AIG 2012 Annual Report Download - page 180

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•We are a globally diversified enterprise with significant income, assets and
liabilities denominated in, and significant capital deployed in, a variety of currencies.
We use a number of measures and approaches to measure and quantify our market risk
exposure, including:
• Duration is the measure of the sensitivities of a fixed-income instrument to the
changes in the benchmark yield curve. Key rate duration measures sensitivities to the movement at a given term
point on the yield curve.
• 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 is a special form of scenario analysis in which the scenarios are designed to lead
to a material adverse outcome. Examples of such scenarios include the stock market crash of October 1987 or
the widening of yields or spread of RMBS or CMBS during 2008.
• VaR is a summary statistical measure that uses the estimated volatility and correlation of market factors,
and a management-determined level of confidence, to estimate how frequently a portfolio of risk exposures could
be expected to lose at least a specified amount.
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The following table provides estimates of our sensitivity to changes in yield curves, equity prices and
foreign currency exchange rates:
Yield sensitive assets $ 326,200 100 bps parallel increase in all yield curves $ (15,800)
Equity and alternative 20% decline in stock prices and value of
investments exposure $ 39,000 alternative investments $ (7,800)
Foreign currency 10% depreciation of all foreign currency
exchange rates net exchange rates against the U.S. dollar $ (590)
exposure $ 5,900
Exposures to yield curve movements include fixed maturity securities, loans, finance receivables and short-term
investments, but exclude consolidated separate account assets. Total yield-sensitive assets decreased 6.2 percent or
approximately $20.4 billion compared to 2011, primarily due to a net decrease in fixed income securities and other
fixed assets of $15.6 billion, and a decrease in cash equivalents of $4.8 billion.
Exposures to equity and alternative investment prices include investments in common stock, preferred stocks, mutual
funds, hedge funds, private equity funds, commercial real estate and real estate funds, but exclude consolidated
separate account assets. Total exposure in these areas decreased 30.3 percent or approximately $11.8 billion in
2012 compared to 2011. This was primarily due to a decrease of $12.4 billion related to our sale of AIA equity
securities as well as decreases in mutual fund values of $129 million and other equity investments of $18 million.
The decrease was partially offset by increases in other common equity securities of $125 million, partnership values
of $197 million and real estate investments of $397 million.
Exposures to foreign currency exchange rates reflect our consolidated non-U.S. dollar net capital investments on a
GAAP basis. Foreign currency exchange rates net exposure increased 53.7 percent or $3.2 billion in 2012 compared
to 2011. This was primarily due to an increase in British pound exposure of $1.7 billion as a result of AIG Europe’s
foreign currency exchange hedging and investment strategy, an increase in market value of fixed maturity securities
of $188 million as well as unrealized investment appreciation and positive results from AIG Europe Ltd operations of
$99 million. Other increases included: changes in Canadian-dollar denominated unearned premium reserves of
Foreign currency exchange rates.
Duration/key rate duration.
Scenario analysis.
Stress testing.
VaR.
Insurance Operations Portfolio Sensitivities
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AIG 2012 Form 10-K 163
Exposure Effect
December 31, December 31, December 31, December 31,
(dollars in millions) 2012 2011*Sensitivity Factor 2012 2011
$ 305,809 $ (16,005)
$ 27,131 $ (5,426)
$ (911)
$ 9,106
ITEM 7 / ENTERPRISE RISK MANAGEMENT
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