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ITEM 7 / ENTERPRISE RISK MANAGEMENT.....................................................................................................................................................................................• Foreign currency exchange rates. We are a globally diversified enterprise with significant income, assets andliabilities 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 riskexposure, including:• Duration/key rate duration.Duration is the measure of the sensitivities of a fixed-income instrument to thechanges in the benchmark yield curve. Key rate duration measures sensitivities to the movement at a given termpoint on the yield curve.• Scenario analysis. asScenario analysis uses historical, hypothetical, or forward-looking macroeconomic scenariosto assess and report exposures. Examples of hypothetical scenarios include a 100 basis point parallel shift in theyield curve or a 10 percent immediate and simultaneous decrease in world-wide equity markets.• Stress testing.tiStress testing is a special form of scenario analysis in which the scenarios are designed to leadto a material adverse outcome. Examples of such scenarios include the stock market crash of October 1987 orthe widening of yields or spread of RMBS or CMBS during 2008.• VaR. 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 couldbe expected to lose at least a specified amount...............................................................................................................................................................................................Insurance Operations Portfolio SensitivitiesThe following table provides estimates of our sensitivity to changes in yield curves, equity prices andforeign currency exchange rates:ExposureEffectDecember 31, December 31, December 31, December 31,(dollars in millions) 2012 2011 * Sensitivity Factor 2012 2011Yield sensitive assets $ 305,809 $ 326,200 100 bps parallel increase in all yield curves $ (16,005) $ (15,800)Equity and alternative20% decline in stock prices and value ofinvestments exposure $ 27,131 $ 39,000 alternative investments $ (5,426) $ (7,800)Foreign currency10% depreciation of all foreign currencyexchange rates net exchange rates against the U.S. dollar $ (911) $ (590)exposure $ 9,106 $ 5,900Exposures to yield curve movements include fixed maturity securities, loans, finance receivables and short-terminvestments, but exclude consolidated separate account assets. Total yield-sensitive assets decreased 6.2 percent orapproximately $20.4 billion compared to 2011, primarily due to a net decrease in fixed income securities and otherfixed 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, mutualfunds, hedge funds, private equity funds, commercial real estate and real estate funds, but exclude consolidatedseparate account assets. Total exposure in these areas decreased 30.3 percent or approximately $11.8 billion in2012 compared to 2011. This was primarily due to a decrease of $12.4 billion related to our sale of AIA equitysecurities 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 valuesof $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 aGAAP basis. Foreign currency exchange rates net exposure increased 53.7 percent or $3.2 billion in 2012 comparedto 2011. This was primarily due to an increase in British pound exposure of $1.7 billion as a result of AIG Europe’sforeign currency exchange hedging and investment strategy, an increase in market value of fixed maturity securitiesof $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..................................................................................................................................................................................................................................AIG 2012 Form 10-K 163