INVESTMENTS

12 Months Ended

Dec. 31, 2012

INVESTMENTS

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 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 as trading and are carried at fair value. None of our fixed maturity securities 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. 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 (loss), net of deferred acquisition costs and deferred income taxes, in Total AIG shareholders' equity. Realized and unrealized gains and losses from fixed maturity 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 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.

Trading securities include the investment portfolio of the DIB. Trading securities for the DIB are held to meet short-term investment objectives and to economically hedge other securities.

Securities Available for Sale

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

(in millions)	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Other-Than- Temporary Impairments in AOCI(a)
December 31, 2012
Bonds available for sale:
U.S. government and government sponsored entities	$	3,161	$	323	$	(1	)	$	3,483	$	–
Obligations of states, municipalities and political subdivisions		33,042		2,685		(22	)		35,705		2
Non-U.S. governments		25,449		1,395		(44	)		26,800		–
Corporate debt		135,728		15,848		(464	)		151,112		115
Mortgage-backed, asset-backed and collateralized:
RMBS		31,330		3,379		(317	)		34,392		1,330
CMBS		9,699		811		(376	)		10,134		(54	)
CDO/ABS		7,740		765		(172	)		8,333		57
Total mortgage-backed, asset-backed and collateralized		48,769		4,955		(865	)		52,859		1,333
Total bonds available for sale(b)		246,149		25,206		(1,396	)		269,959		1,450
Equity securities available for sale:
Common stock		1,492		1,574		(37	)		3,029		–
Preferred stock		55		23		–			78		–
Mutual funds		93		12		–			105		–
Total equity securities available for sale		1,640		1,609		(37	)		3,212		–
Total	$	247,789	$	26,815	$	(1,433	)	$	273,171	$	1,450
December 31, 2011
Bonds available for sale:
U.S. government and government sponsored entities	$	5,661	$	418	$	(1	)	$	6,078	$	–
Obligations of states, municipalities and political subdivisions		35,017		2,554		(73	)		37,498		(28	)
Non-U.S. governments		24,843		994		(102	)		25,735		–
Corporate debt		134,699		11,844		(1,725	)		144,818		115
Mortgage-backed, asset-backed and collateralized:
RMBS		34,780		1,387		(1,563	)		34,604		(716	)
CMBS		8,449		470		(973	)		7,946		(276	)
CDO/ABS		7,321		454		(473	)		7,302		49
Total mortgage-backed, asset-backed and collateralized		50,550		2,311		(3,009	)		49,852		(943	)
Total bonds available for sale(b)		250,770		18,121		(4,910	)		263,981		(856	)
Equity securities available for sale:
Common stock		1,682		1,839		(100	)		3,421		–
Preferred stock		83		60		–			143		–
Mutual funds		55		6		(1	)		60		–
Total equity securities available for sale		1,820		1,905		(101	)		3,624		–
Total	$	252,590	$	20,026	$	(5,011	)	$	267,605	$	(856	)

(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, 2012 and December 31, 2011, bonds available for sale held by us that were below investment grade or not rated totaled $29.6 billion and $24.2 billion, 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
(in millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
December 31, 2012
Bonds available for sale:
U.S. government and government sponsored entities	$	153	$	1	$	–	$	–	$	153	$	1
Obligations of states, municipalities and political subdivisions		692		11		114		11		806		22
Non-U.S. governments		1,555		19		442		25		1,997		44
Corporate debt		8,483		201		3,229		263		11,712		464
RMBS		597		28		1,661		289		2,258		317
CMBS		406		11		1,595		365		2,001		376
CDO/ABS		391		1		1,510		171		1,901		172
Total bonds available for sale		12,277		272		8,551		1,124		20,828		1,396
Equity securities available for sale:
Common stock		247		36		18		1		265		37
Preferred stock		–		–		–		–		–		–
Mutual funds		3		–		–		–		3		–
Total equity securities available for sale		250		36		18		1		268		37
Total	$	12,527	$	308	$	8,569	$	1,125	$	21,096	$	1,433
December 31, 2011
Bonds available for sale:
U.S. government and government sponsored entities	$	142	$	1	$	–	$	–	$	142	$	1
Obligations of states, municipalities and political subdivisions		174		1		669		72		843		73
Non-U.S. governments		3,992		67		424		35		4,416		102
Corporate debt		18,099		937		5,907		788		24,006		1,725
RMBS		10,624		714		4,148		849		14,772		1,563
CMBS		1,697		185		1,724		788		3,421		973
CDO/ABS		1,680		50		1,682		423		3,362		473
Total bonds available for sale		36,408		1,955		14,554		2,955		50,962		4,910
Equity securities available for sale:
Common stock		608		100		–		–		608		100
Preferred stock		6		–		–		–		6		–
Mutual funds		2		1		–		–		2		1
Total equity securities available for sale		616		101		–		–		616		101
Total	$	37,024	$	2,056	$	14,554	$	2,955	$	51,578	$	5,011

