AIG 2011 Annual Report Download - page 123

improvements were partially offset by a $465 million increase in fair value losses of embedded derivatives, net of
economic hedges, relating to variable annuity products with living benefit guarantees, compared to 2010, driven by
declines in long — term interest rates. Due to statutory capital considerations, a significant portion of the interest
rate exposure related to these variable annuity contract features is unhedged.
SunAmerica periodically evaluates the estimates used to establish its liabilities for future policy benefits and
DAC. These estimates may be adjusted based on actual experience and management judgment regarding
assumptions which include mortality, morbidity, persistency, maintenance expenses and investment returns. These
current best estimates are used to determine whether to adjust DAC and record additional liabilities when
unrealized gains or losses on available-for-sale investment securities are recognized through accumulated other
comprehensive income, at each balance sheet date, as if the securities had been sold at their stated aggregate fair
value and the proceeds reinvested at current yields. An actual sale of the underlying securities could trigger an
actual loss recognition event that would result in the amortization of DAC and the recognition of higher reserves
through policyholder benefit expense due to a deficiency in future earnings. Primarily as a result of the low
interest rate environment in 2011, SunAmerica recorded additional future policy benefits and adjustments to DAC
totaling $1.6 billion, net of tax, as of December 31, 2011, which were charged directly to accumulated other
comprehensive income (loss) and included within the change in net unrealized appreciation (depreciation) of
investments.
2010 and 2009 Comparison
SunAmerica reported an increase in operating income in 2010 compared to 2009 primarily due to higher net
investment income and favorable changes in DAC and SIA amortization and policyholder benefit expenses due to
improved equity market conditions in 2010 relative to 2009.
Higher net investment income in 2010 compared to 2009 reflected the following:
• $699 million increase in private equity funds and hedge funds income;
• $539 million increase in valuation gains on ML II; and
• $279 million higher call and tender income.
In 2009, DAC and SIA amortization unlocking and related reserve strengthening charges of $611 million were
primarily due to reductions in the long-term growth assumptions and deteriorated equity market conditions early
in 2009 for group retirement products and individual variable annuities, and projected increases in surrenders for
individual fixed annuities. The 2010 unlocking and reserve strengthening was not significant.
The improvement in the pre-tax results for SunAmerica in 2010 compared to 2009 reflected a decline in net
realized capital losses due principally to a significant decline in other-than-temporary impairments, and an increase
in net realized gains from the sale of investments in 2010 partially offset by affordable housing partnership
impairments and an increase in fair value losses on derivatives primarily used to hedge the effect of interest rate
and foreign exchange movements on GIC reserves. See Results of Operations — Consolidated Results —
Premiums; — Net Investment Income; and — Net Realized Capital Gains (Losses) herein.
AIG 2011 Form 10-K 109