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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JUNE 3, 1999
AMERICAN INTERNATIONAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 13-2592361
(STATE OR OTHER JURISDICTION OF 1-8787 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) (COMMISSION FILE NUMBER) IDENTIFICATION NO.)
</TABLE>
70 PINE STREET
NEW YORK, NEW YORK 10270
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 770-7000
------------------------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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ITEM 5. OTHER EVENTS
American International Group, Inc. (AIG) hereby files restated financial
statements and financial statement schedules for the three years ended December
31, 1998 prepared in accordance with Regulation S-X, together with Selected
Consolidated Financial Data and Management's Discussion and Analysis of
Financial Condition and Results of Operations, to retroactively reflect the
acquisition of SunAmerica Inc. as of January 1, 1999. Also included are Exhibit
12, Computation of Ratios of Earnings to Fixed Charges, and Exhibit 23, Consent
of Independent Accountants.
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data, which has been restated to
include the operations of SunAmerica Inc., the Maryland corporation which was
merged into AIG on January 1, 1999, on a pooling of interest basis, is presented
in accordance with generally accepted accounting principles. This data should be
read in conjunction with the financial statements and accompanying notes
included elsewhere herein.
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Revenues(a) $ 35,716 $ 32,553 $ 29,325 $ 26,610 $ 22,963
General insurance:
Net premiums written 14,586 13,408 12,692 11,893 10,866
Net premiums earned 14,098 12,421 11,855 11,406 10,287
Adjusted underwriting profit 531 490 450 417 201
Net investment income 2,192 1,854 1,691 1,547 1,436
Realized capital gains 205 128 65 68 51
Operating income 2,928 2,472 2,206 2,032 1,688
Life insurance:
Premium income 10,293 9,956 8,995 8,044 6,730
Net investment income 5,201 4,521 3,805 3,059 2,413
Realized capital gains (losses) (74) (9) 4 1 66
Operating income 2,373 2,048 1,657 1,331 1,144
Financial services operating income 869 671 501 424 386
Asset management operating income 191 127 101 35 66
Equity in income of minority-owned insurance operations 57 114 99 82 56
Other realized capital losses (7) (29) (12) (30) (51)
Income before income taxes, minority interest and cumulative
effect of accounting change 6,277 5,310 4,468 3,783 3,222
Income taxes 1,785 1,525 1,234 1,041 851
Income before minority interest and cumulative effect of
accounting change 4,492 3,785 3,234 2,742 2,371
Minority interest (210) (74) (63) (38) (30)
Income before cumulative effect of accounting change 4,282 3,711 3,171 2,704 2,341
Cumulative effect of accounting change, net of tax -- -- -- -- (34)
Net income 4,282 3,711 3,171 2,704 2,307
Earnings per common share(b):
Income before cumulative effect of accounting change 3.51 3.06 2.61 2.22 1.93
Cumulative effect of accounting change, net of tax:
SunAmerica Inc. -- -- -- -- (.03)
Basic 3.51 3.06 2.61 2.22 1.90
Diluted 3.44 3.00 2.56 2.19 1.86
Cash dividends per common share .25 .20 .17 .15 .12
Total assets 233,676 199,614 172,330 150,981 129,002
Long-term debt(c) 22,720 18,950 18,079 14,977 13,087
Capital funds (shareholders' equity) 30,123 26,585 23,705 21,040 17,383
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</TABLE>
(a) Represents the sum of general net premiums earned, life premium income, net
investment income, financial services commissions, transactions and other
fees, asset management commissions and other fees, equity in income of
minority-owned insurance operations and realized capital gains (losses). In
1997, agency operations were presented as a component of general insurance
and for years prior to 1997 agency results have been reclassified to conform
to this presentation.
(b) Per share amounts for all periods presented reflect the adoption of the
Statement of Financial Accounting Standards No. 128 "Earnings per Share."
(c) Including commercial paper and excluding that portion of long-term debt
maturing in less than one year.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF American International Group, Inc. and
Subsidiaries
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATIONAL REVIEW
GENERAL INSURANCE OPERATIONS
AIG's general insurance subsidiaries are multiple line companies writing
substantially all lines of property and casualty insurance. One or more of these
subsidiaries is licensed to write substantially all of these lines in all states
of the United States and in approximately 100 foreign countries.
Domestic general insurance operations are comprised of the Domestic
Brokerage Group, including the domestic operations of Transatlantic Holdings,
Inc. (Transatlantic), Personal Lines, including 20th Century Industries (20th
Century) and Mortgage Guaranty.
Commencing with the third quarter of 1998, Transatlantic and 20th Century
were consolidated into AIG's financial statements, as a result of AIG obtaining
majority ownership.
The Domestic Brokerage Group (DBG) is the primary domestic division. DBG
writes substantially all classes of business insurance accepting such business
mainly from insurance brokers. This provides DBG the opportunity to select
specialized markets and retain underwriting control. Any licensed broker is able
to submit business to DBG without the traditional agent-company contractual
relationship, but such broker usually has no authority to commit DBG to accept a
risk.
AIG's Foreign General insurance group accepts risks primarily underwritten
through American International Underwriters (AIU), a marketing unit consisting
of wholly owned agencies and insurance entities. The Foreign General insurance
group also includes business written by AIG's foreign-based insurance
subsidiaries for their own accounts. The Foreign General insurance group uses
various marketing methods to write both business and personal lines insurance
with certain refinements for local laws, customs and needs. AIU operates in over
70 countries in Asia, the Pacific Rim, Europe, Africa, Middle East and Latin
America. Transatlantic's foreign operations are included in this group. (See
also Note 18 of Notes to Financial Statements.)
General insurance operations for the twelve month periods ending December
31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
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1998 1997 1996
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<S> <C> <C> <C>
Net premiums written:
Domestic $ 9,787 $ 9,038 $ 8,367
Foreign 4,799 4,370 4,325
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Total $14,586 $13,408 $12,692
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Net premiums earned:
Domestic $ 9,471 $ 8,352 $ 7,822
Foreign 4,627 4,069 4,033
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Total $14,098 $12,421 $11,855
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Adjusted underwriting
profit (loss):
Domestic $ 9 $ (7) $ 52
Foreign 522 497 398
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Total $ 531 $ 490 $ 450
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Net investment income:
Domestic $ 1,754 $ 1,485 $ 1,352
Foreign 438 369 339
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Total $ 2,192 $ 1,854 $ 1,691
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Operating income before
realized capital gains:
Domestic $ 1,763 $ 1,478 $ 1,404
Foreign 960 866 737
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Total 2,723 2,344 2,141
Realized capital gains 205 128 65
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Operating income $ 2,928 $ 2,472 $ 2,206
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</TABLE>
In AIG's general insurance operations, 1998 net premiums written and net
premiums earned increased 8.8 percent and 13.5 percent, respectively, from those
of 1997. In 1997, net premiums written increased 5.6 percent and net premiums
earned increased 4.8 percent when compared to 1996.
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American International Group, Inc. and Subsidiaries
General insurance domestic net premiums written and net premiums earned
were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
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1998 1997 1996
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<S> <C> <C> <C>
Net premiums written:
DBG $8,002 $7,885 $7,324
Personal Lines 1,422 812 725
Mortgage Guaranty 363 341 318
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Total $9,787 $9,038 $8,367
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Net premiums earned:
DBG $7,814 $7,207 $6,763
Personal Lines 1,280 790 734
Mortgage Guaranty 377 355 325
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Total $9,471 $8,352 $7,822
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</TABLE>
The commercial insurance market remains highly competitive and excessively
capitalized, both domestically and overseas. DBG has been able to sustain some
growth in various specialty markets, such as pollution, warranty and risk
finance, where AIG provides cost effective coverages for large complex risks,
underwriting flexibility, and creative risk financing solutions; however, in
1998 DBG declined to renew $450 million of domestic business where underwriting
and pricing standards could not be achieved. Non-renewed policies were
principally in the workers' compensation, traditional casualty and property
lines of business.
As reflected in the preceding table showing the distribution of net
premiums written and net premiums earned, domestic growth was primarily achieved
through the growth in the personal auto insurance segment of Personal Lines.
Personal Lines net premiums written increased $610 million in 1998 over 1997,
compared to an increase of $87 million in 1997 over 1996. The consolidation of
20th Century Industries in 1998 accounted for the most significant part of the
increase, $390 million. The balance of the increase was related principally to
higher voluntary auto premiums produced by the mass marketing and specialty auto
divisions of Personal Lines.
Growth of 9.8 percent and 13.7 percent for foreign general insurance net
premiums written and net premiums earned, respectively, in 1998 over 1997
reflect growth of operations in the United Kingdom, the consolidation of
Transatlantic's foreign operations and the inclusion of newly acquired Brazilian
operations for the full year 1998, as opposed to less than one quarter in 1997.
Growth in U.S. dollars, as described below, was negatively impacted by the U.S.
dollar strengthening throughout the year. Foreign general insurance operations
produced 32.9 percent of the general insurance net premiums written in 1998,
32.6 percent in 1997 and 34.1 percent in 1996.
In comparing the foreign exchange rates used to translate the results of
the foreign general insurance group's operations during 1998 to those foreign
exchange rates used to translate the foreign general insurance group's results
during 1997, the U.S. dollar strengthened in value in relation to most major
foreign currencies in which the foreign general insurance group conducts its
business. Accordingly, if the foreign general insurance group's net premiums
written were translated into U.S. dollars utilizing those exchange rates which
prevailed in 1997, thus mitigating the effects of the U.S. dollar's general
strengthening, the foreign general insurance group's premium growth would have
been 17.5 percent. This growth equates to growth in original currency. (See also
the discussion under "Capital Resources" herein.)
Because of the nature and diversity of AIG's operations and the continuing
rapid changes in the insurance industry worldwide, together with the factors
discussed above, it is difficult to assess further or project future growth in
AIG's premiums and reserves.
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.
AIG, along with most general insurance entities, uses the loss ratio, the
expense ratio and the combined ratio as measures of performance. The loss ratio
is derived as the sum of losses and loss expenses incurred divided by net
premiums earned. The expense ratio is derived as statutory underwriting expenses
divided by net premiums written. The combined ratio is the sum of the loss ratio
and the expense ratio. These ratios are relative measurements that describe for
every $100 of net premiums earned or written, the cost of losses and statutory
expenses, respectively. The combined ratio presents the total cost per $100 of
premium production. A combined ratio below 100 demonstrates underwriting profit;
a combined ratio above 100 demonstrates underwriting loss. The statutory general
insurance ratios were as follows:
<TABLE>
<CAPTION>
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1998 1997 1996
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<S> <C> <C> <C>
Domestic:
Loss Ratio 84.25 84.44 85.21
Expense Ratio 15.87 15.90 14.79
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Combined Ratio 100.12 100.34 100.00
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Foreign:
Loss Ratio 57.87 56.61 57.82
Expense Ratio 30.76 31.16 31.77
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Combined Ratio 88.63 87.77 89.59
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Consolidated:
Loss Ratio 75.59 75.33 75.89
Expense Ratio 20.77 20.87 20.58
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Combined Ratio 96.36 96.20 96.47
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</TABLE>
AIG believes that underwriting profit is the true measure of the
performance of the core business of a general insurance company.
3
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Underwriting profit is measured two ways: statutory underwriting profit and
Generally Accepted Accounting Principles (GAAP) underwriting profit.
Statutory underwriting profit is arrived at by reducing net premiums earned
by net losses incurred and net expenses incurred. Statutory accounting differs
from GAAP, as statutory accounting requires immediate expense recognition and
ignores the matching of revenues and expenses as required by GAAP. That is, for
statutory purposes, all expenses, most specifically acquisition expenses, are
recognized immediately, not consistent with the revenues earned.
A basic premise of GAAP accounting is the recognition of expenses at the
same time revenues are earned, the principle of matching. Therefore, to convert
underwriting results to a GAAP basis, acquisition expenses are deferred and
recognized together with the related revenues. Accordingly, the statutory
underwriting profit has been adjusted as a result of acquisition expenses being
deferred as required by GAAP. Thus, "adjusted underwriting profit" is a GAAP
measurement which can be viewed as gross margin or an intermediate subtotal in
calculating operating income and net income.
A major part of the discipline of a successful general insurance company is
to produce an underwriting profit, exclusive of investment income. If
underwriting is not profitable, losses incurred are a major factor. The result
is that the premiums are inadequate to pay for losses and expenses and produce a
profit; therefore, investment income must be used to cover underwriting losses.
If assets and the income therefrom are insufficient to pay claims and expenses
over extended periods, an insurance company cannot survive. For these reasons,
AIG views and manages its underwriting operations separately from its investment
operations.
The adjusted underwriting profits were $531 million in 1998, $490 million
in 1997 and $450 million in 1996. The regulatory, product type and competitive
environment as well as the degree of litigation activity in any one country
varies significantly. These factors have a direct impact on pricing and
consequently profitability as reflected by adjusted underwriting profit and
statutory general insurance ratios. (See also Notes 4 and 18 of Notes to
Financial Statements.)
AIG's results reflect the net impact of incurred losses from catastrophes
approximating $110 million in 1998, $16 million in 1997 and $78 million in 1996.
AIG's gross incurred losses from catastrophes approximated $625 million in 1998,
$22 million in 1997 and $240 million in 1996. The impact of losses caused by
catastrophes can fluctuate widely from year to year, making comparisons of
recurring type business more difficult. The pro forma table below excludes
catastrophe losses in order to present comparable results of AIG's recurring
core underwriting operations. The pro forma consolidated statutory general
insurance ratios would be as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Loss Ratio 74.81 75.20 75.23
Expense Ratio 20.77 20.87 20.58
- -------------------------------------------------------------
Combined Ratio 95.58 96.07 95.81
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</TABLE>
AIG's ability to maintain its combined ratio below 100 is primarily
attributable to the profitability of AIG's Foreign General insurance operations
and AIG's emphasis on maintaining its disciplined underwriting, especially in
the domestic specialty markets. In addition, AIG does not seek net premium
growth where rates do not adequately reflect its assessment of exposures.
General insurance net investment income in 1998 increased 18.3 percent when
compared to 1997. In 1997, net investment income increased 9.6 percent over
1996. The growth in net investment income in each of the three years was
primarily attributable to new cash flow for investment. The new cash flow was
generated from net general insurance operating cash flow and included the
compounding of previously earned and reinvested net investment income. (See also
the discussion under "Liquidity" herein and Note 8 of Notes to Financial
Statements.)
General insurance realized capital gains were $205 million in 1998, $128
million in 1997 and $65 million in 1996. These realized gains resulted from the
ongoing management of the general insurance investment portfolios within the
overall objectives of the general insurance operations and arose primarily from
the disposition of equity securities and available for sale fixed maturities as
well as redemptions of fixed maturities.
General insurance operating income in 1998 increased 18.4 percent when
compared to 1997. The 1997 results reflect an increase of 12.1 percent from
1996. The contribution of general insurance operating income to income before
income taxes and minority interest was 46.6 percent in 1998 and 1997 compared to
49.4 percent in 1996.
AIG is a major purchaser of reinsurance for its general insurance
operations. AIG is cognizant of the need to exercise good judgment in the
selection and approval of both domestic and foreign companies participating in
its reinsurance programs. AIG insures risks in over 100 countries and its
reinsurance programs must be coordinated in order to provide AIG the level of
reinsurance protection that AIG desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.
AIG's general reinsurance assets amounted to $17.61 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at December
31, 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
4
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American International Group, Inc. and Subsidiaries
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, 1998, 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 93 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.
AIG maintains an allowance for estimated unrecoverable reinsurance and has
been largely successful in its previous recovery efforts. At December 31, 1998,
AIG had allowances for unrecoverable reinsurance approximating $100 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 authorities. All material
intercompany transactions have been eliminated in consolidation.
At December 31, 1998, the consolidated general reinsurance assets of $17.61
billion include reinsurance recoverables for paid losses and loss expenses of
$1.72 billion and $13.69 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
December 31, 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 December 31, 1998, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $38.31 billion. These loss reserves
represent the accumulation of estimates of ultimate losses, including IBNR, and
loss expenses and amounts of discounting related to certain workers'
compensation claims. At December 31, 1998, general insurance net loss reserves
increased $3.45 billion to $24.62 billion. The consolidation of Transatlantic
and 20th Century in 1998 increased loss reserves $2.9 billion as compared to
1997; the balance of the increase of $550 million, representing a 2.2 percent of
year end net loss reserves, was comprised of reserves related to new business.
The net loss reserves represent loss reserves reduced by reinsurance
recoverables, 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 December 31, 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. Such
lines include excess and umbrella liability, directors and officers' liability,
professional liability, medical malpractice, general liability, products'
liability, and related classes. These lines account for approximately 50 percent
of net losses and loss expenses. The other group is 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 six 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
5
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 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 environmental 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. Additionally, proposed
legislation, if passed in current form, would be expected to reduce ultimate
asbestos exposure.
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 December
31, 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
December 31, 1998, 1997 and 1996 follows. The 1998 reserve activity includes
Transatlantic.
6
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American International Group, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
GROSS NET GROSS NET GROSS NET
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<S> <C> <C> <C> <C> <C> <C>
ASBESTOS:
Reserve for losses and loss expenses at beginning of year $ 842 $ 195 $ 876 $ 172 $ 744 $ 127
Losses and loss expenses incurred 375 111 238 68 393 103
Losses and loss expenses paid (253) (47) (272) (45) (261) (58)
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Reserve for losses and loss expenses at end of year $ 964 $ 259 $ 842 $ 195 $ 876 $ 172
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ENVIRONMENTAL:
Reserve for losses and loss expenses at beginning of year $1,467 $ 593 $1,427 $ 571 $1,198 $ 380
Losses and loss expenses incurred 285 106 223 85 379 240
Losses and loss expenses paid (216) (93) (183) (63) (150) (49)
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Reserve for losses and loss expenses at end of year $1,536 $ 606 $1,467 $ 593 $1,427 $ 571
- -------------------------------------------------------------------------------------------------------------------
COMBINED:
Reserve for losses and loss expenses at beginning of year $2,309 $ 788 $2,303 $ 743 $1,942 $ 507
Losses and loss expenses incurred 660 217 461 153 772 343
Losses and loss expenses paid (469) (140) (455) (108) (411) (107)
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Reserve for losses and loss expenses at end of year $2,500 $ 865 $2,309 $ 788 $2,303 $ 743
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The gross and net IBNR included in the aforementioned reserve for losses
and loss expenses at December 31, 1998, 1997 and 1996 were estimated as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------- -------------- --------------
GROSS NET GROSS NET GROSS NET
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Combined $979 $359 $1,004 $394 $1,070 $437
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
A summary of asbestos and environmental claims count activity for the years
ended December 31, 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------- ----------------------------------- ------------------------
ASBESTOS ENVIRONMENTAL COMBINED ASBESTOS ENVIRONMENTAL COMBINED ASBESTOS ENVIRONMENTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Claims at beginning of
year 6,150 17,422 23,572 5,668 17,395 23,063 5,244 17,858
Claims during year:
Opened 887 3,502 4,389 1,073 3,624 4,697 1,083 3,836
Settled (81) (677) (758) (169) (644) (813) (117) (466)
Dismissed or otherwise
resolved (568) (3,687) (4,255) (422) (2,953) (3,375) (542) (3,833)
- --------------------------------------------------------------------------------------------------------------------------------
Claims at end of year 6,388 16,560 22,948 6,150 17,422 23,572 5,668 17,395
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------- --------
1996
--------
COMBINED
- -------------------------- --------
<S> <C>
Claims at beginning of
year 23,102
Claims during year:
Opened 4,919
Settled (583)
Dismissed or otherwise
resolved (4,375)
- ----------------------------------------------
Claims at end of year 23,063
- -------------------------------------------------------
</TABLE>
7
<PAGE> 9
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The average cost per claim settled, dismissed or otherwise resolved for the
years ended December 31, 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
GROSS NET
- ------------------------------------------------------------
<S> <C> <C>
1998
Asbestos $390,300 $71,800
Environmental 49,600 21,500
Combined 93,700 28,000
- ------------------------------------------------------------
1997
Asbestos $460,600 $77,000
Environmental 51,000 17,600
Combined 108,800 26,000
- ------------------------------------------------------------
1996
Asbestos $396,700 $88,500
Environmental 34,900 11,400
Combined 83,000 21,600
- ------------------------------------------------------------
</TABLE>
A.M. Best, 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. This is a ratio
derived by taking the current ending losses and loss expense reserves and
dividing by the average annual payments for the prior three years. Therefore,
the ratio derived is a simplistic measure of an estimate of the number of years
it would be before the current ending losses and loss expense reserves would be
paid off using recent average 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 for the years ended December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
GROSS NET
- ------------------------------------------------------------
<S> <C> <C>
1998
Involuntary survival ratios:
Asbestos 3.7 5.2
Environmental 17.0 17.2
Combined 7.8 10.8
- ------------------------------------------------------------
1997
Involuntary survival ratios:
Asbestos 3.8 4.6
Environmental 14.6 18.0
Combined 7.7 11.2
- ------------------------------------------------------------
1996
Involuntary survival ratios:
Asbestos 5.1 4.6
Environmental 16.2 18.8
Combined 9.4 11.5
- ------------------------------------------------------------
</TABLE>
AIG's operations are negatively impacted under guarantee fund assessment
laws which exist in most states. As a result of operating in a state which has
guarantee fund assessment laws, a solvent insurance company may be assessed for
certain obligations arising from the insolvencies of other insurance companies
which operated in that state. AIG generally records these assessments upon
notice. Additionally, certain states permit at least a portion of the assessed
amount to be used as a credit against a company's future premium tax
liabilities. Therefore, the ultimate net assessment cannot reasonably be
estimated. The guarantee fund assessments net of credits for 1998, 1997 and 1996
were $16 million, $15 million and $19 million, respectively.
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
AIG's life insurance subsidiaries offer a wide range of traditional insurance
and financial and investment products. One or more of these subsidiaries is
licensed to write life insurance in all states in the United States and in over
70 foreign countries. Traditional products consist of individual and group life,
annuity, endowment and accident and health policies. Financial and investment
products consist of single premium annuity, variable annuities, guaranteed
investment contracts, universal life and pensions.
AIG's three principal overseas life operations are American Life Insurance
Company (ALICO), American International Assurance Company, Limited together with
American International Assurance Company (Bermuda) Limited (AIA) and Nan Shan
8
<PAGE> 10
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
Life Insurance Company, Ltd. (Nan Shan). ALICO is incorporated in Delaware and
all of its business is written outside of the United States. ALICO has
operations either directly or through subsidiaries in approximately 50 countries
located in Europe, Africa, Latin America, the Caribbean, the Middle East, and
the Far East, with Japan being the largest territory. AIA operates primarily in
Hong Kong, Singapore, Malaysia and Thailand. Nan Shan operates in Taiwan. AIG's
domestic life operations are comprised of two separate operations, AIG's
domestic life companies and the life insurance subsidiaries of SunAmerica Inc.
(SunAmerica), a Delaware corporation which owns substantially all of the
subsidiaries which were owned by SunAmerica Inc., the Maryland company which was
merged into AIG (Original SunAmerica). Both of these operations sell primarily
financial and investment type products. (See also Note 18 of Notes to Financial
Statements.)
Life insurance operations for the twelve month periods ending December 31,
1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Premium income:
Domestic $ 784 $ 583 $ 552
Foreign 9,509 9,373 8,443
- -------------------------------------------------------------
Total $ 10,293 $ 9,956 $ 8,995
- -------------------------------------------------------------
Net investment income:
Domestic $ 2,889 $ 2,464 $ 2,059
Foreign 2,312 2,057 1,746
- -------------------------------------------------------------
Total $ 5,201 $ 4,521 $ 3,805
- -------------------------------------------------------------
Operating income before
realized capital gains
(losses):
Domestic $ 782 $ 632 $ 464
Foreign 1,665 1,425 1,189
- -------------------------------------------------------------
Total 2,447 2,057 1,653
Realized capital gains
(losses) (74) (9) 4
- -------------------------------------------------------------
Operating income $ 2,373 $ 2,048 $ 1,657
- -------------------------------------------------------------
Life insurance in-force:
Domestic $ 65,705 $ 66,267 $ 68,428
Foreign 437,944 377,056 361,564
- -------------------------------------------------------------
Total $503,649 $443,323 $429,992
- -------------------------------------------------------------
</TABLE>
AIG's life premium income in 1998 represented a 3.4 percent increase from
the prior year. This compares with an increase of 10.7 percent in 1997 over
1996. Foreign life operations produced 92.4 percent, 94.1 percent and 93.9
percent of the life premium income in 1998, 1997 and 1996, respectively. (See
also Notes 1, 4 and 6 of Notes to Financial Statements.)
AIG's life insurance operations, demonstrating the strength of its
franchise, continued to show growth in original currencies. As previously
discussed, the U.S. dollar strengthened in value in relation to most major
foreign currencies in which AIG conducts its foreign life operations,
particularly AIA and Nan Shan. Accordingly, if foreign life premium income was
translated into U.S. dollars utilizing those exchange rates which prevailed in
1997, thus mitigating the effects of the U.S. dollar's general strengthening,
foreign life premium growth would have been 15.4 percent. This growth equates to
growth in original currency. (See also the discussion under "Capital Resources"
herein.)
The traditional life products were the major contributors to the growth in
foreign premium income and investment income, particularly those countries in
which AIA and Nan Shan operate. A mixture of traditional, accident and health
and financial products are being sold in Japan through ALICO.
Life insurance net investment income increased 15.0 percent in 1998
compared to an increase of 18.8 percent in 1997. The growth in net investment
income in 1998 and 1997 was attributable to both foreign and domestic 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.)
Life insurance realized capital losses were $74 million in 1998, compared
to realized capital losses of $9 million in 1997 and realized capital gains of
$4 million in 1996. These realized 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 in 1998 increased 15.9 percent to $2.37
billion compared to an increase of 23.6 percent in 1997. Excluding realized
capital gains and losses from life insurance operating income, the percent
increases would be 19.0 percent and 24.4 percent in 1998 and 1997, respectively.
The contribution of life insurance operating income to income before income
taxes and minority interest amounted to 37.8 percent in 1998 compared to 38.6
percent in 1997 and 37.1 percent in 1996.
The risks associated with the traditional life and accident and health
products are underwriting risk and investment risk. The risk associated with the
financial and investment contract products is investment risk.
Underwriting risk represents the exposure to loss resulting from the actual
policy experience adversely emerging in comparison to the assumptions made in
the product pricing associated with mortality, morbidity, termination and
expenses. AIG's life companies limit their maximum underwriting exposure on
traditional life insurance of a single life to approximately one million dollars
of coverage by using yearly renewable term reinsurance. (See also Note 5 of
Notes to Financial Statements.)
The investment risk represents the exposure to loss resulting from the cash
flows from the invested assets, primarily long-term
9
<PAGE> 11
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 the related 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. Additionally, there exists
a future investment risk that is associated with certain policies which have
future premium receipts. That is, the investment of these future premium
receipts may be at a yield below that required to meet future policy
liabilities. At December 31, 1998, the average duration of the investment
portfolio in Japan was 5.6 years. With respect to the investment of the future
premium receipts the average duration is estimated to be 6.1 years. These
durations compare with an estimated average duration of 8.7 years for the
corresponding policy liabilities. To maintain an adequate yield to match the
interest necessary to support future policy liabilities, constant management
focus is required to reinvest the proceeds of the maturing securities and to
invest the future premium receipts 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
AIG's financial services subsidiaries engage in diversified financial products
and services including premium financing, banking services and consumer finance
services.
International Lease Finance Corporation (ILFC) engages primarily in the
acquisition of new and used commercial jet aircraft and the leasing and
remarketing of such aircraft to airlines around the world. (See also Note 18 of
Notes to Financial Statements.)
AIG Financial Products Corp. and its subsidiaries (AIGFP) structure
financial transactions, including long-dated interest rate and currency swaps
and structures borrowings through notes, bonds and guaranteed investment
agreements. (See also Note 18 of Notes to Financial Statements.)
AIG Trading Group Inc. and its subsidiaries (AIGTG) engage in various
commodities trading, foreign exchange trading, interest rate swaps and market
making activities. (See also Note 18 of Notes to Financial Statements.)
Financial services operations for the twelve month periods ending December
31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
International Lease Finance
Corporation $2,002 $1,857 $1,560
AIG Financial Products Corp.* 550 452 369
AIG Trading Group Inc.* 374 562 289
Other 118 171 161
- -------------------------------------------------------------
Total $3,044 $3,042 $2,379
- -------------------------------------------------------------
OPERATING INCOME:
International Lease Finance
Corporation $ 496 $ 382 $ 307
AIG Financial Products Corp. 323 241 189
AIG Trading Group Inc. 123 127 80
Other, including intercompany
adjustments (73) (79) (75)
- -------------------------------------------------------------
Total $ 869 $ 671 $ 501
- -------------------------------------------------------------
</TABLE>
* Represents net trading revenues.
Financial services operating income increased 29.5 percent in 1998 over
1997. This compares with an increase of 33.9 percent in 1997 over 1996.
Financial services operating income represented 13.8 percent of AIG's
income before income taxes and minority interest in 1998. This compares to 12.6
percent and 11.2 percent in 1997 and 1996, respectively.
