AMERICAN INTERNATIONAL GROUP INC
10-Q, 1997-05-14
FIRE, MARINE & CASUALTY INSURANCE
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<PAGE>   1
 
================================================================================
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                             ---------------------
 
                                   FORM 10-Q
               [ X ]  QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
                                       OR
 
            [  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
             FOR THE TRANSITION PERIOD FROM           TO
 
         FOR QUARTER ENDED MARCH 31, 1997 COMMISSION FILE NUMBER 1-8787
 
                             ---------------------
                       AMERICAN INTERNATIONAL GROUP, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                             <C>
                  DELAWARE                                       13-2592361
      (STATE OR OTHER JURISDICTION OF             (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
       INCORPORATION OR ORGANIZATION)
     70 PINE STREET, NEW YORK, NEW YORK                            10270
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                       (ZIP CODE)
 
             REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 770-7000
                                            NONE
     FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT.
</TABLE>
 
                             ---------------------
 
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
 
                              YES  [ X ]  NO  [  ]
 
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 1997: 469,558,711.
 
================================================================================
<PAGE>   2
 
                       AMERICAN INTERNATIONAL GROUP, INC.
 
                           CONSOLIDATED BALANCE SHEET
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                                                                       1996
                                                                   MARCH 31,       ------------
                                                                      1997
                                                                  ------------
                                                                  (UNAUDITED)
<S>                                                               <C>              <C>
ASSETS:
  Investments and cash:
     Fixed maturities:
       Bonds held to maturity, at amortized cost (market value:
          1997 -- $12,967,464; 1996 -- $12,865,357).............  $ 12,576,023     $ 12,258,978
       Bonds available for sale, at market value (amortized
          cost: 1997 -- $34,647,106; 1996 -- $34,243,127).......    35,498,739       35,524,932
       Bonds trading securities, at market value (cost:
          1997 -- $628,734; 1996 -- $357,023)...................       628,606          364,069
       Preferred stocks, at amortized cost (market value:
          1997 -- $361,011; 1996 -- $591,091)...................       240,103          477,247
     Equity securities:
       Common stocks (cost: 1997 -- $5,069,046;
          1996 -- $4,993,799)...................................     6,045,232        5,989,572
       Non-redeemable preferred stocks (cost: 1997 -- $94,460;
          1996 -- $64,705)......................................       107,563           76,068
     Mortgage loans on real estate, policy and collateral
       loans -- net.............................................     7,775,296        7,876,820
     Financial services assets:
       Flight equipment primarily under operating leases, net of
          accumulated depreciation (1997 -- $1,588,540;
          1996 -- $1,465,031)...................................    14,866,433       13,808,660
       Securities available for sale, at market value (cost:
          1997 -- $9,373,209; 1996 -- $9,775,705)...............     9,382,348        9,785,909
       Trading securities, at market value......................     2,336,502        2,357,812
       Spot commodities, at market value........................       450,832          204,705
       Unrealized gain on interest rate and currency swaps,
          options and forward transactions......................     6,582,574        6,906,012
       Trading assets...........................................     4,472,130        3,793,433
       Securities purchased under agreements to resell,
          at contract value.....................................     1,738,520        1,642,591
     Other invested assets......................................     3,132,744        2,915,302
     Short-term investments, at cost which approximates market
       value....................................................     1,770,498        2,008,123
     Cash.......................................................        77,258           58,740
                                                                  ------------     ------------
            Total investments and cash..........................   107,681,401      106,048,973
  Investment income due and accrued.............................     1,195,404        1,198,348
  Premiums and insurance balances receivable -- net.............    10,356,362        9,617,061
  Reinsurance assets............................................    16,810,236       16,526,566
  Deferred policy acquisition costs.............................     6,631,134        6,471,357
  Investments in partially-owned companies......................       973,578          951,352
  Real estate and other fixed assets, net of accumulated
     depreciation (1997 -- $1,424,269; 1996 -- $1,390,225)......     2,079,171        2,122,762
  Separate and variable accounts................................     3,158,144        3,271,716
  Other assets..................................................     2,263,984        2,222,867
                                                                  ------------     ------------
            Total assets........................................  $151,149,414     $148,431,002
                                                                   ===========      ===========
</TABLE>
 
                See Accompanying Notes to Financial Statements.
 
                                        1
<PAGE>   3
 
                       AMERICAN INTERNATIONAL GROUP, INC.
 
                   CONSOLIDATED BALANCE SHEET -- (CONTINUED)
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                                                                       1996
                                                                   MARCH 31,       ------------
                                                                      1997
                                                                  ------------
                                                                  (UNAUDITED)
<S>                                                               <C>              <C>
LIABILITIES:
  Reserve for losses and loss expenses..........................  $ 33,718,890     $ 33,429,807
  Reserve for unearned premiums.................................     7,912,707        7,598,928
  Future policy benefits for life and accident and health
     insurance contracts........................................    24,534,193       24,002,860
  Policyholders' contract deposits..............................     9,826,724        9,803,409
  Other policyholders' funds....................................     2,223,592        2,219,907
  Reserve for commissions, expenses and taxes...................     1,517,348        1,511,122
  Insurance balances payable....................................     2,119,612        1,832,649
  Funds held by companies under reinsurance treaties............       370,877          383,306
  Income taxes payable:
     Current....................................................       392,202          201,978
     Deferred...................................................       497,439          586,703
  Financial services liabilities:
     Borrowings under obligations of guaranteed investment
       agreements...............................................     5,802,499        5,723,228
     Securities sold under agreements to repurchase, at contract
       value....................................................     2,646,728        3,039,423
     Trading liabilities........................................     4,089,060        3,313,508
     Securities and spot commodities sold but not yet purchased,
       at market value..........................................     1,809,125        1,568,542
     Unrealized loss on interest rate and currency swaps,
       options and forward transactions.........................     4,798,120        5,414,433
     Deposits due to banks and other depositors.................     1,166,355        1,206,374
     Commercial paper...........................................     3,348,214        2,739,388
     Notes, bonds and loans payable.............................    12,588,260       12,312,805
  Commercial paper..............................................     1,692,899        1,758,588
  Notes, bonds, loans and mortgages payable.....................     1,053,736          986,505
  Separate and variable accounts................................     3,158,144        3,271,716
  Other liabilities.............................................     3,121,643        3,081,599
                                                                  ------------     ------------
            Total liabilities...................................   128,388,367      125,986,778
                                                                  ------------     ------------
 
  Preferred shareholders' equity in subsidiary company..........       400,000          400,000
 
CAPITAL FUNDS:
  Common stock, $2.50 par value: 1,000,000,000 shares
     authorized; shares issued 1997 -- 506,084,172;
     1996 -- 506,084,172........................................     1,265,210        1,265,210
  Additional paid-in capital....................................       121,183          127,415
  Unrealized appreciation of investments, net of taxes..........     1,048,525        1,378,318
  Cumulative translation adjustments, net of taxes..............      (578,280)        (493,218)
  Retained earnings.............................................    21,154,862       20,420,881
  Treasury stock, at cost; 1997 -- 36,525,461;
     1996 -- 36,643,026 shares of common stock..................      (650,453)        (654,382)
                                                                  ------------     ------------
            Total capital funds.................................    22,361,047       22,044,224
                                                                  ------------     ------------
            Total liabilities and capital funds.................  $151,149,414     $148,431,002
                                                                   ===========      ===========
</TABLE>
 
                See Accompanying Notes to Financial Statements.
 
                                        2
<PAGE>   4
 
                       AMERICAN INTERNATIONAL GROUP, INC.
 
                        CONSOLIDATED STATEMENT OF INCOME
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                            THREE MONTHS
                                                                           ENDED MARCH 31,
                                                                      -------------------------
                                                                         1997           1996
                                                                      ----------     ----------
<S>                                                                   <C>            <C>
General insurance operations:
Net premiums written..............................................    $3,313,944     $3,125,840
Change in unearned premium reserve................................      (319,965)      (299,813)
                                                                      ----------     ----------
Net premiums earned...............................................     2,993,979      2,826,027
Net investment income.............................................       451,071        409,534
Realized capital gains............................................        49,318         27,663
                                                                      ----------     ----------
                                                                       3,494,368      3,263,224
                                                                      ----------     ----------
Losses and loss expenses incurred.................................     2,303,551      2,178,060
Underwriting expenses.............................................       571,644        558,959
                                                                      ----------     ----------
                                                                       2,875,195      2,737,019
                                                                      ----------     ----------
Operating income..................................................       619,173        526,205
                                                                      ----------     ----------
Life insurance operations:
Premium income....................................................     2,301,174      2,041,262
Net investment income.............................................       679,342        642,935
Realized capital gains............................................         8,162          4,058
                                                                      ----------     ----------
                                                                       2,988,678      2,688,255
                                                                      ----------     ----------
Death and other benefits..........................................       895,528        798,993
Increase in future policy benefits................................     1,166,584      1,053,874
Acquisition and insurance expenses................................       572,374        548,444
                                                                      ----------     ----------
                                                                       2,634,486      2,401,311
                                                                      ----------     ----------
Operating income..................................................       354,192        286,944
                                                                      ----------     ----------
Financial services operating income...............................       133,359        108,099
Equity in income of minority-owned insurance operations...........        25,720         22,184
Other realized capital losses.....................................        (7,091)          (799)
Minority interest.................................................       (10,658)       (12,115)
Other income (deductions) -- net..................................       (18,419)       (12,763)
                                                                      ----------     ----------
Income before income taxes........................................     1,096,276        917,755
                                                                      ----------     ----------
Income taxes (benefits) -- Current................................       276,723        280,647
                         -- Deferred..............................        38,618        (34,110)
                                                                      ----------     ----------
                                                                         315,341        246,537
                                                                      ----------     ----------
Net income........................................................    $  780,935     $  671,218
                                                                      ==========     ==========
Earnings per common share.........................................    $     1.66     $     1.42
                                                                      ==========     ==========
Cash dividends per common share...................................    $     0.10     $    0.085
                                                                      ==========     ==========
Average shares outstanding........................................       469,506        473,970
                                                                      ----------     ----------
</TABLE>
 
                See Accompanying Notes to Financial Statements.
 
                                        3
<PAGE>   5
 
                       AMERICAN INTERNATIONAL GROUP, INC.
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                     THREE MONTHS ENDED MARCH
                                                                                31,
                                                                    ---------------------------
                                                                       1997            1996
                                                                    -----------     -----------
<S>                                                                 <C>             <C>
Cash Flows From Operating Activities:
Net income......................................................    $   780,935     $   671,218
                                                                    -----------     -----------
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Non-cash revenues, expenses, gains and losses included in
     income:
  Change in:
     General and life insurance reserves........................      1,148,476       1,202,043
     Premiums and insurance balances receivable and payable --
       net......................................................       (452,338)        225,930
     Reinsurance assets.........................................       (283,670)       (282,922)
     Deferred policy acquisition costs..........................       (159,777)       (160,338)
     Investment income due and accrued..........................          2,944          64,019
     Funds held under reinsurance treaties......................        (12,429)         61,209
     Other policyholders' funds.................................          3,685          25,289
     Current and deferred income taxes -- net...................        228,842          36,561
     Reserve for commissions, expenses and taxes................          6,226         200,934
     Other assets and liabilities -- net........................         (1,073)        (58,903)
     Trading assets and liabilities -- net......................         96,855         645,322
     Trading securities, at market value........................         21,310         618,207
     Spot commodities, at market value..........................       (246,127)         98,741
     Net unrealized gain on interest rate and currency swaps,
       options and forward transactions.........................       (292,875)       (556,717)
     Securities purchased under agreements to resell............        (95,929)       (881,585)
     Securities sold under agreements to repurchase.............       (392,695)        367,524
     Securities and spot commodities sold but not yet purchased,
       at market value..........................................        240,583        (281,857)
  Realized capital gains........................................        (50,389)        (30,922)
  Equity in income of partially-owned companies and other
     invested assets............................................        (34,319)        (37,825)
  Depreciation expenses, principally flight equipment...........        204,018         188,251
  Change in cumulative translation adjustments..................       (115,016)        (25,475)
  Other -- net..................................................         (5,293)         23,812
                                                                    -----------     -----------
  Total adjustments.............................................       (188,991)      1,441,298
                                                                    -----------     -----------
Net cash provided by operating activities.......................    $   591,944     $ 2,112,516
                                                                    -----------     -----------
</TABLE>
 
                See Accompanying Notes to Financial Statements.
 
                                        4
<PAGE>   6
 
                       AMERICAN INTERNATIONAL GROUP, INC.
 
              CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                     THREE MONTHS ENDED MARCH
                                                                                31,
                                                                    ---------------------------
                                                                       1997            1996
                                                                    -----------     -----------
<S>                                                                 <C>             <C>
Cash Flows From Investing Activities:
  Cost of fixed maturities, at amortized cost matured or
     redeemed...................................................    $   428,108     $   401,859
  Cost of bonds, at market sold.................................      2,479,723       2,376,241
  Cost of bonds, at market matured or redeemed..................        707,346         573,533
  Cost of equity securities sold................................        638,538         908,237
  Realized capital gains........................................         50,389          30,922
  Purchases of fixed maturities.................................     (4,332,108)     (5,164,518)
  Purchases of equity securities................................       (737,605)     (1,052,071)
  Mortgage, policy and collateral loans granted.................       (467,118)     (1,237,486)
  Repayments of mortgage, policy and collateral loans...........        568,642         280,476
  Sales of securities available for sale........................      1,047,866         589,219
  Maturities of securities available for sale...................      2,401,923          37,174
  Purchases of securities available for sale....................     (3,059,657)       (843,747)
  Sales of flight equipment.....................................         35,913         141,507
  Purchases of flight equipment.................................     (1,229,084)       (878,048)
  Net additions to real estate and other fixed assets...........        (25,029)        (52,149)
  Sales or distributions of other invested assets...............      2,071,444         170,655
  Investments in other invested assets..........................     (2,276,363)       (275,657)
  Change in short-term investments..............................        237,625         233,213
  Investments in partially-owned companies......................        (10,695)         (6,783)
                                                                    -----------     -----------
Net cash used in investing activities...........................     (1,470,142)     (3,767,423)
                                                                    -----------     -----------
Cash Flows From Financing Activities:
  Change in policyholders' contract deposits....................         23,315       1,465,937
  Change in deposits due to banks and other depositors..........        (40,019)       (237,083)
  Change in commercial paper....................................        543,137         700,460
  Proceeds from notes, bonds, loans and mortgages payable.......      2,115,484         466,827
  Repayments on notes, bonds, loans and mortgages payable.......     (1,775,215)       (557,717)
  Proceeds from guaranteed investment agreements................        587,719         447,331
  Maturities of guaranteed investment agreements................       (508,448)       (535,058)
  Proceeds from subsidiary company preferred stock issued.......             --             (98)
  Proceeds from common stock issued.............................         11,011           5,582
  Cash dividends to shareholders................................        (46,954)        (40,307)
  Acquisition of treasury stock.................................        (14,596)        (96,634)
  Other - net...................................................          1,282           1,936
                                                                    -----------     -----------
Net cash provided by financing activities.......................        896,716       1,621,176
                                                                    -----------     -----------
Change in cash..................................................         18,518         (33,731)
Cash at beginning of period.....................................         58,740          88,371
                                                                    -----------     -----------
Cash at end of period...........................................    $    77,258     $    54,640
                                                                     ==========      ==========
</TABLE>
 
                See Accompanying Notes to Financial Statements.
 
                                        5
<PAGE>   7
 
                       AMERICAN INTERNATIONAL GROUP, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                                 MARCH 31, 1997
 
a)  These statements are unaudited. In the opinion of management, all
     adjustments consisting of normal recurring accruals have been made for a
     fair presentation of the results shown.
 
b)  Earnings per share of American International Group, Inc. (AIG) are based on
     the weighted average number of common shares outstanding during the period.
 
c)  Supplemental cash flow information for the three month periods ended March
     31, 1997 and 1996 is as follows:
 
<TABLE>
<CAPTION>
                                                               1997         1996
                                                             --------     --------
                                                             (IN THOUSANDS)
            <S>                                              <C>          <C>
            Income taxes paid..............................  $ 81,900     $198,600
            Interest paid..................................  $314,600     $380,100
</TABLE>
 
d)  In February 1997, the Financial Accounting Standards Board (FASB) issued
     Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
     (FASB 128). This statement simplifies the existing computational
     guidelines, revises the disclosure requirements and increases earnings per
     share comparability on an international basis.
 
    FASB 128 is effective for year end 1997. Earlier application is not
     permitted. The pro forma share and earnings per share amounts computed
     using FASB 128 for the three month periods ended March 31, 1997 and 1996
     were as follows:
 
<TABLE>
<CAPTION>
                                                                       1997             1996
                                                                     --------         --------
                                                                     (IN THOUSANDS, EXCEPT PER
                                                                     SHARE AMOUNTS)
<S>                                                                  <C>              <C>
Average outstanding shares used in the computation of per share
  earnings:
  Common stock issued............................................     506,084          506,084
  Common stock in treasury.......................................     (36,578)         (32,114)
                                                                     --------         --------
  Average outstanding shares -- basic............................     469,506          473,970
                                                                     --------         --------
  Stock options (treasury stock method)..........................       2,021            1,917
  Stock purchase plan............................................          35               29
                                                                     --------         --------
Average outstanding shares -- diluted............................     471,562          475,916
                                                                     --------         --------
Net income applicable to common stock............................    $780,935         $671,218
                                                                     --------         --------
Net income per share:
  Basic..........................................................       $1.66            $1.42
  Diluted........................................................       $1.66            $1.41
</TABLE>
 
e)  For further information, refer to the Annual Report on Form 10-K of AIG for
     the year ended December 31, 1996.
 
                                        6
<PAGE>   8
 
                       AMERICAN INTERNATIONAL GROUP, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OPERATIONAL REVIEW
 
General Insurance Operations
 
General insurance operations for the three month periods ending March 31, 1997
and 1996 were as follows:
 
(in thousands)
- ------------------------------------------------------
 
<TABLE>
<CAPTION>
                                 1997             1996
- ------------------------------------------------------
<S>                           <C>              <C>
Net premiums written:
  Domestic                    $2,254,153       $2,083,944
  Foreign                      1,059,791        1,041,896
- ------------------------------------------------------
Total                         $3,313,944       $3,125,840
- ------------------------------------------------------
Net premiums earned:
  Domestic                    $2,008,157       $1,857,659
  Foreign                        985,822          968,368
- ------------------------------------------------------
Total                         $2,993,979       $2,826,027
- ------------------------------------------------------
Adjusted underwriting
  profit:
  Domestic                    $   10,973       $      946
  Foreign                        107,811           88,062
- ------------------------------------------------------
Total                         $  118,784       $   89,008
- ------------------------------------------------------
Net investment income:
  Domestic                    $  367,561       $  319,068
  Foreign                         83,510           90,466
- ------------------------------------------------------
Total                         $  451,071       $  409,534
- ------------------------------------------------------
Operating income before
  realized capital gains:
  Domestic                    $  378,534       $  320,014
  Foreign                        191,321          178,528
- ------------------------------------------------------
Total                            569,855          498,542
Realized capital gains            49,318           27,663
- ------------------------------------------------------
Operating income              $  619,173       $  526,205
- ------------------------------------------------------
</TABLE>
 
     During the first three months of 1997, the net premiums written and net
premiums earned in AIG's general insurance operations increased 6.0 percent and
5.9 percent, respectively, from those of 1996.
 
     The growth in net premiums written in the first three months of 1997
resulted from a combination of several factors. Domestically, AIG continued to
achieve volume growth in some specialty markets, mortgage guaranty insurance and
in personal lines. Overseas, the primary reason for growth was also volume
increases. Foreign general insurance operations produced 32.0 percent of the
general insurance net premiums written in the first three months of 1997 and
33.3 percent in the same period of 1996.
 
     In comparing the foreign exchange rates used to translate the results of
AIG's foreign general operations during the first three months of 1997 to those
foreign exchange rates used to translate AIG's foreign general results during
the same period of 1996, the U.S. dollar strengthened in value in relation to
most major foreign currencies in which AIG transacts business. Accordingly, when
foreign net premiums written were translated into U.S. dollars for the purposes
of consolidation, total general insurance net premiums written were
approximately 2.1 percentage points less than they would have been if translated
utilizing those exchange rates which prevailed during that same period of 1996.
 
     Net premiums written are initially deferred and earned based upon the terms
of the underlying policies. The net unearned premium reserve constitutes the
deferred revenues which are generally earned ratably over the policy period.
Thus, the net unearned premium reserve is not fully recognized as net premiums
earned until the end of the policy period.
 
     The statutory general insurance ratios were as follows:
 
             ------------------------------------------------------
 
<TABLE>
<CAPTION>
                                        1997       1996
- ------------------------------------------------------
<S>                                    <C>        <C>
Domestic:
  Loss Ratio                            86.06      86.21
  Expense Ratio                         13.91      13.92
- ------------------------------------------------------
Combined Ratio                          99.97     100.13
- ------------------------------------------------------
Foreign:
  Loss Ratio                            58.36      59.54
  Expense Ratio                         30.80      31.33
- ------------------------------------------------------
Combined Ratio                          89.16      90.87
- ------------------------------------------------------
Consolidated:
  Loss Ratio                            76.94      77.07
  Expense Ratio                         19.31      19.72
- ------------------------------------------------------
Combined Ratio                          96.25      96.79
- ------------------------------------------------------
</TABLE>
 
     Adjusted underwriting profit (operating income less net investment income
and realized capital gains) represents statutory underwriting profit adjusted
primarily for changes in deferred acquisition costs. The adjusted underwriting
profits were $118.8 million in the first three months of 1997 and $89.0 million
in the same period of 1996.
 
                                        7
<PAGE>   9
 
     AIG's results reflect the net impact of incurred losses from catastrophes
approximating $16 million and $56 million in 1997 and 1996, respectively. AIG's
gross incurred losses from catastrophes approximated $22 million and $200
million in 1997 and 1996, respectively. If catastrophes were excluded from the
losses incurred in each period, the pro forma consolidated statutory general
insurance ratios would be as follows:
 
<TABLE>
<CAPTION>
- ------------------------------------------------------
                                       1997        1996
- ------------------------------------------------------
<S>                                    <C>         <C>
Loss Ratio                             76.42       75.09
Expense Ratio                          19.31       19.72
- ------------------------------------------------------
Combined Ratio                         95.73       94.81
- ------------------------------------------------------
</TABLE>
 
     AIG's ability to maintain its combined ratio below 100 is primarily
attributable to the profitability of AIG's foreign general insurance operations
and AIG's emphasis on maintaining its disciplined underwriting, especially in
the domestic specialty markets. In addition, AIG does not seek net premium
growth where rates do not adequately reflect its assessment of exposures.
 
     General insurance net investment income in the first three months of 1997
increased 10.1 percent when compared to the same period of 1996. The growth in
net investment income in 1997 was primarily attributable to new cash flow for
investment. The new cash flow was generated from net general insurance operating
cash flow and included the compounding of previously earned and reinvested net
investment income. (See also the discussion under "Liquidity" herein.)
 
     General insurance realized capital gains were $49.3 million in the first
three months of 1997 and $27.7 million in 1996. These realized gains resulted
from the ongoing management of the general insurance investment portfolios
within the overall objectives of the general insurance operations and arose
primarily from the disposition of equity securities and available for sale and
trading fixed maturities as well as redemptions of fixed maturities.
 
     General insurance operating income in the first three months of 1997
increased 17.7 percent when compared to the same period of 1996. The
contribution of general insurance operating income to income before income taxes
was 56.5 percent in 1997 compared to 57.3 percent in 1996.
 
     AIG is a major purchaser of reinsurance for its general insurance
operations. AIG is cognizant of the need to exercise good judgment in the
selection and approval of both domestic and foreign companies participating in
its reinsurance programs. AIG insures risks in over 100 countries and its
reinsurance programs must be coordinated in order to provide AIG the level of
reinsurance protection that it desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.
 
     AIG's general reinsurance assets amounted to $16.60 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at March
31, 1997, with respect to reinsurance recoverable to the extent that any
reinsurer may not be able to reimburse AIG under the terms of these reinsurance
arrangements. AIG manages its credit risk in its reinsurance relationships by
transacting with reinsurers that it considers financially sound, and when
necessary AIG holds substantial collateral in the form of funds, securities
and/or irrevocable letters of credit. This collateral can be drawn on for
amounts that remain unpaid beyond specified time periods on an individual
reinsurer basis. This development includes losses incurred but not reported
(IBNR). At December 31, 1996, approximately 50 percent of the general
reinsurance assets were from unauthorized reinsurers. In order to obtain
statutory recognition, nearly all of these balances were collateralized. The
remaining 50 percent of the general reinsurance assets were from authorized
reinsurers and over 97 percent of such balances were from reinsurers rated A-
(excellent) or better, as rated by A.M. Best. This rating is a measure of
financial strength. The terms authorized and unauthorized pertain to regulatory
categories, not creditworthiness. Through March 31, 1997, these distribution
percentages have not significantly changed.
 
     AIG's provision for estimated unrecoverable reinsurance has not changed
significantly from December 31, 1996. AIG had allowances for unrecoverable
reinsurance approximating $125 million. At that date, and prior to this
allowance, AIG had no significant reinsurance recoverables from any individual
reinsurer which is financially troubled (e.g., liquidated, insolvent, in
receivership or otherwise subject to formal or informal regulatory restric-
 
                                        8
<PAGE>   10
 
tion). AIG has not entered into any material cessions that would provide surplus
relief.
 
