<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
FOR QUARTER ENDED SEPTEMBER 30, 2000 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)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 770-7000
NONE
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT.
---------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 2000: 2,315,554,522.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Investments and cash:
Fixed maturities:
Bonds available for sale, at market value (amortized
cost: 2000 -- $87,758; 1999 -- $78,218)............. $ 87,129 $ 77,028
Bonds held to maturity, at amortized cost (market
value: 2000 -- $12,029; 1999 -- $12,202)............ 11,801 12,078
Bonds trading securities, at market value (cost:
2000 -- $780; 1999 -- $1,057)....................... 785 1,038
Equity securities:
Common stocks (cost: 2000 -- $6,094;
1999 -- $5,496)..................................... 6,370 6,002
Non-redeemable preferred stocks (cost: 2000 -- $782;
1999 -- $718)....................................... 743 712
Mortgage loans on real estate, net of allowance
(2000 -- $93; 1999 -- $78)............................ 7,128 7,139
Policy Loans........................................... 3,008 2,822
Collateral and guaranteed loans, net of allowance
(2000 -- $68; 1999 -- $74)............................ 2,553 2,173
Financial services and asset management assets:
Flight equipment primarily under operating leases,
net of accumulated depreciation (2000 -- $2,688;
1999 -- $2,200)..................................... 19,305 17,334
Securities available for sale, at market value (cost:
2000 -- $12,617; 1999 -- $12,920)................... 12,650 12,954
Trading securities, at market value.................. 4,568 4,391
Spot commodities, at market value.................... 571 683
Unrealized gain on interest rate and currency swaps,
options and forward transactions.................... 9,190 7,931
Trading assets....................................... 7,865 5,793
Securities purchased under agreements to resell, at
contract value...................................... 14,874 10,897
Other invested assets.................................. 12,430 9,900
Short-term investments, at cost (approximates market
value)................................................ 5,669 7,007
Cash................................................... 280 132
-------- --------
Total investments and cash...................... 206,919 186,014
Investment income due and accrued......................... 2,402 2,054
Premiums and insurance balances receivable, net of
allowance (2000 -- $153; 1999 -- $133)................. 13,685 12,737
Reinsurance assets........................................ 19,614 19,368
Deferred policy acquisition costs......................... 10,166 9,624
Investments in partially-owned companies.................. 335 346
Real estate and other fixed assets, net of accumulated
depreciation (2000 -- $1,949; 1999 -- $1,892).......... 3,278 2,933
Separate and variable accounts............................ 32,757 29,666
Other assets.............................................. 6,250 5,496
-------- --------
Total assets.................................... $295,406 $268,238
======== ========
</TABLE>
See Accompanying Notes to Financial Statements.
1
<PAGE> 3
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES:
Reserve for losses and loss expenses...................... $ 38,268 $ 38,252
Reserve for unearned premiums............................. 12,033 11,450
Future policy benefits for life and accident and health
insurance contracts.................................... 38,001 34,608
Policyholders' contract deposits.......................... 46,063 42,549
Other policyholders' funds................................ 3,547 3,236
Reserve for commissions, expenses and taxes............... 2,999 2,598
Insurance balances payable................................ 3,075 2,254
Funds held by companies under reinsurance treaties........ 821 861
Income taxes payable:
Current................................................ 79 138
Deferred............................................... 1,591 751
Financial services and asset management liabilities:
Borrowings under obligations of guaranteed investment
agreements............................................ 11,695 9,430
Securities sold under agreements to repurchase, at
contract value........................................ 8,846 6,116
Trading liabilities.................................... 3,952 3,821
Securities and spot commodities sold but not yet
purchased, at market value............................ 8,427 6,413
Unrealized loss on interest rate and currency swaps,
options and forward transactions...................... 8,186 8,624
Trust deposits and deposits due to banks and other
depositors............................................ 1,910 2,175
Commercial paper....................................... 4,351 2,958
Notes, bonds and loans payable......................... 17,608 16,806
Commercial paper.......................................... 1,647 1,446
Notes, bonds, loans and mortgages payable................. 2,610 2,344
Separate and variable accounts............................ 32,757 29,666
Minority interests........................................ 1,463 1,350
Other liabilities......................................... 7,661 6,191
-------- --------
Total liabilities................................. 257,590 234,037
-------- --------
Preferred shareholders' equity in subsidiary companies.... 1,245 895
-------- --------
CAPITAL FUNDS:
Common stock, $2.50 par value; 5,000,000,000 shares
authorized; shares issued 2000 -- 2,475,663,918;
1999 -- 1,660,707,090.................................. 6,189 4,152
Additional paid-in capital................................ 1,981 2,080
Retained earnings......................................... 32,893 31,040
Accumulated other comprehensive income.................... (2,036) (2,103)
Treasury stock, at cost; 2000 -- 160,109,396;
1999 -- 111,579,044 shares of common stock............. (2,456) (1,863)
-------- --------
Total capital funds............................... 36,571 33,306
-------- --------
Total liabilities and capital funds............... $295,406 $268,238
======== ========
</TABLE>
See Accompanying Notes to Financial Statements.
2
<PAGE> 4
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
General insurance operations:
Net premiums written................................ $13,023 $12,217 $4,293 $3,972
Change in unearned premium reserve.................. (402) (839) (181) (347)
------- ------- ------ ------
Net premiums earned................................. 12,621 11,378 4,112 3,625
Net investment income............................... 1,999 1,869 676 632
Realized capital gains.............................. 42 211 33 72
------- ------- ------ ------
14,662 13,458 4,821 4,329
------- ------- ------ ------
Losses and loss expenses incurred................... 9,460 8,543 3,066 2,756
Underwriting expenses............................... 2,529 2,288 853 740
------- ------- ------ ------
11,989 10,831 3,919 3,496
------- ------- ------ ------
Operating income.................................... 2,673 2,627 902 833
------- ------- ------ ------
Life insurance operations:
Premium income...................................... 9,942 8,624 3,277 2,767
Net investment income............................... 5,184 4,549 1,773 1,512
Realized capital losses............................. (123) (62) (65) (13)
------- ------- ------ ------
15,003 13,111 4,985 4,266
------- ------- ------ ------
Death and other benefits............................ 4,085 3,598 1,390 1,228
Increase in future policy benefits.................. 5,861 5,025 1,912 1,511
Acquisition and insurance expenses.................. 2,587 2,352 862 777
------- ------- ------ ------
12,533 10,975 4,164 3,516
------- ------- ------ ------
Operating income.................................... 2,470 2,136 821 750
------- ------- ------ ------
Financial services operating income................... 894 756 309 250
Asset management operating income..................... 321 218 111 87
Other realized capital losses......................... (11) (18) (5) (5)
Other income (deductions) -- net...................... (196) (135) (74) (48)
------- ------- ------ ------
Income before income taxes and minority interest...... 6,151 5,584 2,064 1,867
------- ------- ------ ------
Income taxes (benefits) -- Current.................... 1,075 1,314 363 565
-- Deferred................. 749 326 248 (16)
------- ------- ------ ------
1,824 1,640 611 549
------- ------- ------ ------
Income before minority interest....................... 4,327 3,944 1,453 1,318
------- ------- ------ ------
Minority interest..................................... (188) (201) (67) (51)
------- ------- ------ ------
Net income............................................ $ 4,139 $ 3,743 $1,386 $1,267
======= ======= ====== ======
Earnings per common share
Basic............................................... $ 1.79 $ 1.61 $ 0.60 $ 0.55
======= ======= ====== ======
Diluted............................................. $ 1.77 $ 1.59 $ 0.60 $ 0.54
======= ======= ====== ======
Cash dividends per common share....................... $ 0.104 $ 0.093 $0.037 $0.033
======= ======= ====== ======
Average shares outstanding
Basic............................................... 2,316 2,322 2,314 2,322
------- ------- ------ ------
Diluted............................................. 2,341 2,351 2,340 2,351
------- ------- ------ ------
</TABLE>
See Accompanying Notes to Financial Statements.
3
<PAGE> 5
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
------- -------
(UNAUDITED)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income.................................................. $ 4,139 $ 3,743
------- -------
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.................... 3,940 4,971
Premiums and insurance balances receivable and
payable -- net........................................ (127) (1,524)
Reinsurance assets..................................... (246) (869)
Deferred policy acquisition costs...................... (542) (1,030)
Investment income due and accrued...................... (348) (254)
Funds held under reinsurance treaties.................. (40) 29
Other policyholders' funds............................. 311 400
Current and deferred income taxes -- net............... 690 738
Reserve for commissions, expenses and taxes............ 401 549
Other assets and liabilities -- net.................... (371) (965)
Trading assets and liabilities -- net.................. (1,941) (399)
Trading securities, at market value.................... (177) 275
Spot commodities, at market value...................... 112 (146)
Net unrealized gain on interest rate and currency
swaps, options and forward transactions............... (1,697) 2,726
Securities purchased under agreements to resell........ (3,977) (5,427)
Securities sold under agreements to repurchase......... 2,730 3,061
Securities and spot commodities sold but not yet
purchased, at market value............................ 2,014 1,516
Realized capital gains (losses)........................... 92 (131)
Equity in income of partially-owned companies and other
invested assets........................................ (179) (225)
Depreciation expenses, principally flight equipment....... 851 928
Change in cumulative translation adjustments.............. (123) (352)
Other -- net.............................................. (169) 338
------- -------
Total Adjustments......................................... 1,204 4,209
------- -------
Net cash provided by operating activities................... $ 5,343 $ 7,952
------- -------
</TABLE>
See Accompanying Notes to Financial Statements.
4
<PAGE> 6
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash Flows From Investing Activities:
Cost of fixed maturities, at amortized cost matured or
redeemed............................................... $ 892 $ 775
Cost of bonds, at market sold............................. 16,523 22,426
Cost of bonds, at market matured or redeemed.............. 5,620 6,468
Cost of equity securities sold............................ 3,823 3,263
Realized capital gains (losses)........................... (92) 131
Purchases of fixed maturities............................. (31,354) (42,093)
Purchases of equity securities............................ (4,552) (2,636)
Mortgage, policy and collateral loans granted............. (2,188) (2,936)
Repayments of mortgage, policy and collateral loans....... 1,633 2,461
Sales of securities available for sale.................... 4,245 1,598
Maturities of securities available for sale............... 1,264 710
Purchases of securities available for sale................ (5,231) (4,366)
Sales of flight equipment................................. 136 1,206
Purchases of flight equipment............................. (2,646) (2,825)
Net additions to real estate and other fixed assets....... (658) (365)
Sales or distributions of other invested assets........... 3,127 2,381
Investments in other invested assets...................... (4,639) (3,470)
Change in short-term investments.......................... 1,354 85
Investments in partially-owned companies.................. -- 49
-------- --------
Net cash used in investing activities....................... (12,743) (17,138)
-------- --------
Cash Flows From Financing Activities:
Change in policyholders' contract deposits................ 3,561 7,965
Change in trust deposits and deposits due to banks and
other depositors....................................... (265) 383
Change in commercial paper................................ 1,594 (960)
Proceeds from notes, bonds, loans and mortgages payable... 7,238 6,778
Repayments on notes, bonds, loans and mortgages payable... (6,181) (4,820)
Proceeds from guaranteed investment agreements............ 6,711 3,298
Maturities of guaranteed investment agreements............ (4,446) (3,664)
Proceeds from subsidiary company preferred stock issued... 350 --
Proceeds from common stock issued......................... 114 182
Cash dividends to shareholders............................ (249) (225)
Acquisition of treasury stock............................. (930) (225)
Proceeds from redemption of Premium Equity Redemption
Cumulative Security Units.............................. -- 431
Other -- net.............................................. 51 13
-------- --------
Net cash provided by financing activities................... 7,548 9,156
-------- --------
Change in cash.............................................. 148 (30)
Cash at beginning of period................................. 132 303
-------- --------
Cash at end of period....................................... $ 280 $ 273
======== ========
</TABLE>
See Accompanying Notes to Financial Statements.
