AIG 2014 Annual Report Download - page 125

ITEM 7 / INVESTMENTS
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due to equity market performance and lower reinvestment yields on our fixed maturity securities portfolio due to the low
interest rate environment.
Net investment income for 2013 decreased compared to 2012 primarily due to fair value gains from our investments in ML II,
ML III and AIA prior to their sale in 2012.
Non-Life Insurance Companies
For the Non-Life Insurance Companies, the duration of liabilities for long-tail casualty lines is greater than that of other lines. As
a result, the investment strategy within the Non-Life Insurance Companies focuses on growth of surplus and preservation of
capital, subject to liability and other business considerations.
The Non-Life Insurance Companies invest primarily in fixed maturity securities issued by corporations, municipalities and other
governmental agencies and also invest in structured securities collateralized by, among other assets, residential and
commercial real estate and commercial mortgage loans. While invested assets backing reserves of the Non-Life Insurance
Companies are primarily invested in conventional fixed maturity securities, we have continued to allocate a portion of our
investment activity into asset classes that offer higher yields, particularly in the domestic operations. In addition, we continue to
invest in both fixed rate and floating rate investments for their risk-return attributes, as well as to manage our exposure to
potential changes in interest rates. This asset diversification has maintained stable average yields while the overall credit
ratings of our fixed maturity securities were largely unchanged. We expect to continue to pursue this investment strategy to
meet the Non-Life Insurance Companies’ liquidity, duration and credit quality objectives as well as current risk-return and tax
objectives.
In addition, the Non-Life Insurance Companies seek to enhance returns through investments in a diversified portfolio of private
equity funds and hedge funds. Although these alternative investments are subject to periodic earnings fluctuations, they have
historically achieved yields in excess of the fixed maturity portfolio yields and have provided added diversification to the
broader portfolio. The Non-Life Insurance Companies’ investment portfolio also includes, to a lesser extent, equity securities
and other yield-enhancing investments.
With respect to non-affiliate over-the-counter derivatives, the Non-Life Insurance Companies conduct business with highly
rated counterparties and do not expect the counterparties to fail to meet their obligations under the contracts. The Non-Life
Insurance Companies 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. The Non-Life Insurance
Companies generally use ISDA Master Agreements and CSAs with bilateral collateral provisions to reduce counterparty credit
exposures.
Fixed maturity investments of the Non-Life Insurance Companies domestic operations, with an average duration of 4.3 years,
are currently comprised primarily of tax-exempt securities, which provide attractive risk-adjusted after-tax returns, as well as
taxable municipal bonds, government and agency bonds, and corporate bonds. The majority of these high quality investments
are rated A or higher based on composite ratings.
Fixed maturity investments held in the Non-Life Insurance Companies foreign operations are of high quality, primarily rated A
or higher based on composite ratings, and short to intermediate duration, averaging 3.3 years.
Life Insurance Companies
The investment strategy of the Life Insurance Companies is to maximize net investment income and portfolio value, subject to
liquidity requirements, capital constraints, diversification requirements, asset-liability matching and available investment
opportunities.
The Life Insurance Companies use asset-liability management as a primary tool to monitor and manage risk in their
businesses. The Life Insurance Companies fundamental investment strategy is to maintain a diversified, high quality portfolio
of fixed maturity securities with the intent to largely match the characteristics of liabilities, including duration, which is a
measure of sensitivity to changes in interest rates. The investment portfolio of each product line is tailored to the specific