AIG 2008 Annual Report Download - page 278

• The universal life funds have credited interest rates of 1.0 percent to 5.8 percent and guarantees ranging from
1.0 percent to 5.5 percent depending on the year of issue. Additionally, universal life funds are subject to
surrender charges that amount to 13.0 percent of the aggregate fund balance grading to zero over a period not
longer than 20 years.
• For variable products and investment contracts, policy values are expressed in terms of investment units.
Each unit is linked to an asset portfolio. The value of a unit increases or decreases based on the value of the
linked asset portfolio. The current liability at any time is the sum of the current unit value of all investment
units plus any liability for guaranteed minimum death or withdrawal benefits.
Certain products are subject to experience adjustments. These include group life and group medical products,
credit life contracts, accident and health insurance contracts/riders attached to life policies and, to a limited extent,
reinsurance agreements with other direct insurers. Ultimate premiums from these contracts are estimated and
recognized as revenue, and the unearned portions of the premiums recorded as liabilities. Experience adjustments
vary according to the type of contract and the territory in which the policy is in force and are subject to local
regulatory guidance.
12. Variable Life and Annuity Contracts
AIG follows Statement of Position 03-1 (SOP 03-1), which requires recognition of a liability for guaranteed
minimum death benefits and other living benefits related to variable annuity and variable life contracts as well as
certain disclosures for these products.
AIG reports variable contracts through separate accounts when investment income and investment gains and
losses accrue directly to, and investment risk is borne by, the contract holder (traditional variable annuities), and the
separate account qualifies for separate account treatment under SOP 03-1. In some foreign jurisdictions, separate
accounts are not legally insulated from general account creditors and therefore do not qualify for separate account
treatment under SOP 03-1. In such cases, the variable contracts are reported as general account contracts even
though the policyholder bears the risks associated with the performance of the assets. AIG also reports variable
annuity and life contracts through separate accounts, or general accounts when not qualified for separate account
reporting, when AIG contractually guarantees to the contract holder (variable contracts with guarantees) either
(a) total deposits made to the contract less any partial withdrawals plus a minimum return (and in minor instances,
no minimum returns) (Net Deposits Plus a Minimum Return) or (b) the highest contract value attained, typically on
any anniversary date minus any subsequent withdrawals following the contract anniversary (Highest Contract Value
Attained). These guarantees include benefits that are payable in the event of death, annuitization, or, in other
instances, at specified dates during the accumulation period. Such benefits are referred to as guaranteed minimum
death benefits (GMDB), guaranteed minimum income benefits (GMIB), guaranteed minimum withdrawal benefits
(GMWB) and guaranteed minimum account value benefits (GMAV). For AIG, GMDB is by far the most widely
offered benefit.
The assets supporting the variable portion of both traditional variable annuities and variable contracts with
guarantees are carried at fair value and reported as Separate account assets with an equivalent summary total
reported as Separate account liabilities when the separate account qualifies for separate account treatment under
SOP 03-1. Assets for separate accounts that do not qualify for separate account treatment are reported as trading
account assets, and liabilities are included in the respective policyholder liability account of the general account.
Amounts assessed against the contract holders for mortality, administrative, and other services are included in
revenue and changes in liabilities for minimum guarantees are included in policyholder benefits and claims incurred
in the consolidated statement of income. Separate account net investment income, net investment gains and losses,
and the related liability changes are offset within the same line item in the consolidated statement of income for
those accounts that qualify for separate account treatment under SOP 03-1. Net investment income and gains and
losses on trading accounts for contracts that do not qualify for separate account treatment under SOP 03-1 are
reported in net investment income and are principally offset by amounts reported in policyholder benefits and
claims incurred.
272 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)