At December 31, 2012, we held 3,637 and 198 individual fixed maturity and equity securities, respectively, that were in an unrealized loss position, of which 1,385 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, 2012, because we neither intend to sell the securities nor do we believe that it is more likely than not that it will be required to sell these securities before recovery of their amortized cost basis. Furthermore, we expect to recover the entire amortized cost basis of these securities. In performing this evaluation, we considered the recovery periods for securities in previous periods of broad market declines. 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 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 Available for Sale				Fixed Maturity Securities in a Loss Position Available for Sale
December 31, 2012 (in millions)
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	11,801	$	12,001	$	717	$	713
Due after one year through five years		51,646		54,918		3,239		3,162
Due after five years through ten years		72,091		79,531		4,641		4,510
Due after ten years		61,842		70,650		6,602		6,283
Mortgage-backed, asset-backed and collateralized		48,769		52,859		7,025		6,160
Total	$	246,149	$	269,959	$	22,224	$	20,828

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 redemptions of our available for sale securities:

	Years Ended December 31,
	2012				2011				2010
(in millions)	Gross Realized Gains		Gross Realized Losses		Gross Realized Gains		Gross Realized Losses		Gross Realized Gains		Gross Realized Losses
Fixed maturity securities	$	2,778	$	171	$	2,042	$	129	$	2,138	$	292
Equity securities		515		31		199		35		811		86
Total	$	3,293	$	202	$	2,241	$	164	$	2,949	$	378

For the year ended December 31, 2012, 2011 and 2010, the aggregate fair value of available for sale securities sold was $40.3 billion, $44.0 billion and $56.0 billion, which resulted in net realized capital gains of $3.1 billion, $2.1 billion and $2.6 billion, respectively.

Trading Securities

The following table presents the fair value of our trading securities:

	December 31, 2012					December 31, 2011
(in millions)	Fair Value		Percent of Total			Fair Value		Percent of Total
Fixed maturities:
U.S. government and government sponsored entities	$	6,794		27	%	$	6,462		26	%
Obligations of states, territories and political subdivisions		–		–			257		1
Non-U.S. governments		2		–			35		–
Corporate debt		1,320		5			816		3
Mortgage-backed, asset-backed and collateralized:
RMBS		1,727		7			1,648		7
CMBS		2,236		9			1,837		8
CDO/ABS and other collateralized*		12,497		50			6,324		26
Total mortgage-backed, asset-backed and collateralized		16,460		66			9,809		41
ML II		–		–			1,321		5
ML III		8		–			5,664		23
Total fixed maturities		24,584		98			24,364		99
Equity securities		662		2			125		1
Total	$	25,246		100	%	$	24,489		100	%

* Includes $0.9 billion of U.S. Government agency backed ABS.

Maiden Lane III

The FRBNY completed the liquidation of ML III assets during the third quarter of 2012 and substantially all of the sales proceeds have been distributed in accordance with the priority of payments of the transaction. In 2012, we received total payments of approximately $8.5 billion, which included contractual and additional distributions and our original $5.0 billion equity interest in ML III.

In 2012, we purchased $7.1 billion of securities through the FRBNY's auction of ML III assets.

Other Invested Assets

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

December 31, (in millions)	2012		2011
Alternative investments(a)	$	18,990	$	18,793
Mutual funds		128		258
Investment real estate(b)		3,195		2,778
Aircraft asset investments(c)		984		1,100
Life settlement contracts		4,357		4,006
Retained interest in AIA		–		12,367
All other investments		1,463		1,442
Total	$	29,117	$	40,744

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

(b)     Net of accumulated depreciation of $469 million and $428 million in 2012 and 2011, respectively.

