<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 JUNE 30, 1998 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 June 30, 1998: 700,001,267. (Adjusting on a pro forma basis,
common shares outstanding would have been 1,050,001,900 after reflecting a
common stock split in the form of a 50 percent common stock dividend paid July
31, 1998.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Investments and cash:
Fixed maturities:
Bonds available for sale, at market value (amortized
cost: 1998 -- $38,437,198; 1997 -- $36,568,360)... $ 39,998,093 $ 38,077,792
Bonds held to maturity, at amortized cost (market
value: 1998 -- $12,686,092;
1997 -- $13,365,703).............................. 11,991,025 12,530,315
Bonds trading securities, at market value (cost:
1998 -- $773,585; 1997 -- $699,614)............... 791,507 718,548
Preferred stocks, at amortized cost (market value:
1998 -- $572,290; 1997 -- $530,705)............... 232,218 239,331
Equity securities:
Common stocks (cost: 1998 -- $4,461,662;
1997 -- $4,625,433)............................... 5,108,222 5,209,274
Non-redeemable preferred stocks (cost:
1998 -- $220,124; 1997 -- $138,412)............... 227,558 138,745
Mortgage loans on real estate, policy and collateral
loans -- net......................................... 8,278,255 7,919,764
Financial services assets:
Flight equipment primarily under operating leases,
net of accumulated depreciation
(1998 -- $1,857,230; 1997 -- $1,657,313).......... 16,035,894 14,438,074
Securities available for sale, at market value (cost:
1998 -- $7,681,350; 1997 -- $9,145,244)........... 7,686,970 9,145,317
Trading securities, at market value.................. 5,875,223 3,974,561
Spot commodities, at market value.................... 365,608 459,517
Unrealized gain on interest rate and currency swaps,
options and forward transactions.................. 8,060,799 7,422,290
Trading assets....................................... 6,497,672 6,715,486
Securities purchased under agreements to resell,
at contract value................................. 7,690,933 4,551,191
Other invested assets.................................. 5,797,925 4,681,423
Short-term investments, at cost (approximates market
value)............................................... 3,772,939 3,332,542
Cash................................................... 162,854 86,917
------------ ------------
Total investments and cash...................... 128,573,695 119,641,087
Investment income due and accrued......................... 1,613,057 1,368,404
Premiums and insurance balances receivable -- net......... 11,512,725 10,282,987
Reinsurance assets........................................ 16,134,201 16,110,521
Deferred policy acquisition costs......................... 6,801,252 6,592,506
Investments in partially-owned companies.................. 1,141,286 1,121,173
Real estate and other fixed assets, net of accumulated
depreciation (1998 -- $1,565,904;
1997 -- $1,512,617).................................... 2,333,692 2,342,187
Separate and variable accounts............................ 5,063,969 3,993,971
Other assets.............................................. 2,929,344 2,517,851
------------ ------------
Total assets.................................... $176,103,221 $163,970,687
============ ============
</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>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES:
Reserve for losses and loss expenses...................... $ 33,913,832 $ 33,400,160
Reserve for unearned premiums............................. 9,204,004 8,739,006
Future policy benefits for life and accident and health
insurance contracts.................................... 25,869,309 24,502,005
Policyholders' contract deposits.......................... 11,168,502 10,323,112
Other policyholders' funds................................ 2,336,715 2,352,514
Reserve for commissions, expenses and taxes............... 2,097,075 1,739,945
Insurance balances payable................................ 1,998,597 1,702,578
Funds held by companies under reinsurance treaties........ 331,008 336,585
Income taxes payable:
Current................................................ 552,088 585,375
Deferred............................................... 597,349 470,706
Financial services liabilities:
Borrowings under obligations of guaranteed investment
agreements........................................... 8,543,659 8,000,326
Securities sold under agreements to repurchase, at
contract value....................................... 4,694,009 2,706,310
Trading liabilities.................................... 4,879,728 5,366,421
Securities and spot commodities sold but not yet
purchased, at market value........................... 6,980,492 5,171,680
Unrealized loss on interest rate and currency swaps,
options and forward transactions..................... 5,859,944 5,979,571
Deposits due to banks and other depositors............. 962,161 972,423
Commercial paper....................................... 3,331,517 2,208,167
Notes, bonds and loans payable......................... 12,733,857 12,608,891
Commercial paper.......................................... 1,253,137 1,166,740
Notes, bonds, loans and mortgages payable................. 1,379,273 1,276,521
Separate and variable accounts............................ 5,063,969 3,993,971
Other liabilities......................................... 6,223,537 5,966,553
------------ ------------
Total liabilities............................... 149,973,762 139,569,560
------------ ------------
Preferred shareholders' equity in subsidiary company...... 400,000 400,000
------------ ------------
CAPITAL FUNDS:
Common stock, $2.50 par value: 2,000,000,000 shares
authorized; shares issued 1998 -- 759,121,536;
1997 -- 759,121,505.................................... 1,897,804 1,897,804
Additional paid-in capital................................ 87,873 105,689
Retained earnings......................................... 24,645,131 22,920,991
Accumulated other comprehensive income.................... 173,387 172,141
Treasury stock, at cost; 1998 -- 59,120,269;
1997 -- 59,603,224 shares of common stock.............. (1,074,736) (1,095,498)
------------ ------------
Total capital funds............................. 25,729,459 24,001,127
------------ ------------
Total liabilities and capital funds............. $176,103,221 $163,970,687
============ ============
</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>
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- ------------------------
1998 1997 1998 1997
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
General insurance operations:
Net premiums written..................... $ 6,998,633 $6,856,889 $3,617,270 $3,542,945
Change in unearned premium reserve....... (378,520) (648,797) (235,371) (328,832)
----------- ---------- ---------- ----------
Net premiums earned...................... 6,620,113 6,208,092 3,381,899 3,214,113
Net investment income.................... 1,002,749 902,951 501,506 451,880
Realized capital gains................... 96,356 78,599 26,078 29,281
----------- ---------- ---------- ----------
7,719,218 7,189,642 3,909,483 3,695,274
----------- ---------- ---------- ----------
Losses and loss expenses incurred........ 5,039,947 4,741,855 2,574,898 2,438,304
Underwriting expenses.................... 1,299,291 1,212,944 650,566 641,300
----------- ---------- ---------- ----------
6,339,238 5,954,799 3,225,464 3,079,604
----------- ---------- ---------- ----------
Operating income......................... 1,379,980 1,234,843 684,019 615,670
----------- ---------- ---------- ----------
Life insurance operations:
Premium income........................... 4,982,427 4,848,790 2,604,825 2,547,616
Net investment income.................... 1,560,063 1,405,110 808,299 725,768
Realized capital gains (losses).......... (14,495) 6,249 (11,009) (1,913)
----------- ---------- ---------- ----------
6,527,995 6,260,149 3,402,115 3,271,471
----------- ---------- ---------- ----------
Death and other benefits................. 2,092,099 1,931,359 1,118,229 1,035,831
Increase in future policy benefits....... 2,323,747 2,368,354 1,168,917 1,201,770
Acquisition and insurance expenses....... 1,258,305 1,219,117 670,534 646,743
----------- ---------- ---------- ----------
5,674,151 5,518,830 2,957,680 2,884,344
----------- ---------- ---------- ----------
Operating income......................... 853,844 741,319 444,435 387,127
----------- ---------- ---------- ----------
Financial services operating income...... 405,836 306,949 218,751 173,590
Equity in income of minority-owned
insurance operations................... 57,127 57,789 31,623 32,069
Other realized capital gains (losses).... (3,095) (10,136) 8,288 (3,045)
Minority interest........................ (32,981) (20,242) (14,650) (9,584)
Other income (deductions) -- net......... (70,211) (43,851) (40,772) (25,432)
----------- ---------- ---------- ----------
Income before income taxes............... 2,590,500 2,266,671 1,331,694 1,170,395
----------- ---------- ---------- ----------
Income taxes -- Current.................. 631,444 608,408 305,420 331,685
-- Deferred................ 130,513 50,833 84,263 12,215
----------- ---------- ---------- ----------
761,957 659,241 389,683 343,900
----------- ---------- ---------- ----------
Net income............................... $ 1,828,543 $1,607,430 $ 942,011 $ 826,495
=========== ========== ========== ==========
Earnings per common share*
Basic.................................. $ 1.74 $ 1.52 $ 0.90 $ 0.78
=========== ========== ========== ==========
Diluted................................ $ 1.73 $ 1.52 $ 0.89 $ 0.78
=========== ========== ========== ==========
Cash dividends per common share*......... $ 0.10 $ 0.089 $ 0.050 $ 0.045
=========== ========== ========== ==========
Average shares outstanding*
Basic.................................. 1,049,545 1,054,594 1,049,792 1,053,278
----------- ---------- ---------- ----------
Diluted................................ 1,054,760 1,059,409 1,054,999 1,057,899
----------- ---------- ---------- ----------
</TABLE>
- ---------------
* Share information reflects an adjustment on a pro forma basis for a common
stock split in the form of a 50 percent common stock dividend paid July 31,
1998.
See Accompanying Notes to Financial Statements.
3
<PAGE> 5
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ---------------------
1998 1997 1998 1997
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
Net income.................................. $1,828,543 $1,607,430 $ 942,011 $826,495
Other comprehensive income:
Unrealized appreciation (depreciation) of
investments - net of reclassification
adjustments.......................... 137,677 (213,576) (192,426) 214,302
Deferred income tax (expense) benefit
on changes........................... (23,440) 42,582 85,671 (55,503)
Foreign currency translation
adjustments............................ (131,591) (147,744) (38,030) (32,728)
Applicable income tax benefit on
changes.............................. 18,600 36,003 7,255 6,049
---------- ---------- --------- --------
Other comprehensive income.................. 1,246 (282,735) (137,530) 132,120
---------- ---------- --------- --------
Comprehensive Income........................ $1,829,789 $1,324,695 $ 804,481 $958,615
========== ========== ========= ========
</TABLE>
See Accompanying Notes to Financial Statements.
