AIG 2008 Annual Report Download - page 163

Life Insurance & Retirement Services
With respect to Life Insurance & Retirement Services, AIG uses asset-liability management as a tool
worldwide in the life insurance business to influence the composition of the invested assets and appropriate
marketing strategies. AIG’s objective is to maintain a matched asset-liability structure. However, in certain markets,
the absence of long-dated fixed income investment instruments may preclude a matched asset-liability position. In
addition, AIG may occasionally determine that it is economically advantageous to be temporarily in an unmatched
position. To the extent that AIG has maintained a matched asset-liability structure, the economic effect of interest
rate fluctuations is partially mitigated.
AIG’s investment strategy for the Life Insurance & Retirement Services segment is to produce cash flows
greater than maturing insurance liabilities. AIG actively manages the asset-liability relationship in its foreign
operations, even though certain territories lack qualified long-term investments or certain local regulatory
authorities may impose investment restrictions. For example, in several Southeast Asian countries, the duration
of investments is shorter than the effective maturity of the related policy liabilities. Therefore, there is risk that the
reinvestment of the proceeds at the maturity of the initial investments may be at a yield below that of the interest
required for the accretion of the policy liabilities. Additionally, there exists a future investment risk associated with
certain policies currently in-force which will have premium receipts in the future. That is, the investment of these
future premium receipts may be at a yield below that required to meet future policy liabilities.
AIG actively manages the interest rate assumptions and crediting rates used for its new and in force business.
Business strategies continue to evolve to maintain profitability of the overall business. In some countries, new
products are being introduced with minimal investment guarantees, resulting in a shift toward investment-linked
savings products and away from traditional savings products with higher guarantees.
The investment of insurance cash flows and reinvestment of the proceeds of matured securities and coupons
requires active management of investment yields while maintaining satisfactory investment quality and liquidity.
AIG may use alternative investments, including equities, real estate and foreign currency denominated fixed
income instruments in certain foreign jurisdictions where interest rates remain low and there are limited long-dated
bond markets to extend the duration or increase the yield of the investment portfolio to more closely match the
requirements of the policyholder liabilities and DAC recoverability. This strategy has been effectively used in Japan
and more recently by Nan Shan in Taiwan. In Japan, foreign assets, excluding those matched to foreign liabilities,
were approximately 17 percent of statutory assets, which is below the maximum allowable percentage under current
local regulation. Foreign assets comprised approximately 27 percent of Nan Shan’s invested assets at December 31,
2008, slightly below the maximum allowable percentage under current local regulation. The majority of Nan Shan’s
in-force policy portfolio is traditional life and endowment insurance products with implicit interest rate guarantees.
New business with lower interest rate guarantees are gradually reducing the overall interest requirements, but asset
portfolio yields have declined faster due to the prolonged low interest rate environment. As a result, although the
investment margins for a large block of in-force policies are negative, the block remains profitable overall because
the mortality and expense margins presently exceed the negative investment spread. In response to the low interest
rate environment and the volatile exchange rate of the Taiwanese dollar, Nan Shan is emphasizing new products
with lower implied guarantees, including participating endowments and investment-linked products.
AIG actively manages the asset-liability relationship in its domestic operations. This relationship is more
easily managed through the availability of qualified long-term investments.
A number of guaranteed benefits, such as living benefits or guaranteed minimum death benefits, are offered on
certain variable life and variable annuity products. AIG manages its exposure resulting from these long-term
guarantees through reinsurance or capital market hedging instruments.
AIG invests in equities for various reasons, including diversifying its overall exposure to interest rate risk.
Available for sale bonds and equity securities are subject to declines in fair value. Such declines in fair value are
presented in unrealized appreciation or depreciation of investments, net of taxes, as a component of Accumulated
other comprehensive income. Declines that are determined to be other-than-temporary are reflected in income in the
period in which the determination is made. See Critical Accounting Estimates — Other-Than-Temporary Impair-
ments herein. Generally, insurance regulations restrict the types of assets in which an insurance company may
invest. When permitted by regulatory authorities and when deemed necessary to protect insurance assets, including
AIG 2008 Form 10-K 157
American International Group, Inc., and Subsidiaries