2007 Annual Report - AIG.com

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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-ofperiod adjustments collectively decreased pre-tax operating income 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
American International Group, Inc. and Subsidiaries 1. Summary of Significant Accounting Policies ( Changes in the fair value of derivatives (excluding the super Continued senior credit default swap portfolio). In certain instances, no initial gain or loss is recognized in accordance with Emerging the timing and the amount of expected principal and interest Issues Task Force Issue (EITF) 02-3, ‘‘Issues Involved in cash flows reflected in the yield, as applicable. Accounting for Derivative Contracts Held for Trading Purposes ( Dividend income and distributions from common and preferred and Contracts Involved in Energy Trading and Risk Management stock and other investments when receivable. Activities’’ (EITF 02-3). The initial gain or loss is recognized in ( Realized and unrealized gains and losses from investments in income over the life of the transaction or when observable trading securities accounted for at fair value. market data becomes available. ( Earnings from hedge funds and limited partnership investments ( Realized and unrealized gains and losses from trading securiaccounted for under the equity method. ties and spot commodities sold but not yet purchased, futures ( The difference between the carrying amount of a life settleand hybrid financial instruments. ment contract and the life insurance proceeds of the underlying ( Realized gains and losses from the sale of available for sale life insurance policy recorded in income upon the death of the securities and investments in private equities, joint ventures, insured. limited partnerships and other investments. Realized Capital Gains (Losses): Realized capital gains and losses ( Exchange gains and losses resulting from foreign currency are determined by specific identification. The realized capital gains transactions. and losses are generated primarily from the following sources: ( Reductions to the cost basis of securities available for sale for ( Sales of fixed maturity securities and equity securities (except other-than-temporary impairments. trading securities accounted for at fair value), real estate, ( Earnings from hedge funds and limited partnership investments investments in joint ventures and limited partnerships and accounted for under the equity method. other types of investments. Finance charges on consumer loans are recognized as revenue ( Reductions to the cost basis of fixed maturity securities and using the interest method. Revenue ceases to be accrued when equity securities (except trading securities accounted for at fair contractual payments are not received for four consecutive value) and other invested assets for other-than-temporary months for loans and retail sales contracts, and for six months for impairments. revolving retail accounts and private label receivables. Extension ( Changes in fair value of derivatives that are not involved in fees, late charges, and prepayment penalties are recognized as qualifying hedging activities. revenue when received. ( Exchange gains and losses resulting from foreign currency Incurred Policy Losses and Benefits: Incurred policy losses for transactions. short duration insurance contracts consist of the estimated Other Income: Other income includes income from flight equip- ultimate cost of settling claims incurred within the reporting ment, Asset Management operations, the operations of AIGFP and period, including incurred but not reported claims, plus the finance charges on consumer loans. changes in estimates of current and prior period losses resulting Income from flight equipment under operating leases is from the continuous review process. Benefits for long duration recognized over the life of the lease as rentals become receivable insurance contracts consist of benefits paid and changes in future under the provisions of the lease or, in the case of leases with policy benefits liabilities. Benefits for universal life and investmentvarying payments, under the straight-line method over the noncan- type products primarily consist of interest credited to policy celable term of the lease. In certain cases, leases provide for account balances and benefit payments made in excess of policy additional payments contingent on usage. Rental income is account balances. recognized at the time such usage occurs less a provision for (b) Income Taxes: Deferred tax assets and liabilities are future contractual aircraft maintenance. Gains and losses on flight recorded for the effects of temporary differences between the tax equipment are recognized when flight equipment is sold and the basis of an asset or liability and its reported amount in the risk of ownership of the equipment is passed to the new owner. consolidated financial statements. AIG assesses its ability to Income from Asset Management operations is generally recogrealize deferred tax assets primarily based on the earnings nized as revenues as services are performed. Certain costs history, the future earnings potential, the reversal of taxable incurred in the sale of mutual funds are deferred and subsetemporary differences, and the tax planning strategies available to quently amortized. the legal entities when recognizing deferred tax assets in Income from the operations of AIGFP included in other income accordance with Statement of Financial Accounting Standards No. consists of the following: (FAS) 109, ‘‘Accounting for Income Taxes’’ (FAS 109). See ( Interest income and related expenses, including amortization of Note 21 herein for a further discussion of income taxes. premiums and accretion of discounts on bonds with changes in the timing and the amount of expected principal and interest (c) Investments in Fixed Maturities and Equity Securities: cash flows reflected in the yield, as applicable. Bonds held to maturity are principally owned by insurance ( Dividend income and distributions from common and preferred subsidiaries and are carried at amortized cost when AIG has the stock and other investments when receivable. ability and positive intent to hold these securities until maturity. AIG 2007 Form 10-K 139
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AMERICAN INTERNATIONAL GROUP, INC.
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FINANCIAL HIGHLIGHTS (in millions,
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overall financial condition, althou
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Group Executive Committee We are ad
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AIG’s life insurance network is t
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We have also begun to address the e
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WHAT WE SEE The ability to see and
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The Major Accounts Practice within
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Around the world, the middle class
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WE SEE GROWTH OPPORTUNITIES IN EMER
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To grow the strength of the AIG glo
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Since 2003, the AIG Disaster Relief
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RESPECT Respect encompasses how we
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Life Insurance & Retirement Service
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Domestic Brokerage Group— Gross P
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In the summer of 2007, widespread f
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in gross premiums written. It launc
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It grew new business premiums from
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emerging markets for its services,
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ILFC—Revenues by Region Total = $
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AIG Investments acquired a 94 perce
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and changing interest rates, as wel
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American International Group, Inc.
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UNITED STATES SECURITIES AND EXCHAN
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Page 141 and 142: American International Group, Inc.
Page 191: Index of Notes to Consolidated Fina
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SHAREHOLDER INFORMATION Corporate H
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2007 Annual Report - AIG.com

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