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AMERICAN INTERNATIONAL GROUP INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 4, 2014

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 that are defined in the Glossary and Acronyms. American International Group, Inc. (AIG) has incorporated into this discussion a number of cross-references to additional information included elsewhere in this Quarterly Report on Form 10-Q to assist readers seeking additional information related to a particular subject. In this Quarterly Report on Form 10­Q, 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 10­Q and other publicly available documents may include, and officers and representatives of AIG may from time to time make, projections, goals, assumptions and statements that may constitute "forward­looking 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 AIG's belief regarding future events, many of which, by their nature, are inherently uncertain and outside AIG's control. These projections, goals, assumptions and statements include statements preceded by, followed by or including words such as "believe," "anticipate," "expect," "intend," "plan," "view," "target" or "estimate." These projections, goals, assumptions and statements may address, among other things: • AIG's exposures to subprime • AIG's return on equity and earnings mortgages, monoline insurers, the per share; residential and commercial real estate • AIG's strategies to grow net markets, state and municipal bond investment income, efficiently manage issuers and sovereign bond issuers; capital and reduce expenses; • AIG's exposure to European • AIG's strategies for



customer

governments and European financial retention, growth, product development, institutions;

market position, financial results



and

• AIG's strategy for risk management; reserves; and • AIG's generation of deployable • the revenues and combined ratios of capital;

AIG's subsidiaries. 76



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TABLE OF CONTENTS It is possible that AIG's 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 AIG's actual results to differ, possibly materially, from those in the specific projections, goals, assumptions and statements include: • changes in market conditions; • judgments concerning the recognition • the occurrence of catastrophic of deferred tax assets; and events, both natural and man­made; • such other factors discussed in: • significant legal proceedings; • this Part I, Item 2. MD&A of this • the timing and applicable Quarterly Report on Form 10-Q; requirements of any new regulatory • Part I, Item 2. MD&A of the framework to which AIG is subject as a Quarterly Report on Form 10-Q for the nonbank systemically important financial quarterly period ended March 31, 2014; institution (SIFI) and as a global and systemically important insurer (G­SII); • Part I, Item 1A. Risk Factors and • concentrations in AIG's investment Part II, Item 7. MD&A in our Annual portfolios; Report on Form 10-K for the year



ended

• actions by credit rating agencies; December 31, 2013 (2013 Annual Report). • judgments concerning casualty insurance underwriting and insurance liabilities; AIG is not under any obligation (and expressly disclaims 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. 77



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TABLE OF CONTENTS



The MD&A is organized as follows:

INDEX TO ITEM 2 Page USE OF NON-GAAP MEASURES 79 EXECUTIVE OVERVIEW 81 RESULTS OF OPERATIONS 93 Segment Results 95 AIG Property Casualty Operations 99 Liability for Unpaid Claims and Claims Adjustment Expense 116 AIG Life and Retirement Operations 123 Other Operations 137 LIQUIDITY AND CAPITAL RESOURCES 145 Overview 145 Analysis of Sources and Uses of Cash 147 Liquidity and Capital Resources of AIG Parent and Subsidiaries 148 Credit Facilities 153 Contingent Liquidity Facilities 153 Contractual Obligations 154 Off-Balance Sheet Arrangements and Commercial Commitments 155 Debt 157 Credit Ratings 159 Regulation and Supervision 160 Dividends and Repurchases of AIG Common Stock 160 Dividend Restrictions 161 INVESTMENTS 162 Overview 162 Investment Highlights 162 Investment Strategies 162 Credit Ratings 163 Investments by Segment 164 Available-for-Sale Investments 166 Impairments 174 ENTERPRISE RISK MANAGEMENT 179 Overview 179 Credit Risk Management 179 Market Risk Management 180 Liquidity Risk Management 183 CRITICAL ACCOUNTING ESTIMATES 184 REGULATORY ENVIRONMENT 184 Glossary 186 Acronyms 190 78

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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, representative and transparent. Some of the measurements we use are "non­GAAP financial measures" under SEC rules and regulations. GAAP is the acronym for "accounting principles generally accepted in the United States." The non­GAAP financial measures we present may not be comparable to similarly­named measures reported by other companies. Book Value Per Common Share Excluding Accumulated Other Comprehensive Income (Loss) (AOCI) is used to show the amount of our net worth on a per­share basis. We believe Book Value Per Common Share Excluding AOCI is useful to investors because it eliminates the effect of non­cash items that can fluctuate significantly from period to period, including changes in fair value of our available for sale securities portfolio and foreign currency translation adjustments. Book Value Per Common Share Excluding AOCI is derived by dividing Total AIG shareholders' equity, excluding AOCI, by Total common shares outstanding. The reconciliation to book value per common share, the most comparable GAAP measure, is presented in the Executive Overview section of this MD&A. We use the following operating performance measures because we believe they enhance understanding of the underlying profitability of continuing operations and trends of AIG and 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 in the Results of Operations section of this MD&A.



AIG - After­tax operating income (loss) attributable to AIG is derived by excluding the following items from net income (loss) attributable to AIG:

† income (loss) from discontinued † changes in fair value of AIG Life operations;

and Retirement fixed maturity



securities

† income (loss) from divested designated to hedge living benefit businesses, including:

liabilities (net of interest



expense);

† gain on the sale of International † changes in benefit reserves and Lease Finance Corporation (ILFC); and deferred policy acquisition costs (DAC), † certain post-acquisition costs value of business acquired (VOBA), and incurred by AerCap Holdings N.V. sales inducement assets (SIA) related to (AerCap) in connection with its net realized capital gains (losses); acquisition of ILFC and related tax † AIG Property Casualty other effects; (income) expense - net; † legacy tax adjustments primarily † (gain) loss on extinguishment of related to certain changes in uncertain debt; tax positions and other tax adjustments; † net realized capital (gains) † legal reserves (settlements) losses; and related to "legacy crisis matters," † non­qualifying derivative hedging which include favorable and unfavorable activities, excluding net realized settlements related to events leading up capital (gains) losses. to and resulting from our September 2008 liquidity crisis and legal fees incurred by AIG as the plaintiff in connection with such legal matters; † deferred income tax valuation allowance (releases) charges; † AIG Property Casualty † Pre­tax operating income (loss): includes both underwriting income (loss) and net investment income, but excludes net realized capital (gains) losses, other (income) expense - net, and legal settlements related to legacy crisis matters described above. Underwriting income (loss) is derived by reducing net premiums earned by claims and claims adjustment expenses incurred, acquisition expenses and general operating expenses. 79 --------------------------------------------------------------------------------

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Item 2 / USE OF NON-GAAP MEASURES

† Ratios: AIG Property Casualty, along with most property and casualty insurance companies, uses 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 claims and claims adjustment expense, 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. 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. Catastrophe losses are generally weather or seismic events having a net impact on AIG Property Casualty in excess of $10 million each.



† AIG Life and Retirement

† Pre­tax operating income (loss) is derived by excluding the following items from pre­tax income (loss):

† legal settlements related to legacy † net realized capital (gains) crisis matters described above; losses; and † changes in fair values of fixed † changes in benefit reserves and maturity securities designated to hedge DAC, VOBA and SIA related to net living benefit liabilities (net of realized capital gains (losses). interest expense); † Premiums and deposits: includes direct and assumed amounts received on traditional life insurance policies, group benefit policies and deposits on life­contingent payout annuities, as well as deposits received on universal life, investment­type annuity contracts and mutual funds.



† Other Operations - Pre­tax operating income (loss) is derived by excluding the following items from pre­tax income (loss):

† certain legal reserves † net (gain) loss on sale



of divested (settlements) related to legacy crisis businesses, including: matters described above;

† gain on the sale of ILFC;



and

† (gain) loss on extinguishment of † certain post-acquisition costs debt;

incurred by AerCap in connection



with

† net realized capital (gains) its acquisition of ILFC and our share of losses;

AerCap's income taxes. † changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses); † income (loss) from divested businesses, including Aircraft Leasing; and



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

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TABLE OF CONTENTS Item 2 / EXECUTIVE OVERVIEW EXECUTIVE 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 AIG's securities. You should read this Quarterly Report on Form 10­Q, together with the 2013 Annual Report, in its entirety for a complete description of events, trends, uncertainties, risks and critical accounting estimates affecting AIG and its subsidiaries. On June 10, 2014, AIG announced that its Board of Directors appointed Peter D. Hancock as President, Chief Executive Officer and a Director of AIG. Mr. Hancock will assume his new roles on September 1, 2014, when our current President and Chief Executive Officer, Robert H. Benmosche, will assume an advisory role at AIG and is expected to resign as a Director.



We report our results of operations as follows:

† AIG Property Casualty - AIG Property Casualty offers property and casualty insurance products and services to businesses and individuals worldwide. Commercial insurance products for large and small businesses are primarily distributed through insurance brokers. Major lines of business include casualty, property, financial and specialty (including aerospace, environmental, surety, marine, trade credit and political risk insurance). Consumer insurance products are distributed to individual consumers or groups of consumers through insurance brokers, agents, and on a direct-to-consumer basis. Consumer insurance products include accident & health (A&H) and personal insurance. In addition, Fuji Fire & Marine Insurance Company Limited (Fuji) in Japan offers life insurance products through Fuji Life Insurance Company (Fuji Life), which are included in A&H. † AIG Life and Retirement - AIG Life and Retirement offers a comprehensive suite of products and services to individuals and groups, including term life, universal life, A&H, fixed and variable deferred annuities, fixed payout annuities, mutual funds and financial planning. AIG Life and Retirement offers its products and services through a diverse, multi-channel distribution network that includes banks, national, regional and independent broker-dealers, affiliated financial advisors, independent marketing organizations, independent and career insurance agents, structured settlement brokers, benefit consultants and direct-to-consumer platforms. † Other Operations - AIG's Other Operations include results from Mortgage Guaranty operations (conducted through United Guaranty Corporation (UGC)), Global Capital Markets (GCM) operations (consisting of the operations of AIG Markets, Inc. (AIG Markets) and the remaining derivatives portfolio of AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (collectively, AIGFP)), the Direct Investment book (DIB), including the Matched Investment Program (MIP) and certain non-derivative assets and liabilities of AIGFP, Corporate & Other operations (after certain allocations to AIG's business segments), Aircraft Leasing through May 14, 2014 and, subsequent to May 14, 2014, AIG's share of AerCap earnings based on its 46 percent ownership interest. 81

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TABLE OF CONTENTS Item 2 / EXECUTIVE OVERVIEW Executive Summary Financial Performance AIG Property Casualty pre­tax operating income increased in the three-month period ended June 30, 2014 compared to the same period in the prior year primarily due to lower catastrophe losses and a favorable loss reserve development compared to an adverse loss reserve development in the prior year, partially offset by an increase in the frequency and severity of severe losses and a decrease in net investment income. Pre-tax operating income decreased in the six-month period ended June 30, 2014 compared to the same period in the prior year primarily due to a decrease in net investment income and a slight decrease in underwriting income. AIG Life and Retirement pre-tax operating income improved for the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year, reflecting higher fee income from strong growth in assets under management, partially offset by lower investment income, primarily due to strong returns on alternative investments in the prior year periods and lower base investment yield. Disciplined pricing of new business and active management of renewal crediting rates for interest rate sensitive business, together with the run-off of older business with relatively high crediting rates, has largely offset the pressure on investment yields in the sustained low interest rate environment. Premiums and deposits increased in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year, primarily due to continued strong demand for variable annuities in the Retirement Income Solutions product line and improved sales of Fixed Annuities, which have benefitted from slightly higher market interest rates compared to the prior year periods. Mortgage Guaranty pre­tax operating income improved in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year due to an increase in net premiums earned and an increase in favorable prior year loss reserve development. New insurance written decreased in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year due to declining levels of mortgage refinancing activity. Our investment portfolio performance improved slightly in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year due to positive performance on bonds for which we elected the fair value option, primarily driven by lower interest rates since December 31, 2013. Net realized capital gains declined in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year due to lower capital gains from sales of investments related to capital loss carryforward utilization and higher fair value losses on embedded derivatives related to variable annuity guarantee features, net of hedges. 82 --------------------------------------------------------------------------------

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Our Performance - Selected Indicators

Three Months Ended Six Months Ended June 30, June 30, (in millions, except per share data and ratios) 2014 2013 2014 2013 Results of operations data: Total revenues $ 16,105$ 18,426$ 32,217$ 35,388 Income from continuing operations 3,006 2,740 4,665 4,898 Net income attributable to AIG 3,073 2,731 4,682 4,937 Net income per common share attributable to AIG (diluted) 2.10 1.84 3.19 3.33 After-tax operating income attributable to AIG 1,833



1,655 3,614 3,637 After-tax operating income per common share attributable to AIG (diluted)

1.25 1.12 2.46 2.46 Key metrics: AIG Property Casualty combined ratio 98.8 102.6 99.9 100.0 AIG Property Casualty accident year combined ratio, as adjusted 96.9 96.5 97.0 97.0 AIG Life and Retirement premiums and deposits $ 7,360$ 6,765$ 14,489$ 12,345 AIG Life and Retirement assets under management 332,812 293,665 332,812 293,665 Mortgage Guaranty domestic first-lien new insurance written 11,057



13,817 18,662 24,373

June 30, December 31, (in millions, except per share data) 2014 2013 Balance sheet data: Total assets $ 529,109$ 541,329 Long-term debt 38,414 41,693 Total AIG shareholders' equity 108,161 100,470 Book value per common share 75.71 68.62 Book value per common share, excluding AOCI 67.65 64.28 The following table presents a reconciliation of Book value per common share to Book value per common share, excluding accumulated other comprehensive income, which is a non-GAAP measure. See Use of Non­GAAP Measures for additional information. June 30, December 31, (in millions, except per share data) 2014



2013

Total AIG shareholders' equity $ 108,161 $



100,470

Accumulated other comprehensive income 11,511



6,360

Total AIG shareholders' equity, excluding accumulated other comprehensive income $ 96,650 $



94,110

Total common shares outstanding 1,428,575,390



1,464,063,323

Book value per common share $ 75.71 $



68.62

Book value per common share, excluding accumulated other comprehensive income $ 67.65 $ 64.28 83

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TABLE OF CONTENTS Item 2 / EXECUTIVE OVERVIEW Total revenues Income from continuing operations (in millions) (in millions) [[Image Removed]] [[Image Removed]] Net income ATTRIBUTABLE TO AIG Net INCOME PER COMMON SHARE (in millions) ATTRIBUTABLE TO AIG (DILUTED) [[Image Removed]] [[Image Removed]] after-tax operating income Pre-tax operating income by segment attributable to aig (excludes net (in millions) realized capital gains and certain other items) (in millions) [[Image Removed]] [[Image Removed]] 84

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TABLE OF CONTENTS Item 2 / EXECUTIVE OVERVIEW TOTAL ASSETS Long-term debt (in millions) (in millions) [[Image Removed]] [[Image Removed]] Total AIG shareholders' equity Book value per COMMON share and book (in millions) value per common share excluding AOCI [[Image Removed]] [[Image Removed]]



* Includes operating borrowings of other subsidiaries and consolidated investments and hybrid debt securities.

Liquidity and Capital Resources 2014 Highlights

We reduced our debt in the first six months of 2014 as a result of maturities, repayments and repurchases of $5.9 billion, of which $3.0 billion is related to DIB redemptions. We maintained financial flexibility in the first six months of 2014 through $701 million in cash dividends from AIG Property Casualty and $2.5 billion in cash dividends and loan repayments from AIG Life and Retirement, which included approximately $364 million of legal settlement proceeds. Our Board of Directors increased our share repurchase authorization of AIG Common Stock, par value $2.50 per share, (AIG Common Stock), by an additional $2.0 billion on June 5, 2014, resulting in an aggregate remaining authorization at such time of approximately $2.1 billion of AIG Common Stock. During the six months ended June 30, 2014, we repurchased approximately 36 million shares of AIG Common Stock for an aggregate purchase price of approximately $1.9 billion. As of August 4, 2014, an aggregate repurchase authorization of approximately $1.5 billion remains. The total number of shares of AIG Common Stock repurchased in the first half of 2014, and the aggregate purchase price of these shares, reflect our payment of $300 million under an accelerated stock repurchase (ASR) agreement and our initial receipt of 70 percent of the total notional share equivalent, or approximately 3.8 million shares of AIG Common Stock.



We paid a cash dividend on AIG Common Stock of $0.125 per share on each of March 25, 2014 and June 24, 2014.

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Our Board of Directors declared a cash dividend on AIG Common Stock on August 4, 2014 of $0.125 per share, payable on September 25, 2014 to shareholders of record on September 11, 2014.

We received net cash proceeds of approximately $2.4 billion from the sale of ILFC after taking into account the settlement of intercompany loans. This cash amount is in addition to the 97.6 million newly issued AerCap common shares we received as consideration from the sale. Investment Highlights Net investment income increased to $3.9 billion and $8.1 billion for the three- and six-month periods ended June 30, 2014, respectively, compared to the same periods in the prior year. Net investment income for our insurance operations decreased by approximately $131 million and $259 million for the three- and six-month periods ended June 30, 2014, respectively, compared to the same periods in the prior year due to lower reinvestment yields and lower income on alternative investments, although returns on alternative investments continue to benefit from strong equity market performance. While corporate debt securities represented the core of new investment allocations, we continued to make investments in structured securities and other fixed income securities with favorable risk versus return characteristics to improve yields and increase net investment income. Net unrealized gains in our available for sale portfolio increased to approximately $19.4 billion as of June 30, 2014 from approximately $11.7 billion as of December 31, 2013 due to a decline in interest rates over the period and the narrowing of credit spreads.



The overall credit rating of our fixed maturity portfolio remains largely unchanged from December 31, 2013.

Strategic Outlook Industry Trends Our business is affected by industry and economic factors such as interest 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 2014, characterized by factors such as historically low interest rates, instability in the global markets and slowing growth in emerging markets, China and Euro-Zone economies. Interest rates remain low relative to historical levels, which have affected our industry by reducing investment returns. In addition, current market conditions may not necessarily permit insurance companies to increase pricing across all our product lines. 86

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TABLE OF CONTENTS Item 2 / EXECUTIVE OVERVIEW AIG Priorities for 2014 AIG is focused on the following priorities for 2014: † Emphasis on customers; † Growth and profitability in our core insurance businesses; † Enhance the yield on our investments while maintaining focus on credit quality; † Manage our capital more efficiently and redeploy capital to areas that promote profitable growth; † Work with the Board of Governors of the Federal Reserve System (the FRB) in its capacity as our principal regulator; and † Pursue initiatives that continue to reduce expenses and improve efficiencies to best meet the needs of our customers, including centralizing work streams to lower­cost locations and creating a more streamlined organization.



Outlook for Our Operating Businesses

The outlook for each of our businesses and management initiatives to improve growth and performance in 2014 and over the longer term is summarized below. See our 2013 Annual Report for additional information concerning strategic initiatives and opportunities for each of our businesses.



AIG Property Casualty Strategic initiatives and Outlook

Executive Overview Growth and Business Mix - Grow higher value business to increase profitability and expand in attractive growth economies. Underwriting Excellence - Enhance risk selection and pricing to earn returns commensurate with the risk assumed. Claims Best Practices - Improve claims practices, analytics and tools to improve customer service, increase efficiency and lower the loss ratio. Operating Expense Discipline - Apply operating expense discipline and increase efficiencies by taking full advantage of AIG Property Casualty's global footprint. Capital Efficiency - Enhance capital management through initiatives to streamline AIG Property Casualty's legal entity structure, optimize AIG Property Casualty's reinsurance program and improve tax efficiency. Investment Strategy - Execute AIG Property Casualty's investment strategy, which includes increased asset diversification and yield­enhancement opportunities that meet AIG Property Casualty's liquidity, capital, risk and return objectives.



Market Conditions and Industry Trends

AIG Property Casualty expects the current low interest rate environment relative to historical levels, currency volatility, and ongoing uncertainty in global economic conditions will continue to challenge the growth of net investment income and limit growth in some markets. Due to these conditions and overcapacity in the property casualty insurance industry, AIG Property 87 --------------------------------------------------------------------------------

TABLE OF CONTENTS Item 2 / EXECUTIVE OVERVIEW Casualty has sought to modify terms and conditions, grow profitable segments of the business, exit unprofitable businesses and develop advanced data analytics to improve profitability. AIG Property Casualty has observed improving trends in certain key indicators that may offset the effect of current economic challenges. In recent years, AIG Property Casualty has benefitted from favorable pricing trends, particularly in its U.S. commercial business. However, such trends have tapered off in recent quarters. The property casualty insurance industry is experiencing modest growth as a result of this positive rate trend and an increase in overall exposures in certain markets. AIG Property Casualty also expects that expansion in certain growth economies will occur at a faster pace than in developed countries, although at levels lower than those previously expected due to revised economic assumptions. During the second quarter of 2014, within the U.S. commercial property business, AIG Property Casualty observed continued rate pressure in the U.S. Excess and Surplus lines market, particularly with respect to its natural catastrophe exposed business. AIG Property Casualty's strategy is to continue to differentiate its capacity from its peers through leveraging management's significant experience with catastrophic events, providing loss prevention expertise and maintaining discipline in pricing to internal targets despite intense competition. In the U.S., AIG Property Casualty's exposure to terrorism risk is mitigated by the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) in addition to limited private reinsurance protections. TRIPRA is set to expire on December 31, 2014. AIG Property Casualty is closely monitoring the legislative developments related to the TRIPRA renewal or expiration, and has implemented appropriate business strategies for potential legislation outcomes, including non­renewal of the law. For additional information on TRIPRA, see Item 1A. Risk Factors - Reserves and Exposures and Item 7. MD&A - Enterprise Risk Management - Insurance Operations Risks - AIG Property Casualty Key Insurance Risks - Terrorism Risk in the 2013 Annual Report. Strategic Initiatives Growth and Business Mix AIG Property Casualty continues efforts to better segment its business by industry, geography and type of coverage in order to enhance its decision making regarding risk acceptance and pricing. For example, within workers' compensation, AIG Property Casualty has observed different experience and trends based on this segmentation, which helps inform its risk appetite, pricing and loss mitigation decisions. As part of AIG Property Casualty's strategy to expand its consumer operations in growth economies, on May 29, 2013, AIG Property Casualty entered into a joint venture agreement with PICC Life Insurance Company Limited (PICC Life), a subsidiary of the People's Insurance Company (Group) of China Limited (PICC Group), to form an agency distribution company in China to distribute life and retirement products. The joint venture company distributes jointly developed life and retirement insurance products, existing PICC Life products, PICC Property & Casualty Company Limited (PICC P&C) insurance products, AIG Property Casualty products, as well as other products aimed at meeting the needs of this developing market. AIG owns 24.9 percent of the joint venture company with PICC Life holding the remaining 75.1 percent. AIG's participation in the joint venture is managed by AIG Property Casualty. The joint venture commenced operations in March 2014.