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 1998 increased 7.8 percent from 1997
compared to a 19.0 percent increase during 1997 from 1996. The revenue growth in
each year resulted primarily from the increase in flight equipment available for
operating lease, the increase in the relative cost of the leased fleet, the
increase in the relative composition of the fleet with wide bodies which
typically receive higher lease payments and, in 1997, an increase in the number
of aircraft sold. Approximately
10
<PAGE> 12
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
20 percent of ILFC's operating lease revenues are derived from U.S. and Canadian
airlines. During 1998, operating income increased 29.6 percent from 1997 and
24.6 percent during 1997 from 1996. The composite borrowing rates at December
31, 1998, 1997 and 1996 were 6.03 percent, 6.44 percent and 6.23 percent,
respectively. (See also the discussions under "Capital Resources" and
"Liquidity" herein and Note 18 of Notes to Financial Statements.)
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 December
31, 1998, there were 329 aircraft subject to operating leases and there were no
aircraft off lease. (See also the discussions under "Capital Resources" and
"Liquidity" herein.)
AIGFP participates 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 1998 increased 21.7 percent from 1997 compared to a
22.4 percent increase during 1997 from 1996. During 1998, operating income
increased 34.0 percent from 1997 and increased 27.4 percent during 1997 from
1996. As AIGFP is a transaction-oriented operation, current and past revenues
and operating results may not provide a basis for predicting future performance.
(See also the discussions under "Capital Resources," "Liquidity" and
"Derivatives" herein and Note 18 of Notes to Financial Statements.)
AIGTG derives 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 1998 decreased 33.5 percent from 1997
compared to a 94.7 percent increase during 1997 from 1996. During 1998,
operating income decreased 2.4 percent from 1997 compared to a 57.9 percent
increase during 1997 from 1996. The declines in 1998 relative to 1997 resulted
primarily from the decline in trading volume during 1998. A substantial portion
of AIGTG's improvement during 1997 over 1996 was currency trading activity in
volatile foreign exchange markets. As AIGTG is a transaction-oriented operation,
current and past revenues and operating results may not provide a basis for
predicting future performance or for comparing revenues to operating income.
(See also the discussions under "Capital Resources," "Liquidity" and
"Derivatives" herein and Note 18 of Notes to Financial Statements.)
In December 1997, AIGTG sold its energy operations. The sale of these
operations did not have a significant impact on AIG's results of operations.
ASSET MANAGEMENT OPERATIONS
AIG's asset management operations offer a wide variety of investment vehicles
and services, including variable annuities, mutual funds, trust services and
investment asset management. Such products and services are offered to
individuals and institutions both domestically and internationally.
AIG's three principal asset management operations are SunAmerica's asset
management operations (SAMCO), AIG Global Investment Group, Inc. (Global
Investment) and AIG Capital Partners, Inc. (Cap Partners). SAMCO develops and
sells variable annuities and other investment products, sells and manages mutual
funds and provides financial and trust services. Global Investment manages
invested assets of institutions, including insurance companies and pension
funds, and provides custodial and other trust services. Cap Partners organizes,
and manages the invested assets of institutional investment funds and may also
invest in such funds. Each of these subsidiary operations receive fees for
investment products and services provided.
Asset management operations for the twelve month periods ending December
31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Revenues $707 $555 $444
Operating income $191 $127 $101
- -------------------------------------------------------------
</TABLE>
These increases were primarily attributable to management of the variable
annuity business by SAMCO.
Asset management operating income increased 50.4 percent in 1998 over 1997.
This compares with an increase of 25.7 percent in 1997 over 1996.
Asset management operating income represented 3.0 percent of AIG's income
before income taxes and minority interest in 1998. This compares to 2.4 percent
and 2.3 percent in 1997 and 1996, respectively.
OTHER OPERATIONS
In 1998, AIG's equity in income of minority-owned insurance operations was $57
million compared to $114 million in 1997 and $99 million in 1996. In 1998, the
equity interest in insurance companies represented 0.9 percent of income before
income taxes and minority interest compared to 2.1 percent in 1997 and 2.2
percent in 1996. The decrease in income of minority-owned insurance operations
from 1997 to 1998, resulted primarily from the consolidation of Transatlantic's
operations into general insurance operating results. In addition, SELIC
Holdings, Ltd. was consolidated earlier this year. IPC Holdings, Ltd., the
remaining operation included in equity in income of minority-owned insurance
operations in previous periods is now reported as a component of other income
(deductions) -- net.
11
<PAGE> 13
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other realized capital losses amounted to $7 million, $29 million and $12
million in 1998, 1997 and 1996, respectively.
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, costs
associated with the Year 2000 computer issues, as well as the income and
expenses of the parent holding company and other miscellaneous income and
expenses. In 1998, net deductions amounted to $134 million. In 1997 and 1996,
net deductions amounted to $93 million and $84 million, respectively. (See also
the discussion under "Recent Developments" herein.)
Income before income taxes and minority interest amounted to $6.28 billion
in 1998, $5.31 billion in 1997 and $4.47 billion in 1996.
In 1998, AIG recorded a provision for income taxes of $1.79 billion
compared to the provisions of $1.53 billion and $1.23 billion in 1997 and 1996,
respectively. These provisions represent effective tax rates of 28.4 percent in
1998, 28.7 percent in 1997 and 27.6 percent in 1996. (See Note 3 of Notes to
Financial Statements.)
Minority interest represents minority shareholders' equity in income of
certain majority-owned consolidated subsidiaries. Minority interest amounted to
$210 million, $74 million and $63 million in 1998, 1997 and 1996, respectively.
The increase in 1998 from 1997 was primarily related to the minority
shareholders' equity resulting when Transatlantic and 20th Century were
consolidated during 1998.
Net income amounted to $4.28 billion in 1998, $3.71 billion in 1997 and
$3.17 billion in 1996. The increases in net income over the three year period
resulted from those factors described above.
CAPITAL RESOURCES
At December 31, 1998, AIG had total capital funds of $30.12 billion and total
borrowings of $31.91 billion. At that date, $27.80 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 December 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- ------------------------------------------------------------
DECEMBER 31, 1998 1997
- ------------------------------------------------------------
<S> <C> <C>
GIAs -- AIGFP $ 9,188 $ 8,000
- ------------------------------------------------------------
Commercial Paper:
AIG Funding 637 308
ILFC(a) 3,204 2,208
AICCO 727 834
Universal Finance Company (UFC)(a) 68 25
- ------------------------------------------------------------
Total 4,636 3,375
- ------------------------------------------------------------
Medium Term Notes:
ILFC(a) 3,348 2,897
AIG 239 248
Original SunAmerica 228 248
- ------------------------------------------------------------
Total 3,815 3,393
- ------------------------------------------------------------
Notes and Bonds Payable:
ILFC(a) 3,825 3,950
Original SunAmerica 989 888
AIGFP 7,265 4,859
AIG: Lire bonds 159 159
Zero coupon notes 102 91
- ------------------------------------------------------------
Total 12,340 9,947
- ------------------------------------------------------------
Loans and Mortgages Payable:
ILFC(a)(b) 811 904
SPC Credit, Ltd. (SPC)(a) 532 539
AIG Consumer Finance(a) 254 --
AIG 334 239
- ------------------------------------------------------------
Total 1,931 1,682
- ------------------------------------------------------------
Total Borrowings 31,910 26,397
- ------------------------------------------------------------
Borrowings not guaranteed by AIG 12,042 10,523
Matched GIA borrowings 9,188 8,000
Matched notes and bonds payable -- AIGFP 6,565 3,755
- ------------------------------------------------------------
27,795 22,278
- ------------------------------------------------------------
Remaining borrowings of AIG $ 4,115 $ 4,119
- ------------------------------------------------------------
</TABLE>
(a) AIG does not guarantee or support these borrowings.
(b) Capital lease obligations.
See also Note 9 of Notes to Financial Statements.
During 1998, AIGFP increased the aggregate principal amount outstanding of
its notes and bonds payable to $7.27 billion, a net increase of $2.41 billion
and increased its net GIA borrowings by $1.19 billion. AIGFP uses the proceeds
from the issuance of notes and bonds and GIA borrowings to invest in a
diversified portfolio of securities and derivative transactions. The funds may
also be temporarily invested in securities purchased under agreements to resell.
(See also the discussions under "Operational Review", "Liquidity" and
"Derivatives" herein and Notes 1, 8, 9, 12 and 18 of Notes to Financial
Statements.)
12
<PAGE> 14
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
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 December 31, 1998, AIGFP had no
commercial paper outstanding. (See also the discussion under "Derivatives"
herein and Note 9 of Notes to Financial Statements.)
AIG and Funding have entered into two syndicated revolving credit
facilities (the Facilities) aggregating $1 billion. The Facilities consist of a
$500 million 364 day revolving credit facility and a $500 million five year
revolving credit facility. The Facilities can be used for general corporate
purposes and also provide backup for AIG's commercial paper programs
administered by Funding. There are currently no borrowings outstanding under
either of the Facilities, nor were any borrowings outstanding as of December 31,
1998.
At December 31, 1998, ILFC had increased the aggregate principal amount
outstanding of its medium term and term notes to $7.17 billion, a net increase
of $326 million, and recorded a net decline in its capital lease obligations of
$93 million and a net increase in its commercial paper of $996 million. At
December 31, 1998, ILFC had $565 million in aggregate principal amount of debt
securities registered for issuance from time to time. Through March 15, 1999,
ILFC reduced this registered amount to $100 million through the sale of debt
securities amounting to $465 million aggregate principal amount. Also, in March
1999, ILFC registered $2.0 billion in aggregate principal amount of debt
securities for issuance from time to time. At that time, the aggregate principal
amount of registered debt available for issuance was $2.1 billion. 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 1998, AIG issued $31 million principal amount of Medium Term Notes
and $40 million of previously issued notes matured.
At December 31, 1998, AIG had $508 million in aggregate principal amount of
debt securities registered for issuance from time to time.
AIG's capital funds increased $3.54 billion during 1998. Unrealized
appreciation of investments, net of taxes decreased $292 million. During 1998,
the cumulative translation adjustment loss, net of taxes, increased $100
million. The changes from year to year with respect to the unrealized
appreciation of investments, net of taxes and the cumulative translation
adjustment loss, net of taxes were primarily impacted by each of the economic
situations 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 $3.01 billion, resulting from net income less dividends.
During 1998, AIG repurchased 1,044,750 shares of its common stock in the
open market at a cost of $77 million. Shares repurchased prior to July 31, 1998,
have been adjusted for the three for two stock split in the form of a 50 percent
common stock dividend. AIG intends to continue to buy its common shares in the
open market to satisfy its obligations under various employee benefit plans.
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 December 31, 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 and Note 11 of Notes to Financial
Statements.)
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, 1998, 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.
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.
At December 31, 1998, AIG's consolidated invested assets included $7.04
billion of cash and short-term investments. Consolidated net cash provided from
operating activities in 1998 amounted to $7.44 billion.
13
<PAGE> 15
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 approximately $12 billion in
pre-tax cash flow during 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
$7.5 billion in investment income cash flow during 1998. Investment income cash
flow is primarily derived from interest and dividends received and includes
realized capital gains net of realized capital losses.
In addition to the combined insurance pre-tax operating cash flow, AIG's
insurance operations held $6.71 billion in cash and short-term investments at
December 31, 1998. The aforementioned operating cash flow and the cash and
short-term balances held provided AIG's insurance operations with a significant
amount of liquidity.
This liquidity is available, among other things, 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 cash flow coupled with proceeds of approximately $41
billion from the maturities, sales and redemptions of fixed income securities
and from the sale of equity securities was used to purchase approximately $47
billion of fixed income securities and marketable equity securities during 1998.
The following table is a summary of AIG's invested assets by significant
segment, including investment income due and accrued of $1.87 billion and $1.67
billion and real estate of $1.61 billion and $1.52 billion, at December 31, 1998
and 1997, respectively:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
- -------------------------------------------------------------
INVESTED PERCENT
ASSETS OF TOTAL
- -------------------------------------------------------------
<S> <C> <C>
1998
General insurance $ 38,883 22.7%
Life insurance 75,078 43.8
Financial services and asset management 56,619 33.1
Other 714 0.4
- -------------------------------------------------------------
Total $171,294 100.0%
- -------------------------------------------------------------
1997
General insurance $ 31,844 21.6%
Life insurance 65,752 44.7
Financial services and asset management 48,899 33.2
Other 662 0.5
- -------------------------------------------------------------
Total $147,157 100.0%
- -------------------------------------------------------------
</TABLE>
The following tables summarize the composition of AIG's insurance invested
assets by insurance segment, including investment income due and accrued and
real estate, at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------------------------------------------------------
PERCENT DISTRIBUTION
GENERAL LIFE PERCENT ---------------------
DECEMBER 31, 1998 INSURANCE INSURANCE TOTAL OF TOTAL DOMESTIC FOREIGN
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Available for sale, at market value(a) $15,939 $51,237 $ 67,176 59.0% 56.4% 43.6%
Held to maturity, at amortized cost 12,658 -- 12,658 11.1 100.0 --
Equity securities, at market value(b) 3,923 2,092 6,015 5.3 54.1 45.9
Mortgage loans on real estate, policy and collateral
loans 70 9,894 9,964 8.7 55.5 44.5
Short-term investments, including time deposits, and
cash 873 5,835 6,708 5.9 42.6 57.4
Real estate 393 1,124 1,517 1.3 18.2 81.8
Investment income due and accrued 568 1,197 1,765 1.5 51.2 48.8
Other invested assets 4,459 3,699 8,158 7.2 85.9 14.1
- --------------------------------------------------------------------------------------------------------------------------------
Total $38,883 $75,078 $113,961 100.0% 61.7% 38.3%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $1,005 of bonds trading securities, at market value.
(b) Includes $593 of preferred stock, at market value.
14
<PAGE> 16
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------------------------------------------------------
PERCENT DISTRIBUTION
GENERAL LIFE PERCENT ---------------------
DECEMBER 31, 1997 INSURANCE INSURANCE TOTAL OF TOTAL DOMESTIC FOREIGN
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Available for sale, at market value(a) $11,326 $45,262 $56,588 58.0% 57.5% 42.5%
Held to maturity, at amortized cost(b) 12,770 -- 12,770 13.1 100.0 --
Equity securities, at market value(c) 3,314 2,076 5,390 5.5 46.2 53.8
Mortgage loans on real estate, policy and collateral
loans 50 9,362 9,412 9.6 59.8 40.2
Short-term investments, including time deposits, and
cash 617 3,402 4,019 4.1 49.6 50.4
Real estate 402 1,062 1,464 1.5 21.5 78.5
Investment income due and accrued 529 1,114 1,643 1.7 50.6 49.4
Other invested assets 2,836 3,474 6,310 6.5 83.9 16.1
- --------------------------------------------------------------------------------------------------------------------------------
Total $31,844 $65,752 $97,596 100.0% 63.4% 36.6%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $719 of bonds trading securities, at market value.
(b) Includes $239 of preferred stock, at amortized cost.
(c) Includes $275 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 December 31, 1998, approximately 63.3 percent of the fixed maturities
investments were domestic securities. Approximately 33.9 percent of such
domestic securities were rated AAA. Approximately 11 percent were below
investment grade or not rated.
A significant portion of the foreign insurance fixed income portfolio is
rated by Moody's, Standard & Poor's (S&P) or similar foreign services. Similar
credit quality rating services are not available in all overseas locations. AIG
annually reviews the credit quality of the foreign portfolio nonrated fixed
income investments, including mortgages. At December 31, 1998, approximately 17
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 15 percent were below investment grade or not
rated at that date. The decline in credit worthiness results not from a change
in investment policy but rather from economic turmoil, particularly in Southeast
Asia. A large portion of these fixed maturity securities are sovereign fixed
maturity securities supporting the policy liabilities in the country of
issuance.
At December 31, 1998, approximately nine percent of the fixed maturities
portfolio was collateralized mortgage obligations (CMOs), including minor
amounts with respect to commercial mortgage backed securities. Primarily all of
the CMOs were investment grade and approximately 32 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.
Any fixed income security may be subject to downgrade for a variety of
reasons subsequent to any balance sheet date.
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 in unrealized appreciation
of investments, net of taxes as components of comprehensive income.
Mortgage loans on real estate, policy and collateral loans comprised 8.7
percent of AIG's insurance invested assets at December 31, 1998. AIG's insurance
operations' holdings of real estate mortgages amounted to $6.17 billion of which
71.7 percent was domestic. At December 31, 1998 only a nominal amount were in
default. It is AIG's practice to maintain a maximum loan to value ratio of 75
percent at loan origination. At December 31, 1998, AIG's insurance holdings of
collateral loans amounted to $1.16 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
decreased from $2.75 billion at December 31, 1997 to $2.63 billion at December
31, 1998.
15
<PAGE> 17
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 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, 1998 and December 31, 1997. These
calculations used the variance-covariance (delta-normal) methodology. These
calculations also used daily historical interest and foreign currency exchange
rates and equity prices in the two years ending December 31, 1998 and 1997, as
applicable. The VaR model estimated the volatility of each of these rates,
equity prices and the correlations 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 of each of the aforementioned market exposures. Each sensitivity was
estimated separately to capture the market exposures within each insurance
segment. These sensitivities were then applied to a database, 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, 1998 and December 31, 1997 the VaR
of AIG's insurance segments was approximately $760 million and $520 million for
general insurance, respectively and $981 million and $799 million for life
insurance, respectively.
The following table presents the VaR of each component of market risk for
each of AIG's insurance segments as of December 31, 1998 and December 31, 1997.
VaR with respect to combined operations cannot be derived by aggregating the
individual risk or segment amounts presented herein.
<TABLE>
<CAPTION>
(IN MILLIONS)
- -----------------------------------------------------------
GENERAL LIFE
INSURANCE INSURANCE
------------ ------------
MARKET RISK 1998 1997 1998 1997
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate $232 $236 $809 $779
Currency 26 26 457 85
Equity 716 355 254 120
- -----------------------------------------------------------
</TABLE>
FINANCIAL SERVICES AND ASSET MANAGEMENT INVESTED ASSETS
The following table is a summary of the composition of AIG's financial services
and asset management invested assets at December 31, 1998 and 1997. (See also
the discussions under "Operational Review: Financial Services Operations",
"Operational Review: Asset Management Operations", "Capital Resources" and
"Derivatives" herein.)
16
<PAGE> 18
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
- ----------------------------------------------------------------------------------------------------------
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 $16,330 28.8% $14,438 29.5%
Unrealized gain on interest rate and currency swaps, options
and forward transactions 9,881 17.5 7,422 15.2
Securities available for sale, at market value 10,674 18.9 9,145 18.7
Trading securities, at market value 5,668 10.0 3,975 8.1
Securities purchased under agreements to resell, at contract
value 4,838 8.5 4,551 9.3
Trading assets 6,229 11.0 6,715 13.8
Spot commodities, at market value 476 0.8 460 0.9
Other, including short-term investments 2,523 4.5 2,193 4.5
- ----------------------------------------------------------------------------------------------------------
Total $56,619 100.0% $48,899 100.0%
- ----------------------------------------------------------------------------------------------------------
</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 1998, ILFC acquired flight
equipment costing $3.16 billion.
At December 31, 1998, ILFC had committed to purchase or had secured
positions for 303 aircraft deliverable from 1999 through 2006 at an estimated
aggregate purchase price of $17.4 billion. As of March 15, 1999, ILFC has
entered into leases, letters of intent to lease or is in various stages of
negotiation for all of the aircraft to be delivered in 1999 and 57 of 247
aircraft to be delivered subsequent to 1999. ILFC will be required to find
customers for any aircraft presently on order and any aircraft to be ordered,
and it must arrange financing for portions of the purchase price of such
equipment. In a rising interest rate environment, ILFC negotiates higher lease
rates on any new contracts. ILFC has been successful to date both in placing its
new aircraft on lease or under sales contract and obtaining adequate financing.
ILFC is exposed to market risk and the risk of loss of fair value resulting
from adverse fluctuations in interest rates. As of December 31, 1998, AIG
statistically measured the aforementioned loss of fair value through the
application of a VaR model. In this analysis, the net fair value of ILFC was
determined using the financial instrument assets which included the tax adjusted
future flight equipment lease revenue and the financial instrument liabilities
which included the future servicing of the current debt. The estimated impact of
the current derivative positions was also taken into account.
AIG calculated the VaR with respect to the net fair value of ILFC using the
variance-covariance (delta-normal) methodology. This calculation also used daily
historical interest rates for the two years ending December 31, 1998. The VaR
model estimated the volatility of each of these interest rates and the
correlation among them. The yield curve was constructed using eleven key points
on the curve to model possible curve movements. Thus, the VaR measured the
sensitivity of the assets and liabilities to the calculated interest rate
exposures. These sensitivities were then applied to a database, which contained
the historical ranges of movements in interest rates and the correlation among
them. The results were aggregated to provide a single amount that depicts the
maximum potential loss in fair value of a confidence level of 95 percent for a
time period of one month. As of December 31, 1998, the VaR with respect to the
aforementioned net fair value of ILFC was $9 million.
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.)
AIGFP uses the proceeds from the issuance of notes and bonds and GIA
borrowings to invest in a diversified portfolio of securities, including
securities available for sale, at market, and derivative transactions. The funds
may also be temporarily invested in securities purchased under agreements to
resell. The proceeds from the disposal of the aforementioned securities
available for sale and securities purchased under agreements to resell have been
used to fund the maturing GIAs or other AIGFP financings. (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 December
31, 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 $435 million of these securities. There were no securities deemed below
investment grade at December 31, 1998. There have been no significant downgrades
through March 1, 1999. Securities
17
<PAGE> 19
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 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 December 31, 1998
were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
- -------------------------------------------------------------
<S> <C> <C>
Securities available for sale, at
market value(a) $ 483 $ 476
Unrealized gain/loss on interest
rate and currency swaps, options
and forward transactions(b)(c) 9,881 7,055
Trading assets 7,435 4,611
Spot commodities, at market value -- 12
Trading liabilities -- 3,257
Securities and spot commodities
sold but not yet purchased, at
market value 407 --
- -------------------------------------------------------------
</TABLE>
(a) See also Note 8(e) of Notes to Financial Statements.
(b) These amounts are also presented as the respective balance sheet amounts.
(c) At December 31, 1998, AIGTG's replacement values with respect to interest
rate and currency swaps were $642 million.
AIGFP's interest rate and currency risks on securities available for sale,
at market, are managed by taking offsetting positions on a security by security
basis, thereby offsetting a significant portion of the unrealized appreciation
or depreciation. At December 31, 1998, the unrealized gains and losses remaining
after the benefit of the offsets were $43 million and $35 million, respectively.
Trading securities, at market value, and securities and spot commodities
sold but not yet purchased, at market value are marked to market daily with the
unrealized gain or loss being recognized in income at that time. These
securities are held to meet the short-term risk management objectives of AIGFP
and AIGTG.
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 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
18
<PAGE> 20
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
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 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 from
adverse fluctuations in interest rate and foreign currency exchange rates and
equity and commodity prices. AIG statistically measured the losses of fair value
through the application of a VaR model. AIG separately calculated the VaR with
respect to AIGFP and AIGTG, as AIG manages these operations separately.
AIGFP's and AIGTG's asset and liability portfolios for which the VaR
analyses were performed included over the counter and exchange traded
investments, derivative instruments and commodities. Since 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 trading
was not deemed necessary.
AIG calculated the VaR with respect to AIGFP and AIGTG as of December 31,
1998 and December 31, 1997. These calculations used the variance-covariance
(delta-normal) methodology. These calculations also used, where appropriate for
each entity, daily historical interest and foreign currency exchange rates and
equity/commodity prices in the two years ending December 31, 1998 and December
31, 1997, as applicable. The VaR model estimated the volatility of each of these
rates, prices and the correlations among them. For interest rates, the yield
curves of the United States and certain foreign countries were constructed using
eleven separate points on each country's yield curve to model possible curve
movements. Inter-country correlations were also used. The redemption experience
of corporate fixed maturities was taken into account. Thus, the VaR measured the
sensitivity of the asset and the liability portfolios of each of the market
exposures. Each
19
<PAGE> 21
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
sensitivity was estimated separately to capture the market exposures within each
entity. These sensitivities were then applied to a database, which contained
both historical ranges of movements in all market factors and the correlations
among them. The results depict the maximum potential loss in fair value at a
confidence level of 95 percent.
Given the distinct business strategies at AIGFP and AIGTG, the VaR
calculations used different time periods to measure market exposures. Many of
AIGFP's customized, longer-term contracts may require several days to transact
and hedge. AIG therefore used a one month holding period to measure market
exposures for AIGFP. The large majority of AIGTG's contracts can be arranged and
hedged within one day. AIG therefore used a one day holding period to measure
market exposures at AIGTG.
The following table presents the VaR on a combined basis and of each
component of AIGFP's and AIGTG's market risk as of December 31, 1998 and
December 31, 1997. VaR with respect to combined operations cannot be derived by
aggregating the individual risk presented herein.
<TABLE>
<CAPTION>
(IN MILLIONS)
- -----------------------------------------------------------
AIGFP(A)
------------
1998
AIGTG(B)
------------
1997 1997
1998
MARKET RISKS
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Combined $42 $24 $ 3 $ 4
Interest rate 42 24 3 4
Currency -- -- 2 2
Equity/Commodity 2 -- -- --
- -----------------------------------------------------------
</TABLE>
(a) A one month holding period was used to measure the market exposures of
AIGFP.
(b) A one day holding period was used to measure the market exposures of AIGTG.
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 swaps, currency swaps,
equity swaps and swaptions. Such derivatives are traded over the counter. An
interest rate swap is a contract between two parties to exchange interest rate
payments (typically a fixed interest rate versus a variable interest rate)
calculated on a notional principal amount for a specified period of time. The
notional amount is not exchanged. Currency and equity swaps are similar to
interest rate swaps but may involve the exchange of principal amounts at the
commencement and termination of the swap. Swaptions are options where the holder
has the right but not the obligation to enter into a swap transaction or cancel
an existing swap transaction.
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. Options may be traded over the counter or on an exchange.
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 and the terms of over the counter derivatives are non-standard
and unique to each contract. 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
20
<PAGE> 22
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
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 in the event of default. Also, under such agreements, in connection with
a counterparty desiring to terminate a contract prior to maturity, AIGFP may be
permitted to set-off its receivables from that 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 derivatives transactions at December 31, 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, set-off and netting under ISDA Master Agreements
and collateral held.
The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at December 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
(IN MILLIONS)
- ----------------------------------------------------------------------------------------------------------------------------
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 $ 85,379 $105,850 $57,556 $ 7,132 $255,917 $200,491
Currency swaps 27,943 26,154 16,916 2,881 73,894 54,748
Swaptions and equity swaps 2,306 6,102 5,780 1,497 15,685 11,217
- ----------------------------------------------------------------------------------------------------------------------------
Total $115,628 $138,106 $80,252 $11,510 $345,496 $266,456
- ----------------------------------------------------------------------------------------------------------------------------
FUTURES AND FORWARD CONTRACTS:
Exchange traded futures contracts contractual
amount $ 8,290 -- -- -- $ 8,290 $ 4,411
- ----------------------------------------------------------------------------------------------------------------------------
Over the counter forward contracts contractual
amount $ 42,825 $ 61 $ 12 -- $ 42,898 $ 13,271
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 23
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 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:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -----------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
------------------------------------
SWAPS AND FUTURES AND TOTAL TOTAL
SWAPTIONS FORWARD CONTRACTS 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Counterparty credit quality:
AAA $2,360 $-- $2,360 $2,327
AA 3,358 330 3,688 2,311
A 1,789 94 1,883 1,165
BBB 1,040 45 1,085 608
Below investment grade 210 -- 210 290
- -----------------------------------------------------------------------------------------------------------------------------
Total $8,757 $469 $9,226 $6,701
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and December 31, 1997, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -----------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
------------------------------------
SWAPS AND FUTURES AND TOTAL TOTAL
SWAPTIONS FORWARD CONTRACTS 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-U.S. banks $2,708 $169 $2,877 $2,263
Insured municipalities 784 -- 784 757
U.S. industrials 1,120 5 1,125 514
Governmental 603 -- 603 677
Non-U.S. financial service companies 272 -- 272 65
Non-U.S. industrials 1,145 -- 1,145 1,035
Special purpose 423 -- 423 163
U.S. banks 617 294 911 585
U.S. financial service companies 931 1 932 434
Supranationals 154 -- 154 208
- -----------------------------------------------------------------------------------------------------------------------------
Total $8,757 $469 $9,226 $6,701
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following tables provide the contractual and notional amounts of
AIGTG's derivatives portfolio at December 31, 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 December 31,
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 December 31,
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.
22
<PAGE> 24
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
The following tables present AIGTG's derivatives portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative at
December 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
(IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------------------------------
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 $ 9,777 $ 1,985 $ 74 $ -- $ 11,836 $ 24,579
- ---------------------------------------------------------------------------------------------------------------------------------
Forwards $263,312 $ 17,306 $ 1,539 $ -- $282,157 $267,959
- ---------------------------------------------------------------------------------------------------------------------------------
Over the counter purchased options $ 31,039 $ 21,300 $ 5,213 $ 1,308 $ 58,860 $ 60,274
- ---------------------------------------------------------------------------------------------------------------------------------
Over the counter sold options(a) $ 31,922 $ 20,374 $ 5,091 $ 1,474 $ 58,861 $ 58,190
- ---------------------------------------------------------------------------------------------------------------------------------
Notional amount:
Interest rate swaps and forward rate agreements $ 77,872 $ 24,605 $ 7,334 $ 980 $110,791 $ 77,503
Currency swaps 1,488 4,854 1,170 -- 7,512 6,489
Swaptions 81 1,377 1,889 2,419 5,766 1,634
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 79,441 $ 30,836 $ 10,393 $ 3,399 $124,069 $ 85,626
- ---------------------------------------------------------------------------------------------------------------------------------
Credit exposure:
Futures, forwards, swaptions and purchased options
contracts and interest rate and currency swaps:
Gross replacement value $ 7,274 $ 1,806 $ 544 $ 167 $ 9,791 $ 11,020
Master netting arrangements (4,224) (930) (306) (150) (5,610) (5,798)
Collateral (313) (29) (15) (2) (359) (225)
- ---------------------------------------------------------------------------------------------------------------------------------
Net replacement value(b) $ 2,737 $ 847 $ 223 $ 15 $ 3,822 $ 4,997
- ---------------------------------------------------------------------------------------------------------------------------------
</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 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.
