<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
FOR QUARTER ENDED SEPTEMBER 30, 1999 COMMISSION FILE NUMBER 1-8787
---------------------
AMERICAN INTERNATIONAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-2592361
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
OR ORGANIZATION)
70 PINE STREET, NEW YORK, NEW YORK 10270
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 770-7000
NONE
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT.
</TABLE>
---------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 1999: 1,548,241,747.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Investments and cash:
Fixed maturities:
Bonds available for sale, at market value (amortized
cost: 1999 -- $76,709; 1998 -- $63,873)............. $ 76,023 $ 66,317
Bonds held to maturity, at amortized cost (market
value: 1999 -- $12,557; 1998 -- $13,633)............ 12,236 12,658
Bonds trading securities, at market value (cost:
1999 -- $1,055; 1998 -- $990)....................... 1,034 1,005
Equity securities:
Common stocks (cost: 1999 -- $5,448;
1998 -- $5,465)..................................... 5,654 5,648
Non-redeemable preferred stocks (cost: 1999 -- $654;
1998 -- $628)....................................... 632 620
Mortgage loans on real estate, net of allowance
(1999 -- $72; 1998 -- $67)............................ 7,256 6,702
Policy Loans........................................... 2,755 2,626
Collateral and guaranteed loans, net of allowance
(1999 -- $71; 1998 -- $74)............................ 2,207 2,413
Financial services and asset management assets:
Flight equipment primarily under operating leases,
net of accumulated depreciation (1999 -- $2,138;
1998 -- $2,048)..................................... 17,312 16,330
Securities available for sale, at market value (cost:
1999 -- $12,696; 1998 -- $10,667)................... 12,731 10,674
Trading securities, at market value.................. 5,392 5,668
Spot commodities, at market value.................... 622 476
Unrealized gain on interest rate and currency swaps,
options and forward transactions.................... 7,162 9,881
Trading assets....................................... 5,910 6,229
Securities purchased under agreements to resell,
at contract value................................. 10,265 4,838
Other invested assets.................................. 9,772 8,692
Short-term investments, at cost (approximates market
value)................................................ 6,014 6,739
Cash................................................... 273 303
-------- --------
Total investments and cash...................... 183,250 167,819
Investment income due and accrued......................... 2,123 1,869
Premiums and insurance balances receivable, net of
allowance (1999 -- $122; 1998 -- $105)................. 12,895 11,679
Reinsurance assets........................................ 18,613 17,744
Deferred policy acquisition costs......................... 9,111 8,081
Investments in partially-owned companies.................. 348 418
Real estate and other fixed assets, net of accumulated
depreciation (1999 -- $1,958; 1998 -- $1,774).......... 2,813 2,738
Separate and variable accounts............................ 25,136 18,662
Other assets.............................................. 5,497 4,666
-------- --------
Total assets.................................... $259,786 $233,676
======== ========
</TABLE>
See Accompanying Notes to Financial Statements.
1
<PAGE> 3
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES:
Reserve for losses and loss expenses...................... $ 38,429 $ 38,310
Reserve for unearned premiums............................. 11,019 10,009
Future policy benefits for life and accident and health
insurance contracts.................................... 33,144 29,571
Policyholders' contract deposits.......................... 41,889 33,924
Other policyholders' funds................................ 3,120 2,720
Reserve for commissions, expenses and taxes............... 2,774 2,225
Insurance balances payable................................ 1,975 2,283
Funds held by companies under reinsurance treaties........ 866 837
Income taxes payable:
Current................................................ 636 224
Deferred............................................... 576 1,247
Financial services and asset management liabilities:
Borrowings under obligations of guaranteed investment
agreements............................................ 8,822 9,188
Securities sold under agreements to repurchase, at
contract value........................................ 7,534 4,473
Trading liabilities.................................... 3,946 4,664
Securities and spot commodities sold but not yet
purchased, at market value............................ 5,973 4,457
Unrealized loss on interest rate and currency swaps,
options and forward transactions...................... 7,062 7,055
Trust deposits and deposits due to banks and other
depositors............................................ 2,065 1,682
Commercial paper....................................... 2,548 3,204
Notes, bonds and loans payable......................... 17,362 15,249
Commercial paper.......................................... 1,128 1,432
Notes, bonds, loans and mortgages payable................. 2,690 2,837
Separate and variable accounts............................ 25,136 18,662
Minority interests........................................ 1,373 1,590
Other liabilities......................................... 6,524 6,815
-------- --------
Total liabilities................................. 226,591 202,658
-------- --------
Preferred shareholders' equity in subsidiary company...... 895 895
-------- --------
CAPITAL FUNDS:
Preferred stock........................................... -- 248
Common stock, $2.50 par value; 2,000,000,000 shares
authorized; shares issued 1999 -- 1,660,707,090;
1998 -- 1,313,510,800.................................. 4,152 3,284
Additional paid-in capital................................ 2,077 1,319
Retained earnings......................................... 29,806 27,110
Accumulated other comprehensive income.................... (1,853) (10)
Treasury stock, at cost; 1999 -- 112,465,343;
1998 -- 96,373,983 shares of common stock.............. (1,882) (1,828)
-------- --------
Total capital funds............................... 32,300 30,123
-------- --------
Total liabilities and capital funds............... $259,786 $233,676
======== ========
</TABLE>
See Accompanying Notes to Financial Statements.
2
<PAGE> 4
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
General insurance operations:
Net premiums written..................................... $12,217 $10,759 $3,972 $3,760
Change in unearned premium reserve..................... (839) (440) (347) (61)
------- ------- ------ ------
Net premiums earned.................................... 11,378 10,319 3,625 3,699
Net investment income.................................. 1,869 1,587 632 584
Realized capital gains................................. 211 169 72 73
------- ------- ------ ------
13,458 12,075 4,329 4,356
------- ------- ------ ------
Losses and loss expenses incurred...................... 8,543 7,841 2,756 2,801
Underwriting expenses.................................. 2,288 2,073 740 774
------- ------- ------ ------
10,831 9,914 3,496 3,575
------- ------- ------ ------
Operating income....................................... 2,627 2,161 833 781
------- ------- ------ ------
Life insurance operations:
Premium income......................................... 8,624 7,425 2,767 2,420
Net investment income.................................. 4,549 3,790 1,512 1,277
Realized capital losses................................ (62) (17) (13) (9)
------- ------- ------ ------
13,111 11,198 4,266 3,688
------- ------- ------ ------
Death and other benefits............................... 3,598 3,183 1,228 1,091
Increase in future policy benefits..................... 5,025 4,158 1,511 1,276
Acquisition and insurance expenses..................... 2,352 2,079 777 704
------- ------- ------ ------
10,975 9,420 3,516 3,071
------- ------- ------ ------
Operating income....................................... 2,136 1,778 750 617
------- ------- ------ ------
Financial services operating income...................... 756 602 250 227
Asset management operating income........................ 218 140 87 45
Equity in income of minority-owned insurance
operations............................................. -- 57 -- --
Other realized capital losses............................ (18) (11) (5) (8)
Other income (deductions) -- net......................... (135) (106) (48) (38)
------- ------- ------ ------
Income before income taxes and minority interest......... 5,584 4,621 1,867 1,624
------- ------- ------ ------
Income taxes (benefits) -- Current....................... 1,314 1,016 565 385
-- Deferred.................... 326 311 (16) 85
------- ------- ------ ------
1,640 1,327 549 470
------- ------- ------ ------
Income before minority interest.......................... 3,944 3,294 1,318 1,154
------- ------- ------ ------
Minority interest........................................ (201) (132) (51) (78)
------- ------- ------ ------
Net income............................................... $ 3,743 $ 3,162 $1,267 $1,076
======= ======= ====== ======
Earnings per common share*
Basic.................................................. $ 2.42 $ 2.08 $ 0.82 $ 0.71
======= ======= ====== ======
Diluted................................................ $ 2.39 $ 2.03 $ 0.81 $ 0.69
======= ======= ====== ======
Cash dividends per common share*......................... $ 0.140 $ 0.125 $0.050 $0.045
======= ======= ====== ======
Average shares outstanding*
Basic.................................................. 1,548 1,518 1,548 1,519
------- ------- ------ ------
Diluted................................................ 1,567 1,555 1,568 1,553
------- ------- ------ ------
</TABLE>
* Share information reflects an adjustment on a pro forma basis for a common
stock split in the form of a 25 percent common stock dividend paid July 30,
1999.
See Accompanying Notes to Financial Statements.
