AIG 2010 Annual Report Download - page 267

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Separate Account Assets
Separate account assets are composed primarily of registered and unregistered open-end mutual funds that
generally trade daily and are measured at fair value in the manner discussed above for equity securities traded in
active markets.
Other Assets and Liabilities Measured at Fair Value
Securities Purchased (Sold) under Agreements to Resell (Repurchase) — AIG estimates the fair value of
receivables (payables) arising from securities purchased (sold) under agreements to resell (repurchase) using
dealer quotations, discounted cash flow analyses and/or internal valuation models. This methodology considers
such factors as the coupon rate, yield curves, prepayment rates and other relevant factors.
Short-term Investments — For short-term investments that are measured at fair value, AIG obtains fair value
information from independent third-party valuation service providers. The determination of fair value for these
instruments is consistent with the process for fixed maturity securities, as discussed above.
Loans Receivable — AIG estimates the fair value of mortgage and other loans receivable by using dealer
quotations, discounted cash flow analyses and/or internal valuation models. The determination of fair value
considers inputs such as interest rate, maturity, the borrower’s creditworthiness, collateral, subordination,
guarantees, past-due status, yield curves, credit curves, prepayment rates, market pricing for comparable loans and
other relevant factors.
Freestanding Derivatives
Derivative assets and liabilities can be exchange-traded or traded over-the-counter (OTC). AIG generally values
exchange-traded derivatives such as futures and options using quoted prices in active markets for identical
derivatives at the balance sheet date.
OTC derivatives are valued using market transactions and other market evidence whenever possible, including
market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or
alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a
particular model to value an OTC derivative depends on the contractual terms of, and specific risks inherent in
the instrument, as well as the availability of pricing information in the market. AIG generally uses similar models
to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market
prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such
inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model
inputs can generally be corroborated by observable market data by correlation or other means, and model
selection does not involve significant management judgment.
Certain OTC derivatives trade in less liquid markets with limited pricing information, and the determination of
fair value for these derivatives is inherently more difficult. When AIG does not have corroborating market
evidence to support significant model inputs and cannot verify the model to market transactions, the transaction
price may provide the best estimate of fair value. Accordingly, when a pricing model is used to value such an
instrument, the model is adjusted so the model value at inception equals the transaction price. AIG will update
valuation inputs in these models only when corroborated by evidence such as similar market transactions, third
party pricing services and/or broker or dealer quotations, or other empirical market data. When appropriate,
valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such
adjustments are generally based on available market evidence. In the absence of such evidence, management’s best
estimate is used.
AIG 2010 Form 10-K 251