4
<PAGE> 6
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income.................................................. $ 1,828,543 $ 1,607,430
----------- -----------
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.................... 2,331,039 3,527,406
Premiums and insurance balances receivable and
payable -- net....................................... (933,719) (320,498)
Reinsurance assets..................................... (23,680) (589,305)
Deferred policy acquisition costs...................... (208,746) (487,319)
Investment income due and accrued...................... (244,653) (107,125)
Funds held under reinsurance treaties.................. (5,577) (40,764)
Other policyholders' funds............................. (15,799) 139,271
Current and deferred income taxes -- net............... 97,225 260,837
Reserve for commissions, expenses and taxes............ 357,130 183,156
Other assets and liabilities -- net.................... (168,650) 104,928
Trading assets and liabilities -- net.................. (268,879) (358,217)
Trading securities, at market value.................... (1,900,662) (610,516)
Spot commodities, at market value...................... 93,909 (214,960)
Net unrealized gain on interest rate and currency
swaps, options and forward transactions.............. (758,136) (73,454)
Securities purchased under agreements to resell........ (3,139,742) (195,117)
Securities sold under agreements to repurchase......... 1,987,699 (2,205,220)
Securities and spot commodities sold but not yet
purchased, at market value........................... 1,808,812 2,084,957
Realized capital gains.................................... (78,766) (74,712)
Equity in income of partially-owned companies and other
invested assets........................................ (145,970) (86,338)
Depreciation expenses, principally flight equipment....... 438,213 421,479
Change in cumulative translation adjustments.............. (131,591) (147,744)
Other -- net.............................................. 82,908 50,993
----------- -----------
Total adjustments......................................... (827,635) 1,261,738
----------- -----------
Net cash provided by operating activities................... $ 1,000,908 $ 2,869,168
----------- -----------
</TABLE>
See Accompanying Notes to Financial Statements.
5
<PAGE> 7
AMERICAN INTERNATIONAL GROUP, INC
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows From Investing Activities:
Cost of fixed maturities, at amortized cost matured or
redeemed............................................... $ 631,571 $ 635,254
Cost of bonds, at market sold............................. 5,001,296 5,256,685
Cost of bonds, at market matured or redeemed.............. 1,934,235 1,497,586
Cost of equity securities sold............................ 1,265,516 1,233,887
Realized capital gains.................................... 78,766 74,712
Purchases of fixed maturities............................. (8,910,045) (9,779,903)
Purchases of equity securities............................ (1,232,660) (1,365,803)
Mortgage, policy and collateral loans granted............. (1,023,862) (1,007,569)
Repayments of mortgage, policy and collateral loans....... 665,371 727,195
Sales of securities available for sale.................... 2,099,249 2,511,042
Maturities of securities available for sale............... 1,819,476 2,474,748
Purchases of securities available for sale................ (2,476,157) (3,564,080)
Sales of flight equipment................................. 380,624 284,790
Purchases of flight equipment............................. (2,258,592) (2,392,791)
Net additions to real estate and other fixed assets....... (149,569) (181,118)
Sales or distributions of other invested assets........... 547,052 3,416,136
Investments in other invested assets...................... (1,537,251) (3,941,938)
Change in short-term investments.......................... (440,397) (347,383)
Investments in partially-owned companies.................. (28,940) (22,923)
----------- -----------
Net cash used in investing activities....................... (3,634,317) (4,491,473)
----------- -----------
Cash Flows From Financing Activities:
Change in policyholders' contract deposits................ 845,390 242,540
Change in deposits due to banks and other depositors...... (10,262) 2,598
Change in commercial paper................................ 1,209,747 815,496
Proceeds from notes, bonds, loans and mortgages payable... 2,840,865 4,103,943
Repayments on notes, bonds, loans and mortgages payable... (2,618,270) (3,521,326)
Liquidation of zero coupon notes payable.................. -- (12,235)
Proceeds from guaranteed investment agreements............ 2,552,214 1,766,257
Maturities of guaranteed investment agreements............ (2,008,881) (1,401,098)
Proceeds from common stock issued......................... 22,918 16,868
Cash dividends to shareholders............................ (104,403) (93,708)
Acquisition of treasury stock............................. (26,981) (270,985)
Other - net............................................... 7,009 2,016
----------- -----------
Net cash provided by financing activities................... 2,709,346 1,650,366
----------- -----------
Change in cash.............................................. 75,937 28,061
Cash at beginning of period................................. 86,917 58,740
----------- -----------
Cash at end of period....................................... $ 162,854 $ 86,801
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements.
6
<PAGE> 8
AMERICAN INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
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,
retroactively adjusted to reflect all stock splits. Following are the net
income per share figures, before and after adjustment for the common stock
split in the form of a 50 percent common stock dividend paid July 31, 1998:
<TABLE>
<CAPTION>
SIX MONTHS SECOND QUARTER
-------------- --------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Pre-split -- basic......................... $2.61 $2.29 $1.34 $1.18
Post-split -- basic........................ $1.74 $1.52 $0.90 $0.78
Pre-split -- diluted....................... $2.60 $2.28 $1.34 $1.18
Post-split -- diluted...................... $1.73 $1.52 $0.89 $0.78
</TABLE>
Cash dividends per common share reflect the adjustment for a common stock
split in the form of a 50 percent common stock dividend paid July 31, 1998.
Following are the dividend per share figures before and after adjustment for
the stock split:
<TABLE>
<CAPTION>
SIX MONTHS SECOND QUARTER
---------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Pre-split.............................. $0.150 $0.133 $0.075 $0.067
Post-split............................. $0.100 $0.089 $0.050 $0.045
</TABLE>
c) Supplemental cash flow information for the six month periods ended June 30,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Income taxes paid..................................... $631,200 $366,400
Interest paid......................................... $902,500 $703,000
</TABLE>
d) Statement of Accounting Standards No. 130 "Comprehensive Income" (FASB 130)
was adopted by AIG effective January 1, 1998. FASB 130 establishes standards
for reporting comprehensive income and its components as part of capital
funds. Such statement is presented herein.
The reclassification adjustments with respect to available for sale
securities were $23.4 million and $78.8 million for the second quarter and
first six months of 1998, respectively.
e) Derivatives Accounting Policy: AIG Financial Products Corp. and its
subsidiaries (AIGFP) and AIG Trading Group Inc. and its subsidiaries (AIGTG)
enter into future, forward, swap and option derivative transactions. These
transactions are marked to market. With the exception of the derivatives
used in market hedging activities with respect to securities available for
sale, at market, the marks to market on all such other derivative
transactions are recognized in income currently. The mark to market with
respect to derivatives which hedge the market movements of securities
available for sale, at market is recognized as a component of unrealized
appreciation of investments, net of taxes. When the underlying security is
sold, the loss or gain resulting from the hedging derivative transaction is
recognized as income in that same period.
f) In June 1998, FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" (FASB
133). This statement requires AIG to recognize all derivatives in the
consolidated balance sheet measuring these derivatives at fair value. The
recognition of the changes in the fair value of a derivative depends on a
number of factors, including the intended use of the derivative. AIGTG and
AIGFP account for derivatives as described above. AIG is evaluating the
impact of FASB 133 with respect to any of its other derivative transactions
that AIG's other operations may engage in. AIG believes that the impact of
FASB 133 on its results of operations, financial condition or liquidity will
not be significant. FASB 133 is effective for the year commencing January 1,
2000.
g) For further information, refer to the Annual Report on Form 10-K of AIG for
the year ended December 31, 1997.
7
<PAGE> 9
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 six month periods ending June 30, 1998, and
1997 were as follows:
(in thousands)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------
<S> <C> <C>
Net premiums written:
Domestic $4,710,277 $4,636,016
Foreign 2,288,356 2,220,873
- --------------------------------------------------------
Total $6,998,633 $6,856,889
- --------------------------------------------------------
Net premiums earned:
Domestic $4,493,967 $4,159,980
Foreign 2,126,146 2,048,112
- --------------------------------------------------------
Total $6,620,113 $6,208,092
- --------------------------------------------------------
Adjusted underwriting
profit:
Domestic $ 9,490 $ 10,173
Foreign 271,385 243,120
- --------------------------------------------------------
Total $ 280,875 $ 253,293
- --------------------------------------------------------
Net investment income:
Domestic $ 806,298 $ 732,003
Foreign 196,451 170,948
- --------------------------------------------------------
Total $1,002,749 $ 902,951
- --------------------------------------------------------
Operating income before
realized capital gains:
Domestic $ 815,788 $ 742,176
Foreign 467,836 414,068
- --------------------------------------------------------
Total 1,283,624 1,156,244
Realized capital gains 96,356 78,599
- --------------------------------------------------------
Operating income $1,379,980 $1,234,843
- --------------------------------------------------------
</TABLE>
During the first six months of 1998, the net premiums written and net
premiums earned in AIG's general insurance operations increased 2.1 percent and
6.6 percent, respectively, from those of 1997.
Although the commercial insurance market remains highly competitive and
excessively capitalized, AIG has been able to sustain growth in various
specialty markets. Foreign general insurance operations produced 32.7 percent of
the general insurance net premiums written in the first six months of 1998 and
32.4 percent in the same period of 1997.
In comparing the foreign currency exchange rates used to translate the
results of AIG's foreign general operations during the first six months of 1998
to those foreign currency exchange rates used to translate AIG's foreign general
results during the same period of 1997, 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 the preparation of the consolidated financial statements,
total general insurance net premiums written were approximately 2.6 percentage
points less than they would have been if translated utilizing those foreign
currency exchange rates which prevailed during that same period of 1997.
Net premiums written are initially deferred and earned based upon the terms
of the underlying policies. The net unearned premium reserve constitutes
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>
1998 1997
- -------------------------------------------------------
<S> <C> <C>
Domestic:
Loss Ratio 85.15 85.68
Expense Ratio 14.86 14.44
- -------------------------------------------------------
Combined Ratio 100.01 100.12
- -------------------------------------------------------
Foreign:
Loss Ratio 57.06 57.49
Expense Ratio 29.84 30.69
- -------------------------------------------------------
Combined Ratio 86.90 88.18
- -------------------------------------------------------
Consolidated:
Loss Ratio 76.13 76.38
Expense Ratio 19.76 19.70
- -------------------------------------------------------
Combined Ratio 95.89 96.08
- -------------------------------------------------------
</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 $280.9 million in the first six months of 1998 and $253.3 million
in the same period of 1997.
AIG's results reflect the net impact of incurred losses from catastrophes
approximating $27 million and $16 million in 1998 and 1997, respectively.
8
<PAGE> 10
AIG's gross incurred losses from catastrophes approximated $100 million and $22
million in 1998 and 1997, respectively.
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 six months of 1998
increased 11.1 percent when compared to the same period of 1997. The growth in
net investment income in 1998 was attributable to new cash flow for investment
and the compounding of previously earned and reinvested net investment income.
(See also the discussion under "Liquidity" herein.)
General insurance realized capital gains were $96.4 million in the first
six months of 1998 and $78.6 million in 1997. 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 fixed maturities as
well as redemptions of fixed maturities.
General insurance operating income in the first six months of 1998
increased 11.8 percent when compared to the same period of 1997. The
contribution of general insurance operating income to income before income taxes
was 53.3 percent in 1998 compared to 54.5 percent in 1997.
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 AIG desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.
AIG's general reinsurance assets amounted to $16.01 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at June 30,
1998 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. At December 31, 1997, 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 94 percent of such balances are 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 June 30, 1998, these distribution
percentages have not significantly changed.
AIG's provision for estimated unrecoverable reinsurance has not changed
significantly from December 31, 1997 when AIG had allowances for unrecoverable
reinsurance approximating $120 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 restriction).
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 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
9
<PAGE> 11
authorities. All material intercompany transactions have been eliminated in
consolidation.
At June 30, 1998, the consolidated general reinsurance assets of $16.01
billion include reinsurance recoverables for paid losses and loss expenses of
$1.59 billion and $12.42 billion with respect to the ceded reserve for losses
and loss expenses, including ceded losses incurred but not reported (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
June 30, 1998 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 June 30, 1998, general insurance reserves for losses and loss expenses
(loss reserves) amounted to $33.91 billion, an increase of $513.7 million or 1.5
percent from 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 $325.6 million or 1.5 percent to $21.50 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 June 30, 1998.
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 seven 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 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 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 claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump
10
<PAGE> 12
sites (hereinafter referred to collectively 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 that any firm
direction will develop 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 with the same degree of
reliability as is the case for other types of 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. Although the estimated
liabilities for these claims are subject to a significantly greater margin of
error than for other claims, the reserves carried for these claims at June 30,
1998 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 environmental claims separately and combined at June
30, 1998 and 1997 was as follows:
(in millions)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
GROSS Net Gross Net
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Asbestos:
Reserve for losses and
loss expenses at
beginning of year $ 842.1 $195.1 $ 875.9 $172.3
Losses and loss
expenses incurred 129.4 20.6 184.1 47.9
Losses and loss
expenses paid (142.1) (25.5) (208.0) (31.8)
- --------------------------------------------------------------
Reserve for losses and
loss expenses at end
of period $ 829.4 $190.2 $ 852.0 $188.4
- --------------------------------------------------------------
Environmental:
Reserve for losses and
loss expenses at
beginning of year $1,467.1 $592.2 $1,427.4 $570.6
Losses and loss
expenses incurred 92.2 38.2 124.0 56.8
Losses and loss
expenses paid (100.7) (40.3) (76.2) (27.8)
- --------------------------------------------------------------
Reserve for losses and
loss expenses at end
of period $1,458.6 $590.1 $1,475.2 $599.6
- --------------------------------------------------------------
Combined:
Reserve for losses and
loss expenses at
beginning of year $2,309.2 $787.3 $2,303.3 $742.9
Losses and loss
expenses incurred 221.6 58.8 308.1 104.7
Losses and loss
expenses paid (242.8) (65.8) (284.2) (59.6)
- --------------------------------------------------------------
Reserve for losses and
loss expenses at end
of period $2,288.0 $780.3 $2,327.2 $788.0
- --------------------------------------------------------------
</TABLE>
11
<PAGE> 13
The gross and net IBNR included in the reserve for losses and loss expenses
at June 30, 1998 and December 31, 1997 were estimated as follows:
(in thousands)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------------- ---------------------
GROSS Net Gross Net
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Combined $949,000 $362,990 $1,004,000 $393,900
- ------------------------------------------------------------------
</TABLE>
A summary of asbestos and environmental claims count activity for the six
month periods ended June 30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
ASBESTOS ENVIRONMENTAL Combined Asbestos Environmental Combined
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Claims at beginning of year 6,150 17,422 23,572 5,668 17,395 23,063
Claims during period:
Opened 470 1,606 2,076 657 1,795 2,452
Settled (28) (313) (341) (65) (239) (304)
Dismissed or otherwise resolved (323) (1,982) (2,305) (244) (915) (1,159)
- ---------------------------------------------------------------------------------------------------------------------
Claims at end of period 6,269 16,733 23,002 6,016 18,036 24,052
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The average cost per claim settled, dismissed or otherwise resolved for the
six month periods ended June 30, 1998 and 1997 was as follows:
- ------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------------ -------------------
GROSS Net Gross Net
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Asbestos $404,800 $72,600 $673,100 $102,900
Environmental 43,900 17,600 66,000 24,100
Combined 91,800 24,900 194,300 40,700
- ----------------------------------------------------------------
</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 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 extremely
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 June 30, 1998 and 1997 were as follows:
- ------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
GROSS Net Gross Net
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Involuntary survival
ratios:
Asbestos 2.4 3.1 2.9 3.4
Environmental 16.8 17.5 17.7 19.2
Combined 5.8 8.8 6.7 9.8
- ---------------------------------------------------------
</TABLE>
12
<PAGE> 14
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 1997 was $15.4
million. Based upon current information, AIG does not anticipate that its net
assessment will be significantly different in 1998.
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 six month periods ending June 30, 1998
and 1997 were as follows:
(in thousands)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------
<S> <C> <C>
Premium income:
Domestic $ 373,527 $ 249,236
Foreign 4,608,900 4,599,554
- ---------------------------------------------------------
Total $ 4,982,427 $ 4,848,790
- ---------------------------------------------------------
Net investment income:
Domestic $ 463,049 $ 410,284
Foreign 1,097,014 994,826
- ---------------------------------------------------------
Total $ 1,560,063 $ 1,405,110
- ---------------------------------------------------------
Operating income before
realized capital gains
(losses):
Domestic $ 73,495 $ 61,884
Foreign 794,844 673,186
- ---------------------------------------------------------
Total 868,339 735,070
Realized capital gains
(losses) (14,495) 6,249
- ---------------------------------------------------------
Operating income $ 853,844 $ 741,319
- ---------------------------------------------------------
Life insurance in-force:*
Domestic $ 61,758,850 $ 59,516,720
Foreign 387,225,073 377,056,403
- ---------------------------------------------------------
Total $448,983,923 $436,573,123
- ---------------------------------------------------------
</TABLE>
* Amounts presented were as at June 30, 1998 and December 31, 1997,
respectively.
AIG's life insurance operations, demonstrating the strength of its
franchise, continued to show growth in local currency. AIG's life premium income
during the first six months of 1998 represented a 2.8 percent increase in U.S.
dollars from the same period in 1997. Foreign life operations produced 92.5
percent and 94.9 percent of the life premium income in 1998 and 1997,
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 six months of 1998, when foreign life premium income was
translated into U.S. dollars for purposes of the preparation of the consolidated
financial statements, total life premium income was approximately 15.6
percentage points less than it would have been if translated utilizing exchange
rates prevailing in 1997.
Life insurance net investment income increased 11.0 percent during the
first six months of 1998. 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 traditional life products, such as whole and term life and endowments,
were the major contributors to the growth in investment income as well as local
currency premium income. A mixture of traditional, accident and health and
financial products are being sold in Japan.
Life insurance realized capital losses were $14.5 million in 1998 compared
to realized capital gains of $6.2 million in 1997. These realized capital gains
and losses 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 six months of 1998
increased 15.2 percent to $853.8 million. Excluding realized capital gains and
losses from life insurance operating income, the
13
<PAGE> 15
increase would be 18.1 percent. The contribution of life insurance operating
income to income before income taxes amounted to 33.0 percent during the first
six months of 1998 compared to 32.7 percent in the same period of 1997.
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 June 30, 1998.
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, 1997, the average duration
of the investment portfolio in Japan was 5.7 years, while the related policy
liabilities were estimated to be 13.7 years. These durations have not changed
significantly during 1998. 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 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 six month periods ending June 30,
1998 and 1997 were as follows:
(in thousands)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------
<S> <C> <C>
Revenues:
International Lease Finance
Corp. $ 962,960 $ 877,874
AIG Financial Products Corp.* 206,742 190,178
AIG Trading Group Inc.* 195,005 220,124
Other 165,977 161,736
- ---------------------------------------------------------
Total $1,530,684 $1,449,912
- ---------------------------------------------------------
Operating income:
International Lease Finance
Corp. $ 230,052 $ 178,698
AIG Financial Products Corp. 119,346 98,555
AIG Trading Group Inc. 64,113 51,730
Other, including intercompany
adjustments (7,675) (22,034)
- ---------------------------------------------------------
Total $ 405,836 $ 306,949
- ---------------------------------------------------------
</TABLE>
* Represents net trading revenues.
