AMERICAN INTERNATIONAL GROUP, INC.

UNITED STATES

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 September 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 every Interactive Data File required to be submitted 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 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 ☐

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 October 29, 2018, there were 884,648,470 shares outstanding of the registrant’s common stock.

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

September 30, 2018

FORM 10-Q
Item Number	Description		Page
Part I — Financial Information
ITEM 1	Condensed Consolidated Financial Statements		2
	Note 1.	Basis of Presentation	9
	Note 2.	Summary of Significant Accounting Policies	10
	Note 3.	Segment Information	14
	Note 4	Business Combination	17
	Note 5.	Fair Value Measurements	18
	Note 6.	Investments	36
	Note 7.	Lending Activities	45
	Note 8.	Variable Interest Entities	47
	Note 9.	Derivatives and Hedge Accounting	48
	Note 10.	Insurance Liabilities	53
	Note 11.	Contingencies, Commitments and Guarantees	56
	Note 12.	Equity	58
	Note 13.	Earnings Per Share	63
	Note 14.	Employee Benefits	64
	Note 15.	Income Taxes	65
	Note 16.	Information Provided in Connection with Outstanding Debt and Preference Shares	70
	Note 17.	Subsequent Events	76
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of
	Operations		77
	· Cautionary Statement Regarding Forward-Looking Information		77
	· Use of Non-GAAP Measures		80
	· Critical Accounting Estimates		82
	· Executive Summary		83
	· Consolidated Results of Operations		93
	· Business Segment Operations		100
	· Investments		136
	· Insurance Reserves		149
	· Liquidity and Capital Resources		163
	· Enterprise Risk Management		175
	· Regulatory Environment		182
	· Glossary		183
	· Acronyms		186
ITEM 3	Quantitative and Qualitative Disclosures About Market Risk		187
ITEM 4	Controls and Procedures		187
Part II — Other Information
ITEM 1	Legal Proceedings		188
ITEM 1A	Risk Factors		188
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds		188
ITEM 4	Mine Safety Disclosures		188
ITEM 5	Other Information		189
ITEM 6	Exhibits		190
Signatures			191

AIG | Third Quarter 2018 Form 10-Q 1

TABLE OF CONTENTS

Part I – Financial Information

Item 1. | Fin ancial Statements

American International Group, Inc.

Condensed Consolidated Balance Sheets (unaudited)

	September 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 - $228,047; 2017 - $225,461)	$	232,720	$	238,992
Other bond securities, at fair value (See Note 6)		11,420		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 6)		1,443		589
Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2018 - $0; 2017 - $5)		41,878		37,023
Other invested assets (portion measured at fair value: 2018 - $6,144; 2017 - $6,248)		19,739		20,822
Short-term investments, including restricted cash of 2018 - $28; 2017 - $58
(portion measured at fair value: 2018 - $3,633; 2017 - $2,615)		8,863		10,386
Total investments		316,063		322,292

Cash		2,741		2,362
Accrued investment income		2,524		2,356
Premiums and other receivables, net of allowance		12,238		10,248
Reinsurance assets, net of allowance		37,178		33,024
Deferred income taxes		15,088		14,033
Deferred policy acquisition costs		12,683		10,994
Other assets, including restricted cash of $354 in 2018 and $317 in 2017
(portion measured at fair value: 2018 - $950; 2017 - $922)		13,300		10,194
Separate account assets, at fair value		93,045		92,798
Total assets	$	504,860	$	498,301
Liabilities:
Liability for unpaid losses and loss adjustment expenses	$	81,959	$	78,393
Unearned premiums		20,829		19,030
Future policy benefits for life and accident and health insurance contracts		44,374		45,432
Policyholder contract deposits (portion measured at fair value: 2018 - $3,376; 2017 - $4,150)		140,491		135,602
Other policyholder funds		3,738		3,648
Other liabilities (portion measured at fair value: 2018 - $1,491; 2017 - $1,124)		26,653		26,050
Long-term debt (portion measured at fair value: 2018 - $2,311; 2017 - $2,888)		34,594		31,640
Separate account liabilities		93,045		92,798
Total liabilities		445,683		432,593
*Contingencies, commitments and guarantees (See Note 11***)

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 - 1,022,023,965 shares; 2017 - 1,007,626,835 shares of common stock		(48,401)		(47,595)
Additional paid-in capital		81,008		81,078
Retained earnings		21,749		21,457
Accumulated other comprehensive income (loss)		(536)		5,465
Total AIG shareholders’ equity		58,586		65,171
Non-redeemable noncontrolling interests		591		537
Total equity		59,177		65,708
Total liabilities and equity	$	504,860	$	498,301

See accompanying Notes to Condensed Consolidated Financial Statements.

2 AIG | Third Quarter 2018 Form 10-Q

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American International Group, Inc.

Condensed Consolidated Statements of Income (Loss) (unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in millions, except per share data)		2018		2017		2018		2017
Revenues:
Premiums	$	7,668	$	8,063	$	22,150	$	23,459
Policy fees		530		728		2,057		2,177
Net investment income		3,396		3,416		9,722		10,715
Net realized capital losses:
Total other-than-temporary impairments on available for sale securities		(13)		(66)		(116)		(138)
Portion of other-than-temporary impairments on available for sale
fixed maturity securities recognized in Other comprehensive income (loss)		(22)		(8)		(42)		(57)
Net other-than-temporary impairments on available for sale
securities recognized in net income (loss)		(35)		(74)		(158)		(195)
Other realized capital losses		(476)		(848)		(207)		(911)
Total net realized capital losses		(511)		(922)		(365)		(1,106)
Other income		403		466		1,265		1,640
Total revenues		11,486		11,751		34,829		36,885
Benefits, losses and expenses:
Policyholder benefits and losses incurred		8,312		10,322		19,484		22,653
Interest credited to policyholder account balances		933		867		2,784		2,683
Amortization of deferred policy acquisition costs		1,118		912		3,813		3,135
General operating and other expenses		2,325		2,149		6,919		6,774
Interest expense		326		290		902		880
(Gain) loss on extinguishment of debt		1		1		10		(4)
Net (gain) loss on sale of divested businesses		(2)		13		(35)		173
Total benefits, losses and expenses		13,013		14,554		33,877		36,294
Income (loss) from continuing operations before
income tax expense (benefit)		(1,527)		(2,803)		952		591
Income tax expense (benefit)		(307)		(1,091)		291		(18)
Income (loss) from continuing operations		(1,220)		(1,712)		661		609
Income (loss) from discontinued operations, net of income tax expense		(39)		(1)		(40)		7
Net income (loss)		(1,259)		(1,713)		621		616
Less:
Net income from continuing operations attributable to
noncontrolling interests		-		26		5		40
Net income (loss) attributable to AIG	$	(1,259)	$	(1,739)	$	616	$	576

Income (loss) per common share attributable to AIG:
Basic:
Income (loss) from continuing operations	$	(1.37)	$	(1.91)	$	0.72	$	0.60
Income (loss) from discontinued operations	$	(0.04)	$	-	$	(0.04)	$	0.01
Net income (loss) attributable to AIG	$	(1.41)	$	(1.91)	$	0.68	$	0.61
Diluted:
Income (loss) from continuing operations	$	(1.37)	$	(1.91)	$	0.71	$	0.59
Income (loss) from discontinued operations	$	(0.04)	$	-	$	(0.04)	$	0.01
Net income (loss) attributable to AIG	$	(1.41)	$	(1.91)	$	0.67	$	0.60
Weighted average shares outstanding:
Basic		895,237,359		908,667,044		902,081,555		938,130,832
Diluted		895,237,359		908,667,044		916,818,269		961,295,946
Dividends declared per common share	$	0.32	$	0.32	$	0.96	$	0.96

See accompanying Notes to Condensed Consolidated Financial Statements.

AIG | Third Quarter 2018 Form 10-Q 3

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American International Group, Inc.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions)		2018		2017		2018		2017
Net income (loss)	$	(1,259)	$	(1,713)	$	621	$	616
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		107		97		(1,089)		330
Change in unrealized appreciation (depreciation) of all other investments		(758)		492		(4,222)		1,840
Change in foreign currency translation adjustments		(129)		325		(181)		447
Change in retirement plan liabilities adjustment		14		63		66		92
Change in fair value of liabilities under fair value option attributable to changes in
own credit risk		-		-		1		-
Other comprehensive income (loss)		(766)		977		(5,425)		2,709
Comprehensive income (loss)		(2,025)		(736)		(4,804)		3,325
Comprehensive income attributable to noncontrolling interests		-		26		5		40
Comprehensive income (loss) attributable to AIG	$	(2,025)	$	(762)	$	(4,809)	$	3,285

See accompanying Notes to Condensed Consolidated Financial Statements.

4 AIG | Third Quarter 2018 Form 10-Q

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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 (Loss)		Equity		Interests		Equity
Three Months Ended September 30, 2018
Balance, beginning of period	$	4,766	$	(48,052)	$	80,924	$	23,318	$	230	$	61,186	$	611	$	61,797
Cumulative effect of change in accounting
principle, net of tax		-		-		-		-		-		-		-		-
Common stock issued under stock plans		-		-		-		-		-		-		-		-
Purchase of common stock		-		(348)		-		-		-		(348)		-		(348)
Net income (loss) attributable to AIG or
noncontrolling interests		-		-		-		(1,259)		-		(1,259)		-		(1,259)
Dividends		-		-		-		(283)		-		(283)		-		(283)
Other comprehensive income (loss)		-		-		-		-		(766)		(766)		-		(766)
Net increase due to acquisitions and consolidations		-		-		-		-		-		-		1		1
Contributions from noncontrolling interests		-		-		-		-		-		-		18		18
Distributions to noncontrolling interests		-		-		-		-		-		-		(38)		(38)
Other		-		(1)		84		(27)		-		56		(1)		55
Balance, end of period	$	4,766	$	(48,401)	$	81,008	$	21,749	$	(536)	$	58,586	$	591	$	59,177

Nine Months Ended September 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		-		(994)		-		-		-		(994)		-		(994)
Net income attributable to AIG or
noncontrolling interests		-		-		-		616		-		616		5		621
Dividends		-		-		-		(858)		-		(858)		-		(858)
Other comprehensive income (loss)		-		-		-		-		(5,425)		(5,425)		-		(5,425)
Current and deferred income taxes		-		-		-		-		-		-		-		-
Net increase due to acquisitions and consolidations		-		-		-		-		-		-		99		99
Contributions from noncontrolling interests		-		-		-		-		-		-		21		21
Distributions to noncontrolling interests		-		-		-		-		-		-		(65)		(65)
Other		-		1		267		(34)		-		234		(6)		228
Balance, end of period	$	4,766	$	(48,401)	$	81,008	$	21,749	$	(536)	$	58,586	$	591	$	59,177

AIG | Third Quarter 2018 Form 10-Q 5

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American International Group, Inc.

Condensed Consolidated Statements of Equity (unaudited)(continued)

														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
Three Months Ended September 30, 2017
Balance, beginning of period	$	4,766	$	(47,329)	$	80,913	$	30,420	$	4,962	$	73,732	$	592	$	74,324
Common stock issued under stock plans		-		-		-		-		-		-		-		-
Purchase of common stock		-		(275)		-		-		-		(275)		-		(275)
Net income (loss) attributable to AIG or
noncontrolling interests		-		-		-		(1,739)		-		(1,739)		26		(1,713)
Dividends		-		-		-		(287)		-		(287)		-		(287)
Other comprehensive income (loss)		-		-		-		-		977		977		-		977
Current and deferred income taxes		-		-		-		-		-		-		-		-
Net increase due to acquisitions and consolidations		-		-		-		-		-		-		32		32
Contributions from noncontrolling interests		-		-		-		-		-		-		(1)		(1)
Distributions to noncontrolling interests		-		-		-		-		-		-		(49)		(49)
Other		-		2		63		(5)		-		60		(56)		4
Balance, end of period	$	4,766	$	(47,602)	$	80,976	$	28,389	$	5,939	$	72,468	$	544	$	73,012

Nine Months Ended September 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		-		(6,275)		-		-		-		(6,275)		-		(6,275)
Net income attributable to AIG or
noncontrolling interests		-		-		-		576		-		576		40		616
Dividends		-		-		-		(884)		-		(884)		-		(884)
Other comprehensive income (loss)		-		-		-		-		2,709		2,709		-		2,709
Current and deferred income taxes		-		-		(4)		-		-		(4)		-		(4)
Net increase due to acquisitions and consolidations		-		-		-		-		-		-		78		78
Contributions from noncontrolling interests		-		-		-		-		-		-		13		13
Distributions to noncontrolling interests		-		-		-		-		-		-		(131)		(131)
Other		-		4		220		(14)		-		210		(14)		196
Balance, end of period	$	4,766	$	(47,602)	$	80,976	$	28,389	$	5,939	$	72,468	$	544	$	73,012

See accompanying Notes to Condensed Consolidated Financial Statements.