5
<PAGE> 7
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- --------------------
2000 1999 2000 1999
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income............................................. $4,139 $ 3,743 $1,386 $1,267
Other comprehensive income:
Unrealized appreciation (depreciation) of
investments -- net of reclassification
adjustments....................................... 294 (2,329) 873 (985)
Deferred income tax (expense) benefit on
changes......................................... (150) 843 (349) 344
Foreign currency translation adjustments............. (123) (352) (127) (73)
Applicable income tax (expense) benefit on
changes......................................... 46 (5) 22 (10)
------ ------- ------ ------
Total................................................ 67 (1,843) 419 (724)
------ ------- ------ ------
Comprehensive income................................... $4,206 $ 1,900 $1,805 $ 543
====== ======= ====== ======
</TABLE>
See Accompanying Notes to Financial Statements.
6
<PAGE> 8
AMERICAN INTERNATIONAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
a) These statements are unaudited. In the opinion of management, all
adjustments consisting of normal recurring accruals have been made for a
fair presentation of the results shown. All material intercompany accounts
and transactions have been eliminated. For further information, refer to the
Annual Report on Form 10-K of AIG for the year ended December 31, 1999 and
the Statistical Supplement for the quarter ended September 30, 2000, which
can be viewed on AIG's website at www.aig.com.
b) 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 28, 2000.
The quarterly dividend rate per common share, commencing with the dividend
paid September 15, 2000 is $0.037.
c) Cash flow information for the nine month periods ended September 30, 2000
and 1999 is as follows:
<TABLE>
<CAPTION>
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Income taxes paid......................................... $ 964 $ 909
Interest paid............................................. $1,952 $1,531
</TABLE>
d) Segment Information:
The following table summarizes the operations by major operating segment for
the first nine months and third quarter of 2000 and 1999 (in millions):
<TABLE>
<CAPTION>
OPERATING SEGMENTS
------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ----------------
2000 1999 2000 1999
------- ------- ------- ------
<S> <C> <C> <C> <C>
Revenues(1):
General Insurance....................................... $14,662 $13,458 $ 4,821 $4,329
Life Insurance.......................................... 15,003 13,111 4,985 4,266
Financial Services...................................... 2,894 2,402 1,024 799
Asset Management........................................ 908 705 315 249
Other................................................... (11) (18) (5) (5)
------- ------- ------- ------
Total................................................. $33,456 $29,658 $11,140 $9,638
======= ======= ======= ======
Operating income:
General Insurance....................................... $ 2,673 $ 2,627 $ 902 $ 833
Life Insurance.......................................... 2,470 2,136 821 750
Financial Services...................................... 894 756 309 250
Asset Management........................................ 321 218 111 87
Other................................................... (207) (153) (79) (53)
------- ------- ------- ------
Total................................................. $ 6,151 $ 5,584 $ 2,064 $1,867
======= ======= ======= ======
</TABLE>
-------------------
(1) Represents the sum of general net premiums earned, life premium
income, net investment income, financial services commissions,
transaction and other fees, asset management commissions and other
fees, and realized capital gains (losses).
7
<PAGE> 9
The following table summarizes AIG's general insurance operations by major
reporting group for the first nine months and third quarter of 2000 and 1999
(in millions):
<TABLE>
<CAPTION>
GENERAL INSURANCE
--------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
2000 1999 2000 1999
------- ------- ------ ------
<S> <C> <C> <C> <C>
Revenues:
Domestic Brokerage Group(1)........................... $ 7,659 $ 7,222 $2,464 $2,307
Foreign General(1).................................... 4,719 4,226 1,558 1,320
Other................................................. 2,284 2,010 799 702
------- ------- ------ ------
Total............................................... $14,662 $13,458 $4,821 $4,329
======= ======= ====== ======
Operating income before realized capital gains(2):
Domestic Brokerage Group(1)........................... $ 1,499 $ 1,283 $ 527 $ 435
Foreign General(1).................................... 712 692 208 185
Other................................................. 420 441 134 141
------- ------- ------ ------
Total............................................... $ 2,631 $ 2,416 $ 869 $ 761
======= ======= ====== ======
</TABLE>
-------------------
(1) Reflects the realignment of certain internal divisions.
(2) 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 first nine months and third quarter of 2000 and 1999
(in millions):
<TABLE>
<CAPTION>
LIFE INSURANCE
--------------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
2000 1999 2000 1999
------- ------- ------ ------
<S> <C> <C> <C> <C>
Revenues:
American International Assurance Company Ltd. and Nan
Shan Life Insurance Company, Ltd. .................. $ 6,983 $ 5,994 $2,307 $1,983
American Life Insurance Company....................... 4,095 3,601 1,345 1,075
Domestic Life......................................... 3,582 3,221 1,218 1,113
Other................................................. 343 295 115 95
------- ------- ------ ------
Total............................................... $15,003 $13,111 $4,985 $4,266
======= ======= ====== ======
Operating income before realized capital gains(1):
American International Assurance Company Ltd. and Nan
Shan Life Insurance Company, Ltd. .................. $ 1,028 $ 866 $ 355 $ 305
American Life Insurance Company....................... 561 508 189 169
Domestic Life......................................... 948 777 323 273
Other................................................. 56 47 19 16
------- ------- ------ ------
Total............................................... $ 2,593 $ 2,198 $ 886 $ 763
======= ======= ====== ======
</TABLE>
-------------------
(1) Realized capital gains are not deemed to be an integral part of
AIG's life insurance operations' internal reporting groups.
8
<PAGE> 10
The following table summarizes AIG's financial services operations by major
reporting group for the first nine months and third quarter of 2000 and 1999
(in millions):
<TABLE>
<CAPTION>
FINANCIAL SERVICES
----------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- --------------
2000 1999 2000 1999
------ ------ ------ ----
<S> <C> <C> <C> <C>
Revenues:
International Lease Finance Corporation ................. $1,786 $1,635 $ 629 $558
AIG Financial Products Corp. ............................ 711 495 260 189
AIG Trading Group Inc. .................................. 190 153 55 25
Other.................................................... 207 119 80 27
------ ------ ------ ----
Total.................................................. $2,894 $2,402 $1,024 $799
====== ====== ====== ====
Operating income:
International Lease Finance Corporation ................. $ 476 $ 430 $ 166 $146
AIG Financial Products Corp. ............................ 433 316 155 120
AIG Trading Group Inc. .................................. 41 77 6 10
Other.................................................... (56) (67) (18) (26)
------ ------ ------ ----
Total.................................................. $ 894 $ 756 $ 309 $250
====== ====== ====== ====
</TABLE>
e) Statement of Accounting Standards No. 130 "Comprehensive Income" (FASB 130)
establishes standards for reporting comprehensive income and its components
as part of capital funds. The reclassification adjustments with respect to
available for sale securities were $(92) million and $131 million for the
first nine months and $(37) million and $54 million for the third quarter of
2000 and 1999, respectively.
f) 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 mark 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 derivative hedging transaction is
recognized as income in that same period.
g) In June 1998, FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" (FASB
133). AIG has reviewed and continues to review the effect of the
implementation of FASB 133, as amended by FASB 138 and related
implementation guidance. 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
and the extent to which it is effective as part of a hedge transaction.
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 does not believe that the implementation of FASB 133
will have a significant impact on its results of operations or financial
condition. FASB 133 is effective for the year commencing January 1, 2001.
9
<PAGE> 11
AMERICAN INTERNATIONAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q may include, and AIG's officers and
representatives may from time to time make, statements which may constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are not historical facts but
instead represent only AIG's belief regarding future events, many of which, by
their nature, are inherently uncertain and outside of AIG's control. These
statements may address, among other things, AIG's strategy for growth, product
development, regulatory approvals, market position, financial results and
reserves. It is possible that AIG's actual results and financial condition may
differ, possibly materially, from the anticipated results and financial
condition indicated in these forward-looking statements. Important factors that
could cause AIG's actual results to differ, possibly materially, from those in
the specific forward-looking statements are discussed throughout this
Management's Discussion and Analysis of Financial Condition and Results of
Operations. AIG is not under any obligation to (and expressly disclaims any such
obligations to) update or alter any forward-looking statement, whether written
or oral, that may be made from time to time, whether as a result of new
information, future events or otherwise.
OPERATIONAL REVIEW
General Insurance Operations
AIG's general insurance subsidiaries are multiple line companies writing
substantially all lines of property and casualty insurance.
Domestic general insurance operations are comprised of the Domestic
Brokerage Group (DBG), which includes the domestic operations of Transatlantic
Holdings, Inc. (Transatlantic), Personal Lines, including 21st Century Insurance
Group (21st Century) and Mortgage Guaranty.
DBG is AIG's 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.
Personal Lines engages in the mass marketing of personal lines insurance,
primarily private passenger auto, and includes homeowners and personal umbrella
coverages.
Mortgage Guaranty provides guaranty insurance on conventional first
mortgage loans on single family dwellings and condominiums.
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 (d) of Notes to Financial Statements.)
General insurance operations for the nine month periods ending September
30, 2000 and 1999 were as follows:
(in millions)
------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------
<S> <C> <C>
Net premiums written*:
Domestic $ 8,612 $ 8,175
Foreign 4,411 4,042
-------------------------------------------------------
Total $13,023 $12,217
-------------------------------------------------------
Net premiums earned*:
Domestic $ 8,349 $ 7,519
Foreign 4,272 3,859
-------------------------------------------------------
Total $12,621 $11,378
-------------------------------------------------------
Adjusted underwriting profit*:
Domestic $ 361 $ 257
Foreign 271 290
-------------------------------------------------------
Total $ 632 $ 547
-------------------------------------------------------
</TABLE>
10
<PAGE> 12
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------
<S> <C> <C>
Net investment income:
Domestic $ 1,558 $ 1,467
Foreign 441 402
-------------------------------------------------------
Total $ 1,999 $ 1,869
-------------------------------------------------------
Operating income before realized
capital gains*:
Domestic $ 1,919 $ 1,724
Foreign 712 692
-------------------------------------------------------
Total 2,631 2,416
Realized capital gains 42 211
-------------------------------------------------------
Operating income $ 2,673 $ 2,627
-------------------------------------------------------
</TABLE>
* Reflects the realignment of certain internal divisions.
During the first nine months of 2000, the net premiums written and net
premiums earned in AIG's general insurance operations increased 6.6 percent and
10.9 percent, respectively, from those of 1999.
General insurance domestic net premiums written and net premiums earned for
the nine month periods ending September 30, 2000 and 1999 were as follows:
(in millions)
------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------
<S> <C> <C>
Net premiums written:
DBG* $6,409 $6,273
Personal Lines 1,868 1,611
Mortgage Guaranty 335 291
-------------------------------------------------------
Total* $8,612 $8,175
-------------------------------------------------------
Net premiums earned:
DBG* $6,257 $5,703
Personal Lines 1,756 1,525
Mortgage Guaranty 336 291
-------------------------------------------------------
Total* $8,349 $7,519
-------------------------------------------------------
</TABLE>
* Reflects the realignment of certain internal divisions.