3
<PAGE> 5
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1999 1998
------- -------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income.................................................. $ 3,743 $ 3,162
======= =======
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.................... 4,971 3,055
Premiums and insurance balances receivable and
payable -- net........................................ (1,524) (1,219)
Reinsurance assets..................................... (869) (345)
Deferred policy acquisition costs...................... (1,030) (272)
Investment income due and accrued...................... (254) (353)
Funds held under reinsurance treaties.................. 29 (30)
Other policyholders' funds............................. 400 56
Current and deferred income taxes -- net............... 738 413
Reserve for commissions, expenses and taxes............ 549 281
Other assets and liabilities -- net.................... (965) (741)
Trading assets and liabilities -- net.................. (399) 696
Trading securities, at market value.................... 275 (2,404)
Spot commodities, at market value...................... (146) --
Net unrealized gain on interest rate and currency
swaps, options and forward transactions............... 2,726 (1,202)
Securities purchased under agreements to resell........ (5,427) (419)
Securities sold under agreements to repurchase......... 3,061 1,053
Securities and spot commodities sold but not yet
purchased, at market value............................ 1,516 (334)
Realized capital gains.................................... (131) (141)
Equity in income of partially-owned companies and other
invested assets........................................ (225) (152)
Depreciation expenses, principally flight equipment....... 928 678
Change in cumulative translation adjustments.............. (352) (160)
Other -- net.............................................. 338 147
------- -------
Total Adjustments......................................... 4,209 (1,393)
------- -------
Net cash provided by operating activities................... $ 7,952 $ 1,769
======= =======
</TABLE>
See Accompanying Notes to Financial Statements.
4
<PAGE> 6
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash Flows From Investing Activities:
Cost of fixed maturities, at amortized cost matured or
redeemed................................................ $ 775 $ 1,083
Cost of bonds, at market sold............................. 22,426 20,826
Cost of bonds, at market matured or redeemed.............. 6,468 6,260
Cost of equity securities sold............................ 3,263 2,118
Realized capital gains.................................... 131 141
Purchases of fixed maturities............................. (42,093) (30,935)
Purchases of equity securities............................ (2,636) (1,939)
Acquisition of 20th Century, net of cash acquired......... -- (482)
Mortgage, policy and collateral loans granted............. (2,936) (2,717)
Repayments of mortgage, policy and collateral loans....... 2,461 1,670
Sales of securities available for sale.................... 1,598 2,274
Maturities of securities available for sale............... 710 1,897
Purchases of securities available for sale................ (4,366) (4,344)
Sales of flight equipment................................. 1,206 523
Purchases of flight equipment............................. (2,825) (2,549)
Net additions to real estate and other fixed assets....... (365) (290)
Sales or distributions of other invested assets........... 2,381 1,980
Investments in other invested assets...................... (3,470) (3,715)
Change in short-term investments.......................... 85 128
Investments in partially-owned companies.................. 49 (35)
-------- --------
Net cash used in investing activities....................... (17,138) (8,106)
-------- --------
Cash Flows From Financing Activities:
Change in policyholders' contract deposits................ 7,965 3,222
Change in trust deposits due to banks and other
depositors.............................................. 383 (527)
Change in commercial paper................................ (960) 915
Proceeds from notes, bonds, loans and mortgages payable... 6,778 6,074
Repayments on notes, bonds, loans and mortgages payable... (4,820) (3,341)
Proceeds from guaranteed investment agreements............ 3,298 3,860
Maturities of guaranteed investment agreements............ (3,664) (3,448)
Proceeds from common stock issued......................... 182 28
Cash dividends to shareholders............................ (225) (234)
Acquisition of treasury stock............................. (225) (38)
Proceeds from redemption of Premium Equity Redemption
Cumulative Security Units............................... 431 --
Other -- net.............................................. 13 (51)
-------- --------
Net cash provided by financing activities................... 9,156 6,460
-------- --------
Change in cash.............................................. (30) 123
Cash at beginning of period................................. 303 87
-------- --------
Cash at end of period....................................... $ 273 $ 210
======== ========
</TABLE>
See Accompanying Notes to Financial Statements.
5
<PAGE> 7
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net income............................................... $ 3,743 $3,162 $1,267 $ 1,076
Other comprehensive income:
Unrealized depreciation of investments -- net of
reclassification adjustments........................ (2,329) (903) (985) (1,125)
Deferred income tax benefit on changes.............. 843 339 344 392
Foreign currency translation adjustments............... (352) (160) (73) (28)
Applicable income tax (expense) benefit on
changes........................................... (5) 13 (10) (6)
------- ------ ------ -------
Other comprehensive income............................... (1,843) (711) (724) (767)
------- ------ ------ -------
Comprehensive income..................................... $ 1,900 $2,451 $ 543 $ 309
======= ====== ====== =======
</TABLE>
See Accompanying Notes to Financial Statements.
6
<PAGE> 8
AMERICAN INTERNATIONAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
a) On January 1, 1999 (the merger date), American International Group, Inc.
(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.
(SunAmerica) based on an exchange ratio of 0.855 shares of AIG common stock
for each share of SunAmerica stock. Because of the merger, which was
accounted for as a pooling of interests, all prior historical financial
information presented herein has been restated to include SunAmerica.
The following is a reconciliation of the individual company results to the
combined results for the first nine months and third quarter of 1998: (in
millions)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ ----------------------------
AIG SUNAMERICA TOTAL AIG SUNAMERICA TOTAL
------- ---------- ------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................. $24,231 $1,825 $26,056 $8,400 $639 $9,039
Net income................ $ 2,760 $ 402 $ 3,162 $ 932 $144 $1,076
</TABLE>
b) These statements are unaudited. In the opinion of management, all
adjustments consisting of normal recurring accruals have been made for a
fair presentation of the results shown. For further information, refer to
the Annual Report on Form 10-K of AIG for the year ended December 31, 1998,
and the Current Report on Form 8-K of AIG dated June 3, 1999, as amended.
c) Earnings per share of AIG are based on the weighted average number of common
shares outstanding during the period, retroactively adjusted to reflect all
stock splits.
Cash dividends per common share reflect the adjustment for a common stock
split in the form of a 25 percent common stock dividend paid July 30, 1999.
The quarterly dividend rate per common share, commencing with the dividend
paid September 17, 1999 is $0.05.
d) Supplemental cash flow information for the nine month periods ended
September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
Income taxes paid......................................... $ 909 $ 872
Interest paid............................................. $1,531 $1,376
</TABLE>
7
<PAGE> 9
e) Segment Information:
The following table summarizes the operations by major operating segment for
the first nine months and third quarter of 1999 and 1998 (in millions):
<TABLE>
<CAPTION>
OPERATING SEGMENTS
--------------------------------------------
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues(1):
General Insurance..................................... $13,458 $12,075 $4,329 $4,356
Life Insurance...................................... 13,111 11,198 4,266 3,688
Financial Services.................................. 2,402 2,218 799 821
Asset Management.................................... 705 519 249 182
Other(2)............................................ (18) 46 (5) (8)
------- ------- ------ ------
Total............................................. $29,658 $26,056 $9,638 $9,039
======= ======= ====== ======
Operating income:
General Insurance................................... $ 2,627 $ 2,161 $ 833 $ 781
Life Insurance...................................... 2,136 1,778 750 617
Financial Services.................................. 756 602 250 227
Asset Management.................................... 218 140 87 45
Other(2)............................................ (153) (60) (53) (46)
------- ------- ------ ------
Total............................................. $ 5,584 $ 4,621 $1,867 $1,624
======= ======= ====== ======
</TABLE>
-------------------
(1) 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).
(2) Includes AIG Parent and other operations which are not required to be
reported separately, other income (deductions) -- net, and adjustments
and eliminations.
The following table summarizes AIG's general insurance operations by major
reporting group for the first nine months and third quarter of 1999 and 1998
(in millions):
<TABLE>
<CAPTION>
GENERAL INSURANCE
--------------------------------------------
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Domestic Brokerage Group.............................. $ 7,088 $ 7,107 $2,266 $2,403
Foreign General..................................... 4,360 3,684 1,361 1,382
Other............................................... 2,010 1,284 702 571
------- ------- ------ ------
Total............................................. $13,458 $12,075 $4,329 $4,356
======= ======= ====== ======
Operating income before realized capital gains(1):
Domestic Brokerage Group............................ $ 1,276 $ 975 $ 435 $ 331
Foreign General..................................... 699 711 185 243
Other............................................... 441 306 141 134
------- ------- ------ ------
Total............................................. $ 2,416 $ 1,992 $ 761 $ 708
======= ======= ====== ======
</TABLE>
-------------------
(1) Realized capital gains are not deemed to be an integral part of
AIG's general insurance operations' internal reporting groups.
8
<PAGE> 10
The following table summarizes AIG's life insurance operations by major
reporting group for the first nine months and third quarter of 1999 and 1998
(in millions):
<TABLE>
<CAPTION>
LIFE INSURANCE
--------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
1999 1998 1999 1998
------- ------- ------ ------
<S> <C> <C> <C> <C>
Revenues:
American International Assurance Company Ltd. and Nan
Shan Life Insurance Company, Ltd. ...................... $ 5,994 $ 5,150 $1,983 $1,645
American Life Insurance Company....................... 3,601 3,012 1,075 1,026
Domestic life......................................... 3,221 2,750 1,113 933
Other................................................. 295 286 95 84
------- ------- ------ ------
Total............................................... $13,111 $11,198 $4,266 $3,688
======= ======= ====== ======
Operating income before realized capital gains(1):
American International Assurance Company Ltd. and Nan
Shan Life Insurance Company, Ltd. .................. $ 866 $ 754 $ 305 $ 273
American Life Insurance Company....................... 508 423 169 139
Domestic life......................................... 777 577 273 203
Other................................................. 47 41 16 11
------- ------- ------ ------
Total............................................... $ 2,198 $ 1,795 $ 763 $ 626
======= ======= ====== ======
</TABLE>
-------------------
(1) Realized capital gains are not deemed to be an integral part of
AIG's life insurance operations' internal reporting groups.
