AIG 2010 Annual Report Download - page 281

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2010, private equity fund investments included above are not redeemable during the lives of
the funds and have expected remaining lives that extend in some cases more than 10 years. At that date,
35 percent of the total above had expected remaining lives of less than three years, 41 percent between 3 and
7 years and 24 percent between 7 and 10 years. Expected lives are based upon legal maturity, which can be
extended at the fund manager’s discretion, typically in one-year increments.
At December 31, 2010, hedge fund investments included above are redeemable monthly (19 percent), quarterly
(50 percent), semi-annually (4 percent) and annually (27 percent), with redemption notices ranging from 1 day to
180 days. More than 85 percent require redemption notices of less than 90 days. Investments representing
approximately 66 percent of the value of the hedge fund investments cannot be redeemed, either in whole or in
part, because the investments include various restrictions. The majority of these restrictions were put in place in
2008 and do not have stated end dates. The remaining restrictions, which have pre-defined end dates, are
generally expected to be lifted by the end of 2012. The partial restrictions relate to certain hedge funds that hold
at least one investment that the fund manager deems to be illiquid. In order to treat investors fairly and to
accommodate subsequent subscription and redemption requests, the fund manager isolates these illiquid assets
from the rest of the fund until the assets become liquid.
Fair Value Measurements on a Non-Recurring Basis
AIG also measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually or
when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
These assets include cost and equity-method investments, life settlement contracts, flight equipment primarily
under operating leases, collateral securing foreclosed loans and real estate and other fixed assets, goodwill and
other intangible assets. AIG uses a variety of techniques to measure the fair value of these assets when
appropriate, as described below:
•Cost and Equity-Method Investments: When AIG determines that the carrying value of these assets may not
be recoverable, AIG records the assets at fair value with the loss recognized in earnings. In such cases, AIG
measures the fair value of these assets using the techniques discussed in Valuation Methodologies, above, for
Other invested assets.
•Life Settlement Contracts: AIG measures the fair value of individual life settlement contracts (which are
included in other invested assets) whenever the carrying value plus the undiscounted future costs that are
expected to be incurred to keep the life settlement contract in force exceed the expected proceeds from the
contract. In those situations, the fair value is determined on a discounted cash flow basis, incorporating
current life expectancy assumptions. The discount rate incorporates current information about market
interest rates, the credit exposure to the insurance company that issued the life settlement contract and
AIG’s estimate of the risk margin an investor in the contracts would require.
•Flight Equipment Primarily Under Operating Leases: When AIG determines that the carrying value of its
commercial aircraft may not be recoverable, AIG records the aircraft at fair value with the loss recognized
in earnings. AIG measures the fair value of its commercial aircraft using an earnings approach based on the
present value of all cash flows from existing and projected lease payments (based on historical experience
and current expectations regarding market participants), including net contingent rentals for the period
extending to the end of the aircraft’s economic life in its highest and best use configuration, plus its
disposition value.
•Collateral Securing Foreclosed Loans and Real Estate and Other Fixed Assets: When AIG takes collateral in
connection with foreclosed loans, AIG generally bases its estimate of fair value on the price that would be
received in a current transaction to sell the asset by itself, by reference to observable transactions for similar
assets.
AIG 2010 Form 10-K 265