AIG 2011 Annual Report Download - page 259

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which converts expected future cash flows to a single present value amount, with specific consideration of inputs
relevant to structured securities, including ratings, collateral types, geographic concentrations, underlying loan
vintages, loan delinquencies, and weighted average coupons and maturities. Broker prices may also be based on a
market approach that considers recent transactions involving identical or similar securities. When the volume or
level of market activity for an investment in RMBS, CMBS, CDOs or other ABS is limited, certain inputs used to
determine fair value may not be observable in the market.
Maiden Lane Interests
At their inception, AIG’s interests in ML II and ML III were valued and recorded at the transaction prices of
$1 billion and $5 billion, respectively.
Subsequently, AIG’s interest in ML III has been valued using a discounted cash flow methodology that (i) uses
the estimated future cash flows and the fair value of the ML III assets, (ii) allocates the estimated future cash
flows according to the ML III waterfall, and (iii) determines the discount rate to be applied to AIG’s interest in
ML III by reference to the discount rate implied by the estimated value of ML III assets and the estimated future
cash flows of AIG’s interest in the capital structure. Estimated cash flows and discount rates used in the valuations
are validated, to the extent possible, using market observable information for securities with similar asset pools,
structure and terms.
The fair value methodology used since inception and prior to March 31, 2011 for AIG’s interest in ML II had
used the same discounted cash flow methodology as for ML III. As a result of the announcement on March 31,
2011 by the FRBNY of its plan to begin selling the assets in the ML II portfolio over time through a competitive
sales process, AIG modified its methodology for estimating the fair value of its interest in ML II to incorporate
the assumption of a current liquidation, which (i) uses the estimated fair value of the ML II assets and
(ii) allocates the estimated asset fair value according to the ML II waterfall.
AIG does not believe a change in the fair value methodology used for its interest in ML III is appropriate at
this time based on current available information. Other methodologies employed or assumptions made in
determining fair value for these investments could result in amounts that differ significantly from the amounts
reported.
Adjustments to the fair value of AIG’s interest in ML II are recorded in the Consolidated Statement of
Operations in Net investment income for SunAmerica’s domestic life insurance companies. Adjustments to the fair
value of AIG’s interest in ML III are recorded in the Consolidated Statement of Operations in Net investment
income for AIG’s Other operations.
AIG expects to receive repayment of its initial investment as well as incremental undiscounted cash flows and
accrued interest on the Maiden Lane Interests after repayment of the first priority obligations owed to the
FRBNY. On February 8, 2012, the FRBNY announced that the proceeds from the most recent sale of ML II
assets would enable the repayment of the entire remaining outstanding balance of the senior loan from the
FRBNY to ML II. AIG therefore, expects to begin receiving repayment of its $1 billion initial investment in ML
II, plus accrued interest, commencing in 2012. Any proceeds in excess of AIG’s principal and interest will be
allocated five-sixths to the FRBNY and one-sixth to AIG. Under the terms of the Master Transaction Agreement
dated December 8, 2010, among AIG Parent, AM Holdings LLC (formerly known as ALICO Holdings LLC),
AIA Aurora LLC, the FRBNY, the Department of the Treasury, and the Trust, all payments received by AIG
from ML II will be required to be used to pay down the liquidation preference of the AIA SPV Preferred
Interests. The fair value of AIG’s interest in ML II is most affected by the liquidation proceeds realized by the
FRBNY from the sale of the collateral securities. A 10 percent change in the liquidation proceeds realized by the
FRBNY would result in a change of approximately $152 million in the fair value of the ML II interest. The fair
value of AIG’s interest in ML III is most affected by changes in the discount rates and changes in the estimated
future collateral cash flows used in the valuation. Changes in estimated future cash flows for ML III would be the
AIG 2011 Form 10-K 245