AIG 2013 Annual Report Download - page 137

Other reserve changes in the table above include loss recognition, primarily on certain long-term payout annuity
contracts. In connection with our program to utilize capital loss carryforwards, we sold investment securities in 2013
and 2012. These and other investment sales with subsequent reinvestment at lower yields triggered recording of loss
recognition reserves of $1.5 billion and $1.2 billion on certain long-term payout annuity contracts in 2013 and 2012,
respectively. There were loss recognition reserves related to unrealized appreciation of investments as of
December 31, 2011, but no actual loss recognition recorded in 2011. Assumptions related to investment yields,
mortality experience and expenses are reviewed periodically and updated as appropriate, which could also result in
additional loss recognition reserves.
Loss recognition attributable to our program to utilize capital loss carryforwards is excluded from Pre-tax operating
income and reported within Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital
gains (losses) in the AIG Life and Retirement Results table herein. See Note 9 to the Consolidated Financial
Statements and Critical Accounting Estimates — Future Policy Benefits for Life and Accident and Health Insurance
Contracts (AIG Life and Retirement) for additional information on loss recognition.
DAC for investment-oriented products is adjusted at each balance sheet date to reflect the change in DAC as if fixed
maturity and equity securities available for sale had been sold at their stated aggregate fair value and the proceeds
reinvested at current yields. The change in DAC related to unrealized appreciation of investments generally moves in
the opposite direction of the changes in unrealized appreciation of the available for sale securities portfolio. When
market interest rates rose in 2013, the fair value and unrealized appreciation of the portfolio decreased, resulting in
an increase in DAC. In 2012 and 2011, when interest rates were declining and unrealized gains in the portfolio
increased, DAC and reserves related to unrealized appreciation decreased.
The following table summarizes the major components of the changes in AIG Life and Retirement DAC:
Balance, beginning of year $ 6,502 $ 7,258
Acquisition costs deferred 724 869
Amortization expense (931) (1,142)
Change related to unrealized depreciation (appreciation) of investments (621) (486)
Increase (decrease) due to foreign exchange (2) 3
Balance, end of year*$ 5,672 $ 6,502
*Balance excluding the amount related to unrealized appreciation of investments was $7.8 billion, $7.5 billion and $7.9 billion at December 31,
2013, 2012 and 2011, respectively.
Policy acquisition costs and policy issuance costs related to universal life and investment-type products (collectively,
investment-oriented products) are deferred and amortized, with interest, in relation to the incidence of estimated
gross profits to be realized over a period that approximates the estimated lives of the contracts. Estimated gross
profits include net investment income and spreads, net realized investment gains and losses, fees, surrender
charges, expenses, and mortality gains and losses. If the assumptions used for estimated gross profits change
significantly, DAC and related reserves are recalculated using the new assumptions, and any resulting adjustment is
included in income. Updating such assumptions may result in acceleration of amortization in some products and
deceleration of amortization in other products. See Critical Accounting Estimates — Estimated Gross Profits for
Investment-Oriented Products (AIG Life and Retirement) for additional information on these assumptions.
Pre-tax operating income in 2013 included a net increase of $153 million from adjustments to update certain gross
profit assumptions used to amortize DAC and related items in our investment-oriented product lines. These
Other Reserve Changes
DAC and Reserves Related to Unrealized Appreciation of Investments
DAC Rollforward
Estimated Gross Profits for Investment-Oriented Products
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AIG 2013 Form 10-K 119
ITEM 7 / RESULTS OF OPERATIONS / AIG LIFE AND RETIREMENT
Years Ended December 31,
(in millions) 2013 2012 2011
$ 5,672
930
(658)
784
(5)
$ 6,723
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