     AIG's Reinsurance Security Department conducts ongoing detailed assessments
of the reinsurance markets and current and potential reinsurers both foreign and
domestic. Such assessments include, but are not limited to, identifying if a
reinsurer is appropriately licensed and has sufficient financial capacity, and
the local economic environment in which a foreign reinsurer operates. This
department also reviews the nature of the risks ceded and the need for
collateral. In addition, AIG's Credit Risk Committee reviews the credit limits
for and concentrations with any one reinsurer.
 
     AIG enters into certain intercompany reinsurance transactions for its
general and life operations. AIG enters into these transactions as a sound and
prudent business practice in order to maintain underwriting control and spread
insurance risk among various legal entities. These reinsurance agreements have
been approved by the appropriate regulatory authorities. All material
intercompany transactions have been eliminated in consolidation.
 
     At March 31, 1997, the consolidated general reinsurance assets of $16.60
billion include reinsurance recoverables for paid losses and loss expenses of
$1.94 billion and $13.14 billion with respect to the ceded reserve for losses
and loss expenses, including ceded IBNR (ceded reserves). The ceded reserves
represent the accumulation of estimates of ultimate ceded losses including
provisions for ceded IBNR and loss expenses. The methods used to determine such
estimates and to establish the resulting ceded reserves are continually reviewed
and updated. Any adjustments therefrom are reflected in income currently. It is
AIG's belief that the ceded reserves at March 31, 1997 were representative of
the ultimate losses recoverable. In the future, as the ceded reserves continue
to develop to ultimate amounts, the ultimate loss recoverable may be greater or
less than the reserves currently ceded.
 
     At March 31, 1997, general insurance reserves for losses and loss expenses
(loss reserves) amounted to $33.72 billion, an increase of $289.1 million or one
percent over the prior year end and represent the accumulation of estimates of
ultimate losses, including IBNR, and loss expenses and minor amounts of
discounting related to certain workers' compensation claims. General insurance
net loss reserves increased $176.5 million or one percent to $20.58 billion and
represent loss reserves reduced by reinsurance recoverable, net of an allowance
for unrecoverable reinsurance. The methods used to determine such estimates and
to establish the resulting reserves are continually reviewed and updated. Any
adjustments resulting therefrom are reflected in operating income currently. It
is management's belief that the general insurance net loss reserves are adequate
to cover all general insurance net losses and loss expenses as at March 31,
1997. In the future, if the general insurance net loss reserves develop
deficiently, such deficiency would have an adverse impact on such future results
of operations.
 
     In a very broad sense, the general loss reserves can be categorized into
two distinct groups: one group being long tail casualty lines of business; the
other being short tail lines of business consisting principally of property
lines and including certain classes of casualty lines.
 
     Estimation of ultimate net losses and loss expenses (net losses) for long
tail casualty lines of business is a complex process and depends on a number of
factors, including the line and volume of the business involved. In the more
recent accident years of long tail casualty lines there is limited statistical
credibility in reported net losses. That is, a relatively low proportion of net
losses would be reported claims and expenses and an even smaller proportion
would be net losses paid. A relatively high proportion of net losses would
therefore be IBNR.
 
     A variety of actuarial methods and assumptions are normally employed to
estimate net losses for long tail casualty lines. These methods ordinarily
involve the use of loss trend factors intended to reflect the estimated annual
growth in loss costs from one accident year to the next. For the majority of
long tail casualty lines, net loss trend factors approximated eight percent.
Loss trend factors reflect many items including changes in claims handling,
exposure and policy forms and current and future estimates of monetary inflation
and social inflation. Thus, many factors are implicitly considered in estimating
the year to year growth in loss costs. Therefore, AIG's carried net long tail
loss reserves are judgmentally set as well as tested for
 
                                        9
<PAGE>   11
 
reasonableness using the most appropriate loss trend factors for each class of
business. In the evaluation of AIG's net loss reserves, loss trend factors vary
slightly, depending on the particular class and nature of the business involved.
These factors are periodically reviewed and subsequently adjusted, as
appropriate, to reflect emerging trends which are based upon past loss
experience.
 
     Estimation of net losses for short tail business is less complex than for
long tail casualty lines. Loss cost trends for many property lines can generally
be assumed to be similar to the growth in exposure of such lines. For example,
if the fire insurance coverage remained proportional to the actual value of the
property, the growth in the property's exposure to fire loss can be approximated
by the amount of insurance purchased.
 
     For other property and short tail casualty lines, the loss trend is
implicitly assumed to grow at the rate that reported net losses grow from one
year to the next. The concerns noted above for longer tail casualty lines with
respect to the limited statistical credibility of reported net losses generally
do not apply to shorter tail lines.
 
     AIG continues to receive indemnity claims asserting injuries from toxic
waste, hazardous substances, and other environmental pollutants and alleged
damages to cover the cleanup costs of hazardous waste dump sites (hereinafter
collectively referred to as environmental claims) and indemnity claims asserting
injuries from asbestos. The vast majority of these asbestos and environmental
claims emanate from policies written in 1984 and prior years. AIG has
established a specialized claims unit which investigates and adjusts all such
asbestos and environmental claims. Commencing in 1985, standard policies
contained an absolute exclusion for pollution related damage. However, AIG
currently underwrites pollution impairment liability insurance on a claims made
basis and excluded such claims from the analyses included herein.
 
     Estimation of asbestos and environmental claims loss reserves is a
difficult process. These asbestos and environmental claims cannot be estimated
by conventional reserving techniques as previously described. Quantitative
techniques frequently have to be supplemented by subjective considerations
including managerial judgment. Significant factors which affect the trends which
influence the development of asbestos and environmental claims are the
inconsistent court resolutions and judicial interpretations which broaden the
intent of the policies and scope of coverage. The current case law can be
characterized as still evolving and there is little likelihood of any firm
direction in the near future. Additionally, the exposure for cleanup costs of
hazardous waste dump sites involves issues such as allocation of responsibility
among potentially responsible parties and the government's refusal to release
parties. The cleanup cost exposure may significantly change if the Congressional
reauthorization of Superfund dramatically changes, thereby reducing or
increasing litigation and cleanup costs.
 
     In the interim, AIG and other industry members have and will continue to
litigate the broadening judicial interpretation of the policy coverage and the
liability issues. At the current time, it is not possible to determine the
future development of asbestos and environmental claims. Such development will
be affected by the extent to which courts continue to expand the intent of the
policies and the scope of the coverage, as they have in the past, as well as by
changes in Superfund and waste dump site coverage issues. Additional liabilities
could emerge for amounts in excess of the current reserves held. Although this
emergence cannot now be reasonably estimated, it could have a material adverse
impact on AIG's future operating results. The reserves carried for these claims
at March 31, 1997 are believed to be adequate as these reserves are based on the
known facts and current law. Furthermore, as AIG's net exposure retained
relative to the gross exposure written was lower in 1984 and prior years, the
potential impact of these claims is much smaller on the net loss reserves than
on the gross loss reserves. (See the previous discussion on reinsurance
collectibility herein.)
 
     The majority of AIG's exposures for asbestos and environmental claims are
excess casualty coverages, not primary coverages. Thus, the litigation costs are
treated in the same manner as indemnity reserves. That is, litigation expenses
are included within the limits of the liability AIG incurs. Individual
significant claim liabilities, where future litigation costs are reasonably
determinable, are established on a case basis.
 
     A summary of reserve activity, including estimates for applicable IBNR,
relating to asbestos and
 
                                       10
<PAGE>   12
 
environmental claims separately and combined at March 31, 1997 and 1996 was as
follows:
 
(in millions)
- ------------------------------------------------------
 
<TABLE>
<CAPTION>
                               1997               1996
                          -------------      -------------
                          GROSS     NET      Gross     Net
- ------------------------------------------------------
<S>                      <C>       <C>      <C>       <C>
Asbestos:
Reserve for losses and
  loss expenses at
  beginning of period    $  875.9  $172.3   $  744.8  $127.9
Losses and loss
  expenses incurred         112.2    16.2       55.8    12.9
Losses and loss
  expenses paid            (142.5)  (15.4)     (78.2)  (14.9)
- ------------------------------------------------------
Reserve for losses and
  loss expenses at end
  of period              $  845.6  $173.1   $  722.4  $125.9
- ------------------------------------------------------
Environmental:
Reserve for losses and
  loss expenses at
  beginning of period    $1,427.4  $570.6   $1,197.9  $379.3
Losses and loss
  expenses incurred          38.4    12.0       89.8    29.8
Losses and loss
  expenses paid             (28.5)  (10.2)     (37.2)  (11.8)
- ------------------------------------------------------
Reserve for losses and
  loss expenses at end
  of period              $1,437.3  $572.4   $1,250.5  $397.3
- ------------------------------------------------------
Combined:
Reserve for losses and
  loss expenses at
  beginning of period    $2,303.3  $742.9   $1,942.7  $507.2
Losses and loss
  expenses incurred         150.6    28.2      145.6    42.7
Losses and loss
  expenses paid            (171.0)  (25.6)    (115.4)  (26.7)
- ------------------------------------------------------
Reserve for losses and
  loss expenses at end
  of period              $2,282.9  $745.5   $1,972.9  $523.2
- ------------------------------------------------------
</TABLE>
 
     The gross and net IBNR included in the aforementioned reserve for losses
and loss expenses at March 31, 1997 and 1996 were estimated as follows:
 
(in thousands)
- ------------------------------------------------------
 
<TABLE>
<CAPTION>
                           1997                  1996
                    -----------------      ----------------
                     GROSS       NET       Gross      Net
- ------------------------------------------------------
<S>                <C>         <C>        <C>       <C>
Combined           $1,057,550  $424,052   $741,000  $244,200
- ------------------------------------------------------
</TABLE>
 
     A summary of asbestos and environmental claims count activity for the three
month periods ended March 31, 1997 and 1996 were as follows:
 
<TABLE>
<CAPTION>
   ------------------------------------------------------------------------------------------------------------------
                                                        1997                                        1996
                                         ----------------------------------          ----------------------------------
                                        ASBESTOS    ENVIRONMENTAL    COMBINED       Asbestos    Environmental    Combined
- ------------------------------------------------------------------------------------------------------------------
<S>                                     <C>         <C>              <C>            <C>         <C>              <C>
Claims at beginning of period             5,668         17,395        23,063          5,244         17,858        23,102
Claims during period:
  Opened                                    331            961         1,292            283            548           831
  Settled                                   (46)          (113)         (159)           (29)          (157)         (186)
  Dismissed or otherwise resolved          (180)          (494)         (674)          (206)        (1,396)       (1,602)
- ------------------------------------------------------------------------------------------------------------------
Claims at end of period                   5,773         17,749        23,522          5,292         16,853        22,145
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
 
     The average cost per claim settled, dismissed or otherwise resolved for the
three month periods ended March 31, 1997 and 1996 was as follows:
 
- ------------------------------------------------------
 
<TABLE>
<CAPTION>
                         1997                   1996
                    ---------------       ----------------
                    GROSS      NET        Gross      Net
- ------------------------------------------------------
<S>                <C>       <C>         <C>       <C>
Asbestos           $630,500  $68,100     $332,800  $ 63,400
Environmental        47,000   16,800       24,000     7,600
Combined            205,300   30,700       64,500    14,900
- ------------------------------------------------------
</TABLE>
 
     An insurance rating agency has developed a survival ratio to measure the
number of years it would take a company to exhaust both its asbestos and
environmental reserves for losses and loss expenses based on that company's
current level of asbestos and environmental claims payments. The higher the
ratio, the more years the reserves for losses and loss expenses cover these
claims payments. These ratios are computed based on the respective ending
reserves for losses and loss expenses over the respective claims settlements
during the fiscal year. Such payments include indemnity payments and legal and
loss adjustment payments. It should be noted, however, that this is an ex-
 
                                       11
<PAGE>   13
 
tremely simplistic approach to measuring asbestos and environmental reserve
levels. Many factors, such as aggressive settlement procedures, mix of business
and level of coverage provided, have significant impact on the amount of
asbestos and environmental losses and loss expense reserves, ultimate payments
thereof and the resultant ratio.
 
     The developed survival ratios include both involuntary and voluntary
indemnity payments. Involuntary payments include court judgments, court orders,
covered claims with no coverage defenses, state mandated cleanup costs, claims
where AIG's coverage defenses are minimal, and settlements made less than six
months before the first trial setting. Also, AIG considers all legal and loss
adjustment payments as involuntary.
 
     AIG believes voluntary indemnity payments should be excluded from the
survival ratio. The special asbestos and environmental claims unit actively
manages AIG's asbestos and environmental claims and proactively pursues early
settlement of environmental claims for all known and unknown sites. As a result,
AIG reduces its exposure to future environmental loss contingencies.
 
