AIG 2009 Annual Report Download - page 164

American International Group, Inc., and Subsidiaries
Investment Strategy
AIG’s investment strategies are tailored to the specific business needs of each operating unit. The investment
objectives are driven by the business model for each of the businesses: General Insurance, life insurance, retirement
services and the Matched Investment Program. The primary objectives are generation of investment income,
preservation of capital, liquidity management and growth of surplus to support the insurance products. Market
conditions varied in 2009, with notable improvement in the second half of the year increasing the value of the
investments that had suffered declines in 2008 and early 2009.
At the local operating unit level, investment strategies are based on considerations that include the local market,
liability duration and cash flow characteristics, rating agency and regulatory capital considerations, legal investment
limitations, tax optimization and diversification.
The majority of assets backing insurance liabilities at AIG consist of intermediate and long duration fixed maturity
securities. In the case of life insurance & retirement services companies, as well as in the MIP portfolio, the
fundamental investment strategy is, as nearly as is practicable, to match the duration characteristics of the liabilities
with comparable duration assets. Fixed maturity securities held by the insurance companies included in the
Commercial Insurance Group historically have consisted primarily of laddered holdings of tax-exempt municipal
bonds, which provided attractive after-tax returns and limited credit risk. In order to meet the Commercial Insurance
Group’s current risk/return and tax objectives, the domestic property and casualty companies have begun to shift
investment allocations away from tax exempt municipal bonds towards taxable instruments which meet the companies’
liquidity, duration and quality objectives as well as current risk-return and tax objectives. Fixed maturity securities
held by Foreign General Insurance companies consist primarily of intermediate duration high grade securities.
The market price of fixed maturity securities reflects numerous components, including interest rate environment,
credit spread, embedded optionality (such as call features), liquidity, structural complexity, foreign exchange risk, and
other credit and non-credit factors. However, in most circumstances, pricing is most sensitive to interest rates, such
that the market price declines as interest rates rise, and increases as interest rates fall. This effect is more pronounced
for longer duration securities.
AIG marks to market the vast majority of the invested assets held by its insurance companies. However, with
limited exceptions (primarily with respect to separate account products on AIG’s Consolidated Balance Sheet), AIG
does not mark-to-market its insurance liabilities for changes in interest rates, even though rising interest rates have
the effect of reducing the fair value of such liabilities, and falling interest rates have the opposite effect. This results in
the recording of changes in unrealized gains (losses) on securities in Accumulated other comprehensive income
resulting from changes in interest rates without any correlative, inverse changes in gains (losses) on AIG’s liabilities.
Because AIG’s asset duration in certain low-yield currencies, particularly Japan and Taiwan, is shorter than its liability
duration, AIG views increasing interest rates in these countries as economically advantageous, notwithstanding the
effect that higher rates have on the market value of its fixed maturity portfolio.
At December 31, 2009, approximately 53 percent of the fixed maturity securities were in domestic entities.
Approximately 27 percent of such securities were rated AAA by one or more of the principal rating agencies.
Approximately 11 percent were below investment grade or not rated. AIG’s investment decision process relies
primarily on internally generated fundamental analysis and internal risk ratings. Third-party rating services’ ratings
and opinions provide one source of independent perspectives for consideration in the internal analysis.
A significant portion of the foreign fixed maturity portfolio is rated by Moody’s, S&P or similar foreign rating
services. Rating services are not available in all overseas locations. AIG’s Credit Risk Committee closely reviews the
credit quality of the foreign portfolio’s non-rated fixed maturity securities. At December 31, 2009, approximately
15 percent of the foreign fixed income investments were either rated AAA or, on the basis of AIG’s internal analysis,
were equivalent from a credit standpoint to securities so rated. Approximately 5 percent were below investment grade
or not rated at that date. Approximately one third of the foreign fixed maturity portfolio is sovereign fixed maturity
securities supporting policy liabilities in the country of issuance.
AIG 2009 Form 10-K 156