AIG 2011 Annual Report Download - page 158

Chartis
In AIG’s general insurance business, the duration of liabilities for long-tail casualty lines is greater than other
lines. As differentiated from the life insurance and retirement services companies, the focus is not on asset-liability
matching, but on preservation of capital and growth of surplus.
Fixed income holdings of Chartis domestic operations, with an average duration of 4.3 years, are currently
comprised primarily of tax-exempt securities, which provide attractive risk-adjusted after-tax returns as well as
taxable municipal bonds, government bonds and agency and corporate securities. The majority of these high
quality investments are rated A or higher.
Fixed income assets held in Chartis foreign operations are of high quality and short to intermediate duration,
averaging 4 years.
While invested assets backing reserves are invested in conventional fixed income securities in Chartis domestic
operations, a modest portion of surplus is allocated to large capitalization, high-dividend, public equity strategies
and to alternative investments, including private equity and hedge funds. Notwithstanding the current
environment, these investments have provided a combination of added diversification and attractive long-term
returns over time.
SunAmerica
With respect to SunAmerica companies, AIG uses asset-liability management as a tool to determine the
composition of the invested assets. AIG’s objective is to maintain a matched asset-liability structure, although AIG
may occasionally determine that it is economically advantageous to be temporarily in an unmatched position. To
the extent that AIG has maintained a matched asset-liability structure, the economic effect of interest rate
fluctuations is partially mitigated.
AIG’s investment strategy for SunAmerica is to produce cash flows greater than maturing insurance liabilities.
There exists a future investment risk associated with certain policies currently in-force which will have premium
receipts in the future. That is, the investment of these future premium receipts may be at a yield below that
required to meet future policy liabilities.
SunAmerica frequently reviews its interest rate assumptions and actively manages the crediting rates used for its
new and in force business. Business strategies continue to evolve to maintain profitability of the overall business.
The investment of insurance cash flows and reinvestment of the proceeds of matured securities and coupons
requires active management of investment yields while maintaining satisfactory investment quality and liquidity.
A number of guaranteed benefits, such as living benefits and guaranteed minimum death benefits, are offered
on certain variable and indexed annuity products. The fair value of these benefits is measured based on actuarial
and capital market assumptions related to projected cash flows over the expected lives of the contracts.
SunAmerica manages its exposure resulting from these long-term guarantees through reinsurance or capital
market hedging instruments. SunAmerica actively reviews underlying assumptions of policyholder behavior and
persistency related to these guarantees. SunAmerica has taken positions in certain derivative financial instruments
in order to hedge the impact of changes in equity markets and interest rates on these benefit guarantees.
SunAmerica executes listed futures and options contracts on equity indexes to hedge certain guarantees of variable
and indexed annuity products. SunAmerica also enters into various types of futures and options contracts,
primarily to hedge changes in value of certain guarantees of variable and indexed annuities due to fluctuations in
interest rates. SunAmerica uses several instruments to hedge interest rate exposure, including listed futures on
government securities, listed options on government securities and, beginning in 2012, the purchase of government
securities.
With respect to over-the-counter derivatives, SunAmerica deals with highly rated counterparties and does not
expect the counterparties to fail to meet their obligations under the contracts. SunAmerica has controls in place to
monitor credit exposures by limiting transactions with specific counterparties within specified dollar limits and
144 AIG 2011 Form 10-K