6 AIG | Third Quarter 2018 Form 10-Q

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American International Group, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

	Nine Months Ended September 30,
(in millions)		2018		2017
Cash flows from operating activities:
Net income	$	621	$	616
(Income) loss from discontinued operations		40		(7)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Noncash revenues, expenses, gains and losses included in income (loss):
Net gains on sales of securities available for sale and other assets		(71)		(404)
Net (gain) loss on sale of divested businesses		(35)		173
(Gains) losses on extinguishment of debt		10		(4)
Unrealized losses in earnings - net		601		251
Equity in (income) loss from equity method investments, net of dividends or distributions		141		(16)
Depreciation and other amortization		3,813		2,806
Impairments of assets		269		669
Changes in operating assets and liabilities:
Insurance reserves		96		4,448
Premiums and other receivables and payables - net		968		300
Reinsurance assets and funds held under reinsurance treaties		(2,057)		(12,705)
Capitalization of deferred policy acquisition costs		(4,366)		(3,593)
Current and deferred income taxes - net		224		(508)
Other, net		(292)		(888)
Total adjustments		(699)		(9,471)
Net cash used in operating activities		(38)		(8,862)
Cash flows from investing activities:
Proceeds from (payments for)
Sales or distributions of:
Available for sale securities		18,103		27,733
Other securities		3,258		2,647
Other invested assets		3,799		4,074
Divested businesses, net		10		605
Maturities of fixed maturity securities available for sale		18,305		22,126
Principal payments received on and sales of mortgage and other loans receivable		3,068		3,932
Purchases of:
Available for sale securities		(32,807)		(38,717)
Other securities		(940)		(355)
Other invested assets		(2,263)		(2,359)
Mortgage and other loans receivable		(7,918)		(6,517)
Acquisition of businesses, net of cash and restricted cash acquired		(5,052)		-
Net change in short-term investments		2,411		2,815
Other, net		(891)		(1,509)
Net cash provided by (used in) investing activities		(917)		14,475
Cash flows from financing activities:
Proceeds from (payments for)
Policyholder contract deposits		18,150		13,164
Policyholder contract withdrawals		(13,004)		(11,363)
Issuance of long-term debt		4,059		2,405
Repayments of long-term debt		(2,788)		(2,751)
Purchase of common stock		(994)		(6,275)
Dividends paid		(858)		(884)
Other, net		(3,232)		578
Net cash provided by (used in) financing activities		1,333		(5,126)
Effect of exchange rate changes on cash and restricted cash		8		(22)
Net increase in cash and restricted cash		386		465
Cash and restricted cash at beginning of year		2,737		2,107
Change in cash of businesses held for sale		-		133
Cash and restricted cash at end of period	$	3,123	$	2,705

AIG | Third Quarter 2018 Form 10-Q 7

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American International Group, Inc.

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

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

	Nine Months Ended September 30,
		2018		2017
Cash	$	2,741	$	2,433
Restricted cash included in Short-term investments^*		28		53
Restricted cash included in Other assets^*		354		219
Total cash and restricted cash shown in the Condensed Consolidated Statements of Cash Flows	$	3,123	$	2,705


Cash paid during the period for:
Interest	$	1,018	$	1,046
Taxes	$	67	$	490
Non-cash investing/financing activities:
Interest credited to policyholder contract deposits included in financing activities	$	2,525	$	2,494

* 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.

8 AIG | Third Quarter 2018 Form 10-Q

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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 September 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.

AIG | Third Quarter 2018 Form 10-Q 9

TABLE OF CONTENTS

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

Acquisition of Validus

On July 18, 2018, we completed the purchase of Validus Holdings, Ltd. (Validus), a leading provider of reinsurance, primary insurance, and asset management services, for $5.5 billion in cash. The results of Validus following the date of the acquisition are included in our General Insurance segment starting in the third quarter of 2018. Our North America results include the results of Validus Reinsurance, Ltd. and Western World Insurance Group, Inc., while our International results include the results of Talbot Holdings Ltd.

For additional information relating to the acquisition of Validus, see Note 4.

OUT OF PERIOD ADJUSTMENTS

For the three- and nine-month periods ended September 30, 2018, our results include out of period adjustments relating to prior periods that decreased net income attributable to AIG by $205 million and $28 million, respectively, and decreased Income from continuing operations before income taxes by $253 million and $15 million, respectively. The out of period adjustments for the three-month period are primarily related to decreases in deferred policy acquisition costs and increases in policyholder contract deposits due to the update of actuarial assumptions.

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 requires 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 are 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.

10 AIG | Third Quarter 2018 Form 10-Q

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

Intra-Entity Transfers of Assets Other than Inventory

In October 2016, the FASB issued an accounting standard that requires 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.

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 are 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 15.

AIG | Third Quarter 2018 Form 10-Q 11

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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, January 1, 2019, using the additional (and optional) transition method and recognizing a cumulative-effect adjustment to the opening balance of retained earnings, at the adoption date. 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 will adopt the standard on its effective date. The standard’s impact is immaterial to our reported consolidated financial condition, results of operations, cash flows and required disclosures.

12 AIG | Third Quarter 2018 Form 10-Q

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

Targeted Improvements to the Accounting for Long-Duration Contracts

In August 2018, the FASB issued an accounting standard update with the objective of making targeted improvements to the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. The changes to the measurement, recognition and disclosure as provided by the new accounting standard update are summarized below:

· Requires the review and if necessary update of future policy benefit assumptions at least annually for traditional and limited pay long duration contracts.

· Requires the discount rate assumption to be updated at the end of each reporting period using a upper medium grade (low-credit risk) fixed income instrument yield that maximizes the use of observable market inputs and recognizes the impact of changes to discount rates in other comprehensive income.

· Simplifies the amortization of deferred acquisition costs (DAC) to a constant level basis over the expected term of the related contracts with adjustments for unexpected terminations, but no longer requires an impairment test.

· Requires the measurement of all market risk benefits associated with deposit (or account balance) contracts at fair value through the income statement with the exception of instrument-specific credit risk changes, which will be recognized in other comprehensive income.

· Increased disclosures of disaggregated roll-forwards of policy benefits, account balances, market risk benefits, separate account liabilities and information about significant inputs, judgments and methods used in measurement and changes thereto and effect of those changes.

We plan to adopt the standard on its effective date, January 1, 2021. We are evaluating the method of adoption and impact of the standard on our reported consolidated financial condition, results of operations, cash flows and required disclosures. The adoption of this standard is expected to have a significant impact on our consolidated financial condition, results of operations, cash flows and required disclosures, as well as systems, processes and controls.

AIG | Third Quarter 2018 Form 10-Q 13

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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. This also includes the results of Validus Reinsurance, Ltd. and Western World Insurance Group, Inc. as of the acquisition date.

· International — consists of insurance businesses in Japan, the United Kingdom, Europe, Asia Pacific, Latin America, Puerto Rico, Australia, the Middle East and Africa. This also includes the results of Talbot Holdings, Ltd. as of the acquisition date.

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 subsidiary focused on delivering commercial insurance 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.

14 AIG | Third Quarter 2018 Form 10-Q

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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, Fortitude Reinsurance Company Ltd. (Fortitude Re), formerly known as DSA Reinsurance Company, Ltd., 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 September 30,	2018				2017
				Adjusted				Adjusted
		Adjusted		Pre-tax		Adjusted		Pre-tax
(in millions)		Revenues		Income (Loss)		Revenues		Income (Loss)
General Insurance
North America	$	4,129	$	(160)	$	3,634	$	(2,193)
International		3,853		(665)		3,867		(740)
Total General Insurance		7,982		(825)		7,501		(2,933)
Life and Retirement
Individual Retirement		1,335		393		1,343		718
Group Retirement		718		242		702		249
Life Insurance		809		16		1,000		112
Institutional Markets		284		62		1,091		79
Total Life and Retirement		3,146		713		4,136		1,158
Other Operations		135		(417)		127		(366)
Legacy Portfolio		814		84		1,013		286
AIG Consolidation and elimination		(42)		29		(119)		(1)
Total AIG Consolidated adjusted revenues and adjusted pre-tax income		12,035		(416)		12,658		(1,856)
Reconciling Items to revenues and pre-tax income:
Changes in fair value of securities used to hedge guaranteed
living benefits		(5)		(14)		26		26
Changes in benefit reserves and DAC, VOBA and SIA related to
net realized capital gains		-		76		-		84
Other income (expense) - net		(4)		-		(12)		-
Gain (Loss) on extinguishment of debt		-		(1)		-		(1)
Net realized capital losses^*		(540)		(524)		(922)		(922)
Income (loss) from divested businesses		-		2		-		(13)
Non-operating litigation reserves and settlements		-		(5)		1		-
(Unfavorable) favorable prior year development and related amortization
changes ceded under retroactive reinsurance agreements		-		(605)		-		7
Net loss reserve discount benefit (charge)		-		86		-		(48)
Pension expense related to a one-time lump sum payment to former employees		-		-		-		(49)
Integration and transaction costs associated with acquired businesses		-		(91)		-		-
Restructuring and other costs		-		(35)		-		(31)
Revenues and Pre-tax income (loss)	$	11,486	$	(1,527)	$	11,751	$	(2,803)

AIG | Third Quarter 2018 Form 10-Q 15

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

Nine Months Ended September 30,	2018				2017
				Adjusted				Adjusted
		Adjusted		Pre-Tax		Adjusted		Pre-Tax
(in millions)		Revenues		Income (Loss)		Revenues		Income (Loss)
General Insurance
North America	$	10,895	$	567	$	11,145	$	(644)
International		11,758		(314)		11,315		(182)
Total General Insurance		22,653		253		22,460		(826)
Life and Retirement
Individual Retirement		4,062		1,354		4,099		1,815
Group Retirement		2,209		774		2,116		758
Life Insurance		2,962		243		3,043		272
Institutional Markets		838		196		1,946		204
Total Life and Retirement		10,071		2,567		11,204		3,049
Other Operations		454		(1,133)		1,227		(1,039)
Legacy Portfolio		2,431		363		3,235		1,059
AIG Consolidation and elimination		(214)		28		(237)		75
Total AIG Consolidated adjusted revenues and adjusted pre-tax income		35,395		2,078		37,889		2,318
Reconciling Items to revenues and pre-tax income:
Changes in fair value of securities used to hedge guaranteed
living benefits		(109)		(127)		117		117
Changes in benefit reserves and DAC, VOBA and SIA related to
net realized capital gains		-		46		-		195
Other income (expense) - net		(29)		-		(32)		-
Gain (Loss) on extinguishment of debt		-		(10)		-		4
Net realized capital losses^*		(430)		(388)		(1,106)		(1,106)
Income (loss) from divested businesses		-		35		-		(173)
Non-operating litigation reserves and settlements		2		(30)		17		86
(Unfavorable) favorable prior year development and related amortization
changes ceded under retroactive reinsurance agreements		-		(607)		-		(258)
Net loss reserve discount benefit (charge)		-		305		-		(283)
Pension expense related to a one-time lump sum payment to former employees		-		-		-		(50)
Integration and transaction costs associated with acquired businesses		-		(91)		-		-
Restructuring and other costs		-		(259)		-		(259)
Revenues and Pre-tax income	$	34,829	$	952	$	36,885	$	591

* 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.

16 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 4. Business Combination

4. Business Combination

On July 18, 2018, we completed the purchase of a 100 percent voting interest in Validus, a leading provider of reinsurance, primary insurance, and asset management services, for $5.5 billion in cash. This transaction was made with the intent to strengthen our global General Insurance business by expanding our current product portfolio through additional distribution channels and advancing the tools available to enhance underwriting. The impact of the acquisition on Total revenues, Net income (loss), and Net income (loss) attributable to AIG was $756 million, $(105) million, and $(105) million, respectively, for both the three- and nine-month periods ended September 30, 2018. Integration and transaction costs associated with the acquisition of Validus were $91 million for both the three- and nine-month periods ending September 30, 2018 and are included in General operating and other expenses in our Consolidated Statement of Income.

