2007 Annual Report - AIG.com

American International Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of
AIG, its controlled subsidiaries, and variable interest entities in
which AIG is the primary beneficiary. Entities that AIG does not
consolidate but in which it holds 20 percent to 50 percent of the
voting rights and/or has the ability to exercise significant influence
are accounted for under the equity method.
Certain of AIG’s foreign subsidiaries included in the consolidated
financial statements report on a fiscal year ending November 30.
The effect on AIG’s consolidated financial condition and results of
operations of all material events occurring between November 30
and December 31 for all periods presented has been recorded.
The accompanying consolidated financial statements have
been prepared in accordance with U.S. generally accepted
accounting principles (GAAP). All material intercompany accounts
and transactions have been eliminated.
Description of Business
See Note 2 herein for a description of AIG’s businesses.
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ,
possibly materially, from those estimates.
AIG considers its most critical accounting estimates to be
those with respect to reserves for losses and loss expenses,
future policy benefits for life and accident and health contracts,
estimated gross profits for investment-oriented products, recoverability
of deferred policy acquisition costs (DAC), fair value
measurements of certain assets and liabilities, including the
super senior credit default swaps written by AIGFP, other-than-
temporary impairments in the value of investments, the allowance
for finance receivable losses and flight equipment recoverability.
During the second half of 2007, disruption in the global credit
markets, coupled with the repricing of credit risk, and the
U.S. housing market deterioration, particularly in the fourth
quarter, created increasingly difficult conditions in the financial
markets. These conditions have resulted in greater volatility, less
liquidity, widening of credit spreads and a lack of price transparency
in certain markets and have made it more difficult to
value certain of AIG’s invested assets and the obligations and
collateral relating to certain financial instruments issued or held
by AIG, such as AIGFP’s super senior credit default swap portfolio.
Revisions and Reclassifications
In 2007, AIG determined that certain products that were historically
reported as separate account assets under American Institute of
Certified Public Accountants (AICPA) Statement of Position
(SOP) 03-1, ‘‘Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate
Accounts’’ (SOP 03-1) should have been reported as general
account assets. Accordingly, the December 31, 2006 consolidated
balance sheet has been revised to reflect the transfer of $2.4 billion
of assets from separate account assets to general account
assets, and the same amount of liabilities from separate account
liabilities to policyholders’ contract deposits. This revision had no
effect on consolidated income before income taxes, net income, or
shareholders’ equity for any period presented.
Certain reclassifications and format changes have been made
to prior period amounts to conform to the current period
presentation.
Out-of-Period Adjustments
During 2007 and 2006, AIG recorded the effects of certain out-ofperiod
adjustments, which (decreased) increased net income by
$(399) million and $65 million, respectively. During 2007, out-of-
period adjustments collectively decreased pre-tax operating in-
come by $372 million ($399 million after tax). The adjustments
were comprised of a charge of $380 million ($247 million after
tax) to reverse net gains on transfers of investment securities
among legal entities consolidated within AIGFP and a corresponding
increase to accumulated other comprehensive income (loss);
$156 million of additional income tax expense related to the
successful remediation of the material weakness in internal
control over income tax accounting; $142 million ($92 million
after tax) of additional expense related to insurance reserves and
DAC in connection with improvements in its internal control over
financial reporting and consolidation processes; $42 million
($29 million after tax) of additional expense, primarily related to
other remediation activities; and $192 million ($125 million after
tax) of net realized capital gains related to foreign exchange.
Accounting Policies
(a) Revenue Recognition and Expenses:
Premiums and Other Considerations: Premiums for short duration
contracts and considerations received from retailers in connection
with the sale of extended service contracts are earned primarily on a
pro rata basis over the term of the related coverage. The reserve for
unearned premiums includes the portion of premiums written and
other considerations relating to the unexpired terms of coverage.
Premiums for long duration insurance products and life
contingent annuities are recognized as revenues when due.
Estimates for premiums due but not yet collected are accrued.
Consideration for universal life and investment-type products
consists of policy charges for the cost of insurance, administra-
tion, and surrenders during the period. Policy charges collected
with respect to future services are deferred and recognized in a
manner similar to DAC related to such products.
Net Investment Income: Net investment income represents income
primarily from the following sources in AIG’s insurance
operations:
( Interest income and related expenses, including amortization of
premiums and accretion of discounts on bonds with changes in
138 AIG 2007 Form 10-K