AIG 2006 Annual Report Download - page 111

American International Group, Inc. and Subsidiaries
Realized capital gains (losses) include normal portfolio transac-
AIG generates income tax credits as a result of investing in tions as well as derivative gains (losses) for transactions that did
synthetic fuel production (synfuels) related to the investment loss not qualify for hedge accounting treatment under FAS 133,
shown in the above table and records those benefits in its transactional foreign exchange gains and losses and other-than-
provision for income taxes. The amounts of those income tax temporary declines in the value of investments. Realized capital
credits were $127 million, $203 million and $160 million for
gains (losses) for derivatives in Foreign Life Insurance & Retire-
2006, 2005 and 2004, respectively. For a further discussion of
ment Services are related primarily to hedging of fixed income
the effect of fluctuating domestic crude oil prices on synfuel tax
instruments denominated in a currency other than the functional
credits, see Note 12(c) of Notes to Consolidated Financial
currency of the respective country to such functional currency. The
Statements.
related currency gain or loss of the available for sale fixed income
instrument is deferred until the date of the sale.
2005 and 2004 Comparison
The growth in net investment income in 2005 compared to 2004 Deferred Policy Acquisition Costs
reflects growth in general account reserves and surplus for both
Foreign and Domestic Life Insurance & Retirement Services DAC for Life Insurance & Retirement Services products arises
companies. Also, net investment income was positively affected from the deferral of those costs that vary with, and are directly
by the compounding of previously earned and reinvested net related to, the acquisition of new or renewal business. Policy
investment income along with the addition of new cash flow from acquisition costs for life insurance products are generally deferred
operations available for investment. The global flattening of the and amortized over the premium paying period of the policy. Policy
yield curve put additional pressure on yields and spreads, which acquisition costs that relate to universal life and investment-type
was partially offset with income generated from other investment products, including variable and fixed annuities (investment-
sources, including income from partnerships. oriented products), are deferred and amor tized, with interest, as
appropriate, in relation to the historical and future incidence of
The following table summarizes realized capital gains
estimated gross profits to be realized over the estimated lives of
(losses) by major category for 2006, 2005 and 2004:
the contracts. Total acquisition costs deferred increased $310 mil-
(in millions) 2006 2005 2004 lion over 2005 and were generally in line with growth in new
Domestic Life Insurance: business. Total DAC amortization expense, excluding VOBA, grew
Sales of fixed maturities $ (33) $ 65 $ (4) $432 million over 2005 with each year’s amortization expense
Sales of equity securities 17 18 7 level at approximately 14 percent of the opening DAC balance.
Other: Amortization expense includes the effects of current period
Foreign exchange transactions (6) 11 — realized capital gains and losses for investment type products.
Derivatives instruments 25 65 8
With respect to investment-oriented products, AIG’s policy is to
Other-than-temporary decline (192) (119) (98)
Other (26) (5) (33) adjust amortization assumptions for DAC when estimates of
current or future gross profits to be realized from these contracts
Total Domestic Life Insurance $(215) $ 35 $(120)
are revised. With respect to variable annuities sold domestically
Domestic Retirement Services: (representing the vast majority of AIG’s variable annuity business),
Sales of fixed maturities $1$(106) $ 107
the assumption for the long-term annual net growth rate of the
Sales of equity securities 31 115 30
Other: equity markets used in the determination of DAC amortization is
Foreign exchange transactions (13) ——
approximately ten percent. A methodology referred to as ‘‘rever-
Derivatives instruments (33) (12) (14) sion to the mean’’ is used to maintain this long-term net growth
Other-than-temporary decline (368) (267) (305) rate assumption, while giving consideration to short-term varia-
Other (22) (7) (25) tions in equity markets. Estimated gross profits include invest-
Total Domestic Retirement Services $(404) $(277) $(207) ment income and gains and losses less interest required on
Foreign Life Insurance & Retirement policyholder reserves, as well as other charges in the contract
Services: less actual mortality and expenses. Current experience and
Sales of fixed maturities $(209) $ 191 $ 223 changes in the expected future gross profits are analyzed to
Sales of equity securities 459 281 295 determine the effect on the amortization of DAC. The projection of
Other:
estimated gross profits requires significant management judg-
Foreign exchange transactions 106 40 (382)
Derivatives instruments 276 (599) 248 ment. The assumptions with respect to the current and projected
Other-than-temporary decline (81) (39) (38) gross profits are reviewed and analyzed quarterly and are adjusted
Other*156 210 26 accordingly.
Total Foreign Life Insurance & Retirement
Services $ 707 $ 84 $ 372
Total $88$(158) $ 45
* Net of allocations to participating policyholders of $88 million, $109 mil-
lion and $65 million for 2006, 2005 and 2004, respectively.
Form 10-K 2006 AIG 61