Document/Exhibit Description Pages Size
1: 10-K American International Group, Inc. 149± 695K
2: EX-3.(I) Restated Certificate of Incorporation 11 37K
3: EX-3.(II) By-Laws of Aig 14 52K
4: EX-11 Statement Re Computation of Per Share Earnings 1 10K
5: EX-12 Statements Re Computation of Ratios 1 9K
6: EX-21 Subsidiaries of the Registrant 3 23K
7: EX-23 Consent of Coopers & Lybrand L.L.P. 1 8K
8: EX-27 Financial Data Schedule 2± 9K
9: EX-99 Undertakings by the Registrant 2± 11K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
/x/ SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
/ / SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from________to_____________
Commission file number 1-8787
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AMERICAN INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2592361
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
70 Pine Street, New York, New York 10270
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 770-7000
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Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on
Title of each class which registered
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Common Stock, Par Value $2.50 Per Share New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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None
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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 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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /.
The aggregate market value of the shares of all classes of voting
stock of the registrant held by non-affiliates of the registrant on January 31,
1995 was approximately $23,460,599,000 computed upon the basis of the closing
sales price of the Common Stock on that date.
As of January 31, 1995, there were outstanding 315,892,792 shares of
Common Stock, $2.50 par value, of the registrant.
Documents Incorporated by Reference:
The registrant's definitive proxy statement filed or to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors at the annual meeting of the shareholders of the
registrant scheduled to be held on May 24, 1995 is incorporated by reference in
Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
American International Group, Inc. ("AIG"), a Delaware corporation, is a
holding company which through its subsidiaries is primarily engaged in a broad
range of insurance and insurance-related activities in the United States and
abroad. AIG's primary activities include both general and life insurance
operations. The principal insurance company subsidiaries are American Home
Assurance Company ("American Home"), National Union Fire Insurance Company of
Pittsburgh, Pa. ("National Union"), New Hampshire Insurance Company ("New
Hampshire"), Lexington Insurance Company ("Lexington"), American International
Underwriters Overseas, Ltd. ("AIUO"), American Life Insurance Company
("ALICO"), American International Assurance Company, Limited ("AIA"), Nan Shan
Life Insurance Company, Ltd. ("Nan Shan"), The Philippine American Life
Insurance Company ("PHILAM"), American International Reinsurance Company, Ltd.
and United Guaranty Residential Insurance Company. Other significant activities
are financial services and agency and service fee operations. For information
on AIG's business segments, see Note 19 of Notes to Financial Statements.
All per share information herein gives retroactive effect to all stock
dividends and stock splits. As of January 31, 1995, beneficial ownership of
approximately 16.0 percent, 3.6 percent and 2.4 percent of AIG's Common Stock,
$2.50 par value ("Common Stock"), was held by Starr International Company, Inc.
("SICO"), The Starr Foundation and C. V. Starr & Co., Inc. ("Starr"),
respectively.
At December 31, 1994, AIG and its subsidiaries had approximately 32,000
employees.
The following table shows the general development of the business of
AIG on a consolidated basis, the contributions made to AIG's consolidated
revenues and operating income and the assets held, in the periods indicated by
its general insurance, life insurance, agency and service fee and financial
services operations, equity in income of minority-owned insurance companies and
realized capital gains. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations and Notes 1 and 19 of Notes to
Financial Statements.)
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(dollars in thousands)
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Years Ended December 31, 1994 1993 1992 1991 1990
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General insurance operations:
Gross premiums written $ 16,392,409 $ 14,901,255 $ 13,615,715 $ 13,336,248 $ 11,926,850
Net premiums written 10,865,753 10,025,903 9,138,528 9,146,394 9,267,201
Net premiums earned 10,286,831 9,566,640 9,209,390 9,104,632 9,149,414
Adjusted underwriting profit (loss)(a) 147,517 10,391 (195,084) (4,809) 75,184
Net investment income 1,435,092 1,340,480 1,252,086 1,163,461 1,059,161
Realized capital gains 52,487 65,264 67,134 89,275 120,000
Operating income 1,635,096 1,416,135 1,124,136 1,247,927 1,254,345
Identifiable assets(b) 51,372,100 46,981,720 42,416,509(b) 29,278,641 27,993,993
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Loss ratio 77.8 79.2 81.5 78.9 78.2
Expense ratio 20.9 20.9 20.9 21.5 21.4
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Combined ratio 98.7 100.1 102.4 100.4 99.6
=========================================================================================================================
Life insurance operations:
Premium income 6,724,321 5,746,046 4,853,087 4,059,354 3,477,598
Net investment income 1,748,428 1,499,714 1,313,838 1,139,793 977,343
Realized capital gains (losses) 86,706 54,576 43,257 23,219 (6,347)
Operating income 952,484 781,611 667,453 561,839 462,862
Identifiable assets(b) 34,496,652 28,381,164 23,472,687(b) 19,986,909 16,319,156
Insurance in-force at end of year 333,378,811 257,162,102 210,605,862 193,226,288 160,373,296
Agency and service fee operations:
Commissions, management and other fees 236,778 237,738 225,686 211,210 205,679
Net investment income 1,162 1,903 2,611 4,754 5,226
Operating income 54,129 60,247 52,570 46,202 36,663
Identifiable assets 184,310 179,297 157,280 188,638 168,846
Financial services operations:
Commissions, transaction and other fees 1,866,253 1,595,449 1,404,902 1,073,553 704,201
Operating income 404,853 390,038 346,442 222,156 132,505
Identifiable assets 30,660,776 25,514,258 27,138,230 20,485,838 14,472,483
Equity in income of minority-owned
insurance operations 56,005 39,589 27,929 28,806 24,050
Other realized capital losses (52,340) (12,742) (11,293) (14,144) (14,258)
Revenues(c) 22,441,723 20,134,657 18,388,627 16,883,913 15,702,067
Total assets 114,346,117 101,014,848 92,722,182 69,389,468 58,201,835
=========================================================================================================================
(a) Adjusted underwriting profit (loss) is statutory underwriting income
(loss) adjusted primarily for changes in deferral of acquisition costs.
This adjustment is necessary to present the financial statements in
accordance with generally accepted accounting principles.
(b) The insurance assets with respect to December 31, 1992 and subsequent
years conform to the requirements of FASB 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts".
(c) Represents the sum of general net premiums earned, life premium income,
agency commissions, management and other fees, net investment income,
financial services commissions, transaction and other fees, equity in
income of minority-owned insurance operations and realized capital gains.
1
The following table shows identifiable assets, revenues and income
derived from operations in the United States and Canada and from operations in
other countries for the year ended December 31, 1994. (See also Note 19 of
Notes to Financial Statements.)
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(dollars in thousands)
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PERCENT OF TOTAL
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UNITED STATES OTHER UNITED STATES OTHER
TOTAL AND CANADA COUNTRIES AND CANADA COUNTRIES
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General insurance operations:
Net premiums earned $ 10,286,831 $ 6,827,708 $ 3,459,123 66.4% 33.6%
Adjusted underwriting profit (loss) 147,517 (91,524) 239,041 -- --
Net investment income 1,435,092 1,147,595 287,497 80.0 20.0
Realized capital gains (losses) 52,487 62,676 (10,189) -- --
Operating income 1,635,096 1,118,747 516,349 68.4 31.6
Identifiable assets 51,372,100 40,799,419 10,572,681 79.4 20.6
Life insurance operations:
Premium income 6,724,321 370,112 6,354,209 5.5 94.5
Net investment income 1,748,428 600,616 1,147,812 34.4 65.6
Realized capital gains 86,706 4,028 82,678 4.6 95.4
Operating income 952,484 42,271 910,213 4.4 95.6
Identifiable assets 34,496,652 8,563,247 25,933,405 24.8 75.2
Agency and service fee operations:
Commissions, management and other fees 236,778 234,479 2,299 99.0 1.0
Net investment income 1,162 1,149 13 98.9 1.1
Operating income 54,129 52,764 1,365 97.5 2.5
Identifiable assets 184,310 162,566 21,744 88.2 11.8
Financial services operations:
Commissions, transaction and other fees 1,866,253 1,554,701 311,552 83.3 16.7
Operating income 404,853 277,992 126,861 68.7 31.3
Identifiable assets 30,660,776 24,757,029 5,903,747 80.7 19.3
Equity in income of minority-owned
insurance operations 56,005 42,719 13,286 76.3 23.7
Other realized capital losses (52,340) (39,878) (12,462) -- --
Income before income taxes and cumulative
effect of accounting changes 2,951,979 1,420,399 1,531,580 48.1 51.9
Revenues 22,441,723 10,805,905 11,635,818 48.2 51.8
Total Assets 114,346,117 71,838,459 42,507,658 62.8 37.2
=========================================================================================================================
GENERAL INSURANCE OPERATIONS
AIG's general insurance subsidiaries are multiple line companies writing
substantially all lines of property and casualty insurance. One or more of
these companies is licensed to write substantially all of these lines in all
states of the United States and in more than 100 foreign countries.
AIG's business derived from brokers in the United States and Canada is
conducted through its domestic brokerage division, consisting of American Home,
National Union, Lexington and certain other insurance company subsidiaries of
AIG. Also included are the operations of New Hampshire and its subsidiaries,
which were restructured in 1992, thus completing the withdrawal of these
companies from an agency production system. New Hampshire is now integrated
into this division as the AIG company focusing specifically on providing AIG
products and services through brokers to middle market companies.
The domestic brokerage division accepts business mainly from insurance
brokers, enabling selection of specialized markets and retention of
underwriting control. Any licensed broker is able to submit business to these
companies without the traditional agent-company contractual relationship, but
such broker usually has no authority to commit the companies to accept a risk.
In addition to writing substantially all classes of business
insurance, including large commercial or industrial property insurance, excess
liability, inland marine, workers' compensation and excess and umbrella
coverages, the domestic brokerage division offers many specialized forms of
insurance such as directors and officers liability, difference-in-conditions,
kidnap-ransom, export credit and political risk, and various types of
professional errors and omissions coverages. Lexington writes surplus lines,
those risks for which conventional insurance companies do not readily provide
insurance coverage, either because of complexity or because the coverage does
not lend itself to conventional contracts.
Audubon Insurance Company and its subsidiaries ("Audubon") conduct
agency marketing of personal and small commercial coverages in certain Southern
and Western States.
American International Insurance Company ("AIIC") engages in mass
marketing of personal lines coverages. Since 1992, AIIC increased its
participation in non-standard auto business in urban markets.
The business of United Guaranty Corporation ("UGC") and its
subsidiaries is also included in the domestic operations
2
of AIG. The principal business of the UGC subsidiaries is the writing of
residential mortgage loan insurance, which is guaranty insurance on
conventional first mortgage loans on single-family dwellings and condominiums.
Such insurance protects lenders against loss if borrowers default. UGC
subsidiaries also write commercial mortgage loan insurance covering first
mortgage loans on commercial real estate, home equity and property improvement
loan insurance on loans to finance residential property improvements,
alterations and repairs and for other purposes not necessarily related to real
estate, and rent guaranty insurance on commercial and industrial real estate.
UGC had approximately $10 billion of mortgage guarantee risk in-force at
December 31, 1994.
AIG's foreign general insurance business comprises primarily risks
underwritten through American International Underwriters ("AIU"), a marketing
unit consisting of wholly owned agencies and insurance companies. It also
includes business written by foreign-based insurance subsidiaries of AIUO for
their own accounts. In general, the same types of policies and marketing
methods, with certain refinements for local laws, customs and needs, are used
in these foreign operations as have been described above in connection with the
domestic operations.
During 1994 domestic general and foreign general insurance business
accounted for 67.0 percent and 33.0 percent, respectively, of AIG's net
premiums written.
AIG's general insurance company subsidiaries worldwide operate
primarily by underwriting and accepting any size risk for their direct account
and securing reinsurance on that portion of the risk in excess of the limit
which they wish to retain. This operating policy differs from that of many
insurance companies which will underwrite only up to their net retention limit,
thereby requiring the broker or agent to secure commitments from other
underwriters for the remainder of the gross risk amount.
The following table summarizes general insurance premiums written and
earned:
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(in thousands)
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YEARS ENDED DECEMBER 31, WRITTEN EARNED
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1994
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Gross premiums $16,392,409 $15,665,787
Ceded premiums (5,526,656) (5,378,956)
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Net premiums $10,865,753 $10,286,831
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1993
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Gross premiums $14,901,255 $14,405,992
Ceded premiums (4,875,352) (4,839,352)
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Net premiums $10,025,903 $ 9,566,640
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1992
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Gross premiums $13,615,715 $13,616,700
Ceded premiums (4,477,187) (4,407,310)
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Net premiums $ 9,138,528 $ 9,209,390
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The utilization of reinsurance is closely monitored by an internal
reinsurance security committee, consisting of members of AIG's Senior
Management. No single reinsurer is a material reinsurer to AIG nor is AIG's
business substantially dependent upon any reinsurance contract. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 5 of Notes to Financial Statements.)
AIG is well diversified both in terms of lines of business and
geographic locations. Of the general insurance lines of business, workers'
compensation was approximately 16 percent of AIG's net premiums written. This
line is well diversified geographically and is generally written on a
retrospectively rated basis which reduces its exposure to material uncertainty
or risks.
Notwithstanding the above, the majority of AIG's insurance business is
in the casualty classes, which tend to involve longer periods of time for the
reporting and settling of claims. This may increase the risk and uncertainty
with respect to AIG's loss reserve development. (See also the Discussion and
Analysis of Consolidated Net Loss and Loss Expense Reserve Development and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.)
3
The following table is a summary of the general insurance operations,
including ratios, by major operating category for the year ended December 31,
1994. (See also Note 19(b) of Notes to Financial Statements.)
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(dollars in thousands)
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RATIO OF RATIO OF
LOSSES AND UNDERWRITING
LOSS EXPENSES EXPENSES
NET PREMIUMS INCURRED TO INCURRED TO
-------------------------- NET PREMIUMS NET PREMIUMS COMBINED
WRITTEN EARNED EARNED WRITTEN RATIO
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Foreign $ 3,588,608 $ 3,459,123 59.7 33.2 92.9
Commercial casualty(a) 5,718,053 5,329,215 82.6 13.1 95.7
Commercial property 309,802 294,944 102.0 23.9 125.9
Pools and associations(b) 552,975 533,632 145.9 17.3 163.2
Personal lines(c) 492,122 464,120 82.7 21.8 104.5
Mortgage guaranty 204,193 205,797 37.2 26.6 63.8
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Total $10,865,753 $10,286,831 77.8 20.9 98.7
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(a) Including workers' compensation and retrospectively rated risks.
(b) Including involuntary pools.
(c) Including mass marketing and specialty programs.
Loss and expense ratios of AIG's consolidated general
insurance operations are set forth in the following table. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations.)
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(dollars in thousands)
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RATIO OF RATIO OF
LOSSES AND UNDERWRITING
LOSS EXPENSES EXPENSES
NET PREMIUMS INCURRED TO INCURRED TO INDUSTRY
--------------------------- NET PREMIUMS NET PREMIUMS COMBINED UNDERWRITING COMBINED
YEARS ENDED DECEMBER 31, WRITTEN EARNED EARNED WRITTEN RATIO MARGIN RATIO*
==============================================================================================================================
1994 $10,865,753 $10,286,831 77.8 20.9 98.7 1.3 109.7
1993 10,025,903 9,566,640 79.2 20.9 100.1 (0.1) 107.9
1992 9,138,528 9,209,390 81.5 20.9 102.4 (2.4) 119.1
1991 9,146,394 9,104,632 78.9 21.5 100.4 (0.4) 109.5
1990 9,267,201 9,149,414 78.2 21.4 99.6 0.4 109.4
==============================================================================================================================
* Source: Best's Aggregates & Averages (Stock insurance companies, after
dividends to policyholders).
The ratio for 1994 reflects estimated results provided by Conning & Company.
During 1994, of the direct general insurance premiums written (gross
premiums less return premiums and cancellations, excluding reinsurance assumed
and before deducting reinsurance ceded), 9.7 percent and 10.2 percent were
written in California and New York, respectively (no other state accounted for
more than 5 percent of such premiums).
There was no significant adverse effect on AIG's results of operations
from the economic environments in any one state, country or geographic region
for the year ended December 31, 1994.
DISCUSSION AND ANALYSIS OF CONSOLIDATED NET LOSS AND
LOSS EXPENSE RESERVE DEVELOPMENT
The reserve for net losses and loss expenses is exclusive of applicable
reinsurance and represents the accumulation of estimates for reported losses
("case basis reserves") and provisions for losses incurred but not reported
("IBNR"). AIG does not discount its loss reserves other than for minor amounts
related to certain workers' compensation claims.
Loss reserves established with respect to foreign business are set and
monitored in terms of the respective local or functional currency. Therefore,
no assumption is included for changes in currency rates. (See also Note 1(t) of
Notes to Financial Statements.) Losses and loss expenses are charged to income
as incurred.
Management continually reviews the adequacy of established loss
reserves through the utilization of a number of analytical reserve development
techniques (discussed below). Through the use of these techniques, management
is able to monitor the adequacy of its established reserves, including the
appropriate assumptions for inflation. Also, through reactions to the emergence
of specific development patterns, such as case reserve redundancies or
deficiencies and IBNR emergence, management is able to currently determine any
required adjustments. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
The "Analysis of Consolidated Net Loss and Loss Expense Reserve
Development", which follows, presents the development of net loss and loss
expense reserves for calendar years 1984 through 1994. The upper half of the
table shows the cumulative amounts paid during successive years related to the
opening loss reserves. For example, with respect to the net loss and loss
expense reserve of $3,132.7 million as of December 31, 1984, by the end of 1994
(ten years later) $3,772.9 million
4
had actually been paid in settlement of these net loss reserves. In addition,
as reflected in the lower section of the table, the original reserve of
$3,132.7 million was reestimated to be $4,119.7 million at December 31, 1994.
This increase from the original estimate would generally be a combination of a
number of factors, including reserves being settled for larger amounts than
originally estimated. The original estimates will also be increased or
decreased as more information becomes known about the individual claims and
overall claim frequency and severity patterns. The redundancy (deficiency)
depicted in the table, for any particular calendar year, shows the aggregate
change in estimates over the period of years subsequent to the calendar year
reflected at the top of the respective column heading. For example, the
redundancy of $122.7 million at December 31, 1994 related to December 31, 1993
net losses and loss expense reserves of $17,557.0 million represents the
cumulative amount by which reserves for 1993 and prior years have developed
redundantly during 1994.
ANALYSIS OF CONSOLIDATED NET LOSSES AND
LOSS EXPENSE RESERVE DEVELOPMENT
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(in millions)
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1984 1985 1986 1987 1988 1989
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Reserve for Net Losses and Loss
Expenses, December 31, $3,132.7 $4,034.9 $6,199.3 $8,670.7 $11,086.1 $12,958.5
Paid (Cumulative) as of:
One Year Later 1,288.8 1,576.1 2,300.1 2,619.2 3,266.9 3,940.3
Two Years Later 2,183.9 2,823.2 3,676.4 4,315.9 5,451.5 6,476.6
Three Years Later 2,723.9 3,321.1 4,340.7 5,496.6 6,904.5 8,350.8
Four Years Later 2,934.6 3,589.5 4,919.1 6,207.5 7,966.2 9,721.3
Five Years Later 3,072.9 3,886.5 5,260.3 6,757.2 8,792.1 10,764.8
Six Years Later 3,235.6 4,055.3 5,593.1 7,246.1 9,449.6
Seven Years Later 3,329.8 4,267.7 5,902.7 7,616.7
Eight Years Later 3,496.2 4,464.7 6,113.2
Nine Years Later 3,640.0 4,629.6
Ten Years Later 3,772.9
Net Liability Reestimated as of:
End of Year 3,132.7 4,034.9 6,199.3 8,670.7 11,086.1 12,958.5
One Year Later 3,269.9 4,164.2 6,268.3 8,523.6 10,923.8 12,844.5
Two Years Later 3,447.0 4,404.2 6,354.3 8,492.4 10,856.9 12,843.9
Three Years Later 3,638.8 4,502.0 6,397.5 8,488.1 10,811.9 12,809.2
Four Years Later 3,669.6 4,573.4 6,491.1 8,472.3 10,774.9 12,896.4
Five Years Later 3,744.2 4,672.4 6,531.2 8,472.0 10,805.1 13,064.6
Six Years Later 3,819.0 4,728.9 6,598.0 8,470.0 10,953.6
Seven Years Later 3,861.2 4,824.5 6,681.0 8,577.4
Eight Years Later 3,953.3 4,925.6 6,770.0
Nine Years Later 3,970.4 5,052.0
Ten Years Later 4,119.7
Redundancy/(Deficiency) (987.0) (1,017.1) (570.7) 93.3 132.5 (106.1)
==========================================================================================================
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(in millions)
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1990 1991 1992 1993 1994
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Reserve for Net Losses and Loss
Expenses, December 31, $14,699.2 $15,839.9 $16,756.8 $17,557.0 $18,418.9
Paid (Cumulative) as of:
One Year Later 4,315.2 4,747.8 4,882.7 5,146.3
Two Years Later 7,349.7 8,015.4 8,289.4
Three Years Later 9,561.0 10,436.2
Four Years Later 10,223.5
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Net Liability Reestimated as of:
End of Year 14,699.2 15,839.9 16,756.8 17,557.0 18,418.9
One Year Later 14,596.2 15,828.1 16,807.0 17,434.3
Two Years Later 14,595.4 15,902.9 16,603.4
Three Years Later 14,723.7 15,989.7
Four Years Later 14,965.4
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Redundancy/(Deficiency) (266.2) (149.8) 153.4 122.7
==============================================================================================
The trend depicted in the latest development year in the reestimated
liability portion of the "Analysis of Consolidated Net Losses and Loss Expense
Reserve Development" table indicates that the overall position of AIG's 1993
and prior reserves one year later is fairly comparable to the trends reflected
in recent years. The variations in development from original reserves in the
later years of the table are relatively insignificant both in terms of
aggregate amounts and as a percentage of the initial reserve balances.
RECONCILIATION OF NET RESERVE FOR LOSSES AND
LOSS EXPENSES
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(in millions)
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1994 1993 1992
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Net reserve for losses and loss
expenses at beginning of year $17,557.0 $16,756.8 $15,839.9
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Losses and loss expenses incurred:
Current year 8,158.4 7,530.7 7,497.1
Prior years* (152.8) 45.3 6.4
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8,005.6 7,576.0 7,503.5
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Losses and loss expenses paid:
Current year 1,997.4 1,893.1 1,838.8
Prior years 5,146.3 4,882.7 4,747.8
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7,143.7 6,775.8 6,586.6
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Net reserve for losses and loss
expenses at end of year $18,418.9 $17,557.0 $16,756.8
===========================================================================
* Does not include the effects of foreign exchange adjustments as described
above, which are reflected in the above table.
5
Approximately 50 percent of the net losses and loss expense reserves
are paid out within two years of the date incurred. The remaining net losses
and loss expense reserves, particularly those associated with the casualty
lines of business, may extend to 20 years or more.
For further discussion regarding net reserves for losses and loss
expenses, see Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The reserve for losses and loss expenses as reported in AIG's
Consolidated Balance Sheet at December 31, 1994, differs from the total reserve
reported in the Annual Statements filed with state insurance departments and,
where appropriate, with foreign regulatory authorities. The difference at
December 31, 1994 is primarily because of minor discounting on certain workers'
compensation claims, estimates for unrecoverable reinsurance and additional
reserves relating to certain foreign operations. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
The reserve for gross losses and loss expenses is prior to reinsurance
and represents the accumulation for reported losses and IBNR. Management
reviews the adequacy of established gross losses reserves in the manner
previously described for net losses reserves.
The "Analysis of Consolidated Gross Losses and Loss Expense Reserve
Development", which follows, presents the development of gross losses and loss
expense reserves for calendar years 1994, 1993 and 1992. As with the net losses
and loss expense reserve development, the redundancies of $180.3 million and
$332.0 million for 1993 and 1992, respectively, are relatively insignificant
both in terms of an aggregate amount and as a percentage of the initial reserve
balance.
ANALYSIS OF CONSOLIDATED GROSS LOSSES AND
LOSS EXPENSE RESERVE DEVELOPMENT
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(in millions)
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1992 1993 1994
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Gross losses and loss
expenses, December 31, $28,156.8 $30,046.2 $31,435.4
Paid (cumulative) as of:
One Year Later 7,280.9 8,807.1
Two Years Later 13,006.0
Gross Liability Reestimated as of:
End of Year 28,156.8 30,046.2 31,435.4
One Year Later 28,253.4 29,865.9
Two Years Later 27,824.8
Redundancy 332.0 180.3
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LIFE INSURANCE OPERATIONS
AIG's life insurance subsidiaries offer a wide range of traditional insurance
and financial and investment products. One or more of these subsidiaries is
licensed to write life insurance in all states in the United States and in over
70 foreign countries. Traditional products consist of individual and group
life, annuity, and accident and health policies. Financial and investment
products consist of single premium annuity, variable annuities, guaranteed
investment contracts and universal life. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations.)
In the United States, AIG has four domestic life subsidiaries:
American International Life Assurance Company of New York, AIG Life Insurance
Company, Delaware American Life Insurance Company, and Pacific Union Assurance
Company. These companies utilize multiple distribution channels including
brokerage and career and general agents to offer primarily financial
and investment products and specialty forms of accident and health coverage for
individuals and groups, including employee benefit plans. The domestic life
business comprised 5.5 percent of total life premium income in 1994.
Life insurance operations in foreign countries comprised 94.5 percent
of life premium income and 95.6 percent of operating income in 1994. AIG
operates overseas through four main subsidiary companies, ALICO, AIA , Nan Shan
and PHILAM. Although ALICO is incorporated in Delaware, 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 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 primarily in Taiwan while PHILAM in the
Philippines.
Traditional life insurance products such as whole life and endowment
continue to be significant in the overseas companies, especially in Southeast
Asia, while a mixture of traditional, accident and health and financial
products are sold in Japan.
In addition to the above, AIG also has subsidiary operations in
Switzerland (Ticino Societa d'Assicurazioni Sulla Vita), Puerto Rico (AIG Life
Insurance Company of Puerto Rico) and conducts life insurance business through
AIUO subsidiary companies in certain countries in Central and South America.
The foreign life companies have approximately 100,000 career agents
and sell their products largely to indigenous persons in local currencies. In
addition to the agency outlets, these companies also distribute their products
through direct marketing channels, such as mass marketing, and through brokers
and other distribution outlets such as financial institutions.
The following table summarizes the life insurance operating results
for the year ended December 31, 1994. (See also Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
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(dollars in thousands)
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AVERAGE
NET DIRECT TERMINATION RATE
PREMIUM INVESTMENT OPERATING INSURANCE -------------------
INCOME INCOME INCOME(a) IN-FORCE LAPSE OTHER
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Individual:
Life $5,037,032 $1,126,290 $517,235 $260,187,171(b) 7.1% 1.9%
Annuity 60,981 344,087 22,788 (c)
Accident and health 931,620 62,822 268,627 (c)
Group:
Life 331,140 20,413 27,158 73,191,640 8.3% 7.2%
Pension 8,905 181,078 15,107 (c)
Accident and health 354,643 18,932 22,344 (c)
Realized capital gains -- -- 86,706 (c)
Consolidation adjustments -- (5,194) (7,481) (c)
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TOTAL $6,724,321 $1,748,428 $952,484 $333,378,811
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(a) Including income related to investment type products.
(b) Including $160.13 billion of whole life insurance and endowments.
(c) Not applicable.
INSURANCE INVESTMENT OPERATIONS
A significant portion of AIG's general and life operating revenues are derived
from AIG's insurance investment operations. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations and Notes 1, 2, 8
and 19 of Notes to Financial Statements.)
The following table is a summary of the composition of AIG's insurance
invested assets by insurance segment, including investment income due and
accrued and real estate, at December 31, 1994:
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PERCENT DISTRIBUTION
PERCENT ----------------------
GENERAL LIFE TOTAL OF TOTAL DOMESTIC FOREIGN
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Fixed maturities:
Available for sale, at market value(a) $ 4,995,778 $16,890,709 $21,886,487 43.3% 32.2% 67.8%
Held to maturity, at amortized cost(b) 13,454,310 -- 13,454,310 26.6 100.0 --
Equity securities, at market value(c) 2,799,728 2,090,421 4,890,149 9.7 30.4 69.6
Mortgage loans on real estate, policy
and collateral loans 27,725 4,534,604 4,562,329 9.0 43.1 56.9
Short-term investments, including
time deposits, and cash 954,901 1,212,933 2,167,834 4.3 27.6 72.4
Real estate 364,115 648,938 1,013,053 2.0 18.0 82.0
Investment income due and accrued 446,745 471,281 918,026 1.8 57.5 42.5
Other invested assets 829,757 841,185 1,670,942 3.3 50.9 49.1
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Total $23,873,059 $26,690,071 $50,563,130 100.0% 51.7% 48.3%
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(a) Includes $163,956 of bonds trading securities, at market value.
(b) Includes $412,503 of preferred stocks, at amortized cost.
(c) Includes $61,937 of preferred stocks, at market value.
The following table summarizes the investment results of the general
insurance operations. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 8 of Notes to Financial
Statements.)
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ANNUAL AVERAGE CASH AND INVESTED ASSETS
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CASH RATE OF RETURN
(INCLUDING NET --------------------- REALIZED
SHORT-TERM INVESTED INVESTMENT INVESTED CAPITAL
YEARS ENDED DECEMBER 31, INVESTMENTS) ASSETS(a) TOTAL INCOME(b) TOTAL(c) ASSETS(d) GAINS
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1994 $1,387,704 $21,836,228 $23,223,932 $1,435,092 6.2% 6.6% $52,487
1993 1,779,647 19,766,959 21,546,606 1,340,480 6.2 6.8 65,264
1992 1,766,031 18,285,417 20,051,448 1,252,086 6.2 6.8 67,134
1991 1,828,346 16,960,076 18,788,422 1,163,461 6.2 6.9 89,275
1990 1,842,262 15,139,966 16,982,228 1,059,161 6.2 7.0 120,000
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(a) Including investment income due and accrued and real estate.
(b) Net investment income is after deduction of investment expenses and
excludes realized capital gains (losses).
(c) Net investment income divided by the annual average sum of cash and
invested assets.
(d) Net investment income divided by the annual average invested assets.
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The following table summarizes the investment results of the life
insurance operations. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 8 of Notes to Financial
Statements.)
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ASSETS AT END OF PERIOD
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CASH REALIZED
(INCLUDING NET NET YIELD CAPITAL
SHORT-TERM INVESTED INVESTMENT ON MEAN GAINS
YEARS ENDED DECEMBER 31, INVESTMENTS) ASSETS(a) TOTAL INCOME(b) ASSETS(c) (LOSSES)
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1994 $1,212,932 $25,477,139 $26,690,071 $1,748,428 7.4% $86,706
1993 2,878,563 19,158,688 22,037,251 1,499,714 7.8 54,576
1992 2,516,001 15,413,653 17,929,654 1,313,838 8.3 43,257
1991 2,092,084 12,968,083 15,060,167 1,139,793 8.7 23,219
1990 1,789,392 10,602,567 12,391,959 977,343 9.1 (6,347)
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(a) Including investment income due and accrued and real estate.
(b) Net investment income is after deduction of investment expenses and
excludes realized capital gains (losses).
(c) Calculated on the basis of the formula prescribed by the National
Association of Insurance Commissioners.
AIG's worldwide insurance investment policy places primary emphasis on
investments in high quality, fixed income securities in all of its portfolios
and, to a lesser extent, investments in marketable common stocks in order to
preserve policyholders' surplus and generate net investment income. The ability
to implement this policy is somewhat limited in certain territories as there
may be a lack of qualified long term investments or investment restrictions may
be imposed by the local regulatory authorities. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
AGENCY AND SERVICE FEE OPERATIONS
AIG's agency and service fee operations contribute to AIG earnings through fees
as agents and managers, the premiums they generate for AIG's insurance
companies and the revenues they produce from technical and support service
activities.
Several AIG companies act as managing general agents for both AIG
subsidiaries and non-affiliated insurance companies, accepting liability on
risks and actively managing the business produced. These general agencies deal
directly with the producing agents and brokers, exercise full underwriting
control, issue policies, collect premiums, arrange reinsurance, perform
accounting, actuarial and safety and loss control services, adjust and pay
losses and claims, and settle net balances with the represented companies. In
some cases, they also maintain their own and the represented companies'
authority to do business in the jurisdictions in which they operate.
Agency and service fee operations are conducted primarily through AIG
Risk Management, Inc., which provides risk management services to independent
insurance agents, brokers and their customers on a worldwide basis and AIG
Aviation Inc., which sells aviation insurance.
FINANCIAL SERVICES OPERATIONS
AIG operations which contribute to financial services income include primarily
A.I. Credit Corp. ("AICCO"), AIG Financial Products Corp. and its subsidiary
companies ("AIGFP"), AIG Trading Group Inc. and its subsidiaries ("AIGTG"),
International Lease Finance Corporation ("ILFC") and UeberseeBank AG. AICCO's
business is principally in premium financing. AIGFP engages in financial
transactions, including long-dated interest rate and currency swaps and
structures borrowings through guaranteed investment agreements. AIGTG engages in
various commodities trading, foreign exchange trading and market making
activities. ILFC is engaged primarily in the acquisition of new and used
commercial jet aircraft and the leasing and remarketing of such aircraft to
airlines around the world. UeberseeBank AG operates as a Swiss bank. Other
financial services operations are AIG Global Investors, Inc. and AIG
Investment Corporation and their subsidiaries, which manage the investment
portfolios of various AIG subsidiaries. (See also Management's Discussion and
Analysis of Financial Condition and Results of Operations and Notes 1, 9 and
11 of Notes to Financial Statements.)
The following table is a summary of the composition of AIG's financial
services invested assets and liabilities at December 31, 1994. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 1 of Notes to Financial Statements.)
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(in thousands)
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Financial services invested assets:
Flight equipment primarily under operating leases,
net of accumulated depreciation $10,723,527
Securities available for sale, at market value 3,796,792
Trading securities, at market value 2,483,637
Spot commodities, at market value 916,833
Unrealized gain on interest rate and currency
swaps, options and forward transactions 4,650,743
Securities purchased under agreements to resell,
at contract value 1,209,403
Trade receivables 2,629,734
Other, including short-term investments 1,509,593
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Total financial services invested assets $27,920,262
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Financial services liabilities:
Borrowings under obligations of guaranteed
investment agreements $ 5,535,318
Securities sold under agreements to repurchase,
at contract value 1,342,064
Trade payables 2,108,263
Securities sold but not yet purchased, principally
obligations of the U.S. Government and
Government agencies, at market value 192,898
Spot commodities sold but not yet purchased,
at market value 369,089
Unrealized loss on interest rate and currency
swaps, options and forward transactions 3,659,450
Deposits due to banks and other depositors 655,973
Commercial paper 1,960,545
Notes, bonds and loans payable 7,567,046
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Total financial services liabilities $23,390,646
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The following table is a summary of the revenues of AIG's financial
services operations for the year ended December 31, 1994. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 1 of Notes to Financial Statements.)
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(in thousands)
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Financial services revenues:
ILFC $1,097,599
AIGFP* 279,058
AIGTG* 246,643
Other 242,953
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Total financial service revenues $1,866,253
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* Represents net trading revenues.
Other financial services activities include AIG's 30 percent interest
in AB Asesores CFMB, S.L., a Spanish brokerage, investment banking and private
investment management firm, and certain investment management and venture
capital operations in various overseas financial services sectors.
OTHER OPERATIONS
Small AIG subsidiaries provide insurance-related services such as
adjusting claims and marketing specialized products. AIG has several other
relatively small subsidiaries which carry on various businesses. Mt. Mansfield
Company, Inc. owns and operates the ski slopes, lifts, school and an inn located
at Stowe, Vermont.