AIG Property Casualty continues to explore other potential life insurance and accident and health opportunities internationally.

Capital Efficiency AIG Property Casualty continues to execute capital management initiatives by enhancing broad­based risk tolerance guidelines for its operating units, implementing underwriting strategies to increase return on equity by line of business and reducing exposure to businesses with inadequate pricing and increased loss trends. In addition, AIG Property Casualty remains focused on enhancing its global reinsurance strategy to improve overall capital efficiency, which may lead to periodic income statement volatility. 88 --------------------------------------------------------------------------------

TABLE OF CONTENTS Item 2 / EXECUTIVE OVERVIEW AIG Property Casualty also continues to streamline its legal entity structure to enhance transparency for regulators and optimize capital and tax efficiency. The legal entity restructuring initiatives have enhanced AIG Property Casualty's dividend capacity, reduced required capital, and provided tax benefits. Additionally, the restructurings allow AIG Property Casualty to simplify its reinsurance arrangements, which further facilitates increased capital optimization. In the six months ended June 30, 2014, AIG Property Casualty continued the integration of its Japan operations through the conversion of the American Home Assurance Company'sJapan branch to a subsidiary of the Japan holding company effective on April 1, 2014. AIG Property Casualty expects its overall legal entity restructuring to be substantially completed in 2015, subject to regulatory approvals in the relevant jurisdictions.



AIG LifE AND RETIREMENT STRATEGIC INITIATIVES AND Outlook

Executive Overview Product Diversity and Capacity for Growth - Continue to expand AIG Life and Retirement's comprehensive portfolio with superior, differentiated product solutions that meet consumer needs for financial and retirement security, using scale and capital strength to pursue growth opportunities. Integrated Distribution - Grow assets under management by leveraging an extensive distribution organization of over 300,000 financial professionals and expanding relationships with key distribution partners to effectively market diverse product offerings across multiple channels under a more unified branding strategy. Investment Portfolio - Maintain a diversified, high quality portfolio of fixed maturity securities that largely match the duration characteristics of liabilities with assets of comparable duration, and pursue yield-enhancement opportunities that meet liquidity, risk and return objectives. Operational Initiatives - Continue to streamline life insurance and annuity operations and systems into a lower-cost, more agile model that provides superior service and ease of doing business. Effective Risk and Capital Management - Deliver solid earnings through disciplined pricing and diversification of risk and increase capital efficiency within life insurance entities to enhance return on equity.



Market Conditions and Industry Trends

Baby boomers reaching retirement age expect to live longer in retirement and place less reliance on traditional pensions and government retirement benefits than previous generations. These demographic trends, combined with strong equity markets and low volatility, provide a favorable environment for sales of individual variable annuities, and have contributed to growth in separate account assets under management in both Retirement Income Solutions and Group Retirement product lines.An increasing demographic of Americans approaching retirement and seeking guaranteed income features, combined with changes in the competitive landscape, provide opportunities to continue growing AIG Life and Retirement's position in the individual variable annuities market. The interest rate environment has a significant impact on the life and annuity industry. Low long-term interest rates put pressure on long-term investment returns, negatively affect sales of interest rate sensitive products such as fixed annuities, and reduce future profits on certain existing fixed rate products. Low interest rates may also affect future investment margins, and may affect the recoverability and amortization rate of DAC assets in variable annuity, fixed annuity and universal life businesses. While long-term interest rates have continued to remain low relative to historical levels, the modest increase in rates since the first quarter of 2013 has caused demand for fixed annuities products to improve, and continued stable or modestly rising interest rates would provide favorable market conditions for fixed annuity sales and future profitability. AIG Life and Retirement will continue to actively manage renewal crediting rates and use a disciplined approach to pricing new sales of interest rate sensitive products, including minimum rate guarantees. Also, as market conditions change, asset and liability interest rate exposures and strategic asset allocation are managed to emphasize lower or higher durations in the investment portfolio. 89 --------------------------------------------------------------------------------

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Product Diversity and Capacity for Growth

AIG Life and Retirement has been able to meet the demand for guaranteed products and grow sales while managing risk, by offering competitive products with strong de-risking features, such as volatility control funds, rider fees indexed to a market volatility index and required minimum allocations to fixed accounts, and using a dynamic risk hedging program. In addition to individual variable annuities, the Retirement Income Solutions product line is expanding the offerings of index annuities, including those with guarantee features, to provide additional solutions for consumers approaching retirement. Sales in the Fixed Annuities product line have improved compared to the same periods in the prior year, and could strengthen if interest rates rise and the yield curve steepens, as these market conditions make fixed annuity products more attractive compared to alternatives such as bank deposits. Industry sales of individual life products have continued their overall downward trend, particularly in the past several quarters. AIG Life and Retirement is targeting growth by offering differentiated product solutions to better meet consumer needs, and by expanding distribution of life products through new channels and relationships, while maintaining pricing discipline as an integral component of its overall strategy. Advanced underwriting approaches that leverage existing capabilities within AIG are another key focus in AIG Life and Retirement's drive for a sustainable competitive advantage in this product line. The Institutional Markets product line is expected to continue contributing to growth in assets under management from increased stable value wrap business as well as from disciplined growth through the pursuit of select opportunities related to the terminal funding and pension buyout business.



Other Operations strategic initiatives and OUTLOOK

Mortgage Guaranty (UGC) Executive Overview Superior Risk Selection - Ensure the high quality of UGC's new business through disciplined underwriting by using its proprietary multi-variant risk-based pricing model. UGC's pricing model is based on a comprehensive range of risk attributes to generate a price reflecting the credit risk of each loan. Customer focus - Provide exceptional service and transparency to all customers through collaboration and continuous innovation that enhances the mortgage origination process. Product Selection - Provide a complete and competitively priced mortgage insurance product line that delivers flexible submission options and innovative solutions. Expense Management - Streamline UGC's processes through the use of technology and shared services.



Market Conditions and Industry Trends

During 2013, refinancing activity drove much of the increased volume in the mortgage loan industry due to historically low residential mortgage interest rates. However, the majority of UGC's increase in new business written in 2013 was originated from home purchases as opposed to refinancings. Although UGC believes that home purchases will increase during 2014, primarily due to increased buyer confidence arising from home price appreciation and residential mortgage interest rates remaining low relative to historical levels, UGC continues to anticipate a decrease in new insurance written during 2014 compared to 2013 as higher residential mortgage interest rates from the third quarter of 2013 through the second quarter of 2014 have reduced refinancing activity. 90 --------------------------------------------------------------------------------

TABLE OF CONTENTS Item 2 / EXECUTIVE OVERVIEW While higher residential mortgage interest rates have had an unfavorable impact on new mortgage loan volumes, particularly on refinancing activity, UGC expects current residential mortgage interest rates to have a favorable impact on the persistency of business written from 2011 through 2013 since refinancing of mortgage loans would be unattractive to homeowners who originated mortgages at the historically low residential mortgage interest rates prevalent during that period. UGC expects that this higher persistency will continue to benefit its results throughout 2014 and into 2015. UGC also expects that newly reported delinquencies will decline during 2014 and into 2015 and cure rates will improve as a result of home value appreciation, which will encourage homeowners with delinquent mortgages to refinance or sell and purchase another home. UGC believes the combination of higher persistency, lower new delinquencies and improving cure rates, partially offset by a decline in new mortgage loan volumes, will result in favorable operating results for UGC throughout 2014. UGC's continued success, as well as the success of the mortgage insurance industry, can be significantly affected by changes in regulatory and legislative developments and changes in the charters and business practices of Freddie Mac and Fannie Mae (collectively, the GSEs). On July 10, 2014, the GSEs issued in draft form for public comment new eligibility requirements used to approve private mortgage insurers that provide insurance on loans owned or guaranteed by the GSEs. It is unclear what the final eligibility requirements will be; however, if adopted as issued, new requirements would include, among other things, higher capital requirements and heightened liquidity requirements. The National Association of Insurance Commissioners (the NAIC) has begun drafting a new model law for mortgage insurance. A primary focus of the NAIC's effort is to develop a risk based capital (RBC) model that will replace or supplement the current 25:1 risk-to-surplus requirements. This RBC model law may impact the amount of statutory surplus certain UGC subsidiaries must maintain. In addition, the new model law may have an impact on various other business practices, such as underwriting and claims mitigation practices in addition to possible impacts on liquidity and other financial thresholds. UGC cannot predict the potential effects new GSE eligibility requirements and a new model law may have on its business, results of operations, cash flows and financial condition.



Strategic Initiatives

Risk Selection During 2014, UGC expects to continue to be a leading private provider of mortgage insurance and to differentiate itself from its competitors by providing superior service and products to its customers by utilizing its proprietary risk-based pricing strategy. This pricing strategy provides UGC's customers with mortgage insurance products that are priced commensurate with the underwriting risk, which UGC believes will result in an appropriately priced, high-quality book of business. UGC plans to continue to execute this strategy throughout 2014. The business generated under this strategy, which was initiated during 2009, accounted for approximately 65 percent of net premiums earned in the six-month period ended June 30, 2014. 91 --------------------------------------------------------------------------------

TABLE OF CONTENTS Item 2 / EXECUTIVE OVERVIEW Global Capital Markets



AIG Markets acts as the derivatives intermediary between AIG and its subsidiaries and third parties to provide hedging services for AIG entities. The derivative portfolio of AIG Markets consists primarily of interest rate and currency derivatives.

The remaining derivatives portfolio of AIGFP consists primarily of hedges of the assets and liabilities of the DIB and a portion of the legacy hedges for AIG and its subsidiaries. AIGFP's derivatives portfolio consists primarily of interest rate, currency, credit, commodity and equity derivatives. Additionally, AIGFP has a credit default swap portfolio that is being managed for economic benefit and with limited risk. The AIGFP portfolio continues to be wound down and is managed consistent with our risk management objectives. Although the portfolio may experience periodic fair value volatility, it consists predominantly of transactions that we believe are of low complexity, low risk or currently not economically appropriate to unwind based on a cost versus benefit analysis. Direct Investment Book The DIB consists of a portfolio of assets and liabilities held directly by AIG Parent in the MIP and certain non­derivative assets and liabilities of AIGFP. The DIB portfolio is being wound down and is managed with the objective of ensuring that at all times it maintains the liquidity we believe is necessary to meet all of its liabilities as they come due, even under stress scenarios, and to maximize returns consistent with our risk management objectives. The DIB's assets consist primarily of cash, short­term investments, fixed maturity securities issued by corporations, U.S. government and government sponsored entities and mortgage and asset-backed securities. The value of these assets is impacted by macro­economic trends in U.S. and core European markets, including corporate credit spreads, commercial and residential real estate markets, and to a lesser extent, interest rates and foreign exchange rates, among other factors. The majority of these assets are carried at fair value with changes in fair value recognized through earnings. The DIB's liabilities consist primarily of notes and other borrowings supported by assets as well as other short­term financing obligations. The DIB has both liabilities that are held at cost and liabilities that are held at fair value. The liabilities held at fair value vary in price based on changes in AIG's credit spreads with changes in fair value reflected in earnings. Changes in the fundamental drivers of the fair value of DIB assets and liabilities will create earnings volatility for the DIB on a period­to­period comparative basis. 92 --------------------------------------------------------------------------------

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RESULTS OF OPERATIONS The following section provides a comparative discussion of our Results of Operations on a reported basis for the three- and six-month periods ended June 30, 2014 and 2013. Factors that relate primarily to a specific business segment are discussed in more detail within that business segment discussion. For a discussion of the Critical Accounting Estimates that affect the Results of Operations, see the Critical Accounting Estimates section of this MD&A and in Part II, Item 7. MD&A, in the 2013 Annual Report. The following table presents AIG's condensed consolidated results of operations: Three Months Ended Six Months Ended June 30, Percentage June 30, Percentage (in millions) 2014 2013 Change 2014 2013 Change Revenues: Premiums $ 9,458$ 9,200 3 % $ 18,496$ 18,572 - % Policy fees 701 623 13 1,393 1,238 13 Net investment income 3,884 3,844 1 8,080 8,008 1 Net realized capital gains (losses) 101 1,591 (94) (112) 1,891 NM Aircraft leasing revenue 489 1,111 (56) 1,602 2,185 (27) Other income 1,472 2,057 (28) 2,758 3,494 (21) Total revenues 16,105 18,426 (13) 32,217 35,388 (9) Benefits, claims and expenses: Policyholder benefits and claims incurred 6,771 8,090 (16) 13,568 14,818 (8) Interest credited to policyholder account balances 963 972 (1) 1,918 1,989 (4) Amortization of deferred policy acquisition costs 1,396 1,353 3 2,701 2,639 2 Other acquisition and insurance expenses 2,213 2,245 (1) 4,330 4,483 (3) Interest expense 463 535 (13) 942 1,112 (15) Aircraft leasing expenses 489 1,093 (55) 1,585 2,124 (25) Loss on extinguishment of debt 34 38 (11) 272 378 (28) Net (gain) loss on sale of divested businesses (2,174)



47 NM (2,178) 47 NM Other expenses

1,470 888 66 2,326 1,758 32 Total benefits, claims and expenses 11,625 15,261 (24) 25,464 29,348 (13) Income from continuing operations before income tax expense 4,480 3,165 42 6,753 6,040 12 Income tax expense 1,474 425 247 2,088 1,142 83 Income from continuing operations 3,006 2,740 10 4,665 4,898 (5) Income (loss) from discontinued operations, net of income tax expense 30 18 67 (17) 91 NM Net income 3,036 2,758 10 4,648 4,989 (7)



Less: Net income (loss) attributable to noncontrolling interests

(37) 27 NM (34) 52 NM Net income attributable to AIG $ 3,073 $



2,731 13 % $ 4,682$ 4,937 (5) %

Consolidated Quarterly and Year-to-Date Comparison for 2014 and 2013

Income from continuing operations before income tax expense was $4.5 billion for the three-month period ended June 30, 2014 compared to $3.2 billion in the same period in the prior year and reflected pre-tax income from insurance operations of $1.5 billion, $1.2 billion and $211 million from AIG Property Casualty, AIG Life and Retirement and Mortgage Guaranty in the three-month period ended June 30, 2014, respectively, compared to pre-tax income of $1.2 billion, $1.7 billion and $75 million for these operations in the same period in the prior year, respectively. Income from continuing operations before income tax expense was $6.8 billion for the six-month period ended June 30, 2014 compared to $6.0 billion in the same period in the prior year and reflected pre-tax income from insurance operations of $2.8 billion, $2.5 billion and $288 million from AIG Property Casualty, AIG Life and Retirement and Mortgage Guaranty in the 93 --------------------------------------------------------------------------------

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six-month period ended June 30, 2014, respectively, compared to pre-tax income of $2.8 billion, $3.3 billion and $119 million for these operations in the same period in the prior year, respectively.



See the business segment discussions that follow for an analysis of results for these operations.

For the three- and six-month periods ended June 30, 2014, the effective tax rate on income from continuing operations was 32.9 percent and 30.9 percent, respectively. The effective tax rate for the three- and six-month periods ended June 30, 2014 on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits associated with tax-exempt interest income and a decrease in AIG Life and Retirement's capital loss carryforward valuation allowance. For the three- and six-month periods ended June 30, 2013, the effective tax rate on income from continuing operations was 13.4 percent and 18.9 percent, respectively. The effective tax rate for the three- and six-month periods ended June 30, 2013 on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits associated with tax exempt interest income and a decrease in AIG Life and Retirement's capital loss carryforward valuation allowance related to the actual and projected gains on sales of AIG Life and Retirement's available­for­sale securities. For the six-month period ended June 30, 2013, these items were partially offset by changes in uncertain tax positions.



The following table presents a reconciliation of net income attributable to AIG to after-tax operating income attributable to AIG:

Three Months Ended Six Months Ended June 30, June 30, (in millions) 2014 2013 2014 2013 Net income attributable to AIG $



3,073 $ 2,731 $ 4,682 $ 4,937 (Income) loss from discontinued operations

(30) (18) 17 (91) (Income) loss from divested businesses, including gain on the sale of ILFC (1,399) 16 (1,411) (4) Uncertain tax positions and other tax adjustments 39 64 11 690 Legal reserves (settlements) related to legacy crisis matters 321 (257) 319 (321) Deferred income tax valuation allowance releases (75) (752) (140) (1,538)



Changes in fair value of AIG Life and Retirement fixed maturity securities designated to hedge living benefit

liabilities, net of interest expense (35) 45 (84) 64 Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses) 28 835 16 889 Loss on extinguishment of debt 22 25 177 246 Net realized capital (gains) losses (111) (1,034) 27 (1,235) After-tax operating income attributable to AIG $



1,833 $ 1,655 $ 3,614 $ 3,637

Weighted average diluted shares outstanding



1,464,676,330 1,482,246,618 1,468,364,283 1,479,462,612

Income per common share attributable to AIG (diluted) $ 2.10 $

1.84 $ 3.19 $ 3.33



After-tax operating income per common share attributable to AIG (diluted)

$ 1.25 $ 1.12 $ 2.46 $ 2.46 After-tax operating income attributable to AIG increased in the three-month period ended June 30, 2014 compared to the same period in the prior year, primarily due to increases in income from insurance operations, partially offset by a decrease in DIB income. After-tax operating income attributable to AIG decreased slightly in the six-month period ended June 30, 2014 compared to the same period in the prior year, primarily due to decreases in GCM and DIB income, partially offset by increases in income from insurance operations. For the three-month periods ended June 30, 2014 and 2013, the effective tax rate on pre-tax operating income was 33.4 percent and 31.8 percent, respectively. For the six-month periods ended June 30, 2014 and 2013, the effective tax rate on pre-tax operating income was 32.6 percent and 30.8 percent, respectively. The significant factors that contributed to the 94 --------------------------------------------------------------------------------

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difference from the statutory rate included tax benefits resulting from tax-exempt interest income and other permanent tax items, and the impact of discrete tax benefits.

Segment Results

We report the results of our operations through two reportable segments: AIG Property Casualty and AIG Life and Retirement. The Other Operations category consists of businesses and items not allocated to our reportable segments. In 2013, we announced a reorganization of our Consumer Insurance business and named a new management team. Under the new structure, AIG's global life insurance business will be managed as part of AIG Global Consumer Insurance - enabling our consumer network across the world to benefit from the sophistication, scale, and success of our U.S. life insurance platform. The new management team made a number of key appointments and certain critical decisions regarding how its underlying operating segments will be organized. However, we continue to work on the final elements of the new organization and operating structure. When the new structure is finalized, the presentation of AIG Property Casualty and AIG Life and Retirement results may be modified accordingly and prior periods' presentations may be revised to conform to the new operating segments. The following table summarizes the operations of each reportable segment and Other Operations. See also Note 3 to the Condensed Consolidated Financial Statements. Three Months Ended Six Months Ended June 30, Percentage June 30, Percentage (in millions) 2014 2013 Change 2014 2013 Change Total revenues: AIG Property Casualty $ 9,950$ 9,801 2 % $ 19,616$ 19,769 (1) % AIG Life and Retirement 4,570 6,048 (24) 8,921 10,788 (17) Total reportable segments 14,520 15,849 (8) 28,537 30,557 (7) Other Operations 1,804 2,836 (36) 4,064 5,277 (23) Consolidation and eliminations (219) (259) 15 (384) (446) 14 Total revenues $ 16,105$ 18,426 (13) $ 32,217$ 35,388 (9) Pre-tax income (loss): AIG Property Casualty $ 1,490$ 1,205 24 $ 2,799$ 2,819 (1) AIG Life and Retirement 1,249 1,719 (27) 2,481 3,289 (25) Total reportable segments 2,739 2,924 (6) 5,280 6,108 (14) Other Operations: Mortgage Guaranty 211 75 181 288 119 142 Global Capital Markets 245 175 40 274 402 (32) Direct Investment book 272 720 (62) 627 1,032 (39) Corporate & Other 956 (738) NM 132 (1,746) NM Aircraft Leasing - 18 NM 17 61 (72) Consolidation and eliminations 1 1 - 2 2 - Other Operations 1,685 251 NM 1,340 (130) NM Consolidation and eliminations 56 (10) NM 133 62 115 Total pre-tax income $ 4,480$ 3,165 42 $ 6,753$ 6,040 12 95

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Pre-tax operating income (loss): AIG Property Casualty $ 1,355$ 1,086 25 $ 2,514$ 2,643 (5) AIG Life and Retirement 1,180 1,151 3 2,597 2,545 2 Total reportable segments 2,535 2,237 13 5,111 5,188 (1) Other Operations: Mortgage Guaranty 210 73 188 286 114 151 Global Capital Markets 245 175 40 274 402 (32) Direct Investment book 313 591 (47) 753 920 (18) Corporate & Other (570) (642) 11 (1,121) (1,360) 18 Consolidation and eliminations 1 1 - 2 2 - Other Operations 199 198 1 194 78 149 Consolidations, eliminations and other adjustments 10 33 (70) 45 63 (29) Total pre-tax operating income $ 2,744$ 2,468 11 $ 5,350$ 5,329 - Total Revenues (in millions) AIG PROPERTY CASUALTY AIG LIFE AND RETIREMENT [[Image Removed]] [[Image Removed]] OTHER OPERATIONS [[Image Removed]]



A discussion of significant items affecting pre-tax segment income follows. Factors that affect pre-tax operating income for a specific business segment are discussed in the detailed business segment analysis.

