AIG 2011 Annual Report Download - page 153

AIG’s U.S. operations are subject to guarantee fund assessment laws which exist in most states. As a result of
operating in a state that has guarantee fund assessment laws, a solvent insurance company may be assessed for
certain obligations arising from the insolvencies of other insurance companies operated in that state. AIG
generally records these assessments upon notice. Additionally, certain states permit at least a portion of the
assessed amount to be used as a credit against a company’s future premium tax liabilities. Therefore, the ultimate
net assessment cannot reasonably be estimated. The guarantee fund assessments net of credits recognized in 2011,
2010 and 2009, respectively, were $7 million, $16 million and $18 million.
AIG is also required to participate in various involuntary pools (principally workers’ compensation business and,
internationally, personal automobile business) that provide insurance coverage for those not able to obtain such
coverage in the voluntary markets. This participation is also recorded upon notification, as these amounts cannot
reasonably be estimated.
A substantial portion of Chartis’ business is conducted in foreign countries. The degree of regulation and
supervision in foreign jurisdictions varies. Generally, AIG, as well as the underwriting companies operating in such
jurisdictions, must satisfy local regulatory requirements. Licenses issued by foreign authorities to AIG subsidiaries
are subject to modification and revocation. Thus, AIG’s insurance subsidiaries could be prevented from conducting
future business in certain of the jurisdictions where they currently operate. AIG’s international operations include
operations in various developing nations. Both current and future foreign operations could be adversely affected
by unfavorable political developments up to and including nationalization of AIG’s operations without
compensation. Adverse effects resulting from any one country may affect AIG’s results of operations, liquidity and
financial condition depending on the magnitude of the event and AIG’s net financial exposure at that time in that
country.
Foreign insurance operations are individually subject to local solvency margin requirements that require
maintenance of adequate capitalization, with which AIG complies in each country. In addition, certain foreign
locations, notably Japan, have established regulations that can result in guarantee fund assessments. These have
not had a material effect on AIG’s financial condition or results of operations.
See Note 18 to the Consolidated Financial Statements for additional information.
AIG’s investment strategies are tailored to the specific business needs of each operating unit. The investment
objectives are driven by the business model for each of the businesses: general insurance, life insurance,
retirement services and the Direct Investment book. The primary objectives are generation of investment income,
preservation of capital, liquidity management and growth of surplus to support the insurance products.
At the local operating unit level, investment strategies are based on considerations that include the local market,
liability duration and cash flow characteristics, rating agency and regulatory capital considerations, legal investment
limitations, tax optimization and diversification.
The majority of assets backing insurance liabilities at AIG consist of intermediate and long duration fixed
maturity securities. In the case of life insurance and retirement services companies, as well as in the Direct
Investment book, the fundamental investment strategy is, as nearly as is practicable, to match the duration
characteristics of the liabilities with assets of comparable duration. Domestically, fixed maturity securities held by
the insurance companies included in Chartis historically have consisted primarily of laddered holdings of
tax-exempt municipal bonds, which provided attractive after-tax returns and limited credit risk. In order to meet
the current risk-return and tax objectives of Chartis, the domestic property and casualty companies have begun to
shift investment allocations away from tax-exempt municipal bonds towards taxable instruments which meet the
companies’ liquidity, duration and credit quality objectives as well as current risk-return and tax objectives.
Outside of the U.S., fixed maturity securities held by Chartis companies consist primarily of intermediate duration
high-grade securities.
AIG 2011 Form 10-K 139
INVESTMENTS
INVESTMENT STRATEGIES