AIG 2010 Annual Report Download - page 183

American International Group, Inc., and Subsidiaries
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. Additional fair value declines
below recovery value, if any, are 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)) because this is considered a non-credit impairment.
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 in its assessment of potential credit impairments. AIG also may modify 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 are not foreign exchange related, generally AIG 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.
See the discussion in Note 7 to the Consolidated Financial Statements for additional information on the
methodology and significant inputs, by security type, that AIG uses to determine the amount of a credit loss on
fixed maturity securities.
Equity Securities
AIG evaluates its available for sale equity securities, 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 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 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 for which AIG could not reasonably assert that the impairment period would be temporary
(severity losses).
For further discussion, see Note 7 to the Consolidated Financial Statements.
Liability for Legal Contingencies:
AIG estimates and records a liability for potential losses that may arise from litigation and regulatory
proceedings to the extent such losses are probable and can be estimated. Determining a reasonable estimate of
the amount of such losses requires significant management judgment. In many such proceedings, it is not possible
to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability
until the matter is close to resolution. In view of the inherent difficulty of predicting the outcome of such matters,
AIG 2010 Form 10-K 167