AIG 2008 Annual Report Download - page 262

rated third-party reinsurers are utilized to manage net amounts at risk in excess of retention limits. AIG’s Domestic
Life Insurance companies also cede excess, non-economic reserves carried on a statutory-basis only on certain term
and universal life insurance policies and certain fixed annuities to an offshore affiliate.
AIG generally obtains letters of credit in order to obtain statutory recognition of its intercompany reinsurance
transactions. For this purpose, AIG has a $2.5 billion syndicated letter of credit facility outstanding at December 31,
2008, all of which relates to life intercompany reinsurance transactions. AIG has also obtained approximately
$2.3 billion of letters of credit on a bilateral basis all of which relates to life intercompany reinsurance transactions.
All of these approximately $4.8 billion of letters of credit are due to mature on December 31, 2015. In the event that
AIG’s Domestic Life Insurance companies cease to be wholly owned subsidiaries of AIG, then AIG may no longer
be able to utilize these letters of credit or the above referenced facility.
Reinsurance Security
AIG’s third-party reinsurance arrangements do not relieve AIG from its direct obligation to its insureds. Thus,
a credit exposure exists with respect to both general and life reinsurance ceded to the extent that any reinsurer fails
to meet the obligations assumed under any reinsurance agreement. AIG holds substantial collateral as security
under related reinsurance agreements in the form of funds, securities, and/or letters of credit. A provision has been
recorded for estimated unrecoverable reinsurance. AIG has been largely successful in prior recovery efforts.
AIG evaluates the financial condition of its reinsurers and establishes limits per reinsurer through AIG’s Credit
Risk Committee. AIG believes that no exposure to a single reinsurer represents an inappropriate concentration of
risk to AIG, nor is AIG’s business substantially dependent upon any single reinsurer.
8. Deferred Policy Acquisition Costs
The rollforward of deferred policy acquisition costs were as follows:
2008 2007 2006
Years Ended December 31,
(In millions)
General Insurance operations:
Balance at beginning of year ........................... $ 5,407 $ 4,977 $ 4,546
Acquisition costs deferred ............................. 7,370 8,661 8,115
Amortization expense................................. (7,428) (8,235) (7,866)
Increase (decrease) due to foreign exchange and other......... (235) 4 182
Balance at end of year ................................ $ 5,114 $ 5,407 $ 4,977
Life Insurance & Retirement Services operations:
Balance at beginning of year ........................... $38,445 $32,810 $28,106
Acquisition costs deferred ............................. 7,277 7,276 6,823
Amortization expense(a) .............................. (4,971) (3,367) (3,712)
Change in net unrealized gains (losses) on securities .......... 1,419 745 646
Increase (decrease) due to foreign exchange ................ (466) 916 947
Other(b) .......................................... (1,091) 65 —
Subtotal............................................. $40,613 $38,445 $32,810
Consolidation and eliminations............................ 55 62 70
Balance at end of year(c) ................................ $40,668 $38,507 $32,880
Total deferred policy acquisition costs ...................... $45,782 $43,914 $37,857
256 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)