AIG 2009 Annual Report Download - page 276

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AIG adopted a new other-than-temporary impairments accounting standard on April 1, 2009 resulting in a
cumulative effect adjustment to the cost basis of affected securities and DAC and SIA charges related to
other-than-temporary impairments previously taken. There was no material effect to DAC and SIA assets on the
Consolidated Balance Sheet. However, because Net realized capital gains and losses are included in the estimated
gross profits used to amortize DAC for investment-oriented products, DAC amortization is expected to be lower in
future periods.
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 $271 million, $111 million and $213 million in
2009, 2008 and 2007, respectively, while the unamortized balance was $1.63 billion, $2.05 billion and $1.86 billion at
December 31, 2009, 2008 and 2007, respectively. The percentage of the unamortized balance of VOBA at 2009
expected to be amortized in 2010 through 2014 by year is: 12.5 percent, 10.3 percent, 9.0 percent, 7.6 percent and
6.5 percent, respectively, with 54.1 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 related to Net realized capital gains (losses), primarily in the
Domestic Retirement Services business. In 2009, 2008 and 2007, the rate of amortization expense (increased)
decreased by $(484) million, $2.2 billion and $291 million, respectively.
As AIG operates in various global markets, the estimated gross profits used to amortize DAC, VOBA and SIA are
subject to differing market returns and interest rate environments in any single period. The combination of market
returns and interest rates may lead to acceleration of amortization in some products and regions and simultaneous
deceleration of amortization in other products and regions.
DAC, VOBA and SIA for insurance-oriented, investment-oriented and retirement services products are reviewed
for recoverability, which involves estimating the future profitability of current business. This review involves significant
management judgment. If actual future profitability is substantially lower than estimated, AIG’s DAC, VOBA and
SIA may be subject to an impairment charge and AIG’s results of operations could be significantly affected in future
periods.
10. Variable Interest Entities
The accounting standard related to the consolidation of variable interest entities (VIEs) provides guidance for
determining when to consolidate 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 to allow the entity to finance its activities
without additional subordinated financial support. This standard recognizes that consolidation based on majority
voting interest should not apply to these variable interest entities. 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 enters into various arrangements with VIEs in the normal course of business. AIG’s insurance companies are
involved with VIEs primarily as passive investors in debt securities (rated and unrated) and equity interests issued by
VIEs. Through its Financial Services segment and asset management businesses, AIG has participated in
arrangements with VIEs that includes designing and structuring entities, warehousing and managing the collateral of
the entities, and entering into insurance, credit and derivative transactions with the entities. AIG has also established
trusts for the sole purpose of issuing mandatorily redeemable preferred stock totaling $1.3 billion to investors. AIG
has determined that the trusts are VIEs, but has not consolidated these VIEs because AIG is not the primary
beneficiary and does not hold a variable interest in these VIEs.
AIG generally 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 that
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 was unclear from a
AIG 2009 Form 10-K 268