14
<PAGE> 16
Financial services operating income increased 32.2 percent in the first six
months of 1998 over 1997.
Financial services operating income represented 15.7 percent of AIG's
income before income taxes in the first six months of 1998. This compares to
13.5 percent in the same period of 1997.
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 six months of 1998 increased 9.7 percent from 1997. The revenue growth
resulted primarily from the growth in the size and relative cost of the fleet,
the increase in the number of aircraft sold, and more favorable lease rates due
to improved market conditions. Approximately 20 percent of ILFC's operating
lease revenues are derived from U.S. and Canadian airlines. During the first six
months of 1998, operating income increased 28.7 percent from 1997. The composite
borrowing rates during the first six months of 1998 and 1997 were 6.22 percent
and 6.32 percent, respectively. (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 sell or re-lease at
acceptable rates 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 June 30,
1998, there were 325 aircraft subject to operating leases. In addition, one
aircraft was not leased. (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, equity and credit 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 from speculative transactions.
Revenues in the first six months of 1998 increased 8.7 percent from the same
period of 1997. During the first six months of 1998, operating income increased
21.1 percent from the same period of 1997. 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 and precious and base metals.
Revenues in the first six months of 1998 decreased 11.4 percent from the same
period of 1997. During the first six months of 1998, operating income increased
23.9 percent from the same period of 1997. As AIGTG 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.)
OTHER OPERATIONS
In the first six months of 1998, AIG's equity in income of minority-owned
insurance operations was $57.1 million compared to $57.8 million in the same
period of 1997. In the first six months of 1998, the equity interest in
insurance companies represented 2.2 percent of income before income taxes
compared to 2.5 percent in the same period of 1997.
Other realized capital losses amounted to $3.1 million and $10.1 million in
1998 and 1997, respectively.
Minority interest represents minority shareholders' equity in income of
certain consolidated subsidiaries. In the first six months of 1998, minority
interest amounted to $33.0 million. In the first six months of 1997, minority
interest amounted to $20.2 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 six months of 1998, net deductions amounted to $70.2
million. In the same period of 1997, net deductions amounted to $43.9 million.
15
<PAGE> 17
Income before income taxes amounted to $2.59 billion in the first six
months of 1998, and $2.27 billion in the same period of 1997.
In the first six months of 1998, AIG recorded a provision for income taxes
of $762.0 million compared to the provision of $659.2 million in the same period
of 1997. These provisions represent effective tax rates of 29.4 percent in the
first six months of 1998, and 29.1 percent in the same period of 1997.
Net income amounted to $1.83 billion in the first six months of 1998, and
$1.61 billion in the same period of 1997. The increases in net income over the
periods resulted from those factors described above.
CAPITAL RESOURCES
At June 30, 1998, AIG had total capital funds of $25.73 billion and total
borrowings of $27.24 billion. At that date, $24.40 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 and borrowings not guaranteed or matched at June 30, 1998
and December 31, 1997 were as follows:
(in thousands)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------
<S> <C> <C>
GIAs -- AIGFP $ 8,543,659 $ 8,000,326
- ---------------------------------------------------------
Commercial Paper:
Funding 487,864 307,997
ILFC(a) 3,331,517 2,208,167
AICCO 727,166 833,647
Universal Finance Company
(UFC)(a) 38,107 25,096
- ---------------------------------------------------------
Total 4,584,654 3,374,907
- ---------------------------------------------------------
Medium Term Notes:
ILFC(a) 3,049,330 2,896,865
AIG 219,725 248,225
- ---------------------------------------------------------
Total 3,269,055 3,145,090
- ---------------------------------------------------------
Notes and Bonds Payable:
ILFC(a) 4,125,000 3,950,000
AIGFP 4,702,482 4,858,706
AIG: Lire bonds 159,067 159,067
Zero coupon notes 96,301 91,179
- ---------------------------------------------------------
Total 9,082,850 9,058,952
- ---------------------------------------------------------
Loans and Mortgages Payable:
ILFC(a)(b) 857,044 903,320
SPC Credit Limited (SPC)(a) 571,263 538,988
Consumer Finance Group(a) 122,522 --
AIG 210,396 239,062
- ---------------------------------------------------------
Total 1,761,225 1,681,370
- ---------------------------------------------------------
Total Borrowings 27,241,443 25,260,645
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
1998 1997
<S> <C> <C>
Borrowings not guaranteed by
AIG 12,094,783 10,522,436
Matched GIA borrowings 8,543,659 8,000,326
Matched notes and bonds
payable -- AIGFP 3,764,406 3,754,420
- ---------------------------------------------------------
24,402,848 22,277,182
- ---------------------------------------------------------
Remaining borrowings of AIG $ 2,838,595 $ 2,983,463
- ---------------------------------------------------------
</TABLE>
(a)AIG does not guarantee or support these borrowings.
(b)Capital lease obligations.
During the first six months of 1998, AIGFP decreased the aggregate
principal amount outstanding of its notes and bonds payable to $4.70 billion, a
net decrease of $156.2 million and increased its net GIA borrowings by $543.3
million. AIGFP uses the proceeds from the issuance of notes and bonds to invest
in a segregated portfolio of securities available for sale, although these funds
may be temporarily invested in securities purchased under agreements to resell.
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 non-insurance
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, A.I. Credit Corp. (AICCO) and UFC, a consumer finance
subsidiary in Taiwan, issue commercial paper for the funding of their own
operations. AIG does not guarantee AICCO's, ILFC's or UFC'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 June 30, 1998, 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
16
<PAGE> 18
programs administered by Funding. There are currently no borrowings outstanding
under either of the Facilities, nor were any borrowings outstanding as of June
30, 1998.
At June 30, 1998, ILFC had increased the aggregate principal amount
outstanding of its medium term and term notes to $7.17 billion, a net increase
of $327.5 million, and recorded a net decline in its capital lease obligations
of $46.3 million and a net increase in its commercial paper of $1.12 billion. At
June 30, 1998, ILFC had $1.28 billion in aggregate principal amount of debt
securities registered for issuance from time to time. The proceeds of ILFC's
debt financing are primarily used to purchase flight equipment, including
progress payments during the construction phase. 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 and
refinancing of the prior debt. (See also the discussions under "Operational
Review" and "Liquidity" herein.)
During the first six months of 1998, AIG issued $11.5 million principal
amount of Medium Term Notes and $40.0 million of previously issued notes
matured. At June 30, 1998 AIG had $527.3 million in aggregate principal amount
of debt securities registered for issuance from time to time.
AIG's capital funds increased $1.73 billion during the first six months of
1998. Unrealized appreciation of investments, net of taxes increased $114.2
million. During the first six months of 1998, the cumulative translation
adjustment loss, net of taxes, increased $113.0 million. The changes from period
to period with respect to the unrealized appreciation of investments, net of
taxes and the cumulative translation adjustment loss, net of taxes were
primarily impacted by the economic situation in Japan and Southeast Asia and the
general strength of the U.S. dollar against most currencies in which AIG
conducts operations. (See also the discussion under "Operational Review" and
"Liquidity" herein.) Retained earnings increased $1.72 billion, resulting from
net income less dividends.
During the period from January 1, 1998 through July 31, 1998, AIG
repurchased 336,750 shares of its common stock in the open market at a cost of
$24.1 million. The shares repurchased have been adjusted for the common stock
split in the form of a 50 percent common stock dividend paid July 31, 1998. AIG
intends to continue to buy its common shares in the open market to satisfy its
obligations under various employee benefit plans and, depending on market
conditions, for other corporate purposes.
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 June 30, 1998, there
were no significant statutory or regulatory issues which would impair AIG's
financial condition, results of operations or liquidity. To AIG's knowledge, no
AIG company is on any regulatory or similar "watch list." (See also the
discussion under "Liquidity" herein.)
The National Association of Insurance Commissioners (NAIC) has developed
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, 1997, 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 margins. There has been no significant change
through June 30, 1998.
A substantial portion of AIG's general insurance business and a majority of
its life insurance business are conducted 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.
LIQUIDITY
AIG's liquidity is primarily derived from the operating cash flows of its
general and life insurance operations.
17
<PAGE> 19
At June 30, 1998, AIG's consolidated invested assets included approximately
$3.94 billion of cash and short-term investments. Consolidated net cash provided
from operating activities in the first six months of 1998 amounted to $1.0
billion.
Sources of funds considered in meeting the objectives of AIG's financial
services' operations 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 but not yet purchased, issuance of equity, and cash
provided from such operations. AIG's strong capital position is integral to
managing this liquidity, as it enables AIG to raise funds in diverse markets
worldwide. (See also the discussions under "Capital Resources" herein.)
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.
The liquidity of the combined insurance operations is derived both
domestically and abroad. The combined insurance operating cash flow is derived
from two sources, underwriting operations and investment operations. In the
aggregate, AIG's insurance operations generated over $4 billion in pre-tax cash
flow during the first six months of 1998. 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
$2.5 billion in investment income cash flow during the first six months of 1998.
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 $3.5 billion provided the insurance operations
with a significant amount of liquidity during the first six months of 1998. 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. This liquidity
coupled with proceeds approximating $9 billion from the maturities, sales and
redemptions of fixed income securities and from the sale of equity securities
was used to purchase nearly $10 billion of fixed income securities and
marketable equity securities during the first six months of 1998.