     AIG's survival ratios for involuntary asbestos and environmental claims,
separately and combined, were based upon a three year average payment. These
ratios at March 31, 1997 and 1996 were as follows:
 
- ------------------------------------------------------
 
<TABLE>
<CAPTION>
                           1997                  1996
                       -------------         -------------
                      GROSS      NET        Gross      Net
- ------------------------------------------------------
<S>                   <C>       <C>         <C>       <C>
Involuntary survival
  ratios:
  Asbestos              2.5       3.5         3.7       3.1
  Environmental        17.3      17.9        17.4      14.0
  Combined              5.9       9.8         8.1       8.2
- ------------------------------------------------------
</TABLE>
 
     AIG's operations are negatively impacted under guarantee fund assessment
laws which exist in most states. As a result of operating in a state which has
guarantee fund assessment laws, a solvent insurance company may be assessed for
certain obligations arising from the insolvencies of other insurance companies
which operated in that state. AIG generally records these assessments upon
notice. Additionally, certain states permit at least a portion of the assessed
amount to be used as a credit against a company's future premium tax
liabilities. Therefore, the ultimate net assessment cannot reasonably be
estimated. The guarantee fund assessments, net of credits for 1996 was $18.8
million. Based upon current information, AIG does not anticipate that its net
assessment will be significantly different in 1997.
 
     AIG is also required to participate in various involuntary pools
(principally workers' compensation business) which provide insurance coverage
for those not able to obtain such coverage in the voluntary markets. This
participation is also recorded upon notification, as these amounts cannot
reasonably be estimated.
 
Life Insurance Operations
 
Life insurance operations for the three month periods ending March 31, 1997 and
1996 were as follows:
 
(in thousands)
- ------------------------------------------------------
 
<TABLE>
<CAPTION>
                                1997             1996
- ------------------------------------------------------
<S>                         <C>              <C>
Premium income:
  Domestic                  $    117,351     $    141,663
  Foreign                      2,183,823        1,899,599
- ------------------------------------------------------
Total                       $  2,301,174     $  2,041,262
- ------------------------------------------------------
Net investment income:
  Domestic                  $    206,031     $    245,881
  Foreign                        473,311          397,054
- ------------------------------------------------------
Total                       $    679,342     $    642,935
- ------------------------------------------------------
Operating income before
  realized capital gains:
  Domestic                  $     30,292     $     25,228
  Foreign                        315,738          257,658
- ------------------------------------------------------
Total                            346,030          282,886
Realized capital gains             8,162            4,058
- ------------------------------------------------------
Operating income            $    354,192     $    286,944
- ------------------------------------------------------
Life insurance in-force:*
  Domestic                  $ 62,057,378     $ 60,419,342
  Foreign                    366,150,858      361,563,791
- ------------------------------------------------------
Total                       $428,208,236     $421,983,133
- ------------------------------------------------------
</TABLE>
 
* Amounts presented were as at March 31, 1997 and December 31, 1996,
  respectively.
 
     AIG's life insurance operations, demonstrating the strength of its
franchise, continued to show growth primarily as a result of overseas
operations, particularly in Asia. AIG's life premium income during the first
three months of 1997 represented a 12.7 percent increase from the same period in
1996. Foreign life operations produced 94.9 percent and 93.1 percent of the life
premium income in 1997 and 1996, respectively.
 
     As previously discussed, the U.S. dollar strengthened in value in relation
to most major foreign currencies in which AIG transacts business. Accordingly,
for the first three months of 1997, when foreign life premium income was
translated into U.S. dollars for purposes of consolidation, total
 
                                       12
<PAGE>   14
 
life premium income was approximately 3.6
percentage points less than it would have been if translated utilizing exchange
rates prevailing in the same period of 1996.
 
     Life insurance net investment income increased 5.7 percent during the first
three months of 1997. The growth in net investment income was primarily
attributable to foreign new cash flow for investment. The new cash flow was
generated from life insurance operations and included the compounding of
previously earned and reinvested net investment income. (See also the discussion
under "Liquidity" herein.)
 
     The decline in domestic premium income and net investment income resulted
from the redemption of corporate owned life insurance policies beginning in 1996
and continuing into 1997. Such redemptions had no significant effect on domestic
operating income.
 
     The traditional life products, such as whole and term life and endowments,
were the major contributors to the growth in foreign premium income and
investment income, particularly in Asia, and continue to be the primary source
of growth in the life segment. A mixture of traditional, accident and health and
financial products are being sold in Japan.
 
     Life insurance realized capital gains were $8.2 million in 1997 and $4.1
million in 1996. These realized gains resulted from the ongoing management of
the life insurance investment portfolios within the overall objectives of the
life insurance operations and arose primarily from the disposition of equity
securities and available for sale fixed maturities as well as redemptions of
fixed maturities.
 
     Life insurance operating income during the first three months of 1997
increased 23.4 percent to $354.2 million. Excluding realized capital gains from
life insurance operating income, the percent increase would be 22.3 percent
during the first three months of 1997. The contribution of life insurance
operating income to income before income taxes amounted to 32.3 percent during
the first three months of 1997 compared to 31.3 percent in the same period of
1996.
 
     The risks associated with the traditional life and accident and health
products are underwriting risk and investment risk. The risk associated with the
financial and investment contract products is investment risk.
 
     Underwriting risk represents the exposure to loss resulting from the actual
policy experience adversely emerging in comparison to the assumptions made in
the product pricing associated with mortality, morbidity, termination and
expenses. AIG's life companies limit their maximum underwriting exposure on
traditional life insurance of a single life to approximately one million dollars
of coverage by using yearly renewable term reinsurance. The life insurance
operations have not entered into assumption reinsurance transactions or surplus
relief transactions during the two year period ended March 31, 1997.
 
     The investment risk represents the exposure to loss resulting from the cash
flows from the invested assets, primarily long-term fixed rate investments,
being less than the cash flows required to meet the obligations of the expected
policy and contract liabilities and the necessary return on investments.
 
     To minimize its exposure to investment risk, AIG tests the cash flows from
the invested assets and the policy and contract liabilities using various
interest rate scenarios to assess whether there is a liquidity excess or
deficit. If a rebalancing of the invested assets to the policy and contract
claims became necessary and did not occur, a demand could be placed upon
liquidity. (See also the discussion under "Liquidity" herein.)
 
     The asset-liability relationship is appropriately managed in AIG's foreign
operations, as it has been throughout AIG's history, even though certain
territories lack qualified long-term investments or there are investment
restrictions imposed by the local regulatory authorities. For example, in Japan
and several Southeast Asia territories, the duration of the investments is often
for a shorter period than the effective maturity of such policy liabilities.
Therefore, there is a risk that the reinvestment of the proceeds at the maturity
of the investments may be at a yield below that of the interest required for the
accretion of the policy liabilities. At December 31, 1996, the average duration
of the investment portfolio in Japan was 5.9 years, while the related policy
liabilities were estimated to be 12.3 years. These durations have not changed
significantly during 1997. To maintain an adequate yield to match the interest
required over the duration of the liabilities, constant management focus is
required to reinvest the proceeds of the maturing securities without
 
                                       13
<PAGE>   15
 
sacrificing investment quality. To the extent permitted under local regulation,
AIG may invest in qualified longer-term securities outside Japan to achieve a
closer matching in both duration and the required yield. AIG is able to manage
any asset-liability duration difference through maintenance of sufficient global
liquidity and to support any operational shortfall through its international
financial network. Domestically, active monitoring assures appropriate
asset-liability matching as there are investments available to match the
duration and the required yield. (See also the discussion under "Liquidity"
herein.)
 
     AIG uses asset-liability matching as a management tool to determine the
composition of the invested assets and marketing strategies. As a part of these
strategies, AIG may determine that it is economically advantageous to be
temporarily in an unmatched position due to anticipated interest rate or other
economic changes.
 
Financial Services Operations
 
Financial services operations for the three month periods ending March 31, 1997
and 1996 were as follows:
 
(in thousands)
- ------------------------------------------------------
 
<TABLE>
<CAPTION>
                                    1997          1996
- ------------------------------------------------------
<S>                               <C>          <C>
Revenues:
International Lease Finance Corp. $415,588     $  363,360
AIG Financial Products Corp.*       81,176        104,128
AIG Trading Group Inc.*             78,352         65,644
Other                              112,207         70,964
- ------------------------------------------------------
Total                             $687,323     $  604,096
- ------------------------------------------------------
Operating income:
International Lease Finance Corp. $ 84,427     $   69,500
AIG Financial Products Corp.        42,211         41,322
AIG Trading Group Inc.              14,261         11,832
Other, including intercompany
  adjustments                       (7,540)       (14,555)
- ------------------------------------------------------
Total                             $133,359     $  108,099
- ------------------------------------------------------
</TABLE>
 
*Represents net trading revenues.
 
     Financial services operating income increased 23.4 percent in the first
three months of 1997 over 1996.
 
     International Lease Finance Corporation (ILFC) generates its revenues
primarily from leasing new and used commercial jet aircraft to domestic and
foreign airlines. Revenues also result from the remarketing of commercial jets
for its own account, for airlines and for financial institutions. Revenues in
the first three months of 1997 increased 14.4 percent from 1996. The revenue
increase resulted primarily from the growth both in the size and relative cost
of the fleet. During the first three months of 1997, operating income increased
21.5 percent from 1996. The composite borrowing rates during the first three
months of 1997 and 1996 were 6.20 percent and 6.39 percent, respectively.
Declines in interest rates generally have a positive effect on leasing margins.
(See also the discussions under "Capital Resources" and "Liquidity" herein.)
 
     ILFC is exposed to loss through non-performance of aircraft lessees,
through owning aircraft which it would be unable to lease or re-lease at
acceptable rates or sell at lease expiration and through committing to purchase
aircraft which it would be unable to lease. ILFC manages its lessee
non-performance exposure through credit reviews and security deposit
requirements. At March 31, 1997, ILFC's aircraft subject to operating leases
totaled 324 and there were no aircraft off lease. At March 31, 1997,
approximately 80 percent of the fleet was leased to foreign airlines. (See also
the discussions under "Capital Resources" and "Liquidity" herein.)
 
     AIG Financial Products Corp. and its subsidiaries (AIGFP) participate in
the derivatives dealer market conducting, primarily as principal, an interest
rate, currency and equity derivative products business. AIGFP also enters into
structured transactions including long-dated forward foreign exchange contracts,
option transactions, liquidity facilities and investment agreements and invests
in a diversified portfolio of securities. AIGFP derives substantially all its
revenues from proprietary positions entered in connection with counterparty
transactions rather than for speculative transactions. Revenues in the first
three months of 1997 decreased 22.0 percent from the same period of 1996.
However, during the first three months of 1997, operating income increased 2.2
percent from the same period of 1996. As AIGFP is a transaction-oriented
operation, current and past revenues and operating results may not provide a
basis for predicting future performance. (See also the discussions under
"Capital Resources," "Liquidity" and "Derivatives" herein.)
 
     AIG Trading Group Inc. and its subsidiaries (AIGTG) derive a substantial
portion of their revenues from market making and trading activities, as
principals, in foreign exchange, interest rates, precious and base metals and
natural gas and other
 
                                       14
<PAGE>   16
 
energy products. Revenues in the first three months
of 1997 increased 19.4 percent from the same period of 1996. During the first
three months of 1997, operating income increased 20.5 percent from the same
period of 1996. (See also the discussions under "Capital Resources," "Liquidity"
and "Derivatives" herein.)
 
     Financial services operating income represented 12.2 percent of AIG's
income before income taxes in the first three months of 1997. This compares to
11.8 percent in the same period of 1996.
 
Other Operations
 
In the first three months of 1997, AIG's equity in income of minority-owned
insurance operations was $25.7 million compared to $22.2 million in the same
period of 1996. In the first three months of 1997, the equity interest in
insurance companies represented 2.3 percent of income before income taxes
compared to 2.4 percent in the same period of 1996.
 
     Other realized capital losses amounted to $7.1 million and $0.8 million in
the first three months of 1997 and 1996, respectively.
 
     Minority interest represents minority shareholders' equity in income of
certain consolidated subsidiaries. In the first three months of 1997, minority
interest amounted to $10.7 million. In the first three months of 1996, minority
interest amounted to $12.1 million.
 
     Other income (deductions)--net includes AIG's equity in certain minor
majority-owned subsidiaries and certain partially-owned companies, realized
foreign exchange transaction gains and losses in substantially all currencies
and unrealized gains and losses in hyperinflationary currencies, as well as the
income and expenses of the parent holding company and other miscellaneous income
and expenses. In the first three months of 1997, net deductions amounted to
$18.4 million. In the same period of 1996, net deductions amounted to $12.8
million.
 
     Income before income taxes amounted to $1.10 billion in the first three
months of 1997, and $917.8 million in the same period of 1996.
 
     In the first three months of 1997, AIG recorded a provision for income
taxes of $315.3 million compared to the provision of $246.5 million in the same
period of 1996. These provisions represent effective tax rates of 28.8 percent
in the first three months of 1997, and 26.9 percent in the same period of 1996.
The increase in the effective tax rate in 1997 over the prior period is
primarily due to the increase in the domestic general adjusted underwriting
profit relative to income before income taxes.
 
