AIG 2014 Annual Report Download - page 249

ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
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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 independent third-party
valuation service providers, 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 reflect illiquidity and
non-transferability, 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), collateralized debt obligations (CDO), other asset-backed securities (ABS)
and fixed maturity securities issued by government sponsored entities and corporate entities.
Equity Securities Traded in Active Markets
Whenever available, we obtain quoted prices in active markets for identical assets at the balance sheet date to measure equity
securities at fair value. Market price data is generally obtained from exchange or dealer markets.
Mortgage and Other Loans Receivable
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
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, other financing transactions of the
issuer and other available financial information for the issuer, with adjustments made to reflect illiquidity as appropriate.
Short-term Investments
For short-term investments that are measured at amortized cost, the carrying amounts 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 Sheets. When these receivables are measured at fair value, we use market-
observable interest rates to determine fair value.
Separate Account Assets
Separate account assets are composed primarily of registered and unregistered open-end mutual funds that generally trade
daily and are measured at fair value in the manner discussed above for equity securities traded in active markets.