DEFERRED POLICY ACQUISITION COSTS

12 Months Ended

Dec. 31, 2011

DEFERRED POLICY ACQUISITION COSTS

DEFERRED POLICY ACQUISITION COSTS

10. DEFERRED POLICY ACQUISITION COSTS

The following table presents a rollforward of deferred policy acquisition costs:

Years Ended December 31, (in millions)		2011			2010			2009
Chartis:
	Balance, beginning of year	$	4,973		$	4,759		$	4,959
	Dispositions(a)		-			-			(418	)
	Acquisition costs deferred		6,575			6,849			6,490
	Amortization expense		(6,455	)		(6,728	)		(6,663	)
	Increase due to foreign exchange and other		261			93			391
	Balance, end of year	$	5,354		$	4,973		$	4,759
SunAmerica:
	Balance, beginning of year	$	9,606		$	11,098		$	14,447
	Dispositions(b)		-			-			(479	)
	Acquisition costs deferred		1,194			990			1,014
	Amortization expense		(1,535	)		(1,368	)		(1,553	)
	Change in net unrealized losses on securities(c)		(674	)		(1,111	)		(960	)
	Increase (decrease) due to foreign exchange		2			1			(10	)
	Other(d)		-			(4	)		(1,361	)
Balance, end of year(e)		$	8,593		$	9,606		$	11,098
Other operations:
	Balance, beginning of year	$	47		$	24,908		$	26,321
	Dispositions(b)		-			(22,244	)		-
	Acquisition costs deferred		27			1,496			1,545
	Amortization expense		(29	)		(1,038	)		(1,226	)
	Change in net unrealized gains (losses) on securities(c)		-			34			(44	)
	Increase due to foreign exchange		1			377			826
	Activity of discontinued operations		-			220			868
	Reclassified to Assets held for sale		-			(3,521	)		(3,322	)
	Other(d)		(2	)		(185	)		(60	)
Subtotal		$	44		$	47		$	24,908
Consolidation and eliminations			35			42			49
Balance, end of year(e)		$	79		$	89		$	24,957
Total deferred policy acquisition costs		$	14,026		$	14,668		$	40,814

(a)

In 2009, Transatlantic was deconsolidated and 21st Century and HSB were sold.

(b)

For 2010, includes AIG Star and AIG Edison, which were sold in February 2011, AIA which was deconsolidated and ALICO which was sold in 2010 and AIG Life Canada, which was sold in 2009.

(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.

(e)

Includes $(646) million, $(1.0) billion, and $86 million for SunAmerica at December 31, 2011, 2010 and 2009, respectively, and $(34) million for Divested businesses at 2010 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.

    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 $34 million, $90 million and $132 million in 2011, 2010 and 2009, respectively, while the unamortized balance was $430 million, $488 million and $1.6 billion at December 31, 2011, 2010 and 2009, respectively. The percentage of the unamortized balance of VOBA at December 31, 2011 expected to be amortized in 2012 through 2016 by year is: 8.1 percent, 7.6 percent, 6.3 percent, 5.8 percent and 5.1 percent, respectively, with 67.1 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 SunAmerica's domestic retirement services business. In 2011, 2010 and 2009, amortization expense (increased) decreased by $307 million, $101 million and $(113) 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.