AIG 2011 Annual Report Download - page 180

AIG also monitors its aggregate cross-border exposures by country and regional group of countries. AIG
includes in its cross-border exposures both aggregated cross-border credit exposures to unrelated third parties and
its cross-border investments in its own international subsidiaries. Eight countries had cross-border exposures in
excess of 10 percent of Total equity at both December 31, 2011 and December 31, 2010. Based on AIG’s internal
risk ratings, at December 31, 2011, five countries were rated AAA and three were rated AA. The two largest
cross-border exposures were to the United Kingdom and France.
AIG also has a risk concentration, primarily through the investment portfolios of its insurance companies, in the
U.S. municipal sector. A majority of these securities were held in available for sale portfolios of AIG’s domestic
property casualty insurance companies. See Investments — Available for Sale Investments herein for further
details. AIG had $892 million of additional exposure to the municipal sector outside of its insurance company
portfolios at December 31, 2011, compared to $974 million at December 31, 2010. These exposures consisted of
AIGFP derivatives and trading securities (at fair value) and exposure related to other insurance and financial
services operations.
See also Investments herein for further information.
AIG reviews regularly concentration reports in all categories listed above as well as credit trends by risk ratings
and credit spreads. AIG periodically adjusts limits and reviews exposures for risk mitigation to provide reasonable
assurance that the Company does not incur excessive levels of credit risk and that AIG’s credit risk profile is
properly calibrated across business units.
AIG is exposed to market risks, primarily within its insurance and capital markets businesses (see Item 1.
Business — Other Operations — Global Capital Markets regarding its market risk issues). For AIG’s insurance
operations, the asset-liability exposures are predominantly structural in nature, and not the result of speculative
positioning to take advantage of short-term market opportunities. For example, the business model of life
insurance and retirement savings is to collect premiums or deposits from policyholders and invest the proceeds in
predominantly long-term, credit based assets. A spread is earned over time between the asset yield and the cost
payable to policyholders. The asset and liability profiles are managed so that the cash flows resulting from
invested assets are sufficient to meet policyholder obligations when they become due without the need to sell
assets prematurely into a potentially distressed market. In periods of severe market volatility, depressed and
illiquid market values on otherwise performing investments diminish shareholders’ equity even without the
realization of actual credit event related losses. Such diminution of capital strength has caused downward pressure
on the market’s assessment of the financial strength and the credit ratings of insurers.
AIG’s market exposures can be categorized as follows:
•Benchmark interest rates. Benchmark interest rates are also known as risk-free interest rates and are
associated with either the government/treasury yield curve or the swap curve. The fair value of AIG’s
significant fixed maturity securities portfolio changes as benchmark interest rates change.
•Credit spread or risk premium. Credit spread risk is the potential for loss due to a change in an instrument’s
risk premium or yield relative to that of a comparable-duration, default-free instrument.
•Equity and alternative investment prices. AIG’s exposure to equity and alternative investment prices arises
from direct investments in common stocks and mutual funds, from minimum benefit guarantees embedded
in the structure of certain variable annuity and variable life insurance products and from other equity-like
investments, such as hedge funds and private equity funds, private equity investments, commercial real estate
and real estate funds.
•Foreign currency exchange rates. AIG is a globally diversified enterprise with significant income, assets and
liabilities denominated in, and significant capital deployed in, a variety of currencies.
166 AIG 2011 Form 10-K
MARKET RISK MANAGEMENT