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Quarterly and Year-to-date Pre-tax Income Comparison for 2014 and 2013

AIG Property Casualty - Pre-tax income increased in the three-month period ended June 30, 2014 due to underwriting income, compared to an underwriting loss in the same period in the prior year, partially offset by a decrease in net investment income. The improvement in underwriting results was primarily due to lower catastrophe losses and favorable loss reserve development compared to an adverse loss reserve development in the prior year, which were partially offset by an increase in the frequency and severity of severe losses.Pre-tax income decreased in the six-month period ended June 30, 2014 compared to the same period in the prior year, primarily due to a decrease in net investment income and a slight decrease in underwriting income. The decrease in underwriting income resulted from an increase in the frequency and severity of severe losses, higher catastrophe losses and unfavorable loss reserve development, which were partially offset by enhanced risk selection, rate increases and continued improvement from change in business mix, as well as a reserve discount benefit. AIG Life and Retirement - Pre-tax income for the three- and six-month periods ended June 30, 2014 decreased compared to the same periods in the prior year, primarily due to lower net realized capital gains and lower income from legal settlements, partially offset by lower loss recognition expense in the current periods and a slight increase in pre-tax operating income, as noted earlier. Pre-tax income for the six-month period ended June 30, 2014 included realized capital losses from changes in the fair value of embedded derivatives related to variable annuity guarantee features, net of hedges, as a result of reductions in interest rates and narrowing of credit spreads during the period. The significant net realized capital gains in the 2013 periods were primarily due to investment sales related to capital loss carryforward utilization. Other Operations -Pre­tax income improved in the three- and six-month periods ended June 30,2014 compared to the same periods in the prior year primarily due to a gain on sale of divested business related to the sale of ILFC and declines in interest expense from ongoing debt management activities partially offset by decreases in pre-tax income from the DIB and increases in legal reserve expenses. In addition, pre-tax income was also impacted by changes in pre-tax income from GCM. GCM's pre-tax income increased in the three-month period ended June 30, 2014 compared to the same period in the prior year primarily due to gains realized upon unwinding certain positions and a decrease in operating expenses, partially offset by declines in net credit valuation adjustments on derivative assets and liabilities and in unrealized market valuation gains related to the super senior CDS portfolio.GCM's pre-tax income decreased in the six-month period ended June 30, 2014 compared to the same period in the prior year primarily due to declines in net credit valuation adjustments on derivative assets and liabilities and in unrealized market valuation gains related to the super senior CDS portfolio, partially offset by gains realized upon unwinding certain positions and a decrease in operating expenses. A state regulatory agency has requested additional information relating to the unwinding of a position on which we realized gains of $196 million in the three- and six-month periods ended June 30, 2014. The DIB's pre­tax income decreased in the three-month period ended June 30, 2014 compared to the same period in the prior year primarily due to lower fair value appreciation on ABS CDOs and a decrease in gains realized upon unwinding certain positions. The DIB's pre­tax income decreased in the six-month period ended June 30, 2014 compared to the same period in the prior year primarily due to lower fair value appreciation on ABS CDOs and a decline in net credit valuation adjustments on assets and liabilities for which the fair value option was elected, partially offset by an increase in gains realized upon unwinding certain positions. 97

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The following table presents reconciliations of pre-tax income (loss) to pre-tax operating income (loss) by reportable segment and after-tax operating income attributable to AIG, which are non-GAAP measures. See Use of Non-GAAP Measures for additional information. Three Months Ended Six Months Ended June 30, June 30, (in millions) 2014 2013 2014 2013 AIG Property Casualty Pre-tax income $ 1,490$ 1,205$ 2,799$ 2,819 Net realized capital gains (127) (109) (269) (163) Legal settlements - (3) (8) (3) Other (income) expense - net (8) (7) (8) (10) Pre-tax operating income $ 1,355$ 1,086$ 2,514$ 2,643 AIG Life and Retirement Pre-tax income $ 1,249$ 1,719$ 2,481$ 3,289 Legal settlements



(12) (359) (42) (467) Changes in fair value of fixed maturity securities designated to hedge living benefit liabilities, net of interest expense

(54) 69 (130) 98 Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses)

41 1,152 11 1,211 Net realized capital (gains) losses (44) (1,430) 277 (1,586) Pre-tax operating income $ 1,180$ 1,151$ 2,597$ 2,545 Other Operations Pre-tax income (loss) $



1,685 $ 251$ 1,340$ (130) Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses)

1 - 13 - Net realized capital (gains) losses 120 (88) 195 (133) Net (gain) loss on sale of divested businesses (2,146) 47 (2,150) 47 Legal reserves 505 14 529 25 Legal settlements - (46) 12 (48) Loss on extinguishment of debt 34 38 272 378 Aircraft Leasing - (18) (17) (61) Pre-tax operating income $ 199$ 198$ 194$ 78 Total Pre-tax operating income of reportable segments and Other Operations $ 2,734$ 2,435$ 5,305$ 5,266 Consolidations, eliminations and other adjustments 10 33 45 63 Pre-tax operating income 2,744 2,468 5,350 5,329 Income tax expense (918) (786) (1,745) (1,640) Noncontrolling interests excluding net realized capital (gains) losses 7 (27) 9 (52) After-tax operating income attributable to AIG $ 1,833$ 1,655$ 3,614$ 3,637 98

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PRE-TAX INCOME (LOSS) (in millions) AIG PROPERTY CASUALTY AIG LIFE AND RETIREMENT [[Image Removed]] [[Image Removed]]



PRE-TAX OPERATING INCOME (LOSS)

(in millions) AIG PROPERTY CASUALTY AIG LIFE AND RETIREMENT [[Image Removed]] [[Image Removed]] AIG PROPERTY CASUALTY



AIG Property Casualty presents its financial information in two operating segments - Commercial Insurance and Consumer Insurance - as well as an Other category.

Commercial Insurance provides insurance solutions for large and small businesses. Commercial Insurance products are primarily distributed through a network of independent retail and wholesale brokers, and through an independent agency network. Consumer Insurance provides personal insurance solutions for individuals, organizations and families. Products are distributed primarily through agents and brokers, as well as through direct marketing, partner organizations such as bancassurance, and the internet. 99 --------------------------------------------------------------------------------

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The Other category consists primarily of run­off lines of business, including excess workers' compensation, asbestos and legacy environmental (1986 and prior); certain environmental liability businesses written prior to 2004; operations and expenses not attributable to the Commercial Insurance or Consumer Insurance operating segments; unallocated net investment income; net realized capital gains and losses; other income and expense items; and adverse loss development, net of the related amortization of deferred gains for a retroactive reinsurance arrangement.



See Part I, Item 1. Business - AIG Property Casualty in AIG's 2013 Annual Report for further discussion of AIG Property Casualty's products and geographic regions where it distributes its products.

AIG Property Casualty continues to enhance the value­based metrics that provide management with enhanced measures to evaluate its profitability, such as a risk­adjusted profitability model. Along with underwriting results, this risk­adjusted profitability model incorporates elements of capital allocations, costs of capital and net investment income. AIG Property Casualty believes that such performance measures will allow it to better assess the true economic returns of its business.



AIG Property Casualty Quarterly and Year-to-Date 2014 Highlights

Pre­tax operating income increased in the three-month period ended June 30, 2014, compared to the same period in the prior year primarily due to lower catastrophe losses and favorable loss reserve development compared to adverse loss reserve development in the prior year, partially offset by an increase in the frequency and severity of severe losses and a decrease in net investment income. Pre-tax operating income decreased in the six-month period ended June 30, 2014 compared to the same period in the prior year primarily due to a decrease in net investment income. Net premiums written decreased slightly in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year. Commercial Insurance net premiums written declined, reflecting lower retention on renewal business and decreases in new business growth as a result of increased competition, particularly in Casualty and Property. Consumer Insurance net premiums written declined due to the effect of foreign exchange as a result of the strengthening of the U.S. dollar against the Japanese yen. Excluding the effect of foreign exchange, net premiums written increased by approximately four percent and three percent for Consumer Insurance in the three- and six-month periods ended June 30, 2014, respectively, compared to the same periods in the prior year, reflecting growth in Fuji Life and increases in personal property products in both Japan and U.S. due to growth in the housing market. The loss ratio decreased by 3.4 points in the three-month period ended June 30, 2014, compared to the same period in the prior year primarily due to lower catastrophe losses, favorable loss reserve development compared to adverse loss reserve development in the prior year period, the improvement in the accident year loss ratio, as adjusted, in Consumer Insurance primarily as a result of rate increases, improved loss experience in the Japan automobile business, and rate actions and coverage changes in the U.S. Warranty business. These decreases were partially offset by an increase in severe losses in Property and Specialty. The loss ratio increased by 0.2 points in the six-month period ended June 30, 2014, compared to the same period in the prior year primarily due to higher severe and catastrophe losses, and an increase in adverse loss reserve development. These were partially offset by rate increases and improved loss experience in the Japan automobile business, rate actions and coverage changes in the U.S. Warranty business in Consumer Insurance and an increase in discount for certain workers' compensation reserves, which improved the loss ratio by approximately 0.5 points compared to the same period in the prior year. The acquisition ratio decreased by 0.6 points and 0.3 points in the three and six-month periods ended June 30, 2014, respectively, compared to the same periods in the prior year primarily due to lower premium taxes and guaranty fund and other assessments in Commercial Insurance. This decrease was partially offset by an increase in commission rates in Commercial Insurance reflecting the change in business mix to higher value lines. In addition, the Consumer Insurance acquisition ratio for the six-month period ended June 30, 2014 increased due to higher acquisition costs in growth-targeted lines of business. 100

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The general operating expense ratio increased by 0.2 points and remained unchanged in the three- and six-month periods ended June 30, 2014, respectively, compared to the same periods in the prior year, primarily due to an increase in infrastructure costs. In addition, the general operating expenses for the six-month period ended June 30, 2013 included the cost of the implementation of a voluntary early retirement plan in Japan. Net investment income decreased by 4 percent and 5 percent in the three- and six-month periods ended June 30, 2014, respectively, compared to the same periods in the prior year, primarily due to lower returns on alternative investments, lower income on investments accounted for under the fair value option and the effects of lower new investment yields compared to interest rates on matured or sold investments.



Dividends paid by AIG Property Casualty to AIG Parent were $879 million during the three- and six-month periods ended June 30, 2014, including non-cash dividends of $178 million.

AIG Property Casualty Results



The following table presents AIG Property Casualty results:

Three Months Ended Six Months Ended June 30, Percentage June 30, Percentage (in millions) 2014 2013 Change 2014 2013 Change Commercial Insurance Underwriting results: Net premiums written $ 5,816$ 5,876 (1) % $ 10,812$ 10,779 - % Increase in unearned premiums (551) (803) 31 (505) (578) 13 Net premiums earned 5,265 5,073 4 10,307 10,201 1



Claims and claims adjustment expenses incurred 3,564 3,685

(3) 7,065 7,014 1 Acquisition expenses 812 829 (2) 1,630 1,667 (2) General operating expenses 650 647 - 1,260 1,212 4 Underwriting income (loss) 239 (88) NM 352 308 14 Net investment income 624 623 - 1,224 1,268 (3) Pre-tax operating income $ 863$ 535 61 % $ 1,576$ 1,576 - % Consumer Insurance Underwriting results: Net premiums written $ 3,407$ 3,390 1 % $ 6,745$ 6,922 (3) % Increase in unearned premiums (154) (135) (14) (320) (259) (24) Net premiums earned 3,253 3,255 - 6,425 6,663 (4) Claims and claims adjustment expenses incurred 1,814 1,916 (5) 3,758 3,885 (3) Acquisition expenses 842 842 - 1,663 1,692 (2) General operating expenses 529 498 6 995 1,032 (4) Underwriting income (loss) 68 (1) NM 9 54 (83) Net investment income 89 92 (3) 175 190 (8) Pre-tax operating income $ 157$ 91 73 % $ 184$ 244 (25) % Other Underwriting results: Net premiums written $ (10)$ (3) (233) % $ (10)$ (1) NM % Decrease in unearned premiums 23 22 5 39 42 (7) Net premiums earned 13 19 (32) 29 41 (29)



Claims and claims adjustment expenses incurred 133 78

71 209 193 8 General operating expenses 86 75 15 177 201 (12) Underwriting loss (206) (134) (54) (357) (353) (1) Net investment income 541 594 (9) 1,111 1,176 (6)

Pre-tax operating income 335 460 (27) 754 823 (8) 101

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Net realized capital gains 127 109 17 269 163 65 Legal settlements - 3 NM 8 3 167 Other income (expense) - net 8 7 14 8 10 (20) Pre-tax income $ 470$ 579 (19) % $ 1,039$ 999 4 % Total AIG Property Casualty Underwriting results: Net premiums written $ 9,213$ 9,263 (1) % $ 17,547$ 17,700 (1) % Increase in unearned premiums (682) (916) 26 (786) (795) 1 Net premiums earned 8,531 8,347 2 16,761 16,905 (1) Claims and claims adjustment expenses incurred 5,511 5,679 (3) 11,032 11,092 (1) Acquisition expenses 1,654 1,671 (1) 3,293 3,359 (2) General operating expenses 1,265 1,220 4 2,432 2,445 (1) Underwriting income (loss) 101 (223) NM 4 9 (56) Net investment income 1,254 1,309 (4) 2,510 2,634 (5) Pre-tax operating income 1,355 1,086 25 2,514 2,643 (5) Net realized capital gains 127 109 17 269 163 65 Legal settlements - 3 NM 8 3 167 Other income (expense) - net 8 7 14 8 10 (20) Pre-tax income $ 1,490$ 1,205 24 % $ 2,799$ 2,819 (1) % NET PREMIUMS WRITTEN* Pre-Tax oPERATING INCOME (in millions) (in millions) [[Image Removed]] [[Image Removed]]



* The operations reported as part of Other do not have meaningful levels of Net premiums written.

AIG Property Casualty Quarterly Results

Pre­tax operating income increased in the three-month period ended June 30, 2014 due to underwriting income, compared to underwriting loss in the same period in the prior year, partially offset by a decrease in net investment income. The change in underwriting results was primarily due to lower catastrophe losses and favorable loss reserve development compared to adverse loss reserve development in the prior year, which were partially offset by an increase in the frequency and severity of severe losses. Catastrophe losses were $139 million and $316 million for the three-month periods ended June 30, 2014 and 2013, respectively. Net (favorable) adverse loss reserve development including related premium adjustments was $(14) million and $154 million, respectively, in the three-month periods ended June 30, 2014 and 2013. The current accident year losses for the three-month period ended June 30, 2014 included seven severe losses totaling $193 million compared to three severe losses totaling $38 million in the same period in the prior year. Net investment income decreased due to lower returns on alternative investments, lower income on investments accounted for under the fair value option and the effects of lower new investment yields compared to the interest rates on matured or sold investments. 102

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Acquisition expenses decreased in the three-month period ended June 30, 2014 compared to the same period in the prior year primarily due to the effect of foreign exchange as a result of the strengthening of the U.S. dollar against the Japanese yen. Excluding the effect of foreign exchange, acquisition expenses increased in the three-month period ended June 30, 2014 compared to the same period in the prior year, as a result of the change in business mix to higher value lines, which was partially offset by lower premium taxes and guaranty fund and other assessments in Commercial Insurance. General operating expenses increased in the three-month period ended June 30, 2014 compared to the same period in the prior year, primarily due to an increase in infrastructure costs.



AIG Property Casualty Year-to-Date Results

Pre­tax operating income decreased in the six-month period ended June 30, 2014 compared to the same period in the prior year primarily due to a decrease in net investment income and a slight decrease in underwriting income. The decrease in underwriting income resulted from an increase in the frequency and severity of severe losses, higher catastrophe losses and unfavorable loss reserve development, which were almost entirely offset by enhanced risk selection, rate increases and continued improvement from change in business mix, as well as a reserve discount benefit. See Discounting of Reserves for further discussion of the discount benefit. The current accident year losses for the six-month period ended June 30, 2014 included 19 severe losses totaling $379 million compared to six severe losses totaling $98 million in the same period in the prior year. Catastrophe losses were $401 million and $357 million for the six-month periods ended June 30, 2014 and 2013, respectively. Net adverse loss reserve development including related premium adjustments was $148 million and $102 million in the six-month periods ended June 30, 2014 and 2013, respectively. The loss reserve discount was a benefit of $90 million in the six-month period ended June 30, 2014 compared to a charge of $10 million in the same period in the prior year. Net investment income decreased due to lower returns on alternative investments, lower income associated with investments accounted for under the fair value option and the effects of lower new investment yields compared to the interest rates on matured or sold investments. Acquisition expenses decreased in the six-month period ended June 30, 2014 compared to the same period in the prior year primarily due to the effect of foreign exchange as a result of the strengthening of the U.S. dollar against the Japanese yen. Excluding the effect of foreign exchange, acquisition expenses increased in the six-month period ended June 30, 2014 compared to the same period in the prior year, as a result of change in business mix to higher value lines, which was partially offset by lower premium taxes and guaranty fund and other assessments in Commercial Insurance. General operating expenses decreased slightly in the six-month period ended June 30, 2014 compared to the same period in the prior year primarily due to decreases in employee-related expenses, as the six-month period ended June 30, 2013 included a $42 million charge related to the implementation of a voluntary early retirement plan in Japan. This decrease was partially offset by an increase in infrastructure costs.



Commercial Insurance Quarterly Results

Pre­tax operating income increased in the three-month period ended June 30, 2014 compared to the same period in the prior year primarily due to underwriting income, compared to underwriting loss in the same period of 2013. The increase in underwriting results was primarily due to lower catastrophe losses and favorable loss reserve development compared to adverse loss reserve development in the prior year period, which were partially offset by an increase in the frequency and severity of severe losses in the Property and Specialty businesses in the America and EMEA regions. Catastrophe losses were $121 million and $307 million in the three-month periods ended June 30, 2014 and 2013, respectively. Net (favorable) adverse loss reserve development, including related premium adjustments, was $(63) million and $187 million, respectively, in the three-month periods ended June 30, 2014 and 2013. The current accident year losses for the three-month period ended June 30, 2014 include severe losses of $193 million compared to severe losses of $38 million in the same period in the prior year. Acquisition expenses decreased in the three-month period ended June 30, 2014 compared to the same period in the prior year primarily due to lower premium taxes and guaranty fund and other assessments partially offset by higher commission rates reflecting the change in business mix to higher value lines. 103

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General operating expenses increased slightly in the three-month period ended June 30, 2014 compared to the same period in the prior year primarily due to increased infrastructure costs, almost entirely offset by a decrease in employee-related expenses.



Commercial Insurance Year-to-Date Results

Pre­tax operating income increased slightly in the six-month period ended June 30, 2014 compared to the same period in the prior year primarily due to an increase in underwriting income, largely offset by a decrease in allocated net investment income. The increase in underwriting income was primarily due to a benefit in reserve discount, lower catastrophe losses and a decrease in adverse prior year loss reserve development, which were partially offset by higher accident year losses reflecting an increase in the frequency and severity of severe losses in the Property and Specialty businesses. The loss reserve discount was a benefit of $142 million in the six-month period ended June 30, 2014, compared to zero in the prior year period. Catastrophe losses were $305 million and $340 million in the six-month periods ended June 30, 2014 and 2013, respectively. Net adverse prior year loss reserve development, including related premium adjustments, was $97 million and $116 million, respectively, in the six-month periods ended June 30, 2014 and 2013. The current accident year losses for the six-month period ended June 30, 2014 include 16 severe losses totaling $338 million compared to six severe losses totaling $98 million in the same period in the prior year. Additionally, pre-tax operating income was also impacted by a decrease in allocated net investment income primarily due to a reduction in net loss reserves and decreases in capital required to support the segment's operations as a result of changes in the mix of business written.



Acquisition expenses decreased in the six-month period ended June 30, 2014 compared to the same period in the prior year primarily due to lower premium taxes and guaranty fund and other assessments.

General operating expenses increased in the six-month period ended June 30, 2014 compared to the same period in the prior year, primarily due to an increase in infrastructure costs partially offset by a decrease in employee-related expenses. In addition, general operating expenses in the six-month period ended June 30, 2013 included unusually low bad debt expense.



