AIG 2012 Annual Report Download - page 209

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Liability for Legal Contingencies
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We estimate and record a liability for potential losses that may arise from litigation and regulatory proceedings to the
extent such losses are probable and can be estimated. Determining a reasonable estimate of the amount of such
losses requires significant management judgment. In many cases, it is not possible to determine whether a liability
has been incurred or to estimate the ultimate or minimum amount of that liability until the matter is close to
resolution. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which
claimants seek substantial or indeterminate damages, we often cannot predict the outcome or estimate the eventual
loss or range of reasonably possible losses related to such matters.
See Note 16 to the Consolidated Financial Statements.
Fair Value Measurements of Certain Financial Assets and Liabilities
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See Note 6 to the Consolidated Financial Statements for more detailed information about the measurement of fair
value of financial assets and financial liabilities and how our accounting policy incorporates credit risk in fair value
measurements.
The following table presents the fair value of fixed maturity and equity securities by source of value
determination:
Fair value based on external sources(a) $ 280 94%
Fair value based on internal sources 18 6
Total fixed maturity and equity securities(b) $ 298 100%
(a) Includes $28.7 billion for which the primary source is broker quotes.
(b) Includes available for sale and trading securities.
Level 3 Assets and Liabilities
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Assets and liabilities recorded at fair value in the Consolidated Balance Sheet are measured and classified in a
hierarchy for disclosure purposes consisting of three ‘‘levels’’ based on the observability of inputs available in the
marketplace used to measure the fair value. See Note 6 to the Consolidated Financial Statements for additional
information.
The following table presents the amount of assets and liabilities measured at fair value on a recurring basis
and classified as Level 3:
Assets $ 39.4 7.1%
Liabilities 5.3 1.2
Level 3 fair value measurements are based on valuation techniques that use at least one significant input that is
unobservable. We consider unobservable inputs to be those for which market data is not available and that are
developed using the best information available about the assumptions that market participants would use when
valuing the asset or liability. Our assessment of the significance of a particular input to the fair value measurement in
its entirety requires judgment.
We classify fair value measurements for certain assets and liabilities as Level 3 when they require significant
unobservable inputs in their valuation, including contractual terms, prices and rates, yield curves, credit curves,
measures of volatility, prepayment rates, default rates, mortality rates and correlations of such inputs.
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AIG 2012 Form 10-K192
December 31, 2012 Fair Percent
(in billions) Value of Total
December 31, Percentage
December 31, Percentage
(in billions) 2012 of Total 2011 of Total
$ 40.5 7.4%
4.1 0.9
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES