AIG 2014 Annual Report Download - page 126

ITEM 7 / INVESTMENTS
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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.
The Life Insurance Companies invest primarily in fixed maturity securities issued by corporations, municipalities and other
governmental agencies; structured securities collateralized by, among other assets, residential and commercial real estate;
and commercial mortgage loans.
In addition, the Life Insurance Companies seek to enhance returns through investments in a diversified portfolio of alternative
investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically
achieved yields in excess of the fixed maturity portfolio yields. The Life Insurance Companies investment portfolio also
includes, to a lesser extent, equity securities and yield enhancing items.
The Life Insurance Companies monitor fixed income markets, including the level of interest rates, credit spreads and the
shape of the yield curve. The Life Insurance Companies frequently review their interest rate assumptions and actively
manages the crediting rates used for their 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. Specifically, the investment of these future premium receipts may be at
a yield below that required to meet future policy liabilities.
Fixed maturity investments of the Life Insurance Companies domestic operations, with an average duration of 6.62 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 its composite ratings.
Fixed maturity investments held in the Life Insurance Companies foreign operations are of high quality, primarily rated A or
higher based on composite ratings, and intermediate duration, averaging 12.68 years.
NAIC Designations of Fixed Maturity Securities
The Securities Valuation Office (SVO) of the NAIC evaluates the investments of U.S. insurers for statutory reporting purposes
and assigns fixed maturity securities to one of six categories called ‘NAIC Designations.’ In general, NAIC Designations of ‘1’
highest quality, or ‘2’ high quality, include fixed maturity securities considered investment grade, while NAIC Designations of ‘3’
through ‘6’ generally include fixed maturity securities referred to as below investment grade. The NAIC has adopted revised
rating methodologies for certain structured securities, including non-agency RMBS and CMBS, which are intended to enable a
more precise assessment of the value of such structured securities and increase the accuracy in assessing expected losses to
better determine the appropriate capital requirement for such structured securities. These methodologies result in an improved
NAIC Designation for such securities compared to the rating typically assigned by the three major rating agencies. The
following tables summarize the ratings distribution of Life Insurance Companies fixed maturity security portfolio by NAIC
Designation, and the distribution by composite AIG credit rating, which is generally based on ratings of the three major rating
agencies. See Investments – Credit Ratings herein for a full description of the composite AIG credit ratings.