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 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 follow:
<TABLE>
<CAPTION>
(IN MILLIONS)
- ------------------------------------------------------------
NET REPLACEMENT VALUE
----------------------
1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Counterparty credit quality:
AAA $ 462 $ 753
AA 1,821 2,503
A 1,066 1,024
BBB 221 343
Below investment grade 26 98
Not externally rated, including
exchange traded futures and
options* 226 276
- ------------------------------------------------------------
Total $3,822 $4,997
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(IN MILLIONS)
- ------------------------------------------------------------
NET REPLACEMENT VALUE
----------------------
1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Counterparty breakdown by industry:
Non-U.S. banks $1,253 $2,686
U.S. industrials 381 164
Governmental 184 135
Non-U.S. financial service
companies 406 260
Non-U.S. industrials 150 168
U.S. banks 593 560
U.S. financial service companies 629 748
Exchanges* 226 276
- ------------------------------------------------------------
Total $3,822 $4,997
- ------------------------------------------------------------
</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
23
<PAGE> 25
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 its insurance operations; to date, such
activities have not been significant.
AIG has formed a Derivatives Review Committee. This committee, with
certain exceptions, provides an independent review of any proposed derivative
transaction. The committee examines, among other things, the nature and purpose
of the derivative transaction, its potential credit exposure, if any, and the
estimated benefits. This committee does not review those derivative transactions
entered into by AIGFP and AIGTG for their own account.
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 comprehensive
income 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 June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (FASB
130) and 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 was
effective for AIG as of January 1, 1998.
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 was effective for the year ended December 31, 1998 and has been adopted
herein.
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 was effective for the year ended December 31, 1998 and has been
adopted herein.
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
change 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 derivative transactions entered into by other
AIG operations. 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, 2001.
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AcSEC) issued Statement of
Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." This statement provides guidance for the
recording of a liability for insurance-related assessments. The statement
requires that a liability be recognized in certain defined circumstances. AIG
believes that the impact of this statement on its results of operations,
financial condition or liquidity will not be significant. This statement is
effective for the year commencing January 1, 1999.
In October 1998, AcSEC issued SOP 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." This
statement identifies several methods of deposit accounting and provides guidance
on the application of each method. This statement classifies insurance and
reinsurance contracts for which the deposit method is appropriate as contracts
that (i) transfer only significant timing risk, (ii) transfer only significant
underwriting risk, (iii) transfer neither significant timing nor underwriting
risk, and (iv) have an indeterminate risk. AIG believes that the impact of this
statement on its results of operations, financial condition or liquidity will
not be significant. This statement is effective for the year commencing January
1, 2000. Restatement of previously issued financial statements is not permitted.
24
<PAGE> 26
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American International Group, Inc. and Subsidiaries
YEAR 2000 ISSUES
Any statements contained herein that are not historical facts, or that might be
considered an opinion or projection, whether expressed or implied, are meant as,
and should be considered, forward-looking statements as that term is defined in
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
are based on assumptions and opinions concerning a variety of known and unknown
risks, including those risks related to the Year 2000 issue. If any assumptions
or opinions prove incorrect, any forward-looking statements made on that basis
may also prove materially incorrect.
The Year 2000 issue arises from computer programs being written using two
digits rather than four digits to define the applicable year. This could result
in a failure of the information technology systems (IT systems) and other
equipment containing imbedded technology (non-IT systems) in the year 2000,
causing disruption of operations of AIG, its lessees, vendors, or business
partners.
AIG has developed a plan to address the Year 2000 issue as it affects AIG's
internal IT and non-IT systems, and to assess Year 2000 issues relating to third
parties with whom AIG has critical relationships.
The plan for addressing internal systems includes an assessment of internal
IT and non-IT systems and equipment affected by the Year 2000 issue; definition
of strategies to address affected systems and equipment; remediation of
identified affected systems and equipment; and internal certification that each
internal system is Year 2000 compliant. AIG has remediated, tested and returned
to production substantially all of its internal IT systems. AIG continues to
remediate and test internal non-IT systems and expects to complete remediation
by mid-1999.
AIG has also initiated formal communications with respect to the Year 2000
issue to those third parties which have significant interaction with AIG.
Currently, AIG is unable to ascertain whether all such third parties will
successfully address the Year 2000 issue, particularly those third parties
outside the United States where it is believed that remediation efforts relating
to the Year 2000 issue may be less advanced. While AIG expects to have no
interruption of operations as a result of its internal IT and non-IT systems,
significant uncertainties remain about the effect on AIG of third parties who
are not Year 2000 compliant. AIG will continue to monitor third party Year 2000
issue readiness to determine whether additional or alternative measures may be
necessary. Such measures may include the selection of alternate third parties or
other actions designed to mitigate the effects of a third party's lack of
preparedness. There can be no assurance that unresolved Year 2000 issues of
third parties will not have a material adverse impact on AIG's results of
operations, financial condition or liquidity. AIG is considering the effects of
Year 2000 related failures on its business and the most reasonably likely worst
case scenarios have not yet been clearly identified. However, AIG is
establishing contingency plans with respect to third parties unpreparedness,
particularly where such unpreparedness would impact AIG's operations or
liquidity. In order to limit potential business interruptions caused by third
parties who may not be Year 2000 compliant, AIG identified and prioritized all
critical business activities and third party relationships, such as banks,
vendors, brokers and municipalities. AIG has contacted these parties to obtain
information concerning the status of their compliance and is assessing such
information. Contingency plans have been developed which may include
establishing another source, providing assistance to the party or instituting
manual processes on a temporary basis. Contingency plans are being reviewed and
approved by senior management of AIG.
In addition, a comprehensive plan is under development to establish
appropriate communication and command structures at all levels of management
throughout the world. These plans are currently scheduled to be tested in the
Fall of 1999 to insure that sufficient resources will be available for any
problems that may occur.
The project continues to be monitored by an executive steering committee,
AIG's internal audit group and an external consulting company that has been
retained to monitor the project through completion.
Through June 30, 1999, the costs associated with addressing the Year 2000
issue, including developing and implementing the above stated plans and
remediating affected systems and equipment, has approximated $129 million and
has been expensed as incurred. AIG estimates the total costs of the Year 2000
remediation will approximate $175 million.
RECENT DEVELOPMENTS
On January 1, 1999, certain of the member nations of the European Economic and
Monetary Union (EMU) adopted 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 is 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.
25
<PAGE> 27
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants 27
Consolidated Balance Sheet at December 31, 1998
and 1997 28
Consolidated Statement of Income for the years
ended December 31, 1998, 1997 and 1996 30
Consolidated Statement of Capital Funds for the
years ended December 31, 1998, 1997 and 1996 31
Consolidated Statement of Cash Flows for the
years ended December 31, 1998, 1997 and 1996 32
Consolidated Statement of Comprehensive Income
for the years ended December 31, 1998, 1997
and 1996 34
Notes to Financial Statements 35
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
SCHEDULES:
I -- Summary of Investments -- Other Than
Investments in Related Parties as of
December 31, 1998 S-1
III -- Supplementary Insurance Information as of
December 31, 1998, 1997 and 1996 and for
the years then ended S-2
</TABLE>
26
<PAGE> 28
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS American International Group, Inc. and
Subsidiaries
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
AMERICAN INTERNATIONAL GROUP, INC.:
In our opinion, the accompanying consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the consolidated
financial position of American International Group, Inc. and its subsidiaries
(the "Company") at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
listed in the accompanying index present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 11, 1999.
27
<PAGE> 29
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET American International Group, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(IN MILLIONS)
- ----------------------------------------------------------------------------------
DECEMBER 31, 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments and cash:
Fixed maturities:
Bonds available for sale, at market value (amortized
cost: 1998 -- $63,873; 1997 -- $54,106) $ 66,317 $ 56,000
Bonds held to maturity, at amortized cost (market
value: 1998 -- $13,633; 1997 -- $13,366) 12,658 12,530
Bonds trading securities, at market value (cost:
1998 -- $990; 1997 -- $700) 1,005 719
Preferred stocks, at amortized cost (market value:
1997 -- $531) -- 239
Equity securities:
Common stocks (cost: 1998 -- $5,465; 1997 -- $4,658) 5,648 5,306
Non-redeemable preferred stocks (cost: 1998 -- $628;
1997 -- $290) 620 302
Mortgage loans on real estate, net of allowance
(1998 -- $67; 1997 -- $64) 6,702 6,152
Policy loans 2,626 2,746
Collateral and guaranteed loans, net of allowance
(1998 -- $74; 1997 -- $6) 2,413 2,236
Financial services and asset management assets:
Flight equipment primarily under operating leases, net
of accumulated depreciation(1998 -- $2,048;
1997 -- $1,657) 16,330 14,438
Securities available for sale, at market value
(amortized cost: 1998 -- $10,667;1997 -- $9,145) 10,674 9,145
Trading securities, at market value 5,668 3,975
Spot commodities, at market value 476 460
Unrealized gain on interest rate and currency swaps,
options and forward transactions 9,881 7,422
Trading assets 6,229 6,715
Securities purchased under agreements to resell, at
contract value 4,838 4,551
Other invested assets 8,692 6,618
Short-term investments, at cost (approximates market
value) 6,739 4,326
Cash 303 87
- ----------------------------------------------------------------------------------
Total investments and cash 167,819 143,967
Investment income due and accrued 1,869 1,665
Premiums and insurance balances receivable -- net of
allowance (1998 -- $105; 1997 -- $47) 11,679 10,283
Reinsurance assets 17,744 16,111
Deferred policy acquisition costs 8,081 7,152
Investments in partially-owned companies 418 1,121
Real estate and other fixed assets, net of accumulated
depreciation (1998 -- $1,774; 1997 -- $1,534) 2,738 2,424
Separate and variable accounts 18,662 13,509
Other assets 4,666 3,382
- ----------------------------------------------------------------------------------
TOTAL ASSETS $233,676 $199,614
- ----------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements.
28
<PAGE> 30
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET (CONTINUED) American International Group, Inc. and
Subsidiaries
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
- ----------------------------------------------------------------------------------
DECEMBER 31, 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES:
Reserve for losses and loss expenses $ 38,310 $ 33,400
Reserve for unearned premiums 10,009 8,739
Future policy benefits for life and accident and health
insurance contracts 29,571 24,502
Policyholders' contract deposits 33,924 30,321
Other policyholders' funds 2,720 2,352
Reserve for commissions, expenses and taxes 2,225 1,740
Insurance balances payable 2,283 1,703
Funds held by companies under reinsurance treaties 837 337
Income taxes payable:
Current 224 587
Deferred 1,247 855
Financial services and asset management liabilities:
Borrowings under obligations of guaranteed investment
agreements 9,188 8,000
Securities sold under agreements to repurchase, at
contract value 4,473 2,706
Trading liabilities 4,664 5,366
Securities and spot commodities sold but not yet
purchased, at market value 4,457 5,172
Unrealized loss on interest rate and currency swaps,
options and forward transactions 7,055 5,980
Trust deposits and deposits due to banks and other
depositors 1,682 1,399
Commercial paper 3,204 2,208
Notes, bonds and loans payable 15,249 12,609
Commercial paper 1,432 1,167
Notes, bonds, loans and mortgages payable 2,837 2,413
Separate and variable accounts 18,662 13,509
Other liabilities 8,405 7,069
- ----------------------------------------------------------------------------------
TOTAL LIABILITIES 202,658 172,134
- ----------------------------------------------------------------------------------
PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANIES 895 895
- ----------------------------------------------------------------------------------
CAPITAL FUNDS:
Preferred stock 248 248
Common stock, $2.50 par value; 2,000,000,000 shares
authorized; shares issued 1998 -- 1,313,510,800;
1997 -- 933,589,812 3,284 2,334
Additional paid-in capital 1,319 1,335
Retained earnings 27,110 24,101
Accumulated other comprehensive income (10) 382
Treasury stock, at cost; 1998 -- 96,373,983;
1997 -- 67,048,136 shares of common stock (including
70,034,573 and 49,171,453 shares, respectively, held by
subsidiaries) (1,828) (1,815)
- ----------------------------------------------------------------------------------
TOTAL CAPITAL FUNDS 30,123 26,585
- ----------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL FUNDS $233,676 $199,614
- ----------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements.
29
<PAGE> 31
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME American International Group, Inc. and
Subsidiaries
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GENERAL INSURANCE OPERATIONS:
Net premiums written $14,586 $13,408 $12,692
Change in unearned premium reserve (488) (987) (837)
- ---------------------------------------------------------------------------------------------------------
Net premiums earned 14,098 12,421 11,855
Net investment income 2,192 1,854 1,691
Realized capital gains 205 128 65
- ---------------------------------------------------------------------------------------------------------
16,495 14,403 13,611
- ---------------------------------------------------------------------------------------------------------
Losses incurred 9,164 7,801 7,279
Loss expenses incurred 1,493 1,555 1,718
Underwriting expenses (principally policy acquisition
costs) 2,910 2,575 2,408
- ---------------------------------------------------------------------------------------------------------
13,567 11,931 11,405
- ---------------------------------------------------------------------------------------------------------
OPERATING INCOME 2,928 2,472 2,206
- ---------------------------------------------------------------------------------------------------------
LIFE INSURANCE OPERATIONS:
Premium income 10,293 9,956 8,995
Net investment income 5,201 4,521 3,805
Realized capital (losses) gains (74) (9) 4
- ---------------------------------------------------------------------------------------------------------
15,420 14,468 12,804
- ---------------------------------------------------------------------------------------------------------
Death and other benefits 4,543 4,052 3,733
Increase in future policy benefits 5,699 5,718 5,032
Acquisition and insurance expenses 2,805 2,650 2,382
- ---------------------------------------------------------------------------------------------------------
13,047 12,420 11,147
- ---------------------------------------------------------------------------------------------------------
OPERATING INCOME 2,373 2,048 1,657
- ---------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES OPERATING INCOME 869 671 501
- ---------------------------------------------------------------------------------------------------------
ASSET MANAGEMENT OPERATING INCOME 191 127 101
- ---------------------------------------------------------------------------------------------------------
EQUITY IN INCOME OF MINORITY-OWNED INSURANCE OPERATIONS 57 114 99
- ---------------------------------------------------------------------------------------------------------
OTHER REALIZED CAPITAL LOSSES (7) (29) (12)
- ---------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS) -- NET (134) (93) (84)
- ---------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 6,277 5,310 4,468
- ---------------------------------------------------------------------------------------------------------
INCOME TAXES:
Current 1,100 1,304 1,192
Deferred 685 221 42
- ---------------------------------------------------------------------------------------------------------
1,785 1,525 1,234
- ---------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 4,492 3,785 3,234
- ---------------------------------------------------------------------------------------------------------
MINORITY INTEREST (210) (74) (63)
- ---------------------------------------------------------------------------------------------------------
NET INCOME $ 4,282 $ 3,711 $ 3,171
- ---------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
Basic $ 3.51 $ 3.06 $ 2.61
Diluted 3.44 3.00 2.56
- ---------------------------------------------------------------------------------------------------------
AVERAGE SHARES OUTSTANDING:
Basic 1,215 1,206 1,207
Diluted 1,243 1,233 1,234
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements.
30
<PAGE> 32
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CAPITAL FUNDS American International Group, Inc. and
Subsidiaries
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK:
Balance at beginning of year $ 248 $ 385 $ 322
Issuance of preferred stock -- -- 248
Redemption of preferred stock -- (137) (185)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 248 248 385
- ---------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of year 2,334 1,539 1,400
Issuance of common stock 1 162 139
Stock split effected as dividend 949 633 --
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 3,284 2,334 1,539
- ---------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 1,335 996 956
Issuance of common stock (1) 480 (74)
Excess of cost over proceeds of common stock issued
under stock option and stock purchase plans (22) (29) (4)
Excess of redemption value of Series D Preferred shares
over par value of shares of common stock issued, net of
transaction costs -- -- 180
Cost of issuances of preferred securities -- (55) (13)
Stock splits -- SunAmerica -- (65) (60)
Other 7 8 11
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 1,319 1,335 996
- ---------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 24,101 21,290 18,355
Net income 4,282 3,711 3,171
Stock dividends to shareholders (949) (633) --
Cash dividends to shareholders:
Preferred (12) (19) (27)
Common ($.25, $.20 and $.17 per share respectively) (312) (248) (209)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 27,110 24,101 21,290
- ---------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of year 382 868 934
Unrealized appreciation (depreciation) of
investments -- net of reclassification adjustments (387) 232 (10)
Deferred income tax benefit (expense) on changes 95 (33) (19)
Foreign currency translation adjustments (137) (754) (67)
Applicable income tax benefit on changes 37 69 30
- ---------------------------------------------------------------------------------------------------------
Other comprehensive income (392) (486) (66)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year (10) 382 868
- ---------------------------------------------------------------------------------------------------------
TREASURY STOCK, AT COST:
Balance at beginning of year (1,815) (1,373) (926)
Cost of shares acquired during year (81) (508) (494)
Issued under stock option and stock purchase plans 68 66 39
Other -- -- 8
- ---------------------------------------------------------------------------------------------------------
Balance at end of year (1,828) (1,815) (1,373)
- ---------------------------------------------------------------------------------------------------------
TOTAL CAPITAL FUNDS AT END OF YEAR $30,123 $26,585 $23,705
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements.
31
<PAGE> 33
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS American International Group, Inc. and
Subsidiaries
<TABLE>
<CAPTION>
(IN MILLIONS)
- ---------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUMMARY:
Net cash provided by operating activities $ 7,439 $ 3,433 $ 9,840
Net cash used in investing activities (16,207) (7,402) (15,512)
Net cash provided by financing activities 8,984 3,997 5,643
- ---------------------------------------------------------------------------------------------
Change in cash 216 28 (29)
Cash at beginning of year 87 59 88
- ---------------------------------------------------------------------------------------------
Cash at end of year $ 303 $ 87 $ 59
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,282 $ 3,711 $ 3,171
- ---------------------------------------------------------------------------------------------
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 6,990 1,767 4,131
Premiums and insurance balances receivable and
payable -- net (733) (796) (261)
Reinsurance assets (972) 416 352
Deferred policy acquisition costs (1,025) (200) (754)
Investment income due and accrued (111) (229) 5
Funds held under reinsurance treaties 370 (47) 39
Other policyholders' funds 368 133 128
Current and deferred income taxes -- net 225 520 (62)
Reserve for commissions, expenses and taxes 455 229 254
Other assets and liabilities -- net (411) 593 (375)
Trading assets and liabilities -- net (216) (869) (57)
Trading securities, at market value (1,693) (1,617) 284
Spot commodities, at market value (16) (255) 179
Net unrealized gain on interest rate and currency
swaps, options and forward transactions (1,382) 49 (131)
Securities purchased under agreements to resell (287) (2,909) 379
Securities sold under agreements to repurchase 1,767 (333) 1,659
Securities and spot commodities sold but not yet
purchased, at market value (715) 3,603 364
Realized capital gains (124) (90) (57)
Equity in income of partially-owned companies and other
invested assets (176) (157) (153)
Depreciation expenses, principally flight equipment 952 885 817
Change in cumulative translation adjustments (137) (754) (67)
Other -- net 28 (217) (5)
- ---------------------------------------------------------------------------------------------
Total adjustments 3,157 (278) 6,669
- ---------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 7,439 $ 3,433 $ 9,840
- ---------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements.
32
<PAGE> 34
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) American International Group,
Inc. and Subsidiaries
<TABLE>
<CAPTION>
(IN MILLIONS)
- ----------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of fixed maturities, at amortized cost matured or
redeemed $ 1,578 $ 1,226 $ 1,627
Cost of bonds, at market sold 28,110 22,446 17,035
Cost of bonds, at market matured or redeemed 8,315 8,200 5,372
Cost of equity securities sold 2,784 2,262 2,758
Realized capital gains 124 90 57
Purchases of fixed maturities (43,659) (36,428) (30,988)
Purchases of equity securities (3,277) (1,916) (3,218)
Acquisitions, net of cash acquired (515) -- --
Mortgage, policy and collateral loans granted (2,942) (3,233) (3,597)
Repayments of mortgage, policy and collateral loans 2,341 2,962 3,460
Sales of securities available for sale 2,618 4,310 2,062
Maturities of securities available for sale 1,848 3,232 1,603
Purchases of securities available for sale (5,967) (6,916) (9,531)
Sales of flight equipment 687 2,231 1,363
Purchases of flight equipment (3,160) (3,435) (3,254)
Net additions to real estate and other fixed assets (624) (517) (581)
Sales or distributions of other invested assets 2,869 2,549 1,814
Investments in other invested assets (5,109) (2,637) (2,045)
Change in short-term investments (2,227) (1,788) 590
Investments in partially-owned companies (1) (40) (39)
- ----------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES $(16,207) $ (7,402) $(15,512)
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in policyholders' contract deposits $ 4,474 $ 2,816 $ 1,362
Change in trust deposits and deposits due to banks and
other depositors (595) (1,030) (195)
Change in commercial paper 1,261 (1,123) 1,331
Proceeds from notes, bonds, loans and mortgages payable 7,909 8,164 6,198
Repayments on notes, bonds, loans and mortgages payable (4,973) (7,016) (2,775)
Liquidation of zero coupon notes payable -- (12) --
Proceeds from guaranteed investment agreements 6,540 4,930 3,583
Maturities of guaranteed investment agreements (5,353) (2,653) (3,283)
Proceeds from common stock issued 40 614 23
Net proceeds from issuance of preferred stock -- -- 240
Net proceeds from issuance of preferred securities of
subsidiary grantor trusts -- 300 179
Payment for redemption of preferred securities of
subsidiary grantor trusts -- (55) --
Payment for redemption of preferred stock -- (137) --
Cash dividends to shareholders (324) (267) (236)
Acquisition of treasury stock (81) (508) (494)
Other -- net 86 (26) (290)
- ----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 8,984 $ 3,997 $ 5,643
- ----------------------------------------------------------------------------------------------
SUPPLEMENTARY INFORMATION:
TAXES PAID $ 1,334 $ 922 $ 1,170
- ----------------------------------------------------------------------------------------------
INTEREST PAID $ 2,076 $ 1,864 $ 1,661
- ----------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements.
33
<PAGE> 35
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME American International Group,
Inc. and Subsidiaries
<TABLE>
<CAPTION>
(IN MILLIONS)
- ----------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMPREHENSIVE INCOME:
Net income $4,282 $3,711 $3,171
- ----------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME:
Unrealized appreciation (depreciation) of
investments -- net of reclassification adjustments (387) 232 (10)
Deferred income tax benefit (expense) on changes 95 (33) (19)
Foreign currency translation adjustments (137) (754) (67)
Applicable income tax benefit on changes 37 69 30
- ----------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (392) (486) (66)
- ----------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $3,890 $3,225 $3,105
- ----------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements.
34
<PAGE> 36
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS American International Group, Inc. and
Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION: On January 1, 1999 (the merger date), AIG
issued 187.5 million shares of its common stock in exchange for all the
outstanding common stock and Class B stock of SunAmerica Inc., a Maryland
corporation (Original SunAmerica) based on an exchange ratio of 0.855 shares of
AIG common stock for each share of Original SunAmerica stock. The merger was
accounted for as a pooling of interests and the accompanying financial
statements have been restated to combine Original SunAmerica's financial
statements for its fiscal years ended September 30 with AIG's December 31
financial statements for all periods presented.
The financial statements for the quarter ended March 31, 1999, included in
the AIG Form 10-Q for the quarter ended March 31, 1999, reflect the operations
of Original SunAmerica on a pooling of interest basis and the change of its
fiscal year from September 30 to December 31.
The following is a reconciliation of the individual company results to the
combined results for the twelve month periods during 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(IN MILLIONS) AIG SUNAMERICA TOTAL
- --------------------------------------------------------------
DECEMBER 31 SEPTEMBER 30
<S> <C> <C> <C>
1998
Revenues $33,296 $2,420 $35,716
Net income $ 3,766 $ 516 $ 4,282
1997
Revenues $30,602 $1,951 $32,553
Net income $ 3,332 $ 379 $ 3,711
1996
Revenues $27,943 $1,382 $29,325
Net income $ 2,897 $ 274 $ 3,171
- --------------------------------------------------------------
</TABLE>
Certain of AIG's foreign subsidiaries included in the consolidated
financial statements report on a fiscal year ending November 30. All material
intercompany accounts and transactions have been eliminated.
Commencing with the third quarter 1998, Transatlantic and 20th Century were
consolidated into AIG's financial statements as AIG became the majority
shareholder of these entities.
(B) BASIS OF PRESENTATION: The accompanying financial statements have been
prepared on the basis of generally accepted accounting principles (GAAP). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Certain accounts have been reclassified in the 1997 and 1996 financial
statements to conform to their 1998 presentation and certain accounts have been
reclassified herein to conform to the first quarter 1999 presentation.
GENERAL INSURANCE OPERATIONS: AIG's general insurance subsidiaries are
multiple line companies writing substantially all lines of property and casualty
insurance. One or more of these companies is licensed to write substantially all
of these lines in all states of the United States and in more than 100 foreign
countries. Premiums are earned primarily on a pro rata basis over the term of
the related coverage. The reserve for unearned premiums represents the portion
of premiums written relating to the unexpired terms of coverage.
Acquisition costs represent those costs, including commissions, that vary
with and are primarily related to the acquisition of new business. These costs
are deferred and amortized over the period in which the related premiums written
are earned. Investment income is not anticipated in the deferral of acquisition
costs. (See Note 4.)
Losses and loss expenses are charged to income as incurred. The reserve for
losses and loss expenses represents the accumulation of estimates for reported
losses and includes provisions for losses incurred but not reported. The methods
of determining such estimates and establishing resulting reserves, including
amounts relating to reserves for estimated unrecoverable reinsurance, are
continually reviewed and updated. Adjustments resulting therefrom are reflected
in income currently. AIG discounts certain of its loss reserves which are
primarily related to certain workers' compensation claims. (See Note 6.)
LIFE INSURANCE OPERATIONS: AIG's life insurance subsidiaries offer a wide
range of traditional insurance and financial and investment products. One or
more of these subsidiaries is licensed to write life insurance in all states of
the United States and in over 70 foreign countries. Traditional products consist
of individual and group life, annuity, endowment and accident and health
policies. Financial and investment products consist of single premium annuity,
variable annuities, guaranteed investment contracts and universal life. Premiums
for traditional life insurance products and life contingent annuities, excluding
accident and health products, are recognized as revenues when due. Estimates for
premiums due but not yet collected are accrued. Benefits and expenses are
provided against such revenues to recognize profits over the estimated life of
the policies. Revenues for universal life and investment-type products consist
of policy charges for the cost of insurance, administration, and surrenders
during the period. Expenses include interest credited to policy account balances
and benefit payments made in excess of policy account balances. Accident and
health products are accounted for in a manner similar to general insurance
products described above. Investment income reflects certain minor amounts of
realized capital gains where the gains are deemed to be an inherent element in
pricing certain life products in some foreign countries.
Policy acquisition costs for traditional life insurance products are
generally deferred and amortized over the premium paying period of the policy.
Deferred policy acquisition costs and policy initiation costs related to
universal life and investment-type products are amortized in relation to
expected gross profits over the
35
<PAGE> 37
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
life of the policies. Policy acquisition costs with respect to universal life
and investment type products are deferred and amortized, with interest, in
relation to the incidence of estimated gross profits to be realized over the
estimated lives of the contracts. Estimated gross profits are composed of net
interest income, net realized investment gains and losses, variable annuity
fees, surrender charges and direct administrative expenses.
As debt and equity securities available for sale are carried at aggregate
fair value, an adjustment is made to deferred policy acquisition costs equal to
the change in amortization that would have been recorded if such securities had
been sold at their stated aggregate fair value and the proceeds reinvested at
current yields. The change in this adjustment, net of tax, is included with the
change in net unrealized gains/losses on debt and equity securities available
for sale that is credited or charged directly to comprehensive income. Deferred
policy acquisition costs have been reduced by $145 million at December 31, 1998
and $140 million at December 31, 1997 for this adjustment. (See Note 4.)
The liabilities for future policy benefits and policyholders' contract
deposits are established using assumptions described in Note 6.
FINANCIAL SERVICES OPERATIONS: AIG participates in the derivatives dealer
market conducting, primarily as principal, an interest rate, currency, equity
and credit derivative products business. AIG 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.
AIG engages in market making and trading activities, as principal, in
foreign exchange, interest rates and precious and base metals. AIG 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.
AIG, as lessor, leases flight equipment principally under operating leases.
