<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
FOR QUARTER ENDED MARCH 31, 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 March 31, 1999: 1,238,849,022.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Investments and cash:
Fixed maturities:
Bonds available for sale, at market value (amortized
cost: 1999 -- $70,491; 1998 -- $63,873)............. $ 71,880 $ 66,317
Bonds held to maturity, at amortized cost (market
value: 1999 -- $13,353; 1998 -- $13,633)............ 12,550 12,658
Bonds trading securities, at market value (cost:
1999 -- $996; 1998 -- $990)......................... 1,017 1,005
Equity securities:
Common stocks (cost: 1999 -- $5,299;
1998 -- $5,465)..................................... 5,151 5,648
Non-redeemable preferred stocks (cost: 1999 -- $594;
1998 -- $628)....................................... 595 620
Mortgage loans on real estate, net..................... 6,756 6,702
Policy Loans........................................... 2,660 2,626
Collateral and guaranteed loans, net................... 2,276 2,413
Financial services and asset management assets:
Flight equipment primarily under operating leases,
net of accumulated depreciation (1999 -- $2,174;
1998 -- $2,048)..................................... 17,199 16,330
Securities available for sale, at market value (cost:
1999 -- $10,754; 1998 -- $10,667)................... 10,788 10,674
Trading securities, at market value.................. 6,643 5,668
Spot commodities, at market value.................... 263 476
Unrealized gain on interest rate and currency swaps,
options and forward transactions.................... 8,119 9,881
Trading assets....................................... 4,974 6,229
Securities purchased under agreements to resell,
at contract value................................. 7,923 4,838
Other invested assets.................................. 9,901 8,692
Short-term investments, at cost (approximates market
value)................................................ 6,621 6,739
Cash................................................... 246 303
-------- --------
Total investments and cash...................... 175,562 167,819
Investment income due and accrued......................... 1,900 1,869
Premiums and insurance balances receivable -- net......... 12,522 11,679
Reinsurance assets........................................ 18,078 17,744
Deferred policy acquisition costs......................... 8,427 8,081
Investments in partially-owned companies.................. 363 418
Real estate and other fixed assets, net of accumulated
depreciation (1999 -- $1,822; 1998 -- $1,774).......... 2,698 2,738
Separate and variable accounts............................ 22,812 18,662
Other assets.............................................. 4,708 4,666
-------- --------
Total assets.................................... $247,070 $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>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES:
Reserve for losses and loss expenses...................... $ 38,459 $ 38,310
Reserve for unearned premiums............................. 10,246 10,009
Future policy benefits for life and accident and health
insurance contracts.................................... 29,806 29,571
Policyholders' contract deposits.......................... 40,197 33,924
Other policyholders' funds................................ 2,753 2,720
Reserve for commissions, expenses and taxes............... 2,616 2,225
Insurance balances payable................................ 1,873 2,283
Funds held by companies under reinsurance treaties........ 818 837
Income taxes payable:
Current................................................ 494 224
Deferred............................................... 896 1,247
Financial services liabilities:
Borrowings under obligations of guaranteed investment
agreements............................................ 9,036 9,188
Securities sold under agreements to repurchase, at
contract value........................................ 3,761 4,473
Trading liabilities.................................... 4,547 4,664
Securities and spot commodities sold but not yet
purchased, at market value............................ 5,960 4,457
Unrealized loss on interest rate and currency swaps,
options and forward transactions...................... 7,733 7,055
Trust deposits and deposits due to banks and other
depositors............................................ 2,064 1,682
Commercial paper....................................... 3,392 3,204
Notes, bonds and loans payable......................... 15,693 15,249
Commercial paper.......................................... 1,229 1,432
Notes, bonds, loans and mortgages payable................. 2,735 2,837
Separate and variable accounts............................ 22,812 18,662
Minority interests........................................ 1,425 1,590
Other liabilities......................................... 6,663 6,815
-------- --------
Total liabilities................................. 215,208 202,658
-------- --------
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 -- 1,333,645,564;
1998 -- 1,313,510,800.................................. 3,334 3,284
Additional paid-in capital................................ 2,008 1,319
Retained earnings......................................... 28,235 27,110
Accumulated other comprehensive loss...................... (839) (10)
Treasury stock, at cost; 1999 -- 94,796,542;
1998 -- 96,373,983 shares of common stock.............. (1,771) (1,828)
-------- --------
Total capital funds............................... 30,967 30,123
-------- --------
Total liabilities and capital funds............... $247,070 $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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- -------
(UNAUDITED)
<S> <C> <C>
General insurance operations:
Net premiums written...................................... $4,054 $3,381
Change in unearned premium reserve........................ (279) (143)
------ ------
Net premiums earned....................................... 3,775 3,238
Net investment income..................................... 620 501
Realized capital gains.................................... 78 71
------ ------
4,473 3,810
------ ------
Losses and loss expenses incurred......................... 2,843 2,465
Underwriting expenses..................................... 739 649
------ ------
3,582 3,114
------ ------
Operating income.......................................... 891 696
------ ------
Life insurance operations:
Premium income............................................ 2,873 2,389
Net investment income..................................... 1,502 1,227
Realized capital gains (losses)........................... (21) --
------ ------
4,354 3,616
------ ------
Death and other benefits.................................. 1,179 974
Increase in future policy benefits........................ 1,751 1,435
Acquisition and insurance expenses........................ 774 648
------ ------
3,704 3,057
------ ------
Operating income.......................................... 650 559
------ ------
Financial services operating income......................... 251 171
Asset management operating income........................... 58 46
Equity in income of minority-owned insurance operations..... -- 26
Other realized capital losses............................... (7) (12)
Other income (deductions) -- net............................ (42) (29)
------ ------
Income before income taxes and minority interest............ 1,801 1,457
------ ------
Income taxes -- Current..................................... 378 282
-- Deferred.................................. 144 136
------ ------
522 418
------ ------
Income before minority interest............................. 1,279 1,039
------ ------
Minority interest........................................... (80) (29)
------ ------
Net income.................................................. $1,199 $1,010
====== ======
Earnings per common share:
Basic..................................................... $ 0.97 $ 0.83
====== ======
Diluted................................................... $ 0.96 $ 0.81
====== ======
Cash dividends per common share............................. $0.056 $0.050
====== ======
Average shares outstanding:
Basic..................................................... 1,238 1,214
------ ------
Diluted................................................... 1,255 1,244
------ ------
</TABLE>
See Accompanying Notes to Financial Statements.
3
<PAGE> 5
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- -------
(UNAUDITED)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income.................................................. $ 1,199 $ 1,010
======= =======
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.................... 829 1,009
Premiums and insurance balances receivable and (1,253) (353)
payable -- net........................................
Reinsurance assets..................................... (334) (96)
Deferred policy acquisition costs...................... (346) (109)
Investment income due and accrued...................... (31) (56)
Funds held under reinsurance treaties.................. (19) 14
Other policyholders' funds............................. 33 20
Current and deferred income taxes -- net............... 414 111
Reserve for commissions, expenses and taxes............ 391 179
Other assets and liabilities -- net.................... (271) (251)
Trading assets and liabilities -- net.................. 1,138 288
Trading securities, at market value.................... (975) (831)
Spot commodities, at market value...................... 213 (6)
Net unrealized gain on interest rate and currency 2,440 (247)
swaps, options and forward transactions...............
Securities purchased under agreements to resell........ (3,085) (1,802)
Securities sold under agreements to repurchase......... (712) 1,046
Securities and spot commodities sold but not yet 1,503 1,007
purchased, at market value............................
Realized capital gains.................................... (50) (59)
Equity in income of partially-owned companies and other (83) (77)
invested assets........................................
Depreciation expenses, principally flight equipment....... 249 213
Change in cumulative translation adjustments.............. (244) (94)
Other -- net.............................................. (57) 62
------- -------
Total Adjustments......................................... (250) (32)
------- -------
Net cash provided by operating activities................... $ 949 $ 978
======= =======
</TABLE>
See Accompanying Notes to Financial Statements.
4
<PAGE> 6
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
-------- ------------
(UNAUDITED)
<S> <C> <C>
Cash Flows From Investing Activities:
Cost of fixed maturities, at amortized cost matured or
redeemed............................................... $ 228 $ 329
Cost of bonds, at market sold............................. 12,816 6,723
Cost of bonds, at market matured or redeemed.............. 2,783 2,120
Cost of equity securities sold............................ 1,093 691
Realized capital gains.................................... 50 59
Purchases of fixed maturities............................. (22,242) (9,397)
Purchases of equity securities............................ (901) (655)
Mortgage, policy and collateral loans granted............. (1,334) (493)
Repayments of mortgage, policy and collateral loans....... 1,382 413
Sales of securities available for sale.................... 1,600 1,669
Maturities of securities available for sale............... 219 1,356
Purchases of securities available for sale................ (1,893) (1,640)
Sales of flight equipment................................. 53 278
Purchases of flight equipment............................. (1,079) (1,037)
Net additions to real estate and other fixed assets....... (51) (64)
Sales or distributions of other invested assets........... 898 665
Investments in other invested assets...................... (2,101) (1,795)
Change in short-term investments.......................... 118 (352)
Investments in partially-owned companies.................. 47 (7)
-------- -------
Net cash used in investing activities....................... (8,314) (1,137)
-------- -------
Cash Flows From Financing Activities:
Change in policyholders' contract deposits................ 6,273 62
Change in trust deposits and deposits due to banks and
other depositors....................................... 383 (182)
Change in commercial paper................................ (15) 562
Proceeds from notes, bonds, loans and mortgages payable... 2,870 1,323
Repayments on notes, bonds, loans and mortgages payable... (2,531) (1,668)
Proceeds from guaranteed investment agreements............ 290 1,200
Maturities of guaranteed investment agreements............ (442) (996)
Proceeds from common stock issued......................... 129 12
Cash dividends to shareholders............................ (69) (75)
Acquisition of treasury stock............................. (26) (23)
Proceeds from redemption of Premium Equity Redemption
Cumulative Security Units.............................. 431 --
Other -- net.............................................. 15 2
-------- -------
Net cash provided by financing activities................... 7,308 217
-------- -------
Change in cash.............................................. (57) 58
Cash at beginning of period................................. 303 87
-------- -------
Cash at end of period....................................... $ 246 $ 145
======== =======
</TABLE>
See Accompanying Notes to Financial Statements.
