AIG 2008 Annual Report Download - page 218

doubtful accounts on premiums and insurance balances receivable was $578 million and $662 million at
December 31, 2008 and 2007, respectively.
(m) Reinsurance Assets: Reinsurance assets include the balances due from reinsurance and insurance
companies under the terms of AIG’s reinsurance agreements for paid and unpaid losses and loss expenses, ceded
unearned premiums and ceded future policy benefits for life and accident and health insurance contracts and
benefits paid and unpaid. Amounts related to paid and unpaid losses and benefits and loss expenses with respect to
these reinsurance agreements are substantially collateralized. The allowance for doubtful accounts on reinsurance
assets was $425 million and $520 million at December 31, 2008 and 2007, respectively.
(n) Trade Receivables and Trade Payables: Trade receivables and Trade payables for AIGFP include option
premiums paid and received and receivables from and payables to counterparties that relate to unrealized gains and
losses on futures, forwards, and options and balances due from and due to clearing brokers and exchanges.
(o) Deferred Policy Acquisition Costs: Policy acquisition costs represent those costs, including commis-
sions, premium taxes and other underwriting expenses that vary with and are primarily related to the acquisition of
new business.
Short-duration Insurance Contracts: Policy acquisition costs are deferred and amortized over the period in
which the related premiums written are earned. DAC is grouped consistent with the manner in which the insurance
contracts are acquired, serviced and measured for profitability and is reviewed for recoverability based on the
profitability of the underlying insurance contracts. Investment income is not anticipated in assessing the recov-
erability of DAC.
Long-duration Insurance Contracts: Policy acquisition costs for participating life, traditional life and
accident and health insurance products are generally deferred and amortized, with interest, over the premium
paying period in accordance with FAS 60, “Accounting and Reporting by Insurance Enterprises” (FAS 60). Policy
acquisition costs and policy issuance costs related to universal life, and investment-type products (investment-
oriented products) are deferred and amortized, with interest, in relation to the incidence of estimated gross profits to
be realized over the estimated lives of the contracts in accordance with FAS 97, “Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments” (FAS 97). Estimated gross profits are composed of net interest income, net realized investment gains
and losses, fees, surrender charges, expenses, and mortality and morbidity gains and losses. If estimated gross
profits change significantly, DAC is recalculated using the new assumptions. Any resulting adjustment is included
in income as an adjustment to DAC. DAC is grouped consistent with the manner in which the insurance contracts
are acquired, serviced and measured for profitability and is reviewed for recoverability based on the current and
projected future profitability of the underlying insurance contracts.
The DAC for investment-oriented products is also adjusted with respect to estimated gross profits as a result of
changes in the net unrealized gains or losses on fixed maturity and equity securities available for sale. Because fixed
maturity and equity securities available for sale are carried at aggregate fair value, an adjustment is made to DAC
equal to the change in amortization that would have been recorded if such securities had been sold at their stated
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 fixed maturity and equity securities available for sale that
is credited or charged directly to Accumulated other comprehensive income (loss).
Value of Business Acquired (VOBA) is determined at the time of acquisition and is reported in the
consolidated balance sheet with DAC. This value is based on the present value of future pre-tax profits discounted
at yields applicable at the time of purchase. For products accounted for under FAS 60, VOBA is amortized over the
life of the business similar to that for DAC based on the assumptions at purchase. For products accounted for under
FAS 97, VOBA is amortized in relation to the estimated gross profits to date for each period.
Beginning in 2008, for contracts accounted for at fair value under FAS 159, policy acquisition costs are
expensed as incurred and not deferred or amortized.
212 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)