American International (AIG) 10-Q 2018 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018 Commission File Number 1-8787

 

American International Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware	13-2592361
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
175 Water Street, New York, New York	10038
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (212) 770-7000

________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑     No ☐ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☑      No ☐ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☐	Emerging growth company ☐
		(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐      No ☑

As of July 30, 2018, there were 888,446,269 shares outstanding of the registrant’s common stock.

AMERICAN INTERNATIONAL GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED

June 30, 2018

Table of Contents

FORM 10-Q
Item Number	Description		Page
Part I — Financial Information
ITEM 1	Condensed Consolidated Financial Statements		2
	Note 1.	Basis of Presentation	8
	Note 2.	Summary of Significant Accounting Policies	9
	Note 3.	Segment Information	12
	Note 4.	Fair Value Measurements	15
	Note 5.	Investments	33
	Note 6.	Lending Activities	42
	Note 7.	Variable Interest Entities	44
	Note 8.	Derivatives and Hedge Accounting	45
	Note 9.	Insurance Liabilities	50
	Note 10.	Contingencies, Commitments and Guarantees	53
	Note 11.	Equity	55
	Note 12.	Earnings Per Share	59
	Note 13.	Employee Benefits	60
	Note 14.	Income Taxes	61
	Note 15.	Information Provided in Connection with Outstanding Debt	65
	Note 16.	Subsequent Events	71
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of
	Operations		72
	•Cautionary Statement Regarding Forward-Looking Information		72
	•Use of Non-GAAP Measures		74
	•Critical Accounting Estimates		76
	•Executive Summary		77
	•Consolidated Results of Operations		87
	•Business Segment Operations		94
	•Investments		131
	•Insurance Reserves		143
	•Liquidity and Capital Resources		153
	•Enterprise Risk Management		166
	•Regulatory Environment		173
	•Glossary		174
	•Acronyms		177
ITEM 3	Quantitative and Qualitative Disclosures About Market Risk		178
ITEM 4	Controls and Procedures		178
Part II — Other Information
ITEM 1	Legal Proceedings		179
ITEM 1A	Risk Factors		179
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds		180
ITEM 4	Mine Safety Disclosures		180
ITEM 5	Other Information		180
ITEM 6	Exhibits		181
Signatures			182

AIG | Second Quarter 2018 Form 10-Q1

Part I – Financial Information

Item 1. | Financial Statements

American International Group, Inc.

Condensed Consolidated Balance Sheets (unaudited)

	June 30,		December 31,
(in millions, except for share data)		2018		2017
Assets:
Investments:
Fixed maturity securities:
Bonds available for sale, at fair value (amortized cost: 2018 - $223,080; 2017 - $225,461)	$	228,673	$	238,992
Other bond securities, at fair value (See Note 5)		11,774		12,772
Equity Securities:
Common and preferred stock available for sale, at fair value (cost: 2017 - $1,305)		-		1,708
Other common and preferred stock, at fair value (See Note 5)		1,675		589
Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2018 - $0; 2017 - $5)		39,978		37,023
Other invested assets (portion measured at fair value: 2018 - $5,926; 2017 - $6,248)		20,648		20,822
Short-term investments, including restricted cash of 2018 - $18; 2017 - $58
(portion measured at fair value: 2018 - $3,245; 2017 - $2,615)		17,010		10,386
Total investments		319,758		322,292
Cash		2,135		2,362
Accrued investment income		2,449		2,356
Premiums and other receivables, net of allowance		10,860		10,248
Reinsurance assets, net of allowance		34,497		33,024
Deferred income taxes		14,753		14,033
Deferred policy acquisition costs		11,997		10,994
Other assets, including restricted cash of $227 in 2018 and $317 in 2017
(portion measured at fair value: 2018 - $719; 2017 - $922)		9,634		10,194
Separate account assets, at fair value		90,746		92,798
Total assets	$	496,829	$	498,301
Liabilities:
Liability for unpaid losses and loss adjustment expenses	$	76,713	$	78,393
Unearned premiums		19,676		19,030
Future policy benefits for life and accident and health insurance contracts		44,608		45,432
Policyholder contract deposits (portion measured at fair value: 2018 - $3,534; 2017 - $4,150)		138,964		135,602
Other policyholder funds		3,482		3,648
Other liabilities (portion measured at fair value: 2018 - $1,423; 2017 - $1,124)		27,059		26,050
Long-term debt (portion measured at fair value: 2018 - $2,615; 2017 - $2,888)		33,784		31,640
Separate account liabilities		90,746		92,798
Total liabilities		435,032		432,593
Contingencies, commitments and guarantees (See Note 10)
AIG shareholders’ equity:
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2018 - 1,906,671,492 and
2017 - 1,906,671,492		4,766		4,766
Treasury stock, at cost; 2018 - 1,015,457,459 shares; 2017 - 1,007,626,835 shares of common stock		(48,052)		(47,595)
Additional paid-in capital		80,924		81,078
Retained earnings		23,318		21,457
Accumulated other comprehensive income		230		5,465
Total AIG shareholders’ equity		61,186		65,171
Non-redeemable noncontrolling interests		611		537
Total equity		61,797		65,708
Total liabilities and equity	$	496,829	$	498,301
See accompanying Notes to Condensed Consolidated Financial Statements.

2AIG | Second Quarter 2018 Form 10-Q

American International Group, Inc.

Condensed Consolidated Statements of Income (unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(dollars in millions, except per share data)		2018		2017		2018		2017
Revenues:
Premiums	$	7,207	$	7,614	$	14,482	$	15,396
Policy fees		763		725		1,527		1,449
Net investment income		3,065		3,613		6,326		7,299
Net realized capital gains (losses):
Total other-than-temporary impairments on available for sale securities		(28)		(33)		(103)		(72)
Portion of other-than-temporary impairments on available for sale
fixed maturity securities recognized in Other comprehensive income (loss)		(8)		(28)		(20)		(49)
Net other-than-temporary impairments on available for sale
securities recognized in net income		(36)		(61)		(123)		(121)
Other realized capital gains (losses)		201		(8)		269		(63)
Total net realized capital gains (losses)		165		(69)		146		(184)
Other income		431		619		862		1,174
Total revenues		11,631		12,502		23,343		25,134
Benefits, losses and expenses:
Policyholder benefits and losses incurred		5,505		6,284		11,172		12,331
Interest credited to policyholder account balances		935		906		1,851		1,816
Amortization of deferred policy acquisition costs		1,337		1,115		2,695		2,223
General operating and other expenses		2,323		2,182		4,594		4,625
Interest expense		299		292		576		590
(Gain) loss on extinguishment of debt		5		(4)		9		(5)
Net (gain) loss on sale of divested businesses		(25)		60		(33)		160
Total benefits, losses and expenses		10,379		10,835		20,864		21,740
Income from continuing operations before
income tax expense		1,252		1,667		2,479		3,394
Income tax expense		321		557		598		1,073
Income from continuing operations		931		1,110		1,881		2,321
Income (loss) from discontinued operations, net of income tax expense		-		8		(1)		8
Net income		931		1,118		1,880		2,329
Less:
Net income (loss) from continuing operations attributable to
noncontrolling interests		(6)		(12)		5		14
Net income attributable to AIG	$	937	$	1,130	$	1,875	$	2,315
Income (loss) per common share attributable to AIG:
Basic:
Income from continuing operations	$	1.04	$	1.21	$	2.07	$	2.42
Income from discontinued operations	$	-	$	0.01	$	-	$	0.01
Net income attributable to AIG	$	1.04	$	1.22	$	2.07	$	2.43
Diluted:
Income from continuing operations	$	1.02	$	1.18	$	2.04	$	2.36
Income from discontinued operations	$	-	$	0.01	$	-	$	0.01
Net income attributable to AIG	$	1.02	$	1.19	$	2.04	$	2.37
Weighted average shares outstanding:
Basic		903,215,488		925,751,084		905,566,733		953,109,915
Diluted		916,572,481		948,248,771		920,902,720		976,627,652
Dividends declared per common share	$	0.32	$	0.32	$	0.64	$	0.64
See accompanying Notes to Condensed Consolidated Financial Statements.

AIG | Second Quarter 2018 Form 10-Q3

American International Group, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2018		2017		2018		2017
Net income	$	931	$	1,118	$	1,880	$	2,329
Other comprehensive income (loss), net of tax
Change in unrealized appreciation (depreciation) of fixed maturity securities on
which other-than-temporary credit impairments were taken		(1,046)		119		(1,196)		233
Change in unrealized appreciation (depreciation) of all other investments		(756)		653		(3,464)		1,348
Change in foreign currency translation adjustments		(210)		398		(52)		122
Change in retirement plan liabilities adjustment		23		11		52		29
Change in fair value of liabilities under fair value option attributable to changes in
own credit risk		(1)		-		1		-
Other comprehensive income (loss)		(1,990)		1,181		(4,659)		1,732
Comprehensive income (loss)		(1,059)		2,299		(2,779)		4,061
Comprehensive income (loss) attributable to noncontrolling interests		(6)		(12)		5		14
Comprehensive income (loss) attributable to AIG	$	(1,053)	$	2,311	$	(2,784)	$	4,047
See accompanying Notes to Condensed Consolidated Financial Statements.

4AIG | Second Quarter 2018 Form 10-Q

American International Group, Inc.

Condensed Consolidated Statements of Equity (unaudited)

														Non-
										Accumulated		Total AIG		redeemable
						Additional				Other		Share-		Non-
		Common		Treasury		Paid-in		Retained	Comprehensive			holders'		controlling		Total
(in millions)		Stock		Stock		Capital		Earnings		Income		Equity		Interests		Equity
Six Months Ended June 30, 2018
Balance, beginning of year	$	4,766	$	(47,595)	$	81,078	$	21,457	$	5,465	$	65,171	$	537	$	65,708
Cumulative effect of change in accounting
principle, net of tax		-		-		-		568		(576)		(8)		-		(8)
Common stock issued under stock plans		-		187		(337)		-		-		(150)		-		(150)
Purchase of common stock		-		(646)		-		-		-		(646)		-		(646)
Net income attributable to AIG or
noncontrolling interests		-		-		-		1,875		-		1,875		5		1,880
Dividends		-		-		-		(575)		-		(575)		-		(575)
Other comprehensive income (loss)		-		-		-		-		(4,659)		(4,659)		-		(4,659)
Net increase due to acquisitions and consolidations		-		-		-		-		-		-		98		98
Contributions from noncontrolling interests		-		-		-		-		-		-		3		3
Distributions to noncontrolling interests		-		-		-		-		-		-		(27)		(27)
Other		-		2		183		(7)		-		178		(5)		173
Balance, end of period	$	4,766	$	(48,052)	$	80,924	$	23,318	$	230	$	61,186	$	611	$	61,797
Six Months Ended June 30, 2017
Balance, beginning of year	$	4,766	$	(41,471)	$	81,064	$	28,711	$	3,230	$	76,300	$	558	$	76,858
Common stock issued under stock plans		-		140		(304)		-		-		(164)		-		(164)
Purchase of common stock		-		(6,000)		-		-		-		(6,000)		-		(6,000)
Net income attributable to AIG or
noncontrolling interests		-		-		-		2,315		-		2,315		14		2,329
Dividends		-		-		-		(597)		-		(597)		-		(597)
Other comprehensive income (loss)		-		-		-		-		1,732		1,732		-		1,732
Current and deferred income taxes		-		-		(4)		-		-		(4)		-		(4)
Net increase due to acquisitions and consolidations		-		-		-		-		-		-		46		46
Contributions from noncontrolling interests		-		-		-		-		-		-		14		14
Distributions to noncontrolling interests		-		-		-		-		-		-		(82)		(82)
Other		-		2		157		(9)		-		150		42		192
Balance, end of period	$	4,766	$	(47,329)	$	80,913	$	30,420	$	4,962	$	73,732	$	592	$	74,324

See accompanying Notes to Condensed Consolidated Financial Statements.

AIG | Second Quarter 2018 Form 10-Q5

American International Group, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

	Six Months Ended June 30,
(in millions)		2018		2017
Cash flows from operating activities:
Net income	$	1,880	$	2,329
(Income) loss from discontinued operations		1		(8)
Adjustments to reconcile net income to net cash used in operating activities:
Noncash revenues, expenses, gains and losses included in income:
Net gains on sales of securities available for sale and other assets		(103)		(400)
Net (gain) loss on sale of divested businesses		(33)		160
(Gains) losses on extinguishment of debt		9		(5)
Unrealized (gains) losses in earnings - net		43		(287)
Equity in (income) loss from equity method investments, net of dividends or distributions		95		(21)
Depreciation and other amortization		2,784		2,002
Impairments of assets		209		291
Changes in operating assets and liabilities:
Insurance reserves		(745)		598
Premiums and other receivables and payables - net		13		(13)
Reinsurance assets and funds held under reinsurance treaties		(1,413)		(12,524)
Capitalization of deferred policy acquisition costs		(2,875)		(2,425)
Current and deferred income taxes - net		563		669
Other, net		(768)		598
Total adjustments		(2,221)		(11,357)
Net cash used in operating activities		(340)		(9,036)
Cash flows from investing activities:
Proceeds from (payments for)
Sales or distributions of:
Available for sale securities		12,233		23,581
Other securities		2,484		1,871
Other invested assets		2,306		2,823
Divested businesses, net		10		538
Maturities of fixed maturity securities available for sale		12,305		15,128
Principal payments received on and sales of mortgage and other loans receivable		1,836		3,005
Purchases of:
Available for sale securities		(21,000)		(26,025)
Other securities		(797)		(281)
Other invested assets		(1,542)		(1,786)
Mortgage and other loans receivable		(5,165)		(4,259)
Net change in short-term investments		(3,840)		1,047
Other, net		(300)		(917)
Net cash provided by (used in) investing activities		(1,470)		14,725
Cash flows from financing activities:
Proceeds from (payments for)
Policyholder contract deposits		12,625		8,916
Policyholder contract withdrawals		(8,770)		(7,917)
Issuance of long-term debt		3,504		2,221
Repayments of long-term debt		(1,959)		(1,606)
Purchase of common stock		(646)		(6,000)
Dividends paid		(575)		(597)
Other, net		(2,756)		(44)
Net cash provided by (used in) financing activities		1,423		(5,027)
Effect of exchange rate changes on cash and restricted cash		30		(25)
Net increase (decrease) in cash and restricted cash		(357)		637
Cash and restricted cash at beginning of year		2,737		2,107
Change in cash of businesses held for sale		-		66
Cash and restricted cash at end of period	$	2,380	$	2,810

6AIG | Second Quarter 2018 Form 10-Q

American International Group, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)(continued)

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

	Six Months Ended June 30,
		2018		2017
Cash	$	2,135	$	2,517
Restricted cash included in Short-term investments*		18		59
Restricted cash included in Other assets*		227		234
Total cash and restricted cash shown in the Condensed Consolidated Statements of Cash Flows	$	2,380	$	2,810

Cash paid during the period for:
Interest	$	664	$	682
Taxes	$	40	$	402
Non-cash investing/financing activities:
Interest credited to policyholder contract deposits included in financing activities	$	1,662	$	1,654

*    Includes funds held for tax sharing payments to AIG Parent, security deposits for certain leased aircraft and escrow funds, security deposits and replacement reserve deposits related to our affordable housing investments.

See accompanying Notes to Condensed Consolidated Financial Statements.

AIG | Second Quarter 2018 Form 10-Q7

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |1. Basis of Presentation

1. Basis of Presentation

American International Group, Inc. (AIG) is a leading global insurance organization serving customers in more than 80 countries and jurisdictions. AIG companies serve commercial and individual customers through one of the most extensive worldwide property‑casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG Common Stock, par value $2.50 per share (AIG Common Stock), is listed on the New York Stock Exchange (NYSE: AIG) and the Tokyo Stock Exchange. Unless the context indicates otherwise, the terms “AIG,” “we,” “us” or “our” mean American International Group, Inc. and its consolidated subsidiaries and the term “AIG Parent” means American International Group, Inc. and not any of its consolidated subsidiaries.

These unaudited Condensed Consolidated Financial Statements do not include all disclosures that are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) and should be read in conjunction with the audited Consolidated Financial Statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2017 (the 2017 Annual Report). The condensed consolidated financial information as of December 31, 2017 included herein has been derived from the audited Consolidated Financial Statements in the 2017 Annual Report.

Certain of our foreign subsidiaries included in the Condensed Consolidated Financial Statements report on different fiscal-period bases. The effect on our consolidated financial condition and results of operations of all material events occurring at these subsidiaries through the date of each of the periods presented in these Condensed Consolidated Financial Statements has been considered for adjustment and/or disclosure. In the opinion of management, these Condensed Consolidated Financial Statements contain normal recurring adjustments, including eliminations of material intercompany accounts and transactions, necessary for a fair statement of the results presented herein.

Interim-period operating results may not be indicative of the operating results for a full year. We evaluated the need to recognize or disclose events that occurred subsequent to June 30, 2018 and prior to the issuance of these Condensed Consolidated Financial Statements.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment. Accounting policies that we believe are most dependent on the application of estimates and assumptions are considered our critical accounting estimates and are related to the determination of:

•liability for unpaid losses and loss adjustment expenses (loss reserves);

•reinsurance assets;

•valuation of future policy benefit liabilities and timing and extent of loss recognition;

•valuation of liabilities for guaranteed benefit features of variable annuity products;

•estimated gross profits to value deferred policy acquisition costs for investment-oriented products;

•impairment charges, including other-than-temporary impairments on available for sale securities, impairments on other invested assets, including investments in life settlements, and goodwill impairment;

•allowances for loan losses;

•liability for legal contingencies;

•fair value measurements of certain financial assets and liabilities; and

•income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax operating profitability of the character necessary to realize the net deferred tax asset and provisional estimates associated with the Tax Act.

These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of operations and cash flows could be materially affected. 

8AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |1. Basis of Presentation

OUT OF PERIOD ADJUSTMENTS

For the three- and six-month periods ended June 30, 2018, our results included out of period adjustments relating to prior periods that increased Net income attributable to AIG by $116 million and $191 million, respectively, and increased Income from continuing operations before income taxes by $148 million and $257 million, respectively. The out of period adjustments are primarily related to earned premium on certain multi-year insurance policies related to earlier accident years and adjustments to universal life benefit reserves.

We determined that these adjustments were not material to the current quarter or to any previously reported quarterly or annual financial statements.      

2. Summary of Significant Accounting Policies

Accounting Standards Adopted During 2018

Revenue Recognition

In May 2014, the FASB issued an accounting standard that supersedes most existing revenue recognition guidance. The standard excludes from its scope the accounting for insurance contracts, leases, financial instruments, and certain other agreements that are governed under other GAAP guidance, but could affect the revenue recognition for certain of our other activities.

We adopted the standard using the modified retrospective approach on its required effective date of January 1, 2018.  Our analysis of revenues indicated that substantially all of our revenues were from sources excluded from the scope of the standard.  For those revenue sources within the scope of the standard, there were no material changes in the timing or measurement of revenues based upon the guidance.  As substantially all of our revenue sources were excluded from the scope of the standard, the adoption of the standard did not have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued an accounting standard that will require equity investments that do not follow the equity method of accounting or are not subject to consolidation to be measured at fair value with changes in fair value recognized in earnings, while financial liabilities for which fair value option accounting has been elected, changes in fair value due to instrument-specific credit risk will be presented separately in other comprehensive income. The standard allows the election to record equity investments without readily determinable fair values at cost, less impairment, adjusted for subsequent observable price changes with changes in the carrying value of the equity investments recorded in earnings. The standard also updates certain fair value disclosure requirements for financial instruments carried at amortized cost.

We adopted the standard on its effective date of January 1, 2018 using the modified retrospective approach. The impact of the adoption is primarily related to the reclassification of unrealized gains of equity securities resulting in a net decrease to beginning Accumulated other comprehensive income and a corresponding net increase to beginning Retained earnings of $824 million.   

Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued an accounting standard that addresses diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide clarity on the treatment of eight specifically defined types of cash inflows and outflows.

We adopted the standard retrospectively on its effective date of January 1, 2018. The standard addresses presentation in the statement of cash flows only and did not have a material impact on our reported consolidated financial condition, results of operations or required disclosures.  

Intra-Entity Transfers of Assets Other than Inventory

In October 2016, the FASB issued an accounting standard that will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset is sold to a third party.

We adopted the standard on its effective date of January 1, 2018 using a modified retrospective approach.  The adoption of this standard did not have a material impact on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

AIG | Second Quarter 2018 Form 10-Q9

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |2. Summary of Significant Accounting Policies

Restricted Cash

In November 2016, the FASB issued an accounting standard that provides guidance on the presentation of restricted cash in the Statement of Cash Flows.  Entities will be required to explain the changes during a reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents in the statement of cash flows. 

We adopted the standard retrospectively on its effective date of January 1, 2018. The standard addresses presentation of restricted cash in the Statement of Cash Flows only and had no effect on our reported consolidated financial condition, results of operations or required disclosures.

Gains and Losses from the Derecognition of Nonfinancial Assets

In February 2017, the FASB issued an accounting standard that clarifies the scope of the derecognition guidance for the sale, transfer and derecognition of non-financial assets to noncustomers that aligns with the new revenue recognition principles.  The standard also adds new accounting for partial sales of nonfinancial assets (including real estate) that requires an entity to derecognize a nonfinancial asset when it 1) ceases to have a controlling financial interest in the legal entity that holds the asset based on the consolidation model and 2) transfers control of the asset based on the revenue recognition model.

We adopted this standard on its effective date of January 1, 2018 under the modified retrospective approach. Based on our evaluation, the standard did not have a material impact on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

Improving the Presentation of Net Periodic Pension and Postretirement Benefit Cost

In March 2017, the FASB issued an accounting standard that requires entities to report the service cost component of net periodic pension and postretirement benefit costs in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit costs are required to be separately presented in the income statement. The amendments also allow only the service cost component to be eligible for capitalization when applicable.

We adopted this standard on its effective date of January 1, 2018. The standard primarily addresses the presentation of the service cost component of net periodic benefit costs in the income statement. AIG’s U.S. pension plans are frozen and no longer accrue benefits, which are reflected as service costs. Therefore, the standard did not have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

Modification of Share-Based Payment Awards

In May 2017, the FASB issued an accounting standard that provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.  

We prospectively adopted this standard on its effective date of January 1, 2018 and the standard did not have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures.         

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued an accounting standard that allows the optional reclassification of stranded tax effects within accumulated other comprehensive income to retained earnings that arise due to the enactment of the Tax Cuts and Jobs Act of 2017 (Tax Act). The amount of the reclassification would reflect the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment of the Tax Act and other income tax effects of the Tax Act on items remaining in accumulated other comprehensive income.

We adopted the standard effective January 1, 2018. The impact of the adoption of the standard resulted in an increase to beginning Accumulated other comprehensive income and a corresponding decrease to beginning Retained earnings of $248 million. For more information on the adoption of the Tax Act, see Note 14.

10AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |2. Summary of Significant Accounting Policies

Future Application of Accounting Standards

Leases

In February 2016, the FASB issued an accounting standard that will require lessees with lease terms of more than 12 months to recognize a right of use asset and a corresponding lease liability on their balance sheets. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating leases or finance leases.

We plan to adopt the standard on its effective date of January 1, 2019 using a modified retrospective approach. We are currently quantifying the expected recognition on our balance sheet for a right to use asset and a lease liability as required by the standard. We do not expect the impact of the standard to have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

Financial Instruments - Credit Losses

In June 2016, the FASB issued an accounting standard that will change how entities account for credit losses for most financial assets, trade receivables and reinsurance receivables.  The standard will replace the existing incurred loss impairment model with a new “current expected credit loss model” that generally will result in earlier recognition of credit losses.  The standard will apply to financial assets subject to credit losses, including loans measured at amortized cost, reinsurance receivables and certain off-balance sheet credit exposures.  Additionally, the impairment of available-for-sale debt securities, including purchased credit deteriorated securities, are subject to the new guidance and will be measured in a similar manner, except that losses will be recognized as allowances rather than reductions in the amortized cost of the securities.  The standard will also require additional information to be disclosed in the footnotes.

The standard is effective on January 1, 2020, with early adoption permitted on January 1, 2019.  We are continuing to develop our implementation plan to adopt the standard and are assessing the impact of the standard on our reported consolidated financial condition, results of operations, cash flows and required disclosures.  While we expect an increase in our allowances for credit losses for the financial instruments within scope of the standard, given the objective of the new standard, the amount of any change will be dependent on our portfolios’ composition and quality at the adoption date as well as economic conditions and forecasts at that time.

Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued an accounting standard that eliminates the requirement to calculate the implied fair value of goodwill, through a hypothetical purchase price allocation, to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value not to exceed the total amount of goodwill allocated to that reporting unit.  An entity should also consider income tax effects from tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.  

The standard is effective on January 1, 2020, with early adoption permitted. We are evaluating the timing of our adoption. Any impact of the standard will be dependent on the market conditions of the reporting units at the time of adoption.

Premium Amortization on Purchased Callable Debt Securities

In March 2017, the FASB issued an accounting standard that shortens the amortization period for certain callable debt securities held at a premium by requiring the premium to be amortized to the earliest call date.  The standard does not require an accounting change for securities held at a discount, which continue to be amortized to maturity. 

We plan to adopt the standard retrospectively on its effective date, January 1, 2019. We do not expect the standard to have a material impact on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

Derivatives and Hedging

In August 2017, the FASB issued an accounting standard that improves and expands hedge accounting for both financial and commodity risks. The provisions of the amendment are intended to better align the accounting with an entity’s risk management activities, enhance the transparency on how the economic results are presented in the financial statements and the footnote, and simplify the application of hedge accounting treatment.

The standard is effective on January 1, 2019, with early adoption permitted. We are evaluating the timing of adoption and are assessing the impact of the standard on our reported consolidated financial condition, results of operations, cash flows and required disclosures.                                                       

AIG | Second Quarter 2018 Form 10-Q11

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |3. Segment Information

3. Segment Information

We report our results of operations consistent with the manner in which our chief operating decision makers review the business to assess performance and allocate resources, as follows.

General Insurance

General Insurance business is presented as two operating segments:

·North America— consists of insurance businesses in the United States, Canada and Bermuda.

·International — consists of insurance businesses in Japan, the United Kingdom, Europe, Asia Pacific, Latin America, Puerto Rico, Australia, the Middle East and Africa.

Results are presented before internal reinsurance transactions.  North America and International operating segments consist of the following products:

–     Commercial Lines — consists of Liability, Financial Lines, Property and Special Risks.

–     Personal Insurance — consists of Personal Lines and Accident and Health.

Life and Retirement

Life and Retirement business is presented as four operating segments:

·Individual Retirement — consists of fixed annuities, fixed index annuities, variable annuities and retail mutual funds.

·Group Retirement — consists of group mutual funds, group fixed annuities, group variable annuities, individual annuity and investment products, financial planning and advisory services.

·Life Insurance — primary products in the U.S. include term life and universal life insurance. International operations include distribution of life and health products in the UK and Ireland.

·Institutional Markets — consists of stable value wrap products, structured settlement and pension risk transfer annuities, corporate- and bank-owned life insurance and guaranteed investment contracts (GICs).

Other Operations

Other Operations category consists of:

·Income from assets held by AIG Parent and other corporate subsidiaries.

·General operating expenses not attributable to specific reporting segments.

·Interest expense.

·Blackboard — a data-enabled, digital subsidiary that provides the commercial insurance industry with alternative solutions using digital technology, data analytics and automation.

·Fuji Life — consists of term insurance, life insurance, endowment policies and annuities. The sale of this business was completed on April 30, 2017.

12AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |3. Segment Information

Legacy Portfolio

Legacy Portfolio represents exited or discontinued product lines, policy forms or distribution channels. Effective February 2018, our Bermuda domiciled composite reinsurer, DSA Reinsurance Company, Ltd. (DSA Re) is included in our Legacy Portfolio.

·Legacy Life and Retirement Run-Off Lines - Reserves consist of certain structured settlements, pension risk transfer annuities and single premium immediate annuities written prior to April 2012.  Also includes exposures to whole life, long-term care and exited accident & health product lines.

·Legacy General Insurance Run-Off Lines - Reserves consist of excess workers’ compensation, environmental exposures and exposures to other products within General Insurance that are no longer actively marketed.  Also includes the remaining reserves in Eaglestone Reinsurance Company (Eaglestone). 

·Legacy Investments – Includes investment classes that we have placed into run-off including holdings in direct investments as well as investments in global capital markets and global real estate.

We evaluate segment performance based on adjusted revenues and adjusted pre-tax income (loss). Adjusted revenues and adjusted pre-tax income (loss) are derived by excluding certain items from total revenues and net income (loss) attributable to AIG, respectively. For the items excluded from adjusted revenues and adjusted pre-tax income (loss) see the table below.

The following table presents AIG’s continuing operations by operating segment:

Three Months Ended June 30,	2018				2017
				Adjusted				Adjusted
		Adjusted		Pre-tax		Adjusted		Pre-tax
(in millions)		Revenues		Income (Loss)		Revenues		Income (Loss)
General Insurance
North America	$	3,426	$	407	$	3,671	$	721
International		3,801		161		3,750		325
Total General Insurance		7,227		568		7,421		1,046
Life and Retirement
Individual Retirement		1,366		462		1,383		558
Group Retirement		730		250		696		266
Life Insurance		1,092		175		1,030		106
Institutional Markets		277		75		256		63
Total Life and Retirement		3,465		962		3,365		993
Other Operations		169		(374)		626		(365)
Legacy Portfolio		781		134		1,138		431
AIG Consolidation and elimination		(110)		(12)		(54)		28
Total AIG Consolidated adjusted revenues and adjusted pre-tax income		11,532		1,278		12,496		2,133
Reconciling Items to revenues and pre-tax income:
Changes in fair value of securities used to hedge guaranteed
living benefits		(27)		(36)		80		80
Changes in benefit reserves and DAC, VOBA and SIA related to
net realized capital gains		-		1		-		58
Other income (expense) - net		(14)		-		(11)		-
Gain (Loss) on extinguishment of debt		-		(5)		-		4
Net realized capital gains (losses)*		139		155		(69)		(69)
Income (loss) from divested businesses		-		25		-		(60)
Non-operating litigation reserves and settlements		1		(12)		6		80
(Unfavorable) favorable prior year development and related amortization
changes ceded under retroactive reinsurance agreements		-		32		-		(251)
Net loss reserve discount benefit (charge)		-		14		-		(260)
Pension expense related to a one-time lump sum payment to former employees		-		-		-		(1)
Restructuring and other costs		-		(200)		-		(47)
Revenues and Pre-tax income	$	11,631	$	1,252	$	12,502	$	1,667

AIG | Second Quarter 2018 Form 10-Q13

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |3. Segment Information

Six Months Ended June 30,	2018				2017
				Adjusted				Adjusted
		Adjusted		Pre-Tax		Adjusted		Pre-Tax
(in millions)		Revenues		Income (Loss)		Revenues		Income (Loss)
General Insurance
North America	$	6,766	$	727	$	7,511	$	1,549
International		7,905		351		7,448		558
Total General Insurance		14,671		1,078		14,959		2,107
Life and Retirement
Individual Retirement		2,727		961		2,756		1,097
Group Retirement		1,491		532		1,414		509
Life Insurance		2,153		227		2,043		160
Institutional Markets		554		134		855		125
Total Life and Retirement		6,925		1,854		7,068		1,891
Other Operations		319		(716)		1,100		(673)
Legacy Portfolio		1,617		279		2,222		773
AIG Consolidation and elimination		(172)		(1)		(118)		76
Total AIG Consolidated adjusted revenues and adjusted pre-tax income		23,360		2,494		25,231		4,174
Reconciling Items to revenues and pre-tax income:
Changes in fair value of securities used to hedge guaranteed
living benefits		(104)		(113)		91		91
Changes in benefit reserves and DAC, VOBA and SIA related to
net realized capital gains		-		(30)		-		111
Other income (expense) - net		(25)		-		(20)		-
Gain (Loss) on extinguishment of debt		-		(9)		-		5
Net realized capital gains (losses)*		110		136		(184)		(184)
Income (loss) from divested businesses		-		33		-		(160)
Non-operating litigation reserves and settlements		2		(25)		16		86
(Unfavorable) favorable prior year development and related amortization
changes ceded under retroactive reinsurance agreements		-		(2)		-		(265)
Net loss reserve discount benefit (charge)		-		219		-		(235)
Pension expense related to a one-time lump sum payment to former employees		-		-		-		(1)
Restructuring and other costs		-		(224)		-		(228)
Revenues and Pre-tax income	$	23,343	$	2,479	$	25,134	$	3,394

*   Includes all net realized capital gains and losses except earned income (periodic settlements and changes in settlement accruals) on derivative instruments used for non-qualifying (economic) hedging or for asset replication.

14AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

4. Fair Value Measurements

Fair Value Measurements on a Recurring Basis

Assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are measured and classified in accordance with a fair value hierarchy consisting of three “levels” based on the observability of valuation inputs:

•Level 1: Fair value measurements based on quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities.  Market price data generally is obtained from exchange or dealer markets. We do not adjust the quoted price for such instruments.

•Level 2:Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

•Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions about the inputs a hypothetical market participant would use to value that asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

AIG | Second Quarter 2018 Form 10-Q15

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents information about assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value measurement based on the observability of the inputs used:

June 30, 2018							Counterparty		Cash
(in millions)		Level 1		Level 2		Level 3		Netting(a)	Collateral			Total
Assets:
Bonds available for sale:
U.S. government and government sponsored entities	$	147	$	2,497	$	-	$	-	$	-	$	2,644
Obligations of states, municipalities and political subdivisions		-		15,004		2,056		-		-		17,060
Non-U.S. governments		24		15,273		-		-		-		15,297
Corporate debt		-		127,074		884		-		-		127,958
RMBS		-		20,003		15,377		-		-		35,380
CMBS		-		12,479		605		-		-		13,084
CDO/ABS		-		10,394		6,856		-		-		17,250
Total bonds available for sale		171		202,724		25,778		-		-		228,673
Other bond securities:
U.S. government and government sponsored entities		26		2,636		-		-		-		2,662
Non-U.S. governments		-		51		-		-		-		51
Corporate debt		-		1,729		18		-		-		1,747
RMBS		-		382		1,338		-		-		1,720
CMBS		-		340		71		-		-		411
CDO/ABS		-		542		4,641		-		-		5,183
Total other bond securities		26		5,680		6,068		-		-		11,774
Other equity securities(b)		1,628		47		-		-		-		1,675
Mortgage and other loans receivable		-		-		-		-		-		-
Other invested assets(c)		-		-		399		-		-		399
Derivative assets:
Interest rate contracts		-		2,460		-		-		-		2,460
Foreign exchange contracts		-		1,038		-		-		-		1,038
Equity contracts		27		174		79		-		-		280
Credit contracts		-		-		1		-		-		1
Other contracts		-		3		14		-		-		17
Counterparty netting and cash collateral		-		-		-		(1,433)		(1,644)		(3,077)
Total derivative assets		27		3,675		94		(1,433)		(1,644)		719
Short-term investments		2,307		938		-		-		-		3,245
Separate account assets		85,783		4,963		-		-		-		90,746
Total	$	89,942	$	218,027	$	32,339	$	(1,433)	$	(1,644)	$	337,231
Liabilities:
Policyholder contract deposits	$	-	$	-	$	3,534	$	-	$	-	$	3,534
Derivative liabilities:
Interest rate contracts		-		1,925		14		-		-		1,939
Foreign exchange contracts		-		1,082		5		-		-		1,087
Equity contracts		5		3		-		-		-		8
Credit contracts		-		13		247		-		-		260
Other contracts		-		-		4		-		-		4
Counterparty netting and cash collateral		-		-		-		(1,433)		(595)		(2,028)
Total derivative liabilities		5		3,023		270		(1,433)		(595)		1,270
Long-term debt		-		2,615		-		-		-		2,615
Other liabilities		153		-		-		-		-		153
Total	$	158	$	5,638	$	3,804	$	(1,433)	$	(595)	$	7,572

16AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

December 31, 2017							Counterparty		Cash
(in millions)		Level 1		Level 2		Level 3		Netting(a)		Collateral		Total
Assets:
Bonds available for sale:
U.S. government and government sponsored entities	$	201	$	2,455	$	-	$	-	$	-	$	2,656
Obligations of states, municipalities and political subdivisions		-		16,240		2,404		-		-		18,644
Non-U.S. governments		20		15,631		8		-		-		15,659
Corporate debt		-		133,003		1,173		-		-		134,176
RMBS		-		21,098		16,136		-		-		37,234
CMBS		-		13,217		624		-		-		13,841
CDO/ABS		-		8,131		8,651		-		-		16,782
Total bonds available for sale		221		209,775		28,996		-		-		238,992
Other bond securities:
U.S. government and government sponsored entities		238		2,564		-		-		-		2,802
Non-U.S. governments		-		57		-		-		-		57
Corporate debt		-		1,891		18		-		-		1,909
RMBS		-		421		1,464		-		-		1,885
CMBS		-		485		74		-		-		559
CDO/ABS		-		604		4,956		-		-		5,560
Total other bond securities		238		6,022		6,512		-		-		12,772
Equity securities available for sale:
Common stock		1,061		-		-		-		-		1,061
Preferred stock		18		515		-		-		-		533
Mutual funds		110		4		-		-		-		114
Total equity securities available for sale		1,189		519		-		-		-		1,708
Other equity securities		589		-		-		-		-		589
Mortgage and other loans receivable		-		-		5		-		-		5
Other invested assets(c)		-		1		250		-		-		251
Derivative assets:
Interest rate contracts		1		2,170		-		-		-		2,171
Foreign exchange contracts		-		827		4		-		-		831
Equity contracts		188		252		82		-		-		522
Credit contracts		-		-		1		-		-		1
Other contracts		-		-		20		-		-		20
Counterparty netting and cash collateral		-		-		-		(1,464)		(1,159)		(2,623)
Total derivative assets		189		3,249		107		(1,464)		(1,159)		922
Short-term investments		2,078		537		-		-		-		2,615
Separate account assets		87,141		5,657		-		-		-		92,798
Total	$	91,645	$	225,760	$	35,870	$	(1,464)	$	(1,159)	$	350,652
Liabilities:
Policyholder contract deposits	$	-	$	14	$	4,136	$	-	$	-	$	4,150
Derivative liabilities:
Interest rate contracts		2		2,176		22		-		-		2,200
Foreign exchange contracts		-		1,241		4		-		-		1,245
Equity contracts		2		19		-		-		-		21
Credit contracts		-		14		263		-		-		277
Other contracts		-		-		5		-		-		5
Counterparty netting and cash collateral		-		-		-		(1,464)		(1,249)		(2,713)
Total derivative liabilities		4		3,450		294		(1,464)		(1,249)		1,035
Long-term debt		-		2,888		-		-		-		2,888
Other liabilities		46		43		-		-		-		89
Total	$	50	$	6,395	$	4,430	$	(1,464)	$	(1,249)	$	8,162

(a)            Represents netting of derivative exposures covered by qualifying master netting agreements.

(b)            As a result of the adoption of the Recognition and Measurement of Financial Assets and Financial Liabilities standard on January 1, 2018 (Financial Instruments Recognition and Measurement Standard), equity securities are no longer classified and accounted for as available for sale securities.

(c)            Excludes investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent), which totaled $5.5 billion and $6.0 billion as of June 30, 2018 and December 31, 2017, respectively.

AIG | Second Quarter 2018 Form 10-Q17

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

Transfers of Level 1 and Level 2 Assets and Liabilities

Our policy is to record transfers of assets and liabilities between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. Assets are transferred out of Level 1 when they are no longer transacted with sufficient frequency and volume in an active market. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market.

There were no transfers of securities issued by non-U.S. government entities from Level 1 to Level 2 in the three-month period ended June 30, 2018. During the six-month period ended June 30, 2018, we transferred $16 million of securities issued by non-U.S. government entities from Level 1 to Level 2, because they are no longer considered actively traded. For similar reasons, during the three- and six-month periods ended June 30, 2018, we transferred $490 million and $681 million, respectively, of securities issued by the U.S. government and government sponsored entities from Level 1 to Level 2. We had no material transfers from Level 2 to Level 1 during the three- and six-month periods ended June 30, 2018.

There were no transfers of securities issued by non-U.S. government entities from Level 1 to Level 2 in the three-month period ended June 30, 2017. During the six-month period ended June 30, 2017, we transferred $53 million of securities issued by non-U.S. government entities from Level 1 to Level 2, because they are no longer considered actively traded. For similar reasons, during the three- and six-month periods ended June 30, 2017, we transferred $50 million and $113 million, respectively, of securities issued by the U.S. government and government sponsored entities from Level 1 to Level 2. Additionally, we transferred $126 million of preferred stock from Level 1 to Level 2 during the three- and six-month periods ended June 30, 2017. We had no material transfers from Level 2 to Level 1 during the three- and six-month periods ended June 30, 2017.

18AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

Changes in Level 3 Recurring Fair Value Measurements

The following tables present changes during the three- and six-month periods ended June 30, 2018 and 2017 in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) related to the Level 3 assets and liabilities in the Condensed Consolidated Balance Sheets at June 30, 2018 and 2017:

				Net												Changes in
				Realized and												Unrealized Gains
				Unrealized				Purchases,								(Losses) Included
		Fair Value	Gains (Losses)			Other		Sales,		Gross		Gross		Fair Value		in Income on
		Beginning		Included		Comprehensive		Issuances and		Transfers		Transfers		End		Instruments Held
(in millions)		of Period		in Income		Income (Loss)	Settlements, Net			In		Out		of Period		at End of Period
Three Months Ended June 30, 2018
Assets:
Bonds available for sale:
Obligations of states, municipalities
and political subdivisions	$	2,261	$	-	$	(40)	$	(29)	$	-	$	(136)	$	2,056	$	-
Non-U.S. governments		9		(1)		2		(5)		-		(5)		-		-
Corporate debt		1,871		(8)		(7)		(394)		3		(581)		884		-
RMBS		15,839		153		(5)		(616)		8		(2)		15,377		-
CMBS		584		(2)		(4)		(7)		47		(13)		605		-
CDO/ABS		7,846		8		3		56		-		(1,057)		6,856		-
Total bonds available for sale		28,410		150		(51)		(995)		58		(1,794)		25,778		-
Other bond securities:
Corporate debt		19		(1)		-		-		-		-		18		-
RMBS		1,427		16		-		(105)		-		-		1,338		151
CMBS		73		(2)		-		-		-		-		71		4
CDO/ABS		4,776		118		-		(253)		-		-		4,641		204
Total other bond securities		6,295		131		-		(358)		-		-		6,068		359
Other equity securities(a)		3		(3)		-		-		-		-		-		-
Mortgage and other loans receivable		-		-		-		-		-		-		-		-
Other invested assets		292		29		-		78		-		-		399		-
Total	$	35,000	$	307	$	(51)	$	(1,275)	$	58	$	(1,794)	$	32,245	$	359
				Net												Changes in
				Realized and												Unrealized Gains
				Unrealized				Purchases,								(Losses) Included
		Fair Value	(Gains) Losses			Other		Sales,		Gross		Gross		Fair Value		in Income on
		Beginning		Included		Comprehensive		Issuances and		Transfers		Transfers		End		Instruments Held
(in millions)		of Period		in Income		Income (Loss)	Settlements, Net			In		Out		of Period		at End of Period
Liabilities:
Policyholder contract deposits	$	3,696	$	(238)	$	-	$	76	$	-	$	-	$	3,534	$	298
Derivative liabilities, net:
Interest rate contracts		17		(1)		-		(2)		-		-		14		1
Foreign exchange contracts		1		6		-		(2)		-		-		5		(4)
Equity contracts		(78)		5		-		(8)		-		2		(79)		(5)
Credit contracts		250		(4)		-		-		-		-		246		3
Other contracts		(12)		(15)		-		17		-		-		(10)		18
Total derivative liabilities, net(b)		178		(9)		-		5		-		2		176		13
Long-term debt(c)		-		-		-		-		-		-		-		-
Total	$	3,874	$	(247)	$	-	$	81	$	-	$	2	$	3,710	$	311

AIG | Second Quarter 2018 Form 10-Q19

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

				Net												Changes in
				Realized and												Unrealized Gains
				Unrealized				Purchases,								(Losses) Included
		Fair Value	Gains (Losses)			Other		Sales,		Gross		Gross		Fair Value		in Income on
		Beginning		Included		Comprehensive		Issuances and		Transfers		Transfers		End		Instruments Held
(in millions)		of Period		in Income		Income (Loss)	Settlements, Net			In		Out		of Period		at End of Period
Six Months Ended June 30, 2018
Assets:
Bonds available for sale:
Obligations of states, municipalities
and political subdivisions	$	2,404	$	1	$	(115)	$	(98)	$	-	$	(136)	$	2,056	$	-
Non-U.S. governments		8		(5)		6		(4)		-		(5)		-		-
Corporate debt		1,173		(65)		3		(146)		568		(649)		884		-
RMBS		16,136		419		-		(1,152)		8		(34)		15,377		-
CMBS		624		4		(21)		(30)		47		(19)		605		-
CDO/ABS		8,651		16		(85)		(654)		-		(1,072)		6,856		-
Total bonds available for sale		28,996		370		(212)		(2,084)		623		(1,915)		25,778		-
Other bond securities:
Corporate debt		18		-		-		-		-		-		18		1
RMBS		1,464		55		-		(181)		-		-		1,338		153
CMBS		74		(3)		-		(1)		1		-		71		4
CDO/ABS		4,956		207		-		(513)		-		(9)		4,641		208
Total other bond securities		6,512		259		-		(695)		1		(9)		6,068		366
Other equity securities(a)		-		(3)		-		3		-		-		-		-
Mortgage and other loans receivable		5		-		-		(5)		-		-		-		-
Other invested assets		250		52		1		96		-		-		399		25
Total	$	35,763	$	678	$	(211)	$	(2,685)	$	624	$	(1,924)	$	32,245	$	391
				Net												Changes in
				Realized and												Unrealized Gains
				Unrealized				Purchases,								(Losses) Included
		Fair Value	(Gains) Losses			Other		Sales,		Gross		Gross		Fair Value		in Income on
		Beginning		Included		Comprehensive		Issuances and		Transfers		Transfers		End		Instruments Held
(in millions)		of Period		in Income		Income (Loss)	Settlements, Net			In		Out		of Period		at End of Period
Liabilities:
Policyholder contract deposits	$	4,136	$	(744)	$	-	$	142	$	-	$	-	$	3,534	$	902
Derivative liabilities, net:
Interest rate contracts		22		(4)		-		(4)		-		-		14		4
Foreign exchange contracts		-		(4)		-		9		-		-		5		(3)
Equity contracts		(82)		9		-		(8)		-		2		(79)		(9)
Credit contracts		262		(14)		-		(2)		-		-		246		13
Other contracts		(15)		(32)		-		37		-		-		(10)		35
Total derivative liabilities, net(b)		187		(45)		-		32		-		2		176		40
Long-term debt(c)		-		-		-		-		-		-		-		-
Total	$	4,323	$	(789)	$	-	$	174	$	-	$	2	$	3,710	$	942

20AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

				Net												Changes in
				Realized and												Unrealized Gains
				Unrealized				Purchases,								(Losses) Included
		Fair Value		Gains (Losses)		Other		Sales,		Gross		Gross		Fair Value		in Income on
		Beginning		Included		Comprehensive		Issuances and		Transfers		Transfers		End		Instruments Held
(in millions)		of Period		in Income		Income (Loss)	Settlements, Net			In		Out		of Period		at End of Period
Three Months Ended June 30, 2017
Assets:
Bonds available for sale:
Obligations of states, municipalities
and political subdivisions	$	2,041	$	(1)	$	89	$	148	$	8	$	-	$	2,285	$	-
Non-U.S. governments		16		-		1		(5)		-		-		12		-
Corporate debt		1,079		5		3		(153)		70		(72)		932		-
RMBS		16,487		264		346		(681)		-		(23)		16,393		-
CMBS		1,003		18		2		(274)		-		(14)		735		-
CDO/ABS		7,755		(28)		132		746		-		-		8,605		-
Total bonds available for sale		28,381		258		573		(219)		78		(109)		28,962		-
Other bond securities:
Corporate debt		18		-		-		10		-		-		28		-
RMBS		1,502		66		-		(58)		-		-		1,510		43
CMBS		65		2		-		(1)		-		-		66		2
CDO/ABS		5,508		175		-		(449)		-		-		5,234		55
Total other bond securities		7,093		243		-		(498)		-		-		6,838		100
Equity securities available for sale:
Common stock		8		-		-		-		-		(1)		7		-
Total equity securities available for sale		8		-		-		-		-		(1)		7		-
Mortgage and other loans receivable		11		-		-		(6)		-		-		5		-
Other invested assets		180		4		2		39		-		-		225		4
Total	$	35,673	$	505	$	575	$	(684)	$	78	$	(110)	$	36,037	$	104
				Net												Changes in
				Realized and												Unrealized Gains
				Unrealized				Purchases,								(Losses) Included
		Fair Value		(Gains) Losses		Other		Sales,		Gross		Gross		Fair Value		in Income on
		Beginning		Included		Comprehensive		Issuances and		Transfers		Transfers		End		Instruments Held
(in millions)		of Period		in Income		Income (Loss)	Settlements, Net			In		Out		of Period		at End of Period
Liabilities:
Policyholder contract deposits	$	3,072	$	340	$	-	$	106	$	-	$	-	$	3,518	$	(283)
Derivative liabilities, net:
Interest rate contracts		32		2		-		(4)		-		-		30		(1)
Foreign exchange contracts		6		1		-		-		-		-		7		(1)
Equity contracts		(62)		(4)		-		3		-		-		(63)		9
Credit contracts		315		(21)		-		(1)		-		-		293		23
Other contracts		(11)		(20)		-		18		(3)		-		(16)		46
Total derivative liabilities, net(b)		280		(42)		-		16		(3)		-		251		76
Long-term debt(c)		58		2		-		1		-		-		61		(2)
Total	$	3,410	$	300	$	-	$	123	$	(3)	$	-	$	3,830	$	(209)

AIG | Second Quarter 2018 Form 10-Q21

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

				Net												Changes in
				Realized and												Unrealized Gains
				Unrealized				Purchases,								(Losses) Included
		Fair Value		Gains (Losses)		Other		Sales,		Gross		Gross		Fair Value		in Income on
		Beginning		Included		Comprehensive		Issuances and		Transfers		Transfers		End		Instruments Held
(in millions)		of Period		in Income		Income (Loss)	Settlements, Net			In		Out		of Period		at End of Period
Six Months Ended June 30, 2017
Assets:
Bonds available for sale:
Obligations of states, municipalities
and political subdivisions	$	2,040	$	1	$	85	$	169	$	8	$	(18)	$	2,285	$	-
Non-U.S. governments		17		-		1		(6)		-		-		12		-
Corporate debt		1,133		1		-		(166)		206		(242)		932		-
RMBS		16,906		553		497		(1,539)		8		(32)		16,393		-
CMBS		2,040		23		7		(622)		-		(713)		735		-
CDO/ABS		7,835		(22)		180		644		-		(32)		8,605		-
Total bonds available for sale		29,971		556		770		(1,520)		222		(1,037)		28,962		-
Other bond securities:
Corporate debt		17		1		-		10		-		-		28		1
RMBS		1,605		121		-		(183)		-		(33)		1,510		67
CMBS		155		2		-		(18)		-		(73)		66		3
CDO/ABS		5,703		348		-		(817)		-		-		5,234		125
Total other bond securities		7,480		472		-		(1,008)		-		(106)		6,838		196
Equity securities available for sale:
Common stock		-		-		-		8		-		(1)		7		-
Total equity securities available for sale		-		-		-		8		-		(1)		7		-
Mortgage and other loans receivable		11		-		-		(6)		-		-		5		-
Other invested assets		204		3		(3)		22		-		(1)		225		4
Total	$	37,666	$	1,031	$	767	$	(2,504)	$	222	$	(1,145)	$	36,037	$	200
				Net												Changes in
				Realized and												Unrealized Gains
				Unrealized				Purchases,								(Losses) Included
		Fair Value		(Gains) Losses		Other		Sales,		Gross		Gross		Fair Value		in Income on
		Beginning		Included		Comprehensive		Issuances and		Transfers		Transfers		End		Instruments Held
(in millions)		of Period		in Income		Income (Loss)	Settlements, Net			In		Out		of Period		at End of Period
Liabilities:
Policyholder contract deposits	$	3,033	$	295	$	-	$	190	$	-	$	-	$	3,518	$	(185)
Derivative liabilities, net:
Interest rate contracts		38		(1)		-		(7)		-		-		30		2
Foreign exchange contracts		11		1		-		(5)		-		-		7		(1)
Equity contracts		(58)		(15)		-		10		-		-		(63)		14
Credit contracts		329		(36)		-		-		-		-		293		34
Other contracts		(11)		(39)		-		37		(3)		-		(16)		45
Total derivative liabilities, net(b)		309		(90)		-		35		(3)		-		251		94
Long-term debt(c)		71		14		-		(24)		-		-		61		(4)
Total	$	3,413	$	219	$	-	$	201	$	(3)	$	-	$	3,830	$	(95)

(a)  As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer classified and accounted for as available for sale securities.

(b)  Total Level 3 derivative exposures have been netted in these tables for presentation purposes only.

(c)  Includes guaranteed investment agreements (GIAs), notes, bonds, loans and mortgages payable.

22AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

Net realized and unrealized gains and losses included in income related to Level 3 assets and liabilities shown above are reported in the Condensed Consolidated Statements of Income as follows:

		Net		Net Realized
		Investment		Capital		Other
(in millions)		Income	Gains (Losses)			Income		Total
Three Months Ended June 30, 2018
Bonds available for sale	$	200	$	(50)	$	-	$	150
Other bond securities		34		-		97		131
Other equity securities		(3)		-		-		(3)
Other invested assets		32		-		(3)		29
Six Months Ended June 30, 2018
Bonds available for sale	$	482	$	(112)	$	-	$	370
Other bond securities		57		(4)		206		259
Other equity securities		(3)		-		-		(3)
Other invested assets		57		-		(5)		52
Three Months Ended June 30, 2017
Bonds available for sale	$	294	$	(36)	$	-	$	258
Other bond securities		97		(4)		150		243
Other invested assets		3		1		-		4
Six Months Ended June 30, 2017
Bonds available for sale	$	592	$	(36)	$	-	$	556
Other bond securities		172		2		298		472
Other invested assets		3		(2)		2		3
		Net		Net Realized
		Investment		Capital		Other
(in millions)		Income	(Gains) Losses			Income		Total
Three Months Ended June 30, 2018
Policyholder contract deposits	$	-	$	(238)	$	-	$	(238)
Derivative liabilities, net		-		(3)		(6)		(9)
Long-term debt		-		-		-		-
Six Months Ended June 30, 2018
Policyholder contract deposits	$	-	$	(744)	$	-	$	(744)
Derivative liabilities, net		-		(2)		(43)		(45)
Long-term debt		-		-		-		-
Three Months Ended June 30, 2017
Policyholder contract deposits	$	-	$	340	$	-	$	340
Derivative liabilities, net		-		(1)		(41)		(42)
Long-term debt		-		-		2		2
Six Months Ended June 30, 2017
Policyholder contract deposits	$	-	$	295	$	-	$	295
Derivative liabilities, net		-		(8)		(82)		(90)
Long-term debt		-		-		14		14

AIG | Second Quarter 2018 Form 10-Q23

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

The following table presents the gross components of purchases, sales, issuances and settlements, net, shown above, for the three- and six-month periods ended June 30, 2018 and 2017 related to Level 3 assets and liabilities in the Condensed Consolidated Balance Sheets:

						Issuances		Purchases, Sales,
						and		Issuances and
(in millions)		Purchases		Sales		Settlements(a)		Settlements, Net(a)
Three Months Ended June 30, 2018
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	9	$	-	$	(38)	$	(29)
Non-U.S. governments		-		-		(5)		(5)
Corporate debt		1		(213)		(182)		(394)
RMBS		274		(5)		(885)		(616)
CMBS		-		-		(7)		(7)
CDO/ABS		475		(62)		(357)		56
Total bonds available for sale		759		(280)		(1,474)		(995)
Other bond securities:
Corporate debt		-		-		-		-
RMBS		-		(29)		(76)		(105)
CMBS		-		-		-		-
CDO/ABS		-		-		(253)		(253)
Total other bond securities		-		(29)		(329)		(358)
Other equity securities		-		-		-		-
Other invested assets		131		(29)		(24)		78
Total assets	$	890	$	(338)	$	(1,827)	$	(1,275)
Liabilities:
Policyholder contract deposits	$	-	$	131	$	(55)	$	76
Derivative liabilities, net		(12)		-		17		5
Long-term debt(b)		-		-		-		-
Total liabilities	$	(12)	$	131	$	(38)	$	81
Three Months Ended June 30, 2017
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	186	$	(11)	$	(27)	$	148
Non-U.S. governments		-		-		(5)		(5)
Corporate debt		30		(54)		(129)		(153)
RMBS		301		-		(982)		(681)
CMBS		-		(44)		(230)		(274)
CDO/ABS		1,194		-		(448)		746
Total bonds available for sale		1,711		(109)		(1,821)		(219)
Other bond securities:
Corporate debt		11		-		(1)		10
RMBS		14		-		(72)		(58)
CMBS		-		-		(1)		(1)
CDO/ABS		-		(8)		(441)		(449)
Total other bond securities		25		(8)		(515)		(498)
Other equity securities		-		-		-		-
Mortgage and other loans receivable		-		(6)		-		(6)
Other invested assets		42		(2)		(1)		39
Total assets	$	1,778	$	(125)	$	(2,337)	$	(684)
Liabilities:
Policyholder contract deposits	$	-	$	82	$	24	$	106
Derivative liabilities, net		-		-		16		16
Long-term debt(b)		-		-		1		1
Total liabilities	$	-	$	82	$	41	$	123

24AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

						Issuances		Purchases, Sales,
						and		Issuances and
(in millions)		Purchases		Sales		Settlements(a)		Settlements, Net(a)
Six Months Ended June 30, 2018
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	24	$	-	$	(122)	$	(98)
Non-U.S. governments		2		-		(6)		(4)
Corporate debt		255		(216)		(185)		(146)
RMBS		507		(10)		(1,649)		(1,152)
CMBS		12		-		(42)		(30)
CDO/ABS		970		(913)		(711)		(654)
Total bonds available for sale		1,770		(1,139)		(2,715)		(2,084)
Other bond securities:
Corporate debt		-		-		-		-
RMBS		1		(34)		(148)		(181)
CMBS		-		-		(1)		(1)
CDO/ABS		-		(4)		(509)		(513)
Total other bond securities		1		(38)		(658)		(695)
Other equity securities		3		-		-		3
Mortgage and other loans receivable		-		(5)		-		(5)
Other invested assets		153		(29)		(28)		96
Total assets	$	1,927	$	(1,211)	$	(3,401)	$	(2,685)
Liabilities:
Policyholder contract deposits	$	-	$	243	$	(101)	$	142
Derivative liabilities, net		(19)		-		51		32
Long-term debt(b)		-		-		-		-
Total liabilities	$	(19)	$	243	$	(50)	$	174
Six Months Ended June 30, 2017
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	223	$	(16)	$	(38)	$	169
Non-U.S. governments		-		(1)		(5)		(6)
Corporate debt		30		(54)		(142)		(166)
RMBS		640		(244)		(1,935)		(1,539)
CMBS		39		(111)		(550)		(622)
CDO/ABS		1,207		-		(563)		644
Total bonds available for sale		2,139		(426)		(3,233)		(1,520)
Other bond securities:
Corporate debt		11		-		(1)		10
RMBS		112		(167)		(128)		(183)
CMBS		-		(11)		(7)		(18)
CDO/ABS		-		(8)		(809)		(817)
Total other bond securities		123		(186)		(945)		(1,008)
Equity securities available for sale		8		-		-		8
Other equity securities		-		-		-		-
Mortgage and other loans receivable		-		(6)		-		(6)
Other invested assets		43		(2)		(19)		22
Total assets	$	2,313	$	(620)	$	(4,197)	$	(2,504)
Liabilities:
Policyholder contract deposits	$	-	$	152	$	38	$	190
Derivative liabilities, net		-		-		35		35
Long-term debt(b)		-		-		(24)		(24)
Total liabilities	$	-	$	152	$	49	$	201

(a)  There were no issuances during the three- and six-month periods ended June 30, 2018 and 2017, respectively.

