To Our Shareholders
While I can offer little comfort to those of you who suffered severe losses as AIG shareholders during 2008, I can assure you that everyone at AIG is working hard to preserve as much value as possible while maximizing the future potential of AIG’s businesses around the world.

Last year’s economic cataclysm was unprecedented. Less than 12 months after reporting record results, AIG found itself on the brink of collapse. On September 18, when I consented to the U.S. government’s request to lead AIG, I found an organization full of proud, talented and dedicated people who were stunned and bewildered to see their life’s work—and in many cases their life’s savings—a shambles.

The swift decline of AIG seemed all the more incongruous because most of our businesses were healthy and operating normally—as they are today. But the implosion of the U.S. housing market exposed AIG’s risk concentration in mortgage-backed securities. That concentration, combined with tumbling asset values and dysfunctional credit markets, led to a sudden and severe cash crisis.

WHAT HAPPENED?

In 1998, AIGFP began to sell credit default swaps to other fi nancial institutions to protect against the default of certain securities. At the time, many of these securities were rated AAA, the highest rating possible. However, in late 2007, as the U.S. residential mortgage market began to deteriorate, the valuation of these securities declined severely.

As a result, AIG recorded substantial unrealized market valuation losses, especially on AIGFP’s credit default swap portfolio, which led to significant cash requirements.

At the same time, AIG reported large unrealized losses in its securities lending program. Through this program, AIG made short-term loans of certain securities it owned to generate revenues by investing in high-grade residential mortgagebacked securities. These and other AIG real estate-related investments suffered sharp losses in value as well.

It is important to reiterate that throughout the crisis, AIG’s insurance businesses were—and continue to be—healthy and well capitalized. The losses that occurred as a result of AIGFP’s actions have no direct impact on AIG policyholders. AIG’s insurance companies are closely regulated, and their reserves are protected with adequate assets to meet policyholder obligations.

The collapse of respected fi nancial institutions such as Bear Stearns and Lehman Brothers sent shock waves throughout the world economy. The crisis at the U.S.-sponsored mortgage companies Fannie Mae and Freddie Mac added to the financial disruption. Credit markets deteriorated rapidly, making it virtually impossible to access capital. In September, AIG’s credit ratings were downgraded once again, triggering additional collateral calls and cash requirements in excess of $20 billion. Although solvent, AIG suddenly faced an acute liquidity crisis.

INVESTMENT FROM THE U.S. GOVERNMENT.
Because of its size and substantial interconnection with fi nancial markets and institutions around the world, the government recognized that a failure of AIG would have had severe ramifi cations.

In addition to being one of the world’s largest insurers, AIG was providing more than $400 billion of credit protection to banks and other clients around the world through its credit default swap business. AIG also is a major participant in foreign exchange and interest rate markets.

To stabilize AIG and prevent reverberations throughout the economy, the government extended to AIG a two-year emergency loan of $85 billion on September 16, 2008. The facility carried a rate of LIBOR (the London Interbank Offered Rate—a widely used benchmark to set short-term interest rates) plus 8.5 percent, a commitment fee of 2 percent on the loan principal and a fee on the undrawn portion of 8.5 percent. Additionally, the government would be entitled to 79.9 percent equity ownership of the company through preferred stock.

With the loan in place, the management team developed a plan to enable AIG to sell many of its leading businesses around the world to pay back the government loan with interest. However, with this divestiture and restructuring plan in place, AIG still had to address its two principal liquidity issues: the multisector credit default swap portfolio and the securities lending program. On November 10, 2008, AIG and the Federal Reserve Bank of New York (NY Fed) announced a comprehensive plan to address AIG’s liquidity issues and provide more time and greater flexibility to sell assets and repay the government.

Among the provisions was the creation of two financing entities, Maiden Lane II and Maiden Lane III, to acquire AIG’s securities lending assets and the multi-sector collateralized debt obligations that were guaranteed by AIGFP’s credit default swaps. The entities were funded primarily by the government, with a subordinated capital contribution by AIG. Under the terms of the agreements, the majority of any appreciation in the securities held by the entities would go to the government, but a portion would be retained by AIG.

In addition, the U.S. Department of the Treasury (U.S. Treasury) purchased, through the Troubled Asset Relief Program (TARP), $40 billion of newly issued AIG perpetual preferred shares. The proceeds were used to pay down a portion of the government loan.

The perpetual preferred shares carried a 10 percent coupon with cumulative dividends. Although Maiden Lane II and III and the government’s equity injection signifi cantly relieved AIG’s liquidity pressures, the world economy in general and the financial industry in particular continued to falter. AIG’s losses mounted throughout the end of the year, taking a heavy toll on fourth quarter results.

2008 RESULTS.
AIG reported that the continued severe credit market deterioration, particularly in mortgage-backed securities, and charges related to ongoing restructuring activities, contributed to a record net loss for the fourth quarter of $61.7 billion, or $22.95 per diluted share, compared to a 2007 fourth quarter net loss of $5.3 billion, or $2.08 per diluted share. AIG’s reported net loss for full year 2008 was $99.3 billion, or $37.84 per diluted share, compared to net income of $6.2 billion, or $2.39 per diluted share, for full year 2007.

