AIG 2011 Annual Report Download - page 231

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
becomes high enough to reduce the probability weighted expected undiscounted future cash flows to be realized
from the aircraft to an amount that is less than its carrying value. In addition, changes in portfolio strategies,
changes in demand for a particular aircraft type and changes in economic and market circumstances, including risk
factors affecting the airline industry, can affect the impairment assessment.
When assets are retired or disposed of, the cost and associated accumulated depreciation are removed from the
related accounts and the difference, net of proceeds, is recorded as a gain in Other income.
Other invested assets: Other invested assets consist primarily of investments by AIG’s insurance operations in
hedge funds, private equity funds, other investment partnerships and direct private equity investments. AIG’s
investments in life settlement contracts and its 33 percent interest in AIA are also included in Other invested
assets.
Hedge funds, private equity funds and other investment partnerships in which AIG’s insurance operations hold
in the aggregate less than a five percent interest are reported at fair value. The change in fair value is recognized
as a component of Accumulated other comprehensive income (loss). With respect to hedge funds, private equity
funds and other investment partnerships in which AIG holds in the aggregate a five percent or greater interest or
less than a five percent interest but in which AIG has more than a minor influence over the operations of the
investee, AIG’s carrying value is its share of the net asset value of the funds or the partnerships. The changes in
such net asset values, accounted for under the equity method, are recorded in Net investment income. Direct
private equity investments entered into for strategic purposes and not solely for capital appreciation or for income
generation are also accounted for under the equity method.
In applying the equity method of accounting, AIG consistently uses the most recently available financial
information provided by the general partner or manager of each of these investments, which is one to three
months prior to the end of AIG’s reporting period. The financial statements of these investees are generally
audited annually.
Life settlement contracts are accounted for under the investment method. Under the investment method, AIG
recognizes its initial investment in life settlement contracts at the transaction price plus all initial direct external
costs. Continuing costs to keep the policy in force, primarily life insurance premiums, increase the carrying value
of the investment. AIG recognizes income on individual life settlement contracts when the insured dies, at an
amount equal to the excess of the contract proceeds over the carrying amount of the contract at that time.
Contracts are reviewed for indications that the expected future proceeds from the contract would not be sufficient
to recover AIG’s estimated future carrying amount of the contract, which is the current carrying amount for the
contract plus anticipated undiscounted future premiums and other capitalizable future costs. Any such contracts
identified are written down to their estimated fair value.
AIG accounts for its investment in AIA under the fair value option with gains and losses recorded in Net
investment income. See Note 7 herein for further information.
Also included in Other invested assets are real estate held for investment and aircraft asset investments held by
non-Aircraft Leasing subsidiaries. See Note 7 herein for further information.
Short-term investments: Short-term investments consist of interest-bearing cash equivalents, time deposits,
securities purchased under agreements to resell, and investments, such as commercial paper, with original
maturities within one year from the date of purchase.
Securities purchased under agreements to resell (reverse repurchase agreements) generally are accounted for as
collateralized lending transactions. These agreements are recorded at their contracted resale amounts plus accrued
interest, other than those that are accounted for at fair value. Such agreements entered into by AIGFP are carried
at fair value based on market observable interest rates. AIG’s policy is to take possession of or obtain a security
interest in securities purchased under agreements to resell. The value of reverse repurchase agreements that were
accounted for as collateralized lending transactions was $7.0 billion at December 31, 2011. The fair value of
securities collateral received by AIG was $6.8 billion at December 31, 2011, of which $122 million was repledged
by AIG.
AIG 2011 Form 10-K 217