AIG 2013 Annual Report Download - page 165

Fixed maturity securities held in AIG Property Casualty’s foreign operations are of high quality being rated A or
higher based on composite ratings, and are of short to intermediate duration, averaging 4.3 years.
While invested assets backing reserves are primarily invested in conventional fixed maturity securities in AIG
Property Casualty’s domestic operations, a modest portion of surplus is allocated to alternative investments, including
private equity and hedge funds. These investments provide a combination of added diversification and attractive
long-term returns.
Our investment strategy is to maximize net investment income and portfolio value, subject to liquidity requirements,
capital constraints, diversification requirements, asset-liability matching and available investment opportunities.
We use asset-liability management as a primary tool to monitor and manage risk in our businesses. Our objective is
to maintain an investment portfolio with assets having weighted average durations that are matched to the duration
and cash flow profile of our liabilities, to the extent practicable. The investment portfolio of each product line is
tailored to the specific characteristics of its insurance liabilities, and as a result, certain portfolios are shorter in
duration and others are longer in duration. An extended low interest rate environment may result in a lengthening of
liability durations from initial estimates, primarily due to lower lapses.
AIG Life and Retirement monitors fixed income markets, including the level of interest rates, credit spreads and the
shape of the yield curve. AIG Life and Retirement 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 in a historically low interest rate environment. The low interest rate
environment makes it more difficult to profitably price attractive guaranteed return products and puts margin pressure
on existing products, due to the challenge of investing recurring premiums and deposits and reinvesting investment
portfolio cash flows in the low rate environment while maintaining satisfactory investment quality and liquidity. In
addition, there is investment risk associated with future premium receipts from certain in-force business. That is, the
investment of these future premium receipts may be at a yield below that required to meet future policy liabilities.
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. We manage our
exposure resulting from these long-term guarantees through reinsurance or capital market hedging instruments. We
actively review underlying assumptions of policyholder behavior and persistency related to these guarantees. We
have taken positions in certain derivative financial instruments to hedge the impact of changes in equity markets and
interest rates on these benefit guarantees. We execute listed futures and options contracts on equity indexes to
hedge certain guarantees of variable and indexed annuity products. We also enter 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. We use several instruments to hedge interest rate exposure, including listed futures on
government securities, listed options on government securities and the purchase of government securities.
With respect to over-the-counter derivatives, we deal with highly rated counterparties and do not expect the
counterparties to fail to meet their obligations under the contracts. We have controls in place to monitor credit
exposures by limiting transactions with specific counterparties within specified dollar limits and assessing the
creditworthiness of counterparties periodically. We generally use ISDA Master Agreements and Credit Support
Annexes (CSAs) with bilateral collateral provisions to reduce counterparty credit exposures.
Fixed maturity securities of AIG Life and Retirement, with an average duration of 6.4 years, are comprised of taxable
corporate bonds, as well as taxable municipal and government bonds, and agency and non-agency structured
securities. The majority of these investments are held in the available for sale portfolio and are rated investment
grade based on our composite ratings.
AIG Life and Retirement
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AIG 2013 Form 10-K 147
ITEM 7 / INVESTMENTS
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