs. other factors that may affect the loss ratio. When this review
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 2006 for the year-end 2006 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
42 AIG 2006 Form 10-K

into larger groups. The greater degree of credibility in the claims Loss development methods generally give full credibility to the
experience of the larger groups may outweigh the greater degree reported loss experience to date. In the example above, loss
of homogeneity of the individual subclasses. This determination of development methods would typically indicate an ultimate loss
data segmentation and actuarial methods is carefully considered estimate of $10 million, as the reported losses of $1 million
for each class of business. The segmentation and actuarial would be estimated to reflect only 10 percent of the ultimate
methods chosen are those which together are expected to losses.
produce the most accurate estimate of the loss reserves. A key advantage of loss development methods is that they
Actuarial methods used by AIG for most long-tail casualty respond quickly to any actual changes in loss costs for the class
classes of business include loss development methods and of business. Therefore, if loss experience is unexpectedly deterio-
expected loss ratio methods, including ‘‘Bornhuetter Ferguson’’ rating or improving, the loss development method gives full
methods described below. Other methods considered include credibility to the changing experience. Expected loss ratio meth-
frequency/severity methods, although these are generally used by ods would be slower to respond to the change, as they would
AIG more for pricing analysis than for loss reserve analysis. Loss continue to give more weight to the expected loss ratio, until
development methods utilize the actual loss development patterns enough evidence emerged for the expected loss ratio to be
from prior accident years to project the reported losses to an modified to reflect the changing loss experience. On the other
ultimate basis for subsequent accident years. Loss development hand, loss development methods have the disadvantage of
methods generally are most appropriate for classes of business overreacting to changes in reported losses if in fact the loss
which exhibit a stable pattern of loss development from one experience is not credible. For example, the presence or absence
accident year to the next, and for which the components of the of large losses at the early stages of loss development could
classes have similar development characteristics. For example, cause the loss development method to overreact to the favorable
property exposures would generally not be combined into the or unfavorable experience by assuming it will continue at later
same class as casualty exposures, and primary casualty expo- stages of development. In these instances, expected loss ratio
sures would generally not be combined into the same class as methods such as ‘‘Bornhuetter Ferguson’’ have the advantage of
excess casualty exposures. Expected loss ratio methods are properly recognizing large losses without extrapolating unusual
generally utilized by AIG where the reported loss data lacks large loss activity onto the unreported portion of the losses for
sufficient credibility to utilize loss development methods, such as the accident year. AIG’s loss reserve reviews for long-tail classes
for new classes of business or for long-tail classes at early stages typically utilize a combination of both loss development and
of loss development. expected loss ratio methods. Loss development methods are
Expected loss ratio methods rely on the application of an generally given more weight for accident years and classes of
expected loss ratio to the earned premium for the class of business where the loss experience is highly credible. Expected
business to determine the loss reserves. For example, an loss ratio methods are given more weight where the reported loss
expected loss ratio of 70 percent applied to an earned premium experience is less credible, or is driven more by large losses.
base of $10 million for a class of business would generate an Expected loss ratio methods require sufficient information to
ultimate loss estimate of $7 million. Subtracting any reported paid determine the appropriate expected loss ratio. This information
losses and loss expense would result in the indicated loss generally includes the actual loss ratios for prior accident years,
reserve for this class. ‘‘Bornhuetter Ferguson’’ methods are and rate changes as well as underwriting or other changes which
expected loss ratio methods for which the expected loss ratio is would affect the loss ratio. Further, an estimate of the loss cost
applied only to the expected unreported portion of the losses. For trend or loss ratio trend is required in order to allow for the effect
example, for a long-tail class of business for which only 10 per- of inflation and other factors which may increase or otherwise
cent of the losses are expected to be reported at the end of the change the loss costs from one accident year to the next.
accident year, the expected loss ratio would be applied to the Frequency/severity methods generally rely on the determination
90 percent of the losses still unreported. The actual reported of an ultimate number of claims and an average severity for each
losses at the end of the accident year would be added to claim for each accident year. Multiplying the estimated ultimate
determine the total ultimate loss estimate for the accident year. number of claims for each accident year by the expected average
Subtracting the reported paid losses and loss expenses would severity of each claim produces the estimated ultimate loss for
result in the indicated loss reserve. In the example above, the the accident year. Frequency/severity methods generally require a
expected loss ratio of 70 percent would be multiplied by sufficient volume of claims in order for the average severity to be
90 percent. The result of 63 percent would be applied to the predictable. Average severity for subsequent accident years is
earned premium of $10 million resulting in an estimated unre- generally determined by applying an estimated annual loss cost
ported loss of $6.3 million. Actual reported losses would be trend to the estimated average claim severity from prior accident
added to arrive at the total ultimate losses. If the reported losses years. Frequency/severity methods have the advantage that
were $1 million, the ultimate loss estimate under the ‘‘Bornhuet- ultimate claim counts can generally be estimated more quickly
ter Ferguson’’ method would be $7.3 million versus the $7 million and accurately than can ultimate losses. Thus, if the average
amount under the expected loss ratio method described above. claim severity can be accurately estimated, these methods can
Thus, the ‘‘Bornhuetter Ferguson’’ method gives partial credibility more quickly respond to changes in loss experience than other
to the actual loss experience to date for the class of business. methods. However, for average severity to be predictable, the
Form 10-K 2006 AIG 43

class of business must consist of homogeneous types of claims more than by claim frequency. Severity trends have varied
for which loss severity trends from one year to the next are significantly from accident year to accident year.
reasonably consistent. Generally these methods work best for
Workers Compensation: AIG generally utilizes loss development
high frequency, low severity classes of business such as personal
methods for all but the most recent accident year. Expected loss
auto. AIG utilizes these methods in pricing subclasses of
ratio methods generally are given significant weight only in the
professional liability. However, AIG does not generally utilize
most recent accident year. Workers compensation claims are
frequency/severity methods to test loss reserves, due to the
generally characterized by high frequency, low severity, and
general nature of AIG’s reserves being applicable to lower
relatively consistent loss development from one accident year to
frequency, higher severity commercial classes of business where
the next. AIG is a leading writer of workers compensation, and
average claim severity is volatile.
thus has sufficient volume of claims experience to utilize
Excess Casualty: AIG generally uses a combination of loss development methods. AIG does not believe frequency/severity
development methods and expected loss ratio methods for excess methods are as appropriate, due to significant growth and
casualty classes. Expected loss ratio methods are generally changes in AIG’s workers compensation business over the years.
utilized for at least the three latest accident years, due to the AIG generally segregates California business from other business
relatively low credibility of the reported losses. The loss experi- in evaluating workers compensation reserves. Certain classes of
ence is generally reviewed separately for lead umbrella classes workers compensation, such as construction, are also evaluated
and for other excess classes, due to the relatively shorter tail for separately. Additionally, AIG writes a number of very large
lead umbrella business. Automobile-related claims are generally accounts which include workers compensation coverage. These
reviewed separately from non-auto claims, due to the shorter tail accounts are generally priced by AIG actuaries, and to the extent
nature of the automobile related claims. The expected loss ratios appropriate, the indicated losses based on the pricing analysis
utilized for recent accident years are based on the projected may be utilized to record the initial estimated loss reserves for
ultimate loss ratios of prior years, adjusted for rate changes, these accounts.
estimated loss cost trends and all other changes that can be
Excess Workers Compensation: AIG generally utilizes a combina-
quantified. The estimated loss cost trend utilized in the year-end
tion of loss development methods and expected loss ratio
2006 reviews averaged approximately 6 percent for excess
methods. Loss development methods are given the greater weight
casualty classes. Frequency/severity methods are generally not
for mature accident years such as 2000 and prior. Expected loss
utilized as the vast majority of reported claims do not result in a
ratio methods are given the greater weight for the more recent
claim payment. In addition, the average severity varies significantly
accident years. Excess workers compensation is an extremely
from accident year to accident year due to large losses which
long-tail class of business, with loss emergence extending for
characterize this class of business, as well as changing propor-
decades. Therefore there is limited credibility in the reported
tions of claims which do not result in a claim payment.
losses for many of the more recent accident years. Beginning with
D&O: AIG generally utilizes a combination of loss development the year-end 2005 loss reserve review, AIG’s actuaries began to
methods and expected loss ratio methods for D&O and related utilize claims projections provided by AIG claims staff to help
management liability classes of business. Expected loss ratio determine the loss development factors for this class of business.
methods are given more weight in the two most recent accident
General Liability: AIG generally uses a combination of loss
years, whereas loss development methods are given more weight
development methods and expected loss ratio methods for
in more mature accident years. Beginning with the year-end 2005
primary general liability or products liability classes. For certain
loss reserve review, AIG’s actuaries began to utilize claim
classes of business with sufficient loss volume, loss development
projections provided by AIG claims staff as a benchmark for
methods may be given significant weight for all but the most
determining the indicated ultimate losses for accident years 2004
recent one or two accident years, whereas for smaller or more
and prior. For the year end 2006 loss reserve review, claims
volatile classes of business, loss development methods may be
projections for accident years 2005 and prior were utilized. In
given limited weight for the five or more most recent accident
prior years, AIG’s actuaries had utilized these claims projections
years. Expected loss ratio methods would be utilized for the more
as a benchmark for profitability studies for major classes of D&O
recent accident years for these classes. The loss experience for
and related management liability business. The track record of
primary general liability business is generally reviewed at a level
these claims projections has indicated a very low margin of error,
that is believed to provide the most appropriate data for reserve
thus providing support for their usage as a benchmark in
analysis. For example, primary claims made business is generally
determining the estimated loss reserve. These classes of busi-
segregated from business written on an occurrence policy form.
ness reflect claims made coverage, and losses are characterized
Additionally, certain subclasses, such as construction, are gener-
by low frequency and high severity. Thus, the claim projections
ally reviewed separately from business in other subclasses. Due
can produce an accurate overall indicator of the ultimate loss
to the fairly long-tail nature of general liability business, and the
exposure for these classes by identifying and estimating all large
many subclasses that are reviewed individually, there is less
losses. Frequency/severity methods are generally not utilized for
credibility in the reported losses and increased reliance on
these classes as the overall losses are driven by large losses
expected loss ratio methods. AIG’s actuaries generally do not
utilize frequency/severity methods to test reserves for this
44 AIG 2006 Form 10-K

business, due to significant changes and growth in AIG’s general accident year. Frequency/severity methods are not employed due
liability and products liability business over the years. to the high severity nature of the claims and different mix of
claims from year to year.
Commercial Automobile Liability: AIG generally utilizes loss devel-
opment methods for all but the most recent accident year for Personal Auto (Domestic): AIG generally utilizes frequency/severity
commercial automobile classes of business. Expected loss ratio methods and loss development methods for domestic personal
methods are generally given significant weight only in the most auto classes. For many classes of business, greater reliance is
recent accident year. Frequency/severity methods are generally placed on frequency/severity methods as claim counts emerge
not utilized due to significant changes and growth in this business quickly for personal auto and allow for more immediate analysis of
over the years. resulting loss trends and comparisons to industry and other
diagnostic metrics.
Healthcare: AIG generally uses a combination of loss development
methods and expected loss ratio methods for healthcare classes Fidelity/Surety: AIG generally uses loss development methods for
of business. The largest component of the healthcare business fidelity exposures for all but the latest accident year. Expected
consists of coverage written for hospitals and other healthcare loss ratio methods are also given weight for the more recent
facilities. Reserves for excess coverage are tested separately accident years, and for the latest accident year they may be given
from those for primary coverage. For primary coverages, loss 100 percent weight. For surety exposures, AIG generally uses the
development methods are generally given the majority of the same method as for short-tail classes.
weight for all but the latest three accident years, and are given
Mortgage Guaranty: AIG tests mortgage guaranty reserves using
some weight for all years other than the latest accident year. For
loss development methods, supplemented by an internal claim
excess coverages, expected loss methods are generally given all
analysis by actuaries and staff who specialize in the mortgage
the weight for the latest three accident years, and are also given
guaranty business. The claim analysis projects ultimate losses for
considerable weight for accident years prior to the latest three
claims within each of several categories of default based on
years. For other classes of healthcare coverage, an analogous
actual historical experience and is essentially a frequency/severity
weighting between loss development and expected loss ratio
analysis for each category of default.
methods is utilized. The weights assigned to each method are
those which are believed to result in the best combination of Short-Tail Classes: AIG generally uses either loss development
responsiveness and stability. Frequency/severity methods are methods or IBNR factor methods to set reserves for short-tail
sometimes utilized for pricing certain healthcare accounts or classes such as property coverages. Where a factor is used, it
business. However, in testing loss reserves the business is generally represents a percent of earned premium or other
generally combined into larger groupings to enhance the credibility exposure measure. The factor is determined based on prior
of the loss experience. The frequency/severity methods that are accident year experience. For example, the IBNR for a class of
applicable in pricing may not be appropriate for reserve testing property coverage might be expected to approximate 20 percent
and thus frequency/severity methods are not generally employed of the latest year’s earned premium. The factor is continually
in AIG’s healthcare reserve analyses. reevaluated in light of emerging claim experience as well as rate
changes or other factors that could affect the adequacy of the
Professional Liability: AIG generally uses a combination of loss
IBNR factor being employed.
development methods and expected loss ratio methods for
professional liability classes of business. Loss development International: Business written by AIG’s Foreign General Insurance
methods are used for the more mature accident years. Greater sub-segment includes both long-tail and short-tail classes of
weight is given to expected loss ratio methods in the more recent business. For long-tail classes of business, the actuarial methods
accident years. Reserves are tested separately for claims made utilized would be analogous to those described above. However,
classes and classes written on occurrence policy forms. Further the majority of business written by Foreign General Insurance is
segmentations are made in a manner believed to provide the short-tail, high frequency and low severity in nature. For this
most appropriate balance between credibility and homogeneity of business, loss development methods are generally employed to
the data. Frequency/severity methods are used in pricing and test the loss reserves. AIG maintains a data base of detailed
profitability analyses for some classes of professional liability; historical premium and loss transactions in original currency for
however, for loss reserve testing, the need to enhance credibility business written by Foreign General Insurance, thereby allowing
generally results in classes that are not sufficiently homogenous AIG actuaries to determine the current reserves without any
to utilize frequency/severity methods. distortion from changes in exchange rates over time. In testing
the Foreign General Insurance reserves, AIG’s actuaries segment
Aviation: AIG generally uses a combination of loss development
the data by region, country or class of business as appropriate to
methods and expected loss ratio methods for aviation exposures.
determine the optimal balance between homogeneity and
Aviation claims are not very long-tail in nature; however, they are
credibility.
driven by claim severity. Thus a combination of both development
and expected loss ratio methods are used for all but the latest Loss Adjustment Expenses: AIG determines reserves for legal
accident year to determine the loss reserves. Expected loss ratio defense and cost containment loss adjustment expenses for each
methods are used to determine the loss reserves for the latest class of business by one or more actuarial methods. The methods
Form 10-K 2006 AIG 45

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 six 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 2006 loss
loss expense to paid losses, based on actual experience from reserve review for excess casualty will range from negative four
prior accident years or from similar classes of business. AIG percent to positive 16 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 2006 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- $1.7 billion increase or a $1.2 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 four percent cited above, whereas actual loss cost trends
loss and loss expense liability from the event. 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 16 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
3.25 percent below those actually utilized in the year-end 2006
its aggregate carried reserves as necessary so that the actual
reserve review to approximately ten 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 3.25 percent and ten percent, respectively, the net
Volatility of Reserve Estimates and Sensitivity Analyses
loss reserves for the excess casualty class would decrease by
approximately $450 million under the lower assumptions orAs described above, AIG uses numerous assumptions in determin-
increase by approximately $1.25 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
period of time subsequent to the recording of the initial lossposition of using alternative loss trend or loss development factor
reserve estimates for any accident year. Thus, there is theassumptions rather than those actually used in determining AIG’s
potential for the reserves with respect to a number of accidentbest estimates in the year-end loss reserve analyses for 2006.
years to be significantly affected by changes in the loss costThe analysis addresses each major class of business for which a
trends or loss development factors that were initially relied uponmaterial deviation to AIG’s overall reserve position is believed
in setting the reserves. These changes in loss trends or lossreasonably possible, and uses what AIG believes is a reasonably
development factors could be attributable to changes in inflationlikely range of potential deviation for each class. There can be no
or in the judicial environment, or in other social or economicassurance, however, that actual reserve development will be
conditions affecting claims. Thus, there is the potential forconsistent with either the original or the adjusted loss trend or
variations greater than the amounts cited above, either positivelyloss development factor assumptions, or that other assumptions
or negatively.made in the reserving process will not materially affect reserve
development for a particular class of business.
46 AIG 2006 Form 10-K

D&O and Related Management Liability Classes of Business: For trend could vary significantly from this assumption, and there can
D&O and related management liability classes of business, the be no assurance that actual loss costs will not deviate, perhaps
assumed loss cost trend was approximately four percent. After materially, by greater than five percent.
evaluating the historical loss cost trends from prior accident years For excess workers compensation business, the assumed loss
since the early 1990s, in AIG’s judgment, it is reasonably likely development factors are a critical assumption. Excess workers
that actual loss cost trends applicable to the year-end 2006 loss compensation is an extremely long-tail class of business, with a
reserve review for these classes will range from negative much greater than normal uncertainty as to the appropriate loss
11 percent to positive 19 percent, or approximately 15 percent development factors for the tail of the loss development. After
lower or higher than the assumption actually utilized in the year- evaluating the historical loss development factors for prior
end 2006 reserve review. A 15 percent change in the assumed accident years since the 1980s, in AIG’s judgment, it is
loss cost trend for these classes would cause approximately a reasonably likely that actual loss development factors will range
$625 million increase or a $550 million decrease in the net loss approximately 15 percent lower or higher than those factors
and loss expense reserves for these classes of business. It actually utilized in the year-end 2006 loss reserve review for
should be emphasized that the 15 percent deviations are not excess workers compensation. If the loss development factor
considered the highest possible deviations that might be ex- assumptions were changed by 15 percent, the net loss reserves
pected, but rather what is considered by AIG to reflect a for excess workers compensation would increase or decrease by
reasonably likely range of potential deviation. Actual loss cost approximately $600 million. Given the exceptionally long-tail for
trends for these classes in the early 1990s were negative for this class of business, there is the potential for actual deviations
several years, including amounts below the negative 11 percent in the loss development tail to exceed the deviations assumed,
cited above, whereas actual loss cost trends in the late 1990s perhaps materially.
ran at nearly 50 percent per year for several years, vastly
Primary Workers Compensation: For primary workers compensa-
exceeding the 19 percent figure cited above. Because the D&O
tion, the loss cost trend assumption is not believed to be material
class of business has exhibited highly volatile loss trends from
with respect to AIG’s loss reserves. This is primarily because
one accident year to the next, there is the possibility of an
AIG’s actuaries are generally able to use loss development
exceptionally high deviation.
projections for all but the most recent accident year’s reserves,
For D&O and related management liability classes of business,
so there is limited need to rely on loss cost trend assumptions for
the assumed loss development factors are also an important
primary workers compensation business.
assumption but less critical than for excess casualty. Because
However, for primary workers compensation business the loss
these classes are written on a claims made basis, the loss
development factor assumptions are important. Generally, AIG’s
reporting and development tail is much shorter than for excess
actual historical workers compensation loss development factors
casualty. However, the high severity nature of the claims does
would be expected to provide a reasonably accurate predictor of
create the potential for significant deviations in loss development
future loss development. However, workers compensation is a
patterns from one year to the next. After evaluating the historical
long-tail class of business, and AIG’s business reflects a very
loss development factors for these classes of business for
significant volume of losses particularly in recent accident years
accident years since the early 1990s, in AIG’s judgment, it is
due to growth of the business. After evaluating the actual
reasonably likely that actual loss development factors will range
historical loss developments since the 1980s for this business, in
approximately five percent lower or higher than those factors
AIG’s judgment, it is reasonably likely that actual loss develop-
actually utilized in the year-end 2006 loss reserve review for these
ment factors will fall within the range of approximately 2.75 per-
classes. If the loss development factor assumptions were
cent below to 7.5 percent above those actually utilized in the year-
changed by five percent, the net loss reserves for these classes
end 2006 loss reserve review. If the loss development factor
would be estimated to increase or decrease by approximately
assumptions were changed by 2.75 percent and 7.5 percent,
$200 million. As noted above for excess casualty, actual historical
respectively, the net loss reserves for workers compensation
loss development factors are generally used to project future loss
would decrease or increase by approximately $525 million and
development. However, there can be no assurance that future
$1.5 billion, respectively. It should be noted that loss emergence
loss development patterns will be the same as in the past, or that
in 2006 for this class was higher than historical averages,
they will not deviate by more than the five percent.
resulting in an increase in loss reserves for prior accident years.
Excess Workers Compensation: For excess workers compensation However, it is too soon to ascertain if this increased emergence
business, loss costs were trended at six percent per annum. After represents a new trend in the pattern of loss development. For
reviewing actual industry loss trends for the past ten years, in this class of business, there can be no assurance that actual
AIG’s judgment, it is reasonably likely that actual loss cost trends deviations from the expected loss development factors will not
applicable to the year-end 2006 loss reserve review for excess exceed the deviations assumed, perhaps materially.
workers compensation will range five percent lower or higher than
Other Casualty Classes of Business: For casualty business other
this estimated loss trend. A five percent change in the assumed
than the classes discussed above, there is generally some
loss cost trend would cause approximately a $350 million
potential for deviation in both the loss cost trend and loss
increase or a $225 million decrease in the net loss reserves for
development factor assumptions. However, the effect of such
this business. It should be emphasized that the actual loss cost
Form 10-K 2006 AIG 47

deviations is expected to be less material when compared to the Superfund and waste dump site coverage and liability issues. If
the asbestos and environmental reserves develop deficiently,effect on the classes cited above.
such deficiency would have an adverse effect on AIG’s future
results of operations.Asbestos and Environmental Reserves
With respect to known asbestos and environmental claims, AIG
The 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 such
ago is subject to greater uncertainty than other types of claims asbestos and environmental claims. These units evaluate these
due to inconsistent court decisions as well as judicial interpreta- asbestos and environmental claims utilizing a claim-by-claim
tions and legislative actions that in some cases have tended to approach that involves a detailed review of individual policy terms
broaden coverage beyond the original intent of such policies and and exposures. Because each policyholder presents different
in others have expanded theories of liability. The insurance liability and coverage issues, AIG generally evaluates exposure on
industry as a whole is engaged in extensive litigation over these a policy-by-policy basis, considering a variety of factors such as
coverage and liability issues and is thus confronted with a known facts, current law, jurisdiction, policy language and other
continuing uncertainty in its efforts to quantify these exposures. factors that are unique to each policy. Quantitative techniques
AIG continues to receive claims asserting injuries and dam- have to be supplemented by subjective considerations, including
ages 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 as
of 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 early
The vast majority of these asbestos and environmental claims resolution with respect to these claims in an attempt to mitigate
emanate 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-resolution
also implemented. The current environmental policies that AIG techniques, including policy buybacks, complete environmental
underwrites 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 specialized
tal 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, while
indemnity amounts. That is, litigation expenses are included within AIG has resolved all claims with respect to miners and major
the limits of the liability AIG incurs. Individual significant claim manufacturers (Tier One), its claims staff continues to operate
liabilities, where future litigation costs are reasonably determina- under the same proactive philosophy to resolve claims involving
ble, are established on a case-by-case basis. accounts with products containing asbestos (Tier Two), products
Estimation of asbestos and environmental claims loss containing small amounts of asbestos, companies in the distribu-
reserves is a subjective process and reserves for asbestos and tion process, and parties with remote, ill-defined involvement in
environmental claims cannot be estimated using conventional asbestos (Tiers Three and Four). Through its commitment to
reserving techniques such as those that rely on historical accident appropriate staffing, training, and management oversight of asbes-
year loss development factors. The methods used to determine tos cases, AIG mitigates to the extent possible its exposure to
asbestos and environmental loss estimates and to establish the these claims.
resulting reserves are continually reviewed and updated by To determine the appropriate loss reserve as of December 31,
management. 2006 for its asbestos and environmental exposures, AIG per-
Significant factors which affect the trends that influence the formed a series of top-down and ground-up reserve analyses. In
asbestos and environmental claims estimation process are the order to ensure it had the most comprehensive analysis possible,
inconsistent court resolutions and judicial interpretations which AIG engaged a third-party actuary to assist in a review of these
broaden the intent of the policies and scope of coverage. The exposures, including ground-up estimates for both asbestos
current case law can be characterized as still evolving, and there reserves and environmental reserves consistent with the 2005
is little likelihood that any firm direction will develop in the near review. Prior to 2005, AIG’s reserve analyses for asbestos and
future. Additionally, the exposures for cleanup costs of hazardous environmental exposures was focused around a report year
waste dump sites involve issues such as allocation of responsibil- projection of aggregate losses for both asbestos and environmen-
ity among potentially responsible parties and the government’s tal reserves. Additional tests such as market share analyses were
refusal to release parties. also performed. Ground-up analyses take into account policy-
Due to this uncertainty, it is not possible to determine the holder-specific and claim-specific information that has been gath-
future development of asbestos and environmental claims with ered over many years from a variety of sources. Ground-up studies
the same degree of reliability as with other types of claims. Such can thus more accurately assess the exposure to AIG’s layers of
future development will be affected by the extent to which courts coverage for each policyholder, and hence for all policyholders in
continue to expand the intent of the policies and the scope of the the aggregate, provided a sufficient sample of the policyholders
coverage, as they have in the past, as well as by the changes in can be modeled in this manner.
48 AIG 2006 Form 10-K

In order to ensure its ground-up analyses were comprehensive, For environmental claims, an analogous series of frequency/
AIG staff produced in the 2006 analyses the information required severity tests are produced. Environmental claims from future
at policy and claim level detail for over 1,000 asbestos defend- report years, (i.e., IBNR) are projected out ten years, i.e., through
ants and nearly 1,000 environmental defendants. This repre- the year 2016.
sented over 95 percent of all accounts for which AIG had received At year-end 2006, AIG considered a number of factors and
any claim notice of any amount pertaining to asbestos or recent experience in addition to the results of the respective top-
environmental exposure. AIG did not set any minimum thresholds, down and ground-up analyses performed for asbestos and
such as amount of case reserve outstanding, or paid losses to environmental reserves. AIG considered the significant uncertainty
date, that would have served to reduce the sample size and that remains as to AIG’s ultimate liability relating to asbestos and
hence the comprehensiveness of the ground-up analysis. The environmental claims. This uncertainty is due to several factors
results of the ground-up analysis for each significant account were including:
examined by AIG’s claims staff for reasonableness, for consis- ( The long latency period between asbestos exposure and
tency with policy coverage terms, and any claim settlement terms disease manifestation and the resulting potential for involve-
applicable. Adjustments were incorporated accordingly. The results ment of multiple policy periods for individual claims;
from the universe of modeled accounts, which as noted above ( The increase in the volume of claims by currently unimpaired
reflects the vast majority of AIG’s known exposures, were then plaintiffs;
utilized to estimate the ultimate losses from accounts or expo- ( Claims filed under the non-aggregate premises or operations
sures that could not be modeled and to determine the appropriate section of general liability policies;
provision for all unreported claims. ( The number of insureds seeking bankruptcy protection and the
AIG conducted a comprehensive analysis of reinsurance effect of prepackaged bankruptcies;
recoverability to establish the appropriate asbestos and environ- ( Diverging legal interpretations; and
mental reserve net of reinsurance. AIG determined the amount of ( With respect to environmental claims, the difficulty in estimat-
reinsurance that would be ceded to insolvent reinsurers or to ing the allocation of remediation cost among various parties.
commuted reinsurance contracts for both reported claims and for After carefully considering the results of the ground-up analy-
IBNR. These amounts were then deducted from the indicated sis, which AIG updates on an annual basis, as well as all of the
amount of reinsurance recoverable. The year-end 2006 analysis above factors, including the recent report year experience, AIG
reflected an update to the comprehensive analysis of reinsurance determined its best estimate was to recognize an increase of
recoverability that was first completed in 2005. All asbestos $256 million in its carried net asbestos reserves, and a decrease
accounts for which there was a significant change in estimated of $58 million in its carried net environmental reserves at
losses in the 2006 review were analyzed to determine the December 31, 2006. The corresponding changes in gross
appropriate reserve net of reinsurance. reserves were an increase of approximately $570 million for
AIG also completed a top-down report year projection of its asbestos and a decrease of approximately $230 million for
indicated asbestos and environmental loss reserves. These environmental, respectively. A minor amount of additional incurred
projections consist of a series of tests performed separately for loss emergence pertaining to asbestos was reflected in 2006,
asbestos and for environmental exposures. primarily attributable to the general reinsurance operations of
For asbestos, these tests project the expected losses to be Transatlantic. The majority of the increase in asbestos reserves
reported over the next twenty years, i.e., from 2007 through resulting from the 2006 review is attributable to higher than
2026, based on the actual losses reported through 2006 and the expected emergence of claims pertaining to new asbestos policy
expected future loss emergence for these claims. Three scenarios exposures. A significant portion of this increase pertains to higher
were tested, with a series of assumptions ranging from more layers of excess coverage for certain major asbestos defendants
optimistic to more conservative. In the first scenario, all carried on business written by DBG. Approximately $80 million of the
asbestos case reserves are assumed to be within ten percent of overall $256 million net asbestos reserve increase is attributable
their ultimate settlement value. The second scenario relies on an to business written by Foreign General, approximately $30 million
actuarial projection of report year development for asbestos of which is in turn ceded to DBG. In 2006, Foreign General
claims reported from 1993 to the present to estimate case enhanced its capability to identify asbestos exposures, resulting in
reserve adequacy as of year-end 2006. The third scenario relies the identification of additional asbestos defendants in 2006, as
on an actuarial projection of report year claims for asbestos but well as higher layers of exposure for certain existing defendants.
reflects claims reported from 1989 to the present to estimate As described above, the ground up analysis as of 2006 now
case reserve adequacy as of year-end 2006. Based on the results models over 1,000 asbestos defendants and over 95 percent of
of the prior report years for each of the three scenarios described all known reported asbestos claims.
above, the report year approach then projects forward to the year The decrease in environmental reserves resulting from the
2026 the expected future report year losses, based on AIG’s 2006 review is primarily attributable to favorable loss trends in
estimate of reasonable loss trend assumptions. These calcula- recent report years. These favorable trends resulted in a reduced
tions are performed on losses gross of reinsurance. The IBNR expectation of unreported claims, i.e., IBNR, for future report
(including a provision for development of reported claims) on a years.
net basis is based on applying a factor reflecting the expected
ratio of net losses to gross losses for future loss emergence.
Form 10-K 2006 AIG 49

A summary of reserve activity, including estimates for applicable IBNR, relating to asbestos and environmental claims
separately and combined at December 31, 2006, 2005 and 2004 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.
2006 2005 2004
(in millions) Gross Net Gross Net Gross Net
Asbestos:
Reserve for losses and loss expenses at beginning of year $4,441 $1,840 $2,559 $1,060 $1,235 $ 386
Losses and loss expenses incurred(a)
571 267 2,207(b)
903(b)
1,595(b)
772(b)
Losses and loss expenses paid(a)
(548) (218) (325) (123) (271) (98)
Reserve for losses and loss expenses at end of year $4,464 $1,889 $4,441 $1,840 $2,559 $1,060
Environmental:
Reserve for losses and loss expenses at beginning of year $ 926 $ 410 $ 974 $ 451 $ 789 $ 283
(232) (59) 47(c)
27(c)
314(c)
234(c)
(106) (61) (95) (68) (129) (66)
Reserve for losses and loss expenses at end of year $ 588 $ 290 $ 926 $ 410 $ 974 $ 451
Combined:
Reserve for losses and loss expenses at beginning of year $5,367 $2,250 $3,533 $1,511 $2,024 $ 669
339 208 2,254(d)
930(d)
1,909(d)
1,006(d)
(654) (279) (420) (191) (400) (164)
Reserve for losses and loss expenses at end of year $5,052 $2,179 $5,367 $2,250 $3,533 $1,511
(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 $1.2 billion in the fourth quarter of 2005 and 2004, respectively,
and increases to net losses and loss expense reserves of $843 million and $650 million for the fourth quarter of 2005 and 2004, respectively.
(c) Includes increases to gross losses and loss expense reserves of $56 million and $250 million in the fourth quarter of 2005 and 2004, respectively,
(d) Includes increases to gross losses and loss expense reserves of $2.0 billion and $1.5 billion in the fourth quarter of 2005 and 2004, respectively,
As indicated in the table above, asbestos loss payments increased signiﬁcantly in 2006 compared to the prior years, primarily as a
result of payments pertaining to settlements that had been negotiated in earlier periods.
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, 2006, 2005 and 2004 were estimated as follows:
2006 2005 2004
(in millions) Gross Net Gross Net Gross Net
Asbestos $3,212 $1,469 $3,401 $1,465 $2,033 $ 876
Environmental 340 173 586 266 606 284
Combined $3,552 $1,642 $3,987 $1,731 $2,639 $1,160
A summary of asbestos and environmental claims count activity for the years ended December 31, 2006, 2005 and
2004 was as follows:
2006 2005 2004
Asbestos Environmental Combined Asbestos Environmental Combined Asbestos Environmental Combined
Claims at beginning of year 7,293 9,873 17,166 7,575 8,216 15,791 7,474 8,852 16,326
Claims during year:
Opened 643 1,383 2,026 854 5,253* 6,107 909 2,592 3,501
Settled (150) (155) (305) (67) (219) (286) (100) (279) (379)
Dismissed or otherwise
resolved (908) (1,659) (2,567) (1,069) (3,377) (4,446) (708) (2,949) (3,657)
Claims at end of year 6,878 9,442 16,320 7,293 9,873 17,166 7,575 8,216 15,791
* The opened claims count increased substantially during 2005 compared to 2004 because a court ruling led AIG to report separate opened claims for
previously pending cases relating to alleged MTBE exposures that AIG previously had counted in the aggregate as only a single claim on the assumption
that the cases would be consolidated into a single federal court proceeding.
50 AIG 2006 Form 10-K

Survival Ratios — Asbestos and Environmental Life Insurance & Retirement Services
OperationsThe following table presents AIG’s survival ratios for asbestos and
environmental claims for year-end 2006, 2005 and 2004. The AIG’s Life Insurance & Retirement Services subsidiaries offer a
survival ratio is derived by dividing the year end carried loss wide range of insurance and retirement savings products both
reserve by the average payments for the three most recent domestically and abroad.
calendar years for these claims. Therefore, the survival ratio is a Domestically, AIG’s Life Insurance & Retirement Services
simplistic measure estimating the number of years it would be operations offer a broad range of protection products, such as life
before the current ending loss reserves for these claims would be insurance and group life and health products, including disability
paid off using recent year average payments. The December 31, income products and payout annuities, which include single
2006 survival ratio is lower than the ratio at December 31, 2005 premium immediate annuities, structured settlements and termi-
because the more recent periods included in the rolling average nal funding annuities. Home service operations include an array of
reflect higher claims payments. Many factors, such as aggressive life insurance, accident and health and annuity products sold
settlement procedures, mix of business and level of coverage primarily through career agents. In addition, home service in-
provided, have a significant effect on the amount of asbestos and cludes a small block of runoff property and casualty coverage.
environmental reserves and payments and the resultant survival Retirement services include group retirement products, individual
ratio. Thus, caution should be exercised in attempting to deter- fixed and variable annuities sold through banks, broker-dealers
mine reserve adequacy for these claims based simply on this and exclusive sales representatives, and annuity runoff opera-
survival ratio. tions, which include previously acquired ‘‘closed blocks’’ and
other fixed and variable annuities largely sold through distributionAIG’s survival ratios for asbestos and environmental
relationships that have been discontinued.claims, separately and combined were based upon a
Overseas, AIG’s Life Insurance & Retirement Services opera-three-year average payment. These ratios for the years
tions include insurance and investment-oriented products such asended December 31, 2006, 2005 and 2004 were as
whole and term life, investment linked, universal life and endow-follows:
ments, personal accident and health products, group products
Gross Net including pension, life and health, and fixed and variable
2006 annuities.
Survival ratios: AIG’s Life Insurance & Retirement Services subsidiaries report
Asbestos 11.7 12.9
their operations through the following major internal reporting
Environmental 5.3 4.5
units and business units:Combined 10.3 10.3
2005
Foreign Life Insurance & Retirement ServicesSurvival ratios:
Asbestos 15.9 19.8 Japan and Other*
( ALICOCombined 13.0 14.2
( AIG Star Life
2004
( AIG Edison LifeSurvival ratios:
Asbestos 10.7 13.5 Asia
( AIACombined 9.1 10.5
( Nan Shan
( AIRCO
( Philamlife
Domestic Life Insurance
( AIG American General
( USLIFE
( AGLA
Domestic Retirement Services
( VALIC
( AIG Annuity
( AIG SunAmerica
* Japan and Other consists of all operations in Japan and the
operations of ALICO and its subsidiaries worldwide.
Form 10-K 2006 AIG 51

Life Insurance & Retirement Services Results
Life Insurance & Retirement Services results for 2006, 2005 and 2004 were as follows:
Net Realized
GAAP Investment Capital Gains Total Operating
(in millions) Premiums Income (Losses) Revenues Income
2006
Foreign Life Insurance & Retirement Services $24,036 $ 9,173 $ 707 $33,916 $ 6,792
Domestic Life Insurance 5,543 3,778 (215) 9,106 917
Domestic Retirement Services 1,057 6,488 (404) 7,141 2,323
Total $30,636 $19,439 $ 88 $50,163 $10,032
2005
Domestic Life Insurance 5,447 3,733 35 9,215 1,495
Domestic Retirement Services 937 6,226 (277) 6,886 2,164
Total $29,400 $18,134 $(158) $47,376 $ 8,904
2004
Domestic Life Insurance 5,376 3,459 (120) 8,715 1,023
Domestic Retirement Services 795 5,976 (207) 6,564 2,054
Total $28,088 $15,269 $ 45 $43,402 $ 7,925
invested assets. Realized capital gains increased $246 millionThe following table presents the Insurance In-force for
in 2006 compared to 2005. In addition, operating income inLife Insurance & Retirement Services for the years
2006 includes charges of $125 million for the adverse Superiorended December 31, 2006, 2005 and 2004:
National arbitration ruling (see Note 12(c) of Notes to Consoli-
dated Financial Statements) and $66 million related to the
(in millions) 2006 2005 2004
exiting of the domestic financial institutions credit life business.
Foreign $1,162,699 $1,027,682 $1,085,843
Domestic* 907,901 825,151 772,251
Total $2,070,600 $1,852,833 $1,858,094
Life Insurance & Retirement Services revenues, including real-* Domestic insurance in-force for 2005 includes the effect of the non-
ized capital losses of $158 million, grew $4.0 billion torenewal of a single large group life case of $36 billion.
$47.4 billion. The increase in revenues reflects growth in the
underlying global Life Insurance & Retirement Services busi-2006 and 2005 Comparison
nesses. Operating income grew $979 million in 2005, reflecting
Life Insurance & Retirement Service revenues increased growth in both domestic and overseas operations. In 2005, the
$2.8 billion in 2006, to $50.2 billion. The increased revenues Domestic Life Insurance reporting unit performed well in its life
reflect growth in the underlying global Life Insurance & Retire- insurance and payout annuities businesses, but results were
ment Services businesses. Revenues include the positive effect offset by restructuring efforts in both home services and group
of out of period adjustments related to the accounting for life/health. The Domestic Retirement Services reporting unit
certain interests in unit investment trusts totaling $240 million faced a challenging environment in 2005, resulting in lower
in 2006. Operating income grew by $1.1 billion from 2005, to deposits and increased surrender rates. The Foreign Life
$10.0 billion, reflecting higher revenues and out of period Insurance & Retirement Services reporting unit had improved
reductions of policy benefits expense of $163 million resulting operating income in 2005 helped by higher net investment
from corrections of par policyholder dividend reserves and income, lower acquisition and operating expenses in life insur-
allocations between participating and non-participating accounts, ance and strong growth in annuities, partially offset by lower
both of which were related to remediation efforts. Net invest- realized capital gains and higher incurred policy benefit costs.
ment income increased $1.3 billion, reflecting growth in the
underlying global business and the related increased level of
52 AIG 2006 Form 10-K

Foreign Life Insurance & Retirement Services Results
Foreign Life Insurance & Retirement Services results for 2006, 2005 and 2004 were as follows:
Net Realized
2006
Japan and Other:
Life insurance(a)
$ 4,769 $1,696 $316 $ 6,781 $1,725
Personal accident 3,957 162 49 4,168 1,122
Group products 1,740 541 13 2,294 272
Individual fixed annuities 337 1,930 28 2,295 553
Individual variable annuities 173 325 — 498 60
Total $10,976 $4,654 $406 $16,036 $3,732
Asia:
Life insurance(b)
$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 fixed annuities 63 97 3 163 27
Total $13,060 $4,519 $301 $17,880 $3,060
Total Foreign Life Insurance & Retirement Services:
Life insurance(a)(b)
$15,718 $5,884 $574 $22,176 $4,241
Group products 2,226 648 47 2,921 450
Total $24,036 $9,173 $707 $33,916 $6,792
2005
Japan and Other:
Life insurance $ 4,852 $1,752 $ (52) $ 6,552 $1,280
Personal accident 3,788 137 (15) 3,910 1,051
Group products 1,473 535 (34) 1,974 191
Total $10,502 $4,863 $ (72) $15,293 $2,959
Asia:
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 $15,631 $4,808 $ 94 $20,533 $3,187
Personal accident 5,002 255 (30) 5,227 1,292
Group products 1,925 613 (9) 2,529 322
Total $23,016 $8,175 $ 84 $31,275 $5,245
Form 10-K 2006 AIG 53

Net Realized
2004
Japan and Other:
Life insurance $ 4,469 $1,371 $(134) $ 5,706 $1,079
Personal accident 3,307 96 16 3,419 932
Group products 1,229 378 (42) 1,565 133
Total $ 9,385 $2,998 $(156) $12,227 $2,393
Asia:
Life insurance $10,469 $2,676 $ 497 $13,642 $2,098
Personal accident 994 83 17 1,094 260
Group products(c)
986 53 14 1,053 90
Individual variable annuities — 1 — 1 —
Total $12,532 $2,836 $ 528 $15,896 $2,455
Life insurance $14,938 $4,047 $ 363 $19,348 $3,177
Group products(c)
2,215 431 (28) 2,618 223
Total $21,917 $5,834 $ 372 $28,123 $4,848
(a) Includes the effect of out of period adjustments related to the accounting for certain interests in unit investment trusts. For 2006, the effect was an
increase of $32 million in both net investment income and operating income.
(b) Includes the effect of out of period adjustments related to the accounting for certain interests in unit investment trusts. For 2006, the effect was an
increase of $208 million and $137 million in net investment income and operating income, respectively. Operating income also includes an out of
period reduction in participating policyholder dividend reserves of $163 million, primarily as a result of tax remediation adjustments.
(c) Revenues include approximately $640 million of premiums from a single reinsurance transaction involving terminal funding business, which is offset by
a similar increase of beneﬁt reserves.
2006. In addition, operating income was negatively affected by
AIG transacts business in most major foreign currencies and
the continued runoff of the older, higher margin in-force business
therefore premiums reported in U.S. dollars vary by volume and
of AIG Star Life and AIG Edison Life.
from changes in foreign currency translation rates. The following
Life insurance GAAP premiums declined in 2006 compared to
table summarizes the effect of changes in foreign currency
2005 primarily due to the effect of foreign exchange. Foreign
exchange rates on the growth of the Foreign Life Insurance &
exchange negatively affected GAAP premiums by approximately
Retirement Services GAAP premiums for the year ended Decem-
$250 million, most notably as a result of the weakening in the
ber 31, 2006 and 2005:
Japanese Yen. Life insurance operating income grew $445 million,
primarily due to an increase of $368 million of realized capital2006 2005
gains. Life insurance growth improved due to an increase in single
Growth in original currency* 6.4% 2.5% premium life insurance sales in Japan as a result of further bank
Foreign exchange effect (2.0) 2.5
deregulation effective in December 2005. The expansion of the
Growth as reported in U.S. dollars 4.4% 5.0% bank distribution platform for single premium life insurance
products adds to the existing multiple distribution platforms in* Computed using a constant exchange rate for each period.
Japan, where AIG remains the leading foreign insurance provider.
Personal accident revenues grew $258 million or 7 percentJapan and Other
resulting in operating income growth of $71 million or 7 percent.2006 and 2005 Comparison
Personal accident operating income includes the effect of higher
Total revenues for Japan and Other increased $743 million in
terminations of certain accident and health policies in Japan
2006, to $16.0 billion, compared to 2005. Operating income grew
which increased expenses by $54 million in 2006. The higher
$773 million, due to growth in the underlying retirement services
terminations are a result of a change in the Japanese tax
businesses and realized capital gains of $406 million. The 2006
regulations that reduced the tax deduction for premiums. AIG’s
results for the reporting unit were negatively affected by the
Japanese operations have experienced lower sales and higher
weakening of the Japanese Yen against the U.S. dollar during
terminations of these contracts. DAC related to these accident
54 AIG 2006 Form 10-K

and health policies in force at December 31, 2006 totaled ing realized capital gains of $301 million. Revenues and
$214 million. In response to the tax law change, AIG has operating income in 2006 include $208 million and
introduced new products, both life and health, to meet the needs $137 million, respectively, from out of period adjustments
of clients in that market. AIG continues to believe that the effect related to certain investments in unit trusts. GAAP premiums
of future policy terminations will not be material to AIG’s grew 4 percent in 2006 compared to 2005. The GAAP
consolidated financial condition or results of operations. premium growth rate was negatively affected by the continu-
Revenues from group products increased in 2006 by $320 mil- ing trend towards investment-oriented products in Asia as
lion, to $2.3 billion, resulting in an increase in operating income only a portion of policy charges collected from the custom-
of $81 million to $272 million. Fixed annuity reserves continued ers are reported as GAAP premiums. AIG’s Life Insurance
to grow due to positive net flows, but demand for U.S. dollar fixed operations in Asia have responded to this trend by offering a
annuities has slowed due to a weaker Japanese Yen. The wide array of investment linked products, with multiple fund
individual fixed annuity revenues grew $302 million to $2.3 billion choices but with minimal investment guarantees.
resulting in an increase in operating income of $163 million to Operating income benefited in 2006 from an out of period
$553 million. Growth in variable annuity deposits has accelerated reduction in participating policyholder dividend reserves of
compared to 2005 due to new product offerings and stronger $163 million, primarily as a result of tax remediation adjustments
equity markets, resulting in higher fees and policy charges and a correction to expense allocations between participating and
included in GAAP premiums. Variable annuity revenues declined in non-participating accounts. Certain participating policyholder divi-
2006 compared to 2005 due to lower policyholder trading gains dend reserves are determined on an after tax basis and as a
which comprise the entirety of variable annuity net investment result any change in the local tax provision will have a partially
income. Policyholder trading gains are offset by an equal increase offsetting, but not equal, effect on participating policyholder
in policy benefits expense, as all investment returns for these dividend reserves. The amount of the offsetting effect depends on
variable annuities accrue to the benefit of the policyholder. the level of participation required by law or regulation in that
specific country or by the participation level provided for in the
underlying contracts. In 2005, operating income for Asia included2005 and 2004 Comparison
a charge of $137 million related to an increase in participating
In 2005, total revenues for the Japan and Other reporting
policyholder dividends as a result of the settlement of a tax
unit grew $3.1 billion to $15.3 billion, including policyholder
dispute in Singapore. Life insurance revenues grew $1.4 billion to
trading gains of $1.3 billion. Operating income grew
$15.4 billion in 2006, including realized capital gains of $258 mil-
$566 million to $3.0 billion. Compared to 2004, results
lion and policyholder trading gains of $552 million, helped by
reported in U.S. dollars were negatively affected by foreign
strong growth in investment linked products throughout Asia.
exchange, particularly the weakening of the Japanese Yen to
Operating income grew $609 million, including adjustments in
the U.S. dollar. In addition, Japan and Other operating
2006 and 2005 for participating policyholder dividend reserves
income was negatively affected by the runoff of older higher
mentioned above. Operating income includes the Life Insurance &
margin in-force business of AIG Star Life and AIG Edison
Retirement Services segment’s equal share of the results of AIG
Life. Life insurance operating income grew primarily due to
Credit Card Company (Taiwan), which amounted to a loss of
lower realized capital losses and higher GAAP premiums.
$47 million in 2006 compared to a gain of $26 million in 2005.
Personal accident operating income continued to report
Personal accident revenues grew 28 percent to $1.7 billion,
stable profit margins and grew $119 million to $1.05 billion.
reflecting increased focus on risk based accident and health
Group operating income grew to $191 million on strong
products. The growth in revenues resulted in operating income of
growth in ALICO operations outside of Japan. Individual fixed
$337 million for the year, an increase of 40 percent over 2005.
annuities operating income grew to $390 million, primarily
Group products revenues increased $72 million from 2005, to
from strong growth of net flows that increased underlying
$627 million, resulting in operating income growth of $47 million
reserves in Japan. Individual fixed annuity operating income
to $178 million.
for 2005 included a charge of $47 million related to the
unwinding of certain businesses in Chile that were sold in
2006. Individual variable annuities operating income grew to
$47 million on higher average reserves. Net investment In 2005, revenues were essentially unchanged at $16.0 bil-
income for individual variable annuities grew to $767 million lion on lower realized capital gains that declined $372 mil-
in 2005 and represents policyholder trading gains lion, due to lower gains on derivatives that did not qualify for
(losses) that are offset by an equal amount in incurred hedge accounting. Operating income declined in 2005 by
policy losses and benefits. $169 million due to the decrease in realized capital gains
and an increase in liabilities for participating policyholder
dividends of $137 million as a result of the settlement of aAsia
tax dispute in Singapore. Life insurance GAAP premiums2006 and 2005 Comparison
grew $310 million to $10.8 billion. Life insurance operating
Revenues for Asia grew $1.9 billion in 2006 to $17.9 billion.
income did not grow in 2005 due to the effect of the
Operating income grew $774 million, to $3.1 billion, includ-
additional par policy dividend reserves previously noted and
Form 10-K 2006 AIG 55

lower realized capital gains. Personal accident operating 2004. 2004 GAAP premiums included premiums of approxi-
income declined primarily due to realized capital losses in mately $640 million from a single reinsurance transaction
2005 compared to realized capital gains in 2004. Group involving terminal funding business, which is offset by a
products GAAP premiums dropped in 2005 compared to similar increase in benefit reserves.
Domestic Life Insurance Results
Domestic Life Insurance results, presented on a sub-product basis for 2006, 2005 and 2004 were as follows:
Net Realized Operating
GAAP Investment Capital Gains Total Income
(in millions) Premiums Income (Losses) Revenues (Loss)
2006
Life insurance(a)
$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(b)
1,582 1,004 (51) 2,535 76
Individual ﬁxed annuities 4 77 (8) 73 8
Individual annuities — runoff(c)
45 477 (27) 495 56
Total $5,543 $3,778 $(215) $9,106 $ 917
2005
Life insurance(a)
$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(b)
1,473 912 (34) 2,351 128
50 616 (26) 640 135
Total $5,447 $3,733 $ 35 $9,215 $1,495
2004
Life insurance(a)
$1,821 $1,228 $ (94) $2,955 $ 612
Home service 812 608 (18) 1,402 290
Group life/health 1,195 182 — 1,377 (131)
Payout annuities(b)
1,484 801 (8) 2,277 124
Individual ﬁxed annuities 4 22 3 29 1
60 618 (3) 675 127
Total $5,376 $3,459 $(120) $8,715 $1,023
(a) Effective January 1, 2006, the broker-dealer operations of the Domestic Life Insurance companies are being reported and managed within the Asset
Management segment. Included in GAAP premiums and Total Revenues were revenues of $102 million and $96 million, respectively, for 2005 and
2004.
(b) GAAP Premiums and Total Revenues include structured settlements, single premium immediate annuities and terminal funding annuities.
(c) Primarily represents runoff annuity business sold through discontinued distribution relationships.
56 AIG 2006 Form 10-K

DAC unlocking charge of $11 million and higher realized capitalThe following table reflects periodic Domestic Life insur-
losses. Group life/health operating income for 2006 was lowerance sales by product for 2006, 2005 and 2004,
than 2005 primarily due to the $125 million Superior Nationalrespectively:
charge and the $66 million loss associated with the exit from theDomestic Life Insurance
financial institutions credit business. The group life/health lines
(in millions) 2006 2005 2004
operating income was also affected by a $25 million charge for
Periodic Premium Sales By Product*: litigation reserves. Payout annuities operating income declined for
Universal life $334 $271 $201 2006 due to lower calls and tenders on fixed maturity securities.
Variable universal life 56 44 79 In addition, various methodologies and assumptions were en-
Term life 240 229 215 hanced for payout annuity reserves, resulting in a $24 million
Whole life/other 13 10 13 increase to the payout annuity reserves. Individual annuities —
Total $643 $554 $508 runoff operating income is down from 2005 due to the decline in
the block of business and the related DAC unlocking charge of* Periodic premium represents premium from new business expected to
$30 million to reflect lower in-force amounts.be collected over a one-year period.
2005 and 2004 Comparison2006 and 2005 Comparison
The Domestic Life Insurance operations in 2005 had continuedGAAP premiums for Domestic Life Insurance were $5.5 billion in
growth in term and universal life sales with good performance2006, a 2 percent increase compared to 2005. Overall, periodic
from the independent distribution channels. GAAP premiums forlife insurance sales grew by 16 percent, compared to 2005,
life insurance grew 12 percent in 2005 reflecting consistentlyreflecting increased growth from the independent distribution
strong sales from the independent distribution platform. Payoutplatform. During the second half of 2006, certain universal life
annuities declined slightly due to the low interest rate environmentproducts were re-priced and underwriting standards were tight-
and the competitive market conditions for structured settlementened, which could affect future periodic life insurance sales. GAAP
and single premiums individual annuity business. Home servicepremiums from AGLA, AIG’s home service business, declined
GAAP premiums were essentially flat in this slow growth business.slightly in 2006 as the reduction of premium in-force from normal
The group life/health GAAP premiums declined by $116 million, orlapses and maturities exceeded sales growth for the period. GAAP
10 percent, primarily due to the non-renewal of several accountspremiums for group life/health for 2006 declined over the prior
where pricing was unacceptable and loss experience was higheryear primarily due to restructuring efforts in certain product lines,
than anticipated.including the financial institutions credit life business and the
employer benefits business. The GAAP premium growth from
Domestic Life Insurance operating income of $1.5 billion
payout annuities for 2006 reflects increased sales of single
increased 46 percent in 2005 resulting from increased realized
premium annuities and structured settlements when compared to
capital gains, higher partnership income and growth in the
2005. At December 31, 2006, AIG effectively exited the financial
underlying business compared to 2004. Life insurance operating
institutions credit business through a third party indemnity
income was up 43 percent in 2005 compared to 2004 due in part
reinsurance agreement. The transaction is expected to close in
to growth in the underlying business, improved mortality results
the first quarter of 2007, subject to normal closing requirements,
and higher realized capital gains, offset by higher losses from
including regulatory approval. GAAP premiums in 2006 related to
partnership investments in synthetic fuel production facilities.
this business were approximately $100 million.
Home service operating income declined as a result of a
reduction in premiums in-force and higher insurance and acquisi-Domestic Life Insurance operating income of $917 million
tions expenses, combined with an increase in losses related todeclined by 39 percent in 2006 compared to 2005 due to several
hurricanes. Group life/health operating income was affected bysignificant transactions, including a $125 million charge resulting
the non-renewal of cases where acceptable margins could not befrom the loss of the Superior National arbitration. For a further
achieved. Operating income in 2004 includes a $178 milliondiscussion of the Superior National arbitration see Note 12(c) of
charge related to a workers compensation quota share reinsur-Notes to Consolidated Financial Statements. In addition, Domestic
ance agreement with Superior National. In addition, in 2004, asLife operating income was negatively affected by a $55 million
part of the business review of group life/health, approximatelyaccrual related to other litigation and a $66 million loss related to
$68 million was incurred for reserve strengthening and al-exiting the financial institutions credit business.
lowances for receivables. Payout annuities operating income
Life insurance operating income decreased by $220 million or increased 3 percent as growth in the business base was offset by
25 percent for 2006 due to a $45 million decrease in partnership higher realized capital losses. Individual annuities runoff operating
income, $30 million in litigation-related charges and realized income increased in 2005 primarily as a result of lower operating
capital losses that offset growth in the underlying business. Home expenses offset by higher realized capital losses when compared
service operating income was flat compared with 2005 due to to 2004.
increased net investment income from partnerships and lower
acquisition costs and catastrophe losses, partially offset by a
Form 10-K 2006 AIG 57

Domestic Retirement Services Results
Domestic Retirement Services results, presented on a sub-product basis for 2006, 2005 and 2004 were as follows:
Net Realized
(in millions) Premiums Income (Losses) Revenue Income
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 fixed annuities 97 3,346 (214) 3,229 858
Individual variable annuities 467 217 4 688 189
Individual annuities — runoff* 22 430 — 452 62
Total $ 937 $6,226 $(277) $6,886 $2,164
2004
Group retirement products $ 313 $2,201 $(111) $2,403 $ 987
Individual fixed annuities 55 3,078 (78) 3,055 851
Individual variable annuities 407 239 (17) 629 176
Individual annuities — runoff* 20 458 (1) 477 40
Total $ 795 $5,976 $(207) $6,564 $2,054
* Primarily represents runoff annuity business sold through discontinued distribution relationships.
2006 and 2005 Comparison operating income. Total revenues for individual fixed annuities
were up 7 percent in 2006 and operating income was up
Domestic Retirement Services total deposits decreased slightly for
21 percent primarily driven by higher partnership and yield
2006 compared to 2005. The decrease in total deposits reflects
enhancement income. Individual variable annuity total revenues
lower fixed annuity sales that continued to face increased
were up 7 percent in 2006, primarily driven by higher variable
competition from bank deposit products and money market funds
annuity fees resulting from the increase in the equity markets.
offering very competitive short-term rates in the flat yield curve
Offsetting somewhat the growth in total revenues was an increase
environment. This was partially offset by substantially higher
in DAC amortization resulting from increased surrender activity in
individual variable annuity sales and group mutual fund deposits.
the first half of 2006, with operating income up 2 percent for the
Individual variable annuity deposits grew 29 percent in 2006 from
year. In 2006, the individual annuities runoff operating income
2005, reflecting growth in products with living benefit guarantee
increased $15 million even though the underlying reserves
features. Group retirement deposits grew 6 percent in 2006,
decreased. The higher income in 2006 was primarily due to
reflecting 51 percent growth in group mutual fund sales partially
increased net spreads as a result of higher investment yields
offset by a 1 percent sales drop in annuity deposits. Over time,
partially offset by increased realized capital losses and lower
this will result in a gradual reduction in overall profit margins of
volumes due to the continued runoff of the business.
this business driven by the growth in the lower-margin mutual fund
products relative to the annuity products. Fixed annuity surrender
rates increased in 2006 compared to 2005 due to products
coming out of their surrender charge period and the increased The Domestic Retirement Services businesses faced a challenging
competition from banks. Individual fixed annuity net flows for environment in 2005, as deposits declined approximately 18 per-
2006 were negative $2.7 billion compared to positive net flows of cent from 2004. The decrease in AIG’s individual variable annuity
$1.3 billion in 2005, reflecting both the lower deposits and higher product sales in 2005 was largely attributable to significant
surrenders, caused by the flat or inverted yield curve. variable annuity sales declines at several of AIG’s largest
Total domestic retirement service operating income for 2006 of distribution firms due to lackluster equity markets, more intense
$2.3 billion increased 7 percent from 2005. Group retirement industry competition with regard to living benefit product features
products total revenues were flat in 2006 primarily due to and heightened compliance procedures over selling practices.
improvements in partnership income and variable annuity fees AIG’s introduction of more competitive guaranteed minimum
being offset by increased capital losses. The flat revenues, withdrawal features was delayed until late in the fourth quarter of
coupled with higher amortization of deferred acquisition costs 2005 due to filing delays associated with the restatements.
related to internal replacements of existing contracts into new During 2005, the interest yield curve flattened and, as a result,
contracts, resulted in a 4 percent decrease in group retirement competing bank products such as certificates of deposit and other
58 AIG 2006 Form 10-K

money market instruments with shorter durations than AIG’s In 2006, surrender rates increased for individual fixed annui-
individual fixed annuity products became more attractive. ties, group retirement products and individual variable annuities.
Total Domestic Retirement Services operating income for 2005 The increase in surrender rate for fixed annuities continues to be
of $2.2 billion increased 5 percent compared to 2004 operating driven by the shape of the yield curve and general aging of the in-
income of $2.1 billion. Total revenues for the group retirement force block; however, less than 20 percent of the individual fixed
products increased 5 percent in 2005 compared to 2004 while annuity reserves as of December 31, 2006 were available to be
operating income increased 7 percent, primarily due to higher surrendered without charge. Surrender rates for group retirement
variable annuity fee income and lower realized capital losses. products increased only slightly as a result of successful retention
Individual fixed annuity total revenues were up 6 percent in 2005 efforts. In 2006, new products were introduced to retain assets
primarily due to an increase in net investment income, partially and AIG has retained or attracted over $1 billion in assets.
offset by higher realized capital losses. Operating income for Individual variable annuity surrender rates for 2006 primarily
individual fixed annuities increased primarily due to the increase in reflect higher shock-lapses that occur following expiration of the
net investment income from growth in average reserves and surrender charge period on certain 3-year and 7-year contracts,
higher surrender charges, partially offset by the higher level of although the trend moderated during the year. Reflecting a
realized capital losses. Individual variable annuities total revenues widespread industry phenomenon, this lapse rate, much of which
were up 9 percent in 2005, primarily driven by higher variable was anticipated when the products were issued, has recently been
annuity fees resulting from the increase in the equity markets in affected by investor demand to exchange existing policies for new-
the fourth quarter of 2004 and an increase in realized capital generation contracts with living benefits or lower fees. In addition,
gains. The 7 percent growth in individual variable annuities income the high lapse rates are in part due to the surrenders within
was consistent with the overall growth in reserves. In 2005, the certain acquired blocks of business.
individual annuities runoff operating income increased $22 million A further increase in the level of surrenders in any of these
even though the underlying reserves decreased. The higher businesses or in the individual fixed annuities runoff block could
income in 2005 was due to lower interest crediting rates and accelerate the amortization of DAC and negatively affect fee
lower DAC amortization due to lower surrenders. income earned on assets under management.
The following table presents the net flows by line of
Domestic Retirement Services Supplemental Data
business for 2006, 2005 and 2004:
The following table presents deposits for 2006, 2005 and Net Flows(a)
2004: (in millions) 2006 2005 2004
(in millions) 2006 2005 2004 Group retirement products(b)
$ 467 $ 628 $ 1,706
Individual fixed annuities (2,697) 1,288 5,936Group retirement products:
Individual variable annuities (114) (336) 1,145Annuities $ 5,464 $ 5,532 $ 5,555
Individual fixed annuities — runoff (1,009) (818) (714)Mutual funds 1,361 904 947
Individual fixed annuities 5,330 6,861 9,713 Total $(3,353) $ 762 $ 8,073
Individual variable annuities 4,266 3,319 4,126
(a) Net flows are defined as deposits received less benefits, surrenders,Individual fixed annuities — runoff 56 67 77
withdrawals and death benefits.
Total $16,477 $16,683 $20,418 (b) Includes mutual funds.
The combination of lower deposits and higher surrenders in theThe following table presents the amount of reserves by
individual fixed annuity and individual fixed annuity-runoff blocks,surrender charge category as of December 31, 2006:
which include closed blocks of business from acquired companies
Group Individual Individual
or terminated distribution relationships, resulted in negative netRetirement Fixed Variable
(in millions) Products* Annuities Annuities flows for 2006. The continuation of the current interest rate and
competitive environment could prolong this trend.Zero or 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 $57,954 $52,685 $31,093
* Excludes mutual funds.
Form 10-K 2006 AIG 59

