AIG 2011 Annual Report Download - page 233

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AIG uses a ‘‘reversion to the mean’’ methodology, which allows AIG to maintain its long-term assumptions,
while also giving consideration to the effect of deviations from these assumptions occurring in the current period.
A DAC unlocking is performed when management determines that key assumptions (e.g. market return, surrender
rates, etc.) should be modified. The DAC asset is recalculated using the new assumptions. The use of a reversion
to the mean assumption is common within the industry; however, the parameters used in the methodology are
subject to judgment and vary within the industry. If estimated gross profits change significantly, DAC is
recalculated using the new assumptions. Any resulting adjustment is included in income as an adjustment to DAC.
DAC is grouped consistent with the manner in which the insurance contracts are acquired, serviced and measured
for profitability and is reviewed for recoverability based on the current and projected future profitability of the
underlying insurance contracts.
The DAC for investment-oriented products is also adjusted for changes in estimated gross profits that result
from changes in the net unrealized gains or losses on fixed maturity and equity securities available for sale.
Because fixed maturity and equity securities available for sale are carried at aggregate fair value, an adjustment is
made to DAC equal to the change in DAC amortization that would have been recorded if such securities had
been sold at their stated aggregate fair value and the proceeds reinvested at current yields. For long-duration
traditional business, if such reinvestment would not be sufficient to recover DAC and meet policyholder
obligations an adjustment to DAC and additional future policy benefits for those products is recorded using
current best estimates that incorporate a review of assumptions regarding mortality, morbidity, persistency,
maintenance expenses and investment returns. The change in these adjustments, net of tax, is included with the
change in net unrealized appreciation (depreciation) of investments that is credited or charged directly to
Accumulated other comprehensive income (loss).
Value of Business Acquired (VOBA) is determined at the time of acquisition and is reported in the
Consolidated Balance Sheet with DAC. This value is based on the present value of future pre-tax profits
discounted at yields applicable at the time of purchase. For participating life, traditional life and accident and
health insurance products, VOBA is amortized over the life of the business similar to that for DAC based on the
assumptions at purchase. For universal life, and investment-oriented products, VOBA is amortized in relation to
the estimated gross profits to date for each period.
For contracts accounted for at fair value, policy acquisition costs are expensed as incurred and not deferred or
amortized.
See (v) Recent Accounting Standards — Future Application of Accounting Standards herein for changes related
to deferred acquisition costs in 2012 due to the adoption of a new accounting standard that addresses the
accounting for costs associated with acquiring or renewing insurance contracts.
(h) Derivative assets and derivative liabilities, at fair value: Interest rate, currency, equity and commodity
swaps, credit contracts (including AIGFP’s super senior credit default swap portfolio), swaptions, options and
forward transactions are accounted for as derivatives recorded on a trade-date basis, and carried at fair value.
Unrealized gains and losses are reflected in income, when appropriate. In certain instances, a contract’s
transaction price is the best indication of initial fair value. Aggregate asset or liability positions are netted on the
Consolidated Balance Sheet only to the extent permitted by qualifying master netting arrangements in place with
each respective counterparty. Cash collateral posted by AIG with counterparties in conjunction with transactions
supported by qualifying master netting arrangements is reported as a reduction of the corresponding net derivative
liability, while cash collateral received by AIG in conjunction with transactions supported by qualifying master
netting arrangements is reported as a reduction of the corresponding net derivative asset.
(i) Other assets: Other assets consists of, prepaid expenses, including deferred advertising costs, sales
inducement assets, deposits, other deferred charges, real estate, other fixed assets, capitalized software costs,
goodwill, intangible assets other than goodwill, restricted cash, including net cash proceeds from the AIA initial
AIG 2011 Form 10-K 219