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 Continued Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction’’ (FSP 13-2). FSP 13-2 addresses how a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease transaction affects the accounting for the lease by the lessor, and directs that the tax assumptions be consistent with any FIN 48 uncertain tax position related to the lease. AIG adopted FSP 13-2 on January 1, 2007. Upon adoption, AIG recorded a $50 million decrease in the opening balance of retained earnings, net of tax, to reflect the cumulative effect of this change in accounting. As a result of adopting SOP 05-1, FIN 48 and FSP 13-2, AIG recorded a total decrease to opening retained earnings of $203 million as of January 1, 2007. also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value. FAS 159 permits the fair value option election on an instrument-by-instrument basis for eligible items existing at the adoption date and at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. AIG adopted FAS 159 on January 1, 2008, its required effective date. The adoption of FAS 159 with respect to elections made in the Life Insurance & Retirement Services segment is expected to result in a decrease to opening 2008 retained earnings of approximately $600 million. The adoption of FAS 159 with respect to elections made by AIGFP is currently being evaluated for the effect of recently issued draft guidance by the FASB, anticipated to be issued in final form in early 2008, and its potential effect on AIG’s consolidated financial statements. SOP 07-1 Future Application of Accounting Standards In June 2007, the AICPA issued SOP No. 07-1 (SOP 07-1), FAS 157 ‘‘Clarification of the Scope of the Audit and Accounting Guide ‘Audits of Investment Companies’ and Accounting by Parent Companies and In September 2006, the FASB issued FAS 157, ‘‘Fair Value Equity Method Investors for Investments in Investment Companies.’’ Measurements’’ (FAS 157). FAS 157 defines fair value, estab- SOP 07-1 amends the guidance for whether an entity may apply the lishes a framework for measuring fair value and expands disclo- Audit and Accounting Guide, ‘‘Audits of Investment Companies’’ (the sure requirements regarding fair value measurements but does Guide). In February 2008, the FASB issued an FSP indefinitely not change existing guidance about whether an instrument is deferring the effective date of SOP 07-1. carried at fair value. FAS 157 nullifies the guidance in EITF 02-3 that precluded the recognition of a trading profit at the inception of a derivative contract unless the fair value of such contract was FAS 141(R) obtained from a quoted market price or other valuation technique In December 2007, the FASB issued FAS 141 (revised 2007), incorporating observable market data. FAS 157 also clarifies that ‘‘Business Combinations’’ (FAS 141(R)). FAS 141(R) changes the an issuer’s credit standing should be considered when measuring accounting for business combinations in a number of ways, liabilities at fair value. including broadening the transactions or events that are consid- AIG adopted FAS 157 on January 1, 2008, its required ered business combinations, requiring an acquirer to recognize effective date. FAS 157 must be applied prospectively, except that 100 percent of the fair values of assets acquired, liabilities the difference between the carrying amount and fair value of a assumed, and noncontrolling interests in acquisitions of less than stand-alone derivative or hybrid instrument measured using the a 100 percent controlling interest when the acquisition constitutes guidance in EITF 02-3 on recognition of a trading profit at the a change in control of the acquired entity, recognizing contingent inception of a derivative, is to be applied as a cumulative-effect consideration arrangements at their acquisition-date fair values adjustment to opening retained earnings on January 1, 2008. The with subsequent changes in fair value generally reflected in adoption of FAS 157 was not material to AIG’s financial condition. income, and recognizing preacquisition loss and gain contingen- However, the adoption of FAS 157 is expected to affect first cies at their acquisition-date fair values, among other changes. quarter 2008 earnings, due to changes in the valuation methodoltions FAS 141(R) is required to be adopted for business combina- ogy for hybrid financial instrument and derivative liabilities (both for which the acquisition date is on or after the beginning of freestanding and embedded) currently carried at fair value. These the first annual reporting period beginning on or after Decem- methodology changes primarily include the incorporation of AIG’s ber 15, 2008 (January 1, 2009 for AIG). Early adoption is own credit risk and the inclusion of explicit risk margins, where prohibited. AIG is evaluating the effect FAS 141(R) will have on its appropriate. consolidated financial statements. FAS 159 FAS 160 In February 2007, the FASB issued FAS 159, ‘‘The Fair Value Option for Financial Assets and Financial Liabilities’’ (FAS 159). FAS 159 permits entities to choose to measure at fair value many financial instruments and certain other items that are not required to be measured at fair value. Subsequent changes in fair value for designated items are required to be reported in income. FAS 159 In December 2007, the FASB issued FAS 160, ‘‘Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51’’ (FAS 160). FAS 160 requires noncontrolling (i.e., minority) interests in partially owned consolidated subsidiaries to be classified in the consolidated balance sheet as a separate component of consolidated shareholders’ equity. FAS 160 also 146 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries 1. Summary of Significant Accounting Policies Continued business written by AIG’s foreign-based insurance subsidiaries. The Foreign General Insurance group uses various marketing methods to write both business and consumer lines insurance with certain refinements for local laws, customs and needs. AIU operates in Asia, the Pacific