AIG 2008 Annual Report Download - page 236

4. Fair Value Measurements
Effective January 1, 2008, AIG adopted FAS 157 and FAS 159, which specify measurement and disclosure
standards related to assets and liabilities measured at fair value. See Note 1 herein for additional information.
The most significant effect of adopting FAS 157 on AIG’s results of operations for 2008 related to changes in
fair value methodologies with respect to both liabilities already carried at fair value, primarily hybrid notes and
derivatives, and newly elected liabilities measured at fair value (see FAS 159 discussion below). Specifically, the
incorporation of AIG’s own credit spreads and the incorporation of explicit risk margins (embedded policy
derivatives at transition only) to reflect the risk of AIG’s non-performance resulted in an increase of $1.8 billion to
pre-tax income ($1.2 billion after tax) for 2008, as follows:
Twelve Months Ended
December 31, 2008
Liabilities Carried
at Fair Value Business Segment Affected
Net Pre-Tax
Increase (Decrease)
(In millions)
Income statement caption:
Net realized capital losses ........... $ 542 Freestanding
derivatives
All segments —
excluding AIGFP
(155) Embedded policy
derivatives
Life Insurance &
Retirement Services
Unrealized market valuation losses on
AIGFP super senior credit default
swap portfolio .................. 185 Super senior credit
default swap portfolio
AIGFP
Other income ..................... 1,209 Notes, GIAs,
derivatives, other
liabilities
AIGFP
Net pre-tax increase .................. $1,781
Liabilities already carried at fair value .... $1,697
Newly elected liabilities measured at fair
value (FAS 159 elected) ............. 84
Net pre-tax increase .................. $1,781
Fair Value Measurements on a Recurring Basis
AIG measures at fair value on a recurring basis financial instruments in its trading and available for sale
securities portfolios, certain mortgage and other loans receivable, certain spot commodities, derivative assets and
liabilities, securities purchased (sold) under agreements to resell (repurchase), securities lending invested collateral,
non-traded equity investments and certain private limited partnerships and certain hedge funds included in other
invested assets, certain short-term investments, separate and variable account assets, certain policyholder contract
deposits, securities and spot commodities sold but not yet purchased, certain trust deposits and deposits due to banks
and other depositors, certain long-term debt, and certain hybrid financial instruments included in other liabilities.
The fair value of a financial instrument is the amount that would be received on sale of an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.
The degree of judgment used in measuring the fair value of financial instruments generally correlates with the
level of pricing observability. Financial instruments with quoted prices in active markets generally have more
pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments traded in
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
230 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)