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ITEM 8 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.....................................................................................................................................................................................2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES..............................................................................................................................................................................................(a)Revenues and expenses:Premiums: Premiums for short duration contracts are recorded as written on the inception date of the policy.Premiums are earned primarily on a pro rata basis over the term of the related coverage. Sales of extended servicescontracts are reflected as premiums and earned on a pro rata basis over the term of the related coverage. Thereserve for unearned premiums includes the portion of premiums written relating to the unexpired terms of coverage.Reinsurance premiums under a reinsurance contract are typically earned over the same period as the underlyingpolicies, or risks, covered by the contracts. As a result, the earning pattern of a reinsurance contract may extend upto 24 months, reflecting the inception dates of the underlying policies throughout a year.Reinsurance premiums ceded are recognized as a reduction in revenues over the period the reinsurance coverage isprovided in proportion to the risks to which the premiums relate.Premiums for long duration insurance products and life contingent annuities are recognized as revenues when due.Estimates for premiums due but not yet collected are accrued.Policy fees: Policy fees represent fees recognized from universal life and investment-type products consisting ofpolicy charges for the cost of insurance, policy administration charges, amortization of unearned revenue reservesand surrender charges.Net investment income:For a discussion of our policies on net investment income, see Note 7 herein.Net realized capital gains (losses):Note 7 herein.For a discussion of our policies on net realized capital gains (losses), seeOther income: Other income includes unrealized gains and losses on derivatives, including unrealized marketvaluation gains and losses associated with the Global Capital Markets (GCM) super senior credit default swap (CDS)portfolio, as well as income from the Direct Investment book (DIB).Other income from the operations of the DIB and our Other Operations category consists of the following:• Change in fair value relating to financial assets and liabilities for which the fair value option has been elected.• Interest income and related expenses, including amortization of premiums and accretion of discounts on bondswith changes in the timing and the amount of expected principal and interest cash flows reflected in the yield, asapplicable.• Dividend income from common and preferred stock and distributions from other investments.• Changes in the fair value of trading securities and spot commodities sold but not yet purchased, futures, hybridfinancial instruments, securities purchased under agreements to resell, and securities sold under agreements torepurchase for which the fair value option was elected.• Realized capital gains and losses from the sales of available for sale securities and investments in private equityfunds and hedge funds and other investments.• Income earned on real estate based investments and related losses from property level impairments and financingcosts.• Exchange gains and losses resulting from foreign currency transactions.• Reductions to the cost basis of securities available for sale for other-than-temporary impairments.• Earnings from private equity funds and hedge fund investments accounted for under the equity method.• Gains and losses recognized in earnings on derivatives for the effective portion and their related hedged items.Policyholder benefits and claims incurred: Incurred claims and claims adjustment expense for short durationinsurance contracts consist of the estimated ultimate cost of settling claims incurred within the reporting period,including incurred but not reported claims, plus changes in estimates of current and prior period losses resulting fromthe continuous review process, which are charged to income as incurred. Benefits for long duration insurance..................................................................................................................................................................................................................................212 AIG 2012 Form 10-K