The following table summarizes AIG's financial services operations by major
reporting group for the first nine months and third quarter of 1999 and 1998
(in millions):
<TABLE>
<CAPTION>
FINANCIAL SERVICES
----------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- --------------
1999 1998 1999 1998
------ ------ ----- -----
<S> <C> <C> <C> <C>
Revenues:
International Lease Finance Corporation .................... $1,635 $1,474 $558 $511
AIG Financial Products Corp. ............................. 495 354 189 147
AIG Trading Group Inc. ................................... 153 316 25 121
Other..................................................... 119 74 27 42
------ ------ ---- ----
Total................................................... $2,402 $2,218 $799 $821
====== ====== ==== ====
Operating income:
International Lease Finance Corporation .................. $ 430 $ 353 $146 $123
AIG Financial Products Corp. ............................. 316 202 120 83
AIG Trading Group Inc. ................................... 77 105 10 41
Other..................................................... (67) (58) (26) (20)
------ ------ ---- ----
Total................................................... $ 756 $ 602 $250 $227
====== ====== ==== ====
</TABLE>
f) Statement of Accounting Standards No. 130 "Comprehensive Income" (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 $131 million and $141 million for the
first nine months and $54 million and $56 million for the third quarter of
1999 and 1998, respectively.
g) Derivatives Accounting Policy: AIG Financial Products Corp. and its
subsidiaries (AIGFP) and AIG Trading Group Inc. and its subsidiaries (AIGTG)
enter into future, forward, swap and option derivative transactions. These
transactions are marked to market. With the exception of the derivatives
used in market hedging activities with respect to securities available for
sale, at market, the marks to market on all such other derivative
transactions are recognized in income currently. The mark to market with
respect to derivatives which hedge the market movements of securities
available for sale, at market is recognized as a component of unrealized
appreciation of investments, net of taxes. When the underlying security is
sold, the loss or gain resulting from the hedging derivative transaction is
recognized as income in that same period.
h) In June 1998, FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" (FASB
133). This statement requires AIG to recognize all derivatives in the
consolidated balance sheet measuring these derivatives at fair value. The
recognition of the changes in the fair value of a derivative depends on a
number of factors, including the intended use of the derivative. AIGTG and
AIGFP 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.
9
<PAGE> 11
AMERICAN INTERNATIONAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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 (e) of Notes to Financial Statements.)
General insurance operations for the nine month periods ending September 30,
1999 and 1998 were as follows:
(in millions)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------
<S> <C> <C>
Net premiums written:
Domestic $ 8,040 $ 7,224
Foreign 4,177 3,535
- -------------------------------------------------------
Total $12,217 $10,759
- -------------------------------------------------------
Net premiums earned:
Domestic $ 7,385 $ 6,984
Foreign 3,993 3,335
- -------------------------------------------------------
Total $11,378 $10,319
- -------------------------------------------------------
Adjusted underwriting profit:
Domestic $ 250 $ 16
Foreign 297 389
- -------------------------------------------------------
Total $ 547 $ 405
- -------------------------------------------------------
Net investment income:
Domestic $ 1,467 $ 1,265
Foreign 402 322
- -------------------------------------------------------
Total $ 1,869 $ 1,587
- -------------------------------------------------------
Operating income before realized
capital gains:
Domestic $ 1,717 $ 1,281
Foreign 699 711
- -------------------------------------------------------
Total 2,416 1,992
Realized capital gains 211 169
- -------------------------------------------------------
Operating income $ 2,627 $ 2,161
- -------------------------------------------------------
</TABLE>
During the first nine months of 1999, AIG's net premiums written and net
premiums earned increased 13.6 percent and 10.3 percent, respectively, from
those of 1998.
General insurance domestic net premiums written and net premiums earned for
the nine month periods ending September 30, 1999 and 1998 were as follows:
(in millions)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------
<S> <C> <C>
Net premiums written:
DBG $6,138 $6,037
Personal Lines 1,611 918
Mortgage Guaranty 291 269
- -------------------------------------------------------
Total $8,040 $7,224
- -------------------------------------------------------
Net premiums earned:
DBG $5,569 $5,835
Personal Lines 1,525 868
Mortgage Guaranty 291 281
- -------------------------------------------------------
Total $7,385 $6,984
- -------------------------------------------------------
</TABLE>
10
<PAGE> 12
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, during
the first nine months of 1999, DBG declined to renew $370 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 $693 million in the first nine
months of 1999 over the same period of 1998. The consolidation of 20th Century
Industries for nine months in 1999 compared to three months in 1998 accounted
for the most significant part of the increase, $381 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 18.2 percent and 19.7 percent for foreign general insurance net
premiums written and net premiums earned, respectively, in the first nine months
of 1999 over 1998 reflects growth of operations in the United Kingdom, the Far
East, and the consolidation of Transatlantic's foreign operations for nine
months in 1999 compared to three months in 1998. Foreign general insurance
operations produced 34.2 percent of the general insurance net premiums written
in the first nine months of 1999 and 32.9 percent in 1998.
Foreign exchange rates had a minor impact on the foreign general insurance
group's net premiums written when translated into U.S. dollars utilizing those
exchange rates which prevailed in 1998. (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>
1999 1998
- -------------------------------------------------------
<S> <C> <C>
Domestic:
Loss Ratio 81.24 84.63
Expense Ratio 15.93 15.35
- -------------------------------------------------------
Combined Ratio 97.17 99.98
- -------------------------------------------------------
Foreign:
Loss Ratio 63.68 57.90
Expense Ratio 28.93 30.32
- -------------------------------------------------------
Combined Ratio 92.61 88.22
- -------------------------------------------------------
Consolidated:
Loss Ratio 75.08 75.99
Expense Ratio 20.37 20.27
- -------------------------------------------------------
Combined Ratio 95.45 96.26
- -------------------------------------------------------
</TABLE>
AIG believes that underwriting profit is the true measure of the
performance of the core business of a general insurance company.
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
11
<PAGE> 13
as required by GAAP. That is, for statutory purposes, all expenses, most
specifically acquisition expenses, are recognized immediately which is 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 $547 million in the first nine
months of 1999 and $405 million in the same period of 1998. 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. The results reflect
the consolidation of Transatlantic and 20th Century for nine months in 1999
compared to three months in 1998.
AIG's results reflect the net impact of incurred losses from catastrophes
approximating $73 million and $83 million in 1999 and 1998, respectively. AIG's
gross incurred losses from catastrophes approximated $180 million and $400
million in 1999 and 1998, respectively.
If catastrophes were excluded from the losses incurred in each period, the
pro forma consolidated statutory general insurance ratios would be as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------
1999 1998
- --------------------------------------------------------
<S> <C> <C>
Loss Ratio 74.44 75.18
Expense Ratio 20.37 20.27
- --------------------------------------------------------
Combined Ratio 94.81 95.45
- --------------------------------------------------------
</TABLE>
AIG presents calculations of general insurance ratios which exclude
catastrophe losses because the impact of catastrophes can fluctuate widely from
period to period making comparisons of recurring type business more difficult.
Thus, the pro forma results are comparable and allow the reader to focus on the
results of AIG's core business, underwriting.
AIG's ability to maintain its combined ratio below 100 is primarily
attributable to the profitability of AIG's Foreign General insurance operations
and AIG's emphasis on maintaining its disciplined underwriting, especially in
the domestic specialty markets. In addition, AIG does not seek net premium
growth where rates do not adequately reflect its assessment of exposures.
General insurance net investment income in the first nine months of 1999
increased 17.8 percent when compared to the same period of 1998. The growth in
net investment income in 1999 was primarily attributable to new cash flow for
investment and the consolidation of Transatlantic and 20th Century Industries
for nine months in 1999 compared to three months in 1998. The new cash flow was
generated from net general insurance operating cash flow and included the
compounding of previously earned and reinvested net investment income. (See also
the discussion under "Liquidity" herein.)
General insurance realized capital gains were $211 million in the first
nine months of 1999 and $169 million in 1998. These realized gains resulted from
the ongoing management of the general insurance investment portfolios within the
overall objectives of the general insurance operations and arose primarily from
the disposition of equity securities and available for sale fixed maturities as
well as redemptions of fixed maturities.
General insurance operating income in the first nine months of 1999
increased 21.5 percent when compared to the same period of 1998. The
contribution of general insurance operating income to income before income taxes
and minority interest was 47.1 percent in 1999 compared to 46.8 percent in 1998.
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
12
<PAGE> 14
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 $18.38 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at
September 30, 1999 with respect to reinsurance recoverable to the extent that
any reinsurer may not be able to reimburse AIG under the terms of these
reinsurance arrangements. AIG manages its credit risk in its reinsurance
relationships by transacting with reinsurers that it considers financially
sound, and when necessary AIG holds substantial collateral in the form of funds,
securities and/or irrevocable letters of credit. This collateral can be drawn on
for amounts that remain unpaid beyond specified time periods on an individual
reinsurer basis. At December 31, 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. Through September 30, 1999, these distribution
percentages have not significantly changed.