Life Insurance & Retirement Services Net Investment Income and
(in millions) 2006 2005 2004
Realized Capital Gains (Losses)
Total investment income before
The following table summarizes the components of net policyholder trading gains
investment income for 2006, 2005 and 2004: (losses) $18,726 $17,293 $15,361
Policyholder trading gains(in millions) 2006 2005 2004
(losses)(c)
1,053 1,177 196
Domestic
Total investment income 19,779 18,470 15,557Fixed maturities, including short
term investments $ 9,089 $ 9,060 $ 8,646 Investment expenses 340 336 288
Equity securities 32 10 27 Net investment income(d)
$19,439 $18,134 $15,269
Interest on mortgage, policy and
(a) Other net investment income includes real estate income, income oncollateral loans 798 728 669
non-partnership invested assets, securities lending and Life Insurance
Partnership income — excluding
& Retirement Services’ equal share of the results of AIG Credit Card
Synfuels 505 359 293 Company (Taiwan).
Partnership income (loss) — (b) Includes the effect of out of period adjustments relating to the
Synfuels (107) (143) (121) accounting for certain interests in unit investment trusts. For 2006, the
Unit investment trusts 5 — — effect was an increase of $240 million.
Other(a)
49 56 (20) (c) Relates principally to assets held in various trading securities accounts
that do not qualify for separate account treatment under SOP 03-1.
Total investment income 10,371 10,070 9,494
These amounts are offset by an equal change included in incurred
policy losses and benefits.Investment expenses 105 111 59
(d) Includes call and tender income.Net investment income $10,266 $ 9,959 $ 9,435
The following table summarizes Domestic LifeForeign
Fixed maturities, including short Insurance & Retirement Services partnership income
term investments $ 6,845 $ 5,995 $ 5,002 (losses) by sub-product line for 2006, 2005 and 2004:
Equity securities 339 300 182
(in millions) 2006 2005 2004
Interest on mortgage, policy and
Domestic Life — excluding Synfuels:collateral loans 455 448 426
Life insurance $ 67 $ 136 $ 43
Partnership income 94 57 20
Home service 13 (1) 8
Unit investment trusts(b)
310 — —
Subtotal 80 135 51
Other(a)
312 423 237
Domestic Life — Synfuels:
Total investment income before Life insurance (73) (97) (74)
policyholder trading gains Home service (34) (46) (47)
(losses) 8,355 7,223 5,867 Subtotal (107) (143) (121)
Total Domestic Life (27) (8) (70)Policyholder trading gains
(losses)(c)
1,053 1,177 196 Retirement Services:
Group retirement products 178 89 95
Individual fixed annuities 247 135 147
Investment expenses 235 225 229 Total Retirement Services 425 224 242
Net investment income $ 9,173 $ 8,175 $ 5,834 Total $ 398 $ 216 $ 172
Total
Fixed maturities, including short 2006 and 2005 Comparison
term investments $15,934 $15,055 $13,648
Net investment income increased 7 percent for 2006 compared toEquity securities 371 310 209
2005 as income from fixed maturity and equity securitiesInterest on mortgage, policy and
increased as levels of invested assets grew. Net investmentcollateral loans 1,253 1,176 1,095
Partnership income — excluding income in 2006 also included out of period adjustments relating
Synfuels 599 416 313 to the accounting for certain interests in unit investment trusts of
Partnership income (loss) — $240 million. Partially offsetting this growth were lower policy-
Synfuels (107) (143) (121) holder trading gains (losses) in 2006. Net Investment income for
Unit investment trusts(b)
315 — — certain operations include investments in structured notes linked
Other(a)
361(c)
479 217 to emerging market sovereign debt that incorporates both interest
rate risk and currency risk. In addition, period to period compari-
sons of investment income for some lines of business are
affected by yield enhancement activity, particularly partnership
income as shown in the above table. See also Insurance and
Asset Management Invested Assets herein.
60 AIG 2006 Form 10-K

Realized capital gains (losses) include normal portfolio transac-
AIG generates income tax credits as a result of investing in
tions as well as derivative gains (losses) for transactions that did
synthetic fuel production (synfuels) related to the investment loss
not qualify for hedge accounting treatment under FAS 133,
shown in the above table and records those benefits in its
transactional foreign exchange gains and losses and other-than-provision for income taxes. The amounts of those income tax
temporary declines in the value of investments. Realized capitalcredits were $127 million, $203 million and $160 million for
gains (losses) for derivatives in Foreign Life Insurance & Retire-2006, 2005 and 2004, respectively. For a further discussion of
ment Services are related primarily to hedging of fixed incomethe effect of fluctuating domestic crude oil prices on synfuel tax
instruments denominated in a currency other than the functionalcredits, see Note 12(c) of Notes to Consolidated Financial
currency of the respective country to such functional currency. TheStatements.
related currency gain or loss of the available for sale fixed income
instrument is deferred until the date of the sale.2005 and 2004 Comparison
The growth in net investment income in 2005 compared to 2004
Deferred Policy Acquisition Costs
reflects growth in general account reserves and surplus for both
Foreign and Domestic Life Insurance & Retirement Services DAC for Life Insurance & Retirement Services products arises
companies. Also, net investment income was positively affected from the deferral of those costs that vary with, and are directly
by the compounding of previously earned and reinvested net related to, the acquisition of new or renewal business. Policy
investment income along with the addition of new cash flow from acquisition costs for life insurance products are generally deferred
operations available for investment. The global flattening of the and amortized over the premium paying period of the policy. Policy
yield curve put additional pressure on yields and spreads, which acquisition costs that relate to universal life and investment-type
was partially offset with income generated from other investment products, including variable and fixed annuities (investment-
sources, including income from partnerships. oriented products), are deferred and amortized, with interest, as
appropriate, in relation to the historical and future incidence ofThe following table summarizes realized capital gains
estimated gross profits to be realized over the estimated lives of(losses) by major category for 2006, 2005 and 2004:
the contracts. Total acquisition costs deferred increased $310 mil-
(in millions) 2006 2005 2004
lion over 2005 and were generally in line with growth in new
Domestic Life Insurance: business. Total DAC amortization expense, excluding VOBA, grew
Sales of fixed maturities $ (33) $ 65 $ (4) $432 million over 2005 with each year’s amortization expense
Sales of equity securities 17 18 7 level at approximately 14 percent of the opening DAC balance.
Other:
Amortization expense includes the effects of current period
Foreign exchange transactions (6) 11 —
realized capital gains and losses for investment type products.Derivatives instruments 25 65 8
With respect to investment-oriented products, AIG’s policy is toOther-than-temporary decline (192) (119) (98)
Other (26) (5) (33) adjust amortization assumptions for DAC when estimates of
current or future gross profits to be realized from these contractsTotal Domestic Life Insurance $(215) $ 35 $(120)
are revised. With respect to variable annuities sold domesticallyDomestic Retirement Services:
(representing the vast majority of AIG’s variable annuity business),Sales of fixed maturities $ 1 $(106) $ 107
the assumption for the long-term annual net growth rate of theSales of equity securities 31 115 30
Other: equity markets used in the determination of DAC amortization is
Foreign exchange transactions (13) — — approximately ten percent. A methodology referred to as ‘‘rever-
Derivatives instruments (33) (12) (14) sion to the mean’’ is used to maintain this long-term net growth
Other-than-temporary decline (368) (267) (305)
rate assumption, while giving consideration to short-term varia-
Other (22) (7) (25)
tions in equity markets. Estimated gross profits include invest-
Total Domestic Retirement Services $(404) $(277) $(207)
ment income and gains and losses less interest required on
Foreign Life Insurance & Retirement policyholder reserves, as well as other charges in the contract
Services: less actual mortality and expenses. Current experience and
Sales of fixed maturities $(209) $ 191 $ 223
changes in the expected future gross profits are analyzed to
Sales of equity securities 459 281 295
determine the effect on the amortization of DAC. The projection ofOther:
estimated gross profits requires significant management judg-Foreign exchange transactions 106 40 (382)
Derivatives instruments 276 (599) 248 ment. The assumptions with respect to the current and projected
Other-than-temporary decline (81) (39) (38) gross profits are reviewed and analyzed quarterly and are adjusted
Other*
156 210 26 accordingly.
Total Foreign Life Insurance & Retirement
Services $ 707 $ 84 $ 372
Total $ 88 $(158) $ 45
* Net of allocations to participating policyholders of $88 million, $109 mil-
lion and $65 million for 2006, 2005 and 2004, respectively.
Form 10-K 2006 AIG 61

The following table summarizes the major components of the changes in DAC and Value of Business Acquired
(VOBA) for 2006 and 2005:
2006 2005
(in millions) DAC VOBA Total DAC VOBA Total
Domestic Life Insurance & Retirement Services:
Balance at beginning of year(a)
$ 9,599 $ 869 $10,468 $ 8,214 $ 836 $ 9,050
Acquisition costs deferred 1,832 — 1,832 1,840 — 1,840
Amortization (charged) or credited to operating income:
Related to realized capital gains (losses) 77 16 93 45 3 48
Related to unlocking future assumptions (40) (5) (45) (15) — (15)
All other amortization(b)
(1,387) (81) (1,468) (1,399) (85) (1,484)
Related to change in unrealized gains (losses) on securities 744 34 778 904 112 1,016
Increase (decrease) due to foreign exchange (1) — (1) 10 3 13
Balance at end of year $10,824 $ 833 $11,657 $ 9,599 $ 869 $10,468
Foreign Life Insurance & Retirement Services:
$16,360 $1,278 $17,638 $14,349 $1,681 $16,030
Related to realized capital gains (losses) 4 1 5 (1) (1) (2)
Related to unlocking future assumptions 87 15 102 93 — 93
All other amortization (2,214) (185) (2,399) (1,764) (204) (1,968)
Related to change in unrealized gains (losses) on securities (127) (5) (132) (47) 8 (39)
Increase (decrease) due to foreign exchange 904 44 948 (943) (206) (1,149)
Balance at end of year $20,005 $1,148 $21,153 $16,360 $1,278 $17,638
Total Life Insurance & Retirement Services:
$25,959 $2,147 $28,106 $22,563 $2,517 $25,080
Related to realized capital gains (losses) 81 17 98 44 2 46
Related to unlocking future assumptions 47 10 57 78 — 78
All other amortization (3,601) (266) (3,867) (3,163) (289) (3,452)
Related to change in unrealized gains (losses) on securities 617 29 646 857 120 977
Increase (decrease) due to foreign exchange 903 44 947 (933) (203) (1,136)
Balance at end of year $30,829 $1,981 $32,810 $25,959 $2,147 $28,106
(a) In 2006, sales inducement assets were reclassified to Other assets in the consolidated balance sheet. All periods have been adjusted to reflect this
reclassification.
(b) In 2006, all other amortization for Domestic Life Insurance & Retirement Services includes $136 million of negative amortization related to changes in
estimates from conversion of actuarial systems, which is substantially offset by related adjustments in incurred policy losses and benefits in the
consolidated statement of income.
AIG’s variable annuity earnings will be affected by changes in recoverability, which involves estimating the future profitability of
market returns because separate account revenues, primarily current business. This review also involves significant manage-
composed of mortality and expense charges and asset management judgment. If the actual emergence of future profitability were
ment fees, are a function of asset values. to be substantially lower than estimated, AIG’s results of
DAC for both insurance-oriented and investment-oriented prod- operations could be significantly affected in future periods.
ucts as well as retirement services products is reviewed for
62 AIG 2006 Form 10-K

Aircraft LeasingFinancial Services Operations
AIG’s Aircraft Leasing operations represent the operations of ILFC,AIG’s Financial Services subsidiaries engage in diversified activi-
which generates its revenues primarily from leasing new and usedties including aircraft and equipment leasing, capital markets,
commercial jet aircraft to foreign and domestic airlines. Revenuesconsumer finance and insurance premium finance.
also result from the remarketing of commercial jets for ILFC’s own
account, and remarketing and fleet management services forFinancial Services Results
airlines and financial institutions. ILFC finances its purchases of
Financial Services results for 2006, 2005 and 2004 were aircraft primarily through the issuance of a variety of debt
as follows: instruments. The composite borrowing rates at December 31,
2006 and 2005 were 5.17 percent and 4.61 percent, respec-(in millions) 2006 2005 2004
tively. The composite borrowing rates did not reflect the benefit of
Revenues(a)
:
economically hedging ILFC’s floating rate and foreign currency
Aircraft Leasing(b)
$4,143 $ 3,578 $3,136
denominated debt using interest rate and foreign currency deriva-Capital Markets(c)(d)
(186) 3,260 1,278
tives. These derivatives are effective economic hedges; however,Consumer Finance(e)
3,819 3,613 2,978
since hedge accounting under FAS 133 was not applied, theOther 234 74 103
benefits of using derivatives to hedge these exposures were not
Total $8,010 $10,525 $7,495
reflected in ILFC’s borrowing rates.
Operating income (loss)(a)
:
ILFC’s sources of revenue are principally from scheduled and
Aircraft Leasing $ 639 $ 679 $ 642
charter airlines and companies associated with the airline indus-
Capital Markets(d)
(873) 2,661 662
try. The airline industry is sensitive to changes in economicConsumer Finance(f)
761 876 786
conditions and is cyclical and highly competitive. Airlines andOther, including
related companies may be affected by political or economicintercompany adjustments(g)
(3) 60 90
instability, terrorist activities, changes in national policy, competi-
Total $ 524 $ 4,276 $2,180
tive pressures on certain air carriers, fuel prices and shortages,
(a) Includes the effect of hedging activities that did not qualify for hedge labor stoppages, insurance costs, recessions, world health issues
and other political or economic events adversely affecting world or
exchange gains and losses. For 2006, 2005 and 2004, respectively,
regional trading markets.the effect was $(1.8) billion, $2.0 billion and $(122) million in both
revenues and operating income for Capital Markets. These amounts ILFC is exposed to operating loss and liquidity strain through
result primarily from interest rate and foreign currency derivatives that nonperformance of aircraft lessees, through owning aircraft which
are economically hedging available for sale securities and borrowings.
it would be unable to sell or re-lease at acceptable rates at leaseFor 2004, the effect was $(27) million in operating income for Aircraft
expiration and, in part, through committing to purchase aircraftLeasing. During 2006 and 2005, Aircraft Leasing derivative gains and
losses were reported as part of AIG’s Other category, and were not which it would be unable to lease.
reported in Aircraft Leasing operating income.
ILFC’s revenues and operating income may be adversely
(b) Revenues are primarily aircraft lease rentals from ILFC. affected by the volatile competitive environment in which its
(c) Revenues, shown net of interest expense of $3.2 billion, $3.0 billion customers operate. ILFC manages the risk of nonperformance by
and $2.3 billion, in 2006, 2005 and 2004, respectively, were primarily
its lessees with security deposit requirements, repossessionfrom hedged financial positions entered into in connection with
rights, overhaul requirements and close monitoring of industrycounterparty transactions and the effect of hedging activities that did
not qualify for hedge accounting treatment under FAS 133 described in conditions through its marketing force. However, there can be no
(a) above.
assurance that ILFC would be able to successfully manage the
(d) Certain transactions entered into by AIGFP generate tax credits and risks relating to the effect of possible future deterioration in the
benefits which are included in income taxes in the consolidated
airline industry. Approximately 90 percent of ILFC’s fleet is leasedstatement of income. The amounts of such tax credits and benefits for
to non-U.S. carriers, and the fleet, comprised of the most efficientthe years ended December 31, 2006, 2005 and 2004, respectively,
are $50 million, $67 million and $107 million. aircraft in the airline industry, continues to be in high demand
(e) Revenues are primarily finance charges. from such carriers.
(f) Includes catastrophe-related losses of $62 million recorded in the third ILFC typically contracts to re-lease aircraft before the end of
quarter of 2005 resulting from hurricane Katrina, which were reduced the existing lease term. For aircraft returned before the end of the
by $35 million in 2006 due to the reevaluation of the remaining
lease term, ILFC has generally been able to re-lease such aircraftestimated losses.
within two to six months of its return. As a lessor, ILFC considers(g) Includes specific reserves recorded during 2006 in the amount of
an aircraft ‘‘idle’’ or ‘‘off lease’’ when the aircraft is not subject$42 million related to two commercial lending transactions.
to a signed lease agreement or signed letter of intent. ILFC had
Financial Services operating income decreased in 2006 com-
one aircraft off lease at December 31, 2006, and all new aircraft
pared to 2005 and increased in 2005 compared to 2004, due
scheduled for delivery through 2007 have been leased.
primarily to the effect of hedging activities that did not qualify for
Management formally reviews regularly, and no less frequently
hedge accounting under FAS 133. AIG is reinstituting hedge
than quarterly, issues affecting ILFC’s fleet, including events and
accounting in the first quarter of 2007 for AIGFP and later in
circumstances that may cause impairment of aircraft values.
2007 for the balance of the Financial Services operations.
Management evaluates aircraft in the fleet as necessary based on
Form 10-K 2006 AIG 63

these events and circumstances in accordance with Statement of tions derive substantially all their revenues from hedged financial
Financial Accounting Standards No. 144, ‘‘Accounting for the positions entered into in connection with counterparty transac-
Impairment or Disposal of Long-Lived Assets’’ (FAS 144). ILFC has tions rather than from speculative transactions. AIGFP also
not recognized any impairment related to its fleet in 2006, 2005 participates as a dealer in a wide variety of financial derivatives
and 2004. ILFC has been able to re-lease the aircraft without transactions. AIGFP economically hedges the market risks arising
diminution in lease rates that would result in an impairment under from its transactions, although hedge accounting under FAS 133
FAS 144. was not being applied during 2006, 2005 and 2004 to any of the
derivatives and related assets and liabilities. Accordingly, reve-
nues and operating income were exposed to volatility resultingAircraft Leasing Results
from differences in the timing of revenue recognition between the
2006 and 2005 Comparison derivatives and the hedged assets and liabilities. Revenues and
operating income of the Capital Markets operations and theILFC’s operating income decreased in 2006 compared to 2005 by
percentage change in these amounts for any given period are also$40 million, or 6 percent. Rental revenues increased by $536 mil-
significantly affected by the number, size and profitability oflion or 16 percent, driven by a larger aircraft fleet, increased
transactions entered into by these subsidiaries during that periodutilization and higher lease rates. During 2006, ILFC’s fleet
relative to those entered into during the prior period. Generally,subject to operating leases increased by 78 airplanes to a total of
the realization of transaction revenues as measured by the receipt824. The increase in rental revenues was offset in part by
of funds is not a significant reporting event as the gain or loss onincreases in depreciation expense and interest expense, charges
AIGFP’s trading transactions is currently reflected in operatingrelated to bankrupt airlines, as well as the settlement of a tax
income as the fair values change from period to period.dispute in Australia related to the restructuring of ownership of
Derivative transactions are entered into in the ordinary courseaircraft. Depreciation expense increased by $200 million, or
of AIGFP operations. Derivatives are recorded at fair value,14 percent, in line with the increase in the size of the aircraft
determined by reference to the mark to market value of thefleet. Interest expense increased by $317 million, or 28 percent,
derivative or their estimated fair value where market prices aredriven by rising cost of funds, a weaker U.S. dollar against the
not readily available. The resulting aggregate unrealized gains orEuro and the British Pound and additional borrowings funding
losses from the derivatives are reflected in the consolidatedaircraft purchases. As noted above, ILFC’s interest expense did
income statement. Where AIGFP cannot verify significant modelnot reflect the benefit of hedging these exposures. Gains or
inputs to observable market data and cannot verify the modellosses on derivatives for ILFC are reported in AIG’s Other
value to market transactions, AIGFP values the contract at thecategory.
transaction price at inception and, consequently, records no initial
gain or loss in accordance with Emerging Issues Task Force Issue
No. 02-03, ‘‘Issues Involved in Accounting for Derivative Contracts
ILFC’s operating income increased in 2005 compared to 2004 by Held for Trading Purposes and Contracts Involved in Energy
$37 million, or 6 percent. Rental revenues increased by $499 mil- Trading and Risk Management Activities’’ (EITF 02-03). Such initial
lion, or 17 percent, driven by a larger aircraft fleet and increased gain or loss is recognized over the life of the transaction. AIGFP
utilization. During 2005, ILFC’s fleet subject to operating leases periodically reevaluates its revenue recognition under EITF 02-03
increased by 79 airplanes to a total of 746. The increase in rental based on the observability of market parameters. The mark to fair
revenues was offset in part by increases in depreciation expense, value of derivative transactions is reflected in the consolidated
interest expense, leasing-related costs and other reserves. Depre- balance sheet in the captions ‘‘Unrealized gain on swaps, options
ciation expense increased by $111 million, or 9 percent, in line and forward transactions’’ and ‘‘Unrealized loss on swaps,
with the increase in the size of the aircraft fleet. Interest expense options and forward transactions.’’ Unrealized gains represent the
increased by $132 million, or 13 percent, driven by rising cost of present value of the aggregate of each net receivable, by
funds and additional borrowings funding aircraft purchases. counterparty, and the unrealized losses represent the present
value of the aggregate of each net payable, by counterparty, as of
Capital Markets December 31, 2006. These amounts will change from one period
to the next due to changes in interest rates, currency rates, equity
Capital Markets represents the operations of AIGFP, which
and commodity prices and other market variables, as well as cash
engages as principal in a wide variety of financial transactions,
movements, execution of new transactions and the maturing of
including standard and customized financial products involving
existing transactions.
commodities, credit, currencies, energy, equities and rates. AIGFP
Spread income on investments and borrowings is recorded on
also invests in a diversified portfolio of securities and principal
an accrual basis over the life of the transaction. Investments are
investments and engages in borrowing activities involving issuing
classified as securities available for sale and are carried at fair
standard and structured notes and other securities, and entering
value with the resulting unrealized gains or losses reflected in
into GIAs.
accumulated other comprehensive income. U.S. dollar denomi-
As Capital Markets is a transaction-oriented operation, current
nated borrowings are carried at cost, while borrowings in any
and past revenues and operating results may not provide a basis
currency other than the U.S. dollar result in unrealized foreign
for predicting future performance. AIG’s Capital Markets opera-
64 AIG 2006 Form 10-K

exchange gains or losses reported in income. AIGFP hedges the standing as of January 1, 2006. The cumulative effect of the
economic exposure on its investments and borrowings on a adoption of FAS 155 on these instruments at January 1, 2006
portfolio basis using derivatives and other financial instruments. was a pre-tax loss of $29 million. The effect of these hybrid
While these hedges are highly effective economic hedges, they did financial instruments reflected in AIGFP’s operating income in
not qualify for hedge accounting treatment under FAS 133 through 2006 was a pretax loss of $287 million, largely offset by gains on
2006. The change in the fair value of the derivatives used to economic hedge positions also reflected in AIGFP’s operating
hedge these economic exposures is therefore included in Other income.
income, while the offsetting change in fair value of the hedged
investments and borrowings is not recognized in income. AIG is 2005 and 2004 Comparison
reinstituting hedge accounting in the first quarter of 2007 for
Capital Markets operating income in 2005 increased by $2 billion
AIGFP.
compared to 2004, primarily due to a gain related to derivatives
To the extent the Financial Services subsidiaries, other than
not qualifying for hedge accounting treatment of $2.01 billion in
AIGFP, use derivatives to economically hedge their assets or
2005 compared to a loss of $122 million in 2004. The majority
liabilities with respect to their future cash flows, and such hedges
of the net gain on AIGFP’s derivatives recognized in 2005 was
did not qualify for hedge accounting treatment under FAS 133, the
due to the strengthening of the U.S. dollar against the Euro and
changes in fair value of such derivatives were recorded in realized
British Pound, which resulted in an increase in the fair value of
capital gains (losses) or other income. Amounts recorded in
the foreign currency derivatives hedging available for sale securi-
realized capital gains (losses) are reported as part of AIG’s Other
ties. To a lesser extent, the net gain was also due to the fall in
category.
long-term U.S. interest rates, which resulted in an increase in the
fair value of AIGFP’s interest rate derivatives hedging its assets
Capital Markets Results
and liabilities. The majority of the net loss on AIGFP’s derivatives
recognized in 2004 was due to the weakening of the U.S. dollar2006 and 2005 Comparison
against the Euro and British Pound, which resulted in a decrease
Capital Markets operating income in 2006 decreased by $3.53 bil- in the fair value of the foreign currency derivatives hedging
lion compared to 2005. Improved results, primarily from increased available for sale securities. This loss was partially offset by an
transaction flow in AIGFP’s credit, commodity index, energy and increase in the fair value of its interest rate derivatives hedging its
equity products, were more than offset by the loss resulting from assets and liabilities as a result of the decrease in long-term
the effect of derivatives not qualifying for hedge accounting U.S. interest rates.
treatment under FAS 133. This loss was $1.82 billion in 2006 Financial market conditions in 2005 compared to 2004 were
compared to a gain of $2.01 billion in 2005, a decrease of characterized by a general flattening of interest rate yield curves
$3.83 billion. A large part of the net loss on AIGFP’s derivatives across fixed income markets globally, some tightening of credit
recognized in 2006 was due to the weakening of the U.S. dollar, spreads, higher equity valuations and a stronger U.S. dollar.
primarily against the British Pound and Euro, resulting in a AIGFP’s 2005 results were adversely affected by customer
decrease in the fair value of the foreign currency derivatives uncertainty surrounding the negative actions of the rating agen-
hedging AIGFP’s available for sale securities. The majority of the cies and the investigations, as well as the negative effect on its
net gain on AIGFP’s derivatives in 2005 was due to the structured notes business of AIG being unable to fully access the
strengthening of the U.S. dollar, primarily against the British capital markets during 2005.
Pound and Euro, which increased the fair value of the foreign Capital Markets operating income was also negatively affected
currency derivatives hedging available for sale securities. To a in 2004 by the costs of the PNC settlement.
lesser extent, the net gain in 2005 was due to the decrease in
long-term U.S. interest rates, which increased the fair value of Consumer Finance
derivatives hedging AIGFP’s assets and liabilities.
AIG’s consumer finance operations in North America are princi-Financial market conditions in 2006 were characterized by a
pally conducted through AGF. Effective January 2, 2007, AGFgeneral flattening of interest rate yield curves across fixed income
expanded its operations into the United Kingdom through themarkets globally, tightening of credit spreads, higher equity
acquisition of Ocean Finance and Mortgages Limited, a financevaluations and a weaker U.S. dollar.
broker for home owner loans in the United Kingdom. AGF derivesThe most significant component of Capital Markets operating
a substantial portion of its revenues from finance chargesexpenses is compensation, which was approximately $544 mil-
assessed on outstanding real estate loans, secured and un-lion, $481 million and $497 million in 2006, 2005 and 2004,
secured non-real estate loans and retail sales finance receivables.respectively. The amount of compensation was not affected by
The real estate loans are comprised principally of first lien andgains and losses arising from derivatives not qualifying for hedge
some second lien mortgages on residential real estate generallyaccounting treatment under FAS 133.
having a maximum term of 360 months, and are considered non-AIG elected to early adopt FAS 155, ‘‘Accounting for Certain
conforming. The real estate loans may be closed-end accounts orHybrid Financial Instruments’’ (FAS 155), in 2006 and AIGFP
open-end home equity lines of credit and may be fixed rate orelected to apply the fair value option to its structured notes and
adjustable rate products. AGF does not offer mortgage productsother financial liabilities containing embedded derivatives out-
Form 10-K 2006 AIG 65

with borrower payment options that allow for negative amortization term borrowing rates were 5.14 percent in 2006 compared to
of the principal balance. The secured non-real estate loans are 3.58 percent in 2005. AGF’s long-term borrowing rates were
secured by consumer goods, automobiles or other personal 5.05 percent in 2006 compared to 4.41 percent in 2005. AGF’s
property. Both secured and unsecured non-real estate loans and net charge-off ratio improved to 0.95 percent in 2006 from 1.19
retail sales finance receivables generally have a maximum term of percent in 2005. The improvement in the net charge-off ratio in
60 months. The core of AGF’s originations is sourced through its 2006 was primarily due to positive economic fundamentals. The
branches. However, a significant volume of real estate loans is U.S. economy continued to expand during the year, and the
also originated through broker relationships, and to lesser unemployment rate remained low, which improved the credit
extents, through correspondent relationships and direct mail quality of AGF’s portfolio. AGF’s delinquency ratio remained
solicitations. In the first quarter of 2006, two wholly owned relatively low, although it increased to 2.06 percent at Decem-
subsidiaries of AGF discontinued originating real estate loans ber 31, 2006 from 1.93 percent at December 31, 2005. AGF
through an arrangement with AIG Federal Savings Bank, a reduced the hurricane Katrina portion of its allowance for finance
federally chartered thrift, and began originating such loans under receivable losses to $15 million at December 31, 2006 after the
their own state licenses. reevaluation of its remaining estimated losses. AGF’s allowance
AIG’s foreign consumer finance operations are principally ratio was 2.01 percent at December 31, 2006 compared to
conducted through AIGCFG. AIGCFG operates primarily in emerging 2.20 percent at December 31, 2005.
and developing markets. AIGCFG has operations in Argentina, Revenues from the foreign consumer finance operations in-
China, Hong Kong, Mexico, Philippines, Poland, Taiwan and creased by approximately 19 percent in 2006 compared to 2005.
Thailand. Certain of the AIGCFG operations are owned in part or in Loan growth, particularly in Poland and Argentina, was the primary
whole by Life Insurance subsidiaries. Accordingly, the financial driver behind the higher revenues. Higher revenues were more
results of those companies are shared between Financial Services than offset, however, by AIGCFG’s $47 million share of the
and Life Insurance & Retirement Services according to their allowance for losses related to industry-wide credit deterioration in
ownership percentages. While products vary by market, the the Taiwan credit card market, increased cost of funds, and higher
businesses generally provide credit cards, unsecured and secured operating expenses in connection with expansion into new
non-real estate loans, term deposits, savings accounts, retail markets and distribution channels and new product promotions,
sales finance and real estate loans. AIGCFG originates finance resulting in lower operating income for 2006 compared to 2005.
receivables through its branches and direct solicitation. AIGCFG
also originates finance receivables indirectly through relationships 2005 and 2004 Comparison
with retailers, auto dealers, and independent agents.
Revenues and operating income from the Consumer Finance
operations improved in 2005, both domestically and
Consumer Finance Results
internationally.
2006 and 2005 Comparison Domestically, the relatively low interest rate environment
contributed to a high level of mortgage refinancing activity. AGF’sConsumer Finance operating income decreased to $761 million,
real estate loans increased 21 percent during 2005 compared toor 13 percent, in 2006 compared to 2005. Operating income from
2004. AGF’s short-term borrowing rates rose to 3.58 percent indomestic consumer finance operations declined as a result of
2005 compared to 2.68 percent in 2004. AGF’s long-termdecreased originations and purchases of real estate loans and
borrowing rates were 4.41 percent in 2005 compared to 4.28 per-margin compression resulting from increased interest rates and
cent in 2004. Despite high energy costs, the U.S. economyflattened yield curves. The foreign operations operating income
continued to expand during 2005, improving consumer creditdecreased primarily due to the credit deterioration in the Taiwan
quality. Both AGF’s net charge-off ratio and delinquency ratiocredit card market.
improved in 2005 compared to 2004. AGF’s net charge-off ratioDomestically, the U.S. housing market deteriorated throughout
improved to 1.19 percent in 2005 from 1.60 percent in 2004.2006 and ended the year fairly weak compared to recent years.
The improvement in the net charge-off ratio in 2005 was primarilyAs a result, the real estate loan portfolio decreased slightly during
due to the improving economy and a higher proportion of average2006 due to lower refinancing activity. This lower refinancing
net receivables that were real estate loans. AGF’s delinquencyactivity also caused a significant decrease in originations and
ratio at December 31, 2005 was 1.93 percent compared towhole loan sales in AGF’s mortgage banking operation, which
2.31 percent at December 31, 2004. However, AGF incurredresulted in a substantial reduction of revenue and operating
charges of approximately $62 million for the estimated effect ofincome compared to the prior year. However, softening home
hurricane Katrina on customers in the Gulf Coast areas affectedprices (reducing the equity customers are able to extract from
by the storm. At December 31, 2005, AGF’s allowance ratio wastheir homes when refinancing) and higher mortgage rates contrib-
2.20 percent compared to 2.26 percent at December 31, 2004.uted to customers utilizing non-real estate loans, which increased
Foreign consumer finance operations performed well, as the10 percent compared to 2005. Retail sales finance receivables
operations in Poland and Argentina recorded improved growth inalso increased 23 percent due to increased marketing efforts and
operating income. The Hong Kong businesses experienced im-customer demand. Higher revenue resulting from portfolio growth
proved loan and earnings growth in a strengthening economy.was more than offset by higher interest expense. AGF’s short-
66 AIG 2006 Form 10-K

clients primarily in the U.S. marketplace. SAAMCo manages,Asset Management Operations
advises and/or administers retail mutual funds, as well as the
AIG’s Asset Management operations comprise a wide variety of underlying assets of variable annuities sold by AIG SunAmerica
investment-related services and investment products. Such ser- and VALIC to individuals and groups throughout the United States.
vices and products are offered to individuals and institutions both
domestically and overseas, and are primarily comprised of Spread- Other
Based Investment Businesses, Institutional Asset Management
Included in the Other category for Asset Management is income orand Brokerage Services and Mutual Funds.
loss from partnerships. Partnership assets consist of investmentsThe revenues and operating income for this segment are
in a diversified portfolio of private equity funds, affordable housingsubject to variability because they are affected by the general
partnerships and hedge fund investments.conditions in the equity and credit markets. In addition, realized
gains and performance fees are contingent upon various fund
Asset Management Resultsclosings, maturity levels and market conditions.
Asset Management results for 2006, 2005 and 2004
Spread-Based Investment Business were as follows:
In prior years, the sale of GICs to investors, both domestically and (in millions) 2006 2005 2004
overseas, was AIG’s primary institutional Spread-Based Invest-
Revenues:
ment Business. During 2005, AIG launched its MIP and its asset
Spread-Based Investment
management subsidiaries, primarily SunAmerica Life, ceased
Business $3,554 $3,547 $3,192
writing new GIC business. The GIC business will continue to run
Institutional Asset
off for the foreseeable future while the MIP business is expected
Management 1,670 1,195 1,049
to grow.
Brokerage Services and
Mutual Funds 293 257 249
Institutional Asset Management Other 297 326 224
AIG’s Institutional Asset Management business provides an array Total $5,814 $5,325 $4,714
of investment products and services globally to institutional Operating income:
investors, AIG subsidiaries and affiliates and high net worth Spread-Based Investment
investors. These products and services include traditional equity Business(a)
$ 947 $1,185 $1,328
and fixed income investment management and a full range of Institutional Asset
alternative asset classes. Delivery of AIG’s Institutional Asset Management(b)(c)
1,031 686 515
Management products and services is accomplished via a global Brokerage Services and
network of operating subsidiaries comprising AIGGIG. The primary Mutual Funds 87 66 70
operating entities within this group are AIG Global Investment Other 281 316 212
Corp., AIG Global Real Estate Investment Corp. and AIG Private Total $2,346 $2,253 $2,125
Bank. AIG Private Bank offers banking, trading and investment
(a) Includes the effect of hedging activities that did not qualify for hedgemanagement services to private client and high net worth
individuals and institutions globally. exchange gains and losses. For 2004, the effect was a gain of
Within the alternative investment asset class, AIGGIG offers $313 million in operating income. During 2006 and 2005, these
derivative gains and losses were reported as part of AIG’s Otherhedge and private equity fund-of-funds, direct investments and
category, and were not reported in Asset Management operating
distressed debt investments. Within the structured fixed income
income.
and equity product asset class, AIGGIG offers various forms of
(b) Includes the full results of certain AIG managed private equity and real
structured and credit linked notes, various forms of collateralized estate funds that are consolidated pursuant to FIN 46(R), ‘‘Consolida-
debt obligations and other investment strategies aimed at achiev- tion of Variable Interest Entities’’. Also includes $346 million, $261 mil-
lion and $195 million for 2006, 2005 and 2004, respectively, of third-ing superior returns or capital preservation. In addition, Institu-
party limited partner earnings offset in minority interest expense on the
tional Asset Management’s product offerings include various
consolidated statement of income which is not a component of
forms of principal protected and liability management structures. operating income.
(c) Includes the full results of certain AIG managed partnerships that are
consolidated effective January 1, 2006 pursuant to EITF 04-5,Brokerage Services and Mutual Funds
‘‘Determining Whether a General Partner, or the General Partners as a
AIG’s Brokerage Services and Mutual Funds business provides Group, Controls a Limited Partnership or Similar Entity When the
Limited Partners Have Certain Rights’’. For 2006, operating incomemutual fund and broker-dealer related services to retail investors,
includes $252 million of third-party limited partner earnings offset in
group trusts and corporate accounts through an independent minority interest expense which is not a component of operating
network of financial advisors. The AIG Advisor Group, Inc., a income.
subsidiary of AIG Retirement Services, Inc., is comprised of
several broker-dealer entities that provide these services to
Form 10-K 2006 AIG 67

2006 and 2005 Comparison management, and the associated fee revenue, along with strong
realized gains on sales of real estate investments and perform-
Asset Management operating income increased 4 percent in 2006
ance fees earned on various private equity investments. The
compared to 2005 on revenues that increased 9 percent.
increase in operating income was achieved despite the runoff of
Operating income related to the Spread-Based Investment
the existing GIC portfolio and the delay in the MIP. The decline in
Business declined 20 percent in 2006 compared to 2005 due
GIC operating income compared to 2004 reflects tighter spreads
primarily to the continued runoff of GIC balances and spread
in the GIC portfolio, partially offset by improved partnership
compression related to increases in short-term interest rates. A
returns. Spread compression occurred as the base portfolio yield
significant portion of the remaining GIC portfolio consists of
declined due to an increase in the cost of funds in the short-term
floating rate obligations. AIG has entered into hedges to manage
floating rate portion of the GIC portfolio, only partially offset by
against increases in short-term interest rates. AIG believes these
increased investment income from the floating rate assets
hedges are economically effective, but they did not qualify for
backing the portfolio.
hedge accounting treatment under FAS 133. Income or loss from
these hedges are classified as realized capital gains or losses
Other Operationsand are included in AIG’s Other category. The decline in operating
income was partially offset by improved partnership income, The operating loss of AIG’s Other category for the years ended
particularly during the fourth quarter of 2006. Partnership income December 31, 2006, 2005 and 2004 was as follows:
is primarily derived from alternative investments and is affected
by performance in the equity markets. Thus, revenues, operating (in millions) 2006 2005 2004
income and cash flow attributable to GICs will vary among Other Operating Income
reporting periods. Commencing with transactions initiated in the (Loss):
first quarter of 2007, AIG is reinstituting hedge accounting for Equity earnings in
derivative transactions related to the MIP. unconsolidated entities $ 193 $ (124) $ 157
During 2005, the MIP replaced the GIC program as AIG’s Interest expense (859) (541) (435)
principal spread-based investment activity. While the MIP showed Unallocated corporate
strong growth in operating income, AIG does not expect that the expenses (555) (413) (316)
income growth in the MIP will offset the runoff in the GIC portfolio Compensation expense —
for the foreseeable future, because the asset mix under the MIP SICO Plans (108) (205) (62)
Compensation expense —does not include the alternative investments utilized in the GIC
Starr tender offer (54) — —program.
Realized capital gains (losses) (295) 505 94The MIP was initially launched in the Euromarkets in
Regulatory settlement costs — (1,644) —September 2005 through AIG’s $10 billion Euro medium term
Other miscellaneous, net (23) (113) —note program. Through December 31, 2006, AIG has issued the
equivalent of $5.3 billion for the MIP in the Euromarkets and the Total Other $(1,701) $(2,535) $ (562)
U.S. public and private markets.
Operating income related to Institutional Asset Management
increased 50 percent in 2006 to $1.0 billion compared to 2005,
primarily due to an increase of $337 million in gains on certain Operating loss for AIG’s Other category declined to $1.7 billion in
VIEs and partnerships. These gains are offset in minority interest 2006 compared to $2.5 billion in 2005, largely due to regulatory
expense, which is not a component of operating income. AIG’s settlement costs of $1.6 billion in 2005 as described under
unaffiliated client assets under management, including both retail Item 3. Legal Proceedings. Interest expense grew in 2006 as a
mutual funds and institutional accounts, increased 21 percent result of increased borrowings by the parent holding company.
from year-end 2005 to $75 billion, resulting in higher manage- Unallocated corporate expenses increased $142 million due to
ment fee income. Increased realized capital gains on real estate increases in general corporate expenses primarily resulting from
investments from 2005 also contributed to the increase in ongoing efforts to improve internal controls, higher stock compen-
operating income. The growth in Institutional Asset Management sation expenses and expenses relating to executive departures in
revenues and operating income were driven by contributions from 2005 and 2006. AIG expects these compensation expenses to
all asset classes globally. Partially offsetting this growth were continue to increase as these improvement efforts progress.
lower performance-based fees on private equity investments, and Operating income in 2006 also includes realized capital losses of
higher expenses related to the planned expansion of marketing $295 million, primarily reflecting the effect of hedging activities in
and distribution capabilities, combined with technology and opera- the Financial Services and Asset Management segments that did
tional infrastructure-related enhancements. not qualify for hedge accounting treatment under FAS 133. Also
reflected in Other operating loss in 2006 is an out of period
charge of $61 million with respect to the SICO Plans and a one-2005 and 2004 Comparison
time charge related to the Starr tender offer of $54 million. For a
Asset Management operating income increased in 2005 compared
further discussion of these items, see Note 16 of Notes to
to 2004 as a result of growth in institutional assets under
Consolidated Financial Statements. These declines were partially
68 AIG 2006 Form 10-K

offset by increased equity earnings in certain unconsolidated Borrowings issued or guaranteed by AIG and those
subsidiaries. borrowings not guaranteed by AIG at December 31, 2006
and 2005 were as follows:
AIG’s Other operating loss was $2.5 billion in 2005 compared to AIG borrowings:
$562 million in 2004, reflecting the $1.6 billion of regulatory Notes and bonds payable $ 8,915 $ 4,607
Loans and mortgages payable 841 814settlement costs in 2005. In addition, AIG’s equity in certain
AIG MIP matched notes and bondspartially owned subsidiaries includes $312 million and $96 million
payable 5,468 —in catastrophe losses in 2005 and 2004, respectively.
Series AIGFP matched notes and
bonds payable 72 —
Capital Resources and Liquidity
Total AIG Borrowing 15,296 5,421
At December 31, 2006, AIG had total consolidated shareholders’ Borrowings guaranteed by AIG:
equity of $101.68 billion and total consolidated borrowings of AIGFP
$148.68 billion. At that date, $131.55 billion of such borrowings GIAs 20,664 20,811
were not guaranteed by AIG, were matched borrowings by AIG or Notes and bonds payable 37,528 26,463
Hybrid financial instrumentAIGFP, or represented liabilities connected to trust preferred
liabilities(a)
8,856 —stock.
Total 67,048 47,274In 2007, AIG expects to issue capital securities in one or more
series. The proceeds will be used to repurchase shares of AIG Funding, Inc. commercial paper 4,821 2,694
common stock or to otherwise improve the efficiency of AIG’s AGC Notes and bonds payable 797 797
capital structure.
Liabilities connected to trust
preferred stock 1,440 1,391
Borrowings
Total borrowings issued or
guaranteed by AIG 89,402 57,577At December 31, 2006, AIG’s net borrowings were
$17.13 billion after reflecting amounts that were Borrowings not guaranteed by AIG:
matched borrowings by AIG and AIGFP, amounts not ILFC
Commercial paper 2,747 2,615guaranteed by AIG and liabilities connected to trust
Notes and bonds payable(b)
26,591 23,715preferred stock. The following table summarizes
Total 29,338 26,330borrowings outstanding at December 31, 2006 and 2005:
AGF(in millions) 2006 2005
Commercial paper 4,328 3,423
AIG’s net borrowings $ 17,126 $ 10,425 Notes and bonds payable 19,595 18,719
Liabilities connected to trust
Total 23,923 22,142
preferred stock 1,440 1,391
AIGCFGAIG MIP matched notes and bonds
Commercial paper 227 476
payable 5,468 —
Loans and mortgages payable 1,453 1,047
Series AIGFP matched notes and
Total 1,680 1,523bonds payable 72 —
AIGFP AIG Finance Taiwan Limited
commercial paper 26 —GIAs 20,664 20,811
Matched notes and bonds payable 35,776 24,950 Other Subsidiaries 1,065 927
Hybrid financial instrument
Variable Interest Entity debt:
liabilities*
8,856 — A.I. Credit 880 —
Borrowings not guaranteed by AIG 59,277 52,272 AIGGIG 55 140
AIG Global Real Estate Investment 2,052 977Total $148,679 $109,849
AIG SunAmerica 203 233
* Represents structured notes issued by AIGFP that are accounted for ALICO 55 —
using the fair value option.
Total 3,245 1,350
Total borrowings not guaranteed by
AIG 59,277 52,272
Total Debt $148,679 $109,849
(a) Represents structured notes issued by AIGFP that are accounted for
using the fair value option.
(b) Includes borrowings under Export Credit Facility of $2.7 billion and
$2.6 billion, at December 31, 2006 and 2005, respectively.
Form 10-K 2006 AIG 69

The debt activity, excluding commercial paper of $12.15 billion and VIE debt of $3.25 billion, for the year ended
December 31, 2006 was as follows:
Balance at Maturities Effect of Balance at
December 31, and Foreign Other December 31,
(in millions) 2005 Issuances Repayments Exchange Changes 2006
AIG
Notes and bonds payable $ 4,607 $ 5,262 $ (1,096) $ 142 $ — $ 8,915
Loans and mortgages payable 814 1,348 (1,325) 3 1 841
AIG MIP matched notes and bonds payable — 5,371 — 98 (1) 5,468
Series AIGFP matched notes and bonds payable — 72 — — — 72
AIGFP
GIAs 20,811 12,265 (12,432) 20 — 20,664
Notes and bonds payable and hybrid financial instrument
liabilities 26,463 32,115 (12,532) 299 39 46,384
AGC notes and bonds payable 797 — — — — 797
Liabilities connected to trust preferred stock 1,391 — — — 49 1,440
ILFC notes and bonds payable 23,715 6,406 (3,843) 535 (222) 26,591
AGF notes and bonds payable 18,719 3,620 (3,065) 296 25 19,595
AIGCFG loans and mortgages payable 1,047 3,067 (2,711) 58 (8) 1,453
Other subsidiaries 927 344 (350) 4 140 1,065
Total $99,291 $69,870 $(37,354) $1,455 $ 23 $133,285
$98 million relates to notes issued to fund the MIP. AIG hasAIG (Parent Company)
hedged the currency exposure arising from foreign currency
AIG intends to continue its customary practice of issuing debt
denominated notes by effectively economically hedging that
securities from time to time to meet its financing needs and those
exposure, although such hedges did not qualify for hedge
of certain of its subsidiaries for general corporate purposes, as
accounting treatment under FAS 133. In 2007, through Febru-
well as for the MIP. In July 2006, AIG filed and had declared
ary 15, AIG issued the equivalent of $194 million under the Euro
effective a post-effective amendment to its universal shelf
program to fund the MIP.
registration statement to sell up to $25.1 billion of debt
In 2006, AIG issued in Rule 144A/Regulation S offerings
securities, preferred and common stock and other securities.
$3 billion principal amount of senior notes, of which $1.0 billion
In October 2006, AIG established a medium term note program
was exchanged by AIG for substantially identical notes that are
under its shelf registration statement providing for the issuance of
registered under the Securities Act. The proceeds from the sale of
up to $25.1 billion of AIG debt securities. The proceeds from the
$2.25 billion of these notes were used for AIG’s general corporate
issuance of these debt securities may be used (i) by AIG for
purposes and $750 million was used to fund the MIP. In 2007,
general corporate purposes, (ii) by AIGFP as it would use the
through February 15, AIG issued in Rule 144A offerings an
proceeds from its own borrowings as discussed below or (iii) to
aggregate of $750 million principal amount of senior notes, of
fund the MIP. As of December 31, 2006, $1.8 billion principal
which $500 million was used to fund the MIP and $250 million
amount of notes were outstanding under the medium term note
was used for AIG’s general corporate purposes.
program, of which (i) $749 million was used for AIG’s general
In November 2006, AIG filed a shelf registration statement in
corporate purposes, (ii) $72 million was used by AIGFP and
Japan, providing for the issuance of up to Japanese
(iii) $1.0 billion was used to fund the MIP. The maturity dates of
Yen 300 billion principal amount of senior notes. In December
these notes range from 2011 to 2046. To the extent deemed
2006, AIG issued the equivalent of $429 million under the
appropriate, AIG may enter into swap transactions to manage its
Japanese shelf registration statement, the proceeds of which were
effective borrowing with respect to these notes.
used for AIG’s general corporate purposes.
AIG also maintains a Euro medium term note program under
In November 2006, AIG established an Australian dollar debt
which an aggregate nominal amount of up to $10.0 billion of
program under which senior notes with an aggregate amount of up
notes may be outstanding at any one time. The program provides
to 5 billion Australian dollars may be outstanding at any one time.
that additional notes may be issued to replace matured or
The program provides that additional notes may be issued to
redeemed notes. As of December 31, 2006, the equivalent of
replace matured or redeemed notes. Although as of December 31,
$5.7 billion of notes were outstanding under the program, of
2006 there were no outstanding notes under the Australian
which $3.7 billion were used to fund the MIP and the remainder
program, AIG intends to use the program opportunistically to fund
was used for AIG’s general corporate purposes. The aggregate
the MIP or for AIG’s general corporate purposes.
amount outstanding includes $249 million resulting from foreign
In March 2006, AIG borrowed a total of $1.3 billion on an
exchange translation into U.S. dollars, of which $151 million
unsecured basis pursuant to loan agreements with third-party
relates to notes issued by AIG for general corporate purposes and
banks, of which $700 million remained outstanding on Decem-
70 AIG 2006 Form 10-K

ber 31, 2006; $500 million was repaid in February 2007, and the Revolving Credit Facilities. These facilities are used as back up for
balance matures in March 2007. ILFC’s maturing debt and other obligations.
As a well-known seasoned issuer, ILFC has filed an automatic
shelf registration statement with the SEC allowing ILFC immediateAIGFP
access to the U.S. public debt markets. For 2006, $1.90 billion of
AIGFP uses the proceeds from the issuance of notes and bonds
debt securities were issued under this registration statement and
and GIA borrowings to invest in a diversified portfolio of securities
$3.52 billion were issued under a prior registration statement. In
and derivative transactions. The borrowings may also be tempora-
addition, ILFC has a Euro medium term note program for
rily invested in securities purchased under agreements to resell.
$7.0 billion, under which $4.28 billion in notes were sold through
AIGFP’s notes and bonds include structured debt instruments
December 31, 2006. Notes issued under the Euro medium term
whose payment terms are linked to one or more financial or other
note program are included in ILFC Notes and bonds payable in the
indices (such as an equity index or commodity index or another
preceding table of borrowings. The foreign exchange adjustment
measure that is not considered to be clearly and closely related to
for the foreign currency denominated debt was $733 million at
the debt instrument). These notes contain embedded derivatives
December 31, 2006 and $197 million at December 31, 2005.
that otherwise would be required to be accounted for separately
ILFC has substantially eliminated the currency exposure arising
under FAS 133. Upon AIG’s early adoption of FAS 155, AIGFP
from foreign currency denominated notes by economically hedging
elected the fair value option for these notes. The notes that are
the portion of the note exposure not already offset by Euro-
accounted for using the fair value option are reported separately
denominated operating lease payments, although such hedges did
under hybrid financial instrument liabilities. AIG guarantees the
not qualify for hedge accounting treatment under FAS 133.
obligations of AIGFP under AIGFP’s notes and bonds and GIA
ILFC had a $4.3 billion Export Credit Facility for use in
borrowings. See Operating Review — Financial Services Opera-
connection with the purchase of approximately 75 aircraft deliv-
tions, Liquidity and Derivatives herein.
ered through 2001. This facility was guaranteed by various
In June 2006, AIGFP sold an aggregate of $2.0 billion principal
European Export Credit Agencies. The interest rate varies from
amount of senior, floating rate notes in Rule 144A offerings, of
5.75 percent to 5.90 percent on these amortizing ten-year
which $1.0 billion matures in 2007 and $1.0 billion matures in
borrowings depending on the delivery date of the aircraft. At
2008. AIGFP also has a Euro medium term note program under
December 31, 2006, ILFC had $1.0 billion outstanding under this
which an aggregate nominal amount of up to $10.0 billion of
facility. The debt is collateralized by a pledge of the shares of a
notes may be outstanding at any one time. The program provides
subsidiary of ILFC, which holds title to the aircraft financed under
that additional notes may be issued to replace matured or
the facility.
redeemed notes. As of December 31, 2006, $5.66 billion of
In May 2004, ILFC entered into a similarly structured Export
notes were outstanding under the program, including $575 million
Credit Facility for up to a maximum of $2.64 billion for Airbus
resulting from foreign exchange translation into U.S. dollars.
aircraft to be delivered through May 31, 2005. The facility was
AIGFP’s Rule 144A Notes and the notes issued under this
subsequently increased to $3.64 billion and extended to include
program are guaranteed by AIG and are included in AIGFP’s Notes
aircraft to be delivered through May 31, 2007. The facility
and Bonds Payable in the preceding table of borrowings.
becomes available as the various European Export Credit Agen-
cies provide their guarantees for aircraft based on a six-month
AIG Funding forward-looking calendar, and the interest rate is determined
through a bid process. At December 31, 2006, ILFC hadAIG Funding, Inc. (AIG Funding), issues commercial paper that is
$1.7 billion outstanding under this facility. Borrowings withguaranteed by AIG in order to help fulfill the short-term cash
respect to these facilities are included in ILFC’s Notes and bondsrequirements of AIG and its subsidiaries. The issuance of AIG
payable in the preceding table of borrowings.Funding’s commercial paper, including the guarantee by AIG, is
From time to time, ILFC enters into funded financing agree-subject to the approval of AIG’s Board of Directors or the Finance
ments. As of December 31, 2006, ILFC had a total of $1.2 billionCommittee of the Board if it exceeds certain pre-approved limits.
outstanding, which has varying maturities through February 2012.As backup for the commercial paper program and for other
The interest rates are LIBOR-based, with spreads ranging fromgeneral corporate purposes, AIG and AIG Funding maintain
0.30 percent to 1.625 percent.revolving credit facilities, which, as of December 31, 2006, had
In December of 2005, ILFC issued two tranches of junioran aggregate of $5.8 billion available to be drawn and which are
subordinated debt totaling $1.0 billion to underlie trust preferredsummarized below under Revolving Credit Facilities.
securities issued by a trust sponsored by ILFC. Both tranches
mature on December 21, 2065, but each tranche has a differentILFC
call option. The $600 million tranche has a call date of
ILFC fulfills its short-term cash requirements through operating December 21, 2010 and the $400 million tranche has a call date
cash flows and the issuance of commercial paper. The issuance of December 21, 2015. The tranche with the 2010 call date has
of commercial paper is subject to the approval of ILFC’s Board of a fixed interest rate of 5.90 percent for the first five years. The
Directors and is not guaranteed by AIG. ILFC maintains syndicated tranche with the 2015 call date has a fixed interest rate of
revolving credit facilities which, as of December 31, 2006, 6.25 percent for the first ten years.
aggregated $6.5 billion and which are summarized below under
Form 10-K 2006 AIG 71

Both tranches have interest rate adjustments if the call option with the SEC allowing AGF immediate access to the U.S. public
is not exercised. If the call option is not exercised, the new debt markets. At December 31, 2006, AGF had the corporate
interest rate will be a floating quarterly reset rate based on the authority to issue up to $13.4 billion of debt securities under its
initial credit spread plus the highest of (i) 3-month LIBOR, shelf registration statements.
(ii) 10-year constant maturity treasury and (iii) 30-year constant In January 2007, AGF issued junior subordinated debentures in
maturity treasury. an aggregate principal amount of $350 million that mature in
The proceeds of ILFC’s debt financing are primarily used to January 2067. The debentures underlie a series of trust preferred
purchase flight equipment, including progress payments during the securities sold by a trust sponsored by AGF in a Rule 144A/
construction phase. The primary sources for the repayment of this Regulation S offering. AGF can redeem the debentures at par
debt and the interest expense thereon are the cash flow from beginning in January 2017 and until that time will pay a fixed rate
operations, proceeds from the sale of flight equipment and the of interest. If AGF does not redeem the debentures in January
rollover and refinancing of the prior debt. AIG does not guarantee 2017, the interest rate changes to a floating rate, which will reset
the debt obligations of ILFC. See also Operating Review — based on 3-month LIBOR.
Financial Services Operations and Liquidity herein. AGF’s funding sources include a medium term note program,
private placement debt, retail note issuances, securitizations of
finance receivables that AGF accounts for as on-balance-sheetAGF
secured financings and bank financings. In addition, AGF has
AGF fulfills its short-term cash requirements through the issuance
become an established issuer of long-term debt in the interna-
of commercial paper. The issuance of commercial paper is subject
tional capital markets.
to the approval of AGF’s Board of Directors and is not guaranteed
In addition to debt refinancing activities, proceeds from the
by AIG. AGF maintains committed syndicated revolving credit
collection of finance receivables may be used to pay the principal
facilities which, as of December 31, 2006, aggregated to
and interest on AGF’s debt. AIG does not guarantee any of the
$4.25 billion and which are summarized below under Revolving
debt obligations of AGF. See also Operating Review — Financial
Credit Facilities. The facilities can be used for general corporate
Services Operations and Liquidity herein.
purposes and to provide backup for AGF’s commercial paper
programs.
AIGCFG
AGF issued $3.62 billion during 2006 and $5.51 billion during
2005 of notes and bonds ranging in maturities from two to AIGCFG has a variety of funding mechanisms for its various
25 years. As of December 31, 2006, notes and bonds aggregat- markets, including: retail and wholesale deposits; short-term and
ing $19.59 billion were outstanding with maturity dates ranging long-term bank loans and intercompany subordinated debt. AIG
from 2007 to 2031 at interest rates ranging from 1.94 percent to Credit Card Company (Taiwan), a consumer finance business in
8.45 percent. To the extent deemed appropriate, AGF may enter Taiwan, has issued commercial paper for the funding of its own
into swap transactions to manage its effective borrowing with operations. AIG does not guarantee any borrowings for AIGCFG
respect to these notes and bonds. As a well-known seasoned businesses, including this commercial paper.
issuer, AGF has filed an automatic shelf registration statement
72 AIG 2006 Form 10-K

AIG, ILFC and AGF expect to replace or extend these creditRevolving Credit Facilities
facilities on or prior to their expiration. Some of the facilities, as
AIG, ILFC and AGF maintain the following committed, unsecured
noted below, contain a ‘‘term-out option’’ allowing for the
revolving credit facilities in order to support their respective
conversion by the borrower of any outstanding loans at expiration
commercial paper programs and for general corporate purposes.
into one-year term loans.
Available
Amount One-Year
(in millions) December 31, Term-Out
Facility Size Borrower(s) 2006 Expiration Option
AIG:
364-Day Syndicated Facility $1,625 AIG $1,625 July 2007 Yes
AIG Funding(a)
AIG Capital Corporation(a)
5-Year Syndicated Facility 1,625 AIG 1,625 July 2011 No
AIG Funding(a)
364-Day Bilateral Facility 3,200 AIG(b)
505 November 2007 Yes
AIG Funding
364-Day Intercompany Facility(c)
2,000 AIG 2,000 October 2007 Yes
Total AIG $8,450 $5,755
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
Total ILFC $6,500 $6,500
AGF:
364-Day Syndicated Facility $2,125 American General Finance $2,125 July 2007 Yes
Corporation
American General Finance, Inc.(d)
5-Year Syndicated Facility 2,125 American General Finance 2,125 July 2010 No
Corporation
Total AGF $4,250 $4,250
(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-term and long-term
debt ratings. The following table presents the credit ratings of AIG and certain of its subsidiaries as of February 28, 2007. 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 (2nd of 9) AA (2nd of 8) AA (2nd of 9)
AIG Financial Products Corp.(d)
P-1 A-1+ — Aa2 AA —
AIG Funding, Inc.(d)
P-1 A-1+ F1+ — — —
ILFC P-1 A-1+ F1 (1st of 5) A1 (3rd of 9) AA-(e)
(2nd of 8) A+ (3rd of 9)
American General Finance Corporation P-1 A-1 (1st of 6) F1 A1 A+ (3rd of 8) A+
American General Finance, Inc. P-1 A-1 F1 — — A+
(a) Moody’s Investors Service (Moody’s). 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). 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). 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. A negative outlook by S&P indicates that a rating may be lowered, but is not necessarily a precursor of a ratings change. The
outlook on all other credit ratings in the table is stable.
Form 10-K 2006 AIG 73

These credit ratings are current opinions of the rating agen- adverse effect on its financial condition or liquidity. Ratings
cies. As such, they may be changed, suspended or withdrawn at downgrades could also trigger the application of termination
any time by the rating agencies as a result of changes in, or provisions in certain of AIG’s contracts, principally agreements
unavailability of, information or based on other circumstances. entered into by AIGFP and assumed reinsurance contracts entered
Ratings may also be withdrawn at AIG management’s request. into by Transatlantic.
This discussion of ratings is not a complete list of ratings of AIG It is estimated that, as of the close of business on
and its subsidiaries. See Item 1A. Risk Factors for more February 15, 2007, based on AIGFP’s outstanding municipal GIAs
information regarding the credit ratings of AIG and its subsidiaries and financial derivatives transactions as of such date, a
and certain risks related thereto. downgrade of AIG’s long-term senior debt ratings to ‘Aa3’ by
‘‘Rating triggers’’ have been defined by one independent rating Moody’s or ‘AA–’ by S&P would permit counterparties to call for
agency to include clauses or agreements the outcome of which approximately $864 million of collateral. Further, additional
depends upon the level of ratings maintained by one or more downgrades could result in requirements for substantial additional
rating agencies. Rating triggers generally relate to events which collateral, which could have a material effect on how AIGFP
(i) could result in the termination or limitation of credit availability, manages its liquidity. The actual amount of additional collateral
or require accelerated repayment, (ii) could result in the termina- that AIGFP would be required to post to counterparties in the
tion of business contracts or (iii) could require a company to post event of such downgrades depends on market conditions, the fair
collateral for the benefit of counterparties. value of the outstanding affected transactions and other factors
AIG believes that any of its own or its subsidiaries’ contractual prevailing at the time of the downgrade. Additional obligations to
obligations that are subject to ‘‘ratings triggers’’ or financial post collateral would increase the demand on AIGFP’s liquidity.
covenants relating to ‘‘ratings triggers’’ would not have a material
74 AIG 2006 Form 10-K

Contractual Obligations and Other Commercial Commitments
The maturity schedule of contractual obligations of AIG and its consolidated subsidiaries at December 31, 2006 was as
follows:
Payments due by Period
Total Less Than 1-3 3+
-5 Over
(in millions) Payments One Year Years Years Five Years
Borrowings(a)
$133,285 $ 34,670 $ 29,949 $30,483 $ 38,183
Interest payments on borrowings 44,090 4,960 8,130 5,445 25,555
Loss reserves(b)
79,999 22,000 24,399 11,600 22,000
Insurance and investment contract liabilities(c)
577,730 16,023 27,728 39,376 494,603
GIC liabilities(d)
56,042 19,399 23,209 3,889 9,545
Aircraft purchase commitments 19,042 5,442 7,079 2,155 4,366
Operating leases 2,763 626 802 581 754
Total $912,951 $103,120 $121,296 $93,529 $595,006
(a) Excludes commercial paper and obligations included as debt pursuant to FASB Interpretation No. 46, ‘‘Consolidation of Variable Interest Entities’’
(FIN 46R), and includes hybrid financial instrument liabilities recorded at fair value. See also Note 9 of Notes to Consolidated Financial Statements.
(b) Represents future loss and loss adjustment expense payments estimated based on historical loss development payment patterns.
(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) the occurrence of a payment 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 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 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.
The maturity schedule of other commercial commitments of AIG and its consolidated subsidiaries at December 31,
2006 was as follows:
Amount of Commitment Expiration
Less Over
Total Amounts Than 1-3 3+
-5 Five
Committed One Year Years Years Years
Letters of credit:
Life Insurance & Retirement Services $ 185 $ 21 $ 28 $ — $ 136
Parent Company(a)
641 522 1 118 —
DBG 198 198 — — —
Standby letters of credit:
Capital Markets 1,739 1,427 104 40 168
Guarantees:
Life Insurance & Retirement Services(b)
2,100 113 423 7 1,557
Aircraft Leasing 161 — 52 — 109
Asset Management 246 23 53 — 170
Other commercial commitments(c):
Capital Markets(d)
15,946 5,127 2,313 2,640 5,866
Aircraft Leasing(e)
344 — — — 344
Life Insurance & Retirement Services(f)
4,896 1,119 1,730 1,177 870
Asset Management(g)
1,310 896 255 91 68
Life Settlement 203 — 203 — —
DBG(h)
1,588 690 603 295 —
Parent Company 193 56 137 — —
Total $29,750 $10,192 $5,902 $4,368 $9,288
(a) Represents reimbursement obligations under letters of credit issued by commercial banks.
(b) Primarily AIG SunAmerica construction guarantees connected to affordable housing investments.
(c) Excludes commitments with respect to pension plans. The annual pension contribution for 2007 is expected to be approximately $95 million for U.S.
and non-U.S. plans. See also Note 15 of Notes to Consolidated Financial Statements.
(d) Primarily liquidity facilities provided in connection with certain municipal swap transactions and collateralized bond obligations.
(e) Primarily in connection with options to acquire aircraft.
(f) Primarily AIG SunAmerica commitments to invest in partnerships.
(g) Includes commitments to invest in limited partnerships, private equity and hedge funds and real estate.
(h) Primarily commitments to invest in limited partnerships.
Form 10-K 2006 AIG 75