5
<PAGE> 7
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1999 1998
------ ------
(UNAUDITED)
<S> <C> <C>
Net income.................................................. $1,199 $1,010
Other comprehensive income:
Unrealized appreciation (depreciation) of
investments -- net of reclassification adjustments..... (908) 400
Deferred income tax benefit (expense) on changes....... 325 (134)
Foreign currency translation adjustments.................. (243) (93)
Applicable income tax (expense) benefit on changes..... (3) 11
------ ------
Other comprehensive (loss) income........................... (829) 184
------ ------
Comprehensive income........................................ $ 370 $1,194
====== ======
</TABLE>
See Accompanying Notes to Financial Statements.
6
<PAGE> 8
AMERICAN INTERNATIONAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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.
Commencing as of the merger date, SunAmerica's prospective operations are
presented on a calendar year ending December 31. Prior to the merger,
SunAmerica reported its operations on a fiscal year ending September 30. For
the period October 1, 1998 through December 31, 1998, SunAmerica's revenues
were $318 million, operating income was $52 million and net income was $29
million; dividends distributed were $33 million. Thus, the net change in
SunAmerica's retained earnings was a decrease of $4 million. The change in
accumulated other comprehensive income was a decline of $94 million.
The following is a reconciliation of the individual company results to the
combined results for the three month period ended March 31, 1998: (in
millions)
<TABLE>
<CAPTION>
AIG SUNAMERICA TOTAL
------ ---------- ------
<S> <C> <C> <C>
Revenues............................................. $7,689 $588 $8,277
Net income........................................... $ 886 $124 $1,010
</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 Form 10-K of SunAmerica Inc. for the year ended September 30, 1998.
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 50 percent common stock dividend paid July 31, 1998.
The quarterly dividend rate per common share, commencing with the dividend
paid September 18, 1998 is $0.056.
d) Cash flow information for the three month periods ended March 31, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
----- -----
(i) (IN MILLIONS)
<S> <C> <C>
Income taxes paid........................................... $242 $313
Interest paid............................................... $474 $392
</TABLE>
(ii) On December 31, 1998, SunAmerica's life operations acquired through a
reinsurance transaction a block of financial and investment type life
products which substantially increased policyholders' contract deposits
and invested assets.
7
<PAGE> 9
e) Segment Information:
The following table summarizes the operations by major operating segment for
the three month periods ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
OPERATING SEGMENTS
------------------
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
Revenues(1):
General Insurance......................................... $4,473 $3,810
Life Insurance............................................ 4,354 3,616
Financial Services........................................ 789 674
Asset Management.......................................... 216 163
Other..................................................... (7) 14
------ ------
Total................................................... $9,825 $8,277
====== ======
Operating income:
General Insurance......................................... $ 891 $ 696
Life Insurance............................................ 650 559
Financial Services........................................ 251 171
Asset Management.......................................... 58 46
Other..................................................... (49) (15)
------ ------
Total................................................... $1,801 $1,457
====== ======
</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).
The following table summarizes AIG's general insurance operations by major
reporting group for the three month periods ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
GENERAL INSURANCE
------------------
1999 1998
------- -------
(IN MILLIONS)
<S> <C> <C>
Revenues:
Domestic Brokerage Group.................................. $2,426 $2,334
Foreign General........................................... 1,430 1,148
Other..................................................... 617 328
------ ------
Total................................................... $4,473 $3,810
====== ======
Operating income before realized capital gains(1):
Domestic Brokerage Group.................................. $ 430 $ 335
Foreign General........................................... 252 209
Other..................................................... 131 81
------ ------
Total................................................... $ 813 $ 625
====== ======
</TABLE>
-------------------
(1) Realized capital gains are not deemed to be an integral part of
AIG's general insurance operations' internal reporting groups.
The following table summarizes AIG's life insurance operations by major
reporting group for the three month periods ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
LIFE INSURANCE
----------------
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
Revenues:
American International Assurance Company Ltd. and Nan Shan
Life Insurance Company, Ltd. ........................... $1,925 $1,636
American Life Insurance Company........................... 1,275 999
Domestic Life............................................. 1,052 897
Other..................................................... 102 84
------ ------
Total................................................... $4,354 $3,616
====== ======
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
LIFE INSURANCE
----------------
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
Operating income before realized capital gains(1):
American International Assurance Company Ltd. and Nan Shan
Life Insurance Company, Ltd. ........................... $ 263 $ 219
American Life Insurance Company........................... 165 143
Domestic Life............................................. 229 182
Other..................................................... 14 15
------ ------
Total................................................... $ 671 $ 559
====== ======
</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 three month periods ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
FINANCIAL
SERVICES
--------------
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Revenues:
International Lease Finance Corporation .................. $512 $461
AIG Financial Products Corp. ............................. 168 116
AIG Trading Group Inc. ................................... 64 77
Other..................................................... 45 20
---- ----
Total................................................... $789 $674
==== ====
Operating income:
International Lease Finance Corporation .................. $133 $104
AIG Financial Products Corp. ............................. 101 68
AIG Trading Group Inc. ................................... 39 22
Other..................................................... (22) (23)
---- ----
Total................................................... $251 $171
==== ====
</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 adjustment with respect to
available for sale securities was $50 million.
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,
2000.
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
companies 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 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 three month periods ending March 31, 1999
and 1998 were as follows:
(in millions)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------
<S> <C> <C>
Net premiums written:
Domestic $2,672 $2,267
Foreign 1,382 1,114
- -------------------------------------------------------
Total $4,054 $3,381
- -------------------------------------------------------
Net premiums earned:
Domestic $2,474 $2,166
Foreign 1,301 1,072
- -------------------------------------------------------
Total $3,775 $3,238
- -------------------------------------------------------
Adjusted underwriting profit:
Domestic $ 55 $ 9
Foreign 138 115
- -------------------------------------------------------
Total $ 193 $ 124
- -------------------------------------------------------
Net investment income:
Domestic $ 506 $ 407
Foreign 114 94
- -------------------------------------------------------
Total $ 620 $ 501
- -------------------------------------------------------
Operating income before realized
capital gains:
Domestic $ 561 $ 416
Foreign 252 209
- -------------------------------------------------------
Total 813 625
Realized capital gains 78 71
- -------------------------------------------------------
Operating income $ 891 $ 696
- -------------------------------------------------------
</TABLE>
During the first three months of 1999, the net premiums written and net
premiums earned in AIG's general insurance operations increased 19.9 percent and
16.6 percent, respectively, from those of 1998.
The commercial insurance market remains highly competitive and excessively
capitalized. DBG has been able to sustain growth in various specialty markets.
However, DBG has also non-renewed certain of its policies where underwriting and
pricing standards could not be achieved.
Domestic growth was primarily achieved through the growth in the personal
auto insurance segment of Personal Lines.
Foreign general insurance operations produced 34.1 percent of the general
insurance net premiums written in the first three months of 1999 and 33.0
percent in the same period of 1998. The Far East operations were the major
source of this growth.
Net premiums written are initially deferred and earned based upon the terms
of the underlying
10
<PAGE> 12
policies. The net unearned premium reserve constitutes deferred revenues which
are generally earned ratably over the policy period. Thus, the net unearned
premium reserve is not fully recognized as net premiums earned until the end of
the policy period.
The statutory general insurance ratios were as follows:
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------
<S> <C> <C>
Consolidated:
Loss Ratio 75.30 76.12
Expense Ratio 19.98 19.95
- -------------------------------------------------------
Combined Ratio 95.28 96.07
- -------------------------------------------------------
</TABLE>
Adjusted underwriting profit (operating income less net investment income
and realized capital gains) represents statutory underwriting profit adjusted
primarily for changes in deferred policy acquisition costs. The adjusted
underwriting profits were $193 million in the first three months of 1999 and
$124 million in the same period of 1998.
There were no catastrophe losses in the first three months of 1999 or the
first three months of 1998.
AIG's ability to maintain its combined ratio below 100 is primarily
attributable to the profitability of AIG's foreign general insurance operations
and AIG's emphasis on maintaining its disciplined underwriting, especially in
the domestic specialty markets. In addition, AIG does not seek net premium
growth where rates do not adequately reflect its assessment of exposures.
General insurance net investment income in the first three months of 1999
increased 23.7 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. 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 $78 million in the first
three months of 1999 and $71 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 three months of 1999
increased 28.0 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 49.5 percent in 1999 compared to 47.8 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 and approval of both domestic and foreign companies participating in
its reinsurance programs. AIG insures risks in over 100 countries and its
reinsurance programs must be coordinated in order to provide AIG the level of
reinsurance protection that AIG desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.
