AIG 2010 Annual Report Download - page 144

American International Group, Inc., and Subsidiaries
government bonds and agency and corporate securities. The majority of these high quality investments are rated
AAA or AA.
Fixed income assets held in Chartis International are of high quality and short to intermediate duration,
averaging 2.5 years.
While invested assets backing reserves are invested in conventional fixed income securities in Chartis U.S., a
modest portion of surplus is allocated to large capitalization, high-dividend, public equity strategies and to
alternative investments, including private equity and hedge funds. Notwithstanding the current environment, these
investments have provided a combination of added diversification and attractive long-term returns over time.
SunAmerica
With respect to SunAmerica companies, AIG uses asset-liability management as a tool to determine the
composition of the invested assets. 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 SunAmerica is to produce cash flows greater than maturing insurance liabilities.
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.
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 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. The fair value of these benefits is measured based on actuarial
and capital market assumptions related to projected cash flows over the expected lives of the contracts. AIG
manages its exposure resulting from these long-term guarantees through reinsurance or capital market hedging
instruments. SunAmerica has taken positions in certain derivative financial instruments in order to hedge the
impact of changes in equity markets and interest rates on these benefit guarantees. SunAmerica executes listed
futures and options contracts on equity indexes to hedge certain guarantees of variable annuity products.
SunAmerica also enters into various types of futures and options contracts, primarily to hedge changes in value of
certain guarantees of variable annuities due to fluctuations in interest rates. SunAmerica’s interest rate hedging
instruments include listed futures on government securities and listed options on government securities.
With respect to over-the-counter derivatives, SunAmerica deals with highly rated counterparties and does not
expect the counterparties to fail to meet their obligations under the contracts. SunAmerica has controls in place to
monitor credit exposures by limiting transactions with specific counterparties within specified dollar limits and
assessing the creditworthiness of counterparties periodically. SunAmerica generally uses ISDA Master Agreements
and Credit Support Annexes with bilateral collateral provisions to reduce counterparty credit exposures.
Available for sale bonds and equity securities are subject to declines in fair value. Such declines in fair value are
presented in unrealized appreciation (depreciation) of investments, net of taxes, as a component of Accumulated
other comprehensive income. AIG recognizes the credit component of an other-than-temporary impairment of a
fixed maturity security in earnings and the non-credit component in Accumulated other comprehensive income
when AIG does not intend to sell the security or it is more likely than not that AIG will not be required to sell
the security prior to recovery. See Investments — Other-Than-Temporary Impairments herein. Generally, insurance
128 AIG 2010 Form 10-K