AIG 2011 Annual Report Download - page 261

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of these investments from net asset value information provided by the general partner or manager of the
investments, the financial statements of which are generally audited annually. AIG considers observable market
data and performs certain control procedures to validate the appropriateness of using the net asset value as a fair
value measurement. The fair values of other investments carried at fair value, such as direct private equity
holdings, are initially determined based on transaction price and are subsequently estimated based on available
evidence such as market transactions in similar instruments and other financing transactions of the issuer, with
adjustments made to reflect illiquidity as appropriate.
Short-term Investments
For short-term investments that are measured at fair value, the carrying values of these assets approximate fair
values because of the relatively short period of time between origination and expected realization, and their
limited exposure to credit risk.
Securities Purchased Under Agreements to Resell
Securities purchased under agreements to resell are generally treated as collateralized receivables. AIG reports
certain receivables arising from securities purchased under agreements to resell in Short-term investments in the
Consolidated Balance Sheet. AIG uses market-observable interest rates for receivables measured at fair value.
This methodology considers such factors as the coupon rate, yield curves and other relevant factors.
Separate Account Assets
Separate account assets are composed primarily of registered and unregistered open-end mutual funds that
generally trade daily and are measured at fair value in the manner discussed above for equity securities traded in
active markets.
Freestanding Derivatives
Derivative assets and liabilities can be exchange-traded or traded over-the-counter (OTC). AIG generally values
exchange-traded derivatives such as futures and options using quoted prices in active markets for identical
derivatives at the balance sheet date.
OTC derivatives are valued using market transactions and other market evidence whenever possible, including
market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or
alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a
particular model to value an OTC derivative depends on the contractual terms of, and specific risks inherent in
the instrument, as well as the availability of pricing information in the market. AIG generally uses similar models
to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market
prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such
inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model
inputs can generally be corroborated by observable market data by correlation or other means, and model
selection does not involve significant management judgment.
Certain OTC derivatives trade in less liquid markets with limited pricing information, and the determination of
fair value for these derivatives is inherently more difficult. When AIG does not have corroborating market
evidence to support significant model inputs and cannot verify the model to market transactions, the transaction
price may provide the best estimate of fair value. Accordingly, when a pricing model is used to value such an
instrument, the model is adjusted so the model value at inception equals the transaction price. AIG will update
valuation inputs in these models only when corroborated by evidence such as similar market transactions, third
party pricing services and/or broker or dealer quotations, or other empirical market data. When appropriate,
valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such
adjustments are generally based on available market evidence. In the absence of such evidence, management’s best
estimate is used.
AIG 2011 Form 10-K 247