The following table is a summary of AIG's invested assets by significant
segment, including investment income due and accrued and real estate, at June
30, 1998 and December 31, 1997:
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
--------------------------- ---------------------------
INVESTED Percent Invested Percent
ASSETS of Total Assets of Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General insurance $ 33,410,955 25.4% $ 31,844,084 26.0%
Life insurance 42,885,291 32.6 41,046,969 33.5
Financial services 54,644,699 41.5 48,899,127 39.9
Other 626,516 0.5 661,701 0.6
- ------------------------------------------------------------------------------------------------------------------------
Total $131,567,461 100.0% $122,451,881 100.0%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 20
INSURANCE INVESTED ASSETS
The following tables summarize the composition of AIG's insurance invested
assets by insurance seg-
ment, including investment income due and accrued and real estate, at June 30,
1998 and December 31, 1997:
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT DISTRIBUTION
PERCENT ---------------------
JUNE 30, 1998 GENERAL LIFE TOTAL OF TOTAL DOMESTIC FOREIGN
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Available for sale, at market value(a) $11,694,718 $28,960,586 $40,655,304 53.3% 39.0% 61.0%
Held to maturity, at amortized cost(b) 12,223,243 -- 12,223,243 16.0 100.0 --
Equity securities, at market value(c) 3,482,683 1,661,992 5,144,675 6.7 48.5 51.5
Mortgage loans on real estate, policy
and
collateral loans 52,571 6,434,192 6,486,763 8.5 37.7 62.3
Short-term investments, including time
deposits, and cash 1,111,223 2,430,635 3,541,858 4.6 24.9 75.1
Real estate 389,426 935,400 1,324,826 1.7 17.2 82.8
Investment income due and accrued 531,145 985,029 1,516,174 2.1 38.3 61.7
Other invested assets 3,925,946 1,477,457 5,403,403 7.1 79.4 20.6
- ------------------------------------------------------------------------------------------------------------------------
Total $33,410,955 $42,885,291 $76,296,246 100.0% 51.1% 48.9%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)Includes $791,507 of bonds trading securities, at market value.
(b)Includes $232,218 of preferred stock, at amortized cost.
(c)Includes $200,423 of preferred stock, at market value.
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent Distribution
Percent ---------------------
December 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) $11,326,246 $27,340,210 $38,666,456 53.0% 37.8% 62.2%
Held to maturity, at amortized cost(b) 12,769,646 -- 12,769,646 17.5 100.0 --
Equity securities, at market value(c) 3,314,603 1,815,849 5,130,452 7.0 43.5 56.5
Mortgage loans on real estate, policy
and collateral loans 50,297 6,147,606 6,197,903 8.5 39.0 61.0
Short-term investments, including time
deposits, and cash 616,683 2,409,353 3,026,036 4.2 33.1 66.9
Real estate 401,995 979,543 1,381,538 1.9 16.8 83.2
Investment income due and accrued 528,164 817,348 1,345,512 1.9 39.7 60.3
Other invested assets 2,836,450 1,537,060 4,373,510 6.0 76.7 23.3
- ------------------------------------------------------------------------------------------------------------------------
Total $31,844,084 $41,046,969 $72,891,053 100.0% 51.0% 49.0%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)Includes $718,548 of bonds trading securities, at market value.
(b)Includes $239,331 of preferred stock, at amortized cost.
(c)Includes $111,609 of preferred stock, at market value.
Generally, insurance regulations restrict the types of assets in which an
insurance company may invest.
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. With respect to
general insurance, AIG's strategy is to invest in longer duration fixed
maturities to maximize the yields at the date of purchase. With respect to life
insurance, AIG's strategy is to produce cash flows required to meet maturing
insurance liabilities (See also the discussion under "Operational Review: Life
Insurance Operations" herein.)
The fixed maturity available for sale portfolio is subject to decline in
fair value as interest rates rise. Such declines in fair value are presented as
a component of capital funds in unrealized appreciation of investments, net of
taxes.
The fixed maturities held to maturity portfolio is exposed to adverse
interest rate fluctuations. However, AIG has the ability and intent to hold such
securities to maturity. Therefore, there would be no detrimental impact to AIG's
results of operations or financial condition as a result of such fluctuations.
At June 30, 1998, approximately 53.1 percent of the fixed maturities
investments were domestic securities. Approximately 40 percent of such domestic
securities were rated AAA. Approximately 10 percent were below investment grade
or not rated.
19
<PAGE> 21
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 June 30, 1998, approximately 19
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. Approximately 13 percent were below investment grade or not
rated at that date.
At June 30, 1998, approximately five percent of the fixed maturities
portfolio was Collateralized Mortgage Obligations (CMOs), including minor
amounts with respect to Commercial Mortgage Backed Securities. All of the CMOs
were investment grade and approximately 53 percent of the CMOs were backed by
various U.S. government agencies. 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 at June 30, 1998.
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 of August 1, 1998.
AIG invests in equities for reasons including diversifying its overall
exposure to interest rate risk. Equity securities are subject to declines in
fair value. Such declines in fair value are presented as components of capital
funds in unrealized appreciation of investments, net of taxes.
Mortgage loans on real estate, policy and collateral loans comprised 8.5
percent of AIG's insurance invested assets at June 30, 1998. AIG's insurance
operations' holdings of real estate mortgages amounted to $2.56 billion of which
35.4 percent was domestic. At June 30, 1998, no domestic mortgages and only a
nominal amount of foreign mortgages were in default. It is AIG's practice to
maintain a maximum loan to value ratio of 75 percent at loan origination. At
June 30, 1998, AIG's insurance holdings of collateral loans amounted to $1.13
billion, all of which were foreign. It is AIG's strategy to enter into mortgage
and collateral loans as an adjunct primarily to life insurance fixed maturity
investments. AIG's policy loans increased from $2.67 billion at December 31,
1997 to $2.79 billion at June 30, 1998.
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.
When permitted by regulatory authorities and when deemed necessary to
protect insurance assets, including invested assets, from adverse movements in
foreign currency exchange rates, interest rates and equity prices, AIG and its
insurance subsidiaries may enter into derivative transactions as end users. To
date, such activities have not been significant. (See also the discussion under
"Derivatives" herein.)
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.
AIG's insurance operations are exposed to market risk. Market risk is the
risk of loss of fair value resulting from adverse fluctuations in interest and
foreign currency exchange rates and equity prices.
Measuring potential losses in fair values has recently become the focus of
risk management efforts by many companies. Such measurements are performed
through the application of various statistical techniques. One such technique is
Value at Risk (VaR). VaR is a summary statistical measure that uses historical
interest and foreign currency exchange rates and equity prices and estimates the
volatility and correlation of each of these rates and prices to calculate the
maximum loss that could occur over a defined period of time given a certain
probability.
AIG believes that statistical models alone do not provide a reliable method
of monitoring and controlling market risk. While VaR models are relatively
sophisticated, the quantitative market risk
20
<PAGE> 22
information generated is limited by the assumptions and parameters established
in creating the related models. Therefore, such models are tools and do not
substitute for the experience or judgment of senior management.
AIG has performed a VaR analysis to estimate the maximum potential loss of
fair value for each of AIG's insurance segments and for each market risk within
each insurance segment. In this analysis, financial instrument assets include
the domestic and foreign invested assets excluding real estate and investment
income due and accrued. Financial instrument liabilities include reserve for
losses and loss expenses, reserve for unearned premiums, future policy benefits
for life and accident and health insurance contracts and policyholders' funds.
Due to the nature of each insurance segment, AIG manages the general and
life insurance operations separately. As a result, AIG manages separately the
invested assets of each. Accordingly, the VaR analysis was separately performed
for the general and the life insurance operations.
AIG calculated the VaR with respect to the net fair value of each of AIG's
insurance segments as of December 31, 1997. Through June 30, 1998, the economic
facts and circumstances have not significantly changed. Therefore, the VaR at
December 31, 1997 was representative of a VaR at June 30, 1998. This calculation
used the variance-covariance (delta-normal) methodology. The calculation also
used daily historical interest and foreign currency exchange rates and equity
prices in the two years ending December 31, 1997. The VaR model estimated the
volatility of each of these rates and equity prices and the correlation among
them. For interest rates, each country's yield curve was constructed using
eleven separate points on this curve to model possible curve movements.
Inter-country correlations were also used. The redemption experience of
municipal and corporate fixed maturities and mortgage securities was taken into
account as well as the use of financial modeling. Thus, the VaR measured the
sensitivity of the asset and the liability portfolios to each of the
aforementioned market risk exposures. Each sensitivity was estimated separately
to capture the market exposures within each insurance segment. These
sensitivities were then applied to a data base which contained both historical
ranges of movements in all market factors and the correlations among them. The
results were aggregated to provide a single amount that depicts the maximum
potential loss in fair value at a confidence level of 95 percent for a time
period of one month. At December 31, 1997 the VaR of AIG's insurance segments
was approximately $520 million for general insurance and $799 million for life
insurance.
The following table presents the VaR of each component of market risk for
each of AIG's insurance segments as of December 31, 1997. VaR with respect to
combined operations cannot be derived by aggregating the individual risk or
segment amounts presented herein.
(in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET RISK GENERAL INSURANCE LIFE INSURANCE
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate $235.6 $779.3
Currency 25.9 84.9
Equity 354.5 120.1
- -------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 23
FINANCIAL SERVICES INVESTED ASSETS
The following table is a summary of the composition of AIG's financial
services invested assets at June 30, 1998 and December 31, 1997. (See also the
discussions under "Operational Review: Financial Services Operations," "Capital
Resources" and "Derivatives" herein.)
