AIG 2008 Annual Report Download - page 184

Insurance, Asset Management and Financial Services (excluding Capital Markets) Sensitivities
The following table provides estimates of AIG’s sensitivity to a yield curve upward shift, equity losses
and foreign currency exchange rate losses at December 31, 2008:
Exposure Sensitivity Factor Effect
(dollars in millions)
Yield Curve . . . . . . . . . . . . . . . . . $500,000 100 bps parallel upward shift in all yield curves $23,500
Equity and Alternative
Investments . . . . . . . . . . . . . . . $ 47,000 15% drop in stock prices and value of alternative investments $ 7,050
Foreign Currency Exchange
Rates. . . . . . . . . . . . . . . . . . . . $ 17,000 10% depreciation of all foreign currency exchange rates
against the U.S. dollar
$ 1,700
Exposures for 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 per SOP 03-1). Exposures for 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 per SOP 03-1 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.
The above sensitivities of a 100 bps upward shift in yield curves, a 15 percent drop in equities and alternative
assets, and a 10 percent depreciation of all foreign currency exchange rates against the U.S. dollar were chosen
solely for illustrative purposes. The selection of these specific events should not be construed as a prediction, but
only as a demonstration of the potential effects of such events. These scenarios should not be construed as the only
risks AIG faces; these events are shown as an indication of several possible losses AIG could experience. In
addition, losses from these and other risks could be materially higher than illustrated.
The sensitivity factors presented above were selected based on historical data from 1987 to 2007, 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 15 percent drop for equity and alternative investments is 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 USD/JPY exchange rate.
Period
Standard
Deviation
Suggested
Scenario
Scenario as a
Multiple of SD
2008 Change/
Return
2008 as a
Multiple of SD
10-Year Treasury (bps) . . . 1987-2007 98.1 100.0 1.0 (185.0) 1.9
S&P500 ............. 1987-2007 16.1% 15.0% 0.9 (38.5)% 2.4
USD/JPY ............. 1987-2007 10.0% 10.0% 1.0 23.3% 2.3
Total non-trading market risk based on AIG’s previously reported VaR measure resulted in total non-trading
market risk of $10.4 billion at December 31, 2008 compared to $5.6 billion at December 31, 2007. The increase in
VaR primarily results from much higher volatilities in financial markets and by a significant decrease in benchmark
interest rates globally.
Operational Risk Management
AIG’s Operational Risk Management department (ORM) oversees AIG’s operational risk management
practices. The Director of ORM reports to the CRO. ORM is responsible for establishing the framework, principles
and guidelines of AIG’s operational risk management program. AIG has implemented an operational risk
management framework and a risk and control self assessment (RCSA) process.
178 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries