AIG 2005 Annual Report Download - page 133

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
Impairment of mortgage loans on real estate and collateral
1. Summary of Significant Accounting Policies
loans is based upon certain risk factors and when collection of
Continued
all amounts due under the contractual term is not probable.
Premiums and discounts arising from the purchase of bonds This impairment is generally measured based on the present
are treated as yield adjustments over their estimated lives or value of expected future cash flows discounted at the loan’s
call date, if applicable. effective interest rate subject to the fair value of underlying
Bond trading securities are carried at current market values, collateral. Interest income on such loans is recognized as cash
and changes in fair value are recorded in income currently. is received.
Common and preferred stocks are carried at current market There is no allowance for policy loans, as these loans serve
values. Dividend income is generally recognized when to reduce the death benefit paid when the death claim is made
receivable. and the balances are effectively collateralized by the cash
Unrealized gains and losses from investments in equity surrender value of the policy.
securities and fixed maturities available for sale are reflected as
a separate component of comprehensive income, net of (e) Financial Services – Flight Equipment: Flight equipment is
deferred income taxes in consolidated shareholders’ equity stated at cost. Major additions, modifications and interest are
currently. Unrealized gains and losses from investments in capitalized. Normal maintenance and repairs, airframe and
trading securities are reflected in income currently. Investments engine overhauls and compliance with return conditions of
in fixed maturities and equity securities are recorded on a trade flight equipment on lease are provided by and paid for by the
date basis. lessee. Under the provisions of most leases for certain airframe
Realized capital gains and losses are determined principally and engine overhauls, the lessee is reimbursed for costs
by specific identification. AIG evaluates its investments for incurred up to but not exceeding contingent rentals paid to
impairment. As a matter of policy, the determination that a AIG by the lessee. AIG provides a charge to income for such
security has incurred an other-than-temporary decline in value reimbursements based upon the expected reimbursements dur-
and the amount of any loss recognition requires the judgment ing the life of the lease. Depreciation and amortization are
of AIG’s management and a continual review of its computed on the straight-line basis to a residual value of
investments. approximately 15 percent over the estimated useful lives of the
In general, a security is considered a candidate for other- related assets but not exceeding 25 years. ILFC’s management
than-temporary impairment if it meets any of the following is very active in the airline industry and remains current on
criteria: issues affecting its fleet, including events and circumstances
mTrading at a significant (25 percent or more) discount to par that may affect impairment of aircraft values (e.g. residual
or amortized cost (if lower) for an extended period of time values, useful life, current and future revenue generating
(nine months or longer); capacity). Aircraft in the fleet are evaluated, as necessary,
mThe occurrence of a discrete credit event resulting in (i) the based on these events and circumstances in accordance with
issuer defaulting on a material outstanding obligation; or Statement of Financial Accounting Standards (FAS) No. 144
(ii) the issuer seeking protection from creditors under the ‘‘Accounting for the Impairment or Disposal of Long-Lived
bankruptcy laws or any similar laws intended for the court Assets’’ (FAS 144). FAS 144 requires that long-lived assets be
supervised reorganization of insolvent enterprises; or (iii) the reviewed for impairment whenever events or changes in
issuer proposing a voluntary reorganization pursuant to circumstances indicate that the carrying amount of an asset
which creditors are asked to exchange their claims for cash may not be recoverable. Recoverability of assets is measured by
or securities having a fair value substantially lower than par comparing the carrying amount of an asset to future undis-
value of their claims; or counted net cash flows expected to be generated by the asset.
mIn the opinion of AIG’s management, it is probable that These evaluations for impairment are significantly affected by
AIG may not realize a full recovery on its investment, estimates of future revenues and other factors which involve
irrespective of the occurrence of one of the foregoing some amount of uncertainty.
events. This caption also includes deposits for aircraft to be
Once a security has been identified as other-than-tempora- purchased. At the time the assets are retired or disposed of, the
rily impaired, the amount of such impairment is determined by cost and associated accumulated depreciation and amortization
reference to that security’s contemporaneous market price and are removed from the related accounts and the difference, net
recorded as a charge to earnings. of proceeds, is recorded as a gain or loss.
AIG also enters into dollar roll agreements. These are (f) Financial Services – Securities Available for Sale, at mar-
agreements to sell mortgage-backed securities and to repurchase ket value: These securities are held to meet long-term
substantially similar securities at a specified price and date in investment objectives and are accounted for as available for
the future. At December 31, 2005, 2004 and 2003, there were sale, carried at current market values and recorded on a trade-
no dollar roll agreements outstanding. date basis. This portfolio is hedged using interest rate, foreign
(d) Mortgage Loans on Real Estate, Policy, and Collateral exchange, commodity and equity derivatives. The market risk
Loans – net: Mortgage loans on real estate, policy loans, and associated with such hedges is managed on a portfolio basis,
collateral loans are carried at unpaid principal balances. with third party hedging transactions executed as necessary. As
Interest income on such loans is accrued as earned. hedge accounting treatment is not achieved in accordance with
AIG m Form 10-K 81