AIG 2010 Annual Report Download - page 208

American International Group, Inc., and Subsidiaries
Moreover, 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,
2010 2009
ABS Category
RMBS Prime 69.49% 64.35%
RMBS Alt-A 43.17 37.47
RMBS Subprime 35.21 29.32
CMBS 52.64 67.14
CDOs 23.57 19.01
Other 71.66 70.62
Total 42.30% 42.75%
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, 2010 and 2009, CDO collateral managers
provided market prices for 58.0 percent and 62.8 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 fixed maturity 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 Capital Markets 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
192 AIG 2010 Form 10-K