As part of the purchase, we guaranteed 6,000 issued and outstanding 5.875% Non-Cumulative Preference Shares, Series A (the Series A Preference Shares) and 10,000 issued and outstanding 5.800% Non-Cumulative Preference Shares, Series B (together with the Series A Preference Shares, the Preference Shares). On September 27, 2018, we provided notice to the preference shareholders that on October 30, 2018 (the Redemption Date), we will redeem all of the Preference Shares at a redemption price of $26,000 per Preference Share, plus all declared and unpaid dividends, if any, up to, but excluding, the Redemption Date. Accordingly, as of September 30, 2018, the Preference Shares are included within Other liabilities on our Condensed Consolidated Balance Sheet.

The purchase was accounted for under the acquisition method. Accordingly, the total purchase price was allocated to the estimated fair values of assets acquired and liabilities assumed. This allocation resulted in the purchase price exceeding the fair value of net assets acquired, which results in a difference recorded as goodwill. Goodwill generated from the acquisition is attributable to expected synergies from future growth and potential future monetization opportunities. Goodwill related to the purchase of Validus assigned to our General Insurance operating segments was $1.8 billion for North America and $157 million for International.

In addition, Validus participates in the market for insurance-linked securities (ILS) primarily through AlphaCat Managers, Ltd (AlphaCat Manager). AlphaCat Manager is an asset manager primarily for third party investors and in connection with the issuance of ILS invests in AlphaCat funds which are considered variable interest entities (VIEs). ILS are financial instruments for which the values are determined based on insurance losses caused primarily by natural catastrophes such as major earthquakes and hurricanes. We report the investment in AlphaCat funds, which approximated $128 million at September 30, 2018, in Other Invested Assets in the Condensed Consolidated Balance Sheet.

The following table summarizes the estimated provisional fair values of major classes of identifiable assets acquired and liabilities assumed as of July 18, 2018:

(in millions)		July 18, 2018
Identifiable net assets:
Investments	$	6,613
Cash		330
Premiums and other receivables		2,130
Reinsurance assets		1,692
Value of business acquired*		298
Deferred income taxes		63
Other assets, including restricted cash of $93		1,008
Liability for unpaid claims and claims adjustment expense		(4,138)
Unearned premiums		(2,083)
Long-term debt		(1,106)
Other liabilities		(913)
Preference shares		(416)
Total identifiable net assets acquired		3,478
Cash consideration paid		5,475
Goodwill recognized from acquisition	$	1,997

* Reported in Deferred policy acquisition costs in the Condensed Consolidated Balance Sheet.

AIG | Third Quarter 2018 Form 10-Q 17

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 4. Business Combination

The following unaudited summarized pro forma consolidated income statement information assumes that the acquisition of Validus occurred as of January 1, 2017. The pro forma amounts are for comparative purposes only and may not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable period and may not be indicative of the results that will be attained in the future.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions)		2018		2017*		2018*		2017*
Total revenues	$	11,486	$	12,418	$	36,028	$	38,752
Net income (loss)		(1,259)		(1,958)		576		571
Net income (loss) attributable to AIG		(1,259)		(1,984)		571		531

Income (loss) per common share attributable to AIG:
Basic:
Net income (loss) attributable to AIG		(1.41)		(2.18)		0.63		0.57
Diluted:
Net income (loss) attributable to AIG		(1.41)		(2.18)		0.62		0.55

* Pro forma adjustments were made to Validus external reporting results prior to the acquisition date for the deconsolidation of certain asset management entities consistent with AIG’s post acquisition accounting, which had no impact on Net income attributable to Validus.

The following table presents details of the identified intangible assets acquired:

			Estimated Weighted
(in millions, except years)		Fair Value	Average Useful Life
Definite lived intangibles
Value of distribution network acquired^(a)(b)	$	444	15 years
Value of business acquired^(c)		298	2 years
Indefinite lived intangibles^(a)
Syndicate capacity		193
Other		75
Total	$	1,010

(a) Reported in Other assets in the Condensed Consolidated Balance Sheet.

(b) Amortization is reported in General operating and other expenses in the Condensed Consolidated Statement of Income (Loss).

(c) Reported in Deferred policy acquisition costs in the Condensed Consolidated Balance Sheet and Amortization of deferred policy acquisition costs in the Condensed Consolidated Statement of Income (Loss).

5. 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.

18 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

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.

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:

September 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	$	9	$	3,084	$	-	$	-	$	-	$	3,093
Obligations of states, municipalities and political subdivisions		-		14,516		1,996		-		-		16,512
Non-U.S. governments		19		15,196		4		-		-		15,219
Corporate debt		-		130,942		942		-		-		131,884
RMBS		-		20,365		14,861		-		-		35,226
CMBS		-		11,990		701		-		-		12,691
CDO/ABS		-		9,263		8,832		-		-		18,095
Total bonds available for sale		28		205,356		27,336		-		-		232,720
Other bond securities:
U.S. government and government sponsored entities		96		2,538		-		-		-		2,634
Non-U.S. governments		-		49		-		-		-		49
Corporate debt		-		1,707		-		-		-		1,707
RMBS		-		311		1,349		-		-		1,660
CMBS		-		328		73		-		-		401
CDO/ABS		-		511		4,458		-		-		4,969
Total other bond securities		96		5,444		5,880		-		-		11,420
Other equity securities^(b)		1,400		18		25		-		-		1,443
Mortgage and other loans receivable		-		-		-		-		-		-
Other invested assets^(c)		-		603		398		-		-		1,001
Derivative assets:
Interest rate contracts		-		2,505		-		-		-		2,505
Foreign exchange contracts		-		927		-		-		-		927
Equity contracts		16		220		104		-		-		340
Credit contracts		-		-		1		-		-		1
Other contracts		-		-		15		-		-		15
Counterparty netting and cash collateral		-		-		-		(1,874)		(964)		(2,838)
Total derivative assets		16		3,652		120		(1,874)		(964)		950
Short-term investments		2,513		1,120		-		-		-		3,633
Separate account assets		88,092		4,953		-		-		-		93,045
Total	$	92,145	$	221,146	$	33,759	$	(1,874)	$	(964)	$	344,212
Liabilities:
Policyholder contract deposits	$	-	$	-	$	3,376	$	-	$	-	$	3,376
Derivative liabilities:
Interest rate contracts		1		2,106		12		-		-		2,119
Foreign exchange contracts		-		1,082		5		-		-		1,087
Equity contracts		2		2		1		-		-		5
Credit contracts		-		15		237		-		-		252
Other contracts		-		-		3		-		-		3
Counterparty netting and cash collateral		-		-		-		(1,874)		(290)		(2,164)
Total derivative liabilities		3		3,205		258		(1,874)		(290)		1,302
Long-term debt		-		2,311		-		-		-		2,311
Other liabilities		165		24		-		-		-		189
Total	$	168	$	5,540	$	3,634	$	(1,874)	$	(290)	$	7,178

AIG | Third Quarter 2018 Form 10-Q 19

TABLE OF CONTENTS

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. 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 $5.1 billion and $6.0 billion as of September 30, 2018 and December 31, 2017, respectively.

20 AIG | Third Quarter 2018 Form 10-Q

TABLE OF CONTENTS

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. 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 September 30, 2018. During the nine-month period ended September 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 nine-month periods ended September 30, 2018, we transferred $52 million and $733 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 nine-month periods ended September 30, 2018.

There were no transfers of preferred stock or securities issued by the U.S. government and government sponsored entities from Level 1 to Level 2 during the three-month period ended September 30, 2017. During the three- and nine-month periods ended September 30, 2017, we transferred $300 million and $352 million, respectively, 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 nine-month period ended September 30, 2017, we transferred $113 million 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 nine-month period ended September 30, 2017. We had no material transfers from Level 2 to Level 1 during the three- and nine-month periods ended September 30, 2017.

AIG | Third Quarter 2018 Form 10-Q 21

TABLE OF CONTENTS

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

Changes in Level 3 Recurring Fair Value Measurements

The following tables present changes during the three- and nine-month periods ended September 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 September 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		Acquisition		of Period		at End of Period
Three Months Ended September 30, 2018
Assets:
Bonds available for sale:
Obligations of states, municipalities
and political subdivisions	$	2,056	$	-	$	(37)	$	(46)	$	54	$	(31)	$	-	$	1,996	$	-
Non-U.S. governments		-		-		(1)		1		4		-		-		4		-
Corporate debt		884		7		(10)		(28)		133		(44)		-		942		-
RMBS		15,377		213		5		(725)		-		(16)		7		14,861		-
CMBS		605		14		(14)		31		64		-		1		701		-
CDO/ABS		6,856		15		(31)		320		1,508		-		164		8,832		-
Total bonds available for sale		25,778		249		(88)		(447)		1,763		(91)		172		27,336		-
Other bond securities:
Corporate debt		18		-		-		(18)		-		-		-		-		(2)
RMBS		1,338		18		-		(57)		50		-		-		1,349		(29)
CMBS		71		(2)		-		-		4		-		-		73		(2)
CDO/ABS		4,641		76		-		(267)		-		-		8		4,458		(6)
Total other bond securities		6,068		92		-		(342)		54		-		8		5,880		(39)
Other equity securities^(a)		-		1		-		24		-		-		-		25		-
Mortgage and other loans receivable		-		-		-		-		-		-		-		-		-
Other invested assets		399		-		-		(1)		-		-		-		398		-
Total	$	32,245	$	342	$	(88)	$	(766)	$	1,817	$	(91)	$	180	$	33,639	$	(39)
				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		Acquisition		of Period		at End of Period
Liabilities:
Policyholder contract deposits	$	3,534	$	(242)	$	-	$	84	$	-	$	-	$	-	$	3,376	$	179
Derivative liabilities, net:
Interest rate contracts		14		(1)		-		(1)		-		-		-		12		1
Foreign exchange contracts		5		2		-		(2)		-		-		-		5		(5)
Equity contracts		(79)		(12)		-		(12)		-		-		-		(103)		10
Credit contracts		246		(9)		-		(1)		-		-		-		236		10
Other contracts		(10)		(19)		-		17		-		-		-		(12)		14
Total derivative liabilities, net^(b)		176		(39)		-		1		-		-		-		138		30
Long-term debt^(c)		-		-		-		-		-		-		-		-		-
Total	$	3,710	$	(281)	$	-	$	85	$	-	$	-	$	-	$	3,514	$	209

22 AIG | Third Quarter 2018 Form 10-Q

TABLE OF CONTENTS

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. 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		Acquisition		of Period		at End of Period
Nine Months Ended September 30, 2018
Assets:
Bonds available for sale:
Obligations of states, municipalities
and political subdivisions	$	2,404	$	1	$	(152)	$	(144)	$	54	$	(167)	$	-	$	1,996	$	-
Non-U.S. governments		8		(5)		5		(3)		4		(5)		-		4		-
Corporate debt		1,173		(58)		(7)		(174)		701		(693)		-		942		-
RMBS		16,136		632		5		(1,877)		8		(50)		7		14,861		-
CMBS		624		18		(35)		1		111		(19)		1		701		-
CDO/ABS		8,651		31		(116)		(334)		1,508		(1,072)		164		8,832		-
Total bonds available for sale		28,996		619		(300)		(2,531)		2,386		(2,006)		172		27,336		-
Other bond securities:
Corporate debt		18		-		-		(18)		-		-		-		-		(1)
RMBS		1,464		73		-		(238)		50		-		-		1,349		124
CMBS		74		(5)		-		(1)		5		-		-		73		2
CDO/ABS		4,956		283		-		(780)		-		(9)		8		4,458		201
Total other bond securities		6,512		351		-		(1,037)		55		(9)		8		5,880		326
Other equity securities^(a)		-		(2)		-		27		-		-		-		25		-
Mortgage and other loans receivable		5		-		-		(5)		-		-		-		-		-
Other invested assets		250		52		1		95		-		-		-		398		56
Total	$	35,763	$	1,020	$	(299)	$	(3,451)	$	2,441	$	(2,015)	$	180	$	33,639	$	382
				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		Acquisition		of Period		at End of Period
Liabilities:
Policyholder contract deposits	$	4,136	$	(986)	$	-	$	226	$	-	$	-	$	-	$	3,376	$	1,081
Derivative liabilities, net:
Interest rate contracts		22		(5)		-		(5)		-		-		-		12		5
Foreign exchange contracts		-		(2)		-		7		-		-		-		5		(5)
Equity contracts		(82)		(3)		-		(20)		-		2		-		(103)		2
Credit contracts		262		(23)		-		(3)		-		-		-		236		23
Other contracts		(15)		(51)		-		54		-		-		-		(12)		42
Total derivative liabilities, net^(b)		187		(84)		-		33		-		2		-		138		67
Long-term debt^(c)		-		-		-		-		-		-		-		-		-
Total	$	4,323	$	(1,070)	$	-	$	259	$	-	$	2	$	-	$	3,514	$	1,148