Accordingly, income is reported over the life of the lease as rentals become
receivable under the provisions of the lease or, in the case of leases with
varying payments, under the straight-line method over the noncancelable term of
the lease. In certain cases, leases provide for additional amounts contingent on
usage. AIG is also a remarketer of flight equipment for its own account and for
airlines and financial institutions. AIG's revenues from such operations consist
of net gains on sales of flight equipment and commissions.
ASSET MANAGEMENT OPERATIONS: AIG's asset management operations offer a
wide variety of investment vehicles and services, including variable annuities,
mutual funds, trust services and investment asset management. Such products and
services are offered to individuals and institutions both domestically and
internationally. The fees generated with respect to asset management operations
are recognized as revenues when earned. Costs incurred in the sale of variable
annuities and mutual funds are deferred and subsequently amortized. With respect
to variable annuities, acquisition costs are amortized in relation to the
incidence of estimated gross profits to be realized over the estimated lives of
the variable annuity contracts. With respect to the sale of mutual funds,
acquisition costs are amortized over the estimated lives of the funds obtained.
(C) NON-CASH TRANSACTION: In July 1998, 224,950 shares of 20th Century's
Series A preferred stock were converted into 19,584,368 shares of 20th Century's
common stock.
(D) INVESTMENTS IN FIXED MATURITIES AND EQUITY SECURITIES: Bonds and
preferred stocks held to maturity, both of which are principally owned by the
insurance subsidiaries, are carried at amortized cost where AIG has the ability
and positive intent to hold these securities until maturity. Where AIG may not
have the positive intent to hold these securities until maturity, those bonds
are considered to be available for sale and carried at current market values.
Interest income with respect to fixed maturity securities is accrued currently.
Included in the bonds available for sale are collateralized mortgage
obligations (CMOs). Premiums and discounts arising from the purchase of CMOs are
treated as yield adjustments over their estimated life.
Bond trading securities are carried at current market values, as it is
AIG's intention to sell these securities in the near term.
Common and non-redeemable preferred stocks are carried at current market
values. Dividend income is generally recognized when receivable.
Unrealized gains and losses from investments in equity securities and fixed
maturities available for sale are reflected as a separate component of
comprehensive income, net of deferred income taxes in capital funds currently.
Unrealized gains and losses from investments in trading securities are reflected
in income currently.
Realized capital gains and losses are determined principally by specific
identification. Where declines in values of securities below cost or amortized
cost are considered to be other than temporary, a charge is reflected in income
for the difference between cost or amortized cost and estimated net realizable
value.
(E) MORTGAGE LOANS ON REAL ESTATE, POLICY AND COLLATERAL
LOANS -- NET: Mortgage loans on real estate, policy loans and collateral loans
are carried at unpaid principal balances. Interest income on such loans is
accrued currently.
Impairment of mortgage loans on real estate and collateral loans is
generally measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate subject to the fair value of
underlying collateral. Interest income on such loans is recognized as cash is
received.
There is no allowance for policy loans, as these loans serve to reduce the
death benefit paid when the death claim is made and
36
<PAGE> 38
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
the balances are effectively collateralized by the cash surrender value of the
policy.
(F) FLIGHT EQUIPMENT: Flight equipment is stated at cost. Major additions
and modifications are capitalized. Normal maintenance and repairs, airframe and
engine overhauls and compliance with return conditions of flight equipment on
lease are provided by and paid for by the lessee. Under the provisions of most
leases for certain airframe and engine overhauls, the lessee is reimbursed for
costs incurred up to but not exceeding contingent rentals paid to AIG by the
lessee. AIG provides a charge to income for such reimbursements based upon the
expected reimbursements during the life of the lease. Depreciation and
amortization are computed on the straight-line basis to a residual value of
approximately 15 percent over the estimated useful lives of the related assets
but not exceeding 25 years. AIG monitors the global aircraft market and the
values of various types and models of aircraft within that market relative to
the values of its own fleet. If events or circumstances were such that the
carrying amount of AIG's aircraft might be impaired, AIG would determine if such
impairment existed and recognize such impairment. This caption also includes
deposits for aircraft to be purchased.
At the time the assets are retired or disposed of, the cost and associated
accumulated depreciation and amortization are removed from the related accounts
and the difference, net of proceeds, is recorded as a gain or loss.
(G) SECURITIES AVAILABLE FOR SALE, AT MARKET VALUE: These securities are
held to meet long term investment objectives and are accounted for as available
for sale, carried at current market values and recorded on a trade date basis.
Unrealized gains and losses from valuing these securities and any related hedges
are reflected in capital funds currently, net of any related deferred income
taxes. When the underlying security is sold, the realized loss or gain resulting
from the hedging derivative transaction is recognized in income in that same
period as the realized gain or loss of the hedged security.
(H) TRADING SECURITIES, AT MARKET VALUE: Trading securities are held to
meet short term investment objectives, including hedging securities. These
securities are recorded on a trade date basis and carried at current market
values. Unrealized gains and losses are reflected in income currently.
(I) SPOT COMMODITIES, AT MARKET VALUE: Spot commodities are carried at
current market values and are recorded on a settlement date basis. The exposure
to market risk may be reduced through the use of forwards, futures and option
contracts. Unrealized gains and losses of both commodities and any derivative
transactions are reflected in income currently.
(J) UNREALIZED GAIN AND UNREALIZED LOSS ON INTEREST RATE AND CURRENCY
SWAPS, OPTIONS AND FORWARD TRANSACTIONS: Interest rate swaps, currency swaps,
equity swaps, swaptions, options and forward transactions are accounted for as
contractual commitments recorded on a trade date basis and are carried at
current market values or estimated fair values when market values are not
available. Unrealized gains and losses are reflected in income currently.
Estimated fair values are based on the use of valuation models that utilize,
among other things, current interest, foreign exchange and volatility rates.
These valuations represent an assessment of the present values of expected
future cash flows of these transactions and may include reserves for market risk
as deemed appropriate. The portfolio's discounted cash flows are evaluated with
reference to current market conditions, maturities within the portfolio and
other relevant factors. Based upon this evaluation, it is determined what
offsetting transactions, if any, are necessary to reduce the market risk of the
portfolio. AIG manages its market risk with a variety of transactions, including
swaps, trading securities, futures contracts and other transactions as
appropriate. Because of the limited liquidity of some of these instruments, the
recorded values of these transactions may be different than the values that
might be realized if AIG were to sell or close out the transactions prior to
maturity. AIG believes that such differences are not significant to the results
of operations, financial condition or liquidity. Such differences would be
immediately recognized when the transactions are sold or closed out prior to
maturity.
(K) TRADING ASSETS AND TRADING LIABILITIES: Trading assets and trading
liabilities include option premiums paid and received and receivables from and
payables to counterparties which relate to unrealized gains and losses on
futures, forwards and options and balances due from and due to clearing brokers
and exchanges.
Futures, forwards and options purchased and written are accounted for as
contractual commitments on a trade date basis and are carried at fair values.
Unrealized gains and losses are reflected in income currently. The fair values
of futures contracts are based on closing exchange quotations. Commodity forward
transactions are carried at fair values derived from dealer quotations and
underlying commodity exchange quotations. For long dated forward transactions,
where there are no dealer or exchange quotations, fair values are derived using
internally developed valuation methodologies based on available market
information. Options are carried at fair values based on the use of valuation
models that utilize, among other things, current interest or commodity rates and
foreign exchange and volatility rates, as applicable.
(L) SECURITIES PURCHASED (SOLD) UNDER AGREEMENTS TO RESELL (REPURCHASE), AT
CONTRACT VALUE: Purchases of securities under agreements to resell and sales of
securities under agreements to repurchase are accounted for as collateralized
transactions and are recorded at their contracted resale or repurchase amounts,
plus accrued interest. Generally, it is AIG's policy to take possession of or
obtain a security interest in securities purchased under agreements to resell.
AIG minimizes the credit risk that counterparties to transactions might be
unable to fulfill their contractual obligations by monitoring customer credit
exposure and collateral value and
37
<PAGE> 39
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
generally requiring additional collateral to be deposited with AIG when deemed
necessary.
(M) OTHER INVESTED ASSETS: Other invested assets consist primarily of
investments by AIG's insurance operations in joint ventures and partnerships and
other investments not classified elsewhere herein. The joint ventures and
partnerships are carried at equity or cost depending on the nature of the
invested asset and the ownership percentage thereof. Other investments are
carried at cost or market values depending upon the nature of the underlying
assets. Unrealized gains and losses from the revaluation of those investments
carried at market values are reflected in comprehensive income, net of any
related deferred income taxes.
(N) REINSURANCE ASSETS: Reinsurance assets include the balances due from
both reinsurance and insurance companies under the terms of AIG's reinsurance
arrangements for paid and unpaid losses and loss expenses, ceded unearned
premiums and ceded future policy benefits for life and accident and health
insurance contracts and benefits paid and unpaid. It also includes funds held
under reinsurance treaties. Amounts related to reinsurance arrangements paid and
unpaid losses and loss expenses are substantially collateralized.
(O) INVESTMENTS IN PARTIALLY-OWNED COMPANIES: The equity method of
accounting is used for AIG's investment in companies in which AIG's ownership
interest approximates twenty but is not greater than fifty percent
(minority-owned companies). Equity in income of minority-owned insurance
operations is presented separately in the consolidated statement of income.
Equity in net income of other unconsolidated companies is principally included
in other income (deductions) -- net. At December 31, 1998, AIG's significant
investments in partially-owned companies included its 19.9 percent interest in
Richmond Insurance Company; and its 24.4 percent interest in IPC Holdings, Ltd.
This balance sheet caption also includes investments in less significant
partially-owned companies and in certain minor majority-owned subsidiaries. The
amount of dividends received from unconsolidated subsidiaries owned less than 50
percent were $24 million, $30 million and $13 million in 1998, 1997 and 1996
respectively. The undistributed earnings of unconsolidated subsidiaries owned
less than 50 percent was $59 million as of December 31, 1998.
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.
As a result of purchases of the common stock of Transatlantic, as of August
1998, AIG owns more than 50 percent of the voting securities of Transatlantic.
Commencing with the third quarter of 1998, AIG accounted for its investment in
Transatlantic on a consolidated basis.
(P) REAL ESTATE AND OTHER FIXED ASSETS: The costs of buildings and
furniture and equipment are depreciated principally on a straight-line basis
over their estimated useful lives (maximum of 40 years for buildings and 10
years for furniture and equipment). Expenditures for maintenance and repairs are
charged to income as incurred; expenditures for betterments are capitalized and
depreciated.
From time to time, AIG assesses the carrying value of its real estate
relative to the market values of real estate within the specific local area. At
December 31, 1998, there were no impairments.
(Q) SEPARATE AND VARIABLE ACCOUNTS: Separate and variable accounts
represent funds for which investment income and investment gains and losses
accrue directly to the policyholders. Each account has specific investment
objectives, and the assets are carried at market value. The assets of each
account are legally segregated and are not subject to claims which arise out of
any other business of AIG.
(R) SECURITIES AND SPOT COMMODITIES SOLD BUT NOT YET PURCHASED, AT MARKET
VALUE: Securities and spot commodities sold but not yet purchased represent
sales of securities and spot commodities not owned at the time of sale. The
obligations arising from such transactions are recorded on a trade date basis
and carried at the respective current market values or current commodity prices.
(S) PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANIES: Preferred
shareholders' equity in subsidiary companies relates to outstanding preferred
stock of ILFC and certain subsidiaries of SunAmerica Inc., the Delaware
corporation which now owns substantially all of the subsidiaries held by
Original SunAmerica prior to the merger date (SunAmerica), both wholly owned
subsidiaries of AIG. Dividends on such preferred stock are accounted for as
interest expense and included as minority interest in the consolidated statement
of income.
(T) TRANSLATION OF FOREIGN CURRENCIES: Financial statement accounts
expressed in foreign currencies are translated into U.S. dollars in accordance
with Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation" (FASB 52). Under FASB 52, functional currency assets and
liabilities are translated into U.S. dollars generally using current rates of
exchange prevailing at the balance sheet date of each respective subsidiary and
the related translation adjustments are recorded as a separate component of
comprehensive income, net of any related taxes in capital funds. Functional
currencies are generally the currencies of the local operating environment.
Income statement accounts expressed in functional currencies are translated
using average exchange rates. The adjustments resulting from translation of
financial statements of foreign entities operating in highly inflationary
economies are recorded in income. Exchange gains and losses resulting from
foreign currency transactions are also recorded in income currently. The
exchange gain or loss with respect to utilization of foreign exchange hedging
instruments is recorded as a component of comprehensive income.
38
<PAGE> 40
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(U) INCOME TAXES: Deferred federal and foreign income taxes are provided
for temporary differences for the expected future tax consequences of events
that have been recognized in AIG's financial statements or tax returns.
(V) EARNINGS PER SHARE: Basic earnings per common share are based on the
weighted average number of common shares outstanding, retroactively adjusted to
reflect all stock dividends and stock splits. Diluted earnings per share are
based on those shares used in basic earnings per share plus shares that would
have been outstanding assuming issuance of common shares for all dilutive
potential common shares outstanding, retroactively adjusted to reflect all stock
dividends and stock splits.
The computation of earnings per share for December 31, 1998, 1997 and 1996
was as follows:
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
NUMERATOR FOR BASIC EARNINGS PER
SHARE:
Net income $4,282 $3,711 $3,171
Less:
Dividends on non-convertible
preferred stock -- (6) (11)
Dividends on convertible preferred
stock (12) (12) (16)
- ----------------------------------------------------------------
Net income applicable to common stock $4,270 $3,693 $3,144
- ----------------------------------------------------------------
DENOMINATOR FOR BASIC EARNINGS PER
SHARE:
Average shares outstanding used in the
computation of per share earnings:
Common stock issued 1,306 1,295 1,289
Common stock in treasury (89) (86) (79)
Common stock contingently issuable (2) (3) (3)
- ----------------------------------------------------------------
Average outstanding shares -- basic 1,215 1,206 1,207
- ----------------------------------------------------------------
NUMERATOR FOR DILUTED EARNINGS PER
SHARE:
Net income $4,282 $3,711 $3,171
Less:
Dividends on non-convertible
preferred stock -- (6) (11)
- ----------------------------------------------------------------
Net income applicable to common stock $4,282 $3,705 $3,160
- ----------------------------------------------------------------
DENOMINATOR FOR DILUTED EARNINGS PER
SHARE:
Average shares outstanding 1,217 1,209 1,210
Incremental shares from potential
common stock:
Average number of shares arising
from outstanding employee stock
plans (treasury stock method) 12 9 7
Average number of shares issuable
upon conversion of convertible
securities and preferred stock 14 15 17
- ----------------------------------------------------------------
Average shares outstanding -- diluted 1,243 1,233 1,234
- ----------------------------------------------------------------
EARNINGS PER SHARE:
Basic $ 3.51 $ 3.06 $ 2.61
Diluted 3.44 3.00 2.56
- ----------------------------------------------------------------
</TABLE>
(W) ACCOUNTING STANDARDS: In June 1997, FASB issued Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" (FASB 130) and
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 was
effective for AIG as of January 1, 1998.
FASB 131 establishes standards for the way AIG is required to disclose
information about its operating segments in its annual financial statements and
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 was effective
for the year ended December 31, 1998 and has been adopted herein.
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 was effective for the year ended December 31, 1998 and has been
adopted herein.
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
change in the fair value of a derivative depends on a number of factors,
including the intended use of the derivative. Currently, AIG Financial Products
Corp. and its subsidiaries (AIGFP) and AIG Trading Group Inc. and its
subsidiaries (AIGTG) 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 derivative transactions
entered into by other AIG operations. 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, 2001.
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AcSEC) issued Statement of
Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." This statement provides guidance for the
recording of a liability for insurance-related assessments. The statement
requires that a liability be recognized in certain defined circumstances. AIG
believes that the impact of this statement on its results of operations,
financial condition or liquidity will not be significant. This statement is
effective for the year commencing January 1, 1999.
39
<PAGE> 41
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In October 1998, AcSEC issued SOP 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." This
statement identifies several methods of deposit accounting and provides guidance
on the application of each method. This statement classifies insurance and
reinsurance contracts for which the deposit method is appropriate as contracts
that (i) transfer only significant timing risk, (ii) transfer only significant
underwriting risk, (iii) transfer neither significant timing nor underwriting
risk, and (iv) have an indeterminate risk. AIG believes that the impact of this
statement on its results of operations, financial condition or liquidity will
not be significant. This statement is effective for the year commencing January
1, 2000. Restatement of previously issued financial statements is not permitted.
2. FOREIGN OPERATIONS
Certain subsidiaries operate solely outside of the United States. Their assets
and liabilities are located principally in the countries where the insurance
risks are written and/or investment and non-insurance related operations are
located. In addition, certain of AIG's domestic subsidiaries have branch and/or
subsidiary operations and substantial assets and liabilities in foreign
countries. Certain countries have restrictions on the conversions of funds which
generally cause a delay in the outward remittance of such funds. Approximately
32 percent and 29 percent of consolidated assets at December 31, 1998 and 1997,
respectively, and 49 percent of revenues for the year ended December 31, 1998
and 51 percent for each of the years ended December 31, 1997 and 1996,
respectively, were located in or derived from foreign countries (other than
Canada). (See Note 18.)
3. FEDERAL INCOME TAXES
(a) AIG and its domestic subsidiaries file a consolidated U.S. Federal
income tax return. Revenue Agent's Reports assessing additional taxes for the
years 1987, 1988, 1989 and 1990 have been issued and Letters of Protest
contesting the assessments have been filed with the Internal Revenue Service. It
is management's belief that there are substantial arguments in support of the
positions taken by AIG in its Letters of Protest. AIG also believes that the
impact of the results of these examinations will not be significant to AIG's
financial condition, results of operations or liquidity.
Foreign income not expected to be taxed in the United States has arisen
because AIG's foreign subsidiaries were generally not subject to U.S. income
taxes on income earned prior to January 1, 1987. Such income would become
subject to U.S. income taxes at current tax rates if remitted to the United
States or if other events occur which would make these amounts currently
taxable. The cumulative amount of translated undistributed earnings of AIG's
foreign subsidiaries currently not subject to U.S. income taxes was
approximately $3.3 billion at December 31, 1998. Management presently has not
subjected and has no intention of subjecting these accumulated earnings to
material U.S. income taxes and no provision has been made in the accompanying
financial statements for such taxes.
(b) The U.S. Federal income tax rate is 35 percent for 1998, 1997 and 1996.
Actual tax expense on income differs from the
40
<PAGE> 42
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
3. FEDERAL INCOME TAXES (continued)
"expected" amount computed by applying the Federal income tax rate because of
the following:
(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
-------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
OF PRE-TAX OF PRE-TAX OF PRE-TAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
"Expected" tax expense $2,197 35.0% $1,859 35.0% $1,564 35.0%
Adjustments:
Tax exempt interest (284) (4.5) (287) (5.4) (279) (6.2)
Dividends received deduction (30) (0.5) (28) (0.5) (32) (0.7)
State income taxes 34 0.5 33 0.6 52 1.1
Foreign income not expected to be taxed in the U.S.,
less foreign income taxes (85) (1.4) (33) (0.6) (22) (0.5)
Affordable housing tax credits (39) (0.6) (24) (0.5) (22) (0.5)
Other (8) (0.1) 5 0.1 (27) (0.6)
- ----------------------------------------------------------------------------------------------------------------------------
Actual tax expense $1,785 28.4% $1,525 28.7% $1,234 27.6%
- ----------------------------------------------------------------------------------------------------------------------------
Foreign and domestic components of actual tax expense:
Foreign:
Current $ 386 $ 317 $ 392
Deferred 31 75 (1)
Domestic*:
Current 714 987 800
Deferred 654 146 43
- ----------------------------------------------------------------------------------------------------------------------------
Total $1,785 $1,525 $1,234
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Including U.S. tax on foreign income.
41
<PAGE> 43
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FEDERAL INCOME TAXES (continued)
(c) The components of the net deferred tax liability as of December 31,
1998 and December 31, 1997 were as follows:
(IN MILLIONS)
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loss reserve discount $1,275 $1,235
Unearned premium reserve reduction 390 322
Accruals not currently deductible 555 505
Adjustment to life policy reserves 935 950
Cumulative translation adjustment 151 116
Other 62 44
- ------------------------------------------------------------
3,368 3,172
- ------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 2,002 1,728
Financial service products mark to
market differential 330 270
Depreciation of flight equipment 1,137 943
Acquisition net asset basis adjustments 93 119
Unrealized appreciation of investments 707 706
Other 346 261
- ------------------------------------------------------------
4,615 4,027
- ------------------------------------------------------------
Net deferred tax liability $1,247 $ 855
- ------------------------------------------------------------
</TABLE>
4. DEFERRED POLICY ACQUISITION COSTS
The following reflects the policy acquisition costs deferred for amortization
against future income and the related amortization charged to income for general
and life insurance operations, excluding certain amounts deferred and amortized
in the same period:
(IN MILLIONS)
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
General insurance operations:
Balance at beginning of year $1,637 $1,416 $1,290
- -------------------------------------------------------------
Acquisition costs deferred
Commissions 664 592 592
Other 909 845 714
- -------------------------------------------------------------
1,573 1,437 1,306
- -------------------------------------------------------------
Amortization charged to income
Commissions 568 552 557
Other 790 664 623
- -------------------------------------------------------------
1,358 1,216 1,180
- -------------------------------------------------------------
Balance at end of year $1,852 $1,637 $1,416
- -------------------------------------------------------------
Life insurance operations:
Balance at beginning of year $5,515 $5,403 $4,636
- -------------------------------------------------------------
Acquisition costs deferred
Commissions 892 963 955
Other 421 825 612
- -------------------------------------------------------------
1,313 1,788 1,567
- -------------------------------------------------------------
Amortization charged to income
Commissions 450 489 454
Other 309 385 210
- -------------------------------------------------------------
759 874 664
- -------------------------------------------------------------
Increase (decrease) due to
foreign exchange 160 (802) (136)
- -------------------------------------------------------------
Balance at end of year $6,229 $5,515 $5,403
- -------------------------------------------------------------
Total deferred policy acquisition
costs $8,081 $7,152 $6,819
- -------------------------------------------------------------
</TABLE>
5. REINSURANCE
In the ordinary course of business, AIG's general and life insurance companies
cede reinsurance to other insurance companies in order to provide greater
diversification of AIG's business and limit the potential for losses arising
from large risks.
General reinsurance is effected under reinsurance treaties and by
negotiation on individual risks. Certain of these reinsurance arrangements
consist of excess of loss contracts which protect AIG against losses over
stipulated amounts. Ceded premiums are considered prepaid reinsurance premiums
and are amortized into income over the contract period in proportion to the
protection received. Amounts recoverable from general reinsurers are estimated
in a manner consistent with the claims liabilities associated with the
reinsurance and presented as a component of reinsurance assets.
AIG life companies limit exposure to loss on any single life. For ordinary
insurance, AIG retains a maximum of approximately one million dollars of
coverage per individual life. There are smaller
42
<PAGE> 44
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
5. REINSURANCE (continued)
retentions for other lines of business. Life reinsurance is effected
principally under yearly renewable term treaties. The premiums with respect to
these treaties are considered prepaid reinsurance premiums and are amortized
into income over the contract period in proportion to the protection provided.
Amounts recoverable from life reinsurers are estimated in a manner consistent
with the assumptions used for the underlying policy benefits and are presented
as a component of reinsurance assets.
General insurance premiums written and earned were comprised of the
following:
(IN MILLIONS)
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, WRITTEN EARNED
- ------------------------------------------------------------
<S> <C> <C>
1998
Gross premiums $20,684 $20,092
Ceded premiums (6,098) (5,994)
- ------------------------------------------------------------
Net premiums $14,586 $14,098
- ------------------------------------------------------------
1997
Gross premiums $18,742 $17,566
Ceded premiums (5,334) (5,145)
- ------------------------------------------------------------
Net premiums $13,408 $12,421
- ------------------------------------------------------------
1996
Gross premiums $18,319 $17,580
Ceded premiums (5,627) (5,725)
- ------------------------------------------------------------
Net premiums $12,692 $11,855
- ------------------------------------------------------------
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, reinsurance
recoveries, which reduced loss and loss expenses incurred, amounted to $5.36
billion, $4.59 billion and $5.07 billion, respectively.
Life insurance net premium income was comprised of the following:
(IN MILLIONS)
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Gross premium income $10,578 $10,242 $9,256
Ceded premiums (285) (286) (261)
- -------------------------------------------------------------
Net premium income $10,293 $ 9,956 $8,995
- -------------------------------------------------------------
</TABLE>
Life insurance recoveries, which reduced death and other benefits,
approximated $138 million, $136 million and $113 million, respectively, for the
years ended December 31, 1998, 1997 and 1996.
AIG's reinsurance arrangements do not relieve AIG from its direct
obligation to its insureds. Thus, a credit exposure exists with respect to both
general and life reinsurance ceded to the extent that any reinsurer is unable to
meet the obligations assumed under the reinsurance agreements. AIG holds
substantial collateral as security under related reinsurance agreements in the
form of funds, securities and/or letters of credit. A provision has been
recorded for estimated unrecoverable reinsurance. AIG has been largely
successful in prior recovery efforts.
AIG evaluates the financial condition of its reinsurers through an internal
reinsurance security committee consisting of members of AIG's senior management.
No single reinsurer is a material reinsurer to AIG nor is AIG's business
substantially dependent upon any reinsurance contract.
Life insurance ceded to other insurance companies was as follows:
(IN MILLIONS)
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Life insurance in-force $62,434 $56,681 $52,392
- -------------------------------------------------------------
</TABLE>
Life insurance assumed represented 0.3 percent of gross life insurance
in-force at December 31, 1998 and 1997 and 0.2 percent for 1996, and life
insurance premium income assumed represented 0.3 percent, 0.2 percent and 0.1
percent of gross premium income for the periods ended December 31, 1998, 1997
and 1996.
Supplemental information for gross loss and benefit reserves net of ceded
reinsurance at December 31, 1998 and 1997 follows:
(IN MILLIONS)
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
AS NET OF
REPORTED REINSURANCE
- ------------------------------------------------------------
<S> <C> <C>
December 31, 1998
Reserve for losses and loss
expenses $(38,310) $(24,619)
Future policy benefits for life and
accident and health insurance
contracts (29,571) (29,433)
Premiums and insurance balances
receivable -- net 11,679 13,394
Funds held under reinsurance
treaties -- 446
Reserve for unearned premiums (10,009) (8,255)
Reinsurance assets 17,744 --
- ------------------------------------------------------------
December 31, 1997
Reserve for losses and loss
expenses $(33,400) $(21,171)
Future policy benefits for life and
accident and health insurance
contracts (24,502) (24,374)
Premiums and insurance balances
receivable -- net 10,283 12,306
Funds held under reinsurance
treaties -- 81
Reserve for unearned premiums (8,739) (7,089)
Reinsurance assets 16,111 --
- ------------------------------------------------------------
</TABLE>
43
<PAGE> 45
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RESERVE FOR LOSSES AND LOSS EXPENSES AND FUTURE LIFE POLICY BENEFITS AND
POLICYHOLDERS' CONTRACT DEPOSITS
(a) The following analysis provides a reconciliation of the activity in the
reserve for losses and loss expenses:
(IN MILLIONS)
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
At beginning of year:
Reserve for losses and loss
expenses $33,400 $33,430 $33,047
Reinsurance recoverable (12,229) (13,023) (13,354)
- -------------------------------------------------------------
21,171 20,407 19,693
- -------------------------------------------------------------
Acquisitions 2,896 -- --
Losses and loss expenses
incurred:
Current year 10,938 9,732 9,273
Prior year (281) (376) (276)
- -------------------------------------------------------------
Total 10,657 9,356 8,997
- -------------------------------------------------------------
Losses and loss expenses paid:
Current year 4,389 2,976 3,002
Prior year 5,716 5,616 5,281
- -------------------------------------------------------------
Total 10,105 8,592 8,283
- -------------------------------------------------------------
At end of year:
Net reserve for losses and
loss expenses 24,619 21,171 20,407
Reinsurance recoverable 13,691 12,229 13,023
- -------------------------------------------------------------
Total $38,310 $33,400 $33,430
- -------------------------------------------------------------
</TABLE>
(b) The analysis of the future policy benefits and policyholders' contract
deposits liabilities as at December 31, 1998 and 1997 follows:
(IN MILLIONS)
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Future policy benefits:
Long duration contracts $28,535 $23,918
Short duration contracts 1,036 584
- ------------------------------------------------------------
Total $29,571 $24,502
- ------------------------------------------------------------
Policyholders' contract deposits:
Annuities $18,129 $19,204
Guaranteed investment contracts (GICs) 12,007 8,230
Corporate life products 2,266 1,967
Universal life 639 540
Other investment contracts 883 380
- ------------------------------------------------------------
Total $33,924 $30,321
- ------------------------------------------------------------
</TABLE>
(c) Long duration contract liabilities included in future policy benefits,
as presented in the table above, result from traditional life products. Short
duration contract liabilities are primarily accident and health products. The
liability for future life policy benefits has been established based upon the
following assumptions:
(i) Interest rates (exclusive of immediate/terminal funding annuities),
which vary by territory, year of issuance and products, range from 3.0 percent
to 12.0 percent within the first 20 years. Interest rates on immediate/terminal
funding annuities are at a maximum of 12.2 percent and grade to not greater than
7.5 percent.