Despite the challenging conditions in 2008, insurance premiums and other considerations declined only modestly by 1.9 percent for the fourth quarter, compared to the same period of 2007. For the year, premiums and other considerations grew by 5.3 percent.

A NEW RESTRUCTURING PLAN.
Although the divestiture and business sale process had some successes with several announced transactions, the worldwide economy continued to worsen at an alarming pace, and potential buyers of AIG businesses faced growing challenges of their own, including a lack of access to capital.

The life insurance sector has seen enormous declines in stock market value. Life insurance company stocks, as measured by indices published by A.M. Best, have declined 51 percent globally and 60 percent in the United States since October 1, 2008. Standard & Poor’s recently downgraded many major life insurance companies in the U.S. The same trend is seen among life insurers throughout Europe with the rating agencies Fitch and Moody’s.

Against this backdrop, on March 2, 2009, AIG made important adjustments in our plan to assure the stability and vitality of our businesses, protect policyholders and repay the government. In cooperation with the U.S. Treasury and the Federal Reserve, agreements in principle were reached to develop a new set of tools to strengthen AIG’s capital base and allow us time to benefi t from future improvements in market and industry conditions.

Under the new plan, the terms of the U.S. Treasury’s preferred stock investment in AIG will be modified to make these preferred securities more closely resemble common equity, improving AIG’s capital structure.

The U.S. Treasury also agreed to provide AIG with a new fi ve-year standby equity capital facility, which will allow AIG to raise up to $30 billion of capital by issuing noncumulative preferred stock to the U.S. Treasury from time to time.

AIG will transfer to the NY Fed, or to a trust for its benefi t, preferred interests in American Life Insurance Company (ALICO) and American International Assurance Company, Limited (AIA) in return for a reduction in the outstanding balance of up to $26 billion of the senior secured credit facility.

In addition, AIG announced that it expects to transfer to the NY Fed embedded value of up to $8.5 billion, representing securitization notes of certain of its U.S. life insurance businesses, in return for a further reduction in its outstanding senior secured credit facility balance. This capital management strategy—securitization—
will not affect the day-to-day operations, sales activities or customers of these businesses.

Also, under the terms of the new plan, the NY Fed will remove the LIBOR floor on the senior secured credit facility. This will save AIG an estimated $1 billion in interest costs per year, based on current levels.

Moving forward, AIG will continue to have access to the remaining NY Fed credit facility. Following the repayment of the outstanding amount on the facility with the preferred interests and securitization notes, the total amount available to AIG under the facility will be at least $25 billion.

Also on March 2, AIG announced its intention to form a general insurance holding company, composed of its Commercial Insurance Group, Foreign General unit, and other property and casualty operations, to be called AIU Holdings, Inc. The new holding company will have its own board of directors, management team and brand distinct from AIG.

The name of the company is derived from American International Underwriters, a world-class organization whose legacy can be traced back to its formation in 1926. Taken together, AIU Holdings, Inc. includes the largest U.S. underwriters of commercial and industrial insurance, and the most extensive international property-casualty network. AIU Holdings, Inc. is a unique leading franchise with more than 40,000 employees worldwide and over 650 products and services that generate net premiums written in excess of $40 billion.

The steps toward this separation of AIU Holdings, Inc. will assist AIG in preparing for the potential sale of a minority stake in the business. This ultimately may include a public offering of shares, depending on market conditions.

Further, AIG announced that it is considering combining its domestic life and retirement businesses to enhance market competitiveness. With combined assets of $240 billion, 16 million customers and over 300,000 licensed financial professionals, the combined companies would be operating from a position of signifi cant strength and business diversifi cation.

AIG’S PRIORITIES GOING FORWARD.
Preserving the value of our businesses and returning value to American taxpayers have been the top priorities for AIG since the U.S. government’s initial investment in AIG in September 2008. AIG was the first TARP-funded company to embark upon a clear plan to return value to taxpayers—predicated on divesting assets, reducing unnecessary expenses, and keeping our insurance businesses healthy and well capitalized.

To reduce expenses, we initiated a thorough review of all company expenditures, events and other business activities last October. In the wake of that review, AIG has taken several measures to control expenses, further align the company with the interests of taxpayers, and ultimately become a more focused and competitive enterprise, including the cancellation of more than 600 conferences, meetings and other events that were not essential in the current environment.

Executive compensation has received a great deal of attention since AIG received public aid. As I write this letter, there is bitter controversy over retention contracts that were written for AIGFP employees in early 2008. AIG was legally bound to honor those contracts, which provide incentive for AIGFP employees to remain and carefully unwind transactions as the business is being closed down. I am pleased that, in light of the controversy, a number of AIGFP employees have agreed to return all or part of these payments.

Even prior to this controversy, however, we had taken a number of steps to restrict executive compensation. I agreed to serve AIG for $1 a year in 2008 and 2009, with no bonus, no severance agreement and no equity contribution of any kind. For AIG’s top seven executives, there will be no annual bonus for 2008 and no regular salary increase through 2009.

