Bring on tomorrow - AIG.com

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES.....................................................................................................................................................................................Liability for Legal Contingencies..............................................................................................................................................................................................We estimate and record a liability for potential losses that may arise from litigation and regulatory proceedings to theextent such losses are probable and can be estimated. Determining a reasonable estimate of the amount of suchlosses requires significant management judgment. In many cases, it is not possible to determine whether a liabilityhas been incurred or to estimate the ultimate or minimum amount of that liability until the matter is close toresolution. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in whichclaimants seek substantial or indeterminate damages, we often cannot predict the outcome or estimate the eventualloss or range of reasonably possible losses related to such matters.See Note 16 to the Consolidated Financial Statements.Fair Value Measurements of Certain Financial Assets and Liabilities..............................................................................................................................................................................................See Note 6 to the Consolidated Financial Statements for more detailed information about the measurement of fairvalue of financial assets and financial liabilities and how our accounting policy incorporates credit risk in fair valuemeasurements.The following table presents the fair value of fixed maturity and equity securities by source of valuedetermination:December 31, 2012 Fair Percent(in billions) Value of TotalFair value based on external sources (a) $ 280 94%Fair value based on internal sources 18 6Total fixed maturity and equity securities (b) $ 298 100%(a) Includes $28.7 billion for which the primary source is broker quotes.(b)Includes available for sale and trading securities.Level 3 Assets and Liabilities..............................................................................................................................................................................................Assets and liabilities recorded at fair value in the Consolidated Balance Sheet are measured and classified in ahierarchy for disclosure purposes consisting of three ‘‘levels’’ based on the observability of inputs available in themarketplace used to measure the fair value. See Note 6 to the Consolidated Financial Statements for additionalinformation.The following table presents the amount of assets and liabilities measured at fair value on a recurring basisand classified as Level 3:December 31, Percentage December 31, Percentage(in billions) 2012 of Total 2011 of TotalAssets $ 40.5 7.4% $ 39.4 7.1%Liabilities 4.1 0.95.3 1.2Level 3 fair value measurements are based on valuation techniques that use at least one significant input that isunobservable. We consider unobservable inputs to be those for which market data is not available and that aredeveloped using the best information available about the assumptions that market participants would use whenvaluing the asset or liability. Our assessment of the significance of a particular input to the fair value measurement inits entirety requires judgment.We classify fair value measurements for certain assets and liabilities as Level 3 when they require significantunobservable inputs in their valuation, including contractual terms, prices and rates, yield curves, credit curves,measures of volatility, prepayment rates, default rates, mortality rates and correlations of such inputs...................................................................................................................................................................................................................................192 AIG 2012 Form 10-K