During the latter part of 1999, the commercial insurance market continued
to experience some rate increases. However, this market remains competitive and
excessively capitalized. DBG continued to monitor its operations, canceling,
non-renewing or losing business where underwriting and pricing standards could
not be achieved. During the first nine months of 2000, DBG declined to renew
$262 million of business. DBG has been able to sustain some growth in various
specialty markets, such as pollution, excess liability and risk management,
where AIG provides cost effective coverages for large complex risks,
underwriting flexibility, and creative risk financing solutions. Virtually all
areas of DBG experienced rate increases. Excluding non-renewed business DBG's
net premiums written increased approximately six percent.
As reflected in the preceding table showing the distribution of net
premiums written, domestic growth was primarily achieved through the growth in
the personal auto insurance segment of Personal Lines. Personal Lines net
premiums written increased $257 million in the first nine months of 2000 over
the same period of 1999. The increase was related to the significant growth in
the number of policies issued with respect to the preferred, standard and
non-standard auto risks.
Growth of 9.1 percent and 10.7 percent for foreign general insurance net
premiums written and net premiums earned, respectively, in the first nine months
of 2000 over 1999 reflects growth of operations in the United Kingdom and the
Far East. Foreign general insurance operations produced 33.9 percent of the
general insurance net premiums written in the first nine months of 2000 and 33.1
percent in 1999.
Differences in foreign exchange rates during 2000 relative to 1999 had a
negligible effect on foreign general insurance net premiums written when
translated from original currencies into U.S. dollars. (See also the discussion
under "Capital Resources" herein.)
Because of the nature and diversity of AIG's operations and the continuing
rapid changes in the insurance industry worldwide, together with the factors
discussed above, it is difficult to assess further or project future growth in
AIG's net premiums written and reserve for losses and loss expenses.
Net premiums written are initially deferred and earned based upon the terms
of the underlying policies. The net unearned premium reserve constitutes
deferred revenues which are generally earned ratably over the policy period.
Thus, the net unearned premium reserve is not fully recognized as net premiums
earned until the end of the policy period.
AIG, along with most general insurance entities, uses the loss ratio, the
expense ratio and the combined ratio as measures of performance. The loss ratio
is derived as the sum of losses and loss expenses incurred divided by net
premiums earned. The expense ratio is derived as statutory underwriting expenses
divided by net premiums written. The combined ratio is the sum of the loss ratio
and the expense ratio. These ratios are relative measurements that describe for
every $100 of net premiums earned or written, the cost of losses and statutory
expenses, respectively. The combined ratio presents the total cost per $100 of
premium production. A combined ratio below 100 demonstrates underwrit-
11
<PAGE> 13
ing profit; a combined ratio above 100 demonstrates underwriting loss. The
statutory general insurance ratios were as follows:
------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------
<S> <C> <C>
Domestic:
Loss Ratio 80.48 81.02
Expense Ratio 16.60 16.09
-------------------------------------------------------
Combined Ratio 97.08 97.11
-------------------------------------------------------
Foreign:
Loss Ratio 64.15 63.50
Expense Ratio 29.68 29.04
-------------------------------------------------------
Combined Ratio 93.83 92.54
-------------------------------------------------------
Consolidated:
Loss Ratio 74.95 75.08
Expense Ratio 21.03 20.37
-------------------------------------------------------
Combined Ratio 95.98 95.45
-------------------------------------------------------
</TABLE>
AIG believes that underwriting profit is the true measure of the
performance of the core business of a general insurance company.
Underwriting profit is measured two ways: statutory underwriting profit and
Generally Accepted Accounting Principles (GAAP) underwriting profit.
Statutory underwriting profit is arrived at by reducing net premiums earned
by net losses incurred and net expenses incurred. Statutory accounting differs
from GAAP, as statutory accounting requires immediate expense recognition and
ignores the matching of revenues and expenses as required by GAAP. That is, for
statutory purposes, all expenses, most specifically acquisition expenses, are
recognized immediately which is not consistent with the revenues earned.
A basic premise of GAAP accounting is the recognition of expenses at the
same time revenues are earned, the principle of matching. Therefore, to convert
underwriting results to a GAAP basis, acquisition expenses are deferred and
recognized together with the related revenues. Accordingly, the statutory
underwriting profit has been adjusted as a result of acquisition expenses being
deferred as required by GAAP. Thus, "adjusted underwriting profit" is a GAAP
measurement which can be viewed as gross margin or an intermediate subtotal in
calculating operating income and net income.
A major part of the discipline of a successful general insurance company is
to produce an underwriting profit, exclusive of investment income. If
underwriting is not profitable, losses incurred are a major factor. The result
is that the premiums are inadequate to pay for losses and expenses and produce a
profit; therefore, investment income must be used to cover underwriting losses.
If assets and the income therefrom are insufficient to pay claims and expenses
over extended periods, an insurance company cannot survive. For these reasons,
AIG views and manages its underwriting operations separately from its investment
operations.
The adjusted underwriting profits were $632 million in the first nine
months of 2000 and $547 million in the same period of 1999. The regulatory,
product type and competitive environment as well as the degree of litigation
activity in any one country varies significantly. These factors have a direct
impact on pricing and consequently profitability as reflected by adjusted
underwriting profit and statutory general insurance ratios.
AIG's results reflect the net impact of incurred losses from catastrophes
approximating $44 million and $73 million in the first nine months of 2000 and
1999, respectively. AIG's gross incurred losses from catastrophes approximated
$112 million and $180 million in 2000 and 1999, respectively.
If catastrophes were excluded from the losses incurred, the pro forma
consolidated statutory general insurance ratios would be as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------
2000 1999
--------------------------------------------------------
<S> <C> <C>
Loss Ratio 74.60 74.44
Expense Ratio 21.03 20.37
--------------------------------------------------------
Combined Ratio 95.63 94.81
--------------------------------------------------------
</TABLE>
AIG presents calculations of general insurance ratios which exclude
catastrophe losses because the impact of catastrophes can fluctuate widely from
period to period making comparisons of recurring type business more difficult.
Thus, the pro forma results are comparable and allow the reader to focus on the
results of AIG's core business, underwriting.
AIG's historic ability to maintain its combined ratio below 100 is
primarily attributable to the profitability of AIG's foreign general insurance
operations and AIG's emphasis on maintaining its disciplined underwriting,
especially in the domestic specialty markets. In addition, AIG does not seek net
premium growth where rates do not adequately reflect its assessment of
exposures.
General insurance net investment income in the first nine months of 2000
increased 6.9 percent when compared to the same period of 1999. The growth in
net investment income in 2000 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
12
<PAGE> 14
compounding of previously earned and reinvested net investment income. (See also
the discussion under "Liquidity" herein.)
General insurance realized capital gains were $42 million in the first nine
months of 2000 and $211 million in 1999. These realized gains resulted from the
ongoing management of the general insurance investment portfolios within the
overall objectives of the general insurance operations and arose primarily from
the disposition of equity securities and available for sale fixed maturities as
well as redemptions of fixed maturities.
General insurance operating income in the first nine months of 2000
increased 1.7 percent when compared to the same period of 1999. The contribution
of general insurance operating income to income before income taxes and minority
interest was 43.5 percent in 2000 compared to 47.1 percent in 1999.
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 70 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 $19.38 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at
September 30, 2000 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, 1999, 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 95 percent of such balances are from reinsurers rated
A-(excellent) or better, as rated by A.M. Best. This rating is a measure of
financial strength. The terms authorized and unauthorized pertain to regulatory
categories, not creditworthiness. Through September 30, 2000, these distribution
percentages have not significantly changed.
AIG's allowance for estimated unrecoverable reinsurance has not changed
significantly from December 31, 1999 when AIG had allowances for unrecoverable
reinsurance approximating $78 million. At that date, and prior to this
allowance, AIG had no significant reinsurance recoverables from any individual
reinsurer which is financially troubled (e.g., liquidated, insolvent, in
receivership or otherwise subject to formal or informal regulatory restriction).
AIG's Reinsurance Security Department conducts ongoing detailed assessments
of the reinsurance markets and current and potential reinsurers, both foreign
and domestic. Such assessments include, but are not limited to, identifying if a
reinsurer is appropriately licensed, and has sufficient financial capacity, and
the local economic environment in which a foreign reinsurer operates. This
department also reviews the nature of the risks ceded and the need for
collateral. In addition, AIG's Credit Risk Committee reviews the credit limits
for and concentrations with any one reinsurer.
AIG enters into certain intercompany reinsurance transactions for its
general and life operations. AIG enters these transactions as a sound and
prudent business practice in order to maintain underwriting control and spread
insurance risk among various legal entities. These reinsurance agreements have
been approved by the appropriate regulatory authorities. All material
intercompany transactions have been eliminated in consolidation.
At September 30, 2000, the consolidated general reinsurance assets of
$19.38 billion include reinsurance recoverables for paid losses and loss
expenses of $2.83 billion and $13.66 billion with respect to the ceded reserve
for losses and loss expenses, including ceded losses incurred but not reported
(IBNR) (ceded reserves). The ceded reserves represent the accumulation of
estimates of ultimate ceded losses including provisions for ceded IBNR and loss
expenses. The methods used to determine such estimates and to establish the
resulting ceded reserves are continually reviewed and updated. Any adjustments
therefrom are reflected in income currently. It is AIG's belief that the ceded
reserves at September 30, 2000 were repre-
13
<PAGE> 15
sentative of the ultimate losses recoverable. In the future, as the ceded
reserves continue to develop to ultimate amounts, the ultimate loss recoverable
may be greater or less than the reserves currently ceded.
At September 30, 2000, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $38.27 billion. These loss reserves
represent the accumulation of estimates of ultimate losses, including IBNR, and
loss expenses and amounts of discounting related to certain workers'
compensation claims. At September 30, 2000, general insurance net loss reserves
increased $10 million to $24.61 billion. The net loss reserves represent loss
reserves reduced by reinsurance recoverables, net of an allowance for
unrecoverable reinsurance. The methods used to determine such estimates and to
establish the resulting reserves are continually reviewed and updated. Any
adjustments resulting therefrom are reflected in operating income currently. It
is management's belief that the general insurance net loss reserves are adequate
to cover all general insurance net losses and loss expenses as at September 30,
2000. In the future, if the general insurance net loss reserves develop
deficiently, such deficiency would have an adverse impact on such future results
of operations.
In a very broad sense, the general loss reserves can be categorized into
two distinct groups: one group being long tail casualty lines of business. Such
lines include excess and umbrella liability, directors and officers' liability,
professional liability, medical malpractice, general liability, products'
liability, and related classes. These lines account for approximately one-half
of net losses and loss expenses. The other group is short tail lines of business
consisting principally of property lines, certain classes of casualty lines and
includes personal 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 four percent. Loss
trend factors reflect many items including changes in claims handling, exposure
and policy forms and current and future estimates of monetary inflation and
social inflation. Thus, many factors are implicitly considered in estimating the
year to year growth in loss costs. Therefore, AIG's carried net long tail loss
reserves are judgmentally set as well as tested for reasonableness using the
most appropriate loss trend factors for each class of business. In the
evaluation of AIG's net loss reserves, loss trend factors vary slightly,
depending on the particular class and nature of the business involved. These
factors are periodically reviewed and subsequently adjusted, as appropriate, to
reflect emerging trends which are based upon past loss experience.
Estimation of net losses for short tail business is less complex than for
long tail casualty lines. Loss cost trends for many property lines can generally
be assumed to be similar to the growth in exposure of such lines. For example,
if the fire insurance coverage remained proportional to the actual value of the
property, the growth in property's exposure to fire loss can be approximated by
the amount of insurance purchased.
For other property and short tail casualty lines, the loss trend is
implicitly assumed to grow at the rate that reported net losses grow from one
year to the next. The concerns noted above for longer tail casualty lines with
respect to the limited statistical credibility of reported net losses generally
do not apply to shorter tail lines.
