2007 Annual Report - AIG.com

American International Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements Continued
1. Summary of Significant Accounting Policies
unamortized discounts or premiums. See Note 11 herein for
Continued
additional information.
Long-term borrowings also include liabilities connected to trust
sales inducement assets totaled $1.7 billion and $1.3 billion at
preferred stock principally related to outstanding securities issued
December 31, 2007 and 2006, respectively. The amortization
by AIG Life Holdings (US), Inc. (AIGLH), a wholly owned subsidiary
expense associated with these assets is reported within Incurred
of AIG. Cash distributions on such preferred stock are accounted
policy losses and benefits expense in the consolidated statement
for as interest expense.
of income. Such amortization expense totaled $149 million,
$132 million and $127 million for the years ended December 31, (cc) Other Liabilities: Other liabilities consist of other funds on
2007, 2006 and 2005, respectively. deposit, non-AIGFP free-standing derivatives liabilities carried at
See Note 8 herein for a discussion of derivatives.
fair value, and other payables. See Note 8 herein for a discussion
of derivatives. AIG has entered into certain insurance and
(x) Reserve for Losses and Loss Expenses: Losses and
reinsurance contracts, primarily in its General Insurance segment,
loss expenses are charged to income as incurred. The reserve for
that do not contain sufficient insurance risk to be accounted for
losses and loss expenses represents the accumulation of estias
insurance or reinsurance. Accordingly, the premiums received
mates for unpaid reported losses and includes provisions for
on such contracts, after deduction for certain related expenses,
losses incurred but not reported. The methods of determining
are recorded as deposits within Other liabilities in the consolisuch
estimates and establishing resulting reserves, including
dated balance sheet. Net proceeds of these deposits are invested
amounts relating to allowances for estimated unrecoverable
and generate net investment income. As amounts are paid,
reinsurance, are reviewed and updated. If the estimate of
consistent with the underlying contracts, the deposit liability is
reserves is determined to be inadequate or redundant, the
reduced.
increase or decrease is reflected in income. AIG discounts its loss
reserves relating to workers compensation business written by its (dd) Contingent Liabilities: Amounts are accrued for the reso-
U.S. domiciled subsidiaries as permitted by the domiciliary
lution of claims that have either been asserted or are deemed
statutory regulatory authorities.
probable of assertion if, in the opinion of management, it is both
probable that a liability has been incurred and the amount of the
(y) Future Policy Benefits for Life and Accident and
liability can be reasonably estimated. In many cases, it is not
Health Contracts and Policyholders’ Contract Deposits:
possible to determine whether a liability has been incurred or to
The liability for future policy benefits and policyholders’ contract
estimate the ultimate or minimum amount of that liability until
deposits are established using assumptions described in Note 9
years after the contingency arises, in which case, no accrual is
herein. Future policy benefits for life and accident and health
made until that time.
insurance contracts include provisions for future dividends to
participating policyholders, accrued in accordance with all applica- (ee) Preferred Shareholders’ Equity in Subsidiary Compable
regulatory or contractual provisions. Policyholders’ contract nies: Preferred shareholders’ equity in subsidiary companies
deposits include AIG’s liability for certain guarantee benefits relates principally to outstanding preferred stock or interest of
accounted for as embedded derivatives at fair value in accordance ILFC, a wholly owned subsidiary of AIG. Cash distributions on such
with FAS 133.
preferred stock or interest are accounted for as interest expense.
(z) Other Policyholders’ Funds: Other policyholders’ funds are
reported at cost and include any policyholders’ funds on deposit
that encompass premium deposits and similar items.
(bb) Commercial Paper and Extendible Commercial Notes
and Long-Term Borrowings: AIG’s funding is principally obtained
from medium and long-term borrowings and commercial
paper. Commercial paper, when issued at a discount, is recorded
at the proceeds received and accreted to its par value. Extendible
commercial notes are issued by AGF with initial maturities of up to
90 days, which AGF may extend to 390 days. Long-term
borrowings are carried at the principal amount borrowed, net of
(aa) Financial Services — Securities and Spot Commodi-
ties Sold but not yet Purchased, at Fair Value: Securities
and spot commodities sold but not yet purchased represent sales
of securities and spot commodities not owned at the time of sale.
The obligations arising from such transactions are recorded on a
trade-date basis and carried at fair value. Also included are
obligations under gold leases, which are accounted for as a debt
host with an embedded gold derivative.
(ff) Foreign Currency: Financial statement accounts expressed
in foreign currencies are translated into U.S. dollars in accordance
with FAS 52, ‘‘Foreign Currency Translation’’ (FAS 52). Under
FAS 52, functional currency assets and liabilities are translated
into U.S. dollars generally using rates of exchange prevailing at
the balance sheet date of each respective subsidiary and the
related translation adjustments are recorded as a separate
component of Accumulated other comprehensive income (loss),
net of any related taxes, in consolidated shareholders’ equity.
Functional currencies are generally the currencies of the local
operating environment. Income statement accounts expressed in
functional currencies are translated using average exchange rates
during the period. The adjustments resulting from translation of
financial statements of foreign entities operating in highly inflation-
ary economies are recorded in income. Exchange gains and
losses resulting from foreign currency transactions are recorded in
income.
(gg) Earnings per Share: Basic earnings per share is based
on the weighted average number of common shares outstanding,
adjusted to reflect all stock dividends and stock splits. Diluted
144 AIG 2007 Form 10-K