2007 Annual Report - AIG.com

American International Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements Continued
15. Statutory Financial Data
value of financial instruments generally correlates with the level of
pricing observability. Financial instruments with quoted prices in
Statutory surplus and net income for General Insurance active markets generally have more pricing observability and less
and Life Insurance & Retirement Services operations in judgment is used in measuring fair value. Conversely, financial
accordance with statutory accounting practices were as instruments traded in other than active markets or that do not
follows:
have quoted prices have less observability and are measured at
Years Ended December 31,
fair value using valuation models or other pricing techniques that
(in millions) 2007 2006 2005 require more judgment. Pricing observability is affected by a
Statutory surplus (a) :
number of factors, including the type of financial instrument,
General Insurance $37,705 $32,665 $24,508 whether the financial instrument is new to the market and not yet
Life Insurance &
established, the characteristics specific to the transaction and
Retirement Services 33,212 35,058 30,739 general market conditions.
Statutory net income (a)(b) :
Fixed maturities, equity securities, securities available for sale,
General Insurance (c) 8,018 8,010 1,713
trading securities and securities sold under agreements to
Life Insurance &
Retirement Services (a) 4,465 5,088 4,762
repurchase: AIG maximizes the use of observable inputs and
minimizes the use of unobservable inputs when measuring fair
(a) Statutory surplus and net income with respect to foreign operations are value. AIG obtains market price data to value financial instruments
estimated at November 30. The basis of presentation for branches of
whenever such information is available. Market price data gener-
AIA is the Hong Kong statutory filing basis. The basis of presentation
for branches of ALICO is the U.S. statutory filing basis. AIG Star Life, ally is obtained from market exchanges or dealer quotations. The
AIG Edison Life, Nan Shan and Philamlife are estimated based on their types of instruments valued based on market price data include G-
respective local country filing basis.
7 government and agency securities, equities listed in active
(b) Includes realized capital gains and losses and taxes.
markets, and investments in publicly traded mutual funds with
(c) Includes catastrophe losses, net of tax, of $177 million and $1.9 bil- quoted market prices.
lion in 2007 and 2005, respectively.
AIG estimates the fair value of fixed income instruments not
AIG’s insurance subsidiaries file financial statements prepared traded in active markets by referring to traded securities with
in accordance with statutory accounting practices prescribed or similar attributes and using a matrix pricing methodology. This
permitted by domestic and foreign insurance regulatory authorisecurity’s
methodology considers such factors as the issuer’s industry, the
ties. The differences between statutory financial statements and
rating and tenor, its coupon rate, its position in the
financial statements prepared in accordance with U.S. GAAP vary capital structure of the issuer, and other relevant factors. The
between domestic and foreign by jurisdiction. The principal
types of fixed income instruments not traded in active markets
differences are that statutory financial statements do not reflect include non-G-7 government securities, municipal bonds, certain
DAC, some bond portfolios may be carried at amortized cost, hybrid financial instruments, most investment-grade and high-yield
assets and liabilities are presented net of reinsurance, policy- corporate bonds, and most mortgage- and asset-backed products.
holder liabilities are generally valued using more conservative
AIG initially estimates the fair value of equity instruments not
assumptions and certain assets are non-admitted.
traded in active markets by reference to the transaction price.
At December 31, 2007, 2006 and 2005, statutory capital of This valuation is adjusted only when changes to inputs and
AIG’s insurance subsidiaries exceeded minimum company action assumptions are corroborated by evidence such as transactions in
level requirements. In 2005, AIG nonetheless contributed an similar instruments, completed or pending third-party transactions
additional $750 million of capital into American Home Assurance in the underlying investment or comparable entities, subsequent
Company (American Home) effective September 30, 2005 and rounds of financing, recapitalizations and other transactions
contributed a further $2.25 billion of capital in February 2006 for across the capital structure, offerings in the equity capital
a total of approximately $3 billion of capital into Domestic General markets, and changes in financial ratios or cash flows.
Insurance subsidiaries effective December 31, 2005.
For equity and fixed income instruments that are not traded in
active markets or that are subject to transfer restrictions,
16. Fair Value of Financial Instruments
valuations are adjusted to reflect illiquidity and/or non-transferability,
and such adjustments generally are based on available market
FAS 107, ‘‘Disclosures about Fair Value of Financial Instruments’’
evidence. In the absence of such evidence, management’s best
(FAS 107), requires disclosure of fair value information about
estimate is used.
financial instruments for which it is practicable to estimate such
fair value. FAS 107 excludes certain financial instruments,
Unrealized gain (loss) on swaps, options and forward transac-
including those related to insurance contracts and lease
tions: Unrealized gain (loss) on swaps, options and forward
contracts.
transactions (derivative assets and liabilities) can be exchange-
The fair value of a financial instrument is the amount that traded or traded over the counter (OTC). AIG generally values
would be received to sell an asset or paid to transfer a liability in exchange-traded derivatives within portfolios using models that
an orderly transaction between market participants at the measurement
calibrate to market clearing levels and that eliminate timing
date. The degree of judgment used in measuring the
fair
182 AIG 2007 Form 10-K