AIG 2011 Annual Report Download - page 227

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reinsurance premiums ceded are expensed over the period the reinsurance coverage is provided in proportion
to the risks to which they relate.
Premiums for long duration insurance products and life contingent annuities are recognized as revenues when
due. Estimates for premiums due but not yet collected are accrued.
Policy fees: Policy fees represent fees recognized from universal life and investment-type products consisting of
policy charges for the cost of insurance, policy administration charges, amortization of unearned revenue reserves
and surrender charges.
Net investment income: Net investment income represents income primarily from the following sources in
AIG’s insurance operations and AIG Parent:
• Interest income and related expenses, including amortization of premiums and accretion of discounts on
bonds with changes in the timing and the amount of expected principal and interest cash flows reflected in
the yield, as applicable.
• Dividend income from common and preferred stock and distributions from other investments.
• Realized and unrealized gains and losses from investments in trading securities accounted for at fair value.
• Earnings from private equity funds and hedge fund investments accounted for under the equity method.
• The difference between the carrying amount of a life settlement contract and the life insurance proceeds of
the underlying life insurance policy recorded in income upon the death of the insured.
• Changes in the fair values of AIG’s interests in ML II, ML III, AIA and MetLife securities prior to sale.
Net realized capital gains (losses): Net realized capital gains and losses are determined by specific identification.
The net realized capital gains and losses are generated primarily from the following sources:
• Sales of fixed maturity securities and equity securities (except trading securities accounted for at fair value),
real estate, investments in private equity funds and hedge funds and other types of investments.
• Reductions to the cost basis of fixed maturity securities and equity securities (except trading securities
accounted for at fair value) and other invested assets for other-than-temporary impairments.
• Changes in fair value of derivatives except for (1) those instruments at AIG Financial Products Corp. and
AIG Trading Group Inc. and their respective subsidiaries (collectively, AIGFP), (2) those instruments that
qualify for hedge accounting treatment when the change in the fair value of the hedged item is not reported
in Net realized capital gains (losses), and (3) those instruments that are designated as economic hedges of
financial instruments for which the fair value option has been elected.
• Exchange gains and losses resulting from foreign currency transactions.
Aircraft leasing revenue: Income from flight equipment under operating leases is recognized over the life of the
lease as rentals become receivable under the provisions of the lease or, in the case of leases with varying
payments, under the straight-line method over the noncancelable term of the lease. In certain cases, leases provide
for additional payments contingent on usage. In those cases, rental income is recognized at the time such usage
occurs, net of estimated future contractual aircraft maintenance reimbursements. Gains on sales of flight
equipment are recognized in Other income when flight equipment is sold and the risk of ownership of the
equipment is passed to the new owner.
Other income: Other income includes unrealized gains and losses on derivatives, including unrealized market
valuation gains and losses associated with AIGFP’s super senior credit default swap (CDS) portfolio, as well as
income from the Direct Investment book.
AIG 2011 Form 10-K 213