AIG's allowance for estimated unrecoverable reinsurance has not changed
significantly from December 31, 1998 when 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 September 30, 1999, the consolidated general reinsurance assets of
$18.38 billion include reinsurance recoverables for paid losses and loss
expenses of $2.20 billion and $13.73 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 September 30, 1999 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 September 30, 1999, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $38.43 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 September 30, 1999, general insurance net loss reserves
increased $76 million to $24.70 billion. 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 September 30,
1999. 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.
13
<PAGE> 15
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 five percent. Loss
trend factors reflect many items including changes in claims handling, exposure
and policy forms and current and future estimates of monetary inflation and
social inflation. Thus, many factors are implicitly considered in estimating the
year to year growth in loss costs. Therefore, AIG's carried net long tail loss
reserves are judgmentally set as well as tested for reasonableness using the
most appropriate loss trend factors for each class of business. In the
evaluation of AIG's net loss reserves, loss trend factors vary slightly,
depending on the particular class and nature of the business involved. These
factors are periodically reviewed and subsequently adjusted, as appropriate, to
reflect emerging trends which are based upon past loss experience.
Estimation of net losses for short tail business is less complex than for
long tail casualty lines. Loss cost trends for many property lines can generally
be assumed to be similar to the growth in exposure of such lines. For example,
if the fire insurance coverage remained proportional to the actual value of the
property, the growth in property's exposure to fire loss can be approximated by
the amount of insurance purchased.
For other property and short tail casualty lines, the loss trend is
implicitly assumed to grow at the rate that reported net losses grow from one
year to the next. The concerns noted above for longer tail casualty lines with
respect to the limited statistical credibility of reported net losses generally
do not apply to shorter tail lines.
AIG continues to receive claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump 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 broaden-
14
<PAGE> 16
ing 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 the 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 September 30, 1999 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
September 30, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
(in millions)
- ------------------------------------------------------------
1999 1998
------------- -------------
GROSS Net Gross Net
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
Asbestos:
Reserve for losses and loss
expenses at beginning of year $ 964 $259 $ 842 $195
Losses and loss expenses
incurred 366 57 259 75
Losses and loss expenses paid (200) (39) (194) (37)
- ------------------------------------------------------------
Reserve for losses and loss
expenses at end of period $1,130 $277 $ 907 $233
- ------------------------------------------------------------
Environmental:
Reserve for losses and loss
expenses at beginning of
year $1,536 $604 $1,467 $593
Losses and loss expenses
incurred 77 22 130 60
Losses and loss expenses paid (104) (46) (170) (70)
- ------------------------------------------------------------
Reserve for losses and loss
expenses at end of period $1,509 $580 $1,427 $583
- ------------------------------------------------------------
Combined:
Reserve for losses and loss
expenses at beginning of
year $2,500 $863 $2,309 $788
Losses and loss expenses
incurred 443 79 389 135
Losses and loss expenses paid (304) (85) (364) (107)
- ------------------------------------------------------------
Reserve for losses and loss
expenses at end of period $2,639 $857 $2,334 $816
- ------------------------------------------------------------
</TABLE>
The gross and net IBNR included in the aforementioned reserve for losses
and loss expenses at September 30, 1999 and December 31, 1998 were estimated as
follows:
(in millions)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------- -------------
GROSS Net Gross Net
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
Combined $ 933 $322 $ 979 $359
- ------------------------------------------------------------
</TABLE>
A summary of asbestos and environmental claims count activity for the nine
month periods ended September 30, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1999 1998
----------------------------------- -----------------------------------
ASBESTOS ENVIRONMENTAL Combined Asbestos Environmental Combined
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Claims at beginning of year 6,388 16,560 22,948 6,150 17,422 23,572
Claims during period:
Opened 715 1,792 2,507 652 2,405 3,057
Settled (206) (717) (923) (51) (460) (511)
Dismissed or otherwise resolved (307) (3,748) (4,055) (482) (2,780) (3,262)
- ---------------------------------------------------------------------------------------------------------------------
Claims at end of period 6,590 13,887 20,477 6,269 16,587 22,856
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 17
The average cost per claim settled, dismissed or otherwise resolved for the
nine month periods ended September 30, 1999 and 1998 was as follows:
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
GROSS Net Gross Net
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asbestos $390,300 $77,400 $363,200 $69,200
Environmental 23,200 10,200 52,700 21,500
Combined 61,100 17,200 96,500 28,200
- -------------------------------------------------------------------
</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 at September 30, 1999 and 1998 were as follows:
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
GROSS Net Gross Net
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Involuntary survival
ratios:
Asbestos 4.0 5.3 3.2 4.2
Environmental 17.0 18.1 16.3 17.5
Combined 9.2 13.6 7.0 9.9
- ---------------------------------------------------------
</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 were $16
million. Based upon current information, AIG does not anticipate that its net
assessment will be significantly different in 1999.
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, guar-
16
<PAGE> 18
anteed 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
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 corporation which
was merged into AIG. Both of these operations sell primarily financial and
investment type products. (See also Note (e) of Notes to Financial Statements.)
Life insurance operations for the nine month periods ending September 30,
1999 and 1998 were as follows:
(in millions)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------
<S> <C> <C>
Premium income:
Domestic $ 675 $ 591
Foreign 7,949 6,834
- --------------------------------------------------------
Total $ 8,624 $ 7,425
- --------------------------------------------------------
Net investment income:
Domestic $ 2,600 $ 2,149
Foreign 1,949 1,641
- --------------------------------------------------------
Total $ 4,549 $ 3,790
- --------------------------------------------------------
Operating income before realized
capital losses:
Domestic $ 777 $ 577
Foreign 1,421 1,218
- --------------------------------------------------------
Total 2,198 1,795
Realized capital losses (62) (17)
- --------------------------------------------------------
Operating income $ 2,136 $ 1,778
- --------------------------------------------------------
Life insurance in-force:*
Domestic $103,480 $ 65,705
Foreign 476,808 437,944
- --------------------------------------------------------
Total $580,288 $503,649
- --------------------------------------------------------
</TABLE>
* Amounts presented were as at September 30, 1999 and December 31, 1998,
respectively.
AIG's life premium income during the first nine months of 1999 represented
a 16.1 percent increase from the same period in 1998. Foreign life operations
produced 92.2 percent and 92.0 percent of the life premium income in 1999 and
1998, respectively.
AIG's life insurance operations, demonstrating the strength of its
franchise, continued to show growth in original currencies.
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 20.0 percent during the
first nine months of 1999. The growth in net investment income was primarily
attributable to both foreign and domestic operations 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 $62 million in 1999 and $17
million in 1998. These realized capital losses resulted from the ongoing
management of the life insurance investment portfolios within the overall
objectives of the life insurance operations and arose primarily from the
disposition of equity securities and available for sale fixed maturities as well
as redemptions of fixed maturities.
Life insurance operating income during the first nine months of 1999
increased 20.2 percent to $2.14 billion. Excluding realized capital losses from
life insurance operating income, the percent increase would be 22.5. The
contribution of life insurance operating income to income before income taxes
and minority interest amounted to 38.3 percent during the first nine months of
1999 compared to 38.5 percent in the same period of 1998.
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.
17
<PAGE> 19
Underwriting risk represents the exposure to loss resulting from the actual
policy experience adversely emerging in comparison to the assumptions made in
the product pricing associated with mortality, morbidity, termination and
expenses. AIG's life companies limit their maximum underwriting exposure on
traditional life insurance of a single life to approximately one million dollars
of coverage by using yearly renewable term reinsurance.
The investment risk represents the exposure to loss resulting from the cash
flows from the invested assets, primarily long-term fixed rate investments,
being less than the cash flows required to meet the obligations of the expected
policy and contract liabilities and the necessary return on investments.
To minimize its exposure to investment risk, AIG tests the cash flows from
the invested assets and the policy and contract liabilities using various
interest rate scenarios to assess whether there is a liquidity excess or
deficit. If a rebalancing of the invested assets to the policy and contract
claims became necessary and did not occur, a demand could be placed upon
liquidity. (See also the discussion under "Liquidity" herein.)
The asset-liability relationship is appropriately managed in AIG's foreign
operations, as it has been throughout AIG's history, even though certain
territories lack qualified long-term investments or there are investment
restrictions imposed by the local regulatory authorities. For example, in Japan
and several Southeast Asia territories, the duration of the investments is often
for a shorter period than the effective maturity of 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. These durations have not changed significantly
during 1999. 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 (e) 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 structure borrowings through notes, bonds and guaranteed investment
agreements. (See also Note (e) 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 (e) of Notes to Financial Statements.)
18
<PAGE> 20
Financial services operations for the nine month periods ending September
30, 1999 and 1998 were as follows:
(in millions)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------
<S> <C> <C>
Revenues:
International Lease Finance
Corporation $1,635 $1,474
AIG Financial Products Corp.* 495 354
AIG Trading Group Inc.* 153 316
Other 119 74
- --------------------------------------------------------
Total $2,402 $2,218
- --------------------------------------------------------
Operating income:
International Lease Finance
Corporation $ 430 $ 353
AIG Financial Products Corp. 316 202
AIG Trading Group Inc. 77 105
Other, including intercompany
adjustments (67) (58)
- --------------------------------------------------------
Total $ 756 $ 602
- --------------------------------------------------------
</TABLE>
* Represents net trading revenues.
Financial services operating income increased 25.5 percent in the first
nine months of 1999 over 1998.
