2007 Annual Report - AIG.com

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American International Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements Continued 10. Variable Life and Annuity Contracts Continued The vast majority of AIG’s exposure on guarantees made to variable contract holders arises from GMDB. Details concerning AIG’s GMDB exposures at December 31, 2007 and 2006 are as follows: annuity and life contracts through separate and variable accounts, or general accounts when not qualified for separate account reporting, when AIG contractually guarantees to the contract holder (variable contracts with guarantees) either (a) total deposits made to the contract less any partial withdrawals plus a minimum return (and in minor instances, no minimum returns) (Net 2007 Deposits Plus a Minimum Return) or (b) the highest contract value Account value (a) $66 $17 attained, typically on any anniversary date minus any subsequent Amount at risk (b) 5 1 withdrawals following the contract anniversary (Highest Contract Average attained age of contract holders by product Value Attained). These guarantees include benefits that are 38-69 years 55-72 years payable in the event of death, annuitization, or, in other instances, Range of guaranteed at specified dates during the accumulation period. Such benefits minimum return rates 3-10% are referred to as guaranteed minimum death benefits (GMDB), 2006 guaranteed minimum income benefits (GMIB), guaranteed mini- Account value (a) $64 $15 mum withdrawal benefits (GMWB) and guaranteed minimum Amount at risk (b) 6 1 account value benefits (GMAV). For AIG, GMDB is by far the most Average attained age of Net Deposits Plus a Minimum Highest Contract (dollars in billions) Return Value Attained widely offered benefit. contract holders by product 38-70 years 56-71 years The assets supporting the variable portion of both traditional Range of guaranteed variable annuities and variable contracts with guarantees are minimum return rates 0-10% carried at fair value and reported as Separate and variable (a) Included in Policyholders’ contract deposits in the consolidated balance account assets with an equivalent summary total reported as sheet. Separate and variable account liabilities when the separate (b) Represents the amount of death benefit currently in excess of Account account qualifies for separate account treatment under SOP 03-1. value. Assets for separate accounts that do not qualify for separate account treatment are reported as trading account assets, and The following summarizes GMDB liabilities for guarantees liabilities are included in the respective policyholder liability on variable contracts reflected in the general account. account of the general account. Amounts assessed against the (in millions) 2007 2006 contract holders for mortality, administrative, and other services Balance at January 1 $406 $442 are included in revenue and changes in liabilities for minimum Reserve increase 111 35 guarantees are included in incurred policy losses and benefits in Benefits paid (54) (71) the consolidated statement of income. Separate and variable account net investment income, net investment gains and losses, Balance at December 31 $463 $406 and the related liability changes are offset within the same line The GMDB liability is determined each period end by estimating item in the consolidated statement of income for those accounts the expected value of death benefits in excess of the projected that qualify for separate account treatment under SOP 03-1. Net account balance and recognizing the excess ratably over the investment income and gains and losses on trading accounts for accumulation period based on total expected assessments. AIG contracts that do not qualify for separate account treatment under regularly evaluates estimates used and adjusts the additional SOP 03-1 are reported in net investment income and are liability balance, with a related charge or credit to benefit principally offset by amounts reported in incurred policy losses expense, if actual experience or other evidence suggests that and benefits. earlier assumptions should be revised. The following assumptions and methodology were used to determine the GMDB liability at December 31, 2007: ( Data used was up to 1,000 stochastically generated investment performance scenarios. ( Mean investment performance assumptions ranged from three percent to approximately ten percent depending on the block of business. ( Volatility assumptions ranged from eight percent to 23 percent depending on the block of business. ( Mortality was assumed at between 50 percent and 102 percent of various life and annuity mortality tables. ( For domestic contracts, lapse rates vary by contract type and duration and ranged from zero percent to 40 percent. For 168 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries 10. Variable Life and Annuity Contracts annuitization and recognizing the excess ratably over the accumu- Continued lation period based on total expected assessments. AIG periodically evaluates estimates used and adjusts the additional liability Japan, lapse rates ranged from zero percent to 20 percent balance, with a related charge or credit to benefit expense, if depending on the type of contract. actual experience or other evidence suggests that earlier assump- ( For domestic contracts, the discount rate ranged from 3.25 pertions should be revised. cent to 11 percent. For Japan, the discount rate ranged from AIG contracts currently include a minimal amount of GMAV and two percent to seven percent. GMWB. GMAV and GMWB are considered to be embedded In addition to GMDB, AIG’s contracts currently include to a derivatives and are recognized at fair value through earnings. AIG lesser extent GMIB. The GMIB liability is determined each period enters into derivative contracts to economically hedge a portion of end by estimating the expected value of the annuitization benefits the exposure that arises from GMAV and GMWB. in excess of the projected account balance at the date of AIG 2007 Form 10-K 169
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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 171 and 172: 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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