ADDITIONAL INVESTMENTS
As of March 15, 1995, AIG holds a 46.4 percent interest in Transatlantic
Holdings, Inc., a reinsurance holding company, and a 19.9 percent interest in
Richmond Insurance Company, Ltd., a reinsurer. (See also Note 1(n) of Notes to
Financial Statements.) During 1992, AIG acquired convertible preferred stock
in The Robert Plan Corporation, a leading servicer and underwriter of
private passenger and commercial automobile insurance in urban markets. During
1993, AIG acquired a 23.1 percent interest in Kroll Associates, an international
investigation and consulting firm. AIG holds a 23.9 percent interest in SELIC
Holdings, Ltd., an insurance holding company and a 24.4 percent interest in IPC
Holding, Ltd., a reinsurance holding company. During 1994, AIG invested $200
million in non-voting convertible preferred stock of Alexander and Alexander
Services, Inc., an independent insurance brokerage operation. As of March 24,
1995, AIG had invested $236 million in convertible preferred stock and warrants
of 20th Century Industries, a low-cost provider of mass marketed auto insurance
in California.
LOCATIONS OF CERTAIN ASSETS
As of December 31, 1994, approximately 37 percent of the consolidated assets of
AIG were located in foreign countries (other than Canada), including $925.2
million of cash and securities on deposit with foreign regulatory
authorities. Foreign operations and assets held abroad may be adversely affected
by political developments in foreign countries, including such possibilities as
tax changes, nationalization and changes in regulatory policy, as well as by
consequence of hostilities and unrest. The risks of such occurrences and their
overall effect upon AIG vary from country to country and cannot easily be
predicted. If expropriation or nationalization does occur, AIG's policy is to
take all appropriate measures to seek recovery of such assets. Certain of the
countries in which AIG's business is conducted have currency restrictions which
generally cause a delay in a company's ability to repatriate assets and profits.
(See also Notes 1(t), 2 and 19(d) of Notes to Financial Statements.)
INSURANCE REGULATION AND COMPETITION
Certain states require registration and periodic reporting by insurance
companies which are licensed in such states and are controlled by other
corporations. Applicable legislation typically requires periodic disclosure
concerning the corporation which controls the registered insurer and the other
companies in the holding company system and prior approval of intercorporate
transfers of assets (including in some instances payment of dividends by the
insurance subsidiary) within the holding company system. AIG's subsidiaries are
registered under such legislation in those states which have such requirements.
(See also Note 10(b) of Notes to Financial Statements.)
AIG's insurance subsidiaries, in common with other insurers, are
subject to regulation and supervision by the states and by other jurisdictions
in which they do business. Within the United States, the method of such
regulation varies but generally has its source in statutes that delegate
regulatory and
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supervisory powers to an insurance official. The regulation and supervision
relate primarily to approval of policy forms and rates, the standards of
solvency that must be met and maintained, including risk based capital
measurements, the licensing of insurers and their agents, the nature of and
limitations on investments, restrictions on the size of risks which may be
insured under a single policy, deposits of securities for the benefit of
policyholders, methods of accounting, periodic examinations of the affairs of
insurance companies, the form and content of reports of financial condition
required to be filed, and reserves for unearned premiums, losses and other
purposes. In general, such regulation is for the protection of policyholders
rather than security holders. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
Risk Based Capital (RBC) is designed to measure the adequacy of an
insurer's statutory surplus in relation to the risks inherent in its business.
Thus, inadequately capitalized general and life insurance companies may be
identified.
The RBC formula develops a risk adjusted target level of statutory
surplus by applying certain factors to various asset, premium and reserve
items. Higher factors are applied to more risky items and lower factors are
applied to less risky items. Thus, the target level of statutory surplus varies
not only as a result of the insurer's size, but also on the risk profile of the
insurer's operations.
The RBC Model Law provides for four incremental levels of regulatory
attention for insurers whose surplus is below the calculated RBC target. These
levels of attention range in severity from requiring the insurer to submit a
plan for corrective action to actually placing the insurer under regulatory
control.
To the extent that any of AIG's insurance entities would fall below
prescribed levels of surplus, it would be AIG's intention to infuse necessary
capital to support that entity.
These statutory surplus of each of AIG's domestic general and life
insurance company subsidiaries exceeded its RBC standards by considerable
margins as of December 31, 1994.
A substantial portion of AIG's general insurance business and a
majority of its life insurance business is carried on 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. Licenses issued by foreign authorities to AIG
subsidiaries are subject to modification or revocation by such authorities, and
AIU or other AIG subsidiaries could be prevented from conducting business in
certain of the jurisdictions where they currently operate. In the past, AIU has
been allowed to modify its operations to conform with new licensing
requirements in most jurisdictions.
In addition to licensing requirements, AIG's foreign operations are
also regulated in various jurisdictions with respect to currency, policy
language and terms, amount and type of security deposits, amount and type of
reserves, amount and type of local investment and the share of profits to be
returned to policyholders on participating policies. Some foreign countries
regulate rates in various types of policies. Certain countries have established
reinsurance institutions, wholly or partially owned by the state, to which
admitted insurers are obligated to cede a portion of their business on terms
which do not always allow foreign insurers, including AIG, full compensation.
Regulations governing constitution of technical reserves and remittance
balances in some countries may hinder remittance of profits and repatriation of
assets.
The insurance industry is highly competitive. Within the United
States, AIG's general insurance subsidiaries compete with approximately 4,300
other stock companies, specialty insurance organizations, mutual companies and
other underwriting organizations. AIG's life insurance companies compete in
the United States with some 1,600 life insurance companies and other
participants in related financial service fields. Overseas, AIG subsidiaries
compete for business with foreign insurance operations of the larger U.S.
insurers and local companies in particular areas in which they are active.
AIG's financial services subsidiaries, particularly AIGTG and AIGFP,
operate in a highly competitive environment both domestically and overseas.
Principal sources of competition are banks, investment banks and other non-bank
financial institutions.
ITEM 2. PROPERTIES
AIG and its subsidiaries operate from approximately 250 offices in the United
States, 5 offices in Canada and numerous offices in other foreign countries.
The offices in Manchester, New Hampshire; Springfield, Illinois; Houston,
Texas; Atlanta, Georgia; Baton Rouge, Louisiana; Wilmington, Delaware; Hato
Rey, Puerto Rico; San Diego, California; Greensboro, North Carolina;
Livingston, New Jersey; 70 Pine Street and 72 Wall Street in New York City;
and offices in approximately 30 foreign countries including Bermuda, Hong
Kong, the Philippines, Japan, England, Singapore, Taiwan and Thailand are
located in buildings owned by AIG and its subsidiaries. The remainder of the
office space utilized by AIG subsidiaries is leased.
ITEM 3. LEGAL PROCEEDINGS
AIG and its subsidiaries, in common with the insurance industry in general, are
subject to litigation, including claims for punitive damages, in the normal
course of their business. AIG does not believe that such litigation will have a
material adverse effect on its financial condition, future operating results or
liquidity. (See also the Discussion and Analysis of Consolidated Net Loss and
Loss Expense Reserve Development and Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1994.
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DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning the directors and executive
officers of AIG. All directors are elected at the annual meeting of
shareholders. All officers serve at the pleasure of the Board of Directors, but
subject to the foregoing, are elected for terms of one year expiring in May of
each year.
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SERVED AS
DIRECTOR OR
OFFICER
NAME TITLE AGE SINCE
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M. Bernard Aidinoff* Director 66 1984
Lloyd Bentsen Director 74 1995
Marshall A. Cohen Director 59 1992
Barber B. Conable, Jr. Director 72 1991
Martin S. Feldstein Director 55 1987
Houghton Freeman Director 73 1967
Leslie L. Gonda Director 75 1990
M. R. Greenberg* Director, Chairman, and Chief Executive Officer 69 1967
Carla A. Hills Director 61 1993
Frank J. Hoenemeyer Director 75 1985
John I. Howell* Director 78 1969
Edward E. Matthews Director and Vice Chairman-Finance 63 1973
Dean P. Phypers Director 66 1979
John J. Roberts* Director and Vice Chairman-External Affairs 72 1967
Ernest E. Stempel* Director and Vice Chairman-Life Insurance 78 1967
Thomas R. Tizzio* Director and President 57 1982
Jeffrey W. Greenberg Executive Vice President-Domestic General Insurance-Brokerage 43 1987
Edmund S. W. Tse Executive Vice President-Life Insurance 57 1991
Lawrence W. English Senior Vice President-Administration 53 1985
Axel I. Freudmann Senior Vice President-Human Resources 48 1986
John G. Hughes Senior Vice President-Worldwide Claims 64 1978
Kevin H. Kelley Senior Vice President-Domestic General Insurance-Brokerage 44 1991
Win J. Neuger Senior Vice President and Chief Investment Officer 45 1995
R. Kendall Nottingham Senior Vice President-Life Insurance 56 1991
Petros K. Sabatacakis Senior Vice President-Financial Services 48 1992
Robert M. Sandler Senior Vice President, Senior Casualty Actuary and Senior Claims Officer 52 1980
Howard I. Smith Senior Vice President and Comptroller 50 1984
Stephen Y. N. Tse Senior Vice President 64 1974
Wayland M. Mead Acting General Counsel 63 1975
Robert K. Conry Vice President and Director of Internal Audit 42 1992
Patrick J. Foley Vice President 64 1982
Robert E. Lewis Vice President and Chief Credit Officer 44 1993
Christian M. Milton Vice President-Reinsurance 47 1985
Nicholas A. O'Kulich Vice President-Life Insurance 51 1991
Douglas A. Paul Vice President-Strategic Planning 46 1983
Frank Petralito II Vice President and Director of Taxes 58 1978
Kathleen E. Shannon Vice President and Secretary 45 1986
Joseph H. Umansky Vice President and Deputy Comptroller 47 1992
John T. Wooster, Jr. Vice President-Communications 55 1989
William N. Dooley Treasurer 41 1992
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* Member of Executive Committee.
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Except as hereinafter noted, each of the directors who is also an
executive officer of AIG and each of the other executive officers has, for more
than five years, occupied an executive position with AIG or companies that are
now its subsidiaries, or with Starr. Jeffrey W. Greenberg is the son of M.R.
Greenberg. There are no other arrangements or understandings between any
director or officer and any other person pursuant to which the director or
officer was elected to such position. Mr. Lewis was Assistant General Manager
for North America, Chief Credit Officer, and senior executive responsible for
risk and exposure management of ING Bank in New York, the bank division of
Internationale Nederlanden Group, from 1988 until joining AIG in October, 1993.
Mr. O'Kulich was president of Maccabees Life & Annuity Company from 1982 to
July 31, 1989 and was self employed from August, 1989 until joining AIG in May,
1990. Mr. Sabatacakis was Managing Director and head of the Capital Markets and
Treasury Group of Chemical Banking Corporation prior to joining AIG in
February, 1992. Mr. Neuger was Managing Director, Global Investment
Management-Equity at Bankers Trust Company prior to joining AIG in February,
1995.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
(a) The table below shows the high and low closing sales prices per share of
AIG's common stock, as reported on the New York Stock Exchange Composite Tape,
for each quarter of 1994 and 1993, as adjusted for the 50 percent common stock
split in the form of a common stock dividend paid July 30, 1993. All prices are
as reported by the National Quotation Bureau, Incorporated.
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1994 1993
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High Low High Low
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First Quarter 92 5/8 82 1/2 85 1/8 75
Second Quarter 96 1/2 84 88 79 1/8
Third Quarter 95 7/8 88 1/8 100 85 1/2
Fourth Quarter 99 3/4 87 5/8 97 7/8 83 5/8
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(b) In 1994, AIG paid a quarterly dividend of 10.0 cents in March and
June and 11.5 cents in September and December for a total cash payment of 43
cents per share of common stock. In 1993, AIG paid a quarterly dividend of 9.3
cents in March and June and 10.0 cents in September and December for a total
cash payment of 38.6 cents per share of common stock. These amounts reflect the
adjustment for a 50 percent common stock split in the form of a common stock
dividend paid July 30, 1993. Subject to the dividend preference of any of AIG's
serial preferred stock which may be outstanding, the holders of shares of
common stock are entitled to receive such dividends as may be declared by the
Board of Directors from funds legally available therefor. AIG redeemed the 750
shares of Series M-1 Preferred Stock on April 2, 1993 and the 750 shares of
Series M-2 Preferred Stock on March 5, 1993 at a price of $100,000 per share
plus accrued dividends.
See Note 10(b) of Notes to Financial Statements for a discussion of
certain restrictions on the payment of dividends to AIG by some of its
insurance subsidiaries.
(c) The approximate number of holders of Common Stock as of January
31, 1995, based upon the number of record holders, was 15,900.
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ITEM 6. SELECTED FINANCIAL DATA
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data is presented in accordance
with generally accepted accounting principles. This data should be read in
conjunction with the financial statements and accompanying notes included
elsewhere herein.
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(in thousands, except per share amounts)
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YEARS ENDED DECEMBER 31, 1994 1993 1992 1991 1990
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Revenues(a) $ 22,441,723 $ 20,134,657 $18,388,627 $16,883,913 $15,702,067
General insurance:
Net premiums written 10,865,753 10,025,903 9,138,528 9,146,394 9,267,201
Net premiums earned 10,286,831 9,566,640 9,209,390 9,104,632 9,149,414
Adjusted underwriting profit (loss) 147,517 10,391 (195,084) (4,809) 75,184
Net investment income 1,435,092 1,340,480 1,252,086 1,163,461 1,059,161
Realized capital gains 52,487 65,264 67,134 89,275 120,000
Operating income 1,635,096 1,416,135 1,124,136 1,247,927 1,254,345
Life insurance:
Premium income 6,724,321 5,746,046 4,853,087 4,059,354 3,477,598
Net investment income 1,748,428 1,499,714 1,313,838 1,139,793 977,343
Realized capital gains (losses) 86,706 54,576 43,257 23,219 (6,347)
Operating income 952,484 781,611 667,453 561,839 462,862
Agency and service fee operating income 54,129 60,247 52,570 46,202 36,663
Financial services operating income 404,853 390,038 346,442 222,156 132,505
Equity in income of minority-owned insurance
operations 56,005 39,589 27,929 28,806 24,050
Other realized capital losses (52,340) (12,742) (11,293) (14,144) (14,258)
Income before income taxes and cumulative
effect of accounting changes 2,951,979 2,601,081 2,137,048 2,022,575 1,811,534
Income taxes 776,464 683,003 512,033 469,566 369,240
Income before cumulative effect of accounting changes 2,175,515 1,918,078 1,625,015 1,553,009 1,442,294
Cumulative effect of accounting changes, net of tax:
AIG -- -- 31,941 -- --
Minority-owned insurance operations -- 20,695 -- -- --
Net income 2,175,515 1,938,773 1,656,956 1,553,009 1,442,294
Earnings per common share:
Income before cumulative effect of
accounting changes 6.87 6.04 5.10 4.86 4.61
Cumulative effect of accounting changes, net of tax:
AIG -- -- .10 -- --
Minority-owned insurance operations -- .07 -- -- --
Net income 6.87 6.11 5.20 4.86 4.61
Cash dividends per common share .43 .39 .35 .31 .27
Total assets(b) 114,346,117 101,014,848 92,722,182 69,389,468 58,201,835
Long-term debt(c) 12,613,907 10,955,963 9,517,595 7,591,385 6,780,211
Capital funds (shareholders' equity) 16,421,661 15,224,195 12,782,152 11,463,454 9,904,442
=================================================================================================================================
(a) Represents the sum of general net premiums earned, life premium income,
agency commissions, management and other fees, net investment income,
financial services commissions, transaction and other fees, equity in
income of minority-owned insurance operations and realized capital gains.
(See also tables under Item 1, "Business".)
(b) The assets with respect to December 31, 1992 and subsequent years conform
to the requirements of FASB 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts."
(c) Including commercial paper and excluding that portion of long-term debt
maturing in less than one year.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATIONAL REVIEW
GENERAL INSURANCE OPERATIONS
General insurance operations for the twelve month periods ending December 31,
1994, 1993 and 1992 were as follows:
[Enlarge/Download Table]
(in thousands)
---------------------------------------------------------------------------------------------------
1994 1993 1992
===================================================================================================
Net premiums written:
Domestic $ 7,277,200 $ 7,006,600 $6,564,600
Foreign 3,588,600 3,019,300 2,573,900
---------------------------------------------------------------------------------------------------
Total $10,865,800 $10,025,900 $9,138,500
===================================================================================================
Net premiums earned:
Domestic $ 6,827,700 $ 6,664,800 $6,712,800
Foreign 3,459,100 2,901,800 2,496,600
---------------------------------------------------------------------------------------------------
Total $10,286,800 $ 9,566,600 $9,209,400
===================================================================================================
Adjusted underwriting
profit (loss):
Domestic $ (91,500) $ (130,300) $ (290,100)
Foreign 239,000 140,700 95,000
---------------------------------------------------------------------------------------------------
Total $ 147,500 $ 10,400 $ (195,100)
===================================================================================================
Net investment income:
Domestic $ 1,147,600 $ 1,086,000 $1,014,600
Foreign 287,500 254,500 237,500
---------------------------------------------------------------------------------------------------
Total $ 1,435,100 $ 1,340,500 $1,252,100
===================================================================================================
Operating income before
realized capital gains:
Domestic $ 1,056,100 $ 955,700 $ 724,500
Foreign 526,500 395,200 332,500
---------------------------------------------------------------------------------------------------
Total 1,582,600 1,350,900 1,057,000
Realized capital gains 52,500 65,200 67,100
---------------------------------------------------------------------------------------------------
Operating income $ 1,635,100 $ 1,416,100 $1,124,100
===================================================================================================
In AIG's general insurance operations, 1994 net premiums written and
net premiums earned increased 8.4 percent and 7.5 percent, respectively, from
those of 1993. In 1993, net premiums written increased 9.7 percent and net
premiums earned increased 3.9 percent when compared to 1992.
The growth in net premiums written in 1994 and 1993 resulted from a
combination of several factors. Although AIG continued to achieve some general
price increases in domestic commercial property and some specialty casualty
markets, the primary reasons for this growth were price and volume increases
overseas. Foreign general insurance operations produced 33.0 percent of the
general insurance net premiums written in 1994, 30.1 percent in 1993 and 28.2
percent in 1992.
During 1994, the U.S. dollar declined in value in relation to most
major foreign currencies in which AIG transacts business. Accordingly, the
translation of foreign net premiums written into U.S. dollars for the purposes
of consolidation caused the increase in total net premiums written to be
approximately one and one-half percentage points greater than it would have
been if translated utilizing exchange rates prevailing in 1993.
If the net premiums written with respect to the domestic risk
management operations were excluded from both 1994 and 1993, the domestic net
premiums written would have increased approximately 12 percent. The decline in
the volume of the risk management net premiums written was generally a result
of higher deductibles. This decline had no impact on the operating income
produced by the risk management business.
Net premiums written are initially deferred and earned based upon the
terms of the underlying policies. The net unearned premium reserve constitutes
the deferred revenues which are generally earned ratably over the policy
period. Thus, the net unearned premium reserve is not fully recognized as net
premiums earned until the end of the policy period.
The statutory general insurance ratios were as follows:
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------
1994 1993 1992
===================================================================================================
Domestic:
Loss Ratio 87.03 87.27 89.12
Expense Ratio 14.87 15.12 15.42
---------------------------------------------------------------------------------------------------
Combined Ratio 101.90 102.39 104.54
===================================================================================================
Foreign:
Loss Ratio 59.64 60.64 60.93
Expense Ratio 33.22 34.26 34.81
---------------------------------------------------------------------------------------------------
Combined Ratio 92.86 94.90 95.74
===================================================================================================
Consolidated:
Loss Ratio 77.82 79.19 81.48
Expense Ratio 20.93 20.88 20.88
---------------------------------------------------------------------------------------------------
Combined Ratio 98.75 100.07 102.36
===================================================================================================
The Northridge earthquake which struck the Los Angeles area of
California in January, 1994, resulted in gross and net incurred losses of
approximately $174 million and $55 million, respectively. Although there were
severe winter storms during the first quarter of 1994, AIG considered these as
losses incurred in the ordinary course of business, not as catastrophes. The
gross and net losses recorded in 1993 for catastrophes were approximately $134
million and $70 million, respectively. The catastrophes incurred in both 1994
and 1993 were significantly below the gross and net catastrophe losses of
approximately $567 million and $192 million, respectively, recorded in 1992.
Three major storms, Andrew, Iniki and Omar, occurred in 1992. If the
catastrophes were excluded from the losses incurred in each period, the pro
forma consolidated statutory general insurance ratios would be as follows:
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------
1994 1993 1992
===================================================================================================
Loss Ratio 77.29 78.46 79.40
Expense Ratio 20.93 20.88 20.88
---------------------------------------------------------------------------------------------------
Combined Ratio 98.22 99.34 100.28
===================================================================================================
The maintenance of the pro forma statutory combined ratio in all three
years at a level approximating 100 is a result of AIG's emphasis on maintaining
its underwriting discipline within the continued overall competitiveness of the
domestic market environment as well as AIG's expense control.
14
American International Group, Inc. and Subsidiaries
Adjusted underwriting profit or loss (operating income less net
investment income and realized capital gains) represents statutory underwriting
profit or loss adjusted primarily for changes in deferred acquisition costs.
(See also Note 4 of Notes to Financial Statements.) The adjusted underwriting
profit in 1994 was $147.5 million compared to an adjusted underwriting profit
of $10.4 million recorded in 1993 and an adjusted underwriting loss of $195.1
million in 1992. (See also Note 19 of Notes to Financial Statements.)
The domestic adjusted underwriting loss has been impacted
significantly by catastrophes in all three years. Excluding the effects of
these catastrophes, the domestic general insurance operation has significantly
improved over the three year period. This improvement is a result of a strategy
implemented several years ago. That is, AIG withdrew from certain classes of
business, primarily agency lines and certain segments of workers' compensation
business. At that time, AIG had determined that the returns on capital or
equity allocated to such classes were deemed unacceptable. AIG's objective
continues to be disciplined underwriting, especially in the domestic primary
casualty market, and AIG does not seek net premium growth where rates do not
adequately reflect its assessment of exposures.
General insurance net investment income in 1994 increased 7.1 percent
when compared to 1993. In 1993, net investment income increased 7.1 percent
over 1992. The growth in net investment income in each of the three years was
primarily attributable to new cash flow for investment. The new cash flow was
generated from net general insurance operating cash flow and included the
compounding of previously earned and reinvested net investment income. (See
also the discussion under "Liquidity" herein.)
General insurance realized capital gains were $52.5 million in 1994,
$65.3 million in 1993 and $67.1 million in 1992. 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 and
trading fixed maturities as well as redemptions of fixed maturities.
General insurance operating income in 1994 increased 15.5 percent when
compared to 1993. The 1993 results reflect an increase of 26.0 percent from
1992. The contribution of general insurance operating income to income before
income taxes and the cumulative effect of accounting changes was 55.4 percent
in 1994 compared to 54.4 percent in 1993 and 52.6 percent in 1992.
A year to year comparison of operating income is significantly
influenced by the catastrophe losses in any one year as well as the volatility
from one year to the next in realized capital gains. Adjusting each year to
exclude the effects of both catastrophe losses and realized capital gains,
operating income would have increased by 15.3 percent in 1994 and 13.9 percent
in 1993. The increase in the growth rate of 1994 over 1993 and 1993 over 1992
after the aforementioned adjustments was a result of the increased net
investment income and improvement in underwriting results.
AIG is a major purchaser of reinsurance for its general insurance
operations. AIG is cognizant of the need to exercise good judgment in the
selection and approval of both domestic and foreign companies participating in
its reinsurance programs. AIG insures risks in over 100 countries and its
reinsurance programs must be coordinated in order to provide AIG the level of
reinsurance protection which AIG desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.
AIG's general reinsurance assets amounted to $16.29 billion and
resulted from its reinsurance arrangements. Thus, a credit exposure existed at
December 31, 1994 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. The
application of this collateral against balances due or any changes to the
amount of collateral are based on the development of losses recoverable on an
individual reinsurer basis. This development includes losses incurred but not
reported (IBNR). Approximately 59 percent of reinsurance recoverable is from
unauthorized reinsurers. In order to obtain statutory recognition, nearly all
of these balances are collateralized. The remaining 41 percent of the
reinsurance recoverable is from authorized reinsurers and over 90 percent of
such balances are from reinsurers rated A- (excellent) or better, as rated by
A.M. Best. This rating is a measure of financial strength. The terms
authorized and unauthorized pertain to regulatory categories, not
creditworthiness.
AIG maintains a provision for estimated unrecoverable reinsurance and
has been largely successful in its prior recovery efforts. At December 31,
1994, AIG had allowances for unrecoverable reinsurance approximating $110
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 whether a reinsurer
has sufficient financial capacity. Also considered are such things as the local
economic environment and exchange rates of foreign reinsurers. 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
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
among various legal entities. These reinsurance agreements have been approved
by the appropriate regulatory authorities. All material intercompany
transactions have been eliminated in consolidation.
The consolidated general reinsurance assets of $16.29 billion include
reinsurance recoverables for (i) paid losses and loss expenses of $1.44 billion
and (ii) the ceded reserve for losses and loss expenses, including losses and
loss expenses incurred but not reported (ceded reserves) of $13.02 billion. The
ceded reserves represent the accumulation of estimates of ultimate ceded losses
including provisions for ceded IBNR and loss expenses. The methods used to
determine such estimates and to establish the resulting ceded reserves are
continually reviewed and updated. Any adjustments therefrom are reflected in
income currently. It is AIG's belief that the ceded reserves at December 31,
1994 were representative of the ultimate losses recoverable. In the future, as
the ceded reserves continue to develop to ultimate amounts, the ultimate loss
recoverable may be greater or less than the reserves currently ceded.
At December 31, 1994, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $31.44 billion, an increase of $1.39
billion or 4.6 percent over the prior year end. General insurance net loss
reserves represent the accumulation of estimates of ultimate losses, including
IBNR, and loss expenses, reduced by reinsurance recoverable net of an allowance
for unrecoverable reinsurance and minor amounts of discounting related to
certain workers' compensation claims. The net loss reserves increased $861.9
million or 4.9 percent to $18.42 billion. The methods used to determine such
estimates and to establish the resulting reserves are continually reviewed and
updated. Any adjustments resulting therefrom are reflected in operating income
currently. It is management's belief that the general insurance net loss
reserves are adequate to cover all general insurance net losses and loss
expenses as at December 31, 1994. In the future, if the general insurance net
loss reserves develop deficiently, such deficiency would have an adverse impact
on such future results of operations.
In a very broad sense, the general loss reserves can be categorized
into two distinct groups: one group being long tail casualty lines of business;
the other being short tail lines of business consisting principally of property
lines and including certain classes of casualty lines.
Estimation of ultimate net losses and loss expenses (net losses) for
long tail casualty lines of business is a complex process and depends on a
number of factors, including the line and volume of the business involved. In
the more recent accident years of long tail casualty lines there is limited
statistical credibility in reported net losses. That is, a relatively low
proportion of net losses would be reported claims and expenses and an even
smaller proportion would be net losses paid. A relatively high proportion of
net losses would therefore be IBNR.
A variety of actuarial methods and assumptions are normally employed
to estimate net losses for long tail casualty lines. These methods ordinarily
involve the use of loss trend factors intended to reflect the estimated annual
growth in loss costs from one accident year to the next. 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. For the
majority of long tail casualty lines, net loss trend factors approximating 10
percent were employed. 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 indemnity claims asserting injuries from
toxic waste, hazardous substances, and other environmental pollutants and
alleged damages to cover the cleanup costs of hazardous waste dump sites
(hereinafter collectively referred to as environmental claims) and indemnity
claims asserting injuries from asbestos. The vast majority of these asbestos
and environmental claims emanate from policies written in 1984 and prior years.
Commencing in 1985, standard policies contained an absolute exclusion for
pollution related damage. However, AIG currently underwrites pollution
impairment liability insurance on a claims made basis and excluded such claims
from the analyses included herein. AIG has established a specialized claims
unit which investigates and adjusts all such asbestos and environmental claims.
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, judicial interpretations which broaden the
intent of the policies and scope of coverage and the increasing number of new
claims. The case law that has emerged can be characterized as still being in
its infancy and the likelihood of any firm direction in the near future is very
16
American International Group, Inc. and Subsidiaries
small. 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 expected in 1995 dramatically changes, thereby
reducing or increasing litigation and cleanup costs.
In the interim, AIG and other industry members have and will continue
to litigate the broadening judicial interpretation of the policy coverage and
the liability issues. At the current time, it is not possible to determine the
future development of asbestos and environmental claims. Such development will
be affected by the extent to which courts continue to expand the intent of the
policies and the scope of the coverage, as they have in the past, as well as by
changes in Superfund and waste dump site coverage issues. Additional
liabilities could emerge for amounts in excess of the current reserves held.
Although this emergence cannot now be reasonably estimated, it could have a
material adverse impact on AIG's future operating results. The reserves carried
for these claims at December 31, 1994 are believed to be adequate as these
reserves are based on the known facts and current law. Furthermore, as AIG's
net exposure retained relative to the gross exposure written was lower in 1984
and prior years, the potential impact of these claims is much smaller on the
net loss reserves than on the gross loss reserves. (See the previous discussion
on reinsurance collectibility herein.)
The majority of AIG's exposures for asbestos and environmental claims
are excess casualty coverages, not primary coverages. Thus, the litigation
costs are treated in the same manner as indemnity reserves. That is, litigation
expenses are included within the limits of the liability AIG incurs. Individual
significant claim liabilities, where future litigation costs are reasonably
determinable, are established on a case basis.
A summary of reserve activity, including estimates for applicable
IBNR, relating to asbestos and environmental claims separately and combined at
December 31, 1994 and 1993 was as follows:
[Enlarge/Download Table]
(in millions)
--------------------------------------------------------------------------------------------------
1994 1993
------------------------ ----------------------
Gross Net Gross Net
==================================================================================================
Asbestos:
Reserve for losses and loss
expenses at beginning of year $ 656.0 $116.7 $ 558.4 $ 86.9
Losses and loss expenses incurred 149.2 45.8 242.9 65.1
Losses and loss expenses paid (119.2) (32.3) (145.3) (35.3)
---------------------------------------------------------------------------------------------------
Reserve for losses and loss
expenses at end of year $ 686.0 $130.2 $ 656.0 $ 116.7
===================================================================================================
Environmental:
Reserve for losses and loss
expenses at beginning of year $ 684.8 $191.5 $ 566.4 $ 166.6
Losses and loss expenses incurred 187.5 61.8 278.6 106.5
Losses and loss expenses paid (144.2) (53.2) (160.2) (81.6)
---------------------------------------------------------------------------------------------------
Reserve for losses and loss
expenses at end of year $ 728.1 $200.1 $ 684.8 $ 191.5
===================================================================================================
Combined:
Reserve for losses and loss
expenses at beginning of year $1,340.8 $308.2 $1,124.8 $ 253.5
Losses and loss expenses incurred 336.7 107.6 521.5 171.6
Losses and loss expenses paid (263.4) (85.5) (305.5) (116.9)
---------------------------------------------------------------------------------------------------
Reserve for losses and loss
expenses at end of year $1,414.1 $330.3 $1,340.8 $ 308.2
===================================================================================================
The gross and net IBNR included in the aforementioned reserve for
losses and loss expenses at December 31, 1994 and 1993 were estimated as
follows:
[Enlarge/Download Table]
(in thousands)
--------------------------------------------------------------------------------------------------
1994 1993
------------------------ ----------------------
Gross Net Gross Net
==================================================================================================
Combined $150,000 $30,000 $150,000 $30,000
===================================================================================================
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
A summary of asbestos and environmental claims count activity for the
years ended December 31, 1994 and 1993 were as follows:
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------------------
1994 1993
------------------------------------ -------------------------------------
ASBESTOS ENVIRONMENTAL COMBINED ASBESTOS ENVIRONMENTAL COMBINED
=====================================================================================================================
Claims at beginning of year 5,522 16,661 22,183 5,490 14,169 19,659
Claims during year:
Opened 1,626 3,178 4,804 1,381 4,875 6,256
Settled (106) (501) (607) (144) (455) (599)
Dismissed or otherwise resolved (1,095) (3,115) (4,210) (1,205) (1,928) (3,133)
---------------------------------------------------------------------------------------------------------------------
Claims at end of year 5,947 16,223 22,170 5,522 16,661 22,183
=====================================================================================================================
The average cost per claim settled, dismissed or otherwise resolved
for the years ended December 31, 1994 and 1993 was as follows:
[Enlarge/Download Table]
----------------------------------------------------------------------------------------
1994 1993
-------------------- ----------------------
Gross Net Gross Net
========================================================================================
Asbestos $99,300 $26,900 $107,700 $26,200
Environmental 39,900 14,700 67,200 34,200
Combined 54,700 17,700 81,900 31,300
========================================================================================
Recently, an insurance rating agency has developed a survival ratio to
measure the number of years it would take a company to exhaust both its
asbestos and environmental reserves for losses and loss expenses based on that
company's current level of asbestos and environmental claims payments. The
higher the ratio, the more years the reserves for losses and loss expenses
cover these claims payments. These ratios are computed based on the respective
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, do have significant impact on the
amount of asbestos and environmental losses and loss expense reserves, ultimate
payments thereof and the resultant ratio. In addition to the study published by
that insurance rating agency, another published study projected significantly
lower ultimate costs for toxic waste cleanups for the insurance industry.
The developed survival ratios include both involuntary and voluntary
indemnity payments. Involuntary payments include court judgments; court orders;
covered claims with no coverage defenses; state mandated cleanup costs; claims
where AIG's coverage defenses are minimal; and settlements made less than six
months before the first trial setting. Also, AIG considers all legal and loss
adjustment payments as involuntary.
AIG believes voluntary indemnity payments should be excluded from the
survival ratio. The special asbestos and environmental claims unit actively
manages AIG's asbestos and environmental claims and proactively pursues early
settlement of environmental claims for all known and unknown sites. As a
result, AIG reduces its exposure to future environmental loss contingencies.
Accordingly, AIG's survival ratios for involuntary asbestos and
environmental claims, separately and combined, were estimated as follows for
the years ended December 31, 1994 and 1993:
[Enlarge/Download Table]
----------------------------------------------------------------------------------------
1994 1993
-------------------- ---------------------
Gross Net Gross Net
========================================================================================
Involuntary survival ratios:
Asbestos 5.8 4.0 4.5 3.3
Environmental 11.0 8.1 9.4 5.0
Combined 7.9 6.1 6.3 4.2
========================================================================================
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
1994, 1993 and 1992 were $48.2 million, $69.1 million and $27.7 million,
respectively. Also, AIG is 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. (See also Note 19 of Notes to Financial Statements.)
18
American International Group, Inc. and Subsidiaries
LIFE INSURANCE OPERATIONS
Life insurance operations for the twelve month periods ending December 31,
1994, 1993 and 1992 were as follows:
[Download Table]
(in thousands)
-----------------------------------------------------------------------------------
1994 1993 1992
===================================================================================
Premium income:
Domestic $ 370,100 $ 268,300 $ 269,400
Foreign 6,354,200 5,477,700 4,583,700
-----------------------------------------------------------------------------------
Total $ 6,724,300 $ 5,746,000 $ 4,853,100
===================================================================================
Net investment income:
Domestic $ 600,600 $ 471,500 $ 409,300
Foreign 1,147,800 1,028,200 904,500
-----------------------------------------------------------------------------------
Total $ 1,748,400 $ 1,499,700 $ 1,313,800
===================================================================================
Operating income before
realized capital gains:
Domestic $ 38,300 $ 19,300 $ 10,800
Foreign 827,500 707,700 613,400
-----------------------------------------------------------------------------------
Total 865,800 727,000 624,200
Realized capital gains 86,700 54,600 43,300
-----------------------------------------------------------------------------------
Operating income $ 952,500 $ 781,600 $ 667,500
===================================================================================
Life insurance in-force:
Domestic $ 43,849,700 $ 17,167,300 $ 15,745,400
Foreign 289,529,100 239,994,800 194,860,500
-----------------------------------------------------------------------------------
Total $333,378,800 $257,162,100 $210,605,900
===================================================================================
AIG's life insurance operations continued to show growth as a result
of overseas operations, particularly in Asia. AIG's life premium income in 1994
represented an 17.0 percent increase from the prior year. This compares with an
increase of 18.4 percent in 1993 over 1992. Foreign life operations produced
94.5 percent, 95.3 percent and 94.4 percent of the life premium income in 1994,
1993 and 1992, respectively. (See also Notes 1, 4 and 6 of Notes to Financial
Statements.)