Financial services operating income represented 13.5 percent of AIG's
income before income taxes and minority interest in the first nine months of
1999. This compares to 13.0 percent in the same period of 1998.
ILFC generates its revenues primarily from leasing new and used commercial
jet aircraft to domestic and foreign airlines. Revenues also result from the
remarketing of commercial jets for its own account, for airlines and for
financial institutions. Revenues in the first nine months of 1999 increased 10.9
percent from 1998. The revenue growth resulted primarily from the increase in
flight equipment available for operating lease and the increase in the relative
cost of the leased fleet. Approximately 20 percent of ILFC's operating lease
revenues are derived from U.S. and Canadian airlines. During the first nine
months of 1999, operating income increased 21.6 percent from 1998. The composite
borrowing rates at the end of the first nine months of 1999 and 1998 were 6.03
percent and 6.18 percent, respectively. (See also the discussions under "Capital
Resources" and "Liquidity" herein and Note (e) 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 September
30, 1999, there were 340 aircraft subject to operating leases and there was one
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 the first nine months of 1999 increased 40.0 percent
from the same period of 1998. During the first nine months of 1999, operating
income increased 56.6 percent from the same period of 1998. 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 (e) 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 the first nine months of 1999 decreased
51.4 percent from the same period of 1998. During the first nine months of 1999,
operating income decreased 26.6 percent from the same period of 1998. The
slowing of AIGTG revenues and operating income resulted primarily from sharply
higher volatility in the gold market during the third quarter of 1999. 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 (e) of Notes to
Financial Statements.)
Asset Management Operations
AIG's asset management operations offer a wide variety of investment
vehicles and services, including variable annuities, mutual funds, and
investment asset management. Such products and services are offered to
individuals and institutions both domestically and internationally.
19
<PAGE> 21
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 services. Global Investment manages invested assets
of institutions, including insurance companies and pension funds, and provides
custodial 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 receives fees for investment products and services
provided.
Asset management operations for the nine month periods ending September 30,
1999 and 1998 were as follows:
(in millions)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------
<S> <C> <C>
Revenues $705 $519
Operating income $218 $140
- -------------------------------------------------------
</TABLE>
These increases were primarily attributable to management of the variable
annuity business by SAMCO.
Asset management operating income in the first nine months of 1999
increased 55.4 percent when compared to the same period of 1998.
Asset management operating income represented 3.9 percent of AIG's income
before income taxes and minority interest in the first nine months of 1999. This
compares to 3.0 percent in the same period of 1998.
OTHER OPERATIONS
In the first nine months of 1998, AIG's equity in income of minority-owned
insurance operations was $57 million. In the first nine months of 1998, the
equity interest in insurance companies represented 1.2 percent of income before
income taxes and minority interest. In 1999, AIG did not report equity in income
of minority-owned insurance operations as a result of the consolidation of
Transatlantic's and SELIC Holdings, Ltd. operations into general insurance
operating results. 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.
Other realized capital losses amounted to $18 million and $11 million in
the first nine months of 1999 and 1998, 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 the first nine months of 1999, net deductions amounted to $135
million. In the same period of 1998, net deductions amounted to $106 million.
(See also the discussion under "Recent Developments" herein.)
Income before income taxes and minority interest amounted to $5.58 billion
in the first nine months of 1999 and $4.62 billion in the same period of 1998.
In the first nine months of 1999, AIG recorded a provision for income taxes
of $1.64 billion compared to the provision of $1.33 billion in the same period
of 1998. These provisions represent effective tax rates of 29.4 percent in the
first nine months of 1999 and 28.7 percent in the same period of 1998.
Minority interest represents minority shareholders' equity in income of
certain majority-owned consolidated subsidiaries. Minority interest amounted to
$201 million and $132 million in the first nine months of 1999 and 1998,
respectively. The increase in 1999 from 1998 was primarily related to the
minority shareholders' equity resulting when Transatlantic and 20th Century were
consolidated during the third quarter of 1998.
Net income amounted to $3.74 billion in the first nine months of 1999 and
$3.16 billion in the same period of 1998. The increases in net income over the
periods resulted from those factors described above.
CAPITAL RESOURCES
At September 30, 1999, AIG had total capital funds of $32.30 billion and
total borrowings of $32.55 billion. At that date, $28.94 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.
20
<PAGE> 22
Total borrowings and borrowings not guaranteed or matched at September 30,
1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------
1999 1998
- --------------------------------------------------------
<S> <C> <C>
GIAs -- AIGFP $ 8,822 $ 9,188
- --------------------------------------------------------
Commercial Paper:
AIG Funding 427 637
ILFC(a) 2,548 3,204
AICCO 618 727
Universal Finance Company (UFC)(a) 83 68
- --------------------------------------------------------
Total 3,676 4,636
- --------------------------------------------------------
Medium Term Notes:
ILFC(a) 4,229 3,348
AIG 282 239
SunAmerica 211 228
- --------------------------------------------------------
Total 4,722 3,815
- --------------------------------------------------------
Notes and Bonds Payable:
ILFC(a) 4,315 3,825
AIGFP 8,119 7,265
AIG: Lire bonds 159 159
Zero coupon notes 110 102
SunAmerica 864 989
- --------------------------------------------------------
Total 13,567 12,340
- --------------------------------------------------------
Loans and Mortgages Payable:
ILFC(a)(b) 698 811
AIG Finance (Hong Kong) Limited(a) 539 532
AIG Consumer Finance(a) 224 254
AIG 302 334
- --------------------------------------------------------
Total 1,763 1,931
- --------------------------------------------------------
Total Borrowings 32,550 31,910
- --------------------------------------------------------
Borrowings not guaranteed by AIG 12,636 12,042
Matched GIA borrowings 8,822 9,188
Matched notes and bonds
payable -- AIGFP 7,479 6,565
- --------------------------------------------------------
28,937 27,795
- --------------------------------------------------------
Remaining borrowings of AIG $ 3,613 $ 4,115
- --------------------------------------------------------
</TABLE>
(a)AIG does not guarantee or support these borrowings.
(b)Capital lease obligations.
The maturity distributions of total borrowings at September 30, 1999 and
December 31, 1998 were as follows:
(in millions)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------
<S> <C> <C>
Short-term borrowings $ 9,795 $ 9,190
Long-term borrowings(a) 22,755 22,720
- --------------------------------------------------------
Total borrowings $32,550 $31,910
- --------------------------------------------------------
</TABLE>
(a)Including commercial paper and excluding that portion of long-term debt
maturing in less than one year.
During the first nine months of 1999, AIGFP increased the aggregate
principal amount outstanding of its notes and bonds payable to $8.12 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.)
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 September 30, 1999, AIGFP had no
commercial paper outstanding. (See also the discussion under "Derivatives"
herein.)
AIG and Funding have entered into two syndicated revolving credit
facilities (the Facilities) aggregating $1 billion. The Facilities consist of a
$500 million 364 day revolving credit facility and a $500 million five year
revolving credit facility. The Facilities can be used for general corporate
purposes and also provide backup for AIG's commercial paper programs
administered by Funding. There are currently no borrowings outstanding under
either of the Facilities, nor were any borrowings outstanding as of September
30, 1999.
At September 30, 1999, ILFC had increased the aggregate principal amount
outstanding of its medium term and term notes to $8.54 billion, a net increase
of $1.37 billion, and recorded a net decline in its capital lease obligations of
$113 million and a net decrease in its commercial paper of $656 million. At
September 30, 1999, ILFC had $1.68 billion in aggregate principal amount of debt
securities registered for issuance from time to time. In addition, ILFC
established a Euro Medium Term Note Program for $2.0 billion, under which $771
million in notes were sold through September 30, 1999.
ILFC has an Export Credit Facility, up to a maximum of $4.3 billion, for
approximately 75 aircraft to be delivered from 1999 through 2001. ILFC has the
right, but is not required, to use the
21
<PAGE> 23
facility to fund 85 percent of each aircraft's purchase price. This facility is
guaranteed by various European Export Credit Agencies. The interest rate varies
from 5.75 percent to 5.90 percent on the first 75 aircraft depending on the
delivery date of the aircraft. Through September 30, 1999, ILFC borrowed $1.12
billion under this facility. Borrowings with respect to this facility are
included in Notes and Bonds Payable in the accompanying table of borrowings.
The proceeds of ILFC's debt financing are primarily used to purchase flight
equipment, including progress payments during the construction phase. The
primary sources for the repayment of this debt and the interest expense thereon
are the cash flow from operations, proceeds from the sale of flight equipment
and the rollover and refinancing of the prior debt. (See also the discussions
under "Operational Review" and "Liquidity" herein.)
During the first nine months of 1999, AIG issued $93 million principal
amount of Medium Term Notes and $50 million of previously issued notes matured.
At September 30, 1999, AIG had $415 million in aggregate principal amount
of debt securities registered for issuance from time to time.
AIG's capital funds increased $2.18 billion during the first nine months of
1999. Unrealized appreciation of investments, net of taxes decreased $1.49
billion. During the first nine months of 1999, the cumulative translation
adjustment loss, net of taxes increased $357 million. The change from period to
period with respect to the unrealized appreciation of investments, net of taxes
was primarily impacted by interest rates. (See also the discussion under
"Operational Review" and "Liquidity" herein.) Retained earnings increased $2.70
billion, resulting from net income less dividends.
