AIG 2010 Annual Report Download - page 177

American International Group, Inc., and Subsidiaries
ILFC’s management formally reviews regularly, and no less frequently than quarterly, issues affecting ILFC’s
fleet, including events and circumstances that may cause impairment of aircraft values. Management evaluates
aircraft in the fleet as necessary based on these events and circumstances. ILFC recognized asset impairment
charges related to its fleet in 2010 and 2009 of $1.6 billion and $51 million, respectively. ILFC did not recognize
any asset impairment charges in 2008.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires the application of accounting policies
that often involve a significant degree of judgment. AIG considers its accounting policies that are most dependent
on the application of estimates and assumptions, and therefore viewed as critical accounting estimates, to be those
relating to items considered by management in the determination of:
• insurance liabilities, including general insurance unpaid claims and claims adjustment expenses and future
policy benefits for life and accident and health contracts;
• recoverability of assets, including deferred policy acquisition costs (DAC) and flight equipment;
• estimated gross profits for investment-oriented products;
• impairment charges, including other-than-temporary impairments on financial instruments;
• liabilities for legal contingencies;
• estimates with respect to income taxes, including recoverability of deferred tax assets; and
• fair value measurements of certain financial assets and liabilities, including credit default swaps (CDS) and
AIG’s economic interest in ML II and equity interest in ML III.
These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at
the time of estimation. To the extent actual experience differs from the assumptions used, AIG’s financial
condition and results of operations would be directly affected.
The major categories for which assumptions are developed and used to establish each critical accounting
estimate are highlighted below.
Liability for Unpaid Claims and Claims Adjustment Expenses (general insurance):
•Loss trend factors: used to establish expected loss ratios for subsequent accident years based on premium
rate adequacy and the projected loss ratio with respect to prior accident years.
•Expected loss ratios for the latest accident year: in this case, accident year 2010 for the year-end 2010 loss
reserve analysis. For low-frequency, high-severity classes such as excess casualty, expected loss ratios
generally are utilized for at least the three most recent accident years.
•Loss development factors: used to project the reported losses for each accident year to an ultimate amount.
•Reinsurance recoverable on unpaid losses: the expected recoveries from reinsurers on losses that have not yet
been reported and/or settled.
AIG uses numerous assumptions in determining its best estimate of reserves for each class of business. The
importance of any specific assumption can vary by both class of business and accident year. If actual experience
differs from key assumptions used in establishing reserves, there is potential for significant variation in the
development of loss reserves, particularly for long-tail casualty classes of business such as excess casualty, D&O or
primary and excess workers’ compensation.
AIG 2010 Form 10-K 161