AIG 2008 Annual Report Download - page 119

Deferred Policy Acquisition Costs and Sales Inducement Assets
DAC for Life Insurance & Retirement Services products arises from the deferral of costs that vary with, and are
directly related to, the acquisition of new or renewal business. Policy acquisition costs for life insurance products
are generally deferred and amortized over the premium paying period in accordance with FAS 60, “Accounting and
Reporting by Insurance Enterprises” (FAS 60). Policy acquisition costs that relate to universal life and investment-
type products are generally deferred and amortized, with interest in relation to the incidence of estimated gross
profits to be realized over the estimated lives of the contracts in accordance with FAS 97. Value of Business
Acquired (VOBA) is determined at the time of acquisition and is reported on the consolidated balance sheet with
DAC and amortized over the life of the business, similar to DAC. AIG offers sales inducements to contract holders
(bonus interest) on certain annuity and investment contracts. Sales inducements are recognized as an asset (SIA)
with a corresponding increase to the liability for policyholder contract deposits on the consolidated balance sheet
and are amortized over the life of the contract similar to DAC. The deferral of acquisition and sales inducement
costs decreased $164 million in 2008 compared to 2007 primarily due to declines in new business production
resulting from AIG’s liquidity issues. Total amortization expense increased by $1.5 billion in 2008 compared to
2007. The current year amortization includes a $3.2 billion increase to operating income related to net realized
capital losses in 2008 compared to $333 million in 2007 reflecting significantly higher other-than-temporary
impairment charges. Current year amortization for Domestic Retirement Services also includes adjustments for
DAC and SIA unlocking of $961 million related to the continued weakness in the equity markets and DAC and SIA
unlocking of $267 million due to higher surrender activity. There was no effect from higher surrender activity in
Domestic Life and the Foreign Life operations as the write-off of the DAC was offset by related policy charges. In
2007, amortization expense included changes in actuarial estimates of $732 million, mostly offset in policyholder
benefits and claims incurred, which decreased the reported expense. Annualized amortization expense levels in
2008 and 2007 were approximately 13 percent and 10 percent, respectively, of the opening DAC balance.
AIG adopted FAS 159 on January 1, 2008 and elected to apply fair value accounting for an investment-linked
product sold principally in Asia. Upon fair value election, all DAC and SIA are written off and there is no further
deferral or amortization of DAC and SIA for that product. The amounts of DAC and SIAwritten off as of January 1,
2008 were $1.1 billion and $299 million, respectively.
The following table summarizes the major components of the changes in DAC/VOBA and SIA:
DAC/VOBA SIA Total DAC/VOBA SIA Total
2008 2007
Years Ended December 31,
(In millions)
Foreign Life Insurance & Retirement
Services
Balance at beginning of year ......... $26,175 $ 681 $26,856 $21,153 $ 404 $21,557
Acquisition costs deferred ......... 5,622 66 5,688 5,640 241 5,881
Amortization (charged) or credited to
operating income(a) ............ (4,449) (90) (4,539) (1,879) 10 (1,869)
Change in unrealized gains (losses) on
securities .................... 261 (8) 253 301 16 317
Increase (decrease) due to foreign
exchange .................... (352) (33) (385) 831 10 841
Other(b) ...................... (1,091) (299) (1,390) 129 — 129
Balance at end of year .............. $26,166 $ 317 $26,483 $26,175 $ 681 $26,856
AIG 2008 Form 10-K 113
American International Group, Inc., and Subsidiaries