AIG 2007 Annual Report Download - page 213

American International Group, Inc. and Subsidiaries
6. Deferred Policy Acquisition Costs
The following reflects the policy acquisition costs deferred for amortization against future income and the related
amortization charged to income for General Insurance and Life Insurance & Retirement Services operations:
Years Ended December 31,
(in millions) 2007 2006 2005
General Insurance operations:
Balance at beginning of year $ 4,355 $ 4,048 $ 3,998
Acquisition costs deferred 8,661 8,115 7,480
Amortization expense (8,235) (7,866) (7,365)
Increase (decrease) due to foreign exchange and other (138) 58 (65)
Balance at end of year $ 4,643 $ 4,355 $ 4,048
Life Insurance & Retirement Services operations:
Balance at beginning of year $32,810 $28,106 $25,080
Acquisition costs deferred 7,276 6,823 6,513
Amortization expense(a) (3,367) (3,712) (3,328)
Change in net unrealized gains (losses) on securities 745 646 977
Increase (decrease) due to foreign exchange 916 947 (1,136)
Other(b) 65 ——
Subtotal $38,445 $32,810 $28,106
Consolidation and eliminations 62 70 —
Balance at end of year(c) $38,507 $32,880 $28,106
Total deferred policy acquisition costs $43,150 $37,235 $32,154
(a) In 2007, amortization expense was reduced by $733 million related to changes in actuarial estimates, which was mostly offset in incurred policy
losses and benefits.
(b) In 2007, includes the cumulative effect of the adoption of SOP 05-1 of $(118) million and a balance sheet reclassification of $189 million.
(c) Includes $5 million and $(720) million at December 31, 2007 and 2006, respectively, related to the effect of net unrealized gains and losses on
available for sale securities.
Included in the above table is the VOBA, an intangible asset interest or do not have sufficient equity that is at risk which would
recorded during purchase accounting, which is amortized in a allow the entity to finance its activities without additional subordi-
manner similar to DAC. Amortization of VOBA was $213 million, nated financial support. FIN 46R recognizes that consolidation
$239 million and $291 million in 2007, 2006 and 2005, based on majority voting interest should not apply to certain types
respectively, while the unamortized balance was $1.86 billion, of entities that are defined as VIEs. A VIE is consolidated by its
$1.98 billion and $2.14 billion at December 31, 2007, 2006 and primary beneficiary, which is the party that absorbs a majority of
2005, respectively. The percentage of the unamortized balance of the expected losses or a majority of the expected residual returns
VOBA at 2007 expected to be amortized in 2008 through 2012 by of the VIE, or both.
year is: 11.7 percent, 10.2 percent, 8.4 percent, 6.6 percent and AIG, in the normal course of business, is involved with various
5.9 percent, respectively, with 57.2 percent being amortized after VIEs. In some cases, AIG has participated to varying degrees in
five years. These projections are based on current estimates for the design of the entity. AIG’s involvement in VIEs varies from
investment, persistency, mortality and morbidity assumptions. The being a passive investor to managing and structuring the activities
DAC amortization charged to income includes the increase or of the VIE. AIG engages in transactions with VIEs to manage its
decrease of amortization for FAS 97-related realized capital gains investment needs, obtain funding as well as facilitate client needs
(losses), primarily in the Domestic Retirement Services business. through a global network of operating subsidiaries comprising AIG
In 2007, 2006 and 2005, the rate of amortization expense Global Asset Management Holdings Corp. and its subsidiaries and
decreased by $291 million, $90 million and $46 million, affiliated companies (collectively, AIG Investments) and AIGFP. AIG
respectively. purchases debt securities (rated and unrated) and equity interests
There were no impairments of DAC or VOBA for the years issued by VIEs, makes loans and provides other credit support to
ended December 31, 2007, 2006 and 2005. VIEs, enters into insurance and reinsurance transactions with
VIEs, enters into leasing arrangements with VIEs, enters into
derivative transactions with VIEs through AIGFP and acts as the
7. Variable Interest Entities
collateral manager of VIEs through AIG Investments and AIGFP.
FIN 46R, ‘‘Consolidation of Variable Interest Entities’’ clarifies the Obligations to outside interest holders in VIEs consolidated by AIG
consolidation accounting for certain entities in which equity are reported as liabilities in the consolidated financial statements.
investors do not have the characteristics of a controlling financial These interest holders generally have recourse only to the assets
AIG 2007 Form 10-K 159