Management's Discussion and Analysis of Financial Condition and Results of Operations is designed to provide the reader a narrative with respect to American International Group, Inc.'s (AIG's) operations, financial condition and liquidity and certain other significant matters.

Index Page

Cautionary Statement Regarding Forward-Looking Information 87 Overview 88 Consideration of AIG's Ability to Continue as a Going Concern 88 Capital Resources and Liquidity 90 Liquidity 90 Outlook 107 Results of Operations 110 Consolidated Results 111 Segment Results 117 General Insurance Operations 118 Liability for unpaid claims and claims adjustment expense 123 Life Insurance & Retirement Services Operations 131 Deferred Policy Acquisition Costs and Sales Inducement Assets 147 Financial Services Operations 148 Asset Management Operations 154 Other Operations 156 Critical Accounting Estimates 159 Investments 182 Investment Strategy 183 Other-Than-Temporary Impairments 190 Risk Management 194 Overview 194 Credit Risk Management 195 Insurance Risk Management 196

Cautionary Statement Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q and other publicly available documents may include, and AIG's officers and representatives may from time to time make, projections and statements which may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These projections and statements are not historical facts but instead represent only AIG's belief regarding future events, many of which, by their nature, are inherently uncertain and outside AIG's control. These projections and statements may address, among other things:

º •
º the outcome of the completed and proposed transactions with the Federal Reserve Bank of New York (FRBNY) and the United States Department of the Treasury (Department of the Treasury);

º •
º the number, size, terms, cost, proceeds and timing of dispositions and their potential effect on AIG's businesses, financial condition, results of operations, cash flows and liquidity (and AIG at any time and from time to time may change its plans with respect to the sale of one or more businesses);

º •
º AIG's exposures to subprime mortgages, monoline insurers and the residential and commercial real estate markets;

º •
º the separation of AIG's businesses from AIG parent company;

º •
º AIG's ability to retain and motivate its employees; and

º •
º AIG's strategy for customer retention, growth, product development, market position, financial results and reserves.

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

º •
º a failure of the completed transactions with the FRBNY or the Department of the Treasury to achieve their desired objectives;

º •
º a failure to complete the proposed transactions with the FRBNY;

º •
º developments in global credit markets; and

º •
º such other factors as discussed throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations and in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q, in Part II, Item 1A. Risk Factors of AIG's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009, and in Part I, Item 1A. Risk Factors of the Annual Report on Form 10-K for the year ended December 31, 2008.

AIG is not under any obligation (and expressly disclaims any obligation) to update or alter any projection or other statement, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise.

In addition to reviewing AIG's results for the three- and nine-month periods ended September 30, 2009, this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) supplements and updates the information and discussion included in the Annual Report on Form 10-K of AIG for the year ended December 31, 2008, including the Form 10-K/A (Amendment No. 1) filed on April 30, 2009 (the 2008 Form 10-K), and the revised financial information reflecting the adoption of the accounting standard related to noncontrolling interests in consolidated financial statements, included in AIG's Current Report on Form 8-K filed on June 29, 2009 (collectively, the 2008 Financial Statements), to reflect developments in or affecting AIG's business to date during 2009.

Throughout this MD&A, AIG presents its operations in the way it believes will be most meaningful. Statutory underwriting profit (loss) is presented in accordance with accounting principles prescribed by insurance regulatory authorities because these are standard measures of performance used in the insurance industry and thus allow more meaningful comparisons with AIG's insurance competitors. AIG also uses cross-references to additional information included in this Quarterly Report on Form 10-Q and in the 2008 Form 10-K to assist readers seeking related information on a particular subject.

Overview

AIG identifies its operating segments by product line, consistent with its management structure. These segments are General Insurance, Life Insurance & Retirement Services, Financial Services and Asset Management. Through these operating segments, AIG provides insurance, financial and investment products and services to both businesses and individuals in more than 130 countries and jurisdictions.

