AIG 2009 Annual Report Download - page 223

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain direct response advertising costs are deferred and amortized over the expected future benefit period. When
AIG can demonstrate that its customers have responded specifically to direct-response advertising, the primary
purpose of which is to elicit sales to customers, and when it can be shown such advertising results in probable future
economic benefits, the advertising costs are capitalized. Deferred advertising costs are amortized on a
cost-pool-by-cost-pool basis over the expected future economic benefit period and are reviewed regularly for
recoverability. Deferred advertising costs totaled $207 million and $640 million at December 31, 2009 and 2008,
respectively. The amount of expense amortized into income was $173 million, $483 million and $395 million, for the
years ended 2009, 2008 and 2007, respectively.
AIG offers sales inducements, which include enhanced crediting rates or bonus payments to contract holders
(bonus interest) on certain annuity and investment contract products. Sales inducements provided to the
contractholder are recognized as part of the liability for policyholders’ contract deposits in the Consolidated Balance
Sheet. Such amounts are deferred and amortized over the life of the contract using the same methodology and
assumptions used to amortize DAC. To qualify for such accounting treatment, the bonus interest must be explicitly
identified in the contract at inception, and AIG must demonstrate that such amounts are incremental to amounts AIG
credits on similar contracts without bonus interest, and are higher than the contract’s expected ongoing crediting rates
for periods after the bonus period. The deferred bonus interest and other deferred sales inducement assets totaled
$1.3 billion and $1.8 billion at December 31, 2009 and 2008, respectively. The amortization expense associated with
these assets is reported within Policyholder benefits and claims incurred in the Consolidated Statement of Income.
Such amortization expense totaled $259 million, $56 million and $149 million for the years ended December 31, 2009,
2008 and 2007, respectively.
All commodities are recorded at the lower of cost or fair value. The exposure to market risk may be reduced
through the use of forwards, futures and option contracts. Lower of cost or fair value reductions in commodity
positions and unrealized gains and losses in related derivatives are reflected in Other income.
See Note 11 herein for a discussion of derivatives.
(m) Separate accounts: Separate accounts represent funds for which investment income and investment gains and
losses accrue directly to the policyholders who bear the investment risk. Each account has specific investment
objectives, and the assets are carried at fair value. The assets of each account are legally segregated and are not
subject to claims that arise out of any other business of AIG. The liabilities for these accounts are equal to the account
assets.
(n) Liability for unpaid claims and claims adjustment expense: Claims and claims adjustment expenses are charged to
income as incurred. The liability for unpaid claims and claims adjustment expense represents the accumulation of
estimates for unpaid reported losses and includes provisions for losses incurred but not reported. The methods of
determining such estimates and establishing resulting reserves, including amounts relating to allowances for estimated
unrecoverable reinsurance, are reviewed and updated. If the estimate of reserves is determined to be inadequate or
redundant, the increase or decrease is reflected in income. AIG discounts its loss reserves relating to workers’
compensation business written by its U.S. domiciled subsidiaries as permitted by the domiciliary statutory regulatory
authorities.
(o) Future policy benefits for life and accident and health contracts and Policyholder contract deposits: The liability for
future policy benefits and policyholder contract deposits are established using assumptions described in Note 12
herein. Future policy benefits for life and accident and health insurance contracts include provisions for future
dividends to participating policyholders, accrued in accordance with all applicable regulatory or contractual
provisions. Also included in Future policy benefits are liabilities for annuities issued in structured settlement
arrangements whereby a claimant has agreed to settle a general insurance claim in exchange for fixed payments over a
fixed determinable period of time with a life contingency feature. Structured settlement liabilities are presented on a
discounted basis as the settled claims are fixed and determinable. Policyholder contract deposits include AIG’s liability
for (a) certain guarantee benefits accounted for as embedded derivatives at fair value, (b) annuities issued in a
215 AIG 2009 Form 10-K