AIG 2010 Annual Report Download - page 264

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, benchmark yields, interest rate yield
curves, credit spreads, currency rates, quoted prices for similar securities 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 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 has processes designed to ensure that the values received or internally estimated are accurately recorded,
that the data inputs and the valuation techniques utilized are appropriate and 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 methodology above is relevant for all fixed maturity securities; following are discussions of certain
procedures unique to specific classes of securities.
Fixed Maturity Securities issued by Government Entities
For most debt securities issued by government entities, AIG obtains fair value information from independent
third-party valuation service providers, as quoted prices in active markets are generally only available for limited
debt securities issued by government entities. The fair values received from these valuation service providers may
be based on a market approach using matrix pricing, which considers a security’s relationship to other securities
for which a quoted price in an active market may be available, or alternatively based on an income approach,
which uses valuation techniques to convert future cash flows to a single present value amount.
Fixed Maturity Securities issued by Corporate Entities
For most debt securities issued by corporate entities, AIG obtains fair value information from third-party
valuation service providers. For certain corporate debt securities, AIG obtains fair value information from brokers.
For those corporate debt 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.
RMBS, CMBS, CDOs and other ABS
Third-party valuation service providers also provide fair value information for the majority of AIG investments
in RMBS, CMBS, CDOs and other ABS. Where pricing is not available from valuation service providers, AIG
obtains fair value information from brokers. Broker prices may be based on an income approach, which converts
expected future cash flows to a single present value amount, with specific consideration of inputs relevant to
structured securities, including ratings, collateral types, geographic concentrations, underlying loan vintages, loan
delinquencies, and weighted average coupons and maturities. Broker prices may also be based on a market
approach that considers recent transactions involving identical or similar securities. When the volume or level of
248 AIG 2010 Form 10-K