AIG 2012 Annual Report Download - page 126

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AIG Life and Retirement is proactively addressing the impact of sustained low interest rates. During 2012,
a number of actions were taken on both the asset and liability sides of our balance sheet:
• Opportunistic investments in structured securities and re-deployment of cash in 2011 to increase yields
• Continued disciplined approach to new business pricing
• Actively managing renewal credited rates
• Re-priced certain life insurance and annuity products to reflect current low rate environment
• Re-filed certain products to continue lowering minimum rate guarantees
As a result of these actions, we estimate that the effect of interest rates remaining at or near current levels through
the end of 2013 on pre-tax operating income would not be material, and would be modestly more significant with
respect to 2014 results.
Opportunistic Investments: The majority of assets backing insurance and annuity liabilities consists of
intermediate- and long-term fixed maturity securities. We generally purchase assets with the intent of matching
expected maturities of the insurance liabilities. An extended low interest rate environment may result in a lengthening
of liability maturities from initial estimates, primarily due to lower lapses. Opportunistic investments in structured
securities, private placement corporate debt securities and mortgage loans continue to be made to improve yields,
increase net investment income and help to offset the impact of the lower interest rate environment.
Disciplined New Business Pricing: New fixed annuity sales have declined in 2012 relative to 2011, due to the
relatively low crediting rates offered as a result of our disciplined approach to new business. However, even in the
current interest rate environment, we continue to pursue new sales of life and annuity products at targeted net
investment spreads. New sales of fixed annuity products generally have minimum interest rate guarantees of
1 percent. Universal life insurance interest rate guarantees are generally 2 to 3 percent on new non-indexed products
and 1 percent on new indexed products, and are designed to be sufficient to meet targeted net investment spreads.
If the low interest rate environment continues, we expect our fixed annuities sales (including deposits into fixed
options within variable annuities sold in group retirement markets) to remain weak into 2013.
Active Management of Renewal Credited Rates: The contractual provisions for renewal of crediting rates and
guaranteed minimum crediting rates included in our products may have the effect, in a continued low interest rate
environment, of reducing our spreads and thus reducing future profitability. Although we partially mitigate this interest
rate risk through its asset-liability management process, product design elements and crediting rate strategies, a
prolonged low interest rate environment may negatively affect future profitability. Our annuity and universal life
products were designed with contractual provisions that allow crediting rates to be reset at pre-established intervals
subject to minimum crediting rate guarantees. We have adjusted, and will continue to adjust, crediting rates in order
to maintain targeted net investment spreads on both new business and in-force business where crediting rates are
above minimum guarantees. In addition to annuity and universal life products discussed above, certain traditional
long-duration products for which we do not have the ability to adjust interest rates, such as payout annuities, are
exposed to reduced earnings and potential reserve increases in a prolonged low interest rate environment.
As indicated in the table below, approximately 63 percent of our annuity and universal life account values are at their
minimum crediting rates as of December 31, 2012, an increase from 45 percent at December 31, 2011. These
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AIG 2012 Form 10-K 109
ITEM 7 / RESULTS OF OPERATIONS