(c)     Consist primarily of AIG Life and Retirement investments in aircraft equipment held in 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 DIB investments, 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 (loss). These investments are subject to other-than-temporary impairment evaluation (see below for discussion on evaluating equity investments for other-than-temporary impairment). The gross unrealized loss recorded in Accumulated other comprehensive income on such investments was $68 million and $269 million at December 31, 2012 and 2011, respectively, the majority of which pertains to investments in private equity funds and hedge funds that have been in continuous unrealized loss position 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. Under the equity method of accounting, our carrying value 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 DIB investments, 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.

Direct private equity investments entered into for strategic purposes and not solely for capital appreciation or for income generation are also accounted for under the equity method. Dividends received from our other strategic investments were $8 million, $17 million and $25 million for the years ended December 31, 2012, 2011, and 2010, respectively. The undistributed earnings of other strategic investments in which our ownership interest is less than 50 percent were $51 million, $9 million and $8 million at December 31, 2012, 2011, and 2010, respectively.

On October 29, 2010, we completed an IPO of 8.08 billion ordinary shares of AIA for aggregate gross proceeds of approximately $20.5 billion. Upon completion of the IPO, we owned 33 percent of AIA's outstanding shares. Accordingly, we deconsolidated AIA and recorded a pre-tax gain of $16.3 billion in 2010. On March 7, 2012, we sold approximately 1.72 billion ordinary shares of AIA for gross proceeds of approximately $6.0 billion. On September 11, 2012, we sold approximately 600 million ordinary shares of AIA for gross proceeds of approximately $2.0 billion. On December 20, 2012, we sold approximately 1.65 billion ordinary shares of AIA for gross proceeds of approximately $6.5 billion. As a result of these sales, we retained no interest in AIA as of December 31, 2012. We accounted for our investment in AIA under the fair value option with gains and losses recorded in Net investment income. We recorded fair value option gains from our investment in AIA of $2.1 billion and $1.3 billion for the years ended December 31, 2012 and 2011, and a fair value option loss of $0.6 billion for the year ended December 31, 2010. At December 31, 2011, the fair value of our 33 percent retained interest in AIA was approximately $12.4 billion, and was included in Other invested assets.

The following table presents the carrying value and ownership percentage of AIA and all other equity method investments:

	2012				2011
(in millions, except percentages)	Carrying Value		Ownership Percentage		Carrying Value		Ownership Percentage
AIA	$	–	–	%	$	12,367		33	%
All other equity method investments		11,544	Various			9,026		Various
Total	$	11,544			$	21,393

Summarized Financial Information of AIA

The following is summarized financial information of AIA:

Year Ended December 31, (in millions)	2011
Operating results:
Total revenues	$	13,802
Total expenses		(12,436	)
Net income	$	1,366

At December 31, (in millions)	2011
Balance sheet:
Total assets	$	112,673
Total liabilities	$	(90,894	)

Substantially all of AIA's assets consist of financial investments and deferred acquisition and origination costs and substantially all of its liabilities consist of insurance- and investment-contract-related liabilities.

Summarized financial information for AIA was as of and for the year ended 2011. AIA was consolidated through October 28, 2010. As a result, comparable amounts for 2010 are not being presented.

Summarized Financial Information of Other Equity Method Investees

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

Years Ended December 31, (in millions)	2012			2011			2010
Operating results:
Total revenues	$	9,438		$	12,749		$	14,079
Total expenses		(5,183	)		(3,530	)		(3,812	)
Net income	$	4,255		$	9,219		$	10,267

At December 31, (in millions)	2012			2011
Balance sheet:
Total assets	$	139,681		$	95,749
Total liabilities	$	(26,529	)	$	(22,379	)

Summarized financial information for these equity method investees may be presented on a lag, due to the unavailability of information for the investees at the respective balance sheet date, and is included for the periods in which we held an equity method ownership interest. Summarized financial information for investees of entities that have been divested or are held-for-sale is not included in the table above.

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 subject to impairment review, as discussed below.

