AIG 2010 Annual Report Download - page 182

American International Group, Inc., and Subsidiaries
(d) Represents the net impact of a 10 basis point parallel shift in the yield curve.
The analysis of DAC, guaranteed benefits reserve and unearned revenue liability is a dynamic process that
considers all relevant factors and assumptions described above. Each of the factors set forth above is estimated
individually, without consideration of any correlation among the key assumptions. An assessment of sensitivity
associated with changes in any single assumption would not necessarily be an indicator of future results.
Deferred Policy Acquisition Costs — Short Duration (general insurance):
•Recoverability: based upon the current terms and profitability of the underlying insurance contracts.
Policy acquisition costs are deferred and amortized over the period in which the related premiums written are
earned, generally 12 months. 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. AIG assesses the recoverability of its DAC on an annual basis or more frequently
if circumstances indicate an impairment may have occurred. This assessment is performed by comparing recorded
unearned premium to the sum of expected claims, claims adjustment expenses and maintenance cost, unamortized
DAC and anticipated maintenance costs. If the sum of these costs exceeds the amount of recorded unearned
premium, the excess is recognized as an offset against the asset established for DAC. This offset is referred to as a
premium deficiency charge. Investment income is not anticipated in assessing the recoverability of DAC. Increases
in the expected claims, and claims adjustment expenses can have a significant impact on the likelihood and
amount of a premium deficiency charge. Management tested the recoverability of DAC and determined that
recorded unearned premiums of its Chartis U.S. and Chartis International operating segments exceeded the sum
of these costs at December 31, 2010, by one percent and 16 percent, respectively, and, therefore, the DAC of
these reporting units was considered to be recoverable. DAC for Chartis U.S. and Chartis International amounted
to $1.8 billion and $1.6 billion, respectively, at December 31, 2010.
Flight Equipment Recoverability (Financial Services):
•Expected undiscounted future net cash flows: based upon current lease rates, projected future lease rates and
lease periods and estimated residual or sales values of each aircraft based on expectations regarding the use
of the aircraft and market participants.
Other-Than-Temporary Impairments:
At each balance sheet date, AIG evaluates its available for sale securities holdings with unrealized losses. Prior
to April 1, 2009, these reviews were conducted pursuant to accounting standards that were amended on that date.
See Note 7 to the Consolidated Financial Statements for a discussion of AIG’s process for evaluating
other-than-temporary impairments under these prior accounting standards.
Fixed Maturity Securities
In April 2009, the Financial Accounting Standards Board issued a new accounting standard addressing
recognition and presentation of other-than-temporary impairments, which amended the other-than-temporary
impairment model for fixed maturity securities and requires additional disclosures. The impairment model for
equity securities was not affected. See Note 2 to the Consolidated Financial Statements for additional discussion
on the other-than-temporary impairments accounting standard.
In connection with AIG’s adoption of the new other-than-temporary impairments accounting standard on
April 1, 2009, AIG changed its process for determining other-than-temporary impairments with respect to
available for sale fixed maturity securities. If AIG intends to sell a fixed maturity security or it is more likely than
not that AIG will be required to sell a fixed maturity security before recovery of its amortized cost basis, and the
fair value of the security is below amortized cost, an other-than-temporary impairment has occurred and the
amortized cost is written down to current fair value, with a corresponding charge to earnings.
166 AIG 2010 Form 10-K