INVESTMENTS

12 Months Ended

Dec. 31, 2014

INVESTMENTS

INVESTMENTS

6. 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 these securities until maturity. When we do not have the ability or positive intent to hold bonds until maturity, these securities are classified as available for sale or are measured at fair value at our election. None of our fixed maturity securities met the criteria for held to maturity classification at December 31, 2014 or 2013.

Fixed maturity and equity securities classified as available for sale are carried at fair value. Unrealized gains and losses from available for sale investments in fixed maturity and equity securities are reported as a separate component of Accumulated other comprehensive income, net of deferred policy acquisition costs and deferred income taxes, in shareholders’ equity. Realized and unrealized gains and losses from fixed maturity and equity securities measured at fair value at our election are reflected in Net investment income (for insurance subsidiaries) or Other income (for Corporate and Other). 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 yield adjustments over their estimated holding periods, until maturity, or call date, if applicable. For investments in certain RMBS, CMBS and CDO/ABS, (collectively, structured securities), recognized yields are updated based on current information regarding the timing and amount of expected undiscounted future cash flows. For high credit quality structured securities, effective yields are recalculated based on actual payments received and updated prepayment expectations, and the amortized cost is adjusted to the amount that would have existed had the new effective yield been applied since acquisition with a corresponding charge or credit to net investment income. For structured securities that are not high credit quality, effective yields are recalculated and adjusted prospectively based on changes 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 securities represents 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 recalculated and adjusted prospectively to reflect changes in the contractual benchmark interest rates on variable rate securities and any significant increases in undiscounted expected future cash flows arising due to reasons other than interest rate changes.

Securities Available for Sale

The following table presents the amortized cost or cost and fair value of our available for sale securities:

										Other-Than-
		Amortized		Gross		Gross				Temporary
		Cost or		Unrealized		Unrealized		Fair		Impairments
(in millions)		Cost		Gains		Losses		Value		in AOCI(a)
December 31, 2014
Bonds available for sale:
U.S. government and government sponsored entities	$	2,806	$	204	$	(18)	$	2,992	$	-
Obligations of states, municipalities and political subdivisions		25,979		1,729		(49)		27,659		(13)
Non-U.S. governments		20,280		966		(151)		21,095		-
Corporate debt		134,961		10,594		(1,122)		144,433		64
Mortgage-backed, asset-backed and collateralized:
RMBS		34,377		3,435		(292)		37,520		1,767
CMBS		12,129		815		(59)		12,885		215
CDO/ABS		12,775		628		(128)		13,275		47
Total mortgage-backed, asset-backed and collateralized		59,281		4,878		(479)		63,680		2,029
Total bonds available for sale(b)		243,307		18,371		(1,819)		259,859		2,080
Equity securities available for sale:
Common stock		1,185		2,461		(17)		3,629		-
Preferred stock		21		4		-		25		-
Mutual funds		724		54		(37)		741		-
Total equity securities available for sale		1,930		2,519		(54)		4,395		-
Total	$	245,237	$	20,890	$	(1,873)	$	264,254	$	2,080
December 31, 2013
Bonds available for sale:
U.S. government and government sponsored entities	$	3,084	$	150	$	(39)	$	3,195	$	-
Obligations of states, municipalities and political subdivisions		28,704		1,122		(446)		29,380		(15)
Non-U.S. governments		22,045		822		(358)		22,509		-
Corporate debt		139,461		7,989		(2,898)		144,552		74
Mortgage-backed, asset-backed and collateralized:
RMBS		33,520		3,101		(473)		36,148		1,670
CMBS		11,216		558		(292)		11,482		125
CDO/ABS		10,501		649		(142)		11,008		62
Total mortgage-backed, asset-backed and collateralized		55,237		4,308		(907)		58,638		1,857
Total bonds available for sale(b)		248,531		14,391		(4,648)		258,274		1,916
Equity securities available for sale:
Common stock		1,280		1,953		(14)		3,219		-
Preferred stock		24		4		(1)		27		-
Mutual funds		422		12		(24)		410		-
Total equity securities available for sale		1,726		1,969		(39)		3,656		-
Total	$	250,257	$	16,360	$	(4,687)	$	261,930	$	1,916

(a) Represents the amount of other-than-temporary impairment losses recognized in Accumulated other comprehensive income. Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

(b)At December 31,2014 and 2013, bonds available for sale held by us that were below investment grade or not rated totaled $35.1billion and $32.6billion, respectively.

