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 March 31, 2019

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 ☑

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, Par Value $2.50 Per Share	AIG	New York Stock Exchange
Warrants (expiring January 19, 2021)	AIG WS	New York Stock Exchange
5.75% Series A-2 Junior Subordinated Debentures	AIG 67BP	New York Stock Exchange
4.875% Series A-3 Junior Subordinated Debentures	AIG 67EU	New York Stock Exchange
Stock Purchase Rights		New York Stock Exchange
Depository Shares Each Representing a 1/1,000th Interest in a Share of Series A 5.85% Non-Cumulative Perpetual Preferred Stock	AIG PRA	New York Stock Exchange

As of May 2, 2019, there were 869,753,584 shares outstanding of the registrant’s common stock.

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

March 31, 2019

FORM 10-Q
Item Number	Description		Page
Part I — Financial Information
ITEM 1	Condensed Consolidated Financial Statements		2
	Note 1.	Basis of Presentation	8
	Note 2.	Summary of Significant Accounting Policies	9
	Note 3.	Segment Information	11
	Note 4	Business Combination	13
	Note 5.	Fair Value Measurements	13
	Note 6.	Investments	27
	Note 7.	Lending Activities	36
	Note 8.	Variable Interest Entities	38
	Note 9.	Derivatives and Hedge Accounting	39
	Note 10.	Insurance Liabilities	43
	Note 11.	Contingencies, Commitments and Guarantees	45
	Note 12.	Equity	47
	Note 13.	Earnings Per Share	51
	Note 14.	Employee Benefits	52
	Note 15.	Income Taxes	53
	Note 16.	Information Provided in Connection with Outstanding Debt	56
	Note 17.	Subsequent Events	60
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of
	Operations		61
	· Cautionary Statement Regarding Forward-Looking Information		61
	· Use of Non-GAAP Measures		63
	· Critical Accounting Estimates		65
	· Executive Summary		65
	· Consolidated Results of Operations		72
	· Business Segment Operations		76
	· Investments		102
	· Insurance Reserves		114
	· Liquidity and Capital Resources		122
	· Enterprise Risk Management		134
	· Regulatory Environment		134
	· Glossary		135
	· Acronyms		138
ITEM 3	Quantitative and Qualitative Disclosures About Market Risk		139
ITEM 4	Controls and Procedures		139
Part II — Other Information
ITEM 1	Legal Proceedings		140
ITEM 1A	Risk Factors		140
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds		140
ITEM 4	Mine Safety Disclosures		140
ITEM 6	Exhibits		141
Signatures			142

AIG | First Quarter 2019 Form 10-Q 1

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Part I – Financial Information

Item 1. | Fin ancial Statements

American International Group, Inc.

Condensed Consolidated Balance Sheets (unaudited)

	March 31,		December 31,
(in millions, except for share data)		2019		2018
Assets:
Investments:
Fixed maturity securities:
Bonds available for sale, at fair value (amortized cost: 2019 - $228,608; 2018 - $225,780)	$	238,201	$	229,391
Other bond securities, at fair value (See Note 6)		11,511		11,415
Equity Securities, at fair value (See Note 6)		841		1,253
Mortgage and other loans receivable, net of allowance		43,834		43,135
Other invested assets (portion measured at fair value: 2019 - $5,759; 2018 - $5,894)		19,343		19,341
Short-term investments, including restricted cash of $251 in 2019 and $142 in 2018
(portion measured at fair value: 2019 - $4,040; 2018 - $3,015)		11,133		9,674
Total investments		324,863		314,209

Cash		2,565		2,873
Accrued investment income		2,482		2,389
Premiums and other receivables, net of allowance		12,655		11,011
Reinsurance assets, net of allowance		40,558		38,172
Deferred income taxes		14,545		15,221
Deferred policy acquisition costs		12,128		12,694
Other assets, including restricted cash of $363 in 2019 and $343 in 2018
(portion measured at fair value: 2019 - $951; 2018 - $973)		14,308		13,568
Separate account assets, at fair value		88,818		81,847
Total assets	$	512,922	$	491,984
Liabilities:
Liability for unpaid losses and loss adjustment expenses	$	82,496	$	83,639
Unearned premiums		20,812		19,248
Future policy benefits for life and accident and health insurance contracts		46,508		44,935
Policyholder contract deposits (portion measured at fair value: 2019 - $4,878; 2018 - $4,116)		145,380		142,262
Other policyholder funds		3,493		3,568
Other liabilities (portion measured at fair value: 2019 - $1,421; 2018 - $1,265)		27,546		24,636
Long-term debt (portion measured at fair value: 2019 - $2,263; 2018 - $2,213)		35,776		34,540
Separate account liabilities		88,818		81,847
Total liabilities		450,829		434,675
*Contingencies, commitments and guarantees (See Note 11***)

AIG shareholders’ equity:
Series A Non-cumulative preferred stock and additional paid in capital, $5.00 par value; 100,000,000 shares
authorized; shares issued: 2019 - 20,000 and 2018 - 0; liquidation preference $500		485		-
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2019 - 1,906,671,492 and
2018 - 1,906,671,492		4,766		4,766
Treasury stock, at cost; 2019 - 1,036,934,591 shares; 2018 - 1,040,062,063 shares of common stock		(48,999)		(49,144)
Additional paid-in capital		81,148		81,268
Retained earnings		21,259		20,884
Accumulated other comprehensive income (loss)		2,128		(1,413)
Total AIG shareholders’ equity		60,787		56,361
Non-redeemable noncontrolling interests		1,306		948
Total equity		62,093		57,309
Total liabilities and equity	$	512,922	$	491,984

See accompanying Notes to Condensed Consolidated Financial Statements.

2 AIG | First Quarter 2019 Form 10-Q

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American International Group, Inc.

Condensed Consolidated Statements of Income (unaudited)

	Three Months Ended March 31,
(dollars in millions, except per share data)		2019		2018
Revenues:
Premiums	$	8,070	$	7,275
Policy fees		735		764
Net investment income		3,879		3,261
Net realized capital losses:
Total other-than-temporary impairments on available for sale securities		(80)		(75)
Portion of other-than-temporary impairments on available for sale
fixed maturity securities recognized in Other comprehensive income (loss)		(3)		(12)
Net other-than-temporary impairments on available for sale
securities recognized in net income		(83)		(87)
Other realized capital gains (losses)		(363)		68
Total net realized capital losses		(446)		(19)
Other income		218		431
Total revenues		12,456		11,712
Benefits, losses and expenses:
Policyholder benefits and losses incurred		6,679		5,667
Interest credited to policyholder account balances		940		916
Amortization of deferred policy acquisition costs		1,289		1,358
General operating and other expenses		2,053		2,271
Interest expense		349		277
(Gain) loss on extinguishment of debt		(2)		4
Net gain on sale of divested businesses		(6)		(8)
Total benefits, losses and expenses		11,302		10,485
Income from continuing operations before income tax expense		1,154		1,227
Income tax expense		217		277
Income from continuing operations		937		950
Loss from discontinued operations, net of income tax expense		-		(1)
Net income		937		949
Less:
Net income from continuing operations attributable to
noncontrolling interests		283		11
Net income attributable to AIG	$	654	$	938

Income per common share attributable to AIG:
Basic:
Income from continuing operations	$	0.75	$	1.03
Income from discontinued operations	$	-	$	-
Net income attributable to AIG	$	0.75	$	1.03
Diluted:
Income from continuing operations	$	0.75	$	1.01
Income from discontinued operations	$	-	$	-
Net income attributable to AIG	$	0.75	$	1.01
Weighted average shares outstanding:
Basic		875,383,084		907,951,597
Diluted		877,512,244		925,266,577

See accompanying Notes to Condensed Consolidated Financial Statements.

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American International Group, Inc.

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

	Three Months Ended March 31,
(in millions)		2019		2018
Net income	$	937	$	949
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		676		(150)
Change in unrealized appreciation (depreciation) of all other investments		2,708		(2,708)
Change in foreign currency translation adjustments		164		158
Change in retirement plan liabilities adjustment		(1)		29
Change in fair value of liabilities under fair value option attributable to changes in own credit risk		-		2
Other comprehensive income (loss)		3,547		(2,669)
Comprehensive income (loss)		4,484		(1,720)
Comprehensive income attributable to noncontrolling interests		289		11
Comprehensive income (loss) attributable to AIG	$	4,195	$	(1,731)

See accompanying Notes to Condensed Consolidated Financial Statements.

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American International Group, Inc.

Condensed Consolidated Statements of Equity (unaudited)

		Preferred														Non-
	Stock and											Accumulated		Total AIG		redeemable
	Additional							Additional				Other		Share-		Non-
		Paid-in		Common		Treasury		Paid-in		Retained	Comprehensive			holders'		controlling		Total
(in millions)		Capital		Stock		Stock		Capital		Earnings	Income (Loss)			Equity		Interests		Equity
Three Months Ended March 31, 2019
Balance, beginning of year	$	-	$	4,766	$	(49,144)	$	81,268	$	20,884	$	(1,413)	$	56,361	$	948	$	57,309
Preferred stock issued		485		-		-		-		-		-		485		-		485
Common stock issued under stock plans		-		-		145		(222)		-		-		(77)		-		(77)
Purchase of common stock		-		-		-		-		-		-		-		-		-
Net income attributable to AIG or
noncontrolling interests		-		-		-		-		654		-		654		283		937
Dividends		-		-		-		-		(278)		-		(278)		-		(278)
Other comprehensive income		-		-		-		-		-		3,541		3,541		6		3,547
Current and deferred income taxes		-		-		-		(1)		-		-		(1)		-		(1)
Net increase due to acquisitions
and consolidations		-		-		-		-		-		-		-		108		108
Contributions from noncontrolling interests		-		-		-		-		-		-		-		12		12
Distributions to noncontrolling interests		-		-		-		-		-		-		-		(59)		(59)
Other		-		-		-		103		(1)		-		102		8		110
Balance, end of period	$	485	$	4,766	$	(48,999)	$	81,148	$	21,259	$	2,128	$	60,787	$	1,306	$	62,093


Three Months Ended March 31, 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		-		-		186		(336)		-		-		(150)		-		(150)
Purchase of common stock		-		-		(298)		-		-		-		(298)		-		(298)
Net income attributable to AIG or
noncontrolling interests		-		-		-		-		938		-		938		11		949
Dividends		-		-		-		-		(289)		-		(289)		-		(289)
Other comprehensive income (loss)		-		-		-		-		-		(2,669)		(2,669)		-		(2,669)
Net increase due to acquisitions
and consolidations		-		-		-		-		-		-		-		36		36
Contributions from noncontrolling interests		-		-		-		-		-		-		-		10		10
Distributions to noncontrolling interests		-		-		-		-		-		-		-		(25)		(25)
Other		-		-		1		99		(3)		-		97		(4)		93
Balance, end of period	$	-	$	4,766	$	(47,706)	$	80,841	$	22,671	$	2,220	$	62,792	$	565	$	63,357

See accompanying Notes to Condensed Consolidated Financial Statements.

AIG | First Quarter 2019 Form 10-Q 5

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American International Group, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

	Three Months Ended March 31,
(in millions)		2019		2018
Cash flows from operating activities:
Net income	$	937	$	949
Loss from discontinued operations		-		1
Adjustments to reconcile net income to net cash used in operating activities:
Noncash revenues, expenses, gains and losses included in income:
Net gains on sales of securities available for sale and other assets		(22)		(120)
Net gain on sale of divested businesses		(6)		(8)
(Gains) losses on extinguishment of debt		(2)		4
Unrealized losses in earnings - net		367		268
Equity in income from equity method investments, net of dividends or distributions		(83)		(86)
Depreciation and other amortization		1,299		1,382
Impairments of assets		125		105
Changes in operating assets and liabilities:
Insurance reserves		596		137
Premiums and other receivables and payables - net		315		400
Reinsurance assets and funds held under reinsurance treaties		(2,495)		(1,706)
Capitalization of deferred policy acquisition costs		(1,420)		(1,397)
Current and deferred income taxes - net		167		250
Other, net		(754)		(1,117)
Total adjustments		(1,913)		(1,888)
Net cash used in operating activities		(976)		(938)
Cash flows from investing activities:
Proceeds from (payments for)
Sales or distributions of:
Available for sale securities		6,370		5,638
Other securities		1,034		1,385
Other invested assets		1,118		1,064
Divested businesses, net		-		6
Maturities of fixed maturity securities available for sale		4,957		5,347
Principal payments received on and sales of mortgage and other loans receivable		861		1,037
Purchases of:
Available for sale securities		(12,757)		(9,042)
Other securities		(287)		(384)
Other invested assets		(567)		(847)
Mortgage and other loans receivable		(1,504)		(2,490)
Net change in short-term investments		(1,221)		(3,040)
Other, net		17		(646)
Net cash used in investing activities		(1,979)		(1,972)
Cash flows from financing activities:
Proceeds from (payments for)
Policyholder contract deposits		5,629		7,069
Policyholder contract withdrawals		(4,195)		(4,160)
Issuance of long-term debt		1,449		3,039
Repayments of long-term debt		(589)		(1,327)
Issuance of preferred stock		485		-
Purchase of common stock		-		(298)
Dividends paid		(278)		(289)
Other, net		263		(1,548)
Net cash provided by financing activities		2,764		2,486
Effect of exchange rate changes on cash and restricted cash		12		58
Net decrease in cash and restricted cash		(179)		(366)
Cash and restricted cash at beginning of year		3,358		2,737
Cash and restricted cash at end of period	$	3,179	$	2,371

6 AIG | First Quarter 2019 Form 10-Q

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American International Group, Inc.

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

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

	Three Months Ended March 31,
(in millions)		2019		2018
Cash	$	2,565	$	2,103
Restricted cash included in Short-term investments^*		251		47
Restricted cash included in Other assets^*		363		221
Total cash and restricted cash shown in the Condensed Consolidated Statements of Cash Flows	$	3,179	$	2,371


Cash paid during the period for:
Interest	$	315	$	357
Taxes	$	50	$	28
Non-cash investing/financing activities:
Interest credited to policyholder contract deposits included in financing activities	$	878	$	825

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

See accompanying Notes to Condensed Consolidated Financial Statements.

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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). 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, 2018 (the 2018 Annual Report). The condensed consolidated financial information as of December 31, 2018 included herein has been derived from the audited Consolidated Financial Statements in the 2018 Annual Report.

Certain of our foreign subsidiaries included in the Condensed Consolidated Financial Statements report on the basis of fiscal period ending November 30. 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 March 31, 2019 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;

• valuation of embedded derivatives for fixed index annuity and life 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 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.

8 AIG | First Quarter 2019 Form 10-Q

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

2. Summary of Significant Accounting Policies

Accounting Standards Adopted During 2019

Leases

In February 2016, the Financial Accounting Standards Board (FASB) issued an accounting standard that requires 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. Lessor accounting remained largely the same, with the exception of certain specified changes.

We adopted the standard on its effective date of January 1, 2019, using a modified retrospective approach and did not adjust prior comparative periods in accordance with the standard’s transition guidance. The majority of the Company’s lease obligations pertain to real estate utilized in the operation of our businesses. Consequently, the primary impact of adoption resulted in the recognition of discounted lease liabilities of $823 million and corresponding right-of-use assets of $724 million for operating leases pertaining to our real estate portfolio, which are reflected in Other Liabilities and Other Assets, respectively. The standard did not have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

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 adopted the standard using a modified retrospective approach on its effective date of January 1, 2019. The standard did not 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 standard 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 disclosures, and simplify the application of hedge accounting treatment.

We adopted the standard on its effective date of January 1, 2019. The standard did not have a material impact on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

Future Application of Accounting Standards

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.

We plan to adopt the standard on its effective date of January 1, 2020. 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.

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

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.

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 standard prescribes significant and comprehensive changes to recognition, measurement, presentation and disclosure as 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, with the recognition and separate presentation of any resulting re-measurement gain or loss (except for discount rate changes as noted below) in the income statement.

· Requires the discount rate assumption to be updated at the end of each reporting period using an 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 impact of those changes.

We plan to adopt the standard on its effective date of 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.

RECLASSIFICATIONS

In the first quarter of 2019, we began reporting investment income from our non-insurance subsidiaries in Net investment income instead of Other income on a prospective basis to be consistent with how we report investment income from our General Insurance and Life and Retirement reporting segments. This reclassification has no impact to our consolidated statement of operations.

10 AIG | First Quarter 2019 Form 10-Q

TABLE OF CONTENTS

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., Western World Insurance Group, Inc. and Glatfelter Insurance Group. as of their respective acquisition dates.

· 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 its 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 annuities, individual annuity and investment products, and 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.

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), 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.

AIG | First Quarter 2019 Form 10-Q 11

TABLE OF CONTENTS

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

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. Beginning in the first quarter of 2019, on a prospective basis, the changes in the fair value of equity securities are excluded from adjusted pre-tax income (loss). 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 March 31,	2019				2018
				Adjusted				Adjusted
		Total		Pre-tax		Total		Pre-tax
(in millions)		Revenues		Income (Loss)		Revenues		Income (Loss)
General Insurance
North America	$	4,098	$	934	$	3,340	$	320
International		3,704		334		4,104		190
Total General Insurance		7,802		1,268		7,444		510
Life and Retirement
Individual Retirement		1,351		508		1,361		499
Group Retirement		709		232		761		282
Life Insurance		1,073		116		1,061		52
Institutional Markets		1,071		68		277		59
Total Life and Retirement		4,204		924		3,460		892
Other Operations		203		(387)		150		(342)
Legacy Portfolio		706		112		836		145
AIG Consolidation and elimination		(161)		(70)		(62)		11
Total AIG Consolidated adjusted revenues and adjusted pre-tax income		12,754		1,847		11,828		1,216
Reconciling Items from adjusted pre-tax income to pre-tax income:
Changes in fair value of securities used to hedge guaranteed
living benefits		105		96		(77)		(77)
Changes in benefit reserves and DAC, VOBA and SIA related to
net realized capital gains		-		99		-		(31)
Changes in the fair value of equity securities		79		79		-		-
Other income (expense) - net		7		-		(11)		-
Gain (Loss) on extinguishment of debt		-		2		-		(4)
Net realized capital losses^*		(489)		(474)		(29)		(19)
Income (loss) from divested businesses		-		6		-		8
Non-operating litigation reserves and settlements		-		(1)		1		(13)
(Unfavorable) favorable prior year development and related amortization
changes ceded under retroactive reinsurance agreements		-		27		-		(34)
Net loss reserve discount benefit (charge)		-		(473)		-		205
Integration and transaction costs associated with acquired businesses		-		(7)		-		-
Restructuring and other costs		-		(47)		-		(24)
Revenues and Pre-tax income	$	12,456	$	1,154	$	11,712	$	1,227

* 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.