Investments in Life Settlement Contracts

Life settlement contracts are accounted for under the investment method. Under the investment method, we recognize our initial investment in life settlement contracts 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 value of the investment. We recognize income on individual life settlement contracts when the insured dies, at an amount equal to the excess of the contract proceeds over the carrying amount of the contract at that time. Contracts are reviewed for indications that the expected future proceeds from the contract would not be sufficient to recover our estimated future carrying amount of the contract, which is the current carrying amount for the contract plus anticipated undiscounted future premiums and other capitalizable future costs. Any such contracts identified are written down to their estimated fair value.

During 2012, 2011 and 2010, income recognized on life settlement contracts was $253 million, $320 million and $213 million, respectively, and is included in Net investment income in the Consolidated Statement of Operations. Our life settlement contracts reported above are monitored for impairment on a contract-by-contract basis quarterly. Impairment charges on life settlement contracts included in net realized capital gains (losses) totaled $309 million, $312 million and $74 million in 2012, 2011, and 2010 respectively.

The following table presents further information regarding life settlement contracts:

	December 31, 2012
(dollars in millions)	Number of Contracts		Carrying Value		Face Value(Death Benefits)
Remaining Life Expectancy of Insureds:
0 - 1 year		1	$	3	$	8
1 - 2 years		29		19		35
2 - 3 years		90		138		269
3 - 4 years		234		250		554
4 - 5 years		296		283		723
Thereafter		5,023		3,509		16,067
Total		5,673	$	4,202	$	17,656

At December 31, 2012, the anticipated life insurance premiums required to keep the life settlement contracts in force, payable in the next 12 months ending December 31, 2013 and the four succeeding years ending December 31, 2017 are $546 million, $555 million, $562 million, $554 million and $555 million, respectively.

Net Investment Income

Net investment income represents income primarily from the following sources in our insurance operations and AIG Parent:

•

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 stock and distributions from other investments.

•

Realized and unrealized gains and losses from investments in trading securities accounted for at fair value and investments for which the fair value option has been elected.

•

Earnings from private equity funds and hedge fund investments accounted for under the equity method.

•

The difference between the carrying amount of a life settlement contract 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, AIA and MetLife 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)	2012		2011			2010
Fixed maturity securities, including short-term investments	$	12,592	$	11,814		$	14,445
Change in fair value of ML II		246		42			513
Change in fair value of ML III		2,888		(646	)		1,792
Change in fair value of AIA securities including realized gain in 2012		2,069		1,289			(638	)
Change in the fair value of MetLife securities prior to their sale		–		(157	)		665
Equity securities		162		92			234
Interest on mortgage and other loans		1,083		1,065			1,268
Alternative investments*		1,769		1,622			1,957
Real estate		127		107			126
Other investments		11		36			177
Total investment income before policyholder income and trading gains		20,947		15,264			20,539
Policyholder investment income and trading gains		–		–			886
Total investment income		20,947		15,264			21,425
Investment expenses		604		509			491
Net investment income	$	20,343	$	14,755		$	20,934

* Includes hedge funds, private equity funds, affordable housing partnerships 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 fixed maturity securities and equity securities (except trading securities accounted for at fair value and investments for which the fair value option has been elected), real estate, investments in private equity funds and hedge funds and other types of investments.

•

Reductions to the cost basis of fixed maturity securities and equity securities (except trading securities accounted for at fair value and investments for which the fair value option has been elected) and other invested assets for other-than-temporary impairments.

•

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) and the increase (decrease) in unrealized appreciation of our available for sale securities:

Years Ended December 31, (in millions)	2012			2011			2010
Sales of fixed maturity securities	$	2,607		$	1,913		$	1,846
Sales of equity securities		484			164			725
Other-than-temporary impairments:
Severity		(44	)		(51	)		(73	)
Change in intent		(62	)		(12	)		(441	)
Foreign currency declines		(8	)		(32	)		(63	)
Issuer-specific credit events		(1,048	)		(1,165	)		(2,457	)
Adverse projected cash flows		(5	)		(20	)		(5	)
Provision for loan losses		104			48			(304	)
Change in the fair value of MetLife securities prior to their sale		–			(191	)		315
Foreign exchange transactions		(234	)		(93	)		191
Derivative instruments		(684	)		448			(416	)
Other		(181	)		(308	)		(34	)
Net realized capital gains (losses)	$	929		$	701		$	(716	)
Increase in unrealized appreciation of investments:
Fixed maturities	$	10,599		$	5,578		$	8,677
Equity securities		(232	)		(206	)		473
Other investments		343			146			156
Increase in unrealized appreciation*	$	10,710		$	5,518		$	9,306

