AIG 2014 Annual Report Download - page 252

ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
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In addition to calculating an estimate of the fair value of the super senior CDO security referenced in the CDSs using our
internal model, we also consider the price estimates for the super senior CDO securities provided by third parties, including
counterparties to these transactions, to validate the results of the model and to determine the best available estimate of fair
value. In determining the fair value of the super senior CDO security referenced in the CDSs, we use a consistent process that
considers all available pricing data points and eliminates the use of outlying data points. When pricing data points are within a
reasonable range an averaging technique is applied.
Corporate debt/Collateralized loan obligation (CLO) portfolios: For CDSs written on portfolios of investment-grade
corporate debt, we use a mathematical model that produces results that are closely aligned with prices received from third
parties. This methodology uses the current market credit spreads of the names in the portfolios along with the base
correlations implied by the current market prices of comparable tranches of the relevant market traded credit indices as inputs.
We estimate the fair value of our obligations resulting from CDSs written on CLOs to be equivalent to the par value less the
current market value of the referenced obligation. Accordingly, the value is determined by obtaining third-party quotations on
the underlying super senior tranches referenced under the CDS contract.
Long-Term Debt
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 8.5 percent.
Other Liabilities
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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about assets and liabilities measured at fair value on a recurring basis and
indicates the level of the fair value measurement based on the observability of the inputs used:
December 31, 2014 Counterparty Cash
(in millions) Level 1 Level 2 Level 3 Netting(a) Collateral Total
Assets:
Bonds available for sale:
U.S. government and government sponsored entities $322 $2,670 $- $ - $ - $ 2,992
Obligations of states, municipalities and political subdivisions -25,500 2,159 - -27,659
Non-U.S. governments 742 20,323 30 - -21,095
Corporate debt -142,550 1,883 - -144,433