AIG 2010 Annual Report Download - page 234

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 Direct Investment business and Capital
Markets and other receivables. Trade receivables for Capital Markets include receivables from derivative
counterparties. The allowance for doubtful accounts on premiums and other receivables was $515 million and
$537 million at December 31, 2010 and 2009, 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 $493 million and $440 million at December 31, 2010 and 2009, 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.
218 AIG 2010 Form 10-K