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 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
American International Group, Inc. and Subsidiaries 1. Summary of Significant Accounting Policies representing the difference between the fair value of these hybrid Continued financial instruments and the prior carrying value as of December 31, 2005. The effect of adoption on after-tax gross gains and earnings per share is based on those shares used in basic losses was $218 million ($336 million pre-tax) and $229 million earnings per share plus shares that would have been outstanding ($354 million pre-tax), respectively. assuming issuance of common shares for all dilutive potential In connection with AIG’s early adoption of FAS 155, structured common shares outstanding, adjusted to reflect all stock divinote liabilities of $8.9 billion, other structured liabilities in dends and stock splits. conjunction with equity derivative transactions of $111 million, (hh) Recent Accounting Standards: and hybrid financial instruments of $522 million at December 31, Accounting Changes 2006 are now carried at fair value. The effect on earnings for 2006, for changes in the fair value of hybrid financial instruments, SOP 05-1 was a pre-tax loss of $313 million, of which $287 million was reflected in Other income and was largely offset by gains on In September 2005, the AICPA issued SOP 05-1, ‘‘Accounting by economic hedge positions which were also reflected in operating Insurance Enterprises for Deferred Acquisition Costs in Connection income, and $26 million was reflected in Net investment income. with Modifications or Exchanges of Insurance Contracts’’ (SOP 05- 1). SOP 05-1 provides guidance on accounting for internal replacements of insurance and investment contracts other than FAS 158 those specifically described in FAS 97. SOP 05-1 defines an In September 2006, the FASB issued FAS 158, ‘‘Employers’ internal replacement as a modification in product benefits, Accounting for Defined Benefit Pension and Other Postretirement features, rights, or coverage that occurs by the exchange of a Plans — an amendment of FASB Statements No. 87, 88, 106 and contract for a new contract, or by amendment, endorsement, or 132R’’ (FAS 158). FAS 158 requires AIG to prospectively recognize rider to a contract, or by the election of a feature or coverage the overfunded or underfunded status of defined benefit postretirewithin a contract. Internal replacements that result in a substan- ment plans as an asset or liability in AIG’s consolidated balance tially changed contract are accounted for as a termination and a sheet and to recognize changes in that funded status in the year in replacement contract. which the changes occur through Other comprehensive income. FAS SOP 05-1 became effective on January 1, 2007 and generally 158 also requires AIG to measure the funded status of plans as of affects the accounting for internal replacements occurring after the date of its year-end balance sheet, with limited exceptions. AIG that date. In the first quarter of 2007, AIG recorded a cumulative adopted FAS 158 for the year ended December 31, 2006. The effect reduction of $82 million, net of tax, to the opening balance cumulative effect, net of deferred income taxes, on AIG’s consoliof retained earnings on the date of adoption. This adoption dated balance sheet at December 31, 2006 was a net reduction in reflected changes in unamortized DAC, VOBA, deferred sales shareholders’ equity through a charge to Accumulated other inducement assets, unearned revenue liabilities and future policy comprehensive income (loss) of $532 million, with a corresponding benefits for life and accident and health insurance contracts net decrease of $538 million in total assets, and a net decrease of resulting from a shorter expected life related to certain group life $6 million in total liabilities. See Note 18 herein for additional and health insurance contracts and the effect on the gross profits information on the adoption of FAS 158. of investment-oriented products related to previously anticipated future internal replacements. This cumulative effect adjustment FIN 48 affected only the Life Insurance & Retirement Services segment. In July 2006, the FASB issued FASB Interpretation No. (FIN) 48, FAS 155 ‘‘Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109’’ (FIN 48), which clarifies the accounting In February, 2006, the Financial Accounting Standards Board for uncertainty in income tax positions. FIN 48 prescribes a (FASB) issued FAS 155, ‘‘Accounting for Certain Hybrid Financial recognition threshold and measurement attribute for the financial Instruments — an amendment of FAS 140 and FAS 133’’ (FAS statement recognition and measurement of an income tax position 155). FAS 155 allows AIG to include changes in fair value in taken or expected to be taken in a tax return. FIN 48 also earnings on an instrument-by-instrument basis for any hybrid provides guidance on derecognition, classification, interest and financial instrument that contains an embedded derivative that penalties, accounting in interim periods, and additional disclowould otherwise be required to be bifurcated and accounted for sures. AIG adopted FIN 48 on January 1, 2007. Upon adoption, separately under FAS 133. The election to measure the hybrid AIG recognized a $71 million increase in the liability for unrecoginstrument at fair value is irrevocable at the acquisition or nized tax benefits, which was accounted for as a decrease to issuance date. opening retained earnings as of January 1, 2007. See Note 21 AIG elected to early adopt FAS 155 as of January 1, 2006, and for additional FIN 48 disclosures. apply FAS 155 fair value measurement to certain structured note liabilities and structured investments in AIG’s available for sale portfolio that existed at December 31, 2005. The effect of this FSP 13-2 adoption resulted in an $11 million after-tax ($18 million pre-tax) In July 2006, the FASB issued FASB Staff Position decrease to opening retained earnings as of January 1, 2006, No. (FSP) FAS 13-2, ‘‘Accounting for a Change or Projected AIG 2007 Form 10-K 145
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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 147 and 148: American International Group, Inc.
Page 191 and 192: 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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