AIG 2008 Annual Report Download - page 245

(b) Net realized and unrealized gains and losses shown above are reported in the consolidated statement of income
(loss) primarily as follows:
Major Category of Assets/Liabilities Consolidated Statement of Income (Loss) Line Items
Financial Services assets and liabilities • Other income
• Unrealized market valuation losses on AIGFP super senior
credit default swap portfolio
Securities lending invested collateral • Net realized capital gains (losses)
Other invested assets • Net realized capital gains (losses)
Policyholder contract deposits • Policyholder benefits and claims incurred
• Net realized capital gains (losses)
Both observable and unobservable inputs may be used to determine the fair values of positions classified in
Level 3 in the tables above. As a result, the unrealized gains (losses) on instruments held at December 31, 2008 may
include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and
unobservable inputs (e.g., changes in unobservable long-dated volatilities).
AIG uses various hedging techniques to manage risks associated with certain positions, including those
classified within Level 3. Such techniques may include the purchase or sale of financial instruments that are
classified within Level 1 and/or Level 2. As a result, the realized and unrealized gains (losses) for assets and
liabilities classified within Level 3 presented in the table above do not reflect the related realized or unrealized gains
(losses) on hedging instruments that are classified within Level 1 and/or Level 2.
Changes in the fair value of separate and variable account assets are completely offset in the consolidated
statement of income (loss) by changes in separate and variable account liabilities, which are not carried at fair value
and therefore not included in the tables above.
Fair Value Measurements on a Non-Recurring Basis
AIG also measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually, or
when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
These assets include held to maturity securities (in periods prior to the third quarter of 2008), cost and equity-
method investments, life settlement contracts, flight equipment, collateral securing foreclosed loans and real estate
and other fixed assets, goodwill, and other intangible assets. AIG uses a variety of techniques to measure the fair
value of these assets when appropriate, as described below:
•Cost and Equity-Method Investments: When AIG determines that the carrying value of these assets may
not be recoverable, AIG records the assets at fair value with the loss recognized in income. In such cases,
AIG measures the fair value of these assets using the techniques discussed in Fair Value Measurements on a
Recurring Basis — Fair Value Hierarchy, above, for fixed maturities and equity securities.
•Life Settlement Contracts: AIG measures the fair value of individual life settlement contracts (which are
included in other invested assets) whenever the carrying value plus the undiscounted future costs that are
expected to be incurred to keep the life settlement contract in force exceed the expected proceeds from the
contract. In those situations, the fair value is determined on a discounted cash flow basis, incorporating
current life expectancy assumptions. The discount rate incorporates current information about market
interest rates, the credit exposure to the insurance company that issued the life settlement contract and AIG’s
estimate of the risk margin an investor in the contracts would require.
•Flight Equipment Primarily Under Operating Leases: When AIG determines the carrying value of its
commercial aircraft may not be recoverable, AIG records the aircraft at fair value with the loss recognized in
income. AIG measures the fair value of its commercial aircraft using an income approach based on the
present value of all cash flows from existing and projected lease payments (based on historical experience
and current expectations regarding market participants) including net contingent rentals for the period
AIG 2008 Form 10-K 239
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)