SecProbe.io

CORRESP
1
filename1.htm

CORRESP

[AIG DRAFT OF AUGUST 8, 2008]

August 8, 2008

Mr. Jim B. Rosenberg

Senior Assistant Chief Accountant

United States

Securities and Exchange Commission

Division of Corporation Finance

100 F Street, NE

Mail Stop 6010

Washington, D. C. 20549

    Re:

    American International Group, Inc.

    Form 10-K for the Year Ended December 31, 2007

    Form 10-Q for the Quarter Ended March 31, 2008

    File No. 1-8787

Dear Mr. Rosenberg:

We are in receipt of your letter dated June 25, 2008 and thank you for your additional comments
concerning American International Group, Inc.’s (AIG) captioned filings. We are pleased to respond
to your questions and to have the opportunity to work with the Staff of the Commission to further
enhance the overall presentation and disclosure in our filings.

As more fully described below, we have expanded certain of our disclosures in our Form 10-Q for the
quarter ended June 30, 2008. Our responses and those disclosures are provided below. If further
clarification or information is required, please let us know at your earliest convenience.

AIG acknowledges that the adequacy and accuracy of the disclosure in AIG’s filings is the
responsibility of AIG, that Staff comments or changes to disclosure in response to Staff comments
do not foreclose the Commission from taking any action with respect to the filings and that Staff
comments may not be asserted by AIG as a defense in any proceeding initiated by the Commission or
any person under the Federal securities laws of the United States.

We have repeated your questions below to facilitate your review.

Form 10-Q for the Fiscal Quarter Ended March 31, 2008

Note 4—Shareholders’ Equity and Earnings (Loss) Per Share, page 19

    1.

    You disclose that you shortened the vesting period of outstanding awards under your
share-based employee compensation plans during the first quarter of fiscal 2008. Please
provide us your evaluation of the modification

1

[AIG DRAFT OF AUGUST 8, 2008]

    of these awards under paragraph 51 of SFAS 123(R) demonstrating why the unamortized portion
of the awards should be amortized over a shorter period. Explain why there was apparently
no incremental compensation expense that was required to be recorded as a result of the
modifications.

    AIG Response:

On March 11, 2008 AIG shortened the vesting schedules of certain outstanding non-vested awards
of restricted stock units (RSUs) made under various share-based employee compensation plans.
The vesting schedules of outstanding stock options were not modified.

AIG’s RSU awards to employees do not participate in dividends during the vesting periods and
their original grant-date fair values were discounted to reflect this feature as required by
paragraph B93 of SFAS 123(R). Because the vesting schedules—and consequently the discount
periods—of the awards were reduced, the fair values of the awards were greater immediately
after the modification compared with the fair values immediately before the modification,
resulting in incremental compensation cost of $26 million, as required by paragraph 51a.

The vesting-schedule modification applied broadly to all holders of each class of award
modified. Accordingly, AIG determined the vesting-schedule modification to be a “Type I:
Probable-to-Probable” modification as discussed in paragraph B188a. As a result, AIG continues
to amortize the original grant-date fair value of the awards (together with the incremental
compensation cost discussed in the paragraph above) as required by paragraphs 51b and A160, but
over the shorter requisite service (vesting) periods, as required by paragraph 39.

The cost of the increase in the number of awards expected to vest (i.e., the lower forfeiture
rate) that resulted from the shorter vesting schedules was not significant.

AIG expanded its disclosures in the Second Quarter 2008 Form 10-Q (page 23) to include the
following:

During the first quarter of 2008, AIG reviewed the vesting schedules of its share-based
employee compensation plans, and on March 11, 2008, AIG’s management and the Compensation
and Management Resources Committee of AIG’s Board of Directors determined that, to fulfill
the objective of attracting and retaining high quality personnel, the vesting schedules of
certain awards outstanding under these plans and all awards made in the future under these
plans should be shortened.

For accounting purposes, a modification of the terms or conditions of an equity award is
treated as an exchange of the original award for a new award. As a result of this
modification, the incremental compensation cost related to the affected awards totaled $24
million and will, together with the unamortized originally-measured compensation cost, be
amortized over shorter periods. AIG estimates the modifications will increase the
amortization of this cost by $106 million and $46 million in 2008 and 2009, respectively,
with a related reduction in amortization expense of $128 million in 2010 through 2013.

2

[AIG DRAFT OF AUGUST 8, 2008]

Financial Services, page 38

    2.