During the period from January 1, 1999 through June 25, 1999 (the record
date with respect to the five for four split in the form of a 25 percent common
stock dividend), AIG repurchased in the open market 931,000 shares of its common
stock. Subsequent to June 25, 1999 through October 29, 1999, AIG repurchased
1,055,500 shares of its common stock. 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 September 30, 1999,
there were no significant statutory or regulatory issues which would impair
AIG's financial condition, results of operations or liquidity. To AIG's
knowledge, no AIG company is on any regulatory or similar "watch list". (See
also the discussion under "Liquidity" herein.)
The National Association of Insurance Commissioners (NAIC) has developed
Risk-Based Capital (RBC) requirements. RBC relates an individual insurance
company's statutory surplus to the risk inherent in its overall operations. At
September 30, 1999, 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 September 30, 1999, AIG's consolidated invested assets included $6.29
billion of cash and short-term investments. Consolidated net cash provided from
operating activities in the first nine months of 1999 amounted to $7.95 billion.
Sources of funds considered in meeting the objectives of AIG's financial
services operations include guaranteed investment agreements, issuance of long
and short-term debt, maturities and sales of securities available for sale,
securities sold under repurchase agreements, trading liabilities, securities and
spot commodities sold but not yet purchased,
22
<PAGE> 24
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 $14.9 billion in
pre-tax cash flow during the first nine months of 1999. 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 $6.3 billion in investment income cash flow during the
first nine months of 1999. 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 $5.9 billion in cash and short-term investments at
September 30, 1999. 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 $33
billion from the maturities, sales and redemptions of fixed income securities
and from the sale of equity securities was used to purchase approximately $45
billion of fixed income securities and marketable equity securities during the
first nine months of 1999.
The following table is a summary of AIG's invested assets by significant
segment, including investment income due and accrued of $2.12 billion and $1.87
billion and real estate of $1.59 billion and $1.61 billion at September 30, 1999
and December 31, 1998, respectively:
(dollars in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
----------------------- -----------------------
INVESTED Percent Invested Percent
ASSETS of Total Assets of Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General insurance $ 39,397 21.1% $ 38,883 22.7%
Life insurance 85,052 45.5 75,078 43.8
Financial services and asset management 61,852 33.1 56,619 33.1
Other 660 0.3 714 0.4
- -------------------------------------------------------------------------------------------------------------------------
Total $186,961 100.0% $171,294 100.0%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 25
INSURANCE INVESTED ASSETS
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 September 30, 1999 and December 31, 1998:
(dollars in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT DISTRIBUTION
GENERAL LIFE PERCENT ---------------------
SEPTEMBER 30, 1999 INSURANCE INSURANCE TOTAL OF TOTAL DOMESTIC FOREIGN
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Available for sale, at market value(a) $17,089 $59,829 $ 76,918 61.8% 55.5% 44.5%
Held to maturity, at amortized cost 12,236 -- 12,236 9.8 100.0 --
Equity securities, at market value(b) 3,543 2,536 6,079 4.9 48.3 51.7
Mortgage loans on real estate, policy and
collateral loans 70 10,518 10,588 8.5 57.3 42.7
Short-term investments, including time
deposits, and cash 917 4,961 5,878 4.8 40.5 59.5
Real estate 379 1,119 1,498 1.2 18.5 81.5
Investment income due and accrued 639 1,367 2,006 1.6 54.1 45.9
Other invested assets 4,524 4,722 9,246 7.4 84.6 15.4
- -----------------------------------------------------------------------------------------------------------------------
Total $39,397 $85,052 $124,449 100.0% 60.6% 39.4%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)Includes $1,034 of bonds trading securities, at market value.
(b)Includes $617 of preferred stock, at market value.
(dollars in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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.
24
<PAGE> 26
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 maturities available for sale portfolio is subject to decline in
fair value as interest rates rise. Such declines in fair value are presented in
unrealized appreciation of investments, net of taxes as a component of
comprehensive income.
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 September 30, 1999, approximately 61.6 percent of the fixed maturities
investments were domestic securities. Approximately 39 percent of such domestic
securities were rated AAA. Approximately 13 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 September 30, 1999, approximately 16
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 10 percent were below investment grade or not
rated at that date. A large portion of these fixed maturity securities are
sovereign fixed maturity securities supporting the policy liabilities in the
country of issuance.
At September 30, 1999, approximately 16 percent of the fixed maturities
portfolio was collateralized mortgage obligations (CMOs), including commercial
mortgage backed securities. Substantially all of the CMOs were investment grade
and approximately 19 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 changes in 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 a component of comprehensive income.
Mortgage loans on real estate, policy and collateral loans comprised 8.5
percent of AIG's insurance invested assets at September 30, 1999. AIG's
insurance operations' holdings of real estate mortgages amounted to $6.76
billion of which 74.6 percent was domestic. At September 30, 1999, 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 September 30, 1999, AIG's
insurance holdings of collateral loans amounted to $1.08 billion, all of which
were foreign. It is AIG's strategy to enter into mortgage and collateral loans
as an adjunct primarily to life insurance fixed maturity investments. AIG's
policy loans increased from $2.63 billion at December 31, 1998 to $2.76 billion
at September 30, 1999.
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
25
<PAGE> 27
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 June 30, 1999 and December 31, 1998. Through September
30, 1999, the economic facts and circumstances have not significantly changed.
Therefore, the VaR at June 30, 1999 was representative of a VaR at September 30,
1999. 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 June 30, 1999
and December 31, 1998, 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 June 30, 1999 and December 31, 1998 the VaR of
AIG's insurance segments was approximately $864 million and $760 million for
general insurance, respectively, and $1.06 billion and $981 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 June 30, 1999 and December 31, 1998. VaR
with respect to combined operations cannot be derived by aggregating the
individual risk or segment amounts presented herein.
26
<PAGE> 28
(in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GENERAL INSURANCE LIFE INSURANCE
----------------- -----------------
MARKET RISK 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate $309 $232 $844 $809
Currency 41 26 530 457
Equity 790 716 363 254
- ----------------------------------------------------------------------------------------------------------------
</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 September 30, 1999 and December
31, 1998. (See also the discussions under "Operational Review: Financial
Services Operations", "Operational Review: Asset Management Operations",
"Capital Resources" and "Derivatives" herein.)
(dollars in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
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 $17,312 28.0% $16,330 28.8%
Unrealized gain on interest rate and currency swaps, options
and forward transactions 7,162 11.6 9,881 17.5
Securities available for sale, at market value 12,731 20.6 10,674 18.9
Trading securities, at market value 5,392 8.7 5,668 10.0
Securities purchased under agreements to resell, at contract
value 10,265 16.6 4,838 8.5
Trading assets 5,910 9.6 6,229 11.0
Spot commodities, at market value 622 1.0 476 0.8
Other, including short-term investments 2,458 3.9 2,523 4.5
- -----------------------------------------------------------------------------------------------------------------
Total $61,852 100.0% $56,619 100.0%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
As previously discussed, the cash used for the purchase of flight equipment
is derived primarily from the proceeds of ILFC's debt financings. The primary
sources for the repayment of this debt and the interest expense thereon are the
cash flow from operations, proceeds from the sale of flight equipment and the
rollover and refinancing of the prior debt. During the first nine months of
1999, ILFC acquired flight equipment costing $2.83 billion.
ILFC is exposed to market risk and the risk of loss of fair value resulting
from adverse fluctuations in interest rates. As of June 30, 1999 and 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 June 30, 1999 and 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 June 30, 1999 and December 31, 1998, the VaR
with respect to the aforementioned net fair value of ILFC was approximately $14
million and $9 million, respectively. Through September 30, 1999, the economic
facts and circumstances have not significantly changed. Therefore, the VaR at
June 30, 1999 was representative of a VaR at September 30, 1999.
AIGFP's derivative transactions are carried at market value or at estimated
fair value when market prices are not readily available. AIGFP reduces its
27
<PAGE> 29
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
September 30, 1999, 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 $229 million of these securities. There were no securities
deemed below investment grade at September 30, 1999. There have been no
significant downgrades through November 1, 1999. Securities purchased under
agreements to resell are treated as collateralized transactions. AIGFP takes
possession of or obtains a security interest in securities purchased under
agreements to resell. AIGFP further minimizes its credit risk by monitoring
counterparty credit exposure and, when AIGFP deems necessary, it requires
additional collateral to be deposited. Trading securities, at market value are
marked to market daily and are held to meet the short-term risk management
objectives of AIGFP.
AIGTG conducts, as principal, market making and trading activities in
foreign exchange, interest rates and precious and base metals. AIGTG owns
inventories in the commodities in which it trades and may reduce the exposure to
market risk through the use of swaps, forwards, futures and option contracts.
AIGTG uses derivatives to manage the economic exposure of its various trading
positions and transactions from adverse movements of interest rates, foreign
currency exchange rates and commodity prices. AIGTG supports its trading
activities 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 September 30, 1999
were as follows:
(in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
- --------------------------------------------------------------------------------------
<S> <C> <C>
Securities available for sale, at market value $ 555 $ 520
Unrealized gain/loss on interest rate and currency swaps,
options and forward transactions(a)(b) 7,162 7,062
Trading assets 4,967 2,999
Spot commodities, at market value 8 --
Trading liabilities -- 2,501
Securities and spot commodities sold but not yet purchased,
at market value 276 --
- --------------------------------------------------------------------------------------
</TABLE>
(a)These amounts are also presented as the respective balance sheet amounts.