AIG continues to receive claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump sites (hereinafter referred to
collectively as environmental claims) and indemnity claims asserting injuries
from asbestos. The vast majority of these asbestos and environmental claims
emanate from policies written in 1984 and prior years. AIG has established a
specialized claims unit which investigates and adjusts all such asbestos and
environmental claims. Commencing in 1985, standard policies contained an
absolute exclusion for pollution related damage. However, AIG currently
underwrites environmental impairment liability insurance on a
14
<PAGE> 16
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
September 30, 2000 are believed to be adequate as these reserves are based on
the known facts and current law. Furthermore, as AIG's net exposure retained
relative to the gross exposure written was lower in 1984 and prior years, the
potential impact of these claims is much smaller on the net loss reserves than
on the gross loss reserves. (See the previous discussion on reinsurance
collectibility herein.)
The majority of AIG's exposures for asbestos and environmental claims are
excess casualty coverages, not primary coverages. Thus, the litigation costs are
treated in the same manner as indemnity reserves. That is, litigation expenses
are included within the limits of the liability AIG incurs. Individual
significant claim liabilities, where future litigation costs are reasonably
determinable, are established on a case basis.
A summary of reserve activity, including estimates for applicable IBNR,
relating to asbestos and environmental claims separately and combined at
September 30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
(in millions)
------------------------------------------------------------
2000 1999
------------- -------------
GROSS NET GROSS NET
------------------------------------------------------------
<S> <C> <C> <C> <C>
Asbestos:
Reserve for losses and loss
expenses at beginning of
year $1,093 $306 $ 964 $259
Losses and loss expenses
incurred 145 34 366 57
Losses and loss expenses paid (314) (51) (200) (39)
------------------------------------------------------------
Reserve for losses and loss
expenses at end of period $ 924 $289 $1,130 $277
------------------------------------------------------------
Environmental:
Reserve for losses and loss
expenses at beginning of
year $1,519 $585 $1,536 $604
Losses and loss expenses
incurred 58 21 77 22
Losses and loss expenses paid (95) (19) (104) (46)
------------------------------------------------------------
Reserve for losses and loss
expenses at end of period $1,482 $587 $1,509 $580
------------------------------------------------------------
Combined:
Reserve for losses and loss
expenses at beginning of
year $2,612 $891 $2,500 $863
Losses and loss expenses
incurred 203 55 443 79
Losses and loss expenses paid (409) (70) (304) (85)
------------------------------------------------------------
Reserve for losses and loss
expenses at end of period $2,406 $876 $2,639 $857
------------------------------------------------------------
</TABLE>
The gross and net IBNR included in the aforementioned reserve for losses
and loss expenses at September 30, 2000 and December 31, 1999 were estimated as
follows:
(in millions)
------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
------------- -------------
GROSS NET GROSS NET
------------------------------------------------------------
<S> <C> <C> <C> <C>
Combined $ 934 $326 $ 930 $352
------------------------------------------------------------
</TABLE>
15
<PAGE> 17
A summary of asbestos and environmental claims count activity for the nine
month periods ended September 30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
2000 1999
----------------------------------- -----------------------------------
ASBESTOS ENVIRONMENTAL COMBINED ASBESTOS ENVIRONMENTAL COMBINED
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Claims at beginning of year 6,746 13,432 20,178 6,388 16,560 22,948
Claims during period:
Opened 487 1,301 1,788 715 1,792 2,507
Settled (79) (449) (528) (206) (717) (923)
Dismissed or otherwise resolved (351) (2,465) (2,816) (307) (3,748) (4,055)
---------------------------------------------------------------------------------------------------------------------
Claims at end of period 6,803 11,819 18,622 6,590 13,887 20,477
---------------------------------------------------------------------------------------------------------------------
</TABLE>
The average cost per claim settled, dismissed or otherwise resolved for the
nine month periods ended September 30, 2000 and 1999 was as follows:
------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
------------------- ------------------
GROSS NET GROSS NET
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Asbestos $730,200 $118,600 $390,300 $77,400
Environmental 32,600 6,500 23,200 10,200
Combined 122,300 20,900 61,100 17,200
---------------------------------------------------------------
</TABLE>
A.M. Best, an insurance rating agency, has developed a survival ratio to
measure the number of years it would take a company to exhaust both its asbestos
and environmental reserves for losses and loss expenses based on that company's
current level of asbestos and environmental claims payments. This is a ratio
derived by taking the current ending losses and loss expense reserves and
dividing by the average annual payments for the prior three years. Therefore,
the ratio derived is a simplistic measure of an estimate of the number of years
it would be before the current ending losses and loss expense reserves would be
paid off using recent average payments. The higher the ratio, the more years the
reserves for losses and loss expenses cover these claims payments. These ratios
are computed based on the ending reserves for losses and loss expenses over the
respective claims settlements during the fiscal year. Such payments include
indemnity payments and legal and loss adjustment payments. It should be noted,
however, that this is an extremely simplistic approach to measuring asbestos and
environmental reserve levels. Many factors, such as aggressive settlement
procedures, mix of business and level of coverage provided, have significant
impact on the amount of asbestos and environmental losses and loss expense
reserves, ultimate payments thereof and the resultant ratio.
The developed survival ratios include both involuntary and voluntary
indemnity payments. Involuntary payments are primarily attributable to court
judgments, court orders, covered claims with no coverage defenses, state
mandated cleanup costs, claims where AIG's coverage defenses are minimal, and
settlements made less than six months before the first trial setting. Also, AIG
considers all legal and loss adjustment payments as involuntary.
AIG believes voluntary indemnity payments should be excluded from the
survival ratio. The special asbestos and environmental claims unit actively
manages AIG's asbestos and environmental claims and proactively pursues early
settlement of environmental claims for all known and unknown sites. As a result,
AIG reduces its exposure to future environmental loss contingencies.
AIG's survival ratios for involuntary asbestos and environmental claims,
separately and combined, were based upon a three year average payment. These
ratios at September 30, 2000 and 1999 were as follows:
------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
GROSS NET GROSS NET
---------------------------------------------------------
<S> <C> <C> <C> <C>
Involuntary survival
ratios:
Asbestos 2.9 5.1 4.0 5.3
Environmental 20.7 19.4 17.0 18.1
Combined 7.8 12.2 9.2 13.6
---------------------------------------------------------
</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 1999 were $15
million. Based upon current information, AIG does not
16
<PAGE> 18
anticipate that its net assessment will be significantly different in 2000.
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. 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), a Delaware corporation which owns substantially all of the
subsidiaries which were owned by SunAmerica Inc., the Maryland corporation which
was merged into AIG in January 1999. Both of these operations sell primarily
financial and investment type products. (See also Note (d) of Notes to Financial
Statements.)
Life insurance operations for the nine month periods ending September 30,
2000 and 1999 were as follows:
(in millions)
------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------
<S> <C> <C>
Premium income:
Domestic $ 881 $ 675
Foreign 9,061 7,949
--------------------------------------------------------
Total $ 9,942 $ 8,624
--------------------------------------------------------
Net investment income:
Domestic $ 2,854 $ 2,600
Foreign 2,330 1,949
--------------------------------------------------------
Total $ 5,184 $ 4,549
--------------------------------------------------------
Operating income before realized
capital losses:
Domestic $ 948 $ 777
Foreign 1,645 1,421
--------------------------------------------------------
Total 2,593 2,198
Realized capital losses (123) (62)
--------------------------------------------------------
Operating income $ 2,470 $ 2,136
--------------------------------------------------------
Life insurance in-force:*
Domestic $ 86,060 $103,049
Foreign 500,471 481,910
--------------------------------------------------------
Total $586,531 $584,959
--------------------------------------------------------
</TABLE>
* Amounts presented were as at September 30, 2000 and December 31, 1999,
respectively.
AIG's life premium income during the first nine months of 2000 represented
a 15.3 percent increase from the same period in 1999. Foreign life operations
produced 91.1 percent and 92.2 percent of the life premium income in 2000 and
1999, respectively.
The traditional life products, particularly individual life products, were
major contributors to the growth in foreign premium income and resulting
investment income, particularly in 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.
Differences in foreign exchange rates during 2000 relative to 1999 had a
negligible effect on foreign life premium income when translated from original
currencies into U.S. dollars.
Life insurance net investment income increased 14.0 percent during the
first nine months of 2000. 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.)
17
<PAGE> 19
Life insurance realized capital losses were $123 million in 2000 and $62
million in 1999. These realized capital losses resulted from the ongoing
management of the life insurance investment portfolios within the overall
objectives of the life insurance operations and arose primarily from the
disposition of equity securities and available for sale fixed maturities as well
as redemptions of fixed maturities.
Life insurance operating income during the first nine months of 2000
increased 15.6 percent to $2.47 billion. Excluding realized capital losses from
life insurance operating income, the percent increase would be 18.0. The
contribution of life insurance operating income to income before income taxes
and minority interest amounted to 40.2 percent during the first nine months of
2000 compared to 38.3 percent in the same period of 1999.
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 investment risk represents the exposure to loss resulting from the cash
flows from the invested assets, primarily long-term fixed rate investments,
being less than the cash flows required to meet the obligations of the expected
policy and contract liabilities and the necessary return on investments.
To minimize its exposure to investment risk, AIG tests the cash flows from
the invested assets and the policy and contract liabilities using various
interest rate scenarios to assess whether there is a liquidity excess or
deficit. If a rebalancing of the invested assets to the policy and contract
claims became necessary and did not occur, a demand could be placed upon
liquidity. (See also the discussion under "Liquidity" herein.)
The asset-liability relationship is appropriately managed in AIG's foreign
operations, as it has been throughout AIG's history, even though certain
territories lack qualified long-term investments or there are investment
restrictions imposed by the local regulatory authorities. For example, in Japan
and several Southeast Asia territories, the duration of the investments is often
for a shorter period than the effective maturity of the related policy
liabilities. Therefore, there is a risk that the reinvestment of the proceeds at
the maturity of the investments may be at a yield below that of the interest
required for the accretion of the policy liabilities. At December 31, 1999, the
average duration of the investment portfolio in Japan was 5.6 years.
Additionally, there exists a future investment risk that is associated with
certain policies currently in force which will have premium receipts in the
future. That is, the investment of these future premium receipts may be at a
yield below that required to meet future policy liabilities. With respect to the
investment of these future premium receipts, the average maturity is estimated
to be 6.0 years. These durations compare with an estimated average duration of
9.4 years for the corresponding policy liabilities. These durations have not
changed significantly during 2000. 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
18
<PAGE> 20
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 (d) 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 structured borrowings through notes, bonds and guaranteed investment
agreements. (See also Note (d) 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 (d) of Notes to Financial Statements.)
Financial services operations for the nine month periods ending September
30, 2000 and 1999 were as follows:
(in millions)
------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------
<S> <C> <C>
Revenues:
International Lease Finance
Corporation $1,786 $1,635
AIG Financial Products Corp.* 711 495
AIG Trading Group Inc.* 190 153
Other 207 119
--------------------------------------------------------
Total $2,894 $2,402
--------------------------------------------------------
Operating income:
International Lease Finance
Corporation $ 476 $ 430
AIG Financial Products Corp. 433 316
AIG Trading Group Inc. 41 77
Other, including intercompany
adjustments (56) (67)
--------------------------------------------------------
Total $ 894 $ 756
--------------------------------------------------------
</TABLE>
* Represents commissions, transaction and other fees.
Financial services operating income increased 18.2 percent in the first
nine months of 2000 over 1999.