As previously discussed, the U.S. dollar declined in value in relation
to most major foreign currencies in which AIG transacts business. Accordingly,
the translation of foreign life premium income into U.S. dollars for purposes
of consolidation caused the increase in total premium income to be
approximately two percentage points greater than it would have been if
translated utilizing exchange rates prevailing in 1993.
Life insurance net investment income increased 16.6 percent in 1994
compared to an increase of 14.1 percent in 1993. The growth in net investment
income was primarily attributable to new cash flow for investment.
The new cash flow was generated from net life insurance operating cash
flow and included the compounding of previously earned and reinvested net
investment income. (See also the discussion under "Liquidity" herein.)
The growth in the premium income of the domestic life segment resulted
primarily from the risk bearing premium related to corporate-owned life
insurance products. Additionally, the interest income earned on the policy
loans associated with these products has significantly increased domestic
investment income.
The traditional life products, such as whole and term life and
endowments, were the major contributors to the growth in foreign premium income
and investment income, particularly in Asia, and continue to be the primary
source of growth in the life segment. A mixture of traditional, accident and
health and financial products are being sold in Japan.
Life insurance realized capital gains were $86.7 million in 1994,
$54.6 million in 1993 and $43.3 million in 1992. These realized gains 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 and redemptions of fixed maturities.
Life insurance operating income in 1994 increased 21.9 percent to
$952.5 million compared to an increase of 17.1 percent in 1993. Excluding
realized capital gains from life insurance operating income, the percent
increases would be 19.1 percent and 16.5 percent in 1994 and 1993,
respectively. The contribution of life insurance operating income to income
before income taxes and the cumulative effect of accounting changes amounted to
32.3 percent in 1994 compared to 30.0 percent in 1993 and 31.2 percent in 1992.
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 $1.3 million of
coverage by using yearly renewable term reinsurance. The life insurance
operations have not entered into assumption reinsurance transactions or surplus
relief transactions during the three year period ended December 31, 1994. (See
also Note 5 of Notes to Financial Statements.)
The investment risk represents the exposure to loss resulting from the
cash flows from the invested assets, primarily long-term 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, even though certain territories lack qualified long-term
investments or there are investment restrictions imposed by the local
regulatory authorities. For example,
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
in Japan and several Southeast Asia territories, the duration of the
investments is often for a shorter period than the effective maturity of such
policy liabilities. Therefore, there is a risk that the reinvestment of the
proceeds at the maturity of the investments may be at a yield below that of the
interest required for the accretion of the policy liabilities. In Japan, the
average duration of the investment portfolio is 5.0 years, while the related
policy liabilities are estimated to be 11.5 years. To maintain an adequate
yield to match the interest required over the duration of the liabilities,
constant management focus is required to reinvest the proceeds of the maturing
securities without sacrificing investment quality. To the extent permitted
under local regulation, AIG may invest in qualified longer-term securities
outside Japan to achieve a closer matching in both duration and the required
yield. AIG is able to manage any asset-liability duration difference through
maintenance of sufficient global liquidity and to support any operational
shortfall through its international financial network. Domestically, the
asset-liability matching process is appropriately functioning 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.
AGENCY AND SERVICE FEE OPERATIONS
Agency and service fee operating income in 1994 decreased 10.2 percent to $54.1
million compared to $60.2 million which was an increase of 14.6 percent in
1993. The decline in 1994 was due to reduced commission revenue in certain of
AIG's managing general agencies. The increase in operating income in 1993
resulted from the growth of risk management services. Agency and service fee
operating income contributed 1.8 percent to AIG's income before income taxes
and the cumulative effect of accounting changes in 1994 compared to 2.3 percent
in 1993 and 2.5 percent in 1992.
FINANCIAL SERVICES OPERATIONS
Financial services operations for the twelve month periods ending December 31,
1994, 1993 and 1992 were as follows:
[Download Table]
(in thousands)
-----------------------------------------------------------------------------------
1994 1993 1992
===================================================================================
REVENUES:
International Lease Finance Corp. $1,097,600 $ 879,100 $ 690,900
AIG Financial Products Corp.* 279,100 336,100 421,000
AIG Trading Group Inc.* 246,600 227,400 175,800
Other 243,000 152,800 117,200
-----------------------------------------------------------------------------------
Total $1,866,300 $1,595,400 $1,404,900
===================================================================================
Operating income:
International Lease Finance Corp. $ 248,200 $ 220,000 $ 186,200
AIG Financial Products Corp. 131,000 150,100 171,500
AIG Trading Group Inc. 55,200 69,800 56,000
Other, including intercompany
adjustments (29,500) (49,900) (67,300)
-----------------------------------------------------------------------------------
Total $ 404,900 $ 390,000 $ 346,400
===================================================================================
* Represents net trading revenues.
Financial services operating income increased 3.8 percent in 1994 over
1993. This compares with an increase of 12.6 percent in 1993 over 1992. The
financial services operating income in both 1994 and 1993 increased primarily
as a result of the increase in the operating income of International Lease
Finance Corporation (ILFC).
ILFC primarily engages in the acquisition of new and used commercial
jet aircraft and the leasing and sale of such aircraft to airlines around the
world. ILFC derives a substantial portion of its revenues from its leasing
operations and is also engaged in the remarketing of commercial jets to and for
airlines and financial institutions. As a result of the rising interest rate
environment during 1994, ILFC's new borrowings were at higher rates relative to
prior years. In such an environment, ILFC negotiates higher lease rates on any
new contract. The increase in interest rates had a minor impact on ILFC's
current lease margins. It is not anticipated that this rise in interest rates
will have any significant impact on future operating income. (See also the
discussions under "Capital Resources" and "Liquidity" herein.)
ILFC is exposed to loss through non-performance of aircraft lessees,
through owning aircraft which it would be unable to lease or re-lease at
acceptable rates or sell at lease expiration and through committing to purchase
aircraft which it would be unable to lease. ILFC manages its lessee
non-performance exposure through credit reviews and security deposit
requirements. At December 31, 1994, only three of 270 aircraft owned were not
leased. At March 1, 1995, these three aircraft have been committed for either
lease or sale and all other aircraft remain leased. Currently, 77 percent of
the fleet is leased to foreign carriers producing 76.8 percent of ILFC's rental
revenues. (See also the discussions under "Capital Resources" and "Liquidity"
herein.)
AIG Trading Group Inc. and its subsidiaries (AIGTG), derive a
substantial portion of their revenues from market making and trading
activities, as principals, in foreign exchange, interest rates, precious and
base metals, petroleum and natural
20
American International Group, Inc. and Subsidiaries
gas. AIGTG's operating income declined as a result of reduced volatility in
1994 relative to 1993 in the markets in which AIGTG participates. (See also the
discussions under "Capital Resources," "Liquidity" and "Derivatives" herein.)
AIG Financial Products Corp. and its subsidiaries (AIGFP) participate
in the derivatives dealer market conducting, as principals, an interest rate,
currency and equity derivative products business which includes long-dated
transactions. AIGFP also enters into guaranteed investment agreements. In 1994,
AIGFP's revenues and operating income were less than those of 1993 as a result
of fewer transactions. Current and past performance may not provide a basis for
predicting future performance. AIGFP derives substantially all its revenues
from proprietary positions entered in connection with counterparty transactions
rather than for speculative purposes. (See also the discussions under "Capital
Resources," "Liquidity" and "Derivatives" herein.)
Financial services operating income represented 13.7 percent of AIG's
income before income taxes and the cumulative effect of accounting changes in
1994. This compares to 15.0 percent and 16.2 percent in 1993 and 1992,
respectively.
OTHER OPERATIONS
In 1994, AIG's equity in income of minority-owned insurance operations was
$56.0 million compared to $39.6 million in 1993 and $27.9 million in 1992. The
equity interest in insurance companies, which includes two equity operations
which commenced business during 1993, represented 1.9 percent of income before
income taxes and the cumulative effect of accounting changes in 1994, compared
to 1.5 percent in 1993 and 1.3 percent in 1992.
Other realized capital losses amounted to $52.3 million, $12.7 million
and $11.3 million in 1994, 1993 and 1992, respectively.
Minority interest represents minority shareholders' equity in income
of certain consolidated subsidiaries. In 1994, minority interest amounted to
$29.7 million. In 1993 and 1992, minority interest amounted to $26.9 million
and $11.2 million, 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 1994, net deductions amounted to $68.6 million. In 1993
and 1992, net deductions amounted to $46.9 million and $59.0 million,
respectively.
Income before income taxes and the cumulative effect of accounting
changes amounted to $2.95 billion in 1994 and $2.60 billion in 1993. Income
before income taxes was $2.14 billion in 1992.
In 1994, AIG recorded a provision for income taxes of $776.5 million
compared to the provisions of $683.0 million and $512.0 million in 1993 and
1992, respectively. These provisions represent effective tax rates of 26.3
percent in 1994 and 1993 and 24.0 percent in 1992. The most significant cause
for the increase in the effective tax rate for 1993 was the Omnibus Budget
Reconciliation Act of 1993 (the Act). Among other things, the Act increased the
corporate tax rate to 35 percent from 34 percent, effective January 1, 1993.
Additionally, the 1993 effective tax rate was influenced by higher state and
local income taxes. (See Note 3 of Notes to Financial Statements.)
Income before the cumulative effect of accounting changes amounted to
$2.18 billion in 1994, $1.92 billion in 1993 and $1.63 billion in 1992. The
increases in net income over the three year period resulted from those factors
described above.
At January 1, 1993, AIG's equity in income of minority-owned insurance
operations was positively impacted by the cumulative effect of accounting
changes on such operations from the adoption of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes"(FASB 109), which was
partially offset by the adoption of Statement of Financial Accounting Standards
No. 106 "Employer's Accounting for Postretirement Benefits Other than Pension
Plans" (FASB 106). AIG's equity in the cumulative effect of such accounting
changes was a net benefit of $20.7 million.
AIG had adopted FASB 106 and FASB 109 effective as at January 1, 1992,
recording a cumulative effect net benefit of $31.9 million. The pretax
cumulative charge of adopting FASB 106 was $83.1 million and the net of tax
cumulative charge was $54.8 million. The cumulative effect of adopting FASB
109 was a benefit of $86.7 million.
Net income amounted to $2.18 billion in 1994, $1.94 billion in 1993
and $1.66 billion in 1992. The increases in net income over the three year
period resulted from those factors described above.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CAPITAL RESOURCES
At December 31, 1994, AIG had total capital funds of $16.42 billion and total
borrowings of $17.52 billion.
Total borrowings at December 31, 1994 and 1993 were as follows:
[Download Table]
(in thousands)
-----------------------------------------------------------------------------------
December 31, 1994 1993
===================================================================================
Borrowings under Obligations of
Guaranteed Investment Agreements
(GIA) -- AIGFP $ 5,535,300 $ 6,735,600
-----------------------------------------------------------------------------------
Commercial Paper:
Funding 1,211,300 891,700
ILFC 1,960,600* 1,442,400*
AICCO 617,700 638,200
AIGFP -- 176,600
-----------------------------------------------------------------------------------
Total 3,789,600 3,148,900
-----------------------------------------------------------------------------------
Medium Term Notes:
ILFC 1,999,500* 1,753,700*
AIG 155,000 295,000
-----------------------------------------------------------------------------------
Total 2,154,500 2,048,700
-----------------------------------------------------------------------------------
Notes and Bonds Payable:
ILFC 2,950,000* 2,550,000*
AIGFP 1,048,100 521,400
AIG: Lire bonds 159,100 159,100
Zero coupon notes 65,800 59,100
-----------------------------------------------------------------------------------
Total 4,223,000 3,289,600
-----------------------------------------------------------------------------------
Loans and Mortgages Payable:
AIGTG 890,800 117,900
ILFC 678,600* 79,000*
AIG 247,700 269,400
-----------------------------------------------------------------------------------
Total 1,817,100 466,300
-----------------------------------------------------------------------------------
Total Borrowings 17,519,500 15,689,100
-----------------------------------------------------------------------------------
Borrowings not guaranteed by AIG 7,588,700 5,825,100
Matched GIA borrowings 5,535,300 6,735,600
-----------------------------------------------------------------------------------
13,124,000 12,560,700
-----------------------------------------------------------------------------------
Remaining borrowings of AIG $ 4,395,500 $ 3,128,400
===================================================================================
* AIG does not guarantee or support these borrowings.
See also Note 9 of Notes to Financial Statements.
GIAs serve as the primary source of proceeds for AIGFP's investments
in a diversified portfolio of securities and derivative transactions. During
1994, the GIA balance declined $1.2 billion. As a result, AIGFP increased its
term notes payable $526.7 million to $1.05 billion as an additional source of
funding for its operating activities. (See also the discussions under
"Operational Review", "Liquidity" and "Derivatives" herein and Notes 1, 9 and
11 of Notes to Financial Statements.)
AIG Funding, Inc. (Funding), through the issuance of commercial paper,
fulfills the short-term cash requirements of AIG and its subsidiaries. Funding
intends to continue to meet AIG's funding requirements through the issuance of
commercial paper guaranteed by AIG. This issuance of commercial paper is
subject to the approval of AIG's Board of Directors. ILFC, A.I. Credit Corp.
(AICCO) and AIGFP issue commercial paper for the funding of their own
operations. AIG does not guarantee AICCO's or ILFC's commercial paper.
However, AIG has entered into an agreement in support of AICCO's commercial
paper. AIG guarantees AIGFP's commercial paper. (See also the discussion under
"Derivatives" herein and Note 9 of Notes to Financial Statements.)
On December 15, 1994, AIG and Funding entered into two syndicated
revolving credit facilities (the Facilities) aggregating $1 billion. The
Facilities consist of a $500 million 364 day revolving credit facility and a
$500 million five year revolving credit facility. The Facilities represent a
consolidation of domestic and international bilateral lines of credit and can
be used for general corporate purposes. The Facilities also provide backup for
AIG's commercial paper programs administered by Funding. There are currently no
borrowings outstanding under either of the Facilities, nor were any borrowings
outstanding as of December 31, 1994.
During 1994, ILFC increased the aggregate principal amount outstanding
of its medium term and term notes to $4.95 billion at December 31, 1994, a net
increase of $645.8 million. At December 31, 1994, ILFC had $1.6 billion in
aggregate principal amount of debt securities registered for issuance from time
to time. The cash used to purchase flight equipment is derived primarily from
the proceeds of ILFC's debt financing. The primary sources for the repayment of
this debt and the interest expense thereon are the lease receipts received and
proceeds from the sale of flight equipment. During 1994, ILFC obtained net
financing of $1.76 billion for the acquisition of flight equipment costing
$2.73 billion. Additional funds were provided by operating cash flow and the
sale of flight equipment. ILFC sold $100 million of Market Auction Preferred
Stock in 1993. Additionally, $100 million of Market Auction Preferred Stock was
sold in February, 1995. The proceeds from the sale of these securities were
used to reduce ILFC's maturing debt. (See also the discussions under
"Operational Review" and "Liquidity" herein and Notes 1, 9 and 16 of Notes to
Financial Statements.)
During 1994, AIG did not issue any medium term notes and $140.0
million of previously issued notes matured. At December 31, 1994, AIG had
$247.0 million in aggregate principal amount of debt securities registered for
issuance from time to time. (See also the discussion under "Derivatives" herein
and Note 9 of Notes to Financial Statements.)
AIGTG increased its short-term borrowings by $772.9 million to finance
its commodities inventory, futures exchange margin requirements and timing
differences in operating cash flows. (See also the discussion under
"Operational Review," "Liquidity" and "Derivatives" herein and Notes 1, 9 and
11 of Notes to Financial Statements.)
AIG's capital funds have increased $1.20 billion in 1994. Unrealized
appreciation of investments, net of taxes, decreased $738.1 million, primarily
resulting from the rise in domestic interest rates and its effect on the market
values of bonds worldwide. As a result of adopting Financial Accounting
Standards No. 115 "Accounting for Certain Investments on Debt and Equity
Securities", unrealized appreciation of investments, net of taxes, is now
subject to increased volatility resulting from the
22
American International Group, Inc. and Subsidiaries
changes in the market value of bonds available for sale. The cumulative
translation adjustment loss, net of taxes, decreased $60.1 million as a result
of the general weakness of the U.S. dollar against most major currencies.
Retained earnings increased $2.04 billion, resulting from net income less
dividends.
In December 1994, the Mexican peso was devalued significantly against
the U.S. dollar, as well as other currencies. AIG's Mexican operations
constitute only a minor part of AIG's consolidated general and life operations
and therefore the devaluation had little effect on AIG's results of operations
or financial condition. It is also anticipated that there will be little impact
going forward.
During 1994, AIG repurchased 2.09 million shares of its common stock
in the open market at a cost of $177.7 million.
During 1993, preferred stock issued and outstanding decreased $7,500
and additional paid-in capital declined approximately $150 million due to the
redemption of Series M-1 and M-2 Exchangeable Money Market Cumulative Serial
Preferred Stock. Common stock increased by $281.2 million and additional
paid-in capital decreased by that amount as a result of a common stock split in
the form of a 50 percent stock dividend paid July 30, 1993. (See also Note 10
of Notes to Financial Statements.)
Payments of dividends to AIG by its insurance subsidiaries are subject
to certain restrictions imposed by statutory authorities. AIG has in the past
reinvested most of its unrestricted earnings in its operations and believes
such continued reinvestment in the future will be adequate to meet any
foreseeable capital needs. However, AIG may choose from time to time to raise
additional funds through the issuance of additional securities. At December 31,
1994, there were no significant statutory or regulatory issues which would
impair AIG's financial condition, results of operations or liquidity. (See also
the discussion under "Liquidity" herein and Note 10 of Notes to Financial
Statements.)
LIQUIDITY
At December 31, 1994, AIG's consolidated invested assets included approximately
$2.54 billion of cash and short-term investments. Consolidated net cash
provided from operating activities in 1994 amounted to approximately $5.39
billion.
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.
AIG's liquidity is primarily derived from the operating cash flows of
its general and life insurance operations.
The liquidity of the combined insurance operations is derived both
domestically and abroad. The combined insurance pretax operating cash flow is
derived from two sources, underwriting operations and investment operations. In
the aggregate, AIG's insurance operations generated approximately $7.9 billion
in pretax cash flow during 1994. Cash flow includes periodic premium
collections, including policyholders' contract deposits, paid loss recoveries
less reinsurance premiums, losses, benefits, acquisition and operating expenses
paid and investment income. 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 $3.1 billion in investment income cash flow
during 1994. Investment income cash flow is primarily derived from interest and
dividends received and includes realized capital gains.
The combined insurance pretax operating cash flow coupled with the
cash and short-term investments of $2.17 billion provided the insurance
operations with a significant amount of liquidity. This liquidity is available
to purchase high quality and diversified fixed income securities and to a
lesser extent marketable equity securities and to provide mortgage loans on
real estate, policy and collateral and guaranteed loans. With this liquidity
coupled with proceeds of approximately $12.7 billion from the maturities, sales
and redemptions of fixed income securities and from the sales of marketable
equity securities, AIG purchased approximately $19.4 billion of fixed income
securities and marketable equity securities during 1994.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During 1995, AIG expects to have approximately $1 billion of held to
maturity municipal bonds redeemed for approximately $1 billion. Prior to
redemption, the yield on these bonds approximates 8 percent. If these bonds
were redeemed at March 1, 1995, the estimated yield on the reinvestment of the
proceeds in bonds with similar characteristics would approximate 6.5 percent.
AIG does not anticipate that these redemptions will have a significant effect
on AIG's general investment income, operations, financial condition or
liquidity.
The following table is a summary of AIG's invested assets by
significant segment, including investment income due and accrued and real
estate, at December 31, 1994 and 1993:
[Enlarge/Download Table]
(dollars in thousands)
----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------- ---------------------------
INVESTED PERCENT INVESTED PERCENT
ASSETS OF TOTAL ASSETS OF TOTAL
==================================================================================================================================
General insurance $23,873,000 30.2% $22,573,800 33.2%
Life insurance 26,690,100 33.8 22,037,300 32.4
Financial services* 27,920,300 35.4 22,957,300 33.7
Other 491,500 0.6 464,100 0.7
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Total $78,974,900 100.0% $68,032,500 100.0%
==================================================================================================================================
* See also the discussion under "Accounting Standards: Standards Adopted in
1994" herein.
The following tables summarize the composition of AIG's insurance
invested assets by insurance segment, including investment income due and
accrued and real estate, at December 31, 1994 and 1993:
[Enlarge/Download Table]
(dollars in thousands)
----------------------------------------------------------------------------------------------------------------------------------
PERCENT DISTRIBUTION
PERCENT ----------------------
DECEMBER 31, 1994 GENERAL LIFE TOTAL OF TOTAL DOMESTIC FOREIGN
==================================================================================================================================
Fixed Maturities:
Available for sale, at market value(a) $ 4,995,800 $16,890,700 $21,886,500 43.3% 32.2% 67.8%
Held to maturity, at amortized cost(b) 13,454,300 -- 13,454,300 26.6 100.0 --
Equity securities, at market value(c) 2,799,700 2,090,400 4,890,100 9.7 30.4 69.6
Mortgage loans on real estate, policy and
collateral loans 27,700 4,534,600 4,562,300 9.0 43.1 56.9
Short-term investments, including
time deposits, and cash 954,900 1,213,000 2,167,900 4.3 27.6 72.4
Real estate 364,100 648,900 1,013,000 2.0 18.0 82.0
Investment income due and accrued 446,700 471,300 918,000 1.8 57.5 42.5
Other invested assets 829,800 841,200 1,671,000 3.3 50.9 49.1
----------------------------------------------------------------------------------------------------------------------------------
Total $23,873,000 $26,690,100 $50,563,100 100.0% 51.7% 48.3%
==================================================================================================================================
(a) Includes $164,000 of bonds trading securities, at market value.
(b) Includes $412,500 of preferred stock, at amortized cost.
(c) Includes $61,900 of preferred stock, at market value.
[Enlarge/Download Table]
(dollars in thousands)
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PERCENT DISTRIBUTION
PERCENT ----------------------
DECEMBER 31, 1993 GENERAL LIFE TOTAL OF TOTAL DOMESTIC FOREIGN
==================================================================================================================================
Fixed Maturities:
Available for sale, at market value(a) $ 4,387,800 $13,387,800 $17,775,600 39.8% 39.0% 61.0%
Held to maturity, at amortized cost(b) 12,211,100 -- 12,211,100 27.4 100.0 --
Equity securities, at market value(c) 2,816,100 1,562,700 4,378,800 9.8 36.7 63.3
Mortgage loans on real estate, policy and
collateral loans 96,300 2,678,200 2,774,500 6.2 24.6 75.4
Short-term investments, including
time deposits, and cash 1,820,500 2,878,600 4,699,100 10.6 23.1 76.9
Real estate 284,300 572,000 856,300 1.9 16.2 83.8
Investment income due and accrued 429,700 363,900 793,600 1.8 54.0 46.0
Other invested assets 528,000 594,100 1,122,100 2.5 51.4 48.6
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Total $22,573,800 $22,037,300 $44,611,100 100.0% 53.0% 47.0%
==================================================================================================================================
(a) Includes $310,800 of bonds trading securities, at market value.
(b) Includes $17,400 of preferred stock, at amortized cost.
(c) Includes $89,800 of preferred stock, at market value.
24
American International Group, Inc. and Subsidiaries
With respect to fixed maturities, AIG's strategy is to invest in high
quality securities while maintaining diversification to avoid significant
exposure to issuer, industry and/or country concentrations.
At December 31, 1994, approximately 60 percent of the fixed maturity
investments were domestic securities. Approximately 42 percent of such domestic
securities were rated AAA, approximately 2 percent were below investment grade
and less than 1 percent were 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.
However, similar credit quality rating services are not available in all
overseas locations. Thus, AIG annually reviews the credit quality of the
nonrated fixed income investments, including mortgages, in its foreign
portfolio. AIG applies a scale similar to that of Moody's and S&P to the rating
of these securities. Coupling the ratings of this internal review with those of
the independent agencies indicates that approximately 42 percent of the foreign
fixed income investments were rated AAA, less than one percent were deemed
below investment grade and approximately 4 percent were not rated at December
31, 1994.
Although AIG's fixed income insurance portfolios contain only minor
amounts of securities below investment grade, potentially any fixed income
security is subject to downgrade for a variety of reasons subsequent to any
balance sheet date. There have been no significant downgrades as at March 1,
1995.
At December 31, 1994, approximately 5 percent of the fixed maturities
portfolio was Collateralized Mortgage Obligations (CMOs). All of the CMOs were
investment grade and approximately 86 percent of the CMOs were backed by
various U.S. government agencies. Thus, credit risk was minimal. CMOs are
exposed to interest rate risk as the duration and ultimate realized yield would
be affected by the accelerated prepayments of the underlying mortgages. There
were no interest only or principal only CMOs.
When permitted by regulatory authorities and when deemed necessary to
protect insurance assets, including invested assets, from currency risk and
interest rate risk, AIG and its insurance subsidiaries enter into derivative
transactions as end users. To date, such activities have been minor. (See also
the discussion under "Derivatives" herein.)
Short-term investments represent amounts invested in various internal
and external money market funds, time deposits and cash. The $2.53 billion
reduction in short-term investments and cash during 1994 resulted from the
redeployment of funds to purchase fixed maturities both domestically and
overseas, particularly for foreign life operations.
Mortgage loans on real estate, policy, collateral and guaranteed loans
comprised 9.0 percent of AIG's insurance invested assets at December 31, 1994.
AIG's insurance holdings of real estate mortgages amounted to $1.71 billion of
which 33.8 percent was domestic. At December 31, 1994, no domestic mortgages
and only a nominal amount of foreign mortgages were in default. At December 31,
1994, AIG's insurance holdings of collateral loans amounted to $625.7 million,
all of which were foreign. It is AIG's practice to maintain a maximum loan to
value ratio of 75 percent at loan origination. AIG's policy loans increased
from $984.9 million at December 31, 1993 to $2.23 billion at December 31, 1994,
with $1.25 billion of this increase relating to the domestic corporate-owned
life insurance product.
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.
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.
The following table is a summary of the composition of AIG's financial
services invested assets at December 31, 1994 and 1993. (See also the
discussions under "Operational Review," "Capital Resources" and "Derivatives"
herein.)
[Enlarge/Download Table]
(dollars in thousands)
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1994 1993
------------------------- ---------------------------
INVESTED PERCENT INVESTED PERCENT
ASSETS OF TOTAL ASSETS OF TOTAL
==================================================================================================================================
Flight equipment primarily under operating leases, net of
accumulated depreciation $10,723,500 38.4% $ 8,555,400 37.3%
Unrealized gain on interest rate and currency swaps,
options and forward transactions* 4,650,700 16.7 -- --
Securities available for sale, at market value 3,796,800 13.6 4,991,100 21.7
Trading securities, at market value 2,483,600 8.9 2,516,200 11.0
Securities purchased under agreements to resell, at
contract value 1,209,400 4.3 2,737,500 11.9
Trade receivables 2,629,700 9.4 1,328,400 5.8
Spot commodities, at market value 916,800 3.3 764,200 3.3
Net unrealized gain on interest rate and currency swaps,
options and forward transactions -- -- 640,100 2.8
Other, including short-term investments 1,509,800 5.4 1,424,400 6.2
----------------------------------------------------------------------------------------------------------------------------------
Total $27,920,300 100.0% $22,957,300 100.0%
==================================================================================================================================
* See also the discussion under "Accounting Standards: Standards Adopted in
1994" herein.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
As previously discussed, the cash used for the purchase of flight
equipment is derived primarily from the proceeds of ILFC's debt financing. The
primary sources for the repayment of this debt and the interest expense thereon
are the lease receipts received and proceeds from the sale of flight equipment.
During 1994, ILFC obtained net financing of $1.76 billion for the acquisition
of flight equipment costing $2.73 billion. Additional funds were provided by
operating cash flow and the sale of flight equipment.
At December 31, 1994, ILFC had committed to purchase 236 aircraft
deliverable from 1995 through 2000 at an estimated aggregate purchase price of
$13.4 billion and had options to purchase an additional 51 aircraft deliverable
through 2001 at an estimated aggregate exercisable price of $2.8 billion. As at
March 15, 1995, ILFC has entered into leases, letters of intent to lease or is
in various stages of negotiation for 63 of 68 aircraft to be delivered in 1995
and 54 of 168 aircraft to be delivered subsequent to 1995. ILFC will be
required to find customers for any aircraft presently on order and any new
aircraft to be ordered, and it must arrange financing for portions of the
purchase price of such equipment. In a rising interest rate environment, ILFC
negotiates higher lease rates on any new contracts. ILFC has been successful to
date both in placing its new aircraft on lease or under sales contract and
obtaining adequate financing.
AIGFP's positions are carried at market value or at estimated fair
value when market prices are not readily available. These values represent
assessments of the present value of expected future cash flows. The recorded
values of these transactions may be less than the values that might be
realized, if AIGFP were to sell or close out the transactions prior to
maturity. AIGFP reduces its economic risk exposure through similarly valued
offsetting transactions including swaps, trading securities, forwards and
futures. AIG believes that the impact of such limited liquidity would not be
significant to AIG's financial condition or its overall liquidity. (See also
the discussion under "Derivatives" herein.)
Securities available for sale, at market value and securities
purchased under agreements to resell are primarily purchased with the proceeds
of AIGFP's GIA financings and term borrowings. As the GIA and term borrowings
combined net balances have declined since December 31, 1993, the proceeds from
the disposal of securities available for sale and securities purchased under
agreements to resell have been used to fund the maturing GIAs. (See also the
discussion under "Capital Resources" herein.)
Securities available for sale is mainly a portfolio of debt
securities, where the individual securities have varying degrees of credit
risk. At December 31, 1994, the average credit rating to this portfolio was AA
as determined through rating agencies or internal review. There were no
securities deemed below investment grade. There have been no significant
downgrades through March 1, 1995. Securities purchased under agreements to
resell are treated as collateralized transactions. AIGFP generally takes
possession of 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 acts as principal in certain foreign exchange, interest rate,
precious and base metals, petroleum and natural gas trading activities. AIGTG
owns inventories in the commodities in which it trades and may reduce the
exposure to market risk through the use of forwards, futures and option
contracts. AIGTG uses derivatives to manage the economic exposure of its
various trading positions and transactions from adverse movement in interest
rates, exchange rates and commodity prices. AIGTG supports its trading
activities largely through trade payables, short-term borrowings and spot
commodities sold but not yet purchased. (See also the discussions under
"Capital Resources" and "Derivatives" herein.)
DERIVATIVES
Derivatives are financial arrangements among two or more parties whose returns
are linked to or "derived" from some underlying stock, bond, commodity or other
asset, or some index. Derivatives payments may be based on interest rates and
exchange rates and/or prices of certain securities, certain commodities, or
financial or commodity indices. The more significant types of derivative
arrangements in which AIG transacts are swaps, forwards, futures, options and
related instruments.
The most commonly used swaps are interest rate and currency swaps. An
interest rate swap is a contract between two parties to exchange interest rate
payments (typically a fixed interest rate versus a variable interest rate)
calculated on a notional principal amount for a specified period of time. The
notional amount is not exchanged. A currency swap is similar but the notional
amounts are different currencies which are typically exchanged at the
commencement and termination of the swap based upon negotiated exchange rates.
A futures or forward contract is a legal contract between two parties
to purchase or sell at a specified future date a specified quantity of a
commodity, security, currency, financial index or other instrument, at a
specified price. A futures contract is traded on an exchange, while a forward
contract is executed over the counter.
An option contract generally provides the option purchaser with the
right but not the obligation to buy or sell during a period of time or at a
specified date the underlying instrument at a set price. The option writer is
obligated to sell or buy the underlying item if the option purchaser chooses to
exercise his right. The option writer receives a nonrefundable fee or premium
paid by the option purchaser.
Derivatives are generally either negotiated over the counter contracts
or standardized contracts executed on an exchange. Standardized exchange
traded derivatives include futures and options which can be readily bought or
sold over
26
American International Group, Inc. and Subsidiaries
recognized security exchanges and settled through such clearing houses.
Negotiated over the counter derivatives include forwards, swaps and options.
Over the counter derivatives are generally not traded like exchange traded
securities. However, in the normal course of business, with the agreement of
the original counterparty, these contracts may be terminated or assigned to
another counterparty.
Through AIGFP and AIGTG, AIG participates in the derivatives dealer
market acting primarily as principal. In these derivative operations AIG
structures transactions which generally permit its counterparties to enter into
transactions with respect to interest and exchange rate changes, to prices of
securities and to certain commodities and financial or commodity indices. All
significant derivatives activities are conducted through AIGFP and AIGTG.
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.
The senior management of AIG, with review by the Board of Directors,
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 the potential to loss,
while maximizing the rewards afforded by these business opportunities. In doing
so, AIG must manage a variety of exposures to risk including credit risk,
market risk, liquidity risk and legal risk.
Market risk principally arises from the uncertainty that future
earnings are exposed to potential changes in volatility, interest rates,
foreign 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).
AIGFP does not seek to manage the market risk of each of its
individual 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 market risk as deemed appropriate by AIGFP 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 nature of interest rates and market
movements during the day, the system will produce reports for management's
consideration for intra-day offsetting positions. Overnight, the system
generates reports which recommend the types of offsets management should
consider for the following day. Additionally, AIGFP operates in major business
centers overseas and is essentially open for business 24 hours a day. Thus, the
market exposure and offset strategies are monitored, reviewed and coordinated
around the clock. Therefore, offsetting adjustments can be made as and when
necessary from any AIGFP office in the world.
As part of its monitoring and controlling of its exposure to market
risk, AIGFP applies various testing techniques which reflect potential market
movements. These techniques vary by currency and are regularly changed to
reflect factors affecting the derivatives portfolio. In addition to the daily
monitoring, AIGFP's senior management and local risk managers conduct a weekly
review of the derivatives portfolio and existing hedges. This review includes
an examination of the portfolio's risk measures, such as aggregate option
sensitivity to movements in market variables. AIGFP's management may change
these measures to reflect their judgment and evaluation of the dynamics of the
markets. This management group will also determine whether additional or
alternative action is required in order to manage the portfolio. AIG utilizes
an outside consultant to provide the managements of AIG and AIGFP with comfort
that the system produces representative values.
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 wishes to reduce.
AIGTG 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 or through on-line computer systems. In addition, these positions are
reviewed by AIGTG management. Reports which present each trading book's
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
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
extrapolation from verifiable prices nearest to the dates of the transactions.
The methodology may reflect interest and exchange rates, 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.