(b)  Includes GIAs, notes, bonds, loans and mortgages payable.

AIG | Second Quarter 2018 Form 10-Q25

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3 in the tables above. As a result, the unrealized gains (losses) on instruments held at June 30, 2018 and 2017 may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable inputs (e.g., changes in unobservable long-dated volatilities).

Transfers of Level 3 Assets and Liabilities

We record transfers of assets and liabilities into or out of Level 3 classification at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. The Net realized and unrealized gains (losses) included in income or Other comprehensive income (loss) as shown in the table above excludes $24 million of net gains related to assets and liabilities transferred into Level 3 during the six-month period ended June 30, 2018 and includes $22 million of net losses related to assets and liabilities transferred out of Level 3 in both the three- and six-month periods ended June 30, 2018.

The Net realized and unrealized gains (losses) included in income or Other comprehensive income (loss) as shown in the table above excludes $1 million of net gains and $8 million of net losses related to assets and liabilities transferred into Level 3 during the three- and six-month periods ended June 30, 2017, respectively, and includes $7 million of net losses related to assets and liabilities transferred out of Level 3 in both the three- and six-month periods ended June 30, 2017.

Transfers of Level 3 Assets

During the three- and six-month periods ended June 30, 2018 and 2017, transfers into Level 3 assets primarily included certain investments in private placement corporate debt, RMBS, CMBS and CDO/ABS. Transfers of private placement corporate debt and certain ABS into Level 3 assets were primarily the result of limited market pricing information that required us to determine fair value for these securities based on inputs that are adjusted to better reflect our own assumptions regarding the characteristics of a specific security or associated market liquidity.  The transfers of investments in RMBS, CMBS and CDO and certain ABS into Level 3 assets were due to decreases in market transparency and liquidity for individual security types.

During the three- and six-month periods ended June 30, 2018 and 2017, transfers out of Level 3 assets primarily included private placement and other corporate debt, CMBS, RMBS, CDO/ABS and certain investments in municipal securities. Transfers of certain investments in municipal securities, corporate debt, RMBS, CMBS and CDO/ABS out of Level 3 assets were based on consideration of market liquidity as well as related transparency of pricing and associated observable inputs for these investments. Transfers of certain investments in private placement corporate debt and certain ABS out of Level 3 assets were primarily the result of using observable pricing information that reflects the fair value of those securities without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market.

Transfers of Level 3 Liabilities

There were no significant transfers of derivative or other liabilities into or out of Level 3 for the three- and six-month periods ended June 30, 2018 and 2017.

26AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENTS

The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments, and includes only those instruments for which information about the inputs is reasonably available to us, such as data from independent third-party valuation service providers and from internal valuation models. Because input information from third-parties with respect to certain Level 3 instruments (primarily CDO/ABS) may not be reasonably available to us, balances shown below may not equal total amounts reported for such Level 3 assets and liabilities:

	Fair Value at
	June 30,		Valuation		Range
(in millions)	2018		Technique	Unobservable Input(b)	(Weighted Average)
Assets:
Obligations of states, municipalities
and political subdivisions	$	1,521	Discounted cash flow	Yield	3.93% - 4.54% (4.24%)
Corporate debt		721	Discounted cash flow	Yield	3.52% - 14.75% (9.14%)
RMBS(a)		14,915	Discounted cash flow	Constant prepayment rate	4.29% - 12.86% (8.57%)
				Loss severity	39.93% - 75.33% (57.63%)
				Constant default rate	2.80% - 7.70% (5.25%)
				Yield	3.14% - 5.42% (4.28%)
CDO/ABS(a)		4,261	Discounted cash flow	Yield	3.93% - 5.25% (4.59%)
CMBS		442	Discounted cash flow	Yield	2.86% - 6.36% (4.61%)
Liabilities:
Embedded derivatives within
Policyholder contract deposits:
Guaranteed minimum withdrawal benefits (GMWB)		1,332	Discounted cash flow	Equity volatility	6.35% - 50.05%
				Base lapse rate	0.35% - 14.00%
				Dynamic lapse multiplier	30.00% - 170.00%
				Mortality multiplier(c)	40.00% - 153.00%
				Utilization	90.00% - 100.00%
				Equity / interest-rate correlation	20.00% - 40.00%
Index Annuities		1,614	Discounted cash flow	Lapse rate	0.50% - 40.00%
				Mortality multiplier(c)	42.00% - 162.00%
				Option Budget	1.00% - 4.00%
Indexed Life		563	Discounted cash flow	Base lapse rate	2.00% - 19.00%
				Mortality rate	0.00% - 40.00%

AIG | Second Quarter 2018 Form 10-Q27

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

		Fair Value at
		December 31,	Valuation		Range
(in millions)		2017	Technique	Unobservable Input(b)	(Weighted Average)
Assets:
Obligations of states, municipalities
and political subdivisions	$	1,620	Discounted cash flow	Yield	3.55% - 4.32% (3.94%)
Corporate debt		1,086	Discounted cash flow	Yield	3.26% - 12.22% (7.74%)
RMBS(a)		16,156	Discounted cash flow	Constant prepayment rate	3.97% - 13.42% (8.69%)
				Loss severity	43.15% - 77.15% (60.15%)
				Constant default rate	3.31% - 8.30% (5.80%)
				Yield	2.73% - 5.19% (3.96%)
CDO/ABS(a)		5,254	Discounted cash flow	Yield	3.38% - 4.78% (4.08%)
CMBS		487	Discounted cash flow	Yield	2.22% - 7.77% (4.99%)
Liabilities:
Embedded derivatives within
Policyholder contract deposits:
GMWB		1,994	Discounted cash flow	Equity volatility	6.45% - 51.25%
				Base lapse rate	0.35% - 14.00%
				Dynamic lapse multiplier	30.00% - 170.00%
				Mortality multiplier(c)	40.00% - 153.00%
				Utilization	90.00% - 100.00%
				Equity / interest-rate correlation	20.00% - 40.00%
Index Annuities		1,603	Discounted cash flow	Lapse rate	0.50% - 40.00%
				Mortality multiplier(c)	42.00% - 162.00%
				Option Budget	1.00% - 4.00%
Indexed Life		515	Discounted cash flow	Base lapse rate	2.00% - 19.00%
				Mortality rate	0.00% - 40.00%

(a)  Information received from third-party valuation service providers.  The ranges of the unobservable inputs for constant prepayment rate, loss severity and constant default rate relate to each of the individual underlying mortgage loans that comprise the entire portfolio of securities in the RMBS and CDO securitization vehicles and not necessarily to the securitization vehicle bonds (tranches) purchased by us. The ranges of these inputs do not directly correlate to changes in the fair values of the tranches purchased by us, because there are other factors relevant to the fair values of specific tranches owned by us including, but not limited to, purchase price, position in the waterfall, senior versus subordinated position and attachment points.

(b)  Represents discount rates, estimates and assumptions that we believe would be used by market participants when valuing these assets and liabilities.

(c)  Mortality inputs are shown as multipliers of the 2012 Individual Annuity Mortality Basic table.

The ranges of reported inputs for Obligations of states, municipalities and political subdivisions, Corporate debt, RMBS, CDO/ABS, and CMBS valued using a discounted cash flow technique consist of one standard deviation in either direction from the value‑weighted average. The preceding table does not give effect to our risk management practices that might offset risks inherent in these Level 3 assets and liabilities.

Sensitivity to Changes in Unobservable Inputs

We consider unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset or liability. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The following paragraphs provide a general description of sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently of changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply.

28AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

Obligations of States, Municipalities and Political Subdivisions

The significant unobservable input used in the fair value measurement of certain investments in obligations of states, municipalities and political subdivisions is yield.  In general, increases in the yield would decrease the fair value of investments in obligations of states, municipalities and political subdivisions.

Corporate Debt

Corporate debt securities included in Level 3 are primarily private placement issuances that are not traded in active markets or that are subject to transfer restrictions. Fair value measurements consider illiquidity and non‑transferability. When observable price quotations are not available, fair value is determined based on discounted cash flow models using discount rates based on credit spreads, yields or price levels of publicly‑traded debt of the issuer or other comparable securities, considering illiquidity and structure. The significant unobservable input used in the fair value measurement of corporate debt is the yield. The yield is affected by the market movements in credit spreads and U.S. Treasury yields. In addition, the migration in credit quality of a given security generally has a corresponding effect on the fair value measurement of the security. For example, a downward migration of credit quality would increase spreads. Holding U.S. Treasury rates constant, an increase in corporate credit spreads would decrease the fair value of corporate debt. 

RMBS and CDO/ABS

The significant unobservable inputs used in fair value measurements of RMBS and certain CDO/ABS valued by third‑party valuation service providers are constant prepayment rates (CPR), loss severity, constant default rates (CDR) and yield. A change in the assumptions used for the probability of default will generally be accompanied by a corresponding change in the assumption used for the loss severity and an inverse change in the assumption used for prepayment rates. In general, increases in CPR, loss severity, CDR and yield, in isolation, would result in a decrease in the fair value measurement. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship between the directional change of each input is not usually linear.

CMBS

The significant unobservable input used in fair value measurements for CMBS is the yield. Prepayment assumptions for each mortgage pool are factored into the yield. CMBS generally feature a lower degree of prepayment risk than RMBS because commercial mortgages generally contain a penalty for prepayment. In general, increases in the yield would decrease the fair value of CMBS.

Embedded derivatives within Policyholder contract deposits

Embedded derivatives reported within Policyholder contract deposits include GMWB within variable annuity products and interest crediting rates based on market indices within index annuities, indexed life and GICs.  For any given contract, assumptions for unobservable inputs vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. The following unobservable inputs are used for valuing embedded derivatives measured at fair value:

•Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are available. Increases in assumed volatility will generally increase the fair value of both the projected cash flows from rider fees as well as the projected cash flows related to benefit payments. Therefore, the net change in the fair value of the liability may be either a decrease or an increase, depending on the relative changes in projected rider fees and projected benefit payments.

•Equity / interest rate correlation estimates the relationship between changes in equity returns and interest rates in the economic scenario generator used to value our GMWB embedded derivatives.  In general, a higher positive correlation assumes that equity markets and interest rates move in a more correlated fashion, which generally increases the fair value of the liability. 

•Base lapse rate assumptions are determined by company experience and are adjusted at the contract level using a dynamic lapse function, which reduces the base lapse rate when the contract is in-the-money (when the contract holder’s guaranteed value, as estimated by the company, is worth more than their underlying account value). Lapse rates are also generally assumed to be lower in periods when a surrender charge applies. Increases in assumed lapse rates will generally decrease the fair value of the liability, as fewer policyholders would persist to collect guaranteed withdrawal amounts.

•Mortality rate assumptions, which vary by age and gender, are based on company experience and include a mortality improvement assumption. Increases in assumed mortality rates will decrease the fair value of the liability, while lower mortality rate assumptions will generally increase the fair value of the liability, because guaranteed payments will be made for a longer period of time.

AIG | Second Quarter 2018 Form 10-Q29

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

•Utilization assumptions estimate the timing when policyholders with a GMWB will elect to utilize their benefit and begin taking withdrawals. The assumptions may vary by the type of guarantee, tax-qualified status, the contract’s withdrawal history and the age of the policyholder.  Utilization assumptions are based on company experience, which includes partial withdrawal behavior. Increases in assumed utilization rates will generally increase the fair value of the liability.

•Option budget estimates the expected long-term cost of options used to hedge exposures associated with equity price changes. The level of option budgets determines future costs of the options, which impacts the growth in account value and the valuation of embedded derivatives.                       

Investments in Certain Entities Carried at Fair Value Using Net Asset Value Per Share

The following table includes information related to our investments in certain other invested assets, including private equity funds, hedge funds and other alternative investments that calculate net asset value per share (or its equivalent). For these investments, which are measured at fair value on a recurring basis, we use the net asset value per share to measure fair value.

		June 30, 2018				December 31, 2017
			Fair Value			Fair Value
			Using NAV			Using NAV
			Per Share (or		Unfunded	Per Share (or			Unfunded
(in millions)	Investment Category Includes		its equivalent)		Commitments	its equivalent)			Commitments
Investment Category
Private equity funds:
Leveraged buyout	Debt and/or equity investments made as part of a transaction in which assets of mature companies are acquired from the current shareholders, typically with the use of financial leverage	$	1,244	$	787	$	1,243	$	706
Real Estate / Infrastructure	Investments in real estate properties and infrastructure positions, including power plants and other energy generating facilities		209		140		210		187
Venture capital	Early-stage, high-potential, growth companies expected to generate a return through an eventual realization event, such as an initial public offering or sale of the company		146		122		134		73
Distressed	Securities of companies that are in default, under bankruptcy protection, or troubled		106		91		113		42
Other	Includes multi-strategy, mezzanine and other strategies		546		167		428		219
Total private equity funds			2,251		1,307		2,128		1,227
Hedge funds:
Event-driven	Securities of companies undergoing material structural changes, including mergers, acquisitions and other reorganizations		893		-		1,128		-
Long-short	Securities that the manager believes are undervalued, with corresponding short positions to hedge market risk		1,084		-		1,233		-
Macro	Investments that take long and short positions in financial instruments based on a top-down view of certain economic and capital market conditions		966		-		1,011		-
Distressed	Securities of companies that are in default, under bankruptcy protection or troubled		136		8		266		8
Other	Includes investments held in funds that are less liquid, as well as other strategies which allow for broader allocation between public and private investments		197		2		231		4
Total hedge funds			3,276		10		3,869		12
Total		$	5,527	$	1,317	$	5,997	$	1,239

30AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

Private equity fund investments included above are not redeemable, because distributions from the funds will be received when underlying investments of the funds are liquidated. Private equity funds are generally expected to have 10-year lives at their inception, but these lives may be extended at the fund manager’s discretion, typically in one or two-year increments. At June 30, 2018, assuming average original expected lives of 10 years for the funds, 50 percent of the total fair value using net asset value per share (or its equivalent) presented above would have expected remaining lives of three years or less, 24 percent between four and six years and 26 percent between seven and 10 years.

The hedge fund investments included above, which are carried at fair value, are generally redeemable monthly (30 percent), quarterly (38 percent), semi-annually (9 percent) and annually (23 percent), with redemption notices ranging from one day to 180 days. At June 30, 2018, investments representing approximately 54 percent of the total fair value of these hedge fund investments had partial contractual redemption restrictions. These partial redemption restrictions are generally related to one or more investments held in the hedge funds that the fund manager deemed to be illiquid. The majority of these contractual restrictions, which may have been put in place at the fund’s inception or thereafter, have pre-defined end dates. The majority of these restrictions are generally expected to be lifted by the end of 2018.

Fair Value Option

The following table presents the gains or losses recorded related to the eligible instruments for which we elected the fair value option:

	Gain (Loss) Three Months Ended June 30,				Gain (Loss) Six Months Ended June 30,
(in millions)		2018		2017		2018		2017
Assets:
Bond and equity securities	$	129	$	450	$	152	$	799
Alternative investments(a)		96		96		224		277
Liabilities:
Long-term debt(b)		16		(33)		68		(48)
Other liabilities		-		(1)		-		(1)
Total gain	$	241	$	512	$	444	$	1,027

(a)  Includes certain hedge funds, private equity funds and other investment partnerships.

(b)  Includes GIAs, notes, bonds and mortgages payable.

We recognized a loss of $3 million and an immaterial gain during the three- and six-month periods ended June 30, 2017, respectively, attributable to the observable effect of changes in credit spreads on our own liabilities for which the fair value option was elected. We calculate the effect of these credit spread changes using discounted cash flow techniques that incorporate current market interest rates, our observable credit spreads on these liabilities and other factors that mitigate the risk of nonperformance such as cash collateral posted.

As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, we are required to record unrealized gains and losses attributable to the observable effect of changes in credit spreads on our liabilities for which the fair value option was elected in Other Comprehensive Income. An unrealized loss of $1 million and an unrealized gain of $1 million were recognized in Other Comprehensive Income for the three- and six-month periods ended June 30, 2018, respectively.

The following table presents the difference between fair values and the aggregate contractual principal amounts of mortgage and other loans receivable and long-term debt for which the fair value option was elected:

	June 30, 2018						December 31, 2017
			Outstanding						Outstanding
(in millions)	Fair Value		Principal Amount		Difference		Fair Value		Principal Amount		Difference
Assets:
Mortgage and other loans receivable	$	-	$	-	$	-	$	5	$	5	$	-
Liabilities:
Long-term debt*	$	2,615	$	2,114	$	501	$	2,888	$	2,280	$	608

*    Includes GIAs, notes, bonds, loans and mortgages payable.

AIG | Second Quarter 2018 Form 10-Q31

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Fair Value Measurements

FAIR VALUE MEASUREMENTS ON A NON-RECURRING BASIS

The following table presents assets measured at fair value on a non-recurring basis at the time of impairment and the related impairment charges recorded during the periods presented:

	Assets at Fair Value								Impairment Charges*
	Non-Recurring Basis								Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	Level 1		Level 2		Level 3			Total		2018		2017		2018		2017
June 30, 2018
Other investments	$	-	$	-	$	344	$	344	$	61	$	33	$	89	$	50
Investments in life settlements		-		-		-		-		-		46		-		87
Other assets		-		-		-		-		1		-		1		35
Total	$	-	$	-	$	344	$	344	$	62	$	79	$	90	$	172
December 31, 2017
Other investments	$	-	$	-	$	55	$	55
Investments in life settlements		-		-		-		-
Other assets		-		-		-		-
Total	$	-	$	-	$	55	$	55

*    Impairments in the six-month period ended June 30, 2017 included $35 million related to Other assets of $179 million that were sold during the three-month period ended June 30, 2017.

FAIR VALUE INFORMATION ABOUT FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE

The following table presents the carrying amounts and estimated fair values of our financial instruments not measured at fair value and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the observability of the inputs used:

	Estimated Fair Value									Carrying
(in millions)		Level 1		Level 2		Level 3		Total		Value
June 30, 2018
Assets:
Mortgage and other loans receivable	$	-	$	111	$	39,520	$	39,631	$	39,978
Other invested assets		-		781		6		787		782
Short-term investments		-		13,765		-		13,765		13,765
Cash		2,135		-		-		2,135		2,135
Liabilities:
Policyholder contract deposits associated
with investment-type contracts		-		363		121,923		122,286		118,309
Other liabilities		-		1,982		-		1,982		1,982
Long-term debt		-		23,394		4,823		28,217		31,169
December 31, 2017
Assets:
Mortgage and other loans receivable	$	-	$	117	$	37,644	$	37,761	$	37,018
Other invested assets		-		590		6		596		593
Short-term investments		-		7,771		-		7,771		7,771
Cash		2,362		-		-		2,362		2,362
Liabilities:
Policyholder contract deposits associated
with investment-type contracts		-		387		121,809		122,196		114,326
Other liabilities		-		4,494		-		4,494		4,494
Long-term debt		-		23,930		4,313		28,243		28,752

32AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Investments

5. Investments

Securities Available for Sale

The following table presents the amortized cost or cost and fair value of our available for sale securities^(a):

										Other-Than-
		Amortized		Gross		Gross				Temporary
		Cost or		Unrealized		Unrealized		Fair		Impairments
(in millions)		Cost		Gains		Losses		Value		in AOCI(b)
June 30, 2018
Bonds available for sale:
U.S. government and government sponsored entities	$	2,580	$	109	$	(45)	$	2,644	$	-
Obligations of states, municipalities and political subdivisions		16,339		812		(91)		17,060		-
Non-U.S. governments		15,106		489		(298)		15,297		-
Corporate debt		126,059		4,716		(2,817)		127,958		4
Mortgage-backed, asset-backed and collateralized:
RMBS		32,746		3,071		(437)		35,380		1,416
CMBS		13,146		215		(277)		13,084		35
CDO/ABS		17,104		234		(88)		17,250		24
Total mortgage-backed, asset-backed and collateralized		62,996		3,520		(802)		65,714		1,475
Total bonds available for sale(c)		223,080		9,646		(4,053)		228,673		1,479
December 31, 2017
Bonds available for sale:
U.S. government and government sponsored entities	$	2,532	$	160	$	(36)	$	2,656	$	-
Obligations of states, municipalities and political subdivisions		17,377		1,297		(30)		18,644		-
Non-U.S. governments		15,059		717		(117)		15,659		-
Corporate debt		126,310		8,666		(800)		134,176		17
Mortgage-backed, asset-backed and collateralized:
RMBS		34,181		3,273		(220)		37,234		1,568
CMBS		13,538		408		(105)		13,841		42
CDO/ABS		16,464		370		(52)		16,782		29
Total mortgage-backed, asset-backed and collateralized		64,183		4,051		(377)		67,857		1,639
Total bonds available for sale(c)		225,461		14,891		(1,360)		238,992		1,656
Equity securities available for sale:
Common stock		703		379		(21)		1,061		-
Preferred stock		504		29		-		533		-
Mutual funds		98		16		-		114		-
Total equity securities available for sale		1,305		424		(21)		1,708		-
Total	$	226,766	$	15,315	$	(1,381)	$	240,700	$	1,656

(a)  As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer classified and accounted for as available for sale securities.

(b)  Represents the amount of other-than-temporary impairments recognized in Accumulated other comprehensive income. Amount includes unrealized gains and losses on impaired securities relating to changes in the fair value of such securities subsequent to the impairment measurement date.              

(c)  At June 30, 2018 and December 31, 2017, bonds available for sale held by us that were below investment grade or not rated totaled $30.2 billion and $31.5 billion, respectively.

AIG | Second Quarter 2018 Form 10-Q33

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Investments

Securities Available for Sale in a Loss Position

The following table summarizes the fair value and gross unrealized losses on our available for sale securities, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position^(a):

	Less than 12 Months				12 Months or More				Total
				Gross				Gross				Gross
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in millions)		Value		Losses		Value		Losses		Value		Losses
June 30, 2018
Bonds available for sale:
U.S. government and government sponsored entities	$	1,090	$	30	$	293	$	15	$	1,383	$	45
Obligations of states, municipalities and political
subdivisions		2,438		54		548		37		2,986		91
Non-U.S. governments		5,982		210		1,058		88		7,040		298
Corporate debt		51,762		2,256		6,610		561		58,372		2,817
RMBS		8,848		250		2,984		187		11,832		437
CMBS		6,485		179		1,334		98		7,819		277
CDO/ABS		6,513		60		790		28		7,303		88
Total bonds available for sale	$	83,118	$	3,039	$	13,617	$	1,014	$	96,735	$	4,053
December 31, 2017
Bonds available for sale:
U.S. government and government sponsored entities	$	770	$	23	$	332	$	13	$	1,102	$	36
Obligations of states, municipalities and political
subdivisions		586		6		646		24		1,232		30
Non-U.S. governments		3,511		54		857		63		4,368		117
Corporate debt		15,578		453		7,291		347		22,869		800
RMBS		6,212		99		3,790		121		10,002		220
CMBS		3,408		46		1,389		59		4,797		105
CDO/ABS		1,455		24		822		28		2,277		52
Total bonds available for sale		31,520		705		15,127		655		46,647		1,360
Equity securities available for sale:
Common stock		136		21		-		-		136		21
Mutual funds		1		-		-		-		1		-
Total equity securities available for sale		137		21		-		-		137		21
Total	$	31,657	$	726	$	15,127	$	655	$	46,784	$	1,381

(a)  As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer classified and accounted for as available for sale securities.

At June 30, 2018, we held 14,992 individual fixed maturity securities, that were in an unrealized loss position, of which 1,961 individual fixed maturity securities were in a continuous unrealized loss position for 12 months or more. We did not recognize the unrealized losses in earnings on these fixed maturity securities at June 30, 2018 because we neither intend to sell the securities nor do we believe that it is more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. For fixed maturity securities with significant declines, we performed fundamental credit analyses on a security-by-security basis, which included consideration of credit enhancements, expected defaults on underlying collateral, review of relevant industry analyst reports and forecasts and other available market data.

34AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Investments

Contractual Maturities of Fixed Maturity Securities Available for Sale

The following table presents the amortized cost and fair value of fixed maturity securities available for sale by contractual maturity:

	Total Fixed Maturity Securities				Fixed Maturity Securities in a Loss
	Available for Sale				Position Available for Sale
(in millions)		Amortized Cost		Fair Value		Amortized Cost		Fair Value
June 30, 2018
Due in one year or less	$	7,562	$	7,718	$	1,913	$	1,903
Due after one year through five years		45,336		46,295		13,526		13,181
Due after five years through ten years		42,634		42,293		27,391		26,097
Due after ten years		64,552		66,653		30,202		28,600
Mortgage-backed, asset-backed and collateralized		62,996		65,714		27,756		26,954
Total	$	223,080	$	228,673	$	100,788	$	96,735
December 31, 2017
Due in one year or less	$	7,932	$	8,071	$	1,526	$	1,515
Due after one year through five years		47,179		49,093		7,764		7,571
Due after five years through ten years		42,617		43,944		11,559		11,143
Due after ten years		63,550		70,027		9,705		9,342
Mortgage-backed, asset-backed and collateralized		64,183		67,857		17,453		17,076
Total	$	225,461	$	238,992	$	48,007	$	46,647

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.

The following table presents the gross realized gains and gross realized losses from sales or maturities of our available for sale securities:

	Three Months Ended June 30,								Six Months Ended June 30,
		2018				2017			2018					2017
		Gross		Gross		Gross		Gross		Gross		Gross		Gross		Gross
	Realized		Realized		Realized		Realized		Realized		Realized		Realized		Realized
(in millions)		Gains		Losses		Gains		Losses		Gains		Losses		Gains		Losses
Fixed maturity securities	$	100	$	113	$	211	$	46	$	170	$	173	$	544	$	224
Equity securities		-		-		83		2		16		-		100		18
Total	$	100	$	113	$	294	$	48	$	186	$	173	$	644	$	242

For the three- and six-month periods ended June 30, 2018, the aggregate fair value of available for sale securities sold was $6.6 billion and $12.1 billion, respectively, which resulted in net realized capital gains (losses) of $(13) million and $13 million, respectively.

For the three- and six-month periods ended June 30, 2017, the aggregate fair value of available for sale securities sold was $7.6 billion and $23.4 billion, respectively, which resulted in net realized capital gains of $246 million and $402 million, respectively.

AIG | Second Quarter 2018 Form 10-Q35

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Investments

Other Securities Measured at Fair Value

The following table presents the fair value of other securities measured at fair value based on our election of the fair value option:

		June 30, 2018				December 31, 2017
		Fair	Percent			Fair	Percent
(in millions)		Value	of Total			Value	of Total
Fixed maturity securities:
U.S. government and government sponsored entities	$	2,662	20	%	$	2,802	21	%
Non-U.S. governments		51	-			57	1
Corporate debt		1,747	13			1,909	14
Mortgage-backed, asset-backed and collateralized:
RMBS		1,720	13			1,885	14
CMBS		411	3			559	4
CDO/ABS and other collateralized*		5,183	39			5,560	42
Total mortgage-backed, asset-backed and collateralized		7,314	55			8,004	60
Total fixed maturity securities		11,774	88			12,772	96
Equity securities		1,675	12			589	4
Total	$	13,449	100	%	$	13,361	100	%

*    Includes $205 million and $251 million of U.S. government agency-backed ABS at June 30, 2018 and December 31, 2017, respectively.

Other Invested Assets

The following table summarizes the carrying amounts of other invested assets:

		June 30,		December 31,
(in millions)		2018		2017
Alternative investments(a) (b)	$	10,492	$	11,308
Investment real estate(c)		8,879		8,258
All other investments		1,277		1,256
Total	$	20,648	$	20,822

(a)  At June 30, 2018, included hedge funds of $5.0 billion, private equity funds of $5.0 billion, and affordable housing partnerships of $463 million. At December 31, 2017, included hedge funds of $5.8 billion, private equity funds of $5.0 billion, and affordable housing partnerships of $543 million.

(b)  At June 30, 2018, approximately 60 percent and 23 percent of our hedge fund portfolio is available for redemption in 2018 and 2019, respectively, the remaining 17 percent will be available for redemption between 2020 and 2027.

(c)  Net of accumulated depreciation of $594 million and $515 million at June 30, 2018 and December 31, 2017, respectively.     

Net Investment Income

The following table presents the components of Net investment income:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2018		2017		2018		2017
Available for sale fixed maturity securities, including short-term investments	$	2,536	$	2,607	$	5,146	$	5,274
Other fixed maturity securities		(10)		221		(31)		355
Equity securities(a)		3		12		(29)		17
Interest on mortgage and other loans		447		399		897		792
Alternative investments(b)		171		371		508		819
Real estate		30		31		61		80
Other investments		14		100		24		216
Total investment income		3,191		3,741		6,576		7,553
Investment expenses		126		128		250		254
Net investment income	$	3,065	$	3,613	$	6,326	$	7,299

(a)  Upon the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, the change in fair value of all equity securities is included in Net investment income.

36AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Investments

(b)  Includes income from hedge funds, private equity funds and affordable housing partnerships. Hedge funds for which we elected the fair value option are recorded as of the balance sheet date. Other hedge funds are generally reported on a one-month lag, while private equity funds are generally reported on a one-quarter lag.

Net Realized Capital Gains and Losses

The following table presents the components of Net realized capital gains (losses):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2018		2017		2018		2017
Sales of fixed maturity securities	$	(13)	$	165	$	(3)	$	320
Sales of equity securities		-		81		16		82
Other-than-temporary impairments:
Severity		-		(2)		-		(2)
Change in intent		-		(7)		(49)		(8)
Foreign currency declines		(6)		-		(12)		(10)
Issuer-specific credit events		(30)		(55)		(62)		(112)
Adverse projected cash flows		-		(3)		-		(3)
Provision for loan losses		(26)		(24)		(50)		(18)
Foreign exchange transactions		(187)		74		(134)		233
Variable annuity embedded derivatives, net of related hedges		36		(204)		183		(593)
All other derivatives and hedge accounting		375		(94)		150		(81)
Impairments on investments in life settlements		-		(46)		-		(87)
Other		16		46		107		95
Net realized capital gains (losses)	$	165	$	(69)	$	146	$	(184)

Change in Unrealized Appreciation (Depreciation) of Investments

The following table presents the increase (decrease) in unrealized appreciation (depreciation) of our available for sale securities and other investments:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2018		2017		2018		2017
Increase (decrease) in unrealized appreciation (depreciation) of investments:
Fixed maturity securities	$	(2,969)	$	2,500	$	(7,938)	$	3,273
Equity securities(a)		-		(71)		-		43
Other investments		(3)		(83)		(28)		(137)
Total increase (decrease) in unrealized appreciation (depreciation) of investments(b)	$	(2,972)	$	2,346	$	(7,966)	$	3,179

(a)  As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer classified and accounted for as available for sale securities.

(b)  Excludes net unrealized losses attributable to businesses held for sale.

The following table summarizes the unrealized gains and losses recognized during the reporting period on equity securities still held at the reporting date:

	Three Months Ended						Six Months Ended
	June 30, 2018						June 30, 2018
				Other						Other
			Invested						Invested
(in millions)		Equities		Assets		Total		Equities		Assets		Total
Net gains and losses recognized during the period on equity securities	$	3	$	122	$	125	$	(28)	$	314	$	286
Less: Net gains and losses recognized during the period on equity
securities sold during the period		14		28		42		6		27		33
Unrealized gains and losses recognized during the reporting
period on equity securities still held at the reporting date	$	(11)	$	94	$	83	$	(34)	$	287	$	253

AIG | Second Quarter 2018 Form 10-Q37

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Investments

Evaluating Investments for Other-Than-Temporary Impairments

For a discussion of our policy for evaluating investments for other-than-temporary impairments see Note 6 to the Consolidated Financial Statements in the 2017 Annual Report.

Credit Impairments

The following table presents a rollforward of the cumulative credit losses in other-than-temporary impairments recognized in earnings for available for sale fixed maturity securities:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2018		2017		2018		2017
Balance, beginning of period	$	358	$	946	$	526	$	1,098
Increases due to:
Credit impairments on new securities subject to impairment losses		3		41		17		58
Additional credit impairments on previously impaired securities		28		7		45		37
Reductions due to:
Credit impaired securities fully disposed for which there was no
prior intent or requirement to sell		(80)		(44)		(131)		(55)
Accretion on securities previously impaired due to credit*		(121)		(188)		(269)		(376)
Balance, end of period	$	188	$	762	$	188	$	762

*    Represents both accretion recognized due to changes in cash flows expected to be collected over the remaining expected term of the credit impaired securities and the accretion due to the passage of time.

Purchased Credit Impaired (PCI) Securities

We purchase certain RMBS securities that have experienced deterioration in credit quality since their issuance. We determine whether it is probable at acquisition that we will not collect all contractually required payments for these PCI securities, including both principal and interest. At acquisition, the timing and amount of the undiscounted future cash flows expected to be received on each PCI security is determined based on our best estimate using key assumptions, such as interest rates, default rates and prepayment speeds. At acquisition, the difference between the undiscounted expected future cash flows of the PCI securities and the recorded investment in the securities represents the initial accretable yield, which is accreted into Net investment income over their remaining lives on an effective yield basis. Additionally, the difference between the contractually required payments on the PCI securities and the undiscounted expected future cash flows represents the non-accretable difference at acquisition. The accretable yield and the non-accretable difference will change over time, based on actual payments received and changes in estimates of undiscounted expected future cash flows, which are discussed further below.

On a quarterly basis, the undiscounted expected future cash flows associated with PCI securities are re-evaluated based on updates to key assumptions. Declines in undiscounted expected future cash flows due to further credit deterioration as well as changes in the expected timing of the cash flows can result in the recognition of an other-than-temporary impairment charge, as PCI securities are subject to our policy for evaluating investments for other-than-temporary impairment. Changes to undiscounted expected future cash flows due solely to the changes in the contractual benchmark interest rates on variable rate PCI securities will change the accretable yield prospectively. Significant increases in undiscounted expected future cash flows for reasons other than interest rate changes are recognized prospectively as adjustments to the accretable yield.

The following tables present information on our PCI securities, which are included in bonds available for sale:

(in millions)	At Date of Acquisition
Contractually required payments (principal and interest)	$	36,659
Cash flows expected to be collected*		30,085
Recorded investment in acquired securities		20,304

*    Represents undiscounted expected cash flows, including both principal and interest.

38AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Investments

(in millions)	June 30, 2018		December 31, 2017
Outstanding principal balance	$	13,653	$	14,718
Amortized cost		9,628		10,492
Fair value		11,446		12,293

The following table presents activity for the accretable yield on PCI securities:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2018		2017		2018		2017
Balance, beginning of period	$	7,601	$	7,593	$	7,501	$	7,498
Newly purchased PCI securities		4		13		27		101
Disposals		-		-		-		(18)
Accretion		(190)		(206)		(377)		(416)
Effect of changes in interest rate indices		(32)		(135)		174		(114)
Net reclassification from (to) non-accretable difference,
including effects of prepayments		78		200		136		414
Balance, end of period	$	7,461	$	7,465	$	7,461	$	7,465

Pledged Investments

Secured Financing and Similar Arrangements

We enter into secured financing transactions whereby certain securities are sold under agreements to repurchase (repurchase agreements), in which we transfer securities in exchange for cash, with an agreement by us to repurchase the same or substantially similar securities. Our secured financing transactions also include those that involve the transfer of securities to financial institutions in exchange for cash (securities lending agreements). In all of these secured financing transactions, the securities transferred by us (pledged collateral) may be sold or repledged by the counterparties. These agreements are recorded at their contracted amounts plus accrued interest, other than those that are accounted for at fair value.

Pledged collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the amounts borrowed during the life of the transactions. In the event of a decline in the fair value of the pledged collateral under these secured financing transactions, we may be required to transfer cash or additional securities as pledged collateral under these agreements.  At the termination of the transactions, we and our counterparties are obligated to return the amounts borrowed and the securities transferred, respectively.

The following table presents the fair value of securities pledged to counterparties under secured financing transactions, including repurchase and securities lending agreements:        

(in millions)		June 30, 2018		December 31, 2017
Fixed maturity securities available for sale	$	1,804	$	2,911
Other bond securities, at fair value	$	132	$	1,585

At June 30, 2018 and December 31, 2017, amounts borrowed under repurchase and securities lending agreements totaled $2.0billion and $4.5billion, respectively.

AIG | Second Quarter 2018 Form 10-Q39

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Investments

The following table presents the fair value of securities pledged under our repurchase agreements by collateral type and by remaining contractual maturity:

	Remaining Contractual Maturity of the Agreements
(in millions)	Overnight and Continuous			up to 30 days		31 - 90 days		91 - 364 days		365 days or greater		Total
June 30, 2018
Bonds available for sale:
Non-U.S. governments	$	-	$	53	$	-	$	-	$	-	$	53
Corporate debt		-		91		-		-		-		91
Other bond securities:
U.S. government and government sponsored entities		26		-		-		-		-		26
Non-U.S. governments		-		3		-		-		-		3
Corporate debt		-		34		69		-		-		103
Total	$	26	$	181	$	69	$	-	$	-	$	276
December 31, 2017
Bonds available for sale:
Non-U.S. governments	$	-	$	7	$	19	$	-	$	-	$	26
Corporate debt		-		13		35		-		-		48
Other bond securities:
U.S. government and government sponsored entities		44		-		-		-		-		44
Non-U.S. governments		-		-		11		-		-		11
Corporate debt		-		387		1,065		-		-		1,452
Total	$	44	$	407	$	1,130	$	-	$	-	$	1,581

The following table presents the fair value of securities pledged under our securities lending agreements by collateral type and by remaining contractual maturity:

	Remaining Contractual Maturity of the Agreements
(in millions)		Overnight and Continuous		up to 30 days		31 - 90 days		91 - 364 days		365 days or greater		Total
June 30, 2018
Bonds available for sale:
Non-U.S. governments	$	-	$	58	$	17	$	-	$	-	$	75
Corporate debt		-		663		922		-		-		1,585
Other bond securities:
Non-U.S. governments		-		-		-		-		-		-
Corporate debt		-		-		-		-		-		-
Total	$	-	$	721	$	939	$	-	$	-	$	1,660
December 31, 2017
Bonds available for sale:
Non-U.S. governments	$	-	$	-	$	18	$	-	$	-	$	18
Corporate debt		-		588		2,231		-		-		2,819
Other bond securities:
Non-U.S. governments		-		-		22		-		-		22
Corporate debt		-		-		56		-		-		56
Total	$	-	$	588	$	2,327	$	-	$	-	$	2,915

40AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Investments

We also enter into agreements in which securities are purchased by us under agreements to resell (reverse repurchase agreements), which are accounted for as secured financing transactions and reported as short-term investments or other assets, depending on their terms. These agreements are recorded at their contracted resale amounts plus accrued interest, other than those that are accounted for at fair value. In all reverse repurchase transactions, we take possession of or obtain a security interest in the related securities, and we have the right to sell or repledge this collateral received.

The following table presents information on the fair value of securities pledged to us under reverse repurchase agreements:

(in millions)		June 30, 2018		December 31, 2017
Securities collateral pledged to us	$	5,667	$	2,227
Amount sold or repledged by us	$	113	$	46

At June 30, 2018 and December 31, 2017, amounts loaned under reverse repurchase agreements totaled $5.8 billion and $2.2 billion, respectively.

We do not currently offset any secured financing transactions. All such transactions are collateralized and margined daily consistent with market standards and subject to enforceable master netting arrangements with rights of set off.

Insurance – Statutory and Other Deposits

The total carrying value of cash and securities deposited by our insurance subsidiaries under requirements of regulatory authorities or other insurance-related arrangements, including certain annuity-related obligations and certain reinsurance treaties, was $4.1 billion and $4.9 billion at June 30, 2018 and December 31, 2017, respectively.

Other Pledges and Restrictions

Certain of our subsidiaries are members of Federal Home Loan Banks (FHLBs) and such membership requires the members to own stock in these FHLBs. We owned an aggregate of $189 million and $93 million of stock in FHLBs at June 30, 2018 and December 31, 2017, respectively. In addition, our subsidiaries have pledged securities available for sale and residential loans associated with borrowings and funding agreements from FHLBs, with a fair value of $4.1 billion and $2.0 billion, respectively, at June 30, 2018 and $2.7 billion and $471 million, respectively, at December 31, 2017.

Certain GIAs have provisions that require collateral to be posted or payments to be made by us upon a downgrade of our long-term debt ratings. The actual amount of collateral required to be posted to the counterparties in the event of such downgrades, and the aggregate amount of payments that we could be required to make, depend on market conditions, the fair value of outstanding affected transactions and other factors prevailing at and after the time of the downgrade. The fair value of securities pledged as collateral with respect to these obligations was approximately $1.9 billion and $2.0 billion at June 30, 2018 and December 31, 2017, respectively. This collateral primarily consists of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.

Investments held in escrow accounts or otherwise subject to restriction as to their use were $236 million and $255 million, comprised of bonds available for sale and short term investments at June 30, 2018 and December 31, 2017, respectively.

AIG | Second Quarter 2018 Form 10-Q41

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |6. Lending Activities

6. Lending Activities 

The following table presents the composition of Mortgage and other loans receivable, net:

	June 30,			December 31,
(in millions)		2018		2017
Commercial mortgages*	$	30,888	$	28,596
Residential mortgages		6,200		5,398
Life insurance policy loans		2,192		2,295
Commercial loans, other loans and notes receivable		1,054		1,056
Total mortgage and other loans receivable		40,334		37,345
Allowance for credit losses		(356)		(322)
Mortgage and other loans receivable, net	$	39,978	$	37,023

*    Commercial mortgages primarily represent loans for apartments, offices and retail properties, with exposures in New York and California representing the largest geographic concentrations (aggregating approximately 22 percent and 11 percent, respectively, at June 30, 2018, and 23 percent and 12 percent, respectively, at December 31, 2017).

Credit Quality of Commercial Mortgages

The following table presents debt service coverage ratios and loan-to-value ratios for commercial mortgages:

	Debt Service Coverage Ratios(a)
(in millions)		>1.20X		1.00X - 1.20X		<1.00X		Total
June 30, 2018
Loan-to-Value Ratios(b)
Less than 65%	$	18,043	$	2,554	$	305	$	20,902
65% to 75%		7,515		202		220		7,937
76% to 80%		1,154		23		-		1,177
Greater than 80%		614		203		55		872
Total commercial mortgages	$	27,326	$	2,982	$	580	$	30,888
December 31, 2017
Loan-to-Value Ratios(b)
Less than 65%	$	18,000	$	1,525	$	351	$	19,876
65% to 75%		6,038		193		184		6,415
76% to 80%		569		40		-		609
Greater than 80%		1,416		206		74		1,696
Total commercial mortgages	$	26,023	$	1,964	$	609	$	28,596

(a)  The debt service coverage ratio compares a property’s net operating income to its debt service payments, including principal and interest. Our weighted average debt service coverage ratio was 2.0X and 2.1X at June 30, 2018 and December 31, 2017, respectively.

(b)  The loan-to-value ratio compares the current unpaid principal balance of the loan to the estimated fair value of the underlying property collateralizing the loan. Our weighted average loan-to-value ratio was 58 percent and 57 percent at June 30, 2018, and December 31, 2017, respectively.

42AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |6. Lending Activities

The following table presents the credit quality performance indicators for commercial mortgages:

	Number															Percent
	of	Class														of
(dollars in millions)	Loans	Apartments			Offices		Retail	Industrial			Hotel		Others		Total(c)	Total $
June 30, 2018
Credit Quality Performance
Indicator:
In good standing	765	$	9,449	$	9,276	$	5,048	$	2,625	$	2,424	$	1,932	$	30,754	100	%
Restructured(a)	4		-		114		4		-		16		-		134	-
90 days or less delinquent	-		-		-		-		-		-		-		-	-
>90 days delinquent or in
process of foreclosure	-		-		-		-		-		-		-		-	-
Total(b)	769	$	9,449	$	9,390	$	5,052	$	2,625	$	2,440	$	1,932	$	30,888	100	%
Allowance for credit losses:
Specific		$	-	$	2	$	1	$	-	$	1	$	-	$	4	-	%
General			90		107		36		10		16		19		278	1
Total allowance for credit losses		$	90	$	109	$	37	$	10	$	17	$	19	$	282	1	%

December 31, 2017
Credit Quality Performance
Indicator:
In good standing	778	$	8,163	$	8,585	$	5,338	$	2,023	$	2,373	$	1,960	$	28,442	99	%
Restructured(a)	5		-		115		23		-		16		-		154	1
90 days or less delinquent	-		-		-		-		-		-		-		-	-
>90 days delinquent or in
process of foreclosure	-		-		-		-		-		-		-		-	-
Total(b)	783	$	8,163	$	8,700	$	5,361	$	2,023	$	2,389	$	1,960	$	28,596	100	%
Allowance for credit losses:
Specific		$	-	$	3	$	1	$	-	$	1	$	-	$	5	-	%
General			72		94		37		6		15		18		242	1
Total allowance for credit losses		$	72	$	97	$	38	$	6	$	16	$	18	$	247	1	%

(a)  Loans that have been modified in troubled debt restructurings and are performing according to their restructured terms. For additional discussion of troubled debt restructurings see Note 7 to the Consolidated Financial Statements in the 2017 Annual Report.

(b)  Does not reflect allowance for credit losses.

(c)  Our commercial mortgage loan portfolio is current as to payments of principal and interest, for both periods presented.  There were no significant amounts of nonperforming commercial mortgages (defined as those loans where payment of contractual principal or interest is more than 90 days past due) during any of the periods presented.     

Allowance for Credit Losses

For a discussion of our accounting policy for evaluating Mortgage and other loans receivable for impairment seeNote 7 to the Consolidated Financial Statements in the 2017 Annual Report

The following table presents a rollforward of the changes in the allowance for losses on Mortgage and other loans receivable:

	2018						2017
Six Months Ended June 30,		Commercial		Other				Commercial		Other
(in millions)		Mortgages		Loans		Total		Mortgages		Loans		Total
Allowance, beginning of year	$	247	$	75	$	322	$	194	$	103	$	297
Loans charged off		(16)		-		(16)		(5)		(2)		(7)
Recoveries of loans previously charged off		-		-		-		-		-		-
Net charge-offs		(16)		-		(16)		(5)		(2)		(7)
Provision for loan losses		51		(1)		50		37		(20)		17
Other		-		-		-		-		-		-
Allowance, end of period	$	282 *	$	74	$	356	$	226 *	$	81	$	307

*    Of the total allowance, $5 million and $35 million relate to individually assessed credit losses on $60 million and $289 million of commercial mortgages at June 30, 2018 and 2017, respectively.

AIG | Second Quarter 2018 Form 10-Q43

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |6. Lending Activities

There were no loans modified in troubled debt restructurings during the six-month period ended June 30, 2018.  During the six-month period ended June 30, 2017, loans with a carrying value of $21 million were modified in troubled debt restructurings.       

7. Variable Interest Entities

We enter into various arrangements with variable interest entities (VIEs) in the normal course of business and consolidate the VIEs when we determine we are the primary beneficiary. This analysis includes a review of the VIE’s capital structure, related contractual relationships and terms, nature of the VIE’s operations and purpose, nature of the VIE’s interests issued and our involvement with the entity. When assessing the need to consolidate a VIE, we evaluate the design of the VIE as well as the related risks the entity was designed to expose the variable interest holders to.

The primary beneficiary is the entity that has both (1) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE.  While also considering these factors, the consolidation conclusion depends on the breadth of our decision-making ability and our ability to influence activities that significantly affect the economic performance of the VIE.

Balance Sheet Classification and Exposure to Loss

The following table presents the total assets and total liabilities associated with our variable interests in consolidated VIEs, as classified in the Condensed Consolidated Balance Sheets:

(in millions)		Real Estate and Investment Entities(d)		Securitization Vehicles(e)		Affordable Housing Partnerships		Other		Total
June 30, 2018
Assets:
Bonds available for sale	$	-	$	8,472	$	-	$	-	$	8,472
Other bond securities		-		4,199		-		3		4,202
Mortgage and other loans receivable		-		3,126		-		-		3,126
Other invested assets		1,524		-		3,264		27		4,815
Other(a)		285		1,507		405		84		2,281
Total assets(b)	$	1,809	$	17,304	$	3,669	$	114	$	22,896
Liabilities:
Long-term debt	$	805	$	2,687	$	1,941	$	5	$	5,438
Other (c)		129		77		170		25		401
Total liabilities	$	934	$	2,764	$	2,111	$	30	$	5,839
December 31, 2017
Assets:
Bonds available for sale	$	-	$	9,632	$	-	$	-	$	9,632
Other bond securities		-		4,518		-		3		4,521
Mortgage and other loans receivable		-		2,290		-		-		2,290
Other invested assets		1,365		206		3,087		25		4,683
Other(a)		302		1,481		350		85		2,218
Total assets(b)	$	1,667	$	18,127	$	3,437	$	113	$	23,344
Liabilities:
Long-term debt	$	680	$	1,624	$	1,825	$	5	$	4,134
Other(c)		144		244		181		26		595
Total liabilities	$	824	$	1,868	$	2,006	$	31	$	4,729

(a)  Comprised primarily of Short-term investments and Other assets at June 30, 2018 and December 31, 2017.

(b)  The assets of each VIE can be used only to settle specific obligations of that VIE.

(c)  Comprised primarily of Other liabilities at June 30, 2018 and December 31, 2017.

(d)  At June 30, 2018 and December 31, 2017, off-balance sheet exposure primarily consisting of commitments to real estate and investment entities was $237 million and $86 million, respectively.

(e)  At June 30, 2018 and December 31, 2017, $16.4 billion and $17.6 billion, respectively, of the total assets of consolidated securitization vehicles were owed to AIG Parent or its subsidiaries.

44AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |7. Variable Interest Entities

We calculate our maximum exposure to loss to be (i) the amount invested in the debt or equity of the VIE, (ii) the notional amount of VIE assets or liabilities where we have also provided credit protection to the VIE with the VIE as the referenced obligation, and (iii) other commitments and guarantees to the VIE. Interest holders in VIEs sponsored by us generally have recourse only to the assets and cash flows of the VIEs and do not have recourse to us, except in limited circumstances when we have provided a guarantee to the VIE’s interest holders.

The following table presents total assets of unconsolidated VIEs in which we hold a variable interest, as well as our maximum exposure to loss associated with these VIEs:

			Maximum Exposure to Loss
		Total VIE		On-Balance		Off-Balance
(in millions)		Assets		Sheet(b)		Sheet			Total
June 30, 2018
Real estate and investment entities(a)	$	348,774	$	8,426	$	1,946		$	10,372
Affordable housing partnerships		4,094		641		-			641
Other		2,800		293		1,219	(c)		1,512
Total	$	355,668	$	9,360	$	3,165		$	12,525
December 31, 2017
Real estate and investment entities(a)	$	380,030	$	9,253	$	2,043		$	11,296
Affordable housing partnerships		4,468		725		-			725
Other		2,703		254		1,205	(c)		1,459
Total	$	387,201	$	10,232	$	3,248		$	13,480

(a)  Comprised primarily of hedge funds and private equity funds.

(b)  At June 30, 2018 and December 31, 2017, $9.0 billion and $9.8 billion, respectively, of our total unconsolidated VIE assets were recorded as Other invested assets.

(c)  These amounts represent our estimate of the maximum exposure to loss under certain insurance policies issued to VIEs if a hypothetical loss occurred to the extent of the full amount of the insured value.  Our insurance policies cover defined risks and our estimate of liability is included in our insurance reserves on the balance sheet.

For additional information on VIEs seeNote 10 to the Consolidated Financial Statements in the 2017 Annual Report.                         

8. Derivatives and Hedge Accounting

We use derivatives and other financial instruments as part of our financial risk management programs and as part of our investment operations.

For a discussion of our accounting policies and procedures regarding derivatives and hedge accounting see Note 11 to the Consolidated Financial Statements in the 2017 Annual Report.

Our businesses use derivatives and other instruments as part of their financial risk management. Interest rate derivatives (such as interest rate swaps) are used to manage interest rate risk associated with embedded derivatives contained in insurance contract liabilities, fixed maturity securities, outstanding medium‑ and long‑term notes as well as other interest rate sensitive assets and liabilities. Foreign exchange derivatives (principally foreign exchange forwards and options) are used to economically mitigate risk associated with non‑U.S. dollar denominated debt, net capital exposures, and foreign currency transactions. Equity derivatives are used to mitigate financial risk embedded in certain insurance liabilities. We use credit derivatives to manage our credit exposures. The derivatives are effective economic hedges of the exposures that they are meant to offset.

In addition to hedging activities, we also enter into derivative instruments with respect to investment operations, which may include, among other things, CDSs and purchases of investments with embedded derivatives, such as equity‑linked notes and convertible bonds.

AIG | Second Quarter 2018 Form 10-Q45

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |8. Derivatives and Hedge Accounting

The following table presents the notional amounts of our derivatives and the fair value of derivative assets and liabilities in the Condensed Consolidated Balance Sheets:

	June 30, 2018								December 31, 2017
	Gross Derivative Assets				Gross Derivative Liabilities				Gross Derivative Assets				Gross Derivative Liabilities
		Notional		Fair		Notional		Fair		Notional		Fair		Notional		Fair
(in millions)		Amount		Value		Amount		Value		Amount		Value		Amount		Value
Derivatives designated as
hedging instruments:(a)
Interest rate contracts	$	50	$	1	$	926	$	25	$	-	$	-	$	838	$	15
Foreign exchange contracts		4,590		235		3,540		257		2,823		173		4,783		350
Equity contracts		-		-		-		-		-		-		159		19
Derivatives not designated
as hedging instruments:(a)
Interest rate contracts		44,599		2,459		32,708		1,914		37,751		2,171		26,461		2,185
Foreign exchange contracts		11,768		803		4,778		830		6,305		658		11,093		895
Equity contracts		18,562		280		3,610		8		19,975		522		1,130		2
Credit contracts(b)		9		1		1,399		260		4		1		1,365		277
Other contracts(c)		38,342		17		59		4		39,829		20		59		5
Total derivatives, gross	$	117,920	$	3,796	$	47,020	$	3,298	$	106,687	$	3,545	$	45,888	$	3,748
Counterparty netting(d)				(1,433)				(1,433)				(1,464)				(1,464)
Cash collateral(e)				(1,644)				(595)				(1,159)				(1,249)
Total derivatives on condensed
consolidated balance sheets(f)			$	719			$	1,270			$	922			$	1,035

(a)  Fair value amounts are shown before the effects of counterparty netting adjustments and offsetting cash collateral.