Securities Available for Sale in a Loss Position

The following table summarizes the fair value and gross unrealized losses on our available for sale securities, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position:

	Less than 12 Months				12 Months or More				Total
				Gross				Gross				Gross
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in millions)		Value		Losses		Value		Losses		Value		Losses
December 31, 2014
Bonds available for sale:
U.S. government and government sponsored entities	$	526	$	5	$	281	$	13	$	807	$	18
Obligations of states, municipalities and political
subdivisions		495		9		794		40		1,289		49
Non-U.S. governments		1,606		42		1,690		109		3,296		151
Corporate debt		12,132		450		11,570		672		23,702		1,122
RMBS		4,621		109		3,996		183		8,617		292
CMBS		220		1		2,087		58		2,307		59
CDO/ABS		3,857		50		1,860		78		5,717		128
Total bonds available for sale		23,457		666		22,278		1,153		45,735		1,819
Equity securities available for sale:
Common stock		88		16		2		1		90		17
Mutual funds		280		37		64		-		344		37
Total equity securities available for sale		368		53		66		1		434		54
Total	$	23,825	$	719	$	22,344	$	1,154	$	46,169	$	1,873
December 31, 2013
Bonds available for sale:
U.S. government and government sponsored entities	$	1,101	$	34	$	42	$	5	$	1,143	$	39
Obligations of states, municipalities and political
subdivisions		6,134		379		376		67		6,510		446
Non-U.S. governments		4,102		217		710		141		4,812		358
Corporate debt		38,495		2,251		4,926		647		43,421		2,898
RMBS		8,543		349		1,217		124		9,760		473
CMBS		3,191		176		1,215		116		4,406		292
CDO/ABS		2,845		62		915		80		3,760		142
Total bonds available for sale		64,411		3,468		9,401		1,180		73,812		4,648
Equity securities available for sale:
Common stock		96		14		-		-		96		14
Preferred stock		5		1		-		-		5		1
Mutual funds		369		24		-		-		369		24
Total equity securities available for sale		470		39		-		-		470		39
Total	$	64,881	$	3,507	$	9,401	$	1,180	$	74,282	$	4,687

At December 31,2014, we held 6,394 and 118 individual fixed maturity and equity securities, respectively, that were in an unrealized loss position, of which 2,123 individual fixed maturity securities were in a continuous unrealized loss position for longer than 12 months. We did not recognize the unrealized losses in earnings on these fixed maturity securities at December 31,2014, because we neither intend to sell the securities nor do we believe that it is more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. For fixed maturity securities with significant declines, we performed fundamental credit analysis on a security-by-security basis, which included consideration of credit enhancements, expected defaults on underlying collateral, review of relevant industry analyst reports and forecasts and other available market data.

Contractual Maturities of Fixed Maturity Securities Available for Sale

The following table presents the amortized cost and fair value of fixed maturity securities available for sale by contractual maturity:

	Total Fixed Maturity Securities				Fixed Maturity Securities Available
December 31, 2014	Available for Sale				for Sale in a Loss Position
(in millions)		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	9,821	$	9,975	$	637	$	620
Due after one year through five years		48,352		50,873		6,669		6,529
Due after five years through ten years		62,685		65,889		12,873		12,338
Due after ten years		63,168		69,442		10,255		9,607
Mortgage-backed, asset-backed and collateralized		59,281		63,680		17,120		16,641
Total	$	243,307	$	259,859	$	47,554	$	45,735

Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.