12 AIG | First Quarter 2019 Form 10-Q

TABLE OF CONTENTS

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 Holdings, Ltd. (Validus), a leading provider of reinsurance, primary insurance, and asset management services, for $5.5 billion in cash.

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 is approximately $124 million at March 31, 2019, in Other Invested Assets in the Condensed Consolidated Balance Sheet.

The following unaudited summarized pro forma consolidated income statement information assumes that the acquisition of Validus occurred as of January 1, 2018. 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 March 31,
(in millions)		2019		2018*
Total revenues	$	12,456	$	12,242
Net income		937		951
Net income attributable to AIG		654		940

Income per common share attributable to AIG:
Basic:
Net income attributable to AIG		0.75		1.04
Diluted:
Net income attributable to AIG		0.75		1.02

* 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.

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.

AIG | First Quarter 2019 Form 10-Q 13

TABLE OF CONTENTS

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:

March 31, 2019							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	$	-	$	3,401	$	-	$	-	$	-	$	3,401
Obligations of states, municipalities and political subdivisions		-		13,786		2,136		-		-		15,922
Non-U.S. governments		15		15,256		3		-		-		15,274
Corporate debt		-		137,141		1,532		-		-		138,673
RMBS		-		19,959		14,045		-		-		34,004
CMBS		-		12,269		892		-		-		13,161
CDO/ABS		-		8,926		8,840		-		-		17,766
Total bonds available for sale		15		210,738		27,448		-		-		238,201
Other bond securities:
U.S. government and government sponsored entities		84		2,696		-		-		-		2,780
Non-U.S. governments		-		51		-		-		-		51
Corporate debt		-		1,745		-		-		-		1,745
RMBS		-		491		1,266		-		-		1,757
CMBS		-		315		84		-		-		399
CDO/ABS		-		530		4,249		-		-		4,779
Total other bond securities		84		5,828		5,599		-		-		11,511
Equity securities		804		11		26		-		-		841
Other invested assets^(b)		-		86		591		-		-		677
Derivative assets:
Interest rate contracts		4		2,660		-		-		-		2,664
Foreign exchange contracts		-		1,106		1		-		-		1,107
Equity contracts		55		330		103		-		-		488
Credit contracts		-		-		1		-		-		1
Other contracts		-		-		13		-		-		13
Counterparty netting and cash collateral		-		-		-		(1,647)		(1,734)		(3,381)
Total derivative assets		59		4,096		118		(1,647)		(1,734)		892
Short-term investments		1,993		2,047		-		-		-		4,040
Separate account assets		84,260		4,558		-		-		-		88,818
Other assets		-		-		59		-		-		59
Total	$	87,215	$	227,364	$	33,841	$	(1,647)	$	(1,734)	$	345,039
Liabilities:
Policyholder contract deposits	$	-	$	-	$	4,878	$	-	$	-	$	4,878
Derivative liabilities:
Interest rate contracts		-		1,905		15		-		-		1,920
Foreign exchange contracts		-		850		-		-		-		850
Equity contracts		12		32		7		-		-		51
Credit contracts		-		17		223		-		-		240
Other contracts		-		-		5		-		-		5
Counterparty netting and cash collateral		-		-		-		(1,647)		(188)		(1,835)
Total derivative liabilities		12		2,804		250		(1,647)		(188)		1,231
Long-term debt		-		2,263		-		-		-		2,263
Other liabilities		105		85		-		-		-		190
Total	$	117	$	5,152	$	5,128	$	(1,647)	$	(188)	$	8,562

14 AIG | First Quarter 2019 Form 10-Q

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

December 31, 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	$	53	$	3,207	$	-	$	-	$	-	$	3,260
Obligations of states, municipalities and political subdivisions		-		14,001		2,000		-		-		16,001
Non-U.S. governments		69		14,445		11		-		-		14,525
Corporate debt		-		129,836		864		-		-		130,700
RMBS		-		20,178		14,199		-		-		34,377
CMBS		-		11,784		917		-		-		12,701
CDO/ABS		-		8,725		9,102		-		-		17,827
Total bonds available for sale		122		202,176		27,093		-		-		229,391
Other bond securities:
U.S. government and government sponsored entities		11		2,654		-		-		-		2,665
Non-U.S. governments		-		45		-		-		-		45
Corporate debt		-		1,671		-		-		-		1,671
RMBS		-		424		1,290		-		-		1,714
CMBS		-		311		77		-		-		388
CDO/ABS		-		454		4,478		-		-		4,932
Total other bond securities		11		5,559		5,845		-		-		11,415
Equity securities		1,213		13		27		-		-		1,253
Other invested assets^(b)		-		341		587		-		-		928
Derivative assets:
Interest rate contracts		2		2,888		-		-		-		2,890
Foreign exchange contracts		-		1,159		5		-		-		1,164
Equity contracts		133		190		75		-		-		398
Credit contracts		-		-		1		-		-		1
Other contracts		-		-		15		-		-		15
Counterparty netting and cash collateral		-		-		-		(1,713)		(1,840)		(3,553)
Total derivative assets		135		4,237		96		(1,713)		(1,840)		915
Short-term investments		2,416		599		-		-		-		3,015
Separate account assets		77,202		4,645		-		-		-		81,847
Other assets		-		-		58		-		-		58
Total	$	81,099	$	217,570	$	33,706	$	(1,713)	$	(1,840)	$	328,822
Liabilities:
Policyholder contract deposits	$	-	$	-	$	4,116	$	-	$	-	$	4,116
Derivative liabilities:
Interest rate contracts		4		2,004		15		-		-		2,023
Foreign exchange contracts		-		858		-		-		-		858
Equity contracts		12		3		-		-		-		15
Credit contracts		-		8		228		-		-		236
Other contracts		-		-		6		-		-		6
Counterparty netting and cash collateral		-		-		-		(1,713)		(187)		(1,900)
Total derivative liabilities		16		2,873		249		(1,713)		(187)		1,238
Long-term debt		-		2,213		-		-		-		2,213
Other liabilities		16		11		-		-		-		27
Total	$	32	$	5,097	$	4,365	$	(1,713)	$	(187)	$	7,594

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

(b) 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 $5.0 billion as of March 31, 2019 and December 31, 2018, respectively.

AIG | First Quarter 2019 Form 10-Q 15

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.

During the three-month periods ended March 31, 2019 and 2018, we transferred $62 million and $16 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 three-month periods ended March 31, 2019 and 2018, we transferred $51 million and $191 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-month periods ended March 31, 2019 and 2018.

Changes in Level 3 Recurring Fair Value Measurements

The following tables present changes during the three-month periods ended March 31, 2019 and 2018 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 March 31, 2019 and 2018:

				Net												Changes in
				Realized and				Purchases,								Unrealized Gains
				Unrealized				Sales,								(Losses) Included
		Fair Value		Gains (Losses)		Other		Issuances and		Gross		Gross		Fair Value		in Income on
		Beginning		Included		Comprehensive		Settlements,		Transfers		Transfers		End		Instruments Held
(in millions)		of Period		in Income		Income (Loss)		Net		In		Out		of Period		at End of Period
Three Months Ended March 31, 2019
Assets:
Bonds available for sale:
Obligations of states, municipalities
and political subdivisions	$	2,000	$	(1)	$	97	$	24	$	29	$	(13)	$	2,136	$	-
Non-U.S. governments		11		-		-		(4)		-		(4)		3		-
Corporate debt		864		(3)		38		34		654		(55)		1,532		-
RMBS		14,199		227		24		(412)		23		(16)		14,045		-
CMBS		917		1		17		146		-		(189)		892		-
CDO/ABS		9,102		4		54		(45)		92		(367)		8,840		-
Total bonds available for sale		27,093		228		230		(257)		798		(644)		27,448		-
Other bond securities:
Corporate debt		-		-		-		-		-		-		-		-
RMBS		1,290		17		-		(41)		-		-		1,266		-
CMBS		77		4		-		3		-		-		84		3
CDO/ABS		4,478		68		-		(201)		-		(96)		4,249		24
Total other bond securities		5,845		89		-		(239)		-		(96)		5,599		27
Equity securities		27		-		-		-		-		(1)		26		-
Mortgage and other loans receivable		-		-		-		-		-		-		-		-
Other invested assets		587		-		-		4		-		-		591		2
Other assets		58		-		-		1		-		-		59		-
Total	$	33,610	$	317	$	230	$	(491)	$	798	$	(741)	$	33,723	$	29

				Net												Changes in
				Realized and				Purchases,								Unrealized Gains
				Unrealized				Sales,								(Losses) Included
		Fair Value		(Gains) Losses		Other		Issuances and		Gross		Gross		Fair Value		in Income on
		Beginning		Included		Comprehensive		Settlements,		Transfers		Transfers		End		Instruments Held
(in millions)		of Period		in Income		Income (Loss)		Net		In		Out		of Period		at End of Period
Liabilities:
Policyholder contract deposits	$	4,116	$	569	$	-	$	193	$	-	$	-	$	4,878	$	(521)
Derivative liabilities, net:
Interest rate contracts		15		1		-		(1)		-		-		15		(1)
Foreign exchange contracts		(5)		(5)		-		9		-		-		(1)		(1)
Equity contracts		(75)		(16)		-		(5)		-		-		(96)		19
Credit contracts		227		(3)		-		(2)		-		-		222		4
Other contracts		(9)		(17)		-		18		-		-		(8)		17
Total derivative liabilities, net^(a)		153		(40)		-		19		-		-		132		38
Total	$	4,269	$	529	$	-	$	212	$	-	$	-	$	5,010	$	(483)

16 AIG | First Quarter 2019 Form 10-Q

TABLE OF CONTENTS

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

				Net												Changes in
				Realized and				Purchases,								Unrealized Gains
				Unrealized				Sales,								(Losses) Included
		Fair Value		Gains (Losses)		Other		Issuances and		Gross		Gross		Fair Value		in Income on
		Beginning		Included		Comprehensive		Settlements,		Transfers		Transfers		End		Instruments Held
(in millions)		of Period		in Income		Income (Loss)		Net		In		Out		of Period		at End of Period
Three Months Ended March 31, 2018
Assets:
Bonds available for sale:
Obligations of states,
municipalities and
political subdivisions	$	2,404	$	1	$	(75)	$	(69)	$	-	$	-	$	2,261	$	-
Non-U.S. governments		8		(4)		4		1		-		-		9		-
Corporate debt		1,173		(57)		10		248		565		(68)		1,871		-
RMBS		16,136		266		5		(536)		-		(32)		15,839		-
CMBS		624		6		(17)		(23)		-		(6)		584		-
CDO/ABS		8,651		8		(88)		(710)		-		(15)		7,846		-
Total bonds available for sale		28,996		220		(161)		(1,089)		565		(121)		28,410		-
Other bond securities:
Corporate debt		18		1		-		-		-		-		19		-
RMBS		1,464		39		-		(76)		-		-		1,427		51
CMBS		74		(1)		-		(1)		1		-		73		(1)
CDO/ABS		4,956		89		-		(260)		-		(9)		4,776		8
Total other bond securities		6,512		128		-		(337)		1		(9)		6,295		58
Equity securities		-		-		-		3		-		-		3		2
Mortgage and other loans receivable		5		-		-		(5)		-		-		-		-
Other invested assets		250		23		1		18		-		-		292		30
Other assets		-		-		-		-		-		-		-		-
Total	$	35,763	$	371	$	(160)	$	(1,410)	$	566	$	(130)	$	35,000	$	90

				Net												Changes in
				Realized and				Purchases,								Unrealized Gains
				Unrealized				Sales,								(Losses) Included
		Fair Value		(Gains) Losses		Other		Issuances and		Gross		Gross		Fair Value		in Income on
		Beginning		Included		Comprehensive		Settlements,		Transfers		Transfers		End		Instruments Held
(in millions)		of Period		in Income		Income (Loss)		Net		In		Out		of Period		at End of Period
Liabilities:
Policyholder contract deposits	$	4,136	$	(506)	$	-	$	66	$	-	$	-	$	3,696	$	604
Derivative liabilities, net:
Interest rate contracts		22		(3)		-		(2)		-		-		17		3
Foreign exchange contracts		-		(10)		-		11		-		-		1		3
Equity contracts		(82)		4		-		-		-		-		(78)		(4)
Credit contracts		262		(10)		-		(2)		-		-		250		10
Other contracts		(15)		(17)		-		20		-		-		(12)		17
Total derivative liabilities, net^(a)		187		(36)		-		27		-		-		178		29
Total	$	4,323	$	(542)	$	-	$	93	$	-	$	-	$	3,874	$	633

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

AIG | First Quarter 2019 Form 10-Q 17

TABLE OF CONTENTS

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 March 31, 2019
Assets:
Bonds available for sale	$	242	$	(14)	$	-	$	228
Other bond securities		87		2		-		89
Other invested assets		-		-		-		-
Three Months Ended March 31, 2018
Assets:
Bonds available for sale	$	282	$	(62)	$	-	$	220
Other bond securities		23		(4)		109		128
Other invested assets		25		-		(2)		23

		Net		Net Realized
		Investment		Capital		Other
(in millions)		Income	(Gains) Losses			Income		Total
Three Months Ended March 31, 2019
Liabilities:
Policyholder contract deposits	$	-	$	569	$	-	$	569
Derivative liabilities, net		-		(24)		(16)		(40)
Three Months Ended March 31, 2018
Liabilities:
Policyholder contract deposits	$	-	$	(506)	$	-	$	(506)
Derivative liabilities, net		-		1		(37)		(36)

18 AIG | First Quarter 2019 Form 10-Q

TABLE OF CONTENTS

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-month periods ended March 31, 2019 and 2018 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 March 31, 2019
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	47	$	(15)	$	(8)	$	24
Non-U.S. governments		-		-		(4)		(4)
Corporate debt		49		-		(15)		34
RMBS		307		(26)		(693)		(412)
CMBS		184		-		(38)		146
CDO/ABS		198		(156)		(87)		(45)
Total bonds available for sale		785		(197)		(845)		(257)
Other bond securities:
RMBS		-		-		(41)		(41)
CMBS		4		-		(1)		3
CDO/ABS		-		-		(201)		(201)
Total other bond securities		4		-		(243)		(239)
Equity securities		-		-		-		-
Mortgage and other loans receivable		-		-		-		-
Other invested assets		4		-		-		4
Other assets		-		-		1		1
Total assets	$	793	$	(197)	$	(1,087)	$	(491)
Liabilities:
Policyholder contract deposits	$	-	$	173	$	20	$	193
Derivative liabilities, net		(13)		-		32		19
Total liabilities	$	(13)	$	173	$	52	$	212
Three Months Ended March 31, 2018
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	15	$	-	$	(84)	$	(69)
Non-U.S. governments		2		-		(1)		1
Corporate debt		254		(3)		(3)		248
RMBS		233		(5)		(764)		(536)
CMBS		12		-		(35)		(23)
CDO/ABS		495		(851)		(354)		(710)
Total bonds available for sale		1,011		(859)		(1,241)		(1,089)
Other bond securities:
RMBS		1		(5)		(72)		(76)
CMBS		-		-		(1)		(1)
CDO/ABS		-		(4)		(256)		(260)
Total other bond securities		1		(9)		(329)		(337)
Equity securities		3		-		-		3
Mortgage and other loans receivable		-		(5)		-		(5)
Other invested assets		22		-		(4)		18
Total assets	$	1,037	$	(873)	$	(1,574)	$	(1,410)
Liabilities:
Policyholder contract deposits	$	-	$	112	$	(46)	$	66
Derivative liabilities, net		(7)		-		34		27
Total liabilities	$	(7)	$	112	$	(12)	$	93

(a) There were no issuances during the three-month periods ended March 31, 2019 and 2018, respectively.

AIG | First Quarter 2019 Form 10-Q 19

TABLE OF CONTENTS

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 March 31, 2019 and 2018 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 $55 million and $24 million of net losses related to assets and liabilities transferred into Level 3 during the three-month periods ended March 31, 2019 and 2018, respectively, and includes $1 million of net losses related to assets and liabilities transferred out of Level 3 in the three-month period ended March 31, 2019.

Transfers of Level 3 Assets

During the three-month periods ended March 31, 2019 and 2018, 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-month periods ended March 31, 2019 and 2018, 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-month periods ended March 31, 2019 and 2018.