Consumer Insurance Quarterly Results

Pre­tax operating income increased in the three-month period ended June 30, 2014 compared to the same period in the prior year due to underwriting income, compared to a slight underwriting loss in the same period in the prior year. The underwriting income reflected lower current accident year losses partially offset by lower favorable prior year loss reserve development. Net favorable loss reserve development was $16 million in the three-month period ended June 30, 2014 compared to net favorable loss reserve development of $53 million in the same period in the prior year. Acquisition expenses were unchanged in the three-month period ended June 30, 2014 compared to the same period in the prior year. Excluding the effect of foreign exchange, acquisition expenses increased in the three- month period ended June 30, 2014 compared to the same period in the prior year, as a result of change in business mix and higher costs in growth-targeted lines of business. Direct marketing expenses are included within acquisition expenses. Direct marketing expenses excluding commissions, were $106 million for the three-month period ended June 30, 2014 compared to $118 million in the same period in the prior year. These expenses, while not deferrable, are expected to generate business that has an average expected overall persistency of approximately five years and, in Japan, approximately nine years.



General operating expenses increased in the three-month period ended June 30, 2014 compared to the same period in the prior year primarily due to higher infrastructure costs primarily related to the ongoing integration of AIG Property Casualty's Japanese entities.

Consumer Insurance Year-to-Date Results

Pre­tax operating income decreased in the six-month period ended June 30, 2014 compared to the same period in the prior year due to decreases in underwriting income and allocated net investment income. The decrease in underwriting income was primarily due to higher catastrophe and severe losses and lower favorable prior year loss reserve development in the six-month period ended June 30, 2014. Catastrophe losses in the six-month period ended June 30, 2014 were $96 million compared to $17 million in the same period in the prior year. Severe losses, which are included in current accident year losses, 104 --------------------------------------------------------------------------------

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were $41 million in the six-month period ended June 30, 2014. There were no severe losses in the same period in the prior year. Net favorable prior year loss reserve development was $30 million in the six-month period ended June 30, 2014, compared to $95 million in the same period in the prior year. The decrease in allocated net investment income was due to reductions in net loss reserves, in part driven by changes in foreign exchange rates, and a decline in risk-free rates used in AIG Property Casualty's investment income allocation model. Acquisition expenses decreased in the six-month period ended June 30, 2014 compared to the same period in the prior year, primarily due to the effect of foreign exchange as a result of the strengthening of the U.S. dollar against the Japanese yen. Excluding the effect of foreign exchange, acquisition expenses increased in the six-month period ended June 30, 2014, compared to the same period in the prior year, as a result of change in business mix and higher costs in growth­targeted lines of business. Direct marketing expenses excluding commissions, were $195 million for the six-month period ended June 30, 2014, compared to $224 million in the same period in the prior year. General operating expenses decreased in the six-month period ended June 30, 2014 compared to the same period in the prior year primarily due to a decrease in employee-related expense and the effect of foreign exchange, which were partially offset by higher infrastructure costs primarily related to the ongoing integration of AIG Property Casualty's Japanese entities.



Other Quarterly Results

Pre­tax operating income decreased in the three-month period ended June 30, 2014 compared to the same period in the prior year, primarily due to an increase in underwriting loss, which reflected higher adverse prior year loss reserve development and an increase in general operating expenses. Net prior year adverse loss reserve development was $65 million in the three-month period ended June 30, 2014 compared to $20 million in the same period in the prior year.



General operating expenses increased in the three-month period ended June 30, 2014 compared to the same period in the prior year primarily due to higher infrastructure costs.

Other Year-to-Date Results

Pre­tax operating income decreased in the six-month period ended June 30, 2014 compared to the same period in the prior year primarily due to lower net investment income. Net prior year adverse loss reserve development was $81 million in both the six-month periods ended June 30, 2014 and 2013.

General operating expenses decreased in the six-month period ended June 30, 2014 compared to the same period in the prior year primarily due to a decrease in employee-related expenses partially offset by higher infrastructure costs. In the six-month period ended June 30, 2013, AIG Property Casualty incurred a $42 million charge related to the implementation of a voluntary early retirement plan in Japan.



AIG Property Casualty Net Premiums Written

The following table presents AIG Property Casualty net premiums written by major line of business: Three Months Ended Six Months Ended June 30, Percentage June 30, Percentage (in millions) 2014 2013 Change 2014 2013 Change Commercial Insurance Casualty $ 2,004$ 2,110 (5) % $ 4,016$ 4,354 (8) % Property 1,731 1,770 (2) 2,659 2,453 8 Specialty 907 882 3 1,901 1,854 3 Financial lines 1,174 1,114 5 2,236 2,118 6 Total net premiums written $ 5,816$ 5,876 (1) % $ 10,812$ 10,779 - % 105

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Consumer Insurance Accident & Health $ 1,622$ 1,645 (1) % $ 3,283$ 3,438 (5) % Personal lines 1,785 1,745 2 3,462 3,484 (1) Total net premiums written $ 3,407$ 3,390 1 % $ 6,745$ 6,922 (3) % Other (10) (3) (233) (10) (1) NM



Total AIG Property Casualty net premiums written $ 9,213$ 9,263 (1) % $ 17,547$ 17,700 (1) %

Worldwide NET PREMIUMS WRITTEN by Line of Business

(in millions) Commercial Insurance [[Image Removed]] Consumer Insurance [[Image Removed]] 106

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Commercial Insurance Quarterly and Year-to-Date Net Premiums Written

During the three- and six-month periods ended June 30, 2014, Commercial Insurance continued to focus on the execution of its strategic objectives.

AIG Property Casualty entered into a catastrophe bond reinsurance transaction, effective as of January 1, 2014, with Tradewynd Re Ltd., which provides AIG Property Casualty with up to $400 million of indemnity reinsurance protection against U.S., Gulf of Mexico and Caribbean named storms, and U.S. and Canadian earthquakes. To fund its potential obligations to AIG Property Casualty, Tradewynd Re Ltd. issued three tranches of notes. The transaction provides AIG Property Casualty with fully collateralized coverage against losses from the events described above on a per-occurrence basis through December 2016. However, the transaction has the effect of reducing net premiums written as further discussed below. Casualty net premiums written decreased in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year primarily due to the declining rate environment and increased competition, coupled with the effect on renewals from AIG Property Casualty's strategy to enhance risk selection, particularly in the Americas. Strong growth and new writings in certain lines of business were more than offset by rate declines or market compression in others. AIG Property Casualty implemented overall rate increases in retained business, especially in the U.S., that partially offset these rate declines. Property net premiums written decreased in the three- month period ended June 30, 2014 compared to the same period in the prior year primarily due to decreases in new business growth and lower retentions in renewal business due to increased competition and rate pressure in certain lines, particularly in the U.S. These decreases were partially offset by increases in targeted growth products outside the U.S., particularly in EMEA. Net premiums written increased in the six-month period ended June 30, 2014 compared to the same period in the prior year primarily due to increases in targeted growth products and changes to optimize AIG Property Casualty's reinsurance structure as part of its decision to retain more favorable risks while continuing to manage aggregate exposure. These increases, although significant, were offset in part by competition and rate pressure in certain lines where underwriting discipline resulted in less favorable retention in renewal business. Net premiums written in the six-month period ended June 30, 2014 reflected the effect of the catastrophe bond reinsurance transactions described above. Catastrophe bond reinsurance transactions reduced net premiums written by $56 million and $96 million in the six-month periods ended June 30, 2014 and 2013, respectively. Specialty net premiums written increased in the three- and six-month periods ended June 30, 2014, compared to the same periods in the prior year primarily due to rate increases in environmental business and small­ and medium­sized enterprise markets in the Americas region. Additionally, for the six-month period ended June 30, 2014, net premiums written also reflected new business growth in EMEA.



Financial lines net premiums written increased in the three- and six-month periods ended June 30, 2014, compared to the same periods in the prior year reflecting growth in new business related to targeted growth products, particularly in the Americas and EMEA regions, as well as a favorable rate environment globally.

Consumer Insurance Quarterly and Year-to-Date Net Premiums Written

Consumer Insurance net premiums written, excluding the effect of foreign exchange, increased in the three- and six-month periods ended June 30, 2014, compared to the same periods in the prior year as the business continued to grow through multiple product and distribution channels. In the three- and six-month periods ended June 30, 2014, direct marketing accounted for approximately 16 percent of Consumer Insurance net premiums written. A&H net premiums written, excluding the effect of foreign exchange, increased in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year. The increase in net premiums written was due to the continued growth of Fuji Life medical products, partially offset by decreases in certain classes of business due to strict underwriting discipline. 107 --------------------------------------------------------------------------------

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Personal lines net premiums written, excluding the effect of foreign exchange, increased in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year. The increase was primarily due to new business sales in Japan personal property and increased rates and improved retention in U.S. private client group, as well as continued growth of automobile and specialty products in EMEA.



AIG Property Casualty Net Premiums Written by Region

The following table presents AIG Property Casualty's net premiums written by region: Percentage Percentage Three Months Ended Percentage Change in Six Months Ended Percentage Change in June 30, Change in Original June 30, Change in Original (in millions) 2014 2013 U.S. dollars Currency 2014 2013 U.S. dollars Currency

Commercial Insurance: Americas $ 4,018$ 4,201 (4) % (4) % $ 6,908$ 7,079 (2) % (2) % Asia Pacific 496 516 (4) 1 957 1,017 (6) 2 EMEA 1,302 1,159 12 9 2,947 2,683 10 8 Total net premiums written $ 5,816$ 5,876 (1) % (1) % $ 10,812$ 10,779 - % 1 % Consumer Insurance: Americas $ 965$ 930 4 % 7 % $ 1,947$ 1,905 2 % 6 % Asia Pacific 1,932 1,985 (3) 2 3,681 3,958 (7) 2 EMEA 510 475 7 3 1,117 1,059 5 3 Total net premiums written $ 3,407$ 3,390 1 % 4 % $ 6,745$ 6,922 (3) % 3 %



Other:

Americas $ (10)$ (3) (233) % NM % $ (10)$ (1) NM % NM %



Total net premiums written $ (10)$ (3) (233) %

NM % $ (10)$ (1) NM % NM % Total AIG Property Casualty: Americas $ 4,973$ 5,128 (3) % (2) % $ 8,845$ 8,983 (2) % (1) % Asia Pacific 2,428 2,501 (3) 1 4,638 4,975 (7) 2 EMEA 1,812 1,634 11 7 4,064 3,742 9 6 Total net premiums written $ 9,213$ 9,263 (1) % 1 % $ 17,547$ 17,700 (1) % 2 %



WORLDWIDE NET PREMIUMS WRITTEN BY REGION (in millions)

[[Image Removed]] 108

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AIG Property Casualty's business is transacted in most major foreign currencies. The following table presents the quarterly weighted average exchange rates of the currencies that have the most significant impact to our businesses: Three Months Ended Six Months Ended June 30, Percentage June 30, Percentage Rate for 1 USD 2014 2013 Change 2014 2013 Change Currency: JPY 102.20 97.84 4 % 102.68 93.14 10 % EUR 0.73 0.77 (5) % 0.73 0.76 (4) % GBP 0.60 0.66 (9) % 0.61 0.65 (6) % The Americas net premiums written decreased in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year primarily due to decreases in new business growth, lower retention on renewal business and rate pressure in Commercial Insurance, particularly in the Property and Casualty businesses, which were partially offset by continued growth in Consumer Insurance private client group and warranty businesses. Additionally, for the six-month period ended June 30, 2014, the decrease in net premiums written was partially offset by the effect of catastrophe bond reinsurance transactions. Asia Pacific net premiums written decreased in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year primarily due to the strengthening of the U.S. dollar against the Japanese yen. Excluding the effect of foreign exchange, net premiums written increased, primarily due to growth in Consumer Insurance from Fuji Life. EMEA net premiums written increased in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year due to Commercial Insurance new business growth, particularly in Property and Financial lines, and rate improvements on retained business, as well as growth in Consumer Insurance Personal lines products. 109

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AIG Property Casualty Underwriting Ratios

The following tables present the AIG Property Casualty combined ratios based on GAAP data and reconciliation to the accident year combined ratio, as adjusted: Three Months Ended Six Months Ended June 30, Increase June 30, Increase 2014 2013 (Decrease) 2014 2013 (Decrease) Commercial Insurance Loss ratio 67.7 72.6 (4.9) 68.5 68.8 (0.3) Catastrophe losses and reinstatement premiums (2.3) (6.0) 3.7 (2.9) (3.4) 0.5



Prior year development net of premium adjustments 0.7 (4.4)

5.1 (1.2) (1.6) 0.4 Net reserve discount benefit 0.3 - 0.3 1.4 - 1.4 Accident year loss ratio, as adjusted 66.4 62.2 4.2 65.8 63.8 2.0 Acquisition ratio 15.4 16.3 (0.9) 15.8 16.3 (0.5) General operating expense ratio 12.3 12.8 (0.5) 12.2 11.9 0.3 Expense ratio 27.7 29.1 (1.4) 28.0 28.2 (0.2) Combined ratio 95.4 101.7 (6.3) 96.5 97.0 (0.5) Catastrophe losses and reinstatement premiums (2.3) (6.0) 3.7 (2.9) (3.4) 0.5



Prior year development net of premium adjustments 0.7 (4.4)

5.1 (1.2) (1.6) 0.4 Net reserve discount benefit 0.3 - 0.3 1.4 - 1.4 Accident year combined ratio, as adjusted 94.1 91.3 2.8 93.8 92.0 1.8 Consumer Insurance Loss ratio 55.8 58.9 (3.1) 58.5 58.3 0.2



Catastrophe losses and reinstatement premiums (0.6) (0.3)

(0.3) (1.5) (0.2) (1.3) Prior year development net of premium adjustments 0.5 1.6 (1.1) 0.5 1.4 (0.9) Accident year loss ratio, as adjusted 55.7 60.2 (4.5) 57.5 59.5 (2.0) Acquisition ratio 25.9 25.9 - 25.9 25.4 0.5 General operating expense ratio 16.3 15.3 1.0 15.5 15.5 - Expense ratio 42.2 41.2 1.0 41.4 40.9 0.5 Combined ratio 98.0 100.1 (2.1) 99.9 99.2 0.7



Catastrophe losses and reinstatement premiums (0.6) (0.3)

(0.3) (1.5) (0.2) (1.3) Prior year development net of premium adjustments 0.5 1.6 (1.1) 0.5 1.4 (0.9) Accident year combined ratio, as adjusted 97.9 101.4



(3.5) 98.9 100.4 (1.5)

Total AIG Property Casualty Loss ratio 64.6 68.0 (3.4) 65.8 65.6 0.2



Catastrophe losses and reinstatement premiums (1.6) (3.7)

2.1 (2.4) (2.1) (0.3) Prior year development net of premium adjustments (0.2) (2.3) 2.1 (1.0) (0.9) (0.1) Net reserve discount benefit (0.1) (0.1) - 0.5 - 0.5 Accident year loss ratio, as adjusted 62.7 61.9 0.8 62.9 62.6 0.3 Acquisition ratio 19.4 20.0 (0.6) 19.6 19.9 (0.3) General operating expense ratio 14.8 14.6 0.2 14.5 14.5 - Expense ratio 34.2 34.6 (0.4) 34.1 34.4 (0.3) Combined ratio 98.8 102.6 (3.8) 99.9 100.0 (0.1) Catastrophe losses and reinstatement premiums (1.6) (3.7) 2.1 (2.4) (2.1) (0.3) Prior year development net of premium adjustments (0.2) (2.3) 2.1 (1.0) (0.9) (0.1) Net reserve discount benefit (0.1) (0.1) - 0.5 - 0.5 Accident year combined ratio, as adjusted 96.9 96.5 0.4 97.0 97.0 - 110

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Commercial insurance ratios Three Months Ended June 30, Six Months Ended June 30, [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] 111

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CoNSUMER insurance ratios Three Months Ended June 30, Six Months Ended June 30, [[Image Removed]]

[[Image Removed]] [[Image Removed]] [[Image Removed]] Given the nature of the lines of business and the expenses included in Other, AIG Property Casualty determined that the traditional underwriting measures of loss ratio, acquisition ratio, general operating expense ratio and combined ratio do not provide a relevant measure of underwriting performance. Therefore, these ratios are not presented for Other. 112 --------------------------------------------------------------------------------

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The following tables present AIG Property Casualty accident year catastrophe and severe losses by region and the number of events:

Catastrophes* # of Asia (in millions) Events Americas Pacific EMEA Total Three Months Ended June 30, 2014 Windstorms and hailstorms 5 $ 126$ 11$ 2$ 139



Total catastrophe-related charges 5 $ 126$ 11$ 2$ 139Commercial Insurance

$ 116$ 3$ 2$ 121 Consumer Insurance $ 10$ 8 $ - $ 18 Three Months Ended June 30, 2013 Flooding 4 $ 158 $ - $ 47$ 205 Windstorms and hailstorms 4 111 - - 111



Total catastrophe-related charges 8 $ 269 $ - $ 47$ 316Commercial Insurance

$ 262 $ - $ 45$ 307 Consumer Insurance $ 7 $ - $ 2$ 9 Six Months Ended June 30, 2014 Windstorms and hailstorms 9 $ 290$ 89$ 22$ 401



Total catastrophe-related charges 9 $ 290$ 89$ 22$ 401Commercial Insurance

$ 239$ 45$ 21$ 305 Consumer Insurance $ 51$ 44$ 1$ 96 Six Months Ended June 30, 2013 Flooding 6 $ 158$ 10$ 47$ 215 Windstorms and hailstorms 5 142 - - 142



Total catastrophe-related charges 11 $ 300$ 10$ 47$ 357Commercial Insurance

$ 286$ 9$ 45$ 340 Consumer Insurance $ 14$ 1$ 2$ 17



* Catastrophes are generally weather or seismic events having a net impact on AIG Property Casualty in excess of $10 million each.

Severe Losses* # of Asia (in millions) Events Americas Pacific EMEA Total Three Months Ended June 30, 2014 Commercial Insurance 7 $ 62$ 45$ 86$ 193 Consumer Insurance - - - - - Total severe losses 7 $ 62$ 45$ 86$ 193 Three Months Ended June 30, 2013 Commercial Insurance 3 $ - $ 20$ 18$ 38 Consumer Insurance - - - - - Total severe losses 3 $ - $ 20$ 18$ 38 Six Months Ended June 30, 2014 Commercial Insurance 16 $ 108$ 55$ 175$ 338 Consumer Insurance 3 37 4 - 41 Total severe losses 19 $ 145$ 59$ 175$ 379 Six Months Ended June 30, 2013 Commercial Insurance 6 $ 40$ 20$ 38$ 98 Consumer Insurance - - - - - Total severe losses 6 $ 40$ 20$ 38$ 98



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

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Commercial Quarterly and Year-to-Date Insurance Ratios

The combined ratio decreased by 6.3 points in the three-month period ended June 30, 2014, compared to the same period in the prior year due primarily to a decrease in the loss ratio. The acquisition ratio and general operating expense ratio also declined. The loss ratio decreased by 4.9 points in the three- month period ended June 30, 2014, compared to the same period in the prior year, primarily due to lower catastrophe losses and favorable loss reserve development compared to adverse loss reserve development for the same period in the prior year. The combined ratio decreased by 0.5 points for the six-month period ended June 30, 2014, compared to the same period in the prior year, due to a benefit in reserve discount. The accident year combined ratio, as adjusted, increased by 2.8 points and 1.8 points in the three- and six-month periods ended June 30, 2014, respectively, compared to the same periods in the prior year primarily due to higher severe losses. The accident year loss ratio, as adjusted, increased in the three- and six-month periods ended June 30, 2014, compared to the same periods in the prior year primarily due to higher frequency and severity in severe losses, particularly in Property and Specialty businesses, and a slight increase in non-severe property related losses. This was partially offset by an improvement in financial lines as a result of loss mitigation activities. Severe losses represented approximately 3.7 points and 3.3 points in the three- and six-month periods ended June 30, 2014, respectively, compared to 0.7 points and 1.0 point in the same periods in the prior year, respectively, and are included in the accident year loss ratio, as adjusted. The acquisition ratio decreased by 0.9 points and 0.5 points in the three- and six-month periods ended June 30, 2014, respectively, compared to the same periods in the prior year primarily due to lower premium taxes and guaranty fund and other assessments partially offset by higher commission rates reflecting the change in business mix to higher value lines. The general operating expense ratio decreased by 0.5 points in the three-month period ended June 30, 2014, compared to the same period in the prior year, due to a higher premiums earned base. The general operating expense ratio increased by 0.3 points in the six-month period ended June 30, 2014, compared to the same period in the prior year, primarily due to unusually low bad debt expense in the six-month period ended June 30, 2013.



