AIG 2011 Annual Report Download - page 297

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in the above table is the VOBA, an intangible asset recorded during purchase accounting, which is
amortized in a manner similar to DAC. Amortization of VOBA was $34 million, $90 million and $132 million in
2011, 2010 and 2009, respectively, while the unamortized balance was $430 million, $488 million and $1.6 billion at
December 31, 2011, 2010 and 2009, respectively. The percentage of the unamortized balance of VOBA at
December 31, 2011 expected to be amortized in 2012 through 2016 by year is: 8.1 percent, 7.6 percent,
6.3 percent, 5.8 percent and 5.1 percent, respectively, with 67.1 percent being amortized after five years. These
projections are based on current estimates for investment, persistency, mortality and morbidity assumptions. The
DAC amortization charged to income includes the increase or decrease of amortization related to Net realized
capital gains (losses), primarily in SunAmerica’s domestic retirement services business. In 2011, 2010 and 2009,
amortization expense (increased) decreased by $307 million, $101 million and $(113) million, respectively.
As AIG operates in various global markets, the estimated gross profits used to amortize DAC, VOBA and SIA
are subject to differing market returns and interest rate environments in any single period. The combination of
market returns and interest rates may lead to acceleration of amortization in some products and regions and
simultaneous deceleration of amortization in other products and regions.
DAC, VOBA and SIA for insurance-oriented, investment-oriented and retirement services products are
reviewed for recoverability, which involves estimating the future profitability of current business. This review
involves significant management judgment. If actual future profitability is substantially lower than estimated, AIG’s
DAC, VOBA and SIA may be subject to an impairment charge and AIG’s results of operations could be
significantly affected in future periods.
A variable interest entity (VIE) is a legal entity that does not have sufficient equity at risk to finance its
activities without additional subordinated financial support or is structured such that equity investors lack the
ability to make significant decisions relating to the entity’s operations through voting rights and do not
substantively participate in the gains and losses of the entity. Consolidation of a VIE by its primary beneficiary is
not based on majority voting interest, but is based on other criteria discussed below.
While AIG enters into various arrangements with VIEs in the normal course of business, AIG’s involvement
with VIEs is primarily via its insurance companies as a passive investor in debt securities (rated and unrated) and
equity interests issued by VIEs. In all instances, AIG consolidates the VIE when it determines it is the primary
beneficiary. This analysis includes a review of the VIE’s capital structure, contractual relationships and terms,
nature of the VIE’s operations and purpose, nature of the VIE’s interests issued and AIG’s involvements with the
entity. When assessing the need to consolidate a VIE, AIG evaluates the design of the VIE as well as the related
risks the entity was designed to expose the variable interest holders to.
For VIEs with attributes consistent with that of an investment company or a money market fund, the primary
beneficiary is the party or group of related parties that absorbs a majority of the expected losses of the VIE,
receives the majority of the expected residual returns of the VIE, or both.
For all other variable interest entities, the primary beneficiary is the entity that has both (1) the power to direct
the activities of the VIE that most significantly affect the entity’s economic performance and (2) the obligation to
absorb losses or the right to receive benefits that could be potentially significant to the VIE. While also
considering these factors, the consolidation conclusion depends on the breadth of AIG’s decision-making ability
and its ability to influence activities that significantly affect the economic performance of the VIE.
AIG 2011 Form 10-K 283
11. VARIABLE INTEREST ENTITIES