The gross unrealized gains and gross unrealized losses of AIGFP and
AIGTG included in the financial services assets and liabilities at December 31,
1994 were as follows:
[Download Table]
(in thousands)
-----------------------------------------------------------------------------------
GROSS GROSS BALANCE
UNREALIZED UNREALIZED SHEET
GAINS LOSSES AMOUNT
===================================================================================
Securities available for
sale, at market value $ 243,200 $ 240,400 $3,796,800
Unrealized gain/loss on
interest rate and currency
swaps, options and forward
transactions(a) 4,650,700 3,659,400 --
Trading securities, at
market value -- -- 2,483,600
Securities sold but not yet
purchased, principally
obligations of the U.S.
government and government
agencies, at market value -- -- 192,900
Trade receivables(b) 3,530,300 1,659,500 2,629,700
Spot commodities, at
market value(c) 179,100 96,400 916,800
Trade payables -- 1,097,400 2,108,300
Spot commodities sold but
not yet purchased, at
market value 83,800 33,400 369,100
===================================================================================
(a) See also the discussion under "Accounting Standards: Standards Adopted in
1994" herein.
(b) The net replacement value with respect to futures and forward contracts
of AIGTG at December 31, 1994 was $1.87 billion.
(c) The net replacement value with respect to purchased option contracts of
AIGTG at December 31, 1994 was $275.1 million.
The interest rate risk on securities available for sale, at market, is
managed by taking offsetting positions on a security by security basis, thereby
offsetting a significant portion of the unrealized appreciation or
depreciation. At December 31, 1994, the unrealized gains and losses remaining
after benefit of the offsets were $8.3 million and $5.6 million, respectively.
AIGFP carries its derivatives at market or estimated fair value,
whichever is appropriate. Because of limited liquidity of these instruments,
the recorded estimated fair values of these derivatives may be different than
the values that might be realized if AIGFP were to sell or close out the
transactions prior to maturity. (See also the discussions under "Operational
Review: Financial Services", "Liquidity" and "Accounting Standards: Standards
Adopted in 1994" herein.)
Trading securities, at market value, and securities sold but not yet
purchased 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.
AIGTG acts as principal in certain foreign exchange, interest rate,
precious and base metals, petroleum and natural gas trading activities. AIGTG
owns inventories in the commodities in which it trades. These inventories are
carried at market and may be substantially hedged. AIGTG uses derivatives to
manage the economic exposure of its various trading positions and transactions
from adverse movements in interest rates, exchange rates and commodity prices.
(See also the discussions under "Operational Review: Financial Services" and
"Liquidity" herein.)
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 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 and margin agreements.
The significant majority of AIGFP's transactions are contracted and
documented under master netting agreements that provide for set-off and close
out netting in the event of default. Excluding regulated exchange transactions,
AIGTG, whenever possible, enters into netting agreements with its
counter-parties which are similar in effect to those discussed above.
The following tables provide the notional and contractual amounts of
AIGFP's derivatives portfolio at December 31, 1994. The notional amounts used
to express the extent of AIGFP's involvement in derivatives transactions
represent a standard of measurement of the volume of AIGFP'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
28
American International Group, Inc. and Subsidiaries
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 foreign exchange forwards and exchange traded futures and options
contracts are determined by the contractual agreements.
AIGFP extensively uses legally enforceable master closeout netting
agreements. Thus, contracts subject to such arrangements permit AIGFP to offset
its receivables from and payables to the same counterparty. As a result, the
net replacement value represents the net sum of estimated positive fair values
after the application of such agreements and collateral held. The net
replacement value most closely represents the net credit risk to AIGFP or the
maximum amount exposed to potential loss. (See also the discussion under
"Accounting Standards: Standards Adopted in 1994" herein.)
The following table presents AIGFP's derivatives portfolio by maturity
and type of derivative at December 31, 1994:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
---------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN YEAR BUT YEARS BUT AFTER
ONE WITHIN WITHIN TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1994 1993
==================================================================================================================================
Interest rate, currency and equity/commodity
swaps and swaptions:
Notional amount:
Interest rate swaps $ 7,395,000 $57,086,000 $32,063,000 $ 9,037,000 $105,581,000 $ 77,462,500
Currency swaps 50,100 10,817,200 5,902,000 1,491,000 18,260,300 16,123,000
Equity/commodity swaps 341,000 411,000 40,000 25,000 817,000 1,227,000
Swaptions 246,000 4,997,000 2,672,000 1,145,000 9,060,000 8,265,800
----------------------------------------------------------------------------------------------------------------------------------
Total $ 8,032,100 $73,311,200 $40,677,000 $11,698,000 $133,718,300 $103,078,300
==================================================================================================================================
Futures and forward contracts:
Exchange traded futures contracts
contractual amount* $13,182,900 -- -- -- $ 13,182,900 $ 27,132,300
==================================================================================================================================
Over the counter forward contracts
contractual amount $ 1,983,900 $64,800 -- -- $ 2,048,700 $ 945,100
==================================================================================================================================
* Exchange traded futures are not deemed to have significant credit exposure
as the exchanges guarantee that every contract will be properly settled.
At December 31, 1994, the counterparty credit quality by derivative
product with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
---------------------------------
SWAPS AND FUTURES AND
SWAPTIONS FORWARD CONTRACTS TOTAL
==================================================================================================================================
Counterparty credit quality:
AAA $1,087,800 $ 4,500 $1,092,300
AA 1,977,600 9,100 1,986,700
A 1,007,900 4,500 1,012,400
BBB 525,000 -- 525,000
Below investment grade 21,000 -- 21,000
Not externally rated--exchanges -- 13,300 13,300
----------------------------------------------------------------------------------------------------------------------------------
Total $4,619,300 $31,400 $4,650,700
==================================================================================================================================
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
At December 31, 1994, the counterparty breakdown by industry with
respect to the net replacement value of AIGFP's derivatives portfolio was as
follows:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
---------------------------------
SWAPS AND FUTURES AND
SWAPTIONS FORWARD CONTRACTS TOTAL
==================================================================================================================================
Non-U.S. banks $2,085,500 $15,200 $2,100,700
Insured municipalities 270,000 -- 270,000
U.S. industrials 493,600 -- 493,600
Governmental 726,100 -- 726,100
Non-U.S. financial service companies 31,000 -- 31,000
Non-U.S. industrials 372,300 -- 372,300
Special purpose 16,400 -- 16,400
U.S. banks 169,000 2,900 171,900
U.S. financial service companies 323,600 -- 323,600
Supranationals 131,800 -- 131,800
Exchanges -- 13,300 13,300
----------------------------------------------------------------------------------------------------------------------------------
Total $4,619,300 $31,400 $4,650,700
==================================================================================================================================
The following tables provide the notional and contractual amounts of
AIGTG's derivatives portfolio at December 31, 1994. In addition, the estimated
positive fair values associated with the derivatives portfolio are also
provided and include a maturity profile for the December 31, 1994 balances
based upon the expected timing of the future cash flows.
The notional amounts used to express the extent of AIGTG's involvement
in derivatives transactions represent a standard of measurement of the volume
of AIGTG's swaps business. Notional amount is not a quantification of the
market or credit risks of the positions and is not necessarily 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 foreign exchange forwards and exchange traded futures and
options contracts are determined by the contractual agreements.
The gross replacement values presented represent the sum of the
estimated fair values of all of AIGTG's derivatives contracts at December 31,
1994. These values do not represent the credit risk to AIGTG.
Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
closeout netting agreements and collateral held. The net replacement values
most closely represent the net credit risk to AIGTG or the maximum amount
exposed to potential loss. (See also the discussion under "Accounting
Standards: Standards Adopted in 1994" herein.)
30
American International Group, Inc. and Subsidiaries
The following tables present AIGTG's derivatives portfolio and
associated credit exposure, if applicable, by maturity and type of derivative
at December 31, 1994:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
----------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN YEAR BUT YEARS BUT AFTER
ONE WITHIN WITHIN TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1994 1993
==================================================================================================================================
Futures and forward contracts and interest swaps:
Exchange traded futures contracts
contractual amount(a) $ 17,778,200 $3,683,000 $ 42,900 -- $ 21,504,100 $ 11,582,600
==================================================================================================================================
Over the counter forward contracts
contractual amount(b) $182,254,500 $8,825,800 $ 93,000 $4,700 $191,178,000 $104,333,300
==================================================================================================================================
Credit exposure for over the counter forwards:
Gross replacement value $ 2,934,700 $ 509,600 $ 79,500 $7,200 $ 3,531,000 $ 2,180,700
Master netting arrangements (1,284,000) (238,700) (54,000) (800) (1,577,500) (700,800)
Collateral (82,700) -- -- -- (82,700) --
----------------------------------------------------------------------------------------------------------------------------------
Net replacement value(c) $ 1,568,000 $ 270,900 $ 25,500 $6,400 $ 1,870,800 $ 1,479,900
==================================================================================================================================
(a) Exchange traded futures are not deemed to have significant credit
exposure as the exchanges guarantee that every contract will be properly
settled.
(b) Includes interest rate swaps with notional amounts of approximately
$549.0 million and $203.4 million at December 31, 1994 and 1993,
respectively.
(c) The net replacement values with respect to futures and forward contracts
are presented as a component of trade receivables in the accompanying
balance sheet.
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
----------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN YEAR BUT YEARS BUT AFTER
ONE WITHIN WITHIN TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1994 1993
==================================================================================================================================
Option contracts:
Contractual amounts for purchased options:
Exchange traded(a) $ 1,363,100 $ 47,500 -- -- $ 1,410,600 $ 4,399,900
Over the counter 12,127,400 1,699,200 -- -- 13,826,600 15,047,400
----------------------------------------------------------------------------------------------------------------------------------
Total $13,490,500 $1,746,700 -- -- $15,237,200 $19,447,300
==================================================================================================================================
Credit exposure for over the counter
purchased options:
Gross replacement value $ 309,500 $ 60,000 -- -- $ 369,500 $ 313,600
Master netting arrangements (59,100) (12,700) -- -- (71,800) --
Collateral (22,600) -- -- -- (22,600) --
----------------------------------------------------------------------------------------------------------------------------------
Net replacement value(b) $ 227,800 $ 47,300 -- -- $ 275,100 $ 313,600
==================================================================================================================================
Contractual amounts for sold options(c) $12,300,000 $1,857,900 -- -- $14,157,900 $17,495,400
==================================================================================================================================
(a) Exchange traded options are not deemed to have significant credit
exposure as the exchanges guarantee that every option will be properly
settled.
(b) The net replacement value with respect to purchased options is presented
as a component of spot commodities, at market value in the accompanying
balance sheet.
(c) Options obligate AIGTG to buy or sell the underlying item if the option
purchaser chooses to exercise. The amounts do not represent credit
exposures.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
At December 31, 1994, the counterparty credit quality by derivative
product with respect to the net replacement value of AIGTG's derivatives
portfolio was as follows:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
----------------------------------------------
FUTURES AND
FORWARD CONTRACTS OVER THE COUNTER
AND INTEREST RATE SWAPS PURCHASED OPTIONS TOTAL
==================================================================================================================================
Counterparty credit quality:
AAA $ 213,800 $ 25,700 $ 239,500
AA 611,300 171,000 782,300
A 581,900 38,000 619,900
BBB 60,700 6,700 67,400
Below investment grade 26,300 6,000 32,300
Not externally rated* 376,800 27,700 404,500
----------------------------------------------------------------------------------------------------------------------------------
Total $1,870,800 $275,100 $2,145,900
==================================================================================================================================
* Includes $140.0 million due from exchanges.
At December 31, 1994, the counterparty breakdown by industry with
respect to the net replacement value of AIGTG's derivatives portfolio was as
follows:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
----------------------------------------------
FUTURES AND
FORWARD CONTRACTS OVER THE COUNTER
AND INTEREST RATE SWAPS PURCHASED OPTIONS TOTAL
==================================================================================================================================
Non-U.S. banks $ 637,400 $180,400 $ 817,800
U.S. industrials 307,600 14,500 322,100
Governmental 94,600 16,800 111,400
Non-U.S. financial service companies 52,500 1,800 54,300
Non-U.S. industrials 137,800 26,300 164,100
U.S. banks 398,100 28,000 426,100
U.S. financial service companies 102,800 7,300 110,100
Exchanges 140,000 -- 140,000
----------------------------------------------------------------------------------------------------------------------------------
Total $1,870,800 $275,100 $2,145,900
==================================================================================================================================
Generally, AIG manages and operates its businesses in the currencies
of the local operating environment. Thus, exchange gains or losses occur when
AIG's foreign currency net investment is affected by changes in the foreign
exchange rates relative to the U.S. dollar from one reporting period to the
next.
As an end-user, AIG and its subsidiaries, including its insurance
subsidiaries, use derivatives to aid in managing AIG's foreign exchange
translation exposure. Derivatives may also be used to minimize certain
exposures with respect to AIG's debt financing and insurance investment
operations; to date, such activities have been minor.
AIG, through its Foreign Exchange Operating Committee, evaluates its
worldwide consolidated 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 purchases options where the cost of such is
reasonable and markets are liquid to reduce these exchange translation
exposures. The exchange gain or loss with respect to these hedging instruments
is recorded on an accrual basis as a component of the cumulative translation
adjustment account in capital funds. AIG's largest currency net investments
have had historically stable exchange rates with respect to the U.S. dollar.
Management of AIG's liquidity profile is designed to ensure that even
under adverse conditions AIG is able to raise funds at the most economical cost
to fund maturing liabilities and capital and liquidity requirements of its
subsidiaries. Sources of funds considered in meeting these objectives include
guaranteed investment agreements, issuance of long and short-term debt,
maturities and sales of securities available for sale, securities sold under
repurchase agreements, trade payables, securities and spot commodities sold,
not yet purchased, issuance of equity, and cash provided from operations. AIG's
strong capital position is integral to managing liquidity, as it enables AIG to
raise funds in diverse markets worldwide. (See also the discussions under
"Capital Resources" and "Liquidity" herein.)
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
32
American International Group, Inc. and Subsidiaries
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.
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.
Over the counter derivatives dealers have drafted a code of conduct to
provide standards for their industry. The alternative to self-regulation is
federal regulation. AIG supports self-regulation and expects to adhere to
promulgated standards.
RECENT DEVELOPMENTS
In 1989, the National Association of Insurance Commissioners (NAIC) adopted the
"NAIC Solvency Policing Agenda for 1990". Included in this agenda was the
development of Risk-Based Capital (RBC) requirements. RBC relates an individual
insurance company's statutory surplus to the risk inherent in its overall
operations. AIG believes that the development of RBC standards is a positive
step for the insurance industry but further believes the standards in their
present form may lead to an inefficient deployment of industry capital. As
experience is gained with the application of RBC standards, it is likely that
adjustments to the formula will be made.
Standards for the life RBC formula and a model act have been approved
by regulators and were effective with the 1993 statutory financial statements.
At December 31, 1994, the adjusted capital of each of AIG's four domestic life
companies exceeded each of their RBC standards by considerable margins.
RBC standards for property and casualty insurers were finalized in
principle in December 1993 and were effective with the 1994 statutory financial
statements. At December 31, 1994, the adjusted capital of each of AIG's
domestic general companies exceeded each of their RBC standards by considerable
margins. Additionally, no AIG company is on any regulatory or similar "watch
list".
In 1992, domestic life insurance companies were required for
regulatory purposes to fully adopt two investment reserves, the Asset Valuation
Reserve (AVR) and the Interest Maintenance Reserve (IMR). The AVR is formula
based and applies to all invested assets which are subject to either credit or
market risk. The IMR defers realized capital gains and losses on the sale of
fixed maturities and mortgage loans. The realized gains and losses are
subsequently amortized into investment income over the original term of the
disposed assets. The impact of these reserves on the separately reported
statutory income of certain domestic life companies was significant in 1994.
However, there was no impact on AIG's 1994 GAAP consolidated life insurance
operating income presented herein.
In July 1994, AIG acquired $200 million of 8 percent convertible
preferred stock of Alexander & Alexander Services Inc. (A&A), an independent
insurance brokerage operation. The preferred stock is convertible into common
stock of A&A at $17 per share. Both the convertible preferred stock and the
common stock are non-voting in the hands of AIG. AIG may elect in the future to
exchange its non-voting common stock for up to 9.9 percent of A&A's voting
common stock. The dividend will be paid in-kind for the first two years; and,
at A&A's option, for an additional three years.
In December 1994, AIG acquired $200 million in a new issue of 9
percent cumulative convertible preferred stock of 20th Century Industries (20th
Century), a low-cost provider of mass marketed auto insurance in California.
Dividends on the preferred stock will be paid in cash or in kind for the first
three years at 20th Century's option, and in cash thereafter. Additionally, AIG
invested $16 million in warrants for 16 million common shares of 20th Century
at a per share exercise price of $13.50. AIG expects to enter a strategic
alliance with 20th Century to extend the direct marketing of personal
automobile insurance to certain western states. Pursuant to its agreement with
20th Century, by March 31, 1995, AIG will invest an additional $20 million in
the preferred stock of 20th Century.
In January 1995, the Kobe region of Japan suffered severe damage as a
result of an earthquake. The impact of the insured losses on AIG's 1995 results
of operations before taxes is currently estimated to be $50 million net of
reinsurance.
ACCOUNTING STANDARDS
STANDARDS ADOPTED IN 1994:
In March 1992, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 39 "Offsetting of Amounts Related to Certain Contracts"
(Interpretation), which is effective for fiscal years beginning after December
15, 1993. The Interpretation requires that unrealized gains and losses on
swaps, forwards, options and similar contracts be recognized as assets and
liabilities. Previously, AIG's policy was to record such unrealized gains and
losses on a net basis in the consolidated balance sheet. The Interpretation
allows the netting of such unrealized gains and losses with the same
counterparty when they are included under a master netting arrangement with the
counterparty and the contracts are reported at market or fair value.
Although there was no effect on AIG's operating income upon the
adoption of the Interpretation, AIG adopted this Interpretation effective
January 1, 1994, and now presents certain of its financial services assets and
liabilities, primarily unrealized gain (loss) on interest rate and currency
swaps, options and forward transactions, on a gross basis. Thus, both
consolidated assets and liabilities have increased. The effect of presenting
these assets and liabilities on a gross basis on AIG's consolidated balance
sheet was not significant. The prior year's balance sheet was not reclassified.
In November 1992, FASB issued Statement of Financial Accounting
Standards No. 112 "Employers' Accounting for Post-employment Benefits" (FASB
112). FASB 112 established accounting standards for employers who provide
benefits to former or inactive employees after employment but before
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
retirement. FASB 112 was adopted by AIG effective January 1, 1994, and had no
significant effect on AIG's results of operations, financial condition or
liquidity.
In May 1993, FASB issued Statement of Financial Accounting Standards
No. 114 "Accounting by Creditors for Impairment of a Loan" (FASB 114). FASB 114
addresses the accounting by all creditors for impairment of certain loans. The
impaired loans are to be measured at the present value of all expected future
cash flows. The present value may be determined by discounting the expected
future cash flows at the loan's effective rate or valued at the loan's
observable market price or valued at the fair value of the collateral if the
loan is collateral dependent. AIG adopted FASB 114 effective December 31, 1994.
In October 1994, FASB issued Statement of Financial Accounting
Standards No. 118 "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures" (FASB 118). FASB 118 amends FASB 114 to allow a
creditor to use existing methods to recognize interest income on an impaired
loan. FASB 118 also amends certain disclosure requirements of FASB 114. This
statement is effective at the same time as FASB 114. AIG adopted FASB 118
effective December 31, 1994. The adoption of these statements did not cause any
significant impact on AIG's results of operations, financial condition or
liquidity.
In October 1994, FASB issued Statement of Financial Accounting
Standards No. 119 "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments" (FASB 119). FASB 119 requires disclosure about
derivative financial instruments and amends FASB Statement No. 105 "Disclosure
of Information about Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit Risk" (FASB 105) and FASB
Statement No. 107 "Disclosure about Fair Value of Financial Instruments".
FASB 119 requires disclosure about the amounts, nature and terms of
derivatives that are not subject to FASB 105. Also, FASB 119 requires
disclosure about financial instruments held or issued for trading purposes and
purposes other than trading. This statement was adopted by AIG effective
December 31, 1994.
34
American International Group, Inc. and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
[Download Table]
--------------------------------------------------------------
PAGE
--------------------------------------------------------------
Report of Independent Accountants 36
Consolidated Balance Sheet at
December 31, 1994 and 1993 37
Consolidated Statement of Income for the
years ended December 31, 1994, 1993
and 1992 39
Consolidated Statement of Capital Funds
for the years ended December 31, 1994,
1993 and 1992 40
Consolidated Statement of Cash Flows for
the years ended December 31, 1994,
1993 and 1992 41
Notes to Financial Statements 43
Schedules:
I--Summary of Investments--Other Than
Investments in Related
Parties as of
December 31, 1994 S-1
II--Condensed Financial Information of
Registrant as of December 31, 1994
and 1993 and for the years ended
December 31, 1994, 1993 and 1992 S-2
III--Supplementary Insurance Information as
of December 31, 1994, 1993 and
1992 and for the years then ended S-4
IV--Reinsurance as of December 31, 1994,
1993 and 1992 and for the years
then ended S-5
VI--Supplemental Information Concerning
Property-Casualty Insurance Operations
as of December 31, 1994, 1993
and 1992 and for the years then ended S-6
35
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
American International Group, Inc.
We have audited the consolidated financial statements of American
International Group, Inc. and subsidiaries listed in the index on page 35 of
this Form 10-K. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American International Group, Inc. and subsidiaries as of December 31, 1994 and
1993, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
As discussed in Note 1(w) of Notes to Financial Statements, the
Company changed its method of accounting for investments in certain fixed
maturity securities in 1993, and in 1992 for income taxes and postretirement
benefits other than pensions.
COOPERS & LYBRAND L.L.P.
New York, New York
February 23, 1995.
36
American International Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
[Enlarge/Download Table]
(in thousands)
------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1994 1993
==============================================================================================================================
ASSETS:
Investments and cash:
Fixed maturities:
Bonds held to maturity, at amortized cost (market value: 1994-$13,109,700;
1993-$13,278,300) $ 13,041,807 $ 12,193,701
Bonds available for sale, at market value (amortized cost: 1994-$22,207,300;
1993-$16,599,600) 21,812,600 17,562,411
Bonds trading securities, at market value (cost: 1994-$172,000;
1993-$307,900) 163,956 310,834
Preferred stocks, at amortized cost (market value: 1994-$424,800; 1993-$18,000) 412,503 17,428
Equity securities:
Common stocks (cost: 1994-$4,607,800; 1993-$3,720,000) 5,002,668 4,364,410
Non-redeemable preferred stocks (cost: 1994-$85,900; 1993-$108,200) 96,503 123,837
Mortgage loans on real estate, policy and collateral loans-net 5,353,074 3,576,516
Financial services assets:
Flight equipment primarily under operating leases, net of accumulated depreciation
(1994-$959,100; 1993-$599,800) 10,723,527 8,555,356
Securities available for sale, at market value (cost: 1994-$3,794,100;
1993-$4,971,800) 3,796,792 4,991,105
Trading securities, at market value 2,483,637 2,516,166
Spot commodities, at market value 916,833 764,215
Net unrealized gain on interest rate and currency swaps, options and forward transactions -- 640,120
Unrealized gain on interest rate and currency swaps, options and forward transactions 4,650,743 --
Trade receivables 2,629,734 1,328,391
Securities purchased under agreements to resell, at contract value 1,209,403 2,737,507
Other invested assets 1,953,015 1,265,056
Short-term investments, at cost which approximates market value 2,467,453 5,072,893
Cash 76,237 157,481
------------------------------------------------------------------------------------------------------------------------------
Total investments and cash 76,790,485 66,177,427
Investment income due and accrued 927,951 808,268
Premiums and insurance balances receivable-net 8,802,207 8,364,096
Reinsurance assets 16,289,607 15,883,788
Deferred policy acquisition costs 5,132,245 4,249,409
Investments in partially-owned companies 645,167 571,680
Real estate and other fixed assets, net of accumulated depreciation
(1994-$1,129,500; 1993-$950,000) 1,865,244 1,615,742
Separate and variable accounts 2,297,605 1,914,815
Other assets 1,595,606 1,429,623
------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $114,346,117 $101,014,848
==============================================================================================================================
See Accompanying Notes to Financial Statements.
37
American International Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET (CONTINUED)
[Enlarge/Download Table]
(in thousands, except share amounts)
----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1994 1993
==================================================================================================================================
LIABILITIES:
Reserve for losses and loss expenses $ 31,435,355 $ 30,046,172
Reserve for unearned premiums 6,318,754 5,515,670
Future policy benefits for life and accident and health insurance contracts 17,432,222 14,638,382
Policyholders' contract deposits 6,487,426 4,439,839
Other policyholders' funds 1,951,358 1,739,290
Reserve for commissions, expenses and taxes 1,319,183 1,113,397
Insurance balances payable 1,462,545 1,458,383
Funds held by companies under reinsurance treaties 382,853 406,902
Income taxes payable:
Current 420,569 358,219
Deferred 33,031 447,790
Financial services liabilities:
Borrowings under obligations of guaranteed investment agreements 5,535,318 6,735,579
Securities sold under agreements to repurchase, at contract value 1,342,064 2,299,563
Trade payables 2,108,263 1,688,147
Securities sold but not yet purchased, principally obligations of the
U.S. Government and Government agencies, at market value 192,898 696,454
Spot commodities sold but not yet purchased, at market value 369,089 285,757
Unrealized loss on interest rate and currency swaps, options and forward transactions 3,659,450 --
Deposits due to banks and other depositors 655,973 557,372
Commercial paper 1,960,545 1,618,979
Notes, bonds and loans payable 7,567,046 5,021,941
Commercial paper 1,829,014 1,529,906
Notes, bonds, loans and mortgages payable 627,554 782,660
Separate and variable accounts 2,297,605 1,914,815
Other liabilities 2,336,341 2,295,436
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TOTAL LIABILITIES 97,724,456 85,590,653
==================================================================================================================================
COMMITMENTS AND CONTINGENT LIABILITIES
PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANY 200,000 200,000
CAPITAL FUNDS:
Common stock, $2.50 par value; 500,000,000 shares authorized; shares issued
1994-337,390,984; 1993-337,390,986 843,477 843,477
Additional paid-in capital 565,410 572,142
Unrealized appreciation of investments, net of taxes 184,556 922,646
Cumulative translation adjustments, net of taxes (288,074) (348,186)
Retained earnings 15,340,928 13,301,529
Treasury stock; 1994-21,550,358; 1993-19,762,919 shares of common stock
(including 18,538,925 and 18,747,224 shares, respectively held by subsidiaries) (224,636) (67,413)
----------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL FUNDS 16,421,661 15,224,195
----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL FUNDS $114,346,117 $101,014,848
==================================================================================================================================
See Accompanying Notes to Financial Statements.
38
American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
[Enlarge/Download Table]
(in thousands, except per share amounts)
----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1994 1993 1992
==================================================================================================================================
GENERAL INSURANCE OPERATIONS:
Net premiums written $10,865,753 $10,025,903 $ 9,138,528
Change in unearned premium reserve (578,922) (459,263) 70,862
----------------------------------------------------------------------------------------------------------------------------------
Net premiums earned 10,286,831 9,566,640 9,209,390
Net investment income 1,435,092 1,340,480 1,252,086
Realized capital gains 52,487 65,264 67,134
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11,774,410 10,972,384 10,528,610
----------------------------------------------------------------------------------------------------------------------------------
Losses incurred 6,645,223 6,310,099 6,172,111
Loss expenses incurred 1,360,378 1,265,917 1,331,393
Underwriting expenses (principally policy acquisition costs) 2,133,713 1,980,233 1,900,970
----------------------------------------------------------------------------------------------------------------------------------
10,139,314 9,556,249 9,404,474
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OPERATING INCOME 1,635,096 1,416,135 1,124,136
----------------------------------------------------------------------------------------------------------------------------------
LIFE INSURANCE OPERATIONS:
Premium income 6,724,321 5,746,046 4,853,087
Net investment income 1,748,428 1,499,714 1,313,838
Realized capital gains 86,706 54,576 43,257
----------------------------------------------------------------------------------------------------------------------------------
8,559,455 7,300,336 6,210,182
----------------------------------------------------------------------------------------------------------------------------------
Death and other benefits 2,716,093 2,374,112 1,849,238
Increase in future policy benefits 3,066,468 2,517,245 2,274,638
Acquisition and insurance expenses 1,824,410 1,627,368 1,418,853
----------------------------------------------------------------------------------------------------------------------------------
7,606,971 6,518,725 5,542,729
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OPERATING INCOME 952,484 781,611 667,453
----------------------------------------------------------------------------------------------------------------------------------
Agency and service fee operating income 54,129 60,247 52,570
----------------------------------------------------------------------------------------------------------------------------------
Financial services operating income 404,853 390,038 346,442
----------------------------------------------------------------------------------------------------------------------------------
Equity in income of minority-owned insurance operations 56,005 39,589 27,929
----------------------------------------------------------------------------------------------------------------------------------
Other realized capital losses (52,340) (12,742) (11,293)
----------------------------------------------------------------------------------------------------------------------------------
Minority interest (29,657) (26,938) (11,201)
----------------------------------------------------------------------------------------------------------------------------------
Other income (deductions)-net (68,591) (46,859) (58,988)
----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
accounting changes 2,951,979 2,601,081 2,137,048
----------------------------------------------------------------------------------------------------------------------------------
Income taxes (benefits):
Current 836,764 772,032 556,332
Deferred (60,300) (89,029) (44,299)
----------------------------------------------------------------------------------------------------------------------------------
776,464 683,003 512,033
----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting changes 2,175,515 1,918,078 1,625,015
Cumulative effect of accounting changes, net of tax
AIG -- -- 31,941
Minority-owned insurance operations -- 20,695 --
----------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,175,515 $ 1,938,773 $ 1,656,956
==================================================================================================================================
Earnings per common share:
Income before cumulative effect of accounting changes $6.87 $6.04 $ 5.10
Cumulative effect of accounting changes, net of tax
AIG -- -- .10
Minority-owned insurance operations -- .07 --
----------------------------------------------------------------------------------------------------------------------------------
Net income $6.87 $6.11 $ 5.20
==================================================================================================================================
Average shares outstanding 316,586 317,461 317,637
==================================================================================================================================
See Accompanying Notes to Financial Statements.
39
American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CAPITAL FUNDS
[Enlarge/Download Table]
(in thousands, except per share amounts)
----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1994 1993 1992
==================================================================================================================================
PREFERRED STOCK:
Series M-1 and M-2, exchangeable money market cumulative serial:
Balance at beginning of year $ -- $ 8 $ 8
Redemption of preferred stock -- (8) --
----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year -- -- 8
----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of year 843,477 562,324 562,324
Stock split effected as dividend -- 281,153 --
----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 843,477 843,477 562,324
----------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 572,142 1,014,947 1,029,733
Excess (deficit) of proceeds over (under) par value of common stock
or cost of treasury common stock issued under stock
option and stock purchase plans (6,732) (10,131) (13,353)
Stock split effected as dividend -- (281,153) --
Redemption of preferred stock -- (149,992) --
Other -- (1,529) (1,433)
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Balance at end of year 565,410 572,142 1,014,947
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UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS, NET OF TAXES:
Balance at beginning of year 922,646 129,816 114,826
Changes during year (1,084,566) 719,824 26,812
Deferred income tax (expense) benefit on changes 346,476 (177,971) (11,822)
Cumulative effect of accounting change, net of taxes of $156,521 -- 250,977 --
----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 184,556 922,646 129,816
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CUMULATIVE TRANSLATION ADJUSTMENTS, NET OF TAXES:
Balance at beginning of year (348,186) (333,882) (167,567)
Changes during year 37,089 8,742 (212,541)
Applicable income tax (expense) benefit on changes 23,023 (23,046) 46,226
----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (288,074) (348,186) (333,882)
----------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 13,301,529 11,486,615 9,946,335
Net income 2,175,515 1,938,773 1,656,956
Cash dividends to shareholders:
Preferred -- (1,043) (4,471)
Common ($.43, $.39 and $.35 per share, respectively) (136,116) (122,816) (112,205)
----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 15,340,928 13,301,529 11,486,615
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TREASURY STOCK, AT COST:
Balance at beginning of year (67,413) (77,676) (22,205)
Cost of shares acquired during year (178,676) (13,148) (82,096)
Issued under stock option and stock purchase plans 21,453 23,411 26,625
----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (224,636) (67,413) (77,676)
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Total capital funds at end of year $16,421,661 $15,224,195 $12,782,152
==================================================================================================================================
See Accompanying Notes to Financial Statements.
40
American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
[Enlarge/Download Table]
(in thousands)
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YEARS ENDED DECEMBER 31, 1994 1993 1992
==================================================================================================================================
SUMMARY:
Net cash provided by operating activities $ 5,388,795 $ 6,467,451 $ 2,983,661
Net cash used in investing activities (9,139,291) (7,998,990) (5,944,009)
Net cash provided by financing activities 3,669,252 1,552,392 2,948,448
----------------------------------------------------------------------------------------------------------------------------------
Change in cash (81,244) 20,853 (11,900)
Cash at beginning of year 157,481 136,628 148,528
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Cash at end of year $ 76,237 $ 157,481 $ 136,628
==================================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,175,515 $ 1,938,773 $ 1,656,956
----------------------------------------------------------------------------------------------------------------------------------
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 5,426,572 4,770,443 3,755,753
Premiums and insurance balances receivable and payable-net (433,949) 204,046 (119,083)
Reinsurance assets (405,819) (1,541,186) (980,757)
Deferred policy acquisition costs (882,836) (591,591) (415,142)
Investment income due and accrued (119,683) (25,877) (72,442)
Funds held under reinsurance treaties (24,049) 75,387 14,332
Other policyholders' funds 212,068 212,813 (163,971)
Current and deferred income taxes-net 2,050 141,143 (46,695)
Reserve for commissions, expenses and taxes 205,786 188,592 82,052
Other assets and liabilities-net (123,796) 15,711 366,672
Trade receivables and payables-net (881,227) 1,483,536 (1,537,589)
Trading securities, at market value 32,529 (568,946) (322,323)
Spot commodities, at market value (152,618) (132,498) 313,274
Net unrealized gain on interest rate and currency swaps,
options and forward transactions (351,173) 782,580 (880,117)
Securities purchased under agreements to resell 1,528,104 1,579,805 (1,132,296)
Securities sold under agreements to repurchase (957,499) (1,332,642) 1,881,101
Securities sold but not yet purchased (503,556) 279,063 (594,152)
Spot commodities sold but not yet purchased, at market value 83,332 (1,250,918) 1,290,089
Realized capital gains (86,853) (107,098) (99,098)
Equity in income of partially-owned companies and other invested assets (108,378) (61,934) (19,041)
Depreciation expenses, principally flight equipment 581,930 472,247 391,865
Cumulative effect of accounting changes -- (20,695) (31,941)
Change in cumulative translation adjustments 37,089 8,742 (212,541)
Other-net 135,256 (52,045) (141,245)
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Total adjustments 3,213,280 4,528,678 1,326,705
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 5,388,795 $ 6,467,451 $ 2,983,661
==================================================================================================================================
See Accompanying Notes to Financial Statements.