AIG's subsidiaries serve commercial, institutional and individual customers through an extensive property-casualty and life insurance and retirement services network. AIG's Financial Services businesses include commercial aircraft and equipment leasing, capital markets operations and consumer finance, both in the United States and abroad. AIG also provides asset management services to institutions and individuals.

Consideration of AIG's Ability to Continue as a Going Concern

In the 2008 Form 10-K, management disclosed the conditions and events that led management to conclude that AIG would have adequate liquidity to finance and operate AIG's businesses, execute its asset disposition plan and repay its obligations for at least the next twelve months. At that time, the United States government issued the following statement referring to the March 2009 agreements in principle and other transactions they expected to

undertake with AIG (many of which were subsequently undertaken) to strengthen its capital position, enhance its liquidity, reduce its borrowing costs and facilitate AIG's asset disposition program.

"The steps announced today provide tangible evidence of the U.S. government's commitment to the orderly restructuring of AIG over time in the face of continuing market dislocations and economic deterioration. Orderly restructuring is essential to AIG's repayment of the support it has received from U.S. taxpayers and to preserving financial stability. The U.S. government is committed to continuing to work with AIG to maintain its ability to meet its obligations as they come due."

In connection with the preparation of this Quarterly Report on Form 10-Q, management assessed whether AIG had the ability to continue as a going concern. In making this assessment, AIG considered:

º •
º The commitment of the FRBNY and the Department of the Treasury to the orderly restructuring of AIG and their commitment to continuing to work with AIG to maintain its ability to meet its obligations as they come due;

º •
º AIG's liquidity-related actions and plans to stabilize its businesses and repay the debt outstanding under the facility (the FRBNY Facility) provided by the FRBNY under the Credit Agreement, dated as of September 22, 2008 (as amended, the FRBNY Credit Agreement), between AIG and the FRBNY;

º •
º The level of AIG's realized and unrealized losses and the negative impact of these losses in shareholders' equity and on the capital levels of AIG's insurance subsidiaries;

º •
º The substantial resolution of the liquidity issues surrounding the multi-sector super senior credit default swap portfolio of AIG Financial Products Corp. and AIG Trading Group, Inc. and their respective subsidiaries (collectively, AIGFP) and the U.S. securities lending program;

º •
º The additional capital provided or committed through the AIG Series F Preferred Stock to AIG by the Department of the Treasury;

º •
º The proposed transactions contemplated by the Purchase Agreement, dated as of June 25, 2009, among AIG, American International Reinsurance Company, Limited (AIRCO) and the FRBNY (the AIA Purchase Agreement) and the Purchase Agreement, dated as of June 25, 2009, between AIG and the FRBNY (the ALICO Purchase Agreement);

º •
º The planned sales of significant subsidiaries;

º •
º The continuing liquidity issues in certain of AIG's businesses and AIG's actions to address such issues; and

º •
º The substantial risks to which AIG is subject.

See Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2008 Form 10-K, Notes 1 and 8 to the Consolidated Financial Statements and the discussion below for further details on these items.

In considering these items, management made significant judgments and estimates with respect to the potentially adverse financial and liquidity effects of AIG's risks and uncertainties. Management also assessed other items and risks arising in AIG's businesses and made reasonable judgments and estimates with respect thereto. After consideration, management believes that it will have adequate liquidity to finance and operate AIG's businesses and continue as a going concern for at least the next twelve months.

It is possible that the actual outcome of one or more of management's plans could be materially different or that one or more of management's significant judgments or estimates about the potential effects of the risks and uncertainties could prove to be materially incorrect or that the proposed transactions discussed below are not consummated. If one or more of these possible outcomes is realized, AIG may need additional U.S. government support to meet its obligations as they come due. If additional support is not available in such circumstances, there could be substantial doubt about AIG's ability to operate as a going concern.

