AIG 2012 Annual Report Download - page 279

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Equity Securities
We evaluate our available for sale equity securities, equity method and cost method investments for impairment by
considering such securities as candidates for other-than-temporary impairment if they meet any of the following
criteria:
• the security has traded at a significant (25 percent or more) discount to cost for an extended period of time (nine
consecutive months or longer);
• a discrete credit event has occurred 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 the par value of their claims; or
• we have concluded that it 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 in
which we could not reasonably assert that the impairment period would be temporary (severity losses).
Other Invested Assets
Our investments in private equity funds and hedge funds are evaluated for impairment similar to the evaluation of
equity securities for impairments as discussed above. Such evaluation considers market conditions, events and
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 settlement contracts are monitored for impairment based on the underlying life insurance
policies, with cash flows reported periodically. An investment in a life settlement contract is considered impaired if the
undiscounted cash flows resulting from the expected proceeds from the insurance policy are less than the carrying
amount of the investment plus anticipated continuing costs. If an impairment loss is recognized, the investment is
written down to fair value. During 2011, we implemented an enhanced process in which updated medical information
on individual insured lives is requested on a routine basis. In cases where updated information indicates that an
individual’s health has improved, an impairment loss may arise as a result of revised estimates of net cash flows
from the related contract. We also revised the valuation table used to estimate future net cash flows. This had the
general effect of decreasing the projected net cash flows on a number of contracts. These changes resulted in an
increase in the number of life settlement contracts identified as potentially impaired.
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.
Purchased Credit Impaired (PCI) Securities
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In 2011, we began purchasing certain RMBS securities that had experienced deterioration in credit quality since their
issuance. We determined, based on our expectations as to the timing and amount of cash flows expected to be
received, that it was probable at acquisition that we would 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 was
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 to be 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. Over time, based on actual payments received and changes in estimates
of undiscounted expected future cash flows, the accretable yield and the non-accretable difference can change, as
discussed further below.
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AIG 2012 Form 10-K262
ITEM 8 / NOTE 7. INVESTMENTS