AIG 2010 Annual Report Download - page 300

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) For 2010, includes AIA which was deconsolidated and ALICO which was sold in 2010, AIG Life Canada was sold in 2009 and the Brazil
operations were sold in 2008.
(c) In 2009, includes an increase of $1.3 billion and $2 million related to the cumulative effect of adopting a new other-than-temporary
impairments accounting standard for SunAmerica and Divested businesses, respectively.
(d) In 2009, includes a decrease of $1.3 billion and $2 million related to the cumulative effect of adopting a new other-than-temporary impairments
accounting standard for SunAmerica and Divested businesses, respectively. In 2008, primarily represents the cumulative effect of adopting a new
accounting standard addressing the fair value option for financial assets and financial liabilities for Divested businesses.
(e) Includes $(1.0) billion, $86 million, and $1.0 billion for SunAmerica at December 31, 2010, 2009 and 2008, respectively, and $(34) million
and $9 million for Divested businesses at 2009 and 2008, respectively, related to the effect of net unrealized gains and losses on available for
sale securities. For the year ended December 31, 2010, there were no net unrealized gains and losses on available for sale securities associated
with divested businesses.
(f) Includes AIA, which was deconsolidated in 2010, ALICO, which was sold in 2010 and AIG Star and AIG Edison, which were sold in
February 2011.
AIG adopted an 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 $90 million, $132 million and $(33) million in
2010, 2009 and 2008, respectively, while the unamortized balance was $488 million, $1.6 billion and $2.1 billion at
December 31, 2010, 2009 and 2008, respectively. The percentage of the unamortized balance of VOBA at
December 31, 2010 expected to be amortized in 2011 through 2015 by year is: 9.9 percent, 8.8 percent,
7.7 percent, 6.4 percent and 5.9 percent, respectively, with 61.3 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 SunAmerica’s domestic retirement services business. In 2010, 2009 and 2008, the
rate of amortization expense (increased) decreased by $101 million, $(113) million and $2.2 billion, 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.
11. Variable Interest Entities
A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional
subordinated financial support or is structured such that equity investors lack the ability to make significant
decisions relating to the entity’s operations through voting rights and do not substantively participate in the gains
and losses of the entity. Consolidation of a VIE by its primary beneficiary is not based on majority voting interest,
but is based on other criteria discussed below.
While AIG enters into various arrangements with VIEs in the normal course of business, AIG’s involvement
with VIEs is primarily via its insurance companies as a passive investor in debt securities (rated and unrated) and
284 AIG 2010 Form 10-K