AIG 2015 Annual Report Download - page 114

ITEM 7 / INVESTMENTS
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114
The following table presents the components of Net Investment Income:
Years Ended December 31,
(in millions) 2015 2014 2013
Interest and dividends $12,856 $ 13,246 $ 13,199
Alternative investments 1,476 2,624 2,803
Other investment income* 249 726 356
Total investment income 14,581 16,596 16,358
Investment expenses 528 517 548
Total net investment income $14,053 $ 16,079 $ 15,810
* Includes changes in fair value of certain fixed maturity securities where the fair value option has been elected and which are used to economically hedge the
interest rate risk in GMWB embedded derivatives. For the years ended December 31, 2015, 2014 and 2013, the net investment income (loss) recorded on these
securities was $(43) million, $260 million and $(161) million, respectively.
Net investment income decreased for 2015 compared to 2014 due to lower income on alternative investments, primarily
related to hedge fund performance, lower income on assets for which the fair value option was elected, and lower
reinvestment yields.
Net investment income for 2014 increased compared to 2013 primarily due to positive performance on bonds where we
elected the fair value option, driven by movements in interest rates, partially offset by lower income on alternative investments
due to equity market performance and lower reinvestment yields on our fixed maturity securities portfolio due to the low
interest rate environment.
Non-Life Insurance Companies
For the Non-Life Insurance Companies, the duration of liabilities for long-tail casualty lines is greater than that of other lines. As
a result, the investment strategy within the Non-Life Insurance Companies focuses on growth of surplus and preservation of
capital, subject to liability and other business considerations.
The Non-Life Insurance Companies invest primarily in fixed maturity securities issued by corporations, municipalities and other
governmental agencies and also invest in structured securities collateralized by, among other assets, residential and
commercial real estate and commercial mortgage loans. While invested assets backing reserves of the Non-Life Insurance
Companies are primarily invested in conventional fixed maturity securities, we have continued to allocate a portion of our
investment activity into asset classes that offer higher yields, particularly in the domestic operations. In addition, we continue to
invest in both fixed rate and floating rate asset-backed investments for their risk-return attributes, as well as to manage our
exposure to potential changes in interest rates. This asset diversification has maintained stable average yields while the overall
credit ratings of our fixed maturity securities were largely unchanged. We expect to continue to pursue this investment strategy
to meet the Non-Life Insurance Companies’ liquidity, duration and credit quality objectives as well as current risk-return and tax
objectives.
In addition, the Non-Life Insurance Companies seek to enhance returns through selective 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 and have provided added diversification to the
broader portfolio. The Non-Life Insurance Companies’ investment portfolio also includes, to a lesser extent, equity securities.
With respect to non-affiliate over-the-counter derivatives, the Non-Life Insurance Companies conduct business with highly
rated counterparties and do not expect the counterparties to fail to meet their obligations under the contracts. The Non-Life
Insurance Companies 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. The Non-Life Insurance
Companies generally use ISDA Master Agreements and Credit Support Annexes (CSAs) with bilateral collateral provisions to
reduce counterparty credit exposures.
Fixed maturity investments of the Non-Life Insurance Companies domestic operations, with an intermediate duration of 4.7
years, are currently comprised primarily of tax-exempt securities, which provide attractive risk-adjusted after-tax returns, as