Capital Resources and Liquidity

Liquidity

At October 28, 2009, AIG had outstanding net borrowings under the FRBNY Facility of $41.7 billion, with a remaining borrowing capacity of $18.3 billion, and accrued compounding interest and fees of $5.2 billion. Net borrowings increased $5.9 billion from September 30, 2009 primarily due to AIG's secured loan of $2 billion to International Lease Finance Corporation (ILFC) that permitted ILFC to repay a maturing bank facility, and the repayment of approximately $4.9 billion in commercial paper maturities under the CPFF, which had the effect of unencumbering certain assets securing such commercial paper. The remaining amount outstanding under the CPFF after the October 2009 repayments is approximately $5.8 billion, which includes $2.0 billion for AIG Funding, Inc. (AIG Funding), $2.7 billion for Curzon Funding LLC, and $1.1 billion for Nightingale Finance LLC. In January 2010, AIG will assess whether to borrow additional funds under the FRBNY Facility in order to repay the remaining amounts outstanding under the CPFF, taking into account availability of other sources of funding.

The net borrowing amounts shown at September 30, 2009 and October 28, 2009 were reduced by approximately $1.6 billion drawn under the Department of the Treasury Commitment, but which had not yet been utilized, and are more fully described in the summary of drawdown activity under the Department of the Treasury Commitment shown below. In addition, the net borrowings as of these dates were further reduced by $1.6 billion due to loans to AIG from AGF. AIG expects that these loans will be repaid to support AGF's liquidity as needed.

Net borrowings outstanding and remaining available amount that can be borrowed under the FRBNY Facility were as follows:

                                                 Inception Through
                                            December 31,     September 30,       Increase
(in millions)                                       2008              2009     (Decrease)

Net borrowings:
  Loans to AIGFP for collateral
  postings, GIA and other debt
  maturities                              $       46,997   $        49,347   $      2,350
  AIGFP repayments to AIG                         (4,093 )          (8,441 )       (4,348 )
  Capital contributions and loans to
  insurance companies(a)                          20,850            23,245          2,395
  Repayment of obligations to
  securities lending program                       3,160             3,160              -
  Repayment of intercompany loans                  1,528             1,528              -
  Contributions to AIGCFG
  subsidiaries(b)                                  1,672             1,242           (430 )
  Loans to ILFC                                        -             1,700          1,700
  Debt payments                                    2,109             3,760          1,651
  Funding of equity interest in ML III             5,000             5,000              -
  Repayment from the proceeds of the
  issuance of Series D Preferred Stock
  and common stock warrant                       (40,000 )         (40,000 )            -
  Other(c)                                          (423 )          (4,741 )       (4,318 )

Net borrowings                                    36,800            35,800         (1,000 )

Total FRBNY Facility                              60,000            60,000              -

Remaining available amount                        23,200            24,200          1,000

Net borrowings                                    36,800            35,800         (1,000 )
Accrued compounding interest and
fees(d)                                            3,631             5,209          1,578

Total balance outstanding                 $       40,431   $        41,009   $        578

º (a)
º Includes securities lending activities.

º (b)
º Includes repayments and sales of subsidiaries.

º (c)
º Includes repayments with proceeds from the CPFF, tax refunds, loans to AIG from AGF discussed above and drawdowns under the Department of the Treasury Commitment, which had not yet been utilized.

º (d)
º Excludes interest payable of $8 million and $5 million at December 31, 2008 and September 30, 2009, respectively, which was included in Other liabilities.

On April 17, 2009, AIG entered into a Securities Purchase Agreement with the Department of the Treasury, pursuant to which the Department of the Treasury will provide an amount up to $29.835 billion (the Department of the Treasury Commitment) in exchange for increases in the liquidation preference of AIG's Series F Fixed Rate Non-Cumulative Perpetual Preferred Stock, par value $5.00 per share (the AIG Series F Preferred Stock), so long as (i) AIG is not a debtor in a pending case under Title 11 of the United States Code; and (ii) the AIG Credit Facility Trust, a trust established for the sole benefit of the United States Treasury (Trust) (or any successor entity established for the sole benefit of the United States Treasury) and the Department of the Treasury, in the aggregate, "beneficially own" more than 50 percent of the aggregate voting power of AIG's voting securities. Upon drawings under this commitment, the liquidation preference of the AIG Series F Preferred Stock increases proportionately.

