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ITEM 7 / INVESTMENTS.....................................................................................................................................................................................as taxable municipal bonds, government bonds and agency and corporate securities. The majority of these highquality 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 intermediateduration, averaging 3.5 years.While invested assets backing reserves are invested in conventional fixed income securities in AIG Property Casualtydomestic operations, a modest portion of surplus is allocated to alternative investments, including private equity andhedge funds. Notwithstanding the current environment, these investments have provided a combination of addeddiversification and attractive long-term returns over time.AIG Life and Retirement..............................................................................................................................................................................................With respect to AIG Life and Retirement, we use asset-liability management as a tool to determine the compositionof the invested assets. Our objective is to maintain a matched asset-liability structure, although we may occasionallydetermine that it is economically advantageous to be temporarily in an unmatched position. To the extent that wehave maintained a matched asset-liability structure, the economic effect of interest rate fluctuations is partiallymitigated.Our investment strategy for AIG Life and Retirement is to produce cash flows greater than maturing insuranceliabilities. There exists a future investment risk associated with certain policies currently in-force which will havepremium receipts in the future. That is, the investment of these future premium receipts may be at a yield below thatrequired to meet future policy liabilities.AIG Life and Retirement frequently reviews its interest rate assumptions and actively manages the crediting ratesused for its new and in force business. Business strategies continue to evolve to maintain profitability of the overallbusiness.The investment of insurance cash flows and reinvestment of the proceeds of matured securities and couponsrequires 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 oncertain variable and indexed annuity products. The fair value of these benefits is measured based on actuarial andcapital market assumptions related to projected cash flows over the expected lives of the contracts. We manage ourexposure resulting from these long-term guarantees through reinsurance or capital market hedging instruments. Weactively review underlying assumptions of policyholder behavior and persistency related to these guarantees. Wehave taken positions in certain derivative financial instruments in order to hedge the impact of changes in equitymarkets and interest rates on these benefit guarantees. We execute listed futures and options contracts on equityindexes to hedge certain guarantees of variable and indexed annuity products. We also enter into various types offutures and options contracts, primarily to hedge changes in value of certain guarantees of variable and indexedannuities due to fluctuations in interest rates. We use several instruments to hedge interest rate exposure, includinglisted futures on government securities, listed options on government securities and the purchase of governmentsecurities.With respect to over-the-counter derivatives, we deal with highly rated counterparties and do not expect thecounterparties to fail to meet their obligations under the contracts. We have controls in place to monitor creditexposures by limiting transactions with specific counterparties within specified dollar limits and assessing thecreditworthiness of counterparties periodically. We generally use ISDA Master Agreements and Credit SupportAnnexes (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 taxablecorporate bonds, as well as municipal and government bonds, commercial mortgage loans, and agency andnon-agency structured securities. The majority of these investments are held in the available for sale portfolio andare rated investment grade based on our composite ratings...................................................................................................................................................................................................................................142 AIG 2012 Form 10-K