AIG 2011 Annual Report Download - page 273

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transfers of Level 3 Assets and Liabilities
AIG’s policy is to transfer assets and liabilities into Level 3 when a significant input cannot be corroborated
with market observable data. This may include circumstances in which market activity has dramatically decreased
and transparency to underlying inputs cannot be observed, current prices are not available and substantial price
variances in quotations among market participants exist.
In certain cases, the inputs used to measure the fair value may fall into different levels of the fair value
hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its
entirety falls is determined based on the lowest level input that is significant to the fair value measurement. AIG’s
assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment.
In making the assessment, AIG considers factors specific to the asset or liability.
AIG’s policy is to record transfers of assets and liabilities into or out of Level 3 at their fair values as of the
end of each reporting period, consistent with the date of the determination of fair value. As a result, the Net
realized and unrealized gains (losses) included in income or other comprehensive income and as shown in the
table above excludes $68 million of net losses related to assets and liabilities transferred into Level 3 during 2011,
and includes $45 million of net gains related to assets and liabilities transferred out of Level 3 during 2011.
Transfers of Level 3 Assets
During the year ended December 31, 2011, transfers into Level 3 included certain RMBS, CMBS, ABS, private
placement corporate debt and certain private equity funds and hedge funds. The transfers into Level 3 of
investments in certain RMBS, CMBS and certain ABS were due to a decrease in market transparency, downward
credit migration and an overall increase in price disparity for certain individual security types. The downward
credit migration in part reflected AIG’s move to using composite credit ratings for these securities commencing in
2011, in order to reduce reliance on any single rating agency. Transfers into Level 3 for private placement
corporate debt and certain other ABS were primarily the result of AIG adjusting matrix pricing information
downward to better reflect the additional risk premium associated with those securities that AIG believes was not
captured in the matrix. Certain private equity funds and hedge funds were transferred into Level 3 due to these
investments being carried at fair value and no longer being accounted for using the equity method of accounting,
consistent with the changes to AIG’s ownership and lack of ability to exercise significant influence over the
respective investments. Other private equity funds and hedge funds transferred into Level 3 represented interests
in hedge funds carried at fair value with limited market activity due to fund-imposed redemption restrictions.
Assets are transferred out of Level 3 when circumstances change such that significant inputs can be
corroborated with market observable data. This may be due to a significant increase in market activity for the
asset, a specific event, one or more significant input(s) becoming observable or when a long-term interest rate
significant to a valuation becomes short-term and thus observable. In addition, transfers out of Level 3 also occur
when investments are no longer carried at fair value as the result of a change in the applicable accounting
methodology, given changes in the nature and extent of AIG’s ownership interest. During the year ended
December 31, 2011, transfers out of Level 3 primarily related to investments in private placement corporate debt,
investments in certain CMBS and ABS and certain private equity funds and hedge funds. Transfers out of Level 3
for private placement corporate debt and for certain ABS were primarily the result of AIG using observable
pricing information or a third party pricing quotation that appropriately reflects the fair value of those securities,
without the need for adjustment based on AIG’s own assumptions regarding the characteristics of a specific
security or the current liquidity in the market. Transfers out of Level 3 for certain CMBS and certain other ABS
investments were primarily due to increased observations of market transactions and price information for those
securities. Certain private equity funds and hedge funds were transferred out of Level 3 due to these investments
no longer being carried at fair value, based on AIG’s use of the equity method of accounting consistent with the
changes to AIG’s ownership and ability to exercise significant influence over the respective investments.
AIG 2011 Form 10-K 259