Consumer Quarterly and Year-to-Date Insurance Ratios

The combined ratio decreased by 2.1 points in the three-month period ended June 30, 2014 compared to the same period in the prior year, primarily due to a lower loss ratio. In the six- month period ended June 30, 2014, the combined ratio increased by 0.7 points compared to the same period in the prior year due to increases in both the loss ratio and the acquisition ratio. The accident year combined ratio, as adjusted, decreased by 3.5 points and 1.5 points in the three- and six- month periods ended June 30, 2014, respectively, due to a lower accident year loss ratio, as adjusted, compared to the same periods in the prior year. The accident year loss ratio, as adjusted, decreased by 4.5 points and 2.0 points in the three- and six- month periods ended June 30, 2014, respectively, compared to the same periods in the prior year, primarily as a result of rate increases and improved loss experience in the Japan automobile business, and rate actions and coverage changes in the U.S. Warranty business. The severe losses of $41 million, resulting largely from three fire claims, accounted for 0.6 points of the accident year loss ratio, as adjusted, in the six- month period ended June 30, 2014. The acquisition ratio remained unchanged in the three-month period ended June 30, 2014, and increased by 0.5 points in the six-month period ended June 30, 2014, compared to the same periods in the prior year, primarily due to the combined effect of the change in business mix and higher acquisition costs in growth-targeted lines of business. The general operating expense ratio increased by 1.0 point in the three- month period ended June 30, 2014 due to higher infrastructure costs primarily related to the ongoing integration of AIG Property Casualty's Japanese entities. The general operating expense ratio remained unchanged in the six-month period ended June 30, 2014 primarily due to a decrease in employee-related expenses offset by higher infrastructure costs. 114

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AIG Property Casualty Net Investment Income and Net Realized Capital Gains (Losses)

The following table presents AIG Property Casualty's net investment income and net realized capital gains (losses):

Three Months Ended Six Months Ended June 30, Percentage June 30, Percentage (in millions) 2014 2013 Change 2014 2013 Change Net Investment Income by Component Interest and dividends $ 987$ 1,008 (2) % $ 1,945$ 2,012 (3) % Alternative investments 188 240 (22) 457 498 (8) Fair value option assets 55 70 (21) 79 115 (31) Other income (loss) - net 24 (9) NM 29 9 222 Total net investment income $ 1,254$ 1,309 (4) % $ 2,510$ 2,634 (5) % Net Investment Income by Operating Segment Commercial Insurance $ 624$ 623 - % $ 1,224$ 1,268 (3) % Consumer Insurance 89 92 (3) 175 190 (8) Other 541 594 (9) 1,111 1,176 (6) Total net investment income $ 1,254$ 1,309 (4) % $ 2,510$ 2,634 (5) % Net realized capital gains $ 127$ 109 17 % $ 269$ 163 65 % AIG Property Casualty manages and accounts for its invested assets on a legal entity basis in conformity with regulatory requirements. Within a legal entity, invested assets are available to pay claims and expenses of both Commercial Insurance and Consumer Insurance operating segments as well as the Other category. Invested assets are not segregated or otherwise separately identified for the Commercial Insurance and Consumer Insurance operating segments. Investment income is allocated to the Commercial Insurance and Consumer Insurance operating segments based on an internal investment income allocation model. The model estimates investable funds based primarily on loss reserves, unearned premiums and a capital allocation for each segment. The investment income allocation is calculated based on the estimated investable funds and risk­free yields (plus a liquidity premium) consistent with the approximate duration of the liabilities. The actual yields in excess of the allocated amounts and the investment income from the assets not attributed to the Commercial Insurance or the Consumer Insurance operating segments are assigned to the Other category. Net realized capital gains (losses) and Other income (expense) - net are not allocated to Commercial Insurance and Consumer Insurance, but are reported as part of the Other category.



Quarterly and Year-to-Date Net Investment Income

Net investment income is influenced by a number of factors, including equity market performance, changes in overall asset allocation, changes in the timing and amount of expected cash flows on certain structured securities, and the movements of interest rates. Net investment income decreased by $55 million, or 4 percent, and $124 million, or 5 percent in the three- and six-month periods ended June 30, 2014, compared to the same periods in the prior year, respectively, primarily due to lower income on alternative investments and lower income associated with investments accounted for under the fair value option as the prior year period included a $58 million gain related to the PICC P&C rights offering in June 2013. The decrease in interest rates during the three- and six-month periods ended June 30, 2014 was primarily offset by continued portfolio diversification, which helped mitigate the effects of higher interest rates on matured or sold investments versus new investment yields. Corporate debt securities continued to be the largest asset category. AIG Property Casualty continued to focus on risk­weighted opportunistic investments in higher yielding assets such as structured securities and mortgage loans. In addition, AIG Property Casualty continued to maintain a defensive strategy on interest rates in the current rising rate environment, since the first quarter of 2013, by continuing to invest in floating rate securities. This asset diversification has maintained stable average yields while the overall credit ratings of AIG Property Casualty's fixed maturity securities were largely unchanged. AIG Property Casualty expects to continue to refine its investment strategy during the remainder of 2014 to meet its liquidity, duration and credit quality objectives as well as current risk­return and tax objectives. 115 --------------------------------------------------------------------------------

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Item 2 / results of operations / AIG PROPERTY CASUALTY

The fair value of AIG Property Casualty's invested assets portfolio increased compared to December 31, 2013, primarily due to an increase in unrealized appreciation, which was driven by lower interest rates and narrowing spreads.

Quarterly and Year-to-Date Net Realized Capital Gains (Losses)

Net realized capital gains increased in the three-month period ended June 30, 2014 compared to the same period in the prior year, primarily due to gains on derivatives used to economically hedge foreign currency positions compared to losses in the same period in the prior year, which were partially offset by lower gains on sales of securities. Net realized capital gains increased in the six-month period ended June 30, 2014 compared to the same period in the prior year, primarily due to gains on sales of securities, which were accomplished along with AIG Property Casualty's portfolio diversification and derisking strategy. In addition to the higher overall gains on sales of securities, gains were also recorded on derivatives used to economically hedge foreign currency positions compared to losses in the same period in the prior year. AIG Property Casualty recognized other­than­temporary impairment charges of $18 million and $34 million in the three- and six-month periods ended June 30, 2014, respectively, slightly higher than the same periods in the prior year.



Liability for Unpaid Claims and Claims Adjustment Expense

The following discussion of the consolidated liability for unpaid claims and claims adjustment expense (loss reserves) presents loss reserves for AIG Property Casualty, as well as the loss reserves pertaining to the Mortgage Guaranty reporting unit, which is reported in Other Operations.

The following table presents the components of AIG's gross loss reserves by major lines of business on a U.S. statutory basis*:

June 30, December 31, (in millions) 2014



2013

Other liability occurrence (including asbestos and environmental)

$ 20,375 $



21,023

International 17,219



17,126

Workers' compensation (net of discount) 15,043 15,390 Other liability claims made 10,592 10,645 Property 3,749 4,111 Auto liability 2,541 2,581 Products liability 1,458 1,463 Medical malpractice 1,644 1,714 Mortgage guaranty / credit 1,173 1,348 Accident and health 1,269 1,378 Commercial multiple peril 1,886 1,886 Aircraft 1,360 1,276 Fidelity/surety 622 538 Other 1,046 1,068 Total $ 79,977$ 81,547



* Presented by lines of business pursuant to statutory reporting requirements as prescribed by the National Association of Insurance Commissioners.

Gross loss reserves represent the accumulation of estimates of ultimate losses, including estimates for incurred but not reported (IBNR) and loss expenses, less applicable discount for future investment income. AIG Property Casualty regularly reviews and updates the methods and assumptions used to determine loss reserve estimates and to establish the resulting reserves. Any adjustments resulting from this review are reflected in pre­tax operating income. Because loss reserve estimates are subject to the outcome of future events, changes in estimates are unavoidable given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase prior years' estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease prior years' estimates of ultimate cost are referred to as favorable development. 116

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Item 2 / results of operations / Liability for Unpaid Claims and Claims Adjustment Expense

The net loss reserves represent loss reserves reduced by estimated salvage and subrogation, reinsurance recoverable, net of an allowance for unrecoverable reinsurance, and applicable discount for future investment income.

The following table presents the components of net loss reserves:

June 30, December 31, (in millions) 2014 2013 Gross loss reserves before reinsurance and discount $ 83,622$ 85,102 Less: discount (3,645) (3,555) Gross loss reserves, net of discount, before reinsurance 79,977 81,547 Less: reinsurance recoverable* (16,887) (17,231) Net liability for unpaid claims and claims adjustment expense $



63,090 $ 64,316

* Includes $1.5 billion and $1.6 billion of reinsurance recoverable under a retroactive reinsurance agreement at June 30, 2014 and December 31, 2013, respectively.

Gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.5 billion and $12.0 billion at June 30, 2014 and December 31, 2013, respectively. These recoverable amounts are related to certain policies with high deductibles, primarily for U.S. commercial casualty business, where AIG Property Casualty manages and pays the entire claim on behalf of the insured and is reimbursed by the insured for the deductible portion of the claim. At June 30, 2014 and December 31, 2013, AIG Property Casualty held collateral totaling $9.3 billion and $9.0 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and trust agreements. The following table classifies the components of net loss reserves by business unit(a): June 30, December 31, (in millions) 2014 2013 AIG Property Casualty: Commercial Insurance Casualty $ 34,216$ 34,494 Financial lines 9,855 9,803 Specialty 5,665 5,485 Property 4,052 4,293 Total Commercial Insurance(b) 53,788 54,075 Consumer Insurance Personal lines 3,072 3,385 Accident and health 1,943 2,094 Total Consumer Insurance(b) 5,015



5,479

Other 3,156



3,475

Total AIG Property Casualty 61,959



63,029

Other Operations - Mortgage Guaranty 1,131



1,287

Net liability for unpaid claims and claims adjustment expense $ 63,090

$ 64,316

(a) Excludes future policyholder benefits of $3.6 billion and $3.5 billion at June 30, 2014 and December 31, 2013, respectively.

(b) The December 31, 2013 balances have been reclassified between lines of businesses of Commercial Insurance and Consumer Insurance. The impact of this correction was a total decrease of $325 million in Commercial Insurance and a corresponding increase in Consumer Insurance, with no income statement or balance sheet impact. 117

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Item 2 / results of operations / Liability for Unpaid Claims and Claims Adjustment Expense

Discounting of Reserves



The following table presents the components of AIG Property Casualty's loss reserve discount included above:

June 30, 2014 December 31, 2013 Commercial Commercial (in millions) Insurance Other Total Insurance Other Total U.S. workers' compensation: Tabular $ 597$ 201$ 798$ 597$ 201$ 798 Non-tabular 1,764 1,067 2,831 1,622 1,102 2,724 Asbestos - 16 16 - 33 33 Total reserve discount $ 2,361$ 1,284$ 3,645$ 2,219$ 1,336$ 3,555



The following table presents the net reserve discount benefit (charge):

Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Commercial Commercial Commercial Commercial (in millions) Insurance Other Total Insurance Other Total Insurance Other Total Insurance Other Total Change in loss reserve discount - current accident year $ 93 $ - $ 93$ 71 $ - $ 71$ 135 $ - $ 135$ 142 $ - $ 142 Change in loss reserve discount - prior year development - (12) (12) - -

- 110 (15) 95 - - - Accretion of reserve discount (77) (19) (96) (71) (5)



(76) (103) (37) (140) (142) (10) (152) Net reserve discount

benefit (charge) $ 16$ (31)$ (15) $ - $ (5)$ (5)$ 142$ (52)$ 90 $ - $ (10)$ (10)

Commencing January 1, 2014, AIG Property Casualty merged its two internal pooling arrangements into one pool, and changed the participation percentages of the pool members. This resulted in an additional workers' compensation loss reserve discount benefit of approximately $110 million recorded during the first quarter of 2014. As a result of changes in the participation percentages and domiciliary states of the participants of the combined pool, a portion of the workers' compensation reserves that had been held in New York subsidiaries and discounted pursuant to New York discounting rules which generally do not permit non-tabular discounting on IBNR and prescribe a fixed 5 percent discount rate for application to case reserves, are now held in Pennsylvania and Delaware subsidiaries and discounted pursuant to Pennsylvania and Delaware rules. Pennsylvania discounting rules permit non-tabular discounting on IBNR and allow a variable discount rate for application to case reserves. AIG Property Casualty received a permitted practice from the Delaware Department of Insurance to allow discounting on the same basis as its Pennsylvania domiciled companies.



Quarterly Reserving Conclusion

AIG net loss reserves represent our best estimate of our liability for net losses and loss expenses as of June 30, 2014. While we regularly review the adequacy of established loss reserves, there can be no assurance that our ultimate loss reserves will not develop adversely and materially exceed our loss reserves as of June 30, 2014. In our opinion, such adverse development and resulting increase in reserves are not likely to have a material adverse effect on our consolidated financial condition, although such events could have a material adverse effect on our consolidated results of operations for an individual reporting period. 118

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Item 2 / results of operations / Liability for Unpaid Claims and Claims Adjustment Expense

The following table presents the rollforward of net loss reserves:

Three Months Ended Six Months Ended June 30, June 30, (in millions) 2014 2013 2014 2013 Net liability for unpaid claims and claims adjustment expense at beginning of period $ 63,956$ 66,825$ 64,316$ 68,782 Foreign exchange effect 95 (393) 44 (909) Other, including dispositions - (79) - (79) Change due to retroactive asbestos reinsurance transaction 82 22 86 66 Losses and loss expenses incurred: Current year, undiscounted 5,341 5,380 10,712 10,791 Prior years (favorable) unfavorable development, undiscounted(a) (35) 213 150 160 Change in discount 15 5 (90) 10 Losses and loss expenses incurred(b) 5,321 5,598 10,772 10,961 Losses and loss expenses paid(b) 6,364 6,381 12,128 13,229 Net liability for unpaid claims and claims adjustment expense at end of period $ 63,090$ 65,592$ 63,090$ 65,592



(a) See tables below for details of prior year development by business unit, accident year and major class of business.

(b) These amounts exclude benefit from retroactive reinsurance.

The following table summarizes development, (favorable) or unfavorable, of incurred losses and loss expenses for prior years, net of reinsurance, by business unit and major class of business:

Three Months Ended Six Months Ended June 30, June 30, (in millions) 2014 2013 2014 2013 Prior accident year development by major class of business: Commercial Insurance U.S.: Excess casualty $ (3)$ 13$ 10$ (12) Financial lines including professional liability (50) 10 (67) 6 Primary casualty: - Loss-sensitive 68 70 64 80 Other 49 2 87 48 Healthcare 1 - 10 - Specialty 33 18 98 5 Property excluding natural catastrophes 17 (9) (5) (63) Natural catastrophes (31) 165 (73) 179 All other, net 4 29 43 9 Total Commercial Insurance - U.S. 88 298 167 252 Commercial Insurance International: Primary casualty 7 (12) (7) (2) Financial lines 16 (6) 119 (10) Specialty (22) (14) (12) (34) Property excluding natural catastrophes (40) 8 (57) 23 Natural catastrophes (42) (10) (47) (23) All other, net (2) (7) (2) (10) Total Commercial Insurance - International (83) (41) (6) (56) Total Commercial Insurance 5 257 161 196 Consumer Insurance - U.S.: Natural catastrophes - (24) (1) (47) All other, net 5 (1) (22) (20) Total Consumer Insurance - U.S. 5 (25) (23) (67) 119

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Item 2 / results of operations / Liability for Unpaid Claims and Claims Adjustment Expense

Consumer Insurance - International: Natural catastrophes (1) (1) (6) (2) All other, net (20) (27) (1) (26) Total Consumer Insurance - International (21) (28) (7) (28) Total Consumer Insurance (16) (53) (30) (95) Other - U.S.: Asbestos and environmental (1986 and prior) 46 18 47 33 Run-off environmental (1987 to 2004) 23 - 23 37 Total all other, net - - 16 - Total Other - U.S. 69 18 86 70 Other - International: Asbestos and environmental (1986 and prior) (4) 2 (4) 11 Total all other, net - - (1) - Total Other - International (4) 2 (5) 11 Total Other 65 20 81 81 Total AIG Property Casualty 54 224 212 182 Other Operations - Mortgage Guaranty (89) (11) (62) (22) Total prior year (favorable) unfavorable development $



(35) $ 213$ 150$ 160

AIG Property Casualty prior year development $ 54$ 224$ 212$ 182 Premium adjustments



(68) (70) (64) (80) AIG Property Casualty prior year development, net of premium adjustments $ (14)$ 154$ 148$ 102

Quarterly and Year-to-Date Net Loss Development

In determining the loss development from prior accident years, AIG analyzes and evaluates the change in estimated ultimate loss for each accident year by class of business. For example, if loss emergence for a class of business is different than expected for certain accident years, we examine the indicated effect such emergence would have on the reserves of that class of business. In some cases, the higher or lower than expected emergence may result in no clear change in the ultimate loss estimate for the accident years in question, and no adjustment would be made to the reserves for the class of business for prior accident years. In other cases, the higher or lower than expected emergence may result in a larger change, either favorable or unfavorable. As appropriate, we make adjustments for the difference between the actual and expected loss emergence for each accident year. As part of our reserving process, we also consider notices of claims received with respect to emerging and/or evolving issues. In the three-month period ended June 30, 2014, the favorable prior year loss development, net of premium accruals of $68 million, was $14 million, which was driven by net favorable development in International Commercial and International Consumer Insurance, offset by reserve increases in U.S. Commercial Insurance (that were largely counter-balanced by premium accruals) and Other - U.S. The primary components of the favorable loss reserve development were Natural catastrophes of $74 million, and International Commercial Property, including $30 million favorable loss reserve development from a 2012 severe loss. The adverse development in Other of $65 million included a single large claim settlement in the run-off environmental exposures (1987 - 2004) and adverse development on legacy pollution exposures (1986 and prior), partially offset by an $8 million favorable asbestos settlement. The net adverse development (after premium accruals) in U.S. Commercial Insurance was driven by Primary Casualty (especially Auto Liability), and Specialty lines, offset by Financial Lines and Natural catastrophes. In the six-month period ended June 30, 2014, the adverse prior year loss development, net of premium accruals of $64 million, was $148 million, which was driven by reserve increases on claims in U.S. Commercial Insurance and Other - U.S. that was modestly offset by net favorable development in U.S. Consumer Insurance. The net adverse development in U.S. Commercial Insurance was driven by Primary Casualty and Specialty lines, partially offset by Financial Lines and Natural catastrophes, while the adverse development in Other - U.S. was driven by adverse development on legacy pollution exposures (1986 and prior) and run-off environmental exposures (1987 - 2004). 120 --------------------------------------------------------------------------------

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Item 2 / results of operations / Liability for Unpaid Claims and Claims Adjustment Expense

For the three- and six-month periods ended June 30, 2013, the net adverse development, net of premium accruals of $70 million and $80 million, was $154 million and $102 million, respectively, which was driven by reserve increases on claims in U.S. Commercial Insurance and Other - U.S., partially offset by net favorable development in U.S. Consumer Insurance, International Commercial and International Consumer lines. The net adverse development in U.S. Commercial Insurance was primarily attributable to domestic property exposures, mostly due to the increase in reserves for Storm Sandy, with adverse development in non-loss sensitive Primary Casualty lines, driven by higher than expected legal costs on claims for construction defects claims from accident years 2004 and prior. The adverse development on those classes was partially offset by case reductions on some large claims and favorable development on non-natural catastrophe Property business. The adverse development in Other - U.S. for the three- and six-month periods ended June 30, 2013 included adverse development on legacy asbestos and environmental exposures (1986 and prior). In addition, the six-month period ended June 30, 2013 included adverse development on run off environmental exposures (1987 - 2004).



See AIG Property Casualty Results herein and Other Operations - Other Operations Results - Mortgage Guaranty for further discussion of net loss development.

The following table summarizes development, (favorable) or unfavorable, of

incurred losses and loss expenses for prior years, net of reinsurance, by accident year: Three Months Ended Six Months Ended June 30, June 30, (in millions) 2014 2013 2014 2013 Prior accident year development by accident year: Accident Year 2013 $ (67) $ - $ (127) $ - 2012 (43) 72 (90) 34 2011 (104) (10) (46) (37) 2010 (3) 9 51 (10) 2009 50 15 98 (16) 2008 (5) 13 52 28 2007 (21) 27 (9) 26 2006 5 14 7 22 2005 14 36 13 40 2004 and prior 139 37 201 73 Total prior year (favorable) unfavorable development $ (35)$ 213



$ 150$ 160

Asbestos and Environmental Reserves

The estimation of loss reserves relating to asbestos and environmental claims on insurance policies written many years ago is subject to greater uncertainty than other types of claims due to inconsistent court decisions as well as judicial interpretations and legislative actions that in some cases have tended to broaden coverage beyond the original intent of such policies and in others have expanded theories of liability. As described more fully in the 2013 Annual Report, AIG Property Casualty's reserves relating to asbestos and environmental claims reflect comprehensive ground­up and top-down analyses performed periodically. In the six-month period ended June 30, 2014, AIG Property Casualty increased its gross asbestos reserves by $22 million and the net asbestos reserves by $26 million primarily due to minor changes in estimates, accretion of discount, and anticipated uncollectible reinsurance. For the same period, AIG Property Casualty increased its gross environmental reserves by $119 million and its net environmental reserves by $50 million to reflect the results of a top-down analysis completed in the second quarter. In addition to the U.S. asbestos and environmental reserve amounts shown in the tables below, AIG Property Casualty also has asbestos reserves relating to foreign risks written by non­U.S. entities of $137 million gross and $111 million net as of June 30, 2014. The asbestos reserves relating to non­U.S. risks written by non­U.S. entities were $134 million gross and $108 million net as of December 31, 2013. 121

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Item 2 / results of operations / Liability for Unpaid Claims and Claims Adjustment Expense

The following table provides a summary of reserve activity, including estimates for applicable IBNR, relating to asbestos and environmental claims:

As of or for the Six Months Ended June 30, 2014 2013 (in millions) Gross Net Gross Net Asbestos: Liability for unpaid claims and claims adjustment expense at beginning of year $



4,720 $ 529$ 4,896$ 427 Change in net loss reserves due to retroactive reinsurance: Paid losses recoverable under retroactive reinsurance contracts

- 88 - 69 Re-estimation of amounts recoverable under retroactive reinsurance contracts(a)

- (2) - (3) Change in net loss reserves due to retroactive reinsurance - 86 - 66 Dispositions - - (12) (12) Loss and loss expenses incurred: Undiscounted (8) 10 - 6 Change in discount 30 18 23 10 Losses and loss expenses incurred(b) 22 28 23 16 Losses and loss expenses paid(b)



(421) (261) (252) (114) Liability for unpaid claims and claims adjustment expense at end of period

$ 4,321$ 382$ 4,655$ 383 Environmental: Liability for unpaid claims and claims adjustment expense at beginning of year $ 313$ 163$ 309$ 163 Dispositions - - (1) (1) Losses and loss expenses incurred 119 50 61 38 Losses and loss expenses paid



(28) (16) (58) (33) Liability for unpaid claims and claims adjustment expense at end of period

$ 404$ 197$ 311$ 167 Combined: Liability for unpaid claims and claims adjustment expense at beginning of year $



5,033 $ 692$ 5,205$ 590 Change in net loss reserves due to retroactive reinsurance: Paid losses recoverable under retroactive reinsurance contracts

- 88 - 69 Re-estimation of amount recoverable under retroactive reinsurance contracts

- (2) - (3) Change in net loss reserves due to retroactive reinsurance - 86 - 66 Dispositions - - (13) (13) Losses and loss expenses incurred: Undiscounted 111 60 61 44 Change in discount 30 18 23 10 Losses and loss expenses incurred 141 78 84 54 Losses and loss expenses paid



(449) (277) (310) (147) Liability for unpaid claims and claims adjustment expense at end of period

$



4,725 $ 579$ 4,966$ 550

(a) Re-estimation of amounts recoverable under retroactive reinsurance contracts includes effect of changes in reserve estimates and changes in discount.

