AIG 2012 Annual Report Download - page 278

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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. The estimated recovery value is the
present value of cash flows expected to be collected, as determined by management. The difference between fair
value and amortized cost that is not related to a credit impairment is recognized in unrealized appreciation
(depreciation) of fixed maturity securities on which other-than-temporary credit impairments were taken (a separate
component of Accumulated other comprehensive income (loss)).
When estimating future cash flows for a structured fixed maturity security (e.g., RMBS, CMBS, CDO, ABS)
management considers historical performance of underlying assets and available market information as well as
bond-specific structural considerations, such as credit enhancement and priority of payment structure of the security.
In addition, the process of estimating future cash flows includes, but is not limited to, the following critical inputs,
which vary by asset class:
• Current delinquency rates;
• Expected default rates and the timing of such defaults;
• 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.
We consider severe price declines in our assessment of potential credit impairments. We may also modify our
modeled outputs for certain securities when we determine 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, we prospectively accrete into earnings the difference between
the new amortized cost and the expected undiscounted recovery value over the remaining expected holding period of
the security.
Credit Impairments
The following table presents a rollforward of the cumulative credit loss component of other-than-temporary
impairments recognized in earnings for available for sale fixed maturity securities held by us, and includes
structured, corporate, municipal and sovereign fixed maturity securities:
Balance, beginning of year $ 6,786 $ 7,803
Increases due to:
Credit impairments on new securities subject to impairment losses 235 627
Additional credit impairments on previously impaired securities 735 1,294
Reductions due to:
Credit impaired securities fully disposed for which there was no prior intent or
requirement to sell (529) (1,039)
Credit impaired securities for which there is a current intent or anticipated
requirement to sell – (503)
Accretion on securities previously impaired due to credit*(544) (332)
Hybrid securities with embedded credit derivatives reclassified to Bond trading
securities (179) (748)
Other – (316)
Balance, end of year $ 6,504 $ 6,786
* Represents accretion recognized due to changes in cash flows expected to be collected over the remaining expected term of the credit impaired
securities as well as the accretion due to the passage of time.
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AIG 2012 Form 10-K 261
$ 6,504
194
483
(1,105)
(5)
(915)
–
8
$ 5,164
Years Ended December 31,
(in millions) 2012 2011 2010
ITEM 8 / NOTE 7. INVESTMENTS