The operating income before net realized capital gains (losses) increased 14.2% to $2.90 billion. Domestic Life Insurance & Retirement Services increased 31.2% and Foreign Life Insurance & Retirement Services increased 3.9% compared to the second quarter of 2006, or 14.3% excluding the $144 million pre-tax increase in second quarter 2006 income relating to the out of period adjustment from unit investment trust accounting.

Operating income growth in the domestic life insurance line was driven by increased partnership income, overall in-force business growth and a decrease in certain litigation accruals, partially offset by higher policyholder benefits. Second quarter 2007 retail periodic premium sales of life insurance declined compared to the second quarter of 2006, primarily as a result of re-pricing of certain products and tightening of underwriting standards in the second half of 2006. Payout annuities results reflect growth in in-force business, increased net investment income and favorable policyholder benefits compared to the second quarter of 2006. The decline in premiums compared to the second quarter of 2006 was largely the result of a decline in single premium immediate annuity sales resulting from a re-pricing of this product line in the second half of 2006.

In Domestic Retirement Services, all major product lines reported increased operating income in the second quarter of 2007, primarily due to higher partnership and yield enhancement income. Group retirement products experienced increased variable annuity and mutual fund deposits and continued to improve their efforts to retain client assets via new rollover products and guaranteed living benefit riders. Individual fixed annuity net flows, while still negative, improved compared to the same period last year due to increased deposits. However, surrender rates increased due to a large number of policies coming out of their surrender charge periods and competition from bank and other short-term fixed rate products. Individual variable annuity results benefited from higher fee income on increased assets under management due to appreciation in the equity markets.

Foreign Life Insurance & Retirement Services operating income benefited from continued premium growth and increased partnership and unit investment trust income compared to the second quarter of 2006. Foreign life insurance sales were strong in most regions compared to the second quarter of 2006, with U.S. dollar life insurance products in Japan, investment-linked products in Asia and guaranteed income bond products in the U.K. contributing to this growth. Personal accident & health premium growth in Europe and Asia is helping offset results in Japan, which were affected by declining sales and increased expenses related to the termination of certain tax-related products and a provision related to the continuing industry-wide regulatory review of claims. Group products experienced premium growth in the European credit business and higher fee income from pension business in Brazil and Southeast Asia.

Foreign individual fixed annuity operating income increased in the second quarter of 2007 compared to the prior year''s second quarter due to higher assets under management, net surrender charge income, lower deferred acquisition cost (DAC) amortization related to realized capital losses and the positive effect of DAC unlocking. The weak yen continues to adversely affect fixed annuity sales and surrender activity in Japan. New product and distribution initiatives increased annuity production in Korea, Taiwan and the U.K.

Financial Services

The operating income was $512 million, a decline of 16.5 % compared to the second quarter of 2006.

Aircraft Leasing operating income was $190 million in the second quarter of 2007, compared to $189 million in the second quarter of 2006. Strong lease rates and continued growth in the ILFC lease portfolio were partially offset by the increase in interest expense and lower flight equipment remarketing compared to the second quarter of 2006.

Capital Markets operating income increased 29.4 % as AIG Financial Products Corp. experienced increased transaction flow in its equity, credit and currency products compared to the second quarter of 2006.

Consumer Finance operating income was $58 million compared to $199 million in the second quarter of 2006. Second quarter 2007 results include the previously announced $50 million charge related to the estimated cost of implementing the financial remediation plan, pursuant to the terms of the Supervisory Agreement reached by AIG''s domestic consumer finance operations with the Office of Thrift Supervision. This is in addition to the $128 million charge in the first quarter of 2007. American General Finance, Inc. operating income was also adversely affected by lower real estate production volumes and margin compression compared to the prior year. While charge-off and delinquency ratios increased primarily due to maturing of the portfolio, they remain stable and near historic lows.

Overseas, loan growth in Poland and Argentina fueled strong revenue increases, partially offset by sluggish results in Asia and higher expansion related expenses.

Asset Management

Asset Management operating income in the second quarter of 2007, before the effect of consolidated investments that are offset in minority interest expense and net realized capital gains (losses), was $549 million, a 5% increase compared to the second quarter of 2006. The increase in Guaranteed Investment Contracts operating income was due to a significant increase in partnership income. Growth in the Matched Investment Program also contributed to the increase in second quarter 2007 operating income. Institutional Asset Management results declined, as lower levels of income from gains on real estate sales and carried interest on private equity investments offset higher management fee income resulting from growth in client assets under management. In the second quarter of 2007, a $398 million net realized gain was recognized on the sale of a portion of AIG''s investment in Blackstone Group, LP in connection with its initial public offering. This gain is reported in Asset Management net realized capital gains (losses).

Other Operations

The operating income from Other Operations, including other net realized capital gains (losses) and inter-company eliminations, amounted to a loss of $443 million compared to a $258 million loss in the second quarter of 2006. These results primarily reflect higher interest expense resulting from increased parent company borrowings, higher unallocated corporate expenses and lower income from unconsolidated entities.

AIG’s Exposure to the U.S. Residential Mortgage Market

Over the past several weeks, the US mortgage market has been the subject of a considerable amount of press and stress, as a consequence of an increase in delinquencies in the private mortgage market, a tightening in credit availability, and the difficulties some funds have experienced in situations where high leverage and strained liquidity have forced them to realize large losses and, in some cases, cease operations. Although there are clear signs that this stress will continue for some time, much of the dialogue has suggested that there is a considerable amount of confusion about the market in general, its participants, how it functions, and where the potential for future stress is greatest.

AIG is active in many segments of the residential mortgage market from lending to mortgage insurance to investments to super senior portfolio protections. Certain segments of the market have experienced credit deterioration, which is affecting the current results in AIG''s mortgage insurance business. AIG also holds residential mortgage-related securities and recognizes that the current market dislocation has caused quoted prices in many of them to decline. AIG views such declines as temporary, as the robust cash flow characteristics combined with the reasonably short maturity structure of most of these securities will exert a very strong pull to par even if markets remain unfavorable.

AIG views recent pricing as indicative of market turmoil unrelated to the fundamental financial characteristics of these securities. In addition, the firm believes that it would take declines in housing values to reach depression proportions, along with default frequencies never experienced, before AAA and AA investments would be impaired. AIG does not need to liquidate any investment securities in a chaotic market due to its strong liquidity and cash flow as well as its superior financial strength. The management believes that its exposures to this market are prudent, given the nature of its business and financial strength. AIG has the financial wherewithal and expertise to take advantage of opportunities as they arise in the future. Although the market may continue to experience a period of adjustment and volatility, the firm’s exposures are understood and well managed within an appropriate risk tolerance for a strong world leader in Insurance and Financial Services.

AIG is active in several segments of the US mortgage market.