2007 Annual Report - AIG.com

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American International Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements Continued 1. Summary of Significant Accounting Policies circumstances, the loss is recognized in the period in which the Continued intent to hold the securities to recovery no longer existed. In periods subsequent to the recognition of an other-than- When AIG does not have the positive intent to hold bonds until temporary impairment charge for fixed maturity securities, which is maturity, these securities are classified as available for sale or as not credit or foreign exchange related, AIG generally accretes the trading and are carried at fair value. discount or amortizes the reduced premium resulting from the Premiums and discounts arising from the purchase of bonds reduction in cost basis over the remaining life of the security. classified as held to maturity or available for sale are treated as For certain investments in beneficial interests in securitized yield adjustments over their estimated lives, until maturity, or call financial assets of less than high quality with contractual cash date, if applicable. flows, including asset-backed securities, EITF 99-20, ‘‘Recognition Common and preferred stocks are carried at fair value. of Interest Income and Impairment on Purchased Beneficial AIG also enters into dollar roll agreements. These are Interests and Beneficial Interests that Continued to Be Held by a agreements to sell mortgage-backed securities and to repurchase Transferor in Securitized Financial Assets’’ requires periodic substantially similar securities at a specified price and date in the updates of AIG’s best estimate of cash flows over the life of the future. At December 31, 2007 and 2006, there were no dollar roll security. If the fair value of an investment in beneficial interests in agreements outstanding. a securitized financial asset is less than its cost or amortized For AIG’s insurance subsidiaries, unrealized gains and losses cost and there has been a decrease in the present value of the on investments in trading securities are reported in Net investestimated cash flows since the last revised estimate, considering ment income. Unrealized gains and losses from available for sale both their timing and amount, an other-than-temporary impairment investments in equity and fixed maturity securities are reported as charge is recognized. Interest income is recognized based on a separate component of Accumulated other comprehensive changes in the timing and the amount of expected principal and income (loss), net of deferred income taxes, in consolidated interest cash flows reflected in the yield. shareholders’ equity. Investments in fixed maturities and equity AIG also considers its intent and ability to retain a temporarily securities are recorded on a trade-date basis. depressed security until recovery. Estimating future cash flows is AIG evaluates its investments for other-than-temporary impaira quantitative and qualitative process that incorporates informament. The determination that a security has incurred an othertion received from third-party sources along with certain internal than-temporary impairment in value and the amount of any loss assumptions and judgments regarding the future performance of recognized requires the judgment of AIG’s management and a the underlying collateral. In addition, projections of expected continual review of its investments. future cash flows may change based upon new information AIG evaluates its investments for other-than-temporary impairregarding the performance of the underlying collateral. ment such that a security is considered a candidate for other-thantemporary impairment if it meets any of the following criteria: (d) Mortgage and Other Loans Receivable — net: Mort- ( Trading at a significant (25 percent or more) discount to par, gage and other loans receivable includes mortgage loans on real amortized cost (if lower) or cost for an extended period of time estate, policy loans and collateral, commercial and guaranteed (nine consecutive months or longer); loans. Mortgage loans on real estate and collateral, commercial ( The occurrence of a discrete credit event resulting in (i) the and guaranteed loans are carried at unpaid principal balances issuer defaulting on a material outstanding obligation; (ii) the less credit allowances and plus or minus adjustments for the issuer seeking protection from creditors under the bankruptcy accretion or amortization of discount or premium. Interest income laws or any similar laws intended for court supervised on such loans is accrued as earned. reorganization of insolvent enterprises; or (iii) the issuer Impairment of mortgage loans on real estate and collateral proposing a voluntary reorganization pursuant to which credi- and commercial loans is based on certain risk factors and when tors are asked to exchange their claims for cash or securities collection of all amounts due under the contractual terms is not having a fair value substantially lower than par value of their probable. This impairment is generally measured based on the claims; or present value of expected future cash flows discounted at the ( AIG may not realize a full recovery on its investment regardless loan’s effective interest rate subject to the fair value of underlying of the occurrence of one of the foregoing events. collateral. Interest income on such impaired loans is recognized The above criteria also consider circumstances of a rapid and as cash is received. severe market valuation decline, such as that experienced in Policy loans are carried at unpaid principal amount. There is no current credit markets, in which AIG could not reasonably assert allowance for policy loans because these loans serve to reduce that the recovery period would be temporary. the death benefit paid when the death claim is made and the At each balance sheet date, AIG evaluates its securities balances are effectively collateralized by the cash surrender value holdings with unrealized losses. When AIG does not intend to hold of the policy. such securities until they have recovered their cost basis, based (e) Financial Services — Flight Equipment: Flight equipment on the circumstances at the date of evaluation, AIG records the is stated at cost, net of accumulated depreciation. Major unrealized loss in income. If a loss is recognized from a sale additions, modifications and interest are