AIG | Third Quarter 2018 Form 10-Q 23

TABLE OF CONTENTS

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. 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 September 30, 2017
Assets:
Bonds available for sale:
Obligations of states, municipalities
and political subdivisions	$	2,285	$	2	$	38	$	52	$	-	$	(6)	$	2,371	$	-
Non-U.S. governments		12		(5)		4		-		-		-		11		-
Corporate debt		932		5		(2)		(53)		449		(121)		1,210		-
RMBS		16,393		253		495		(731)		11		(7)		16,414		-
CMBS		735		2		5		(77)		-		-		665		-
CDO/ABS		8,605		8		(12)		(166)		-		(21)		8,414		-
Total bonds available for sale		28,962		265		528		(975)		460		(155)		29,085		-
Other bond securities:
Corporate debt		28		1		-		-		-		(11)		18		-
RMBS		1,510		63		-		(130)		-		-		1,443		49
CMBS		66		2		-		42		-		(45)		65		3
CDO/ABS		5,234		111		-		(505)		-		(6)		4,834		(34)
Total other bond securities		6,838		177		-		(593)		-		(62)		6,360		18
Equity securities available for sale:
Common stock		7		-		-		(2)		-		-		5		-
Total equity securities available for sale		7		-		-		(2)		-		-		5		-
Mortgage and other loans receivable		5		-		-		-		-		-		5		-
Other invested assets		225		-		(2)		36		-		-		259		(3)
Total	$	36,037	$	442	$	526	$	(1,534)	$	460	$	(217)	$	35,714	$	15
				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	$	3,518	$	299	$	-	$	157	$	-	$	-	$	3,974	$	(220)
Derivative liabilities, net:
Interest rate contracts		30		(2)		-		(2)		-		-		26		1
Foreign exchange contracts		7		-		-		(4)		-		-		3		-
Equity contracts		(63)		(11)		-		5		-		-		(69)		8
Credit contracts		293		(19)		-		(1)		-		-		273		19
Other contracts		(16)		(19)		-		19		-		-		(16)		12
Total derivative liabilities, net^(b)		251		(51)		-		17		-		-		217		40
Long-term debt^(c)		61		2		-		(60)		-		-		3		4
Total	$	3,830	$	250	$	-	$	114	$	-	$	-	$	4,194	$	(176)

24 AIG | Third Quarter 2018 Form 10-Q

TABLE OF CONTENTS

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. 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
Nine Months Ended September 30, 2017
Assets:
Bonds available for sale:
Obligations of states, municipalities
and political subdivisions	$	2,040	$	3	$	123	$	221	$	8	$	(24)	$	2,371	$	-
Non-U.S. governments		17		(5)		5		(6)		-		-		11		-
Corporate debt		1,133		6		(2)		(219)		655		(363)		1,210		-
RMBS		16,906		806		992		(2,270)		19		(39)		16,414		-
CMBS		2,040		25		12		(699)		-		(713)		665		-
CDO/ABS		7,835		(14)		168		478		-		(53)		8,414		-
Total bonds available for sale		29,971		821		1,298		(2,495)		682		(1,192)		29,085		-
Other bond securities:
Corporate debt		17		2		-		10		-		(11)		18		1
RMBS		1,605		184		-		(313)		-		(33)		1,443		116
CMBS		155		4		-		24		-		(118)		65		6
CDO/ABS		5,703		459		-		(1,322)		-		(6)		4,834		91
Total other bond securities		7,480		649		-		(1,601)		-		(168)		6,360		214
Equity securities available for sale:
Common stock		-		-		-		6		-		(1)		5		-
Total equity securities available for sale		-		-		-		6		-		(1)		5		-
Mortgage and other loans receivable		11		-		-		(6)		-		-		5		-
Other invested assets		204		3		(5)		58		-		(1)		259		1
Total	$	37,666	$	1,473	$	1,293	$	(4,038)	$	682	$	(1,362)	$	35,714	$	215
				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	$	594	$	-	$	347	$	-	$	-	$	3,974	$	(405)
Derivative liabilities, net:
Interest rate contracts		38		(3)		-		(9)		-		-		26		3
Foreign exchange contracts		11		1		-		(9)		-		-		3		(1)
Equity contracts		(58)		(26)		-		15		-		-		(69)		22
Credit contracts		329		(55)		-		(1)		-		-		273		53
Other contracts		(11)		(58)		-		56		(3)		-		(16)		57
Total derivative liabilities, net^(b)		309		(141)		-		52		(3)		-		217		134
Long-term debt^(c)		71		16		-		(84)		-		-		3		-
Total	$	3,413	$	469	$	-	$	315	$	(3)	$	-	$	4,194	$	(271)

(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.

AIG | Third Quarter 2018 Form 10-Q 25

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. 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 September 30, 2018
Bonds available for sale	$	249	$	-	$	-	$	249
Other bond securities		35		1		56		92
Other equity securities		1		-		-		1
Other invested assets		-		-		-		-
Nine Months Ended September 30, 2018
Bonds available for sale	$	731	$	(112)	$	-	$	619
Other bond securities		92		(3)		262		351
Other equity securities		(2)		-		-		(2)
Other invested assets		57		-		(5)		52
Three Months Ended September 30, 2017
Bonds available for sale	$	257	$	8	$	-	$	265
Other bond securities		87		(2)		92		177
Other invested assets		2		1		(3)		-
Nine Months Ended September 30, 2017
Bonds available for sale	$	849	$	(28)	$	-	$	821
Other bond securities		259		-		390		649
Other invested assets		5		(1)		(1)		3


		Net		Net Realized
		Investment		Capital		Other
(in millions)		Income	(Gains) Losses			Income		Total
Three Months Ended September 30, 2018
Policyholder contract deposits	$	-	$	(242)	$	-	$	(242)
Derivative liabilities, net		-		(1)		(38)		(39)
Long-term debt		-		-		-		-
Nine Months Ended September 30, 2018
Policyholder contract deposits	$	-	$	(986)	$	-	$	(986)
Derivative liabilities, net		-		(3)		(81)		(84)
Long-term debt		-		-		-		-
Three Months Ended September 30, 2017
Policyholder contract deposits	$	-	$	299	$	-	$	299
Derivative liabilities, net		-		(5)		(46)		(51)
Long-term debt		-		-		2		2
Nine Months Ended September 30, 2017
Policyholder contract deposits	$	-	$	594	$	-	$	594
Derivative liabilities, net		-		(13)		(128)		(141)
Long-term debt		-		-		16		16

26 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

The following table presents the gross components of purchases, sales, issuances and settlements, net, shown above, for the three- and nine-month periods ended September 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 September 30, 2018
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	-	$	(8)	$	(38)	$	(46)
Non-U.S. governments		-		-		1		1
Corporate debt		25		-		(53)		(28)
RMBS		123		(2)		(846)		(725)
CMBS		58		(2)		(25)		31
CDO/ABS		394		(49)		(25)		320
Total bonds available for sale		600		(61)		(986)		(447)
Other bond securities:
Corporate debt		-		-		(18)		(18)
RMBS		-		-		(57)		(57)
CMBS		-		-		-		-
CDO/ABS		-		-		(267)		(267)
Total other bond securities		-		-		(342)		(342)
Other equity securities		24		-		-		24
Other invested assets		-		-		(1)		(1)
Total assets	$	624	$	(61)	$	(1,329)	$	(766)
Liabilities:
Policyholder contract deposits	$	-	$	148	$	(64)	$	84
Derivative liabilities, net		(18)		-		19		1
Long-term debt^(b)		-		-		-		-
Total liabilities	$	(18)	$	148	$	(45)	$	85
Three Months Ended September 30, 2017
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	56	$	-	$	(4)	$	52
Non-U.S. governments		7		-		(7)		-
Corporate debt		6		(5)		(54)		(53)
RMBS		194		(16)		(909)		(731)
CMBS		-		(17)		(60)		(77)
CDO/ABS		402		(136)		(432)		(166)
Total bonds available for sale		665		(174)		(1,466)		(975)
Other bond securities:
Corporate debt		-		-		-		-
RMBS		-		(51)		(79)		(130)
CMBS		42		-		-		42
CDO/ABS		-		(57)		(448)		(505)
Total other bond securities		42		(108)		(527)		(593)
Equity securities available for sale		4		-		(6)		(2)
Other equity securities		-		-		-		-
Mortgage and other loans receivable		-		-		-		-
Other invested assets		46		(9)		(1)		36
Total assets	$	757	$	(291)	$	(2,000)	$	(1,534)
Liabilities:
Policyholder contract deposits	$	-	$	79	$	78	$	157
Derivative liabilities, net		-		-		17		17
Long-term debt^(b)		-		-		(60)		(60)
Total liabilities	$	-	$	79	$	35	$	114

AIG | Third Quarter 2018 Form 10-Q 27

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

						Issuances		Purchases, Sales,
						and		Issuances and
(in millions)		Purchases		Sales		Settlements^(a)		Settlements, Net^(a)
Nine Months Ended September 30, 2018
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	24	$	(8)	$	(160)	$	(144)
Non-U.S. governments		2		-		(5)		(3)
Corporate debt		280		(216)		(238)		(174)
RMBS		630		(12)		(2,495)		(1,877)
CMBS		70		(2)		(67)		1
CDO/ABS		1,364		(962)		(736)		(334)
Total bonds available for sale		2,370		(1,200)		(3,701)		(2,531)
Other bond securities:
Corporate debt		-		-		(18)		(18)
RMBS		1		(34)		(205)		(238)
CMBS		-		-		(1)		(1)
CDO/ABS		-		(4)		(776)		(780)
Total other bond securities		1		(38)		(1,000)		(1,037)
Other equity securities		27		-		-		27
Mortgage and other loans receivable		-		(5)		-		(5)
Other invested assets		153		(29)		(29)		95
Total assets	$	2,551	$	(1,272)	$	(4,730)	$	(3,451)
Liabilities:
Policyholder contract deposits	$	-	$	391	$	(165)	$	226
Derivative liabilities, net		(37)		-		70		33
Long-term debt^(b)		-		-		-		-
Total liabilities	$	(37)	$	391	$	(95)	$	259
Nine Months Ended September 30, 2017
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	279	$	(16)	$	(42)	$	221
Non-U.S. governments		7		(1)		(12)		(6)
Corporate debt		36		(59)		(196)		(219)
RMBS		834		(260)		(2,844)		(2,270)
CMBS		39		(128)		(610)		(699)
CDO/ABS		1,609		(136)		(995)		478
Total bonds available for sale		2,804		(600)		(4,699)		(2,495)
Other bond securities:
Corporate debt		11		-		(1)		10
RMBS		112		(218)		(207)		(313)
CMBS		42		(11)		(7)		24
CDO/ABS		-		(65)		(1,257)		(1,322)
Total other bond securities		165		(294)		(1,472)		(1,601)
Equity securities available for sale		12		-		(6)		6
Other equity securities		-		-		-		-
Mortgage and other loans receivable		-		(6)		-		(6)
Other invested assets		89		(11)		(20)		58
Total assets	$	3,070	$	(911)	$	(6,197)	$	(4,038)
Liabilities:
Policyholder contract deposits	$	-	$	231	$	116	$	347
Derivative liabilities, net		-		-		52		52
Long-term debt^(b)		-		-		(84)		(84)
Total liabilities	$	-	$	231	$	84	$	315

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

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

28 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. 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 September 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 $17 million and $41 million of net gains related to assets and liabilities transferred into Level 3 during the three- and nine-month periods ended September 30, 2018, respectively, and includes $2 million and $(20) million of net gains (losses) related to assets and liabilities transferred out of Level 3 in the three- and nine-month periods ended September 30, 2018, respectively.

The Net realized and unrealized gains (losses) included in income or Other comprehensive income (loss) as shown in the table above excludes $49 million and $57 million of net losses related to assets and liabilities transferred into Level 3 during the three- and nine-month periods ended September 30, 2017, respectively, and includes $32 million and $38 million of net losses related to assets and liabilities transferred out of Level 3 during the three- and nine-month periods ended September 30, 2017, respectively.

Transfers of Level 3 Assets

During the three- and nine-month periods ended September 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 nine-month periods ended September 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 nine-month periods ended September 30, 2018 and 2017.

