AIG 2011 Annual Report Download - page 289

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• loss severity and the timing of any recovery; and
• expected prepayment speeds.
For corporate, municipal and sovereign fixed maturity securities determined to be credit impaired, management
considers the fair value as the recovery value when available information does not indicate that another value is
more relevant or reliable. When management identifies information that supports a recovery value other than the
fair value, the determination of a recovery value considers scenarios specific to the issuer and the security, and
may be based upon estimates of outcomes of corporate restructurings, political and macroeconomic factors,
stability and financial strength of the issuer, the value of any secondary sources of repayment and the disposition
of assets.
Equity Securities
The impairment model for equity securities and other cost and equity method investments was not affected by
the adoption of the accounting standard related to other-than-temporary impairments in the second quarter of
2009. AIG continues to evaluate its available for sale equity securities, equity method and cost method
investments for impairment by considering such securities as candidates for other-than-temporary impairment if
they meet any of the following criteria:
• the security has traded at a significant (25 percent or more) discount to cost for an extended period of time
(nine consecutive months or longer);
• a discrete credit event has occurred resulting in (i) the issuer defaulting on a material outstanding obligation;
(ii) the issuer seeking protection from creditors under the bankruptcy laws or any similar laws intended for
court-supervised reorganization of insolvent enterprises; or (iii) the issuer proposing a voluntary
reorganization pursuant to which creditors are asked to exchange their claims for cash or securities having a
fair value substantially lower than the par value of their claims; or
• AIG has concluded that it may not realize a full recovery on its investment, regardless of the occurrence of
one of the foregoing events.
The determination that an equity security is other-than-temporarily impaired requires the judgment of
management and consideration of the fundamental condition of the issuer, its near-term prospects and all the
relevant facts and circumstances. The above criteria also consider circumstances of a rapid and severe market
valuation decline in which AIG could not reasonably assert that the impairment period would be temporary
(severity losses).
Other Invested Assets
AIG’s investments in private equity funds and hedge funds are evaluated for impairment similar to the
evaluation of equity securities for impairments as discussed above. Such evaluation considers market conditions,
events and volatility that may impact the recoverability of the underlying investments within these private equity
funds and hedge funds and is based on the nature of the underlying investments and specific inherent risks. Such
risks may evolve based on the nature of the underlying investments.
AIG’s investments in life settlement contracts are monitored for impairment based on the underlying life
insurance policies, with cash flows reported periodically. An investment in a life settlement contract is considered
impaired if the undiscounted cash flows resulting from the expected proceeds from the insurance policy are less
than the carrying amount of the investment plus anticipated continuing costs. If an impairment loss is recognized,
the investment is written down to fair value. During 2011, Chartis implemented an enhanced process in which
updated medical information on individual insured lives is requested on a routine basis. In cases where updated
information indicates that an individual’s health has improved, an impairment loss may arise as a result of revised
estimates of net cash flows from the related contract. Chartis also revised the valuation table used to estimate
AIG 2011 Form 10-K 275