AIG 2011 Annual Report Download - page 67

• continuing to build, strengthen and streamline the financial and operating systems infrastructure and control
environment throughout the organization, particularly in financial reporting, financial operations and human
resources; and
• restructuring AIG’s operations consistent with its smaller size and plans to increase its competitiveness.
Deferred Policy Acquisition Costs
In October 2010, the Financial Accounting Standards Board (FASB) issued an accounting standard update that
amends the accounting for deferring costs incurred by insurance companies in connection with acquiring or
renewing insurance contracts to limit deferral to only costs that are incremental and directly related to the
successful acquisition of new business or renewal of existing business.
As a result, AIG expects a pre-tax reduction of Deferred policy acquisition costs at January 1, 2012 of
approximately $4.9 billion and an after-tax decrease in AIG shareholders’ equity of approximately $3.3 billion,
consisting of a decrease in Retained earnings of approximately $3.7 billion, partially offset by an increase in
Accumulated other comprehensive income of $0.4 billion. The reduction in DAC is primarily due to costs
associated with unsuccessful sales efforts, which are no longer deferrable, and advertising costs that do not meet
the direct response advertising criteria under the accounting standard. The reduction in DAC at January 1, 2012
includes a reduction at Chartis of approximately $2.8 billion and SunAmerica of approximately $2.1 billion. The
retrospective adoption will improve Income (loss) from continuing operations before income tax expense (benefit)
by approximately $149 million, $90 million and $40 million, respectively, for the years ended December 31, 2011,
2010, and 2009. The improvement in Income (loss) from continuing operations is primarily due to the
amortization of acquisition costs being greater than the deferral of acquisition costs in these years, and therefore
due to the adoption of the standard, the reduction in amortization expense is greater than the reduction in
deferrals. The impact to these years includes the results from Chartis, SunAmerica, UGC and divested businesses.
During this three-year period, the composition of DAC reflects the change in the mix of distribution channels.
The following table shows the increase (decrease) to pre-tax income (loss) for the years ended December 31, 2011,
2010 and 2009 related to the retrospective adoption of the accounting standard for each business unit impacted:
Years Ended December 31,
(in millions) 2011 2010 2009
Chartis $ 107 $67$51
SunAmerica 46 (11) 54
UGC (4) 34 1
Divested businesses -- (66)
Total $ 149 $90$40
Chartis expects the accounting standard will increase its future combined ratio by approximately 50 to 100 basis
points. However, the increase could vary depending on the level of premium production, changes in product mix
and distribution channels utilized to acquire business. For SunAmerica, the effect on future years’ earnings will be
partially offset by lower amortization resulting from the reduction in the existing DAC asset upon adoption. As a
result, this standard is not expected to have a material effect on SunAmerica operating results in 2012.
See Note 2 to the Consolidated Financial Statements for further discussion.
Chartis
Given the continued global economic environment and current property and casualty market conditions, 2012 is
expected to remain challenging, but improving trends in certain key indicators may offset some of the challenges.
The weakness of ratable exposures (asset values, payrolls, and sales) experienced in 2009 and 2010 and its negative
impact on the overall market premium base, as well as continued weakness in commercial insurance rates, were
initially expected to continue through 2011. However, in 2011, Chartis observed that the extent of ratable exposure
weakness in the United States was beginning to abate. In addition, beginning in the second quarter of 2011 and
AIG 2011 Form 10-K 53