Special Purpose Vehicles and Off Balance Sheet Arrangements with an aggregate purchase price of $8 billion. AIG or its
subsidiaries from time to time may buy shares of its common
AIG transacts with special purpose vehicles (SPVs) in the ordinary
stock in the open market for general corporate purposes, including
course of business. Many of these SPVs are included in the
to satisfy its obligations under various employee benefit plans.
consolidated financial statements but some are off balance sheet.
During 2006, ILFC purchased 17,000 shares of AIG common
AIG has guidelines with respect to the formation of and
stock at an average cost of $72.18 per share to satisfy its
investment in SPVs and off balance sheet arrangements. In
obligations under an employee benefit plan. See Capital Re-
addition, AIG has expanded the responsibility of its Complex
sources and Liquidity — Liquidity for a discussion of possible
Structured Financial Transaction Committee (CSFT) to include the
share repurchases in 2007.
review of any transaction that could subject AIG to heightened
legal, reputational, regulatory, accounting or other risk. See
Dividends from Insurance Subsidiaries
Item 9A. Controls and Procedures — Management’s Report on
Internal Control Over Financial Reporting for a further discussion Payments of dividends to AIG by its insurance subsidiaries are
of the CSFT. subject to certain restrictions imposed by regulatory authorities.
For additional information related to AIG’s activities with With respect to AIG’s domestic insurance subsidiaries, the
respect to VIEs and certain guarantees, see Notes 1 and 18 of payment of any dividend requires formal notice to the insurance
Notes to Consolidated Financial Statements. department in which the particular insurance subsidiary is
domiciled. Under the laws of many states, an insurer may pay a
Shareholders’ Equity dividend without prior approval of the insurance regulator when
the amount of the dividend is below certain regulatory thresholds.
AIG’s consolidated shareholders’ equity increased during
Other foreign jurisdictions may restrict the ability of AIG’s foreign
2006 and 2005 as follows:
insurance subsidiaries to pay dividends. The most significant
(in millions) 2006 2005 foreign insurance regulatory jurisdictions include Bermuda, Japan,
Hong Kong, Taiwan, the United Kingdom, Thailand and Singapore.Beginning of year $ 86,317 $79,673
Largely as a result of the restrictions, approximately 90 percent ofNet income 14,048 10,477
consolidated shareholders’ equity was restricted from immediateUnrealized appreciation (depreciation)
transfer to AIG parent at December 31, 2006. See Regulation andof investments, net of tax 1,735 (1,978)
Supervision herein. AIG cannot predict how recent regulatoryCumulative translation adjustment,
investigations may affect the ability of its regulated subsidiaries tonet of tax 936 (540)
pay dividends. To AIG’s knowledge, no AIG company is currently onDividends to shareholders (1,690) (1,615)
Other* 331 300 any regulatory or similar ‘‘watch list’’ with regard to solvency. See
also Liquidity herein, Note 12 of Notes to Consolidated FinancialEnd of year $101,677 $86,317
Statements and Item 1A. Risk Factors — Liquidity.
* Reflects the effects of employee stock transactions and in 2006 also
reflects the cumulative effect of accounting changes, including the
Regulation and Supervisionadoption of FAS 158. See Note 1(hh) of Notes to Consolidated Financial
Statements.
AIG’s insurance subsidiaries, in common with other insurers, are
AIG has in the past reinvested most of its unrestricted subject to regulation and supervision by the states and jurisdic-
earnings in its operations and believes such continued reinvest- tions in which they do business. In the U.S., the NAIC has
ment in the future will be adequate to meet any foreseeable developed Risk-Based Capital (RBC) requirements. RBC relates an
capital needs. However, AIG may choose from time to time to individual insurance company’s statutory surplus to the risk
raise additional funds through the issuance of additional inherent in its overall operations.
securities. In preparing both its 2004 and 2005 audited statutory
In February 2007, AIG’s Board of Directors adopted a new financial statements for its Domestic General Insurance compa-
dividend policy, to take effect with the dividend to be declared in nies, AIG agreed with the relevant state regulatory authorities on
the second quarter of 2007, providing that under ordinary the statutory accounting treatment of the various items requiring
circumstances, AIG’s plan will be to increase its common stock adjustment or restatement. With respect to the 2004 audited
dividend by approximately 20 percent annually. statutory financial statements, these adjustments and restate-
ments reduced previously reported General Insurance statutory
surplus at December 31, 2004 by approximately $3.5 billion, toShare Repurchases
approximately $20.6 billion. With respect to the 2005 audited
During 2006, AIG did not purchase any shares of its common
statutory financial statements, the state regulators permitted the
stock under its existing share repurchase authorization. At
Domestic General Insurance companies to record a $724 million
December 31, 2006, an additional 36,542,700 shares could be
reduction to opening statutory surplus as of January 1, 2005.
purchased under the then current authorization by AIG’s Board of
AIG’s insurance subsidiaries file financial statements prepared
Directors. In February 2007, AIG’s Board of Directors increased
in accordance with statutory accounting practices prescribed or
the repurchase program by authorizing the repurchase of shares
76 AIG 2006 Form 10-K

permitted by domestic and foreign insurance regulatory authori- these assessments upon notice. Additionally, certain states
ties. The principal differences between statutory financial state- permit at least a portion of the assessed amount to be used as a
ments and financial statements prepared in accordance with credit against a company’s future premium tax liabilities. There-
U.S. GAAP for domestic companies are that statutory financial fore, the ultimate net assessment cannot reasonably be esti-
statements do not reflect DAC, some bond portfolios may be mated. The guarantee fund assessments net of credits for 2006,
carried at amortized cost, assets and liabilities are presented net 2005 and 2004, respectively, were $97 million, $124 million and
of reinsurance, policyholder liabilities are valued using more $118 million.
conservative assumptions and certain assets are non-admitted. AIG is also required to participate in various involuntary pools
In connection with the filing of the 2005 statutory financial (principally workers compensation business) which provide insur-
statements for AIG’s Domestic General Insurance companies, AIG ance coverage for those not able to obtain such coverage in the
agreed with the relevant state insurance regulators on the voluntary markets. This participation is also recorded upon
statutory accounting treatment of various items. The regulatory notification, as these amounts cannot reasonably be estimated.
authorities have also permitted certain of the domestic and A substantial portion of AIG’s General Insurance business and
foreign insurance subsidiaries to support the carrying value of a majority of its Life Insurance & Retirement Services business
their investments in certain non-insurance and foreign insurance are conducted in foreign countries. The degree of regulation and
subsidiaries by utilizing the AIG audited consolidated financial supervision in foreign jurisdictions varies. Generally, AIG, as well
statements to satisfy the requirement that the U.S. GAAP-basis as the underwriting companies operating in such jurisdictions,
equity of such entities be audited. In addition, the regulatory must satisfy local regulatory requirements. Licenses issued by
authorities have permitted the Domestic General Insurance com- foreign authorities to AIG subsidiaries are subject to modification
panies to utilize audited financial statements prepared on a basis and revocation. Thus, AIG’s insurance subsidiaries could be
of accounting other than U.S. GAAP to value investments in joint prevented from conducting future business in certain of the
ventures, limited partnerships and hedge funds. AIG has received jurisdictions where they currently operate. AIG’s international
similar permitted practices authorizations from insurance regula- operations include operations in various developing nations. Both
tory authorities in connection with the 2006 statutory financial current and future foreign operations could be adversely affected
statements. These permitted practices did not affect the Domes- by unfavorable political developments up to and including national-
tic General Insurance companies’ compliance with minimum ization of AIG’s operations without compensation. Adverse effects
regulatory capital requirements. resulting from any one country may affect AIG’s results of
Statutory capital of each company continued to exceed operations, liquidity and financial condition depending on the
minimum company action level requirements following the adjust- magnitude of the event and AIG’s net financial exposure at that
ments, but AIG nonetheless contributed an additional $750 million time in that country.
of capital into American Home effective September 30, 2005 and Foreign insurance operations are individually subject to local
contributed a further $2.25 billion of capital in February 2006 for solvency margin requirements that require maintenance of ade-
a total of approximately $3 billion of capital into Domestic General quate capitalization, which AIG complies with by country. In
Insurance subsidiaries effective December 31, 2005. To enhance addition, certain foreign locations, notably Japan, have estab-
their current capital positions, AIG suspended dividends from the lished regulations that can result in guarantee fund assessments.
DBG companies from the fourth quarter 2005 through 2006, but These have not had a material effect on AIG’s financial condition
AIG expects dividend payments will resume in the first quarter of or results of operations.
2007. AIG believes it has the capital resources and liquidity to
fund any necessary statutory capital contributions. Liquidity
As discussed above, various regulators have commenced
AIG manages liquidity at both the subsidiary and parent company
investigations into certain insurance business practices. In addi-
levels. At December 31, 2006, AIG’s consolidated invested
tion, the OTS and other regulators routinely conduct examinations
assets, primarily held by its subsidiaries, included $26.8 billion in
of AIG and its subsidiaries, including AIG’s consumer finance
cash and short-term investments. Consolidated net cash provided
operations. AIG cannot predict the ultimate effect that these
from operating activities in 2006 amounted to $6.8 billion. At the
investigations and examinations, or any additional regulation
parent company level, liquidity management activities are con-
arising therefrom, might have on its business. Federal, state or
ducted in a manner to preserve and enhance funding stability,
local legislation may affect AIG’s ability to operate and expand its
flexibility, and diversity through the full range of potential operating
various financial services businesses, and changes in the current
environments and market conditions. AIG’s primary sources of
laws, regulations or interpretations thereof may have a material
cash flow are dividends and other payments from its regulated
adverse effect on these businesses.
and unregulated subsidiaries, as well as issuances of debt
AIG’s U.S. operations are negatively affected under guarantee
securities. Primary uses of cash flow are for debt service,
fund assessment laws which exist in most states. As a result of
subsidiary funding and shareholder dividend payments. Manage-
operating in a state which has guarantee fund assessment laws,
ment believes that AIG’s liquid assets, cash provided by opera-
a solvent insurance company may be assessed for certain
tions and access to the capital markets will enable it to meet its
obligations arising from the insolvencies of other insurance
anticipated cash requirements, including the funding of increased
companies which operated in that state. AIG generally records
Form 10-K 2006 AIG 77

dividends under AIG’s new dividend policy and repurchases of tial portion of the Life Insurance & Retirement Services operations
common stock. bond portfolio diminished significantly in value and/or defaulted,
AIG might need to liquidate other portions of its Life Insurance &
Retirement Services investment portfolio and/or arrange financ-Insurance Operations
ing. Potential events causing such a liquidity strain could be the
The liquidity of the combined insurance operations is derived both
result of economic collapse of a nation or region in which Life
domestically and abroad. The combined insurance operating cash
Insurance & Retirement Services operations exist, nationalization,
flow is derived from two sources, underwriting operations and
terrorist acts, or other economic or political upheaval. In addition,
investment operations. Cash flow from underwriting operations
a significant rise in interest rates leading to a major increase in
includes periodic premium collections, including policyholders’
policyholder surrenders could also create a liquidity strain.
contract deposits, and paid loss recoveries, less reinsurance
premiums, losses, benefits, and acquisition and operating ex-
Financial Services
penses. Generally, there is a time lag from when premiums are
collected and, when as a result of the occurrence of events AIG’s major Financial Services operating subsidiaries consist of
specified in the policy, the losses and benefits are paid. AIGFP, ILFC, AGF and AIGCFG. Sources of funds considered in
Investment cash flow is primarily derived from interest and meeting the liquidity needs of AIGFP’s operations include GIAs,
dividends received and includes realized capital gains net of issuance of long-term and short-term debt, proceeds from maturi-
realized capital losses. ties, sales of securities available for sale and securities and spot
In addition to the combined insurance operating cash flow, commodities leased or sold under repurchase agreements. ILFC,
AIG’s insurance operations held $11.2 billion in cash and short- AGF and AIGCFG utilize the commercial paper markets, bank loans
term investments at December 31, 2006. Operating cash flow and and bank credit facilities as sources of liquidity. ILFC and AGF
the cash and short-term balances held provided AIG’s insurance also fund in the domestic and international capital markets
operations with a significant amount of liquidity. This liquidity is without reliance on any guarantee from AIG. An additional source
available, among other things, to purchase predominately high of liquidity for ILFC is the use of export credit facilities. AIGCFG
quality and diversified fixed income securities and, to a lesser also uses wholesale and retail bank deposits as sources of funds.
extent, marketable equity securities, and to provide mortgage On occasion, AIG has provided equity capital to ILFC, AGF and
loans on real estate, policy loans, and collateral loans. This cash AIGCFG and provides intercompany loans to AIGCFG.
flow coupled with proceeds of approximately $126 billion from the
maturities, sales and redemptions of fixed income securities and Asset Management
from the sale of equity securities was used to purchase
Asset Management operating cash flow is derived primarily from
approximately $161 billion of fixed income securities and market-
investment income in connection with domestic and foreign GICs
able equity securities during 2006.
and from the collection of various forms of investment manage-
See also Operating Review — General Insurance Operations
ment fees, brokerage commissions and custody fees earned from
— General Insurance Net Investment Income and Life Insurance &
affiliated and unaffiliated clients. Investment management fees
Retirement Services Operations — Life Insurance & Retirement
are typically asset-based fees collected on a periodic basis, while
Services Net Investment Income and Realized Capital Gains
brokerage commissions and custody fees are more transaction
(Losses) herein.
driven and received on a continual basis. Asset Management also
derives cash from the realization of gains earned through its
General Insurance
investment partnership holdings and collects various forms of
General Insurance operating cash flow is derived from underwriting incentive management fees. These incentive management fees,
and investment activities. With respect to General Insurance which are typically based on the appreciation and/or realization of
operations, if paid losses accelerated beyond AIG’s ability to fund gains on managed assets, are generally received in the form of
such paid losses from current operating cash flows, AIG might carried interest earned from sponsored funds managed on behalf
need to liquidate a portion of its General Insurance investment of clients. Asset Management’s spread-based investment busi-
portfolio and/or arrange for financing. Potential events causing ness derives cash from the investment income and the sale of
such a liquidity strain could be the result of several significant invested assets backing these contract liabilities.
catastrophic events occurring in a relatively short period of time. AIGGIG incurs expenses with associated cash outflows from
Additional strain on liquidity could occur if the investments the operation of its business, including costs related to portfolio
liquidated to fund such paid losses were sold into a depressed management and related back and middle office costs. In
market place and/or reinsurance recoverable on such paid losses addition, cash is used in association with investment warehousing
became uncollectible or collateral supporting such reinsurance activities wherein AIGGIG funds and holds an investment for the
recoverable significantly decreased in value. benefit of a future investment vehicle.
Cash needs for the spread-based investment business are
principally the result of GIC maturities. Significant blocks of theLife Insurance & Retirement Services
GIC portfolio will mature over the next five years. AIG utilizes
Life Insurance & Retirement Services operating cash flow is
asset liability matching to control liquidity risks associated with
derived from underwriting and investment activities. If a substan-
78 AIG 2006 Form 10-K

this business. In addition, AIG believes that its products incorpo- potential operating environments and market conditions. Assess-
rate certain restrictions which encourage persistency, limiting the ing liquidity risk involves forecasting of cash inflows/outflows on
magnitude of unforeseen surrenders in the GIC portfolio. both a short- and long-term basis. Corporate Treasury is responsi-
Liquidity for Asset Management operations can be affected by ble for formulating the parent company’s liquidity and contingency
significant credit or geopolitical events that might cause a delay in planning efforts, as well as for execution of AIG’s specific funding
fund closings, securitizations or an inability of AIG’s clients to activities. Through active liquidity management, AIG seeks to
fund their capital commitments. AIGGIG has relied upon AIG from retain stable, reliable and cost-effective funding sources. In
time to time in order to fund certain liquidity requirements addition to current liquidity requirements, factors which affect
associated with investment warehousing. In addition, AIG Global funding decisions include market conditions, prevailing interest
Real Estate maintains several external credit lines in order to fund rates and the desired maturity profile of liabilities. The objectives
its ongoing property development and construction related of contingency planning are to ensure maintenance of appropriate
activities. liquidity during normal and stress periods, to measure and project
funding requirements during periods of stress, and to manage
access to funding sources. Diversification of funding sources is anAIG (Parent Company)
important element of AIG’s liquidity risk management approach.
The liquidity of the parent company is principally derived from its
AIG’s liquidity could be impaired by an inability to access the
subsidiaries. The primary sources of cash flow are dividends and
capital markets or by unforeseen significant outflows of cash. This
other payments from its regulated and unregulated subsidiaries,
situation may arise due to circumstances that AIG may be unable
as well as issuance of debt securities. Primary uses of cash flow
to control, such as a general market disruption or an operational
are for debt service, subsidiary funding, shareholder dividend
problem that affects third parties or AIG. Regulatory and other
payments and purchases of outstanding shares of common stock.
legal restrictions may limit AIG’s ability to transfer funds freely,
In 2006, AIG Parent collected $2.1 billion in dividends and other
either to or from its subsidiaries. In particular, many of AIG’s
payments from subsidiaries and issued $6.6 billion in debt
subsidiaries, including its insurance subsidiaries, are subject to
securities excluding MIP and Series AIGFP debt. AIG Parent also
laws and regulations that authorize regulatory bodies to block or
made interest payments totaling $232 million, made $2.9 billion
reduce the flow of funds to the parent holding company, or that
in capital contributions to subsidiaries (principally $2.3 billion to
prohibit such transfers altogether in certain circumstances. These
DBG), and paid $1.6 billion in dividends to shareholders in 2006.
laws and regulations may hinder AIG’s ability to access funds that
No share repurchases were made by AIG Parent in 2006.
it may need to make payments on its obligations. Because of the
AIG funds its short-term working capital needs through com-
wide geographic profile of AIG’s regulated subsidiaries, manage-
mercial paper issued by AIG Funding. As of December 31, 2006,
ment believes that these cash flows represent a diversified source
AIG Funding had $4.8 billion of commercial paper outstanding with
of liquidity for AIG. For a further discussion of the regulatory
an average maturity of 28 days. As additional liquidity, AIG and
environment in which AIG subsidiaries operate and other issues
AIG Funding maintain revolving credit facilities that, as of
affecting AIG’s liquidity, see Item 1A. Risk Factors.
December 31, 2006, had an aggregate of $5.8 billion available to
be drawn, which are summarized above under Revolving Credit
Invested Assets
Facilities.
At the parent company level, liquidity management activities AIG’s investment strategy is to invest primarily in high quality
are conducted in a manner intended to preserve and enhance securities while maintaining diversification to avoid significant
funding stability, flexibility, and diversity through the full range of exposure to issuer, industry and/or country concentrations.
Form 10-K 2006 AIG 79

The following tables summarize the composition of AIG’s invested assets by segment, at December 31, 2006 and
2005:
Life
Insurance &
General Retirement Financial Asset
(in millions) Insurance Services Services Management Other Total
2006
Fixed maturities:
Bonds available for sale, at fair value $ 67,994 $287,360 $ 1,357 $30,680 $ — $387,391
Bonds held to maturity, at amortized cost 21,437 — — — — 21,437
Bond trading securities, at fair value 1 1,995 — 7,041 — 9,037
Equity securities:
Common stocks available for sale, at fair value 4,245 8,711 — 226 80 13,262
Common and preferred stocks trading, at fair value 350 13,705 — 366 — 14,421
Preferred stocks available for sale, at fair value 1,884 650 5 — — 2,539
Mortgage loans on real estate, net of allowance 13 12,852 95 4,107 — 17,067
Policy loans 1 7,458 2 48 (8) 7,501
Collateral and guaranteed loans, net of allowance 3 733 2,301 729 84 3,850
Financial services assets:
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 — — 19,252 — — 19,252
Trading assets — — 2,468 — — 2,468
Securities purchased under agreements to resell, at contract
value — — 33,702 — — 33,702
Finance receivables, net of allowance — — 29,573 — — 29,573
Securities lending collateral, at fair value 5,376 50,099 76 13,755 — 69,306
Other invested assets 9,207 14,263 2,212 15,823 609 42,114
Short-term investments, at cost 3,281 6,893 1,245 13,825 5 25,249
Total investments and ﬁnancial services assets as shown on
the balance sheet 113,792 404,719 184,619 86,600 770 790,500
Cash 334 672 390 186 8 1,590
Investment income due and accrued 1,363 4,364 23 326 1 6,077
Real estate, net of accumulated depreciation 570 698 17 75 26 1,386
Total invested assets* $116,059 $410,453 $185,049 $87,187 $805 $799,553
* At December 31, 2006, approximately 68 percent and 32 percent of invested assets were held in domestic and foreign investments, respectively.
80 AIG 2006 Form 10-K

Life
Insurance &
General Retirement Financial Asset
(in millions) Insurance Services Services Management Other Total
2005
Fixed maturities:
Bonds available for sale, at fair value $50,870 $273,165 $ 1,307 $34,174 $ — $359,516
Bonds held to maturity, at amortized cost 21,528 — — — — 21,528
Bond trading securities, at fair value — 1,073 — 3,563 — 4,636
Equity securities:
Common stocks available for sale, at fair value 4,505 7,436 — 227 59 12,227
Common stocks trading, at fair value 425 8,122 — 412 — 8,959
Preferred stocks available for sale, at fair value 1,632 760 10 — — 2,402
Mortgage loans on real estate, net of allowance 14 10,247 71 3,968 — 14,300
Policy loans 2 6,987 2 48 — 7,039
Collateral and guaranteed loans, net of allowance 3 1,172 1,719 578 98 3,570
Flight equipment primarily under operating leases, net of
accumulated depreciation — — 36,245 — — 36,245
Securities available for sale, at fair value — — 37,511 — — 37,511
Trading securities, at fair value — — 6,499 — — 6,499
Spot commodities — — 92 — — 92
Unrealized gain on swaps, options and forward transactions — — 18,695 — — 18,695
Trading assets — — 1,204 — — 1,204
Securities purchased under agreements to resell, at contract
value — 28 14,519 — — 14,547
Finance receivables, net of allowance — — 27,995 — — 27,995
Securities lending collateral, at fair value 4,931 42,991 — 11,549 — 59,471
Other invested assets 6,350 9,847 2,758 12,096 21 31,072
Short-term investments, at cost 2,482 5,855 1,382 5,619 4 15,342
Total investments and financial services assets as shown on the
balance sheet 92,742 367,683 150,009 72,234 182 682,850
Cash 305 989 331 196 76 1,897
Investment income due and accrued 1,232 4,073 18 402 2 5,727
Real estate, net of accumulated depreciation 525 659 17 73 19 1,293
Total invested assets* $94,804 $373,404 $150,375 $72,905 $279 $691,767
* At December 31, 2005, approximately 70 percent and 30 percent of invested assets were held in domestic and foreign investments, respectively.
combination of added diversification and attractive long-termGeneral Insurance Invested Assets
returns.In AIG’s General Insurance business, the duration of liabilities for
General Insurance invested assets grew by $21.3 billion, orlong-tail casualty lines is greater than other lines. As differentiated
22 percent, during 2006 as bond holdings grew by $17 billion, orfrom the Life Insurance & Retirement Services companies, the
24 percent. Listed equity holdings remained essentially flat atfocus is not on asset-liability matching, but on preservation of
$6.5 billion.capital and growth of surplus.
Fixed income holdings of the Domestic General Insurance
Life Insurance & Retirement Services Investedcompanies are comprised primarily of tax-exempt securities, which
Assetsprovide attractive risk-adjusted after-tax returns. These high quality
With respect to Life Insurance & Retirement Services, AIG’smunicipal investments have an average rating of high AA.
investment strategy is to produce cash flows greater thanFixed income assets held in Foreign General Insurance are of
maturing insurance liabilities. AIG actively manages the asset-high quality and short to intermediate duration, averaging
liability relationship in its foreign operations, as it has been doing4.2 years compared to 7.2 years for those in Domestic General
throughout AIG’s history, even though certain territories lackInsurance.
qualified long-term investments or certain local regulatory authori-While reserves are invested in conventional fixed income
ties may impose investment restrictions. For example, in severalsecurities in Domestic General Insurance, a modest portion of
Southeast Asian countries, the duration of investments is shortersurplus is allocated to large capitalization, high-dividend, public
than the effective maturity of the related policy liabilities.equity strategies and to alternative investments, including private
Therefore, there is risk that the reinvestment of the proceeds atequity and hedge funds. These investments have provided a
Form 10-K 2006 AIG 81

the maturity of the initial investments may be at a yield below that AIG actively manages the asset-liability relationship in its
of the interest required for the accretion of the policy liabilities. domestic operations. This relationship is more easily managed
Additionally, there exists a future investment risk associated with through the availability of qualified long-term investments.
certain policies currently in-force which will have premium receipts A number of guaranteed benefits, such as living benefits or
in the future. That is, the investment of these future premium guaranteed minimum death benefits, are offered on certain
receipts may be at a yield below that required to meet future variable life and variable annuity products. AIG manages its
policy liabilities. exposure resulting from these long-term guarantees through
In 2006, new money investment rates generally increased in reinsurance or capital market hedging instruments.
the U.S., Japan and Taiwan, and were generally unchanged in AIG invests in equities for various reasons, including diversify-
Thailand. In regard to in-force business, management focus is ing its overall exposure to interest rate risk. Available for sale
required in both the investment and product management process bonds and equity securities are subject to declines in fair value.
to maintain an adequate yield to match the interest necessary to Such declines in fair value are presented in unrealized apprecia-
support future policy liabilities. Business strategies continue to tion or depreciation of investments, net of taxes, as a component
evolve to maintain profitability of the overall business. In some of Accumulated other comprehensive income. Declines that are
countries, new products are being introduced with minimal determined to be other-than-temporary are reflected in income in
investment guarantees resulting in a shift toward investment the period in which the intent to hold the securities to recovery no
linked savings products and away from traditional savings prod- longer exists. See Valuation of Invested Assets herein. Generally,
ucts with higher guarantees. insurance regulations restrict the types of assets in which an
The investment of insurance cash flows and reinvestment of insurance company may invest. When permitted by regulatory
the proceeds of matured securities and coupons requires active authorities and when deemed necessary to protect insurance
management of investment yields while maintaining satisfactory assets, including invested assets, from adverse movements in
investment quality and liquidity. foreign currency exchange rates, interest rates and equity prices,
AIG may use alternative investments in certain foreign jurisdic- AIG and its insurance subsidiaries may enter into derivative
tions where interest rates remain low and there are limited long- transactions as end users to hedge their exposures. For a further
dated bond markets, including equities, real estate and foreign discussion of AIG’s use of derivatives, see Risk Management —
currency denominated fixed income instruments to extend the Credit Risk Management — Derivatives herein.
duration or increase the yield of the investment portfolio to more In certain jurisdictions, significant regulatory and/or foreign
closely match the requirements of the policyholder liabilities and governmental barriers exist which may not permit the immediate
DAC recoverability. This strategy has been effectively used in free flow of funds between insurance subsidiaries or from the
Japan and more recently by Nan Shan in Taiwan. In Japan, foreign insurance subsidiaries to AIG parent. For a discussion of these
assets, excluding those matched to foreign liabilities, were restrictions, see Item 1. Business — Regulation.
approximately 30 percent of statutory assets, which is below the Life Insurance & Retirement Services invested assets grew by
maximum allowable percentage under current local regulation. $37.0 billion, or 10 percent, during 2006 as bond holdings grew
Foreign assets comprised approximately 32 percent of Nan by $15.1 billion, or 6 percent, and listed equity holdings grew by
Shan’s invested assets at December 31, 2006, slightly below the $6.7 billion, or 41 percent. For a discussion of credit risk
maximum allowable percentage under current local regulation. The exposures, see Risk Management — Credit Risk Management
majority of Nan Shan’s in-force policy portfolio is traditional life herein.
and endowment insurance products with implicit interest rate
guarantees. New business with lower interest rate guarantees are Financial Services Invested Assets
gradually reducing the overall interest requirements, but asset ILFC
portfolio yields have declined faster due to the prolonged low
The cash used for the purchase of flight equipment is derivedinterest rate environment. As a result, although the investment
primarily from the proceeds of ILFC’s debt financings. The primarymargins for a large block of in-force policies are negative, the
sources for the repayment of this debt and the related interestblock remains profitable because the mortality and expense
expense are ILFC’s cash flow from operations, proceeds from themargins presently exceed the negative investment spread. In
sale of flight equipment and the rollover and refinancing of theresponse to the low interest rate environment and the volatile
prior debt. During 2006, ILFC acquired flight equipment costingexchange rate of the NT dollar, Nan Shan is emphasizing new
$6.0 billion. For a further discussion of ILFC’s borrowings, seeproducts with lower implied guarantees, including participating
Operating Review — Financial Services Operations — Aircraft Leas-endowments and investment linked products. Although the risks of
ing and Capital Resources — Borrowings herein.a continued low interest rate environment coupled with a volatile
At December 31, 2006, ILFC had committed to purchase 254NT dollar could increase net liabilities and require additional
new aircraft deliverable from 2007 through 2015 for an estimatedcapital to maintain adequate local solvency margins, Nan Shan
aggregate purchase price of $19.0 billion. As of February 22,currently believes it has adequate resources to meet all future
2007, ILFC has entered into leases for all of the new aircraft topolicy obligations.
be delivered in 2007, and 64 of 171 of the new aircraft to be
delivered subsequent to 2007. ILFC will be required to find
customers for any aircraft currently on order and any aircraft to be
82 AIG 2006 Form 10-K

ordered, and it must arrange financing for portions of the terms of the investment security, which achieves the economic
purchase price of such equipment. ILFC has been successful to result of converting the return on the underlying security to
date both in placing its new aircraft on lease or under sales U.S. dollar LIBOR plus or minus a spread based on the underlying
contract and obtaining adequate financing, but there can be no profit on each security on the initial trade date. The market risk
assurance that such success will continue in future environments. associated with such internal hedges is managed on a portfolio
basis, with third-party hedging transactions executed as neces-
sary. As hedge accounting treatment was not achieved in 2006,Capital Markets
the unrealized gains and losses on the derivative transactions
Capital Markets derivative transactions are carried at market value
with unaffiliated third parties were reflected in operating income.
or at estimated fair value when market prices are not readily
The unrealized gains and losses on the underlying securities
available. AIGFP reduces its economic risk exposure through
available for sale resulting from changes in interest rates and
similarly valued offsetting transactions including swaps, trading
currency rates and commodity and equity prices were included in
securities, options, forwards and futures. The estimated fair
Accumulated other comprehensive income, or in operating income,
values of these transactions represent assessments of the
as appropriate. When a security is sold, the realized gain or loss
present value of expected future cash flows. These transactions
with respect to this security is then included in operating income.
would be exposed to liquidity risk if AIGFP were required to sell or
Securities purchased under agreements to resell are treated
close out the transactions prior to maturity. AIG believes that the
as collateralized financing transactions. AIGFP takes possession
effect of any such event would not be significant to AIG’s financial
of or obtains a security interest in securities purchased under
condition or its overall liquidity. For a further discussion on the
agreements to resell.
use of derivatives by Capital Markets, see Operating Review —
AIGFP owns inventories in certain commodities in which it
Financial Services Operations — Capital Markets and Risk Man-
trades, and may reduce the exposure to market risk through the
agement — Derivatives herein and Note 19 of Notes to Consoli-
use of swaps, forwards, futures, and option contracts. Physical
dated Financial Statements.
commodities held in AIGFP’s wholly owned broker-dealer subsidi-
AIGFP uses the proceeds from the issuance of notes and
ary are recorded at fair value. All other commodities are recorded
bonds and GIAs to invest in a diversified portfolio of securities,
at the lower of cost or market value.
including securities available for sale, at market, and derivative
Trading securities, at fair value, and securities and spot
transactions. The funds may also be invested in securities
commodities sold but not yet purchased, at fair value, are marked
purchased under agreements to resell. The proceeds from the
to market daily with the unrealized gain or loss being recognized
disposal of the aforementioned securities available for sale and
in income at that time. These trading securities are purchased
securities purchased under agreements to resell are used to fund
and sold as necessary to meet the risk management objectives of
the maturing GIAs or other AIGFP financings, or invest in new
Capital Markets operations.
assets. For a further discussion of AIGFP’s borrowings, see
The gross unrealized gains and gross unrealized losses ofCapital Resources — Borrowings herein.
Capital Markets operations included in the financialSecurities available for sale is predominately a diversified
services assets and liabilities at December 31, 2006portfolio of high grade fixed income securities, where the
were as follows:individual securities have varying degrees of credit risk. At
December 31, 2006, the average credit rating of this portfolio
Gross Gross
was in the AA+ category or the equivalent thereto as determined Unrealized Unrealized
(in millions) Gains Lossesthrough rating agencies or internal review. AIGFP has also entered
into credit derivative transactions to economically hedge its credit Securities available for sale, at fair
value(a)
$ 1,575 $ 282risk associated with $128 million of these securities. Securities
Unrealized gain/loss on swaps, optionsdeemed below investment grade at December 31, 2006
and forward transactions(b)
19,252 11,401amounted to approximately $340 million in fair value, representing
0.7 percent of the total AIGFP securities available for sale. There (a) See Note 8(i) of Notes to Consolidated Financial Statements.
have been no significant downgrades through February 15, 2007. (b) These amounts are also presented as the respective balance sheet
amounts.If its securities available for sale portfolio were to suffer
significant default and the collateral held declined significantly in
The senior management of AIG defines the policies and
value with no replacement or the credit default swap counterparty
establishes general operating parameters for Capital Markets
failed to perform, AIGFP could have a liquidity strain. AIG
operations. AIG’s senior management has established various
guarantees AIGFP’s payment obligations, including its debt
oversight committees to monitor on an ongoing basis the various
obligations.
financial market, operational and credit risks attendant to the
AIGFP’s exposure management objective is to minimize interest
Capital Markets operations. The senior management of AIGFP
rate, currency, commodity and equity risks associated with its
reports the results of its operations to and reviews future
securities available for sale. That is, when AIGFP purchases a
strategies with AIG’s senior management.
security for its securities available for sale investment portfolio, it
AIGFP actively manages the exposures to limit potential losses,
simultaneously enters into an offsetting internal hedge such that
while maximizing the rewards afforded by these business opportu-
the payment terms of the hedging transaction offset the payment
Form 10-K 2006 AIG 83

nities. In doing so, AIGFP must continually manage a variety of available for sale. Therefore, the decision to sell any such fixed
exposures, including credit, market, liquidity, operational and legal maturity security classified as available for sale reflects the
risks. judgment of AIG’s management that the security sold is unlikely to
provide, on a relative value basis, as attractive a return in the
future as alternative securities entailing comparable risks. WithConsumer Finance
respect to distressed securities, the sale decision reflects
AIG’s Consumer Finance operations provide a wide variety of
management’s judgment that the risk-discounted anticipated ulti-
consumer finance products, including real estate and other
mate recovery is less than the value achievable on sale.
consumer loans, credit card loans, retail sales finance and credit-
related insurance to customers both domestically and overseas,
Traded Securities
particularly in emerging markets. These products are funded
through a combination of deposits and various borrowings, The valuation of AIG’s investment portfolio involves obtaining a
including commercial paper and medium-term notes. AIG’s Con- market value for each security. The source for the fair value is
sumer Finance operations are exposed to credit risk and risk of generally from market exchanges or dealer quotations, with the
loss resulting from adverse fluctuations in interest rates. Over half exception of nontraded securities. AIG considers nontraded securi-
of the finance receivables are real estate loans which are ties to mean certain fixed income investments, certain structured
substantially collateralized by the related properties. securities, direct private equities, limited partnerships, and hedge
With respect to credit losses, the allowance for losses is funds.
maintained at a level considered adequate to absorb anticipated
credit losses existing in that portfolio as of the balance sheet Nontraded Securities
date.
The aggregate carrying value of AIG’s nontraded securities at
December 31, 2006 was approximately $67 billion. The methodol-
Asset Management Invested Assets
ogy used to estimate fair value of nontraded fixed income
Asset Management invested assets are primarily comprised of investments is by reference to traded securities with similar
assets supporting AIG’s spread-based investment business, which attributes and using a matrix pricing methodology. This methodol-
includes AIG’s MIP and domestic GIC programs as well as AIG’s ogy takes into account such factors as the issuer’s industry, the
foreign spread-based business. Asset Management invested as- security’s rating and tenor, its coupon rate, its position in the
sets also include assets attributable to certain consolidated capital structure of the issuer, and other relevant factors. The
partnerships and variable interest entities. A portion of these change in fair value is recognized as a component of Accumulated
consolidated assets is offset by minority interest liabilities other comprehensive income, net of tax.
attributable to unaffiliated investor entities in AIG-sponsored For certain structured securities, the carrying value is based
investment vehicles. on an estimate of the security’s future cash flows pursuant to the
The spread-based investment business strategy is to produce requirements of Emerging Issues Task Force Issue No. 99-20,
cash flows greater than maturing liabilities. The asset-liability ‘‘Recognition of Interest Income and Impairment on Purchased
relationship is managed actively, leveraging the organization’s and Retained Beneficial Interests in Securitized Financial Assets.’’
experience in the Life Insurance & Retirement Services segment. The change in carrying value is recognized in income.
Margins are emphasized while maintaining satisfactory investment Hedge funds and limited partnerships in which AIG holds in the
quality and liquidity. The invested assets are predominantly fixed aggregate less than a five percent interest are carried at fair
income securities for the spread-based investment business. value. The change in fair value is recognized as a component of
Asset Management invested assets grew by $14.3 billion, or Accumulated other comprehensive income, net of tax.
20 percent during 2006, although aggregate Asset Management With respect to hedge funds and limited partnerships in which
fixed income investments remained essentially flat at $37.7 bil- AIG holds in the aggregate a five percent or greater interest, or
lion. The growth in invested assets was primarily attributable to less than a five percent interest but where AIG has more than a
increases in short-term investments, securities lending collateral minor influence over the operations of the investee, AIG accounts
and real estate investments. These increases were primarily for these investments using the equity method. The changes in
driven by continued growth of the MIP and AIG’s foreign spread- such net asset values are included in operating income.
based business, and the growth of AIG’s institutional Asset AIG obtains the fair value of its investments in limited
Management business. These increases were partially offset by partnerships and hedge funds from information provided by the
the decrease in assets associated with the runoff of the domestic general partner or manager of each of these investments, the
GIC program. accounts of which generally are audited on an annual basis.
Each of these investment categories is regularly tested to
determine if impairment in value exists. Various valuation tech-Valuation of Invested Assets
niques are used with respect to each category in this
AIG has the ability to hold any fixed maturity security to its stated
determination.
maturity, including those fixed maturity securities classified as
84 AIG 2006 Form 10-K

$944 million, $598 million and $684 million in 2006, 2005 andPortfolio Review
2004, respectively. Just over half of other-than-temporary impair-
AIG periodically evaluates its securities for other-than-temporary
ment charges in 2006 were a result of the decision not to hold
impairments in valuation. As a matter of policy, the determination
these investment securities until they fully recover in value. The
that a security has incurred an other-than-temporary decline in
writedowns recorded in 2005 and 2004 were primarily the result
value and the amount of any loss recognition requires the
of adverse changes in the creditworthiness of the issuer.
judgment of AIG’s management and a continual review of its
No impairment charge with respect to any one single credit
investments. See Note 1(e) of Notes to Consolidated Financial
was significant to AIG’s consolidated financial condition or results
Statements for further information on AIG’s policy.
of operations, and no individual impairment loss exceeded
Once a security has been identified as other-than-temporarily
1.0 percent of consolidated net income for 2006.
impaired, the amount of such impairment is determined by
Excluding the other-than-temporary impairments noted above,
reference to that security’s contemporaneous market price and
the changes in fair value for AIG’s available for sale portfolio,
recorded as a charge to earnings.
which constitutes the vast majority of AIG’s investments, were
As a result of these policies, AIG recorded, in realized capital
recorded in Accumulated other comprehensive income as unreal-
gains (losses), other-than-temporary impairment pretax losses of
ized gains or losses, net of tax.
At December 31, 2006, aggregate pretax unrealized gains were $17.5 billion, while the pretax unrealized losses with
respect to investment grade bonds, non-investment grade bonds and equity securities were $3.6 billion, $134 million
and $159 million, respectively. Aging of the pretax unrealized losses with respect to these 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:
Less than or equal to Greater than 20% to Greater than 50%
20% of Cost(a)
50% of Cost(a)
of Cost(a)
Total
Aging 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 $ 28,869 $ 376 3,941 $ 74 $17 9 $ — $ — — $ 28,943 $ 393 3,950
7-12 months 37,835 777 4,876 — — — — — — 37,835 777 4,876
H12 months 82,945 2,377 10,640 10 4 5 — — — 82,955 2,381 10,645
Total $149,649 $3,530 19,457 $ 84 $21 14 $ — $ — — $149,733 $3,551 19,471
Below
investment
grade bonds
0-6 months $ 1,828 $ 56 341 $ 3 $ 1 5 $ 1 $ 1 4 $ 1,832 $ 58 350
7-12 months 1,043 28 146 3 1 4 — — — 1,046 29 150
H12 months 1,085 47 201 — — — — — — 1,085 47 201
Total $ 3,956 $ 131 688 $ 6 $ 2 9 $ 1 $ 1 4 $ 3,963 $ 134 701
Total bonds
0-6 months $ 30,697 $ 432 4,282 $ 77 $18 14 $ 1 $ 1 4 $ 30,775 $ 451 4,300
7-12 months 38,878 805 5,022 3 1 4 — — — 38,881 806 5,026
H12 months 84,030 2,424 10,841 10 4 5 — — — 84,040 2,428 10,846
Total $153,605 $3,661 20,145 $ 90 $23 23 $ 1 $ 1 4 $153,696 $3,685 20,172
Equity securities
0-6 months $ 2,042 $ 86 1,309 $ 68 $20 54 $ 1 $ — 3 $ 2,111 $ 106 1,366
7-12 months 566 36 309 56 16 72 1 1 3 623 53 384
H12 months — — — — — — — — — — — —
Total $ 2,608 $ 122 1,618 $124 $36 126 $ 2 $ 1 6 $ 2,734 $ 159 1,750
(a) For bonds, represents amortized cost.
(b) As more fully described above, upon realization, certain realized losses will be charged to participating policyholder accounts, or realization will result in
a current decrease in the amortization of DAC.
Form 10-K 2006 AIG 85

At December 31, 2006, the fair value of AIG’s fixed maturities responsible for establishing and implementing risk management
and equity securities aggregated $496.0 billion. At December 31, processes and responding to the individual needs and issues
2006, aggregate unrealized gains after taxes for fixed maturity within their business, including risk concentrations within their
and equity securities were $11.4 billion. At December 31, 2006, business segments.
the aggregate unrealized losses after taxes of fixed maturity and
equity securities were approximately $2.5 billion. Corporate Risk Management
The effect on net income of unrealized losses after taxes will
AIG’s major risks are addressed at the corporate level through the
be mitigated upon realization because certain realized losses will
Enterprise Risk Management Department (ERM). ERM is headed
be charged to participating policyholder accounts, or realization
by AIG’s Chief Risk Officer (CRO) and is responsible for assisting
will result in current decreases in the amortization of certain DAC.
AIG’s business leaders, executive management and the Board of
At December 31, 2006, unrealized losses for fixed maturity
Directors to identify, assess, quantify, manage and mitigate the
securities and equity securities did not reflect any significant
risks incurred by AIG. An important goal of ERM is to ensure that
industry concentrations.
once appropriate governance, authorities, procedures and policies
The amortized cost of fixed maturities available for sale have been established, aggregated risks do not result in inappro-
in an unrealized loss position at December 31, 2006, by priate concentrations.
contractual maturity, is shown below: Senior management defines the policies, has established
general operating parameters for its global businesses and has(in millions) Amortized Cost
established various oversight committees to monitor the risks
Due in one year or less $ 6,139
attendant to its businesses:Due after one year through five years 31,839
( The Credit Risk Committee (CRC) is responsible forDue after five years through ten years 51,084
Due after ten years 64,634 (i) approving credit risk policies and procedures for use
Total $153,696 throughout AIG; (ii) delegating credit authority to business unit
credit officers and select business unit managers;
For the year ended December 31, 2006, the pretax realized (iii) approving transaction requests and limits for corporate,
losses incurred with respect to the sale of fixed maturities and sovereign and cross-border credit exposures that exceed the
equity securities were $1.3 billion. The aggregate fair value of delegated authorities; (iv) establishing and maintaining AIG’s
securities sold was $43 billion, which was approximately 97 per- risk rating process for corporate, financial and sovereign
cent of amortized cost. The average period of time that securities obligors; and (v) regular reviews of credit risk exposures in the
sold at a loss during the year ended December 31, 2006 were portfolios of all credit-incurring business units.
trading continuously at a price below book value was approxi- ( The Financial Risk Committee (FRC) oversees AIG’s market risk
mately four months. See Risk Management — Investments herein exposures to interest rates, foreign exchange and equity prices
for an additional discussion of investment risks associated with and provides strategic direction for AIG’s asset-liability manage-
AIG’s investment portfolio. ment. The FRC meets monthly and acts as a central mecha-
nism for AIG senior management to review comprehensive
Risk Management information on AIG’s financial exposures and to exercise broad
control over these exposures.Overview
( The Foreign Exchange Committee (FEC) monitors trends in
AIG believes that strong risk management practices and a sound foreign exchange rates, reviews AIG’s foreign exchange expo-
internal control environment are fundamental to its continued sures, and provides recommendations on foreign currency
success and profitable growth. Failure to manage risk properly asset allocation and remittance hedging.
could expose AIG to significant losses, regulatory issues and a ( The Derivatives Review Committee (DRC) provides an indepen-
damaged reputation. dent review of any proposed derivative transaction or program
The major risks to which AIG is exposed include the following: not otherwise managed by AIGFP. The DRC examines, among
( Insurance risk — the potential loss resulting from ultimate other things, the nature and purpose of the derivative transac-
claims and expenses exceeding held reserves. tion, its potential credit exposure, if any, and the estimated
( Credit risk — the potential loss arising from an obligor’s benefits.
inability or unwillingness to meet its obligations to AIG. ( The Complex Structured Finance Transaction Committee
( Market risk — the potential loss arising from adverse fluctua- (CSFTC) has the authority and responsibility to review and
tions in interest rates, foreign currencies, equity and commod- approve proposed transactions that could subject AIG to
ity prices, and their levels of volatility. heightened legal, reputational, accounting, or regulatory risk
( Operational risk — the potential loss resulting from inadequate (CSFTs). The CSFTC provides guidance to and monitors the
or failed internal processes, people, and systems, or from activities of transaction review committees (TRCs) which have
external events. been established in all major business units. TRCs have the
AIG senior management establishes the framework, principles responsibility to identify, review and refer CSFTs to the CSFTC.
and guidelines for risk management. The business executives are
86 AIG 2006 Form 10-K

( Manage the approval process for all requests for credit limits,Credit Risk Management
program limits and transactions.
Credit risk is one of AIG’s largest single business risks and AIG ( Approve delegated credit authorities to CRM credit executives
devotes considerable resources, expertise and controls to manag-
and business unit credit officers.
ing its credit exposures. Credit risk is defined as the risk that ( Aggregate globally all credit exposure data by counterparty,
AIG’s customers or counterparties are unable or unwilling to repay
country and industry and report risk concentrations regularly to
their contractual obligations when they come due. Credit risk may
the CRC.
also be manifested: (i) through the downgrading of credit ratings ( Administer regular portfolio credit reviews of all investment,
of counterparties whose credit instruments AIG may be holding,
derivative and credit-incurring business units.
or, in some cases, insuring, causing the value of the assets to ( Develop methodologies for quantification and assessment of
decline or insured risks to rise and (ii) as cross-border risk where
credit risks, including the establishment and maintenance of
a country (sovereign government risk) or one or more non-
AIG’s internal risk rating process.
sovereign obligors within a country are unable to repay an ( Approve appropriate credit reserves and methodologies at the
obligation or are unable to provide foreign exchange to service a
business unit and enterprise levels.
credit or equity exposure incurred by another AIG business unit
AIG closely monitors and controls its company-wide credit risk
located outside that country.
concentrations and attempts to avoid unwanted or excessive risk
AIG’s credit risks are managed at the corporate level by the
accumulations, whether funded or unfunded. To minimize the level
Credit Risk Management Department (CRM) whose primary role is
of credit risk in certain circumstances, AIG may require collateral,
to support and supplement the work of the CRC. CRM is headed
guarantees and/or reinsurance support such as letters of credit.
by AIG’s Chief Credit Officer (CCO), who reports to AIG’s CRO.
AIG defines its aggregate credit exposures to a counterparty as
AIG’s CCO is primarily responsible for the development and
the sum of its fixed maturities, loans, derivatives (mark to
maintenance of credit risk policies and procedures approved by
market), deposits (in the case of financial institutions) and the
the CRC. In discharging this function CRM has the following
specified credit equivalent exposure to certain insurance products
responsibilities:
which embody credit risk.
The following table presents AIG’s largest credit exposures at December 31, 2006 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 AA (weighted average)(b)
73.5%
Single largest non-sovereign (financial institution) AA 7.4
Single largest corporate AAA 5.6
Single largest sovereign AA– 14.3
Non-Investment Grade:
Single largest sovereign BB 1.4
Single largest non-sovereign BB 0.6
(a) Risk rating is based on external ratings, or equivalent, based on AIG’s internal risk rating process.
(b) Six are highly-rated financial institutions and three are investment-grade rated sovereigns; none is rated lower than BBB+ or its equivalent.
AIG closely controls its aggregate cross-border exposures to to the following industries (in descending order by approximate
avoid excessive concentrations in any one country or regional size):
group of countries. AIG defines its cross-border exposure to – global telecommunications companies;
include both cross-border credit exposures and its large cross- – U.S. residential mortgages;
border investments in its own international subsidiaries. Nine – global life insurance carriers;
countries had cross-border exposures in excess of 10 percent of – U.S.-based regional financial institutions;
total shareholders’ equity; seven are AAA-rated and two are AA- – U.S. commercial mortgages;
rated. – global reinsurance firms; and
In addition, AIG closely monitors its industry concentrations, – global securities firms.
the risks of which are often mitigated by the breadth and scope of The CRC reviews quarterly concentration reports in all catego-
AIG’s international operations. ries listed above as well as credit trends by risk ratings. The CRC
( AIG’s single largest industry credit exposure is to the highly- may adjust limits to provide reasonable assurance that AIG does
rated global financial institutions sector, accounting for 72 per- not incur excessive levels of credit risk and that AIG’s credit risk
cent of total shareholders’ equity at December 31, 2006. profile is properly calibrated across business units.
( AIG’s other industry credit concentrations in excess of 10 per-
cent of total shareholders’ equity at December 31, 2006 exist
Form 10-K 2006 AIG 87

While VaR models are relatively sophisticated, their results areMarket Risk Management
limited by the assumptions and parameters used in these models.
AIG seeks to minimize market risks by matching the market risks
AIG believes that statistical models alone do not provide a reliable
in its assets with the market risks in its liabilities. Nevertheless,
method of monitoring and controlling market risk. Therefore, such
AIG does have net exposure to market risks, primarily within its
models are tools and do not substitute for the experience or
insurance businesses. These asset-liability exposures are
judgment of senior management.
predominantly structural in nature, and not the result of specula-
tive positioning to take advantage of short-term market opportuni-
Insurance, Asset Management and Non-Trading Financial Services
ties. The Market Risk Management Department (MRM), which
VaR
reports to the CRO, is responsible for control and oversight of
AIG has performed one comprehensive VaR analysis across all ofmarket risks in all aspects of AIG’s financial services, insurance,
its non-trading businesses, and a separate VaR analysis for itsand investment activities.
trading business at AIGFP. The comprehensive VaR is categorized
AIG’s market exposures arise from the following:
by AIG business segment (General Insurance, Life Insurance &
( AIG is a globally diversified enterprise with capital deployed in a
Retirement Services, Financial Services and Asset Management)
variety of currencies. Capital deployed in AIG’s overseas
and also by market risk factor (interest rate, currency and equity).
businesses, when converted into U.S. dollars for financial
For the insurance segments, assets included are invested
reporting purposes, constitutes a ‘‘long foreign currency/short
assets (excluding real estate and investment income due and
U.S. dollar’’ market exposure on AIG’s balance sheet. Similarly,
accrued), and liabilities included are reserve for losses and loss
overseas earnings denominated in foreign currency also repre-
expenses, reserve for unearned premiums, future policy benefits
sent a ‘‘long foreign currency/short U.S. dollar’’ market
for life and accident and health insurance contracts and other
exposure on AIG’s income statement.
policyholders’ funds. For financial services companies, loans and
( Much of AIG’s domestic capital is invested in fixed income or
leases represent the majority of assets represented in the VaR
equity securities, leading to exposures to U.S. yields and equity
calculation, while bonds and notes issued represent the majority
markets.
of liabilities.
( Several of AIG’s Foreign Life subsidiaries operate in developing
AIG calculated the VaR with respect to net fair values as of
markets where maturities on longer-term life insurance liabili-
December 31, 2006 and 2005. The VaR number represents the
ties exceed the maximum maturities of available local currency
maximum potential loss as of those dates that could be incurred
assets.
with a 95 percent confidence (i.e., only five percent of historical
AIG analyzes market risk using various statistical techniques
scenarios show losses greater than the VaR figure) within a one-
including Value at Risk (VaR). VaR is a summary statistical
month holding period. AIG uses the historical simulation methodol-
measure that uses the estimated volatility and correlation of
ogy that entails repricing all assets and liabilities under explicit
market factors to calculate the maximum loss that could occur
changes in market rates within a specific historical time period.
over a defined period of time given a certain probability. VaR
AIG uses the most recent three years of historical market
measures not only the size of individual exposures but also the
information for interest rates, foreign exchange rates, and equity
interaction between different market exposures, thereby providing
index prices. For each scenario, each transaction was repriced.
a portfolio approach to measuring market risk. Substantially
Segment and AIG-wide scenario values are then calculated by
similar VaR methodologies are used to determine capital require-
netting the values of all the underlying assets and liabilities.
ments for market risk within AIG’s economic capital framework.
88 AIG 2006 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 each of AIG’s non-trading investments as of December 31, 2006 and 2005. 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, 2006 December 31, 2005
(in millions) As of December 31 Average High Low As of December 31 Average High Low
Total AIG Non-Trading Market
risk:
Diversified $5,073 $5,209 $5,783 $4,852 $5,186 $5,353 $5,543 $5,186
Interest rate 4,577 4,962 5,765 4,498 4,869 4,963 5,223 4,707
Currency 686 641 707 509 667 622 667 532
Equity 1,873 1,754 1,873 1,650 1,650 2,113 2,358 1,650
General Insurance:
Market risk:
Diversified $1,717 $1,697 $1,776 $1,617 $1,617 $1,585 $1,672 $1,396
Interest rate 1,541 1,635 1,717 1,541 1,717 1,746 1,931 1,563
Currency 212 162 212 119 130 125 139 111
Equity 573 551 573 535 535 651 727 535
Life Insurance & Retirement
Services:
Market risk: Diversified $4,574 $4,672 $5,224 $4,307 $4,307 $4,710 $5,088 $4,307
Interest rate 4,471 4,563 5,060 4,229 4,277 4,425 4,715 4,277
Currency 568 538 592 459 538 515 556 441
Equity 1,293 1,228 1,299 1,133 1,133 1,396 1,559 1,133
Non-Trading
Financial Services:
Market risk:
Diversified $ 125 $ 165 $ 252 $ 125 $ 252 $ 161 $ 252 $ 85
Interest rate 127 166 249 127 249 165 249 85
Currency 11 8 11 7 10 7 10 4
Equity 1 1 2 1 2 2 2 1
Asset Management:
Market risk:
Combined $ 64 $ 144 $ 190 $ 64 $ 186 $ 148 $ 186 $ 113
Interest rate 63 145 192 63 189 137 189 101
Currency 3 4 7 3 4 2 4 2
Equity 8 9 13 8 13 75 178 13
AIG’s total VaR declined from $5.2 billion at the end of 2005 guidelines for operational risk management. This framework also
to $5.1 billion at the end of 2006, even as the diversified VaR in utilizes the risk management efforts of AIG’s compliance, legal
each of the Insurance segments grew modestly. Two factors and regulatory and internal audit functions. ORM also manages
contributed to the decline in total VaR. A reduction in interest rate compliance with the requirements of the Sarbanes-Oxley Act of
volatility in many currencies moderated AIG’s interest rate risk 2002.
profile, and higher correlations between the long asset duration Each business is responsible for implementing the components
exposure in U.S. fixed income and long liability duration exposures of AIG’s operational risk management program to ensure that
in many emerging markets provided a greater diversification effective operational risk management practices are utilized
benefit during 2006. Lower VaR figures in both the Financial throughout AIG. These components include governance, risk and
Services and Asset Management segments during 2006 were the control self assessment, risk event data analysis, and key risk
result of a combination of closer duration matching and a indicators. The program currently incorporates the following:
reduction of interest rate volatility. ( Governance
Strong governance sets the appropriate tone to enable effec-
tive management of the risks inherent in each of AIG’s busi-Operational Risk Management
nesses, as well as aid in the management of reputational risk.
AIG has established a corporate-level Operational Risk Manage-
Each AIG business is responsible for maintaining appropriate
ment Department (ORM) to oversee AIG’s operational risk man-
governance over its management of operational risk. This respon-
agement practices. The Director of ORM reports to the CRO. ORM
is responsible for establishing the framework, principles and
Form 10-K 2006 AIG 89

sibility includes developing and implementing policies, procedures, business written by Lexington. Concord Re was capitalized with
management oversight processes, and other governance-related approximately $730 million through the issuance of equity
activities consistent with AIG’s overall operational risk manage- securities and loans from third party investors. AIG and its
ment process. subsidiaries invest in a wide variety of investment vehicles
( Risk and Control Self Assessment managed by third parties where AIG has no control over
AIG’s operational risk management program includes a self investment decisions. Accordingly, there can be no assurance that
assessment process. The self assessment process is used to such vehicles do not, or will not, hold securities of Concord Re.
identify key operational risks in a business and evaluate the
effectiveness of existing controls to mitigate those risks, as well Reinsurance Recoverable
as develop corrective action plans for identified deficiencies.
The Reinsurance Security Department reviews the nature of the
risks ceded to reinsurers and the requirements for credit risk
Insurance Risk Management
mitigants. For example, in AIG’s treaty reinsurance contracts, AIG
Reinsurance frequently includes provisions that require a reinsurer to post
collateral when a referenced event occurs. Furthermore, AIG limitsAIG uses reinsurance programs for its general insurance risks as
its unsecured exposure to reinsurers through the use of creditfollows: (i) facultative to cover large individual exposures;
triggers, which include, but are not limited to, insurer financial(ii) quota share treaties to cover specific books of business;
strength rating downgrades, declines in policyholders surplus(iii) excess of loss treaties to cover large losses; and
below predetermined levels or reaching maximum limits of(iv) catastrophe treaties to cover certain catastrophes including
reinsurance recoverable. In addition, AIG’s CRC reviews allearthquake, flood, wind and terror. AIG’s Reinsurance Security
reinsurer exposures and credit limits and approves most largeDepartment conducts periodic detailed assessments of the
reinsurer credit limits that represent actual or potential creditreinsurance markets and current and potential reinsurers, both
concentrations. AIG believes that no exposure to a singleforeign and domestic. Such assessments may include, but are not
reinsurer represents an inappropriate concentration of risk to AIG,limited to, identifying if a reinsurer is appropriately licensed and
nor is AIG’s business substantially dependent upon any singlehas sufficient financial capacity, and evaluating the local economic
reinsurance contract.environment in which a foreign reinsurer operates.
AIG’s consolidated general reinsurance assets amounted toAIG enters into intercompany reinsurance transactions, prima-
$21.8 billion at December 31, 2006. AIG manages the credit riskrily through AIRCO, for its General Insurance and Life Insurance &
in its reinsurance relationships by transacting with reinsurers thatRetirement Services operations. AIG enters into these transac-
it considers financially sound, and when necessary AIG holdstions as a sound and prudent business practice in order to
substantial collateral in the form of funds, securities and/ormaintain underwriting control and spread insurance risk among
irrevocable letters of credit. This collateral can be drawn on forAIG’s various legal entities. AIG generally obtains letters of credit
amounts that remain unpaid beyond specified time periods on anfrom third-party financial institutions in order to obtain statutory
individual reinsurer basis. At December 31, 2006, approximatelyrecognition of these intercompany reinsurance transactions. At
54 percent of the general reinsurance assets were from unautho-December 31, 2006, approximately $4.0 billion of letters of credit
rized reinsurers. Many of these balances were collateralized,were outstanding to cover intercompany reinsurance transactions
permitting statutory recognition. Additionally, with the approval ofwith AIRCO or other General Insurance subsidiaries.
insurance regulators, AIG posted approximately $2 billion ofAlthough reinsurance arrangements do not relieve AIG subsidi-
letters of credit issued by commercial banks in favor of certainaries from their direct obligations to insureds, an efficient and
Domestic General Insurance companies to permit those compa-effective reinsurance program substantially limits AIG’s exposure
nies statutory recognition of balances otherwise uncollateralizedto potentially significant losses. AIG continually evaluates the
at December 31, 2006. The remaining 46 percent of the generalreinsurance markets and the relative attractiveness of various
reinsurance assets were from authorized reinsurers. The termsarrangements for coverage, including structures such as catastro-
authorized and unauthorized pertain to regulatory categories, notphe bonds, insurance risk securitizations and ‘‘sidecar’’ and
creditworthiness. At December 31, 2006, approximately 85 per-similar vehicles.
cent of the balances with respect to authorized reinsurers areEffective July 15, 2006, Lexington and Concord Re Limited
from reinsurers rated A (excellent) or better, as rated by A.M.(Concord Re), a ‘‘sidecar’’ reinsurer that was established exclu-
Best, or A (strong) or better, as rated by S&P. These ratings aresively to reinsure Lexington, entered into a quota share reinsur-
measures of financial strength.ance agreement covering the U.S. commercial property insurance
90 AIG 2006 Form 10-K

