AIG 2008 Annual Report Download - page 215

AIG evaluates its available for sale, equity method and cost method investments for impairment such that a
security is considered a candidate for other-than-temporary impairment if it meets any of the following criteria:
• Trading at a significant (25 percent or more) discount to par, amortized cost (if lower) or cost for an extended
period of time (nine consecutive months or longer);
• The occurrence of a discrete credit event 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 par value of their claims; or
• AIG may not realize a full recovery on its investment regardless of the occurrence of one of the foregoing
events.
The determination that a security has incurred an other-than-temporary decline in value 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, such as that experienced in current credit markets, in which AIG could not reasonably assert that
the impairment period would be temporary (severity losses).
At each balance sheet date, AIG evaluates its securities holdings with unrealized losses. When AIG does not
intend to hold such securities until they have recovered their cost basis based on the circumstances at the date of
evaluation, AIG records the unrealized loss in income. If a loss is recognized from a sale subsequent to a balance
sheet date pursuant to changes in circumstances, the loss is recognized in the period in which the intent to hold the
securities to recovery no longer existed.
In periods subsequent to the recognition of an other-than-temporary impairment charge for fixed maturity
securities, which is not intent, credit or foreign exchange related, AIG generally accretes into income the discount or
amortizes the reduced premium resulting from the reduction in cost basis over the remaining life of the security.
Certain investments in beneficial interests in securitized financial assets of less than high quality with
contractual cash flows, including asset-backed securities, are subject to the impairment and income recognition
guidance of EITF 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and
Beneficial Interests that Continued to Be Held by a Transferor in Securitized Financial Assets” as amended by FSP
No. EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20,” which became effective
prospectively in the fourth quarter of 2008. EITF 99-20 requires periodic updates of AIG’s best estimate of cash
flows over the life of the security. If the fair value of such security is less than its cost or amortized cost and there has
been a decrease in the present value of the estimated cash flows since the last revised estimate, considering both
their timing and amount, an other-than-temporary impairment charge is recognized. Interest income is recognized
based on changes in the timing and the amount of expected principal and interest cash flows reflected in the yield.
AIG also considers its intent and ability to retain a temporarily impaired security until recovery. Estimating
future cash flows is a quantitative and qualitative process that incorporates information received from third-party
sources and, in the case of certain structured securities, with certain internal assumptions and judgments regarding
the future performance of the underlying collateral. In addition, projections of expected future cash flows may
change based upon new information regarding the performance of the underlying collateral.
(d) Securities Lending Invested Collateral, at Fair Value and Securities Lending Payable: AIG’s insurance
and asset management operations lend their securities and primarily take cash as collateral with respect to the
securities lent. Invested collateral consists of interest-bearing cash equivalents and fixed and floating rate bonds,
whose changes in fair value are recorded as a separate component of Accumulated other comprehensive income
(loss), net of deferred income taxes. The invested collateral is evaluated for other-than-temporary impairment by
applying the same criteria used for investments in fixed maturities. Income earned on invested collateral, net of
interest payable to the collateral provider, is recorded in Net investment income. AIG generally obtains and
maintains cash collateral from securities borrowers at current market levels for the securities lent. During the fourth
AIG 2008 Form 10-K 209
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)