AIG 2009 Annual Report Download - page 220

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AIG minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual
obligations by monitoring customer credit exposure and collateral value and generally requiring additional collateral
to be deposited with AIG when necessary.
Short-term investments: Short-term investments consist of interest-bearing cash equivalents, time deposits, and
investments with original maturities within one year from the date of purchase, such as commercial paper.
(e) Cash: Cash represents cash on hand and non-interest bearing demand deposits.
(f) Premiums and other receivables: Premiums and other receivables includes premium balances receivable, amounts
due from agents and brokers and insureds, trade receivables for AIGFP and other receivables. Trade receivables for
AIGFP include receivables from derivative counterparties. The allowance for doubtful accounts on premiums and
other receivables was $537 million and $578 million at December 31, 2009 and 2008, respectively.
(g) Reinsurance assets — net: 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 $440 million and $425 million at December 31, 2009 and 2008, respectively.
(h) Deferred policy acquisition costs: Policy acquisition costs represent those costs, including commissions, 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 recoverability 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. 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. 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 participating life, traditional life and accident and health insurance products,
VOBA is amortized over the life of the business similar to that for DAC based on the assumptions at purchase. For
universal life, and investment-oriented products, VOBA is amortized in relation to the estimated gross profits to date
for each period.
AIG 2009 Form 10-K 212