AIG 2010 Annual Report Download - page 31

American International Group, Inc., and Subsidiaries
Reinsurance Activities
Chartis subsidiaries operate worldwide primarily by underwriting and accepting risks for their direct account on
a gross line basis and subsequently reinsuring on either an individual risk or an aggregate basis to the extent those
risks exceed the desired retention level.
For a further discussion of reinsurance, see Item 1A. Risk Factors — Reinsurance; and Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Insurance Risk
Management — Reinsurance.
Insurance Investment Activities
A significant portion of the revenues of Chartis and SunAmerica operations are derived from AIG’s insurance
investment activities. As insurance companies, Chartis and SunAmerica generally receive premiums and deposits
well in advance of paying covered claims or benefits. In the intervening periods, these premiums and deposits are
invested to generate net investment income and fee income that is available to pay claims or benefits.
AIG’s worldwide insurance investment policy places primary emphasis on investments in fixed income securities
of corporations, municipal bonds and government issuances in all of its portfolios, and, to a lesser extent,
investments in high-yield bonds, common stocks, real estate, hedge funds and other alternative investments.
The majority of assets backing insurance liabilities at AIG consist of intermediate and long duration fixed
maturity securities. In the case of SunAmerica, 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 Chartis U.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 Chartis International companies consist primarily of intermediate duration high-grade
securities.
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Investments — Investment Strategy for discussion of AIG’s investment strategy.
The following table summarizes the investment results of AIG’s insurance operations, excluding the results of
discontinued operations:
Annual Net
Years Ended December 31, Average Investment Pre-tax Return on
(in millions) Investments(a) Income Average Investments(b)
Chartis:
2010 $100,583 $ 4,392 4.4%
2009 89,236 3,292 3.7
2008 92,313 2,567 2.8
SunAmerica:
2010 $154,167 $10,768 7.0%
2009 148,202 9,553 6.4
2008 196,515 9,134 4.6
(a) Includes real estate investments and, in 2008, collateral assets invested under the securities lending program, and excludes cash and short-term
investments.
(b) Net investment income divided by the annual average investments.
AIG 2010 Form 10-K 15