AIG 2009 Annual Report Download - page 160

American International Group, Inc., and Subsidiaries
the size of the credit exposure, a decline in the fair value of this portfolio could have a material adverse effect on
AIG’s consolidated results of operations for an individual reporting period or to AIG’s consolidated financial
condition.
Key Assumptions Used in the BET model — Multi-Sector CDOs
The most significant assumption used in the BET model is the estimated price of the individual securities within the
CDO collateral pools. The following table summarizes the gross transaction notional weighted average price by ABS
category.
Gross Transaction Notional Weighted
Average Price at December 31,
2009 2008
ABS Category
RMBS Prime 64.35% 50.46%
RMBS Alt-A 37.47 31.68
RMBS Subprime 29.32 29.02
CMBS 67.14 54.50
CDOs 19.01 17.53
Other 70.62 50.92
Total 42.75% 36.65%
Prices for the individual securities held by a CDO are obtained in most cases from the CDO collateral managers, to
the extent available. For the years ended December 31, 2009 and 2008, CDO collateral managers provided market
prices for 62.8 percent and 61.2 percent of the underlying securities, respectively. When a price for an individual
security is not provided by a CDO collateral manager, AIGFP derives the price through a pricing matrix using prices
from CDO collateral managers for similar securities. Matrix pricing is a mathematical technique used principally to
value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the
relationship of the security to other benchmark-quoted securities. Substantially all of the CDO collateral managers
who provided prices used dealer prices for all or part of the underlying securities, in some cases supplemented by
third-party pricing services.
The BET model also uses diversity scores, weighted average lives, recovery rates and discount rates. The
determination of some of these inputs requires the use of judgment and estimates, particularly in the absence of
market-observable data. Diversity scores (which reflect default correlations between the underlying securities of a
CDO) are obtained from CDO trustees or implied from default correlations. Weighted average lives of the underlying
securities are obtained, when available, from external subscription services such as Bloomberg and Intex and, if not
available, AIGFP utilizes an estimate reflecting known weighted average lives.
Collateral recovery rates are obtained from the multi-sector CDO recovery data of a major rating agency. AIGFP
utilizes a LIBOR-based interest rate curve to derive its discount rates.
AIGFP employs similar control processes to validate these model inputs as those used to value AIG’s investment
portfolio as described in Fair Value Measurements of Certain Financial Assets and Liabilities — Overview. The
effects of the adjustments resulting from the validation process were de minimis for each period presented.
Valuation Sensitivity — Arbitrage Portfolio
Multi-Sector CDOs
AIG utilizes sensitivity analyses that estimate the effects of using alternative pricing and other key inputs on AIG’s
calculation of the unrealized market valuation loss related to the AIGFP super senior credit default swap portfolio.
While AIG believes that the ranges used in these analyses are reasonable, given the current difficult market
conditions, AIG is unable to predict which of the scenarios is most likely to occur. As recent experience demonstrates,
AIG 2009 Form 10-K 152