41
American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT
OF CASH FLOWS (CONTINUED)
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1994 1993 1992
==================================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of fixed maturities, at amortized cost sold $ -- $ 1,319,187 $ 1,189,167
Cost of fixed maturities, at amortized cost matured or redeemed 580,098 2,202,289 1,544,986
Cost of bonds, at market sold 7,945,587 5,251,475 5,301,328
Cost of bonds, at market matured or redeemed 1,451,753 556,881 769,043
Cost of equity securities sold 2,675,545 1,885,439 1,699,855
Realized capital gains 86,853 107,098 99,098
Purchases of fixed maturities (16,168,618) (11,965,103) (11,656,635)
Purchases of equity securities (3,518,311) (2,868,385) (2,043,295)
Mortgage, policy and collateral loans granted (2,691,600) (1,234,780) (869,290)
Repayments of mortgage, policy and collateral loans 780,406 691,284 789,158
Sales or maturities of securities held for investment -- 1,902,814 2,385,465
Sales of securities available for sale 4,421,682 -- --
Maturities of securities available for sale 464,301 -- --
Purchases of securities held for investment -- (2,714,813) (2,751,823)
Purchases of securities available for sale (3,695,670) -- --
Sales of flight equipment 266,262 301,353 210,927
Purchases of flight equipment (2,726,791) (2,410,816) (1,746,762)
Net additions to real estate and other fixed assets (469,759) (389,390) (249,705)
Sales or distributions of other invested assets 370,047 325,077 255,497
Investments in other invested assets (913,346) (436,660) (232,317)
Change in short-term investments 2,081,866 (424,014) (547,229)
Investments in partially-owned companies (79,596) (97,926) (91,477)
----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES $ (9,139,291) $ (7,998,990) $ (5,944,009)
==================================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in policyholders' contract deposits $ 2,047,587 $ (46,863) $ 709,298
Change in deposits due to banks and other depositors 98,601 (444,238) 789,579
Change in commercial paper 640,674 523,576 856,092
Proceeds from notes, bonds, loans and mortgages payable 4,810,073 2,479,559 2,388,701
Repayments on notes, bonds, loans and mortgages payable (2,427,351) (822,147) (1,639,780)
Liquidation of zero coupon notes payable -- -- (4,647)
Proceeds from guaranteed investment agreements 3,650,957 4,244,133 3,024,305
Maturities of guaranteed investment agreements (4,851,218) (4,206,373) (3,088,167)
Proceeds from subsidiary company preferred stock issued -- 98,472 98,567
Proceeds from common stock issued 14,721 13,280 13,272
Cash dividends to shareholders (136,116) (123,859) (116,676)
Acquisition of treasury stock (178,676) (13,148) (82,096)
Redemption of preferred stock -- (150,000) --
----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 3,669,252 $ 1,552,392 $ 2,948,448
==================================================================================================================================
TAXES PAID $ 741,900 $ 466,600 $ 328,900
==================================================================================================================================
INTEREST PAID $ 1,055,500 $ 1,017,100 $ 1,052,000
==================================================================================================================================
See Accompanying Notes to Financial Statements.
42
American International Group, Inc. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION:The consolidated financial statements include
the accounts of American International Group, Inc. and all significant
subsidiaries (AIG). All material intercompany accounts and transactions have
been eliminated.
(b) BASIS OF PRESENTATION: The accompanying financial statements have
been prepared on the basis of generally accepted accounting principles. Certain
accounts have been reclassified in the 1993 and 1992 financial statements to
conform to their 1994 presentation.
General Insurance Operations:Premiums are earned primarily on a pro
rata basis over the term of the related coverage. The reserve for unearned
premiums represents the portion of net premiums written relating to the
unexpired terms of coverage.
Acquisition costs are deferred and amortized over the period in which
the related premiums are earned. Investment income is not anticipated in the
deferral of acquisition costs (see Note 4).
Losses and loss expenses are charged to income as incurred. The
reserve for losses and loss expenses represents the accumulation of estimates
for reported losses and includes provisions for losses incurred but not
reported. AIG does not discount its loss reserves, other than for very minor
amounts related to certain workers' compensation claims. The methods of
determining such estimates and establishing resulting reserves, including
amounts relating to reserves for estimated unrecoverable reinsurance, are
continually reviewed and updated. Adjustments resulting therefrom are reflected
in income currently.
LIFE INSURANCE OPERATIONS: Premiums for traditional life insurance
products are generally recognized as revenues over the premium paying period of
the related policies. Benefits and expenses are provided against such revenues
to recognize profits over the estimated life of the policies. Revenues for
universal life and investment-type products consist of policy charges for the
cost of insurance, administration, and surrenders during the period. Expenses
include interest credited to policy account balances and benefit payments made
in excess of policy account balances. Investment income reflects certain minor
amounts of realized capital gains where the gains are deemed to be an inherent
element in pricing certain life products in some foreign countries.
Policy acquisition costs for traditional life insurance products are
generally deferred and amortized over the premium paying period of the policy.
Deferred policy acquisition costs and policy initiation costs related to
universal life and investment-type products are amortized in relation to
expected gross profits over the life of the policies (see Note 4).
The liabilities for future policy benefits and policyholders' contract
deposits are established using assumptions described in Note 6.
FINANCIAL SERVICES OPERATIONS: AIG conducts, primarily as principal,
an interest rate, currency, and equity derivative products business which
includes long-dated transactions. AIG also enters into guaranteed investment
agreement transactions. In the course of conducting this business, AIG also
engages in a variety of other related financial transactions, including
offsetting transactions.
AIG, as principal, engages in certain foreign exchange, interest
rates, precious and base metals, petroleum and natural gas trading activities.
AIG owns inventories in the commodities in which it trades and may reduce the
exposure to market risk through the use of forwards, futures and option
contracts.
AIG, as lessor, leases flight equipment principally under operating
leases. Accordingly, income is reported over the life of the lease as rentals
become receivable under the provisions of the lease or, in the case of leases
with varying payments, under the straight-line method over the noncancelable
term of the lease. In certain cases, leases provide for additional amounts
contingent on usage. AIG also is a marketer of flight equipment and marketing
revenues from such operations consisting of net gains on sales of flight
equipment, commissions and net gains on dispositions of leased flight
equipment.
(c) INVESTMENTS IN FIXED MATURITIES AND EQUITY SECURITIES: Bonds and
preferred stocks held to maturity, both of which are principally owned by the
insurance subsidiaries, are carried at amortized cost where AIG has the ability
and positive intent to hold these securities until maturity. Where AIG may not
have the positive intent to hold these securities until maturity, those bonds
are considered to be available for sale and carried at market value. Included
in the bonds available for sale are collateralized mortgage obligations (CMOs).
Premiums and discounts arising from the purchase of CMOs are treated as yield
adjustments over the estimated life. Bond trading securities are carried at
market value, as it is AIG's intention to sell these securities in the near
term. Common and non-redeemable preferred stocks are carried at market value.
Unrealized gains and losses from investments in equity securities and
fixed maturities available for sale are reflected in capital funds, net of any
related deferred income taxes. Unrealized gains and losses from investments in
trading securities are reflected in income currently.
Realized capital gains and losses are determined principally by
specific identification. Where declines in values of securities below cost or
amortized cost are considered to be other than temporary, a charge would be
reflected in income for the difference between amortized cost and estimated net
realizable value.
(d) MORTGAGE LOANS ON REAL ESTATE, POLICY AND COLLATERAL LOANS--NET:
Mortgage loans on real estate, policy loans and collateral loans are carried at
unpaid principal balances. Impairment of mortgage loans on real estate and
collateral loans is generally measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate subject to
the fair value of underlying collateral. Interest income on such loans is
recognized as cash is received.
(e) FLIGHT EQUIPMENT: Flight equipment is stated at cost. Major
additions and modifications are capitalized. Normal maintenance and repairs,
airframe and engine overhauls and compliance
43
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
with return conditions of flight equipment on lease are provided by and paid
for by the lessee. Under the provisions of most leases for certain airframe and
engine overhauls, the lessee is reimbursed for costs incurred up to but not
exceeding contingent rentals paid to AIG by the lessee. AIG provides a charge
to income for such reimbursements based upon the hours utilized during the
period and the expected reimbursement during the life of the lease.
Depreciation and amortization are computed on the straight-line basis to a
residual value of approximately 15 percent over the estimated useful lives of
the related assets but not exceeding 25 years. This caption also includes
deposits for aircraft to be purchased.
At the time the assets are retired or disposed of, the cost and
associated accumulated depreciation and amortization are removed from the
related accounts and the difference, net of proceeds, is recorded as a gain or
loss.
(f) SECURITIES AVAILABLE FOR SALE, AT MARKET VALUE:
These securities are held to meet long term investment objectives and are
accounted for as available for sale, carried at market value and are recorded
on a trade date basis. Unrealized gains and losses are reflected in capital
funds, net of any related deferred income taxes.
(g) TRADING SECURITIES, AT MARKET VALUE: Trading securities are held
to meet short term investment objectives, including hedging securities. These
securities are recorded on a trade date basis and marked to market daily. The
unrealized gains and losses are reflected in income daily.
(h) SPOT COMMODITIES, AT MARKET VALUE: Spot commodities, which include
commodities and options, are valued at market and are recorded on a trade date
basis. The unrealized gains and losses are reflected in income currently. The
exposure to market risk may be reduced through the use of forwards, futures and
option contracts. These contracts are valued at market and are recorded as
contractual commitments on a trade date basis. The unrealized gains and losses
on open contracts are reflected in income currently.
(i) UNREALIZED GAIN AND UNREALIZED LOSS ON INTEREST RATE AND CURRENCY
SWAPS, OPTIONS AND FORWARD TRANSACTIONS: Swaps, options and forward
transactions are accounted for as contractual commitments recorded on a trade
date basis and are carried at market or estimated fair value when market values
are not available. Estimated fair values are based on the use of valuation
models that utilize, among other things, current interest, foreign exchange and
volatility rates with the resulting unrealized gains or losses reflected in
income currently. These valuations represent an assessment of the present
values of expected future cash flows of these transactions and may include
reserves for market risk as deemed appropriate. The portfolio's discounted cash
flows are evaluated with reference to current market conditions, maturities
within the portfolio and other relevant factors. Based upon this evaluation, it
is determined what, if any, offsetting transactions are necessary to reduce the
market risk of the portfolio. The recorded values of these transactions may be
different than the values that might be realized if AIG were to sell or close
out the transactions prior to maturity. AIG manages its market risk with a
variety of transactions, including swaps, trading securities, futures and
forward contracts and other transactions as appropriate.
(j) TRADE RECEIVABLES AND TRADE PAYABLES: Trade receivables and trade
payables include balances due from and due to clearing brokers and exchanges
and receivables from and payables to counterparties which relate to unrealized
gains and losses on open futures and forward contracts, securities, commodities
and swaps.
(k) SECURITIES PURCHASED (SOLD) UNDER AGREEMENTS TO RESELL
(REPURCHASE), AT CONTRACT VALUE: Purchases of securities under agreements to
resell and sales of securities under agreements to repurchase are accounted for
as collateralized transactions and are recorded at their contracted resale or
repurchase amounts, plus accrued interest. Generally, it is AIG's policy to
take possession of securities purchased under agreements to resell.
AIG minimizes the credit risk that counterparties to transactions
might be unable to fulfill their contractual obligations by monitoring customer
credit exposure and collateral value and generally requiring additional
collateral to be deposited with AIG when deemed necessary.
(l) OTHER INVESTED ASSETS: Other invested assets consist primarily of
investments in joint ventures and partnerships and other investments not
classified elsewhere herein. The joint ventures and partnerships are carried at
equity or cost depending on the nature of the invested asset and the ownership
percentage thereof. Other investments are carried at cost or market depending
upon the nature of the underlying assets. Unrealized gains and losses from the
revaluation of those investments carried at market are reflected in capital
funds, net of any related taxes.
(m) REINSURANCE ASSETS: Reinsurance assets include the balances due
from both reinsurance and insurance companies under the terms of AIG's
reinsurance arrangements for paid and unpaid losses and loss expenses, ceded
unearned premiums and ceded future policy benefits for life and accident and
health insurance contracts and benefits paid and unpaid. It also includes funds
held under reinsurance treaties.
(n) INVESTMENTS IN PARTIALLY-OWNED COMPANIES:
The equity method of accounting is used for AIG's investment in companies in
which AIG's ownership interest approximates twenty but is not greater than
fifty percent (minority-owned companies). Equity in income of minority-owned
insurance operations is presented separately in the consolidated statement of
income. Equity in realized capital gains of such companies is included in other
realized capital gains (losses). Equity in net income of other unconsolidated
companies is principally included in other income (deductions)-net. At
December 31, 1994, AIG's significant investments in partially-owned companies
included its 46.4 percent interest in Transatlantic Holdings, Inc.
(Transatlantic), which derives a substantial portion of its assumed reinsurance
from AIG subsidiaries; its 19.9 percent
44
American International Group, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
interest in Richmond Insurance Company; its 23.9 percent interest in SELIC
Holdings, Ltd; and its 24.4 percent interest in IPC Holdings, Ltd. This balance
sheet caption also includes investments in less significant partially-owned
companies and in certain minor majority-owned subsidiaries. At December 31,
1994, the market value of AIG's investment in Transatlantic exceeded its
carrying value by approximately $239.3 million.
(o) REAL ESTATE AND OTHER FIXED ASSETS: The costs of buildings and
furniture and equipment are depreciated principally on a straight-line basis
over their estimated useful lives (maximum of 40 years for buildings and 10
years for furniture and equipment). Expenditures for maintenance and repairs
are charged to income as incurred; expenditures for betterments are capitalized
and depreciated.
(p) SEPARATE AND VARIABLE ACCOUNTS: Separate and variable accounts
represent funds for which investment income and investment gains and losses
accrue directly to the policyholders. Each account has specific investment
objectives, and the assets are carried at market value. The assets of each
account are legally segregated and are not subject to claims which arise out of
any other business of AIG.
(q) SECURITIES SOLD BUT NOT YET PURCHASED, PRINCIPALLY OBLIGATIONS OF
THE U.S. GOVERNMENT AND GOVERNMENT AGENCIES, AT MARKET VALUE: Securities sold
but not yet purchased represent sales of securities not owned at the time of
sale. These obligations are recorded on a trade date basis and are carried at
current market values. The unrealized gains and losses are reflected in income
currently.
(r) SPOT COMMODITIES SOLD BUT NOT YET PURCHASED, AT MARKET VALUE: Spot
commodities sold but not yet purchased represent sales of commodities not owned
at the time of sale. These obligations are recorded on a trade date basis and
are carried at market values based upon current commodity prices. The
unrealized gains and losses are reflected in income currently.
(s) PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANY: Preferred
shareholders' equity in subsidiary company relates to outstanding market
auction preferred stock of International Lease Finance Corporation (ILFC), a
wholly owned subsidiary of AIG.
(t) TRANSLATION OF FOREIGN CURRENCIES: Financial statement accounts
expressed in foreign currencies are translated into U.S. dollars in accordance
with Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation" (FASB 52). Under FASB 52, functional currency assets and
liabilities are translated into U.S. dollars generally using current rates of
exchange and the related translation adjustments are recorded as a separate
component of capital funds net of any related taxes. Functional currencies are
generally the currencies of the local operating environment. Income statement
accounts expressed in functional currencies are translated using average
exchange rates. The adjustments resulting from translation of financial
statements of foreign entities operating in highly inflationary economies are
recorded in income. Exchange gains and losses resulting from foreign currency
transactions are also recorded in income currently. The exchange gain or loss
with respect to utilization of foreign exchange hedging instruments is recorded
as a component of capital funds.
(u) INCOME TAXES: Deferred federal and foreign income taxes are
provided for temporary differences for the expected future tax consequences of
events that have been recognized in AIG's financial statements or tax returns.
(v) EARNINGS PER SHARE: Earnings per common share are based on the
weighted average number of common shares outstanding, retroactively adjusted to
reflect all stock dividends and stock splits. The effect of all other common
stock equivalents is not significant for any period presented.
(w) ACCOUNTING STANDARDS:
(i) STANDARDS ADOPTED IN 1994: In March 1992, the Financial Accounting
Standards Board (FASB) issued Interpretation No. 39 "Offsetting of Amounts
Related to Certain Contracts" (Interpretation), which is effective for fiscal
years beginning after December 15, 1993. The Interpretation requires that
unrealized gains and losses on swaps, forwards, options and similar contracts
be recognized as assets and liabilities. Previously, AIG's policy was to record
such unrealized gains and losses on a net basis in the consolidated balance
sheet. The Interpretation allows the netting of such unrealized gains and
losses with the same counterparty when they are included under a master netting
arrangement with the counterparty and the contracts are reported at market
value.
Although there was no effect on AIG's operating income upon the
adoption of the Interpretation, AIG now presents certain of its financial
services assets and liabilities, primarily unrealized gain or loss on interest
rate and currency swaps, options and forward transactions, on a gross basis.
Thus, both consolidated assets and liabilities have increased. The effect of
presenting these assets and liabilities on a gross basis on AIG's consolidated
balance sheet was not significant. Prior years' balance sheets are not required
to be restated. AIG adopted this interpretation effective January 1, 1994.
In November 1992, FASB issued Statement of Financial Accounting
Standards No. 112 "Employers' Accounting for Postemployment Benefits" (FASB
112). FASB 112 establishes accounting standards for employers who provide
benefits to former or inactive employees after employment but before
retirement. FASB 112 was adopted by AIG effective January 1, 1994 and had no
significant impact on AIG's results of operations, financial condition or
liquidity.
In May 1993, FASB issued Statement of Financial Accounting Standards
No. 114 "Accounting by Creditors for Impairment of a Loan" (FASB 114). FASB 114
addresses the accounting by all creditors for impairment of certain loans. The
impaired loans are to be measured at the present value of all expected future
cash flows. The present value may be determined by discounting the expected
future cash flows at the loan's effective rate or valued at the loan's
observable market price or valued at the fair value of the collateral if the
loan is collateral dependent.
45
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In October 1994, FASB issued Statement of Financial Accounting
Standards No. 118 "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures" (FASB 118). FASB 118 amends FASB 114 to allow a
creditor to use existing methods to recognize interest income on an impaired
loan. FASB 118 also amends certain disclosure requirements of FASB 114. AIG has
adopted FASB 114 and FASB 118 effective December 31, 1994. The adoption of
these statements did not have any significant impact on AIG's results of
operations, financial condition or liquidity.
In October 1994, FASB issued Statement of Financial Accounting
Standards No. 119 "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments" (FASB 119). FASB 119 requires disclosure about
derivative financial instruments and amends FASB 105 "Disclosure of Information
about Financial Instruments with Off-Balance Sheet Risk and Financial
Instruments with Concentrations of Credit Risk" (FASB 105) and FASB 107
"Disclosure about Fair Value of Financial Instruments".
FASB 119 requires disclosure about the amounts, nature and terms of
derivatives that are not subject to FASB 105. Also, FASB 119 requires
disclosure about financial instruments held or issued for trading purposes and
purposes other than trading. This statement was adopted by AIG effective
December 31, 1994.
In December 1994, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position 94-5 "Disclosure of Certain
Matters in the Financial Statements of Insurance Enterprises" (SOP 94-5).
Pursuant to SOP 94-5, AIG has disclosed certain information with respect to
unpaid claims and claim adjustment expenses; accounting methods used by AIG's
insurance subsidiaries that are permitted by various domestic and foreign
insurance regulatory authorities rather than prescribed by such authorities;
and AIG's policies and methodologies for estimating the liability for unpaid
claim adjustment expense for difficult-to-estimate liabilities.
(ii) STANDARDS ADOPTED PRIOR TO 1994: In 1990, FASB issued Statement
of Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (FASB 106). FASB 106 establishes
accounting for postretirement benefits, principally postretirement health care
and life insurance benefits. It requires accrual accounting for postretirement
benefits during the years that an employee renders services. FASB 106 has been
adopted effective January 1, 1992. The consolidated transition liability was
approximately $83.1 million, including minor amounts for certain foreign plans.
The transition liability was recognized immediately at adoption as a change in
accounting principle. The cumulative effect of the adoption of FASB 106 was a
charge of $54.8 million, net of a tax benefit of $28.3 million.
In 1992, FASB issued Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" (FASB 109). FASB 109's objectives are to
recognize (a) the amount of taxes payable or refundable for the current year
and (b) deferred tax liabilities and assets for expected future tax
consequences of events that have been recognized in the financial statements or
tax returns. The measurement of a deferred tax asset is subject to the
expectation of future realization. AIG adopted FASB 109, effective January 1,
1992. The cumulative effect of adopting FASB 109 was a benefit of $86.7
million.
At January 1, 1993, AIG adopted Statement of Accounting Standards No.
113 "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts" (FASB 113). This statement specifies the accounting
for the reinsuring (ceding) of insurance contracts and, effective in the first
quarter of 1993, eliminates the reporting of assets and liabilities net of the
effects of reinsurance. As required by FASB 113, the reserve for losses and
loss expenses, reserve for unearned premiums and future policy benefits for
life and accident and health insurance contracts have been presented gross of
ceded reinsurance. A reinsurance asset was established to include the
aforementioned ceded reinsurance balances. FASB 113 also establishes the
conditions required for a contract with a reinsurer to be accounted for as
reinsurance ceded and prescribes accounting and reporting standards for the
contract. There has been no material effect on AIG's general or life insurance
operating income as a result of the adoption of FASB 113.
In May 1993, FASB issued Statement of Accounting Standards No. 115
"Accounting for Certain Investments on Debt and Equity Securities" (FASB 115)
and AIG adopted this standard at December 31, 1993. The pretax increase in
carrying value of bonds available for sale as a result of marking to market was
$919.3 million. The portion which inured to the benefit of policyholders was
$511.8 million, which has been recorded as a component of future policy
benefits for life and accident and health insurance contracts. Thus, the
unrealized appreciation of investments increased $251.0 million, net of taxes
of $156.5 million.
FASB 115 addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. Those investments are to be classified in three
categories and accounted for as follows:
* Where an enterprise has the positive intent and ability to hold debt
securities to maturity, those securities are deemed to be held to maturity
securities and reported at amortized cost.
* Where an enterprise purchases debt and equity securities principally
for the purpose of selling them in the near term, those securities are deemed
to be trading securities and are reported at fair value, with the unrealized
gains and losses included in operating income.
* Where debt and equity securities are not reported either as held to
maturity securities or trading securities, those securities are deemed to be
available for sale securities and reported at fair value, with unrealized gains
and losses excluded from operating income and reported in a separate component
of shareholders' equity.
46
American International Group, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
This statement has significantly changed and narrowed the meaning of
the held to maturity category from previous generally accepted accounting
principles.
During 1993, the Emerging Issues Task Force (EITF) of the FASB adopted
an accounting rule "Accounting for Multiple-Year Retrospectively Rated Contract
by Ceding and Assuming Enterprises" (EITF Issue No. 93-6). This rule encompasses
any multiyear retrospectively rated contract requiring that insurers recognize
as assets the reinsurer's obligations, and that ceding insurers accrue
liabilities for the contract obligations. AIG has analyzed the aspects of this
accounting rule and determined that its implementation had no significant
impact on AIG's results of operations or financial condition.
2. FOREIGN OPERATIONS
Certain subsidiaries operate solely outside of the United States. Their assets
and liabilities are located principally in the countries where the insurance
risks are written and/or investment and non-insurance related operations are
located. In addition, certain of AIG's domestic subsidiaries have branch and/or
subsidiary operations and substantial assets and liabilities in foreign
countries. Certain countries have restrictions on the conversions of funds
which generally cause a delay in the outward remittance of such funds.
Approximately 37 percent and 36 percent of consolidated assets at December 31,
1994 and 1993, respectively, and 52 percent, 50 percent and 47 percent of
revenues for the years ended December 31, 1994, 1993 and 1992, respectively,
were located in or derived from foreign countries (other than Canada). (See
Note 19.)
3. FEDERAL INCOME TAXES
(a) AIG and its domestic subsidiaries file a consolidated U.S. Federal income
tax return. Revenue Agent's Reports assessing additional taxes for the years
1985 through 1988 have been issued and Letters of Protest contesting the
assessments have been filed with the Internal Revenue Service. It is
management's belief that there are substantial arguments in support of the
positions taken by AIG in its Letters of Protest. Management also believes that
the final result of these examinations will be immaterial to the financial
statements.
Foreign income not expected to be taxed in the United States has
arisen because AIG's foreign subsidiaries were generally not subject to U.S.
income taxes on income earned prior to January 1, 1987. Such income would
become subject to U.S. income taxes at current tax rates if remitted to the
United States or if other events occur which would make these amounts currently
taxable. The cumulative amount of undistributed earnings of AIG's foreign
subsidiaries currently not subject to U.S. income taxes was approximately $2.6
billion at December 31, 1994. Management presently has no intention of
subjecting these accumulated earnings to material U.S. income taxes and no
provision has been made in the accompanying financial statements for such
taxes.
Income taxes paid in 1994, 1993 and 1992 amounted to $741,900,000,
$466,600,000 and $328,900,000, respectively.
The Omnibus Budget Reconciliation Act of 1993 (the 1993 Act) increased
the highest tax rate on corporations to 35 percent for 1993 and subsequent
years. The 1993 Act requires securities dealers to recognize for tax purposes
the mark-to-market gain or loss on certain securities. The adjustment from this
change in accounting method must be phased into taxable income over five years
beginning in 1993. The 1993 Act also disallows several items as expenses
beginning in 1994. None of these items will have a significant effect on AIG's
net income or financial condition. However, it is expected that income taxes
paid will increase as a result of such changes.
The Uruguay Round of the General Agreement on Tariffs and Trade
Agreements Act (GATT) contains several revenue raising provisions. One of
GATT's funding measures requires AIG to include Subpart F income from foreign
subsidiaries in estimated tax payments. It is anticipated that the timing of
income taxes paid will accelerate as a result of this change.
During 1994, the Internal Revenue Service issued Treasury Regulations
that affect the tax accounting method for companies which enter into hedging
transactions. The expected effect of these Regulations is to accelerate the
timing of AIG's income tax payments. None of these 1994 changes will have a
material effect on AIG's net income.
47
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FEDERAL INCOME TAXES (continued)
(b) The U.S. Federal income tax rate is 35 percent for 1994 and 1993
and 34 percent for 1992. Actual tax expense on income differs from the
"expected" amount computed by applying the Federal income tax rate because of
the following:
[Enlarge/Download Table]
(dollars in thousands)
-------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1994 1993 1992
---------------------- ---------------------- ---------------------
PERCENT PERCENT PERCENT
OF PRE-TAX OF PRE-TAX OF PRE-TAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
=========================================================================================================================
"Expected" tax expense $1,033,193 35.0% $ 910,378 35.0% $ 726,596 34.0%
Adjustments:
Tax exempt interest (260,146) (8.8) (248,887) (9.6) (228,883) (10.7)
Dividends received deduction (12,326) (0.4) (9,357) (0.4) (8,726) (0.4)
State income taxes 36,025 1.2 48,424 1.9 22,307 1.0
Foreign income not expected to be
taxed in the U.S., less foreign income taxes 4,708 0.2 10,481 0.4 18,780 0.9
Other (24,990) (0.9) (28,036) (1.0) (18,041) (0.8)
-------------------------------------------------------------------------------------------------------------------------
Actual tax expense $ 776,464 26.3% $ 683,003 26.3% $ 512,033 24.0%
=========================================================================================================================
FOREIGN AND DOMESTIC COMPONENTS
OF ACTUAL TAX EXPENSE:
FOREIGN:
Current $ 244,405 $ 219,799 $ 159,113
Deferred 38,625 17,736 21,998
DOMESTIC*:
Current 592,359 552,233 397,219
Deferred (98,925) (106,765) (66,297)
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Total $ 776,464 $ 683,003 $ 512,033
=========================================================================================================================
* Including U.S. tax on foreign income.
(c) The components of the net deferred tax liability as of December
31, 1994 and December 31, 1993 were as follows:
[Download Table]
(in thousands)
------------------------------------------------------------------------------------
1994 1993
====================================================================================
DEFERRED TAX ASSETS:
Loss reserve discount $1,276,085 $1,266,010
Unearned premium reserve reduction 241,695 212,588
Accruals not currently deductible 309,088 294,630
Adjustment to life policy reserves 370,835 272,236
Cumulative translation adjustment 15,608 1,847
Other 26,227 70,173
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2,239,538 2,117,484
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DEFERRED TAX LIABILITIES:
Deferred policy acquisition costs 1,082,040 937,046
Financial service products
mark to market differential 226,598 346,262
Depreciation of flight equipment 522,282 350,779
Acquisition net asset basis adjustments 238,019 275,765
Unrealized appreciation of investments 57,547 404,264
Other 146,083 251,158
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2,272,569 2,565,274
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Net deferred tax liability $ 33,031 $ 447,790
====================================================================================
4. DEFERRED POLICY ACQUISITION COSTS
The following reflects the policy acquisition costs deferred for amortization
against future income and the related amortization charged to income for
general and life insurance operations, excluding certain amounts deferred and
amortized in the same period:
[Download Table]
(in thousands)
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1994 1993 1992
====================================================================================
GENERAL INSURANCE OPERATIONS:
Balance at beginning of year $1,009,545 $ 880,257 $ 872,012
------------------------------------------------------------------------------------
Acquisition costs deferred
Commissions 602,014 475,511 418,527
Other 523,246 492,944 428,694
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1,125,260 968,455 847,221
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Amortization charged to income
Commissions 469,181 416,134 453,328
Other 486,130 423,033 385,648
------------------------------------------------------------------------------------
955,311 839,167 838,976
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Balance at end of year $1,179,494 $1,009,545 $ 880,257
====================================================================================
LIFE INSURANCE OPERATIONS:
Balance at beginning of year $3,239,864 $2,777,561 $2,370,664
------------------------------------------------------------------------------------
Acquisition costs deferred
Commissions 741,532 604,906 551,121
Other 337,066 294,636 246,839
------------------------------------------------------------------------------------
1,078,598 899,542 797,960
------------------------------------------------------------------------------------
Amortization charged to income
Commissions 368,448 304,276 265,600
Other 168,916 165,034 129,275
------------------------------------------------------------------------------------
537,364 469,310 394,875
------------------------------------------------------------------------------------
Increase due to foreign exchange 171,653 32,071 3,812
------------------------------------------------------------------------------------
Balance at end of year $3,952,751 $3,239,864 $2,777,561
------------------------------------------------------------------------------------
Total deferred policy acquisition costs $5,132,245 $4,249,409 $3,657,818
====================================================================================
48
American International Group, Inc. and Subsidiaries
5. REINSURANCE
In the ordinary course of business, AIG's general and life insurance companies
cede reinsurance to other insurance companies in order to provide greater
diversification of AIG's business and limit the potential for losses arising
from large risks.
General reinsurance is effected under reinsurance treaties and by
negotiation on individual risks. Certain of these reinsurance arrangements
consist of excess of loss contracts which protect AIG against losses over
stipulated amounts. Amounts recoverable from general reinsurers are estimated
in a manner consistent with the claims liabilities associated with the
reinsurance and presented as a component of reinsurance assets.
AIG life companies limit exposure to loss on any single life. For
ordinary insurance, AIG retains a maximum of approximately $1,300,000 of
coverage per individual life. There are smaller retentions for other lines of
business. Life reinsurance is effected principally under yearly renewable term
treaties. Amounts recoverable from life reinsurers are estimated in a manner
consistent with the assumptions used for the underlying policy benefits and are
presented as a component of reinsurance assets.
General insurance premiums written and earned were comprised of the
following:
[Enlarge/Download Table]
(in thousands)
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, WRITTEN EARNED
====================================================================================
1994
Gross premiums $16,392,409 $15,665,787
Ceded premiums (5,526,656) (5,378,956)
------------------------------------------------------------------------------------
Net premiums $10,865,753 $10,286,831
====================================================================================
1993
Gross premiums $14,901,255 $14,405,992
Ceded premiums (4,875,352) (4,839,352)
------------------------------------------------------------------------------------
Net premiums $10,025,903 $ 9,566,640
====================================================================================
1992
Gross premiums $13,615,715 $13,616,700
Ceded premiums (4,477,187) (4,407,310)
------------------------------------------------------------------------------------
Net premiums $ 9,138,528 $ 9,209,390
====================================================================================
In the normal course of their operations, certain AIG subsidiaries are
provided reinsurance coverages from AIG's minority-owned reinsurance
companies. During 1994, 1993 and 1992, the premiums written which were ceded to
Transatlantic amounted to $200,000,000, $238,100,000 and $210,700,000,
respectively.
For the years ended December 31, 1994, 1993 and 1992, reinsurance
recoveries, which reduced loss and loss expenses incurred, amounted to $4.84
billion, $4.45 billion and $4.19 billion, respectively.
Life insurance net premium income was comprised of the following:
[Enlarge/Download Table]
(in thousands)
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1994 1993 1992
====================================================================================
Gross premium income $6,886,249 $5,924,557 $5,023,534
Ceded premiums (161,928) (178,511) (170,447)
------------------------------------------------------------------------------------
Net premium income $6,724,321 $5,746,046 $4,853,087
====================================================================================
Life insurance recoveries, which reduced death and other benefits,
approximated $96.0 million, $76.7 million and $64.8 million, respectively, for
each of the years ended December 31, 1994, 1993 and 1992.
AIG's reinsurance arrangements do not relieve AIG from its direct
obligation to its insureds. Thus, a credit exposure exists with respect to both
general and life reinsurance ceded to the extent that any reinsurer is unable
to meet the obligations assumed under the reinsurance agreements. AIG holds
substantial collateral as security under related reinsurance agreements in the
form of funds, securities and/or letters of credit. A provision has been
recorded for estimated unrecoverable reinsurance. AIG has been largely
successful in prior recovery efforts.
AIG evaluates the financial condition of its reinsurers through an
internal reinsurance security committee consisting of members of AIG's Senior
Management. No single reinsurer is a material reinsurer to AIG nor is AIG's
business substantially dependent upon any reinsurance contract.
Life insurance ceded to other insurance companies was as follows:
[Download Table]
(in thousands)
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1994 1993 1992
====================================================================================
Life insurance in-force $30,184,126 $13,006,029 $11,344,069
====================================================================================
* The principal reason for the increase in 1994 relates to life insurance
in-force ceded with respect to corporate-owned life insurance.
Life insurance assumed represented 0.1 percent of gross life insurance
in-force at December 31, 1994, and 0.5 percent for 1993 and 1.7 percent for
1992, and 0.1 percent, 0.1 percent and 0.2 percent of gross premium income for
each of the periods ended December 31, 1994, 1993 and 1992, respectively.
Supplemental information for gross loss and benefit reserves net of
ceded reinsurance at December 31, 1994 and 1993 follows:
[Enlarge/Download Table]
(in thousands)
------------------------------------------------------------------------------------
AS NET OF
REPORTED REINSURANCE
====================================================================================
December 31, 1994
Reserve for losses and loss expenses $(31,435,355) $(18,418,855)
Future policy benefits for life and accident
and health insurance contracts (17,432,222) (17,108,322)
Premium and insurance balances
receivable-net 8,802,207 10,245,259
Funds held under reinsurance treaties -- 112,455
Reserve for unearned premiums (6,318,754) (4,925,054)
Reinsurance assets 16,289,607 --
====================================================================================
December 31, 1993
Reserve for losses and loss expenses $(30,046,172) $(17,556,972)
Future policy benefits for life and accident
and health insurance contracts (14,638,382) (14,344,882)
Premium and insurance balances
receivable-net 8,364,096 10,122,694
Funds held under reinsurance treaties -- 96,490
Reserve for unearned premiums (5,515,670) (4,269,670)
Reinsurance assets 15,883,788 --
====================================================================================
49
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RESERVE FOR LOSSES AND LOSS EXPENSES AND FUTURE LIFE
POLICY BENEFITS AND POLICYHOLDERS' CONTRACT DEPOSITS
(a) The following analysis provides a reconciliation of the activity in the
reserve for losses and loss expenses:
[Enlarge/Download Table]
(in thousands)
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1994 1993 1992
====================================================================================
At beginning of year:
Reserve for losses and
loss expenses $ 30,046,200 $ 28,156,800 $ 26,239,900
Reinsurance recoverable (12,489,200) (11,400,000) (10,400,000)
------------------------------------------------------------------------------------
17,557,000 16,756,800 15,839,900
------------------------------------------------------------------------------------
Losses and loss expenses incurred:
Current year 8,158,400 7,530,700 7,497,100
Prior year (152,800) 45,300 6,400
------------------------------------------------------------------------------------
8,005,600 7,576,000 7,503,500
------------------------------------------------------------------------------------
Losses and loss expenses paid:
Current year 1,997,400 1,893,100 1,838,800
Prior year 5,146,300 4,882,700 4,747,800
------------------------------------------------------------------------------------
7,143,700 6,775,800 6,586,600
------------------------------------------------------------------------------------
At end of year:
Net reserve for losses and
loss expenses 18,418,900 17,557,000 16,756,800
Reinsurance recoverable 13,016,500 12,489,200 11,400,000
------------------------------------------------------------------------------------
$ 31,435,400 $ 30,046,200 $ 28,156,800
====================================================================================
(b) The analysis of the future policy benefits and policyholders'
contract deposits liabilities as at December 31, 1994 and 1993 follows:
[Download Table]
(in thousands)
------------------------------------------------------------------------------------
1994 1993
====================================================================================
Future policy benefits:
Long duration contracts $16,916,382 $14,223,502
Short duration contracts 515,840 414,880
------------------------------------------------------------------------------------
Total $17,432,222 $14,638,382
====================================================================================
Policyholders' contract deposits:
Annuities $ 3,171,013 $ 2,686,439
Guaranteed investments contracts (GICs) 812,737 729,679
Corporate-owned life insurance 1,483,882 195,610
Universal life 364,356 312,312
Other investment contracts 655,438 515,799
------------------------------------------------------------------------------------
Total $ 6,487,426 $ 4,439,839
====================================================================================
(c) Long duration contract liabilities included in future policy
benefits, as presented in the table above, result from traditional life
products. Short duration contract liabilities are primarily accident and health
products. These long duration products generally have fixed cash values and
there are no surrender charges. The liability for future life policy benefits
has been established based upon the following assumptions:
(i) Interest rates (exclusive of immediate/terminal funding
annuities), which vary by territory, year of issuance and products, range from
3.0 percent to 12.0 percent within the first 20 years. Interest rates on
immediate/terminal funding annuities are at a maximum of 12.2 percent and grade
to not greater than 7.5 percent.
