AIG 2007 Annual Report Download - page 42

AAA 38%
AA 28%
A 18%
BBB 11%
Lower 4%
Non-rated 1%
Consolidated Bond Portfolio Ratings*
*Excluding AIGFP.
40 AIG 2007 Annual Report
AIG’s cash and invested assets totaled $862.49 billion at year-end 2007,
compared to $801.94 billion at year-end 2006, an increase of
7.6 percent. Of AIG’s total cash and invested assets, 15.0 percent
was derived from General Insurance operations, 54.5 percent from
Life Insurance & Retirement Services operations, 21.1 percent from
Financial Services operations, 8.4 percent from Asset Management
operations and 1.0 percent from other sources.
General Insurance net investment income grew 7.7 percent
in 2007 to $6.13 billion. Total General Insurance cash and invested
assets amounted to $129.79 billion at year end, an increase of
11.8 percent over year-end 2006. Life Insurance & Retirement
Services net investment income increased 11.6 percent to
$22.34 billion. Life Insurance & Retirement Services cash and
invested assets were $470.51 billion at year end, an increase of
9.7 percent over year-end 2006.
Asset Management cash and invested assets amounted to
$72.04 billion at year end. The majority of these assets relate to
guaranteed investment contracts (GICs) or obligations issued
pursuant to AIG’s Matched Investment Program (MIP). The GIC
portfolio continues to run off, and the MIP has replaced the GIC
program as AIG’s principal institutional spread-based investment
activity. The MIP program demonstrated good growth in 2007.
Investment strategies are tailored to the specific business needs of
each operating unit based on considerations that include the realities
of the local market, liability duration and cash flow characteristics,
rating agency and regulatory capital considerations, legal invest-
ment limitations, tax optimization, diversification and other risk
control considerations. Overall, these strategies are intended to
produce a reasonably stable and predictable return throughout the
economic cycle, without undue risk or volatility.
Domestic General Insurance portfolios consist principally of
highly rated tax-exempt municipal bonds, together with a modest—
about 15 percent—allocation to public and private equity, hedge fund
and other partnership investments. Foreign General Insurance assets
are primarily invested in a mix of high-quality taxable bonds, but also
include a modest allocation to public and private equities.
For Domestic Life Insurance & Retirement Services and Asset
Management companies, the portfolios consist principally of
investment grade corporate debt securities and highly rated mortgage-
backed and asset-backed securities. In addition, a small allocation—
normally about 10 percent—is made to other, more volatile but
potentially higher-yielding investments, including high-yield,
distressed and emerging market bonds; public and private equity
securities; hedge funds; real estate; and other investments having
equity-like risks and expected returns. The modestly higher
concentration of such higher risk assets in the Asset Management
segment reflects both the historical focus on such assets in
AIG SunAmerica’s portfolio, as well as the concentration of such
assets within AIG’s asset management business, reflecting both AIG’s
interest in sponsored investment products, as well as the impact of
consolidation of certain such products on AIG’s balance sheet.
Foreign Life Insurance & Retirement Services portfolios, other
than those that are dollar-denominated, are generally concentrated
in local sovereign and other high-quality (in the context of the local
market) bonds matched as nearly as possible to the liability charac-
teristics of the business. Due to the limited or nonexistent supply
of long-dated maturities in certain markets, as well as the very long
duration of traditional life products, asset durations tend to be
somewhat short in many non-U.S. jurisdictions relative to liability
durations. Exposure to corporate credit (other than those entities that
are government related) in non-dollar portfolios is limited outside of
Western Europe, due to the generally fewer number of corporate
issuers in many of the markets in which AIG operates, or, in the
case of Japan, due to the absence of a significant spread differential
between sovereign and high-quality non-sovereign debt.
As markets mature and corporate issuance of debt becomes more
common, the amount of corporate credit positions in non-Western
portfolios is expected to increase. In jurisdictions with limited long-
dated bond markets, equities are used to extend the effective duration
of investment portfolios. In addition, foreign exchange positions are
employed to diversify risk and enhance yield in certain markets with
very low domestic interest rate curves, such as Japan and Taiwan.
Such foreign exchange positions in both Taiwan and Japan consisted
predominantly of high-quality fixed income investments denomi-
nated in developed or newly industrialized currencies, as defined by
the International Monetary Fund and the World Bank.
Assets supporting GICs are invested similarly to other Domestic
Life Insurance & Retirement Services and Asset Management portfo-
lios, with particular attention given to aligning the maturity profile
of assets and liabilities. As the overall maturity profile is somewhat
shorter than that of traditional life products, heavier use is made of
asset-backed and floating rate investments.
For both Life Insurance & Retirement Services and General
Insurance companies, allocation to equities is intended to provide an
economic hedge against the potential risks associated with inflation
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