AIG's general reinsurance assets amounted to $17.95 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at March
31, 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 March 31, 1999, these distribution
percentages have not significantly changed.
AIG's provision 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).
11
<PAGE> 13
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 March 31, 1999, the consolidated general reinsurance assets of $17.95
billion include reinsurance recoverables for paid losses and loss expenses of
$2.0 billion and $13.74 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
March 31, 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 March 31, 1999, general insurance reserves for losses and loss expenses
(loss reserves) amounted to $38.46 billion. These loss reserves represent the
accumulation of estimates of ultimate losses, including IBNR, and loss expenses
and minor amounts of discounting related to certain workers' compensation
claims. At March 31, 1999, general insurance net loss reserves increased $96
million to $24.71 billion. These loss reserves represent loss reserves reduced
by reinsurance recoverable, net of an allowance for unrecoverable reinsurance.
The methods used to determine such estimates and to establish the resulting
reserves are continually reviewed and updated. Any adjustments resulting
therefrom are reflected in operating income currently. It is management's belief
that the general insurance net loss reserves are adequate to cover all general
insurance net losses and loss expenses as at March 31, 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.
In a very broad sense, the general loss reserves can be categorized into
two distinct groups: one group being long tail casualty lines of business; the
other being short tail lines of business consisting principally of property
lines and including certain classes of casualty lines.
Estimation of ultimate net losses and loss expenses (net losses) for long
tail casualty lines of business is a complex process and depends on a number of
factors, including the line and volume of the business involved. In the more
recent accident years of long tail casualty lines there is limited statistical
credibility in reported net losses. That is, a relatively low proportion of net
losses would be reported claims and expenses and an even smaller proportion
would be net losses paid. A relatively high proportion of net losses would
therefore be IBNR.
A variety of actuarial methods and assumptions are normally employed to
estimate net losses for long tail casualty lines. These methods ordinarily
involve the use of loss trend factors intended to reflect the estimated annual
growth in loss costs from one accident year to the next. For the majority of
long tail casualty lines, net loss trend factors approximated six percent. Loss
trend factors reflect many items including changes in claims handling, exposure
and policy forms and current and future estimates of monetary inflation and
social inflation. Thus, many factors are implicitly considered in estimating the
year to year growth in loss costs. Therefore, AIG's carried net long tail loss
reserves are judgmentally set as well as tested for reasonableness using the
most appropriate loss trend factors for each class of business. In the
evaluation of AIG's net loss reserves, loss trend factors vary slightly,
depending on the particular 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 cover-
12
<PAGE> 14
age remained proportional to the actual value of the property, the growth in
property's exposure to fire loss can be approximated by the amount of insurance
purchased.
For other property and short tail casualty lines, the loss trend is
implicitly assumed to grow at the rate that reported net losses grow from one
year to the next. The concerns noted above for longer tail casualty lines with
respect to the limited statistical credibility of reported net losses generally
do not apply to shorter tail lines.
AIG continues to receive claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump sites (hereinafter referred to
collectively as environmental claims) and indemnity claims asserting injuries
from asbestos. The vast majority of these asbestos and environmental claims
emanate from policies written in 1984 and prior years. AIG has established a
specialized claims unit which investigates and adjusts all such asbestos and
environmental claims. Commencing in 1985, standard policies contained an
absolute exclusion for pollution related damage. However, AIG currently
underwrites environmental impairment liability insurance on a claims made basis
and excluded such claims from the analyses included herein.
Estimation of asbestos and environmental claims loss reserves is a
difficult process. These asbestos and environmental claims cannot be estimated
by conventional reserving techniques as previously described. Quantitative
techniques frequently have to be supplemented by subjective considerations
including managerial judgment. Significant factors which affect the trends which
influence the development of asbestos and environmental claims are the
inconsistent court resolutions and judicial interpretations which broaden the
intent of the policies and scope of coverage. The current case law can be
characterized as still evolving and there is little likelihood that any firm
direction will develop in the near future. Additionally, the exposure for
cleanup costs of hazardous waste dump sites involves issues such as allocation
of responsibility among potentially responsible parties and the government's
refusal to release parties. The cleanup cost exposure may significantly change
if the Congressional reauthorization of Superfund dramatically changes, thereby
reducing or increasing litigation and cleanup costs. Additionally, proposed
legislation, if passed in current form, would be expected to reduce ultimate
asbestos exposure.
In the interim, AIG and other industry members have and will continue to
litigate the broadening judicial interpretation of the policy coverage and the
liability issues. At the current time, it is not possible to determine the
future development of asbestos and environmental claims with the same degree of
reliability as is the case for other types of claims. Such development will be
affected by the extent to which courts continue to expand the intent of the
policies and the scope of the coverage, as they have in the past, as well as by
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
March 31, 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
13
<PAGE> 15
environmental claims separately and combined at March 31, 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 170 22 80 6
Losses and loss expenses paid (62) (12) (74) (8)
- ------------------------------------------------------------
Reserve for losses and loss
expenses at end of period $1,072 $269 $ 848 $193
- ------------------------------------------------------------
Environmental:
Reserve for losses and loss
expenses at beginning of
year $1,536 $604 $1,467 $593
Losses and loss expenses
incurred 10 7 89 41
Losses and loss expenses paid (43) (17) (68) (24)
- ------------------------------------------------------------
Reserve for losses and loss
expenses at end of period $1,503 $594 $1,488 $610
- ------------------------------------------------------------
Combined:
Reserve for losses and loss
expenses at beginning of
year $2,500 $863 $2,309 $788
Losses and loss expenses
incurred 180 29 169 47
Losses and loss expenses paid (105) (29) (142) (32)
- ------------------------------------------------------------
Reserve for losses and loss
expenses at end of period $2,575 $863 $2,336 $803
- ------------------------------------------------------------
</TABLE>
The gross and net IBNR included in the aforementioned reserve for losses
and loss expenses at March 31, 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 $966 $346 $ 979 $359
- -------------------------------------------------------------
</TABLE>
A summary of asbestos and environmental claims count activity for the three
month periods ended March 31, 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 426 778 1,204 249 880 1,129
Settled (27) (135) (162) (18) (154) (172)
Dismissed or otherwise resolved (290) (1,447) (1,737) (179) (1,316) (1,495)
- ---------------------------------------------------------------------------------------------------------------------
Claims at end of period 6,497 15,756 22,253 6,202 16,832 23,034
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The average cost per claim settled, dismissed or otherwise resolved for the
three month periods ended March 31, 1999 and 1998 was as follows:
- ------------------------------------------------------
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
GROSS Net Gross Net
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asbestos $195,000 $39,400 $373,600 $41,600
Environmental 27,100 10,600 46,700 16,300
Combined 55,100 15,400 85,400 19,300
- -------------------------------------------------------------------
</TABLE>
An insurance rating agency has developed a survival ratio to measure the
number of years it would take a company to exhaust both its asbestos and
environmental reserves for losses and loss expenses based on that company's
current level of asbestos and environmental claims payments. The higher the
ratio, the more years the reserves for losses and loss expenses cover these
claims payments. These ratios are computed based on the ending reserves for
losses and loss expenses over the respective claims settlements during the
fiscal year. Such payments include indemnity payments and legal and loss
adjustment payments. It should be noted, however, that this is an extremely
simplistic approach to measuring asbestos and environmental reserve levels. Many
factors, such as aggressive settlement procedures, mix of business and level of
coverage provided, have significant impact on the amount of asbestos and
environmental losses and
14
<PAGE> 16
loss expense reserves, ultimate payments thereof and the resultant ratio.
The developed survival ratios include both involuntary and voluntary
indemnity payments. Involuntary payments include court judgments, court orders,
covered claims with no coverage defenses, state mandated cleanup costs, claims
where AIG's coverage defenses are minimal, and settlements made less than six
months before the first trial setting. Also, AIG considers all legal and loss
adjustment payments as involuntary.
AIG believes voluntary indemnity payments should be excluded from the
survival ratio. The special asbestos and environmental claims unit actively
manages AIG's asbestos and environmental claims and proactively pursues early
settlement of environmental claims for all known and unknown sites. As a result,
AIG reduces its exposure to future environmental loss contingencies.
AIG's survival ratios for involuntary asbestos and environmental claims,
separately and combined, were based upon a three year average payment. These
ratios at March 31, 1999 and 1998 were as follows:
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
GROSS Net Gross Net
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Involuntary survival
ratios:
Asbestos 2.3 3.9 2.2 3.8
Environmental 13.0 13.1 15.8 16.4
Combined 4.9 8.2 5.3 9.7
- ---------------------------------------------------------
</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 was $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, guaranteed investment contracts, universal life and pensions.
AIG's three principal overseas life operations are American Life Insurance
Company (ALICO), American International Assurance Company, Limited together with
American International Assurance Company (Bermuda) Limited (AIA) and Nan Shan
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). Both of these operations sell primarily financial and investment
type products. (See also Note (e) of Notes to Financial Statements.)
