AIG 2013 Annual Report Download - page 40

We continued our strategy to take advantage of the pricing differential between traditional reinsurance markets and
capital markets. On July 9, 2013, we entered into a five-year catastrophe bond transaction with Tradewynd Re Ltd.,
which will provide $125 million of indemnity protection against U.S., Caribbean and Gulf of Mexico named storms,
and U.S. and Canadian earthquakes. The transaction provides us with fully collateralized coverage against losses
from the events described above on a per-occurrence basis through June 2018.
In addition, we entered into a five-year capital markets reinsurance transaction, effective as of January 1, 2014 with
Tradewynd Re Ltd., which will provide $400 million of indemnity reinsurance protection against U.S., Caribbean and
Gulf of Mexico named storms, and U.S. and Canadian earthquakes. To fund its potential obligations to AIG,
Tradewynd Re Ltd. issued three tranches of notes, one with a one-year term and two with three-year terms. The
transaction closed December 18, 2013 and provides AIG with fully collateralized coverage against losses from the
events described above on a per-occurrence basis through December 2018.
See Item 7. MD&A — Enterprise Risk Management — Insurance Operations Risks — AIG Property Casualty Key
Insurance Risks — Reinsurance Recoverable for a summary of significant reinsurers.
AIG Property Casualty and AIG Life and Retirement 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 is available to pay claims
or benefits. As a result, we generate significant revenues from insurance
investment activities.
AIG’s worldwide insurance investment policy places primary emphasis on
investments in fixed maturity securities of corporations, municipal bonds
and government issuances in all of its 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 at AIG consist of intermediate and long duration fixed maturity
securities.
AIG Property Casualty — Fixed maturity securities held by the insurance companies included in AIG Property
Casualty domestic operations have historically consisted primarily of laddered holdings 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 property and casualty companies have
been shifting investment allocations to a broader array of debt, including structured securities and equity sectors. 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 AIG Property Casualty international operations consist
primarily of intermediate duration high-grade securities, primarily in the markets being served. In addition, AIG
Property Casualty has redeployed cash in excess of operating needs and short-term investments into longer-term,
higher-yielding securities.
AIG Life and Retirement — Our investment strategy is to largely match the duration of our liabilities with assets of
comparable duration, to the extent practicable. AIG Life and Retirement primarily invests in a diversified portfolio of
fixed maturity securities, including corporate bonds, RMBS, CMBS and CDO/ABS. To further diversify the portfolio,
investments are made in private equity funds, hedge funds and affordable housing partnerships. Although these
alternative investments are subject to periodic earnings fluctuations, for the three years ended December 31, 2013,
they have achieved total returns in excess of AIG Life and Retirement’s fixed maturity security returns. AIG Life and
Retirement expects that these alternative investments will continue to outperform the fixed maturity security portfolio
over the long term.
GENERATING REVENUES: INVESTMENT ACTIVITIES OF OUR INSURANCE OPERATIONS
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AIG 2013 Form 10-K22
ITEM 1 / BUSINESS
We generate significant
revenues in our AIG Property
Casualty and AIG Life and
Retirement operations from
investment activities.
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