AIG 2013 Annual Report Download - page 253

Policyholder contract deposits accounted for at fair value are measured using an earnings approach by taking into
consideration the following factors:
• Current policyholder account values and related surrender charges;
• The present value of estimated future cash inflows (policy fees) and outflows (benefits and maintenance expenses)
associated with the product using risk neutral valuations, incorporating expectations about policyholder behavior,
market returns and other factors; and
• A risk margin that market participants would require for a market return and the uncertainty inherent in the model
inputs.
The change in fair value of these policyholder contract deposits is recorded as Policyholder benefits and claims
incurred in the Consolidated Statements of Income.
The fair value of non-structured liabilities is generally determined by using market prices from exchange or dealer
markets, when available, or discounting expected cash flows using the appropriate discount rate for the applicable
maturity. We determine the fair value of structured liabilities and hybrid financial instruments (where performance is
linked to structured interest rates, inflation or currency risks) using the appropriate derivative valuation methodology
(described above) given the nature of the embedded risk profile. In addition, adjustments are made to the valuations
of both non-structured and structured liabilities to reflect our own creditworthiness based on the methodology
described under the caption ‘‘Incorporation of Credit Risk in Fair Value Measurements — Our Own Credit Risk’’
above.
Borrowings under obligations of guaranteed investment agreements (GIAs), which are guaranteed by us, are
recorded at fair value using discounted cash flow calculations based on interest rates currently being offered for
similar contracts and our current market observable implicit credit spread rates with maturities consistent with those
remaining for the contracts being valued. Obligations may be called at various times prior to maturity at the option of
the counterparty. Interest rates on these borrowings are primarily fixed, vary by maturity and range up to 9.8 percent.
Other liabilities measured at fair value include certain securities sold under agreements to repurchase and certain
securities sold but not yet purchased. Liabilities arising from securities sold under agreements to repurchase are
generally treated as collateralized borrowings. We estimate the fair value of liabilities arising under these agreements
by using market-observable interest rates. This methodology considers such factors as the coupon rate, yield curves
and other relevant factors. Fair values for securities sold but not yet purchased are based on current market prices.
Policyholder Contract Deposits
Long-Term Debt
Other Liabilities
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AIG 2013 Form 10-K 235
ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
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