A summary of drawdown activity and available amount under the Department of the Treasury Commitment were as follows:

                                                             Inception Through
     (in millions)                                          September 30, 2009

         Drawdown No.1 on May 13, 2009(a)                   $            1,150
         Drawdown No.2 on August 13, 2009(b)                             2,056

     Total drawdowns                                                     3,206

     Original availability under commitment                             29,835
     Less: Total drawdowns                                              (3,206 )

     Remaining available amount at September 30, 2009       $           26,629

º (a)
º Represents a capital contribution to Domestic Life & Retirement Services companies.

º (b)
º Represents UGC related restructuring transactions and a pending intercompany purchase of ILFC common shares. As of October 28, 2009, approximately $1.6 billion of the $2.056 billion received by AIG was temporarily utilized to repay the FRBNY Facility.

On November 6, 2009, AIG delivered a notice of an additional drawdown of approximately $2.1 billion under the Department of the Treasury Commitment related primarily to the intercompany purchase of ILFC common shares. AIG expects to receive the funds on November 13, 2009.

Additional details regarding liquidity sources are included in Liquidity of Parent and Subsidiaries below.

Transactions Proposed to be Completed with the FRBNY

AIA Purchase Agreement

On June 25, 2009, AIG and AIRCO entered into the AIA Purchase Agreement with the FRBNY pursuant to which the FRBNY will purchase preferred equity interests in a newly formed special purpose vehicle in exchange for a reduction in the outstanding balance of the FRBNY Facility and the maximum amount available to be borrowed thereunder equal to the liquidation preference of the preferred equity, which will be $16 billion, provided the maximum amount available under the FRBNY Facility will not be less than $25 billion as a result of such reduction.

ALICO Purchase Agreement

On June 25, 2009, AIG entered into the ALICO Purchase Agreement with the FRBNY pursuant to which the FRBNY will purchase preferred equity interests in a newly formed special purpose vehicle in exchange for a reduction in the outstanding balance of the FRBNY Facility and the maximum amount available to be borrowed thereunder equal to the liquidation preference of the preferred equity, which will be $9 billion, provided the maximum amount available under the FRBNY Facility will not be less than $25 billion as a result of such reduction.

Amortization of Prepaid Commitment Asset

Any permanent reduction in the FRBNY Facility will result in accelerated amortization of a portion of the prepaid commitment asset. Therefore, AIG anticipates that the consummation of each of the AIA Purchase Agreement and

the ALICO Purchase Agreement will result in accelerated amortization of the prepaid commitment asset at the time that the senior interests are transferred to the FRBNY, currently expected to occur in the fourth quarter of 2009. Acceleration of the amortization will result in a pre-tax charge to earnings which AIG expects to aggregate to approximately $5 billion.

Life Insurance Securitizations

On March 2, 2009, AIG and the Board of Governors of the Federal Reserve System announced their intent to enter into transactions pursuant to which the FRBNY will purchase embedded value securitization notes issued by newly-formed SPVs to be repaid with the net cash flows from designated blocks of existing life insurance policies. The proceeds of the notes would be applied in settlement of a portion of the outstanding balance of the FRBNY Facility and would reduce the maximum amount to be borrowed under the FRBNY Facility (provided the maximum amount available thereunder will not be less than $25 billion as a result of such reduction). The amount of the FRBNY Facility reduction will be based on the proceeds received and will also result in accelerated amortization of a portion of the prepaid commitment asset. The SPVs are expected to be consolidated by AIG.

See Note 1 to the Consolidated Financial Statements for further information on these transactions and Note 8 to the Consolidated Financial Statements for information on additional transactions completed in 2009.

