AIG 2011 Annual Report Download - page 258

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
credit rating, industry sector, and when applicable, collateral quality and other security or issuer-specific
information. When market transactions or other market observable data is limited, the extent to which judgment is
applied in determining fair value is greatly increased.
AIG has control processes designed to ensure that the fair values received from third party valuation services
are accurately recorded, that their data inputs and valuation techniques are appropriate and consistently applied
and that the assumptions used appear reasonable and consistent with the objective of determining fair value. AIG
assesses the reasonableness of individual security values received from valuation service providers through various
analytical techniques, and has procedures to escalate related questions internally and to the third party valuation
services for resolution. In order to assess the degree of pricing consensus among various valuation services for
specific asset types, AIG has conducted comparisons of prices received from available sources. Management has
used these comparisons to establish a hierarchy for the fair values received from third party valuation services to
be used for particular security classes. AIG also validates prices for selected securities through reviews by
members of management who have relevant expertise and who are independent of those charged with executing
investing transactions.
When AIG’s third-party valuation service providers are unable to obtain sufficient market observable
information upon which to estimate the fair value for a particular security, fair value is determined either by
requesting brokers who are knowledgeable about these securities to provide a price quote, which is generally
non-binding, or by employing widely accepted valuation models. Fair values provided by brokers are subject to
similar control processes to those noted above for fair values from third party valuation services, including
management reviews. Fair values determined internally are also subject to management review in order to ensure
that valuation models and related inputs are reasonable.
The methodology above is relevant for all fixed maturity securities; following are discussions of certain
procedures unique to specific classes of securities.
Fixed Maturity Securities issued by Government Entities
For most debt securities issued by government entities, AIG obtains fair value information from independent
third-party valuation service providers, as quoted prices in active markets are generally only available for limited
debt securities issued by government entities. The fair values received from these valuation service providers may
be based on a market approach using matrix pricing, which considers a security’s relationship to other securities
for which quoted prices in an active market may be available, or alternatively based on an income approach, which
uses valuation techniques to convert future cash flows to a single present value amount.
Fixed Maturity Securities issued by Corporate Entities
For most debt securities issued by corporate entities, AIG obtains fair value information from independent
third-party valuation service providers. For certain corporate debt securities, AIG obtains fair value information
from brokers. For those corporate debt instruments (for example, private placements) that are not traded in active
markets or that are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and
non-transferability, and such adjustments generally are based on available market evidence. When observable price
quotations are not available, fair value is determined based on discounted cash flow models using discount rates
based on credit spreads, yields or price levels of publicly-traded debt of the issuer or other comparable securities,
adjusted for illiquidity and structure.
RMBS, CMBS, CDOs and other ABS
Independent third-party valuation service providers also provide fair value information for the majority of AIG
investments in RMBS, CMBS, CDOs and other ABS. Where pricing is not available from valuation service
providers, AIG obtains fair value information from brokers. Broker prices may be based on an income approach,
244 AIG 2011 Form 10-K