     Net income amounted to $780.9 million in the first three months of 1997 and
$671.2 million in the same period of 1996. The increases in net income over the
periods resulted from those factors described above.
 
CAPITAL RESOURCES
 
At March 31, 1997, AIG had total capital funds of $22.36 billion and total
borrowings of $24.49 billion. At that date, $20.85 billion of such borrowings
were either not guaranteed by AIG or were matched borrowings under obligations
of guaranteed investment agreements (GIAs) or matched notes and bonds payable.
 
     Total borrowings at March 31, 1997 and December 31, 1996 were as follows:
 
(in thousands)
- ------------------------------------------------------
 
<TABLE>
<CAPTION>
                                 1997            1996
- ------------------------------------------------------
<S>                           <C>             <C>
GIAs -- AIGFP                 $ 5,802,499     $ 5,723,228
- ------------------------------------------------------
Commercial Paper:
  Funding                         868,791       1,018,510
  ILFC(a)                       3,348,214       2,739,388
  AICCO                           824,108         740,078
- ------------------------------------------------------
  Total                         5,041,113       4,497,976
- ------------------------------------------------------
Medium Term Notes:
  ILFC(a)                       2,510,065       2,551,485
  AIG                             140,000         140,000
- ------------------------------------------------------
  Total                         2,650,065       2,691,485
- ------------------------------------------------------
Notes and Bonds Payable:
  ILFC(a)                       3,800,000       3,500,000
  AIGFP                         5,286,474       5,243,042
  AIGTG                                --          10,442
  AIG: Lire bonds                 159,067         159,067
     Zero coupon notes             84,017          81,761
- ------------------------------------------------------
  Total                         9,329,558       8,994,312
- ------------------------------------------------------
Loans and Mortgages Payable:
  ILFC(a)(b)                      991,721       1,007,836
  AIG                             670,652         605,677
- ------------------------------------------------------
  Total                         1,662,373       1,613,513
- ------------------------------------------------------
Total Borrowings               24,485,608      23,520,514
- ------------------------------------------------------
Borrowings not guaranteed by
  AIG                          10,650,000       9,798,709
Matched GIA borrowings          5,802,499       5,723,228
Matched notes and bonds
  payable -- AIGFP              4,401,611       4,576,900
- ------------------------------------------------------
                               20,854,110      20,098,837
- ------------------------------------------------------
Remaining borrowings of AIG   $ 3,631,498     $ 3,421,677
- ------------------------------------------------------
</TABLE>
 
(a)AIG does not guarantee or support these borrowings.
(b)Primarily capital lease obligations.
 
     AIGFP increased the aggregate principal amount outstanding of its notes and
bonds payable
 
                                       15
<PAGE>   17
 
to $5.29 billion, a net increase of $43.4 million and increased its net GIA
borrowings by $79.3 million. AIGFP uses the proceeds from the issuance of notes
and bonds to invest in a segregated portfolio of securities available for sale.
Funds received from GIA borrowings are invested in a diversified portfolio of
securities and derivative transactions. (See also the discussions under
"Operational Review", "Liquidity" and "Derivatives" herein.)
 
     AIG Funding, Inc. (Funding), through the issuance of commercial paper,
fulfills the short-term cash requirements of AIG and its subsidiaries. Funding
intends to continue to meet AIG's funding requirements through the issuance of
commercial paper guaranteed by AIG. This issuance of Funding's commercial paper
is subject to the approval of AIG's Board of Directors. ILFC and A.I. Credit
Corp. (AICCO) issue commercial paper for the funding of their own operations.
AIG does not guarantee AICCO's or ILFC's commercial paper. However, AIG has
entered into an agreement in support of AICCO's commercial paper. From time to
time, AIGFP may issue commercial paper, which AIG guarantees, to fund its
operations. At March 31, 1997, AIGFP had no commercial paper outstanding. (See
also the discussion under "Derivatives" herein.)
 
     AIG and Funding have entered into two syndicated revolving credit
facilities (the Facilities) aggregating $1 billion. The Facilities consist of a
$500 million 364 day revolving credit facility and a $500 million five year
revolving credit facility. The Facilities can be used for general corporate
purposes and also provide backup for AIG's commercial paper programs
administered by Funding. There are currently no borrowings outstanding under
either of the Facilities, nor were any borrowings outstanding as of March 31,
1997.
 
     ILFC increased the aggregate principal amount outstanding of its medium
term and term notes to $6.31 billion at March 31, 1997, a net increase of $258.6
million, and recorded a net decline in its capital lease obligations of $16.3
million and a net increase in its commercial paper of $608.8 million at that
date. At March 31, 1997, ILFC had $1.97 billion aggregate principal amount of
debt securities registered for issuance from time to time. The cash used to
purchase flight equipment, including progress payments during the construction
phase, is primarily derived from the proceeds of ILFC's debt financings. The
primary sources for the repayment of this debt and the interest expense thereon
are the cash flow from operations, proceeds from the sale of flight equipment
and the rollover of prior debt. (See also the discussions under "Operational
Review" and "Liquidity" herein.)
 
     During the first three months of 1997, AIG did not issue any medium term
notes and none of previously issued notes matured. At March 31, 1997, AIG had
$647.0 million aggregate principal amount of debt securities registered for
issuance from time to time.
 
     AIG's capital funds have increased $316.8 million in the first three months
of 1997. Unrealized appreciation of investments, net of taxes declined $329.8
million, primarily as a result of the effect of rising interest rates on the
market value of the bonds available for sale portfolio. During the first three
months of 1997, the cumulative translation adjustment loss, net of taxes,
increased $85.1 million and retained earnings increased $734.0 million,
resulting from net income less dividends.
 
     Through April 30, 1997, AIG repurchased in the open market 1.8 million
shares of its common stock at a cost of $209.5 million. AIG intends to continue
to buy its common shares in the open market from time to time and to satisfy its
obligations under various employee benefit plans through such purchases.
 
     Payments of dividends to AIG by its insurance subsidiaries are subject to
certain restrictions imposed by statutory authorities. AIG has in the past
reinvested most of its unrestricted earnings in its operations and believes such
continued reinvestment in the future will be adequate to meet any foreseeable
capital needs. However, AIG may choose from time to time to raise additional
funds through the issuance of additional securities. At March 31, 1997, there
were no significant statutory or regulatory issues which would impair AIG's
financial condition, results of operations or liquidity. (See also the
discussion under "Liquidity" herein.)
 
     In 1989, the National Association of Insurance Commissioners (NAIC) adopted
the "NAIC Solvency Policing Agenda for 1990". Included in this agenda was the
development of Risk-Based Capital (RBC) requirements. RBC relates an individual
insurance company's statutory surplus to the risk inherent in its overall
operations.
 
     At December 31, 1996, the adjusted capital of each of AIG's domestic
general companies and of each of AIG's domestic life companies exceeded each of
their RBC standards by considerable mar-
 
                                       16
<PAGE>   18
 
gins. There has been no significant change through
March 31, 1997.
 
     A substantial portion of AIG's general insurance business and a majority of
its life insurance business is carried on in foreign countries. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Generally, AIG, as well as the underwriting companies
operating in such jurisdictions, must satisfy local regulatory requirements.
 
     To AIG's knowledge, no AIG company is on any regulatory or similar "watch
list".
 
LIQUIDITY
 
At March 31, 1997, AIG's consolidated invested assets included approximately
$1.85 billion of cash and short-term investments. Consolidated net cash provided
from operating activities in the first three months of 1997 amounted to
approximately $591.9 million.
 
     Management believes that AIG's liquid assets, its net cash provided by
operations, and access to the capital markets will enable it to meet any
foreseeable cash requirements.
 
     AIG's liquidity is primarily derived from the operating cash flows of its
general and life insurance operations.
 
     The liquidity of the combined insurance operations is derived both
domestically and abroad. The combined insurance pre-tax operating cash flow is
derived from two sources, underwriting operations and investment operations. In
the aggregate, AIG's insurance operations generated approximately $1.2 billion
in pre-tax cash flow during the first three months of 1997. Cash flow includes
periodic premium collections, including policyholders' contract deposits, paid
loss recoveries less reinsurance premiums, losses, benefits, acquisition and
operating expenses. Generally, there is a time lag from when premiums are
collected and, when as a result of the occurrence of events specified in the
policy, the losses and benefits are paid. AIG's insurance investment operations
generated approximately $1.2 billion in investment income cash flow during the
first three months of 1997. Investment income cash flow is primarily derived
from interest and dividends received and includes realized capital gains.
 
     The combined insurance pre-tax operating cash flow coupled with the cash
and short-term investments of $1.5 billion provided the insurance operations
with a significant amount of liquidity during the first three months of 1997.
This liquidity is available to purchase high quality and diversified fixed
income securities and to a lesser extent marketable equity securities and to
provide mortgage loans on real estate, policy loans and collateral loans. With
this liquidity coupled with proceeds of approximately $4.25 billion from the
maturities, sales and redemptions of fixed income securities and from the sale
of marketable equity securities, AIG purchased approximately $5.07 billion of
fixed income securities and marketable equity securities during the first three
months of 1997.
 
     During the first three months of 1997, AIG received nearly $300 million
from redemptions of held to maturity municipal bonds. Prior to redemption, the
average yield on these bonds approximated 6.25 percent. The average yield on the
reinvestment of the proceeds in bonds with similar characteristics approximated
5.75 percent. AIG does not anticipate that these redemptions will have a
significant effect on AIG's general investment income, operations, financial
condition or liquidity.
 
                                       17
<PAGE>   19
 
          The following table is a summary of AIG's
invested assets by significant segment, including
investment income due and accrued and real
estate, at March 31, 1997 and December 31, 1996:
 
(dollars in thousands)
- --------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                        MARCH 31, 1997                            December 31, 1996
                                                   ------------------------                   ------------------------
                                                    INVESTED         PERCENT                   Invested         Percent
                                                     ASSETS          OF TOTAL                   Assets          of Total
   ------------------------------------------------------------------------------------------------------------------
<S>                                               <C>                <C>                     <C>                <C>
General insurance                                 $ 28,856,427          26.2%                $ 28,786,140          26.5%
Life insurance                                      38,726,543          35.1                   38,491,870          35.4
Financial services                                  41,990,333          38.1                   40,938,871          37.7
Other                                                  631,761           0.6                      401,248           0.4
- ------------------------------------------------------------------------------------------------------------------
Total                                             $110,205,064         100.0%                $108,618,129         100.0%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
 
     The following tables summarize the composition of AIG's insurance invested
assets by insurance segment, including investment income due and accrued and
real estate, at March 31, 1997 and December 31, 1996:
 
(dollars in thousands)
- --------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                                                                       PERCENT DISTRIBUTION
                                                                                          PERCENT       ------------------
             MARCH 31, 1997                 GENERAL          LIFE            TOTAL        OF TOTAL     DOMESTIC     FOREIGN
- ------------------------------------------------------------------------------------------------------------------
<S>                                       <C>             <C>             <C>             <C>          <C>          <C>
Fixed Maturities:
  Available for sale, at market value(a)  $ 9,693,695     $26,318,588     $36,012,283        53.3%        34.8%       65.2%
  Held to maturity, at amortized cost(b)   12,816,126              --      12,816,126        19.0        100.0          --
Equity securities, at market value(c)       3,141,497       2,819,949       5,961,446         8.8         32.5        67.5
Mortgage loans on real estate, policy
  and
  collateral loans                             47,105       6,090,128       6,137,233         9.1         41.2        58.8
Short-term investments, including time
  deposits, and cash                          592,357         871,826       1,464,183         2.2         17.2        82.8
Real estate                                   400,801         811,478       1,212,279         1.8         18.8        81.2
Investment income due and accrued             488,539         698,137       1,186,676         1.7         45.9        54.1
Other invested assets                       1,676,307       1,116,437       2,792,744         4.1         52.5        47.5
- ------------------------------------------------------------------------------------------------------------------
Total                                     $28,856,427     $38,726,543     $67,582,970       100.0%        47.8%       52.2%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
 
(a)Includes $628,606 of bonds trading securities, at market value.
(b)Includes $240,103 of preferred stock, at amortized cost.
(c)Includes $78,228 of preferred stock, at market value.
 