The following table provides information for each reinsurer representing in excess of five percent of AIG’s general reinsurance assets
at December 31, 2006.
Percent of
A.M. Gross General Uncollateralized
S&P Best Reinsurance Reinsurance Collateral Reinsurance
(in millions) Rating Rating Assets Assets, Net Held(a)
Assets
Reinsurer:
Swiss Reinsurance Group AA- A+ $2,032 9.3% $339 $1,693
Berkshire Hathaway Insurance Group AAA A++ $1,575 7.2% $144 $1,431
Munich Reinsurance Group AA- A+ $1,268 5.8% $341 $ 927
Lloyd’s Syndicates — Lloyd’s of London(b)
A A $1,250 5.7% $101 $1,149
(a) Excludes collateral held in excess of applicable treaty balances.
(b) Excludes Equitas gross reinsurance assets that are unrated, which are less than five percent of AIG’s general reinsurance assets.
At December 31, 2006, consolidated general reinsurance assets of distribution; (ii) underwriting approval processes and authorities;
$21.8 billion include reinsurance recoverables for paid losses and (iii) exposure limits with ongoing monitoring; (iv) modeling and
loss expenses of $1.0 billion and $17.3 billion with respect to the reporting of aggregations and limit concentrations at multiple
ceded reserve for losses and loss expenses, including ceded levels (policy, line of business, product group, country, individ-
losses IBNR (ceded reserves) and $3.5 billion of ceded reserve for ual/group, correlation and catastrophic risk events);
unearned premiums. The ceded reserve for losses and loss (v) compliance with financial reporting and capital and solvency
expenses represent the accumulation of estimates of ultimate targets; (vi) extensive use of reinsurance, both internal and third-
ceded losses including provisions for ceded IBNR and loss party; and (vii) review and establishment of reserves.
expenses. The methods used to determine such estimates and to AIG has two major categories of insurance risks as follows:
establish the resulting ceded reserves involve significant judgment ( General Insurance — risks covered include property, casualty,
in projecting the frequency and severity of losses over multiple fidelity/surety, management liability and mortgage insurance.
years and are continually reviewed and updated by management. Risks in the general insurance segment are managed through
Any adjustments thereto are reflected in income currently. It is aggregations and limitations of concentrations at multiple levels:
AIG’s belief that the ceded reserves for losses and loss expenses policy, line of business, correlation and catastrophic risk events.
at December 31, 2006 were representative of the ultimate losses ( Life Insurance & Retirement Services — risks include mortality
recoverable. In the future, as the ceded reserves continue to and morbidity in the insurance-oriented products and insuffi-
develop to ultimate amounts, the ultimate loss recoverable may be cient cash flows to cover contract liabilities in the retirement
greater or less than the reserves currently ceded. savings-oriented products. In the Life Insurance & Retirement
AIG maintains an allowance for estimated unrecoverable Services segment, risk is aggregated and limited by individ-
reinsurance of $536 million. The allowance was reduced substan- ual/group, product group, country and catastrophic risk events.
tially during 2006, as uncollectible amounts due from individual AIG closely manages insurance risk by overseeing and control-
reinsurers were charged off against the allowance, primarily as a ling the nature and geographic location of the risks in each line of
result of the balance sheet reconciliation remediation process; in business underwritten, the terms and conditions of the underwrit-
addition, a portion of the allowance was reclassified to align it ing and the premiums charged for taking on the risk. Concentra-
with the related receivable. The reduction for charge offs was tions of risk primarily arise from external events, such as wind,
partially offset by additional provisions totaling $147 million flood, earthquake, terrorism and pandemics, which are analyzed
during 2006. At December 31, 2006, AIG had no significant using various modeling techniques.
reinsurance recoverables due from any individual reinsurer that AIG is a major purchaser of reinsurance for its insurance
was financially troubled (i.e., liquidated, insolvent, in receivership operations. The use of reinsurance facilitates insurance risk
or otherwise subject to formal or informal regulatory restriction). management (retention, volatility, concentrations) and capital
planning locally (branch and subsidiary). Pooling of AIG’s reinsur-
ance risks enables AIG to purchase reinsurance more efficiently atSegment Risk Management
a consolidated level, manage global counterparty risk and relation-
Other than as described above, AIG manages its business risk
ships and manage global catastrophe risks, both for the General
oversight activities through its business segments.
Insurance and Life Insurance & Retirement Services businesses.
Insurance Operations
General Insurance
AIG’s multiple insurance businesses conducted on a global basis
In General Insurance, underwriting risks are managed through the
expose AIG to a wide variety of risks with different time horizons.
application approval process, exposure limitations as well as
These risks are managed throughout the organization, both
through exclusions, coverage limits and reinsurance. The risks
centrally and locally, through a number of procedures, including:
covered by AIG are managed through limits on delegated under-
(i) pre-launch approval of product design, development and
Form 10-K 2006 AIG 91

writing authority, the use of sound underwriting practices, pricing overview of modeled losses associated with the more significant
procedures and the use of actuarial analysis as part of the natural perils, which includes exposures for DBG, Personal Lines,
determination of overall adequacy of provisions for insurance Foreign General (other than Ascot), HSB and 21st Century.
contract liabilities. Transatlantic and Ascot utilize a different model, and their
A primary goal of AIG in managing its General Insurance combined results are presented separately below. The modeled
operations is to achieve an underwriting profit. To achieve this results assume that all reinsurers fulfill their obligations to AIG in
goal, AIG must be disciplined in its risk selection, and premiums accordance with their terms.
must be adequate and terms and conditions appropriate to cover It is important to recognize that there is no standard
the risk accepted. methodology to project the possible losses from total property
and workers compensation exposures. Further, there are no
Catastrophe Exposures industry standard assumptions to be utilized in projecting these
losses. The use of different methodologies and assumptionsThe nature of AIG’s business exposes it to various catastrophic
could materially change the projected losses. Therefore, theserisk events in which multiple losses across multiple lines of
modeled losses may not be comparable to estimates made bybusiness can occur in any calendar year. In order to control this
other companies.exposure, AIG uses a combination of techniques, including setting
These estimates are inherently uncertain and may not reflectaggregate limits in key business units, monitoring and modeling
AIG’s maximum exposures to these events. It is highly likely thataccumulated exposures and purchasing catastrophe reinsurance
AIG’s losses will vary, perhaps significantly, from these estimates.to supplement its other reinsurance protections.
The modeled results provided in the table below were basedNatural disasters such as hurricanes, earthquakes and other
on the aggregate exceedence probability (AEP) losses whichcatastrophes have the potential to adversely affect AIG’s operat-
represent total property and workers compensation losses thating results. Other risks, such as an outbreak of a pandemic
may occur in any single year from one or more natural events. Thedisease, such as the Avian Influenza A Virus (H5N1), could
model, which has been updated to reflect 2005 catastrophes,adversely affect AIG’s business and operating results to an extent
generally used exposure data as of mid-year 2006 and the currentthat may be only partially offset by reinsurance programs.
reinsurance program structure. The values provided were basedAIG evaluates catastrophic events and assesses the probability
on 100-year return period losses, which have a one percentof occurrence and magnitude of catastrophic events through the
likelihood of being exceeded in any single year. Thus, the modeluse of state-of-the-art industry recognized models, among other
projects that there is a one percent probability that AIG couldtechniques. AIG supplements these models by periodically moni-
incur in any year losses in excess of the modeled amounts fortoring the risk exposure of AIG’s worldwide General Insurance
these perils.operations and adjusting such models accordingly. Following is an
Net, After Percentage of Total
Net of Income Shareholders’ Equity at
(in millions) Gross Reinsurance Taxes December 31, 2006
Natural Peril:
Earthquake $3,676 $2,474 $1,608 1.6%
Tropical Cyclone* $4,780 $3,196 $2,077 2.0%
* Includes hurricanes, typhoons and other wind-related events.
The combined earthquake and tropical cyclone 100-year return Single event modeled property and workers compensation
period modeled losses for Ascot and Transatlantic together are losses to AIG’s worldwide portfolio of risk for key geographic
estimated to be $1.1 billion, on a gross basis, $761 million, net areas. Gross values represent AIG’s liability after the application
of reinsurance, and $494 million, net after income taxes, or of policy limits and deductibles, and net values represent losses
0.5 percent of total shareholders’ equity at December 31, 2006. after all reinsurance is applied.
In addition, AIG evaluates potential single event earthquake
Net of
and hurricane losses that may be incurred. The single events (in millions) Gross Reinsurance
utilized are a subset of potential events identified and utilized by
Natural Peril:
Lloyd’s(1)
and referred to as Realistic Disaster Scenarios (RDSs). Miami Hurricane $4,493 $2,798
The purpose of this analysis is to utilize these RDSs to provide a San Francisco Earthquake 4,029 2,613
reference frame and place into context the model results. Northeast Hurricane 3,711 2,592
Los Angeles Earthquake 3,508 2,440However, it is important to note that the specific events used for
Gulf Coast Hurricane 2,609 1,717this analysis do not necessarily represent the worst case loss that
Japanese Earthquake 553 150AIG could incur from this type of an event in these regions. The
European Windstorm 230 83
losses associated with the RDSs are included in the table below.
Japanese Typhoon 178 143
(1) Lloyd’s Realistic Disaster Scenarios, Scenario Specifications, April
2006
92 AIG 2006 Form 10-K

Life Insurance & Retirement ServicesThe specific international RDS events do not necessarily corre-
spond to AIG’s international exposures. As a result, AIG runs its
In Life Insurance & Retirement Services, the primary risks are
own simulations where statistical return period losses associated
(i) underwriting, which represents the exposure to loss resulting
with the written exposure specific to AIG provide the basis for
from the actual policy experience emerging adversely in compari-
monitoring risk. Based on these simulations, the 100-year return
son to the assumptions made in the product pricing associated
period for Japanese Earthquake is $296 million gross, and
with mortality, morbidity, termination and expenses; and
$120 million net, the 100-year return period for European
(ii) investment risk which represents the exposure to loss resulting
Windstorm is $269 million gross, and $80 million net, and the
from the cash flows from the invested assets being less than the
100-year return period for Japanese Typhoon is $306 million
cash flows required to meet the obligations of the expected policy
gross, and $252 million net.
and contract liabilities and the necessary return on investments.
ACTUAL RESULTS IN ANY PERIOD ARE LIKELY TO VARY,
AIG businesses manage these risks through exposure limitations
PERHAPS MATERIALLY, FROM THE MODELED SCENARIOS, AND
and the active management of the asset-liability relationship in
THE OCCURRENCE OF ONE OR MORE SEVERE EVENTS COULD
their operations. The emergence of significant adverse experience
HAVE A MATERIAL ADVERSE EFFECT ON AIG’S FINANCIAL CONDI-
would require an adjustment to DAC and benefit reserves that
TION, RESULTS OF OPERATIONS AND LIQUIDITY.
could have a material adverse effect on AIG’s consolidated results
of operations for a particular period.Measures Implemented to Control Hurricane and Earthquake
AIG’s Foreign Life Insurance & Retirement Services companiesCatastrophic Risk
generally limit their maximum underwriting exposure on life
Catastrophic risk from the earthquake and hurricane perils is
insurance of a single life to approximately $1.7 million of
proactively managed through reinsurance programs, and aggregate
coverage. AIG’s Domestic Life Insurance & Retirement Services
accumulation monitoring. Catastrophe reinsurance is purchased by
companies limit their maximum underwriting exposure on life
AIG from financially sound reinsurers. Recoveries under this
insurance of a single life to $10 million of coverage in certain
program, along with other non-catastrophic reinsurance protec-
circumstances by using yearly renewable term reinsurance. In Life
tions, are reflected in the net values provided in the tables above.
Insurance & Retirement Services, the reinsurance programs
In addition to catastrophic reinsurance programs, hurricane and
provide risk mitigation per policy, per individual life and group
earthquake exposures are controlled by periodically monitoring
covers and for catastrophic risk events.
aggregate exposures. The aggregate exposures are calculated by
compiling total liability within AIG defined hurricane and earth-
Pandemic Influenza
quake catastrophe risk zones and therefore represent the maxi-
mum that could be lost in any individual zone. These aggregate The potential for a pandemic influenza outbreak has received
accumulations are tracked over time in order to monitor both long much recent attention. While outbreaks of the Avian Flu continue
and short term trends. AIG’s major property writers, Lexington and to occur among poultry or wild birds in a number of countries in
AIG private client group, have also implemented catastrophe- Asia, Europe, including the U.K., and Africa, transmission to
related underwriting procedures and manage their books at an humans has been rare to date. If the virus mutates to a form that
account level. Lexington individually models most accounts prior to can be transmitted from human to human, it has the potential to
binding in order to specifically quantify catastrophic risk for each spread rapidly worldwide. If such an outbreak were to take place,
account. early quarantine and vaccination could be critical to containment.
The contagion and mortality rates of any mutated H5N1 virus
Terrorism
that can be transmitted from human to human are highly
speculative. AIG continues to monitor the developing facts. AExposure to loss from terrorist attack is controlled by limiting the
significant global outbreak could have a material adverse effect onaggregate accumulation of workers compensation and property
Life Insurance & Retirement Services operating results andinsurance that is underwritten within defined target locations.
liquidity from increased mortality and morbidity rates. AIG contin-Modeling is used to provide projections of probable maximum loss
ues to analyze its exposure to this serious threat and hasby target location based upon the actual exposures of AIG
engaged an external risk management firm to model losspolicyholders.
scenarios associated with an outbreak of Avian Flu. Using a 1 inTerrorism risk is monitored to manage AIG’s exposure. AIG
100-year return period, AIG estimates its after-tax net lossesshares its exposures to terrorism risks under the Terrorism Risk
under its life insurance policies due to Avian Flu at less thanInsurance Act (TRIA). During 2006, AIG’s deductible under TRIA
1 percent of consolidated shareholders’ equity as of Decem-was approximately $3.3 billion, with a 10 percent share of
ber 31, 2006. This estimate was calculated over a 3-year period,certified terrorism losses in excess of the deductible. As of
although the majority of the losses would be incurred in the firstJanuary 1, 2007, the deductible increased to approximately
year. The modeled losses calculated were based on 2005 policy$4.0 billion, with a 15 percent share of certified terrorism losses
data representing approximately 90 percent of AIG’s individual life,in excess of the deductible. Without an extension by Congress,
group life and credit life books of business, net of reinsurance.TRIA will sunset at December 31, 2007. Should TRIA not be
This estimate does not include claims that could be made underrenewed, AIG would expect to reassess and modify its underwrit-
other policies, such as business interruption or general liabilitying guidelines and retention levels as appropriate.
Form 10-K 2006 AIG 93

policies, and does not reflect estimates for losses resulting from determine that it is economically advantageous to be temporarily
disruption of AIG’s own business operations that may arise out of in an unmatched position.
such a pandemic. The model used to generate this estimate has
only recently been developed. The reasonableness of the model Financial Services
and its underlying assumptions cannot readily be verified by
AIG’s Financial Services subsidiaries engage in diversified activi-
reference to comparable historical events. As a result, AIG’s
ties including aircraft and equipment leasing, capital markets,
actual losses from a pandemic influenza outbreak are likely to
consumer finance and insurance premium finance.
vary significantly from those predicted by the model.
Aircraft Leasing
Investments
AIG’s Aircraft Leasing operations represent the operations of ILFC,
AIG’s fixed maturity investments totaled $417.9 billion at Decem-
which generates its revenues primarily from leasing new and used
ber 31, 2006, compared to $385.7 billion at December 31,
commercial jet aircraft to scheduled and charter airlines and
2005. AIG’s investment strategies are tailored to the specific
companies associated with the airline industry. Risks inherent in
business needs of each operating unit based on considerations
this business, and which are managed at the business unit level,
that include the local market, liability duration and cash flow
include: (i) the risk that there will be no market for the aircraft
characteristics, rating agency and regulatory capital considera-
acquired; (ii) the risk that aircraft cannot be placed with lessees;
tions, legal investment limitations, tax optimization, diversification
(iii) the risk of nonperformance by lessees; and (iv) the risk that
and credit limits. These strategies are intended to produce a
aircraft and related assets cannot be disposed of at the time and
reasonably stable and predictable return throughout the economic
in a manner desired.
cycle, without undue risk or volatility.
At December 31, 2006, approximately 57 percent of the fixed
Capital Markets
maturities investments were domestic securities. Approximately
39 percent of such domestic securities were rated AAA by one or The Capital Markets operations of AIG are conducted primarily
more of the principal rating agencies. Approximately five percent through AIGFP, which engages as principal in standard and
were below investment grade or not rated. customized interest rate, currency, equity, commodity, energy and
A significant portion of the foreign fixed income portfolio is credit products with top-tier corporations, financial institutions,
rated by Moody’s, S&P or similar foreign rating services. Rating governments, agencies, institutional investors and high-net-worth
services are not available in all overseas locations. The CRC individuals throughout the world.
closely reviews the credit quality of the foreign portfolio’s non- The senior management of AIG defines the policies and
rated fixed income investments. At December 31, 2006, approxi- establishes general operating parameters for Capital Markets
mately 20 percent of the foreign fixed income investments were operations. AIG’s senior management has established various
either rated AAA or, on the basis of AIG’s internal analysis, were oversight committees to monitor on an ongoing basis the various
equivalent from a credit standpoint to securities so rated. financial market, operational and credit risk attendant to the
Approximately five percent were below investment grade or not Capital Markets operations. The senior management of AIGFP
rated at that date. A large portion of the foreign fixed income reports the results of its operations to and reviews future
portfolio is sovereign fixed maturity securities supporting the strategies with AIG’s senior management.
policy liabilities in the country of issuance. AIGFP actively manages its exposures to limit potential losses,
The credit ratings of fixed maturity investments, other than while maximizing the rewards afforded by these business opportu-
those of AIGFP, at December 31, 2006 were: nities. In doing so, AIGFP must continually manage a variety of
exposures including credit, market, liquidity, operational and legal
2006
risks.
AAA 31% AIGFP enters into credit derivative transactions in the ordinary
AA 26 course of its business. The majority of AIGFP’s credit derivatives
A 23
require AIGFP to provide credit protection on a designated
BBB 14
portfolio of loans or debt securities. AIGFP provides such credit
Below investment grade 4
protection on a ‘‘second loss’’ basis, under which AIGFP’sNon-rated 2
payment obligations arise only after credit losses in the desig-
Total 100%
nated portfolio exceed a specified threshold amount or level of
AIG uses asset-liability matching as a management tool ‘‘first losses.’’ The threshold amount of credit losses that must
worldwide in the life insurance business to determine the be realized before AIGFP has any payment obligation is negotiated
composition of the invested assets and appropriate marketing by AIGFP for each transaction to provide that the likelihood of any
strategies. AIG’s objective is to maintain a matched asset-liability payment obligation by AIGFP under each transaction is remote,
structure. However, in certain markets, the absence of long-dated even in severe recessionary market scenarios.
fixed income instruments may preclude a matched asset-liability In certain cases, the credit risk associated with a designated
position in those markets. In addition, AIG may occasionally portfolio is tranched into different layers of risk, which are then
analyzed and rated by the credit rating agencies. Typically, there
94 AIG 2006 Form 10-K

will be an equity layer covering the first credit losses in respect of associated with such internal hedges is managed on a portfolio
the portfolio up to a specified percentage of the total portfolio, basis, with third-party hedging transactions executed as neces-
and then successive layers that are rated, generally a BBB-rated sary. These hedging activities did not qualify for hedge accounting
layer, an A-rated layer, an AA-rated layer, and one or more AAA- treatment under FAS 133.
rated layers. In transactions that are rated, the risk layer or Securities purchased under agreements to resell are treated
tranche that is immediately junior to the threshold level above as collateralized financing transactions. AIGFP takes possession
which AIGFP’s payment obligation would generally arise is rated of or obtains a security interest in securities purchased under
AAA by the rating agencies. In transactions that are not rated, agreements to resell.
AIGFP applies the same risk criteria for setting the threshold level A counterparty may default on any obligation to AIG, including a
for its payment obligations. Therefore, the risk layer assumed by derivative contract. Credit risk is a consequence of extending
AIGFP with respect to the designated portfolio in these transac- credit and/or carrying trading and investment positions. Credit risk
tions is often called the ‘‘super senior’’ risk layer, defined as the exists for a derivative contract when that contract has a positive
layer of credit risk senior to a risk layer that has been rated AAA fair value to AIG. The maximum potential exposure will increase or
by the credit rating agencies, or if the transaction is not rated, decrease during the life of the derivative commitments as a
equivalent thereto. function of maturity and market conditions. To help manage this
AIGFP continually monitors the underlying portfolios to deter- risk, AIGFP’s credit department operates within the guidelines set
mine whether the credit loss experience for any particular portfolio by the CRC. Transactions which fall outside these pre-established
has caused the likelihood of AIGFP having a payment obligation guidelines require the specific approval of the CRC. It is also
under the transaction to be greater than super senior risk. AIGFP AIG’s policy to establish reserves for potential credit impairment
maintains the ability opportunistically to economically hedge when necessary.
specific securities in a portfolio and thereby further limit its In addition, AIGFP utilizes various credit enhancements, includ-
exposure to loss and has hedged outstanding transactions in this ing letters of credit, guarantees, collateral, credit triggers, credit
manner on occasion. At December 31, 2006, the notional amount derivatives and margin agreements to reduce the credit risk
with respect to the Capital Markets credit derivative portfolio relating to its outstanding financial derivative transactions. AIGFP
(including the super senior transactions) was $483.6 billion. requires credit enhancements in connection with specific transac-
Financial Services securities available for sale is predominately tions based on, among other things, the creditworthiness of the
a diversified portfolio of high grade fixed income securities. At counterparties, and the transaction’s size and maturity. Further-
December 31, 2006, the average credit rating of this portfolio more, AIGFP generally seeks to enter into agreements that have
was in the AA+ category or the equivalent thereto as determined the benefit of set-off and close-out netting provisions. These
through rating agencies or internal review. AIGFP has also entered provisions provide that, in the case of an early termination of a
into credit derivative transactions to economically hedge its credit transaction, AIGFP can set-off its receivables from a counterparty
risk associated with $128 million of these securities. Securities against its payables to the same counterparty arising out of all
deemed below investment grade at December 31, 2006 covered transactions. As a result, where a legally enforceable
amounted to approximately $340 million in fair value representing netting agreement exists, the fair value of the transaction with the
0.7 percent of the total AIGFP securities available for sale. There counterparty represents the net sum of estimated positive fair
have been no significant downgrades through February 15, 2007. values. The fair value of AIGFP’s interest rate, currency, commod-
If its securities available for sale portfolio were to suffer ity and equity swaps, options, swaptions, and forward commit-
significant default and the collateral held declined significantly in ments, futures, and forward contracts approximated
value with no replacement or the credit default swap counterparty $19.25 billion at December 31, 2006 and $18.70 billion at
failed to perform, AIGFP could have a liquidity strain. AIG December 31, 2005. Where applicable, these amounts have been
guarantees AIGFP’s payment obligations, including its debt determined in accordance with the respective close-out netting
obligations. provisions.
AIGFP’s management objective is to minimize interest rate, AIGFP independently evaluates the counterparty credit quality
currency, commodity and equity risks associated with its securi- by reference to ratings from rating agencies or, where such ratings
ties available for sale. That is, when AIGFP purchases a security are not available, by internal analysis consistent with the risk
for its securities available for sale investment portfolio, it rating policies of the CRC. In addition, AIGFP’s credit approval
simultaneously enters into an offsetting internal hedge such that process involves pre-set counterparty and country credit exposure
the payment terms of the hedging transaction offset the payment limits and, for particularly credit-intensive transactions, requires
terms of the investment security, which achieves the economic approval from the CRC. AIG estimates that the average credit
result of converting the return on the underlying security to rating of Capital Markets derivatives counterparties, measured by
U.S. dollar LIBOR plus or minus a spread based on the underlying reference to the fair value of its derivative portfolio as a whole, is
profit on each security on the initial trade date. The market risk equivalent to the AA rating category.
Form 10-K 2006 AIG 95

At December 31, 2006 and 2005, the distribution by AIGFP’s minimal reliance on market risk driven revenue is
counterparty credit quality with respect to the fair value of reflected in its VaR. AIGFP’s VaR calculation is based on the
Capital Markets derivatives portfolios was as follows: interest rate, equity, commodity and foreign exchange risk arising
from its portfolio. Because the market risk with respect to
Percentage of
securities available for sale, at market, is substantially hedged,Total Fair Value
segregation of the financial instruments into trading and other2006 2005
than trading was not deemed necessary.
Counterparty credit quality:
In the calculation of VaR for AIGFP, AIG uses the historical
AAA 28% 24%
simulation methodology that entails repricing all transactions
AA 41 43
under explicit changes in market rates within a specific historical
A 19 21
time period. AIGFP attempts to secure reliable and independent
BBB 11 9
current market prices, such as published exchange prices,
Below investment grade 1 3
external subscription services such as Bloomberg or Reuters, or
Total 100% 100% third-party broker quotes. When such prices are not available,
AIGFP uses an internal methodology which includes extrapolation
from observable and verifiable prices nearest to the dates of theCapital Markets Trading VaR
transactions. Historically, actual results have not deviated from
AIGFP maintains a very conservative market risk profile and
these models in any material respect.
minimizes risk in interest rates, equities, commodities and foreign
AIGFP reports its VaR using a 95 percent confidence interval
exchange. Market exposures in option implied volatilities, correla-
and a one-day holding period, facilitating risk comparison with
tions and basis risks are also minimized over time but those are
AIGFP’s trading peers and reflecting the fact that market risks can
the main types of market risks that AIGFP manages. As a result,
be actively assumed and offset in AIGFP’s trading portfolio.
AIGFP’s operating income due to changes in market prices and
rates is generally a very small percentage of its overall operating
income.
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 2006 and 2005. The diversified VaR is usually smaller than the sum of its components
due to correlation effects.
For the Year Ended For the Year Ended
(in millions) As of December 31 Average High Low As of December 31 Average High Low
Total AIG trading market risk:
Diversified $4 $4 $7 $3 $5 $4 $7 $3
Interest rate 2 2 3 1 2 2 3 1
Currency 1 1 3 1 1 1 1 —
Equity 3 3 4 2 3 2 5 —
Commodity 3 3 4 2 2 2 3 1
* In 2006, VaR calculations were changed from a 30-day holding period to a one-day holding period. Accordingly, the 2005 VaR amounts have been
restated to reflect this change.
Consumer Finance these loans. AGF manages the credit risk inherent in its portfolio
by using credit scoring models at the time of credit applications,
AIG’s Consumer Finance operations provide a wide variety of
established underwriting criteria, and, in certain cases, individual
consumer finance products, including real estate and other
loan reviews. AGF monitors the quality of the finance receivables
consumer loans, credit card loans, retail sales finance and credit-
portfolio and determines the appropriate level of the allowance for
related insurance to customers both domestically and overseas,
losses through its Credit Strategy and Policy Committee. This
particularly in emerging markets. Consumer Finance operations
Committee bases its conclusions on quantitative analyses, quali-
include AGF as well as AIGCFG. AGF provides a wide variety of
tative factors, current economic conditions and trends, and each
consumer finance products, including real estate loans, non-real
Committee member’s experience in the consumer finance indus-
estate loans, retail sales finance and credit-related insurance to
try. Through 2006, the credit quality of AGF’s finance receivables
customers in the United States, Puerto Rico and the U.S. Virgin
continued to be strong. However, declines in the strength of the
Islands. AIGCFG, through its subsidiaries, is engaged in develop-
U.S. housing market or economy may adversely affect the future
ing a multi-product consumer finance business with an emphasis
credit quality of these receivables.
on emerging markets.
AIGCFG monitors the quality of its finance receivable portfolio
Many of AGF’s borrowers are non-prime or sub-prime. Current
and determines the appropriate level of the allowance for losses
economic conditions, such as interest rate and employment
through several internal committees. These committees base their
levels, can have a direct effect on the borrowers’ ability to repay
96 AIG 2006 Form 10-K

conclusions on quantitative analysis, qualitative factors, current tions require to cover potential, unexpected losses within a
economic conditions and trends, political and regulatory implica- confidence level consistent with the risk profile selected by
tions, competition and the judgment of the committees’ members. management. The Economic Capital requirement can then be
AIG’s Consumer Finance operations are exposed to credit risk compared with the economic capital resources available to AIG.
and risk of loss resulting from adverse fluctuations in interest The Economic Capital requirement is driven by exposures to
rates and payment defaults. Credit loss exposure is managed risks and correlations among various types of risks. As a global
through a combination of underwriting controls, mix of finance financial conglomerate, AIG is exposed to various risks including
receivables, collateral and collection efficiency. Large product underwriting, financial and operational risks. The Economic Capital
programs are subject to CRC approval. initiative has modeled these risks into five major categories:
Over half of the finance receivables are real estate loans which property & casualty insurance risk, life insurance risk, market risk,
are collateralized by the related properties. With respect to credit credit risk and operational risk. Within each risk category, there are
losses, the allowance for losses is maintained at a level sub-risks that have been modeled in greater detail. The Economic
considered adequate to absorb anticipated credit losses existing Capital initiative also analyzes and includes diversification benefits
in that portfolio as of the balance sheet date. within and across risk categories and business segments.
A primary objective of the Economic Capital initiative is to
develop a comprehensive framework to discuss capital andAsset Management
performance on a risk-adjusted basis internally with AIG manage-
AIG’s Asset Management operations are exposed to various forms
ment and externally with the investment community, credit
of credit, market and operational risks. Asset Management
providers, regulators and rating agencies. Economic Capital analy-
complies with AIG’s corporate risk management guidelines and
sis provides a framework to validate AIG’s capital adequacy, to
framework and is subject to periodic reviews by the CRC. In
measure more precisely capital efficiency at various levels
addition, transactions are referred to the Asset Management
throughout the organization, to allocate capital consistently among
investment committees for approval of investment decisions.
AIG’s businesses, to quantify the specific areas of diversification
The majority of the credit and market risk exposures within
benefits and to assess relative economic value added by a
Asset Management results from the spread-based investment
business, product or transaction to AIG as a whole. The Economic
business and the investment activities of AIG Global Real Estate
Capital initiative will also be a component in developing a more
Investment Corp.
efficient capital structure. Other key areas of Economic Capital
In the spread-based investment businesses, GIC and MIP, the
applications include strategic decision-making for mergers, acqui-
primary risk is investment risk, which represents the exposure to
sitions and divestitures, risk retention, reinsurance and hedging
loss resulting from the cash flows from the invested assets being
strategies and product development and pricing.
less than the cash flows required to meet the obligations of the
During 2006, AIG developed a methodology framework that
liabilities and the necessary return on investments. Credit risk is
incorporates financial services industry best practices, maintains
also a significant component of the investment strategy for these
consistency with regulatory frameworks and reflects AIG’s distinct
businesses. Market risk is taken in the form of duration and
global business and management strategies. By utilizing stochas-
convexity risk. While AIG generally maintains a matched asset-
tic simulation techniques, where appropriate, AIG enhanced
liability relationship, it may occasionally determine that it is
existing models or developed new ones through a collaborative
economically advantageous to be in an unmatched duration
effort among business executives, actuaries, finance specialists
position. The risks in the spread-based businesses are managed
and risk professionals. Initial assessments of Economic Capital
through exposure limitations, active management of the investment
were made and AIG began reviewing its economic capital model
portfolios and close oversight of the asset-liability relationship.
methodology with the rating agencies.
Within AIG Global Real Estate Investment Corp., AIG is exposed
The initial assessments were made at the corporate, segment
to the general conditions in global real estate markets and the
and major business unit level, and detailed analyses of selected
credit markets. Such exposure can subject Asset Management to
businesses and products were undertaken. AIG also developed
delays in real estate sales, additional carrying costs and in turn
assessments of diversification benefits across lines of business,
affect operating results within the segment. These risks are
geographic regions and risk categories. Given the breadth and
mitigated through the underwriting process, transaction and con-
global nature of AIG’s businesses, these benefits were found to
tract terms and conditions and portfolio diversification by type of
be significant.
project, sponsor, real estate market and country. AIG’s exposure to
The initial assessments have provided useful insight into the
real estate investments is monitored on an ongoing basis by the
overall capital strength of the corporation and its segments and,
Asset Management real estate investment committee.
to date, the initiative has introduced guidance concerning
processes to assess economic risk and returns for selected
Economic Capital issues, including funding and investment strategies for the MIP,
product development, pricing, hedging for living benefits in theSince mid 2005, AIG has been developing a firm-wide economic
variable annuity business and asset-liability management strate-capital model to improve decision making and to enhance
gies for life insurance products, particularly in Asian markets.shareholder value. Economic Capital is the amount of capital the
organization, its segments, profit centers, products or transac-
Form 10-K 2006 AIG 97

Throughout 2007, AIG will continue to enhance the methodol- On September 19, 2005, the FASB issued Statement of
ogy to provide assurance regarding the completeness and rele- Position 05-1, ‘‘Accounting by Insurance Enterprises for Deferred
vance of the model’s results. AIG will continue discussions with Acquisition Costs in Connection with Modifications or Exchanges
the rating agencies concerning its enterprise risk management of Insurance Contracts.’’
processes and the results of its new economic capital model for On February 16, 2006, the FASB issued FAS No. 155,
their consideration in the rating process. AIG’s analysis and ‘‘Accounting for Certain Hybrid Financial Instruments.’’
conclusions concerning the economic capital support of its On January 17, 2007, the FASB issued Statement 133
segments and major business units will be further extended to Implementation Issue No. B40, ‘‘Embedded Derivatives: Applica-
include consideration for capital availability and mobility. The tion of Paragraph 13(b) to Securitized Interests in Prepayable
framework and process will increasingly provide assistance in Financial Assets’’ (Issue B40).
management’s decision-making concerning capital management On March 27, 2006, the FASB issued FASB FTB 85-4-1,
and capital allocation, mergers, acquisitions and divestitures, risk ‘‘Accounting for Life Settlement Contracts by Third-Party Inves-
retention, reinsurance and hedging strategies and product devel- tors’’ (FSP 85-4-1), an amendment of FTB 85-4, ‘‘Accounting for
opment and pricing. Purchases of Life Insurance.’’
On April 13, 2006, the FASB issued FSP FIN 46(R)-6,
‘‘Determining the Variability to be Considered in Applying FASBRecent Accounting Standards
Interpretation No. 46(R).’’
At the March 2004 meeting, the Emerging Issues Task Force
On July 13, 2006, the FASB issued FIN 48, ‘‘Accounting for
(EITF) reached a consensus with respect to Issue No. 03-1, ‘‘The
Uncertainty in Income Taxes — an interpretation of FASB State-
Meaning of Other-Than-Temporary Impairment and Its Application
ment No. 109’’ (FIN 48).
to Certain Investments.’’ On September 30, 2004, the FASB
Effective January 1, 2006, AIG adopted the fair value recogni-
issued FASB Staff Position (FSP) EITF Issue 03-1-1, Effective Date
tion provisions of Statement of FAS No. 123R ‘‘Share-Based
of Paragraphs 10-20 of EITF Issue No. 03-1, ‘‘The Meaning of
Payments’’ (FAS 123R). For further discussion of this recent
Other-Than-Temporary Impairment and its Application to Certain
accounting standard and its application to AIG, see Note 14 of
Investments.’’ In November 2005, the FASB issued FSP
Notes to Consolidated Financial Statements.
FAS 115-1, ‘‘The Meaning of Other-Than-Temporary Impairment
In September 2006, the FASB issued FAS No. 157, ‘‘Fair Value
and Its Application to Certain Investments,’’ which replaces the
Measurements’’ (FAS 157).
measurement and recognition guidance set forth in Issue
In September 2006, the FASB issued FAS No. 158, ‘‘Employ-
No. 03-1 and codifies certain existing guidance on impairment.
ers’ Accounting for Defined Benefit Pension and Other Postretire-
At the June 2005 meeting, the EITF reached a consensus with
ment Plans, an amendment of FASB Statements No. 87, 88, 106
respect to Issue No. 04-5, ‘‘Determining Whether a General
and 132(R)’’ (FAS 158).
Partner, or the General Partners as a Group, Controls a Limited
In February 2007, the FASB issued FAS No. 159, ‘‘The Fair
Partnership or Similar Entity When the Limited Partners have
Value Option for Financial Assets and Financial Liabilities’’
Certain Rights.’’
(FAS 159).
On June 29, 2005, the FASB issued Statement 133 Implemen-
For further discussion of these recent accounting standards
tation Issues No. B38, ‘‘Embedded Derivatives: Evaluation of Net
and their application to AIG, see Note 1(hh) of Notes to
Settlement with Respect to the Settlement of a Debt Instrument
Consolidated Financial Statements.
through Exercise of an Embedded Put Option or Call Option’’ and
No. B39, ‘‘Application of Paragraph 13(b) to Call Options That are
Exercisable Only by the Debtor.’’
98 AIG 2006 Form 10-K

Item 7A.
Quantitative and Qualitative Disclosures About
Market Risk
Included in Item 7. Management’s Discussion and Analysis of
Item 8.
Financial Statements and Supplementary Data
Index to Financial Statements and Schedules
Page Page
Report of Independent Registered Public Schedules:*
Accounting Firm 100 I – Summary of Investments — Other Than
Consolidated Balance Sheet at December 31, Investments in Related Parties at
2006 and 2005 102 December 31, 2006
Consolidated Statement of Income for the years II – Condensed Financial Information of
ended December 31, 2006, 2005 and Registrant at December 31, 2006 and
2004 104 2005 and for the years ended
Consolidated Statement of Shareholders’ Equity December 31, 2006, 2005 and 2004
for the years ended December 31, 2006, III – Supplementary Insurance Information at
2005 and 2004 105 December 31, 2006, 2005 and 2004 and
Consolidated Statement of Cash Flows for the for the years then ended
years ended December 31, 2006, 2005 IV – Reinsurance at December 31, 2006, 2005
and 2004 106 and 2004 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, 2006, 2005 and 2004
2006, 2005 and 2004 108
Notes to Consolidated Financial Statements 110
* 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.
Form 10-K 2006 AIG 99

Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of of the effectiveness of internal control over financial reporting.
American International Group, Inc.: Our responsibility is to express opinions on management’s
assessment and on the effectiveness of AIG’s internal control
over financial reporting based on our audit.We have completed integrated audits of American International
We conducted our audit of internal control over financialGroup, Inc.’s consolidated financial statements and of its internal
reporting in accordance with the standards of the Public Companycontrol over financial reporting as of December 31, 2006, in
Accounting Oversight Board (United States). Those standardsaccordance with the standards of the Public Company Accounting
require that we plan and perform the audit to obtain reasonableOversight Board (United States). Our opinions, based on our
assurance about whether effective internal control over financialaudits, are presented below.
reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining anConsolidated Financial Statements and Financial Statement
understanding of internal control over financial reporting, evaluat-Schedules
ing management’s assessment, testing and evaluating the design
In our opinion, the consolidated financial statements listed in the
and operating effectiveness of internal control, and performing
accompanying index present fairly, in all material respects, the
such other procedures as we consider necessary in the circum-
financial position of American International Group, Inc. and its
stances. We believe that our audit provides a reasonable basis for
subsidiaries (AIG) at December 31, 2006 and 2005, and the
our opinions.
results of their operations and their cash flows for each of the
A company’s internal control over financial reporting is a
three years in the period ended December 31, 2006 in conformity
process designed to provide reasonable assurance regarding the
with accounting principles generally accepted in the United States
reliability of financial reporting and the preparation of financial
of America. In addition, in our opinion, the financial statement
statements for external purposes in accordance with generally
schedules listed in the accompanying index present fairly, in all
accepted accounting principles. A company’s internal control over
material respects, the information set forth therein when read in
financial reporting includes those policies and procedures that
conjunction with the related consolidated financial statements.
(i) pertain to the maintenance of records that, in reasonable
These financial statements and financial statement schedules are
detail, accurately and fairly reflect the transactions and disposi-
the responsibility of AIG’s management. Our responsibility is to
tions of the assets of the company; (ii) provide reasonable
express an opinion on these financial statements and financial
assurance that transactions are recorded as necessary to permit
statement schedules based on our audits. We conducted our
preparation of financial statements in accordance with generally
audits of these statements in accordance with the standards of
accepted accounting principles, and that receipts and expendi-
the Public Company Accounting Oversight Board (United States).
tures of the company are being made only in accordance with
Those standards require that we plan and perform the audit to
authorizations of management and directors of the company; and
obtain reasonable assurance about whether the financial state-
(iii) provide reasonable assurance regarding prevention or timely
ments are free of material misstatement. An audit of financial
detection of unauthorized acquisition, use, or disposition of the
statements includes examining, on a test basis, evidence support-
company’s assets that could have a material effect on the
ing the amounts and disclosures in the financial statements,
financial statements.
assessing the accounting principles used and significant esti-
Because of its inherent limitations, internal control over
mates made by management, and evaluating the overall financial
financial reporting may not prevent or detect misstatements. Also,
statement presentation. We believe that our audits provide a
projections of any evaluation of effectiveness to future periods are
reasonable basis for our opinion.
subject to the risk that controls may become inadequate because
As described in Notes 1, 14 and 15 to the consolidated
of changes in conditions, or that the degree of compliance with
financial statements, AIG changed its accounting for certain hybrid
the policies or procedures may deteriorate.
financial instruments, life settlement contracts and share based
A material weakness is a control deficiency, or a combination
compensation as of January 1, 2006, and certain employee
of control deficiencies, that results in more than a remote
benefit plans as of December 31, 2006.
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. As of
Internal Control Over Financial Reporting December 31, 2006, a material weakness relating to the controls
over income tax accounting has been identified and included inAlso, we have audited management’s assessment, included in
management’s assessment.Management’s Report on Internal Control Over Financial Reporting
Controls over income tax accounting: AIG did not maintainappearing under Item 9A, that AIG did not maintain effective
effective controls over the determination and reporting of certaininternal control over financial reporting as of December 31, 2006
components of the provision for income taxes and related incomebecause of the effect of the material weakness relating to
tax balances. Specifically, AIG did not maintain effective controlscontrols over income tax accounting, based on criteria established
to review and monitor the accuracy of the components of thein Internal Control — Integrated Framework issued by the Commit-
income tax provision calculations and related income tax balancestee of Sponsoring Organizations of the Treadway Commission
and to monitor the differences between the income tax basis and(COSO). AIG’s management is responsible for maintaining effec-
the financial reporting basis of assets and liabilities to effectivelytive internal control over financial reporting and for its assessment
100 AIG 2006 Form 10-K

Report of Independent Registered Public Accounting Firm Continued
reconcile the differences to the deferred income tax balances. In our opinion, management’s assessment that AIG did not
These control deficiencies resulted in adjustments to income tax maintain effective internal control over financial reporting as of
expense, income taxes payable and deferred income tax asset December 31, 2006 is fairly stated, in all material respects,
and liability accounts in the 2006 annual and interim consolidated based on criteria established in Internal Control — Integrated
financial statements. Furthermore, these control deficiencies Framework issued by the COSO. Also, in our opinion, because of
could result in a material misstatement of the annual or interim the effect of the material weakness described above on the
AIG consolidated financial statements that would not be prevented achievement of the objectives of the control criteria, AIG has not
or detected. Accordingly, AIG management has concluded that maintained effective internal control over financial reporting as of
these control deficiencies constitute a material weakness. December 31, 2006, based on criteria established in Internal
This material weakness was considered in determining the Control — Integrated Framework issued by the COSO.
nature, timing, and extent of audit tests applied in our audit of the
2006 consolidated financial statements, and our opinion regarding
PricewaterhouseCoopers LLP
the effectiveness of AIG’s internal control over financial reporting
New York, New York
does not affect our opinion on those consolidated financial
March 1, 2007
statements.
Form 10-K 2006 AIG 101

Consolidated Balance Sheet
December 31,
Assets:
Investments and financial services assets:
Fixed maturities:
Bonds available for sale, at fair value (amortized cost: 2006 — $377,698; 2005 — $349,612)
(includes hybrid financial instruments: 2006 — $522) $ 387,391 $359,516
Bonds held to maturity, at amortized cost (fair value: 2006 — $22,154; 2005 — $22,047) 21,437 21,528
Bond trading securities, at fair value (cost: 2006 — $9,016; 2005 — $4,623) 9,037 4,636
Equity securities:
Common stocks available for sale, at fair value (cost: 2006 — $10,662; 2005 — $10,125) 13,262 12,227
Common and preferred stocks trading, at fair value (cost: 2006 — $12,734; 2005 — $7,746) 14,421 8,959
Preferred stocks available for sale, at fair value (cost: 2006 — $2,485; 2005 — $2,282) 2,539 2,402
Mortgage loans on real estate, net of allowance (2006 — $55; 2005 — $54) 17,067 14,300
Policy loans 7,501 7,039
Collateral and guaranteed loans, net of allowance (2006 — $9; 2005 — $10) 3,850 3,570
Flight equipment primarily under operating leases, net of accumulated depreciation
(2006 — $8,835; 2005 — $7,419) 39,875 36,245
Securities available for sale, at fair value (cost: 2006 — $45,912; 2005 — $37,572) 47,205 37,511
Trading securities, at fair value 5,031 6,499
Spot commodities 220 92
Unrealized gain on swaps, options and forward transactions 19,252 18,695
Trading assets 2,468 1,204
Securities purchased under agreements to resell, at contract value 33,702 14,547
Finance receivables, net of allowance (2006 — $737; 2005 — $670) (includes finance receivables
held for sale: 2006 — $1,124; 2005 — $1,110) 29,573 27,995
Securities lending collateral, at fair value (which approximates cost) 69,306 59,471
Other invested assets 42,114 31,072
Short-term investments, at cost (approximates fair value) 25,249 15,342
Total investments and financial services assets 790,500 682,850
Cash 1,590 1,897
Investment income due and accrued 6,077 5,727
Premiums and insurance balances receivable, net of allowance (2006 — $756; 2005 — $871) 17,789 15,333
Reinsurance assets, net of allowance (2006 — $536; 2005 — $999) 23,355 24,978
Deferred policy acquisition costs 37,235 32,154
Investments in partially owned companies 1,101 1,158
Real estate and other fixed assets, net of accumulated depreciation (2006 — $5,525; 2005 — $4,990) 4,381 3,641
Separate and variable accounts 72,655 63,797
Goodwill 8,628 8,093
Other assets 16,103 13,423
Total assets $ 979,414 $853,051
See Accompanying Notes to Consolidated Financial Statements.
102 AIG 2006 Form 10-K

Consolidated Balance Sheet Continued
December 31,
(in millions, except share data) 2006 2005
Liabilities:
Reserve for losses and loss expenses $ 79,999 $ 77,169
Unearned premiums 26,271 24,243
Future policy benefits for life and accident and health insurance contracts 122,230 108,807
Policyholders’ contract deposits 244,658 227,027
Other policyholders’ funds 10,238 10,870
Commissions, expenses and taxes payable 5,305 4,769
Insurance balances payable 3,789 3,564
Funds held by companies under reinsurance treaties 2,602 4,174
Income taxes payable 9,546 6,288
Financial services liabilities:
Borrowings under obligations of guaranteed investment agreements 20,664 20,811
Securities sold under agreements to repurchase, at contract value 22,710 11,047
Trading liabilities 3,141 2,546
Hybrid financial instrument liabilities, at fair value 8,856 —
Securities and spot commodities sold but not yet purchased, at market value 4,076 5,975
Unrealized loss on swaps, options and forward transactions 11,401 12,740
Trust deposits and deposits due to banks and other depositors 5,249 4,877
Notes, bonds, loans and mortgages payable 87,602 71,313
Notes, bonds, loans and mortgages payable 17,088 7,126
Liabilities connected to trust preferred stock 1,440 1,391
Separate and variable accounts 72,655 63,797
Securities lending payable 70,198 60,409
Minority interest 7,778 5,124
Other liabilities (includes hybrid financial instruments: 2006 — $111) 27,021 23,273
Total liabilities 877,546 766,548
Preferred shareholders’ equity in subsidiary companies 191 186
Commitments and Contingent Liabilities (See Note 12)
Shareholders’ equity:
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued 2006 and 2005 —
2,751,327,476 6,878 6,878
Additional paid-in capital 2,590 2,339
Retained earnings 84,996 72,330
Accumulated other comprehensive income (loss) 9,110 6,967
Treasury stock, at cost; 2006 — 150,131,273; 2005 — 154,680,704 shares of common stock
(including 119,278,644 and 119,271,176 shares, respectively, held by subsidiaries) (1,897) (2,197)
Total shareholders’ equity 101,677 86,317
Total liabilities, preferred shareholders’ equity in subsidiary companies and shareholders’ equity $ 979,414 $853,051
Form 10-K 2006 AIG 103

Consolidated Statement of Income
(in millions, except per share data) 2006 2005 2004
Revenues:
Premiums and other considerations $ 74,083 $70,209 $66,625
Net investment income 25,292 22,165 18,465
Realized capital gains (losses) 106 341 44
Other income 13,713 16,190 12,532
Total revenues 113,194 108,905 97,666
Benefits and expenses:
Incurred policy losses and benefits 59,706 63,558 58,212
Insurance acquisition and other operating expenses 31,801 30,134 24,609
Total benefits and expenses 91,507 93,692 82,821
Income before income taxes, minority interest and cumulative effect of accounting changes 21,687 15,213 14,845
Income taxes:
Current 5,489 2,587 2,645
Deferred 1,048 1,671 1,762
Total income taxes 6,537 4,258 4,407
Income before minority interest and cumulative effect of accounting changes 15,150 10,955 10,438
Minority interest (1,136) (478) (455)
Income before cumulative effect of accounting changes 14,014 10,477 9,983
Cumulative effect of accounting changes, net of tax 34 — (144)
Net income $ 14,048 $10,477 $ 9,839
Basic
Income before cumulative effect of accounting changes $ 5.38 $ 4.03 $ 3.83
Cumulative effect of accounting changes, net of tax 0.01 — (0.06)
Net income $ 5.39 $ 4.03 $ 3.77
Diluted
Net income $ 5.36 $ 3.99 $ 3.73
Average shares outstanding:
Basic 2,608 2,597 2,606
Diluted 2,623 2,627 2,637
104 AIG 2006 Form 10-K

Consolidated Statement of Shareholders’ Equity
Amounts SharesYears Ended December 31,
(in millions, except share and per share data) 2006 2005 2004 2006 2005 2004
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 2,339 2,094 2,028
Excess of cost over proceeds of
common stock issued under
stock plans (128) (91) (105)
Other 379 336 171
Balance, end of year 2,590 2,339 2,094
Retained earnings:
Cumulative effect of accounting
changes, net of tax 308 — —
Adjusted balance, beginning of year 72,638 63,468 54,384
Net income 14,048 10,477 9,839
Dividends to common shareholders
($0.65, $0.63 and $0.29 per
share, respectively) (1,690) (1,615) (755)
Accumulated other comprehensive
income (loss):
Unrealized appreciation (depreciation)
of investments, net of tax:
Unrealized appreciation
(depreciation) of investments, net
of reclassification adjustments 2,574 (3,577) 1,868
Income tax benefit (expense) (839) 1,599 (612)
Foreign currency translation
adjustments, net of tax:
Balance, beginning of year (1,241) (701) (1,524)
Translation adjustment 1,283 (926) 993
Income tax benefit (expense) (347) 386 (170)
Balance, end of year (305) (1,241) (701)
Net derivative gains (losses) arising
from cash flow hedging activities:
Balance, beginning of year (25) (53) (103)
Net deferred gains on cash flow
hedges, net of reclassification
adjustments 13 35 83
Deferred income tax expense (15) (7) (33)
Balance, end of year (27) (25) (53)
Retirement plan liabilities adjustment,
net of taxes:
Balance, beginning of year (115) (128) (106)
Minimum pension liability
adjustment 80 81 (100)
Deferred income tax benefit
(expense) (74) (68) 78
Adjustment to initially apply
FAS 158, net of tax (532) — —
Balance, end of year (641) (115) (128)
Accumulated other comprehensive
income (loss), end of year 9,110 6,967 9,444
Treasury stock, at cost:
Balance, beginning of year (2,197) (2,211) (1,397) (154,680,704) (154,904,286) (142,880,430)
Cost of shares acquired (20) (176) (1,083) (288,365) (2,654,272) (16,426,114)
Issued under stock plans 291 173 263 4,579,913 2,625,227 4,310,733
Other 29 17 6 257,883 252,627 91,525
Balance, end of year (1,897) (2,197) (2,211) (150,131,273) (154,680,704) (154,904,286)
Total shareholders’ equity, end of year $101,677 $86,317 $79,673
Form 10-K 2006 AIG 105

Consolidated Statement of Cash Flows
(in millions) 2006 2005 2004
Summary:
Net cash provided by operating activities $ 6,829 $ 25,382 $ 29,414
Net cash used in investing activities (67,040) (62,500) (92,596)
Net cash provided by financing activities 59,790 37,169 64,217
Effect of exchange rate changes on cash 114 (163) 52
Change in cash (307) (112) 1,087
Cash at beginning of year 1,897 2,009 922
Cash at end of year $ 1,590 $ 1,897 $ 2,009
Cash flows from operating activities:
Net income $ 14,048 $ 10,477 $ 9,839
Adjustments to reconcile net income to net cash provided by operating activities:
Noncash revenues, expenses, gains and losses included in income:
Net gains on sales of securities available for sale and other assets (763) (1,218) (1,003)
Foreign exchange transaction (gains) losses 1,795 (3,330) 1,231
Net unrealized (gains) losses on non-AIGFP derivative assets and liabilities (713) 878 (648)
Equity in income of partially owned companies and other invested assets (3,990) (1,421) (1,279)
Amortization of deferred policy acquisition costs 11,578 10,693 9,815
Amortization of premium and discount on securities 699 207 502
Depreciation expenses, principally flight equipment 2,374 2,200 2,035
Provision for finance receivable losses 495 435 389
Impairment losses 944 598 684
Changes in operating assets and liabilities:
General and life insurance reserves 13,173 27,299 22,818
Premiums and insurance balances receivable and payable — net (1,214) 192 (953)
Reinsurance assets 1,665 (5,365) 1,032
Capitalization of deferred policy acquisition costs (15,363) (14,454) (13,334)
Investment income due and accrued (235) (171) (916)
Funds held under reinsurance treaties (1,612) 770 361
Other policyholders’ funds (953) 518 962
Income taxes payable 2,003 1,543 1,356
Commissions, expenses and taxes payable 408 140 (16)
Other assets and liabilities — net 331 2,966 1,943
Bonds, common and preferred stocks trading, at fair value (7,851) (5,448) (3,189)
Trading assets and liabilities — net (668) 2,272 (4,783)
Trading securities, at fair value 1,339 (3,753) 1,254
Spot commodities (128) 442 (289)
Net unrealized (gain) loss on swaps, options and forward transactions (1,482) 934 2,302
Securities purchased under agreements to resell (19,154) 11,725 (5,427)
Securities sold under agreements to repurchase 11,645 (12,534) 5,688
Securities and spot commodities sold but not yet purchased, at market value (1,899) 571 (269)
Finance receivables held for sale — originations and purchases (10,786) (13,070) (6,504)
Sales of finance receivables — held for sale 10,602 12,821 5,784
Other, net 541 (1,535) 29
Total adjustments (7,219) 14,905 19,575
Net cash provided by operating activities $ 6,829 $ 25,382 $ 29,414
106 AIG 2006 Form 10-K

Consolidated Statement of Cash Flows Continued
(in millions) 2006 2005 2004
Cash flows from investing activities:
Proceeds from (payments for)
Sales and maturities of fixed maturity securities available for sale $ 112,899 $ 140,076 $ 115,625
Sales of equity securities available for sale 12,475 11,661 12,246
Proceeds from fixed maturity securities held to maturity 205 46 226
Sales of flight equipment 697 573 1,219
Sales or distributions of other invested assets 14,087 14,899 8,361
Payments received on mortgage, policy, collateral and guaranteed loans 5,165 3,679 1,928
Principal payments received on finance receivables held for investment 12,586 12,461 10,780
Purchases of fixed maturity securities available for sale (146,465) (175,657) (159,229)
Purchases of equity securities available for sale (14,482) (13,273) (13,361)
Purchases of fixed maturity securities held to maturity (197) (3,333) (10,512)
Purchases of flight equipment (6,009) (6,193) (4,860)
Purchases of other invested assets (16,040) (15,059) (11,764)
Mortgage, policy, collateral and guaranteed loans issued (7,438) (5,310) (2,180)
Finance receivables held for investment — originations and purchases (13,830) (17,276) (16,416)
Change in securities lending collateral (9,835) (10,301) (19,777)
Net additions to real estate, fixed assets, and other assets (1,097) (941) (643)
Net change in short-term investments (9,716) 760 (2,542)
Net change in non-AIGFP derivative assets and liabilities (45) 688 (1,697)
Net cash used in investing activities $ (67,040) $ (62,500) $ (92,596)
Cash flows from financing activities:
Proceeds from (payments for)
Policyholders’ contract deposits $ 54,195 $ 50,229 $ 54,550
Policyholders’ contract withdrawals (41,866) (35,797) (24,497)
Change in other deposits 1,269 (957) 2,519
Change in commercial paper 2,952 (476) 3,738
Notes, bonds, loans and mortgages payable, and hybrid financial instrument liabilities
issued 58,763 53,624 31,488
Repayments on notes, bonds, loans and mortgages payable, and hybrid financial
instrument liabilities (24,047) (40,767) (24,638)
Issuance of guaranteed investment agreements 12,265 13,437 11,469
Maturities of guaranteed investment agreements (12,433) (10,861) (8,314)
Change in securities lending payable 9,789 10,437 19,777
Redemption of subsidiary company preferred stock — (100) (200)
Issuance of treasury stock 163 82 158
Cash dividends paid to shareholders (1,638) (1,421) (730)
Acquisition of treasury stock (20) (176) (1,083)
Other, net 398 (85) (20)
Net cash provided by financing activities $ 59,790 $ 37,169 $ 64,217
Supplementary disclosure of cash flow information:
Cash paid during the period for:
Interest $ 6,539 $ 4,883 $ 4,281
Taxes $ 4,693 $ 2,593 $ 3,060
Non-cash activities:
Interest credited to policyholder accounts included in financing activities $ 10,746 $ 9,782 $ 6,859
See accompanying Notes to Consolidated Financial Statements.
Form 10-K 2006 AIG 107

Consolidated Statement of Comprehensive Income
(in millions) 2006 2005 2004
Net income $14,048 $10,477 $ 9,839
Other comprehensive income (loss):
Unrealized (depreciation) appreciation of investments — net of reclassification adjustments 2,574 (3,577) 1,868
Deferred income tax benefit (expense) on above changes (839) 1,599 (612)
Foreign currency translation adjustments 1,283 (926) 993
Deferred income tax benefit (expense) on above changes (347) 386 (170)
Net derivative gains arising from cash flow hedging activities — net of reclassification
adjustments 13 35 83
Deferred income tax expense on above changes (15) (7) (33)
Retirement plan liabilities adjustment 80 81 (100)
Deferred income tax benefit (expense) on above changes (74) (68) 78
Other comprehensive income (loss) 2,675 (2,477) 2,107
Comprehensive income $16,723 $ 8,000 $11,946
108 AIG 2006 Form 10-K

Index of Notes to Consolidated Financial Statements
Page
Note 1. Summary of Significant Accounting Policies 110
Note 2. Segment Information 118
Note 3. Federal Income Taxes 124
Note 4. Deferred Policy Acquisition Costs 126
Note 5. Reinsurance 127
Note 6. Reserve for Losses and Loss Expenses and Future Life Policy Benefits and Policyholders’ Contract Deposits 128
Note 7. Statutory Financial Data 130
Note 8. Investment Information 130
Note 9. Debt Outstanding 135
Note 10. Preferred Shareholders’ Equity in Subsidiary Companies 140
Note 11. Shareholders’ Equity and Earnings Per Share 140
Note 12. Commitments, Contingencies and Guarantees 141
Note 13. Fair Value of Financial Instruments 146
Note 14. Stock Compensation Plans 148
Note 15. Employee Benefits 153
Note 16. Benefits Provided by Starr International Company, Inc. and C.V. Starr & Co., Inc. 162
Note 17. Ownership and Transactions with Related Parties 162
Note 18. Variable Interest Entities 163
Note 19. Derivatives 165
Note 20. Variable Life and Annuity Contracts 167
Note 21. Quarterly Financial Information (Unaudited) 169
Note 22. Information Provided in Connection With Outstanding Debt 170
Note 23. Cash Flows 176
Form 10-K 2006 AIG 109

Notes to Consolidated Financial Statements
expense of $153 million and $149 million in the years ended1. Summary of Significant Accounting Policies
December 31, 2005 and 2004, respectively, to conform to the
Basis of Presentation current year’s presentation. This revision did not have any effect
on consolidated pre-tax income, net income or shareholders’The consolidated financial statements include the accounts of AIG
equity.and its majority owned subsidiaries. AIG consolidates subsidiaries
In 2006 AIG determined that certain products that werein which it holds a controlling financial interest. Entities that AIG
historically reported as separate account assets under SOP 03-1does not consolidate but of which it holds 20 percent to 50
should have been reported as general account assets. Accord-percent of the voting rights and/or has the ability to exercise
ingly, AIG revised the classification of approximately $2.7 billion ofsignificant influence are accounted for under the equity method.
assets from separate account assets in prior years to generalCertain of AIG’s foreign subsidiaries included in the consoli-
account assets, and the same amount of liabilities from separatedated financial statements report on a fiscal year ending
account liabilities to policyholders’ contract deposits at Decem-November 30. The effect on AIG’s consolidated financial condition
ber 31, 2006. As a result, Net investment income and Incurredand results of operations of all material events occurring after
policy losses and benefits each increased approximately $258 mil-November 30 and prior to the applicable balance sheet date has
lion for the earnings on the general account assets that accruebeen recorded.
directly to the benefit of the policyholders. This revision did notThe accompanying consolidated financial statements have
have any effect on consolidated income before income taxes, netbeen prepared in accordance with U.S. generally accepted
income, or shareholders’ equity for any period presented.accounting principles (GAAP). All material intercompany accounts
Certain reclassifications and format changes have been madeand transactions have been eliminated.
to prior year amounts to conform to the current year presentation.
Description of Business
Accounting Policies
See Note 2 herein for a description of AIG’s businesses.
(a) Revenue Recognition and Expenses:
Use of Estimates
Premiums and other Considerations: Premiums for short duration
AIG considers its most critical accounting estimates to be those contracts and considerations received from retailers in connection
with respect to reserves for losses and loss expenses, future with the sale of extended service contracts are earned primarily
policy benefits for life and accident and health contracts, recover- on a pro rata basis over the term of the related coverage. The
ability of deferred policy acquisition costs (DAC), estimated gross reserve for unearned premium includes the portion of premiums
profits for investment-oriented products, fair value determinations written and other considerations relating to the unexpired terms of
for certain Capital Markets assets and liabilities, other-than- coverage. Premiums for long duration insurance products and life
temporary declines in the value of investments and flight contingent annuities are recognized as revenues when due.
equipment recoverability. Estimates for premiums due but not yet collected are accrued.
The preparation of financial statements in conformity with Consideration for universal life and investment-type products
GAAP requires management to make estimates and assumptions consist of policy charges for the cost of insurance, administration,
that affect the reported amounts of assets and liabilities and and surrenders during the period. Policy charges collected with
disclosure of contingent assets and liabilities at the date of the respect to future services are deferred and recognized in a
financial statements and the reported amounts of revenues and manner similar to DAC related to such products.
expenses during the reporting periods. Actual results could differ,
Net Investment Income: Net investment income represents in-possibly materially, from those estimates.
come primarily from the following sources in AIG’s insurance
Revisions and Reclassifications operations:
( Accrued interest income, as well as amortization and accretionIt was determined during 2006 that for certain deferred sales
of premiums and discounts on bonds.inducement assets, the asset and related amortization expense
( Dividend income and distributions from common and preferredhad historically been reported within deferred policy acquisition
stock and other investments when receivable.costs on the consolidated balance sheet and income statement.
( Unrealized gains and losses from investments in tradingUnder Statement of Position 03-1, ‘‘Accounting and Reporting by
securities and hybrid financial instruments.Insurance Enterprises for Certain Nontraditional Long-Duration
( Earnings from hedge funds and limited partnership investmentsContracts and for Separate Accounts’’ (SOP 03-1), such assets
accounted for under the equity method.should be classified separately from DAC and the amortization
( The difference between the carrying amount of a life settle-reported in benefit expense. Accordingly, the December 31, 2005
ment contract and the life insurance proceeds of the underlyingconsolidated balance sheet reflects a revision of $1.1 billion from
life insurance policy recorded in income upon the death of theDAC to other assets, and the consolidated income statement
insured.includes a revision from acquisition expense to policy benefit
110 AIG 2006 Form 10-K

( Unrealized gains and losses from trading securities, commodi-1. Summary of Significant Accounting Policies
ties sold, but not yet purchased, futures and hybrid financialContinued
instruments.
Realized Capital Gains (Losses): Realized capital gains and losses ( Realized gains and losses from the sale of available for sale
are determined principally by specific identification. The realized securities and investments in private equities, joint ventures
capital gains and losses are generated primarily from the following and limited partnerships.
sources (in AIG’s insurance operations and Other category): ( Exchange gains and losses resulting from foreign currency
( Sales of fixed maturity securities, equity securities, real estate, transactions.
investments in joint ventures and limited partnerships and ( Reductions to the cost basis of equity securities for other-than-
other types of investments. temporary impairments.
( Reductions to the cost basis of fixed maturities, equity ( Earnings from hedge funds and limited partnership investments
securities and other invested assets for other-than-temporary accounted for under the equity method.
impairments.
Incurred policy losses and benefits: Incurred policy losses for( Changes in fair value of derivatives used for other than hedging
short duration insurance contracts consist of the estimated
activities.
ultimate cost of settling claims incurred within the reporting( Exchange gains and losses resulting from foreign currency
period, including incurred but not reported claims, plus the
transactions.
changes in estimates of current and prior period losses resulting
Other Income: Other income includes income from flight equip- from the continuous review process. Benefits for long duration
ment, finance charges on consumer loans and income generated insurance contracts consist of benefits paid and changes in future
from asset management activities and from the operations of policy benefits liabilities. Benefits for universal life and investment-
AIGFP. type products primarily consists of interest credited to policy
Income from flight equipment under operating leases is account balances and benefit payments made in excess of policy
recognized over the life of the lease as rentals become receivable account balances.
under the provisions of the lease or, in the case of leases with
(b) Foreign Currency: Financial statement accounts expressed
varying payments, under the straight-line method over the noncan-
in foreign currencies are translated into U.S. dollars in accordance
celable term of the lease. In certain cases, leases provide for
with Statement of Financial Accounting Standards (FAS) 52,
additional payments contingent on usage. Rental income is
‘‘Foreign Currency Translation’’ (FAS 52). Under FAS 52, functional
recognized at the time such usage occurs less a provision for
currency assets and liabilities are translated into U.S. dollars
future contractual aircraft maintenance. Gains and losses on flight
generally using current rates of exchange prevailing at the balance
equipment are recognized when flight equipment is sold and the
sheet date of each respective subsidiary and the related transla-
risk of ownership of the equipment is passed to the new owner.
tion adjustments are recorded as a separate component of other
Finance charges on consumer loans are recognized as revenue
comprehensive income, net of any related taxes, in consolidated
using the interest method. Revenue ceases to be accrued when
shareholders’ equity. Functional currencies are generally the
contractual payments are not received for four consecutive
currencies of the local operating environment. Income statement
months for loans and retail sales contracts, and for six months for
accounts expressed in functional currencies are translated using
revolving retail accounts and private label receivables. Extension
average exchange rates. The adjustments resulting from transla-
fees, late charges, and prepayment penalties are recognized as
tion of financial statements of foreign entities operating in highly
revenue when received.
inflationary economies are recorded in income. Exchange gains
Income generated with respect to asset management opera-
and losses resulting from foreign currency transactions are
tions is generally recognized as revenues as services are
recorded in income currently.
performed. Certain costs incurred in the sale of mutual funds are
deferred and subsequently amortized. (c) Income Taxes: Deferred tax assets and liabilities are
Income generated from the operations of AIGFP includes the recorded for the effects of temporary differences between the tax
following: basis of an asset or liability and its reported amount in the
( Accrued interest income and expense, as well as amortization consolidated financial statements. AIG assesses its ability to
and accretion of premiums and discounts on bonds. realize deferred tax assets primarily based on the earnings
( Dividend income and distributions from common and preferred history, future earnings potential, the reversal of taxable tempo-
stock and other investments when receivable. rary differences, and the tax planning strategies available to the
( Changes in the fair value of derivatives. In certain instances, legal entities recognizing deferred tax assets, in accordance with
no initial gain or loss is recognized in accordance with FAS 109, ‘‘Accounting for Income Taxes.’’ See Note 3 herein for a
Emerging Issues Task Force Issue No. 02-3, ‘‘Issues Involved further discussion of income taxes.
in Accounting for Derivative Contracts held for Trading Purposes
(d) Contingencies: Amounts are accrued for the financial
and Contracts Involved in Energy Trading and Risk Management
resolution of claims that have either been asserted or are
Activities’’ (EITF 02-3). The initial gain or loss is recognized
deemed probable of assertion if, in the opinion of management, it
over the life of the transactions and as observable market data
is both probable that a liability has been incurred and the amount
becomes available.
Form 10-K 2006 AIG 111

