AIG 2012 Annual Report Download - page 159

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as taxable municipal bonds, government bonds and agency and corporate securities. The majority of these high
quality investments are rated A or higher based on composite ratings.
Fixed income assets held in AIG Property Casualty foreign operations are of high quality and short to intermediate
duration, averaging 3.5 years.
While invested assets backing reserves are invested in conventional fixed income securities in AIG Property Casualty
domestic operations, a modest portion of surplus is allocated 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.
AIG Life and Retirement
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With respect to AIG Life and Retirement, we use asset-liability management as a tool to determine the composition
of the invested assets. Our objective is to maintain a matched asset-liability structure, although we may occasionally
determine that it is economically advantageous to be temporarily in an unmatched position. To the extent that we
have maintained a matched asset-liability structure, the economic effect of interest rate fluctuations is partially
mitigated.
Our investment strategy for AIG Life and Retirement 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 Life and Retirement frequently reviews its interest rate assumptions and actively manages the 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.
A number of guaranteed benefits, such as living benefits and guaranteed minimum death benefits, are offered on
certain variable and indexed 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. We manage our
exposure resulting from these long-term guarantees through reinsurance or capital market hedging instruments. We
actively review underlying assumptions of policyholder behavior and persistency related to these guarantees. We
have 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. We execute listed futures and options contracts on equity
indexes to hedge certain guarantees of variable and indexed annuity products. We also enter into various types of
futures and options contracts, primarily to hedge changes in value of certain guarantees of variable and indexed
annuities due to fluctuations in interest rates. We use several instruments to hedge interest rate exposure, including
listed futures on government securities, listed options on government securities and the purchase of government
securities.
With respect to over-the-counter derivatives, we deal with highly rated counterparties and do not expect the
counterparties to fail to meet their obligations under the contracts. We have controls in place to monitor credit
exposures by limiting transactions with specific counterparties within specified dollar limits and assessing the
creditworthiness of counterparties periodically. We generally use ISDA Master Agreements and Credit Support
Annexes (CSAs) with bilateral collateral provisions to reduce counterparty credit exposures.
Fixed income holdings of AIG Life and Retirement, with an average duration of 6.3 years, are comprised of taxable
corporate bonds, as well as municipal and government bonds, commercial mortgage loans, and agency and
non-agency structured securities. The majority of these investments are held in the available for sale portfolio and
are rated investment grade based on our composite ratings.
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AIG 2012 Form 10-K142
ITEM 7 / INVESTMENTS