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ITEM 8 / NOTE 10. DEFERRED POLICY ACQUISITION COSTS.....................................................................................................................................................................................The change in these adjustments, net of tax, is included with the change in net unrealized appreciation (depreciation)of investments that is credited or charged directly to Accumulated other comprehensive income (loss) (Shadow DAC).Value of Business Acquired (VOBA) is determined at the time of acquisition and is reported in the ConsolidatedBalance Sheet with DAC. This value is based on the present value of future pre-tax profits discounted at yieldsapplicable at the time of purchase. For participating life, traditional life and accident and health insurance products,VOBA is amortized over the life of the business similar to that for DAC based on the assumptions at purchase. Foruniversal life, and investment-oriented products, VOBA is amortized in relation to the estimated gross profits to datefor each period.For contracts accounted for at fair value, policy acquisition costs are expensed as incurred and not deferred oramortized.For discussion related to changes in deferred acquisition costs in 2012 due to the adoption of a new accountingstandard that addresses the accounting for costs associated with acquiring or renewing insurance contracts. SeeNote 2 herein.The following table presents a rollforward of DAC:Years Ended December 31,(in millions) 2012 2011 2010AIG Property Casualty:Balance, beginning of year $ 2,375 $ 2,099 $ 1,919Acquisition costs deferred 4,861 4,548 4,058Amortization expense (4,761) (4,324) (3,894)Increase (decrease) due to foreign exchange and other (34) 52 16Balance, end of year $ 2,441 $ 2,375 $ 2,099AIG Life and Retirement:Balance, beginning of year $ 6,502 $ 7,258 $ 8,462Acquisition costs deferred 724 869 701Amortization expense (931) (1,142) (1,086)Change in net unrealized losses on securities (621) (486) (817)Increase (decrease) due to foreign exchange (2) 3 1Other – – (3)Balance, end of year (a) $ 5,672 $ 6,502 $ 7,258Other operations:Balance, beginning of year $ 25 $ 32 $ 17,505Dispositions (b) – – (16,117)Acquisition costs deferred 36 14 1,218Amortization expense (17) (20) (841)Change in net unrealized gains (losses) on securities – – 28Increase due to foreign exchange – 1 314Activity of discontinued operations – – 59Reclassified to Assets held for sale – – (1,960)Other – (2) (174)Subtotal $ 44 $ 25 $ 32Consolidation and eliminations 25 35 42Balance, end of year (a) $ 69 $ 60 $ 74Total deferred policy acquisition costs $ 8,182 $ 8,937 $ 9,431(a) Includes $(619) million, $(1.4) billion, and $(758) million for AIG Life and Retirement at December 31, 2012, 2011 and 2010, respectively, and$(34) million for Divested businesses at 2011 related to the effect of net unrealized gains and losses on available for sale securities. For the yearended December 31, 2010, there were no net unrealized gains and losses on available for sale securities associated with divested businesses.(b) For 2010, includes AIA which was deconsolidated and ALICO which was sold in 2010...................................................................................................................................................................................................................................AIG 2012 Form 10-K 271