(b) These amounts exclude benefit from retroactive reinsurance.

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Item 2 / results of operations / AIG LIFE AND RETIREMENT

AIG LIFE AND RETIREMENT



AIG Life and Retirement presents its financial information in two operating segments - Retail and Institutional.

Retail products are generally marketed directly to individual consumers through independent and career insurance agents, retail banks, direct-to-consumer platforms, and national, regional and independent broker-dealers. The primary products offered by the Retail segment include term and universal life insurance, A&H, individual fixed and variable annuities, retail mutual funds and advisory services. Institutional products are generally marketed to groups or large institutions through affiliated financial advisors or intermediaries including benefit consultants, independent marketing organizations, structured settlement brokers and broker-dealers. Institutional segment products include fixed and variable group annuities, group mutual funds, stable value wrap products, structured settlement and terminal funding annuities, high net worth products, corporate- and bank-owned life insurance, guaranteed investment contracts and a wide range of group benefit products.



AIG Life and Retirement Quarterly and Year-to-date 2014 Highlights

Pre-tax operating income for the three- and six-month periods ended June 30, 2014 improved slightly compared to the same periods in the prior year, reflecting higher fee income from strong growth in assets under management, partially offset by lower net investment income, primarily due to strong returns on alternative investments in the prior year periods and lower base investment yield. AIG Life and Retirement has continued to emphasize disciplined pricing of new business and active management of renewal crediting rates for interest rate sensitive business which, together with the run-off of older business with relatively high crediting rates, has largely offset the pressure on investment yields in the sustained low interest rate environment. Pre-tax income for the three- and six-month periods ended June 30, 2014 decreased compared to the same periods in the prior year, primarily due to lower net realized capital gains and lower income from legal settlements, partially offset by lower loss recognition expense. Pre-tax income for the six-month period ended June 30, 2014 included realized capital losses from changes in the fair value of embedded derivatives related to variable annuity guarantee features, net of hedges, as a result of decreases in interest rates and narrowing of credit spreads during the period. The significant net realized capital gains in the three- and six-month periods ended June 30, 2013 were primarily due to gains on investment sales related to capital loss carryforward utilization. These decreases in pre-tax income were partially offset by lower loss recognition expense compared to the same periods in the prior year. Loss recognition expense, which was triggered primarily by the reinvestment of investment sales proceeds during 2013 in the low interest rate environment, is reported within changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses). Premiums and deposits improved in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year, primarily due to continued strong demand for variable annuities in the Retirement Income Solutions product line and improved sales of Fixed Annuities, which have benefitted from slightly higher market interest rates in the current year periods. Although interest rates have declined during 2014 and remain at historically low levels, they have increased compared to the same periods in the prior year. As a result of the increase in premiums and deposits, net flows increased to $939 million and $2.0 billion in the three- and six-month periods ended June 30, 2014, respectively, compared to net flows of $417 million and $173 million in the same periods in the prior year. See AIG Life and Retirement - Premiums, Deposits and Net Flows for discussion of premiums as well as net flows by product line. Dividends and loan repayments paid by AIG Life and Retirement subsidiaries to AIG Parent included cash dividends and loan repayments of $886 million in the three-month period ended June 30, 2014, reflecting continued strong statutory earnings. In addition, AIG Life and Retirement distributed $642 million of preferred equity interests in two aircraft trust entities to AIG Parent through a non-cash dividend in the three-month period ended June 30, 2014. Cash dividends and loan repayments paid by AIG Life and Retirement subsidiaries to AIG Parent totaled $2.5 billion in the six-month period ended June 30, 2014, which included approximately $364 million of legal settlement proceeds. 123 --------------------------------------------------------------------------------

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Item 2 / results of operations / AIG LIFE AND RETIREMENT

AIG Life and Retirement Results

The following table presents AIG Life and Retirement results:

Three Months Ended Six Months Ended June 30, Percentage June 30, Percentage (in millions) 2014 2013 Change 2014 2013 Change Retail Revenue: Premiums $ 431$ 389 11 % $ 818$ 747 10 % Policy fees 542 491 10 1,078 978 10 Net investment income 1,464 1,510 (3) 3,092 3,167 (2) Other income 454 382 19 879 747 18 Operating expenses: Policyholder benefits and claims incurred 753 689 9 1,471 1,324 11 Interest credited to policyholder account balances 565 584 (3) 1,128 1,195 (6) Amortization of deferred policy acquisition costs 190 177 7 383 340 13 Other acquisition and insurance expenses 699 652 7 1,367 1,289 6 Pre-tax operating income 684 670 2 1,518 1,491 2 Legal settlements 8 221 (96) 28 297 (91) Changes in fair value of fixed maturity securities designated to hedge living benefit liabilities, net of interest expense 54 (69) NM 130 (98) NM Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses) (27) (160) 83 14 (121) NM Net realized capital gains (losses) 19 515 (96) (287) 604 NM Pre-tax income $ 738$ 1,177 (37) % $ 1,403$ 2,173 (35) % Institutional Revenue: Premiums $ 269$ 260 3 % $ 479$ 522 (8) % Policy fees 159 132 20 315 260 21 Net investment income 1,097 1,127 (3) 2,286 2,347 (3) Other income 44 37 19 79 65 22 Operating expenses: Policyholder benefits and claims incurred 486 494 (2) 913 957 (5) Interest credited to policyholder account balances 397 387 3 787 793 (1) Amortization of deferred policy acquisition costs 19 25 (24) 40 50 (20) Other acquisition and insurance expenses 171 169 1 340 340 - Pre-tax operating income 496 481 3 1,079 1,054 2 Legal settlements 4 138 (97) 14 170 (92) Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses) (14) (992) 99 (25) (1,090) 98 Net realized capital gains (losses) 25 915 (97) 10 982 (99) Pre-tax income $ 511$ 542 (6) % $ 1,078$ 1,116 (3) % Total AIG Life and Retirement Revenue: Premiums $ 700$ 649 8 % $ 1,297$ 1,269 2 % Policy fees 701 623 13 1,393 1,238 13 Net investment income 2,561 2,637 (3) 5,378 5,514 (2) Other income 498 419 19 958 812 18 124

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Item 2 / results of operations / AIG LIFE AND RETIREMENT

Operating expenses: Policyholder benefits and claims incurred 1,239 1,183 5 2,384 2,281 5 Interest credited to policyholder account balances 962 971 (1) 1,915 1,988 (4) Amortization of deferred policy acquisition costs 209 202 3 423 390 8 Other acquisition and insurance expenses 870 821 6 1,707 1,629 5 Pre-tax operating income 1,180 1,151 3 2,597 2,545 2 Legal settlements 12 359 (97) 42 467 (91) Changes in fair value of fixed maturity securities designated to hedge living benefit liabilities, net of interest expense 54 (69) NM 130 (98) NM Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses) (41) (1,152) 96 (11) (1,211) 99 Net realized capital gains (losses) 44 1,430 (97) (277) 1,586 NM Pre-tax income $ 1,249$ 1,719 (27) % $ 2,481$ 3,289 (25) %



AIG LIFE AND RETIREMENT PRE-TAX OPERATING INCOME (in millions)

[[Image Removed]]



AIG Life and Retirement Quarterly and Year-to-date Results

Pre-tax operating income for the three- and six-month periods ended June 30, 2014 improved slightly compared to the same periods in the prior year, reflecting higher fee income from growth in assets under management, primarily due to strong sales of individual variable annuities, positive net flows and a favorable equity market, partially offset by lower net investment income. The decreases in net investment income for the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year reflected lower income from alternative investments, primarily hedge funds, which had strong returns in the prior year periods. Lower base investment yields reflected strong performance of commercial mortgage loans and structured securities in the prior year periods, as well as investment of available cash in the low interest rate environment. These decreases in net investment income compared to the same periods in the prior year were partially offset by growth in invested assets and better performance of assets for which the fair value option has been elected. AIG Life and Retirement has continued to emphasize disciplined pricing of new business and active management of renewal crediting rates for interest rate sensitive business which, together with the run-off of older business with relatively high crediting rates, has largely offset the pressure on investment yields in the sustained low interest rate environment. See AIG Life and Retirement - Investments and Spread Management for additional discussion of variances in net investment income. 125 --------------------------------------------------------------------------------

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Pre-tax income for the three- and six-month periods ended June 30, 2014 decreased compared to the same periods in the prior year, primarily due to lower net realized capital gains and lower income from legal settlements, partially offset by lower loss recognition expense. The decrease in net realized capital gains was primarily due to significant net realized capital gains in the three- and six-month periods ended June 30, 2013 on investment sales to utilize capital loss carryforwards. See AIG Life and Retirement - Investments and Spread Management for additional discussion of realized capital gains (losses) on invested assets. Net realized capital gains (losses) in the three- and six-month periods ended June 30, 2014 also included net gains of $16 million and net losses of $335 million, respectively, compared to net gains of $180 million and $131 million in the same periods in the prior year, from the change in the fair value of embedded derivatives related to variable annuities with GMWB living benefit guarantee features, net of hedges. These embedded derivatives are primarily in the Retirement Income Solutions product line of the Retail operating segment and, to a lesser extent, in the Group Retirement product line of the Institutional operating segment. The fair value losses in the six-month period ended June 30, 2014 were primarily due to narrower credit spreads and a decrease in interest rates during 2014, which were partially offset by increases in the fair value of U.S. Treasury bonds used to hedge interest rate risk, discussed below. The fair value calculation for these embedded derivatives reflects a market participant's view of AIG Life and Retirement's claims-paying ability by adjusting the interest rate swap curve used to discount the expected cash flows with an additional spread to reflect non-performance risk. This non-performance spread adjustment is derived from corporate credit spreads in the marketplace, which were narrower in the six-month period ended June 30, 2014 compared to the same period in the prior year, contributing to the current year fair value losses on embedded derivatives. AIG Life and Retirement has a dynamic hedging program designed to manage economic risk exposure associated with the impact of changes in equity markets, interest rates and volatilities on the fair value of embedded derivative liabilities related to these guaranteed living benefit features. This program utilizes derivative instruments, including equity options, futures contracts and interest rate swap contracts, as well as U.S. Treasury bonds. While a small portion of AIG Life and Retirement's interest rate risk related to these products is unhedged, the majority of the interest rate exposure related to guaranteed living benefit features is hedged with derivative instruments and, to a lesser extent, with U. S. Treasury bonds, which AIG Life and Retirement began purchasing in 2012 as a capital-efficient strategy to reduce interest rate risk exposure over time. The hedging-related change in the fair value of the U.S. Treasury bonds is also excluded from pre-tax operating income and reported in changes in fair value of fixed maturity securities designated to hedge living benefit liabilities. The decrease in pre-tax income of AIG Life and Retirement compared to the three- and six-month periods ended June 30, 2013 also reflected lower income from legal settlements with financial institutions that participated in the creation, offering and sale of RMBS from which AIG and its subsidiaries realized losses during the financial crisis. These decreases in pre-tax income were partially offset by significantly lower loss recognition expense for certain traditional product lines, which was $12 million and $22 million in the three- and six-month periods ended June 30, 2014, respectively, compared to $1.1 billion and $1.2 billion in the same periods in the prior year. Loss recognition recorded in the 2013 periods was primarily a result of the reinvestment of investment sales proceeds during 2013 in the low interest rate environment. Loss recognition is reported in changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses). See AIG Life and Retirement Reserves and DAC - Other Reserve Changes for additional discussion of loss recognition.



Retail Quarterly and Year-to-date Results

Pre-tax operating income for the Retail operating segment increased slightly in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year, due primarily to higher fee income partially offset by lower net investment income. The decrease in net investment income compared to the same periods in the prior year included lower income from alternative investments and declining base portfolio yields, partially offset by growth in invested assets and better performance of fair value option assets. Higher fee income in the Retirement Income Solutions product line reflected growth in assets under management driven by strong sales of variable annuities, positive net flows and favorable equity market performance. Base spread (defined as net investment income excluding alternative investments and other enhancements, less interest credited) for the Fixed Annuities product line decreased in the three-month period ended June 30, 2014 compared to the same period in the prior year, which reflected declining base yields partially offset by active crediting rate management and the run-off of older business with relatively high crediting rates. DAC amortization expense increased compared to the six-month period ended June 30, 2013, as the favorable impact of equity market performance reduced amortization expense in the prior year period but had a smaller impact on the same period in 2014. Advisory fees and other income increased in the 126 --------------------------------------------------------------------------------

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three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year due to higher volumes of advisory services, which were offered in the Brokerage Services, Retirement Income Solutions and Retail Mutual Fund product lines. The increase in advisory fee and other income was partially offset by a related increase in advisory expense, which is included in other acquisition and insurance expense. Pre-tax income for the Retail operating segment decreased in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year, primarily due to lower gains from investment sales to utilize capital loss carryforwards and, for the six-month period, to fair value losses in the current year on embedded derivatives related to variable annuity guarantee features, net of hedges, primarily as a result of narrower credit spreads as well as a reduction in interest rates during the six-month period. The realized capital losses on embedded derivatives in the six-month period ended June 30, 2014 were partially offset by a favorable variance in the fair value of the U.S. Treasury bonds used to hedge interest rate risk related to these products, which is also excluded from pre-tax operating income and reported in changes in fair value of fixed maturity securities designated to hedge living benefit liabilities. These embedded derivatives had fair value gains in the same periods of the prior year due primarily to the increase in market interest rates during those periods. The decrease in Pre-tax income for the Retail operating segment also reflected a decrease in legal settlement income, partially offset by lower loss recognition expense.



Institutional Quarterly and Year-to-date Results

Pre-tax operating income for the Institutional operating segment, which primarily reflects the Group Retirement product line, increased slightly in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year, due in part to higher fee income from growth in assets under management, driven principally by favorable equity market performance and development of the stable value wrap business. In addition, effective crediting rate management in the Group Retirement product line helped offset the pressure on yields from reinvestment in the sustained low interest rate environment. Net investment income for the three- and six-month periods ended June 30, 2014 decreased compared to the same periods in the prior year, primarily due to lower income from alternative investments, partially offset by higher call income and better performance of fair value option assets. Pre-tax income for the Institutional operating segment decreased in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year, primarily due to lower gains from investment sales to utilize capital loss carryforwards and lower legal settlement proceeds in the current year periods compared to the same periods in the prior year. These decreases were partially offset by lower loss recognition expense in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year. Loss recognition expense in the 2013 periods was triggered primarily by reinvestment of proceeds from investment sales in the low interest rate environment. See AIG Life and Retirement Reserves and DAC - Other Reserve Changes for additional discussion of loss recognition, which is reported in changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses).



AIG Life and Retirement Premiums, Deposits and Net Flows

Premiums represent amounts received on traditional life insurance policies, group benefit policies and deposits on life-contingent payout annuities. Premiums and deposits is a non­GAAP financial measure that includes direct and assumed premiums as well as deposits received on universal life insurance, investment-type annuity contracts and mutual funds.

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The following table presents a reconciliation of premiums and deposits to GAAP premiums: Three Months Ended Six Months Ended June 30, June 30, (in millions) 2014 2013 2014 2013 Premiums and deposits $ 7,360$ 6,765$ 14,489$ 12,345 Deposits (6,626) (5,957) (12,999) (10,761) Other (34) (159) (193) (315) Premiums $ 700$ 649$ 1,297$ 1,269 Premiums improved in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year, primarily from higher immediate annuity premiums in the Fixed Annuities product line, partially offset by higher ceded premiums in the Life Insurance and A&H product line and lower structured settlement premiums in the Institutional Markets product line. The following table presents premiums and deposits by operating segment and product line: Three Months Ended Six Months Ended June 30, Percentage June 30, Percentage (in millions) 2014 2013 Change 2014 2013 Change Retail Life Insurance and A&H $ 836$ 840 - % $ 1,663$ 1,675 (1) % Fixed Annuities 1,061 355 199 2,021 731 176 Retirement Income Solutions 2,570 2,233 15 4,743 3,646 30 Retail Mutual Funds 896 1,216 (26) 2,058 2,049 - Closed blocks 23 22 5 42 51 (18) Total Retail $ 5,386$ 4,666 15 % $ 10,527$ 8,152 29 % Institutional Group Retirement $ 1,640$ 1,705 (4) % $ 3,348$ 3,445 (3) % Institutional Markets 195 223 (13) 342 404 (15) Group Benefits 139 171 (19) 272 344 (21) Total Institutional 1,974 2,099



(6) 3,962 4,193 (6) Total Life and Retirement premiums and deposits $ 7,360$ 6,765

9 % $ 14,489$ 12,345 17 % Premiums and deposits improved significantly in the three-and six-month periods ended June 30, 2014 compared to the same periods in the prior year, primarily from improved sales in the Fixed Annuities product line and continued strong sales of individual variable annuities with guarantee features, as well as newer index annuities, in the Retirement Income Solutions product line. The improvement in the premium and deposits for those product lines in the three-month period ended June 30, 2014 was partially offset by lower Retail Mutual Fund sales. 128

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TOTAL PREMIUMS AND DEPOSITS by OPERATING SEGMENT (in millions) [[Image Removed]]

Net Flows Net flows are presented for investment product lines, which include Fixed Annuities, Retirement Income Solutions, Retail Mutual Funds and Group Retirement. Net flows from annuities, which are included in the Fixed Annuities, Retirement Income Solutions and Group Retirement product lines, represent premiums and deposits less death, surrender and other withdrawal benefits. Net flows from mutual funds, which are included in the Retail Mutual Funds and Group Retirement product lines, represent deposits less withdrawals.



The following table summarizes net flows for investment product lines:

Three Months Ended Six Months Ended June 30, June 30, (in millions) 2014 2013 2014 2013 Net flows Fixed Annuities $ (424)$ (1,264)$ (839)$ (2,263) Retirement Income Solutions 1,605 1,292 2,874 1,863 Retail Mutual Funds 153 688 393 989 Group Retirement (395) (299) (473) (416) Total net flows* $ 939$ 417$ 1,955$ 173 * Excludes activity related to closed blocks of fixed and variable annuities, which had reserves of approximately $5.5 billion and $6.0 billion at June 30, 2014 and 2013, respectively.



Quarterly and Year-to-date Net Flows

Total net flows from annuities and mutual funds in AIG Life and Retirement's investment product lines increased in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year. A discussion of the significant variances in net flows for each of these product lines follows, including variances in premiums and deposits, a key component of net flows.



Retail Net Flows

Fixed Annuities premiums and deposits improved in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year, due to modest increases in interest rates and steepening of the yield curve compared to the same periods in the prior year, which have made fixed annuity products more attractive in the marketplace compared to 129 --------------------------------------------------------------------------------

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competing products such as bank deposits. Although market interest rates have declined during 2014 and remain at historically low levels, they have increased compared to the same periods of the prior year. While still negative, fixed annuities net flows for the three- and six-month periods ended June 30, 2014 improved compared to the same periods in the prior year, primarily due to the increase in deposits and stable surrender rates. Retirement Income Solutions premiums and deposits and net flows increased significantly in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year, reflecting a lower surrender rate and a continued high volume of variable annuity sales, which have benefitted from product enhancements and expanded distribution as well as a more favorable competitive environment. In addition, sales of newer index annuities have shown strong initial results. Retail Mutual Fund deposits decreased in the three-month period ended June 30, 2014, and net flows decreased in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year, due to higher redemptions in both periods, combined with the lower deposits in the quarter. The decreases were primarily driven by the Focused Dividend Strategy fund, which had lower deposits in the three-month period and higher redemptions in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year, due to recent fund performance.



Institutional Net Flows

Group Retirement net flows decreased in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year, primarily due to moderately lower premiums and deposits and, for the three-month period ended June 30, 2014, slightly higher surrenders. Surrender of an additional large group, anticipated in the second half of 2014, is expected to put pressure on net flows of this product line. The surrender rate for the Group Retirement product line improved in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year, primarily due to growth in assets under management.