(b)  As of June 30, 2018 and December 31, 2017, included CDSs on super senior multi-sector CDOs with a net notional amount of $640 million and $685 million (fair value liability of $241 million and $254 million), respectively. The net notional amount represents the maximum exposure to loss on the portfolio. As of June 30, 2018 and December 31, 2017, there were no super senior corporate debt/CLOs remaining.

(c)  Consists primarily of stable value wraps and contracts with multiple underlying exposures.

(d)  Represents netting of derivative exposures covered by a qualifying master netting agreement.

(e)  Represents cash collateral posted and received that is eligible for netting.

(f)  Freestanding derivatives only, excludes embedded derivatives. Derivative instrument assets and liabilities are recorded in Other Assets and Liabilities, respectively.  Fair value of assets related to bifurcated embedded derivatives was zero at both June 30, 2018 and December 31, 2017. Fair value of liabilities related to bifurcated embedded derivatives was $3.5 billion and $4.1 billion, respectively, at June 30, 2018 and December 31, 2017. A bifurcated embedded derivative is generally presented with the host contract in the Condensed Consolidated Balance Sheets. Embedded derivatives are primarily related to guarantee features in variable annuity products, which include equity and interest rate components.   

46AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |8. Derivatives and Hedge Accounting

Collateral

We engage in derivative transactions that are not subject to a clearing requirement directly with unaffiliated third parties, in most cases, under International Swaps and Derivatives Association, Inc. (ISDA) Master Agreements. Many of the ISDA Master Agreements also include Credit Support Annex (CSA) provisions, which provide for collateral postings that may vary at various ratings and threshold levels. We attempt to reduce our risk with certain counterparties by entering into agreements that enable collateral to be obtained from a counterparty on an upfront or contingent basis. We minimize the risk that counterparties might be unable to fulfill their contractual obligations by monitoring counterparty credit exposure and collateral value and generally requiring additional collateral to be posted upon the occurrence of certain events or circumstances. In addition, certain derivative transactions have provisions that require collateral to be posted upon a downgrade of our long‑term debt ratings or give the counterparty the right to terminate the transaction. In the case of some of the derivative transactions, upon a downgrade of our long‑term debt ratings, as an alternative to posting collateral and subject to certain conditions, we may assign the transaction to an obligor with higher debt ratings or arrange for a substitute guarantee of our obligations by an obligor with higher debt ratings or take other similar action. The actual amount of collateral required to be posted to counterparties in the event of such downgrades, or the aggregate amount of payments that we could be required to make, depends on market conditions, the fair value of outstanding affected transactions and other factors prevailing at and after the time of the downgrade.

Collateral posted by us to third parties for derivative transactions was $2.2 billion and $2.9 billion at June 30, 2018 and December 31, 2017, respectively. In the case of collateral posted under derivative transactions that are not subject to clearing, this collateral can generally be repledged or resold by the counterparties. Collateral provided to us from third parties for derivative transactions was $1.7 billion and $1.3 billion at June 30, 2018 and December 31, 2017, respectively. In the case of collateral provided to us under derivative transactions that are not subject to clearing, we generally can repledge or resell collateral.

Offsetting

We have elected to present all derivative receivables and derivative payables, and the related cash collateral received and paid, on a net basis on our Condensed Consolidated Balance Sheets when a legally enforceable ISDA Master Agreement exists between us and our derivative counterparty. An ISDA Master Agreement is an agreement governing multiple derivative transactions between two counterparties. The ISDA Master Agreement generally provides for the net settlement of all, or a specified group, of these derivative transactions, as well as transferred collateral, through a single payment, and in a single currency, as applicable. The net settlement provisions apply in the event of a default on, or affecting any, one derivative transaction or a termination event affecting all, or a specified group of, derivative transactions governed by the ISDA Master Agreement.

Hedge Accounting

We designated certain derivatives entered into with third parties as fair value hedges of available for sale investment securities held by our insurance subsidiaries. The fair value hedges include foreign currency forwards and cross currency swaps designated as hedges of the change in fair value of foreign currency denominated available for sale securities attributable to changes in foreign exchange rates. We also designated certain interest rate swaps entered into with third parties as fair value hedges of fixed rate GICs attributable to changes in benchmark interest rates.

We use foreign currency denominated debt and cross-currency swaps as hedging instruments in net investment hedge relationships to mitigate the foreign exchange risk associated with our non-U.S. dollar functional currency foreign subsidiaries. For net investment hedge relationships where issued debt is used as a hedging instrument, we assess the hedge effectiveness and measure the amount of ineffectiveness based on changes in spot rates. For net investment hedge relationships that use derivatives as hedging instruments, we assess hedge effectiveness and measure hedge ineffectiveness using changes in forward rates.For the three- and six-month periods ended June 30, 2018, we recognized a gain of $119 million and a loss of $1 million, respectively, and for the three- and six-month periods ended June 30, 2017, we recognized losses of $6 million and $48 million, respectively, included in Change in foreign currency translation adjustment in Other comprehensive income related to the net investment hedge relationships.

A qualitative methodology is utilized to assess hedge effectiveness for net investment hedges, while regression analysis is employed for all other hedges.

AIG | Second Quarter 2018 Form 10-Q47

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |8. Derivatives and Hedge Accounting

The following table presents the gain (loss) recognized in earnings on our derivative instruments in fair value hedging relationships in the Condensed Consolidated Statements of Income:

	Gains/(Losses) Recognized in Earnings for:				Including Gains/(Losses) Attributable to:
	Hedging		Hedged		Hedge		Excluded
(in millions)	Derivatives(a)		Items		Ineffectiveness		Components		Other(b)
Three Months Ended June 30, 2018
Interest rate contracts:
Realized capital gains/(losses)	$	-	$	-	$	-	$	-	$	-
Foreign exchange contracts:
Realized capital gains/(losses)		236		(199)		-		37		-
Other income		-		-		-		-		-
Equity contracts:
Realized capital gains/(losses)		-		-		-		-		-
Three Months Ended June 30, 2017
Interest rate contracts:
Realized capital gains/(losses)	$	3	$	(3)	$	-	$	-	$	-
Foreign exchange contracts:
Realized capital gains/(losses)		(213)		232		-		19		-
Other income		-		3		-		-		3
Equity contracts:
Realized capital gains/(losses)		(24)		24		-		-		-
Six Months Ended June 30, 2018
Interest rate contracts:
Realized capital gains/(losses)	$	(8)	$	9	$	1	$	-	$	-
Foreign exchange contracts:
Realized capital gains/(losses)		195		(191)		-		4		-
Other income		-		-		-		-		-
Equity contracts:
Realized capital gains/(losses)		-		-		-		-		-
Six Months Ended June 30, 2017
Interest rate contracts:
Realized capital gains/(losses)	$	2	$	(2)	$	-	$	-	$	-
Foreign exchange contracts:
Realized capital gains/(losses)		(161)		190		-		29		-
Other income		-		4		-		-		4
Equity contracts:
Realized capital gains/(losses)		(26)		24		-		(2)		-

(a)  The amounts presented do not include the periodic net coupon settlements of the derivative contract or the coupon income (expense) related to the hedged item.

(b)  Represents accretion/amortization of opening fair value of the hedged item at inception of hedge relationship, amortization of basis adjustment on hedged item following the discontinuation of hedge accounting, and the release of debt basis adjustment following the repurchase of issued debt that was part of previously-discontinued fair value hedge relationship.

48AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |8. Derivatives and Hedge Accounting

Derivatives Not Designated as Hedging Instruments

The following table presents the effect of derivative instruments not designated as hedging instruments in the Condensed Consolidated Statements of Income:

	Gains (Losses) Recognized in Earnings
	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2018		2017		2018		2017
By Derivative Type:
Interest rate contracts	$	(224)	$	251	$	(622)	$	99
Foreign exchange contracts		391		(76)		252		(122)
Equity contracts		(114)		(176)		(187)		(490)
Credit contracts		1		21		12		36
Other contracts		17		18		34		36
Embedded derivatives		344		(259)		935		(113)
Total	$	415	$	(221)	$	424	$	(554)
By Classification:
Policy fees	$	17	$	19	$	34	$	39
Net investment income		1		(5)		(3)		(7)
Net realized capital gains (losses)		369		(316)		356		(700)
Other income		29		80		41		113
Policyholder benefits and claims incurred		(1)		1		(4)		1
Total	$	415	$	(221)	$	424	$	(554)

Credit Risk-Related Contingent Features

We estimate that at June 30, 2018, based on our outstanding financial derivative transactions, a downgrade of our long-term senior debt ratings to BBB or BBB– by Standard & Poor’s Financial Services LLC, a subsidiary of S&P Global Inc., and/or a downgrade to Baa2 or Baa3 by Moody’s Investors’ Service, Inc. would permit counterparties to make additional collateral calls and permit certain counterparties to elect early termination of contracts, resulting in corresponding collateral postings and termination payments in the total amount of up to approximately $58 million. The aggregate fair value of our derivatives that were in a net liability position and that contain such credit risk-related contingencies which can be triggered below our long-term senior debt ratings of BBB+ or Baa1 was approximately $461 million and $572 million at June 30, 2018 and December 31, 2017, respectively. The aggregate fair value of assets posted as collateral under these contracts at June 30, 2018 and December 31, 2017, was approximately $505 million and $676 million, respectively.                 

Hybrid Securities with Embedded Credit Derivatives

We invest in hybrid securities (such as credit‑linked notes) with the intent of generating income, and not specifically to acquire exposure to embedded derivative risk. As is the case with our other investments in RMBS, CMBS, CDOs and ABS, our investments in these hybrid securities are exposed to losses only up to the amount of our initial investment in the hybrid security. Other than our initial investment in the hybrid securities, we have no further obligation to make payments on the embedded credit derivatives in the related hybrid securities.

We elect to account for our investments in these hybrid securities with embedded written credit derivatives at fair value, with changes in fair value recognized in Net investment income and Other income. Our investments in these hybrid securities are reported as Other bond securities in the Condensed Consolidated Balance Sheets. The fair values of these hybrid securities were $4.1 billion and $4.4 billion at June 30, 2018 and December 31, 2017, respectively. These securities have par amounts of $8.8 billion and $9.1 billion at June 30, 2018 and December 31, 2017, respectively, and have remaining stated maturity dates that extend to 2052.

AIG | Second Quarter 2018 Form 10-Q49

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |9. Insurance Liabilities

9. Insurance Liabilities

Liability for Unpaid Losses and Loss Adjustment Expenses (Loss Reserves)

Loss reserves represent the accumulation of estimates of unpaid claims, including estimates for claims incurred but not reported (IBNR) and loss adjustment expenses (LAE), less applicable discount. We regularly review and update the methods used to determine loss reserve estimates. Any adjustments resulting from this review are reflected currently in pre-tax income, except to the extent it impacts a deferred gain under a retroactive reinsurance agreement in which case the ceded portion would be amortized into pre-tax income in subsequent periods. Because these estimates are subject to the outcome of future events, changes in estimates are common given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase previous estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost are referred to as favorable development.

Our gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.9 billion and $12.6 billion at June 30, 2018 and December 31, 2017, respectively. These recoverable amounts are related to certain policies with high deductibles (in excess of high dollar amounts retained by the insured through self-insured retentions, deductibles, retrospective programs, or captive arrangements, each referred to generically as “deductibles”), primarily for U.S. commercial casualty business. With respect to the deductible portion of the claim, we manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim.  Thus, these recoverable amounts represent a credit exposure to us. At June 30, 2018 and December 31, 2017, we held collateral of approximately $9.4 billion and $9.5 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and funded trust agreements.

The following table presents the roll-forward of activity in Loss Reserves:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2018		2017		2018		2017
Liability for unpaid loss and loss adjustment expenses, beginning of period	$	78,098	$	76,050	$	78,393	$	77,077
Reinsurance recoverable		(27,211)		(26,920)		(26,708)		(15,532)
Net Liability for unpaid loss and loss adjustment expenses, beginning of period		50,887		49,130		51,685		61,545
Losses and loss adjustment expenses incurred:
Current year		4,452		4,209		9,130		8,510
Prior years, excluding discount and amortization of deferred gain		(26)		391		(65)		453
Prior years, discount charge (benefit)		9		260		(177)		235
Prior years, amortization of deferred gain on retroactive reinsurance(a)		(69)		(82)		(108)		(120)
Total losses and loss adjustment expenses incurred		4,366		4,778		8,780		9,078
Losses and loss adjustment expenses paid:
Current year		(910)		(1,137)		(1,520)		(1,708)
Prior years		(4,635)		(4,252)		(9,414)		(9,043)
Total losses and loss adjustment expenses paid		(5,545)		(5,389)		(10,934)		(10,751)
Other changes:
Foreign exchange effect		(431)		463		(157)		358
Retroactive reinsurance adjustment (net of discount)(b)		30		(299)		(67)		(11,460)
Reclassified to liabilities held for sale(c)		-		79		-		(8)
Total other changes		(401)		243		(224)		(11,110)
Liability for unpaid loss and loss adjustment expenses, end of period:
Net liability for unpaid losses and loss adjustment expenses		49,307		48,762		49,307		48,762
Reinsurance recoverable		27,406		27,660		27,406		27,660
Total	$	76,713	$	76,422	$	76,713	$	76,422

(a)  Includes $8 million and $10 million for the retroactive reinsurance agreement with NICO covering U.S. asbestos exposures for the three-month periods ended June 30, 2018 and 2017, respectively, and $13 million for both six-month periods ended June 30, 2018 and 2017.

(b)  Includes discount on retroactive reinsurance of $(20) million and $(108) million for the three-month periods ended June 30, 2018 and 2017, respectively, and $108 million and $1.5 billion for the six-month periods ended June 30, 2018 and 2017, respectively.

(c)  Represents change in loss reserves included in our sale of certain of our insurance operations to Fairfax Financial Holdings Limited (Fairfax) for the three- and six-month periods ended June 30, 2017.  Upon consummation of the sale, we retained a portion of these reserves through reinsurance arrangements.       

50AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |9. Insurance Liabilities

On January 20, 2017, we entered into an adverse development reinsurance agreement with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc. (Berkshire), under which we transferred to NICO 80 percent of the reserve risk on substantially all of our U.S. Commercial long-tail exposures for accident years 2015 and prior. Under this agreement, we ceded to NICO 80 percent of the paid losses on subject business paid on or after January 1, 2016 in excess of $25 billion of net paid losses, up to an aggregate limit of $25 billion.  At NICO’s 80 percent share, NICO’s limit of liability under the contract is $20 billion.  We account for this transaction as retroactive reinsurance. We paid total consideration, including interest, of $10.2 billion. The consideration was placed into a collateral trust account as security for NICO’s claim payment obligations, and Berkshire has provided a parental guarantee to secure the obligations of NICO under the agreement. The total paid claims subject to the agreement as of June 30, 2018 were below the attachment point.                

Discounting of Loss Reserves

At June 30, 2018, the loss reserves reflect a net loss reserve discount of $2.0 billion, including tabular and non-tabular calculations based upon the following assumptions:

Certain asbestos claims are discounted when allowed by the regulator and when payments are fixed and determinable, based on the investment yields of the companies and the payout pattern for the claims. At December 31, 2016, the discount for asbestos reserves was fully amortized.

The tabular workers’ compensation discount is calculated based on a 3.5 percent interest rate and the mortality rate used in the 2007 U.S. Life Table.

The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New York and Pennsylvania, and follows the statutory regulations (prescribed or permitted) for each state.  For New York companies, the discount is based on a 5 percent interest rate and the companies’ own payout patterns. For the Pennsylvania companies, the statute specifies discount factors for accident years 2001 and prior, which are based on a 6 percent interest rate and an industry payout pattern.  For accident years 2002 and subsequent, the discount is based on the payout patterns and investment yields of the companies.

In 2013, our Pennsylvania regulator approved use of a consistent discount rate (U.S. Treasury rate plus a liquidity premium) to all of our workers’ compensation reserves in our Pennsylvania-domiciled companies, as well as our use of updated payout patterns specific to our primary and excess workers compensation portfolios. 

The discount consists of $622 million of tabular discount and $1.3 billion of non-tabular discount for workers’ compensation. During the six-month periods ended June 30, 2018 and 2017, the benefit/(charge) from changes in discount of $219 million and $(235) million, respectively, were recorded as part of the policyholder benefits and losses incurred in the Consolidated Statement of Income.

The following table presents the components of the loss reserve discount discussed above:

	June 30, 2018						December 31, 2017
	North						North
	America						America
	Commercial			Legacy			Commercial			Legacy
(in millions)	Insurance			Portfolio		Total	Insurance			Portfolio		Total
U.S. workers' compensation	$	2,638	$	964	$	3,602	$	2,465	$	918	$	3,383
Retroactive reinsurance		(1,647)		-		(1,647)		(1,539)		-		(1,539)
Total reserve discount*	$	991	$	964	$	1,955	$	926	$	918	$	1,844

* Excludes $170 million and $173 million of discount related to certain long tail liabilities in the United Kingdom at June 30, 2018 and December 31, 2017, respectively.

AIG | Second Quarter 2018 Form 10-Q51

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |9. Insurance Liabilities

The following tables present the net loss reserve discount benefit (charge):

Three Months Ended June 30,	2018						2017
	North						North
	America						America
	Commercial			Legacy			Commercial			Legacy
(in millions)	Insurance			Portfolio		Total	Insurance			Portfolio		Total
Current accident year	$	23	$	-	$	23	$	29	$	-	$	29
Accretion and other adjustments
to prior year discount		(133)		(12)		(145)		(57)		(43)		(100)
Effect of interest rate changes		96		40		136		(128)		(61)		(189)
Net reserve discount
benefit (charge)		(14)		28		14		(156)		(104)		(260)
Change in discount on loss reserves
ceded under retroactive reinsurance		20		-		20		108		-		108
Net change in total reserve
discount(a)	$	6	$	28	$	34	$	(48)	$	(104)	$	(152)
Six Months Ended June 30,	2018						2017
	North						North
	America						America
	Commercial			Legacy			Commercial			Legacy
(in millions)	Insurance			Portfolio		Total	Insurance			Portfolio		Total
Current accident year	$	42	$	-	$	42	$	61	$	-	$	61
Accretion and other adjustments
to prior year discount		(88)		(30)		(118)		(105)		(59)		(164)
Effect of interest rate changes		219		76		295		(89)		(43)		(132)
Net reserve discount
benefit (charge)		173		46		219		(133)		(102)		(235)
Change in discount on loss reserves
ceded under retroactive reinsurance		(108)		-		(108)		(1,547)		-		(1,547)
Net change in total reserve
discount(b)	$	65	$	46	$	111	$	(1,680)	$	(102)	$	(1,782)

(a)Excludes $7 million and $4 million of discount related to certain long tail liabilities in the United Kingdom for the three-month periods ended June 30, 2018 and 2017, respectively.

(b)Excludes $3 million and $(4) million of discount related to certain long tail liabilities in the United Kingdom for the six-month periods ended June 30, 2018 and 2017, respectively.

During the six-month period ended June 30, 2018 effective interest rates increased due to an increase in the forward yield curve component of the discount rates reflecting an increase in U.S. Treasury rates along with changes in payout pattern assumptions. This resulted in an increase in the loss reserve discount by $295 million in the six-month period ended June 30, 2018.

During the six-month period ended June 30, 2017 effective interest rates decreased due to a decrease in the forward yield curve component of the discount rates reflecting a decrease in U.S. Treasury rates along with changes in payout pattern assumptions. This resulted in a decrease in the loss reserve discount by $132 million in the six-month period ended June 30, 2017.

52AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |10. Contingencies, Commitments and Guarantees

10. Contingencies, Commitments and Guarantees

In the normal course of business, various contingent liabilities and commitments are entered into by AIG and our subsidiaries. In addition, AIG Parent guarantees various obligations of certain subsidiaries.

Although AIG cannot currently quantify its ultimate liability for unresolved litigation and investigation matters, including those referred to below, it is possible that such liability could have a material adverse effect on AIG’s consolidated financial condition or its consolidated results of operations or consolidated cash flows for an individual reporting period.

Legal Contingencies

Overview.In the normal course of business, AIG and our subsidiaries are, like others in the insurance and financial services industries in general, subject to regulatory and government investigations and actions, and litigation and other forms of dispute resolution in a large number of proceedings pending in various domestic and foreign jurisdictions.  Certain of these matters involve potentially significant risk of loss due to potential for significant jury awards and settlements, punitive damages or other penalties.  Many of these matters are also highly complex and seek recovery on behalf of a class or similarly large number of plaintiffs.  It is therefore inherently difficult to predict the size or scope of potential future losses arising from these matters.  In our insurance and reinsurance operations, litigation and arbitration concerning the scope of coverage under insurance and reinsurance contracts, and litigation and arbitration in which our subsidiaries defend or indemnify their insureds under insurance contracts, are generally considered in the establishment of our loss reserves.  Separate and apart from the foregoing matters involving insurance and reinsurance coverage, AIG, our subsidiaries and their respective officers and directors are subject to a variety of additional types of legal proceedings brought by holders of AIG securities, customers, employees and others, alleging, among other things, breach of contractual or fiduciary duties, bad faith and violations of federal and state statutes and regulations.  With respect to these other categories of matters not arising out of claims for insurance or reinsurance coverage, we establish reserves for loss contingencies when it is probable that a loss will be incurred and the amount of the loss can be reasonably estimated.  In many instances, we are unable to determine whether a loss is probable or to reasonably estimate the amount of such a loss and, therefore, the potential future losses arising from legal proceedings may exceed the amount of liabilities that we have recorded in our financial statements covering these matters.  While such potential future charges could be material, based on information currently known to management, management does not believe, other than may be discussed below, that any such charges are likely to have a material adverse effect on our financial position or results of operation.

Additionally, from time to time, various regulatory and governmental agencies review the transactions and practices of AIG and our subsidiaries in connection with industry-wide and other inquiries into, among other matters, the business practices of current and former operating insurance subsidiaries. We have cooperated, and will continue to cooperate, in producing documents and other information in response to such requests.

Tax Litigation

We are party to pending tax litigation before the Southern District of New York. For additional information see Note 14 to the Condensed Consolidated Financial Statements.                              

AIG | Second Quarter 2018 Form 10-Q53

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |10. Contingencies, Commitments and Guarantees

Other Commitments

In the normal course of business, we enter into commitments to invest in limited partnerships, private equity funds and hedge funds and to purchase and develop real estate in the U.S. and abroad. These commitments totaled $3.3 billion at June 30, 2018.

Guarantees

Subsidiaries

We have issued unconditional guarantees with respect to the prompt payment, when due, of all present and future payment obligations and liabilities of AIG Financial Products Corp. and related subsidiaries (collectively AIGFP) and of AIG Markets arising from transactions entered into by AIG Markets.

In connection with AIGFP’s business activities, AIGFP has issued, in a limited number of transactions, standby letters of credit or similar facilities to equity investors of structured leasing transactions in an amount equal to the termination value owing to the equity investor by the lessee in the event of a lessee default (the equity termination value). The total amount outstanding at June 30, 2018 was $85 million. In those transactions, AIGFP has agreed to pay such amount if the lessee fails to pay. The amount payable by AIGFP is, in certain cases, partially offset by amounts payable under other instruments typically equal to the present value of scheduled payments to be made by AIGFP. In the event that AIGFP is required to make a payment to the equity investor, the lessee is unconditionally obligated to reimburse AIGFP. To the extent that the equity investor is paid the equity termination value from the standby letter of credit and/or other sources, including payments by the lessee, AIGFP takes an assignment of the equity investor’s rights under the lease of the underlying property. Because the obligations of the lessee under the lease transactions are generally economically defeased, lessee bankruptcy is the most likely circumstance in which AIGFP would be required to pay without reimbursement.

AIG Parent files a consolidated federal income tax return with certain subsidiaries and acts as an agent for the consolidated tax group when making payments to the Internal Revenue Service (IRS). AIG Parent and its subsidiaries have adopted, pursuant to a written agreement, a method of allocating consolidated federal income taxes. Under an Amended and Restated Tax Payment Allocation Agreement dated June 6, 2011 between AIG Parent and one of its Bermuda-domiciled insurance subsidiaries, AIG Life of Bermuda, Ltd. (AIGB), AIG Parent has agreed to indemnify AIGB for any tax liability (including interest and penalties) resulting from adjustments made by the IRS or other appropriate authorities to taxable income, special deductions or credits in connection with investments made by AIGB in certain affiliated entities.

Asset Dispositions

We are subject to financial guarantees and indemnity arrangements in connection with the completed sales of businesses pursuant to our asset disposition plan. The various arrangements may be triggered by, among other things, declines in asset values, the occurrence of specified business contingencies, the realization of contingent liabilities, developments in litigation or breaches of representations, warranties or covenants provided by us. These arrangements are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential obligation is subject to contractual limitations, while in other cases such limitations are not specified or are not applicable.

We are unable to develop a reasonable estimate of the maximum potential payout under certain of these arrangements. Overall, we believe that it is unlikely we will have to make any material payments related to completed sales under these arrangements, and no material liabilities related to these arrangements have been recorded in the Condensed Consolidated Balance Sheets.

Other

•For additional discussion on commitments and guarantees associated with VIEs seeNote 7 to the Condensed Consolidated Financial Statements.

•For additional disclosures about derivatives see Note 8 to the Condensed Consolidated Financial Statements.

•For additional disclosures about guarantees of outstanding debt see Note 15 to the Condensed Consolidated Financial Statements. 

54AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |11. Equity

11. Equity

Shares Outstanding

The following table presents a rollforward of outstanding shares:

Six Months Ended June 30, 2018	Common	Treasury	Common Stock
	Stock Issued	Stock	Outstanding
Shares, beginning of year	1,906,671,492	(1,007,626,835)	899,044,657
Shares issued	-	4,047,626	4,047,626
Shares repurchased	-	(11,878,250)	(11,878,250)
Shares, end of period	1,906,671,492	(1,015,457,459)	891,214,033

Dividends

Dividends are payable on AIG Common Stock only when, as and if declared by our Board of Directors in its discretion, from funds legally available for this purpose. In considering whether to pay a dividend on or purchase shares of AIG Common Stock, our Board of Directors considers a number of factors, including, but not limited to: the capital resources available to support our insurance operations and business strategies, AIG’s funding capacity and capital resources in comparison to internal benchmarks, expectations for capital generation, rating agency expectations for capital, regulatory standards for capital and capital distributions, and such other factors as our Board of Directors may deem relevant.

The following table presents record date, payment date and dividends paid per share on AIG Common Stock:          

		Dividends Paid
Record Date	Payment Date	Per Share
June 14, 2018	June 28, 2018	0.32
March 15, 2018	March 29, 2018	0.32
June 14, 2017	June 28, 2017	0.32
March 15, 2017	March 29, 2017	0.32

For a discussion of restrictions on payments of dividends to AIG Parent by its subsidiaries seeNote 19 to the Consolidated Financial Statements in the 2017 Annual Report. 

Repurchase of AIG Common Stock

The following table presents repurchases of AIG Common Stock and warrants to purchase shares of AIG Common Stock:

Six Months Ended June 30,
(in millions)		2018		2017
Aggregate repurchases of common stock	$	646	$	6,000
Total number of common shares repurchased		12		95
Aggregate repurchases of warrants	$	4	$	-
Total number of warrants repurchased*		-		-

*    For the six-month period ended June 30, 2018, we repurchased 266,453 warrants to purchase shares of AIG Common Stock.

Our Board of Directors has authorized the repurchase of shares of AIG Common Stock and warrants to purchase shares of AIG Common Stock through a series of actions. On May 3, 2017, our Board of Directors authorized an additional increase of $2.5 billion to its previous share repurchase authorization. As of June 30, 2018, approximately $1.6 billion remained under our share repurchase authorization. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants). Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans.

The timing of any future repurchases will depend on market conditions, our business and strategic plans, financial condition, results of operations, liquidity and other factors.

AIG | Second Quarter 2018 Form 10-Q55

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |11. Equity

Accumulated Other Comprehensive Income

The following table presents a rollforward of Accumulated other comprehensive income:

		Unrealized Appreciation								Fair Value of
		(Depreciation) of Fixed		Unrealized						Liabilities Under
		Maturity Securities on		Appreciation		Foreign		Retirement		Fair Value Option
		Which Other-Than-		(Depreciation)		Currency		Plan		Attributable to
		Temporary Credit		of All Other		Translation		Liabilities		Changes in
(in millions)		Impairments Were Taken		Investments		Adjustments		Adjustment		Own Credit Risk		Total
Balance, December 31, 2017, net of tax	$	793	$	7,693	$	(2,090)	$	(931)	$	-	$	5,465
Cumulative effect of change in
accounting principles		169		(285)		(284)		(183)		7		(576)
Change in unrealized depreciation of investments		(1,608)		(6,358)		-		-		-		(7,966)
Change in deferred policy acquisition costs
adjustment and other		114		905		-		-		-		1,019
Change in future policy benefits		-		1,124		-		-		-		1,124
Change in foreign currency translation adjustments		-		-		(23)		-		-		(23)
Change in net actuarial loss		-		-		-		38		-		38
Change in prior service credit		-		-		-		(2)		-		(2)
Change in deferred tax asset (liability)		298		865		(29)		16		-		1,150
Change in fair value of liabilities under fair value
option attributable to changes in own credit risk		-		-		-		-		1		1
Total other comprehensive income (loss)		(1,196)		(3,464)		(52)		52		1		(4,659)
Noncontrolling interests		-		-		-		-		-		-
Balance, June 30, 2018, net of tax	$	(234)	$	3,944	$	(2,426)	$	(1,062)	$	8	$	230
Balance, December 31, 2016, net of tax	$	426	$	6,405	$	(2,629)	$	(972)	$	-	$	3,230
Change in unrealized appreciation of investments		341		2,838		-		-		-		3,179
Change in deferred policy acquisition costs
adjustment and other*		17		(998)		-		-		-		(981)
Change in future policy benefits		-		(539)		-		-		-		(539)
Change in foreign currency translation adjustments		-		-		146		-		-		146
Change in net actuarial loss		-		-		-		38		-		38
Change in prior service cost		-		-		-		6		-		6
Change in deferred tax asset (liability)		(125)		47		(24)		(15)		-		(117)
Total other comprehensive income		233		1,348		122		29		-		1,732
Noncontrolling interests		-		-		-		-		-		-
Balance, June 30, 2017, net of tax	$	659	$	7,753	$	(2,507)	$	(943)	$	-	$	4,962

*    Includes net unrealized gains attributable to businesses held for sale.

56AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |11. Equity

The following table presents the other comprehensive income reclassification adjustments for the three- and six-month periods ended June 30, 2018 and 2017, respectively:

		Unrealized Appreciation
		(Depreciation) of Fixed								Fair Value of
		Maturity Investments		Unrealized						Liabilities Under
		on Which Other-Than-		Appreciation		Foreign		Retirement		Fair Value Option
		Temporary Credit		(Depreciation)		Currency		Plan		Attributable to
		Impairments Were		of All Other		Translation		Liabilities		Changes in
(in millions)		Recognized		Investments		Adjustments		Adjustment		Own Credit Risk		Total
Three Months Ended June 30, 2018
Unrealized change arising during period	$	(1,282)	$	(964)	$	(195)	$	16	$	(1)	$	(2,426)
Less: Reclassification adjustments
included in net income		2		(14)		-		(8)		-		(20)
Total other comprehensive income (loss),
before income tax expense (benefit)		(1,284)		(950)		(195)		24		(1)		(2,406)
Less: Income tax expense (benefit)		(238)		(194)		15		1		-		(416)
Total other comprehensive income (loss),
net of income tax expense (benefit)	$	(1,046)	$	(756)	$	(210)	$	23	$	(1)	$	(1,990)
Three Months Ended June 30, 2017
Unrealized change arising during period	$	203	$	944	$	450	$	6	$	-	$	1,603
Less: Reclassification adjustments
included in net income		20		285		-		(10)		-		295
Total other comprehensive income,
before income tax expense		183		659		450		16		-		1,308
Less: Income tax expense		64		6		52		5		-		127
Total other comprehensive income,
net of income tax expense	$	119	$	653	$	398	$	11	$	-	$	1,181
Six Months Ended June 30, 2018
Unrealized change arising during period	$	(1,490)	$	(4,350)	$	(23)	$	19	$	1	$	(5,843)
Less: Reclassification adjustments
included in net income		4		(21)		-		(17)		-		(34)
Total other comprehensive income (loss),
before income tax expense (benefit)		(1,494)		(4,329)		(23)		36		1		(5,809)
Less: Income tax expense (benefit)		(298)		(865)		29		(16)		-		(1,150)
Total other comprehensive income (loss),
net of income tax expense (benefit)	$	(1,196)	$	(3,464)	$	(52)	$	52	$	1	$	(4,659)
Six Months Ended June 30, 2017
Unrealized change arising during period	$	393	$	1,779	$	146	$	24	$	-	$	2,342
Less: Reclassification adjustments
included in net income		35		478		-		(20)		-		493
Total other comprehensive income,
before income tax expense		358		1,301		146		44		-		1,849
Less: Income tax expense (benefit)		125		(47)		24		15		-		117
Total other comprehensive income,
net of income tax expense (benefit)	$	233	$	1,348	$	122	$	29	$	-	$	1,732

AIG | Second Quarter 2018 Form 10-Q57

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |11. Equity

The following table presents the effect of the reclassification of significant items out of Accumulated other comprehensive income on the respective line items in the Condensed Consolidated Statements of Income:

	Amount Reclassified from Accumulated Other Comprehensive Income					Affected Line Item in the Condensed Consolidated Statements of Income
	Three Months Ended June 30,
(in millions)		2018		2017
Unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were taken
Investments		$	2	$	20		Other realized capital gains
Total			2		20
Unrealized appreciation (depreciation) of all other investments
Investments			(15)		227		Other realized capital gains
Deferred acquisition costs adjustment			1		58		Amortization of deferred policy acquisition costs
Future policy benefits			-		-		Policyholder benefits and losses incurred
Total			(14)		285
Change in retirement plan liabilities adjustment
Prior-service credit			1		1		*
Actuarial losses			(9)		(11)		*
Total			(8)		(10)
Total reclassifications for the period		$	(20)	$	295
	Amount Reclassified from Accumulated Other Comprehensive Income					Affected Line Item in the Condensed Consolidated Statements of Income
	Six Months Ended June 30,
(in millions)		2018		2017
Unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were taken
Investments		$	4	$	35		Other realized capital gains
Total			4		35
Unrealized appreciation (depreciation) of all other investments
Investments			9		367		Other realized capital gains
Deferred acquisition costs adjustment			(30)		111		Amortization of deferred policy acquisition costs
Future policy benefits			-		-		Policyholder benefits and losses incurred
Total			(21)		478
Change in retirement plan liabilities adjustment
Prior-service credit			1		1		*
Actuarial losses			(18)		(21)		*
Total			(17)		(20)
Total reclassifications for the period		$	(34)	$	493

*    These Accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 13 to the Condensed Consolidated Financial Statements. 

58AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |12. Earnings Per Share (EPS)

12. Earnings Per Share (EPS)

The basic EPS computation is based on the weighted average number of common shares outstanding, adjusted to reflect all stock dividends and stock splits. The diluted EPS computation is based on those shares used in the basic EPS computation plus shares that would have been outstanding assuming issuance of common shares for all dilutive potential common shares outstanding and adjusted to reflect all stock dividends and stock splits.

The following table presents the computation of basic and diluted EPS:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(dollars in millions, except per share data)		2018		2017		2018		2017
Numerator for EPS:
Income from continuing operations	$	931	$	1,110	$	1,881	$	2,321
Less: Net income (loss) from continuing operations attributable to noncontrolling interests		(6)		(12)		5		14
Income attributable to AIG common shareholders from continuing operations		937		1,122		1,876		2,307
Income (loss) from discontinued operations, net of income tax expense		-		8		(1)		8
Net income attributable to AIG common shareholders	$	937	$	1,130	$	1,875	$	2,315
Denominator for EPS:
Weighted average shares outstanding — basic		903,215,488		925,751,084		905,566,733		953,109,915
Dilutive shares		13,356,993		22,497,687		15,335,987		23,517,737
Weighted average shares outstanding — diluted(a)		916,572,481		948,248,771		920,902,720		976,627,652
Income per common share attributable to AIG:
Basic:
Income from continuing operations	$	1.04	$	1.21	$	2.07	$	2.42
Income from discontinued operations	$	-	$	0.01	$	-	$	0.01
Net income attributable to AIG	$	1.04	$	1.22	$	2.07	$	2.43
Diluted:
Income from continuing operations	$	1.02	$	1.18	$	2.04	$	2.36
Income from discontinued operations	$	-	$	0.01	$	-	$	0.01
Net income attributable to AIG	$	1.02	$	1.19	$	2.04	$	2.37

(a)  Dilutive shares included our share‑based employee compensation plans and a weighted average portion of the warrants issued to AIG shareholders as part of AIG’s recapitalization in January 2011. The number of shares excluded from diluted shares outstanding was 5.2 million and 4.2 million for the three- and six-month periods ended June 30, 2018, respectively, and 1.9 million and 1.8 million for the three- and six-month periods ended June 30, 2017, respectively, because the effect of including those shares in the calculation would have been anti-dilutive.

AIG | Second Quarter 2018 Form 10-Q59

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |13. Employee Benefits

13. Employee Benefits

We sponsor various defined benefit pension plans, post-retirement medical and life insurance plans for eligible employees and retirees in the U.S. and certain non-U.S. countries.

The following table presents the components of net periodic benefit cost with respect to pensions and other postretirement benefits:

	Pension						Postretirement
		U.S.		Non-U.S.				U.S.		Non-U.S.
(in millions)		Plans		Plans		Total		Plans		Plans		Total
Three Months Ended June 30, 2018
Components of net periodic benefit cost:
Service cost	$	2	$	5	$	7	$	1	$	1	$	2
Interest cost		40		4		44		1		1		2
Expected return on assets		(70)		(6)		(76)		-		-		-
Amortization of prior service credit		-		-		-		(1)		(1)		(2)
Amortization of net loss		7		2		9		-		-		-
Net periodic benefit cost (credit)	$	(21)	$	5	$	(16)	$	1	$	1	$	2
Three Months Ended June 30, 2017
Components of net periodic benefit cost:
Service cost	$	7	$	8	$	15	$	1	$	-	$	1
Interest cost		42		4		46		1		1		2
Expected return on assets		(64)		(6)		(70)		-		-		-
Amortization of prior service credit		-		-		-		(1)		-		(1)
Amortization of net loss		7		3		10		-		-		-
Net periodic benefit cost (credit)	$	(8)	$	9	$	1	$	1	$	1	$	2
Six Months Ended June 30, 2018
Components of net periodic benefit cost:
Service cost	$	4	$	11	$	15	$	1	$	1	$	2
Interest cost		81		8		89		3		1		4
Expected return on assets		(141)		(13)		(154)		-		-		-
Amortization of prior service cost (credit)		-		1		1		(1)		(1)		(2)
Amortization of net loss		14		4		18		-		-		-
Net periodic benefit cost (credit)	$	(42)	$	11	$	(31)	$	3	$	1	$	4
Six Months Ended June 30, 2017
Components of net periodic benefit cost:
Service cost	$	13	$	16	$	29	$	1	$	1	$	2
Interest cost		85		8		93		3		2		5
Expected return on assets		(128)		(12)		(140)		-		-		-
Amortization of prior service credit		-		-		-		(1)		-		(1)
Amortization of net loss		14		6		20		-		-		-
Net periodic benefit cost (credit)	$	(16)	$	18	$	2	$	3	$	3	$	6

For the six-month period ended June 30, 2018, we did not make any contributions to the U.S. AIG Retirement Plan.

60AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |14. Income Taxes

14. Income Taxes

U.S. Tax Reform Overview

On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the Tax Act).  The Tax Act reduced the statutory rate of U.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting AIG and the insurance industry.     

During December 2017, the SEC staff issued Staff Accounting Bulletin 118 (SAB 118), which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 addressed situations where accounting for certain income tax effects of the Tax Act under ASC 740 may be incomplete upon issuance of an entity’s financial statements and provides a one-year measurement period from the enactment date to complete the accounting under ASC 740. In accordance with SAB 118, a company was required to reflect the following:

•Income tax effects of those aspects of the Tax Act for which accounting under ASC 740 is complete

•Provisional estimate of income tax effects of the Tax Act to the extent accounting is incomplete but a reasonable estimate is determinable  

•If a provisional estimate cannot be determined, ASC 740 should still be applied on the basis of tax law provisions that were in effect immediately before the enactment of the Tax Act.

At December 31, 2017, we originally recorded a provisional estimate of income tax effects of the Tax Act of $6.7 billion, including a tax charge of $6.7 billion attributable to the reduction in the U.S. corporate income tax rate and tax benefit of $38 million related to the deemed repatriation tax. During the period ended June 30, 2018, we have not recorded any material adjustments to these provisional amounts. We continue to refine our analysis and calculations, which could impact the provisional estimates previously recorded. Accordingly, as of June 30, 2018, we have not fully completed our accounting for the tax effects of the Tax Act. 

The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. There are substantial uncertainties in the interpretation of BEAT and GILTI and formal guidance from the U.S. tax authority is still pending. Depending on the content of such guidance, changes to the interpretations and assumptions made by us, and/or actions we may take, it is possible that the impact from BEAT or GILTI could change amounts recorded, possibly materially. Consistent with accounting guidance, we treat BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner. 

Tax effects for which a reasonable estimate can be determined 

Deemed Repatriation Tax

The Tax Act requires companies to pay a one-time transition tax, net of tax credits related to applicable foreign taxes paid, on previously untaxed current and accumulated earnings and profits (E&P) of certain of our foreign subsidiaries.  In the determination of the deemed repatriation tax, we reviewed estimated post-1986 E&P of certain material relevant foreign subsidiaries, and any related non-U.S. income tax paid on such earnings. We originally recorded a provisional estimated tax benefit of $38 million at December 31, 2017. While the IRS has issued some guidance on the calculation of the deemed repatriation tax, there are still certain aspects of the calculation that require further clarification. We are continuing to gather additional information to more precisely compute the amount of deemed repatriation tax. As we continue to refine our analysis, we will refine our calculations of the one-time transition tax, which could impact the provisional estimate previously recorded.

Other Provisions

The Tax Act modified computations of insurance reserves for both life and general insurance companies.  For life insurance companies, tax reserves are now computed with reference to NAIC reserves.  For general insurance companies, the Tax Act extends the discount period for certain long-tail lines of business from 10 years to 24 years and increases the discount rate, replacing the applicable federal rate for a higher-yield corporate bond rate, and eliminates the election allowing companies to use their historical loss payment patterns for loss reserve discounting.  Adjustments related to the differences in insurance reserves balances computed under the old tax law versus the Tax Act have to be taken into income over eight years by both life and general insurance companies.  At December 31, 2017, we recorded provisional estimates with respect to such items. As of June 30, 2018, these estimates remain provisional.

AIG | Second Quarter 2018 Form 10-Q61

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |14. Income Taxes

Provisions Impacting Projections of Taxable Income and Valuation Allowance Considerations

Certain provisions of the Tax Act impact our projections of future taxable income used in analyzing realizability of our U.S. tax attribute deferred tax asset.  As discussed above, there are specific insurance industry provisions, including changes in computations of insurance reserves, amortization of specified policy acquisition expenses, and treatment of separate account dividends received deduction. Provisional estimates have been included in our future taxable income projections for these insurance industry specific provisions to reflect application of the new tax law.

Because we have made provisional estimates related to the impact of certain aspects of the Tax Act on our future taxable income, corresponding determination of the need for a valuation allowance is also provisional.  Generally, the Tax Act provisions result in an increase in our taxable income and, thus, accelerate utilization of our tax attribute deferred tax asset.  Accordingly, we do not currently anticipate that our reliance on provisional estimates would have a material impact on our determination of the realizability of our deferred tax assets.

In all cases, we will continue to refine our calculations as additional analysis is completed. Our estimates may also be impacted as additional guidance from taxing authorities is issued.

Tax effects for which no estimate can be determined

Our accounting for the following elements of the Tax Act is incomplete and we continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before enactment of the Tax Act.

The Tax Act may affect the results in certain investments and partnerships in which we are a non-controlling interest owner. The information needed to determine a provisional estimate is not currently available (such as for interest deduction limitations in those entities and the changed definition of a U.S. Shareholder). Accordingly, no provisional estimates were recorded. 

At December 31, 2017, due to minimal formal guidance issued from state and local jurisdictions, provisional estimates were not recorded for the impact of any state and local corporate income tax implications of the Tax Act.  Guidance from state and local jurisdictions has varied and most have not formally passed law specific to the treatment of the Tax Act. While we have not identified any material impact at this point in time, we continue to review any guidance issued by those states that have passed tax legislation related to the Tax Act and continue to work through the state and local corporate income tax implications of the Tax Act.  We expect further guidance throughout 2018 and the impact, if any, will be recorded when the related guidance is issued.  

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued an accounting standard that allows the optional reclassification of stranded tax effects within accumulated other comprehensive income (AOCI) that arise due to the enactment of the Tax Act to retained earnings. We elected to early adopt the standard for the three-month period ended March 31, 2018. As a result of adopting this standard, we reclassified $248 million from AOCI to retained earnings. The amount reclassified includes stranded effects related to the change in the U.S. federal corporate income tax rate on the gross temporary differences and related valuation allowances. The effect of the Tax Act on gross temporary differences related to AOCI is provisional. As we finalize the accounting for tax effects of the Tax Act on these items, additional reclassification adjustments may be recorded in future periods. 

We use an item-by-item approach to release the stranded or disproportionate income tax effects in AOCI related to our available-for-sale securities. Under this approach, a portion of the disproportionate tax effects is assigned to each individual security lot at the date the amount becomes lodged.  When the individual securities are sold, mature, or are otherwise impaired on an other-than-temporary basis, the assigned portion of the disproportionate tax effect is reclassified from AOCI to income from continuing operations.

Interim Tax Calculation Method

We use the estimated annual effective tax rate method in computing our interim tax provision. Certain items, including those deemed to be unusual, infrequent or that cannot be reliably estimated, are excluded from the estimated annual effective tax rate. In these cases, the actual tax expense or benefit is reported in the same period as the related item.  Certain tax effects are also not reflected in the estimated annual effective tax rate, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions, and are recorded in the period in which the change occurs. While certain impacts of the Tax Act are included in our annual effective tax rate, we continue to refine our calculations as additional information becomes available, which may result in changes to the estimated annual effective tax rate.

Interim Tax Expense (Benefit)

For the three-month period ended June 30, 2018, the effective tax rate on income from continuing operations was 25.6 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, additional U.S. taxes imposed on

62AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |14. Income Taxes

income of our foreign subsidiaries under international provisions of the Tax Act, valuation allowance activity related to certain foreign subsidiaries and state jurisdictions and non-deductible transfer pricing charges, partially offset by tax benefits associated with tax exempt income, and reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities.

For the six-month period ended June 30, 2018, the effective tax rate on income from continuing operations was 24.1 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, additional U.S. taxes imposed on income of our foreign subsidiaries under international provisions of the Tax Act,  valuation allowance activity related to certain foreign subsidiaries and state jurisdictions and non-deductible transfer pricing charges, partially offset by tax benefits associated with tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities and excess tax deductions related to share based compensation payments recorded through the income statement.

For the three-month period ended June 30, 2017, the effective tax rate on income from continuing operations was 33.4 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits associated with tax exempt income and reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, partially offset by tax charges related to increases in uncertain tax positions associated with the impact of settlement discussions with the IRS related to certain open tax issues.

For the six-month period ended June 30, 2017, the effective tax rate on income from continuing operations was 31.6 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits associated with tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities and excess tax deductions related to share based compensation payments recorded through the income statement, partially offset by tax charges related to increases in uncertain tax positions associated with the impact of settlement discussions with the IRS related to certain open tax issues.

As a result of the Tax Act, the majority of accumulated foreign earnings that were previously untaxed are subject to a one-time deemed repatriation tax. Going forward, certain foreign earnings of our foreign affiliates will be exempt from U.S. tax upon repatriation. Notwithstanding the changes, U.S. tax on foreign exchange gain or loss and certain non-U.S. withholding taxes will continue to be applicable upon future repatriations of foreign earnings. For the six-month period ended June 30, 2018, we still consider our foreign earnings with respect to certain operations in Canada, South Africa, the Far East, Latin America, Bermuda as well as the European, Asia Pacific and Middle East regions to be indefinitely reinvested.  These earnings relate to ongoing operations and have been reinvested in active business operations. Deferred taxes, if necessary, have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.

Assessment of Deferred Tax Asset Valuation Allowance

The evaluation of the recoverability of our deferred tax asset and the need for a valuation allowance requires us to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.

Our framework for assessing the recoverability of the deferred tax asset requires us to consider all available evidence, including:

•the nature, frequency, and amount of cumulative financial reporting income and losses in recent years;

•the sustainability of recent operating profitability of our subsidiaries;

•the predictability of future operating profitability of the character necessary to realize the net deferred tax asset;

•the carryforward period for the net operating loss, capital loss and foreign tax credit carryforwards, including the effect of reversing taxable temporary differences; and

•prudent and feasible actions and tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax asset.

In performing our assessment of the recoverability of the deferred tax asset under this framework, we consider tax laws governing the utilization of the net operating loss, capital loss and foreign tax credit carryforwards in each applicable jurisdiction.  Under U.S. tax law, a company generally must use its net operating loss carryforwards before it can use its foreign tax credit carryforwards, even though the carryforward period for the foreign tax credit is shorter than for the net operating loss.  Our U.S. federal consolidated income tax group includes both life companies and non-life companies.  While the U.S. taxable income of our non-life companies can be offset by our net operating loss carryforwards, only a portion (no more than 35 percent) of the U.S. taxable income of our life

AIG | Second Quarter 2018 Form 10-Q63

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |14. Income Taxes

companies can be offset by those net operating loss carryforwards.  The remaining tax liability of our life companies can be offset by the foreign tax credit carryforwards.  Accordingly, we utilize both the net operating loss and foreign tax credit carryforwards concurrently which enables us to realize our tax attributes prior to expiration. As of June 30, 2018, based on all available evidence, it is more likely than not that the U.S. net operating loss and foreign tax credit carryforwards will be utilized prior to expiration and, thus, no valuation allowance has been established.

Estimates of future taxable income, including income generated from prudent and feasible actions and tax planning strategies could change in the near term, perhaps materially, which may require us to consider any potential impact to our assessment of the recoverability of the deferred tax asset. Such potential impact could be material to our consolidated financial condition or results of operations for an individual reporting period.

For the three- and six-month periods ended June 30, 2018, recent changes in market conditions, including rising interest rates, impacted the unrealized tax gains and losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, resulting in a deferred tax asset related to net unrealized tax capital losses. The deferred tax asset relates to the unrealized losses for which the carryforward period has not yet begun, and as such, when assessing its recoverability, we consider our ability and intent to hold the underlying securities to recovery, as well as carryback capacity of such losses, to the extent they were to become realized. As of June 30, 2018, based on all available evidence, we concluded no valuation allowance is necessary in the U.S. Life Insurance Companies’ available for sale securities portfolio.

For the three- and six-month periods ended June 30, 2018, recent changes in market conditions, including rising interest rates, impacted the unrealized tax gains and losses in the U.S. Non-Life Companies’ available for sale securities portfolio, resulting in a decrease to the deferred tax liability related to net unrealized tax capital gains.  As of June 30, 2018, we continue to be in an overall unrealized tax gain position with respect to the U.S. Non-Life Companies’ available for sale securities portfolio and thus concluded no valuation allowance is necessary in the U.S. Non-Life Companies’ available for sale securities portfolio.

For the three- and six-month periods ended June 30, 2018, we recognized net increases of $7 million and $37 million, respectively, in our deferred tax asset valuation allowance associated with certain foreign subsidiaries and state jurisdictions, primarily attributable to current year activity.

Tax Examinations and Litigation

On August 1, 2012, we filed a motion for partial summary judgment related to the disallowance of foreign tax credits associated with cross border financing transactions in the Southern District of New York. The Southern District of New York denied our summary judgment motion and upon AIG’s appeal, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) affirmed the denial. AIG’s petition for certiorari to the U.S. Supreme Court from the decision of the Second Circuit was denied on March 7, 2016.  As a result, the case has been remanded back to the Southern District of New York for a jury trial.

In January 2018, the parties reached non-binding agreements in principle on issues presented in the dispute and are currently reviewing the computations reflecting the settlement terms. The resolution is not final and is subject to various reviews. The litigation has been stayed pending the outcome of the review process. We can provide no assurance regarding the outcome of any such litigation or whether binding compromised settlements with the parties will ultimately be reached. We currently believe that we have adequate reserves for the potential liabilities that may result from these matters.

Accounting for Uncertainty in Income Taxes

At both June 30, 2018 and December 31, 2017, our unrecognized tax benefits, excluding interest and penalties were $4.7 billion. At June 30, 2018 and December 31, 2017, our unrecognized tax benefits related to tax positions that, if recognized, would not affect the effective tax rate because they relate to such factors as the timing, rather than the permissibility, of the deduction were $45 million and $28 million, respectively.  Accordingly, at both June 30, 2018 and December 31, 2017, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.7 billion.

Interest and penalties related to unrecognized tax benefits are recognized in income tax expense.  At June 30, 2018 and December 31, 2017, we had accrued liabilities of $2.1 billion and $2.0 billion, respectively, for the payment of interest (net of the federal benefit) and penalties. For the six-month periods ended June 30, 2018 and 2017, we accrued expense (benefit) of $100 million and $75 million, respectively, for the payment of interest and penalties.

We believe it is reasonably possible that our unrecognized tax benefits could decrease within the next 12 months by as much as $3.9 billion, principally as a result of potential resolutions or settlements of prior years’ tax items. The prior years’ tax items include unrecognized tax benefits related to the deductibility of certain expenses and matters related to cross border financing transactions.                              

64AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |15. Information Provided in Connection with Outstanding Debt

15.Information Provided in Connection with Outstanding Debt

The following Condensed Consolidating Financial Statements reflect the results of AIG Life Holdings, Inc. (AIGLH), a holding company and a wholly owned subsidiary of AIG. AIG provides a full and unconditional guarantee of all outstanding debt of AIGLH.

Condensed Consolidating Balance Sheets

		American
		International						Reclassifications
		Group, Inc.				Other		and	Consolidated
(in millions)	(As Guarantor)			AIGLH		Subsidiaries		Eliminations		AIG
June 30, 2018
Assets:
Short-term investments(a)	$	9,212	$	-	$	10,673	$	(2,875)	$	17,010
Other investments(b)		3,852		-		298,896		-		302,748
Total investments		13,064		-		309,569		(2,875)		319,758
Cash		3		3		2,129		-		2,135
Loans to subsidiaries(c)		34,954		-		545		(35,499)		-
Investment in consolidated subsidiaries(c)		34,689		26,840		-		(61,529)		-
Other assets, including deferred income taxes(d)		15,899		168		160,720		(1,851)		174,936
Total assets	$	98,609	$	27,011	$	472,963	$	(101,754)	$	496,829
Liabilities:
Insurance liabilities	$	-	$	-	$	283,443	$	-	$	283,443
Long-term debt		22,653		642		10,489		-		33,784
Other liabilities, including intercompany balances(b)		14,224		144		108,209		(4,772)		117,805
Loans from subsidiaries(c)		546		-		34,953		(35,499)		-
Total liabilities		37,423		786		437,094		(40,271)		435,032
Total AIG shareholders’ equity		61,186		26,225		35,258		(61,483)		61,186
Non-redeemable noncontrolling interests		-		-		611		-		611
Total equity		61,186		26,225		35,869		(61,483)		61,797
Total liabilities and equity	$	98,609	$	27,011	$	472,963	$	(101,754)	$	496,829
December 31, 2017
Assets:
Short-term investments(a)	$	2,541	$	-	$	11,559	$	(3,714)	$	10,386
Other investments(b)		6,004		-		305,902		-		311,906
Total investments		8,545		-		317,461		(3,714)		322,292
Cash		3		20		2,339		-		2,362
Loans to subsidiaries(c)		35,004		-		517		(35,521)		-
Investment in consolidated subsidiaries(c)		40,135		30,359		-		(70,494)		-
Other assets, including deferred income taxes(d)		16,016		170		159,594		(2,133)		173,647
Total assets	$	99,703	$	30,549	$	479,911	$	(111,862)	$	498,301
Liabilities:
Insurance liabilities	$	-	$	-	$	282,105	$	-	$	282,105
Long-term debt		21,557		642		9,441		-		31,640
Other liabilities, including intercompany balances(b)		12,458		143		112,275		(6,028)		118,848
Loans from subsidiaries(c)		517		-		35,004		(35,521)		-
Total liabilities		34,532		785		438,825		(41,549)		432,593
Total AIG shareholders’ equity		65,171		29,764		40,549		(70,313)		65,171
Non-redeemable noncontrolling interests		-		-		537		-		537
Total equity		65,171		29,764		41,086		(70,313)		65,708
Total liabilities and equity	$	99,703	$	30,549	$	479,911	$	(111,862)	$	498,301

(a)  At June 30, 2018, includes restricted cash of $1 million and $17 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively. At December 31, 2017, includes restricted cash of $4 million and $54 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively.