(ii) Mortality and surrender rates are based upon actual experience by
geographical area modified to allow for variations in policy form. The weighted
average lapse rate, including surrenders, for individual and group life
approximated 7.8 percent.
(iii) The portions of current and prior net income and of current
unrealized appreciation of investments that can inure to the benefit of AIG are
restricted in some cases by the insurance contracts and by the local insurance
regulations of the countries in which the policies are in force.
(iv) Participating life business represented approximately 30 percent of
the gross insurance in-force at December 31, 1998 and 46 percent of gross
premium income in 1998. The amount of dividends to be paid is determined
annually by the Boards of Directors. Anticipated dividends are considered as a
planned contractual benefit in computing the value of future policy benefits and
are provided ratably over the premium-paying period of the contracts.
(d) The liability for policyholders' contract deposits has been established
based on the following assumptions:
(i) Interest rates credited on deferred annuities, which vary by territory
and year of issuance, range from 3.0 percent to 7.1 percent. Credited interest
rate guarantees are generally for a period of one year. Withdrawal charges
generally range from 3.0 percent to 10.0 percent grading to zero over a period
of 5 to 10 years.
(ii) Domestically, GICs have market value withdrawal provisions for any
funds withdrawn other than benefit responsive payments. Interest rates credited
generally range from 4.7 percent to 8.1 percent and maturities range from 1 to
20 years. Overseas, primarily in the United Kingdom, GIC type contracts are
credited at rates ranging from 4.6 percent to 6.5 percent with guarantees
generally being one year. Contracts in other foreign locations have interest
rates, maturities and withdrawal charges based upon local economic and
regulatory conditions.
(iii) Interest rates on corporate life insurance products are guaranteed at
4.0 percent and the weighted average rate credited in 1998 was 7.0 percent.
(iv) The universal life funds have credited interest rates of 4.5 percent
to 7.5 percent and guarantees ranging from 3.5 percent to 5.5 percent depending
on the year of issue. Additionally, universal life funds are subject to
surrender charges that amount to 11.0 percent of the fund balance grading to
zero over a period not longer than 20 years.
(e) Certain products, which are short duration contracts, are subject to
experience adjustments. These include group life and group medical products,
credit life contracts, accident & health insurance contracts/riders attached to
life policies and, to a limited extent, reinsurance agreements with other direct
insurers. Ultimate
44
<PAGE> 46
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
6. RESERVE FOR LOSSES AND LOSS EXPENSES AND FUTURE LIFE POLICY BENEFITS AND
POLICYHOLDERS' CONTRACT DEPOSITS (continued)
premiums from these contracts are estimated and recognized as revenue and the
unearned portions of the premiums are held as reserves. Experience adjustments
vary according to the type of contract and the territory in which the policy is
in force and are subject to local regulatory guidance.
7. STATUTORY FINANCIAL DATA
Statutory surplus and net income for general insurance and life insurance
operations as reported to regulatory authorities were as follows:
(IN MILLIONS)
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Statutory surplus:
General insurance $15,523 $14,071 $12,311
Life insurance 8,177 6,966 6,729
Statutory net income*:
General insurance 2,252 2,041 1,727
Life insurance 925 1,357 1,062
- -------------------------------------------------------------
</TABLE>
* Includes net realized capital gains and losses.
AIG's insurance subsidiaries file financial statements prepared in
accordance with statutory accounting practices prescribed or permitted by
domestic or foreign insurance regulatory authorities. The differences between
statutory financial statements and financial statements prepared in accordance
with GAAP vary between domestic and foreign jurisdictions. The principal
differences are that statutory financial statements do not reflect deferred
policy acquisition costs and deferred income taxes, all bonds are carried at
amortized cost and reinsurance assets and liabilities are presented net of
reinsurance. AIG's use of permitted statutory accounting practices does not have
a significant impact on statutory surplus.
8. INVESTMENT INFORMATION
(A) STATUTORY DEPOSITS: Cash and securities with carrying values of $4.12
billion and $3.89 billion were deposited by AIG's subsidiaries under
requirements of regulatory authorities as of December 31, 1998 and 1997,
respectively.
(B) NET INVESTMENT INCOME: An analysis of the net investment income from
the general and life insurance operations follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
General insurance:
Fixed maturities $1,663 $1,490 $1,392
Equity securities 80 55 75
Short-term investments 73 40 41
Other (net of interest expense
on funds held) 481 337 253
- -------------------------------------------------------------
Total investment income 2,297 1,922 1,761
Investment expenses 105 68 70
- -------------------------------------------------------------
Net investment income $2,192 $1,854 $1,691
- -------------------------------------------------------------
Life insurance:
Fixed maturities $3,683 $3,154 $2,554
Equity securities 72 79 94
Short-term investments 308 148 123
Interest on mortgage, policy
and collateral loans 820 766 832
Other 627 624 411
- -------------------------------------------------------------
Total investment income 5,510 4,771 4,014
Investment expenses 309 250 209
- -------------------------------------------------------------
Net investment income $5,201 $4,521 $3,805
- -------------------------------------------------------------
</TABLE>
(C) INVESTMENT GAINS AND LOSSES: The realized capital gains (losses) and
increase (decrease) in unrealized appreciation of investments for 1998, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -----------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Realized capital gains (losses) on
investments:
Fixed maturities(a) $ 121 $ 64 $ (74)
Equity securities 105 134 166
Other (102) (108) (35)
- -----------------------------------------------------------
Realized capital gains $ 124 $ 90 $ 57
- -----------------------------------------------------------
Increase (decrease) in unrealized
appreciation of investments:
Fixed maturities $ 555 $ 712 $(280)
Equity securities (484) (405) 292
Other(b) (458) (75) (22)
- -----------------------------------------------------------
Increase (decrease) in unrealized
appreciation $(387) $ 232 $ (10)
- -----------------------------------------------------------
</TABLE>
(a) The realized gains (losses) resulted from the sale of available for sale
fixed maturities.
(b) Includes $301 million increase, $158 million decrease and $51 million
increase in unrealized appreciation attributable to participating
policyholders at December 31, 1998, 1997 and 1996, respectively.
45
<PAGE> 47
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENT INFORMATION (continued)
The gross gains and gross losses realized on the disposition of available
for sale securities for 1998, 1997 and 1996 follow:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -------------------------------------------------------------
GROSS GROSS
REALIZED REALIZED
GAINS LOSSES
- -------------------------------------------------------------
<S> <C> <C>
1998
Bonds $ 502 $363
Common stocks 542 454
Preferred stocks 12 11
Financial services securities available
for sale 4 2
- -------------------------------------------------------------
Total $1,060 $830
- -------------------------------------------------------------
1997
Bonds $ 229 $247
Common stocks 559 419
Preferred stocks 6 11
Financial services securities available
for sale 6 3
- -------------------------------------------------------------
Total $ 800 $680
- -------------------------------------------------------------
1996
Bonds $ 128 $194
Common stocks 363 208
Preferred stocks 11 1
Financial services securities available
for sale 7 2
- -------------------------------------------------------------
Total $ 509 $405
- -------------------------------------------------------------
</TABLE>
(D) MARKET VALUE OF FIXED MATURITIES AND UNREALIZED APPRECIATION OF
INVESTMENTS: At December 31, 1998 and 1997, the balance of the unrealized
appreciation of investments in equity securities (before applicable taxes)
included gross gains of approximately $1.3 billion and $1.9 billion and gross
losses of approximately $1.2 billion and $1.3 billion, respectively.
The deferred tax payable related to the net unrealized appreciation of
investments was $707 million at December 31, 1998 and $706 million at December
31, 1997.
The amortized cost and estimated market value of investments in fixed
maturities carried at amortized cost at December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Fixed maturities held
to maturity:
Bonds:
U.S.
Government(a) $ 9 $ 1 $-- $ 10
States(b) 12,648 975 2 13,621
All other
corporate 1 1 -- 2
- -----------------------------------------------------------------------
Total fixed
maturities $12,658 $ 977 $ 2 $13,633
- -----------------------------------------------------------------------
1997
Fixed maturities held
to maturity:
Bonds:
U.S.
Government(a) $ 9 $ 1 $-- $ 10
States(b) 12,521 836 1 13,356
- -----------------------------------------------------------------------
Total bonds 12,530 837 1 13,366
Preferred stocks 239 292 -- 531
- -----------------------------------------------------------------------
Total fixed
maturities $12,769 $1,129 $ 1 $13,897
- -----------------------------------------------------------------------
</TABLE>
(a) Including U.S. Government agencies and authorities.
(b) Including municipalities and political subdivisions.
46
<PAGE> 48
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
8. INVESTMENT INFORMATION (continued)
The amortized cost and estimated market value of bonds available for sale
and carried at market value at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Fixed maturities
available for sale:
Bonds:
U.S.
Government(a) $2,827 $ 216 $ 2 $ 3,041
States(b) 6,514 427 65 6,876
Foreign
governments 10,523 671 42 11,152
All other
corporate 44,009 1,861 622 45,248
- -----------------------------------------------------------------------
Total bonds $63,873 $3,175 $731 $66,317
- -----------------------------------------------------------------------
1997
Fixed maturities
available for sale:
Bonds:
U.S.
Government(a) $2,310 $ 133 $ 2 $ 2,441
States(b) 5,870 333 2 6,201
Foreign
governments 8,311 374 104 8,581
All other
corporate 37,615 1,333 171 38,777
- -----------------------------------------------------------------------
Total bonds $54,106 $2,173 $279 $56,000
- -----------------------------------------------------------------------
</TABLE>
(a) Including U.S. Government agencies and authorities.
(b) Including municipalities and political subdivisions.
The amortized cost and estimated market values of fixed maturities held to
maturity and fixed maturities available for sale at December 31, 1998, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because certain borrowers have the right to call or
prepay certain obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
(IN MILLIONS)
- ------------------------------------------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
- ------------------------------------------------------------
<S> <C> <C>
Fixed maturities held to maturity:
Due in one year or less $ 520 $ 554
Due after one year through five
years 1,722 1,849
Due after five years through ten
years 3,075 3,314
Due after ten years 7,341 7,916
- ------------------------------------------------------------
Total held to maturity $12,658 $13,633
- ------------------------------------------------------------
Fixed maturities available for sale:
Due in one year or less $ 3,597 $ 3,634
Due after one year through five
years 21,449 22,279
Due after five years through ten
years 21,014 21,789
Due after ten years 17,813 18,615
- ------------------------------------------------------------
Total available for sale $63,873 $66,317
- ------------------------------------------------------------
</TABLE>
(E) SECURITIES AVAILABLE FOR SALE: AIGFP follows a policy of minimizing
interest rate, equity and currency risks associated with securities available
for sale by entering into swap or other transactions. In addition, to reduce its
credit risk, AIGFP has entered into credit derivative transactions with respect
to $435 million of securities available for sale. At December 31, 1998, the
cumulative increase in carrying value of the securities available for sale and
related hedges as a result of marking to market such securities net of hedging
transactions was $7 million.
47
<PAGE> 49
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENT INFORMATION (continued)
The amortized cost, related hedges and estimated market value of securities
available for sale and carried at market value at December 31, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- ----------------------------------------------------------------------------------------------------------------------------
UNREALIZED
GAINS
GROSS GROSS (LOSSES) -- NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED ON HEDGING MARKET
COST GAINS LOSSES TRANSACTIONS VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Securities available for sale:
Corporate and bank debt $ 5,440 $149 $13 $ (131) $ 5,445
Foreign government obligations 405 16 1 (15) 405
Asset-backed and collateralized 3,037 91 8 (95) 3,025
Preferred stocks 970 10 -- 3 983
U.S. Government obligations 815 15 -- (14) 816
- ----------------------------------------------------------------------------------------------------------------------------
Total $10,667 $281 $22 $ (252) $10,674
- ----------------------------------------------------------------------------------------------------------------------------
1997
Securities available for sale:
Corporate and bank debt $ 5,203 $ 45 $37 $ (10) $ 5,201
Foreign government obligations 337 2 30 29 338
Asset-backed and collateralized 2,344 34 16 (17) 2,345
Preferred stocks 675 -- 1 1 675
U.S. Government obligations 586 12 -- (12) 586
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 9,145 $ 93 $84 $ (9) $ 9,145
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated market values of securities available for
sale at December 31, 1998, by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because certain borrowers have
the right to call or prepay certain obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
(IN MILLIONS)
- ------------------------------------------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
- ------------------------------------------------------------
<S> <C> <C>
Securities available for sale:
Due in one year or less $ 807 $ 807
Due after one year through five
years 4,445 4,459
Due after five years through ten
years 1,293 1,299
Due after ten years 1,085 1,084
Asset-backed and collateralized 3,037 3,025
- ------------------------------------------------------------
Total available for sale $10,667 $10,674
- ------------------------------------------------------------
</TABLE>
No securities available for sale were below investment grade at December
31, 1998.
(F) CMOS: At December 31, 1998, CMOs, held by AIG's life companies, were
presented as a component of bonds available for sale, at market value. All of
the CMOs were investment grade and approximately 32 percent of the CMOs were
backed by various U.S. government agencies. The remaining 68 percent were
corporate issuances.
At December 31, 1998 and 1997, the market value of the CMO portfolio was
$7.29 billion and $7.96 billion, respectively; the amortized cost was
approximately $7.07 billion in 1998 and $7.73 billion in 1997. AIG's CMO
portfolio is readily marketable. There were no derivative (high risk) CMO
securities contained in this portfolio at December 31, 1998 and 1997.
The distribution of the CMOs at December 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -----------------------------------------------------------
1998 1997
- -----------------------------------------------------------
<S> <C> <C>
GNMA 6% 9%
FHLMC 15 21
FNMA 10 15
VA 1 2
Non-governmental 68 53
- -----------------------------------------------------------
100% 100%
- -----------------------------------------------------------
</TABLE>
AIG is not exposed to any significant credit concentration risk of a single
or group non-governmental issuer.
At December 31, 1998, the gross weighted average coupon of this portfolio
was 6.8 percent. The gross weighted average life of this portfolio was
approximately 5.12 years.
48
<PAGE> 50
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
8. INVESTMENT INFORMATION (continued)
(G) FIXED MATURITIES BELOW INVESTMENT GRADE: At December 31, 1998, fixed
maturities held by AIG that were below investment grade or not rated totaled
$8.96 billion.
(H) At December 31, 1998, non-income producing invested assets were
insignificant.
9. DEBT OUTSTANDING
At December 31, 1998, AIG's debt outstanding of $31.91 billion, shown below,
included borrowings of $27.80 billion which were either not guaranteed by AIG or
were matched borrowings under obligations of guaranteed investment agreements
(GIAs) or matched notes and bonds payable.
<TABLE>
<CAPTION>
(IN MILLIONS)
- ------------------------------------------------------------
<S> <C>
Borrowings under obligations of GIAs -- AIGFP $ 9,188
- ------------------------------------------------------------
Commercial Paper:
AIG Funding Inc. (Funding) 637
ILFC(a) 3,204
A.I. Credit Corp. (AICCO) 727
Universal Finance Company (UFC)(a) 68
- ------------------------------------------------------------
Total 4,636
- ------------------------------------------------------------
Medium Term Notes:
ILFC(a) 3,348
AIG 239
Original SunAmerica(c) 228
- ------------------------------------------------------------
Total 3,815
- ------------------------------------------------------------
Notes and Bonds Payable:
ILFC(a) 3,825
Original SunAmerica(c) 989
AIGFP 7,265
AIG: Lire bonds 159
Zero coupon notes 102
- ------------------------------------------------------------
Total 12,340
- ------------------------------------------------------------
Loans and Mortgages Payable:
ILFC(a)(b) 811
SPC Credit Limited (SPC)(a) 532
Consumer Finance(a) 254
AIG 334
- ------------------------------------------------------------
Total 1,931
- ------------------------------------------------------------
Total Borrowings 31,910
- ------------------------------------------------------------
Borrowings not guaranteed by AIG 12,042
Matched GIA borrowings 9,188
Matched notes and bonds payable -- AIGFP 6,565
- ------------------------------------------------------------
27,795
- ------------------------------------------------------------
Remaining borrowings of AIG $ 4,115
- ------------------------------------------------------------
</TABLE>
(a) AIG does not guarantee or support these borrowings.
(b) Capital lease obligations.
(c) Assumed by AIG as a result of the merger.
The amount of long-term borrowings is $22.72 billion and the amount of
short-term borrowings is $9.19 billion. Long-term borrowings include commercial
paper; short-term borrowings represent borrowings that mature in less than one
year.
(A) COMMERCIAL PAPER: At December 31, 1998, the commercial paper issued
and outstanding was as follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
- ----------------------------------------------------------------------
WEIGHTED
NET AVERAGE WEIGHTED
BOOK UNAMORTIZED FACE INTEREST AVERAGE
VALUE DISCOUNT AMOUNT RATE MATURITY
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Funding $ 637 $ 2 $ 639 5.07% 28 days
ILFC 3,204 11 3,215 5.30 83 days
AICCO 727 2 729 5.24 20 days
UFC* 68 1 69 7.04 182 days
- ----------------------------------------------------------------------
Total $4,636 $16 $4,652 -- --
- ----------------------------------------------------------------------
</TABLE>
* Issued in Taiwan N.T. dollars at prevailing local interest rates.
Commercial paper issued by Funding is guaranteed by AIG. AIG has entered
into an agreement in support of AICCO's commercial paper. AIG does not guarantee
ILFC's or UFC's commercial paper.
(B) BORROWINGS UNDER OBLIGATIONS OF GUARANTEED INVESTMENT
AGREEMENTS: Borrowings under obligations of guaranteed investment agreements,
which are guaranteed by AIG, are recorded at the amount outstanding under each
contract. Obligations may be called at various times prior to maturity at the
option of the counterparty. Interest rates on these borrowings are primarily
fixed and range up to 9.8 percent.
Payments due under these investment agreements in each of the next five
years ending December 31, and the periods thereafter based on the earliest call
dates, were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -------------------------------------------------------------
PRINCIPAL
AMOUNT
- -------------------------------------------------------------
<S> <C>
1999 $4,460
2000 865
2001 370
2002 110
2003 67
Remaining years after 2003 3,316
- -------------------------------------------------------------
Total $9,188
- -------------------------------------------------------------
</TABLE>
At December 31, 1998, the market value of securities pledged as collateral
with respect to these obligations approximated $961 million.
Funds received from GIA borrowings are invested in a diversified portfolio
of securities and derivative transactions.
49
<PAGE> 51
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. DEBT OUTSTANDING (continued)
(C) MEDIUM TERM NOTES PAYABLE:
(i) Medium Term Notes Payable Issued by AIG: AIG's Medium Term Notes are
unsecured obligations which normally may not be redeemed by AIG prior to
maturity and bear interest at either fixed rates set by AIG at issuance or
variable rates determined by reference to an interest rate or other formula.
An analysis of the Medium Term Notes for the year ended December 31, 1998
was as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -----------------------------------------------------------
MEDIUM TERM NOTE SERIES: B E TOTAL
- -----------------------------------------------------------
<S> <C> <C> <C>
Balance December 31, 1997 $ 40 $208 $248
Issued during year -- 31 31
Matured during year (40) -- (40)
- -----------------------------------------------------------
Balance December 31, 1998 $ -- $239 $239
- -----------------------------------------------------------
</TABLE>
The interest rates on this debt range from 2.25 percent to 6.25 percent. To
the extent deemed appropriate, AIG may enter into swap transactions to reduce
its effective borrowing rates with respect to these notes.
During 1997, AIG issued $100 million principal amount of equity-linked
Medium Term Notes due July 30, 2004. These notes accrue interest at the rate of
2.25 percent and the total return on these notes is linked to the appreciation
in market value of AIG's common stock. The notes may be redeemed, at the option
of AIG, as a whole but not in part, at any time on or after July 30, 2000. In
conjunction with the issuance of these notes, AIG entered into a series of swap
transactions which effectively converted its interest expense to a fixed rate of
5.87 percent and transferred the equity appreciation exposure to a third party.
AIG is exposed to credit risk with respect to the counterparties to these swap
transactions.
At December 31, 1998, the maturity schedule for AIG's outstanding Medium
Term Notes was as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- -------------------------------------------------------------
PRINCIPAL
AMOUNT
- -------------------------------------------------------------
<S> <C>
1999 $108
2000 31
Remaining years after 2003 100
- -------------------------------------------------------------
Total $239
- -------------------------------------------------------------
</TABLE>
At December 31, 1998, AIG had $508 million principal amount of Term Notes
registered and available for issuance from time to time.
(ii) Medium Term Notes Payable Issued by ILFC: ILFC's Medium Term Notes
are unsecured obligations which may not be redeemed by ILFC prior to maturity
and bear interest at fixed rates set by ILFC at issuance.
As of December 31, 1998, notes in aggregate principal amount of $3.35
billion were outstanding with maturity dates from 1999 to 2005 at interest rates
ranging from 4.85 percent to 8.55 percent. These notes provide for a single
principal payment at the maturity of each note.
At December 31, 1998, the maturity schedule for ILFC's outstanding Medium
Term Notes was as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- ------------------------------------------------------------
PRINCIPAL
AMOUNT
- ------------------------------------------------------------
<S> <C>
1999 $ 733
2000 1,005
2001 867
2002 378
2003 260
Remaining years after 2003 105
- ------------------------------------------------------------
Total $ 3,348
- ------------------------------------------------------------
</TABLE>
(iii) Medium Term Notes Payable Issued by Original SunAmerica: Original
SunAmerica's Medium Term Notes are unsecured obligations which may not be
redeemed by SunAmerica prior to maturity.
As of December 31, 1998, notes in aggregate principal amount of $228
million were outstanding with maturity dates from 1999 to 2026 at interest rates
ranging from 5.38 percent to 7.38 percent.
At December 31, 1998, the maturity schedule for Original SunAmerica's
outstanding Medium Term Notes was as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- ------------------------------------------------------------
PRINCIPAL
AMOUNT
- ------------------------------------------------------------
<S> <C>
1999 $ 18
2000 14
2001 24
2002 24
2003 19
Remaining years after 2003 129
- ------------------------------------------------------------
Total $ 228
- ------------------------------------------------------------
</TABLE>
(D) NOTES AND BONDS PAYABLE:
(i) Zero Coupon Notes: On October 1, 1984, AIG issued Eurodollar zero
coupon notes in the aggregate principal amount at stated maturity of $750
million. The notes were offered at 12 percent of principal amount at stated
maturity, bear no interest and are due August 15, 2004. The net proceeds to AIG
from the issuance were $86 million. The notes are redeemable at any time in
whole or in part at the option of AIG at 100 percent of their principal amount
at stated maturity. The notes are also redeemable at the option of AIG or bearer
notes may be redeemed at the option of the holder in the event of certain
changes involving taxation in the United States at prices ranging from 52.72
percent
50
<PAGE> 52
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
9. DEBT OUTSTANDING (continued)
currently, to 89.88 percent after August 15, 2003, of the principal amount at
stated maturity together with accrued amortization of original issue discount
from the preceding August 15. During 1998 and 1997, no notes were repurchased.
At December 31, 1998, the notes outstanding had a face value of $189 million, an
unamortized discount of $87 million and a net book value of $102 million. The
amortization of the original issue discount was recorded as interest expense.
(ii) Italian Lire Bonds: In December, 1991, AIG issued unsecured bonds
denominated in Italian Lire. The principal amount of 200 billion Italian Lire
Bonds matures December 4, 2001 and accrues interest at a rate of 11.7 percent
which is paid annually. These bonds are not redeemable prior to maturity, except
in the event of certain changes involving taxation in the United States or the
imposition of certain certification, identification or reporting requirements.
Simultaneous with the issuance of this debt, AIG entered into a swap
transaction which effectively converted AIG's net interest expense to a U.S.
dollar liability of approximately 7.9 percent, which requires the payment of
proceeds at maturity of approximately $159 million in exchange for 200 billion
Italian Lire and interest thereon.
(iii) Term Notes Issued by ILFC: ILFC has issued unsecured obligations
which may not be redeemed prior to maturity.
As of December 31, 1998, notes in aggregate principal amount of $3.83
billion were outstanding with maturity dates from 1999 to 2004 and interest
rates ranging from 5.50 percent to 8.88 percent. Term notes in the aggregate
principal amount of $300 million are at floating interest rates and the
remainder are at fixed rates. These notes provide for a single principal payment
at maturity.
At December 31, 1998, the maturity schedule for ILFC's Term Notes was as
follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- ------------------------------------------------------------
PRINCIPAL
AMOUNT
- ------------------------------------------------------------
<S> <C>
1999 $ 1,150
2000 900
2001 1,075
2002 400
2003 200
Remaining years after 2003 100
- ------------------------------------------------------------
Total $ 3,825
- ------------------------------------------------------------
</TABLE>
AIG does not guarantee any of the debt obligations of ILFC.
(iv) Notes and Debentures Issued by Original SunAmerica: Original
SunAmerica issued unsecured obligations which may not be redeemed prior to
maturity.
As of December 31, 1998, Notes and Debentures in aggregate principal amount
of $989 million were outstanding with maturity dates from 1999 to 2097 at
interest rates ranging from 5.60 percent to 9.95 percent.
At December 31, 1998, the maturity schedule for Original SunAmerica's Notes
and Debentures was as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- ------------------------------------------------------------
PRINCIPAL
AMOUNT
- ------------------------------------------------------------
<S> <C>
1999 $ 556
Remaining years after 2003(a) 433
- ------------------------------------------------------------
Total $ 989
- ------------------------------------------------------------
</TABLE>
(a) Net of unamortized discount of $43 million at December 31, 1998.
(v) Notes and Bonds Payable Issued by AIGFP: At December 31, 1998, AIGFP's
bonds outstanding, the proceeds of which are invested in a segregated portfolio
of securities available for sale, were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
- -----------------------------------------------------------------
YEAR OF INTEREST U.S. DOLLAR
ISSUE MATURITY CURRENCY RATE CARRYING VALUE
- -----------------------------------------------------------------
<C> <C> <S> <C> <C>
1993 1999 French franc 4.60% $ 515
1998 1999 United Kingdom pound 6.91 414
1998 1999 Denmark krone 3.56 115
1997 2002 US dollar 5.16 150
1997 1999 Irish punt 6.20 158
1997 2000 Irish punt 6.19 294
1997 2000 Irish punt 5.95 148
1997 2002 New Zealand dollar 8.52 125
1998 1999 Italian lire 7.19 327
1998 2020 US dollar 8.75 129
1998 2020 US dollar 8.75 378
1997 1999 New Zealand dollar 9.43 117
1996 1999 New Zealand dollar 8.51 354
1998 2000 Irish punt 6.51 141
1995 2000 Italian lire 7.76 123
1998 2001 US dollar 5.47 500
1998 2001 US dollar 5.45 850
1998 2003 US dollar 5.47 1,000
1998 2022 US dollar 7.25 120
1998 1999 US dollar 5.63 210
1998 2002 Japanese yen 4.50 190
- -----------------------------------------------------------------
Total $ 6,358
- -----------------------------------------------------------------
</TABLE>
AIGFP is also obligated under various notes maturing from 1999 through
2026. The majority of these notes are denominated in U.S. dollars and bear
interest at various interest rates. At
51
<PAGE> 53
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. DEBT OUTSTANDING (continued)
December 31, 1998, these notes had a U.S. dollar carrying value of
$907 million.
AIG guarantees all of AIGFP's debt.
(E) LOANS AND MORTGAGES PAYABLE: Loans and mortgages payable at December
31, 1998, consisted of the following:
<TABLE>
<CAPTION>
(in millions)
- ---------------------------------------------------------------
CONSUMER
ILFC SPC FINANCE AIG TOTAL
- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Uncollateralized loans
payable $ -- $532 $ 254 $123 $ 909
Collateralized loans
and mortgages payable 811 -- -- 211 1,022
- ---------------------------------------------------------------
Total $811 $532 $ 254 $334 $1,931
- ---------------------------------------------------------------
</TABLE>
At December 31, 1998, ILFC's capital lease obligations were $811 million.
Fixed interest rates with respect to these obligations range from 6.18 percent
to 6.89 percent; variable rates are referenced to LIBOR. These obligations
mature through 2005. The flight equipment associated with the capital lease
obligations had a net book value of $1.14 billion.
At December 31, 1998, the maturity schedule for ILFC's capital lease
obligations, were as follows:
(in millions)
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- -------------------------------------------------------------
<S> <C>
1999 $ 144
2000 138
2001 132
2002 126
2003 119
Remaining years after 2003 373
- -------------------------------------------------------------
Total minimum lease obligations 1,032
- -------------------------------------------------------------
Less amount representing interest 221
- -------------------------------------------------------------
Present value of net minimum capital lease obligations $ 811
- -------------------------------------------------------------
</TABLE>
(F) Combined principal payments due of all significant debt, excluding
commercial paper, in each of the next five years ending December 31, 1998, and
periods thereafter were as follows:
(in millions)
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- -------------------------------------------------------------
<S> <C>
1999 $ 9,379
2000 3,659
2001 3,977
2002 1,503
2003 1,665
Remaining years after 2003 5,285
- -------------------------------------------------------------
Total $25,468
- -------------------------------------------------------------
</TABLE>
(G) REVOLVING CREDIT FACILITIES: AIG and Funding have entered into two
syndicated revolving credit facilities (the Facilities) aggregating $1 billion.
