AIG 2007 Annual Report Download - page 194

American International Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements Continued
circumstances, the loss is recognized in the period in which the
1. Summary of Significant Accounting Policies
intent to hold the securities to recovery no longer existed.
Continued
In periods subsequent to the recognition of an other-than-
When AIG does not have the positive intent to hold bonds until temporary impairment charge for fixed maturity securities, which is
maturity, these securities are classified as available for sale or as not credit or foreign exchange related, AIG generally accretes the
trading and are carried at fair value. discount or amortizes the reduced premium resulting from the
Premiums and discounts arising from the purchase of bonds reduction in cost basis over the remaining life of the security.
classified as held to maturity or available for sale are treated as For certain investments in beneficial interests in securitized
yield adjustments over their estimated lives, until maturity, or call financial assets of less than high quality with contractual cash
date, if applicable. flows, including asset-backed securities, EITF 99-20, ‘‘Recognition
Common and preferred stocks are carried at fair value. of Interest Income and Impairment on Purchased Beneficial
AIG also enters into dollar roll agreements. These are Interests and Beneficial Interests that Continued to Be Held by a
agreements to sell mortgage-backed securities and to repurchase Transferor in Securitized Financial Assets’’ requires periodic
substantially similar securities at a specified price and date in the updates of AIG’s best estimate of cash flows over the life of the
future. At December 31, 2007 and 2006, there were no dollar roll security. If the fair value of an investment in beneficial interests in
agreements outstanding. a securitized financial asset is less than its cost or amor tized
For AIG’s insurance subsidiaries, unrealized gains and losses cost and there has been a decrease in the present value of the
on investments in trading securities are reported in Net invest- estimated cash flows since the last revised estimate, considering
ment income. Unrealized gains and losses from available for sale both their timing and amount, an other-than-temporary impairment
investments in equity and fixed maturity securities are reported as charge is recognized. Interest income is recognized based on
a separate component of Accumulated other comprehensive changes in the timing and the amount of expected principal and
income (loss), net of deferred income taxes, in consolidated interest cash flows reflected in the yield.
shareholders’ equity. Investments in fixed maturities and equity AIG also considers its intent and ability to retain a temporarily
securities are recorded on a trade-date basis. depressed security until recovery. Estimating future cash flows is
AIG evaluates its investments for other-than-temporary impair- a quantitative and qualitative process that incorporates informa-
ment. The determination that a security has incurred an other- tion received from third-party sources along with certain internal
than-temporary impairment in value and the amount of any loss assumptions and judgments regarding the future performance of
recognized requires the judgment of AIG’s management and a the underlying collateral. In addition, projections of expected
continual review of its investments. future cash flows may change based upon new information
AIG evaluates its investments for other-than-temporary impair- regarding the performance of the underlying collateral.
ment such that a security is considered a candidate for other-than-
temporary impairment if it meets any of the following criteria: (d) Mortgage and Other Loans Receivable — net: Mort-
(Trading at a significant (25 percent or more) discount to par, gage and other loans receivable includes mortgage loans on real
amortized cost (if lower) or cost for an extended period of time estate, policy loans and collateral, commercial and guaranteed
(nine consecutive months or longer); loans. Mortgage loans on real estate and collateral, commercial
(The occurrence of a discrete credit event resulting in (i) the and guaranteed loans are carried at unpaid principal balances
issuer defaulting on a material outstanding obligation; (ii) the less credit allowances and plus or minus adjustments for the
issuer seeking protection from creditors under the bankruptcy accretion or amortization of discount or premium. Interest income
laws or any similar laws intended for court supervised on such loans is accrued as earned.
reorganization of insolvent enterprises; or (iii) the issuer Impairment of mortgage loans on real estate and collateral
proposing a voluntary reorganization pursuant to which credi- and commercial loans is based on certain risk factors and when
tors are asked to exchange their claims for cash or securities collection of all amounts due under the contractual terms is not
having a fair value substantially lower than par value of their probable. This impairment is generally measured based on the
claims; or present value of expected future cash flows discounted at the
(AIG may not realize a full recovery on its investment regardless loan’s effective interest rate subject to the fair value of underlying
of the occurrence of one of the foregoing events. collateral. Interest income on such impaired loans is recognized
The above criteria also consider circumstances of a rapid and as cash is received.
severe market valuation decline, such as that experienced in Policy loans are carried at unpaid principal amount. There is no
current credit markets, in which AIG could not reasonably assert allowance for policy loans because these loans serve to reduce
that the recovery period would be temporary. the death benefit paid when the death claim is made and the
At each balance sheet date, AIG evaluates its securities balances are effectively collateralized by the cash surrender value
holdings with unrealized losses. When AIG does not intend to hold of the policy.
such securities until they have recovered their cost basis, based (e) Financial Services — Flight Equipment: Flight equipment
on the circumstances at the date of evaluation, AIG records the is stated at cost, net of accumulated depreciation. Major
unrealized loss in income. If a loss is recognized from a sale additions, modifications and interest are capitalized. Normal
subsequent to a balance sheet date pursuant to changes in maintenance and repairs, airframe and engine overhauls and
140 AIG 2007 Form 10-K