AIG 2013 Annual Report Download - page 250

We estimate 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.
We initially estimate the fair value of investments in certain hedge funds, private equity funds and other investment
partnerships by reference to the transaction price. Subsequently, we generally obtain the fair value 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. We consider observable market data and perform
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, other financing transactions of the issuer and other available financial information
for the issuer, with adjustments made to reflect illiquidity as appropriate.
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 (reverse repurchase agreements) are
generally treated as collateralized receivables. We report certain receivables arising from securities purchased under
agreements to resell as Short-term investments in the Consolidated Balance Sheets. We use market-observable
interest rates for receivables measured at fair value. This methodology considers such factors as the coupon rate
and yield curves.
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.
Derivative assets and liabilities can be exchange-traded or traded over-the-counter (OTC). We generally value
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. We generally use 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.
For certain OTC derivatives that trade in less liquid markets, where we generally do 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,
Mortgage and Other Loans Receivable
Other Invested Assets
Short-term Investments
Separate Account Assets
Freestanding Derivatives
..................................................................................................................................................................................................................................
AIG 2013 Form 10-K232
ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
..................................................................................................................................................................................
............................................................................................................................................................................................
............................................................................................................................................................................................
............................................................................................................................................................................................
............................................................................................................................................................................................
............................................................................................................................................................................................