2007 Annual Report - AIG.com

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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
American International Group, Inc. and Subsidiaries 16. Fair Value of Financial Instruments Continued differences between the closing price of the exchange-traded derivatives and their underlying instruments. OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model to value an OTC derivative depends on the contractual terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. AIG generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be verified and model selection does not involve significant management judgment. Certain OTC derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. When AIG does not have corroborating market evidence to support significant model inputs and cannot verify the model to market transactions, transaction price is initially used as the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so that the model value at inception equals the transaction price. Subsequent to initial recognition, AIG updates valuation inputs when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations, or other empirical market data. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Mortgage and other loans receivable: When practical, the fair values of loans on real estate and collateral loans were estimated using discounted cash flow calculations based upon AIG’s current incremental lending rates for similar type loans. The fair values of the policy loans were not calculated as AIG believes it would have to expend excessive costs for the benefits derived. Finance receivables: Fair values were estimated using discounted cash flow calculations based upon the weighted average rates currently being offered for similar finance receivables. Securities lending invested collateral and securities lending payable: Securities lending collateral are floating rate fixed maturity securities recorded at fair value. Fair values were based upon quoted market prices or internally developed models consistent with the methodology for other fixed maturity securities. The contract values of securities lending payable approximate fair value as these obligations are short-term in nature. Spot commodities: Fair values were based on current market prices of reference spot futures contracts traded on exchanges. Cash, short-term investments, trade receivables, trade payables, securities purchased (sold) under agreements to resell (repurchase), commercial paper and extendible commercial notes: The carrying values of these assets and liabilities approximate fair values because of the relatively short period of time between origination and expected realization. Other invested assets: Consisting principally of hedge funds and limited partnerships. Fair values are determined based on the net asset values provided by the general partner or manager of each investment. AIG obtains the fair value of its investments in limited partnerships and hedge funds from information provided by the general partner or manager of these investments, the accounts of which generally are audited on an annual basis. The transaction price is used as the best estimate of fair value at inception. Policyholders’ contract deposits: Fair values were estimated using discounted cash flow calculations based upon interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. Securities and spot commodities sold but not yet purchased: The carrying amounts for the securities and spot commodities sold but not yet purchased approximate fair values. Fair values for securities and spot commodities sold short were based on current market prices. Trust deposits and deposits due to banks and other depositors: To the extent certain amounts are not demand deposits or certificates of deposit which mature in more than one year, fair values were not calculated as AIG believes it would have to expend excessive costs for the benefits derived. Commercial paper and extendible commercial notes: The carrying amount approximates fair value. Long-term borrowings: When practical, the fair values of these obligations were estimated using discounted cash flow calculations based upon AIG’s current incremental borrowing rates for similar types of borrowings with maturities consistent with those remaining for the debt being valued. AIG 2007 Form 10-K 183
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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 185 and 186: American International Group, Inc.
Page 191 and 192: Index of Notes to Consolidated Fina
Page 235: American International Group, Inc.
Page 275 and 276: SHAREHOLDER INFORMATION Corporate H
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2007 Annual Report - AIG.com

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