15
<PAGE> 17
Life insurance operations for the three month periods ending March 31, 1999
and 1998 were as follows:
(in millions)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------
<S> <C> <C>
Premium income:
Domestic $ 223 $ 199
Foreign 2,650 2,190
- --------------------------------------------------------
Total $ 2,873 $ 2,389
- --------------------------------------------------------
Net investment income:
Domestic $ 843 $ 697
Foreign 659 530
- --------------------------------------------------------
Total $ 1,502 $ 1,227
- --------------------------------------------------------
Operating income before realized
capital gains (losses):
Domestic $ 229 $ 182
Foreign 442 377
- --------------------------------------------------------
Total 671 559
Realized capital gains (losses) (21) --
- --------------------------------------------------------
Operating income $ 650 $ 559
- --------------------------------------------------------
Life insurance in-force:*
Domestic $100,579 $ 65,705
Foreign 440,026 437,944
- --------------------------------------------------------
Total $540,605 $503,649
- --------------------------------------------------------
</TABLE>
* Amounts presented were as at March 31, 1999 and December 31, 1998,
respectively.
AIG's life premium income during the first three months of 1999 represented
a 20.3 percent increase from the same period in 1998. Foreign life operations
produced 92.2 percent and 91.7 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 22.4 percent during the
first three 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 $21 million in 1999, compared
to realized capital gains of $138 thousand in 1998. These realized gains and
losses resulted from the ongoing management of the life insurance investment
portfolios within the overall objectives of the life insurance operations and
arose primarily from the disposition of equity securities and available for sale
fixed maturities as well as redemptions of fixed maturities.
Life insurance operating income during the first three months of 1999
increased 16.3 percent to $650 million. Excluding realized capital gains and
losses from life insurance operating income, the percent increase would be 20.2.
The contribution of life insurance operating income to income before income
taxes and minority interest amounted to 36.1 percent during the first three
months of 1999 compared to 38.4 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.
Underwriting risk represents the exposure to loss resulting from the actual
policy experience adversely emerging in comparison to the assumptions made in
the product pricing associated with mortality, morbidity, termination and
expenses. AIG's life companies limit their maximum underwriting exposure on
traditional life insurance of a single life to approximately one million dollars
of coverage by using yearly renewable term reinsurance. The life insurance
operations have not entered into assumption reinsurance transactions or surplus
relief transactions during the two year period ended March 31, 1999.
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
16
<PAGE> 18
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 structures 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.)
Financial services operations for the three month periods ending March 31,
1999 and 1998 were as follows:
(in millions)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------
<S> <C> <C>
Revenues:
International Lease Finance Corporation $512 $461
AIG Financial Products Corp.* 168 116
AIG Trading Group Inc.* 64 77
Other 45 20
- -------------------------------------------------------
Total $789 $674
- -------------------------------------------------------
Operating income:
International Lease Finance Corporation $133 $104
AIG Financial Products Corp. 101 68
AIG Trading Group Inc. 39 22
Other, including intercompany adjustments (22) (23)
- -------------------------------------------------------
Total $251 $171
- -------------------------------------------------------
</TABLE>
* Represents net trading revenues.
Financial services operating income increased 46.5 percent in the first
three months of 1999 over 1998.
Financial services operating income represented 13.9 percent of AIG's
income before income taxes and minority interest in the first three months of
1999. This compares to 11.7 percent in the same period of 1998.
17
<PAGE> 19
ILFC generates its revenues primarily from leasing new and used commercial
jet aircraft to domestic and foreign airlines. Revenues also result from the
remarketing of commercial jets for its own account, for airlines and for
financial institutions. Revenues in the first three months of 1999 increased
11.1 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
three months of 1999, operating income increased 28.7 percent from 1998. The
composite borrowing rates at the end of the first three months of 1999 and 1998
were 5.90 percent and 6.29 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 March 31,
1999, there were 343 aircraft subject to operating leases and there were four
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 three months of 1999 increased 44.8 percent
from the same period of 1998. During the first three months of 1999, operating
income increased 48.5 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 three months of 1999 decreased
16.8 percent from the same period of 1998. During the first three months of
1999, operating income increased 76.1 percent from the same period of 1998. 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, trust
services and investment asset management. Such products and services are offered
to individuals and institutions both domestically and internationally.
AIG's three principal asset management operations are SunAmerica's asset
management operations (SAMCO), AIG Global Investment Group, Inc. (Global
Investment) and AIG Capital Partners, Inc. (Cap Partners). SAMCO develops and
sells variable annuities and other investment products, sells and manages mutual
funds and provides financial and trust services. Global Investment manages
invested assets of institutions, including insurance companies and pension
funds, and provides custodial and other trust services. Cap Partners organizes,
and manages the invested assets of institutional investment funds and may invest
in such funds. Each of these subsidiary operations receive fees for investment
products and services provided.
Asset management operations for the three month periods ending March 31,
1999 and 1998 were as follows:
(in millions)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------
<S> <C> <C>
Revenues $216 $163
Operating income $ 58 $ 46
- -------------------------------------------------------
</TABLE>
18
<PAGE> 20
These increases were primarily attributable to management of the variable
annuity business by SAMCO.
Asset management operating income in the first three months of 1999
increased 25.0 percent when compared to the same period of 1998.
Asset management operating income represented 3.2 percent of AIG's income
before income taxes and minority interest in both the first three months of 1999
and 1998.
OTHER OPERATIONS
In the first three months of 1998, AIG's equity in income of minority-owned
insurance operations was $26 million. In the first three months of 1998, the
equity interest in insurance companies represented 1.8 percent of income before
income taxes and minority interest. The decrease in income of minority-owned
insurance operations from 1998 to 1999, resulted primarily from 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 $7 million and $12 million in the
first three 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 three months of 1999, net deductions amounted to $42
million. In the same period of 1998, net deductions amounted to $29 million.
(See also the discussion under "Recent Developments" herein.)
Income before income taxes and minority interest amounted to $1.80 billion
in the first three months of 1999 and $1.46 billion in the same period of 1998.
In the first three months of 1999, AIG recorded a provision for income
taxes of $522 million compared to the provision of $418 million in the same
period of 1998. These provisions represent effective tax rates of 29.0 percent
in the first three 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
$80 million and $29 million in the first three 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 amount to $1.20 billion in the first three months of 1999 and
$1.01 billion in the same period of 1998. The increases in net income over the
periods resulted from those factors described above.
CAPITAL RESOURCES
At March 31, 1999, AIG had total capital funds of $30.97 billion and total
borrowings of $32.09 billion. At that date, $28.50 billion of such borrowings
were either not guaranteed by AIG or were matched borrowings under obligations
of guaranteed investment agreements (GIAs) or matched notes and bonds payable.
Total borrowings and borrowings not guaranteed or matched at March 31, 1999
and December 31, 1998 were as follows:
(in millions)
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------
<S> <C> <C>
GIAs -- AIGFP $ 9,036 $ 9,188
- --------------------------------------------------------
Commercial Paper:
AIG Funding 240 637
ILFC(a) 3,392 3,204
AICCO 908 727
Universal Finance Company (UFC)(a) 81 68
- --------------------------------------------------------
Total 4,621 4,636
- --------------------------------------------------------
Medium Term Notes:
ILFC(a) 3,704 3,348
AIG 269 239
SunAmerica 211 228
- --------------------------------------------------------
Total 4,184 3,815
- --------------------------------------------------------
Notes and Bonds Payable:
ILFC(a) 3,937 3,825
AIGFP 7,257 7,265
AIG: Lire bonds 159 159
Zero coupon notes 105 102
SunAmerica 863 989
- --------------------------------------------------------
Total 12,321 12,340
- --------------------------------------------------------
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------
<S> <C> <C>
Loans and Mortgages Payable:
ILFC(a)(b) 794 811
SPC Credit, Ltd. (SPC)(a) 564 532
AIG Consumer Finance(a) 252 254
AIG 313 334
- --------------------------------------------------------
Total 1,923 1,931
- --------------------------------------------------------
Total Borrowings 32,085 31,910
- --------------------------------------------------------
Borrowings not guaranteed by AIG 12,724 12,042
Matched GIA borrowings 9,036 9,188
Matched notes and bonds
payable -- AIGFP 6,742 6,565
- --------------------------------------------------------
28,502 27,795
- --------------------------------------------------------
Remaining borrowings of AIG $ 3,583 $ 4,115
- --------------------------------------------------------
</TABLE>
(a)AIG does not guarantee or support these borrowings.
(b)Capital lease obligations.
During the first three months of 1999, AIGFP decreased the aggregate
principal amount outstanding of its notes and bonds payable to $7.26 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 March 31, 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 March 31,
1999.
At March 31, 1999, ILFC had increased the aggregate principal amount
outstanding of its medium term and term notes to $7.64 billion, a net increase
of $468 million, and recorded a net decline in its capital lease obligations of
$17 million and a net increase in its commercial paper of $188 million. At March
31, 1999, ILFC had $2.0 billion in aggregate principal amount of debt securities
registered for issuance from time to time. The proceeds of ILFC's debt financing
are primarily used to purchase flight equipment, including progress payments
during the construction phase. The primary sources for the repayment of this
debt and the interest expense thereon are the cash flow from operations,
proceeds from the sale of flight equipment and the rollover and refinancing of
the prior debt. (See also the discussions under "Operational Review" and
"Liquidity" herein.)
During the first three months of 1999, AIG issued $30 million principal
amount of Medium Term Notes and no previously issued notes matured.
At March 31, 1999, AIG had $478 million in aggregate principal amount of
debt securities registered for issuance from time to time.