The following table presents the gross realized gains and gross realized losses from sales or maturities of our available for sale securities:

	Years Ended December 31,
		2014				2013				2012
		Gross		Gross		Gross		Gross	Gross		Gross
	Realized		Realized		Realized		Realized		Realized		Realized
(in millions)		Gains		Losses		Gains		Losses	Gains		Losses
Fixed maturity securities	$	703	$	118	$	2,634	$	202	$	2,778	$	171
Equity securities		135		24		130		19		515		31
Total	$	838	$	142	$	2,764	$	221	$	3,293	$	202

For the years ended December 31,2014, 2013 and 2012, the aggregate fair value of available for sale securities sold was $25.3 billion, $35.9 billion and $40.3 billion, which resulted in net realized capital gains of $0.7 billion, $2.5 billion and $3.1 billion, respectively.

Other Securities Measured at Fair Value

The following table presents the fair value of other securities measured at fair value based on our election of the fair value option:

		December 31, 2014				December 31, 2013
		Fair	Percent			Fair	Percent
(in millions)		Value	of Total			Value	of Total
Fixed maturity securities:
U.S. government and government sponsored entities	$	5,498	27	%	$	5,723	24	%
Obligations of states, territories and political subdivisions		122	1			121	1
Non-U.S. governments		2	-			2	-
Corporate debt		719	3			1,169	5
Mortgage-backed, asset-backed and collateralized:
RMBS		2,094	10			2,263	10
CMBS		1,077	5			1,353	6
CDO/ABS and other collateralized(a)		10,200	49			11,985	51
Total mortgage-backed, asset-backed and collateralized		13,371	64			15,601	67
Other		-	-			7	-
Total fixed maturity securities		19,712	95			22,623	97
Equity securities		1,049	5			834	3
Total	$	20,761	100	%	$	23,457	100	%

(a)Includes $0.9 billion and $1.0 billion of U.S. Government agency backed ABS at December 31, 2014 and 2013, respectively.

Other Invested Assets

The following table summarizes the carrying amounts of other invested assets:

December 31,
(in millions)		2014		2013
Alternative investments(a)	$	19,656	$	19,709
Mutual funds		-		85
Investment real estate(b)		3,612		3,113
Aircraft asset investments(c)		651		763
Investments in life settlements		3,753		3,601
Investment in AerCap		4,972		-
All other investments		1,874		1,388
Total	$	34,518	$	28,659

(a) Includes hedge funds, private equity funds, affordable housing partnerships, and other investment partnerships.

(b) Net of accumulated depreciation of $315 million and $513 million in 2014 and 2013, respectively.

(c) Consists primarily of investments in aircraft equipment held in consolidated trusts.

Other Invested Assets Carried at Fair Value

Certain hedge funds, private equity funds, affordable housing partnerships and other investment partnerships for which we have elected the fair value option are reported at fair value with changes in fair value recognized in Net investment income with the exception of investments of AIG’s Corporate and Other category, for which such changes are reported in Other income. Other investments in hedge funds, private equity funds, affordable housing partnerships and other investment partnerships in which our insurance operations do not hold aggregate interests sufficient to exercise more than minor influence over the respective partnerships are reported at fair value with changes in fair value recognized as a component of Accumulated other comprehensive income. These investments are subject to other-than-temporary impairment evaluations (see discussion below on evaluating equity investments for other-than-temporary impairment). The gross unrealized loss recorded in Other comprehensive income on such investments was $56 million and $15 million at December 31,2014 and 2013, respectively, the majority of which pertains to investments in private equity funds and hedge funds that have been in continuous unrealized loss positions for less than 12 months.

Other Invested Assets – Equity Method Investments

We account for hedge funds, private equity funds, affordable housing partnerships and other investment partnerships using the equity method of accounting unless our interest is so minor that we may have virtually no influence over partnership operating and financial policies, or we have elected the fair value option. Under the equity method of accounting, our carrying amount generally is our share of the net asset value of the funds or the partnerships, and changes in our share of the net asset values are recorded in Net investment income with the exception of investments of AIG’s Corporate and Other category, for which such changes are reported in Other income. In applying the equity method of accounting, we consistently use the most recently available financial information provided by the general partner or manager of each of these investments, which is one to three months prior to the end of our reporting period. The financial statements of these investees are generally audited annually.