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. 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
	September 30,		Valuation		Range
(in millions)	2018		Technique	Unobservable Input^(b)	(Weighted Average)
Assets:

Obligations of states, municipalities
and political subdivisions	$	1,439	Discounted cash flow	Yield	4.04% - 4.81% (4.42%)

Corporate debt		727	Discounted cash flow	Yield	3.55% - 15.26% (9.40%)

RMBS^(a)		14,257	Discounted cash flow	Constant prepayment rate	4.51% - 13.02% (8.76%)
				Loss severity	39.83% - 73.69% (56.76%)
				Constant default rate	2.69% - 7.58% (5.14%)
				Yield	3.17% - 5.38% (4.28%)

CDO/ABS^(a)		4,792	Discounted cash flow	Yield	4.09% - 5.38% (4.74%)

CMBS		461	Discounted cash flow	Yield	3.09% - 7.20% (5.15%)
Liabilities:

Embedded derivatives within
Policyholder contract deposits:

Guaranteed minimum withdrawal benefits (GMWB)		1,046	Discounted cash flow	Equity volatility	6.15% - 48.35%
				Base lapse rate	0.16% - 12.60%
				Dynamic lapse multiplier	20.00% - 180.00%
				Mortality multiplier^(c)	40.00% - 153.00%
				Utilization	90.00% - 100.00%
				Equity / interest-rate correlation	20.00% - 40.00%

Index Annuities		1,890	Discounted cash flow	Lapse rate	0.50% - 40.00%
				Mortality multiplier^(c)	42.00% - 162.00%
				Option Budget	1.00% - 3.00%

Indexed Life		414	Discounted cash flow	Base lapse rate	0.00% - 13.00%
				Mortality rate	0.00% - 100.00%

30 AIG | Third Quarter 2018 Form 10-Q

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

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.

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

• 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

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

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.

		September 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	$	700	$	646	$	1,243	$	706

Real Estate / Infrastructure	Investments in real estate properties and infrastructure positions, including power plants and other energy generating facilities		185		84		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		102		113		134		73

Growth Equity	Funds that make investments in established companies for the purpose of growing their businesses		306		35		215		73

Mezzanine	Funds that make investments in the junior debt and equity securities of leveraged companies		220		107		171		135

Other	Includes distressed funds that invest in securities of companies that are in default or under bankruptcy protection, as well as funds that have multi-strategy, and other strategies		624		324		155		53
Total private equity funds			2,137		1,309		2,128		1,227
*Hedge funds:*
Event-driven	Securities of companies undergoing material structural changes, including mergers, acquisitions and other reorganizations		888		-		1,128		-

Long-short	Securities that the manager believes are undervalued, with corresponding short positions to hedge market risk		993		-		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		871		-		1,011		-

Distressed	Securities of companies that are in default, under bankruptcy protection or troubled		44		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		210		1		231		4
Total hedge funds			3,006		9		3,869		12
Total		$	5,143	$	1,318	$	5,997	$	1,239

* Beginning in the third quarter of 2018, Growth Equity and Mezzanine private equity fund categories are shown separately. Prior periods were revised to conform to the current period presentation.

AIG | Third Quarter 2018 Form 10-Q 33

TABLE OF CONTENTS

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. 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 September 30, 2018, assuming average original expected lives of 10 years for the funds, 17 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, 40 percent between four and six years and 43 percent between seven and 10 years.

The hedge fund investments included above, which are carried at fair value, are generally redeemable monthly (34 percent), quarterly (34 percent), semi-annually (9 percent) and annually (23 percent), with redemption notices ranging from one day to 180 days. At September 30, 2018, investments representing approximately 52 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 September 30,				Gain (Loss) Nine Months Ended September 30,
	Gain (Loss) Three Months Ended September 30,				Gain (Loss) Nine Months Ended September 30,
(in millions)		2018		2017		2018		2017
Assets:
Bond and equity securities	$	122	$	289	$	274	$	1,088
Alternative investments^(a)		131		129		355		406
Other, including Short-term investments		-		1		-		1
Liabilities:
Long-term debt^(b)		6		(18)		74		(66)
Other liabilities		-		(1)		-		(2)
Total gain	$	259	$	400	$	703	$	1,427

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

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

We recognized gains of $2 million during both three- and nine-month periods ended September 30, 2017 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 gain of $1 million was recognized in Other Comprehensive Income for the nine-month period ended September 30, 2018. There was no material unrealized gain or loss recognized in Other Comprehensive Income for the three-month period ended September 30, 2018.

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:

	September 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^*	$	2,311	$	1,798	$	513	$	2,888	$	2,280	$	608

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

34 AIG | Third Quarter 2018 Form 10-Q

TABLE OF CONTENTS

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. 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^(a)
	Non-Recurring Basis								Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	Level 1		Level 2		Level 3			Total		2018		2017		2018		2017
September 30, 2018
Other investments	$	-	$	-	$	344	$	344	$	-	$	26	$	89	$	76
Investments in life settlements		-		-		-		-		-		273		-		360
Other assets		-		-		2		2		34		-		35		35
Total	$	-	$	-	$	346	$	346	$	34	$	299	$	124	$	471
December 31, 2017
Other investments	$	-	$	-	$	55	$	55
Investments in life settlements		-		-		-		-
Other assets		-		-		-		-
Total	$	-	$	-	$	55	$	55

(a) Impairments in the nine-month period ended September 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
September 30, 2018
Assets:
Mortgage and other loans receivable	$	-	$	108	$	41,060	$	41,168	$	41,878
Other invested assets		-		771		6		777		773
Short-term investments		-		5,230		-		5,230		5,230
Cash		2,741		-		-		2,741		2,741
Liabilities:
Policyholder contract deposits associated
with investment-type contracts		-		349		122,487		122,836		119,493
Other liabilities		-		1,465		1		1,466		1,466
Long-term debt		-		24,147		8,221		32,368		32,283
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

AIG | Third Quarter 2018 Form 10-Q 35

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

6. 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)
September 30, 2018
Bonds available for sale:
U.S. government and government sponsored entities	$	3,069	$	101	$	(77)	$	3,093	$	-
Obligations of states, municipalities and political subdivisions		16,030		632		(150)		16,512		4
Non-U.S. governments		15,021		478		(280)		15,219		-
Corporate debt		130,263		4,302		(2,681)		131,884		(11)
Mortgage-backed, asset-backed and collateralized:
RMBS		32,825		2,961		(560)		35,226		1,330
CMBS		12,821		182		(312)		12,691		28
CDO/ABS		18,018		189		(112)		18,095		17
Total mortgage-backed, asset-backed and collateralized		63,664		3,332		(984)		66,012		1,375
Total bonds available for sale^(c)		228,047		8,845		(4,172)		232,720		1,368
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

(b) Represents the amount of other-than-temporary impairments recognized in Accumulated other comprehensive income (loss). 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 September 30, 2018 and December 31, 2017, bonds available for sale held by us that were below investment grade or not rated totaled $30.6 billion and $31.5 billion, respectively.

36 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. 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
September 30, 2018
Bonds available for sale:
U.S. government and government sponsored entities	$	1,406	$	61	$	364	$	16	$	1,770	$	77
Obligations of states, municipalities and political
subdivisions		3,475		98		743		52		4,218		150
Non-U.S. governments		5,079		172		1,821		108		6,900		280
Corporate debt		52,590		1,947		9,929		734		62,519		2,681
RMBS		7,930		245		4,706		315		12,636		560
CMBS		5,062		146		2,626		166		7,688		312
CDO/ABS		7,483		79		1,061		33		8,544		112
Total bonds available for sale	$	83,025	$	2,748	$	21,250	$	1,424	$	104,275	$	4,172
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

At September 30, 2018, we held 16,950 individual fixed maturity securities that were in an unrealized loss position, of which 3,008 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 September 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.

AIG | Third Quarter 2018 Form 10-Q 37

TABLE OF CONTENTS

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. 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
September 30, 2018
Due in one year or less	$	8,421	$	8,559	$	2,043	$	2,032
Due after one year through five years		48,626		49,416		16,406		16,042
Due after five years through ten years		42,674		42,475		26,927		25,844
Due after ten years		64,662		66,258		33,219		31,489
Mortgage-backed, asset-backed and collateralized		63,664		66,012		29,852		28,868
Total	$	228,047	$	232,720	$	108,447	$	104,275
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 September 30,								Nine Months Ended September 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	$	82	$	71	$	93	$	39	$	252	$	244	$	637	$	263
Equity securities		-		-		6		2		16		-		106		20
Total	$	82	$	71	$	99	$	41	$	268	$	244	$	743	$	283

For the three- and nine-month periods ended September 30, 2018, the aggregate fair value of available for sale securities sold was $6.0 billion and $18.1 billion, respectively, which resulted in net realized capital gains of $11 million and $24 million, respectively.

For the three- and nine-month periods ended September 30, 2017, the aggregate fair value of available for sale securities sold was $4.4 billion and $27.8 billion, respectively, which resulted in net realized capital gains of $58 million and $460 million, respectively.

38 AIG | Third Quarter 2018 Form 10-Q

TABLE OF CONTENTS

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

		September 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	$	2,634	21	%	$	2,802	21	%
Non-U.S. governments		49	-			57	1
Corporate debt		1,707	13			1,909	14
Mortgage-backed, asset-backed and collateralized:
RMBS		1,660	13			1,885	14
CMBS		401	3			559	4
CDO/ABS and other collateralized^*		4,969	39			5,560	42
Total mortgage-backed, asset-backed and collateralized		7,030	55			8,004	60
Total fixed maturity securities		11,420	89			12,772	96
Equity securities		1,443	11			589	4
Total	$	12,863	100	%	$	13,361	100	%

* Includes $186 million and $251 million of U.S. government agency-backed ABS at September 30, 2018 and December 31, 2017, respectively.

Other Invested Assets

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

		September 30,		December 31,
(in millions)		2018		2017
Alternative investments^{(a) (b)}	$	9,655	$	11,308
Investment real estate^(c)		8,819		8,258
All other investments		1,265		1,256
Total	$	19,739	$	20,822

(a) At September 30, 2018, included hedge funds of $4.6 billion, private equity funds of $4.6 billion, and affordable housing partnerships of $434 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 September 30, 2018, approximately 52 percent and 21 percent of our hedge fund portfolio is available for redemption in 2018 and 2019, respectively, the remaining 27 percent will be available for redemption between 2020 and 2027.

(c) Net of accumulated depreciation of $553 million and $515 million at September 30, 2018 and December 31, 2017, respectively.

Net Investment Income

The following table presents the components of Net investment income:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions)		2018		2017		2018		2017
Available for sale fixed maturity securities, including short-term investments	$	2,629	$	2,552	$	7,775	$	7,826
Other fixed maturity securities		60		145		29		500
Equity securities^(a)		(21)		5		(50)		22
Interest on mortgage and other loans		455		414		1,352		1,206
Alternative investments^(b)		329		355		837		1,174
Real estate		72		51		133		131
Other investments		(13)		30		11		246
Total investment income		3,511		3,552		10,087		11,105
Investment expenses		115		136		365		390
Net investment income	$	3,396	$	3,416	$	9,722	$	10,715

(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.