The Facilities consist of a $500 million 364 day revolving credit facility and a
$500 million five year revolving credit facility. The Facilities can be used for
general corporate purposes and also provide backup for AIG's commercial paper
programs administered by Funding. There are currently no borrowings outstanding
under either of the Facilities, nor were any borrowings outstanding as of
December 31, 1998.
(H) INTEREST EXPENSE FOR ALL INDEBTEDNESS: Total interest expense for all
indebtedness, net of capitalized interest, aggregated $1.99 billion in 1998,
$1.81 billion in 1997 and $1.59 billion in 1996. Dividends on the preferred
shareholders' equity in subsidiary companies of ILFC and certain SunAmerica
subsidiaries are accounted for as interest expense and included as minority
interest in the consolidated statement of income. The dividends for ILFC for
December 31, 1998, 1997 and 1996 were approximately $17 million in each of the
three years. The dividends for the SunAmerica subsidiaries were approximately
$40 million for December 31, 1998 and 1997 and approximately $20 million for
1996.
10. PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANIES
Preferred shareholders' equity in subsidiary companies represents preferred
stocks issued by ILFC and certain SunAmerica subsidiaries, wholly owned
subsidiaries of AIG.
(A) ILFC: The preferred stock consists of 4,000 shares of market auction
preferred stock ("MAPS") in eight series of 500 shares each. Each of these
shares has a liquidation value of $100 per share and is not convertible. The
dividend rate, other than the initial rate, for each dividend period for each
series is reset approximately every seven weeks (49 days) on the basis of orders
placed in an auction. At December 31, 1998, the dividend rate ranged from 4.09
percent to 4.44 percent.
(B) SUNAMERICA: The preferred stock consists of $185 million liquidation
amount of 8.35% Trust Originated Preferred Securities issued by SunAmerica
Capital Trust II in October 1995 and $310 million liquidation amount of 8.30%
Trust Originated Preferred Securities issued by SunAmerica Capital Trust III in
November 1996.
In connection with the issuance of the 8.35% Trust Originated Preferred
Securities and the related purchase by Original SunAmerica of the grantor
trust's common securities, Original SunAmerica issued to the grantor trust $191
million principal amount of 8.35% junior subordinated debentures, due 2044,
which are redeemable at the option of AIG on or after September 30, 2000 at a
redemption price of $25 per debenture plus accrued and unpaid interest.
In connection with the issuance of the 8.30% Trust Originated Preferred
Securities and the related purchase by Original SunAmerica of the grantor
trust's common securities, Original SunAmerica
52
<PAGE> 54
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
10. PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANIES (continued)
issued to the grantor trust $321 million principal amount of 8.30% junior
subordinated debentures, due 2045, which are redeemable at the option of AIG on
or after November 13, 2001 at a redemption price of $25 per debenture plus
accrued and unpaid interest.
The interest and other payment dates on the debentures correspond to the
distribution and other payment dates on the preferred and common securities. The
preferred and common securities will be redeemed on a pro rata basis, to the
same extent as the debentures are repaid. Under certain circumstances involving
a change in law or legal interpretation, the debentures may be distributed to
holders of the preferred and common securities in liquidation of the grantor
trust(s). AIG's obligations under the debentures and related agreements, taken
together, provide a full and unconditional guarantee of payments due on the
preferred securities.
The grantor trusts are wholly owned subsidiaries of AIG. The debentures
issued to the grantor trusts and the common securities purchased by Original
SunAmerica from the grantor trusts are eliminated in the consolidated balance
sheet.
11. CAPITAL FUNDS
(a) AIG parent depends on its subsidiaries for cash flow in the form of loans,
advances and dividends. AIG's insurance subsidiaries are subject to regulatory
restrictions on the amount of dividends which can be remitted to AIG parent.
These restrictions vary by state. For example, unless permitted by the New York
Superintendent of Insurance, general insurance companies domiciled in New York
may not pay dividends to shareholders which in any twelve month period exceed
the lesser of 10 percent of the company's statutory policyholders' surplus or
100 percent of its "adjusted net investment income", as defined. Generally, less
severe restrictions applicable to both general and life insurance companies
exist in most of the other states in which AIG's insurance subsidiaries are
domiciled. Certain foreign jurisdictions have restrictions which generally cause
only a temporary delay in the remittance of dividends. There are also various
local restrictions limiting cash loans and advances to AIG by its subsidiaries.
Largely as a result of the restrictions, approximately 68 percent of
consolidated capital funds were restricted from immediate transfer to AIG parent
at December 31, 1998.
(b) At December 31, 1998, there were 6,000,000 shares of AIG's $5 par value
serial preferred stock authorized, issuable in series.
(c) The activity for preferred stock issued by Original SunAmerica prior to
the merger with AIG for the three years ended September 30, 1998 was as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Shares outstanding at
beginning of year 4,000,000 8,001,565 9,004,065
Issuance of Series E
Depositary Shares -- -- 4,000,000
Redemption of Series D
Depositary Shares -- -- (5,002,500)
Redemption of Series B
Preferred Shares -- (3,514,765) --
Redemption of Series C
Preferred Shares -- (486,800) --
- ---------------------------------------------------------------
Shares outstanding at end
of year 4,000,000 4,000,000 8,001,565
- ---------------------------------------------------------------
</TABLE>
Prior to the merger, Original SunAmerica was authorized to issue 20,000,000
shares of preferred stock ("Preferred Stock"). All preferred shares of Original
SunAmerica ranked on a parity with each other and ranked senior to common stock
of Original SunAmerica as to payment of dividends and distribution of assets
upon dissolution, liquidation or winding up of Original SunAmerica.
On November 1, 1995, Original SunAmerica issued 4,000,000 $3.10 Depositary
Shares (the "Series E Depositary Shares"), each representing one-fiftieth of a
share of Series E Mandatory Conversion Premium Dividend Preferred Stock, with a
liquidation preference of $62 per share. On September 22, 1998, Original
SunAmerica announced that it would redeem all of its Series E Depositary Shares.
The redemption was completed on October 30, 1998 and resulted in the issuance of
11,250,709 shares of Original SunAmerica's common stock and cash payment of all
accrued and unpaid dividends through the redemption date.
On March 10, 1993, Original SunAmerica issued 5,002,500 $2.78 Depositary
Shares (the "Series D Depositary Shares"), each representing one-fiftieth of a
share of Series D Mandatory Conversion Premium Dividend Preferred Stock, with a
liquidation preference of $37 per share. On January 2, 1996, Original SunAmerica
redeemed all of the Series D Depositary Shares for a call price equal to $49.95
per share plus accrued and unpaid dividends to the redemption date. The call
price was paid with 5,112,529 shares of Original SunAmerica's common stock.
At September 30, 1996, Original SunAmerica had outstanding 486,800 shares
of Adjustable Rate Cumulative Preferred Stock, Series C (the "Series C Preferred
Shares"), with a liquidation preference of $100 per share. On October 4, 1996,
Original SunAmerica redeemed all of the Series C Preferred Shares for a cash
payment equal to the total liquidation amount of $49 million plus accrued and
unpaid dividends to the redemption date.
In 1992, Original SunAmerica issued 5,620,000 shares of 9 1/4% Preferred
Stock, Series B (the "Series B Preferred Shares"),
53
<PAGE> 55
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. CAPITAL FUNDS (continued)
with a liquidation preference of $25 per share. On June 13, 1995, Original
SunAmerica exchanged 2,105,235 Series B Preferred Shares with a liquidation
preference of $53 million for $53 million liquidation amount of 9.95% Trust
Originated Preferred Securities of SunAmerica Capital Trust I. On June 16, 1997,
Original SunAmerica redeemed all of the remaining Series B Preferred Shares for
a cash payment equal to the total liquidation amount of approximately $88
million plus accrued and unpaid dividends to the redemption date.
(d) The common stock activity for the three years ended December 31, 1998
was as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1998(A) 1997(A) 1996(A)
- -----------------------------------------------------------------
<S> <C> <C> <C>
Shares outstanding
beginning of year 866,541,676 571,572,606 520,709,051
Acquired during the
year (974,815) (4,657,254) (5,384,672)
Common shares issued -- 9,122,850 --
Redemption of
depositary shares -- -- 4,371,615
Issued under stock
option and purchase
plans 1,556,136 1,082,647 756,228
Issued in connection
with acquisition -- 4,391 100,824
Issued under
contractual
obligations 37,123 1,967 --
Stock split effected
as stock dividend 379,536,828 308,708,094 51,053,760
Other(b) (29,560,131) (19,293,625) (34,200)
- -----------------------------------------------------------------
Shares outstanding at
end of year 1,217,136,817 866,541,676 571,572,606
- -----------------------------------------------------------------
</TABLE>
(a) Outstanding shares have been adjusted to reflect the conversion of all
outstanding Original SunAmerica shares by converting each outstanding share
of Original SunAmerica to .855 shares of AIG.
(b) Shares issued to AIG and subsidiaries as part of stock split effected as
stock dividend and conversion of Original SunAmerica non-transferrable Class
B stock to common stock.
Common stock increased and retained earnings decreased $949 million in 1998
and $633 million in 1997 as a result of common stock splits in the form of 50
percent common stock dividends paid July 31, 1998 and July 25, 1997,
respectively.
(e) On November 6, 1996, Original SunAmerica issued 11,500,000 8 1/2%
Premium Equity Redemption Cumulative Security Units (the "Units") with a stated
amount of $37.50 per Unit. Each Unit consisted of a stock purchase contract (the
"Contract") and a United States Treasury Note (the "Treasury Note") having a
principal amount equal to the stated amount and maturing on October 31, 1999.
The holders of the Units received interest on the Treasury Notes payable by the
United States Government at a rate of 7 1/2% per annum and Contract fees payable
at a rate of 1% per annum (both, the "Unit Payments") based upon the stated
amount. The Contract obligated Original SunAmerica to deliver on October 31,
1999 to the holder of each Unit one and one-half shares of common stock of
Original SunAmerica, subject to adjustment under certain defined circumstances,
and obligated the holder of the Unit to pay to Original SunAmerica $37.50 per
Unit. The Treasury Notes were held by a collateral agent to secure payment to
Original SunAmerica as required under the Contract, but could be redeemed by the
holders of the Units under certain defined circumstances. Original SunAmerica
redeemed all of its Units on December 6, 1998. In connection with this
redemption, Original SunAmerica issued 10,108,229 shares of Original
SunAmerica's common stock and made a cash payment for all accrued and unpaid
Contract fees.
(f) 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. The reclassification adjustments with respect to available for
sale securities were $124 million, $90 million and $57 million for December 31,
1998, 1997 and 1996, respectively.
12. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, various commitments and contingent liabilities
are entered into by AIG and certain of its subsidiaries. In addition, AIG
guarantees various obligations of certain subsidiaries.
(a) Commitments to extend credit are agreements to lend subject to certain
conditions. These commitments generally have fixed expiration dates or
termination clauses and typically require payment of a fee. These commitments,
made principally by AIG Capital Corp., approximated $92 million for both
December 31, 1998 and December 31, 1997. AIG uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet
instruments. AIG evaluates each counterparty's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
AIG upon extension of credit, is based on management's credit evaluation of the
counterparty.
(b) AIG and certain of its subsidiaries become parties to financial
instruments with market risk resulting from both dealer and end user activities
and to reduce currency, interest rate, equity and commodity exposures. To the
extent those instruments are carried at their estimated fair value, the elements
of currency, interest rate, equity and commodity risks are reflected in the
consolidated balance sheet. In addition, these instruments involve, to varying
degrees, elements of credit risk not explicitly recognized in the consolidated
balance sheet. Collateral is required, at the discretion of AIG, on certain
transactions based on the creditworthiness of the counterparty.
(c) AIGFP becomes a party to off-balance sheet financial instruments in the
normal course of its business and to reduce its currency, interest rate and
equity exposures. Interest rate, currency and equity risks related to such
instruments are reflected in the consolidated financial statements to the extent
these instruments are carried at a market or a fair value, whichever is
appropriate. Because of limited liquidity of certain of these instruments, the
54
<PAGE> 56
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
12. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
recorded estimated fair values of such instruments may be different than the
values that might be realized if AIGFP were to sell or close out the
transactions prior to maturity.
AIGFP, in the ordinary course of its operations and as principal,
structures derivative transactions to meet the needs of investors who may be
seeking to hedge certain aspects of such investor's operations. AIGFP may also
enter into derivative transactions for its own account. Such derivative
transactions include interest rate, currency and equity swaps, swaptions and
forward commitments. Interest rate swap transactions generally involve the
exchange of fixed and floating rate interest payment obligations without the
exchange of the underlying principal amounts. AIGFP typically becomes a
principal in the exchange of interest payments between the parties and,
therefore, may be exposed to loss, if counterparties default. Currency and
equity swaps are similar to interest rate swaps, but may involve the exchange of
principal amounts at the beginning and end of the transaction. Swaptions are
options where the holder has the right but not the obligation to enter into a
swap transaction or cancel an existing swap transaction. At December 31, 1998,
the notional principal amount of the sum of the swap pays and receives
approximated $345.5 billion, primarily related to interest rate swaps of
approximately $255.9 billion.
The following tables provide the contractual and notional amounts of
derivatives transactions of AIGFP and AIGTG at December 31, 1998.
The notional amounts used to express the extent of involvement in swap
transactions represent a standard of measurement of the volume of swaps business
of AIGFP and AIGTG. 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 following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at December 31, 1998 and December 31, 1997:
(IN MILLIONS)
- --------------------------------------------------------------------------------
<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 $ 85,379 $105,850 $57,556 $ 7,132 $255,917 $200,491
Currency swaps 27,943 26,154 16,916 2,881 73,894 54,748
Swaptions and equity swaps 2,306 6,102 5,780 1,497 15,685 11,217
- --------------------------------------------------------------------------------------------------------------------------------
Total $115,628 $138,106 $80,252 $11,510 $345,496 $266,456
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Futures and forward contracts are contracts for delivery of foreign
currencies or financial indices in which the seller/purchaser agrees to
make/take delivery at a specified future date of a specified instrument, at a
specified price or yield. Risks arise as a result of movements in current market
prices from contracted prices and the potential inability of counterparties to
meet their obligations under the contracts. At December 31, 1998, the
contractual amount of AIGFP's futures and forward contracts approximated $51.2
billion.
The following table presents AIGFP's futures and forward contracts
portfolio by maturity and type of derivative at December 31, 1998 and December
31, 1997:
(IN MILLIONS)
- --------------------------------------------------------------------------------
<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>
Futures and forward contracts:
Exchange traded futures contracts
contractual amount $ 8,290 -- -- -- $ 8,290 $ 4,411
- --------------------------------------------------------------------------------------------------------------------
Over the counter forward contracts
contractual amount $42,825 $61 $12 -- $42,898 $13,271
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
These instruments involve, to varying degrees, elements of credit risk not
explicitly recognized in the consolidated financial statements. The gross
exposure to credit risk with respect to these instruments was $20.50 billion at
December 31, 1998.
55
<PAGE> 57
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AIGFP utilizes various credit enhancements, including collateral, credit
triggers and credit derivatives to reduce the credit exposure relating to these
off-balance sheet financial instruments. AIGFP requires credit enhancements in
connection with specific transactions based on, among other things, the
creditworthiness of the counterparties and the transaction's size and maturity.
In addition, AIGFP's derivative transactions are generally documented under ISDA
Master Agreements. Such agreements provide for legally enforceable set-off and
close out netting of exposures to specific counterparties. Under such
agreements, in connection with an early termination of a transaction, AIGFP is
permitted to set off its receivables from a counterparty against its payables to
the same counterparty arising out of all included transactions. As a result, the
net replacement value represents the net sum of estimated positive fair values
after the application of such strategies, agreements and collateral held. The
net replacement value most closely represents the net credit risk to AIGFP or
the maximum amount exposed to potential loss. The net replacement value of all
interest rate, currency, and equity swaps, swaptions and forward commitments at
December 31, 1998, approximated $8.76 billion. The net replacement value for
futures and forward contracts at December 31, 1998, approximated $469 million.
AIGFP independently evaluates the creditworthiness of its counterparties,
taking into account credit ratings assigned by recognized statistical rating
organizations. In addition, AIGFP's credit approval process involves pre-set
counterparty, country and industry credit exposure limits and, for particularly
credit intensive transactions, obtaining approval from AIG's Credit Risk
Committee. The average credit rating of AIGFP's counterparties as a whole (as
measured by AIGFP) is equivalent to AA. The maximum potential loss will increase
or decrease during the life of the derivative commitments as a function of
maturity and market conditions.
56
<PAGE> 58
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
12. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 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 MILLIONS)
- --------------------------------------------------------------------------------
<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 $2,360 $-- $2,360 $2,327
AA 3,358 330 3,688 2,311
A 1,789 94 1,883 1,165
BBB 1,040 45 1,085 608
Below investment grade 210 -- 210 290
- -----------------------------------------------------------------------------------------------------------------------
Total $8,757 $469 $9,226 $6,701
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and December 31, 1997, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:
(IN MILLIONS)
- --------------------------------------------------------------------------------
<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 $2,708 $169 $2,877 $2,263
Insured municipalities 784 -- 784 757
U.S. industrials 1,120 5 1,125 514
Governmental 603 -- 603 677
Non-U.S. financial service companies 272 -- 272 65
Non-U.S. industrials 1,145 -- 1,145 1,035
Special purpose 423 -- 423 163
U.S. banks 617 294 911 585
U.S. financial service companies 931 1 932 434
Supranationals 154 -- 154 208
- ----------------------------------------------------------------------------------------------------------------------
Total $8,757 $469 $9,226 $6,701
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
AIGFP has entered into commitments to provide liquidity for certain
tax-exempt variable rate demand notes issued by municipal entities. The
agreements allow the holders, in certain circumstances, to tender the notes to
the issuer at par value. In the event a remarketing agent of an issuer is unable
to resell such tendered notes, AIGFP would be obligated to purchase the notes at
par value. With respect to certain notes that have been issued, AIGFP has
fulfilled its liquidity commitments by arranging bank liquidity facilities.
These banks agree to purchase the notes that AIGFP is otherwise obligated to
purchase in connection with a failed remarketing. It is the intention of AIGFP
to arrange similar liquidity with respect to the $123 million aggregate amount
of notes that are expected to be issued through 1999.
Securities sold, but not yet purchased represent obligations of AIGFP to
deliver specified securities at their contracted prices, and thereby create a
liability to repurchase the securities in the market at prevailing prices.
AIGFP monitors and controls its risk exposure on a daily basis through
financial, credit and legal reporting systems and, accordingly, believes that it
has in place effective procedures for evaluating and limiting the credit and
market risks to which it is subject. Management is not aware of any potential
counterparty defaults.
57
<PAGE> 59
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Commissions, transactions and other fees for the twelve months ended
December 31, 1998, 1997 and 1996 from AIGFP's operations were $550 million, $452
million and $369 million, respectively.
(d) AIGTG becomes a party to off-balance sheet financial instruments in the
normal course of its business and to reduce its currency, interest rate and
commodity exposures.
The following tables provide the contractual and notional amounts of
AIGTG's derivatives portfolio at December 31, 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 December 31,
1998 balances based upon the expected timing of the future cash flows.
Futures and forward contracts are contracts for delivery of foreign
currencies, commodities or financial indices in which the seller/purchaser
agrees to make/take delivery at a specified future date of a specified
instrument, at a specified price or yield. Risks arise as a result of movements
in current market prices from con-tracted prices and the potential inability of
counterparties to meet their obligations under the contracts. Options are
contracts that allow the holder of the option to purchase or sell the underlying
commodity, currency or index at a specified price and within, or at, a specified
period of time. Risks arise as a result of movements in current market prices
from contracted prices, and the potential inability of the counterparties to
meet their obligations under the contracts. As a writer of options, AIGTG
generally receives an option premium and then manages the risk of any
unfavorable change in the value of the underlying commodity, currency or index.
At December 31, 1998, the contractual amount of AIGTG's futures, forward and
option contracts approximated $411.71 billion.
The gross replacement values presented represent the sum of the estimated
positive fair values of all of AIGTG's derivatives contracts at December 31,
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 within a product category. At December 31, 1998, the net
replacement value of AIGTG's futures, forward and option contracts and interest
rate and currency swaps approximated $3.8 billion.
58
<PAGE> 60
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
12. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
The following tables present AIGTG's derivatives portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative at
December 31, 1998 and December 31, 1997:
(IN MILLIONS)
- --------------------------------------------------------------------------------
<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 $ 9,777 $1,985 $74 $ -- $ 11,836 $ 24,579
- --------------------------------------------------------------------------------------------------------------------------------
Forwards $263,312 $17,306 $1,539 $ -- $282,157 $267,959
- --------------------------------------------------------------------------------------------------------------------------------
Over the counter purchased options $ 31,039 $21,300 $5,213 $1,308 $ 58,860 $ 60,274
- --------------------------------------------------------------------------------------------------------------------------------
Over the counter sold options(a) $ 31,922 $20,374 $5,091 $1,474 $ 58,861 $ 58,190
- --------------------------------------------------------------------------------------------------------------------------------
Notional amount:
Interest rate swaps and forward rate agreements $ 77,872 $24,605 $7,334 $ 980 $110,791 $ 77,503
Currency swaps 1,488 4,854 1,170 -- 7,512 6,489
Swaptions 81 1,377 1,889 2,419 5,766 1,634
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 79,441 $30,836 $10,393 $3,399 $124,069 $ 85,626
- --------------------------------------------------------------------------------------------------------------------------------
Credit exposure:
Futures, forwards swaptions and purchased options
contracts and interest rate and currency swaps:
Gross replacement value $ 7,274 $1,806 $544 $ 167 $ 9,791 $ 11,020
Master netting arrangements (4,224) (930) (306) (150) (5,610) (5,798)
Collateral (313) (29) (15) (2) (359) (225)
- --------------------------------------------------------------------------------------------------------------------------------
Net replacement value(b) $ 2,737 $847 $223 $ 15 $ 3,822 $ 4,997
- --------------------------------------------------------------------------------------------------------------------------------
</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 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.
AIGTG independently evaluates the creditworthiness of its counterparties,
taking into account credit ratings assigned by recognized statistical rating
organizations. In addition, AIGTG's credit approval process involves pre-set
counterparty, country and industry credit exposure limits and, for particularly
credit intensive transactions, obtaining approval from AIG's Credit Risk
Committee. The maximum potential loss will increase or decrease during the life
of the derivative commitments as a function of maturity and market conditions.
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1998 and
December 31, 1997, the counterparty credit quality and counterparty breakdown by
industry with respect
59
<PAGE> 61
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
to the net replacement value of AIGTG's derivatives portfolio was as follows:
(IN MILLIONS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------
NET
REPLACEMENT VALUE
------------------
1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Counterparty credit quality:
AAA $ 462 $ 753
AA 1,821 2,503
A 1,066 1,024
BBB 221 343
Below investment grade 26 98
Not externally rated, including
exchange traded futures and options* 226 276
- ------------------------------------------------------------
Total $3,822 $4,997
- ------------------------------------------------------------
Counterparty breakdown by industry:
Non-U.S. banks $1,253 $2,686
U.S. industrials 381 164
Governmental 184 135
Non-U.S. financial service companies 406 260
Non-U.S. industrials 150 168
U.S. banks 593 560
U.S. financial service companies 629 748
Exchanges* 226 276
- ------------------------------------------------------------
Total $3,822 $4,997
- ------------------------------------------------------------
</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.
Spot commodities sold but not yet purchased represent obligations of AIGTG
to deliver spot commodities at their contracted prices and thereby create a
liability to repurchase the spot commodities in the market at prevailing prices.
AIGTG limits its risks by holding offsetting positions. In addition, AIGTG
monitors and controls its risk exposures through various monitoring systems
which evaluate AIGTG's market and credit risks, and through credit approvals and
limits. At December 31, 1998, AIGTG did not have a significant concentration of
credit risk from either an individual counterparty or group of counterparties.
Commissions, transactions and other fees for the twelve months ended
December 31, 1998, 1997 and 1996 from AIGTG's operations were $374 million, $562
million and $289 million, respectively.
At December 31, 1998, AIGTG had issued and outstanding $140 million
principal amount of letters of credit. These letters of credit were issued
primarily to various exchanges.
AIG has issued unconditional guarantees with respect to the prompt payment,
when due, of all present and future obligations and liabilities of AIGFP and
AIGTG arising from transactions entered into by AIGFP and AIGTG.
(e) As a component of its asset and liability management strategy,
SunAmerica utilizes Swap Agreements to match assets more closely to liabilities.
Swap Agreements are agreements to exchange with a counterparty interest rate
payments of differing character (for example, variable-rate payments exchanged
for fixed-rate payments) based on an underlying principal balance (notional
principal) to hedge against interest rate changes. SunAmerica typically utilizes
Swap Agreements to create a hedge that effectively converts floating-rate assets
and liabilities into fixed-rate instruments. At September 30, 1998, Original
SunAmerica had 38 outstanding Swap Agreements with an aggregate notional
principal amount of $1.87 billion. These agreements mature in various years
through 2010 and have an average remaining maturity of 43 months. With respect
to swaps that hedge assets, net interest received (paid) amounted to ($7
million), ($1 million) and $5 million for the years ended September 30, 1998,
1997 and 1996, respectively. With respect to swaps that hedge liabilities, net
interest paid amounted to $5 million, $2 million and $168 thousand for the years
ended September 30, 1998, 1997 and 1996, respectively, and were charged to
operating income.
For investment purposes, Original SunAmerica also has entered into various
Total Return Agreements with an aggregate notional principal amount of $533
million (the "Notional Amount") at September 30, 1998. The Total Return
Agreements effectively exchange a fixed rate of interest (the "Payment Amount")
on the Notional Amount for the coupon income plus or minus the increase or
decrease in the fair value (the "Total Return") of specified
non-investment-grade bonds (the "Bonds"). The Total Return Agreements mature in
March 1999; however, SunAmerica intends to enter into other similar agreements.
SunAmerica is exposed to potential loss, due to credit risk on the underlying
non-investment-grade bonds and bond market fluctuations, equal to the Payment
Amount plus any reduction in the aggregate fair value of the Bonds below the
Notional Amount. SunAmerica is also exposed to potential credit loss in the
event of nonperformance by the investment-grade-rated counterparty with respect
to any increase in the aggregate market value of the Bonds above the Notional
Amount. However, nonperformance is not anticipated and, therefore, no collateral
is held or pledged. The agreements were marked to market and the change in
market value was recognized currently in life investment income. Net amounts
received (paid) were included in operating income and totaled ($34 million), $35
million, and $32 million for the years ended September 30, 1998, 1997 and 1996,
respectively.
(f) At December 31, 1998, ILFC had committed to purchase or had secured
positions for 303 aircraft deliverable from 1999
60
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
12. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
through 2006 at an estimated aggregate purchase price of $17.4 billion. ILFC
will be required to find customers for any aircraft presently on order and any
aircraft to be ordered, and it must arrange financing for portions of the
purchase price of such equipment.
(g) AIG and its subsidiaries, in common with the insurance industry in
general, are subject to litigation, including claims for punitive damages, in
the normal course of their business. AIG does not believe that such litigation
will have a material effect on its operating results and financial condition.
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 sites (hereinafter collectively
referred to as environmental claims) and indemnity claims asserting injuries
from asbestos. Estimation of asbestos and environmental claims loss reserves is
a difficult process, as these claims, which emanate from policies written in
1984 and prior years, cannot be estimated by conventional reserving techniques.
Asbestos and environmental claims development is affected by factors such as
inconsistent court resolutions, the broadening of the intent of policies and
scope of coverage and increasing number of new claims. AIG and other industry
members have and will continue to litigate the broadening judicial
interpretation of policy coverage and the liability issues. If the courts
continue in the future to expand the intent of the policies and the scope of the
coverage, as they have in the past, additional liabilities would emerge for
amounts in excess of reserves held. This emergence cannot now be reasonably
estimated, but could have a material impact on AIG's future operating results.
The reserves carried for these claims as at December 31, 1998 ($2.5 billion
gross; $865 million net) are believed to be adequate as these reserves are based
on known facts and current law.
A summary of reserve activity, including estimates for applicable incurred
but not reported losses and loss expenses, relating to asbestos and
environmental claims separately and combined at December 31, 1998, 1997 and 1996
follows. The 1998 reserve activity includes Transatlantic.
<TABLE>
<CAPTION>
(IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
GROSS NET GROSS NET GROSS NET
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Asbestos:
Reserve for losses and loss expenses at beginning of year $ 842 $ 195 $ 876 $ 172 $ 744 $ 127
Losses and loss expenses incurred 375 111 238 68 393 103
Losses and loss expenses paid (253) (47) (272) (45) (261) (58)
- -------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 964 $ 259 $ 842 $ 195 $ 876 $ 172
- -------------------------------------------------------------------------------------------------------------------
Environmental:
Reserve for losses and loss expenses at beginning of year $1,467 $ 593 $1,427 $ 571 $1,198 $ 380
Losses and loss expenses incurred 285 106 223 85 379 240
Losses and loss expenses paid (216) (93) (183) (63) (150) (49)
- -------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $1,536 $ 606 $1,467 $ 593 $1,427 $ 571
- -------------------------------------------------------------------------------------------------------------------
Combined:
Reserve for losses and loss expenses at beginning of year $2,309 $ 788 $2,303 $ 743 $1,942 $ 507
Losses and loss expenses incurred 660 217 461 153 772 343
Losses and loss expenses paid (469) (140) (455) (108) (411) (107)
- -------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $2,500 $ 865 $2,309 $ 788 $2,303 $ 743
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" (FASB 107) requires disclosure of fair value
information about financial instruments, as defined therein, for which it is
practicable to estimate such fair value. These financial instruments may or may
not be recognized in the consolidated balance sheet. In the measurement of the
fair value of certain of the financial instruments, quoted market prices were
not available and other valuation techniques were utilized. These derived fair
value estimates are significantly affected by the assumptions used. FASB 107
excludes certain financial instruments, including those related to insurance
contracts.
