AIG 2015 Annual Report Download - page 249

ITEM 8 / NOTE 4. FAIR VALUE MEASUREMENTS
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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.
Freestanding Derivatives
Derivative assets and liabilities can be exchange-traded or traded over-the-counter (OTC). We generally value exchange-
traded derivatives such as futures and options using quoted prices in active markets for identical derivatives at the balance
sheet date.
OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based
inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources
with reasonable levels of price transparency. When models are used, the selection of a particular model to value an OTC
derivative depends on the contractual terms of, and specific risks inherent in the instrument, as well as the availability of pricing
information in the market. We generally use similar models to value similar instruments. Valuation models require a variety of
inputs, including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment
rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and
options, model inputs can generally be corroborated by observable market data by correlation or other means, and model
selection does not involve significant management judgment.
For certain OTC derivatives that trade in less liquid markets, where we generally do not have corroborating market evidence to
support significant model inputs and cannot verify the model to market transactions, the transaction price may provide the best
estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so the
model value at inception equals the transaction price. We will update valuation inputs in these models only when corroborated
by evidence such as similar market transactions, independent third-party valuation service providers and/or broker or dealer
quotations, or other empirical market data. When appropriate, valuations are adjusted for various factors such as liquidity,
bid/offer spreads and credit considerations. Such adjustments are generally based on available market evidence. In the
absence of such evidence, management’s best estimate is used.
We value our super senior credit default swap portfolio using prices obtained from vendors and/or counterparties. The
valuation of the super senior credit derivatives is complex because of the limited availability of market observable information
due to the lack of trading and price transparency in certain structured finance markets. Our valuation methodologies for the
super senior CDS portfolio have evolved over time in response to market conditions and the availability of market observable
information. We have sought to calibrate the methodologies to available market information and to review the assumptions of
the methodologies on a regular basis.
Embedded Derivatives within Policyholder Contract Deposits
Certain variable annuity and equity-indexed annuity and life contracts contain embedded derivatives that we bifurcate from the
host contracts and account for separately at fair value, with changes in fair value recognized in earnings. These embedded
derivatives are classified within Policyholder contract deposits. We have concluded these contracts contain either (i) a written
option that guarantees a minimum accumulation value at maturity, (ii) a written option that guarantees annual withdrawals
regardless of underlying market performance for a specific period or for life, or (iii) equity-indexed written options that meet the
criteria of derivatives and must be bifurcated.