capitalized. Normal subsequent to a balance sheet date pursuant to changes in maintenance and repairs, airframe and engine overhauls and 140 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries 1. Summary of Significant Accounting Policies Continued compliance with return conditions of flight equipment on lease are provided by and paid for by the lessee. Under the provisions of most leases for certain airframe and engine overhauls, the lessee is reimbursed for certain costs incurred up to but not exceeding contingent rentals paid to AIG by the lessee. AIG provides a charge to income for such reimbursements based on the expected reimbursements during the life of the lease. For passenger aircraft, depreciation is generally computed on the straight-line basis to a residual value of approximately 15 percent of the cost of the asset over its estimated useful life of 25 years. For freighter aircraft, depreciation is computed on the straight-line basis to a zero residual value over its useful life of 35 years. At December 31, 2007, ILFC had twelve freighter aircraft in its fleet. Aircraft in the fleet are evaluated for impairment in accordance with FAS 144. FAS 144 requires long-lived assets to be evaluated for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. These evaluations for impairment are significantly affected by estimates of future net cash flows and other factors that involve uncertainty. When assets are retired or disposed of, the cost and associated accumulated depreciation are removed from the related accounts and the difference, net of proceeds, is recorded as a gain or loss in Other income. (f) Financial Services — Securities Available for Sale, at fair value: These securities are held to meet long-term investment objectives and are accounted for as available for sale, carried at fair values and recorded on a trade-date basis. This portfolio is hedged using interest rate, foreign exchange, commodity and equity derivatives. The market risk associated with such hedges is managed on a portfolio basis, with third-party hedging transactions executed as necessary. Because hedge accounting treatment is not achieved in accordance with FAS 133, ‘‘Accounting for Derivative Instruments and Hedging Activities’’ (FAS 133), the unrealized gains and losses on these securities resulting from changes in interest rates, currency rates and equity prices are recorded in Accumulated other comprehensive income (loss) in consolidated shareholders’ equity while the unrealized gains and losses on the hedging instruments are reflected in Other income. (g) Financial Services — Trading Securities, at fair value: Trading securities are held to meet short-term investment objectives and to economically hedge other securities. Trading securities are recorded on a trade-date basis and carried at fair value. Realized and unrealized gains and losses are reflected in Other income. (h) Financial Services — Spot Commodities: Spot commodities held in AIGFP’s wholly owned broker-dealer subsidiary are recorded at fair value. All other commodities are recorded at the lower of cost or fair value. Spot commodities are recorded on a trade-date basis. The exposure to market risk may be reduced through the use of forwards, futures and option contracts. Lower of cost or fair value reductions in commodity positions and unrealized gains and losses in related derivatives are reflected in Other income. (i) Financial Services — Unrealized Gain and Unrealized Loss on Swaps, Options and Forward Transactions: Inter- est rate, currency, equity and commodity swaps (including AIGFP’s super senior credit default swap portfolio), swaptions, options and forward transactions are accounted for as derivatives recorded on a trade-date basis, and carried at fair value. Unrealized gains and losses are reflected in income, when appropriate. In certain instances, when income is not recognized at inception of the contract under EITF 02-3, income is recognized over the life of the contract and as observable market data becomes available. (j) Financial Services — Trade Receivables and Trade Payables: Trade receivables and Trade payables include option premiums paid and received and receivables from and payables to counterparties that relate to unrealized gains and losses on futures, forwards, and options and balances due from and due to clearing brokers and exchanges. (k) Financial Services — Securities Purchased (Sold) Under Agreements to Resell (Repurchase), at contract value: Securities purchased under agreements to resell and Securities sold under agreements to repurchase are accounted for as collateralized borrowing or lending transactions and are recorded at their contracted resale or repurchase amounts, plus accrued interest. AIG’s policy is to take possession of or obtain a security interest in securities purchased under agreements to resell. AIG minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and generally requiring additional collateral to be deposited with AIG when necessary. (l) Financial Services — Finance Receivables: Finance receivables, which are reported net of unearned finance charges, are held for both investment purposes and for sale. Finance receivables held for investment purposes are carried at amortized cost, which includes accrued finance charges on interest bearing finance receivables, unamortized deferred origination costs, and unamortized net premiums and discounts on purchased finance receivables. The allowance for finance receivable losses is established through the provision for finance receivable losses charged to expense and is maintained at a level considered adequate to absorb estimated credit losses in the portfolio. The portfolio is periodically evaluated on a pooled basis and factors such as economic conditions, portfolio composition, and loss and delinquency experience are considered in the evaluation of the allowance. Direct costs of originating finance receivables, net of nonrefundable points and fees, are deferred and included in the carrying amount of the related receivables. The amount deferred is amortized to income as an adjustment to finance charge revenues using the interest method. AIG 2007 Form 10-K 141
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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 191 and 192: Index of Notes to Consolidated Fina
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SHAREHOLDER INFORMATION Corporate H
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