    Please refer to prior comment three. You state that your credit-based analyses
estimate potential realized credit pre-tax losses of approximately $1.2 billion to
approximately $2.4 billion, as compared to the $20.6 billion of unrealized market losses
recognized in the fourth quarter of 2007 and first quarter of 2008. Please expand your
disclosure to explain the specific factors causing the divergence between your estimates
of fair value and amounts to be ultimately realized upon settlement maturity.

    AIG Response:

    The unrealized market valuation losses of $20.6 billion recorded on AIGFP’s super senior
credit default swap portfolio represent the cumulative change in fair value of these
derivatives. Consistent with the definition of fair value in the Statement of Financial
Accounting Standards No. 157, “Fair Value Measurements” (FAS 157), the unrealized market
valuation loss of $20.6 billion represents AIG’s best estimate of the amount it would need
to pay to a willing, able and knowledgeable third-party to assume the obligations under
AIGFP’s super senior credit default swap portfolio as of March 31, 2008.

    On the other hand, AIG’s estimate of the potential pre-tax realized credit losses of
approximately $1.2 billion to approximately $2.4 billion as of March 31, 2008 represents
its then current estimate of the potential credit losses that it may incur if the
multi-sector CDO portion of AIGFP’s super senior credit default swap portfolio and the
referenced obligations acquired by AIGFP in extinguishing its obligations under the swaps
are held to maturity. Credit losses represent a point-in-time estimate, using information
available at that particular date, of the potential shortfall of principal and/or interest
cash flows on the referenced obligations and credits underlying the portfolio that will not
be recovered assuming the credit derivative portfolio and referenced obligations are held
to maturity. At March 31, 2008, AIG derived its estimates of the potential pre-tax
realized credit losses by applying two distinct methods, a ratings-based static stress test
and a roll rate analysis.

    At March 31, 2008, the estimates for the range of the potential realized credit losses were
lower than the fair value of AIGFP’s super senior multi-sector CDO credit default swap
portfolio, a net loss of $19.3 billion at March 31, 2008. The fair value of AIGFP’s super
senior multi-sector CDO credit default swap portfolio is based upon fair value accounting
principles, which rely on third-party prices for both the underlying collateral securities
and the CDOs that AIGFP’s super senior credit default swaps wrap. These prices currently
incorporate liquidity premiums, risk aversion elements and credit risk modeling, which in
some instances may use more conservative assumptions than those used by AIG in its roll
rate stress testing. Due to the ongoing disruption in the U.S. residential mortgage market
and credit markets and the downgrades of RMBS and CDOs by the rating agencies,

3

[AIG DRAFT OF AUGUST 8, 2008]

    the market continues to lack transparency around the pricing of these securities. These
prices are not necessarily reflective of the ultimate potential realized credit losses
AIGFP could incur in the future related to the AIGFP super senior multi-sector CDO credit
default swap portfolio, and AIG believes they incorporate a significant amount of
market-driven risk aversion.

    In conducting its risk analyses as of June 30, 2008, AIG discontinued use of the
rating-based static stress test and used only the roll rate stress test because it believes
that the roll rate stress test provides a more reasonable analysis methodology to
illustrate potential realized credit losses than the rating-based static stress test used
previously.

    AIG expanded its disclosures in the Second Quarter 2008 Form 10-Q (pages 121-123) to
include the following:

The unrealized market valuation
losses of $26.1 billion recorded on AIGFP’s super
senior multi-sector credit default swap portfolio represents the cumulative
change in fair value of these derivatives, which represents AIG’s best estimate of
the amount it would need to pay to a willing, able and knowledgeable third party to
assume the obligations under AIGFP’s super senior multi-sector CDO credit default
swap portfolio as of June 30, 2008.

Stress Testing/Sensitivity Analysis

At June 30, 2008, AIG used a roll rate analysis to stress the AIGFP super senior
multi-sector CDO credit default swap portfolio for potential pre-tax realized credit
losses that it may incur if the multi-sector CDO super senior credit default swap
portfolio and the referenced obligations acquired by AIGFP in extinguishing its
obligations under the swaps are held to maturity. Credit losses represent an estimate
of the potential shortfall of principal and/or interest cash flows on the referenced
obligations and credits underlying the portfolio that will not be recovered assuming
the portfolio and referenced obligations are held to maturity. Two scenarios
illustrated in this process resulted in potential pre-tax realized credit losses of
approximately $5.0 billion (Scenario A) and approximately $8.5 billion (Scenario B).
Actual ultimate realized credit losses are likely to vary, perhaps materially, from
these scenarios, and there can be no assurance that the ultimate realized credit
losses related to the AIGFP super senior multi-sector CDO credit default swap
portfolio will be consistent with either scenario or that such realized credit losses
will not exceed the potential realized credit losses illustrated by Scenario B.