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
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 $16,035,894 29.3% $14,438,074 29.5%
Unrealized gain on interest rate and currency swaps,
options and forward transactions 8,060,799 14.7 7,422,290 15.2
Securities available for sale, at market value 7,686,970 14.1 9,145,317 18.7
Trading securities, at market value 5,875,223 10.8 3,974,561 8.1
Securities purchased under agreements to resell, at
contract value 7,690,933 14.1 4,551,191 9.3
Trading assets 6,497,672 11.9 6,715,486 13.8
Spot commodities, at market value 365,608 0.7 459,517 0.9
Other, including short-term investments 2,431,600 4.4 2,192,691 4.5
- --------------------------------------------------------------------------------------------------------------------
Total $54,644,699 100.0% $48,899,127 100.0%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
As previously discussed, the cash used for the purchase of flight equipment
is derived primarily from the proceeds of ILFC's debt 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 and refinancing of the prior debt. During the first six months of 1998,
ILFC acquired flight equipment costing $2.26 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 "Operational Review: Financial Services Operations" and "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 June 30,
1998, the average credit rating of this portfolio was AA or the equivalent
thereto as determined through rating agencies or internal review. AIGFP has also
entered into credit derivative transactions to hedge its credit risk associated
with $397.3 million of these securities. There were no securities deemed below
investment grade at June 30, 1998. There have been no significant downgrades
through August 1, 1998. 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 and precious and base metals. 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, foreign
currency exchange rates and commodity prices. AIGTG supports its trading
activities
22
<PAGE> 24
largely through trading liabilities, unrealized losses on swaps, short-term
borrowings, securities sold under agreements to repurchase and securities and
commodities sold but not yet purchased. (See also the discussions under "Capital
Resources" and "Derivatives" herein.)
The gross unrealized gains and gross unrealized losses of AIGFP and AIGTG
included in the financial services assets and liabilities at June 30, 1998 were
as follows:
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
- --------------------------------------------------------------------------------------
<S> <C> <C>
Securities available for sale, at market value $ 289,061 $ 283,441
Unrealized gain/loss on interest rate and currency swaps,
options and forward transactions(a)(b) 8,060,799 5,859,944
Trading assets 5,959,527 3,688,188
Spot commodities, at market value -- 52,661
Trading liabilities -- 3,115,902
Securities and spot commodities sold but not yet purchased,
at market value 389,304 --
- --------------------------------------------------------------------------------------
</TABLE>
(a)These amounts are also presented as the respective balance sheet amounts.
(b)At June 30, 1998, AIGTG's replacement values with respect to interest rate
and currency swaps were $717.8 million.
AIGFP's 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 June 30, 1998, the unrealized gains and losses remaining after the benefit of
the offsets were $10.7 million and $5.1 million, respectively.
Trading securities and spot commodities, 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 and spot commodities are held to meet the short-term risk
management objectives of AIGFP and AIGTG.
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 arises principally from the uncertainty that future earnings
are exposed to potential changes in volatility, interest rates, foreign currency
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 the parameters
established by AIG's senior management. Well established market risk management
techniques such as sensitivity analysis are used. Additionally, this department
verifies that specific market risks of each of certain subsidiaries are managed
and hedged by that subsidiary.
AIGFP is exposed to market risk due to changes in the level and volatility
of interest rates and the shape and slope of the yield curve. AIGFP hedges its
exposure to interest rate risk by entering into transactions such as interest
rate swaps and options and purchasing U.S. and foreign government obligations.
AIGFP is exposed to market risk due to changes in and volatility of foreign
currency exchange rates. AIGFP hedges its foreign currency exchange risk
primarily through the use of currency swaps, options, forwards and futures.
AIGFP is exposed to market risk due to changes in the level and volatility
of equity prices which affect the value of securities or instruments that derive
their value from a particular stock, a
23
<PAGE> 25
basket of stocks or a stock index. AIGFP reduces the risk of loss inherent in
its inventory in equity securities by entering into hedging transactions,
including equity swaps and options and purchasing U.S. and foreign government
obligations.
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 changes in interest rates and other 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.
All of AIGTG's market risk sensitive instruments are entered into for
trading purposes. The fair values of AIGTG's financial instruments are exposed
to market risk as a result of adverse market changes in interest rates, foreign
currency exchange rates, commodity prices and adverse changes in the liquidity
of the markets in which AIGTG trades.
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 expects 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 books
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 may determine 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
24
<PAGE> 26
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.
AIGFP and AIGTG are both exposed to the risk of loss of fair value.
Sensitivity analysis is the statistical technique utilized to measure this
exposure. Such analysis is performed and presented separately for AIGFP and
AIGTG as AIG manages these operations separately.
AIGFP and AIGTG used the sensitivity analysis model to measure the
potential loss in fair value of market risk sensitive instruments of each of
their respective portfolios. This potential loss in fair value results from
selected hypothetical changes in interest and foreign currency exchange rates,
equity prices and/or other market rates or prices over time.
The portfolios for which this analysis was performed included market risk
sensitive transactions entered into by AIGFP and AIGTG. This includes over the
counter and exchange traded investments, derivative transactions, borrowings and
hedged securities and commodities. As the market risk with respect to securities
available for sale, at market is substantially hedged, segregation of market
sensitive instruments into trading and other than hedging was not done.
In each of these models, the market risks of AIGFP and AIGTG have been
classified as changes in the level of either interest rates, foreign currency
exchange rates, equity prices or commodity prices and the respective volatility
of each. For each risk, four sensitivities were calculated under four scenarios
with respect to the fair values of the portfolios at June 30, 1998. The four
scenarios consisted of uniformly increasing or decreasing the relevant market
rates or prices by 10 percent; and uniformly increasing or decreasing the
relevant market volatility by 10 percent. For a given risk, the sensitivity
presented herein was the largest potential loss in fair value assuming trade
settlement under the most adverse of the four scenarios that could result in one
day.
Not all market risk exposures that are managed by AIGFP and AIGTG are
quantified by this analysis. In almost all currencies, changes in the slope and
shape of the yield curve or changes in the relative value between certain types
of financial instruments or between the same type of instruments in different
currencies could affect the results of this analysis. Additionally, the
following quantitative information does not take into account anticipated
management reaction to breaches of counterparty credit limitations caused by the
shocks within a given risk category. The actual results could differ from the
results of this analysis because market movements could be different from the
scenarios that were considered or because the composition of the portfolio could
change substantially with time. AIGFP is also exposed to uncertainty on the
amount of dividends paid or the cost of borrowing certain equities.
The following table presents the one day exposure to the potential loss in
fair value of each component of AIGFP's market risk as of June 30, 1998 under
the most adverse scenario as mentioned above:
(in millions)
- ------------------------------------------------------
<TABLE>
<CAPTION>
MARKET RISK
- ------------------------------------------------------
<S> <C>
Interest rate $ 17.6
Currency 32.3
Equity 13.1
- ------------------------------------------------------
</TABLE>
The following table presents the one day exposure to potential loss in fair
value of each component of AIGTG's market risk as of June 30, 1998 under the
most adverse scenario as discussed above:
(in millions)
- ------------------------------------------------------
<TABLE>
<CAPTION>
MARKET RISK
- ------------------------------------------------------
<S> <C>
Interest rate $2.3
Currency 0.1
Commodity 2.8
- ------------------------------------------------------
</TABLE>
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
25
<PAGE> 27
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.
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.
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.
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 transactions.
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
26
<PAGE> 28
derivatives transactions at June 30, 1998 and
December 31, 1997.
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 June 30, 1998 and December 31, 1997:
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REMAINING LIFE
---------------------------------------------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate, currency and
equity/commodity swaps and
swaptions:
Notional amount:
Interest rate swaps $65,537,000 $83,845,000 $49,561,000 $ 9,507,000 $208,450,000 $200,491,000
Currency swaps 10,042,000 32,446,000 11,229,000 4,461,000 58,178,000 54,748,000
Swaptions and equity swaps 2,836,000 3,088,000 3,724,000 1,449,000 11,097,000 11,217,000
- -----------------------------------------------------------------------------------------------------------------------
Total $78,415,000 $119,379,000 $64,514,000 $15,417,000 $277,725,000 $266,456,000
- -----------------------------------------------------------------------------------------------------------------------
Futures and forward contracts:
Exchange traded futures
contracts contractual amount $ 3,345,000 -- -- -- $ 3,345,000 $ 4,411,000
Over the counter forward
contracts contractual amount $17,077,000 -- -- -- $ 17,077,000 $ 13,271,000
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At June 30, 1998 and December
31, 1997, 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 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Counterparty credit quality:
AAA $1,989,189 $ 549 $1,989,738 $2,326,502
AA 3,019,790 12,771 3,032,561 2,311,104
A 1,112,949 11,472 1,124,421 1,165,410
BBB 783,103 -- 783,103 608,495
Below investment grade 301,177 -- 301,177 289,563
- ----------------------------------------------------------------------------------------------------------------------
Total $7,206,208 $24,792 $7,231,000 $6,701,074
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 29
At June 30, 1998 and December 31, 1997, the counterparty breakdown by
industry with re-
spect 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 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-U.S. banks $2,553,882 $24,243 $2,578,125 $2,263,305
Insured municipalities 770,665 -- 770,665 757,514
U.S. industrials 572,144 -- 572,144 514,041
Governmental 725,161 -- 725,161 677,230
Non-U.S. financial service companies 212,398 -- 212,398 64,787
Non-U.S. industrials 957,089 -- 957,089 1,034,792
Special purpose 265,660 -- 265,660 163,109
U.S. banks 453,211 -- 453,211 584,915
U.S. financial service companies 435,849 549 436,398 433,710
Supranationals 260,149 -- 260,149 207,671
- ----------------------------------------------------------------------------------------------------------------------
Total $7,206,208 $24,792 $7,231,000 $6,701,074
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The following tables provide the contractual and notional amounts of
AIGTG's derivatives portfolio at June 30, 1998 and December 31, 1997. In
addition, the estimated positive fair values associated with the derivatives
portfolio are also provided and include a maturity profile for the June 30, 1998
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 June 30, 1998 and December 31, 1997.