(b)  Includes intercompany derivative positions, which are reported at fair value before credit valuation adjustment.

(c)  Eliminated in consolidation.

(d)  At June 30, 2018, includes restricted cash of $1 million and $226 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively. At December 31, 2017, includes restricted cash of $1 million and $316 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively.

AIG | Second Quarter 2018 Form 10-Q65

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |15. Information Provided in Connection with Outstanding Debt

Condensed Consolidating Statements of Income

		American
		International						Reclassifications
		Group, Inc.				Other		and		Consolidated
(in millions)		(As Guarantor)		AIGLH		Subsidiaries		Eliminations		AIG
Three Months Ended June 30, 2018
Revenues:
Equity in earnings of consolidated subsidiaries*	$	845	$	459	$	-	$	(1,304)	$	-
Other income		309		-		11,179		143		11,631
Total revenues		1,154		459		11,179		(1,161)		11,631
Expenses:
Interest expense		246		13		43		(3)		299
Loss on extinguishment of debt		-		-		5		-		5
Other expenses		359		-		9,738		(22)		10,075
Total expenses		605		13		9,786		(25)		10,379
Income (loss) from continuing operations before income tax
expense (benefit)		549		446		1,393		(1,136)		1,252
Income tax expense (benefit)		(389)		(1)		711		-		321
Income (loss) from continuing operations		938		447		682		(1,136)		931
Income (loss) from discontinued operations, net
of income taxes		(1)		-		1		-		-
Net income (loss)		937		447		683		(1,136)		931
Less:
Net loss from continuing operations
attributable to noncontrolling interests		-		-		(6)		-		(6)
Net income (loss) attributable to AIG	$	937	$	447	$	689	$	(1,136)	$	937
Three Months Ended June 30, 2017
Revenues:
Equity in earnings of consolidated subsidiaries*	$	1,430	$	815	$	-	$	(2,245)	$	-
Other income		232		-		12,248		22		12,502
Total revenues		1,662		815		12,248		(2,223)		12,502
Expenses:
Interest expense		241		13		39		(1)		292
Gain on extinguishment of debt		-		-		(4)		-		(4)
Other expenses		181		-		10,386		(20)		10,547
Total expenses		422		13		10,421		(21)		10,835
Income (loss) from continuing operations before income tax
expense (benefit)		1,240		802		1,827		(2,202)		1,667
Income tax expense (benefit)		109		(4)		452		-		557
Income (loss) from continuing operations		1,131		806		1,375		(2,202)		1,110
Income (loss) from discontinued operations, net
of income taxes		(1)		-		9		-		8
Net income (loss)		1,130		806		1,384		(2,202)		1,118
Less:
Net loss from continuing operations
attributable to noncontrolling interests		-		-		(12)		-		(12)
Net income (loss) attributable to AIG	$	1,130	$	806	$	1,396	$	(2,202)	$	1,130

66AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |15. Information Provided in Connection with Outstanding Debt

		American
		International						Reclassifications
		Group, Inc.				Other		and		Consolidated
(in millions)		(As Guarantor)		AIGLH		Subsidiaries		Eliminations		AIG
Six Months Ended June 30, 2018
Revenues:
Equity in earnings of consolidated subsidiaries*	$	1,878	$	1,181	$	-	$	(3,059)	$	-
Other income		567		-		22,691		85		23,343
Total revenues		2,445		1,181		22,691		(2,974)		23,343
Expenses:
Interest expense		466		25		91		(6)		576
Loss on extinguishment of debt		-		-		9		-		9
Other expenses		511		1		19,844		(77)		20,279
Total expenses		977		26		19,944		(83)		20,864
Income (loss) from continuing operations before income tax
expense (benefit)		1,468		1,155		2,747		(2,891)		2,479
Income tax expense (benefit)		(408)		2		1,004		-		598
Income (loss) from continuing operations		1,876		1,153		1,743		(2,891)		1,881
Loss from discontinued operations, net
of income taxes		(1)		-		-		-		(1)
Net income (loss)		1,875		1,153		1,743		(2,891)		1,880
Less:
Net income from continuing operations
attributable to noncontrolling interests		-		-		5		-		5
Net income (loss) attributable to AIG	$	1,875	$	1,153	$	1,738	$	(2,891)	$	1,875
Six Months Ended June 30, 2017
Revenues:
Equity in earnings of consolidated subsidiaries*	$	2,892	$	1,415	$	-	$	(4,307)	$	-
Other income		428		-		24,630		76		25,134
Total revenues		3,320		1,415		24,630		(4,231)		25,134
Expenses:
Interest expense		483		25		85		(3)		590
Gain on extinguishment of debt		-		-		(5)		-		(5)
Other expenses		516		1		20,711		(73)		21,155
Total expenses		999		26		20,791		(76)		21,740
Income (loss) from continuing operations before income tax
expense (benefit)		2,321		1,389		3,839		(4,155)		3,394
Income tax expense (benefit)		5		(8)		1,076		-		1,073
Income (loss) from continuing operations		2,316		1,397		2,763		(4,155)		2,321
Income (loss) from discontinued operations, net
of income taxes		(1)		-		9		-		8
Net income (loss)		2,315		1,397		2,772		(4,155)		2,329
Less:
Net income from continuing operations
attributable to noncontrolling interests		-		-		14		-		14
Net income (loss) attributable to AIG	$	2,315	$	1,397	$	2,758	$	(4,155)	$	2,315

*    Eliminated in consolidation.

AIG | Second Quarter 2018 Form 10-Q67

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |15. Information Provided in Connection with Outstanding Debt

Condensed Consolidating Statements of Comprehensive Income

		American
		International						Reclassifications
		Group, Inc.				Other		and		Consolidated
(in millions)		(As Guarantor)		AIGLH		Subsidiaries		Eliminations		AIG
Three Months Ended June 30, 2018
Net income (loss)	$	937	$	447	$	683	$	(1,136)	$	931
Other comprehensive income (loss)		(1,990)		(1,510)		(651)		2,161		(1,990)
Comprehensive income (loss)		(1,053)		(1,063)		32		1,025		(1,059)
Total comprehensive loss attributable to
noncontrolling interests		-		-		(6)		-		(6)
Comprehensive income (loss) attributable to AIG	$	(1,053)	$	(1,063)	$	38	$	1,025	$	(1,053)
Three Months Ended June 30, 2017
Net income (loss)	$	1,130	$	806	$	1,384	$	(2,202)	$	1,118
Other comprehensive income (loss)		1,181		1,122		(1,541)		419		1,181
Comprehensive income (loss)		2,311		1,928		(157)		(1,783)		2,299
Total comprehensive loss attributable to
noncontrolling interests		-		-		(12)		-		(12)
Comprehensive income (loss) attributable to AIG	$	2,311	$	1,928	$	(145)	$	(1,783)	$	2,311
Six Months Ended June 30, 2018
Net income (loss)	$	1,875	$	1,153	$	1,743	$	(2,891)	$	1,880
Other comprehensive income (loss)		(4,659)		3,440		14,004		(17,444)		(4,659)
Comprehensive income (loss)		(2,784)		4,593		15,747		(20,335)		(2,779)
Total comprehensive income attributable to
noncontrolling interests		-		-		5		-		5
Comprehensive income (loss) attributable to AIG	$	(2,784)	$	4,593	$	15,742	$	(20,335)	$	(2,784)
Six Months Ended June 30, 2017
Net income (loss)	$	2,315	$	1,397	$	2,772	$	(4,155)	$	2,329
Other comprehensive income (loss)		1,732		5,782		49,489		(55,271)		1,732
Comprehensive income (loss)		4,047		7,179		52,261		(59,426)		4,061
Total comprehensive income attributable to
noncontrolling interests		-		-		14		-		14
Comprehensive income (loss) attributable to AIG	$	4,047	$	7,179	$	52,247	$	(59,426)	$	4,047

68AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |15. Information Provided in Connection with Outstanding Debt

Condensed Consolidating Statements of Cash Flows

		American
		International					Reclassifications
		Group, Inc.				Other		and		Consolidated
(in millions)	(As Guarantor)			AIGLH		Subsidiaries		Eliminations		AIG
Six Months Ended June 30, 2018
Net cash (used in) provided by operating activities	$	1,312	$	1,211	$	(849)	$	(2,014)	$	(340)
Cash flows from investing activities:
Sales of investments		3,800		-		29,992		(2,628)		31,164
Sales of divested businesses, net		-		-		10		-		10
Purchase of investments		(1,327)		-		(29,805)		2,628		(28,504)
Loans to subsidiaries - net		422		-		(25)		(397)		-
Contributions from (to) subsidiaries - net		57		-		-		(57)		-
Net change in short-term investments		(4,017)		-		177		-		(3,840)
Other, net		(51)		-		(249)		-		(300)
Net cash (used in) provided by investing activities		(1,116)		-		100		(454)		(1,470)
Cash flows from financing activities:
Issuance of long-term debt		2,472		-		1,032		-		3,504
Repayments of long-term debt		(1,313)		-		(646)		-		(1,959)
Purchase of common stock		(646)		-		-		-		(646)
Intercompany loans - net		25		-		(422)		397		-
Cash dividends paid		(575)		(1,228)		(786)		2,014		(575)
Other, net		(162)		-		1,204		57		1,099
Net cash (used in) provided by financing activities		(199)		(1,228)		382		2,468		1,423
Effect of exchange rate changes on cash and
restricted cash		-		-		30		-		30
Change in cash and restricted cash		(3)		(17)		(337)		-		(357)
Cash and restricted cash at beginning of year		8		20		2,709		-		2,737
Cash and restricted cash at end of period	$	5	$	3	$	2,372	$	-	$	2,380
Six Months Ended June 30, 2017
Net cash (used in) provided by operating activities	$	665	$	629	$	(8,973)	$	(1,357)	$	(9,036)
Cash flows from investing activities:
Sales of investments		5,030		-		44,776		(3,398)		46,408
Sales of divested businesses, net		-		-		538		-		538
Purchase of investments		(1,158)		-		(34,591)		3,398		(32,351)
Loans to subsidiaries - net		350		-		73		(423)		-
Contributions from (to) subsidiaries - net		931		-		-		(931)		-
Net change in short-term investments		405		-		642		-		1,047
Other, net		(46)		-		(871)		-		(917)
Net cash (used in) provided by investing activities		5,512		-		10,567		(1,354)		14,725
Cash flows from financing activities:
Issuance of long-term debt		1,108		-		1,113		-		2,221
Repayments of long-term debt		(606)		-		(1,000)		-		(1,606)
Purchase of common stock		(6,000)		-		-		-		(6,000)
Intercompany loans - net		(73)		-		(350)		423		-
Cash dividends paid		(597)		(652)		(705)		1,357		(597)
Other, net		(3)		-		27		931		955
Net cash (used in) provided by financing activities		(6,171)		(652)		(915)		2,711		(5,027)
Effect of exchange rate changes on cash and
restricted cash		-		-		(25)		-		(25)
Change in cash and restricted cash		6		(23)		654		-		637
Cash and restricted cash at beginning of year		3		34		2,070		-		2,107
Change in cash of businesses held for sale		-		-		66		-		66
Cash and restricted cash at end of period	$	9	$	11	$	2,790	$	-	$	2,810

AIG | Second Quarter 2018 Form 10-Q69

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |15. Information Provided in Connection with Outstanding Debt

Supplementary Disclosure of Condensed Consolidating Cash Flow Information

		American
		International					Reclassifications
		Group, Inc.				Other		and		Consolidated
(in millions)	(As Guarantor)			AIGLH		Subsidiaries		Eliminations		AIG
June 30, 2018
Cash	$	3	$	3	$	2,129	$	-	$	2,135
Restricted cash included in Short-term investments		1		-		17		-		18
Restricted cash included in Other assets		1		-		226		-		227
Total cash and restricted cash shown in the Condensed
Consolidating Statements of Cash Flows	$	5	$	3	$	2,372	$	-	$	2,380
Cash (paid) received during the 2018 period for:
Interest:
Third party	$	(478)	$	(23)	$	(163)	$	-	$	(664)
Intercompany		(1)		(1)		2		-		-
Taxes:
Income tax authorities	$	(17)	$	-	$	(23)	$	-	$	(40)
Intercompany		846		-		(846)		-		-
June 30, 2017
Cash	$	5	$	11	$	2,501	$	-	$	2,517
Restricted cash included in Short-term investments		3		-		56		-		59
Restricted cash included in Other assets		1		-		233		-		234
Total cash and restricted cash shown in the Condensed
Consolidating Statements of Cash Flows	$	9	$	11	$	2,790	$	-	$	2,810
Cash (paid) received during the 2017 period for:
Interest:
Third party	$	(513)	$	-	$	(169)	$	-	$	(682)
Intercompany		-		-		-		-		-
Taxes:
Income tax authorities	$	(280)	$	-	$	(122)	$	-	$	(402)
Intercompany		1,495		-		(1,495)		-		-

American International Group, Inc. (As Guarantor) Supplementary Disclosure of Non-Cash Activities:

Six Months Ended June 30,
(in millions)		2018		2017
Intercompany non-cash financing and investing activities:
Capital contributions	$	2,339	$	198
Dividends received in the form of securities		60		735
Return of capital		2,706		26

70AIG | Second Quarter 2018 Form 10-Q

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |16. Subsequent Events

16. Subsequent Events  

ACQUISITION OF BUSINESS

On July 18, 2018, we completed our acquisition of Validus Holdings, Ltd. (Validus), a leading provider of reinsurance, primary insurance, and asset management services, for approximately $5.5 billion in cash. We are completing our valuation of the assets acquired and liabilities assumed as well as the related goodwill and other intangible assets. The results of Validus following the date of the acquisition will be included in our General Insurance segment starting in the third quarter of 2018.

SALE OF NON-CONTROLLING INTEREST IN DSA RE

DSA Re was formed during the first quarter of 2018 in connection with a series of affiliated reinsurance transactions related to our Legacy Portfolio. Those reinsurance transactions were designed to consolidate most of our Legacy Insurance Run-Off Lines into a single legal entity. As of June 30, 2018, the affiliated transactions included the cession of approximately $31 billion of reserves from our Legacy Life and Retirement Run-Off Lines and approximately $5 billion of reserves from our Legacy General Insurance Run-Off Lines related to business written by multiple wholly-owned AIG subsidiaries.

On July 31, 2018, we entered into a membership interest purchase agreement with Fortitude Group Holdings, LLC (Fortitude), a wholly-owned subsidiary of AIG, and TC Group Cayman Investment Holdings, L.P. (TCG), an affiliate of The Carlyle Group L.P.  We formed Fortitude to act as a holding company for DSA Re. Subject to the satisfaction or waiver of certain conditions in the purchase agreement, TCG will purchase a 19.9 percent ownership interest in Fortitude. Following the closing of the transaction, Fortitude will own 100 percent of the outstanding common shares of DSA Re and AIG will have an 80.1 percent ownership interest in Fortitude.

Dividends Declared

On August 2, 2018, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on September 28, 2018 to shareholders of record on September 17, 2018.

AIG | Second Quarter 2018 Form 10-Q71

ITEM 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations

Glossary and Acronyms of Selected Insurance Terms and References

Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), we use certain terms and abbreviations, which are summarized in the Glossary and Acronyms.

American International Group, Inc. (AIG) has incorporated into this discussion a number of cross-references to additional information included throughout this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2017 (the 2017 Annual Report) to assist readers seeking additional information related to a particular subject.

In this Quarterly Report on Form 10-Q, unless otherwise mentioned or unless the context indicates otherwise, we use the terms “AIG,” the “Company,” “we,” “us” and “our” to refer to American International Group, Inc., a Delaware corporation, and its consolidated subsidiaries. We use the term “AIG Parent” to refer solely to American International Group, Inc., and not to any of its consolidated subsidiaries.

Cautionary Statement Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q and other publicly available documents may include, and officers and representatives of AIG may from time to time make and discuss, projections, goals, assumptions and statements that may constitute “forward‑looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These projections, goals, assumptions and statements are not historical facts but instead represent only a belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These projections, goals, assumptions and statements include statements preceded by, followed by or including words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “focused on achieving,” “view,” “target,” "goal" or “estimate.” These projections, goals, assumptions and statements may relate to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, anticipated organizational, business or regulatory changes, anticipated sales, monetization and/or acquisitions of businesses or assets or successful integration of acquired businesses, management succession and retention plans, exposure to risk, trends in operations and financial results.

It is possible that our actual results and financial condition will differ, possibly materially, from the results and financial condition indicated in these projections, goals, assumptions and statements. Factors that could cause our actual results to differ, possibly materially, from those in the specific projections, goals, assumptions and statements include:

•changes in market and industry conditions; •negative impacts on customers, business partners and other stakeholders; •the occurrence of catastrophic events, both natural and man-made; •our ability to successfully reorganize our businesses, as well as improve profitability, without negatively impacting client relationships or our competitive position; •our ability to successfully dispose of, monetize and/or acquire businesses or assets or successfully integrate acquired businesses; •changes in judgments concerning insurance underwriting and insurance liabilities; •changes in judgments concerning potential cost saving opportunities; •the impact of potential information technology, cybersecurity or data security breaches, including as a result of cyber-attacks or security vulnerabilities; •disruptions in the availability of our electronic data systems or those of third parties; •our ability to successfully manage Legacy portfolios; •concentrations in our investment portfolios; •actions by credit rating agencies; •the requirements, which may change from time to time, of the global regulatory framework to which we are subject, including as a global systemically important insurer (G-SII); •significant legal, regulatory or governmental proceedings; •changes in judgments concerning the recognition of deferred tax assets; and •such other factors discussed in: –Part I, Item 2. MD&A and Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q; –Part I, Item 2. MD&A of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018; and ���Part I, Item 1A. Risk Factors and Part II, Item 7. MD&A of the 2017 Annual Report.

We are not under any obligation (and expressly disclaim any obligation) to update or alter any projections, goals, assumptions or other statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise.

72AIG | Second Quarter 2018 Form 10-Q

INDEX TO ITEM 2
	Page
Use of Non-GAAP Measures	74
Critical Accounting Estimates	76
Executive Summary	77
Overview	77
Financial Performance Summary	79
AIG's Outlook – Industry and Economic Factors	83
Consolidated Results of Operations	87
Business Segment Operations	94
General Insurance	95
Life and Retirement	108
Other Operations	126
Legacy Portfolio	127
Investments	131
Overview	131
Investment Highlights in the Six Months Ended June 30, 2018	131
Investment Strategies	131
Credit Ratings	133
Impairments	139
Insurance Reserves	143
Loss Reserves	143
Life and Annuity Reserves and DAC	148
Liquidity and Capital Resources	153
Overview	153
Analysis of Sources and Uses of Cash	155
Liquidity and Capital Resources of AIG Parent and Subsidiaries	156
Credit Facilities	158
Contractual Obligations	159
Off-Balance Sheet Arrangements and Commercial Commitments	160
Debt	162
Credit Ratings	164
Financial Strength Ratings	165
Regulation and Supervision	165
Dividends and Repurchases of AIG Common Stock	165
Dividend Restrictions	166
Enterprise Risk Management	166
Overview	166
Credit Risk Management	166
Market Risk Management	167
Liquidity Risk Management	171
Regulatory Environment	173
Glossary	174
Acronyms	177

AIG | Second Quarter 2018 Form 10-Q73

ITEM 2 | Use of Non-GAAP Measures

Use of Non-GAAP Measures

Throughout this MD&A, we present our financial condition and results of operations in the way we believe will be most meaningful and representative of our business results. Some of the measurements we use are “non‑GAAP financial measures” under Securities and Exchange Commission rules and regulations. GAAP is the acronym for “generally accepted accounting principles” in the United States. The non‑GAAP financial measures we present may not be comparable to similarly‑named measures reported by other companies.

Book value per common share, excluding accumulated other comprehensive income (AOCI) and Book value per common share, excluding AOCI and deferred tax assets (DTA) (Adjusted book value per common share) are used to show the amount of our net worth on a per-share basis. We believe these measures are useful to investors because they eliminate items that can fluctuate significantly from period to period, including changes in fair value of our available for sale securities portfolio, foreign currency translation adjustments and U.S. tax attribute deferred tax assets. These measures also eliminate the asymmetrical impact resulting from changes in fair value of our available for sale securities portfolio wherein there is largely no offsetting impact for certain related insurance liabilities. We exclude deferred tax assets representing U.S. tax attributes related to net operating loss carryforwards and foreign tax credits as they have not yet been utilized. Amounts for interim periods are estimates based on projections of full-year attribute utilization. As net operating loss carryforwards and foreign tax credits are utilized, the portion of the DTA utilized is included in these book value per common share metrics. Book value per common share excluding AOCI, is derived by dividing total AIG shareholders’ equity, excluding AOCI, by total common shares outstanding. Adjusted book value per common share is derived by dividing total AIG shareholders’ equity, excluding AOCI and DTA (Adjusted Shareholders’ Equity), by total common shares outstanding. The reconciliation to book value per common share, the most comparable GAAP measure, is presented in the Executive Summary section of this MD&A.

Return on equity – Adjusted after-tax income excluding AOCI and DTA (Adjusted return on equity) is used to show the rate of return on shareholders’ equity. We believe this measure is useful to investors because it eliminates items that can fluctuate significantly from period to period, including changes in fair value of our available for sale securities portfolio, foreign currency translation adjustments and U.S. tax attribute deferred tax assets. This measure also eliminates the asymmetrical impact resulting from changes in fair value of our available for sale securities portfolio wherein there is largely no offsetting impact for certain related insurance liabilities. We exclude deferred tax assets representing U.S. tax attributes related to net operating loss carryforwards and foreign tax credits as they have not yet been utilized. Amounts for interim periods are estimates based on projections of full-year attribute utilization. As net operating loss carryforwards and foreign tax credits are utilized, the portion of the DTA utilized is included in Adjusted return on equity. Adjusted return on equity is derived by dividing actual or annualized adjusted after-tax income attributable to AIG by average Adjusted Shareholders’ Equity. The reconciliation to return on equity, the most comparable GAAP measure, is presented in the Executive Summary section of this MD&A.

Adjusted after-tax income attributable to AIG is derived by excluding the tax effected adjusted pre-tax income (APTI) adjustments described below and the following tax items from net income attributable to AIG:

•deferred income tax valuation allowance releases and charges;

•changes in uncertain tax positions and other tax items related to legacy matters having no relevance to our current businesses or operating performance; and

•net tax charge related to the enactment of the Tax Cuts and Jobs Act (Tax Act).

We use the following operating performance measures because we believe they enhance the understanding of the underlying profitability of continuing operations and trends of our business segments. We believe they also allow for more meaningful comparisons with our insurance competitors. When we use these measures, reconciliations to the most comparable GAAP measure are provided on a consolidated basis in the Consolidated Results of Operations section of this MD&A.

Adjusted revenues exclude Net realized capital gains (losses), income from non-operating litigation settlements (included in Other income for GAAP purposes) and changes in fair value of securities used to hedge guaranteed living benefits (included in Net investment income for GAAP purposes). Adjusted revenues is a GAAP measure for our operating segments.

74AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Use of Non-GAAP Measures

Adjusted pre-tax income is derived by excluding the items set forth below from income from continuing operations before income tax. This definition is consistent across our segments. These items generally fall into one or more of the following broad categories: legacy matters having no relevance to our current businesses or operating performance; adjustments to enhance transparency to the underlying economics of transactions; and measures that we believe to be common to the industry. APTI is a GAAP measure for our segments. Excluded items include the following:

•changes in fair value of securities used to hedge guaranteed living benefits; •changes in benefit reserves and deferred policy acquisition costs (DAC), value of business acquired (VOBA), and sales inducement assets (SIA) related to net realized capital gains and losses; •loss (gain) on extinguishment of debt; •all net realized capital gains and losses except earned income (periodic settlements and changes in settlement accruals) on derivative instruments used for non-qualifying (economic) hedging or for asset replication. Earned income on such economic hedges is reclassified from net realized capital gains and losses to specific APTI line items based on the economic risk being hedged (e.g. net investment income and interest credited to policyholder account balances); •income or loss from discontinued operations; •net loss reserve discount benefit (charge); •pension expense related to a one-time lump sum payment to former employees; •income and loss from divested businesses; •non-operating litigation reserves and settlements; •restructuring and other costs related to initiatives designed to reduce operating expenses, improve efficiency and simplify our organization; and •the portion of favorable or unfavorable prior year reserve development for which we have ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain.

·General Insurance

–   Ratios:We, along with most property and casualty insurance companies, use the loss ratio, the expense ratio and the combined ratio as measures of underwriting performance. These ratios are relative measurements that describe, for every $100 of net premiums earned, the amount of losses and loss adjustment expenses (which for General Insurance excludes net loss reserve discount), and the amount of other underwriting expenses that would be incurred. A combined ratio of less than 100 indicates underwriting income and a combined ratio of over 100 indicates an underwriting loss. Our ratios are calculated using the relevant segment information calculated under GAAP, and thus may not be comparable to similar ratios calculated for regulatory reporting purposes. The underwriting environment varies across countries and products, as does the degree of litigation activity, all of which affect such ratios. In addition, investment returns, local taxes, cost of capital, regulation, product type and competition can have an effect on pricing and consequently on profitability as reflected in underwriting income and associated ratios.

–   Accident year loss and combined ratios, as adjusted:both the accident year loss and combined ratios, as adjusted, exclude catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting. Natural and man-made catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and also include certain man-made events, such as terrorism and civil disorders that meet the $10 million threshold. We believe the as adjusted ratios are meaningful measures of our underwriting results on an ongoing basis as they exclude catastrophes and the impact of reserve discounting which are outside of management’s control. We also exclude prior year development to provide transparency related to current accident year results.

·Life and Retirement

–Premiums and deposits: includes direct and assumed amounts received and earned on traditional life insurance policies, group benefit policies and life‑contingent payout annuities, as well as deposits received on universal life, investment‑type annuity contracts, Federal Home Loan Bank (FHLB) funding agreements and mutual funds.

Results from discontinued operations are excluded from all of these measures.

AIG | Second Quarter 2018 Form 10-Q75

ITEM 2 |Critical Accounting Estimates

Critical Accounting Estimates

The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment.

The accounting policies that we believe are most dependent on the application of estimates and assumptions, which are critical accounting estimates, are related to the determination of:

•loss reserves;

•reinsurance assets;

•valuation of future policy benefit liabilities and timing and extent of loss recognition;

•valuation of liabilities for guaranteed benefit features of variable annuity products;

•estimated gross profits to value deferred acquisition costs for investment-oriented products;

•impairment charges, including other-than-temporary impairments on available for sale securities, impairments on other invested assets, including investments in life settlements, and goodwill impairment;

•liability for legal contingencies;

•fair value measurements of certain financial assets and liabilities; and

•income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax operating profitability of the character necessary to realize the net deferred tax asset and provisional estimates associated with the Tax Act.

These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of operations and cash flows could be materially affected.

For a complete discussion of our critical accounting estimates, see Part II, Item 7. MD&A — Critical Accounting Estimates in the 2017 Annual Report.

76AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Executive Summary

Executive Summary

Overview

This overview of the MD&A highlights selected information and may not contain all of the information that is important to current or potential investors in our securities. You should read this Quarterly Report on Form 10-Q, together with the 2017 Annual Report,  in their entirety for a more detailed description of events, trends, uncertainties, risks and critical accounting estimates affecting us.

On July 18, 2018, we completed our acquisition of Validus Holdings, Ltd. (Validus), a leading provider of reinsurance, primary insurance, and asset management services, for approximately $5.5 billion in cash. This transaction strengthens our global General Insurance business by expanding our current product portfolio through additional distribution channels and advancing the tools available to enhance underwriting.  The results of Validus following the date of the acquisition will be included in our General Insurance segment starting in the third quarter of 2018.  North America will include the results of Validus Reinsurance, Ltd., AlphaCat Reinsurance Ltd., Western World Insurance Group, Inc. and Crop Risk Services, Inc. International will include the results of Talbot Holdings Ltd.

In February 2018, we closed a series of affiliated reinsurance transactions impacting the Legacy Portfolio. These transactions were designed to consolidate most of our Legacy Insurance Run-Off Lines into a single legal entity, DSA Reinsurance Company, Ltd. (DSA Re), a Bermuda domiciled composite reinsurer, 100 percent owned by AIG. The transactions include the cession of approximately $31 billion of reserves from our Legacy Life and Retirement Run-Off Lines and approximately $5 billion of reserves from our Legacy General Insurance Run-Off Lines relating to business written by multiple AIG legal entities. This represented over 75 percent of the insurance reserves in the Legacy Portfolio as of December 31, 2017. DSA Re has approximately $42 billion of total assets, managed by AIG Investments, and is AIG’s main run-off reinsurer with its own dedicated management team.

On July 31, 2018, we entered into a membership interest purchase agreement with Fortitude Group Holdings, LLC (Fortitude), a wholly-owned subsidiary of AIG, and TC Group Cayman Investment Holdings, L.P. (TCG), an affiliate of The Carlyle Group L.P. We formed Fortitude to act as a holding company for DSA Re.  Subject to the satisfaction or waiver of certain conditions in the purchase agreement, TCG will purchase a 19.9 percent ownership interest in Fortitude. As of the closing of the transaction, Fortitude will own 100 percent of the outstanding common shares of DSA Re and AIG will have an 80.1 percent ownership interest in Fortitude.

See Business Segment Operations – Legacy Portfolio.

AIG | Second Quarter 2018 Form 10-Q77

ITEM 2 |Executive Summary

AIG’S OPERATING STRUCTURE

Our Core businesses include General Insurance, Life and Retirement and Other Operations. General Insurance consists of two operating segments – North America and International. Life and Retirement consists of four operating segments – Individual Retirement, Group Retirement, Life Insurance and Institutional Markets. Blackboard U.S. Holdings, Inc. (Blackboard), AIG’s technology-driven subsidiary, is reported within Other Operations. We also report a Legacy Portfolio consisting of our run-off insurance lines and legacy investments that we consider non-core. Effective February 2018, our Bermuda domiciled composite reinsurer, DSA Re is included in our Legacy Portfolio.

Consistent with how we now manage our business, our General Insurance North America operating segment primarily includes insurance businesses in the United States, Canada and Bermuda. Our General Insurance International operating segment includes insurance businesses in Japan, the United Kingdom, Europe, the Asia Pacific region, Latin America, Puerto Rico, Australia, the Middle East and Africa. General Insurance results are presented before consideration of internal reinsurance agreements.

Business Segments

General Insurance General Insurance is a leading provider of insurance products and services for commercial and personal insurance customers. It includes one of the world’s most far-reaching property casualty networks. General Insurance offers a broad range of products to customers through a diversified, multichannel distribution network. Customers value General Insurance’s strong capital position, extensive risk management and claims experience and its ability to be a market leader in critical lines of the insurance business.	Life and Retirement Life and Retirement is a unique franchise that brings together a broad portfolio of life insurance, retirement and institutional products offered through an extensive, multichannel distribution network. It holds long-standing, leading market positions in many of the markets it serves in the U.S. With its strong capital position, customer-focused service, breadth of product expertise and deep distribution relationships across multiple channels, Life and Retirement is well positioned to serve growing market needs.
General Insurance includes the following major operating companies: National Union Fire Insurance Company of Pittsburgh, Pa. (National Union); American Home Assurance Company (American Home); Lexington Insurance Company (Lexington); AIG General Insurance Company, Ltd. (AIG Sonpo);  AIG Asia Pacific Insurance, Pte, Ltd. and AIG Europe Limited.	Life and Retirement includes the following major operating companies: American General Life Insurance Company (American General Life); The Variable Annuity Life Insurance Company (VALIC), The United States Life Insurance Company in the City of New York (U.S. Life), Laya Healthcare Limited and AIG Life Limited.
Other Operations Other Operations consists of businesses and items not attributed to our General Insurance and Life and Retirement segments or our Legacy Portfolio. It includes AIG Parent; Blackboard; AIG Fuji Life Insurance Company, Ltd. (Fuji Life), which was sold on April 30, 2017; deferred tax assets related to tax attributes; corporate expenses and intercompany eliminations.	Legacy Portfolio Legacy Portfolio includes Legacy Life and Retirement Run-Off Lines, Legacy General Insurance Run-Off Lines, and Legacy Investments. Effective February 2018, DSA Re, a Bermudian composite reinsurer, is included in our Legacy Portfolio.

78AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Executive Summary

Financial Performance Summary

Net Income Attributable To AIG Three Months Ended June 30, (in millions)

Quarterly 2018 and 2017 Comparison Decreased due to: •lower investment returns on alternative investments, primarily driven by less robust private equity and hedge fund performance compared to the same period in 2017, and a decline in income from securities for which the fair value option was elected as a result of credit spread widening and rising interest rates; •lower premiums due to the sale of Fuji Life in the second quarter of 2017; and •higher general and other operating expenses. This decrease was partially offset by:  •lower policyholder benefits and losses incurred driven by pre-tax favorable prior year loss reserve development in the three-month period ended June 30, 2018 compared to pre-tax unfavorable prior year loss reserve development in the three-month period ended June 30, 2017; •net realized capital gains in the three-month period ended June 30, 2018 compared to net realized capital losses in the three-month period ended June 30, 2017; and •gains on sale of divested businesses in the three-month period ended June 30, 2018 compared to losses on sale of divested businesses in the three-month period ended June 30, 2017. For further discussion see Consolidated Results of Operations.

AIG | Second Quarter 2018 Form 10-Q79

ITEM 2 |Executive Summary

Net Income Attributable To AIG Six Months Ended June 30, (in millions)
	Year-to-Date 2018 and 2017 Comparison Decreased due to: •lower investment returns on alternative investments, primarily driven by less robust private equity and hedge fund performance compared to the same period in 2017, a decline in income from securities for which the fair value option was elected as a result of credit spread widening and rising interest rates, and lower invested assets resulting from the funding of the adverse development reinsurance agreement with NICO late in the first quarter of 2017; and •lower premiums due to the sale of Fuji Life in the second quarter of 2017. This decrease was partially offset by:  •lower policyholder benefits and losses incurred driven by pre-tax favorable prior-year loss reserve development in the six-month period ended June 30, 2018 compared to pre-tax unfavorable prior year loss reserve development in the six-month period ended June 30, 2017 mainly resulting from the reduction in the Ogden discount rate during the first quarter of 2017; •net realized capital gains in the six-month period ended June 30, 2018 compared to net realized capital losses in the three-month period ended June 30, 2017; and •gains on sale of divested businesses in the six-month period ended June 30, 2018 compared to losses on sale of divested businesses in the six-month period ended June 30, 2017. For further discussion see Consolidated Results of Operations.
Adjusted Pre-Tax Income* Three Months Ended June 30, (in millions)
	Quarterly 2018 and 2017 Comparison Decreased due to: •lower investment returns on alternative investments, primarily driven by less robust private equity and hedge fund performance compared to the same period in 2017, and a decline in income from securities for which the fair value option was elected as a result of credit spread widening and rising interest rates; •higher losses and loss adjustment expenses incurred from General Insurance operations, reflecting higher accident year losses, partially offset by pre-tax favorable prior year loss reserve development in the three-month period ended June 30, 2018 compared to pre-tax unfavorable prior year loss reserve development in the three-month period ended June 30, 2017; and •lower premiums due to the sale of Fuji Life in the second quarter of 2017.

*    Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations. 

80AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Executive Summary

Adjusted Pre-Tax Income* Six Months Ended June 30, (in millions)

Year-to-Date 2018 and 2017 Comparison Decreased due to: •lower investment returns on alternative investments, primarily driven by less robust private equity and hedge fund performance compared to the same period in 2017, a decline in income from securities for which the fair value option was elected as a result of credit spread widening and rising interest rates, and lower invested assets resulting from the funding of the adverse development reinsurance agreement with NICO late in the first quarter of 2017; and •higher losses and loss adjustment expenses incurred from General Insurance operations, reflecting higher catastrophe losses and higher accident year losses, partially offset by pre-tax favorable prior year loss reserve development in the six-month period ended June 30, 2018 compared to pre-tax unfavorable prior year loss reserve development in the six-month period ended June 30, 2017 mainly resulting from the reduction in the Ogden discount rate during the first quarter of 2017; and •lower premiums due to the sale of Fuji Life in the second quarter of 2017. For further discussion see Consolidated Results of Operations.

*    Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations. 

General Operating and Other Expenses Three Months Ended June 30, (in millions)

Quarterly 2018 and 2017 Comparison Increased due to higher restructuring and other costs, partially offset by the divestiture of Fuji Life.  In keeping with our broad and ongoing efforts to transform for long-term competitiveness, general operating and other expenses for the second quarters of 2018 and 2017 included approximately $200 million and $47 million of pre-tax restructuring and other costs, respectively, which were primarily comprised of employee severance charges related to efficiency initiatives.

AIG | Second Quarter 2018 Form 10-Q81

ITEM 2 |Executive Summary

General Operating and Other Expenses Six Months Ended June 30, (in millions)

Year-to-Date 2018 and 2017 Comparison Declined due to lower employee-related expenses and professional fee reductions related to our ongoing efficiency program, and the divestiture of Fuji Life. In keeping with our broad and ongoing efforts to transform for long-term competitiveness, general operating and other expenses for the six-month periods ended June 30, 2018 and 2017 included approximately $224 million and $228 million of pre-tax restructuring and other costs, respectively, which were primarily comprised of employee severance charges related to efficiency initiatives. We continue to execute initiatives focused on organizational simplification, operational efficiency, and business rationalization.

Return on Equity
Adjusted Return on Equity*

*    Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.

82AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Executive Summary

Book Value Per Share	Book Value Per Share, excluding AOCI*

*    Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations. 

AIG’s Outlook – Industry and economic factors

Our business is affected by industry and economic factors such as interest rates, currency exchange rates, credit and equity market conditions, catastrophic claims events, regulation, tax policy, competition, and general economic, market and political conditions. We continued to operate under difficult market conditions in the first six months of 2018, characterized by factors such as historically low interest rates, uncertainties in the annuity marketplace resulting from legislative and regulatory initiatives aimed at re-evaluating the standard of care for sales of investment products and services, historically high levels of catastrophic events, slowing growth in China and Euro-Zone economies, and the UK’s pending withdrawal from its membership in the European Union (the EU) (commonly referred to as Brexit). Brexit has also affected the U.S. dollar/British pound exchange rate and increased the volatility of exchange rates among the euro, British pound and the Japanese yen (the Major Currencies), which may continue for some time.

Impact of Changes in the Interest Rate Environment

Interest rates continued to increase in the first six months of 2018 but remained low relative to historical levels. A sustained low interest rate environment negatively affects sales of interest rate sensitive products in our industry and may negatively impact the profitability of our existing business as we reinvest cash flows from investments, including increased calls and prepayments of fixed maturity securities and mortgage loans, at rates below the average yield of our existing portfolios. We actively manage our exposure to the interest rate environment through portfolio selection and asset-liability management, including spread management strategies for our investment-oriented products and economic hedging of interest rate risk from guarantee features in our variable and fixed index annuities.

Additionally, sustained low interest rates on discounting of projected benefit cash flows for our pension plans may result in higher pension expense.

Annuity Sales and Surrenders

The sustained low interest rate environment has a significant impact on the annuity industry. Low long-term interest rates put pressure on investment returns, which may negatively affect sales of interest rate sensitive products and reduce future profits on certain existing fixed rate products.  However, our disciplined rate setting has helped to mitigate some of the pressure on investment spreads. As long as the low interest rate environment continues, conditions will be challenging for the fixed annuity market. Rapidly rising interest rates could create the potential for increased sales, but may also drive higher surrenders. Customers are, however, currently buying fixed annuities with surrender charge periods of four to seven years in pursuit of higher returns, which may help mitigate increased early surrenders in a rapidly rising rate environment. In addition, older contracts that have higher minimum interest rates and continue to be attractive to the contract holders have driven better than expected persistency in Fixed Annuities, although the reserves for such contracts have continued to decrease over time in amount and as a percentage of the total annuity portfolio.  We will closely monitor surrenders of Fixed Annuities as contracts with lower minimum interest rates come out of the surrender charge period in a more attractive rate environment. Low interest rates have also driven growth in our fixed index annuity products, which provide additional interest crediting tied to favorable performance in certain equity market indices and the availability of guaranteed living benefits. Changes in interest rates significantly impact the valuation of our liabilities for annuities with guaranteed income features and the value of the related hedging portfolio.

AIG | Second Quarter 2018 Form 10-Q83

ITEM 2 |Executive Summary

Reinvestment and Spread Management

We actively monitor fixed income markets, including the level of interest rates, credit spreads and the shape of the yield curve. We also frequently review our interest rate assumptions and actively manage the crediting rates used for new and in-force business. Business strategies continue to evolve to maintain profitability of the overall business in a historically low interest rate environment. The low interest rate environment puts margin pressure on pricing of new business and on existing products, due to the challenge of investing new money or recurring premiums and deposits, and reinvesting investment portfolio cash flows, in the low interest rate environment. In addition, there is investment risk associated with future premium receipts from certain in‑force business. Specifically, the investment of these future premium receipts may be at a yield below that required to meet future policy liabilities.

The contractual provisions for renewal of crediting rates and guaranteed minimum crediting rates included in products may reduce spreads in a sustained low interest rate environment and thus reduce future profitability. Although this interest rate risk is partially mitigated through the asset‑liability management process, product design elements and crediting rate strategies, a sustained low interest rate environment may negatively affect future profitability.

For additional information on our investment and asset-liability management strategies see Investments.

For investment-oriented products in our Individual Retirement, Group Retirement, Life Insurance and Institutional Markets businesses, our spread management strategies include disciplined pricing and product design for new business, modifying or limiting the sale of products that do not achieve targeted spreads, using asset-liability management to match assets to liabilities to the extent practicable, and actively managing crediting rates to help mitigate some of the pressure on investment spreads. Renewal crediting rate management is done under contractual provisions that were designed to allow crediting rates to be reset at pre-established intervals in accordance with state and federal laws and subject to minimum crediting rate guarantees. We will continue to adjust crediting rates on in-force business to mitigate the pressure on spreads from declining base yields, but our ability to lower crediting rates may be limited by the competitive environment, contractual minimum crediting rates, and provisions that allow rates to be reset only at pre-established intervals.

Of the aggregate fixed account values of our Individual Retirement and Group Retirement annuity products, 70 percent were crediting at the contractual minimum guaranteed interest rate at June 30, 2018. The percentage of fixed account values of our annuity products that are currently crediting at rates above one percent was 70 percent and 69 percent at June 30, 2018 and December 31, 2017, respectively. These businesses continue to focus on pricing discipline and strategies to reduce the minimum guaranteed interest crediting rates offered on new sales. In the core universal life business in our Life Insurance business, 71 percent of the account values were crediting at the contractual minimum guaranteed interest rate at June 30, 2018.

84AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Executive Summary

The following table presents fixed annuity and universal life account values of our Individual Retirement, Group Retirement and Life Insurance operating segments by contractual minimum guaranteed interest rate and current crediting rates:

	Current Crediting Rates
June 30, 2018			1-50 Basis		More than 50
Contractual Minimum Guaranteed	At Contractual		Points Above		Basis Points
Interest Rate	Minimum		Minimum		Above Minimum
(in millions)	Guarantee		Guarantee		Guarantee			Total
Individual Retirement*
1%	$	3,875	$	4,885	$	12,559	$	21,319
> 1% - 2%		6,824		86		3,580		10,490
> 2% - 3%		13,153		298		99		13,550
> 3% - 4%		9,886		43		8		9,937
> 4% - 5%		622		-		4		626
> 5% - 5.5%		34		-		5		39
Total Individual Retirement	$	34,394	$	5,312	$	16,255	$	55,961
Group Retirement*
1%	$	1,470	$	3,296	$	2,160	$	6,926
> 1% - 2%		6,206		607		137		6,950
> 2% - 3%		15,375		-		-		15,375
> 3% - 4%		865		-		-		865
> 4% - 5%		7,115		-		-		7,115
> 5% - 5.5%		179		-		-		179
Total Group Retirement	$	31,210	$	3,903	$	2,297	$	37,410
Universal life insurance
1%	$	-	$	-	$	10	$	10
> 1% - 2%		120		95		224		439
> 2% - 3%		607		471		996		2,074
> 3% - 4%		1,673		218		141		2,032
> 4% - 5%		3,182		220		-		3,402
> 5% - 5.5%		304		-		-		304
Total universal life insurance	$	5,886	$	1,004	$	1,371	$	8,261
Total	$	71,490	$	10,219	$	19,923	$	101,632
Percentage of total		70	%	10	%	20	%	100	%

*    Individual Retirement and Group Retirement amounts shown include fixed options within variable annuity products.

General Insurance

The impact of low interest rates on our General Insurance segment is primarily on our long-tail Casualty line of business. We expect limited impacts on our existing long-tail Casualty business as the duration of our assets is slightly longer than that of our liabilities. Sustained low interest rates would potentially impact new and renewal business for the long-tail Casualty line as we may not be able to adjust our future pricing consistent with our profitability objectives to fully offset the impact of investing at lower rates. However, we will continue to maintain pricing discipline and risk selection.

In addition, for our General Insurance segment and General Insurance Run-Off Lines reported within the Legacy Portfolio, sustained low interest rates may unfavorably affect the net loss reserve discount for workers’ compensation, and to a lesser extent could favorably impact assumptions about future medical costs, the combined net effect of which could result in higher net loss reserves.  

AIG | Second Quarter 2018 Form 10-Q85

ITEM 2 |Executive Summary

Standard of Care Developments

Our Individual Retirement and Group Retirement operating segments provide products and services that are subject to restrictions imposed by the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the Internal Revenue Code, including the requirements set forth in the final fiduciary duty rule issued by the Department of Labor (the DOL) in April 2016 (the DOL Fiduciary Rule). On March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit (the Fifth Circuit) ruled that the DOL exceeded its authority in promulgating the DOL Fiduciary Rule, specifically in its broadening the scope of “investment advice” fiduciary and in the terms of the best interest contract exemption.  Following the Fifth Circuit’s decision, the DOL announced on March 16, 2018, that it was suspending enforcement of the DOL Fiduciary Rule pending further review. The Fifth Circuit subsequently denied, on May 22, 2018, a motion to reconsider the panel’s decision and a further motion for rehearing by the full Fifth Circuit. If the Fifth Circuit’s final judgment is not further appealed, the ruling has the effect of invalidating the DOL Fiduciary Rule in its entirety.

In addition to recent developments surrounding the DOL Fiduciary Rule, the Securities and Exchange Commission (SEC), lawmakers and state insurance regulators are also engaged in re-evaluating what is an appropriate regulatory framework around a standard of care for the sale of investment products and services.  On April 18, 2018, the SEC proposed a package of rulemakings and interpretations designed to address the standard of care issues and the transparency of retail investors’ relationships with investment advisors and broker-dealers.  The comment period for these proposed rules expires on August 7, 2018.  We are evaluating the scope and potential impact of the SEC’s proposals and are closely following other similar federal and state-level regulatory developments. While we cannot predict the long-term impact of these developments on our Retirement businesses, we believe our diverse annuity product offerings position Individual Retirement and Group Retirement to compete effectively in this evolving marketplace.

Impact of Currency Volatility

Currency volatility remains acute. Such volatility affected line item components of income for those businesses with substantial international operations. In particular, growth trends in net premiums written reported in U.S. dollars can differ significantly from those measured in original currencies. The net effect on underwriting results, however, is significantly mitigated, as both revenues and expenses are similarly affected.

These currencies may continue to fluctuate, in either direction, especially as a result of the UK’s announced exit from the EU, and such fluctuations will affect net premiums written growth trends reported in U.S. dollars, as well as financial statement line item comparability.

General Insurance businesses are transacted in most major foreign currencies. The following table presents the average of the quarterly weighted average exchange rates of the Major Currencies, which have the most significant impact on our businesses:

	Three Months Ended				Six Months Ended
	June 30,		Percentage		June 30,		Percentage
Rate for 1 USD	2018	2017	Change		2018	2017	Change
Currency:
GBP	0.72	0.79	(9)	%	0.73	0.80	(9)	%
EUR	0.82	0.92	(11)	%	0.82	0.93	(12)	%
JPY	107.76	111.86	(4)	%	109.19	113.27	(4)	%

Unless otherwise noted, references to the effects of foreign exchange in the General Insurance discussion of results of operations are with respect to movements in the Major Currencies included in the preceding table.

Other Industry Developments

On September 7, 2017, the UK Ministry of Justice announced a proposal to increase the Ogden rate from negative 0.75 percent to between zero and one percent. This proposal has to be passed by Parliament. We will continue to monitor the progress with this potential change.

86AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Consolidated Results of Operations

Consolidated Results of Operations

The following section provides a comparative discussion of our Consolidated Results of Operations on a reported basis for the three- and six-month periods ended June 30, 2018 and 2017. Factors that relate primarily to a specific business are discussed in more detail within the business segment operations section.

For a discussion of the Critical Accounting Estimates that affect our results of operations see the Critical Accounting Estimates section of this MD&Aand Part II, Item 7. MD&A — Critical Accounting Estimates in the 2017 Annual Report. 

The following table presents our consolidated results of operations and other key financial metrics:

	Three Months Ended						Six Months Ended
	June 30,				Percentage		June 30,				Percentage
(in millions)		2018		2017	Change			2018		2017	Change
Revenues:
Premiums	$	7,207	$	7,614	(5)	%	$	14,482	$	15,396	(6)	%
Policy fees		763		725	5			1,527		1,449	5
Net investment income		3,065		3,613	(15)			6,326		7,299	(13)
Net realized capital gains (losses)		165		(69)	NM			146		(184)	NM
Other income		431		619	(30)			862		1,174	(27)
Total revenues		11,631		12,502	(7)			23,343		25,134	(7)
Benefits, losses and expenses:
Policyholder benefits and losses incurred		5,505		6,284	(12)			11,172		12,331	(9)
Interest credited to policyholder account balances		935		906	3			1,851		1,816	2
Amortization of deferred policy acquisition costs		1,337		1,115	20			2,695		2,223	21
General operating and other expenses		2,323		2,182	6			4,594		4,625	(1)
Interest expense		299		292	2			576		590	(2)
(Gain) loss on extinguishment of debt		5		(4)	NM			9		(5)	NM
Net (gain) loss on sale of divested businesses		(25)		60	NM			(33)		160	NM
Total benefits, losses and expenses		10,379		10,835	(4)			20,864		21,740	(4)
Income from continuing operations before
income tax expense		1,252		1,667	(25)			2,479		3,394	(27)
Income tax expense		321		557	(42)			598		1,073	(44)
Income from continuing operations		931		1,110	(16)			1,881		2,321	(19)
Income (loss) from discontinued operations,
net of income tax expense		-		8	NM			(1)		8	NM
Net income		931		1,118	(17)			1,880		2,329	(19)
Less: Net income (loss) attributable to
noncontrolling interests		(6)		(12)	50			5		14	(64)
Net income attributable to AIG	$	937	$	1,130	(17)	%	$	1,875	$	2,315	(19)	%

	June 30,			December 31,
(in millions, except per share data)		2018		2017
Balance sheet data:
Total assets	$	496,829	$	498,301
Long-term debt		33,784		31,640
Total AIG shareholders’ equity		61,186		65,171
Book value per common share		68.65		72.49
Book value per common share, excluding AOCI		68.40		66.41
Adjusted book value per common share		57.34		54.74

AIG | Second Quarter 2018 Form 10-Q87

ITEM 2 | Consolidated Results of Operations

The following table presents a reconciliation of Book value per common share to Book value per common share, excluding AOCI and Book value per common share, excluding AOCI and DTA (Adjusted book value per common share), which are non-GAAP measures. For additional information see Use of Non‑GAAP Measures. 

		June 30,		December 31,
(in millions, except per share data)		2018		2017
Total AIG shareholders' equity	$	61,186	$	65,171
Accumulated other comprehensive income		230		5,465
Total AIG shareholders' equity, excluding AOCI		60,956		59,706
Deferred tax assets		9,853		10,492
Adjusted shareholders' equity	$	51,103	$	49,214
Total common shares outstanding		891,214,033		899,044,657
Book value per common share	$	68.65	$	72.49
Book value per common share, excluding AOCI		68.40		66.41
Adjusted book value per common share		57.34		54.74

The following table presents a reconciliation of Return on equity to Adjusted Return on equity, which is a non-GAAP measure. For additional information see Use of Non‑GAAP Measures. 

	Three Months Ended						Six Months Ended						Year Ended
	June 30,						June 30,						December 31,
(dollars in millions)		2018			2017			2018			2017			2017
Actual or annualized net income (loss) attributable to AIG	$	3,748		$	4,520		$	3,750		$	4,630		$	(6,084)
Actual or annualized adjusted after-tax income attributable to AIG		3,844			5,796			3,848			5,632			2,231
Average AIG Shareholders' equity	$	61,989		$	73,901		$	63,050		$	74,700		$	72,348
Average AOCI		1,225			4,372			2,639			3,991			4,675
Average AIG Shareholders' equity, excluding average AOCI		60,764			69,529			60,411			70,709			67,673
Average DTA		10,034			14,436			10,186			14,547			13,806
Average adjusted AIG Shareholders' equity	$	50,730		$	55,093		$	50,225		$	56,162		$	53,867
ROE		6.0	%		6.1	%		5.9	%		6.2	%		(8.4)	%
Adjusted Return on Equity		7.6	%		10.5	%		7.7	%		10.0	%		4.1	%

88AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Consolidated Results of Operations

The following table presents a reconciliation of pre-tax income/net income (loss) attributable to AIG to adjusted pre-tax income/adjusted after-tax income attributable to AIG:

Three Months Ended June 30,	2018						2017
				Total Tax						Total Tax
				(Benefit)		After				(Benefit)		After
(in millions, except per share data)		Pre-tax		Charge		Tax		Pre-tax		Charge		Tax
Pre-tax income/net income (loss), including
noncontrolling interests	$	1,252	$	321	$	933	$	1,667	$	557	$	1,118
Noncontrolling interest						4						12
Pre-tax income/net income (loss) attributable
to AIG	$	1,252	$	321	$	937	$	1,667	$	557	$	1,130
Changes in uncertain tax positions and other tax adjustments				(3)		3				(66)		66
Deferred income tax valuation allowance charges				(7)		7				8		(8)
Changes in fair value of securities used to hedge
guaranteed living benefits		36		8		28		(80)		(28)		(52)
Changes in benefit reserves and DAC, VOBA and
SIA related to net realized capital gains (losses)		(1)		-		(1)		(58)		(20)		(38)
Unfavorable (favorable) prior year development and
related amortization changes ceded
under retroactive reinsurance agreements		(32)		(7)		(25)		251		89		162
(Gain) loss on extinguishment of debt		5		1		4		(4)		(2)		(2)
Net realized capital (gains) losses*		(155)		(29)		(126)		69		38		31
Noncontrolling interest on
net realized capital (gains) losses						(2)						-
Income from discontinued operations						-						(8)
(Income) loss from divested businesses		(25)		(5)		(20)		60		40		20
Non-operating litigation reserves and settlements		12		2		10		(80)		(28)		(52)
Net loss reserve discount (benefit) charge		(14)		(3)		(11)		260		90		170
Pension expense related to a one-time lump sum
payment to former employees		-		-		-		1		1		-
Restructuring and other costs		200		43		157		47		17		30
Adjusted pre-tax income/Adjusted after-tax
income	$	1,278	$	321	$	961	$	2,133	$	696	$	1,449
Weighted average diluted shares outstanding						916.6						948.2
Income (loss) per common share attributable
to AIG (diluted)					$	1.02					$	1.19
Adjusted after-tax income (loss) per
common share attributable to AIG (diluted)					$	1.05					$	1.53

AIG | Second Quarter 2018 Form 10-Q89

ITEM 2 | Consolidated Results of Operations

Six Months Ended June 30,	2018						2017
				Total Tax						Total Tax
				(Benefit)		After				(Benefit)		After
(in millions, except per share data)		Pre-tax		Charge		Tax		Pre-tax		Charge		Tax
Pre-tax income/net income (loss), including
noncontrolling interests	$	2,479	$	598	$	1,881	$	3,394	$	1,073	$	2,324
Noncontrolling interest						(6)						(9)
Pre-tax income/net income (loss) attributable
to AIG	$	2,479	$	598	$	1,875	$	3,394	$	1,073	$	2,315
Changes in uncertain tax positions and other tax adjustments				1		(1)				(16)		16
Deferred income tax valuation allowance charges				(37)		37				21		(21)
Changes in fair value of securities used to hedge
guaranteed living benefits		113		24		89		(91)		(32)		(59)
Changes in benefit reserves and DAC, VOBA and
SIA related to net realized capital gains (losses)		30		6		24		(111)		(39)		(72)
Unfavorable (favorable) prior year development and
related amortization changes ceded
under retroactive reinsurance agreements		2		-		2		265		93		172
(Gain) loss on extinguishment of debt		9		2		7		(5)		(2)		(3)
Net realized capital (gains) losses*		(136)		(30)		(106)		184		85		99
Noncontrolling interest on
net realized capital (gains) losses						(1)						5
(Income) loss from discontinued operations						1						(8)
(Income) loss from divested businesses		(33)		(7)		(26)		160		34		126
Non-operating litigation reserves and settlements		25		5		20		(86)		(30)		(56)
Net loss reserve discount (benefit) charge		(219)		(46)		(173)		235		81		154
Pension expense related to a one-time lump sum
payment to former employees		-		-		-		1		1		-
Restructuring and other costs		224		48		176		228		80		148
Adjusted pre-tax income/Adjusted after-tax
income	$	2,494	$	564	$	1,924	$	4,174	$	1,349	$	2,816
Weighted average diluted shares outstanding						920.9						976.6
Income (loss) per common share attributable
to AIG (diluted)					$	2.04					$	2.37
Adjusted after-tax income (loss) per
common share attributable to AIG (diluted)					$	2.09					$	2.88

*   Includes all net realized capital gains and losses except earned income (periodic settlements and changes in settlement accruals) on derivative instruments used for non-qualifying (economic) hedging or for asset replication.

90AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Consolidated Results of Operations

QUARTERLY pre-tax income Comparison for 2018 and 2017

Pre-tax income decreased in the three-month period ended June 30, 2018 compared to the same period in 2017 primarily due to:

•lower investment returns on alternative investments, primarily driven by less robust private equity and hedge fund performance compared to the same period in 2017, and a decline in income from securities for which the fair value option was elected as a result of credit spread widening and rising interest rates;

•lower premiums due to the sale of Fuji Life in the second quarter of 2017; and

•higher general operating and other expenses.

Partially offset by:

•lower policyholder benefits and losses incurred driven by pre-tax favorable prior year loss reserve development in the three-month period ending June 30, 2018 compared to pre-tax unfavorable prior year loss reserve development in the three-month period ended June 30, 2017;

•net realized capital gains due to:

–Life and Retirement guaranteed living benefits, net of hedges, which reflected net realized capital gains in the three-month period ended June 30, 2018 compared to net realized capital losses in the three-month period ended June 30, 2017, primarily due to changes in movement in the non-performance or “own credit” risk adjustment (NPA), which are not hedged as part of our economic hedging program (see Insurance Reserves – Life and Annuity Reserves and DAC – Variable Annuity Guaranteed Benefits and Hedging Results);  

–a gain on the sale of our investment in Castle Holdings’ aircraft assets in the three-month period ended June 30, 2018; and

•gains on sale of divested businesses in the three-month period ended June 30, 2018 compared to losses on sale of divested businesses in the three-month period ended June 30, 2017. The three-month period ended June 30, 2017 included losses on the agreements to sell Fuji Life to FWD Group and certain insurance operations and assets to Fairfax.

yEAR-TO-DATE pre-tax income Comparison for 2018 and 2017

Pre-tax income decreased in the six-month period ended June 30, 2018 compared to the same period in 2017 primarily due to:

•lower investment returns on alternative investments, primarily driven by less robust private equity and hedge fund performance compared to the same period in 2017, a decline in income from securities for which the fair value option was elected as a result of credit spread widening and rising interest rates, and lower invested assets resulting from the funding of the adverse development reinsurance agreement with NICO late in the first quarter of 2017; and

•lower premiums due to the sale of Fuji Life in the second quarter of 2017.

Partially offset by:

•lower policyholder benefits and losses incurred driven by pre-tax favorable prior year loss reserve development in the six-month period ended June 30, 2018 compared to pre-tax unfavorable prior year loss reserve development in the six-month period ended June 30, 2017 mainly resulting from the reduction in the Ogden discount rate during the first quarter of 2017;

• net realized capital gains due to:

–Life and Retirement guaranteed living benefits, net of hedges, which reflected net realized capital gains in the six-month period ended June 30, 2018 compared to net realized capital losses in the six-month period ended June 30, 2017, primarily due to changes in movement in the NPA, which are not hedged as part of our economic hedging program (see Insurance Reserves – Life and Annuity Reserves and DAC – Variable Annuity Guaranteed Benefits and Hedging Results);  

–a gain on the sale of our investment in Castle Holdings’ aircraft assets in the six-month period ended June 30, 2018; and

•gains on sale of divested businesses in the six-month period ended June 30, 2018 compared to losses on sale of divested businesses in the six-month period ended June 30, 2017. The six-month period ended June 30, 2017 included losses on the agreements to sell Fuji Life to FWD Group and certain insurance operations and assets to Fairfax.

AIG | Second Quarter 2018 Form 10-Q91

ITEM 2 | Consolidated Results of Operations

U.S. Tax Reform Overview

On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the Tax Act).  The Tax Act reduced the statutory rate of U.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting AIG and the insurance industry.  At December 31, 2017, we originally recorded a provisional estimate of income tax effects of the Tax Act of $6.7 billion, including a tax charge of $6.7 billion attributable to the reduction in the U.S. corporate income tax rate and tax benefit of $38 million related to the deemed repatriation tax. During the six-month period ended June 30, 2018, we have not recorded any material adjustments to these provisional amounts. We continue to refine our analysis and calculations, which could impact the provisional estimates previously recorded. Accordingly, as of June 30, 2018, we have not fully completed our accounting for the tax effects of the Tax Act. 

Changes specific to the insurance industry include the calculation of insurance tax reserves and related transition adjustments, amortization of specified policy acquisition expenses, treatment of separate account dividends received deductions and computation of pro-ration adjustments.  Provisions of the Tax Act with broader application include reductions or elimination of deductions for certain items, e.g., reductions to corporate dividends received deductions, disallowance of entertainment expenses and limitations on the deduction of certain executive compensation costs. These provisions, generally, result in an increase in AIG’s taxable income.   

The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. There are substantial uncertainties in the interpretation of BEAT and GILTI and formal guidance from the U.S. tax authority is still pending. Depending on the content of such guidance, changes to the interpretations and assumptions made by us, and/or actions we may take, it is possible that the impact from BEAT or GILTI could change amounts recorded, possibly materially. Consistent with accounting guidance, we treat BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner. 

In our assessment of the realizability of our deferred tax assets, we made certain assumptions related to the impact of the Tax Act on our future taxable income.  Generally, the Tax Act provisions result in an increase in our taxable income and, thus, accelerate utilization of our tax attribute deferred tax asset.  Accordingly, we do not currently anticipate that our reliance on provisional estimates would have a material impact on our determination of the realizability of our deferred tax assets.  

Repatriation Assumptions

As a result of the Tax Act, the majority of accumulated foreign earnings that were previously untaxed are subject to a one-time deemed repatriation tax. Going forward, foreign earnings not taxed as part of the one-time deemed repatriation (or otherwise taxed currently under the GILTI or subpart F regimes) will generally be exempt from U.S. tax upon repatriation. Notwithstanding the changes, U.S. tax on foreign exchange gain or loss and certain non-U.S. withholding taxes will continue to be applicable upon future repatriations of foreign earnings.  For the six-month period ended June 30, 2018, we still consider our foreign earnings with respect to certain operations in Canada, South Africa, the Far East, Latin America, Bermuda as well as the European, Asia Pacific and Middle East regions to be indefinitely reinvested.  These earnings relate to ongoing operations and have been reinvested in active business operations. Deferred taxes, if necessary, have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.

Deemed Repatriation Tax & Impact on Liquidity

The Tax Act required companies to pay a one-time transition tax, net of tax credits related to applicable foreign taxes paid, on previously untaxed current and accumulated earnings and profits (E&P) of certain of our foreign subsidiaries.  In the determination of the deemed repatriation tax, we reviewed estimated post-1986 E&P of the relevant foreign subsidiaries, and any related non-U.S. income tax paid on such earnings. We originally recorded a provisional estimated tax benefit of $38 million at December 31, 2017.  This amount is not considered to be material to our liquidity and capital resources. As we continue to refine our E&P analysis, we will refine our calculations of the one-time transition tax, which could impact the provisional estimate previously recorded.

92AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Consolidated Results of Operations

Interim Tax Calculation Method

We use the estimated annual effective tax rate method in computing our interim tax provision. Certain items, including those deemed to be unusual, infrequent or that cannot be reliably estimated, are excluded from the estimated annual effective tax rate. In these cases, the actual tax expense or benefit is reported in the same period as the related item. Certain tax effects are also not reflected in the estimated annual effective tax rate, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions and are recorded in the period in which the change occurs.  While certain impacts of the Tax Act are included in our annual effective tax rate, we continue to refine our calculations as additional information becomes available, which may result in changes to the estimated annual effective tax rate.

Income Tax expense analysis

For the three-month period ended June 30, 2018, the effective tax rate on income from continuing operations was 25.6 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, additional U.S. taxes imposed on income of our foreign subsidiaries under international provisions of the Tax Act, valuation allowance activity related to certain foreign subsidiaries and state jurisdictions and non-deductible transfer pricing charges, partially offset by tax benefits associated with tax exempt income, and reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities.

For the six-month period ended June 30, 2018, the effective tax rate on income from continuing operations was 24.1 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, additional U.S. taxes imposed on income of our foreign subsidiaries under international provisions of the Tax Act,  valuation allowance activity related to certain foreign subsidiaries and state jurisdictions and non-deductible transfer pricing charges, partially offset by tax benefits associated with tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities and excess tax deductions related to share based compensation payments recorded through the income statement.

For the three-month period ended June 30, 2017, the effective tax rate on income from continuing operations was 33.4 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits associated with tax exempt income and reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, partially offset by tax charges related to increases in uncertain tax positions associated with the impact of settlement discussions with the IRS related to certain open tax issues.

For the six-month period ended June 30, 2017, the effective tax rate on income from continuing operations was 31.6 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits associated with tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities and excess tax deductions related to share based compensation payments recorded through the income statement, partially offset by tax charges related to increases in uncertain tax positions associated with the impact of settlement discussions with the IRS related to certain open tax issues.

AIG | Second Quarter 2018 Form 10-Q93

ITEM 2 | Consolidated Results of Operations

Business Segment Operations

Our business operations consist of General Insurance, Life and Retirement, Other Operations, and a Legacy Portfolio.

General Insurance consists of two operating segments: North America and International. Life and Retirement consists of four operating segments: Group Retirement, Individual Retirement, Life Insurance and Institutional Markets. Other Operations consists of businesses and items not allocated to our other businesses, which are primarily AIG Parent, Blackboard and Fuji Life, which was sold on April 30, 2017.  Our Legacy Portfolio consists of our Legacy Life and Retirement Run-Off Lines, Legacy General Insurance Run-Off Lines, and Legacy Investments. Effective February 2018, DSA Re is included in our Legacy Portfolio.

The following table summarizes Adjusted pre-tax income (loss) from our business segment operations. See alsoNote 3 to the Condensed Consolidated Financial Statements.  

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2018		2017		2018		2017
Core business:
General Insurance
North America	$	407	$	721	$	727	$	1,549
International		161		325		351		558
General Insurance		568		1,046		1,078		2,107
Life and Retirement
Individual Retirement		462		558		961		1,097
Group Retirement		250		266		532		509
Life Insurance		175		106		227		160
Institutional Markets		75		63		134		125
Life and Retirement		962		993		1,854		1,891
Other Operations		(374)		(365)		(716)		(673)
Consolidations, eliminations and other adjustments		(12)		28		(1)		76
Total Core		1,144		1,702		2,215		3,401
Legacy Portfolio		134		431		279		773
Adjusted pre-tax income (loss)	$	1,278	$	2,133	$	2,494	$	4,174

94AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Business Segment Operations| General Insurance

General Insurance

General Insurance is managed by our geographic markets of North America and International.  Our global presence is reflected in our multinational capabilities to provide our Commercial Lines and Personal Insurance products within these geographic markets.

PRODUCTS AND DISTRIBUTION
	Liability: Products include general liability, environmental, commercial automobile liability, workers’ compensation, excess casualty and crisis management insurance products. Casualty also includes risk-sharing and other customized structured programs for large corporate and multinational customers. Financial Lines: Products include professional liability insurance for a range of businesses and risks, including directors and officers liability (D&O), mergers and acquisitions, fidelity, employment practices, fiduciary liability, cyber risk, kidnap and ransom, and errors and omissions insurance. Property: Products include commercial, industrial and energy-related property insurance products and services that cover exposures to man-made and natural disasters, including business interruption. Special Risks: Products include aerospace, political risk, trade credit, portfolio solutions, surety and marine insurance. Personal Lines:Products include personal auto and property in selected international markets and insurance for high net worth individuals offered through AIG Private Client Group in the U.S. that covers auto, homeowners, umbrella, yacht, fine art and collections. In addition, we offer extended warranty insurance and services covering electronics, appliances, and HVAC. Accident & Health: Products include voluntary and sponsor-paid personal accident and supplemental health products for individuals, employees, associations and other organizations, as well as a broad range of travel insurance products and services for leisure and business travelers.
	General Insurance products in North America and International markets are distributed through various channels, including captive and independent agents, brokers, affinity partners, airlines and travel agents, and retailers. Our distribution network is aided by our competitive position to write multiple-national and cross-border risks in both Commercial Lines and Personal Insurance.

BUSINESSSTRATEGY 

Profitable Growth: Deploy capital efficiently to act opportunistically and optimize diversity within the portfolio to grow in profitable lines, geographies and customer segments.  Look to inorganic growth opportunities in profitable markets and segments to expand our capabilities and footprint.

Reinsurance Optimization: Strategically partner with reinsurers to reduce exposure to losses arising from frequency of large catastrophic events and the severity from individual risk losses. We will optimize our reinsurance program to manage volatility and protect the balance sheet from tail events and unpredictable net losses in support of our profitable growth objectives.

Underwriting Excellence: Empower and increase accountability of the underwriter and continue to integrate underwriting, claims and actuarial to enable better decision making.  Focus on enhancing risk selection, driving consistent underwriting best practices and building robust monitoring standards to improve underwriting results. 

AIG | Second Quarter 2018 Form 10-Q95

ITEM 2 | Business Segment Operations| General Insurance

COMPETITION and challenges

Operatingin ahighly competitive industry, General Insurance competesagainst several hundred companies,specialty insurance organizations, mutual companies and other underwriting organizations in theU.S. In internationalmarkets, we compete forbusiness with theforeign insurance operations of large global insurance groups and localcompanies in specific market areas and product types. Insurance companies compete through a combination of risk acceptance criteria, product pricing, service and terms and conditions. General Insurance seeks to distinguish itself in theinsurance industry primarily based on its well-established brand, global franchise, multinational capabilities, financial and capital strength, innovative products, claims expertise to handle complex claims, expertise in providing specialized coverages and customer service.

We serve our business and individual customers on a global basis — from the largest multinational corporationsto localbusinesses and individuals. Our clients benefit from our substantial underwriting expertise.

Our challenges include:

•long-tail Commercial Lines exposures that create added complexity in pricing and risk management;

•over capacity in certain lines of business that creates downward market pressure on pricing;

•tort environment volatility in certain jurisdictions and lines of business; and

•volatility in claims arising from natural and man-made catastrophes.

OUTLOOK—INDUSTRY AND ECONOMIC FACTORS

Below is a discussion of the industry and economic factors impacting our operating segments:

General Insurance – North America

Commercial Lines continues to face challenging market conditions, with excess capacity negatively impacting the rate environment and suppressing margins. However, we continue to achieve positive rate increases across a number of lines and sub-segments as a result of our disciplined underwriting strategy and focus on risk selection. We observe higher loss cost trends in Casualty, in particular Excess Casualty. The more profitable segments of Commercial Lines remain highly competitive; however, we continue to achieve growth in several of our high margin businesses.

Personal Insurance growth prospects are supported by the need for full life cycle products and coverage, increases in personal wealth accumulation, and awareness of insurance protection and risk management. We compete in the high net worth market, accident and health insurance, travel insurance, and warranty services and will continue to expand our innovative products and services to distribution partners and clients. 

General Insurance – International

We believe our global presence provides Commercial Lines and Personal Insurance a distinct competitive advantage, as the demand for multinational cross-border coverage and services increases due to the growing number of international customers, while giving us the ability to respond quickly to local market conditions and build client relationships.

The Commercial Lines market continues to be highly competitive, with increased pressure on rates, particularly in Europe and the Asia Pacific region, due to increased market capacity and ample availability of capital. Despite this, we are continuing to grow our most profitable segments across all regions and are maintaining market leadership in key developed and developing markets. We are maintaining our underwriting discipline and continuing our risk selection strategy to improve profitability.

Personal Insurance focuses on individual customers, as well as group and corporate clients. Although market competition within Personal Insurance has increased, we continue to benefit from the underwriting quality, portfolio diversity, and low volatility of the short-tailed risk in these business lines.  We expect our newly formed entity in Japan – AIG Sonpo – to provide the necessary scale and platform to compete more efficiently in the Japanese market.  Outside of Japan, Personal Insurance continues to invest selectively in international markets, which we believe have higher potential for sustainable profitability and lower volatility across the entire portfolio.

96AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Business Segment Operations| General Insurance

General INSURANCE RESULTS

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)		2018		2017	Change			2018		2017	Change
Underwriting results:
Net premiums written	$	6,977	$	6,672	5	%	$	13,148	$	12,969	1	%
(Increase) decrease in unearned premiums(a)		(407)		(148)	(175)			105		44	139
Net premiums earned		6,570		6,524	1			13,253		13,013	2
Losses and loss adjustment expenses incurred(b)		4,317		4,175	3			8,805		8,412	5
Acquisition expenses:
Amortization of deferred policy acquisition costs		1,092		960	14			2,158		1,869	15
Other acquisition expenses		297		350	(15)			682		738	(8)
Total acquisition expenses		1,389		1,310	6			2,840		2,607	9
General operating expenses		953		890	7			1,948		1,833	6
Underwriting income (loss)(a)		(89)		149	NM			(340)		161	NM
Net investment income		657		897	(27)			1,418		1,946	(27)
Adjusted pre-tax income	$	568	$	1,046	(46)	%	$	1,078	$	2,107	(49)	%

Loss ratio(b)	65.7	64.0	1.7	66.4	64.6	1.8
Acquisition ratio	21.1	20.1	1.0	21.4	20.0	1.4
General operating expense ratio	14.5	13.6	0.9	14.7	14.1	0.6
Expense ratio	35.6	33.7	1.9	36.1	34.1	2.0
Combined ratio(b)	101.3	97.7	3.6	102.5	98.7	3.8
Adjustments for accident year loss ratio, as adjusted
and accident year combined ratio, as adjusted:
Catastrophe losses and reinstatement premiums	(2.3)	(2.8)	0.5	(3.9)	(3.1)	(0.8)
Prior year development, net of (additional) return premium on loss sensitive business	0.8	(1.1)	1.9	1.2	(0.8)	2.0
Adjustment for ceded premiums under reinsurance contracts related to prior accident years and other	1.2	(0.4)	1.6	0.5	(0.3)	0.8
Accident year loss ratio, as adjusted	65.4	59.7	5.7	64.2	60.4	3.8
Accident year combined ratio, as adjusted	101.0	93.4	7.6	100.3	94.5	5.8

(a) In the three- and six-month periods ended June 30, 2018, the Underwriting loss included an additional $115 million of net premiums earned for multi-year policies related to earlier accident years.

(b) Consistent with our definition of APTI, excludes net loss reserve discount and the portion of favorable or unfavorable prior year reserve development for which we have ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain.

The following table presents General Insurance net premiums written by operating segment, showing change on both reported and constant dollar basis:

	Three Months Ended June 30,				Percentage Change in				Six Months Ended June 30,				Percentage Change in
(in millions)		2018		2017	U.S. dollars		Original Currency			2018		2017	U.S. dollars		Original Currency
North America	$	3,236	$	3,125	4	%	5	%	$	5,275	$	5,448	(3)	%	(2)	%
International(a)		3,741		3,547	5		-			7,873		7,521	5		(2)
Total net premiums written	$	6,977	$	6,672	5	%	2	%	$	13,148	$	12,969	1	%	(2)	%

(a)  As result of the merger of AIUI Japan and Fuji Fire and Marine Insurance Company (Fuji), Fuji’s fiscal reporting period was conformed to that of AIU Japan (Japan Merger Impact).  Therefore, the six-month period ended June 30, 2018 includes approximately $300 million for two additional months of Net premiums written.

AIG | Second Quarter 2018 Form 10-Q97

ITEM 2 | Business Segment Operations| General Insurance

The following tables present General Insurance accident year catastrophes and severe losses by geography^(a) and number of events:

Catastrophes^(b)

	# of		North
(in millions)	Events		America		International		Total
Three Months Ended June 30, 2018
Windstorms and hailstorms	4	$	99	$	16	$	115
Wildfire	1		10		-		10
Earthquakes	1		(12)		27		15
Volcanic eruptions	1		10		-		10
Total catastrophe-related charges	7	$	107	$	43	$	150
Three Months Ended June 30, 2017
Windstorms and hailstorms	4	$	176	$	4	$	180
Total catastrophe-related charges	4	$	176	$	4	$	180
Six Months Ended June 30, 2018
Windstorms and hailstorms	8	$	372	$	36	$	408
Wildfire	1		11		-		11
Earthquakes	2		13		84		97
Volcanic eruptions	1		10		-		10
Total catastrophe-related charges	12	$	406	$	120	$	526
Six Months Ended June 30, 2017
Windstorms and hailstorms	10	$	338	$	4	$	342
Tropical cyclone	1		-		66		66
Total catastrophe-related charges	11	$	338	$	70	$	408

(a) Geography: North America primarily includes insurance businesses in the United States, Canada and Bermuda. International includes insurance businesses in Japan, the United Kingdom, Europe, the Asia Pacific region, Latin America, Puerto Rico, Australia, the Middle East and Africa. Geography results are presented before consideration of internal reinsurance agreements.

(b) Natural and man-made catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and also include certain man-made events, such as terrorism and civil disorders that meet the $10 million threshold.

Severe Losses^(c)

	# of		North
(in millions)	Events		America		International		Total
Three Months Ended June 30,
2018	15	$	160	$	133	$	293
2017	5	$	61	$	64	$	125
Six Months Ended June 30,
2018	25	$	196	$	232	$	428
2017	9	$	105	$	77	$	182

(c)  Severe losses are defined as non-catastrophe individual first party losses, surety losses and trade credit losses greater than $10 million, net of related reinsurance and salvage and subrogation.

98AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Business Segment Operations| General Insurance

North america Results

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)		2018		2017	Change			2018		2017	Change
Underwriting results:
Net premiums written	$	3,236	$	3,125	4	%	$	5,275	$	5,448	(3)	%
(Increase) decrease in unearned premiums(a)		(344)		(233)	(48)			309		393	(21)
Net premiums earned		2,892		2,892	-			5,584		5,841	(4)
Losses and loss adjustment expenses incurred(b)		2,115		2,166	(2)			4,268		4,329	(1)
Acquisition expenses:
Amortization of deferred policy acquisition costs		430		340	26			788		663	19
Other acquisition expenses		102		113	(10)			256		275	(7)
Total acquisition expenses		532		453	17			1,044		938	11
General operating expenses		372		331	12			727		695	5
Underwriting loss(a)		(127)		(58)	(119)			(455)		(121)	(276)
Net investment income		534		779	(31)			1,182		1,670	(29)
Adjusted pre-tax income	$	407	$	721	(44)	%	$	727	$	1,549	(53)	%

Loss ratio(b)	73.1	74.9	(1.8)	76.4	74.1	2.3
Acquisition ratio	18.4	15.7	2.7	18.7	16.1	2.6
General operating expense ratio	12.9	11.4	1.5	13.0	11.9	1.1
Expense ratio	31.3	27.1	4.2	31.7	28.0	3.7
Combined ratio(b)	104.4	102.0	2.4	108.1	102.1	6.0
Adjustments for accident year loss ratio, as adjusted
and accident year combined ratio, as adjusted:
Catastrophe losses and reinstatement premiums	(3.7)	(6.1)	2.4	(7.2)	(5.8)	(1.4)
Prior year development, net of (additional) return premium on loss sensitive business	1.6	(0.7)	2.3	2.1	0.8	1.3
Adjustment for ceded premiums under reinsurance contracts related to prior accident years and other	3.0	(1.1)	4.1	1.5	(0.6)	2.1
Accident year loss ratio, as adjusted	74.0	67.0	7.0	72.8	68.5	4.3
Accident year combined ratio, as adjusted	105.3	94.1	11.2	104.5	96.5	8.0

(a)  In the three- and six-month periods ended June 30, 2018, the Underwriting loss included an additional $115 million of net premiums earned for multi-year policies related to earlier accident years.

(b)  Consistent with our definition of APTI, excludes net loss reserve discount and the portion of favorable or unfavorable prior year reserve development for which we have ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain.

AIG | Second Quarter 2018 Form 10-Q99

ITEM 2 | Business Segment Operations| General Insurance

Business and Financial Highlights

The North America General Insurance business is focused on making progress towards improved underwriting results and efficiencies. This includes strengthening our talent base; ongoing investment in pricing and monitoring tools; continuous review of our risk appetite combined with enhanced focus on portfolio management and individual business strategy; and increased use of reinsurance.

Adjusted pre-tax income decreased in the three- and six-month periods ended June 30, 2018 compared to the same periods in the prior year, primarily due to lower net investment income reflecting lower investment returns on alternative investments, decline in income from securities for which the fair value option was elected and lower interest and dividends due to lower invested assets resulting from the first quarter 2017 funding of the adverse development reinsurance agreement with NICO.

In the three-month period ended June 30, 2018, compared to the same period in the prior year, the loss ratio decreased primarily due to lower catastrophe losses and favorable prior year loss reserve development partially offset by higher current accident year loss ratio, as adjusted. In the six-month period ended June 30, 2018, compared to the same period in the prior year, the loss ratio increased primarily due to the higher catastrophe losses and higher current accident year loss ratio, as adjusted.

The increase in the current accident year loss ratio, as adjusted, was mainly driven by higher severe losses, an increase in Excess casualty and Financial Lines loss estimates which occurred in the second half of 2017, and higher ceded earned premiums related to the 2018 North American catastrophe reinsurance program, which were partially offset by a favorable change in the portfolio mix.

Net premiums written increased in the three-month period ended June 30, 2018 compared to the same period in the prior year primarily due to lower ceded premiums driven by changes in the 2018 reinsurance programs and portfolio mix. Net premiums written decreased in the six-month period ended June 30, 2018 compared to the same period in the prior year mainly due to lower production primarily in Property and remediation in programs business partially offset by growth in the Travel business within Personal Insurance.

North America Adjusted Pre-Tax Income Three Months Ended June 30, (in millions)

Quarterly 2018 and 2017 Comparison Adjusted pre-tax income decreased primarily due to: •lower investment returns on alternative investments, primarily driven by less robust private equity and hedge fund performance compared to the same period in 2017, and a decline in income from securities for which the fair value option was elected, as a result of credit spread widening and rising interest rates; •higher current accident year loss ratio, as adjusted, due to higher severe losses, higher ceded premiums related to the 2018 North American catastrophe reinsurance program, and an increase in Excess casualty and Financial Lines loss estimates which occurred in the second half of 2017, partially offset by a favorable change in the portfolio mix; •higher acquisition expenses primarily driven by changes in Personal Insurance’s portfolio mix and higher insurance taxes, licenses and fees; and •higher general operating expenses primarily driven by targeted investment in strategic program initiatives. This decrease was partially offset by lower catastrophe losses and favorable prior year loss reserve development.

100AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Business Segment Operations| General Insurance

North America Adjusted Pre-Tax Income Six Months Ended June 30, (in millions)

Year-to-Date 2018 and 2017 Comparison Adjusted pre-tax income decreased primarily due to: •lower investment returns on alternative investments, primarily driven by less robust private equity and hedge fund performance compared to the same period in 2017, and a decline in income from securities for which the fair value option was elected, as a result of credit spread widening and rising interest rates, as well as lower interest and dividends due to lower invested assets resulting from the first quarter 2017 funding of the adverse development reinsurance agreement with NICO; •higher current accident year loss ratio, as adjusted, due to higher severe losses, higher ceded premiums related to the 2018 North American catastrophe reinsurance program, and an increase in Excess casualty and Financial Lines loss estimates which occurred in the second half of 2017, partially offset by a favorable change in the portfolio mix; •higher acquisition expenses primarily driven by changes in Personal Insurance’s portfolio mix and higher insurance taxes, licenses and fees; and •higher catastrophe losses. This decrease was partially offset by higher favorable prior year loss reserve development compared to unfavorable loss reserve development in the prior-year period.

North America Net Premiums Written Three Months Ended June 30, (in millions)

Quarterly 2018 and 2017 Comparison Net premiums written increased primarily due to: •growth in the Travel business within Personal Insurance; and •lower ceded premiums due to changes in the 2018 reinsurance programs. This increase was partially offset by lower production primarily in Property and remediation in programs business mainly due to underwriting actions taken to strengthen our portfolio and to maintain pricing discipline.

AIG | Second Quarter 2018 Form 10-Q101

ITEM 2 | Business Segment Operations| General Insurance

North America Net Premiums Written Six Months Ended June 30, (in millions)
	Year-to-Date 2018 and 2017 Comparison Net premiums written decreased primarily due to lower production primarily in Property, D&O products within Financial Lines and remediation in programs business mainly due to underwriting actions taken to strengthen our portfolio and to maintain pricing discipline. This decrease was partially offset by growth in the Travel business within Personal Insurance.

North America Combined Ratios Three Months Ended June 30,

Quarterly 2018 and 2017 Comparison The increase in the combined ratio reflected an increase in the expense ratio partially offset by a decrease in the loss ratio. The increase in the expense ratio reflected: •a higher acquisition ratio driven primarily by changes in Personal Insurance’s portfolio mix and higher insurance taxes, licenses and fees; and •a higher general operating expense ratio primarily driven by targeted investment in strategic program initiatives. The decrease in the loss ratio reflected lower catastrophe losses and favorable prior year loss reserve development. This decrease was partially offset by higher current accident year loss ratio, as adjusted, due to: •higher severe losses; •higher ceded earned premiums related to the 2018 North American catastrophe reinsurance program; and •an increase in Excess casualty and Financial Lines loss estimates which occurred in the second half of 2017.

102AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Business Segment Operations| General Insurance

North America Combined Ratios Six Months Ended June 30,

Year-to-Date 2018 and 2017 Comparison The increase in the combined ratio reflected an increase in both the loss ratio and the expense ratio. The increase in the loss ratio was primarily due to higher catastrophe losses and higher current accident year loss ratio, as adjusted, partially offset by higher favorable prior year loss reserve development. The increase in the current accident year loss ratio, as adjusted, was primarily due to: •higher severe losses; •higher ceded earned premiums related to the 2018 North American catastrophe reinsurance program; and •an increase in Excess casualty and Financial Lines loss estimates in the second half of 2017, which was partially offset by a favorable change in the portfolio mix. The increase in the expense ratio reflected: •a higher acquisition ratio primarily due to changes in Personal Insurance’s portfolio mix and higher insurance taxes, licenses and fees; and •a higher general operating expense ratio primarily driven by targeted investment in strategic program initiatives.

AIG | Second Quarter 2018 Form 10-Q103

ITEM 2 | Business Segment Operations| General Insurance

International Results

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)		2018		2017	Change			2018		2017	Change
Underwriting results:
Net premiums written	$	3,741	$	3,547	5	%	$	7,873	$	7,521	5	%
(Increase) decrease in unearned premiums		(63)		85	NM			(204)		(349)	42
Net premiums earned		3,678		3,632	1			7,669		7,172	7
Losses and loss adjustment expenses incurred		2,202		2,009	10			4,537		4,083	11
Acquisition expenses:
Amortization of deferred policy acquisition costs		662		620	7			1,370		1,206	14
Other acquisition expenses		195		237	(18)			426		463	(8)
Total acquisition expenses		857		857	-			1,796		1,669	8
General operating expenses		581		559	4			1,221		1,138	7
Underwriting income(a)		38		207	(82)			115		282	(59)
Net investment income		123		118	4			236		276	(14)
Adjusted pre-tax income	$	161	$	325	(50)	%	$	351	$	558	(37)	%

Loss ratio	59.9	55.3	4.6	59.2	56.9	2.3
Acquisition ratio	23.3	23.6	(0.3)	23.4	23.3	0.1
General operating expense ratio	15.8	15.4	0.4	15.9	15.9	-
Expense ratio	39.1	39.0	0.1	39.3	39.2	0.1
Combined ratio	99.0	94.3	4.7	98.5	96.1	2.4
Adjustments for accident year loss ratio, as adjusted
and accident year combined ratio, as adjusted:
Catastrophe losses and reinstatement premiums	(1.2)	(0.1)	(1.1)	(1.6)	(0.9)	(0.7)
Prior year development, net of (additional) return premium on loss sensitive business	0.2	(1.5)	1.7	0.5	(2.2)	2.7
Adjustment for ceded premiums under reinsurance contracts related to prior accident years	-	-	NM	-	-	NM
Accident year loss ratio, as adjusted	58.9	53.7	5.2	58.1	53.8	4.3
Accident year combined ratio, as adjusted	98.0	92.7	5.3	97.4	93.0	4.4

(a)  As result of the Japan Merger Impact, the six-month period ended June 30, 2018 includes two additional months of operating earnings increasing Net premiums written, Net premiums earned, Losses and loss adjustment expenses incurred, and Adjusted pre-tax income by approximately $300 million, $300 million, $200 million and $15 million, respectively.

Business and Financial Highlights

The International General Insurance business is focused on delivering an underwriting profit and improved efficiency, further improving underwriting margins, and growing profitably in segments and geographies that support our growth strategy.  This includes the execution of efficiency gains and a return to a focus on new business sales in Japan, preparation for Brexit, and a strategic review of the use of reinsurance.

Adjusted pre-tax income decreased in the three- and six-month periods ended June 30, 2018 compared to the same periods in the prior year, primarily due to higher severe, attritional and catastrophe losses, partially offset by favorable prior year loss reserve development.

Net premiums written, excluding the impact of foreign exchange, increased in the three-month period ended June 30, 2018 primarily due to higher premiums in the Accident & Health business and the inclusion of the seasonally large Fuji annual policy renewal period, which in previous years was reported in the third quarter, partially offset by the sale of certain insurance operations and assets to Fairfax. Net premiums written, excluding the impact of foreign exchange, in the six-month period ended June 30, 2018 also reflected the Japan Merger Impact and higher ceded premiums related to the changes in 2018 reinsurance programs resulting in a decrease compared to the same period in the prior year.

104AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Business Segment Operations| General Insurance

International Adjusted Pre-Tax Income Three Months Ended June 30, (in millions)
	Quarterly 2018 and 2017 Comparison Adjusted pre-tax income decreased due to higher severe, attritional and catastrophe losses. This decrease was partially offset by favorable prior year loss reserve development in the second quarter of 2018 compared to unfavorable development in the prior year period.

International Adjusted Pre-Tax Income Six Months Ended June 30, (in millions)

Year-to-Date 2018 and 2017 Comparison Adjusted pre-tax income decreased due to: •higher current accident year loss ratio, as adjusted, driven primarily by higher severe and attritional losses, and higher ceded earned premiums related to the additional reinsurance protection against severe losses added for international locations on a global basis and the 2018 catastrophe reinsurance program; •lower investment returns on alternative investments, primarily driven by less robust private equity and hedge fund performance compared to the same period in 2017, and a decline in income from securities for which the fair value option was elected, as a result of credit spread widening and rising interest rates; and •higher catastrophe losses. This decrease was partially offset by favorable prior year loss reserve development in the first half of 2018 compared to unfavorable development in the prior year mainly resulting from the reduction in the Ogden discount rate.

AIG | Second Quarter 2018 Form 10-Q105

ITEM 2 | Business Segment Operations| General Insurance

International Net Premiums Written Three Months Ended June 30, (in millions)
	Quarterly 2018 and 2017 Comparison Net premiums written, excluding the impact of foreign exchange, increased due to: •higher premiums driven by Accident & Health business; •growth in the Financial Lines business in Europe; and •higher premiums in Japan driven in part by the annual policy renewal period being reported in the second quarter of 2018 compared to the third quarter of the prior year as a result of conforming Fuji’s fiscal reporting period following its merger into AIG Sonpo. These increases were partially offset by: •the sale of certain insurance operations and assets to Fairfax; and •lower new business production in Japan resulting from a focus on servicing existing renewals, remediation of certain distribution channels and reduction in the direct-to-policyholder business, for which new business was discontinued in 2016.
International Net Premiums Written Six Months Ended June 30, (in millions)
	Year-to-Date 2018 and 2017 Comparison Net premiums written, excluding the impact of foreign exchange, decreased due to: •the sale of certain insurance operations and assets to Fairfax; •higher ceded premiums due to changes in 2018 reinsurance programs; •lower new business production in Japan resulting from a focus on servicing existing renewals, remediation of certain distribution channels and reduction in the direct-to-policyholder business, for which new business was discontinued in 2016; and •lower production in Property and Casualty primarily driven by execution of our portfolio optimization strategy in Europe. This decrease was partially offset by: •higher premiums driven by the Accident & Health business; •growth of the Financial Lines business in Europe; and •the Japan Merger Impact.

106AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Business Segment Operations| General Insurance

International Combined Ratios Three Months Ended June 30,
	Quarterly 2018 and 2017 Comparison The increase in combined ratio primarily reflected a higher loss ratio while the expense ratio remained relatively flat. The increase in the loss ratio was primarily due to: •higher current accident year loss ratio, as adjusted, driven by higher severe and attritional losses; and •higher catastrophe losses. This increase in the loss ratio was partially offset by favorable prior year loss reserve development in the second quarter of 2018 compared to unfavorable development in the prior year period.
International Combined Ratios Six Months Ended June 30,
	Year-to-Date 2018 and 2017 Comparison The increase in combined ratio primarily reflected a higher loss ratio while the expense ratio remained relatively flat. The increase in the loss ratio was primarily due to: •higher current accident year loss ratio, as adjusted, driven by higher severe and attritional losses, and higher ceded earned premiums; and •higher catastrophe losses. This increase in the loss ratio was partially offset by favorable prior year loss reserve development in the first half of 2018 compared to unfavorable development in the prior year period mainly resulting from the reduction in the Ogden discount rate.

AIG | Second Quarter 2018 Form 10-Q107

ITEM 2 |Business Segment Operations | Life and Retirement

Life and Retirement

PRODUCTS AND DISTRIBUTION
	Variable Annuities:Products include variable annuities that offer a combination of growth potential, death benefit features and income protection features.  Variable annuities are distributed primarily through banks, wirehouses, and regional and independent broker-dealers. Index Annuities:Products include fixed index annuities that provide growth potential based in part on the performance of a market index. Certain fixed index annuity products offer optional income protection features. Fixed index annuities are distributed primarily through banks, broker dealers, independent marketing organizations and independent insurance agents. Fixed Annuities:Products include single premium fixed annuities, immediate annuities and deferred income annuities. The Fixed Annuities product line maintains its industry-leading position in the U.S. bank distribution channel by designing products collaboratively with banks and offering an efficient and flexible administration platform. Retail Mutual Funds:Includes our mutual fund sales and related administration and servicing operations. Retail Mutual Funds are distributed primarily through broker-dealers.
	Group Retirement:Products and servicesinclude groupmutual funds,group fixedannuities, group variable annuities, individual annuity and investment products, and financial planning and advisory services. Products and services are marketed by the Variable Annuity Life Insurance Company (VALIC) under the VALIC brand and include investment offerings and plan administrative and compliance services. VALIC career financial advisors and independent financial advisors provide retirement plan participants with enrollment support and comprehensive financial planning services.
	Life Insurance: In the U.S., products primarily include term life and universal life insurance. International operations include the distribution of life and health products in the UK and Ireland.  Life products in the U.S. are primarily distributed through independent marketing organizations, independent insurance agents, financial advisors and direct marketing.
	Institutional Markets: Products primarily include stable value wrap products, structured settlement and pension risk transfer annuities, corporate- and bank-owned life insurance and guaranteed investment contracts (GICs). Institutional Markets products are primarily distributed through specialized marketing and consulting firms and structured settlement brokers.

Federal Home Loan Bank (FHLB) Funding Agreements are issued through our Individual Retirement, Group Retirement and Institutional Markets operating segments. Funding agreements are issued by our U.S. Life and Retirement companies to the FHLBs in their respective districts at floating rates over specified periods, which can be prepaid at our discretion. Proceeds are invested in fixed income securities and other suitable investments to generate spreads. These investment contracts do not have mortality or morbidity risk and are similar to GICs.

108AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Business Segment Operations | Life and Retirement

BUSINESSSTRATEGY 

Deliver client-centric solutions through our unique franchise by bringing together a broad portfolio of life insurance, retirement and institutional products offered through an extensive, multichannel distribution network. Life and Retirement focuses on ease of doing business, offering valuable solutions, and expanding and deepening its distribution relationships across multiple channels.

Position market leading businesses to serve growing needs by continually enhancing product solutions, service delivery and digital capabilities while using data and analytics in an innovative manner to improve customer experience.

Individual Retirementwill continue to capitalize on the opportunityto meet consumer demand for guaranteed income by maintaining innovative variable and index annuity products, while also managing risk from guaranteefeatures through risk-mitigating product design and well-developed economic hedging capabilities.  Our fixed annuity productsprovide diversity in our annuity product suite by offering stable returns for retirement savings.

Group Retirementcontinues to enhance its technology platform to improve thecustomer experience for plansponsors and individual participants. VALIC’s self-service tools paired with its career financial advisors provide a compelling service platform. Group Retirement’s strategy also involves providing financial planning services for its clients and meeting their need for income in retirement.

Life Insurance continues to invest to position itself for growth, while executingon strategies to enhance returns. Life Insurance is focused on rationalizingits product portfolio, aligning distribution with itsmost productive channels, consolidatingsystems on state-of-the-art platforms, and employing innovative underwriting enhancements.

Institutional Markets continues to grow its assets under management across multiple product lines, including stable value wrap, GICs and pension risk transfer annuities. Our growth strategy is opportunistic and allows us to pursue select transactions that meet our risk-adjusted return requirements.

Enhance Operational Effectiveness by simplifyingprocesses and operating environments to increase competitiveness, improve service and product capabilities and facilitate deliveryof our target customer experience.We continueto invest in technology to improve operating efficiency and ease of doing business for our distribution partners and customers. In the U.S. Life business, we are focused on leveraging our most efficient systems and increasing automation of our underwriting process. We believe that simplifying our operating models will enhance productivity and support further profitable growth.

Manage our Balance Sheet through a rigorous approach to our products and portfolio. We match our product design and high quality investments with our asset and liability exposures to maximize our ability to meet cash and liquidity needs under various operating scenarios.

Deliver Value Creation and Manage Capital by striving to deliversolid earnings throughdisciplined pricing, sustainableunderwriting improvements, expense reductions, and diversification of risk, while optimizing capital allocation and efficiency within insurance entitiesto enhance return on equity. 

AIG | Second Quarter 2018 Form 10-Q109

ITEM 2 |Business Segment Operations | Life and Retirement

COMPETITION and challenges

Life and Retirement operates in the highly competitive insurance and financial services industry in the U.S. and select international markets, competing against various financial services companies, including banks and other life insurance and mutual fund companies.Competition is primarily based on product pricing and design, distribution, financial strength, customer service and ease of doing business.

Our business remains competitive due to its long-standing market leading positions, innovative products, distribution relationships across multiple channels, customer-focused service and strong financial ratings.

Our primary challenges include:

·a sustained low interest rate environment, which makes it difficult to profitably price new products and puts margin pressure on existing business due to lower reinvestment yields;

·increased competition in our primary markets, including aggressive pricing of annuities by private equity-backed annuity writers, increased competition and consolidation of employer groups in the group retirement planning market, and peers with different profitability targets in the pension risk transfer space;

·increasingly complex new and proposed regulatory requirements, which have affected industry growth; and

·upgrading our technology and underwriting processes while managing general operating expenses.

OUTLOOK—INDUSTRY AND ECONOMIC FACTORS

Below is a discussion of the industry and economic factors impacting our specific operating segments:

Individual Retirement

Increasing life expectancy and reduced expectations for traditional retirement income from defined benefit programs and fixed income securities are leadingAmericans to seek additional financial security as they approach retirement.The strong demand for individual variable and fixed index annuities with guaranteed income features has attracted increased competitionin this product space.In response to the continued lowinterest rate environment,which has added pressure toprofit margins, we have developed guaranteed income benefits for both variable and fixed index annuities with margins that are less sensitive to the level of interest rates. 

Changes in the interest rate environment can have a significant impact on sales, surrender rates, investment returns, guaranteed income features, and spreads in the annuity industry. 

Group Retirement

Group Retirement competes in the defined contribution market under the VALIC brand.  VALIC is a leadingretirement plan provider in the U.S. for K-12 schools and school districts, highereducation, healthcare, government andother not-for-profit institutions.The defined contribution market is a highly efficient and competitive market that requires supportfor bothplan sponsors and individualparticipants. To meet this challenge, VALIC isinvesting in a client-focused technology platform tosupport improved compliance and self-service functionality.VALIC’s servicemodel pairs self-service tools with its career financial advisors who provide individual plan participants with enrollment support and comprehensive financial planning services.

Changes in the interest rate environment can have a significant impact on investment returns, guaranteed income features, and spreads, and a moderate impact on sales and surrender rates.

110AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Business Segment Operations | Life and Retirement

Life Insurance

Consumers have a significant need for life insurance, whether it is used for income replacement for their surviving family, estate planning or wealth transfer. Additionally, consumers use life insurance to provide living benefits in case of chronic, critical or terminal illnesses, as well as to supplement retirement income.  

In response to consumer needs and a sustained low interest rate environment, our Life Insurance product portfolio has been evolving. We will continue to place a strong focus on indexed universal life products and de-emphasize products with long-duration interest rate guarantees.

As life insurance ownership remains at historical lows in the United States, efforts to expand the reach and increase the affordability of life insurance are critical. The industry is investing in consumer-centric efforts to reduce traditional barriers to securing life protection by simplifying the sales and service experience. Digitally enabled processes and tools provide a fast, friendly and simple path to life insurance protection. 

Institutional Markets

Institutional Markets serves a variety of needs for corporate clients. Demand is driven by a number of factors including the macroeconomic and regulatory environment. We expect to see continued growth in the pension risk transfer market as corporate plan sponsors look to transfer asset or liability, longevity, administrative and operational risks associated with their defined benefit plans.

Changes in the interest rate environment can have a significant impact on investment returns and net investment spreads, as well as reduce the tax efficiency associated with institutional life insurance products, dampening organic growth opportunities. 

For additional discussion of the impact of market interest rate movement on our Life and Retirement business see Executive Summary – AIG’s Outlook – Industry and Economic Factors – Impact of Changes in the Interest Rate Environment.

life and retirement RESULTS

	Three Months Ended						Six Months Ended
	June 30,				Percentage		June 30,				Percentage
(in millions)		2018		2017	Change			2018		2017	Change
Revenues:
Premiums	$	490	$	502	(2)	%	$	936	$	1,338	(30)	%
Policy fees		731		694	5			1,465		1,382	6
Net investment income		1,995		1,944	3			4,041		3,906	3
Other income		249		225	11			483		442	9
Total adjusted revenues		3,465		3,365	3			6,925		7,068	(2)
Benefits and expenses:
Policyholder benefits and losses incurred		770		767	-			1,600		1,877	(15)
Interest credited to policyholder account balances		869		851	2			1,723		1,697	2
Amortization of deferred policy acquisition costs		225		199	13			471		427	10
General operating and other expenses*		599		536	12			1,199		1,133	6
Interest expense		40		19	111			78		43	81
Total operating expenses		2,503		2,372	6			5,071		5,177	(2)
Adjusted pre-tax income	$	962	$	993	(3)	%	$	1,854	$	1,891	(2)	%

*    Includes general operating expenses, non-deferrable commissions, other acquisition expenses, advisory fee expenses and other expenses.

Our insurance companies generate significant revenues from investment activities. As a result, the operating segments in Life and Retirement are subject to variances in net investment income on the asset portfolios that support insurance liabilities and surplus.

For additional information on our investment strategy, asset-liability management process and invested asset composition see Investments.

AIG | Second Quarter 2018 Form 10-Q111

ITEM 2 |Business Segment Operations | Life and Retirement

Individual Retirement Results

	Three Months Ended							Six Months Ended
	June 30,					Percentage		June 30,					Percentage
(in millions)		2018		2017		Change			2018		2017		Change
Revenues:
Premiums	$	16	$	31		(48)	%	$	28	$	59		(53)	%
Policy fees		202		192		5			406		377		8
Net investment income		975		1,003		(3)			1,959		2,010		(3)
Advisory fee and other income		173		157		10			334		310		8
Benefits and expenses:
Policyholder benefits and losses incurred		85		36		136			132		73		81
Interest credited to policyholder account balances		415		412		1			827		827		-
Amortization of deferred policy acquisition costs		130		126		3			264		255		4
Non deferrable insurance commissions		80		73		10			161		145		11
Advisory fee expenses		67		60		12			121		118		3
General operating expenses		107		108		(1)			222		218		2
Interest expense		20		10		100			39		23		70
Adjusted pre-tax income	$	462	$	558		(17)	%	$	961	$	1,097		(12)	%
Fixed Annuities base net investment spread:
Base yield		4.72	%	4.87	%	(15)	bps		4.66	%	4.89	%	(23)	bps
Cost of funds		2.64		2.64		-			2.65		2.66		(1)
Fixed Annuities base net investment spread		2.08	%	2.23	%	(15)	bps		2.01	%	2.23	%	(22)	bps

Business and Financial Highlights

The market environment continues to reflect uncertainties in the annuity business resulting from a sustained low interest rate environment. While interest rates continue to increase, rates remain low relative to historical levels. Premiums and deposits improved in the three- and six-month periods ended June 30, 2018 compared to the same periods in the prior year. Premiums and deposits in the six-month period ended June 30, 2018 included deposits from the FHLB funding agreement. Net flows in the three- and six-month periods ended June 30, 2018 deteriorated compared to the same periods in the prior year and continued to be negative primarily due to higher surrenders and withdrawals, primarily in Retail Mutual Funds.

Adjusted pre-tax income decreased in the three- and six-month periods ended June 30, 2018 compared to the same periods in the prior year, reflecting higher policyholder benefits, and decreases in equity market performance, Fixed Annuity base net investment spread and gains on securities for which the fair value option was elected. Partially offsetting these decreases were higher policy fees and advisory fees, increased base portfolio income for Index Annuities and, in the six-month period ended June 30, 2018, the receipt of non-recurring payments on structured securities.

Fixed Annuities base net investment spread in the three- and six-month periods ended June 30, 2018, excluding accretion and other investment income, declined compared to the same periods in the prior year primarily due to lower reinvestment yields.

112AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Business Segment Operations | Life and Retirement

Individual Retirement Adjusted Pre-Tax Income Three Months Ended June 30, (in millions)

Quarterly 2018 and 2017 Comparison Adjusted pre-tax income decreased primarily due to: •higher policyholder benefits, which reflected unfavorable actuarial adjustments to Variable Annuities in the three-month period ended June 30, 2018 compared to favorable adjustments to immediate annuities in the prior year period; •a decline in net investment income, primarily due to lower gains on securities for which the fair value option was elected; •a decline in Fixed Annuity base net investment spread driven by lower reinvestment yields, partially offset by increases from accretion and other investment income. In addition, income from base portfolio reflected declines due to lower invested assets in Fixed Annuities; and •lower equity market performance in the three-month period ended June 30, 2018, which contributed to an increase in DAC amortization. Partially offsetting these decreases were: •higher Index Annuity base portfolio income reflecting growth in assets; and •higher policy fees and advisory fees, net of expenses, primarily driven by asset growth in Index and Variable Annuities.

Individual Retirement Adjusted Pre-Tax Income Six Months Ended June 30, (in millions)

Year-to-Date 2018 and 2017 Comparison Adjusted pre-tax income decreased primarily due to: •higher policyholder benefits, which reflected unfavorable actuarial adjustments to Variable Annuities in the six-month period ended June 30, 2018 compared to favorable adjustments to immediate annuities in the prior year period; •a decline in net investment income, primarily from lower gains on securities for which the fair value option was elected and income from bond call and tender, partially offset by the receipt of non-recurring payments on structured securities; •lower equity market performance in the six-month period ended June 30, 2018, which contributed to increases in policyholder benefits and DAC amortization; and •a decline in Fixed Annuity base net investment spread driven by lower reinvestment yields, partially offset by increases from accretion and other investment income. In addition, income from base portfolio reflected declines due to lower invested assets in Fixed Annuities. Partially offsetting these decreases were: •higher Index Annuity base portfolio income reflecting growth in assets; and •higher policy fees and advisory fees, net of expenses, primarily driven by asset growth in Index and Variable Annuities.

AIG | Second Quarter 2018 Form 10-Q113

ITEM 2 |Business Segment Operations | Life and Retirement

Individual Retirement GAAP Premiums, Premiums and Deposits, Surrenders and Net Flows

For Individual Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums decreased in the three- and six-month periods ended June 30, 2018 compared to the same periods in the prior year, primarily due to competitive market rates.

Premiums and deposits is a non‑GAAP financial measure that includes, in addition to direct and assumed premiums, deposits received on investment-type annuity contracts, FHLB funding agreements and mutual funds under administration.

Net flows for annuity products in Individual Retirement represent premiums and deposits less death, surrender and other withdrawal benefits. Net flows for mutual funds represent deposits less withdrawals. Deposits from FHLB funding agreements were excluded from net flows of Individual Retirement, as net flows from these funding agreements are not considered part of the metric to measure Individual Retirement’s core recurring performance.

The following table presents a reconciliation of Individual Retirement GAAP premiums to premiums and deposits:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2018		2017		2018		2017
Premiums	$	16	$	31	$	28	$	59
Deposits		3,408		2,862		7,755		6,219
Other		(2)		(1)		(3)		(4)
Premiums and deposits	$	3,422	$	2,892	$	7,780	$	6,274

The following table presents surrenders as a percentage of average reserves:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Surrenders as a percentage of average reserves
Fixed Annuities	8.1	%	7.0	%	7.7	%	7.0	%
Variable and Index Annuities	6.3		6.2		6.3		6.1

The following table presents reserves for Fixed Annuities and Variable and Index Annuities by surrender charge category:

	June 30, 2018				December 31, 2017
				Variable				Variable
		Fixed		and Index		Fixed		and Index
(in millions)		Annuities		Annuities		Annuities		Annuities
No surrender charge	$	31,199	$	19,800	$	32,299	$	18,896
Greater than 0% - 2%		1,637		6,371		1,704		6,045
Greater than 2% - 4%		1,456		10,229		1,560		9,470
Greater than 4%		14,091		33,377		13,329		34,677
Non-surrenderable		1,629		452		1,665		429
Total reserves	$	50,012	$	70,229	$	50,557	$	69,517

Individual Retirement annuities are typically subject to a four- to seven-year surrender charge period, depending on the product. For Variable and Index Annuities, the proportion of reserves subject to surrender charges at June 30, 2018 has decreased compared to December 31, 2017 due to normal aging of the business and continued decline in sales. The increase in reserves with no surrender charge contributed to the increase in the surrender rate for Variable and Index Annuities in the three- and six-month periods ended June 30, 2018 compared to the same periods in the prior year. Increases in market interest rates in the six-month period ended June 30, 2018 contributed to the increase in the surrender rate for Fixed Annuities in the six-month period ended June 30, 2018 compared to the same period in the prior year.

114AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Business Segment Operations | Life and Retirement

A discussion of the significant variances in premiums and deposits and net flows for each product line follows:

Individual Retirement Premiums and Deposits (P&D) and Net Flows Three Months Ended June 30, (in millions)

Quarterly 2018 and 2017 Comparison   •Fixed Annuities premiums and deposits increased primarily due to higher broker dealer and bank distribution sales driven by favorable market conditions. Net flows continued to be negative but improved primarily due to higher premiums and deposits, partially offset by increased surrenders. •Variable and Index Annuities premiums and deposits increased primarily due to higher index annuity sales driven by expanded distribution and market growth, partially offset by lower variable annuity sales driven by lower bank and broker dealer distribution sales. Index annuity net flows increased primarily due to higher sales. Variable annuity net flows remained negative and deteriorated primarily due to lower sales and higher surrenders. •Retail Mutual Fundsnet flows remained negative and deteriorated reflecting lower deposits and higher withdrawals due to continued negative industry trends in U.S. equity actively managed funds and the impact of underperformance within our largest fund in early 2018.

Individual Retirement Premiums and Deposits (P&D) and Net Flows Six Months Ended June 30, (in millions)

Year-to-Date 2018 and 2017 Comparison   •Fixed Annuities premiums and deposits increased primarily due to higher broker dealer and bank distribution sales driven by favorable market conditions. Net flows continued to be negative but improved primarily due to higher premiums and deposits, partially offset by increased surrenders. •Variable and Index Annuities premiums and deposits increased primarily due to higher index annuity sales driven by expanded distribution and market growth, partially offset by lower variable annuity sales driven by lower bank and broker dealer distribution sales. Index annuity net flows increased primarily due to higher sales. Variable annuity net flows remained negative and deteriorated primarily due to lower sales and higher surrenders. •Funding Agreementspremiums and deposits in the six-month period ended June 30, 2018 reflected deposits from the FHLB funding agreement, which were excluded from reported net flows. •Retail Mutual Funds net flows remained negative and deteriorated reflecting lower deposits and higher withdrawals due to continued negative industry trends in U.S. equity actively managed funds and the impact of underperformance within our largest fund in early 2018.

