AIG 2011 Annual Report Download - page 193

Due to the complexity of the U.S. federal income tax laws involved in determining the amount of income taxes
related to differences between book carrying value and tax basis of subsidiaries, as well as the level of judgment
and reliance on reasonable assumptions and estimates in calculating this liability, AIG considers the U.S. federal
income taxes accrued on the earnings of certain foreign subsidiaries to be a critical accounting estimate.
Recoverability of DAC is based on the current terms and profitability of the underlying insurance contracts.
Policy acquisition costs are deferred and amortized over the period in which the related premiums written are
earned, generally 12 months for short-duration insurance contracts. DAC is grouped consistent with the manner in
which the insurance contracts are acquired, serviced and measured for profitability and is reviewed for
recoverability based on the profitability of the underlying insurance contracts. AIG assesses the recoverability of its
DAC on an annual basis or more frequently if circumstances indicate an impairment may have occurred. This
assessment is performed by comparing recorded unearned premium to the sum of expected claims, claims
adjustment expenses, anticipated maintenance costs and unamortized DAC. If the sum of these costs exceeds the
amount of recorded unearned premium, the excess is recognized as an offset against the asset established for
DAC. This offset is referred to as a premium deficiency charge. Investment income is not anticipated in assessing
the recoverability of DAC. Increases in expected claims and claims adjustment expenses can have a significant
impact on the likelihood and amount of a premium deficiency charge.
Management tested the recoverability of DAC and determined that recorded unearned premiums of its Chartis
domestic and international operations exceeded the sum of these costs at December 31, 2011, by 1 percent and
19 percent, respectively, and, therefore, the DAC of these operations was considered to be recoverable.
Short-duration DAC for Chartis domestic and international operations amounted to $1.7 billion and $1.8 billion,
respectively, at December 31, 2011.
Expected undiscounted future net cash flows: based upon current lease rates, projected future lease rates and
lease periods and estimated residual or disposal values of each aircraft based on expectations regarding the use of
the aircraft and market participants.
AIG uses numerous assumptions in determining its best estimate of reserves for each class of business. The
importance of any specific assumption can vary by both class of business and accident year. If actual experience
differs from key assumptions used in establishing reserves, there is potential for significant variation in the
development of loss reserves, particularly for long-tail casualty classes of business such as excess casualty, D&O or
primary and excess workers’ compensation. The key assumptions that could have a material impact on loss
reserves are as follows:
• Loss trend factors, which are used to establish expected loss ratios for subsequent accident years based on
the projected loss ratios for prior accident years.
• Expected loss ratios for the latest accident year (i.e., accident year 2011 for the year-end 2011 loss reserve
analysis) and, in some cases for accident years prior to the latest accident year. The expected loss ratio
generally reflects the projected loss ratio from prior accident years, adjusted for the loss trend (see above)
and the effect of rate changes and other quantifiable factors on the loss ratio. For low-frequency,
high-severity classes such as excess casualty, expected loss ratios generally are used for at least the three
most recent accident years.
AIG 2011 Form 10-K 179
U.S. INCOME TAXES ON EARNINGS OF CERTAIN FOREIGN SUBSIDIARIES:
DEFERRED POLICY ACQUISITION COSTS – SHORT DURATION (CHARTIS AND
MORTGAGE GUARANTY):
FLIGHT EQUIPMENT RECOVERABILITY (AIRCRAFT LEASING):
LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSES
(CHARTIS AND MORTGAGE GUARANTY):