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.
28
<PAGE> 30
The following tables present AIGTG's derivatives portfolio and the
associated credit exposure, if
applicable, by maturity and type of derivative at June 30, 1998 and December 31,
1997:
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REMAINING LIFE
-----------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contractual amount of futures,
forwards and options:
Exchange traded futures and
options $ 14,273,817 $1,836,223 $ 88,863 $ -- $ 16,198,903 $ 24,579,298
- ----------------------------------------------------------------------------------------------------------------------
Forwards $289,011,992 $17,188,073 $2,300,384 $ -- $308,500,449 $267,959,285
- ----------------------------------------------------------------------------------------------------------------------
Over the counter purchased
options $ 51,931,672 $16,050,114 $5,083,138 $ -- $ 73,064,924 $ 60,273,754
- ----------------------------------------------------------------------------------------------------------------------
Over the counter sold
options(a) $ 51,212,243 $12,353,796 $4,624,712 $ 40,000 $ 68,230,751 $ 58,189,846
- ----------------------------------------------------------------------------------------------------------------------
Notional amount:
Interest rate swaps and forward
rate agreements $ 64,991,243 $19,182,102 $4,556,511 $ 287,423 $ 89,017,279 $ 77,502,650
Currency swaps 636,036 5,206,692 1,133,359 -- 6,976,087 6,489,333
Swaptions 103,833 1,295,433 1,283,492 1,166,676 3,849,434 1,633,988
- ----------------------------------------------------------------------------------------------------------------------
Total $ 65,731,112 $25,684,227 $6,973,362 $1,454,099 $ 99,842,800 $ 85,625,971
- ----------------------------------------------------------------------------------------------------------------------
Credit exposure:
Futures, forwards, swaptions
and purchased options
contracts and interest rate
and currency swaps:
Gross replacement value $ 6,415,093 $1,662,353 $ 543,550 $ 52,365 $ 8,673,361 $ 11,019,717
Master netting arrangements (3,483,828) (600,576) (232,949) (25,757) (4,343,110) (5,798,311)
Collateral (152,463) (126,485) (24,320) (2,710) (305,978) (224,678)
- ----------------------------------------------------------------------------------------------------------------------
Net replacement value(b) $ 2,778,802 $ 935,292 $ 286,281 $ 23,898 $ 4,024,273 $ 4,996,728
- ----------------------------------------------------------------------------------------------------------------------
</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 exposure.
(b) The net replacement values with respect to exchange traded futures and
options, forward contracts, swaptions and purchased over the counter 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.
29
<PAGE> 31
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At June 30, 1998 and December
31, 1997, 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
----------------------------
1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Counterparty credit quality:
AAA $ 542,526 $ 752,741
AA 1,954,737 2,503,289
A 857,252 1,023,650
BBB 274,041 342,695
Below investment grade 146,379 98,425
Not externally rated, including exchange traded futures
and options* 249,338 275,928
- --------------------------------------------------------------------------------------------
Total $4,024,273 $4,996,728
- --------------------------------------------------------------------------------------------
Counterparty breakdown by industry:
Non-U.S. banks $1,700,007 $2,685,998
U.S. industrials 249,446 163,484
Governmental 130,842 135,269
Non-U.S. financial service companies 242,352 260,412
Non-U.S. industrials 170,733 167,835
U.S. banks 455,184 560,388
U.S. financial service companies 826,371 747,414
Exchanges* 249,338 275,928
- --------------------------------------------------------------------------------------------
Total $4,024,273 $4,996,728
- --------------------------------------------------------------------------------------------
</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 operations; to date, such
activities have not been significant.
AIG, through its Foreign Exchange Operating Committee, evaluates each of
its worldwide consolidated foreign currency 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.
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 legal advisors, both
domestically and abroad, in order to understand the nature of legal risk, to
improve documentation and to strengthen transaction structure.
ACCOUNTING STANDARDS
In February 1997, 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.
AIG adopted all requirements of FASB 128 at December 31, 1997 and all prior
period information has been restated.
In June 1997, FASB issued Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" (FASB 130) and
30
<PAGE> 32
Statement of Financial Accounting Standards
No. 131 "Disclosure about Segments of an Enterprise and Related Information"
(FASB 131).
FASB 130 establishes standards for reporting comprehensive income and its
components in a full set of general purpose financial statements. FASB 130 is
effective for AIG as of January 1, 1998 and has been adopted herein. FASB 130
had no impact on AIG's results of operations, financial condition or liquidity.
FASB 131 establishes standards for the way AIG is required to disclose
certain information about its operating segments in its annual financial
statements and certain selected information in its interim financial statements.
FASB 131 establishes, where practicable, standards with respect to geographic
areas, among other things. Certain descriptive information is also required.
FASB 131 is effective for the year ended December 31, 1998.
In February 1998, FASB issued Statement of Financial Accounting Standards
No. 132 "Employers' Disclosures about Pensions and Other Postretirement
Benefits" (FASB 132). This statement requires AIG to revise its disclosures
about pension and other postretirement benefit plans and does not change the
measurement or recognition of these plans. Also, FASB 132 requires additional
information on changes in the benefit obligations and fair values of plan
assets. FASB 132 is effective for the year ended December 31, 1998.
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" (FASB 133).
This statement requires AIG to recognize all derivatives in the consolidated
balance sheet measuring these derivatives at fair value. The recognition of the
changes in the fair value of a derivative depends on a number of factors,
including the intended use of the derivative. Currently, AIGTG and AIGFP
present, in all material respects, the changes in fair value of their derivative
transactions as a component of AIG's operating income. AIG is evaluating the
impact of FASB 133 with respect to any of its other derivative transactions that
AIG's other operations may engage in. AIG believes that the impact of FASB 133
on its results of operations, financial condition or liquidity will not be
significant. FASB 133 is effective for the year commencing January 1, 2000.
RECENT DEVELOPMENTS
AIG is subject to the Year 2000 computer program issue. That is, certain of
AIG's computer systems, software products or other business systems may not
accept, input, store, or output dates in the years 1999, 2000 and thereafter
without error or interruption. If such a deficiency is not corrected, it is
possible that some applications could fail or create erroneous results by or at
the year 2000.
AIG has already reviewed and identified its business systems, including
computer programs that are subject to such Year 2000 risk. Accordingly, AIG
commenced the remediation of such systems and such remediation and testing
thereof is anticipated to be complete in advance of the year 2000. The costs of
such remediation are expensed as incurred. Approximately $60 million has been
incurred to date. These expenditures are not material to AIG's results of
operations, financial condition or liquidity.
AIG has also initiated formal communications to those non-AIG entities
which have significant transactions with AIG to coordinate the Year 2000
conversions.
On January 1, 1999, certain of the member nations of the European Economic
and Monetary Union (EMU) will adopt a common currency, the Euro. Once the
national currencies are phased out, the Euro will be the sole legal tender of
each of these nations. During the transition period, commerce of these nations
will be transacted in the Euro or in the currently existing national currency.
AIG has identified the significant issues and will be prepared with respect
to the phase in of and ultimate redenomination to the Euro. Any costs associated
with the adoption of the Euro are expensed as incurred and are not material to
AIG's results of operations, financial condition or liquidity.
In January 1998, AIG purchased the 76.1 percent of the outstanding shares
of SELIC Holdings, Ltd. (SELIC) which AIG did not own. Prior to the purchase of
these shares, SELIC's operations were accounted for on an equity basis and
presented as a component of equity in income of minority-owned insurance
operations. Subsequent to the acquisition, SELIC was consolidated as a component
of general insurance operations.
31
<PAGE> 33
As a result of recent purchases of the common stock of Transatlantic
Holdings, Inc. (Transatlantic), as of August 7, 1998, AIG owns more than 50
percent of the voting securities of Transatlantic. Commencing with the third
quarter of 1998, AIG intends to account for its investment in Transatlantic on a
consolidated basis.
As a result of recent purchases of the common stock of 20th Century
Industries (20th Century), the conversion of shares of 20th Century convertible
preferred stock and the exercise of warrants to purchase common stock, as of
July 27, 1998, AIG owns more than 50 percent of the voting securities of 20th
Century. Commencing with the third quarter of 1998, AIG intends to account for
its investment in 20th Century on a consolidated basis.
32
<PAGE> 34
PART II -- OTHER INFORMATION
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on May 20, 1998, the
Shareholders:
(a) elected seventeen directors as follows:
<TABLE>
<CAPTION>
NOMINEE SHARES FOR SHARES WITHHELD
------- ---------- ---------------
<S> <C> <C>
M. Bernard Aidinoff............................. 640,302,309 6,177,225
Lloyd M. Bentsen................................ 635,180,551 11,298,983
Pei-yuan Chia................................... 635,941,645 10,537,889
Marshall A. Cohen............................... 642,207,262 4,272,272
Barber B. Conable, Jr........................... 641,548,162 4,931,372
Martin Feldstein................................ 641,489,414 4,990,120
Leslie L. Gonda................................. 640,906,051 5,573,483
Evan G. Greenberg............................... 640,194,140 6,285,394
Maurice R. Greenberg............................ 640,102,601 6,376,933
Carla A. Hills.................................. 636,611,257 9,868,277
Frank J. Hoenemeyer............................. 641,553,695 4,925,839
Edward E. Matthews.............................. 640,262,190 6,217,344
Dean P. Phypers................................. 642,172,791 4,306,743
Howard I. Smith................................. 640,293,373 6,186,161
Thomas R. Tizzio................................ 640,287,666 6,191,868
Edmund S.W. Tse................................. 640,304,732 6,174,802
Frank G. Wisner................................. 637,864,262 8,615,272
</TABLE>
(b) approved, by a vote of 609,638,883 shares to 36,252,277 shares, with
588,374 abstentions, a proposal to amend the Restated Certificate of
Incorporation to increase the authorized number of shares of Common
Stock from 1,000,000,000 shares to 2,000,000,000 shares;
(c) approved, by a vote of 645,664,837 shares to 372,092 shares, with
442,605 abstentions, a proposal to select PricewaterhouseCoopers LLP as
independent accountants for 1998;
(d) rejected, by a vote of 95,783,703 shares for and 490,329,442 shares
against, with 19,902,030 shares abstaining and 40,464,359 shares not
voting, a shareholder proposal requesting AIG to change the composition
of the Nominating Committee; and
(e) rejected, by a vote of 84,655,628 shares for and 504,377,671 shares
against, with 16,981,876 shares abstaining and 40,464,359 shares not
voting, a shareholder proposal requesting AIG to provide a report on
certain Board matters.