20 AIG | First Quarter 2019 Form 10-Q

TABLE OF CONTENTS

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
	March 31,		Valuation		Range
(in millions)	2019		Technique	Unobservable Input^(b)	(Weighted Average)
Assets:

Obligations of states, municipalities
and political subdivisions	$	1,590	Discounted cash flow	Yield	3.59% - 4.58% (4.08%)

Corporate debt		530	Discounted cash flow	Yield	4.23% - 6.09% (5.16%)

RMBS^(a)		13,243	Discounted cash flow	Constant prepayment rate	3.63% - 12.64% (8.13%)
				Loss severity	38.94% - 75.51% (57.22%)
				Constant default rate	2.17% - 7.14% (4.65%)
				Yield	2.96% - 5.07% (4.01%)

CDO/ABS^(a)		4,554	Discounted cash flow	Yield	3.45% - 5.21% (4.33%)

CMBS		484	Discounted cash flow	Yield	2.81% - 5.81% (4.31%)
Liabilities:

Embedded derivatives within
Policyholder contract deposits:

Guaranteed minimum withdrawal benefits (GMWB)		2,023	Discounted cash flow	Equity volatility	5.85% - 46.25%
				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		2,382	Discounted cash flow	Lapse rate	0.50% - 40.00%
				Mortality multiplier^(c)	42.00% - 162.00%
				Option Budget	1.00% - 4.00%

Indexed Life		448	Discounted cash flow	Base lapse rate	0.00% - 13.00%
				Mortality rate	0.00% - 100.00%

AIG | First Quarter 2019 Form 10-Q 21

TABLE OF CONTENTS

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


		Fair Value at
		December 31,	Valuation		Range
(in millions)		2018	Technique	Unobservable Input^(b)	(Weighted Average)
Assets:

Obligations of states, municipalities
and political subdivisions	$	1,473	Discounted cash flow	Yield	3.91% - 5.00% (4.46%)

Corporate debt		445	Discounted cash flow	Yield	4.35% - 5.99% (5.17%)

RMBS^(a)		13,608	Discounted cash flow	Constant prepayment rate	4.58% - 14.00% (9.29%)
				Loss severity	39.66% - 74.40% (57.03%)
				Constant default rate	2.46% - 7.39% (4.92%)
				Yield	3.31% - 5.50% (4.40%)

CDO/ABS^(a)		5,461	Discounted cash flow	Yield	3.65% - 5.10% (4.37%)

CMBS		447	Discounted cash flow	Yield	3.29% - 6.07% (4.68%)
Liabilities:

Embedded derivatives within
Policyholder contract deposits:

GMWB		1,943	Discounted cash flow	Equity volatility	6.05% - 47.65%
				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		1,778	Discounted cash flow	Lapse rate	0.50% - 40.00%
				Mortality multiplier^(c)	42.00% - 162.00%
				Option Budget	1.00% - 3.00%

Indexed Life		374	Discounted cash flow	Base lapse rate	0.00% - 13.00%
				Mortality rate	0.00% - 100.00%

(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.

22 AIG | First Quarter 2019 Form 10-Q

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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.

AIG | First Quarter 2019 Form 10-Q 23

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

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

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

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

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

		March 31, 2019				December 31, 2018
			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	$	970	$	1,378	$	847	$	1,327

Real Estate / Infrastructure	Investments in real estate properties and infrastructure positions, including power plants and other energy generating facilities		232		179		190		83

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		130		116		126		127

Growth Equity	Funds that make investments in established companies for the purpose of growing their businesses		371		29		362		28

Mezzanine	Funds that make investments in the junior debt and equity securities of leveraged companies		218		97		211		75

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		623		285		514		307
Total private equity funds			2,544		2,084		2,250		1,947
*Hedge funds:*
Event-driven	Securities of companies undergoing material structural changes, including mergers, acquisitions and other reorganizations		815		-		787		-

Long-short	Securities that the manager believes are undervalued, with corresponding short positions to hedge market risk		725		-		863		-

Macro	Investments that take long and short positions in financial instruments based on a top-down view of certain economic and capital market conditions		820		-		887		-

Distressed	Securities of companies that are in default, under bankruptcy protection or troubled		18		-		21		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		160		1		158		1
Total hedge funds			2,538		1		2,716		9
Total		$	5,082	$	2,085	$	4,966	$	1,956

24 AIG | First Quarter 2019 Form 10-Q

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 March 31, 2019, assuming average original expected lives of 10 years for the funds, 19 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, 43 percent between four and six years and 38 percent between seven and 10 years.

The hedge fund investments included above, which are carried at fair value, are generally redeemable monthly (35 percent), quarterly (29 percent), semi-annually (10 percent) and annually (26 percent), with redemption notices ranging from one day to 180 days. At March 31, 2019, investments representing approximately 56 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 2019.

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:

Three Months Ended March 31,	Gain (Loss)
(in millions)		2019		2018
Assets:
Bond and equity securities	$	355	$	23
Alternative investments^(a)		230		128
Liabilities:
Long-term debt^(b)		(60)		52
Total gain	$	525	$	203

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

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

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. 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.

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:

March 31, 2019

December 31, 2018

Outstanding

(in millions)

Fair Value

Principal Amount

Difference

Fair Value

Principal Amount

Difference

Liabilities:

Long-term debt^*

2,263

1,685

578

2,213

1,653

560

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

AIG | First Quarter 2019 Form 10-Q 25

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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
		Non-Recurring Basis							Three Months Ended March 31,
(in millions)		Level 1		Level 2		Level 3		Total		2019		2018
March 31, 2019
Other investments	$	-	$	-	$	207	$	207	$	41	$	28
Other assets		-		-		1		1		8		-
Total	$	-	$	-	$	208	$	208	$	49	$	28
December 31, 2018
Other investments	$	-	$	-	$	315	$	315
Other assets		-		-		11		11
Total	$	-	$	-	$	326	$	326

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
March 31, 2019
Assets:
Mortgage and other loans receivable	$	-	$	107	$	44,870	$	44,977	$	43,834
Other invested assets		-		699		6		705		705
Short-term investments		-		7,093		-		7,093		7,093
Cash		2,565		-		-		2,565		2,565
Other assets		348		15		-		363		363
Liabilities:
Policyholder contract deposits associated
with investment-type contracts		-		337		119,312		119,649		122,616
Other liabilities		-		1,606		-		1,606		1,606
Long-term debt		1,044		24,384		8,432		33,860		33,513
December 31, 2018
Assets:
Mortgage and other loans receivable	$	-	$	105	$	43,522	$	43,627	$	43,135
Other invested assets		-		731		6		737		737
Short-term investments		-		6,659		-		6,659		6,659
Cash		2,873		-		-		2,873		2,873
Other assets		308		35		-		343		343
Liabilities:
Policyholder contract deposits associated
with investment-type contracts		-		339		121,035		121,374		120,602
Other liabilities		-		1,154		-		1,154		1,154
Long-term debt		-		22,822		8,775		31,597		32,327

26 AIG | First Quarter 2019 Form 10-Q

TABLE OF CONTENTS

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:

										Other-Than-
		Amortized		Gross		Gross				Temporary
		Cost or		Unrealized		Unrealized		Fair		Impairments
(in millions)		Cost		Gains		Losses		Value		in AOCI^(a)
March 31, 2019
Bonds available for sale:
U.S. government and government sponsored entities	$	3,267	$	151	$	(17)	$	3,401	$	-
Obligations of states, municipalities and political subdivisions		14,952		1,013		(43)		15,922		-
Non-U.S. governments		14,799		600		(125)		15,274		-
Corporate debt		133,768		6,314		(1,409)		138,673		(24)
Mortgage-backed, asset-backed and collateralized:
RMBS		31,324		2,871		(191)		34,004		1,171
CMBS		12,895		355		(89)		13,161		31
CDO/ABS		17,603		287		(124)		17,766		17
Total mortgage-backed, asset-backed and collateralized		61,822		3,513		(404)		64,931		1,219
Total bonds available for sale^(b)	$	228,608	$	11,591	$	(1,998)	$	238,201	$	1,195
December 31, 2018
Bonds available for sale:
U.S. government and government sponsored entities	$	3,170	$	132	$	(42)	$	3,260	$	-
Obligations of states, municipalities and political subdivisions		15,421		701		(121)		16,001		4
Non-U.S. governments		14,376		451		(302)		14,525		-
Corporate debt		130,436		3,911		(3,647)		130,700		4
Mortgage-backed, asset-backed and collateralized:
RMBS		31,940		2,754		(317)		34,377		1,155
CMBS		12,673		242		(214)		12,701		31
CDO/ABS		17,764		228		(165)		17,827		17
Total mortgage-backed, asset-backed and collateralized		62,377		3,224		(696)		64,905		1,203
Total bonds available for sale^(b)	$	225,780	$	8,419	$	(4,808)	$	229,391	$	1,211

(a) 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.

(b) At March 31, 2019 and December 31, 2018, bonds available for sale held by us that were below investment grade or not rated totaled $29.1 billion and $28.8 billion, respectively.

AIG | First Quarter 2019 Form 10-Q 27

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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:

	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
March 31, 2019
Bonds available for sale:
U.S. government and government sponsored entities	$	508	$	10	$	356	$	7	$	864	$	17
Obligations of states, municipalities and political
subdivisions		331		8		935		35		1,266		43
Non-U.S. governments		2,642		52		1,635		73		4,277		125
Corporate debt		16,010		520		21,874		889		37,884		1,409
RMBS		4,715		73		3,800		118		8,515		191
CMBS		1,524		20		2,796		69		4,320		89
CDO/ABS		7,121		99		1,554		25		8,675		124
Total bonds available for sale	$	32,851	$	782	$	32,950	$	1,216	$	65,801	$	1,998
December 31, 2018
Bonds available for sale:
U.S. government and government sponsored entities	$	574	$	13	$	873	$	29	$	1,447	$	42
Obligations of states, municipalities and political
subdivisions		1,965		51		1,530		70		3,495		121
Non-U.S. governments		3,851		149		2,422		153		6,273		302
Corporate debt		47,364		2,181		20,056		1,466		67,420		3,647
RMBS		5,231		94		5,641		223		10,872		317
CMBS		2,646		47		4,264		167		6,910		214
CDO/ABS		9,169		144		1,324		21		10,493		165
Total bonds available for sale	$	70,800	$	2,679	$	36,110	$	2,129	$	106,910	$	4,808

At March 31, 2019, we held 10,388 individual fixed maturity securities that were in an unrealized loss position, of which 4,656 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 March 31, 2019 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.

28 AIG | First Quarter 2019 Form 10-Q

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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
March 31, 2019
Due in one year or less	$	10,113	$	10,263	$	2,009	$	1,978
Due after one year through five years		46,478		47,484		11,419		11,088
Due after five years through ten years		44,185		45,355		15,183		14,787
Due after ten years		66,010		70,168		17,274		16,438
Mortgage-backed, asset-backed and collateralized		61,822		64,931		21,914		21,510
Total	$	228,608	$	238,201	$	67,799	$	65,801
December 31, 2018
Due in one year or less	$	9,539	$	9,674	$	2,322	$	2,294
Due after one year through five years		47,400		47,905		17,382		16,844
Due after five years through ten years		42,363		42,045		27,724		26,517
Due after ten years		64,101		64,862		35,319		32,980
Mortgage-backed, asset-backed and collateralized		62,377		64,905		28,971		28,275
Total	$	225,780	$	229,391	$	111,718	$	106,910

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 March 31,		2019				2018
		Gross		Gross		Gross		Gross
	Realized		Realized		Realized		Realized
(in millions)		Gains		Losses		Gains		Losses
Fixed maturity securities	$	93	$	124	$	70	$	60
Equity securities		-		-		16		-
Total	$	93	$	124	$	86	$	60

For the three-month periods ended March 31, 2019 and 2018, the aggregate fair value of available for sale securities sold was $6.4 billion and $5.5 billion, respectively, which resulted in net realized capital gains (losses) of $(31) million and $26 million, respectively.

AIG | First Quarter 2019 Form 10-Q 29

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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:

		March 31, 2019				December 31, 2018
		Fair	Percent			Fair	Percent
(in millions)		Value	of Total			Value	of Total
Fixed maturity securities:
U.S. government and government sponsored entities	$	2,780	23	%	$	2,665	21	%
Non-U.S. governments		51	-			45	-
Corporate debt		1,745	14			1,671	13
Mortgage-backed, asset-backed and collateralized:
RMBS		1,757	14			1,714	14
CMBS		399	3			388	3
CDO/ABS and other collateralized^*		4,779	39			4,932	39
Total mortgage-backed, asset-backed and collateralized		6,935	56			7,034	56
Total fixed maturity securities		11,511	93			11,415	90
Equity securities		841	7			1,253	10
Total	$	12,352	100	%	$	12,668	100	%

* Includes $164 million and $178 million of U.S. government agency-backed ABS at March 31, 2019 and December 31, 2018, respectively.

Other Invested Assets

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

		March 31,		December 31,
(in millions)		2019		2018
Alternative investments^{(a) (b)}	$	8,711	$	8,966
Investment real estate^(c)		9,204		8,935
All other investments		1,428		1,440
Total	$	19,343	$	19,341

(a) At March 31, 2019, included hedge funds of $3.9 billion, private equity funds of $4.4 billion, and affordable housing partnerships of $392 million. At December 31, 2018, included hedge funds of $4.2 billion, private equity funds of $4.3 billion, and affordable housing partnerships of $438 million.

(b) At March 31, 2019, approximately 72 percent of our hedge fund portfolio is available for redemption in 2019. The remaining 28 percent will be available for redemption between 2020 and 2027.

(c) Net of accumulated depreciation of $633 million and $598 million at March 31, 2019 and December 31, 2018, respectively.

Net Investment Income

The following table presents the components of Net investment income:

Three Months Ended March 31,
(in millions)		2019		2018
Available for sale fixed maturity securities, including short-term investments	$	2,653	$	2,610
Other fixed maturity securities		327		(21)
Equity securities		79		(32)
Interest on mortgage and other loans		498		450
Alternative investments^(a)		419		337
Real estate		69		31
Other investments		(52)		10
Total investment income		3,993		3,385
Investment expenses		114		124
Net investment income	$	3,879	$	3,261

(a) Includes income from hedge funds, private equity funds and affordable housing partnerships. Hedge funds are recorded as of the balance sheet date. Private equity funds are generally reported on a one-quarter lag.

30 AIG | First Quarter 2019 Form 10-Q

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

Net Realized Capital Gains and Losses

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

Three Months Ended March 31,
(in millions)		2019		2018
Sales of fixed maturity securities	$	(31)	$	10
Sales of equity securities		-		16
Other-than-temporary impairments:
Change in intent		(3)		(49)
Foreign currency declines		(6)		(6)
Issuer-specific credit events		(71)		(32)
Adverse projected cash flows		(3)		-
Provision for loan losses		(24)		(24)
Foreign exchange transactions		(37)		53
Variable annuity embedded derivatives, net of related hedges		(261)		147
All other derivatives and hedge accounting		(72)		(225)
Other		62		91
Net realized capital losses	$	(446)	$	(19)

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 March 31,
(in millions)		2019		2018
Increase (decrease) in unrealized appreciation (depreciation) of investments:
Fixed maturity securities	$	5,982	$	(4,969)
Other investments		(69)		(25)
Total increase (decrease) in unrealized appreciation (depreciation) of investments	$	5,913	$	(4,994)

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

				Other Invested
(in millions)		Equities		Assets		Total
Three Months Ended March 31, 2019
Net gains and losses recognized during the period on equity securities	$	79	$	239	$	318
Less: Net gains and losses recognized during the period on equity securities sold
during the period		19		10		29
Unrealized gains and losses recognized during the reporting period on equity
securities still held at the reporting date	$	60	$	229	$	289
Three Months Ended March 31, 2018
Net gains and losses recognized during the period on equity securities	$	(31)	$	192	$	161
Less: Net gains and losses recognized during the period on equity securities sold
during the period		(8)		(1)		(9)
Unrealized gains and losses recognized during the reporting period on equity
securities still held at the reporting date	$	(23)	$	193	$	170

AIG | First Quarter 2019 Form 10-Q 31

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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 2018 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 March 31,
(in millions)		2019		2018
Balance, beginning of year	$	-	$	526
Increases due to:
Credit impairments on new securities subject to impairment losses		68		14
Additional credit impairments on previously impaired securities		6		17
Reductions due to:
Credit impaired securities fully disposed for which there was no
prior intent or requirement to sell		(21)		(51)
Accretion on securities previously impaired due to credit^*		(53)		(148)
Balance, end of period	$	-	$	358

* 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)	$	36,385
Cash flows expected to be collected^*		29,862
Recorded investment in acquired securities		20,156

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

32 AIG | First Quarter 2019 Form 10-Q

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

(in millions)	March 31, 2019		December 31, 2018
Outstanding principal balance	$	12,063	$	12,495
Amortized cost		8,307		8,646
Fair value		9,973		10,280

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

Three Months Ended March 31,
(in millions)		2019		2018
Balance, beginning of year	$	7,210	$	7,501
Newly purchased PCI securities		12		23
Accretion		(172)		(187)
Effect of changes in interest rate indices		(134)		206
Net reclassification from (to) non-accretable difference, including effects of prepayments		(115)		58
Balance, end of period	$	6,801	$	7,601

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)		March 31, 2019		December 31, 2018
Fixed maturity securities available for sale	$	1,503	$	1,050
Other bond securities, at fair value	$	184	$	122

At March 31, 2019 and December 31, 2018, amounts borrowed under repurchase and securities lending agreements totaled $1.7 billion and $1.2 billion, respectively.

AIG | First Quarter 2019 Form 10-Q 33

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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
March 31, 2019
Bonds available for sale:
Non-U.S. governments	$	41	$	-	$	-	$	-	$	-	$	41
Corporate debt		46		7		-		-		-		53
Other bond securities:
U.S. government and government sponsored entities		86		-		-		-		-		86
Non-U.S. governments		-		3		-		-		-		3
Corporate debt		-		63		32		-		-		95
Total	$	173	$	73	$	32	$	-	$	-	$	278

December 31, 2018
Bonds available for sale:
Non-U.S. governments	$	25	$	35	$	-	$	-	$	-	$	60
Corporate debt		51		55		-		-		-		106
Other bond securities:
U.S. government and government sponsored entities		11		-		-		-		-		11
Non-U.S. governments		-		3		-		-		-		3
Corporate debt		17		38		53		-		-		108
Total	$	104	$	131	$	53	$	-	$	-	$	288

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
March 31, 2019
Bonds available for sale:
Obligations of states, municipalities and political
subdivisions	$	-	$	77	$	55	$	-	$	-	$	132
Non-U.S. governments		-		19		23		-		-		42
Corporate debt		-		276		528		431		-		1,235
Total	$	-	$	372	$	606	$	431	$	-	$	1,409

December 31, 2018
Bonds available for sale:
Obligations of states, municipalities and political
subdivisions	$	-	$	50	$	130	$	-	$	-	$	180
Non-U.S. governments		-		21		8		-		-		29
Corporate debt		-		330		345		-		-		675
Total	$	-	$	401	$	483	$	-	$	-	$	884

34 AIG | First Quarter 2019 Form 10-Q

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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)		March 31, 2019		December 31, 2018
Securities collateral pledged to us	$	1,374	$	426
Amount sold or repledged by us		121		106

At March 31, 2019 and December 31, 2018, amounts loaned under reverse repurchase agreements totaled $1.4 billion and $426 million, 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 $8.2 billion and $7.9 billion at March 31, 2019 and December 31, 2018, 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 $185 million and $202 million of stock in FHLBs at March 31, 2019 and December 31, 2018, 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 $4.6 billion and $2.1 billion, respectively, at March 31, 2019 and $4.2 billion and $2.1 billion, respectively, at December 31, 2018.

