AIG 2013 Annual Report Download - page 249

discussed further below, control processes are applied to the fair values received from third-party valuation services
to ensure the accuracy of these values.
Valuation service providers typically obtain data about market transactions and other key valuation model inputs from
multiple sources and, through the use of market-accepted valuation methodologies, which may utilize matrix pricing,
financial models, accompanying model inputs and various assumptions, provide a single fair value measurement for
individual securities. The inputs used by the valuation service providers include, but are not limited to, market prices
from completed transactions for identical securities and transactions for comparable securities, benchmark yields,
interest rate yield curves, credit spreads, currency rates, quoted prices for similar securities and other market-
observable information, as applicable. If fair value is determined using financial models, these models generally take
into account, among other things, market observable information as of the measurement date as well as the specific
attributes of the security being valued, including its term, interest rate, 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.
We have 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. We assess the
reasonableness of individual security values received from valuation service providers through various analytical
techniques, and have procedures to escalate related questions internally and to the third party valuation services for
resolution. To assess the degree of pricing consensus among various valuation services for specific asset types, we
have conducted comparisons of prices received from available sources. We have used these comparisons to
establish a hierarchy for the fair values received from third party valuation services to be used for particular security
classes. We also validate 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 our 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
market accepted valuation models. Broker prices may be based on an income approach, which converts expected
future cash flows to a single present value amount, with specific consideration of inputs relevant to particular security
types. For structured securities, such inputs may include ratings, collateral types, geographic concentrations,
underlying loan vintages, loan delinquencies and defaults, prepayments, and weighted average coupons and
maturities. When the volume or level of market activity for a security is limited, certain inputs used to determine fair
value may not be observable in the market. Broker prices may also be based on a market approach that considers
recent transactions involving identical or similar securities. 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. 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 comparable securities, adjusted for illiquidity and structure. Fair values determined internally are
also subject to management review to ensure that valuation models and related inputs are reasonable.
The methodology above is relevant for all fixed maturity securities including residential mortgage backed securities
(RMBS), commercial mortgage backed securities (CMBS), collateralized debt obligations (CDO), other asset-backed
securities (ABS) and fixed maturity securities issued by government sponsored entities and corporate entities.
Whenever available, we obtain quoted prices in active markets for identical assets at the balance sheet date to
measure equity securities at fair value. Market price data is generally obtained from exchange or dealer markets.
Equity Securities Traded in Active Markets
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AIG 2013 Form 10-K 231
ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
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