AIG 2008 Annual Report Download - page 263

(a) In 2007, amortization expense was reduced by $732 million related to changes in actuarial estimates, which
was mostly offset in policyholder benefits and claims incurred.
(b) In 2008, primarily represents the cumulative effect of the adoption of FAS 159. 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 $1.4 billion, $5 million and $(720) million at December 31, 2008, 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 recorded during purchase accounting, which is
amortized in a manner similar to DAC. Amortization of VOBA was $111 million, $213 million and $239 million in
2008, 2007 and 2006, respectively, while the unamortized balance was $2.05 billion, $1.86 billion and $1.98 billion
at December 31, 2008, 2007 and 2006, respectively. The percentage of the unamortized balance of VOBA at 2008
expected to be amortized in 2009 through 2013 by year is: 11.7 percent, 10.0 percent, 8.1 percent, 7.4 percent and
6.2 percent, respectively, with 56.6 percent being amortized after five years. These projections are based on current
estimates for investment, persistency, mortality and morbidity assumptions. The DAC amortization charged to
income includes the increase or decrease of amortization for FAS 97-related realized capital gains (losses),
primarily in the Domestic Retirement Services business. In 2008, 2007 and 2006, the rate of amortization expense
decreased by $2.2 billion, $291 million and $90 million, respectively.
There were no impairments of DAC or VOBA for the years ended December 31, 2008, 2007 and 2006.
9. Variable Interest Entities
FIN 46R, “Consolidation of Variable Interest Entities” provides the guidance for the determination of
consolidation for certain entities in which equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity that is at risk which would allow the entity to finance its activities without
additional subordinated financial support. FIN 46R recognizes that consolidation based on majority voting interest
should not apply to these VIEs. A VIE is consolidated by its primary beneficiary, which is the party or group of
related parties that absorbs a majority of the expected losses of the VIE, receives the majority of the expected
residual returns of the VIE, or both.
AIG primarily determines whether it is the primary beneficiary or a significant interest holder based on a
qualitative assessment of the VIE. This includes a review of the VIE’s capital structure, contractual relationships
and terms, nature of the VIE’s operations and purpose, nature of the VIE’s interests issued, and AIG’s interests in the
entity which either create or absorb variability. AIG evaluates the design of the VIE and the related risks the entity
was designed to expose the variable interest holders to in evaluating consolidation. In limited cases, when it may be
unclear from a qualitative standpoint if AIG is the primary beneficiary, AIG uses a quantitative analysis to calculate
the probability weighted expected losses and probability weighted expected residual returns using cash flow
modeling.
AIG’s total off balance sheet exposure associated with VIEs was $3.3 billion and $1.2 billion at December 31,
2008 and 2007, respectively.
AIG 2008 Form 10-K 257
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)