AIG 2009 Annual Report Download - page 246

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
incorporate counterparty credit risk by using discount rates that take into consideration cash issuance spreads for
similar instruments or other observable information.
Fixed Maturity Securities — Trading and Available for Sale
AIG maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair
value. Whenever available, AIG obtains quoted prices in active markets for identical assets at the balance sheet date
to measure at fair value fixed maturity securities in its trading and available for sale portfolios. Market price data
generally is obtained from dealer markets.
AIG estimates the fair value of fixed maturity securities not traded in active markets, including receivables
(payables) arising from securities purchased (sold) under agreements to resell (repurchase), and mortgage and other
loans receivable for which AIG elected the fair value option, by referring to traded securities with similar attributes,
using dealer quotations, a matrix pricing methodology, discounted cash flow analyses and/or internal valuation
models. This methodology considers such factors as the issuer’s industry, the security’s rating and tenor, its coupon
rate, its position in the capital structure of the issuer, yield curves, credit curves, prepayment rates and other relevant
factors. For certain fixed maturity instruments (for example, private placements) that are not traded in active markets
or that are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and
such adjustments generally are based on available market evidence. In the absence of such evidence, management’s
best estimate is used.
Maiden Lane II and Maiden Lane III
At their inception, ML II and ML III were valued and recorded at the transaction prices of $1 billion and $5 billion,
respectively. Subsequently, Maiden Lane Interests are valued using a discounted cash flow methodology that uses the
estimated future cash flows of the Maiden Lane assets. AIG applies model-determined market discount rates to its
interests. These discount rates are calibrated to the changes in the estimated asset values for the underlying assets
commensurate with AIG’s interests in the capital structure of the respective entities. Estimated cash flows and
discount rates used in the valuations are validated, to the extent possible, using market observable information for
securities with similar asset pools, structure and terms.
The fair value methodology used assumes that the underlying collateral in the Maiden Lane Interests will continue
to be held and generate cash flows into the foreseeable future and does not assume a current liquidation of the assets
underlying the Maiden Lane Interests. Other methodologies employed or assumptions made in determining fair value
for these investments could result in amounts that differ significantly from the amounts reported.
Adjustments to the fair value of AIG’s investment in ML II are recorded on the Consolidated Statement of Income
(Loss) in Net investment income for AIG’s Domestic Life Insurance companies. Adjustments to the fair value of
AIG’s investment in ML III are recorded in Net investment income on the Consolidated Statement of Income (Loss)
and, beginning in the second quarter of 2009, were included in Other Noncore business results, reflecting the
contribution to an AIG subsidiary. Prior to the second quarter of 2009, such amounts had been included in Other
parent company results. AIG’s investments in the Maiden Lane Interests are included in bond trading securities, at
fair value, on the Consolidated Balance Sheet.
Equity Securities Traded in Active Markets — Trading and Available for Sale
AIG maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair
value. Whenever available, AIG obtains quoted prices in active markets for identical assets at the balance sheet date
to measure at fair value marketable equity securities in its trading and available for sale portfolios. Market price data
generally is obtained from exchange or dealer markets.
AIG 2009 Form 10-K 238