AIG's capital funds increased $844 million during the first three months of
1999. Unrealized appreciation of investments, net of taxes decreased $583
million. During the first three months of 1999, the cumulative translation
adjustment loss, net of taxes increased $246 million. The changes from period to
period with respect to the unrealized appreciation of investments, net of taxes
was primarily impacted by the unsettled financial markets in Asia and domestic
interest rates. (See also the discussion under "Operational Review" and
"Liquidity" herein.) Retained earnings increased $1.13 billion, resulting from
net income less dividends.
During the period from January 1, 1999 through April 30, 1999, AIG
repurchased 496,000 shares of its common stock in the open market. 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 im-
20
<PAGE> 22
posed by statutory authorities. AIG has in the past
reinvested most of its unrestricted earnings in its operations and believes such
continued reinvestment in the future will be adequate to meet any foreseeable
capital needs. However, AIG may choose from time to time to raise additional
funds through the issuance of additional securities. At March 31, 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
March 31, 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 March 31, 1999, AIG's consolidated invested assets included $6.87
billion of cash and short-term investments. Consolidated net cash provided from
operating activities in the first three months of 1999 amounted to $949 million.
Sources of funds considered in meeting the objectives of AIG's financial
services operations include guaranteed investment agreements, issuance of long
and short-term debt, maturities and sales of securities available for sale,
securities sold under repurchase agreements, trading liabilities, securities and
spot commodities sold but not yet purchased, issuance of equity, and cash
provided from such operations. AIG's strong capital position is integral to
managing this liquidity, as it enables AIG to raise funds in diverse markets
worldwide. (See also the discussions under "Capital Resources" herein.)
Management believes that AIG's liquid assets, its net cash provided by
operations, and access to the capital markets will enable it to meet any
foreseeable cash requirements.
The liquidity of the combined insurance operations is derived both
domestically and abroad. The combined insurance operating cash flow is derived
from two sources, underwriting operations and investment operations. In the
aggregate, AIG's insurance operations generated approximately $6.5 billion in
pre-tax cash flow during the first three 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 $2.1 billion in investment income cash flow during the
first three 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. On December 31, 1998, SunAmerica acquired through a
reinsurance transaction a block of financial and investment type life products
which substantially increased policyholders' contract deposits and invested
assets.
In addition to the combined insurance pre-tax operating cash flow, AIG's
insurance operations held $6.45 billion in cash and short-term investments at
March 31, 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 $17
billion from the maturities, sales and redemptions of fixed income securities
and from the sale of equity securities was used to purchase approximately $23
billion of fixed income securities and marketable equity securities during the
first three months of 1999.
21
<PAGE> 23
The following table is a summary of AIG's invested assets by significant
segment, including investment income due and accrued and real estate, at March
31, 1999 and December 31, 1998:
(dollars in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
----------------------- -----------------------
INVESTED Percent Invested Percent
ASSETS of Total Assets of Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General insurance $ 38,787 21.7% $ 38,883 22.7%
Life insurance 81,128 45.3 75,078 43.8
Financial services and asset management 58,364 32.6 56,619 33.1
Other 725 0.4 714 0.4
- ------------------------------------------------------------------------------------------------------------------------
Total $179,004 100.0% $171,294 100.0%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 March 31, 1999 and December 31, 1998:
(dollars in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT DISTRIBUTION
GENERAL LIFE PERCENT ---------------------
MARCH 31, 1999 INSURANCE INSURANCE TOTAL OF TOTAL DOMESTIC FOREIGN
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Available for sale, at market value(a) $16,100 $56,654 $ 72,754 60.7% 59.3% 40.7%
Held to maturity, at amortized cost 12,550 -- 12,550 10.4 100.0 --
Equity securities, at market value(b) 3,496 1,982 5,478 4.6 52.4 47.6
Mortgage loans on real estate, policy and
collateral loans 71 9,973 10,044 8.4 56.3 43.7
Short-term investments, including time
deposits, and cash 815 5,637 6,452 5.4 49.2 50.8
Real estate 384 1,074 1,458 1.2 19.5 80.5
Investment income due and accrued 554 1,252 1,806 1.5 55.2 44.8
Other invested assets 4,817 4,556 9,373 7.8 85.7 14.3
- ------------------------------------------------------------------------------------------------------------------------
Total $38,787 $81,128 $119,915 100.0% 64.0% 36.0%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)Includes $1,017 of bonds trading securities, at market value.
(b)Includes $568 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.
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.)
22
<PAGE> 24
The fixed maturity available for sale portfolio is subject to decline in
fair value as interest rates rise. Such declines in fair value are presented as
a component of capital funds in unrealized appreciation of investments, net of
taxes.
The fixed maturities held to maturity portfolio is exposed to adverse
interest rate fluctuations. However, AIG has the ability and intent to hold such
securities to maturity. Therefore, there would be no detrimental impact to AIG's
results of operations or financial condition as a result of such fluctuations.
At March 31, 1999, approximately 65.3 percent of the fixed maturities
investments were domestic securities. Approximately 37 percent of such domestic
securities were rated AAA. Approximately 12 percent were below investment grade
or not rated.
A significant portion of the foreign insurance fixed income portfolio is
rated by Moody's, Standard & Poor's (S&P) or similar foreign services. Similar
credit quality rating services are not available in all overseas locations. AIG
annually reviews the credit quality of the foreign portfolio nonrated fixed
income investments, including mortgages. At March 31, 1999, approximately 15
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 14 percent were below investment grade or not
rated at that date. The decline in credit worthiness results not from a change
in investment policy but rather from economic turmoil, particularly in Southeast
Asia. A large portion of these fixed maturity securities are sovereign fixed
maturity securities supporting the policy liabilities in the country of
issuance.
At March 31, 1999, approximately 17 percent of the fixed maturities
portfolio was collateralized mortgage obligations (CMOs), including minor
amounts with respect to commercial mortgage backed securities. Primarily all of
the CMOs were investment grade and approximately 20 percent of the CMOs were
backed by various U.S. government agencies. CMOs are exposed to interest rate
risk as the duration and ultimate realized yield would be affected by the
accelerated prepayments of the underlying mortgages.
Any fixed income security may be subject to downgrade for a variety of
reasons subsequent to any balance sheet date.
AIG invests in equities for reasons including diversifying its overall
exposure to interest rate risk. Equity securities are subject to declines in
fair value. Such declines in fair value are presented as components of capital
funds in unrealized appreciation of investments, net of taxes.
Mortgage loans on real estate, policy and collateral loans comprised 8.4
percent of AIG's insurance invested assets at March 31, 1999. AIG's insurance
operations' holdings of real estate mortgages amounted to $6.24 billion of which
72.6 percent was domestic. At March 31, 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 March 31, 1999, AIG's insurance holdings of
collateral loans amounted to $1.14 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 $2.66 billion at March 31,
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 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
23
<PAGE> 25
generally cause only minor delays in the outward
remittance of the funds.
AIG's insurance operations are exposed to market risk. Market risk is the
risk of loss of fair value resulting from adverse fluctuations in interest and
foreign currency exchange rates and equity prices.
Measuring potential losses in fair values has recently become the focus of
risk management efforts by many companies. Such measurements are performed
through the application of various statistical techniques. One such technique is
Value at Risk (VaR). VaR is a summary statistical measure that uses historical
interest and foreign currency exchange rates and equity prices and estimates the
volatility and correlation of each of these rates and prices to calculate the
maximum loss that could occur over a defined period of time given a certain
probability.
AIG believes that statistical models alone do not provide a reliable method
of monitoring and controlling market risk. While VaR models are relatively
sophisticated, the quantitative market risk information generated is limited by
the assumptions and parameters established in creating the related models.
Therefore, such models are tools and do not substitute for the experience or
judgment of senior management.
AIG has performed a VaR analysis to estimate the maximum potential loss of
fair value for each of AIG's insurance segments and for each market risk within
each insurance segment. In this analysis, financial instrument assets include
the domestic and foreign invested assets excluding real estate and investment
income due and accrued. Financial instrument liabilities include reserve for
losses and loss expenses, reserve for unearned premiums, future policy benefits
for life and accident and health insurance contracts and policyholders' funds.
Due to the nature of each insurance segment, AIG manages the general and
life insurance operations separately. As a result, AIG manages separately the
invested assets of each. Accordingly, the VaR analysis was separately performed
for the general and the life insurance operations.
AIG calculated the VaR with respect to the net fair value of each of AIG's
insurance segments as of December 31, 1998 and December 31, 1997. Through March
31, 1999, the economic facts and circumstances have not significantly changed.
Therefore, the VaR at December 31, 1998 was representative of a VaR at March 31,
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 December 31,
1998 and 1997, as applicable. The VaR model estimated the volatility of each of
these rates, equity prices and the correlations among them. For interest rates,
each country's yield curve was constructed using eleven separate points on this
curve to model possible curve movements. Inter-country correlations were also
used. The redemption experience of municipal and corporate fixed maturities and
mortgage securities was taken into account as well as the use of financial
modeling. Thus, the VaR measured the sensitivity of the asset and the liability
portfolios of each of the aforementioned market exposures. Each sensitivity was
estimated separately to capture the market exposures within each insurance
segment. These sensitivities were then applied to a database, which contained
both historical ranges of movements in all market factors and the correlations
among them. The results were aggregated to provide a single amount that depicts
the maximum potential loss in fair value at a confidence level of 95 percent for
a time period of one month. At December 31, 1998 and December 31, 1997 the VaR
of AIG's insurance segments was approximately $760 million and $520 million for
general insurance, respectively, and $981 million and $799 million for life
insurance, respectively.