AIG | Third Quarter 2018 Form 10-Q 39

TABLE OF CONTENTS

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. 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				Nine Months Ended
	September 30,				September 30,
(in millions)		2018		2017		2018		2017
Sales of fixed maturity securities	$	11	$	54	$	8	$	374
Sales of equity securities		-		4		16		86
Other-than-temporary impairments:
Severity		-		-		-		(2)
Change in intent		(3)		(1)		(52)		(9)
Foreign currency declines		(1)		(1)		(13)		(11)
Issuer-specific credit events		(30)		(85)		(92)		(197)
Adverse projected cash flows		(1)		(1)		(1)		(4)
Provision for loan losses		(23)		(38)		(73)		(56)
Foreign exchange transactions		(21)		66		(155)		299
Variable annuity embedded derivatives, net of related hedges		(185)		(430)		(2)		(1,023)
All other derivatives and hedge accounting		(1)		(136)		149		(217)
Impairments on investments in life settlements		-		(273)		-		(360)
Loss on sale of private equity funds		(311)		-		(311)		-
Other		54		(81)		161		14
Net realized capital losses	$	(511)	$	(922)	$	(365)	$	(1,106)

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				Nine Months Ended
	September 30,				September 30,
(in millions)		2018		2017		2018		2017
Increase (decrease) in unrealized appreciation (depreciation) of investments:
Fixed maturity securities	$	(920)	$	1,059	$	(8,858)	$	4,332
Equity securities^(a)		-		9		-		52
Other investments		(31)		10		(59)		(127)
Total increase (decrease) in unrealized appreciation (depreciation) of investments^(b)	$	(951)	$	1,078	$	(8,917)	$	4,257

(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						Nine Months Ended
	September 30, 2018						September 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	$	(13)	$	183	$	170	$	(41)	$	497	$	456
Less: Net gains and losses recognized during the period on equity
securities sold during the period		28		18		46		34		45		79
Unrealized gains and losses recognized during the reporting
period on equity securities still held at the reporting date	$	(41)	$	165	$	124	$	(75)	$	452	$	377

40 AIG | Third Quarter 2018 Form 10-Q

TABLE OF CONTENTS

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. 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				Nine Months Ended
	September 30,				September 30,
(in millions)		2018		2017		2018		2017
Balance, beginning of period	$	188	$	762	$	526	$	1,098
Increases due to:
Credit impairments on new securities subject to impairment losses		15		58		32		116
Additional credit impairments on previously impaired securities		16		12		61		49
Reductions due to:
Credit impaired securities fully disposed for which there was no
prior intent or requirement to sell		(12)		(44)		(143)		(99)
Accretion on securities previously impaired due to credit^*		(164)		(147)		(433)		(523)
Balance, end of period	$	43	$	641	$	43	$	641

* 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)	$	36,640
Cash flows expected to be collected^*		30,077
Recorded investment in acquired securities		20,294

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

AIG | Third Quarter 2018 Form 10-Q 41

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

(in millions)	September 30, 2018		December 31, 2017
Outstanding principal balance	$	13,060	$	14,718
Amortized cost		9,087		10,492
Fair value		10,941		12,293

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions)		2018		2017		2018		2017
Balance, beginning of period	$	7,461	$	7,465	$	7,501	$	7,498
Newly purchased PCI securities		5		16		32		117
Disposals		-		-		-		(18)
Accretion		(176)		(193)		(553)		(609)
Effect of changes in interest rate indices		15		(74)		189		(188)
Net reclassification from (to) non-accretable difference,
including effects of prepayments		93		172		229		586
Balance, end of period	$	7,398	$	7,386	$	7,398	$	7,386

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)		September 30, 2018		December 31, 2017
Fixed maturity securities available for sale	$	1,247	$	2,911
Other bond securities, at fair value	$	136	$	1,585

At September 30, 2018 and December 31, 2017, amounts borrowed under repurchase and securities lending agreements totaled $1.5 billion and $4.5 billion, respectively.

42 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. 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
September 30, 2018
Bonds available for sale:
Non-U.S. governments	$	-	$	79	$	-	$	-	$	-	$	79
Corporate debt		-		110		1		-		-		111
Other bond securities:
U.S. government and government sponsored entities		24		-		-		-		-		24
Non-U.S. governments		-		3		-		-		-		3
Corporate debt		-		55		54		-		-		109
Total	$	24	$	247	$	55	$	-	$	-	$	326

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
September 30, 2018
Bonds available for sale:
Non-U.S. governments	$	-	$	-	$	82	$	22	$	-	$	104
Corporate debt		-		378		467		108		-		953
Other bond securities:
Non-U.S. governments		-		-		-		-		-		-
Corporate debt		-		-		-		-		-		-
Total	$	-	$	378	$	549	$	130	$	-	$	1,057

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

AIG | Third Quarter 2018 Form 10-Q 43

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. 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)		September 30, 2018		December 31, 2017
Securities collateral pledged to us	$	1,324	$	2,227
Amount sold or repledged by us	$	164	$	46

At September 30, 2018 and December 31, 2017, amounts loaned under reverse repurchase agreements totaled $1.3 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 $7.9 billion and $4.9 billion at September 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 $205 million and $93 million of stock in FHLBs at September 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 $4.2 billion and $2.0 billion, respectively, at September 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 $1.7 billion and $2.0 billion at September 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 $155 million and $255 million, comprised of bonds available for sale and short term investments at September 30, 2018 and December 31, 2017, respectively.

44 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 7. Lending Activities

7. Lending Activities

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

	September 30,			December 31,
(in millions)		2018		2017
Commercial mortgages^*	$	32,082	$	28,596
Residential mortgages		6,530		5,398
Life insurance policy loans		2,178		2,295
Commercial loans, other loans and notes receivable		1,467		1,056
Total mortgage and other loans receivable		42,257		37,345
Allowance for credit losses		(379)		(322)
Mortgage and other loans receivable, net	$	41,878	$	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 September 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
September 30, 2018
Loan-to-Value Ratios^(b)
Less than 65%	$	17,986	$	2,508	$	239	$	20,733
65% to 75%		9,115		302		258		9,675
76% to 80%		831		8		15		854
Greater than 80%		572		106		142		820
Total commercial mortgages	$	28,504	$	2,924	$	654	$	32,082

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 1.9X and 2.1X at September 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 September 30, 2018, and December 31, 2017, respectively.

AIG | Third Quarter 2018 Form 10-Q 45

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 7. 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 $
September 30, 2018
Credit Quality Performance
Indicator:
In good standing	763	$	10,393	$	9,257	$	5,333	$	3,002	$	2,531	$	1,422	$	31,938	100	%
Restructured^(a)	4		-		113		-		15		16		-		144	-
90 days or less delinquent	-		-		-		-		-		-		-		-	-
>90 days delinquent or in
process of foreclosure	-		-		-		-		-		-		-		-	-
Total^(b)	767	$	10,393	$	9,370	$	5,333	$	3,017	$	2,547	$	1,422	$	32,082	100	%
Allowance for credit losses:
Specific		$	-	$	2	$	-	$	-	$	1	$	-	$	3	-	%
General			106		96		46		12		19		14		293	1
Total allowance for credit losses		$	106	$	98	$	46	$	12	$	20	$	14	$	296	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 see Note 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
Nine Months Ended September 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		(17)		-		(17)		(5)		(2)		(7)
Recoveries of loans previously charged off		-		-		-		-		-		-
Net charge-offs		(17)		-		(17)		(5)		(2)		(7)
Provision for loan losses		66		8		74		75		(20)		55
Other		-		-		-		-		-		-
Allowance, end of period	$	296 ^*	$	83	$	379	$	264 ^*	$	81	$	345

* Of the total allowance, $3 million and $35 million relate to individually assessed credit losses on $25 million and $342 million of commercial mortgages at September 30, 2018 and 2017, respectively.

46 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 7. Lending Activities

During the nine-month periods ended September 30, 2018 and 2017, loans with a carrying value of $15 million and $25 million, respectively, were modified in troubled debt restructurings.

8. 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
September 30, 2018
Assets:
Bonds available for sale	$	-	$	8,130	$	-	$	-	$	8,130
Other bond securities		-		4,010		-		2		4,012
Mortgage and other loans receivable		-		3,424		-		-		3,424
Other invested assets		1,696		-		3,231		25		4,952
Other^(a)		259		1,448		428		82		2,217
Total assets^(b)	$	1,955	$	17,012	$	3,659	$	109	$	22,735
Liabilities:
Long-term debt	$	785	$	2,858	$	1,922	$	5	$	5,570
Other ^(c)		138		126		172		23		459
Total liabilities	$	923	$	2,984	$	2,094	$	28	$	6,029
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 September 30, 2018 and December 31, 2017.

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

(d) At September 30, 2018 and December 31, 2017, off-balance sheet exposure primarily consisting of commitments to real estate and investment entities was $227 million and $86 million, respectively.

(e) At September 30, 2018 and December 31, 2017, $16.1 billion and $17.6 billion, respectively, of the total assets of consolidated securitization vehicles were owed to AIG Parent or its subsidiaries.

AIG | Third Quarter 2018 Form 10-Q 47

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 8. 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
September 30, 2018
Real estate and investment entities^(a)	$	322,117	$	7,902	$	1,994		$	9,896
Affordable housing partnerships		4,116		606		-			606
Other		2,705		260		1,222	^(c)		1,482
Total	$	328,938	$	8,768	$	3,216		$	11,984
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 September 30, 2018 and December 31, 2017, $8.5 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 see Note 10 to the Consolidated Financial Statements in the 2017 Annual Report.

9. 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.

48 AIG | Third Quarter 2018 Form 10-Q

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

	September 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	$	75	$	1	$	811	$	23	$	-	$	-	$	838	$	15
Foreign exchange contracts		4,323		241		4,173		269		2,823		173		4,783		350
Equity contracts		-		-		-		-		-		-		159		19
Derivatives not designated
as hedging instruments:^(a)
Interest rate contracts		36,841		2,504		27,131		2,096		37,751		2,171		26,461		2,185
Foreign exchange contracts		8,877		686		8,282		818		6,305		658		11,093		895
Equity contracts		18,826		340		1,585		5		19,975		522		1,130		2
Credit contracts^(b)		3		1		1,418		252		4		1		1,365		277
Other contracts^(c)		38,292		15		60		3		39,829		20		59		5
Total derivatives, gross	$	107,237	$	3,788	$	43,460	$	3,466	$	106,687	$	3,545	$	45,888	$	3,748
Counterparty netting^(d)				(1,874)				(1,874)				(1,464)				(1,464)
Cash collateral^(e)				(964)				(290)				(1,159)				(1,249)
Total derivatives on condensed
consolidated balance sheets^(f)			$	950			$	1,302			$	922			$	1,035

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

(b) As of September 30, 2018 and December 31, 2017, included CDSs on super senior multi-sector CDOs with a net notional amount of $616 million and $685 million (fair value liability of $232 million and $254 million), respectively. The net notional amount represents the maximum exposure to loss on the portfolio. As of September 30, 2018 and December 31, 2017, there were no super senior corporate debt/CLOs remaining.

(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 September 30, 2018 and December 31, 2017. Fair value of liabilities related to bifurcated embedded derivatives was $3.4 billion and $4.1 billion, respectively, at September 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.

AIG | Third Quarter 2018 Form 10-Q 49

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 9. 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 $2.0 billion and $2.9 billion at September 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 $1.2 billion and $1.3 billion at September 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 nine-month periods ended September 30, 2018, we recognized a gain of $28 million and $27 million, respectively, and for the three- and nine-month periods ended September 30, 2017, we recognized losses of $39 million and $87 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.

50 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 9. 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 September 30, 2018
Interest rate contracts:
Realized capital gains/(losses)	$	(1)	$	1	$	-	$	-	$	-
Foreign exchange contracts:
Realized capital gains/(losses)		(11)		16		-		5		-
Other income		-		-		-		-		-
Equity contracts:
Realized capital gains/(losses)		-		-		-		-		-
Three Months Ended September 30, 2017
Interest rate contracts:
Realized capital gains/(losses)	$	(1)	$	1	$	-	$	-	$	-
Foreign exchange contracts:
Realized capital gains/(losses)		(157)		142		-		(15)		-
Other income		-		-		-		-		-
Equity contracts:
Realized capital gains/(losses)		(3)		2		-		(1)		-
Nine Months Ended September 30, 2018
Interest rate contracts:
Realized capital gains/(losses)	$	(9)	$	10	$	1	$	-	$	-
Foreign exchange contracts:
Realized capital gains/(losses)		184		(175)		-		9		-
Other income		-		-		-		-		-
Equity contracts:
Realized capital gains/(losses)		-		-		-		-		-
Nine Months Ended September 30, 2017
Interest rate contracts:
Realized capital gains/(losses)	$	1	$	(1)	$	-	$	-	$	-
Foreign exchange contracts:
Realized capital gains/(losses)		(318)		332		-		14		-
Other income		-		4		-		-		4
Equity contracts:
Realized capital gains/(losses)		(29)		26		-		(3)		-

(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.

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 9. 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				Nine Months Ended
	September 30,				September 30,
(in millions)		2018		2017		2018		2017
By Derivative Type:
Interest rate contracts	$	(270)	$	(18)	$	(892)	$	81
Foreign exchange contracts		43		(98)		295		(220)
Equity contracts		(199)		(233)		(386)		(723)
Credit contracts		6		19		18		55
Other contracts		18		19		52		55
Embedded derivatives		229		(213)		1,164		(326)
Total	$	(173)	$	(524)	$	251	$	(1,078)
By Classification:
Policy fees	$	17	$	20	$	51	$	59
Net investment income		-		(3)		(3)		(10)
Net realized capital gains (losses)		(223)		(550)		133		(1,250)
Other income		35		8		76		121
Policyholder benefits and claims incurred		(2)		1		(6)		2
Total	$	(173)	$	(524)	$	251	$	(1,078)

Credit Risk-Related Contingent Features

We estimate that at September 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 $49 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 $421 million and $572 million at September 30, 2018 and December 31, 2017, respectively. The aggregate fair value of assets posted as collateral under these contracts at September 30, 2018 and December 31, 2017, was approximately $466 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 $4.0 billion and $4.4 billion at September 30, 2018 and December 31, 2017, respectively. These securities have par amounts of $8.6 billion and $9.1 billion at September 30, 2018 and December 31, 2017, respectively, and have remaining stated maturity dates that extend to 2052.