The following table presents reserves for selected investment product lines by surrender charge category at June 30, 2014 and December 31, 2013:

June 30, 2014



December 31, 2013

Group Individual Retirement



Group Individual Retirement

Retirement Fixed Income Retirement Fixed Income (in millions) Products(a) Annuities Solutions Products(a) Annuities Solutions No surrender charge(b) $ 61,877$ 32,130$ 1,927$ 60,962$ 30,906$ 2,065 0% - 2% 1,762 2,497 17,109 1,508 2,261 16,839 Greater than 2% - 4% 1,880 4,235 3,449 1,967 4,349 2,734 Greater than 4% 5,845 14,831 22,652 5,719 16,895 19,039 Non-surrenderable 663 3,462 163 315 2,758 67



Total reserves $ 72,027$ 57,155$ 45,300$ 70,471$ 57,169$ 40,744

(a) Excludes mutual fund assets under management of $16.3 billion and $15.1 billion at June 30, 2014 and December 31, 2013, respectively.

(b) Group Retirement Products include reserves of approximately $6.2 billion that are subject to 20 percent annual withdrawal limitations at both June 30, 2014 and December 31, 2013.



The following table presents surrender rates for selected investment product lines for the three- and six-month periods ended June 30, 2014 and 2013:

Three Months Ended Six Months Ended June 30, June 30, (in millions) 2014 2013 2014 2013 Surrenders as a percentage of average account value Fixed Annuities 6.7 % 7.1 % 6.7 % 6.8 % Retirement Income Solutions 7.4 10.3 7.4 9.7 Group Retirement 8.7 9.5 8.2 9.3 130

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AIG Life and Retirement Investments and Spread Management

Investments AIG Life and Retirement invests primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies; structured securities collateralized by, among other assets, residential and commercial real estate; and commercial mortgage loans. Income from these investments, as well as cash and short-term investments, is included in the measure of base net investment income, after excluding certain items such as call and tender income, mortgage prepayment fees, change in accretion of discount for certain high credit quality structured securities and impairment charges on investments in leased commercial aircraft. In addition, AIG Life and Retirement seeks to enhance returns through investments in a diversified portfolio of private equity funds, hedge funds, and affordable housing partnerships. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields. AIG Life and Retirement's investment portfolio also includes, to a lesser extent, common and preferred stocks and yield-enhancement items, such as the investment in PICC Group and other securities for which the fair value option has been elected. AIG Life and Retirement's fundamental investment strategy is to maintain a diversified, high quality portfolio of fixed maturity securities with the intent to largely match the characteristics of liabilities, including duration, which is a measure of sensitivity to changes in interest rates. The investment portfolio of each product line is tailored to the specific characteristics of its insurance liabilities, and as a result, certain portfolios are shorter in duration and others are longer in duration. See Investments herein for additional discussion of the asset liability management process.



Yield and Net Investment Income

Overall, AIG Life and Retirement's fixed maturity portfolio yields in the three- and six-month periods ended June 30, 2014 declined compared to the same periods in the prior year, primarily as a result of investment purchases and reinvestment of portfolio cash flows from investment sales, interest and maturities that have been made at yields lower than the weighted average yield of the existing portfolio due to the sustained historically low interest rate environment. Although portfolio yields continue to be under pressure from the investment of premiums, deposits and portfolio cash flows in the sustained low interest rate environment, AIG Life and Retirement expects to continue pursuing opportunities to maintain or increase yields without assuming additional credit risk through the purchase of less liquid asset classes, such as private placement debt, commercial mortgage loans and asset-backed securities. AIG Life and Retirement maintains investment portfolios for each product line which, to the extent practicable, match established duration targets based on the characteristics of liabilities. AIG Life and Retirement has not made significant changes during 2014 in the duration targets or credit quality of assets supporting its business lines. Net investment income from assets that support liabilities is allocated to the product line they support. Net investment income from investments in excess of liabilities, which include the majority of the alternative investments, is allocated to the product lines using a capital-based internal allocation model. Net Investment Income Net investment income for the three-month period ended June 30, 2014 decreased compared to the same period in the prior year, including a $184 million decrease in income from alternative investments, which was primarily attributable to strong returns on hedge funds in the same period in the prior year. The lower alternative investment income was partially offset by fair value gains of $26 million on assets for which the fair value option has been elected, compared to $113 million of net losses on such assets in the same period of the prior year. The improved performance of fair value option assets reflected lower losses from PICC Group of $20 million in the three-month period ended June 30, 2014 compared to losses of $84 million in the same period in the prior year, as well as higher gains on fair value option bonds in the 2014 period. Base net investment income, which excludes alternative investments and other enhancements, decreased compared to the same period in the prior year as 131 --------------------------------------------------------------------------------

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growth in invested assets was more than offset by lower base yield. The decrease in base yield primarily reflected strong performance of commercial mortgage loans and structured securities in the prior year period, as well as investment of available cash, including proceeds from sales made during 2013 to offset capital loss carryforwards, at rates that continue to be below the weighted average yield of the overall portfolio. Net investment income for the six-month period ended June 30, 2014 decreased compared to the same period in the prior year, primarily due to a $133 million decrease in income from alternative investments, which reflected strong returns on hedge funds in the same period in the prior year, and lower call and tender income. Fair value losses were $20 million compared to $33 million of net losses in the same period in the prior year, which included losses from PICC Group of $99 million in the six-month period ended June 30, 2014 compared to losses of $53 million for the same period in the prior year, partially offset by higher gains from fair value option bonds. Base net investment income increased slightly due to growth in invested assets. Base net investment income in the six-month period ended June 30, 2014 also included participation income on a commercial mortgage loan and income from the redemption of an asset classified in Other invested assets, while the same period in the prior year also benefitted from strong results in commercial mortgage loans and structured securities. Spread Management The contractual provisions for renewal of crediting rates and guaranteed minimum crediting rates included in products may have the effect, in a sustained low interest rate environment, of reducing spreads and thus reducing future profitability. Although this interest rate risk is partially mitigated through AIG Life and Retirement's asset­liability management process, product design elements and crediting rate strategies, a prolonged low interest rate environment may negatively affect future profitability. Disciplined pricing on new business is used to continue to pursue new sales of life and annuity products at targeted net investment spreads in the current low interest rate environment. AIG Life and Retirement has a dynamic product management process to ensure that new business offerings appropriately reflect the current interest rate environment. To the extent that AIG Life and Retirement cannot achieve targeted net investment spreads on new business, products are re-priced or no longer sold. Additionally, existing products with higher minimum rate guarantees have been re-filed with lower crediting rates as permitted under state insurance product regulations.



† New sales of fixed annuity products generally have minimum interest rate guarantees of 1 percent.

† Universal life insurance interest rate guarantees are generally 2 to 3 percent on new non-indexed products and zero to 2 percent on new indexed products, and are designed to be sufficiently low to meet targeted net investment spreads. AIG Life and Retirement is in the process of lowering the minimum guaranteed interest rates on new universal life products, and expects this process to be substantially completed in 2014. Renewal crediting rate management is done under contractual provisions in annuity and universal life products that were designed to allow crediting rates to be reset at pre-established intervals subject to minimum crediting rate guarantees. AIG Life and Retirement has adjusted, and will continue to adjust, crediting rates to maintain targeted net investment spreads on both new business and in-force business where crediting rates are above minimum guarantees. In addition to annuity and universal life products, certain traditional long-duration products for which AIG Life and Retirement does not have the ability to adjust interest rates, such as payout annuities, expose AIG Life and Retirement to reduced earnings and potential loss recognition reserve increases in a prolonged low interest rate environment. See AIG Life and Retirement Reserves and DAC - Other Reserve Changes for additional discussion of loss recognition. As of June 30, 2014, AIG Life and Retirement's universal life and annuity products had minimum guaranteed interest rates ranging from 1 percent to 5.5 percent, with the higher rates representing guarantees on older products. As indicated in the table below, approximately 71 percent of annuity and universal life account values were at their minimum crediting rates as of June 30, 2014, compared to 73 percent at December 31, 2013. As a result of disciplined pricing on new business and the run-off of older business with higher minimum interest crediting rates, fixed annuity account values having contractual minimum guaranteed rates above 1 percent decreased from 84 percent at December 31, 2013 to 81 percent at June 30, 2014. 132 --------------------------------------------------------------------------------

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The following table presents universal life and fixed annuity account values by contractual minimum guaranteed interest rate and current crediting rates:

Current Crediting Rates June 30, 2014 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 Universal life insurance 1% $ 67 $ - $ 9 $ 76 > 1% - 2% 47 69 214 330 > 2% - 3% 408 394 1,476 2,278 > 3% - 4% 2,071 598 1,174 3,843 > 4% - 5% 4,110 187 - 4,297 > 5% - 5.5% 336 - - 336 Subtotal $ 7,039$ 1,248$ 2,873$ 11,160 Fixed annuities * 1% $ 1,730$ 7,328$ 9,188$ 18,246 > 1% - 2% 12,957 3,297 5,152 21,406 > 2% - 3% 32,182 203 2,168 34,553 > 3% - 4% 13,287 159 30 13,476 > 4% - 5% 8,020 9 4 8,033 > 5% - 5.5% 229 - 5 234 Subtotal $ 68,405$ 10,996$ 16,547$ 95,948 Total $ 75,444$ 12,244$ 19,420$ 107,108 Percentage of total 71 % 11 % 18 % 100 %



* Fixed annuities include fixed options within variable annuities sold in Group Retirement and Retirement Income Solutions product lines.

Net Realized Capital Gains (Losses)

AIG Life and Retirement's pre-tax income reflected net realized capital gains in the three-month period and net realized capital losses in the six-month period ended June 30, 2014, compared to significant net realized capital gains in the same periods in the prior year. The decreases were largely due to lower net capital gains on the sales of investments, which were $89 million and $196 million in the three- and six-month periods June 30, 2014, respectively, compared to $1.3 billion and $1.6 billion in the same periods in the prior year. The net realized capital gains in the prior year periods included investment sales related to the utilization of capital loss carryforwards. Other-than-temporary impairments remained at relatively low levels in the three- and six-month periods ended June 30, 2014 and decreased compared to the same periods in the prior year. In addition to investment activity, AIG Life and Retirement's net realized capital gains (losses) also included decreases from the change in fair value of embedded derivatives in variable annuities with GMWB living benefit features and related hedges, primarily in the Retail operating segment. See AIG Life and Retirement - Results for additional discussion of such activity. NAIC Designations The Securities Valuation Office (SVO) of the NAIC evaluates the investments of U.S. insurers for statutory reporting purposes and assigns fixed maturity securities to one of six categories called "NAIC Designations." In general, NAIC Designations of "1" highest quality, or "2" high quality, include fixed maturity securities considered investment grade, while NAIC Designations of "3" through "6" generally include fixed maturity securities referred to as below investment grade. The NAIC has adopted revised rating methodologies for certain structured securities, including non-agency RMBS and CMBS, which are intended to enable a more precise assessment of the value of such structured securities and increase the accuracy in assessing expected losses to better determine the appropriate capital requirement for such structured securities. These methodologies result in an improved NAIC Designation for such securities compared to the rating typically assigned by the three major rating agencies. The following tables summarize the ratings distribution of AIG Life and Retirement's fixed maturity security portfolio by NAIC 133

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Designation, and the distribution by composite AIG credit rating, which is generally based on ratings of the three major rating agencies. See Investments - Credit Ratings herein for a full description of the composite AIG credit ratings.

The following table presents the fixed maturity security portfolio of AIG Life and Retirement categorized by NAIC Designation, at fair value:

June 30, 2014 (in millions) Total Total Below Investment Investment NAIC Designation 1 2 Grade 3 4 5 6 Grade Total Other fixed maturity securities $ 49,028$ 64,238 $



113,266 $ 4,173$ 2,116$ 294$ 118$ 6,701$ 119,967 Mortgage-backed, asset-backed and collateralized 40,719 1,518 42,237 757 375 252 612 1,996 44,233 Total*

$ 89,747$ 65,756$ 155,503$ 4,930$ 2,491$ 546$ 730$ 8,697$ 164,200



* Excludes $1.0 billion of fixed maturity securities for which no NAIC Designation is available because they are not held in legal entities within AIG Life and Retirement that require a statutory filing.

The following table presents the fixed maturity security portfolio of AIG Life and Retirement categorized by composite AIG credit rating, at fair value:

June 30, 2014 (in millions) Total Total Below Investment CCC and Investment Composite AIG Credit Rating AAA/AA/A BBB



Grade BB B Lower Grade Total Other fixed maturity securities

$ 48,649$ 64,949 $



113,598 $ 3,840$ 2,184$ 345$ 6,369$ 119,967 Mortgage-backed, asset-backed and collateralized 25,073 2,947 28,020 1,571 1,840 12,802 16,213 44,233 Total*

$ 73,722$ 67,896$ 141,618$ 5,411$ 4,024$ 13,147$ 22,582$ 164,200



* Excludes $1.0 billion of fixed maturity securities for which no NAIC Designation is available because they are not held in legal entities within AIG Life and Retirement that require a statutory filing.

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AIG Life and Retirement Reserves and DAC

The following table presents AIG Life and Retirement insurance reserves and mutual fund assets under management:

Three Months Ended Six Months Ended June 30, June 30, (in millions) 2014 2013 2014 2013 Retail Balance at beginning of period, gross $ 139,395$ 126,705$ 137,278$ 123,699 Premiums and deposits 5,386 4,666 10,527 8,152 Surrenders and withdrawals (2,677) (2,571) (5,516) (5,068) Death and other contract benefits (995) (979) (1,850) (1,774) Subtotal 1,714 1,116 3,161 1,310 Change in fair value of underlying assets and reserve accretion, net of policy fees 1,322 (102) 1,845 1,643 Cost of funds 535 551 1,064 1,132 Other reserve changes (395) (243) (777) 243 Balance at end of period 142,571 128,027 142,571 128,027 Reserves related to unrealized appreciation of investments 225 84 225 84 Reinsurance ceded (1,474) (1,502) (1,474) (1,502) Total insurance reserves and retail mutual fund assets under management $ 141,322$ 126,609$ 141,322$ 126,609 Institutional Balance at beginning of period, gross $ 121,045$ 112,602$ 119,892$ 110,494 Premiums and deposits 1,974 2,099 3,962 4,193 Surrenders and withdrawals (1,932) (2,086) (3,659) (5,098) Death and other contract benefits (564) (496) (1,086) (973) Subtotal (522) (483) (783) (1,878) Change in fair value of underlying assets and reserve accretion, net of policy fees 2,084 522 3,277 3,615 Cost of funds 394 380 780 778 Other reserve changes (167) 836 (332) 848 Balance at end of period 122,834 113,857 122,834 113,857 Reserves related to unrealized appreciation of investments 1,065 215 1,065 215 Reinsurance ceded (202) (217) (202) (217) Total insurance reserves and group mutual fund assets under management $ 123,697$ 113,855$ 123,697$ 113,855 Total AIG Life and Retirement: Balance at beginning of period, gross $ 260,440$ 239,307$ 257,170$ 234,193 Premiums and deposits 7,360 6,765 14,489 12,345 Surrenders and withdrawals (4,609) (4,657) (9,175) (10,166) Death and other contract benefits (1,559) (1,475) (2,936) (2,747) Subtotal 1,192 633 2,378 (568) Change in fair value of underlying assets and reserve accretion, net of policy fees 3,406 420 5,122 5,258 Cost of funds 929 931 1,844 1,910 Other reserve changes (562) 593 (1,109) 1,091 Balance at end of period 265,405 241,884 265,405 241,884 Reserves related to unrealized appreciation of investments 1,290 299 1,290 299 Reinsurance ceded (1,676) (1,719) (1,676) (1,719) Total insurance reserves and mutual fund assets under management $ 265,019$ 240,464$ 265,019$ 240,464 135

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Other Reserve Changes Other reserve changes in the table above include loss recognition on certain long-term payout annuity contracts. Sales of securities in connection with the program to utilize capital loss carryforwards and other investment sales with subsequent reinvestment at lower yields triggered recording of loss recognition reserves of $12 million and $22 million in the three- and six-month periods ended June 30, 2014, respectively, compared to $1.1 billion and $1.2 billion in the same periods in prior year, primarily on certain long-term payout annuity contracts. Assumptions related to investment yields, mortality experience and expenses are reviewed periodically and updated as appropriate, which could also result in additional loss recognition reserves. Loss recognition attributable to the program to utilize capital loss carryforwards is excluded from Pre-tax operating income and reported within Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses) in the AIG Life and Retirement Results table herein.



DAC and Reserves Related to Unrealized Appreciation of Investments

DAC for universal life and investment-type products (collectively, investment-oriented products) is adjusted at each balance sheet date to reflect the change in DAC as if fixed maturity and equity securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. The change in DAC related to unrealized appreciation of investments generally moves in the opposite direction of the changes in unrealized appreciation of the available for sale securities portfolio. The increases in the unrealized appreciation of investments in the three- and six-month periods ended June 30, 2014 of $3.0 billion and $6.4 billion, respectively, which were driven by the decline in market interest rates, resulted in a decrease in DAC and an increase in shadow loss reserves related to unrealized appreciation of investments. Shadow loss reserves were immaterial at December 31, 2013 and increased to $1.3 billion at June 30, 2014. The change in this component of DAC and shadow loss reserves in the three- and six-month periods ended June 30, 2014 was greater than the change in the same periods of the prior year, due to a larger movement in unrealized appreciation of investments. DAC Rollforward The following table summarizes the major components of the changes in AIG Life and Retirement DAC: Six Months Ended June 30, (in millions) 2014 2013 Balance, beginning of year $ 6,723$ 5,672 Acquisition costs deferred 492 409 Amortization expense (411) (390) Change related to unrealized depreciation (appreciation) of investments (613) 469 Other - (4) Balance, end of period* $ 6,191$ 6,156



* DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments was $7.9 billion and $7.5 billion at June 30, 2014 and 2013, respectively.

Estimated Gross Profits for Investment-Oriented Products

Policy acquisition costs and policy issuance costs that are incremental and directly related to the successful acquisition of new or renewal of existing contracts for investment-oriented products are deferred and amortized, with interest, in relation to the incidence of estimated gross profits to be realized over a period that approximates the estimated lives of the contracts. Estimated gross profits include net investment income and spreads, net realized capital gains and losses, fees, surrender charges, expenses, and mortality gains and losses. If the assumptions used for estimated gross profits change significantly, DAC and related reserves (which may include VOBA, SIA, guaranteed benefit reserves and unearned revenue reserves) are recalculated using the new assumptions, and any resulting adjustment is included in income. Updating such assumptions may 136

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Item 2 / results of operations / AIG LIFE AND RETIREMENT

result in acceleration of amortization in some products and deceleration of amortization in other products. During the third quarter of 2014, AIG Life and Retirement will conduct its comprehensive annual review and update of estimated gross profit assumptions. In estimating future gross profits for variable annuity products, a long-term annual asset growth assumption is applied to estimate the future growth in assets and related asset-based fees. In determining the asset growth rate, the effect of short-term fluctuations in the equity markets is partially mitigated through the use of a "reversion to the mean" methodology, whereby short-term asset growth above or below the long-term annual rate assumption will impact the growth assumption applied to the five-year period subsequent to the current balance sheet date. When actual performance significantly deviates from the annual long-term growth assumption, as evidenced by growth assumptions for the five-year reversion to the mean period remaining below a certain rate (floor) or above a certain rate (cap) for a sustained period, judgment may be applied to revise or "unlock" the growth rate assumptions to be used for both the five-year reversion to the mean period as well as the long-term annual growth assumption applied to subsequent periods. For variable annuities in the Retirement Income Solutions product line, the assumed annual growth rate has remained above zero percent for the five-year reversion to the mean period and therefore has not met the criteria for adjustment; however, additional favorable equity market performance in excess of long-term assumptions could result in "unlocking" in this product line in the future, with a positive effect on pre-tax income in the period of the unlocking. OTHER OPERATIONS



AIG's Other Operations include results from Mortgage Guaranty, GCM, DIB, Corporate & Other (after allocations to AIG's business segments), Aircraft Leasing through May 14, 2014 and, subsequent to May 14, 2014, AIG's share of AerCap earnings based on its 46 percent ownership interest.