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 $1.6 billion at both March 31, 2019 and December 31, 2018, 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 $262 million and $273 million, comprised of bonds available for sale and short term investments at March 31, 2019 and December 31, 2018, respectively.

AIG | First Quarter 2019 Form 10-Q 35

TABLE OF CONTENTS

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:

	March 31,			December 31,
(in millions)		2019		2018
Commercial mortgages^*	$	33,665	$	32,882
Residential mortgages		6,500		6,532
Life insurance policy loans		2,124		2,147
Commercial loans, other loans and notes receivable		1,967		1,971
Total mortgage and other loans receivable		44,256		43,532
Allowance for credit losses		(422)		(397)
Mortgage and other loans receivable, net	$	43,834	$	43,135

* 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 23 percent and 10 percent, respectively, at March 31, 2019, and 22 percent and 11 percent, respectively, at December 31, 2018).

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
March 31, 2019
Loan-to-Value Ratios^(b)
Less than 65%	$	20,054	$	2,274	$	247	$	22,575
65% to 75%		9,266		297		203		9,766
76% to 80%		838		20		20		878
Greater than 80%		244		96		106		446
Total commercial mortgages	$	30,402	$	2,687	$	576	$	33,665

December 31, 2018
Loan-to-Value Ratios^(b)
Less than 65%	$	19,204	$	2,543	$	250	$	21,997
65% to 75%		9,060		300		203		9,563
76% to 80%		476		20		15		511
Greater than 80%		596		103		112		811
Total commercial mortgages	$	29,336	$	2,966	$	580	$	32,882

(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 1.9 X for both periods ended March 31, 2019 and December 31, 2018.

(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 for both periods ended March 31, 2019, and December 31, 2018.

36 AIG | First Quarter 2019 Form 10-Q

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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 $
March 31, 2019
Credit Quality Performance
Indicator:
In good standing	762	$	12,061	$	9,797	$	5,613	$	2,989	$	2,511	$	584	$	33,555	100	%
Restructured^(a)	2		-		94		-		-		16		-		110	-
90 days or less delinquent	-		-		-		-		-		-		-		-	-
>90 days delinquent or in
process of foreclosure	-		-		-		-		-		-		-		-	-
Total^(b)	764	$	12,061	$	9,891	$	5,613	$	2,989	$	2,527	$	584	$	33,665	100	%
Allowance for credit losses:
Specific		$	-	$	2	$	-	$	-	$	1	$	-	$	3	-	%
General			126		104		51		12		20		7		320	1
Total allowance for credit losses		$	126	$	106	$	51	$	12	$	21	$	7	$	323	1	%

December 31, 2018
Credit Quality Performance
Indicator:
In good standing	762	$	11,190	$	9,774	$	5,645	$	3,074	$	2,507	$	580	$	32,770	100	%
Restructured^(a)	2		-		96		-		-		16		-		112	-
90 days or less delinquent	-		-		-		-		-		-		-		-	-
>90 days delinquent or in
process of foreclosure	-		-		-		-		-		-		-		-	-
Total^(b)	764	$	11,190	$	9,870	$	5,645	$	3,074	$	2,523	$	580	$	32,882	100	%
Allowance for credit losses:
Specific		$	-	$	2	$	-	$	-	$	1	$	-	$	3	-	%
General			122		104		51		13		19		6		315	1
Total allowance for credit losses		$	122	$	106	$	51	$	13	$	20	$	6	$	318	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 2018 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 2018 Annual Report.

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

Three Months Ended March 31,	2019						2018
		Commercial		Other				Commercial		Other
(in millions)		Mortgages		Loans		Total		Mortgages		Loans		Total
Allowance, beginning of year	$	318	$	79	$	397	$	247	$	75	$	322
Loans charged off		-		-		-		-		-		-
Recoveries of loans previously charged off		-		-		-		-		-		-
Net charge-offs		-		-		-		-		-		-
Provision for loan losses		5		20		25		27		(2)		25
Other		-		-		-		-		-		-
Allowance, end of period	$	323 ^*	$	99	$	422	$	274 ^*	$	73	$	347

* Of the total allowance, $3 million and $23 million relate to individually assessed credit losses on $148 million and $82 million of commercial mortgages at March 31, 2019 and 2018, respectively.

AIG | First Quarter 2019 Form 10-Q 37

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

There were no loans modified in troubled debt restructurings during the three-month periods ended March 31, 2019, and March 31, 2018.

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
March 31, 2019
Assets:
Bonds available for sale	$	-	$	8,285	$	-	$	-	$	8,285
Other bond securities		-		3,802		-		2		3,804
Mortgage and other loans receivable		-		3,593		-		-		3,593
Other invested assets		5,438		-		3,650		25		9,113
Other^(a)		603		2,064		459		72		3,198
Total assets^(b)	$	6,041	$	17,744	$	4,109	$	99	$	27,993
Liabilities:
Long-term debt	$	2,593	$	3,764	$	2,152	$	5	$	8,514
Other^(c)		227		546		207		23		1,003
Total liabilities	$	2,820	$	4,310	$	2,359	$	28	$	9,517
December 31, 2018
Assets:
Bonds available for sale	$	-	$	7,662	$	-	$	-	$	7,662
Other bond securities		-		3,923		-		2		3,925
Mortgage and other loans receivable		-		3,693		-		-		3,693
Other invested assets		5,212		-		3,142		24		8,378
Other^(a)		580		1,581		394		70		2,625
Total assets^(b)	$	5,792	$	16,859	$	3,536	$	96	$	26,283
Liabilities:
Long-term debt	$	2,577	$	3,154	$	1,834	$	4	$	7,569
Other^(c)		227		165		159		24		575
Total liabilities	$	2,804	$	3,319	$	1,993	$	28	$	8,144

(a) Comprised primarily of Short-term investments and Other assets at March 31, 2019 and December 31, 2018.

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

(d) At March 31, 2019 and December 31, 2018, off-balance sheet exposure primarily consisting of commitments to real estate and investment entities was $2.9 billion and $1.4 billion, respectively.

(e) At March 31, 2019 and December 31, 2018, $16.9 billion and $16.0 billion, respectively, of the total assets of consolidated securitization vehicles were owed to AIG Parent or its subsidiaries.

38 AIG | First Quarter 2019 Form 10-Q

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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
March 31, 2019
Real estate and investment entities^(a)	$	264,238	$	6,492	$	3,190		$	9,682
Affordable housing partnerships		3,650		544		-			544
Other		5,365		327		-	^(c)		327
Total	$	273,253	$	7,363	$	3,190		$	10,553
December 31, 2018
Real estate and investment entities^(a)	$	309,598	$	6,820	$	2,501		$	9,321
Affordable housing partnerships		4,116		607		-			607
Other		2,813		284		1,222	^(c)		1,506
Total	$	316,527	$	7,711	$	3,723		$	11,434

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

(b) At March 31, 2019 and December 31, 2018, $7.0 billion and $7.4 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 2018 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 2018 Annual Report.

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

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

AIG | First Quarter 2019 Form 10-Q 39

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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:

	March 31, 2019								December 31, 2018
	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	$	-	$	-	$	830	$	14	$	10	$	-	$	866	$	19
Foreign exchange contracts		5,749		371		2,954		150		6,357		363		2,536		147
Derivatives not designated
as hedging instruments:^(a)
Interest rate contracts		50,037		2,664		28,818		1,906		42,821		2,890		27,329		2,004
Foreign exchange contracts		13,113		736		4,108		700		11,134		801		5,434		711
Equity contracts		14,356		488		3,938		51		17,807		398		2,399		15
Credit contracts^(b)		3		1		1,441		240		8		1		1,406		236
Other contracts^(c)		39,096		13		57		5		39,070		15		58		6
Total derivatives, gross	$	122,354	$	4,273	$	42,146	$	3,066	$	117,207	$	4,468	$	40,028	$	3,138
Counterparty netting^(d)				(1,647)				(1,647)				(1,713)				(1,713)
Cash collateral^(e)				(1,734)				(188)				(1,840)				(187)
Total derivatives on condensed
consolidated balance sheets^(f)			$	892			$	1,231			$	915			$	1,238

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

(b) As of March 31, 2019 and December 31, 2018, included CDSs on super senior multi-sector CDOs with a net notional amount of $580 million and $592 million (fair value liability of $217 million and $224 million), respectively. The net notional amount represents the maximum exposure to loss on the portfolio. As of March 31, 2019 and December 31, 2018, 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 March 31, 2019 and December 31, 2018. Fair value of liabilities related to bifurcated embedded derivatives was $4.9 billion and $4.1 billion, respectively, at March 31, 2019 and December 31, 2018. 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.

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 $1.7 billion at both March 31, 2019 and December 31, 2018. 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 $1.9 billion and $2.1 billion at March 31, 2019 and December 31, 2018, 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.

40 AIG | First Quarter 2019 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 9. Derivatives and Hedge Accounting

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-month periods ended March 31, 2019 and 2018, we recognized gains (losses) of $64 million and $(120) 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.

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:
	Hedging		Excluded		Hedged
(in millions)	Derivatives^(a)		Components^(b)		Items		Net Impact
Three Months Ended March 31, 2019
Interest rate contracts:
Realized capital gains/(losses)	$	-	$	-	$	-	$	-
Interest credited to policyholder account balances		5		-		(5)		-
Net investment income		(1)		-		1		-
Foreign exchange contracts:
Realized capital gains/(losses)		(8)		(14)		8		(14)
Three Months Ended March 31, 2018
Interest rate contracts:
Realized capital gains/(losses)	$	(8)	$	-	$	9	$	1
Interest credited to policyholder account balances		-		-		-		-
Net investment income		-		-		-		-
Foreign exchange contracts:
Realized capital gains/(losses)		(8)		(33)		8		(33)

(a) Gains and losses on derivative instruments designated and qualifying in fair value hedges that are included in the assessment of hedge effectiveness.

(b) Gains and losses on derivative instruments designated and qualifying in fair value hedges that are excluded from the assessment of hedge effectiveness and recognized in earnings on a mark-to-market basis.

AIG | First Quarter 2019 Form 10-Q 41

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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)
Three Months Ended March 31,	Recognized in Earnings
(in millions)		2019		2018
By Derivative Type:
Interest rate contracts	$	359	$	(398)
Foreign exchange contracts		(28)		(139)
Equity contracts		(208)		(73)
Credit contracts		(8)		11
Other contracts		16		17
Embedded derivatives		(449)		591
Total	$	(318)	$	9
By Classification:
Policy fees	$	17	$	17
Net investment income		(5)		(4)
Net realized capital losses		(334)		(13)
Other income		-		12
Policyholder benefits and claims incurred		4		(3)
Total	$	(318)	$	9

Credit Risk-Related Contingent Features

We estimate that at March 31, 2019, 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 $63 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 $436 million and $423 million at March 31, 2019 and December 31, 2018, respectively. The aggregate fair value of assets posted as collateral under these contracts at March 31, 2019 and December 31, 2018, was approximately $480 million and $453 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 $3.8 billion and $3.9 billion at March 31, 2019 and December 31, 2018, respectively. These securities have par amounts of $8.3 billion and $8.5 billion at March 31, 2019 and December 31, 2018, respectively, and have remaining stated maturity dates that extend to 2052.

42 AIG | First Quarter 2019 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 such adjustment 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 $12.7 billion and $12.3 billion at March 31, 2019 and December 31, 2018, 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 March 31, 2019 and December 31, 2018, we held collateral of approximately $9.0 billion and $9.2 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
	March 31,
(in millions)		2019		2018
Liability for unpaid loss and loss adjustment expenses, beginning of period	$	83,639	$	78,393
Reinsurance recoverable		(31,690)		(26,708)
Net Liability for unpaid loss and loss adjustment expenses, beginning of period		51,949		51,685
Losses and loss adjustment expenses incurred:
Current year		4,805		4,698
Prior years, excluding discount and amortization of deferred gain		(15)		(40)
Prior years, discount charge (benefit)		497		(205)
Prior years, amortization of deferred gain on retroactive reinsurance^(a)		(86)		(39)
Total losses and loss adjustment expenses incurred		5,201		4,414
Losses and loss adjustment expenses paid:
Current year		(344)		(610)
Prior years		(6,120)		(4,779)
Total losses and loss adjustment expenses paid		(6,464)		(5,389)
Other changes:
Foreign exchange effect		216		274
Retroactive reinsurance adjustment (net of discount)^(b)		(190)		(97)
Total other changes		26		177
Liability for unpaid loss and loss adjustment expenses, end of period:
Net liability for unpaid losses and loss adjustment expenses		50,712		50,887
Reinsurance recoverable		31,784		27,211
Total	$	82,496	$	78,098

(a) Includes $9 million and $5 million for the retroactive reinsurance agreement with NICO covering U.S. asbestos exposures for the three-month periods ended March 31, 2019 and 2018, respectively.

(b) Includes change in discount on retroactive reinsurance of $(307) million and $128 million for the three-month periods ended March 31, 2019 and 2018, respectively.

AIG | First Quarter 2019 Form 10-Q 43

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

On January 20, 2017, we entered into an adverse development reinsurance agreement with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc. (Berkshire), under which we transferred to NICO 80 percent of the reserve risk on substantially all of our U.S. Commercial long-tail exposures for accident years 2015 and prior. Under this agreement, we ceded to NICO 80 percent of the paid losses on subject business paid on or after January 1, 2016 in excess of $25 billion of net paid losses, up to an aggregate limit of $25 billion. At NICO’s 80 percent share, NICO’s limit of liability under the contract is $20 billion. We account for this transaction as retroactive reinsurance. We paid total consideration, including interest, of $10.2 billion. The consideration was placed into a collateral trust account as security for NICO’s claim payment obligations, and Berkshire has provided a parental guarantee to secure the obligations of NICO under the agreement. The total paid claims subject to the agreement as of March 31, 2019 were below the attachment point.

Discounting of Loss Reserves

At March 31, 2019, the loss reserves reflect a net loss reserve discount of $1.9 billion, including tabular and non-tabular calculations based upon the following assumptions:

The discount for asbestos reserves has been 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 $603 million of tabular discount and $1.3 billion of non-tabular discount for workers’ compensation as of March 31, 2019. During the three-month periods ended March 31, 2019 and 2018, the benefit/(charge) from changes in discount of $(473) million and $205 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:

	March 31, 2019						December 31, 2018
	North						North
	America						America
	Commercial			Legacy			Commercial			Legacy
(in millions)	Insurance			Portfolio		Total	Insurance			Portfolio		Total
U.S. workers' compensation	$	2,387	$	894	$	3,281	$	2,782	$	973	$	3,755
Retroactive reinsurance		(1,412)		-		(1,412)		(1,720)		-		(1,720)
Total reserve discount^*	$	975	$	894	$	1,869	$	1,062	$	973	$	2,035

* Excludes $198 million and $163 million of discount related to certain long tail liabilities in the United Kingdom at March 31, 2019 and December 31, 2018, respectively.

44 AIG | First Quarter 2019 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 March 31,	2019						2018
	North						North
	America						America
	Commercial		Legacy				Commercial		Legacy
(in millions)	Insurance		Portfolio			Total	Insurance		Portfolio			Total
Current accident year	$	24	$	-	$	24	$	19	$	-	$	19
Accretion and other adjustments to prior year discount		(251)		(13)		(264)		45		(18)		27
Effect of interest rate changes		(167)		(66)		(233)		123		36		159
Net reserve discount benefit (charge)		(394)		(79)		(473)		187		18		205
Change in discount on loss reserves ceded under
retroactive reinsurance		307		-		307		(128)		-		(128)
Net change in total reserve discount^(a)	$	(87)	$	(79)	$	(166)	$	59	$	18	$	77

(a) Excludes $35 million and $(5) million discount related to certain long tail liabilities in the United Kingdom for the three-month periods ended March 31, 2019 and 2018, respectively.

During the three-month period ended March 31, 2019, effective interest rates declined due to a decrease in the forward yield curve component of the discount rates. This decrease reflects a decline in U.S. Treasury rates. The decrease together with certain changes in payout pattern assumptions resulted in a decrease in the loss reserve discount by $233 million in the first quarter of 2019.

During the three-month period ended March 31, 2018, effective interest rates increased due to an increase in the forward yield curve component of the discount rates. This increase reflects an incline in U.S. Treasury rates. The increase together with certain changes in payout pattern assumptions resulted in an increase in the loss reserve discount by $159 million in the first quarter of 2018.

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 as may be discussed below, that any such charges are likely to have a material adverse effect on our financial position or results of operation.

AIG | First Quarter 2019 Form 10-Q 45

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

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.

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 $7.3 billion at March 31, 2019.

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 March 31, 2019 was $82 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.

46 AIG | First Quarter 2019 Form 10-Q

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

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 of AIG Life Holdings, Inc. (AIGLH), see Note 16.

12. Equity

Shares Outstanding

Preferred Stock

On March 14, 2019, we issued 20,000 shares of 5.85% Series A Non-Cumulative Preferred Stock (Series A Preferred Stock) (equivalent to 20,000,000 Depositary Shares, each representing a 1/1,000th interest in a share of Series A Preferred Stock), $5.00 par value and $25,000 liquidation preference per share (equivalent to $25 per Depositary Share). After underwriting discounts and expenses, we received net proceeds of approximately $485 million.