Summarized Financial Information of Equity Method Investees

The following is the aggregated summarized financial information of our equity method investees, including those for which the fair value option has been elected:

Years Ended December 31,
(in millions)		2014		2013		2012
Operating results:
Total revenues	$	29,579	$	19,181	$	9,438
Total expenses		(7,828)		(5,515)		(5,183)
Net income	$	21,751	$	13,666	$	4,255
At December 31,
(in millions)				2014		2013
Balance sheet:
Total assets			$	207,994	$	150,586
Total liabilities			$	(67,346)	$	(25,134)

The following table presents the carrying amount and ownership percentage of equity method investments at December 31, 2014 and 2013:

		2014			2013
		Carrying	Ownership		Carrying	Ownership
(in millions, except percentages)		Value	Percentage		Value	Percentage
Equity method investments	$	18,951	Various	$	12,921	Various

Summarized financial information for these equity method investees may be presented on a lag, due to the unavailability of information for the investees at our respective balance sheet dates, and is included for the periods in which we held an equity method ownership interest.

Other Investments

Also included in Other invested assets are real estate held for investment and aircraft asset investments held by non-Aircraft Leasing subsidiaries. These investments are reported at cost, less depreciation and are subject to impairment review, as discussed below.

Investments in Life Settlements

Investments in life settlements are accounted for under the investment method. Under the investment method, we recognize our initial investment in life settlements at the transaction price plus all initial direct external costs. Continuing costs to keep the policy in force, primarily life insurance premiums, increase the carrying amount of the investment. We recognize income on individual investments in life settlements when the insured dies, at an amount equal to the excess of the investment proceeds over the carrying amount of the investment at that time. These investments are subject to impairment review, as discussed below.

During 2014, 2013 and 2012, income recognized on investments in life settlements was $407 million, $334 million and $253 million, respectively, and is included in Net investment income in the Consolidated Statements of Income.

The following table presents further information regarding investments in life settlements:

	December 31, 2014
	Number of		Carrying	Face Value
(dollars in millions)	Contracts		Value	(Death Benefits)
Remaining Life Expectancy of Insureds:
0 – 1 year	1	$	-	$	-
1 – 2 years	12		9		19
2 – 3 years	18		11		19
3 – 4 years	77		42		93
4 – 5 years	152		205		436
Thereafter	4,687		3,486		15,370
Total	4,947	$	3,753	$	15,937

Remaining life expectancy for year 0-1 references policies whose current life expectancy is less than 12 months as of the valuation date. Remaining life expectancy is not an indication of expected maturity. Actual maturity dates in any category may vary significantly (either earlier or later) from the remaining life expectancies reported above.

At December 31,2014, management’s best estimate of the life insurance premiums required to keep the investments in life settlements in force, payable in the 12 months endingDecember 31, 2015 and the four succeeding years ending December 31, 2019 are $545 million, $562 million, $584 million, $607 million and $627 million, respectively.

Net Investment Income

Net investment income represents income primarily from the following sources:

• Interest income and related expenses, including amortization of premiums and accretion of discounts on bonds with changes in the timing and the amount of expected principal and interest cash flows reflected in the yield, as applicable.
• Dividend income from common and preferred stocks and distributions from other investments.
• Realized and unrealized gains and losses from investments in other securities and investments for which we elected the fair value option.
• Earnings from alternative investments.
• The difference between the carrying amount of an investment in life settlements and the life insurance proceeds of the underlying life insurance policy recorded in income upon the death of the insured.
• Changes in the fair values of our interests in ML II and AIA securities prior to sale and change in the fair value of our interests in ML III prior to the FRBNY liquidation of ML III assets.