* 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 earnings. 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 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:

Years Ended December 31, (in millions)	2012			2011			2010
Balance, beginning of year	$	6,504		$	6,786		$	7,803
Increases due to:
Credit impairments on new securities subject to impairment losses		194			235			627
Additional credit impairments on previously impaired securities		483			735			1,294
Reductions due to:
Credit impaired securities fully disposed for which there was no prior intent or requirement to sell		(1,105	)		(529	)		(1,039	)
Credit impaired securities for which there is a current intent or anticipated requirement to sell		(5	)		–			(503	)
Accretion on securities previously impaired due to credit*		(915	)		(544	)		(332	)
Hybrid securities with embedded credit derivatives reclassified to Bond trading securities		–			(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 impaired securities as well as the accretion due to the passage of time.

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

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.

On a quarterly basis, the undiscounted expected future cash flows associated with PCI securities are re-evaluated based on updates to key assumptions. Declines in undiscounted expected future cash flows due to further credit deterioration as well as changes in the expected timing of the cash flows can result in the recognition of an other-than-temporary impairment charge, as PCI securities are subject to our policy for evaluating investments for other-than-temporary impairment. Changes to undiscounted expected future cash flows due solely to the changes in the 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 are recognized 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)	$	18,708
Cash flows expected to be collected*		14,626
Recorded investment in acquired securities		9,379

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

(in millions)	December 31, 2012		December 31, 2011
Outstanding principal balance	$	11,791	$	10,119
Amortized cost		7,718		7,006
Fair value		8,823		6,535

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

Years Ended December 31, (in millions)	2012			2011
Balance, beginning of year	$	4,135		$	–
Newly purchased PCI securities		1,620			3,943
Disposals		(298	)		–
Accretion		(672	)		(324	)
Effect of changes in interest rate indices		(213	)		(62	)
Net reclassification from non-accretable difference, including effects of prepayments		194			578
Balance, end of year	$	4,766		$	4,135

Pledged Investments

Secured Financing and Similar Arrangements

We enter into financing transactions whereby certain securities are transferred 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. Where 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. We treat these transactions as secured financing arrangements.

Secured financing transactions also include securities 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.

Under the secured financing transactions described above, securities available for sale with a fair value of $8.2 billion and $2.3 billion at December 31, 2012 and December 31, 2011, respectively, and trading securities with a fair value of $3.0 billion and $2.8 billion at December 31, 2012 and December 31, 2011, respectively, were pledged to counterparties.

Prior to January 1, 2012, in the case of repurchase agreements where we did not obtain collateral sufficient to fund substantially all of the cost of purchasing identical replacement securities during the term of the contract (generally less than 90 percent of the security value), we accounted for the transaction as a sale of the security and reported the obligation to repurchase the security as a derivative contract. The fair value of securities transferred under repurchase agreements accounted for as sales was $2.1 billion at December 31, 2011. Effective January 1, 2012, the level of collateral received by the transferor in a repurchase agreement or similar arrangement is no longer relevant in determining whether the transaction should be accounted for as a sale. There were no repurchase agreements accounted for as sales as of December 31, 2012.

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 fair value of securities collateral pledged to us was $11.0 billion and $6.8 billion at December 31, 2012 and December 31, 2011, respectively, of which $33 million and $122 million was repledged by us.

Insurance – Statutory and Other Deposits

Total carrying values of cash and securities deposited by our insurance subsidiaries under requirements of regulatory authorities or other insurance-related arrangements, including certain annuity-related obligations and certain reinsurance agreements, were $8.9 billion and $9.8 billion at December 31, 2012 and 2011, 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. These subsidiaries owned an aggregate of $84 million and $77 million of stock in FHLBs at December 31, 2012 and December 31, 2011, 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 $341 million at December 31, 2012, 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 $4.4 billion and $5.1 billion at December 31, 2012 and December 31, 2011, 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.