AIG 2011 Annual Report Download - page 232

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AIG minimizes the risk that counterparties to transactions might be unable to fulfill their contractual obligations
by monitoring customer credit exposure and collateral value and generally requiring additional collateral to be
deposited with AIG when necessary.
(d) Cash: Cash represents cash on hand and non-interest bearing demand deposits.
(e) Premiums and other receivables – net: Premiums and other receivables includes premium balances
receivable, amounts due from agents and brokers and insureds, trade receivables for Direct Investment book and
Global Capital Markets and other receivables. Trade receivables for Global Capital Markets include cash collateral
posted to derivative counterparties that are not eligible to be netted against derivative liabilities. The allowance for
doubtful accounts on premiums and other receivables was $484 million and $515 million at December 31, 2011
and 2010, respectively.
(f) Reinsurance assets – net: In the ordinary course of business, AIG uses both treaty and facultative
reinsurance to minimize its net loss exposure to any single catastrophic loss event or to an accumulation of losses
from a number of smaller events. AIG determines the portion of the incurred but not reported (IBNR) loss that
will be recoverable under its reinsurance contracts by reference to the terms of the reinsurance protection
purchased. This determination is necessarily based on the estimate of IBNR and accordingly, is subject to the
same uncertainties as the estimate of IBNR. Reinsurance assets include the balances due from reinsurance and
insurance companies under the terms of AIG’s reinsurance agreements for paid and unpaid losses and loss
expenses, ceded unearned premiums and ceded future policy benefits for life and accident and health insurance
contracts and benefits paid and unpaid. Amounts related to paid and unpaid losses and benefits and loss expenses
with respect to these reinsurance agreements are substantially collateralized. AIG remains liable to the extent that
its reinsurers do not meet their obligation under the reinsurance contracts, and as such, AIG regularly evaluates
the financial condition of its reinsurers and monitors concentration of credit risk. The allowance for doubtful
accounts on reinsurance assets was $365 million and $492 million at December 31, 2011 and 2010, respectively.
(g) Deferred policy acquisition costs: Policy acquisition costs represent those costs, including commissions,
premium taxes and other underwriting expenses that vary with and are primarily related to the acquisition of new
business.
Short-duration insurance contracts: Policy acquisition costs are deferred and amortized over the period in which
the related premiums written are earned. 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. Investment income is not anticipated in assessing the
recoverability of DAC. 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 premiums to the sum of expected claims, claims adjustment expenses, unamortized DAC and
maintenance costs. If the sum of these costs exceeds the amount of recorded unearned premiums, the excess is
recognized as an offset against the asset established for DAC. This offset is referred to as a premium deficiency
charge. Increases in expected claims and claims adjustment expenses can have a significant impact on the
likelihood and amount of a premium deficiency charge.
Long-duration insurance contracts: Policy acquisition costs for participating life, traditional life and accident and
health insurance products are generally deferred and amortized, with interest, over the premium paying period.
Policy acquisition costs and policy issuance costs related to universal life, and investment-type products
(investment-oriented products) are deferred and amortized, with interest, in relation to the incidence of estimated
gross profits to be realized over the estimated lives of the contracts. Estimated gross profits are composed of net
interest income, net realized investment gains and losses, fees, surrender charges, expenses, and mortality and
morbidity gains and losses.
218 AIG 2011 Form 10-K