AIG 2007 Annual Report Download - page 237

American International Group, Inc. and Subsidiaries
Securities lending invested collateral and securities lending pay-
16. Fair Value of Financial Instruments
able: Securities lending collateral are floating rate fixed maturity
Continued
securities recorded at fair value. Fair values were based upon
differences between the closing price of the exchange-traded quoted market prices or internally developed models consistent
derivatives and their underlying instruments. with the methodology for other fixed maturity securities. The
OTC derivatives are valued using market transactions and other contract values of securities lending payable approximate fair
market evidence whenever possible, including market-based inputs value as these obligations are short-term in nature.
to models, model calibration to market clearing transactions,
broker or dealer quotations or alternative pricing sources with Spot commodities: Fair values were based on current market
reasonable levels of price transparency. When models are used, prices of reference spot futures contracts traded on exchanges.
the selection of a particular model to value an OTC derivative Cash, short-term investments, trade receivables, trade payables,
depends on the contractual terms of, and specific risks inherent securities purchased (sold) under agreements to resell (repur-
in, the instrument as well as the availability of pricing information chase), commercial paper and extendible commercial notes: The
in the market. AIG generally uses similar models to value similar carrying values of these assets and liabilities approximate fair
instruments. Valuation models require a variety of inputs, includ- values because of the relatively short period of time between
ing contractual terms, market prices and rates, yield curves, credit origination and expected realization.
curves, measures of volatility, prepayment rates and correlations
of such inputs. For OTC derivatives that trade in liquid markets, Other invested assets: Consisting principally of hedge funds and
such as generic forwards, swaps and options, model inputs can limited partnerships. Fair values are determined based on the net
generally be verified and model selection does not involve asset values provided by the general partner or manager of each
significant management judgment. investment. AIG obtains the fair value of its investments in limited
Certain OTC derivatives trade in less liquid markets with partnerships and hedge funds from information provided by the general
limited pricing information, and the determination of fair value for partner or manager of these investments, the accounts of which
these derivatives is inherently more difficult. When AIG does not generally are audited on an annual basis. The transaction price is used
have corroborating market evidence to support significant model as the best estimate of fair value at inception.
inputs and cannot verify the model to market transactions, Policyholders’ contract deposits: Fair values were estimated using
transaction price is initially used as the best estimate of fair discounted cash flow calculations based upon interest rates
value. Accordingly, when a pricing model is used to value such an currently being offered for similar contracts with maturities
instrument, the model is adjusted so that the model value at consistent with those remaining for the contracts being valued.
inception equals the transaction price. Subsequent to initial
recognition, AIG updates valuation inputs when corroborated by Securities and spot commodities sold but not yet purchased: The
evidence such as similar market transactions, third-party pricing carrying amounts for the securities and spot commodities sold but not
services and/or broker or dealer quotations, or other empirical yet purchased approximate fair values. Fair values for securities and
market data. When appropriate, valuations are adjusted for spot commodities sold short were based on current market prices.
various factors such as liquidity, bid/offer spreads and credit Trust deposits and deposits due to banks and other depositors:
considerations. Such adjustments are generally based on availa- To the extent certain amounts are not demand deposits or
ble market evidence. In the absence of such evidence, manage- certificates of deposit which mature in more than one year, fair
ment’s best estimate is used. values were not calculated as AIG believes it would have to
Mortgage and other loans receivable: When practical, the fair expend excessive costs for the benefits derived.
values of loans on real estate and collateral loans were estimated Commercial paper and extendible commercial notes: The carrying
using discounted cash flow calculations based upon AIG’s current amount approximates fair value.
incremental lending rates for similar type loans. The fair values of
the policy loans were not calculated as AIG believes it would have Long-term borrowings: When practical, the fair values of these
to expend excessive costs for the benefits derived. obligations were estimated using discounted cash flow calcula-
tions based upon AIG’s current incremental borrowing rates for
Finance receivables: Fair values were estimated using discounted similar types of borrowings with maturities consistent with those
cash flow calculations based upon the weighted average rates remaining for the debt being valued.
currently being offered for similar finance receivables.
AIG 2007 Form 10-K 183