AIG's Strategy for Stabilization and Repayment of its Obligations as They Come Due

Future Cash Requirements

  AIG expects that the repayment of future debt maturities will represent its
primary use of financing cash flows.

The following table shows the maturing debt of AIG and its subsidiaries for the
next four quarters:


                                 Fourth      First     Second      Third
                                Quarter    Quarter    Quarter    Quarter
          (in millions)            2009       2010       2010       2010      Total

          AIG                   $ 1,000    $   888    $     -    $   500   $  2,388
          AIG MIP                     -        500          -        933      1,433
          AIGFP                   1,580        915        385        275      3,155
          ILFC                    3,049        738      1,476      2,070      7,333
          AGF(a)(b)               1,661        723        589      5,192      8,165
          Other subsidiaries        353         56        224         78        711

          Total                 $ 7,643    $ 3,820    $ 2,674    $ 9,048   $ 23,185

º (a)
º American General Finance, Inc.

º (b)
º On July 9, 2009, AGF converted the $2.45 billion of loans that AGF had previously drawn on its 364-Day Syndicated Facility into one-year term loans. AIG has provided a capital support agreement for the benefit of the lenders of these termed-out loans, which must be repaid by July 9, 2010.

Debt maturities for the Matched Investment Program (MIP) are expected to be funded through cash flows generated from invested assets (principal and interest) as well as the sale or financing of the asset portfolios in the program. Approximately $2.3 billion of AIGFP's debt maturities through September 30, 2010 are fully collateralized with assets backing the corresponding liabilities.

In addition to these cash requirements, at October 28, 2009, AIG affiliates had $5.8 billion of commercial paper outstanding under the CPFF, all of which matures in January 2010, including $2.0 billion issued by AIG Funding. AIG Funding intends to repay this maturing commercial paper in January 2010, which could lead to an increase in borrowings under the FRBNY Facility.

AIG expects to meet these obligations primarily through the cash flows from, and the disposition of, assets supporting these obligations as well as through borrowings from the FRBNY Facility. In addition, AIG also expects to

collect dividends, distributions and other payments from certain subsidiaries to fund payments on its obligations. Additional liquidity is also available under the Department of Treasury Commitment.

In the first nine months of 2009, AIG made capital contributions of $2.4 billion to certain of its Domestic Life Insurance & Retirement Services companies. Approximately $1.2 billion of this amount was funded through drawdowns under the Department of the Treasury Commitment. If a substantial portion of the Domestic Life Insurance & Retirement Services bond portfolio diminishes significantly in value or suffers adverse credit events, AIG may need to provide additional capital support for these operations.

AIG made capital contributions of $641 million to its Commercial Insurance companies in the first six months of 2009, all of which was returned as a dividend to AIG in July 2009. In addition, in connection with the sale by a Commercial Insurance subsidiary of a portion of its common stock of Transatlantic Holdings, Inc. (Transatlantic), AIG made a capital contribution of $91 million in the second quarter of 2009 to that company.

AIG also made a $600 million capital contribution to AGF (through AIG Capital Corporation) during the first nine months of 2009, and AGF loaned $1.6 billion to AIG parent under demand notes.

AIG has developed certain plans (described below), some of which have already been implemented, to provide stability to its businesses and to provide for the timely repayment of the FRBNY Facility; other plans are still being formulated.

Asset Disposition Plan

Since September 2008, AIG has been working to execute an orderly asset disposition plan, protect and enhance the value of its key businesses, and position these franchises for the future. AIG continually reassesses this plan to maximize value while maintaining flexibility in its liquidity and capital, and expects to accomplish this over a longer time frame than originally contemplated.

Sales of Businesses and Specific Asset Dispositions

Sales of Businesses

Dispositions of certain businesses will be subject to regulatory approval. Proceeds from these dispositions, to the extent they do not represent capital of AIG's insurance subsidiaries required for regulatory or ratings purposes, are contractually required to be applied toward the repayment of the FRBNY Facility as mandatory prepayments.

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