The following methods and assumptions were used by AIG in estimating the
fair value of the financial instruments presented:
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Fixed maturity securities: Fair values for fixed maturity securities
carried at amortized cost or at market value were generally based upon quoted
market prices. For certain fixed maturity securities for which market prices
were not readily available, fair values were estimated using values obtained
from independent pricing services. No other fair valuation techniques were
applied to
61
<PAGE> 63
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
these securities as AIG believes it would have to expend excessive costs for the
benefits derived.
Equity securities: Fair values for equity securities were based upon quoted
market prices.
Mortgage loans on real estate, policy and collateral loans: Where
practical, the fair values of loans on real estate and collateral loans were
estimated using discounted cash flow calculations based upon AIG's current
incremental lending rates for similar type loans. The fair values of the policy
loans were not calculated as AIG believes it would have to expend excessive
costs for the benefits derived.
Trading assets and trading liabilities: Fair values for trading assets and
trading liabilities approximate the carrying values presented in the
consolidated balance sheet.
Securities available for sale: Fair values for securities available for
sale and related hedges were based on quoted market prices. For securities and
related hedges for which market prices were not readily available, fair values
were estimated using quoted market prices of comparable investments.
Trading securities: Fair values for trading securities were based on
current market value where available. For securities for which market values
were not readily available, fair values were estimated using quoted market
prices of comparable investments.
Spot commodities: Fair values for spot commodities were based on current
market prices.
Unrealized gains and losses on interest rate and currency swaps, options
and forward transactions: Fair values for swaps, options and forward
transactions were based on the use of valuation models that utilize, among other
things, current interest, foreign exchange and volatility rates, as applicable.
Securities purchased (sold) under agreements to resell (repurchase), at
contract value: As these securities (obligations) are short-term in nature, the
contract values approximate fair values.
Other invested assets: For assets for which market prices were not readily
available, fair valuation techniques were not applied as AIG believes it would
have to expend excessive costs for the benefits derived.
Policyholders' contract deposits: Fair values of policyholder contract
deposits were estimated using discounted cash flow calculations based upon
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.
GIAs: Fair values of AIG's obligations under investment type agreements
were estimated using discounted cash flow calculations based on interest rates
currently being offered for similar agreements with maturities consistent with
those remaining for the agreements being valued. Additionally, AIG follows a
policy of minimizing interest rate risks associated with GIAs by entering into
swap transactions.
Securities and spot commodities sold but not yet purchased: The carrying
amounts for the financial instruments approximate fair values. Fair values for
spot commodities sold short were based on current market prices.
Trust deposits and deposits due to banks and other depositors: To the
extent certain amounts are not demand deposits or certificates of deposit which
mature in more than one year, fair values were not calculated as AIG believes it
would have to expend excessive costs for the benefits derived.
Commercial paper: The carrying amount of AIG's commercial paper borrowings
approximates fair value.
Notes, bonds, loans and mortgages payable: Where practical, the fair values
of these obligations were estimated using discounted cash flow calculations
based upon AIG's current incremental borrowing rates for similar types of
borrowings with maturities consistent with those remaining for the debt being
valued.
62
<PAGE> 64
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The carrying values and fair values of AIG's financial instruments at
December 31, 1998 and December 31, 1997 and the average fair values with respect
to derivative positions during 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
AVERAGE AVERAGE
CARRYING FAIR FAIR CARRYING FAIR FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities $79,980 $80,955 $ -- $69,488 $70,616 $ --
Equity securities 6,268 6,268 -- 5,608 5,608 --
Mortgage loans on real estate, policy and collateral loans 11,741 11,871 -- 11,134 11,311 --
Securities available for sale 10,674 10,674 8,855 9,145 9,145 8,653
Trading securities 5,668 5,668 5,682 3,975 3,975 2,905
Spot commodities 476 476 442 460 460 450
Unrealized gain on interest rate and currency swaps, options
and forward transactions 9,881 9,881 9,997 7,422 7,422 7,226
Trading assets 6,229 6,229 6,048 6,715 6,715 5,481
Securities purchased under agreements to resell 4,838 4,838 -- 4,551 4,551 --
Other invested assets 8,692 9,040 -- 6,618 7,052 --
Short-term investments 6,739 6,739 -- 4,326 4,326 --
Cash 303 303 -- 87 87 --
Policyholders' contract deposits 33,924 33,906 -- 30,321 29,754 --
Borrowings under obligations of guaranteed investment
agreements 9,188 10,146 -- 8,000 8,676 --
Securities sold under agreements to repurchase 4,473 4,473 -- 2,706 2,706 --
Trading liabilities 4,664 4,664 4,824 5,366 5,366 4,549
Securities and spot commodities sold but not yet purchased 4,457 4,457 5,614 5,172 5,172 3,648
Unrealized loss on interest rate and currency swaps, options
and forward transactions 7,055 7,055 6,805 5,980 5,980 5,270
Trust deposits and deposits due to banks and other
depositors 1,682 1,759 -- 1,399 1,399 --
Commercial paper 4,636 4,636 -- 3,375 3,375 --
Notes, bonds, loans and mortgages payable 18,086 18,527 -- 15,022 15,132 --
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Off-balance sheet financial instruments: Financial instruments which are
not currently recognized in the consolidated balance sheet of AIG are
principally commitments to extend credit and financial guarantees. The
unrecognized fair values of these instruments represent fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
current agreements and the counterparties' credit standings. No valuation was
made as AIG believes it would have to expend excessive costs for the benefits
derived.
14. STOCK COMPENSATION PLANS
(a) At December 31, 1998, AIG had two types of stock-based compensation plans.
One was a stock option plan; the other, an employee stock purchase plan. AIG
applies APB Opinion 25 "Accounting for Stock Issued to Employees" and related
Interpretations (APB25) in accounting for its plans. Accordingly, no
compensation costs have been recognized for either plan.
Had compensation costs for these plans and the Original SunAmerica plans
been determined consistent with the method of Statement of Financial Accounting
Standards No. 123 "Accounting for Awards of Stock Based Compensation to
Employees" (FASB123), AIG's net income and earnings per share for the years
ended December 31, 1998, 1997 and 1996 would have been reduced to the pro forma
amounts as follows:
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported(a) $4,282 $3,711 $3,171
Pro forma 4,235 3,690 3,162
Earnings per share -- diluted:(b)
As reported $ 3.44 $ 3.00 $ 2.56
Pro forma 3.41 2.99 2.55
- -------------------------------------------------------------
</TABLE>
(a) Post merger amounts.
(b) Includes Original SunAmerica shares which were exchanged for AIG shares at
an exchange ratio of 0.855 shares of AIG common stock for each share of
Original SunAmerica common stock.
63
<PAGE> 65
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. STOCK COMPENSATION PLANS (continued)
(I) STOCK OPTION PLAN: On December 19, 1991, the AIG Board of Directors
adopted a 1991 employee stock option plan (the 1991 Plan), which provided that
options to purchase a maximum of 10,125,000 shares of common stock could be
granted to officers and other key employees at prices not less than fair market
value at the date of grant. Both the 1991 Plan, and the options with respect to
252,870 shares granted thereunder on December 19, 1991, were approved by
shareholders at the 1992 Annual Meeting. An amendment to the 1991 Plan, approved
by shareholders at the 1997 Annual Meeting, increased the aggregate number of
shares available for grant to 17,718,750 shares to assure that adequate shares
are available for grant during the remaining term of the 1991 Plan. A second
amendment to the 1991 Plan limits the maximum number of shares as to which stock
options may be granted to any employee in any one year to 202,500 shares. At
December 31, 1998, 9,184,869 shares were reserved for future grants under the
amended 1991 Plan. As of March 18, 1992, no further options could be granted
under the 1987 employee stock option plan (the 1987 Plan), but outstanding
options granted under the 1987 Plan continue in force until exercise or
expiration. At December 31, 1998, there were 8,882,557 shares reserved for
issuance under these plans.
Under each plan, 25 percent of the options granted become exercisable on
the anniversary of the date of grant in each of the four years following that
grant and all options expire 10 years from the date of the grant. As of December
31, 1998, outstanding options granted with respect to 5,762,938 shares qualified
for Incentive Stock Option treatment under the Economic Recovery Tax Act of
1981.
Additional information with respect to AIG's plans at December 31, 1998,
and changes for the three years then ended, was as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares Under Option:
Outstanding at beginning of year 9,310,014 $32.65 9,705,984 $26.12 9,294,103 $21.73
Granted 915,319 87.42 1,115,325 70.52 1,402,650 48.25
Exercised (1,192,871) 18.33 (1,402,982) 17.41 (887,740) 14.83
Forfeited (149,905) 46.86 (108,313) 34.73 (103,029) 28.22
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 8,882,557 $39.98 9,310,014 $32.65 9,705,984 $26.12
- ---------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 6,282,271 $28.38 6,342,378 $23.01 6,531,486 $19.17
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value per
share of options granted $30.67 $26.21 $18.23
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE> 66
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
14. STOCK COMPENSATION PLANS (continued)
Information about stock options outstanding at December 31, 1998, is
summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$11.58 -- 19.11 1,987,821 2.0 years $14.61 1,987,821 $14.61_
23.56 -- 30.89 2,691,004 5.0 years 26.36 2,671,978 26.33_
32.44 -- 44.72 1,037,071 6.9 years 40.85 759,892 40.84_
48.72 -- 58.17 1,212,551 7.9 years 48.86 601,157 48.79_
66.00 -- 78.33 1,058,216 8.9 years 70.91 261,423 70.83_
80.17 -- 98.46 895,894 9.9 years 87.65 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
8,882,557 $39.98 6,282,271 $28.38
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair values of stock options granted during the years ended December
31, 1998, 1997 and 1996 were $28 million, $29 million and $26 million,
respectively. The fair value of each option is estimated on the date of the
grant using the Black-Scholes option-pricing model.
The following weighted average assumptions were used for grants in 1998,
1997 and 1996, respectively: dividend yields of 0.24 percent, 0.30 percent and
0.33 percent; expected volatilities of 22.0 percent, 20.0 percent and 20.0
percent; risk-free interest rates of 4.73 percent, 6.03 percent and 6.29 percent
and expected terms of 7 years.
(II) EMPLOYEE STOCK PURCHASE PLAN: AIG's 1984 employee stock purchase plan
was adopted at its 1984 shareholders' meeting and became effective as of July 1,
1984. Eligible employees could receive privileges to purchase up to an aggregate
of 4,429,687 shares of AIG common stock, at a price equal to 85 percent of the
fair market value on the date of grant of the purchase privilege. Purchase
privileges were granted annually and were limited to the number of whole shares
that could be purchased by an amount equal to 5 percent of an employee's annual
salary or $5,500, whichever was less.
AIG's 1996 employee stock purchase plan was adopted at its 1996
shareholders' meeting and became effective as of July 1, 1996, replacing the
1984 plan. Eligible employees may receive privileges to purchase up to an
aggregate of 2,250,000 shares of AIG common stock, at a price equal to 85
percent of the fair market value on the date of the grant of the purchase
privilege. Purchase privileges are granted annually and are limited to the
number of whole shares that can be purchased by an amount equal to 5 percent of
an employee's annual salary or $5,500, whichever is less. Beginning with the
January 1, 1998 subscription, the maximum allowable purchase limitation
increased to 10 percent of an employee's annual salary or $10,000 per year,
whichever is less, and the eligibility requirement was reduced from two years to
one year. In all other respects, the 1996 plan is identical to the 1984 plan.
There were 104,008 shares and 328,988 shares issued under the 1984 plan at
weighted average prices of $35.17 and $29.73 for the years ended December 31,
1997 and 1996, respectively. There were 340,419 shares and 220,627 shares issued
under the 1996 plan at weighted average prices of $53.89 and $38.51 for the
years ended December 31, 1998 and 1997, respectively. The excess or deficit of
the proceeds over the par value or cost of the common stock issued under these
plans was credited or charged to additional paid-in capital.
As of December 31, 1998, there were 396,285 shares of common stock
subscribed to at a weighted average price of $71.63 per share pursuant to grants
of privileges under the 1996 plan. There were 1,292,668 shares available for the
grant of future purchase privileges under the 1996 plan at December 31, 1998.
The fair values of purchase privileges granted during the years ended
December 31, 1998, 1997 and 1996 were $10 million, $4 million and $3 million,
respectively. The weighted average fair values per share of those purchase
rights granted in 1998, 1997 and 1996 were $19.33, $13.35 and $8.76,
respectively. The fair value of each purchase right is estimated on the date of
the subscription using the Black-Scholes model.
The following weighted average assumptions were used for grants in 1998,
1997 and 1996, respectively: dividend yields of 0.24 percent, 0.30 percent and
0.37 percent; expected volatilities of 33.0 percent, 26.0 percent and 21.9
percent; risk-free interest rates of 5.26 percent, 5.81 percent and 5.54
percent; and expected terms of 1 year.
(b) The following are disclosures with respect to the stock compensation
plans of Original SunAmerica prior to its merger into AIG. Both share
information and exercise price information have been recalculated to reflect the
exchange ratio of .855 shares of AIG common stock for each outstanding share of
Original SunAmerica
65
<PAGE> 67
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. STOCK COMPENSATION PLAN (continued)
common stock. At September 30, 1998, Original SunAmerica had
five stock-based compensation plans, which are described below. Original
SunAmerica applied APB 25, in accounting for such plans, and, accordingly, no
compensation cost has been recognized for stock options granted pursuant to
these plans. As of the merger date, no further options or stock awards may be
granted under such plans.
The fair values of stock options granted during the year ended September
30, 1998, 1997 and 1996 were $49 million, $32 million, and $13 million,
respectively. The fair value of each option is estimated on the grant date using
the Black-Scholes option pricing model.
The following weighted average assumptions were used for grants in 1998,
1997 and 1996, respectively: dividend yields of 0.7 percent, 0.9 percent and 1.3
percent; expected volatilities of 40.6 percent, 39.3 percent and 40.3 percent;
risk free interest rates of 5.9 percent, 6.2 percent and 6.0 percent and
expected terms of 8.0 years, 7.0 years and 6.6 years.
Original SunAmerica's five stock plans were the 1997 Employee Incentive
Stock Plan (the "1997 Plan"), the 1995 Performance Stock Plan (the "1995 Plan"),
the 1988 Employee Stock Plan (the "1988 Plan"), the Long-Term Performance-Based
Incentive Plan (the "CEO Plan") and the Non-Employee Directors' Stock Option
Plan. The 1988 Plan was replaced by the 1997 Plan. Under these stock plans,
Original SunAmerica could grant an aggregate of 36,450,830 shares to its
employees in the form of either stock option restricted stock or stock units. At
September 30, 1998, 8,805,157 shares remained available for future grant.
Options granted under the plans have an exercise price equal to the market price
at the date of grant, have a maximum term of 10 years and generally became
exercisable ratably over a five-year period. Under the terms of the stock option
agreements, the merger with AIG constituted a change in control and caused all
unvested stock options to become immediately exercisable.
Under its CEO Plan, Original SunAmerica could grant shares of its common
stock to Original SunAmerica's Chief Executive Officer ("CEO") in the form of
stock options. Prior to amendment of the CEO Plan, which was approved by
Original SunAmerica's shareholders in fiscal year 1997, awards under this plan
were also made in the form of restricted stock or deferred shares. As a result
of the amendment, restricted stock or deferred shares are no longer awarded. The
actual number of options granted were predicated upon defined performance of
Original SunAmerica's common stock relative to defined performance of the S&P
500 Index. Restricted shares are held in escrow until the earlier of the CEO's
death, disability or retirement, or change in control of Original SunAmerica.
Deferred shares are held in escrow until 18 months after the earlier of CEO's
death, disability or retirement, or change in control of Original SunAmerica.
Stock options granted under this plan have an exercise price equal to the market
price at the date of grant, have a maximum term of 10 years and are immediately
exercisable.
Additional information with respect to Original SunAmerica's plans at
September 30, 1998 and changes for the three years then ended was as follows:
<TABLE>
<CAPTION>
(SHARES IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares Under Option:
Outstanding at beginning of year 12,821 $16.69 10,646 $10.80 8,823 $ 7.98
Granted 2,456 53.79 2,939 35.68 2,217 21.43
Exercised (805) 9.70 (652) 5.42 (262) 5.85
Forfeited (591) 25.50 (112) 19.67 (132) 10.33
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 13,881 $23.29 12,821 $16.69 10,646 $10.80
- ---------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 10,011 $17.63 8,302 $11.29 6,859 $ 7.82
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
66
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
14. STOCK COMPENSATION PLAN (continued)
Information about Original SunAmerica stock options outstanding at
September 30, 1998, is summarized as follows:
<TABLE>
<CAPTION>
(SHARES IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.01 -- 2.75 1,849 1.8 years $ 2.34 1,849 $ 2.34
5.26 -- 8.36 1,405 4.2 years 6.71 1,405 6.71
9.49 -- 14.40 3,557 6.2 years 11.72 2,909 11.38
17.51 -- 23.93 1,955 7.4 years 21.15 1,226 19.72
29.63 -- 38.98 1,825 8.1 years 30.75 961 29.72
46.02 -- 70.65 3,290 9.2 years 51.80 1,661 46.26
- ---------------------------------------------------------------------------------------------------------------------------------
13,881 $23.29 10,011 $17.63
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1998, 1,854,738 shares of unvested restricted stock were
outstanding, and deferred shares and stock units representing 1,813,776 shares
of stock were outstanding. Original SunAmerica granted restricted stock and
stock units aggregating 316,449 shares in the year ended September 30, 1997 and
451,127 shares in the year ended September 30, 1996. No restricted stock or
stock units were granted in the year ended September 30, 1998. The weighted
average per share fair value of such stock at the date of grant was $26.99 in
1997 and $18.51 in 1996. Restrictions generally lapsed either on an accelerated
basis, upon achievement of defined performance goals, upon a change in control
of Original SunAmerica, or over a defined length of service. Compensation cost
charged to operations for all outstanding restricted stock, deferred shares and
stock units amounted to $11 million for the year ended September 30, 1998, $24
million for the year ended September 30, 1997 and $21 million for the year ended
September 30, 1996. The merger with AIG constituted a change in control of
Original SunAmerica under the terms of the various stock compensation plans and
all unvested restricted stock and 538,650 stock units vested.
15. EMPLOYEE BENEFITS
(a) Employees of AIG, its subsidiaries and certain affiliated companies,
including employees in foreign countries, are generally covered under various
funded and insured pension plans. Eligibility for participation in the various
plans is based on either completion of a specified period of continuous service
or date of hire, subject to age limitation.
AIG's U.S. retirement plan is a qualified, noncontributory, defined benefit
plan. All qualified employees, other than those of SunAmerica, who have attained
age 21 and completed twelve months of continuous service are eligible to
participate in this plan. An employee with 5 or more years of service is
entitled to pension benefits beginning at normal retirement at age 65. Benefits
are based upon a percentage of average final compensation multiplied by years of
credited service limited to 44 years of credited service. The average final
compensation is subject to certain limitations. Annual funding requirements are
determined based on the "projected unit credit" cost method which attributes a
pro rata portion of the total projected benefit payable at normal retirement to
each year of credited service.
AIG has adopted a Supplemental Executive Retirement Program (Supplemental
Plan) to provide additional retirement benefits to designated executives and key
employees. Under the Supplemental Plan, the annual benefit, not to exceed 60
percent of average final compensation, accrues at a percentage of average final
pay multiplied for each year of credited service reduced by any benefits from
the current and any predecessor retirement plans, Social Security, if any, and
from any qualified pension plan of prior employers. The Supplemental Plan also
provides a benefit equal to the reduction in benefits payable under the AIG
retirement plan as a result of Federal limitations on benefits payable
thereunder. Currently, the Supplemental Plan is unfunded.
Eligibility for participation in the various non-U.S. retirement plans is
either based on completion of a specified period of continuous service or date
of hire, subject to age limitation. Where non-U.S. retirement plans are defined
benefit plans, they are generally based on the employees' years of credited
service and average compensation in the years preceding retirement.
In addition to AIG's defined benefit pension plan, AIG and its subsidiaries
provide a postretirement benefit program for medical care and life insurance,
domestically and in certain foreign countries. Eligibility in the various plans
is generally based upon completion of a specified period of eligible service and
reaching a specified age. Benefits vary by geographic location.
AIG's U.S. postretirement medical and life insurance benefits are based
upon the employee electing immediate retirement and having a minimum of ten
years of service. Retirees and their dependents who were age 65 by May 1, 1989
participate in the
67
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- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. EMPLOYEE BENEFITS (continued)
medical plan at no cost. Employees who retired after May 1, 1989 and on or prior
to January 1, 1993 pay the active employee premium if under age 65 and 50
percent of the active employee premium if over age 65. Retiree contributions are
subject to adjustment annually. Other cost sharing features of the medical plan
include deductibles, coinsurance and Medicare coordination and a lifetime
maximum benefit of $1 million. The lifetime maximum benefit of the medical plan
was increased to $1.5 million effective January 1, 1999. The maximum life
insurance benefit prior to age 70 is $32,500, with a maximum of $25,000
thereafter.
Effective January 1, 1993, both plans' provisions were amended. Employees
who retire after January 1, 1993 are required to pay the actual cost of the
medical benefits premium reduced by a credit which is based upon age and years
of service at retirement. The life insurance benefit varies by age at retirement
from $5,000 for retirement at ages 55 through 59 to $15,000 for retirement at
ages 65 and over. These plans also benefit Transatlantic's employees.
(b) AIG sponsors a voluntary savings plan for domestic employees (a 401(k)
plan), which, during the three years ended December 31, 1998, provided for
salary reduction contributions by employees and matching contributions by AIG of
up to 6 percent of annual salary depending on the employees' years of service.
(c) SunAmerica sponsors a voluntary savings plan for its employees (the
"SunAmerica 401(k) plan"), which, during the three years ended September 30,
1998, provided for salary reduction contributions by qualifying employees and
matching contributions by SunAmerica of up to 4 percent of qualifying employees'
annual salaries.
(d) AIG has certain benefits provided to former or inactive employees who
are not retirees. Certain of these benefits are insured and expensed currently;
other expenses are provided for currently. Such uninsured expenses include long
and short-term disability medical and life insurance continuation, short-term
disability income continuation and COBRA medical subsidies. The provision for
these benefits at December 31, 1998 was $5 million. The incremental expense was
insignificant.
68
<PAGE> 70
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
15. EMPLOYEE BENEFITS (continued)
The following table sets forth the change in benefit obligation, change in
plan assets and weighted average assumptions associated with various pension
plan and postretirement benefits. The amounts are recognized in the accompanying
consolidated balance sheet as of December 31, 1998 and 1997:
(IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
--------------------------- ---------------------------
NON-U.S. U.S. NON-U.S. U.S.
1998 PLANS PLANS TOTAL PLANS PLANS TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 330 $ 363 $ 693 $ 19 $ 70 $ 89
Acquisitions(a) -- 49 49 -- 1 1
Service cost 32 33 65 1 2 3
Interest cost 16 29 45 -- 5 5
Participant contributions 4 -- 4 -- -- --
Actuarial (gain)/loss 21 33 54 (13) 5 (8)
Benefits paid (18) (8) (26) -- (5) (5)
Effect of foreign currency fluctuation 42 -- 42 -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 427 $ 499 $ 926 $ 7 $ 78 $ 85
- ------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 160 $ 297 $ 457 $ -- $ -- $ --
Acquisitions(a) -- 37 37 -- -- --
Actual return on plan assets net of expenses 20 55 75 -- -- --
Employer contributions 24 18 42 -- 5 5
Participant contributions 4 -- 4 -- -- --
Benefits paid (18) (8) (26) -- (5) (5)
Effect of foreign currency fluctuation 18 -- 18 -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year(b) $ 208 $ 399 $ 607 $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------
Reconciliation of funded status:
Funded status $(219) $(100) $(319) $ (7) $ (78) $ (85)
Unrecognized actuarial (gain)/loss 80 (4) 76 -- 16 16
Unrecognized transition (asset)/obligation 13 7 20 -- -- --
Unrecognized prior service cost 13 21 34 -- (21) (21)
- ------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $(113) $ (76) $(189) $ (7) $ (83) $ (90)
- ------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the statement of financial position
consist of:
Prepaid benefit cost $ 4 $ -- $ 4 $ -- $ -- $ --
Accrued benefit liability (175) (83) (258) (7) (83) (90)
Intangible asset 58 7 65 -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $(113) $ (76) $(189) $ (7) $ (83) $ (90)
- ------------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions as of December 31,
Discount rate 3.0-10.0% 6.75% 6.25-7.0% 6.75%
Expected return on plan assets 3.5-13.0 8.5 N/A N/A
Rate of compensation increase 2.0-10.0 5.0 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
For measurement purposes, a 7.5 percent annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 1998.
The rate was assumed to decrease gradually to 5.5 percent for 2000 and remain at
that level thereafter.
(a) Acquisitions include the opening balances with respect to Transatlantic and
20th Century. Transatlantic's domestic employees are and have been covered
by AIG's plans.
(b) Plan assets are invested primarily in fixed-income securities and listed
stocks.
69
<PAGE> 71
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. EMPLOYEE BENEFITS (continued)
(IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
--------------------------- ---------------------------
NON-U.S. U.S. NON-U.S. U.S.
1997 PLANS PLANS TOTAL PLANS PLANS TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 340 $273 $ 613 $17 $ 59 $ 76
Service cost 21 23 44 2 1 3
Interest cost 13 21 34 -- 4 4
Participant contributions 4 -- 4 -- -- --
Plan amendments -- 5 5 -- 4 4
Actuarial loss 6 47 53 -- 6 6
Benefits paid (12) (6) (18) -- (4) (4)
Effect of foreign currency fluctuation (42) -- (42) -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 330 $363 $ 693 $ 19 $ 70 $ 89
- ------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 171 $231 $ 402 $ -- $ -- $ --
Asset adjustment -- (1) (1) -- -- --
Actual return on plan assets net of expenses -- 54 54 -- -- --
Employer contributions 15 19 34 -- -- --
Participant contributions 4 -- 4 -- -- --
Benefits paid (12) (6) (18) -- -- --
Effect of foreign currency fluctuation (18) -- (18) -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year* $ 160 $297 $ 457 $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------
Reconciliation of funded status:
Funded status $(170) $(66) $(236) $(19) $(70) $ (89)
Unrecognized actuarial (gain)/loss 65 (16) 49 -- 11 11
Unrecognized transition obligation 12 7 19 -- -- --
Unrecognized prior service cost 14 21 35 -- (22) (22)
- ------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $ (79) $(54) $(133) $(19) $(81) $(100)
- ------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the statement of financial position
consist of:
Prepaid benefit cost $ 6 $ -- $ 6 $ -- $ -- $ --
Accrued benefit liability (133) (58) (191) (19) (81) (100)
Intangible asset 48 4 52 -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $ (79) $(54) $(133) $(19) $(81) $(100)
- ------------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions as of December 31,
Discount rate 3.5-10.0% 7.0% 7.0-10.0% 7.0%
Expected return on plan assets 4.0-9.2 9.0 N/A N/A
Rate of compensation increase 2.5-10.0 5.0 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
For measurement purposes, an 8.5 percent annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 1997.
The rate was assumed to decrease gradually to 5.5 percent for 2000 and remain at
that level thereafter.
*Plan assets are invested primarily in fixed-income securities and listed
stocks.
70
<PAGE> 72
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
15. EMPLOYEE BENEFITS (continued)
The net benefit cost for the years ended December 31, 1998, 1997, and 1996
included the following components:
(IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
-------------------------- --------------------------
NON-U.S. U.S. NON-U.S. U.S.
PLANS PLANS TOTAL PLANS PLANS TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
Components of net period benefit cost:
Service cost $ 32 $ 33 $ 65 $ 1 $ 2 $ 3
Interest cost 16 29 45 1 5 6
Expected return on assets (9) (29) (38) -- -- --
Amortization of prior service cost 2 2 4 -- (1) (1)
Amortization of transitional (asset)/liability 2 1 3 (1) -- (1)
Recognized actuarial loss 3 1 4 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 46 $ 37 $ 83 $ 1 $ 6 $ 7
- ---------------------------------------------------------------------------------------------------------------------
1997
Components of net period benefit cost:
Service cost $ 21 $ 23 $ 44 $ 1 $ 2 $ 3
Interest cost 13 21 34 1 4 5
Expected return on assets (9) (20) (29) -- -- --
Amortization of prior service cost 2 2 4 -- (1) (1)
Amortization of transitional liability 2 2 4 -- -- --
Recognized actuarial loss 2 -- 2 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 31 $ 28 $ 59 $ 2 $ 5 $ 7
- ---------------------------------------------------------------------------------------------------------------------
1996
Components of net period benefit cost:
Service cost $ 23 $ 21 $ 44 $ 1 $ 1 $ 2
Interest cost 14 18 32 1 4 5
Expected return on assets (9) (17) (26) -- -- --
Amortization of prior service cost 2 1 3 -- (1) (1)
Amortization of transitional liability 2 2 4 -- -- --
Recognized actuarial loss 2 -- 2 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 34 $ 25 $ 59 $ 2 $ 4 $ 6
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $460 million, $394 million and $196 million,
respectively, as of December 31, 1998 and $314 million, $268 million and $119
million as of December 31, 1997.