Financial services operating income represented 14.5 percent of AIG's
income before income taxes and minority interest in the first nine months of
2000. This compares to 13.5 percent in the same period of 1999.
ILFC generates its revenues primarily from leasing new and used commercial
jet aircraft to domestic and foreign airlines. Revenues also result from the
remarketing of commercial jets for its own account, for airlines and for
financial institutions. Revenues in the first nine months of 2000 increased 9.2
percent from 1999. The revenue growth resulted primarily from the increase in
flight equipment available for operating lease and the increase in the relative
cost of the leased fleet. Approximately 20 percent of ILFC's operating lease
revenues are derived from U.S. and Canadian airlines. During the first nine
months of 2000, operating income increased 10.9 percent from 1999. The composite
borrowing rates at the end of the first nine months of 2000 and 1999 were 6.38
percent and 6.03 percent, respectively. (See also the discussions under "Capital
Resources" and "Liquidity" herein and Note (d) of Notes to Financial
Statements.)
ILFC is exposed to loss through non-performance of aircraft lessees,
through owning aircraft which it would be unable to sell or re-lease at
acceptable rates at lease expiration and through committing to purchase aircraft
which it would be unable to lease. ILFC manages its lessee non-performance
exposure through credit reviews and security deposit requirements. At September
30, 2000, there were 387 aircraft subject to operating leases and there were two
aircraft off lease. (See also the discussions under "Capital Resources" and
"Liquidity" herein.)
AIGFP participates in the derivatives dealer market conducting, primarily
as principal, an interest rate, currency, equity and credit derivative products
business. AIGFP also enters into structured transactions including long-dated
forward foreign exchange contracts, option transactions, liquidity facilities
and investment agreements and invests in a diversified portfolio of securities.
AIGFP derives substantially all its revenues from proprietary positions entered
in connection with counterparty transactions rather than from speculative
transactions. Revenues in the first nine months of 2000 increased 43.6 percent
from the same period of 1999. During the first nine months of 2000, operating
income increased 36.9 percent from the same period of 1999. 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 (d) of Notes to Financial Statements.)
AIGTG derives a substantial portion of its revenues from market making and
trading activities, as principal, in foreign exchange, interest rates and
precious and base metals. Revenues in the first nine months of 2000 increased
24.0 percent from the same period of 1999. During the first nine months of
19
<PAGE> 21
2000, operating income decreased 47.1 percent from the same period of 1999. As
AIGTG is a transaction-oriented operation, current and past revenues and
operating results may not provide a basis for predicting future performance or
for comparing revenues to operating income. (See also the discussions under
"Capital Resources," "Liquidity" and "Derivatives" herein and Note (d) of Notes
to Financial Statements.)
AIG Consumer Finance Group, Inc., through its subsidiaries, is engaged in
developing a multi-product consumer finance business with an emphasis on
emerging markets.
Asset Management Operations
AIG's asset management operations offer a wide variety of investment
vehicles and services, including variable annuities, mutual funds, and
investment asset management. Such products and services are offered to
individuals and institutions both domestically and internationally.
AIG's three principal asset management operations are SunAmerica's asset
management operations (SAAMCo), AIG Global Investment Group, Inc. (Global
Investment) and AIG Capital Partners, Inc. (Cap Partners). SAAMCo develops and
sells variable annuities and other investment products, sells and manages mutual
funds and provides financial services. Global Investment manages invested assets
of institutions, including insurance companies and pension funds, and provides
custodial services. Cap Partners organizes, and manages the invested assets of
institutional investment funds and may also invest in such funds. Each of these
subsidiary operations receives fees for investment products and services
provided.
Asset management operations for the nine month periods ending September 30,
2000 and 1999 were as follows:
(in millions)
------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------
<S> <C> <C>
Revenues $908 $705
Operating income $321 $218
-------------------------------------------------------
</TABLE>
These increases were primarily attributable to increased fees from the
management of the variable annuity business and mutual fund assets by SAAMCo.
Asset management operating income in the first nine months of 2000
increased 47.1 percent when compared to the same period of 1999.
Asset management operating income represented 5.2 percent of AIG's income
before income taxes and minority interest in the first nine months of 2000. This
compares to 3.9 percent in the same period of 1999.
At September 30, 2000, AIG's third party assets under management, including
both retail mutual funds and institutional accounts approximated $36 billion.
Other Operations
Other realized capital losses amounted to $11 million and $18 million in
the first nine months of 2000 and 1999, 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, as well as the
income and expenses of the parent holding company and other miscellaneous income
and expenses. In the first nine months of 2000, net deductions amounted to $196
million. In the same period of 1999, net deductions amounted to $135 million.
Income before income taxes and minority interest amounted to $6.15 billion
in the first nine months of 2000 and $5.58 billion in the same period of 1999.
In the first nine months of 2000, AIG recorded a provision for income taxes
of $1.82 billion compared to the provision of $1.64 billion in the same period
of 1999. These provisions represent effective tax rates of 29.7 percent in the
first nine months of 2000 and 29.4 percent in the same period of 1999.
Minority interest represents minority shareholders' equity in income of
certain majority-owned consolidated subsidiaries. Minority interest amounted to
$188 million and $201 million in the first nine months of 2000 and 1999,
respectively.
Net income amounted to $4.14 billion in the first nine months of 2000 and
$3.74 billion in the same period of 1999. The increases in net income over the
periods resulted from those factors described above.
CAPITAL RESOURCES
At September 30, 2000, AIG had total capital funds of $36.57 billion and
total borrowings of $37.91 billion. At that date, $34.15 billion of such
20
<PAGE> 22
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 September 30,
2000 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------
2000 1999
--------------------------------------------------------
<S> <C> <C>
GIAs -- AIGFP $11,695 $ 9,430
--------------------------------------------------------
Commercial Paper:
AIG Funding, Inc. 1,002 888
ILFC(a) 4,351 2,958
A.I. Credit Corp. 547 475
AIG Finance (Taiwan) Limited(a) 98 83
--------------------------------------------------------
Total 5,998 4,404
--------------------------------------------------------
Medium Term Notes:
ILFC(a) 2,979 3,226
AIG 590 481
--------------------------------------------------------
Total 3,569 3,707
--------------------------------------------------------
Notes and Bonds Payable:
ILFC(a) 5,232 5,016
AIGFP 8,425 7,895
AIG 715 705
--------------------------------------------------------
Total 14,372 13,616
--------------------------------------------------------
Loans and Mortgages Payable:
ILFC(a)(b) 972 670
AIG Finance (Hong Kong) Limited(a) 381 566
AIG Consumer Finance Group,
Inc.(a) 579 334
AIG 345 257
--------------------------------------------------------
Total 2,277 1,827
--------------------------------------------------------
Total Borrowings 37,911 32,984
--------------------------------------------------------
Borrowings not guaranteed by AIG 14,592 12,853
Matched GIA borrowings 11,695 9,430
Matched notes and bonds
payable -- AIGFP 7,858 7,370
--------------------------------------------------------
34,145 29,653
--------------------------------------------------------
Remaining borrowings of AIG $ 3,766 $ 3,331
--------------------------------------------------------
</TABLE>
(a)AIG does not guarantee or support these borrowings.
(b)Primarily capital lease obligations.
The maturity distributions of total borrowings at September 30, 2000 and
December 31, 1999 were as follows:
(in millions)
------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------
<S> <C> <C>
Short-term borrowings $14,345 $10,088
Long-term borrowings(a) 23,566 22,896
--------------------------------------------------------
Total borrowings $37,911 $32,984
--------------------------------------------------------
</TABLE>
(a)Including commercial paper and excluding that portion of long-term debt
maturing in less than one year.
During the first nine months of 2000, AIGFP increased the aggregate
principal amount outstanding of its notes and bonds payable to $8.43 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 AIG Finance (Taiwan)
Limited -- (AIGF-Taiwan), 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 AIGF-Taiwan's commercial paper. However, AIG has entered into
an agreement in support of AICCO's commercial paper. (See also the discussion
under "Derivatives" herein.)
AIG and Funding have entered into revolving credit facilities
(collectively, the Facility) aggregating $1.5 billion. The Facility consists of
$1.0 billion in short-term revolving credit facilities and a $500 million five
year revolving credit facility. The Facility 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 the
Facility, nor were any borrowings outstanding as of September 30, 2000.
At September 30, 2000, ILFC had decreased the aggregate principal amount
outstanding of its medium term and term notes to $8.21 billion, a net decrease
of $31 million, and recorded a $400 million increase in bank loans, a net
decline in its capital lease obligations of $98 million and a net increase in
its commercial paper of $1.39 billion. At September 30, 2000, ILFC had $625
million in aggregate principal amount of debt securities registered for issuance
from time to time. In addition, ILFC established a Euro Medium Term Note Program
for $2.0 billion, under which $771 million in notes were sold through September
30, 2000.
ILFC has an Export Credit Facility, up to a maximum of $4.3 billion, for
approximately 75 aircraft to be delivered through 2001. ILFC has the
21
<PAGE> 23
right, but is not required, to use the facility to fund 85 percent of each
aircraft's purchase price. This facility is guaranteed by various European
Export Credit Agencies. The interest rate varies from 5.75 percent to 5.90
percent on the first 75 aircraft depending on the delivery date of the aircraft.
Through September 30, 2000, ILFC borrowed $1.90 billion under this facility.
Borrowings with respect to this facility are included in Notes and Bonds Payable
in the accompanying table of borrowings.
The proceeds of ILFC's debt financing are primarily used to purchase flight
equipment, including progress payments during the construction phase. The
primary sources for the repayment of this debt and the interest expense thereon
are the cash flow from operations, proceeds from the sale of flight equipment
and the rollover and refinancing of the prior debt. (See also the discussions
under "Operational Review" and "Liquidity" herein.)
During the first nine months of 2000, AIG issued $234 million principal
amount of Medium Term Notes and $125 million of previously issued notes matured.
At September 30, 2000, AIG had $781 million in aggregate principal amount
of debt securities registered for issuance from time to time.
AIG's capital funds increased $3.27 billion during the first nine months of
2000. Unrealized appreciation of investments, net of taxes increased $144
million. During the first nine months of 2000, the cumulative translation
adjustment loss, net of taxes decreased $77 million. (See also the discussion
under "Operational Review" and "Liquidity" herein.) Retained earnings increased
$1.85 billion, resulting from net income less dividends.
During the period from January 1, 2000 through June 30, 2000, AIG
repurchased in the open market 10,351,600 shares of its common stock. AIG
intends to continue to buy its common shares in the open market for general
corporate purposes, including to satisfy its obligations under various employee
benefit plans.
Payments of dividends to AIG by its insurance subsidiaries are subject to
certain restrictions imposed by statutory authorities. AIG has in the past
reinvested most of its unrestricted earnings in its operations and believes such
continued reinvestment in the future will be adequate to meet any foreseeable
capital needs. However, AIG may choose from time to time to raise additional
funds through the issuance of additional securities. At September 30, 2000,
there were no significant statutory or regulatory issues which would impair
AIG's financial condition, results of operations or liquidity. To AIG's
knowledge, no AIG company is on any regulatory or similar "watch list". (See
also the discussion under "Liquidity" herein.)
The National Association of Insurance Commissioners (NAIC) has developed
Risk-Based Capital (RBC) requirements. RBC relates an individual insurance
company's statutory surplus to the risk inherent in its overall operations. At
September 30, 2000, the adjusted capital of each of AIG's domestic general and
life companies exceeded each of their RBC standards by considerable margins.
A substantial portion of AIG's general insurance business and a majority of
its life insurance business are conducted in foreign countries. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Generally, AIG, as well as the underwriting companies
operating in such jurisdictions, must satisfy local regulatory requirements.
