AIG 2013 Annual Report Download - page 135

Changes in fair value of fixed maturity securities designated to hedge living benefit liabilities, which are excluded
from Pre-tax operating income, are a component of AIG Life and Retirement’s dynamic hedging program designed to
manage economic risk exposure associated with changes in equity markets, interest rates and volatilities related to
embedded derivative liabilities contained in guaranteed benefit features of variable annuities. We substantially hedge
our exposure to equity markets, and the majority of our interest rate exposure is hedged with derivative instruments
and, to a lesser extent, with U.S. Treasury bonds that we began purchasing in 2012 as a capital-efficient strategy to
reduce our interest rate risk exposure over time. As a result of increases in interest rates on U.S. Treasury bonds
during 2013, the fair value of the U.S. Treasury bonds used for hedging, net of financing costs, decreased by
$161 million in 2013, compared to an increase in fair value of $37 million in 2012.
Net realized capital gains increased in 2013 and 2012 compared to 2011 as a result of higher gains from sales
activity in connection with utilizing capital loss carryforwards, lower other-than-temporary impairments, and fair value
gains on embedded derivatives, net of hedges, which had net gains of $31 million in 2013, compared to net losses of
$799 million in 2012 and $242 million in 2011. The changes in the fair value of embedded derivatives, net of hedges,
were primarily due to changes in projected interest rates and equity market returns.
Changes in Fair Value of Fixed Maturity Securities Designated to Hedge Living Benefits Liabilities
Net Realized Capital Gains (Losses)
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AIG 2013 Form 10-K 117
ITEM 7 / RESULTS OF OPERATIONS / AIG LIFE AND RETIREMENT
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