The following table presents the components of Net investment income:

Years Ended December 31,
(in millions)		2014		2013		2012
Fixed maturity securities, including short-term investments	$	12,322	$	12,044	$	12,592
Change in fair value of ML II		-		-		246
Change in fair value of ML III		-		-		2,888
Change in fair value of AIA securities including realized gain		-		-		2,069
Equity securities		221		178		162
Interest on mortgage and other loans		1,272		1,144		1,083
Alternative investments*		2,624		2,803		1,769
Real estate		110		128		127
Other investments		47		61		11
Total investment income		16,596		16,358		20,947
Investment expenses		517		548		604
Net investment income	$	16,079	$	15,810	$	20,343

* Includes hedge funds, private equity funds, affordable housing partnerships, investments in life settlements and other investment partnerships.

Net Realized Capital Gains and Losses

Net realized capital gains and losses are determined by specific identification. The net realized capital gains and losses are generated primarily from the following sources:

• Sales of available for sale fixed maturity securities,available for sale equity securities and real estate.
• Reductions to the cost basis of available for sale fixed maturity securities, available for sale equity securities and certain other invested assets for other-than-temporary impairments.
• Impairments on investments in life settlements.
• Changes in fair value of derivatives except for (1) those instruments at AIGFP that are not intermediated on behalf of other AIG subsidiaries and (2) those instruments that are designated as hedging instruments when the change in the fair value of the hedged item is not reported in Net realized capital gains (losses).
• Exchange gains and losses resulting from foreign currency transactions.

The following table presents the components of Net realized capital gains (losses):

Years Ended December 31,
(in millions)		2014		2013		2012
Sales of fixed maturity securities	$	585	$	2,432	$	2,607
Sales of equity securities		111		111		484
Other-than-temporary impairments:
Severity		(3)		(6)		(44)
Change in intent		(40)		(48)		(62)
Foreign currency declines		(19)		(1)		(8)
Issuer-specific credit events		(169)		(170)		(931)
Adverse projected cash flows		(16)		(7)		(5)
Provision for loan losses		(1)		(26)		104
Foreign exchange transactions		598		151		(233)
Derivative instruments		(177)		287		(529)
Impairments of investments in life settlements		(201)		(971)		(309)
Other		71		187		13
Net realized capital gains	$	739	$	1,939	$	1,087

Change in Unrealized Appreciation (Depreciation) of Investments

The following table presents the increase (decrease) in unrealized appreciation (depreciation) of our available for sale securities and other investments:

	Years Ended
	December 31,
(in millions)		2014		2013
Increase (decrease) in unrealized appreciation (depreciation) of investments:
Fixed maturities	$	6,809	$	(14,066)
Equity securities		535		360
Other investments		376		101
Total increase (decrease) in unrealized appreciation (depreciation) of investments*	$	7,720	$	(13,605)

* Excludes net unrealized gains attributable to businesses held for sale.

Evaluating Investments for Other-Than-Temporary Impairments

Fixed Maturity Securities

If we intend to sell a fixed maturity security or it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis and the fair value of the security is below amortized cost, an other-than-temporary impairment has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized capital losses.When assessing our intent to sell a fixed maturity security, or whether it is more likely than not that we 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 our investment portfolio, sales of securities to meet cash flow needs and sales of securities to take advantage of favorable pricing.

For fixed maturity securities for which a credit impairment has occurred, the amortized cost is written down to the estimated recoverable value with a corresponding charge to realized capital losses. The estimated recoverable 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 presented in unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were recognized (a separate component of accumulated other comprehensive income).

When estimating future cash flows for structured fixed maturity securities (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 recoverable value when available information does not indicate that another value is more relevant or reliable. When management identifies information that supports a recoverable value other than the fair value, the determination of a recoverable 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 model inputs when we determine that price movements in certain sectors are indicative of factors not captured 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 recoverable value over the remaining expected holding period of the security.