We may redeem the Series A Preferred Stock at our option, (a) in whole, but not in part, at any time prior to March 15, 2024, within 90 days after the occurrence of a “Rating Agency Event,” at a redemption price equal to $25,500 per share of the Series A Preferred Stock (equivalent to $25.50 per Depositary Share), plus an amount equal to any dividends per share that have been declared but not paid prior to the redemption date (but no amount due in respect of any dividends that have not been declared prior to such date), or (b) (i) in whole, but not in part, at any time prior to March 15, 2024, within 90 days after the occurrence of a “Regulatory Capital Event,” or (ii) in whole or in part, from time to time, on or after March 15, 2024, in each case, at a redemption price equal to $25,000 per share of the Series A Preferred Stock (equivalent to $25.00 per Depositary Share), plus an amount equal to any dividends per share that have been declared but not paid prior to the redemption date (but no amount due in respect of any dividends that have not been declared prior to such date).

A “Rating Agency Event” is generally defined to mean that any nationally recognized statistical rating organization within the meaning of Section 3(a)(62) of the Exchange Act that then publishes a rating for us amends, clarifies or changes the criteria it uses to assign equity credit to securities such as the Series A Preferred Stock, which amendment, clarification or change results in the shortening of the length of time the Series A Preferred Stock is assigned a particular level of equity credit by that rating agency as compared to the length of time it would have been assigned that level of equity credit by that rating agency or its predecessor on the initial issuance of the Series A Preferred Stock, or the lowering of the equity credit (including up to a lesser amount) assigned to the Series A Preferred Stock by that rating agency as compared to the equity credit assigned by that rating agency or its predecessor on the initial issuance of the Series A Preferred Stock. A “Regulatory Capital Event” is generally defined to mean our good faith determination that as a result of a change in law, rule or regulation, or a proposed change or an official judicial or administrative pronouncement, there is more than an insubstantial risk that the full liquidation preference of the Series A Preferred Stock would not qualify as capital (or a substantially similar concept) for purposes of any group capital standard to which we are or will be subject.

Holders of the Series A Preferred Stock will be entitled to receive dividend payments only when, as and if declared by our board of directors (or a duly authorized committee of the board). Dividends will be payable from the original date of issue at a rate of 5.85% per annum, payable quarterly, in arrears, on the fifteenth day of March, June, September and December of each year, beginning on June 15, 2019. Dividends on the Series A Preferred Stock will be non-cumulative.

In the event of any liquidation, dissolution or winding-up of the affairs of AIG, whether voluntary or involuntary, before any distribution or payment out of our assets may be made to or set aside for the holders of any junior stock, holders of the Series A Preferred Stock will be entitled to receive out of our assets legally available for distribution to our stockholders, an amount equal to $25,000 per share of Series A Preferred Stock (equivalent to $25.00 per Depositary Share), together with an amount equal to all declared and unpaid dividends (if any), but no amount in respect of any undeclared dividends prior to such payment date. Distributions will be made only to the extent of our assets that are available for distribution to stockholders (i.e., after satisfaction of all our liabilities to creditors, if any).

The Series A Preferred Stock does not have voting rights, except in limited circumstances, including in the case of certain dividend non-payments.

AIG | First Quarter 2019 Form 10-Q 47

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

Common Stock

The following table presents a rollforward of outstanding shares:

Three Months Ended March 31, 2019	Common	Treasury	Common Stock
	Stock Issued	Stock	Outstanding
Shares, beginning of year	1,906,671,492	(1,040,062,063)	866,609,429
Shares issued	-	3,127,472	3,127,472
Shares repurchased	-	-	-
Shares, end of period	1,906,671,492	(1,036,934,591)	869,736,901

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 payment of dividends is also subject to the terms of AIG’s outstanding Series A Preferred Stock, pursuant to which no dividends may be declared or paid on any AIG Common Stock unless the full dividends for the latest completed dividend period on all outstanding shares of Series A Preferred Stock have been declared and paid or provided for.

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
February 13, 2019	March 15, 2019	March 29, 2019	0.32
February 8, 2018	March 15, 2018	March 29, 2018	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 2018 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:

Three Months Ended March 31,
(in millions)		2019		2018
Aggregate repurchases of common stock	$	-	$	298
Total number of common shares repurchased		-		5
Aggregate repurchases of warrants	$	-	$	2
Total number of warrants repurchased^*		-		-

* For the three-month periods ended March 31, 2018, we repurchased 97,553 warrants to purchase shares of AIG Common Stock. For the three-month periods ended March 31, 2019, we did not repurchase any warrants to purchase shares of AIG Common Stock..

Our Board of Directors has authorized the repurchase of shares of AIG Common Stock and warrants to purchase shares of AIG Common Stock through a series of actions. On February 13, 2019, our Board of Directors authorized an additional increase of approximately $1.5 billion to its previous share repurchase authorization. As of March 31, 2019, $2.0 billion remained under our share repurchase authorization. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants). Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans.

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

We did not repurchase any shares of AIG Common Stock during the three months ended March 31, 2019. 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. The repurchase of AIG Common Stock is also subject to the terms of AIG’s outstanding Series A Preferred Stock, pursuant to which AIG may not (other than in limited circumstances) purchase, redeem or otherwise acquire AIG Common Stock unless the full dividends for the latest completed dividend period on all outstanding shares of Series A Preferred Stock have been declared and paid or provided for.

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, December 31, 2018, net of tax	$	(38)	$	2,426	$	(2,725)	$	(1,086)	$	10	$	(1,413)
Change in unrealized appreciation of investments		849		5,064		-		-		-		5,913
Change in deferred policy acquisition costs
adjustment and other		(8)		(856)		-		-		-		(864)
Change in future policy benefits		-		(1,068)		-		-		-		(1,068)
Change in foreign currency translation adjustments		-		-		188		-		-		188
Change in net actuarial loss		-		-		-		1		-		1
Change in prior service credit		-		-		-		(1)		-		(1)
Change in deferred tax liability		(165)		(432)		(24)		(1)		-		(622)
Change in fair value of liabilities under fair value
option attributable to changes in own credit risk		-		-		-		-		-		-
Total other comprehensive income (loss)		676		2,708		164		(1)		-		3,547
Noncontrolling interests		-		5		1		-		-		6
Balance, March 31, 2019, net of tax	$	638	$	5,129	$	(2,562)	$	(1,087)	$	10	$	2,128


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		(240)		(4,754)		-		-		-		(4,994)
Change in deferred policy acquisition costs
adjustment and other		30		634		-		-		-		664
Change in future policy benefits		-		741		-		-		-		741
Change in foreign currency translation adjustments		-		-		172		-		-		172
Change in net actuarial loss		-		-		-		16		-		16
Change in prior service credit		-		-		-		(4)		-		(4)
Change in deferred tax asset (liability)		60		671		(14)		17		-		734
Change in fair value of liabilities under fair value
option attributable to changes in own credit risk		-		-		-		-		2		2
Total other comprehensive income (loss)		(150)		(2,708)		158		29		2		(2,669)
Noncontrolling interests		-		-		-		-		-		-
Balance, March 31, 2018, net of tax	$	812	$	4,700	$	(2,216)	$	(1,085)	$	9	$	2,220

AIG | First Quarter 2019 Form 10-Q 49

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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-month periods ended March 31, 2019 and 2018, respectively:

		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
March 31, 2019
Unrealized change arising during period	$	841	$	3,109	$	188	$	(5)	$	-	$	4,133
Less: Reclassification adjustments
included in net income		-		(31)		-		(5)		-		(36)
Total other comprehensive income (loss),
before income tax expense		841		3,140		188		-		-		4,169
Less: Income tax expense		165		432		24		1		-		622
Total other comprehensive income (loss),
net of income tax expense	$	676	$	2,708	$	164	$	(1)	$	-	$	3,547

March 31, 2018
Unrealized change arising during period	$	(208)	$	(3,386)	$	172	$	3	$	2	$	(3,417)
Less: Reclassification adjustments
included in net income		2		(7)		-		(9)		-		(14)
Total other comprehensive income (loss),
before income tax expense (benefit)		(210)		(3,379)		172		12		2		(3,403)
Less: Income tax expense (benefit)		(60)		(671)		14		(17)		-		(734)
Total other comprehensive income (loss),
net of income tax expense (benefit)	$	(150)	$	(2,708)	$	158	$	29	$	2	$	(2,669)

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
	Three Months Ended March 31,					Affected Line Item in the
(in millions)			2019		2018	Condensed Consolidated Statements of Income
Unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were taken

Investments		$	-	$	2	Other realized capital gains
Total			-		2
Unrealized appreciation (depreciation) of
all other investments
Investments			(31)		24	Other realized capital gains
Deferred acquisition costs adjustment			-		(31)	Amortization of deferred policy acquisition costs
Future policy benefits			-		-	Policyholder benefits and losses incurred
Total			(31)		(7)
Change in retirement plan liabilities adjustment
Prior-service credit			-		-	*
Actuarial losses			(5)		(9)	*
Total			(5)		(9)
Total reclassifications for the period		$	(36)	$	(14)

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

50 AIG | First Quarter 2019 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 March 31,
(dollars in millions, except per share data)		2019		2018
Numerator for EPS:
Income from continuing operations	$	937	$	950
Less: Net income from continuing operations attributable to noncontrolling interests		283		11
Income attributable to AIG common shareholders from continuing operations		654		939
Loss from discontinued operations, net of income tax expense		-		(1)
Net income attributable to AIG common shareholders	$	654	$	938
Denominator for EPS:
Weighted average shares outstanding — basic		875,383,084		907,951,597
Dilutive shares		2,129,160		17,314,980
Weighted average shares outstanding — diluted^(a)		877,512,244		925,266,577
Income per common share attributable to AIG:
Basic:
Income from continuing operations	$	0.75	$	1.03
Income from discontinued operations	$	-	$	-
Net income attributable to AIG	$	0.75	$	1.03
Diluted:
Income from continuing operations	$	0.75	$	1.01
Income from discontinued operations	$	-	$	-
Net income attributable to AIG	$	0.75	$	1.01

(a) Dilutive shares included our share‑based employee compensation plans and a weighted average portion of the warrants issued to AIG shareholders as part of AIG’s recapitalization in January 2011. The number of shares excluded from diluted shares outstanding was 64.3 million and 0.7 million for the three-month periods ended March 31, 2019 and 2018, respectively, because the effect of including those shares in the calculation would have been anti-dilutive.

AIG | First Quarter 2019 Form 10-Q 51

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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 March 31, 2019
Components of net periodic benefit cost:
Service cost	$	2	$	6	$	8	$	-	$	-	$	-
Interest cost		44		4		48		2		-		2
Expected return on assets		(57)		(5)		(62)		-		-		-
Amortization of prior service cost		-		-		-		-		-		-
Amortization of net loss		8		1		9		-		-		-
Net periodic benefit cost (credit)		(3)		6		3		2		-		2
Settlement gain		-		(4)		(4)		-		-		-
Net benefit cost (credit)	$	(3)	$	2	$	(1)	$	2	$	-	$	2
Three Months Ended March 31, 2018
Components of net periodic benefit cost:
Service cost	$	2	$	6	$	8	$	-	$	-	$	-
Interest cost		41		4		45		2		-		2
Expected return on assets		(71)		(7)		(78)		-		-		-
Amortization of prior service cost		-		1		1		-		-		-
Amortization of net loss		7		2		9		-		-		-
Net periodic benefit cost (credit)		(21)		6		(15)		2		-		2
Settlement gain		-		-		-		-		-		-
Net benefit cost (credit)	$	(21)	$	6	$	(15)	$	2	$	-	$	2

For the three-month period ended March 31, 2019, we did not make any contributions to the U.S. AIG Retirement Plan.

52 AIG | First Quarter 2019 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

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, while certain formal guidance was issued by the U.S. tax authority, there are still aspects of the Tax Act that remain unclear and additional guidance is expected later in 2019. 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.

Interim Tax Calculation Method

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

Interim Tax Expense (Benefit)

For the three-month period ended March 31, 2019, the effective tax rate on income from continuing operations was 18.8 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax benefits associated with tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, and valuation allowance activity related to certain foreign subsidiaries, partially offset by tax charges associated with the effect of foreign operations, state and local income taxes, a net tax charge related to the accrual of IRS interest, excess tax charges related to share based compensation payments recorded through the income statement, non-deductible transfer pricing charges, and U.S. tax imposed on GILTI earned by certain foreign subsidiaries. The effect of foreign operations is primarily related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, other foreign taxes, and foreign income subject to U.S. taxation.

For the three-month period ended March 31, 2018, the effective tax rate on income from continuing operations was 22.6 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, tax on GILTI earned by certain foreign subsidiaries, valuation allowance activity related to certain foreign subsidiaries 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.

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 three-month period ended March 31, 2019, 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 | First Quarter 2019 Form 10-Q 53

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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 March 31, 2019, 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 and interpretations and assumptions related to the impact of the Tax Act 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-month period ended March 31, 2019, recent changes in market conditions, including interest rate fluctuations, impacted the unrealized tax gains and losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, resulting in a decrease to the 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 March 31, 2019, based on all available evidence, we concluded that no valuation allowance is required. For the three-month period ended March 31, 2019, we released $290 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-month period ended March 31, 2019, we recognized a net decrease of $38 million in our deferred tax asset valuation allowance associated with certain foreign subsidiaries, primarily attributable to changes in projections and current year activity.

54 AIG | First Quarter 2019 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 March 31, 2019 and December 31, 2018, our unrecognized tax benefits, excluding interest and penalties, were $4.7 billion. At March 31, 2019 and December 31, 2018, 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 $38 million, respectively. Accordingly, at both March 31, 2019 and December 31, 2018, 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 March 31, 2019 and December 31, 2018, we had accrued liabilities of $2.3 billion and $2.2 billion, respectively, for the payment of interest (net of the federal benefit) and penalties. For the three-month periods ended March 31, 2019 and 2018, we accrued expense (benefit) of $58 million and $54 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 | First Quarter 2019 Form 10-Q 55

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

16. Information Provided in Connection with Outstanding Debt

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 of Validus and all outstanding debt of AIGLH.

Condensed Consolidating Balance Sheets

		American
		International		Validus						Reclassifications
		Group, Inc.		Holdings,				Other		and	Consolidated
(in millions)	(As Guarantor)			Ltd.		AIGLH		Subsidiaries		Eliminations		AIG
March 31, 2019
Assets:
Short-term investments^(a)	$	2,051	$	2	$	-	$	11,306	$	(2,226)	$	11,133
Other investments^(b)		3,750		-		-		309,980		-		313,730
Total investments		5,801		2		-		321,286		(2,226)		324,863
Cash		2		1		3		2,559		-		2,565
Loans to subsidiaries^(c)		35,221		-		-		608		(35,829)		-
Investment in consolidated subsidiaries^(c)		36,737		4,282		29,312		-		(70,331)		-
Other assets, including deferred income taxes^(d)		15,707		1,796		126		170,000		(2,135)		185,494
Total assets	$	93,468	$	6,081	$	29,441	$	494,453	$	(110,521)	$	512,922
Liabilities:
Insurance liabilities	$	-	$	-	$	-	$	298,689	$	-	$	298,689
Long-term debt		22,993		357		643		11,783		-		35,776
Other liabilities, including intercompany balances^(b)		9,080		221		133		111,293		(4,363)		116,364
Loans from subsidiaries^(c)		608		-		-		35,222		(35,830)		-
Total liabilities		32,681		578		776		456,987		(40,193)		450,829
Total AIG shareholders’ equity		60,787		5,503		28,665		36,160		(70,328)		60,787
Non-redeemable noncontrolling interests		-		-		-		1,306		-		1,306
Total equity		60,787		5,503		28,665		37,466		(70,328)		62,093
Total liabilities and equity	$	93,468	$	6,081	$	29,441	$	494,453	$	(110,521)	$	512,922

December 31, 2018
Assets:
Short-term investments^(a)	$	1,141	$	2	$	-	$	10,329	$	(1,798)	$	9,674
Other investments^(b)		3,377		-		-		301,158		-		304,535
Total investments		4,518		2		-		311,487		(1,798)		314,209
Cash		2		9		9		2,853		-		2,873
Loans to subsidiaries^(c)		34,963		-		-		615		(35,578)		-
Investment in consolidated subsidiaries^(c)		33,300		4,029		26,321		-		(63,650)		-
Other assets, including deferred income taxes^(d)		15,389		1,798		124		159,430		(1,839)		174,902
Total assets	$	88,172	$	5,838	$	26,454	$	474,385	$	(102,865)	$	491,984
Liabilities:
Insurance liabilities	$	-	$	-	$	-	$	293,652	$	-	$	293,652
Long-term debt		22,422		359		643		11,116		-		34,540
Other liabilities, including intercompany balances^(b)		8,774		228		144		100,974		(3,637)		106,483
Loans from subsidiaries^(c)		615		-		-		34,963		(35,578)		-
Total liabilities		31,811		587		787		440,705		(39,215)		434,675
Total AIG shareholders’ equity		56,361		5,251		25,667		32,732		(63,650)		56,361
Non-redeemable noncontrolling interests		-		-		-		948		-		948
Total equity		56,361		5,251		25,667		33,680		(63,650)		57,309
Total liabilities and equity	$	88,172	$	5,838	$	26,454	$	474,385	$	(102,865)	$	491,984

(a) At March 31, 2019, includes restricted cash of $8 million and $243 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively. At December 31, 2018, includes restricted cash of $124 million and $18 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively.

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

(d) At March 31, 2019, includes restricted cash of $1 million and $362 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively. At December 31, 2018, includes restricted cash of $1 million and $342 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively.

