AIG 2012 Annual Report Download - page 120

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include investment spreads, net realized investment gains and losses, fees, surrender charges, expenses and
mortality gains and losses. Emerging actual gross profits are used to true up the amortization of DAC, VOBA and
SIA each quarter. In addition, future assumptions are reviewed to determine whether they should be modified. If so,
the DAC, VOBA and SIA assets may be recalculated and adjusted to reflect the updated assumptions. AIG Life and
Retirement completed its comprehensive annual review of DAC assumptions in the fourth quarter of 2012 and
adjusted the assumption for future fixed annuity surrender rates to be more consistent with recent experience that is
expected to continue as long as interest rates remain relatively low.
Other acquisition and insurance expenses increased in 2012 due to higher marketing and distribution expenses
associated with growth initiatives for variable annuities and group retirement products.
2011 and 2010 Comparison
AIG Life and Retirement Operating Income
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Operating income decreased in 2011 due to lower net investment income, higher DAC amortization and higher
policyholder benefit expense in its variable annuity business due to separate account performance, and an increase
in death claim reserves.
Policy fees were essentially flat from 2010.
Net investment income decreased in 2011 compared to 2010 reflecting lower base yields of 12 basis points as
investment purchases in late 2010 and 2011 were made at yields lower than the weighted average yields of the
existing base portfolio. Net investment income also decreased due to a $471 million decrease in fair value gains on
ML II, $196 million lower call and tender income, $163 million of impairment charges on investments in leased
commercial aircraft and a $121 million decrease in private equity and hedge funds income. The lower yields were
partially offset by an increase in income from the reinvestment of significant amounts of cash and short term
investments during 2011.
Other income increased due to the previously discussed legal settlement proceeds of $226 million in 2011.
Policyholder benefits and claims incurred increased as a result of reserve charges for death claims not submitted to
us in the normal course of business and higher reserves for guaranteed death benefits in our variable annuity
products as a result of less favorable separate account performance in 2011 as compared to 2010.
Other acquisition and insurance expenses declined due to legal expense accruals and state guaranty fund
assessments which were higher in 2010, as well as a reduction in the cost of letters of credit related to reinsurance.
Life Insurance Operating Income
Life Insurance operating income decreased in 2011 due to lower net investment income and an increase in death
claim reserves, partially offset by lower DAC amortization due to updating actuarial assumptions in 2010 principally
related to mortality and surrender rates.
Policyholder fees declined primarily as a result of updating certain assumptions in 2010 related to universal life and
deferred annuity business, which resulted in a $58 million increase in fee income.
Net investment income decreased in 2011 compared to 2010 reflecting lower base yields as investment purchases in
late 2010 and 2011 were made at yields lower than the weighted average yields of the existing base portfolio. Net
investment income also decreased due to a $149 million decrease in fair value gains on ML II, $126 million lower call
and tender income and $50 million of impairment charges on investments in leased commercial aircraft. The lower
yields were partially offset by an increase in income from the reinvestment of significant amounts of cash and short
term investments during 2011.
Policyholder benefits and claims incurred increased in 2011 reflecting an increase in reserves for death claims. AIG
Life and Retirement recorded an increase of approximately $202 million in the estimated reserves for incurred but not
reported death claims in 2011 in conjunction with the use of the Social Security Death Master File (SSDMF) to
identify potential claims not yet filed with its life insurance companies.
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AIG 2012 Form 10-K 103
ITEM 7 / RESULTS OF OPERATIONS