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ITEM 8 / NOTE 7. INVESTMENTS.....................................................................................................................................................................................7. INVESTMENTS..............................................................................................................................................................................................Fixed Maturity and Equity Securities..............................................................................................................................................................................................Bonds held to maturity are carried at amortized cost when we have the ability and positive intent to hold thesesecurities until maturity. When we do not have the ability or positive intent to hold bonds until maturity, thesesecurities are classified as available for sale or as trading and are carried at fair value. None of our fixed maturitysecurities met the criteria for held to maturity classification at December 31, 2012 or 2011.Fixed maturity and equity securities classified as available for sale or as trading are carried at fair value. Unrealizedgains and losses from available for sale investments in fixed maturity and equity securities are reported as aseparate component of Accumulated other comprehensive income (loss), net of deferred acquisition costs anddeferred income taxes, in Total AIG shareholders’ equity. Realized and unrealized gains and losses from fixedmaturity and equity securities classified as trading are reflected in Net investment income (for insurance subsidiaries)or Other income (for DIB). Investments in fixed maturity and equity securities are recorded on a trade-date basis.Premiums and discounts arising from the purchase of bonds classified as available for sale are treated as yieldadjustments over their estimated holding periods, until maturity, or call date, if applicable. For investments in certainRMBS, CMBS and CDO/ABS, (collectively, structured securities), recognized yields are updated based on currentinformation regarding the timing and amount of expected undiscounted future cash flows. For high credit qualitystructured securities, effective yields are recalculated based on actual payments received and updated prepaymentexpectations, and the amortized cost is adjusted to the amount that would have existed had the new effective yieldbeen applied since acquisition with a corresponding charge or credit to net investment income. For structuredsecurities that are not high credit quality, effective yields are recalculated and adjusted prospectively based onchanges in expected undiscounted future cash flows. For purchased credit impaired (PCI) securities, at acquisition,the difference between the undiscounted expected future cash flows and the recorded investment in the securitiesrepresents the initial accretable yield, which is to be accreted into net investment income over the securities’remaining lives on a level-yield basis. Subsequently, effective yields recognized on PCI securities are recalculatedand adjusted prospectively to reflect changes in the contractual benchmark interest rates on variable rate securitiesand any significant increases in undiscounted expected future cash flows arising due to reasons other than interestrate changes.Trading securities include the investment portfolio of the DIB. Trading securities for the DIB are held to meetshort-term investment objectives and to economically hedge other securities...................................................................................................................................................................................................................................252 AIG 2012 Form 10-K