AIG 2008 Annual Report Download - page 134

other-than-active markets or that do not have quoted prices have less observability and are measured at fair value
using valuation models or other pricing techniques that require more judgment. An active market is one in which
transactions for the asset or liability being valued occur with sufficient frequency and volume to provide pricing
information on an ongoing basis. An other-than-active market is one in which there are few transactions, the prices
are not current, price quotations vary substantially either over time or among market makers, or in which little
information is released publicly for the asset or liability being valued. Pricing observability is affected by a number
of factors, including the type of financial instrument, whether the financial instrument is new to the market and not
yet established, the characteristics specific to the transaction and general market conditions.
AIG management is responsible for the determination of the value of the financial assets and financial
liabilities carried at fair value and the supporting methodologies and assumptions. With respect to securities, AIG
employs independent third-party valuation service providers to gather, analyze, and interpret market information
and derive fair values based upon relevant methodologies and assumptions for individual instruments. When AIG’s
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 quote, which is generally non-binding, or by employing widely accepted internal
valuation models.
Valuation service providers typically obtain data about market transactions and other key valuation model
inputs from multiple sources and, through the use of widely accepted internal valuation models, provide a single fair
value measurement for individual securities for which a fair value has been requested under the terms of service
agreements. The inputs used by the valuation service providers include, but are not limited to, market prices from
recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads,
currency rates, and other market-observable information, as applicable. The valuation models 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 issue 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.
AIG employs specific control processes to determine the reasonableness of the fair values of AIG’s financial
assets and financial liabilities. AIG’s processes are designed to ensure that the values received or internally
estimated are accurately recorded and that the data inputs and the valuation techniques utilized are appropriate,
consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair
value. AIG assesses the reasonableness of individual security values received from valuation service providers
through various analytical techniques. In addition, AIG may validate the reasonableness of fair values by comparing
information obtained from AIG’s valuation service providers to other third-party valuation sources for selected
securities. AIG also validates prices for selected securities obtained from brokers through reviews by members of
management who have relevant expertise and who are independent of those charged with executing investing
transactions.
The fair value of fixed income and equity securities by source of value determination was as follows:
At December 31, 2008
Fair
Value
Percent
of Total
(In billions)
Fair value based on external sources(a) .............................. $387 91%
Fair value based on internal sources ................................ 38 9
Total fixed income and equity securities(b) ........................... $425 100%
(a) Includes $45.8 billion whose primary source is broker quotes.
(b) Includes available for sale, trading and securities lending invested collateral securities.
128 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries