AIG 2005 Annual Report Download - page 131

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Life Insurance & Retirement Services Operations: AIG’s Life
1. Summary of Significant Accounting Policies
Insurance & Retirement Services subsidiaries offer a wide range
(a) Principles of Consolidation: Certain of AIG’s foreign of insurance and retirement savings products both domestically
subsidiaries included in the consolidated financial statements and abroad. Insurance-oriented products consist of individual
report on a fiscal year ending November 30. The consolidated and group life, payout annuities, endowment, and accident and
financial statements include the accounts of AIG, its majority health policies. Retirement savings-oriented products consist
owned subsidiaries and those entities required to be consoli- generally of fixed and variable annuities.
dated under applicable accounting standards. See also Premiums for life insurance products and life contingent
Note 1(gg) herein. All material intercompany accounts and annuities are recognized as revenues when due. Estimates for
transactions have been eliminated. premiums due but not yet collected are accrued. Benefits and
expenses are provided against such revenues to recognize profits
(b) Basis of Presentation: The accompanying financial state- over the estimated life of the policies. Revenues for universal
ments have been prepared on the basis of U.S. generally life and investment-type products consist of policy charges for
accepted accounting principles (GAAP). The preparation of the cost of insurance, administration, and surrenders during the
financial statements in conformity with GAAP requires man- period. Policy charges collected with respect to future services
agement to make estimates and assumptions that affect the are deferred and recognized in a manner similar to the deferred
reported amounts of assets and liabilities and disclosure of policy acquisition costs related to such products. Expenses
contingent assets and liabilities at the date of the financial include interest credited to policy account balances and benefit
statements and the reported amounts of revenues and expenses payments made in excess of policy account balances. Personal
during the reporting periods. Actual results could differ from accident products are accounted for in a manner similar to
those estimates. general insurance products described above.
Policy acquisition costs for life insurance products are
General Insurance Operations: AIG’s General Insurance subsidi-
generally deferred and amortized over the premium paying
aries are multiple line companies writing substantially all lines
period of the policy Statement of Financial Accounting
of property and casualty insurance both domestically and
Standards No. 60, ‘‘Accounting and Reporting by Insurance
abroad. Premiums are earned primarily on a pro rata basis over
Enterprises’’ (FAS 60). Policy acquisition costs and policy
the term of the related coverage. The reserve for unearned
issuance costs related to universal life and investment-type
premiums represents the portion of premiums written relating
products (investment-oriented products) are deferred and amor-
to the unexpired terms of coverage.
tized, with interest, in relation to the incidence of estimated
Acquisition costs represent those costs, including commis-
gross profits to be realized over the estimated lives of the
sions and premium taxes, that vary with and are primarily
contracts under Statement of Financial Accounting Standards
related to the acquisition of new business. These costs are
No. 97, ‘‘Accounting and Reporting by Insurance Enterprises
deferred and amortized over the period in which the related
for Certain Long-Duration Contracts and for Realized Gains
premiums written are earned. The deferred policy acquisition
and Losses from the Sale of Investments’’ (FAS 97). Estimated
cost (DAC) asset is reviewed for recoverability based on the
gross profits are composed of net interest income, net realized
profitability of the underlying insurance contracts. Investment
investment gains and losses, fees, surrender charges, expenses,
income is not anticipated in the recoverability of deferred
and mortality and morbidity gains and losses.
policy acquisition costs.
The resulting DAC asset is reviewed for recoverability based
Losses and loss expenses are charged to income as incurred.
on the profitability (both current and projected future) of the
The reserve for losses and loss expenses represents the
underlying insurance contracts.
accumulation of estimates for reported losses and includes
The deferred policy acquisition costs for investment-oriented
provisions for losses incurred but not reported. The methods of
products are adjusted with respect to estimated gross profits as
determining such estimates and establishing resulting reserves,
a result of changes in the net unrealized gains or losses on debt
including amounts relating to reserves for estimated unrecover-
and equity securities available for sale. That is, as debt and
able reinsurance, are reviewed and updated. Adjustments
equity securities available for sale are carried at aggregate fair
resulting therefrom are reflected in income currently. AIG
value, an adjustment is made to deferred policy acquisition
discounts its loss reserves relating to workers compensation
costs equal to the change in amortization that would have
business written by its U.S. domiciled subsidiaries as permitted
been recorded if such securities had been sold at their stated
by the domiciliary statutory regulatory authorities. As of year
aggregate fair value and the proceeds reinvested at current
end 2005, this discount is $512 million on a tabular basis and
yields. The change in this adjustment, net of tax, is included
$1.11 billion on a non-tabular basis. Additionally, AIG
with the change in net unrealized gains/losses on debt and
discounts liability business assumed by American International
equity securities available for sale that is credited or charged
Reinsurance Company, Ltd. (AIRCO) from the Domestic
directly to comprehensive income. Deferred policy acquisition
Brokerage Group (DBG) as permitted by its domiciliary
costs have been decreased by $1.14 billion at December 31,
regulatory authority. As of year end 2005, this discount is
2005 and decreased by $2.26 billion at December 31, 2004 for
$490 million. The total amount of discount is $2.11 billion or
this adjustment. See also Note 4 herein.
less than three percent of outstanding loss reserves as reflected
Value of Business Acquired (VOBA) is determined at time
on the accompanying consolidated balance sheet.
of acquisition. This value is based on present value of future
AIG m Form 10-K 79