Notes to Consolidated Financial Statements Continued
creditworthiness of the obligor, unanticipated changes in interest1. Summary of Significant Accounting Policies
rates, tax laws, statutory capital positions and liquidity events,Continued
among others, AIG revisits its intent. Further, if a loss is
of the liability can be reasonably estimated. In many cases, it is
recognized from a sale subsequent to a balance sheet date
not possible to determine whether a liability has been incurred or
pursuant to these unexpected changes in circumstances, the loss
to estimate the ultimate or minimum amount of that liability until
is recognized in the period in which the intent to hold the
years after the contingency arises, in which case no accrual is
securities to recovery no longer existed.
made until that time.
In periods subsequent to the recognition of an other-than-
(e) Investments in Fixed Maturities and Equity Securities: temporary impairment loss for debt securities, AIG generally
Bonds held to maturity are principally owned by the insurance amortizes the discount or reduced premium over the remaining
subsidiaries and are carried at amortized cost where AIG has the life of the security in a prospective manner based on the amount
ability and positive intent to hold these securities until maturity. and timing of future estimated cash flows.
Where AIG may not have the positive intent to hold bonds until
(f) Mortgage Loans on Real Estate — net, Policy, Collat-
maturity and such securities are not designated as trading, these
eral and Guaranteed Loans — net: Mortgage loans on real
securities are considered to be available for sale and carried at
estate, policy, collateral and guaranteed loans are carried at
current fair values.
unpaid principal balances. Interest income on such loans is
Premiums and discounts arising from the purchase of bonds
accrued as earned.
are treated as yield adjustments over their estimated lives, until
Impairment of mortgage loans on real estate and collateral
maturity, or call date, if applicable.
loans is based upon certain risk factors and when collection of all
Bond trading securities are carried at current fair values.
amounts due under the contractual term is not probable. This
Common and preferred stocks are carried at current fair
impairment is generally measured based on the present value of
values.
expected future cash flows discounted at the loan’s effective
AIG may also enter into dollar roll agreements. These are
interest rate subject to the fair value of underlying collateral if the
agreements to sell mortgage-backed securities and to repurchase
loan is collateral dependent. Interest income on such impaired
substantially similar securities at a specified price and date in the
loans is recognized as cash is received.
future. At December 31, 2006, 2005 and 2004, there were no
There is no allowance for policy loans, as these loans serve to
dollar roll agreements outstanding.
reduce the death benefit paid when the death claim is made and
Unrealized gains and losses from available for sale invest-
the balances are effectively collateralized by the cash surrender
ments in equity and fixed maturity securities are reflected as a
value of the policy.
separate component of other comprehensive income, net of
deferred income taxes currently. Unrealized gains and losses from (g) Financial Services — Flight Equipment: Flight equipment
investments in trading securities are reflected in income currently. is stated at cost, net of accumulated depreciation. Major
Investments in fixed maturities and equity securities are recorded additions, modifications and interest are capitalized. Normal
on a trade date basis. maintenance and repairs, airframe and engine overhauls and
AIG evaluates its investments for impairment. As a matter of compliance with return conditions of flight equipment on lease are
policy, the determination that a security has incurred an other- provided by and paid for by the lessee. Under the provisions of
than-temporary decline in value and the amount of any loss most leases for certain airframe and engine overhauls, the lessee
recognition requires the judgment of AIG’s management and a is reimbursed for certain costs incurred up to but not exceeding
continual review of its investments. contingent rentals paid to AIG by the lessee. AIG provides a
In general, a security is considered a candidate for other-than- charge to income for such reimbursements based upon the
temporary impairment if it meets any of the following criteria: expected reimbursements during the life of the lease. Deprecia-
( Trading at a significant (25 percent or more) discount to par or tion and amortization are computed on the straight-line basis to a
amortized cost (if lower) for an extended period of time (nine residual value of approximately 15 percent over the estimated
months or longer); useful lives of the related assets but not exceeding 25 years.
( The occurrence of a discrete credit event resulting in the debtor Aircraft in the fleet are evaluated, as necessary, based on these
defaulting or seeking bankruptcy or insolvency protection or events and circumstances in accordance with FAS No. 144,
voluntary reorganization; or ‘‘Accounting for the Impairment or Disposal of Long-Lived Assets’’
( The probability of non-realization of a full recovery on its (FAS 144). FAS 144 requires that long-lived assets be reviewed for
investment, irrespective of the occurrence of one of the impairment whenever events or changes in circumstances indicate
foregoing events. that the carrying amount of an asset may not be recoverable.
At each balance sheet date, AIG evaluates its securities Recoverability of assets is measured by comparing the carrying
holdings in an unrealized loss position. Where AIG does not intend amount of an asset to future undiscounted net cash flows
to hold such securities until they have fully recovered their expected to be generated by the asset. These evaluations for
carrying value, based on the circumstances present at the date of impairment are significantly affected by estimates of future
evaluation, AIG records the unrealized loss in income. If events or revenues and other factors which involve some amount of
circumstances change, such as unexpected changes in the uncertainty.
112 AIG 2006 Form 10-K

which includes interpolation and extrapolation from observable1. Summary of Significant Accounting Policies
and verifiable prices nearest to the dates of the transactions.Continued
These valuations represent an assessment of the present values
This caption also includes deposits for aircraft to be pur-
of expected future cash flows of these transactions and reflect
chased. At the time the assets are retired or disposed of, the
market and credit risk. The portfolio’s discounted cash flows are
cost and associated accumulated depreciation and amortization
evaluated with reference to current market conditions, maturities
are removed from the related accounts and the difference, net of
within the portfolio, and other relevant factors. Based upon this
proceeds, is recorded as a gain or loss in Other income.
evaluation, it is determined what offsetting transactions, if any,
(h) Financial Services — Securities Available for Sale, at are necessary to reduce the market risk of the portfolio. AIG
fair value: These securities are held to meet long-term invest- manages its market risk with a variety of transactions, including
ment objectives and are accounted for as available for sale, swaps, trading securities, futures and forward contracts and other
carried at current fair values and recorded on a trade-date basis. transactions as appropriate. Because of the limited liquidity of
This portfolio is hedged using interest rate, foreign exchange, some of these instruments, the recorded values of these
commodity and equity derivatives. The market risk associated with transactions may be different from the values that might be
such hedges is managed on a portfolio basis, with third party realized if AIG were to sell or close out the transactions prior to
hedging transactions executed as necessary. As hedge accounting maturity. AIG believes that such differences are not significant to
treatment is not achieved in accordance with FAS 133, ‘‘Account- its financial condition or liquidity. Such differences would be
ing for Derivative Instruments and Hedging Activities’’ (FAS 133), immediately recognized in income when the transactions were
the unrealized gains and losses on these securities resulting from sold or closed out prior to maturity.
changes in interest rates, currency rates and equity prices are
(l) Financial Services — Trading Assets and Trading
recorded in Other comprehensive income in consolidated share-
Liabilities: Trading assets and trading liabilities include option
holders’ equity while the unrealized gains and losses on the
premiums paid and received and receivables from and payables to
related economic hedges are reflected in Other income.
counterparties which relate to unrealized gains and losses on
(i) Financial Services — Trading Securities, at fair value: futures, forwards, and options and balances due from and due to
Trading securities are held to meet short-term investment objec- clearing brokers and exchanges.
tives, including hedging securities. These securities are recorded
(m) Financial Services — Securities Purchased (Sold)
on a trade-date basis and carried at current fair values. Unrealized
Under Agreements to Resell (Repurchase), at contract
gains and losses are reflected in Other income currently.
value: Purchases of securities under agreements to resell and
(j) Financial Services — Spot Commodities: Spot commodi- sales of securities under agreements to repurchase are accounted
ties held in AIGFP’s wholly owned broker-dealer subsidiary are for as collateralized borrowing or lending transactions and are
recorded at fair value. All other commodities are recorded at the recorded at their contracted resale or repurchase amounts, plus
lower of cost or market value. Spot commodities are recorded on accrued interest. AIG’s policy is to take possession of or obtain a
a trade-date basis. The exposure to market risk may be reduced security interest in securities purchased under agreements to
through the use of forwards, futures and option contracts. Lower resell.
of cost or fair value reductions in commodity positions and AIG minimizes the credit risk that counterparties to transac-
unrealized gains and losses in related derivatives are reflected in tions might be unable to fulfill their contractual obligations by
Other income currently. monitoring customer credit exposure and collateral value and
generally requiring additional collateral to be deposited with AIG
(k) Financial Services — Unrealized Gain and Unrealized
when deemed necessary.
Loss on Swaps, Options and Forward Transactions: Inter-
est rate, currency, equity and commodity swaps, swaptions, (n) Financial Services — Finance Receivables: Finance re-
options and forward transactions are accounted for as derivatives ceivables, which are net of unearned finance charges, are held for
recorded on a trade-date basis and are carried at current market both investment purposes and for sale. Finance receivables held
values or estimated fair values when market prices are not for investment purposes are carried at amortized cost which
available. Unrealized gains and losses are reflected in income includes accrued finance charges on interest bearing finance
currently, where appropriate. In certain instances, when income is receivables, unamortized deferred origination costs, and unamor-
not recognized at inception of the contract under EITF 02-03, tized net premiums and discounts on purchased finance receiv-
income is recognized over the life of the contract and as ables. The allowance for finance receivable losses is established
observable market data becomes available. Estimated fair values through the provision for finance receivable losses charged to
are based on the use of valuation models that utilize, among expense and is maintained at a level considered adequate to
other things, current interest, foreign exchange, equity, commodity absorb estimated credit losses in the existing portfolio. The
and volatility rates. AIG attempts to secure reliable and indepen- portfolio is periodically evaluated on a pooled basis and factors
dent current market prices, such as published exchange prices, such as economic conditions, portfolio composition, and loss and
external subscription services’ prices such as Bloomberg or delinquency experience are considered in the evaluation of the
Reuters or third-party broker quotes for use in its models. When allowance.
such prices are not available, AIG uses an internal methodology
Form 10-K 2006 AIG 113

(s) Reinsurance Assets: Reinsurance assets include the bal-1. Summary of Significant Accounting Policies
ances due from reinsurance and insurance companies under theContinued
terms of AIG’s reinsurance agreements for paid and unpaid losses
Direct costs of originating loans, net of nonrefundable points
and loss expenses, ceded unearned premiums and ceded future
and fees, are deferred and included in the carrying amount of the
policy benefits for life and accident and health insurance contracts
related loans. The amount deferred is recognized as an adjust-
and benefits paid and unpaid. Amounts related to paid and unpaid
ment to finance charge revenues, using the interest method.
losses, benefits and loss expenses with respect to these
Finance receivables originated and intended for sale in the
reinsurance agreements are substantially collateralized.
secondary market are carried at the lower of cost or market value,
as determined by aggregate outstanding commitments from (t) Deferred Policy Acquisition Costs:
investors or current investor yield requirements. AGF recognizes
General Insurance: Acquisition costs represent those costs, in-net unrealized losses through a valuation allowance by charges to
cluding commissions, premium taxes and other underwritingincome.
expenses, that vary with and are primarily related to the
(o) Securities Lending Collateral and Securities Lending acquisition of new business. These costs are deferred and
Payable, at fair value: AIG’s insurance and asset management amortized over the period in which the related premiums written
operations lend their securities and primarily take cash as are earned. DAC is grouped consistent with the manner in which
collateral with respect to the securities lent. Invested collateral the insurance contracts are acquired, serviced and measured for
consists primarily of floating rate bonds. Income earned on profitability and is reviewed for recoverability based on the
invested collateral, net of interest payable to the collateral profitability of the underlying insurance contracts. Investment
provider, is recorded in net investment income. income is not anticipated in the recoverability of deferred policy
The fair value of securities pledged under securities lending acquisition costs.
arrangements was $69 billion and $59 billion as of December 31,
Life Insurance & Retirement Services: Acquisition costs represent2006 and 2005, respectively. These securities are included in
those costs, including commissions, underwriting and marketingbonds available for sale in AIG’s consolidated balance sheet.
expenses, that vary with, and are primarily related to, the
(p) Other Invested Assets: Other invested assets consist acquisition of new business. Policy acquisition costs for traditional
primarily of investments by AIG’s insurance operations in hedge life insurance products are generally deferred and amortized over
funds and limited partnerships. the premium paying period in accordance with FAS 60, ‘‘Account-
Hedge funds and limited partnerships in which AIG holds in the ing and Reporting by Insurance Enterprises’’ (FAS 60). Policy
aggregate less than a five percent interest are reported at fair acquisition costs and policy issuance costs related to universal
value. The change in fair value is recognized as a component of life, participating life, and investment-type products (investment-
Other comprehensive income. oriented products) are deferred and amortized, with interest, in
With respect to hedge funds and limited partnerships in which relation to the incidence of estimated gross profits to be realized
AIG holds in the aggregate a five percent or greater interest or over the estimated lives of the contracts in accordance with
less than a five percent interest but where AIG has more than a FAS 97, ‘‘Accounting and Reporting by Insurance Enterprises for
minor influence over the operations of the investee, AIG’s carrying Certain Long-Duration Contracts and for Realized Gains and
value is its share of the net asset value of the funds or the Losses from the Sale of Investments’’ (FAS 97). Estimated gross
partnerships. The changes in such net asset values, accounted profits are composed of net interest income, net realized
for under the equity method, are recorded in earnings through net investment gains and losses, fees, surrender charges, expenses,
investment income. and mortality and morbidity gains and losses. If estimated gross
AIG obtains the fair values of its investments in limited profits change significantly, DAC is recalculated using the new
partnerships and hedge funds from information provided by the assumptions. Any resulting adjustment is included in current
general partner or manager of each of these investments, the earnings as an adjustment to DAC. DAC is grouped consistent
accounts of which generally are audited on an annual basis. with the manner in which the insurance contracts are acquired,
Also included in other invested assets are real estate held for serviced and measured for profitability and is reviewed for
investment, aircraft asset investments held by non-financial recoverability based on the profitability (both current and projected
services subsidiaries and investments in life settlement contracts. future) of the underlying insurance contracts.
See Notes 8(g) and 8(h) herein for further information. The DAC for investment-oriented products is also adjusted with
respect to estimated gross profits as a result of changes in the
(q) Short-term Investments: Short-term investments consist
net unrealized gains or losses on debt and equity securities
of interest bearing cash equivalents, time deposits, and invest-
available for sale. That is, as debt and equity securities available
ments with original maturities within one year, such as commer-
for sale are carried at aggregate fair value, an adjustment is made
cial paper.
to DAC equal to the change in amortization that would have been
(r) Cash: Cash represents cash on hand and non-interest bear- recorded if such securities had been sold at their stated
ing demand deposits. aggregate fair value and the proceeds reinvested at current yields.
The change in this adjustment, net of tax, is included with the
change in net unrealized gains/losses on debt and equity
114 AIG 2006 Form 10-K

(x) Goodwill and Intangible Assets: Goodwill is the excess of1. Summary of Significant Accounting Policies
cost over the fair value of net assets acquired. Goodwill isContinued
reviewed for impairment on an annual basis, or more frequently if
securities available for sale that is credited or charged directly to
circumstances indicate that a possible impairment has occurred.
other comprehensive income. DAC has been decreased by $720
The assessment of impairment involves a two-step process
million at December 31, 2006 and decreased by $1.14 billion at
whereby an initial assessment for potential impairment is per-
December 31, 2005 for this adjustment. See also Note 4 herein.
formed, followed by a measurement of the amount of impairment,
Value of Business Acquired (VOBA) is determined at the time
if any. Impairment testing is performed using the fair value
of acquisition and is reported on the consolidated balance sheet
approach, which requires the use of estimates and judgment, at
with DAC. This value is based on present value of future pre-tax
the ‘‘reporting unit’’ level. A reporting unit is the operating
profits discounted at current yields applicable at time of purchase.
segment, or a business that is one level below the operating
For products accounted under FAS 60, VOBA is amortized over the
segment if discrete financial information is prepared and regularly
life of the business similar to that for DAC based on the
reviewed by management at that level. The determination of a
assumptions at purchase. For FAS 97 products, VOBA is amor-
reporting unit’s fair value is based on management’s best
tized in relation to the estimated gross profits to date for each
estimate, which generally considers the unit’s market-based
period. As of December 31, 2006, there have been no impair-
earning multiples of peer companies and expected future earn-
ments of VOBA.
ings. If the carrying value of a reporting unit’s goodwill exceeds
(u) Investments in Partially Owned Companies: At Decem- its fair value, the excess is recognized as an impairment and
ber 31, 2006, AIG’s significant investments in partially owned recorded as a charge against net income. No impairment has
companies included its 19.4 percent interest in Allied World been recorded by AIG in 2006, 2005 or 2004. Changes in the
Assurance Holdings, Ltd., its 26 percent interest in Tata AIG Life carrying amount of goodwill result from foreign currency transla-
Insurance Company, Ltd., its 26 percent interest in Tata AIG tion adjustments and other purchase price adjustments.
General Insurance Company, Ltd. and its 24.5 percent interest in
(y) Other Assets: Other assets consist of prepaid expenses,
The Fuji Fire and Marine Insurance Co., Ltd. This balance sheet
including deferred advertising costs, sales inducement assets and
caption also includes investments in less significant partially
derivatives assets at fair value, other than derivatives in AIGFP,
owned companies. The amounts of dividends received from
and other deferred charges.
unconsolidated entities where AIG’s ownership interest is less
Generally, advertising costs are expensed as incurred except
than 50 percent were $28 million, $146 million and $22 million in
for certain direct response stand-alone cost pools, which are
2006, 2005 and 2004, respectively. The undistributed earnings of
deferred over the expected future benefit period in accordance
unconsolidated entities where AIG’s ownership interest is less
with Statement of Position 93-7, ‘‘Reporting on Advertising
than 50 percent were $300 million, $179 million and $445 mil-
Costs.’’ In instances where AIG can demonstrate that its custom-
lion as of December 31, 2006, 2005 and 2004, respectively.
ers have responded specifically to direct-response advertising,
(v) Real Estate and Other Fixed Assets: The costs of whose primary purpose is to elicit sales to customers and where
buildings and furniture and equipment are depreciated principally it can be shown that such advertising results in probable future
on a straight-line basis over their estimated useful lives (maximum economic benefits, the advertising costs are capitalized. Deferred
of 40 years for buildings and ten years for furniture and advertising costs are amortized on a cost-pool by cost-pool basis
equipment). Expenditures for maintenance and repairs are over the expected economic future benefit period and are reviewed
charged to income as incurred; expenditures for betterments are regularly for recoverability. Deferred advertising costs amounted to
capitalized and depreciated. $1.05 billion and $915 million at December 31, 2006 and 2005,
AIG periodically assesses the carrying value of its real estate respectively. The amount of expense amortized into earnings was
for purposes of determining any asset impairment. $359 million, $272 million and $244 million, for 2006, 2005,
Also included in Real Estate and Other Fixed Assets are and 2004, respectively.
capitalized software costs, which represent costs directly related AIG offers sales inducements, which include enhanced credit-
to obtaining, developing or upgrading internal use software. Such ing rates or bonus payments to contract holders (bonus interest)
costs are capitalized and amortized using the straight-line method on certain annuity and investment contract products. Sales
over a period generally not to exceed five years. inducements provided to the contractholder are recognized as part
of the liability for policyholders’ contract deposits on the consoli-
(w) Separate and Variable Accounts: Separate and variable
dated balance sheet. Such amounts are deferred and amortized
accounts represent funds for which investment income and
over the life of the contract using the same methodology and
investment gains and losses accrue directly to the policyholders
assumptions used to amortize DAC. To qualify for such accounting
who predominantly bear the investment risk. Each account has
treatment, the bonus interest must be explicitly identified in the
specific investment objectives, and the assets are carried at fair
contract at inception, and AIG must demonstrate that such
value. The assets of each account are legally segregated and are
amounts are incremental to amounts AIG credits on similar
not subject to claims which arise out of any other business of
contracts without bonus interest, and are higher than the
AIG. The liabilities for these accounts are generally equal to the
contract’s expected ongoing crediting rates for periods after the
account assets.
bonus period. The deferred bonus interest and other deferred
Form 10-K 2006 AIG 115

in AIGFP, and other payables. See Note 19 herein for a discussion1. Summary of Significant Accounting Policies
of Derivatives. AIG has entered into certain insurance andContinued
reinsurance contracts, primarily in its general insurance segment,
sales inducement assets amounted to $1.3 billion and $1.1 bil-
that do not contain sufficient insurance risk to be accounted for
lion at December 31, 2006 and 2005, respectively. The amortiza-
as insurance or reinsurance. Accordingly, these transactions are
tion expense associated with these assets is reported within
recorded based upon deposit accounting, and the premiums
Incurred policy losses and benefits expense on the consolidated
received, after deduction for certain related expenses, are
statement of income. Such amortization expense totaled
recorded as deposits within Other liabilities on the consolidated
$135 million, $127 million and $104 million for the years ended
balance sheet. Net proceeds of these deposits are invested and
December 31, 2006, 2005 and 2004, respectively.
generate net investment income. As amounts are paid, consistent
See Note 19 herein for a discussion of derivatives.
with the underlying contracts, the deposit liability is reduced.
(z) Reserve for Losses and Loss Expenses: Losses and loss
(gg) Preferred Shareholders’ Equity in Subsidiary
expenses are charged to income as incurred. The reserve for
Companies: Preferred shareholders’ equity in subsidiary compa-
losses and loss expenses represents the accumulation of esti-
nies relates principally to outstanding preferred stock or interest
mates for unpaid reported losses and includes provisions for
of ILFC, a wholly owned subsidiary of AIG. Cash distributions on
losses incurred but not reported. The methods of determining
such preferred stock or interest are accounted for as interest
such estimates and establishing resulting reserves, including
expense.
amounts relating to allowances for estimated unrecoverable
reinsurance, are reviewed and updated. If the estimate of (hh) Recent Accounting Standards:
reserves is determined to be inadequate or redundant, the
Accounting Changes
increase or decrease is reflected in income. AIG discounts its loss
reserves relating to workers compensation business written by its FSP FAS 115-1, ‘‘The Meaning of Other-Than-Temporary Impair-
U.S. domiciled subsidiaries as permitted by the domiciliary ment and Its Application to Certain Investments,’’ replaces the
statutory regulatory authorities. measurement and recognition guidance set forth in EITF Issue
No. 03-1 and codifies certain existing guidance on impairment and
(aa) Future Policy Benefits for Life and Accident and
accretion of income in periods subsequent to an other-than-
Health Contracts: The liabilities for future policy benefits and
temporary impairment, where appropriate. AIG’s adoption of FSP
policyholders’ contract deposits are established using assump-
FAS 115-1 on January 1, 2006 did not have a material effect on
tions described in Note 6 herein.
AIG’s consolidated financial condition or results of operations.
(bb) Other Policyholders’ Funds: Other policyholders’ funds In December 2004, the FASB issued FAS 123, ‘‘Share-Based
are reported at cost and include any policyholders’ funds on Payment’’ (FAS 123R). FAS 123R and its related interpretive
deposit which encompasses premium deposits and similar items. guidance replaces FAS 123, ‘‘Accounting for Stock-Based Compen-
sation’’ (FAS 123), which superseded Accounting Principles Board
(cc) Financial Services — Securities and Spot Commodi-
Opinion No. 25, ‘‘Accounting for Stock Issued to Employees’’
ties Sold but not yet Purchased, at market value: Securi-
(APB 25) and amended FAS 95, ‘‘Statement of Cash Flows.’’
ties and spot commodities sold but not yet purchased represent
FAS 123, as originally issued in 1995, established as preferable a
sales of securities and spot commodities not owned at the time
fair-value-based method of accounting for share-based payment
of sale. The obligations arising from such transactions are
transactions with employees. On January 1, 2003, AIG adopted
recorded on a trade-date basis and carried at fair value. Also
the recognition provisions of FAS 123. See also Note 14 herein.
included are obligations under gold leases, which are accounted
AIG adopted the provisions of the revised FAS 123R and its
for as a debt host with an embedded gold derivative.
related interpretive guidance on January 1, 2006.
(dd) Short- and Long-Term Borrowings: AIG’s funding is For its service-based awards under the 1999 Stock Option
principally obtained from medium term and long-term borrowings Plan, 2002 Stock Incentive Plan and 1996 Employee Stock
and commercial paper. Commercial paper, when issued at a Purchase Plan, AIG recognizes compensation on a straight-line
discount, is recorded at the proceeds received and accreted to its basis over the scheduled vesting period. Unrecognized unvested
par value. Long-term borrowings are carried at the principal compensation expense for stock option awards granted under
amount borrowed, net of unamortized discounts or premiums. See APB 25 (i.e., before January 1, 2003) will be recognized from
Note 9 herein for additional information. January 1, 2006 to the vesting date. However, for the SICO Plans,
the AIG Deferred Compensation Profit Participant Plan (AIG
(ee) Liabilities Connected to Trust Preferred Stock: Liabili-
DCPPP) and the AIG Partners Plan, which contain both perform-
ties connected to trust preferred stock principally relates to
ance and service conditions, AIG recognizes compensation utiliz-
outstanding securities issued by American General Corporation
ing a graded vesting expense attribution method. The effect of
(AGC), a wholly owned subsidiary of AIG. Cash distributions on
this approach is to recognize compensation cost over the requisite
such preferred stock are accounted for as interest expense.
service period for each separately vesting tranche of the award.
AIG’s share-based plans generally provide for accelerated(ff) Other Liabilities: Other liabilities consist of other funds on
vesting after the participant turns 65 and retires. For awardsdeposit, derivatives liabilities at fair value, other than derivatives
116 AIG 2006 Form 10-K

not have a material effect on AIG’s consolidated financial1. Summary of Significant Accounting Policies
condition or results of operations.Continued
On February 16, 2006, the FASB issued FAS 155, ‘‘Accounting
granted after January 1, 2006, compensation expense is recog-
for Certain Hybrid Financial Instruments’’ (FAS 155), an amend-
nized ratably from the date of grant through the shorter of age 65
ment of FAS 140 and FAS 133. FAS 155 allows AIG to include
or the vesting period. This change did not have a material effect
changes in fair value in earnings on an instrument-by-instrument
on AIG’s consolidated financial position or results of operations.
basis for any hybrid financial instrument that contains an
Awards granted prior to January 1, 2006 will continue to be
embedded derivative that would otherwise be required to be
recognized over the vesting period with accelerated expense
bifurcated and accounted for separately under FAS 133. The
recognition upon an actual retirement. Starr International Com-
election to measure the hybrid instrument at fair value is
pany, Inc. (SICO) compensation expense for participants retiring
irrevocable at the acquisition or issuance date.
after age 65 had been reflected in prior years’ results consistent
AIG elected to early adopt FAS 155 as of January 1, 2006, and
with vested status under the SICO Plans.
apply FAS 155 fair value measurement to certain structured note
At the June 2005 meeting, the FASB’s Emerging Issues Task
liabilities and structured investments in AIG’s available for sale
Force (EITF) reached a consensus with respect to Issue No. 04-5,
portfolio that existed at December 31, 2005. The effect of this
‘‘Determining Whether a General Partner, or the General Partners
adoption resulted in an $11 million after-tax ($18 million pre-tax)
as a Group, Controls a Limited Partnership or Similar Entity When
decrease to opening retained earnings as of January 1, 2006,
the Limited Partners Have Certain Rights’’ (EITF 04-5). EITF 04-5
representing the difference between the fair value of these hybrid
addresses what rights held by the limited partner(s) preclude
financial instruments and the prior carrying value as of Decem-
consolidation in circumstances in which the sole general partner
ber 31, 2005. The effect of adoption on after-tax gross gains and
would consolidate the limited partnership in accordance with
losses was $218 million ($336 million pre-tax) and $229 million
generally accepted accounting principles absent the existence of
($354 million pre-tax), respectively.
the rights held by the limited partner(s). Based on that consen-
In connection with AIG’s early adoption of FAS 155, structured
sus, the EITF 04-5 also agreed to amend the consensus in Issue
note liabilities of $8.9 billion, other structured liabilities in
No. 96-16, ‘‘Investor’s Accounting for an Investee When the
conjunction with equity derivative transactions of $111 million,
Investor Has a Majority of the Voting Interest but the Minority
and hybrid financial instruments of $522 million at December 31,
Shareholders Have Certain Approval or Veto Rights.’’ The guidance
2006 are now carried at fair value. The effect on earnings for
in this Issue was effective after June 29, 2005 for general
2006, for changes in the fair value of hybrid financial instruments,
partners of all new limited partnerships formed and for existing
was a pre-tax loss of $313 million, of which $287 million is
limited partnerships for which the partnership agreements are
reflected in Other income and is largely offset by gains on
modified. For general partners in all other limited partnerships,
economic hedge positions which are also reflected in operating
the guidance in this Issue was effective beginning January 1,
income, and $26 million is reflected in Net investment income.
2006. The effect of the adoption of this EITF Issue was not
In January 2007, the FASB issued Statement 133 Implementa-
material to AIG’s consolidated financial condition or results of
tion Issue No. B40, ‘‘Embedded Derivatives: Application of Para-
operations.
graph 13(b) to Securitized Interests in Prepayable Financial Assets’’
(Issue B40). Issue B40 provides guidance for when prepayment risk
tation Issue No. B38, ‘‘Embedded Derivatives: Evaluation of Net
needs to be considered in determining whether mortgage-backed
Settlement with Respect to the Settlement of a Debt Instrument
and other asset-backed securities contain an embedded derivative
through Exercise of an Embedded Put Option or Call Option.’’ This
requiring bifurcation. Effective with AIG’s adoption of FAS 155
implementation guidance relates to the potential settlement of the
beginning January 1, 2006, AIG has been treating derivatives
debtor’s obligation to the creditor that would occur upon exercise
embedded in securitized interests in prepayable financial assets in
of the put option or call option, which meets the net settlement
accordance with the guidance in Issue B40. Therefore, the adoption
criterion in FAS 133. The effective date of the implementation
of this guidance did not have a material effect on AIG’s consoli-
guidance was January 1, 2006. The adoption of this guidance did
dated financial condition or results of operations.
not have a material effect on AIG’s consolidated financial
On March 27, 2006, the FASB issued FSP FTB 85-4-1,
condition or results of operations.
‘‘Accounting for Life Settlement Contracts by Third-Party Investors’’
(FSP 85-4-1), an amendment of FTB 85-4, ‘‘Accounting for
tation Issue No. B39, ‘‘Application of Paragraph 13(b) to Call
Purchases of Life Insurance.’’ Life settlements are designed to
Options That Are Exercisable Only by the Debtor.’’ The conditions
assist life insurance policyholders in monetizing the existing value
in FAS 133 paragraph 13(b) do not apply to an embedded call
of life insurance policies. FSP 85-4-1 allows AIG to measure life
option in a hybrid instrument containing a debt host contract if the
settlement contracts using either the investment method or fair
right to accelerate the settlement of the debt can be exercised
value method. The election is made on an instrument-by-instrument
only by the debtor (issuer/borrower). This guidance does not apply
basis and is irrevocable. AIG elected to early adopt FSP 85-4-1 as
to other embedded derivative features that may be present in the
of January 1, 2006 using the investment method for pre-existing
same hybrid instrument. The effective date of the implementation
investments held at December 31, 2005. The effect of this
guidance was January 1, 2006. The adoption of this guidance did
adoption resulted in a $319 million after-tax ($487 million pre-tax)
Form 10-K 2006 AIG 117

effect of a shorter expected amortization period for deferred1. Summary of Significant Accounting Policies
items related to certain group life and health insurance contractsContinued
and the effect on the estimated gross profits of investment-
increase to opening retained earnings. See Note 8(h) herein for oriented products related to previously anticipated future internal
additional disclosures related to life settlement contracts. replacements. AIG does not expect the implementation of SOP 05-
On April 13, 2006, the FASB issued FSP FIN 46(R)-6, 1 to have a material effect on its consolidated financial condition
‘‘Determining the Variability to be Considered in Applying FASB or its consolidated results of operations, although operating
Interpretation No. 46(R)’’ (FIN 46(R)-6 or FSP). The FSP affects income for the Life Insurance & Retirement Services segment will
the identification of which entities are variable interest entities be negatively affected.
(VIEs) through a ‘‘by design’’ approach in identifying and measur- On July 13, 2006, the FASB issued FASB Interpretation No. 48,
ing the variable interests of the VIE and its primary beneficiary. ‘‘Accounting for Uncertainty in Income Taxes — an interpretation of
The requirements became effective beginning in the third quarter FASB Statement No. 109’’ (FIN 48), which clarifies the accounting
of 2006 and are to be applied to all new VIEs with which AIG for uncertainty in income tax positions. FIN 48 prescribes a
becomes involved. The new requirements need not be applied to recognition threshold and measurement attribute for the financial
entities that have previously been analyzed under FIN 46(R) statement recognition and measurement of an income tax position
unless a reconsideration event occurs. The adoption of this taken or expected to be taken in a tax return. FIN 48 also
guidance did not have a material effect on AIG’s consolidated provides guidance on derecognition, classification, interest and
financial condition or results of operations. penalties, accounting in interim periods, and additional disclo-
In September 2006, the FASB issued FAS 158, ‘‘Employers’ sures. The effective date of this implementation guidance is
Accounting for Defined Benefit Pension and Other Postretirement January 1, 2007, with the cumulative effect of the change in
Plans — an amendment of FASB Statements No. 87, 88, 106 and accounting principles recorded as an adjustment to opening
132(R)’’ (FAS 158). FAS 158 requires AIG to prospectively recognize retained earnings. AIG does not expect the implementation of
the over funded or under funded status of defined benefit FIN 48 to be material to its consolidated financial condition.
postretirement plans as an asset or liability in AIG’s consolidated In September 2006, the FASB issued FAS 157, ‘‘Fair Value
balance sheet and to recognize changes in that funded status in Measurements’’ (FAS 157). FAS 157 defines fair value, estab-
the year in which the changes occur through Other Comprehensive lishes a framework for measuring fair value and expands disclo-
Income. FAS 158 also requires AIG to measure the funded status sures about fair value measurements. FAS 157 is effective for
of plans as of the date of its year-end balance sheet, with limited financial statements issued for fiscal years beginning after
exceptions. AIG adopted FAS 158 for the year ending December 31, November 15, 2007. AIG is currently assessing the effect of
2006. The cumulative effect, net of deferred income taxes, on implementing this guidance.
AIG’s consolidated balance sheet at December 31, 2006 was a net In February 2007, the FASB issued FAS 159, ‘‘The Fair Value
reduction in shareholders’ equity through a charge to Accumulated Option for Financial Assets and Financial Liabilities’’ (FAS 159).
other comprehensive income of $532 million, with a corresponding FAS 159 permits entities to choose to measure at fair value many
net decrease of $538 million in total assets, and a net decrease of financial instruments and certain other items that are not
$6 million in total liabilities. See Note 15 herein for additional currently required to be measured at fair value. Subsequent
information on the adoption of FAS 158. changes in fair value for designated items will be required to be
reported in earnings in the current period. FAS 159 also
Future Application of Accounting Standards establishes presentation and disclosure requirements for similar
types of assets and liabilities measured at fair value. FAS 159 is
On September 19, 2005, the AICPA issued Statement of Posi-
effective for financial statements issued for fiscal years beginning
tion 05-1, ‘‘Accounting by Insurance Enterprises for Deferred
after November 15, 2007. AIG is currently assessing the effect of
Acquisition Costs in Connection with Modifications or Exchanges
implementing this guidance, which depends on the nature and
of Insurance Contracts’’ (SOP 05-1). SOP 05-1 provides guidance
extent of items elected to be measured at fair value, upon initial
on accounting for DAC on internal replacements of insurance and
application of the standard on January 1, 2008.
investment contracts other than those specifically described in
FAS 97. SOP 05-1 defines an internal replacement as a
2. Segment Informationmodification in product benefits, features, rights, or coverage that
occurs by the exchange of a contract for a new contract, or by AIG identifies its reportable segments by product line consistent
amendment, endorsement, or rider to a contract, or by the with its management structure. These segments and their respec-
election of a feature or coverage within a contract. tive operations are as follows:
The effective date of the implementation guidance is Janu-
General Insurance: AIG’s General Insurance subsidiaries are multi-
ary 1, 2007. Upon implementation, AIG expects to record a
ple line companies writing substantially all lines of commercial
decrease to opening retained earnings of approximately $100 mil-
property and casualty insurance and various personal lines both
lion, net of tax, to reflect changes in unamortized DAC, VOBA,
domestically and abroad. AIG’s principal General Insurance opera-
unearned revenue liabilities and deferred sales inducement as-
tions are as follows:
sets. This adjustment will reflect changes including the cumulative
118 AIG 2006 Form 10-K

Nan Shan in the Asia internal reporting unit and other operations2. Segment Information
are included with ALICO, AIG Star Life and AIG Edison Life in theContinued
Japan and Other reporting unit. Prior period amounts have been
Domestic Brokerage Group (DBG) writes substantially all
reclassified to conform to the current period presentation.
classes of business insurance in the U.S. and Canada, accepting
AIG’s principal Domestic Life Insurance & Retirement Services
such business mainly from insurance brokers.
operations are American General Life Insurance Company
Transatlantic Holdings, Inc. (Transatlantic) subsidiaries offer rein-
(AG Life), The United States Life Insurance Company in the City of
surance on both a treaty and facultative basis to insurers in the U.S.
New York (USLIFE), American General Life and Accident Insurance
and abroad. Transatlantic structures programs for a full range of
Company (AGLA and, collectively with AG Life and USLIFE, the
property and casualty products with an emphasis on specialty risks.
Domestic Life Insurance internal reporting unit), AIG Annuity
AIG’s Personal Lines operations provide automobile insurance
Insurance Company (AIG Annuity), The Variable Annuity Life
through AIG Direct, a mass marketing operation, Agency Auto
Insurance Company (VALIC) and AIG Retirement Services, Inc (AIG
Division and 21st Century Insurance Group (21st Century), as well
SunAmerica and, collectively with AIG Annuity and VALIC, the
as a broad range of coverages for high net-worth individuals
Domestic Retirement Services internal reporting unit).
through the AIG Private Client Group.
American International Reinsurance Company (AIRCO) acts
Mortgage Guaranty operations provide guaranty insurance
primarily as an internal reinsurance company for AIG’s insurance
primarily on conventional first mortgage loans on single family
operations.
dwellings and condominiums.
Life Insurance & Retirement Services is comprised of two major
AIG’s Foreign General Insurance group accepts risks primarily
groupings of products and services: insurance-oriented products and
underwritten through American International Underwriters (AIU), a
services and retirement savings products and services.
marketing unit consisting of wholly owned agencies and insurance
companies. The Foreign General Insurance group also includes Financial Services: AIG’s Financial Services subsidiaries engage
business written by AIG’s foreign-based insurance subsidiaries. in diversified financial products and services including aircraft and
The Foreign General Insurance group uses various marketing equipment leasing, capital markets transactions, consumer
methods to write both business and consumer lines insurance finance and insurance premium finance.
with certain refinements for local laws, customs and needs. AIU AIG’s Aircraft Leasing operations represent the operations of
operates in Asia, the Pacific Rim, Europe, including the U.K., International Lease Finance Corporation (ILFC), which generates
Africa, the Middle East and Latin America. its revenues primarily from leasing new and used commercial jet
Each of the General Insurance sub-segments is comprised of aircraft to domestic and foreign airlines. Revenues also result
groupings of major products and services as follows: DBG is from the remarketing of commercial jets for its own account, and
comprised of domestic commercial insurance products and services; remarketing and fleet management services for airlines and for
Transatlantic is comprised of reinsurance products and services sold financial institutions.
to other general insurance companies; Personal Lines are comprised AIG’s Capital Markets operations are conducted through AIGFP.
of general insurance products and services sold to individuals; As Capital Markets is a transaction-oriented operation, current and
Mortgage Guaranty is comprised of products insuring against losses past revenues and operating results may not provide a basis for
arising under certain loan agreements; and Foreign General is predicting future performance.
comprised of general insurance products sold overseas. AIG’s Capital Markets operations derive substantially all their
revenues from hedged financial positions entered in connection
Life Insurance & Retirement Services: AIG’s Life Insurance &
with counterparty transactions rather than from speculative trans-
Retirement Services subsidiaries offer a wide range of insurance
actions. These subsidiaries participate in the derivatives and
and retirement savings products both domestically and abroad.
financial transactions dealer markets conducting, primarily as
Insurance-oriented products consist of individual and group life,
principal, an interest rate, currency, equity, commodity, energy
payout annuities (including structured settlements), endowment
and credit products business.
and accident and health policies. Retirement savings products
Consumer Finance operations include American General Finance
consist generally of fixed and variable annuities.
Inc. (AGF) as well as AIG Consumer Finance Group Inc. (AIGCFG). AGF
AIG’s principal overseas Life Insurance & Retirement Services
and AIGCFG provide a wide variety of consumer finance products,
operations are American Life Insurance Company (ALICO), Ameri-
including non-conforming real estate mortgages, consumer loans,
can International Assurance Company, Limited, together with
retail sales finance and credit-related insurance to customers both
American International Assurance Company (Bermuda) Limited
domestically and overseas, particularly in emerging markets.
(AIA), Nan Shan Life Insurance Company, Ltd. (Nan Shan), The
Philippine American Life and General Insurance Company (Philam- Asset Management: AIG’s Asset Management operations com-
Life), AIG Edison Life Insurance Company (AIG Edison Life) and prise a wide variety of investment-related services and investment
AIG Star Life Insurance Co. Ltd. (AIG Star Life). In 2006, the major products including institutional and retail asset management,
internal reporting units for the Foreign Life operations were broker-dealer services and institutional spread-based investment
realigned to better reflect the current management structure. business. Such services and products are offered to individuals
PhilamLife and other Life operations were classified as a reporting and institutions both domestically and overseas.
unit in 2005. In 2006, PhilamLife is included with AIA, AIRCO and
Form 10-K 2006 AIG 119

2. Segment Information
Continued
The following table summarizes the operations by major operating segment for the years ended December 31, 2006,
2005 and 2004:
Operating Segments
Life
Insurance
General & Retirement Financial Asset Consolidation
(in millions) Insurance Services Services Management Other(a)
Total and Elimination Consolidated
2006
Revenues(b)
$ 49,206 $ 50,163 $ 8,010 $ 5,814 $ (295) $ 112,898 $ 296 $113,194
Interest expense 23 74 6,216 105 533 6,951 — 6,951
Operating income (loss)
before minority interest 10,412 10,032 524 2,346 (1,701) 21,613 74 21,687
Income taxes (benefits) 2,351 2,861 (23) 606 716 6,511 26 6,537
Depreciation expense 274 268 1,655 13 164 2,374 — 2,374
Capital expenditures 375 711 6,278 835 244 8,443 — 8,443
Identifiable assets 167,004 534,977 206,845 97,913 105,279 1,112,018 (132,604) 979,414
2005
Revenues(b)
$ 45,174 $ 47,376 $ 10,525 $ 5,325 $ 505 $ 108,905 $ — $108,905
before minority interest 2,315 8,904 4,276 2,253 (2,535)(c)
15,213 — 15,213
Income taxes (benefits) 140 2,155 1,366 718 (121) 4,258 — 4,258
Identifiable assets 150,667 480,622 166,488 81,080 92,835 971,692 (118,641) 853,051
2004
Revenues(b)
$ 41,961 $ 43,402 $ 7,495 $ 4,714 $ 94 $ 97,666 $ — $ 97,666
before minority interest 3,177 7,925 2,180 2,125 (562) 14,845 — 14,845
Income taxes (benefits) 616 2,525 654 753 (141) 4,407 — 4,407
(a) Includes AIG Parent and other operations which are not required to be reported separately. The following table presents the operating loss for AIG’s
Other category for the years ended December 31, 2006, 2005 and 2004:
For the Years Ended December 31,
(in millions) 2006 2005 2004
Operating income (loss):
Equity earnings in unconsolidated entities* $ 193 $ (124) $ 157
Interest expense (859) (541) (435)
Unallocated corporate expenses (555) (413) (316)
Compensation expense — SICO Plans (108) (205) (62)
Compensation expense — Starr tender offer (54) — —
Realized capital gains (losses) (295) 505 94
Regulatory settlement costs — (1,644) —
Other miscellaneous, net (23) (113) —
Total Other $ (1,701) $ (2,535) $ (562)
* Includes current year catastrophe-related losses from unconsolidated entities of $312 million and $96 million for 2005 and 2004, respectively.
There were no significant catastrophe-related losses in 2006.
(b) Represents the sum of General Insurance net premiums earned, Life Insurance & Retirement Services GAAP premiums, net investment income,
(c) Includes settlement costs of $1.64 billion as described in Note 12(a) Litigation and Investigations herein.
120 AIG 2006 Form 10-K

Continued
The following table summarizes AIG’s General Insurance operations by major internal reporting unit for the years ended
December 31, 2006, 2005 and 2004:
General Insurance
Domestic Total Consolidation Total
Brokerage Personal Mortgage Foreign Reportable and General
(in millions) Group Transatlantic Lines Guaranty General Segment Elimination Insurance
2006
Revenues(a)(b)
$ 27,445 $ 4,050 $4,871 $ 877 $11,973 $ 49,216 $ (10) $ 49,206
Losses & loss expenses
incurred 16,622 2,463 3,306 349 5,312 28,052 — 28,052
Underwriting expenses 4,838 998 1,133 200 3,573 10,742 — 10,742
Operating income(b)(c)(d)
5,985 589 432 328 3,088 10,422 (10) 10,412
Depreciation expense 100 2 52 5 115 274 — 274
Capital expenditures 125 2 94 11 143 375 — 375
2005
Revenues(a)
$ 25,206 $ 3,766 $4,848 $ 655 $10,684 $ 45,159 $ 15 $ 45,174
incurred 21,328 2,877 3,566 139 5,181 33,091 — 33,091
Underwriting expenses 4,524 928 1,087 153 3,076 9,768 — 9,768
Operating income (loss)(c)(d)(e)
(646)(f)
(39) 195 363 2,427 2,300 15 2,315
2004
Revenues(a)
$ 23,332 $ 3,990 $4,488 $ 660 $ 9,473 $ 41,943 $ 18 $ 41,961
incurred 18,808 2,755 3,211 142 5,441 30,357 — 30,357
Underwriting expenses 3,747 953 920 119 2,688 8,427 — 8,427
Operating income(c)
777 282 357 399 1,344 3,159 18 3,177
(a) Represents the sum of General Insurance net premiums earned, net investment income and realized capital gains (losses).
(b) Includes the effect of out of period adjustments related to the accounting for certain interests in unit investment trusts. For DBG, the effect was an
increase of $66 million in both revenues and operating income and for Foreign General, the effect was an increase of $424 million in both revenues
and operating income.
(c) There were no signiﬁcant catastrophe-related losses in 2006. Catastrophe-related losses for 2005 and 2004 by reporting unit were:
2005 2004
Net Net
Insurance Reinstatement Insurance Reinstatement
Related Premium Related Premium
(in millions) Losses Cost Losses Cost
Reporting Unit:
DBG $1,747 $122 $ 582 $ —
Transatlantic 463 45 215 —
Personal Lines 112 2 25 —
Mortgage Guaranty 10 — — —
Foreign General 293 94 232 —
Total $2,625 $263 $1,054 $ —
(d) Includes additional losses incurred and net reinstatement premiums related to prior year catastrophes of $199 million and $277 million in 2006 and
2005, respectively.
(e) 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.
(f) 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.
Form 10-K 2006 AIG 121

Continued
The following table summarizes AIG’s Life Insurance & Retirement Services operations by major internal reporting unit
for the years ended December 31, 2006, 2005 and 2004:
Total Life
Domestic Domestic Total Consolidation Insurance &
Japan Life Retirement Reportable and Retirement
(in millions) and Other(a)
Asia(b)
Insurance(c)
Services(d)
Segment Elimination Services
2006
Revenues:(e)(f)
Insurance-oriented products $ 13,243 $ 17,712 $ 8,538 $ — $ 39,493 $ — $ 39,493
Retirement savings products 2,793 168 568 7,141 10,670 — 10,670
Total revenues 16,036 17,880 9,106 7,141 50,163 — 50,163
Operating income(f)
3,732 3,060 917 2,323 10,032 — 10,032
Depreciation expense 101 70 63 34 268 — 268
Capital expenditures 342 260 71 38 711 — 711
Identiﬁable assets 136,127 109,148 103,628 192,885 541,788 (6,811) 534,977
2005
Revenues:(e)
Total revenues 15,293 15,982 9,215 6,886 47,376 — 47,376
Operating income 2,959 2,286 1,495 2,164 8,904 — 8,904
2004
Revenues:(e)
Total revenues 12,227 15,896 8,715 6,564 43,402 — 43,402
Operating income 2,393 2,455 1,023 2,054 7,925 — 7,925
(a) Revenues and operating income include realized capital gains (losses) of $406 million, $(72) million and $(156) million for 2006, 2005 and 2004, respectively.
Includes the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133 and the application of FAS 52, which were
$191 million, $(462) million and $(300) million for 2006, 2005 and 2004, respectively.
(b) Revenues in 2004 include approximately $640 million of premium from a single reinsurance transaction involving terminal funding pension business, which is
offset by a similar increase in beneﬁt reserves. Revenues and operating income include realized capital gains (losses) of $301 million, $156 million and
$528 million for 2006, 2005 and 2004, respectively. Includes the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133
and the application of FAS 52, which were $191 million, $(97) million and $166 million for 2006, 2005 and 2004, respectively.
(c) Includes the life operations of AIG Life Insurance Company and American International Life Assurance Company of New York. Operating income in 2006 included
charges of $125 million resulting from the adverse Superior National arbitration ruling and $66 million related to the exiting of the domestic financial institutions credit
life business. Operating income in 2004 included a $178 million charge related to a workers compensation quota share reinsurance agreement with Superior National.
See Note 12(c) herein for additional information. In addition, in 2004, as part of the business review of group life/health, approximately $68 million was incurred for
reserve strengthening and allowances for receivables. Revenues and operating income include realized capital gains (losses) of $(215) million, $35 million and
$(120) million for 2006, 2005 and 2004, respectively. Includes the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133 and
the application of FAS 52, which were $19 million, $76 million and $8 million for 2006, 2005 and 2004, respectively.
(d) Revenues and operating income include realized capital gains (losses) of $(404) million, $(277) million and $(207) million for 2006, 2005 and 2004, respectively.
Includes the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133 and the application of FAS 52, which were
$(46) million, $(12) million and $(14) million for 2006, 2005 and 2004, respectively.
(e) Represents the sum of Life Insurance & Retirement Services GAAP premiums, net investment income and realized capital gains (losses).
(f) Includes the effect of out of period adjustments related to the accounting for certain interests in unit investment trusts. For 2006 the effect was an increase of
$240 million in revenues and $169 million in operating income.
122 AIG 2006 Form 10-K

Continued
The following table summarizes AIG’s Financial Services operations by major internal reporting unit for the years ended
December 31, 2006, 2005 and 2004:
Financial Services
Total Consolidation Total
Aircraft Capital Consumer Reportable and Financial
(in millions) Leasing Markets(a)
Finance Other(b)
Segment Elimination Services
2006
Revenues(c)(d)(e)
$ 4,143 $ (186) $ 3,819 $ 626 $ 8,402 $ (392) $ 8,010
Interest expense(d)
1,442 3,215 1,303 319 6,279 (63) 6,216
Operating income (loss)(e)
639 (873) 761(f)
(3) 524 — 524
Depreciation expense 1,584 19 41 11 1,655 — 1,655
Capital expenditures 6,012 15 52 199 6,278 — 6,278
2005
Revenues(c)(d)(e)
$ 3,578 $ 3,260 $ 3,613 $ 387 $ 10,838 $ (313) $ 10,525
Interest expense(d)
1,125 3,033 1,005 316 5,479 (200) 5,279
Operating income(e)
679 2,661 876(f)
60 4,276 — 4,276
2004
Revenues(c)(d)(e)
$ 3,136 $ 1,278 $ 2,978 $ 835 $ 8,227 $ (732) $ 7,495
Interest expense(d)
993 2,300 705 144 4,142 (101) 4,041
Operating income(e)
642 662 786 90 2,180 — 2,180
(a) Certain transactions entered into by AIGFP generate tax credits and benefits which are included in income taxes in the consolidated statement of
income. The amount of such tax credits and benefits for the years ended December 31, 2006, 2005 and 2004 were $50 million, $67 million, and
$107 million, respectively.
(b) Operating loss in 2006 includes specific reserves of $42 million related to two commercial lending transactions.
(c) 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.
(d) Interest expense for the Capital Markets business is included in Revenues above and in Other income on the Consolidated Statement of Income.
(e) Includes the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains
and losses. For 2006, 2005 and 2004, respectively, the effect was $(1.82) billion, $2.01 billion and $(122) million in both revenues and operating
income for Capital Markets. These amounts result primarily from interest rate and foreign currency derivatives that are economically hedging available
for sale securities and borrowings. For 2004, the effect was $(27) million in operating income for Aircraft Leasing. During 2006 and 2005, Aircraft
Leasing derivative gains and losses were reported as part of AIG’s Other category, and were not reported in Aircraft Leasing’s operating income.
(f) Includes catastrophe-related losses of $62 million recorded in 2005 resulting from hurricane Katrina, which were reduced by $35 million in 2006 as a
result of reevaluation of the remaining estimated losses.
Form 10-K 2006 AIG 123

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
2006
Revenues(b)
$57,986 $33,795 $21,413 $113,194
Real estate and other fixed assets, net of accumulated depreciation 2,432 1,082 867 4,381
Flight equipment primarily under operating leases, net of accumulated depreciation(c)
39,875 — — 39,875
2005
Revenues(b)
$59,858 $32,036 $17,011 $108,905
Real estate and other fixed assets, net of accumulated depreciation 1,905 929 807 3,641
36,245 — — 36,245
2004
Revenues(b)
$53,827 $27,761 $16,078 $ 97,666
Real estate and other fixed assets, net of accumulated depreciation 1,777 894 834 3,505
32,130 — — 32,130
(a) Including revenues from General Insurance operations in Canada of $691 million, $638 million and $549 million in 2006, 2005 and 2004,
respectively.
(b) Represents the sum of General Insurance net premiums earned, Life Insurance & Retirement Services GAAP premiums, net investment income,
Financial Services interest, lease and finance charges, Asset Management net investment income with respect to spread-based products and advisory
and management fees, and realized capital gains (losses).
(c) Approximately 90 percent of ILFC’s fleet is operated by foreign airlines.
insurance companies to distribute amounts from their3. Federal Income Taxes
policyholders’ surplus accounts in 2005 and 2006 without
AIG and its eligible U.S. subsidiaries file a consolidated U.S. incurring federal income tax on the distributions. In 2005 and
federal income tax return. Life Insurance subsidiaries of American 2006, AIG made distributions and eliminated the aggregate
General Corporation (AGC) also file a consolidated U.S. federal balance of $945 million from its policyholders’ surplus accounts.
income tax return and will not be included in AIG’s consolidated A Revenue Agent’s Report proposing to assess additional
federal income tax return until 2007. Other U.S. entities included taxes for the years 1997 to 1999 has been issued to AIG and a
in the consolidated financial statements also file separate U.S. Letter of Protest contesting the proposed assessments has been
federal income tax returns. Subsidiaries operating outside the filed with the Internal Revenue Service (IRS). A draft settlement
U.S. are taxed, and income tax expense is recorded, based on agreed to in substance has been received from the IRS for years
applicable U.S. and foreign statutes. 1997 to 1999. Settlement has been reached with the IRS for
U.S. federal income taxes have not been provided on years prior to 1997 although AIG has reserved the right to timely
$1.3 billion of undistributed earnings of certain U.S. subsidiaries claim refunds for items related to the restatements of AIG’s 2004
that are not included in the consolidated AIG U.S. federal income and prior financial statements during 2005.
tax return because tax planning strategies are available, and In addition, for the years ended September 30, 1993 and
would be utilized, to eliminate the tax liability related to these 1994, a Notice of Deficiency assessing additional taxes has been
earnings. U.S. federal income taxes have not been provided on issued to AIG Retirement Services Inc., which has filed a petition
the undistributed earnings of certain non-U.S. subsidiaries to the for redetermination with the United States Tax Court challenging
extent that such earnings have been reinvested abroad for an the Notice. Revenue Agents’ Reports for the years ended
indefinite period of time. At December 31, 2006, the cumulative September 30, 1995 and 1996 and for the period from
amount of undistributed earnings in these subsidiaries September 30, 1997 to December 31, 1998 have also been
approximated $17.6 billion. Determining the deferred tax liability issued to AIG Retirement Services Inc., and Letters of Protest
that would arise if these earnings were not permanently contesting the proposed assessments have been filed with the
reinvested abroad is not practicable. IRS. Similarly, SunAmerica Life Insurance Company (SunAmerica
A component of life insurance surplus accumulated prior to Life) has also received a proposed assessment and has filed a
1984 is not taxable unless it exceeds certain statutory limitations protest for the year ended December 31, 1999.
or is distributed to shareholders. The American Jobs Creation Act
of 2004 amended the federal income tax law to permit life
124 AIG 2006 Form 10-K

AGC’s tax years through 1999 have been audited and settled3. Federal Income Taxes
with the IRS. Although a Revenue Agent’s Report has not yet beenContinued
issued to AGC for years ended December 31, 2000, 2001 and
It is management’s belief that there are substantial arguments
2002, AIG has received a notice of proposed adjustment for
in support of the positions taken by AIG, AIG Retirement Services
certain items during that period from the IRS.
Inc., and SunAmerica Life in their Letters of Protest and Tax Court
litigation. Although the final outcome of any issues raised in
connection with these years is uncertain, AIG believes that any tax
obligation, including interest thereon, would not be material to
AIG’s consolidated financial condition, results of operations or
liquidity.
The pretax components of U.S. and foreign income reflect the locations in which such pretax income was generated.
The pretax U.S. and foreign income was as follows for the years ended December 31, 2006, 2005 and 2004:
(in millions) 2006 2005 2004
U.S. $ 9,862 $ 6,103 $ 6,069
Foreign 11,825 9,110 8,776
Total $21,687 $15,213 $14,845
The U.S. federal income tax rate was 35 percent for 2006, 2005 and 2004. Actual tax expense on income differs from
the ‘‘expected’’ amount computed by applying the federal income tax rate because of the following:
2006 2005 2004
Percent Percent Percent
Years Ended December 31, of Pretax of Pretax of Pretax
(dollars in millions) Amount Income Amount Income Amount Income
U.S. federal income tax at statutory rate $7,591 35.0% $5,325 35.0% $5,197 35.0%
Adjustments:
Tax exempt interest (718) (3.3) (566) (3.7) (440) (2.9)
Partnerships and joint ventures (265) (1.2) (85) (0.5) (27) (0.2)
Synthetic fuel and other tax credits (196) (0.9) (296) (1.9) (310) (2.1)
Effect of foreign operations (132) (0.6) (253) (1.7) (11) (0.1)
Dividends received deduction (102) (0.5) (117) (0.8) (83) (0.6)
State income taxes 59 0.3 86 0.6 23 0.2
Nondeductible compensation 61 0.3 83 0.5 20 0.1
Penalties 3 — 76 0.5 28 0.2
Other 236 1.0 5 — 10 0.1
Actual income tax expense $6,537 30.1% $4,258 28.0% $4,407 29.7%
Foreign and U.S. components of actual income tax expense:
Foreign:
Current $2,725 $ 974 $1,104
Deferred 933 426 561
U.S.:
Current 2,764 1,613 1,541
Deferred 115 1,245 1,201
Total $6,537 $4,258 $4,407
Form 10-K 2006 AIG 125

3. Federal Income Taxes
Continued
The components of the net deferred tax liability as of December 31, 2006 and 2005 were as follows:
Deferred tax assets:
Loss reserve discount $ 1,969 $ 2,242
Unearned premium reserve reduction 1,352 1,042
Loan loss and other reserves 1,054 419
Investment in foreign subsidiaries and joint ventures 420 349
Adjustment to life policy reserves 3,584 3,170
Accruals not currently deductible, and other 1,420 1,189
Total deferred tax assets 9,799 8,411
Deferred tax liabilities:
Deferred policy acquisition costs 10,396 7,573
Flight equipment, fixed assets and intangible assets 4,377 3,196
Unrealized appreciation of investments 3,370 4,025
Other 508 224
Total deferred tax liabilities 18,651 15,018
Net deferred tax liability $ 8,852 $ 6,607
AIG has recorded alternative minimum tax credit carry forwards of $222 million and $192 million at December 31, 2006 and 2005, respectively. The
alternative minimum tax credits do not expire.
4. 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) 2006 2005 2004
General Insurance operations:
Balance at beginning of year $ 4,048 $ 3,998 $ 3,619
Acquisition costs deferred 8,115 7,480 6,617
Amortization expense (7,866) (7,365) (6,301)
Increase (decrease) due to foreign exchange 58 (65) 63
Balance at end of year $ 4,355 $ 4,048 $ 3,998
Life Insurance & Retirement Services operations:
Balance at beginning of year $28,106 $25,080 $21,822
Acquisition costs deferred 6,823 6,513 6,266
Amortization expense (3,712) (3,328) (3,514)
Change in net unrealized gains (losses) on securities 646 977 (198)
Increase (decrease) due to foreign exchange 947 (1,136) 704
Subtotal $32,810 $28,106 $25,080
Consolidation and elimination 70 — —
Balance at end of year $32,880 $28,106 $25,080
Total deferred policy acquisition costs $37,235 $32,154 $29,078
Included in the above table is the VOBA, an intangible asset after five years. These projections are based on current estimates
recorded during purchase accounting, which is amortized in a for investment, persistency, mortality, and morbidity assumptions.
manner similar to DAC. Amortization of VOBA was $239 million, The DAC amortization charged to income includes the increase or
$291 million and $407 million while the unamortized balance was decrease of amortization for FAS 97-related realized capital gains
$1.98 billion, $2.14 billion and $2.52 billion for 2006, 2005 and (losses), primarily in the Domestic Retirement Services business.
2004, respectively. The percentage of the unamortized balance of For 2006, 2005 and 2004, respectively, the rate of amortization
VOBA at 2006 expected to be amortized for 2007 through 2012 expense decreased by $98 million, $46 million and $41 million.
by year is: 11.3 percent, 10.0 percent, 8.8 percent, 7.3 percent There were no impairments of DAC or VOBA for the years
and 6.0 percent, respectively, with 56.6 percent being amortized ended December 31, 2006, 2005 and 2004.
126 AIG 2006 Form 10-K

Life Insurance & Retirement Services premiums were5. Reinsurance
comprised of the following:
In the ordinary course of business, AIG’s General Insurance and
Years Ended December 31,Life Insurance companies place reinsurance with other insurance
(in millions) 2006 2005 2004
companies in order to provide greater diversification of AIG’s
Gross premiums $32,117 $30,717 $29,202business and limit the potential for losses arising from large
Ceded premiums (1,481) (1,317) (1,114)risks. In addition, AIG’s General Insurance subsidiaries assume
reinsurance from other insurance companies. Premiums $30,636 $29,400 $28,088
General Reinsurance: General reinsurance is effected under rein-
Life Insurance recoveries, which reduced death and other
surance treaties and by negotiation on individual risks. Certain of
benefits, approximated $806 million, $770 million and $779 mil-
these reinsurance arrangements consist of excess of loss
lion, respectively, for the years ended December 31, 2006, 2005
contracts which protect AIG against losses over stipulated
and 2004.
amounts. Ceded premiums are considered prepaid reinsurance
Life Insurance in force ceded to other insurancepremiums and are recognized as a reduction of premiums earned
companies was as follows:over the contract period in proportion to the protection received.
Amounts recoverable from general reinsurers are estimated in a
manner consistent with the claims liabilities associated with the (in millions) 2006 2005 2004
reinsurance and presented as a component of reinsurance
Life Insurance in force
assets. Assumed reinsurance premiums are earned primarily on a
ceded $408,970 $365,082 $344,036
pro-rata basis over the terms of the reinsurance contracts.
Life Insurance assumed represented 0.1 percent, 0.8 percentGeneral Insurance premiums written and earned were
and 0.7 percent of gross Life Insurance in force at December 31,comprised of the following:
2006, 2005 and 2004, respectively, and Life Insurance &
Retirement Services premiums assumed represented 0.1 percent,(in millions) 2006 2005 2004
0.3 percent and 2.5 percent of gross GAAP premiums for the
Premiums written: years ended December 31, 2006, 2005 and 2004, respectively.
Direct $ 49,609 $ 46,689 $ 44,692
Supplemental information for gross loss and benefitAssumed 6,671 6,036 7,354
reserves net of ceded reinsurance at December 31, 2006Ceded (11,414) (10,853) (11,423)
and 2005 follows:Total $ 44,866 $ 41,872 $ 40,623
As Net ofPremiums earned:
(in millions) Reported Reinsurance
Direct $ 47,973 $ 45,794 $ 43,109
2006Assumed 6,449 5,921 7,094
Reserve for losses and loss expenses $ (79,999) $ (62,630)Ceded (10,971) (10,906) (11,666)
Future policy benefits for life and
Total $ 43,451 $ 40,809 $ 38,537
accident and health insurance
contracts (122,230) (120,656)
For the years ended December 31, 2006, 2005 and 2004,
Reserve for unearned premiums (26,271) (22,759)
reinsurance recoveries, which reduced loss and loss expenses
Reinsurance assets 23,355 —
incurred, amounted to $8.3 billion, $20.7 billion and $12.1 bil-
2005lion, respectively.
Reserve for losses and loss expenses $ (77,169) $ (57,476)
Life Insurance: Life reinsurance is effected principally under yearly Future policy benefits for life and
renewable term treaties. The premiums with respect to these accident and health insurance
treaties are considered prepaid reinsurance premiums and are contracts (108,807) (107,420)
recognized as a reduction of premiums earned over the contract Reserve for unearned premiums (24,243) (21,174)
period in proportion to the protection provided. Amounts recover- Reinsurance assets 24,978 —
able from life reinsurers are estimated in a manner consistent
with the assumptions used for the underlying policy benefits and AIRCO acts primarily as an internal reinsurance company for
are presented as a component of reinsurance assets. AIG’s insurance operations. This facilitates insurance risk manage-
ment (retention, volatility, concentrations) and capital planning
locally (branch and subsidiary). It also allows AIG to pool its
insurance risks and purchase reinsurance more efficiently at a
consolidated level, manage global counterparty risk and relation-
ships and manage global life catastrophe risks.
AIG’s Domestic Life Insurance & Retirement Services opera-
tions utilize internal and third-party reinsurance relationships to
Form 10-K 2006 AIG 127

