AIG 2013 Annual Report Download - page 186

currency exchange rate exposures with the objective of protecting statutory capital at the regulated insurance entity
level. We manage cash flow risk on our foreign currency-denominated debt issued by AIG Parent, and use a variety
of techniques to mitigate this risk, including but not limited to the execution of cross-currency swaps and the issuance
of new foreign currency-denominated debt to replace equivalent maturing debt. At the AIG Parent level, we monitor
our foreign currency exposures against single currency and aggregate currency portfolio limits. As a matter of
general practice, we do not typically hedge our foreign currency exposures to net investments in subsidiaries.
However, we may utilize either cross-currency swaps or our foreign currency- denominated debt as a net investment
hedge of our capital in subsidiaries.
At December 31, 2013, our five largest foreign currency net asset positions were denominated in British pounds,
Canadian dollars, Euro, Hong Kong dollars and Japanese yen. Foreign currency-denominated net asset position at
December 31, 2013 increased 13.7 percent, or $1.2 billion, compared to December 31, 2012. This was primarily due
to an increase in our Hong Kong dollar position of $523 million and $337 million resulting from AIG Life and
Retirement’s and AIG Property Casualty’s investments in PICC Group and PICC P&C, respectively; an increase in
our British pound position of $730 million as a result of AIG Parent repurchasing outstanding British pound-
denominated debt; an increase in our Japanese yen position of $513 million resulting from AIG Property Casualty
Japan’s operations and unrealized appreciation of investments; and an increase in our Israeli shekel position of
$128 million resulting from the increase in our ownership of AIG Israel Insurance Company Limited. These increases
were partially offset by a decrease in our British pound position of $400 million resulting from AI Overseas
Association (AIOA) IBNR reserves adjustments; a decrease in our Canadian dollar position of $389 million, primarily
from the operations of AIG Insurance Company of Canada; and a decrease of $225 million, resulting from the
weakening of other currencies against the U.S. dollar.
For illustrative purposes, we modeled our sensitivities based on a 100 basis point increase in yield curves, a
20 percent decline in equities and alternative assets, and a 10 percent depreciation of all foreign currency exchange
rates against the U.S. dollar. This should not be taken as a prediction, but only as a demonstration of the potential
effects of such events.
The sensitivity factors utilized for 2013 and presented above were selected based on historical data from 1993 to
2013, as follows (see the table below):
• a 100 basis point parallel shift in the yield curve is consistent with a one standard deviation movement of the
benchmark ten-year treasury yield;
• a 20 percent drop for equity and alternative investments is broadly consistent with a one standard deviation
movement in the S&P 500; and
• a 10 percent depreciation of foreign currency exchange rates is consistent with a one standard deviation
movement in the U.S. dollar (USD)/Great Britain pound (GBP) exchange rate.
10-Year Treasury 1993 – 2013 0.01 0.01 0.96 0.01 1.21 0.01
S&P 500 1993 – 2013 0.19 0.20 1.04 0.30 1.53 0.20
USD/GBP 1993 – 2013 0.09 0.10 1.07 0.02 0.20 0.10
To control our exposure to market risk, we rely on a three-tiered system of limits that the CMRO closely monitors
and reports to our CRO, senior management and risk committees.
Our CRO and CMRO establish market risk limits that are consistent with our Risk Appetite Statement and approved
by each of the FRG and the GRC. These limits are tiered to accommodate product line, business unit and
enterprise-wide needs and risk profiles. Consolidated company-level limits define our aggregate maximum exposure
for the various market risk factors. Business unit limits are designed to control specific, material market risk activities
on a more granular level and additional limits are allocated into individual regions, lines of business and portfolios to
address idiosyncratic risks not captured by the higher-level limits, as well as to address the requirements of
Risk Monitoring and Limits
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AIG 2013 Form 10-K168
ITEM 7 / ENTERPRISE RISK MANAGEMENT
2013 Scenario as 2013 2013 as a Multiple Original 2012 Scenario (based
Standard Suggested a Multiple of Change/ of Standard on Standard Deviation for
Period Deviation 2013 Scenario Standard Deviation Return Deviation 1992-2012 Period)
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