AIG 2014 Annual Report Download - page 284

ITEM 8 / NOTE 9. DEFERRED POLICY ACQUISITION COSTS
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267
The following table presents a rollforward of DAC and VOBA:
Years Ended December 31,
(in millions) 2014 2013 2012
Non-Life Insurance Companies:
Balance, beginning of year $2,493 $ 2,342 $ 2,306
Acquisition costs deferred 4,805 4,803 4,834
Amortization expense (4,599) (4,481) (4,764)
Other (148) (171) (34)
Balance, end of year $2,551 $ 2,493 $ 2,342
Life Insurance Companies:
Balance, beginning of year $6,920 $ 5,815 $ 6,607
Acquisition costs deferred 1,114 1,034 788
Amortization expense (727) (674) (945)
Change in net unrealized gains (losses) on securities (360) 784 (621)
Decrease due to foreign exchange (32) (39) (14)
Other 343 --
Balance, end of year $7,258 $ 6,920 $ 5,815
Consolidation and eliminations 18 23 25
Total deferred policy acquisition costs* $9,827 $ 9,436 $ 8,182
Supplemental Information:
VOBA amortization expense included in Life Insurance Companies DAC amortization 17 23 58
VOBA, end of year included in Life Insurance Companies DAC balance 510 373 368
* Net of reductions in DAC of $1.4 billion, $1.1 billion, and $1.8 billion for Life Insurance Companies at December 31, 2014, 2013 and 2012, respectively,
related to the effect of net unrealized gains and losses on available for sale securities (shadow DAC).
The percentage of the unamortized balance of VOBA at December 31, 2014 expected to be amortized in 2015 through 2019
by year is: 10.1 percent, 8.9 percent, 7.9 percent, 7.2 percent and 6.7 percent, respectively, with 59.2 percent being amortized
after five years. These projections are based on current estimates for investment income and spreads, persistency, mortality
and morbidity assumptions.
DAC, VOBA and SIA for insurance-oriented and investment-oriented 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
A variable interest entity (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 or 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.
We enter into various arrangements with VIEs in the normal course of business and consolidate the VIEs when we determine
we are the primary beneficiary. This analysis includes a review of the VIE’s capital structure, related contractual relationships
and terms, nature of the VIE’s operations and purpose, nature of the VIE’s interests issued and our involvement with the entity.
When assessing the need to consolidate a VIE, we evaluate the design of the VIE as well as the related risks the entity was
designed to expose the variable interest holders to.
For VIEs with attributes consistent with that of an investment company or a money market fund, the primary beneficiary 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.