5. Reinsurance 6. Reserve for Losses and Loss Expenses and
Continued Future Life Policy Benefits and Policyholders’
Contract Depositsmanage insurance risks and to facilitate capital management
strategies. Pools of highly-rated third-party reinsurers are utilized The following analysis provides a reconciliation of the
to manage net amounts at risk in excess of retention limits. AIG’s activity in the reserve for losses and loss expenses:
Domestic Life Insurance companies also cede excess, non-
Years Ended December 31,economic reserves carried on a statutory-basis only on certain
(in millions) 2006 2005 2004
term and universal life insurance policies and certain fixed
At beginning of year:annuities to an offshore affiliate.
Reserve for losses andAIG generally obtains letters of credit in order to obtain
loss expenses $ 77,169 $ 61,878 $ 51,871statutory recognition of its intercompany reinsurance transactions.
Reinsurance recoverable (19,693) (14,624) (15,643)
For this purpose, AIG has a $2.5 billion syndicated letter of credit
Total 57,476 47,254 36,228facility outstanding as of December 31, 2006, all of which relates
to life intercompany reinsurance transactions. Foreign exchange effect 741 (628) 524
AIG is also a party to a 364-day bilateral revolving credit facility Acquisition(a)
55 — —
for an aggregate amount of $3.2 billion. The facility can be drawn Losses and loss expenses
in the form of letters of credit with terms of up to eight years. As incurred:
of December 31, 2006, approximately $2.69 billion principal Current year 27,805 28,426 26,793
amount of letters of credit are outstanding under this facility, of Prior years, other than
which approximately $1.3 billion relates to life intercompany accretion of discount (53) 4,680(b)
3,187(c)
reinsurance transactions. AIG has also obtained approximately Prior years, accretion of
$201 million of letters of credit on a bilateral basis. discount 300 (15) 377
Total 28,052 33,091 30,357Reinsurance Security: AIG’s third party reinsurance arrangements
do not relieve AIG from its direct obligation to its insureds. Thus, Losses and loss expenses
a credit exposure exists with respect to both general and life paid:
reinsurance ceded to the extent that any reinsurer fails to meet Current year 8,368 7,331 7,692
the obligations assumed under any reinsurance agreement. AIG Prior years 15,326 14,910 12,163
holds substantial collateral as security under related reinsurance Total 23,694 22,241 19,855
agreements in the form of funds, securities, and/or letters of
At end of year:credit. A provision has been recorded for estimated unrecoverable
Net reserve for losses and
reinsurance. AIG has been largely successful in prior recovery
loss expenses 62,630 57,476 47,254
efforts.
Reinsurance recoverable 17,369 19,693 14,624
AIG evaluates the financial condition of its reinsurers and
Total $ 79,999 $ 77,169 $ 61,878establishes limits per reinsurer through AIG’s Credit Risk Commit-
tee. AIG believes that no exposure to a single reinsurer repre- (a) Reflects the opening balance with respect to the acquisition of the
Central Insurance Co., Ltd. in the third quarter of 2006.sents an inappropriate concentration of risk to AIG, nor is AIG’s
business substantially dependent upon any single reinsurer. (b) Includes fourth quarter charge of $1.8 billion resulting from the annual
review of General Insurance loss and loss adjustment reserves.
(c) Includes fourth quarter charge of $850 million attributable to the
change in estimate for asbestos and environmental exposures.
The analysis of the future policy benefits and policyholders’
contract deposits liabilities follows:
(in millions) 2006 2005*
Future policy benefits:
Long duration contracts $121,364 $107,877
Short duration contracts 866 930
Total $122,230 $108,807
* 2005 amounts have been reclassified to conform to 2006 presentation.
128 AIG 2006 Form 10-K

including bonuses, 12.0 percent. Less than 1.0 percent of the6. 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
Years Ended December 31, range from zero percent to 20.0 percent grading to zero over a
(in millions) 2006 2005*
period of zero to 19 years.
Policyholders’ contract deposits: ( Domestically, guaranteed investment contracts (GICs) have
Annuities $144,599 $142,057 market value withdrawal provisions for any funds withdrawn
GICs 34,746 39,705 other than benefit responsive payments. Interest rates credited
Universal life products 22,632 18,682 generally range from 2.6 percent to 9.0 percent. The vast
Variable investment contracts 14,289 8,373 majority of these GICs mature within five years. Overseas,
Variable products 14,264 7,799 interest rates credited on GICs generally range from 1.2 per-
Corporate life products 2,083 2,077 cent to 5.2 percent and maturities range from one to
Other investment contracts 12,045 8,334 five years.
Total $244,658 $227,027 ( Interest rates on corporate life insurance products are guaran-
teed at 4.0 percent and the weighted average rate credited inLong duration contract liabilities included in future policy
2006 was 5.2 percent.benefits, as presented in the preceding table, result from life
( The universal life funds have credited interest rates ofproducts. Short duration contract liabilities are primarily accident
1.5 percent to 7.0 percent and guarantees ranging fromand health products. The liability for future life policy benefits has
1.5 percent to 5.5 percent depending on the year of issue.been established based upon the following assumptions:
Additionally, universal life funds are subject to surrender
( Interest rates (exclusive of immediate/terminal funding annui- charges that amount to 12.2 percent of the aggregate fund
ties), which vary by territory, year of issuance and products, balance grading to zero over a period not longer than 20 years.
range from 1.0 percent to 12.5 percent within the first ( For variable products and investment contracts, policy values
20 years. Interest rates on immediate/terminal funding annui- are expressed in terms of investment units. Each unit is linked
ties are at a maximum of 11.5 percent and grade to not to an asset portfolio. The value of a unit increases or
greater than 6.0 percent. decreases based on the value of the linked asset portfolio. The
( Mortality and surrender rates are based upon actual experience current liability at any time is the sum of the current unit value
by geographical area modified to allow for variations in policy of all investment units plus any liability for guaranteed
form. The weighted average lapse rate, including surrenders, minimum death or withdrawal benefits. A portion of these
for individual and group life approximated 7.4 percent. liabilities are classified in the Spread-Based Investment Busi-
( The portions of current and prior net income and of current ness for segment reporting purposes.
unrealized appreciation of investments that can inure to the Certain products are subject to experience adjustments. These
benefit of AIG are restricted in some cases by the insurance include group life and group medical products, credit life con-
contracts and by the local insurance regulations of the tracts, accident and health insurance contracts/riders attached to
countries in which the policies are in force. life policies and, to a limited extent, reinsurance agreements with
( Participating life business represented approximately 19 per- other direct insurers. Ultimate premiums from these contracts are
cent of the gross insurance in force at December 31, 2006 estimated and recognized as revenue, and the unearned portions
and 34 percent of gross GAAP premiums in 2006. The amount of the premiums recorded as liabilities. Experience adjustments
of annual dividends to be paid is determined locally by the vary according to the type of contract and the territory in which
boards of directors. Provisions for future dividend payments are the policy is in force and are subject to local regulatory guidance.
computed by jurisdiction, reflecting local regulations.
The liability for policyholders’ contract deposits has been
established based on the following assumptions:
( Interest rates credited on deferred annuities, which vary by
territory and year of issuance, range from 1.2 percent to,
Form 10-K 2006 AIG 129

Statutory capital of each company continued to exceed7. Statutory Financial Data
minimum company action level requirements following the adjust-
Statutory surplus and net income for General Insurance, ments, but AIG nonetheless contributed an additional $750 million
Life Insurance & Retirement Services operations in accor- of capital into American Home Assurance Company (American
dance with regulatory accounting practices were as Home) effective September 30, 2005 and contributed a further
follows: $2.25 billion of capital in February 2006 for a total of approxi-
mately $3 billion of capital into Domestic General InsuranceYears Ended December 31,
(in millions) 2006 2005 2004 subsidiaries effective December 31, 2005.
Statutory surplus(a)
:
8. Investment InformationGeneral Insurance $32,665 $24,508 $20,632
Life Insurance &
Retirement Services 35,058 30,739 28,609 Insurance Operations
Statutory net income(a)(b)
:
General Insurance(c)
8,010 1,713 3,028 (a) Statutory Deposits: Cash and securities with carrying
Life Insurance & values of $16.5 billion and $11.8 billion were deposited by AIG’s
Retirement Services(a)
5,088 4,762 4,474 insurance subsidiaries under requirements of regulatory authori-
ties as of December 31, 2006 and 2005, respectively.(a) Statutory surplus and net income with respect to foreign operations are
estimated as of November 30. The basis of presentation for branches
(b) Net Investment Income: An analysis of net investmentof AIA is the Hong Kong statutory filing basis. The basis of presentation
for branches of ALICO is the U.S. statutory filing basis. AIG Star Life, income follows:
AIG Edison Life, Nan Shan and Philamlife are estimated based on their
Years Ended December 31,respective local country filing basis.
(in millions) 2006 2005 2004
(b) Includes realized capital gains and losses and taxes.
Fixed maturities $19,078 $17,685 $15,884(c) Includes catastrophe losses, net of tax, of $1.9 billion and $660 mil-
lion in 2005 and 2004, respectively. Equity securities 1,693 1,730 621
Short-term investments 719 494 177
AIG’s insurance subsidiaries file financial statements prepared
Interest on mortgage,
in accordance with statutory accounting practices prescribed or policy and collateral
permitted by domestic and foreign insurance regulatory authori- loans 1,253 1,177 1,096
ties. The differences between statutory financial statements and Other invested assets 3,551 1,905 1,444
financial statements prepared in accordance with U.S. GAAP vary
between domestic and foreign by jurisdiction. The principal
Investment expenses 1,002 826 757
differences are that statutory financial statements do not reflect
Net investment income $25,292 $22,165 $18,465DAC, some bond portfolios may be carried at amortized cost,
assets and liabilities are presented net of reinsurance, policy-
holder liabilities are valued using more conservative assumptions
and certain assets are non-admitted.
130 AIG 2006 Form 10-K

8. Investment Information
Continued
(c) Realized Gains and Losses:
The realized capital gains (losses) and increase (decrease) in unrealized appreciation of AIG’s consolidated available
for sale investments were as follows:
(in millions) 2006 2005 2004
Realized capital gains (losses):
Fixed maturities*
$(1,069) $ (108) $ 178
Equity securities*
679 588 541
Other gains (losses) 496 (139) (675)
Realized capital gains (losses) $ 106 $ 341 $ 44
Increase (decrease) in unrealized appreciation of investments:
Fixed maturities $ (198) $(4,656) $1,436
Equity securities 432 850 445
Other investments 986 2,138 (283)
Capital Markets investments 1,354 (1,909) 270
Increase (decrease) in unrealized appreciation $ 2,574 $(3,577) $1,868
* Includes other-than-temporary impairments.
Net unrealized gains included in the Consolidated Income Statement from investment securities classified as trading securities for 2006,
2005 and 2004 were $938 million, $1.1 billion and $269 million, respectively.
The gross realized gains and gross realized losses on AIG’s consolidated available for sale securities were as follows:
2006 2005 2004
Gross Gross Gross Gross Gross Gross
Realized Realized Realized Realized Realized Realized
(in millions) Gains Losses Gains Losses Gains Losses
Fixed maturities $ 711 $ 1,780 $1,586 $1,694 $1,560 $1,382
Equity securities 1,111 454 930 409 774 379
Preferred stocks 22 — 101 34 173 27
Total $ 1,844 $ 2,234 $2,617 $2,137 $2,507 $1,788
(d) Fair Value of Investment Securities:
The amortized cost and estimated fair value of securities available for sale and held to maturity for the Insurance and
Asset Management segments at December 31, 2006 and December 31, 2005 follows:
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(in millions) Cost Gains Losses Value Cost Gains Losses Value
Available for sale:(a)(b)
U.S. government and government
sponsored entities $ 5,386 $ 106 $ 130 $ 5,362 $ 7,848 $ 124 $ 94 $ 7,878
States(b)(c)
59,785 1,056 210 60,631 49,116 853 315 49,654
Foreign governments 62,153 5,428 436 67,145 57,509 4,881 665 61,725
Corporate debt 249,839 6,519 2,627 253,731 235,139 7,770 2,650 240,259
Total bonds $377,163 $13,109 $3,403 $386,869 $349,612 $13,628 $3,724 $359,516
Equity securities 13,147 2,813 159 15,801 12,407 2,479 257 14,629
Total $390,310 $15,922 $3,562 $402,670 $362,019 $16,107 $3,981 $374,145
Held to maturity:(a)
Bonds — States(c)
$ 21,437 $ 731 $ 14 $ 22,154 $ 21,528 $ 552 $ 33 $ 22,047
(a) At December 31, 2006 and 2005, fixed maturities held by AIG that were below investment grade or not rated totaled $21.24 billion and $20.54 billion,
respectively.
(b) In 2006, excludes hybrid financial instruments with an estimated fair value of $522 million at December 31, 2006.
(c) Including municipalities and political subdivisions.
Form 10-K 2006 AIG 131

Continued
The following table presents the amortized cost and estimated fair values of fixed maturity securities available for sale
and held to maturity at December 31, 2006, 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
Estimated Estimated
Amortized Fair Amortized Fair
(in millions) Cost Value Cost Value
Due in one year or less $ 12,730 $ 12,925 $ 66 $ 68
Due after one year through five years 78,800 80,349 430 444
Due after five years through ten years 139,579 141,994 17,516 18,092
Due after ten years 146,054 151,601 3,425 3,550
Total available for sale* $377,163 $386,869 $ 21,437 $ 22,154
* Contractual maturities include mortgage backed securities with an amortized cost and estimated fair value of $48.2 billion and $48.1 billion,
respectively. Such securities have been allocated to the contractual maturities based on estimated future cash flows.
(e) Non-Income Producing Invested Assets: At December 31, 2006, non-income producing invested assets were insignificant.
(f) Gross Unrealized Losses and Estimated Fair Values on Investments:
The following table summarizes the gross unrealized losses and cost basis on securities available for sale, aggregated
by major investment category and length of time that individual securities have been in a continuous unrealized loss
position, at December 31, 2006 and 2005.
Less than 12 Months 12 Months or More Total
Unrealized Unrealized Unrealized
(in millions) Cost(a)
Losses Cost(a)
Losses Cost(a)
Losses
2006
Bonds(b)
$ 60,591 $1,197 $82,252 $2,206 $142,843 $3,403
Equity securities 2,734 159 — — 2,734 159
Total $ 63,325 $1,356 $82,252 $2,206 $145,577 $3,562
2005
Bonds(b)
$121,631 $2,715 $21,160 $1,009 $142,791 $3,724
Equity securities 3,894 246 97 11 3,991 257
Total $125,525 $2,961 $21,257 $1,020 $146,782 $3,981
(a) For bonds, represents amortized cost.
(b) Primarily relates to the corporate debt category.
132 AIG 2006 Form 10-K

Continued
As of December 31, 2006, AIG held 20,172 and 1,750 of invested assets on the consolidated balance sheet. These
individual bond and stock investments, respectively, that were in investments are monitored for impairment on a contract by
an unrealized loss position, of which 10,846 individual invest- contract basis quarterly. During 2006, income recognized on life
ments were in an unrealized loss position continuously for 12 settlement contracts previously held in non-consolidated trusts
months or more. was $38 million, and is included in net investment income on the
consolidated statement of income. Further information regarding
AIG recorded other-than-temporary impairment losses of ap-
life settlement contracts as of December 31, 2006 is as follows:
proximately $944 million, $598 million and $684 million in
(dollars in millions)
realized capital gains (losses) in 2006, 2005 and 2004, respec-
Remaining Life
tively. See Note 1(e) herein for AIG’s other-than-temporary impair- Expectancy Number of Carrying Face Value
ment accounting policy. of Insureds Contracts Value (Death Benefits)
0 – 1 year 4 $ 6 $ 8(g) Other Invested Assets: Other invested assets as of De-
1 – 2 years 23 10 15cember 31, 2006 were $42.1 billion, consisting primarily of hedge
2 – 3 years 61 58 88funds and limited partnerships. Approximately $5.3 billion relates
3 – 4 years 123 108 188to available for sale investments carried at fair value, with
4 – 5 years 135 79 170unrealized gains and losses recorded in a separate component of
Thereafter 1,453 829 3,197Other comprehensive income, net of deferred taxes, with almost
Total 1,799 $1,090 $3,666all of the remaining investments being accounted for on the equity
method of accounting. All of the investments are subject to
As of December 31, 2006, the anticipated life insuranceimpairment testing (see Note 1(e) herein). The gross unrealized
premiums required to keep the life settlement contracts in force,loss on the investments accounted for as available for sale as of
payable in the ensuing twelve months ending December 31, 2007December 31, 2006 was $167 million, the majority of which
and the four succeeding years ending December 31, 2011 arerepresents investments that have been in a continuous unrealized
$77 million, $81 million, $85 million, $86 million, and $87 mil-loss position for less than 12 months.
lion, respectively.
Other invested assets at December 31, 2006, also includes
Financial Servicesapproximately $1.8 billion of aircraft asset investments held by
non-financial services subsidiaries. (i) Economic Hedging of Securities Available for Sale:
AIGFP follows a policy of minimizing interest rate, currency,(h) Investments in Life Settlement Contracts: In June
commodity, and equity risks associated with securities available2006, AIG restructured its ownership of life settlement contracts
for sale by entering into internal offsetting positions, on a securitywith no effect on the economic substance of these investments.
by security basis within its derivatives portfolio, thereby offsettingAt the same time, AIG paid $610 million to its former co-investors
a significant portion of the unrealized appreciation and deprecia-to acquire all the remaining interests in life settlement contracts
tion. In addition, to reduce its credit risk, AIGFP has entered intoheld in previously non-consolidated trusts. The life insurers for a
credit derivative transactions with respect to $128 million ofsmall portion of these newly consolidated life settlement con-
securities available for sale to economically hedge its credit risk.tracts include AIG subsidiaries. As a result, amounts related to
As previously discussed, these economic offsets did not meet thelife insurance issued by AIG subsidiaries are eliminated in
hedge accounting requirements of FAS 133 and, therefore, areconsolidation.
recorded in Other income in the Consolidated Statement of
At December 31, 2006, the carrying value of AIG’s life Income.
settlement contracts was $1.1 billion, and is included in Other
Form 10-K 2006 AIG 133

Continued
(j) Fair Value of Fixed Maturities and Unrealized Appreciation of Investments — Capital Markets
The amortized cost and estimated fair value of Capital Markets securities available for sale at December 31, 2006 and
2005 were as follows:
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(in millions) Cost Gains Losses Value Cost Gains Losses Value
Securities available for sale:
Corporate and bank debt $40,194 $1,257 $265 $41,186 $30,690 $386 $783 $30,293
Foreign governments 706 33 1 738 825 5 31 799
Asset-backed and
collateralized 2,731 170 6 2,895 3,522 202 42 3,682
U.S. government and
government sponsored
entities 2,281 115 10 2,386 2,535 209 7 2,737
Total $45,912 $1,575 $282 $47,205 $37,572 $802 $863 $37,511
The amortized cost and estimated fair values of Capital Markets securities available for sale at December 31, 2006, by
contractual maturity, are shown below. 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.
Estimated
Amortized Fair
(in millions) Cost Value
Securities available for sale:
Due in one year or less $ 1,235 $ 1,336
Due after one year through ﬁve years 7,509 7,746
Due after ﬁve years through ten years 10,570 11,023
Due after ten years 23,867 24,204
Asset-backed and collateralized 2,731 2,896
Total securities available for sale $45,912 $47,205
The following table summarizes the gross unrealized losses and cost basis on Capital Markets securities available for
sale, aggregated by length of time that individual securities have been in a continuous unrealized loss position, at
December 31, 2006 and 2005.
12 Months or More TotalLess than 12 Months
Gross Gross Gross
Unrealized Unrealized Unrealized
(in millions) Cost Losses Cost Losses Cost Losses
2006
Securities available for sale $ 9,065 $ 60 $1,788 $222 $10,853 $282
2005
Securities available for sale $15,676 $713 $1,280 $150 $16,956 $863
134 AIG 2006 Form 10-K

Continued
(k) Finance Receivables:
Finance receivables, net of unearned finance charges, were as follows:
Real estate loans $20,321 $20,407
Non-real estate loans 4,506 3,831
Retail sales finance 3,092 2,522
Credit card loans 1,413 1,498
Other loans 978 407
Total finance receivables 30,310 28,665
Allowance for losses (737) (670)
Finance receivables, net $29,573 $27,995
9. Debt Outstanding
At December 31, 2006, AIG’s net borrowings were $17.13 billion after reflecting amounts not guaranteed by AIG,
amounts that were matched borrowings by AIG and AIGFP and liabilities connected to trust preferred stock. The
following table summarizes borrowings outstanding at December 31, 2006 and 2005:
AIG’s net borrowings $ 17,126 $ 10,425
Liabilities connected to trust preferred stock 1,440 1,391
AIG Matched Investment Program
matched notes and bonds payable 5,468 —
Series AIGFP matched notes and bonds payable 72 —
AIGFP:
GIAs 20,664 20,811
Matched notes and bonds payable 35,776 24,950
Hybrid financial instrument liabilities(a)
8,856 —
Borrowings not guaranteed by AIG(b)
59,277 52,272
Total debt(c)
$148,679 $109,849
(a) Represents structured notes issued by AIGFP that are accounted for under the fair value option.
(b) Includes commercial paper not guaranteed by AIG.
(c) Total debt in 2006 includes commercial paper of $12.15 billion and $3.25 billion of debt related to VIEs required to be consolidated under the
provisions of FIN 46R.
Form 10-K 2006 AIG 135

9. Debt Outstanding
Continued
Total debt at December 31, 2006 is shown below with year of payment due in each of the next five years and
thereafter.
(in millions) Total(a)
2007 2008 2009 2010 2011 Thereafter
AIG:
Notes and bonds payable $ 8,915 $ 165 $ 1,322 $ — $ 498 $ 420 $ 6,510
Loans and mortgages payable 841 744 — — — — 97
AIG Matched Investment Program matched notes
and bonds payable 5,468 — — 750 755 2,909 1,054
Series AIGFP matched notes and bonds payable 72 — — — — — 72
Total AIG(a)
15,296 909 1,322 750 1,253 3,329 7,733
AIGFP:
GIAs 20,664 6,962 2,145 953 920 478 9,206
Notes and bonds payable 37,528 15,835 5,139 3,475 323 8,145 4,611
Hybrid financial instrument liabilities(b)
8,856 2,082 1,288 392 1,687 566 2,841
Total AIGFP 67,048 24,879 8,572 4,820 2,930 9,189 16,658
AGC Notes and bonds payable 797 — — — 499 — 298
Liabilities connected to trust preferred stock 1,440 — — — — — 1,440
ILFC(c)
:
Notes and bonds payable 22,773 3,347 3,865 3,145 3,465 3,488 5,463
Export credit facility(d)
2,659 482 482 430 317 227 721
Bank financings 1,159 75 25 471 103 160 325
Total ILFC 26,591 3,904 4,372 4,046 3,885 3,875 6,509
AGF Notes and bonds payable(c)
19,595 4,415 2,512 2,279 2,711 2,797 4,881
AIGCFG Loans and mortgages payable(c)
1,453 358 450 645 — — —
Other subsidiaries(c)
1,065 205 55 126 15 — 664
Total $133,285 $34,670 $17,283 $12,666 $11,293 $19,190 $38,183
(a) Excludes $12.15 billion of commercial paper and $3.25 billion of debt related to VIEs required to be consolidated under the provisions of FIN 46R.
(b) Represents structured notes issued by AIGFP that are accounted for under the fair value option.
(c) AIG does not guarantee these borrowings.
(d) Reflects future minimum payment for ILFC’s borrowing under the Export Credit Facility.
136 AIG 2006 Form 10-K

In 2006, AIG issued in Rule 144A/Regulation S offerings9. Debt Outstanding
$3 billion principal amount of senior notes, of which $1.0 billionContinued
was exchanged by AIG for substantially identical notes that are
registered under the Securities Act of 1933 (Securities Act). The
At December 31, 2006, long-term borrowings were $98.68
proceeds from the sale of $2.25 billion of these notes were used
billion and short-term borrowings were $34.6 billion, excluding
for AIG’s general corporate purposes and $750 million were used
$3.25 billion with respect to VIE debt required to be consolidated
to fund the MIP.
under the provisions of FIN 46R. Long-term borrowings exclude
In November 2006, AIG filed a shelf registration statement in
that portion of long-term debt maturing in less than one year.
Japan, providing for the issuance of up to Japanese Yen
(a) Commercial Paper: 300 billion principal amount of senior notes in the aggregate. In
December 2006, AIG issued the equivalent of $429 million under
At December 31, 2006, the commercial paper issued and
this shelf registration statement, the proceeds of which were used
outstanding was as follows:
for AIG’s general corporate purposes.
Unamortized Weighted Weighted
(ii) Notes and bonds issued by SunAmerica Inc. (SAI): As ofNet Discount Average Average
(dollars in Book and Accrued Face Interest Maturity December 31, 2006, notes and bonds originally issued by SAI
millions) Value Interest Amount Rate in Days
aggregating $435 million (net of unamortized discount of
ILFC $ 2,747 $11 $ 2,758 5.30% 28 $40 million) were outstanding with maturity dates from 2007 to
AGF 4,328 14 4,342 5.30 24 2097 at interest rates ranging from 5.60 percent to 9.95 percent.
AIG Funding 4,821 18 4,839 5.28 28
(iii) Redemption of Zero Coupon Convertible Senior Debentures:AIGCC —
On November 9, 2006, AIG redeemed all of its outstanding ZeroTaiwan(a)
227 1 228 2.32 48
Coupon Convertible Senior Debentures initially issued in 2001 forAIGF —
an aggregate redemption price of $1.07 billion.Taiwan(a)
26 — 26 2.00 83
Total(b)
$12,149 $44 $12,193 — — (c) AIGFP Borrowings:
(a) Issued in Taiwan N.T. dollars at prevailing local interest rates.
(i) Borrowings under Obligations of Guaranteed Investment
(b) Excludes $880 million of VIE commercial paper required to be
Agreements: Borrowings under obligations of guaranteed
consolidated under the provisions of FIN 46R.
investment agreements (GIAs), which are guaranteed by AIG, are
At December 31, 2006, AIG did not guarantee the commercial recorded at the amount outstanding under each contract.
paper of any of its subsidiaries other than AIG Funding. Obligations may be called at various times prior to maturity at the
option of the counterparty. Interest rates on these borrowings are
(b) AIG Borrowings:
primarily fixed, vary by maturity, and range up to 9.8 percent.
(i) Notes and bonds issued by AIG: In October 2006, AIG Funds received from GIA borrowings are invested in a
established a medium term note program under its shelf diversified portfolio of securities and derivative transactions. At
registration statement providing for the issuance of up to December 31, 2006, the fair value of securities pledged as
$25.1 billion of AIG debt securities. The proceeds from the collateral with respect to these obligations approximated
issuance of these debt securities may be used (i) by AIG (ii) by $7.4 billion.
AIGFP as it would use the proceeds from its own borrowings as
(ii) Notes and Bonds issued by AIGFP:
discussed below or (iii) to fund the Matched Investment Program
(MIP). As of December 31, 2006, $1.8 billion principal amount of At December 31, 2006, AIGFP’s notes and bonds
notes were outstanding under the medium term note program, of outstanding, the proceeds of which are invested in a
which (i) $749 million was used for AIG’s general corporate diversified portfolio of securities and derivative
purposes, (ii) $72 million was used by AIGFP and (iii) $1.0 billion transactions, were as follows:
was used to fund the MIP. The maturity dates of these notes
Range of U.S. Dollar
range from 2011 to 2046. To the extent deemed appropriate, AIG Maturities Range of Carrying
(dollars in millions) Currency Interest Rates Valuemay enter into swap transactions to manage its effective
borrowing rate with respect to these notes. 2007-2046 U.S. dollar 0.18 - 8.60% $ 34,788
As of December 31, 2006, the equivalent of $5.7 billion of 2007-2011 United Kingdom pound 4.68 - 5.31 4,285
notes were outstanding under AIG’s Euro medium term note 2007-2024 Euro 0.29 - 9.25 3,312
program, of which the proceeds from $3.7 billion of notes were 2008-2011 New Zealand dollar 6.30 - 8.35 1,395
used to fund the MIP and the remainder was used for AIG’s 2007-2036 Japanese Yen 0.01 - 7.00 1,533
general corporate purposes. AIG has hedged the currency 2007-2015 Australian dollar 1.14 - 4.89 392
exposure arising from foreign currency denominated notes by 2007-2024 Swiss francs 0.25 - 1.38 600
2007-2015 Other 2.53 - 3.72 79economically hedging that exposure, although such hedges did not
qualify for hedge accounting treatment under FAS 133. Total $ 46,384
Form 10-K 2006 AIG 137

Commission (SEC) allowing ILFC immediate access to the U.S.9. Debt Outstanding
public debt markets. During 2006, $1.9 billion of debt securitiesContinued
were issued under this registration statement and $3.52 billion
AIGFP economically hedges its notes and bonds. AIG
were issued under a prior registration statement. In addition, ILFC
guarantees all of AIGFP’s debt.
has a Euro medium term note program for $7.0 billion, under
(iii) Hybrid financial instrument liabilities: AIGFP’s notes and bonds which $4.28 billion in notes were sold through December 31,
include structured debt instruments whose payment terms are 2006. The foreign exchange adjustment for the foreign currency
linked to one or more financial or other indices (such as an equity denominated debt was $733 million at December 31, 2006 and
index or commodity index or another measure that is not $197 million at December 31, 2005. ILFC has substantially
considered to be clearly and closely related to the debt eliminated the currency exposure arising from foreign currency
instrument). These notes contain embedded derivatives that denominated notes by economically hedging the portion of the
otherwise would be required to be accounted for separately under note exposure not already offset by Euro-denominated operating
FAS 133. Upon AIG’s early adoption of FAS 155, AIGFP elected lease payments, although such hedges did not qualify for hedge
the fair value option for these notes. The notes that are accounting treatment under FAS 133.
accounted for using the fair value option are reported separately In December 2005, ILFC issued two tranches of junior
under hybrid financial instrument liabilities at fair value. subordinated debt totaling $1.0 billion to underlie trust preferred
securities issued by a trust sponsored by ILFC. Both tranches
(d) AGC Borrowings: As of December 31, 2006, AGC notes
mature on December 21, 2065, but each tranche has a different
aggregating $797 million were outstanding with maturity dates
call option. The $600 million tranche has a call date of
ranging from 2010 to 2029 at interest rates of up to
December 21, 2010 and the $400 million tranche has a call date
7.50 percent. AIG guarantees the notes and bonds of AGC.
of December 21, 2015. The note with the 2010 call date has a
fixed interest rate of 5.90 percent for the first five years. The note(e) Liabilities Connected to Trust Preferred Stock: AGC
with the 2015 call date has a fixed interest rate of 6.25 percentissued Junior Subordinated Debentures (liabilities) to certain
for the first ten years. Both tranches have interest ratetrusts established by AGC, which represent the sole assets of the
adjustments if the call option is not exercised. The new interesttrusts. The trusts have no independent operations. The trusts
rate is a floating quarterly reset rate based on the initial creditissued mandatory redeemable preferred stock to investors. The
spread plus the highest of (i) 3 month LIBOR, (ii) 10-year constantinterest terms and payment dates of the liabilities correspond to
maturity treasury and (iii) 30-year constant maturity treasury.those of the preferred stock. AGC’s obligations with respect to the
liabilities and related agreements, when taken together, constitute
(ii) Export credit facility: ILFC had a $4.3 billion Export Credit
a full and unconditional guarantee by AGC of payments due on the
Facility (ECA) for use in connection with the purchase of
preferred securities. AIG guarantees the obligations of AGC with
approximately 75 aircraft delivered through 2001. This facility was
respect to these liabilities and related agreements. The liabilities
guaranteed by various European Export Credit Agencies. The
are redeemable, under certain conditions, at the option of AGC on
interest rate varies from 5.75 percent to 5.90 percent on these
a proportionate basis.
amortizing ten-year borrowings depending on the delivery date of
As of December 31, 2006, the preferred stock outstanding
the aircraft. At December 31, 2006, ILFC had $1.0 billion
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 $2.64 billion for Airbus aircraft to be
preferred stock issued by American General Institutional Capital A
delivered through May 31, 2005. The facility was subsequently
in December 1996.
increased to $3.64 billion and extended to include aircraft to be
delivered through May 31, 2007. The facility becomes available(f) ILFC Borrowings:
as the various European Export Credit Agencies provide their
(i) Notes and Bonds issued by ILFC: As of December 31, 2006,
guarantees for aircraft based on a six-month forward-looking
notes aggregating $22.8 billion were outstanding, consisting of
calendar, and the interest rate is determined through a bid
$12.8 billion of term notes, $9.0 billion of medium-term notes
process. At December 31, 2006, ILFC had $1.7 billion
with maturities ranging from 2007 to 2013 and interest rates
outstanding under this facility.
ranging from 3.32 percent to 6.62 percent and $1.0 billion of
(iii) Bank Financings: From time to time, ILFC enters into variousjunior subordinated debt as discussed below. Notes aggregating
bank financings. As of December 31, 2006, the total funded$5.1 billion are at floating interest rates and the remainder are at
amount was $1.2 billion. The financings mature through 2012.fixed rates. To the extent deemed appropriate, ILFC may enter into
AIG does not guarantee any of the debt obligations of ILFC.swap transactions to manage its effective borrowing rates with
respect to these notes.
(g) AGF Borrowings: As of December 31, 2006, notes and
As a well-known seasoned issuer, ILFC has filed an automatic
bonds aggregating $19.59 billion were outstanding with maturity
shelf registration statement with the Securities and Exchange
dates ranging from 2007 to 2031 at interest rates ranging from
138 AIG 2006 Form 10-K

(h) Other Notes, Bonds, Loans and Mortgages Payable at9. Debt Outstanding
December 31, 2006, consisted of the following:Continued
1.94 percent to 8.45 percent. To the extent deemed appropriate, Uncollateralized Collateralized
Notes/Bonds/Loans Loans andAGF may enter into swap transactions to manage its effective
(in millions) Payable Mortgages Payable
borrowing rates with respect to these notes.
AIGCFG $1,453 $ —As a well-known seasoned issuer, AGF has ﬁled an automatic
AIG 841 —shelf registration statement with the SEC allowing AGF immediate
Other subsidiaries 774 291
access to the U.S. public debt markets. At December 31, 2006,
Total $3,068 $291
AGF had the corporate authority to issue up to $13.4 billion of
debt securities registered under the Securities Act using AGF’s
(i) Revolving Credit Facilities of AIG, ILFC and AGF: AIG,
effective shelf registration statements.
ILFC and AGF maintain the following committed, unsecured
AGF uses the proceeds from the issuance of notes and bonds
revolving credit facilities in order to support their respective
for the funding of its ﬁnance receivables. AIG does not guarantee
commercial paper programs and for general corporate purposes.
any of the debt obligations of AGF.
AIG, ILFC and AGF each expects to replace or extend these credit
facilities on or prior to their expiration. Some of the facilities, as
noted below, contain a ‘‘term-out option’’ allowing for the
conversion by the borrower of any outstanding loans at expiration
into one-year term loans.
One-Year
Available Amount Term-
December 31, Out
(in millions) Size Borrower(s) 2006 Expiration Option
Facility:
AIG:
364-Day Syndicated Facility $ 1,625 AIG $ 1,625 July 2007 Yes
AIG Funding(a)
5-Year Syndicated Facility 1,625 AIG 1,625 July 2011 No
AIG Funding(a)
364-Day Bilateral Facility 3,200 AIG 505(b)
November 2007 Yes
AIG Funding
364-Day Intercompany Facility(c)
2,000 AIG 2,000 October 2007 Yes
Total AIG 8,450 5,755
ILFC:
Total ILFC 6,500 6,500
AGF:
364-Day Syndicated Facility 2,125 American General 2,125 July 2007 Yes
Finance Corporation
American General
Finance, Inc.(d)
5-Year Syndicated Facility 2,125 American General 2,125 July 2010 No
Finance Corporation
Total AGF $ 4,250 $ 4,250
(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.
Form 10-K 2006 AIG 139

9. Debt Outstanding
Continued
(j) Interest Expense for All Indebtedness: Total interest 11. Shareholders’ Equity and Earnings Per
expense for all indebtedness, net of capitalized interest, aggre- Share
gated $6.95 billion in 2006, $5.7 billion in 2005 and $4.4 billion
Shareholders’ Equityin 2004. Capitalized interest was $59 million in 2006, $64 million
in 2005 and $59 million in 2004. Cash distributions on the AIG parent depends on its subsidiaries for cash ﬂow in the form
preferred shareholders’ equity in subsidiary companies of ILFC of loans, advances, reimbursement for shared expenses, and
and liabilities connected to trust preferred stock of AGC subsidiar- dividends. AIG’s insurance subsidiaries are subject to regulatory
ies are accounted for as interest expense in the consolidated restrictions on the amount of dividends which can be remitted to
statement of income. The cash distributions for ILFC were AIG parent. These restrictions vary by state. For example, unless
approximately $5 million, $5 million and $4 million for the years permitted by the New York Superintendent of Insurance, general
ended December 31, 2006, 2005 and 2004, respectively. The insurance companies domiciled in New York may not pay dividends
cash distributions for AGC subsidiaries were approximately to shareholders which in any twelve month period exceed the
$107 million, $112 million and $123 million for the years ended lesser of ten percent of the company’s statutory policyholders’
December 31, 2006, 2005 and 2004, respectively. surplus or 100 percent of its ‘‘adjusted net investment income,’’
as deﬁned. Generally, less severe restrictions applicable to both
10. Preferred Shareholders’ Equity in Subsidiary General and Life Insurance companies exist in most of the other
Companies states in which AIG’s insurance subsidiaries are domiciled.
Certain foreign jurisdictions have restrictions which could delay or
As of December 31, 2006, preferred shareholders’ equity in
limit the remittance of dividends. There are also various local
subsidiary companies represents preferred stocks issued by ILFC,
restrictions limiting cash loans and advances to AIG by its
a wholly owned subsidiary of AIG.
subsidiaries. Largely as a result of the restrictions, approximately
At December 31, 2006, the preferred stock consists of 1,000
90 percent of consolidated shareholders’ equity was restricted
shares of market auction preferred stock (MAPS) in two series
from immediate transfer to AIG parent at December 31, 2006.
(Series A and B) of 500 shares each. Each of the MAPS shares
At December 31, 2006, there were 6,000,000 shares of AIG’s
has a liquidation value of $100,000 per share and is not
$5 par value serial preferred stock authorized, issuable in series,
convertible. The dividend rate, other than the initial rate, for each
none of which were outstanding.
dividend period for each series is reset approximately every seven
weeks (49 days) on the basis of orders placed in an auction.
During 2006, ILFC extended each of the MAPS dividend periods
for three years. At December 31, 2006, the dividend rate for
Series A MAPS was 4.70 percent and the dividend rate for
Series B MAPS was 5.59 percent.
140 AIG 2006 Form 10-K

11. Shareholders’ Equity and Earnings Per Share
Continued
Earnings Per Share
Basic earnings per share are based on the weighted average number of common shares outstanding, retroactively adjusted to reflect all
stock dividends and stock splits. Diluted earnings per share are based on those shares used in basic earnings per share plus shares
that would have been outstanding assuming issuance of common shares for all dilutive potential common shares outstanding,
retroactively adjusted to reflect all stock dividends and stock splits.
The computation of earnings per share for December 31, 2006, 2005 and 2004 was as follows:
(in millions, except per share data) 2006 2005 2004
Numerator for earnings per share:
Income before cumulative effect of accounting changes $14,014 $10,477 $9,983
Cumulative effect of accounting changes, net of tax 34 — (144)
Net income applicable to common stock for basic EPS $14,048 $10,477 $9,839
Interest on contingently convertible bonds, net of tax(a)
10 11 11
Net income applicable to common stock for diluted EPS $14,058 $10,488 $9,850
Cumulative effect of accounting changes, net of tax (34) — 144
Income before cumulative effect of accounting changes applicable to common stock for diluted EPS $14,024 $10,488 $9,994
Denominator for earnings per share:
Weighted-average shares outstanding used in the computation of EPS:
Common stock issued 2,751 2,751 2,751
Common stock in treasury (153) (155) (146)
Deferred shares 10 1 1
Weighted-average shares outstanding — basic 2,608 2,597 2,606
Incremental shares from potential common stock:
Weighted-average number of shares arising from outstanding employee stock plans (treasury stock
method)(b)
7 21 22
Contingently convertible bonds(a)
8 9 9
Weighted-adjusted average shares outstanding — diluted(b)
2,623 2,627 2,637
Earnings per share:
Basic:
Net income $ 5.39 $ 4.03 $ 3.77
Diluted:
Net income $ 5.36 $ 3.99 $ 3.73
(a) Assumes conversion of contingently convertible bonds due to the adoption of EITF Issue No. 04-8 ‘‘Accounting Issues Related to Certain Features of
Contingently Convertible Debt and the Effect on Diluted Earnings per Share.’’
(b) Certain shares arising from employee stock plans were not included in the computation of diluted earnings per share where the exercise price of the
options exceeded the average market price and would have been antidilutive. The number of shares excluded were 13 million, 19 million and 7 million
for 2006, 2005 and 2004, respectively.
12. Commitments, Contingencies and Guarantees
In the normal course of business, various commitments and damages, in the normal course of their business. In AIG’s
contingent liabilities are entered into by AIG and certain of its insurance operations, litigation arising from claims settlement
subsidiaries. In addition, AIG guarantees various obligations of activities is generally considered in the establishment of AIG’s
certain subsidiaries. reserve for losses and loss expenses. However, in certain
circumstances, AIG provides disclosure because of the size or
(a) Litigation and Investigations
nature of the potential liability to AIG. The potential for increasing
Litigation Arising from Operations. AIG and its subsidiaries, in
jury awards and settlements makes it difficult to assess the
common with the insurance and financial services industries in
ultimate outcome of such litigation.
general, are subject to litigation, including claims for punitive
Form 10-K 2006 AIG 141

plaintiffs’ claims, it cannot currently estimate the likelihood of12. Commitments, Contingencies and
prevailing in this action or reasonably estimate the likely dam-Guarantees
ages, if any.Continued
2006 Regulatory Settlements. In February 2006, AIG reached
Litigation Arising from Insurance Operations — Caremark. AIG
a resolution of claims and matters under investigation with the
and certain of its subsidiaries have been named defendants in
United States Department of Justice (DOJ), SEC, the Office of the
two putative class actions in state court in Alabama that arise out
New York Attorney General (NYAG) and the New York State
of the 1999 settlement of class and derivative litigation involving
Department of Insurance (DOI). AIG recorded an after-tax charge
Caremark Rx, Inc. (Caremark). An excess policy issued by a
of $1.15 billion relating to these settlements in the fourth quarter
subsidiary of AIG with respect to the 1999 litigation was expressly
of 2005.
stated to be without limit of liability. In the current actions,
The settlements resolved investigations conducted by the SEC,
plaintiffs allege that the judge approving the 1999 settlement was
NYAG and DOI in connection with the accounting, financial
misled as to the extent of available insurance coverage and would
reporting and insurance brokerage practices of AIG and its
not have approved the settlement had he known of the existence
subsidiaries, as well as claims relating to the underpayment of
and/or unlimited nature of the excess policy. They further allege
certain workers compensation premium taxes and other assess-
that AIG, its subsidiaries, and Caremark are liable for fraud and
ments. These settlements did not, however, resolve investigations
suppression for misrepresenting and/or concealing the nature and
by regulators from other states into insurance brokerage practices
extent of coverage. In their complaint, plaintiffs request compen-
related to contingent commissions and other broker-related con-
satory damages for the 1999 class in the amount of $3.2 billion,
duct, such as alleged bid rigging. Nor did the settlements resolve
plus punitive damages. AIG and its subsidiaries deny the
any obligations that AIG may have to state guarantee funds in
allegations of fraud and suppression and have asserted, inter
connection with any of these matters.
alia, that information concerning the excess policy was publicly
As a result of these settlements, AIG made payments or
disclosed months prior to the approval of the settlement. AIG and
placed amounts in escrow in 2006 totaling approximately
its subsidiaries further assert that the current claims are barred
$1.64 billion, $225 million of which represented fines and
by the statute of limitations and that plaintiffs’ assertions that
penalties. Amounts held in escrow totaling $699 million, including
the statute was tolled cannot stand against the public disclosure
interest thereon, are included in other assets at December 31,
of the excess coverage. Plaintiffs, in turn, have asserted that the
2006. At that date, approximately $314 million of the funds were
disclosure was insufficient to inform them of the nature of the
escrowed for settlement of claims resulting from the underpay-
coverage and did not start the running of the statute of
ment by AIG of its residual market assessments for workers
limitations. The trial court is currently considering, under stan-
compensation. The National Workers Compensation Reinsurance
dards mandated by the Alabama Supreme Court, whether a class
Pool on behalf of its participant members and various states have
action can be certified. AIG cannot reasonably estimate either the
communicated to AIG that they may assert claims with respect to
likelihood of its prevailing in these actions or the potential
the underpayment of such assessments. AIG cannot currently
damages in the event liability is determined.
estimate whether the amount ultimately required to settle these
Litigation Arising from Insurance Operations — Gunderson. A
claims will exceed the funds escrowed for this purpose.
subsidiary of AIG has been named as a defendant in a putative
The remaining escrowed funds, which amounted to $385 at
class action lawsuit in the 14th Judicial District Court for the
December 31, 2006, are set aside for settlements with certain
State of Louisiana. The Gunderson complaint alleges failure to
AIG policyholders specified in the settlements who claimed to
comply with certain provisions of the Louisiana Any Willing
have been harmed by AIG’s insurance brokerage practices. Any
Provider Act (the Act) relating to discounts taken by defendants on
funds remaining at the end of the escrow period will be used to
bills submitted by Louisiana medical providers and hospitals that
resolve claims asserted by policyholders relating to such insur-
provided treatment or services to workers compensation claim-
ance brokerage practices, including those described in Private
ants and seeks monetary penalties and injunctive relief. On
Litigation below.
July 20, 2006, the court denied defendants’ motion for summary
In addition to the escrowed funds, the $800 million was
judgment and granted plaintiffs’ partial motion for summary
deposited into a fund under the supervision of the SEC as part of
judgment, holding that the AIG subsidiary was a ‘‘group pur-
the settlements to be available to resolve claims asserted against
chaser’’ and, therefore, potentially subject to liability under the
AIG by investors including, the shareholder lawsuits described
Act. On November 28, 2006, the court issued an order certifying
herein.
a class of providers and hospitals. In an unrelated action also
At the current time, AIG cannot predict the outcome of the
arising under the Act, a Louisiana appellate court ruled that the
matters described above, or estimate any potential additional cost
district court lacked jurisdiction to adjudicate the claims at issue.
related to these matters.
In response, defendants in Gunderson filed an exception for lack
Also, as part of the settlements, AIG has agreed to retain, for
of subject matter jurisdiction. On January 19, 2007, the court
a period of three years, an independent consultant who will
denied the motion, holding that it has jurisdiction over the putative
conduct a review that will include, among other things, the
class claims. The AIG subsidiary is appealing the class certifica-
adequacy of AIG’s internal control over financial reporting, the
tion ruling and intends to seek an appeal from the jurisdictional
policies, procedures and effectiveness of AIG’s regulatory, compli-
ruling. While AIG believes that it has meritorious defenses to
142 AIG 2006 Form 10-K

Derivative Actions — Southern District of New York. Between12. Commitments, Contingencies and
October 25, 2004 and July 14, 2005, seven separate derivativeGuarantees
actions were filed in the Southern District of New York, five ofContinued
which were consolidated into a single action. The New York
ance and legal functions and the remediation plan that AIG has
derivative complaint contains nearly the same types of allegations
implemented as a result of its own internal review.
made in the securities fraud and ERISA actions described above.
The named defendants include current and former officers and
Private Litigation
directors of AIG, as well as Marsh & McLennan Companies, Inc.
Securities Actions. Beginning in October 2004, a number of
(Marsh), SICO, Starr, ACE Limited and subsidiaries (ACE), General
putative securities fraud class action suits were filed against AIG
Reinsurance Corporation, PwC, and certain employees or officers
and consolidated as In re American International Group, Inc.
of these entity defendants. Plaintiffs assert claims for breach of
Securities Litigation. Subsequently, a separate, though similar,
fiduciary duty, gross mismanagement, waste of corporate assets,
securities fraud action was also brought against AIG by certain
unjust enrichment, insider selling, auditor breach of contract,
Florida pension funds. The lead plaintiff in the class action is a
auditor professional negligence and disgorgement from AIG’s
group of public retirement systems and pension funds benefiting
former Chief Executive Officer and Chief Financial Officer of
Ohio state employees, suing on behalf of themselves and all
incentive-based compensation and AIG share proceeds under
purchasers of AIG’s publicly traded securities between Octo-
Section 304 of the Sarbanes-Oxley Act, among others. Plaintiffs
ber 28, 1999 and April 1, 2005. The named defendants are AIG
seek, among other things, compensatory damages, corporate
and a number of present and former AIG officers and directors, as
governance reforms, and a voiding of the election of certain AIG
well as Starr, SICO, General Reinsurance Corporation, and
directors. AIG’s Board of Directors has appointed a special
PricewaterhouseCoopers LLP (PwC), among others. The lead
committee of independent directors (special committee) to review
plaintiff alleges, among other things, that AIG: (1) concealed that
the matters asserted in the operative consolidated derivative
it engaged in anti-competitive conduct through alleged payment of
complaint. The court has approved agreements staying the
contingent commissions to brokers and participation in illegal bid-
derivative case pending in the Southern District of New York while
rigging; (2) concealed that it used ‘‘income smoothing’’ products
the special committee performs its work. The current stay extends
and other techniques to inflate its earnings; (3) concealed that it
until March 14, 2007.
marketed and sold ‘‘income smoothing’’ insurance products to
Derivative Actions — Delaware Chancery Court. From October
other companies; and (4) misled investors about the scope of
2004 to April 2005, AIG shareholders filed five derivative
government investigations. In addition, the lead plaintiff alleges
complaints in the Delaware Chancery Court. All of these derivative
that AIG’s former Chief Executive Officer manipulated AIG’s stock
lawsuits have been consolidated into a single action. The
price. The lead plaintiff asserts claims for violations of Sec-
amended consolidated complaint names 43 defendants (not
tions 11 and 15 of the Securities Act, Section 10(b) of the
including nominal defendant AIG) who, like the New York consoli-
Exchange Act, and Rule 10b-5 promulgated thereunder, Sec-
dated derivative litigation, are current and former officers and
tion 20(a) of the Exchange Act, and Section 20A of the Exchange
directors of AIG, as well as other entities and certain of their
Act. In April 2006, the court denied the defendants’ motions to
current and former employees and directors. The factual allega-
dismiss the second amended class action complaint and the
tions, legal claims and relief sought in Delaware action are similar
Florida complaint. In December 2006, a third amended class
to those alleged in the New York derivative actions, except that
action complaint was filed, which does not differ substantially
plaintiffs in the Delaware derivative action assert claims only
from the prior complaint. Fact and class discovery is currently
under state law. The court has approved agreements staying the
ongoing.
derivative case pending in the Delaware Chancery Court while the
ERISA Action. Between November 30, 2004 and July 1, 2005,
special committee performs its work. The current stay extends
several ERISA actions were filed on behalf of purported class of
until March 14, 2007.
participants and beneficiaries of three pension plans sponsored
An additional derivative lawsuit was filed in the Delaware
by AIG or its subsidiaries. A consolidated complaint filed on
Chancery Court in December 2002 against twenty directors and
September 26, 2005 alleges a class period between Septem-
executives of AIG as well as against AIG as a nominal defendant,
ber 30, 2000 and May 31, 2005 and names as defendants AIG,
alleges, among other things, that the directors of AIG breached
the members of AIG’s Retirement Board and the Administrative
the fiduciary duties of loyalty and care by approving the payment
Boards of the plans at issue, and four present or former members
of commissions to Starr and of rental and service fees to SICO
of AIG’s Board of Directors. The factual allegations in the
and the executives breached their duty of loyalty by causing AIG to
complaint are essentially identical to those in the securities
enter into contracts with Starr and SICO and their fiduciary duties
actions described above. Plaintiffs allege that defendants violated
by usurping AIG’s corporate opportunity. The complaint further
duties under ERISA by allowing the plans to offer AIG stock as a
alleges that the Starr agencies did not provide any services that
permitted investment, when defendants allegedly knew it was not
AIG was not capable of providing itself, and that the diversion of
a prudent investment, and by failing to provide participants with
commissions to these entities was solely for the benefit of Starr’s
accurate information about AIG stock. AIG’s motion to dismiss
owners. The complaint also alleged that the service fees and
was denied by order dated December 12, 2006. Discovery will be
rental payments made to SICO and its subsidiaries were improper.
consolidated with proceedings in the securities actions.
Form 10-K 2006 AIG 143

that the defendants violated the Sherman Antitrust Act, RICO, the12. Commitments, Contingencies and
antitrust laws of 48 states and the District of Columbia, and areGuarantees
liable under common law breach of fiduciary duty and unjustContinued
enrichment theories. Plaintiffs seek treble damages plus interest
Under the terms of a stipulation approved by the Court on
and attorneys’ fees as a result of the alleged RICO and Sherman
February 16, 2006, the claims against the outside independent
Act violations.
directors were dismissed with prejudice, while the claims against
The plaintiffs in the Employee Benefits Complaint are nine
the other directors were dismissed without prejudice. On Octo-
individual employees and corporate and municipal employers
ber 31, 2005, Messrs. Greenberg, Matthews and Smith, SICO and
alleging claims on behalf of two separate nationwide purported
Starr filed motions to dismiss the amended complaint. In an
classes: an employee class and an employer class that acquired
opinion dated June 21, 2006, the Court denied defendants’
insurance products from the defendants from August 26, 1994 to
motion to dismiss, except with respect to plaintiff’s challenge to
the date of any class certification. The Employee Benefits
payments made to Starr before January 1, 2000. On July 21,
Complaint names AIG, as well as eleven brokers and five other
2006, plaintiff filed its second amended complaint, which alleges
insurers, as defendants. The activities alleged in the Employee
that, between January 1, 2000 and May 31, 2005, individual
Benefits Complaint, with certain exceptions, track the allegations
defendants breached their duty of loyalty by causing AIG to enter
of contingent commissions, bid-rigging and tying made in the
into contracts with Starr and SICO and breached their fiduciary
Commercial Complaint.
duties by usurping AIG’s corporate opportunity. Starr is charged
On October 3, 2006, Judge Hochberg of the District of New
with aiding and abetting breaches of fiduciary duty and unjust
Jersey reserved in part and denied in part motions filed by the
enrichment for its acceptance of the fees. SICO is no longer
insurer defendants and broker defendants to dismiss the multi-
named as a defendant. Discovery is currently ongoing.
district litigation. The Court also ordered the plaintiffs in both
Policyholder Actions. After the NYAG filed its complaint against
actions to file supplemental statements of particularity to elabo-
insurance broker Marsh, policyholders brought multiple federal
rate on the allegations in their complaints. Plaintiffs filed their
antitrust and Racketeer Influenced and Corrupt Organizations Act
supplemental statements on October 25, 2006, and the AIG
(RICO) class actions in jurisdictions across the nation against
defendants, along with other insurer and broker defendants in the
insurers and brokers, including AIG and a number of its subsidiar-
two consolidated actions, filed renewed motions to dismiss on
ies, alleging that the insurers and brokers engaged in a broad
November 30, 2006. Briefing has been completed on the renewed
conspiracy to allocate customers, steer business, and rig bids.
motions to dismiss, as well as plaintiffs’ motion for class
These actions, including 18 complaints filed in different federal
certification in both cases. On February 16, 2007, Chief Judge
courts naming AIG or an AIG subsidiary as a defendant, were
Brown of the District of New Jersey transferred the multi-district
consolidated by the judicial panel on multi-district litigation and
litigation to himself. Oral argument on the renewed motions to
transferred to the United States District Court for the District of
dismiss has been scheduled before Chief Judge Brown on
New Jersey for coordinated pretrial proceedings. The consolidated
March 1, 2007. Fact discovery in the multi-district litigation
actions have proceeded in that court in two parallel actions, In re
proceeding is ongoing.
Insurance Brokerage Antitrust Litigation (the Commercial Com-
A number of complaints making allegations similar to those in
plaint) and In re Employee Benefit Insurance Brokerage Antitrust
the Commercial Complaint have been filed against AIG and other
Litigation (the Employee Benefits Complaint, and together with the
defendants in state and federal courts around the country. The
Commercial Complaint, the multi-district litigation).
defendants have thus far been successful in having the federal
The plaintiffs in the Commercial Complaint are nineteen
actions transferred to the District of New Jersey and consolidated
corporations, individuals and public entities that contracted with
into the multi-district litigation. The AIG defendants have also
the broker defendants for the provision of insurance brokerage
sought to have state court actions making similar allegations
services for a variety of insurance needs. The broker defendants
stayed pending resolution of the multi-district litigation proceeding.
are alleged to have placed insurance coverage on the plaintiffs’
In one state court action pending in Florida, the trial court recently
behalf with a number of insurance companies named as defend-
decided not to grant an additional stay, but instead to allow the
ants, including AIG subsidiaries. The Commercial Complaint also
case to proceed.
named ten brokers and fourteen other insurers (one of which has
Litigation Relating to 21st Century. Shortly after the announce-
since settled) as defendants. The Commercial Complaint alleges
ment in late January 2007 of AIG’s offer to acquire the
that defendants engaged in a widespread conspiracy to allocate
outstanding shares of 21st Century not already owned by AIG and
customers through ‘‘bid-rigging’’ and ‘‘steering’’ practices. The
its subsidiaries, two related class actions were filed in the
Commercial Complaint also alleges that the insurer defendants
Superior Court of California, Los Angeles County, against AIG,
permitted brokers to place business with AIG subsidiaries through
21st Century, and the individual members of 21st Century’s
wholesale intermediaries affiliated with or owned by those same
Board of Directors, two of whom are current executive officers of
brokers rather than placing the business with AIG subsidiaries
AIG. The actions were filed purportedly on behalf of the minority
directly. Finally, the Commercial Complaint alleges that the insurer
shareholders of 21st Century and assert breaches of fiduciary
defendants entered into agreements with broker defendants that
duty in connection with the AIG proposal. The complaints allege
tied insurance placements to reinsurance placements in order to
that the proposed per share price is unfair and seek preliminary
provide additional compensation to each broker. Plaintiffs assert
144 AIG 2006 Form 10-K