(dollars in thousands)
- --------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                                                                       Percent Distribution
                                                                                          Percent       ------------------
           December 31, 1996                General          Life            Total        of Total     Domestic     Foreign
- ------------------------------------------------------------------------------------------------------------------
<S>                                       <C>             <C>             <C>             <C>          <C>          <C>
Fixed Maturities:
  Available for sale, at market value(a)  $ 9,713,937     $26,058,027     $35,771,964        53.2%        34.6%       65.4%
  Held to maturity, at amortized cost(b)   12,736,225              --      12,736,225        18.9        100.0          --
Equity securities, at market value(c)       3,265,756       2,608,309       5,874,065         8.7         33.9        66.1
Mortgage loans on real estate, policy
  and
  collateral loans                             50,578       6,224,878       6,275,456         9.3         43.1        56.9
Short-term investments, including time
  deposits, and cash                          605,363       1,002,060       1,607,423         2.4         19.3        80.7
Real estate                                   409,808         843,933       1,253,741         1.9         18.2        81.8
Investment income due and accrued             493,338         697,891       1,191,229         1.8         44.4        55.6
Other invested assets                       1,511,135       1,056,772       2,567,907         3.8         51.6        48.4
- ------------------------------------------------------------------------------------------------------------------
Total                                     $28,786,140     $38,491,870     $67,278,010       100.0%        47.9%       52.1%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
 
(a)Includes $364,069 of bonds trading securities, at market value.
(b)Includes $477,247 of preferred stock, at amortized cost.
(c)Includes $46,732 of preferred stock, at market value.
 
                                       18
<PAGE>   20
 
     With respect to fixed maturities, AIG's general strategy is to invest in
high quality securities while maintaining diversification to avoid significant
exposure to issuer, industry and/or country concentrations.
 
     At March 31, 1997, approximately 52 percent of the fixed maturity
investments were domestic securities. Approximately 39 percent of such domestic
securities were rated AAA. Approximately six percent were below investment grade
or not rated.
 
     A significant portion of the foreign insurance fixed income portfolio is
rated by Moody's, Standard & Poor's (S&P) or similar foreign services. Similar
credit quality rating services are not available in all overseas locations. AIG
annually reviews the credit quality of the foreign portfolio nonrated fixed
income investments, including mortgages. At March 31, 1997, approximately 30
percent of the foreign fixed income investments were either rated AAA or, on the
basis of AIG's internal analysis were equivalent from a credit standpoint to
securities so rated. Less than three percent of these investments were deemed
below investment grade and approximately two percent were not rated at that
date.
 
     Although AIG's fixed income insurance portfolios contain only minor amounts
of securities below investment grade, any fixed income security may be subject
to downgrade for a variety of reasons subsequent to any balance sheet date.
There have been no significant downgrades as at May 1, 1997.
 
     At March 31, 1997, approximately 5 percent of the fixed maturities
portfolio was Collateralized Mortgage Obligations (CMOs). All of the CMOs were
investment grade and approximately 71 percent of the CMOs were backed by various
U.S. government agencies. Thus, credit risk was minimal. CMOs are exposed to
interest rate risk as the duration and ultimate realized yield would be affected
by the accelerated prepayments of the underlying mortgages. There were no
interest only or principal only CMOs.
 
     When permitted by regulatory authorities and when deemed necessary to
protect insurance assets, including invested assets, from currency risk and
interest rate risk, AIG and its insurance subsidiaries enter into derivative
transactions as end users. To date, such activities have been minor. (See also
the discussion under "Derivatives" herein.)
 
     Mortgage loans on real estate, policy and collateral loans comprised 9.1
percent of AIG's insurance invested assets at March 31, 1997. AIG's insurance
operations' holdings of real estate mortgages amounted to $2.44 billion of which
34.9 percent was domestic. At March 31, 1997, no domestic mortgages and only a
nominal amount of foreign mortgages were in default. At March 31, 1997, AIG's
insurance holdings of collateral loans amounted to $885.3 million, all of which
were foreign. It is AIG's practice to maintain a maximum loan to value ratio of
75 percent at loan origination. AIG's policy loans decreased from $3.00 billion
at December 31, 1996 to $2.81 billion at March 31, 1997, with most of this
decrease relating to the redemption of domestic corporate-owned life insurance
products.
 
     Short-term investments represent amounts invested in various internal and
external money market funds, time deposits and cash held.
 
     AIG's real estate investment properties are primarily occupied by AIG's
various operations. The current market value of these properties considerably
exceeds their carrying value.
 
     Other invested assets were primarily comprised of both foreign and domestic
private placements, limited partnerships and outside managed funds.
 
     In certain jurisdictions, significant regulatory and/or foreign
governmental barriers exist which may not permit the immediate free flow of
funds between insurance subsidiaries or from the insurance subsidiaries to AIG
parent. These barriers generally cause only minor delays in the outward
remittance of the funds.
 
                                       19
<PAGE>   21
 
     The following table is a summary of the composition of AIG's financial
services invested assets at March 31, 1997 and December 31, 1996. (See also the
discussions under "Operational Review," "Capital Resources" and "Derivatives"
herein.)
 
(dollars in thousands)
- --------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                                       1997                             1996
                                                             -----------------------          -----------------------
                                                             INVESTED         PERCENT         Invested         Percent
                                                              ASSETS          OF TOTAL         Assets          of Total
- -----------------------------------------------------------------------------------------------------------------
<S>                                                         <C>               <C>            <C>               <C>
Flight equipment primarily under operating leases, net of
  accumulated depreciation                                  $14,866,433          35.4%       $13,808,660          33.7%
Unrealized gain on interest rate and currency swaps,
  options and forward transactions                            6,582,574          15.7          6,906,012          16.9
Securities available for sale, at market value                9,382,348          22.3          9,785,909          23.9
Trading securities, at market value                           2,336,502           5.6          2,357,812           5.7
Securities purchased under agreements to resell, at
  contract value                                              1,738,520           4.1          1,642,591           4.0
Trading assets                                                4,472,130          10.7          3,793,433           9.3
Spot commodities, at market value                               450,832           1.1            204,705           0.5
Other, including short-term investments                       2,160,994           5.1          2,439,749           6.0
- -----------------------------------------------------------------------------------------------------------------
Total                                                       $41,990,333         100.0%       $40,938,871         100.0%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
 
     As previously discussed, the cash used for the purchase of flight equipment
is derived primarily from the proceeds of ILFC's debt financing. The primary
sources for the repayment of this debt and the interest expense thereon are the
cash flow from operations, proceeds from the sale of flight equipment and the
rollover of prior debt. During the first three months of 1997, ILFC acquired
flight equipment costing $1.23 billion.
 
     AIGFP's derivative transactions are carried at market value or at estimated
fair value when market prices are not readily available. AIGFP reduces its
economic risk exposure through similarly valued offsetting transactions
including swaps, trading securities, options, forwards and futures. The
estimated fair values of these transactions represent assessments of the present
value of expected future cash flows. These transactions are exposed to liquidity
risk if AIGFP were to sell or close out the transactions prior to maturity. AIG
believes that the impact of any such limited liquidity would not be significant
to AIG's financial condition or its overall liquidity. (See also the discussion
under "Derivatives" herein.)
 
     Securities available for sale, at market value and securities purchased
under agreements to resell are purchased with the proceeds of AIGFP's GIA
financings and other long and short-term borrowings. The proceeds from the
disposal of securities available for sale and securities purchased under
agreements to resell have been used to fund the maturing GIAs or other AIGFP
financing. (See also the discussion under "Capital Resources" herein.)
 
     Securities available for sale is mainly a portfolio of debt securities,
where the individual securities have varying degrees of credit risk. At March
31, 1997, the average credit rating of this portfolio was AA or the equivalent
thereto as determined through rating agencies or internal review. At that date,
AIGFP has also entered into credit derivative transactions to hedge its credit
risk associated with $2.14 billion of these securities. There were no securities
deemed below investment grade. There have been no significant downgrades through
May 1, 1997. Securities purchased under agreements to resell are treated as
collateralized transactions. AIGFP takes possession of or obtains a security
interest in securities purchased under agreements to resell. AIGFP further
minimizes its credit risk by monitoring counterparty credit exposure and, when
AIGFP deems necessary, it requires additional collateral to be deposited.
Trading securities, at market value are marked to market daily and are held to
meet the short-term risk management objectives of AIGFP.
 
     AIGTG conducts, as principal, market making and trading activities in
foreign exchange, interest rates, precious and base metals and natural gas and
other energy products. AIGTG owns inventories in the commodities in which it
trades and may reduce the exposure to market risk through the use of swaps,
forwards, futures and option contracts. AIGTG uses derivatives to manage the
economic exposure of its various trading positions and transactions from adverse
movements of interest rates, exchange rates and commodity prices. AIGTG supports
its trading activities largely through trading liabilities, unrealized losses on
swaps, short-term borrowings and spot commodities sold but not yet purchased.
(See also the discussions under "Capital Resources" and "Derivatives" herein.)
 
                                       20
<PAGE>   22
 
DERIVATIVES
 
Derivatives are financial arrangements among two or more parties whose returns
are linked to or "derived" from some underlying equity, debt, commodity or other
asset, liability, or index. Derivatives payments may be based on interest rates
and exchange rates and/or prices of certain securities, certain commodities, or
financial or commodity indices. The more significant types of derivative
arrangements in which AIG transacts are swaps, forwards, futures, options and
related instruments.
 
     The most commonly used swaps are interest rate and currency swaps. An
interest rate swap is a contract between two parties to exchange interest rate
payments (typically a fixed interest rate versus a variable interest rate)
calculated on a notional principal amount for a specified period of time. The
notional amount is not exchanged. A currency swap is similar but the notional
amounts are different currencies which are typically exchanged at the
commencement and termination of the swap based upon negotiated exchange rates.
 
     A futures or forward contract is a legal contract between two parties to
purchase or sell at a specified future date a specified quantity of a commodity,
security, currency, financial index or other instrument, at a specified price. A
futures contract is traded on an exchange, while a forward contract is executed
over the counter.
 
     An option contract generally provides the option purchaser with the right
but not the obligation to buy or sell during a period of time or at a specified
date the underlying instrument at a set price. The option writer is obligated to
sell or buy the underlying item if the option purchaser chooses to exercise his
right. The option writer receives a nonrefundable fee or premium paid by the
option purchaser.
 
     Derivatives are generally either negotiated over the counter contracts or
standardized contracts executed on an exchange. Standardized exchange traded
derivatives include futures and options which can be readily bought or sold over
recognized security or commodity exchanges and settled daily through such
clearing houses. Negotiated over the counter derivatives include forwards, swaps
and options. Over the counter derivatives are generally not traded like exchange
traded securities. However, in the normal course of business, with the agreement
of the original counterparty, these contracts may be terminated early or
assigned to another counterparty.
 
     All significant derivatives activities are conducted through AIGFP and
AIGTG permitting AIG to participate in the derivatives dealer market acting
primarily as principal. In these derivative operations, AIG structures
agreements which generally allow its counterparties to enter into transactions
with respect to changes in interest and exchange rates, securities' prices and
certain commodities and financial or commodity indices. Generally, derivatives
are used by AIG's customers such as corporations, financial institutions,
multinational organizations, sovereign entities, government agencies and
municipalities. For example, a futures, forward or option contract can be used
to protect the customers' assets or liabilities against price fluctuations.
 
     The senior management of AIG defines the policies and establishes general
operating parameters for AIGFP and AIGTG. AIG's senior management has
established various oversight committees to review the various financial market,
operational and credit issues of AIGFP and AIGTG. The senior managements of
AIGFP and AIGTG report the results of their respective operations to and review
future strategies with AIG's senior management.
 
     AIG actively manages the exposures to limit potential losses, while
maximizing the rewards afforded by these business opportunities. In doing so,
AIG must manage a variety of exposures including credit, market, liquidity,
operational and legal risks.
 
     Market risk principally arises from the uncertainty that future earnings
are exposed to potential changes in volatility, interest rates, foreign exchange
rates, and equity and commodity prices. AIG generally controls its exposure to
market risk by taking offsetting positions. AIG's philosophy with respect to its
financial services operations is to minimize or set limits for open or uncovered
positions that are to be carried. Credit risk exposure is separately managed.
(See the discussion on the management of credit risk below.)
 
     AIG's Market Risk Management Department provides detailed independent
review of AIG's market exposures, particularly those market exposures of AIGFP
and AIGTG. This department determines whether AIG's market risks, as well as
those market risks of individual subsidiaries, are within
 
                                       21
<PAGE>   23
 
the parameters established by AIG's senior management. Well established market
risk management techniques such as value at risk and scenario analysis are used.
Additionally, this department verifies that specific market risks of each of
certain subsidiaries are managed and hedged by that subsidiary.
 
     AIGFP does not seek to manage the market risk of each of its transactions
through an individual offsetting transaction. Rather, AIGFP takes a portfolio
approach to the management of its market risk exposure. AIGFP values its
portfolio at market value or estimated fair value when market values are not
readily available. These valuations represent an assessment of the present
values of expected future cash flows of AIGFP's transactions and may include
reserves for such risks as are deemed appropriate by AIGFP's and AIG's
management. AIGFP evaluates the portfolio's discounted cash flows with reference
to current market conditions, maturities within the portfolio and other relevant
factors. Based upon this evaluation, AIGFP determines what, if any, offsetting
transactions are necessary to reduce the market risk exposure of the portfolio.
 
     The aforementioned estimated fair values are based upon the use of
valuation models. These models utilize, among other things, current interest,
foreign exchange and volatility rates. These valuation models are integrated
into the evaluation of the portfolio, as described above, in order to provide
timely information for the market risk management of the portfolio.
 