56 AIG | First Quarter 2019 Form 10-Q

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

Condensed Consolidating Statements of Income

		American
		International		Validus						Reclassifications
		Group, Inc.		Holdings,				Other		and		Consolidated
(in millions)		(As Guarantor)		Ltd.		AIGLH		Subsidiaries		Eliminations		AIG
Three Months Ended March 31, 2019
Revenues:
Equity in earnings of consolidated subsidiaries^*	$	708	$	207	$	700	$	-	$	(1,615)	$	-
Other income		287		1		-		12,208		(40)		12,456
Total revenues		995		208		700		12,208		(1,655)		12,456
Expenses:
Interest expense		246		-		13		94		(4)		349
Loss on extinguishment of debt		-		4		-		(6)		-		(2)
Other expenses		188		1		-		10,804		(38)		10,955
Total expenses		434		5		13		10,892		(42)		11,302
Income (loss) from continuing operations before income tax
expense (benefit)		561		203		687		1,316		(1,613)		1,154
Income tax expense (benefit)		(94)		-		(1)		312		-		217
Income (loss) from continuing operations		655		203		688		1,004		(1,613)		937
Income (loss) from discontinued operations, net of income taxes		(1)		-		-		1		-		-
Net income (loss)		654		203		688		1,005		(1,613)		937
Less:
Net income (loss) from continuing operations attributable to
noncontrolling interests		-		-		-		283		-		283
Net income (loss) attributable to AIG	$	654	$	203	$	688	$	722	$	(1,613)	$	654

Three Months Ended March 31, 2018
Revenues:
Equity in earnings of consolidated subsidiaries^*	$	1,033	$	-	$	722	$	-	$	(1,755)	$	-
Other income		258		-		-		11,512		(58)		11,712
Total revenues		1,291		-		722		11,512		(1,813)		11,712
Expenses:
Interest expense		220		-		12		48		(3)		277
Loss on extinguishment of debt		-		-		-		4		-		4
Other expenses		152		-		1		10,106		(55)		10,204
Total expenses		372		-		13		10,158		(58)		10,485
Income (loss) from continuing operations before income tax
expense (benefit)		919		-		709		1,354		(1,755)		1,227
Income tax expense (benefit)		(19)		-		3		293		-		277
Income (loss) from continuing operations		938		-		706		1,061		(1,755)		950
Loss from discontinued operations, net of income taxes		-		-		-		(1)		-		(1)
Net income (loss)		938		-		706		1,060		(1,755)		949
Less:
Net income (loss) from continuing operations attributable to
noncontrolling interests		-		-		-		11		-		11
Net income (loss) attributable to AIG	$	938	$	-	$	706	$	1,049	$	(1,755)	$	938

* Eliminated in consolidation.

AIG | First Quarter 2019 Form 10-Q 57

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

Condensed Consolidating Statements of Comprehensive Income

		American
		International		Validus						Reclassifications
		Group, Inc.		Holdings,				Other		and		Consolidated
(in millions)	(As Guarantor)			Ltd.		AIGLH		Subsidiaries		Eliminations		AIG
Three Months Ended March 31, 2019
Net income (loss)	$	654	$	203	$	688	$	1,005	$	(1,613)	$	937
Other comprehensive income (loss)		3,541		1		5,308		9,175		(14,478)		3,547
Comprehensive income (loss)		4,195		204		5,996		10,180		(16,091)		4,484
Total comprehensive income attributable to noncontrolling interests		-		-		-		289		-		289
Comprehensive income (loss) attributable to AIG	$	4,195	$	204	$	5,996	$	9,891	$	(16,091)	$	4,195

Three Months Ended March 31, 2018
Net income (loss)	$	938	$	-	$	706	$	1,060	$	(1,755)	$	949
Other comprehensive income (loss)		(2,669)		-		4,950		14,655		(19,605)		(2,669)
Comprehensive income (loss)		(1,731)		-		5,656		15,715		(21,360)		(1,720)
Total comprehensive income attributable to noncontrolling interests		-		-		-		11		-		11
Comprehensive income (loss) attributable to AIG	$	(1,731)	$	-	$	5,656	$	15,704	$	(21,360)	$	(1,731)

58 AIG | First Quarter 2019 Form 10-Q

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

Condensed Consolidating Statements of Cash Flows

		American
		International		Validus					Reclassifications
		Group, Inc.		Holdings,				Other		and		Consolidated
(in millions)	(As Guarantor)			Ltd.		AIGLH		Subsidiaries		Eliminations		AIG
Three Months Ended March 31, 2019
Net cash (used in) provided by operating activities	$	318	$	(8)	$	480	$	(665)	$	(1,101)	$	(976)
Cash flows from investing activities:
Sales of investments		864		-		-		13,840		(364)		14,340
Sales of divested businesses, net		-		-		-		-		-		-
Purchase of investments		(675)		-		-		(14,804)		364		(15,115)
Loans to subsidiaries - net		(10)		-		-		10		-		-
Contributions from (to) subsidiaries - net		(319)		-		-		-		319		-
Acquisition of businesses, net of cash and
restricted cash acquired		-		-		-		-		-		-
Net change in short-term investments		(1,020)		-		-		(201)		-		(1,221)
Other, net		(20)		-		-		37		-		17
Net cash (used in) provided by investing activities		(1,180)		-		-		(1,118)		319		(1,979)
Cash flows from financing activities:
Issuance of long-term debt		596		-		-		853		-		1,449
Repayments of long-term debt		-		-		-		(589)		-		(589)
Issuance of preferred stock		485		-		-		-		-		485
Purchase of common stock		-		-		-		-		-		-
Intercompany loans - net		(10)		-		-		10		-		-
Cash dividends paid		(278)		-		(486)		(615)		1,101		(278)
Other, net		(47)		-		-		2,063		(319)		1,697
Net cash (used in) provided by financing activities		746		-		(486)		1,722		782		2,764
Effect of exchange rate changes on cash and
restricted cash		-		-		-		12		-		12
Change in cash and restricted cash		(116)		(8)		(6)		(49)		-		(179)
Cash and restricted cash at beginning of year		127		9		9		3,213		-		3,358
Cash and restricted cash at end of period	$	11	$	1	$	3	$	3,164	$	-	$	3,179

Three Months Ended March 31, 2018
Net cash (used in) provided by operating activities	$	9	$	-	$	362	$	(501)	$	(808)	$	(938)
Cash flows from investing activities:
Sales of investments		1,322		-		-		15,830		(2,681)		14,471
Sales of divested businesses, net		-		-		-		6		-		6
Purchase of investments		(39)		-		-		(15,405)		2,681		(12,763)
Loans to subsidiaries - net		422		-		-		(60)		(362)		-
Contributions from (to) subsidiaries - net		153		-		-		-		(153)		-
Net change in short-term investments		(2,460)		-		-		(580)		-		(3,040)
Other, net		(79)		-		-		(567)		-		(646)
Net cash (used in) investing activities		(681)		-		-		(776)		(515)		(1,972)
Cash flows from financing activities:
Issuance of long-term debt		2,472		-		-		567		-		3,039
Repayments of long-term debt		(1,107)		-		-		(220)		-		(1,327)
Purchase of common stock		(298)		-		-		-		-		(298)
Intercompany loans - net		60		-		-		(422)		362		-
Cash dividends paid		(289)		-		(377)		(431)		808		(289)
Other, net		(154)		-		-		1,362		153		1,361
Net cash (used in) provided by financing activities		684		-		(377)		856		1,323		2,486
Effect of exchange rate changes on cash and
restricted cash		-		-		-		58		-		58
Change in cash and restricted cash		12		-		(15)		(363)		-		(366)
Cash and restricted cash at beginning of year		8		-		20		2,709		-		2,737
Cash and restricted cash at end of period	$	20	$	-	$	5	$	2,346	$	-	$	2,371

AIG | First Quarter 2019 Form 10-Q 59

TABLE OF CONTENTS

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

Supplementary Disclosure of Condensed Consolidating Cash Flow Information

		American
		International		Validus					Reclassifications
		Group, Inc.		Holdings,				Other		and		Consolidated
(in millions)	(As Guarantor)			Ltd.		AIGLH		Subsidiaries		Eliminations		AIG
March 31, 2019
Cash	$	2	$	1	$	3	$	2,559	$	-	$	2,565
Restricted cash included in Short-term investments		8		-		-		243		-		251
Restricted cash included in Other assets		1		-		-		362		-		363
Total cash and restricted cash shown in the Condensed
Consolidating Statements of Cash Flows	$	11	$	1	$	3	$	3,164	$	-	$	3,179

Cash (paid) received during the 2019 period for:
Interest:
Third party	$	(225)	$	(11)	$	(23)	$	(56)	$	-	$	(315)
Intercompany		(1)		-		-		1		-		-
Taxes:
Income tax authorities	$	(4)	$	-	$	-	$	(46)	$	-	$	(50)
Intercompany		194		-		-		(194)		-		-

March 31, 2018
Cash	$	4	$	-	$	5	$	2,094	$	-	$	2,103
Restricted cash included in Short-term investments		15		-		-		32		-		47
Restricted cash included in Other assets		1		-		-		220		-		221
Total cash and restricted cash shown in the Condensed
Consolidating Statements of Cash Flows	$	20	$	-	$	5	$	2,346	$	-	$	2,371

Cash (paid) received during the 2018 period for:
Interest:
Third party	$	(260)	$	-	$	-	$	(97)	$	-	$	(357)
Intercompany		-		-		-		-		-		-
Taxes:
Income tax authorities	$	(9)	$	-	$	-	$	(19)	$	-	$	(28)
Intercompany		403		-		-		(403)		-		-

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

Three Months Ended March 31,
(in millions)		2019		2018
Intercompany non-cash financing and investing activities:
Capital contributions	$	-	$	2,339
Dividends received in the form of securities		486		60
Return of capital		-		2,706

17. Subsequent Events

Dividends Declared

On May 6, 2019, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on June 28, 2019 to shareholders of record on June 14, 2019.

60 AIG | First Quarter 2019 Form 10-Q

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

Glossary and Acronyms of Selected Insurance Terms and References

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

American International Group, Inc. (AIG) has incorporated into this discussion a number of cross-references to additional information included throughout this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2018 (the 2018 Annual Report) to assist readers seeking additional information related to a particular subject.

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

Cautionary Statement Regarding Forward-Looking Information

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

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

· changes in market and industry conditions;

· the occurrence of catastrophic events, both natural and man-made;

· our ability to successfully reorganize our businesses and execute on our initiatives to improve our underwriting capabilities and reinsurance programs, as well as improve profitability, without negatively impacting client relationships or our competitive position;

· our ability to successfully dispose of, monetize and/or acquire businesses or assets or successfully integrate acquired businesses;

· actions by credit rating agencies;

· changes in judgments concerning insurance underwriting and insurance liabilities;

· changes in judgments concerning potential cost saving opportunities;

· the impact of potential information technology, cybersecurity or data security breaches, including as a result of cyber-attacks or security vulnerabilities;

· disruptions in the availability of our electronic data systems or those of third parties;

· the effectiveness of our strategies to recruit and retain key personnel and our ability to implement effective succession plans;

· negative impacts on customers, business partners and other stakeholders;

· our ability to successfully manage Legacy portfolios;

· concentrations in our investment portfolios;

· the requirements, which may change from time to time, of the global regulatory framework to which we are subject;

· significant legal, regulatory or governmental proceedings;

· changes in judgments concerning the recognition of deferred tax assets and goodwill impairment; and

· such other factors discussed in:

– Part I, Item 2. MD&A of this Quarterly Report on Form 10-Q; and

– Part I, Item 1A. Risk Factors and Part II, Item 7. MD&A of the 2018 Annual Report.

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

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INDEX TO ITEM 2
		Page
Use of Non-GAAP Measures		63
Critical Accounting Estimates		65
Executive Summary		65
Overview		65
Financial Performance Summary		67
AIG's Outlook – Industry and Economic Factors		69
Consolidated Results of Operations		72
Business Segment Operations		76
General Insurance		77
Life and Retirement		85
Other Operations		99
Legacy Portfolio		100
Investments		102
Overview		102
Investment Highlights in the First Quarter of 2019		102
Investment Strategies		102
Credit Ratings		104
Impairments		111
Insurance Reserves		114
Loss Reserves		114
Life and Annuity Reserves and DAC		117
Liquidity and Capital Resources		122
Overview		122
Analysis of Sources and Uses of Cash		124
Liquidity and Capital Resources of AIG Parent and Subsidiaries		125
Credit Facilities		127
Contractual Obligations		128
Off-Balance Sheet Arrangements and Commercial Commitments		129
Debt		130
Credit Ratings		132
Financial Strength Ratings		133
Regulation and Supervision		133
Dividends and Repurchases of AIG Common Stock		133
Restrictions on Dividends from Subsidiaries		133
Enterprise Risk Management		134
Overview		134
Regulatory Environment		134
Glossary		135
Acronyms		138

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ITEM 2 | Use of Non-GAAP Measures

Use of Non-GAAP Measures

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

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

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

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

· deferred income tax valuation allowance releases and charges;

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

· net tax charge related to the enactment of the Tax Cuts and Jobs Act (Tax Act);

and by excluding the net realized capital gains (losses) from noncontrolling interests.

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

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

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ITEM 2 | Use of Non-GAAP Measures

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

· changes in fair value of securities used to hedge guaranteed living benefits;

· changes in benefit reserves and deferred policy acquisition costs (DAC), value of business acquired (VOBA), and sales inducement assets (SIA) related to net realized capital gains and losses;

· changes in the fair value of equity securities;

· loss (gain) on extinguishment of debt;

· all net realized capital gains and losses except earned income (periodic settlements and changes in settlement accruals) on derivative instruments used for non-qualifying (economic) hedging or for asset replication. Earned income on such economic hedges is reclassified from net realized capital gains and losses to specific APTI line items based on the economic risk being hedged (e.g. net investment income and interest credited to policyholder account balances);

· income or loss from discontinued operations;

· net loss reserve discount benefit (charge);

· pension expense related to a one-time lump sum payment to former employees;

· income and loss from divested businesses;

· non-operating litigation reserves and settlements;

· restructuring and other costs related to initiatives designed to reduce operating expenses, improve efficiency and simplify our organization;

· the portion of favorable or unfavorable prior year reserve development for which we have ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain;

· integration and transaction costs associated with acquired businesses;

· losses from the impairment of goodwill; and

· non-recurring external costs associated with the implementation of non-ordinary course legal or regulatory changes or changes to accounting principles.

· General Insurance

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

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

· Life and Retirement

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

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

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ITEM 2 | Critical Accounting Estimates

Critical Acco unting Estimates

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

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

· loss reserves;

· reinsurance assets;

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

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

· valuation of embedded derivatives for fixed index annuity and life products;

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

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

· 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 estimates associated with the Tax Act.

For a complete discussion of our critical accounting estimates, see Part II, Item 7. MD&A — Critical Accounting Estimates in the 2018 Annual Report.

Executive Summary

Overview

This overview of the MD&A highlights selected information and may not contain all of the information that is important to current or potential investors in our securities. You should read this Quarterly Report on Form 10-Q, together with the 2018 Annual Report, in their entirety for a more detailed description of events, trends, uncertainties, risks and critical accounting estimates affecting us.

Beginning in the first quarter of 2019, on a prospective basis, the changes in the fair value of equity securities are excluded from adjusted pre-tax income (loss).

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AIG’S OPERATING STRUCTURE

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

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

For further discussion on our business segments see Note 3 to the Condensed Consolidated Financial Statements.

Business Segments


	General Insurance General Insurance is a leading provider of insurance products and services for commercial and personal insurance customers. It includes one of the world’s most far-reaching property casualty networks. General Insurance offers a broad range of products to customers through a diversified, multichannel distribution network. Customers value General Insurance’s strong capital position, extensive risk management and claims experience and its ability to be a market leader in critical lines of the insurance business.	Life and Retirement Life and Retirement is a unique franchise that brings together a broad portfolio of life insurance, retirement and institutional products offered through an extensive, multichannel distribution network. It holds long-standing, leading market positions in many of the markets it serves in the U.S. With its strong capital position, customer-focused service, breadth of product expertise and deep distribution relationships across multiple channels, Life and Retirement is well positioned to serve growing market needs.
	General Insurance includes the following major operating companies: National Union Fire Insurance Company of Pittsburgh, Pa. (National Union); American Home Assurance Company (American Home); Lexington Insurance Company (Lexington); AIG General Insurance Company, Ltd. (AIG Sonpo); AIG Asia Pacific Insurance, Pte, Ltd.; AIG Europe S.A.; American International Group UK Ltd.; Validus Reinsurance, Ltd.; Talbot Holdings Ltd.; Western World Insurance Group, Inc. and Glatfelter Insurance Group.	Life and Retirement includes the following major operating companies: American General Life Insurance Company (American General Life); The Variable Annuity Life Insurance Company (VALIC); The United States Life Insurance Company in the City of New York (U.S. Life); Laya Healthcare Limited and AIG Life Limited.


	Other Operations Other Operations consists of businesses and items not attributed to our General Insurance and Life and Retirement segments or our Legacy Portfolio. It includes AIG Parent; Blackboard; deferred tax assets related to tax attributes; corporate expenses and intercompany eliminations.	Legacy Portfolio Legacy Portfolio includes Legacy Life and Retirement Run-Off Lines, Legacy General Insurance Run-Off Lines, and Legacy Investments. Effective February 2018, Fortitude Re, our Bermuda-domiciled composite reinsurer, is included in our Legacy Portfolio.

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Financial Performance Summary

Net Income Attributable To AIG Three Months Ended March 31, (in millions)
	2019 and 2018 Comparison Decrease in Net income attributable to AIG is the result of: Increases due to: • improvement in accident year losses in General Insurance as a result of underwriting discipline, increased use of reinsurance and a change in business mix as well as lower catastrophe losses in General Insurance; • higher investment returns in our hedge fund portfolio and equity securities due to robust equity market returns in the first quarter of 2019 and an increase in income from fixed maturity securities for which the fair value option was elected, compared to the same period in the prior year where returns were lower as a result of an increase in rates and widening spreads that occurred, as well as negative performance of our fair value option equity securities portfolio; and • lower general and other operating expenses as a result of ongoing strategic initiatives to reduce costs. These increases were more than offset by: • higher net realized capital losses; • a net loss reserve discount charge in the first quarter of 2019 compared to a loss reserve discount benefit in the first quarter of 2018; and • the impact of noncontrolling interest attributed to Fortitude Re results in the first quarter of 2019 as discussed in Consolidated Results of Operations. For further discussion see Consolidated Results of Operations.
Adjusted Pre-Tax Income* Three Months Ended March 31, (in millions)
	2019 and 2018 Comparison Increase in Adjusted pre-tax income primarily due to: • higher investment returns in our hedge fund portfolio due to robust equity market returns in the first quarter of 2019 and an increase in income from fixed maturity securities for which the fair value option was elected, compared to the same period in the prior year where returns were lower as a result of an increase in rates and widening spreads that occurred, as well as negative performance of our fair value option equity securities portfolio; • lower general operating and other expenses; and • a General Insurance underwriting profit in the first quarter of 2019 compared to an underwriting loss in the same period in the prior year driven by lower catastrophe losses and lower accident year losses as a result of underwriting discipline, increased use of reinsurance and a change in business mix.