52 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 10. Insurance Liabilities

10. 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 $12.1 billion and $12.6 billion at September 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 September 30, 2018 and December 31, 2017, we held collateral of approximately $9.3 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				Nine Months Ended
	September 30,				September 30,
(in millions)		2018		2017		2018		2017
Liability for unpaid loss and loss adjustment expenses, beginning of period	$	76,713	$	76,422	$	78,393	$	77,077
Reinsurance recoverable		(27,406)		(27,660)		(26,708)		(15,532)
Net Liability for unpaid loss and loss adjustment expenses, beginning of period		49,307		48,762		51,685		61,545
Losses and loss adjustment expenses incurred:
Current year		6,670		7,511		15,800		16,021
Prior years, excluding discount and amortization of deferred gain		949		901		884		1,354
Prior years, discount charge (benefit)		3		48		(174)		283
Prior years, amortization of deferred gain on retroactive reinsurance^(a)		(175)		(75)		(283)		(195)
Total losses and loss adjustment expenses incurred		7,447		8,385		16,227		17,463
Losses and loss adjustment expenses paid:
Current year		(1,791)		(1,634)		(3,289)		(3,342)
Prior years		(4,526)		(3,395)		(14,312)		(12,438)
Total losses and loss adjustment expenses paid		(6,317)		(5,029)		(17,601)		(15,780)
Other changes:
Foreign exchange effect		(236)		330		(393)		688
Acquisitions^(b)		3,020		-		3,020		-
Retroactive reinsurance adjustment (net of discount)^(c)		(464)		22		(181)		(11,438)
Reclassified to liabilities held for sale^(d)		-		8		-		-
Total other changes		2,320		360		2,446		(10,750)
Liability for unpaid loss and loss adjustment expenses, end of period:
Net liability for unpaid losses and loss adjustment expenses		52,757		52,478		52,757		52,478
Reinsurance recoverable		29,202		27,609		29,202		27,609
Total	$	81,959	$	80,087	$	81,959	$	80,087

(a) Includes $9 million and $6 million for the retroactive reinsurance agreement with NICO covering U.S. asbestos exposures for the three-month periods ended September 30, 2018 and 2017, respectively, and $22 million and $11 million for the nine-month periods ended September 30, 2018 and 2017, respectively.

(b) Amounts relate to the acquisition of Validus in July 2018.

(c) Includes discount on retroactive reinsurance of $46 million and $(53) million for the three-month periods ended September 30, 2018 and 2017, respectively, and $154 million and $1.5 billion for the nine-month periods ended September 30, 2018 and 2017, respectively.

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 10. Insurance Liabilities

(d) 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 nine-month periods ended September 30, 2017. Upon consummation of the sale, we retained a portion of these reserves through reinsurance arrangements.

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 September 30, 2018 were below the attachment point.

Discounting of Loss Reserves

At September 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 $1.4 billion of non-tabular discount for workers’ compensation. During the nine-month periods ended September 30, 2018 and 2017, the benefit/(charge) from changes in discount of $305 million and $(283) 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:

	September 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	$	2,733	$	955	$	3,688	$	2,465	$	918	$	3,383
Retroactive reinsurance		(1,693)		-		(1,693)		(1,539)		-		(1,539)
Total reserve discount^*	$	1,040	$	955	$	1,995	$	926	$	918	$	1,844

* Excludes $182 million and $173 million of discount related to certain long tail liabilities in the United Kingdom at September 30, 2018 and December 31, 2017, respectively.

54 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 10. Insurance Liabilities

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

Three Months Ended September 30,	2018						2017
	North						North
	America						America
	Commercial			Legacy			Commercial			Legacy
(in millions)	Insurance			Portfolio		Total	Insurance			Portfolio		Total
Current accident year	$	89	$	-	$	89	$	33	$	-	$	33
Accretion and other adjustments
to prior year discount		(7)		(12)		(19)		(100)		25		(75)
Effect of interest rate changes		13		3		16		(7)		1		(6)
Net reserve discount
benefit (charge)		95		(9)		86		(74)		26		(48)
Change in discount on loss reserves
ceded under retroactive reinsurance		(46)		-		(46)		53		-		53
Net change in total reserve
discount^(a)	$	49	$	(9)	$	40	$	(21)	$	26	$	5

Nine Months Ended September 30,	2018						2017
	North						North
	America						America
	Commercial			Legacy			Commercial			Legacy
(in millions)	Insurance			Portfolio		Total	Insurance			Portfolio		Total
Current accident year	$	131	$	-	$	131	$	94	$	-	$	94
Accretion and other adjustments
to prior year discount		(95)		(42)		(137)		(205)		(34)		(239)
Effect of interest rate changes		232		79		311		(96)		(42)		(138)
Net reserve discount
benefit (charge)		268		37		305		(207)		(76)		(283)
Change in discount on loss reserves
ceded under retroactive reinsurance		(154)		-		(154)		(1,494)		-		(1,494)
Net change in total reserve
discount^(b)	$	114	$	37	$	151	$	(1,701)	$	(76)	$	(1,777)

(a) Excludes $12 million and $(18) million discount related to certain long tail liabilities in the United Kingdom for the three-month periods ended September 30, 2018 and 2017, respectively.

(b) Excludes $10 million and $20 million discount related to certain long tail liabilities in the United Kingdom for the nine-month periods ended September 30, 2018 and 2017, respectively.

During the nine-month period ended September 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 $311 million in the nine-month period ended September 30, 2018.

During the nine-month period ended September 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 $138 million in the nine-month period ended September 30, 2017.

AIG | Third Quarter 2018 Form 10-Q 55

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 11. Contingencies, Commitments and Guarantees

11. 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 15 to the Condensed Consolidated Financial Statements.

56 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 11. 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 $3.6 billion at September 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 September 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 see Note 8.

· For additional disclosures about derivatives see Note 9.

· For additional disclosures about guarantees of outstanding debt and Preference Shares of Validus and outstanding debt of AIG Life Holdings, Inc. (AIGLH), see Note 16.

AIG | Third Quarter 2018 Form 10-Q 57

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 12. Equity

12. Equity

Shares Outstanding

The following table presents a rollforward of outstanding shares:

Nine Months Ended September 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	-	4,055,727	4,055,727
Shares repurchased	-	(18,452,857)	(18,452,857)
Shares, end of period	1,906,671,492	(1,022,023,965)	884,647,527

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 declaration date, record date, payment date and dividends paid per share on AIG Common Stock:

				Dividends Paid
Declaration Date	Record Date	Payment Date		Per Share
August 2, 2018	September 17, 2018	September 28, 2018	$	0.32
May 2, 2018	June 14, 2018	June 28, 2018		0.32
February 8, 2018	March 15, 2018	March 29, 2018		0.32
August 2, 2017	September 15, 2017	September 29, 2017		0.32
May 3, 2017	June 14, 2017	June 28, 2017		0.32
February 14, 2017	March 15, 2017	March 29, 2017		0.32

For a discussion of restrictions on payments of dividends to AIG Parent by its subsidiaries see Note 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:

Nine Months Ended September 30,
(in millions)		2018		2017
Aggregate repurchases of common stock	$	994	$	6,275
Total number of common shares repurchased		18		100
Aggregate repurchases of warrants	$	6	$	3
Total number of warrants repurchased^*		-		-

* For the nine-month periods ended September 30, 2018 and 2017, we repurchased 366,253 and 185,000 warrants to purchase shares of AIG Common Stock, respectively.

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 September 30, 2018, approximately $1.3 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).

58 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 12. Equity

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.

Accumulated Other Comprehensive Income

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

		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, June 30, 2018, net of tax	$	(234)	$	3,944	$	(2,426)	$	(1,062)	$	8	$	230
Cumulative effect of change in
accounting principles		-		-		-		-		-		-
Change in unrealized appreciation (depreciation)
of investments		350		(1,301)		-		-		-		(951)
Change in deferred policy acquisition costs
adjustment and other		(205)		216		-		-		-		11
Change in future policy benefits		-		340		-		-		-		340
Change in foreign currency translation adjustments		-		-		(131)		-		-		(131)
Change in net actuarial loss		-		-		-		16		-		16
Change in prior service cost		-		-		-		-		-		-
Change in deferred tax asset (liability)		(38)		(13)		2		(2)		-		(51)
Change in fair value of liabilities under fair value
option attributable to changes in own credit risk		-		-		-		-		-		-
Total other comprehensive income (loss)		107		(758)		(129)		14		-		(766)
Noncontrolling interests		-		-		-		-		-		-
Balance, September 30, 2018, net of tax	$	(127)	$	3,186	$	(2,555)	$	(1,048)	$	8	$	(536)

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		(1,258)		(7,659)		-		-		-		(8,917)
Change in deferred policy acquisition costs
adjustment and other		(91)		1,121		-		-		-		1,030
Change in future policy benefits		-		1,464		-		-		-		1,464
Change in foreign currency translation adjustments		-		-		(154)		-		-		(154)
Change in net actuarial loss		-		-		-		54		-		54
Change in prior service credit		-		-		-		(2)		-		(2)
Change in deferred tax asset (liability)		260		852		(27)		14		-		1,099
Change in fair value of liabilities under fair value
option attributable to changes in own credit risk		-		-		-		-		1		1
Total other comprehensive income (loss)		(1,089)		(4,222)		(181)		66		1		(5,425)
Noncontrolling interests		-		-		-		-		-		-
Balance, September 30, 2018, net of tax	$	(127)	$	3,186	$	(2,555)	$	(1,048)	$	8	$	(536)

AIG | Third Quarter 2018 Form 10-Q 59

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 12. Equity

		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, June 30, 2017, net of tax	$	659	$	7,753	$	(2,507)	$	(943)	$	-	$	4,962
Change in unrealized appreciation of investments		223		855		-		-		-		1,078
Change in deferred policy acquisition costs
adjustment and other		(73)		(271)		-		-		-		(344)
Change in future policy benefits		-		114		-		-		-		114
Change in foreign currency translation adjustments		-		-		328		-		-		328
Change in net actuarial loss		-		-		-		96		-		96
Change in prior service cost		-		-		-		-		-		-
Change in deferred tax liability		(53)		(206)		(3)		(33)		-		(295)
Total other comprehensive income		97		492		325		63		-		977
Noncontrolling interests		-		-		-		-		-		-
Balance, September 30, 2017, net of tax	$	756	$	8,245	$	(2,182)	$	(880)	$	-	$	5,939

Balance, December 31, 2016, net of tax	$	426	$	6,405	$	(2,629)	$	(972)	$	-	$	3,230
Change in unrealized appreciation of investments		564		3,693		-		-		-		4,257
Change in deferred policy acquisition costs
adjustment and other^*		(56)		(1,269)		-		-		-		(1,325)
Change in future policy benefits		-		(425)		-		-		-		(425)
Change in foreign currency translation adjustments		-		-		474		-		-		474
Change in net actuarial loss		-		-		-		134		-		134
Change in prior service cost		-		-		-		6		-		6
Change in deferred tax liability		(178)		(159)		(27)		(48)		-		(412)
Total other comprehensive income		330		1,840		447		92		-		2,709
Noncontrolling interests		-		-		-		-		-		-
Balance, September 30, 2017, net of tax	$	756	$	8,245	$	(2,182)	$	(880)	$	-	$	5,939