Credit Impairments

The following table presents a rollforward of the cumulative credit losses in other-than-temporary impairments recognized in earnings for available for sale fixed maturity securities:

Years Ended December 31,
(in millions)		2014		2013		2012
Balance, beginning of year	$	3,872	$	5,164	$	6,504
Increases due to:
Credit impairments on new securities subject to impairment losses		49		47		194
Additional credit impairments on previously impaired securities		85		78		483
Reductions due to:
Credit impaired securities fully disposed for which there was no
prior intent or requirement to sell		(613)		(643)		(1,105)
Credit impaired securities for which there is a current intent or
anticipated requirement to sell		-		-		(5)
Accretion on securities previously impaired due to credit*		(725)		(774)		(915)
Other		(9)		-		8
Balance, end of year	$	2,659	$	3,872	$	5,164

* Represents both accretion recognized due to changes in cash flows expected to be collected over the remaining expected term of the credit impaired securities and the accretion due to the passage of time.

Equity Securities

We evaluate our available for sale equity securities 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 we may not realize a full recovery on our 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. In addition to the above criteria, all equity securities that have been in a continuous decline in value below cost over twelve months are impaired. We also consider circumstances of a rapid and severe market valuation decline (50 percent or more) discount to cost, in which we could not reasonably assert that the impairment period would be temporary (severity losses).

Other Invested Assets

Our equity and cost method investments in private equity funds, hedge funds and other entities 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 settlements are monitored for impairment on a contract-by-contract basis quarterly. An investment in life settlements is considered impaired if the undiscounted cash flows resulting from the expected proceeds from the investment in life settlements would not be sufficient to recover our estimated future carrying amount of the investment in life settlements, which is the current carrying amount for the investment in life settlements plus anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired investments in life settlements are written down to their estimated fair value which is determined on a discounted cash flow basis, incorporating current market longevity assumptions and market yields.

In general, fair value estimates for the investments in life settlements are calculated using cash flows based on medical underwriting ratings of the policies from a third-party underwriter, applied to an industry mortality table. Ourmortality assumptions are based on an industry table as supplemented with proprietary data on the olderage mortality of U.S. insured lives. Mortality improvement factors are applied to theseassumptionsbased on our view of future mortality improvements likely to apply to the U.S. insured lives population. Our mortality assumptions coupled with the mortality improvement rates are used in our estimate of future net cash flows from theinvestments in life settlements.

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 amount. When the expected cash flows are less than the carrying amount, the investments are written down to fair value with a corresponding charge to earnings.

Purchased Credit Impaired (PCI) Securities

We purchase certain RMBS securities that have experienced deterioration incredit quality since their issuance. We determine, based on our expectations as to the timing and amountof cash flows expected to be received, whether it is probable at acquisition that we will not collect all contractuallyrequired payments for these PCI securities, including both principal and interest after considering the effects ofprepayments. At acquisition, the timing and amount of the undiscounted future cash flows expected to be received oneach PCI security is determined based on our best estimate using key assumptions, such as interestrates, default rates and prepayment speeds. At acquisition, the difference between the undiscounted expected futurecash flows of the PCI securities and the recorded investment in the securities represents the initial accretable yield,which is accreted into Net investment income over their remaining lives on a level-yield basis. Additionally, thedifference between the contractually required payments on the PCI securities and the undiscounted expected futurecash flows represents the non-accretable difference at acquisition. The accretable yield and the non-accretable difference will change over time, based on actual payments received and changes in estimates of undiscounted expected future cash flows, which are discussed further below.

On a quarterly basis, the undiscounted expected future cash flows associated with PCI securities are re-evaluatedbased on updates to key assumptions. Declines in undiscounted expected future cash flows due to further creditdeterioration as well as changes in the expected timing of the cash flows can result in the recognition of another-than-temporary impairment charge, as PCI securities are subject to our policy for evaluating investments forother-than-temporary impairment. Changes to undiscounted expected future cash flows due solely to the changes inthe contractual benchmark interest rates on variable rate PCI securities will change the accretable yield prospectively.Significant increases in undiscounted expected future cash flows for reasons other than interest rate changes arerecognized prospectively as adjustments to the accretable yield.

The following tables present information on our PCI securities, which are included in bonds available for sale:

(in millions)	At Date of Acquisition
Contractually required payments (principal and interest)	$	30,520
Cash flows expected to be collected*		24,561
Recorded investment in acquired securities		16,311

* Represents undiscounted expected cash flows, including both principal and interest.

