AIG 2010 Annual Report Download - page 166

American International Group, Inc., and Subsidiaries
•Value-at-Risk (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.
•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 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.
Insurance Assets 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) 2010 2009 Sensitivity Factor 2010 2009
Yield sensitive assets $403,500 $524,000 100 bps parallel increase in all yield curves $ (19,700) $(26,200)
Equity and alternative $ 54,300 $ 44,000 20% decline in stock prices and value of $ (10,861) $ (8,800)
investments exposure alternative investments
Foreign currency exchange rates $ 6,200 $ 22,000 10% depreciation of all foreign currency $ (620) $ (2,200)
net exposure exchange rates against the U.S. dollar
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, net
of Nan Shan DAC adjustment. Comparisons of 2010 exposures to 2009 are as follows:
• total-yield sensitive assets decreased by 23 percent ($121 billion) compared to 2009. This decrease is
primarily due to the divestitures of ALICO, AIA, AGF, and CFG, totaling ($152 billion), and is partially
offset by an increase in asset prices of $10 billion as well as new investments of $23 billion.
• total equity and alternative investments increased 22 percent ($10.0 billion) compared to 2009. The increase
is primarily due to (1) the inclusion of AIG’s remaining stake in the AIA SPV (33 percent, or $11.1 billion)
in All Other investments; (2) the inclusion of AIG’s stake in the ALICO SPV ($6.5 billion) in common and
preferred stocks trading at fair value; and (3) rallying world equity markets in the third quarter of 2010,
which lifted the value of common and preferred equity holdings available for sale by approximately
$2.0 billion. The increase was partly offset by the exclusion of AIA’s common and preferred equity holdings
available for sale ($6.4 billion), AIA’s mutual fund investments ($1.2 billion), and AIA’s and ALICO’s real
estate investments ($1.0 billion and $800 million, respectively). AIRCO’s real estate investments decreased
by approximately $500 million.
• the $15.6 billion decrease in foreign currency exchange rates net exposure is primarily due to the
deconsolidation of AIA and sale of ALICO.
The above changes of 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 were chosen
150 AIG 2010 Form 10-K