2007 Annual Report - AIG.com

American International Group, Inc. and Subsidiaries
AIG’s businesses, to quantify the specific areas of diversification businesses, segments, geographies and product lines. Commencbenefits
and to assess relative economic value added by a
ing in 2008, the economic value added for each of AIG’s business
business, product or transaction to AIG as a whole. The Economic segments will be considered as an element, alongside other
Capital initiative will also provide necessary and relevant analyses existing measures, in the evaluation of senior management
and inputs in developing a more efficient capital structure. Other performance. The capital planning and allocation process will
key areas of Economic Capital applications include strategic continue to be enhanced by incorporating the regulatory, rating
decision-making for mergers, acquisitions and divestitures, risk agency and economic capital requirements for business segments
accumulation and concentration, risk retention, reinsurance and as well as the assessment of the mobility of excess economic
hedging strategies and product development and pricing.
capital.
During 2006, AIG developed a methodology framework that
incorporates financial services industry best practices, maintains Recent Accounting Standards
consistency with regulatory frameworks and reflects AIG’s distinct
global business and management strategies. By utilizing stochastic
Accounting Changes
simulation techniques, where appropriate, AIG enhanced In September 2005, the American Institute of Certified Public
existing models or developed new ones through a collaborative Accountants (AICPA) issued Statement of Position 05-1, ‘‘Accounteffort
among business executives, actuaries, finance specialists ing by Insurance Enterprises for Deferred Acquisition Costs in
and risk professionals. The initial assessments provided useful Connection with Modifications or Exchanges of Insurance
insight into the overall capital strength of AIG and its segments. Contracts.’’
Throughout 2007, AIG’s focus has been on a wide range of In February 2006, the Financial Accounting Standards Board
business applications of the model together with the continued (FASB) issued FAS 155, ‘‘Accounting for Certain Hybrid Financial
enhancement of the granularity of the model. Key methodology Instruments — an amendment of FAS 140 and FAS 133.’’
enhancements introduced during 2007 include capital fungibility In July 2006, the FASB issued FASB Interpretation No. 48,
and diversification among legal entities, business units and
‘‘Accounting for Uncertainty in Income Taxes — an interpretation of
geographic regions, consistent economic scenarios in developed FASB Statement No. 109.’’
and developing markets, and extensive catastrophic scenario
In July 2006, the FASB issued FASB Staff Position
analysis and stress testing. Furthermore, AIG enhanced its
(FSP) No. 13-2, ‘‘Accounting for a Change or Projected Change in
comprehensive set of risk governance structures to support the the Timing of Cash Flows Relating to Income Taxes Generated by
model’s inputs, assumptions and methodologies. Finally, AIG has a Leveraged Lease Transaction.’’
engaged a panel of independent experts to provide further
In September 2006, the FASB issued FAS No. 157, ‘‘Fair Value
assurance to AIG’s senior management, business segment execu- Measurements.’’
tives and external constituents as to the validity of the model and In September 2006, the FASB issued FAS 158, ‘‘Employers’
its results for business segments and for AIG in the aggregate. Accounting for Defined Benefit Pension and Other Postretirement
Besides model enhancements and firm-wide capital strength Plans — an amendment of FASB Statements No. 87, 88, 106 and
analysis, during 2007 AIG also incorporated its Economic Capital 132R.’’
model and analysis into a number of specific business issues and In February 2007, the FASB issued FAS No. 159, ‘‘The Fair
in developing new business strategies. For example, economic Value Option for Financial Assets and Financial Liabilities.’’
capital analysis is being incorporated into the assessment phase In June 2007, the AICPA issued Statement of Position
for mergers, acquisitions and divestures, and in the development No. 07-1, ‘‘Clarification of the Scope of the Audit and Accounting
of capital markets solutions. In the reinsurance area, economic Guide ’Audits of Investment Companies’ and Accounting by Parent
capital considerations are fundamental to the development of Companies and Equity Method Investors for Investments in
optimal risk retention and reinsurance strategies and management Investment Companies.’’ (Indefinitely deferred by the FASB)
of credit exposures to reinsurance counterparties. In the Life
In December 2007, the FASB issued FAS No. 141 (revised
Insurance & Retirement Services segment, the Economic Capital 2007), ‘‘Business Combinations.’’
model has been used for product development, pricing and
In December 2007, the FASB issued FAS No. 160, ‘‘Nonconhedging
strategies for living benefits in the variable annuity
trolling Interests in Consolidated Financial Statements, an amendbusiness.
For life insurance products in Asian markets, enhanced ment of ARB No. 51.’’
asset-liability management strategies have been formulated for
For further discussion of these recent accounting standards
long duration liability structures and low interest rate environand
their application to AIG, see Note 1(hh) to Consolidated
ments in certain markets using the technology developed for AIG’s
Financial Statements.
Economic Capital model.
In 2008, AIG plans to extend the model’s application by
building on the work performed in 2007 for a wider range of
AIG 2007 Form 10-K 127