AIG 2011 Annual Report Download - page 260

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
result of changes in interest rates and their effect on the underlying floating rate securities as well as expectations
of defaults, recoveries and prepayments on underlying loans.
The LIBOR interest rate curve changes are determined based on observable prices, interpolated or extrapolated
to derive a LIBOR for a specific maturity term as necessary. The spreads over LIBOR for the Maiden Lane
Interests (including collateral-specific credit and liquidity spreads) can change as a result of changes in market
expectations about the future performance of these investments as well as changes in the risk premium that
market participants would demand at the time of the transactions.
Changes in the discount rate or the estimated future cash flows used in the valuation would alter AIG’s estimate
of the fair value of AIG’s interest in ML III as shown in the table below.
Year Ended December 31, 2011 Maiden Lane III
(in millions) Fair Value Change
Discount Rates:
200 basis point increase $ (585)
200 basis point decrease 668
400 basis point increase (1,101)
400 basis point decrease 1,433
Estimated Future Cash Flows:
10% increase 658
10% decrease (664)
20% increase 1,309
20% decrease (1,338)
If the FRBNY were to announce a plan to liquidate the assets of ML III at their estimated fair values, similar
to their disclosed plan for ML II, the impact of the change in AIG’s assumptions would be an increase in the fair
value of AIG’s interest in ML III by approximately $685 million at December 31, 2011.
AIG believes that the ranges of discount rates used in these analyses are reasonable on the basis of implied
spread volatilities of similar collateral securities. The ranges of estimated future cash flows were determined on
the basis of historical variability in the estimated cash flows. Because of these factors, the fair values of the
Maiden Lane Interests are likely to vary, perhaps materially, from the amounts estimated.
Equity Securities Traded in Active Markets – Trading and Available for Sale
Whenever available, AIG obtains quoted prices in active markets for identical assets at the balance sheet date
to measure at fair value marketable equity securities in its trading and available for sale portfolios or in Other
invested assets. Market price data is generally obtained from exchange or dealer markets.
Mortgage and Other Loans Receivable
AIG estimates the fair value of mortgage and other loans receivable that are measured at fair value by using
dealer quotations, discounted cash flow analyses and/or internal valuation models. The determination of fair value
considers inputs such as interest rate, maturity, the borrower’s creditworthiness, collateral, subordination,
guarantees, past-due status, yield curves, credit curves, prepayment rates, market pricing for comparable loans and
other relevant factors.
Other Invested Assets
AIG initially estimates the fair value of investments in certain hedge funds, private equity funds and other
investment partnerships by reference to the transaction price. Subsequently, AIG generally obtains the fair value
246 AIG 2011 Form 10-K