AIG 2012 Annual Report Download - page 252

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When our third-party valuation service providers are unable to obtain sufficient market observable information upon
which to estimate the fair value for a particular security, fair value is determined either by requesting brokers who are
knowledgeable about these securities to provide a price quote, which is generally non-binding, or by employing
widely accepted valuation models. 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 particular security
types. For structured securities, such inputs may include ratings, collateral types, geographic concentrations,
underlying loan vintages, loan delinquencies, and weighted average coupons and maturities. When the volume or
level of market activity for a security is limited, certain inputs used to determine fair value may not be observable in
the market. Broker prices may also be based on a market approach that considers recent transactions involving
identical or similar securities. Fair values provided by brokers are subject to similar control processes to those noted
above for fair values from third party valuation services, including management reviews. 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 non-transferability, and such adjustments generally are
based on available market evidence. When observable price quotations are not available, fair value is determined
based on discounted cash flow models using discount rates based on credit spreads, yields or price levels of
comparable securities, adjusted for illiquidity and structure. Fair values determined internally are also subject to
management review to ensure that valuation models and related inputs are reasonable.
The methodology above is relevant for all fixed maturity securities including residential mortgage-backed securities
(RMBS), commercial mortgage backed securities (CMBS), CDOs, other asset-backed securities (ABS) and fixed
maturity securities issued by government sponsored entities and corporate entities.
Equity Securities Traded in Active Markets – Trading and Available for Sale
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Whenever available, we obtain quoted prices in active markets for identical assets at the balance sheet date to
measure at fair value marketable equity securities in our trading and available for sale portfolios or in Other invested
assets. Market price data is generally obtained from exchange or dealer markets.
Mortgage and Other Loans Receivable
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We estimate the fair value of mortgage and other loans receivable that are measured at fair value 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.
Other Invested Assets
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We initially estimate the fair value of investments in certain hedge funds, private equity funds and other investment
partnerships by reference to the transaction price. Subsequently, we generally obtain the fair value of these
investments from net asset value information provided by the general partner or manager of the investments, the
financial statements of which are generally audited annually. We consider observable market data and perform
certain control procedures to validate the appropriateness of using the net asset value as a fair value measurement.
The fair values of other investments carried at fair value, such as direct private equity holdings, are initially
determined based on transaction price and are subsequently estimated based on available evidence such as market
transactions in similar instruments and other financing transactions of the issuer, with adjustments made to reflect
illiquidity as appropriate.
Short-term Investments
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For short-term investments that are measured at fair value, the carrying values of these assets approximate fair
values because of the relatively short period of time between origination and expected realization, and their limited
exposure to credit risk. Securities purchased under agreements to resell (reverse repurchase agreements) are
generally treated as collateralized receivables. We report certain receivables arising from securities purchased under
agreements to resell as Short-term investments in the Consolidated Balance Sheet. We use market-observable
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AIG 2012 Form 10-K 235
ITEM 8 / NOTE 6. FAIR VALUE MEASUREMENTS