AIG 2013 Annual Report Download - page 133

Overall, our yields declined in 2013 as investment purchases were made at yields lower than the weighted average
yield of the existing portfolio. In 2012, the impact of lower yields on new purchases was largely offset by
reinvestment of significant amounts of cash and short-term investments during 2011. During prolonged periods of low
or declining interest rates, we generally must invest new net flows and reinvest the cash flows from investment sales,
interest and maturities of our portfolio in lower yielding securities.
Opportunistic investments in structured securities, private placement corporate debt securities and commercial
mortgage loans continue to be made to improve yields, increase net investment income and help to offset the impact
of the lower interest rate environment.
We maintain investment portfolios for each product line which, to the extent practicable, match established duration
targets based on the characteristics of our liabilities. We allocate net investment income from assets that support
liabilities to the product line they support. Net investment income from investments in excess of liabilities, which
include the majority of our alternative investments, is allocated to the product lines using a capital-based internal
allocation model.
Net investment income increased slightly in 2013 compared to 2012, as reinvestment in the low interest rate
environment resulted in a 13 basis point decrease in the base portfolio yield in 2013, which was offset by growth in
average assets from positive net flows, a $613 million increase in alternative investment income and a $50 million
increase in call and tender income. The increase in alternative investment yield to almost 16 percent in 2013 from
approximately 10 percent in 2012 reflected higher hedge fund income due to favorable equity market conditions and
several large redemptions from hedge funds that are not accounted for using the equity method. This increase in
alternative investment income was partially offset by decreases in other investment income enhancement items in
2013, which included net fair value losses of $23 million in 2013 from our investment in PICC Group compared to
gains of $57 million in 2012; a $38 million decrease in accretion of discount for certain highly rated structured
securities, driven by recent increases in market interest rates; and fair value gains of $246 million recognized in 2012
on our investment in ML II, which was liquidated in March 2012 when we received a distribution of $1.6 billion from
the sale by the FRBNY of the securities held in ML II.
Net investment income increased in 2012 compared to 2011, reflecting higher base portfolio yields of 9 basis points
due to the reinvestment of significant amounts of cash and short-term investments during 2011, opportunistic
investments in structured securities, fair value gains on MLII and other structured securities, a fair value gain of
approximately $57 million on the investment in PICC Group, lower impairment charges on investments in leased
commercial aircraft and higher returns on alternative investments.
The contractual provisions for renewal of crediting rates and guaranteed minimum crediting rates included in our
products may have the effect, in a continued low interest rate environment, of reducing our spreads and thus
reducing future profitability. Although we partially mitigate this interest rate risk through our asset-liability management
process, product design elements and crediting rate strategies, a prolonged low interest rate environment may
negatively affect future profitability.
Disciplined pricing on new business resulted in lower new fixed annuity deposits in the first six months of 2013
relative to the same period in 2012, due to the relatively low crediting rates offered. However, deposits improved in
the latter half of 2013 due to the modest increases in market interest rates, resulting in an overall increase in
deposits for 2013 compared to 2012. In the historically low interest rate environment experienced in 2013 and 2012,
we have continued to pursue new sales of life and annuity products at targeted net investment spreads. We have a
dynamic product management process to ensure that new business offerings appropriately reflect the current interest
rate environment. To the extent that we cannot achieve targeted net investment spreads on new business, products
Yield and Net Investment Income
2013 and 2012 Comparison
Net Investment Income
2012 and 2011 Comparison
Spread Management
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AIG 2013 Form 10-K 115
ITEM 7 / RESULTS OF OPERATIONS / AIG LIFE AND RETIREMENT
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