LIQUIDITY
AIG's liquidity is primarily derived from the operating cash flows of its
general and life insurance operations.
At September 30, 2000, AIG's consolidated invested assets included $5.95
billion of cash and short-term investments. Consolidated net cash provided from
operating activities in the first nine months of 2000 amounted to $5.34 billion.
Sources of funds considered in meeting the objectives of AIG's financial
services operations include guaranteed investment agreements, issuance of long
and short-term debt, maturities and sales of securities available for sale,
securities sold under repurchase agreements, trading liabilities, securities and
spot commodities sold but not yet purchased, issuance of equity, and cash
provided from such operations. AIG's strong capital position is integral to
managing this liquidity, as it enables AIG to raise funds in diverse markets
worldwide. (See also the discussions under "Capital Resources" herein.)
Management believes that AIG's liquid assets, its net cash provided by
operations, and access to the capital markets will enable it to meet any
foreseeable cash requirements.
The liquidity of the combined insurance operations is derived both
domestically and abroad. The
22
<PAGE> 24
combined insurance operating cash flow is derived from two sources, underwriting
operations and investment operations. In the aggregate, AIG's insurance
operations generated approximately $12 billion in pre-tax cash flow during the
first nine months of 2000. Cash flow includes periodic premium collections,
including policyholders' contract deposits, paid loss recoveries less
reinsurance premiums, losses, benefits, acquisition and operating expenses.
Generally, there is a time lag from when premiums are collected and, when as a
result of the occurrence of events specified in the policy, the losses and
benefits are paid. AIG's insurance investment operations generated approximately
$6.8 billion in investment income cash flow during the first nine months of
2000. Investment income cash flow is primarily derived from interest and
dividends received and includes realized capital gains net of realized capital
losses.
In addition to the combined insurance pre-tax operating cash flow, AIG's
insurance operations held $5.4 billion in cash and short-term investments at
September 30, 2000. 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 $27
billion from the maturities, sales and redemptions of fixed income securities
and from the sale of equity securities was used to purchase approximately $36
billion of fixed income securities and marketable equity securities during the
first nine months of 2000.
The following table is a summary of AIG's invested assets by significant
segment, including investment income due and accrued of $2.40 billion and $2.05
billion, and real estate of $1.68 billion and $1.62 billion at September 30,
2000 and December 31, 1999, respectively:
(dollars in millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 December 31, 1999
----------------------- -----------------------
INVESTED PERCENT INVESTED PERCENT
ASSETS OF TOTAL ASSETS OF TOTAL
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General insurance $ 42,000 19.9% $ 39,135 20.6%
Life insurance 96,202 45.6 87,355 46.1
Financial services and asset management 71,797 34.0 62,548 33.0
Other 1,005 0.5 651 0.3
-------------------------------------------------------------------------------------------------------------------------
Total $211,004 100.0% $189,689 100.0%
-------------------------------------------------------------------------------------------------------------------------
</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 September 30, 2000 and December 31, 1999:
(dollars in millions)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
PERCENT DISTRIBUTION
GENERAL LIFE PERCENT ---------------------
SEPTEMBER 30, 2000 INSURANCE INSURANCE TOTAL OF TOTAL DOMESTIC FOREIGN
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Available for sale, at market value(a) $17,414 $70,353 $ 87,767 63.5% 51.8% 48.2%
Held to maturity, at amortized cost 11,801 -- 11,801 8.5 100.0 --
Equity securities, at market value(b) 4,102 2,805 6,907 5.0 49.3 50.7
Mortgage loans on real estate, policy and
collateral loans 56 10,657 10,713 7.8 56.9 43.1
Short-term investments, including time
deposits, and cash 1,308 4,068 5,376 3.9 38.9 61.1
Real estate 380 1,199 1,579 1.1 16.0 84.0
Investment income due and accrued 581 1,758 2,339 1.7 47.4 52.6
Other invested assets 6,358 5,362 11,720 8.5 84.9 15.1
-----------------------------------------------------------------------------------------------------------------------
Total $42,000 $96,202 $138,202 100.0% 58.0% 42.0%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)Includes $785 million of bonds trading securities, at market value.
(b)Includes $729 million of non-redeemable preferred stocks, at market value.
23
<PAGE> 25
(dollars in millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent Distribution
General Life Percent ---------------------
December 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) $16,903 $61,022 $ 77,925 61.6% 53.5% 46.5%
Held to maturity, at amortized cost 12,078 -- 12,078 9.5 100.0 --
Equity securities, at market value(b) 4,000 2,503 6,503 5.1 50.2 49.8
Mortgage loans on real estate, policy and
collateral loans 70 10,420 10,490 8.3 57.0 43.0
Short-term investments, including time
deposits, and cash 977 5,710 6,687 5.3 45.1 54.9
Real estate 381 1,141 1,522 1.2 18.5 81.5
Investment income due and accrued 576 1,421 1,997 1.6 48.0 52.0
Other invested assets 4,150 5,138 9,288 7.4 85.1 14.9
------------------------------------------------------------------------------------------------------------------------
Total $39,135 $87,355 $126,490 100.0% 59.5% 40.5%
------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)Includes $1.04 billion of bonds trading securities, at market value.
(b)Includes $697 million of non-redeemable preferred stocks, at market value.
Generally, insurance regulations restrict the types of assets in which an
insurance company may invest.
With respect to fixed maturities, AIG's general strategy is to invest in
high quality securities while maintaining diversification to avoid significant
exposure to issuer, industry and/or country concentrations. With respect to
general insurance, AIG's strategy is to invest in longer duration fixed
maturities to maximize the yields at the date of purchase. With respect to life
insurance, AIG's strategy is to produce cash flows required to meet maturing
insurance liabilities. (See also the discussion under "Operational Review: Life
Insurance Operations" herein.)
The fixed maturities 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 comprehensive income 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 September 30, 2000, approximately 58 percent of the fixed maturities
investments were domestic securities. Approximately 39 percent of such domestic
securities were rated AAA. Approximately 13 percent were below investment grade
or not rated.
A significant portion of the foreign insurance fixed income portfolio is
rated by Moody's, Standard & Poor's (S&P) or similar foreign services. Similar
credit quality rating services are not available in all overseas locations. AIG
annually reviews the credit quality of the foreign portfolio nonrated fixed
income investments, including mortgages. At September 30, 2000, approximately 11
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 12 percent were below investment grade or not
rated at that date. A large portion of these fixed maturity securities are
sovereign fixed maturity securities supporting the policy liabilities in the
country of issuance.
At September 30, 2000, approximately 18 percent of the fixed maturities
portfolio was collateralized mortgage obligations (CMOs), including commercial
mortgage backed securities. Substantially all of the CMOs were investment grade
and approximately 17 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 various reasons, including diversifying its
overall exposure to interest rate risk. Equity securities are subject to
declines in fair value. Such declines in fair value are presented in unrealized
appreciation of investments, net of taxes as a component of comprehensive
income.
Mortgage loans on real estate, policy and collateral loans comprised 7.8
percent of AIG's insurance invested assets at September 30, 2000. AIG's
insurance operations' holdings of real estate mortgages amounted to $6.71
billion of which 76.5 per-
24
<PAGE> 26
cent was domestic. At September 30, 2000, only a nominal amount were in default.
It is AIG's practice to maintain a maximum loan to value ratio of 75 percent at
loan origination. At September 30, 2000, AIG's insurance holdings of collateral
loans amounted to $995 million, 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 $2.82
billion at December 31, 1999 to $3.01 billion at September 30, 2000.
Short-term investments represent amounts invested in various internal and
external money market funds, time deposits and cash held.
AIG's real estate investment properties are primarily occupied by AIG's
various operations. The current market value of these properties considerably
exceeds their carrying value.
Other invested assets were primarily comprised of both foreign and domestic
private placements, limited partnerships and outside managed funds.
When permitted by regulatory authorities and when deemed necessary to
protect insurance assets, including invested assets, from adverse movements in
foreign currency exchange rates, interest rates and equity prices, AIG and its
insurance subsidiaries may enter into derivative transactions as end users. To
date, such activities have not been significant. (See also the discussion under
"Derivatives" herein.)
In certain jurisdictions, significant regulatory and/or foreign
governmental barriers exist which may not permit the immediate free flow of
funds between insurance subsidiaries or from the insurance subsidiaries to AIG
parent. These barriers generally cause only minor delays in the outward
remittance of the funds.
AIG's insurance operations are exposed to market risk. Market risk is the
risk of loss of fair value resulting from adverse fluctuations in interest and
foreign currency exchange rates and equity prices.
Measuring potential losses in fair values has recently become the focus of
risk management efforts by many companies. Such measurements are performed
through the application of various statistical techniques. One such technique is
Value at Risk (VaR). VaR is a summary statistical measure that uses historical
interest and foreign currency exchange rates and equity prices and estimates the
volatility and correlation of each of these rates and prices to calculate the
maximum loss that could occur over a defined period of time given a certain
probability.
AIG believes that statistical models alone do not provide a reliable method
of monitoring and controlling market risk. While VaR models are relatively
sophisticated, the quantitative market risk information generated is limited by
the assumptions and parameters established in creating the related models.
Therefore, such models are tools and do not substitute for the experience or
judgment of senior management.
AIG has performed a VaR analysis to estimate the maximum potential loss of
fair value for each of AIG's insurance segments and for each market risk within
each insurance segment. In this analysis, financial instrument assets include
the domestic and foreign invested assets excluding real estate and investment
income due and accrued. Financial instrument liabilities include reserve for
losses and loss expenses, reserve for unearned premiums, future policy benefits
for life and accident and health insurance contracts and policyholders' funds.
Due to the nature of each insurance segment, AIG manages the general and
life insurance operations separately. As a result, AIG manages separately the
invested assets of each. Accordingly, the VaR analysis was separately performed
for the general and the life insurance operations.
AIG calculated the VaR with respect to the net fair value of each of AIG's
insurance segments as of September 30, 2000 and December 31, 1999. AIG has
refined its methodology for calculating VaR and the results of the calculations
presented herein were performed using historical simulation. Using historical
simulation over the delta-normal approach does not significantly change the
results of this disclosure. The historical simulation methodology entails
re-pricing all assets and liabilities under explicit changes in market rates
within a specific historical time period. In this case, the most recent three
years of historical market information for interest rates, foreign exchange
rates, and equity index prices were used to construct the historical scenarios.
For each scenario, each transaction was re-priced. Portfolio, business unit, and
finally AIG-wide scenario values were then calculated by netting the values of
all the underlying assets and liabilities. The final VaR number represents the
maximum potential loss incurred by these scenarios with 95%
25
<PAGE> 27
confidence (i.e., only 5% of historical scenarios show losses greater than the
VaR figure). A one month holding period was assumed in computing the VaR figure.
At September 30, 2000 and December 31, 1999 the VaR of AIG's insurance segments
was approximately $737 million and $863 million for general insurance,
respectively, and $1.11 billion and $1.19 billion 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 September 30, 2000 and December 31, 1999.
VaR with respect to combined operations cannot be derived by aggregating the
individual risk or segment amounts presented herein.
