AIG 2010 Annual Report Download - page 186

American International Group, Inc., and Subsidiaries
of the security being valued, including its term, interest rate, credit rating, industry sector, and when applicable,
collateral quality and other security or issuer-specific information. When market transactions or other market
observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased.
AIG employs specific control processes to determine the reasonableness of the fair values of AIG’s financial
assets and financial liabilities. AIG’s processes are designed to ensure that the values received or internally
estimated are accurately recorded and that the data inputs and the valuation techniques utilized are appropriate,
consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair
value. AIG assesses the reasonableness of individual security values received from valuation service providers
through various analytical techniques. In addition, AIG may validate the reasonableness of fair values by
comparing information obtained from AIG’s valuation service providers to other third-party valuation sources for
selected securities. AIG also validates prices for selected securities obtained from brokers through reviews by
members of management who have relevant expertise and who are independent of those charged with executing
investing transactions.
The following table presents the fair value of fixed income and equity securities by source of value determination:
At December 31, 2010 Fair Percent
(in billions) Value of Total
Fair value based on external sources(a) $238 89%
Fair value based on internal sources 28 11
Total fixed income and equity securities(b) $266 100%
(a) Includes $22.3 billion for which the primary source is broker quotes.
(b) Includes available for sale and trading securities.
See Note 6 to the Consolidated Financial Statements for more detailed information about AIG’s accounting
policy for the incorporation of credit risk in fair value measurements and the measurement of fair value of
financial assets and financial liabilities.
Level 3 Assets and Liabilities
Assets and liabilities recorded at fair value in the Consolidated Balance Sheet are classified in a hierarchy for
disclosure purposes consisting of three ‘‘levels’’ based on the observability of inputs available in the marketplace
used to measure the fair value. See Note 6 to the Consolidated Financial Statements for additional information
about the three levels of observability.
At December 31, 2010, AIG classified $36.3 billion and $6.2 billion of assets and liabilities, respectively,
measured at fair value on a recurring basis as Level 3. This represented 5.3 percent and 1.1 percent of the total
assets and liabilities, respectively, at December 31, 2010. At December 31, 2009, AIG classified $38.9 billion and
$13.9 billion of assets and liabilities, respectively, measured at fair value on a recurring basis as Level 3. This
represented 4.6 percent and 1.9 percent of the total assets and liabilities, respectively, at December 31, 2009.
Level 3 fair value measurements are based on valuation techniques that use at least one significant input that is
unobservable. These measurements are made under circumstances in which there is little, if any, market activity
for the asset or liability. AIG’s assessment of the significance of a particular input to the fair value measurement
in its entirety requires judgment.
Certain fair value measurements are based on valuation techniques that use significant inputs that are
unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions
classified in Level 3. These measurements include circumstances in which there is little, if any, market activity for
the asset or liability. Therefore, AIG must make certain assumptions as to the inputs a hypothetical market
participant would use to value that asset or liability. In certain cases, the inputs used to measure fair value may
fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which
the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to
170 AIG 2010 Form 10-K