Minimum future rental income on noncancelable operating12. Commitments, Contingencies and
leases of flight equipment which have been delivered atGuarantees
December 31, 2006 was as follows:Continued
and permanent injunctive relief to enjoin the consummation of the (in millions)
proposed transaction.
2007 $ 3,663
SICO. In July, 2005, SICO filed a complaint against AIG in the 2008 3,220
Southern District of New York, claiming that AIG had refused to 2009 2,682
provide SICO access to certain artwork and asked the court to 2010 2,271
order AIG immediately to release the property to SICO. AIG filed 2011 1,800
an answer denying SICO’s allegations and setting forth defenses Remaining years after 2011 4,011
to SICO’s claims. In addition, AIG filed counterclaims asserting
Total $17,647
breach of contract, unjust enrichment, conversion, breach of
Flight equipment is leased, under operating leases, withfiduciary duty, a constructive trust and declaratory judgment,
remaining terms ranging from 1 to 13 years.relating to SICO’s breach of its commitment to use its AIG shares
only for the benefit of AIG and AIG employees. Fact and expert
Lease Commitmentsdiscovery has been substantially concluded and briefing on SICO’s
motion for summary judgment is underway. AIG and its subsidiaries occupy leased space in many locations
Regulatory Investigations. Regulators from several states have under various long-term leases and have entered into various
commenced investigations into insurance brokerage practices leases covering the long-term use of data processing equipment.
related to contingent commissions and other industry-wide prac-
At December 31, 2006, the future minimum leasetices as well as other broker-related conduct, such as alleged bid-
payments under operating leases were as follows:rigging. In addition, various federal and state regulatory agencies
are reviewing certain transactions and practices of AIG and its (in millions)
subsidiaries in connection with industry-wide and other inquiries.
2007 $ 626AIG has cooperated, and will continue to cooperate, in producing
2008 461
documents and other information in response to subpoenas and
2009 341
other requests.
2010 274
Wells Notices. AIG understands that some of its employees
2011 307
have received Wells notices in connection with previously dis-
Remaining years after 2011 754
closed SEC investigations of certain of AIG’s transactions or
Total $2,763accounting practices. Under SEC procedures, a Wells notice is an
indication that the SEC staff has made a preliminary decision to Rent expense approximated $657 million, $597 million, and
recommend enforcement action that provides recipients with an $568 million for the years ended December 31, 2006, 2005, and
opportunity to respond to the SEC staff before a formal 2004, respectively.
recommendation is finalized. It is possible that additional current
and former employees could receive similar notices in the future Other Commitments
as the regulatory investigations proceed.
On June 27, 2005, AIG entered into an agreement pursuant to
which AIG agrees, subject to certain conditions, to make any
Effect on AIG
payment that is not promptly paid with respect to the benefits
In the opinion of AIG management, AIG’s ultimate liability for the accrued by certain employees of AIG and its subsidiaries under
unresolved litigation and investigation matters referred to above is the SICO Plans (as discussed in Note 16 herein).
not likely to have a material adverse effect on AIG’s consolidated
(c) Contingenciesfinancial condition, although it is possible that the effect would be
Loss Reservesmaterial to AIG’s consolidated results of operations for an
individual reporting period. Although AIG regularly reviews the adequacy of the established
reserve for losses and loss expenses, there can be no assurance(b) Commitments
that AIG’s ultimate loss reserves will not develop adversely and
Flight Equipment
materially exceed AIG’s current loss reserves. Estimation of
At December 31, 2006, ILFC had committed to purchase 254 new ultimate net losses, loss expenses and loss reserves is a
aircraft deliverable from 2007 through 2015 at an estimated complex process for long-tail casualty lines of business, which
aggregate purchase price of $19.0 billion. ILFC will be required to include excess and umbrella liability, directors and officers liability
find customers for any aircraft acquired, and it must arrange (D&O), professional liability, medical malpractice, workers compen-
financing for portions of the purchase price of such equipment. sation, general liability, products liability and related classes, as
well as for asbestos and environmental exposures. Generally,
actual historical loss development factors are used to project
Form 10-K 2006 AIG 145

at their estimated fair values in the consolidated balance sheet.12. Commitments, Contingencies and
The vast majority of AIG’s derivative activity is transacted byGuarantees
AIGFP. See also Note 19 herein.Continued
AIG has issued unconditional guarantees with respect to the
future loss development. However, there can be no assurance
prompt payment, when due, of all present and future payment
that future loss development patterns will be the same as in the
obligations and liabilities of AIGFP arising from transactions
past. Moreover, any deviation in loss cost trends or in loss
entered into by AIGFP.
development factors might not be discernible for an extended
SAI Deferred Compensation Holdings, Inc., a wholly owned
period of time subsequent to the recording of the initial loss
subsidiary of AIG, has established a deferred compensation plan
reserve estimates for any accident year. Thus, there is the
for registered representatives of certain AIG subsidiaries, pursu-
potential for reserves with respect to a number of years to be
ant to which participants have the opportunity to invest deferred
significantly affected by changes in loss cost trends or loss
commissions and fees on a notional basis. The value of the
development factors that were relied upon in setting the reserves.
deferred compensation fluctuates with the value of the deferred
These changes in loss cost trends or loss development factors
investment alternatives chosen. AIG has provided a full and
could be attributable to changes in inflation, in labor and material
unconditional guarantee of the obligations of SAI Deferred Com-
costs or in the judicial environment, or in other social or economic
pensation Holdings, Inc. to pay the deferred compensation under
phenomena affecting claims.
the plan.
Superior National. On December 30, 2004, an arbitration panel
issued its ruling in connection with a 1998 workers compensation
13. Fair Value of Financial Instrumentsquota share reinsurance agreement under which Superior National
Insurance Company, among others, was reinsured by USLIFE, a Statement of Financial Accounting Standards No. 107, ‘‘Disclo-
subsidiary of AGC. In its 2-1 ruling, the arbitration panel refused sures about Fair Value of Financial Instruments’’ (FAS 107),
to rescind the contract as requested by USLIFE. Instead, the panel requires disclosure of fair value information about financial
reformed the contract to reduce USLIFE’s participation by ten instruments, as defined therein, for which it is practicable to
percent. Further, the arbitration ruling established a second phase estimate such fair value. In the measurement of the fair value of
of arbitration for USLIFE to present its challenges to certain certain financial instruments, where quoted market prices are not
cessions to the contract. The second phase has now been available, other valuation techniques are utilized. These fair value
completed, and the arbitration panel has issued two awards estimates are derived using internally developed valuation method-
resolving the issues presented in phase two in favor of the ologies based on available and observable market information.
cedents. USLIFE has filed a petition to vacate all of the arbitration FAS 107 excludes certain financial instruments, including those
awards from both phases of the arbitration in California federal related to insurance contracts and lease contracts.
court. In addition, USLIFE is pursuing certain insurance recover- The following methods and assumptions were used by AIG in
ables in connection with the contract. As a result of the ruling AIG estimating the fair value of the financial instruments presented:
increased its reserves by $125 million in the fourth quarter to
Cash and short-term investments: The carrying amounts approxi-$478 million. AIG believes that the reserves should be adequate
mate fair values.to fund unpaid claims.
Synthetic Fuel Tax Credits. AIG generates income tax credits as Fixed maturity securities: Fair values were generally based upon
a result of investing in synthetic fuel production. Tax credits quoted market prices. For certain fixed maturity securities for
generated from the production and sale of synthetic fuel under the which market prices were not readily available, fair values were
Internal Revenue Code are subject to an annual phase-out estimated using values obtained from independent pricing
provision that is based on the average wellhead price of domestic services.
crude oil. The price range within which the tax credits are phased-
Equity securities: Fair values were based on quoted marketout was originally established in 1980 and is adjusted annually for
prices. Where market prices were not readily available, fair valuesinflation. Depending on the price of domestic crude oil for a
were estimated using quoted market prices of comparableparticular year, all or a portion of the tax credits generated in that
investments.year might be eliminated. AIG evaluates the production levels of
its synthetic fuel production facilities in light of the risk of phase- Mortgage loans on real estate, policy and collateral loans: Where
out of the associated tax credits. As a result of fluctuating practical, the fair values of loans on real estate and collateral
domestic crude oil prices, AIG evaluates and adjusts production loans were estimated using discounted cash flow calculations
levels when appropriate in light of this risk. Regardless of oil based upon AIG’s current incremental lending rates for similar
prices, the tax credits expire after 2007. type loans. The fair values of the policy loans were not calculated
as AIG believes it would have to expend excessive costs for the(d) Guarantees
benefits derived.AIG and certain of its subsidiaries become parties to derivative
financial instruments with market risk resulting from both dealer Trading assets and trading liabilities: Fair values approximate the
and end-user activities and to reduce currency, interest rate, carrying values.
equity and commodity exposures. These instruments are carried
146 AIG 2006 Form 10-K

currently being offered for similar contracts with maturities13. Fair Value of Financial Instruments
consistent with those remaining for the contracts being valued.Continued
Finance receivables: Fair values were estimated using discounted GIAs: Fair values of AIG’s obligations under investment type
cash flow calculations based upon the weighted average rates agreements were estimated using discounted cash flow calcula-
currently being offered for similar finance receivables. tions based on interest rates currently being offered for similar
agreements with maturities consistent with those remaining for
Securities lending collateral and securities lending payable: The
the agreements being valued.
contract values of these financial instruments approximate fair
value. Securities and spot commodities sold but not yet purchased: The
carrying amounts for the securities and spot commodities sold but
Spot commodities: Fair values are based on current market
not yet purchased approximate fair values. Fair values for spot
prices.
commodities sold short were based on current market prices.
Unrealized gains and losses on swaps, options and forward
Trust deposits and deposits due to banks and other depositors:
transactions: Fair values were based on the use of valuation
To the extent certain amounts are not demand deposits or
models that utilize, among other things, current interest, foreign
certificates of deposit which mature in more than one year, fair
exchange commodity, equity and volatility rates, as applicable.
values were not calculated as AIG believes it would have to
Securities purchased (sold) under agreements to resell (repur- expend excessive costs for the benefits derived.
chase), at contract value: As these securities (obligations) are
Commercial paper: The carrying amount approximates fair value.
short-term in nature, the contract values approximate fair values.
Notes, bonds, loans and mortgages: Where practical, the fair
Other invested assets: Consisting principally of hedge funds and
values of these obligations were estimated using discounted cash
limited partnerships. Fair values are determined based on the net
flow calculations based upon AIG’s current incremental borrowing
asset values provided by the general partner or manager of each
rates for similar types of borrowings with maturities consistent
investment.
with those remaining for the debt being valued.
Policyholders’ contract deposits: Fair values were estimated using
discounted cash flow calculations based upon interest rates
Form 10-K 2006 AIG 147

13. Fair Value of Financial Instruments
Continued
The carrying values and fair values of AIG’s financial instruments at December 31, 2006 and 2005 were as follows:
2006 2005
Carrying Fair Carrying Fair
(in millions) Value(a)
Value Value(a)
Value
Assets:
Fixed maturities $417,865 $418,582 $385,680 $386,199
Equity securities 30,222 30,222 23,588 23,588
Mortgage loans on real estate, policy and collateral loans 28,418 28,655 24,909 26,352
Securities available for sale 47,205 47,205 37,511 37,511
Trading securities 5,031 5,031 6,499 6,499
Spot commodities 220 220 92 96
Unrealized gain on swaps, options and forward transactions 19,252 19,252 18,695 18,695
Trading assets 2,468 2,468 1,204 1,204
Securities purchased under agreements to resell 33,702 33,702 14,547 14,547
Finance receivables, net of allowance 29,573 26,712 27,995 27,528
Securities lending collateral 69,306 69,306 59,471 59,471
Other invested assets(b)
40,330 40,637 29,186 29,408
Short-term investments 25,249 25,249 15,342 15,342
Cash 1,590 1,590 1,897 1,897
Liabilities:
Policyholders’ contract deposits 244,658 239,964 227,027 223,244
Borrowings under obligations of guaranteed investment agreements 20,664 20,684 20,811 22,373
Securities sold under agreements to repurchase 22,710 22,710 11,047 11,047
Trading liabilities 3,141 3,141 2,546 2,546
Hybrid financial instrument liabilities 8,856 8,856 — —
Securities and spot commodities sold but not yet purchased 4,076 4,076 5,975 5,975
Unrealized loss on swaps, options and forward transactions 11,401 11,401 12,740 12,740
Trust deposits and deposits due to banks and other depositors 5,249 5,261 4,877 5,032
Commercial paper 13,029 13,029 9,208 9,208
Notes, bonds, loans and mortgages payable 104,690 106,494 78,439 79,518
Securities lending payable 70,198 70,198 60,409 60,409
(a) The carrying value of all other financial instruments approximates fair value.
(b) Excludes aircraft asset investments held by non-Financial Services subsidiaries.
At December 31, 2006, AIG’s non-employee directors received14. Stock Compensation Plans
stock-based compensation in two forms, options granted pursuant
At December 31, 2006, AIG employees could be awarded to the 1999 Plan and grants of AIG common stock with delivery
compensation pursuant to six different stock-based compensation deferred until retirement from the Board, pursuant to the AIG
plan arrangements: (i) AIG 1999 Stock Option Plan, as amended Director Stock Plan, which was approved by the shareholders at
(1999 Plan); (ii) AIG 1996 Employee Stock Purchase Plan, as the 2004 Annual Meeting of Shareholders.
amended (1996 Plan); (iii) AIG 2002 Stock Incentive Plan, as From January 1, 2003 through December 31, 2005, AIG
amended (2002 Plan) under which AIG has issued time-vested accounted for share-based payment transactions with employees
restricted stock units (RSUs) and performance restricted stock under FAS No. 123, ‘‘Accounting for Stock-Based Compensation.’’
units (performance RSUs); (iv) SICO’s Deferred Compensation Share-based employee compensation expense from option awards
Profit Participation Plans (SICO Plans); (v) AIG’s 2005-2006 was not recognized in the statement of income in prior periods.
Deferred Compensation Profit Participation Plan (AIG DCPPP) and Effective January 1, 2006, AIG adopted the fair value recognition
(vi) the AIG Partners Plan. The AIG DCPPP was adopted as a provisions of FAS 123R. FAS 123R requires that companies use a
replacement for the SICO Plans for the 2005-2006 period, and fair value method to value share-based payments and recognize
the AIG Partners Plan replaces the AIG DCPPP. Stock-based the related compensation expense in net earnings. AIG adopted
compensation earned under the AIG DCPPP and the AIG Partners FAS 123R using the modified prospective application method, and
Plan is issued as awards under the 2002 Plan. AIG currently accordingly, financial statement amounts for the prior periods
settles share option exercises and other share awards to presented have not been restated to reflect the fair value method
participants through the issuance of shares it has previously of expensing share-based compensation under FAS 123R. The
acquired and holds in its treasury account, except for share modified prospective application method provides for the recogni-
awards made by SICO, which are settled by SICO. tion of the fair value with respect to share-based compensation
148 AIG 2006 Form 10-K

corresponding reductions in expense as they occur. The pre-tax14. Stock Compensation Plans
cumulative effect of adoption, recognized as a reduction in stock-Continued
based compensation of $46 million, was recorded as a cumula-
for shares subscribed for or granted on or after January 1, 2006
tive effect of an accounting change, net of tax. FAS 123R requires
and all previously granted but unvested awards as of January 1,
AIG to reflect the cash savings resulting from excess tax benefits
2006.
in its financial statements as cash flow from financing activities,
The adoption of FAS 123R resulted in share-based compensa-
rather than as cash flow from operating activities as in prior
tion expense of approximately $17 million during 2006, related to
periods. The amount of this excess tax benefit for 2006 was
awards which were accounted for under the provisions of
$27.9 million.
Accounting Principles Board Opinion No. 25, ‘‘Accounting for Stock
Included in AIG’s consolidated statement of income for the
Issued to Employees.’’ FAS 123R also requires AIG to estimate
year ended December 31, 2006 was pre-tax share-based compen-
forfeitures in calculating the expense relating to share-based
sation expense of $353 million ($326 million after tax).
compensation, rather than recognizing these forfeitures and
The effect of the adoption of FAS 123R on the consolidated statements of income and cash flows for the year ended
December 31, 2006 was as follows:
Including
Effect of Effect of
Pre-adoption of Adoption of Adoption of
(in millions, except per share data) FAS 123R FAS 123R FAS 123R
Income before income taxes, minority interest and cumulative effect of an accounting
change $21,704 $ (17) $21,687
Provision for income taxes $ 6,539 $ (2) $ 6,537
Income before minority interest and cumulative effect of an accounting change $15,165 $ (15) $15,150
Cumulative effect of an accounting change, net of tax $ — $ 34 $ 34
Net income $14,029 $ 19 $14,048
Net cash provided by (used in) operating activities $ 6,857 $ (28) $ 6,829
Net cash provided by financing activities $59,762 $ 28 $59,790
Basic earnings per share $ 5.38 $0.01 $ 5.39
Diluted earnings per share $ 5.35 $0.01 $ 5.36
Form 10-K 2006 AIG 149

14. Stock Compensation Plans Valuation Methodology
Continued
In 2004, AIG developed a binomial lattice model to calculate the
fair value of stock option grants. In prior years, a Black-ScholesIncluded in share-based compensation expense of $353 million
model was used. A more detailed description of the valuationfor 2006 was a one-time compensation cost of approximately
methodology is provided below.$54 million related to the Starr tender offer and various out of
period adjustments totalling $61 million, primarily relating to The following weighted average assumptions were used
stock-splits and other miscellaneous items for the SICO Plans, for stock options granted in 2006 and 2005:
offset by a $46 million pre-tax adjustment for the cumulative
2006 2005effect of the adoption of FAS 123R. See Note 16 herein for a
discussion of the Starr tender offer. Expected annual dividend yield(a)
0.92% 0.71%
If AIG had adopted the FAS 123 provisions for recognizing Expected volatility(b)
23.50% 27.3%
Risk-free interest rate(c)
4.61% 4.17%compensation expense commencing at the date of grant of the
Expected term(d)
7 years 7 yearsawards, the effect would not have been material to net income or
basic or diluted earnings per share for 2005.
(a) The dividend yield is based on the dividend yield over the twelve month
period prior to the grant date.
1999 Stock Option Plan (b) In 2006, expected volatility is the average of historical volatility (based
on seven years of daily stock price changes) and the implied volatility
The 1999 Plan provides that options to purchase a maximum of of actively traded options on AIG shares and in 2005, expected
volatility is the historical volatility based on ﬁve years of daily stock45,000,000 shares of common stock can be granted to certain
price changes.key employees and members of the Board of Directors at prices
(c) The interest rate curves used in the valuation model were thenot less than fair market value at the date of grant.
U.S. Treasury STRIP rates with terms from 3 months to 10 years.
The 1999 Plan was approved by the shareholders at the 2000
(d) The contractual term of the option is generally 10 years with an
Annual Meeting of Shareholders, with certain amendments ap-
expected term of 7 years calculated based on an analysis of historical
proved at the 2003 Annual Meeting of Shareholders. The 1999 employee exercise behavior and employee turnover (post-vesting termi-
nations). The early exercise rate is a function of time elapsed since thePlan superseded the 1991 Employee Stock Option Plan (the 1991
grant. Fifteen years of historical data were used to estimate the earlyPlan), although outstanding options granted under the 1991 Plan
exercise rate.
continue in-force until exercise or expiration. The maximum
number of shares that may be granted to any employee in any Additional information with respect to AIG’s stock option
one year under the 1999 Plan is 900,000. Options granted under plans at December 31, 2006, and changes for the year
the 1999 Plan generally vest over four years (25 percent vesting then ended, were as follows:
per year) and expire 10 years from the date of grant.
Weighted Average
At December 31, 2006, there were 19,615,911 shares Shares Exercise Price
reserved for future grants under the 1999 Plan and
Options:28,021,943 shares reserved for issuance under the 1999 and
Outstanding at beginning of year 52,545,425 $ 54.841991 Plans.
Granted 1,621,910 $70.51
Exercised* (5,329,026) $27.97Deferrals
Forfeited or expired (1,182,589) $70.76
At December 31, 2006, AIG was obligated to issue Outstanding at end of year 47,655,720 $57.99
8,382,632 shares in connection with previous exercises of Options exercisable at end of
options with delivery deferred. year 39,383,670 $56.81
Weighted average fair value per
share of options granted $23.41
* Includes options with respect to 2,067,643 shares exercised with
delivery deferred, resulting in obligations to issue 1,527,613 shares.
150 AIG 2006 Form 10-K

14. Stock Compensation Plans
Continued
The following table presents information about stock options outstanding at December 31, 2006:
Options Outstanding Options Exercisable
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Aggregate Intrinsic Number Remaining Average Aggregate
Range of Number Contractual Exercise Values Exercisable Contractual Exercise Intrinsic Values
Exercise Prices Outstanding Life Price (in millions) (vested) Life Price (in millions)
$24.55-$26.45 3,077,376 0.82 $24.67 $144 3,077,376 0.82 $24.67 $144
$31.02-$41.51 5,198,823 1.58 36.91 181 5,198,823 1.58 36.91 181
$43.31-$53.40 6,665,147 3.83 48.59 154 5,900,494 3.53 48.80 135
$54.11-$59.99 8,314,413 4.07 57.86 115 6,780,399 3.01 57.52 96
$60.13-$63.95 8,766,329 5.94 62.33 82 7,547,511 5.77 62.12 72
$64.01-$69.63 8,034,276 6.82 65.45 50 4,948,364 5.75 65.53 30
$70.35-$98.00 7,599,356 5.53 81.36 1 5,930,703 4.40 84.06 —
Total 47,655,720 4.60 $57.99 $727 39,383,670 3.81 $56.81 $658
Vested and expected-to-vest options as of December 31, 2006, than performance RSUs granted under the AIG DCPPP and the AIG
included in the table above, totaled 45,382,149, with a weighted Partners Plan vest on the fourth anniversary of the date of grant.
average exercise price of $57.42, a weighted average contractual
life of 4.33 years and an aggregate intrinsic value of $720 million. Director Stock Awards
As of December 31, 2006, total unrecognized compensation
The methodology used for valuing employee stock options is also
cost (net of expected forfeitures) was $133 million and $3 million
used to value director stock options. Director stock options vest
related to non-vested share-based compensation awards granted
one year after the grant date, but are otherwise the same as
under the 1999 Plan and the 1996 Plan, respectively, with
employee stock options. Options with respect to 40,000 shares
blended weighted average periods of 1.44 years and 0.41 years,
and 32,500 shares were granted during 2006 and 2005,
respectively. The cost of awards outstanding under these plans at
respectively.
December 31, 2006 is expected to be recognized over approxi-
AIG also granted 14,000 shares and 6,250 shares, with
mately three years and one year, respectively, for the 1999 Plan
delivery deferred, to directors during 2006 and 2005, respec-
and the 1996 Plan.
tively, under the Director Stock Plan. At December 31, 2006,
The intrinsic value of options exercised during 2006 was
there were 71,000 shares reserved for future grants under the
approximately $215 million. The fair value of options vesting
Director Stock Plan.
during 2006 was approximately $97 million. AIG received
$104 million and $65 million in cash during 2006 and 2005,
Employee Stock Purchase Planrespectively, from the exercise of stock options. The tax beneﬁts
realized as a result of stock option exercises were $35 million AIG’s 1996 Plan provides that eligible employees (those employed
and $20 million for 2006 and 2005, respectively. at least one year) may receive privileges to purchase up to an
aggregate of 10,000,000 shares of AIG common stock, at a price
2002 Stock Incentive Plan equal to 85 percent of the fair market value on the date of the
grant of the purchase privilege. Purchase privileges are granted
The 2002 Plan was adopted at the 2002 Annual Meeting of
quarterly and are limited to the number of whole shares that can
shareholders and amended and restated by the AIG Board of
be purchased on an annual basis by an amount equal to the
Directors on September 18, 2002. The 2002 Plan provides that
lesser of 10 percent of an employee’s annual salary or $10,000.
equity-based or equity-related awards with respect to shares of
common stock can be issued to employees in any year up to a
SICO Plansmaximum of that number of shares equal to (a) 1,000,000 shares
plus (b) the number of shares available but not issued in the prior The SICO Plans provide that shares of AIG common stock
calendar year. The maximum award that a grantee may receive currently held by SICO are set aside for the beneﬁt of the
under the 2002 Plan per year is rights with respect to participant and distributed upon retirement. The SICO Board of
250,000 shares. During 2006 and 2005, 6,836,785 RSUs, Directors currently may permit an early payout of shares under
including performance RSUs, and 3,055,835 RSUs, respectively, certain circumstances. Prior to payout, the participant is not
were granted by AIG. There were 4,488,458 shares reserved for entitled to vote, dispose of or receive dividends with respect to
issuance in connection with future awards at December 31, 2006. such shares, and shares are subject to forfeiture under certain
Substantially all RSUs granted to date under the 2002 Plan other
Form 10-K 2006 AIG 151

ance period is September 21, 2005 to December 31, 2006. At14. Stock Compensation Plans
the end of the performance period, common shares are contin-Continued
gently allocated. The service period and related vesting consists
conditions, including but not limited to the participant’s termina-
of three pre-retirement tranches and a final retirement tranche at
tion of employment with AIG prior to normal retirement age.
age 65.
Historically, SICO’s Board of Directors could elect to pay a
At December 31, 2006, there were units representing
participant cash in lieu of shares of AIG common stock. On
4,590,622 shares granted to participants.
December 9, 2005, SICO notified participants that essentially all
subsequent distributions would be made only in shares, and not
AIG Partners Plancash. As of that date, AIG modified its accounting for the SICO
Plans from variable to fixed measurement accounting. Variable On June 26, 2006, AIG’s Compensation Committee approved two
measurement accounting is used for those few awards for which grants under the AIG Partners Plan. The first grant has a
cash elections had been made prior to March 2005. The SICO performance period which runs from January 1, 2006 through
Plans are also described in Note 16 herein. December 31, 2007. The second grant has a performance period
Although none of the costs of the various benefits provided which runs from January 1, 2007 through December 31, 2008.
under the SICO Plans have been paid by AIG, AIG has recorded Both grants vest 50 percent on the fourth and sixth anniversaries
compensation expense for the deferred compensation amounts of the first day of the related performance period. In addition, the
paid to AIG employees by SICO, with an offsetting amount Compensation Committee approved the performance metrics for
credited to additional paid-in capital reflecting amounts deemed the two grants prior to the date of grant. The measurement of the
contributed by SICO. grants is deemed to have occurred on June 26, 2006 when there
As of December 9, 2005, there were 12,650,292 non-vested was mutual understanding of the key terms and conditions of the
AIG shares under the SICO Plans with a weighted-average fair grants. Consistent with this treatment: a) 1,068,605 performance
value per share of $61.92. As of December 31, 2006, there were RSUs for the first grant and 2,488,865 performance RSUs for the
11,443,772 non-vested AIG shares under the SICO Plans with a second grant and b) unrecognized compensation of $49 million for
weighted-average fair value per share of $61.72. the first grant and $137 million for the second grant are included
A significant portion of the awards under the SICO Plans vest in the related disclosure tables. Performance RSUs related to the
upon retirement when or after the participant reaches age 65. The first grant are excluded from AIG’s diluted shares calculation
portion of the awards for which early payout is available vest on because an insufficient amount of time has elapsed to conclu-
the applicable payout date. sively determine that the performance metric will be achieved at
the end of the related performance period. Because the perform-
AIG DCPPP ance period for the second grant does not begin until January 1,
2007, compensation expense for the second grant is not included
Effective September 21, 2005, AIG adopted the AIG DCPPP, which
in AIG’s 2006 results and diluted shares calculation.
provides equity-based compensation to key AIG employees, includ-
ing senior executive officers. The AIG DCPPP was modeled on the
ValuationSICO Plans.
The AIG DCPPP contingently allocates a fixed number of shares The fair value of each award granted under the 2002 Plan, the
to each participant if AIG’s cumulative adjusted earnings per AIG DCPPP, the AIG Partners Plan, and the SICO Plans is based
share, as determined by AIG’s Compensation Committee, for on the closing price of AIG stock on the date of grant.
2005 and 2006 exceed that for 2003 and 2004. The perform-
The following table presents a summary of shares relating to outstanding awards unvested under the foregoing plans
as of December 31, 2006, and changes for the year then ended:
Number of Shares Weighted Average Grant-Date Fair Value
AIG AIG Partners Total SICO AIG AIG Partners Total SICO
2002 Plan DCPPP Plan 2002 Plan Plans 2002 Plan DCPPP Plan 2002 Plan Plans
Unvested at January 1, 2006 4,322,265 4,898,880 — 9,221,145 12,650,292 $63.63 $52.55 $ — $57.74 $61.92
Granted 3,198,885 — 3,637,900 6,836,785 — 70.04 — 56.49 62.83 —
Vested (130,185) — — (130,185) (794,814) 61.44 — — 61.44 65.68
Forfeited (209,370) (308,258) (30,860) (548,488) (411,706) 62.53 59.40 56.22 60.41 60.38
Unvested at December 31,
2006 7,181,595 4,590,622 3,607,040 15,379,257 11,443,772 $66.56 $52.09 $56.50 $59.88 $61.72
152 AIG 2006 Form 10-K

portion of the total projected benefit payable at normal retirement14. Stock Compensation Plans
to each year of credited service.Continued
The HSB Group Inc. (HSB) retirement plan was merged into the
The total unrecognized compensation cost (net of ex- AIG U.S. retirement plan effective April 1, 2001. Benefits for HSB
pected forfeitures) related to non-vested share-based participants were changed effective January 1, 2005 to be
compensation awards granted under the 2002 Plan, the substantially similar to the AIG U.S. retirement plan benefits
AIG DCPPP, the AIG Partners Plan and the SICO Plans at subject to a grandfathering agreement.
December 31, 2006 and the blended weighted-average 21st Century sponsors its own benefit plans for its eligible
period over which that cost is expected to be recognized employees. Assets, obligations and costs with respect to 21st
at December 31, 2006 are as follows: Century’s plans are included herein. The assumptions used in its
plans were not significantly different from those used by AIG inBlendedUnrecognized
Weighted-Compensation AIG’s U.S. plans.
AverageCost
The AIG Excess Retirement Income Plan provides a benefit(in millions) Period
equal to the reduction in benefits payable under the AIG U.S.
2002 Plan $322 1.79 years retirement plan as a result of federal tax limitations on compensa-
AIG DCPPP $208 4.49 years tion and benefits payable thereunder. AIG has adopted a Supple-
AIG Partners Plan $191 2.37 years
mental Executive Retirement Plan (Supplemental Plan) to provide
Total 2002 Plan $721 2.72 years
additional retirement benefits to designated executives. Under the
SICO Plans $301 5.95 years
Supplemental Plan, an annual benefit accrues at a percentage of
final average pay multiplied by each year of credited service, not
The total cost for awards outstanding as of December 31, 2006
greater than 60 percent of final average pay, reduced by any
under the 2002 Plan, the AIG DCPPP, the AIG Partners Plan, and
benefits from the current and any predecessor retirement plans
the SICO Plans is expected to be recognized over approximately 4
(including the AIG Excess Retirement Income Plan and any
years, 11 years, 6 years and 23 years, respectively.
comparable plans), Social Security, if any, and from any qualified
pension plan of prior employers. Currently, each of these plans is
15. Employee Benefits
unfunded. AGC and HSB have adopted similar supplemental type
(a) Pension Plans: Employees of AIG, its subsidiaries and plans. These plans are also unfunded.
certain affiliated companies, including employees in foreign Where non-U.S. retirement plans are defined benefit plans,
countries, are generally covered under various funded, unfunded they are generally either based on the employees’ years of
and insured pension plans. Eligibility for participation in the credited service and compensation in the years preceding retire-
various plans is based on either completion of a specified period ment, or on points accumulated based on the employee’s job
of continuous service or date of hire, subject to age limitations. grade and other factors during each year of service.
Some AIG subsidiaries provide retirement benefits through defined AIG is in the process of spinning off the assets and liabilities
benefit plans, others employ defined contribution plans and some in the AIG U.S. retirement plan attributable to employees of Starr
use both. and The Starr Foundation. The accumulated benefit obligation of
AIG’s U.S. retirement plan is a qualified, noncontributory the employees in these two entities was computed as of
defined benefit plan which is subject to the provisions of ERISA. December 31, 2005. At December 31, 2005, the AIG
All employees of AIG and most of its subsidiaries and affiliates U.S. retirement plan was funded at an amount slightly greater
who are regularly employed in the United States, including certain than the accumulated benefit obligation. In the first quarter of
U.S. citizens employed abroad on a U.S. dollar payroll, and who 2007, AIG will transfer assets of approximately $32 million, which
have attained age 21 and completed twelve months of continuous is the equivalent of the present value of the December 31, 2005
service are eligible to participate in this plan. An employee with 5 accumulated benefit (adjusted for interest and benefit payments
or more years of plan participation is entitled to pension benefits through the transfer date) attributable to the employees in those
beginning at normal retirement at age 65. Benefits are based entities. Consistent with this arrangement, the amounts shown in
upon a percentage of average final compensation multiplied by the financial statements and footnote exclude liabilities and
years of credited service limited to 44 years of credited service. assets for employees of Starr.
The average final compensation is subject to certain limitations.
(b) Postretirement Plans: In addition to AIG’s defined benefit
Employees may elect certain options with respect to receipt of
pension plans, AIG and its subsidiaries provide a postretirement
their pension benefits including a joint and survivor annuity. An
benefit program for medical care and life insurance in the U.S.
employee with 10 or more years of plan participation may retire
and in certain non-U.S. countries. Eligibility in the various plans is
early from age 55 to 64. An early retirement factor is applied
generally based upon completion of a specified period of eligible
resulting in a reduced benefit. If an employee terminates with less
service and attaining a specified age. Overseas, benefits vary by
than five years of continuous service, the employee forfeits the
geographic location.
right to receive any pension benefits accumulated to that time.
AIG’s U.S. postretirement medical and life insurance benefits
Annual funding requirements are determined based on the
are based upon the employee electing immediate retirement and
‘‘projected unit credit’’ cost method, which attributes a pro rata
having a minimum of ten years of service. Retirees who reached
Form 10-K 2006 AIG 153

provided for currently. Such uninsured expenses include long-term15. Employee Benefits
disability benefits, medical and life insurance continuation, andContinued
COBRA medical subsidies.
age 65 by May 1, 1989 and their dependents participate in the
medical plan at no cost. Employees who retired after May 1, 1989 (e) Benefit Obligations: The measurement date for some of
and prior to January 1, 1993 pay 50 percent of the active the non-U.S. defined benefit pension and postretirement plans is
employee premium. Retiree contributions are subject to adjust- November 30, consistent with the fiscal year end of the
ment annually. Other cost sharing features of the medical plan sponsoring companies. For all other plans, accumulated benefit
include deductibles, coinsurance and Medicare coordination and a obligations represent the present value of pension benefits earned
lifetime maximum benefit of $2.0 million. The maximum life as of December 31, 2006 based on service and compensation as
insurance benefit prior to age 70 is $32,500, with a maximum of of December 31, 2006. Projected benefit obligations for defined
$25,000 thereafter. benefit plans represent the present value of pension benefits
Effective January 1, 1993, both plans’ provisions were earned as of December 31, 2006 projected for estimated salary
amended. Employees who retire after January 1, 1993 are increases to an assumed date with respect to retirement,
required to pay the actual cost of the medical benefits premium termination, disability or death. Projected benefit obligations for
reduced by a credit of a certain amount, based on years of postretirement plans represent the present value of postretire-
service at retirement. The life insurance benefit varies by age at ment medical and life insurance benefits deemed earned as of
retirement from $5,000 for retirement at ages 55 through 59; December 31, 2006 projected for estimated salary and medical
$10,000 for retirement at ages 60 through 64; and $15,000 for claim rate increases to an assumed date with respect to
retirement at ages 65 and over. retirement, termination, disability, or death.
(c) Voluntary Savings Plans: AIG sponsors a voluntary sav- The accumulated benefit obligations with respect to both
ings plan for domestic employees (the AIG Incentive Savings plan), non-U.S. and U.S. pension benefit plans as of Decem-
which provides for salary reduction contributions by employees ber 31, 2006 and 2005 were as follows:
and matching contributions by AIG of up to seven percent of
(in millions) 2006* 2005
annual salary depending on the employees’ years of service.
Non-U.S. pension benefit plans $1,384 $1,210Contributions are funded currently.
U.S. pension benefit plans $2,689 $2,704
(d) Postemployment Benefits: AIG provides certain benefits
* As of November 30, 2006 for non-U.S. plans of sponsoring companies
to inactive employees who are not retirees. Certain of these with a fiscal year-end date of November 30, 2006.
benefits are insured and expensed currently; other expenses are
154 AIG 2006 Form 10-K

Continued
The following table sets forth the change in the projected benefit obligation of the defined benefit pension plans,
including the supplemental plans, and postretirement benefit plans as of December 31, 2006 and 2005:
Pension Postretirement
Non- Non-
U.S. U.S. U.S. U.S.
(in millions) Plans Plans(a)
Total Plans Plans Total
2006(b)
Change in projected benefit obligation:
Benefit obligation at beginning of year $1,351 $3,131 $4,482 $43 $205 $248
Service cost 78 130 208 4 6 10
Interest cost 36 169 205 2 11 13
Participant contributions 1 — 1 — — —
Actuarial (gain) loss (40) (245) (285) 5 (1) 4
Plan amendments and mergers — — — — 47 47
Benefits paid:
AIG assets (28) (10) (38) (1) (16) (17)
Plan assets (27) (84) (111) — — —
Effect of foreign currency fluctuation 71 — 71 — — —
Other(c)
136 (12) 124 — — —
Benefit obligation at end of year $1,578 $3,079 $4,657 $53 $252 $305
2005
Change in projected benefit obligation:
Benefit obligation at beginning of year $1,376 $2,750 $4,126 $35 $243 $278
Service cost 71 111 182 4 5 9
Interest cost 32 153 185 2 11 13
Actuarial (gain) loss 77 241 318 3 (38) (35)
Plan amendments, mergers and new material plans 43 (29) 14 — — —
Benefits paid:
AIG assets (28) (11) (39) (1) (16) (17)
Plan assets (29) (84) (113) — — —
Effect of foreign currency fluctuation (184) — (184) 1 — 1
Other (8) — (8) (1) — (1)
Benefit obligation at end of year $1,351 $3,131 $4,482 $43 $205 $248
(a) Includes excess retirement income type plans and supplemental executive retirement type plans.
(b) As of November 30, 2006 for non-U.S. plans of sponsoring companies with fiscal year-end date of November 30, 2006.
(c) With respect to AIG’s non-U.S. plan obligations, $100 million of this increase is the result of the reclassification of the Swiss plans. The Swiss plans
were previously categorized as defined contribution plans since insurance companies have guaranteed the risks associated with these plans. However,
the cost of paying for these guarantees is now viewed as a liability for the company in Switzerland. Therefore, the Swiss plans are treated as defined
benefit plans. $45 million of the increase is due to the inclusion of new plans during 2006.
The weighted average assumptions used to determine the benefit obligations at December 31, 2006 and 2005 are as
follows:
Non-U.S. U.S. Non-U.S. U.S.
Plans Plans Plans Plans
2006*
Discount rate 2.25 - 10.75% 6.00% 4.00 - 5.75% 6.00%
Rate of compensation increase 1.50 - 10.00% 4.25% 3.00% 4.25%
2005
Discount rate 1.75 - 12.00% 5.50% 4.50 - 5.50% 5.50%
Rate of compensation increase 1.50 - 10.00% 4.25% 2.50 - 3.00% 4.25%
* At November 30, 2006 for non-U.S. plans of sponsoring companies with a fiscal year-end date of November 30, 2006.
Form 10-K 2006 AIG 155

Discount Rate Methodology15. Employee Benefits
Continued
The projected benefit cash flows under the AIG Retirement Plan
were discounted using the spot rates derived from the Citigroup
The benefit obligations for non-U.S. plans reflect those assump-
Pension Discount Curve as of December 31, 2006 and Decem-
tions that were most appropriate for the local economic environ-
ber 31, 2005 and an equivalent single discount rate was derived
ments of each of the subsidiaries providing such benefits.
resulting in the same liability. This single discount rate was
To measure the obligations at December 31, 2006 for AIG’s
rounded to the nearest 25 basis points, namely 6.0 percent and
U.S. plans, an 8.0 percent annual rate of increase in the per
5.5 percent as of December 31, 2006 and December 31, 2005,
capita cost of covered medical benefits for pre-age-65 retirees, a
respectively. The rates applied to other U.S. plans were not
6.7 percent annual rate of increase in the per capita cost of
significantly different from those discussed above.
covered medical benefits for post-age-65 retirees and a 10.0 per-
Japan represents over 62 percent of the liabilities of the
cent annual rate of increase in the per capita cost of retiree
non-U.S. pension plans. The discount rate for Japan was selected
prescription drug coverage were used for 2007. These rates were
by reference to the published Moody’s/S&P AA Corporate Bond
assumed to decrease gradually to 5.0 percent in 2013 and
Universe at the measurement date having regard to the duration
remain at that level thereafter.
of the plans’ liabilities.
To measure the obligations at December 31, 2005 for AIG’s
The mortality assumption used to determine the obligations for
U.S. plans, a 9.0 percent annual rate of increase in the per capita
the U.S. plans as of December 31, 2006 and December 31,
cost of covered medical benefit for pre-age-65 retirees, a
2005 was based on the RP2000 White Collar Combined Mortality
7.0 percent annual rate of increase in the per capita cost of
Table projected to 2006. The mortality assumptions for AIG’s
covered medical benefits for post-age-65 retirees and an 11.0 per-
non-U.S. plans vary by country. There was a change in the
cent annual rate of increase in the per capita cost of retiree
mortality table assumption for Ireland, Japan, Taiwan and United
prescription drug coverage was used for 2006.
Kingdom as of December 31, 2006 (November 30, 2006 for non-
The assumed range for 2007 with respect to the annual rates
U.S. plans of sponsoring companies with a fiscal year-end date of
of increase in the per capita cost of covered healthcare benefits
November 30, 2006). The assumptions used are expected to
of AIG’s non-U.S. plans is 6.0 to 8.0 percent. These rates are
reasonably anticipate future mortality experience. No other signifi-
assumed to decrease gradually to 4.0 to 6.0 percent over the
cant changes have been made for the December 31, 2006
next three years and remain at that level thereafter.
obligations (November 30, 2006 obligations for non-U.S. plans of
A one percent point change in the assumed healthcare sponsoring companies with a fiscal year-end date of November 30,
cost trend rate would have the following effect on AIG’s 2006).
postretirement benefit obligations at December 31,
(f) Funded Status: The funded status of the AIG defined benefit
2006* and 2005:
plans is a comparison of the projected benefit obligations to the
One Percent One Percent assets related to the respective plan, if any. Effective Decem-
Increase Decrease
ber 31, 2006, AIG has adopted FAS 158 ‘‘Employers’ Accounting
(in millions) 2006 2005 2006 2005
for Defined Benefit Pension and Other Postretirement Plans’’ — an
Non-U.S. plans $10 $ 8 $(7) $(6) amendment of FASB Statements No. 87, 88, 106 and 132(R). All
U.S. plans $ 3 $(2) $(3) $ 2 amounts shown are pre-tax, unless noted otherwise.
* At November 30, 2006, for non-U.S. plans with a fiscal year-end date of
November 30, 2006.
156 AIG 2006 Form 10-K

Continued
The following table sets forth the funded status of the plans, reconciled to the amount reported on the consolidated
balance sheet at December 31, 2006 (these assets and liabilities were not reported on the consolidated balance sheet
at December 31, 2005):
Pension Postretirement(b)
(in millions) Plans(a)
Plans Total Plans Plans Total
2006
Fair value of plan assets $ 850 $2,760 $ 3,610 $ — $ — $ —
Less projected benefit obligations 1,578 3,079 4,657 53 252 305
Funded status at end of year $ (728) $ (319) $(1,047) $(53) $(252) $(305)
Amounts recognized in the consolidated balance sheet:
Assets $ 18 $ — $ 18 $ — $ — $ —
Liabilities (746) (319) (1,065) (53) (252) (305)
Total amounts recognized $ (728) $ (319) $(1,047) $(53) $(252) $(305)
Amounts recognized in Accumulated other comprehensive
income:
Net loss $ 256 $ 687 $ 943 $ 7 $ 3 $ 10
Prior service cost (credit) (72) (20) (92) — 22 22
Total amounts recognized $ 184 $ 667 $ 851 $ 7 $ 25 $ 32
2005
Fair value of plan assets $ 699 $2,561 $ 3,260 $ — $ — $ —
Less projected benefit obligations 1,351 3,130 4,481 43 205 248
Funded status at end of year $ (652) $ (569) $(1,221) $(43) $(205) $(248)
Amounts not yet recognized:
Actuarial (gains)/losses(c)
303 1,093 1,396 3 5 8
Prior service cost (79) (23) (102) — (32) (32)
Transition obligations 1 — 1 — — —
Net amount recognized $ (427) $ 501 $ 74 $(40) $(232) $(272)
Composition of net amount recognized:
Prepaid benefit cost $ 24 $ 670 $ 694 $ — $ — $ —
Accrued benefit cost (590) (217) (807) (40) (232) (272)
Intangible asset 3 6 9 — — —
Accumulated other comprehensive income 136 42 178 — — —
Net amount recognized $ (427) $ 501 $ 74 $(40) $(232) $(272)
(a) A significant portion of these plans, particularly those in Japan, are not required by local regulation to be funded currently. With respect to the funded
status of these Japanese plans, the projected benefit obligation amounts to approximately $414 million and $410 million of which approximately $379
million and $360 million has been recognized at November 30, 2006 and December 31, 2005, respectively.
(b) AIG does not currently fund postretirement benefits.
(c) Actuarial (gains)/losses are amounts included in the projected benefit obligations but not yet recognized in the financial statements.
Form 10-K 2006 AIG 157

Continued
The following table sets forth the effect of FAS 158 on the consolidated balance sheet at December 31, 2006:
Including
Effect of Effect of
Pre-adoption Adoption of Adoption of
(in millions) of FAS 158 FAS 158 FAS 158
Prepaid assets (pensions) $ 550 $(532) $ 18
Intangible assets (pensions) 6 (6) —
Total assets 979,952 (538) 979,414
Liability for pension benefits(a)
1,140 230 1,370
Net deferred tax liability 9,088 (236) 8,852
Total liabilities 877,552 (6) 877,546
Accumulated other comprehensive income, net of tax 9,642 (532) 9,110
Total liabilities, preferred shareholders’ equity in subsidiary companies and
shareholders’ equity $979,952 $(538) $979,414
(a) Included in Other liabilities in the consolidated balance sheet.
Defined benefit pension plan obligations where the projected benefit obligation was in excess of the related plan
assets at December 31, 2006 and 2005 were as follows:
2006* 2005
(in millions) Plans Plans Plans Plans
Projected benefit obligation $1,486 $3,079 $1,284 $3,130
Accumulated benefit obligation 1,323 2,689 1,163 2,704
Fair value of plan assets 740 2,760 610 2,561
* At November 30, 2006 for non-U.S. plans of sponsoring companies with fiscal year-end date of November 30, 2006.
Defined benefit pension plan obligations where the accumulated benefit obligation was in excess of the related plan
assets at December 31, 2006 and 2005 were as follows:
2006* 2005
(in millions) Plans Plans Plans Plans
Projected benefit obligation $1,465 $240 $1,281 $268
Accumulated benefit obligation 1,311 204 1,161 224
Fair value of plan assets 723 11 607 9
* At November 30, 2006 for non-U.S. plans of sponsoring companies with fiscal year-end date of November 30, 2006.
158 AIG 2006 Form 10-K

Continued
(g) Plan Assets:
The following table sets forth the change in plan assets as of December 31, 2006 and 2005:
(in millions) Plans Plans Total Plans Plans Total
2006(a)
Change in plan assets:
Fair value of plan assets, at beginning of year $699 $2,561 $3,260 $— $ — $ —
Actual return on plan assets, net of expenses 33 282 315 — — —
AIG contributions 69 11 80 1 16 17
Benefits paid:
AIG assets (28) (10) (38) (1) (16) (17)
Plan assets (27) (84) (111) — — —
Effect of foreign currency fluctuation 41 — 41 — — —
Other(b)
62 — 62 — — —
Fair value of plan assets, end of year $850 $2,760 $3,610 $— $ — $ —
2005
Change in plan assets:
Fair value of plan assets, at beginning of year $624 $2,247 $2,871 $— $ — $ —
Actual return on plan assets, net of expenses 101 113 214 — — —
AIG contributions 95 298 393 1 16 17
Benefits paid:
AIG assets (28) (11) (39) (1) (16) (17)
Plan assets (29) (84) (113) — — —
Effect of foreign currency fluctuation (85) — (85) — — —
Other 20 (2) 18 — — —
Fair value of plan assets, end of year $699 $2,561 $3,260 $— $ — $ —
(a) As of November 30, 2006 for non-U.S. plans of sponsoring companies with fiscal year-end date of November 30, 2006.
(b) With respect to AIG’s non-U.S. plan assets $80 million of this increase resulted from the reclassification of the Swiss plans. For further discussion of
the Swiss plans see the preceding discussion in Note 15(e).
The asset allocation percentage by major asset class for AIG’s plans at December 31, 2006 and 2005, and the target
allocation for 2007 follow:
Non-U.S. Plans-Allocation U.S. Plans-Allocation
Target Actual Actual Target Actual Actual
2007 2006* 2005 2007 2006 2005
Asset class:
Equity securities 0-75% 47% 46% 20-70% 64% 59%
Debt securities 0-100 32 27 20-70 26 34
Other 0-100 21 27 5-25 10 7
Total 100% 100% 100% 100%
* At November 30, 2006 for non-U.S. plans of sponsoring companies with fiscal year-end of November 30, 2006.
Other includes cash, insurance contracts and real estate asset The investment strategy with respect to AIG’s pension plan
classes. assets is designed to achieve investment returns that will fully
Included in equity securities for the U.S. plans at Decem- fund the pension plan over the long term, while limiting the risk of
ber 31, 2006 and 2005 were 55,680 and 602,680 shares of AIG under funding over shorter time periods.
common stock, with values of $4.0 million and $41.1 million, The expected rate of return with respect to AIG’s domestic
respectively. pension plan was 8.0 percent for years ended December 31,
2006 and 2005. These rates of return are an aggregation of
Form 10-K 2006 AIG 159

AIG contributed $80 million during 2006 to its U.S. and15. Employee Benefits
non-U.S. pension plans. The annual pension contribution for 2007Continued
is expected to be approximately $95 million for U.S. and
expected returns within each asset category. The return with
non-U.S. plans.
respect to each asset class considers both historical returns and
the future expectations for such returns. The expected future benefit payments, net of
participants’ contributions, with respect to the defined
(h) Expected Cash Flows: With respect to AIG’s U.S. pension
benefit pension plans and other postretirement benefit
plan, the actuarially prepared funding amount ranges from the
plans, are as follows:
minimum amount AIG would be required to contribute to the
Pension Postretirementmaximum amount that would be deductible for U.S. tax purposes.
Non-U.S. U.S. Non-U.S. U.S.This range is generally not determined until the fourth quarter with
(in millions) Plans Plans Plans Plansrespect to the contribution year. Contributed amounts in excess of
2007 $ 67 $108 $1 $ 20the minimum amounts are deemed voluntary. Amounts in excess
2008 71 117 1 21of the maximum amount would be subject to an excise tax and
2009 80 126 1 22may not be deductible under the Internal Revenue Code. Supple-
2010 79 136 1 20mental and excess plans’ payments and postretirement plan
2011 83 148 1 21payments are deductible when paid.
2012-2016 440 944 3 116
160 AIG 2006 Form 10-K

Continued
(i) Components of net periodic benefit cost and other amounts recognized in other comprehensive income:
The following table presents the components of net periodic benefit cost recognized in income and other amounts
recognized in other comprehensive income with respect to the defined benefit pension plans and other postretirement
benefit plans for the year ended December 31, 2006 (no amounts were recognized in other comprehensive income for
the years ended 2005 and 2004):
Pensions Postretirement
(in millions) Plans Plans Total Plans Plans Total
2006
Components of net periodic benefit cost:
Service cost $ 78 $ 130 $ 208 $ 4 $ 6 $10
Interest cost 36 169 205 2 11 13
Expected return on assets (28) (201) (229) — — —
Amortization of prior service cost (9) (3) (12) — (6) (6)
Amortization of transitional obligation 1 — 1 — — —
Recognition of net actuarial (gains)/losses 16 75 91 — — —
Other 1 6 7 — — —
Net periodic benefit cost $ 95 $ 176 $ 271 $ 6 $11 $17
Total recognized in other comprehensive income $ 38 $ 24 $ 62 $ — $ — $ —
Total recognized in net periodic benefit cost and other comprehensive
income $133 $ 200 $ 333 $ 6 $11 $17
2005
Service cost $ 71 $ 111 $ 182 $ 4 $ 5 $ 9
Interest cost 32 153 185 2 11 13
Amortization of prior service cost (10) (3) (13) — (6) (6)
Recognition of net actuarial (gains)/losses 21 55 76 — — —
Other 7 1 8 — — —
Net periodic benefit cost $101 $ 137 $ 238 $ 6 $10 $16
2004
Service cost $ 59 $ 101 $ 160 $ 3 $ 6 $ 9
Interest cost 33 147 180 2 14 16
Amortization of prior service cost (8) — (8) — (7) (7)
Recognition of net actuarial (gains)/losses 15 53 68 11 2 13
Other* (24) — (24) 3 — 3
Net periodic benefit cost $ 55 $ 131 $ 186 $19 $15 $34
* The reduction resulted from transferring to the Japanese government certain Japanese plan obligations approximating $50 million reduced by
approximately $26 million loss incurred with respect to the settlement of those obligations.
For the U.S. plans, the estimated net loss, prior service credit and transition obligation for the defined benefit pension plans that will be
amortized from Accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $37 million,
$3 million and $0 million, respectively. For the non-U.S. plans, the estimated net loss, prior service credit and transition obligation for
the defined benefit pension plans that will be amortized from Accumulated other comprehensive income into net periodic benefit cost
over the next fiscal year are $11 million, $10 million and $1 million, respectively. The estimated net loss, prior service credit and
transition obligation for the other defined benefit postretirement plans that will be amortized from Accumulated other comprehensive
income into net periodic benefit cost over the next fiscal year will be less than $5 million in the aggregate.
Form 10-K 2006 AIG 161

Continued
The weighted average assumptions used to determine the net periodic benefit costs for the years ended December 31,
2006, 2005 and 2004 were as follows:
Plans* Plans Plans* Plans
2006
Discount rate 1.75-12.00% 5.50% 4.50-5.50% 5.50%
Rate of compensation increase 1.50-10.00% 4.25% 2.50-3.00% 4.25%
Expected return on assets 2.50-13.50% 8.00% N/A N/A
2005
Discount rate 1.75-12.00% 5.75% 4.50-6.00% 5.75%
Rate of compensation increase 1.50-10.00% 4.25% 3.00% 4.25%
2004
Discount rate 2.00-8.00% 6.00% 5.50-6.00% 6.00%
Rate of compensation increase 1.50-7.00% 4.25% 5.50% 4.25%
* The benefit obligations for non-U.S. plans reflect those assumptions that were most appropriate for the local economic environments of the subsidiaries
providing such benefits.
AIG’s postretirement plans provide benefits primarily in the form of defined employer contributions rather than defined employer benefits.
Changes in the assumed healthcare cost trend rate do not have a material effect on postretirement expense.
December 9, 2005, the date of SICO’s notice to participants in16. Benefits Provided by Starr International
the SICO Plans. See also Note 12(b) Commitments herein.Company, Inc. and C.V. Starr & Co., Inc.
Compensation expense in 2006 included various out of period
SICO has provided a series of two-year Deferred Compensation adjustments totaling $61 million, primarily relating to stock-splits
Profit Participation Plans (SICO Plans) to certain AIG employees. and other miscellaneous items for the SICO plans. See also
The SICO Plans came into being in 1975 when the voting Note 14 herein.
shareholders and Board of Directors of SICO, a private holding In January 2006, C.V. Starr & Co., Inc. (Starr) completed its
company whose principal asset is AIG common stock, decided tender offer to purchase Starr interests from AIG employees. In
that a portion of the capital value of SICO should be used to conjunction with AIG’s adoption of FAS 123R, Starr is considered
provide an incentive plan for the current and succeeding manage- to be an ‘‘economic interest holder’’ in AIG. As a result,
ments of all American International companies, including AIG. compensation expense of $54 million was recorded in 2006
None of the costs of the various benefits provided under the results with respect to the Starr tender offer.
SICO Plans has been paid by AIG, although AIG has recorded a As a result of its changing relationship with Starr and SICO,
charge to reported earnings for the deferred compensation AIG has established new executive compensation plans to replace
amounts paid to AIG employees by SICO, with an offsetting the SICO plans and investment opportunities previously provided
amount credited to additional paid-in capital reflecting amounts by Starr. See Note 14 for a description of these plans.
deemed contributed by SICO. The SICO Plans provide that shares Compensation expense with respect to the SICO Plans aggre-
currently owned by SICO are set aside by SICO for the benefit of gated $108 million, $205 million and $62 million for 2006, 2005
the participant and distributed upon retirement. The SICO Board and 2004, respectively.
of Directors currently may permit an early payout of units under
certain circumstances. Prior to payout, the participant is not 17. Ownership and Transactions With
entitled to vote, dispose of or receive dividends with respect to Related Parties
such shares, and shares are subject to forfeiture under certain
(a) Ownership: According to the Schedule 13D filed on Novem-conditions, including but not limited to the participant’s voluntary
ber 20, 2006 by Starr, SICO, Edward E. Matthews, Maurice R.termination of employment with AIG prior to normal retirement
Greenberg, the Maurice R. and Corinne P. Greenberg Familyage. Under the SICO Plans, SICO’s Board of Directors may elect
Foundation, Inc., the Universal Foundation, Inc. and the Mauriceto pay a participant cash in lieu of shares of AIG common stock.
R. and Corinne P. Greenberg Joint Tenancy Company, LLC, theseFollowing notification from SICO to participants in the SICO Plans
reporting persons could be deemed to beneficially ownthat it will settle specific future awards under the SICO Plans with
365,923,844 shares of common stock at that date. Based on theshares rather than cash, AIG modified its accounting for the
shares of common stock outstanding as of January 31, 2007,SICO Plans from variable to fixed measurement accounting. AIG
this ownership would represent approximately 14 percent of thegave effect to this change in settlement method beginning on
162 AIG 2006 Form 10-K

and do not have recourse to AIG, except where AIG has provided a17. Ownership and Transactions With
guarantee to the VIE’s interest holders.Related Parties
AIG determines whether an entity is a VIE, who the variableContinued
interest holders are, and which party is the primary beneficiary of
voting stock of AIG. Although these reporting persons have made
the VIE by performing an analysis of the design of the VIE that
filings under Section 16 of the Exchange Act, reporting sales of
includes a review of, among other factors, its capital structure,
shares of common stock, no amendment to the Schedule 13D
contractual relationships and terms, nature of the entity’s opera-
has been filed to report a change in ownership subsequent to
tions and purpose, nature of the entity’s interests issued, AIG’s
November 20, 2006.
interests in the entity which either create or absorb variability and
(b) Transactions with Related Parties: Prior to the termina- related party relationships. AIG consolidates a VIE in situations
tion of their agency relationships with Starr during 2006, AIG and where all of AIG’s interests in the VIE, when combined, absorb a
its subsidiaries paid commissions to Starr and its subsidiaries for majority of the expected losses or a majority of the expected
the production and management of insurance business in the residual returns of the VIE.
ordinary course of business. Payment for the production of In addition to the VIEs that are consolidated in accordance with
insurance business to Starr aggregated approximately $47 million FIN 46R, the Company has significant variable interests in certain
in 2006, $214 million in 2005, and $205 million in 2004. AIG other VIEs that are not consolidated because the Company is not
also received approximately $4 million in 2006, $23 million in the primary beneficiary. AIG applies quantitative and qualitative
2005, and $24 million in 2004 from Starr and paid none in 2006, measures in identifying significant variable interests.
approximately $20,000 in 2005, and $39,000 in 2004 to Starr in Entities for which AIG is the primary beneficiary and consoli-
rental fees and none in 2006 and 2005 and $262,000 in 2004 dates or where AIG has a significant variable interest are as
for services. AIG also received none in 2006, approximately follows:
$2 million in 2005, and $1 million in 2004, respectively, from
SICO and paid none in 2006 and approximately $1 million in each SunAmerica Affordable Housing Partnerships
of the years 2005 and 2004 to SICO as reimbursement for
SunAmerica Affordable Housing Partners, Inc. (SAAHP) organizes
services rendered at cost. AIG also paid to SICO $2 million in
limited partnerships (investment partnerships) that are considered
2006, $3 million in 2005, and $4 million in 2004 in rental fees.
to be VIEs, and that are consolidated by AIG. The investment
There are no significant receivables from/payables to related
partnerships invest as limited partners in operating partnerships
parties at December 31, 2006.
that develop and operate affordable housing qualifying for federal
tax credits and a few market rate properties across the United
18. Variable Interest Entities
States. The general partners in the operating partnerships are
FIN 46R clarifies the consolidation accounting for certain entities almost exclusively unaffiliated third-party developers. AIG does not
in which equity investors do not have the characteristics of a normally consolidate an operating partnership if the general
controlling financial interest or do not have sufficient equity that is partner is an unaffiliated person. Through approximately 1,150
at risk which would allow the entity to finance its activities without partnerships, SAAHP has invested in developments with approxi-
additional subordinated financial support. FIN 46R recognizes that mately 155,000 apartment units nationwide, and has syndicated
consolidation based on majority voting interest should not apply to over $6 billion in partnership equity since 1991 to other investors
certain types of entities that are defined as VIEs. A VIE is who will receive, among other benefits, tax credits under certain
consolidated by its primary beneficiary, which is the party that sections of the Internal Revenue Code. AIG Retirement Services,
absorbs a majority of the expected losses or a majority of the Inc. functions as the general partner in certain investment
expected residual returns of the VIE, or both. partnerships and acts both as a credit enhancer in certain
AIG, in the normal course of business, is involved with various transactions, through differing structures with respect to funding
VIEs. In some cases, AIG has participated to varying degrees in development costs for the operating partnerships, and as guaran-
the design of the entity. AIG’s involvement in VIEs varies from tor that investors will receive the tax benefits projected at the
being a passive investor to managing and structuring the activities time of syndication. AIG Retirement Services, Inc. consolidates
of the VIE. AIG engages in transactions with VIEs to manage its these investment partnerships as a result of the guarantee
investment needs, obtain funding as well as facilitate client needs provided to the investors. As part of their incentive compensation,
through AIGGIC and AIGFP. AIG purchases debt securities (rated certain key SAAHP employees have been awarded residual cash
and unrated) and equity interests issued by VIEs, makes loans flow interests in the partnerships, subject to certain vesting
and provides other credit support to VIEs, enters into insurance requirements. The operating income of SAAHP is reported, along
and reinsurance transactions with VIEs, enters into leasing with other SunAmerica partnership income, as a component of
arrangements with VIEs, enters into derivative transactions with AIG’s Asset Management segment.
VIEs through AIGFP and acts as the collateral manager of VIEs
through AIGGIC and AIGFP. Obligations to outside interest holders Asset Management
in VIEs consolidated by AIG are reported as liabilities in the
In certain instances, AIGGIC acts as the collateral manager or
consolidated financial statements. These interest holders gener-
general partner of an investment fund, collateralized debt obliga-
ally have recourse only to the assets and cash flows of the VIEs
Form 10-K 2006 AIG 163

AIGFP is the primary beneficiary of an asset-backed commer-18. Variable Interest Entities
cial paper conduit with which it entered into several total returnContinued
swaps covering all the conduit’s assets that absorb the majority
tion (CDO), collateralized loan obligation (CLO), private equity fund
of the expected losses of the entity. The assets of the conduit
or hedge fund. Such entities are typically registered investment
serve as collateral for the conduit’s obligations. AIGFP is also the
companies or qualify for the specialized investment company
primary beneficiary of several structured financing transactions in
accounting in accordance with the AICPA Investment Company
which AIGFP holds the first loss position either by investing in the
Audit and Accounting Guide. In CDO and CLO transactions, AIG
equity of the VIE or implicitly through a lending or derivative
establishes a trust or other special purpose entity that purchases
arrangement.
a portfolio of assets such as bank loans, corporate debt, or non-
In certain instances, AIGFP enters into liquidity facilities with
performing credits and issues trust certificates or debt securities
various SPEs where AIGFP provides liquidity to the SPE in the form
that represent interests in the portfolio of assets. These transac-
of a guarantee, derivative, or a letter of credit and does not
tions can be cash-based or synthetic and are actively or passively
consolidate the VIE. AIGFP also executes various swap and option
managed. For investment partnerships, hedge funds and private
transactions with VIEs. Such contractual arrangements are done in
equity funds, AIG acts as the general partner or manager of the
the ordinary course of business. Typically, interest rate derivatives
fund and is responsible for carrying out the investment mandate
such as interest rate swaps and options executed with VIEs are
of the VIE. Often, AIG’s insurance operations participate in these
not deemed to be variable interests or significant variable
AIG managed structures as a passive investor in the debt or
interests because the underlying is an observable market interest
equity issued by the VIE. Typically, AIG does not provide any
rate and AIGFP as the derivative counterparty to the VIE is senior
guarantees to the investors in the VIE.
to the debt and equity holders.
AIGGIC is an investor in various real estate investments. These
investments are typically with unaffiliated third-party developers
Asset Management and Insurance Activitiesvia a partnership or limited liability company structure. Some of
these entities are VIEs. The activities of these VIEs principally AIG uses VIEs in connection with certain guaranteed investment
consists of the development or redevelopment of all major types contract programs written by its Life Insurance & Retirement
of commercial (retail, office, industrial, logistics parks, mixed use, Services subsidiaries (GIC Programs). In the GIC Programs, AIG’s
etc.) and residential real estate. AIG’s involvement varies from Life Insurance subsidiaries (principally SunAmerica Life) provide
being a passive equity investor to actively managing the activities guaranteed investment contracts to VIEs in which AIG does not
of the VIE. have a direct variable interest, as defined under FIN 46R, in the
entity. The VIE issues notes or bonds which are sold to third-party
Investment Activities institutional investors. Neither AIG nor the insurance company
issuing the GICs has any direct obligation to the investors in the
As part of its investment activities, AIG’s insurance operations
notes or bonds. The proceeds from the securities issued by the
invest in obligations which include debt and equity securities and
VIE are invested by the VIE in the GICs. The insurance company
interests issued by VIEs. These investments include investments
subsidiaries use the proceeds to invest in a diversified portfolio of
in AIG sponsored and non-sponsored investment funds, hedge
securities, primarily investment grade bonds. Both the assets and
funds, private equity funds, and structured financing arrange-
the liabilities of the insurance companies arising from these GIC
ments. The investments in these VIEs allow AIG’s insurance
Programs are presented in AIG’s consolidated balance sheet.
entities to purchase assets permitted by insurance regulations
Thus, at December 31, 2006, approximately $32 billion of
while maximizing their return on these assets. AIG’s insurance
policyholders’ contract deposits represented liabilities from issu-
operations typically are not involved in the design or establish-
ances of GICs included in these GIC Programs.
ment of the VIE, nor do they actively participate in the manage-
Assets held by VIEs which are currently consolidated because
ment of the VIE.
AIG is the primary beneficiary (except for those VIEs where AIG
also owns a majority voting interest), approximated $9.1 billion at
AIGFP December 31, 2006. These consolidated assets are reflected in
AIG’s consolidated balance sheet as Investments and FinancialThe variable interests that AIGFP may hold in VIEs include debt
services assets.securities, equity interests, loans, derivative instruments and
Assets of VIEs where AIG has a significant variable interestother credit support arrangements. Transactions associated with
and does not consolidate the VIE because AIG is not the primaryVIEs include an asset-backed commercial paper conduit, asset
beneficiary, approximated at $130.1 billion December 31, 2006.securitizations, collateralized debt obligations, investment vehicles
Although expected losses are not expected to be material, AIG’sand other structured financial transactions. AIGFP engages in
maximum exposure to loss from its involvement with thesethese transactions to facilitate client needs for investment
unconsolidated VIEs approximates $38.7 billion at December 31,purposes and to obtain funding.
2006. For this purpose, maximum loss is considered to be theAIGFP invests in preferred securities issued by VIEs. Addition-
notional amount of credit lines, guarantees and other creditally, AIGFP establishes VIEs that issue preferred interests to third
support, and liquidity facilities, the notional amounts of creditparties and uses the proceeds to provide financing to AIGFP
subsidiaries. In certain instances, AIGFP consolidates these VIEs.
164 AIG 2006 Form 10-K