(b)At September 30, 1999, AIGTG's replacement values with respect to interest
rate and currency swaps were $386 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 September 30, 1999, the unrealized gains and losses
remaining after the benefit of the offsets were $41 million and $6 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
28
<PAGE> 30
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 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.
29
<PAGE> 31
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 June 30, 1999
and December 31, 1998. Through September 30, 1999, the trading activities and
exposures have not significantly changed. Therefore, the VaR at June 30, 1999
was representative of a VaR at September 30, 1999. 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 June
30, 1999 and December 31, 1998, 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
30
<PAGE> 32
and the liability portfolios of each of the market exposures. Each 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 June 30, 1999 and December
31, 1998. VaR with respect to combined operations cannot be derived by
aggregating the individual risk presented herein.
(in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AIGFP(A) AIGTG(b)
----------- -----------
MARKET RISKS 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Combined $29 $42 $ 4 $ 3
Interest rate 29 42 1 3
Currency -- -- 2 2
Equity/Commodity 3 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 secur-
31
<PAGE> 33
ity or commodity exchanges and settled daily through such clearing houses.
Negotiated over the counter derivatives include forwards, swaps and options.
Over the counter derivatives are generally not traded like exchange traded
securities. However, in the normal course of business, with the agreement of the
original counterparty, these contracts may be terminated early or assigned to
another counterparty.
All significant derivatives activities are conducted through AIGFP and
AIGTG permitting AIG to participate in the derivatives dealer market acting
primarily as principal. In these derivative operations, AIG structures
agreements which generally allow its counterparties to enter into transactions
with respect to changes in interest and exchange rates, securities' prices and
certain commodities and financial or commodity indices. Generally, derivatives
are used by AIG's customers such as corporations, financial institutions,
multinational organizations, sovereign entities, government agencies and
municipalities. For example, a futures, forward or option contract can be used
to protect the customers' assets or liabilities against price fluctuations.
A counterparty may default on any obligation to AIG, including a derivative
contract. Credit risk is a consequence of extending credit and/or carrying
trading and investment positions. Credit risk exists for a derivative contract
when that contract has an estimated positive fair value. To help manage this
risk, the credit departments of AIGFP and AIGTG operate within the guidelines of
the AIG Credit Risk Committee, which sets credit policy and limits for
counterparties and provides limits for derivative transactions with
counterparties having different credit ratings. In addition to credit ratings,
this committee takes into account other factors, including the industry and
country of the counterparty. Transactions which fall outside these
pre-established guidelines require the approval of the AIG Credit Risk
Committee. It is also AIG's policy to establish reserves for potential credit
impairment when necessary.
AIGFP and AIGTG determine the credit quality of each of their
counterparties taking into account credit ratings assigned by recognized
statistical rating organizations. If it is determined that a counterparty
requires credit enhancement, then one or more enhancement techniques will be
used. Examples of such enhancement techniques include letters of credit,
guarantees, collateral credit triggers and credit derivatives and margin
agreements.
A significant majority of AIGFP's transactions are contracted and
documented under ISDA Master Agreements that provide for legally enforceable
set-offs in the event of a default or in connection with the termination of a
transaction. Under such agreements, AIGFP is permitted to set-off its
receivables from a counterparty against AIGFP's payables to that same
counterparty arising out of all included transactions. Excluding regulated
exchange transactions, AIGTG, whenever possible, enters into netting agreements
with its counterparties which are similar in effect to those discussed above.
The following tables provide the notional and contractual amounts of
AIGFP's and AIGTG's derivative transactions at September 30, 1999 and December
31, 1998.
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, netting under ISDA Master Agreements and applying
collateral held.
The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at September 30, 1999 and December 31, 1998:
32
<PAGE> 34
(in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REMAINING LIFE
-------------------------------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate, currency and
equity/commodity swaps and swaptions:
Notional amount:
Interest rate swaps $ 79,471 $115,469 $66,720 $ 7,044 $268,704 $255,917
Currency swaps 26,878 27,552 21,183 3,458 79,071 73,894
Swaptions and equity swaps 4,565 20,191 10,869 2,855 38,480 15,685
- --------------------------------------------------------------------------------------------------------------------
Total $110,914 $163,212 $98,772 $13,357 $386,255 $345,496
- --------------------------------------------------------------------------------------------------------------------
Futures and forward contracts:
Exchange traded futures contracts
contractual amount $ 12,552 -- -- -- $ 12,552 $ 8,290
- --------------------------------------------------------------------------------------------------------------------
Over the counter forward contracts
contractual amount $ 31,801 $ 342 $ 50 -- $ 32,193 $ 42,898
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At September 30, 1999 and
December 31, 1998, 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 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Counterparty credit quality:
AAA $2,036 $ -- $2,036 $2,360
AA 2,378 65 2,443 3,688
A 1,457 68 1,525 1,883
BBB 624 -- 624 1,085
Below investment grade 88 -- 88 210
- ----------------------------------------------------------------------------------------------------------------
Total $6,583 $133 $6,716 $9,226
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1999 and December 31, 1998, 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 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-U.S. banks $2,410 $117 $2,527 $2,877
Insured municipalities 456 -- 456 784
U.S. industrials 806 -- 806 1,125
Governmental 320 7 327 603
Non-U.S. financial service companies 117 -- 117 272
Non-U.S. industrials 661 -- 661 1,145
Special purpose 434 -- 434 423
U.S. banks 173 9 182 911
U.S. financial service companies 714 -- 714 932
Supranationals 492 -- 492 154
- ----------------------------------------------------------------------------------------------------------------
Total $6,583 $133 $6,716 $9,226
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The following tables provide the contractual and notional amounts of
AIGTG's derivatives portfolio at September 30, 1999 and December 31, 1998. In
addition, the estimated positive fair values associated with the derivatives
portfolio are also provided and include a maturity profile for the
33
<PAGE> 35
September 30, 1999 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 September 30,
1999 and December 31, 1998. 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 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.
The following tables present AIGTG's derivatives portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative at
September 30, 1999 and December 31, 1998:
(in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REMAINING LIFE
------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contractual amount of futures, forwards and
options:
Exchange traded futures and options $ 12,026 $ 3,012 $ 45 $ -- $ 15,083 $ 11,836
- --------------------------------------------------------------------------------------------------------------------
Forwards $223,563 $17,588 $2,670 $ 3 $243,824 $282,157
- --------------------------------------------------------------------------------------------------------------------
Over the counter purchased options $ 48,273 $19,549 $4,300 $2,046 $ 74,168 $ 58,860
- --------------------------------------------------------------------------------------------------------------------
Over the counter sold options(a) $ 47,978 $19,221 $4,787 $1,910 $ 73,896 $ 58,861
- --------------------------------------------------------------------------------------------------------------------
Notional amount:
Interest rate swaps and forward rate
agreements $ 48,489 $ 9,152 $3,772 $ 726 $ 62,139 $110,791
Currency swaps 2,138 4,215 679 -- 7,032 7,512
Swaptions 740 6,106 1,668 198 8,712 5,766
- --------------------------------------------------------------------------------------------------------------------
Total $ 51,367 $19,473 $6,119 $ 924 $ 77,883 $124,069
- --------------------------------------------------------------------------------------------------------------------
Credit exposure:
Futures, forwards, swaptions and purchased
options contracts and interest rate and
currency swaps:
Gross replacement value $ 5,830 $ 1,670 $ 260 $ 34 $ 7,794 $ 9,791
Master netting arrangements (3,285) (915) (159) (11) (4,370) (5,610)
Collateral (85) (62) (11) -- (158) (359)
- --------------------------------------------------------------------------------------------------------------------
Net replacement value(b) $ 2,460 $ 693 $ 90 $ 23 $ 3,266 $ 3,822
- --------------------------------------------------------------------------------------------------------------------
</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.
34
<PAGE> 36
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At September 30, 1999 and
December 31, 1998, the counterparty credit quality and counterparty breakdown by
industry with respect to the net replacement value of AIGTG's derivatives
portfolio was as follows:
(in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET REPLACEMENT VALUE
-----------------------
1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Counterparty credit quality:
AAA $ 471 $ 462
AA 1,322 1,821
A 831 1,066
BBB 302 221
Below investment grade 75 26
Not externally rated, including exchange traded futures
and options* 265 226
- ---------------------------------------------------------------------------------------
Total $3,266 $3,822
- ---------------------------------------------------------------------------------------
Counterparty breakdown by industry:
Non-U.S. banks $1,006 $1,253
U.S. industrials 68 381
Governmental 233 184
Non-U.S. financial service companies 755 406
Non-U.S. industrials 191 150
U.S. banks 365 593
U.S. financial service companies 383 629
Exchanges* 265 226
- ---------------------------------------------------------------------------------------
Total $3,266 $3,822
- ---------------------------------------------------------------------------------------
</TABLE>
* Exchange traded futures and options are not deemed to have significant credit
exposure as the exchanges guarantee that every contract will be properly
settled on a daily basis.