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

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General Operating and Other Expenses

Three Months Ended March 31,

(in millions)

2019 and 2018 Comparison

General operating and other expenses declined primarily due to lower employee related expenses and professional fee reductions pertaining to ongoing efficiency programs. The declines were partially offset due to the increase in expenses caused by the acquisitions of Validus and Glatfelter in the third and fourth quarters of 2018, respectively.

In keeping with our broad and ongoing efforts to transform for long-term competitiveness, general operating and other expenses for the first quarters of 2019 and 2018 included approximately $47 million and $24 million of pre-tax restructuring and other costs, respectively, which were primarily comprised of employee severance charges and other exit costs related to organizational simplification, operational efficiency, and business rationalization.

Return on Common Equity		Adjusted Return on Common Equity*

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

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

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

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AIG’s Outlook – Industry and economic factors

Our business is affected by industry and economic factors such as interest rates, currency exchange rates, credit and equity market conditions, catastrophic claims events, regulation, tax policy, competition, and general economic, market and political conditions. We continued to operate under difficult market conditions in the first quarter of 2019, characterized by factors such as the impact of historically low interest rates, uncertainties in the annuity marketplace resulting from legislative and regulatory initiatives aimed at re-evaluating the standard of care for sales of investment products and services, slowing growth in China and Euro-Zone economies, global trade tensions and the UK’s pending withdrawal from its membership in the European Union (the EU) (commonly referred to as Brexit). Brexit has also affected the U.S. dollar/British pound exchange rate and increased the volatility of exchange rates among the euro, British pound and the Japanese yen (the Major Currencies), which may continue for some time.

Impact of Changes in the Interest Rate Environment

Interest rates in 2019 have remained low by historical standards, notwithstanding that interest rates rose in 2018, and in some cases have risen close to highs of the preceding five to ten years. In early 2019, the Federal Open Market Committee of the Federal Reserve System indicated that it expects the pace of rate increases to slow. The low interest rate environment negatively affects sales of interest rate sensitive products in our industry and may negatively impact the profitability of our existing business as we reinvest cash flows from investments, including increased calls and prepayments of fixed maturity securities and mortgage loans, at rates below the average yield of our existing portfolios. As rates rise, some of these impacts may abate while there may be different impacts, some of which are highlighted below. We actively manage our exposure to the interest rate environment through portfolio selection and asset-liability management, including spread management strategies for our investment-oriented products and economic hedging of interest rate risk from guarantee features in our variable and fixed index annuities.

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

Annuity Sales and Surrenders

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

Reinvestment and Spread Management

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

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

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

For investment-oriented products in our Individual Retirement, Group Retirement, Life Insurance and Institutional Markets businesses, our spread management strategies include disciplined pricing and product design for new business, modifying or limiting the sale of products that do not achieve targeted spreads, using asset-liability management to match assets to liabilities to the extent practicable,

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and actively managing crediting rates to help mitigate some of the pressure on investment spreads. Renewal crediting rate management is done under contractual provisions that were designed to allow crediting rates to be reset at pre-established intervals in accordance with state and federal laws and subject to minimum crediting rate guarantees. We will continue to adjust crediting rates on in-force business to mitigate the pressure on spreads from declining base yields, but our ability to lower crediting rates may be limited by the competitive environment, contractual minimum crediting rates, and provisions that allow rates to be reset only at pre-established intervals. As interest rates rise, we may need to raise crediting rates on in-force business for competitive and other reasons potentially reducing the impact of investing in a higher interest rate environment.

Of the aggregate fixed account values of our Individual Retirement and Group Retirement annuity products, 63 percent were crediting at the contractual minimum guaranteed interest rate at March 31, 2019. The percentage of fixed account values of our annuity products that are currently crediting at rates above one percent was 65 percent and 66 percent at March 31, 2019 and December 31, 2018, respectively. These businesses continue to focus on pricing discipline and strategies to manage the minimum guaranteed interest crediting rates offered on new sales in the context of regulatory requirements and competitive positioning. In the core universal life business in our Life Insurance business, 65 percent of the account values were crediting at the contractual minimum guaranteed interest rate at March 31, 2019.

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

	Current Crediting Rates
March 31, 2019			1-50 Basis		More than 50
Contractual Minimum Guaranteed	At Contractual		Points Above		Basis Points
Interest Rate	Minimum		Minimum		Above Minimum
(in millions)	Guarantee		Guarantee		Guarantee			Total
Individual Retirement^*
<=1%	$	1,002	$	4,285	$	20,198	$	25,485
> 1% - 2%		6,884		183		1,768		8,835
> 2% - 3%		12,251		265		74		12,590
> 3% - 4%		9,505		42		7		9,554
> 4% - 5%		532		-		4		536
> 5% - 5.5%		34		-		5		39
Total Individual Retirement	$	30,208	$	4,775	$	22,056	$	57,039
Group Retirement^*
1%	$	1,533	$	2,686	$	3,202	$	7,421
> 1% - 2%		5,449		876		1,142		7,467
> 2% - 3%		14,954		3		-		14,957
> 3% - 4%		830		-		-		830
> 4% - 5%		7,078		-		-		7,078
> 5% - 5.5%		174		-		-		174
Total Group Retirement	$	30,018	$	3,565	$	4,344	$	37,927
Universal life insurance
1%	$	-	$	-	$	-	$	-
> 1% - 2%		93		24		365		482
> 2% - 3%		277		578		1,081		1,936
> 3% - 4%		1,544		491		7		2,042
> 4% - 5%		2,988		227		-		3,215
> 5% - 5.5%		264		-		-		264
Total universal life insurance	$	5,166	$	1,320	$	1,453	$	7,939
Total	$	65,392	$	9,660	$	27,853	$	102,905
Percentage of total		64	%	9	%	27	%	100	%

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

General Insurance

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

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

Standard of Care Developments

The SEC, federal and state lawmakers and state insurance regulators continue their efforts at evaluating what is an appropriate regulatory framework around a standard of care for the sale of investment products and services. For example, on April 18, 2018, the SEC proposed a package of rulemakings and interpretations designed to address the standard of care issues and the transparency of retail investors’ relationships with investment advisors and broker-dealers. Additionally, on July 18, 2018, the New York State Department of Financial Services adopted a best interest standard of care regulation applicable to annuity and life transactions through issuance of the First Amendment to Insurance Regulation 187 – Suitability and Best Interests in Life Insurance and Annuity Transactions (Regulation 187). The compliance date for Regulation 187 is August 1, 2019 for annuity products and February 1, 2020 for life products. As amended, Regulation 187 requires producers to act in their client’s best interest when making point-of-sale and in-force recommendations, and provide in writing the basis for the recommendation, as well as the facts and analysis to support the recommendation. The amended regulation also imposes additional duties on life insurance companies in relation to these transactions, such as requiring insurers to establish and maintain procedures designed to prevent financial exploitation and abuse. We will implement and enhance processes and procedures, where needed, to comply with this regulation. Other states, such as Nevada, Maryland and New Jersey, have also proposed similar standard of care regulations applicable to insurance producers and/or insurance companies. We continue to closely follow these proposals and other relevant federal and state-level regulatory and legislative developments in this area. While we cannot predict the long-term impact of these developments on our Life and Retirement businesses, we believe our diverse product offerings and distribution relationships position us to compete effectively in this evolving marketplace.

Impact of Currency Volatility

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

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

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

Three Months Ended March 31,			Percentage
Rate for 1 USD	2019	2018	Change
Currency:
GBP	0.78	0.73	7	%
EUR	0.88	0.82	7	%
JPY	110.50	110.62	-	%

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

Other Industry Developments

On September 7, 2017, the UK Ministry of Justice announced a proposal to increase the Ogden rate from negative 0.75 percent to between zero and one percent. Following this announcement, on December 20, 2018 the UK Parliament passed the Civil Liability Act 2018 which implements a new framework for determining the Ogden rate and requires the UK Ministry of Justice to start a review of the Ogden rate within 90 days of its commencement and review periodically thereafter. The Ministry of Justice concluded a public call for evidence on January 30, 2019 prior to beginning its first review. We will continue to monitor the progress of potential changes to the Ogden rate.

AIG | First Quarter 2019 Form 10-Q 71

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ITEM 2 | Consolidated Results of Operations

Consolidated Results of Operations

The following section provides a comparative discussion of our Consolidated Results of Operations on a reported basis for the three month periods ended March 31, 2019 and 2018. Factors that relate primarily to a specific business are discussed in more detail within the business segment operations section.

For a discussion of the Critical Accounting Estimates that affect our results of operations see the Critical Accounting Estimates section of this MD&A and Part II, Item 7. MD&A — Critical Accounting Estimates in the 2018 Annual Report.

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

Three Months Ended March 31,					Percentage
(in millions)		2019		2018	Change
Revenues:
Premiums	$	8,070	$	7,275	11	%
Policy fees		735		764	(4)
Net investment income		3,879		3,261	19
Net realized capital losses		(446)		(19)	NM
Other income		218		431	(49)
Total revenues		12,456		11,712	6
Benefits, losses and expenses:
Policyholder benefits and losses incurred		6,679		5,667	18
Interest credited to policyholder account balances		940		916	3
Amortization of deferred policy acquisition costs		1,289		1,358	(5)
General operating and other expenses		2,053		2,271	(10)
Interest expense		349		277	26
(Gain) loss on extinguishment of debt		(2)		4	NM
Net gain on sale of divested businesses		(6)		(8)	25
Total benefits, losses and expenses		11,302		10,485	8
Income from continuing operations before
income tax expense		1,154		1,227	(6)
Income tax expense		217		277	(22)
Income from continuing operations		937		950	(1)
Loss from discontinued operations,
net of income tax expense		-		(1)	NM
Net income		937		949	(1)
Less: Net income (loss) attributable to
noncontrolling interests		283		11	NM
Net income attributable to AIG	$	654	$	938	(30)	%

March 31,

December 31,

(in millions, except per share data)

2019

2018

Balance sheet data:

Total assets

512,922

491,984

Long-term debt

35,776

34,540

Total AIG shareholders’ equity

60,787

56,361

Book value per common share

69.33

65.04

Book value per common share, excluding AOCI

66.89

66.67

Adjusted book value per common share

55.47

54.95

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

		March 31,		December 31,
(in millions, except per share data)		2019		2018
Total AIG shareholders' equity	$	60,787	$	56,361
Preferred equity		485		-
Total AIG common shareholders' equity		60,302		56,361
Accumulated other comprehensive income (loss)		2,128		(1,413)
Total AIG common shareholders' equity, excluding AOCI		58,174		57,774
Deferred tax assets		9,926		10,153
Adjusted common shareholders' equity	$	48,248	$	47,621

Total common shares outstanding		869,736,901		866,609,429
Book value per common share	$	69.33	$	65.04
Book value per common share, excluding AOCI		66.89		66.67
Adjusted book value per common share		55.47		54.95

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

	Three Months Ended						Year Ended
	March 31,						December 31,
(dollars in millions)		2019			2018			2018
Actual or annualized net income (loss) attributable to AIG	$	2,616		$	3,752		$	(6)
Actual or annualized adjusted after-tax income attributable to AIG		5,552			3,852			1,064

Average AIG common shareholders' equity	$	58,332		$	63,982		$	60,819
Average AOCI		358			3,843			1,193
Average AIG common shareholders' equity, excluding average AOCI		57,974			60,139			59,626
Average DTA		10,040			10,353			10,133
Average adjusted AIG common shareholders' equity	$	47,934		$	49,786		$	49,493
Return on common equity		4.5	%		5.9	%		0.0	%
Adjusted return on common equity		11.6	%		7.7	%		2.1	%

AIG | First Quarter 2019 Form 10-Q 73

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ITEM 2 | Consolidated Results of Operations

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

Three Months Ended March 31,	2019								2018
				Total Tax								Total Tax
				(Benefit)	Noncontrolling			After				(Benefit)	Noncontrolling			After
(in millions, except per share data)		Pre-tax		Charge		Interest^(b)		Tax		Pre-tax		Charge		Interest		Tax
Pre-tax income/net income, including
noncontrolling interests	$	1,154	$	217	$	-	$	937	$	1,227	$	277	$	-	$	949
Noncontrolling interest						(283)		(283)						(11)		(11)
Pre-tax income/net income attributable
to AIG	$	1,154	$	217	$	(283)	$	654	$	1,227	$	277	$	(11)	$	938
Changes in uncertain tax positions and other tax adjustments				12		-		(12)				4		-		(4)
Deferred income tax valuation allowance (releases) charges				38		-		(38)				(30)		-		30
Changes in fair value of securities used to hedge
guaranteed living benefits		(96)		(20)		-		(76)		77		16		-		61
Changes in benefit reserves and DAC, VOBA and
SIA related to net realized capital gains (losses)		(99)		(21)		-		(78)		31		6		-		25
Changes in the fair value of equity securities		(79)		(17)		-		(62)		-		-		-		-
Unfavorable (favorable) prior year development and
related amortization changes ceded
under retroactive reinsurance agreements		(27)		(5)		-		(22)		34		7		-		27
(Gain) loss on extinguishment of debt		(2)		(1)		-		(1)		4		1		-		3
Net realized capital (gains) losses^(a)		474		109		-		365		19		(1)		-		20
Loss from discontinued operations								-								1
Income from divested businesses		(6)		(1)		-		(5)		(8)		(2)		-		(6)
Non-operating litigation reserves and settlements		1		1		-		-		13		3		-		10
Net loss reserve discount (benefit) charge		473		99		-		374		(205)		(43)		-		(162)
Integration and transaction costs associated with acquired
businesses		7		2		-		5		-		-		-		-
Restructuring and other costs		47		10		-		37		24		5		-		19
Noncontrolling interest primarily related to net realized capital
gains (losses) of Fortitude Holdings' standalone results^(b)						247		247						1		1
Adjusted pre-tax income/Adjusted after-tax
income	$	1,847	$	423	$	(36)	$	1,388	$	1,216	$	243	$	(10)	$	963

Weighted average diluted shares outstanding								877.5								925.3
Income per common share attributable
to AIG (diluted)							$	0.75							$	1.01
Adjusted after-tax income per common share
attributable to AIG (diluted)							$	1.58							$	1.04

(a) 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.

(b) Noncontrolling interests is primarily due to the 19.9 percent investment in Fortitude Holdings by an affiliate of The Carlyle Group L.P. (Carlyle), which occurred in the fourth quarter of 2018. Carlyle is allocated 19.9 percent of Fortitude Holdings’ standalone financial results. Fortitude Holdings’ results are mostly eliminated in AIG’s consolidated income from continuing operations given that its results arise from intercompany transactions. Noncontrolling interests is calculated based on the standalone financial results of Fortitude Holdings. The most significant component of Fortitude Holdings’ standalone results concerns gains related to the change in fair value of embedded derivatives, which moved materially in the quarter due to lower rates and tightening credit spreads, and which are recorded in net realized capital gains and losses of Fortitude Holdings. In accordance with AIG's adjusted after-tax income definition, realized capital gains and losses are excluded from noncontrolling interests.

Fortitude Holdings’ summarized financial information (standalone results) is presented below:

Three Months Ended March 31, 2019		Fortitude		AIG Noncontrolling
(in millions)		Holdings		Interest
Revenues	$	606	$	121
Expenses		472		94
Adjusted pre-tax income		134		27
Taxes on adjusted pre-tax income		28		6
Adjusted after-tax income, excluding realized capital gains		106		21

Net realized capital gains		1,573		313
Taxes on realized capital gains		330		66
After-tax net realized capital gains		1,243		247
Net income	$	1,349	$	268

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ITEM 2 | Consolidated Results of Operations

first QUARTER pre-tax income Comparison for 2019 and 2018

Decrease in pre-tax income in the first quarter of 2019 compared to the first quarter of 2018 is the result of:

Increases due to:

• improvement in accident year losses in General Insurance as a result of underwriting discipline, increased use of reinsurance and a change in business mix as well as lower catastrophe losses in General Insurance;

• higher investment returns in our hedge fund portfolio and equity securities due to robust equity market returns in the first quarter of 2019 and an increase in income from fixed maturity securities for which the fair value option was elected, compared to the same period in the prior year where returns were lower as a result of an increase in rates and widening spreads that occurred, as well as negative performance of our fair value option equity securities portfolio; and

• lower general and other operating expenses as a result of ongoing strategic initiatives to reduce costs, partially offset by the increase in expenses caused by the acquisitions of Validus and Glatfelter in the third and fourth quarters of 2018, respectively.

These increases were more than offset by:

• higher net realized capital losses due to Life and Retirement guaranteed living benefits, net of hedges, which reflected net realized capital losses in the first quarter of 2019 compared to net realized capital gains in the first quarter of 2018, primarily due to changes in the movement in the non-performance or “own credit” risk adjustment (NPA), which is not hedged as part of our economic hedging program (see Insurance Reserves – Life and Annuity Reserves and DAC – Variable Annuity Guaranteed Benefits and Hedging Results), partially offset from gains in fixed income securities due to credit spreads tightening; and

• a net loss reserve discount charge in the first quarter of 2019 compared to a loss reserve discount benefit in the first quarter of 2018.

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

Repatriation Assumptions

As a result of the Tax Act, the majority of accumulated foreign earnings that were previously untaxed are subject to a one-time deemed repatriation tax. Going forward, foreign earnings not taxed as part of the one-time deemed repatriation (or otherwise taxed currently under the GILTI or subpart F regimes) will generally be exempt from U.S. tax upon repatriation. Notwithstanding the changes, U.S. tax on foreign exchange gain or loss and certain non-U.S. withholding taxes will continue to be applicable upon future repatriations of foreign earnings. For 2019, 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.

