AIG 2010 Annual Report Download - page 141

American International Group, Inc., and Subsidiaries
Divested Businesses
Divested businesses include the operating results of divested businesses that did not qualify for discontinued
operations accounting through the date of their sale as well as certain non-core businesses currently in run-off.
Divested businesses include the historical results of AIA through October 29, 2010. On October 29, 2010, AIG
completed an initial public offering of 8.08 billion ordinary shares of AIA for aggregate gross proceeds of
approximately $20.51 billion. Upon completion of the initial public offering, AIG owned approximately 33 percent
of AIA’s outstanding shares. Accordingly, AIG deconsolidated AIA and recorded a pre-tax gain of $16.3 billion
($12.8 billion after tax) on the transaction.
Following the classification of AGF as discontinued operations in the third quarter of 2010 (see Note 4 to the
Consolidated Financial Statements), AIG’s remaining consumer finance businesses are now reported in AIG’s
Other operations category as part of Divested businesses.
At December 31, 2010, the remaining consumer finance operations were conducted through the AIG Federal
Savings Bank and the Consumer Finance Group in Poland. During 2010, AIG completed the sale of consumer
finance operations in Argentina, Colombia, India and Taiwan and its banking business in Poland.
Investments
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 Direct Investment business. The primary objectives are generation of investment
income, preservation of capital, liquidity management and growth of surplus to support the insurance products.
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 and retirement services companies, as well as in the Direct
Investment business, the fundamental investment strategy is, as nearly as is practicable, to match the duration
characteristics of the liabilities with assets of comparable duration. Fixed maturity securities held by the insurance
companies included in Chartis U.S. 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 current
risk/return and tax objectives of Chartis U.S., 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 credit quality objectives as well as current risk-return and tax objectives. Fixed
maturity securities held by Chartis International 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 accounts for the vast majority of the invested assets held by its insurance companies at fair value.
However, with limited exceptions (primarily with respect to separate account products on AIG’s Consolidated
Balance Sheet), AIG does not modify the fair value of 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,
AIG 2010 Form 10-K 125