The following table presents the VaR of each component of market risk for
each of AIG's insurance segments as of December 31, 1998 and December 31, 1997.
VaR with respect to combined operations cannot be derived by aggregating the
individual risk or segment amounts presented herein.
24
<PAGE> 26
(in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GENERAL LIFE
INSURANCE INSURANCE
--------------- ---------------
MARKET RISK 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate $232 $236 $809 $779
Currency 26 26 457 85
Equity 716 355 254 120
- ---------------------------------------------------------------------------------------------------
</TABLE>
FINANCIAL SERVICES AND ASSET MANAGEMENT INVESTED ASSETS
The following table is a summary of the composition of AIG's financial
services and asset management invested assets at March 31, 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 $17,199 29.4% $ 16,330 28.8%
Unrealized gain on interest rate and currency swaps, options
and forward transactions 8,119 13.9 9,881 17.5
Securities available for sale, at market value 10,788 18.5 10,674 18.9
Trading securities, at market value 6,643 11.4 5,668 10.0
Securities purchased under agreements to resell, at contract
value 7,923 13.6 4,838 8.5
Trading assets 4,974 8.5 6,229 11.0
Spot commodities, at market value 263 0.5 476 0.8
Other, including short-term investments 2,455 4.2 2,523 4.5
- -----------------------------------------------------------------------------------------------------------------
Total $58,364 100.0% $ 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 three months of
1999, ILFC acquired flight equipment costing $1.08 billion.
ILFC is exposed to market risk and the risk of loss of fair value resulting
from adverse fluctuations in interest rates. As of December 31, 1998, AIG
statistically measured the aforementioned loss of fair value through the
application of a VaR model. In this analysis, the net fair value of ILFC was
determined using the financial instrument assets which included the tax adjusted
future flight equipment lease revenue and the financial instrument liabilities
which included the future servicing of the current debt. The estimated impact of
the current derivative positions was also taken into account.
AIG calculated the VaR with respect to the net fair value of ILFC using the
variance-covariance (delta-normal) methodology. This calculation also used daily
historical interest rates for the two years ending December 31, 1998. The VaR
model estimated the volatility of each of these interest rates and the
correlation among them. The yield curve was constructed using eleven key points
on the curve to model possible curve movements. Thus, the VaR measured the
sensitivity of the assets and liabilities to the calculated interest rate
exposures. These sensitivities were then applied to a database, which contained
the historical ranges of movements in interest rates and the correlation among
them. The results were aggregated to provide a single amount that depicts the
maximum potential loss in fair value of a confidence level of 95 percent for a
time period of one month. As of December 31, 1998, the VaR with respect to the
aforementioned net fair value of ILFC was $9 million. Through March 31, 1999,
the economic facts and circumstances have not significantly changed. Therefore,
the VaR at December 31, 1998 was representative of a VaR at March 31, 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
economic risk exposure through similarly valued
25
<PAGE> 27
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 March
31, 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 $304 million of these securities. There were no securities deemed below
investment grade at March 31, 1999. There have been no significant downgrades
through May 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.)
26
<PAGE> 28
The gross unrealized gains and gross unrealized losses of AIGFP and AIGTG
included in the financial services assets and liabilities at March 31, 1999 were
as follows:
(in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
- --------------------------------------------------------------------------------------
<S> <C> <C>
Securities available for sale, at market value $ 503 $ 469
Unrealized gain/loss on interest rate and currency swaps,
options and forward transactions(a)(b) 8,119 7,733
Trading assets 5,491 3,479
Spot commodities, at market value -- 52
Trading liabilities -- 2,757
Securities and spot commodities sold but not yet purchased,
at market value 372 --
- --------------------------------------------------------------------------------------
</TABLE>
(a)These amounts are also presented as the respective balance sheet amounts.
(b)At March 31, 1999, AIGTG's replacement values with respect to interest rate
and currency swaps were $570 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 March 31, 1999, the unrealized gains and losses remaining
after the benefit of the offsets were $43 million and $9 million, respectively.
Trading securities, at market value, and securities and spot commodities
sold but not yet purchased, at market value are marked to market daily with the
unrealized gain or loss being recognized in income at that time. These
securities are held to meet the short-term risk management objectives of AIGFP
and AIGTG.
The senior management of AIG defines the policies and establishes general
operating parameters for AIGFP and AIGTG. AIG's senior management has
established various oversight committees to review the various financial market,
operational and credit issues of AIGFP and AIGTG. The senior managements of
AIGFP and AIGTG report the results of their respective operations to and review
future strategies with AIG's senior management.
AIG actively manages the exposures to limit potential losses, while
maximizing the rewards afforded by these business opportunities. In doing so,
AIG must manage a variety of exposures including credit, market, liquidity,
operational and legal risks.
Market risk arises principally from the uncertainty that future earnings
are exposed to potential changes in volatility, interest rates, foreign currency
exchange rates, and equity and commodity prices. AIG generally controls its
exposure to market risk by taking offsetting positions. AIG's philosophy with
respect to its financial services operations is to minimize or set limits for
open or uncovered positions that are to be carried. Credit risk exposure is
separately managed. (See the discussion on the management of credit risk below.)
AIG's Market Risk Management Department provides detailed independent
review of AIG's market exposures, particularly those market exposures of AIGFP
and AIGTG. This department determines whether AIG's market risks, as well as
those market risks of individual subsidiaries, are within the parameters
established by AIG's senior management. Well established market risk management
techniques such as sensitivity analysis are used. Additionally, this department
verifies that specific market risks of each of certain subsidiaries are managed
and hedged by that subsidiary.
AIGFP is exposed to market risk due to changes in the level and volatility
of interest rates and the shape and slope of the yield curve. AIGFP hedges its
exposure to interest rate risk by entering into transactions such as interest
rate swaps and options and purchasing U.S. and foreign government obligations.
AIGFP is exposed to market risk due to changes in and volatility of foreign
currency exchange rates. AIGFP hedges its foreign currency exchange risk
primarily through the use of currency swaps, options, forwards and futures.
AIGFP is exposed to market risk due to changes in the level and volatility
of equity prices which affect the value of securities or instruments that derive
their value from a particular stock, a basket of stocks or a stock index. AIGFP
reduces the risk of loss inherent in its inventory in equity securities by
entering into hedging transactions, including equity swaps and options and
purchasing U.S. and foreign government obligations.
AIGFP does not seek to manage the market risk of each of its transactions
through an individual
27
<PAGE> 29
offsetting transaction. Rather, AIGFP takes a portfolio approach to the
management of its market risk exposure. AIGFP values its portfolio at market
value or estimated fair value when market values are not readily available.
These valuations represent an assessment of the present values of expected
future cash flows of AIGFP's transactions and may include reserves for such
risks as are deemed appropriate by AIGFP's and AIG's management. AIGFP evaluates
the portfolio's discounted cash flows with reference to current market
conditions, maturities within the portfolio and other relevant factors. Based
upon this evaluation, AIGFP determines what, if any, offsetting transactions are
necessary to reduce the market risk exposure of the portfolio.
The aforementioned estimated fair values are based upon the use of
valuation models. These models utilize, among other things, current interest,
foreign exchange and volatility rates. These valuation models are integrated
into the evaluation of the portfolio, as described above, in order to provide
timely information for the market risk management of the portfolio.
Additionally, depending upon the changes in interest rates and other market
movements during the day, the system will produce reports for management's
consideration for intra-day offsetting positions. Overnight, the system
generates reports which recommend the types of offsets management should
consider for the following day. Additionally, AIGFP operates in major business
centers overseas and is essentially open for business 24 hours a day. Thus, the
market exposure and offset strategies are monitored, reviewed and coordinated
around the clock. Therefore, offsetting adjustments can be made as and when
necessary from any AIGFP office in the world.
As part of its monitoring and controlling of its exposure to market risk,
AIGFP applies various testing techniques which reflect potential market
movements. These techniques vary by currency and are regularly changed to
reflect factors affecting the derivatives portfolio. In addition to the daily
monitoring, AIGFP's senior management and local risk managers conduct a weekly
review of the derivatives portfolio and existing hedges. This review includes an
examination of the portfolio's risk measures, such as aggregate option
sensitivity to movements in market variables. AIGFP's management may change
these measures to reflect their judgment and evaluation of the dynamics of the
markets. This management group will also determine whether additional or
alternative action is required in order to manage the portfolio. AIG utilizes an
outside consultant to provide the managements of AIG and AIGFP with comfort that
the system produces representative values.
All of AIGTG's market risk sensitive instruments are entered into for
trading purposes. The fair values of AIGTG's financial instruments are exposed
to market risk as a result of adverse market changes in interest rates, foreign
currency exchange rates, commodity prices and adverse changes in the liquidity
of the markets in which AIGTG trades.
AIGTG's approach to managing market risk is to establish an appropriate
offsetting position to a particular transaction or group of transactions
depending upon the extent of market risk AIGTG expects to reduce.
AIGTG's senior management has established positions and stop-loss limits
for each line of business. AIGTG's traders are required to maintain positions
within these limits. These positions are monitored during the day either
manually and/or through on-line computer systems. In addition, these positions
are reviewed by AIGTG's management. Reports which present each trading books
position and the prior day's profit and loss are reviewed by traders, head
traders and AIGTG's senior management. Based upon these and other reports,
AIGTG's senior management may determine to adjust AIGTG's risk profile.