     Additionally, depending upon the nature of interest rates and market
movements during the day, the system will produce reports for management's
consideration for intra-day offsetting positions. Overnight, the system
generates reports which recommend the types of offsets management should
consider for the following day. Additionally, AIGFP operates in major business
centers overseas and is essentially open for business 24 hours a day. Thus, the
market exposure and offset strategies are monitored, reviewed and coordinated
around the clock. Therefore, offsetting adjustments can be made as and when
necessary from any AIGFP office in the world.
 
     As part of its monitoring and controlling of its exposure to market risk,
AIGFP applies various testing techniques which reflect potential market
movements. These techniques vary by currency and are regularly changed to
reflect factors affecting the derivatives portfolio. In addition to the daily
monitoring, AIGFP's senior management and local risk managers conduct a weekly
review of the derivatives portfolio and existing hedges. This review includes an
examination of the portfolio's risk measures, such as aggregate option
sensitivity to movements in market variables. AIGFP's management may change
these measures to reflect their judgment and evaluation of the dynamics of the
markets. This management group will also determine whether additional or
alternative action is required in order to manage the portfolio. AIG utilizes an
outside consultant to provide the managements of AIG and AIGFP with comfort that
the system produces representative values.
 
     AIGTG's approach to managing market risk is to establish an appropriate
offsetting position to a particular transaction or group of transactions
depending upon the extent of market risk AIGTG wishes to reduce.
 
     AIGTG's senior management has established positions and stop-loss limits
for each line of business. AIGTG's traders are required to maintain positions
within these limits. These positions are monitored during the day either
manually and/or through on-line computer systems. In addition, these positions
are reviewed by AIGTG's management. Reports which present each trading book's
position and the prior day's profit and loss are reviewed by traders, head
traders and AIGTG's senior management. Based upon these and other reports,
AIGTG's senior management determines whether to adjust AIGTG's risk profile.
 
     AIGTG attempts to secure reliable current market prices, such as published
prices or third party quotes, to value its derivatives. Where such prices are
not available, AIGTG uses an internal methodology which includes interpolation
or extrapolation from verifiable prices nearest to the dates of the
transactions. The methodology may reflect interest and exchange rates, commodity
prices, volatility rates and other relevant factors.
 
     A significant portion of AIGTG's business is transacted in liquid markets.
Certain of AIGTG's derivative product exposures are evaluated using simulation
techniques which consider such factors as changes in currency and commodity
prices, interest rates, volatility levels and the effect of time. Though not
indicative of the future, past volatile market scenarios have represented profit
opportunities for AIGTG.
 
                                       22
<PAGE>   24
 
     The gross unrealized gains and gross unrealized losses of AIGFP and AIGTG
included in the financial services assets and liabilities at March 31, 1997 were
as follows:
 
(in thousands)
- ------------------------------------------------------
 
<TABLE>
<CAPTION>
                     GROSS          GROSS         BALANCE
                   UNREALIZED     UNREALIZED       SHEET
                     GAINS          LOSSES         AMOUNT
- ------------------------------------------------------
<S>                <C>            <C>            <C>
Securities
  available for
  sale, at market
  value            $  222,374     $  213,235     $9,382,348
Unrealized
  gain/loss on
  interest rate
  and currency
  swaps, options
  and forward
transactions(a)(b)  6,582,574      4,798,120             --
Trading
  securities, at
  market value             --             --      2,336,502
Trading assets      6,318,568      4,090,739      4,472,130
Spot commodities,
  at market value          --          2,284        450,832
Trading
  liabilities              --      2,787,620      4,089,060
Securities and
  spot commodities
  sold but not yet
  purchased, at
  market value         93,420             --      1,809,125
- ------------------------------------------------------
</TABLE>
 
(a)These amounts are also presented as the respective balance sheet amounts.
(b)At March 31, 1997, AIGTG's net replacement values with respect to interest
   rate and currency swaps were $533.2 million.
 
     The interest rate risk on securities available for sale, at market, is
managed by taking offsetting positions on a security by security basis, thereby
offsetting a significant portion of the unrealized appreciation or depreciation.
At March 31, 1997, the unrealized gains and losses remaining after benefit of
the offsets were $12.7 million and $3.6 million, respectively.
 
     AIGFP carries its derivatives at market or estimated fair value, whichever
is appropriate. Because of limited liquidity of certain of these instruments,
the recorded estimated fair values of these derivatives may be different than
the values that might be realized if AIGFP were to sell or close out the
transactions prior to maturity. (See also the discussions under "Operational
Review: Financial Services" and "Liquidity" herein.)
 
     Trading securities, at market value, and securities and spot commodities
sold but not yet purchased, at market value are marked to market daily with the
unrealized gain or loss being recognized in income at that time. These
securities are held to meet the short-term risk management objectives of AIGFP
and AIGTG.
 
     AIGTG conducts, as principal, market making and trading activities in
foreign exchange, interest rates, precious and base metals and natural gas and
other energy products. AIGTG owns inventories in the commodities in which it
trades. These inventories are carried at market and may be substantially hedged.
AIGTG uses derivatives to manage the economic exposure of its various trading
positions and transactions from adverse movements in interest rates, exchange
rates and commodity prices. (See also the discussions under "Operational Review:
Financial Services" and "Liquidity" herein.)
 
     A counterparty may default on any obligation to AIG, including a derivative
contract. Credit risk is a consequence of extending credit and/or carrying
trading and investment positions. Credit risk exists for a derivative contract
when that contract has an estimated positive fair value. To help manage this
risk, the credit departments of AIGFP and AIGTG operate within the guidelines of
the AIG Credit Risk Committee, which sets credit policy and limits for
counterparties and provides limits for derivative transactions with
counterparties having different credit ratings. In addition to credit ratings,
this committee takes into account other factors, including the industry and
country of the counterparty. Transactions which fall outside these
pre-established guidelines require the approval of the AIG Credit Risk
Committee. It is also AIG's policy to establish reserves for potential credit
impairment when necessary.
 
     AIGFP and AIGTG determine the credit quality of each of their
counterparties taking into account credit ratings assigned by recognized
statistical rating organizations. If it is determined that a counterparty
requires credit enhancement, then one or more enhancement techniques will be
used. Examples of such enhancement techniques include letters of credit,
guarantees, collateral credit triggers and credit derivatives and margin
agreements.
 
     A significant majority of AIGFP's transactions are contracted and
documented under ISDA Master Agreements that provide for legally enforceable
set-off and close out netting of exposures in the event of default. Under such
agreements, in connection with the early termination of a transaction, AIGFP is
permitted to set-off its receivables from a counterparty against AIGFP's
payables to that same counterparty arising out of all included trans-
 
                                       23
<PAGE>   25
 
actions. Excluding regulated exchange transactions, AIGTG, whenever possible,
enters into netting agreements with its counterparties which are similar in
effect to those discussed above.
 
     The following tables provide the notional and contractual amounts of
AIGFP's and AIGTG's derivatives portfolio at March 31, 1997 and December 31,
1996.
 
     The notional amounts used to express the extent of AIGFP's and AIGTG's
involvement in swap transactions represent a standard of measurement of the
volume of AIGFP's and AIGTG's swaps business. Notional amount is not a
quantification of market risk or credit risk and it may not necessarily be
recorded on the balance sheet. Notional amounts represent those amounts used to
calculate contractual cash flows to be exchanged and are not paid or received,
except for certain contracts such as currency swaps.
 
     The timing and the amount of cash flows relating to AIGFP's and AIGTG's
foreign exchange forwards and exchange traded futures and options contracts are
determined by each of the respective contractual agreements.
 
     The net replacement value most closely represents the net credit risk to
AIGFP or the maximum amount exposed to potential loss after the application of
the aforementioned strategies, ISDA Master Agreements and collateral held.
 
     The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at March 31, 1997 and December 31, 1996:
 
(in thousands)
- --------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                        REMAINING LIFE
                                     ---------------------------------------------------
                                       ONE        TWO THROUGH    SIX THROUGH     AFTER TEN        TOTAL           TOTAL
                                      YEAR        FIVE YEARS      TEN YEARS        YEARS           1997            1996
- ------------------------------------------------------------------------------------------------------------------
<S>                                <C>            <C>            <C>            <C>            <C>             <C>
Interest rate, currency and
  equity/commodity swaps and swaptions:
Notional amount:
  Interest rate swaps              $47,798,200    $68,299,400    $40,593,000    $10,026,550    $166,717,150    $165,771,800
  Currency swaps                    12,234,600    16,587,500      9,112,200       4,045,200      41,979,500      39,182,900
  Equity/commodity swaps                    --        21,000             --          50,000          71,000         103,600
  Swaptions                            569,540     1,913,360      1,760,750         466,720       4,710,370       5,617,700
- ------------------------------------------------------------------------------------------------------------------
Total                              $60,602,340    $86,821,260    $51,465,950    $14,588,470    $213,478,020    $210,676,000
- ------------------------------------------------------------------------------------------------------------------
Futures and forward contracts:
Exchange traded futures
  contracts
  contractual amount               $ 3,620,236            --             --              --    $  3,620,236    $  6,867,300
- ------------------------------------------------------------------------------------------------------------------
Over the counter forward
  contracts
  contractual amount               $ 7,794,010            --             --              --    $  7,794,010    $  5,952,200
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
 
                                       24
<PAGE>   26
 
     AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At March 31, 1997 and December
31, 1996, the counterparty credit quality by derivative product with respect to
the net replacement value of AIGFP's derivatives portfolio was as follows:
 
(in thousands)
- --------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                                   NET REPLACEMENT VALUE
                                                               -----------------------------
                                                              SWAPS AND         FUTURES AND        TOTAL         Total
                                                              SWAPTIONS      FORWARD CONTRACTS      1997          1996
- ------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>            <C>                 <C>           <C>
Counterparty credit quality:
  AAA                                                         $1,460,340          $    --        $1,460,340    $1,732,315
  AA                                                          2,194,916            14,423         2,209,339     2,021,878
  A                                                           1,235,413            21,468         1,256,881     1,461,063
  BBB                                                         1,047,794                --         1,047,794     1,150,420
  Below investment grade                                         16,590                --            16,590        26,293
- ------------------------------------------------------------------------------------------------------------------
Total                                                         $5,955,053          $35,891        $5,990,944    $6,391,969
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
 
     At March 31, 1997 and December 31, 1996, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:
 
(in thousands)
- --------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                                   NET REPLACEMENT VALUE
                                                               -----------------------------
                                                              SWAPS AND         FUTURES AND        TOTAL         Total
                                                              SWAPTIONS      FORWARD CONTRACTS      1997          1996
- ------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>            <C>                 <C>           <C>
Non-U.S. banks                                                $2,501,231          $31,234        $2,532,465    $2,330,481
Insured municipalities                                          493,612                --           493,612       656,373
U.S. industrials                                                723,369                --           723,369       894,942
Governmental                                                    703,323             3,226           706,549       894,284
Non-U.S. financial service companies                             36,203                --            36,203        34,383
Non-U.S. industrials                                            448,832             1,431           450,263       497,839
Special purpose                                                 132,818                --           132,818       121,137
U.S. banks                                                      220,085                --           220,085       251,641
U.S. financial service companies                                532,937                --           532,937       534,965
Supranationals                                                  162,643                --           162,643       175,924
- ------------------------------------------------------------------------------------------------------------------
Total                                                         $5,955,053          $35,891        $5,990,944    $6,391,969
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
 
     The following tables provide the contractual and notional amounts of
AIGTG's derivatives portfolio at March 31, 1997 and December 31, 1996. In
addition, the estimated positive fair values associated with the derivatives
portfolio are also provided and include a maturity profile for the March 31,
1997 balances based upon the expected timing of the future cash flows.
 
     The gross replacement values presented represent the sum of the estimated
positive fair values of all of AIGTG's derivatives contracts at March 31, 1997
and December 31, 1996. These values do not represent the credit risk to AIGTG.
 
     Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
closeout netting agreements and collateral held. The net replacement values most
closely represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss.
 