On December 31, 1998, the company amended its retirement and postretirement
healthcare plan to provide increased benefits to certain employees who retire
prior to age 65.
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the healthcare plan. A one-percentage-point change in
assumed healthcare cost trend rates would have the following effects:
(IN MILLIONS)
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
- --------------------------------------------------------------
<S> <C> <C>
Effect on total of service
and interest cost
components $ 1 $ --
Effect on postretirement
benefit obligation 4 (3)
- --------------------------------------------------------------
</TABLE>
71
<PAGE> 73
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. LEASES
(a) AIG and its subsidiaries occupy leased space in many locations under various
long-term leases and have entered into various leases covering the long-term use
of data processing equipment.
At December 31, 1998, the future minimum lease payments under operating
leases were as follows:
(IN MILLIONS)
- ------------------------------------------------------------------
<TABLE>
<S> <C>
1999 $ 267
2000 208
2001 166
2002 124
2003 123
Remaining years after 2003 427
- ------------------------------------------------------------
Total $1,315
- ------------------------------------------------------------
</TABLE>
Rent expense approximated $287 million, $252 million and $228 million for
the years ended December 31, 1998, 1997 and 1996, respectively.
(b) Minimum future rental income on noncancelable operating leases of
flight equipment which have been delivered at December 31, 1998 was as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
- ------------------------------------------------------------
<S> <C>
1999 $1,589
2000 1,391
2001 1,237
2002 1,055
2003 803
Remaining years after 2003 1,173
- ------------------------------------------------------------
Total $7,248
- ------------------------------------------------------------
</TABLE>
Flight equipment is leased, under operating leases, for periods ranging
from one to 12 years.
17. OWNERSHIP AND TRANSACTIONS WITH RELATED PARTIES
(A) OWNERSHIP: The directors and officers of AIG, the directors and holders of
common stock of C.V. Starr & Co., Inc. (Starr), a private holding company, The
Starr Foundation, Starr International Company, Inc. (SICO), a private holding
company, and Starr own or otherwise control approximately 28 percent of the
voting stock of AIG. Six directors of AIG also serve as directors of Starr and
SICO.
(B) TRANSACTIONS WITH RELATED PARTIES: During the ordinary course of
business, AIG and its subsidiaries pay commissions to Starr and its subsidiaries
for the production and management of insurance business. There are no
significant receivables from/payables to related parties at December 31, 1998.
Net commission payments to Starr aggregated approximately $46 million in 1998
and 1997 and $48 million in 1996, from which Starr is required to pay
commissions due originating brokers and its operating expenses. AIG also
received approximately $13 million in 1998, $14 million in 1997 and $15 million
in 1996 from Starr and paid approximately $37,000 in 1998 and $35,000 in 1997
and $34,000 in 1996 to Starr in rental fees. AIG also received approximately $1
million in 1998, 1997 and 1996 from SICO and paid approximately $1 million in
each of the years 1998, 1997 and 1996 to SICO as reimbursement for services
rendered at cost. AIG also paid to SICO $4 million in 1998, 1997 and 1996 in
rental fees.
18. SEGMENT INFORMATION
(a) AIG's operations are conducted principally through four business segments.
These segments and their respective operations are as follows:
General Insurance -- AIG's general insurance subsidiaries are multiple line
companies writing substantially all lines of property and casualty insurance.
One or more of these companies is licensed to write substantially all of these
lines in all states of the United States and in approximately 100 foreign
countries.
DBG writes substantially all classes of business insurance accepting such
business mainly from insurance brokers. This provides DBG the opportunity to
select specialized markets and retain underwriting control. Any licensed broker
is able to submit business to DBG without the traditional agent-company
contractual relationship, but such broker usually has no authority to commit DBG
to accept a risk. Transatlantic's domestic operations are included in this
group.
AIG's Foreign General insurance group accepts risks primarily underwritten
through AIU, a marketing unit consisting of wholly owned agencies and insurance
entities. The Foreign General insurance group also includes business written by
AIG's foreign-based insurance subsidiaries for their own accounts. The Foreign
General group uses various marketing methods to write both business and personal
lines insurance with certain refinements for local laws, customs and needs. AIU
operates in over 70 countries in Asia, the Pacific Rim, Europe, Africa, Middle
East and Latin America. Transatlantic's foreign operations are included in this
group.
Life Insurance -- AIG's life insurance subsidiaries offer a wide range of
traditional insurance and financial and investment products. One or more of
these subsidiaries is licensed to write life insurance in all states in the
United States and in over 70 foreign countries. Traditional products consist of
individual and group life, annuity, endowment and accident and health policies.
Financial and investment products consist of single premium annuity, variable
annuities, guaranteed investment contracts, universal life and pensions.
AIG's three principal overseas life operations are ALICO, AIA and Nan Shan.
ALICO is incorporated in Delaware and all of its business is written outside of
the United States. ALICO has operations either directly or through subsidiaries
in approximately 50 countries located in Europe, Africa, Latin America, the
Caribbean, the Middle East, and the Far East, with Japan being the largest
territory. AIA operates primarily in Hong Kong, Singapore,
72
<PAGE> 74
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
18. SEGMENT INFORMATION (continued)
Malaysia and Thailand. Nan Shan operates in Taiwan. AIG's domestic life
operations are comprised of two separate operations, AIG's domestic life
companies and the life insurance subsidiaries of SunAmerica. Both of these
operations sell primarily financial and investment type products.
Financial Services -- AIG's financial services subsidiaries engage in
diversified financial products and services including premium financing, banking
services and consumer finance services.
ILFC engages primarily in the acquisition of new and used commercial jet
aircraft and the leasing and remarketing of such aircraft to airlines around the
world.
AIGFP structures financial transactions, including long-dated interest rate
and currency swaps and structures borrowings through notes, bonds and guaranteed
investment agreements.
AIGTG engages in various commodities trading, foreign exchange trading,
interest rate swaps and market making activities.
Asset Management -- AIG's asset management operations offer a wide variety
of investment vehicles and services, including variable annuities, mutual funds,
trust services and investment asset management. Such products and services are
offered to individuals and institutions both domestically and internationally.
AIG's three principal asset management operations are SAMCO, Global
Investment and Cap Partners. SAMCO develops and sells variable annuities and
other investment products, sells and manages mutual funds and provides financial
and trust services. Global Investment manages invested assets of institutions,
including insurance companies and pension funds, and provides custodial and
other trust services. Cap Partners organizes, and manages the invested assets of
institutional investment funds and may also invest in such funds. Each of these
subsidiary operations receive fees for investment products and services
provided.
73
<PAGE> 75
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
18. SEGMENT INFORMATION (continued)
(b) The following table summarizes the operations by major operating
segment for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
OPERATING SEGMENTS -- 1998
-----------------------------------------------------------------------------
GENERAL LIFE FINANCIAL ASSET
(IN MILLIONS) INSURANCE INSURANCE SERVICES MANAGEMENT OTHER(A) CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues(b) $ 16,495 $ 15,420 $ 3,044 $ 707 $ 50 $ 35,716
Interest revenue -- -- 1,203 63 -- 1,266
Interest expense 7 184 1,835 14 36 2,076
Realized capital gains (losses) 205 (74) -- -- (7) 124
Operating income (loss) before minority
interest 2,928 2,373 869 191 (84) 6,277
Income taxes 646 728 297 45 69 1,785
Equity in income of minority-owned insurance
operations 57 -- -- -- -- 57
Depreciation expense 109 72 662 14 95 952
Capital expenditures 220 277 3,233 33 142 3,905
Identifiable assets 73,226 103,611 59,198 915 (3,274) 233,676
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
OPERATING SEGMENTS -- 1997
-----------------------------------------------------------------------------
GENERAL LIFE FINANCIAL ASSET
(IN MILLIONS) INSURANCE INSURANCE SERVICES MANAGEMENT OTHER(A) CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues(b) $ 14,403 $ 14,468 $ 3,042 $ 555 $ 85 $ 32,553
Interest revenue -- -- 992 55 -- 1,047
Interest expense 2 135 1,682 17 34 1,870
Realized capital gains (losses) 128 (9) -- -- (29) 90
Operating income (loss) before minority
interest 2,472 2,048 671 127 (8) 5,310
Income taxes 514 625 244 48 94 1,525
Equity in income of minority-owned insurance
operations 114 -- -- -- -- 114
Depreciation expense 89 62 650 10 74 885
Capital expenditures 166 346 3,515 4 174 4,205
Identifiable assets 62,386 87,747 51,110 646 (2,275) 199,614
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
OPERATING SEGMENTS -- 1996
-----------------------------------------------------------------------------
GENERAL LIFE FINANCIAL ASSET
(IN MILLIONS) INSURANCE INSURANCE SERVICES MANAGEMENT OTHER(A) CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues(b) $ 13,611 $ 12,804 $ 2,379 $ 444 $ 87 $ 29,325
Interest revenue -- -- 846 58 -- 904
Interest expense 2 87 1,478 25 29 1,621
Realized capital gains (losses) 65 4 -- -- (12) 57
Operating income before minority interest 2,206 1,657 501 101 3 4,468
Income taxes 456 505 186 32 55 1,234
Equity in income of minority-owned insurance
operations 99 -- -- -- -- 99
Depreciation expense 85 61 588 9 74 817
Capital expenditures 133 237 3,342 16 167 3,895
Identifiable assets 58,792 72,275 43,074 787 (2,598) 172,330
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes AIG Parent and other operations which are not required to be
reported separately, other income (deductions)-net and adjustments and
eliminations.
(b) Represents the sum of general net premiums earned, life premium income, net
investment income, financial services commissions, transactions and other
fees, asset management commissions and other fees, equity in income of
minority-owned insurance operations and realized capital gains (losses).
74
<PAGE> 76
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
18. SEGMENT INFORMATION (continued)
(c) The following table summarizes AIG's general insurance operations by
major internal reporting group for the years ended December 31, 1998, 1997 and
1996
<TABLE>
<CAPTION>
GENERAL INSURANCE -- 1998
---------------------------------------------
DOMESTIC TOTAL
BROKERAGE FOREIGN GENERAL
(IN MILLIONS) GROUP GENERAL OTHER(A) INSURANCE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net premiums written $ 8,002 $ 4,799 $1,785 $14,586
Net premiums earned 7,814 4,627 1,657 14,098
Losses & loss expenses incurred 6,862 2,678 1,117 10,657
Underwriting expenses 1,169 1,427 314 2,910
Adjusted underwriting profit (loss)(b) (217) 522 226 531
Net investment income 1,570 438 184 2,192
Operating income before realized capital gains(c) 1,353 960 410 2,723
Equity in income of minority-owned insurance operations 57 -- -- 57
Depreciation expense 34 63 12 109
Capital expenditures 66 110 44 220
Identifiable assets 53,844 16,060 3,322 73,226
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GENERAL INSURANCE -- 1997
---------------------------------------------
DOMESTIC TOTAL
BROKERAGE FOREIGN GENERAL
(IN MILLIONS) GROUP GENERAL OTHER(A) INSURANCE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net premiums written $ 7,885 $ 4,370 $1,153 $13,408
Net premiums earned 7,207 4,069 1,145 12,421
Losses & loss expenses incurred 6,268 2,304 784 9,356
Underwriting expenses 1,080 1,268 227 2,575
Adjusted underwriting profit (loss)(b) (141) 497 134 490
Net investment income 1,356 369 129 1,854
Operating income before realized capital gains(c) 1,215 866 263 2,344
Equity in income of minority-owned insurance operations 114 -- -- 114
Depreciation expense 27 57 5 89
Capital expenditures 61 94 11 166
Identifiable assets 46,548 13,405 2,433 62,386
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GENERAL INSURANCE -- 1996
---------------------------------------------
DOMESTIC TOTAL
BROKERAGE FOREIGN GENERAL
(IN MILLIONS) GROUP GENERAL OTHER(A) INSURANCE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net premiums written $ 7,324 $ 4,325 $1,043 $12,692
Net premiums earned 6,763 4,033 1,059 11,855
Losses & loss expenses incurred 5,886 2,332 779 8,997
Underwriting expenses 916 1,303 189 2,408
Adjusted underwriting profit (loss)(b) (39) 398 91 450
Net investment income 1,242 339 110 1,691
Operating income before realized capital gains(c) 1,203 737 201 2,141
Equity in income of minority-owned insurance operations 99 -- -- 99
Depreciation expense 27 54 4 85
Capital expenditures 41 86 6 133
Identifiable assets 43,718 13,025 2,049 58,792
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes other operations which are not required to be reported separately
and adjustments and eliminations.
(b) Adjusted underwriting profit (loss) represents statutory underwriting profit
or loss adjusted primarily for changes in deferred acquisition costs.
(c) Realized capital gains are not deemed to be an integral part of AIG's
general insurance operations' internal reporting groups.
75
<PAGE> 77
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
18. SEGMENT INFORMATION (continued)
(d) The following table summarizes AIG's life insurance operations by major
reporting group for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
LIFE INSURANCE -- 1998
--------------------------------------------------------
AIA TOTAL
AND DOMESTIC LIFE
(IN MILLIONS) ALICO NAN SHAN LIFE OTHER(A) INSURANCE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premium income $ 3,212 $ 6,052 $ 784 $ 245 $ 10,293
Net investment income 1,019 1,189 2,889 104 5,201
Operating income before realized capital gains(b) 576 1,040 782 49 2,447
Depreciation expense 31 25 11 5 72
Capital expenditures 201 64 1 11 277
Identifiable assets 23,495 23,860 54,869 1,387 103,611
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
LIFE INSURANCE -- 1997
--------------------------------------------------------
AIA TOTAL
AND DOMESTIC LIFE
(IN MILLIONS) ALICO NAN SHAN LIFE OTHER(A) INSURANCE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premium income $ 2,811 $ 6,278 $ 583 $ 284 $ 9,956
Net investment income 754 1,188 2,464 115 4,521
Operating income before realized capital gains(b) 461 895 632 69 2,057
Depreciation expense 24 25 8 5 62
Capital expenditures 197 132 1 16 346
Identifiable assets 16,745 20,003 49,729 1,270 87,747
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
LIFE INSURANCE -- 1996
--------------------------------------------------------
AIA TOTAL
AND DOMESTIC LIFE
(IN MILLIONS) ALICO NAN SHAN LIFE OTHER(A) INSURANCE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premium income $ 2,595 $ 5,592 $ 552 $ 256 $ 8,995
Net investment income 663 979 2,059 104 3,805
Operating income before realized capital gains(b) 396 731 464 62 1,653
Depreciation expense 21 24 10 6 61
Capital expenditures 199 29 1 8 237
Identifiable assets 14,839 20,474 35,402 1,560 72,275
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes other operations which are not required to be reported separately
and adjustments and eliminations.
(b) Realized capital gains are not deemed to be an integral part of AIG's life
insurance operations' internal reporting groups.
76
<PAGE> 78
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
18. SEGMENT INFORMATION (continued)
(e) The following table summarizes AIG's financial services operations by
major reporting group for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
FINANCIAL SERVICES -- 1998
-------------------------------------------------------
TOTAL
FINANCIAL
(IN MILLIONS) ILFC AIGFP(A) AIGTG OTHER(B) SERVICES
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commissions, transactions and other fees(c) $ 2,002 $ 550 $ 374 $ 118 $ 3,044
Interest revenue 49 941 74 139 1,203
Interest expense 694 997 59 85 1,835
Operating income (loss) 496 323 123 (73) 869
Depreciation expense 581 6 8 67 662
Capital expenditures 3,160 3 13 57 3,233
Identifiable assets 16,846 28,080 10,526 3,746 59,198
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL SERVICES -- 1997
-------------------------------------------------------
TOTAL
FINANCIAL
(IN MILLIONS) ILFC AIGFP(A) AIGTG OTHER(B) SERVICES
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commissions, transactions and other fees(c) $ 1,857 $ 452 $ 562 $ 171 $ 3,042
Interest revenue 41 768 88 95 992
Interest expense 691 857 42 92 1,682
Operating income (loss) 382 241 127 (79) 671
Depreciation expense 576 7 6 61 650
Capital expenditures 3,436 5 9 65 3,515
Identifiable assets 15,028 22,941 10,017 3,124 51,110
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL SERVICES -- 1996
------------------------------------------------------
TOTAL
FINANCIAL
(IN MILLIONS) ILFC AIGFP(A) AIGTG OTHER(B) SERVICES
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commissions, transactions and other fees(c) $ 1,560 $ 369 $ 289 $ 161 $ 2,379
Interest revenue 44 675 38 89 846
Interest expense 624 737 26 91 1,478
Operating income (loss) 307 189 80 (75) 501
Depreciation expense 526 9 6 47 588
Capital expenditures 3,254 10 16 62 3,342
Identifiable assets 14,394 20,288 5,115 3,277 43,074
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) AIGFP's interest revenue and interest expense are reported as net revenues.
(b) Includes other operations which are not required to be reported separately
and adjustments and eliminations.
(c) Commissions, transactions and other fees are the sum of the net gain or loss
of trading activities, the net change in unrealized gain or loss, net
interest revenues from forward rate agreements and interest rate swaps and
where applicable, management and incentive fees from asset management
activities.
77
<PAGE> 79
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
18. SEGMENT INFORMATION (continued)
(f) A substantial portion of AIG's operations is conducted in countries
other than the United States and Canada. The following table summarizes AIG's
operations by major geographic segment. Allocations have been made on the basis
of the location of operations and assets.
<TABLE>
<CAPTION>
GEOGRAPHIC SEGMENTS -- 1998
--------------------------------------------------
OTHER
(IN MILLIONS) DOMESTIC(A) FAR EAST FOREIGN CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues(b) $18,238 $10,571 $6,907 $ 35,716
Real estate and other fixed assets, net of accumulated
depreciation 1,062 895 781 2,738
Flight equipment primarily under operating leases, net of
accumulated depreciation 16,330 -- -- 16,330
- ----------------------------------------------------------------------------------------------------------------
GEOGRAPHIC SEGMENTS -- 1997
--------------------------------------------------
OTHER
(in millions) DOMESTIC(A) FAR EAST FOREIGN CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------------
Revenues(b) $16,092 $11,671 $4,790 $ 32,553
Real estate and other fixed assets, net of accumulated
depreciation 949 779 696 2,424
Flight equipment primarily under operating leases, net of
accumulated depreciation 14,438 -- -- 14,438
- ----------------------------------------------------------------------------------------------------------------
GEOGRAPHIC SEGMENTS -- 1996
--------------------------------------------------
OTHER
(in millions) DOMESTIC(A) FAR EAST FOREIGN CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------------
Revenues(b) $14,337 $10,691 $4,297 $ 29,325
Real estate and other fixed assets, net of accumulated
depreciation 916 748 564 2,228
Flight equipment primarily under operating leases, net of
accumulated depreciation 13,809 -- -- 13,809
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Including general insurance operations in Canada.
(b) Represents the sum of general net premiums earned, life premium income, net
investment income, financial services commissions, transactions and other
fees, asset management commissions and other fees, equity in income of
minority-owned insurance operations and realized capital gains (losses).
78
<PAGE> 80
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
19. SUMMARY OF QUARTERLY FINANCIAL INFORMATION -- UNAUDITED
The following quarterly financial information for each of the three months ended
March 31, June 30, September 30 and December 31, 1998 and 1997 is unaudited.
However, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the results of operations for
such periods, have been made for a fair presentation of the results shown.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30,
------------------ ------------------ -------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997 1998(A) 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $8,277 $7,593 $8,740 $8,187 $9,039 $8,242
Net income 1,010 861 1,076 913 1,076 934
- ------------------------------------------------------------------------------------------------------------
Net income per common share:
Basic $ 0.83 $ 0.71 $ 0.88 $ 0.75 $ 0.89 $ 0.78
Diluted 0.81 0.70 0.86 0.74 0.87 0.75
Average shares outstanding:
Basic 1,214 1,207 1,215 1,204 1,215 1,202
Diluted 1,244 1,232 1,245 1,231 1,242 1,230
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
THREE MONTHS ENDED
-------------------
DECEMBER 31,
-------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1998(A) 1997
- --------------------------------------- -------------------
<S> <C> <C>
Revenues $9,660 $8,531
Net income 1,120 1,003
- -------------------------------------------------------------------
Net income per common share:
Basic $ 0.91 $ 0.82
Diluted 0.90 0.81
Average shares outstanding:
Basic 1,215 1,213
Diluted 1,241 1,241
- ---------------------------------------------------------------------------
</TABLE>
(a) Including the operations of Transatlantic and 20th Century.
79
<PAGE> 81
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(C) EXHIBITS.
<TABLE>
<CAPTION>
<C> <S> <C>
12 Computation of Ratios of Earnings to Fixed Charges
23 Consent of PricewaterhouseCoopers LLP
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN INTERNATIONAL GROUP, INC.
(Registrant)
By /s/ HOWARD I. SMITH
----------------------------------------------
Name: Howard I. Smith
Title: Executive Vice President,
Chief Financial Officer &
Comptroller
Date: August 10, 1999
80
<PAGE> 82
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
------- ----------- --------
<C> <S> <C>
12 Computation of Ratios of Earnings to Fixed Charges Filed herewith.
23 Consent of PricewaterhouseCoopers LLP Filed herewith.
</TABLE>
<PAGE> 1
- --------------------------------------------------------------------------------
COMPUTATION OF RATIOS OF Exhibit 12
EARNINGS TO FIXED CHARGES American International Group, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT RATIOS)
- ------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income before income taxes, minority interest and
cumulative effect of accounting change $6,277 $5,310 $4,468 $3,783 $3,222
Less-Equity income of less than 50% owned persons 98 120 121 91 54
Add-Dividends from less than 50% owned persons 24 30 13 6 4
- ------------------------------------------------------------------------------------------------------------------------------
6,203 5,220 4,360 3,698 3,172
Add-Fixed charges 2,172 1,954 1,697 1,550 1,465
Less-Capitalized interest 86 60 61 51 46
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes, minority interest cumulative
effect of accounting change and fixed charges $8,289 $7,114 $5,996 $5,197 $4,591
- ------------------------------------------------------------------------------------------------------------------------------
Fixed charges:
Interest costs $2,076 $1,870 $1,621 $1,478 $1,395
Rental expense* 96 84 76 72 70
- ------------------------------------------------------------------------------------------------------------------------------
Total fixed charges $2,172 $1,954 $1,697 $1,550 $1,465
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 3.82 3.64 3.53 3.35 3.13
- ------------------------------------------------------------------------------------------------------------------------------
* The proportion deemed representative of the interest factor.
</TABLE>
The ratios shown are 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,
excluding the effects of the operating results of AIGFP, are 5.93, 5.48, 5.29,
4.85 and 5.27 for 1998, 1997, 1996, 1995 and 1994, 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.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
American International Group, Inc. on Forms S-3 and S-8 (No. 2-38768, No.
2-44043, No. 2-45346, No. 2-51498, No. 2-59317, No. 2-61858, No. 2-62760, No.
2-64336, No. 2-67600, No. 2-72058, No. 2-75874, No. 2-75875, No. 2-78291, No.
2-87005, No. 2-82989, No. 2-90756, No. 2-91945, No. 2-95589, No. 2-97439, No.
33-8495, No. 33-13874, No. 33-18073, No. 33-25291, No. 33-41643, No. 33-48996,
No. 33-57250, No. 33-60327, No. 33-60827, No. 33-62821, No. 333-21365, No.
333-48639, No. 333-58095, No. 333-70069, No. 333-74187 and 333-83813) of our
report dated February 11, 1999, on our audits of the consolidated financial
statements and financial statement schedules of American International Group,
Inc. and subsidiaries as of December 31, 1998 and 1997 and for each of the three
years in the period ended December 31, 1998, which report is included in the
Current Report on Form 8-K of American International Group, Inc. dated June 3,
1999, as amended, and to the reference to our firm under the headings "Financial
Statements" or "Experts" included in the Prospectuses.
PricewaterhouseCoopers LLP
New York, New York
August 10, 1999.
<PAGE> 1
- --------------------------------------------------------------------------------
SCHEDULE I
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1998
(in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT AT
WHICH SHOWN
IN THE
BALANCE
TYPE OF INVESTMENT COST* VALUE SHEET
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Fixed maturities:
Bonds:
United States Government and government agencies and
authorities $ 2,893 $ 3,098 $ 3,096
States, municipalities and political subdivisions 19,415 20,762 19,789
Foreign governments 11,202 11,846 11,846
Public utilities 3,874 4,213 4,213
All other corporate 40,137 41,036 41,036
- ------------------------------------------------------------------------------------------------------
Total bonds 77,521 80,955 79,980
Preferred stocks -- -- --
- ------------------------------------------------------------------------------------------------------
Total fixed maturities 77,521 80,955 79,980
- ------------------------------------------------------------------------------------------------------
Equity securities:
Common stocks:
Public utilities 249 275 275
Banks, trust and insurance companies 760 828 828
Industrial, miscellaneous and all other 4,456 4,545 4,545
- ------------------------------------------------------------------------------------------------------
Total common stocks 5,465 5,648 5,648
Non-redeemable preferred stocks 628 620 620
- ------------------------------------------------------------------------------------------------------
Total equity securities 6,093 6,268 6,268
- ------------------------------------------------------------------------------------------------------
Mortgage loans on real estate, policy and collateral loans 11,741 11,741 11,741
Financial services assets:
Flight equipment primarily under operating leases, net of
accumulated depreciation 16,330 -- 16,330
Securities available for sale, at market value 10,667 10,674 10,674
Trading securities, at market value -- 5,668 5,668
Spot commodities, at market value -- 476 476
Unrealized gain on interest rate and currency swaps,
options and forward transactions -- 9,881 9,881
Trading assets 6,229 -- 6,229
Securities purchased under agreements to resell, at
contract value 4,838 -- 4,838
Other invested assets 8,692 -- 8,692
Short-term investments, at cost (approximates market value) 6,739 -- 6,739
- ------------------------------------------------------------------------------------------------------
Total investments $148,850 -- $167,516
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Original cost of equity securities and, as to fixed maturities, original cost
reduced by repayments and adjusted for amortization of premiums or accrual of
discounts.
S-1
<PAGE> 2
- --------------------------------------------------------------------------------
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES Schedule III
SUPPLEMENTARY INSURANCE INFORMATION
AS OF DECEMBER 31, 1998, 1997 AND 1996 AND FOR THE YEARS THEN ENDED
<TABLE>
<CAPTION>
(IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------------------
RESERVES FOR
LOSSES AND LOSSES AND
DEFERRED LOSS RESERVE POLICY LOSS
POLICY EXPENSES, FOR AND NET EXPENSES
ACQUISITION FUTURE POLICY UNEARNED CONTRACT PREMIUM INVESTMENT INCURRED,
SEGMENT COSTS BENEFITS(A) PREMIUMS CLAIMS(B) REVENUE INCOME BENEFITS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
General insurance $1,852 $38,310 $10,009 $ -- $14,098 $2,192 $10,657
Life insurance 6,229 29,571 -- 1,135 10,293 5,201 10,242
- ---------------------------------------------------------------------------------------------------------------------
$8,081 $67,881 $10,009 $1,135 $24,391 $7,393 $20,899
- ---------------------------------------------------------------------------------------------------------------------
1997
General insurance $1,637 $33,400 $ 8,739 $ -- $12,421 $1,854 $ 9,356
Life insurance 5,515 24,502 -- 795 9,956 4,521 9,770
- ---------------------------------------------------------------------------------------------------------------------
$7,152 $57,902 $ 8,739 $ 795 $22,377 $6,375 $19,126
- ---------------------------------------------------------------------------------------------------------------------
1996
General insurance $1,416 $33,430 $ 7,599 $ -- $11,855 $1,691 $ 8,997
Life insurance 5,403 24,003 -- 794 8,995 3,805 8,765
- ---------------------------------------------------------------------------------------------------------------------
$6,819 $57,433 $ 7,599 $ 794 $20,850 $5,496 $17,762
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
(IN MILLIONS)
- --------------------- ------------------------------------------
AMORTIZATION
OF DEFERRED
POLICY OTHER NET
ACQUISITION OPERATING PREMIUMS
SEGMENT COSTS(C) EXPENSES WRITTEN
- --------------------- ------------------------------------------
<S> <C> <C> <C>
1998
General insurance $1,358 $1,552 $14,586
Life insurance 759 2,046 --
- -----------------------------------------------------------------------------
$2,117 $3,598 $14,586
- ------------------------------------------------------------------------------------------
1997
General insurance $1,216 $1,359 $13,408
Life insurance 874 1,776 --
- -------------------------------------------------------------------------------------------------------
$2,090 $3,135 $13,408
- --------------------------------------------------------------------------------------------------------------------
1996
General insurance $1,180 $1,228 $12,692
Life insurance 664 1,718 --
- ---------------------------------------------------------------------------------------------------------------------
$1,844 $2,946 $12,692
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Reserves for losses and loss expenses with respect to the general insurance
operations are net of discounts of $551 million, $294 million and $62
million for 1998, 1997 and 1996, respectively.
(b) Reflected in insurance balances payable on the accompanying balance sheet.
(c) Amounts shown for general insurance segment exclude amounts deferred and
amortized in the same period.
S-2
