AIG 2011 Annual Report Download - page 92

As discussed earlier, investment income is allocated to the Commercial Insurance and Consumer Insurance
segments based on an internal investment income allocation model. See Segment Results — Chartis Operations
for more information.
The following table presents Chartis investing and other results:
Percentage Change
Years Ended December 31,
(in millions) 2011 2010 2009 2011 vs. 2010 2010 vs. 2009
Net investment income $ 4,348 $ 4,392 $ 3,292 (1)% 33%
Net realized capital gains (losses) 587 (49) (530) NM 91
Bargain purchase gain -332 - NM NM
Other income (expense) – net*(5) 669 - NM NM
Investing and other results $ 4,930 $ 5,344 $ 2,762 (8)% 93%
* Includes gain on divested properties of $669 million in 2010.
2011 and 2010 Comparison
Net investment income: Overall in 2011, net investment income decreased slightly due to declines in private
equity and hedge fund income as well as increases in investment expenses. These decreases were largely offset by
increases in interest income. The decrease in private equity and hedge fund income reflects the decline in the
overall equity markets during the second half of 2011. The increase in investment expenses in 2011 resulted mainly
from increases in both internal and external investment management fees. The interest income increase relates to
the redeployment of cash and short term instruments into longer term, higher yield securities. In addition, 2011
reflects a full year of interest income related to Fuji, which has been consolidated by Chartis since July 1, 2010.
Net realized capital gains (losses): Increases are due to gains on the sales of fixed maturity securities in
connection with the strategy discussed above to better align Chartis’ investment allocations with current overall
performance and income tax objectives; a decrease in other-than-temporary impairment charges; gains from
improvements in foreign currency exchange rates, primarily the strengthening of the Japanese Yen against the U.S.
Dollar; and gains from derivative instruments that do not qualify for hedge accounting, resulting primarily from
declining long term interest rates. These derivative instruments economically hedge products that provide benefits
over an extended period of time.
These gains were partially offset by impairments recognized within other invested assets, primarily life
settlement contracts. For the year ended December 31, 2011 and 2010, impairment charges of $351 million and
$78 million, respectively, were recorded by Chartis related to life settlement contracts, including approximately
$38 million and $4 million of impairments, respectively, associated with life insurance policies issued by
SunAmerica life insurance companies that are eliminated in consolidation. Life settlement contracts are evaluated
for impairment on a contract-by-contract basis. A contract is identified as potentially impaired if its undiscounted
future net cash flows are less than the current carrying value of such contract. Life settlement contracts are
impaired, and written down to fair value, when the carrying value of the contract is greater than the estimated fair
value.
During 2011, Chartis began receiving updated medical information for its life settlement contracts as a result of
an enhanced process in which information on individual insured lives is requested on a routine basis. In cases
where updated information indicates that an individual’s health has improved, an impairment loss may arise as a
result of revised estimates of net cash flows from the related contract. This had the general effect of decreasing
the projected net cash flows on a number of contracts, resulting in an increase in the number of contracts
identified as potentially impaired when compared to previous analyses. Further, the domestic operations of Chartis
refined their fair values based upon the availability of recent medical information.
Bargain purchase gain: On March 31, 2010 Chartis purchased additional voting shares in Fuji which resulted in
the effective control and consolidation of Fuji. This acquisition resulted in a bargain purchase gain of $0.3 billion,
which was included in the Consolidated Statement of Income (Loss) in Other Income. The bargain purchase gain
is primarily attributable to the depressed market value of Fuji’s common stock, which Chartis believes was the
result of macro-economic, capital market and regulatory factors in Japan coupled with Fuji’s financial condition
and results of operations. Chartis anticipates that the bargain purchase gain will not be subject to U.S. or foreign
income tax because the gain would only be recognized for tax purposes upon the sale of the Fuji shares.
78 AIG 2011 Form 10-K