                                       25
<PAGE>   27
 
     The following tables present AIGTG's derivatives portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative at
March 31, 1997 and December 31, 1996:
 
(in thousands)
- --------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                        REMAINING LIFE
                                      --------------------------------------------------
                                        ONE         TWO THROUGH    SIX THROUGH    AFTER TEN       TOTAL           TOTAL
                                        YEAR        FIVE YEARS      TEN YEARS       YEARS          1997            1996
- ------------------------------------------------------------------------------------------------------------------
<S>                                 <C>             <C>            <C>            <C>          <C>             <C>
CONTRACTUAL AMOUNT OF FUTURES,
  FORWARDS AND OPTIONS:
  Exchange traded futures and
    options                         $ 14,558,783    $1,999,448     $   73,641     $     --     $ 16,631,872    $ 17,004,692
- ------------------------------------------------------------------------------------------------------------------
  Forwards                          $220,537,544    $11,134,052    $1,267,185     $  2,862     $232,941,643    $216,775,766
- ------------------------------------------------------------------------------------------------------------------
  Over the counter purchased
    options                         $ 31,721,238    $5,837,205     $1,334,688     $     --     $ 38,893,131    $ 27,377,217
- ------------------------------------------------------------------------------------------------------------------
  Over the counter sold options(a)  $ 33,001,801    $6,352,071     $1,146,927     $     --     $ 40,500,799    $ 31,049,529
- ------------------------------------------------------------------------------------------------------------------
Notional amount:
  Interest rate swaps and forward
    rate agreements                 $ 52,925,645    $10,083,285    $1,394,437     $125,342     $ 64,528,709    $ 66,306,480
  Currency swaps                       1,074,248     2,921,261      1,201,834      363,897        5,561,240       5,853,194
- ------------------------------------------------------------------------------------------------------------------
Total                               $ 53,999,893    $13,004,546    $2,596,271     $489,239     $ 70,089,949    $ 72,159,674
- ------------------------------------------------------------------------------------------------------------------
Credit Exposure:
  Futures, forwards and purchased
    options contracts and interest
    rate and currency swaps:
      Gross replacement value       $  6,377,897    $1,244,244     $  364,772     $ 59,322     $  8,046,235    $  7,489,766
      Master netting arrangements     (3,526,252)     (495,208)      (126,754)     (18,271)      (4,166,485)     (3,872,291)
      Collateral                         (61,175)      (38,340)        (9,001)          --         (108,516)       (149,347)
- ------------------------------------------------------------------------------------------------------------------
Net replacement value (b)           $  2,790,470    $  710,696     $  229,017     $ 41,051     $  3,771,234    $  3,468,128
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
 
(a) Sold options obligate AIGTG to buy or sell the underlying item if the option
    purchaser chooses to exercise. The amounts do not represent credit
    exposures.
 
(b) The net replacement values with respect to futures and forward contracts and
    purchased options are presented as a component of trading assets in the
    accompanying balance sheet. The net replacement values with respect to
    interest rate and currency swaps are presented as a component of unrealized
    gain on interest rate and currency swaps, options and forward transactions
    in the accompanying balance sheet.
 
                                       26
<PAGE>   28
 
     AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At March 31, 1997 and December
31, 1996, the counterparty credit quality and counterparty breakdown by industry
with respect to the net replacement value of AIGTG's derivatives portfolio was
as follows:
 
(in thousands)
- --------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                                                           NET REPLACEMENT VALUE
                                                                                        ---------------------------
                                                                                          1997              1996
- ------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>               <C>
Counterparty credit quality:
    AAA                                                                                 $ 513,611         $ 447,236
    AA                                                                                  1,244,386         1,075,713
    A                                                                                   1,210,315         1,133,332
    BBB                                                                                   429,279           518,485
    Below investment grade                                                                101,177           115,810
    Not externally rated, including exchange traded futures and options*                  272,466           177,552
- ------------------------------------------------------------------------------------------------------------------
        Total                                                                           $3,771,234        $3,468,128
- ------------------------------------------------------------------------------------------------------------------
Counterparty breakdown by industry:
    Non-U.S. banks                                                                      $1,485,020        $1,269,399
    U.S. industrials                                                                      629,398           761,634
    Governmental                                                                          134,835           121,278
    Non-U.S. financial service companies                                                  278,314           186,476
    Non-U.S. industrials                                                                  155,425           192,669
    U.S. banks                                                                            339,655           309,154
    U.S. financial service companies                                                      476,121           449,966
    Exchanges*                                                                            272,466           177,552
- ------------------------------------------------------------------------------------------------------------------
        Total                                                                           $3,771,234        $3,468,128
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
 
* Exchange traded futures and options are not deemed to have significant credit
  exposure as the exchanges guarantee that every contract will be properly
  settled on a daily basis.
 
     Generally, AIG manages and operates its businesses in the currencies of the
local operating environment. Thus, exchange gains or losses occur when AIG's
foreign currency net investment is affected by changes in the foreign exchange
rates relative to the U.S. dollar from one reporting period to the next.
 
     As an end user, AIG and its subsidiaries, including its insurance
subsidiaries, use derivatives to aid in managing AIG's foreign exchange
translation exposure. Derivatives may also be used to minimize certain exposures
with respect to AIG's debt financing and insurance investment operations; to
date, such activities have been minor.
 
     AIG, through its Foreign Exchange Operating Committee, evaluates its
worldwide consolidated net asset or liability positions and manages AIG's
translation exposure to adverse movement in currency exchange rates. AIG may use
forward exchange contracts and purchase options where the cost of such is
reasonable and markets are liquid to reduce these exchange translation
exposures. The exchange gain or loss with respect to these hedging instruments
is recorded on an accrual basis as a component of the cumulative translation
adjustment account in capital funds. AIG's largest currency net investments have
had historically stable exchange rates with respect to the U.S. dollar.
 
     Management of AIG's liquidity profile is designed to ensure that even under
adverse conditions AIG is able to raise funds at the most economical cost to
fund maturing liabilities and capital and liquidity requirements of its
subsidiaries. Sources of funds considered in meeting these objectives include
guaranteed investment agreements, issuance of long and short-term debt,
maturities and sales of securities available for sale, securities sold under
repurchase agreements, trading liabilities, securities and spot commodities
sold, not yet purchased, issuance of equity, and cash provided from operations.
AIG's strong capital position is integral to managing liquidity, as it enables
AIG to raise funds in diverse markets worldwide. (See also the discussions under
"Capital Resources" and "Liquidity" herein.)
 
     Legal risk arises from the uncertainty of the enforceability, through legal
or judicial processes, of the obligations of AIG's clients and counterparties,
including contractual provisions intended to reduce credit exposure by providing
for the netting of mutual obligations. (See also the discussion on master
netting agreements above.) AIG seeks to eliminate or minimize such uncertainty
through continuous consultation with internal and external
 
                                       27
<PAGE>   29
 
legal advisors, both domestically and abroad, in order to understand the nature
of legal risk, to improve documentation and to strengthen transaction structure.
 
     Over the counter derivatives are not transacted in an exchange traded
environment. The futures exchanges maintain considerable financial requirements
and surveillance to ensure the integrity of exchange traded futures and options.
 
                                       28
<PAGE>   30
 
PART II -- OTHER INFORMATION
 
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
 
     (a)  Exhibits
        See accompanying Exhibit Index.
 
     (b)  There have been no reports on Form 8-K filed during the quarter ended
        March 31, 1997.
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
                                            AMERICAN INTERNATIONAL GROUP, INC.
 
                                          --------------------------------------
                                                       (Registrant)
 
                                                 s/s HOWARD I. SMITH
 
                                          --------------------------------------
                                                     Howard I. Smith
                                             Executive Vice President, Chief
                                            Financial Officer and Comptroller
 
Dated: May 13, 1997
 
                                       29
<PAGE>   31
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                               DESCRIPTION                                    LOCATION
- -------   -----------------------------------------------------------------    ------------------
<C>       <S>                                                                  <C>
    2     Plan of acquisition, reorganization, arrangement, liquidation or
          succession.......................................................    None
    4     Instruments defining the rights of security holders, including
          indentures.......................................................    Not required to be
                                                                               filed.
   10     Material contracts...............................................    None
   11     Statement re computation of per share earnings...................    Filed herewith.
   12     Statement re computation of ratios...............................    Filed herewith.
   15     Letter re unaudited interim financial information................    None
   18     Letter re change in accounting principles........................    None
   19     Report furnished to security holders.............................    None
   22     Published report regarding matters submitted to vote of security
          holders..........................................................    None
   23     Consents of experts and counsel..................................    None
   24     Power of attorney................................................    None
   27     Financial Data Schedule..........................................    Provided herewith.
   99     Additional exhibits..............................................    None
</TABLE>
 
                                       30

<PAGE>   1
 
                                                                      EXHIBIT 11
 
                       AMERICAN INTERNATIONAL GROUP, INC.
 
                       COMPUTATION OF EARNINGS PER SHARE
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                         THREE MONTHS ENDED
                                                                              MARCH 31,
                                                                       -----------------------
                                                                         1997           1996
                                                                       --------       --------
<S>                                                                    <C>            <C>
Average outstanding shares used in the computation of per share
  earnings:
  Common stock*......................................................   506,084        506,084
  Common stock in treasury*..........................................   (36,578)       (32,114)
                                                                       --------       --------
                                                                        469,506        473,970
                                                                       ========       ========
Net income applicable to common stock................................  $780,935       $671,218
                                                                       ========       ========
Net income per share.................................................     $1.66          $1.42
                                                                       ========       ========
</TABLE>
 
- ---------------
 
* The effects of all other common stock equivalents are not significant.

<PAGE>   1
 
                                                                      EXHIBIT 12
 
                       AMERICAN INTERNATIONAL GROUP, INC.
 
               COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
                         (IN THOUSANDS, EXCEPT RATIOS)
 
<TABLE>
<CAPTION>
                                                                          THREE MONTHS ENDED
                                                                              MARCH 31,
                                                                       ------------------------
                                                                          1997          1996
                                                                       ----------    ----------
<S>                                                                    <C>           <C>
Income before income taxes...........................................  $1,096,276    $  917,755
Less -- Equity income of less than 50% owned persons.................      25,193        26,244
Add -- Dividends from less than 50% owned persons....................       3,461         2,585
                                                                       ----------    ----------
                                                                        1,074,544       894,096
 
Add --
  Fixed charges......................................................     449,951       361,902
Less --
  Capitalized interest...............................................      11,851        11,920
                                                                       ----------    ----------
Income before income taxes and fixed charges.........................  $1,512,644    $1,244,078
                                                                        =========     =========
Fixed charges:
  Interest costs.....................................................  $  431,400    $  343,271
  Rent expense *.....................................................      18,551        18,631
                                                                       ----------    ----------
     Total fixed charges.............................................  $  449,951    $  361,902
                                                                        =========     =========
Ratio of earnings to fixed charges...................................        3.36          3.44
</TABLE>
 
- ---------------
 
* The proportion deemed representative of the interest factor.
 
     The ratio shown is significantly affected as a result of the inclusion of
the fixed charges and operating results of AIG Financial Products Corp. and its
subsidiaries (AIGFP). AIGFP structures borrowings through guaranteed investment
agreements and engages in other complex financial transactions, including
interest rate and currency swaps. In the course of its business, AIGFP enters
into borrowings that are primarily used to purchase assets that yield rates
greater than the rates on the borrowings with the intent of earning a profit on
the spread and to finance the acquisition of securities utilized to hedge
certain transactions. The pro forma ratios of earnings to fixed charges, which
exclude the effects of the operating results of AIGFP, are 5.43 and 5.12 for
1997 and 1996, respectively. As AIGFP will continue to be a subsidiary, AIG
expects that these ratios will continue to be lower than they would be if the
fixed charges and operating results of AIGFP were not included therein.

<TABLE> <S> <C>

<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
       
<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               MAR-31-1997
<EXCHANGE-RATE>                                      1
<DEBT-HELD-FOR-SALE>                        35,498,739
<DEBT-CARRYING-VALUE>                       12,576,023
<DEBT-MARKET-VALUE>                         12,967,464
<EQUITIES>                                   6,152,795
<MORTGAGE>                                   2,869,230
<REAL-ESTATE>                                1,328,259
<TOTAL-INVEST>                             107,604,143
<CASH>                                          77,258
<RECOVER-REINSURE>                          16,810,236
<DEFERRED-ACQUISITION>                       6,631,134
<TOTAL-ASSETS>                             151,149,414
<POLICY-LOSSES>                             58,253,083
<UNEARNED-PREMIUMS>                          7,912,707
<POLICY-OTHER>                                       0
<POLICY-HOLDER-FUNDS>                       12,050,316
<NOTES-PAYABLE>                             18,683,109
                                0
                                          0
<COMMON>                                     1,265,210
<OTHER-SE>                                  21,095,837
<TOTAL-LIABILITY-AND-EQUITY>               151,149,414
                                   5,295,153
<INVESTMENT-INCOME>                          1,130,413
<INVESTMENT-GAINS>                              50,389
<OTHER-INCOME>                                 (18,419)
<BENEFITS>                                   4,365,663
<UNDERWRITING-AMORTIZATION>                    438,044
<UNDERWRITING-OTHER>                           705,974
<INCOME-PRETAX>                              1,096,276
<INCOME-TAX>                                   315,341
<INCOME-CONTINUING>                            780,935
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   780,935
<EPS-PRIMARY>                                     1.66
<EPS-DILUTED>                                     1.66
<RESERVE-OPEN>                              20,407,300
<PROVISION-CURRENT>                          2,303,600
<PROVISION-PRIOR>                                    0
<PAYMENTS-CURRENT>                             770,700
<PAYMENTS-PRIOR>                             1,356,400
<RESERVE-CLOSE>                             20,583,800
<CUMULATIVE-DEFICIENCY>                              0
        

</TABLE>


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