AIG | Second Quarter 2018 Form 10-Q115

ITEM 2 |Business Segment Operations | Life and Retirement

Group Retirement Results

	Three Months Ended							Six Months Ended
	June 30,					Percentage		June 30,					Percentage
(in millions)		2018		2017		Change			2018		2017		Change
Revenues:
Premiums	$	15	$	4		275	%	$	21	$	13		62	%
Policy fees		112		101		11			224		200		12
Net investment income		542		535		1			1,124		1,090		3
Advisory fee and other income		61		56		9			122		111		10
Benefits and expenses:
Policyholder benefits and losses incurred		22		5		340			38		26		46
Interest credited to policyholder account balances		276		284		(3)			551		562		(2)
Amortization of deferred policy acquisition costs		26		25		4			51		47		9
Non deferrable insurance commissions		28		25		12			57		52		10
Advisory fee expenses		19		19		-			41		37		11
General operating expenses		98		66		48			200		168		19
Interest expense		11		6		83			21		13		62
Adjusted pre-tax income	$	250	$	266		(6)	%	$	532	$	509		5	%
Base net investment spread:
Base yield		4.56	%	4.47	%	9	bps		4.54	%	4.58	%	(4)	bps
Cost of funds		2.69		2.82		(13)			2.70		2.82		(12)
Base net investment spread		1.87	%	1.65	%	22	bps		1.84	%	1.76	%	8	bps

Business and Financial Highlights

Group Retirement is focused on implementing initiatives to grow its business. However, external factors, including the consolidation of healthcare providers and other employers in target markets, continue to impact Group Retirement’s customer retention. Premiums and deposits increased in the three- and six-month periods ended June 30, 2018 compared to the same periods in the prior year. Premiums and deposits in the six-month period ended June 30, 2018 included deposits from the FHLB funding agreement. Net flows deteriorated in the three- and six-month periods ended June 30, 2018 compared to the same periods in the prior year and continued to be negative primarily due to higher surrenders, partially offset by increased deposits.

Adjusted pre-tax income decreased in the three-month period ended June 30, 2018 as improvements in base net investment spread and higher policy fees were more than offset by higher general operating expenses. Adjusted pre-tax income increased in the six-month period ended June 30, 2018 reflecting improved base net investment spread, higher policy fees and the receipt of non-recurring payments on structured securities, partially offset by higher general operating expenses and decreases in gains on securities for which the fair value option was elected and income from bond call and tender.

Group Retirement base net investment spread improved in the three- and six-month periods ended June 30, 2018 compared to the same periods in the prior year primarily due to effective crediting rate management, higher accretion and other investment income, partially offset by lower reinvestment yields. Excluding accretion and other investment income, base spreads were in line with the prior year periods.

116AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Business Segment Operations | Life and Retirement

Group Retirement Adjusted Pre-Tax Income Three Months Ended June 30, (in millions)

Quarterly 2018 and 2017 Comparison Adjusted pre-tax income decreased primarily due to: •higher general operating expenses, which reflected lower legal expenses in the three-month period ended June 30, 2017 and continued investments in people and technology in the three-month period ended June 30, 2018; and •an increase in policyholder benefits primarily due an increase in reserves for guaranteed minimum death benefits. Partially offsetting these decreases were: •an increase in net investment spread primarily due to effective crediting rate management, higher accretion and other investment income, partially offset by lower reinvestment yields; and •higher policy fees primarily driven by growth in separate account assets.

Group Retirement Adjusted Pre-Tax Income Six Months Ended June 30, (in millions)

Year-to-Date 2018 and 2017 Comparison Adjusted pre-tax income increased primarily due to: •higher net investment income, primarily from the receipt of non-recurring payments on structured securities, partially offset by lower gains on securities for which the fair value option was elected and income from bond call and tender activity; •an increase in net investment spread primarily due to effective crediting rate management, higher accretion and other investment income, partially offset by lower reinvestment yields; and •higher policy fees primarily driven by growth in assets. Partially offsetting these increases were higher general operating expenses, which reflected lower legal expenses in the six-month period ended June 30, 2017 and continued investments in people and technology in the six-month period ended June 30, 2018.

AIG | Second Quarter 2018 Form 10-Q117

ITEM 2 |Business Segment Operations | Life and Retirement

Group Retirement GAAP Premiums, Premiums and Deposits, Surrenders and Net Flows

For Group Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums in the three- and six-month periods ended June 30, 2018, which primarily represent immediate annuities, increased compared to the same periods in the prior year reflecting the typical volumes expected for this product.

Premiums and deposits is a non‑GAAP financial measure that includes, in addition to direct and assumed premiums, deposits received on investment-type annuity contracts, FHLB funding agreements and mutual funds under administration.

Net flows for annuity products included in Group Retirement represent premiums and deposits less death, surrender and other withdrawal benefits. Net flows for mutual funds represent deposits less withdrawals. Deposits from FHLB funding agreements were excluded from net flows of Group Retirement, as net flows from these funding agreements are not considered part of the metric to measure Group Retirement’s core recurring performance.

The following table presents a reconciliation of Group Retirement GAAP premiums to premiums and deposits:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2018		2017		2018		2017
Premiums	$	15	$	4	$	21	$	13
Deposits		2,330		1,798		4,396		3,829
Premiums and deposits	$	2,345	$	1,802	$	4,417	$	3,842

The following table presents Group Retirement surrenders as a percentage of average reserves and mutual funds under administration:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Surrenders as a percentage of average reserves and mutual funds	10.9	%	8.0	%	10.5	%	9.1	%

The following table presents reserves for Group Retirement annuities by surrender charge category:

		June 30,			December 31,
(in millions)		2018	(a)		2017	(a)
No surrender charge(b)	$	69,085		$	69,006
Greater than 0% - 2%		750			1,087
Greater than 2% - 4%		1,291			1,344
Greater than 4%		5,744			5,270
Non-surrenderable		612			439
Total reserves	$	77,482		$	77,146

(a)  Excludes mutual fund assets under administration of $20.1 billion and $20.2 billion at June 30, 2018 and December 31, 2017, respectively.

(b)  Group Retirement amounts in this category include reserves of approximately $6.3 billion, at both June 30, 2018 and December 31, 2017, which are subject to 20 percent annual withdrawal limitations.

Group Retirement annuities are typically subject to a five- to seven-year surrender charge period, depending on the product.  At June 30, 2018, Group Retirement annuity reserves increased compared to December 31, 2017 primarily due to increased deposits. The surrender rate in the three- and six-month periods ended June 30, 2018 increased compared to the same periods in the prior year primarily due to higher surrenders, including approximately $870 million of large group plan surrenders.

118AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Business Segment Operations | Life and Retirement

A discussion of the significant variances in premiums and deposits and net flows follows:

Group Retirement Premiums and Deposits and Net Flows Three Months Ended June 30, (in millions)
	Quarterly 2018 and 2017 Comparison Net flows deteriorated and continued to be negative primarily due tohigher surrenders driven mainly by the consolidation of healthcare providers, partially offset by higher group acquisition deposits.
Group Retirement Premiums and Deposits and Net Flows Six Months Ended June 30, (in millions)
	Year-to-Date 2018 and 2017 Comparison Net flows deteriorated and continued to be negative primarily due to higher surrenders driven mainly by the consolidation of healthcare providers, including approximately $870 million of large group plan surrenders, partially offset by higher group acquisition and individual annuity deposits. Premiums and deposits in the six-month period ended June 30, 2018 reflected deposits from the FHLB funding agreement, which were excluded from reported net flows.

AIG | Second Quarter 2018 Form 10-Q119

ITEM 2 |Business Segment Operations | Life and Retirement

Life Insurance Results

	Three Months Ended						Six Months Ended
	June 30,				Percentage		June 30,				Percentage
(in millions)		2018		2017	Change			2018		2017	Change
Revenues:
Premiums	$	418	$	400	5	%	$	797	$	784	2	%
Policy fees		377		357	6			754		717	5
Net investment income		282		261	8			575		521	10
Other income		15		12	25			27		21	29
Benefits and expenses:
Policyholder benefits and losses incurred		571		615	(7)			1,217		1,208	1
Interest credited to policyholder account balances		94		93	1			189		188	1
Amortization of deferred policy acquisition costs		68		48	42			154		124	24
Non deferrable insurance commissions		20		25	(20)			42		56	(25)
General operating expenses		158		141	12			312		302	3
Interest expense		6		2	200			12		5	140
Adjusted pre-tax income	$	175	$	106	65	%	$	227	$	160	42	%

Business and Financial Highlights

Life Insurance is focused on selling profitable new products through strategic channels to enhance future returns. Premiums and deposits in the three- and six-month periods ended June 30, 2018 reflected growth in universal life deposits, term life premiums and international life and health premiums, partially offset by lower group benefits premiums. Adjusted pre-tax income in the three- and six-month periods ended June 30, 2018 increased compared to the same periods in the prior year, which reflected favorable actuarial adjustments to universal life, favorable ceded premium reinsurance adjustments and higher base portfolio net investment income, partially offset by the impact of the aging of the policyholder population base. Adjusted pre-tax income in the six-month period ended June 30, 2018 included higher income from alternative investments.

Life Insurance Adjusted Pre-Tax Income Three Months Ended June 30, (in millions)

Quarterly 2018 and 2017 Comparison Adjusted pre-tax income increased primarily due to: •favorable actuarial adjustments to universal life, partially offset by the impact of the aging of the policyholder population base in domestic individual life business; •favorable ceded premium reinsurance adjustments in domestic life business; and •higher net investment income primarily due to higher base portfolio income driven by growth in invested assets.

120AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Business Segment Operations | Life and Retirement

Life Insurance Adjusted Pre-Tax Income Six Months Ended June 30, (in millions)

Year-to-Date 2018 and 2017 Comparison Adjusted pre-tax income increased primarily due to: •favorable actuarial adjustments to universal life, partially offset by the impact of the aging of the policyholder population base in domestic individual life business; •favorable ceded premium reinsurance adjustments in domestic life business; and •higher net investment income primarily due to higher base portfolio income driven by growth in invested assets and higher income from alternative investments.

Life Insurance GAAP Premiums and Premiums and Deposits

Premiums for Life Insurance represent amounts received on traditional life insurance policies, primarily term life, international life and health and group benefits. Premiums, excluding the effect of foreign exchange, increased in the three-month period ended June 30, 2018 compared to the same period in the prior year, primarily due to growth in international life and health, including assumed premiums on business distributed by Laya Healthcare, and an increase in domestic term life premiums, partially offset by lower premiums on group benefits policies. Premiums, excluding the effect of foreign exchange, decreased slightly in the six-month period ended June 30, 2018 compared to the same period in the prior year as lower group benefits premiums more than offset the growth in international life and health and domestic term life businesses. Premiums for the three- and six-month period ended June 30, 2018 included favorable ceded premium reinsurance adjustments in domestic life business.

Premiums and deposits for Life Insurance is a non-GAAP financial measure that includes direct and assumed premiums as well as deposits received on universal life insurance.

AIG | Second Quarter 2018 Form 10-Q121

ITEM 2 |Business Segment Operations | Life and Retirement

The following table presents a reconciliation of Life Insurance GAAP premiums to premiums and deposits:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2018		2017		2018		2017
Premiums	$	418	$	400	$	797	$	784
Deposits		410		381		822		749
Other		152		166		330		324
Premiums and deposits	$	980	$	947	$	1,949	$	1,857

A discussion of the significant variances in premiums and deposits follows:

Life Insurance Premiums and Deposits Three Months Ended June 30, (in millions)
	Quarterly 2018 and 2017 Comparison Premiums and deposits, excluding the effect of foreign exchange, increased primarily due to growth in universal life, term life and international life and health, including assumed premiums on business distributed by Laya Healthcare. This increase was partially offset by lower group benefits premiums.

Life Insurance Premiums and Deposits Six Months Ended June 30, (in millions)
	Year-to-Date 2018 and 2017 Comparison Premiums and deposits, excluding the effect of foreign exchange, increased primarily due to growth in universal life, term life and international life and health, including assumed premiums on business distributed by Laya Healthcare. This increase was partially offset by lower group benefits premiums.

122AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Business Segment Operations | Life and Retirement

Institutional markets Results

	Three Months Ended						Six Months Ended
	June 30,				Percentage		June 30,				Percentage
(in millions)		2018		2017	Change			2018		2017	Change
Revenues:
Premiums	$	41	$	67	(39)	%	$	90	$	482	(81)	%
Policy fees		40		44	(9)			81		88	(8)
Net investment income		196		145	35			383		285	34
Benefits and expenses:
Policyholder benefits and losses incurred		92		111	(17)			213		570	(63)
Interest credited to policyholder account balances		84		62	35			156		120	30
Amortization of deferred policy acquisition costs		1		-	NM			2		1	100
Non deferrable insurance commissions		7		7	-			14		15	(7)
General operating expenses		15		12	25			29		22	32
Interest expense		3		1	200			6		2	200
Adjusted pre-tax income	$	75	$	63	19	%	$	134	$	125	7	%

Business and Financial Highlights

Institutional Markets continued to opportunistically grow its assets under management, which drove the increase in net investment spread over recent years. Product distribution continues to be strong and the business is focused on maintaining pricing discipline to achieve attractive risk adjusted return.

Institutional Markets Adjusted Pre-Tax Income Three Months Ended June 30, (in millions)

Quarterly 2018 and 2017 Comparison Adjusted pre-tax income increased as continued growth in reserves and assets under management drove the increase in net investment income with similar impact to interest credited to policyholder account balances. Decreases in premiums and policyholder benefits were primarily due to lower structured settlement annuity business written in the three-month period ended June 30, 2018.

AIG | Second Quarter 2018 Form 10-Q123

ITEM 2 |Business Segment Operations | Life and Retirement

Institutional Markets Adjusted Pre-Tax Income Six Months Ended June 30, (in millions)

Year-to-Date 2018 and 2017 Comparison Adjusted pre-tax income increased as continued growth in reserves and assets under management drove the increase in net investment income with similar impact to interest credited to policyholder account balances. Decreases in premiums and policyholder benefits were primarily due to higher pension risk transfer business written in the six-month period ended June 30, 2017.

Institutional markets GAAP Premiums and Premiums and Deposits

Premiums for Institutional Markets primarily represent amounts received on pension risk transfer or structured settlement annuities with life contingencies. Premiums decreased in the three-month period ended June 30, 2018 compared to the same period in the prior year primarily due to lower structured settlement annuity premiums.  Premiums decreased in the six-month period ended June 30, 2018 compared to the same period in the prior year primarily driven by the pension risk transfer business written in the six-month period ended June 30, 2017 and lower structured settlement annuity premiums in the six-month period ended June 30, 2018.

Premiums and deposits for Institutional Markets is a non-GAAP financial measure that includes direct premiums as well as deposits received on universal life insurance and investment-type annuity contracts, including GICs and FHLB funding agreements.

The following table presents a reconciliation of Institutional Markets GAAP premiums to premiums and deposits:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2018		2017		2018		2017
Premiums	$	41	$	67	$	90	$	482
Deposits		565		76		1,973		226
Other		46		7		52		15
Premiums and deposits	$	652	$	150	$	2,115	$	723

124AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Business Segment Operations | Life and Retirement

A discussion of the significant variances in premiums and deposits follows:

Institutional Markets Premiums and Deposits Three Months Ended June 30, (in millions)
	Quarterly 2018 and 2017 Comparison Premiums and deposits increased primarily due to higher GIC deposits.
Institutional Markets Premiums and Deposits Six Months Ended June 30, (in millions)
	Year-to-Date 2018 and 2017 Comparison Premiums and deposits increased primarily driven by $1.4 billion in FHLB funding agreements and higher GIC deposits, partially offset by lower sales in pension risk transfer and structured settlements.

AIG | Second Quarter 2018 Form 10-Q125

ITEM 2 |Business Segment Operations| Other Operations

Other Operations

The following table presents Other Operations results:

	Three Months Ended						Six Months Ended
	June 30,				Percentage		June 30,				Percentage
(in millions)		2018		2017	Change			2018		2017	Change
Adjusted pre-tax income (loss) by activities:
Fuji Life	$	-	$	27	NM	%	$	-	$	43	NM	%
Parent and Other:
Corporate general operating expenses		(184)		(235)	22			(337)		(391)	14
Interest expense		(258)		(242)	(7)			(496)		(486)	(2)
Other income, net		68		85	(20)			117		161	(27)
Total Parent and Other		(374)		(392)	5			(716)		(716)	-
Adjusted pre-tax loss before eliminations		(374)		(365)	(2)			(716)		(673)	(6)
Consolidation, eliminations and other adjustments		(12)		28	NM			(1)		76	NM
Adjusted pre-tax loss	$	(386)	$	(337)	(15)	%	$	(717)	$	(597)	(20)	%

Quarterly 2018 and 2017 Comparison

Parent and Other adjusted pre-tax loss decreased compared to the same period in the prior year primarily as a result of lower General operating expenses due to one-time payments in the second quarter of 2017 related to executive leadership changes. This decrease was partially offset by higher interest expense driven by debt issuances totaling $2.5 billion at the end of the first quarter of 2018. Other income decreased due to lower income from investments accounted for under the fair value option partially offset by income on securities purchased under reverse repurchase agreements.

Fuji Life was sold on April 30, 2017.

Year-to-date 2018 and 2017 Comparison

Parent and Other adjusted pre-tax loss remained flat compared to the same period in the prior year. General operating expenses decreased primarily due to one-time payments in the second quarter of 2017 related to executive leadership changes. Interest expense increased as a result of debt issuances totaling $2.5 billion at the end of the first quarter of 2018. Other income decreased as a result of lower income from investments accounted for under the fair value option offset by investment income for equity securities and income on securities purchased under reverse repurchase agreements.

Fuji Life was sold on April 30, 2017.

126AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Business Segment Operations| Legacy Portfolio

Legacy Portfolio

Legacy Portfolio represents exited or discontinued product lines, policy forms or distribution channels. Effective February 2018, our Bermuda domiciled composite reinsurer, DSA Reinsurance Company, Ltd. (DSA Re) is included in our Legacy Portfolio.

·Legacy Life and Retirement Run-Off Lines - Reserves consist of certain structured settlements, pension risk transfer annuities and single premium immediate annuities written prior to April 2012. Also includes exposures to whole life, long-term care and exited accident & health product lines.

·Legacy General Insurance Run-Off Lines - Reserves consist of excess workers’ compensation, environmental exposures and exposures to other products within General Insurance that are no longer actively marketed.  Also includes the remaining reserves in Eaglestone Reinsurance Company (Eaglestone). 

·Legacy Investments – Includes investment classes that we have placed into run-off including holdings in direct investments as well as investments in global capital markets and global real estate.

BUSINESSSTRATEGY 

For Legacy insurance lines, securing the interests of our policyholders and insureds is paramount. We have considered and continue to evaluate the following strategies for these lines:

•Third party and affiliated reinsurance and retrocessions to improve capital efficiency

•Commutations of assumed reinsurance and direct policy buy-backs

•Enhance insured policyholder options and claims resolution strategies

•Enhanced asset liability management and expense management

For Legacy investments, our business strategy is to maximize liquidity to AIG Parent and minimize book value impairments while sourcing for our insurance companies attractive assets for their portfolios.

SALE OF NON-CONTROLLING INTEREST IN DSA RE

DSA Re was formed during the first quarter of 2018 in connection with a series of affiliated reinsurance transactions related to our Legacy Portfolio. Those reinsurance transactions were designed to consolidate most of our Legacy Insurance Run-Off Lines into a single legal entity. As of June 30, 2018, the affiliated transactions included the cession of approximately $31 billion of reserves from our Legacy Life and Retirement Run-Off Lines and approximately $5 billion of reserves from our Legacy General Insurance Run-Off Lines related to business written by multiple wholly-owned AIG subsidiaries. In the second quarter of 2018, we formed Fortitude, a wholly-owned subsidiary of AIG, to act as a holding company for DSA Re.

On July 31, 2018, we entered into a membership interest purchase agreement (the Purchase Agreement) with Fortitude and TCG, an affiliate of The Carlyle Group L.P. (Carlyle).  Subject to the satisfaction or waiver of certain conditions set forth therein, the Purchase Agreement provides that TCG will purchase a 19.9 percent ownership interest in Fortitude (the DSA Re Transaction).  Following the closing of the DSA Re Transaction (the DSA Re Closing), Fortitude will own 100 percent of the outstanding common shares of DSA Re and AIG will have an 80.1 percent ownership interest in Fortitude.

Subject to certain adjustments specified in the Purchase Agreement, TCG will pay us approximately $476 million, which is based on DSA Re’s total shareholder’s equity of $2.9 billion as of March 31, 2018 excluding planned distributions that the parties will seek to cause to be paid to us on a non-pro rata basis prior to the end of the 18th month following the DSA Re Closing, subject to regulatory approvals (the Target Distribution). $381 million of the purchase price will be paid at the DSA Re Closing and up to $95 million will be paid following December 31, 2023 (the Deferred Payment), subject to the purchase price adjustment described below. To the extent we do not receive all or a portion of the Target Distribution within 18 months of the DSA Re Closing, TCG will pay us up to an additional $100 million. 

AIG | Second Quarter 2018 Form 10-Q127

ITEM 2 |Business Segment Operations| Legacy Portfolio

As part of the establishment of DSA Re, we implemented a capital maintenance agreement (CMA) with DSA Re that remains in effect so long as we own at least 50 percent of DSA Re.  If there are any CMA funding obligations that occur within 18 months of the DSA Re Closing, we will fund those obligations on a non-dilutive basis to TCG, but only if, and to the extent, we actually receive the Target Distribution prior to the expiration of such period. 

The affiliated reinsurance transactions executed in the first quarter of 2018 with DSA Re resulted in prepaid insurance assets on the ceding subsidiaries’ balance sheets of approximately $2.5 billion (after-tax). These assets have been eliminated in AIG’s consolidated financial statements since the counterparties were wholly-owned. In the event of a sale of a controlling interest in Fortitude, our Legacy Portfolio may recognize a loss for the portion of the unamortized balance of these assets and related deferred acquisition costs of $0.5 billion (after-tax) that are not recoverable, if any, in the period in which our interest in Fortitude becomes non-controlling. This loss would be incremental to any gain or loss recognized on the sale of our controlling interest in Fortitude.

We have also agreed to a post-closing purchase price adjustment wherein we will reimburse TCG for adverse development in property casualty related reserves, based on an agreed methodology, that occurs on or prior to December 31, 2023, up to the value of TCG’s investment in Fortitude.  Any amount due to TCG in respect of this will be offset by the amount of the Deferred Payment otherwise due from TCG to us.

We have agreed to commit to invest $6 billion of investment assets into various Carlyle strategies within the 30 months following the DSA Re Closing, and will be required to pay a proportionate amount of an agreed make-whole fee to the extent we fail to satisfy such commitment.

Our Board of Directors and the governing bodies of TCG and Fortitude have each approved the DSA Re Transaction.  Each of the parties has made customary representations and warranties in the Purchase Agreement and agreed to certain covenants and agreements.  We have agreed, subject to certain exceptions, to cause DSA Re to conduct its business in all material respects in the ordinary course of business consistent with past practice between the date of the Purchase Agreement and the DSA Re Closing and that DSA Re will not engage in certain kinds of transactions during such period. 

As contemplated by the Purchase Agreement, at the DSA Re Closing, we, Fortitude and TCG will enter into an Amended and Restated Limited Liability Company Operating Agreement of Fortitude, governing the rights of the parties thereto.  In addition, at the DSA Re Closing, DSA Re will enter into (1) a Transition Services Agreement with us, pursuant to which we and certain of our affiliates will provide certain transition services to DSA Re, (2) an Investment Management Agreement with an affiliate of TCG (the Investment Manager), pursuant to which the Investment Manager will provide certain alternative asset management and advisory services to DSA Re with respect to certain asset classes and (3) an Exclusivity Agreement with the Investment Manager pursuant to which the Investment Manager will be the exclusive provider of alternative asset management and advisory services with respect to certain new business acquired by DSA Re following the DSA Re Closing with respect to certain asset classes. 

Consummation of the DSA Re Transaction is subject to customary closing conditions, including, among others, (1) the receipt of regulatory approval of the Bermuda Monetary Authority, (2) the absence of any injunction, judgment or ruling of a governmental authority enjoining, restraining or otherwise prohibiting the DSA Re Transaction and (3) subject to specified materiality standards, the accuracy of the representations and warranties of, and performance of all covenants by, the parties as set forth in the Purchase Agreement. In addition, our obligations and the obligations of Fortitude to consummate the DSA Re Transaction are conditioned on DSA Re’s receipt of approvals from its board of directors regarding entry into the Investment Management Agreement and the Exclusivity Agreement.  The Purchase Agreement also provides for certain termination rights for both us and TCG.

128AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Business Segment Operations| Legacy Portfolio

LEGACY PORTFOLIO RESULTS

	Three Months Ended						Six Months Ended
	June 30,				Percentage		June 30,				Percentage
(in millions)		2018		2017	Change			2018		2017	Change
Revenues:
Premiums	$	134	$	146	(8)	%	$	275	$	313	(12)	%
Policy fees		32		32	-			62		67	(7)
Net investment income		623		722	(14)			1,188		1,452	(18)
Other income (loss)		(8)		238	NM			92		390	(76)
Total adjusted revenues		781		1,138	(31)			1,617		2,222	(27)
Benefits and expenses:
Policyholder benefits and losses and loss adjustment
expenses incurred		453		488	(7)			959		970	(1)
Interest credited to policyholder account balances		63		57	11			122		120	2
Amortization of deferred policy acquisition costs		19		14	36			37		42	(12)
General operating and other expenses		104		120	(13)			204		247	(17)
Interest expense		8		28	(71)			16		70	(77)
Total benefits and expenses		647		707	(8)			1,338		1,449	(8)
Adjusted pre-tax income	$	134	$	431	(69)	%	$	279	$	773	(64)	%
Adjusted pre-tax income by type:
General Insurance Run-Off Lines	$	44	$	57	(23)	%	$	106	$	144	(26)	%
Life and Retirement Run-Off Lines		58		139	(58)			86		229	(62)
Legacy Investments		32		235	(86)			87		400	(78)
Adjusted pre-tax income	$	134	$	431	(69)	%	$	279	$	773	(64)	%

Business and Financial Highlights

In February 2018, we used $2.6 billion of existing Legacy Portfolio cash and investment assets to capitalize DSA Re in order to enable it to assume insurance risk and other economic risk from U.S. and Bermudian insurance companies. These assets included approximately $1.6 billion of capital released by Eaglestone, an affiliated entity, to AIG Parent as a result of the commutation of certain property and casualty risks from other AIG subsidiaries, which were subsequently ceded to DSA Re. DSA Re also has additional eligible regulatory capital under the Bermuda Monetary Authority capital framework in the form of $550 million in letter of credit agreements with guarantees from AIG Parent. In the six-month period ended June 30, 2018, DSA Re disbursed tax sharing payments of $369 million to AIG Parent.

AIG | Second Quarter 2018 Form 10-Q129

ITEM 2 |Business Segment Operations| Legacy Portfolio

Legacy Portfolio Adjusted Pre-Tax Income Three Months Ended June 30, (in millions)
	Quarterly 2018 and 2017 Comparison Adjusted pre-tax income decreased due to: •lower Legacy Life and Retirement earnings compared to the second quarter of 2017 due to lower net investment income, partially offset by modest mortality gains; •lower Legacy General Insurance earnings compared to the second quarter of 2017 due to lower net investment income; and •lower Legacy Investment earnings compared to the second quarter of 2017 due to continued dispositions of non- insurance investment assets, primarily driven by the sale of the life settlements portfolio in 2017 and lower gain on fair value option portfolios in the second quarter of 2018. .
Legacy Portfolio Adjusted Pre-Tax Income Six Months Ended June 30, (in millions)
	Year-to-Date 2018 and 2017 Comparison Adjusted pre-tax income decreased due to: •lower Legacy Life and Retirement earnings compared to the first half of 2017 due to lower net investment income and a refinement in reserves related to pay-out annuities, which was partially offset by modest mortality gains; •lower Legacy General Insurance earnings compared to the first half of 2017 due to lower net investment income; and •lower Legacy Investment earnings compared to the first half of 2017 due to continued dispositions of non- insurance investment assets, primarily driven by the sale of the life settlements portfolio in 2017 and lower gain on fair value option portfolios in the first half of 2018.

130AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Investments

Investments

Overview

Our investment strategies are tailored to the specific business needs of each operating unit. The investment objectives are driven by the respective operating segments and AIG Parent. The primary objectives are generation of investment income, preservation of capital, liquidity management and growth of surplus to support the insurance products. The majority of assets backing our insurance liabilities consist of fixed maturity securities.

Investment Highlights in the Six Months Ended June 30, 2018

•A rise in interest rates and widening credit spreads, as well as the adoption of the Recognition and Measurement of Financial Assets and Financial Liabilities Standard (Financial Instruments Recognition and Measurement Standard) on January 1, 2018, which resulted in the reclassification of unrealized gains in our equity securities to retained earnings, resulted in a net unrealized loss in our investment portfolio.  Net unrealized gains in our available for sale portfolio decreased to approximately $5.6 billion as of June 30, 2018 from approximately $13.9 billion as of December 31, 2017.

•We continued to make investments in structured securities and other fixed maturity securities and increased lending activities in mortgage loans with favorable risk compared to return characteristics to improve yields and increase net investment income.

•Lower investment returns on alternative investments, primarily driven by less robust private equity and hedge fund performance compared to the same period in 2017, a decline in income from securities for which the fair value option was elected as a result of credit spread widening and rising interest rates, and lower invested assets resulting from the funding of the adverse development reinsurance agreement with NICO late in the first quarter 2017.

•During the six-months ended June 30, 2018, we reduced our hedge fund portfolio by approximately $1.3 billion as a result of redemptions consistent with our planned reduction of exposure.

•Blended investment yields on new investments were lower than blended rates on investments that were sold, matured or called.

•In the first quarter of 2018, we sold our remaining interest in Arch Capital, which we received as part of the consideration for selling United Guaranty to Arch in 2016.

Investment Strategies

Investment strategies are based on considerations that include the local and general market conditions, liability duration and cash flow characteristics, rating agency and regulatory capital considerations, legal investment limitations, tax optimization and diversification.

Some of our key investment strategies are as follows:

•Fixed maturity securities held by the U.S. insurance companies included in General Insurance consist of a mix of instruments that meet our current risk-return, tax, liquidity, credit quality and diversification objectives.

•Outside of the U.S., fixed maturity securities held by General Insurance companies consist primarily of high-grade securities generally denominated in the currencies of the countries in which we operate.

•While more of a focus is placed on asset-liability management in Life and Retirement companies, our fundamental strategy across all of our investment portfolios is to optimize the duration characteristics of the assets within a target range based on comparable liability characteristics, to the extent practicable.

•AIG Parent, included in Other Operations, actively manages its assets and liabilities in terms of products, counterparties and duration. AIG Parent’s liquidity sources are held primarily in the form of cash, short-term investments and publicly traded, investment-grade rated fixed maturity securities. Based upon an assessment of its immediate and longer-term funding needs, AIG Parent purchases publicly traded, investment-grade rated fixed maturity securities that can be readily monetized through sales or repurchase agreements. These securities allow us to diversify sources of liquidity while reducing the cost of maintaining sufficient liquidity.

Attribution of Net Investment Income to Operating Segments

Net investment income is attributed to our businesses based on internal models consistent with the nature of the underlying businesses.

AIG | Second Quarter 2018 Form 10-Q131

ITEM 2 | Investments

For General Insurance — North America and International and Legacy General Insurance Run-Off Lines, we estimate investable funds based primarily on loss reserves and unearned premiums. The allocation of net investment income of the General Insurance companies to segments is calculated based on these estimated investable funds, consistent with the approximate duration of the liabilities and the required economic capital allocation for each segment

For Life and Retirement — Individual Retirement, Group Retirement, Life Insurance, and Institutional Markets and Legacy Life and Retirement Run-Off Lines, net investment income is attributed based on invested assets from segregated product line portfolios held in our Life and Retirement companies. All invested assets of the Life and Retirement companies in excess of liabilities are allocated based on estimates of required economic capital allocation for each segment.

Asset Liability Measurement

For the General Insurance companies, the duration of liabilities for long-tail casualty lines is greater than that of other lines. As a result, the investment strategy within the General Insurance companies focuses on growth of surplus and preservation of capital, subject to liability and other business considerations.

The General Insurance companies invest primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies and also invest in structured securities collateralized by, among other assets, residential and commercial real estate and commercial mortgage loans. While invested assets backing reserves of the General Insurance companies are primarily invested in conventional fixed maturity securities, we have continued to allocate a portion of our investment activity into asset classes that offer higher yields, particularly in the domestic operations. In addition, we continue to invest in both fixed rate and floating rate asset-backed investments for their risk-return attributes, as well as to manage our exposure to potential changes in interest rates. This asset diversification has maintained stable average yields while the overall credit ratings of our fixed maturity securities were largely unchanged. We expect to continue to pursue this investment strategy to meet the General Insurance companies’ liquidity, duration and credit quality objectives as well as current risk‑return and tax objectives.

In addition, the General Insurance companies seek to enhance returns through selective investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields and have provided added diversification to the broader portfolio. 

Fixed maturity securities of the General Insurance companies’ domestic operations, with an average duration of 4.1 years, are currently comprised of corporate bonds, structured securities, taxable municipal bonds and government and agency bonds as well as tax-exempt securities, which provide attractive risk-adjusted after-tax returns. The majority of these high quality investments are rated A or higher based on composite ratings.

Fixed maturity securities held in the General Insurance companies’ foreign operations are of high quality, primarily rated A or higher based on composite ratings, with an average duration of 3.5 years.

The investment strategy of the Life and Retirement companies is to maximize net investment income and portfolio value, subject to liquidity requirements, capital constraints, diversification requirements, asset‑liability management and available investment opportunities.

The Life and Retirement companies use asset‑liability management as a primary tool to monitor and manage risk in their businesses. The Life and Retirement companies' fundamental investment strategy is to maintain a diversified, high to medium quality portfolio of fixed maturity securities that, to the extent practicable, complements the characteristics of liabilities, including duration, which is a measure of sensitivity to changes in interest rates. The investment portfolio of each product line is tailored to the specific characteristics of its insurance liabilities, and as a result, certain portfolios are shorter in duration and others are longer in duration.  An extended low interest rate environment may result in a lengthening of liability durations from initial estimates, primarily due to lower lapses, which may require us to further extend the duration of the investment portfolio.

The Life and Retirement companies invest primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies; structured securities collateralized by, among other assets, residential and commercial real estate; and commercial mortgage loans.

In addition, the Life and Retirement companies seek to enhance returns through investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields.  While a diversified portfolio of alternative investments remains a fundamental component of the investment strategy of the Life and Retirement companies, we have reduced the overall size of the hedge fund portfolio, in light of changing market conditions and perceived market opportunities, and to continue reducing the size of the private equity portfolio.

Fixed maturity securities of the Life and Retirement companies domestic operations, with an average duration of 7.2 years, are comprised primarily of taxable corporate bonds, as well as taxable municipal and government bonds, and agency and non‑agency

132AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Investments

structured securities. The majority of these investments are held in the available for sale portfolio and are rated investment grade based on its composite ratings.

Fixed maturity securities held in the Life and Retirement companies foreign operations are of high quality, primarily rated A or higher based on composite ratings, with an average duration of 21.7 years.

NAIC Designations of Fixed Maturity Securities

The Securities Valuation Office (SVO) of the National Association of Insurance Companies (NAIC) evaluates the investments of U.S. insurers for statutory reporting purposes and assigns fixed maturity securities to one of six categories called ‘NAIC Designations.’ In general, NAIC Designations of ‘1’ highest quality, or ‘2’ high quality, include fixed maturity securities considered investment grade, while NAIC Designations of ‘3’ through ‘6’ generally include fixed maturity securities referred to as below investment grade.  The NAIC has adopted revised rating methodologies for certain structured securities, including non-agency RMBS and CMBS, which are intended to enable a more precise assessment of the value of such structured securities and increase the accuracy in assessing expected losses to better determine the appropriate capital requirement for such structured securities.  These methodologies result in an improved NAIC Designation for such securities compared to the rating typically assigned by the three major rating agencies.  The following tables summarize the ratings distribution of U.S. Insurance Companies fixed maturity security portfolio by NAIC Designation, and the distribution by composite AIG credit rating, which is generally based on ratings of the three major rating agencies.

For a full description of the composite AIG credit ratings seeInvestments – Credit Ratings. 

The following table presents the fixed maturity security portfolio categorized by NAIC Designation, at fair value:

June 30, 2018
(in millions)
																Total
						Total										Below
						Investment										Investment
NAIC Designation		1		2		Grade		3		4		5		6		Grade		Total
Other fixed maturity securities	$	83,706	$	67,861	$	151,567	$	6,019	$	4,756	$	1,196	$	181	$	12,152	$	163,719
Mortgage-backed, asset-backed and collateralized		64,505		2,851		67,356		595		370		151		4,428		5,544		72,900
Total*	$	148,211	$	70,712	$	218,923	$	6,614	$	5,126	$	1,347	$	4,609	$	17,696	$	236,619

*     Excludes $3.8 billion of fixed maturity securities for which no NAIC Designation is available because they are held in legal entities within U.S. Insurance Companies that do not require a statutory filing.

The following table presents the fixed maturity security portfolio categorized by composite AIG credit rating, at fair value:

June 30, 2018
(in millions)
														Total
						Total								Below
						Investment						CCC and		Investment
Composite AIG Credit Rating		AAA/AA/A		BBB		Grade		BB		B		Lower		Grade		Total
Other fixed maturity securities	$	84,421	$	67,666	$	152,087	$	5,815	$	4,775	$	1,042	$	11,632	$	163,719
Mortgage-backed, asset-backed and collateralized		47,690		4,165		51,855		1,176		614		19,255		21,045		72,900
Total*	$	132,111	$	71,831	$	203,942	$	6,991	$	5,389	$	20,297	$	32,677	$	236,619

*    Excludes $3.8 billion of fixed maturity securities for which no NAIC Designation is available because they are held in legal entities within U.S. Insurance Companies that do not require a statutory filing.

Credit Ratings

At June 30, 2018, approximately 89 percent of our fixed maturity securities were held by our domestic entities. Approximately 17 percent of these securities were rated AAA by one or more of the principal rating agencies, and approximately 16 percent were rated below investment grade or not rated. Our investment decision process relies primarily on internally generated fundamental analysis and internal risk ratings. Third-party rating services’ ratings and opinions provide one source of independent perspective for consideration in the internal analysis.

Moody’s Investors Service Inc. (Moody’s), Standard & Poor’s Financial Services LLC, a subsidiary of S&P Global Inc. (S&P), or similar foreign rating services rate a significant portion of our foreign entities’ fixed maturity securities portfolio. Rating services are not available for some foreign-issued securities. Our Credit Risk Management department closely reviews the credit quality of the foreign portfolio’s non-rated fixed maturity securities. At June 30, 2018, approximately 22 percent of such investments were either rated AAA or, on the basis of our internal analysis, were equivalent from a credit standpoint to securities rated AAA, and approximately 8 percent

AIG | Second Quarter 2018 Form 10-Q133

ITEM 2 | Investments

were below investment grade or not rated. Approximately 34 percent of the foreign entities’ fixed maturity securities portfolio is comprised of sovereign fixed maturity securities supporting policy liabilities in the country of issuance.

Composite AIG Credit Ratings

With respect to our fixed maturity securities, the credit ratings in the table below and in subsequent tables reflect: (a) a composite of the ratings of the three major rating agencies, or when agency ratings are not available, the rating assigned by the NAIC SVO (over 99 percent of total fixed maturity securities), or (b) our equivalent internal ratings when these investments have not been rated by any of the major rating agencies or the NAIC.  The “Non-rated” category in those tables consists of fixed maturity securities that have not been rated by any of the major rating agencies, the NAIC or us.

For a discussion of credit risks associated with Investments see Enterprise Risk Management.

The following table presents the composite AIG credit ratings of our fixed maturity securities calculated on the basis of their fair value:

	Available for Sale				Other				Total
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
(in millions)		2018		2017		2018		2017		2018		2017
Rating:
Other fixed maturity
securities
AAA	$	10,843	$	11,644	$	2,589	$	2,656	$	13,432	$	14,300
AA		28,226		29,560		133		212		28,359		29,772
A		41,485		45,049		1,581		1,745		43,066		46,794
BBB		67,848		70,636		139		138		67,987		70,774
Below investment grade		12,916		13,173		18		17		12,934		13,190
Non-rated		1,641		1,073		-		-		1,641		1,073
Total	$	162,959	$	171,135	$	4,460	$	4,768	$	167,419	$	175,903
Mortgage-backed, asset-
backed and collateralized
AAA	$	28,763	$	30,306	$	478	$	818	$	29,241	$	31,124
AA		10,114		8,158		928		610		11,042		8,768
A		7,189		7,760		224		382		7,413		8,142
BBB		3,997		4,414		168		163		4,165		4,577
Below investment grade		15,627		17,194		5,392		6,004		21,019		23,198
Non-rated		24		25		124		27		148		52
Total	$	65,714	$	67,857	$	7,314	$	8,004	$	73,028	$	75,861
Total
AAA	$	39,606	$	41,950	$	3,067	$	3,474	$	42,673	$	45,424
AA		38,340		37,718		1,061		822		39,401		38,540
A		48,674		52,809		1,805		2,127		50,479		54,936
BBB		71,845		75,050		307		301		72,152		75,351
Below investment grade		28,543		30,367		5,410		6,021		33,953		36,388
Non-rated		1,665		1,098		124		27		1,789		1,125
Total	$	228,673	$	238,992	$	11,774	$	12,772	$	240,447	$	251,764

134AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Investments

Available‑for‑Sale Investments

The following table presents the fair value of our available‑for‑sale securities:

		Fair Value at		Fair Value at
		June 30,		December 31,
(in millions)		2018		2017
Bonds available for sale:
U.S. government and government sponsored entities	$	2,644	$	2,656
Obligations of states, municipalities and political subdivisions		17,060		18,644
Non-U.S. governments		15,297		15,659
Corporate debt		127,958		134,176
Mortgage-backed, asset-backed and collateralized:
RMBS		35,380		37,234
CMBS		13,084		13,841
CDO/ABS		17,250		16,782
Total mortgage-backed, asset-backed and collateralized		65,714		67,857
Total bonds available for sale(a)		228,673		238,992
Equity securities available for sale:
Common stock		-		1,061
Preferred stock		-		533
Mutual funds		-		114
Total equity securities available for sale(b)		-		1,708
Total	$	228,673	$	240,700

(a)  At June 30, 2018 and December 31, 2017, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $30.2 billion and $31.5 billion, respectively.

(b)  As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer classified and accounted for as available for sale securities.

The following table presents the fair value of our aggregate credit exposures to non-U.S. governments for our fixed maturity securities:

	June 30,		December 31,
(in millions)		2018		2017
Japan	$	1,834	$	1,791
Germany		1,259		1,623
United Kingdom		1,106		1,214
France		953		923
Canada		946		1,051
Netherlands		633		608
United Arab Emirates		463		432
Mexico		457		513
Indonesia		456		493
Norway		361		409
Other		6,880		6,659
Total	$	15,348	$	15,716

AIG | Second Quarter 2018 Form 10-Q135

ITEM 2 | Investments

The following table presents the fair value of our aggregate European credit exposures by major sector for our fixed maturity securities:

	June 30, 2018
						Non-					December 31,
				Financial		Financial		Structured				2017
(in millions)		Sovereign		Institution		Corporates		Products		Total		Total
Euro-Zone countries:
France	$	953	$	1,442	$	1,878	$	-	$	4,273	$	4,169
Germany		1,258		230		2,060		1		3,549		3,803
Netherlands		634		886		1,086		47		2,653		2,868
Ireland		37		16		474		640		1,167		1,071
Belgium		250		71		780		-		1,101		1,216
Spain		32		214		785		-		1,031		1,009
Italy		-		231		424		-		655		694
Luxembourg		-		39		479		-		518		436
Finland		49		46		70		-		165		163
Austria		117		9		-		-		126		37
Other - EuroZone		683		95		233		-		1,011		1,013
Total Euro-Zone	$	4,013	$	3,279	$	8,269	$	688	$	16,249	$	16,479
Remainder of Europe:
United Kingdom	$	1,106	$	3,426	$	7,798	$	3,531	$	15,861	$	16,975
Switzerland		33		974		931		-		1,938		2,299
Sweden		110		353		136		-		599		658
Norway		361		43		155		-		559		618
Russian Federation		111		23		137		-		271		284
Other - Remainder of Europe		153		66		106		-		325		287
Total - Remainder of Europe	$	1,874	$	4,885	$	9,263	$	3,531	$	19,553	$	21,121
Total	$	5,887	$	8,164	$	17,532	$	4,219	$	35,802	$	37,600

Investments in Municipal Bonds

At June 30, 2018, the U.S. municipal bond portfolio was composed primarily of essential service revenue bonds and high-quality tax-exempt bonds with 93 percent of the portfolio rated A or higher.

136AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Investments

The following table presents the fair values of our available for sale U.S. municipal bond portfolio by state and municipal bond type:

	June 30, 2018
		State		Local				Total	December 31,
		General		General				Fair		2017
(in millions)		Obligation		Obligation		Revenue		Value		Total Fair Value
State:
New York	$	20	$	445	$	2,705	$	3,170	$	3,562
California		640		402		1,930		2,972		3,275
Texas		190		640		1,009		1,839		1,992
Illinois		107		124		735		966		908
Massachusetts		423		-		468		891		966
Florida		64		-		574		638		666
Virginia		8		-		587		595		639
Washington		249		-		336		585		650
Ohio		79		-		418		497		575
Georgia		115		87		284		486		566
Washington D.C.		36		-		439		475		497
Pennsylvania		127		22		272		421		418
Maryland		157		89		101		347		380
All other states(a)		366		304		2,508		3,178		3,550
Total(b)(c)	$	2,581	$	2,113	$	12,366	$	17,060	$	18,644

(a)  We did not have material credit exposure to the government of Puerto Rico.

(b)  Excludes certain university and not-for-profit entities that issue their bonds in the corporate debt market. Includes industrial revenue bonds.

(c)  Includes $0.6 billion of pre-refunded municipal bonds.

Investments in Corporate Debt Securities

The following table presents the industry categories of our available for sale corporate debt securities:

		Fair Value at		Fair Value at
Industry Category		June 30,		December 31,
(in millions)		2018		2017
Financial institutions:
Money Center/Global Bank Groups	$	9,073	$	9,295
Regional banks — other		641		562
Life insurance		3,382		3,603
Securities firms and other finance companies		372		386
Insurance non-life		4,588		4,893
Regional banks — North America		5,829		6,320
Other financial institutions		10,111		9,906
Utilities		17,617		18,655
Communications		8,915		9,756
Consumer noncyclical		15,728		15,873
Capital goods		7,230		7,797
Energy		12,426		13,171
Consumer cyclical		8,090		9,166
Basic		5,588		6,123
Other		18,368		18,670
Total*	$	127,958	$	134,176

*    At June 30, 2018 and December 31, 2017, respectively, approximately 90 and 91 percent of these investments were rated investment grade.

Our investments in the energy category, as a percentage of total investments in available-for-sale fixed maturities, was 5.4 and 5.5 percent at June 30, 2018 and December 31, 2017, respectively. While the energy investments are primarily investment grade and are actively managed, the category continues to experience volatility that could adversely affect credit quality and fair value.

AIG | Second Quarter 2018 Form 10-Q137

ITEM 2 | Investments

Investments in RMBS

The following table presents AIG’s RMBS available for sale securities:

		Fair Value at		Fair Value at
		June 30,		December 31,
(in millions)		2018		2017
Agency RMBS	$	14,361	$	15,002
Alt-A RMBS		10,849		11,624
Subprime RMBS		2,930		2,947
Prime non-agency		6,495		6,891
Other housing related		745		770
Total RMBS(a)(b)	$	35,380	$	37,234

(a)  Includes approximately $11.4 billion and $12.3 billion at June 30, 2018, and December 31, 2017, respectively, of certain RMBS that had experienced deterioration in credit quality since their origination. For additional discussion on Purchased Credit Impaired (PCI) Securities see Note 5 to the Condensed Consolidated Financial Statements.

(b)  The weighted average expected life was six years at both June 30, 2018 and December 31, 2017.

Our underwriting practices for investing in RMBS, other asset‑backed securities (ABS) and CDOs take into consideration the quality of the originator, the manager, the servicer, security credit ratings, underlying characteristics of the mortgages, borrower characteristics, and the level of credit enhancement in the transaction.

Investments in CMBS

The following table presents our CMBS available for sale securities:

		Fair Value at		Fair Value at
		June 30,		December 31,
(in millions)		2018		2017
CMBS (traditional)	$	10,396	$	11,092
Agency		2,107		2,093
Other		581		656
Total	$	13,084	$	13,841

The fair value of CMBS holdings remained stable during the second quarter of 2018. The majority of our investments in CMBS are in tranches that contain substantial protection features through collateral subordination. The majority of CMBS holdings are traditional conduit transactions, broadly diversified across property types and geographical areas.

Investments in CDOs

The following table presents our CDO available for sale securities by collateral type:

		Fair value at		Fair value at
		June 30,		December 31,
(in millions)		2018		2017
Collateral Type:
Bank loans (CLO)	$	8,146	$	8,112
Other		64		94
Total	$	8,210	$	8,206

Commercial Mortgage Loans

At June 30, 2018, we had direct commercial mortgage loan exposure of $30.9 billion. All commercial mortgage loans were current or performing according to their restructured terms.

138AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Investments

The following table presents the commercial mortgage loan exposure by location and class of loan based on amortized cost:

	Number															Percent
	of	Class														of
(dollars in millions)	Loans	Apartments			Offices		Retail	Industrial		Hotel			Others		Total	Total
June 30, 2018
State:
New York	96	$	1,751	$	3,980	$	532	$	297	$	103	$	177	$	6,840	22	%
California	80		467		1,024		296		357		837		357		3,338	11
Texas	53		317		1,091		192		82		125		37		1,844	6
Massachusetts	19		729		431		404		-		-		26		1,590	5
Florida	83		472		81		431		226		219		67		1,496	5
New Jersey	42		771		46		426		41		28		33		1,345	4
Illinois	17		456		303		11		25		-		23		818	3
Pennsylvania	25		80		21		573		47		25		-		746	2
Washington D.C.	12		326		357		-		-		19		-		702	2
Ohio	26		161		11		202		237		-		5		616	2
Other states	241		1,766		948		1,341		754		477		126		5,412	18
Foreign	75		2,153		1,097		644		559		607		1,081		6,141	20
Total*	769	$	9,449	$	9,390	$	5,052	$	2,625	$	2,440	$	1,932	$	30,888	100	%
December 31, 2017
State:
New York	97	$	1,673	$	3,716	$	556	$	265	$	105	$	177	$	6,492	23	%
California	86		438		1,055		301		313		845		360		3,312	12
Texas	55		327		934		160		83		154		38		1,696	6
Massachusetts	21		701		384		410		-		-		27		1,522	5
New Jersey	42		667		46		486		41		28		32		1,300	4
Florida	81		319		84		435		227		19		69		1,153	4
Pennsylvania	25		74		22		577		47		26		-		746	3
Illinois	15		315		304		11		25		-		23		678	2
Ohio	26		163		11		205		240		-		5		624	2
Washington D.C.	11		232		359		-		-		19		-		610	2
Other states	253		1,790		964		1,466		696		564		160		5,640	20
Foreign	71		1,464		821		754		86		629		1,069		4,823	17
Total*	783	$	8,163	$	8,700	$	5,361	$	2,023	$	2,389	$	1,960	$	28,596	100	%

*    Does not reflect allowance for credit losses.

For additional discussion on commercial mortgage loans see Note 7 to the Consolidated Financial Statements in the 2017 Annual Report.

Impairments

The following table presents impairments by investment type:

		Three Months Ended				Six Months Ended
		June 30,				June 30,
(in millions)		2018		2017		2018		2017
Other-than-temporary Impairments:
Fixed maturity securities, available for sale	$	36	$	55	$	123	$	113
Equity securities, available for sale(a)		-		6		-		8
Private equity funds and hedge funds		-		6		-		14
Subtotal		36		67		123		135
Other impairments:
Investments in life settlements		-		46		-		87
Other investments		-		4		-		4
Real estate(b)		61		-		71		52
Total	$	97	$	117	$	194	$	278

AIG | Second Quarter 2018 Form 10-Q139

ITEM 2 | Investments

(a)  Upon the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer required to be evaluated for other-than-temporary impairments.

(b)  Impairments in 2017 include $35 million related to other assets that were sold.

Other-Than-Temporary Impairments

To determine other-than-temporary impairments, we use fundamental credit analyses of individual securities without regard to rating agency ratings. Based on this analysis, we expect to receive cash flows sufficient to cover the amortized cost of all below investment grade securities for which credit impairments were not recognized.

The following tables present other-than-temporary impairment charges recorded in earnings on fixed maturity securities, equity securities, private equity funds and hedge funds.

Other-than-temporary impairment charges by investment type and impairment type:

							Other Fixed		Equities/Other
(in millions)	RMBS		CDO/ABS		CMBS		Maturity		Invested Assets*			Total
Three Months Ended June 30, 2018
Severity	$	-	$	-	$	-	$	-	$	-	$	-
Change in intent		-		-		-		-		-		-
Foreign currency declines		-		-		-		6		-		6
Issuer-specific credit events		9		-		7		14		-		30
Adverse projected cash flows		-		-		-		-		-		-
Total	$	9	$	-	$	7	$	20	$	-	$	36
Three Months Ended June 30, 2017
Impairment Type:
Severity	$	-	$	-	$	-	$	-	$	2	$	2
Change in intent		-		-		-		7		-		7
Foreign currency declines		-		-		-		-		-		-
Issuer-specific credit events		4		33		6		2		10		55
Adverse projected cash flows		3		-		-		-		-		3
Total	$	7	$	33	$	6	$	9	$	12	$	67
Six Months Ended June 30, 2018
Impairment Type:
Severity	$	-	$	-	$	-	$	-	$	-	$	-
Change in intent		-		-		-		49		-		49
Foreign currency declines		-		-		-		12		-		12
Issuer-specific credit events		24		2		13		23		-		62
Adverse projected cash flows		-		-		-		-		-		-
Total	$	24	$	2	$	13	$	84	$	-	$	123
Six Months Ended June 30, 2017
Impairment Type:
Severity	$	-	$	-	$	-	$	-	$	2	$	2
Change in intent		-		-		-		8		-		8
Foreign currency declines		-		-		-		10		-		10
Issuer-specific credit events		16		33		21		22		20		112
Adverse projected cash flows		3		-		-		-		-		3
Total	$	19	$	33	$	21	$	40	$	22	$	135

*    Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments. Upon the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer required to be evaluated for other-than-temporary impairments.

140AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Investments

We recorded other-than-temporary impairment charges in the six-months ended June 30, 2018 and 2017 related to:

•issuer-specific credit events;

•securities that we intend to sell or for which it is more likely than not that we will be required to sell;

•declines due to foreign exchange rates;

•adverse changes in estimated cash flows on certain structured securities; and

•securities that experienced severe market valuation declines.

In addition, impairments are recorded on real estate and investments in life settlements.

In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities that is not foreign-exchange related, we generally prospectively accrete into earnings the difference between the new amortized cost and the expected undiscounted recoverable value over the remaining life of the security. The accretion that was recognized for these securities in earnings was $121 million and $188 million in the three-month periods ended June 30, 2018 and 2017, respectively, and $269 million and $376 million in the six-month periods ended June 30, 2018 and 2017, respectively.

For a discussion of our other-than-temporary impairment accounting policy seeNote 6 to the Consolidated Financial Statements in the 2017 Annual Report. 

The following table shows the aging of the pre-tax unrealized losses of fixed maturity securities, the extent to which the fair value is less than amortized cost or cost, and the number of respective items in each category:

June 30, 2018		Less Than or Equal					Greater Than 20%					Greater Than 50%
		to 20% of Cost(b)					to 50% of Cost(b)					of Cost(b)					Total
Aging(a)			Unrealized					Unrealized					Unrealized					Unrealized
(dollars in millions)		Cost(c)		Loss	Items(e)		Cost(c)		Loss	Items(e)		Cost(c)		Loss	Items(e)		Cost(c)		Loss(d)	Items(e)
Investment grade
bonds
0-6 months	$	60,327	$	1,653	7,430	$	76	$	18	3	$	10	$	8	4	$	60,413	$	1,679	7,437
7-11 months		17,798		777	2,082		-		-	-		-		-	-		17,798		777	2,082
12 months or more		12,726		813	1,544		27		9	13		29		18	11		12,782		840	1,568
Total	$	90,851	$	3,243	11,056	$	103	$	27	16	$	39	$	26	15	$	90,993	$	3,296	11,087
Below investment
grade bonds
0-6 months	$	6,277	$	194	3,013	$	104	$	29	39	$	172	$	170	15	$	6,553	$	393	3,067
7-11 months		1,015		59	436		378		131	8		-		-	1		1,393		190	445
12 months or more		1,702		125	359		122		34	25		25		15	9		1,849		174	393
Total	$	8,994	$	378	3,808	$	604	$	194	72	$	197	$	185	25	$	9,795	$	757	3,905
Total bonds
0-6 months	$	66,604	$	1,847	10,443	$	180	$	47	42	$	182	$	178	19	$	66,966	$	2,072	10,504
7-11 months		18,813		836	2,518		378		131	8		-		-	1		19,191		967	2,527
12 months or more		14,428		938	1,903		149		43	38		54		33	20		14,631		1,014	1,961
Total(e)	$	99,845	$	3,621	14,864	$	707	$	221	88	$	236	$	211	40	$	100,788	$	4,053	14,992

(a)  Represents the number of consecutive months that fair value has been less than cost by any amount.

