AIG 2005 Annual Report Download - page 148

Notes to Consolidated Financial Statements Continued
4. Deferred Policy Acquisition Costs 5. Reinsurance
In the ordinary course of business, AIG’s General and Life
The following reflects the policy acquisition costs deferred for
Insurance companies place reinsurance with other insurance
amortization against future income and the related amortiza-
companies in order to provide greater diversification of AIG’s
tion charged to income for general and life insurance &
business and limit the potential for losses arising from large
retirement services operations:
risks.
Years Ended December 31, General Reinsurance: General reinsurance is effected under
(in millions) 2005 2004 2003
reinsurance treaties and by negotiation on individual risks.
General Insurance Certain of these reinsurance arrangements consist of excess of
operations: loss contracts which protect AIG against losses over stipulated
Balance at beginning of
year $ 3,998 $ 3,619 $ 3,072 amounts. Ceded premiums are considered prepaid reinsurance
premiums and are amortized into income over the contract
Acquisition costs deferred 7,480 6,617 5,223
period in proportion to the protection received. Amounts
Amortization charged to
Income (7,430) (6,238) (4,676) recoverable from general reinsurers are estimated in a manner
consistent with the claims liabilities associated with the
Balance at end of year $ 4,048 $ 3,998 $ 3,619
reinsurance and presented as a component of reinsurance
Life Insurance & Retirement assets.
Services operations:
Balance at beginning of General Insurance premiums written and earned were com-
year $25,819 $22,375 $18,850 prised of the following:
Value of business
acquired –– 1,538* Years Ended December 31,
Acquisition costs deferred 6,777 6,504 5,052 (in millions) Written Earned
Amortization charged to 2005
Income (3,379) (3,551) (2,778) Gross premiums $ 52,725 $ 51,715
Change in net unrealized Ceded premiums (10,853) (10,906)
gains (losses) on
securities 1,127 (219) (813) Net premiums $ 41,872 $ 40,809
Increase (decrease) due 2004
to foreign exchange (1,144) 710 526 Gross premiums $ 52,046 $ 50,203
Balance at end of year $29,200 $25,819 $22,375 Ceded premiums (11,423) (11,666)
Total deferred policy Net premiums $ 40,623 $ 38,537
acquisition costs $33,248 $29,817 $25,994
2003
* Relates to the acquisition of AIG Edison Life in August 2003. Gross premiums $ 46,938 $ 42,745
Included in the above table is the value of business acquired Ceded premiums (11,907) (11,439)
(VOBA), an intangible asset recorded during purchase ac- Net premiums $ 35,031 $ 31,306
counting, which is amortized in a manner similar to deferred
For the years ended December 31, 2005, 2004 and 2003,
acquisition costs. Amortization of VOBA was $291 million,
reinsurance recoveries, which reduced loss and loss expenses
$407 million and $326 million while the unamortized balance
incurred, amounted to $20.71 billion, $12.14 billion and
was $2.14 billion, $2.52 billion and $3.17 billion for 2005,
$10.09 billion, respectively.
2004 and 2003, respectively. The percentage of the unamor-
tized balance of VOBA at 2005 expected to be amortized for Life Insurance: AIG Life Insurance companies generally limit
2006 through 2011 by year is: 12.0 percent, 10.5 percent, exposure to loss on any single life. For ordinary insurance, AIG
9.2 percent, 8.0 percent, and 6.7 percent, respectively, with generally retains a maximum of approximately $1.7 million of
53.7 percent being amortized after five years. These projections coverage per individual life with respect to AIG’s overseas life
are based on current estimates for investment, persistency, operations and $10 million of coverage per individual life with
mortality, and morbidity assumptions. The DAC amortization respect to AIG’s domestic life operations. There are smaller
charged to income includes the increase or decrease of retentions for other lines of business. Life reinsurance is
amortization for FAS 97-related realized capital gains (losses), effected principally under yearly renewable term treaties. The
primarily in the domestic Retirement Services business. For premiums with respect to these treaties are considered prepaid
2005, 2004 and 2003, respectively, the rate of amortization reinsurance premiums and are amortized into income over the
expense has been decreased by $57 million, $44 million and
$54 million.
96 AIG m Form 10-K