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ITEM 8 / NOTE 7. INVESTMENTS.....................................................................................................................................................................................For all other fixed maturity securities for which a credit impairment has occurred, the amortized cost is written downto the estimated recovery value with a corresponding charge to earnings. The estimated recovery value is thepresent value of cash flows expected to be collected, as determined by management. The difference between fairvalue 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 separatecomponent 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 asbond-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, managementconsiders the fair value as the recovery value when available information does not indicate that another value ismore relevant or reliable. When management identifies information that supports a recovery value other than the fairvalue, the determination of a recovery value considers scenarios specific to the issuer and the security, and may bebased upon estimates of outcomes of corporate restructurings, political and macroeconomic factors, stability andfinancial 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 ourmodeled outputs for certain securities when we determine that price declines are indicative of factors notcomprehended by the cash flow models.In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixedmaturity securities that is not foreign exchange related, we prospectively accrete into earnings the difference betweenthe new amortized cost and the expected undiscounted recovery value over the remaining expected holding period ofthe security.Credit ImpairmentsThe following table presents a rollforward of the cumulative credit loss component of other-than-temporaryimpairments recognized in earnings for available for sale fixed maturity securities held by us, and includesstructured, corporate, municipal and sovereign fixed maturity securities:Years Ended December 31,(in millions) 2012 2011 2010Balance, beginning of year $ 6,504 $ 6,786 $ 7,803Increases due to:Credit impairments on new securities subject to impairment losses 194 235 627Additional credit impairments on previously impaired securities 483 735 1,294Reductions due to:Credit impaired securities fully disposed for which there was no prior intent orrequirement to sell (1,105) (529) (1,039)Credit impaired securities for which there is a current intent or anticipatedrequirement to sell (5) – (503)Accretion on securities previously impaired due to credit * (915) (544) (332)Hybrid securities with embedded credit derivatives reclassified to Bond tradingsecurities – (179) (748)Other 8 – (316)Balance, end of year $ 5,164 $ 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 impairedsecurities as well as the accretion due to the passage of time...................................................................................................................................................................................................................................AIG 2012 Form 10-K 261
ITEM 8 / NOTE 7. INVESTMENTS.....................................................................................................................................................................................Equity SecuritiesWe evaluate our available for sale equity securities, equity method and cost method investments for impairment byconsidering such securities as candidates for other-than-temporary impairment if they meet any of the followingcriteria:• the security has traded at a significant (25 percent or more) discount to cost for an extended period of time (nineconsecutive months or longer);• a discrete credit event has occurred resulting in (i) the issuer defaulting on a material outstanding obligation; (ii) theissuer seeking protection from creditors under the bankruptcy laws or any similar laws intended for courtsupervisedreorganization of insolvent enterprises; or (iii) the issuer proposing a voluntary reorganization pursuantto which creditors are asked to exchange their claims for cash or securities having a fair value substantially lowerthan 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 ofthe foregoing events.The determination that an equity security is other-than-temporarily impaired requires the judgment of managementand consideration of the fundamental condition of the issuer, its near-term prospects and all the relevant facts andcircumstances. The above criteria also consider circumstances of a rapid and severe market valuation decline inwhich we could not reasonably assert that the impairment period would be temporary (severity losses).Other Invested AssetsOur investments in private equity funds and hedge funds are evaluated for impairment similar to the evaluation ofequity securities for impairments as discussed above. Such evaluation considers market conditions, events andvolatility that may impact the recoverability of the underlying investments within these private equity funds and hedgefunds and is based on the nature of the underlying investments and specific inherent risks. Such risks may evolvebased on the nature of the underlying investments.Our investments in life settlement contracts are monitored for impairment based on the underlying life insurancepolicies, with cash flows reported periodically. An investment in a life settlement contract is considered impaired if theundiscounted cash flows resulting from the expected proceeds from the insurance policy are less than the carryingamount of the investment plus anticipated continuing costs. If an impairment loss is recognized, the investment iswritten down to fair value. During 2011, we implemented an enhanced process in which updated medical informationon individual insured lives is requested on a routine basis. In cases where updated information indicates that anindividual’s health has improved, an impairment loss may arise as a result of revised estimates of net cash flowsfrom the related contract. We also revised the valuation table used to estimate future net cash flows. This had thegeneral effect of decreasing the projected net cash flows on a number of contracts. These changes resulted in anincrease 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 incircumstances 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 thecarrying value, the investments are written down to fair value with a corresponding charge to earnings.Purchased Credit Impaired (PCI) Securities..............................................................................................................................................................................................In 2011, we began purchasing certain RMBS securities that had experienced deterioration in credit quality since theirissuance. We determined, based on our