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

60 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 12. Equity

The following table presents the other comprehensive income reclassification adjustments for the three- and nine-month periods ended September 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 September 30, 2018
Unrealized change arising during period	$	146	$	(705)	$	(131)	$	7	$	-	$	(683)
Less: Reclassification adjustments
included in net income		1		40		-		(9)		-		32
Total other comprehensive income (loss),
before income tax expense (benefit)		145		(745)		(131)		16		-		(715)
Less: Income tax expense (benefit)		38		13		(2)		2		-		51
Total other comprehensive income (loss),
net of income tax expense (benefit)	$	107	$	(758)	$	(129)	$	14	$	-	$	(766)
Three Months Ended September 30, 2017
Unrealized change arising during period	$	160	$	831	$	328	$	38	$	-	$	1,357
Less: Reclassification adjustments
included in net income		10		133		-		(58)		-		85
Total other comprehensive income,
before income tax expense		150		698		328		96		-		1,272
Less: Income tax expense		53		206		3		33		-		295
Total other comprehensive income,
net of income tax expense	$	97	$	492	$	325	$	63	$	-	$	977
Nine Months Ended September 30, 2018
Unrealized change arising during period	$	(1,344)	$	(5,055)	$	(154)	$	26	$	1	$	(6,526)
Less: Reclassification adjustments
included in net income		5		19		-		(26)		-		(2)
Total other comprehensive income (loss),
before income tax expense (benefit)		(1,349)		(5,074)		(154)		52		1		(6,524)
Less: Income tax expense (benefit)		(260)		(852)		27		(14)		-		(1,099)
Total other comprehensive income (loss),
net of income tax expense (benefit)	$	(1,089)	$	(4,222)	$	(181)	$	66	$	1	$	(5,425)
Nine Months Ended September 30, 2017
Unrealized change arising during period	$	553	$	2,610	$	474	$	62	$	-	$	3,699
Less: Reclassification adjustments
included in net income		45		611		-		(78)		-		578
Total other comprehensive income,
before income tax expense		508		1,999		474		140		-		3,121
Less: Income tax expense		178		159		27		48		-		412
Total other comprehensive income,
net of income tax expense	$	330	$	1,840	$	447	$	92	$	-	$	2,709

AIG | Third Quarter 2018 Form 10-Q 61

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 12. 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 September 30,
(in millions)		2018		2017
Unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were taken

Investments		$	1	$	10		Other realized capital gains
Total			1		10
Unrealized appreciation (depreciation) of all other investments
Investments			10		48		Other realized capital gains
Deferred acquisition costs adjustment			30		85		Amortization of deferred policy acquisition costs
Future policy benefits			-		-		Policyholder benefits and losses incurred
Total			40		133
Change in retirement plan liabilities adjustment
Prior-service credit			-		-		*
Actuarial losses			(9)		(58)		*
Total			(9)		(58)
Total reclassifications for the period		$	32	$	85
	Amount Reclassified from Accumulated Other Comprehensive Income					Affected Line Item in the Condensed Consolidated Statements of Income

	Nine Months Ended September 30,
(in millions)		2018		2017
Unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were taken

Investments		$	5	$	45		Other realized capital gains
Total			5		45
Unrealized appreciation (depreciation) of all other investments
Investments			19		415		Other realized capital gains
Deferred acquisition costs adjustment			-		196		Amortization of deferred policy acquisition costs
Future policy benefits			-		-		Policyholder benefits and losses incurred
Total			19		611
Change in retirement plan liabilities adjustment
Prior-service credit			1		1		*
Actuarial losses			(27)		(79)		*
Total			(26)		(78)
Total reclassifications for the period		$	(2)	$	578

* These Accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 14.

62 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 13. Earnings Per Share (EPS)

13. 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				Nine Months Ended
	September 30,				September 30,
(dollars in millions, except per share data)		2018		2017		2018		2017
Numerator for EPS:
Income (loss) from continuing operations	$	(1,220)	$	(1,712)	$	661	$	609
Less: Net income from continuing operations attributable to noncontrolling interests		-		26		5		40
Income (loss) attributable to AIG common shareholders
from continuing operations		(1,220)		(1,738)		656		569
Income (loss) from discontinued operations, net of income tax expense		(39)		(1)		(40)		7
Net income (loss) attributable to AIG common shareholders	$	(1,259)	$	(1,739)	$	616	$	576
Denominator for EPS:
Weighted average shares outstanding — basic		895,237,359		908,667,044		902,081,555		938,130,832
Dilutive shares		-		-		14,736,714		23,165,114
Weighted average shares outstanding — diluted^(a)(b)		895,237,359		908,667,044		916,818,269		961,295,946
Income (loss) per common share attributable to AIG:
Basic:
Income (loss) from continuing operations	$	(1.37)	$	(1.91)	$	0.72	$	0.60
Income (loss) from discontinued operations	$	(0.04)	$	-	$	(0.04)	$	0.01
Income (loss) attributable to AIG	$	(1.41)	$	(1.91)	$	0.68	$	0.61
Diluted:
Income (loss) from continuing operations	$	(1.37)	$	(1.91)	$	0.71	$	0.59
Income (loss) from discontinued operations	$	(0.04)	$	-	$	(0.04)	$	0.01
Income (loss) attributable to AIG	$	(1.41)	$	(1.91)	$	0.67	$	0.60

(a) Shares in the diluted EPS calculation represent basic shares for the three-month periods ended September 30, 2018 and 2017 due to the net losses in those periods. The shares excluded from the calculation were 13,538,168 and 22,459,868 shares, respectively.

(b) 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 5.8 million and 4.7 million for the three- and nine-month periods ended September 30, 2018, respectively, and 2.4 million and 2.0 million for the three- and nine-month periods ended September 30, 2017, respectively, because the effect of including those shares in the calculation would have been anti-dilutive.

AIG | Third Quarter 2018 Form 10-Q 63

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 14. Employee Benefits

14. 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 September 30, 2018
Components of net periodic benefit cost:
Service cost	$	-	$	6	$	6	$	-	$	-	$	-
Interest cost		41		4		45		1		1		2
Expected return on assets		(72)		(6)		(78)		-		-		-
Amortization of prior service cost		-		-		-		-		-		-
Amortization of net loss		7		2		9		-		-		-
Net periodic benefit cost (credit)	$	(24)	$	6	$	(18)	$	1	$	1	$	2
Three Months Ended September 30, 2017
Components of net periodic benefit cost:
Service cost	$	(5)	$	7	$	2	$	-	$	1	$	1
Interest cost		41		4		45		2		1		3
Expected return on assets		(66)		(6)		(72)		-		-		-
Amortization of prior service cost		-		-		-		-		-		-
Amortization of net loss		6		3		9		-		-		-
Curtailment gain		-		(5)		(5)		-		-		-
Settlement charges		50		-		50		-		-		-
Net periodic benefit cost	$	26	$	3	$	29	$	2	$	2	$	4
Nine Months Ended September 30, 2018
Components of net periodic benefit cost:
Service cost	$	4	$	17	$	21	$	1	$	1	$	2
Interest cost		122		12		134		4		2		6
Expected return on assets		(213)		(19)		(232)		-		-		-
Amortization of prior service cost (credit)		-		1		1		(1)		(1)		(2)
Amortization of net loss		21		6		27		-		-		-
Net periodic benefit cost (credit)	$	(66)	$	17	$	(49)	$	4	$	2	$	6
Nine Months Ended September 30, 2017
Components of net periodic benefit cost:
Service cost	$	8	$	23	$	31	$	1	$	2	$	3
Interest cost		126		12		138		5		3		8
Expected return on assets		(194)		(18)		(212)		-		-		-
Amortization of prior service credit		-		-		-		(1)		-		(1)
Amortization of net loss		20		9		29		-		-		-
Curtailment gain		-		(5)		(5)		-		-		-
Settlement charges		50		-		50		-		-		-
Net periodic benefit cost	$	10	$	21	$	31	$	5	$	5	$	10

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

64 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 15. Income Taxes

15. 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. Our provisional estimate of $6.7 billion was based in part on a reasonable estimate of the effects of the statutory income tax rate reduction on existing deferred tax balances and of certain provisions of the Tax Act. We recently filed our 2017 consolidated U.S. income tax return and have substantially completed our review of the primary impact of the Tax Act provisions on our deferred taxes. As a result, we consider the accounting for the effects of the rate change on deferred tax balances to be complete and no material measurement period changes were recorded for this item. As further guidance is issued by the U.S. tax authority, any resulting changes in our estimates will be treated in accordance with the relevant accounting guidance.

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. Such guidance may result in changes to the interpretations and assumptions we made and actions we may take, which may impact amounts recorded with respect to international provisions of the Tax Act, 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. We were able to reasonably estimate the deemed repatriation tax and originally recorded a provisional estimated tax benefit of $38 million at December 31, 2017. We have completed our review of post-1986 E&P computations of our foreign affiliates. Incorporating additional IRS guidance issued with respect to the deemed repatriation tax, as well as the relevant basis adjustments, we recognized a measurement period tax charge of $62 million. The effect of deemed repatriation tax, which has now been determined to be complete, resulted in a liability of $24 million.

AIG | Third Quarter 2018 Form 10-Q 65

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 15. Income Taxes

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. Accordingly, these changes give rise to new deferred tax liabilities. At December 31, 2017, we recorded a provisional estimate of $1.9 billion with respect to such deferred tax liabilities. This increase in deferred tax liabilities was offset by an increase in the deferred tax asset related to insurance reserves as a result of applying the new provisions of the Tax Act. As of September 30, 2018, these estimates remain provisional.

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. While we have substantively completed our review of the primary impact of the Tax Act provisions on our deferred tax balances, we are still analyzing the complex interplay of the new tax rules with the rules governing the utilization of our tax attributes. We expect to finalize this analysis and to complete our accounting within the prescribed measurement period. Accordingly, as of September 30, 2018, these estimates remain provisional.

Tax effects for which no estimate can be determined

At December 31, 2017, our accounting for the following elements of the Tax Act was 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. At December 31, 2017, the information needed to determine a provisional estimate was not currently available (such as for interest deduction limitations in those entities and the changed definition of a U.S. Shareholder), and accordingly, no provisional estimates were recorded. We have since completed our review of these investments and partnerships. As of September 30, 2018, we consider the accounting for this item to be complete and no measurement period change was 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. If new law or guidance is issued beyond this period, any further change will be reflected in the period in which the new law is enacted under relevant accounting guidance.

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. As of September 30, 2018, the effect of the Tax Act on gross temporary differences related to AOCI is complete, and no additional reclassification adjustments were recorded.

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.

66 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 15. Income Taxes

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. As of September 30, 2018, the annual effective tax rate includes the tax effects of significant catastrophe losses recognized in the third quarter of 2018.

Interim Tax Expense (Benefit)

For the three-month period ended September 30, 2018, the effective tax rate on loss from continuing operations was 20.1 percent. The effective tax rate on loss 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 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. As noted above, we also recorded a measurement period tax charge of $62 million related to the effects of the deemed repatriation tax.

For the nine-month period ended September 30, 2018, the effective tax rate on income from continuing operations was 30.6 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, 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 September 30, 2017, the effective tax rate on loss from continuing operations was 38.9 percent. The effective tax rate on loss 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 losses in our European operations taxed at a statutory tax rate lower than 35 percent.

For the nine-month period ended September 30, 2017, the effective tax rate on income from continuing operations was not meaningful, due to a tax benefit on pre-tax income. The tax benefit was primarily due to 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 in accordance with relevant accounting literature, 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 and losses in our European operations taxed at a statutory tax rate lower than 35 percent.

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 nine-month period ended September 30, 2018, we 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.

AIG | Third Quarter 2018 Form 10-Q 67

TABLE OF CONTENTS

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 15. Income Taxes

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 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 September 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 nine-month periods ended September 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 of September 30, 2018, based on all available evidence, we concluded that a valuation allowance should be established on a portion of the deferred tax asset related to unrealized losses that are not more-likely-than-not to be realized. For both the three- and nine-month periods ended September 30, 2018, we established $149 million of valuation allowance associated with the unrealized tax losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, all of which was allocated to other comprehensive income.

For the three- and nine-month periods ended September 30, 2018, we recognized net increases of $5 million and $42 million, respectively, in our deferred tax asset valuation allowance associated with certain foreign subsidiaries and state jurisdictions, primarily attributable to current year activity.

68 AIG | Third Quarter 2018 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 15. Income Taxes

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 September 30, 2018 and December 31, 2017, our unrecognized tax benefits, excluding interest and penalties were $4.7 billion. At September 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 September 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 September 30, 2018 and December 31, 2017, we had accrued liabilities of $2.2 billion and $2.0 billion, respectively, for the payment of interest (net of the federal benefit) and penalties. For the nine-month periods ended September 30, 2018 and 2017, we accrued expense (benefit) of $148 million and $102 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.

AIG | Third Quarter 2018 Form 10-Q 69

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 16. Information Provided in Connection with Outstanding Debt and Preference Shares

16. Information Provided in Connection with Outstanding Debt and Preference Shares

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

Condensed Consolidating Balance Sheets

American

International

Validus

Reclassifications

AMERICAN INTERNATIONAL GROUP, INC. - Quarter Report: 2018 September (Form 10-Q)