In addition, these executives gave up their right to receive severance and did not accept payments from their deferred compensation accounts, money that they earned over the years and had every right to receive. Salary and bonus restrictions have been put in place for the entire senior partner group of 50.

To keep our insurance businesses healthy, we have emphasized the need to maintain quality customer service and, just as important, to maintain discipline in our business practices. Our goal is to achieve an underwriting profit. We will not artificially price business to build market share—our pricing must appropriately refl ect risk. As I have said repeatedly, we do not want to fi nd ourselves sitting on a pile of unprofitable policies after we emerge from this difficult period.

BOARD AND MANAGEMENT CHANGES.
With the considerable change that has taken place at AIG over the past year, there have been significant changes in corporate leadership.

Martin J. Sullivan stepped down as President and Chief Executive Officer in June following a 37-year career with AIG. Robert B. Willumstad assumed the role of Chairman and Chief Executive Officer until September, when the U.S. government asked me to serve in those capacities.

We were extremely fortunate when Paula Rosput Reynolds agreed to join AIG in October 2008 as Vice Chairman and Chief Restructuring Officer. I cannot overstate the contribution she has made. In addition, Anastasia D. Kelly, Executive Vice President, General Counsel and Senior Regulatory and Compliance Officer, assumed a new role as Vice Chairman with additional responsibilities for Government Affairs, Communications and Human Resources. Richard H. Booth was elected Vice Chairman, Transition Planning and Chief Administrative Officer, in addition to his role as Chairman of HSB Group, Inc. And, David L. Herzog, Senior Vice President and Comptroller, was elected Executive Vice President and Chief Financial Offi cer, succeeding Steven J. Bensinger who left AIG in October.

Edmund S.W. Tse, who is retiring as Senior Vice Chairman, Life Insurance, made enormous contributions to AIG during his 48-year career. Edmund joined AIG in 1961 and has served on the AIG Board since 1996. He has played a principal role in building our life operations throughout Southeast Asia, as well as in the establishment of our business in China. We have all benefi ted from Edmund’s counsel and leadership, and I am glad that he will continue to serve as a senior advisor and Honorary Chairman of AIA.

Ambassador Frank G. Wisner, who retired from AIG in March as Vice Chairman, served the company with distinction for over a decade. Frank brought deep knowledge of international affairs and public policy to his position as Vice Chairman, External Affairs, and also through his service on the Board from 1997 until 2003. He retires with our deep appreciation.

Three other Board members have retired since the 2008 annual meeting: Ellen V. Futter, Richard C. Holbrooke, and Fred H. Langhammer. In addition, current directors Virginia M. Rometty and Michael H. Sutton have decided that they will not stand for election at the 2009 annual meeting. We thank them all for their dedicated service.

In July 2008, the Board elected Suzanne Nora Johnson a Director. She is a former Vice Chairman of The Goldman Sachs Group, Inc. In November 2008, Dennis D. Dammerman was elected a Director. Dennis is a former Vice Chairman of the Board of General Electric Company.

OUR VISION FOR THE FUTURE.
Our priorities are clear: protect customers, repay taxpayers, and give employees a vision of success and a path for achieving it. To be successful, we must move quickly to allow our ongoing businesses to operate with greater independence and transparency, still as AIG entities but separate from the financial challenges of the parent company.

In this way, we will preserve and build value in our businesses, return value to the government and provide a new sense of purpose to our employees. Speaking of AIG’s employees, this year they deserve more than a routine acknowledgment. All of our 116,000 employees are striving under difficult circumstances to overcome AIG’s financial challenges.

Each one has been affected in some way, and many have suffered severely. Nevertheless, throughout even the most difficult days of the past year, they have worked with commitment and focus. I am extremely proud of them—and salute each and every one.

I also want to thank our customers, policyholders and business partners who stayed with AIG during our most difficult moments. We are working very hard to reward your trust and confidence.

Insurance is about keeping commitments. AIG became a great company by keeping its commitments, and that has not changed. However, AIG strayed into businesses that were outside of its core competency, and shareholders have paid a heavy price as a result. We are now committed to an orderly, responsible resolution of AIG’s financial issues and to helping our businesses prosper and contribute to a world economic recovery. We are extremely grateful to the Federal Reserve and the U.S. Treasury for providing the tools to pursue our restructuring plan.

I can say confidently that everyone at AIG will work as hard as we can to achieve the best possible outcome for our customers, employees, business partners, shareholders and the American taxpayers.

Sincerely,
Edward M. Liddy
Chairman and Chief Executive Officer
March 27, 2009

Download AIG 2008 Annual Report

PDF format, 1.6MB, 352Pages.

American International Group, Inc.
70 Pine Street
New York, NY 10270
www.aig.com

American International Group, Inc. (AIG), a Delaware corporation, is a holding company which, through its subsidiaries, is engaged in a broad range of insurance and insurance-related activities in the United States and abroad.

AIG’s primary activities include both General Insurance and Life Insurance & Retirement Services operations. Other significant activities include Financial Services and Asset Management.

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