AIG 2007 Annual Report Download - page 196

American International Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements Continued
(p) Cash: Cash represents cash on hand and non-interest
1. Summary of Significant Accounting Policies
bearing demand deposits.
Continued
Finance receivables originated and intended for sale in the (q) Reinsurance Assets: Reinsurance assets include the bal-
secondary market are carried at the lower of cost or fair value, as ances due from reinsurance and insurance companies under the
determined by aggregate outstanding commitments from investors terms of AIG’s reinsurance agreements for paid and unpaid losses
or current investor yield requirements. American General Finance, and loss expenses, ceded unearned premiums and ceded future
Inc. (AGF) recognizes net unrealized losses through a valuation policy benefits for life and accident and health insurance contracts
allowance by charges to income. and benefits paid and unpaid. Amounts related to paid and unpaid
losses and benefits and loss expenses with respect to these
(m) Securities Lending Invested Collateral, at Fair Value reinsurance agreements are substantially collateralized.
and Securities Lending Payable: AIG’s insurance and asset
management operations lend their securities and primarily take (r) Deferred Policy Acquisition Costs:
cash as collateral with respect to the securities lent. Invested Policy acquisition costs represent those costs, including com-
collateral consists of interest-bearing cash equivalents and floating missions, premium taxes and other underwriting expenses that
rate bonds, whose changes in fair value are recorded as a vary with and are primarily related to the acquisition of new
separate component of Accumulated other comprehensive income business.
(loss), net of deferred income taxes. The invested collateral is General Insurance: Policy acquisition costs are deferred and
evaluated for other-than-temporary impairment by applying the amortized over the period in which the related premiums written
same criteria used for investments in fixed maturities. Income are earned. DAC is grouped consistent with the manner in which
earned on invested collateral, net of interest payable to the the insurance contracts are acquired, serviced and measured for
collateral provider, is recorded in Net investment income. profitability and is reviewed for recoverability based on the
The fair value of securities pledged under securities lending profitability of the underlying insurance contracts. Investment
arrangements was $76 billion and $69 billion at December 31, income is not anticipated in assessing the recoverability of DAC.
2007 and 2006, respectively. These securities are included in
bonds available for sale in AIG’s consolidated balance sheet. Life Insurance & Retirement Services: Policy acquisition costs for
traditional life insurance products are generally deferred and
(n) Other Invested Assets: Other invested assets consist amortized over the premium paying period in accordance with
primarily of investments by AIG’s insurance operations in hedge FAS 60, ‘‘Accounting and Reporting by Insurance Enterprises’’
funds, private equity and limited partnerships. (FAS 60). Policy acquisition costs and policy issuance costs
Hedge funds and limited partnerships in which AIG’s insurance related to universal life, participating life, and investment-type
operations hold in the aggregate less than a five percent interest products (investment-oriented products) are deferred and amor-
are reported at fair value. The change in fair value is recognized tized, with interest, in relation to the incidence of estimated gross
as a component of Accumulated other comprehensive income profits to be realized over the estimated lives of the contracts in
(loss). accordance with FAS 97, ‘‘Accounting and Reporting by Insurance
With respect to hedge funds and limited partnerships in which Enterprises for Certain Long-Duration Contracts and for Realized
AIG holds in the aggregate a five percent or greater interest or Gains and Losses from the Sale of Investments’’ (FAS 97).
less than a five percent interest but in which AIG has more than a Estimated gross profits are composed of net interest income, net
minor influence over the operations of the investee, AIG’s carrying realized investment gains and losses, fees, surrender charges,
value is its share of the net asset value of the funds or the expenses, and mortality and morbidity gains and losses. If
partnerships. The changes in such net asset values, accounted estimated gross profits change significantly, DAC is recalculated
for under the equity method, are recorded in Net investment using the new assumptions. Any resulting adjustment is included
income. in income as an adjustment to DAC. DAC is grouped consistent
In applying the equity method of accounting, AIG consistently with the manner in which the insurance contracts are acquired,
uses the most recently available financial information provided by serviced and measured for profitability and is reviewed for
the general partner or manager of each of these investments, recoverability based on the current and projected future profitabil-
which is one to three months prior to the end of AIG’s reporting ity of the underlying insurance contracts.
period. The financial statements of these investees are generally The DAC for investment-oriented products is also adjusted with
audited on an annual basis. respect to estimated gross profits as a result of changes in the
Also included in Other invested assets are real estate held for net unrealized gains or losses on fixed maturity and equity
investment, aircraft asset investments held by non-financial securities available for sale. Because fixed maturity and equity
services subsidiaries and investments in life settlement contracts. securities available for sale are carried at aggregate fair value, an
See Note 3(g) herein for further information. adjustment is made to DAC equal to the change in amortization
(o) Short-term Investments: Short-term investments consist that would have been recorded if such securities had been sold at
of interest-bearing cash equivalents, time deposits, and invest- their stated aggregate fair value and the proceeds reinvested at
ments with original maturities within one year from the date of current yields. The change in this adjustment, net of tax, is
purchase, such as commercial paper. included with the change in net unrealized gains/losses on fixed
142 AIG 2007 Form 10-K