(in millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GENERAL INSURANCE LIFE INSURANCE
----------------- -------------------
MARKET RISK 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate $439 $338 $1,089 $950
Currency 50 29 372 566
Equity 603 798 293 396
------------------------------------------------------------------------------------------------------------------
</TABLE>
FINANCIAL SERVICES AND ASSET MANAGEMENT INVESTED ASSETS
The following table is a summary of the composition of AIG's financial
services and asset management invested assets at September 30, 2000 and December
31, 1999. (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>
2000 1999
---------------------- ----------------------
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 $19,305 26.9% $17,334 27.7%
Unrealized gain on interest rate and currency swaps, options
and forward transactions 9,190 12.8 7,931 12.7
Securities available for sale, at market value 12,650 17.6 12,954 20.7
Trading securities, at market value 4,568 6.4 4,391 7.0
Securities purchased under agreements to resell, at contract
value 14,860 20.7 10,897 17.4
Trading assets 7,865 11.0 5,793 9.3
Spot commodities, at market value 571 0.8 683 1.1
Other, including short-term investments 2,788 3.8 2,565 4.1
-----------------------------------------------------------------------------------------------------------------
Total $71,797 100.0% $62,548 100.0%
-----------------------------------------------------------------------------------------------------------------
</TABLE>
As previously discussed, the cash used for the purchase of flight equipment
is derived primarily from the proceeds of ILFC's debt financings. The primary
sources for the repayment of this debt and the interest expense thereon are the
cash flow from operations, proceeds from the sale of flight equipment and the
rollover and refinancing of the prior debt. During the first nine months of
2000, ILFC acquired flight equipment costing $2.65 billion.
ILFC is exposed to market risk and the risk of loss of fair value resulting
from adverse fluctuations in interest rates. As of September 30, 2000 and
December 31, 1999, 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 September 30, 2000 and
December 31, 1999. 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
26
<PAGE> 28
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 September 30, 2000 and December 31, 1999, the VaR with respect to the
aforementioned net fair value of ILFC was approximately $16 million and $50
million, respectively.
AIGFP's derivative transactions are carried at market value or at estimated
fair value when market prices are not readily available. AIGFP reduces its
economic risk exposure through similarly valued offsetting transactions
including swaps, trading securities, options, forwards and futures. The
estimated fair values of these transactions represent assessments of the present
value of expected future cash flows. These transactions are exposed to liquidity
risk if AIGFP were to sell or close out the transactions prior to maturity. AIG
believes that the impact of any such limited liquidity would not be significant
to AIG's financial condition or its overall liquidity. (See also the discussion
under "Operational Review: Financial Services Operations" and "Derivatives"
herein.)
AIGFP uses the proceeds from the issuance of notes and bonds and GIA
borrowings to invest in a diversified portfolio of securities, including
securities available for sale, at market, and derivative transactions. The funds
may also be temporarily invested in securities purchased under agreements to
resell. The proceeds from the disposal of the aforementioned securities
available for sale and securities purchased under agreements to resell have been
used to fund the maturing GIAs or other AIGFP financings. (See also the
discussion under "Capital Resources" herein.)
Securities available for sale is mainly a portfolio of debt securities,
where the individual securities have varying degrees of credit risk. At
September 30, 2000, 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 $182 million of these securities. There were no securities
deemed below investment grade at September 30, 2000. There have been no
significant downgrades through November 1, 2000. Securities purchased under
agreements to resell are treated as collateralized transactions. AIGFP takes
possession of or obtains a security interest in securities purchased under
agreements to resell. AIGFP further minimizes its credit risk by monitoring
counterparty credit exposure and, when AIGFP deems necessary, it requires
additional collateral to be deposited. Trading securities, at market value are
marked to market daily and are held to meet the short-term risk management
objectives of AIGFP.
AIGTG conducts, as principal, market making and trading activities in
foreign exchange, interest rates and precious and base metals. AIGTG owns
inventories in the commodities in which it trades and may reduce the exposure to
market risk through the use of swaps, forwards, futures and option contracts.
AIGTG uses derivatives to manage the economic exposure of its various trading
positions and transactions from adverse movements of interest rates, foreign
currency exchange rates and commodity prices. AIGTG supports its trading
activities largely through trading liabilities, unrealized losses on swaps,
short-term borrowings, securities sold under agreements to repurchase and
securities and commodities sold, but not yet purchased. (See also the
discussions under "Capital Resources" and "Derivatives" herein.)
The gross unrealized gains and gross unrealized losses of AIGFP and AIGTG
included in the financial services assets and liabilities at September 30, 2000
were as follows:
(in millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
--------------------------------------------------------------------------------------
<S> <C> <C>
Securities available for sale, at market value $ 893 $ 859
Unrealized gain/loss on interest rate and currency swaps,
options and forward transactions(a)(b) 9,190 8,186
Trading assets 7,624 5,534
Spot commodities, at market value 25 --
Trading liabilities -- 2,431
Securities and spot commodities sold but not yet purchased,
at market value 472 --
--------------------------------------------------------------------------------------
</TABLE>
(a)These amounts are also presented as the respective balance sheet amounts.
(b)At September 30, 2000, AIGTG's replacement values with respect to interest
rate and currency swaps were $361 million.
27
<PAGE> 29
AIGFP's interest rate and currency risks on securities available for sale,
at market, are managed by taking offsetting positions on a security by security
basis, thereby offsetting a significant portion of the unrealized appreciation
or depreciation. At September 30, 2000, the unrealized gains and losses
remaining after the benefit of the offsets were $39 million and $5 million,
respectively.
Trading securities, at market value, and securities and spot commodities
sold but not yet purchased, at market value are marked to market daily with the
unrealized gain or loss being recognized in income at that time. These
securities are held to meet the short-term risk management objectives of AIGFP
and AIGTG.
The senior management of AIG defines the policies and establishes general
operating parameters for AIGFP and AIGTG. AIG's senior management has
established various oversight committees to review the various financial market,
operational and credit issues of AIGFP and AIGTG. The senior managements of
AIGFP and AIGTG report the results of their respective operations to and review
future strategies with AIG's senior management.
AIG actively manages the exposures to limit potential losses, while
maximizing the rewards afforded by these business opportunities. In doing so,
AIG must manage a variety of exposures including credit, market, liquidity,
operational and legal risks.
Market risk arises principally from the uncertainty that future earnings
are exposed to potential changes in volatility, interest rates, foreign currency
exchange rates, and equity and commodity prices. AIG generally controls its
exposure to market risk by taking offsetting positions. AIG's philosophy with
respect to its financial services operations is to minimize or set limits for
open or uncovered positions that are to be carried. Credit risk exposure is
separately managed. (See the discussion on the management of credit risk below.)
AIG's Market Risk Management Department provides detailed independent
review of AIG's market exposures, particularly those market exposures of AIGFP
and AIGTG. This department determines whether AIG's market risks, as well as
those market risks of individual subsidiaries, are within the parameters
established by AIG's senior management. Well established market risk management
techniques such as sensitivity analysis are used. Additionally, this department
verifies that specific market risks of each of certain subsidiaries are managed
and hedged by that subsidiary.
AIGFP is exposed to market risk due to changes in the level and volatility
of interest rates and the shape and slope of the yield curve. AIGFP hedges its
exposure to interest rate risk by entering into transactions such as interest
rate swaps and options and purchasing U.S. and foreign government obligations.
AIGFP is exposed to market risk due to changes in and volatility of foreign
currency exchange rates. AIGFP hedges its foreign currency exchange risk
primarily through the use of currency swaps, options, forwards and futures.
AIGFP is exposed to market risk due to changes in the level and volatility
of equity prices which affect the value of securities or instruments that derive
their value from a particular stock, a basket of stocks or a stock index. AIGFP
reduces the risk of loss inherent in its inventory in equity securities by
entering into hedging transactions, including equity swaps and options and
purchasing U.S. and foreign government obligations.
AIGFP does not seek to manage the market risk of each of its transactions
through an individual offsetting transaction. Rather, AIGFP takes a portfolio
approach to the management of its market 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
28
<PAGE> 30
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.
All of AIGTG's market risk sensitive instruments are entered into for
trading purposes. The fair values of AIGTG's financial instruments are exposed
to market risk as a result of adverse market changes in interest rates, foreign
currency exchange rates, commodity prices and adverse changes in the liquidity
of the markets in which AIGTG trades.
AIGTG's approach to managing market risk is to establish an appropriate
offsetting position to a particular transaction or group of transactions
depending upon the extent of market risk AIGTG expects to reduce.
AIGTG's senior management has established positions and stop-loss limits
for each line of business. AIGTG's traders are required to maintain positions
within these limits. These positions are monitored during the day either
manually and/or through on-line computer systems. In addition, these positions
are reviewed by AIGTG's management. Reports which present each trading books
position and the prior day's profit and loss are reviewed by traders, head
traders and AIGTG's senior management. Based upon these and other reports,
AIGTG's senior management may determine to adjust AIGTG's risk profile.
AIGTG attempts to secure reliable current market prices, such as published
prices or third party quotes, to value its derivatives. Where such prices are
not available, AIGTG uses an internal methodology which includes interpolation
or extrapolation from verifiable prices nearest to the dates of the
transactions. The methodology may reflect interest and exchange rates, commodity
prices, volatility rates and other relevant factors.
A significant portion of AIGTG's business is transacted in liquid markets.
Certain of AIGTG's derivative product exposures are evaluated using simulation
techniques which consider such factors as changes in currency and commodity
prices, interest rates, volatility levels and the effect of time. Though not
indicative of the future, past volatile market scenarios have represented profit
opportunities for AIGTG.
AIGFP and AIGTG are both exposed to the risk of loss of fair value from
adverse fluctuations in interest rate and foreign currency exchange rates and
equity and commodity prices. AIG statistically measured the losses of fair value
through the application of a VaR model. AIG separately calculated the VaR with
respect to AIGFP and AIGTG, as AIG manages these operations separately.
AIGFP's and AIGTG's asset and liability portfolios for which the VaR
analyses were performed included over the counter and exchange traded
investments, derivative instruments and commodities. Since the market risk with
respect to securities available for sale, at market is substantially hedged,
segregation of market sensitive instruments into trading and other than trading
was not deemed necessary.
AIG calculated the VaR with respect to AIGFP and AIGTG as of September 30,
2000 and December 31, 1999. AIG has refined its methodology for calculating VaR
and the results of the calculations presented herein were performed using
historical simulation. Using historical simulation over the delta-normal
approach does not significantly change the results of this disclosure. The
historical simulation methodology entails re-pricing all assets and liabilities
under explicit changes in market rates within a specific historical time period.
In this case, the most recent three years of historical
29
<PAGE> 31
market information for interest rates, foreign exchange rates, and equity index
prices were used to construct the historical scenarios. For each scenario, each
transaction was re-priced. Portfolio, business unit, and finally AIG-wide
scenario values were then calculated by netting the values of all the underlying
assets and liabilities. The final VaR number represents the maximum potential
loss incurred by these scenarios with 95% confidence (i.e., only 5% of
historical scenarios show losses greater than the VaR figure).
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 September 30, 2000 and
December 31, 1999. VaR with respect to combined operations cannot be derived by
aggregating the individual risk presented herein.
<TABLE>
<CAPTION>
(in millions)
---------------------------------------------------------------------------------------
AIGFP(A) AIGTG(B)
----------- -----------
MARKET RISKS 2000 1999 2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Combined $8 $24 $4 $ 5
Interest rate 7 23 3 3
Currency -- -- 3 4
Equity/Commodity 2 1 -- --
---------------------------------------------------------------------------------------
</TABLE>
(a)A one month holding period was used to measure the market exposures of AIGFP.
(b)A one day holding period was used to measure the market exposures of AIGTG.
DERIVATIVES
Derivatives are financial arrangements among two or more parties whose
returns are linked to or "derived" from some underlying equity, debt, commodity
or other asset, liability, or index. Derivatives payments may be based on
interest rates and exchange rates and/or prices of certain securities, certain
commodities, or financial or commodity indices. The more significant types of
derivative arrangements in which AIG transacts are swaps, forwards, futures,
options and related instruments.