(ii) Mortality and surrender rates are based upon actual experience by
geographical area modified to allow for variations in policy form. The weighted
average lapse rate, including surrenders, for individual and group life
approximated 7.5 percent.
(iii) The portion of net income and unrealized appreciation of
investments that can inure to the benefit of AIG is limited in some cases by
the insurance contracts and by the local insurance regulations of the countries
in which the policies are in force. All net income and unrealized appreciation
of investments in excess of these limits have been included in the reserve for
future policy benefits in the consolidated balance sheet.
(iv) Participating life business represented approximately 27 percent
of the gross insurance in-force at December 31, 1994 and 48 percent of gross
premium income in 1994. The amount of dividends to be paid is determined
annually by the Boards of Directors. Anticipated dividends are considered as a
planned contractual benefit in computing the value of future policy benefits
and are provided ratably over the premium-paying period of the contracts.
(d) The liability for policyholders' contract deposits has been
established based on the following assumptions:
(i) Interest rates credited on deferred annuities vary by year of
issuance and range from 8.2 percent to 4.0 percent. Credited interest rate
guarantees are generally for a period of one year. Withdrawal charges generally
range from 6.0 percent to 10.0 percent grading to 0 percent over a period of 7
to 10 years.
(ii) Domestically, GICs have market value withdrawal provisions for
any funds withdrawn other than benefit responsive payments. Interest rates
credited generally range from 4.7 percent to 9.1 percent and maturities range
from 2 to 7 years. Overseas, primarily in the United Kingdom, GIC type
contracts are credited at rates ranging from 4.5 percent to 7.0 percent with
maturities generally being one year. Contracts in other foreign locations have
interest rates, maturities and withdrawal charges based upon local economic and
regulatory conditions.
(iii) Interest rates on corporate-owned life insurance business are
guaranteed at 4 percent and credited on average 9.7 percent on funds supported
by policy loans.
(iv) The universal life funds have credited interest rates of 6
percent to 7 percent and guarantees ranging from 4 percent to 5.5 percent
depending on the year of issue. Additionally, universal life funds are subject
to surrender charges that amount to 7.5 percent of the fund balance and grade
off over no more than 15 years from issue.
(e) Experience adjustments, relating to future policy benefits and
policyholders' contract deposits, vary according to the type of contract and
the territory in which the policy is in force. In general terms, investments,
mortality and morbidity results may be passed through by experience credits or
as an adjustment to the premium mechanism, subject to local regulatory
guidance.
50
American International Group, Inc. and Subsidiaries
7. STATUTORY FINANCIAL DATA
Statutory surplus and net income for general insurance and life insurance
operations as reported to regulatory authorities were as follows:
[Download Table]
(in thousands)
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1994 1993 1992
====================================================================================
Statutory surplus:
General insurance $9,521,550 $7,164,367 $6,552,960
Life insurance 3,834,269 3,275,078 2,141,637
Statutory net income
(including net realized
capital gains and losses):
General insurance 1,304,022 1,206,387 875,231
Life insurance 730,170 570,570 378,704
====================================================================================
AIG's insurance subsidiaries file financial statements prepared in
accordance with statutory accounting practices prescribed or permitted by
domestic or foreign insurance regulatory authorities. The differences between
statutory financial statements and financial statements prepared in accordance
with generally accepted accounting principles (GAAP) vary between domestic and
foreign jurisdictions. The principal differences are that statutory financial
statements do not reflect deferred policy acquisition costs and deferred income
taxes, all bonds are carried at amortized cost and reinsurance assets and
liabilities are presented net of reinsurance. AIG's use of permitted statutory
accounting practices does not have a significant impact on statutory surplus.
8. INVESTMENT INFORMATION
(a) STATUTORY DEPOSITS: Cash and securities with carrying values of $3.04
billion and $2.95 billion were deposited by AIG's subsidiaries under
requirements of regulatory authorities as of December 31, 1994 and 1993,
respectively.
(b) NET INVESTMENT INCOME: An analysis of the net investment income
from the general and life insurance operations follows:
[Download Table]
(in thousands)
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1994 1993 1992
====================================================================================
General insurance:
Fixed maturities $1,198,432 $1,136,120 $1,108,643
Equity securities 90,773 96,311 34,964
Short-term investments 48,023 62,156 72,334
Other (net of interest
expense on funds held) 158,718 97,150 83,410
------------------------------------------------------------------------------------
Total investment income 1,495,946 1,391,737 1,299,351
Investment expenses 60,854 51,257 47,265
------------------------------------------------------------------------------------
Net investment income $1,435,092 $1,340,480 $1,252,086
====================================================================================
Life insurance:
Fixed maturities $1,194,686 $ 975,623 $ 904,733
Equity securities 58,017 38,361 18,692
Short-term investments 92,484 220,050 157,976
Interest on mortgage, policy
and collateral loans 369,935 242,014 232,472
Other 119,769 94,146 63,851
------------------------------------------------------------------------------------
Total investment income 1,834,891 1,570,194 1,377,724
Investment expenses 86,463 70,480 63,886
------------------------------------------------------------------------------------
Net investment income $1,748,428 $1,499,714 $1,313,838
====================================================================================
(c) INVESTMENT GAINS AND LOSSES: The realized capital gains and
increase or decrease in unrealized appreciation of investments for 1994, 1993
and 1992 were as follows:
[Enlarge/Download Table]
(in thousands)
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1994 1993 1992
====================================================================================
Realized capital gains (losses)
on investments:
Fixed maturities (a) $ (116,903) $ 125,296 $130,698
Equity securities 223,603 65,090 57,616
Other (19,847) (83,288) (89,216)
------------------------------------------------------------------------------------
Realized capital gains $ 86,853 $ 107,098 $ 99,098
====================================================================================
Increase (decrease) in unrealized
appreciation of investments:
Cumulative effect of
accounting change (b) $ -- $ 407,498 $ --
Fixed maturities (1,357,521) 31,382 38,592
Equity securities (254,518) 545,074 (75,771)
Other 527,473)(c) 143,368 63,991
------------------------------------------------------------------------------------
Increase (decrease) in unrealized
appreciation $(1,084,566) $1,127,322 $ 26,812
====================================================================================
(a) In 1994, the realized gains (losses) resulted from the sale of available
for sale fixed maturities. Prior to 1994, a majority of the gains (losses)
realized resulted from sales of bonds carried at market value.
(b) Includes $511.8 million increase in unrealized appreciation attributable
to participating policyholders at December 31, 1993.
(c) Includes $440.5 million decrease in unrealized appreciation attributable
to participating policyholders at December 31, 1994.
The gross gains and gross losses realized on the disposition of
available for sale securities for 1994 follows:
[Download Table]
(in thousands)
------------------------------------------------------------------------------------
GROSS GROSS
REALIZED REALIZED
GAINS LOSSES
====================================================================================
1994
Bonds $ 50,416 $139,224
Common Stocks 302,318 92,257
Preferred Stocks 13,911 369
Financial services securities available for sale 41,029 8,334
------------------------------------------------------------------------------------
Total $407,674 $240,184
====================================================================================
During 1993 and 1992, gross gains of $99,162,000 and $87,776,000,
respectively, and gross losses of $43,094,000 and $35,635,000, respectively,
were realized on dispositions of fixed maturities carried at amortized cost.
(d) MARKET VALUE OF FIXED MATURITIES AND UNREALIZED APPRECIATION OF
INVESTMENTS: At December 31, 1994, the balance of the unrealized appreciation
of investments in equity securities (before applicable taxes) included gross
gains of approximately $1,320,000,000 and gross losses of approximately
$914,500,000.
At December 31, 1993, the balance of the unrealized appreciation of
investments in equity securities (before applicable taxes) included gross gains
of approximately $906,400,000 and gross losses of approximately $246,400,000.
The deferred tax payable related to the net unrealized appreciation of
investments was $57,547,000 at December 31, 1994 and $404,264,000 at December
31, 1993.
51
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENT INFORMATION (continued)
The amortized cost and estimated market value of investments in fixed
maturities carried at amortized cost at December 31, 1994 and December 31, 1993
were as follows:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
========================================================================================
1994
Fixed maturities held to
maturity:
Bonds:
U.S. Government (a) $ 4,627 $ 39 $ 201 $ 4,465
States (b) 13,035,025 346,979 278,845 13,103,159
Foreign Governments 126 -- -- 126
All other corporate 2,029 -- 109 1,920
----------------------------------------------------------------------------------------
Total bonds 13,041,807 347,018 279,155 13,109,670
Preferred stocks 412,503 12,484 212 424,775
----------------------------------------------------------------------------------------
Total fixed maturities $13,454,310 $ 359,502 $279,367 $13,534,445
========================================================================================
1993
Fixed maturities held to
maturity:
Bonds:
U.S. Government (a) $ 14,330 $ 745 $ 27 $ 15,048
States (b) 12,176,138 1,087,519 3,850 13,259,807
All other corporate 3,233 242 -- 3,475
----------------------------------------------------------------------------------------
Total bonds 12,193,701 1,088,506 3,877 13,278,330
Preferred stocks 17,428 6,084 5,519 17,993
----------------------------------------------------------------------------------------
Total fixed maturities $12,211,129 $1,094,590 $ 9,396 $13,296,323
========================================================================================
(a) Including U.S. Government agencies and authorities.
(b) Including municipalities and political subdivisions.
The amortized cost and estimated market value of bonds available for
sale and carried at market value at December 31, 1994 and 1993 were as follows:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
========================================================================================
1994
Fixed maturities available
for sale:
Bonds:
U.S. Government (a) $ 1,425,914 $ 35,565 $133,547 $ 1,327,932
States (b) 2,449,698 27,765 114,764 2,362,699
Foreign governments 5,310,211 78,319 117,465 5,271,065
All other corporate 13,021,488 215,274 385,858 12,850,904
----------------------------------------------------------------------------------------
Total bonds $22,207,311 $ 356,923 $751,634 $21,812,600
========================================================================================
1993
Fixed maturities available
for sale:
Bonds:
U.S. Government (a) $ 1,211,016 $ 84,342 $ 14,823 $ 1,280,535
States (b) 1,876,795 123,697 4,404 1,996,088
Foreign governments 4,422,548 237,961 5,928 4,654,581
All other corporate 9,089,243 610,802 68,838 9,631,207
----------------------------------------------------------------------------------------
Total bonds $16,599,602 $1,056,802 $ 93,993 $17,562,411
========================================================================================
(a) Including U.S. Government agencies and authorities.
(b) Including municipalities and political subdivisions.
The amortized cost and estimated market value of securities available
for sale and carried at market value at December 31, 1994 and 1993 were as
follows:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
========================================================================================
1994
Securities available for sale:
Corporate and bank
debt $1,228,207 $ 29,622 $ 28,771 $1,229,058
Foreign government
obligations 1,254,856 159,775 158,269 1,256,362
Asset-backed and
collateralized 774,277 12,803 12,228 774,852
Preferred stocks 146,521 1,402 1,416 146,507
U.S. Government
obligations 390,215 39,560 39,762 390,013
----------------------------------------------------------------------------------------
Total $3,794,076 $243,162 $240,446 $3,796,792
========================================================================================
1993
Securities available for sale:
Corporate and bank
debt $1,549,993 $158,532 $148,320 $1,560,205
Foreign government
obligations 1,943,953 179,016 176,199 1,946,770
Asset-backed and
collateralized 850,783 32,547 30,027 853,303
Preferred stocks 272,477 1,501 567 273,411
U.S. Government
obligations 354,609 12,595 9,788 357,416
----------------------------------------------------------------------------------------
Total $4,971,815 $384,191 $364,901 $4,991,105
========================================================================================
The amortized cost and estimated market values of fixed maturities
held to maturity and fixed maturities available for sale at December 31, 1994,
by contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because certain borrowers have the right to call or
prepay certain obligations with or without call or prepayment penalties.
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
========================================================================================
Fixed maturities held to maturity:
Due in one year or less $ 98,894 $ 99,896
Due after one year through five years 1,565,915 1,598,466
Due after five years through ten years 4,826,173 4,865,742
Due after ten years 6,963,328 6,970,341
----------------------------------------------------------------------------------------
Total held to maturity $13,454,310 $13,534,445
========================================================================================
Fixed maturities available for sale:
Due in one year or less $ 1,149,688 $ 1,145,356
Due after one year through five years 8,639,832 8,546,882
Due after five years through ten years 9,099,515 8,926,127
Due after ten years 3,318,276 3,194,235
----------------------------------------------------------------------------------------
Total available for sale $22,207,311 $21,812,600
========================================================================================
The amortized cost and estimated market values of securities available
for sale at December 31, 1994, by contractual maturity, are shown below.
Actual maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay certain obligations with or without
call or prepayment penalties.
52
American International Group, Inc. and Subsidiaries
8. INVESTMENT INFORMATION (continued)
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
========================================================================================
Securities available for sale:
Due in one year or less $ 288,434 $ 288,224
Due after one year through five years 1,313,647 1,314,795
Due after five years through ten years 1,278,481 1,279,054
Due after ten years 139,237 139,867
Asset backed and collateralized 774,277 774,852
----------------------------------------------------------------------------------------
Total available for sale $3,794,076 $3,796,792
========================================================================================
(e) CMOs: CMOs, held by AIG's life companies, are presented as a
component of bonds available for sale, at market. The CMOs are principally U.S.
government and government agency backed and AAA rated securities. These
represent 86 percent of the CMOs held. Whole loans represent 14 percent of the
CMOs held and are investment grade.
At December 31, 1994 and 1993, the market value of the CMO portfolio
was $1.7 billion and $1.8 billion, respectively; the amortized cost was
approximately $1.8 billion in 1994 and $1.7 billion in 1993. AIG's CMO
portfolio is readily marketable. There were no derivative (high risk) CMO
securities contained in this portfolio at December 31, 1994.
The distribution of the CMOs at December 31, 1994 and 1993 was as
follows:
[Enlarge/Download Table]
----------------------------------------------------------------------------------------
1994 1993
========================================================================================
GNMA 38% 48%
FNMA 23 22
FHLMC 20 21
VA 5 4
Other 14 5
----------------------------------------------------------------------------------------
100% 100%
========================================================================================
At December 31, 1994, the gross weighted average coupon of this
portfolio was 7.6 percent. The gross weighted average life of this portfolio
was 7.8 years.
(f) FIXED MATURITIES BELOW INVESTMENT GRADE: At December 31, 1994, the
fixed maturities and securities available for sale held by AIG that were below
investment grade were insignificant.
(g) During 1993, certain investments held by AIGFP experienced
financial difficulties and suffered rating downgrades. The pretax impact on AIG
of the estimated other than temporary impairment in value of these investments
was $215 million. As is AIG's policy in such situations where credit ratings
have deteriorated significantly, these impairments have been appropriately
recognized by charges to income of $104 million in 1993 and $111 million prior
to 1993.
(h) At December 31, 1994, non-income producing invested assets were
insignificant.
9. DEBT OUTSTANDING
At December 31, 1994, AIG had the following debt outstanding:
[Enlarge/Download Table]
(in thousands)
========================================================================================
Borrowings under Obligations of
Guaranteed Investment Agreements
(GIA) -- AIGFP $ 5,535,318
----------------------------------------------------------------------------------------
Commercial Paper:
AIG Funding Inc. (Funding) 1,211,280
ILFC 1,960,545*
A.I. Credit Corp. (AICCO) 617,734
----------------------------------------------------------------------------------------
Total 3,789,559
========================================================================================
Medium Term Notes:
ILFC 1,999,535*
AIG 155,000
----------------------------------------------------------------------------------------
Total 2,154,535
========================================================================================
Notes and Bonds Payable:
ILFC 2,950,000*
AIGFP 1,048,061
AIG: Lire bonds 159,067
Zero coupon notes 65,831
----------------------------------------------------------------------------------------
Total 4,222,959
========================================================================================
Loans and Mortgages Payable
AIGTG 890,800
ILFC 678,650*
AIG 247,656
----------------------------------------------------------------------------------------
Total 1,817,106
========================================================================================
Total Borrowings 17,519,477
========================================================================================
Borrowings not guaranteed by AIG 7,588,730
Matched GIA borrowings 5,535,318
----------------------------------------------------------------------------------------
13,124,048
----------------------------------------------------------------------------------------
Remaining borrowings of AIG $ 4,395,429
========================================================================================
* AIG does not guarantee or support these borrowings.
(a) COMMERCIAL PAPER: At December 31, 1994, the commercial paper issued
and outstanding was as follows:
[Enlarge/Download Table]
(dollars in thousands)
----------------------------------------------------------------------------------------
WEIGHTED
NET AVERAGE WEIGHTED
BOOK UNAMORTIZED FACE INTEREST AVERAGE
VALUE DISCOUNT AMOUNT RATE MATURITY
========================================================================================
Funding $1,211,280 $10,540 $1,221,820 6.47% 49 days
AICCO 617,734 2,891 620,625 5.83 30 days
ILFC 1,960,545 11,816 1,972,361 5.73 100 days
----------------------------------------------------------------------------------------
Total $3,789,559 $25,247 $3,814,806 -- --
========================================================================================
Commercial paper issued by Funding is guaranteed by AIG. AIG has
entered into an agreement in support of AICCO's commercial paper. AIG does not
guarantee ILFC's commercial paper.
(b) BORROWINGS UNDER OBLIGATIONS OF GUARANTEED INVESTMENT
AGREEMENTS: Borrowings under obligations of guaranteed investment agreements,
which are guaranteed by AIG, are recorded on the basis of proceeds received.
Obligations may be called at various times prior to maturity at the option of
the counterparty. Interest rates on these borrowings range from 3.3 percent to
10.6 percent.
53
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. DEBT OUTSTANDING (continued)
Payments due under these investment agreements in each of the next
five years ending December 31, and the periods thereafter based on the earliest
call dates, were as follows:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
========================================================================================
1995 $2,444,707
1996 715,338
1997 68,826
1998 28,631
1999 237,362
Remaining years after 1999 2,040,454
----------------------------------------------------------------------------------------
Total $5,535,318
========================================================================================
At December 31, 1994, the market value of securities pledged as
collateral with respect to these obligations approximated $1,057,319,000.
(c) MEDIUM TERM NOTES PAYABLE:
(i) MEDIUM TERM NOTES PAYABLE ISSUED BY AIG: AIG's Medium Term Notes
are unsecured obligations which may not be redeemed by AIG prior to maturity
and bear interest at either fixed rates set by AIG at issuance or variable
rates determined by reference to an interest rate or other formula.
An analysis of the Medium Term Notes for the year ended December 31,
1994 was as follows:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------
MEDIUM TERM
NOTE SERIES: B C D TOTAL
========================================================================================
Balance December 31, 1993 $40,000 $105,000 $150,000 $295,000
Matured during year -- 15,000 125,000 140,000
----------------------------------------------------------------------------------------
Balance December 31, 1994 $40,000 $ 90,000 $ 25,000 $155,000
========================================================================================
The interest rates on this debt range up to 8.45 percent. To the
extent deemed appropriate, AIG may enter into swap transactions to reduce its
effective short-term borrowing rate.
At December 31, 1994, the maturity schedule for AIG's outstanding
Medium Term Notes was as follows:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
========================================================================================
1995 $ 40,000
1996 75,000
1997 --
1998 40,000
----------------------------------------------------------------------------------------
Total $155,000
========================================================================================
At December 31, 1994, AIG had $247,000,000 principal amount of Series
D Medium Term Notes registered and available for issuance from time to time.
(ii) MEDIUM TERM NOTES PAYABLE ISSUED BY ILFC: ILFC's Medium Term
Notes are unsecured obligations which may not be redeemed by ILFC prior to
maturity and bear interest at fixed rates set by ILFC at issuance.
As of December 31, 1994, notes in aggregate principal amount of
$1,999,535,000 were outstanding with maturity dates varying from 1995 to 2004
at interest rates ranging from 3.75 percent to 9.88 percent. These notes
provide for a single principal payment at the maturity of each note.
At December 31, 1994, the maturity schedule for ILFC's outstanding
Medium Term Notes was as follows:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
========================================================================================
1995 $ 319,900
1996 442,550
1997 412,600
1998 433,235
1999 273,250
Remaining years after 1999 118,000
----------------------------------------------------------------------------------------
Total $1,999,535
========================================================================================
(d) NOTES AND BONDS PAYABLE:
(i) ZERO COUPON NOTES: On October 1, 1984, AIG issued Eurodollar zero
coupon notes in the aggregate principal amount at stated maturity of
$750,000,000. The notes were offered at 12 percent of principal amount at
stated maturity, bear no interest and are due August 15, 2004. The net proceeds
to AIG from the issuance were $85,625,000. The notes are redeemable at any time
in whole or in part at the option of AIG at 100 percent of their principal
amount at stated maturity. The notes are also redeemable at the option of AIG
or bearer notes may be redeemed at the option of the holder in the event of
certain changes involving taxation in the United States at prices ranging from
34.41 percent currently, to 89.88 percent after August 15, 2003, of the
principal amount at stated maturity together with accrued amortization of
original issue discount from the preceding August 15. During 1994 and 1993, no
notes were repurchased. At December 31, 1994, the notes outstanding have a face
value of $189,200,000, an unamortized discount of $123,369,000 and a net book
value of $65,831,000. The amortization of the original issue discount is
recorded as interest expense.
(ii) ITALIAN LIRE BONDS: In December, 1991, AIG issued unsecured bonds
denominated in Italian Lire. The principal amount of 200 billion Italian Lire
Bonds matures December 4, 2001 and accrues interest at a rate of 11.7 percent
which is paid annually. These bonds are not redeemable prior to maturity,
except in the event of certain changes involving taxation in the United States
or the imposition of certain certification, identification or reporting
requirements.
Simultaneous with the issuance of this debt, AIG entered into a swap
transaction which effectively converted AIG's net interest expense to a U.S.
dollar liability of approximately 7.9 percent, which requires the payment of
proceeds at maturity of approximately $159 million in exchange for 200 billion
Italian Lire and interest thereon.
54
American International Group, Inc. and Subsidiaries
9. DEBT OUTSTANDING (continued)
(iii) TERM NOTES ISSUED BY ILFC: ILFC has issued unsecured obligations
which may not be redeemed prior to maturity. $100,000,000 of such term notes
are at floating interest rates and the remainder are at fixed rates.
As of December 31, 1994, notes in aggregate principal amount of
$2,950,000,000 were outstanding with maturity dates varying from 1995 to 2004
and interest rates ranging from 4.75 percent to 8.88 percent. These notes
provide for a single principal payment at maturity.
At December 31, 1994, the maturity schedule for ILFC's Term Notes was
as follows:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
========================================================================================
1995 $ 500,000
1996 600,000
1997 650,000
1998 500,000
1999 350,000
Remaining years after 1999 350,000
----------------------------------------------------------------------------------------
Total $2,950,000
========================================================================================
AIG does not guarantee any of the debt obligations of ILFC.
(iv) Notes and Bonds Payable Issued by AIGFP:During 1992, AIGFP's
foreign banking subsidiary issued Netherland guilder denominated bonds. The
bonds mature on June 30, 1997 and have a Netherland guilder interest rate of
8.4 percent. Interest is payable annually. At December 31, 1994, these bonds
had a U.S. dollar carrying value of $110.1 million.
During 1994, AIGFP issued Swiss franc denominated notes, maturing on
May 15, 1998 and June 1, 1999 in the amount of Swiss franc 130 million and 61
million, respectively. These notes have an interest rate that is six month
Swiss franc LIBOR plus 22 basis points. Interest is payable semi-annually. At
December 31, 1994, these notes had a U.S. dollar carrying value of $148.6
million.
AIGFP is also obligated under various notes maturing in 1995 through
2005. The majority of these notes are U.S. dollar denominated and accrue
interest at various interest rates. At December 31, 1994, these notes amounted
to $789.4 million.
(e) LOANS AND MORTGAGES PAYABLE: Loans and mortgages payable at
December 31, 1994 consisted of the following:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------
FINANCIAL
SERVICES AIG TOTAL
========================================================================================
Uncollateralized loans payable $1,240,547 $116,466 $1,357,013
Collateralized loans and
mortgages payable 328,903 131,190 460,093
----------------------------------------------------------------------------------------
Total $1,569,450 $247,656 $1,817,106
========================================================================================
(f) INTEREST EXPENSE FOR ALL INDEBTEDNESS: Total interest expense for
all indebtedness, net of capitalized interest, aggregated $1,289,277,000 in
1994, $1,103,955,000 in 1993 and $1,128,007,000 in 1992. Interest expense paid
approximated $1,055,503,000 in 1994, $1,017,066,000 in 1993 and $1,051,976,000
in 1992.
10. CAPITAL FUNDS
(a) At December 31, 1994, there were 6,000,000 shares of AIG's $5 par value
serial preferred stock authorized, issuable in series. AIG redeemed the
Exchangeable Money Market Cumulative Serial Preferred(TM) Stock, Series M-1 on
April 2, 1993 and the Exchangeable Money Market Cumulative Serial Preferred
Stock, Series M-2 (Series M-1 and M-2 together, MMP(TM)), on March 5, 1993 at a
price of $100,000 per share plus accrued dividends.
During 1993 and 1992, dividends paid on the MMP aggregated $1,043,000
and $4,471,000, respectively.
(b) AIG parent depends on its subsidiaries for cash flow in the form
of loans, advances and dividends. Some AIG subsidiaries, namely those in the
insurance business, are subject to regulatory restrictions on the amount of
dividends which can be remitted to AIG parent. These restrictions vary by
state. For example, unless permitted by the New York Superintendent of
Insurance, general insurance companies domiciled in New York may not pay
dividends to shareholders which in any twelve month period exceed the lesser of
10 percent of the company's statutory policyholders' surplus or 100 percent of
its "adjusted net investment income", as defined. Generally, less severe
restrictions applicable to both general and life insurance companies exist in
most of the other states in which AIG's insurance subsidiaries are domiciled.
Certain foreign jurisdictions have restrictions which generally cause only a
temporary delay in the remittance of dividends. There are also various local
restrictions limiting cash loans and advances to AIG by its subsidiaries.
Largely as a result of the restrictions, approximately 64 percent of
consolidated capital funds were restricted from immediate transfer to AIG
parent at December 31, 1994.
(c) The common stock activity for the three years ended December 31,
1994 was as follows:
[Enlarge/Download Table]
----------------------------------------------------------------------------------------
1994 1993 1992
========================================================================================
Shares outstanding at
beginning of year 317,628,067 211,629,013 212,269,558
Acquired during year (2,086,113) (148,872) (963,062)
Issued under stock option
and purchase plans 298,672 350,848 322,517
Stock split effected
as dividend -- 112,461,475 --
Other* -- (6,664,397) --
----------------------------------------------------------------------------------------
Shares outstanding at end of year 315,840,626 317,628,067 211,629,013
========================================================================================
* Shares issued to AIG and subsidiaries as part of stock split effected as
dividend.
Common stock increased and additional paid-in capital decreased $281.2
million as a result of a common stock split in the form of a 50 percent stock
dividend paid July 30, 1993 to holders of record July 2, 1993.
55
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, various commitments and contingent
liabilities are entered into by AIG and certain of its subsidiaries. In
addition, AIG guarantees various obligations of certain subsidiaries.
(a) Commitments to extend credit are agreements to lend subject to
certain conditions. These commitments generally have fixed expiration dates or
termination clauses and typically require payment of a fee. At December 31,
1994 and 1993, these commitments, made principally by AIG Capital Corp.,
approximated $133,000,000 and $140,700,000 respectively. AIG uses the same
credit policies in making commitments and conditional obligations as it does
for on-balance sheet instruments. AIG evaluates each counterparty's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by AIG upon extension of credit, is based on management's
credit evaluation of the counterparty.
(b) AIG and certain of its subsidiaries become parties to financial
instruments with market risk resulting from both dealer and end user activities
and to reduce currency, interest rate, equity and commodity exposures. To the
extent those instruments are carried at their estimated fair value, the
elements of currency, interest rate, equity and commodity risks are reflected
in the consolidated balance sheet. In addition, these instruments involve, to
varying degrees, elements of credit risk not explicitly recognized in the
consolidated balance sheet. Collateral is required, at the discretion of AIG,
on certain transactions based on the creditworthiness of the counterparty.
(c) AIGFP becomes party to off-balance sheet financial instruments in
the normal course of its business and to reduce its currency, interest rate,
equity and commodity exposures.
AIGFP, as principal and for its own account, enters into interest
rate, currency, equity and commodity swaps and swaptions. Interest rate swap
transactions generally involve the exchange of fixed and floating rate interest
payment obligations without the exchange of the underlying principal amounts.
AIGFP typically becomes a principal in the exchange of interest payments
between the parties and, therefore, may be exposed to loss, if counterparties
default. Currency, equity and commodity swaps are similar to interest rate
swaps, but may involve the exchange of principal amounts at the beginning and
end of the transaction. At December 31, 1994, the notional principal amount of
the sum of the swap pays and receives approximated $133.7 billion, primarily
related to interest rate swaps of approximately $105.6 billion.
The following tables provide the notional and contractual amounts of
AIGFP's derivatives portfolio at December 31, 1994. The notional amounts used
to express the extent of AIGFP's involvement in derivatives transactions
represent a standard of measurement of the volume of AIGFP'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 foreign
exchange forwards and exchange traded futures and options contracts are
determined by the contractual agreements.
The following table presents AIGFP's swaps and swaptions portfolio by
maturity and type of derivative at December 31, 1994:
[Enlarge/Download Table]
(in thousands)
-----------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN YEAR BUT YEARS BUT AFTER
ONE WITHIN WITHIN TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1994 1993
===================================================================================================================================
INTEREST RATE, CURRENCY AND EQUITY/COMMODITY
SWAPS AND SWAPTIONS:
Notional amount:
Interest rate swaps $7,395,000 $57,086,000 $32,063,000 $ 9,037,000 $105,581,000 $ 77,462,500
Currency swaps 50,100 10,817,200 5,902,000 1,491,000 18,260,300 16,123,000
Equity/commodity swaps 341,000 411,000 40,000 25,000 817,000 1,227,000
Swaptions 246,000 4,997,000 2,672,000 1,145,000 9,060,000 8,265,800
-----------------------------------------------------------------------------------------------------------------------------------
Total $8,032,100 $73,311,200 $40,677,000 $11,698,000 $133,718,300 $103,078,300
===================================================================================================================================
56
American International Group, Inc. and Subsidiaries
11. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Futures and forward contracts are contracts for delivery of foreign
currencies, commodities or financial indices in which the seller/purchaser
agrees to make/take delivery at a specified future date of a specified
instrument, at a specified price or yield. Risks arise as a result of movements
in current market prices from contracted prices and the potential inability of
counterparties to meet their obligations under the contracts. At December 31,
1994, the contractual amount of AIGFP's futures and forward contracts
approximated $15.2 billion.
The following table presents AIGFP's futures and forward contracts
portfolio, by maturity and type of derivative at December 31, 1994:
[Enlarge/Download Table]
(in thousands)
-----------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
-------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN YEAR BUT YEARS BUT AFTER
ONE WITHIN WITHIN TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1994 1993
===================================================================================================================================
Futures and forward contracts:
Exchange traded futures contracts
contractual amount* $13,182,900 -- -- -- $13,182,900 $27,132,300
===================================================================================================================================
Over the counter forward contracts
contractual amount $ 1,983,900 $64,800 -- -- $ 2,048,700 $ 945,100
===================================================================================================================================
* Exchange traded futures are not deemed to have significant credit exposure
as the exchanges guarantee that every contract will be properly settled.
AIGFP extensively uses legally enforceable master closeout netting
agreements. Thus, contracts subject to such arrangements permit AIGFP to offset
its receivables from and payables to the same counterparty. As a result, the
net replacement value represents the net sum of estimated positive fair values
after the application of such agreements and collateral held. The net
replacement value most closely represents the net credit risk to AIGFP or the
maximum amount exposed to potential loss. The net replacement value of all
interest rate, currency, and equity/commodity swaps and swaptions at December
31, 1994, approximated $4.6 billion. The net replacement value for futures and
forward contracts at December 31, 1994, approximated $31.4 million.
AIGFP independently evaluates the creditworthiness of its
counterparties, taking into account credit ratings assigned by recognized
statistical rating organizations. In addition, AIGFP's credit approval process
involves pre-set counterparty, country and industry credit exposure limits and,
for particularly credit intensive transactions, obtaining approval from AIG's
Credit Risk Committee. The average credit rating of AIGFP's counterparties as a
whole (as measured by AIGFP) is equivalent to AA. The maximum potential loss
will increase or decrease during the life of the derivative commitments as a
function of maturity and market conditions.
At December 31, 1994, the counterparty credit quality by derivative
product with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:
[Enlarge/Download Table]
(in thousands)
-----------------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
------------------------------------
SWAPS AND FUTURES AND
SWAPTIONS FORWARD CONTRACTS TOTAL
===================================================================================================================================
Counterparty credit quality:
AAA $1,087,800 $ 4,500 $1,092,300
AA 1,977,600 9,100 1,986,700
A 1,007,900 4,500 1,012,400
BBB 525,000 -- 525,000
Below investment grade 21,000 -- 21,000
Not externally rated--exchanges -- 13,300 13,300
-----------------------------------------------------------------------------------------------------------------------------------
Total $4,619,300 $31,400 $4,650,700
===================================================================================================================================
57
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
At December 31, 1994, the counterparty breakdown by industry with
respect to the net replacement value of AIGFP's derivatives portfolio was as
follows:
[Enlarge/Download Table]
(in thousands)
-----------------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
-------------------------------------
SWAPS AND FUTURES AND
SWAPTIONS FORWARD CONTRACTS TOTAL
===================================================================================================================================
Non-U.S. banks $2,085,500 $15,200 $2,100,700
Insured municipalities 270,000 -- 270,000
U.S. industrials 493,600 -- 493,600
Governmental 726,100 -- 726,100
Non-U.S. financial service companies 31,000 -- 31,000
Non-U.S. industrials 372,300 -- 372,300
Special purpose 16,400 -- 16,400
U.S. banks 169,000 2,900 171,900
U.S. financial service companies 323,600 -- 323,600
Supranationals 131,800 -- 131,800
Exchanges -- 13,300 13,300
-----------------------------------------------------------------------------------------------------------------------------------
Total $4,619,300 $31,400 $4,650,700
===================================================================================================================================
AIGFP has entered into commitments to provide liquidity for certain
insured variable rate bonds issued by municipal entities. The bond agreements
allow the holders, in certain circumstances, to tender the bonds to the issuer
at par value. In the event a remarketing agent of an issuer is unable to resell
such bonds, AIGFP would be obligated to purchase the bonds at par value. AIGFP
would receive interest on any bonds purchased at rates above the then
prevailing market rates. These liquidity facilities aggregate $436 million and
extend through December 31, 1997. Additional commitments to provide liquidity
for bonds not yet issued by municipal entities aggregated $1.3 billion at
December 31, 1994. It is management's intention, as with existing obligations,
to remove itself from this risk through bank participations before the issuance
of the underlying bonds. Therefore, in management's opinion, it is unlikely
that AIGFP will become obligated to purchase any bonds pursuant to the
liquidity facilities.