ITEM 5 -- OTHER INFORMATION
Under AIG's By-Laws, notice of any shareholder proposal to be made at the
1999 Annual Meeting of Shareholders must be received no less than 60 days nor
more than 90 days prior to the date of the Annual Meeting. If public notice of
the 1999 Annual Meeting is not given at least 70 days before the meeting date,
any shareholder proposal must be received by AIG within 10 days after such
public notice.
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
June 30, 1998.
33
<PAGE> 35
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/ HOWARD I. SMITH
--------------------------------------
Howard I. Smith
Executive Vice President, Chief
Financial Officer and Comptroller
Dated: August 13, 1998
34
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession................................... None
3(i) Certificate of Amendment of Certificate of Incorporation of
AIG, filed June 3, 1998..................................... Filed herewith.
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>
35
<PAGE> 1
Exhibit 3(i)
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
AMERICAN INTERNATIONAL GROUP, INC.
-------------------------------------------------------------
Adopted in accordance with the provisions of Section 242
of the General Corporation Law of the State of Delaware
-------------------------------------------------------------
WE, HOWARD I. SMITH, Executive Vice President, Chief Financial Officer and
Comptroller, and KATHLEEN E. SHANNON, Vice President and Secretary of AMERICAN
INTERNATIONAL GROUP, INC., a corporation existing under the Laws of the State
of Delaware, DO HEREBY CERTIFY under the seal of said corporation as follows:
FIRST: The Restated Certificate of Incorporation of said corporation,
as amended, has been amended so that the first paragraph of ARTICLE FOUR
thereof shall read in its entirety as follows:
"The total number of shares of all classes of stock which the
Company shall have authority to issue is 2,006,000,000, of which
6,000,000 shares are to be Serial Preferred Stock, par value $5.00
per share (hereinafter called the "Serial Preferred Stock"), and
2,000,000,000 shares are to be Common Stock, par value $2.50 per
share (hereinafter called the "Common Stock")."
SECOND: That such amendment has been duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law of the State
of Delaware by the Board of Directors of said corporation and by the
affirmative vote of a majority of the shares of Common Stock present
and entitled to vote at the May 20, 1998 Annual Meeting of Shareholders
duly called and held upon notice in accordance with Section 222 of the
General Corporation Law of the State of Delaware.
<PAGE> 2
THIRD: That the capital of the corporation will not be reduced under
or by reason of said amendment.
IN WITNESS WHEREOF, we have both signed this certificate and caused the
corporate seal of the corporation to be hereunder affixed this 26th day of May,
1998.
/s/ Howard I. Smith
-----------------------------------
HOWARD I. SMITH
Executive Vice President, Chief
Financial Officer and Comptroller
ATTEST:
/s/ Kathleen E. Shannon
- ------------------------------------
KATHLEEN E. SHANNON
Vice President and Secretary
<PAGE> 3
STATE OF NEW YORK
ss:
COUNTY OF NEW YORK
BE IT REMEMBERED that on this 26th day of May, 1998, personally came
before me, Sandra A. LeMonds, a Notary Public in and for the County and State
aforesaid, HOWARD I. SMITH and KATHLEEN E. SHANNON, Executive Vice President,
Chief Financial Officer and Comptroller and Vice President and Secretary,
respectively, of AMERICAN INTERNATIONAL GROUP, INC., the corporation mentioned
in the foregoing Certificate, to me known and known by me to be the persons
whose signatures appear on the foregoing Certificate, and they being by me duly
sworn did depose and say that they signed and acknowledged the said Certificate
to be their act and deed and the act and deed of the said corporation, and that
the seal thereto affixed is the seal of the said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year hereinabove written.
/s/ Sandra A. LeMonds
---------------------
Sandra LeMonds
Notary Public, State of NY
No. 01 LE5059041
Qualified in New York County
Commission expires April 22, 2000
<PAGE> 1
EXHIBIT 11
AMERICAN INTERNATIONAL GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1998(a) 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SHARE INFORMATION REFLECTS AN ADJUSTMENT
ON A PRO FORMA BASIS FOR A COMMON STOCK
SPLIT IN THE FORM OF A 50 PERCENT COMMON
STOCK DIVIDEND PAID JULY 31, 1998.
Numerator:
Net income (applicable to common stock)... $1,828,543 $1,607,430 $ 942,011 $ 826,495
========== ========== ========== ==========
Denominator:
Average outstanding shares used in the
computation of per share earnings:
Common Stock............................ 1,138,682 1,138,689 1,138,682 1,138,689
Common stock in treasury................ (89,137) (84,095) (88,890) (85,411)
---------- ---------- ---------- ----------
Average outstanding shares -- basic....... 1,049,545 1,054,594 1,049,792 1,053,278
---------- ---------- ---------- ----------
Stock options (treasury stock method)..... 5,118 4,738 5,114 4,547
Stock purchase plan....................... 97 77 93 74
---------- ---------- ---------- ----------
Average outstanding shares -- diluted..... 1,054,760 1,059,409 1,054,999 1,057,899
---------- ---------- ---------- ----------
Net income per share:
Basic................................... $ 1.74 $ 1.52 $ 0.90 $ 0.78
---------- ---------- ---------- ----------
Diluted................................. $ 1.73 $ 1.52 $ 0.89 $ 0.78
---------- ---------- ---------- ----------
</TABLE>
- ---------------
(a) The number of common shares outstanding as of June 30, 1998 was
1,050,001,900.
The number of common shares that would have been outstanding as of June 30,
1998 assuming the exercise or issuance of all potentially dilutive common
shares is 1,055,712,757.
<PAGE> 1
EXHIBIT 12
AMERICAN INTERNATIONAL GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income before income taxes................ $2,590,500 $2,266,671 $1,331,694 $1,170,395
Less -- Equity income of less than 50%
owned persons........................... 73,061 66,147 38,977 40,954
Add -- Dividend from less than 50% owned
persons................................. 17,288 16,565 7,841 13,104
---------- ---------- ---------- ----------
2,534,727 2,217,089 1,300,558 1,142,545
Add --
Fixed charges........................... 1,007,845 893,281 524,196 443,330
Less --
Capitalized interest.................... 31,887 23,778 16,989 11,927
---------- ---------- ---------- ----------
Income before income taxes and fixed
charges................................. $3,510,685 $3,086,592 $1,807,765 $1,573,948
========== ========== ========== ==========
Fixed charges:
Interest costs.......................... $ 963,811 $ 856,179 $ 502,179 $ 424,779
Rent expense*........................... 44,034 37,102 22,017 18,551
---------- ---------- ---------- ----------
Total fixed charges............. $1,007,845 $ 893,281 $ 524,196 $ 443,330
========== ========== ========== ==========
Ratio of earnings to fixed charges........ 3.48 3.46 3.45 3.55
</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 5.81 and 5.32 for the
second quarter and 5.74 and 5.37 for the first six months of 1998 and 1997,
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 39,998,093
<DEBT-CARRYING-VALUE> 11,991,025
<DEBT-MARKET-VALUE> 12,686,092
<EQUITIES> 5,335,780
<MORTGAGE> 3,085,160
<REAL-ESTATE> 1,380,709
<TOTAL-INVEST> 128,410,841
<CASH> 162,854
<RECOVER-REINSURE> 16,134,201
<DEFERRED-ACQUISITION> 6,801,252
<TOTAL-ASSETS> 176,103,221
<POLICY-LOSSES> 59,783,141
<UNEARNED-PREMIUMS> 9,204,004
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 13,505,217
<NOTES-PAYABLE> 18,697,784
0
0
<COMMON> 1,897,804
<OTHER-SE> 23,831,655
<TOTAL-LIABILITY-AND-EQUITY> 176,103,221
11,602,540
<INVESTMENT-INCOME> 2,562,812
<INVESTMENT-GAINS> 78,766
<OTHER-INCOME> (70,211)
<BENEFITS> 9,455,793
<UNDERWRITING-AMORTIZATION> 938,382
<UNDERWRITING-OTHER> 1,619,214
<INCOME-PRETAX> 2,590,500
<INCOME-TAX> 761,957
<INCOME-CONTINUING> 1,828,543
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,828,543
<EPS-PRIMARY> 1.74 <F1>
<EPS-DILUTED> 1.73 <F1>
<RESERVE-OPEN> 21,171,500
<PROVISION-CURRENT> 5,039,900
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 1,633,100
<PAYMENTS-PRIOR> 3,081,300
<RESERVE-CLOSE> 21,497,000
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>EARNINGS PER SHARE INFORMATION REFLECTS AN ADJUSTMENT ON A PRO FORMA BASIS
FOR A COMMON STOCK SPLIT IN THE FORM OF A 50 PERCENT COMMON DIVIDEND PAID JULY
31, 1998. PRIOR PERIOD FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED FOR THIS
STOCK SPLIT.
</FN>
</TABLE>
