AIG 2006 Annual Report Download - page 164

American International Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements Continued
(s) Reinsurance Assets: Reinsurance assets include the bal-
1. Summary of Significant Accounting Policies
ances due from reinsurance and insurance companies under the
Continued
terms of AIG’s reinsurance agreements for paid and unpaid losses
Direct costs of originating loans, net of nonrefundable points and loss expenses, ceded unearned premiums and ceded future
and fees, are deferred and included in the carrying amount of the policy benefits for life and accident and health insurance contracts
related loans. The amount deferred is recognized as an adjust- and benefits paid and unpaid. Amounts related to paid and unpaid
ment to finance charge revenues, using the interest method. losses, benefits and loss expenses with respect to these
Finance receivables originated and intended for sale in the reinsurance agreements are substantially collateralized.
secondary market are carried at the lower of cost or market value,
as determined by aggregate outstanding commitments from (t) Deferred Policy Acquisition Costs:
investors or current investor yield requirements. AGF recognizes General Insurance: Acquisition costs represent those costs, in-
net unrealized losses through a valuation allowance by charges to cluding commissions, premium taxes and other underwriting
income. expenses, that vary with and are primarily related to the
(o) Securities Lending Collateral and Securities Lending acquisition of new business. These costs are deferred and
Payable, at fair value: AIG’s insurance and asset management amortized over the period in which the related premiums written
operations lend their securities and primarily take cash as are earned. DAC is grouped consistent with the manner in which
collateral with respect to the securities lent. Invested collateral the insurance contracts are acquired, serviced and measured for
consists primarily of floating rate bonds. Income earned on profitability and is reviewed for recoverability based on the
invested collateral, net of interest payable to the collateral profitability of the underlying insurance contracts. Investment
provider, is recorded in net investment income. income is not anticipated in the recoverability of deferred policy
The fair value of securities pledged under securities lending acquisition costs.
arrangements was $69 billion and $59 billion as of December 31, Life Insurance & Retirement Services: Acquisition costs represent
2006 and 2005, respectively. These securities are included in those costs, including commissions, underwriting and marketing
bonds available for sale in AIG’s consolidated balance sheet. expenses, that vary with, and are primarily related to, the
(p) Other Invested Assets: Other invested assets consist acquisition of new business. Policy acquisition costs for traditional
primarily of investments by AIG’s insurance operations in hedge life insurance products are generally deferred and amortized over
funds and limited partnerships. the premium paying period in accordance with FAS 60, ‘‘Account-
Hedge funds and limited partnerships in which AIG holds in the ing and Reporting by Insurance Enterprises’’ (FAS 60). Policy
aggregate less than a five percent interest are reported at fair acquisition costs and policy issuance costs related to universal
value. The change in fair value is recognized as a component of life, participating life, and investment-type products (investment-
Other comprehensive income. oriented products) are deferred and amortized, with interest, in
With respect to hedge funds and limited partnerships in which relation to the incidence of estimated gross profits to be realized
AIG holds in the aggregate a five percent or greater interest or over the estimated lives of the contracts in accordance with
less than a five percent interest but where AIG has more than a FAS 97, ‘‘Accounting and Reporting by Insurance Enterprises for
minor influence over the operations of the investee, AIG’s carrying Certain Long-Duration Contracts and for Realized Gains and
value is its share of the net asset value of the funds or the Losses from the Sale of Investments’’ (FAS 97). Estimated gross
partnerships. The changes in such net asset values, accounted profits are composed of net interest income, net realized
for under the equity method, are recorded in earnings through net investment gains and losses, fees, surrender charges, expenses,
investment income. and mortality and morbidity gains and losses. If estimated gross
AIG obtains the fair values of its investments in limited profits change significantly, DAC is recalculated using the new
partnerships and hedge funds from information provided by the assumptions. Any resulting adjustment is included in current
general partner or manager of each of these investments, the earnings as an adjustment to DAC. DAC is grouped consistent
accounts of which generally are audited on an annual basis. with the manner in which the insurance contracts are acquired,
Also included in other invested assets are real estate held for serviced and measured for profitability and is reviewed for
investment, aircraft asset investments held by non-financial recoverability based on the profitability (both current and projected
services subsidiaries and investments in life settlement contracts. future) of the underlying insurance contracts.
See Notes 8(g) and 8(h) herein for further information. The DAC for investment-oriented products is also adjusted with
respect to estimated gross profits as a result of changes in the
(q) Short-term Investments: Short-term investments consist net unrealized gains or losses on debt and equity securities
of interest bearing cash equivalents, time deposits, and invest- available for sale. That is, as debt and equity securities available
ments with original maturities within one year, such as commer- for sale are carried at aggregate fair value, an adjustment is made
cial paper. to DAC equal to the change in amortization that would have been
(r) Cash: Cash represents cash on hand and non-interest bear- recorded if such securities had been sold at their stated
ing demand deposits. aggregate fair value and the proceeds reinvested at current yields.
The change in this adjustment, net of tax, is included with the
change in net unrealized gains/losses on debt and equity
114 AIG 2006 Form 10-K