AIG 2005 Annual Report Download - page 44

42 Review of Operations
Investments
portfolios, with particular attention given
to aligning the maturity profile of assets
and liabilities. As the overall maturity pro-
file is somewhat shorter than that of tradi-
tional life products, heavier use is made of
asset-backed and floating rate investments.
For both Life Insurance & Retirement
Services and General Insurance compa-
nies, allocation to equities is intended to
provide an economic hedge against the
potential risks associated with inflation
and changing interest rates, as well as the
potential for superior long-term perfor-
mance in funding liabilities for which
there are no, or very limited, fixed income
alternatives.
Financial Services cash and invested
assets amounted to $150.38 billion at year
end, of which $82.37 billion, or 54.8 per-
cent, related to Capital Markets opera-
tions. The majority of Capital Markets
assets represent the investment of proceeds
from the issuance of guaranteed invest-
ment agreements, notes and other bonds in
short- and medium-term securities of high
credit quality. Aircraft owned by ILFC for
lease to commercial airlines around the
world are the other principal component of
Financial Services cash and invested assets.
At year end, the net book value of the fleet
totaled $36.25 billion.
Within the fixed income credit portfo-
lios, we conduct rigorous and thorough
independent credit analyses, and follow
policies of extensive diversification and
active management. Portfolios of mort-
gage-backed securities and related asset
classes are actively managed to mitigate
prepayment risk.
In most global equity and credit
markets, 2005 saw a continuation of the
recovery that began in late 2002. Credit
spreads in the U.S. market remained gener-
ally at tight levels (with the notable excep-
tion of the auto sector) with most areas of
the market remaining near historic narrow
levels. At the same time, equity markets in
Asia, Europe, Japan and Latin America
turned in generally positive returns, with
For Domestic Life & Retirement
Services and Asset Management companies,
the portfolios consist principally of
investment grade corporate debt securities,
highly rated mortgage-backed and asset-
backed securities. In addition, a small
allocation – normally about 10 percent – is
made to other, more volatile but potentially
higher yielding investments, including
high yield, distressed and emerging market
bonds; public and private equity securities;
hedge funds; real estate and other
investments having equity-like risks and
expected returns.
Non-U.S. Life Insurance & Retirement
Services portfolios, other than those that
are dollar-denominated, are generally con-
centrated in local sovereign and other high
quality (in the context of the local market)
bonds matched as nearly as possible to the
liability characteristics of the business. Due
to the limited or non-existent supply of
long-dated maturities in certain markets, as
well as the very long duration of traditional
life products, asset durations tend to be
somewhat short in many non-U.S. jurisdic-
tions relative to liability durations.
Exposure to corporate credit in nondollar
portfolios is limited outside of Western
Europe, due to the generally fewer number
of corporate issuers in many of the markets
in which AIG operates, or, in the case of
Japan, due to the absence of a significant
spread differential between sovereign and
high quality nonsovereign debt. In jurisdic-
tions with limited long-dated bond markets,
equities are used to extend the effective
duration of investment portfolios. In
addition, foreign exchange positions are
employed to diversify risk and enhance
yield in certain markets with very low
domestic interest rate curves, such as Japan
and Taiwan.
Assets supporting guaranteed invest-
ment contracts are invested similarly to
other Domestic Life Insurance & Retire-
ment Services and Asset Management
AIG’s cash and invested assets totaled
$691.77 billion at year-end 2005, com-
pared to $649.83 billion at year-end 2004,
an increase of 6.5 percent. Of this total,
13.7 percent was derived from General
Insurance operations, 54.0 percent from
Life Insurance & Retirement Services
operations, 21.7 percent from Financial
Services operations, 10.5 percent from
Asset Management operations and less
than one percent from other sources.
General Insurance net investment income
grew 26.1 percent in 2005 to $4.03 billion.
Life Insurance & Retirement Services net
investment income increased 18.8 percent
to $18.13 billion.
Total General Insurance cash and
invested assets amounted to $94.80 billion
at year end, an increase of 14.9 percent
over year-end 2004. Life Insurance &
Retirement Services cash and invested
assets were $373.40 billion at year end, an
increase of 8.7 percent over year-end 2004.
Asset Management invested assets
amounted to $72.91 billion at year end.
The majority of these assets relate to guar-
anteed investment contracts.
Investment strategies are tailored to the
specific business needs of each operating
unit based on considerations that include
the realities of the local market, liability
duration and cash flow characteristics,
rating agency and regulatory capital con-
siderations, legal investment limitations,
tax optimization, diversification and other
risk control considerations. Overall, these
strategies are intended to produce a reason-
ably stable and predictable return through-
out the economic cycle, without undue
risk or volatility.
Domestic General Insurance portfolios
consist principally of highly rated tax-
exempt municipal bonds, together with a
modest– about 15 percent– allocation to
public and private equity and other part-
nership investments. Non-U.S. General
Insurance assets are normally invested in a
mix of high quality taxable dollar bonds
and equities.