(b)  Represents the percentage by which fair value is less than cost at June 30, 2018.

(c)  For bonds, represents amortized cost.

(d)  The effect on Net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will result in current decreases in the amortization of certain DAC.

(e)  Item count is by CUSIP by subsidiary.

AIG | Second Quarter 2018 Form 10-Q141

ITEM 2 | Investments

Change in Unrealized Gains and Losses on Investments

The change in net unrealized gains and losses on investments in the three- and six-month periods ended June 30, 2018 was primarily attributable to decreases in the fair value of fixed maturity securities. For the six-month period ended June 30, 2018, net unrealized losses related to fixed maturity securities decreased by $8.0 billion due primarily to an increase in rates and a widening of credit spreads.

The change in net unrealized gains and losses on investments in the three- and six-month periods ended June 30, 2017 was primarily attributable to increases in the fair value of fixed maturity securities. For the six-month period ended June 30, 2017, net unrealized gains related to fixed maturity and equity securities increased by $3.3 billion due primarily to a decrease in rates and a narrowing of credit spreads.

For further discussion of our investment portfolio see also Note 5 to the Condensed Consolidated Financial Statements.

Net Realized Capital Gains and Losses

The following table presents the components of Net realized capital gains (losses):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2018		2017		2018		2017
Sales of fixed maturity securities	$	(13)	$	165	$	(3)	$	320
Sales of equity securities		-		81		16		82
Other-than-temporary impairments:
Severity		-		(2)		-		(2)
Change in intent		-		(7)		(49)		(8)
Foreign currency declines		(6)		-		(12)		(10)
Issuer-specific credit events		(30)		(55)		(62)		(112)
Adverse projected cash flows		-		(3)		-		(3)
Provision for loan losses		(26)		(24)		(50)		(18)
Foreign exchange transactions		(187)		74		(134)		233
Variable annuity embedded derivatives, net of related hedges		36		(204)		183		(593)
All other derivatives and hedge accounting		375		(94)		150		(81)
Impairments on investments in life settlements		-		(46)		-		(87)
Other		16		46		107		95
Net realized capital gains (losses)	$	165	$	(69)	$	146	$	(184)

We experienced net realized capital gains in the three- and six-month periods ended June 30, 2018 compared to losses in the same periods in the prior year due primarily to derivative gains compared to derivatives losses, which more than offset lower gains on the sales of securities and foreign exchange losses compared to gains in the prior year periods. Net realized capital gains in the three- and six-month periods ended June 30, 2018 were primarily related to derivative gains, which more than offset other-than-temporary impairment charges and foreign exchange losses.

Net realized capital losses in the three- and six-month periods ended June 30, 2017 were primarily related to derivative and hedge accounting losses, and impairments, which were higher than the foreign exchange gains and the gains recognized on the sales of securities.

Variable annuity embedded derivatives, net of related hedges, reflected gains in the three- and six-month periods ended June 30, 2018 compared to losses in the same periods in the prior year primarily due to changes in the non-performance or “own credit” risk adjustment used in the valuation of the variable annuities with guaranteed minimum withdrawal benefits (GMWB) embedded derivative, which are not hedged as part of our economic hedging program.

For additional discussion of market risk management related to these product features see MD&A – Enterprise Risk Management – Insurance Risks – Life and Retirement Companies’ Key Risks – Variable Annuity Risk Management and Hedging Programs in the 2017 Annual Report. For more information on the economic hedging target and the impact to pre-tax income of this program see Insurance Reserves – Life and Annuity Reserves and DAC – Variable Annuity Guaranteed Benefits and Hedging Results in this MD&A.

For further discussion of our investment portfolio see also Note 5 to the Condensed Consolidated Financial Statements.

142AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Insurance Reserves

Insurance Reserves

Liability for unpaid losses and loss adjustment expenses (Loss Reserves)

The following table presents the components of our gross and net loss reserves by segment and major lines of business:

	June 30, 2018						December 31, 2017
	Net liability for		Reinsurance		Gross liability		Net liability		Reinsurance		Gross liability
	unpaid losses		recoverable on		for unpaid		for unpaid		recoverable on		for unpaid
	and loss		unpaid losses and		losses and		losses and		unpaid losses and		losses and
	adjustment		loss adjustment		loss adjustment		loss adjustment		loss adjustment		loss adjustment
(in millions)	expenses		expenses		expenses		expenses		expenses		expenses
General Insurance:
U.S. Workers' Compensation
(net of discount)	$	5,450	$	4,986	$	10,436	$	5,690	$	4,974	$	10,664
U.S. Excess Casualty		4,354		4,095		8,449		4,802		4,053		8,855
U.S. Other Casualty		4,782		4,862		9,644		5,149		4,793		9,942
U.S. Financial Lines		4,973		1,954		6,927		5,104		1,962		7,066
U.S. Property and Special risks		4,935		992		5,927		5,410		968		6,378
U.S. Personal Insurance		1,098		200		1,298		1,380		194		1,574
Europe Casualty and Financial Lines		6,860		1,254		8,114		6,986		1,156		8,142
Europe Property and Special risks		2,106		685		2,791		2,022		632		2,654
Europe and Japan Personal Insurance		2,267		378		2,645		2,348		349		2,697
Other product lines		5,848		2,630		8,478		5,804		2,307		8,111
Unallocated loss adjustment expenses		1,932		1,319		3,251		1,974		1,258		3,232
Total General Insurance		44,605		23,355		67,960		46,669		22,646		69,315
Legacy Portfolio - Run-off Lines:
U.S. Long Tail Insurance lines
(net of discount)		4,099		3,717		7,816		4,465		3,675		8,140
Other run-off product lines		176		68		244		153		65		218
Unallocated loss adjusted expenses		399		116		515		370		111		481
Total Legacy Portfolio - Run-off Lines		4,674		3,901		8,575		4,988		3,851		8,839
Other Operations (Blackboard)		28		150		178		28		211		239
Total	$	49,307	$	27,406	$	76,713	$	51,685	$	26,708	$	78,393

*    Includes loss reserve discount of $2.0 billion and $1.8 billion for the three-month period ended June 30, 2018 and year ended December 31, 2017, respectively. For discussion of loss reserve discount see Note 9 to the Condensed Consolidated Financial Statements.

AIG | Second Quarter 2018 Form 10-Q143

ITEM 2 |Insurance Reserves

PRIOR YEAR DEVELOPMENT

The following table summarizes incurred (favorable) unfavorable prior year development net of reinsurance by segment:

		Three Months Ended				Six Months Ended
		June 30,				June 30,
(in millions)		2018		2017		2018		2017
General Insurance:
North America*	$	(54)	$	4	$	(132)	$	(74)
International		(7)		54		(37)		156
Total General Insurance	$	(61)	$	58	$	(169)	$	82
Legacy Portfolio - Run-off Lines		(2)		(2)		(4)		(16)
Total prior year (favorable) unfavorable development	$	(63)	$	56	$	(173)	$	66

*    Includes the amortization attributed to the deferred gain at inception from the NICO adverse development reinsurance agreement of $57 million and $62 million for the three-month periods ended June 30, 2018 and 2017, respectively and $119 million and $103 million for the six-month periods ended June 30, 2018 and 2017, respectively. Consistent with our definition of APTI, prior year development excludes the portion of (favorable)/ unfavorable prior year reserve development for which we have ceded the risk under the NICO reinsurance agreements of $(19) million and $273 million for the three-month periods ended June 30, 2018 and 2017, respectively, and $(10) million and $284 million for the six-month periods ended June 30, 2018 and 2017, respectively. The related changes in amortization of the deferred gain were $13 million and $20 million for the three-month periods ended June 30, 2018 and 2017, respectively, and $(10) million and $17 million for the six-month periods ended June 30, 2018 and 2017, respectively.

Net Loss Development

In the three- and six month periods ended June 30, 2018 we recognized favorable prior year loss reserve development of $63 million and $173 million, respectively. For North America, the favorable development in the current period was primarily driven by amortization of the deferred gain from the adverse development reinsurance agreement with NICO and favorable development on prior year catastrophes in U.S. Property and Special Risks business. This was partially offset by adverse development in U.S. Personal Insurance. For International, the favorable development was driven by Europe and Japan Personal Insurance, partially offset by Non-European Financial Lines. For the Legacy General Insurance Run-Off Lines, we recognized $150 million of adverse development in pre-1986 environmental liability entirely offset by favorable development in casualty policies relating to the trucking business, with smaller favorable contributions from runoff medical malpractice and post-1986 environmental liability. The adverse development in pre-1986 environmental liability was driven by increasing severity of claims from excess casualty policies.

In the three- and six-month periods ended June 30, 2017, we recognized unfavorable prior year loss reserve development of $56 million and $66 million, respectively. This unfavorable development was primarily a result of the following: 

•Higher than expected losses for U.S. Other Casualty – we observed unfavorable claim experience within primary general liability segments, particularly due to construction defects and multi-year construction projects that cover all contractors on the site (wrap business), along with other large individual claims with nearly all of the unfavorable development coming from accident years 2015 and prior and roughly one-third from accident years 2006 and prior.

•Unfavorable development in U.S. Excess Casualty was driven by continued unfavorable claim experience in the construction defects and wrap business primarily from accident years 2006 and prior.

•Higher than expected losses in Europe Property and Special Risks were driven by unexpected development on several large claims including aviation, marine and trade credit primarily from accident year 2016.

In addition in the first quarter of 2017, we increased our loss reserves by $102 million as a result of the decision made by the UK Ministry of Justice to reduce the discount rate applied to lump-sum bodily injury payouts, known as the Ogden rate. This change primarily impacted the Europe Casualty and Financial Lines. These prior year loss reserve increases were partially offset by the recognition of the amortization of the deferred gain from the adverse development reinsurance agreement with NICO in North America.

144AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Insurance Reserves

The following tables summarize incurred (favorable) unfavorable prior year development net of reinsurance, by segment and major lines of business, and by accident year groupings:

Three Months Ended June 30, 2018
(in millions)		Total		2017		2016 & Prior
General Insurance North America:
U.S. Workers' Compensation	$	(25)	$	-	$	(25)
U.S. Excess casualty		(15)		-		(15)
U.S. Other casualty		-		22		(22)
U.S. Financial lines		(10)		(1)		(9)
U.S. Property and special risks		(51)		(53)		2
U.S. Personal insurance		42		46		(4)
Other product lines		5		4		1
Total General Insurance North America	$	(54)	$	18	$	(72)
General Insurance International:
Europe casualty and financial lines	$	-	$	(1)	$	1
Europe property and special risks		(5)		(10)		5
Europe and Japan Personal insurance		(23)		(29)		6
Other product lines		21		15		6
Total General Insurance International	$	(7)	$	(25)	$	18
Legacy Portfolio - Run-off Lines		(2)		46		(48)
Total prior year (favorable) unfavorable development	$	(63)	$	39	$	(102)
Three Months Ended June 30, 2017
(in millions)		Total		2016		2015 & Prior
General Insurance North America:
U.S. Workers' Compensation	$	(20)	$	-	$	(20)
U.S. Excess casualty		10		12		(2)
U.S. Other casualty		37		(3)		40
U.S. Financial lines		(10)		-		(10)
U.S. Property and special risks		4		(2)		6
U.S. Personal insurance		(14)		(7)		(7)
Other product lines		(3)		(8)		5
Total General Insurance North America	$	4	$	(8)	$	12
General Insurance International:
Europe casualty and financial lines	$	(3)	$	(17)	$	14
Europe property and special risks		54		47		7
Europe and Japan Personal insurance		7		(2)		9
Other product lines		(4)		9		(13)
Total General Insurance International	$	54	$	37	$	17
Legacy Portfolio - Run-off Lines		(2)		29		(31)
Total prior year (favorable) unfavorable development	$	56	$	58	$	(2)

AIG | Second Quarter 2018 Form 10-Q145

ITEM 2 |Insurance Reserves

Six Months Ended June 30, 2018
(in millions)		Total		2017		2016 & Prior
General Insurance North America:
U.S. Workers' Compensation	$	(45)	$	-	$	(45)
U.S. Excess casualty		(30)		-		(30)
U.S. Other casualty		(17)		21		(38)
U.S. Financial lines		(22)		(3)		(19)
U.S. Property and special risks		(120)		(116)		(4)
U.S. Personal insurance		99		102		(3)
Other product lines		3		5		(2)
Total General Insurance North America	$	(132)	$	9	$	(141)
General Insurance International:
Europe casualty and financial lines	$	1	$	-	$	1
Europe property and special risks		(2)		(13)		11
Europe and Japan Personal insurance		(63)		(44)		(19)
Other product lines		27		27		-
Total General Insurance International	$	(37)	$	(30)	$	(7)
Legacy Portfolio - Run-off Lines		(4)		43		(47)
Total prior year (favorable) unfavorable development	$	(173)	$	22	$	(195)
Six Months Ended June 30, 2017
(in millions)		Total		2016		2015 & Prior
General Insurance North America:
U.S. Workers' Compensation	$	(33)	$	-	$	(33)
U.S. Excess casualty		(11)		12		(23)
U.S. Other casualty		21		(8)		29
U.S. Financial lines		(5)		1		(6)
U.S. Property and special risks		(41)		(32)		(9)
U.S. Personal insurance		(18)		(17)		(1)
Other product lines		13		(5)		18
Total General Insurance North America	$	(74)	$	(49)	$	(25)
General Insurance International:
Europe casualty and financial lines	$	96	$	4	$	92
Europe property and special risks		80		76		4
Europe and Japan Personal insurance		7		(6)		13
Other product lines		(27)		(15)		(12)
Total General Insurance International	$	156	$	59	$	97
Legacy Portfolio - Run-off Lines		(16)		29		(45)
Total prior year (favorable) unfavorable development	$	66	$	39	$	27

We note that for certain categories of claims (e.g., construction defect claims and environmental claims) and for reinsurance recoverable, losses may sometimes be reclassified to an earlier or later accident year as more information about the date of occurrence becomes available to us. These reclassifications are shown as development in the respective years in the tables above. This may affect the comparability of the data presented in our tables.

Significant Reinsurance Agreements

In the first quarter of 2017, we entered into an adverse development reinsurance agreement with NICO, a subsidiary of Berkshire Hathaway Inc., under which we transferred to NICO 80 percent of the reserve risk on substantially all of our U.S. Commercial long-tail exposures for accident years 2015 and prior. Under this agreement, we ceded to NICO 80 percent of the losses on subject business paid on or after January 1, 2016 in excess of $25 billion of net paid losses, up to an aggregate limit of $25 billion. We account for this transaction as retroactive reinsurance. This transaction resulted in a gain, which under U.S. GAAP retroactive reinsurance accounting is deferred and amortized into income over the settlement period. NICO created a collateral trust account as security for their claim payment obligations to us, into which they deposited the consideration paid under the agreement, and Berkshire Hathaway Inc. has provided a parental guarantee to secure NICO’s obligations under the agreement.

146AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Insurance Reserves

For a description of AIG’s catastrophe reinsurance protection for 2018, see Part II, Item 7. MD&A – Enterprise Risk Management – Insurance Risks – General Insurance Companies’  Key Risks – Natural Catastrophe Risk in our 2017 Annual Report.

The table below shows the calculation of the deferred gain on the adverse development reinsurance agreement as of June 30, 2018 and as of December 31, 2017, showing the effect of discounting of loss reserves and amortization of the deferred gain.

		June 30,		December 31,
(in millions)		2018		2017
Gross Covered Losses
Covered reserves before discount	$	24,374	$	26,654
Inception to date losses paid		17,058		14,788
Attachment point		(25,000)		(25,000)
Covered losses above attachment point	$	16,432	$	16,442
Deferred Gain Development
Covered losses above attachment ceded to NICO (80%)	$	13,146	$	13,153
Consideration paid including interest		(10,188)		(10,188)
Pre-tax deferred gain before discount and amortization		2,958		2,965
Discount on ceded losses(a)		(1,647)		(1,539)
Pre-tax deferred gain before amortization		1,311		1,426
Inception to date amortization of deferred gain at inception		(347)		(228)
Inception to date amortization attributed to changes in deferred gain(b)		(7)		(31)
Deferred gain liability reflected in AIG's balance sheet	$	957	$	1,167

(a)            For the period from inception to June 30, 2018, the accretion of discount and a reduction in effective interest rates was offset by changes in estimates of the amount and timing of future recoveries under the Adverse Development Reinsurance Agreement.

(b) Excluded from our definition of APTI.

The following table presents the rollforward of activity in the deferred gain from the adverse development reinsurance agreement:

		Three Months Ended				Six Months Ended
		June 30,				June 30,
(in millions)		2018		2017		2018		2017
Balance at beginning of year net of discount	$	1,013	$	968	$	1,167	$	-
Gain at inception		-		-		-		1,116
Unfavorable prior year reserve development ceded to NICO(a)		(15)		273		(7)		284
Amortization attributed to deferred gain at inception(b)		(57)		(62)		(119)		(103)
Amortization attributed to changes in deferred gain(c)		(4)		(10)		24		(12)
Changes in discount on ceded loss reserves		20		108		(108)		(8)
Balance at end of period, net of discount	$	957	$	1,277	$	957	$	1,277

(a)  Prior year reserve development ceded to NICO under the retroactive reinsurance agreement is deferred under U.S. GAAP.

(b)  Represents amortization of the deferred gain recognized in APTI.

(c)  Excluded from APTI and included in U.S. GAAP.

The lines of business subject to this agreement have been the source of the majority of the prior year adverse development charges over the past several years. The agreement is expected to result in lower capital charges for reserve risks at our U.S. insurance subsidiaries. In addition, we would expect future net investment income to decline as a result of lower invested assets.

For a summary of significant reinsurers see Item 7. MD&A – Enterprise Risk Management – Insurance Operations Risks – General Insurance Companies Key Insurance Risks – Reinsurance Recoverable in our 2017 Annual Report.

AIG | Second Quarter 2018 Form 10-Q147

ITEM 2 |Insurance Reserves

LIFE AND ANNUITY reserves and dac

The following section provides discussion of life and annuity reserves and deferred policy acquisition costs.

Variable Annuity Guaranteed Benefits and Hedging Results

Our Individual Retirement and Group Retirement businesses offer variable annuity products with GMWB riders that provide guaranteed living benefit features. The liabilities for GMWB are accounted for as embedded derivatives measured at fair value. The fair value of the embedded derivatives may fluctuate significantly based on market interest rates, equity prices, credit spreads, market volatility, policyholder behavior and other factors.

In addition to risk-mitigating features in our variable annuity product design, we have an economic hedging program designed to manage market risk from GMWB, including exposures to changes in interest rates, equity prices, credit spreads and volatility. The hedging program utilizes derivative instruments, including but not limited to equity options, futures contracts and interest rate swap and swaption contracts, as well as fixed maturity securities with a fair value election.

For additional discussion of market risk management related to these product features seeEnterprise Risk Management – Insurance Risks – Life and Retirement Companies Key Risks – Variable Annuity Risk Management and Hedging Programs in our 2017 Annual Report. 

Differences in Valuation of Embedded Derivatives and Economic Hedge Target

The variable annuity hedging program utilizes an economic hedge target, which represents an estimate of the underlying economic risks in our GMWB riders. The economic hedge target differs from the U.S. GAAP valuation of the GMWB embedded derivatives primarily due to the following:

•The economic hedge target includes 100 percent of rider fees in present value calculations; the U.S. GAAP valuation reflects only those fees attributed to the embedded derivative such that the initial value at contract issue equals zero;

•The economic hedge target uses best estimate actuarial assumptions and excludes explicit risk margins used for U.S. GAAP valuation, such as margins for policyholder behavior, mortality, and volatility; and

•The economic hedge target excludes the non-performance or “own credit” risk adjustment used in the U.S. GAAP valuation, which reflects a market participant’s view of our claims-paying ability by incorporating an additional spread (the NPA spread) to the swap curve used to discount projected benefit cash flows. Because the discount rate includes the NPA spread and other explicit risk margins, the U.S. GAAP valuation is generally less sensitive to movements in interest rates and other market factors, and to changes from actuarial assumption updates, than the economic hedge target. For more information on our valuation methodology for embedded derivatives within policyholder contract deposits seeNote 4 to the Condensed Consolidated Financial Statements. 

The market value of the hedge portfolio compared to the economic hedge target at any point in time may be different and is not expected to be fully offsetting. In addition to the derivatives held in conjunction with the variable annuity hedging program, the Life and Retirement companies have cash and invested assets available to cover future claims payable under these guarantees.  The primary sources of difference between the change in the fair value of the hedging portfolio and the economic hedge target include:

•Basis risk due to the variance between expected and actual fund returns, which may be either positive or negative;

•Realized volatility versus implied volatility;

•Actual versus expected changes in the hedge target driven by assumptions not subject to hedging, particularly policyholder behavior; and

•Risk exposures that we have elected not to explicitly or fully hedge.

148AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Insurance Reserves

The following table presents a reconciliation between the fair value of the U.S. GAAP embedded derivatives and the value of our economic hedge target:

		June 30,		December 31,
(in millions)		2018		2017
Reconciliation of embedded derivatives and economic hedge target:
Embedded derivative liability	$	1,332	$	1,994
Exclude non-performance risk adjustment		(1,876)		(1,947)
Embedded derivative liability, excluding NPA		3,208		3,941
Adjustments for risk margins and differences in valuation		(1,458)		(1,557)
Economic hedge target liability	$	1,750	$	2,384

Impact on Pre-tax Income (Loss)

The impact on our pre-tax income (loss) of the variable annuity guaranteed living benefits and related hedging results includes changes in the fair value of the GMWB embedded derivatives, and changes in the fair value of related derivative hedging instruments, both of which are recorded in Other realized capital gains (losses). Realized capital gains (losses), as well as net investment income from changes in the fair value of fixed maturity securities used in the hedging program, are excluded from adjusted pre-tax income of Individual Retirement and Group Retirement.

The change in the fair value of the embedded derivatives and the change in the value of the hedging portfolio are not expected to be fully offsetting, primarily due to the differences in valuation between the economic hedge target, the U.S. GAAP embedded derivatives and the fair value of the hedging portfolio, as discussed above. When corporate credit spreads widen, the change in the NPA spread generally reduces the fair value of the embedded derivative liabilities, resulting in a gain, and when corporate credit spreads narrow or tighten, the change in the NPA spread generally increases the fair value of the embedded derivative liabilities, resulting in a loss. In addition to changes driven by credit market-related movements in the NPA spread, the NPA balance also reflects changes in business activity and in the net amount at risk from the underlying guaranteed living benefits.

The following table presents the net increase (decrease) to consolidated pre-tax income (loss) from changes in the fair value of the GMWB embedded derivatives and related hedges, excluding related DAC amortization:

		Three Months Ended				Six Months Ended
		June 30,				June 30,
(in millions)		2018		2017		2018		2017
Change in fair value of embedded derivatives, excluding NPA	$	373	$	(19)	$	924	$	572
Change in fair value of variable annuity hedging portfolio:
Fixed maturity securities		(37)		80		(114)		91
Interest rate derivative contracts		(184)		213		(590)		30
Equity derivative contracts		(154)		(259)		(80)		(668)
Change in fair value of variable annuity hedging portfolio		(375)		34		(784)		(547)
Change in fair value of embedded derivatives excluding NPA, net of hedging portfolio		(2)		15		140		25
Change in fair value of embedded derivatives due to NPA spread		100		(218)		172		(403)
Change in fair value of embedded derivatives due to change in NPA volume		(99)		79		(243)		(124)
Total change due to NPA		1		(139)		(71)		(527)
Net impact on pre-tax income (loss)	$	(1)	$	(124)	$	69	$	(502)
By Consolidated Income Statement line
Net Investment Income	$	(37)	$	80	$	(114)	$	91
Net Realized capital gains (losses)		36		(204)		183		(593)
Net Impact on pre-tax income (loss)	$	(1)	$	(124)	$	69	$	(502)

The net impact on pre-tax income from the GMWB and related hedges in the three-month period ended June 30, 2018 (excluding related DAC amortization) was insignificant as gains from the impact of widening credit spreads on the NPA were substantially offset by the impact on NPA volume of lower expected GMWB payments, driven by higher interest rates. The net impact on pre-tax income from the GMWB and related hedges in the six-month period ended June 30, 2018 was primarily driven by gains from the impact of widening credit spreads on the NPA spread, higher interest rates and equity market volatility, partially offset by the impact on NPA volume of lower expected GMWB payments, driven by higher interest rates. The net impact on pre-tax income from the GMWB and related hedges in the three- and six-month periods ended June 30, 2017 was primarily driven by losses from the impact of tightening

AIG | Second Quarter 2018 Form 10-Q149

ITEM 2 |Insurance Reserves

credit spreads on the NPA spread in both periods, and the impact on the NPA volume of lower expected GMWB payments in the six-month period ended June 30, 2017, driven by higher equity markets.

The change in the fair value of embedded derivatives, excluding NPA, in the three- and six-month periods ended June 30, 2018 reflected gains from equity market volatility and reductions in risk margins due to higher interest rates, substantially offset by losses from the related hedging portfolio in the three-month period ended June 30, 2018. In the six-month period ended June 30, 2018, fair value gains on embedded derivatives, excluding NPA, was not fully offset by fair value losses on the related hedging portfolio. The change in the fair value of embedded derivatives excluding NPA in the three- and six-month periods ended June 30, 2017 was largely offset by the related hedging portfolio.

Fair value gains or losses in the hedging portfolio are typically not fully offset by increases or decreases in liabilities on a U.S. GAAP basis, due to the NPA and other risk margins used for U.S. GAAP valuation that cause the embedded derivatives to be less sensitive to changes in market rates than the hedge portfolio. On an economic basis, the changes in the fair value of the hedge portfolio were partially offset by the decrease in the economic hedge target, as discussed below.

Change in Economic Hedge Target

The decrease in the economic hedge target liability in the first half of 2018 was primarily due to widening credit spreads, higher interest rates and equity market volatility.

Change in Fair Value of the Hedging Portfolio

The changes in the fair value of the economic hedge target and, to a lesser extent, the embedded derivatives, were offset in part by the following changes in the fair value of the variable annuity hedging portfolio:

•Changes in the fair value of fixed maturity securities, primarily corporate bonds for which the fair value option has been elected, are used as a capital-efficient way to economically hedge interest rate and credit spread-related risk. The change in the fair value of the corporate bond hedging program in the three- and six-month periods ended June 30, 2018 reflected losses due to increases in interest rates and widening of credit spreads, while the three- and six-month periods ended June 30, 2017 reflected gains, due to tightening of credit spreads. The change in the fair value of the hedging bonds, which is excluded from the adjusted pre-tax income of the Individual Retirement and Group Retirement segments, is reported in net investment income on the Consolidated Statements of Income (Loss).

•Changes in the fair value of interest rate derivative contracts, which included swaps, swaptions and futures, resulted in net losses driven by higher interest rates in the three- and six-month periods ended June 30, 2018 compared to net gains from interest rate declines in the same periods in the prior year.

•The change in the fair value of equity derivative contracts, which included futures and options, reflected lower losses in the three- and six-month periods ended June 30, 2018 compared to the same periods in the prior year, which varied based on the relative change in equity market returns in the respective periods.

DAC

The following table summarizes the major components of the changes in DAC, including VOBA, within the Life and Retirement companies, excluding DAC of the Legacy Portfolio:

Six Months Ended June 30,
(in millions)		2018		2017
Balance, beginning of year	$	7,637	$	7,571
Acquisition costs deferred		544		480
Amortization expense:
Related to realized capital gains and losses		(27)		109
All other operating amortization		(471)		(427)
Increase (decrease) in DAC due to foreign exchange		(10)		14
Change related to unrealized depreciation (appreciation) of investments		831		(104)
Balance, end of period*	$	8,504	$	7,643

*   DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments was $9.0 billion and $8.6 billion at June 30, 2018 and 2017, respectively.

150AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Insurance Reserves

DAC and Reserves Related to Unrealized Appreciation of Investments

DAC and Reserves for universal life and investment-type products (collectively, investment-oriented products) are adjusted at each balance sheet date to reflect the change in DAC, unearned revenue, and benefit reserves with an offset to Other comprehensive income (OCI) as if securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields (shadow Investment-Oriented Adjustments). Similarly, for long-duration traditional products, significant unrealized appreciation of investments in a sustained low interest rate environment may cause additional future policy benefit liabilities (shadow Loss Adjustments) with an offset to OCI to be recorded.

Shadow adjustments to DAC and unearned revenue generally move in the opposite direction of the change in unrealized appreciation of the available for sale securities portfolio, reducing the reported DAC and unearned revenue balance when market interest rates decline. Conversely, shadow adjustments to benefit reserves generally move in the same direction as the change in unrealized appreciation of the available for sale securities portfolio, increasing reported future policy benefit liabilities balance when market interest rates decline.

Market interest rates increased in the six-month period ended June 30,2018, which resulted in a $6.7 billion decrease in the unrealized appreciation of fixed maturity securities held to support businesses in the Life and Retirement companies at June 30, 2018 compared to December 31, 2017. At June 30, 2018, the shadow Investment-Oriented Adjustments reflected increases in DAC and unearned revenues and a decrease in future policy benefit liabilities compared to December 31, 2017, while the shadow Loss Adjustments reflected a decrease in future policy benefit liabilities.

Reserves

The following table presents a rollforward of insurance reserves by operating segments for Life and Retirement, including future policy benefits, policyholder contract deposits, other policy funds, and separate account liabilities, as well as Retail Mutual Funds and Group Retirement mutual fund assets under administration:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2018		2017		2018		2017
Individual Retirement
Balance at beginning of period, gross	$	137,244	$	131,624	$	138,571	$	129,321
Premiums and deposits		3,422		2,892		7,780		6,274
Surrenders and withdrawals		(3,607)		(2,762)		(6,737)		(5,636)
Death and other contract benefits		(864)		(821)		(1,764)		(1,624)
Subtotal		(1,049)		(691)		(721)		(986)
Change in fair value of underlying assets and reserve accretion, net of
policy fees		664		1,887		(1,274)		4,264
Cost of funds*		377		381		755		763
Other reserve changes		(102)		10		(197)		(151)
Balance at end of period		137,134		133,211		137,134		133,211
Reinsurance ceded		(322)		(333)		(322)		(333)
Total Individual Retirement insurance reserves and mutual fund assets	$	136,812	$	132,878	$	136,812	$	132,878
Group Retirement
Balance at beginning of period, gross	$	96,754	$	90,958	$	97,306	$	88,622
Premiums and deposits		2,345		1,802		4,417		3,842
Surrenders and withdrawals		(2,638)		(1,835)		(5,105)		(4,123)
Death and other contract benefits		(166)		(148)		(317)		(282)
Subtotal		(459)		(181)		(1,005)		(563)
Change in fair value of underlying assets and reserve accretion, net of
policy fees		982		1,593		712		4,037
Cost of funds*		271		279		541		553
Other reserve changes		-		-		(6)		-
Balance at end of period		97,548		92,649		97,548		92,649
Total Group Retirement insurance reserves and mutual fund assets	$	97,548	$	92,649	$	97,548	$	92,649

AIG | Second Quarter 2018 Form 10-Q151

ITEM 2 |Insurance Reserves

Life Insurance
Balance at beginning of period, gross	$	19,706	$	18,533	$	19,424	$	18,397
Premiums and deposits		892		884		1,776		1,740
Surrenders and withdrawals		(140)		(136)		(314)		(294)
Death and other contract benefits		(110)		(159)		(206)		(290)
Subtotal		642		589		1,256		1,156
Change in fair value of underlying assets and reserve accretion, net of
policy fees		(295)		(229)		(542)		(433)
Cost of funds*		94		93		189		188
Other reserve changes		(500)		(292)		(680)		(614)
Balance at end of period		19,647		18,694		19,647		18,694
Reinsurance ceded		(1,050)		(1,075)		(1,050)		(1,075)
Total Life Insurance reserves	$	18,597	$	17,619	$	18,597	$	17,619
Institutional Markets
Balance at beginning of period, gross	$	19,579	$	15,815	$	18,580	$	15,385
Premiums and deposits		652		150		2,115		723
Surrenders and withdrawals		(484)		(564)		(1,006)		(763)
Death and other contract benefits		(168)		(108)		(275)		(203)
Subtotal		-		(522)		834		(243)
Change in fair value of underlying assets and reserve accretion, net of
policy fees		16		47		77		103
Cost of funds*		84		62		156		120
Other reserve changes		15		43		47		80
Balance at end of period		19,694		15,445		19,694		15,445
Reinsurance ceded		(43)		(3)		(43)		(3)
Total Institutional Markets reserves	$	19,651	$	15,442	$	19,651	$	15,442
Total insurance reserves and mutual fund assets
Balance at beginning of period, gross	$	273,283	$	256,930	$	273,881	$	251,725
Premiums and deposits		7,311		5,728		16,088		12,579
Surrenders and withdrawals		(6,869)		(5,297)		(13,162)		(10,816)
Death and other contract benefits		(1,308)		(1,236)		(2,562)		(2,399)
Subtotal		(866)		(805)		364		(636)
Change in fair value of underlying assets and reserve accretion, net of
policy fees		1,367		3,298		(1,027)		7,971
Cost of funds*		826		815		1,641		1,624
Other reserve changes		(587)		(239)		(836)		(685)
Balance at end of period		274,023		259,999		274,023		259,999
Reinsurance ceded		(1,415)		(1,411)		(1,415)		(1,411)
Total insurance reserves and mutual fund assets	$	272,608	$	258,588	$	272,608	$	258,588

*    Excludes amortization of deferred sales inducements.

Insurance reserves of Life and Retirement, as well as Retail Mutual Funds and Group Retirement mutual fund assets under administration, were comprised of the following balances:

		June 30,		December 31,
(in millions)		2018		2017
Future policy benefits	$	13,847	$	13,592
Policyholder contract deposits		134,273		130,735
Other policy funds		452		401
Separate account liabilities		88,815		90,819
Total insurance reserves*		237,387		235,547
Mutual fund assets		36,636		38,334
Total insurance reserves and mutual fund assets	$	274,023	$	273,881

*    Excludes reserves related to the Legacy Portfolio.

152AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Liquidity and Capital Resources

Liquidity and Capital Resources

Overview

Liquidity refers to the ability to generate sufficient cash resources to meet our payment obligations.  It is defined as cash and unencumbered assets that can be monetized in a short period of time at a reasonable cost. We manage our liquidity prudently through various risk committees, policies and procedures, and a stress testing and liquidity risk framework established by our Treasury group with oversight by Enterprise Risk Management (ERM). Our liquidity risk framework is designed to manage liquidity at both AIG Parent and its subsidiaries to meet our financial obligations for a minimum of six months under a liquidity stress scenario.

See Part II, Item 7. MD&A — Enterprise Risk Management — Risk Appetite, Limits, Identification, and Measurement in the 2017 Annual Report and Enterprise Risk Management — Liquidity Risk Management below for additional information.

Capital refers to the long-term financial resources available to support the operation of our businesses, fund business growth, and cover financial and operational needs that arise from adverse circumstances. Our primary source of ongoing capital generation is derived from the profitability of our insurance subsidiaries. We must comply with numerous constraints on our minimum capital positions. These constraints drive the requirements for capital adequacy at AIG and the individual businesses and are based on internally-defined risk tolerances, regulatory requirements, rating agency and creditor expectations and business needs. Actual capital levels are monitored on a regular basis, and using ERM’s stress testing methodology, we evaluate the capital impact of potential macroeconomic, financial and insurance stresses in relation to the relevant capital constraints of both AIG and our insurance subsidiaries.

We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to policyholders, customers, creditors and debt-holders, including those arising from reasonably foreseeable contingencies or events.

Nevertheless, some circumstances may cause our cash or capital needs to exceed projected liquidity or readily deployable capital resources. Additional collateral calls, deterioration in investment portfolios or reserve strengthening affecting statutory surplus, higher surrenders of annuities and other policies, downgrades in credit ratings, or catastrophic losses may result in significant additional cash or capital needs and loss of sources of liquidity and capital. In addition, regulatory and other legal restrictions could limit our ability to transfer funds freely, either to or from our subsidiaries.

Depending on market conditions, regulatory and rating agency considerations and other factors, we may take various liability and capital management actions. Liability management actions may include, but are not limited to, repurchasing or redeeming outstanding debt, issuing new debt or engaging in debt exchange offers. Capital management actions may include, but are not limited to, paying dividends to our shareholders and share and/or warrant repurchases. 

AIG | Second Quarter 2018 Form 10-Q153

ITEM 2 |Liquidity and Capital Resources

LIQUIDITY AND CAPITAL RESOURCES ACTIVITY FOR the Six Months Ended june 30, 2018

Sources

AIG Parent Funding from Subsidiaries^(a)

During the six-month period ended June 30, 2018, AIG Parent received $2.1 billion in dividends from subsidiaries. Of this amount, $825 million consisted of dividends in the form of cash and fixed maturity securities from our General Insurance companies, $1.2 billion consisted of dividends and loan repayments in the form of cash from our Life and Retirement companies and $21 million consisted of dividends in the form of cash from our Other category.

AIG Parent also received a net amount of  $819 million in tax sharing payments in the form of cash from our insurance businesses in the six-month period ended June 30, 2018, including $441 million of such payments in the second quarter of 2018.  The tax sharing payments may be subject to adjustment in future periods.

Debt Issuance

In March 2018, we issued $750 million aggregate principal amount of 4.200% Notes Due 2028; $1.0 billion aggregate principal amount of 4.750% Notes Due 2048; and $750 million aggregate principal amount of 5.750% Fixed-To-Floating Rate Series A-9 Junior Subordinated Debentures Due 2048 (Junior Subordinated Debentures). We used the net proceeds from these offerings for general corporate purposes, including funding a portion of the consideration for the acquisition of Validus.

Uses^(b)        

Debt Reduction

In May 2018,  we redeemed all of our outstanding 8.000% Series A-7 Junior Subordinated Debentures and 8.625% Series A-8 Junior Subordinated Debentures in each case for a redemption price of 100 percent of the principal amount, plus accrued and unpaid interest, for approximately $15 million and $7 million, respectively.

We also made other repurchases of and repayments on debt instruments of approximately $2.0 billion during the six-month period ended June 30, 2018. AIG Parent made interest payments on our debt instruments totaling $478 million during the six-month period ended June 30, 2018.

Dividend

We paid a cash dividend of $0.32 per share on AIG Common Stock during each of the first and second quarters of 2018 totaling $575 million over both quarters.

Repurchase of Common Stock^(c)

We repurchased approximately 12 million shares of AIG Common Stock during the six-month period ended June 30, 2018, for an aggregate purchase price of approximately $646 million.

(a)  In July 2018, we received approximately $210 million in additional dividends in the form of cash and fixed maturity securities from our General Insurance companies. These dividends had been declared during the second quarter of 2018.

(b) On July 18, 2018, we completed our acquisition of Validus for approximately $5.5 billion in cash. For additional information, see Liquidity and Capital Resources of AIG Parent and Subsidiaries. 

(c) Pursuant to an Exchange Act Rule 10b5-1 repurchase plan, from July 1 to August 2, 2018, we repurchased approximately $149 million of additional shares of AIG Common Stock.

154AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Liquidity and Capital Resources

Analysis of Sources and Uses of Cash

The following table presents selected data from AIG's Consolidated Statements of Cash Flows:

Six Months Ended June 30,
(in millions)		2018		2017
Sources:
Net cash provided by other investing activities	$	-	$	14,725
Changes in policyholder contract balances		3,855		999
Issuance of long-term debt		3,504		2,221
Total sources		7,359		17,945
Uses:
Net cash used in operating activities		(340)		(9,036)
Net cash used in other investing activities		(1,470)		-
Repayments of long-term debt		(1,959)		(1,606)
Purchases of AIG Common Stock		(646)		(6,000)
Dividends paid		(575)		(597)
Net cash used in other financing activities		(2,756)		(44)
Total uses		(7,746)		(17,283)
Effect of exchange rate changes on cash and restricted cash		30		(25)
Increase (decrease) in cash and restricted cash	$	(357)	$	637

The following table presents a summary of AIG’s Consolidated Statement of Cash Flows:

Six Months Ended June 30,
(in millions)		2018		2017
Summary:
Net cash provided by (used in) operating activities	$	(340)	$	(9,036)
Net cash provided by (used in) investing activities		(1,470)		14,725
Net cash provided by (used in) financing activities		1,423		(5,027)
Effect of exchange rate changes on cash and restricted cash		30		(25)
Increase (decrease) in cash and restricted cash		(357)		637
Cash and restricted cash at beginning of year		2,737		2,107
Change in cash of businesses held for sale		-		66
Cash and restricted cash at end of period	$	2,380	$	2,810

Operating Cash Flow Activities

Insurance companies generally receive most premiums in advance of the payment of claims or policy benefits. The ability of insurance companies to generate positive cash flow is affected by the frequency and severity of losses under their insurance policies, policy retention rates and operating expenses.

Interest payments totaled $664 million in the six-month period ended June 30, 2018 compared to $682 million in the same period in the prior year. Excluding interest payments, AIG had operating cash inflows of $324 million in the six-month period ended June 30, 2018 compared to operating cash outflows of $8.4 billion in the same period in the prior year. The operating cash outflow in the six-month period ended June 30, 2017 was primarily due to payment for the adverse development reinsurance agreement entered into with NICO.

AIG | Second Quarter 2018 Form 10-Q155

ITEM 2 |Liquidity and Capital Resources

Investing Cash Flow Activities

Net cash used in investing activities in the six-month period ended June 30, 2018 was $1.5 billion compared to investing cash inflows of $14.7 billion in the six-month period ended June 30, 2017. The six-month period ended June 30, 2017 included sales of certain investments to fund the adverse development reinsurance agreement entered into with NICO.

Financing Cash Flow Activities

Net cash provided by financing activities in the six-month period ended June 30, 2018 reflected:

•approximately $575 million in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each of the first and second quarters of 2018;

•approximately $646 million to repurchase approximately 12 million shares of AIG Common Stock; and

•approximately $1.5 billion in net inflows from the issuance and repayment of long-term debt.

Net cash used in financing activities in the six-month period ended June 30, 2017 reflected:

•approximately $597 million in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each of the first and second quarters of 2017;

•approximately $6.0 billion to repurchase approximately 95 million shares of AIG Common Stock; and

•approximately $615 million in net inflows from the issuance and repayment of long-term debt.

Liquidity and Capital Resources of AIG Parent and Subsidiaries

AIG Parent

As of June 30, 2018, AIG Parent had approximately $13.8 billion in liquidity sources. AIG Parent’s liquidity sources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities. Fixed maturity securities primarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities. AIG Parent actively manages its assets and liabilities in terms of products, counterparties and duration. Based upon an assessment of funding needs, the liquidity sources can be readily monetized through sales or repurchase agreements or contributed as admitted assets to regulated insurance companies. AIG Parent liquidity is monitored through the use of various internal liquidity risk measures. AIG Parent’s primary sources of liquidity are dividends, distributions, loans and other payments from subsidiaries and credit facilities.  AIG Parent’s primary uses of liquidity are for debt service, capital and liability management, and operating expenses.

We believe that we have sufficient liquidity and capital resources to satisfy our reasonably foreseeable future requirements and meet our obligations to our creditors, debt-holders and insurance company subsidiaries. We expect to access the debt markets from time to time to meet funding requirements as needed.

We utilize our capital resources to support our businesses, with the majority of capital allocated to our insurance operations. Should we have or generate more capital than is needed to support our business strategies (including organic growth or acquisition opportunities) or mitigate risks inherent to our business, we may develop plans to distribute such capital to shareholders via dividends or share repurchase authorizations or deploy such capital towards liability management.

In the normal course, it is expected that a portion of the capital released by our insurance operations, by our other operations or through the utilization of AIG’s deferred tax assets may be available to support our business strategies, for distribution to shareholders or for liability management.

In developing plans to distribute capital, AIG considers a number of factors, including, but not limited to: AIG’s business and strategic plans, expectations for capital generation and utilization, AIG’s funding capacity and capital resources in comparison to internal benchmarks, as well as rating agency expectations, regulatory standards and internal stress tests for capital.

156AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Liquidity and Capital Resources

The following table presents AIG Parent's liquidity sources:

	As of		As of
(In millions)	June 30, 2018		December 31, 2017
Cash and short-term investments(a)	$	6,152	$	2,114
Unencumbered fixed maturity securities(b)		3,124		5,172
Total AIG Parent liquidity		9,276		7,286
Available capacity under syndicated credit facility(c)		4,500		4,500
Total AIG Parent liquidity sources	$	13,776	$	11,786

(a)  Cash and short-term investments include reverse repurchase agreements totaling $2.8 billion and $1.7 billion as of June 30, 2018 and December 31, 2017, respectively.

(b)  Unencumbered securities consist of publicly traded, investment grade rated fixed maturity securities. Fixed maturity securities primarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities.

(c)  For additional information relating to this syndicated credit facility see Credit Facilities below.

Closing of Validus Acquisition

On July 18, 2018, we completed our acquisition of Validus for approximately $5.5 billion in cash from AIG Parent. Following the consummation of the acquisition, AIG executed a guarantee, dated July 26, 2018, with respect to Validus’ outstanding Series A Preference Shares and Series B Preference Shares (together, the Preference Shares), pursuant to which AIG provided a full and unconditional guarantee of Validus’ obligations with respect to the Preference Shares. In addition, AIG executed a guarantee, dated July 26, 2018, with respect to Validus’ aggregate outstanding 8.875% Senior Notes due 2040 (the Notes), pursuant to which AIG provided a full and unconditional guarantee of Validus’ obligations with respect to the Notes. AIG also entered into certain letter of credit agreements in support of the Validus companies.

Insurance Companies

We expect that our insurance companies will be able to continue to satisfy reasonably foreseeable future liquidity requirements and meet their obligations, including those arising from reasonably foreseeable contingencies or events, through cash from operations and, to the extent necessary, monetization of invested assets. Our insurance companies’ liquidity resources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities.

Each of our material insurance companies’ liquidity is monitored through various internal liquidity risk measures.  The primary sources of liquidity are premiums, fees, reinsurance recoverables and investment income and maturities. The primary uses of liquidity are paid losses, reinsurance payments, benefit claims, surrenders, withdrawals, interest payments, dividends, expenses, investment purchases and collateral requirements.

Our General Insurance companies may require additional funding to meet capital or liquidity needs under certain circumstances.  Large catastrophes may require us to provide additional support to our affected operations. Downgrades in our credit ratings could put pressure on the insurer financial strength ratings of our subsidiaries, which could result in non‑renewals or cancellations by policyholders and adversely affect the subsidiary’s ability to meet its own obligations. Increases in market interest rates may adversely affect the financial strength ratings of our subsidiaries, as rating agency capital models may reduce the amount of available capital relative to required capital. Other potential events that could cause a liquidity strain include an economic collapse of a nation or region significant to our operations, nationalization, catastrophic terrorist acts, pandemics or other events causing economic or political upheaval.

Management believes that because of the size and liquidity of our Life and Retirement companies’ investment portfolios, normal deviations from projected claim or surrender experience would not create significant liquidity risk. Furthermore, our Life and Retirement companies’ products contain certain features that mitigate surrender risk, including surrender charges. However, in times of extreme capital markets disruption, liquidity needs could outpace resources. As part of their risk management framework, our Life and Retirement companies continue to evaluate and, where appropriate, pursue strategies and programs to improve their liquidity position and facilitate their ability to maintain a fully invested asset portfolio.

Certain of our U.S. insurance companies are members of the Federal Home Loan Banks (FHLBs) in their respective districts. Borrowings from the FHLBs are used to supplement liquidity or for other uses deemed appropriate by management. Our U.S. General Insurance companies had no outstanding borrowings from the FHLBs at June 30, 2018 and had outstanding borrowings in an aggregate amount of approximately $190 million at December 31, 2017. Our U.S. Life and Retirement companies had no outstanding borrowings in the form of cash advances from the FHLBs at June 30, 2018 or December 31, 2017. In addition, $3.4 billion and $606 million were due to the FHLBs in the respective districts of our U.S. Life and Retirement companies at June 30, 2018  and December 31, 2017, respectively, under funding agreements issued through our Individual Retirement, Group Retirement and Institutional Markets operating segments, which were reported in Policyholder contract deposits.

AIG | Second Quarter 2018 Form 10-Q157

ITEM 2 |Liquidity and Capital Resources

Certain of our U.S. Life and Retirement companies have programs, which began in 2012, that lend securities from their investment portfolio to supplement liquidity or for other uses as deemed appropriate by management. Under these programs, these U.S. Life and Retirement companies lend securities to financial institutions and receive cash as collateral equal to 102 percent of the fair value of the loaned securities. Cash collateral received is invested in short-term investments. Additionally, the aggregate amount of securities that a Life and Retirement company is able to lend under its program at any time is limited to five percent of its general account statutory-basis admitted assets. Our U.S. Life and Retirement companies had $1.6 billion and $2.9 billion of securities subject to these agreements at June 30, 2018 and December 31, 2017, respectively, and $1.7 billion and $3.0 billion of liabilities to borrowers for collateral received at June 30, 2018 and December 31, 2017, respectively.

AIG generally manages capital between AIG Parent and our insurance companies through internal, Board-approved policies and limits, as well as management standards. In addition, AIG Parent has unconditional capital maintenance agreements (CMAs) in place with certain subsidiaries. Nevertheless, regulatory and other legal restrictions could limit our ability to transfer capital freely, either to or from our subsidiaries.

In February 2018, AIG Parent entered into a CMA with DSA Re. Among other things, the CMA provides that AIG Parent will maintain available statutory capital and surplus of DSA Re’s long term business fund and its general business account at or above a stress threshold percentage of its projected enhanced capital requirement in respect of the applicable fund, as defined under Bermuda law. As of June 30, 2018, the stress threshold percentage under this CMA was 125 percent.

AIG Parent and/or certain subsidiaries are parties to several letter of credit agreements with various financial institutions.  These financial institutions issue letters of credit from time to time to certain of our General Insurance companies for insurance regulatory and reinsurance collateral purposes or for capital support, and the total outstanding amount of issued letters of credit for these purposes was approximately $2.4 billion at June 30, 2018. Letters of credit issued in support of the Life and Retirement companies totaled approximately $911 million at June 30, 2018. Letters of credit issued in support of DSA Re totaled $550 million at June 30, 2018.

During 2016, we created a new Switzerland-domiciled international holding company, AIG International Holdings, GmbH (AIGIH), which is intended to be the ultimate holding company for all of our international entities. This international holding company structure is part of our ongoing efforts to simplify our organizational structure, and is expected to facilitate the optimization of our international capital strategy from both a regulatory and a tax perspective. Through August 2, 2018, substantially all of our international operations have been transferred to AIGIH. We will continue to monitor our international holding company structure in light of regulatory, tax and other developments, to ensure that this strategy continues to be effective.

In the six-month period ended June 30, 2018, our General Insurance companies paid approximately $825 million in dividends in the form of cash and fixed maturity securities to AIG Parent. The fixed maturity securities primarily included U.S. government and government-sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities.

In the six-month period ended June 30, 2018, our Life and Retirement companies collectively paid a total of $1.2 billion in dividends and loan repayments in the form of cash to AIG Parent.

Credit Facilities

We maintain a committed, revolving syndicated credit facility (the Facility) as a potential source of liquidity for general corporate purposes. The Facility provides for aggregate commitments by the bank syndicate to provide unsecured revolving loans and/or standby letters of credit of up to $4.5 billion without any limits on the type of borrowings and is scheduled to expire in June 2022.

As of June 30, 2018, a total of $4.5 billion remains available under the Facility. Our ability to utilize the Facility is not contingent on our credit ratings. However, our ability to utilize the Facility is conditioned on the satisfaction of certain legal, operating, administrative and financial covenants and other requirements contained in the Facility. These include covenants relating to our maintenance of a specified total consolidated net worth and total consolidated debt to total consolidated capitalization. Failure to satisfy these and other requirements contained in the Facility would restrict our access to the Facility and could have a material adverse effect on our financial condition, results of operations and liquidity. We expect to utilize the Facility from time to time, and may use the proceeds for general corporate purposes.

158AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Liquidity and Capital Resources

Contractual Obligations

The following table summarizes contractual obligations in total, and by remaining maturity:

June 30, 2018			Payments due by Period
		Total	Remainder of			2019 -		2021 -
(in millions)		Payments		2018		2020		2022		2023		Thereafter
Insurance operations
Loss reserves	$	78,668	$	17,848	$	22,582	$	12,620	$	4,124	$	21,494
Insurance and investment contract liabilities		242,595		10,201		31,249		29,177		13,323		158,645
Borrowings		988		-		119		227		-		642
Interest payments on borrowings		877		25		99		99		50		604
Other long-term obligations		-		-		-		-		-		-
Total	$	323,128	$	28,074	$	54,049	$	42,123	$	17,497	$	181,385
Other
Borrowings	$	25,269	$	627	$	2,639	$	3,250	$	1,747	$	17,006
Interest payments on borrowings		16,032		743		2,083		1,808		824		10,574
Other long-term obligations		431		45		180		171		1		34
Total	$	41,732	$	1,415	$	4,902	$	5,229	$	2,572	$	27,614
Consolidated
Loss reserves	$	78,668	$	17,848	$	22,582	$	12,620	$	4,124	$	21,494
Insurance and investment contract liabilities		242,595		10,201		31,249		29,177		13,323		158,645
Borrowings		26,257		627		2,758		3,477		1,747		17,648
Interest payments on borrowings		16,909		768		2,182		1,907		874		11,178
Other long-term obligations(a)		431		45		180		171		1		34
Total(b)	$	364,860	$	29,489	$	58,951	$	47,352	$	20,069	$	208,999

(a)  Primarily includes contracts to purchase future services and other capital expenditures.

(b)  Does not reflect unrecognized tax benefits of $4.7 billion. For additional information see Note 14 to the Condensed Consolidated Financial Statements.

Loss Reserves

Loss reserves relate to our General Insurance companies and represent estimates of future loss and loss adjustment expense payments estimated based on historical loss development payment patterns. Due to the significance of the assumptions used, the payments by period presented above could be materially different from actual required payments. We believe that our General Insurance companies maintain adequate financial resources to meet the actual required payments under these obligations.

Insurance and Investment Contract Liabilities

Insurance and investment contract liabilities, including GIC liabilities, relate to our Life and Retirement companies. These liabilities include various investment-type products with contractually scheduled maturities, including periodic payments. These 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) we are not currently making payments until the occurrence of an insurable event, such as death or disability, (ii) payments are conditional on survivorship or (iii) payment may occur due to a surrender or other non-scheduled event beyond our control.

We have made significant assumptions to determine the estimated undiscounted cash flows of these contractual policy benefits. These assumptions include mortality, morbidity, future lapse rates, expenses, investment returns and interest crediting rates, offset by expected future deposits and premiums on in-force policies. Due to the significance of the assumptions, the periodic amounts presented could be materially different from actual required payments. The amounts presented in this table are undiscounted and exceed the future policy benefits and policyholder contract deposits included in the Consolidated Balance Sheets.

We believe that our Life and Retirement companies have adequate financial resources to meet the payments actually required under these obligations. These subsidiaries have substantial liquidity in the form of cash and short-term investments. In addition, our Life and Retirement companies maintain significant levels of investmentgrade rated fixed maturity securities, including substantial holdings in government and corporate bonds, and could seek to monetize those holdings in the event operating cash flows are insufficient. We expect liquidity needs related to GIC liabilities to be funded through cash flows generated from maturities and sales of invested assets.

AIG | Second Quarter 2018 Form 10-Q159

ITEM 2 |Liquidity and Capital Resources

Borrowings

Our borrowings exclude those incurred by consolidated investments and include hybrid financial instrument liabilities recorded at fair value. We expect to repay the long-term debt maturities and interest accrued on borrowings by AIG through maturing investments and dispositions of invested assets, future cash flows from operations, cash flows generated from invested assets, future debt issuance and other financing arrangements. Borrowings supported by assets of AIG include various notes and bonds payable as well as GIAs that are supported by cash and investments held by AIG Parent and certain non-insurance subsidiaries for the repayment of those obligations.