Rim, Europe, including the United Kingdom, Africa, the Middle East and Latin America. Each of the General Insurance sub-segments is comprised of groupings of major products and services as follows: DBG is comprised of domestic commercial insurance products and services; Transatlantic is comprised of reinsurance products and services sold to other general insurance companies; Personal Lines is comprised of general insurance products and services sold to individuals; Mortgage Guaranty is comprised of products insuring against losses arising under certain loan agreements; and Foreign General is comprised of general insurance products sold overseas. establishes accounting rules for subsequent acquisitions and sales of noncontrolling interests and how noncontrolling interests should be presented in the consolidated statement of income. The noncontrolling interests’ share of subsidiary income should be reported as a part of consolidated net income with disclosure of the attribution of consolidated net income to the controlling and noncontrolling interests on the face of the consolidated statement of income. FAS 160 is required to be adopted in the first annual reporting period beginning on or after December 15, 2008 (January 1, 2009 for AIG) and earlier application is prohibited. FAS 160 must be adopted prospectively, except that noncontrolling interests should be reclassified from liabilities to a separate component of shareholders’ equity and consolidated net income should be recast to include net income attributable to both the controlling and noncontrolling interests retrospectively. Had AIG adopted FAS 160 at December 31, 2007, AIG would have reclassified Life Insurance & Retirement Services: AIG’s Life Insurance & Retirement Services subsidiaries offer a wide range of insurance and retirement savings products both domestically and abroad. $10.4 billion of minority (i.e., noncontrolling) interests from Insurance-oriented products consist of individual and group life, liabilities to Shareholders’ equity. payout annuities (including structured settlements), endowment and accident and health policies. Retirement savings products 2. Segment Information consist generally of fixed and variable annuities. Revenues in the Life Insurance & Retirement Services segment represent Life Insurance & Retirement Services Premiums and other considerations, Net investment income and Net realized capital gains (losses). AIG’s principal Foreign Life Insurance & Retirement Services operations are American Life Insurance Company (ALICO), Ameri- can International Assurance Company, Limited, together with American International Assurance Company (Bermuda) Limited (AIA), Nan Shan Life Insurance Company, Ltd. (Nan Shan), The Philippine American Life and General Insurance Company (Philamlife), AIG Edison Life Insurance Company (AIG Edison Life) and AIG Star Life Insurance Co. Ltd. (AIG Star Life). AIG’s principal Domestic Life Insurance & Retirement Services operations are American General Life Insurance Company (AG Life), The United States Life Insurance Company in the City of New York (USLIFE), American General Life and Accident Insurance Company (AGLA and, collectively with AG Life and USLIFE, the Domestic Life Insurance internal reporting unit), AIG Annuity Insurance Company (AIG Annuity), The Variable Annuity Life Insurance Company (VALIC) and AIG Retirement Services, Inc (AIG SunAmerica and, collectively with AIG Annuity and VALIC, the Domestic Retirement Services internal reporting unit). American International Reinsurance Company (AIRCO) acts primarily as an internal reinsurance company for AIG’s insurance operations. Life Insurance & Retirement Services is comprised of two major groupings of products and services: insurance-oriented products and services and retirement savings products and services. AIG identifies its reportable segments by product line consistent with its management structure. These segments and their respec- tive operations are as follows: General Insurance: AIG’s General Insurance subsidiaries write substantially all lines of commercial property and casualty insurance and various personal lines both domestically and abroad. Revenues in the General Insurance segment represent General Insurance net Premiums and other considerations earned, Net investment income and Net realized capital gains (losses). AIG’s principal General Insurance operations are as follows: Domestic Brokerage Group (DBG) writes substantially all classes of business insurance in the U.S. and Canada, accepting such business mainly from insurance brokers. Transatlantic Holdings, Inc. (Transatlantic) subsidiaries offer reinsurance on both a treaty and facultative basis to insurers in the U.S. and abroad. Transatlantic structures programs for a full range of property and casualty products with an emphasis on specialty risks. AIG’s Personal Lines operations provide automobile insurance through aigdirect.com, the newly formed operation resulting from the merger of AIG Direct and 21st Century Insurance Group (21st Century), and the Agency Auto Division, as well as a broad range of coverages for high net worth individuals through the AIG Private Client Group. Mortgage Guaranty operations provide residential mortgage guaranty insurance that covers the first loss for credit defaults on high loan-to-value conventional first- and second-lien mortgages for the purchase or refinance of one to four family residences. AIG’s Foreign General Insurance group accepts risks primarily underwritten through American International Underwriters (AIU), a marketing unit consisting of wholly owned agencies and insurance companies. The Foreign General Insurance group also includes Financial Services: AIG’s Financial Services subsidiaries engage in diversified activities including aircraft and equipment leasing, AIG 2007 Form 10-K 147
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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 149 and 150: 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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