AIG 2011 Annual Report Download - page 122

2011 and 2010 Comparison
SunAmerica reported a decrease in operating income in 2011 compared to 2010, reflecting lower net investment
income, higher DAC amortization and higher policyholder benefit expense in SunAmerica’s variable annuity
business due to equity market conditions, and an increase in incurred but not reported (IBNR) death claim
reserves.
Net investment income reflected a slight decline in base yields (12 basis points), as investment purchases in late
2010 and 2011 were made at yields lower than the weighted average yields of the existing base portfolio. The
lower yields were partially offset by an increase in income from the reinvestment of significant amounts of cash
and short term investments during 2011. The following decreases in investment enhancement items also
contributed to lower net investment income in 2011 compared to 2010:
• $471 million decrease in valuation gains on ML II;
• $196 million lower call and tender income;
• $163 million of losses from equity-method investments in two trusts created by AIG to hold leased
commercial aircraft, in which SunAmerica has non-voting preferred equity and debt interests. The losses
reflect aircraft impairments recorded by the trusts in 2011 based on reviews of aircraft recoverability, which
consider projected undiscounted future cash flows subject to assumptions based on current macroeconomic
and industry trends and conditions; and
• $121 million decrease in private equity funds and hedge funds income.
DAC amortization and policyholder benefit expenses related to weaker equity market conditions were
$93 million in 2011, compared to an $87 million reduction to expenses due to more favorable equity market
conditions in 2010. In a weak equity market, SunAmerica increases policyholder benefit reserves to recognize the
expected value of death benefits in excess of the projected account balance for certain guaranteed benefits
features of variable annuities. The DAC asset related to these products may also be adjusted through amortization
expense, to reflect updates of future estimated gross profits due to equity market assumptions. The effect on the
estimated gross profits of variable products of short-term fluctuations in the equity markets are mitigated in part
through the use of a reversion to mean methodology. Under this methodology, SunAmerica assumes a long-term
growth rate for the assets backing these liabilities, which factors in potential short-term fluctuations in the
financial markets, and if the long-term growth rate assumption is deemed to be unreasonable in light of the
current market conditions, the long-term growth rate assumption is revised upward or downward to reflect the
revised estimate. See Note 2(g) to the Consolidated Financial Statements for additional discussion.
SunAmerica recorded an increase of approximately $202 million in the estimated reserves for incurred but not
reported death claims in 2011 in conjunction with the use of the Social Security Death Master File (SSDMF) to
identify potential claims not yet filed with its life insurance companies. Although SunAmerica has enhanced its
claims practices to include use of the SSDMF, it is possible that industry-wide regulatory inquiries, audits and
other regulatory activity could result in the payment of additional death claims, additional escheatment of funds
deemed abandoned under state laws, administrative penalties and interest.
Offsetting these decreases in operating income was $226 million of legal settlement net proceeds received in
2011. In three separate agreements, SAFG Retirement Services, Inc. (SAFG), formerly known as AIG Retirement
Services, Inc. agreed to resolve its claims in the matter titled AIG Retirement Services, Inc. v. Altus Finance S.A.
et al.
Other acquisition and insurance expenses declined $159 million, or 8 percent, compared to 2010, primarily due
to legal expense accruals and state guaranty fund assessments which were higher in 2010, as well as a reduction in
the cost of letters of credit related to reinsurance.
Pre-tax income for SunAmerica reflected net realized capital gains in 2011 compared to net realized capital
losses in 2010 due principally to a $981 million decline in other-than-temporary impairments, a decline in fair
value losses on derivatives primarily used to hedge the effect of interest rate and foreign exchange movements on
Guaranteed Investment Contracts (GIC) reserves, and declines in the allowance for mortgage loans. These
108 AIG 2011 Form 10-K