AIGTG attempts to secure reliable current market prices, such as published
prices or third party quotes, to value its derivatives. Where such prices are
not available, AIGTG uses an internal methodology which includes interpolation
or extrapolation from verifiable prices nearest to the dates of the
transactions. The methodology may reflect interest and exchange rates, commodity
prices, volatility rates and other relevant factors.
A significant portion of AIGTG's business is transacted in liquid markets.
Certain of AIGTG's derivative product exposures are evaluated using 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.
28
<PAGE> 30
AIGFP and AIGTG are both exposed to the risk of loss of fair value from
adverse fluctuations in interest rate and foreign currency exchange rates and
equity and commodity prices. AIG statistically measured the losses of fair value
through the application of a VaR model. AIG separately calculated the VaR with
respect to AIGFP and AIGTG, as AIG manages these operations separately.
AIGFP's and AIGTG's asset and liability portfolios for which the VaR
analyses were performed included over the counter and exchange traded
investments, derivative instruments and commodities. Since the market risk with
respect to securities available for sale, at market is substantially hedged,
segregation of market sensitive instruments into trading and other than trading
was not deemed necessary.
AIG calculated the VaR with respect to AIGFP and AIGTG as of December 31,
1998 and December 31, 1997. Through March 31, 1999, the economic factors and
circumstances have not significantly changed. Therefore, the VaR at December 31,
1998 was representative of a VaR at March 31, 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
December 31, 1998 and December 31, 1997, as applicable. The VaR model estimated
the volatility of each of these rates, prices and the correlations among them.
For interest rates, the yield curves of the United States and certain foreign
countries were constructed using eleven separate points on each country's yield
curve to model possible curve movements. Inter-country correlations were also
used. The redemption experience of corporate fixed maturities was taken into
account. Thus, the VaR measured the sensitivity of the asset and the liability
portfolios of each of the market exposures. Each sensitivity was estimated
separately to capture the market exposures within each entity. These
sensitivities were then applied to a database, which contained both historical
ranges of movements in all market factors and the correlations among them. The
results depict the maximum potential loss in fair value at a confidence level of
95 percent.
Given the distinct business strategies at AIGFP and AIGTG, the VaR
calculations used different time periods to measure market exposures. Many of
AIGFP's customized, longer-term contracts may require several days to transact
and hedge. AIG therefore used a one month holding period to measure market
exposures for AIGFP. The large majority of AIGTG's contracts can be arranged and
hedged within one day. AIG therefore used a one day holding period to measure
market exposures at AIGTG.
The following table presents the VaR on a combined basis and of each
component of AIGFP's and AIGTG's market risk as of December 31, 1998 and
December 31, 1997. VaR with respect to combined operations cannot be derived by
aggregating the individual risk presented herein.
(in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AIGFP(A) AIGTG(B)
----------- -----------
MARKET RISKS 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Combined $42 $24 $ 3 $ 4
Interest rate 42 24 3 4
Currency -- -- 2 2
Equity/Commodity 2 -- -- --
- ---------------------------------------------------------------------------------------
</TABLE>
(a)A one month holding period was used to measure the market exposures of AIGFP.
(b)A one day holding period was used to measure the market exposures of AIGTG.
DERIVATIVES
Derivatives are financial arrangements among two or more parties whose
returns are linked to or "derived" from some underlying equity, debt, commodity
or other asset, liability, or index. Derivatives payments may be based on
interest rates and exchange rates and/or prices of certain securities, certain
commodities, or financial or commodity indices. The more significant types of
derivative arrangements in which AIG transacts are swaps, forwards, futures,
options and related instruments.
The most commonly used swaps are interest rate and currency swaps. An
interest rate swap is a contract between two parties to exchange interest rate
payments (typically a fixed interest rate versus a variable interest rate)
calculated on a notional
29
<PAGE> 31
principal amount for a specified period of time. The notional amount is not
exchanged. A currency swap is similar but the notional amounts are different
currencies which are typically exchanged at the commencement and termination of
the swap based upon negotiated exchange rates.
A futures or forward contract is a legal contract between two parties to
purchase or sell at a specified future date a specified quantity of a commodity,
security, currency, financial index or other instrument, at a specified price. A
futures contract is traded on an exchange, while a forward contract is executed
over the counter.
Over the counter derivatives are not transacted in an exchange traded
environment. The futures exchanges maintain considerable financial requirements
and surveillance to ensure the integrity of exchange traded futures and options.
An option contract generally provides the option purchaser with the right
but not the obligation to buy or sell during a period of time or at a specified
date the underlying instrument at a set price. The option writer is obligated to
sell or buy the underlying item if the option purchaser chooses to exercise his
right. The option writer receives a nonrefundable fee or premium paid by the
option purchaser.
Derivatives are generally either negotiated over the counter contracts or
standardized contracts executed on an exchange. Standardized exchange traded
derivatives include futures and options which can be readily bought or sold over
recognized security or commodity exchanges and settled daily through such
clearing houses. Negotiated over the counter derivatives include forwards, swaps
and options. Over the counter derivatives are generally not traded like exchange
traded securities. However, in the normal course of business, with the agreement
of the original counterparty, these contracts may be terminated early or
assigned to another counterparty.
All significant derivatives activities are conducted through AIGFP and
AIGTG permitting AIG to participate in the derivatives dealer market acting
primarily as principal. In these derivative operations, AIG structures
agreements which generally allow its counterparties to enter into transactions
with respect to changes in interest and exchange rates, securities' prices and
certain commodities and financial or commodity indices. Generally, derivatives
are used by AIG's customers such as corporations, financial institutions,
multinational organizations, sovereign entities, government agencies and
municipalities. For example, a futures, forward or option contract can be used
to protect the customers' assets or liabilities against price fluctuations.
A counterparty may default on any obligation to AIG, including a derivative
contract. Credit risk is a consequence of extending credit and/or carrying
trading and investment positions. Credit risk exists for a derivative contract
when that contract has an estimated positive fair value. To help manage this
risk, the credit departments of AIGFP and AIGTG operate within the guidelines of
the AIG Credit Risk Committee, which sets credit policy and limits for
counterparties and provides limits for derivative transactions with
counterparties having different credit ratings. In addition to credit ratings,
this committee takes into account other factors, including the industry and
country of the counterparty. Transactions which fall outside these
pre-established guidelines require the approval of the AIG Credit Risk
Committee. It is also AIG's policy to establish reserves for potential credit
impairment when necessary.
AIGFP and AIGTG determine the credit quality of each of their
counterparties taking into account credit ratings assigned by recognized
statistical rating organizations. If it is determined that a counterparty
requires credit enhancement, then one or more enhancement techniques will be
used. Examples of such enhancement techniques include letters of credit,
guarantees, collateral credit triggers and credit derivatives and margin
agreements.
A significant majority of AIGFP's transactions are contracted and
documented under ISDA Master Agreements that provide for legally enforceable
set-off and close out netting of exposures in the event of default. Under such
agreements, in connection with the early termination of a transaction, AIGFP is
permitted to set-off its receivables from a counterparty against AIGFP's
payables to that same counterparty arising out of all included transactions.
Excluding regulated exchange transactions, AIGTG, whenever possible, enters into
netting agreements with its counterparties which are similar in effect to those
discussed above.
The following tables provide the notional and contractual amounts of
AIGFP's and AIGTG's
30
<PAGE> 32
derivative transactions at March 31, 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, set-off and netting under ISDA Master Agreements
and collateral held.
The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at March 31, 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>
Interest rate, currency and
equity/commodity swaps and swaptions:
Notional amount:
Interest rate swaps $ 81,886 $110,386 $57,891 $ 7,057 $257,220 $255,917
Currency swaps 24,455 27,417 18,484 2,628 72,984 73,894
Swaptions and equity swaps 5,706 5,830 5,302 1,370 18,208 15,685
- --------------------------------------------------------------------------------------------------------------------
Total $112,047 $143,633 $81,677 $11,055 $348,412 $345,496
- --------------------------------------------------------------------------------------------------------------------
Futures and forward contracts:
Exchange traded futures contracts
contractual amount $ 7,819 -- -- -- $ 7,819 $ 8,290
- --------------------------------------------------------------------------------------------------------------------
Over the counter forward contracts
contractual amount $ 41,485 $ 69 $ 12 -- $ 41,566 $ 42,898
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At March 31, 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 $2,211 $ -- $2,211 $2,360
AA 2,532 178 2,710 3,688
A 1,221 55 1,276 1,883
BBB 1,062 28 1,090 1,085
Below investment grade 190 -- 190 210
- ----------------------------------------------------------------------------------------------------------------
Total $7,216 $261 $7,477 $9,226
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 33
At March 31, 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 $2,142 $ 99 $2,241 $2,877
Insured municipalities 648 -- 648 784
U.S. industrials 920 -- 920 1,125
Governmental 455 -- 455 603
Non-U.S. financial service companies 125 -- 125 272
Non-U.S. industrials 1,219 -- 1,219 1,145
Special purpose 372 -- 372 423
U.S. banks 464 161 625 911
U.S. financial service companies 760 1 761 932
Supranationals 111 -- 111 154
- ----------------------------------------------------------------------------------------------------------------
Total $7,216 $261 $7,477 $9,226
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The following tables provide the contractual and notional amounts of
AIGTG's derivatives portfolio at March 31, 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 March 31,
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 March 31, 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
closeout netting agreements and collateral held. The net replacement values most
closely represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss.
