AIG 2014 Annual Report Download - page 183

ITEM 7 / ENTERPRISE RISK MANAGEMENT
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Sensitivity factor 10% depreciation of all foreign currency
exchange rates against the U.S. dollar
Foreign currency-denominated net
asset position(d) $12,005 $ 10,350 $(1,201) $ (1,035)
(a) At December 31, 2014, the analysis covered $290 billion of $309 billion interest-rate sensitive assets. Excluded are $1 billion in DIB assets, $8 billion of
loans, and $4 billion of investments in life settlements. In addition, $5 billion of assets across various asset categories were excluded due to modeling limitations.
At December 31, 2013, the analysis covered $283 billion of $306 billion interest-rate sensitive assets. Excluded are $6 billion in DIB assets, $5 billion of loans,
and $4 billion of investments in life settlements. In addition, $8 billion of assets across various asset categories were excluded due to modeling and/or data
limitations.
(b) Commencing in the first quarter of 2014, we began using a duration and convexity method to estimate the impact of a 100 basis point increase in interest
rates on each security. The change in method had no material effect on the amounts presented at December 31, 2013.
(c) Includes our investments in PICC Group and PICC P&C.
(d) The majority of the foreign currency exposure is reported on a one quarter lag.
Foreign currency-denominated net asset position reflects our consolidated non-U.S. dollar assets less our consolidated
non-U.S dollar liabilities on a U.S. GAAP basis. We use a bottom-up approach in managing our foreign 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, 2014, our five largest foreign currency net asset positions were denominated in British pounds, Canadian
dollars, Euro, Hong Kong dollars and Japanese yen. Our foreign currency-denominated net asset position at December 31,
2014 increased by 16.0 percent, or $1.7 billion, compared to December 31, 2013. The increase was mostly due to a $650
million increase in our Hong Kong dollar position, primarily resulting from the Non-Life Insurance Companies investment in
PICC P&C; a $585 million increase in our British pound position, primarily resulting from AIG Parent repurchasing outstanding
British pound-denominated debt; a $378 million increase in our Japanese yen position, mainly attributable to Japanese yen
deferred tax liability reduction; a $153 million increase in our Canadian dollar position, mainly attributable to an increase in
operating income from underwriting and investments; and a $75 million increase in our Euro position primarily resulting from
AIG Parent repurchasing outstanding Euro-denominated debt. These increases were partially offset by a $173 million
decrease in our Polish zloty position, primarily resulting from the sale of our equity investment in Santander Consumer Bank.
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. The estimated results presented in the table above should not be taken as a prediction, but only as a
demonstration of the potential effects of such events.
The sensitivity factors utilized for 2014 and presented above were selected based on historical data from 1994 to 2014, 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.
2014 Scenario as 2014 2014 as a Multiple Original 2013 Scenario (based
Standard Suggested a Multiple o
f
Change/ of Standard on Standard Deviation fo
r
Period Deviation 2014 Scenario Standard Deviation Return Deviation 1993-2013 Period)
10-Year Treasury 1994-2014 0.01 0.01 1.00 (0.01) 0.87 0.01
S&P 500 1994-2014 0.19 0.20 1.05 0.11 0.60 0.20
USD/GBP 1994-2014 0.09 0.10 1.07 (0.06) 0.63 0.10