		December 31,		December 31,
(in millions)		2014		2013
Outstanding principal balance	$	16,962	$	14,741
Amortized cost		12,216		10,110
Fair value		13,462		11,338

The following table presents activity for the accretable yield on PCI securities:

Years Ended December 31,
(in millions)		2014		2013
Balance, beginning of year	$	6,940	$	4,766
Newly purchased PCI securities		1,289		1,773
Disposals		-		(60)
Accretion		(880)		(719)
Effect of changes in interest rate indices		(542)		302
Net reclassification from non-accretable difference,
including effects of prepayments		58		878
Balance, end of year	$	6,865	$	6,940

Pledged Investments

Secured Financing and Similar Arrangements

We enter into secured financing transactions whereby certain securities are sold under agreements to repurchase (repurchase agreements), in which we transfer securities in exchange for cash, with an agreement by us to repurchase the same or substantially similar securities. In the majority of these repurchase agreements, the securities transferred by us may be sold or repledged by the counterparties. Repurchase agreements entered into by the DIB are carried at fair value based on market-observable interest rates. All other repurchase agreements are recorded at their contracted repurchase amounts plus accrued interest.

At December 31, 2013, our secured financing transactions also included those that involve the transfer of securities to financial institutions in exchange for cash or other liquid collateral. Securities transferred by us under these financing transactions may be sold or repledged by the counterparties. As collateral for the securities transferred by us, counterparties transfer assets to us, such as cash or high quality fixed maturity securities. Collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the transferred securities during the life of the transactions. When we receive fixed maturity securities as collateral, we do not have the right to sell or repledge this collateral unless an event of default occurs by the counterparties. At the termination of the transactions, we and our counterparties are obligated to return the collateral provided and the securities transferred, respectively.

The following table presents the fair value of securities pledged to counterparties under secured financing transactions:

(in millions)		December 31, 2014		December 31, 2013
Securities available for sale	$	-	$	3,837
Other securities		2,122		2,766

We also enter into agreements in which securities are purchased by us under agreements to resell (reverse repurchase agreements), which are accounted for as secured financing transactions and reported as Short-term investments or Other assets, depending on their terms. These agreements are recorded at their contracted resale amounts plus accrued interest, other than those that are accounted for at fair value. Such agreements entered into by the DIB are carried at fair value based on market observable interest rates. In all reverse repurchase transactions, we take possession of or obtain a security interest in the related securities, and we have the right to sell or repledge this collateral received.

The following table presents information on the fair value of securities pledged to us under reverse repurchase agreements:

(in millions)		December 31, 2014		December 31, 2013
Securities collateral pledged to us	$	2,506	$	8,878
Amount repledged by us		131		71

Insurance–Statutory and Other Deposits

Total carrying amounts of cash and securities deposited by our insurance subsidiaries under requirements ofregulatory authorities or other insurance-related arrangements, including certain annuity-related obligations and certain reinsurance agreements, were $5.9 billion and $6.7billion at December 31,2014 and 2013, respectively.

Other Pledges

Certain of our subsidiaries are members of Federal Home Loan Banks (FHLBs) and such membership requires the members to own stock in these FHLBs. We owned an aggregate of $44 million and $57 million of stock in FHLBs at December 31,2014 and 2013, respectively. To the extent an AIG subsidiary borrows from the FHLB, its ownership interest in the stock of FHLBs will be pledged to the FHLB. In addition, our subsidiaries have pledged securities available for sale with a fair value of $535 million and $80 million at December 31,2014 and 2013, respectively, associated with advances from the FHLBs.

Certain GIAs have provisions that require collateral to be posted or payments to be made by us upon a downgrade of our long-term debt ratings. The actual amount of collateral required to be posted to the counterparties in the event of such downgrades, and the aggregate amount of payments that we could be required to make, depend on market conditions, the fair value of outstanding affected transactions and other factors prevailing at and after the time of the downgrade. The fair value of securities pledged as collateral with respect to these obligations approximated $3.5 billion and $4.2 billion at December 31,2014 and 2013, respectively. This collateral primarily consists of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.