AIG 2009 Annual Report Download - page 266

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Evaluating Investments for Other-Than-Temporary Impairments
On April 1, 2009, AIG adopted prospectively a new accounting standard addressing the evaluation of fixed maturity
securities for other-than-temporary impairments. These requirements have significantly altered AIG’s policies and
procedures for determining impairment charges recognized through earnings. The new standard requires a company
to recognize the credit component (a credit impairment) of an other-than-temporary impairment of a fixed maturity
security in earnings and the non-credit component in Accumulated other comprehensive income when the company
does not intend to sell the security or it is more likely than not that the company will not be required to sell the
security prior to recovery. The new standard also changes the threshold for determining when an
other-than-temporary impairment has occurred on a fixed maturity security with respect to intent and ability to hold
the security until recovery and requires additional disclosures. A credit impairment, which is recognized in earnings
when it occurs, is the difference between the amortized cost of the fixed maturity security and the estimated present
value of cash flows expected to be collected (recovery value), as determined by management. The difference between
fair value and amortized cost that is not related to a credit impairment is recognized as a separate component of
Accumulated other comprehensive income (loss). AIG refers to both credit impairments and impairments recognized
as a result of intent to sell as ‘‘impairment charges.’’ The impairment model for equity securities was not affected by
the new standard.
Impairment Policy — Effective April 1, 2009 and Thereafter
Fixed Maturity Securities
If AIG intends to sell a fixed maturity security or it is more likely than not that AIG will be required to sell a fixed
maturity security before recovery of its amortized cost basis and the fair value of the security is below amortized cost,
an other-than-temporary impairment has occurred and the amortized cost is written down to current fair value, with a
corresponding charge to earnings.
For all other fixed maturity securities for which a credit impairment has occurred, the amortized cost is written
down to the estimated recovery value with a corresponding charge to earnings. Changes in fair value compared to
recovery value, if any, is charged to unrealized appreciation (depreciation) of fixed maturity investments on which
other-than-temporary credit impairments were taken (a component of Accumulated other comprehensive income
(loss)).
When assessing AIG’s intent to sell a fixed maturity security, or if it is more likely than not that AIG will be
required to sell a fixed maturity security before recovery of its amortized cost basis, management evaluates relevant
facts and circumstances including, but not limited to, decisions to reposition AIG’s investment portfolio, sale of
securities to meet cash flow needs and sales of securities to capitalize on favorable pricing.
AIG considers severe price declines and the duration of such price declines in its assessment of potential credit
impairments. AIG also modifies its modeled outputs for certain securities when it determines that price declines are
indicative of factors not comprehended by the cash flow models.
In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed
maturity securities that is not foreign exchange related, AIG generally prospectively accretes into earnings the
difference between the new amortized cost and the expected undiscounted recovery value over the remaining
expected holding period of the security.
AIG 2009 Form 10-K 258