Interim Tax Calculation Method

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ITEM 2 | Consolidated Results of Operations

cases, the actual tax expense or benefit is reported in the same period as the related item. Certain tax effects are also not reflected in the estimated annual effective tax rate, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions and are recorded in the period in which the change occurs. While certain impacts of the Tax Act are included in our annual effective tax rate, we continue to refine our calculations as additional information becomes available, which may result in changes to the estimated annual effective tax rate.

Income Tax expense analysis

Business Segment Operations

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

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

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

Three Months Ended March 31,
(in millions)		2019		2018
Core business:
General Insurance
North America	$	934	$	320
International		334		190
General Insurance		1,268		510
Life and Retirement
Individual Retirement		508		499
Group Retirement		232		282
Life Insurance		116		52
Institutional Markets		68		59
Life and Retirement		924		892
Other Operations		(387)		(342)
Consolidations, eliminations and other adjustments		(70)		11
Total Core		1,735		1,071
Legacy Portfolio		112		145
Adjusted pre-tax income (loss)	$	1,847	$	1,216

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ITEM 2 | Business Segment Operations | General Insurance

General Insurance

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

PRODUCTS AND DISTRIBUTION




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

BUSINESS STRATEGY

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

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

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

AIG | First Quarter 2019 Form 10-Q 77

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ITEM 2 | Business Segment Operations | General Insurance

COMPETITION and challenges

Operating in a highly competitive industry, General Insurance competes against several hundred companies, specialty insurance organizations, mutual companies and other underwriting organizations in the U.S. In international markets, we compete for business with the foreign insurance operations of large global insurance groups and local companies in specific market areas and product types. Insurance companies compete through a combination of risk acceptance criteria, product pricing, service and terms and conditions. General Insurance seeks to distinguish itself in the insurance industry primarily based on its well-established brand, global franchise, multinational capabilities, financial and capital strength, innovative products, claims expertise to handle complex claims, expertise in providing specialized coverages and customer service.

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

Our challenges include:

• long-tail Commercial Lines exposures that create added challenges to pricing and risk management;

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

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

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

OUTLOOK—INDUSTRY AND ECONOMIC FACTORS

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

General Insurance – North America

Commercial Lines over recent years has experienced challenging market conditions, with widespread excess capacity increasing competition and suppressing rates across multiple classes of business. However, in more recent periods we are seeing growing market support for rate increases in certain U.S. liability segments (outside of workers’ compensation), with increasing traction in excess casualty, D&O and commercial auto, where rates are supported by a trend of higher loss cost inflation. On the shorter tailed lines, the market is supporting higher rates for accounts which suffered losses from major catastrophe events in 2017 and 2018. We continue to achieve positive rate increases across a number of lines and classes of business as a result of our disciplined underwriting strategy and focus on risk selection. Further, we continue to achieve growth in several of our Commercial Lines high margin businesses, although these market segments remain highly competitive.

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

General Insurance – International

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

The Commercial Lines market continues to be highly competitive, due to increased market capacity and ample availability of capital. Despite this, we continue to grow our most profitable segments and diversify our portfolio across all regions by expanding into new product lines (e.g., cyber), new client segments (e.g., middle market) and new distribution channels (e.g., digital and national brokers) while remaining a market leader in key developed and developing markets. We are maintaining our underwriting discipline and continuing our risk selection strategy to improve profitability.

Personal Insurance focuses on individual customers, as well as group and corporate clients. Although market competition within Personal Insurance has increased, we continue to benefit from the underwriting quality, portfolio diversity, and low volatility of the short-tailed risk in these business lines.

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ITEM 2 | Business Segment Operations | General Insurance

General INSURANCE RESULTS

Three Months Ended March 31,					Percentage
(in millions)		2019		2018	Change
Underwriting results:
Net premiums written	$	6,033	$	6,171	(2)	%
Decrease in unearned premiums		680		512	33
Net premiums earned		6,713		6,683	-
Losses and loss adjustment expenses incurred^(a)		4,233		4,488	(6)
Acquisition expenses:
Amortization of deferred policy acquisition costs		1,159		1,066	9
Other acquisition expenses		303		385	(21)
Total acquisition expenses		1,462		1,451	1
General operating expenses		839		995	(16)
Underwriting income (loss)		179		(251)	NM
Net investment income		1,089		761	43
Adjusted pre-tax income (loss)	$	1,268	$	510	149	%

Loss ratio^(a)	63.1	67.2	(4.1)
Acquisition ratio	21.8	21.7	0.1
General operating expense ratio	12.5	14.9	(2.4)
Expense ratio	34.3	36.6	(2.3)
Combined ratio^(a)	97.4	103.8	(6.4)
Adjustments for accident year loss ratio, as adjusted
and accident year combined ratio, as adjusted:
Catastrophe losses and reinstatement premiums	(2.7)	(5.7)	3.0
Prior year development, net of (additional) return premium on loss sensitive business	1.0	1.6	(0.6)
Adjustment for ceded premiums under reinsurance contracts related to prior accident years and other	0.4	-	0.4
Accident year loss ratio, as adjusted	61.8	63.1	(1.3)
Accident year combined ratio, as adjusted	96.1	99.7	(3.6)

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

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

Three Months Ended March 31,					Percentage Change in
(in millions)		2019		2018	U.S. dollars		Original Currency
North America^(a)(b)	$	2,578	$	2,039	26	%	26	%
International^(a)(c)		3,455		4,132	(16)		(13)
Total net premiums written	$	6,033	$	6,171	(2)	%	-	%

(a) The three-month period ended March 31, 2019 includes Validus Net premiums written for North America and International of $1.1 billion and $171 million, respectively.

(b) The three-month period ended March 31, 2019 includes Glatfelter Net premiums written for North America of $76 million.

(c) As a result of the merger of AIUI Japan and Fuji Fire and Marine Insurance Company (Fuji), Fuji’s fiscal reporting period was conformed to that of AIUI Japan (Japan Merger Impact). Therefore, the three-month period ended March 31, 2018 included approximately $300 million for two additional months of Net premiums written.

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ITEM 2 | Business Segment Operations | General Insurance

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

Catastrophes^(b)

	# of		North
(in millions)	Events		America		International		Total
Three Months Ended March 31, 2019
Flooding	1	$	-	$	10	$	10
Windstorms and hailstorms	3		153		2		155
Tropical cyclone	1		5		5		10
Total catastrophe-related charges	5	$	158	$	17	$	175
Three Months Ended March 31, 2018
Windstorms and hailstorms	4	$	274	$	19	$	293
Earthquakes	1		25		58		83
Total catastrophe-related charges	5	$	299	$	77	$	376

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

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

North america Results

Three Months Ended March 31,					Percentage
(in millions)		2019		2018	Change
Underwriting results:
Net premiums written	$	2,578	$	2,039	26	%
Decrease in unearned premiums		575		653	(12)
Net premiums earned		3,153		2,692	17
Losses and loss adjustment expenses incurred^(a)		2,189		2,153	2
Acquisition expenses:
Amortization of deferred policy acquisition costs		508		358	42
Other acquisition expenses		106		154	(31)
Total acquisition expenses		614		512	20
General operating expenses		361		355	2
Underwriting loss		(11)		(328)	97
Net investment income		945		648	46
Adjusted pre-tax income	$	934	$	320	192	%

Loss ratio^(a)	69.4	80.0	(10.6)
Acquisition ratio	19.5	19.0	0.5
General operating expense ratio	11.4	13.2	(1.8)
Expense ratio	30.9	32.2	(1.3)
Combined ratio^(a)	100.3	112.2	(11.9)
Adjustments for accident year loss ratio, as adjusted
and accident year combined ratio, as adjusted:
Catastrophe losses and reinstatement premiums	(5.1)	(11.1)	6.0
Prior year development, net of (additional) return premium on loss sensitive business	1.8	2.8	(1.0)
Adjustment for ceded premiums under reinsurance contracts related to prior accident years and other	1.0	-	1.0
Accident year loss ratio, as adjusted	67.1	71.7	(4.6)
Accident year combined ratio, as adjusted	98.0	103.9	(5.9)

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ITEM 2 | Business Segment Operations | General Insurance

Business and Financial Highlights

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

Adjusted pre-tax income increased in the three-month period ended March 31, 2019 compared to the same period in the prior year, primarily due to higher net investment income reflecting higher income on alternative investments, lower catastrophe losses and the inclusion of the Validus acquisition.

For a discussion of 2019 reinsurance programs see Part II, Item 7 Management's Discussion and Analysis of Financial Condition Results of Operation - Enterprise Risk Management in our 2018 Annual Report.

North America Adjusted Pre-Tax Income (Loss)

Three Months Ended March 31,

(in millions)

2019 and 2018 Comparison

Adjusted pre-tax income increased primarily due to:

• higher net investment income reflecting higher income on alternative investments and the inclusion of the Validus acquisition;

• lower catastrophe losses; and

• lower current accident year loss ratio, as adjusted, driven primarily by underwriting actions and a change in business mix including the Validus and Glatfelter acquisitions.

North America Net Premiums Written

Three Months Ended March 31,

(in millions)

2019 and 2018 Comparison

Net premiums written increased primarily due to the inclusion of the Validus and Glatfelter acquisitions.

This increase was partially offset by:

• higher ceded premiums due to the changes in 2019 reinsurance programs; and

• lower production primarily in Excess Casualty, Retail Property, and Construction due to underwriting actions taken to strengthen our portfolio and to maintain pricing discipline.

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ITEM 2 | Business Segment Operations | General Insurance

North America Combined Ratios

Three Months Ended March 31,

2019 and 2018 Comparison

The decrease in the combined ratio reflected a decrease in both the loss ratio and the expense ratio.

The decrease in the loss ratio primarily reflected:

• lower catastrophe losses; and

• lower accident year loss ratio, as adjusted, due to a change in business mix including the Validus and Glatfelter acquisitions.

The decrease in the expense ratio reflected:

• lower general operating expense ratio primarily driven by expense reduction initiatives; and

• higher acquisition ratio primarily due to changes in portfolio mix and changes in the 2019 reinsurance programs.

International Results

Three Months Ended March 31,					Percentage
(in millions)		2019		2018	Change
Underwriting results:
Net premiums written	$	3,455	$	4,132	(16)	%
(Increase) decrease in unearned premiums		105		(141)	NM
Net premiums earned		3,560		3,991	(11)
Losses and loss adjustment expenses incurred		2,044		2,335	(12)
Acquisition expenses:
Amortization of deferred policy acquisition costs		651		708	(8)
Other acquisition expenses		197		231	(15)
Total acquisition expenses		848		939	(10)
General operating expenses		478		640	(25)
Underwriting income^(a)		190		77	147
Net investment income		144		113	27
Adjusted pre-tax income	$	334	$	190	76	%

Loss ratio	57.4	58.5	(1.1)
Acquisition ratio	23.8	23.5	0.3
General operating expense ratio	13.4	16.0	(2.6)
Expense ratio	37.2	39.5	(2.3)
Combined ratio	94.6	98.0	(3.4)
Adjustments for accident year loss ratio, as adjusted
and accident year combined ratio, as adjusted:
Catastrophe losses and reinstatement premiums	(0.5)	(1.9)	1.4
Prior year development, net of (additional) return premium on loss sensitive business	0.4	0.7	(0.3)
Adjustment for ceded premiums under reinsurance contracts related to prior accident years	-	-	NM
Accident year loss ratio, as adjusted	57.3	57.3	(0.0)
Accident year combined ratio, as adjusted	94.5	96.8	(2.3)

(a) As result of the Japan Merger Impact, the three-month period ended March 31, 2018 includes two additional months of operating earnings increasing Net premiums written, Net premiums earned, Losses and loss adjustment expenses incurred, and Adjusted pre-tax income by approximately $300 million, $300 million, $200 million and $15 million, respectively.

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Business and Financial Highlights

The International General Insurance business is focused on underwriting profits and improved efficiency, further improving underwriting margins, and growing profitably in segments and geographies that support our growth strategy.

Adjusted pre-tax income increased in the first quarter of 2019 compared to the same period in the prior year primarily due to lower General operating expenses, inclusion of the Validus acquisition and lower catastrophe losses.

Net premiums written, excluding the impact of foreign exchange, decreased primarily due to the Japan Merger Impact, higher ceded premiums, and lower Accident & Health business in Asia Pacific, partially offset by inclusion of the Validus acquisition.

International Adjusted Pre-Tax Loss

Three Months Ended March 31,

(in millions)

2019 and 2018 Comparison

Adjusted pre-tax Income increased primarily due to:

· lower general operating expenses;

· inclusion of the Validus acquisition; and

· lower catastrophe losses.

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International Net Premiums Written

Three Months Ended March 31,

(in millions)

2019 and 2018 Comparison

Net premiums written, excluding the impact of foreign exchange, decreased due to:

· the Japan Merger Impact;

· higher ceded premiums due to changes in 2019 reinsurance programs; and

· lower Accident & Health business in Asia Pacific.

This decrease was partially offset by:

· inclusion of the Validus acquisition.

International Combined Ratios

Three Months Ended March 31,

2019 and 2018 Comparison

The decrease in the combined ratio reflected a decrease in both the expense ratio and the loss ratio.

This decrease in the expense ratio reflected a lower general operating expense ratio driven by the Japan Merger Impact, lower employee-related expenses and other expense reduction initiatives.

This decrease in the loss ratio was primarily driven by lower catastrophe losses.

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ITEM 2 | Business Segment Operations | Life and Retirement

Life and Retirement

PRODUCTS AND DISTRIBUTION
	Variable Annuities: Products include variable annuities that offer a combination of growth potential, death benefit features and income protection features. Variable annuities are distributed primarily through banks, wirehouses, and regional and independent broker-dealers. Index Annuities: Products include fixed index annuities that provide growth potential based in part on the performance of a market index. Certain fixed index annuity products offer optional income protection features. Fixed index annuities are distributed primarily through banks, broker dealers, independent marketing organizations and independent insurance agents. Fixed Annuities: Products include single premium fixed annuities, immediate annuities and deferred income annuities. The Fixed Annuities product line maintains its industry-leading position in the U.S. bank distribution channel by designing products collaboratively with banks and offering an efficient and flexible administration platform. Retail Mutual Funds: Includes our mutual fund sales and related administration and servicing operations. Retail Mutual Funds are distributed primarily through broker-dealers.
	Group Retirement: Products and services consist of group mutual funds, group annuities, individual annuity and investment products, and financial planning and advisory services. In March 2019, the products and services marketed by The Variable Annuity Life Insurance Company (VALIC), which include investment offerings and plan administrative and compliance services, were rebranded under the AIG Retirement Services name to allow the business to fully leverage the strength and scale of the AIG brand. Legal entity names will, however, remain unchanged: The Variable Annuity Life Insurance Company and its subsidiaries, VALIC Financial Advisors, Inc. and VALIC Retirement Services Company. AIG Retirement Services career financial advisors and independent financial advisors provide retirement plan participants with enrollment support and comprehensive financial planning services.
	Life Insurance: In the U.S., products primarily include term life and universal life insurance distributed through independent marketing organizations, independent insurance agents, financial advisors and direct marketing. International operations include the distribution of life and health products in the UK and Ireland.
	Institutional Markets: Products primarily include stable value wrap products, structured settlement and pension risk transfer annuities, corporate- and bank-owned life insurance and guaranteed investment contracts (GICs). Institutional Markets products are primarily distributed through specialized marketing and consulting firms and structured settlement brokers.

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ITEM 2 | Business Segment Operations | Life and Retirement

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

BUSINESS STRATEGY

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

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


	Individual Retirement will continue to capitalize on the opportunity to meet consumer demand for guaranteed income by maintaining innovative variable and index annuity products, while also managing risk from guarantee features through risk-mitigating product design and well-developed economic hedging capabilities. Our fixed annuity products provide diversity in our annuity product suite by offering stable returns for retirement savings.			Group Retirement continues to enhance its technology platform to improve the customer experience for plan sponsors and individual participants. AIG Retirement Services’ (formerly VALIC) self-service tools paired with its career financial advisors provide a compelling service platform. Group Retirement’s strategy also involves providing financial planning services for its clients and meeting their need for income in retirement.


	Life Insurance in the U.S. will continue to position itself for growth and changing market dynamics while continuing to execute strategies to enhance returns. Our focus is on materializing success from a multi-year effort of building state-of-the-art platforms and underwriting innovations, which are expected to bring process improvements and cost efficiencies. In the UK, AIG Life Insurance will continue to focus on growing the business organically and through potential acquisition opportunities.			Institutional Markets continues to grow its assets under management across multiple product lines, including stable value wrap, GICs and pension risk transfer annuities. Our growth strategy is opportunistic and allows us to pursue select transactions that meet our risk-adjusted return requirements.

Enhance Operational Effectiveness by simplifying processes and operating environments to increase competitiveness, improve service and product capabilities and facilitate delivery of our target customer experience. We continue to invest in technology to improve operating efficiency and ease of doing business for our distribution partners and customers. We believe that simplifying our operating models will enhance productivity and support further profitable growth.

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

Deliver Value Creation and Manage Capital by striving to deliver solid earnings through disciplined pricing, sustainable underwriting improvements, expense reductions, and diversification of risk, while optimizing capital allocation and efficiency within insurance entities to enhance return on equity.

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ITEM 2 | Business Segment Operations | Life and Retirement

COMPETITION and challenges

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

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

Our primary challenges include:

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

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

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

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

OUTLOOK—INDUSTRY AND ECONOMIC FACTORS

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

Individual Retirement

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

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

Group Retirement

Group Retirement competes in the defined contribution market under the AIG Retirement Services brand. AIG Retirement Services is a leading retirement plan provider in the U.S. for K-12 schools and school districts, higher education, healthcare, government and other not-for-profit institutions. The defined contribution market is a highly efficient and competitive market that requires support for both plan sponsors and individual participants. To meet this challenge, AIG Retirement Services is investing in a client-focused technology platform to support improved compliance and self-service functionality. AIG Retirement Services’ model pairs self-service tools with its career financial advisors who provide individual plan participants with enrollment support and comprehensive financial planning services.

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

AMERICAN INTERNATIONAL GROUP, INC. - Quarter Report: 2019 March (Form 10-Q)