AIG 2015 Annual Report Download - page 6

ITEM 1 / BUSINESS / AIG
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6
HOW WE GENERATE REVENUES AND PROFITABILITY
We earn revenues primarily from insurance premiums, policy fees from universal life insurance and investment products, and
income from investments and advisory fees.
Our expenses consist of policyholder benefits and losses incurred, interest credited to policyholders, commissions and other
costs of selling and servicing our products, and general operating expenses.
Our profitability is dependent on our ability to properly price and manage risk on insurance and annuity products, to manage
our portfolio of investments effectively, and to control costs through expense discipline.
INVESTMENT ACTIVITIES OF OUR INSURANCE OPERATIONS
Our Non-Life Insurance Companies and Life Insurance Companies generally receive
premiums and deposits well in advance of paying covered claims or benefits. In the
intervening periods, we invest these premiums and deposits to generate net
investment income that, along with the invested funds, is available to pay claims or
benefits. As a result, we generate significant revenues from insurance investment
activities.
We generate significant
revenues in our insurance
operations from investment
activities.
Our worldwide insurance investment policy places primary emphasis on investments
in corporate bonds, municipal bonds and government bonds in all of our portfolios,
and, to a lesser extent, investments in high yield bonds, common stock, real estate,
hedge funds and other alternative investments.
The majority of assets backing our insurance liabilities consist of intermediate and long duration fixed maturity securities.
Non-Life Insurance Companies — Fixed maturity securities held by the insurance companies included in the Non-Life
Insurance Companies’ domestic operations have historically consisted primarily of corporate bonds, municipal bonds and
government bonds. These investments provided attractive returns and limited credit risk. To meet our domestic operations’
current risk return and business objectives, our domestic Non-Life Insurance Companies have been shifting investment
allocations to a broader array of investments, including structured securities, mortgage loans, equity related opportunities and
other investments that offer attractive risk-adjusted returns. Our fixed maturity securities must meet our liquidity, duration and
quality objectives as well as current capital, risk return and business objectives. Fixed maturity securities held by the Non-Life
Insurance Companies’ international operations consist primarily of intermediate duration high-grade securities, primarily in the
markets being served. In addition, the Non-Life Insurance Companies have redeployed cash in excess of operating needs into
investments consistent with the asset classes described above.
Life Insurance Companies — The investment strategy for the portfolios of the Life Insurance Companies is largely to match
our liabilities with assets of comparable duration, to the extent practicable. The Life Insurance Companies primarily invest in a
diversified portfolio of fixed maturity securities, which include corporate bonds and structured securities. To further diversify the
portfolio, investments are selectively made in alternative investments, including private equity funds, hedge funds and
affordable housing partnerships. See Item 7. MD&A — Investments for additional discussion of investment strategies.