AIG 2006 Annual Report Download - page 162

American International Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements Continued
creditworthiness of the obligor, unanticipated changes in interest
1. Summary of Significant Accounting Policies
rates, tax laws, statutory capital positions and liquidity events,
Continued
among others, AIG revisits its intent. Further, if a loss is
of the liability can be reasonably estimated. In many cases, it is recognized from a sale subsequent to a balance sheet date
not possible to determine whether a liability has been incurred or pursuant to these unexpected changes in circumstances, the loss
to estimate the ultimate or minimum amount of that liability until is recognized in the period in which the intent to hold the
years after the contingency arises, in which case no accrual is securities to recovery no longer existed.
made until that time. In periods subsequent to the recognition of an other-than-
(e) Investments in Fixed Maturities and Equity Securities: temporary impairment loss for debt securities, AIG generally
Bonds held to maturity are principally owned by the insurance amortizes the discount or reduced premium over the remaining
subsidiaries and are carried at amortized cost where AIG has the life of the security in a prospective manner based on the amount
ability and positive intent to hold these securities until maturity. and timing of future estimated cash flows.
Where AIG may not have the positive intent to hold bonds until (f) Mortgage Loans on Real Estate — net, Policy, Collat-
maturity and such securities are not designated as trading, these eral and Guaranteed Loans — net: Mortgage loans on real
securities are considered to be available for sale and carried at estate, policy, collateral and guaranteed loans are carried at
current fair values. unpaid principal balances. Interest income on such loans is
Premiums and discounts arising from the purchase of bonds accrued as earned.
are treated as yield adjustments over their estimated lives, until Impairment of mortgage loans on real estate and collateral
maturity, or call date, if applicable. loans is based upon certain risk factors and when collection of all
Bond trading securities are carried at current fair values. amounts due under the contractual term is not probable. This
Common and preferred stocks are carried at current fair impairment is generally measured based on the present value of
values. expected future cash flows discounted at the loan’s effective
AIG may also enter into dollar roll agreements. These are interest rate subject to the fair value of underlying collateral if the
agreements to sell mortgage-backed securities and to repurchase loan is collateral dependent. Interest income on such impaired
substantially similar securities at a specified price and date in the loans is recognized as cash is received.
future. At December 31, 2006, 2005 and 2004, there were no There is no allowance for policy loans, as these loans serve to
dollar roll agreements outstanding. reduce the death benefit paid when the death claim is made and
Unrealized gains and losses from available for sale invest- the balances are effectively collateralized by the cash surrender
ments in equity and fixed maturity securities are reflected as a value of the policy.
separate component of other comprehensive income, net of
deferred income taxes currently. Unrealized gains and losses from (g) Financial Services — Flight Equipment: Flight equipment
investments in trading securities are reflected in income currently. is stated at cost, net of accumulated depreciation. Major
Investments in fixed maturities and equity securities are recorded additions, modifications and interest are capitalized. Normal
on a trade date basis. maintenance and repairs, airframe and engine overhauls and
AIG evaluates its investments for impairment. As a matter of compliance with return conditions of flight equipment on lease are
policy, the determination that a security has incurred an other- provided by and paid for by the lessee. Under the provisions of
than-temporary decline in value and the amount of any loss most leases for certain air frame and engine overhauls, the lessee
recognition requires the judgment of AIG’s management and a is reimbursed for certain costs incurred up to but not exceeding
continual review of its investments. contingent rentals paid to AIG by the lessee. AIG provides a
In general, a security is considered a candidate for other-than- charge to income for such reimbursements based upon the
temporary impairment if it meets any of the following criteria: expected reimbursements during the life of the lease. Deprecia-
(Trading at a significant (25 percent or more) discount to par or tion and amortization are computed on the straight-line basis to a
amortized cost (if lower) for an extended period of time (nine residual value of approximately 15 percent over the estimated
months or longer); useful lives of the related assets but not exceeding 25 years.
(The occurrence of a discrete credit event resulting in the debtor Aircraft in the fleet are evaluated, as necessary, based on these
defaulting or seeking bankruptcy or insolvency protection or events and circumstances in accordance with FAS No. 144,
voluntary reorganization; or ‘‘Accounting for the Impairment or Disposal of Long-Lived Assets’’
(The probability of non-realization of a full recovery on its (FAS 144). FAS 144 requires that long-lived assets be reviewed for
investment, irrespective of the occurrence of one of the impairment whenever events or changes in circumstances indicate
foregoing events. that the carrying amount of an asset may not be recoverable.
At each balance sheet date, AIG evaluates its securities Recoverability of assets is measured by comparing the carrying
holdings in an unrealized loss position. Where AIG does not intend amount of an asset to future undiscounted net cash flows
to hold such securities until they have fully recovered their expected to be generated by the asset. These evaluations for
carrying value, based on the circumstances present at the date of impairment are significantly affected by estimates of future
evaluation, AIG records the unrealized loss in income. If events or revenues and other factors which involve some amount of
circumstances change, such as unexpected changes in the uncertainty.
112 AIG 2006 Form 10-K