This excerpt taken from the AAME 10-K filed Mar 30, 2007.
Note 15. Disclosures About Fair Value of Financial Instruments
The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts which the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The fair value estimates as of December 31, 2006 and 2005 were based on pertinent information available to management as of the respective dates. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, current estimates of fair value may differ significantly from amounts that might ultimately be realized.
The following describes the methods and assumptions used by the Company in estimating fair values:
Cash and Cash Equivalents, including Short-term Investments
The carrying amount approximates fair value due to the short-term nature of the instruments.
Fixed Maturities, Common and Non-Redeemable Preferred Stocks and Publicly Traded Other Invested Assets
The carrying amount is determined in accordance with methods prescribed by the NAIC, which do not differ materially from nationally quoted market prices. Certain non-redeemable preferred stocks that do not have quoted values are carried at estimated fair value as determined by management.
Non-publicly Traded Invested Assets
The fair value of investments in certain limited partnerships which are included in other invested assets on the consolidated balance sheet, were determined by officers of those limited partnerships.
The fair values are estimated based on quoted market prices for those or similar investments.
Debt Payable and Junior Subordinated Debentures
The fair value is estimated based on the quoted market prices for the same or similar issues or on the current rates offered for debt having the same or similar returns and remaining maturities.