AIG 2006 Annual Report Download - page 81

American International Group, Inc. and Subsidiaries
Deferred Policy Acquisition Costs (Life Insurance & Retirement Flight Equipment — Recoverability (Financial Services):
Services): (Expected undiscounted future net cash flows: based upon
(Recoverability: based on current and future expected profitabil- current lease rates, projected future lease rates and estimated
ity, which is affected by interest rates, foreign exchange rates, terminal values of each aircraft based on third party
mortality experience, and policy persistency. information.
Deferred Policy Acquisition Costs (General Insurance): Operating Review
(Recoverability and eligibility: based upon the current terms and General Insurance Operations
profitability of the underlying insurance contracts.
AIG’s General Insurance subsidiaries are multiple line companies
writing substantially all lines of commercial property and casualty
Fair Value Determinations Of Certain Assets And Liabilities
insurance and various personal lines both domestically and
(Financial Services):
abroad.
(Valuation models: utilizing factors, such as market liquidity and As previously noted, AIG believes it should present and discuss
current interest, foreign exchange and volatility rates. its financial information in a manner most meaningful to its
(Market price data: AIG attempts to secure reliable and financial statement users. Accordingly, in its General Insurance
independent current market price data, such as published business, AIG uses certain regulatory measures, where AIG has
exchange rates from external subscription services such as determined these measurements to be useful and meaningful.
Bloomberg or Reuters or third-party broker quotes for use in its A critical discipline of a successful general insurance business
models. When such data is not available, AIG uses an internal is the objective to produce profit from underwriting activities
methodology, which includes interpolation and extrapolation exclusive of investment-related income. When underwriting is not
from verifiable prices from trades occurring on dates nearest to profitable, premiums are inadequate to pay for insured losses and
the dates of the transactions. underwriting related expenses. In these situations, the addition of
general insurance related investment income and realized capital
Other-Than-Temporary Declines In The Value Of Investments: gains may, however, enable a general insurance business to
A security is considered a candidate for other-than-temporary produce operating income. For these reasons, AIG views underwrit-
impairment if it meets any of the following criteria: ing results to be critical in the overall evaluation of performance.
(Trading at a significant (25 percent or more) discount to par or See also Liquidity herein.
amortized cost (if lower) for an extended period of time (nine Statutor y underwriting profit is derived by reducing net premi-
months or longer); ums earned by net losses and loss expenses incurred and net
(The occurrence of a discrete credit event resulting in the debtor expenses incurred. Statutor y accounting generally requires imme-
defaulting or seeking bankruptcy or insolvency protection or diate expense recognition and ignores the matching of revenues
voluntary reorganization; or and expenses as required by GAAP. That is, for statutory
(The probability of non-realization of a full recovery on its purposes, expenses (including acquisition costs) are recognized
investment, irrespective of the occurrence of one of the immediately, not over the same period that the revenues are
foregoing events. earned. Thus, statutory expenses exclude changes in DAC.
At each balance sheet date, AIG evaluates its securities GAAP provides for the recognition of expenses at the same
holdings in an unrealized loss position. Where AIG does not intend time revenues are earned, the accounting principle of matching.
to hold such securities until they have fully recovered their Therefore, acquisition expenses are deferred and amortized over
carrying value, based on the circumstances present at the date of the period the related net premiums written are earned. DAC is
evaluation, AIG records the unrealized loss in income. If events or reviewed for recoverability, and such review requires management
circumstances change, such as unexpected changes in the judgment. The most comparable GAAP measure to statutory
creditworthiness of the obligor, unanticipated changes in interest underwriting profit is income before income taxes, minority
rates, tax laws, statutory capital positions and unforeseen liquidity interest and cumulative effect of an accounting change. A table
events, among others, AIG revisits its intent. Further, if a loss is reconciling statutory underwriting profit to income before income
recognized from a sale subsequent to a balance sheet date taxes, minority interest and cumulative effect of an accounting
pursuant to these unexpected changes in circumstances, the loss change is contained in footnote (g) to the following table. See also
is recognized in the period in which the intent to hold the Critical Accounting Estimates herein and Notes 1 and 4 of Notes
securities to recovery no longer existed. to Consolidated Financial Statements.
In periods subsequent to the recognition of an other-than- AIG, along with most general insurance companies, uses the
temporary impairment loss for debt securities, AIG amortizes the loss ratio, the expense ratio and the combined ratio as measures
discount or reduced premium over the remaining life of the of underwriting performance. The loss ratio is the sum of losses
security in a prospective manner based on the amount and timing and loss expenses incurred divided by net premiums earned. The
of estimated future cash flows. expense ratio is statutory underwriting expenses divided by net
premiums written. These ratios are relative measurements that
describe, for every $100 of net premiums earned or written, the
Form 10-K 2006 AIG 31