expectations as to the timing and amount of cash flows expected to bereceived, that it was probable at acquisition that we would not collect all contractually required payments for thesePCI securities, including both principal and interest after considering the effects of prepayments. At acquisition, thetiming and amount of the undiscounted future cash flows expected to be received on each PCI security wasdetermined based on our best estimate using key assumptions, such as interest rates, default rates and prepaymentspeeds. At acquisition, the difference between the undiscounted expected future cash flows of the PCI securities andthe recorded investment in the securities represents the initial accretable yield, which is to be accreted into netinvestment income over their remaining lives on a level-yield basis. Additionally, the difference between thecontractually required payments on the PCI securities and the undiscounted expected future cash flows representsthe non-accretable difference at acquisition. Over time, based on actual payments received and changes in estimatesof undiscounted expected future cash flows, the accretable yield and the non-accretable difference can change, asdiscussed further below...................................................................................................................................................................................................................................262 AIG 2012 Form 10-K
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American International Group, Inc.2
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KEY FACTS & FIGURES52,000+ $65.7 bi
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■We said we would return to profi
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Financial HighlightsYears Ended Dec
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~63,000AIG EMPLOYEES AROUND THE WOR
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$115.1 millionAVERAGE CLAIMS PAID E
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$10,000MAXIMUM DONATION MADE BY AIG
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American International Group, Inc.F
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AMERICAN INTERNATIONAL GROUP, INC.A
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ITEM 1 / BUSINESS / AIG............
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ITEM 1 / BUSINESS / AIG............
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ITEM 1 / BUSINESS / AIG PROPERTY CA
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ITEM 1 / BUSINESS / AIG PROPERTY CA
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ITEM 1 / BUSINESS / AIG LIFE AND RE
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ITEM 1 / BUSINESS / OTHER OPERATION
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ITEM 1 / BUSINESS / OTHER OPERATION
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ITEM 1 / BUSINESS..................
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ITEM 1 / BUSINESS..................
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ITEM 1 / BUSINESS..................
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ITEM 1 / BUSINESS..................
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ITEM 1 / BUSINESS..................
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ITEM 1A / RISK FACTORS.............
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ITEM 1B / UNRESOLVED STAFF COMMENTS
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ITEM 5 / MARKET FOR REGISTRANT’S
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ITEM 6 / SELECTED FINANCIAL DATA...
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ITEM 6 / SELECTED FINANCIAL DATA...
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ITEM 7 / MANAGEMENT’S DISCUSSION
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ITEM 7 / USE OF NON-GAAP MEASURES..
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ITEM 7 / EXECUTIVE SUMMARY.........
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ITEM 7 / RESULTS OF OPERATIONS.....
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ITEM 7 / LIQUIDITY AND CAPITAL RESO
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ITEM 7 / INVESTMENTS...............
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ITEM 7 / ENTERPRISE RISK MANAGEMENT
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ITEM 7 / CRITICAL ACCOUNTING ESTIMA
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ITEM 7 / GLOSSARY..................
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ITEM 7 / GLOSSARY..................
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ITEM 7A / QUANTITATIVE AND QUALITAT
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ITEM 8 / INDEX TO FINANCIAL STATEME
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AMERICAN INTERNATIONAL GROUP, INC.C
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Page 227 and 228: ITEM 8 / NOTE 1. BASIS OF PRESENTAT
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ITEM 8 / NOTE 19. EARNINGS (LOSS) P
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ITEM 8 / NOTE 22. EMPLOYEE BENEFITS
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ITEM 8 / NOTE 24. INCOME TAXES.....
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ITEM 8 / NOTE 27. INFORMATION PROVI
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PART II............................
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PART IV............................
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SignatureTitle/s/ ARTHUR C. MARTINE
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ExhibitNumber Description Location(
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Condensed Financial Information of
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Condensed Financial Information of
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Notes to Condensed Financial Inform
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Supplementary Insurance Information
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Valuation and Qualifying AccountsFo
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Subsidiaries of RegistrantExhibit 2
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Percentageof VotingSecuritiesJurisd
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Percentageof VotingSecuritiesJurisd
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CONSENT OF INDEPENDENT REGISTERED P
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CERTIFICATIONSI, Robert H. Benmosch
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CERTIFICATIONExhibit 32In connectio
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SECURITIES REGISTERED PURSUANT TO S
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American International Group, Inc.1
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