In prior quarters, AIG conducted risk analyses of the AIGFP super senior multi-sector CDO credit
default swap portfolio using certain ratings-based static stress tests, which centered around
scenarios of further stress on the

4

[AIG DRAFT OF AUGUST 8, 2008]

portfolio resulting from downgrades by the rating agencies from current levels on the
underlying collateral in the CDO structures supported by AIGFP’s credit default
swaps. During the first quarter of 2008, AIG developed an additional methodology to
conduct stress tests for potential realized credit losses from AIGFP’s super senior
multi-sector CDO credit default swap portfolio that combined a roll rate estimate of
the losses emanating from the subprime and Alt-A RMBS collateral securities in the
multi-sector CDOs, plus an estimate of losses arising from CDO securities (inner
CDOs) and other ABS, such as CMBS, credit card and auto loan ABS, held by the CDOs.
In conducting its risk analyses as of June 30, 2008, AIG discontinued use of the
rating-based static stress test and used only the roll rate stress test because it
believes that the roll rate stress test provides a more reasonable analysis
methodology to illustrate potential realized credit losses than the rating-based
static stress test used previously.

In the second quarter of 2008, AIG stressed the AIGFP super senior multi-sector CDO
credit default swap portfolio using a roll rate analysis as applied to all RMBS
collateral including subprime, Alt-A and prime residential mortgages that comprise
the subprime, Alt-A and prime RMBS. This analysis assumed that certain percentages of
actual delinquent mortgages will roll into default and foreclosure. It also assumed
that certain percentages of non-delinquent mortgages will become delinquent and
default over time, with those delinquency percentages depending on the age of the
mortgage pool. To those assumed defaults AIG applied loss severities (one minus
recovery) to derive estimated ultimate losses for each mortgage pool comprising a
subprime, Alt-A and prime RMBS. Because subprime, Alt-A and prime RMBS have differing
characteristics, the roll rates and loss severities differed. AIG then estimated
tranche losses from these roll rate losses by applying the pool losses up through the
capital structure of the RMBS. In this estimate of tranche losses, AIG introduced in
the quarter an enhancement to the roll rate analysis to take into account the cash
flow waterfall and to capture the potential effects, both positive and negative, of
cash flow diversion within each CDO. To these estimated subprime, Alt-A and prime
RMBS losses AIG added estimated credit losses on the inner CDOs and other ABS, such
as CMBS, credit card and auto loan ABS, calculated by using rating-based static
percentages, in the case of inner CDOs varying by vintage and type of CDO, and, in
the case of other ABS, by rating. In addition to the foregoing, the analysis
incorporates the effects of certain other factors such as mortgage prepayment rates,
excess spread and delinquency triggers. The total of the roll rate losses and the
losses on the inner CDOs and other ABS using two different scenarios of assumptions
yielded estimated potential pre-tax realized credit losses of approximately $5.0
billion and approximately $8.5 billion.

At March 31, 2008, AIG’s credit-based analyses estimated potential pre-tax realized
credit losses at approximately $1.2 billion to $2.4 billion. The

5

[AIG DRAFT OF AUGUST 8, 2008]

estimate of $2.4 billion was derived using the roll rate stress test described above.
The increase in the estimated potential realized credit loss illustrated by Scenarios
A and B was the result of both enhancements to the model and changes in the
assumptions used. The model was enhanced by inclusion of prime RMBS into the
portfolio of securities subjected to the roll rate analysis and the introduction of
analytics to capture the potential effects of the cash flow waterfall. Changes in
assumptions included revisions to the roll rate percentages and loss severities on
subprime and Alt-A mortgages in view of deteriorating real estate market conditions,
as well as a higher stress to other ABS collateral and the use of current inner CDO
ratings in the rating-based static percentage. The potential realized credit loss
illustrated by Scenario B is the result of applying different, more highly stressed
assumptions to the roll rate analysis model than those used in Scenario A.

Due to the dislocation in the market for CDO and RMBS collateral, AIG does not use
the market values of the underlying CDO collateral in estimating its potential
realized credit losses. The use of factors derived from market-observable prices in
models used to determine the estimates for future realized credit losses could result
in materially higher estimates of potential realized credit losses.

Under
the terms of most of these credit derivatives, credit losses to AIG would
generally result from the credit impairment of the referenced obligations that AIG
would acquire in extinguishing its swap obligations. Based upon its most current
analyses, AIG believes that any credit losses which may emerge over time at AIGFP
will not be material to AIG