AIG’s insurance operations). AIG had no hedges that were18. Variable Interest Entities
considered fair value hedges or net investment hedges atContinued
December 31, 2006. At December 31, 2006, AIG’s hedge
default swaps and certain total return swaps, and the amount
accounting was limited to cash flow hedge accounting primarily
invested in the debt or equity issued by the VIE.
related to the hedge of forecasted transactions.
AIG assesses, both at the hedge’s inception and on an
19. Derivatives
ongoing basis, whether the derivatives used in hedging transac-
tions are highly effective in offsetting changes in fair values orDerivatives are financial arrangements among two or more parties
cash flows of hedged items.with returns linked to or ‘‘derived’’ from some underlying equity,
As of January 1, 2006 and December 31, 2006, the relateddebt, commodity or other asset, liability, or index. Derivative
balance of accumulated derivative net loss arising from cash flowpayments may be based on interest rates and exchange rates
hedges, net of tax, was $25 million and $28 million, respectively.and/or prices of certain securities, commodities, or financial or
Of the change in accumulated derivative net loss $3 millioncommodity indices or other variables. Collateral is required, at the
represents current period reclassifications to operating income.discretion of AIG, on certain transactions based on the
In addition to hedging activities, AIG also uses derivativecreditworthiness of the counterparty.
instruments with respect to investment operations, which include,AIG carries all derivatives in the consolidated balance sheet at
among other things, credit default swaps, and purchasing invest-fair value. The changes in fair value of the derivative transactions
ments with embedded derivatives, such as equity linked notes andof AIGFP are presented as a component of AIG’s operating
convertible bonds. All changes in the fair value of theseincome. However, in certain instances, when income is not
derivatives are recorded in earnings. AIG bifurcates an embeddedrecognized up front under EITF 02-03, income is recognized over
derivative where: (i) the economic characteristics of the embeddedthe life of the contract, where appropriate.
instruments are not clearly and closely related to those of theThe discussion below relates to the derivative activities of AIG
remaining components of the financial instrument; (ii) the contract(other than those of AIGFP) that qualify for hedge accounting
that embodies both the embedded derivative instrument and thetreatment under FAS 133.
host contract is not remeasured at fair value; and (iii) a separateFor derivatives designated as hedges, on the date the
instrument with the same terms as the embedded instrumentderivative contract is entered into, AIG designates the derivative
meets the definition of a derivative under FAS 133.as: (i) a hedge of the subsequent changes in the fair value of a
The overwhelming majority of AIG’s derivatives activities arerecognized asset or liability or of an unrecognized firm commit-
conducted by AIGFP. AIGFP becomes a party to derivative financialment (‘‘fair value’’ hedge); (ii) a hedge of a forecasted transac-
instruments in the normal course of business and to reducetion, or the variability of cash flows to be received or paid related
currency, interest rate, commodity, and equity exposures. Suchto a recognized asset or liability (‘‘cash flow’’ hedge); or (iii) a
instruments are reflected in the consolidated financial statementshedge of a net investment in a foreign operation. Fair value and
and are carried at a market or a fair value, whichever iscash flow hedges may involve foreign currencies (‘‘foreign currency
appropriate. The recorded estimated fair values of such instru-hedges’’). The gain or loss in the fair value of a derivative that is
ments may be different from the values that might be realized ifappropriately and contemporaneously documented, designated
AIGFP was required to sell or close out the transactions prior toand is highly effective as a fair value hedge is recorded in current
maturity.period earnings, along with the loss or gain on the hedged item
AIGFP, in the ordinary course of operations and as principal,attributable to the hedged risk. The gain or loss in the fair value
structures and enters into derivative transactions to meet theof a derivative that is appropriately and contemporaneously
needs of counterparties who may be seeking to hedge certaindocumented, designated and is highly effective as a cash flow
aspects of such counterparties’ operations or obtain a desiredhedge is recorded in other comprehensive income, until earnings
financial exposure. AIGFP also enters into derivative transactionsare affected by the variability of cash flows in the hedged item. Of
to hedge the financial exposures arising from its counterpartythe amount deferred in Other comprehensive income at Decem-
transactions. Such derivative transactions include interest rate,ber 31, 2006, AIG does not expect a material amount to be
currency, commodity, credit and equity swaps, swaptions, andreclassified into earnings over the next twelve months. The portion
forward commitments. Interest rate swap transactions generallyof the gain or loss in the fair value of a derivative in a cash flow
involve the exchange of fixed and floating rate interest paymenthedge that represents hedge ineffectiveness is recognized imme-
obligations without the exchange of the underlying notionaldiately in current period earnings. The amount of ineffectiveness
amounts. AIGFP typically becomes a principal in the exchange ofwas not material for 2006, 2005 and 2004. The gain or loss in
interest payments between the parties and, therefore, is exposedthe fair value of a derivative that is appropriately and contempora-
to counterparty credit risk and may be exposed to loss, ifneously documented, designated and is highly effective as a
counterparties default. Currency, commodity, and equity swapshedge of a net investment in a foreign operation is recorded in
are similar to interest rate swaps, but involve the exchange ofthe foreign currency translation adjustments account within other
specific currencies or cashflows based on the underlying commod-comprehensive income. Changes in the fair value of derivatives
ity, equity securities or indices. Also, they may involve theused for other than hedging activities are reported in current
exchange of notional amounts at the beginning and end of theperiod earnings (principally in realized capital gains and losses for
Form 10-K 2006 AIG 165

amount is not a quantification of market risk or credit risk and is19. Derivatives
not recorded on the consolidated balance sheet. NotionalContinued
amounts generally represent those amounts used to calculate
transaction. Swaptions are options where the holder has the right
contractual cash flows to be exchanged and are not paid or
but not the obligation to enter into a swap transaction or cancel
received, except for certain contracts such as currency swaps.
an existing swap transaction. At December 31, 2006, the
The timing and the amount of cash flows relating to Capital
aggregate notional amount of AIGFP’s outstanding swap transac-
Markets foreign exchange forwards and exchange traded futures
tions approximated $1,456 billion, primarily related to interest
and options contracts are determined by each of the respective
rate swaps of approximately $1,058 billion.
contractual agreements.
Notional amount represents a standard of measurement of the
volume of swaps business of Capital Markets operations. Notional
The following table presents the contractual and notional amounts by maturity and type of derivative of Capital
Markets derivatives portfolio at December 31, 2006 and 2005:
Remaining Life of Notional Amount*
One Two Through Six Through After Ten Total Total
(in millions) Year Five Years Ten Years Years 2006 2005
Capital Markets interest rate, currency and
equity swaps and swaptions:
Notional amount:
Interest rate swaps $380,704 $505,317 $149,573 $22,685 $1,058,279 $ 837,389
Currency swaps 59,656 111,571 36,438 10,426 218,091 211,519
Swaptions, equity and commodity swaps 65,402 64,467 30,319 19,852 180,040 175,097
Total $505,762 $681,355 $216,330 $52,963 $1,456,410 $1,224,005
* 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 change in the value of the underlying commodity, currency or index
holder to sell or purchase foreign currencies, commodities or by entering into offsetting transactions with third-party market
financial indices in which the seller/purchaser agrees to make/ participants. Risks arise as a result of movements in current
take delivery at a specified future date of a specified instrument, market prices from contracted prices, and the potential inability of
at a specified price or yield. Options are contracts that allow the the counterparties to meet their obligations under the contracts.
holder of the option to purchase or sell the underlying commodity, At December 31, 2006, the contractual amount of Capital
currency or index at a specified price and within, or at, a specified Markets futures, forward and option contracts approximated
period of time. As a writer of options, AIGFP generally receives an $520.2 billion.
option premium and then manages the risk of any unfavorable
The following table presents Capital Markets futures, forward and option contracts portfolio by maturity and type of
derivative at December 31, 2006 and 2005:
Remaining Life
One Two Through Six Through After Ten Total Total
(in millions) Year Five Years Ten Years Years 2006 2005
Futures, forward and options contracts:
Exchange traded futures and options contracts
contractual amount $ 25,798 $1,473 $ — $ — $ 27,271 $ 25,298
Over the counter forward contracts
contractual amount 484,524 6,903 1,486 — 492,913 295,778
Total $510,322 $8,376 $1,486 $ — $520,184 $321,076
AIGFP enters into credit derivative transactions in the ordinary be realized before AIGFP has any payment obligation is negotiated
course of its business. The majority of AIGFP’s credit derivatives by AIGFP for each transaction to provide that the likelihood of any
require AIGFP to provide credit protection on a designated payment obligation by AIGFP under each transaction is remote,
portfolio of loans or debt securities. AIGFP provides such credit even in severe recessionary market scenarios. At December 31,
protection on a ‘‘second loss’’ basis, under which AIGFP’s 2006 and 2005, the notional amounts of this credit derivatives
payment obligations arise only after credit losses in the desig- portfolio (including the super senior transactions) were $483.6 bil-
nated portfolio exceed a specified threshold amount or level of lion and $387.2 billion, respectively.
‘‘first losses.’’ The threshold amount of credit losses that must
166 AIG 2006 Form 10-K

reported as trading account assets, and liabilities are included in19. Derivatives
the respective policyholder liability account of the general account.Continued
Amounts assessed against the contract holders for mortality,
AIG and its subsidiaries also use derivatives and other
administrative, and other services are included in revenue and
instruments as part of its financial risk management programs.
changes in liabilities for minimum guarantees are included in
Interest rate derivatives (such as interest rate swaps) are used to
incurred policy losses and benefits in the Consolidated Statement
manage interest rate risk associated with its investments in fixed
of Income. Separate and variable account net investment income,
income securities, commercial paper issuances, medium- and
net investment gains and losses, and the related liability changes
long-term note offerings, and other interest rate sensitive assets
are offset within the same line item in the Consolidated
and liabilities. In addition, foreign exchange derivatives (principally
Statement of Income for those accounts that qualify for separate
cross currency swaps, forwards and options) are used to
account treatment under SOP 03-1. Net investment income and
economically hedge non-U.S. dollar denominated debt, net capital
gains and losses on trading accounts for contracts that do not
exposures and foreign exchange transactions. The derivatives are
qualify for separate account treatment under SOP 03-1 are
effective economic hedges of the exposures they are meant to
reported in net investment income and are offset by an equal
offset.
amount reported in incurred policy losses and benefits.
20. Variable Life and Annuity Contracts The vast majority of AIG’s exposure on guarantees made
to variable contract holders arises from GMDB. Details
AIG follows American Institute of Certified Public Accountants
concerning AIG’s GMDB exposures as of December 31,
Statement of Position 03-1 (SOP 03-1), which requires recognition
2006 and 2005 are as follows:
of a liability for guaranteed minimum death benefits and other
Net Depositsliving benefits related to variable annuity and variable life
Plus a Minimum Highest Contract
contracts as well as certain disclosures for these products. (dollars in billions) Return Value Attained
AIG reports variable contracts through separate and variable
2006accounts when investment income and investment gains and
Account value(a)
$64 $15losses accrue directly to, and investment risk is borne by, the
Amount at risk(b)
6 1
contract holder (traditional variable annuities), and the separate
Average attained age of
account qualifies for separate account treatment under SOP 03-1.
contract holders by product 38-70 years 56-71 years
In some foreign jurisdictions, separate accounts are not legally
Range of guaranteedinsulated from general account creditors and therefore do not
minimum return rates 0-10%qualify for separate account treatment under SOP 03-1. In such
cases, the variable contracts are reported as general account 2005
contracts. AIG also reports variable annuity and life contracts Account value(a)
$59 $13
Amount at risk(b)
7 1through separate and variable accounts, or general accounts when
Average attained age ofnot qualified for separate account reporting, where AIG contractu-
contract holders by product 51-70 years 57-70 yearsally guarantees to the contract holder (variable contracts with
guarantees) either (a) total deposits made to the contract less any Range of guaranteed
partial withdrawals plus a minimum return (and in minor in- minimum return rates 0-10%
stances, no minimum returns) (Net Deposits Plus a Minimum
(a) Included in Policyholders’ contract deposits in the Consolidated
Return) or (b) the highest contract value attained, typically on any Balance Sheet.
anniversary date minus any subsequent withdrawals following the
(b) Represents the amount of death benefit currently in excess of Account
contract anniversary (Highest Contract Value Attained). These value.
guarantees include benefits that are payable in the event of
The following summarizes GMDB liabilities for guaranteesdeath, annuitization, or, in other instances, at specified dates
on variable contracts reflected in the general account.during the accumulation period. Such benefits are referred to as
guaranteed minimum death benefits (GMDB), guaranteed minimum (in millions) 2006 2005
income benefits (GMIB), and guaranteed minimum withdrawal
Balance at January 1 $442 $485
benefit (GMWB), or guaranteed minimum account value benefits
Reserve increase 35 33
(GMAV), respectively. For AIG, GMDB is by far the most widely
Benefits paid (71) (76)
offered benefit.
Balance at December 31 $406 $442The assets supporting the variable portion of both traditional
variable annuities and variable contracts with guarantees are The GMDB liability is determined each period end by estimating
carried at fair value and reported as summary total separate and the expected value of death benefits in excess of the projected
variable account assets with an equivalent summary total re- account balance and recognizing the excess ratably over the
ported for liabilities when the separate account qualifies for accumulation period based on total expected assessments. AIG
separate account treatment under SOP 03-1. Assets for separate regularly evaluates estimates used and adjusts the additional
accounts that do not qualify for separate account treatment are liability balance, with a related charge or credit to benefit
Form 10-K 2006 AIG 167

In addition to GMDB, AIG’s contracts currently include to a20. Variable Life and Annuity Contracts
lesser extent GMIB. The GMIB liability is determined each periodContinued
end by estimating the expected value of the annuitization beneﬁts
expense, if actual experience or other evidence suggests that
in excess of the projected account balance at the date of
earlier assumptions should be revised.
annuitization and recognizing the excess ratably over the accumu-
The following assumptions and methodology were used to
lation period based on total expected assessments. AIG regularly
determine the domestic and foreign GMDB liability as of Decem-
evaluates estimates used and adjusts the additional liability
ber 31, 2006:
balance, with a related charge or credit to beneﬁt expense, if( Data used was up to 5,000 stochastically generated invest-
actual experience or other evidence suggests that earlier assump-
ment performance scenarios.
tions should be revised. As of December 31, 2006, most of AIG’s( Mean investment performance assumptions ranged from 0 per-
GMIB exposure was transferred via reinsurance agreements.
cent to approximately ten percent depending on the block of
Contracts with GMIB not reinsured have account values of
business.
$21 million with a corresponding reserve of less than $4 million.( Volatility assumptions ranged from 10 percent to 30 percent
AIG contracts currently include a minimal amount of GMAV and
depending on the block of business.
GMWB. GMAV and GMWB are considered to be derivatives and( Mortality was assumed at between 60 percent and 102 per-
are recognized at fair value through earnings. AIG enters into
cent of various life and annuity mortality tables.
derivative contracts to partially hedge the economic exposure that( For domestic contracts, lapse rates vary by contract type and
arises from GMAV and GMWB.
duration and ranged from zero percent to 40 percent. For
Japan, lapse rates ranged from zero percent to 20 percent
depending on the type of contract.
( For domestic contracts, the discount rate ranged from 3.25 per-
cent to 11 percent. For Japan, the discount rate ranged from
zero percent to seven percent.
168 AIG 2006 Form 10-K

21. Quarterly Financial Information (Unaudited)
The following quarterly ﬁnancial information for each of the three months ended March 31, June 30, September 30 and
December 31, 2006 and 2005 is unaudited. However, in the opinion of management, all adjustments (consisting only
of normal recurring adjustments) necessary for a fair statement of the results of operations for such periods, have been
made.
Consolidated Statements of Income
Three Months Ended
March 31, June 30, September 30, December 31,
(in millions, except per share data) 2006 2005 2006 2005 2006 2005(a)
2006 2005(b)
Revenues $27,259 $27,202 $26,743 $27,903 $29,199 $26,408 $29,993 $27,392
Income before income taxes, minority interest and
cumulative effect of an accounting change 4,793 5,649 5,241 6,701 6,301 2,547 5,352 316
Income before cumulative effect of an accounting change 3,161 3,799 3,190 4,489 4,224 1,745 3,439 444
Net income $ 3,195 $ 3,799 $ 3,190 $ 4,489 $ 4,224 $ 1,745 $ 3,439 $ 444
Basic
Income before cumulative effect of an accounting change $ 1.21 $ 1.46 $ 1.23 $ 1.73 $ 1.62 $ 0.67 $ 1.32 $ 0.17
Cumulative effect of an accounting change, net of tax 0.01 — — — — — — —
Net income $ 1.22 $ 1.46 $ 1.23 $ 1.73 $ 1.62 $ 0.67 $ 1.32 $ 0.17
Diluted
Income before cumulative effect of an accounting change $ 1.21 $ 1.45 $ 1.21(c)
$ 1.71 $ 1.61 $ 0.66(c)
$ 1.31 $ 0.17
Cumulative effect of an accounting change, net of tax 0.01 — — — — — — —
Net income $ 1.22 $ 1.45 $ 1.21(c)
$ 1.71 $ 1.61 $ 0.66(c)
$ 1.31 $ 0.17
Average shares outstanding:
Basic 2,605 2,597 2,606 2,596 2,607 2,597 2,610 2,597
Diluted 2,624 2,624 2,625 2,623 2,626 2,624 2,622 2,626
(a) The third quarter of 2005 included catastrophe losses of approximately $2.4 billion.
(b) The fourth quarter of 2005 included catastrophe losses of $841 million, regulatory settlement costs of approximately $1.6 billion, and an increase in
net reserves of approximately $1.8 billion resulting from the annual review of General Insurance loss and loss adjustment reserves.
(c) Diluted earnings per common share were $1.216 for the quarter ended June 30, 2006, and $0.666 for the quarter ended September 30, 2005 using
the discrete period weighted average shares outstanding for the respective periods.
Form 10-K 2006 AIG 169

22. Information Provided in Connection With Outstanding Debt
The following condensed consolidating ﬁnancial statements are provided in compliance with Regulation S-X of the SEC.
(a) AGC is a holding company and a wholly owned subsidiary of AIG. AIG provides a full and unconditional guarantee of
all outstanding debt of AGC.
American General Corporation (AGC):
Condensed Consolidating Balance Sheet
American
International
Group, Inc. AGC Other Consolidated
(in millions) Guarantor Issuer Subsidiaries Eliminations AIG
December 31, 2006
Assets:
Invested assets $ 7,346 $ — $797,976 $ (14,822) $790,500
Cash 76 — 1,514 — 1,590
Carrying value of subsidiaries and partially owned companies,
at equity 109,125 27,967 8,436 (144,427) 1,101
Other assets 3,989 2,622 181,561 (1,949) 186,223
Total assets $120,536 $30,589 $989,487 $(161,198) $979,414
Liabilities:
Insurance liabilities $ 21 $ — $495,135 $ (64) $495,092
Debt 15,157 2,136 146,206 (14,820) 148,679
Other liabilities 3,681 3,508 228,068 (1,482) 233,775
Total liabilities 18,859 5,644 869,409 (16,366) 877,546
Preferred shareholders’ equity in subsidiary companies — — 191 — 191
Total shareholders’ equity 101,677 24,945 119,887 (144,832) 101,677
Total liabilities, preferred shareholders’ equity in subsidiary
companies and shareholders’ equity $120,536 $30,589 $989,487 $(161,198) $979,414
December 31, 2005
Assets:
Invested assets $ 122 $ — $696,424 $ (13,696) $682,850
Cash 190 — 1,707 — 1,897
at equity 90,723 27,027 15,577 (132,169) 1,158
Other assets 4,332 2,577 161,564 (1,327) 167,146
Total assets $ 95,367 $29,604 $875,272 $(147,192) $853,051
Liabilities:
Insurance liabilities $ 408 $ — $460,271 $ (56) $460,623
Debt 5,329 2,087 114,490 (12,057) 109,849
Other liabilities 3,313 4,110 191,707 (3,054) 196,076
Total liabilities 9,050 6,197 766,468 (15,167) 766,548
Total shareholders’ equity 86,317 23,407 108,618 (132,025) 86,317
companies and shareholders’ equity $ 95,367 $29,604 $875,272 $(147,192) $853,051
170 AIG 2006 Form 10-K

Continued
Condensed Consolidating Statement of Income
American
International
(in millions) Guarantor Issuer Subsidiaries Eliminations AIG
Year Ended December 31, 2006
Operating income $ (786) $ 122 $22,351 $ — $21,687
Equity in undistributed net income of consolidated subsidiaries 13,308 1,263 — (14,571) —
Dividend income from consolidated subsidiaries 1,689 602 — (2,291) —
Income taxes (benefits) 197 (131) 6,471 — 6,537
Minority interest — — (1,136) — (1,136)
Cumulative effect of an accounting change 34 — — — 34
Net income (loss) $14,048 $2,118 $14,744 $(16,862) $14,048
Operating income $(1,569) $ (200) $16,982 $ — $15,213
Dividend income from consolidated subsidiaries 1,958 — — (1,958) —
Income taxes (benefits) 68 (92) 4,282 — 4,258
Minority interest — — (478) — (478)
Net income (loss) $10,477 $2,422 $12,222 $(14,644) $10,477
Operating income $ 161 $ 90 $14,594 $ — $14,845
Dividend income from consolidated subsidiaries 1,939 65 — (2,004) —
Income taxes (benefits) 863 31 3,513 — 4,407
Cumulative effect of an accounting change — — (144) — (144)
Net income (loss) $ 9,839 $2,172 $10,482 $(12,654) $ 9,839
Form 10-K 2006 AIG 171

Continued
Condensed Consolidating Statements of Cash Flow
American
International
(in millions) Guarantor Issuer Subsidiaries AIG
Net cash provided by operating activities $ (590) $ 258 $ 7,161 $ 6,829
Cash flows from investing:
Invested assets disposed 3,831 — 154,283 158,114
Invested assets acquired (8,298) — (215,759) (224,057)
Other (3,176) (67) 2,146 (1,097)
Net cash used in investing activities (7,643) (67) (59,330) (67,040)
Issuance of debt 12,038 — 61,942 73,980
Repayments of debt (2,417) — (34,063) (36,480)
Other (1,502) (191) 23,983 22,290
Net cash provided by (used in) financing activities 8,119 (191) 51,862 59,790
Effect of exchange rate changes on cash — — 114 114
Change in cash (114) — (193) (307)
Cash at beginning of year 190 — 1,707 1,897
Cash at end of year $ 76 $ — $ 1,514 $ 1,590
Net cash provided by operating activities $ 1,854 $ 805 $ 22,723 $ 25,382
Invested assets disposed — — 184,843 184,843
Invested assets acquired (598) — (245,804) (246,402)
Other (1,083) (247) 389 (941)
Net cash used in investing activities (1,681) (247) (60,572) (62,500)
Issuance of debt 2,101 — 64,960 67,061
Repayments of debt (607) (398) (51,099) (52,104)
Other (1,494) (160) 23,866 22,212
Net cash provided by (used in) financing activities — (558) 37,727 37,169
Effect of exchange rate changes on cash — (163) (163)
Change in cash 173 — (285) (112)
Net cash provided by operating activities $ 1,390 $ 839 $ 27,185 $ 29,414
Invested assets disposed 502 — 149,883 150,385
Other 251 (408) (486) (643)
Net cash used in investing activities 646 (408) (92,834) (92,596)
Issuance of debt — — 46,695 46,695
Repayments of debt (400) (349) (32,203) (32,952)
Other (1,638) (82) 52,194 50,474
Net cash provided by (used in) financing activities (2,038) (431) 66,686 64,217
Effect of exchange rate changes on cash — 52 52
Change in cash (2) — 1,089 1,087
Cash at beginning of year 19 — 903 922
172 AIG 2006 Form 10-K

Continued
(b) AIG Liquidity Corp. is a wholly owned subsidiary of AIG. AIG provides a full and unconditional guarantee of all
obligations of AIG Liquidity Corp., which commenced operations in 2003.
AIG Liquidity Corp.:
Condensed Consolidating Balance Sheet
American
International AIG
Group, Inc. Liquidity Other Consolidated
(in millions) Guarantor Corp. Subsidiaries Eliminations AIG
December 31, 2006
Assets:
Invested assets $ 7,346 $ * $ 797,976 $ (14,822) $790,500
Cash 76 * 1,514 — 1,590
at equity 109,125 — 36,403 (144,427) 1,101
Other assets 3,989 * 184,183 (1,949) 186,223
Total assets $120,536 $ * $1,020,076 $(161,198) $979,414
Liabilities:
Insurance liabilities $ 21 $ — $ 495,135 $ (64) $495,092
Debt 15,157 * 148,342 (14,820) 148,679
Other liabilities 3,681 * 231,576 (1,482) 233,775
Total liabilities 18,859 $ * $ 875,053 $ (16,366) $877,546
Total shareholders’ equity 101,677 * 144,832 (144,832) 101,677
companies and shareholders’ equity $120,536 $ * $1,020,076 $(161,198) $979,414
December 31, 2005
Assets:
Invested assets $ 122 $ * $ 696,424 $ (13,696) $682,850
Cash 190 * 1,707 — 1,897
at equity 90,723 — 42,604 (132,169) 1,158
Other assets 4,332 * 164,141 (1,327) 167,146
Total assets $ 95,367 $ * $ 904,876 $(147,192) $853,051
Liabilities:
Insurance liabilities $ 408 $ — $ 460,271 $ (56) $460,623
Debt 5,329 * 116,577 (12,057) 109,849
Other liabilities 3,313 * 195,817 (3,054) 196,076
Total liabilities 9,050 * 772,665 (15,167) 766,548
Total shareholders’ equity 86,317 * 132,025 (132,025) 86,317
companies and shareholders’ equity $ 95,367 $ * $ 904,876 $(147,192) $853,051
* Amounts signiﬁcantly less than $1 million.
Form 10-K 2006 AIG 173

Continued
Condensed Consolidating Statement of Income
American
International AIG
(in millions) Guarantor Corp. Subsidiaries Eliminations AIG
Operating Income $ (786) $ * $22,473 $ — $21,687
Equity in undistributed net income of consolidated subsidiaries 13,308 — 1,263 (14,571) —
Dividend income from consolidated subsidiaries 1,689 — 602 (2,291) —
Income taxes (benefits) 197 * 6,340 — 6,537
Minority interest — — (1,136) — (1,136)
Cumulative effect of an accounting change 34 * — — 34
Net income (loss) $14,048 $ * $16,862 $(16,862) $14,048
Operating Income $ (1,569) $ * $16,782 $ — $15,213
Dividend income from consolidated subsidiaries 1,958 * — (1,958) —
Income taxes (benefits) 68 — 4,190 — 4,258
Net income (loss) $10,477 $ * $14,644 $(14,644) $10,477
Operating Income $ 161 $ * $14,684 $ — $14,845
Dividend income from consolidated subsidiaries 1,939 — 65 (2,004) —
Income taxes (benefits) 863 * 3,544 — 4,407
Cumulative effect of an accounting change — — (144) — (144)
Net income (loss) $ 9,839 $ * $12,654 $(12,654) $ 9,839
174 AIG 2006 Form 10-K

Continued
Condensed Consolidating Statements of Cash Flow
American
International AIG
(in millions) Guarantor Corp. Subsidiaries AIG
Net cash provided by operating activities $ (590) $ * $ 7,419 $ 6,829
Invested assets disposed 3,831 — 154,283 158,114
Invested assets acquired (8,298) — (215,759) (224,057)
Other (3,176) * 2,079 (1,097)
Net cash used in investing activities (7,643) * (59,397) (67,040)
Issuance of debt 12,038 — 61,942 73,980
Repayments of debt (2,417) — (34,063) (36,480)
Other (1,502) * 23,792 22,290
Net cash provided by (used in) financing activities 8,119 * 51,671 59,790
Change in cash (114) * (193) (307)
Cash at end of year $ 76 $ * $ 1,514 $ 1,590
Net cash provided by operating activities $ 1,854 $ * $ 23,528 $ 25,382
Invested assets disposed — — 184,843 184,843
Other (1,083) * 142 (941)
Net cash used in investing activities (1,681) * (60,819) (62,500)
Issuance of debt 2,101 — 64,960 67,061
Repayments of debt (607) — (51,497) (52,104)
Other (1,494) * 23,706 22,212
Net cash provided by (used in) financing activities — * 37,169 37,169
Effect of exchange rate changes on cash — — (163) (163)
Change in cash 173 * (285) (112)
Net cash provided by operating activities $ 1,390 $ * $ 28,024 $ 29,414
Invested assets disposed 502 — 149,883 150,385
Other 251 * (894) (643)
Net cash used in investing activities 646 * (93,242) (92,596)
Issuance of debt — — 46,695 46,695
Repayments of debt (400) — (32,552) (32,952)
Other (1,638) * 52,112 50,474
Net cash provided by (used in) financing activities (2,038) * 66,255 64,217
Change in cash (2) * 1,089 1,087
Cash at beginning of year 19 — 903 922
Form 10-K 2006 AIG 175

23. Cash Flows
As part of its remediation activities during 2006, AIG determined that certain non-cash activities and adjustments,
including the effects of changes in foreign exchange translation on assets and liabilities, previously were misclassified
within the operating, investing and financing sections of the Consolidated Statement of Cash Flows. The more
significant line items revised include the change in General and life insurance reserves and DAC within operating
activities; Purchases of fixed maturity securities within investing activities; and Proceeds from notes, bonds, loans and
mortgages payable, and hybrid financial instrument liabilities within financing activities. After evaluating the effect of
these items during the third quarter of 2006, AIG has revised the previous periods presented below to conform to the
2006 presentation:
Year Ended Year Ended
(in millions) December 31, 2005 December 31, 2004
Cash flows from operating activities — As previously reported $ 25,138 $ 30,716
Revisions 244 (1,302)
Cash flows from operating activities — As revised $ 25,382 $ 29,414
Cash flows from investing activities — As previously reported $(57,321) $(97,115)
Revisions (5,179) 4,519
Cash flows from investing activities — As revised $(62,500) $(92,596)
Cash flows from financing activities — As previously reported $ 32,999 $ 66,494
Revisions 4,170 (2,277)
Cash flows from financing activities — As revised $ 37,169 $ 64,217
Effect of exchange rate changes on cash — As previously reported $ (928) $ 992
Revisions 765 (940)
Effect of exchange rate changes on cash — As revised $ (163) $ 52
There was no effect on ending cash balances.
176 AIG 2006 Form 10-K

Part II – Other Information
As a result of the remaining material weakness in internalItem 9.
control over financial reporting relating to income tax accounting,Changes in and Disagreements With Account-
described more fully below, AIG’s Chief Executive Officer and Chiefants on Accounting and Financial Disclosure
Financial Officer concluded that, as of December 31, 2006, AIG’s
There have been no changes in accountants during the twenty-four disclosure controls and procedures were ineffective.
months ended December 31, 2006. Notwithstanding the existence of this remaining material
weakness, AIG believes that the consolidated financial statements
Item 9A. in this Annual Report on Form 10-K fairly present, in all material
Controls and Procedures respects, AIG’s financial condition as of December 31, 2006 and
2005, and results of its operations and cash flows for the yearsEvaluation of Disclosure Controls and
ended December 31, 2006, 2005 and 2004, in conformity withProcedures
U.S. generally accepted accounting principles (GAAP).
In connection with the preparation of this Annual Report on
Form 10-K, an evaluation was carried out by AIG’s management, Management’s Report on Internal Control Over
with the participation of AIG’s Chief Executive Officer and Chief Financial Reporting
Financial Officer, of the effectiveness of AIG’s disclosure controls
Management of AIG is responsible for establishing and maintain-and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
ing adequate internal control over financial reporting. AIG’sunder the Securities Exchange Act of 1934 (Exchange Act)) as of
internal control over financial reporting is a process, under theDecember 31, 2006. Disclosure controls and procedures are
supervision of AIG’s Chief Executive Officer and Chief Financialdesigned to ensure that information required to be disclosed in
Officer, designed to provide reasonable assurance regarding thereports filed or submitted under the Exchange Act is recorded,
reliability of financial reporting and the preparation of AIG’sprocessed, summarized and reported within the time periods
financial statements for external purposes in accordance withspecified in SEC rules and forms and that such information is
GAAP.accumulated and communicated to management, including the
Because of its inherent limitations, internal control overChief Executive Officer and Chief Financial Officer, to allow timely
financial reporting may not prevent or detect misstatements. Also,decisions regarding required disclosures.
projections of any evaluation of effectiveness to future periods areDuring the evaluation of disclosure controls and procedures as
subject to the risk that controls may become inadequate becauseof December 31, 2005 conducted during the preparation of AIG’s
of changes in conditions or that the degree of compliance with thefinancial statements to be included in the Annual Report on
policies or procedures may deteriorate.Form 10-K for the year ended December 31, 2005, three material
AIG management conducted an assessment of the effective-weaknesses in internal control over financial reporting were
ness of AIG’s internal control over financial reporting as ofidentified, relating to controls over certain balance sheet reconcili-
December 31, 2006 based on the criteria established in Internalations, controls over the accounting for certain derivative transac-
Control — Integrated Framework issued by the Committee oftions and controls over income tax accounting. As a result, AIG’s
Sponsoring Organizations of the Treadway Commission (COSO).Chief Executive Officer and Chief Financial Officer concluded that,
A material weakness is a control deficiency, or a combinationas of December 31, 2005, AIG’s disclosure controls and
of control deficiencies, that results in more than a remoteprocedures were ineffective.
likelihood that a material misstatement of AIG’s annual or interimUnder the direction of its Chief Executive Officer and Chief
financial statements will not be prevented or detected. AIGFinancial Officer, AIG continued to implement its plans to
management has concluded that, as of December 31, 2006, theremediate the material weaknesses, and adjusted these plans as
material weakness relating to the controls over income taxappropriate.
accounting was not fully remediated.AIG’s remediation efforts were governed by a Steering Commit-
Controls over income tax accounting: AIG did not maintaintee, under the direction of AIG’s Chief Risk Officer and also
effective controls over the determination and reporting of certainincluding AIG’s Chief Executive Officer, Chief Financial Officer and
components of the provision for income taxes and related incomeComptroller. The status of remediation of each material weakness
tax balances. Specifically, AIG did not maintain effective controlswas reviewed with the Audit Committee and this Committee was
to review and monitor the accuracy of the components of theadvised of issues encountered and key decisions reached by AIG
income tax provision calculations and related income tax balancesmanagement relating to the remediation efforts.
and to monitor the differences between the income tax basis andAs of December 31, 2006 and as described under Remedia-
the financial reporting basis of assets and liabilities to effectivelytion of Material Weaknesses in Internal Control Over Financial
reconcile the differences to the deferred income tax balances.Reporting below, the material weaknesses relating to the controls
These control deficiencies resulted in adjustments to income taxover certain balance sheet reconciliations and the controls over
expense, income taxes payable and deferred income tax assetthe accounting for certain derivative transactions were
and liability accounts in the 2006 annual and interim consolidatedremediated, and the material weakness relating to the controls
financial statements. Furthermore, these control deficienciesover income tax accounting was not fully remediated.
could result in a material misstatement of the annual or interim
Form 10-K 2006 AIG 177

AIG consolidated financial statements that would not be prevented certain balance sheet reconciliations had been achieved as of
or detected. Accordingly, AIG management has concluded that December 31, 2006.
these control deficiencies constitute a material weakness. Controls over the accounting for certain derivative transactions:
As a result of the material weakness in internal control over As of December 31, 2005, AIG did not maintain effective controls
financial reporting described above, AIG management has con- over accounting for certain derivative transactions and related
cluded that, as of December 31, 2006, AIG’s internal control over assets and liabilities under FAS 133. In particular, AIG did not
financial reporting was not effective based on the criteria in maintain effective controls over the evaluation and documentation
Internal Control — Integrated Framework issued by the COSO. of whether certain derivative transactions qualified under GAAP for
Management’s assessment of the effectiveness of AIG’s hedge accounting.
internal control over financial reporting as of December 31, 2006 During 2006, AIG management implemented effective controls
has been audited by PricewaterhouseCoopers LLP, an independent over accounting for derivative transactions. An important element
registered public accounting firm, as stated in their report, which of this implementation was the hiring in key staff positions of
is included in this Annual Report on Form 10-K. additional professionals with expertise in derivatives and hedge
accounting.
AIG management has established a new corporate team withRemediation of Material Weaknesses in
the responsibility and authority for overseeing and monitoring theInternal Control Over Financial Reporting
application of hedge accounting throughout AIG. This team,
Throughout 2006 and continuing in 2007, AIG has been actively
staffed with accounting and quantitative professionals with exten-
engaged in the implementation of remediation efforts to address
sive experience in dealing with derivative accounting matters, is
the three material weaknesses in existence at December 31,
responsible to ensure that the application of hedge accounting by
2005. These remediation efforts, outlined below, are specifically
AIG or its subsidiaries is in compliance with FAS 133 and AIG’s
designed to address the material weaknesses identified by AIG
accounting policies. As part of this activity, both enhancements to
management. As a result of its assessment of the effectiveness
existing systems and investments in new applications were made
of internal control over financial reporting, AIG management
to automate certain processes with respect to the application of
determined that as of December 31, 2006, two material weak-
hedge accounting and to reduce reliance on manual procedures.
nesses, relating to the controls over certain balance sheet
Based upon the significant actions taken and the testing and
reconciliations and the controls over the accounting for certain
evaluation of the effectiveness of the controls, AIG management
derivative transactions, had been remediated, but the material
has concluded that remediation of the material weakness in AIG’s
weakness relating to the controls over income tax accounting had
controls over the accounting for certain derivative transactions
not been remediated.
had been achieved as of December 31, 2006.
Controls over certain balance sheet reconciliations: As of De-
Continuing Remediationcember 31, 2005, AIG did not maintain effective controls to
ensure the accuracy of certain balance sheet accounts in certain
Controls over income tax accounting: As of December 31, 2005,
key segments of AIG’s operations, principally in the Domestic
AIG did not maintain effective controls over the determination and
Brokerage Group (DBG). Specifically, accounting personnel did not
reporting of certain components of the provision for income taxes
perform timely reconciliations and did not properly resolve
and related income tax balances. During 2006, AIG management
reconciling items for premium receivables, reinsurance recover-
took the following actions to remediate this material weakness:
ables and intercompany accounts.
During 2006, AIG management developed and implemented a ( Continued focus on implementing and testing of standard key
corporate-wide accounting policy on balance sheet reconciliations, controls globally,
which augments the corporate guidelines on balance sheet
( Continued focus on reconciling, evaluating and monitoring of
reconciliations that were released in 2005. The policy requires all
historical balance sheet income tax accounts as well as more
reporting units to perform timely reconciliations of their balance
detailed financial statement exposure analysis,
sheet accounts including the resolution of reconciling items and
the evaluation of exposure. ( Implementation of a global income tax accounting reporting
AIG reporting units, including DBG, have been performing tool,
reconciliations of their accounts consistent with this policy.
( Hiring of additional qualified staff including a new Director of
Implementation of the new policy was supplemented with dedi-
Taxes, as well as Tax Managers and Tax Accountants at
cated training sessions, a self-assessment process and the
designated business units and Corporate, and
continued addition of qualified staff to monitor on-going compli-
ance with the new policy. ( Development and dissemination of income tax accounting
AIG continues to develop further enhancements to its controls training and education programs at the Corporate and business
over certain balance sheet reconciliations. Based upon the unit levels utilizing site visits and training conferences.
significant actions taken and the testing and evaluation of the
Notwithstanding these significant efforts towards remediation
effectiveness of the controls, AIG management has concluded
of the material weakness in controls over income tax accounting,
that remediation of the material weakness in AIG’s controls over
implementation and testing of the standard key controls, as well
178 AIG 2006 Form 10-K

as procedures and processes, were not completed within all procedures performed and compensating controls in place, AIG
business units as of December 31, 2006. As a result, the believes that the consolidated financial statements present fairly
effectiveness and sustainability of controls and processes could in all material respects AIG’s financial condition as of Decem-
not be assured as of that date. ber 31, 2006 and 2005, and results of its operations and cash
Furthermore, during 2006, the reconciliation, evaluation and flows for the years ended December 31, 2006, 2005 and 2004,
monitoring of historical balance sheet income tax accounts in conformity with GAAP.
identified errors in the income tax balances. The errors identified AIG recognizes that improvement in its internal controls over
to date were not material; therefore, they were recorded and financial reporting and consolidation processes, as well as those
disclosed in the period in which they were identified. AIG has not over investment accounting, is essential. Over time, AIG intends to
completed the necessary reconciliation and evaluation of all reduce its reliance on the manual controls that have been
historical balance sheet income tax accounts; accordingly, addi- established. AIG is currently developing new systems and
tional work is required in the analysis of the remaining prior year processes which will allow it to rely on front end detection and
balances. AIG cannot predict the outcome of the review and preventative controls which will be more sustainable over the long
analysis described above or estimate the potential adjustments term. AIG recognizes that, to accomplish its goals, further
related to these remediation activities. However, in the opinion of strengthening and investing are needed in financial personnel, as
AIG management and based upon information currently known, well as in systems and processes. AIG is committed to making
resolution of these historical balance sheet income tax accounts the investments necessary to make these improvements.
is not likely to have a material adverse effect on AIG’s
consolidated financial condition, but it is possible that the effect Changes in Internal Controls over Financial
could be material to AIG’s consolidated results of operations for Reporting
an individual reporting period.
Changes in AIG’s internal control over financial reporting during
Remediation of the material weakness in controls over income
the quarter ended December 31, 2006 that have materially
tax accounting requires completing the implementation of key
affected, or are reasonably likely to materially affect, AIG’s
controls in the applicable AIG business units and testing them
internal control over financial reporting have been described
after they are in place to validate their effectiveness and
above.
sustainability. Due to the nature of these requirements and the
need to complete the reconciliation of certain historical balances,
Item 9B.no assurance can be given as to the specific timing of the
Other Informationremediation of this material weakness. AIG management contin-
ues to assign the highest priority to AIG’s remediation efforts in None.
this area, with the goal of remediating this material weakness by
year-end 2007.
While the material weakness in controls over income tax
accounting was not remediated, due to the substantive alternative
Form 10-K 2006 AIG 179

Part III
Item 10. Item 12.
Directors, Executive Officers and Corporate Security Ownership of Certain Beneficial
Governance Owners and Management and Related
Stockholder Matters
Except for the information provided in Part I under the heading
‘‘Directors and Executive Officers of AIG’’, this item, including This item is omitted because a definitive proxy statement which
information regarding AIG’s audit committee and audit committee involves the election of directors will be filed with the SEC not
financial expert, any material changes to the procedures by which later than 120 days after the close of the fiscal year pursuant to
security holders may recommend nominees to AIG’s board of Regulation 14A.
directors, if any, and information relating to AIG’s code of ethics
that applies to its directors, executive officers and senior financial Item 13.
officers, is omitted because a definitive proxy statement which Certain Relationships and Related Transactions,
involves the election of directors will be filed with the SEC not and Director Independence
later than 120 days after the close of the fiscal year pursuant to
This item is omitted because a definitive proxy statement which
Regulation 14A.
involves the election of directors will be filed with the SEC not
Item 11.
Regulation 14A.
Executive Compensation
This item is omitted because a definitive proxy statement which Item 14.
involves the election of directors will be filed with the SEC not Principal Accountant Fees and Services
This item is omitted because a definitive proxy statement which
Regulation 14A.
involves the election of directors will be filed with the SEC not
Regulation 14A.
Part IV
Item 15.
Exhibits and Financial Statement Schedules*
(a) Financial Statements and Schedules. See accompanying Index
to Financial Statements.
(b) Exhibits. See accompanying Exhibit Index.
* Part IV Item 15, Schedules, the Exhibits Index, and certain Exhibits were included in the Form 10-K filed with the Securities and
Exchange Commission but have not been included herein. Copies may be obtained electronically through AIG’s website at
www.aigcorporate.com or from the Director of Investor Relations, American International Group, Inc.
180 AIG 2006 Form 10-K

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly
caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New
York and State of New York, on the 1st of March, 2007.
AMERICAN INTERNATIONAL GROUP, INC.
By /s/ MARTIN J. SULLIVAN
(Martin J. Sullivan, President and Chief Executive Officer)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Martin J.
Sullivan and Steven J. Bensinger, and each of them severally, his or her true and lawful attorney-in-fact, with full power of substitution
and resubstitution, to sign in his or her name, place and stead, in any and all capacities, to do any and all things and execute any and
all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934, as amended, and any
rules, regulations and requirements of the U.S. Securities and Exchange Commission in connection with this Annual Report on
Form 10-K and any and all amendments hereto, as fully for all intents and purposes as he or she might or could do in person, and
hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his or her substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been
signed below by the following persons in the capacities indicated on the 1st of March, 2007.
Signature Title
President, Chief Executive Officer and Director/s/ MARTIN J. SULLIVAN
(Principal Executive Officer)(Martin J. Sullivan)
/s/ STEVEN J. BENSINGER Executive Vice President and Chief Financial Officer
(Principal Financial Officer)(Steven J. Bensinger)
/s/ DAVID L. HERZOG Senior Vice President and Comptroller
(Principal Accounting Officer)(David L. Herzog)
/s/ MARSHALL A. COHEN Director
(Marshall A. Cohen)
/s/ MARTIN S. FELDSTEIN Director
(Martin S. Feldstein)
/s/ ELLEN V. FUTTER Director
(Ellen V. Futter)
/s/ STEPHEN L. HAMMERMAN Director
(Stephen L. Hammerman)
/s/ RICHARD C. HOLBROOKE Director
(Richard C. Holbrooke)
/s/ FRED H. LANGHAMMER Director
(Fred H. Langhammer)
Form 10-K 2006 AIG 181

Signature Title
/s/ GEORGE L. MILES, JR. Director
(George L. Miles, Jr.)
/s/ MORRIS W. OFFIT Director
(Morris W. Ofﬁt)
/s/ JAMES F. ORR III Director
(James F. Orr III)
/s/ VIRGINIA M. ROMETTY Director
(Virginia M. Rometty)
/s/ MICHAEL H. SUTTON Director
(Michael H. Sutton)
/s/ EDMUND S.W. TSE Director
(Edmund S.W. Tse)
/s/ ROBERT B. WILLUMSTAD Director
(Robert B. Willumstad)
/s/ FRANK G. ZARB Director
(Frank G. Zarb)
182 AIG 2006 Form 10-K

Computation of Ratios of Earnings to Fixed Charges Exhibit 12
(in millions, except ratios) 2006 2005 2004 2003 2002
Income before income taxes, minority interest and cumulative effect of
accounting changes $21,687 $15,213 $14,845 $11,907 $ 7,808
Less — Equity income of less than 50% owned companies 188 (129) 164 146 168
Add — Dividends from less than 50% owned companies 28 146 22 13 13
21,527 15,488 14,703 11,774 7,653
Add — Fixed charges 9,062 7,663 6,049 5,762 4,893
Less — Capitalized interest 59 64 59 52 61
Income before income taxes, minority interest, cumulative effect of
accounting changes and fixed charges $30,530 $23,087 $20,693 $17,484 $12,485
Fixed charges:
Interest costs $ 8,843 $ 7,464 $ 5,860 $ 5,588 $ 4,725
Rental expense* 219 199 189 174 168
Total fixed charges $ 9,062 $ 7,663 $ 6,049 $ 5,762 $ 4,893
Ratio of earnings to fixed charges 3.37 3.01 3.42 3.03 2.55
Secondary Ratio
Interest credited to GIC and GIA policy and contract holders $ (5,128) $ (4,760) $ (3,674) $ (3,578) $ (2,702)
Total fixed charges excluding interest credited to GIC and GIA policy and
contract holders $ 3,934 $ 2,903 $ 2,375 $ 2,184 $ 2,191
Secondary ratio of earnings to fixed charges 6.46 6.31 7.17 6.37 4.47
* The proportion deemed representative of the interest factor.
The secondary ratio is disclosed for the convenience of fixed principally SunAmerica Life Insurance Company and AIG Financial
income investors and the rating agencies that serve them and is Products Corp. and its subsidiaries, respectively. The proceeds
more comparable to the ratios disclosed by all issuers of fixed from GICs and GIAs are invested in a diversified portfolio of
income securities. The secondary ratio removes interest credited securities, primarily investment grade bonds. The assets acquired
to guaranteed investment contract (GIC) policyholders and guaran- yield rates greater than the rates on the related policyholders
teed investment agreement (GIA) contractholders. Such interest obligation or contract, with the intent of earning a profit from the
expenses are also removed from earnings used in this calculation. spread.
GICs and GIAs are entered into by AIG’s insurance subsidiaries,
Form 10-K 2006 AIG 183

Subsidiaries of Registrant Exhibit 21
Percentage
of Voting
Securities
Jurisdiction of held by
Incorporation Immediate
or Organization Parent(1)
American International Group, Inc.(2)
Delaware (3)
AIG Capital Corporation Delaware 100
AIG Capital India Private Limited India 99(4)
AIG Global Asset Management Company (India) Private Limited India 99(5)
AIG Consumer Finance Group, Inc. Delaware 100
AIG Bank Polska S.A. Poland 99.92
AIG Credit S.A. Poland 100
Compania Financiera Argentina S.A. Argentina 100
AIG Equipment Finance Holdings, Inc. Delaware 100
AIG Commercial Equipment Finance, Inc. Delaware 100
AIG Commercial Equipment Finance Company Canada Canada 100
AIG Rail Services, Inc. Delaware 100
AIG Finance Holdings, Inc. New York 100
AIG Finance (Hong Kong) Limited Hong Kong 100
AIG Global Asset Management Holdings Corp. Delaware 100
AIG Asset Management Services, Inc. Delaware 100
Brazos Capital Management, L.P. Delaware 100
AIG Capital Partners, Inc. Delaware 100
AIG Equity Sales Corp. New York 100
AIG Global Investment Corp. New Jersey 100
AIG Securities Lending Corp. Delaware 100
AIG Global Real Estate Investment Corp. Delaware 100
International Lease Finance Corporation California 67.23(6)
AIG Credit Corp. Delaware 100
A.I. Credit Consumer Discount Corp. Pennsylvania 100
A.I. Credit Corp. New Hampshire 100
AICCO, Inc. Delaware 100
AICCO, Inc. California 100
AIG Credit Corp. of Canada Canada 100
Imperial Premium Funding, Inc. Delaware 100
AIG Egypt Insurance Company, S.A.E. Egypt 89.98
AIG Federal Savings Bank USA 100
AIG Financial Advisor Services, Inc. Delaware 100
AIG Financial Advisor Services (Europe), S.A. Luxembourg 100
AIG Financial Products Corp. Delaware 100
AIG Matched Funding Corp. Delaware 100
Banque AIG France 90(7)
AIG Funding, Inc. Delaware 100
AIG Global Trade & Political Risk Insurance Company New Jersey 100
AIG Israel Insurance Company Ltd. Israel 50.01
AIG Life Holdings (International) LLC Delaware 100
AIG Star Life Insurance Co., Ltd. Japan 100
American International Reinsurance Company, Ltd. Bermuda 100
AIG Life Edison Insurance Company Japan 90(8)
American International Assurance Company, Limited Hong Kong 100
American International Assurance Company (Australia) Limited Australia 100
American International Assurance Company (Bermuda) Limited Bermuda 100
American International Assurance Co. (Vietnam) Limited Vietnam 100
Tata AIG Life Insurance Company Limited India 26
Nan Shan Life Insurance Company, Ltd. Taiwan 95
AIG Life Insurance Company Delaware 79(9)
AIG Life Insurance Company of Puerto Rico Puerto Rico 100
AIG Life Insurance Company (Switzerland) Ltd. Switzerland 100
AIG Liquidity Corp. Delaware 100
184 AIG 2006 Form 10-K

Subsidiaries of Registrant Continued
Percentage
of Voting
Securities
AIG Private Bank Ltd. Switzerland 100
AIG Property Casualty Insurance Group, Inc. Delaware 100
AIG Commercial Insurance Group, Inc. Delaware 100
AIG Aviation, Inc. Georgia 100
AIG Casualty Company Pennsylvania 100
AIG Risk Management, Inc. New York 100
AIU Insurance Company New York 52(10)
American Home Assurance Company New York 100
AIG Domestic Claims, Inc. Delaware 50(11)
AIG Hawaii Insurance Company Hawaii 100
American Paciﬁc Insurance Company Hawaii 100
American International Insurance Company New York 50(12)
AIG Advantage Insurance Company Minnesota 100
American International Insurance Company of California California 100
American International Insurance Company of New Jersey New Jersey 100
American International Realty Corp. Delaware 31.5(13)
Pine Street Real Estate Holdings Corp. New Hampshire 31.47(14)
Transatlantic Holdings, Inc. Delaware 33.34(15)
Transatlantic Reinsurance Company New York 100
Putnam Reinsurance Company New York 100
Trans Re Zurich Switzerland 100
American International Surplus Lines Agency, Inc. New Jersey 100
Audubon Insurance Company Louisiana 100
Agency Management Corporation Louisiana 100
The Gulf Agency, Inc. Alabama 100
Audubon Indemnity Company Mississippi 100
Commerce and Industry Insurance Company New York 100
Commerce and Industry Insurance Company of Canada Canada 100
The Insurance Company of the State of Pennsylvania Pennsylvania 100
Landmark Insurance Company California 100
National Union Fire Insurance Company of Pittsburgh, Pa Pennsylvania 100
American International Specialty Lines Insurance Company Alaska 70(16)
Lexington Insurance Company Delaware 70(17)
AIG Centennial Insurance Company Pennsylvania 100
AIG Auto Insurance Company of New Jersey New Jersey 100
AIG Preferred Insurance Company Pennsylvania 100
AIG Premier Insurance Company Pennsylvania 100
AIG Indemnity Insurance Company Pennsylvania 100
JI Accident & Fire Insurance Co. Ltd. Japan 50
National Union Fire Insurance Company of Louisiana Louisiana 100
National Union Fire Insurance Company of Vermont Vermont 100
21st Century Insurance Group California 33.03(18)
21st Century Casualty Company California 100
21st Century Insurance Company California 100
21st Century Insurance Company of the Southwest Texas 100
Starr Excess Liability Insurance Company, Ltd. Delaware 100
Starr Liability Insurance International Ltd. Ireland 100
New Hampshire Insurance Company Pennsylvania 100
AI Network Corporation Delaware 100
AIG Europe, S.A. France 70.48(19)
American International Paciﬁc Insurance Company Colorado 100
American International South Insurance Company Pennsylvania 100
Granite State Insurance Company Pennsylvania 100
Illinois National Insurance Co. Illinois 100
Form 10-K 2006 AIG 185

Percentage
of Voting
Securities
New Hampshire Indemnity Company, Inc. Pennsylvania 100
AIG National Insurance Company, Inc. New York 100
New Hampshire Insurance Services, Inc. New Hampshire 100
Risk Specialists Companies, Inc. Delaware 100
AIG Marketing, Inc. Delaware 100
American International Insurance Company of Delaware Delaware 100
Hawaii Insurance Consultants, Inc. Hawaii 100
AIG Retirement Services, Inc. Delaware 100
SunAmerica Life Insurance Company Arizona 100
SunAmerica Investments, Inc. Georgia 70(20)
AIG Advisor Group, Inc. Maryland 100
Advantage Capital Corporation New York 100
American General Securities Incorporated Texas 100
FSC Securities Corporation Delaware 100
Royal Alliance Associates, Inc. Delaware 100
SunAmerica Securities, Inc. Delaware 100
AIG SunAmerica Life Assurance Company Arizona 100
AIG SunAmerica Asset Management Corp. Delaware 100
AIG SunAmerica Capital Services, Inc. Delaware 100
First SunAmerica Life Insurance Company New York 100
AIG Technologies, Inc. New Hampshire 100
AIG Trading Group, Inc. Delaware 100
AIG International, Inc. Delaware 100
AIGTI, Inc. Delaware 100
AIU Holdings, LLC Delaware 100
AIG Central Europe & CIS Insurance Holdings Corporation Delaware 100
AIG Bulgaria Insurance and Reinsurance Company EAD Bulgaria 100
AIG Czech Republic pojistovna, as Czech Republic 100
AIG Kazakhstan Insurance Company, S.A. Kazakhstan 88.87
AIG Memsa, Inc. Delaware 100
AIG Hayleys Investment Holdings (Private) Ltd. Sri Lanka 80
Hayleys AIG Insurance Company, Ltd. Sri Lanka 100
AIG Iraq Delaware 100
AIG Lebanon, S.A.L Lebanon 100
AIG Libya, Inc. Libya 100
AIG Sigora A.S Turkey 100
Tata AIG General Insurance Company Limited India 26
AIU Africa Holdings, Inc. Delaware 100
AIG Kenya Insurance Company, Limited Kenya 100
AIU North America, Inc. New York 100
American General Corporation Texas 100
AGC Life Insurance Company Missouri 100
AIG Life Holdings (Canada), ULC Canada 100
AIG Assurance Canada Canada 100
AIG Life Insurance Company of Canada Canada 100
AIG Life of Bermuda, Ltd. Bermuda 100
American General Life and Accident Insurance Company Tennessee 100
American General Life Insurance Company Texas 100
AIG Annuity Insurance Company Texas 100
AIG Enterprise Services, LLC Delaware 100
American General Annuity Service Corporation Texas 100
American General Life Companies, LLC Delaware 100
American General Property Insurance Company Tennessee 51.85(21)
186 AIG 2006 Form 10-K

Percentage
of Voting
Securities
American General Property Insurance Company of Florida Florida 100
The United State Life Insurance Company in the City of New York New York 100
The Variable Annuity Life Insurance Company Texas 100
VALIC Retirement Services Company Texas 100
American General Assurance Company Illinois 100
American General Indemnity Company Illinois 100
American General Bancassurance Services, Inc. Illinois 100
American General Finance, Inc. Indiana 100
American General Auto Finance, Inc. Delaware 100
American General Finance Corporation Indiana 100
Merit Life Insurance Co. Indiana 100
MorEquity, Inc. Nevada 100
Wilmington Finance, Inc. Delaware 100
Yosemite Insurance Company Indiana 100
CommoLoCo, Inc. Puerto Rico 100
American General Financial Services of Alabama, Inc. Delaware 100
American General Investment Management Corporation Delaware 100
American General Realty Investment Corporation Texas 100
Knickerbocker Corporation Texas 100
American International Life Assurance Company of New York New York 77.52(22)
American International Underwriters Corporation New York 100
American International Underwriters Overseas, Ltd. Bermuda 100
A.I.G. Colombia Seguros Generales S.A. Colombia 100
AIG Brasil Companhia de Seguros Brazil 50
AIG Direct Marketing Company Ltd. Taiwan 100
Central Insurance Company Limited Taiwan 100
AIG Europe (Ireland) Limited Ireland 100
AIG Europe (UK) Limited England 100
AIG General Insurance (Thailand) Company Limited Thailand 100
AIG General Insurance (Vietnam) Company Limited Vietnam 100
AIG MEMSA Insurance Company Ltd. United Arab Emirates 100
AIG Takaful B.S.C. Bahrain 100
American International Insurance Company of Puerto Rico Puerto Rico 100
American International Underwriters GmBH Germany 100
La Meridional Compania Argentina de Seguros Argentina 100
La Seguridad de Centroamerica Compania de Seguros S.A. Guatemala 100
Richmond Insurance Company Limited Bermuda 100
Underwriters Adjustment Company Panama 100
American Life Insurance Company Delaware 100
AIG Life (Bulgaria) Z.D.A.D. Bulgaria 100
ALICO, S.A. France 100
First American Polish Life Insurance and Reinsurance Company, S.A. Poland 100
Inversiones Interamericana S.A. (Chile) Chile 100
Pharaonic American Life Insurance Company Egypt 71.63
Unibanco AIG Seguros S.A. Brazil 47.80(23)
American Security Life Insurance Company, Ltd. Lichtenstein 100
Delaware American Life Insurance Company Delaware 100
HSB Group, Inc. Delaware 100
The Hartford Steam Boiler Inspection and Insurance Company Connecticut 100
The Hartford Steam Boiler Inspection and Insurance Company of Connecticut Connecticut 100
HSB Engineering Insurance Limited England 100
The Boiler Inspection and Insurance Company of Canada Canada 100
Mt. Mansﬁeld Company, Inc. Vermont 100
The Philippine American Life and General Insurance Company Philippines 99.78
Form 10-K 2006 AIG 187

Percentage
of Voting
Securities
Pacific Union Assurance Company California 100
Philam Equitable Life Assurance Company, Inc. Philippines 95.31
Philam Insurance Company, Inc. Philippines 100
United Guaranty Corporation North Carolina 36.31(24)
A.I.G. Mortgage Holdings Israel, Ltd. Israel 82.12
E.M.I.-Ezer Mortgage Insurance Company, Limited Israel 100
AIG United Guaranty Agenzia DI Assicurazione S.R.L Italy 100
AIG United Guaranty Insurance (Asia) Limited Hong Kong 100
AIG United Guaranty Re, Ltd. Ireland 100
United Guaranty Insurance Company North Carolina 100
United Guaranty Mortgage Insurance Company North Carolina 100
United Guaranty Mortgage Insurance Company Canada Canada 100
United Guaranty Mortgage Insurance Company of North Carolina North Carolina 100
United Guaranty Partners Insurance Company Vermont 80
United Guaranty Residential Insurance Company North Carolina 75.03(25)
United Guaranty Credit Insurance Company North Carolina 100
United Guaranty Insurance Company of North Carolina North Carolina 100
United Guaranty Mortgage Indemnity Company North Carolina 100
United Guaranty Residential Insurance Company of North Carolina North Carolina 100
United Guaranty Services, Inc. North Carolina 100
(1) Percentages include directors’ qualifying shares.
(2) All subsidiaries listed are consolidated in the accompanying financial statements. Certain subsidiaries have been omitted from the tabulation. The
omitted subsidiaries, when considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary.
(3) The common stock is owned approximately 14.1 percent by C.V. Starr & Co., Inc., Edward E. Matthews, Maurice R. and Corinne P. Greenberg Joint
Tenancy Company, LLC, Starr International Company, Inc., The Maurice R. Greenberg and Corinne P. Greenberg Family Foundation, Inc. and the
Universal Foundation, Inc.
(4) Also owned 1 percent by AIG Global Investment Corp.
(5) Also owned 1 percent by AIG Capital Corporation.
(6) Also owned 32.77 percent by National Union Fire Insurance Company of Pittsburgh, Pa.
(7) Also owned 10 percent by AIG Matched Funding Corp.
(8) Also owned 10 percent by a subsidiary of American Life Insurance Company.
(9) Also owned 21 percent by Commerce and Industry Insurance Company.
(10) Also owned 8 percent by The Insurance Company of the State of Pennsylvania, 32 percent by National Union Fire Insurance Company of the
Pittsburgh, Pa., and 8 percent by AIG Casualty Company.
(11) Also owned 50 percent by The Insurance Company of the State of Pennsylvania.
(12) Also owned 25 percent by Commerce and Industry Insurance Company and 25 percent by AIU Insurance Company.
(13) Also owned by 11 other AIG subsidiaries.
(14) Also owned by 11 other AIG Subsidiaries.
(15) Also owned 25.85 percent by AIG.
(16) Also owned 20 percent by the Insurance Company of the State of Pennsylvania and 10 percent by AIG Casualty Company.
(17) Also owned 20 percent by the Insurance Company of the State of Pennsylvania and 10 percent by AIG Casualty Company.
(18) Also owned 16.85 percent by American Home Assurance Company, 6.34 percent by Commerce and Industry Insurance Company and 6.34 percent by
New Hampshire Insurance Company.
(19) 100 percent held together with AIG companies.
(20) Also owned 30 percent by AIG Retirement Services, Inc.
(21) Also owned 48.15 percent by American General Life and Accident Insurance Company.
(22) Also owned 22.48 percent by American Home Assurance Company.
(23) Also owned 1.7 percent by American International Underwriters Overseas, Ltd. and 0.48 percent by American Home Assurance Company.
(24) Also owned 45.88 percent by National Union Fire Insurance Company of Pittsburgh, Pa., 16.95% by New Hampshire Insurance Company and
0.86 percent by The Insurance Company of the State of Pennsylvania.
(25) Also owned 24.97 percent by United Guaranty Residential Insurance Company of North Carolina.
188 AIG 2006 Form 10-K

Consent of Independent Registered Public Accounting Firm Exhibit 23
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 and Form S-3 (No. 2-45346,
No. 2-75875, No. 2-78291, No. 2-91945, No. 33-18073,
No. 33-57250, No. 333-48639, No. 333-58095, No. 333-70069,
No. 333-83813, No. 333-31346, No. 333-39976,
No. 333-45828, No. 333-50198, No. 333-52938,
No. 333-68640, No. 333-74187, No. 333-101640,
No. 333-101967, No. 333-108466, No. 333-111737,
No. 333-115911, No. 333-106040 and No. 333-132561) of
American International Group, Inc. of our report dated March 1,
2007, relating to the financial statements, financial statement
schedules, management’s assessment of the effectiveness of
internal control over financial reporting and the effectiveness of
internal control over financial reporting, which appears in this
Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
March 1, 2007
Form 10-K 2006 AIG 189

Exhibit 31
CERTIFICATIONS
I, Martin J. Sullivan, certify that:
1. I have reviewed this Annual Report on Form 10-K of American International Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 1, 2007
/s/ MARTIN J. SULLIVAN
Martin J. Sullivan
President and Chief Executive Officer
190 AIG 2006 Form 10-K

CERTIFICATIONS
I, Steven J. Bensinger, certify that:
1. I have reviewed this Annual Report on Form 10-K of American International Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 1, 2007
/s/ STEVEN J. BENSINGER
Steven J. Bensinger
Executive Vice President and Chief Financial Officer
Form 10-K 2006 AIG 191

Exhibit 32
CERTIFICATION
In connection with this Annual Report on Form 10-K of American International Group, Inc. (the ‘‘Company’’) for the year ended
December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), I, Martin J. Sullivan,
President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: March 1, 2007
/s/ MARTIN J. SULLIVAN
Martin J. Sullivan
President and Chief Executive Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or
as a separate disclosure document.
CERTIFICATION
In connection with this Annual Report on Form 10-K of American International Group, Inc. (the ‘‘Company’’) for the year ended
December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), I, Steven J. Bensinger,
Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: March 1, 2007
/s/ STEVEN J. BENSINGER
Steven J. Bensinger
Executive Vice President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or
as a separate disclosure document.
192 AIG 2006 Form 10-K

AIG Annual Reports and Proxy Statements2006 Form 10-K

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