Off-Balance Sheet Arrangements and Commercial Commitments

The following table summarizes Off-Balance Sheet Arrangements and Commercial Commitments in total, and by remaining maturity:

June 30, 2018				Amount of Commitment Expiring
		Total Amounts		Remainder		2019 -		2021 -
(in millions)		Committed		of 2018		2020		2022		2023		Thereafter
Insurance operations
Guarantees:
Standby letters of credit	$	114	$	101	$	2	$	-	$	-	$	11
Guarantees of indebtedness		61		61		-		-		-		-
All other guarantees(a)		2		-		-		2		-		-
Commitments:
Investment commitments(b)		3,063		1,822		980		234		-		27
Commitments to extend credit		2,808		1,986		363		307		74		78
Letters of credit		6		3		3		-		-		-
Total(c)	$	6,054	$	3,973	$	1,348	$	543	$	74	$	116
Other
Guarantees:
Liquidity facilities(d)	$	74	$	-	$	-	$	-	$	-	$	74
Standby letters of credit		85		85		-		-		-		-
Guarantees of indebtedness		1		1		-		-		-		-
All other guarantees		77		-		28		28		14		7
Commitments:
Investment commitments(b)		272		16		16		79		67		94
Commitments to extend credit(e)		-		-		-		-		-		-
Letters of credit		16		16		-		-		-		-
Total(c)(f)	$	525	$	118	$	44	$	107	$	81	$	175
Consolidated
Guarantees:
Liquidity facilities(d)	$	74	$	-	$	-	$	-	$	-	$	74
Standby letters of credit		199		186		2		-		-		11
Guarantees of indebtedness		62		62		-		-		-		-
All other guarantees(a)		79		-		28		30		14		7
Commitments:
Investment commitments(b)		3,335		1,838		996		313		67		121
Commitments to extend credit(e)		2,808		1,986		363		307		74		78
Letters of credit		22		19		3		-		-		-
Total(c)(f)	$	6,579	$	4,091	$	1,392	$	650	$	155	$	291

(a)  Includes construction guarantees connected to affordable housing investments by our Life and Retirement companies. Excludes potential amounts for indemnification obligations included in asset sales agreements. For further information on indemnification obligations see Note 10 to the Condensed Consolidated Financial Statements.

(b)  Includes commitments to invest in private equity funds, hedge funds and other funds and commitments to purchase and develop real estate in the United States and abroad. The commitments to invest in private equity funds, hedge funds and other funds are called at the discretion of each fund, as needed for funding new investments or expenses of the fund. The expiration of these commitments is estimated in the table above based on the expected life cycle of the related fund, consistent with past trends of requirements for funding. Investors under these commitments are primarily insurance and real estate subsidiaries.

(c)  Does not include guarantees, CMAs or other support arrangements among AIG consolidated entities.

(d)  Primarily represents liquidity facilities provided in connection with certain municipal swap transactions and collateralized bond obligations.

160AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Liquidity and Capital Resources

(e) Previously included a senior unsecured revolving credit facility of up to $200 million between AerCap Ireland Capital Designated Activity Company, as borrower, and AIG Parent, as lender (the AerCap Credit Facility). AerCap Ireland Capital Designated Activity Company elected to terminate the AerCap Credit Facility, effective June 13, 2018.

(f)  Excludes commitments with respect to pension plans. The remaining annual pension contribution for 2018 is expected to be approximately $27 million for U.S. and non-U.S. plans.

Tax Matters

If the settlement agreements in principle are concluded in our ongoing dispute related to the disallowance of foreign tax credits associated with cross border financing transactions, we will be required to make a payment to the U.S. Treasury. Although we can provide no assurance regarding whether the non-binding settlements will be finalized, the amount we currently expect to pay based on current proposed settlement terms is approximately $1.3 billion. This amount is net of payments previously made with respect to cross border financing transactions involving matters dating back to 1997 and other matters largely related to the same tax years.  There remains uncertainty with regard to whether the settlements in principle will ultimately be approved by the relevant authorities as well as the amount and timing of any potential payments, which are not likely to be made before sometime in 2019.

For additional information regarding this matter see Note 14 to the Condensed Consolidated Financial Statements.

Arrangements with Variable Interest Entities

We enter into various arrangements with variable interest entities (VIEs) in the normal course of business, and we consolidate a VIE when we are the primary beneficiary of the entity.

For a further discussion of our involvement with VIEs see Note 7 to the Condensed Consolidated Financial Statements.

Indemnification Agreements

We are subject to financial guarantees and indemnity arrangements in connection with our sales of businesses. These arrangements may be triggered by declines in asset values, specified business contingencies, the realization of contingent liabilities, litigation developments, or breaches of representations, warranties or covenants provided by us. These arrangements are typically subject to time limitations, defined by contract or by operation of law, such as by prevailing statutes of limitation. Depending on the specific terms of the arrangements, the maximum potential obligation may or may not be subject to contractual limitations.

For additional information regarding our indemnification agreements see Note 10 to the Condensed Consolidated Financial Statements.

We have recorded liabilities for certain of these arrangements where it is possible to estimate them. These liabilities are not material in the aggregate. We are unable to develop a reasonable estimate of the maximum potential payout under some of these arrangements. Overall, we believe that it is unlikely we will have to make any material payments under these arrangements.

AIG | Second Quarter 2018 Form 10-Q161

ITEM 2 |Liquidity and Capital Resources

Debt

The following table provides the rollforward of AIG’s total debt outstanding:

		Balance at				Maturities		Effect of					Balance at
Six Months Ended June 30, 2018		December 31,				and		Foreign		Other		June 30,
(in millions)		2017		Issuances	Repayments			Exchange		Changes			2018
Debt issued or guaranteed by AIG:
AIG general borrowings:
Notes and bonds payable	$	20,339	$	1,729	$	(1,107)	$	(77)	$	14		$	20,898
Junior subordinated debt		841		743		(22)		(8)		-			1,554
AIG Japan Holdings Kabushiki Kaisha		334		-		-		12		-			346
AIGLH notes and bonds payable		281		-		-		-		-			281
AIGLH junior subordinated debt		361		-		-		-		-			361
Total AIG general borrowings		22,156		2,472		(1,129)		(73)		14			23,440
AIG borrowings supported by assets:(a)
MIP notes payable		356		-		(184)		9		-			181
Series AIGFP matched notes and bonds payable		21		-		-		-		-			21
GIAs, at fair value		2,707		80		(236)		-		(78)	(b)		2,473
Notes and bonds payable, at fair value		181		-		(35)		-		(4)	(b)		142
Total AIG borrowings supported by assets		3,265		80		(455)		9		(82)			2,817
Total debt issued or guaranteed by AIG		25,421		2,552		(1,584)		(64)		(68)			26,257
Debt not guaranteed by AIG:
Other subsidiaries' notes, bonds, loans and
mortgages payable(c)		190		-		(190)		-		-			-
Debt of consolidated investments(d)		6,029		952		(250)		39		757	(e)		7,527
Total debt not guaranteed by AIG		6,219		952		(440)		39		757			7,527
Total debt	$	31,640	$	3,504	$	(2,024)	$	(25)	$	689		$	33,784

(a)  AIG Parent guarantees all such debt, except for MIP notes payable and Series AIGFP matched notes and bonds payable, which are direct obligations of AIG Parent. Collateral posted to third parties was $1.9 billion and $2.0 billion at  June 30, 2018 and December 31, 2017, respectively. This collateral primarily consists of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.

(b)  Primarily represents adjustments to the fair value of debt.

(c)  Includes primarily borrowings with Federal Home Loan Banks by our U.S. insurance companies.  These borrowings are short term in nature and related activity is presented net of issuances and maturities and repayments.

(d)  At June 30, 2018, includes debt of consolidated investment vehicles related to real estate investments of $2.9 billion, affordable housing partnership investments of $1.9 billion and other securitization vehicles of $2.7 billion. At December 31, 2017, includes debt of consolidated investment vehicles related to real estate investments of $2.5 billion, affordable housing partnership investments of $1.8 billion and other securitization vehicles of $1.7 billion.

(e)  Includes the effect of consolidating previously unconsolidated partnerships.

162AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Liquidity and Capital Resources

TOTAL DEBT OUTSTANDING

(in millions)

Debt Maturities

The following table summarizes maturing debt at June 30, 2018 of AIG (excluding $7.5 billion of borrowings of consolidated investments) for the next four quarters:

		Third		Fourth		First		Second
		Quarter		Quarter		Quarter		Quarter
(in millions)		2018		2018		2019		2019		Total
AIG general borrowings	$	-	$	-	$	-	$	-	$	-
AIG borrowings supported by assets		485		142		18		18		663
Other subsidiaries' notes, bonds, loans and
mortgages payable		-		-		-		-		-
Total	$	485	$	142	$	18	$	18	$	663

AIG | Second Quarter 2018 Form 10-Q163

ITEM 2 |Liquidity and Capital Resources

The following table presents maturities of long-term debt (including unamortized original issue discount, hedge accounting valuation adjustments and fair value adjustments, when applicable), excluding $7.5 billion in borrowings of debt of consolidated investments:

June 30, 2018			Remainder		Year Ending
(in millions)		Total		of 2018		2019		2020		2021		2022		2023	Thereafter
Debt issued or guaranteed by AIG:
AIG general borrowings:
Notes and bonds payable	$	20,898	$	-	$	999	$	1,344	$	1,496	$	1,508	$	1,636	$	13,915
Junior subordinated debt		1,554		-		-		-		-		-		-		1,554
AIG Japan Holdings Kabushiki Kaisha		346		-		-		119		227		-		-		-
AIGLH notes and bonds payable		281		-		-		-		-		-		-		281
AIGLH junior subordinated debt		361		-		-		-		-		-		-		361
Total AIG general borrowings		23,440		-		999		1,463		1,723		1,508		1,636		16,111
AIG borrowings supported by assets:
MIP notes payable		181		181		-		-		-		-		-		-
Series AIGFP matched notes and
bonds payable		21		-		-		-		-		-		-		21
GIAs, at fair value		2,473		356		266		30		200		46		111		1,464
Notes and bonds payable, at fair value		142		90		-		-		-		-		-		52
Total AIG borrowings supported by assets		2,817		627		266		30		200		46		111		1,537
Total debt issued or guaranteed by AIG		26,257		627		1,265		1,493		1,923		1,554		1,747		17,648
Other subsidiaries notes, bonds, loans
and mortgages payable		-		-		-		-		-		-		-		-
Total	$	26,257	$	627	$	1,265	$	1,493	$	1,923	$	1,554	$	1,747	$	17,648

Credit Ratings

Credit ratings estimate a company’s ability to meet its obligations and may directly affect the cost and availability of financing to that company. The following table presents the credit ratings of AIG and certain of its subsidiaries as of July 27, 2018. Figures in parentheses indicate the relative ranking of the ratings within the agency’s rating categories; that ranking refers only to the major rating category and not to the modifiers assigned by the rating agencies.

	Short-Term Debt		Senior Long-Term Debt
	Moody’s	S&P	Moody’s(a)	S&P(b)	Fitch(c)
AIG	P-2 (2nd of 3)	A-2 (2nd of 8)	Baa 1 (4th of 9)	BBB+ (4th of 9)	BBB+ (4th of 9)
	Stable Outlook		Stable Outlook	Negative Outlook	Negative Outlook
AIG Financial Products Corp.(d)	P-2	A-2	Baa 1	BBB+	-
	Stable Outlook		Stable Outlook	Negative Outlook

(a)  Moody’s appends numerical modifiers 1, 2 and 3 to the generic rating categories to show relative position within the rating categories.

(b)  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 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.

These credit ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. Ratings may also be withdrawn at our request.

We are party to some agreements that contain “ratings triggers.” Depending on the ratings maintained by one or more rating agencies, these triggers could result in (i) the termination or limitation of credit availability or a requirement for accelerated repayment, (ii) the termination of business contracts or (iii) a requirement to post collateral for the benefit of counterparties.

In the event of adverse actions on our long-term debt ratings by the major rating agencies, AIGFP and certain other AIG entities would be required to post additional collateral under some derivative transactions or could experience termination of the transactions. Such requirements and terminations could adversely affect our business, our consolidated results of operations in a reporting period or our liquidity. In the event of a further downgrade of AIG’s long-term senior debt ratings, AIGFP and certain other AIG entities would be required to post additional collateral, and certain of the counterparties of AIGFP or of such other AIG entities would be permitted to terminate their contracts early.

164AIG | Second Quarter 2018 Form 10-Q

ITEM 2 |Liquidity and Capital Resources

The actual amount of collateral that we would be required to post to counterparties in the event of such downgrades, or the aggregate amount of payments that we could be required to make, depends on market conditions, the fair value of outstanding affected transactions and other factors prevailing at the time of the downgrade.

For a discussion of the effects of downgrades in our credit ratings see Note 8 to the Condensed Consolidated Financial Statements herein and Part I, Item 1A. Risk Factors – Liquidity, Capital and Credit in our 2017 Annual Report.  

FINANCIAL STRENGTH Ratings

Financial Strength ratings estimate an insurance company’s ability to pay its obligations under an insurance policy.The following table presents the ratings of our significant insurance subsidiaries as of July 27, 2018.

	A.M. Best	S&P	Fitch	Moody’s
National Union Fire Insurance Company of Pittsburgh, Pa.	A	A+	A	A2
Lexington Insurance Company	A	A+	A	A2
American Home Assurance Company  (US)	A	A+	A	A2
American General Life Insurance Company	A	A+	A+	A2
The Variable Annuity Life Insurance Company	A	A+	A+	A2
United States Life Insurance Company in the City of New York	A	A+	A+	A2
AIG Europe Limited	A	A+	A	A2
AIG General Insurance Co. Ltd.	NR	A+	NR	NR

These financial strength ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. 

For a discussion of the effects of downgrades in our financial strength ratings see Note 8 to the Condensed Consolidated Financial Statements herein and Part I, Item 1A. Risk Factors – Liquidity, Capital and Credit in our 2017 Annual Report.  

Regulation and Supervision

For a discussion of our regulation and supervision by different regulatory authorities in the United States and abroad, including with respect to our liquidity and capital resources see Part I, Item 1. Business — Regulation and Part I, Item 1A. Risk Factors — Regulation in our 2017 Annual Report, and Regulatory Environment below in this Quarterly Report on Form 10-Q.

Dividends and Repurchases of AIG Common Stock

On February 8, 2018, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March 29, 2018 to shareholders of record on March 15, 2018. On May 2, 2018, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on June 28, 2018 to shareholders of record on June 14, 2018.  On August 2, 2018, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on September 28, 2018 to shareholders of record on September 17, 2018. The payment of any future dividends will be at the discretion of our Board of Directors and will depend on various factors, as discussed further in Note 11 to the Condensed Consolidated Financial Statements.

Our Board of Directors has authorized the repurchase of shares of AIG Common Stock and warrants to purchase shares of AIG Common Stock through a series of actions. On May 3, 2017, our Board of Directors approved an additional increase of $2.5 billion to the share repurchase authorization.  As of August 2, 2018, approximately $1.5 billion remained under the authorization. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants).  Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans. The timing of any future share repurchases will depend on market conditions, our business and strategic plans, financial condition, results of operations, liquidity and other factors.

During the six-month period ended June 30, 2018, we repurchased approximately 12 million shares of AIG Common Stock for an aggregate purchase price of approximately $646 million pursuant to this authorization. Pursuant to an Exchange Act Rule 10b5-1 repurchase plan, from July 1 to August 2, 2018, we repurchased approximately $149 million of additional shares of AIG Common Stock.

AIG | Second Quarter 2018 Form 10-Q165

ITEM 2 |Liquidity and Capital Resources

Dividend Restrictions

Payments of dividends to AIG by its insurance subsidiaries are subject to certain restrictions imposed by regulatory authorities.

For a discussion of restrictions on payments of dividends by our subsidiaries see Note 19 to the Consolidated Financial Statements in the 2017 Annual Report.

Enterprise Risk Management

Risk management includes the identification and measurement of various forms of risk, the establishment of risk thresholds and the creation of processes intended to maintain risks within these thresholds while optimizing returns. We consider risk management an integral part of managing our core businesses and a key element of our approach to corporate governance.

Overview

We have an integrated process for managing risks throughout our organization in accordance with our firm‑wide risk appetite. Our Board of Directors has oversight responsibility for the management of risk. Our Enterprise Risk Management (ERM) Department supervises and integrates the risk management functions in each of our business units, providing senior management with a consolidated view of AIG’s major risk positions. Within each business unit, senior leaders and executives approve risk‑taking policies and targeted risk tolerance within the framework provided by ERM. ERM supports our businesses and management in the embedding of risk management in our key day-to-day business processes and in identifying, assessing, quantifying, managing, monitoring, reporting, and mitigating the risks taken by us and our businesses. Nevertheless, our risk management efforts may not always be successful and material adverse effects on our business, results of operations, cash flows, liquidity or financial condition may occur.

For a further discussion of AIG’s risk management program see Part II, Item 7. MD&A ─ Enterprise Risk Management in the 2017 Annual Report.

Credit Risk Management

Overview

Credit risk is defined as the risk that our customers or counterparties are unable or unwilling to repay their contractual obligations when they become due. Credit risk may also result from a downgrade of a counterparty’s credit ratings or a widening of its credit spreads.

We devote considerable resources to managing our direct and indirect credit exposures. These exposures may arise from, but are not limited to, fixed income investments, equity securities, deposits, commercial paper investments, reverse repurchase agreements and repurchase agreements, corporate and consumer loans, leases, reinsurance recoverables, counterparty risk arising from derivatives activities, collateral extended to counterparties, insurance risk cessions to third parties, financial guarantees, letters of credit, and certain General Insurance businesses.

We monitor and control our company-wide credit risk concentrations and attempt to avoid unwanted or excessive risk accumulations, whether funded or unfunded. To minimize the level of credit risk in some circumstances, we may require mitigants, such as third‑party guarantees, reinsurance or collateral, including commercial bank-issued letters of credit and trust collateral accounts. We treat these guarantees, reinsurance recoverables, and letters of credit as credit exposure and include them in our risk concentration exposure data. We also monitor closely the quality of any trust collateral accounts.

For further information on our credit concentrations and credit exposures see Investments – Available-for-Sale Investments.

166AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Enterprise Risk Management

Our credit risk management framework incorporates the following elements:

Risk Identification	including the ongoing capture and monitoring of all existing, contingent, potential and emerging credit risk exposures, whether funded or unfunded
Risk Measurement	comprising risk ratings, default probabilities, loss given default and expected loss parameters, exposure calculations, stress testing and other risk analytics
Risk Limits	including, but not limited to, a system of single obligor or risk group-based AIG-wide house limits and sub-limits for corporates, financial institutions, sovereigns and sub-sovereigns when appropriate and a defined process for identifying, evaluating, documenting and approving, if appropriate, breaches of and exceptions to such limits
Risk Delegations	a comprehensive credit risk delegation framework from the Chief Credit Officer (CCO) to authorized credit professionals throughout the company
Risk Evaluation, Monitoring and Reporting	including the ongoing analysis and assessment of credit risks, trending of those risks and reporting of other key risk metrics and limits to the CCO and senior management, as may be required
Credit Reserving	including but not limited to development of a proper framework, policies and procedures for establishing accurate identification of (i) Allowance for Loan and Lease Losses, and (ii) other-than-temporary impairments for securities portfolios

Market Risk Management

Market risk is defined as the risk of adverse impact due to systemic movements in one or more of the following market risk drivers:  equity and commodity prices, residential and commercial real estate values, interest rates, credit spreads, foreign exchange, inflation, and their levels of volatility.

We are engaged in a variety of insurance, investment and other financial services businesses that expose us to market risk, directly and indirectly. We are exposed to market risks primarily within our insurance and capital markets activities, on both the asset and liability side of our balance sheet through on- and off-balance sheet exposures. The Risk Officer within each business is responsible for creating a framework to properly identify these risks, then ensuring that they are appropriately measured, monitored and managed in accordance with the risk governance framework established by the Chief Market Risk Officer (CMRO).

The scope and magnitude of our market risk exposures is managed under a robust framework that contains defined risk limits and minimum standards for managing market risk in a manner consistent with our risk appetite statement. Our market risk management framework focuses on quantifying the financial repercussions of changes in these broad market observables, as opposed to the idiosyncratic risks associated with individual assets that are addressed through our credit risk management function.

Many of our market risk exposures related to interest rates and equity returns are associated with our Life and Retirement companies and relate to both asset and liability exposures. In addition, these exposures are long-term in nature. Examples of liability-related exposures include interest rate sensitive surrenders in our fixed deferred annuity product portfolio. Also, we have equity market risk sensitive surrenders in our variable annuity product portfolio. These interactive asset-liability types of risk exposures are regularly monitored in accordance with the risk governance framework noted above.

AIG | Second Quarter 2018 Form 10-Q167

ITEM 2 | Enterprise Risk Management

Risk Identification

Market risk focuses on quantifying the financial repercussions of changes in broad, external, predominantly market-observable risks. Financial repercussions can include an adverse impact on results of operations, financial condition, liquidity and capital.

Each of the following systemic risks is considered a market risk:

Equity prices	We are exposed to changes in equity market prices affecting a variety of instruments. Changes in equity prices can affect the valuation of publicly traded equity shares, investments in private equity, hedge funds and mutual funds, exchange-traded funds, and other equity-linked capital market instruments as well as equity-linked insurance products, including but not limited to index annuities, variable annuities, indexed universal life insurance and variable universal life insurance.
Residential and commercial real estate values	Our investment portfolios are exposed to the risk of changing values in a variety of residential and commercial real estate investments. Changes in residential/commercial real estate prices can affect the valuation of residential/commercial mortgages, residential/commercial mortgage‑backed securities and other structured securities with underlying assets that include residential/commercial mortgages, trusts that include residential/commercial real estate and/or mortgages, residential mortgage insurance and reinsurance contracts and commercial real estate investments.
Interest rates	Interest rate risk can arise from a mismatch in the interest rate exposure of assets versus liabilities. Lower interest rates generally result in lower investment income and make some of our product offerings less attractive to investors. Conversely, higher interest rates are typically beneficial for the opposite reasons. However, when rates rise quickly, there can be a temporary asymmetric GAAP accounting effect where the existing securities lose market value, which is largely reported in Other comprehensive income, and the offsetting decrease in the value of related liabilities may not be recognized. Changes in interest rates can affect the valuation of fixed maturity securities, financial liabilities, insurance contracts including but not limited to universal life, fixed rate annuities, variable annuities and derivative contracts.
Credit spreads	Credit spreads measure an instrument’s risk premium or yield relative to that of a comparable duration, default‑free instrument. Changes in credit spreads can affect the valuation of fixed maturity securities, including but not limited to corporate bonds, ABS, mortgage-backed securities, AIG-issued debt obligations, credit derivatives and derivative credit valuation adjustments. Much like higher interest rates, wider credit spreads with unchanged default losses mean more investment income in the long term. In the short term, quickly rising spreads will cause a loss in the value of existing fixed maturity securities, which is largely reported in Other comprehensive income. A precipitous widening of credit spreads may also signal a fundamental weakness in the credit worthiness of bond obligors, potentially resulting in default losses.
Foreign exchange (FX) rates	We are a globally diversified enterprise with income, assets and liabilities denominated in, and capital deployed in, a variety of currencies. Changes in FX rates can affect the valuation of a broad range of balance sheet and income statement items as well as the settlement of cash flows exchanged in specific transactions.
Commodity prices	Changes in commodity prices (the value of commodities) can affect the valuation of publicly‑traded commodities, commodity indices and derivatives on commodities and commodity indices. We are exposed to commodity prices primarily through their impact on the prices and credit quality of commodity producers’ debt and equity securities in our investment portfolio.
Inflation	Changes in inflation can affect the valuation of fixed maturity securities, including AIG-issued debt obligations, derivatives and other contracts explicitly linked to inflation indices, and insurance contracts where the claims are linked to inflation either explicitly, via indexing, or implicitly, through medical costs or wage levels.

168AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Enterprise Risk Management

Risk Measurement

Our market risk measurement framework was developed with the main objective of communicating the range and scale of our market risk exposures. At the firm‑wide level market risk is measured in a manner that is consistent with AIG’s risk appetite statement. This is designed to ensure that we remain within our stated risk tolerance levels and can determine how much additional market risk taking capacity is available within our framework. Our risk appetite is currently defined in terms of capital and liquidity levels. At the market risk level, the framework measures our overall exposure to each systemic market risk change on an economic basis.

In addition, we continue to use enhanced economic, GAAP accounting and statutory capital‑based risk measures at the market risk level, business‑unit level and firm‑wide levels. This process aims to ensure that we have a comprehensive view of the impact of our market risk exposures.

We use a number of approaches to measure our market risk exposure, including:

		Examples include:
Sensitivity analysis	measures the impact from a unit change in a market risk input	•a one basis point increase in yield on fixed maturity securities, •a one basis point increase in credit spreads of fixed maturity securities, and •a one percent increase in prices of equity securities.
Scenario analysis	uses historical, hypothetical, or forward‑looking macroeconomic scenarios to assess and report exposures	•a 100 basis point parallel shift in the yield curve, or •a 20 percent immediate and simultaneous decrease in world‑wide equity markets. Scenarios may also utilize a stochastic framework to arrive at a probability distribution of losses.
Stress testing	a special form of scenario analysis in which the scenarios are designed to lead to a material adverse outcome	•the stock market crash of October 1987 or the widening of yields or spreads of RMBS or CMBS during 2008.

AIG | Second Quarter 2018 Form 10-Q169

ITEM 2 | Enterprise Risk Management

Market Risk Sensitivities

The following table provides estimates of our sensitivity to changes in yield curves, equity prices and foreign currency exchange rates:

	Balance Sheet Exposure							Economic Effect
	June 30,			December 31,				June 30,		December 31,
(dollars in millions)		2018			2017				2018		2017
Sensitivity factor							100 bps parallel increase in all yield curves
Interest rate sensitive assets:
Fixed maturity securities	$	236,747		$	248,195			$	(14,068)	$	(14,998)
Mortgage and other loans receivable		30,846			28,799				(1,659)		(1,566)
Preferred stock		14			14				(1)		(1)
Derivatives:
Interest rate contracts		521			(29)				(1,102)		(1,343)
Equity contracts		272			501				33		36
Foreign exchange contracts		(49)			(416)				47		42
Credit contracts		(259)			(276)				-		-
Other contracts		13			17				-		-
Total interest rate sensitive assets	$	268,105	(a)	$	276,805	(a)		$	(16,750)	$	(17,830)
Interest rate sensitive liabilities:
Policyholder contract deposits:
Investment-type contracts	$	118,309		$	114,326			$	(2,511)	$	506
Variable annuity and other embedded
derivatives		3,509			4,148				(1,290)		(2,175)
Long-term debt(b)		25,269			24,445				(1,904)		(1,803)
Total interest rate sensitive liabilities	$	147,087		$	142,919			$	(5,705)	$	(3,472)
Sensitivity factor								20% decline in stock prices and value of
								derivatives and alternative investments
Derivatives:
Equity contracts(c)	$	272		$	501			$	(54)	$	(100)
Equity and alternative investments
exposure:
Real estate investments		8,879			8,258				(1,776)		(1,652)
Private equity		5,504			5,540				(1,101)		(1,108)
Hedge funds		4,988			5,768				(998)		(1,153)
Common equity		1,138			1,215				(228)		(243)
PICC Investment		524			549				(105)		(110)
Other investments		688			761				(137)		(152)
Total derivatives, equity and alternative
investments exposure	$	21,993		$	22,592			$	(4,399)	$	(4,518)
Policyholder contract deposits:
Variable annuity and other embedded
derivatives(c)	$	3,509		$	4,148			$	639	$	982
Total liability exposure	$	3,509		$	4,148			$	639	$	982
Sensitivity factor								10% depreciation of all foreign currency
								exchange rates against the U.S. dollar
Foreign currency-denominated net
asset position:
Great Britain pound	$	2,342		$	2,026			$	(234)	$	(203)
Euro		1,063			1,349				(106)		(135)
Japanese yen		733			651				(73)		(65)
All other foreign currencies		2,320			2,533				(232)		(253)
Total foreign currency-denominated net
asset position(d)	$	6,458		$	6,559			$	(645)	$	(656)

170AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Enterprise Risk Management

(a)  At June 30, 2018, the analysis covered $268.1 billion of $281.5 billion interest-rate sensitive assets. Excluded were $9.1 billion of loans. In addition, $4.3 billion of assets across various asset categories were excluded due to modeling limitations. At December 31, 2017, the analysis covered $276.8 billion of $289.6 billion interest-rate sensitive assets. Excluded were $8.2 billion of loans. In addition, $4.6 billion of assets across various asset categories were excluded due to modeling limitations.

(b)  At June 30, 2018, the analysis excluded $7.6 billion of long-term debt related to debt of consolidated investments, $643 million of AIGLH borrowings and $346 million of AIG Japan Holdings loans. At December 31, 2017, the analysis excluded $6.0 billion of long-term debt related to debt of consolidated investments, $642 million of AIGLH borrowings, $190 million of borrowings from the FHLB and $334 million of AIG Japan Holdings loans.

(c)  The balance sheet exposures for equity contracts and variable annuity and other embedded derivatives are also reflected under “Interest rate sensitive liabilities” above, and are not additive.

(d)  The majority of the foreign currency exposure is reported on a one quarter lag.

The sensitivity analysis is an estimate and should not be viewed as predictive of our future financial performance. We cannot ensure that our actual losses in any particular period will not exceed the amounts indicated above.

We use duration and convexity metrics to measure price sensitivity to interest rate changes for interest rate sensitive assets excluding derivatives and long-term debt. Duration measures the relative sensitivity of the fair value of a financial instrument to changes in interest rates. Convexity measures the rate of change of duration with respect to changes in interest rates.

Interest rate sensitivity of a derivative is calculated as change in its value with respect to plus a 100 basis point change in the interest rate environment, calculated as: scenario value minus base value, where base value is the value of the derivative under the yield curves as of the period end and scenario value is the value reflecting a 100 basis point parallel increase in all yield curves. 

We evaluate our interest rate risk without the effect of any correlation among other key market risks or other assumptions used for calculating the fair value of our financial liabilities and embedded derivatives. This scenario does not measure changes in value resulting from non-parallel shifts in the yield curve, which could produce different results.

We evaluate our equity price risk without the effect of any correlation among other key market risks or other assumptions used for calculating the fair value of our financial liabilities and embedded derivatives. This scenario considers the direct impact of declines in equity prices and not changes in asset-based fees, changes in the estimated gross profits used for amortizing DAC, or changes in any other assumptions used to calculate the fair value of the embedded derivatives related to the living benefit features within variable annuity products. In addition, this scenario does not reflect the impact of basis risk, such as projections about the future performance of the underlying contract holder funds and actual fund returns, which we use as a basis for developing our hedging strategy.

Foreign currency-denominated net asset position reflects our consolidated non‑U.S. dollar assets less our consolidated non‑U.S dollar liabilities on a GAAP basis, with certain adjustments. We use a bottom-up approach in managing our foreign currency exchange rate exposures with the objective of protecting statutory capital at the regulated insurance entity level. At the AIG Parent level, we monitor our foreign currency exposures against single currency and aggregate currency portfolio limits.

Our foreign currency-denominated net asset position at June 30, 2018, remained relatively flat compared to December 31, 2017.

For illustrative purposes, we modeled our sensitivities based on a 100 basis point increase in yield curves, a 20 percent decline in equities and alternative assets, and a 10 percent depreciation of all foreign currency exchange rates against the U.S. dollar. The estimated results presented in the table above should not be taken as a prediction, but only as a demonstration of the potential effects of such events.

Liquidity Risk Management

Liquidity risk is defined as the risk that our financial condition will be adversely affected by the inability or perceived inability to meet our short-term cash, collateral or other financial obligations. Failure to appropriately manage liquidity risk can result in insolvency, reduced operating flexibility, increased costs, reputational harm and regulatory action.

AIG and its legal entities seek to maintain sufficient liquidity both during the normal course of business and under defined liquidity stress scenarios to ensure that sufficient cash will be available to meet the obligations as they come due.

AIG Parent liquidity risk tolerance levels are designed to allow us to meet our financial obligations for a minimum of six months under a liquidity stress scenario. We maintain liquidity limits and minimum coverage ratios designed to ensure that funding needs are met under varying stress conditions. If we project that we will breach these tolerances, we will assess and determine appropriate liquidity management actions. However, the market conditions in effect at that time may not permit us to achieve an increase in liquidity sources or a reduction in liquidity requirements.

AIG | Second Quarter 2018 Form 10-Q171

ITEM 2 | Enterprise Risk Management

Risk Identification

The following sources of liquidity and funding risks could impact our ability to meet short-term financial obligations as they come due.

Market/Monetization Risk	Assets may not be readily transformed into cash due to unfavorable market conditions. Market liquidity risk may limit our ability to sell assets at reasonable values to meet liquidity needs.
Cash Flow Mismatch Risk	Discrete and cumulative cash flow mismatches or gaps over short-term horizons under both expected and adverse business conditions may create future liquidity shortfalls.
Event Funding Risk	Additional funding may be required as the result of a trigger event. Event funding risk comes in many forms and may result from a downgrade in credit ratings, a market event, or some other event that creates a funding obligation or limits existing funding options.
Financing Risk	We may be unable to raise additional cash on a secured or unsecured basis due to unfavorable market conditions, AIG-specific issues, or any other issue that impedes access to additional funding.

Risk Measurement

Comprehensive cash flow projections under normal conditions are the primary component for identifying and measuring liquidity risk. We produce comprehensive liquidity projections over varying time horizons that incorporate all relevant liquidity sources and uses and include known and likely cash inflows and outflows. In addition, we perform stress testing by identifying liquidity stress scenarios and assessing the effects of these scenarios on our cash flow and liquidity.

We use a number of approaches to measure our liquidity risk exposure, including:

Minimum Liquidity Limits	Minimum Liquidity Limits specify the amount of assets required to be maintained in order to meet obligations as they arise over a specified time horizon under stressed liquidity conditions.
Coverage Ratios	Coverage Ratios measure the adequacy of available liquidity sources, including the ability to monetize assets to meet the forecasted cash flows over a specified time horizon. The portfolio of assets is selected based on our ability to convert those assets into cash under the assumed stressed conditions and within the specified time horizon.
Cash Flow Forecasts	Cash Flow Forecasts measure the liquidity needed for a specific legal entity over a specified time horizon.
Stress Testing	Asset liquidity and Coverage Ratios are re-measured under defined liquidity stress scenarios that will impact net cash flows, liquid assets and/or other funding sources.

Relevant liquidity reporting is produced and reported regularly to AIG Parent and business unit risk committees. The frequency, content, and nature of reporting will vary for each business unit and legal entity, based on its complexity, risk profile, activities and size.

172AIG | Second Quarter 2018 Form 10-Q

ITEM 2 | Regulatory Environment

Regulatory Environment

Overview

Our operations around the world are subject to regulation by many different types of regulatory authorities, including insurance, securities, derivatives, investment advisory and thrift regulators in the United States and abroad. The insurance and financial services industries generally have been subject to heightened regulatory scrutiny and supervision in recent years.

Our insurance subsidiaries are subject to regulation and supervision by the states and jurisdictions in which they do business. We expect that the domestic and international regulations applicable to us and our regulated entities will continue to evolve for the foreseeable future.

The Bermuda Monetary Authority (the BMA) regulates AIG’s operating (re)insurance subsidiaries in Bermuda.  The Insurance Act 1978 and its related regulations (as amended, the Insurance Act), as enforced by the BMA, impose a variety of requirements and restrictions on our Bermuda operating (re)insurance subsidiaries including:  the filing of annual statutory financial returns; the filing of annual GAAP financial statements; compliance with minimum enhanced capital requirements; compliance with the Insurance Code of Conduct; compliance with minimum solvency margins and liquidity ratios; limitations on dividends and distributions; preparation of an annual Financial Condition Report providing details of measures governing the business operations, corporate governance framework, solvency and financial performance; and restrictions on certain changes in control of regulated (re)insurers.

For updated information on the impact of the DOL Fiduciary Rule and the related regulatory developments regarding a standard of care for the sale of investment products and services, see Executive Summary – AIG’s Outlook – Industry and Economic Factors – Standard of Care Developments.

In addition to the information set forth in this Quarterly Report on Form 10-Q, our regulatory status is also discussed in Part I, Item 1. Business – Regulation, Part I, Item 1A. Risk Factors – Regulation and Note 19 to the Consolidated Financial Statements in the 2017 Annual Report.

AIG | Second Quarter 2018 Form 10-Q173

Glossary

Glossary

Accident year The annual calendar accounting period in which loss events occurred, regardless of when the losses are actually reported, booked or paid.

Accident year combined ratio, as adjusted  The combined ratio excluding catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting.

Accident year loss ratio, as adjusted  The loss ratio excluding catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting.

Acquisition ratio  Acquisition costs divided by net premiums earned.  Acquisition costs are those costs incurred to acquire new and renewal insurance contracts and also include the amortization of VOBA and DAC. Acquisition costs vary with sales and include, but are not limited to, commissions, premium taxes, direct marketing costs and certain costs of personnel engaged in sales support activities such as underwriting.

Additional premium represents a premium on an insurance policy over and above the initial premium imposed at the beginning of the policy. An additional premium may be assessed if the insured’s risk is found to have increased significantly.

Adjusted revenuesexclude Net realized capital gains (losses), income from non-operating litigation settlements (included in Other income for GAAP purposes) and changes in fair value of securities used to hedge guaranteed living benefits (included in Net investment income for GAAP purposes).

Assets under administrationinclude assets under management and Retail Mutual Funds and Group Retirement mutual fund assets that we sell or administer.

Assets under management include assets in the general and separate accounts of our subsidiaries that support liabilities and surplus related to our life and annuity insurance products and the notional value of stable value wrap contracts.

Base SpreadNet investment income excluding income from alternative investments and other enhancements, less interest credited excluding amortization of sales inducement assets.

Base Yield  Net investment income excluding income from alternative investments and other enhancements, as a percentage of average base invested asset portfolio, which excludes alternative investments, other bond securities and certain other investments for which the fair value option has been elected.

Book value per common share, excluding accumulated other comprehensive income (AOCI) and Book value per common share, excluding AOCI and deferred tax assets (DTA) (Adjusted book value per common share) are non-GAAP measures and are used to show the amount of our net worth on a per-share basis. Book value per common share excluding AOCI is derived by dividing total AIG shareholders’ equity, excluding AOCI, by total common shares outstanding. Adjusted book value per common share is derived by dividing total AIG shareholders’ equity, excluding AOCI and DTA (Adjusted Shareholders’ Equity), by total common shares outstanding.

Casualty insurance  Insurance that is primarily associated with the losses caused by injuries to third persons, i.e., not the insured, and the legal liability imposed on the insured as a result.

Combined ratio  Sum of the loss ratio and the acquisition and general operating expense ratios.

CSACredit Support Annex  A legal document generally associated with an ISDA Master Agreement that provides for collateral postings which could vary depending on ratings and threshold levels.

CVACredit Valuation Adjustment  The CVA adjusts the valuation of derivatives to account for nonperformance risk of our counterparty with respect to all net derivative assets positions. Also, the CVA reflects the fair value movement in AIGFP's asset portfolio that is attributable to credit movements only, without the impact of other market factors such as interest rates and foreign exchange rates. Finally, the CVA also accounts for our own credit risk in the fair value measurement of all derivative net liability positions and liabilities where AIG has elected the fair value option, when appropriate.

DACDeferred Policy Acquisition Costs  Deferred costs that are incremental and directly related to the successful acquisition of new business or renewal of existing business.

174AIG | Second Quarter 2018 Form 10-Q

Glossary

DAC Related to Unrealized Appreciation (Depreciation) of Investments An adjustment to DAC and Reserves for investment-oriented products, equal to the change in DAC and Unearned Revenue amortization that would have been recorded if fixed maturity and equity securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields.  An adjustment to benefit reserves for investment-oriented products is also recognized to reflect the application of the benefit ratio to the accumulated assessments that would have been recorded if fixed maturity and equity securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields (collectively referred to as “shadow Investment-Oriented Adjustments”).

For long-duration traditional products, significant unrealized appreciation of investments in a sustained low interest rate environment may cause additional future policy benefit liabilities to be recorded (shadow loss reserves).

Deferred Gain on Retroactive ReinsuranceRetroactive reinsurance is a reinsurance contract in which an assuming entity agrees to reimburse a ceding entity for liabilities incurred as a result of past insurable events. If the amount of premium paid by the ceding reinsurer is less than the related ceded loss reserves, the resulting gain is deferred and amortized over the settlement period of the reserves. Any related development on the ceded loss reserves recoverable under the contract would increase the deferred gain if unfavorable, or decrease the deferred gain if favorable.

Expense ratio  Sum of acquisition expenses and general operating expenses, divided by net premiums earned.

General operating expense ratio  General operating expenses divided by net premiums earned. General operating expenses are those costs that are generally attributed to the support infrastructure of the organization and include but are not limited to personnel costs, projects and bad debt expenses. General operating expenses exclude losses and loss adjustment expenses incurred, acquisition expenses, and investment expenses.

GIC/GIAGuaranteed Investment Contract/Guaranteed Investment Agreement  A contract whereby the seller provides a guaranteed repayment of principal and a fixed or floating interest rate for a predetermined period of time.

G-SIIGlobal Systemically Important Insurer  An insurer that is deemed globally systemically important (that is, of such size, market importance and global interconnectedness that the distress or failure of the insurer would cause significant dislocation in the global financial system and adverse economic consequences across a range of countries) by the Financial Stability Board, in consultation with and based on a methodology developed by the International Association of Insurance Supervisors.

IBNRIncurred But Not Reported  Estimates of claims that have been incurred but not reported to us.

ISDA Master Agreement  An agreement between two counterparties, which may have multiple derivative transactions with each other governed by such agreement, that generally provides for the net settlement of all or a specified group of these derivative transactions, as well as pledged collateral, through a single payment, in a single currency, in the event of a default on, or affecting any, one derivative transaction or a termination event affecting all, or a specified group of, derivative transactions.

LAELoss Adjustment Expenses  The expenses directly attributed to settling and paying claims of insureds and include, but are not limited to, legal fees, adjuster’s fees and the portion of general expenses allocated to claim settlement costs.

Loss Ratio  Losses and loss adjustment expenses incurred divided by net premiums earned.

Loss reserve development  The increase or decrease in incurred losses and loss adjustment expenses related to prior yearsas a result of the re-estimation of loss reserves at successive valuation dates for a given group of claims.

Loss reserves  Liability for unpaid losses and loss adjustment expenses. The estimated ultimate cost of settling claims relating to insured events that have occurred on or before the balance sheet date, whether or not reported to the insurer at that date.

Loan-to-Value Ratio  Principal amount of loan amount divided by appraised value of collateral securing the loan.

Master netting agreement  An agreement between two counterparties who have multiple derivative contracts with each other that provides for the net settlement of all contracts covered by such agreement, as well as pledged collateral, through a single payment, in a single currency, in the event of default on or upon termination of any one such contract.

Natural catastrophe and man-made lossesare generally weather or seismic events having a net impact on AIG in excess of $10 million each and also include certain man-made events, such as terrorism and civil disorders that meet the $10 million threshold.

Net premiums written represent the sales of an insurer, adjusted for reinsurance premiums assumed and ceded, during a given period. Net premiums earned are the revenue of an insurer for covering risk during a given period. Net premiums written are a measure of performance for a sales period, while Net premiums earned are a measure of performance for a coverage period.

AIG | Second Quarter 2018 Form 10-Q175

Glossary

Noncontrolling interest  The portion of equity ownership in a consolidated subsidiary not attributable to the controlling parent company.

Policy fees  An amount added to a policy premium, or deducted from a policy cash value or contract holder account, to reflect the cost of issuing a policy, establishing the required records, sending premium notices and other related expenses.

Pool  A reinsurance arrangement whereby all of the underwriting results of the pool members are combined and then shared by each member in accordance with its pool participation percentage.

Premiums and deposits – Life and Retirement include direct and assumed amounts received on traditional life insurance policies and group benefit policies, and deposits on life-contingent payout annuities, as well as deposits received on universal life, investment-type annuity contracts, FHLB funding agreements and mutual funds.

Prior year development  See Loss reserve development.

RBC  Risk-Based Capital  A formula designed to measure the adequacy of an insurer’s statutory surplus compared to the risks inherent in its business.

Reinstatement premium  Additional premiums payable to reinsurers to restore coverage limits that have been exhausted as a result of reinsured losses under certain excess of loss reinsurance treaties.

Reinsurance  The practice whereby one insurer, the reinsurer, in consideration of a premium paid to that insurer, agrees to indemnify another insurer, the ceding company, for part or all of the liability of the ceding company under one or more policies or contracts of insurance which it has issued.

Retroactive Reinsurance S ee Deferred Gain on Retroactive Reinsurance.

Return on equity – Adjusted after-tax income excluding AOCI and DTA (Adjusted Return on equity)is a non-GAAP measure and is used to show the rate of return on shareholders’ equity. Adjusted Return on equity is derived by dividing actual or annualized adjusted after-tax income attributable to AIG by average Adjusted Shareholders’ Equity.

Return premium represents amounts given back to the insured in the case of a cancellation, an adjustment to the rate or an overpayment of an advance premium.

Salvage The amount that can be recovered by an insurer for the sale of damaged goods for which a policyholder has been indemnified (and to which title was transferred).

Severe losses are defined as non-catastrophic individual first-party losses, surety and trade credit losses greater than $10 million, net of related reinsurance and salvage and subrogation.

SIASales Inducement Asset  Represents enhanced crediting rates or bonus payments to contract holders on certain annuity and investment contract products that meet the criteria to be deferred and amortized over the life of the contract.

Solvency II Legislation in the European Union which reforms the insurance industry’s solvency framework, including minimum capital and solvency requirements, governance requirements, risk management and public reporting standards.  The Solvency II Directive (2009/138/EEC) was adopted on November 25, 2009 and became effective on January 1, 2016.

Subrogation The amount of recovery for claims we have paid our policyholders, generally from a negligent third party or such party’s insurer.

Surrender charge  A charge levied against an investor for the early withdrawal of funds from a life insurance or annuity contract, or for the cancellation of the agreement.

Surrender rate represents annualized surrenders and withdrawals as a percentage of average reserves and Group Retirement mutual fund assets under administration.

Unearned premium reserveLiabilities established by insurers and reinsurers to reflect unearned premiums, which are usually refundable to policyholders if an insurance or reinsurance contract is canceled prior to expiration of the contract term.

VOBA  Value of Business Acquired  Present value of projected future gross profits from in-force policies of acquired businesses.

176AIG | Second Quarter 2018 Form 10-Q

Acronyms

Acronyms

A&H Accident and Health Insurance	GMWB  Guaranteed Minimum Withdrawal Benefits
ABS  Asset-Backed Securities	ISDA  International Swaps and Derivatives Association, Inc.
CDO  Collateralized Debt Obligations	Moody's Moody's Investors’ Service Inc.
CDS  Credit Default Swap	NAIC  National Association of Insurance Commissioners
CMA  Capital Maintenance Agreement	NM  Not Meaningful
CMBS  Commercial Mortgage-Backed Securities	OTC Over-the-Counter
EGPs  Estimated gross profits	OTTI  Other-Than-Temporary Impairment
FASB  Financial Accounting Standards Board	RMBS  Residential Mortgage-Backed Securities
FRBNY  Federal Reserve Bank of New York	S&P  Standard & Poor’s Financial Services LLC
GAAP  Accounting principles generally accepted in the United States of America	SEC  Securities and Exchange Commission
GMDB  Guaranteed Minimum Death Benefits	URR  Unearned revenue reserve
	VIE  Variable Interest Entity

AIG | Second Quarter 2018 Form 10-Q177

ITEM 3 | Quantitative and Qualitative Disclosures About Market Risk

ITEM 3 | Quantitative and Qualitative Disclosures About Market Risk

Included in Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – Enterprise Risk Management.

ITEM 4 | Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was carried out by AIG’s management, with the participation of AIG’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of AIG’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, AIG’s Chief Executive Officer and Chief Financial Officer have concluded that AIG’s disclosure controls and procedures were effective as of June 30, 2018.

There has been no change in AIG’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2018, that has materially affected, or is reasonably likely to materially affect, AIG’s internal control over financial reporting.

178AIG | Second Quarter 2018 Form 10-Q

Part II – Other Information

ITEM 1 | Legal Proceedings

For a discussion of legal proceedings see Note 10 to the Condensed Consolidated Financial Statements, which is incorporated herein by reference.

ITEM 1A | Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the following risk factor, as well as the other risk factors discussed in Part I, Item 1A. Risk Factors in our 2017 Annual Report.

Our recently acquired reinsurance business exposes us to certain risks, many of which are similar to risks in our existing property casualty insurance business. These risks include the difficulty of estimating ultimate net losses, loss expenses and loss reserves related to reinsurance products; exposure to the effects of natural and man-made catastrophic events; exposure to risks related to the potential concentration of certain reinsurance contracts; the difficulty of adequately pricing reinsurance contracts; and potential downgrades in the Insurer Financial Strength ratings of our reinsurance subsidiaries. These risks may have a material adverse effect on our consolidated results of operations, liquidity and financial condition.

For further discussion, see the following risk factors inPart I, Item 1A. Risk Factors in our 2017 Annual Report:

·“Insurance liabilities are difficult to predict and may exceed the related reserves for losses and loss expenses”;

·“Our consolidated results of operations, liquidity, financial condition and ratings are subject to the effects of natural and man-made catastrophic events”;

·“Concentration of our insurance and other risk exposures may have adverse effects”;

·“Pricing for our products is subject to our ability to adequately assess risks and estimate losses”; and

·“A downgrade in the Insurer Financial Strength ratings of our insurance companies could limit their ability to write or prevent them from writing new business and retaining customers and business.”

In addition, if our reinsurance liabilities increase, we may be required to post additional collateral for insurance company clients. The need to post this additional collateral, if significant enough, may require us to sell investments at a loss in order to provide securities of suitable credit quality or otherwise secure adequate capital at an unattractive cost. This could adversely impact our consolidated results of operations, liquidity and financial condition.

AIG | Second Quarter 2018 Form 10-Q179

ITEM 2 | Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides the information with respect to purchases made by or on behalf of AIG or any “affiliated purchaser” (as defined in Rule 10b‑18(a)(3) under the Securities Exchange Act of 1934) of AIG Common Stock and warrants to purchase AIG Common Stock during the three months ended June 30, 2018:

	Total Number		Average	Total Number of Shares	Approximate Dollar Value of Shares
	of Shares		Price Paid	Purchased as Part of Publicly	that May Yet Be Purchased Under the
Period	Repurchased		per Share	Announced Plans or Programs	Plans or Programs (in millions)
April 1 – 30	-	$	-	-		$	1,962
May 1 – 31	3,398,893		52.64	3,398,893			1,783
June 1 – 30(a)	3,094,654		54.38	3,094,654			1,612	(b)
Total(c)	6,493,547	$	53.47	6,493,547		$	1,612

(a)  During this period, we also repurchased 168,900 warrants to purchase shares of AIG Common Stock, at an average purchase price per warrant of $15.22, for an aggregate purchase price of $2 million. 

(b)  Reflects the purchase of 168,900 warrants to purchase shares of AIG Common Stock, which reduced the dollar value of the remaining repurchase authorization.

(c)  On May 3, 2017, our Board of Directors authorized an additional increase of $2.5 billion to the share repurchase authorization.  As of August 2, 2018, approximately $1.5 billion remained under the authorization. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants).  Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans. The timing of any future share repurchases will depend on market conditions, our business and strategic plans, financial condition, results of operations, liquidity and other factors.

During the three-month period ended June 30, 2018, we repurchased approximately 6.5 million shares of AIG Common Stock under this authorization for an aggregate purchase price of approximately $348 million. We also repurchased 168,900 warrants to purchase shares of AIG Common Stock during the three-month period ended June 30, 2018 for an aggregate purchase price of $2 million. Pursuant to an Exchange Act Rule 10b5-1 plan, from July 1, 2018 to August 2, 2018, we have repurchased approximately $149 million of additional shares of AIG Common Stock and $1 million of warrants to purchase shares of AIG Common Stock. 

ITEM 4 | Mine Safety Disclosures

Not applicable.

ITEM 5 | Other Information

For 2018, we modified our executive compensation program to reflect our commitment to long-term, sustainable, profitable growth.  Individual 2018 short-term incentive awards for the Executive Leadership Team (ELT) are based on metrics designed to emphasize business unit accountability and on an assessment of individual strategic and qualitative performance. Our 2018 long-term incentive (LTI) program for the ELT consists of performance share units (PSUs), restricted stock units (RSUs) and stock options (weighted 50 percent, 25 percent and 25 percent, respectively). PSUs will be earned over a three-year performance period based on a mix of operating metrics consisting of improvement in Combined Ratio, growth in Core Book Value per Share and Core Normalized Return on Equity.  In addition, annual LTI grant amounts for ELT members take into account an assessment of individual performance.

We were not required to disclose the information reported under this Item 5 in a report on Form 8-K during the period covered by this Form 10-Q. The information reported by us under this Item 5 is provided because we deem it to be of importance to our shareholders and would have otherwise reported such information under Item 7.01 of Form 8-K, “Regulation FD.”

180AIG | Second Quarter 2018 Form 10-Q

ITEM 6 | Exhibits 

Exhibit Index

Exhibit Number	Description	Location
4	(1) Certificate of Designations of 5.875% Non-Cumulative Preference Shares, Series A	Incorporated by reference to Exhibit 4.1 to Validus’ Current Report on Form 8-K filed with the SEC on June 13, 2016 (File No. 1-33606).
	(2) Form of share certificate evidencing 5.875% Non-Cumulative Preference Shares, Series A	Incorporated by reference to Exhibit 4.2 to Validus’ Current Report on Form 8-K filed with the SEC on June 13, 2016 (File No. 1-33606).
	(3) Form of depositary receipt for the 5.875% Non-Cumulative Preference Shares, Series A	Incorporated by reference to Exhibit 4.4 to Validus’ Current Report on Form 8-K filed with the SEC on June 13, 2016 (File No. 1-33606).
	(4) Certificate of Designations of 5.800% Non-Cumulative Preference Shares, Series B	Incorporated by reference to Exhibit 4.1 to Validus’ Current Report on Form 8-K filed with the SEC on June 20, 2017 (File No. 1-33606).
	(5) Form of share certificate evidencing 5.800% Non-Cumulative Preference Shares, Series B	Incorporated by reference to Exhibit 4.2 to Validus’ Current Report on Form 8-K filed with the SEC on June 20, 2017 (File No. 1-33606).
	(6) Form of depositary receipt for the 5.800% Non-Cumulative Preference Shares, Series B	Incorporated by reference to Exhibit 4.4 to Validus’ Current Report on Form 8-K filed with the SEC on June 20, 2017 (File No. 1-33606).
	(7) Guarantee, dated July 26, 2018, by AIG, relating to the Preference Shares	Incorporated by reference to Exhibit 4.2 to Validus’ Current Report on Form 8-K filed with the SEC on July 26, 2018 (File No. 1-33606).
	(8) Indenture, dated January 26, 2010, between Validus and The Bank of New York Mellon, as Trustee	Incorporated by reference to Exhibit 4.1 to Validus’ Current Report on Form 8-K filed with the SEC on January 26, 2010 (File No. 1-33606).
	(9) First Supplemental Indenture, dated January 26, 2010, between Validus and The Bank of New York Mellon, as Trustee	Incorporated by reference to Exhibit 4.2 to Validus’ Current Report on Form 8-K filed with the SEC on January 26, 2010 (File No. 1-33606).
	(10) Form of 8.875% Senior Note due 2040 (included in Exhibit 4.9)
	(11) Second Supplemental Indenture, dated July 26, 2018, between Validus and The Bank of New York Mellon, as Trustee	Incorporated by reference to Exhibit 4.1 to Validus’ Current Report on Form 8-K filed with the SEC on July 26, 2018 (File No. 1-33606).
	(12) Guarantee, dated July 26, 2018, by AIG, relating to the Notes	Incorporated by reference to Exhibit 4.3 to Validus’ Current Report on Form 8-K filed with the SEC on July 26, 2018 (File No. 1-33606).
11	Statement re: Computation of Per Share Earnings	Included in Note 12 to the Condensed Consolidated Financial Statements.
12	Computation of Ratios of Earnings to Fixed Charges	Filed herewith.
31	Rule 13a-14(a)/15d-14(a) Certifications	Filed herewith.
32	Section 1350 Certifications*	Filed herewith.
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017, (ii) the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2018 and 2017, (iii) the Condensed Consolidated Statements of Equity for the three and six months ended  June 30, 2018 and 2017, (iv) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017, (v) the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended  June 30, 2018 and 2017 and (vi) the Notes to the Condensed Consolidated Financial Statements	Filed herewith.

*    This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

AIG | Second Quarter 2018 Form 10-Q181

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AMERICAN INTERNATIONAL GROUP, INC.

(Registrant)

/S/ SIDDHARTHA SANKARAN

Siddhartha Sankaran

Executive Vice President

Chief Financial Officer

(Principal Financial Officer)

/S/ ELIAS F. HABAYEB

Elias F. Habayeb

Senior Vice President – General Insurance and

Deputy Chief Financial Officer and

Group Controller

(Principal Accounting Officer)

Dated: August 3, 2018

182AIG | Second Quarter 2018 Form 10-Q