Generally, AIG manages and operates its businesses in the currencies of the
local operating environment. Thus, exchange gains or losses occur when AIG's
foreign currency net investment is affected by changes in the foreign exchange
rates relative to the U.S. dollar from one reporting period to the next.
As an end user, AIG and its subsidiaries, including its insurance
subsidiaries, use derivatives to aid in managing AIG's foreign exchange
translation exposure. Derivatives may also be used to minimize certain exposures
with respect to AIG's debt financing and 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. 131 "Disclosure about
35
<PAGE> 37
Segments of an Enterprise and Related Information" (FASB 131). 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. AIG adopted all requirements of FASB 132 at December 31, 1998.
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" (FASB 133).
This statement requires AIG to recognize all derivatives in the consolidated
balance sheet measuring these derivatives at fair value. The recognition of the
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. This
statement was effective for the year commencing January 1, 1999 and has been
adopted herein. SOP 97-3 did not have a material impact on AIG's results of
operations, financial condition or liquidity.
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.
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.
36
<PAGE> 38
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. Internal non-IT
systems have been substantially remediated or replaced and subsequently tested
for compliance.
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. 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. 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.
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.
The costs associated with addressing the Year 2000 issue, including
developing and implementing the above stated plans and remediating affected
systems and equipment, have been expensed as incurred. AIG estimates that the
total costs of the Year 2000 remediation will approximate $200 million.
RECENT DEVELOPMENTS
The merger of SunAmerica Inc., a leading company in the retirement savings
and asset accumulation business, with and into AIG was effective January 1,
1999. The transaction was treated as a pooling of interests for accounting
purposes. AIG issued 0.855 shares in exchange for each share of SunAmerica Inc.
stock outstanding at the effective time of the merger for an aggregate issuance
of approximately 187.5 million shares.
37
<PAGE> 39
PART II -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See accompanying Exhibit Index.
(b) During the three months ended September 30, 1999, AIG filed a current
report on Form 8-K/A on August 11, 1999, amending AIG's current report
on Form 8-K, dated June 3, 1999, which reported the 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, on a pooling of interests basis. Also included were Exhibit
12, Computation of Ratios of Earnings to Fixed Charges, and Exhibit
23, Consent of Independent Accountants.
38
<PAGE> 40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN INTERNATIONAL GROUP, INC.
--------------------------------------
(Registrant)
/s/ HOWARD I. SMITH
--------------------------------------
Howard I. Smith
Executive Vice President,
Chief Financial Officer
and Comptroller
Dated: November 12, 1999
39
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession................................... None
4 Instruments defining the rights of security holders,
including indentures........................................ Not required to be
filed.
10 Material contracts.......................................... None
11 Statement re computation of per share earnings.............. Filed herewith.
12 Statement re computation of ratios.......................... Filed herewith.
15 Letter re unaudited interim financial information........... None
18 Letter re change in accounting principles................... None
19 Report furnished to security holders........................ None
22 Published report regarding matters submitted to vote of
security holders............................................ None
23 Consents of experts and counsel............................. None
24 Power of attorney........................................... None
27 Financial Data Schedule..................................... Provided herewith.
99 Additional exhibits......................................... None
</TABLE>
40
<PAGE> 1
EXHIBIT 11
AMERICAN INTERNATIONAL GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1999(a) 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Share information reflects an adjustment on a pro forma
basis for a common stock split in the form of a 25
percent common stock dividend paid July 30, 1999.
Numerator:
Basic:
Net income.............................................. $3,743 $3,162 $1,267 $1,076
Series E Mandatory Conversion Premium Dividend Preferred
Stock................................................. -- (9) -- (3)
------ ------ ------ ------
Net income (applicable to common stock)................. $3,743 $3,153 $1,267 $1,073
====== ====== ====== ======
Diluted:
Net income (applicable to common stock)................. $3,743 $3,162 $1,267 $1,076
====== ====== ====== ======
Denominator:
Basic:
Average outstanding shares used in the computation of
per share earnings:
Common stock.......................................... 1,665 1,632 1,662 1,632
Common stock in treasury.............................. (117) (111) (114) (111)
Common stock issued and outstanding but not vested to
participants under various employee stock plans.... -- (3) -- (2)
------ ------ ------ ------
Average outstanding shares -- basic..................... 1,548 1,518 1,548 1,519
------ ------ ------ ------
Diluted:
Average outstanding shares used in the computation of
per share earnings:
Common stock.......................................... 1,665 1,632 1,662 1,632
Common stock in treasury.............................. (117) (111) (114) (111)
Stock options and stock purchase plan (treasury stock
method)............................................... 7 6 7 6
SunAmerica employee stock plans......................... 12 9 13 8
Average number of shares issuable upon conversion of
Series E Mandatory Conversion Premium Dividend
Preferred Stock....................................... -- 14 -- 13
Average number of shares issuable upon conversion of
Premium Equity Redemption Cumulative Security Units... -- 5 -- 5
------ ------ ------ ------
Average outstanding shares -- diluted................... 1,567 1,555 1,568 1,553
------ ------ ------ ------
Net income per share:
Basic................................................. $ 2.42 $ 2.08 $ 0.82 $ 0.71
------ ------ ------ ------
Diluted............................................... $ 2.39 $ 2.03 $ 0.81 $ 0.69
------ ------ ------ ------
</TABLE>
- ---------------
(a) The number of common shares outstanding as of September 30, 1999 was 1,548.
The number of common shares that would have been outstanding as of September
30, 1999 assuming the exercise or issuance of all potentially dilutive
common shares was 1,567.
<PAGE> 1
EXHIBIT 12
AMERICAN INTERNATIONAL GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income before income taxes and minority interest........ $5,584 $4,621 $1,867 $1,624
Less -- Equity income of less than 50% owned persons.... 18 83 4 10
Add -- Dividends from less than 50% owned persons....... 10 19 3 2
------ ------ ------ ------
5,576 4,557 1,866 1,616
Add --
Fixed charges......................................... 1,686 1,571 577 500
Less --
Capitalized interest.................................. 43 47 13 15
------ ------ ------ ------
Income before income taxes, minority interest and fixed
charges............................................... $7,219 $6,081 $2,430 $2,101
====== ====== ====== ======
Fixed charges:
Interest costs........................................ $1,609 $1,505 $ 551 $ 478
Rent expense*......................................... 77 66 26 22
------ ------ ------ ------
Total fixed charges........................... $1,686 $1,571 $ 577 $ 500
====== ====== ====== ======
Ratio of earnings to fixed charges...................... 4.28 3.87 4.21 4.20
</TABLE>
- ---------------
* The proportion deemed representative of the interest factor.
The ratio shown is significantly affected as a result of the inclusion of
the fixed charges and operating results of AIG Financial Products Corp. and its
subsidiaries (AIGFP). AIGFP structures borrowings through guaranteed investment
agreements and engages in other complex financial transactions, including
interest rate and currency swaps. In the course of its business, AIGFP enters
into borrowings that are primarily used to purchase assets that yield rates
greater than the rates on the borrowings with the intent of earning a profit on
the spread and to finance the acquisition of securities utilized to hedge
certain transactions. The pro forma ratios of earnings to fixed charges, which
exclude the effects of the operating results of AIGFP, are 6.89 and 6.12 for the
third quarter and 7.00 and 6.00 for the first nine months of 1999 and 1998,
respectively. As AIGFP will continue to be a subsidiary, AIG expects that these
ratios will continue to be lower than they would be if the fixed charges and
operating results of AIGFP were not included therein.
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 76,023
<DEBT-CARRYING-VALUE> 12,236
<DEBT-MARKET-VALUE> 12,557
<EQUITIES> 6,286
<MORTGAGE> 7,256
<REAL-ESTATE> 1,589
<TOTAL-INVEST> 182,977
<CASH> 273
<RECOVER-REINSURE> 18,613
<DEFERRED-ACQUISITION> 9,111
<TOTAL-ASSETS> 259,786
<POLICY-LOSSES> 71,573
<UNEARNED-PREMIUMS> 11,019
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 45,009
<NOTES-PAYABLE> 23,728
0
0
<COMMON> 4,152
<OTHER-SE> 28,148
<TOTAL-LIABILITY-AND-EQUITY> 259,786
20,002
<INVESTMENT-INCOME> 6,418
<INVESTMENT-GAINS> 131
<OTHER-INCOME> (135)
<BENEFITS> 17,166
<UNDERWRITING-AMORTIZATION> 1,717
<UNDERWRITING-OTHER> 2,923
<INCOME-PRETAX> 5,584<F1>
<INCOME-TAX> 1,640
<INCOME-CONTINUING> 3,743
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,743
<EPS-BASIC> 2.42<F2>
<EPS-DILUTED> 2.39<F2>
<RESERVE-OPEN> 24,619
<PROVISION-CURRENT> 8,543
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 3,677
<PAYMENTS-PRIOR> 4,790
<RESERVE-CLOSE> 24,695
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Amount represents income before income taxes and minority interest.
<F2>Earnings per share information reflects a common stock split in the form of
a 25 percent common stock dividend paid July 30, 1999. Prior period financial
data schedules have not been restated for this stock split.
</FN>
</TABLE>
