AIG 2005 Annual Report Download - page 132

Notes to Consolidated Financial Statements Continued
States. AIGCFG, through its subsidiaries, is engaged in
1. Summary of Significant Accounting Policies
developing a multi-product consumer finance business with an
Continued
emphasis on emerging markets. See also Note 2 herein.
pre-tax profits discounted at current yields applicable at time of Finance charges are recognized as revenue using the interest
purchase. For products accounted under FAS 60, the VOBA is method. Revenue ceases to be accrued when contractual
amortized over the life of the business similar to that for payments are not received for four consecutive months for
Deferred Acquisition Costs based on the assumptions at loans and retail sales contracts, and for six months for
purchase. For FAS 97 products, the VOBA is amortized in revolving retail accounts and private label receivables. Exten-
relation to the estimated gross profits to date for each period. sion fees, late charges, and prepayment penalties are recognized
No impairments have occurred for acquired business to date. as revenue when received.
The liabilities for future policy benefits and policyholders’ Direct costs of originating loans, net of nonrefundable
contract deposits are established using assumptions described in points and fees, are deferred and included in the carrying
Note 6. amount of the related loans. The amount deferred is recognized
as an adjustment to finance charge revenues, using the interest
Financial Services: AIG’s Financial Services subsidiaries engage
method applied on a pool basis over a term that anticipates
in diversified activities including aircraft and equipment
prepayments. If loans are prepaid, any remaining deferral is
leasing, capital markets transactions, consumer finance and
charged or credited to revenue.
insurance premium financing.
The allowance for finance receivable losses is maintained at
AIG’s Aircraft Finance operations represent the operations
a level considered adequate to absorb estimated credit losses in
of International Lease Finance Corporation (ILFC), which
the existing portfolio. The portfolio is periodically evaluated on
generates its revenues primarily from leasing new and used
a pooled basis and factors such as economic conditions,
commercial jet aircraft to domestic and foreign airlines.
portfolio composition, and loss and delinquency experience are
Revenues also result from the remarketing of commercial jets
considered in the evaluation of the allowance.
for its own account, for airlines and for financial institutions.
Foreclosure proceedings are initiated on real estate loans
ILFC, as lessor, leases flight equipment principally under
when four monthly installments are past due, and these loans
operating leases. Accordingly, income is recognized over the
are charged off at foreclosure. All other finance receivables are
life of the lease as rentals become receivable under the
charged off when minimal or no collections have been made
provisions of the lease or, in the case of leases with varying
for six months.
payments, under the straight-line method over the noncancel-
Together, the Aircraft Finance, Capital Markets and Con-
able term of the lease. In certain cases, leases provide for
sumer Finance operations generate the vast majority of the
additional payments contingent on usage. Rental income is
revenues produced by AIG’s consolidated Financial Services
recognized at the time such usage occurs less a provision for
operations.
future contractual aircraft maintenance. ILFC is also a
Imperial A.I. Credit Companies also contribute to Financial
remarketer of flight equipment for its own account and for
Services income. This operation engages principally in insur-
airlines and financial institutions and provides, for a fee, fleet
ance premium financing for both AIG’s customers and those of
management services to certain third-party operators. ILFC’s
other insurers.
revenues from such operations consist of net gains on sales of
flight equipment, commissions and management service fees. Asset Management Operations: AIG’s Asset Management opera-
The Capital Markets operations of AIG are conducted tions comprise a wide variety of investment-related services
through AIG Financial Products Corp. and AIG Trading and investment products including institutional and retail asset
Group, Inc. and their respective subsidiaries (collectively management, broker dealer services and spread-based invest-
referred to as AIGFP), which engages as principal in standard ment business from the sale of guaranteed investment con-
and customized interest rate, currency, equity, commodity, tracts, also known as funding agreements (GICs). Such
energy and credit products with top-tier corporations, financial products and services are offered to individuals and institutions
institutions, governments, agencies, institutional investors, and both domestically and overseas. The fees generated with
high-net-worth individuals throughout the world. AIGFP also respect to Asset Management operations are recognized as
raises funds through municipal reinvestment contracts and revenues when earned. Certain costs incurred in the sale of
other private and public securities offerings, investing the mutual funds are deferred and subsequently amortized.
proceeds in a diversified portfolio of high grade securities and
derivative transactions. AIGFP owns inventories in the com- (c) Investments in Fixed Maturities and Equity Securities:
modities in which it trades and may reduce the exposure to Bonds held to maturity are principally owned by the insurance
market risk through the use of swaps, forwards, futures, and subsidiaries and are carried at amortized cost where AIG has
option contracts. See also Note 2 herein. the ability and positive intent to hold these securities until
Consumer Finance operations include American General maturity.
Finance, Inc. and its subsidiaries (AGF) as well as AIG Where AIG may not have the positive intent to hold bonds
Consumer Finance Group, Inc. (AIGCFG). AGF provides a and preferred stocks until maturity and not classified as trading,
wide variety of consumer finance products, including non- these securities are considered to be available for sale and
conforming real estate mortgages, consumer loans, retail sales carried at current market values. Interest income with respect
finance and credit-related insurance to customers in the United to fixed maturity securities is accrued as earned.
80 AIG m Form 10-K