The most commonly used swaps are interest rate swaps, currency swaps,
equity swaps and swaptions. Such derivatives are traded over the counter. An
interest rate swap is a contract between two parties to exchange interest rate
payments (typically a fixed interest rate versus a variable interest rate)
calculated on a notional principal amount for a specified period of time. The
notional amount is not exchanged. Currency and equity swaps are similar to
interest rate swaps but may involve the exchange of principal amounts at the
commencement and termination of the swap. Swaptions are options where the holder
has the right but not the obligation to enter into a swap transaction or cancel
an existing swap transaction.
A futures or forward contract is a legal contract between two parties to
purchase or sell at a specified future date a specified quantity of a commodity,
security, currency, financial index or other instrument, at a specified price. A
futures contract is traded on an exchange, while a forward contract is executed
over the counter.
Over the counter derivatives are not transacted in an exchange traded
environment. The futures exchanges maintain considerable financial requirements
and surveillance to ensure the integrity of exchange traded futures and options.
30
<PAGE> 32
An option contract generally provides the option purchaser with the right
but not the obligation to buy or sell during a period of time or at a specified
date the underlying instrument at a set price. The option writer is obligated to
sell or buy the underlying item if the option purchaser chooses to exercise his
right. The option writer receives a nonrefundable fee or premium paid by the
option purchaser. Options may be traded over the counter or on an exchange.
Derivatives are generally either negotiated over the counter contracts or
standardized contracts executed on an exchange. Standardized exchange traded
derivatives include futures and options which can be readily bought or sold over
recognized security or commodity exchanges and settled daily through such
clearing houses. Negotiated over the counter derivatives include forwards, swaps
and options. Over the counter derivatives are generally not traded like exchange
traded securities and the terms of over the counter derivatives are non-standard
and unique to each contract. However, in the normal course of business, with the
agreement of the original counterparty, these contracts may be terminated early
or assigned to another counterparty.
All significant derivatives activities are conducted through AIGFP and
AIGTG permitting AIG to participate in the derivatives dealer market acting
primarily as principal. In these derivative operations, AIG structures
agreements which generally allow its counterparties to enter into transactions
with respect to changes in interest and exchange rates, securities' prices, and
certain commodities and financial or commodity indices. Generally, derivatives
are used by AIG's customers such as corporations, financial institutions,
multinational organizations, sovereign entities, government agencies and
municipalities. For example, a futures, forward or option contract can be used
to protect the customers' assets or liabilities against price fluctuations.
A counterparty may default on any obligation to AIG, including a derivative
contract. Credit risk is a consequence of extending credit and/or carrying
trading and investment positions. Credit risk exists for a derivative contract
when that contract has an estimated positive fair value. To help manage this
risk, the credit departments of AIGFP and AIGTG operate within the guidelines of
the AIG Credit Risk Committee, which sets credit policy and limits for
counterparties and provides limits for derivative transactions with
counterparties having different credit ratings. In addition to credit ratings,
this committee takes into account other factors, including the industry and
country of the counterparty. Transactions which fall outside these
pre-established guidelines require the approval of the AIG Credit Risk
Committee. It is also AIG's policy to establish reserves for potential credit
impairment when necessary.
AIGFP and AIGTG determine the credit quality of each of their
counterparties taking into account credit ratings assigned by recognized
statistical rating organizations. If it is determined that a counterparty
requires credit enhancement, then one or more enhancement techniques will be
used. Examples of such enhancement techniques include letters of credit,
guarantees, collateral credit triggers and credit derivatives and margin
agreements.
A significant majority of AIGFP's transactions are contracted and
documented under ISDA Master Agreements that provide for legally enforceable
set-offs in the event of a default. Also, under such agreements, in connection
with a counterparty desiring to terminate a contract prior to maturity, AIGFP
may be permitted to set-off its receivables from that counterparty against
AIGFP's payables to that same counterparty arising out of all included
transactions. Excluding regulated exchange transactions, AIGTG, whenever
possible, enters into netting agreements with its counterparties which are
similar in effect to those discussed above.
The following tables provide the notional and contractual amounts of
AIGFP's and AIGTG's derivative transactions at September 30, 2000 and December
31, 1999.
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
31
<PAGE> 33
contracts are determined by each of the respective contractual agreements.
The net replacement value most closely represents the net credit risk to
AIGFP or the maximum amount exposed to potential loss after the application of
the aforementioned strategies, netting under ISDA Master Agreements and applying
collateral held. Prior to the application of these credit enhancements, the
gross credit risk with respect to these derivative instruments was $31.1 billion
at September 30, 2000. Subsequent to the application of such credit
enhancements, the net exposure to credit risk or the net replacement value of
all interest rate, currency and equity swaps, swaptions and forward commitments
at September 30, 2000, approximated $8.73 billion. The net replacement value for
futures and forward contracts at September 30, 2000, approximated $96 million.
The net replacement value most closely represents the net credit risk to AIGFP
or the maximum amount exposed to potential loss.
The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at September 30, 2000 and December 31, 1999:
(in millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REMAINING LIFE
-------------------------------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate, currency and
equity/commodity swaps and swaptions:
Notional amount:
Interest rate swaps $ 72,861 $161,398 $ 85,970 $ 7,669 $327,898 $281,682
Currency swaps 35,282 39,841 29,734 4,995 109,852 83,673
Swaptions and equity swaps 11,399 25,928 10,350 3,509 51,186 48,002
--------------------------------------------------------------------------------------------------------------------
Total $119,542 $227,167 $126,054 $16,173 $488,936 $413,357
--------------------------------------------------------------------------------------------------------------------
Futures and forward contracts:
Exchange traded futures contracts
contractual amount $ 8,292 -- -- -- $ 8,292 $ 6,587
--------------------------------------------------------------------------------------------------------------------
Over the counter forward contracts
contractual amount $ 16,549 $ 288 $ 43 -- $ 16,880 $ 21,873
--------------------------------------------------------------------------------------------------------------------
</TABLE>
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At September 30, 2000 and
December 31, 1999, 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 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Counterparty credit quality:
AAA $3,333 $-- $3,333 $2,067
AA 2,546 96 2,642 2,839
A 1,545 -- 1,545 1,576
BBB 1,160 -- 1,160 997
Below investment grade 144 -- 144 55
----------------------------------------------------------------------------------------------------------------
Total $8,728 $96 $8,824 $7,534
----------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 2000 and December 31, 1999, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:
32
<PAGE> 34
(in millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET REPLACEMENT VALUE
------------------------------
SWAPS AND FUTURES AND TOTAL TOTAL
SWAPTIONS FORWARD CONTRACTS 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-U.S. banks $2,396 $86 $2,482 $2,515
Insured municipalities 455 -- 455 352
U.S. industrials 1,362 -- 1,362 780
Governmental 387 -- 387 180
Non-U.S. financial service companies 388 -- 388 158
Non-U.S. industrials 1,290 -- 1,290 1,117
Special purpose 1,100 -- 1,100 716
U.S. banks 166 10 176 510
U.S. financial service companies 905 -- 905 1,112
Supranationals 279 -- 279 94
----------------------------------------------------------------------------------------------------------------
Total $8,728 $96 $8,824 $7,534
----------------------------------------------------------------------------------------------------------------
</TABLE>
The following tables provide the contractual and notional amounts of
AIGTG's derivatives portfolio at September 30, 2000 and December 31, 1999. In
addition, the estimated positive fair values associated with the derivatives
portfolio are also provided and include a maturity profile for the September 30,
2000 balances based upon the expected timing of the future cash flows.
The gross replacement values presented represent the sum of the estimated
positive fair values of all of AIGTG's derivatives contracts at September 30,
2000 and December 31, 1999. These values do not represent the credit risk to
AIGTG.
Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master netting
agreements and collateral held. The net replacement values most closely
represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss.
The following tables present AIGTG's derivatives portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative at
September 30, 2000 and December 31, 1999:
33
<PAGE> 35
(in millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REMAINING LIFE
------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contractual amount of futures, forwards and
options:
Exchange traded futures and options $ 13,232 $ 5,174 $ 37 $ -- $ 18,443 $ 18,908
--------------------------------------------------------------------------------------------------------------------
Forwards $204,487 $17,239 $ 2,274 $ -- $224,000 $220,428
--------------------------------------------------------------------------------------------------------------------
Over the counter purchased options $ 76,641 $17,120 $14,742 $113 $108,616 $ 83,871
--------------------------------------------------------------------------------------------------------------------
Over the counter sold options(a) $ 75,177 $16,843 $14,813 $163 $106,996 $ 86,726
--------------------------------------------------------------------------------------------------------------------
Notional amount:
Interest rate swaps and forward rate
agreements $ 31,037 $35,049 $ 6,963 $ 73 $ 73,122 $ 80,436
Currency swaps 822 6,587 900 -- 8,309 8,359
Swaptions 2,980 8,750 1,590 68 13,388 9,996
--------------------------------------------------------------------------------------------------------------------
Total $ 34,839 $50,386 $ 9,453 $141 $ 94,819 $ 98,791
--------------------------------------------------------------------------------------------------------------------
Credit exposure:
Futures, forwards, swaptions and purchased
options contracts and interest rate and
currency swaps:
Gross replacement value $ 6,262 $ 2,989 $ 642 $ 3 $ 9,896 $ 7,889
Master netting arrangements (3,642) (2,146) (467) (3) (6,258) (4,580)
Collateral (123) (34) (17) -- (174) (209)
--------------------------------------------------------------------------------------------------------------------
Net replacement value(b) $ 2,497 $ 809 $ 158 $ -- $ 3,464 $ 3,100
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)Sold options obligate AIGTG to buy or sell the underlying item if the option
purchaser chooses to exercise. The amounts do not represent credit exposure.
(b)The net replacement values with respect to exchange traded futures and
options, forward contracts, and purchased over the counter options are
presented as a component of trading assets in the accompanying balance sheet.
The net replacement values with respect to interest rate and currency swaps
are presented as a component of unrealized gain on interest rate and currency
swaps, options and forward transactions in the accompanying balance sheet.
34
<PAGE> 36
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At September 30, 2000 and
December 31, 1999, 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
-----------------------
2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Counterparty credit quality:
AAA $ 267 $ 276
AA 1,199 1,241
A 1,444 1,010
BBB 338 256
Below investment grade 45 49
Not externally rated, including exchange traded futures
and options* 171 268
---------------------------------------------------------------------------------------
Total $3,464 $3,100
---------------------------------------------------------------------------------------
Counterparty breakdown by industry:
Non-U.S. banks $1,227 926
U.S. industrials 179 70
Governmental 154 178
Non-U.S. financial service companies 687 698
Non-U.S. industrials 199 176
U.S. banks 361 401
U.S. financial service companies 486 383
Exchanges* 171 268
---------------------------------------------------------------------------------------
Total $3,464 $3,100
---------------------------------------------------------------------------------------
</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.
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.
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 accounts.
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 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial
35
<PAGE> 37
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (FASB 133). AIG has reviewed and continues to review the effect of
the implementation of FASB 133, as amended by FASB 138 and related
implementation guidance. 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 and
the extent to which it is effective as part of a hedge transaction. 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 does
not believe that the implementation of FASB 133 will have a significant impact
on its results of operations or financial condition. FASB 133 is effective for
the year commencing January 1, 2001.
RECENT DEVELOPMENT
The shareholders of HSB Group, Inc. (HSB) approved the acquisition of HSB
by AIG on November 6, 2000. The total value of the transaction is approximately
$1.2 billion. The parties expect the transaction to close later this year, upon
receipt of pending regulatory approvals.
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
September 30, 2000.
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 and
Chief Financial Officer
Dated: November 13, 2000
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