Securities sold, but not yet purchased represent obligations of AIGFP
to deliver specified securities at their contracted prices, and thereby create
a liability to repurchase the securities in the market at prevailing prices.
AIGFP monitors and controls its risk exposure on a daily basis through
financial and credit reporting systems and, accordingly, believes that it has
in place effective procedures for evaluating and limiting the credit and market
risks to which it is subject. Management is not aware of any potential
counterparty defaults as of December 31, 1994.
The net trading revenues for the twelve months ended December 31, 1994
from AIGFP's operations were $279.1 million.
(d) AIG Trading Group Inc. and its subsidiaries (AIGTG) becomes party
to off-balance sheet financial instruments in the normal course of its business
and to reduce its currency, interest rate and commodity exposures.
The following table provides the notional and contractual amounts of
AIGTG's derivatives portfolio at December 31, 1994. In addition, the estimated
positive fair values associated with the derivatives portfolio are also
provided and include a maturity profile for the December 31, 1994 balances
based upon the expected timing of the future cash flows.
The notional amounts used to express the extent of AIGTG's involvement
in derivatives transactions represent a standard of measurement of the volume
of AIGTG's swaps business. Notional amount is not a quantification of the
market or credit risks of the positions and is not necessarily 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 foreign exchange forwards and exchange traded futures and
options contracts are determined by the contractual agreements.
The gross replacement values presented represent the sum of the
estimated fair values of all of AIGTG's derivatives contracts at December 31,
1994. These values do not represent the credit risk to AIGTG.
Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
closeout netting agreements and collateral held. The net replacement value most
closely represents the net credit risk to AIGTG or the maximum exposure to
potential loss.
58
American International Group, Inc. and Subsidiaries
11. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Futures and forward contracts are contracts for delivery of foreign
currencies, commodities or financial indices in which the seller/purchaser
agrees to make/take delivery at a specified future date of a specified
instrument at a specified price or yield. Risks arise as a result of movements
in current market prices from contracted prices and the potential inability of
counterparties to meet their obligations under the contracts. At December 31,
1994, the contractual amount of AIGTG's futures and forward contracts
approximated $212.7 billion.
The gross replacement values presented represent the sum of the
estimated fair values of all of AIGTG's derivatives contracts at December 31,
1994. These values do not represent the credit risk to AIGTG.
Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
closeout netting agreements and collateral held. The net replacement values
most closely represent the net credit risk to AIGTG or the maximum amount
exposed to potential loss. At December 31, 1994, the net replacement value of
AIGTG's futures and forwards contracts approximated $1.87 billion.
The following table presents AIGTG's derivatives portfolio and the
associated credit exposure by maturity and type of derivative at December 31,
1994:
[Enlarge/Download Table]
(in thousands)
-----------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
---------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN YEAR BUT YEARS BUT AFTER
ONE WITHIN WITHIN TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1994 1993
===================================================================================================================================
Futures and forward contracts and
interest rate swaps:
Exchange traded futures contracts
contractual amount (a) $ 17,778,200 $3,683,000 $42,900 -- $ 21,504,100 $ 11,582,600
===================================================================================================================================
Over the counter forward contracts
contractual amount (b) $182,254,500 $8,825,800 $93,000 $4,700 $191,178,000 $104,333,300
===================================================================================================================================
Credit exposure for over the counter
forwards:
Gross replacement value $ 2,934,700 $ 509,600 $79,500 $7,200 $ 3,531,000 $ 2,180,700
Master netting arrangements (1,284,000) (238,700) (54,000) (800) (1,577,500) (700,800)
Collateral (82,700) -- -- -- (82,700) --
-----------------------------------------------------------------------------------------------------------------------------------
Net replacement value (c) $ 1,568,000 $ 270,900 $25,500 $6,400 $ 1,870,800 $ 1,479,900
===================================================================================================================================
(a) Exchange traded futures are not deemed to have significant credit exposure
as the exchanges guarantee that every contract will be properly settled.
(b) Includes interest rate swaps with notional amounts of approximately
$549.0 million and $203.4 million at December 31, 1994 and 1993,
respectively.
(c) The net replacement values with respect to futures and forward contracts
are presented as a component of trade receivables in the accompanying
balance sheet.
Options are contracts that allow the holder of the option to purchase
or sell the underlying commodity, currency or index at a specified price and
within, or at, a specified period of time. Risks arise as a result of movements
in current market prices from contracted prices, and the potential inability of
the counterparties to meet their obligations under the contracts. At December
31, 1994, the contractual amounts of AIGTG's purchased options approximated
$15.2 billion.
As a writer of options, AIGTG generally receives an option premium and
then manages the risk of any unfavorable change in the value of the underlying
commodity, currency or index. At December 31, 1994, the contractual amounts for
sold options approximated $14.2 billion.
59
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
The following table presents AIGTG's options portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative
at December 31, 1994:
[Enlarge/Download Table]
(in thousands)
-----------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
--------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN YEAR BUT YEARS BUT AFTER
ONE WITHIN WITHIN TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1994 1993
===================================================================================================================================
Option contracts:
Contractual amounts for purchased options:
Exchange traded (a) $ 1,363,100 $ 47,500 -- -- $ 1,410,600 $ 4,399,900
Over the counter 12,127,400 1,699,200 -- -- 13,826,600 15,047,400
-----------------------------------------------------------------------------------------------------------------------------------
Total $13,490,500 $1,746,700 -- -- $15,237,200 $19,447,300
===================================================================================================================================
Credit exposure for over the counter
purchased options:
Gross replacement value $ 309,500 $ 60,000 -- -- $ 369,500 $ 313,600
Master netting arrangements (59,100) (12,700) -- -- (71,800) --
Collateral (22,600) -- -- -- (22,600) --
-----------------------------------------------------------------------------------------------------------------------------------
Net replacement value (b) $ 227,800 $ 47,300 -- -- $ 275,100 $ 313,600
-----------------------------------------------------------------------------------------------------------------------------------
Contractual amounts for sold options (c) $12,300,000 $1,857,900 -- -- $14,157,900 $17,495,400
===================================================================================================================================
(a) Exchange traded options are not deemed to have significant credit
exposure as the exchanges guarantee that every option will be
properly settled.
(b) The net replacement value with respect to purchased options is
presented as a component of spot commodities, at market value
in the accompanying balance sheet.
(c) Options obligate AIGTG to buy or sell the underlying item if the option
purchaser chooses to exercise. The amounts do not represent credit
exposures.
AIGTG independently evaluates the creditworthiness of its
counterparties, taking into account credit ratings assigned by recognized
statistical rating organizations. In addition, AIGTG's credit approval process
involves pre-set counterparty, country and industry credit exposure limits and,
for particularly credit intensive transactions, obtaining approval from AIG's
Credit Risk Committee. The maximum potential loss will increase or decrease
during the life of the derivative commitments as a function of maturity and
market conditions.
At December 31, 1994, the counterparty credit quality by derivative
product with respect to the net replacement value of AIGTG's derivatives
portfolio was as follows:
[Enlarge/Download Table]
(in thousands)
-----------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
---------------------------------------------
FUTURES AND
FORWARD CONTRACTS OVER THE COUNTER
AND INTEREST RATE SWAPS PURCHASED OPTIONS TOTAL
=================================================================================================================
Counterparty credit quality:
AAA $ 213,800 $ 25,700 $ 239,500
AA 611,300 171,000 782,300
A 581,900 38,000 619,900
BBB 60,700 6,700 67,400
Below investment grade 26,300 6,000 32,300
Not externally rated* 376,800 27,700 404,500
-----------------------------------------------------------------------------------------------------------------
Total $1,870,800 $275,100 $2,145,900
=================================================================================================================
* Includes $140.0 million due from exchanges.
60
American International Group, Inc. and Subsidiaries
11. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
At December 31, 1994 the counterparty breakdown by industry with
respect to the net replacement value of AIGTG's derivatives portfolio was as
follows:
[Enlarge/Download Table]
(in thousands)
-----------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
---------------------------------------------
FUTURES AND
FORWARD CONTRACTS OVER THE COUNTER
AND INTEREST RATE SWAPS PURCHASED OPTIONS TOTAL
=================================================================================================================
Non-U.S. banks $ 637,400 $180,400 $ 817,800
U.S. industrials 307,600 14,500 322,100
Governmental 94,600 16,800 111,400
Non-U.S. financial service companies 52,500 1,800 54,300
Non-U.S. industrials 137,800 26,300 164,100
U.S. banks 398,100 28,000 426,100
U.S. financial service companies 102,800 7,300 110,100
Exchanges 140,000 -- 140,000
-----------------------------------------------------------------------------------------------------------------
Total $1,870,800 $275,100 $2,145,900
=================================================================================================================
AIGTG limits its risks by holding offsetting positions. In addition,
AIGTG monitors and controls its risk exposures through various monitoring
systems which evaluate AIGTG's market and credit risks, and through credit
approvals and limits. At December 31, 1994, AIGTG did not have a significant
concentration of credit risk from either an individual counterparty or group of
counterparties.
The net trading revenues for the twelve months ended December 31, 1994
from AIGTG's operations were $246.6 million.
At December 31, 1994, AIGTG had issued and outstanding $142 million
principal amount of letters of credit. These letters of credit were issued
primarily to various exchanges.
AIG has issued unconditional guarantees with respect to the prompt
payment, when due, of all present and future obligations and liabilities of
AIGFP and AIGTG arising from transactions entered into by AIGFP and AIGTG.
(e) At December 31, 1994, ILFC had committed to purchase 236 aircraft
deliverable from 1995 through 2000 at an estimated aggregate purchase price of
$13.4 billion. Concurrently, at December 31, 1994, ILFC had options to purchase
51 aircraft deliverable through 2001 at an estimated aggregate purchase price
of $2.8 billion. ILFC will be required to find customers for any new aircraft
ordered and arrange financing for portions of the purchase price of such
equipment.
AIG does not anticipate any losses in connection with the
aforementioned activities that would have a material effect on its financial
condition or results of operations.
(f) AIG and its subsidiaries, in common with the insurance industry in
general, are subject to litigation, including claims for punitive damages, in
the normal course of their business. AIG does not believe that such litigation
will have a material effect on its operating results and financial condition.
AIG continues to receive indemnity claims asserting injuries from
toxic waste, hazardous substances, and other environmental pollutants and
alleged damages to cover the cleanup costs of hazardous waste dump sites
(hereinafter collectively referred to as environmental claims) and indemnity
claims asserting injuries from asbestos. Estimation of asbestos and
environmental claims loss reserves is a difficult process, as these claims,
which emanate from policies written in 1984 and prior years, cannot be
estimated by conventional reserving techniques. Asbestos and environmental
claims development is affected by factors such as inconsistent court
resolutions, the broadening of the intent of policies and scope of coverage and
increasing number of new claims. AIG and other industry members have and will
continue to litigate the broadening judicial interpretation of policy coverage
and the liability issues. If the courts continue in the future to expand the
intent of the policies and the scope of the coverage, as they have in the past,
additional liabilities would emerge for amounts in excess of reserves held.
This emergence cannot now be reasonably estimated, but could have a material
impact on AIG's future operating results. The reserves carried for these claims
as at December 31, 1994 ($1.41 billion gross; $330.3 million net) are believed
to be adequate as these reserves are based on known facts and current law.
Furthermore, as AIG's net exposure retained relative to the gross exposure
written was lower in those years, the potential impact of these claims is much
smaller on the net loss reserves than on the gross loss reserves.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" (FASB 107) requires disclosure of fair value
information about financial instruments for which it is practicable to estimate
such fair value. These financial instruments may or may not be recognized in
the consolidated balance sheet. In the measurement of the fair value of certain
of the financial instruments, quoted market prices were not available and other
valuation techniques were utilized. These derived fair value estimates are
significantly affected by the assumptions used. FASB 107 excludes certain
financial instruments, including those related to insurance contracts.
61
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following methods and assumptions were used by AIG in estimating
the fair value of the financial instruments presented:
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Fixed maturity securities: Fair values for fixed maturity securities
carried at amortized cost or at market value were generally based upon quoted
market prices. For certain fixed maturity securities for which market prices
were not readily available, fair values were estimated using values obtained
from independent pricing services. No other fair valuation techniques were
applied to these bonds as AIG believes it would have to expend excessive costs
for the benefits derived.
Equity securities: Fair values for equity securities were based upon
quoted market prices.
Mortgage loans on real estate, policy and collateral loans: Where
practical, the fair values of loans on real estate and collateral loans were
estimated using discounted cash flow calculations based upon AIG's current
incremental lending rates for similar type loans. The fair values of the policy
loans were not calculated as AIG believes it would have to expend excessive
costs for the benefits derived.
Securities held for investment: Fair values for securities held for
investment carried at amortized cost were based upon quoted market prices. For
securities for which market prices were not readily available, fair values were
estimated using quoted market prices of comparable investments.
Trade receivables and trade payables: Fair values for trade
receivables and trade payables approximate the carrying values presented in the
consolidated balance sheet.
Securities available for sale: Fair values for securities available
for sale and related hedges were based on quoted market prices. For securities
and related hedges for which market prices were not readily available, fair
values were estimated using quoted market prices of comparable investments.
Trading securities: Fair values for trading securities were based on
current market value where available. For securities for which market values
were not readily available, fair values were estimated using quoted market
prices of comparable investments.
Spot commodities: Fair values for spot commodities, which include
options, were based on current market prices.
Unrealized gains and losses on interest rate and currency swaps,
options and forward transactions: Fair values for swaps, options and forward
transactions were based on the use of valuation models that utilize, among
other things, current interest, foreign exchange and volatility rates, as
applicable.
Securities purchased (sold) under agreements to resell (repurchase),
at contract value: As these securities (obligations) are short-term in nature,
the contract values approximate fair values.
Other invested assets: For assets for which market prices were not
readily available, fair valuation techniques were not applied as AIG believes
it would have to expend excessive costs for the benefits derived.
Policyholders' contract deposits: Fair values of policyholder contract
deposits were estimated using discounted cash flow calculations based upon
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.
GIAs: Fair values of AIG's obligations under investment type
agreements were estimated using discounted cash flow calculations based on
interest rates currently being offered for similar agreements with maturities
consistent with those remaining for the agreements being valued. Additionally,
AIG follows a policy of minimizing interest rate risks associated with GIAs by
entering into swap transactions.
Securities sold but not yet purchased, principally obligations of the
U.S. Government and Government agencies: The carrying amounts for these
financial instruments approximate fair values.
Spot commodities sold but not yet purchased: Fair values for spot
commodities sold short, which include options, were based on current market
prices.
Deposits due to banks and other depositors: To the extent certain
amounts are not demand deposits or certificates of deposit which mature in more
than one year, fair values were not calculated as AIG believes it would have to
expend excessive costs for the benefits derived.
Commercial paper: The carrying amount of AIG's commercial paper
borrowings approximates fair value.
Notes, bonds, loans and mortgages payable: Where practical, the fair
values of these obligations were estimated using discounted cash flow
calculations based upon AIG's current incremental borrowing rates for similar
types of borrowings with maturities consistent with those remaining for the
debt being valued.
62
American International Group, Inc. and Subsidiaries
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The carrying values and fair values of AIG's financial instruments at
December 31, 1994 and December 31, 1993 and the average fair values with
respect to derivative positions during 1994 were as follows:
[Enlarge/Download Table]
(in thousands)
-----------------------------------------------------------------------------------------------------------------------------------
1994 1993
---------------------------------------- ---------------------------
AVERAGE
CARRYING FAIR FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE
===================================================================================================================================
Fixed maturities $35,430,866 $35,511,002 $ -- $30,084,374 $31,169,569
Equity securities 5,099,171 5,099,171 -- 4,488,247 4,488,247
Mortgage loans on real estate, policy and collateral
loans 5,353,074 5,381,198 -- 3,576,516 3,662,300
Securities available for sale 3,796,792 3,796,792 4,262,469 4,991,105 4,991,105
Trading securities 2,483,637 2,483,637 2,268,539 2,516,166 2,516,166
Spot commodities 916,833 916,833 1,099,350 764,215 764,215
Net unrealized gain on interest rate and currency swaps,
options and forward transactions -- -- -- 640,120 640,120
Unrealized gain on interest rate and currency swaps,
options and forward transactions 4,650,743 4,650,743 4,930,135 -- --
Trade receivables 2,629,734 2,629,734 2,689,014 1,328,391 1,328,391
Securities purchased under agreement to resell 1,209,403 1,209,403 -- 2,737,507 2,737,507
Other invested assets 1,953,015 1,953,015 -- 1,265,056 1,265,056
Short-term investments 2,467,453 2,467,453 -- 5,072,893 5,072,893
Cash 76,237 76,237 -- 157,481 157,481
Policyholders' contract deposits 6,487,426 6,396,626 -- 4,439,839 4,566,204
Borrowings under obligations of guaranteed
investment agreements 5,535,318 5,623,119 -- 6,735,579 7,261,330
Securities sold under agreements to repurchase 1,342,064 1,342,064 -- 2,299,563 2,299,563
Trade payables 2,108,263 2,108,263 2,762,057 1,688,147 1,688,147
Securities sold but not yet purchased, principally
obligations of the U.S. Government and Government
agencies 192,898 192,898 -- 696,454 696,454
Spot commodities sold but not yet purchased 369,089 369,089 394,425 285,757 285,757
Unrealized loss on interest rate and currency swaps,
options and forward transactions 3,659,450 3,659,450 4,071,962 -- --
Deposits due to banks and other depositors 655,973 655,973 -- 557,372 557,372
Commercial paper 3,789,559 3,789,559 -- 3,148,885 3,148,885
Notes, bonds, loans and mortgages payable 8,194,600 8,013,629 -- 5,804,601 5,965,912
===================================================================================================================================
Off-balance sheet financial instruments: Financial instruments which
are not currently recognized in the consolidated balance sheet of AIG are
principally commitments to extend credit and financial guarantees. The
unrecognized fair values of these instruments represent fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the current agreements and the counterparties' credit standings. No valuation
was made as AIG believes it would have to expend excessive costs for the
benefits derived.
13. STOCK PURCHASE PLAN
AIG's 1984 employee stock purchase plan was adopted at the 1984 shareholders'
meeting and became effective as of July 1, 1984. Eligible employees receive
privileges to purchase up to an aggregate of 1,312,500 shares of AIG common
stock, at a price equal to 85 percent of the fair market value on the date of
grant of the purchase privilege.
Purchase privileges are granted annually and are limited to the number
of whole shares that can be purchased by an amount equal to 5 percent of an
employee's annual salary or $3,750, whichever is less.
As of December 31, 1994, there were 91,906 shares of common stock
subscribed to at a weighted average price of $73.77 per share pursuant to
grants of privileges under the 1984 plan. There were 90,661 shares, 93,447
shares and 92,220 shares issued under the 1984 plan at weighted average prices
of $75.55, $54.46 and $49.66 for the years ended December 31, 1994, 1993 and
1992, respectively. The excess of the proceeds over the par value or cost of
the common stock issued was credited to additional paid-in capital. There were
253,528 shares available for the grant of future purchase privileges under the
1984 plan at December 31, 1994.
14. STOCK OPTIONS
On December 19, 1991, the AIG Board of Directors adopted a 1991 employee stock
option plan, which provides that options to purchase a maximum of 3,000,000
shares of common stock could be granted to officers and other key employees at
prices not less than fair market value at the date of grant. Both the 1991
plan, and the options with respect to 74,925 shares granted thereunder on
December 19, 1991, were approved by shareholders at the 1992 Annual Meeting. At
December 31, 1994, 1,744,874 shares were reserved for future grants under the
1991 plan. As of March 18, 1992, no further options could be granted under the
1987 plan, but outstanding options granted under the 1987 plan and the
previously superceded 1982 plan continue in force until exercise or expiration.
At December 31, 1994, there were 2,765,388 shares reserved for issuance under
the 1991, 1987 and 1982 plans.
63
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTIONS (continued)
Under each plan, 25 percent of the options granted become exercisable
on the anniversary of the date of grant in each of the four years following
that grant and all options expire 10 years from the date of the grant. As of
December 31, 1994, outstanding options granted with respect to 2,001,274 shares
qualified for Incentive Stock Option treatment under the Economic Recovery Tax
Act of 1981.
Additional information with respect to the AIG plans at December 31,
1994 was as follows:
[Enlarge/Download Table]
(dollars in thousands, except per share amounts)
----------------------------------------------------------------------------------------
NUMBER PRICE RANGE AGGREGATE
OF PER OPTION
SHARES SHARE PRICE
========================================================================================
Shares under option at
December 31, 1994 2,765,388 $17.33-99.13 $167,201
Shares under option
exercisable at
December 31, 1994 1,800,023 17.33-99.13 84,031
Shares under option exercised
during year ended:
December 31, 1994 208,011 14.87-88.75 7,858
December 31, 1993 314,938 15.63-79.50 8,456
December 31, 1992 391,566 11.87-60.92 8,658
Shares under option granted
during year ended:
December 31, 1994 395,700 88.88-96.88 38,221
December 31, 1993 347,575 84.33-99.13 30,869
December 31, 1992 486,300 54.67-79.50 37,967
Shares under option
forfeited during
year ended:
December 31, 1994 44,186 17.95-96.88 3,189
December 31, 1993 38,137 16.37-88.75 1,844
December 31, 1992 55,208 11.87-60.92 2,306
========================================================================================
15. EMPLOYEE BENEFITS
(a) Employees of AIG, its subsidiaries and certain affiliated companies,
including employees in foreign countries, are generally covered under various
funded and insured pension plans. Eligibility for participation in the various
plans is based on either completion of a specified period of continuous service
or date of hire, subject to age limitation. While benefits vary, they are
usually based on the employees' years of credited service and average
compensation in the three years preceding retirement.
AIG's U.S. retirement plan is a qualified, noncontributory, defined
benefit plan. All qualified employees who have attained age 21 and completed
six months of continuous service are eligible to participate in this plan. An
employee with 5 or more years of service is entitled to pension benefits
beginning at normal retirement at age 65. Benefits are based upon a percentage
of average final compensation multiplied by years of credited service
commencing April 1, 1985 and limited to 44 years of credited service. The
average final compensation is subject to certain limitations. Annual funding
requirements are determined based on the "projected unit credit" cost method
which attributes a pro rata portion of the total projected benefit payable at
normal retirement to each year of credited service.
AIG has adopted a Supplemental Executive Retirement Program
(Supplemental Plan) to provide additional retirement benefits to designated
executives and key employees. Under the Supplemental Plan, the annual benefit,
not to exceed 60 percent of average final compensation, accrues at a percentage
of average final pay multiplied for each year of credited service reduced by
any benefits from the current and any predecessor retirement plans, Social
Security, if any, and from any qualified pension plan of prior employers. The
Supplemental Plan also provides a benefit equal to the reduction in benefits
payable under the AIG retirement plan as a result of Federal limitations on
benefits payable thereunder. Currently, the Supplemental Plan is unfunded.
Eligibility for participation in the various non-U.S. retirement plans
is either based on completion of a specified period of continuous service or
date of hire, subject to age limitation. While benefits vary, they are
generally based on the employees' years of credited service and average
compensation in the years preceding retirement.
Assumptions associated with the projected benefit obligation and
expected long-term rate of return on plan assets at December 31, 1994 were as
follows:
[Enlarge/Download Table]
----------------------------------------------------------------------------------------
RANGE OF
NON-U.S. PLANS* U.S. PLANS
========================================================================================
Discount rate 4.5-10.0% 8.5%
Salary increase rate 3.0-10.0 5.0
Expected long-term rate
of return on plan assets 5.0-8.5 9.0
========================================================================================
* The ranges for the non-U.S. plans reflect the local socioeconomic
environments in which AIG operates.
64
American International Group, Inc. and Subsidiaries
15. EMPLOYEE BENEFITS (continued)
The following table sets forth the funded status of the various
pension plans and the amounts recognized in the accompanying consolidated
balance sheet as of December 31, 1994 and 1993:
[Enlarge/Download Table]
(in thousands)
-----------------------------------------------------------------------------------------------------------------------------------
1994 1993
-------------------------------------- --------------------------------------
NON-U.S. U.S. NON-U.S. U.S.
PLANS PLANS TOTAL PLANS PLANS TOTAL
===================================================================================================================================
Plan assets at fair value* $158,695 $146,065 $304,760 $131,391 $139,129 $270,520
-----------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefits earned prior to
valuation date:
Vested 164,802 99,694 264,496 143,614 94,717 238,331
Nonvested 24,887 14,713 39,600 21,038 15,747 36,785
-----------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 189,689 114,407 304,096 164,652 110,464 275,116
Additional benefits based on estimated
future salary levels 68,908 53,033 121,941 48,973 66,652 115,625
-----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 258,597 167,440 426,037 213,625 177,116 390,741
-----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of
plan assets 99,902 21,375 121,277 82,234 37,987 120,221
-----------------------------------------------------------------------------------------------------------------------------------
Unrecognized prior service cost (9,593) (3,035) (12,628) (9,486) (2,786) (12,272)
Unrecognized net gain (loss) (3,849) 26,582 22,733 (6,344) 1,321 (5,023)
Unamortized balance of the initial transition
amounts (24,259) (12,141) (36,400) (23,266) (13,692) (36,958)
-----------------------------------------------------------------------------------------------------------------------------------
Net amounts to be applied to future periods (37,701) 11,406 (26,295) (39,096) (15,157) (54,253)
Adjustment to reflect minimum liability 19,014 488 19,502 23,268 1,896 25,164
-----------------------------------------------------------------------------------------------------------------------------------
Accrued pension liability $ 81,215 $ 33,269 $114,484 $ 66,406 $ 24,726 $ 91,132
===================================================================================================================================
* Plan assets are invested primarily in fixed-income securities and listed
stocks.
Net pension cost for the years ended December 31, 1994, 1993 and 1992
included the following components:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------
1994 1993 1992
========================================================================================
Cost of benefits earned during the period $ 41,986 $ 33,258 $ 25,175
Interest cost on the projected benefit
obligation 24,795 23,243 18,135
Actual return on all retirement plan assets (8,789) (29,613) (13,574)
Net amortization and deferral of
actuarial gains and losses (15,466) 7,542 (4,856)
Amortization of the initial
transition amount 3,749 3,389 2,014
----------------------------------------------------------------------------------------
Net pension expense* $ 46,275 $ 37,819 $ 26,894
========================================================================================
* Net pension expense included $26,727, $20,999 and $13,478 related to
non-U.S. plans for 1994, 1993 and 1992, respectively.
(b) AIG sponsors a voluntary savings plan for domestic employees (a
401(k) plan), which, during the three years ended December 31, 1994, provided
for salary reduction contributions by employees and matching contributions by
AIG of up to 2 percent of annual salary.
(c) In addition to AIG's defined benefit pension plan, AIG and its
subsidiaries provide a postretirement benefit program for medical care and life
insurance, domestically and in certain foreign countries. Eligibility in the
various plans is generally based upon completion of a specified period of
eligible service and reaching a specified age. Benefits vary by geographic
location.
AIG's U.S. postretirement medical and life insurance benefits are
based upon the employee reaching age 55 with 10 years of service to be eligible
for an immediate benefit from the U.S. retirement plan. Retirees and their
dependents who were age 65 by May 1, 1989 participate in the medical plan at no
cost. All other retirees and dependents over age 65 pay 50 percent of the
premium that is paid by current active employees. Retirees under age 65 pay the
full active premium and covered dependents pay twice the active employee
amounts. Contributions are subject to adjustment annually. Other cost sharing
features of the medical plan include deductibles, coinsurance and Medicare
coordination and a lifetime maximum benefit of $1,000,000. The maximum life
insurance benefit prior to age 70 is $32,500, with a maximum of $25,000
thereafter.
Effective January 1, 1993, both plans' provisions were amended.
Employees who retire on or after January 1, 1993 will be required to pay the
actual cost of the medical benefits reduced by a credit which is based upon age
and years of service at retirement. The life insurance benefit will vary by age
at retirement from $5,000 for retirement at ages 55 through 59 to $15,000 for
retirement at ages 65 and over.
Assumptions associated with the accrued postretirement benefit
liability at December 31, 1994 were as follows:
[Enlarge/Download Table]
----------------------------------------------------------------------------------------
NON-U.S. U.S.
PLANS PLANS
========================================================================================
Discount rate 8.0-10.5% 8.5%
Salary increase rate 7.0-8.0 --
Medical trend rate year 1* 14.0 11.5
Medical trend rate year 7 and 9 6.0 5.5
========================================================================================
* The Medical trend rate grades downward from years 1 through 7 domestically
and years 1 through 9 for the foreign benefits. The trend rates remain
level thereafter.
65
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. EMPLOYEE BENEFITS (continued)
The following table sets forth the liability for the accrued
postretirement benefits of the various plans, and amounts recognized in the
accompanying consolidated balance sheet as of December 31, 1994 and 1993. These
plans are not funded currently.
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------
NON-U.S. U.S.
PLANS PLANS TOTAL
========================================================================================
1994
Accumulated postretirement
benefit obligation:
Retirees $ 1,896 $44,521 $46,417
Fully eligible active employees 4,301 845 5,146
Other active employees 5,932 9,059 14,991
----------------------------------------------------------------------------------------
12,129 54,425 66,554
----------------------------------------------------------------------------------------
Unrecognized net loss -- (2,931) (2,931)
Unrecognized prior service cost -- 30,319 30,319
----------------------------------------------------------------------------------------
Accrued postretirement benefit
liabilities $12,129 $81,813 $93,942
========================================================================================
1993
Accumulated postretirement
benefit obligation:
Retirees $ 1,911 $45,749 $47,660
Fully eligible active employees 3,969 1,633 5,602
Other active employees 4,993 9,602 14,595
----------------------------------------------------------------------------------------
10,873 56,984 67,857
----------------------------------------------------------------------------------------
Unrecognized net loss -- (7,812) (7,812)
Unrecognized prior service cost -- 31,835 31,835
----------------------------------------------------------------------------------------
Accrued postretirement benefit
liabilities $10,873 $81,007 $91,880
========================================================================================
The net periodic postretirement costs for the years ended December 31,
1994, 1993 and 1992 included the following components:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------
LIFE
MEDICAL INSURANCE
PLANS PLANS TOTAL
========================================================================================
1994
Cost of benefits earned during
the period $ 1,160 $ 499 $ 1,659
Interest cost on accumulated
postretirement benefit obligations 4,055 1,032 5,087
Amortization of prior service cost (1,344) (172) (1,516)
Amortization of net actuarial losses 318 -- 318
----------------------------------------------------------------------------------------
Net periodic postretirement
benefit costs $ 4,189 $1,359 $ 5,548
========================================================================================
1993
Cost of benefits earned during
the period $ 876 $ 384 $ 1,260
Interest cost on accumulated
postretirement benefit obligations 3,693 1,110 4,803
Amortization of prior service cost (1,344) (172) (1,516)
----------------------------------------------------------------------------------------
Net periodic postretirement
benefit costs $ 3,225 $1,322 $ 4,547
========================================================================================
1992
Cost of benefits earned during
the period $ 4,439 $ 696 $ 5,135
Interest cost on accumulated
postretirement benefit obligations 5,668 1,283 6,951
----------------------------------------------------------------------------------------
Net periodic postretirement
benefit costs $10,107 $1,979 $12,086
========================================================================================
The medical trend rate assumptions have a significant effect on the
amounts reported. Increasing each trend rate by 1 percent in each year would
increase the accumulated postretirement benefit obligations as of December 31,
1994 by $4.9 million and the aggregate service and interest cost components of
the periodic postretirement benefit costs for 1994 by $493,000.
(d) AIG has certain postemployment benefits provided to former or
inactive employees who are not retirees. Certain of these benefits are insured
and expensed currently; other expenses are provided for currently. Such
uninsured expenses include long and short-term disability medical and life
insurance continuation, short-term disability income continuation and COBRA
medical subsidies. The provision for these benefits at December 31, 1994 was
$5.3 million. The incremental expense was insignificant.
66
American International Group, Inc. and Subsidiaries
16. LEASES
(a) AIG and its subsidiaries occupy leased space in many locations under
various long-term leases and have entered into various leases covering the
long-term use of data processing equipment. At December 31, 1994, the future
minimum lease payments under operating leases were as follows:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------
1995 $183,210
1996 127,399
1997 86,781
1998 69,111
1999 58,324
Remaining years after 1999 227,173
----------------------------------------------------------------------------------------
Total $751,998
========================================================================================
Rent expense approximated $218,900,000, $200,500,000, and $199,200,000
for the years ended December 31, 1994, 1993 and 1992, respectively.
(b) Minimum future rental income on noncancelable operating leases of
flight equipment which have been delivered at December 31, 1994 was as follows:
[Enlarge/Download Table]
(in thousands)
----------------------------------------------------------------------------------------
1995 $ 944,295
1996 816,793
1997 626,652
1998 476,441
1999 339,036
Remaining years after 1999 657,035
----------------------------------------------------------------------------------------
Total $3,860,252
========================================================================================
Flight equipment is leased, under operating leases, for periods
ranging from one to twelve years.
17. OWNERSHIP AND TRANSACTIONS WITH RELATED PARTIES
(a) OWNERSHIP: The directors and officers of AIG, the directors and holders of
common stock of C. V. Starr & Co., Inc. (Starr), a private holding company, The
Starr Foundation, Starr International Company, Inc. (SICO), a private holding
company, and Starr own or otherwise control approximately 29 percent of the
voting stock of AIG. Six directors of AIG also serve as directors of Starr and
SICO.
(b) TRANSACTIONS WITH RELATED PARTIES: During the ordinary course of
business, AIG and its subsidiaries pay commissions to Starr and its
subsidiaries for the production and management of insurance business. Net
commission payments to Starr aggregated approximately $31,200,000 in 1994,
$25,800,000 in 1993 and $21,200,000 in 1992, from which Starr is required to
pay commissions due originating brokers and its operating expenses. AIG also
received approximately $12,900,000 in 1994, $11,800,000 in 1993 and $11,500,000
in 1992 from Starr and paid approximately $42,000 in 1994, $60,000 in 1993 and
$50,000 in 1992 to Starr as reimbursement for services provided at cost. AIG
also received approximately $900,000 in 1994, $600,000 in 1993 and $800,000 in
1992 from SICO and paid approximately $1,200,000 in 1994, $1,100,000 in 1993
and $900,000 in 1992 to SICO as reimbursement for services rendered at cost.
AIG also paid to SICO $3,000,000 in 1994, $3,400,000 in 1993 and $3,800,000 in
1992 in rental fees.
18. SUMMARY OF QUARTERLY FINANCIAL INFORMATION--
UNAUDITED
The following quarterly financial information for each of the three months
ended March 31, June 30, September 30 and December 31, 1994 and 1993 is
unaudited. However, in the opinion of management, all adjustments (consisting
of normal recurring adjustments) necessary to present fairly the results of
operations for such periods, have been made for a fair presentation of the
results shown.