32
<PAGE> 34
The following tables present AIGTG's derivatives portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative at
March 31, 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 $ 11,362 $ 2,561 $ 79 $ -- $ 14,002 $ 11,836
- --------------------------------------------------------------------------------------------------------------------
Forwards $250,662 $17,027 $1,613 $ 10 $269,312 $282,157
- --------------------------------------------------------------------------------------------------------------------
Over the counter purchased options $ 40,226 $20,318 $2,402 $2,330 $ 65,276 $ 58,860
- --------------------------------------------------------------------------------------------------------------------
Over the counter sold options(a) $ 40,837 $20,511 $2,473 $2,180 $ 66,001 $ 58,861
- --------------------------------------------------------------------------------------------------------------------
Notional amount:
Interest rate swaps and forward rate
agreements $ 57,191 $22,739 $6,764 $1,453 $ 88,147 $110,791
Currency swaps 2,222 4,535 848 11 7,616 7,512
Swaptions 761 5,646 2,031 218 8,656 5,766
- --------------------------------------------------------------------------------------------------------------------
Total $ 60,174 $32,920 $9,643 $1,682 $104,419 $124,069
- --------------------------------------------------------------------------------------------------------------------
Credit exposure:
Futures, forwards, swaptions and purchased
options contracts and interest rate and
currency swaps:
Gross replacement value $ 5,977 $ 1,903 $ 394 $ 109 $ 8,383 $ 9,791
Master netting arrangements (3,340) (1,003) (179) (62) (4,584) (5,610)
Collateral (272) (84) (26) (7) (389) (359)
- --------------------------------------------------------------------------------------------------------------------
Net replacement value(b) $ 2,365 $ 816 $ 189 $ 40 $ 3,410 $ 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.
33
<PAGE> 35
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At March 31, 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 $ 326 $ 462
AA 1,678 1,821
A 907 1,066
BBB 266 221
Below investment grade 36 26
Not externally rated, including exchange traded futures
and options* 197 226
- ---------------------------------------------------------------------------------------
Total $3,410 $3,822
- ---------------------------------------------------------------------------------------
Counterparty breakdown by industry:
Non-U.S. banks $1,294 $1,253
U.S. industrials 348 381
Governmental 118 184
Non-U.S. financial service companies 176 406
Non-U.S. industrials 245 150
U.S. banks 486 593
U.S. financial service companies 546 629
Exchanges* 197 226
- ---------------------------------------------------------------------------------------
Total $3,410 $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
34
<PAGE> 36
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, 2000.
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.
35
<PAGE> 37
The plan for addressing internal systems includes an assessment of internal
IT and non-IT systems and equipment affected by the Year 2000 issue; definition
of strategies to address affected systems and equipment; remediation of
identified affected systems and equipment; and internal certification that each
internal system is Year 2000 compliant. AIG has remediated, tested and returned
to production substantially all of its internal IT systems. AIG continues to
remediate and test internal non-IT systems and expects to complete remediation
by mid-1999.
AIG has also initiated formal communications with respect to the Year 2000
issue to those third parties which have significant interaction with AIG.
Currently, AIG is unable to ascertain whether all such third parties will
successfully address the Year 2000 issue, particularly those third parties
outside the United States where it is believed that remediation efforts relating
to the Year 2000 issue may be less advanced. While AIG expects to have no
interruption of operations as a result of its internal IT and non-IT systems,
significant uncertainties remain about the effect on AIG of third parties who
are not Year 2000 compliant. AIG will continue to monitor third party Year 2000
issue readiness to determine whether additional or alternative measures may be
necessary. Such measures may include the selection of alternate third parties or
other actions designed to mitigate the effects of a third party's lack of
preparedness. There can be no assurance that unresolved Year 2000 issues of
third parties will not have a material adverse impact on AIG's results of
operations, financial condition or liquidity. AIG is considering the effects of
Year 2000 related failures on its business and, as the most reasonably likely
worst case scenarios become more clearly identified, AIG will develop
appropriate contingency plans.
The costs associated with addressing the Year 2000 issue, including
developing and implementing the above stated plans and remediating affected
systems and equipment, has approximated $120 million and has been expensed as
incurred. AIG estimates that the total costs of the Year 2000 remediation will
approximate $175 million.
RECENT DEVELOPMENTS
On January 1, 1999, certain of the member nations of the European Economic
and Monetary Union (EMU) adopted a common currency, the euro. Once the national
currencies are phased out, the euro will be the sole legal tender of each of
these nations. During the transition period, commerce of these nations will be
transacted in the euro or in the currently existing national currency.
AIG has identified the significant issues and is prepared with respect to
the phase in of and ultimate redenomination to the euro. Any costs associated
with the adoption of the euro are expensed as incurred and are not material to
AIG's results of operations, financial condition or liquidity.
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.
36
<PAGE> 38
PART II -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See accompanying Exhibit Index.
(b) There have been no reports on Form 8-K filed during the quarter ended
March 31, 1999.
37
<PAGE> 39
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: May 14, 1999
38
<PAGE> 40
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>
39
<PAGE> 1
EXHIBIT 11
AMERICAN INTERNATIONAL GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------
1999(a) 1998(b)
------- -------
<S> <C> <C>
Numerator:
Basic:
Net income.................................................. $1,199 $1,010
Series E Mandatory Conversion Premium Dividend Preferred
Stock..................................................... -- (3)
------ ------
Net income (applicable to common stock)..................... $1,199 $1,007
====== ======
Diluted:
Net income (applicable to common stock)..................... $1,199 $1,010
====== ======
Denominator:
Basic:
Average outstanding shares used in the computation of per
share earnings:
Common stock.............................................. 1,333 1,305
Common stock in treasury.................................. (95) (89)
Common stock issued and outstanding but not vested to
participants under various employee stock plans........ -- (2)
------ ------
Average outstanding shares -- basic......................... 1,238 1,214
------ ------
Diluted:
Average outstanding shares used in the computation of per
share earnings:
Common stock.............................................. 1,333 1,305
Common stock in treasury.................................. (95) (89)
Stock options and stock purchase plan (treasury stock
method)................................................... 6 5
SunAmerica employee stock plans............................. 11 7
Average number of shares issuable upon conversion of
Series E Mandatory Conversion Premium Dividend Preferred
Stock..................................................... -- 11
Average number of shares issuable upon conversion of Premium
Equity Redemption Cumulative Security Units............... -- 5
------ ------
Average outstanding shares -- diluted....................... 1,255 1,244
------ ------
Net income per share:
Basic..................................................... $ 0.97 $ 0.83
------ ------
Diluted................................................... $ 0.96 $ 0.81
------ ------
</TABLE>
- ---------------
(a) The number of common shares outstanding as of March 31, 1999 was 1,239.
The number of common shares that would have been outstanding as of March 31,
1999 assuming the exercise or issuance of all potentially dilutive common
shares is 1,255.
(b) The 1998 share information is adjusted for a common stock split in the form
of a 50 percent common stock dividend paid July 31, 1998.
<PAGE> 1
EXHIBIT 12
AMERICAN INTERNATIONAL GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1999 1998
------ ------
<S> <C> <C>
Income before income taxes and minority interest............ $1,801 $1,457
Less -- Equity income of less than 50% owned persons........ 9 34
Add -- Dividends from less than 50% owned persons........... 3 10
------ ------
1,795 1,433
Add --
Fixed charges............................................. 528 515
Less --
Capitalized interest...................................... 15 15
------ ------
Income before income taxes, minority interest and fixed
charges................................................... $2,308 $1,933
====== ======
Fixed charges:
Interest costs............................................ $ 502 $ 493
Rent expense*............................................. 26 22
------ ------
Total fixed charges............................... $ 528 $ 515
====== ======
Ratio of earnings to fixed charges.......................... 4.37 3.75
</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 7.18 and 5.85 for
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
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 71,880
<DEBT-CARRYING-VALUE> 12,550
<DEBT-MARKET-VALUE> 13,353
<EQUITIES> 5,746
<MORTGAGE> 6,756
<REAL-ESTATE> 1,542
<TOTAL-INVEST> 175,316
<CASH> 246
<RECOVER-REINSURE> 18,078
<DEFERRED-ACQUISITION> 8,427
<TOTAL-ASSETS> 247,070
<POLICY-LOSSES> 68,265
<UNEARNED-PREMIUMS> 10,246
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 42,950
<NOTES-PAYABLE> 23,049
0
0
<COMMON> 3,334
<OTHER-SE> 27,633
<TOTAL-LIABILITY-AND-EQUITY> 247,070
6,648
<INVESTMENT-INCOME> 2,122
<INVESTMENT-GAINS> 50
<OTHER-INCOME> (42)
<BENEFITS> 5,773
<UNDERWRITING-AMORTIZATION> 538
<UNDERWRITING-OTHER> 975
<INCOME-PRETAX> 1,801<F1>
<INCOME-TAX> 522
<INCOME-CONTINUING> 1,199
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,199
<EPS-PRIMARY> 0.97<F2>
<EPS-DILUTED> 0.96<F2>
<RESERVE-OPEN> 24,619
<PROVISION-CURRENT> 2,842
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 1,193
<PAYMENTS-PRIOR> 1,554
<RESERVE-CLOSE> 24,714
<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
50 PERCENT COMMON STOCK DIVIDEND PAID JULY 31, 1998. PRIOR PERIOD FINANCIAL
DATA SCHEDULES HAVE NOT BEEN RESTATED FOR THIS STOCK SPLIT.
</FN>
</TABLE>
