AIG 2013 Annual Report Download - page 278

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.
Our investments in life settlements are monitored for impairment on a contract-by-contract basis quarterly. An
investment in life settlements is considered impaired if the undiscounted cash flows resulting from the expected
proceeds from the investment in life settlements would not be sufficient to recover our estimated future carrying
amount of the investment in life settlements, which is the current carrying amount for the investment in life
settlements plus anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired
investments in life settlements are written down to their estimated fair value which is determined on a discounted
cash flow basis, incorporating current market longevity assumptions and market yields.
In general, fair value estimates for the investments in life settlements are calculated using cash flows based on
medical underwriting ratings of the policies from a third-party underwriter, applied to an industry mortality table. Our
new mortality assumptions are based on an industry table that was supplemented with proprietary data on the older
age mortality of U.S. insured lives. In addition, mortality improvement factors were applied to our new assumptions
based on our view of future mortality improvements likely to apply to the U.S. insured lives population. These
mortality improvement assumptions were based on our analysis of various public industry sources and proprietary
research. Using these new mortality assumptions coupled with the adopted future mortality improvement rates, we
revised our estimate of future net cash flows from the investments in life settlements. This resulted in a significant
increase in the number of investments in life settlements identified as impaired as of December 31, 2013.
Our investments in aircraft assets and real estate are periodically evaluated for recoverability whenever changes in
circumstances indicate the carrying amount of an asset may be impaired. When impairment indicators are present,
we compare expected investment cash flows to carrying value. When the expected cash flows are less than the
carrying value, the investments are written down to fair value with a corresponding charge to earnings.
We purchase certain RMBS securities that have experienced deterioration in credit quality since their issuance. We
determine, based on our expectations as to the timing and amount of cash flows expected to be received, whether it
is probable at acquisition that we will not collect all contractually required payments for these PCI securities, including
both principal and interest after considering the effects of prepayments. At acquisition, the timing and amount of the
undiscounted future cash flows expected to be received on each PCI security is determined based on our best
estimate using key assumptions, such as interest rates, default rates and prepayment speeds. At acquisition, the
difference between the undiscounted expected future cash flows of the PCI securities and the recorded investment in
the securities represents the initial accretable yield, which is accreted into Net investment income over their
remaining lives on a level-yield basis. Additionally, the difference between the contractually required payments on the
PCI securities and the undiscounted expected future cash flows represents the non-accretable difference at
acquisition. The accretable yield and the non-accretable difference will change over time, based on actual payments
received and changes in estimates of undiscounted expected future cash flows, which are discussed further below.
On a quarterly basis, the undiscounted expected future cash flows associated with PCI securities are re-evaluated
based on updates to key assumptions. Declines in undiscounted expected future cash flows due to further credit
deterioration as well as changes in the expected timing of the cash flows can result in the recognition of an
other-than-temporary impairment charge, as PCI securities are subject to our policy for evaluating investments for
other-than-temporary impairment. Changes to undiscounted expected future cash flows due solely to the changes in
the contractual benchmark interest rates on variable rate PCI securities will change the accretable yield prospectively.
Significant increases in undiscounted expected future cash flows for reasons other than interest rate changes are
recognized prospectively as adjustments to the accretable yield.
Purchased Credit Impaired (PCI) Securities
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AIG 2013 Form 10-K260
ITEM 8 / NOTE 6. INVESTMENTS
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