AIG 2011 Annual Report Download - page 181

AIG uses a number of measures and approaches to measure and quantify its market risk exposure, including:
•Duration/key rate duration. Duration is the measure of the sensitivities of a fixed-income instrument to the
parallel shift in the benchmark yield curve. Key rate duration measures sensitivities to the movement at a
given term point on the yield curve.
•Scenario analysis. Scenario analysis uses historical, hypothetical, or forward-looking macroeconomic
scenarios to assess and report exposures. Examples of hypothetical scenarios include a 100 basis point
parallel shift in the yield curve or a 10 percent immediate and simultaneous decrease in world-wide equity
markets.
•Stress testing. Stress testing is a special form of scenario analysis whereby the scenarios used are designed to
lead to a material adverse outcome (for example, the stock market crash of October 1987 or the widening of
yields or spread of RMBS or CMBS during 2008). Stress testing is often used to address Value-at-Risk
(VaR) shortcomings and complement VaR calculations. Particularly in times of significant volatility in
financial markets, using stress scenarios provides more pertinent and forward-looking information on market
risk exposure than VaR results based upon historical data alone.
•VaR . VaR is a summary statistical measure that uses the estimated volatility and correlation of market
factors to calculate the maximum loss that could occur over a defined period of time with a specified level of
statistical confidence. VaR measures not only the size of individual exposures but also the interaction
between different market exposures, thereby providing a portfolio approach to measuring market risk. A key
shortcoming of the VaR approach is its reliance on historical data, making VaR calculations essentially
‘‘backward looking.’’ This shortcoming was most evident during the recent credit crisis.
Insurance and Aircraft Leasing Sensitivities
The following table provides estimates of AIG’s sensitivity to changes in yield curves, equity prices and foreign
currency exchange rates:
As of December 31, Exposure Effect
(dollars in millions) 2011 2010* Sensitivity Factor 2011 2010
Yield sensitive assets $ 326,200 $ 308,900 100 bps parallel increase in all yield
curves $ (15,800) $ (13,400)
Equity and alternative 20% decline in stock prices and value of
investments exposure $ 39,000 $ 46,400 alternative investments $ (7,800) $ (9,300)
Foreign currency exchange rates 10% depreciation of all foreign currency
net exposure $ 5,900 $ 3,400 exchange rates against the U.S. dollar $ (590) $ (340)
* All figures and periods have been adjusted to reflect the divestitures of AIG Star, AIG Edison, and Nan Shan, which occurred in 2011.
Exposures to yield curves include assets that are directly sensitive to yield curve movements, such as fixed
maturity securities, loans, finance receivables and short-term investments (excluding consolidated separate account
assets). Exposures to equity and alternative investment prices include investments in common stocks, preferred
stocks, mutual funds, hedge funds, private equity funds, commercial real estate and real estate funds (excluding
consolidated separate account assets and consolidated managed partnerships and funds). Exposures to foreign
currency exchange rates reflect AIG’s consolidated non-U.S. dollar net capital investments on a GAAP basis.
Comparisons of 2011 exposures to 2010 are as follows:
• Total yield sensitive assets increased 5.6 percent or $17.3 billion compared to 2010, primarily due to an
increase in fixed income assets of $34.9 billion. This increase was partially offset by a decrease in cash and
other assets of $17.6 billion.
• Total equity and alternative investments exposure decreased 15.9 percent or $7.4 billion compared to 2010,
primarily due to: AIG’s sale of MetLife equity securities ($6.5 billion) as well as decreases in mutual fund
values ($1.5 billion), real estate investments ($416 million) and private equity funds and hedge funds values
AIG 2011 Form 10-K 167