Mortgage Guaranty (or UGC) offers private residential mortgage guaranty insurance, which protects mortgage lenders and investors from loss due to borrower default and loan foreclosure. The coverage we provide - which is called mortgage guaranty insurance, mortgage insurance, or simply "MI" - enables borrowers to purchase a house with a modest down payment by protecting lenders against the increased risk of borrower default related to high loan-to-value (LTV) mortgages - those with less than 20 percent equity. Prior to 2009, UGC also offered default insurance on domestic second-lien mortgages, private student loans and on mortgages issued in various countries outside the United States. In 2008, UGC ceased offering all types of default insurance other than on mortgages in the United States and Hong Kong and placed the other lines of business into runoff. Global Capital Markets consists of the operations of AIG Markets and the remaining derivatives portfolio of AIGFP. AIG Markets acts as the derivatives intermediary between AIG and its subsidiaries and third parties to provide hedging services for AIG entities. The AIGFP portfolio continues to be wound down and is managed consistent with our risk management objectives. Direct Investment Book consists of a portfolio of assets and liabilities held directly by AIG Parent in the MIP and certain non­derivative assets and liabilities of AIGFP. The DIB portfolio is being wound down and is managed with the objective of ensuring that at all times it maintains the liquidity we believe is necessary to meet all of its liabilities as they come due, even under stress scenarios, and to maximize returns consistent with our risk management objectives. Corporate & Other consists primarily of interest expense, consolidation and eliminations, expenses of corporate staff not attributable to specific reportable segments, certain expenses related to internal controls and the financial and operating platforms, corporate initiatives, certain compensation plan expenses, corporate level net realized capital gains and losses, certain litigation­related charges and credits, the results of AIG's other non­core business operations, net gain (loss) on sale of divested businesses that did not meet the criteria for discontinued operations accounting treatment, and equity in the earnings of AerCap. 137

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Item 2 / results of operations / OTHER OPERATIONS

Aircraft Leasing consists of ILFC. ILFC is one of the world's leading aircraft lessors. ILFC acquires commercial jet aircraft from various manufacturers and other parties and leases those aircraft to airlines around the world. See Note 4 to the Condensed Consolidated Financial Statements for a discussion on the sale of ILFC effective May 14, 2014. Other Operations Results



The following table presents AIG's Other operations results:

Three Months Ended Six Months Ended June 30, Percentage June 30, Percentage (in millions) 2014 2013 Change 2014 2013 Change Other operations pre-tax operating loss: Mortgage Guaranty $ 210$ 73 188 % $ 286$ 114 151 % Global Capital Markets 245 175 40 274 402 (32) Direct Investment book 313 591 (47) 753 920 (18) Corporate & Other: Interest expense (327) (353) 7 (652) (750) 13 Corporate expenses, net (282) (253) (11) (525) (514) (2)



Equity in pre-tax operating earnings of AerCap(a) 53 -

NM 53 - NM Other non-core businesses (14) (36) 61 3 (96) NM Total Corporate & Other operating loss (570) (642) 11 (1,121) (1,360) 18 Consolidation and eliminations 1 1 - 2 2 -



Total Other operations pre-tax operating income 199 198

1 194 78 149 Legal reserves (505) (14) NM (529) (25) NM Legal settlements - 46 NM (12) 48 NM Loss on extinguishment of debt(b) (34) (38) 11 (272) (378) 28 Aircraft Leasing - 18 NM 17 61 (72)



Net gain (loss) on sale of divested businesses 2,146 (47)

NM 2,150 (47) NM Changes in benefit reserves and DAC, VOBA and SIA related to net realized gains (losses) (1) - NM (13) - NM Net realized capital gains (losses) (120) 88 NM (195) 133 NM Total Other Operations pre-tax income (loss) $ 1,685$ 251



NM % $ 1,340$ (130) NM %

(a) Represents our share of AerCap's pre-tax operating income, which excludes certain post-acquisition costs incurred by AerCap in connection with its acquisition of ILFC.

(b) For the six-month period ended June 30, 2014, primarily reflects the loss on extinguishment of DIB debt, of which $48 million was reported by the DIB and $208 million (net of accelerated amortization of $49 million related hedge accounting basis difference) was reported by Corporate & Other. See Liquidity and Capital Resources for discussion of debt redemptions and repurchases. 138

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Item 2 / results of operations / OTHER OPERATIONS

Total OTHER OPERATIONS Pre-Tax OPERATING INCOME (LOSS)(in millions)

[[Image Removed]] Mortgage Guaranty Results



The following table presents Mortgage Guaranty results:

Three Months Ended Six Months Ended June 30, Percentage June 30, Percentage (dollars in millions) 2014 2013 Change 2014 2013 Change Underwriting results: Net premiums written $ 249$ 275 (9) % $ 480$ 521 (8) % Increase in unearned premiums (23) (67) 66 (41) (119) 66 Net premiums earned 226 208 9 439 402 9 Claims and claims adjustment expenses incurred (7) 119 NM 111 250 (56) Underwriting expenses 56 49 14 110 105 5 Underwriting income 177 40 343 218 47 364 Net investment income 33 33 - 68 67 1 Pre-tax operating income 210 73 188 286 114 151 Net realized capital gains 1 2 (50) 2 5 (60) Pre-tax income $ 211$ 75 181 % $ 288$ 119 142 % Key metrics: Domestic first-lien: New insurance written $ 11,057$ 13,817 (20) % $ 18,662$ 24,373 (23) % Combined ratio 18.7 88.6 50.8 94.3 Risk in force $ 38,917$ 32,349 60+ day delinquency ratio on primary loans(a) 4.8 % 7.1 % Domestic second-lien: Risk in force(b) $ 941$ 1,158



(a) Based on number of policies.

(b) Represents the full amount of second-lien loans insured reduced for contractual aggregate loss limits on certain pools of loans, usually 10 percent of the full amount of loans insured in each pool. Certain second-lien pools have reinstatement provisions, which will expire as the loan balances are repaid. 139

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Item 2 / results of operations / OTHER OPERATIONS

Pre-Tax oPERATING INCOME (LOSS) (in millions)

[[Image Removed]]



Domestic first-lien New insurance written (in millions)

[[Image Removed]]



Mortgage Guaranty Quarterly Results

UGC's pre-tax operating income in the three-month period ended June 30, 2014 increased compared to the same period in the prior year due to improved underwriting income.

First Lien Quarterly Results

First lien pre-tax operating income in the three-month period ended June 30, 2014 increased compared to the same period in the prior year due to improved underwriting income as a result of decreased first-lien claims and claims adjustment expenses incurred and an increase in first lien net premiums earned. The decrease in first-lien claims and claims adjustment expenses reflects $79 million of favorable prior year loss reserve development driven by updated assumptions for overturn rates on previously denied claims related to a settlement with a mortgage lender, compared to favorable prior year loss reserve development of $14 million for the same period in the prior year. The first-lien net premiums earned increased by $37 million largely from growth in the book of business and to a lesser extent the acceleration of premiums earned as the result of the recognition of a shorter expected coverage period on certain single premium business. As a result of the decreased claims and 140 --------------------------------------------------------------------------------

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Item 2 / results of operations / OTHER OPERATIONS

claims adjustment expenses and increased premiums earned, UGC's first-lien combined ratio improved to 18.7 in the three-month period ended June 30, 2014 from 88.6 in the same period in the prior year.

Runoff Businesses Quarterly Results

Runoff businesses include second lien, student loan and international businesses, all of which were placed in runoff during 2008. The runoff business' pre-tax operating income for the three-month period ended June 30, 2014 was $14 million or $11 million lower than the same period in the prior year primarily due to the decline in net premiums earned reflecting the decline of in force business.



Mortgage Guaranty Year-to-Date Results

UGC's pre-tax operating income in the six-month period ended June 30, 2014 increased compared to the same period in the prior year due to improved underwriting income.

First Lien Year-to-Date Results

First-lien pre-tax operating income for the six-month period ended June 30, 2014 increased compared to the same period in the prior year primarily due to improved underwriting income as a result of a $123 million decrease in first-lien claims and claims adjustment expenses incurred reflecting favorable prior year loss reserve development, driven by updated assumptions for overturn rates on previously denied claims related to a settlement with a mortgage lender, and a $65 million increase in first-lien net premiums earned largely from growth in the book of business and, to a lesser extent, the acceleration of premiums earned as the result of the recognition of a shorter expected coverage period on certain single premium business. The decline in first-lien claims and claims adjustment expenses combined with the increase in earned premiums resulted in an improved combined ratio of 50.8 in the six-month period ended June 30, 2014 compared to 94.3 in the same period of the prior year.



Runoff Businesses Year-to-Date Results

The runoff business' pre-tax operating income for the six-month period ended June 30, 2014 was $30 million or $7 million lower than the same period in the prior year. The decline in pre-tax operating income is primarily due to a decline in net premiums earned of $28 million partially offset by a decline in claims and claims adjustment expenses of $15 million and a $9 million reduction in underwriting expenses. New Insurance Written The declines in domestic first lien new insurance written from $13.8 billion to $11.1 billion and from $24.4 billion to $18.7 billion in the three- and six-month periods ended June 30, 2014, respectively, compared to the same periods in the prior year, were primarily due to the contraction in the mortgage originations market, which began in the second half of 2013. Delinquency Inventory The delinquency inventory for domestic first lien business declined during the six-month period ended June 30, 2014 as a result of cures and paid claims exceeding the number of newly reported delinquencies. Mortgage Guaranty's first lien default rate at June 30, 2014 was 4.8 percent compared to 7.1 percent at June 30, 2013. Over the last several quarters, Mortgage Guaranty has seen declining newly reported defaults and increasing cure rates, a trend Mortgage Guaranty expects will continue through 2014. 141 --------------------------------------------------------------------------------

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Item 2 / results of operations / OTHER OPERATIONS

The following table provides a summary of delinquency activity in Mortgage Guaranty's domestic first lien delinquency inventory:

Six Months Ended June 30, (number of policies) 2014 2013 Number of delinquencies at the beginning of the year 47,518 62,832 Newly reported 23,268 28,082 Cures (23,744) (27,927) Claims paid (6,072) (10,195) Other (1,169) 245 Number of delinquencies at the end of the period 39,801



53,037

Global Capital Markets Operations

Global Capital Markets Quarterly Results

GCM's pre-tax income and pre-tax operating income increased in the three-month period ended June 30, 2014 compared to the same period in the prior year primarily due to gains realized upon unwinding certain positions and a decrease in operating expenses, partially offset by declines in net credit valuation adjustments on derivative assets and liabilities and in unrealized market valuation gains related to the super senior CDS portfolio. A state regulatory agency has requested additional information relating to the unwinding of a position on which we realized gains of $196 million in the three-month period ended June 30, 2014.



There were de minimis net credit valuation adjustment gains recognized in the three-month period ended June 30, 2014 compared to net credit valuation adjustment gains of $81 million in the same period in the prior year. The decline resulted primarily from credit valuation gains on uncollateralized derivative assets in the three-month period ended June 30, 2013 due to more significant tightening of counterparty credit spreads.

Unrealized market valuation gains on the CDS portfolio of $73 million and $131 million were recognized in the three-month periods ended June 30, 2014 and 2013, respectively. The decline resulted primarily from amortization and price movements within the CDS portfolio.



Global Capital Markets Year-to-Date Results

GCM's pre-tax income and pre-tax operating income decreased in the six-month period ended June 30, 2014 compared to the same period in the prior year primarily due to declines in net credit valuation adjustments on derivative assets and liabilities and in unrealized market valuation gains related to the super senior CDS portfolio, partially offset by gains realized upon unwinding certain positions and a decrease in operating expenses. See Global Capital Markets Quarterly Results for information regarding a state regulatory agency request for additional information. Net credit valuation adjustment losses of $25 million were recognized in the six-month period ended June 30, 2014 compared to net credit valuation adjustment gains of $134 million in the same period in the prior year. The decline resulted primarily from the recognition of credit valuation losses on derivative assets in the six-month period ended June 30, 2014 due to higher exposure of uncollateralized derivative assets compared to credit valuation gains on uncollateralized derivative assets in the same period in the prior year due to the tightening of counterparty credit spreads. Unrealized market valuation gains on the CDS portfolio of $148 million and $302 million were recognized in the six-month periods ended June 30, 2014 and 2013, respectively. The decline resulted primarily from amortization and price movements within the CDS portfolio. 142 --------------------------------------------------------------------------------

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Item 2 / results of operations / OTHER OPERATIONS

Direct Investment Book Results

The following table presents Direct Investment book results:

Three Months Ended



Six Months Ended

June 30, Percentage June 30, Percentage (in millions) 2014 2013 Change 2014 2013 Change Pre-tax operating income $ 313$ 591 (47) % $ 753$ 920 (18) % Legal settlements - 27 NM - 27 NM Loss on extinguishment of debt (18) - NM (48) (4) NM



Net realized capital gains (losses) (23) 102 NM

(78) 89 NM Pre-tax income $ 272$ 720 (62) % $ 627$ 1,032 (39) %



Direct Investment Book Quarterly Results

The DIB's pre­tax income and pre­tax operating income decreased in the three-month period ended June 30, 2014 compared to the same period in the prior year primarily due to lower fair value appreciation on ABS CDOs and a decrease in gains realized upon unwinding certain positions. The decrease in pre-tax income was also impacted by net realized capital losses in the three-month period ended June 30, 2014 primarily resulting from losses on interest rate hedges as compared to gains on similar positions in the same period in the prior year. Fair value appreciation on ABS CDOs was $234 million and $478 million in the three-month periods ended June 30, 2014 and 2013, respectively. The fair value appreciation on the ABS CDOs was higher in the three-month period ended June 30, 2013 driven primarily by improved collateral pricing due to more significant improvements in home price indices and amortization of the underlying collateral.



Direct Investment Book Year-to-Date Results

The DIB's pre­tax income and pre­tax operating income decreased in the six-month period ended June 30, 2014 compared to the same period in the prior year primarily due to lower fair value appreciation on ABS CDOs and a decline in net credit valuation adjustments on assets and liabilities for which the fair value option was elected, partially offset by an increase in gains realized upon unwinding certain positions. The decrease in pre-tax income was also impacted by net realized capital losses in the six-month period ended June 30, 2014 primarily resulting from losses on interest rate hedges and on debt extinguishments as compared to gains on interest rate hedge positions in the same period in the prior year. Fair value appreciation on ABS CDOs was $460 million and $586 million in the six-month periods ended June 30, 2014 and 2013, respectively. The fair value appreciation on the ABS CDOs was higher in the six-month period ended June 30, 2013 driven primarily by improved collateral pricing due to more significant improvements in home price indices and amortization of the underlying collateral. Net credit valuation adjustment gains of $206 million and $293 million were recognized in the six-month periods ended June 30, 2014 and 2013, respectively. The decrease resulted primarily from a decline in the portfolio size due to sales and maturities as well as lower credit valuation gains on assets due to less significant tightening of counterparty credit spreads and higher credit valuation losses on liabilities due to more significant tightening of AIG's credit spreads in the six-month period ended June 30, 2014 compared to the same period in the prior year. 143

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Item 2 / results of operations / OTHER OPERATIONS

The following table presents credit valuation adjustment gains (losses) for the DIB (excluding intercompany transactions):

Three Months Ended Six Months Ended June 30, June 30, (in millions) 2014 2013 2014 2013 Counterparty Credit Valuation Adjustment on Assets: Other bond securities $ 79$ 49$ 229$ 299 Loans and other assets - (1) - 9 Increase in assets 79



48 229 308 AIG's Own Credit Valuation Adjustment on Liabilities: Notes and bonds payable

(12) (4) (19) (40) Guaranteed Investment Agreements - 23 (3) 28 Other liabilities - - (1) (3) (Increase) decrease in liabilities (12) 19 (23) (15) Net increase to pre-tax operating income $ 67$ 67$ 206$ 293 Corporate & Other Results



Quarterly and Year-to-Date Corporate & Other Results

Corporate & Other's pre­tax operating losses decreased in the three- and six-month periods ended June 30, 2014 compared to the same periods in the prior year primarily due to lower interest expense from ongoing debt management activities described in Liquidity and Capital Resources as well as our share of AerCap's earnings, which is accounted for under the equity method. These items were partially offset by higher compensation expense, which varies in part based on AIG's stock price. Legal Reserves Legal reserve expenses increased by $491 million and $504 million in the three- and six-month periods ended June 30, 2014, respectively, compared to the same periods in the prior year. Aircraft Leasing Results



The following table presents Aircraft Leasing results through May 14, 2014, the date of our sale of ILFC to AerCap:

Three Months Ended Six Months Ended June 30, Percentage June 30, Percentage (in millions) 2014 2013 Change 2014 2013 Change Aircraft leasing revenues, excluding net realized capital gains (losses): Rental revenue $ 486$ 1,090 (55) % $ 1,554$ 2,114 (26) % Interest and other revenues 3 21 (86) 48 71 (32) Total aircraft leasing revenues, excluding net realized capital gains (losses) 489 1,111 (56) 1,602 2,185 (27) Aircraft leasing expense: Impairment charges, fair value adjustments and lease-related charges 14 9 56 34 9 278 Other expenses 475 1,084 (56) 1,551 2,115 (27) Total aircraft leasing expense 489 1,093 (55) 1,585 2,124 (25) Pre-tax income $ - $ 18 NM % $ 17$ 61 (72) % 144

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Item 2 / results of operations / OTHER OPERATIONS

Aircraft Leasing reported pre-tax income in both 2014 and 2013, primarily due to certain adjustments to ILFC's assets and liabilities classified as held-for-sale. See Note 4 to the Consolidated Financial Statements for more information regarding Aircraft Leasing.

Net (Gain) Loss on Sale of Divested Businesses

Net (gain) loss on sale of divested businesses includes a gain of $2.2 billion associated with the completion of the sale of ILFC in the three- and six-month periods ended June 30, 2014.



LIQUIDITY AND CAPITAL RESOURCES

Overview Liquidity refers to the ability to generate sufficient cash resources to meet our payment obligations. It is defined as cash and unencumbered assets that can be monetized in a short period of time at a reasonable cost. We manage our liquidity prudently through various risk committees, policies and procedures, and a stress testing and liquidity framework established by Enterprise Risk Management (ERM). Our liquidity framework is designed to measure both the amount and composition of our liquidity to meet financial obligations in both normal and stressed markets. See Part II, Item 7. MD&A - Enterprise Risk Management - Risk Appetite, Identification, and Measurement in the 2013 Annual Report and Enterprise Risk Management - Liquidity Risk Management below for additional information. Capital refers to the long-term financial resources available to support the operation of our businesses, fund business growth, and cover financial and operational needs that arise from adverse circumstances. Our primary source of ongoing capital generation is the profitability of our insurance subsidiaries. We and our insurance subsidiaries must comply with numerous constraints on our minimum capital positions. These constraints drive the requirements for capital adequacy for both AIG and the individual businesses and are based on internally-defined risk tolerances, regulatory requirements, rating agency and creditor expectations and business needs. Actual capital levels are monitored on a regular basis, and using ERM's stress testing methodology, we evaluate the capital impact of potential macroeconomic, financial and insurance stresses in relation to the relevant capital constraints of both AIG and our insurance subsidiaries. We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to policyholders, customers, creditors and debt-holders, including those arising from reasonably foreseeable contingencies or events. Nevertheless, some circumstances may cause our cash or capital needs to exceed projected liquidity or readily deployable capital resources. Additional collateral calls, deterioration in investment portfolios or reserve strengthening affecting statutory surplus, higher surrenders of annuities and other policies, downgrades in credit ratings, or catastrophic losses may result in significant additional cash or capital needs and loss of sources of liquidity and capital. In addition, regulatory and other legal restrictions could limit our ability to transfer funds freely, either to or from our subsidiaries. Depending on market conditions, regulatory and rating agency considerations and other factors, we may take various liability and capital management actions. Liability management actions may include, but are not limited to, repurchasing or redeeming outstanding debt, issuing new debt or engaging in debt exchange offers. Capital management actions may include, but are not limited to, paying dividends to our shareholders and share repurchases. 145

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Item 2 / LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources Highlights During the Six-Month Period Ended June 30, 2014 Sources* † AIG Parent Funding from Subsidiaries During the six-month period ended June 30, 2014, AIG Parent received $701 million in cash dividends from AIG Property Casualty and $2.5 billion in cash dividends and loan repayments from AIG Life and Retirement, which included approximately $364 million of legal settlement proceeds. AIG Parent also received $781 million in tax sharing payments from our insurance businesses in the six-month period ended June 30, 2014, including $510 million of such payments during the second quarter of 2014, which are subject to reimbursement in future periods. † ILFC Sale On May 14, 2014, we received net cash proceeds of approximately $2.4 billion from the sale of ILFC after taking into account the settlement of intercompany loans. This cash amount is in addition to the 97.6 million newly issued AerCap common shares we received as consideration from the sale. Uses • Debt Reduction** During the six-month period ended June 30, 2014, we reduced DIB debt by approximately $3.0 billion through a redemption of $1.2 billion aggregate principal amount of its 4.250% Notes due 2014, a redemption of $750 million aggregate principal amount of its 3.000% Notes due 2015 and a repurchase of $1.0 billion aggregate principal amount of its 8.250% Notes due 2018, in each case, using cash allocated to the DIB. We also made other repayments of approximately $2.9 billion. AIG Parent made interest payments on our debt instruments totaling $946 million. • Dividend We paid a cash dividend of $0.125 per share on AIG Common Stock during each of the first and second quarters of 2014. • Repurchase of Common Stock We repurchased approximately 36 million shares of AIG Common Stock during the six-month period ended June 30, 2014, for an aggregate purchase price of approximately $1.9 billion. The total number of shares of AIG Common Stock repurchased in the first half of 2014, and the aggregate purchase price of those shares, reflect our payment of $300 million under an ASR agreement and our initial receipt of 70 percent of the total notional share equivalent, or approximately 3.8 million shares of AIG Common Stock.



* On July 16, 2014, we issued $1.0 billion aggregate principal amount of 2.300% Notes due 2019 and $1.5 billion aggregate principal amount of 4.500% Notes due 2044. In July 2014, we also received $650 million in cash in connection with the global resolution of our residential mortgage related disputes with Bank of America.

** On July 14, 2014, we purchased, in cash tender offers, (i) certain junior subordinated debentures issued or guaranteed by AIG for an aggregate purchase price of $1.8 billion and (ii) certain senior notes and debentures issued or guaranteed by AIG for an aggregate purchase price of $700 million. On July 31, 2014, we further reduced DIB debt by approximately $2.0 billion through a redemption of $790 million aggregate principal amount of its 4.875% Notes due 2016 and a redemption of $1.25 billion aggregate principal amount of its 3.800% Notes due 2017, in each case, using cash allocated to the DIB. 146 --------------------------------------------------------------------------------



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