AIG 2011 Annual Report Download - page 71

caused by changes in the equity markets, interest rates and market implied volatilities. SunAmerica substantially
hedges its exposure to equity markets. However, due to regulatory capital considerations, a significant portion of
the interest rate exposure is unhedged. In 2011, SunAmerica experienced losses of $265 million from these
unhedged positions, primarily as a result of the effect of declining interest rates. SunAmerica has purchased
additional hedges and is contemplating additional capital-efficient strategies to reduce this interest rate exposure.
SunAmerica is also exposed to the risk of policyholder behavior differing from that assumed in its pricing model.
Fixed Annuities
After a period of historic lows, interest rates generally increased at the longer part of the yield curve during the
latter part of 2010 and through the first three months of 2011 before declining significantly in the latter part of
2011. Changes in the interest rate environment affect the relative attractiveness of fixed annuities compared to
alternative products. As a result, SunAmerica’s fixed annuity sales declined significantly in the last six months of
2011 compared to the first six months. If the low interest rate environment continues, SunAmerica expects fixed
annuities sales (including deposits into fixed options within variable annuities sold in group retirement markets) to
decline in 2012.
Life Insurance
SunAmerica’s strategic focus includes disciplined underwriting, active expense management, product innovation,
a high quality investment portfolio and a strong capital position. SunAmerica’s distribution strategy is to grow new
sales by strengthening the core retail independent distributor channel with investments in enhanced service
technology, and expanding its market presence to additional channels and niche markets.
SunAmerica’s retail life sales increased 17 percent during 2011. Based on industry information available through
the first nine months of 2011, this growth rate exceeded that of the industry as SunAmerica continued to
re-engage distributors lost during the 2008 economic crisis. SunAmerica anticipates this trend to continue in 2012.
The economic environment has put pressure on consumer spending capacity, which, in part, has tempered sales of
universal life products which typically have higher annual premiums than term products and also offer additional
features.
The direct-to-consumer channel has proven effective for the distribution of certain types of less complex
products, and provides opportunities to bring innovative product solutions to the market that take advantage of
new underwriting technologies. Sales growth through SunAmerica’s affiliated Matrix Direct channel outpaced
retail sales growth and SunAmerica continues to have a positive outlook on future direct sales. The career
distribution channel is focused on improving agent retention and productivity. Career distribution sales in 2011
benefitted from a product suite that has proven appealing to consumers, which is offered though a highly focused,
affiliated distribution group using improved point-of-sale technologies. Steady growth from this channel is expected
to continue.
Investments
SunAmerica built up a large cash and short-term investment position beginning in the fourth quarter of 2010
with the intention of purchasing all the assets in the ML II portfolio. Following the FRBNY’s decision in early
2011 to begin selling the MLII assets through a competitive bidding process, SunAmerica began acquiring other
fixed maturity investments, including certain securities from ML II. Beginning late in the first quarter of 2011,
SunAmerica began investing its excess cash and liquid assets in longer-term higher-yielding securities to improve
spreads, while actively managing credit and liquidity risks. SunAmerica substantially completed this reinvestment
during the year, reducing its cash and short-term investment position from $19.4 billion at December 31, 2010 to
$3.8 billion at December 31, 2011.
During 2011, SunAmerica sold approximately $12.9 billion of investments, which enhanced statutory capital and
generated capital gains. The proceeds of these sales were reinvested at generally lower yields. The impact of these
lower yields, however, was more than offset by the effect of cash redeployment discussed above. Additionally,
during prolonged periods of low or declining interest rates, SunAmerica has to invest net flows and re-invest
interest and principal payments from its investment portfolios in lower yielding securities.
AIG 2011 Form 10-K 57