AIG 2013 Annual Report Download - page 112

We manage and account for our invested assets on a legal entity basis in conformity with regulatory requirements.
Within a legal entity, invested assets are available to pay claims and expenses of both Commercial Insurance and
Consumer Insurance operating segments as well as the Other category. Invested assets are not segregated or
otherwise separately identified for the Commercial Insurance and Consumer Insurance operating segments.
Investment income is allocated to the Commercial Insurance and Consumer Insurance operating segments based on
an internal investment income allocation model. The model estimates investable funds based primarily on loss
reserves, unearned premiums and a capital allocation for each segment. The investment income allocation is
calculated based on the estimated investable funds and risk-free yields (plus a liquidity premium) consistent with the
approximate duration of the liabilities. The actual yields in excess of the allocated amounts and the investment
income from the assets not attributable to the Commercial Insurance and the Consumer Insurance operating
segments are assigned to the Other category. Commencing in the first quarter of 2013, we began applying similar
duration and risk-free yields (plus a liquidity premium) to the allocated capital of Commercial Insurance and
Consumer Insurance as is applied to loss reserves.
Net realized capital gains (losses) and Other income (expense) — net are not allocated to Commercial Insurance
and Consumer Insurance, but are reported as part of the Other category.
Net investment income is influenced by a number of factors, including equity market performance, changes in overall
asset allocation, changes in the timing and amount of expected cash flows on certain structured securities, and the
movements of interest rates. Net investment income increased by $487 million or 10 percent in 2013, compared to
2012, primarily due to increased alternative investment income derived from equity market performance and income
associated with the PICC P&C shares that are accounted for under the fair value option. This alternative investment
performance was most visible in investments in hedge funds, which benefited from the equity market performance.
Fair value increases also contributed to the net investment income increase. The portion of our investment in PICC
P&C shares accounted for under the fair value option, contributed $110 million to net investment income. Although
interest rates remained at historically low levels, there were upward movements in rates throughout the year, with the
ten year U.S. Treasury yield increasing 126 basis points during the year. These increasing rates, coupled with
continued portfolio diversification, helped mitigate the effects of runoff rates on matured or sold investments
exceeding new investment yields. The combination of improving yield differential and above average alternative
investment returns increased the return on invested assets by approximately 0.4 points to 4.2 percent.
Corporate debt securities continued to be the largest asset category. We continued to focus on risk-weighted
opportunistic investments in higher yielding assets such as structured securities and commercial mortgage loans. In
addition we continued to maintain a defensive strategy on interest rates in the current rising rate environment by
increasing our mix of floating rate securities. This asset diversification has achieved an increase in average yields
while the overall credit ratings of our fixed maturity investments were largely unchanged. We expect to continue to
refine our investment strategy in 2014 to meet our liquidity, duration and credit quality objectives as well as current
risk-return and tax objectives.
Our invested asset portfolio decreased by approximately $8 billion, or 6 percent during the year, due to a decline in
unrealized appreciation from rising interest rates, foreign currency translation adjustment losses in our international
portfolio as the dollar strengthened against the yen, and approximately $4.3 billion in dividend remittances to AIG
Parent.
Net realized capital gains in 2013 were driven primarily by gains on the sales of fixed maturity securities, which were
accomplished in concert with our portfolio diversification and derisking strategy. Lower overall gains on sales of
securities, in combination with foreign exchange gains due to dollar strengthening more than offset losses from
derivatives used to economically hedge foreign currency positions compared to the prior year. We recognized
other-than-temporary impairment charges of $53 million, which was a significant improvement from the $377 million
in charges recognized in 2012, as market factors such as improved housing fundamentals resulted in structured
securities impairments well below those recognized in 2012.
2013 and 2012 Comparison
Net Investment Income
Net Realized Capital Gains (Losses)
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AIG 2013 Form 10-K94
ITEM 7 / RESULTS OF OPERATIONS / AIG PROPERTY CASUALTY
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