AIG 2005 Annual Report Download - page 135

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
lion, $244 million and $217 million, for 2005, 2004, and 2003,
1. Summary of Significant Accounting Policies
respectively.
Continued
The market value of securities pledged under securities (r) Deposit Liabilities: AIG has entered into certain insurance
lending arrangements were $59.0 billion and $48.8 billion as of and reinsurance contracts, primarily in its general insurance
December 31, 2005 and 2004, respectively. Of these amounts, segment, which do not contain sufficient amount and timing
$58.3 billion and $48.2 billion represent securities included in risk to be accounted for as insurance or reinsurance. Accord-
bonds available for sale in AIG’s consolidated balance sheet as ingly, these transactions are recorded based upon deposit
of December 31, 2005 and 2004, respectively. accounting, and the premiums received, after deduction for
certain related expenses, are recorded as deposits within Other
(n) Other Invested Assets: Other invested assets consist prima- liabilities on the consolidated balance sheet. Net proceeds of
rily of investments by AIG’s insurance operations in hedge these deposits are invested and generate net investment
funds and limited partnerships. income. As amounts are paid, consistent with the underlying
Hedge funds and limited partnerships in which AIG holds contracts, the deposit liability is reduced. Periodically, AIG
in the aggregate less than a five percent interest are reported at evaluates the expected payments to be made under each
fair value. The change in fair value is recognized as a contract and adjusts the deposit liability through earnings in
component of other comprehensive income. the current period.
With respect to hedge funds and limited partnerships in
which AIG holds in the aggregate a five percent or greater (s) Investments in Partially Owned Companies: Generally, the
interest or less than five percent interest but AIG has more equity method of accounting is used for AIG’s investment in
than a minor influence over the operations of the investee, companies in which AIG’s ownership interest approximates
AIG’s carrying value is the net asset value. The changes in 20 percent but is not greater than 50 percent (minority owned
such net asset values accounted for under the equity method companies). At December 31, 2005, AIG’s significant invest-
are recorded in earnings through net investment income. ments in partially owned companies included its 24.3 percent
AIG obtains the fair value of its investments in limited interest in IPC Holdings, Ltd., its 23.4 percent interest in
partnerships and hedge funds from information provided by the Allied World Assurance Holdings, Ltd., its 26 percent interest
general partner or manager of each of these investments, the in Tata AIG Life Insurance Company, Ltd., its 26 percent
accounts of which are generally audited on an annual basis. interest in Tata AIG General Insurance Company, Ltd. and its
24.5 percent interest in The Fuji Fire and Marine Insurance
(o) Short-term investments: Short-term investments consist of Co., Ltd. This balance sheet caption also includes investments
interest bearing cash equivalents, time deposits, and invest- in less significant partially owned companies. The amounts of
ments maturing within one year, such as commercial paper. dividends received from unconsolidated entities where AIG’s
ownership interest is less than 50 percent were $146 million,
(p) Reinsurance Assets: Reinsurance assets include the bal-
$22 million and $13 million in 2005, 2004 and 2003,
ances due from both reinsurance and insurance companies
respectively. The undistributed earnings of unconsolidated
under the terms of AIG’s reinsurance agreements for paid and
entities where AIG’s ownership interest is less than 50 percent
unpaid losses and loss expenses, ceded unearned premiums and
were $179 million, $445 million and $320 million as of
ceded future policy benefits for life and accident and health
December 31, 2005, 2004 and 2003, respectively.
insurance contracts and benefits paid and unpaid. Amounts
related to paid and unpaid losses and loss expenses with respect (t) Real Estate and Other Fixed Assets: The costs of buildings
to these reinsurance agreements are substantially collateralized. and furniture and equipment are depreciated principally on a
straight-line basis over their estimated useful lives (maximum
(q) Other Assets: Other assets consist of prepaid expenses,
of 40 years for buildings and ten years for furniture and
including deferred advertising costs, derivatives assets at market
equipment). Expenditures for maintenance and repairs are
value, and other deferred charges. Generally, advertising costs
charged to income as incurred; expenditures for betterments
are expensed as incurred except for certain direct response
are capitalized and depreciated.
campaigns, which are deferred over the expected future benefit
AIG periodically assesses the carrying value of its real estate
period in accordance with Statement of Position 93-7, ‘‘Re-
relative to the market values of real estate within the specific
porting on Advertising Costs.’’ In instances where AIG can
local area, for the purpose of determining any asset
demonstrate that its direct-response advertising, whose primary
impairment.
purpose is to elicit sales to customers, can be shown to have
responded specifically to the advertising and that results in (u) Separate and Variable Accounts: Separate and variable
probable future economic benefits are capitalized. Deferred accounts represent funds for which investment income and
advertising costs are included in other assets, are amortized on investment gains and losses accrue directly to the policyholders
a campaign by campaign basis over the expected economic who predominantly bear the investment risk. Each account has
future benefit period and reviewed regularly for recoverability. specific investment objectives, and the assets are carried at
The amount reported in other assets was $915 million and market value. The assets of each account are legally segregated
$879 million at December 31, 2005 and 2004, respectively. and are not subject to claims which arise out of any other
The amount of expense amortized into earnings was $272 mil-
AIG m Form 10-K 83