AIG 2010 Annual Report Download - page 279

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
providers that were reflective of market activity, where previously an internally adjusted price had been used.
Similarly, transfers out of Level 3 for CMBS and CDO investments backed by corporate credits were primarily the
result of AIG using observable pricing information or a third party pricing quote that appropriately reflects the
fair value of those securities, without the need for adjustment based on AIG’s own assumptions regarding the
characteristics of a specific security or the current liquidity in the market. Transfers out of Level 3 for both the
CMBS and CDO investments were primarily due to increased observations of market transactions and price
information for those securities. Certain investment partnerships were transferred out of Level 3 primarily due to
the availability of information related to the underlying assets of these funds.
Transfers of Level 3 Liabilities
During the year ended December 31, 2010, AIG transferred into Level 3 $805 million of liabilities, primarily
related to term notes and hybrid term notes, as well as certain derivatives. Term notes and hybrid term notes were
transferred into Level 3 primarily due to an unobservable credit linked component constituting a significant
amount of the valuations. As AIG provides net presentation of carrying values for its derivative positions in the
table above, transfers out of Level 3 derivatives, which totaled approximately $1.2 billion primarily relate to
certain derivative assets transferred into Level 3 because of the lack of observable inputs on certain interest rate
swaps. Other transfers out of Level 3 liabilities were due to movement in market variables.
AIG uses various hedging techniques to manage risks associated with certain positions, including those classified
within Level 3. Such techniques may include the purchase or sale of financial instruments that are classified within
Level 1 and/or Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities classified
within Level 3 presented in the table above do not reflect the related realized or unrealized gains (losses) on
hedging instruments that are classified within Level 1 and/or Level 2.
Investments in certain entities carried at fair value using net asset value per share
The following table includes information related to AIG’s investments in certain other invested assets, including
private equity funds, hedge funds and other alternative investments that calculate net asset value per share (or
AIG 2010 Form 10-K 263