AIG 2010 Annual Report Download - page 185

American International Group, Inc., and Subsidiaries
Fair Value Measurements of Certain Financial Assets and Liabilities:
Overview
AIG measures the following financial instruments at fair value on a recurring basis:
• trading and available for sale securities portfolios;
• certain mortgage and other loans receivable;
• derivative assets and liabilities;
• securities purchased/sold under agreements to resell/repurchase;
• non-traded equity investments and certain private limited partnerships and certain hedge funds included in
other invested assets;
• certain short-term investments;
• separate 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 upon the sale of an asset or paid
to transfer a liability in an orderly transaction between willing, able and knowledgeable 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 observable valuation inputs. AIG maximizes the use of observable inputs and minimizes the use of
unobservable inputs when measuring fair value. 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 where no quoted prices are available have less observability and are measured at fair value using
valuation models or other pricing techniques that require more judgment. Pricing observability is affected by a
number of factors, including the type of financial instrument, whether the financial instrument is new to the
market, the characteristics specific to the transaction, liquidity 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 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
AIG 2010 Form 10-K 169