[Enlarge/Download Table]
THREE MONTHS ENDED
-----------------------------------------------------------------------
MARCH 31, JUNE 30,
------------------------------ ------------------------------
(in thousands, except per share amounts) 1994 1993 1994 1993
=========================================================================================================================
Revenues $5,225,830 $4,643,240 $5,625,759 $5,015,236
=========================================================================================================================
Income before cumulative effect of
accounting changes $ 505,618 $ 475,226 $ 549,694 $ 481,634
=========================================================================================================================
Cumulative effect of accounting changes (a) $ -- $ 20,695 $ -- $ --
=========================================================================================================================
Net income $ 505,618 $ 495,921 $ 549,694 $ 481,634
=========================================================================================================================
Income before cumulative effect of
accounting changes per common share $1.59 $1.49 $1.74 $1.52
Net income per common share $1.59 $1.56 $1.74 $1.52
Average shares outstanding 317,456 317,484 316,564 317,360
=========================================================================================================================
[Enlarge/Download Table]
THREE MONTHS ENDED
-----------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
------------------------------ ------------------------------
(in thousands, except per share amounts) 1994 1993 1994 1993
=========================================================================================================================
Revenues $5,675,296 $5,119,228 $5,914,838 $5,356,953
Income before cumulative effect of
accounting changes $ 542,527 $ 451,061 $ 577,676 $ 510,157
=========================================================================================================================
Cumulative effect of accounting changes (a) $ -- $ -- $ -- $ --
=========================================================================================================================
Net income $ 542,527 $ 451,061 $ 577,676 $ 510,157
=========================================================================================================================
Income before cumulative effect of
accounting changes per common share $1.71 $1.42 $1.83 $1.61
Net income per common share $1.71 $1.42 $1.83 $1.61
Average shares outstanding 316,368 317,438 315,866 317,577
=========================================================================================================================
(a) Represents a net benefit for the cumulative effect of the adoption of
accounting pronouncements related to postretirement benefits (FASB 106)
and income taxes (FASB 109) by minority-owned insurance operations in
1993.
67
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
19. SEGMENT INFORMATION
(a) AIG's operations are conducted principally through five business segments.
These segments and their respective operations are as follows:
Parent - AIG parent is a holding company owning directly or indirectly
all of the capital stock of certain insurance, insurance related and financial
services companies in both the United States and abroad.
General Insurance - AIG's general insurance operations are multiple
line property and casualty companies writing substantially all lines of
insurance other than title insurance. The general insurance operations also
include mortgage guaranty insurance operations.
Life Insurance - AIG's life insurance operations offer a broad line of
individual and group life, annuity and accident and health policies.
Agency and Service Fee - AIG's agency operations are engaged in the
production and management of various types of insurance for affiliated and
non-affiliated companies.
Financial Services - AIG's financial services operations engage in
diversified financial services for affiliated and non-affiliated companies.
Such operations include, but are not limited to, short-term cash management and
financing, premium financing, interest rate, currency, equity and commodity
derivative products business, various commodities trading and market making
activities, banking services and operations and leasing and remarketing of
flight equipment.
68
American International Group, Inc. and Subsidiaries
19. SEGMENT INFORMATION (continued)
The following table is a summary of the operations by major operating
segments for the years ended December 31, 1994, 1993 and 1992:
[Enlarge/Download Table]
INDUSTRY SEGMENTS-1994
------------------------------------------------------------------------------------
GENERAL LIFE AGENCY AND FINANCIAL
(in thousands) PARENT INSURANCE INSURANCE SERVICE FEE SERVICES
======================================================================================================================
Revenues (b) $ 899,698(c) $11,774,410 $ 8,559,455 $237,940 $ 1,866,253
======================================================================================================================
Income before income taxes
and cumulative effect of
accounting changes $ 899,698(c) $ 1,635,096 $ 952,484 $ 54,129 $ 404,853
======================================================================================================================
Equity in net income (loss) of
partially-owned companies $ 25,476 $ 32,687 $ 829 $ (61) $ --
======================================================================================================================
Depreciation expense $ -- $ 66,514 $ 43,317 $ 3,514 $ 402,741
======================================================================================================================
Capital expenditures $ 545 $ 131,721 $ 106,957 $ 2,822 $ 2,841,317(d)
======================================================================================================================
Identifiable assets $17,295,644 $51,372,100 $34,496,652 $184,310 $30,660,776
======================================================================================================================
[Download Table]
INDUSTRY SEGMENTS-1994
------------------------------
ADJUSTMENTS
AND
(in thousands) ELIMINATIONS(a) CONSOLIDATED
===============================================================
Revenues (b) $ (896,033) $ 22,441,723
===============================================================
Income before income taxes
and cumulative effect of
accounting changes $ (994,281) $ 2,951,979
===============================================================
Equity in net income (loss) of
partially-owned companies $ 182 $ 59,113
===============================================================
Depreciation expense $ 65,844 $ 581,930
===============================================================
Capital expenditures $ 87,882 $ 3,171,244(d)
===============================================================
Identifiable assets $(19,663,365) $114,346,117
===============================================================
[Enlarge/Download Table]
INDUSTRY SEGMENTS-1993
------------------------------------------------------------------------------------
GENERAL LIFE AGENCY AND FINANCIAL
(in thousands) PARENT INSURANCE INSURANCE SERVICE FEE SERVICES
======================================================================================================================
Revenues (b) $ 908,176(c) $10,972,384 $ 7,300,336 $239,641 $ 1,595,449
======================================================================================================================
Income before income taxes
and cumulative effect of
accounting changes $ 908,176(c) $ 1,416,135 $ 781,611 $ 60,247 $ 390,038
======================================================================================================================
Equity in net income (loss) of
partially-owned companies $ 11,183 $ 36,618 $ 1,260 $ (202) $ --
======================================================================================================================
Depreciation expense $ -- $ 40,535 $ 39,258 $ 3,787 $ 326,028
======================================================================================================================
Capital expenditures $ -- $ 103,686 $ 119,157 $ 4,801 $ 2,575,652(d)
======================================================================================================================
Identifiable assets (e) $16,210,208 $46,981,720 $28,381,164 $179,297 $25,514,258
======================================================================================================================
[Download Table]
INDUSTRY SEGMENTS-1993
------------------------------
ADJUSTMENTS
AND
(in thousands) ELIMINATIONS(a) CONSOLIDATED
===============================================================
Revenues (b) $ (881,329) $ 20,134,657
===============================================================
Income before income taxes
and cumulative effect of
accounting changes $ (955,126) $ 2,601,081
===============================================================
Equity in net income (loss) of
partially-owned companies $ 236 $ 49,095
===============================================================
Depreciation expense $ 62,639 $ 472,247
===============================================================
Capital expenditures $ 109,737 $ 2,913,033(d)
===============================================================
Identifiable assets (e) $(16,251,799) $101,014,848
===============================================================
[Enlarge/Download Table]
INDUSTRY SEGMENTS-1992
------------------------------------------------------------------------------------
GENERAL LIFE AGENCY AND FINANCIAL
(in thousands) PARENT INSURANCE INSURANCE SERVICE FEE SERVICES
======================================================================================================================
Revenues (b) $ 637,339(c) $10,528,610 $ 6,210,182 $228,297 $ 1,404,902
======================================================================================================================
Income before income taxes
and cumulative effect of
accounting changes $ 637,339(c) $ 1,124,136 $ 667,453 $ 52,570 $ 346,442
======================================================================================================================
Equity in net income (loss) of
partially-owned companies $ 6,258 $ 19,610 $ 7,382 $ 46 $ --
======================================================================================================================
Depreciation expense $ 1,057 $ 38,963 $ 41,613 $ 3,796 $ 249,548
======================================================================================================================
Capital expenditures $ 2,733 $ 66,899 $ 156,583 $ 16,355 $ 1,793,372(d)
======================================================================================================================
Identifiable assets (e) $13,747,118 $42,416,509 $23,472,687 $157,280 $27,138,230
======================================================================================================================
[Download Table]
INDUSTRY SEGMENTS-1992
------------------------------
ADJUSTMENTS
AND
(in thousands) ELIMINATIONS(a) CONSOLIDATED
===============================================================
Revenues (b) $ (620,703) $ 18,388,627
===============================================================
Income before income taxes
and cumulative effect of
accounting changes $ (690,892) $ 2,137,048
===============================================================
Equity in net income (loss) of
partially-owned companies $ -- $ 33,296
===============================================================
Depreciation expense $ 56,888 $ 391,865
===============================================================
Capital expenditures $ 34,378 $ 2,070,320(d)
===============================================================
Identifiable assets (e) $(14,209,642) $ 92,722,182
===============================================================
(a) Including other operations and other income (deductions)-net, which are
not deemed to be reportable segments.
(b) Including realized capital gains attributable to the segments.
(c) Substantially dividend income from subsidiaries.
(d) Relating primarily to ILFC.
(e) Assets as at December 31, 1993 and 1992 have been adjusted to conform to
the requirements of FASB 113.
69
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
19. SEGMENT INFORMATION (continued)
(b) The following table is a summary of AIG's general insurance
operations by major operating category for the years ended December 31, 1994,
1993 and 1992:
[Enlarge/Download Table]
NET PREMIUMS
--------------------------------------------------------------------------------------
WRITTEN EARNED
----------------------------------------- -----------------------------------------
(in thousands) 1994 1993 1992 1994 1993 1992
====================================================================================================================
UNDERWRITING:
Foreign $ 3,588,608 $ 3,019,328 $2,573,922 $ 3,459,123 $2,901,848 $2,496,596
Commercial casualty (a) 5,718,053 5,438,420 5,209,295 5,329,215 5,244,479 5,350,017
Commercial property 309,802 241,387 166,696 294,944 180,722 210,288
Pools and associations (b) 552,975 746,395 753,361 533,632 723,082 760,159
Personal lines (c) 492,122 401,611 295,876 464,120 362,191 266,024
Mortgage guaranty 204,193 178,762 139,378 205,797 154,318 126,306
--------------------------------------------------------------------------------------------------------------------
Total underwriting $10,865,753 $10,025,903 $9,138,528 $10,286,831 $9,566,640 $9,209,390
====================================================================================================================
Net investment income
Realized capital gains
General insurance operating
income
====================================================================================================================
[Download Table]
OPERATING INCOME
----------------------------------------
(in thousands) 1994 1993 1992
======================================================================
UNDERWRITING:
Foreign $ 239,041 $ 140,666 $ 95,024
Commercial casualty (a) 256,883 255,893 169,554
Commercial property (75,738) (51,688) (23,411)
Pools and associations (b) (334,642) (377,531) (389,507)
Personal lines (c) (17,147) (24,324) (77,234)
Mortgage guaranty 79,120 67,375 30,490
----------------------------------------------------------------------
Total underwriting 147,517 10,391 (195,084)
Net investment income 1,435,092 1,340,480 1,252,086
Realized capital gains 52,487 65,264 67,134
----------------------------------------
General insurance operating
income $1,635,096 $1,416,135 $1,124,136
======================================================================
(a) Including workers' compensation and retrospectively rated risks.
(b) Including involuntary pools.
(c) Including mass marketing and specialty programs.
(c) AIG's individual life insurance and group life insurance portfolio
accounted for 62 percent, 64 percent and 67 percent of AIG's consolidated life
insurance operating income before realized capital gains or losses for the
years ended December 31, 1994, 1993 and 1992, respectively. For those years, 96
percent, 97 percent and 98 percent, respectively, of consolidated life
operating income before realized capital gains or losses was derived from
foreign operations.
(d) A substantial portion of AIG's business is conducted in countries
other than the United States and Canada. The following table is a summary of
AIG's business by geographic segments. Allocations have been made on the basis
of location of operations and assets.
[Enlarge/Download Table]
GEOGRAPHIC SEGMENTS-1994
---------------------------------------------------------
OTHER
(in thousands) DOMESTIC (a) FAR EAST FOREIGN CONSOLIDATED
====================================================================================================================
Revenues (b) $10,805,905 $ 8,374,188 $ 3,261,630 $ 22,441,723
====================================================================================================================
Income before income taxes and cumulative effect of
accounting changes $ 1,420,399 $ 1,192,643 $ 338,937 $ 2,951,979
====================================================================================================================
Identifiable assets $71,838,459 $24,199,044 $18,308,614 $114,346,117
====================================================================================================================
[Enlarge/Download Table]
GEOGRAPHIC SEGMENTS-1993
---------------------------------------------------------
OTHER
(in thousands) DOMESTIC (a) FAR EAST FOREIGN CONSOLIDATED
====================================================================================================================
Revenues (b) $ 9,986,731 $ 6,911,684 $ 3,236,242 $ 20,134,657
====================================================================================================================
Income before income taxes and cumulative effect of
accounting changes $ 1,329,908 $ 900,669 $ 370,504 $ 2,601,081
====================================================================================================================
Identifiable assets (c) $64,482,527 $18,667,545 $17,864,776 $101,014,848
====================================================================================================================
[Enlarge/Download Table]
GEOGRAPHIC SEGMENTS-1992
---------------------------------------------------------
OTHER
(in thousands) DOMESTIC (a) FAR EAST FOREIGN CONSOLIDATED
====================================================================================================================
Revenues (b) $ 9,767,716 $ 5,876,894 $ 2,744,017 $ 18,388,627
====================================================================================================================
Income before income taxes and cumulative effect of
accounting changes $ 1,035,235 $ 799,503 $ 302,310 $ 2,137,048
====================================================================================================================
Identifiable assets (c) $59,443,456 $14,720,118 $18,558,608 $ 92,722,182
====================================================================================================================
(a) Including general insurance operations in Canada.
(b) Revenues are derived from revenues of the general, life, agency and
service fee and financial services operations, equity in income of
minority-owned insurance operations and realized capital gains
attributable to the segments.
(c) Assets as at December 31, 1993 and 1992 have been adjusted to conform to
the requirements of FASB 113.
70
American International Group, Inc. and Subsidiaries
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on accounting
and financial disclosure within the twenty-four months ending December 31,
1994.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
Except for the information provided in Part I under the heading "Directors and
Executive Officers of the Registrant", this item is omitted because a
definitive proxy statement which involves the election of directors will be
filed with the Securities and Exchange Commission not later than 120 days after
the close of the fiscal year pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND EXHIBITS.
1. Financial Statements and Schedules. See accom-
panying Index to Financial Statements.
2. EXHIBITS.
3--Articles of Incorporation and By-Laws.
10--Material Contracts.
11--Computation of Earnings Per Share for the
Years Ended December 31, 1994, 1993,
1992, 1991 and 1990.
12--Computation of Ratios of Earnings to Fixed
Charges for the Years Ended December 31,
1994, 1993, 1992, 1991 and 1990.
21--Subsidiaries of Registrant.
23--Consent of Coopers & Lybrand L.L.P.
24--Power of Attorney.
27--Financial Data Schedule.
28--Information from Statutory Schedule P.
99--Undertakings.
(b) REPORTS ON FORM 8-K.
There have been no reports on Form 8-K filed during the quarter ended
December 31, 1994.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the issuer has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York and State of New York, on the 29th day of March, 1995.
AMERICAN INTERNATIONAL GROUP, INC.
By s/s M.R. GREENBERG, CHAIRMAN
------------------------------------
(M. R. Greenberg, Chairman)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the following
persons in the capacities indicated on the 29th day of March, 1995 and each of
the undersigned persons, in any capacity, hereby severally constitutes M.R.
Greenberg, Edward E. Matthews and Howard I. Smith and each of them, singularly,
his true and lawful attorney with full power to them and each of them to sign
for him, and in his name and in the capacities indicated below, this Annual
Report on Form 10-K and any and all amendments thereto.
[Download Table]
SIGNATURE TITLE
--------- -----
s/s M.R. Greenberg Chairman and Director
------------------------------------ (Principal Executive Officer)
(M. R. Greenberg)
s/s Edward E. Matthews Vice Chairman and Director
------------------------------------ (Principal Financial Officer)
(Edward E. Matthews)
s/s Howard I. Smith Senior Vice President
------------------------------------ and Comptroller
(Howard I. Smith) (Principal Accounting Officer)
s/s M. Bernard Aidinoff Director
------------------------------------
(M. Bernard Aidinoff)
s/s Lloyd Bentsen Director
------------------------------------
(Lloyd Bentsen)
s/s Marshall A. Cohen Director
------------------------------------
(Marshall A. Cohen)
s/s Barber B. Conable, Jr. Director
------------------------------------
(Barber B. Conable, Jr.)
s/s Martin S. Feldstein Director
------------------------------------
(Martin S. Feldstein)
s/s Houghton Freeman Director
------------------------------------
(Houghton Freeman)
II-1
SIGNATURES--(Continued)
[Download Table]
SIGNATURE TITLE
--------- -----
s/s Leslie L. Gonda Director
------------------------------------
(Leslie L. Gonda)
s/s Carla A. Hills Director
------------------------------------
(Carla A. Hills)
s/s Frank J. Hoenemeyer Director
------------------------------------
(Frank J. Hoenemeyer)
s/s John I. Howell Director
------------------------------------
(John I. Howell)
s/s Dean P. Phypers Director
------------------------------------
(Dean P. Phypers)
s/s John J. Roberts Director
------------------------------------
(John J. Roberts)
s/s Ernest E. Stempel Director
------------------------------------
(Ernest E. Stempel)
s/s Thomas R. Tizzio Director
------------------------------------
(Thomas R. Tizzio)
II-2
Schedule I
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 1994
[Enlarge/Download Table]
(in thousands)
------------------------------------------------------------------------------------------------------------------------------
AMOUNT AT
WHICH SHOWN
IN THE
BALANCE
TYPE OF INVESTMENT COST(*) VALUE SHEET
==============================================================================================================================
Fixed maturities:
Bonds:
United States Government and government agencies
and authorities $ 1,430,541 $ 1,332,397 $ 1,332,559
States, municipalities and political subdivisions 15,656,717 15,629,814 15,561,680
Foreign governments 5,310,336 5,271,191 5,271,191
Public utilities 2,660,304 2,701,629 2,701,629
All other corporate 10,363,213 10,151,195 10,151,304
------------------------------------------------------------------------------------------------------------------------------
Total bonds 35,421,111 35,086,226 35,018,363
Preferred stocks 412,503 424,775 412,503
------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities 35,833,614 35,511,001 35,430,866
------------------------------------------------------------------------------------------------------------------------------
Equity securities:
Common stocks:
Public utilities 93,886 96,739 96,739
Banks, trust and insurance companies 558,445 662,662 662,662
Industrial, miscellaneous and all other 3,955,455 4,243,267 4,243,267
------------------------------------------------------------------------------------------------------------------------------
Total common stocks 4,607,786 5,002,668 5,002,668
Non-redeemable preferred stocks 85,901 96,503 96,503
------------------------------------------------------------------------------------------------------------------------------
Total equity securities 4,693,687 5,099,171 5,099,171
------------------------------------------------------------------------------------------------------------------------------
Mortgage loans on real estate, policy and collateral loans 5,353,074 -- 5,353,074
Financial services assets:
Flight equipment primarily under operating leases, net of
accumulated depreciation 10,723,527 10,723,527
Securities available for sale, at market value 3,794,076 3,796,792 3,796,792
Trading securities, at market value -- 2,483,637 2,483,637
Spot commodities, at market value -- 916,833 916,833
Unrealized gain on interest rate and currency swaps,
options and forward transactions -- 4,650,743 4,650,743
Trade receivables 2,629,734 -- 2,629,734
Securities purchased under agreements to resell, at contract value 1,209,403 -- 1,209,403
Other invested assets 1,953,015 -- 1,953,015
Short-term investments, at cost which approximates market value 2,467,453 -- 2,467,453
------------------------------------------------------------------------------------------------------------------------------
Total investments $68,657,583 -- $76,714,248
==============================================================================================================================
(*) Original cost of equity securities and, as to fixed maturities,
original cost reduced by repayments and adjusted for amortization of
premiums or accrual of discounts.
S-1
Schedule II
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET -- PARENT COMPANY ONLY
[Enlarge/Download Table]
(in thousands)
------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1994 1993
------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash $ 57 $ 607
Short-term investments 1,069 2,762
Invested assets 314,404 220,819
Carrying value of subsidiaries and partially-owned companies, at equity 17,135,389 15,754,002
Due from affiliates-net -- 25,898
Premiums and insurance balances receivable-net 49,415 60,340
Other assets 288,154 228,473
------------------------------------------------------------------------------------------------------------------------------
Total assets $17,788,488 $16,292,901
==============================================================================================================================
LIABILITIES:
Insurance balances payable $ 117,560 $ 129,151
Due to affiliates-net 483,890 --
Medium term notes payable 155,000 295,000
Zero coupon notes 65,831 59,116
Italian Lire bonds 159,067 159,067
Other liabilities 385,479 426,372
------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,366,827 1,068,706
==============================================================================================================================
CAPITAL FUNDS:
Common stock 843,477 843,477
Additional paid-in capital 565,410 572,142
Unrealized appreciation of investments, net of taxes 184,556 922,646
Cumulative translation adjustments, net of taxes (288,074) (348,186)
Retained earnings 15,340,928 13,301,529
Treasury stock (224,636) (67,413)
------------------------------------------------------------------------------------------------------------------------------
Total Capital Funds 16,421,661 15,224,195
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and capital funds $17,788,488 $16,292,901
==============================================================================================================================
STATEMENT OF INCOME--PARENT COMPANY ONLY
[Enlarge/Download Table]
(in thousands)
------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1994 1993 1992
==============================================================================================================================
Agency income $ 1,207 $ 2,027 $ 5,716
Dividend income from consolidated subsidiaries:
Cash 898,659 907,432 528,807
Other -- -- 107,941
Dividend income from partially-owned companies 1,039 744 591
Equity in undistributed net income of consolidated subsidiaries
and partially-owned companies 1,499,330 1,201,155 1,036,038
Other income (deductions)-net (59,922) (50,683) 148,445
------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of accounting changes 2,340,313 2,060,675 1,827,538
Income taxes 164,798 121,902 168,374
------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting changes 2,175,515 1,938,773 1,659,164
Cumulative effect of accounting changes, net of tax -- -- (2,208)
------------------------------------------------------------------------------------------------------------------------------
Net income $2,175,515 $ 1,938,773 $ 1,656,956
==============================================================================================================================
S-2
Schedule II
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued)
STATEMENT OF CASH FLOWS--PARENT COMPANY ONLY
[Enlarge/Download Table]
(in thousands)
------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1994 1993 1992
==============================================================================================================================
Cash flows from operating activities
Net income $ 2,175,515 $ 1,938,773 $ 1,656,956
------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Non-cash revenues, expenses, gains and losses included in income:
Equity in undistributed net income of consolidated subsidiaries
and partially-owned companies (1,499,330) (1,201,155) (1,036,038)
Cumulative effect of accounting changes -- -- 2,208
Non-cash dividends from subsidiaries -- -- (107,941)
Change in premiums and insurance balances receivable and
payable-net (666) 16,939 23,905
Change in cumulative translation adjustments (138,528) (7,088) (2,319)
Other-net 84,185 13,657 208,449
------------------------------------------------------------------------------------------------------------------------------
Total adjustments (1,554,339) (1,177,647) (911,736)
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 621,176 761,126 745,220
------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Cost of investments sold or matured -- -- 11,035
Purchase of investments (101,553) (35,226) (27,220)
Change in short-term investments 1,693 111,447 (42,322)
Change in collateral and guaranteed loans -- (2,500) (14,500)
Contributions to subsidiaries and investments in partially-owned
companies (462,056) (237,899) (183,949)
Other-net (2,874) (3,796) (4,539)
------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (564,790) (167,974) (261,495)
------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Change in medium term notes (140,000) 58,000 (169,500)
Proceeds from common stock issued 14,721 13,280 13,272
Change in loans payable 383,135 (377,581) (128,782)
Liquidation of zero coupon notes payable -- -- (4,647)
Cash dividends to shareholders (136,116) (123,859) (116,676)
Acquisition of treasury stock (178,676) (13,148) (82,096)
Redemption of preferred stock -- (150,000) --
------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (56,936) (593,308) (488,429)
------------------------------------------------------------------------------------------------------------------------------
Change in cash (550) (156) (4,704)
Cash at beginning of year 607 763 5,467
------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 57 $ 607 $ 763
==============================================================================================================================
NOTES TO FINANCIAL STATEMENTS--PARENT COMPANY ONLY
(1) Agency operations conducted in New York through the North American
Division of AIU are included in the financial statements of the parent
company.
(2) Certain accounts have been reclassified in the 1993 and 1992 financial
statements to conform to their 1994 presentation.
(3) Other income (deductions)-net includes fees received from consolidated
financial services subsidiaries.
(4) "Equity in undistributed net income of consolidated subsidiaries and
partially-owned companies" in the accompanying Statement of
Income--Parent Company Only--includes equity in the cumulative effect
of accounting changes, net of tax of the minority-owned insurance
operations.
(5) See also Notes to Consolidated Financial Statements.
S-3
Schedule III
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
As of December 31, 1994, 1993 and 1992 and for the years then ended
[Enlarge/Download Table]
(in thousands)
-------------------------------------------------------------------------------------------------------------------------
RESERVES FOR
LOSSES AND
DEFERRED LOSS RESERVE POLICY
POLICY EXPENSES, FOR AND
ACQUISITION FUTURE POLICY UNEARNED CONTRACT PREMIUM
SEGMENT COSTS BENEFITS PREMIUMS CLAIMS(a) REVENUE
=========================================================================================================================
1994
General insurance $1,179,494 $31,435,355 $6,318,754 $ -- $10,286,831
Life insurance 3,952,751 17,432,222 -- 548,243 6,724,321
-------------------------------------------------------------------------------------------------------------------------
$5,132,245 $48,867,577 $6,318,754 $548,243 $17,011,152
=========================================================================================================================
1993
General insurance $1,009,545 $30,046,172 $5,515,670 $ -- $ 9,566,640
Life insurance 3,239,864 14,638,382 -- 406,516 5,746,046
-------------------------------------------------------------------------------------------------------------------------
$4,249,409 $44,684,554 $5,515,670 $406,516 $15,312,686
=========================================================================================================================
1992
General insurance $ 880,257 $28,156,767 $4,956,727 $ -- $ 9,209,390
Life insurance 2,777,561 11,804,484 -- 321,077 4,853,087
-------------------------------------------------------------------------------------------------------------------------
$3,657,818 $39,961,251 $4,956,727 $321,077 $14,062,477
=========================================================================================================================
[Enlarge/Download Table]
(in thousands)
-------------------------------------------------------------------------------------------------------------------------
LOSSES AND AMORTIZATION
LOSS OF DEFERRED
NET EXPENSES POLICY OTHER NET
INVESTMENT INCURRED, ACQUISITION OPERATING PREMIUMS
SEGMENT INCOME BENEFITS COSTS(b) EXPENSES WRITTEN
=========================================================================================================================
1994
General insurance $1,435,092 $ 8,005,601 $ 955,311 $1,178,402 $10,865,753
Life insurance 1,748,428 5,782,561 537,364 1,287,046 --
-------------------------------------------------------------------------------------------------------------------------
$3,183,520 $13,788,162 $1,492,675 $2,465,448 $10,865,753
=========================================================================================================================
1993
General insurance $1,340,480 $ 7,576,016 $ 839,167 $1,141,066 $10,025,903
Life insurance 1,499,714 4,891,357 469,310 1,158,058 --
-------------------------------------------------------------------------------------------------------------------------
$2,840,194 $12,467,373 $1,308,477 $2,299,124 $10,025,903
=========================================================================================================================
1992
General insurance $1,252,086 $ 7,503,504 $ 838,976 $1,061,994 $ 9,138,528
Life insurance 1,313,838 4,123,876 394,875 1,023,978 --
-------------------------------------------------------------------------------------------------------------------------
$2,565,924 $11,627,380 $1,233,851 $2,085,972 $ 9,138,528
=========================================================================================================================
(a) Reflected in insurance balances payable on the accompanying balance sheet.
(b) Amounts shown for general insurance segment exclude amounts deferred and
amortized in the same period.
S-4
Schedule IV
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
REINSURANCE
As of December 31, 1994, 1993 and 1992 and for the years then ended
[Enlarge/Download Table]
(dollars in thousands)
-------------------------------------------------------------------------------------------------------------------------
PERCENT OF
CEDED ASSUMED AMOUNT
TO OTHER FROM OTHER NET ASSUMED
GROSS AMOUNT COMPANIES COMPANIES AMOUNT TO NET
=========================================================================================================================
1994
Life insurance in-force $333,378,811 $30,184,126 $ 235,278 $303,429,963 0.1%
=========================================================================================================================
Premiums:
General insurance $ 15,368,001 $ 5,526,656 $1,024,408 $ 10,865,753 9.4%
Life insurance 6,877,256 161,928 8,993 6,724,321 0.1
-------------------------------------------------------------------------------------------------------------------------
Total premiums $ 22,245,257 $ 5,688,584 $1,033,401 $ 17,590,074 5.9%
=========================================================================================================================
1993
Life insurance in-force $257,162,102 $13,006,029 $1,287,379 $245,443,452 0.5%
=========================================================================================================================
Premiums:
General insurance $ 13,633,638 $ 4,875,352 $1,267,617 $ 10,025,903 12.6%
Life insurance 5,914,007 178,511 10,550 5,746,046 0.2
-------------------------------------------------------------------------------------------------------------------------
Total premiums $ 19,547,645 $ 5,053,863 $1,278,167 $ 15,771,949 8.1%
=========================================================================================================================
1992
Life insurance in-force $210,605,862 $11,344,069 $3,670,939 $202,932,732 1.8%
=========================================================================================================================
Premiums:
General insurance $ 12,797,504 $ 4,477,187 $ 818,211 $ 9,138,528 9.0%
Life insurance 5,013,447 170,447 10,087 4,853,087 0.2
-------------------------------------------------------------------------------------------------------------------------
Total premiums $ 17,810,951 $ 4,647,634 $ 828,298 $ 13,991,615 5.9%
=========================================================================================================================
S-5
Schedule VI
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
As of December 31, 1994, 1993, 1992 and for the years then ended
[Enlarge/Download Table]
(in thousands)
------------------------------------------------------------------------------------------------------------------------
DISCOUNT LOSSES AND LOSS
IF ANY, EXPENSES INCURRED
DEDUCTED FROM RELATED TO PAID
RESERVES FOR ------------------------- LOSSES
LOSSES AND CURRENT PRIOR AND LOSS
AFFILIATION WITH REGISTRANT LOSS EXPENSES YEAR YEARS EXPENSES
========================================================================================================================
1994
AIG and consolidated subsidiaries $21,000 $8,158,400 $(152,800) $7,143,700
1993
AIG and consolidated subsidiaries $21,000 $7,530,700 $ 45,300 $6,775,800
1992
AIG and consolidated subsidiaries $21,000 $7,497,100 $ 6,400 $6,586,600
========================================================================================================================
Note: The ending reserves of 50% or less owned equity investees (minority-owned
companies) are less than 5% of the total reserves.
S-6
EXHIBIT INDEX
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION LOCATION
------ ----------- --------
2 Plan of acquisition, reorganization, arrangement, liquidation
or succession . . . . . . . . . . . . . . . . . . . . . . . . None
3(i) Restated Certificate of Incorporation of AIG,
at November 30, 1994 . . . . . . . . . . . . . . . . . . . . . Filed herewith.
3(ii) By-laws of AIG . . . . . . . . . . . . . . . . . . . . . . . Filed herewith.
4 Instruments defining the rights of security holders, including
indentures
(a) Fiscal Agency Agreement dated as of October 1,
1984 between AIG and Citibank, N.A. . . . . . . . . Not required to be filed. The Registrant
hereby agrees to file with the
Commission a copy of any instrument
defining the rights of holders of
the Registrant's long-term debt
upon request of the Commission.
(b) Indenture dated as of July 15, 1989 between AIG
and The Bank of New York . . . . . . . . . . . . . Not required to be filed. The Registrant
hereby agrees to file with the
Commission a copy of any instrument
defining the rights of holders of
the Registrant's long-term debt
upon request of the Commission.
II-3
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION LOCATION
------ ----------- --------
9 Voting Trust Agreement . . . . . . . . . . . . . . . . . . . None.
10 Material contracts
(a) AIG 1969 Employee Stock Option Plan and
Agreement Form . . . . . . . . . . . . . . . . . . Filed as exhibit to AIG's Registration
Statement (File No. 2-44043) and
incorporated herein by reference.
(b) AIG 1972 Employee Stock Option Plan . . . . . . . . Filed as exhibit to AIG's Registration
Statement (File No. 2-44702) and
incorporated herein by reference.
(c) AIG 1972 Employee Stock Purchase Plan . . . . . . . Filed as exhibit to AIG's Registration
Statement (File No. 2-44043) and
incorporated herein by reference.
(d) AIG 1984 Employee Stock Purchase Plan . . . . . . . Filed as exhibit to AIG's Registration
Statement (File No. 2-91945) and
incorporated herein by reference.
(e) AIG 1977 Stock Option and Stock Appreciation
Rights Plan . . . . . . . . . . . . . . . . . . . . Filed as exhibit to AIG's Registration
Statement (File No. 2-59317) and
incorporated herein by reference.
(f) AIG 1982 Employee Stock Option Plan . . . . . . . . Filed as exhibit to AIG's Registration
Statement (File No. 2-78291) and
incorporated herein by reference.
(g) AIG 1987 Employee Stock Option Plan . . . . . . . . Filed as exhibit to AIG's Definitive
Proxy Statement dated as of April
6, 1987 (File No. 0-4652) and
incorporated herein by reference.
(h) AIG 1991 Employee Stock Option Plan . . . . . . . . Filed as exhibit to AIG's Definitive
Proxy Statement dated as of March
30, 1992 (File No. 0-4652) and
incorporated herein by reference.
(i) AIRCO 1972 Employee Stock Option Plan . . . . . . . Incorporated by reference to AIG's Joint
Proxy Statement and Prospectus
(File No.2-61994).
(j) AIRCO 1977 Stock Option and Stock
Appreciation Rights Plan . . . . . . . . . . . . . Incorporated by reference to AIG's Joint
Proxy Statement and Prospectus
(File No.2-61994).
11 Statement re computation of per share earnings . . . . . . . Filed herewith.
12 Statements re computation of ratios . . . . . . . . . . . . . Filed herewith.
13 Annual report to security holders . . . . . . . . . . . . . . Not required to be filed.
18 Letter re change in accounting principles . . . . . . . . . . None.
21 Subsidiaries of the Registrant . . . . . . . . . . . . . . . Filed herewith.
22 Published report regarding matters submitted to vote of
security holders . . . . . . . . . . . . . . . . . . . . . . None.
II-4
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION LOCATION
------ ----------- --------
23 Consent of Coopers & Lybrand L.L.P. . . . . . . . . . . . . . Filed herewith.
24 Power of attorney . . . . . . . . . . . . . . . . . . . . . . Included on the signature page hereof.
27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . Provided herewith.
28P Information from reports furnished to state insurance regula-
tory authorities . . . . . . . . . . . . . . . . . . . . . . To be filed under hardship exemption.
99 Undertakings by the Registrant required by Item 17 of
Form S-3 and Item 21 of Form S-8, deemed to be incorpo-
rated by reference into AIG's Registration Statements on
Forms S-3 and S-8 (No. 2-38768, No.2-44043, No. 2-
45346, No. 2-51498, No. 2-59317, No. 2-61858, No. 2-
62760, No. 2-64336, No. 2-67600, No. 2-72058, No.
2-75874, No. 2-75875, No. 2-78291, No. 2-87005, No. 2-
82989, No. 2-90756, No. 2-91945, No. 2-95589, No. 2-
97439, No. 33-8495, No. 33-13874, No. 33-18073, No.
33-25291, No. 33-41643, No. 33-48996 and
No. 33-57250) . . . . . . . . . . . . . . . . . . . . . . . . Filed herewith.
II-5
Dates Referenced Herein and Documents Incorporated by Reference
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